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Prepared for the Steering Committee for the Fundamental Reappraisal ofthe
Discount Mechanism Appointed by
the Board of Governors of the Federal Reserve System

The following paper is one of a series prepared by the research staffs of the Board of Governors
of the Federal Reserve System and of the Federal Reserve Banks and by academic economists
in connection with the Fundamental Reappraisal of the Discount Mechanism.
The analyses and conclusions set forth are those of the author and do not necessarily indicate
concurrence by other members of the research staffs, by the Board of Governors, or by the Federal
Reserve Banks.



The Legitimacy
Central Banks

Kenneth E. Boulding
University of Colorado, Boulder, Colorado

July 1969

Kenneth E. Boulding

The problem of legitimacy is one of the most neglected aspects
of the study of social systems. There may be good reasons for this, for it
is inevitably a hot subject. One can hardly discuss the legitimacy of anything without seeming to threaten it, for a great deal of legitimacy depends
on things being taken for granted and not talked about at all. The more one
looks at the dynamics of social systems, however, the more it becomes clear
that the dynamics of legitimacy is one of the most important elements in
the total long-run dynamics of society. It certainly ranks with such things
as population and demographic movements, and even with technological change
with which it is closely intertwined. Its importance can be seen in the
remark that if a person or institution loses legitimacy it loses everything. It can no longer maintain itself in the social system. No amount
of wealth, that is exchange capability, or power, that is, threat capability, can keep an institution alive if there is a widespread denial of
the legitimacy of its role in society. This is because the performance
of any continuous and repeated role requires an acceptance of its legitimacy on the part of those role occupants whose roles are related to it.
A role in the social system is a focal point or node of inputs and
outputs of many different kinds, the output of one role being the input of another.

Inputs, therefore, depend on the willingness of other

role occupants to give outputs, and they will not do this continuously
unless there is legitimacy.

Where people feel that certain outputs

- 2 -

are illegitimate they will eventually find ways of stopping them.
corresponding inputs w l U likewise stop.


To use a rather crude illus-

tration, a bandit can take your money once, but anyone who wants to
take it every week either has to be a landlord or a tax collector, or
perhaps even a bank*
There are a considerable number of sources of legitimacy,and
the functions which relate the determinants of legitimacy to its amount
are extremely complex.

They are certainly non-linear and they exhibit

discontinuities which are, to say the least, disconcerting*


an institution, the legitimacy of which seems to be absolutely unquestioned, collapses overnight*

All of a sudden we reach some kind of a

"cliff11 in the legitimacy function and the institution suddenly becomes

The same thing perhaps can even happen the other way, in

which institutions quite suddently become legitimate after having been

A good example of the former is the collapse of the mon-

archy, beginning in the 17th century*


legitimacy of monarchy

the Cromwellian war in England, largely because an ancient

legitimacy is like a capital stock, it takes a great deal of spending
before it can be exhausted. At the time of Louis XIV in the following
century one might have thought that the legitimacy of monarchy was absolutely unquestioned and secure.

In the following century, however,

it collapsed everywhere and the only monarchs


survived were those

who abandoned their power and became symbols of legitimacy, like the
British, Dutch and Scandinavian monarchs. On the other side, abortion

- 3 -

has been an institution which has been regarded as highly illegitimate
and now in the face of the population problem seems to be acquiring a
quite sudden legitimacy,
at least
We may distinguishAsix classes of sources of legitimacy, that
is, of variables in society which are functionally related to it.
first consists of the payoffs of the institution in question.


If an

institution provides good terms of trade with those who are related to
it, up to a point this contributes to its legitimacy, especially in the
long run.

The case is clearer on the negative side. An institution

which has very poor payoffs, demands a great deal of input from other
people and gives very little output to them, is likely to have its
legitimacy eventually eroded on this account.

The relationship, however,

is certainly non-linear and quite complex, and at times may even be

Just because an institution is useful and pays off well is

not sufficient to give It legitimacy.
The main reason for this, paradoxically enough, is that it is
not merely good payoffs that give legitimacy but also bad payoffs, that
is, sacrifices. A sacrifice or "grant11 may be defined as a one-way
transfer from one decision unit to another, by contrast with exchange,
which is a two-way transfer, from A to B and also from B to A.


structure of one-way transfers of commodities and exchangeables, I call
the "Grants11 economy, and it is a good first approximation measure of
the extent and structure of the integrative system in general.

If A

makes a grant to B, the Implication is that A identifies with B, A and B

- 4are in a community together, and A clearly regards B as legitimate.


dynamics of the grants system is very complex because to some extent
grants are self-justifying.

If A makes sacrifices to B for B it is very

hard for A to admit to himself that these sacrifices have been in vain.
This would be a threat to his identity, which is the greatest threat
that any person can feel. There is, therefore, a strong tendency to
"throw good money after badj!and to continue making sacrifices for some
institution, even after some possibly expected long-run payoffs have
iailed to materialize.

This is what I call the "sacrifice trap.11


see this in the family, for instance, where the devotion of one spouse
to a very unsatisfactory partner often continues for a long time in
spite of very unsatisfactory internal terms of trade. A spouse who
gives a lot to a marriage and gets very little out of it may continue
to do this because of the threat to the personal identity if the process
ever stops. There may come a point, of course, at which the terms of
trade become too bad altogether and a break-up ensues.
"cliff11 phenomenon in the legitimacy function.
happened t& the monarchy, and it can happen
gion of the Aztecs.

This is the

The same thing evidently

to religion, like the reli-

It could even happen to the national state.

The third source of legitimacy is age. Institutions build up
as long as
legitimacy just by sticking around, y\ there is, as it were, an excess
of production over the consumption of it*
howevert may be non-linear.

Even this function,

Up to a point increase in age increases

beyond a certain point, however, the senator becomes senile

- 5 -

and the good old things become old-fashioned*
three phases of the function*

One can detect, perhaps,

When things are new, they have the spe-

cial legitimacy of babies, young people, or the new fashion. At a certain
middle aged or
point they become*old-fashioned and legitimacy declines sharply. Then
as time goes on further they become antiques and legitimacy increases
once again.

In the case of a creative person, for instance, one often

finds a phase of rising legitimacy with age and then a declining phase
as he gets out of date, and then an increasing phase as he acquires a
posthumous reputation, which is presumably the personal equivalent of
being an antique.
The fourth source of legitimacy is mystery. Something which
is not understood but which is dimly perceived as obscurely grand and
magnificent, acquires an aura of legitimacy in the minds of those
who do not understand it.

The temples and impressive ceremonies of

religion, the "state" of kings, the mystique of the brass hat and the
military leader, the sanctity of priesthoods of all kinds and even the
mystery of science and the laboratory are all related to this aspect
of legitimacy*

It depends, of course, on a class structure, on a dis-

tinction between the initiates and the common people.

Historically it

has been a very powerful source of the willingness of the common people
to make sacrifices for the benefit of the initiates and to afford them
a great deal of legitimacy, often in the absence of much in the way of
tangible returns.

- 6 ~

Closely related with this aspect of legitimation is ritual or
artificial order*

Man has always feared the randomness of his environ-

ment, the uncertainty of the weather, the crops, of accidental injury
or death, of disease, of his whole future state.

One of his responses

to this has been to create little islands of artificial order, regularly
repeated rituals, liturgies and human law.

The role which law plays in

legitimation is closely related to this aspect of it as ritual.

To say

that law and ritual are artificial order is not in any sense to deny
them validity, nor does it mean that these artificial orders are arbitrary.

Where they are successful it is precisely because they reflect

an order in the real world, whatever that is*

Nonetheless, they are

artificial in the sense that they create an island, as it were, of life
and experience which is separated from the rest of the world.

A mon-

astery is a good example of such artificial order, so is a law court.
Insofar as the need for legitimation, as we have seen, is closely related
to the need for regularity and for law in the broad sense of regularity
and non-randomness, we can easily see why the development of these
artificial orders of liturgy and legal procedure, of due process and
repeatable and predictable behaviors and decisions are an important
aspect in the legitimation process. Here, too, however, we may run
into non-linear relationships.

Beyond a certain point an artificial

order becomes too artificial, and is protest arises against it, and the
legitimacy of the institution which is based on it may suddenly collapse.
The Reformation, perhaps, may be interpreted as a protest against too

- 7 •

artificial an artificial order in the

Catholic Churctu

The fact that

law does not always maintain legitimacy, as the experience of prohibition indicated, also suggests that law too may be lfa hasslf in the
memorable words of some unmemorable character in Dickens, and when it
is perceived to be such the legitimacy which is based upon it easily
collapses. There are many countries today, indeed, in which law is
much less legitimate than it is in the United States, and the legitimacy
of law itself is a problem to which we have given far too little
The sixth source of legitimacy consists of the alliance of an
institution with other legitimacies•
legitimacy syndrome.

This is what might be called the

If there are institutions which already possess

a great deal of legitimacy it is possible sometimes for new and nonlegitimate institutions to acquire legitimacy by identifying themselves
with the legitimate.

It is easy to cite examples of this. The United

States built Washington in the fashion of ancient Rome.

The United

States, being a new and therefore rather illegitimate republic, sought
to establish its legitimacy by means of a "tie-in11 with Corinthian
columns and handsome domes. The legitimacy of the church often permits
highly radical and otherwise illegitimate movements to spring up within
it, like the Franciscans, or, in our day, the movement of racial equality
or eyen~ the peace movement.
in th.e relationship.

Here again we may run into non-linearities

The nouveau riche person who builds a very fancy

house may thereby diminish rather than enhance his legitimacy in the eyes

- 8 -

of those he most wishes to impress*

A country which wastes its scarce

resources on building a vast presidential palace or a grand new capital
may not acquire much legitimacy thereby,, but only the subtle Sneers
reserved for unwise decision-makers*

One interesting phenomenon here

is that the more legitimacy an institution has the less it has to worry
about these alliances*

In the early days of a university • for instance,

If often builds elaborate Gothic or classical buildings to tie in with
the legitimacy of the past, and to pretend, as it were, that it has the
legitimacy of spurious age*

As it acquires genuine legitimacy, however,

perhaps in the process of providing payoffs, its buildings become skimpier and more austere, it puts less and less into ritual and into elaborate architecture, until finally it ends up by abandoning gowns, Gothic,
ivy, and even grass as it lays down its campus to enormous parking lots.
Let us now apply this analysis as far as we can to the problem
of the legitimacy of the banking system, and the central banks in particular.

The existence of socialist states shows that this is not an

idle problem*

Socialism indeed can be interpreted largely as an attack

on the legitimacy of certain institutions of exchange and in the socialist states we see the very interesting phenomenon of the gradual reestablishment of many of these same institutions with a different framework
of legitimation.

In the western world and especially in the United

States the legitimacy of the banking system is almost completely taken
for granted*

It must not be assumed, however, that the banking system

or any other institution necessarily creates its own legitimacy, and it

- 9 -

must not be assumed that this legitimacy could never disappear, even
though it might seem at the moment to be quite unshakable.

The posses-

sors of unshakable legitimacy should always remember Louis XIV at least
once a day, even though the Federal Reserve is not the sort of place
where heads are likely to roll.

It will at least be an interesting

exercise therefore to apply the six major sources of legitimacy to the
banking system, and see if any dynamic patterns emerge.
The payoffs of the banking system to the rest of society are
fairly clearly positive and also are fairly visible*

Most people out-

side the banking system have contact with it either through having a
checking account, which is clearly a great convenience, and for which
the payment does not seem exorbitant, or through borrowing money, which
again we would not do unless we thought that the returns were likely to
be greater than the costs. The banking system is perhaps the purest
example of an exchange institution.

It lives almost entirely by exchange,

it does very little physical transformation and the utilities which it
creates out of which payoffs to the various parties come are essentially
exchange utilities, such as the creation of convenient forms of exchangeables, like checking accounts, or the separation of ownership from control and the placing of asset complexes in the control of those who
presumably know how to manage them best.

The legitimacy of banking,

therefore, falls or rises with the legitimacy of exchange itself.
Even though the payoffs to the banking system for those who
deal with it are clearly positive, for it is an essential characteristic

- 10 -

of exchange systems that continued exchange would not take place unless
there are positive payoffs to all parties, this is in itself not sufficient to give legitimacy, although it helps.

The somewhat loose rela-

tionship between payoffs and legitimacy may happen for two reasons.
The first, which applies to all exchange institutions, is that an exchange, perhaps

because it involves so little in the way of sacrifice,

does not generate strong integrative sentiments and feelings. My own
bank^advertised as "the bank that puts people first.fl Everybody knows,
however, that this is a ritualistic remark designed solely to create
favorable sentiments*

If, indeed, I thought it true I probably would

not bank there, for what we really want in a bank is that it puts money
first, that is, we want extreme probity in accounting, with not a cent
charming but
out of place, and if this involves some sacrifice of a careless accountant or a benevolent embezzler I doubt very muct if we would fight very
much for putting people first. There have been a number of cases, indeed, of benevolent bank officers who embezzled in order to do good, and
this is usually frowned upon quite severely,

I, at least, want banks to

be honest, impeccable and full of rectitude,

I do not necessarily want

them to be lovable, in spite of some of their advertising.


this absence of lovability in exchange institutions not only seems to
worry them a certain amount, it may occasionally lead to their overthrow*
Schurapeter^ we tcay recall, argued that capitalism would be overthrown
by its very success and because the rationalistic attitude which it
generated would destroy the integrative institutions in, say, the family

- 11 -

or the church, or even the state, which enable exchange to be legitimated.
Exchange and exchange institutions, in other words, simply pay off too

They do not demand any sacrifice.

Thus an institution which

bases its legitimacy on its payoffs may be challenged by another institution which claims to have even better payoffs. This is one reason,
perhaps, why legitimacy which is based merely on payoffs is a little
insecure, whereas a legitimacy which is based on sacrifice is remarkably stable.
It is at least an amusing fantasy to suppose that we might do
a cost-benefit analysis of the financial system, and, indeed, of competing financial systems.
to identify.

The costs, as a matter of fact, are fairly easy

We could, for instance, do a comparative study of, shall

we say, Austria and Hungary, two countries at about the same level of
development, one of which has a predominantly market-based financial
system, whereas the other is a socialist state.

We could find out fairly

easily the costs of the two systems in terms of resources absorbed into
them as of the economy in general.

We could find out, for instance,

what proportion of the gross national product in each case was absorbed
by the financial system.
to assess.

The benefits, of course, would be much harder

Indeed, I would almost despair of ever making a quantitative

assessment of them.

It is on judgements of this kind, however, that

the long-run competition between socialism and capitalism may ultimately
be determined.

- 12 -

Merely asking a question of this kind, however, may seem
somewhat threatening to the legitimacy of either kind of institution.
The legitimacy of the institutions of capitalism could depend a good
deal on their simple age, that is, just on the fact that they are not
questioned, and that we have got along with them for a long time, with
reasonable success.

It is one of the curious problems of the dynamics

of legitimacy, indeed, that a threat to legitimacy is very hard to
counter where the legitimacy itself is a function of age and ritual,
for even an attempt to defend a legitimacy of this kind may destroy it.
This perhaps is one reason why the Marxist threat to the legitimacy of
capitalism was so much more dangerous than would be the case if the
legitimacy depended merely on payoffs.
The payoffs to capitalism are actually quite high. A good
deal of its legitimacy, however, depended on institutions, like private

the legitimacy of which had never really been questioned,

and rested not on the perception of long-run payoffs at all, but simply
on age, long use, and the ritual of law.

The legitimacy of socialist

institutions likewise depends in good measure on the enormous sacrifices
which have been made to create them*

The socialist state asks much more

fiercely than the late President Kennedy, "Ask not what your country can
do for you* ask only what you can do for your country.ft

Because it has

demanded enormous sacrifices of its people, in the interests of an
ideal, It has become very hard for them to admit that the ideal might
not have much in the way of payoffs. Hence the suggestion that the

- 13 -

Relative merits of the systems should be tested by cost-benefit analysis
would probably even be more threatening to the socialist than it is to
the capitalist*
Let us now take a brief look at some of the other sources of
legitimacy and see how they apply to the banking system.

We have already

noticed that banks are not institutions which demand sacrifice, except
perhaps sacrifice of temptations to dishonesty and extravagance. Banks,
therefore, are not "heroic11 institutions and they cannot hope to generate
the kind of love and loyalty towards them which such institutions as
the church and the national state generate.
The banking system is, relatively speaking, a fairly modern

It cannot perhaps draw a great deal of legitimacy from its

age, although we do find banks and institutions of all kinds advertising
the date of their foundation when that is suitably distant in time as
evidence of their integrity, respectability and legitimacy.

The Bank

of England's affectionate title as "The Old Lady of Threadneedle Street"
indicates that age is perhaps not a negligible factor.
The sense of mystery and charisma is also far from a negligible
factor in establishing the legitimacy of banks. The bank may not be a
heroic institution, but it is certainly mysterious to the ordinary person.

Most people even who use banks, and indeed a good many people who

operate them, really do not understand the operations of the banking
system as a whole.

There is, furthermore, a lingering sacred quality

about money itself.

There is something a little mysterious about the

- 14 -

fact that mere green pieces of paper, or even more remarkable, a signature
on a check is sufficient to buy tangible objects of desire.

In the past,

at least, banks have contributed to the sense of mystery by their very
architecture, which has often tended to be quasi-religious.

Even if

banks shied away from the more subtle mysteries of the Gothic, they
have frequently enshrined themselves in pagan temples and Corinthian
columns, lofty ceilings, and marble floors, and a general air of hushed
which hopefully
magnificence.induces in the customer the frame of mind of proper respect
and reverence.
Ritual likewise plays a not insignificant role in establishing
the legitimacy of banks.

Regular hours, standardized procedures, and

a highly formalized accounting system contribute to a sense of regularity
and order.

The banking system, furthermore, is strongly hedged about

by legal safeguards and the ritualistic language of contracts. Alliances
with other legitimacies are seen not only in the architecture but in
the institution of boards of directors, the members of which are usually
drawn from other respectable institutions in the community, and also in
the institution of the charter granted by the state or by the nation,
which brings along with it a certain apparatus of inspection and oversight*

We could even regard national deposit insurance, quite apart

from its strictly economic aspects, as an alliance with the enormous
legitimacy of the national state, for then behind even the most private
of banks stands the majesty and legitimacy of government.

- 15 -

We now come rather belatedly to x^hat is supposed to be the
main object of this paper, which is the problem of the legitimacy of
central banks•
banking system.

Central banking is a rather late development in the
Even in Great Britain the Bank of England did not begin

to act as a central bank until well on into the nineteenth century* The
for the most part
United States got alongAwithout any central bank until 1913, though it
had something that might almost be called an informal central banking
system before that*

Until the establishment of the Federal Reserve Sys-

tem the necessity of central banking was still a matter of debate. The
Japanese, for instance, when they began to introduce western institutions
began with something like the American national banking system, and only
developed a central bank after a number of financial crisis*


however, the legitimacy, indeed almost the necessity, of central banking
seems unquestioned.

Every new country sets up a central bank almost as

soon as it is established.

It is part of what every well-dressed country

will wear.
If we look down our six sources of legitimacy, we will see
that almost everything which can be said of the banking system in general
applies also to central banks. Here they have unquestionably risen in
response to a felt need.

There must, therefore, be some kind of a

payoff to the organization.

These, however, may be of two kinds, market

payoffs and political payoffs. The fact that even under a free banking
system some strategically located banks tended to perform the functions
of a central bank, in that part of their deposits were owned by other

- 16 banks and regarded as reserves, suggests that the function of central
banking is something which will develop even in a pure market system,
simply because there are payoffs for this kind of organization, that
is, it can provide adequate terms of trade for all those with whom it

There are clearly great conveniences, for instance, in the

clearing function, in commercial banks holding their reserves in the
form of deposits in some central bank, whether this is public or private,
and the sheer dynamics of a free financial market would almost certainly
throw up the institution of central banking in one form or another.
Without any exception, as far as I know, however, societies
have not permitted central banking to grow up simply as a result of
market forces, but have always intervened in the matter politically.


some point in the development of the system those who are in control of
the legislative process of society perceive certain payoffs in the development of a government central bank which can then be used to control
the private banking system.

In its political aspects the government

central bank can then be seen as a partial movement toward the socialization of the banking system, which leaves the ownership of most of the
institutions of the system in private hands, but xriiich uses the government central bank as an instrument of control.

This may be regarded for

the most part as a problem in the legitimation of power.

Because of the

very structure of the system, a central bank, whether public or private,
will have a great deal of power, that is, the decisions of its responsible decision-makers \7ill have repercussions extending through the

- 17 -

whole system of the society.

Power, however, as we have seen, to be

exercised continuously must be legitimated, and governmental institutions are the principle agency of legitimation in modern society.
Private power will only be tolerated if it is small. This, indeed, is
the theory behind the encouragement of competition as a regulating
factor, for in a competitive society the power exercised by any particular private decision maker is relatively small and is constantly
checked by his competitors*

In central banking, however, as in electric

power or telephones, there are great advantages of monopoly, which means
a concentration of power, and if this concentration is to be legitimated
it must be regulated in some way through governmental organization.
Hence, it is not surprising to find a strong tendency for government to
take over the central banks, even though, as in the case of the Bank of
England, nationalization^make

practically no difference to its day-to-

day operation or even its general policy.
In this picture the Federal Reserve System presents some
rather curious anomalies, which may, however, in the American context
be more apparent than real. The Federal Reserve System, like the Bank
of England before its nationalization, is theoretically
and is a


owned^series of interlocking corporations, theoretically owned and controlled in large measure by the member banks themselves.

In reality,

of course, the Federal Reserve Banks are public institutions, exercising the great power which they have not to make profit for themselves,
but to advance what they conceive to be the public interest.


- 18 representatives sit on their Boards of Directors and the members of the
Board of Governors of the Federal Reserve System are appointed by the
President of the United States and confirmed by the Senate.

The struc-

ture is thus less socialized than that of the post office, more socialized than A. T. & T., though there are certain parallels between the
Board of Governors of the Federal Reserve System and a regulatory commission for public utilities.
In the American system of legitimacy these apparent anomalies
actually make a good deal of sense, for the American people have a curious ambivalence towards government.

On the one hand it is a strong

source of legitimacy, on the other hand it is also regarded as something which is always potentially illegitimate and can get out of hand;
hence it has to hedged around with all sorts of constitutional safegards.

The American Constitution can be interpreted in considerable

measure as a kind of treaty between a people and its own government regarded as a potential enemy!

Consequently, in the United States

the government does not have any monoply of the legitimating process
and private institutions, simply because they are private, have a
certain legitimacy of their own.

It is not surprising, therefore, to

find in the United States this curious mix of the public and the private
that we find in the Federal Reserve System, and it can certainly be
regarded, for its time, an optimum solution for the maximization of legitimacy.

Today, certainly, in spite of Representative Patman, there seems

to be no major threat within the American system to the legitimacy of
the Federal Reserve System, though there have been frequent and perhaps

- 19 -

justified criticisms of its policies*

As far as I know* thete are no

serious proposals either to nationalize the Federal Reserve Banks or to
put them under the United States Treasury or to dissolve them and go
back to a system of free banking.

The principle of separation of powers

is still very strong and the notion of the Treasury and the Federal
Reserve System as, as it were, two separate fiefs within a broad structure of governmental legitimation does not seem to be seriously threatened.
Most of the other aspects of legitimacy which we noticed as
being characteristic of the banking system also apply to the Federal
Reserve System*

Like the rest of the banking system, Federal Reserve

Banks are not heroic institutions, although their association with the
national state hangs over them a certain cloak of sacrifice-legitimation,
especially insofar as they may have to sacrifice their own ideals of
financial probity in times of war.

Bankers of all sorts tend to be

deflationary rather than inflationary-minded and it must hurt their
souls a little to be accomplices in the inflationary financial policy
which invariably accompanies a war.

This small sacrifice of financial

honor, however, is small compared with the sacrifices of the soldier,
though it may not be insignificant in contributing to the legitimacy of
the institution.

Certainly if the central bank were to oppose a war

effort on the grounds that it offended their financial principles, their
Unwillingness to sacrifice their principles would not be taken kindly,
and would contribute rapidly toward the loss of their legitimacy*
Central banking is now old enough to acquire a little of the
sanctity of age, and it is certainly shrouded in a great deal of mystery

- 20 -

and acquires a certain legitimacy from this fact*

Where the ordinary

men and the ordinary broker have at least some familiarity with the
operations of the member banks, they have no familiarity at all with
the operations of the central bank*

I must confess myself that

I was an economist for thirty years, though not a specialist
in money and banking,



personally set foot within a central

bank of any kind, and my knowledge of them and their operations are
derived wholly from books and talk.

Even in the mind of a professional

economist, therefore, the central banks appear as abstractions and cannot
be visualized as flesh and blood realities,

Whether the central banks

should try to enlighten the public and to dispel the mystery is a nice

It may well be that their own legitimacy is best fostered by

preserving a certain air of charismatic obscurity about their operations.
Their officers might even take to wearing gowns and robes and their
public pronouncements might be couched in even more mysterious and impressive language than they now use.
The concept of a central bank as a creator of artificial
order and financial ritual has some interpretive power and should not
be dismissed lightly*

One of the real problems of central banking

policy is that at the heart of it there is a certain arbitrariness.


movements of the bank rate, the decision to change the asset structures,
the changes in legal reserve ratios, and other instruments of central
bank control have a certain Delphic quality about them*

They emerge

as the result of arguments which are not disclosed, and yet they have

very powerful effects on the total system.

Furthermore, the effefcts of

these decisions are not always easy to trace, and the feedbacks of information are not easy to relate to particular decisions.

Under these

circumstances the ritualizing of these decisions may be a very important
aspect in their legitimation.

One might even speculate on the value

of ritualizing them more than is now the case.

The decisions of a

board, for instance, might be entrusted to a dramatically attired rider
who would deliver them to the White House with the pounding of hooves
and the flourish of trumpets!
We might conclude with a brief look at the possible threats
to the legitimacy of the system.

The fact that the system survived the

Great Depression is a tribute to the remarkable stock of legitimacy which
it possessed.

The extent to which the Federal Reserve System contributed

to the Great Depression is still somewhat a matter of controversy.


certainly cannot be blamed for the whole episode, nonetheless a strong
argument can be made that in this period the payoffs of the system for
the society as a whole were strongly negative and that disastrous mistakes in policy were made.

In the short run, however, as we have

noticed the payoffs of the system are only loosely related to its legitimacy and the other sources of legitimacy for the Federal Reserve System
are quite strong, strong enough, indeed, to enable it to survive a considerable decline in its payoffs to society.

The only source of loss

of legitimacy which seems even remotely on the horizon arises out of
the sixth factor, that is, the alliances with other legitimacies.


- 22 Federal Reserve System is not allied at all with the legitimacies which
derive from religion, from the family, from the arts and from the more
poetic, heroic and evocative aspects of life.
almost wholly an institution of exchange.

It is essentially and

Its inputs and outputs are

exchangeables, and in itself exchange is too rational an institution to
create much loyalty and affection and the kind of legitimacy which proceeds from these sources.

I would argue indeed that an exchange insti-

tution should not try to derive legitimacy from these other sources, for
if it does so it makes itself ridiculous.

The Federal Reserve Board

should certainly not try to become patron of the arts, an inspirer of
heroism or a producer of poetry.

To attempt to do so would be like

tying peacock feathers on a work horse, and the ridiculous incongruities
which would result would lessen rather than enhance the legitimacy of
the institution.
Insofar as the legitimacy of the central banks is enhanced
by alliances, it is with the national state, and the national state

In these days the national state is so fantastically legit-

imate an institution that it seems almost absurd to suppose that its
legitimacy might decline or even collapse.
have happened.

Nevertheless, stranger things

Particularly if the international system deteriorates

much beyond its present deplorable condition, the payoffs of the international system for the human race will be so negative that the legitimacy
of the national state as the essential and primary institution of the
international system will itself be affected.

It may be, indeed, that

before many decades are up, if we live that long, the national state

- 23 itself will have to be desacralized.

This, indeed, is what general and

complete disarmament and stable peace would involve.

To put the matter

brutally, some time in the future it may seem as absurd to die for one's
country as it would be today to die for the Federal Reserve System.
In the long run, therefore, we may see something very peculiar.
It may be the very commonplace and non-heroic aspects of the national
state which will save it, and that the strong alliance which exists between central banks and governments may turn out to be a two-way street.
At the moment, indeed, it is government that confers legitimacy on
central banks to a considerable extent.

It is not wholly inconceivable

that in the future it will be the fact that the central bank is primarily an agency for human welfare and not for human destruction will
confer legitimacy on the government, as we make the subtle transition
from the warfare state which threatens to engulf us all in a common
destruction to the desacralized commonplace, unheroic welfare state
which works simply for human betterment.

In the long run I have a good

deal of confidence that payoffs in terms of human welfare are the only
ultimate and self-sustaining sources of legitimacy.

Sacrifice, age,

mystery and ritual can fool some of the people some of the time.


however, they are not associated with real payoffs they will be found

This of course does not answer the question which we raised earlier

as to whether there is not some other form of social organization which
has still higher payoffs and lower costs than the existing banking

It would be rash indeed to argue that we have exhausted the

- 24 -

potential of social invention in this regard.

I am pretty certain,

however, that whatever mutation may supplant the existing system has
not yet been made, but if the legitimacy of the system rests firmly
on its payoffs then the social invention which will supplant it, if
it ever comes, should be welcomed with joy rather than fear.

It is

only what I do not now mind calling the fraudulent legitimacies which
fear competition.

Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102