There is a rumor out there (which may have just started with this post) that one out of every thirteen copies of Peter Conti-Brown’s new book The Power and Independence of the Federal Reserve includes a chapter exploring how over the last century the Freemasons have influenced and in some respect controlled the form and function of the Federal Reserve. My copy, unfortunately, is not a lucky thirteenth, but instead dispels any such myths—concluding in its final words (at 270) that “the Freemasons just aren’t a part of this story.”
Jesting aside, this conclusion nevertheless brings us full circle to the book’s title and purpose: to explain from where the Federal Reserve has gained its power and from whom (or what) it is independent. In this short review I’ll focus on the latter—a similar focus to that of Usha Rodrigues, though from the perspective of administrative law as opposed to a corporate law. My bottom line is that Conti-Brown’s new book provides us with a much richer account of agency independence that should serve as a model for how with think about independence in other agency contexts as well.
In administrative law, agency independence is conventionally understood as the degree to which the agency is independent from the President and, in particular, the degree of power the President has to appoint and remove the agency’s principal officer(s). Conti-Brown’s conception of Federal Reserve independence is much more complete than administrative law’s conventional account. (To be sure, many administrative law scholars have also moved beyond mere presidential appointment-and-removal authority to explain agency independence.) Indeed, Conti-Brown’s model for agency independence is even more nuanced than the Ulysses/punch-bowl view that has predominated the literature on the Fed: Ulysses, with reference to Homer’s Odyssey, because (at 2) “[w]e write central banking laws that lash us (and our politicians) to the mast and stuff beeswax in the ears of our central bankers. We enjoy the ride while technocratic central bankers guide the ship of the economy to the land of prosperity and low inflation.” Punch bowl, in reference to a quote by Fed Chair William McChesney Martin, in that (at 3) the Fed “is in the position of the chaperone who has ordered the punch bowl removed just when the party was really getting warming up.”
For Conti-Brown, it seems, Fed independence is independence from political control generally, and not just removed from plenary presidential appointment-and-removal control. To be sure, he addresses conventional presidential control—declaring as Daniel Hemel explored yesterday that (at 107) “the [Federal] Reserve Banks are almost certainly unconstitutional” under the President’s appointment-and-removal powers. But to assess Fed independence, Conti-Brown argues that one must at least understand how the Fed is independent (or not) from both the President and Congress, and perhaps also the courts, other agencies, and even the “Club Fed” of the banks, academic economists, and the markets. (If I had more time, I’d love to explore how the Fed is independent from courts as well in light of how much of its regulatory activity is insulated from judicial review.)
Conti-Brown illustrates with historical depth and artful prose the ways in which the Fed is—and is not—independent from the political branches. The story that emerges is much more complex (and less independent) than the Ulysses/punch-bowl model. Let’s take a closer look at both presidential and congressional control.
As for the President (Chapter 8), it is true that the seven members of the Board of Governors are appointed by the President, and confirmed by the Senate, for staggered fourteen-year terms, and can only be fired for cause. Similarly, the Fed Chair, one of the seven Board members, is appointed as Chair for a four-year term, after Senate confirmation, but the statute is silent on whether the President can remove at will. At least one Chair has likely been fired (though he technically resigned). This structure suggests that the President should be able to appoint a new Chair during each presidential term, but with a fourteen-year appointment should at most appoint two Board members per term.
As Conti-Brown explains, that has not occurred in practice. The Board turns over much more quickly—the median term since 1935 is about five years—whereas the Fed Chair has often been reappointed by the subsequent presidential administration. In other words, the President has the control over the Chair because she has only a four-year term and apparently could be fired at will. Yet, because Board members serve far shorter terms than the statutorily guaranteed fourteen years, the President can also influence the Fed by appointing new Board members and, perhaps more importantly, can influence the Fed Chair by how the President stacks the rest of the Board.
This story of presidential control strikes me as far more complex—and far less independent—than the Ulysses/punch-bowl model. To be sure, the President has historically attempted to at least appear to keep politics out of the Fed, perhaps for fear of political or electoral backlash for trying to influence monetary policy. But Conti-Brown’s ultimate conclusion (at 198) is certainly true: “The exact identities of Ulysses (the president) and his chaperone (the Fed chair) matter enormously in determining the shape of the space within which the Fed exercises its extraordinary authority.”
A somewhat similar story emerges with respect to congressional control over the Fed. Conti-Brown documents (in Chapter 9) the bizarre historical development of how the Fed has budget autonomy from Congress. Despite the lack of statutory authority, the Fed gets its budget from the proceeds of its considerable assets, as opposed to congressional appropriation, which is the predominant approach for almost all other federal agencies. The power of the purse grants Congress great control over the regulatory state—a control that is apparently lacking with respect to the Fed. This is a fascinating feature of Fed independence, which Conti-Brown explores in great depth.
At the same time, however, such budgetary autonomy is a congressional gift—or perhaps better said, a congressional acquiescence—which Congress has the power to take away at any time. In fact, the mere threat of legislating away this budgetary autonomy is a powerful congressional limitation on Fed independence. So too is the threat of substantive legislative action and related congressional oversight of the Fed. Indeed, a Brookings paper released last Friday (on April Fool’s Day, no less) further documents the rise of congressional oversight of the Fed and how the Fed has reacted to such oversight efforts in the form of more transparency and responsiveness.
In sum, Conti-Brown’s new book has made me think more deeply about what we mean when we refer to agency independence. It is not just about presidential appointment-and-removal authority—something most administrative law scholars already appreciate. But it is also not just about the formal laws and mechanisms in place for the political branches to control the modern regulatory state. Instead, to evaluate agency independence, we have to understand the historical relationship between the agency and the political branches, the costs of political oversight, and the personalities involved (Conti-Brown illustrates this last point so vividly—one of my favorite aspects of the book). Conti-Brown’s model for understanding agency independence is fleshed out in the context of one of the most55 atypical federal agencies, but the lessons learned can help us better understand agency independence in a variety of other contexts.
Returning to the title of my post, I’m pretty sure that neither the Freemasons nor any other secret society is in control at the Fed. And in the unlikely event that it were ever discovered that such private influence were being exercised, the political branches have ample tools to rein in the Fed’s power—just like Congress and the President do with respect to other federal agencies. Although Conti-Brown paints a picture of Fed power that frighteningly departs from traditional conceptions of democratic governance, the picture of Fed independence is far less scary. And, as Conti-Brown demonstrates, it is certainly not just one of Ulysses or the punch-bowl chaperone.