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provided by Research Papers in Economics FEDERALRESERVE After Greenspan BY ANDREW FOERSTER

Choosing the Next hen Alan Greenspan’s term Greenspan Fed has succeeded. The ends on Jan. 31, 2006, he will decisionmaking process during the Chairman of the Whave served as Chairman of Greenspan era has become more trans- the Board of Governors of the Federal parent over time, but there is still some Federal Reserve Reserve System for 18 years and five uncertainty about how the Fed will months. That is the second-longest build on its recent success. Will tenure in the Fed’s history, just four Greenspan’s successor move more in EDITOR’S NOTE: As this issue went months shorter than the one served by the direction of rules-based decision- to press, President Bush nominated William McChesney Martin from 1951 making, such as adopting an inflation Ben Bernanke, chairman of the Council to 1970. target, or maintain the more discre- Greenspan has earned a reputation tionary approach of recent years? of Economic Advisers, to succeed as a deft handler of monetary policy. The process for choosing a new Alan Greenspan. Confirmation hearings His era coincided with several signifi- chair is itself both discretionary and are pending. cant economic shocks, including the rules-bound. It involves input from the stock market crash in 1987, the terrorist executive and legislative branches of attacks on Sept. 11, 2001, recessions in government, similar to the appoint- the early 1990s and the early 2000s, and ment procedure for many other booms in the stock market and now the government posts. The Federal Reserve housing market. His success in navigat- Act (FRA) of 1913, which established ing those and other pitfalls has helped the Federal Reserve System, dictates Alan Greenspan him gain popularity outside of the usual who is eligible for positions on the August 1987 – January 2006 realm of Fed watchers. All types of Board of Governors, their term limits, media monitor his Congressional testi- and the rules for appointing the chair of mony and various speeches, the likes of the Federal Reserve. Ultimately, howev- which produced now-famous phrases er, the new Chairman can be virtually like “irrational exuberance.” anybody. The nominee’s background, Whoever his successor turns out to qualifications, and economic outlook be will have a difficult act to follow. are largely the choice of the appointing Markets are now accustomed to the President. policies that the Greenspan Fed has pursued. There is general confidence Appointing a Governor that the Fed will keep the economy in The FRA declares, “The Board of good order. At the same time, it is diffi- Governors of the Federal Reserve cult to articulate precisely why the System ... shall be composed of seven

Paul A. Volcker G. William Miller Arthur F. Burns William McChesney Martin, Jr. August 1979 – August 1987 March 1978 – August 1979 February 1970 – January 1978 April 1951 – January 1970 PHOTOGRAPHY: BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM/BRITT LECKMAN OF THE FEDERAL RESERVE OF GOVERNORS BOARD PHOTOGRAPHY:

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members, to be appointed by the within 15 days of Senate confirmation, that the person must be a member of President, by and with the advice and the appointee must take the oath of the Board of Governors. In theory, this consent of the Senate.” In this manner, office, and then the term begins. requirement might suggest that only governorships are similar to many other Governors are appointed to 14-year people with experience on the Board governmental positions that require the terms, each of which begins on Feb. 1 of can be elevated to Chairman. Senate to confirm a presidential even-numbered years. Consequently, Historically, this has not been true, appointment. the terms cycle, with a different term though, as candidates have normally Usually, because Governors serve ending every two years. The fact that been simultaneously appointed as until the end of their term or give many Governors do not fill their entire Governor and Chairman. advance notice of their resignation, term means that nominations have to In addition to the normal 14-year the President is able to give some occur more often than once every two term limit that applies to all Governors, thought into the nomination before years. Instead of a new term beginning the chair is appointed to four-year there is a vacancy. This is the case with with a new appointment, if a Governor terms. Unlike the longer terms applied Greenspan’s pending retirement, since resigns during his term, a new nominee to Governors, the four-year term for it was common knowledge that he simply replaces the outgoing Governor the chair has no set starting and ending could not serve beyond January 2006. and keeps serving the unfulfilled term. date — the four years begin as soon Occasionally, a Governor will decide If the term ends, the nominee can be as the chair takes office. The Chairman to resign on a given date, which creates selected for a new term if the President can serve multiple four-year terms; the a vacancy if a replacement has yet chooses to keep the Governor on the only restriction is that he must to be appointed. Currently, for Board. This means that the term limit remain a Governor. Greenspan was example, the positions held by former applies only to the Governor’s own first appointed Chairman in 1987, Govs. Ben Bernanke and Edward term; Governors themselves can actual- and his fifth and current term began Gramlich remain unfilled. As a ly serve longer than 14 years. Chairman June 19, 2004. result, the President may have varying Greenspan has served for 18 years by The procedure to appoint the time frames to find replacements. The spending the first four serving the end chair of the Board of Governors works administration can look anywhere of a different term, and then being exactly the same as for appointing for possible nominees for Governor appointed to his own term that began Governors. The nominee has a hearing positions. In the past, nominees have in 1992. in the Senate and then is approved by a come from banking, government, aca- The Governors’ 14-year term limit majority vote of that body. If the nomi- demia, and from within the Federal ranks among the longest in U.S. govern- nee for the chair position is Reserve System. ment. These lengthy terms are intended simultaneously chosen for a Governor The FRA states: “In selecting the to help the Fed preserve its independ- position, he goes through the process members of the Board, not more than ence from the political process. only once, although presumably with one of whom shall be selected from any Governors are free to pursue what they increased scrutiny. one Federal Reserve district, the feel is the best policy for the economy Previous chairmen have made a President shall have due regard to a fair even if those policies conflict with what custom of offering their resignation representation of the financial, agricul- elected officials might want. In a world upon the election of a new President. tural, industrial, and commercial with less independence for the Fed, the This tradition allows the President interests, and geographical divisions of President might threaten Governors to appoint a new chair upon the country.” Furthermore, the individ- with removal or withholding of their entering office, one with similar priori- ual may not hold other employment reappointment if the Fed refused to ties. However, while it is customary while serving as a Governor. help the administration. to offer the resignation, the President After the administration chooses a For example, the President may is not under any obligation to accept nominee, the process moves to the want a large short-term monetary stim- the offer. Greenspan, for example, Senate, where the nominee appears ulus right before an election, and if the although appointed initially by before the Committee on Banking, Governors weren’t independent of Reagan, has kept his position during Housing, and Urban Affairs. The nomi- presidential control, they might oblige both Bush administrations, plus nee delivers a prepared statement, the demand. While the Governors gen- the change of party to the Clinton and then fields questions from the erally do not serve their entire term, the administration. members of the committee. The simple presence of lengthy terms helps process usually focuses on the nomi- remove the control of monetary policy The Evolution of Chairmen nee’s qualifications and a discussion of from the political sphere. The nature of individuals who have monetary policy or banking issues. become chairmen of the Board of Next, the entire Senate votes to con- Appointing a Chairman Governors has evolved since Charles firm the nomination, with a simple A simple qualification to become Hamlin became the first Chairman majority vote needed to pass. Finally, Chairman, as stipulated by the FRA, is in 1914. While his primary career

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was as a lawyer in Boston, Hamlin longest-serving Fed Chairman, served act effectively as Fed Chairman. tried unsuccessfully to get into from 1951 to 1970, and followed a path Although much of his career was politics, including two candidacies for in the financial world and corporate spent as a partner in the business Massachusetts’ governor, first in 1902 governance to the Fed. His meteoric consulting firm Townsend-Greenspan, and then in 1910. In 1913 he was rise started as a broker in St. Louis, after he also had been long active in appointed undersecretary of the which he moved to the New York Stock Republican politics, serving as Treasury by Woodrow Wilson, and then Exchange, where he eventually became Chairman of the Council of Economic appointed as a Federal Reserve president of the exchange at the age of Advisors for President Gerald Ford Governor and the first Chairman in 31. He left the exchange during World and Chairman of the National 1914. His tenure as Chairman was brief, War II, and was nominated for the Fed Commission on Social Security Reform ending in 1916, but he stayed on as a chairmanship in 1951. During his under President Reagan. As a result, Governor through 1936, a length tenure, Martin led the Fed into the Greenspan was viewed by many as more allowed before modern term limits modern era following the passage of a “team player” than Volcker, who were enacted. of the Treasury-Fed Accord, and gained in his later years had developed a Roy Young, who served as Chairman a reputation for pursuing monetary sometimes contentious relationship from 1927 to 1930, was the ultimate policy independent of the four adminis- with the Reagan administration. Fed insider. Originally a banker, Young trations that came and went while he In his 1987 book, Volcker: Portrait of became president of the Federal was Chairman. the Money Man, reporter William Reserve Bank of Minneapolis in 1919, The selection of Martin’s successor, Neikirk noted that in “the instant where he served until his appointment Arthur Burns, signified a shift in the analysis that followed Greenspan’s as Governor and Chairman in 1927. type of person who would be tapped selection, it was often suggested After overseeing the Fed during the for Chairman of the Board of that he would not be as tough as stock market crash in 1929, Young Governors. While his predecessors Volcker when the White House put resigned the chairmanship and his had been bankers and politicians, the pressure on and that he would, in Governor position in 1930, and prompt- Burns was an economist by training. an election year, expand the money ly took the position of president He had served on President Dwight supply to take care of whoever the of the Federal Reserve Bank of Boston. Eisenhower’s Council of Economic Republican presidential nominee is.” He returned to the private banking Advisors from 1953 to 1956, and also This, of course, proved to be untrue. sector in 1942 after holding three helped pioneer studies of the business Just four years later, the Greenspan of the most important positions in the cycle with Wesley Mitchell at Fed was widely blamed by Republican Federal Reserve System for 23 years. the National Bureau of Economic politicians for costing President While Hamlin was a politician and Research. The famous monetary econ- Bush re-election by not aggressively Young a banker, Marriner Eccles, who omist Milton Friedman was Burns’ cutting interest rates during the served as Chairman from 1934 to 1948, student at Rutgers University in the 1991 recession. was a combination politician and 1930s, though Friedman would later banker. Eccles started as a private heavily criticize the Burns Fed for its The Post-Greenspan Fed banker in Utah, but when the Great “stop-go” policies that brought on dou- Greenspan’s successor may continue Depression hit, he became convinced ble-digit inflation. the trend away from bankers toward that fiscal policy was needed to help Paul Volcker, who preceded economists. Early chairmen such as the economy. So he moved to the Greenspan, jumped around several Eccles and Martin were bankers by Treasury Department, where he helped times during his career, including stints training, while Burns, Volcker, and President Franklin Roosevelt and at Chase Manhattan, the Treasury Greenspan can generally be thought of Congress draft the Emergency Banking Department, and then president of the as business economists. Some of the Act of 1933, the Federal Housing Act of Federal Reserve Bank of New York. popular names in the news media for 1934, the Glass-Steagal Act of 1933 that From his position at the New York Fed, possible successors are academic econ- created the Federal Deposit Insurance he was nominated by President Jimmy omists. Such a selection would move Corporation, and the Banking Act of Carter in 1979 to become Chairman. the position even more in favor of 1935, which restructured the Federal The Volcker Fed began the long road people with rigorous theoretical back- Reserve System. back from high and erratic inflation to a grounds. In 1935, Eccles was appointed period of credibility in the Fed’s fight Greenspan has succeeded with a Chairman of the Board of Governors, against rising prices. healthy combination of grounded where he served until 1948. He was not Volcker served two terms as Fed practicality and theory. It will be up to reappointed as Chairman by President Chairman, before resigning in August his successor to mix the two and apply Harry Truman, but he retained his posi- of 1987. Following his departure, some the newest insights of monetary tion as Governor until 1951. questioned whether Alan Greenspan economics to the real world issues that William McChesney Martin, the had the political independence to face the Board of Governors. RF

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