Andrew Foerster

English

Research Papers in Economics

W
hen Alan Greenspan’s term
ends on Jan. 31, 2006, he will
have served as Chairman of
the Board of Governors of the Federal
Reserve System for 18 years and five
months. That is the second-longest
tenure in the Fed’s history, just four
months shorter than the one served by
William McChesney Martin from 1951
to 1970.
Greenspan has earned a reputation
as a deft handler of monetary policy.
His era coincided with several signifi-
cant economic shocks, including the
stock market crash in 1987, the terrorist
attacks on Sept. 11, 2001, recessions in
the early 1990s and the early 2000s, and
booms in the stock market and now the
housing market. His success in navigat-
ing those and other pitfalls has helped
him gain popularity outside of the usual
realm of Fed watchers. All types of
media monitor his Congressional testi-
mony and various speeches, the likes of
which produced now-famous phrases
like “irrational exuberance.”
Whoever his successor turns out to
be will have a difficult act to follow.
Markets are now accustomed to the
policies that the Greenspan Fed has
pursued. There is general confidence
that the Fed will keep the economy in
good order. At the same time, it is diffi-
cult to articulate precisely why the
Greenspan Fed has succeeded. The
decisionmaking process during the
Greenspan era has become more trans-
parent over time, but there is still some
uncertainty about how the Fed will
build on its recent success. Will
Greenspan’s successor move more in
the direction of rules-based decision-
making, such as adopting an inflation
target, or maintain the more discre-
tionary approach of recent years? 
The process for choosing a new
chair is itself both discretionary and
rules-bound. It involves input from the
executive and legislative branches of
government, similar to the appoint-
ment procedure for many other
government posts. The Federal Reserve
Act (FRA) of 1913, which established
the Federal Reserve System, dictates
who is eligible for positions on the
Board of Governors, their term limits,
and the rules for appointing the chair of
the Federal Reserve. Ultimately, howev-
er, the new Chairman can be virtually
anybody. The nominee’s background,
qualifications, and economic outlook
are largely the choice of the appointing
President.
Appointing a Governor
The FRA declares, “The Board of
Governors of the Federal Reserve
System... shall be composed of seven
2 Region Focus • Fall 2005
FEDERALR ESERVE
After Greenspan
BY ANDREW FOERSTER
Choosing the Next
Chairman of the
Federal Reserve
EDITOR’S NOTE: As this issue went 
to press, President Bush nominated 
Ben Bernanke, chairman of the Council 
of Economic Advisers, to succeed 
Alan Greenspan. Confirmation hearings
are pending.
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G. William Miller
March 1978 – August 1979
Arthur F. Burns
February 1970 – January 1978
William McChesney Martin, Jr.
April 1951 – January 1970
Alan Greenspan
August 1987 – January 2006
Paul A. Volcker
August 1979 – August 1987
RF Fall2005 v10 p2.ps - 10/24/2005 3:48 PMmembers, to be appointed by the
President, by and with the advice and
consent of the Senate.”  In this manner,
governorships are similar to many other
governmental positions that require the
Senate to confirm a presidential
appointment.
Usually, because Governors serve
until the end of their term or give
advance notice of their resignation, 
the President is able to give some
thought into the nomination before
there is a vacancy. This is the case with
Greenspan’s pending retirement, since
it was common knowledge that he
could not serve beyond January 2006.
Occasionally, a Governor will decide 
to resign on a given date, which creates
a vacancy if a replacement has yet 
to be appointed. Currently, for 
example, the positions held by former
Govs. Ben Bernanke and Edward
Gramlich remain unfilled. As a 
result, the President may have varying
time frames to find replacements. The
administration can look anywhere 
for possible nominees for Governor
positions. In the past, nominees have
come from banking, government, aca-
demia, and from within the Federal
Reserve System.
The FRA states: “In selecting the
members of the Board, not more than
one of whom shall be selected from any
one Federal Reserve district, the
President shall have due regard to a fair
representation of the financial, agricul-
tural, industrial, and commercial
interests, and geographical divisions of
the country.” Furthermore, the individ-
ual may not hold other employment
while serving as a Governor.
After the administration chooses a
nominee, the process moves to the
Senate, where the nominee appears
before the Committee on Banking,
Housing, and Urban Affairs. The nomi-
nee delivers a prepared statement, 
and then fields questions from the
members of the committee. The
process usually focuses on the nomi-
nee’s qualifications and a discussion of
monetary policy or banking issues.
Next, the entire Senate votes to con-
firm the nomination, with a simple
majority vote needed to pass. Finally,
within 15 days of Senate confirmation,
the appointee must take the oath of
office, and then the term begins. 
Governors are appointed to 14-year
terms, each of which begins on Feb. 1 of
even-numbered years. Consequently,
the terms cycle, with a different term
ending every two years. The fact that
many Governors do not fill their entire
term means that nominations have to
occur more often than once every two
years. Instead of a new term beginning
with a new appointment, if a Governor
resigns during his term, a new nominee
simply replaces the outgoing Governor
and keeps serving the unfulfilled term.
If the term ends, the nominee can be
selected for a new term if the President
chooses to keep the Governor on the
Board. This means that the term limit
applies only to the Governor’s own
term; Governors themselves can actual-
ly serve longer than 14 years. Chairman
Greenspan has served for 18 years by
spending the first four serving the end
of a different term, and then being
appointed to his own term that began 
in 1992.
The Governors’ 14-year term limit
ranks among the longest in U.S. govern-
ment. These lengthy terms are intended
to help the Fed preserve its independ-
ence from the political process.
Governors are free to pursue what they
feel is the best policy for the economy
even if those policies conflict with what
elected officials might want. In a world
with less independence for the Fed, the
President might threaten Governors
with removal or withholding of their
reappointment if the Fed refused to
help the administration. 
For example, the President may
want a large short-term monetary stim-
ulus right before an election, and if the
Governors weren’t independent of
presidential control, they might oblige
the demand. While the Governors gen-
erally do not serve their entire term, the
simple presence of lengthy terms helps
remove the control of monetary policy
from the political sphere.
Appointing a Chairman
A simple qualification to become
Chairman, as stipulated by the FRA, is
that the person must be a member of
the Board of Governors. In theory, this
requirement might suggest that only
people with experience on the Board
can be elevated to Chairman.
Historically, this has not been true,
though, as candidates have normally
been simultaneously appointed as
Governor and Chairman. 
In addition to the normal 14-year
term limit that applies to all Governors,
the chair is appointed to four-year
terms. Unlike the longer terms applied
to Governors, the four-year term for
the chair has no set starting and ending
date — the four years begin as soon 
as the chair takes office. The Chairman
can serve multiple four-year terms; the 
only restriction is that he must 
remain a Governor. Greenspan was 
first appointed Chairman in 1987, 
and his fifth and current term began
June 19, 2004.
The procedure to appoint the 
chair of the Board of Governors works
exactly the same as for appointing
Governors. The nominee has a hearing
in the Senate and then is approved by a
majority vote of that body. If the nomi-
nee for the chair position is
simultaneously chosen for a Governor
position, he goes through the process
only once, although presumably with
increased scrutiny.
Previous chairmen have made a 
custom of offering their resignation
upon the election of a new President.
This tradition allows the President 
to appoint a new chair upon 
entering office, one with similar priori-
ties. However, while it is customary 
to offer the resignation, the President 
is not under any obligation to accept 
the offer. Greenspan, for example,
although appointed initially by 
Reagan, has kept his position during
both Bush administrations, plus 
the change of party to the Clinton
administration.
The Evolution of Chairmen
The nature of individuals who have
become chairmen of the Board of
Governors has evolved since Charles
Hamlin became the first Chairman 
in 1914. While his primary career 
Fall 2005 • Region Focus 3
RF Fall2005 v10 revisedpg3.ps - 10/18/2005 9:51 AMwas as a lawyer in Boston, Hamlin 
tried unsuccessfully to get into 
politics, including two candidacies for
Massachusetts’ governor, first in 1902
and then in 1910. In 1913 he was
appointed undersecretary of the
Treasury by Woodrow Wilson, and then
appointed as a Federal Reserve
Governor and the first Chairman in
1914. His tenure as Chairman was brief,
ending in 1916, but he stayed on as a
Governor through 1936, a length
allowed before modern term limits
were enacted.
Roy Young, who served as Chairman
from 1927 to 1930, was the ultimate 
Fed insider. Originally a banker, Young
became president of the Federal
Reserve Bank of Minneapolis in 1919,
where he served until his appointment
as Governor and Chairman in 1927.
After overseeing the Fed during the
stock market crash in 1929, Young
resigned the chairmanship and his
Governor position in 1930, and prompt-
ly took the position of president 
of the Federal Reserve Bank of Boston.
He returned to the private banking 
sector in 1942 after holding three 
of the most important positions in the
Federal Reserve System for 23 years.
While Hamlin was a politician and
Young a banker, Marriner Eccles, who
served as Chairman from 1934 to 1948,
was a combination politician and
banker. Eccles started as a private
banker in Utah, but when the Great
Depression hit, he became convinced
that fiscal policy was needed to help 
the economy. So he moved to the
Treasury Department, where he helped
President Franklin Roosevelt and
Congress draft the Emergency Banking
Act of 1933, the Federal Housing Act of
1934, the Glass-Steagal Act of 1933 that
created the Federal Deposit Insurance
Corporation, and the Banking Act of
1935, which restructured the Federal
Reserve System. 
In 1935, Eccles was appointed
Chairman of the Board of Governors,
where he served until 1948. He was not
reappointed as Chairman by President
Harry Truman, but he retained his posi-
tion as Governor until 1951.
William McChesney Martin, the
longest-serving Fed Chairman, served
from 1951 to 1970, and followed a path
in the financial world and corporate
governance to the Fed. His meteoric
rise started as a broker in St. Louis, after
which he moved to the New York Stock
Exchange, where he eventually became
president of the exchange at the age of
31. He left the exchange during World
War II, and was nominated for the Fed
chairmanship in 1951. During his
tenure, Martin led the Fed into the
modern era following the passage 
of the Treasury-Fed Accord, and gained
a reputation for pursuing monetary 
policy independent of the four adminis-
trations that came and went while he
was Chairman.
The selection of Martin’s successor,
Arthur Burns, signified a shift in the
type of person who would be tapped
for Chairman of the Board of
Governors. While his predecessors
had been bankers and politicians,
Burns was an economist by training.
He had served on President Dwight
Eisenhower’s Council of Economic
Advisors from 1953 to 1956, and also
helped pioneer studies of the business
cycle with Wesley Mitchell at 
the National Bureau of Economic
Research. The famous monetary econ-
omist Milton Friedman was Burns’
student at Rutgers University in the
1930s, though Friedman would later
heavily criticize the Burns Fed for its
“stop-go” policies that brought on dou-
ble-digit inflation.
Paul Volcker, who preceded
Greenspan, jumped around several
times during his career, including stints
at Chase Manhattan, the Treasury
Department, and then president of the
Federal Reserve Bank of New York.
From his position at the New York Fed,
he was nominated by President Jimmy
Carter in 1979 to become Chairman.
The Volcker Fed began the long road
back from high and erratic inflation to a
period of credibility in the Fed’s fight
against rising prices. 
Volcker served two terms as Fed
Chairman, before resigning in August 
of 1987. Following his departure, some
questioned whether Alan Greenspan
had the political independence to 
act effectively as Fed Chairman.
Although much of his career was 
spent as a partner in the business 
consulting firm Townsend-Greenspan,
he also had been long active in
Republican politics, serving as
Chairman of the Council of Economic
Advisors for President Gerald Ford 
and Chairman of the National
Commission on Social Security Reform
under President  Reagan. As a result,
Greenspan was viewed by many as more
of a “team player” than Volcker, who 
in his later years had developed a 
sometimes contentious relationship
with the Reagan administration. 
In his 1987 book, Volcker: Portrait of
the Money Man, reporter William
Neikirk noted that in “the instant
analysis that followed Greenspan’s
selection, it was often suggested 
that he would not be as tough as
Volcker when the White House put
the pressure on and that he would, in
an election year, expand the money
supply to take care of whoever the
Republican presidential nominee is.”
This, of course, proved to be untrue.
Just four years later, the Greenspan 
Fed was widely blamed by Republican
politicians for costing President 
Bush re-election by not aggressively
cutting interest rates during the 
1991 recession.
The Post-Greenspan Fed
Greenspan’s successor may continue
the trend away from bankers toward
economists. Early chairmen such as
Eccles and Martin were bankers by
training, while Burns, Volcker, and
Greenspan can generally be thought of
as business economists. Some of the
popular names in the news media for
possible successors are academic econ-
omists. Such a selection would move
the position even more in favor of 
people with rigorous theoretical back-
grounds. 
Greenspan has succeeded with a
healthy combination of grounded 
practicality and theory. It will be up to
his successor to mix the two and apply
the newest insights of monetary 
economics to the real world issues that
face the Board of Governors.                RF
4 Region Focus • Fall 2005
RF Fall2005 v10 revisedpg4.ps - 10/18/2005 10:32 AM

Federal Reserve : After Greenspan : choosing the next Chairman of the Federal Reserve

http://www.richmondfed.org/publications/research/region_focus/2005/fall/pdf/federal_reserve.pdf

Federal Reserve : After Greenspan : choosing the next Chairman of the Federal Reserve

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Research Papers in Economics