In my last post, I wrote about whether the Reserve Bank presidents were more like the CEO of the Girl Scouts or Warren Buffett on the one hand, or officers of the United States exercising significant government authority on the other. I think the answer is the latter, especially in light of how much authority the Federal Open Market Committee wield over the national economy.

Today I want to address the separate constitutional question I raised in my book and analyzed more thoroughly by Daniel Hemel, namely, whether the appointment and removal procedures designated in the Federal Reserve Act conform to the constitutional requirements as articulated by the Supreme Court.

As Daniel helpfully summarized my constitutional challenge to the Fed:

— (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.”

Daniel’s main defense of the appointment process is that the Fed’s Board of Governors—themselves presidential appointments subject to Senate confirmation—must, by statute, approve of the Reserve Bank presidents submitted by the Banks private-member boards of directors. If, “[a]s a practical matter, the governors can disapprove every nominee until the directors send them someone they like,” then hasn’t Congress deposited the appointment power in the “heads of Departments,” consistent with the Constitution’s Appointments Clause?

I think the answer is no. The Appointments Clause itself contains an apt analogy: the president nominates, but the Senate must approve, before a candidate becomes an officer of the United States. It might well be that “[a]s a practical matter, the [Senators] can disapprove every nominee until [the President] send[s] them someone they like,” but that doesn’t mean the Senate is making the appointment. The procedure is meant to dissipate power, invite politics into the process in the best sense, and otherwise require multiple parties to participate in these key decisions. But the order is key, both for Presidential appointments subject to Senate confirmation and to Reserve Bank directors’ appointments that require the Governors’ approval. The Governors can be—and, at different times in history, have been—more or less active in using their veto, but this doesn’t change the fact that the private boards of directors are initiating the process.

On the removability question, we get into some closer statutory parsing. I argue in the book that if the U.S. President wants to remove a Reserve Bank president without cause, he’ll have to lean through three different layers of bureaucracy: U.S. President >> the Board of Governors >> to the Reserve Bank directors >> the Reserve Bank president. Only the Reserve Bank directors can remove the Reserve Bank president for any reason at all. The rest are protected by some kind of “for cause” removability protection.

On this point, Daniel and I disagree. The Federal Reserve Act articulates a procedure for removing a Reserve Bank president, in 12 U.S.C. § 248(f):

To suspend or remove any officer or director of any Federal reserve bank, the cause of such removal to be forthwith communicated in writing by the Board of Governors of the Federal Reserve System to the removed officer or director and to said bank.

The key question here is “the cause of such removal to be forthwith communicated in writing.” I think this invocation of the key term—“cause”—is enough to put us in a “removability only for cause” world, but Daniel doesn’t. “Apparently any reason will do,” he writes. On that reading, Daniel concludes, “Reserve Bank presidents are inferior officers removable at will by the Board of Governors, and . . . the governors are removable for cause by the (U.S.) President, then this looks almost exactly like the arrangement that the Court in Free Enterprise ultimately allowed.”

The problem with Daniel’s conclusion is in the differentiated treatment of the removal protections afforded to the Governors from the U.S. President and the Reserve Bank presidents from the Governors. In 12 U.S.C. § 242, we learn about the protections for the Board of Governors:

each member [of the Board] shall hold office for a term of fourteen years from the expiration of the term of his predecessor, unless sooner removed for cause by the President

Cause here isn’t defined either. Will any reason do? I doubt it; the legislative history certainly suggests an intent to insulate the Board from presidential meddling. But that’s just the point: the legislative history also suggests an intent to insulate the Reserve Banks from Board meddling. Indeed, by requiring that the Board provide the cause “in writing,” the Federal Reserve Act seems to put more of a burden, not less, on those who would remove the Reserve Bank presidents rather than those who would remove the Governors.

If that statutory protection exists, then, we have two levels of it, in violation of the principle articulated in Free Enterprise Fund v. PCAOB. Hence my claim in the book that the Reserve Banks’ governance is “almost certainly” unconstitutional.

Two concluding points on this debate. First, I’m not as certain as Daniel that the Court would invoke the canon of constitutional avoidance in this context. After all, the Free Enterprise Fund courtassumed that the SEC Commissioners were protected by for-cause removability when the statute is completely silent on this point. This assumption came at the parties’ urging, but normally, as Adrian Vermeule has noted, courts don’t allow parties to stipulate to the law, especially legal propositions that create the very constitutional debility that the Court is addressing.

That said, the Court’s preferred remedy for unconstitutional removability protections is to narrowly rewrite the statute to excise those protections. That revision would be very easy for the Federal Reserve Act: it would leave the “for cause” protection for the Board of Governors but remove any such protection for the Reserve Banks. Hence, constitutional avoidance and the constitutional remedy are essentially identical.

This leads to the second point: Such an exercise, whether to avoid the constitutional defect or to remedy it, would leave the circuitous, confusing, and arguably conflicted governance structure already at the Reserve Banks firmly in place.

This tension between an unconstitutional structure and such a breezy constitutional fix is why I think focusing on the constitutional issues at the Reserve Banks is a bit of a distraction from the broader policy questions related to Fed governance, and why I don’t spend much time on these issues in my book. Whatever the constitutional weaknesses—and, again, I think they are clear—the real trouble with Fed governance goes much deeper.