According to economist Alan Meltzer of Carnegie Mellon University, who has written about the history of the Federal Reserve: Tension between the [Federal Reserve] Board and the reserve banks began before the System opened for business. . . . [Paul] Warburg described the problem. Dominance by the Board would allow political considerations to dominate decisions about interest rates. Dominance by the reserve banks “would . . . reduce the Board to a position of impotence.” Paul Warburg was one of President Wilson’s initial appointments when the Federal Reserve Board began operations in 1914.
a. Why did Congress set up a system that had this tension between the Reserve Banks and the Federal Reserve Board?
b. Has the tension been resolved in the modern Fed? If so, how?
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