Dodd Targets Banker Influence Over New York Fed

(MoneyWatch)  One element of Sen. Chris Dodd's revised financial reform package that may not draw much attention is, in fact, a measuring stick for change. The bill, scheduled to be released this afternoon, is expected to include a ban on bank officers sitting on the board of directors of the New York Federal Reserve.

That means JPMorgan Chase (JPM) CEO Jamie Dimon, arguably the country's most influential financial executive and a diehard opponent of reform, would have to leave the panel, along with two other industry executives. More broadly, the rule could work to curb bankers' longstanding influence over the Federal Reserve's district banks.

Although the Fed was founded nearly a century ago, disputes over who controls the nation's money supply and credit date back to the founding of the U.S., and certainly to the creation of the First Bank of the United States by Alexander Hamilton in 1791. Southern planters and businessmen vied for influence with mostly Northern, urban financial interests. New York bankers later helped sink the First Bank, largely for competitive reasons, culminating in President Andrew Jackson's move in the 1830s to yank the charter of of the Second Bank of the U.S.

Flash forward to 1913. The Federal Reserve Act, which established the Fed system, cemented banks' power, especially that of large New York institutions. It shunted aside concerns over the availability of credit for farmers and instead focused on meeting the needs of financial firms, including creation of a more flexible currency. In an important shift, the bill also transferred chief responsibility for stopping financial crises from New York banks to the newly created reserve institutions; that liberated banks to focus on more profitable endeavors.

Writes historian Lawrence Goodwin in his definitive book on the period, The Populist Moment: "The measure not only centralized and rationalized the nation's financial system in ways harmonious with the preferences of the New York banking community, its method of functioning also removed the bankers themselves from the harsh glare of public view. Popular attention thenceforth was to focus upon 'the Fed,' not upon the actions of New York commercial bankers."

So from the outset, the strongest supporters of central banking in this country tended to be major banking interests. Opponents were largely (though by no means entirely) agrarian, with a traditionally Jeffersonian suspicion of concentrated financial might.

The latest financial crisis has of course reawakened that spirit. Yet the final shape of reform remains very much in doubt, as banking interests, and their paid hands on Capitol Hill, circle the wagons. Watch carefully to see if the New York Fed ban on bankers remains in the Senate bill as debate heats up.

Image courtesy of Flickr user Fromthe olive