Notice & Comment

The Fed (Like Soylent Green) Is Made of People, by Emily S. Bremer

My thanks to Chris Walker for organizing this symposium and inviting me to participate. It’s a pleasure to be involved and an honor to be among such an impressive line-up of scholars and experts. Like yesterday morning’s contributor, Sam Halabi, the Federal Reserve System is not my area of expertise, but I very much enjoyed the opportunity to expand my knowledge by reading Peter Conti-Brown’s excellent book. I also believe that some of the lessons the book offers, and particularly those I’ll discuss here, have resonance throughout the administrative state.

My comments will focus on a core theme of Conti-Brown’s book: Non-legal forces play an essential role in defining the power and independence of the Federal Reserve. Several strands of Conti-Brown’s argument contribute to this theme. The foundation, perhaps, is the important point that the Fed is a “they,” not an “it.” (p. 13). This is true at the institutional level, in the sense that the Fed is a compound entity, composed of a number of constituent institutions. At a more granular level, these institutions are composed of individuals–people who do their jobs through interactions with other people within the Fed, in government more broadly (the President, officials at the Department of the Treasury, individual members of Congress), and in the private sector (especially bankers). All of these people have ideologies, values, and personalities that together help to shape how the Fed exercises its authority over the economy. Only by embracing this messy reality can we see and understand the variety of non-legal forces—personality, culture, tradition, custom, and practice—that shape the Fed and determine its place within the government and the economy.

In some instances, these non-legal forces supplement the law, such that a review of the relevant statutes is simply insufficient to understand how the Fed operates. Conti-Brown’s rich work offers many examples of this phenomenon. For one, although the Banking Act of 1935 legally subordinated the New York Fed to the rest of the Federal Open Market Committee (FOMC) on issues of monetary policy, Conti-Brown shows how the “legislative change was only partial” (p. 46) and initially was ineffective in practice. The statute’s promise was fulfilled only through the force of personality, nearly two decades later, when Chairman William McChesney Martin seized control over monetary policy from the President of the New York Federal Reserve Bank, Allan Sproul (pp. 42-46). In another instance during the Clinton Administration, Edwin “Ted” Truman, a staff economist for the FOMC and the head of the Division of International Finance, designed an innovative way for the Fed to collaborate with Treasury and use an “international swap facility” to help Mexico stave off financial crisis. This innovation enabled the Fed and the Treasury to assist Mexico despite Congress’s refusal to authorize a “bailout” of the Peso (pp. 88-89).

To take a more complex example, Conti-Brown shows how law, practice, and relationships (both personal and institutional) all interact to determine the respective roles of the Chair and the Board of Governors in setting Fed policy (pp. 69-83). These roles are not static—they are dynamic and flexible. Indeed, the combination of legal architecture and non-legal forces creates a governance structure within which individual chairs, governors, and even senior staff members can meaningfully but unpredictably influence Fed policy. The landscape is dynamic for reasons both internal and external. The ever-changing mixture of personalities within the Fed matters, as do the shifting external demands of politics and the economy. The upshot is that one cannot fully understand Fed governance simply by studying the structures established by law. Indeed, it may only be in historical perspective that one can evaluate with any certainty how the legal structure and non-legal forces have combined to shape the Fed’s institutional policy-making space at any given point in time.

Perhaps more troubling is how non-legal forces can create a practical reality that does not just supplement law, but rather deviates from it. Sometimes this is caused by agency inaction. One example Conti-Brown offers relates to the Congress’s 1994 extension of the Truth in Lending Act, which designated the Fed as “the primary regulator of mortgage practices.” This legal mandate was effectively nullified by the Fed’s subsequent failure to regulate mortgages (pp. 65-66). In contrast to such inaction are instances in which a practice has emerged over time that is simply inconsistent with the law on the books. In this vein, Conti-Brown explains how the Fed’s practice of using open market operations to fund itself offers an unlimited budgetary autonomy that is at odds with the more limited autonomy contemplated by statute. There are sound explanations for the emergence of this practice, and it has occurred transparently over time. On this basis, Conti-Brown argues that Congress has acquiesced in it. Nonetheless, the practice has created a reality that is materially inconsistent with what the law requires (p. 205-217).

The contribution of non-legal forces to the Fed’s governance structure, power, and independence offers some significant benefits. A central concern of administrative law is reserving for administrators sufficient policy-making space to exercise expert judgment and respond to changing circumstances and new challenges. Just as the various deference doctrines carve out and protect that space, so too do the non-legal forces that supplement an agency’s statutory framework. This may be highly desirable from a policy perspective. To return to an example discussed above, Truman’s innovative approach to helping Mexico through a financial crisis in the absence of congressional action was surely desirable as a matter of policy. Similarly, the Fed’s ability to influence the economy through the chair’s comments—a power grounded in “venerable tradition,” personality, and leadership—is a powerful and beneficial policy tool.

The cost, however, is a significant loss of transparency. One of the virtues of public law is that one need only read the law to know what it requires. Where non-legal forces supplement an agency’s legal regime, reading the law is no longer sufficient to understand how an agency and its regulatory regime operate. The problem is exacerbated when non-legal forces create a reality that deviates from the law. Here, looking to the law on the books is not merely insufficient, but affirmatively misleading. Conti-Brown thoroughly and persuasively demonstrates that, in the case of the Fed, reduced transparency severely hampers political accountability.

A related problem worth considering is that a lack of transparency affords significant privilege to insiders. As Conti-Brown’s book itself shows, information about how the Fed operates exists and is knowable. But it is not readily available in public law. Complete understanding is instead available only to the limited few who have direct experience with the Fed’s governance structure or possess the time and expertise necessary to research that structure thoroughly. As the gap between the law on the books and the law in practice widens, so too does the transparency deficit and its attendant insiders’ privilege.

Non-legal forces are not unique to the Fed—they are observable throughout the administrative state. This is because, like the Fed, each and every agency is a “they,” not an “it.” This is frequently true at the institutional level, as agencies are often subdivided into distinct institutions, branches, or offices, and it is always true in the sense that agencies are composed of individuals. To phrase it as the title of this post does: Agencies, like Soylent Green, are made of people. From this reality spring some of the most powerful and inescapable forces in government: personality, culture, tradition, custom, and practice.

Emily S. Bremer is an assistant professor at the University of Wyoming College of Law.


This post is part of an online symposium reviewing Peter Conti-Brown’s new book The Power and Independence of the Federal Reserve. You can read the entire series, as well as other posts on the Federal Reserve, here.

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