Published by EH.Net (June 2016)

Peter Conti-Brown, The Power and Independence of the Federal Reserve. Princeton: Princeton University Press, 2016. xvi + 348 pp. $35 (hardcover), ISBN: 978-0-691-16400-7.

Reviewed for EH.Net by John H. Wood, Department of Economics, Wake Forest University.
This book is less about the power and independence of the Federal Reserve than its organization. The many and varied influences on the Fed and its many and varied activities mean that its “‘independence’ as an analytical category is not very useful” (p. 107). Furthermore, although the Fed’s powers may be great conceptually, the complexities of its decision process cast doubt on the efficacy of their exercise. The book is rather about “one of the most organizationally complex entities in the federal government, with some of the most varied missions to accomplish tucked inside. The core questions about the Fed — how it is structured, who pulls its many levers of power, and to what end — are cloaked in opacity. Even the experts who study the Fed are left confused by the set of institutions that has survived the Fed’s sweep through a century of history” (p. x). Although the jacket proclaims that, “Investigating how the Fed influences and is influenced by ideologies, personalities, law, and history, [the book] offers a clear picture of this uniquely important institution,” it actually describes the opposite for the purpose of making clarifying changes. Conti-Brown (currently assistant professor of legal studies and business ethics at the Wharton School of the University of Pennsylvania) promises many examples of Fed activity “in the service of an analytical argument about the Fed’s governance” (p. xiii), but in the end concedes that its “governance is complicated, confused and opaque” (p. 266).

The Board of Governors of the Federal Reserve System consists of seven members appointed by the president for 14-year terms, subject to the advice and consent of the Senate, a new appointment every two years, one of whom is appointed chair for a four-year term. The purpose of this appointment process was to secure independence from politics, which, however, has been defeated by early resignations from the Board and failures to fill Board vacancies. (At present, the Board has five members, making for equal representation of the Board and the regional Fed banks on the Federal Open Market Committee (FOMC), which by law consists of the Board and five of the twelve regional bank presidents.) The Board chair, who is also chair of the chief monetary policy body, the FOMC, possesses no special powers by law, but has frequently achieved a position of dominance by virtue of a special relation with the president and effectively locking the other members of the Board out of the decision process, particularly by preventing their equal access to the Board’s staff. In the mid-1990s, four members of the Board met with Chairman Greenspan “to demand better treatment. [T]hey were frustrated that no one was keeping them adequately informed about the staff’s activities, including discussions with the Treasury Department and research on international financial issues. They felt like figureheads . . . despite their legal role in setting Fed policy” (p. 69). The economics and legal staffs of the Board have had more influence on policies than the governors, especially during crises such as the financial collapse of 2008.

Of all the deficiencies of the Fed’s governance, Conti-Brown is most critical of “The vestigial and unconstitutional Federal Reserve banks” (chapter 5) — unconstitutional because their heads, who serve on the important FOMC, violate Article II, section 2, of the U.S. Constitution which requires that “officers of the United States” be appointed by the president with the Senate’s advice and consent (p. 108). Moreover, the arbitrary locations of the regional banks reflect not a federal conception of the system created in 1913, but political compromises no longer relevant in 2016 (p. 126).

The book ends with proposals for “effective public oversight” of “the jumble of different functions that Congress has given the Federal Reserve over the course of a century” (p. 241). The Dodd-Frank Act’s establishment of the Consumer Financial Protection Board is supported as a way to simplify the Fed by ridding it of what was essentially the regulatory step-child of the agency interested most in monetary policy, although there may be some inconsistency here — more complicating than simplifying — because the Fed retains much of its supervisory function, and the book also supports Dodd-Frank’s creation of a Vice Chairman for Bank Supervision from among the Board’s members.

The author wishes to retain “the statutory vision of a politically accountable Fed chair and a legally powerful and politically insulated Board of Governors” (p. 248), which at present is not fully realized because of presidents’ failures to keep the Board at full strength and members’ tendency to retire early. A consequence, because of the lengthy service of Fed chairs (just short of nineteen years each by William Martin and Alan Greenspan) is their acquisition of “undue influence” (p. 250). This might be corrected by limiting the reappointment of chairs and presidents’ greater attention to keeping the Board at full strength.

Because of their long service and exercise “of values-oriented judgment,” senior staff might also be presidentially appointed subject to Senate confirmation (p. 251).

Reduction of the regional banks’, especially New York’s, “potential to make policy and constitutional trouble for the rest of the system” (p. 254) might be achieved in a variety of ways, such as giving the Board of Governors authority to fire them or giving the president and Senate authority to appoint and confirm them, although this would put them on a level with the Board. Even better, they could be dropped from the FOMC.

Getting to the Fed’s conduct of monetary policy, Conti-Brown is unwilling to take a position on the rules-versus-discretion debate, partly because of the uncertainty of the “lasting viability” of any particular choice. “The better approach would be to focus on the more flexible [and simplified] appointment process” (p. 265). Apparently the right policies are most likely achieved by appointing the right people, democratically, by the president and Senate. “The people are still sovereign” (p. 266).

This book is an interesting, even scary, account of the governance of the Federal Reserve, with examples of the influence of personalities in ways not anticipated by law. The lawyer’s desire to streamline the Fed in the interests of transparency and responsibility is praiseworthy. What the economist finds missing, however, are incentives. What are the right policies and what might make the Fed pursue them? This brings us to the Fed’s relations with the public, who benefit and suffer from the Fed’s activities. What were the reasons for the Fed’s failures during the Great Depression (when money and prices fell by a third), the Great Recession (before which the Fed reinforced the housing bubble and then bailed out the culprits, as had been counted on), and the nine-fold increase in prices since the Fed’s freedom of action was expanded in 1951? There is a strong case for making monetary policy and bank supervision more accountable to the public rather than to the executive. Money and inflation under the Fed have realized the fears of the founders of the Bank of England (1694) and the Banks of the United States (1791 and 1816), who chose private ownership and direction to prevent the subservience of their creations to the executive, which would certainly abuse its authority. Alexander Hamilton wrote: “The stamping of paper money is an operation so much easier than the laying of taxes that a government . . . would rarely fail . . . to indulge itself too far in the employment of that resource to avoid as much as possible one less auspicious to present popularity” (Report on a National Bank, 1790). There is no doubt, since the effective end of the gold standard in 1914, that the principal use of the Fed has been to enable government to evade accountability to taxpayers by means of paper emissions, even going so far, since 2001, as to lower taxes while increasing government spending (as in the tax cuts of 1964 and 1984). Legal simplicity is good, but the greatest problem regarding the structure of monetary policy is to provide an incentive structure tending to benefit the public rather than the ease, irresponsibility, and “present popularity” of government.
John H. Wood is the author of A History of Central Banking in Great Britain and the United States (Cambridge University Press, 2005) and Central Banking in a Democracy (Routledge, 2015). He is working on a history of the political determinants of central banking.

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