I’ve reached the happy milestone of republishing my book, The Power and Independence of the Federal Reserve, in paperback. This means a new preface, copied below. It’s long, but because I spend a lot of time in it discussing some of the themes and ideas that first found their home in these digital pages, I thought I would share it here. Most importantly, I clarify what I really mean when I say that the Federal Reserve Banks are “almost certainly” unconstitutional, a point of contention and debate with fellow blogger Daniel Hemel. I make other points, too, about why hard thinking about central bank governance is so important and relatively rare.
It is often said that an author’s relationship to his book is similar to that of a parent to a child. Having had both, I can see the parallels: When this book first came out in January 2016, I braced myself much as I remember doing when I first dropped off my son for kindergarten.
My kids survived kindergarten, and the book survived its debut. Overall, I’ve been delighted by the book’s reception, but not because the reviews have been uniformly positive (although the fact that most of the reviews have been positive is of course better than the alternative!). Mostly I’ve been delighted that the book seems to be generating debate and reevaluation of what the Federal Reserve is and how the Fed fits within our broader governmental structure. This engagement has been much broader than I had expected for so academic a book, and I’ve been pleased to see such an appetite for hard thinking about something as abstruse as Fed governance.
Not all of even these engaged responses have been positive though, and some criticism I have received has been quite heated. Many people whose ideas I respect see my approach to Fed independence as fundamentally misguided. What is so illuminating about these critiques is that they have divided roughly in half. Either I am accused of being much too hard on the Fed and, reciprocally, much too confident in the virtues of politics. Or I am much too hard on politicians, and, reciprocally, much too confident in the virtues of central banking.
I’ll confess that these inconsistent reactions have confirmed for me that I’m on to something in The Power and Independence of the Federal Reserve. The upshot of my argument is that those who fall too easily into either one of those two camps—the central bankers wary of citizens or the little-d democrats wary of central banks—are too sure of themselves and their rose- or sulfur-colored glasses. The Fed is a much more complicated, and much more interesting, set of institutions than these easy caricatures permit. More importantly, perhaps, the challenge inherent to expanding the benefits of democratic accountability without demolishing the virtues of central banking expertise is much more difficult than these extreme positions would allow.
I see Power and Independence, then, as taking a stand for radical moderation in a time when moderates aren’t a particularly valued voice. To put it differently, this book stands for the proposition that institutions matter, and institutions change, and that we should be mindful of those changes as we go about the project of institutional design no matter who is president. The mechanism of change in the Fed’s case is more often driven by personality rather than law, and this fundamental reality cannot be obscured when we identify the central bank as being existentially defined as being all good or all bad. I never expected to convince all of the partisans that this radical center should be the space where discussions on Fed reform should begin and end, but part of the project’s success has been how many of these partisans concede that the model of central banking they espouse is an oversimplification.
Although I have been pleased by the book’s general reception, even among partisans, there are two specific reactions that have thrilled me less. First, the idea that Power and Independence is a diatribe against the Federal Reserve Banks and their unconstitutional structure has taken root among some readers (perhaps especially at the Reserve Banks themselves). The book isn’t that. There is real value in the Reserve Banks, and I do not seek their abolition. It is true that I think the Federal Open Market Committee—the Fed’s monetary policymaking committee—would be improved by streamlining (and reducing) the number of bodies in the room, but I see the Reserve Banks’ role as the eyes and ears of the Fed scattered throughout the country as worthwhile. Groupthink in central banking, as elsewhere, is a danger; it’s useful, even essential, to have diversity along all dimensions in the central bankers who sit in the big chairs around the big table.
As I write in the introduction, the fault is mine if what I have written is unclear. And gauging by the reaction from the Federal Reserve Banks, I must concede that the tone of my critique of the Reserve Banks should have reflected more of the benefits of the quasi-federalist model of governance, even as I argue that those benefits don’t outweigh the costs.
Because the costs of the opacity of Reserve Bank governance are clear, and there is little justification for giving the private sector (especially among regulated banks) an outsized voice in selecting these public figures. I think the problem of Fed governance begs a simpler conclusion. The people, through the President and the Senate, should select the political heads of the Fed (including the general counsel), and those political heads should in turn choose the rest of the staff, including the Federal Reserve Bank presidents. This is not the fevered critique of a Fed-bashing firebrand (as one Reserve Bank director described me), but a recognition that the reasons that have justified the Fed’s tangled governance structure no longer make sense, if they have ever made sense at all.
I’ll let Power and Independence speak for itself in making those arguments, but I want to defend (and modify) one place that has received more attention than I give it in the book, and that is on the constitutional status of the Federal Reserve Banks. I’m a financial historian and a banking lawyer, not a constitutional scholar, and I fear the presentation of the constitutional argument has both oversimplified a fascinating problem and, in any case, diverted attention from my overall argument about central banking policy, not constitutional law.
I write in chapter five that I think the Federal Reserve Banks are “almost certainly unconstitutional.” This has provoked protests and more than one accusation that I’m playing fast and loose with facts, history, and law. Ironically, I inserted “almost certainly” as a downward modifier, meaning that I retain some doubt (however small) about whether the Supreme Court, following the relevant 2010 decision calling into question the kind of governance structure within the Fed, really would treat the Fed in the same way. But “almost certainly” has been interpreted as nearly the opposite of my intention, meaning that there is no question at all as to the Fed’s unconstitutionality, that the issue seems obvious or beyond the scope of reasonable debate.
Probably the most satisfying and illuminating exchange I had on this question was with the University of Chicago’s Daniel Hemel. He takes a similar view, emphasized differently: he’s not so sure that the Reserve Banks are unconstitutional, but nor is he convinced that they are. Readers can get to the bottom of those debates at their source, but let me make two points more clearly than I did in the original chapter.
First, I have no idea how a court would decide to treat the Fed, because courts are hard to predict and, anyway, the Supreme Court is unlikely to ever take the case (for reasons I explain in the book). If the argument is whether the Fed will be deemed unconstitutional by a future Supreme Court, I plead ignorance. There are far more sophisticated treatments of these kinds of constitutional issues generally—as a matter of history, law, and politics—than I broach in this section of one chapter.
And second, as I write in chapter eleven, the unconstitutional argument is a bit of a red herring precisely because I don’t regard the constitutional fix as anywhere near adequate to address the governance problems that the Reserve Banks present. To improve the Fed’s governance, we should go much further than the Constitution, as interpreted by the U.S. Supreme Court, has done before.
Why, then, make a constitutional argument with such confidence at all? Because I am that confident—almost certain, if I may—that there is no credible way to distinguish the Federal Reserve Banks from the agency invalidated by the Supreme Court’s 2010 decision, and that this feature tells us something about the key question I address in the book: the Fed’s unique power and the opaque governance structure that shelters it.
The second issue I wish I had discussed in more detail is how much central banker ideology matters in determining policy. Some readers got this impression loud and clear, but some of my central banker friends think I misstate what central banking is, as a matter of technique and epistemology. So let me state this clearly: When I say that a central banker is ideological, I am not saying that she is partisan. As I have written after the book came out, I think this characterization—prominent during the 2016 U.S. presidential election—is dangerous and wrong. To say a central banker is ideological is to say that a central banker is human. That basic humanity—strengths and weaknesses, hopes and dreams, friends and enemies—tells us something important about central banking policy. For many central banking decisions, experts will agree on the appropriate disposition, even when that expertise points away from a central banker’s preferred political outcomes. But for the most interesting questions, the experts will not agree. And when the technical apparatus of central banking breaks down, how a central banker resolves those thorny questions will not only reflect technical expertise, though such expertise will surely be involved. It will also reflect the central banker’s values, worldview, judgment—even ideology. Thus, where Janet Yellen will deny that she is ideological, and her opponents will insist that she is partisan, Power and Independence avers that she is human. Any account of the Fed’s power and independence will have to embrace that recognition.
Most authors prefer to expand their audience rather than restrict them, and, again, the size of my audience has caught me by surprise. Still, for the new paperback readers, let me sound two notes of caution. This book is an analytical account of the Fed and its independence, not a chronological history. I jump around a lot on the timeline, which can make it difficult to follow as an audio book, for example. That comprehensive historical effort is coming next, for those readers who would prefer a less academic treatment.
Second, Power and Independence is not the work of a policy entrepreneur. Some books, even by academics, are written with a grand theory of what is disordered about their topic and why the problems must be solved only according to a prescribed grand theoretical solution. One of the most credible critiques I have received is that even my modest legislative proposals, tucked into the final chapter, aren’t worth pursuing because one never knows what a legislative process around Fed governance will in fact yield. This is a fairly compelling argument that may well carry the day, even for me despite my enthusiasms for legislative change at the Fed. My point in including reforms is to initiate discussions, not conclude them. In the chapters ahead, I argue that the Fed’s governance is needlessly opaque, and that a better understanding of where it sits within markets and the government can help improve how the Fed performs its many functions consistent with the demands of democratic accountability. Whether that means limiting the Fed Chair’s tenure or changing the appointment process for the Fed’s general counsel—both of which I favor—is a separate conversation. If the book continues to get people thinking about Fed governance and the mostly incoherent way that the concept of Fed independence gets batted around, I will regard it as a success.
One last clarification for those confused by the book’s cover. That’s not the Federal Reserve Building, but the U.S. Treasury, which seems very odd: why put the Treasury on the cover of a book about the Fed? The reason is aesthetic and substantive. Aesthetically, we were aiming at making the book look like a dollar bill (note the font). Substantively, the U.S. Treasury building was the Federal Reserve building until 1937, and given how much of the book is about the fundamental changes to the Fed during that period, it seemed appropriate. And besides, the book is about where the Fed fits within government, a subtle acknowledgment of how inextricably political the Fed is and must be if it is to succeed. Maybe too subtle for book marketing purposes, but there you have it.
Philadelphia, February 2017
Conti-Brown, P. 2016. The Case for the Federal Reserve Banks’ Constitutionality is Uneasy Indeed, part I: Is the Fed More Like the Girl Scouts or the Government?, Yale J. on Reg.: Notice & Comment (Apr. 22, 2016), http://yalejreg.com/nc/the-case-for-the-federal-reserve banks-constitutionality-is-uneasy-indeed-part-i-is-the-fed-more-lik/.
Conti-Brown, P. 2016. The Case for the Federal Reserve Banks’ Constitutionality is Uneasy Indeed, part II: Appointing and Removing the Reserve Bank Presidents, Yale J. on Reg.: Notice & Comment (May 18, 2016), http://yalejreg.com/nc/the-case-for-the-federal-reserve banks-constitutionality-is-uneasy-indeed-part-ii-appointing-and-rem/.
Conti-Brown, P. 2016. Why conservatives should fear a Trump Federal Reserve. Fortune. Retrieved from http://fortune.com/2016/10/06/donald-trump-federal-reserve-conservatives/
Hemel, D. 2016. Maybe the Federal Reserve Banks Are Constitutional After All, by Daniel Hemel, Yale J. on Reg.: Notice & Comment (Apr. 4, 2016), http://yalejreg.com/nc/maybe-the federal-reserve-banks-are-constitutional-after-all-by-daniel-hemel/.
Mascott, Jennifer L., Who are ‘Officers of the United States’? (February 16, 2017). Available at SSRN: https://ssrn.com/abstract=2918952 or http://dx.doi.org/10.2139/ssrn.2918952
Tillman, Seth Barrett, Who Can Be President of the United States?: Candidate Hillary Clinton and the Problem of Statutory Qualifications (December 1, 2015). 5(1) Br. J. Am. Leg. Studies 95-121 (2016) (peer reviewed). Available at SSRN: https://ssrn.com/abstract=2679512