My many thanks again to Chris Walker, the Journal editors, and the many contributors for a very stimulating symposium on my book, The Power and Independence of the Federal Reserve. I wanted to write today (and, because these issues end up taking so much space to unpack, in a subsequent post as well) to push back against Daniel Hemel’s constitutional analysis , or at least doubt his doubts about the constitutional questions I raise in the book.

I should make two confessions before I engage in substance. First, Daniel’s is the first constitutional defense of the FOMC structure that I’ve seen that makes any kind of sense. The only alternative I’ve seen is a director of the Federal Reserve Bank of New York who seems to insist in Foreign Affairs that a thirty-year old district court case that was vacated on appeal already resolves the issue (although, in his defense, he moves quickly into the policy arguments in favor of the Reserve Banks and spends very little time on the constitutional questions). I’ve also had off-line debates with some Fed insiders who are very agitated by the suggestion that the Reserve Banks have any constitutional problems at all. These arguments become quickly tedious, because they turn into defenses of the integrity of Reserve Bank insiders and referenda on the Fed’s policies during the financial crisis. Those lines of argument are of course non-sequiturs—saying that the Reserve Banks’ governance presents constitutional problems isn’t to say that Reserve Bank insiders are corrupt, or that the Fed’s actions are a fruit of that poisoned tree. Fortunately, Daniel’s post doesn’t fall into that trap. The question of whether the Reserve Banks’ institutional design conforms to the Constitution as recently interpreted by the Supreme Court deserves a more serious look, and Daniel certainly provides it.

My second confession is that I worry that focusing on the constitutional question of Reserve Bank governance, as opposed to the more straight-forward policy questions, provides something of a distraction to the broader issues. A word of warning to future writers on the Fed: You say a key governmental institution like the central bank is unconstitutional, and you really get people’s attention. My problem is that I want readers to focus on the much broader context of the Fed’s institutional design without losing too much to these constitutional debates, as interesting as they are. The desire to move past the constitutional issues is all the more important because of the question of standing that Daniel and I agree will likely prevent judicial review of the Fed’s structure, absent a big change in the DC Circuit’s jurisprudence on this question. And this is frankly as it should be. I’m a judicial agnostic, leaning judicial atheist, on the question whether a judicial invalidation of the relevant sections of the Federal Reserve Act is the right mechanism to correct what I regard as a problem with the current arrangement.

Throat so cleared, let’s get to it: I am not convinced by Daniel’s admittedly “not easy” case for the Reserve Banks constitutionality, on two separate bases, the first of which I cover here.

Recall the way Daniel summarized the constitutional problem:

(1) The Reserve Bank presidents who sit on the FOMC are “Officers of the United States” for constitutional purposes;

(2a) The process for appointing Reserve Bank presidents does not conform to the requirements of Article II, § 2, clause 2 , which governs the appointment of “Officers of the United States”; and/or

(2b) The process for removing Reserve Bank presidents violates the separation of powers, as interpreted by Supreme Court decisions addressing the removal of “Officers.”

To the first, Daniel argues that the Reserve Bank presidents aren’t officers just because the Reserve Banks were established by Congress or because the Reserve Bank presidents receive authority by federal statute: the Society of American Florists and Ornamental Horticulturalists, he notes, was set up by Congress, and the CEO of the Girl Scouts of America receives statutory authority. And it can’t be that just because the Reserve Banks exercise market power that they are officers—Warren Buffett also has market power.

There’s the question: are the Reserve Banks more like the Society of American Florists and Ornamental Horticulturalists, the Girl Scouts of America, or Warren Buffett, or more like government agencies that exercise “significant authority pursuant to the laws of the United States”?

I would argue the latter, and don’t think it’s a close call.

Take three examples. First, open-market operations. Second, the negotiation of international swap agreements. And third, the determination of which financial institutions can receive emergency loans under the (in)famous section 13(3) of the Federal Reserve Act.

On the first, does making decisions about the general economic conditions of the United States and the very value of the nation’s “faith and credit” look more like the “significant authority” that belongs to the government agencies that cannot be delegated to private ones? I’m tempted to say “res ipsa loquitur,” given how much unparalleled power the Fed has over the national and indeed global economy, but it’s worth unpacking these claims a bit.

The key problem with the idea that the Federal Open Market Committee is doing work like the Girls Scouts or the Horticulturalists or Warren Buffett is the very fact that we operate on a fiat currency where cash is literally and legally defined as “Federal Reserve Notes” that are deemed nonconvertible legal tender. The question of what our money should be is among the most controversial in U.S. history, and the debates about the Bank of the United States (both times) and even the Federal Reserve Act did not take for granted the idea that these institutions would be able to set the value of currency at whatever they deemed appropriate. In each case, proponents of the system saw fiat currency as the evil these institutions were designed to prevent.

Well, best laid plans I suppose. The fiat currency is here, not because the government was too jealous of this power, but because the other alternatives were so deeply flawed. The Fed—meaning the Federal Open Market Committee, including the Reserve Bank presidents—plays an extraordinary role in determining the value of our currency, a role that no other private actor can play. Under a gold standard, or under a different theory of money and banking, that role would be diminished and might—might—look different from purely public administrative work. We don’t live in that world today.

This difference, by the way, is precisely why thinking about the institutional design of the Bank of the United States in 1791 just doesn’t tell us much of anything about the constitutionality of the Federal Reserve Banks. The world of central banking has changed dramatically since 1791. This isn’t an argument in favor of living constitutionalism or against originalism. It’s a historical argument that says the functions of the Bank of the United States just don’t look like anything we see inside the Federal Reserve System today.

Second, the negotiation of international swap agreements. As financial historian Harold James has noted , one of the most surprising results from the disclosures of the 2008 FOMC transcripts is just how much they were thinking about the international context, and how aggressively they opened the Fed’s balance sheet and liquidity to currency risk on behalf of foreign banking systems. I’m convinced by the Fed’s justification for these extraordinary decisions, but not everyone is: the Fed’s international role during the crisis has been a lightning rod for criticism, not least is the question of how the Fed got the authority to engage in these transactions, and how they determined which central banks would qualify for this extraordinary relief.

The Fed is fairly transparent about its authority. From its website:

The Federal Reserve operates these swap lines under the authority of section 14 of the Federal Reserve Act and in compliance with authorizations, policies, and procedures established by the Federal Open Market Committee (FOMC).

A federal statute gives the FOMC (including the Reserve Bank presidents) authority. That authority requires making “authorizations, policies, and procedures” that governed how the FOMC would use $600 billion, on behalf of which of our allies and trading partners. For point of reference, the entire discretionary spending by the federal government in 2008 was $1.1 trillion.

Given the scope of this authority, its impact on the global and national economies, and that no other entity—private or public—can legally or functionally fill this role, I have a hard time seeing how this authority isn’t “significant” governmental power.

Finally, consider again the Reserve Banks’ unique role in determining who could receive emergency lending under Section 13(3) of the Federal Reserve Act. These issues are familiar to our readers from a debate I had with Philip Wallach on these pages, but one point from those debates is worth highlighting. In relevant part, the statute as written in 2008 (and although changed, not changed as relevant here) provided that “in unusual and exigent circumstances,” five members of the Fed’s Board of Governors could lend money through a Federal Reserve Bank to any “individual, partnership, or corporation” so long as the loan is “secured to the satisfaction of the Federal reserve bank.” Before making the loan, though, the relevant Reserve Bank has to “obtain evidence” that the individual, partnership, or corporation in question “is unable to secure adequate credit accommodations from other banking institutions.”

That key term—“secured to the satisfaction of the Federal reserve bank”—places an extraordinary amount of authority in the hands of the Reserve Bank. And they used that authority, if we are to take Ben Bernanke and Timothy Geithner at their word. The New York Fed determined that Lehman’s assets weren’t good enough to justify the loan, and recovery was too uncertain. It wasn’t “satisfied” with the security offered. It could have been, but used its extraordinary discretion to reach another conclusion.

Given the financial cataclysm that followed when Lehman was turned down by the Fed—including, as we’ve seen, the Federal Reserve Bank of New York—I would think the decision ranks among the most significant made by a governmental institution in the last century.

Bottom line: These Reserve Banks aren’t your neighborhood Girl Scouts.