By locating the duties related to the execution of monetary policy at the New York Fed, the System gains a number of benefits. These include the New York Fed’s ability to develop expertise in and understanding of the broad spectrum of financial markets and institutions, and its access to a deep pool of specialized financial talent in the place where it is most concentrated. The New York Fed’s institutional knowledge and experience in financial markets and its related disciplines are a critical input at all times, but never more so than during periods of duress. This was evidenced during the financial crisis, when the New York Fed’s unique insights and expertise helped the Federal Reserve respond quickly and effectively to unfolding events. The authors who crafted the Federal Reserve Act such as Carter Glass – assisted by H. Parker Willis – deliberately created a central bank structure that fits the U.S. political system, with a series of important checks and balances – between Washington and the rest of the country, between Washington and New York, and with respect to the role of the federal government versus the private sector. These checks and balances exist to ensure that the central bank acts in the broadest interests of the nation, and is appropriately insulated from short-term political pressures and considerations. In this construction, New York does have a special role, but one that stems from where it sits, in New York City, the nation’s most important financial center.
At that point, a bank under duress had to either close its doors or quickly sell assets. Of course, either action worked to intensify the panic and to increase the stress on the economy. The Federal Reserve was established so that there would be a lender of last resort that could lend against high-quality collateral and provide a reliable and elastic currency. 2 The knowledge that such a lender of last resort existed reduced considerably the incentives for depositors to race to their banks to make withdrawals at the first sign of trouble. 3 At that time, the provision of an elastic currency was especially important because the agricultural sector represented a significant proportion of the U.S. economy. As a result, the demand for credit increased significantly each fall when farmers incurred the costs associated with harvesting their crops. Prior to the establishment of the Federal Reserve, accommodating this seasonal demand necessitated a flow of currency and credit from the major financial markets such as New York and Chicago that put upward pressure on interest rates. With its ability to provide an elastic currency, the Federal Reserve would be able to dampen such seasonal swings in interest rates. At its inception, the Federal Reserve differed from central banks in Europe in that it was decentralized. The design reflected long-standing concerns in our country about the concentration of power in a single authority. These concerns are reflected in the federated system established by the Constitution in 1787.