The Institutions of Federal Reserve Independence Peter Conti-Brown

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Of course, the power of the banks, through the Reserve Banks is not absolute. As noted above, the Banking Act of 1935 dramatically restricted the role that the Reserve Banks played previously.238 That political power is, however, one of the informal mechanisms of the Fed’s independence—or perhaps better, dependence—on the banks it regulates.

Bank participation is at the core of the Compromise of 1913. They are an essential audience for understanding how Fed independence functions, and how it evolves. Legally, private banks are granted direct access to their regulators by owning stock in the Reserve Banks, filling one third of the board seats, and selecting another third of the directors. There is nothing like this arrangement in the government as a matter of legal structure. The informal mechanisms of Fed-bank interaction magnify that proximity. The extent of that magnification is the question. More descriptive and empirical work is needed to assess the informal consequences of that statutory proximity.


The Fed has had an extraordinary century. Its future, including the ways in which it will continue to formulate and implement national and global economic policy, remains contested. As scholars and policy-makers continue to make sense of what the Fed has been, what it is, and what it should be, a robust understanding of the institutions of Fed independence—with an appropriate, nuanced understanding of the relationship between legal and non-legal institutions—can guide those heated debates. Without that understanding, the risk is not only that critics and defenders will talk past each other, but that they will talk past the institutional features of the Federal Reserve itself.

As this article has illustrated in detail, the Fed’s relationships with Congress, the President (and Secretary of the Treasury), and private banks (intermediated by the Reserve Banks) are regulated by institutions legal and non-legal, formal and informal. The assumption that law is the exclusive source of Fed independence is wrong. But the opposite assumption, that law is a charade, is also incorrect. Instead, this article has demonstrated that the legal and non-legal institutions interact with each other in important ways that will not be apparent without a solid understanding of both law and history.

The prominence of the Federal Reserve is surely sufficient to justify the more comprehensive understanding of the institutions of Fed independence. But there are other public policy reasons why an evaluation of the Fed is important, and looming. The question of Fed independence is a perennially contested one. Is an independent Fed, as Chair Martin claimed, “the primary bulwark of the free enterprise system”?239 Or is the Fed’s independence largely responsible for the financial crisis, as Nobel-prize winning economist Joseph Stiglitz has suggested?240

This article has sought to show that both views of Fed independence are essentially nonsensical without further specification. Instead of categorical conclusions regarding the defensibility of Fed independence, this article supports a more cautious approach that places Fed independence within a context of multiple parties, but also within the broader context of legal and non-legal institutions. Thus, the effort here aims not to pass judgment on law reform debates or to propose wholesale rejection of specific institutional arrangements, but instead to set the parameters for those debates—academic and popular—so that they can be more productive.

** Academic Fellow, Stanford Law School, Rock Center for Corporate Governance; PhD Candidate, Princeton University. This article has gone through several distinct iterations, one of which circulated under the title “The Structure of Federal Reserve Independence.” I thank Sarah Carroll, Nikki Conti-Brown, Ronald Gilson, and Michael McConnell for the countless conversations, comments, edits, and suggestions through each iteration. For thorough and helpful comments on the penultimate and final drafts, I thank Mehrsa Baradaran, Steven Davidoff, David Freeman Engstrom, Daniel Hemel, Aziz Huq, Simon Johnson, Kate Judge, Don Langevoort, Isaac Martin, Ajay Mehrotra, Stephen Meyer, Monica Prasad, Saule Omarova, Heidi Schooner, David Skeel, Ezra Suleiman, Adrian Vermeule, Chris Walker, Collin Wedel, Stephen Williams, Art Wilmarth, Andrew Yaphe, and Julian Zelizer. I am also grateful to workshop and conference participants at George Washington University Law School, George Mason Law School, Ohio State Law School, George Washington University, Stanford Graduate School of Business, the American Enterprise Institute, and the U.S. Treasury Historical Speaker Series, for the opportunity to present these ideas and for helpful feedback. I thank finally, and in many instances primarily, my exceptional colleagues at the Stanford Law School Library (especially Rachael Samberg, Sergio Stone, Erika Wayne, and George Wilson) for their expertise and resourcefulness. I note unusual primary source contributions in the footnotes below.

1 The article refers to the Federal Reserve Board only in reference to the pre-1935 entity, the Board of Governors for its post-1935 incarnation, and Reserve Banks throughout. The shorthand “Fed” and “Federal Reserve” refer to the entire System, the Board of Governors, or the FOMC, as will be clear from the context. Absent clarification, “the Fed” refers to the entire System. See Part I.A. for an explanation of the relationship between the many entities that compose the System.

2 Donald Kettl, Leadership at the Fed 9 (1988)

3 Steven K. Beckner, Back from the Brink: The Greenspan Years xi (1997)

4 Alan Blinder, The Quiet Revolution: Central Banking Goes Modern 1 (2004) (describing the explosion of research in CBI).

5 See Part I, infra.

6 There are important exceptions. The most thorough is the work of European legal scholar Rosa Lastra, who focuses on central banking generally. See Rosa Maria Lastra, Central Banking and Banking Regulation 10-70 (1996) (hereinafter Lastra, Banking Regulation); Rosa Maria Lastra, The Legal Foundations of International Monetary Stability 41-72 (2006) (hereinafter, Lastra, Legal Foundations). See also Rosa M. Lastra and Geoffrey P. Miller, Central Bank Independence in Ordinary and Extraordinary Times 31-50, in Jan Kleiman, Central Bank Independence: The Economic Foundations, the Constitutional Implications, and Democratic Accountability (2001). For a recent exception, see Colleen Baker’s work, The Federal Reserve as Last Resort, 46 U. Mich. J. L. Reform 69 (2012), The Federal Reserve’s Use of International Swap Lines, available at Robert Hockett & Saule T. Omarova are at the beginning of a broader project in the role of government as market actors, which includes engagement with the Federal Reserve System. See “Private” Means to “Public” Ends: Governments as Market Actors, 14 Theor. Inq. in Law (forthcoming 2013). Timothy Canova has also sustained a critique of the Fed generally and central bank independence specifically. See, e.g., Timothy A. Canova, Central Bank Independence as Agency Capture: A Review of the Empirical Literature, 30 Banking & Fin. Servs. Pol’y Rep. 11 (2011); Timothy A. Canova, Black Swans and Black Elephants in Plain Sight: An Empirical Review of Central Bank Independence, 14 Chap. L. Rev. 237 (2011). For an excellent though by now dated overview of the Federal Open Market Committee, see Mark Bernstein, The Federal Open Market Committee and the Sharing of Governmental Power with Private Citizens, 75 Va. L. Rev. 111 (1989).

7 See, e.g., Rachel Barkow, Insulating Agencies: Avoiding Capture Through Institutional Design, 89 Tex. L. Rev. 15 (2010) (describing mechanisms of Fed independence within the context of agency independence generally); Adrian Vermeule, Conventions of Agency Independence, Colum. L. Rev. (forthcoming 2013) (discussing conventions of Fed independence within the context of agency independence generally).

8 For an early example by a prominent author, see William Howard Taft, The Boundaries Between the Executive, the Legislative and the Judicial Branches of the Government, 25 Yale L. J. 599, 608 (1916) (“Whether the President has the absolute power of removal without the consent of the Senate in respect to all offices, the tenure of which is not affected by the Constitution, is not definitely settled.”). Several recent articles provide excellent overviews of the literature. See Aziz Z. Huq, Removal as a Political Question, 65 Stan. L. Rev. 1, 23-31 (2013); Barkow, supra note 7, at 16-18; Lisa Schultz Bressman and Robert B. Thompson, The Future of Agency Independence, 63 Vand. L. Rev. 599, 631-637 (2010).

9 The standard account is more robust than this: it looks, too, at the legal relationship between the President and the Fed Chair for purposes of monetary policy. The book from which this article is drawn challenges as incorrect all four of those bases: law, the President, the Fed Chair, and monetary policy. See Peter Conti-Brown, The Structure of Federal Reserve Independence (Princeton University Press, forthcoming 2015).

10 See id.

11 Douglass C. North, Institutions, 5 Journal of Economic Perspectives 97, 97 (1991)

12 See, e.g., Executive Session and the Semiannual Monetary Policy Report to the Congress, February 26, 2013.

13 See, e.g., John B. Taylor, First Principles: Five Keys to Restoring America’s Prosperity 121-144 (2013).

14 See, e.g., Reuven Brenner and Martin Fridson, Bernanke’s World War II Monetary Regime, Wall St. J., March 24, 2013.

15 For a recent defeat, see Bloomberg, L.P. v. Board of Governors of the Federal Reserve System, 601 F.3d 143, 147-49 (2d Cir. 2010) (affirming district court’s decision mandating disclosure under FOIA of crisis loans made through the discount window). For a somewhat quirky example, see MarketWatch, Chinese Woman Reportedly Wants to Sue Federal Reserve over QE, April 15, 2013, available at

16 The Fed’s relationships with Treasury and the President are functionally and formally distinct. For purposes of brevity, however, they are treated together in Part III.

17 See Conti-Brown, supra note 9 at chapter 2.

18 For more thorough and accessible explanations of monetary policy, see Stephen Axilrod, The Federal Reserve: What Everyone Needs to Know 41-64 (2013); Bd. of Gov. of the Federal Reserve System, The Federal Reserve System: Purposes & Functions 27-51 (2005).

19 The Fed is also advised by several Advisory Councils, the most prominent of which is the Federal Advisory Council which was created by the original 1913 Act and intended by some of the Act’s drafters as part of the balance between private and public interests. See Howard Hackley, The Status of the Federal Reserve System in the Federal Government 42-45 (1972) (unpublished, on file with the author and the Stanford Law Library). An explanatory note is appropriate on the provenance of this extraordinary document. Hackley, then General Counsel for the Board of Governors, prepared this 200-page manuscript for internal purposes. It is an extremely valuable scholarly source that contains both references to other useful primary documents (such as early opinion letters from the Comptroller General) and is a useful reflection of the Board’s view of several important legal issues at the time. Upon learning of the document’s existence from William Greider’s journalistic history of the Fed, see Greider, Secrets of the Temple: How the Federal Reserve Runs the Country 49, 736 (1989), I asked the reference librarians at Stanford Law School if they could secure it. For more details on Erika Wayne’s impressive success, see Peter Conti-Brown, We Have Winners! – and a Paean to Law Librarians, The Conglomerate Blog, May 26, 2011, available at

20 William McChesney Martin, Chairman, Bd. of Governors of the Fed. Reserve, Address before the New York Group of the Investment Bankers Association of America 12 (Oct. 19, 1955), available at Note that Martin himself was quoting an unnamed contemporaneous source. But he was in any event fond of metaphors. In an interview, he described the Fed’s aspiration for money and credit to “flow . . . like a stream. This stream or river is flowing through the fields of business and commerce. We don’t want the water to overflow the banks of the stream, flooding and drowning what is in the fields. Neither do we want the stream to dry up, and leave the fields parched.” Interview in U.S. News and World Report, Feb 11, 1955, 56 (cited in Kettl, supra note 2 at 83). And another: “Our purpose is to lean against the winds of deflation or inflation, whichever way they are blowing.” Testimony before U.S. Senate, Committee on Banking and Currency, Nomination of William McChesney Martin, Jr., hearings, 84th Congress. 2d Sess, 1956, 5 (cited in Kettl, supra note 2 at 83). Again, I thank Erika Wayne for the help in locating this source.

21 The rates given at the discount window actually refer to three different kinds of loans: primary credit, secondary credit, and seasonal credit. For ease of explanation, I collapse all three into the generic “discount rate.”

22 Allan H. Meltzer, A History of the Federal Reserve, Volume 1: 1913-1951 68-69 (2003) (stating that although the various proposals considered in the debates preceding the enactment of the Federal Reserve Act were diverse and conflicting, “[a]ll proposals recognized that a central bank could serve as lender of last resort in a banking crisis.”)

23 The use of the discount window to non-banks has created controversy. See Terminating Bailouts for Taxpayer Fairness Act, summary available at During the recent crisis, the term of the discount window was extended from overnight loans to 30 day loans.

24 See Monetary Control Act of 1980.

25 Economists since before Keynes have suggested ways to effect a lower-than-zero real interest rate. See John Maynard Keynes, The General Theory of Employment, Interest, and Money 155 (1936, ed. 2011). For a more recent articulation of this kind of argument, see N. Gregory Mankiw, It May Be Time for the Fed to Go Negative, NY Times, April 18, 2009.

26 See, e.g., Ben Bernanke, Central Bank Independence, Transparency, and Accountability, Speech to the Institute for Monetary and Economic Studies International Conference, Bank of Japan, Tokyo, Japan, May 25, 2010. Again, note that the article focuses on the Fed as regulator of the dollar. Conti-Brown, supra note 9, chapter 4 goes into more detail about the relationship between Fed independence and the Fed’s other missions, including bank regulation, bank supervision, systemic risk regulation, and supervision of the payment system.

27 For interesting assessments of the why question, compare Geoffrey P. Miller, An Interest-Group Theory of Central Bank Independence, 27 J. Legal Stud. 433 (1998) (arguing that CBI is a means by which interest groups which have benefitted from rent-extracting political deals secure price stability to lock in the benefits of those deals) with William Bernhard, Banking on Reform 11 (2002) (arguing that CBI resolves an intra-party conflict over the practice of monetary policy).

28 The focus of the debate most recently is on whether the Fed should have as its monetary goals the optimization of price stability and maximum employment, or should focus, as in the case of other central banks, on price stability alone. For an excellent and thorough overview of the dual employment debate, skewed heavily in favor of the dual mandate, see the papers presented at the April 2013 conference at the Boston Fed, Fulfilling the Full Employment Mandate: Monetary Policy & the Labor Market, available at For a more critical assessment, see Taylor, supra note 13 at 124-128.

29 Jacob E. Gersen, Designing Agencies, in Research Handbook on Public Choice and Public Law 333, 347-48 (Daniel A. Farber & Anne Joseph O'Connell eds., 2010).

30 See Huq, supra note 8; Barkow, supra note 7; Vermeule, supra note 7.

31 Myers v. United States, 272 U.S. 52, 116, 176 (1926).

32 Humphrey’s Executor, 295 U.S. 602, 627-28 (1935).

33 Morrison v. Olson, 487 U.S. 654 (1988).

34 Free Enter. Fund v. Pub. Co. Accounting Oversight Bd., 130 S. Ct. 3138, 3146-47 (2010)

35 One prominent jurist regards the language of Free Enterprise Fund as more fully consistent with the sweep of executive power envisioned by Myers than the more skeptical Humphrey’s Executor. See In re Aiken County, 645 F.3d 428, 444-46 (2011) (Kavanaugh, J., concurring)

36 See Steven Calabresi and Christopher Yoo, The Unitary Executive: Presidential Power from Washington to Bush (2008). See, e.g., Victoria F. Nourse and John P. Figura, Toward a Representational Theory of the Executive, 91 B.U. L. Rev. 273 (2011) for a conflicting view. Interestingly, two proponents of the unitary executive theory, in footnotes, have come to opposite conclusions about the constitutional permissibility of the FOMC. Compare John O. McGinnis and Michael B. Rappaport, Reconciling Originalism and Precedent, 103 Nw. Univ. L. Rev. 803, 850 n.173 (“While we believe that the appropriate precedent rules do not protect the decisions that allow the creation of independent agencies from being overruled (assuming as we believe that they conflict with the original meaning), one important exception may exist to this claim. We are inclined to believe that the independence of the Federal Reserve is now so well accepted that it should be regarded as an entrenched precedent.”) with Steven G. Calabresi, Some Normative Arguments for the Unitary Executive, 48 Ark. L. Rev. 23, 86 n.150 (1994) (“The independence of the Federal Reserve, and of the money supply, provides by far the hardest case for me. Nonetheless, I would note that practical independence can always be achieved within our formal constitutional structure if public opinion thinks it desirable that it should exist. Presidents who fire Watergate special prosecutors or who appoint their campaign managers to be Attorney General rapidly learn that the public has no patience with politicized law enforcement. For this reason, I do not believe we need an independent counsel law in this country to protect against partisan interference with the law enforcement machinery. Similarly, I do not believe we need an independent Federal Reserve Board to protect against presidential manipulation of the money supply. Our best protection against that evil comes from an informed public opinion about the nature of money, and, in the absence of that, statutory guarantees of agency ‘independence’ have proven to be of very little use.”).

37 See Vermeule, supra note 7; Barkow, supra note 7; and Bressman and Thompson, supra note 8.

38 Jennifer Nou, Agency Self-Insulation under Presidential Review, 126 Harv. L. Rev. 1755 (2013).

39 Kirti Datla and Richard L. Revesz, Deconstructing Independent Agencies (and Executive Agencies), 98 Cornell L. Rev. 769 (2013).

40 See Barkow, supra note 7.

41 M. Elizabeth Magill and Adrian Vermeule, Allocating Power within Agencies, 120 Yale L. J. 1032 (2011).

42 Jody Freeman and Jim Rossi, Agency Coordination in Shared Regulatory Space, 125 Harv. L. Rev. (2012).

43 Bressman and Thompson, supra note 8.

44 Huq, supra note 8.

45 Vermeule, supra note 7, at 3.

46 Vermeule, supra note 8.

47 See Peter Conti-Brown, Is the Federal Reserve Constitutional?, And Who Decides?, Featured Essay, Library of Law & Liberty (September 2013), available at

48 See Part III.A.1, infra.

49 The political science literature on central banking is largely distinct from the view of economics. Scholars have puzzled over why politicians would willingly cede control over monetary policy, an area that arguably has outsized impact on the politicians own electoral health. For the most innovative interest group theories, see Miller, supra note 6; John Goodman, The Politics of Central Bank Independence, 23 Comparative Politics 323, 339 (1993) (arguing that interest groups can influence politicians to adopt CBI because the politicians do not expect to be in power by the time the negative electoral consequences of more conservative monetary policy arise). For an explicitly electoral theory, see the series of articles and book by William Bernhard, arguing that CBI is in the long-term interests of both executive branch and legislative branch coalition partners, for different reasons. For the legislative branch, central bank independence is seen as a monitoring device to ensure that the monetary policy decisions of the executive are not inappropriately prejudicial to the electoral prospects of legislatures. The executive branch will agree, because failure to do so may result in what Bernhard calls “legislative punishment,” or the myriad ways in which legislators can punish the executive for failures to pursue policies sympathetic to their electoral interests. The most damaging form of legislative punishment is the withdrawal of coalitional support such that the executive’s own electoral prospects are diminished. See Bernhard,
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