The Social Fabric Matrix Approach to Central Bank Operations: An Application to the Federal Reserve and the Recent Financial Crisis

  • Scott T. Fullwiler


This chapter utilizes the social fabric matrix approach (SFM-A) to provide a detailed description of the Federal Reserve’s (Fed’s) daily operations and the recent financial crisis. The SFM of the Fed’s operations presents the primary components – major norms, institutions, technologies – relevant on a day-to-day basis. The SFM is then used for normative systems analysis (Hayden 1998) to show the articulation of major norms via sub-criteria, rules, regulations, and requirements into significant influences on the actions of authorizing and processing institutions in the Fed’s operations. From the normative systems analysis, three types of time – intraday, maintenance period, and seasonal – in the Fed’s daily operations can be explained. Overall, the Fed’s operations are driven by the goals of stabilizing the payments system and the financial system. Other major norms, such as market efficiency, are important in terms of their influence, but they can become counterproductive to the Fed’s ability to stabilize the payments system and the financial system at times, as they were during the mid-to-late 1990s. Given the SFM, normative systems analysis, and description of time and timeliness in the Fed’s operations, seven general principles of the Fed’s operations are presented, several of which are contrary to popular opinion (even among economists) regarding how central bank operations actually work. Of overarching importance is the realization that the Fed’s operations are concerned with setting an interest rate, not controlling the money supply, which is in fact not possible. The events of August 2007 through December 2008 relevant to the Fed’s daily operations are described and considered within the context of the previously laid out general principles, while as a result of information gathered during this period, three additional general principles of the Fed’s operations are provided.


Central Bank Federal Reserve Payment System Money Market Reserve Requirement 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


  1. Abernathy WA (2003) Business checking freedom act of 2003, H. R. 758 and H. R. 859. Testimony delivered before the Subcommittee on Financial Institutions and Consumer Credit of the Committee on Financial Services, U. S. House of Representatives, March 5Google Scholar
  2. Anderson RG, Rasche RH (2001) Retail sweep programs and bank reserves, 1994–1999. Fed Reserv Bank St. Louis Rev 83(1):1–24Google Scholar
  3. Armantier O, J Arnold, J McAndrews (2008) Changes in the timing distribution of Fedwire funds transfers. Fed Reserv Bank New York Econ Policy Rev 14(1):83–112Google Scholar
  4. Bank for International Settlements (2007) Statistics on payment and settlement systems in selected countries. Committee on Payment and Settlement Systems Report 78, MarchGoogle Scholar
  5. Bernanke B (2009) Federal reserve programs to strengthen credit markets and the economy. Speech given on February 10Google Scholar
  6. Bindseil U (2004) Monetary policy implementation: theory, past, and present. Oxford University Press, New YorkGoogle Scholar
  7. Board of Governors (1990) The federal reserve in the payments system.
  8. Board of Governors (2008) Data on funds service, securities service, and national securities service.
  9. Bond Market Association and the Depository Trust and Clearing Corporation (2003) Issues and recommendations regarding commercial paper settlement practices (discussion paper). Bond Market Association and the Depository Trust and Clearing Corporation, New YorkGoogle Scholar
  10. Bush PD (1987) The theory of institutional change. J Econ Issues 21(3):1075–1115Google Scholar
  11. Clouse JA, Elmendorf DW (1997) Declining required reserve balances and the volatility of the federal funds rate. Federal Reserve Board, Finance and Economics Discussion Series, JuneGoogle Scholar
  12. Clouse JA, D Henderson, A Orphanides, D Small, P Tinsley (2000) Monetary policy when the nominal short-term interest rate is zero. Federal Reserve Board, Finance and Economics Discussion paper, NovemberGoogle Scholar
  13. Commons JR (1995/1924) The legal foundations of capitalism. Transaction Publishers, New Brunswick, NJGoogle Scholar
  14. Edwards JR (1991) The process of accounting innovation: the publication of consolidated accounts in Britain in 1910. Account Hist J 18(2):113–132Google Scholar
  15. Federal Reserve Bank of New York (1999) Annual report on domestic open market operations in 1998Google Scholar
  16. Federal Reserve Bank of New York (2008) Annual report on domestic open market operations in 2007Google Scholar
  17. Federal Reserve Bank of New York (2009) Annual report on domestic open market operations in 2008Google Scholar
  18. Federal Reserve System (2007) Account management guide.
  19. Federal Reserve System (2008) Reserve maintenance manual.
  20. Federal Reserve System Study Group on Alternative Instruments for System Operations (2002) Alternative instruments for open market and discount window operations. Federal Reserve System, DecemberGoogle Scholar
  21. Fullwiler ST (2001) A framework for analyzing the daily federal funds market (Ph.D Dissertation). University of Nebraska, NebraskaGoogle Scholar
  22. Fullwiler ST (2003) Timeliness and the Fed’s daily tactics. J Econ Issues 37(4):851–880Google Scholar
  23. Fullwiler ST (2005) Paying interest on reserve balances: it’s more significant than you think. J Econ Issues 39(2):543–550Google Scholar
  24. Fullwiler ST (2010) Modern Central Bank operations: the general principles. In: Moore B, Rochon L-P (eds) Post-Keynesian monetary theory and policy: horizontalism and structuralism revisited. Edward Elgar, CheltenhamGoogle Scholar
  25. Furfine C (2000) Interbank payments and the daily federal funds rate. J Monetary Econ 46(1):535–553CrossRefGoogle Scholar
  26. Garbade KD, Partlan JC, Santoro PJ (2004) Recent innovations in treasury cash management. Fed Reserv Bank New York Curr Issues Econ Finance 10(11)Google Scholar
  27. Goodhart CAE (2008) The preferential access scheme. Paper presented at global macro economy: imbalances or passive outcomes, Valance Co., Inc., United State Virgin Islands, JanuaryGoogle Scholar
  28. Government Accountability Office (2002) Payment systems: Central Bank roles vary, but goals are the same. GAO-02-303, FebruaryGoogle Scholar
  29. Hancock D, Wilcox JA (1996) Intraday management of bank reserves: the effects of caps and fees on daylight overdrafts. J Money Credit Banking 28(part 2):870–908Google Scholar
  30. Hayden FG (1982) The social fabric matrix: from analytical perspective to policy tool. J Econ Issues 16:637–661Google Scholar
  31. Hayden FG (1998) Normative analysis of instituted processes. In: Fayazmanesh S, Tool MR (eds) Institutional theory and applications: essays in honor of Paul Dale Bush, vol 2. Edward Elgar, Northampton, MA, pp 89–107 (reprinted in this volume)Google Scholar
  32. Hayden FG (2006) Policymaking for a good society: the social fabric matrix approach to policy analysis and program evaluation. Springer, New YorkGoogle Scholar
  33. Hayden FG, SR Bolduc (2000) Contracts and costs in a corporate/government system dynamics network: a United States case. In: Elsner W, Groenewegen J (eds) Industrial policies after 2000. Kluwer, Boston, MAGoogle Scholar
  34. Johnson K, Small D, Tryon R (1999) Monetary policy and price stability. Federal Reserve Board, International Finance Discussion Papers, JulyGoogle Scholar
  35. Keister T, Martin A, McAndrews J (2008) Divorcing money from monetary policy. Fed Reserv Bank New York Econ Policy Rev 14(1):41–56Google Scholar
  36. Kregel J (2008) A simple proposal to resolve the disruption of counterparty risk in short-term credit markets. Jerome Levy Economics Institute Policy Note, October 4Google Scholar
  37. Krieger SC (2002) Recent trends in monetary policy implementation: a view from the desk. Fed Reserv Bank New York Econ Policy Rev 8(1):73–76Google Scholar
  38. Lacker JM (2006) Central Bank credit in the theory of money and payments. Speech at the Economics of Payments II Conference, Federal Reserve Bank of New York, March 29Google Scholar
  39. Martin A, McAndrews J (2008) Should there be intraday money markets? Federal Reserve Bank of New York Staff Report No. 337, JulyGoogle Scholar
  40. McAndrews JJ, Potter SM (2002) Liquidity effects of the events of September 11, 2001. Fed Reserv Bank New York Econ Policy Rev 8(2):59–79Google Scholar
  41. McAndrews J, Rajan S (2000) The timing and funding of Fedwire funds transfers. Fed Reserv Bank New York Econ Policy Rev 6(2):17–32Google Scholar
  42. Mehrling P (2006) Monetary policy implementation: a microstructure approach.
  43. Meulendyke A-M (1998) U.S. monetary policy and financial markets. Federal Reserve Bank of New York, New YorkGoogle Scholar
  44. Meyer LH (2000) Payment of interest on reserves and fed surplus. Testimony delivered before the Committee on Banking and Financial Services, U.S. House of Representatives, 3 MayGoogle Scholar
  45. Minsky HP (1957) Central banking and money market changes. Q J Econ 71(May)Google Scholar
  46. Most KS (1972) Sombart’s proposition revisited. Account Rev 47(4):722–734Google Scholar
  47. Myers MG (1970) A financial history of the United States. Columbia University Press, New YorkGoogle Scholar
  48. Panigay-Coleman S (2002) The evolution of the Federal Reserve’s intraday credit policies. Fed Reserv Bull (February):67–84Google Scholar
  49. Polanyi K (1957) The economy as instituted process. In: Polanyi K et al (eds) Trade and market in early empire. Free Press, Glencoe, IL, pp 243–270Google Scholar
  50. Previts GJ, Merino BD (1998) A history of accountancy in the United States. Ohio State University Press, Columbus, OHGoogle Scholar
  51. Richards HW (1995) Daylight overdraft fees and the Federal Reserve’s payment system risk policy. Fed Reserv Bull (December):1065–1077Google Scholar
  52. Shen P (1997) Settlement risks in large-value payment systems. Fed Reserv Bank Kansas City Econ Rev 82(2nd Quarter):45–62Google Scholar
  53. Small D, Clouse JA (2000) The limits of the Federal Reserve act places on the monetary policy actions of the Federal Reserve. Annu Rev Banking Law 19:553–779Google Scholar
  54. Sombart W (1924) Der Moderne Kapitalismus, 6th edn. Duncker and Humblot, MunichGoogle Scholar
  55. Spahr WE (1926) The clearing and collection of checks. Banker’s Publishing, New YorkGoogle Scholar
  56. Summers BJ, Gilbert RA (1996) Clearing and settlement of U.S. dollar payments: back to the future? Fed Reserv Bank St. Louis Rev 78:3–23Google Scholar
  57. Thornton DL (2003) Forecasting the treasury’s balance at the Fed. Federal Reserve Bank of St. Louis Working Paper No. 2001-004D, MayGoogle Scholar
  58. Whitesell W (2006) Monetary policy implementation without averaging or rate corridors. Federal Reserve Finance and Economics Discussion Series No. 2006-22, MayGoogle Scholar
  59. Yamey BS (1964) Accounting and the rise of capitalism: further notes on a theme by Sombart. J Account Res 2(2):117–136CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC 2009

Authors and Affiliations

  • Scott T. Fullwiler
    • 1
  1. 1.Wartburg CollegeWaverlyUSA

Personalised recommendations