The U.S. Federal Reserve is 12 banks, not one. Each serves a different region of the country and brings insights from that region into the process of formulating nationwide monetary policy. Each also provides a variety of banking services to banks in its region and engages with business leaders in that region. This decentralized structure has long been and remains central to how the Federal Reserve works, yet it has been under-theorized in the literature about the Federal Reserve and regionalism generally.

In a new essay, we seek to give that structure the attention it deserves. The essay, “Regionalism and the Federal Reserve,” explains the importance of the 12 Federal Reserve Banks and how the design of the Federal Reserve system represents an unappreciated form of regionalism – one that allows for uniform policymaking informed by regional and otherwise diverse insights. We also explain why certain features of this decentralized system no longer make sense in the integrated financial system of the 21^st century, and we propose some tweaks to better align the allocation of authority with modern realities.

Although federalism gets far more attention, regionalism is a longstanding and core characteristic of federal administration. The United States is a large and diverse country. Governance structures that empower regional bodies help to accommodate the different needs and experiences of people across the country. Understanding regionalism is particularly vital for making sense of the current moment, when images of the administrative state often belie the way administration is deeply rooted outside the beltway and in communities across the country. The Federal Reserve is a prime example of how this actually works and reveals how often there is a gap between perception and the realities of today’s administration.

The essay connects the Federal Reserve system and the literature on regionalism by distinguishing among three types of regionalism: regional policy variation, regional policy formulation, and regional policy implementation. Regional policy variation involves government bodies carrying out federal programs in different ways and in different regions. This is the most common form of regionalism, and it is important in many domains. It also still lingers in the laws governing the Federal Reserve.

Second and less commonly appreciated is regional policy formulation, the development of national policies while accounting for the views of parties informed by specific regions, yet within the executive rather than legislative branch. Regional voices can help to counter groupthink and incorporate more diverse and diffuse perspectives in shaping federal policy.  The way the Federal Reserve makes monetary policy is exemplary. Prior to 1935, each regional Federal Reserve Bank made its own decisions about buying and selling financial assets like Treasury securities, but those decisions had obvious effects on other districts. In 1935, Congress recognized the need for a uniform policy on this front. Rather than simply shift these decisions to the Board of Governors – a seven-person body that consists entirely of persons who have been nominated by the president and confirmed by the Senate – Congress established the Federal Open Market Committee (FOMC).  All 12 reserve bank presidents and all seven board governors participate in FOMC meetings. All seven governors, the New York Fed President, and a rotating group of four other reserve bank presidents have a right to vote at these meetings. This not only gives the Federal Reserve Banks an official role in setting monetary policy, it also enhances their credibility in the myriad settings outside of FOMC meetings where much of the debate about monetary policy occurs.

The third type of regionalism is regional policy implementation. Just as the SEC, FDIC, FTC, and numerous other federal agencies carry out policies through congressionally authorized regional offices, the Fed implements policies in each region through the Federal Reserve Banks. The banks not only administer payment and lending services, but also facilitate cash distribution, check clearing, installation of in-formation technology, and research development at a regional level. Regional implementation enhances the Fed’s legitimacy, produces economic insights specific to different parts of the nation, and may also help counter the groupthink that can take hold when policymakers all live and work in the same place.

In laying out these different forms of regionalism and mapping the Federal Reserve onto them, our essay provides insight into how the Federal Reserve should be reformed to protect its decentralized character while still providing uniformity and consistency when warranted. For example, we argue that the Federal Reserve Board should determine who can have a “master account” – a prerequisite for a host of Federal Reserve services – even if the reserve banks continue to operate those accounts and provide those services.

Our goal is not to provide a comprehensive account of how the Federal Reserve should be reformed. Rather, the essay shows how the Federal Reserve’s decentralized structure can promote democratic legitimacy, broadly construed. Eliminating some of the harms that arise from outdated aspects of the regionalism embodied in the Federal Reserve would go a long way to protecting the many benefits that accrue from its distinctive regional structure.

This post comes to us from Kathryn Judge, the Harvey J. Goldschmid Professor of Law at Columbia Law School, and Lev Menand, an associate professor of law at the law school. It is based on their recent essay, “Regionalism and the Federal Reserve Banks,” published in the University of Chicago Law Review and available here.