INSTITUTIONAL PRESERVATION AT THE FEDERAL RESERVE

Abstract

This paper explains and presents supporting evidence for the hypothesis that institutional preservation is the central motive for Federal Reserve decision makers' behavior. Welfare maximization can, under certain conditions (i.e., via a vote maximization motive or the direct attribution of socially desirable goals), be a part of the preservation hypothesis, but it is inconsistent with substantial parts of Federal Reserve behavior. This paper presents evidence of this inconsistent behavior that the preservation hypothesis can explain. Such evidence includes opposing better coordination with voters'choices, creating an internally authorized fund that makes foreign loans without congressional authorization, opposing better monetary control procedures, organizing lobbying campaigns to defeat legislation to audit the Federal Reserve and make its meetings open to public scrutiny, failing to take minutes after legislation was enacted, and impairing information dispersal about funding for the Watergate burglars. The paper analyzes, in terms of institutional preservation, the results of recent research on the relationship of central banks' independence from short‐run political forces and their anti‐inflationary monetary policies.