The Institutions of Federal Reserve Independence Peter Conti-Brown



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supra note 27 at 2; William Bernhard, A Political Explanation of Variations in Central Bank Independence, 92 Am. Pol. Sci. Rev. 311 (1998). Bernhard’s Banking on Reform also provides perhaps the single best introduction into the design questions associated with political scientists’ CBI inquiries.

50 For a full review of the extensive literature linking CBI to monetary policy, see Carl E. Walsh, Monetary Theory and Policy 419-424 (2d ed., 2003), Note, however, that the policy outcome that most of these studies analyze is inflation, and not economic growth. Indeed, two influential studies suggest that there is no significant relationship between economic growth and CBI. See Alberto Alesina and Lawrence Summers, Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence 25 J. Money, Credit & Banking 151 (1993); Jacob de Haan and Willem J. Kooi, Does Central Bank Independence Really Matter? New Evidence for Developing Countries Using a New Indicator, 24 J. Banking & Fin. 643 (2000). Some scholars also view this literature as composed of two competing literatures, a theoretical branch that focuses on why CBI would or would not produce better monetary stability, and an empirical branch that tests the relationships between these literatures. See Jakob de Haan, The European Central Bank: Independence, Accountability, and Strategy, 93 Pub. Choice 395, 396 (1997).

51 Bernhard, supra note 49 at 19. For examples of the work engaging CBI at different definitional levels summarized here, see Jakob de Haan, The European Central Bank: Independence, Accountability, and Strategy, 93 Pub. Choice 395 (1997); James Forder, Central Bank Independence: Conceptual Clarifications and Interim Assessment, 50 Ox. Econ. Papers 307 (1998); Gabriel Mangano, Measuring Central Bank Independence: A Tale of Subjectivity and of Its Consequences, 50 Ox. Econ. Papers 468 (1998); Henriette Prast, Commitment Rather Than Independence: An Institutional Design for Reducing the Inflationary Bias of Monetary Policy, 49 Kyklos 377 (1996); Christopher Waller, Performance Contracts for Central Bankers, 77 Fed Reserve Bank of St. Louis Rev. 5 (1995).

52 Alesina & Summers, supra note 50 at 153 (listing mechanisms, all legal, that separate central banks from political interference). See also Lastra, Bank Regulation, supra note 8 at 12. Indeed, one recent effort criticizes the CBI literature as being insufficiently focused on rules. See Andreas Freytag, Does Central Bank Independence Reflect Monetary Commitment Properly? Methodological Considerations, PSL Quart. Rev. (2012).

53 Stanley Fischer, Central-Bank Independence Revisited, 84 Am. Econ. Rev. 201 (1995).

54 For an exception, see Ricardo Reis, Central Bank Design, 27 J. Economic Perspectives 17 (2013). Reis explores more about the mechanics of central bank design, but, once again, the focus is on legislation.

55 A partial exception is Lastra’s taxonomical effort. Lastra orients her discussion of CBI around mechanisms of independence—she refers to them as “safeguards”—that come in three varieties: “organic, functional, and professional.” Lastra, Banking Regulation, supra note 6. Organic and functional safeguards echo the legal separations that form the basis of economists’ empirical models of CBI; organic safeguards refer to “the legal safeguards directed towards the organization of the central bank and to its institutional relationships with the government,” and include mechanisms such as appointment, terms of office, dismissal, salary, prohibitions on central bankers while in office, prohibitions on central bankers after they leave office, and liaisons with the Treasury. Id at 12, 27-36. Functional safeguards refer to legislative restrictions on “the functions of the central bank and the scope of the powers entrusted to it.” Id. at 12. “Professional” safeguards are part of what Lastra calls “de facto” independence, and is “determined by: the personalities of the governor and the minister of finance (and in some countries of other high officials), the political and economic circumstances (e.g., economic expansion or recession); the history and national priorities of the country concerned; the depth and quality of monetary analysis; the rate of turnover of central bank governors and other factors.” Id. As will be seen throughout the rest of the article, the role of individual personalities is extremely important. For representative work in the genres of central bank memoirs and histories sensitive to the role of personality, see Kettl, supra note 2; Laurence H. Meyer, A Term at the Fed (2008); Alan Greenspan, The Age of Turbulence: Adventures in a New World (2007); Marriner S. Eccles, Beckoning Frontiers: Public and Personal Recollections (1951).

56 See Gersen supra note 29 at 339. For more discussion of the “headlessness” phenomenon, see Louis Fisher, The Politics of Shared Power: Congress and the Executive 148 (4th ed. 1998)

57 Matthew D. McCubbins, Roger G. Noll, and Barry R. Weingast, Administrative Procedures as Instruments of Political Control, 3 J. L. & Econ. 165 (1987); Matthew D. McCubbins, Roger G. Noll, and Barry R. Weingast, Structure and Process, Politics and Policy: Administrative Arrangements and the Political Control of Agencies, 75 Va. L. Rev. 431 (1989).

58 See, e.g., Jonathan R. Macey, Organizational Design and Political Control of Administrative Agencies, J. of L., Econ, & Org. 93 (1992).

59 Gersen, supra note 29 at 339.

60 Even here, though, the Congressional focus may well be on Congress metonymically for the President, Congress, and other groups that participate in the legislative process.

61 Elena Kagan, Presidential Administration, 114 Harv. L. Rev. 2245 (2001); Michael A. Livermore and Richard L. Revesz, Regulatory Review, Capture, and Agency Inaction, Geo. L. J. 2013 (forthcoming).

62 Jeffrey S. Banks, Agency Budgets, Cost Information, and Auditing, 33 Am. J. Pol. Sci. 670 (1989).

63 Jacob Gersen, Overlapping and Underlapping Jurisdiction in Administrative Law, 2006 Supreme Court Review 201 (2007); Macey, supra note 58.

64 John D. Huber and Charles R. Shipan, Deliberate Discretion?: The Institutional Foundations of Bureaucratic Autonomy (2002).

65 From courts, see, e.g., City of Arlington, Tex. v. FCC, --- S. Ct. ----, 2013 WL 2149789 (2013) (“The collection of agencies housed outside the traditional executive departments, including the Federal Communications Commission, is routinely described as the “headless fourth branch of government,” reflecting not only the scope of their authority but their practical independence.”); FCC v. Fox Television Stations, Inc., 129 S. Ct. 1800, 1817 (2009) (“There is no reason to magnify the separation-of-powers dilemma posed by the Headless Fourth Branch by letting Article III judges--like jackals stealing the lion's kill--expropriate some of the power that Congress has wrested from the unitary Executive.” (internal citation omitted)). From scholars, the defenders of the unitary executive take particular aim at Humphrey’s-type restrictions on removability as empowering the full independence of the administrative state. See, e.g., Calabresi & Yoo, supra note 36 at 3-4.

66 Daniel Carpenter, The Forging of Bureaucratic Autonomy: Reputations, Networks, and Policy Innovation in Executive Agencies, 1862-1928 34 (2001).

67 Gordon Adams, The Iron Triangle: The Politics of Defense Contracting 24 (Nancy Sokoloff ed., 1981). For more on public choice and bureaucratic policy-making, see Jerry Mashaw, Public Law and Public Choice: Critique and Rapprochement, in Research Handbook on Public Choice and Public Law (Farber & O’Connell, eds.) (2010). For a contrary view of bureaucracy-private interest interaction, see Stephen Croley, Regulation and Public Interest 4 (2008) (explaining that the public choice critique “shows far too little attention the actual processes through which administrative agencies regulate, and that such inattention is largely responsible for the dominant, jaundiced view of regulation.”). .

68 See Miller, supra note 5 (citing the role of private groups in the protection of CBI); John T. Woolley, Monetary Politics: The Federal Reserve and the Politics of Monetary Policy 69-85 (1986).

69 Barkow, supra note 7

70 See Conti-Brown, supra note 10, chapters 2 and 3.

71 Again, other scholars evaluating agency independence have looked more broadly than the narrow removability focus to include term length, funding source, discretion to choose policy instrument, work product review, and more Datla and Revesz, supra note 39. Bressman and Thompson, supra note 8; Barkow, supra note 7. Lastra, Banking Regulation, supra note 6.

72 Vermeule argues that law, politics, and conventions animate the way that agency independence is experienced and regulated by the agencies themselves and by the political branches. To establish this taxonomy, Vermeule draws on the understanding of conventions from Commonwealth systems where conventions are “(1) regular patterns of political behavior (2) followed from a sense of obligation.” Each element of the definition can take stronger or weaker forms, but one of Vermeule’s main points is that these conventions dictate individual (and institutional) behavior, even though they are not a core part of the law. Vermeule, supra note 7 at 16-17.

73 Vermeule, supra note 7, recommends that judges take note of the conventions of independence when adjudicating the traditional removability cases. Huq, supra note 8, would disagree, and argues that courts have no place in making these kinds of determinations in the first place. While this article doesn’t wade too deeply into that doctrinal debate, the analysis here suggests judges will have difficulty in assessing independence in a way that fits within a constitutional framework: courts are not institutionally well-suited to make sense of these non-legal institutions.

74 The article resists Vermeule’s “conventions” as unnecessarily narrow, especially given Vermeule’s use of the term within the context of the British common law (such that conventions become judicially cognizable and given the status of legislation). Some informal institutions are much more malleable than that kind of rigidity permits.

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

76 See Irwin Lester Morris, Congress, the President, and the Federal Reserve: The Politics of American Monetary Policy-Making (2000); John T. Woolley, Monetary Politics: The Federal Reserve and the Politics of Monetary Policy (1986).

77 What does it mean that the Federal Reserve is “independent within the government”? available at http://www.federalreserve.gov/faqs/about_12799.htm.

78 For more on this topic generally, see John D. Huber & Charles R. Shipan, Deliberate Discretion?: The Institutional Foundations of Bureaucratic Autonomy (2002).

79 For a quantitative textual analysis of Fed Chair testimony in Congressional hearings, see Cheryl Schonhardt-Bailey, The Effect of Institutions and Norms on Monetary Policy Oversight: British and American Experiences during the Financial Crisis, May 1, 2013, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2261836.

80 See Sarah Binder & Mark Spindel, Congress and the Federal Reserve: Independence and Accountability (2014) (demonstrating the high, countercyclical frequency of proposed legislation, rather than passed legislation) (on file with author)

81 See Conti-Brown, supra note 10, chapter 3.

82 Of course, the Congress could always legislate to create its own money; but then it would first have to legislate to create its own money. The Fed faces no such barrier.

83 For a thorough overview of these various types of funding structures, see Laurie Leader, The Federal Bank Commission Act: A Proposal to Consolidate the Federal Banking Agencies, 25 Clev. St. L. Rev. 475, (1976).

84 These outlays are not truly mandatory, as Congress, of course, retains the ability to repeal them. The question is, instead, whether they must be reinitiated each year, as is the case with the rest of the federal budget.

85 Bd. of Governors of the Fed. Reserve System, Annual Report: Budget Review 1 (2010), available at http://www.federalreserve.gov/boarddocs/rptcongress/budgetrev10/ar_br10.pdf.

86 See Barkow, supra note 7.

87 Bd. of Governors of the Fed. Reserve System, supra note 85, at 17.

88 Id.

89 See text accompanying notes 18 to 24, infra.

90 See Statement Regarding Transactions in Agency Mortgage-Backed Securities and Treasury Securities, September 13, 2012 (available at http://www.newyorkfed.org/markets/opolicy/operating_policy_120913.html).

91 See Federal Reserve: Purposes and Functions (2005).

92 Chair Bernanke has contested a “money-printing” characterization of the Fed’s monetary authority. See 60 Minutes Interview Transcript, December 6, 2010, CBSNews, available at http://www.cbsnews.com/8301-18560_162-7114229.html (“One myth that’s out there is that what we’re doing is printing money. We’re not printing money. The amount of currency in circulation is not changing. The money supply is not changing in any significant way.”). This is a factually accurate but conceptually misleading point aimed at controlling a debate not directly relevant to our discussion. Bernanke is of course correct that the Fed’s monetary policy framework is based on extensions of bank reserves, not the increase of paper currency (unlike, say, the Reichsbank’s stunning printing bonanza during the hyperinflation of the 1920s in Weimar Germany, see Liaquat Ahamed, Lords of Finance: The Bankers Who Broke the World 20-25 2009). Technically, then, the Fed isn’t printing money at all, but filling the banking system with additional reserves, in return for which it receives income-generating bonds. The inflationary effects of these policies are hotly disputed, but that the Fed has the ability to create money with which it buys interest-bearing bonds is not a contested point. It can “print” the money it uses to implement its monetary policy decisions, and use the proceeds of those decisions to fund its budget.

93 12 U.S.C. § 243.

94 See Cong. Budget Office, The Budgetary Impact and Subsidy Costs of the Federal Reserve’s Action During the Financial Crisis 3 (2010) (noting that the Fed is not subject to the appropriations process and it is able to operate independently from government influence).

95 Interestingly, this aspect of the statute may well be affirmatively inconsistent with the Fed’s practice. The Federal Reserve Bank of New York is responsible for effecting the FOMC’s monetary policy decisions. It is unclear from the annual report on whose balance sheet—whether the FRBNY’s, or the Board’s, or the twelve Reserve Banks equally—resides the proceeds of open market operations. Presumably, those proceeds either belong directly to the Board or are shared in proportion to the Reserve Banks’ capital stock.

96 See Katharina Pistor, Towards a Legal Theory of Finance 26 (November 18, 2012). ECGI - Law Working Paper No. 196; Columbia Law and Economics Working Paper No. 434. Available at SSRN: http://ssrn.com/abstract=2178066. (“Mr. JP Morgan was able to coordinate a private sector rescue of the U.S. financial system in 1907, but only because relative to the capacity of the private entities involved in the rescue its size was still manageable. The crisis raised sufficient concerns about the reliability of private sector bailouts to provide the political impetus for a new central bank, the Federal Reserve, established in 1913.”); Robert F. Bruner & Sean D. Carr, The Panic of 1907: Lessons Learned from the Market’s Perfect Storm 2 (2009) (“Though the duration of the crisis was relatively brief, the repercussions proved far-reaching, resulting in the formal establishment of a powerful central bank in the United States through the Federal Reserve System.”).

97 See Party Divisions of the House of Representatives, 1789-present, available at http://history.house.gov/Institution/Party-Divisions/Party-Divisions/.

98 The Congressional and Presidential elections of 1908 were less important for the shape of the System.

99 John Milton Cooper Jr., The Warrior and the Priest: Woodrow Wilson and Theodore Roosevelt 141 (1983), quoted in Sydney M. Milkis, Theodore Roosevelt, the Progressive Party, and the Transformation of American Democracy 2 (2009).

100 The vote in the House of Representatives was 298 to 60; only two Democrats voted against the bill, whereas 35 Republicans voted in favor. In the Senate, the vote was 43 to 25 (with 27 not voting). The Democrats were unanimous in favor, and all but three Republicans voted against. See Jerome A. Clifford, Independence of the Federal Reserve System 40 (1965).

101 35 Stat. 546 (1908), repealed by Technical Amendments to the Federal Banking Laws, Pub. L. No. 103-325, 108 Stat. 2292, 2294 (1994).

102 Milton Friedman and Anna Schwartz, A Monetary History of the United States (1964).

103 See E.W. Kremmerer, The Purposes of the Federal Reserve Act as Shown by Its Explicit Provisions, 99 Annals of the American Academy of Political and Social Science 62, 64 (1922).

104 In fact, the Act allowed for “eight to twelve” Reserve Banks, the exact number of location of which were then decided by the Secretaries of Treasury and Agriculture during the course of 1914.

105 Paul Warburg, The Federal Reserve System: Its Origin and Growth, vol. 1, 12 (1930).

106 Clifford, supra note 100 at 21. See also Carter Glass, Adventure in Constructive Finance 112-120 (1927) (discussing the ways in which President Wilson envisioned the Federal Reserve Board as mediating the interests of government and banks).

107 Hackley, supra note 19 at 31 (citing several sources from the legislative history for the view that the Federal Reserve Board was intended to be a governmental institution; the Reserve Banks as private corporations.).

108 Glass could get emotional about his attachment to the 1913 Federal Reserve System (and was deeply hostile to the Board of Governors-dominant model that replaced it in 1935). “Next to my own family,” he said, “the Federal Reserve System is nearest to my heart.” Arthur Schlesinger, The Age of Roosevelt: The Politics of Upheaval 296 (1960). He challenged those who would claim credit for its paternity. See Carter Glass, Adventure in Constructive Finance 1-15, 37-58 (1927) (saying that President Wilson’s counselor wrote a “romance on the subject” of the Fed’s founding and called it “history”). Glass’s claims are entertaining but overblown. While his contribution is certain, the original Federal Reserve System was born of a compromise from ideas from Glass, Paul Warburg, Woodrow Wilson, Nelson Aldrich, and even William McAdoo and David Houston (the Secretaries of, respectively, Treasury and Agriculture in charge of selecting the locations of the twelve Reserve Banks). See Ron Chernow, Father of the Fed, Audacity, Fall 1993, 34-45. For a more thorough, still biased, still overwritten, but less entertaining account of the Fed’s founding, see Paul Warburg’s The Federal Reserve System (1930). These “paternity” disputes say nothing of the Fed’s refounding in 1935, the responsibility for which lies with Marriner Eccles. See Memo, Eccles to Roosevelt, November 3, 1934, OF 90, box 2, Franklin D. Roosevelt Library. (My thanks to Sergio Stone for locating a digital copy of this document.) By then Senator Glass was Eccles’ sensitive foe. For more on the politics of the 1935 Act, see Kettl, supra note 2 at 51; Eccles, supra note 55 at 200-229, and Clifford, supra note 100 at 242-45.

109 Glass House Report, H.R. 7837, reported H. Rpt. 63-69 at 12 (1913).

110 E.W. Kremmerer, The Purposes of the Federal Reserve Act as Shown by Its Explicit Provisions, 99 Annals of the American Academy of Political and Social Science 62, 64 (1922)

111 Kettl,
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