Notice & Comment

Form, Function, and the Fed, by Daniel Hemel

I’m neither a constitutional law scholar nor an expert on the Federal Reserve, so I’m reluctant to wade deeper into the debate over the Fed’s constitutionality when I’m already beyond neck deep. In an earlier post, I suggested that “ maybe”—but only maybe—“the Federal Reserve banks are constitutional after all,” a claim that struck me as relatively modest given that the Federal Reserve has been around since 1913 and has survived constitutional challenges so far. Peter Conti-Brown, who most certainly is an expert on the Fed, has responded with two posts taking issue with my analysis: in Peter’s view, the unconstitutionality of the Fed is quite clear. Peter’s posts are characteristically thoughtful and his concerns about the constitutionality of the Fed are well-founded. In the end, though, I’m still not convinced that the constitutional case against the Fed is so open and shut.

For those just joining now, Peter’s constitutional case against the Fed can be summarized as follows:

— (1) The Reserve Bank presidents who sit on the Federal Open Market Committee (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.”

I began my earlier post by questioning Peter’s first premise: if the CEO of the Girl Scouts isn’t an “Officer” of the United States and Warren Buffet isn’t either, why does Peter believe that the presidents of the regional Reserve Banks are “Officers”? After all, the Girl Scouts (like the Reserve Banks) are congressionally chartered, and Warren Buffet (like the Reserve Bank presidents on the FOMC) move markets with their daily trading decisions. And while Supreme Court case law isn’t crystal clear (to put it mildly) as to what makes someone an “Officer,” the best view, I think, is that an “Officer” is one who exercises “regulatory power” pursuant to federal law. See Department of Transportation v. Association of American Railroads (Amtrak), 575 U.S. __ (2015) (Alito, J., concurring) (slip op. at 2-4). The FOMC’s activities are not “regulatory” in the strict sense: the FOMC influences interest rates via open market transactions, but it does not “govern or direct according to rule.” So if we define an “Officer” as Justice Alito’s Amtrak concurrence suggests, the Reserve Bank presidents quite likely lie outside that definition.

This argument is admittedly formalistic, and Peter’s response is a functional one. To paraphrase: Sure, as a formal matter the FOMC only buys and sells securities, engages in swaps, and makes loans, but functionally the FOMC does indeed govern and direct transactions between private parties by determining interest rates. The FOMC certainly influences our lives more than the Postal Regulatory Commission or the Foreign Claims Settlement Commission, and virtually everyone agrees that members of the latter bodies are “Officers” in the constitutional sense of the term. The FOMC, Peter emphasizes, “plays an extraordinary role in determining the market value of our currency, a role that no other private actor can play.” It would be anomalous to say that Reserve Bank presidents on the FOMC aren’t “Officers,” when officials with much less significant functions are.

Assuming that Reserve Bank presidents are indeed “Officers,” what implications follow? Peter says that if the Reserve Bank presidents are “Officers,” then their appointment doesn’t conform to Article II’s requirements. “Officers,” even if they are “inferior” officers, must be appointed by the President, a “Court[] of Law,” or a “Head[] of Department.” As I wrote in my earlier post:

A multimember body such as the Federal Reserve Board of Governors can qualify as a “Head of Department.” . . . . And it is at least arguable that Congress has indeed vested the appointment of Reserve Bank presidents in the Board of Governors. . . . Reserve Bank presidents are chosen by the bank’s directors “with the approval of the Board of Governors.” As a practical matter, the governors can disapprove every nominee until the directors send them someone they like.

Peter responds:

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. . . . [T]he order is key . . . . 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.

This response is a reasonable one, as is Peter’s counter to my “Officer” argument. But there seems to be some tension between the two replies: Functionally, Reserve Bank presidents on the FOMC wield significant power over the economy (even though formally they do so through open market transactions, swaps, and loans rather than “regulation” in the traditional sense). And formally, Reserve Bank presidents are appointed by their banks’ directors (even though functionally the Governors can control the Reserve Bank presidents’ identities). The constitutional case against the FOMC, as I understand it, asks us to be functionalists in defining “Officers” but formalists in defining “appointment.”

Mixing functionalist and formalist arguments is not necessarily a fatal flaw. We might have strong reasons for being functionalists on one point and formalists on another. We might also reject my formalistic “Officer” argument on its own terms and conclude, as a formal matter, that “Officer” status does not depend on regulatory power. Or we might reject my functionalist argument on its own terms and conclude that, for functional reasons, “order is key.” But one cannot simply reject my “Officer” argument because it is too formalist and reject my appointments argument because it is too functionalist—at least, not unless one is willing to cope with quite a bit of cognitive dissonance.

[One might ask whether I’m making the same mixing move myself: after all, my argument on the “Officer” point is a formalist one and my argument on the appointments question is functionalist. I think this is less of a problem for the Fed’s defenders than for its critics. The constitutional case against the Fed—or, at least, this iteration of the argument—is based on the premises that (1) Reserve Bank presidents are “Officers” and (2a) their appointment does not conform to the Article II requirements for “Officers.” My response is that formalists should fall off the bandwagon at (1) and that functionalists should fall off the bandwagon at (2a). The constitutional case against the Fed asks us to be both functionalist and formalist; my response allows us to be either.]

One last point. Peter argues that the FOMC is unconstitutional because Reserve Bank presidents are not appointed according to Article II’s requirements (see 2a above) and because Reserve Banks are not removable by the Board of Governors at will (see 2b). I suggested that the statute addressing removal, 12 U.S.C. § 248(f), might be interpreted to allow for removal at will. Peter rejects that suggestion. Yet the delta between Peter’s position and mine is quite small: In my view, a court confronted with a constitutional challenge to § 248(f) could invoke the avoidance canon and construe § 248(f) to allow for removal of Reserve Bank presidents by the Governors at will. In Peter’s view, a court confronted with a constitutional challenge to § 248(f) would have to strike down the statute and allow for removal at will. These results do differ formally, but as a functional matter they are the same: the FOMC would continue to operate and the Board of Governors could remove Reserve Bank presidents for any reason at all.

I concluded my earlier post by saying that “whether or not we agree with Peter’s conclusion [regarding the FOMC’s constitutional status], his book will serve to define the terms of the debate.” Our exchange here on Notice & Comment (which now spans more than 6500 words) underscores that point. I’ll stand by the “modest claim” I made in the first post that “the presence of Reserve Bank presidents on the FOMC is constitutionally defensible,” even though “it would be easier to defend the FOMC’s structure if the Reserve Bank presidents weren’t there.” But I feel even more confident in the claim that regardless of where one ends up on this question, Peter’s chapter on the constitutionality of the FOMC is the right place to start.