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Origins of the Federal Reserve System: International Incentives and the Domestic Free-rider Problem

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  • Broz, J. Lawrence

Abstract

The Federal Reserve System was established in 1913 to provide the public good of domestic financial system stability. Its main purpose was to safeguard the nation from banking panics and other economically costly financial disturbances. In this article, I explain the collective action behind the Federal Reserve Act by way of the joint products (selective incentives) model. The selective inducement that motivated lobbying for the Federal Reserve was the desire to internationalize usage of the U.S. dollar, a benefit restricted primarily to money-center bankers. Bankers internalized the costs of producing the Federal Reserve because the private gains associated with internationalizing the currency could not be disassociated from production of domestic financial stability. The article provides a road map of the joint products model and demonstrates empirically the supply technology that bound together the public and private goods of the Federal Reserve Act.

Suggested Citation

  • Broz, J. Lawrence, 1999. "Origins of the Federal Reserve System: International Incentives and the Domestic Free-rider Problem," International Organization, Cambridge University Press, vol. 53(1), pages 39-70, January.
    • Handle: RePEc:cup:intorg:v:53:y:1999:i:01:p:39-70_44
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    Cited by:

    1. Brousseau, Eric & Raynaud, Emmanuel, 2011. "“Climbing the hierarchical ladders of rules”: A life-cycle theory of institutional evolution," Journal of Economic Behavior & Organization, Elsevier, vol. 79(1), pages 65-79.
    2. Charles M. Kahn & Stephen F. Quinn & William Roberds, 2023. "The Fed and Its Shadow: A Historical View," Policy Hub, Federal Reserve Bank of Atlanta, vol. 2023(6), pages 1-32, October.
    3. Kevin Young & Stefano Pagliari, 2017. "Capital united? Business unity in regulatory politics and the special place of finance," Regulation & Governance, John Wiley & Sons, vol. 11(1), pages 3-23, March.
    4. Kapur, Devesh, 2002. "The Common Pool Dilemma of Global Public Goods: Lessons from the World Bank's Net Income and Reserves," World Development, Elsevier, vol. 30(3), pages 337-354, March.
    5. Andy Thorpe & Catherine Robinson, 2004. "When goliaths clash: US and EU differences over the labeling of food products derived from genetically modified organisms," Agriculture and Human Values, Springer;The Agriculture, Food, & Human Values Society (AFHVS), vol. 21(4), pages 287-298, January.
    6. Singleton,John, 2010. "Central Banking in the Twentieth Century," Cambridge Books, Cambridge University Press, number 9780521899093.
    7. Jose Ripoll, 2003. "National Appointments to Multinational Monetary Policy Making: A Role Conflict?," Macroeconomics 0301009, University Library of Munich, Germany.

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