Jerome Powell was recently granted permission by Congress to take another lap as Chair of our Federal Reserve System and part of his duties will include frequent public speeches in support of the central bank’s focus on transparency. It is very likely he will find it necessary to expend much effort during those speeches in defense of the Fed’s “independence,” as he will certainly encounter pushback from Congress over the tightening of monetary policy. The punch line is that for the Founders who birthed the system in 1913, central bank independence was a non-starter.
In fact, the very idea of it was squashed in no uncertain terms during a White House meeting between President Woodrow Wilson and a group of prominent bankers in summer 1913. To its Founders (those politicians most responsible for making it a reality) our Federal Reserve System was to be a part of the government itself, and a most important one at that. They felt as did Alexander Hamilton, our nation’s first secretary of the Treasury, ardent central-bank proponent and future Broadway star, who argued that a central bank is “a political machine of the greatest importance to the State.” They harbored no illusions.
Because of this, and because we live under a democracy, it’s important for the Man on the Street to understand this talk about “central bank independence” is of a qualified nature – it is a freedom confined within specific bounds (the so-called dual-mandate on prices and employment.) For the banking professionals who follow the Federal Reserve, the question is more about the central bank’s independence in how to carry out the mandate given to it from Congress. For example, former Fed Vice Chair Richard Clarida pointed out in a recent speech that Congress assigns "a statutory set of goals and tools" to the central bank, which in turn has "substantial independence” in how to fulfill its mandate.
That is the “central bank independence” financial news sites and Wall Street are talking about. Congress is like an Army commander telling his troops what the objective is and in making sure they have the proper weapons and ammunition to attain it. In much the same way that the better armies in history have allowed subordinates wide latitude in how to meet their assigned objectives, the fact remains that what those objectives will be ("take that hill," "wipe out that machine gun nest," "create low and stable inflation") are dictated from the top.
It is true that during the 1836 to 1913 period, when our nation was bereft of a central bank, the intellectuals and bankers who advocated for its reestablishment were overwhelmingly of the opinion that it had to be kept free of politics -- but they were never able to explain how such a thing was possible for a bank that was to be birthed from and sustained by politics. On the other hand, the Founders of our Federal Reserve were clear-eyed about the matter. They understood that the central banking question was about power -- about politics -- and that was a turbulent ocean they were deeply experienced in navigating. They made sure to stamp the Federal Reserve Act to reflect their view of the issue.
Virginian congressman Carter Glass, the man who cobbled together the Federal Reserve Act (with the help of the college-trained academic H.P. Willis) and ushered it through the House of Representatives, stated the bank was to be “a part of the government itself.”Senator Robert Owen of Oklahoma, his counterpart in the other chamber, was just as strong in his belief that “control of the system should be in the hands of the government.” The banking legislation Congress provided for President Woodrow Wilson to sign reflected this idea of political control.
This was little surprise as the most important push for that idea came from the Executive branch itself. President Wilson, the man above all responsible for the Federal Reserve’s birth, stated in a June 1913 address to Congress that control of the system, “must be public, not private, must be vested in the government itself.” He referred to the Federal Reserve Board as a “government board of control” and its members as “officers of the government.”
The idea of central bank independence is a noble one, but our system’s foundation rests upon the idea of strong political control. This is why as early as the 1930s the aforementioned H.P. Willis, whose very hands wrote the Federal Reserve Act, noted that it had become “an agency for the consolidation of all banking under a single supreme authority – the Federal Government.”
Our nation’s first two central banks were also embroiled in politics from the moment they were placed in their cradle until the day the lid on their coffin closed, and such it always has been and always will be for our Federal Reserve System, too. Still, this mixing up of our central banking system with politics and our politics with the central banking system is no reason to hang our heads -- there’s no shame in not being able to attain the impossible. A central bank can be no more independent of politics than a fish can be independent of the ocean in which is swims.
