July 6, 2021

Raul Carrillo, LPE Project & Yale Law School

Since at least the early 1990s, when discussing the administrative, operational, and technical properties of central bank independence (CBI), many economists, including former Federal Reserve Board (Board) Governor and MIT economist Laurence Mayer, have offered a relatively nuanced distinction between different forms of CBI. For instance, Mayer claimed that the Board, per its enabling legislation, enjoys “instrument independence”– it should be able to choose what tools to use to achieve monetary policy goals —but lacks “goal independence,” as Congress should ultimately establish the objectives of monetary policy. As we now consider the appropriate role of central banks in the evolution of digitally native fiat currency and other technologies, popular distinctions like those offered by Gov. Mayer — between applications and objectives, substance and procedure, and method and mission — deserve intense scrutiny. 

Like some others, I think more democratic pressure on the monetary policy goals of the Federal Reserve System (Fed) would be overwhelmingly good. Ultimately, it makes little sense to treat the Fed so differently than other U.S. administrative agencies. However, in the United States, we must also grapple with the more discrete operations of the Fed, in part shielded by the idea of “instrument independence.”  

Fortuitously, many scholars of law and technology are now turning away from an  “instrumentalist approach” — wherein both law and technology are treated simply as means to ends, rather than constitutive of society and political economy. In the context of a CBI discussion, we should follow them and consider how central bank tools — from monetary policy instruments to retail payment instruments — reshape the substantive goals of monetary policy. The design of some of these technologies is derived from the directives of other parts of the Executive Branch. Other developments flow from Fed energy, but extend the Fed’s power beyond its proper ambit. In other words, the Fed lacks instrument independence in many contexts, but when it does gain instrument independence, it often (unaccountably and undemocratically) reaches for goal independence. 

The former dynamic is most explicit when we consider the Fed’s role in economically segregating and subordinating Black, Indigenous, and People of Color, such that the carceral state grew in large part via the criminalization of poverty and informal economies. Noah Zatz’s recent essay at the LPE Blog illustrates how the basic legal concept of “employment” relies on a fissure between proper market-based and other forms of labor. Predictably, the Fed’s monetary policy algorithm for “full employment” excludes domestic, agricultural, carceral, and other labor from primary analysis. This labor is primarily conducted by communities of color.

Crucially, people who are not considered to be proper participants in market-based activity are more likely to be subjected to state surveillance and criminalization.  On the heels of the Civil Rights Movement, Dixiecrats, President Nixon, and Board Chairs Arthur Burns and Paul Volcker all agreed the most effective response to social agitation stemming from unemployment was not jobs, but crime control. Federal and local law enforcement would discipline the restless poor, while tight monetary policy would persist. 

Throughout the 1970s, Coretta Scott King’s Full Employment Action Council fought for a Job Guarantee, while business reactionaries and Fed Governors claimed a rise in Black wages threatened (white) prices. U.S. media linked inflation to Black uprisings and political agitation in the Global South (which the Fed would soon suppress). They read NAIRU (the “non-accelerating inflation rate of unemployment”) into the ensuing Humphrey-Hawkins legislation: while inflation might arise from many sources within an economy, the Fed chooses interest rate management as a tool for suppressing employment and wages of marginalized people, concretely, to ostensibly stabilize prices, abstractly. Unemployed folks are treated as “…pawns to be sacrificed in some economic chess game,” as Scott King famously charged. 

There is certainly no social consensus around the core role of central banks with respect to broader law enforcement. Yet the Fed plays an outsized role in this dimension, at least, demonstrating how the bifurcation between instrument independence and goal dependence breaks down completely.  

Today, the Fed often adopts instruments other Executive Branch agencies press it to adopt. The Fed has necessarily become a large employer of cybersecurity personnel. As Occupy Wall St. activists learned the hard way, the PATRIOT Act provided Reserve Banks with their own actual police officers. Yet long before then, Board “guards” discovered the Watergate burglary. As Conti-Brown, Sarah Bloom Raskin, and others have written, Burns and Nixon had a complex relationship: although the Fed was involved in tracking the serial numbers of Watergate banknotes, it was later accused of stonewalling further legal action on behalf of the President. 

The Fed has not been so kind to marginalized communities and often disciplines them via hand-and-glove relationships with other federal administrative agencies. In 1992, while law enforcement waged war on crime, gangs, and drugs, Congress mandated the filing of Treasury “Suspicious Activity Reports” (SARs) relevant to any possible violation of law or regulation occurring within an account-based financial system. Incentives to over-report are built into the law, shielding financial institutions from liability. 

One might suppose that private financial information would be afforded some protection under the Fourth Amendment’s prohibition against unreasonable searches and seizures by the state. Yet in United States v. Miller (bank accounts) and again in Smith v. Maryland (telephony metadata), the Court decided that government access to third-party business records is not a search for purposes of the Fourth Amendment, as one cannot have a reasonable expectation of privacy in anything shared with another person, even a trusted financial institution. In dissents during this period, Justices Thurgood Marshall and William Douglas warned that faster and better banking would lead to easier law enforcement access to depositor data. Marshall and Douglas could not foresee how much worse the concentration of the credit card industry and mass computerized, pre-emptive, and predictive surveillance would render this predicament. SARs and Cash Transaction Reports (for transactions over $1,000) now travel from depository institutions regulated by the Fed, through “fusion centers” operated by Palantir, not just to the Treasury’s Financial Crimes Enforcement Network (FinCEN), but to all of U.S. law enforcement. It is rarely clear which agencies are storing sensitive data and for how long. SARs rarely lead to investigations of specific criminal activities, but feed the broader mass surveillance machinery. Because many transactions — especially immigrant remittances — are unnecessarily flagged, true money-laundering  is perpetrated by multinational financial institutions, most notoriously HSBC. 

Some analysts argue the Fed is often a principal and not merely an agent in these cases. This claim divorces the Fed’s actions from the pressure of the National Security State (and National Surveillance State) that emanates throughout all levels of government. As Conti-Brown and David Wishnick have acknowledged in a qualified defense of CBI, “the Fed has become an adjunct to the national–security state.” But to the extent the Fed is a principal in these matters, it does not demonstrate the sort of reserved instrument independence suggested by Mayer. 

In an April 2016 memo, soon-to-be President Donald Trump proposed the amendment of Section 326 of the PATRIOT Act to “impound” remittances when senders could not establish lawful presence, as an effort to drive immigrants out of the country. Although he ultimately did not proceed with the plan, banking executives understandably compared Trump’s proposal to conduct that had occurred during the Obama Administration. Neither the Board nor any other U.S. regulator has plenary authority over payment systems. However, the Board (as well as the FDIC and OCC) can regulate certain payment services insofar as they are provided to insured depository institutions. During the Obama Administration, regulators agreed to focus more on reputational risk. In 2011, banking regulators had published a list of categories of “high-risk” merchants, including gun dealers, payday lenders, and firms involved in gambling, cannabis, fireworks, sex work, sexual fetishist communities and socialist bookselling. Critics claim these combined actions pressured financial institutions to terminate relationships with specified businesses (and thus their customers).

The Fed most clearly moves beyond instrument independence and reaches for goal independence at the international level. Here, Conti-Brown and David Zaring argue the Fed is the foremost practitioner of “regulatory diplomacy” in the contemporary administrative state: this entails the power to “disrupt foreign economies, respond to financial contagion that crosses borders, and favor or disfavor allies with extraordinary interventions in the financial systems of other countries.” Indeed, they argue geopolitical interests are manifest in the Fed’s technocratic design. 

In some respects, the National Security State depends on Fed hardware to exist. Following the tragic events of September 11, 2001, financial institutions of all sizes are now deputized and mandated to share consumer information with the federal government to prevent illicit financial flows. United States security demands transcend borders and have generated mimetic efforts in other parts of the world. However, the Fed uniquely exerts broad control over international banking transactions. For instance, U.S. law enforcement authorities issue subpoenas, based on suspicion of involvement in international terrorism, for personal data generated by financial transactions, via the Society for Worldwide Interbank Financial Telecommunication (“SWIFT”), a financial messaging service that facilitates nearly all international money transfers. It can only do so because SWIFT interfaces with Fedwire, which combines with the Clearing House Interbank Payments System (CHIPS) to constitute the primary network for both domestic and foreign large transactions denominated in U.S. dollars. Formally, the Treasury’s Office of Foreign Assets Control, can prohibit transactions involving pass-through systems and banks over which it has jurisdiction. More informally, the US banking regulators (including the Fed) and the DOJ can and do pressure SWIFT, other central banks, correspondent banks, and even specific firms to refuse to do business with certain financial entities. (Some scholars have questioned the constitutionality and general legitimacy of the Fed’s role in “foreign policy”, especially during the Vietnam War). 

As the Fed now explores a more comprehensive transition to “digital fiat currency,” these issues are of dire importance. Some technologists now bill distributed ledger technology and other tools of automation as ways of replacing law with technology. The composite movements of #legaltech, #fintech, #regtech, and #insurtech are raising the stakes of the DFC debate and democratic data governance generally.

Any new “digital dollar” should respect both the privacy and security of its users, especially for the sake of vulnerable communities. Such respect would entail, among other features, offering digital e-cash wallets as a complement to digital deposit bank accounts. While legal firewalls might prevent some level of abuse in an account-based system, technological solutions are also necessary.  If the owner of a public centralized ledger system, (for instance, the Federal Reserve Bank of New York) were able to access digital dollar transaction activity at any given time, the record suggests it would be inappropriately accessed by other governmental entities, including law enforcement.

Within our existing monetary system, the Federal Reserve System does not make any records of where individual Federal Reserve Notes (paper cash instruments) are at any given time; circulation is merely recorded as a single aggregate liability on the Fed’s balance sheet titled ‘Federal Reserve Notes Outstanding.’ There is a small-c conservative case to be made that we should at least preserve the existing balance of security and civil rights interests. Put more simply, we should maintain the ability to make quasi-anonymous, peer-to-peer, permissionless transactions, just as we do in the analog world, as an essential component of our freedoms of speech and assembly, as well as democratic freedoms more broadly. A new public system for payments should proceed from the principle that data that is not harvested in the first place cannot be abused, by law enforcement or anyone else. 

The discourse around digital public money unfortunately rarely speaks to the existing literature concerning the provision of public benefits and its interface with law enforcement. The state that would offer, say, bank accounts for all, is the same state that uses payments data to hound certain subjects in society. Thus, mass and targeted surveillance must be centered within any discussion of a public option for financial services. FDIC surveys consistently note that many “unbanked” households (predominantly households of color) refuse to open bank accounts due to privacy concerns. While providing increased access to digital financial services is vital, a rapid shift to panoptic digitization stands to harm low-income people of color in particular. A true e-cash option, with peer-to-peer, offline transactions, as envisioned in the ABC Act or currently being considered by the Bank of Canada, and recently discussed in Congress, could go a long way in mitigating these concerns. 

There is much work to be done to convince people that some freedoms make us all safer. Yet for many technologists, it is now in everyone’s security interest to “demilitarize the internet” and our broader communications systems. Legal scholars of money, banking, and finance must similarly confront the violence waged in the networks we study. Despite the admirable work of many friends of Just Money, the general public is not aware of the stakes of digital monetary design. I would not go so far as to argue that central bank policy is only democratic if all the conceptual toolkits, legal technologies, software, and hardware are directly selected by legislatures, but the status quo is untenable. For instance, why should the Fed be able to decide the future of financial data governance and privacy for people around the world? As with the monetary system, data governance is a complex field of statecraft: it demands debate and accountability. It does not belong to a single institution of the federal government, much less one that has so clearly collaborated with and oftentimes driven racial subordination and the repression of civil rights.

 

Return to Central Bank Independence roundtable prompt.