The Fed Knows Prices, But the Founders Knew Real Values

by Adam White — Thursday, Apr. 7, 2016

Peter Conti-Brown’s terrific study of the Federal Reserve arrives amid a small boomlet—I won’t say “bubble”—of new books on our central bank: Roger Lowenstein’s America’s Bank: The Epic Struggle to Create the Federal Reserve; former Chairman Bernanke’s memoir, The Courage to Act; similar memoirs by former Chairman Greenspan and former Treasury Secretary Geithner; Philip Wallach’s To the Edge (which was itself the focus of a “Notice and Comment” debate with Conti-Brown); and myriad books analyzing the recent financial crisis and aftermath.

On the one hand, this is wonderful news for those of us who love to think and write about the administrative state. On the other hand, perhaps the fact that the Federal Reserve suddenly deserves—demands—so much attention from scholars and elected officials might suggest that that something has gone awry on matters of financial law and policy.

A century ago, when Lloyd Milton Short published The Development of National Administrative Organization in the United States (1923), the Federal Reserve Board received roughly one page of discussion in a 500-page book, sandwiched between the “Board of Mediation and Conciliation” and the “Rock Creek and Potomac Parkway Commission.” Even if the Fed was already was recognized as (in Short’s words) “one of the most important detached agencies established since the creation of the Interstate Commerce Commission,” it paled in comparison to the fifty pages’ attention paid to the Treasury Department, or even the Post Office.

So whether they are a sign of fruitful scholarly times, or a symptom of something gone awry in American government, we should welcome these books shedding light on a part of American government that long received too little attention, especially among scholars of the administrative state. (I’ve already written a little on these issues, and will write more soon.)

Peter’s contribution is especially welcome. First and foremost, he is adding to a conversation started by Rachel Barkow , Jacob Gersen, and other scholars who in recent years have challenged conventional wisdom as to notions of agency “independence.” Looking beyond the usual paradigm of agency “independence” defined exclusively in terms of the President’s power to fire the agency’s head, these scholars have focused on other ways in which agencies might be “insulated” from political influence—or, one might say, republican accountability.

Conti-Brown’s analysis exemplifies this approach. As to the President, he considers not just the theory and practice of presidential removal power, but also three other “modes of control” that the President wields against the Federal Reserve Board of Governors—or, vice versa. First, there is the President’s “Control by Appointment.” Second, there is the President’s “Control by Domination,” exemplified by President Nixon’s dominance of Arthur Burns, which Conti-Brown calls “a success for the president, and a failure for the Fed and Arthur Burns” (194). And third, “Reverse Control,” exemplified by Alan Greenspan’s persuasive effect on President Clinton. (The latter example calls to mind the lament of Clinton’s political strategist, James Carville, who amid the budget battles quipped , “I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.”)

But no less important is Conti-Brown’s focus on the relationship between the Fed and Congress. Today the Fed enjoys “complete budgetary autonomy” (208), the culmination of decades of dwindling congressional fiscal power over the Fed. By funding itself primarily through interest earned on its massive financial holdings, instead of through appropriations, the Fed enjoys “extraordinary latitude,” according to Conti-Brown (215). An “important barrier between the Fed and Congress” is erected “by removing from Congress one of the most important tools of oversight”—namely, what James Madison famously called “the power of the purse.”

Specifically, Madison urged in Federalist 58 that “[t]his power over the purse may, in fact, be regarded as the most complete and effectual weapon with which any constitution can arm the immediate representatives of the people, for obtaining a redress of every grievance, and for carrying into effect every just and salutary measure.”

Conti-Brown sees things much differently. It’s not that he disagrees with the purse’s power; rather, he disputes Madison’s view that it’s a power that serves useful ends, at least when applied to the Fed. Requiring the Fed to secure funding from Congress “may be well intentioned,” he writes, “but it would also be very harmful,” because “[i]f the Fed had to go to the Congress to receive its funding, the political concessions that Congress could exact would be tantamount to a declaration that monetary policy must be conducted by members of Congress (215). Whether one agrees or disagrees with Conti-Brown’s assessment—and I’m disinclined to give Madison’s view such short shrift, as I’ll explain briefly at the end—Conti-Brown does a very good job highlighting the full measure of the Fed’s “independence.”

But Conti-Brown’s most important contribution goes beyond examining just the Fed’s “independence.” Rather, his book’s major contribution is implied by the title: “The Power andIndependence of the Federal Reserve.” Instead of considering only the Fed’s structural independence, or only the powers wielded by the Fed, Conti-Brown takes care to keep both plainly in sight throughout the book, recognizing that the degree of practical “independence” that the Fed enjoys might change depending on the particular sort of power wielded by the Fed: as “lender of last resort”; as regulator of banks; as supervisor of banks; and as monitor of national financial stability (150).

This is a welcome departure from the normal approach in administrative law, where doctrines of “independence” and “nondelegation” are discussed in relative isolation of one another. Indeed, they are discussed in relative isolation despite the fact that they arose in the same constitutional and political moment—the Supreme Court’s review of the first New Deal. An they are discussed in relative isolation despite the fact that, in the Court’s own decisions, the delegation question lurks in the background of the independence question, and vice versa. (In Morrison v. Olson, for example, the Court’s comfort with the Independent Counsel’s structural independence was justified in part by the IC’s “limited jurisdiction and tenure,” with no “policymaking or significant administrative authority.”)

But Conti-Brown, like other scholars who have diagnosed these broader points of agency independence and power, does not take the further step of asking how our this new recognition of modern agency independence and power should affect constitutional doctrine. Instead, the tendency is to take the structural constitutional doctrines as given, a ceiling on scrutiny that courts should dedicate to the agencies. For example, Conti-Brown’s thorough review of the Federal Reserve Board’s independence from the president culminates with a mere footnote, answering the constitutional question with a shrug: “it is an open question whether the court would” allow a president to fire the Fed chairman at will, with citations to Free Enterprise Fund v. PCAOB, Parsons v. United States, and Shurtleff v. United States. (On other questions he is less uncertain: the Fed’s Reserve Banks “are almost certainly unconstitutional,” because the President doesn’t appoint their heads (107).) That said, Conti-Brown freely admits that he would rather avoid this constitutional debate altogether, and let such questions “rise and fall on the political winds of the time, not the legal determinations of disputes long past” (184).

One might reply, in the words of President Obama, that we needn’t accept this “false choice.” To vindicate the Framers’ design, we can apply fundamental principles through the lens of our modern understandings of today’s agencies, including the Federal Reserve Board of Governors.

Of course, the nation’s central bank has always occupied a curious corner of our constitutional structure—not just the Federal Reserve, but also the banks that preceded it. Chief Justice Marshall recognized in McCulloch v. Maryland that Congress’s chartering of the Bank of the United States was an assertion of “sovereign power” in proper execution of Congress’s enumerated powers, but he did not further explain how the Bank would fit within the three branches of government. As originally enacted , the First Bank of the United States was run primarily by directors elected by the Bank’s stockholders, not men appointed by the President with Senate advice and consent. Even before the Bank was created, Alexander Hamilton had in mind an entity almost fully removed the national government’s ordinary workings: “neither the mass of the parties interested [in the bank’s activities], nor the public in general, can be permitted to be witnesses of the interior management of the directors,” he wrote in his Second Report on Public Credit . “To attach full confidence to an institution of this nature, it appears to be an essential ingredient in its structure, that it shall be under a private, not a public direction, under the guidance of individual interest, not of public policy,” with the public left to rely on the directors’ “magnetic sense of their own interest in proprietors” pursuing “the prosperity of the institution” as the best guarantor of “a careful and prudent administration.”

Needless to say, the founding generation’s embrace of Hamilton’s vision raises significant questions of how such a bank would fit with a theory of the “unitary executive.” Even Steven Calabresi and Christopher Yoo have difficulty grappling with this question in The Unitary Executive: “The one genuinely puzzling entity created at the founding from the perspective of the unitary executive is the first Bank of the United states, which was to be run by a board of directors of whom only a minority were to be selected by President Washington and the national government,” they write. “We think the explanation for the anomaly that was the bank stemmed from doubt as to whether the power it exercised was governmental power at all.”

If this were true in 1791, it certainly was less true in 1913 when the Federal Reserve System was chartered, and even less so in 1935, when the Fed’s “Second Founding” turned “private banks running a private banking policy with public benefits to a public central bank in the modern sense of the word,” as Conti-Brown puts it (31).

And even less true today. Conti-Brown illustrates emphatically the Fed’s expansive regulatory role today. Even if the Fed were “always a regulator of sorts . . . what has changed over its century, and accelerated after the crisis, is the expansive scope of its regulatory portfolio” (158-159). (As former Fed vice chairman Alan Blinder notes in After the Music Stopped, “the Dodd-Frank Act left the fed more powerful than ever.”) The modern Federal Reserve wears “five hundred hats,” as Conti-Brown felicitously puts it. It is a lender of last resort; a supervisor of banks; a monitor of systemic financial risk; and a day-to-day regulator of financial institutions.

But Conti-Brown’s depiction of the modern Federal Reserve—multifaceted, not monolithic—leaves one wondering why more direct presidential and congressional oversight of the Fed is such a bad thing. (Andrew Kloster had a similar reaction yesterday.) Even if everyone agrees that the Fed’s core monetary and lender-of-last-resort activities deserve special “insulation” from political accountability, that is not itself a justification for exempting the Fed’s general regulatory activities from the ordinary means of OIRA oversight and Congress’s power of the purse. Unless one believes that presidential and congressional checks and balances on the agencies is an inherently bad thing, proponents of broad Fed independence need to offer a compelling justification for treating the Fed’s regulatory activities from, say, the EPA’s. One can support both “Hamiltonian” insulation of the Fed’s lending and monetary activities and “Madisonian” republican accountability for regulatory activities.

As noted above, Conti-Brown’s nuanced approach to the Fed’s “independence” in general becomes much more categorical on the question of Congress’s power of the purse. Responding to proposals to “subject the Fed to the annual congressional appropriations process,” he urges that “this proposal may be well intentioned, but it would also be very harmful,” for it “would end the Fed’s ability to conduct monetary policy separately from the House of Representatives. If the Fed had to go to the Congress to receive its funding, the political concessions that Congress could extract would be tantamount to a declaration that monetary policy must be conducted by members of Congress” (215). Again, that might justify maintaining fiscal independence for the Fed’s monetary role, but not its regulatory role. And if the two cannot be separated within the Fed, the natural follow-up question is, why not transfer the Fed’s regulatory powers to another agency, one that actually is accountable Congress’s power of the purse?

To be fair, Conti-Brown’s dim view of Congress puts him in esteemed company. Alan Greenspan and Tim Geithner disagree on many, many things when it comes to monetary policy, as their two recent memoirs illustrated. But as I wrote in a City Journal essay on the books, for all their disagreements on monetary policy they agree on the much more fundamental question of how Congress fits into the picture. Simply put, they both agree that when it comes to the Fed, Congress is counterproductive, democracy is irrelevant, and what the Fed needs most of all is to be left alone to exercise expert judgment.

Except the Fed’s policies aren’t exclusively technocratic. They necessarily implicate value-laden policy judgments. Even Geithner recognized this in his book: “This is the central paradox of financial crises,” he writes in his closing pages. “What feels just and fair is often the opposite of what’s required for a just and fair outcome.” And this is why, he writes, “policymakers generally tend to make crises worse, and why the politics of crisis management are always untenable.” But as I noted in my City Journal essay, the second point does not follow from the first. The Treasury and the Fed might handle purely technical questions better than Congress and citizens, but advanced degrees in macroeconomic modeling don’t guarantee superior insight into what constitutes “a just and fair outcome.”

Conti-Brown recognizes this, too, when he writes that questions of inflation and other macroeconomic concerns, “the question is not purely technocratic but the evaluation of competing value propositions that will otherwise be resolved by partisan politics” (174).

I think he may have meant those last words—“partisan politics”—in a bad way. I wouldn’t. And I’d like to think that Madison wouldn’t, either. It’s often said than an economist (like a cynic) is someone who knows the price of everything but the value of nothing. When it comes to questions of value, better judges are found in the people themselves .

Adam J. White is a visiting fellow at the Hoover Institution. He recently testified before the House Financial Services Committee on constitutional concerns about the Financial Stability Oversight Council.

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