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Why and how Geography matters in nomination at Federal Reserve Board

Summary:
Interesting post by George Selgin. He points how Geography matters in nomination to the Fed Board: Although one might suppose that, to be eligible to serve as a Federal Reserve governor, a candidate should know something about monetary policy or banking or both, so far as the law is concerned, only two things clearly matter: a candidate cannot serve more than once, and he or she can’t be from just anywhere. Few Americans will know that that second requirement exists, why it does, and how it has come to be routinely ignored. Yet the question of geographic eligibility is likely to be raised during upcoming Senate confirmation hearings for two current Fed Board nominees, Judy Shelton and Chris Waller. Hence this brief “Fed Geography Lesson,” written for the sake of those who, should a

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Interesting post by George Selgin. He points how Geography matters in nomination to the Fed Board:

Although one might suppose that, to be eligible to serve as a Federal Reserve governor, a candidate should know something about monetary policy or banking or both, so far as the law is concerned, only two things clearly matter: a candidate cannot serve more than once, and he or she can’t be from just anywhere.

Few Americans will know that that second requirement exists, why it does, and how it has come to be routinely ignored. Yet the question of geographic eligibility is likely to be raised during upcoming Senate confirmation hearings for two current Fed Board nominees, Judy Shelton and Chris Waller. Hence this brief “Fed Geography Lesson,” written for the sake of those who, should a fuss be raised about where a nominee comes from, wonder what it’s all about.

Unlike other central banking arrangements, the Federal Reserve System consists, not of a single central bank, but of a dozen banks each responsible for a separate territory or district. The system is overseen by a Board of Governors headquartered in Washington, D.C., whose seven members are appointed by the President for terms lasting up to 14 years.

When, in 1913, the Federal Reserve Act was being hammered-out in Congress, certain influential Democratic Congressmen, fearing that the Federal Reserve Board (as the present Board of Governors was then known) might come to be dominated by persons (and Wall Street bankers and their cronies especially) from the East Coast, took preventative action: they had the Act’s 10th Section stipulate, first, that no more than one member of the Board should be from any one Federal Reserve district; and second, that in nominating Board members the President “shall have due regard to a fair representation of the financial, agricultural, industrial, and commercial interests, and geographical divisions, of the country.”

This geography constraint has led quite a few nominations to be clocked such as that of Nobel laureate Peter Diamond!:

For most of the Fed’s existence, the Federal Reserve Act’s geographical diversity provisions drew little public attention. But in 2011 they became front-page news when Richard Shelby (R-AL), then ranking member of the Senate Banking Committee, appealed to them, and to the first provision especially, in successfully opposing Nobel Laureate Peter Diamond’s appointment to the Board. Although Diamond was supposed to represent the Chicago Fed district, he had only tenuous ties to it, whereas he’d long resided in Boston, a district that was already being represented at the time by Daniel Tarullo.

Some commentators, including the CMFA’s own Mark Calabria, defended Shelby’s stand, holding it to mark a needed return to strict adherence to the law and to the intentions of the Federal Reserve’s founders. Others, however, including Diamond himself, saw it as mere cover for a strictly partisan act, namely, Republican retaliation for Democrat Senators’ having blocked  Randall Kroszner’s Board reappointment several years before.

Lots of interesting stuff in the post. This aspect of Geography would have mattered in recent Fed nominations but since the post, Trump has made changes…

Amol Agrawal
I am currently pursuing my PhD in economics. I have work-ex of nearly 10 years with most of those years spent figuring economic research in Mumbai’s financial sector.

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