Federal Reserve Structure, Economic Ideas, and Banking Policy During the “Quiet Period” in Banking

We evaluate the decentralized structure of the Federal Reserve System as a mechanism for generating and processing new ideas on banking policy in the 1950s and 1960s. We document that demand for research and analysis was driven by banking industry developments and legal changes that required the Federal Reserve and other banking regulatory agencies to develop guidelines for bank mergers. In response to these developments, the Board and the Reserve Banks hired industrial organization economists and young economists out of graduate school who brought in the leading theory of industrial organization at the time, which was the structure, conduct, and performance (SCP) paradigm. This flow of ideas into the Federal Reserve from academia paralleled the flow that was going on in monetary policy and macroeconomics at the time and contributed to the increased professionalization of research at the Federal Reserve. We document how several Reserve Banks, particularly Boston and Chicago, innovated by creating dissertation support programs, collecting specialized data, and creating the Bank Structure Conference, which became the clearinghouse for academic work on bank structure and later for bank risk and financial stability. We interpret these examples as illustrating an advantage that a decentralized central bank has in the production of knowledge.

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