Since the ten intense months of debates that preceded the passage of the Federal Reserve Act of 1913, has there been a better time to consider the structural design of the Federal Reserve System and its various components? We sit ready to commemorate the Fed’s centennial, which provides a worthwhile (if somewhat arbitrary) moment of reflection. In the coming months, President Obama will make just the second nomination of a new Fed Chair in the last thirty-five years. And the Fed’s own extraordinary market interventions during 2007-2010 and its innovations in monetary policy from 2008 to the present have opened it up to praise and criticism from across the political spectrum. We are truly on the cusp of the Federal Reserve moment.
Much of the focus will be on policy—that is, whether the Fed should have, for example, brokered the JP Morgan Chase/Bear Stearns merger, allowed Lehman Brothers to fail, kept interest rates so low during the early 2000s, initiated various rounds of quantitative easing, etc. This essay will instead address the Fed’s structure, and specifically, whether that structure comports with the requirements of the US Constitution.
I argue that the Federal Reserve’s monetary policy arm, the Federal Open Market Committee, is, under a straightforward application of recent Supreme Court doctrine, unconstitutionally designed. I also argue that that constitutional defect is essentially cosmetic and, in any event, incapable of receiving a review on the merits because of doctrines of justiciability, one of which was invented to avoid this very question. And I will argue that the lack of judicial participation in resolving this constitutional question is an unmitigated good: issues of central bank design are best left to the Congress. Doing otherwise could send the judiciary into areas where it largely lacks institutional competence. And it also allows the merger of policy and institutional design, spheres best left separate in constitutional adjudication.
Constitutional Arguments for Another Time
The claim that the “Federal Reserve” is “unconstitutional” actually entails a broad family of arguments. I can imagine four mostly distinct, sometimes overlapping lines of argument, although there may of course be others. First, the Fed is unconstitutional because it pursues bad policy. That is, “unconstitutional” and “pursues bad policy” are treated as synonyms: when the Fed pursues good policy, it is constitutional; when it pursues bad policy, it is unconstitutional. Second, the Fed is unconstitutional because our federal government is one of enumerated powers, and nowhere does the Constitution permit the modern practice of monetary policy. This is an existential challenge: accepting this argument necessarily means the abolition of the Federal Reserve. Third, the government may be able to pursue monetary policy, but must do so squarely within the Madisonian tripartite framework of the legislative, executive, and judicial branches. This is not an existential challenge per se, but would require the Federal Reserve to lose its vaunted “independence”—as that term is conventionally used—and be subject to the direct control of the executive branch, subject to legislative design. And fourth, central banking fits within the constitutional framework, and an independent Fed does too, but specific features of the Federal Reserve violate specific constitutional principles or provisions as the Supreme Court has construed them. In that sense, the Fed itself is not unconstitutional so much as, for example, the participation of private citizens on the Federal Open Market Committee is constitutionally impermissible.
Because of space concerns, this will attempt only a partial analysis of the last line of argument. Beyond the next few paragraphs, it will all but ignore the rest, for different reasons. The first can be summarily dismissed as the cable news constitutional critique of the Federal Reserve. In the popular imagination, the terms “unconstitutional” and “bad policy” are frequently synonyms. This is a common but regrettable affront to law, language, and democratic deliberation. I do not dismiss the policy concerns, of course: debate about the role of the Fed in the face of financial, fiscal, and monetary crises is important, even essential. But if the inquiry is truly a constitutional one, the policy arguments must remain, to the fullest extent possible, distinct.
The second line of argument is squarely constitutional, but—despite its interest to those libertarians who ascribe to the views of Ron Paul or Murray Rothbard—the argument requires too much history and too little law to be tractable. By too much history, I mean that the incompatibility of central banking with American government finds its roots in the classic battles of Alexander Hamilton versus Thomas Jefferson, Andrew Jackson versus Nicholas Biddle. There have been few political fights as consequential as these to our history. As the eminent 19th century financial historian Albert Bolles put it, “When the smoke of the contest [over government banks] had cleared away, two political parties might be seen, whose opposition, though varying much in conviction, power, and earnestness, has never ceased.” Although coalitions continue to shift, the same sentiment is present in conflicts over fiscal, financial, and monetary issues generally. To make sense, then, of this intellectual and political movement in the context of American government requires more space than I have here. And by too little law, I mean that the existential challenges to central banking—including the basis for a fiat currency that developed gradually through the Fed’s first half century—are too inconsistent with long-settled doctrines of constitutional law to be anything but a constitutional do-over. That, again, is not to say that there isn’t much that is interesting within this space, but it requires more context and less connection to the present state of constitutional law to justify engagement.
The third argument—that the Fed is simply too independent to fit within the constitutional structure—is an important one. I’ve written at length on the question of the Fed’s independence. I won’t belabor those arguments here, except to say that I find the concept of “Fed independence” to be virtually meaningless without further specification as to audience (from whom is the Fed independent?) and mechanism (how is that independence regulated?). The usual focus in administrative law—on independence from the President, regulated by the President’s ability vel non to remove an agency’s officers—is woefully inadequate to explain the phenomenon of Fed independence as it has evolved over the last century. The Fed’s independence is both more and less than it seems under that narrow view. And economists’ views of central bank independence are only slightly better: the focus there is also on independence from government, regulated by law. There is a dearth of emphasis on extra-legal mechanisms of independence and non-independence from other audiences, including private banks, internal employees, international central bankers, and others. There is an argument to be made that the Fed’s independence in varying ways does not comport with constitutional principles or provisions, but that argument must specify both audience and mechanism, and explain why that specific relationship matters.
That leaves the last argument, which is really a subset of the third. We can rephrase it as a question: Does the specific institutional design of the Federal Reserve System in its current form pass constitutional muster? I argue that it does not: under current Supreme Court doctrine, the presence of non-removable Reserve Bank presidents on the Federal Open Market Committee (FOMC) renders the FOMC unconstitutional.
The Unconstitutionality of the FOMC
To understand the constitutional argument I’m making, a bit of factual and legal development is necessary. (Again, for further development of related themes, see the article linked above.) Congress created the FOMC, the Federal Reserve System’s monetary policy committee, in 1933 to centralize what had been the quasi-independent monetary policies of the twelve Reserve Banks, themselves created under the original Federal Reserve Act of 1913. Two years later, in the Banking Act of 1935, Congress refashioned the FOMC to include all seven members of the newly created Board of Governors of the Federal Reserve System (which replaced the original 1913 Federal Reserve Board). The rest of the FOMC included five of the twelve Reserve Bank presidents on a rotating basis. After 1942, the president of the Federal Reserve Bank of New York became a permanent member of the FOMC. By convention, he is also Vice Chair of the Committee. The Committee meets six times per year to announce its outlook on the world and national economy and its decisions regarding various features of monetary policy. I won’t go into detail about the policy levers the Fed pulls; others have presented useful introductions to those levers and the operations generally. See especially Axilrod and the Fed’s own somewhat dated overview.
The presence of the Reserve Banks on the FOMC creates two constitutional debilities. First, the President does not appoint, and the Senate does not confirm, the Banks’ presidents. (Note that while the statute does not require that the Reserve Bank representative be the president, the president is in practice almost always the Bank’s representative.) They are appointed by two-thirds of the directors of each bank. 12 U.S.C. § 341. The directors, in turn, are appointed through a somewhat convoluted statutory process that gives consideration to bankers, selected by bankers; non-bankers, selected by bankers; and non-bankers, selected by the Board of Governors. 12 U.S.C. § 302. The President never formally indicates any preference for their appointment to their posts at the Reserve Banks, and their role within the FOMC is determined by statute. Does this participation violate the Appointments Clause of the Constitution and its requirement of Presidential appointment and Senate confirmation?
Second, the President’s removal authority with respect to the FOMC is circuitous. First, the President has no authority to remove members of the FOMC qua members of the FOMC, just as he has no power to appoint members of that Committee. He appoints and the Senate confirms the seven members of the Board of Governors, who are statutorily members of the FOMC, but also function independently of the FOMC for matters regarding systemic risk regulation, bank supervision, and all else within the Fed’s bailiwick. But put that curiosity to the side, and assume the President’s relationship to the Governors as Governors is identical to his relationship to the Governors qua FOMC members. For Board members in that comprehensive role, the President can remove his appointees “for cause” only. 12 U.S.C. § 242.
So far so good. But what of removal of the Reserve Bank presidents on the FOMC? This is harder. The presidents are removable at the pleasure of the Reserve Bank directors. 12 U.S.C. § 341. Removal of all of those directors is possible, but only after “the cause of such removal” is “forthwith communicated in writing by the Board of Governors of the Federal Reserve System to the removed officer or director and to said bank.” 12 U.S.C. 248(f). While there is some ambiguity as to whether this writing “the cause” of such removal is equivalent to “for cause” removal, I think the inclusion of the term “cause” is sufficient to trigger that presumption, especially when utter silence as to removal in other contexts has been deemed sufficient to create the same for-cause presumption. To summarize: the FOMC consists of twelve members. Congress has made it possible for the President to remove seven of those members in their role as Fed Governors “for cause” only. The remaining five (who are themselves partially rotating targets) are subject to a three-level chain of removal: (at will) by the Reserve Bank directors who are removable (for cause) by the Board of Governors who are removable (for cause) by the President. And so, finally, to the question: does this removability matryoshka—unique among the federal regulatory agencies—violate the separation of powers? Let’s take these two constitutional questions in turn. The Appointments Clause of the U.S. Constitution, Art. II, § 2, cl. 2, requires “Officers of the United States” to be appointed by the President with the Senate’s advice and consent. But there is an exception for “inferior Officers,” whose appointment Congress may vest “in the President alone, in the Courts of Law, or in the Heads of Departments.” Id. The first constitutional question, then, for the Appointments Clause is whether the members of the FOMC are principal or inferior officers.
This is a hard and, as we will see, largely irrelevant question.* A key precedent is Edmond v. United States, which held that “[w]hether one is an ‘inferior’ officer depends on whether he has a superior.” 520 U.S. 651, 662-63 (1997). Moreover, “‘inferior officers’ are officers whose work is directed and supervised at some level” by officers appointed by the President and confirmed by the Senate.
I would think the Reserve Bank president on the FOMC could not qualify as an inferior officer by the Edmond standard. The Board of Governors certainly supervises the Reserve Banks in every other respect. 12 U.S.C. § 301. In their roles as Reserve Bank presidents, the inferior officer designation therefore seems apt. But as members of the FOMC, Reserve Bank presidents’ votes count the same as those of their would-be superiors, the President-appointed, Senate-confirmed Board Governors. As we shall see, though, this question of principal versus inferior officers matters not at all once the unconstitutionality of the removability of the Reserve Bank presidents is acknowledged and remedied.
The second constitutional question involves the strange path the President must take in removing Reserve Bank members of the FOMC. Here, the Supreme Court’s recent decision in Free Enterprise Fund v. PCAOB, 130 S. Ct. 3138 (2010), makes it nearly incontrovertible that the FOMC’s structure as to removability is unconstitutional.
Under Free Enterprise Fund, Congress cannot design a system in which the President can remove the head of an agency or department only “for cause,” and the agency head can in turn remove her subordinate only “for cause.” Previously, the Court had upheld a single-layer restriction on the removability of an agency head, in Humphrey’s Executor v. United States, and the restriction on a subordinate employee where the agency head serves at the President’s pleasure, in Morrison v. Olson. Free Enterprise Fund confronted the combination of those two protections: an agency head (presumed, interestingly, since the statute there was silent) removable for cause (here, the Commissioners of the Securities Exchange Commission) who can remove other officers only for cause (here, members of the Public Company Accounting Oversight Board). The Court held that “such multilevel protection from removal is contrary to Article II’s vesting of the executive power in the President,” and found the provisions that had established the second layer of for-cause protection unconstitutional. Free Enterprise Fund, 130 S. Ct. at 3147.
Stating the holding in Free Enterprise Fund reveals the constitutional defect of the FOMC. The President cannot remove members of the FOMC without reaching through two explicit for-cause removal restrictions, on top of a third layer of at-will removability. Granted, the relationships between the three layers in the FOMC and the two in the SEC-PCAOB are different, but not in ways that would matter constitutionally. Neither is it a defense to say that the President appoints the majority of the FOMC, and is thus protected from seeing his preferred monetary policies hijacked by those with whom he disagrees. It’s simply not the case that Board members always outnumber the Reserve Bank Presidents on the Committee—for a week during the peak of the financial crisis, the FOMC consisted only of nine individuals: four members of the Board of Governors and five Reserve Bank Presidents.
In my view, then, the short answer is yes: the Federal Reserve, as currently designed, is unconstitutional.
The Cosmetic, Irrelevant, and Nonjusticiable Unconstitutionality of the FOMC
Don’t expect markets to roil or anti-Fed litigation to score any major successes at the announcement of the FOMC’s unconstitutionality. It only matters if Congress wants it to matter, for two reasons. First, this is a constitutional defect that is virtually cosmetic. In Free Enterprise Fund, the Court found a constitutional defect in the inability of the President to remove members of the PCAOB, and eliminated that restriction by judicial fiat. The PCAOB continues to operate just as it had done; its members are appointed just as they had been; and there is no evidence anywhere (that I am aware of) that the PCAOB’s enforcement behavior has changed a bit since the case was decided in 2010. The only difference is that the Court rendered the members of the PCAOB removable by the Commissioners of the SEC. That removal has not, to my knowledge, yet occurred.
If the FOMC removability issue were ever litigated to conclusion—which it won’t be—the result is likely to be the same. See, for example, Intercollegiate Broad. Syst., Inc. v. Copyright Royalty Bd., 684 F.3d 1332, 1334 (D.C. Cir. 2012), which found a similar institutional defect and followed the Free Enterprise Fund Court in judicially reconstructing the relevant statute. The members of the FOMC not appointed by the President would be rendered removable at will by the Board of Governors, just as the Governors supervise the Reserve Banks in every other aspect of the Fed’s wide regulatory berth. And, also following Free Enterprise Fund, that removability will immediately render them Appointments Clause-approved inferior officers. See Free Enterprise Fund, 130 S. Ct. at 3162.
Some defenders of the present configuration may say that such a change would have a chilling effect on the FOMC conversations or votes. Would Jeffrey Lacker or Richard Fischer or Thomas Hoenig dissent, as they have done, if the Board could remove them for any reason at all?
It’s impossible of course to speak with certainty to the counterfactual, but I would think the level of control that already exists over the selection of the Reserve Bank presidents, and the public outcry that would result from the exercise of that legal authority, would be all the protection that people like Larcker, Fischer, and Hoenig would need. Formal protection against removability isn’t necessary to make a removal decision controversial: just ask George W. Bush and Alberto Gonzalez (see the at-will service of U.S. Attorneys) or Richard Nixon and Robert Bork (see the at-will service of Special Watergate Prosecutor Archibald Cox). The summary firing of at-will employees of the executive led to the ouster of an Attorney General and, in part, the resignation of a President. This reality speaks, in part, to the almost-comical reductionism of agency independence jurisprudence, which, as in Free Enterprise Fund, equates the phenomenon of agency independence with the agency head’s removability status (at-will heads are not independent; for-cause heads are independent). As I and many others have argued, this formalistic equivalence exists only in the corridors of the U.S. and Federal Reporters.
Cosmetic or not, this question will never be litigated to the merits, absent a seismic shift in standing jurisprudence. There is a reason that no court has ever evaluated the institutional design of the FOMC, arguably the most powerful of federal agencies, for constitutional defect. In the 1970s and 1980s, a series of petitioners—first private citizens, then a member of the House of Representatives, and finally Senators—challenged the structure of the FOMC on the Appointments Clause basis. And in each case, the DC Circuit—the initial appellate forum for most litigation on this issue–refused to reach the merits. See Melcher v. FOMC, 836 F.2d 561 (D.C. Cir. 1989); Committee for Monetary Reform v. Board of Governors, 766 F.2d 538 (D.C. Cir. 1985); Riegle v. FOMC, 656 F.2d 873 (D.C. Cir.) (1981); Reuss v. Balles, 584 F.2d 461 (D.C. Cir.) (1978).
Eventually, the Circuit deemed a petitioner to have standing—Senator Riegle—by virtue of his inability to advise and consent on the appointment of the members of the FOMC. But where the Circuit gave with one hand, it took with the other, deciding that “[t]he most satisfactory means of translating our separation-of-powers concerns into principled decision-making is through a doctrine of circumscribed equitable discretion.” The Supreme Court, in its subsequent treatment of legislative standing in Raines v. Byrd, 521 U.S. 811 (1997), has mostly embraced a similar conclusion regarding legislators’ ability to challenge statutes’ constitutionality. Thus, the courts are unlikely to take up the challenge to the constitutionality of the FOMC. Any hope of redressing this (minor) constitutional defect is in the Congress.
And that is exactly where it belongs. Earlier, I stated that, in the context of administrative law, the identity of policy and constitutional criticisms is an affront to language, law, and democracy. But institutional design and policy are inseparable in the legislative context. What an agency should do—policy—and how the agency should do it—structure/process—are deeply connected issues that deserve the full attention of an active citizenry. I look forward to that debate and earnestly hope that litigants and judges, at least in those capacities, do not.
*A hard and much more relevant threshold question is whether the FOMC is exercising federal policy at all, a prerequisite under Appointments Clause jurisprudence. It is certainly the case that the government has not always had a monopoly on the circulation of currency, for example. I will assume, though, that the FOMC directs federal policy because of the sheer magnitude of the quantities of money at play. While private consortia may exercise some kinds of functions currently in the hands of central banks, I will save for another day the question whether a private party or parties could do so on the stage occupied by the Fed today. For now, I will say only that I am intrigued by but skeptical of this argument.