The Federal Reserve is one of the most powerful institutions involved in the formation of national and international economic policy. It has the formal power to manipulate interest rates and the money supply, which are crucial determinants of inflation, unemployment, and the value of the dollar. Moreover, the Fed can act without the approval of the president or congress, and in this way is insulated from the pressures of electoral politics. With such enormous power and scope in this politically sensitive area, it is all the more paradoxical that the Fed, and central banking more generally, receives such little attention from political scientists. In this investigation the researcher will explore the origins of the Federal Reserve. The techniques of modern political economy are applied to the topic to trace the change from the National Banking System to the Federal Reserve System. First, why did modern central banking come to the United States when it did? This question is particularly relevant since many other countries possessed central banks by 1913, and the theory of central banking had been widely understood since at least the 1870s. Second, why was the organizational structure of the Federal Reserve so different from the structure of other central banks and other agencies in American government? What explains, for example, its level of decentralization and its peculiar mixture of public and private control? Public choice theory and the new institutional economics provide the analytic tools for examining these questions. The proximate objective is to present a comprehensive explanation of the origins of the Federal Reserve, from the shift in the institutional preferences of powerful social actors to the final legislative outcome. Support allows the investigator to gather statistical and literary data from archives in New York, Cambridge, and Washington, D.C.
