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A Letter from the President
 Shortly after becoming president
of the Dallas Fed, I stumbled upon an observation from
the great British prime minister William Gladstone, and
it has become a favorite of mine: Not even love has
made so many fools of men as pondering over the nature
of money.
Gladstone’s witticism is
a humbling reminder for me and my colleagues in the
Federal Reserve System. Our job is to contemplate the
nature of money: how to protect its value; how to use
monetary policy to promote growth with low inflation;
how to manage the payments system to keep our financial
infrastructure humming at peak efficiency.
My first year as president of
the Federal Reserve Bank of Dallas has been filled with
all those contemplations—and many more. I have
been truly inspired by the intelligence, integrity,
competence and work ethic I have found at the Federal
Reserve, not only in Dallas but in Washington and at
the other regional Banks around the country. I owe a
particular debt to my colleagues at the Dallas Fed.
I cannot think of a more interesting job than serving
as the leader of this exemplary group of women and men.
The Forces of Change
The global economy is in the
midst of a tectonic transformation. Powerful new players—among
them China’s 1.3 billion people and India’s
1.1 billion—have entered the marketplace in full
force. At the same time, technology continues to make
enormous advances that spawn new forms of competition
and transform how businesses operate worldwide.
Trade and technology accelerate
what economist Joseph Schumpeter called “creative
destruction,” a somewhat self-contradictory shorthand
for how capitalist systems constantly replace existing
ways of doing business with new ones. (For more on Schumpeter,
see the excerpts below.) Yesterday’s
business practices are rapidly replaced by tomorrow’s
ways of doing business in an economic revolution that
reaches into nearly every corner of the world.
We are not sheltered from the
forces of change at the Dallas Fed. New technologies
are creating challenges and opportunities in the way
we process payments, run cash operations, serve as the
Treasury’s fiscal agent, supervise and regulate
banks and provide them with liquidity, and keep the
public informed.
One of the essays in this annual
report, “Critical Mission,” summarizes the
Dallas Fed’s business side and reports some numbers
that illustrate the depth and breadth of our operations.
Last year, for example, we processed almost 1 billion
checks, worth about $900 billion. We paid out and received
a record 5.4 billion in circulating notes worth almost
$92 billion.
This is important work. Money
flows are an economy’s lifeblood, and the Federal
Reserve’s great responsibility lies in maintaining
the cardiovascular system of American capitalism. The
Fed’s operations—from payments processing
to bank regulation to the New York Desk’s trading
activities— keep open the arteries, veins and
even the capillaries of capitalism.
The sacred duty of the Federal
Reserve System is to conduct monetary policy that sustains
non-inflationary economic growth. To fulfill our role
of helping set monetary policy for the United States,
the Dallas Fed must conduct groundbreaking research
to better understand how our economy behaves in an intensely
interconnected, increasingly globalized world. The new
reality creates a need to rework key assumptions about
the gearing of the U.S. economy and how it affects the
Federal Reserve’s ability to do its job.
Immediately upon becoming Bank
president last year, I challenged our research team
to develop new principles and analytical tools for a
globalized world—new ideas that could serve as
guides for the Federal Open Market Committee and stimulate
the thinking of monetary economists worldwide. “Racing
to the Top,” the cover essay of this annual report,
presents a view of globalization’s impact on the
economy and its effect on a wide range of public policies.
The essay notes a striking correlation
between increasing globalization and better economic
policies. A good example is price stability. In a world
where capital moves at light speed, nations that allow
inflation to erode the value of their money face stiff
penalties in the form of capital flight. Sound money
has become imperative, and inflation has been receding
in all parts of the world over the past two decades.
The Dallas Fed’s work on
globalization is only beginning. Over the next few years,
we will devote much attention to the benefits and challenges
of a world where national borders are becoming less
significant as economic barriers. We will keep you informed
of our findings.
Our mission is to have the Dallas
Fed be the look-to Bank in the Federal Reserve System.
As we hone our operations and expand our research frontiers,
we are striving to become the System’s standard
for excellence and innovation.
My first day at the Dallas Fed,
I called a meeting of the entire staff and quoted a
passage from Carlos Ruiz Zafón’s brilliant
novel, The Shadow of the Wind: “What
destiny does not do is home visits. You have to go for
it.”
The men and women of the Dallas
Federal Reserve are not sitting back, waiting for change
to affect us. We have a responsibility to anticipate
and effect the change our hypercompetitive world requires.
We are wasting no time in going for it.
—Richard W. Fisher
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In
a February 2006 speech at an Institute of
Economic Affairs’ conference in London,
Dallas Fed President Richard W. Fisher paid
homage to economist Joseph Schumpeter and
his concept of creative destruction. The
following is adapted from that speech.
I like Schumpeter
because his writings focus the mind on
the process of change and adaptation.
They are particularly relevant today.
Listen carefully to these quotes from
two of his seminal works.
In his book Capitalism,
Socialism, and Democracy, Schumpeter
wrote: “The opening up of new markets,
foreign or domestic, and the organizational
development from the craft shop and factory...
illustrate the same process of industrial
mutation... that incessantly revolutionizes
the economic structure from within,
incessantly destroying the old one, incessantly
creating a new one. This process of Creative
Destruction is the essential fact about
capitalism. It is... what every capitalist
concern has got to live in.”
And from volume
1 of Schumpeter’s Business Cycles:
“A railroad through new country,
i.e., country not yet served by railroads,
as soon as it gets into working order
upsets all conditions of location, all
cost calculations, all production functions
within its radius of influence; and hardly
any ‘ways of doing things’
which have been optimal before remain
so afterward.”
String the key phrases
of these citations together and you get
the bottom-line plot of capitalism’s
process of creative destruction: The
opening up of new markets, foreign or
domestic, revolutionizes the economic
structure, destroying the old one, creating
a new one. [It] upsets all conditions
of location, all cost calculations, all
production functions, and hardly any ways
of doing things which have been optimal
before remain so afterward.
Here is where China
and India and all the bristling new economic
entrants come in. They are today’s
equivalent of Schumpeter’s railroads.
They and the phenomenon of globalization
are agents of creative destruction writ
large. From now on, hardly any way of
doing things which used to be optimal
will ever be so again.
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