Recently I left the Federal Reserve System for employment as a private-sector attorney after a career of 20 years at the Federal Reserve banks of New York and Cleveland. Throughout that time, it had become increasingly clear to me that policy makers and journalists in Washington hold peculiar notions about the governance and salary structures of the reserve banks.
The most common misconception arises from the mixed public-and-private character of the Federal Reserve System. The Federal Reserve Act of 1913 carefully and deliberately exempted system employees, including those at the Board of Governors in Washington, from the civil service laws and regulations that affect most federal employees. The act clearly leaves discretion over staff salary and benefit levels to the board.
Reserve bank presidents tend to be fairly well compensated by the civil service pay standards so widely followed in Washington, but they perform jobs that would be much more handsomely compensated in the private sector, where compensation packages for most comparable jobs would begin at the $500,000 level, even in regional banking markets. The highest reported reserve bank salary was paid in 1992, while E. Gerald Corrigan still was president of the New York bank. His reported salary was $257,700, and the next most highly paid president, at the San Francisco bank, earned $224,000 that year.
These might look like high salaries from a Washington per-spective -- where cabinet-rank officers earned about $133,000 in 1993 -- and for that reason politicians often make much of the reserve bank presidents' salaries.
Salary ComparisonYear Entity Employees Mean Salary Percent Increase'87 All Reserve banks 23,036 $25,519 - Board of Governors 1,400(*) 38,436 -'88 All Reserve banks 23,660 26,545 4.0% Board of Governors 1,425(*) 39,549 2.7'89 All Reserve banks 23,661 27,959 5.3 Board of Governors 1,450(*) 42,263 7.1'90 All Reserve banks 23,843 29,837 6.7 Board of Governors 1,475(*) 47,161 11.6'91 All Reserve banks 24,017 31,686 6.2 Board of Governors 1,570(*) 47,834 1.4'92 All Reserve banks 24,097 33,333 5.2 Board of Governors 1,600(*) 51,239 7.1'93 All Reserve banks 23,934 35,069 5.2 Board of Governors 1,695(*) 53,297 4.0
(*)Estimated
Source: Federal Reserve
The truth about reserve bank salaries is threefold.
First, the reserve bank presidents and a few of their senior officers might earn more than cabinet-level officials, but so do a lot of senior officers at the board and in the other federal bank supervisory agencies headquartered in Washington.
Second, under current budget guidelines followed at several reserve banks (if not most or all of them), outlays for increased board staff salaries and central automation staff salaries, which are assessed by the board on the reserve banks, must be offset by reduced outlays for reserve bank operations, including reduced reserve bank staff salaries. This creates a zerosum game in which the board's gain is the reserve bank's loss.
And, most of all, the arithmetic mean salaries of reserve banks' staffs are much lower than those of their counterparts in Washington or at the board, even taking into account cost-of-living differentials and purportedly different job skill levels. Lawyers, librarians, bank examiners, and automated systems professionals, for example, typically earn 40% less at regional reserve banks than at the board.
The purportedly larger number of low-level clerical employees at the reserve banks than at the board is a pathetically inadequate explanation of the overall results. (See table.)
Nominal gross domestic product in 1993 was 40.4% higher than in 1987. The average salaries of all reserve banks increased 37.4% during that period, while the average salaries of the board's staff increased 38.7%.
In 1993, the mean salary for New York, the highest reserve bank, was $42,587, and for San Francisco, the next highest, it was $38,216. The two lowest mean salaries were at St. Louis, $30,044, and Richmond, $30,266. The median of these average salaries was about $32,280. For presidents, the salaries, which varied by tenure as well as by region, ranged from $229,600 for San Francisco and $221,700 for Chicago, the two highest, to $159,600 for Richmond and $159,800 for Kansas City, the two lowest. The median president's salary was about $181,000.
By and large, the reserve banks' presidents, officers, and employees, with professional staffs drawn from the same national talent pools as the board's professional staff, work at least as hard as their counterparts at the board. One reason is that, since the time of Chairman Arthur Burns, the board's staff has reviewed the reserve banks' staff work in great detail, even going so far as to keep detailed files on individual reserve bank staff members.
Unfortunately, the reserve banks' staffs are provided no effective formal channels for responding to unfair or one-sided board reviews of their work, in this top-down-only review system. Often, the reviews provided by the board's staff are anonymous, which exacerbates negative reviews and inhibits effective rebuttals. This review system has predictable consequences that, over time, tend to widen the differentials between the reserve banks, on the one hand, and the board, on the other hand, in matters like staffing levels, outlays for equipment and facilities, and salaries.
If there is no serious intention on the part of anyone currently in power in Washington to rectify the power distributions that in turn affect salary and benefits distributions within the Federal Reserve System, then it would serve the interests of all but the highest-ranking reserve bank staffs to be formally declared civil servants as early as tomorrow morning. Nominally, new legislation would be required for this purpose. Lowly as the status of civil-service bureaucrats usually is in the grand scheme of things, such status would offer reserve bank staffs greater protection from political and ideological abuse, together with higher salary levels and more-certain benefits, than most reserve bank staffs currently enjoy.
I would prefer the opposite response: a sudden awakening to the abuses that centralized Federal Reserve power in Washington creates, a renewed congressional determination to reverse this pointless, detrimental legacy of the board in the 1930s, and a ringing affirmation of the private character of the reserve banks and of their directors' discretion and primacy in all staffing, salary, and benefit matters.
But because I fear the continuation and worsening of existing trends in system governance instead, with the continued erosion of reserve banks' independence from the board and the Beltway political process, I propose that Congress do the honorable thing for reserve banks' staffs: Take them out of the monetary policy political football game, declare them to be civil servants, and consequently, for most of them, raise their pay to the same differentials against Washington levels that prevail in the other civil service bureaucracies.
