The U.S. Federal Reserve System has what is perhaps the most complicated structure of any central bank in the world.
The degree to which informed, intelligent citizens are confused by this complexity showed up in responses to a recent column noting Alan Greenspan’s appointment to another four-year term as chair even though his term as governor ends in January 2006. Some explanation is in order.
The Federal Reserve system was created by Congress in two steps: the first in 1913 with passage of the Federal Reserve Act and the second in 1935 when the modern Board of Governors was created.
This board consists of seven governors, each appointed by the president for a 14-year term. One new 14-year term begins in January of every even-numbered year. This structure is a deliberate design to limit presidential influence over the board.
If every governor served a full term without resigning, any single president would be able to appoint the fourth — and majority — member of the seven-person board only in the last year of two consecutive terms.
In practice, sitting governors frequently resign for personal and professional reasons before their terms expire. When someone resigns, the clock on that term is not zeroed out. Instead, someone else is appointed to fill out the remaining time. Greenspan was so appointed to fill out remainder of Paul Volcker’s term at the same time he was appointed as board chairman to succeed Volcker.
No governor can serve more than one full 14-year term. A person may be appointed, however, to fill out several years of someone else’s unexpired term and then be reappointed to his or her own full 14-year term. In theory, someone could serve a total of more than 27 years on the board, 13-plus years of an unexpired term and another 14.
Greenspan served out nearly five years of Volcker’s term before 1992, when President George H.W. Bush appointed him to his own full 14-year term as governor and to another four-year term as chair. The term as governor expires in January 2006, and Greenspan will have to step down, despite the fact that he will be less than halfway through this latest separate appointment as chair.
It is possible for someone whose four-year term as chair has elapsed but who still has part of a 14-year term as governor left to remain on the board as an ordinary voting member. Only Marriner Eccles, who was the first chairman of the board, has ever done this. That decision and Eccles’ petulant behavior in his remaining time on the board did much to tarnish a distinguished record.
Legally, chairmen such as Greenspan, Volcker and Arthur Burns are only first among equals on the board. They and vice chairs, such as the current incumbent, Roger Ferguson, have additional responsibilities but little additional authority. In practice, the chair can wield considerable power, though much less than the general public assumes. But that is a topic for another column.
© 2004 Edward Lotterman
Chanarambie Consulting, Inc.