Is the Fed Still Constitutional?

The American Enterprise Institute’s John Makin—“Dr. Doom,” to his numerous friends—has a piece on the Federal Reserve Board’s recently instigated “QE3” program that is bone-chilling even to regular Makin followers (including yours truly). In essence, QE3 is a “whatever it takes” program to goose the economy with easy money. It may work if the Fed can stay ahead of inflation expectations—that is, if bondholders are stupid and labor markets sticky. The sooner people catch on, the faster the Fed will have to double down. Eventually, it will have to close the spigot—manageable, perhaps, if the economy at that time shows robust growth; disastrous, if it is still in the doldrums. The Fed is making this fantastic gamble because (1) nothing else seems sufficient to revive sluggish growth and employment and (2) a much-noted article by an economist says that this might work.

I have no clue whether QE3 is a good or bad idea. I am quite confident, however, that the Fed’s aggressive course should and in due course will prompt political agitation over its institutional role and design. Alas, merely asking the question tends to bring out the lunatics on all sides (“JFK was killed because he threatened the Fed!” “Attack on the New Deal, Constitution in Exile!”) Perhaps, though,  there is still time for serious deliberation and debate.

Our fate hangs on the Fed; and yet, it is an independent institution, immunized from direct political pressures. In a democracy, operating under a Constitution that makes no explicit provision for a central bank and in many ways resists the creation of fourth or fifth branches of government, an independent Fed is an oddity. For what it’s worth, the Fed’s founders acknowledged the point: initially, the Secretary of the Treasury served as the institution’s ex officio chairman. That arrangement was changed in the 1930s, after the Supreme Court had cleared the way for “independent” agencies.

There are two (and only two) justifications for the arrangement. The first is expertise—not so much the ability to collect it (which can also be done by Congress or the executive), but the ability to act on it without undue political influence. This is the traditional New Deal argument for independent agencies. As it happens I’m not terribly impressed by it. At a bare minimum, though, it presupposes that the agency deals with something that you can actually be expert about. It also presupposes a known and agreed-upon goal and a set of rules and incentives that keeps the agency oriented toward that goal. Otherwise, we’re just deploying technical wizardry  for bureaucratically generated objectives. That does not sound like a good idea.

The second  justification for Fed independence is the political system’s inability to precommit to a stable currency. Leave the printing press in the politicians’ hands: they’ll debase the currency in a heartbeat. We can’t allow that.

The precommitment argument is better than the expertise argument, but it’s not entirely free from doubt. After all, it would also be a good idea if we could precommit to a stable federal tax system. (The fact that no one knows what taxes will be five months from know, plus the fact that whatever Congress may then decide will also last for at most a year, hangs like a wet blanket over the economy.) Arguably, however, there is a constitutional warrant for committing monetary stability (but not fiscal or other questions) to an independent institution.

There is no shred of doubt that the Founders wrote the Constitution in the expectation of, and for the purpose of ensuring, a hard currency. Individual clauses (for example, the prohibition against the state emission of bills of credit) illustrate the point. More importantly, so does the entire constitutional structure. The structure is entirely compatible high and low taxes;  with energy subsidies and without; with a nightwatchman or a nanny state. Not so with the hard money constraint: take that away, and the Constitution—starting with the virtually unlimited powers of Congress to tax and spend—becomes a pact with the devil. So viewed, an independent Fed is a necessary and proper means for the responsible exercise of a federal power—the power to coin money and to regulate the value thereof (and no, that clause does not mandate a gold or other metallic standard).

This is the general shape of an argument for an independent Fed, not the argument itself. (For example, if my originalist friend were to insist that the argument is Humphrey’s Executor redux, I’d beg to differ but readily acknowledge the need for explanation and elaboration.) For present purposes, though, the point is this: there is no constitutional warrant for an independent Fed that acts as the economy’s master puppeteer; issues puts on the stock market; expropriates fixed-income recipients so that Congress can continue to borrow on the cheap; or targets the unemployment rate.

John Makin envisions a process by which the Fed might unwillingly return to what I believe to be its constitutional limits. If its gamble fails to fool the markets, he writes,

the Fed would be forced to avoid sharply higher inflation by engaging in a long and costly process of tightening monetary policy to reanchor inflation expectations at a low level. That process could involve returning the Fed to a single mandate—price stability—that explicitly precludes it from employing monetary policy to affect real variables like growth and employment. Ironically, the application of QE3+, with its aim to use monetary policy to improve labor market conditions, may ultimately result in a prohibition, via a single mandate for price stability, of a link between monetary policy and labor market conditions.

From an institutional perspective, that wouldn’t be the worst outcome. It would be better still, though, if we could get to a monetary stability system without a crash-and-burn exercise. If we want to stage gambles, plenty of institutions answer to the task. The Fed’s point is to prevent them. And that point, for what little it may be worth, is constitutional.

Michael S. Greve

Michael S. Greve is a professor at George Mason University School of Law. From 2000 to August, 2012, Professor Greve was the John G. Searle Scholar at the American Enterprise Institute, where he remains a visiting scholar. His most recent book isy The Upside-Down Constitution (Harvard University Press, 2012).

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Comments

  1. libertarian jerry says

    The Federal Reserve is a cartel of private bankers who have a monopoly on the creation of currency either by buying Treasury Bonds that are used as a form of currency backing or by computer digits or credits that are used by banks to lend out. This fractional reserve lending out,by the banks, to be paid back with interest is now leveraged at amounts approaching 40 to 1 and even higher. Basically what we have is the counterfeiting of real money(gold and silver) by using the receipts for the gold and silver as money. But it goes further then that. There is a symbiotic relationship between the Federal Government and the Federal Reserve. This relationship is that whatever and whenever the government needs funding for anything those funds can be created out of thin air. This can be done in such a way that politically unpopular taxes won’t have to be raised. In exchange for this monetary “service.” The governments part in this scheme is to allow,by enacting Legal Tender Laws,a situation in which all the competition to this fiat currency can be crushed. This situation was brought to light with the recent VonNauthaus Case in which a private citizen issued one ounce Silver Rounds that were put into circulation as real money, (you can Google VonNauthaus Case to get the full story). Along with the government providing the Legal Tender Laws,the government also acts as a collecting agent,thru the IRS, for the interest on the National Debt. Much of this debt is owed to the Federal Reserve Banking Cartel. By “mopping” excess currency out of the system inflation can be dampened and the value of the Federal Reserve Notes, to a certain extent, can be maintained. This is the main reason for the Federal Income Tax. History shows that 99 years ago when the Income Tax became law, also at the same time,the Federal Reserve System was being set up. This was no accident,for the bankers now had a way of guaranteeing their interest payments. The upshot of this is that in the 2nd decade of the 21st Century the United States is hopelessly in unpayable,unsustainable debt. That our money has lost,since the inception of the Federal Reserve,98% of its purchasing power and that our overall standard of living is in decline. The Federal Reserve is a way of channeling the wealth and output of a nation to the elites and to the political class. In the end centrally planned economies with central banking dealing with fiat currency,big government and draconian taxes will lead to a nation’s downfall. It has happened throughout history and is happening to America now.

  2. vtsurgeon says

    As regards the precommitment to a stable currency, as a rationale for the Federal Reserve, we no longer need rely on theory to see how that works out. By any measure, the dollar has been anything but stable over my lifetime, and its purchasing power has has moved only in one direction, down. Mendacious government statisticians can insist there is almost no inflation, but college education, health care, gasoline, and automobiles all cost my children ten times what they did when I was their age. I would not define a ninety percent decrease in purchasing power as any sort of price stability.
    The government is the largest debtor. Inflation is good for debtors. The Federal Reserve is going to continue to inflate the currency. If monetary velocity ever picks up, that inflation will lead to even more rapidly escalating prices at the consumer level, and a crash in bond prices. The Fed will not be able to hoover the excess liquidity out of the system because the US Government is deficit spending to the tune of a trillion dollars/year, and that sum is entirely supplied by Fed dollar printing.
    As the enormous amount of short term Treasury obligations become due, to be refinanced at higher rates, the interest burden of the debt shoots up. This necessitates more borrowing (i.e., money printing by the Fed) if you wish to maintain the same level of non-debt service government spending.
    If there is a way this does not end in hyperinflation, I would like it explained to me.
    So why is the Fed so great?

  3. Mike Mahoney says

    Roger Sherman’s little pamphlet, A Caveat Against Injustice proves the founders were intimate with fiat currency. Using the phrase “coin money” in Article I was deliberate and purposeful. Why would you attempt to state it was not a dictum for a bimetallic money standard when any cursory research shows otherwise? Ref. Federalists Papers #42. Note also; ref. ibid, weights and measures.

  4. JMH says

    The second justification for Fed independence is the political system’s inability to precommit to a stable currency

    Well, I guess we can put that argument out to pasture now. QE1,2 and most especially 3 demonstrate that the Fed isn’t able to precommit to a stable currency either.

    One of the most important insights the Founders had was that the only way to have a functional government that doesn’t devolve into tyranny was to set up competing power centers that would check each other’s excesses. Institutions given power but insulated from control are complete anathema to that. Of course an institution like the Fed will eventually be captured by some interest or other.

  5. Georgiaboy61 says

    The question of the constitutionality of the Federal Reserve should have been settled a long time ago, in the negative. There is no provision in the constitution for a private cartel of banks to act as a “public” agency of the federal government. The founders rightly feared the power of banking institutions, c.f. Thomas Jefferson’s statement, “I believe that banking institutions are more dangerous to our liberties than standing armies. ” There are many others. Moreover, it is plain that who controls the system of banks and finance of a given nation, controls that nation no matter who may in charge at the time. Baron Nathan Rothschild said as much, “I care not what puppet is placed on the throne of England to rule the Empire, …The man that controls Britain’s money supply controls the British Empire. And I control the money supply.” he was speaking of England, but may as well have been speaking about the United States. Another Rothschild scion, Mayer Rothschild, said “Give me control of a nation’s money and I care not who makes the laws.”
    Americans cannot and will not get back their constitutional republic until the power of the Fed over it is broken forever.

  6. IceTrey says

    “the power to coin money and to regulate the value thereof (and no, that clause does not mandate a gold or other metallic standard).”

    Of course it does. A “coin” is a piece of stamped metal, not printed paper or binary code on a computer. There’s also this “No State shall…make any Thing but gold and silver Coin a Tender in Payment of Debts;…” How much more wrong can you be?

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