What About The Fed?

by Jerry O’Driscoll

I have been active in criticizing recent Fed policy, but avoided the controversy over Fed governance (“Audit the Fed”).  I worked for the Dallas Fed for 12 years and believed then, and continue to believe, that there is a legitimate private banking function that the Fed performs.  It was born as a bankers’ bank, a successor to the private clearinghouses.  As explained by Richard Timberlake, legal ambiguity surrounded some of the activities of the private clearinghouses (e.g., provision of reserves in times of distress). The Fed was the compromise.

 The courts have consistently upheld that the 12 Reserve Banks are not part of the government. The presidents are selected by a board of directors, and not subject to Senate confirmation.Their employees are not U.S. officials, not subject to civil service protection, and are private by a variety of legal tests. 

The Board of Governors of the Federal Reserve System are an entirely different matter. They are nominated by the President and appointed by the Senate. The Board’s employees are constructively government employees.  

So the Federal Reserve system is a complicated private/public entitiy. Bureaucrats being bureaucrats and lawyers being lawyers, the Fed has tried to have its cake and eat it: public when it suits it; and private when it suits it. The rubber hits the road over its “independence.”  Indepedent of what? 

The Fed is a creature of Congress and subject to whatever oversight that Congress deems appropriate.  The current debate is over whether the Fed’s monetary operations should be audited. The Fed claims that would interfere with its operational independence.  Yet every private entity is audited without interfering with its ability to operate. This is a sham argument.  

I’m not normally a fan of op-eds by politicians. But Cong. Ron Paul and Sen Jim DeMint have a singularly intelligent piece in the Wall Street Journal on the issue.  I don’t support every single thing they say, but I find them saying sensible things. Decide for yourself.



4 thoughts on “What About The Fed?

  1. One tends to forget the difference between the regional Federal Reserve banks vs. the monetary policy-making Board of Governors, but it is important for understanding the Fed’s full role. I think most of us have the Board in mind when we say “Fed”. Are you saying that the 12 regional banks perform a legitimate private banking function or the whole apparatus does?

  2. Chidem,

    Excellent question.

    The Reserve Banks were intended to provide the banking services to their commercial bank members. The Board of Governors was intended to provide public oversight. The FR Act passed only because it was sold as not being a central bank.

    There was centralization of power in the wake of the Great Depession, a process continuing down to this day. Much like what has occurred between the states and federal government.

    The central banking functon now dominates the “bankers bank” function. The main benefit now of decentralization is providing balance against the center on policy matters. Would that more Bank presidents had the courage to perform that function.

  3. Excellent post, Jerry.
    I’d like to know what you think about the opinion held by some proponents of the Real Bills Doctrine (e.g. Parker Willis at that moment, Antal Fekete nowadays) that the foundation of the Fed in 1913 was not a very bad idea; what was bad indeed was the start of the open market operations by the Fed in the early 20s. For instance, Fekete says those events meant the principles of classical liberalism were thrown out of the window.


  4. I think the big question is whether central banking is consistent with classical liberalism. Could the note issues of the clearinghouse have become legally recognized instead of creating the Fed?

    The Fed turned away from a decentralized bankers’ bank to a full-fledged central bank over time. In the 1920s, I would identify the failure to return to the classic gold standard as the key change. Instead there was a gold exchange standard. Monetary discretion was mixed with the compulsion to maintain the gold standard. Open Market operations were the instrument of discretion.

    Two conflicting rules operated in the 1920s. The system collapsed under its inner contradictions.

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