Central banking and monetary policy face particular challenges in heterogenous and multilevel currency areas. And yet, most literature on central banking, like most modern central banks themselves, assumes the validity of a unitary monetary authority implementing uniform monetary policy, even in compound polities. Here, I explore the dilemmas of central banking and monetary policy in politically decentralized currency areas by analyzing the origins of the Federal Reserve Act of 1913 and its provisions for a multilevel governance structure and decentralized monetary policy. The origins of the Federal Reserve remain puzzling because its decentralized structure is often dismissed as a failed experiment or a political compromise that nobody truly wanted. However, I find that its design was the product of a deliberate political effort to reimagine central banking in a federal society, and I trace the idea of a decentralized “central” bank to a distinct interpretation of the American political-constitutional tradition.
