Notice & Comment

Zeitgeists: The Federal Reserve in its Evolving Regulatory Context

Readers are hard to please. It is bad enough that we criticize books that we could not even begin to write. But even worse, when an author has penned something that we like, all too often our response is not “thank you” but rather “more please”—and sometimes we don’t say “please.” I confess that after reading Peter Conti-Brown’s The Power and Independence of the Federal Reserve, my immediate response was “I hope he writes another book soon, maybe even about a different agency.” His focused examination of a single federal entity is worth reading. I learned a lot about the Federal Reserve and can’t wait to see what Peter writes next.

Yet as I think about it, an inherent problem with a book focused on a single agency is that it cannot tell the whole story. Almost by definition, there isn’t space to explore the full historical context, especially when an agency has evolved over time (and so has lived through, and been changed by, numerous historical trends). In other words, it’s hard to capture the zeitgeist of a single age; it’s almost impossible to capture multiple zeitgeists.

In a recent article, Visualizing Change in Administrative Law, I took a stab at laying out the history of administrative law in the United States. Building on the work of, among others, Sidney Shapiro, Elizabeth Fisher, and Wendy Wagner, I attempted to break down the various eras of the administrative state with hopes of predicting the future. But that type of article also has (major) shortcomings. Again, almost by definition, nuance and detail must be sacrificed to tell the story. Anyone who thinks that he or she can tell the tale of administrative law in a single article, or even a series of articles (or even a series of series of articles), does not understand the complexity of the endeavor.

In other words, here is the dilemma: Scholarship focused on an individual agency cannot readily capture larger trends, while scholarship focused on larger trends cannot readily capture an individual agency.

Even so, as I was reading The Power and Independence of the Federal Reserve, my thoughts kept turning to the broader context. For instance, Peter’s musings on “the Wilsonian Compromise of 1913” (pg. 21) made me think of other Wilsonian contributions (for instance, as Shapiro et al observe, the Progressives believed that an agency ought not be “an agent of the legislature but instead . . . an institution constituted by the legislature to use its [own] best judgment”).

So here is what I am going to try to do: Place the major historical events of the Federal Reserve into the broader timeline of administrative law. My analysis, of course, does not purport to be comprehensive. But hopefully it is interesting.

First, subject to a host of caveats, here are the major periods of administrative law:

Now I’ll try to explain it. In the beginning, there was a classical period. But then—as part of the “Rational Instrumental” paradigm which focused on agencies as instruments of the legislature—came the Interstate Commerce Commission model of regulation. This model moved away from the classical period, but nonetheless required fairly formal procedures. I represent this period using the following chart of discretion-facilitating elements with accompanying safeguards:

Progressives, however, thought that this model was too formal. They pushed instead for a “Deliberative Constitutive” paradigm which would allow agencies, using expertise, to make policy outside of traditional channels. This approach became much more common during the New Deal. As James Landis explained, “[g]overnment no longer dares to rely for its administration upon the casual office-seeker.” The following chart was the result (which changes marked in bold):

The New Deal model, however, also was not permanent. Although the battle was fierce, many came to believe that “expert” agencies could not always be trusted. Justice Robert Jackson, for instance, explained the APA reflects the “conviction” that agency “power was not sufficiently safeguarded and sometimes was put to arbitrary and biased use.” On the other hand, others felt that agency discretion was essential. This conflict eventually led to the enactment of the Administrative Procedure Act in 1946, which was a compromise. The following chart represents the change:

The APA, of course, is still with us, but administrative law has changed a great deal since 1946. For instance, “the Reformation” occurred. This period was driven by concern that agencies need more power, but also worry that agencies could be captured. The result was more elements to facilitate discretion, but also more safeguards on that discretion. Again, the changes are reflected in this chart:

Finally, the 1980s and 90s saw the emergence of “the Counter-Reformation.” This period in some ways reflects skepticism of agency power (e.g., regulatory failure), but also reflects other competing considerations. The result is this:

As I explain, in many ways we still live in the Counter-Reformation, even though this model is now under considerable stress from a lot of different sources.

Now let’s add some of the key moments in the Federal Reserve’s history to this timeline. As Peter explains, there are “three foundings of the Federal Reserve: in 1913, in 1935, and in an informal agreement in 1951 called the Fed-Treasury Accord” (pg. 16). I have marked each of these “foundings” on the chart. I’ve also taken the liberty of adding a “fourth founding” representing the Volker/Greenspan era, during which time the perceived role of the Fed shifted. (It’s not correct to call this period a “founding,” but the term works well enough for purposes here.)

As Peter explains, the First Founding in 1913 reflected the efforts of President Wilson, who wanted “a Washington-based, government-controlled supervisory board . . . on top of the essentially private, decentralized central bank” system (pg. 21). And Wilson wanted this “supervisory board” to be staffed with experts, not market participants. After all, Wilson asked, “Which of you gentlemen thinks the railroads should select members of the Interstate Commerce Commission?” Wilson’s approach here seems consistent with broader trends of the period.

The Second Founding occurred during the New Deal. President Roosevelt, with help from Marriner Eccles, founded a more powerful Fed. Eccles’s “timing was impeccable: the New Deal experimenters were embarking on a legislative frenzy known as the Second New Deal” (pg. 29), which included creating Social Security, reshaping labor law, and revising tax policy. Again, what was happening at the Fed was happening elsewhere across the administrative state. The federal government sought to control many aspects of the American economy. And because of the Great Depression, the nation was more willing to experiment with new models of regulation. The Federal Reserve was part of that experimentation.

The Third Founding occurred during the Truman Administration. The “Fed-Treasury Accord,” as applied, “forms the basis in perception and in fact of the idea that the Fed’s monetary policy is institutionally separate from the economic policies of the president,” (pg. 37). It may just be a coincidence that the Third Founding occurred around the same time as the APA’s enactment. But it is interesting that both in a sense try to regularize the regulatory process.

Finally, I added a “Fourth Founding” to Peter’s narrative because some of the same trends that occurred within the Fed also occurred elsewhere. For instance, Volker and especially Greenspan were wary of regulation. Indeed, “[a]fter he assumed the Fed chair, it didn’t take long for Greenspan’s ideological hostility to regulation to make itself manifest” (pg. 64). This wariness of regulatory failure is a hallmark of the Counter-Reformation.

There is a lot more that could be said about all of this. But here, in the interest of time, I want to talk about the future. My theory is that the Counter-Reformation will be upended as new stresses emerge that require recalibration. For various reasons, including the financial crises of recent years, I suggest that the following may represent the future of administrative law:

For the many of the same reasons, I suspect that the Fed will also experience a “Fifth Founding.” The overarching problem is that we have not perfected discretion. Discretion—perhaps the defining characteristic of administrative law—is both useful and dangerous. The result is regulatory change.

Given that reality, I would not be surprised if Peter finds himself authoring another book. The story of the Federal Reserve, like the story of the administrative state, still has many chapters left to be written.

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