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Political Compromise and Bureaucratic Structure: The Political Origins of the Federal Reserve System

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  • Andrew C. Sobel

Abstract

What is the origin of the structural independence of the Federal Reserve System? Unlike existing explanations on central bank independence, we show that the structural independence of the Fed is not the result of intentional design but a product of compromise among disparate groups. Using agenda-constrained ideal point estimation techniques to estimate both the preferences of senators on key questions of Fed structure and the locations of alternative forms of the bill with respect to those preferences, we show that the structural features of the Fed in the final bill differed markedly from the original preferences of legislators representing competing groups. The result was a compromise that offered the prospect of significant independence for the new agency. The Fed case shows that political compromise can provide useful bureaucratic insulation when the short-term incentives of political principals promote unstable, self-seeking policy choices (JEL N41, N21). The Author 2008. Published by Oxford University Press on behalf of Yale University. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.

Suggested Citation

  • Andrew C. Sobel, 2009. "Political Compromise and Bureaucratic Structure: The Political Origins of the Federal Reserve System," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 25(2), pages 472-498, October.
    • Handle: RePEc:oup:jleorg:v:25:y:2009:i:2:p:472-498
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    File URL: http://hdl.handle.net/10.1093/jleo/ewn010
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    Cited by:

    1. Jordan, Jerry L. & Luther, William J., 2022. "Central bank independence and the Federal Reserve's new operating regime," The Quarterly Review of Economics and Finance, Elsevier, vol. 84(C), pages 510-515.
    2. Tai-Young Kim & Dongyoub Shin & Young-Chul Jeong, 2016. "Inside the “Hybrid” Iron Cage: Political Origins of Hybridization," Organization Science, INFORMS, vol. 27(2), pages 428-445, April.
    3. Jacob Bower-Bir & William Bianco & Nicholas D’Amico & Christopher Kam & Itai Sened & Regina Smyth, 2015. "Predicting majority rule: Evaluating the uncovered set and the strong point," Journal of Theoretical Politics, , vol. 27(4), pages 650-672, October.
    4. William Bianco & Christopher Kam & Itai Sened & Regina Smyth, 2014. "Party relevance and party survival in new democracies," International Area Studies Review, Center for International Area Studies, Hankuk University of Foreign Studies, vol. 17(3), pages 251-261, September.

    More about this item

    JEL classification:

    • N41 - Economic History - - Government, War, Law, International Relations, and Regulation - - - U.S.; Canada: Pre-1913
    • N21 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: Pre-1913

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