Winter 2020
Monetary Policy in the European Union

Monetary Policy in the European Union


Prompt for Discussion

Contributors:  Annelise Riles, Marco Goldoni, Joana Mendes, Jens van’t  Klooster,  Brigitte Young, Jamee  Moudud, Jeremy Leaman, Sebastian Diessner, Agnieszka Smolenska and Will Bateman

The European Central Bank played an important and powerful role in the management of the eurocrisis. Today, in the midst of the COVID-19 pandemic, the ECB once more emerges as a crucial actor. With its Pandemic Emergency Purchase Programme it is taking decisive steps to address the fallout from the crisis – not only attempting to safeguard financial stability, but also to prevent massive unemployment. As the ECB becomes an indispensable actor in crisis management, as its private and public sector bond purchase programmes become ever more far-reaching and larger in volume, it attracts more and more attention. A vibrant debate amongst legal and economic experts and with civil society actors confronts ECB practice with important questions of legality, democracy and policy.

Questions of legality include the following: Is the ECB still acting within its mandate? Can quantitative easing programmes – such as the public sector purchase programme or the pandemic emergency purchase programme – be qualified as monetary policy measures; or are they really economic policy measures that remain within the competence of member states? Is the ECB acting in violation of the prohibition of monetary financing (Art. 123 TFEU) when it purchases public sector bonds in such large quantities and with the aim of ameliorating refinancing conditions of member states?  Is the ECB pursuing with its crisis measures the primary objective of price stability (as mandated by Art. 127 TFEU) or are the ECB’s policy decisions not only informed, but guided by other – secondary – objectives? These questions have been at the heart of two constitutional complaints before the German Federal Constitutional Court (FCC) against two ECB quantitative easing programmes (OMT and PSPP) which triggered a confrontation between the FCC (doubting the legality of the programmes) and the Court of Justice of the European Union (adopting a quite lenient standard of review and confirming their legality).

Apart from debates of legality, questions of legitimacy, democracy and social justice take center stage: Given that the ECB is such a powerful actor and given the distributive consequences of its policy measures, shouldn’t it be subject to greater democratic control? Should monetary policy be democratized? What would it mean to democratize ECB policy? Here, too, views are divided. They are divided as concerns the empirics – the effects of QE programmes on social inequality, the actions of corporations and capital concentration. They are also divided as concerns democracy and democratization: Should central bank independence from politics be safeguarded and in return monetary policy powers be reined in and subjected to strict judicial review (this appears to be the view of the FCC)? Or should the conduct of monetary policy – in recognition that monetary policy cannot be neatly separated from non-monetary economic policy – be “politicized” and become more transparent and inclusive.

Finally, policy considerations are heatedly debated: If the ECB has such powerful policy instruments at its disposal, might it/must it employ them to address pressing public concerns such as climate change, social inequality and structural imbalances between member states?  Suggestions for the (re-)deployment of monetary policy abound: to selectively support green industry; to engage in more outright monetary financing to support the budgets of member states; to start a programme of peoples’ QE, inter alia to promote social cohesion. Yet, can monetary policy make up for the “design flaws” of European monetary union with its separation of monetary policy (as an exclusive EU competence) from fiscal/economic policy (remaining largely a competence of the member states)? Can “more money” – even if directed with precision towards social objectives – be a solution to the current existential crises or does it fuel a growth spiral that is co-responsible for the social and ecological crises we are in?

While the ECB currently addresses some of these questions in its Strategy Review 2020, we wish to join the debate with this roundtable. Our aim is, ideally, to forge a transatlantic debate. We hope to address common concerns raised by central bank monetary policy and in particular quantitative easing – once considered unconventional monetary policy and today widely used by the ECB, the Fed and other central banks around the world. We also want to identify the specificities of ECB monetary policy that result from the particular institutional design of the European monetary union when compared, for example, to the United States system of government.


February 26, 2021
The Hegemony of Central Bankism and Authoritarian Neoliberalism as Obstacles to Human Progress and Survival
Jeremy Leaman, Loughborough University

February 18, 2021
Opening up ECB’s Black Box and Painting it Green- the Monetary Policy Mandate in the Age of New Challenges and Uncertainty
Agnieszka Smoleńska, European Banking Institute

February 10, 2021
The Distributive Impact of Central Banks’ Quantitative Easing Program
Brigitte Young, University of Münster

February 3, 2021
Money and the Debunking of Myths
Jamee K. Moudud, Sarah Lawrence College

January 25, 2021
Post-Crisis Central Banking and the Struggle for Democratic Oversight in Europe – a Trilemma and a Paradox
Sebastian Diessner, European University Institute and London School of Economics

January 18, 2021
The ECB, the climate, and the interpretation of “price stability”
Jens van’t Klooster, KU Leuven

January 12, 2021
Beneath the Spurious Legality of the ECB’s Monetary Policy
Marco Dani, University of Trento, Edoardo Chiti, Sant’Anna Scuola Universitaria Superiore Pisa, Joana Mendes, University du Luxembourg, Agustín José Menéndez, Universidad Autónoma de Madrid, Harm Schepel, University of Kent, Michael A. Wilkinson, London School of Economics

January 4, 2021
Rekindling Public Trust in Central Bankers in an Era of Populism
Annelise Riles, Northwestern University

December 28, 2020
Quantitative Easing, Quasi-Fiscal Power and Constitutionalism
Will Bateman, Australian National University


Link to Article



Race and Money

Race and Money

Prompt for Discussion

Contributors: Mehrsa Baradaran, Michael O’Malley, Michael Ralph, David M. P. Freund, Destin Jenkins, Peter Hudson,  K-Sue Park

In several historic moments of banking or monetary reform, issues of race were inextricably tied to issues of money. The legacy of institutional segregation continues today. More crucially, the history of money, credit, and banking is implicated in ongoing exclusion and exploitation of vulnerable communities.

Scholars in several fields have explored how the institution of enslavement has shaped American capitalism, monetary debates, credit markets, and banking. Enslavement and its long shadow caused stark and ongoing wealth distortion. The Constitution marked slaves as “articles of commerce” and financial ledgers tracked “property in man” as assets, credit, debt, and monetary value. Between 1820 and the Civil War, banks across the south issued notes with images of slaves printed on the money. The Union won the bloody ground battle thanks to war generals Grant and Sherman, but it also, and perhaps more importantly won the currency war thanks to President Lincoln, Treasury Secretary Salmon P. Chase, and the Supreme Court of the United States. Lincoln’s “greenbacks,” backed by the full faith and credit of the US Treasury (but not backed by gold) enabled the Union victory. In turn, the success of the Union army fortified the new currency. The success of the new fiat currency and the Union soldiers were inextricably linked.

The war over slavery was also a war over the future of the economy, the nature of property rights, and the essentiality of value. By issuing fiat currency, Lincoln opened up a debate about how elastic the money supply might be. Fiat money transparently based money’s worth on the federal government’s determination to take it for value. As Keynes said of legal tender—”the state claimed the right not only to enforce the dictionary but to write it!” Scholars in this roundtable will discuss how those crucial debates affected modern theories about money and value.

The scholars in this roundtable will also discuss the ongoing effects of slavery, Jim Crow, housing segregation, and employment discrimination on the modern economy. In America, each rung on the ladder toward prosperity consisted of bank credit—even more so in the 20th century when homeownership became synonymous with both mortgage credit and prosperity. For Blacks and others, the path toward wealth was closed. It was closed by segregation, government policies, and by realities of finance. In this roundtable, we have invited pre-eminent scholars whose work illuminates core issues at the intersection of money and race. We have asked them to respond to a few questions: How did slavery shape the US monetary, credit, and banking system? How did the economic system and monetary forms shape racial dynamics? What aspects of the modern economic system are influenced by America’s racial history? How has America’s racial history affected theories of capital, money, or debt? What do you think current debates about the history of capitalism reveal about the future of the field?


September 25, 2020
How Did Redlining Make Money?
K-Sue Park, Georgetown Law

July 28, 2020
Currency, Colonialism, and Monetary History from Below
Peter James Hudson, University of California, Los Angeles

July 17, 2020
Finance and Violence
Michael Ralph, New York University

June 15, 2020
Debt and the Underdevelopment of Black America
Destin Jenkins, University of Chicago

June 8, 2020
Money is productive, and racist institutions create money
David M. P. Freund, University of Maryland

May 28, 2020
Money and the Limits to Self Making
Michael O’Malley, George Mason University

May 19, 2020
How the Right Used Free Market Capitalism against the Civil Rights Movement
Mehrsa Baradaran, University of California Irvine

Banking: Intermediation or Money Creation

Banking: Intermediation or Money Creation

Prompt for Discussion

View all Roundtable #1 Contributions

Contributors: Morgan Ricks, Marc Lavoie, Robert Hockett, Saule Omarova, Michael Kumhof, Zoltan Jakab, Paul Tucker, Charles Kahn, Daniel Tarullo, Stephen Marglin, Howell Jackson and Christine Desan, Sannoy Das

Commercial banks are, indisputably, at the center of credit allocation in virtually all modern economies.  Astonishingly, however, it remains controversial exactly how banks expand the money supply.

According to one view, banks operate as intermediaries who move money from savers to borrowers.  The basic idea is that banks extend the monetary base by lending out of accumulated funds in a reiterative way.  In round 1: a bank takes a deposit, sets aside a reserve, lends on the money; round 2 – the money lands in another bank, that bank sets aside a reserve, lends on the money; round 3 – the process repeats.   Money’s operation is effectively multiplied in the economy because banks transmit funds constantly from (passive) savers to (active) borrowers, thus distributing money across those hands.   The system works because savers, who are content to leave their funds alone, are unlikely to demand more than the (respective) reserve amounts back from any round.  Banks balance their flow of funds over time as borrowers repay their loans. 

According to another view, commercial banking activity amounts to “money creation” rather than the pooling and transmission of existing funds.  Banks fund the loans they make by issuing deposits (or promises-to-pay in the official unit of account) that are treated by the wider community as money, not only as credit.  They have, in effect, immediate purchasing power.   The constraint on banks’ lending capacity is not the sum of previously accumulated funds, but the banks’ ability to clear obligations owed to other banks against obligations demanded from other banks.  That activity depends on national payments systems coordinated and stabilized by central banks.

We open this roundtable to proponents of each approach to banking.  We invite them to argue their case, to respond to one another, and to elaborate the implications that their view has on matters including the definition of money, the role of private capital accumulation, the relationship of commercial banks to central banks, and the behavior of the money supply. 

Special Edition: Money in the Time of Coronavirus

Special Edition: Money in the Time of Coronavirus

Prompt for Discussion

Contributors: Katharina Pistor, James McAndrews, Saule Omarova, Mark Blyth, Jamee Moudud, Elham Saeidinezhad, Dan Awrey, Fadhel Kaboub, Leah Downey, Virginia France, Lev Menand, Nadav Orian Peer, Robert Hockett, Carolyn Sissoko, Jens van ‘t Klooster, Oscar Perry Abello, and Gerald Epstein

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The financial strains brought by the coronavirus outbreak feel strangely reminiscent of 2008, and yet, markedly different. In the United States, at the writing of this prompt, the S&P 500 has crashed 25%, and the federal funds target rate is once again moving towards the zero bound. The treasury securities market is in disarray, and the Federal Reserve is set to increase its repo lending by over one trillion. In Washington, the administration’s insistence that concerns were overblown is now replaced with negotiations over the size and shape of a stimulus package. “I don’t want to use the b-word”, said a senior administration official about plans to support distressed industries, like airlines. The b-word is, of course, bailout. 

So far, so 2008. But the monetary dynamics we are witnessing in the time of corona also take us into new territory.  The proximate cause of the crisis past came from within the financial system itself: the housing credit bubble and abuses in subprime lending. The corona crisis, on the other hand, emerges from a material threat to human health.   Where the 2008 crisis revealed the vulnerabilities of financial globalization, the corona crisis is disrupting the global production system, upending supply chains, and threatening shortages in essential inventories.  

We wonder about the extent to which the policy arsenal of 2008 can contain the dislocations currently occurring, and what, exactly, stimulating consumer demand means when the consumer herself is in quarantine.  Moreover, the crisis response to the corona crisis is taking place within an institutional setting that was itself reshaped by the 2008 crisis reforms. As corona strains unfold, it remains to be seen whether the promise of financial resilience will be borne out, or whether fundamental design flaws left in place will frustrate reformers’ efforts. 

In this Special Edition Roundtable, JM invites contributors to provide live analysis of money in the time of corona, here in the U.S., and around the world.




June 29, 2020
Roundtable Wrap-up
Sannoy Das, Harvard Law School

May 21, 2020
Human Capital Bonds and Federal Reserve Support for Public Education: The Public Education Emergency Finance Facility (PEEFF)
Gerald Epstein, University of Massachusetts 

May 12, 2020
The Fed Should Bail Out Low-Income Tenants and Not Just Banks and Landlords
Duncan Kennedy, Harvard Law School

April 29, 2020
Getting to Know a Brave New Fed
Oscar Perry Abello
, Next City

April 10, 2020
The Problem with Shareholder Bailouts isn’t Moral Hazard, but Undermining State Capacity
Carolyn Sissoko, University of the West of England

April 2, 2020
Crises, Bailouts, and the Case for a National Investment Authority
Saule Omarova
, Cornell Law School

March 31, 2020
Why the US Congress Gives Dollars to the Fed
Jens van ‘t Klooster, KU Leuven and University of Amsterdam

March 26, 2020
A Fire Sale in the US Treasury Market: What the Coronavirus Crisis Teaches us About the Fundamental Instability of our Current Financial Structure
Carolyn Sissoko, University of the West of England

March 25, 2020
The Democratic Digital Dollar: A ‘Treasury Direct’ Option
Robert Hockett, Cornell Law School

March 22, 2020
Derivative Failures
James McAndrews, TNB USA Inc. and Wharton Financial Institutions Center

March 20, 2020
The Case for Free Money (a real Libra)
Katharina Pistor, Columbia Law School

March 19, 2020
The Monetary/Fiscal Divide is Still Getting in Our Way
Leah Downey, Edmond J. Safra Center for Ethics
at Harvard University

March 18, 2020
Is Monetary System as Systemic and International as Coronavirus?
Elham Saeidinezad, UCLA Department of Economics

March 17, 2020
Here We Go Again? Not Really
Dan Awrey, Cornell Law School

March 16, 2020
Repo in the Time of Corona
Nadav Orian Peer, Colorado Law

March 16, 2020
Beyond Pathogenic Politics
Jamee K. Moudud, Sarah Lawrence College

March 15, 2020
Economic and Financial Responses to the Coronavirus
James McAndrews, TNB USA Inc. and Wharton Financial Institutions Center


Virtual Currencies and the State

Virtual Currencies and the State

Prompt for Discussion

Contributors: Bill Maurer, Lev Menand, Lana Swartz, J.S. Nelson, Benjamin Geva, Hilary Allen, David Golumbia, Finn Brunton, Gili Vidan, Marcelo De Castro Cunha Filho, Susan Silbey, John Haskell, Nathan Tankus, Katharina Pistor, and Joseph Sommer

On October 10th, 2019, the SEC brought suit against Telegram, asserting that its $1.7 billion offering of Gram “tokens” violated federal securities laws.  The same week, five large investors including Visa, Mastercard, Stripe, eBay, and Mercado Pago pulled out of Facebook’s virtual currency Libra, apparently taken aback by the fierce criticism leveled at Libra by politicians and regulators.   These events were striking, occurring as they did against a baseline of official inaction, ambivalence, or accommodation of virtual currencies.  It is an opportune moment to ask:  What are virtual currencies – money, securities, or speculative assets?   How do they relate to modern political communities and to the financial architecture that those states support?  Why at this moment have governments chosen to crack down on virtual currencies?

The movement towards virtual currencies took off in 2008, when an anonymous person or group introduced Bitcoin.  In the decade that followed, Etherium, Peercoin, and others offered similar products:  digital assets created and maintained by a decentralized set of participants that can be traded for goods and services.  Many users praised virtual currencies on the ground that they eliminated the role of law, the government, and/or the financial industry.  According to the Bitcoin model, rules intended to operate mechanically control the production of virtual currencies and limit the quantity of virtual currency ultimately created.   Exchange occurs according to a technology that Marco Iansite and Karim Lakhani describe as “an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way.”  (Harvard Business Review, 18 January 2017.)  The same description suggests the theory underlying virtual currencies:  as a community of independent users opts in and confirms the transfer of digital assets, it makes unnecessary both public payment systems and commercial banks as financial agents.  

Within the virtual currency family, differences in technology, industry location, and ideology have emerged.  While Libra claims the mantle of virtual currencies, for example, it does not use a blockchain nor, at least in its initial version, a decentralized network of users to confirm transfers.  See FT Alphaville.  And rather than aiming at avoiding governmental oversight, it offers a vision of financial inclusion.

In this roundtable, we invite participants to comment on the questions recently raised by the difficulties faced by Telegram and Libra.  What are virtual currencies and how do they relate to public moneys?  What is the theory of value that virtual currencies offer and are those theories supported historically?  Are these monetary systems that are working outside the state – or payments systems derivative of state power?    How do the differences between Libra and more traditional cryptocurrencies explain the governmental response? Are virtual currencies meant to fix problems with the current monetary or payments systems, and if so, what problems?  Or are virtual currencies meant to evade those systems?  


July 3, 2020
Why Do We Keep Taking the Cryptocurrency/Blockchain Scam Seriously?
David Golumbia, Virginia Commonwealth University

June 12, 2020
Decentralization: The Rise of a Hazardous Spec
Gili Vidan, Harvard University

April 28, 2020
Virtual Money at the Edge-of-State
Finn Brunton, NYU Steinhardt School

April 22, 2020
Payment in Virtual Currency
Benjamin Geva, Osgoode Hall Law School of York University

April 15, 2020
What lies behind the apparent trust in cryptocurrencies?
Marcelo de Castro Filho, Massachusetts Institute of Technology
Susan Silbey, Massachusetts Institute of Technology

April 9, 2020
Virtual Currency (in the Shadows of the Money Markets)
John Haskell, The University of Manchester
Nathan Tankus, The Modern Money Network

March 31, 2020
The Case for Cryptocurrencies as a New Category of Regulated Non-Sovereign Fiat Currency
J.S. Nelson, Villanova Law School

March 11, 2020
How is Private Money Possible?
Joseph Sommer

March 4, 2020
Starbucks, Libra, and the Boring Future of Money
Lana Swartz, University of Virginia

February 26, 2020
Cryptocurrencies as Privately-Issued Moneys
Hilary J. Allen, American University Washington College of Law

February 20, 2020
Money at the Zero Lower Bound
Bill Maurer, University of California, Irvine

February 14, 2020
Regulate Virtual Currencies as Currency
Lev Menand, Columbia Law School

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Teaching Money 20/21

This Teaching Money in 20/21 page will enable us to find and share resources particularly relevant for the upcoming year. For example, we are especially curious about your teaching on:
  • The COVID-19 policy response in money, finance and social insurance
  • The past and present of racial segregation through the financial system
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Please send all relevant materials to our Assistant Editor, Dan Rohde:

The Constitution and the Fed after the COVID-19 Crisis

Authors: Christine Desan and Nadav Orian Peer

The COVID-19 financial response brought a seismic shift in the allocation of authority between Congress, the Treasury, and the Federal Reserve.  Between them, those power centers provide the public structure for the material economy.  Congress claims the “power of the purse” or the authority to appropriate public funds; the Treasury holds responsibility over the spending and taxing that puts those orders into effect; and the Federal Reserve literally makes the money we use by creating the dollar reserves that anchor our sovereign money supply.  So when events re-order the relationship between Congress, the Treasury, and the Federal Reserve, the change goes to the heart of our economy as well as our constitutional system.

We understand that emergencies call for action early and explanations later.  But the Financial Crisis of 2008 realigned the triangle of authorities we identify above in lasting ways.  The COVID-19 Crisis looks to have restructured (collapsed?) that triangle altogether.  To date, the federal government’s responses displace the authority of Congress for discretion held by the Treasury.  They load the Fed with an enormous amount of ammunition that will determine who wins (large corporations? indebted fossil fuel companies?), and who loses (minority businesses and lenders? low income tenants? educational institutions?).  They operate through a financial infrastructure that is inaccessible to many Americans and opaque to virtually all others.

So even as emergency operations continue, it’s time to start taking stock.  We focus here on a series of lending facilities at the center of the government’s COVID-19 response.  Established by the Fed, these facilities are anticipated to lend $4.5 trillion over the coming months (see below). The Treasury’s expanded powers lie in the key role that Treasury guarantees play in determining the lending that will be done by these new facilities.  We do not know how the Treasury selects assets and industries to guarantee, how it sets terms for the guarantees, or who is in the room as those terms are hammered out.  Surely the Fed and the Treasury are working together but where, then, is the Fed’s independence?  And where is Congress as the details of an amount – $4.5 trillion – as large as the federal budget in 2019 – are being determined?

  1. The Constitution and Traditional Lender of Last Resort

First, let’s return to basics.  Why does the Federal Reserve wield such enormous authority to dispense credit in money and how is that power supposed to be channeled?  How is that authority consistent with the separation of powers that should leave critical appropriation responsibilities with Congress?  And how do the COVID lending facilities square with the fact that the Fed is supposed to operate within safeguards that give it political independence from the Treasury?

Congress established the Federal Reserve to support the nation’s banking system.  By the early 20th century, Congress had endorsed commercial banks as the vehicle for amplifying sovereign base money:  banks could make credit, denominated in dollars, available when they lent.  The idea, argued in iconic form by Walter Bagehot, was that those lenders could make the best substantive decisions about how to allocate credit; acting with local knowledge, they could judge which borrowers were most likely to be productive.[1]  But a decentralized network of banks was also fragile.  Banks operate by giving out long-term loans in the form of deposits that can be used at any time – “maturity transformation” in the jargon.  Bank panics, where depositors withdraw funds en masse, can destroy banks even if they have only good loans on their books.

In response, Congress designed the Fed as a “lender of last resort.”  The central bank was supposed to extend a life-line to banks to get them through a liquidity crunch so that they could continue as fundamentally solvent institutions.  The Fed can do this because, unlike any other public or private actor, its balance sheet is unconstrained. While other actors must borrow, the Fed has the legal power to issue money: it makes the cash value of the longer-term loans held by stressed lenders immediately available in dollars that the government recognizes as its own liability to those lenders so that they can ride out a panic. See Secs. 10B and 13(3) of the Federal Reserve Act, 12 U.S. C. 347(b); 12 U.S.C. 343. Note that the Fed’s capacity means that it is, effectively, creating money – a capacity that could threaten Congress’s power over appropriations.

Given its enormous power, the Fed was controversial from the start.  Traditionally, Congress has jealously guarded its power over the purse, including its authority to create sovereign money.  That authority to spend public resources lies at the root of our democracy.  In fact, the claim by young colonial legislatures that they had the authority to tax and spend was the matter that split Americans from British rule in the eighteenth century.[2]  Fast forward to the early twentieth century: we can see how the Fed’s design as a fallback lender for banks was essential to its political acceptance.  The Fed was understood merely as a backstop for banks making the real decisions, as opposed to a source of funds that would compete with Congress.

Consistent with that theory, lender of last resort operations typically extend only to supporting solvent commercial banks.  We emphasize that legally, those operations traditionally involve lending, not purchases.  As long as the banks are solvent, any losses on bank loans would accrue to the borrowing bank and its investors, not to the Fed.  Insofar as those Fed lending operations aim to protect the credit system from contagions of panic, as opposed to changing the character and destinations of private lending, they can be understood as instrumental support to the network of private banks.  We’ll come back to the oddity of this narrative as an account of the Fed’s authority, but take its logic seriously here for the purpose of exposing recent changes.

  1. The Constitution and Traditional Monetary Policy

Central banking posed a second challenge to constitutional bounds.  Following European models, Congress gave the Fed authority to purchase assets directly, rather than merely lend.  (See Section 14 of the Federal Reserve Act, 12 U.S.C. 353-359.)  That authority allowed the Fed to conduct open market operations; over the course of the twentieth century, that activity became an essential tool in monetary policy over interest rates.  But Section 14 authority also threatens congressional sovereignty over spending.  For one, it clearly creates money:  the Fed buys assets by crediting a seller with an increase in dollar credit.  (Technically, this is done by crediting the seller’s bank account at the Fed with newly created reserves).  Moreover, purchasing assets obviously intervenes into the market for those assets, changing their supply and, in turn, affecting asset prices.[3]

Here, a series of safeguards, both conceptual and legal, have long kept the Fed’s purchasing power from breaking the surface of constitutional concern.  Again, they operate to categorize the Fed’s purchasing authority as a stabilizing tool.

On the conceptual side, Americans adopted approaches to central banking that cast purchasing operations as simply supporting a healthy market for credit.  As opposed to “picking winners and losers,” that activity was seen as loosening or tightening credit conditions in general.  In fact, the Fed seemed to control those conditions with modest asset purchases that, by successfully affecting the price of credit, spread economy-wide.

For good measure, Section 14 limited Fed discretion by specifying the assets eligible for purchase, primarily U.S. treasuries, and obligations “fully guaranteed by the United States as to the principal and interest.”  In the case of purchases, as opposed to loans, the Fed directly bears the risk of profit or loss.  In the absence of the private filter, Fed purchases seem an awful lot like spending decisions, and those should reside in Congress.  By restricting Fed purchases (mainly) to assets already fully backed by the U.S., Congress can be understood as preserving its power of the purse: such obligations have already been vetted by Congress.[4]

The same reasoning – understanding the Fed’s work as reactive and constrained – went some distance towards distinguishing its responsibilities and role from those of the Treasury department.  The economic imagination emptied “monetary policy,” rightly pursued, of political content compared to fiscal policy on spending.  Here, limits on the President’s removal power over the governors and Reserve Bank presidents kick in.[5]  That constraint arguably liberates the Fed to hold its own course without bowing to political demands for monetary stimulus, a concern conventionally captured by the notion that the Fed should operate independently.  We note here that this traditional conception of central bank independence fails to capture important external influences to which the Fed is subject, including cooperation with Treasury in wartime,  sensitivity to Congressional pressures during recessions, as well as accommodation of private banks in monetary policy implementation.[6]  These pressures notwithstanding, the division of labor between fiscal and monetary policy has long oriented expectations and argument about who was wielding power and how they did so.

  1. The Constitution and the 2008 Crisis

The 2008 crisis brought about significant changes in lender of last resort and monetary policy alike. From the constitutional perspective we sketched above, those 2008 changes – changes that seemed so transformative in their time—now appear subtle in comparison to the COVID-19 response.

First, the Fed expanded its lender of last resort support from commercial banks to “shadow banks” under its emergency Section 13(3) authority.[7]  That expansion was arguably consistent with the traditional ways of distinguishing Fed lending of last resort from congressional spending. Specifically, 2008 Fed lending was still limited to entities that created liquid forms of credit to end-borrowers.  Notable exceptions aside,[8]  the supported shadow banks were, by and large, considered solvent, so the notion of a “private filter” over credit decisions remained.[9]  What is more, those shadow banks suffered from run-like dynamics that could destroy the money supply and cripple the economy.  So, while the recipients of support were new in ways that triggered various anxieties, the constitutional modes of legitimacy actually remained comfortably familiar.

Second, the Fed innovated in making monetary policy.  Traditionally, the Fed had used its ability to control short-term borrowing costs between banks – the “fed funds rate” –  to influence a range of longer-term borrowing costs in the economy, and ultimately, overall economic conditions (employment, price level, growth).  With interest rates already at the zero bound and the financial sector in disarray, Bernanke and Yellen discovered that the Fed’s ability to “transmit” monetary policy through the Fed funds rate had run down.  Enter Quantitative Easing, the Fed’s Section 14 attempt to shape long-term borrowing costs more directly given economic conditions.  Gone were the smallish purchases to control the fed funds rate. In their stead, the Fed purchased two trillion in long-term treasuries and agency mortgage-backed securities (MBS) to reduce their supply, thereby lowering the yield investors demanded to hold them.  In turn, lower yields on these public safe-assets would help reduce rates on long-term private borrowing.

Radical as that seemed at the time, note again the continuity with traditional modes of constitutional legitimacy.  Despite its enormous size, QE was carried out through Section 14, using assets that were already backed by the U.S. in ways vetted by Congress or, in the case of agency MBS, that had a tenable claim to that status.[10]  Limiting QE to these assets meant minimizing potential encroachment on the power of the purse.

  1. The Constitution and COVID-19 Liquidity Facilities

The Fed’s response to the COVID-19 crisis breaches traditional modes of constitutional legitimacy which, miraculously, survived the 2008 vintage.  Following that precedent, the Fed in March 2020 began by authorizing emergency lending to shadow banks under 13(3) (e.g., here, and here), and launching a new QE in treasuries and agency MBS.  But by month’s end, these once extraordinary measures seemed woefully inadequate to the distressed COVID-19 economy. Enter the Fed’s new COVID-19 liquidity facilities, first announced on March 23, following the initial congressional impasse, and expanded in various ways since.  Those facilities subvert the traditional modes of constitutional legitimacy in a number of ways.

First, the Fed’s facilities are offering support not to credit providers but to the end-borrowers: corporations, local and state government, consumers etc.  These recipients are not in the business of maturity transformation and are not vulnerable to runs.  Here, recall that its use to support private credit allocation and to prevent runs was the condition that distinguished central bank money creation from Congressional spending.  With COVID-19, this limitation is gone.

Second, setting some nuance aside, the COVID-19 facilities are structured in ways that leave each facility directly exposed to the credit risk of end-borrowers (corporations, local and state government, consumers).  That risk further undermines the appearance that real decisions over credit, like a private filter, stay with private lenders.  COVID-19 facilities engage in a kind of credit distribution that makes it impossible to ignore that public authority is “picking winners and losers.” That sounds a lot like power of the purse.

Third, while the COVID-19 facilities are stylized as doing Section 13(3) loans of last resort, those facilities’ direct exposure to borrowers makes us wonder whether they are really making “purchases” regulated by Section 14 – a mashup that breaks new statutory ground as a kind of “Section 14(3).”  In some facilities, like the Secondary Market Corporate Facility, the facility will literally purchase corporate bonds in the open market.  In other facilities, the transactional structures are more complex, but the result is similar (again, leaving some nuance aside[11]). That is, the goal of the facilities is reminiscent of QE, and, at an anticipated $4.5 trillion, they are certainly QE sized.  Here at the COVID-19 vanguard, lender of last resort support and monetary policy are blending in to the point they are indistinguishable.

Recognizing that the new facilities are making de facto purchases also exposes that they are reaching far beyond the assets eligible for purchase under Section 14, primarily treasuries and debt fully guaranteed by the U.S.  With minor exceptions, the corporate, local and state government, and consumer debt purchased by the Fed is clearly not Section 14-eligible.  Fed officials are likely aware of this: the transactional structures they chose seem like a kind of regulatory arbitrage, one that dresses-up Section 14 purchases as Section 13(3) loans.  The Fed can, for example, set up a special purpose vehicle (SPV), lend to that SPV, and have the SPV purchase a corporate bond. That may or may not comply with the statutory terms in some superficial sense, but it leaves the deeper constitutional legitimacy of the facilities just as vulnerable.  In the 2010s QE, Section 14’s requirement that assets eligible for purchase be guaranteed by the U.S. worked to maintain ultimate vetting with Congress.  Clearly, this no longer holds.

Finally, the Fed’s lending facilities appear to depend on political direction from the Treasury.  This development follows from the requirements in Section 13(3), added by Dodd-Frank, that the Fed receive “the prior approval of the Secretary of the Treasury” before establishing a lending facility, and even more crucially, that “security for emergency loans is sufficient to protect taxpayers from losses.”  With the Fed providing direct support to end-borrowers in the distressed COVID-19 economy, the no-loss requirement becomes a tall-order.  Traditional lender of last resort meant a private capital buffer between the Fed and the end-borrower.  That buffer is now gone, and the Treasury has stepped into its place through use of its Exchange Stabilization Fund (ESF), first established during the Depression to stabilize the dollar as the U.S. abandoned the gold standard.  The legalities of the ESF raise their own questions, which are beyond our scope here.[12]

Use of the ESF began with a deceptively small amount – $50 billion in March 2020.[13]  If one assumes anticipated losses of ~10% of lending, $50 billion in loss guarantees can support Fed lending to the tune of $500 billion.  No small change, but nowhere near the size required.  So as part of the CARES Act (passed March 27), Treasury requested from Congress – and received – an appropriation for $450 billion to the ESF.  Now, with this additional $450 billion, the Treasury can support $4.5 trillion (10X) in Fed lending.[14]  That is, with a relatively small appropriation of $450 billion, the Treasury and the Fed get to determine whether and how to use an additional $4.5 trillion, including the amount added by Congress to the ESF and the lending done when that amount is used as loss protection.

  1. Closing Thoughts: The Constitution and Monetary Reform

We are left to ask how innovations in the Fed’s lending and purchasing authorities fit with the constitutional framework we had come to assume.  In particular, do they preserve the appropriations authority to Congress?  And is there a coherent division of responsibilities between the Treasury and the Fed, one that renders presidential powers transparent and justifies the Fed’s relative insulation from popular accountability?

We fear that Congress has basically delegated the power of the purse to the Treasury.  Treasury’s discretion over the character of the new lending facilities is extremely broad and the oversight mechanisms correspondingly weak.  This arrangement marks a fundamental reorientation in the relationship between the legislative and executive branch.  Recall that Congress initially deputized the Fed, not the Treasury, to engage in money creation, according to a theory that came to distinguish its rescue and policy roles as stabilizing operations.  Contrast the situation today: the Fed now uses its enormous authority to create money according to the Treasury’s judgment about how to save the economy.

The arrangement marks an equally important reorientation in the relationship between the Treasury and the central bank.  The Federal Reserve and the Treasury are, between themselves, determining what sectors to support and, as importantly, how to support them – under what conditions, with what distribution of costs and risks, and through what kind of process.  Despite their crucial nature, we have no idea how the conditions defined by the “term sheets” are determined or by whom.[15]

We are also concerned that the arrangement obscures the exercise of power by the Treasury, while misusing the notion that a central bank should have independence.  The latter is an organizing principle of modern central banking, intended to insulate the power of money creation from improper manipulation for short-term electoral gain.  What we’re seeing now is a kind of backward use of central bank independence.  On the one hand, the Fed, which is timid to make loans that can result in losses, is taking cover in loan guarantees from the politically accountable Treasury.  On the other hand, the Treasury, which is effectively controlling $4.5 trillion in Fed lending (based on the original ESF amount, expanded by the CARES Act appropriation), is taking cover in the notion that lending is administered by the Fed, a neutral institution, based on Fed expertise, rather than political influence.  In this way, the Treasury gets to avoid the very same political accountability that the Fed cites as justification for its risk taking.

What is to be done?  For starters, we believe it would be far better if Congress itself allocates the risk capital among Fed programs, and takes true accountability for its decisions.  But that injunction may well have been mooted by events: the pandemic requires fast action and collaborative decision-making.  Congress does not seem capable of either.  This raises the possibility of more structural reform.

The narrative that located the Fed as simply backstopping private initiative and stabilizing the wider economy has always been a fiction.  Most dangerously, it arrested an intense American debate about how we should make and allocate credit in money – public or partly public banks?[16]  federal provision of credit to farmers or homeowners?[17] money directly issued outside of banks? postal banking? It romanticized as local lenders those that would consolidate into financial behemoths.  And it ordained the investor instruments, modes of profit, and particular markets that would be supported.

Our point here is not that the COVID-19 response represents a fall from grace, from a time when central banks kept to their proper and humble role.  Our point is that COVID-19 makes impossible to ignore what we argue has always been the case: money creation is inherently political and greater democratic input is required into its large distributive outcomes.

If we want to understand the distributive impact of these huge lending facilities, we need to analyze the way Fed credit flows, the targets it supports, as well as the communities it leaves behind. At broadest level, Fed facilities appear to privilege lending to corporations, as well as to those established businesses and consumers fortunate enough to enjoy access to mainstream financial services.

Communities of color – where centuries of discriminatory policies made such access painfully lacking – once again appear to be left out. According to Fed data, black families are 3.5 times more likely to be unbanked than white families (14% and 4% respectively).  A staggering 35% of black families is underbanked, as compared to 11% of white families.  Credit denial rates for black families are substantial (59% and 41% for families earning less than $40,000 and $40,000-$100,000 respectively) and double the size of their white counterparts.  These black communities, that are so much less likely to benefit from the Fed’s facilities are also those hardest hit by COVID-19, in terms of public health and economic distress alike.  As lawyers, we believe it is important to scrutinize the civil rights implications of government channeling of emergency lending through channels that inherently disfavor minorities.

Minority, and other vulnerable communities, will also suffer disproportionately from the emerging crisis in municipal finance, and the disruption in essential social services it will bring.  While we welcome the Fed’s Municipal Liquidity Facility, the amounts committed remain woefully inadequate (only 20% of 2019 revenues).  We are struck by the ways in which term sheets provide credit to different actors – e.g., municipalities and corporations – on widely different terms, without apparent justifications.  Here at, we plan to continue analysis into the distributive outcomes of Fed COVID-19 lending in a number of ways.  We will update this spotlight as we do so.

Twice in two decades, shocks have destabilized our financial and economic system with such violence that the Fed’s action, directed in convoluted ways by the Treasury and questionable in terms of constitutionality, became necessary.  There could be no more clear demonstration that we need to restructure our financial architecture.  Neither the crises, nor their distributive effects, nor the way their remedy eludes accountability, are sustainable in a democratic society.


[1] Walter Bagehot, Lombard Street: A Description of the Money Market (New York: John Wiley and Sons, Inc., 1873, 1999), 89.

[2] Jack P. Greene, The Quest for Power; the Lower Houses of Assembly in the Southern Royal Colonies, 1689-1776 (Chapel Hill: University of North Carolina Press, 1963); Terry Bouton, Taming Democracy: “The People,” The Founders, and the Troubled Ending of the American Revolution (Oxford, UK: Oxford University Press, 2007).

[3] Traditional monetary policy was carried through a combination of outright purchases, and repurchase agreements with primary dealers, which are purchases in name, but secured loans in essence. Both types of operations shape asset prices, though the effects of the former method (outright purchases) are generally considered greater. The COVID-19 developments we discuss below are generally similar to outright purchases.

[4] Contrast this with collateral the Fed accepts as a lender of last resort to commercial banks under Sec. 10B, which is extremely broad. Why this difference you ask? Recall that when the Fed lends to a commercial bank, that bank’s capital protects the Fed from losses. Outright purchases involve no such capital.

[5] See 12 U.S.C. sec. 242; 248(f), 614.  For analysis of the weirdly conflicting character of presidential control over Bank presidents and the status of the Chair of the Board of Governors, see Peter Conti-Brown, “The Institutions of Federal Reserve Independence,” Yale Journal on Regulation 32, no. 2 (2015): 302-03, 3,

[6] See e.g., Richard H. Timberlake, Monetary Policy in the United States: An Intellectual and Institutional History (Chicago: University of Chicago Press, 1993), 300-15 (wartime coopration with Treasury); Sarah Binder and Mark Spindel, Independence and Accountability: Congress and the Fed in a Polarized Era,  (2016) (considering political sensitivity of Fed to congressional disagreement); Kumhof and Jakab, JustMoney, Banking Roundtable, Jan 29, 2020 (considering pressure for continuing expansion of reserves to accommodate private banks). See also the statutory qualification to the Fed’s authority in 12 U.S.C. 246.  Its reach is uncertain as far as we know.

[7] In a nut shell, shadow banks are institutions that issue money-like liabilities to fund holdings of securities. While these money-like liabilities are subject to run risk similarly to commercial banks, shadow banks lack a bank charter, and do not enjoy deposit insurance, nor access to Fed lending of last resort under ordinary Section 10B. authority.

[8] One such interesting exception is the Fed’s facilitation of the Bear Stearns-JPMC merger through a special purpose vehicle known as Maiden Lane LLC (more on Fed SPVs below). Maiden Lane did not merely lend to Bear, but purchased $30 billion of its assets. JPMC apparently found these assets too risky to assume in the merger, and was only willing to extend a small amount of loss protection ($1 billion, or 3%) to the Fed. This arrangement violated norms around lender of last resort, and was part of the impetus for Dodd-Frank amendments of Section 13(3). A full decade later, the Maiden Lane portfolio was liquidated at a small profit.

[9] It is telling that when the government contemplated purchasing bank assets –a plan later turned into recapitalization of banks by the Paulson Treasury– the plan was not carried through Federal Reserve lender of last resort authority. The so-called Troubled Assets Relief Program (TARP) was subject to direct congressional appropriation in the Emergency Economic Stabilization Act of 2008.

[10] The legal basis for Fed purchases of agency MBS raises important questions. Fannie Mae and Freddie Mac — the GSEs issuing the agency MBS — entered government (FHFA) conservatorship in Sept. 2008. The legal framework for conservatorship is complex and includes the Housing and Economic Recovery Act of 2008 and a series of Senior Preferred Stock Purchase Agreements. While various forms of support were extended to the GSEs, as far as we know, the government never provided permanent blanket guarantees of their liabilities. This raises the possibility that Fed lawyers were (and still are) willing to interpret Section 14 in ways that appear to go beyond the text.  See 12 U.S.C. 355.

[11] The nuance comes in two flavors, light and medium. An example of nuance light is the Mainstreet Loan Lending Program, which requires financial institutions to retain relatively small participations (5%-15%) in the business loans they are essentially selling to the Fed. An example of nuance medium is the Term Asset-Backed Securities Facility (TALF), which provides non-recourse loans, but requires haircuts of 5%-22%. This arrangement essentially operates as a Fed purchase, with the haircut amount acting as limited loss protection to the Fed (In effect, this works similarly to Maiden Lane, discussed in note 8, an arrangement that even in 2008 pushed the envelope of legality).

[12] The Gold Reserve Act (31 U.S. Code § 5302) allows the Secretary of the Treasury, with the approval of the President, to “deal in gold, foreign exchange and other instruments of credit and securities the Secretary considers necessary.” In 2008, the Treasury controversially used this authority to guarantee the money market fund industry. Congress was upset, and attempted to prevent the recurrence of such guarantees for the money fund industry. That didn’t help much. The provision of $10 billion in ESF loss protection to the Fed’s Money Market Mutual Fund Facility (MMLF) in March 2020 has a similar effect to the 2008 guarantees.

[13] By our tally: $10 billion equity investment in the Commercial Paper Funding Facility (March 17), $10 billion in loss protection to the Money Market Mutual Fund Liquidity facility (March 18; note this facility is of a more “traditional” 2008 variety); and then, in the March 23 announcement, $10 billion in loss protection to each of the following: the Primary Market Corporate Credit Facility, the Secondary Market Corporate Facility, and the Term Asset-Backed Securities Loan Facility. These amounts were increased to about $200 billion subsequent to the passage of the CARES Act on March 27. Note that prior to the CARES Act, the ESF had only $40 billion in equity. Depending on the size of losses anticipated on the $50 billion in loss protection, the ESF may have been technically insolvent during that initial period.

[14] The approximate 10-to-1 ratio has been assumed in various Fed and Treasury statements. See, e.g., Chair Powell’s congressional testimony on May 19, 2020 (here at 1:11:50).

[15] An aside here:  It’s not clear whether the Treasury’s determination to provide loss protection to Fed facilities neutralizes the legislative requirement that the Fed take “security for emergency loans …sufficient to protect taxpayers from losses.”  Section 13(3), 12 U.S.C. 343.  The CARES Act provides in Section 4003(c)(3)(B) that “For the avoidance of doubt, any applicable requirements under section 13(3) of the Federal Reserve Act (12 U.S.C. 343(3)), including requirements relating to loan collateralization, taxpayer protection, and borrower solvency, shall apply with  respect to any program or facility described in subsection (b)(4) [Treasury supported facilities].”   On the other hand, Congress’s grant to Treasury of authority to provide loss protection suggests that the legislature may consider that lending facility losses up to that ceiling do not violate the Section 13(3) prohibition.   In that sense, Congress may be creating a caveat to the normal operation of Section 13(3).  In accord with that reading, neither legislators nor Treasury department officials seem focused on the constraint imposed by the provision.  Rather, legislators in the first oversight hearing pressured Fed Chair Powell and Treasury Secretary Mnuchin to take more, not less, risk.

We flag and set aside language in the CARES Act, Sec. 4020,(b)(2), to the effect that the Oversight Committee should determine whether the Fed/Treasury activities were effective in “minimizing long-term costs to the taxpayers and maximizing the benefits for taxpayers.”  In our view, the fact that this language concerns congressional oversight indicates that it does not alter the substantive responsibilities of the Fed under Section 13(3).

The bottom line in our view:  the tension between the dictates of Section 13(3) and those of the CARES Act add to our argument that the current solution exposes the fragility and inadequacy of the current architecture.

[16] See also Edwin J. Perkins, American Public Finance and Financial Services, 1700-1815, Historical Perspectives on Business Enterprise, (Columbus: Ohio State University Press, 1994), 236-38.

[17] See, e.g., St. Louis Convention Southern Alliance, “Report of the Committee on the Monetary System on the Sub-Treasury Plan,” in A Populist Reader, ed. George Brown Tindall (New York: Harper Torchbooks, 1966).

Working Paper: In the Name of the People? – The German Constitutional Court’s Judgment on the European Central Bank’s Public Sector Purchase Programme

Author: Isabel Feichtner

On Tuesday, 5 May 2020, the Federal Constitutional Court of Germany (FCC) issued its judgment in the proceedings on the European Central Bank’s (ECB) Public Sector Purchase Programme. The pronouncement of the judgment at the courthouse in Karlsruhe was originally scheduled for 24 March 2020 and had been moved “in order to prevent the spread of COVID-19.” When it did take place on Tuesday, only 5 of 8 judges of the FCC’s Second Senate were present and seated at safe distance from each other. Before pronouncing the judgment, the court’s president and presiding justice of the Second Senate Andreas Vosskuhle advised the claimants, government representatives and other attendees to keep their distance also after the pronouncement when they would gather in conversation.

He must have anticipated the tumult that this last judgment under his presidency would cause. For the first time, the court in this judgment rules that EU institutions (the Court of Justice of the European Union and the ECB) exceeded their powers and that the resulting ultra vires acts were not binding in Germany. A journalist later humorously remarked the judgment was “something about viruses.” The judgment not only sounds of virus. It might seriously affect how Europe will emerge from the COVID-19 pandemic.

The judgment only addresses the ECB’s Public Sector Purchase Programme, a quantitative easing programme under which the ECB and national central banks purchase government bonds to bring up inflation rates in the euro area. The FCC finds this programme to be illegal, yet holds that illegality may be remedied if the ECB conducts a proportionality review and substantiates that the bond purchases do not have disproportionate economic effects. The judgment does not rule on the Pandemic Emergency Purchase Programme that the ECB announced on 18 March 2020 to address the effects of the COVID-19 pandemic. Yet, it calls into question also the legality of this programme. More disturbingly, the judgment may undermine efforts to strengthen transnational solidarity and democratize the European Union. It comes at a time when inequality in Europe makes itself most acutely felt, when solidarity albeit constantly invoked, is hardly practiced. For the FCC at this moment to tell the highest court of the European Union that its reasoning is incomprehensible and to order the German government to work on the ECB so that it will duly take into account its policies’ effects on German savings accounts, to many (including myself) appears not only puzzling, but dangerous. Dangerous as it cloaks German hegemony in the mantle of democracy.

The Judgment in Brief

The FCC ruled on a number of constitutional complaints brought by individuals who claim that their individual rights under the German constitution (the Basic Law/Grundgesetz) are violated (for an English translation of part of the judgment, see here). Their complaints were primarily directed against the ECB’s Public Sector Purchase Programme (PSPP). Complainants argue that with the PSPP the ECB overstepped its competence to conduct monetary policy. They hold the view that the PSPP is primarily an economic policy measure that – in violation of the prohibition of monetary financing – assists EU Member States who run budget deficits in refinancing their debts and at the same time negatively affects private savings in Germany.

The PSPP forms part of the ECB’s Asset Purchase Programme (APP). The Governing Council of the ECB adopted a decision establishing the PSPP in March 2015 (Decision (EU) 2015/774) and has amended the programme several times since. Under the PPSP central banks of the EU Member States whose currency is the euro and the ECB (the Eurosystem central banks) may purchase euro-denominated marketable debt securities issued by central, regional or local governments of a Member State as well as bonds issued by international organisations and multilateral development banks located in the euro area (Art. 3(1) Decision (EU) 2015/774). These purchases complement the purchase of private assets under the APP. According to the ECB the PSPP, thus, aims to “further ease monetary and financial conditions, including those relevant to the borrowing conditions of euro area non-financial corporations and households, thereby supporting aggregate consumption and investment spending in the euro area and ultimately contributing to a return of inflation rates to levels below but close to 2 % over the medium term.” (Decision (EU) 2015/774, preambular para. 4). The volume of the APP was initially set at €60 billion per month, was scaled up to €80 billion in 2016 and reduced again in 2017 and 2018. The APP was discontinued between January and October 2019 and was restarted on 1 November 2019 with a monthly purchase volume of €20 billion. By 8 November 2019 the purchases under the PSPP had amounted to EUR 2,088,100 million, i.e. 81.63% of the APP’s total volume at that time.

In its judgment on the constitutional complaints, the FCC agrees with the complainants that the ECB by establishing the PSPP exceeded its powers to conduct monetary policy. Yet, it does not make a categorical finding that the PSPP cannot be qualified as a monetary policy measure. Rather, it finds the decisions to establish and implement the PSPP to be procedurally deficient because the ECB “neither assessed nor substantiated that the measures provided for in the decisions on PSPP satisfy the principle of proportionality” (para. 116). The ECB, thus, can remedy illegality by conducting a proportionality review.

Before rendering its final judgment, the FCC had referred the question whether the ECB had complied with EU law to the Court of Justice of the European Union (CJEU) who had answered in the affirmative. As a matter of EU law, the FCC is bound by the CJEU’s interpretations of EU law. The FCC justifies its departure from the CJEU’s ruling on the question whether the ECB acted within its power to conduct monetary policy by holding that the CJEU’s opinion on this question was “simply not comprehensible and thus objectively arbitrary” (para. 116). In the view of the FCC, the CJEU with its incomprehensible reasoning exceeded its power to interpret and apply EU law. Consequently, the part of the CJEU’s judgment that finds that the ECB when establishing the PSPP legally exercised its power to conduct monetary policy was not binding in Germany (para 119).

The FCC orders parliament (Bundestag) and federal government (Bundesregierung) to take steps in order to ensure that the ECB conducts and documents the legally required proportionality assessment, i.e. a proportionality assessment that takes into account “the actual effects of the PSPP” and includes an “an overall assessment and appraisal in this regard” (para. 123). In case the ECB fails to do so within three months, the Bundesbank may no longer participate in the PSPP by purchasing bonds or contributing in increasing the purchase volume and must sell the bonds it purchased under the PSPP.

Reception of the Judgment

Since the judgment was issued, there has been a constant flow of – rather more than less outraged – commentary by legal scholars and economists. On the widely read constitutional law blog Verfassungsblog alone, eleven posts and one podcast seeking to explain and critically assessing the judgment have been published by the time I am writing this. Most commentators are baffled – by the legal reasoning, the court’s (mis-)understanding of monetary policy and EU law, the tone, the ignorance or conscious acceptance of the political fallout this judgment may fuel within the European Union, the potential consequences for the “rule of law” and judicial cooperation, and the list could be continued. EU law scholar Federico Fabbrini and political scientist R. Daniel Kelemen write in the Washington Post of 7 May 2020 that “the German court’s decision didn’t just open Pandora’s box, it ripped the lid off and smashed it to bits” encouraging courts in Poland and Hungary to likewise disrespect EU law.

By contrast, some voices in Germany present the judgment as an act of resistance against the ECB’s “pumping of billions of euros into ailing government budgets.” Such language is familiar from the eurocrisis – the effects of which the PSPP was established to address. At the time, German media commentary repeatedly called out Southern European states, and especially Greece, for “not doing their homework” or “spending beyond their means”. Such sentiment was also behind the constitutional complaints. One of the claimants was Bernd Lucke, who in 2013 co-founded the “Alternative for Deutschland” as an anti-Euro party (today at the far right of the political spectrum and represented in the Bundestag and a number of state parliaments).

I add to the flood of commentary with this “case note” to flag the impact that this decision may have at a critical moment not only on the ECB’s Pandemic Emergency Purchase Programme. The judgment implicates far-reaching questions as to the relationship between monetary policy and economic politics as well as the potential for democratizing money and the economy. These questions reveal themselves with great acuity during the pandemic and guide my reading of this judgment. Like many of my colleagues in Germany and internationally, I am puzzled and concerned by the judgment. Like them, I ask myself what may have ridden the seven justices supporting the opinion (one voted against it, but did not write a separate opinion). Some have suggested that hubris was at play, that the court that had barked so much in the past felt it had to show it could bite to maintain its position as “guardian of the treaties”. Without seeking to rebut these explanations, in this comment I try to read the judgment as giving an impetus to the democratization of the European Union – even though it probably has harmed this cause.

In the following, I render a relatively detailed account of the court’s reasoning in order to shed some light on the relationship between monetary and fiscal/economic policy in the European Monetary Union and the various explicit and implicit conceptions of democracy at play in the judgment. I then briefly address the judgment’s potential implications for the PPEP. Finally, I attempt to make my case that we might read this judgment as promoting democratization.

The Court’s Reasoning Explained

The cause of action: constitutional complaint based on the “right to democracy”

German constitutional law allows individuals to bring constitutional complaints to the FCC who substantiate that their individual rights under the Basic Law are violated by acts of state power. In a series of earlier judgments on European integration (starting with its judgment on the Maastricht treaty), the FCC has interpreted the Basic Law to contain an individual right to democracy that goes beyond the right to participate in elections. According to the FCC this right is violated either when too much power is transferred to the European Union – thus hollowing out the powers of the German parliament (Bundestag) – or when EU institutions manifestly exceed their competences (act ultra vires).

The FCC’s reasoning is as follows: The Basic Law with the right to vote in elections of parliament also protects “the basic democratic contents of the right to vote.” By demanding that all state power derives from the people (Art. 20(2) GG), the Basic Law requires that “any act of public authority exercised in Germany can be traced back to its citizens” (para. 99). At the same time, the Basic Law allows for European integration through a transfer of sovereign powers to the European Union and the FCC consistently stresses the Europe-friendliness of the German constitution. To ensure that such transfer of powers can be traced back to German citizens, it requires an “act of approval” (Art. 23(1) GG) – the law ratifying the EU treaties. If EU institutions act outside the powers transferred to them (ultra vires) this link between the will of the citizens as expressed in the “act of approval” and the exercise of power by the EU is interrupted – the individual right to democracy is affected. The FCC has specified that determination that EU institutions act ultra vires requires a “manifest and structurally significant” exceeding of powers.

Transfer of powers to the EU, moreover, faces limits: “Indispensable elements of the constitutional principle of democracy” (para. 104) must be retained at the national level as required by the Basic Law’s so-called eternity clause (Art. 79(3) GG). In order to protect a core of democracy in Germany, the EU may only be granted specific competences, not however a general competence to determine its own competences (no Kompetenz-Kompetenz). Moreover, the FCC has found that the budgetary responsibility of the Bundestag belongs to the core democratic powers that may not be hollowed out by a transfer of powers to the EU. If a transfer of powers to the EU or the exercise of powers by EU organs detracts from this core and thus affects the “constitutional identity,” the FCC also holds the “right to democracy” to be violated.

The PSPP proceedings centered on the ultra vires doctrine (even though constitutional identity also played a role) – the question whether the ECB manifestly and in a structurally significant way exceeded its competences. As explained above an ultra vires act, according to the FCC, affects the right to democracy. Yet, the finding of an ultra vires act alone would be insufficient for a constitutional complaint to be successful. European institutions are not bound by the German Basic Law and constitutional complaints only provide redress for a violation of individual rights by public authority, i.e. German public authority. The FCC takes this hurdle by reasoning that the constitutional organs, in particular parliament and the federal government have an obligation to “continuously monitor the execution of the European integration agenda” (Integrationsprogramm) for violations by EU institutions (para. 108). If they fail to do so and if they do not take action when EU institutions act ultra vires, their inaction may result in a violation of the individual right to democracy.

Thus, the Court has in its many judgments on European integration incrementally created for itself a way to control – in the name of popular sovereignty of the German people – the bounds of European integration upon the complaints of individual German citizens, i.e. also in situations when the German parliament itself agrees with the transfer of powers or action by EU institutions in question. This is explosive stuff: Not only because the FCC understands democracy as an individual right that it can – in the realm of European integration – enforce against the will of the democratically elected government. But also because the FCC makes acceptance of the primacy of EU law (over national law), that shall ensure EU law’s uniform application and effectiveness throughout the EU, conditional upon compliance by EU institutions with the “agenda of integration” as agreed to with the “act of approval.”

In recent judgments the FCC– in the name of European cooperation – has shown itself slightly more conciliatory. It conceded that before ruling that EU institutions manifestly exceeded their competences and therefore acted ultra vires, it would make use of the preliminary reference procedure (Art. 267 Treaty on the Functioning of the European Union (TFEU)) and ask the CJEU for its interpretation of EU law. It did so in previous proceedings directed against the OMT (Outright Monetary Transactions) Programme (resulting in the CJEU’s Gauweiler judgment) and has done so again in the PSPP proceedings (resulting in the CJEU’s Weiss judgment). As indicated above, the CJEU is mandated with the interpretation of EU law (Art. 19(2) TEU). Its interpretations are binding for the EU Member States. Yet, the FCC finds that the CJEU with part of its reasoning in Weiss itself has acted ultra vires, i.e. in excess of the powers conferred to it. According to the FCC the CJEU’s ruling therefore lacks the democratic legitimation of the “act of approval” and is not binding on the FCC.

Conformity of the PSPP with EU Law – Diverging Views of the FCC and CJEU

With order of 18 July 2017 the FCC had stayed the PSPP proceedings and referred several questions of EU Law to the CJEU for a preliminary ruling (Art. 267 TFEU) – not without expressing its serious doubts as to the compatibility of the PSPP with EU law. The CJEU consequently ruled inter alia on the questions whether the ECB acted within its powers to conduct monetary policy when adopting the decisions on the PSPP (Decision (EU) 2015/774 and subsequent decisions modifying the PSPP) (1) and whether the PSPP is compatible with the prohibition of monetary financing (Art. 123(1) TFEU) (2). It answered both in the affirmative, yet the FCC only followed its interpretation in part.

  1. Did the ESCB exceed its competence to conduct monetary policy?

The EU institutions may only exercise the powers conferred to them – not only as a matter of German constitutional law as laid out above, but also as a matter of EU law, namely Art. 5(1) of the Treaty on European Union (TEU): “The limits of Union competences are governed by the principle of conferral.” EU primary law (i.e. the treaties, including Protocol 4 on the statute of the European System of Central Banks and the European Central Bank) confers to the European System of Central Banks (ESCB) – consisting of the ECB and the central banks of the Member States whose currency is the euro – the power to conduct monetary policy. This power is exclusive, meaning that the Member States whose currency is the euro no longer may conduct a monetary policy of their own (Art. 3(1)(c), 127(2) TFEU). In conducting monetary policy, the ESCB must pursue price stability as its primary objective. Without prejudice to this aim, the ESCB must also “support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union” (Art. 127(1) TFEU). EU primary law does not define price stability. The ECSB specified this aim as an inflation rate below, but close to 2% in the medium term.

In determining whether the ESCB with adoption and implementation of the PSPP remains within its competence to conduct monetary policy, the CJEU looks to the programme’s objective (does it pursue price stability?) as well as to the instruments employed (are they included in the arsenal of monetary policy instruments set out in the ESCB and ECB’s statute?), an approach the CJEU developed in earlier judgments (Pringle and Gauweiler). The CJEU finds that the ESCB with the PSPP pursues price stability (bringing the inflation rate up) and with the purchase of government bonds and bonds of international organisations uses the instrument of open market transactions explicitly provided for in Art. 18.1 ESCB/ECB Statute.

The CJEU clarifies, in a way that will alarm the FCC, that the mere fact that the programme has foreseeable effects on commercial banks and the costs for Member States in financing their deficits does not turn the PSPP into an economic policy measures not covered by the ESCB’s competence. Economic and monetary policy are not absolutely separate, according to the CJEU. In order to achieve the desired inflationary effects the ESCB has to adopt measures that “may entail an impact on the interest rates of government bonds, because, inter alia, those interest rates play a decisive role in the setting of the interest rates applicable to the various economic actors” (Weiss, para. 66).

While the effects on Member States’ refinancing costs, according to the CJEU, do not negate the monetary policy character of the PSPP, the CJEU recognizes proportionality as a limit to the ESCB’s exercise of monetary policy. Art. 5(1) TEU postulates proportionality as a principle governing the use of Union competences and Art. 5(4) TEU clarifies that “[u]nder the principle of proportionality, the content and form of Union action shall not exceed what is necessary to achieve the objectives of the Treaties.” Art. 282(4) TFEU specifically addresses the European Central Bank who “shall adopt such measures as are necessary to carry out its tasks”.

The CJEU consequently asks whether the measures in question are proportionate to the objectives pursued; whether they are (1) suitable and (2) do not go beyond what is necessary. Regarding the standard of review, the CJEU notes the ESCB must be allowed broad discretion regarding the choice of suitable and necessary action. The CJEU does not find any manifest error on the side of the ESCB in adopting the PSPP in order to promote investment activities and thus inflation in the euro area. It refers inter alia to the fact that before the PSPP was adopted inflation was at -0,2%. The CJEU further finds that the PSPP does not go beyond what is manifestly necessary to attain the ESCB’s inflation target. Relevant here is the fact that before adopting the PSPP the ESCB had already implemented a programme of private sector asset purchases that had not shown the desired effect in raising inflation. The CJEU agrees with the ECB that there was “no more limited action available to the ESCB” in order to attain its price stability objective. The CJEU then – still as part of its necessity review – looks at the PSPP’s design and finds that it includes safeguards to limit its effects and circumscribe the risk of losses to the ESCB. These safeguards include eligibility requirements (from which exceptions can be granted and have been granted for Greece) to ensure that no high risk bonds are purchased as well as purchase limits – compliance with both being monitored by the ECB.

This, in abbreviated form, is the reasoning that the FCC declares to be “simply not comprehensible,” “objectively arbitrary,” “not tenable from a methodological perspective.” The FCC states that the CJEU “manifestly fails to give consideration to the importance and scope of the principle of proportionality” (para. 119). What rather seems to have triggered this harsh critique by the FCC is that the CJEU does not review proportionality “German-style.” That it does not focus on what for the FCC is the third stage of proportionality review – appropriateness or proportionality in the strict sense. According to the FCC proportionality review of the PSPP requires that the CJEU “give consideration to the economic and social policy effects of the PSPP”; that it ascertains that the ESCB takes into account “the effects that a programme for the purchase of government bonds has on, for example, public debt, personal savings, pension and retirement schemes, real estate prices and the keeping afloat of economically unviable companies, and – in an overall assessment and appraisal – weigh[s] these effects against the monetary policy objective that the programme aims to achieve and is capable of achieving” (para. 139).

The CJEU in its proportionality review had focused instead on the question of suitability and necessity. It did not weigh the benefits for price stability against general effects on the economy as the FCC would have wanted. Rather, when the CJEU agrees with the Advocate General that “the ESCB weighed up the various interests involved so as effectively to prevent disadvantages which are manifestly disproportionate to the PSPP’s objective” it appears that it was concerned with a weighing of the effects on price stability against the risk of loss for the ESCB (and consequently fiscal loss for the Member States).

A finding that this kind of proportionality review is incomprehensible is difficult to grasp (see also Toni Marzal’s critique). Especially since it remains unclear how the ESCB could possibly carry out the kind of review the FFC is demanding.

What makes the FCC’s proportionality review of the ESCB’s competence to conduct monetary policy so problematic becomes clear by comparison with the realm of fundamental freedoms and individual rights, where proportionality review by CJEU and FCC is routine: A measure that restricts fundamental freedoms/individual rights must pursue a legitimate regulatory objective and the measure must be such that it can contribute to the attainment of this objective (suitability); no measure may be reasonably available that is as effective in attaining the objective, but less restrictive on the right/freedom in question (necessity); the restrictions on the right/freedom may not outweigh the benefits pursued by the measure (balancing test/proportionality in the FCC’s “strict sense”). In this constellation, we see clearly what is to be put into proportion to/weighed against what – the pursuit of the public policy objective against infringement of a freedom/right.

The constellation in the PSPP proceedings is different. Here proportionality is to be employed to delimit the scope (FCC)/exercise (CJEU) of a competence. When applying proportionality to the exercise of a competence it is less clear how a least restrictive measure test is to be applied and how balancing shall proceed, i.e. what is to be weighed against the pursuit of price stability. The CJEU appears to have opted for “risk of loss to the ECB and national central banks” or – as the FCC interprets the CJEU’s necessity test – “the budgetary autonomy of Member States” (para. 133).

The FCC, by contrast, wants the monetary policy objective (price stability) to be balanced against the effects of the measure on the competences of Member States to conduct economic policy. It then appears to equate effects on Member State competences with effects on the economy – including real estate prices, interest on savings accounts, viability of corporations. It thus implies that damaging impact to a Member State’s economy would itself detract from the competence of the Member State to conduct economic policy. It is true that monetary policy has economic effects and that these economic effects may affect the scope of possible economic policy measures available to Member States – in international economic law we might say they affect the “right to regulate”. Yet, different from the constellations in international economic law when the “right to regulate” is invoked, the FCC does not point to particular (types of) measures that Member States no longer can adopt due to the ESCB’s implementation of the PSPP. It is therefore difficult to comprehend – to say the least – how a proportionality test that shall take into account potential impacts of monetary policy on unspecified policy options might be operationalized. Applying this kind of proportionality test is further complicated/made impossible as the effects of the ESCB’s monetary policy on “the economy” vary widely across the euro area.

This question is no further illuminated when the FCC – having concluded that it is not bound by the CJEU’s ultra vires finding of proportionality – goes ahead with its own assessment of proportionality. As indicated, the FCC demands that an asset purchase programme’s monetary policy objectives be weighed and balanced against its economic policy effects. Here, another curiosity appears in the court’s reasoning: While proportionality review, generally, is understood to be a matter of judicial review (with higher or lower levels of scrutiny), the FCC suggests that the ESCB itself needs to conduct and document a proportionality review. It thus imposes a procedural requirement on the ESCB’s conduct of monetary policy.

Holding proportionality review to constitute an obligation of the ESCB, allows the court to leave unanswered the question whether the PSPP is or is not proportional. And since for the FCC proportionality is a question of competence, it consequently does not make a final judgment whether the PSPP is a monetary policy measure or not. What the court does instead, is to list economic effects that the ESCB should take into account when conducting the required proportionality review. The FCC’s list (paras. 170-175) includes: improvement of Member States refinancing conditions, improving the economic situation of banks, risk of real estate and stock market bubbles, risks of losses for private savings and reduced income on pension schemes, increased real estate prices, allowing unviable economic companies to stay on the market and finally “risk that the ESCB becomes dependent on Member State politics as it can no longer simply terminate and undo the programme without jeopardizing the stability of the monetary union” (para. 175).

The court does not engage in a weighing and balancing exercise itself – this is the ESCB’s tasks – but simply makes “the point […] that such effects, which are created or at least amplified by the PSPP, must not be completely ignored.” (para. 173). Many commentators have pointed out that the ECB is far from ignoring these effects – as demonstrated by the manifold publications available via the ECB’s website. The FCC, however, holds a different view: “It is not ascertainable that any such balancing [of these effects against the expected positive contributions to achieving the ECB’s monetary policy objective] was conducted, neither when the programme was first launched nor at any point during its implementation;[…] Neither the ECB’s press releases nor other public statements by ECB officials hint at any such balancing having taken place” (para. 176).

And thus it remains unclear how such a balancing should be conducted. As explained above, proportionality, according to the FCC, is to protect Member States’ competence to conduct economic policy. Yet, it remains obscure how, for example, improved refinancing conditions for Italy – a major worry for the FCC – detract from Germany’s power to make economic policy and how such encroachment should be weighed exactly. Moreover, what may appear as a reduction of economic policy space for one Member State, may expand another Member States’ policy options.

The reasoning of the FCC reveals that what is at stake here for the FCC is less economic policy space of Member States, but rather a particular design of European Monetary Union. According to this design, a common monetary policy is complemented with strict fiscal discipline for the Member States. While it may be correct that, as the FCC insists, Member States have “conferred” few economic policy competences to the EU, EU law imposes many restrictions on Member States economic policy space. It does so in order to ensure sound government budgets and avoid “excessive deficits”. Among these are preventive measures of budget control and economic coordination (Art. 121 TFEU and secondary law) as well as reactive measures such as the excessive deficit procedure (Art. 126 TFEU and secondary law). Further pillars in this architecture of common monetary policy and fiscal discipline are debt brakes (Fiscal Compact) and the prohibitions of government bailouts (Art. 125 TFEU) and monetary financing (Art. 123 TFEU).

When the FCC singles out the improving of refinancing conditions for certain Member States and the consequent “risk … that necessary consolidation and reform measures will either not be implemented or discontinued” (para. 170) as effects that need to be included in the balancing exercise, its focus seems motivated by the concern that this architecture is under threat. This threat follows rather from an expansion of fiscal policy space (for Italy who can refinance her deficit at lesser cost) than a restriction of economic policy competences (for Germany).

This concern of the FCC for fiscal discipline of Member States takes us to the other question referred to the CJEU for a preliminary ruling.

2. Is the PSPP compatible with the prohibition of monetary financing?

The PSPP’s potential impact on Member States’ fiscal discipline was squarely addressed by the FCC’s questioning whether the PSPP was compatible with the prohibition on monetary financing in Art. 123(1) TFEU. Art. 123(1) TFEU prohibits ECB and Member State central banks from providing governments with overdraft facilities or any other type of credit facility and from purchasing debt instruments directly from governments. The CJEU already in its judgment in Gauweiler had addressed the question whether and under which circumstances a government bond purchase programme could violate the prohibition of monetary financing. At issue in the proceedings in Gauweiler was the ESCB’s Outright Monetary Transactions (OMT) programme, which provided for the selective purchase on the secondary market of sovereign bonds from Member States who received financial assistance. The programme’s stated objective was to neutralize interest peaks on the bonds of crisis-ridden Member States and ensure the transmission of monetary policy throughout the euro area. In Gauweiler the CJEU found that the programme did not violate Art. 123(1) TFEU as long as safeguards were in place to ensure, inter alia, that purchases on the secondary market did not amount to direct purchases from governments and thus circumvent the prohibition of monetary financing. From the ruling in Gauweiler it was predictable, that the CJEU in Weiss would not find the PSPP to constitute monetary financing in violation of Art. 123(1) TFEU either.

The CJEU in Weiss first points out that under the PSPP the central banks of the Eurosystem purchase bonds only on the secondary market and not directly from governments. The CJEU recognizes, however, that also purchases on the secondary market may constitute a violation, namely when they have an effect equivalent to direct purchases. The ESCB is thus obliged to make sure, through programme design and monitoring, that no such effects arise. It must further ensure that the programme does not “reduce the impetus which that provision [Art. 123 TFEU] is intended to give the Member States to follow a sound budgetary policy” (Weiss, para. 127).

The CJEU sees sufficient safeguards in place to ensure that the secondary market purchases are not equivalent in effect to direct purchases. In this respect, it is of particular importance to the CJEU that purchasers of government bonds do not act as de facto intermediaries of the ESCB. This would be the case if they can be certain that the ESCB will purchase the government bonds they hold. The CJEU agrees with the ECB that several programme features protect against such de facto intermediation. Among them are the so-called blackout periods, which prohibit the central banks to purchase bonds immediately after their issuance, the ESCB’s option to reduce monthly purchase volumes, limits on purchase volume, the variety of bonds eligible under the programme (including regional and local government bonds), and the restriction of purchases to 33% of a particular bond issuance and issuer.

The CJEU further finds that the PSPP does not reduce the impetus on Member States to conduct sound budgetary policy. On this issue, the CJEU points to the programme’s limitation in time, the possibility to re-sell the purchased bonds, the restrictions on volume, the distribution of purchases among the national central banks according to the key for ECB capital subscriptions, the purchase limits per issue and issuer as well as the programme’s eligibility criteria based on a credit quality assessment of the bond issuer. The CJEU adds that even when the central banks hold the purchased bonds to maturity they do not therewith waive their right to debt payment. As all national central banks only buy bonds from their Member State’s governments and no provision has been made for the sharing of losses incurred by national central banks, a central bank does not bear the risk of losses on bonds purchased by another national central bank. The only losses subject to loss sharing are those incurred on the purchases by the ECB of international bonds, which are limited to 10% of the book value of all purchases under the PSPP.

The FCC accepts the CJEU’s conclusion that PSPP does not violate the prohibition of monetary financing in Art. 123(1) TFEU. Yet, while it agrees with the CJEU’s criteria to determine whether a violation of Art. 123 (1) TFEU occurs, it criticizes their application by the CJEU. It takes particular issue with the CJEU’s treatment of blackout periods. According to the FCC, the CJEU failed to review whether they were suitable (not only to avoid certainty on behalf of governments that their bonds would be purchased, but also to protect the formation of market prices) and indeed observed. The FCC further critiques the CJEU’s treatment of the practice of holding bonds to maturity, which according to the FCC needs to remain the exception to the rule to ensure that the Eurosystem does not become a “permanent source of finance” (para. 197) for the Member States. Moreover, in view of the FCC, the CJEU fails to determine whether the ESCB with adoption of a programme like the PSPP must also adopt a binding exit strategy.

Despite this criticism, the FCC concludes that after the required overall assessment, it cannot ascertain that the adoption and implementation of the PSPP amounts to a qualified violation of the prohibition of monetary financing in Art. 123 (1) TFEU. Thus, even though the FCC does not agree in all points with the CJEU and even though the FCC holds that the CJEU did not fully discharge its duty to effectively review monetary policy, it does not find that on the issue of monetary financing the CJEU acted ultra vires. The FCC consequently accepts as binding the CJEU’s ruling on this count. The FCC underlines as of particular importance the safeguards against selectivity, among them the limitations of purchases to 33% per issuance/issuer and the distribution of purchases according to the ECB’s capital subscription key. The latter was an “objective criterion that is independent of the economic and budgetary situation of the respective Member States” and it could therefore “be ruled out that this criterion could be used to purposely direct bond purchases to support struggling Member States” (para. 203).

The FCC’s Ruling: Violation of the Individual Right to Democracy and Its Remedy

As laid out above, the FCC finds that the CJEU exceeded its judicial mandate under EU law (Art 19 (1) TEU) with its ruling that the PSPP is a monetary policy measure and thus falls within the ESCB’s competence. As an ultra vires act, the ruling did not bind the FCC. Moreover, according to the FCC, due to the exceeding of judicial competence the decision also “lacks the minimum of democratic legitimation necessary under [the Basic Law]” (para. 113).

Not bound by the CJEU’s ruling on competence, the FCC conducts its own assessment. It concludes that the ESCB did not engage in the required balancing exercise to determine proportionality (and consequently competence). As the violation of the principle of proportionality (Art. 5(1), (4) TEU) by the ESCB was “structurally significant” the ECB (like the CJEU) had acted ultra vires.

As outlined above, an ultra vires act, according to the FCC, lacks binding effects in Germany and triggers the integration responsibility of parliament and federal government, i.e. the responsibility to make sure that the EU institutions remain on the path of integration, legitimated by the “act of approval.” A violation of this responsibility results in a violation of the individual right to democracy of German citizens (voters). Since the FCC finds a lack of balancing by the ESCB, but does not itself resolve the issue of proportionality, it concludes that no violation of the integration responsibility can be determined, yet:

At present, it cannot yet be determined whether the Federal Government and the Bundestag did actually violate their responsibility with regard to European integration (Integrationsverantwortung) by failing to actively advocate for the termination of the PSPP. This determination is contingent upon a proportionality assessment by the Governing Council of the ECB, which must be substantiated with comprehensible reasons. In the absence of such an assessment, it is not possible to reach a conclusive decision as to whether the PSPP in its specific form is compatible with Art. 127(1) TFEU” (para. 129).

While the FCC does not find that integration responsibility was violated, it does find that the federal government and parliament must “take steps seeking to ensure that the European Central Bank conducts a proportionality assessment in relation to the PSPP.” In order to do so they “must clearly communicate their legal view to the ECB or take other steps to ensure that conformity with the Treaties is restored.” (para. 232) They shall further “continue monitoring the decisions of the Eurosystem on the purchases of government bonds under the PSPP and use the means at their disposal to ensure that the ESCB stays within its mandate” (para. 233). Contrary to many commentators, the FCC does not see any conflict with central bank independence. Rather it argues that independence must go hand in hand with a strict monitoring of the boundaries of monetary policy.

Finally, if within three months the ECB Governing Council has not adopted “a new decision that demonstrates in a comprehensible and substantiated manner that the monetary policy objectives pursued by the ECB are not disproportionate to the economic and fiscal policy effects resulting from the programme” (para. 235) then the Bundesbank may no longer participate in the PSPP and must sell the bonds it purchased under the PSPP and still holds (para. 235).

Already in the OMT proceedings, Justice Gertrude Lübbe-Wolff ‘s had expressed dismay in her separate opinion at the court’s ultra-vires-and-integration-responsibility-constructions: “In an effort to secure the rule of law, a court may happen to exceed judicial competence. In my view, this has occurred here” (para. 1). A sentiment that is shared by many after the PSPP judgment. In the meantime the EU Commission considers treaty violation proceedings against Germany for not accepting as binding the CJEU’s interpretation of EU law. The ECB issued a press release in which it takes note of the judgment, states its commitment to its mandate and refers to the CJEU’s ruling “that the ECB is acting within its price stability mandate.”

Implications for the PEPP

At the judgment’s pronouncement, FCC president Vosskuhle made sure to stress that it did not apply to the ECB’s Pandemic Emergency Purchase Programme. Yet, a number of the court’s findings are relevant to the PEPP, which the ECB announced on 18 March 2020 and was adopted by the Governing Council on 24 March 2020 with Decision (EU) 2020/440 to address the effects of the COVID-19 pandemic.

With the PEPP the ESCB seeks to address the devastating economic effects of the COVID-19 pandemic. Under the PEPP, which is is to complement the ESCB’s Asset Purchase Programme that includes the PSPP, Eurosystem central banks purchase private and public sector securities. The PEPP has an initial volume of €750 billion. The ECB announced that the Governing Council may increase this volume “by as much as necessary and for as long as needed”. The PEPP is to run until the Governing Council assesses that “the coronavirus crisis phase is over” and at least until the end of 2020. As concerns government debt securities, allocation of purchases shall be guided by the ECB’s capital subscription key (Art. 5(1) Decision (EU) 2020/440). Yet, the PEPP also provides for flexibility in this respect: “Purchases under the PEPP shall be conducted in a flexible manner allowing for fluctuations in the distribution of purchase flows over time, across asset classes and among jurisdictions” (Art. 5(2) Decision (EU) 2020/440).

The policy objective of the PEPP is set out in Decision (EU) 2020/440. The decision stresses the economic shock caused by the pandemic. It states in its preamble that “economic activity across the euro area is declining and will inevitably suffer a considerable contraction” and points to “acute strains on the cash-flows of businesses and worker” that “put the survival of businesses and jobs at risk.” Only thereafter does it make a connection to the monetary policy objective of price stability. According to the decision the current situation hampered “the transmission of the monetary policy impulses and add[ed] severe downside risks to the relevant inflation outlook”. In this context, the PEPP was a “proportionate” measure “to counter the serious risks to price stability, the monetary policy transmission mechanism and the economic outlook in the euro area, which are posed by the outbreak and escalating diffusion of COVID-19.”

ECB president Christine Lagarde specifies in her statement after the PEPP’s announcement: “Monetary policy has to keep the financial sector liquid and ensure supportive financing conditions for all sectors in the economy. This applies equally to individuals, families, firms, banks and governments.” In its announcement of the programme, the ECB furthermore formulates a “whatever it takes approach”: “To the extent that some self-imposed limits might hamper action that the ECB is required to take in order to fulfil its mandate, the Governing Council will consider revising them to the extent necessary to make its action proportionate to the risks that we face. The ECB will not tolerate any risks to the smooth transmission of its monetary policy in all jurisdictions of the euro area.”

In light of these characteristics, it is doubtful whether the PEPP would pass judicial review as envisaged by the FCC. If the ECB failed to properly substantiate proportionality with respect to the PSPP, it also failed to do so here. The question (for the FCC) would be whether it can substantiate that the programme is proportionate and thus falls within the ambit of monetary policy. The decision as well as the ECB’s announcement refer to proportionality between the action taken and “the risks that we face” due to the COVID-19 pandemic. To maintain this kind of proportionality the ECB makes clear that it is determined to revise any limitations in order to enhance the programme’s effectiveness. This account of proportionality differs significantly from the FCC’s account. If the FCC were to review proportionality with respect to the PEPP, it most likely would take issue with the following two characteristics: (1) the wide and rather vague description of the policy objectives – stressing inter alia the need to support financing conditions including those of governments; (2) the “whatever it takes approach” that is guided merely by effectiveness in achieving the programme’s objectives and does not take into account the potential effects on Member States’ ability to autonomously decide on their economic policies.

Furthermore, the FCC’s pronouncements on the prohibition of monetary financing have increased the likeliness that the PEPP will become the target of constitutional complaints. While the PEPP by reference to Decision (EU) 2020/188 on PSPP provides for a blackout period and the 33% limit on purchases per issue/issuer, it also provides for flexibility in the allocation of bond purchases (Art. 5(2) Decision (EU) 2020/440). This characteristic, which may lead to selectivity in government bond purchases, opens the programme to challenge given the OMT and now also PSPP precedents.

As indicated above, selectivity had been an issue specifically in the OMT proceedings because the ESCB’s OMT programme had envisaged selective bond purchases from crisis-ridden Member States. To ensure that selectivity would not lower the impetus for fiscal discipline, FCC and CJEU both found it to be crucial that Member States whose bonds were eligible for purchase under the OMT programme were recipients of financial assistance inter alia by the European Stability Mechanism (ESM) and as such subjected to strict conditionality (securing fiscal discipline and consolidation).

By contrast, financial assistance to deal with the effects of the COVID-19 pandemic will not be extended within the framework of the ESM – inter alia due to the strong resistance by Italy and Spain. It will not be subject to conditionality. The lack of conditionality may expose the PEPP to the challenge that it functions – in the words of the FCC – “to support struggling Member States.” Possibly, Art. 122(2) TFEU, that constitutes and exception to the bail-out prohibition in Art. 125 TFEU during crises caused by natural disaster, might come to the rescue here. It does not allow for financial assistance by the ESCB. Yet, an argument may be made that in a situation when the treaties allow the bail-out of governments and EU rules on budget discipline are suspended, the prohibition of monetary financing should be interpreted more narrowly.

A Case of German Rule of Law Fetish or Impetus for Democratization?

“In the name of the people” the court issued a judgment identifying explicitly and implicitly various dangers to democracy. In this last part of my comment, I wish to raise the question whether the judgment may indeed provide an impetus for democratization or whether it is yet another manifestation of an antidemocratic German obsession with the rule of law (Rechtsstaat).

German constitutional lawyer Helmut Ridder was a harsh critic of this obsession. Frequently, he pointed out how German legal scholarship and courts interpreted the written constitution in light of a higher rule of law and thus undermined efforts at democratization. Democratization for him was to extend not only to the institutions of the state, but to society as a whole, including the economy. One of his examples on how democracy is being obstructed in the name of the “the rule of law” fits particularly well the context of the PSPP judgment. In his monograph “Die soziale Ordnung des Grundgesetzes” (1975) he describes how in 1924 justices in the Weimar Republic announced that they would not comply with a legislative act that prohibited the judicial revaluation of mortgages to compensate for losses from inflation. They justified their disobedience on the basis of a higher moral law. This higher law that in view of the justices mandated revaluation, obviously benefited creditors. Whereas the legislative act prohibiting revaluation would have had the effect that debtors only owed the face value of their obligations, now lightened by depreciation of the currency. On the basis of such judicial practice (and supporting legal scholarship) Helmut Ridder formulated his critique that jurisprudence and scholarship in the name of a rule of law above the legal order continuously consolidated power structures and undermined the progressive, democratizing potential of the written constitution.

The PSPP ruling might be an instance of such constitutional law jurisprudence despite its framing as a defense of democracy. The individual right to democracy, as interpreted by the FCC, allows the court to sidestep parliament in order to control European integration. Moreover, the FCC construes a proportionality test by reading a balancing requirement into the treaties that is nowhere to be found in the written text. The proportionality test advocated by the FCC would not only restrict monetary policy for the benefit of Member State competence, but would also obstruct monetary policy supporting poorer Member States’ budgets. To the FCC, the CJEU is an unreliable guardian of this “rule of law.” It therefore reserves for itself the power to disregard the CJEU’s interpretation of EU law.

The construction of democracy by the FCC, moreover, seems to locate democracy only in state institutions that derive their power from the people (even if indirectly) by way of elections. It does not envisage that also an institution like a central bank that acts independently from such institutions might be a place of democratic politics. The FCC not only holds democracy at the supranational level to be deficient (it made this very explicit in its Lisbon judgment). It also turns the German parliament and the federal government into watchdogs over EU institutions in the name of the individual right to democracy (yet the suspicion arises that the FCC here is less concerned with democracy than with national sovereignty). Might the judgment nonetheless be read to further democratization?

First Reading: Democratization of Monetary Policy from Within?

I would like to suggest for a moment that we (re)interpret the PSPP judgment as envisaging a democratization of monetary policy. A democratization of monetary policy-making by the central banks itself, not through greater control from the outside by the political organs of the EU or Member States.

The FCC asks that the ESCB consider, weigh and balance a wide range of economic and social effects when adopting and implementing monetary policy and that it document this process in a way that is accessible to the public. Admittedly, the effects that the FCC primarily wants to see taken into consideration reflect a preoccupation with fiscal discipline. Yet, taking the FCC at its word could just as well support the claim that the ESCB should also take into account the monetary policy effects on – say – (gender) inequality and climate change mitigation. Such a claim is in in line with calls for a diversification of perspectives, which consequently would also require a diversification of the central banks’ staff, in the making of monetary policy. These calls are receiving growing attention since the financial and euro-crisis, even within the ECB. In 2010, then ECB president Claude Trichet called for “input from various theoretical perspectives and from a range of empirical approaches” and formulated the view that an “open debate and a diversity of views must be cultivated—admittedly not always an easy task in an institution such as the ECB.” Better communication between central bank policy-makers and the public could play a part in forging what Annelise Riles calls financial citizenship – a dedication on the part of central bankers and the public to dialogue and mutual understanding – that consequently leads to more legitimate monetary policy.

To be sure, such a conception of democratic central bank politics is at odds with a conception that holds the ECB to have a narrow mandate and to stand beyond politics, a conception that also figures prominently in the judgment. Even when read through this lens, however, the judgment may act as an impetus for democratization.

Second Reading: Democratization through European Economic Politics

In several parts of its judgment, the FCC refers back to its treatment of central bank independence in the 1993 Maastricht judgment. In Maastricht, the court held that central bank independence constituted a deviation from the principle of democracy, albeit one that was justified since only an institution independent from parliamentary politics could be trusted to maintain the value of the currency. Because central bank independence is an exception to the democracy principle, monetary policy, thus the FCC, must be understood narrowly. The FCC recognizes that a narrow construction of monetary policy cannot be achieved by way of a definition or strict rules. This explains its rather hapless attempt in PSPP to reign in monetary policy through the proportionality principle and judicial review.

Also already in Maastricht the FCC had taken note of what many consider a fundamental design flaw in the European Monetary Union – namely that the single currency is not complemented with a common fiscal and economic politics. A politics that could, for example, address structural imbalances across the euro area and prevent one Member State through its labour politics to gain a competitive advantage over other Member States (as economists argue Germany has done, see e.g. here). At the time it pronounced its Maastricht judgment, the FCC pointed out that it was not up to the court, but to politics to provide a fix to monetary union without political union. A treaty amendment providing for an EU economic and fiscal policy competence could be a remedy. As the discussion on Corona bonds shows, there are (limited) options to allow for some common fiscal politics even without a treaty amendment. So far, however, attempts to institute a common economic and fiscal politics within the EU have been obstructed, inter alia by Germany. In this impasse the ESCB’s rather wide interpretation of its monetary policy mandate could do some work in addressing inequalities caused by the European Monetary Union. With its PSPP judgment the FCC now seeks to reign in and police the ESCB.

The COVID-19 pandemic might make us see the consequences of a combination of narrow monetary policy, fiscal discipline and lack of common democratic economic and fiscal politics even more clearly than we would without the virus: Member States who benefit least from European Monetary Union and who have been hit hard by the eurocrisis and once more by the COVID-19 pandemic will only receive financial assistance either as an act of charity (even if called solidarity) or in combination with conditionality and a commitment to austerity. This will further increase inequality in Europe and undermine even the last bit of transeuropean solidarity.

If this is not an impetus to work towards a transnational European democratic politics – what is?

A Sense of an Ending

This is where I would have left it. Had not my friend said: Your text needs an ending. If a reader followed you for that long you cannot leave her in the cold like this. Her admonishment kept me awake during a lonely full moon COVID-19 night. What should I say to a reader who would like to stay for a coffee and chat about my take on the judgment or the potential for democracy in Europe? I would probably say: Forget my lies. I wrote this comment because I am upset – not only with the judgment, but also idealizations of the EU and German democracy, inequality and lack of solidarity. Possibly, I also want to prove that I can talk the talk, add my voice to the conversation among (male) colleagues. Yet, while I used the words, applied the rules, I realized that joining this conversation might leave me even more dissatisfied. That I long for a different language, a game that is a little fun to play. That I miss promise in the democracy, poetry in the justice that lie at the horizon of my reading of the judgment. Eventually, I remembered a little poetry to offer as a parting gift. It is from Gertrude Lübbe-Wolff’s dissent in OMT: “If they want to take you on a long desert walk that will not lead to a spring – resist.”

Frankfurt, 13 May 2020.

Trivia Contest Winners!

Congratulations Trivia Content Winners! 

Stay tuned for our next trivia contest.


  • Alexander Chen
  • Kathleen Conley and Mary Conley
  • Taylor Custer
  • Edi Ebiefung
  • Malick Ghachem
  • Cooper Godrey
  • Timothy Havel
  • David McKenna
  • Dan Sufranski
  • Daniel Wynbrandt


Q1: What state has TWO Federal Reserve banks – and Why?

A: Missouri, due to a combination of economics and politics. There is still some disagreement over the importance of each factor. RBOC surveys found strong support for Kansas City and St. Louis among bankers. The two cities were large markets and transportation centers with existing correspondent banking relationships. On the political side, Missouri Senator James Reed, who was key to getting the Federal Reserve Act out of committee, and Oklahoma Senator Robert Owen both wanted a Federal Reserve bank in Kansas City, and the Speaker of the House was from Missouri as well. Given the economic realities of the time, Kansas City and St. Louis made sense, but the political optics are hard to ignore.

Q2: What progressive reformer introduced a bill to set up a system of bank deposit insurance in the 1890’s?

A: William Jennings Bryan

Q3:  What Federal Reserve lending facility was named after a street in downtown Manhattan?

A: Maiden Lane

Extra Credit: What 14th century pundit made the revolutionary argument that money belonged to the community, not the monarch?

A: Nicholas Oresme


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O.P. Abello, Getting to Know a Brave New Fed

April 29, 2020

Oscar Perry Abello, Next City

For me, as a journalist covering the economies of cities across the United States, this journey started maybe four years ago. That’s when I first stumbled upon this chart, showing total reserve balances at the Fed.

Until October 2008, it had been relatively low and stable, consistent with what I had learned as an undergrad economics student — that banks are required to keep a certain level of reserve balances in their accounts at the central bank as part of a normally functioning financial system.

But then in October 2008, clearly something had radically changed. All of a sudden, reserve balances shot up to levels that seemed to make no sense, and then kept on going. And it was almost all excess reserves — orders and orders of magnitude beyond required reserves.

As a journalist covering the economies of cities, my instincts flared up. Was there some kind of insidious modern day redlining at work here? I wasn’t sure at the time what it really meant, but at the surface level it certainly seemed plausible that banks were “sitting” on huge amounts of excess reserves at the Fed while every neighborhood I was writing about was struggling to get loans for homeownership or small business. But I wasn’t going to go around making such wild accusations without backing it up with more evidence, data, and perspective.

So, I fired off a few emails to some of the most experienced community bankers I knew, but who had been several years retired from running a community bank. They weren’t sure what was going on either. I couldn’t figure it out in between deadlines, so I filed it away on the mental shelf for a while.

Then came Coronavirus. In response to the economic fallout from this pandemic, unprecedented in both the scale and speed of economic disruption, the Fed suddenly seemed determined to bully its way onto my beat. In just one day, March 23, it leapt into action in ways that took years after the onset of the last financial crisis.

The week after that, on March 31, I published my first story about the Fed, focusing on its latent powers to buy municipal bonds and how close it was to finally using them for the first time. Just a hint of what it could potentially do.

But that was just one story, and I needed to keep digging. For the sake of serving my readers, I needed to understand what the Fed was really doing and how it was going about its work.

I had a working understanding of how the Fed operates. But now that it was becoming more directly active as a player in my coverage area, I needed to understand it as intimately as I understood commercial banks and credit unions and loan funds and foundation endowments and private capital markets and public capital markets — all the pools of capital I had reported about over the past few years with a focus on how they reach some neighborhoods more than others.

I looked first where I look with every other financial institution — its balance sheet. And once again I came across the baffling fact that banks’ reserve balances made up the largest share of the Fed’s liabilities, even more than currency in circulation at that moment and for much of the previous decade.

It was at that point I finally understood that all those reserves on the Fed’s balance sheet clearly had something to do with all the things that were now popping up on the other side of its balance sheet and that seemed to be driving some experts mad with fears of inflation and general “running amok.”

My understanding evolved from my initial instincts. Banks weren’t sitting on cash they should have been lending out. As I have come to learn over the course of a few weeks, those reserve balances at the Fed were actually just a by-product of the central bank’s response to an economic crisis — some of it left over from the last crisis, and even more in response to this one.

Very little if any of this might be new to people who study the Fed all the time, but I needed to connect the dots in a way that worked for me as a journalist, so that I could later connect the dots for my readers.

Poring over papers upon papers, mostly from various research shops at Federal Reserve branches around the country, I eventually came across one 2009 paper from the New York Fed, the heart of it all, explaining how the overall level of reserve balances is based solely on the actions of the Fed, and not any decisions on the part of banks. It sounded crazy at first, but the paper explained everything using the thing that made the most sense to me as an economics journalist — balance sheets.

As that paper explained, even the Fed still needs to keep its balance sheet balanced. When the Fed began creating emergency liquidity facilities in December 2007, in order to balance its balance sheet, the Fed decided initially to sell off Treasury securities and replace them with the emergency liquidity facilities. That kept the initial changes only on the asset side of its balance sheet.

But by mid-2008, the crisis wasn’t even fully realized yet and it was clear things were already going to get worse before they got better. Lehman Brothers collapsed in September 2008. The Fed had already sold off a lot of Treasury securities and it was further expanding its liquidity facilities as the financial crisis got worse. The Fed wasn’t about to sell all its Treasury securities. So, the liquidity facilities started showing up on the other side of the balance sheet as bank reserve balances.

As the New York Fed paper also noted, for a little while the Treasury tried creating a mechanism to drain some of the excess reserves on the liability side of the Fed’s balance sheet, but even that mechanism couldn’t keep up with the growth of the emergency liquidity facilities.

By October 2008, to use words that would become immortal half a decade later, the Fed finally decided to “let it go” — to just let the reserve balances start building up within the system and worry about it later.

And the Fed would need to really “let it go” with what would come next — quantitative easing. The first round, of course, started in December 2008.

While serving a different purpose than emergency liquidity facilities, the effect I could see on the liability side of Fed’s balance sheet was the same. Quantitative Easing meant buying huge quantities of assets on one side — federally guaranteed mortgage-backed securities and longer-term Treasury securities — which in turn meant even more reserve balances started building up on the other side of the balance sheet. As I came to understand, the Fed was using its unique power to create deposit liabilities on its own balance sheet at a scale that was once thought purely theoretical and potentially disastrous in theory as a cause of rampant inflation. But those fears were all in theory.

Source: Carpenter et al. (2013)

By October 2009, reserve balances broke $1 trillion for the first time ever. By August 2014, after three rounds of QE on one side of the balance sheet, reserve balances on the other side peaked at nearly $2.8 trillion. The Cleveland Fed wrote a 2015 briefing about it calling excess reserves, “Oceans of Cash.”

There was for a time a huge question of when or if the Fed would let reserve balances come back down, as assets on the other side of its balance sheet matured or the Fed sold them back to the market. From 2014-2019, that’s exactly what one paper from the Kansas City Fed showed was happening, quietly, smoothly, behind the scenes. That paper also gave a useful but very broad breakdown of which banks it was — foreign banks, large and smaller domestic — that had reserve balances built up and winding down in their accounts at the Fed. By September 2019, total reserve balances at the Fed were back down to $1.4 trillion.

Then came the economic disruption from the COVID-19 pandemic. Quantitative Easing, episode four, began on March 23 — “a new hope,” the St. Louis Fed called it. Between March 11 and April 1, total reserve balances went up a trillion dollars. On April 9, the Fed announced $2.3 trillion in emergency liquidity facilities that touched more parts of the economy than it has ever touched directly before, including small businesses, the corporate bond market, and the municipal bond market.

By April 22, total reserve balances broke $3 trillion for the first time. By now, whatever fears might have existed inside the Fed before 2008 about reserve balances building up within the system had either been re-educated away or retired or were being flat-out ignored. It seemed not to matter anymore. This was a brave new Fed.

Beyond the mechanics of what was happening with the Fed and its balance sheet, as a journalist it became important for me to connect the dots to the CARES Act. The political process had found a way of explicitly shaping the Fed’s liquidity facilities. While far from perfect, what political process is perfect?

The key was the $454 billion Emergency Stabilization Fund created under the CARES Act. Nathan Tankus, in his very helpful recent writings about the Fed, calls it an “accounting gimmick.” I don’t dispute his characterization of it from a technical perspective, but in another sense, those funds are the vehicle by which the political process is shaping the Fed’s crisis response.

Section 4003 of the CARES Act lays out the process for how the Emergency Stabilization Fund gets divvied up. The legislation directs the Treasury Department to use those dollars to make “loans, guarantees or other investments” into various emergency liquidity facilities, and the Federal Reserve comes in with its balance-sheet fire power to leverage the Treasury’s initial investment.

Subsequently, the Treasury allotted $75 billion for the two corporate bond market emergency liquidity facilities, which the Fed is leveraging up to $750 billion in bond-buying power. There’s $35 billion initial investment from the Treasury for the municipal bond market facility, which the Fed is leveraging up to $500 billion.

Most remarkable to me was the Main Street Lending Program. The Treasury Department allotted $75 billion from the Emergency Stabilization Fund for this facility, and the Fed is coming in with $600 billion behind that. That $600 billion will go out in loans to eligible businesses, under terms that include one year of deferred payments, accountability measures to retain employees, limits on executive compensation, and prohibitions on stock buybacks or paying off other debt using Main Street loan proceeds. The $75 billion will cover for any losses on the loans up to that amount before the Fed eats any losses.

Using loan participations, private lenders will underwrite and originate Main Street loans and the Fed will come in behind the scenes to supply 95 percent of the borrowed amount, leaving 5 percent on the private lender’s balance sheet to make sure they have some skin in the game. Having reported a lot recently about the Bank of North Dakota, the only state-owned bank in the country, loan participations by a public entity weren’t so far-fetched to me, but I’m sure they would seem so to others around the country.

With a $1 million minimum loan size, the Main Street Lending Program is not quite accessible to most small businesses, but that minimum could go away later if the Fed and Treasury can be convinced of the need — or maybe Congress can straight up order them to eliminate the minimum. So, in summary, the Main Street lending facility is effectively one line on a term sheet away from being accessible to the vast majority of small businesses in the country, provided they were in good financial shape before the pandemic.

The municipal credit facility also seemed to have shortcomings, but not entirely unworkable, and outcries at initial terms and eligibility have already altered it. Initially it was only available to cities with at least one million people, or counties with at least two million people, leaving out a lot of hard-hit places. On April 27 those thresholds changed to counties with at least 500,000 people and cities with at least 250,000. Maximum maturity of two years initially seemed a bit shorter than ideal, and that changed to three years. The Fed is even considering allowing additional public entities to participate, like school systems, housing authorities, transit authorities and other public entities that issue revenue-backed bonds.

As a reporter, these were all brand new and fascinating lines of questioning about the ways that each facility works and how each would be received among the private financial institutions with the most potential to make them work for the most vulnerable communities.

The Fed is flexing muscles it never used before 2008. The next time around, people need to know, they can demand that Congress make the Fed open up existing facilities to more people and places. They can demand that some of “Emergency Stabilization Fund 2.0” should be allocated to capitalize vehicles that do other things justified under the rubric of “stabilizing the economy in a crisis.”

What if, next time around, the Fed capitalized a small facility to make loans to black-owned businesses or to buy preferred equity shares in MDIs? A secondary capital facility for credit unions? Or a facility to acquire distressed residential or commercial real estate and sell it back to current occupants or to the market with deed restrictions for permanent affordability? What if there were a network of smaller facilities that would be administered by state or local governments — making them de facto public banks, with equity from Treasury as initial capital bases and leverage from the Federal Reserve?

It’s tempting to speculate about having the Federal Reserve’s balance sheet firepower behind priorities like those. But, as a journalist, I don’t have any horse in the race when it comes to which ideas or causes for advocates to back.

What I do have is a journalistic mandate to examine whether financial institutions, public or private, are able to support the people and places that, based on historical patterns, are most likely to be left behind in a crisis or a recession. The Fed is no longer just a systemically essential but distant player in that narrative; it was suddenly, squarely within my beat and doing new things that people deserved to understand better.

The Fed’s post-October 2008 way of operating implies new ways of making demands and holding public officials accountable. It changed in ways that needed to change how I worked, and should probably change how at least some of my readers work. People who care about economic justice and righting the wrongs of history need to know exactly how this brave new Fed works in order to understand more clearly what to demand and how to make demands of an institution that is supposed to be working on behalf of us all.


The Narrow Bank Update: SDNY dismisses TNB suit

Author: Gavriel Schreiber

UPDATE: On March 25, 2020, the Southern District of New York dismissed TNB’s complaint. The court found that the Federal Reserve Board of New York had not constructively denied TNB’s application for a Master Account by delaying the decision 18 months (the application form says a decision “may take 5–7  days”).  The Court therefore held that TNB had not suffered an injury and therefore lacked standing to sue.

In a Nutshell

The Narrow Bank (TNB) is a state-chartered passthrough bank that proposes to hold only one asset: account balances at the Federal Reserve. Providing an ultra-safe option for large investors to hold their high-powered money is meant to increase financial stability and extend the benefits of Federal Reserve accounts, which are currently available only to depository institutions and select governmental entities, to a wider set of economic actors. Opponents worry that the spread of narrow banking, pioneered by TNB, would undermine the business model of existing banks, hamper economic growth, and amplify economic shocks.

The Problem: How Safe is High-Powered Money?

Small Investors/Depositors: Totally Safe

Small investors and depositors can hold cash – money that is recognized unconditionally as payment and is therefore “high-powered money (HPM)” – in bank accounts that are completely safe.

Consider a small investor/depositor with $100 of HPM. By placing her HPM in a commercial bank, she exchanges HPM for a bank deposit, which is a promise to pay $100 of HPM on demand.[1]

While the bank remains solvent, the investor/depositor can be certain that the bank will convert her deposit to HPM on demand.

If the bank goes bankrupt, the investor/depositor’s HPM remains safe. The Federal Deposit Insurance Corporation (FDIC) is a government agency that insures bank deposits up to $250,000. If a bank can’t return HPM to its depositors, the FDIC will do it instead. Relatively small amounts of HPM (under $250,000) can therefore be stored without any risk of loss.

Commercial Banks: Totally Safe

Commercial banks can also hold HPM in bank accounts that are completely safe.

Consider a commercial bank with $5 million in HPM (from depositors). This bank can place its HPM in a special Federal Reserve account available exclusively to commercial banks. Just like regular depository accounts, the Fed promises to pay its depositor HPM on demand. But because the Fed’s promise to pay is money (unlike deposit banks, who promise to pay with money), commercial bank reserves kept at the Fed are completely safe. HPM held by commercial banks, if deposited in the Fed, can therefore be kept completely safe.

Most of the time, commercial banks would prefer to invest their HPM rather than park it safely at the Fed. Nonetheless, commercial banks maintain positive balances in their Fed accounts for a few reasons:

First, the Fed serves as a type of “clearinghouse” with other commercial banks. When a depositor puts money in Commercial Bank A, they receive a deposit, essentially an IOU stating “Commercial Bank A promises to pay HPM to the depositor or anyone to whom the depositer transers the right to his HPM.” A depositor can use this IOU to buy goods, for example, by swiping his debit card at a coffee shop and transferring his right to the coffee shop. The right to the deposit (called a “check drawn against Bank A”) might then make its way into the hands of the coffee shop’s bank, Commercial Bank B, which can demand HPM from Commercial Bank A (the bank that issued the deposit).[2] Because Banks A and B (and all other commercial banks) frequently receive these checks written on deposits issued by one another, settling their accounts with money parked in their Fed accounts saves them the hassle of transporting cash back-and-forth.

The Fed also serves as a clearinghouse for deposits that banks issue to borrowers. When an individual borrows money from Commercial Bank A, they receive a deposit credit. Unlike depositors, however, borrowers provide the bank with a long-term IOU rather than HPM (e.g., borrowing $100 for a 5-year term means receiving a $100 deposit in exchange for a promise to pay the bank $100 plus interest at the end of five years).[3] As before, the depositor can write a check to a person with an account at Commercial Bank B, which can then demand HPM from Commercial Bank A (the bank that issued the deposit). This time, however, if Commercial Bank B demands dollars issued to borrowers who did not provide Commercial Bank A with HPM in exchange for their deposits, Bank A may not have enough HPM to meet its obligations to Bank B.[4]

This is where the Fed’s clearinghouse function becomes essential. Though Bank A’s lending leaves it open to demands for liquid resources that exceed its reserves, all commercial banks lend using this same model. Bank B is the recipient of checks drawn against Bank A, but Bank A is the recipient of checks drawn against Bank B as well. Their reciprocal deposit demands generally “cancel out,” leaving Bank A on the hook only for the difference.[5] This Fed-facilitated reciprocal cancelling-out undergirds our financial system by allowing banks to issue deposits beyond their reserves.[6]

The second set of reasons commercial banks keep some money in their Fed account relates to legal obligations and risk aversion. The financial crisis of 2008 highlighted the importance of holding sufficient liquidity at the Fed.

For the most part, however, ensuring sufficient commercial bank reserves (and thus sufficient liquidity) has been a higher priority for the government than for commercial banks. Historically, the government has mandated commercial banks keep a certain amount of money in their Fed accounts (Required Reserves, or RR). Banks had to simply absorb the costs of keeping their money at the Fed instead of investing.[7]

Around the time of the financial crisis, Congress authorized the Fed to pay banks interest on their reserves held at the Fed.[8] More recently, the Fed expanded this tool, giving interest on both RR[9] and additional interest on any reserves kept at the Fed above the RR baseline (this is called Interest on Excess Reserves, or IOER). This is a massive expansion—as of January 2020, excess reserves totaled $1,350 billion, dwarfing the merely $200 billion of RR. Furthermore, the IOER rate is not insubstantial—standing at the time of writing at over 1.5%.

It’s essential to bear in mind that the enviable position enjoyed by commercial banks—being able to deposit large amounts of cash safely and receive relatively high interest rates on it—is a result of policy choices made by the U.S. government. Guided by congressional directive, the Fed decides which banks receive Fed accounts and decides to give IOER (TNB claims that Congress mandates opening Fed accounts for state-chartered depository institutions. The Fed maintains it has some discretion). With a different set of policy decisions, our financial system could look much different.

Large Investors: Less than Totally Safe

In contrast to small depositors and banks, large investors like money market funds, pension funds, and businesses with large cash balances like Apple and Microsoft cannot store HPM in bank accounts that are completely safe.

These large investors cannot put their HPM safely in a bank, because the FDIC only insures deposits up to $250,000. Though they hold large amounts of unsecured deposits, if the bank collapses, these investors could be left with large losses. Nor can they put their HPM in ultra-safe Federal Reserve accounts, because the Federal Reserve Act only permits depository institutions and certain governmental entities to deposit money with the Federal Reserve Banks. Even though these funds are major economic players, they are still shut out.

By and large these investors turn to putting their funds into the money market, often using overnight general collateral repurchase agreements (repo). Repo is simply a secured loan, backed by collateral. In a repo, a large investor like a pension fund uses its HPM to buy an asset like a Treasury bond from a large financial institution like a broker/dealer or investment bank. In exchange, the financial institutions promises to repurchase that asset from the investor the following day. This sale-and-repurchase arrangement is functionally equivalent to a one-day loan from the buyer-lender (the pension fund) to the seller-borrower (the broker/dealer). The seller-borrower is happy–it gets to use the pension fund’s money to invest. The buyer-lender (the investor) is happy too–though its money isn’t totally safe, if the seller-borrower collapses and is unable to return the HPM, the investor will still have a Treasury bond (or other debt instrument) to sell. The investor then rolls these agreements over, day after day.

These repo agreements are a good option for large investors, but many would probably prefer to simply deposit their cash at the Fed (like commercial banks). TNB wants to help them do just that.

The Proposal

The Narrow Bank extends the unique benefit of Fed accounts, currently conferred only upon depository institutions and certain governmental entities, to large cash investors. TNB plans to take deposits from large investors and park them in its Federal Reserve account. That’s it. The money will earn interest, TNB will take a cut and pass the rest along to its depositors.

All money deposited at TNB will be in the Fed. Thus, there is no risk of TNB being unable to meet demands for deposits (unlike commercial banks, who could be unable to meet their obligations if they make poor investments). TNB deposits will be incredibly safe.

Arguments For

Advocates of TNB have said that…

  1. TNB will reduce the nation’s vulnerability to financial crises. Because TNB would store all deposits in the Fed, it will be immune to runs. Additionally, it will provide a floor to stabilize repo markets. Large investors will only use repo markets to store their money if the return offered by those markets is larger than the return offered by TNB. During times of economic uncertainty, large investors will be able to safely keep their money in the Fed (through TNB) rather than being forced to accept high risk and low returns in volatile markets.

  • TNB will provide an additional tool for the Fed to control inflation. Related to point (1), the “floor” set by TNB depends on the IOER rate set by the Fed. The Fed could raise or lower the IOER in order to encourage or discourage participation in repo markets. Alternatively, the Fed could further differentiate IOER rates and fine-tune liquidity flows between safe deposit facilities and competitive investment markets.

  • TNB will restore agency to investors. Large investors have little option but to maintain large balances with commercial banks, who often engage in risky investments. Some investors don’t mind the risk, others do. TNB provides a safe choice for investors who care about safety above all else.

  • TNB will reduce unfair government favoritism. The federal government advantages commercial banks to the exclusion of other major economic players in two important ways: First, it perversely subsidizes banks’ costs by giving them interest in excess of what they provide their depositors. Second, it allows them the security of Fed accounts. TNB, as a passthrough, will allow other investors to reap the same benefits afforded commercial banks.

  • TNB is not so different from a normal bank. Regular banks take deposits and invest them. Today, Federal Reserve accounts are an investment that many economic actors indirectly hold–from foreign banks to money market funds. TNB would do the same.

  • TNB would promote competition by providing their depositors higher interest rates than those currently offered by commercial banks.

Arguments Against

Opponents of TNB have said that…

  1. TNB will reduce economic activity. Commercial Banks, investment banks, and other financial entities rely on repo markets to fund trading and investment activities. With many institutional investors putting their money in TNB, a large swath of large investors will have less money with which to invest. This could raise the cost of credit for households, businesses, and other banks. Individuals and investors may be more risk-averse than necessary,[10] so employing a fractional reserve banking system forces people to use their money in productive ways rather than keeping it under the proverbial mattress.

  • TNB will reduce the Fed’s ability to implement monetary policy. Institutional investors depositing their money at TNB will leave short-term debt markets, making those rates more volatile and more difficult for the Fed to control. Specifically, TNB will render Fed’s Overnight Reverse Repurchase facility (ONRRP) obsolete. ONRRP, a tool of monetary policy implementation, offers to execute repo agreements at a certain rate. Because no money fund would lend repo to a broker-dealer for a rate that is lower than the one offered by the Fed, ONRRP sets a “floor” on money market lending rates. If TNB obviated the need for money markets and ONRRP, it would undermine the Fed’s ability to set the lower bound of its interest rate target range. TNB will also drastically increase the Fed’s balance sheet, which will limit its ability to implement monetary policy.

  • TNB will compound financial instability. In times of mild economic stress, investors will run from financial markets into TNB. Small shocks will turn into large ones.[11]

  • TNB will force taxpayers to subsidize money market funds. By increasing the Fed’s IOER payment obligations, TNB will reduce the Fed’s remittances to the Treasury. Taxpayers will have to make up the difference.

  • Commercial banks uniquely deserve the advantage of Fed accounts. Commercial banks do things that are socially necessary but less profitable (like providing credit to households and small businesses). By subsidizing commercial banks and using regulation to insulate competition, the Fed allows them to continue their socially beneficial activities.[12] TNB will benefit exclusively “the most financially secure institutions,” so it doesn’t deserve the same advantage.[13]

  • TNB represents a radical redesign of the monetary system that should be undertaken in a more thoughtful and centralized way. The Fed was designed to be a banker’s bank—commercial banks are arms of the central bank. If we want to adopt a new system of money augmentation, we do so by amending the Federal Reserve Act after broad and democratic debate, rather than letting one upstart profit-seeking company upend the system.

What’s the Status of TNB?

Connecticut granted TNB a bank charter. Normally, the Federal Reserve grants state-chartered banks accounts at the Fed as a matter of course. Here, the Fed has refused to act on TNB’s application.

TNB sued the Fed for refusing to act on its application. The Fed filed a motion to dismiss and then proposed a rule which would bar pass-through investment entities like TNB from receiving IOER. Below, a summary:

August 31, 2018 – TNB Files Complaint:



  1. Relief Sought:[14]
    1. TNB seeks declaratory relief and an injunction to compel the Federal Reserve Bank of New York (FRBNY) to open a Federal Reserve “Master Account” for TNB.

  • The applicable statute compels FRBNY to provide TNB a Master Account[15]
    • The statutory framework requires the Fed provide services to all depository institutions.
    • Fed services cannot be accessed without a master account.
    • TNB is a depository institution duly chartered in Connecticut.
    • Therefore, FRBNY must grant TNB a master account.

  • FRBNY has delayed and shows no intention of opening TNB a Master Account.[16]

  • TNB will have a positive effect on the Fed and the broader economy.[17]
    • TNB would pass along IOER rates to its depositors, setting a more solid interest rate floor than the current target federal funds rate.
    • TNB will place competitive pressure on all banks to raise depository interest rates for all depositors.
    • TNB will provide a similar function to the Fed’s current Overnight Reverse Repurchase Agreement Facility (“ON RRP”) and the Foreign Repo Pool (“FRP”).

March 8, 2019, Federal Reserve files Motion to Dismiss



  1. TNB has no standing to sue.[18]
    1. They have not been denied an account, and therefore have suffered no injury.

  • TNB’s Claim is not Ripe.[19]
    • The Fed’s review of TNB’s application is ongoing, and so TNB cannot claim injury based on potential denial of their application.

  • The court should decline jurisdiction over the declaratory judgement request because the request is contrary to the public interest.[20]
    • The Fed is carefully evaluating the impact granting a Master Account might have on the economy, and the court should allow the Fed to finish its inquiry.

  • Providing Master Accounts is discretionary – TNB is not entitled to a Master Account.[21]
    • The Fed has discretion to reject deposits, and therefore reject granting Master Accounts.
    • An obligation to create Master Accounts would impermissibly undermine the Fed’s ability to execute its statutory mandate.

NOTE: the Federal Reserve Board of Governors requested permission to file an Amicus brief in support of the motion to dismiss. That request was granted, and their Amicus brief is forthcoming.


March 12, 2019, Federal Reserve Files Notice of Proposed Rulemaking[22]




The comment period closed on May 13, 2019. As of January 1, 2020, the Fed’s decision was still pending.


Lower the IOER rate paid to institutions that hold a very large proportion of their assets in the form of balances at Reserve Banks. (Such institutions, like TNB, are termed Pass-Through Investment Entities or PTIEs).


  1. Large scale migration of short-term investments from federal funds markets to PTIEs would make other interest rates more volatile, making it more difficult for the Fed to implement policy.
  2. PTIEs would diminish the availability of capital for those institutions that benefit from short-term lending markets.
  3. The ultra-safe option provided by PTIEs would exacerbate economic downturns by fueling runs from money markets to PTIEs.

March 25, 2020 – SDNY Dismisses TNB’s Suit for Lack of Standing




      Judge Andrew L. Carter Jr., writing for the United States District Court for the Southern District of New York, granted the Federal Reserve Bank of New York’s (“FRBNY”) motion to dismiss on March 25, 2020.[1] The Court first found that FRBNY had not yet denied TNB’s application for a Master Account. Next, it found that TNB did not have standing to sue because a delay in deciding on an application, as opposed to a denial, did not result in an actual or imminent injury to TNB. Finally, it held TNB’s claim to be unripe both because TNB had suffered no injury and because any decision on the merits could be rendered moot by the FRBNY’s subsequent actions.

Facts and Procedural Posture:

The Court opened with background on the Federal Reserve System, the federal funds rate, and IOER.[2] It explained that TNB had received a temporary charter from the Connecticut Department of Banking in the form of a temporary Certificate of Authority (“CoA”), which would become a final CoA upon proof that the FRBNY would open a master account for TNB.[3] TNB began the application process in August 2017. After extended back-and-forth, in late 2017 the FRBNY indicated to TNB that it would soon have a master account.[4] However, the Federal Reserve Board raised policy concerns about TNB, and the FRBNY reversed course in February 2018. Despite TNB’s extensive responses to the Board’s policy concerns, the FRBNY has failed to act on TNB’s application (which TNB formally filed on August 31, 2018).[5]

TNB’s experience was unusual. “[T]he master account application process is typically straightforward and short. The applicant completes a one-page form agreement and waits ‘no more than one week’ for a response.”[6] The FRBNY’s form itself explains that “[p]rocessing [an application] may take 5–7 business days.”[7] TNB seemed to be counting on a realtively expedient process, as its temporary CoA was set to expire in early 2019.

TNB filed a complaint. Shortly thereafter, the Board issued an advance notice of proposed rulemaking and the FRBNY filed a motion to dismiss.

The Holding:

The Underlying Injury – or Lack Thereof

The Court found that the FRBNY had not denied TNB’s application. TNB argued that the FRBNY had constructively denied the application by telling TNB in February 2018 that it was unlikely to receive a Master Account, by beginning a rulemaking process that would destroy narrow banks like TNB, and by spending 18 months (and counting) on a process that should have taken only a few days. The Court rejected these claims. It found that TNB only presented facts indicating that the Fed would likely be hostile to TNB, not that it already was. Distinguishing other cases, it further found that the application-processing timeline was not guaranteed.

The Standing Issue

The Court found that TNB did not have standing because it had suffered no injury in fact. Standing requires an actual or imminent injury, not one that is conjectural or hypothetical.[8] Noting that TNB’s application had not been denied, only delayed, it held that TNB had not asserted any actual or imminent injuries, only hypothetical ones.[9]

The Ripenss Issue

The Court found that TNB’s claim was not ripe. Constitutional ripeness is a subset of the injury-in-fact analysis. Because TNB suffered no injury, its claim was constitutionally unripe. Prudential ripeness concerns a claim’s “fitness . . . for judicial decision.”[10]  Because any decision on the merits could be rendered moot if the FRBNY subsequently grants TNB’s application (or denies it for an unanticipated reason), TNB’s claim was not ripe according to the Court. The Court therefore granted the FRBNY’s motion to dismiss. TNB plans to appeal.

[1] TNB USA, Inc. v. Fed. Reserve Bank of N.Y, 1:18-cv-7978 (ALC) (S.D.N.Y. March 25, 2020)

[2] Id. at 1–3.

[3] Id. at

[4] Id. at 4–5.

[5] Id. at 6–7.

[6] Id. at 4 (quoting TNB’s complaint).

[7] Id. (quoting TNB’s complaint) (first emphasis in original).

[8] Id. at 12 (citing Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992)).

[9] Id. at 13–14. The Court also found that TNB’s alleged ongoing injuries, like operating expenses, were too “unclear” to confer standing. Id. at 19–20.

[10] Id. at 17 (quoting Vullo v. Office of the Comptroller of the Currency, 17 Civ. 3574, 2017 WL 6512245, at *8 (S.D.N.Y. Dec. 12, 2017)).


Further Reading


  • JP Koning provides insight about the genesis of TNB and highlights a concern about its long-term viability.

Advocates of TNB:

  • John Cochrane provides a robust defense of narrow banks generally and picks apart the Fed’s arguments against TNB.

  • The WSJ explains how narrow banks benefit depositors

Critics of TNB:

  • George Selgin defends the Fed’s decision to deny TNB a Master Account.

[1] See Andrew Jackson & Steve Dyson, Modernising Money: Why our Monetary System is Broken and How it Can be Fixed, 53 – 63 (Positive Money, 2012).

[2] See Jackson & Dyson, supra note 1 at 57 – 68.

[3] This is called “maturity transformation,” turning productivity in the future (i.e. an individual’s ability to pay $100 plus interest in five years) into money in the present (i.e. $100 in deposits). See C. Desan, Commercial Banking: Financing through Money Creation (aka Endogenous Credit Creation), A Short Overview 2–3 (Sep. 3 2019) (unpublished manuscript) (on file with Christine Desan, Harvard Law School).

[4] See id.

[5] A bank’s books must balance daily. If there is a shortfall, they have to pay the other bank or default. Generally they make up the sortfall by borrowing from other banks in the federal funds market or from the Federal Reserve Banks through the discount window. The repo market is also an option.

[6] See id. If a bank becomes a chronic “debtor” to other banks, lending more money than it receives in deposits, the Fed also facilitates inter-bank lending, whereby banks with too few depositors can borrow HPM from banks with too many. Id. at 3–4.

[7] Morgan Ricks, Money as Infrastructure, 2018 Colum. Bus. L. Rev. 757, 787 – 88 (2018).

[8] Id.

[9] See Gary Gorton, Clearinghouses and the Origin of Central Banking in the United States, 45 J. Econ. Hist. 277 (1985).

[10] Some scholars describe widespread investment as a type of collective action problem — society is better off when everyone invests, but the individual cost-benefit calculus promotes penny-pinching. Financial systems need to be complex in order to mask the true risks of investment to overcome individuals’ stingy inclinations.  See Steve Randy Waldman, Why is Finance so Complex?, Interfluidity Blog (Dec. 26, 2011)

[11] See Regulation D: Reserve Requirements of Depository Institutions, 84 Fed. Reg. 8829, 8829 – 31 (proposed Mar. 12, 2018).

[12] This is known as “cross-subsidization.” For a succinct explanation, read this piece by Scott Sumner. For a critique, check out this piece by Cochrane.

[13] Complaint for Petitioner TNB USA at 1, (S.D.N.Y. 1:18-cv-07978-ALC) (filed Aug. 31, 2018).

[14] Id. at 1 – 4.

[15] Id. at 5 – 10.

[16] Id. at 11 – 15.

[17] Id. at 15 – 22.

[18]  Law in Support of the Federal Reserve Bank’s Motion to Dismiss at 10 – 11, (S.D.N.Y. 1:18-cv-07978-ALC) (filed Mar. 8, 2019)

[19] Id. at 11 – 13.

[20] Id. at 13 – 14.

[21] Id. at 14.

[22] Regulation D: Reserve Requirements of Depository Institutions, 84 Fed. Reg. 8829, 8829 – 31 (proposed Mar. 12, 2018).

About Us

On this website, we approach money as a legal project.  Created to meet demands both public and private, money depends on law for its definition, issue, and operation.    That legal structure of money – its design – matters deeply.  In the words attributed to an early  banker, “those who create and issue money . . . direct the policies of government and hold in the hollow of their hands the destiny of the people.”   Our aim is to encourage discussion, debate, and scholarship on money’s design and its reform towards a world that is as just as it is (economically) productive. (read more)

2020 Conference, Journal of Law, Finance, and Accounting

October 16 & 17, 2020

Bocconi University, Milano

The Journal of Law, Finance, and Accounting (JLFA) is pleased to announce its 10th conference, to be held in Milano on Friday, October 16 and Saturday, October 17, 2020. The conference is organized by Bocconi University.


JLFA is an interdisciplinary journal sponsored by the NYU Stern School of Business and the NYU School of Law. It seeks to publish top-quality empirical, theoretical, and policy-oriented scholarship at the intersection of law, finance and accounting. Prior JLFA conferences were held at New York University (2014, 2019), The Hong Kong Polytechnic University (2015, 2017, 2019), Harvard University (2015), Northwestern Law School (2016), London Business School (2017), and University of Padova (2018).

JLFA is an open-access publication. Papers published on JLFA, through volume 4 (2019), can be downloaded free of charge from


You are invited to submit your original, unpublished papers for presentation at the conference. Accepted papers will be eligible for expedited review and consideration for publication in JLFA. In choosing papers for presentation at the conference, we will give priority to papers which the authors wish to submit to JLFA for consideration for publication. Publication is at the editors’ discretion.

The deadline for submission is Monday, June 1st, 2020. Please submit papers at


We are interested in research that will be of interest to scholars in more than one of our core disciplines.  Topics of interest include, but are not limited to:

  1. The impact of the structure of the legal system – including legal origins, procedural rules, and the legal environment in general, on the evolution of financial contracts, financial markets, business enterprises and business groups.
  2. The impact of particular legal and market institutions, including accounting, on financial markets and corporate actions, and innovation, economic growth and stability.
  3. The co-evolution of the legal rules and market institutions that govern financial sector activity, that activity itself, and the nature of the broader economy and financial markets.
  4. The regulation, organization, and performance of financial institutions.
  5. The relationships between the structure and performance of financial institutions, and the performance of these institutions and the overall performance of financial markets and economies.
  6. The interplay between legal rules, accounting regulations, corporate governance,
    firm performance, cost of equity and debt capital, financial market performance, and economic performance.
  7. The political economy of the regulation of corporate governance, financial institutions, and financial markets.
  8. Accounting, finance, and legal issues concerning ownership and property


Barry Adler, NYU School of Law
John Armour, Oxford, Law Faculty and Said School of Business
Bernard Black, Northwestern University, Pritzker School of Law & Kellogg School of Management
Mark DeFond, University of Southern California
Julian Franks, London Business School, Department of Finance
Joshua Ronen, NYU Stern School of Business, Department of Accounting
Stefano Rossi, Bocconi University
David Yermack, NYU Stern School of Business

For questions about the submission process, please contact Elena Suragni at For substantive questions, please contact Professor Stefano Rossi at or Professor Joshua Ronen at or Professor Bernard Black at (Chief Organizers).

Banking: Intermediation or Money Creation

Banking: Intermediation or Money Creation

Prompt for Discussion

Contributors: Morgan Ricks, Marc Lavoie, Robert Hockett, Saule Omarova, Michael Kumhof, Zoltan Jakab, Paul Tucker, David Freund, Charles Kahn, Daniel Tarullo, Stephen Marglin, Howell Jackson and Christine Desan, Sannoy Das

Commercial banks are, indisputably, at the center of credit allocation in virtually all modern economies.  Astonishingly, however, it remains controversial exactly how banks expand the money supply.

According to one view, banks operate as intermediaries who move money from savers to borrowers.  The basic idea is that banks extend the monetary base by lending out of accumulated funds in a reiterative way.  In round 1: a bank takes a deposit, sets aside a reserve, lends on the money; round 2 – the money lands in another bank, that bank sets aside a reserve, lends on the money; round 3 – the process repeats.   Money’s operation is effectively multiplied in the economy because banks transmit funds constantly from (passive) savers to (active) borrowers, thus distributing money across those hands.   The system works because savers, who are content to leave their funds alone, are unlikely to demand more than the (respective) reserve amounts back from any round.  Banks balance their flow of funds over time as borrowers repay their loans. 

According to another view, commercial banking activity amounts to “money creation” rather than the pooling and transmission of existing funds.  Banks fund the loans they make by issuing deposits (or promises-to-pay in the official unit of account) that are treated by the wider community as money, not only as credit.  They have, in effect, immediate purchasing power.   The constraint on banks’ lending capacity is not the sum of previously accumulated funds, but the banks’ ability to clear obligations owed to other banks against obligations demanded from other banks.  That activity depends on national payments systems coordinated and stabilized by central banks.

We open this roundtable to proponents of each approach to banking.  We invite them to argue their case, to respond to one another, and to elaborate the implications that their view has on matters including the definition of money, the role of private capital accumulation, the relationship of commercial banks to central banks, and the behavior of the money supply. 


August 3, 2020
Roundtable Wrap-up
Sannoy Das, Harvard Law School

March 12, 2020
The Power of Paradigms in Histories of Economic Development
Christine Desan, Harvard Law School

March 5, 2020
Thinking about whether and why money matters is more important than debates about “views” on banking intermediation
Sir Paul Tucker, Harvard Kennedy School

February 27, 2020
What Do Banks Do?
Stephen A. Marglin, Harvard University

February 19, 2020
Focusing on Risk
Daniel K. Tarullo, Harvard Law School

February 13, 2020
Towards a Mixed View
Howell E. Jackson, Harvard Law School

February 5, 2020
What Do Banks Intermediate?
Robert Hockett, Cornell Law School
Saule Omarova, Cornell Law School

January 29, 2020
Banks Are Not Intermediaries of Loanable Funds
Michael Kumhof, Bank of England
Zoltan Jakab, International Monetary Fund

January 23, 2020
What’s at Stake in Debates over Bank Money Creation Mechanics?
Morgan Ricks, Vanderbilt Law School

January 15, 2020
Are Banks Special? A Fintech Perspective
Charles M. Kahn, University of Illinois

January 08, 2020
Endorsing the Money-creation View
Marc Lavoie, University of Ottawa



(Select this tile to learn more about Roundtables)

Our roundtables provide the opportunity for a short, concentrated discussion of a particular design innovation or controversy.  Projected topics include banks and money creation, state public banking, postal banking, the Libra currency project (Zuck Bucks), and open access Federal Reserve Accounts.  An invited contribution from a key player or knowledgeable commentator kicks off the discussion with an entry that sets out the topic.  We publish solicited responses by people with a variety of perspectives.  We welcome your suggestions for topics and participants.  Please send them to Dan Rohde,

[View all Roundtables]

About Roundtables

Our roundtables provide the opportunity for a short, concentrated discussion of a particular design innovation or controversy.  Projected topics include banks and money creation, state public banking, postal banking, the Libra currency project (Zuck Bucks), and open access Federal Reserve Accounts.  An invited contribution from a key player or knowledgeable commentator kicks off the discussion with an entry that sets out the topic.  We publish solicited responses by people with a variety of perspectives.  We welcome your suggestions for topics and participants.  Please send them to Dan Rohde,

View All Roundtables

About Policy Spotlights

This column includes short pieces explaining policy proposals that highlight, revise, or contest current monetary design.  While we focus on contemporary proposals, historical episodes may be included occasionally.  Columns are written by editors or by student authors and will be updated monthly.  Students interested in becoming a Just Money columnist should contact Dan Rohde:

[View all Policy Spotlights]

Policy Spotlights

This column includes short pieces explaining policy proposals that highlight, revise, or contest current monetary design.  While we focus on contemporary proposals, historical episodes may be included occasionally.  Columns are written by editors or by student authors and will be updated monthly. Students interested in becoming a Just Money columnist should contact Dan Rohde:

[View all Policy Spotlights]

About Emerging Scholarship

Coming soon.

[View all Emerging Scholarship]


About Current Scholarship

This page contains abstracts and links to recent scholarship on monetary design and related issues. We also welcome posts to older scholarship that should be flagged.

Please submit abstracts to Dan Rohde:

[View all Current Scholarship]


Current Scholarship

(Select this tile to learn more about Current Scholarship)

This page contains abstracts and links to recent scholarship on monetary design and related issues. We also welcome posts to older scholarship that should be flagged.

Please submit abstracts to Dan Rohde:

[View all Current Scholarship]

Teaching & Resources

The Teaching Archive collects syllabi, course materials, and other teaching tools (videos, charts, animations). We would be delighted to post all relevant contributions. Please send them to Dan Rohde:

History and Economics Seminar

The Joint Center for History and Economics – Spring 2020
February, 18, February 26, and April 20

Tuesday, February 18, 4:30pm 
Diana Kim, Georgetown University
Empires of Vice: The Rise of Opium Prohibition across Southeast Asia
CGIS-S030, 1730 Cambridge Street

Wednesday, February 26, 4:30pm 
Chenzi Xu, Dartmouth College
Reshaping Global Trade:  The Immediate and Long-Term Effects of Bank Failures
CGIS-S030, 1730 Cambridge Street

Monday, April 20, 5:15pm
Paul-Andre Rosental, Sciences Po
A Human Garden: French Policy and the Transatlantic Legacies of Eugenic Experimentation
CGIS-S030, 1730 Cambridge Street

Money and the ‘Level Playing Field’: The Epistemic Problem of European Financial Market Integration

Author: Troels Krarup
Financial market integration processes in the European Union (EU) are characterised by an epistemic problem of economic theory. This problem encompasses what ‘the market’ is, how it is to be ‘integrated’, and the nature and role of ‘money’ as infrastructure of the fully integrated market. The EU’s legal framework has imported this epistemic problem along with the competitive conception of the market as described in economic theory – as a ‘level playing field’ for private exchange, under free, fair and ideally unrestrained competition. It manifests itself in European financial market integration processes, as exemplified in the article, via two otherwise disconnected areas of European Central Bank (ECB) activity: (a) the provision of central bank credit for the purpose of financial transaction settlement in the Eurozone; and (b) the conduct of ordinary monetary policy in the Eurozone. While the problem can be stabilised through legal, technical and other means, it remains latent, and may manifest itself again in unexpected ways, as happened in the wake of the 2008 financial crisis. Thus, contrary to ideologies that are widely understood as more or less coherent systems of doctrines, epistemic problems are characterised by specific tensions, contradictions and conceptual uncertainties.

Troels Krarup (2019) Money and the ‘Level Playing Field’: The Epistemic Problem of European Financial Market Integration, New Political Economy, DOI: 10.1080/13563467.2019.1685959


The (impossible) repo trinity: the political economy of repo markets

Author: Daniela Gabor
In its capacity as debt issuer, the state has played a growing role in financial life over the last 30 years. To examine this role and connect it to shadow banking, the paper develops the concept of the ‘repo trinity’, which captures a set of policy objectives that central banks outlined after the 1998 Russian crisis, the first systemic crisis of collateral-based finance. The repo trinity connected financial stability with liquid government bond markets and free repo markets. It further reinforced the dominance of the US government bond market as institutional template for states adjusting to a world of independent central banks, market-based financing and global competition for liquidity. Central banks and the Financial Stability Board recognized the impossible nature of the trinity after 2008, attributing cyclical leverage (financial instability) and elusive liquidity in collateral markets to deregulated repo markets, markets systemic to shadow banking. The new approach triggered radical changes in crisis central banking but has not powered significant regulatory interventions in the absence of an alternative mode of organizing government bond markets.

Daniela Gabor (2016) The (impossible) repo trinity: the political economy of repo markets, Review of International Political Economy, 23:6, 967-1000

Available at:


Submissions Now Open for 25th Annual Barnes Conference, March 20-21, 2020

The James A. Barnes Club, Temple University’s graduate student history organization, is pleased to announce the 25th Annual Barnes Club Graduate Student History Conference. The event will feature a keynote address from award-winning Professor of Science, Technology, and Society at the Massachusetts Institute of Technology, Dr. Kate Brown, author of Manual for Survival: A Chernobyl Guide to the Future.

The Barnes Club Conference will be held Friday evening March 20 and Saturday March 21, 2020, from 9:00 AM to 5:00 PM at Temple University’s Center City Campus in downtown Philadelphia. The Barnes Club Conference is one of the largest and most prestigious graduate student conferences in the region, drawing participants from across the nation and around the world.

Proposals from graduate students for individual papers or panels are welcome on any topic, time period, or approach to history. We welcome proposals that foreground public history and digital humanities, and are eager to work with applicants in these fields to facilitate their participation. Panels will include three or four paper presentations, running between fifteen and twenty minutes each, with comment and questions to follow.

At the conclusion of the conference, cash prizes will be awarded to the best papers in multiple scholarly categories. Of particular note is the Russell F. Weigley – U.S. Army Heritage Center Foundation Award, a substantial award offered through the U.S. Army Heritage Center to the best paper in military history presented at the conference.

Please submit a 250-word abstract that outlines your original research and a current C.V. via this link no later than Tuesday, December 31, 2019. The registration fee is $50 for presenters and attendees. A continental breakfast, lunch, and pre- and post-conference receptions are included. Registration is free for all Barnes Club Members.

Continuing Lecturer Position

The Department of Political Economy at the University of Sydney is currently advertising a continuing Lecturer position (equivalent to Assistant Professor). Details can be found here: Lecturer in Political Economy

Italy’s mini-BOT Proposal

Author: Michael Svedman
The proposal by Italy’s Lega Norda (or League) political party to introduce a currency-like instrument called the mini-BOT that would circulate alongside the euro has generated significant commentary and criticism. These debates shed light on the public dimension of money by forcing us to consider the relationship between monetary authority and political sovereignty. With implications reaching far beyond the economic impact of such an instrument, the mini-BOT raises urgent questions about the stability of the European Union, the rise of populism on the Left and Right, and the coherence of the neoliberal political and economic consensus that underwrites the EU project.   

The proposal by Italy’s Lega Norda (or League) political party to introduce a currency-like instrument called the mini-BOT that would circulate alongside the euro has generated significant commentary and criticism. These debates shed light on the public dimension of money by forcing us to consider the relationship between monetary authority and political sovereignty. With implications reaching far beyond the economic impact of such an instrument, the mini-BOT raises urgent questions about the stability of the European Union, the rise of populism on the Left and Right, and the coherence of the neoliberal political and economic consensus that underwrites the EU project.   


While several prominent figures associated with the League,
including former Deputy Prime Minister Matteo Salvini and former president of
the Senate Finance Committee Alberto Bagnai, have expressed support for the
idea of using small denomination government bonds to pay public arears, there
is no “official” mini-BOT proposal. A unanimous vote in Parliament on May 30,
2019 to adopt a motion
inviting the government to accelerate the payment of public arrears by issuing
mini-BOT was non-binding and did not spell out the details of such a plan.

Most discussions of the mini-BOT center on a detailed overview of
the plan advanced by Claudio Borghi, the chief financial advisor to the League,
in a 2018 pamphlet titled Mini BOT: Democracy and Sovereignty.
The name ‘mini-BOT’ refers to small denomination, non-interest-bearing treasury
bonds (or Buoni Ordinari del Tesoro). The government would use large issues of
the notes to pay a portion of its public arears. The notes in turn would be
redeemable against future tax obligations as well as in exchange for public
goods and services. According to Borghi, the guaranteed liquidity these public
uses would provide would allow the mini-BOT to circulate widely throughout
Italy at par with the Euro and even encourage their acceptance in private
commercial exchanges.

But the mechanical aspects of the mini-BOT only tell part of the
story, and throughout his pamphlet Borghi articulates a powerful link between
national political sovereignty and the state’s power to issue money. On his
account, the state without monetary sovereignty lacks the meaningful authority
to realize its political goals. This inability to actualize the will of the
electorate in turn vitiates the very notion of a democratically elected
representative body. In short, monetary sovereignty is one of the key powers in
the structure of the state as a political expression of the popular will. Along
with the power to make laws and control the national border, monetary
sovereignty is foundational to Borghi’s account of the sovereign state.

Two features of this argument should be noted. First, it is
antithetical to the basic premise of the EU project, which rests on the idea
that economic convergence across the eurozone is compatible with sovereign
political diversity. This idea reflects neoliberal orthodoxy in treating the
market as a distinct sphere of human activity governed by its own internally
consistent and apolitical logic. Second, Borghi’s rhetoric mines deep veins of
populist sentiment. He invokes the image of the state as the agent of
technocratic elites in Brussels rather than its proper master the Italian
people and channels this resentment into an agenda that joins economic stimulus
with political self-determination.

The ongoing budget conflict between Italy and the EU illustrates the
practical dimensions of this ideological contest. On June 5, 2019, the European
Commission issued a report under Article 126(3) of the TFEU concluding that
Italy’s 2018 budget had not complied with EU budget criteria and recommending
that Excessive Deficit Procedure (EDP) was appropriate. In response, the
Italian government adopted a mid-year budget on July 1, 2019 with the headline
deficit expected to reach 2.04% of GDP as compared to the Commission’s spring
projection of 2.5%. On July 4, in recognition of the mid-year budget and a 2019
spending freeze clause, the Commission determined that opening EDP would no
longer be warranted as Italy had signaled its commitment to sound fiscal
policy. Yet with public debt above 132% of GDP, well in excess of the 60% limit
enshrined by EU policy, Italy remains at the center of a budget crisis. The
tension between the Italian government’s political priorities and EU fiscal
guidelines demonstrates the political pressure the Commission can exert through
the European Central Bank, budgetary surveillance, and constraints on public
spending. Indeed, this conflict animates some of the central issues not only in
Italian politics but across the EU’s shifting political landscape.

In the view of many commentators, the recent vote by Italy’s Five
Star to form a new ruling coalition with the center-left Democratic Party (PD)
signals the resolution of a prolonged crisis in Italian politics. Following the
2018 general election, the Italian government had been controlled by a
fractious political alliance between the hard-right League and the
left-populist Fiver Star Movement. Both the League and Five Star campaigned on
broadly euro-skeptical platforms playing to widespread Italian resentment over economic
stagnation, immigration, and sweeping austerity measures entailing cuts to
government spending and public benefits. In response to these issues, both
parties have expressed support for a parallel currency like the a mini-BOT. The
formation of a new government alliance may blunt these fears, but the debate
surrounding the mini-BOT proposal continues to trace the economic and political
fault lines running through the EU project.

Policy Debate

The mini-BOT proposal articulates two goals. First, to stimulate the
Italian economy and give the Italian government the freedom to increase
spending without running afoul of EU budget constraints. And second, to restore
Italy’s political legitimacy as a sovereign state. The policy debate
surrounding the mini-BOT forks at both of these major points. Simply put, what
are the economic and political consequences of introducing a de facto parallel
currency within the eurozone?

According to its supporters, the mini-BOT would promote Italian
economic growth by increasing productive capacities across the economy and
lifting the burden of austerity imposed by EU fiscal and monetary policy. The
basic idea is that productive potential is lying dormant in the economy because
limits on public spending have restricted aggregate demand while the deflationary
effect of sweeping austerity measures across the EU has depressed wages and
growth. By injecting liquidity into the economy in the form of fiscal money,
the government could stimulate demand and reverse these downward pressures. Bossone
and Cattaneo
have written perhaps most extensively about the potential
benefits of a parallel currency system like the mini-BOT for Italy’s economy.
Their work concentrates on the Keynesian multiplier effect of increased
government spending, which would improve wages, production, and fiscal revenues.
Their model holds that such spending would generate enough tax revenue to
offset the cost of the tax rebate.

Critics of the mini-BOT, however, argue that the mechanism would
weaken Italy’s fiscal position precisely because it would decrease the overall
tax take. By accepting mini-BOT for tax payments in place of euros, the Italian
government would dilute its tax revenue stream and increase the burden of its
euro-denominated debts. Skeptics also question whether the mini-BOT would actually
trade at par value with the euro. Borghi is notably vague about exactly how the
mini-BOT would maintain par value with euros, and several commentators have
predicted that their value would be discounted in private transactions, in turn
driving up the cost to the government of mini-BOT denominated contracts
relative to contracts for similar goods and services in exchange for euros.
Papadia and Roth suggest that the mini-BOT would be most attractive to
risk-loving traders, and thus shift wealth from budget-constrained taxpayers
selling them at a discount to actors who could afford to speculate on their

Perhaps more urgent than the debate over the mini-BOT’s probable
economic outcomes are the questions it raises about the political consequences
of introducing a parallel currency within the European monetary union.    

The threshold question is whether the mini-BOT proposal is legal under TFEU rules. Article 128 restricts the issue of legal tender within the monetary union to the European Central Bank. According to Borghi and others, the mini-BOT would not have “legal tender” status and therefore would comply with TFEU guidelines. Borghi points out, for example, that private sector actors could not be compelled to accept or recognize them. There is also a question of whether the mini-BOT would constitute debt such that the parameters set by Stability and Growth Pact (SGP) guidelines would apply to any issue of the notes. For the proponents of fiscal money schemes, such notes are not properly thought of as debt because they are not redeemable for anything and no ‘put’ date or maturity attaches to them. Borghi argues that, rather than contributing to Italy’s public debt, the mini-BOT would simply repackage existing debt into a liquid vehicle in order to free up public resources. Critics counter that the mini-BOT proposal is a blatant effort to circumvent SGP guidelines. Indeed, according to the Bank of Italy, the mini-BOT and all fiscal money would constitute debt from an accounting perspective. In general, these questions are matters of political and legal determinations as much as they are economic.

Finally, many critics and proponents alike recognize the mini-BOT as a covert method of going off the euro and ultimately precipitating a so-called Ital-exit, or Italy’s withdrawal from the European Union. Borghi’s emphasis on sovereignty clearly signals the euro-skeptical valence of the mini-BOT proposal. He characterizes the wide circulation of the mini-BOT his proposal envisions as a “spare tire” that would allow Italy to transition seamlessly to its own currency in the event of an Ital-exit. Likewise, Stiglitz has also argued that introducing a parallel currency represents an effective blueprint for a European Union member state to leave the monetary union. Its critics see in the mini-BOT a fundamental threat to the liberal consensus of the entire European Union project. To borrow language from a recent article appearing the New York Times, the mini-BOT “would threaten to bring the entire eurozone tumbling down because it would erode the very premise of the euro as a single monetary unit.” In short, the mini-BOT debate traces the same fault lines as the rise of far-right and otherwise populist political factions across Europe.     

Additional Resources

The Legal Architecture of Globalization: Money, Debt and Development – Overview

Harvard Law School, Spring 2019
Professor Christine Desan

Course Syllabus [pdf] | Course Materials [page]

Course Description: An integrated political economy now covers much of the globe.  This course focuses on the monetary structure of that phenomenon as a matter created and contested in law.  Trade, extraction, exchange, debt, and economic development – for centuries, all have depended on money as their medium.  By examining the changing legal design of money, we will study globalization as a material, ideological, and distributive event of enormous significance.

Early sovereigns prioritized domestic law, both public and private, in developing the rules that provide the basic matrix for exchange. Those rules created the mediums that carry value – including money, credit, and circulating capital.  Nation-states today still claim sovereignty over those decisions; they are basic to self-determination and economic development.  But the latitude for those decisions had changed.  New monetary and financial relations now bind states, individuals, and other entities together and reconfigure the possibilities for their interaction.

We consider the way that political communities assert sovereignty in money and finance, the challenges that occur as different sovereign projects collide, interact, or compete with one another, and the character of the international orders that have resulted, including those of early Europe, the era of the Gold Standard, the Bretton Woods period, and the contemporary system.  We will focus, in particular, on the advent and development of finance-based money, a form of liquidity based on sovereign debt and expanded by commercial banks and capital markets.  We discuss how that finance-based form defines value, authority, and markets in the modern world, with attention to its influence shaping international law and international financial institutions, its role as the medium for much of modern globalization, and its implications for global and domestic inequality.

Inaugural LPE Project Conference – Call for Papers: “Law and Political Economy: Democracy After Neoliberalism”

The Law and Political Economy Project’s inaugural conference, to be held April 3rd & 4th, 2020 at Yale Law School, will be an opportunity for LPE scholars to come together to identify and develop pressing questions for law and political economy as a movement, and for the current political moment. For more information, go to:

Orian Peer, Nadav

Nadav Orian Peer (profile)

Kreitner, Roy

Roy Kreitner (profile)

Constitutional Law of Money – Materials

Professor Christine Desan (profile)
Harvard Law School – Fall 2017

Course Overview (Description and Syllabus)

I. Governing at the Material Level

Class 1: The Dollar as a Democratic Medium
Readings Notes and Discussion

Class 2: Money: the Basic Design
Readings Notes and Discussion

Class 3: Money: the Modern Design (a very brief introduction)
Readings Notes and Discussion

II. Experiments with Money: Economic Development, Sovereignty, and the Contest over Federalism (1690-1865)

Class 4: Money and Self-Determination — The Colonial  Experience
Readings, Notes and Discussion

Class 5: Money and Nation-building – the Revolution and the Constitution
Readings, Notes and Discussion

Class 6: The New Federalist Approach to Money: Public Debt and National Banking
 Readings, Notes and Discussion

Class 7: Revising Public Obligation: The Contracts Clause and Article I, Sec. 10 
Readings, Notes and Discussion

Class 8: State Development Strategies in an Illiquid World: Banks and Corporations
Readings, Notes and Discussion

Class 9: Federalism Contested: Jackson and the Battle over the Bank(s)
Readings, Notes and Discussion

Class 10: Free Banking: The High Tide of State Power
Readings, Notes and Discussion

III. Configuring Federal Monetary Power (1865-Present)

Class 11: National Banking I: Federal Entry into Retail Banking
Readings, Notes and Discussion

Class 12: National Banking II: Constitutional Claims to Credit Outside the Commercial System
Readings, Notes and Discussion

Class 13: Conceptualizing the Modern Market: Gold, Futures, and Economic Expertise
Readings, Notes and Discussion

Class 14: “Fed-eralizing” the Monetary System
Guest lecturer: Prof. Nadav Orian Peer, Tulane Law School
Readings, Notes and Discussion

Class 15: Liberating the Fed: the Movement towards Discretionary Monetary Policy
 Readings, Notes and Discussion

Class 16: Credit Allocation as a Political Project
Readings, Notes and Discussion

Class 17: Market Funding and Financialization
Readings, Notes and Discussion

Class 18: The Financial Crisis
Readings, Notes and Discussion

Class 19: The Constitutional Charge of Administrative Accountability and Independence: The Fed and Monetary Policy
Readings, Notes and Discussion

IV: Money in Constitutional Dimension: Contemporary Issues

Class 20: The Constitutional Right to Credit? Banking and the Unbanked

Class 21: Finance and Inequality

Class 22: Monetary Reform: Proposals to Restructure Money

Class 23: The Debate over Fiscal Policy: From Austerity to Full Employment Proposals

Class 24: Dreams about Money

Constitutional Law of Money – Overview

Professor Christine Desan (profile)
Harvard Law School – Spring 2019

Syllabus  |  Course Materials (coming soon)

Course Description:
According to one of the framers, the “soul of the Constitution” was the clause allocating authority over money.   Over the following centuries, money has remained at the center of debates over governance, including the division between state and federal sovereigns, American approaches to economic development and social welfare, the scope of judicial review, federal preemption, and the allocation of fundamental decisions about material distribution.  The authority of the Federal Reserve, for example, apparently includes the ability to make monetary policy decisions that move hundreds of billions of dollars.  This 3-credit course picks up an essential line of constitutional debate and determination, including those concerning the national debt, the contracts clause, state police powers, the Legal Tender Cases, the Gold Clause cases, and the role and responsibilities of the Treasury and the Federal Reserve.

The Legal Architecture of Globalization: Money, Debt, and Development – Materials

Harvard Law School, Spring 2019
Professor Christine Desan

Introduction and Overview

Class 01: Money, Debt, and Development: Challenges and Change in a Globalizing World
Reading, Background and Discussion

I. A Baseline: Money and its Design in the Early Western World

Class 02: Course Overview and Introduction to Money as a Legal Institution
Reading, Background and Discussion

Class 03: Commodity Money and Medieval Constitutionalism (the Law on Money Creation and Debasement)
Reading, Background and Discussion

Class 04: Medieval Money, Development, and the Law on Exchange (Usury and Nominalism)
Reading, Background and Discussion

Class 05: Sovereignty and International Law in an Age of Bullion: the Early Modern Settlement
Reading, Background and Discussion

II. The Early Modern Quartet: Modern Money, Public Debt, Securities Markets, and Commercial Banking in the Era of European Expansion

Class 06: The Invention of Modern (Bank-based) Money
Reading, Background and Discussion

Class 07: The New Public Law of Money: Public Debt and the Ascendance of Creditors’ Rights
Reading, Background and Discussion

Class 08: Securities Markets and the Accommodation of International Law: the Rise of Capital Out of the South Sea Debacle
Reading, Background and Discussion

Class 09: The Development of Commercial Banking
Reading, Background and Discussion

Class 10: Time-out – Contemporary Money-Making (a short introduction to the modern Fed, commercial banks, and the way they Interact)
Reading, Background and Discussion

III. The “First Globalization”: the International Gold Standard and its Legacies

Class 11: Modern Markets as a Radical Innovation: Power, Problems, and Commentary
Reading, Background and Discussion

Class 12: The Quartet on the Stage of Empire: Finance in the Ottoman World (i.e., imperialism as a monetary matter)
Reading, Background and Discussion

Class 13: The International Gold Standard & the Geography of Development
Reading, Background and Discussion

Class 14: Sovereign Debt Under the Gold Standard: Practice and Law
Reading, Background and Discussion

Class 15: Austerity under Pressure: the Classic Conflict between Discipline and Domestic Need
Reading, Background and Discussion

Class 16: The Bretton Woods Balance
Reading, Background and Discussion

IV. The “Second Globalization”: The Promise and Dangers of Capital

Class 17: Debating Development and the IMF
Reading, Background and Discussion

Class 18: Monetary Adjustment, the IMF, and Austerity Resurgent: The Challenges of Economic Development 
Reading, Background and Discussion

Class 19: The Two Faces of Debt: Financialization and Conditionality
Reading, Background and Discussion

Class 20: Capital Rules: Capital Mobility as a Governance Issue
[Guest speaker: Professor Rawi Abdelal, Harvard Business School]
Reading, Background and Discussion

Class 21: Instability at the Core: The Financial Crisis of 2008  
Reading, Background and Discussion

Class 22: The “Judicialization” of Sovereign Debt: Bonds, Courts, and Financial Centers as Authors of Law
Reading, Background and Discussion

Class 23: Wealth and Inequality: Debating Distribution in a Financialized World
Reading, Background and Discussion

Christine Desan, Managing Editor

Christine Desan is the Leo Gottlieb Professor of Law at Harvard Law School and the author of Making Money:  Coin, Currency, and the Coming of Capitalism (Oxford University Press, 2014). The book argues that a radical transformation in the way societies produce money ushered in capitalism as a public project.  From creating money as a direct credit (coined or not) that linked the political community to members, sovereigns moved to intermediating the public medium.  They issued it through investors, nascent central bankers, and enshrined the profit motive as the incentive that regulated money’s production.  Those innovations exploded old strictures on money creation and revolutionized attitudes towards self-interest.

Desan’s research more generally explores money as a constitutional (small “c”) project that structures material life and governance. Earlier work focused on the adjudicative power of legislatures and sovereign immunity.  Desan teaches courses on the constitutional law of money, globalization as a monetary phenomenon, and monetary reform.  She is co-founder of Harvard’s Program on the Study of Capitalism, an interdisciplinary project that brings together classes, resources, research funds, and advising on that subject and has taught the Program’s anchoring research seminar, the Workshop on the Political Economy of Modern Capitalism, with Professor Sven Beckert (History, Harvard University) since 2005.  Desan is on the Board of the Institute for Global Law and Policy and is an editor of the journal Eighteenth Century Studies. She has been a fellow at the Radcliffe Institute for Advanced Study and at the Massachusetts Historical Society, and served on her municipality’s committee on campaign reform for ten years.  Recent work includes edited volumes A Cultural History of Money in the Age of Enlightenment (2019), and, with Sven Beckert, American Capitalism:  New Histories (Columbia University Press, 2018).  

Dan Rohde, Assistant Editor

Dan Rohde

Dan Rohde is an S.J.D. Candidate at Harvard Law School, where his research focuses on the legal history of money and capitalism, particularly in the legal history and design of monetary institutions, business firms and employment. His dissertation will look at the legal history of the Bank of Canada, and will explore how its creation was interlaced with the growth of Canadian sovereignty and Canadian  capitalism.

Prior to enrolling at Harvard Law School, Dan practiced in labor and employment law at a leading union-side law firm in Toronto, Ontario, Canada, as well as at a legal clinic that specializes in cases with a systemic impact on those living in poverty throughout Ontario. Originally from Syracuse, NY, he also worked briefly as an elementary school teacher in Brooklyn, NY.

Dan has a B.A. from the New School University, an M.S. in Education from Brooklyn College, and a J.D. from the University of Toronto Faculty of Law.  After law school, he clerked at the Ontario Court of Appeal for Associate Chief Justice Alexandra Hoy, Associate Chief Justice Dennis O’Connor and Justice Eileen Gillese.

Mehrsa Baradaran, Co-Editor

Mehrsa Baradaran is a professor of law at the University of California, Irvine School of Law.  Baradaran writes about banking law, financial inclusion, inequality, and the racial wealth gap. Her scholarship includes the books How the Other Half Banks and The Color of Money: Black Banks and the Racial Wealth Gap, both published by the Harvard University Press. The Color of Money: Black Banks and the Racial Wealth Gap was awarded the Best Book of the Year by the Urban Affairs Association, the PROSE Award Honorable Mention in the Business, Finance & Management category. Baradaran was also selected as a finalist at the 2018 Georgia Author of the Year Awards for the book in the category of history/biography.

Baradaran has also published articles including “Jim Crow Credit” in the Irvine Law Review, “Regulation by Hypothetical” in the Vanderbilt Law Review, “It’s Time for Postal Banking” in the Harvard Law Review Forum, and  “Banking and the Social Contract” in the Notre Dame Law Review.  Baradaran and her books have received significant national and international media coverage and have been featured in the New York Times, the AtlanticSlateAmerican Banker, the Wall Street Journal and Financial Times; on National Public Radio’s “Marketplace,” C-SPAN’s “Washington Journal” and Public Broadcasting Service’s “NewsHour;” and as part of TEDxUGA. She has advised U.S. Senators and Congressmen on policy, testified before the U.S. Congress, and spoken at national and international forums like the U.S. Treasury and the World Bank.

She earned her bachelor’s degree cum laude from Brigham Young University and her law degree cum laude from NYU, where she served as a member of the New York University Law Review.

Roy Kreitner, Co-Editor

Roy Kreitner is a professor at the law faculty of Tel Aviv University. His research focuses on private law theory, jurisprudence and legal history, and the history and theory of money. His scholarship includes Calculating Promises: The Emergence of Modern American Contract Doctrine (Stanford, 2007), and articles such as The Jurisprudence of Global Money (Theoretical Inquiries in Law, 2010); Legal History of Money (Annual Review of Law and Social Science, 2012); Toward a Political Economy of Money (in Research Handbook on Political Economy and Law, Hugo Mattei & John D. Haskell eds., 2015); Voicing the Market (Toronto Law Journal, 2019); and Money Talks: Institutional Investors and Voice in Contract (Theoretical Inquiries in Law, 2019).

Kreitner is currently working on a book manuscript on the history of money in the United States between the Civil War and World War I. The book details the transformation of money from a searing issue of electoral politics in the last third of the 19th century to an expert dominated issue of bank reform by the time of the establishment of the Federal Reserve. It tries to answer the question of how money could go from center-stage and fever pitch to non-partisan technocratic reform within a generation, and to explore the meaning of such a shift not only for money, but for the shape of American capitalism writ large.

Kreitner has been a fellow at the American Council of Learned Societies and at the Radcliffe Institute for Advanced Study, and a visiting professor at Brooklyn Law School, the University of Virginia, and the University of Toronto.

Lev Menand, Co-Editor

Lev Menand is a lecturer in law and academic fellow at Columbia Law School. Lev’s research focuses on banking law and financial regulation, central banking, money and monetary administration, the law of regulated industries, legal theory, and the history of economic thought. During the Obama administration, Lev served as senior advisor to the Deputy Secretary of the Treasury and senior advisor to the Assistant Secretary of the Treasury for Financial Institutions. He has also worked as an economist at the Federal Reserve Bank of New York in both the Bank’s Supervision Group and in its Research and Statistics Group, where he helped to develop econometric models for the Federal Reserve System’s first Comprehensive Capital Assessment and Review. During his time at the New York Fed, Lev was seconded to the Financial Stability Oversight Council, where he helped to prepare the Council’s first financial stability report. Lev has a B.A. from Harvard College and a J.D. from Yale Law School. He clerked for Judge Jed S. Rakoff on the Southern District of New York and Chief Judge Robert A. Katzmann on the U.S. Court of Appeals for the Second Circuit.

Nadav Orian Peer, Co-Editor

Nadav Orian Peer is an associate professor at the University of Colorado Law School. His scholarship and teaching focus on the law of financial institutions, including banking, capital markets, derivatives and community reinvestment.

Orian Peer’s research explores the intense framework of governance and regulation that undergirds the day-to-day functioning of financial markets. The design and operation of this framework has profound implications for the distribution of credit and economic opportunity in society. His recent articles include Negotiating the Lender-of-Last-Resort: The 1913 Fed Act as a Debate Over Credit Distribution (15 NYU Journal of Law & Business, 2019) and Your Grandfather’s Shadow Banking: Clearing and Call Loans in Gilded Age New York, forthcoming in Inside Money: Re-Theorizing Liquidity (Christine Desan ed.). Orian Peer’s current research focuses on policy proposals to increase access to credit for important social goals like fair housing, and climate mitigation efforts.

Before joining Colorado Law, Orian Peer worked as a visiting assistant professor in Tulane Law School, as well as a business economist at the Federal Reserve Bank of Chicago (Financial Markets Group). He completed an S.J.D. at Harvard Law School, where he taught as a Byse Fellow. As a member of the Israel Bar Association, he also practiced commercial litigation, specializing in bankruptcy and secured transactions.





Morgan Ricks, Co-Editor

Morgan Ricks is Professor of Law at Vanderbilt University Law School. He studies financial regulation. From 2009-10, he was a senior policy advisor and financial restructuring expert at the U.S. Treasury Department, where he focused primarily on financial stability initiatives and capital markets policy. Before joining the Treasury Department, he was a risk-arbitrage trader at Citadel Investment Group, a Chicago-based hedge fund. He previously served as a vice president in the investment banking division of Merrill Lynch & Co., where he specialized in strategic and capital-raising transactions for financial services companies. He began his career as a mergers and acquisitions attorney at Wachtell Lipton Rosen & Katz. He is the author of The Money Problem: Rethinking Financial Regulation (U. Chicago Press 2016).


Bryna Godar, Columnist

Bryna Godar is a JD at Harvard Law School (class of 2021). Prior to law school, Bryna worked as a journalist in Wisconsin and Minnesota, including at The Capital Times and The Associated Press. She primarily covered policy and politics at the local, state, and national levels, including national elections, the criminal law system, and government spending decisions.

As a law student, Bryna has focused on economic and social justice. She has worked as a legal intern at the Immigrant Law Center of Minnesota, is involved in the Cyberlaw Clinic at Harvard Law School, and has researched data tracking requirements for police departments. She is also an editor for the Harvard Law Review and a mediator for the Harvard Mediation Program.


Michael Svedman, Columnist

Michael Svedman is a JD at Harvard Law School (class of 2020). He has worked as a legal intern at ArchCity Defenders, a civil rights law firm in St. Louis, MO, and as a summer associate in the corporate department at Cravath, Swaine & Moore in New York, NY. Michael’s research as a law student has focused on matters related to the law of money and finance, and he has written on topics including the Italian mini-BOT proposal and the status of parallel currencies under EU law, the political economy of large passive investment vehicles, and corporate governance reforms aimed at curbing financialization.

Michael is also the executive article editor of the Harvard Law & Policy Review and a managing editor of the Harvard Law School Blockchain and Fintech Initiative’s Ledgers & Law blog.

Susan Smith, Web Developer

Susan Smith - White Mountains, NHSusan Smith is a faculty assistant at Harvard Law School. Before coming to HLS, she was a course manager, project evaluator and mentor for students working through online programming courses at Udacity.

Susan has a B.A. from Framingham State University, and an A.L.M. from the Harvard University Extension School.


[View all Conferences]

We include Calls For Papers (CFPs), conference and meeting announcements, and other relevant events that come across our radar.  Currently, the Archive includes panels, keynotes, and photos of the conference on Money as a Democratic Medium (Harvard Law School, Dec. 14-15, 2018). 

We welcome notices and other relevant content.  They should be sent to Dan Rohde:

MDM 2018: Welcoming Remarks

Podcast: Christine Desan opens the first Money as a Democratic Medium conference.

Christine Desan, Harvard Law School

Recognizing money and credit as public projects exposes issues of democratic purpose and possibility. In a novel focus, this conference makes those issues central.