July 4, 2022
Lev Menand, Columbia Law School
Central bank independence faces heightened scrutiny today, with scholars and policy experts—including several in this roundtable
—questioning its desirability and legitimacy.
But even its critics tend to take its legality for granted. They presume that legislators might insulate monetary policy decision makers from other government officials without violating a country’s fundamental law.
Twenty years ago, that would surely have been a safe assumption in the United States. Central bank independence was in vogue in American universities and in Washington and attempts to challenge the unusual structure of the U.S. central bank, the Federal Reserve, had been repeatedly
dismissed by courts
. But, following a recent shift in the makeup of the U.S. Supreme Court, and a concerted attack by legal scholars, politicians, and practitioners on the constitutionality of various aspects of the federal administrative state, the legal status of the world’s most important central bank is no longer so clear. Fed officials appear to be in engaged in quintessential “executive” activity—buying and selling financial assets, lending money, clearing payments, regulating financial institutions—and recent doctrine suggests that officials who engage in such activity must be subject to certain minimum levels of presidential control. For example, in 2010, the Court invalidated limits on the ability of the Securities and Exchange Commission to remove members of the Public Accounting Oversight Board
on the grounds that these provisions put too much distance between the Board and the President. In 2020, the Court invalidated restrictions on the President’s power to remove the director of the Consumer Financial Protection Bureau
. In 2021, the Court extended its reasoning to the director of the Federal Housing Finance Administration
a statute authorizing the Secretary of Commerce to appoint Administrative Patent Judges, concluding that they are “principal officers” under the Constitution, appointable only by the President.
The Fed’s power likely outstrips that of these other agencies. Yet, of the Fed’s top nineteen leaders
, the President can remove seven only for cause and the President can neither appoint nor remove the other twelve under any circumstances.
Does this structure pose a separation of powers problem? Can Congress constitutionally locate so much power over the nation’s economy and financial system to officials outside the executive branch?
To shed light on these questions, this post turns to historical practice, early understandings, and antebellum Supreme Court doctrine.
It explains why, up until recently, no mainstream judges or scholars thought that the Fed’s structure posed any constitutional problems: the legislature’s power to insulate monetary policy from executive control was settled in the Early Republic with the President’s role limited ever since. It further demonstrates that invalidating the Fed’s design would not only break with over two centuries of settled constitutional interpretation but would also disrupt some of our most longstanding and important judicial precedents, including the canonical case of McCulloch v. Maryland
I. Independent Monetary Policy at the Founding
For much of American history, presidents had substantially less control over the appointment and removal of officials charged with regulating our country’s money supply than they do today. Indeed, when the constitutionality of insulating monetary policy was actively debated and litigated in the United States—in the First Congress and the decades that followed—the idea was widely considered a quintessential application
of the Constitution’s separation of powers (rather than a potential violation of it). As Alexander Hamilton explained in Federalist 69
on the “Real Character of the Executive,” whereas in Britain the King “can coin money,” in the United States, the President under the new federal Constitution “can prescribe no rules concerning the . . . currency of the nation.” Many policymakers believed that limiting the role of the executive in monetary affairs was crucial to preventing tyranny and abuse.
Hamilton, the country’s first Secretary of the Treasury, championed outsourcing as the best way to expand the money supply. Specifically, in his Report on a National Bank
, Hamilton argued that Congress should establish a special corporate instrumentality to issue paper currency, what today we would call a central bank.
“To attach full confidence to an institution of this nature,” he explained, it is ”an essential ingredient in its structure, that it shall be under a private not a public Direction.” The problem with executive or legislative control, he argued, was that “a feeble or too sanguine administration would really be liable to being too much influenced by public necessity.”
It would indeed be little less than a miracle, should the credit of the Bank be at the disposal of the Government, if in a long series of time, there was not experienced a calamitous abuse of it. . . . [W]hat Government ever uniformly consulted its true interest, in opposition to the temptations of momentary exigencies? What nation was ever blessed with a constant succession of upright and wise Administrators?
Instead of Presidents, investors should be given the keys:
The keen, steady, and, as it were, magnetic sense, of their own interest, as proprietors . . . is the only security, that can always be relied upon, for a careful and prudent administration. It is therefore the only basis on which an enlightened, unqualified and permanent confidence can be expected to be erected and maintained.
Hamilton’s arguments sparked fierce resistance, drawing numerous constitutional objections. As Chief Justice John Marshall later put it
, the Act to Incorporate the Bank of the United States “did not steal upon an unsuspecting legislature, and pass unobserved. Its principle was completely understood, and was opposed with equal zeal and ability. After being resisted . . . with as much persevering talent as any measure has ever experienced . . . it became law.”
II. Independent Monetary Policy in the Early Republic
The Bank’s design was ultimately upheld in two important Supreme Court cases. The first, and best known, was McCulloch v. Maryland
concerned the second Bank of the United States, chartered in 1816 after Congress permitted the first Bank’s charter to expire in 1811. Congress empowered the second Bank
to perform a variety of fiscal functions, including, most importantly, issuing paper notes that the Treasury accepted in payment of taxes. And while Congress authorized the President to appoint and remove five of the Bank’s directors, it delegated the power to appoint and remove the other twenty to private investors. The second Bank was to be independent.
addressed whether, among other things, the government had the power to organize its fiscal affairs in this manner. (No one argued, incidentally, that there was an Appointments Clause problem or that the President ought to be able to remove all of the Bank’s directors.) Although nowhere in the Constitution was Congress expressly empowered to charter a corporation, the Court held
that creating corporate entities to achieve public goals was within the broad powers of the legislature. “A constitution . . . requires that only its great outlines should be marked, its important objects designated, and the minor ingredients which compose those objects, be deduced from the nature of the objects themselves.” Establishing a corporation, or an independent agency, or any other structure, is “never the end for which other powers are exercised, but a means by which other objects are accomplished.” In other words, an independent Bank was kosher.
Modern readers, inexpert in the nature and purpose of government chartered banking, are often confused about whether McCulloch
has any bearing on administrative law or if instead it simply recognizes the power of Congress to offer the power of limited liability to ordinary business enterprises in the way that, for example, the State of Delaware routinely does today. To better appreciate McCulloch
’s meaning, it is worth examining a second decision, Osborn v. Bank of the United States
, in which the Court explicitly revisits McCulloch. In Osborn
, Chief Justice Marshall explained why insulating the Bank from the government was crucial to the Bank’s public mission. According to Marshall, “The [business] operations of the Bank . . . give its value to [its] currency . . .
They enable the Bank to render those services to the nation for which it was created, and are, therefore, of the very essence of its character, as national instruments. . . . [The Bank’s] corporate character is merely an incident, which enables it to transact that business more beneficially.
Were the Bank’s management in government hands, Marshall explains, its notes would be of inferior quality, impairing the government’s fiscal strength. But the Bank’s governance does not make the Bank “private”:
The Bank is not considered as a private corporation, whose principal object is individual trade and individual profit; but as a public corporation, created for public and national purposes. That the mere business of banking is, in its own nature, a private business, and may be carried on by individuals or companies having no political connexion with the government, is admitted; but the Bank is not such an individual or company. It was not created for its own sake, or for private purposes. It has never been supposed that Congress could create such a corporation.
To the Court, the Bank was a legislative instrumentality, subject to private as well as public direction since such hybridity was, in the eyes of the legislature, necessary to carry out its function.
III. Independent Monetary Policy After McCulloch
For generations after McCulloch
, these decisions were seen as having settled the question of monetary outsourcing from a constitutional perspective. Although President Jackson vetoed a bill to re-charter the second Bank of the United States, Congress eventually set up another federal framework for monetary expansion during the Civil War. The new system “split the atom
” of the second Bank by diffusing monetary control across thousands of “national banks.” Each national bank was owned by its own shareholders, and these shareholders, not the President (or anyone in the Treasury Department), were entrusted with selecting national bank officers and directors
, and it was these shareholders who alone could remove them.
Legislators worried that a single National Bank (with branches across the country) would be too powerful: the decisions of its leaders would not be subject to sufficient outside checks. But they did not worry that such a “central bank” would be unconstitutional, or that the new system of multiple banks of issue ran afoul of our fundamental law. After all, Congress had already insulated monetary expansion from executive control twice (in 1791 and again in 1816), and the Supreme Court had upheld the arrangement (in 1819, and again in 1823).
Similarly, in 1913, when Congress established the Federal Reserve System and empowered it to issue “federal reserve notes,” i.e. cash, it also adopted provisions insulating the Fed’s top officials from presidential appointment and removal. There was nothing novel about these provisions at the time. To the contrary, many policymakers saw them, and the authority they did
give to the President, as a radical and dangerous experiment likely to fail.
In 1913, no other country in the world had a monetary authority with so many leaders appointed by its chief executive. In the United Kingdom, for example, private investors appointed all of the directors of the Bank of England; the Crown, the Prime Minister, the Chancellor, and Parliament had no say. As an opponent of delegating the power to expand the money supply to investor-appointed officers and directors explained during legislative debates about the Federal Reserve Act: “I do not believe in the system that provides for the issuing of currency through national banks . . . I would have the Government, and the Government alone [issue currency] . . . but this system . . . has passed the stage of discussion, because the Supreme Court . . . decided that such a system was constitutional in the case of McCulloch against Maryland.” It is hard to see how a Federal Reserve fully in the hands of investor-owned banks
could be constitutional while our current framework of partial presidential involvement is not.
In the coming years, the Supreme Court is likely to face challenges to the Fed’s constitutionality. If it does, it should consider these challenges in their full context. Congress has insulated the process of monetary expansion from executive control since the Founding. And the Supreme Court upheld that arrangement in McCulloch v. Maryland. Although the modern Fed has powers that the second Bank of the United States lacked (such as the express power to regulate state-chartered banks), the reverse is also true. (For example, the second Bank could conduct a general banking business with the public. Imagine a Fed that routinely lent to Apple or Google or members of Congress!)
Scholars and judges should also reexamine the Court’s recent decisions regarding independent agencies in light of the legal history of money and banking. A monolithic approach to the separation of powers—such as that advanced by advocates of unitary executive theory—is at odds with, among other things, the Marshall Court’s jurisprudence. In Osborn, for example, the Court examined why legislators insulated the second Bank of the United States from political control. It concluded that a public bank in private hands was a reasonable way to support a stable dollar. A similar logic might apply to contemporary restrictions on the president’s power to appoint or remove government officials at many federal agencies (including qualification requirements and multi-layered agencies). These limits are often imposed to enhance government accountability (not detract from it). To the extent that they promote expertise and competence, facilitate oversight by the legislature, and prevent patronage and corruption, it would be a blow to effective government for the Court to strike them down. And it would add insult to injury for the Court to do so in the name of a formalistic interpretation of the Constitution that runs contrary to the Constitution’s own logic and the logic underpinning some of our most highly regarded precedents.
 “Central bank independence” generally refers to the insulation of officials charged with managing the size of the money supply from other government officials, including executive and legislative leaders and judges. This piece focuses on the Fed’s independence from the executive as it is that independence that poses the most pressing legal questions. BACK TO POST
 The President can appoint and remove for cause members of the Fed’s Board of Governors (who serve staggered 14-year terms) and can neither appoint nor remove the Presidents of the Fed’s twelve Reserve Banks (who are appointed by twelve separate nine-member boards, with six members of each board appointed by investor-owned banks and three members appointed by the Fed’s Board of Governors). Importantly, the Board of Governors can remove at will the twelve Reserve Bank Presidents. 12 U.S.C. § 248(f). BACK TO POST
 On June 7, 2022, a special purpose depository institution in Wyoming brought suit against two Fed entities arguing, among other things, that the President must be permitted to appoint all of the Fed’s final decision makers BACK TO POST
 It draws at various points on Lev Menand, “The Logic and Limits of the Federal Reserve Act,” 40 YALE J. ON REG. (forthcoming). BACK TO POST
 As late as the 1970s, money and banking were seen as the special province of the legislature. House Concurrent Resolution 133, 89 Stat. 1194 (Mar. 24, 1975) (“Whereas article I, section 8, of the Constitution provides that congress shall have the money power . . . Whereas Congress established the Federal Reserve Board as its agent, and delegated to its agent the day-to-day responsibility for managing the money supply . . . “). BACK TO POST
 At the time, these instrumentalities were generally known as “public banks.” BACK TO POST
 I explore the implications of these decisions for our understanding of Congress’s power under the necessary and proper clause to structure the government in ways that limit the president’s appointment and removal authority in other forthcoming work. I also tackle some of the implications for business law, including, proposals to offer general federal incorporation. BACK TO POST
 In 1933, Congress granted public officials a broad for cause removal power. BACK TO POST
 Indeed, this was one of the main grounds for opposition to the Act. BACK TO POST
Return to Central Bank Independence roundtable prompt.