Restructuring public institutions in the face of changing needs is hard. Politics are such that abolishing an existing government institution is nigh impossible.
In sharply reducing its check-processing infrastructure, the Federal Reserve seems an exception to that general rule. The Fed has not yet weathered all the challenges to its historical structure posed by an evolving economy.
People are writing fewer checks as they use electronic bill payment options and debit cards more. Just 25 years ago, checks composed 86 percent of all noncash transactions. Now they are at 45 percent and dropping. In absolute volumes, checks paid have dropped from 42 billion in 2000 to under 37 billion transactions in 2003.
Declining volumes are not the only factor reducing the need for check-processing facilities. Increasingly, checks are “truncated.” The paper check is digitized, front and back, when deposited by the payee. It is then destroyed and never returned to the writer. Once digitized, further processing is computerized and requires fewer workers.
The Fed handles less than half of this declining business. Many checks are deposited in the same bank on which they are drawn and thus require no outside clearing. Large banks clear for smaller banks and groups of banks have their own regional facilities.
Both private banks and the Fed are reducing their check facilities. The Fed has 12 district banks, including one in Minneapolis, and another 25 branches in cities such as Detroit and Baltimore. While branches were originally created to make it easy for commercial bankers to get “discount window” Fed loans in an era of steam locomotives, check clearing has been their main activity for decades.
Some branches are now reduced to small storefront operations with tiny staffs. At the 12 district banks, floor space constructed for specialized check-clearing operations stands empty and check-processing employee rolls are shrinking apace.
Congress understands the changing environment, and there’s little political opposition to the Fed’s downsizing.
The shrinking of Fed facilities raises a broader question. Do we really need 12 districts and 25 additional branches? These were initially created in a historic political compromise to allay the fears of concentrated power of a single central bank based in New York or Washington, D.C. Moreover, the limitations of trains and telegraphs created practical reasons for a decentralized system.
The primary monetary policy tool in 1913 – discount window loans from the Fed to commercial banks that needed additional funds for lending – has largely dried up. The money supply is now expanded and contracted by the Fed buying and selling government bonds.
If we don’t need 37 banks and branches for discount lending or check clearing, do we need them at all? I think the Fed’s decentralized structure produces better monetary policy than we would have with only the Board of Governors in Washington. But that is hard to prove with objective evidence, and is best left to another column.
© 2004 Edward Lotterman
Chanarambie Consulting, Inc.