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.