A Well-Designed Institution

Over the years, there have been changes in the Fed's structure to improve its independence, credibility, accountability and transparency. These changes have led to a better institutional design that makes U.S. policy credible and based on sound economic reasoning, as opposed to politics. In times of financial and economic crisis, there is a tendency to reexamine the structure of the Federal Reserve System. To the uninformed observer, the Fed's structure is in many ways mind-boggling. In particular, it seems counterintuitive that, in a democracy, the central bank should have independence from Congress. Yet, this independence is the result of Congress trying to avoid making monetary policy mistakes for political gain. Of course, accountability of public policymakers is a fundamental principle in a democracy. It is the tension between independence and accountability that led to the design of the Federal Reserve, and it has been an ever-present force in U.S. monetary policy for the last century.

In the end, the Federal Reserve System is a well-designed institution, created by Congress, that keeps the government from relying on the printing press to finance public spending. It is independent, credible, accountable and transparent. It is a nearly 100-year-old success story that has served the nation well.

Part 1: The Power of Money

Governments have a great power that no one else in the economy has—the ability to print money. This power, however, brings with it a dangerous temptation.

Part 2: Central Bank Independence and Inflation

To minimize the "inflation bias" of of discretionary monetary policymaking, many governments have decided to give their central bank legal independence.

Part 3: A Series of Checks and Balances

While the Federal Reserve was created to run monetary policy, it was given a complicated system of checks and balances.

Part 4: Will the Financial Crisis Further Limit the Fed's Independence? Should It?

As part of the Fed's accountability to the public, senior Federal Reserve officials testify regularly before Congress.

Part 5: A Well-Designed Institution

Over the years, there have been changes in the Fed's structure to improve its independence, credibility, accountability and transparency.

Credits

• Christopher J. Waller, Author
• Kevin L. Kliesen, Contributor
• Steve Greene, Editor
• Brian Ebert, Designer
• Barb Passiglia, Production
• Harry Campbell, Illustrator