Governing Money Democratically: Rechartering the Federal Reserve

LEAH DOWNEY

Money connects all members of a polity.¹ It is central to the project of collec­tive life; we all use it, desire it, and rely on it. Money is the instantiation of our social and economic interdependence.

Delegation has been part of democratic governance for centuries. Life in the modern world is a series of delegations: we delegate our political power to elected representatives, we delegate our parental duties to teachers and nannies, we delegate the responsibility for our health to medical profession­als, we delegate the task of fixing our pipes to plumbers, and the list goes on. Unsurprisingly, then, much of democratic political theory in the modern period has been focused on the relationship between the people and their delegates, most especially, their elected representatives. Democracy itself, conceived of as rule by the people, depends on the nature and strength of this relationship. If the strength of this relationship should wither away, the health and sustainability of the democracy would be in danger.

The basic democratic commitment is that citizens should make self­constituting choices themselves or should elect people to make those choices on their behalf.³ The ossification of the administrative state is a threat to this promise. In this chapter, I focus on the form that threat takes vis-a-vis monetary policy, defending the claim that democratic power over the mac­roeconomy has atrophied and suggesting a remedy.

The chapter proceeds in four parts. First, I outline the political environ­ment at the founding of the Federal Reserve (the Fed). The Fed's design is the result of political compromises made in 1913 that are no longer salient to the democratic governance of the money supply of 2020. The second part goes on to ask, if that is true, why has so little changed? I explore both the gen­eral benefits of temporary legislation as well as the specific use of temporary charters to establish central banks in US history. Third, I employ the work of Jean-Jacques Rousseau to argue that there are fundamental, democratic reasons for regular rechartering. The final section offers a provocative sug­gestion for restructuring one aspect of the Fed to illustrate the wide range of possibilities for that process. The conclusion considers how the threat of climate change, and current central bank responses to it, intersect with my argument.

It's Not 1913 Anymore

The Federal Reserve Act of 1913 established the Federal Reserve System (the Fed). The culmination of a long and messy political battle, the Federal Reserve was a compromise constructed along two primary axes: How centralized or decentralized should the central bank be? Should it be public or private?

Commercial bankers were the most prominent advocates of establishing a central bank at the time. The Panic of 1907 lingered in the air. The crisis had been quelled largely by J. P. Morgan wielding his personal and political prow­ess to coordinate a private bank bailout. Going forward, however, bankers did not want to rely on such informal means for securing the financial system. Instead, they preferred the idea of establishing a central bank, a formal insti­tution that could act as a lender of last resort—a backstop against bank runs.⁴

Beyond concerns of financial security, American bankers felt they were falling behind their European counterparts.

Bankers wanted the new bank to be privately controlled. In their view, the country's political class simply did not have the proper training to responsi­bly govern centralized reserves efficiently. This view continues to motivate support for the independence of the modern Federal Reserve.⁶ Senator Rob­ert Owen, one of the founding fathers of the Federal Reserve System, wrote: In developing the Federal Reserve bill there was a fierce controversy as to whether bankers or private individuals should govern the credit system or whether the United States should do so through a Board of Governors who should take an oath of office of loyalty to the public and become officially responsible to the public under their oath of office. The big bankers and certain representatives demanded bank control.⁷

Bankers preferred a central bank that was both centralized and private. Achieving this aim proved politically impossible.

A second group had different ambitions for the Fed. As well as striking fear into the heart of bankers, the Panic of 1907 ignited a surge of popular distaste for concentrated private interests. The public was not pleased with the economic wrath of the Panic of 1907, nor with what they took it to reveal: that a very small group of men more or less ran the entire financial system. This group came to be known as the “Money Trust.”

A congressional subcommittee, led by Arsene Pujo of Louisiana, was es­tablished to investigate the Money Trust.” The Pujo hearings were well pub­licized and highly influential, taking place at the very same moment the Federal Reserve Act was being debated.

The agricultural community had yet another set of plans for a central bank. Their primary concern was credit allocation. Farmers tethered to the cycle of the harvest found it very difficult to get credit when they needed it.⁹ Agricultural advocates in the discussions surrounding the founding of the Fed proposed a central bank that could directly allocate credit to certain sectors.¹⁰ They were worried the central bank would be used exclusively to bail out bankers, leaving farmers high and dry. The agricultural community, like the antitrust Democrats, favored a centralized, public Federal Reserve System.¹¹

Many rejected the project of centralizing power over the money supply wholesale. General aversion to the idea of a central bank was known as “the ghost of Andrew Jackson.” This opposition, spanning the political spectrum, has been largely attributed to a commitment to federalism, a sort of Ameri­can allergy to centralized power. Warburg expressed it well:

It was generally held that the centralization of banking would inevitably re­sult in one of two alternatives: either complete government control, which meant politics in banking or control by “Wall Street”, which meant banking in politics. Abhorrence of both extremes had led to an almost fanatic con­viction that the only hope of keeping the country's credit system indepen­dent was to be sought in complete decentralization of banking.¹²

Some were not entirely opposed to establishing a central bank but rejected the centralization of power.

To achieve his desired aim, establishing a central bank, President Wood­row Wilson had to navigate the political morass between those who wanted a centralized private bank, those who wanted a centralized public bank, and those who could not countenance a centralized bank at all. He compromised on all fronts. Ultimately, he attempted to establish a form of financial fed­eralism to mirror the nation's political federalism.¹³ The result was a Federal Reserve System made up of 12 regional reserve banks, decentralized and pri­vately owned, and one public capstone body located in Washington, DC.

Today's Federal Reserve System is a legislative Frankenstein: the jerry- rigged structure of private, public, centralized, and decentralized elements cobbled together over a century ago largely remains.¹⁴ Twelve regional Fed­eral Reserve Banks (FRBs) make up a decentralized web of private corpora­tions located today exactly where they were placed just after the founding of the Federal Reserve. The reserve banks were largely placed where the com­mercial banks wanted them to go—including cities that today seem faintly absurd. Why do we need an FRB in both Kansas City and St. Louis?¹⁵

As a private corporation, each reserve bank has a president and CEO as well as a board of directors. Each board has nine people, split into three cat­egories: Class A, B, and C. Class A are bankers appointed by the stockholder banks, Class B are nonbankers appointed by the stockholder banks, and Class C are nonbankers appointed by the Federal Reserve Board of Gover­nors.¹⁶ In short, the board of each reserve bank is two-thirds stockholding bankers or stockholding banker appointees.

While the regional banks are private and decentralized and the monetary policymaking authority (the FOMC) is a centralized blend of private and pub­lic powers, the execution of monetary policy is centralized and private. Any­time the Federal Reserve System directly engages with the market, with the exception of crisis facilities, it does so through “primary dealers.”¹⁹ Primary dealers are securities brokers that trade directly with the Fed. They are re­quired to bid when the Fed conducts open market operations and to provide information to the Fed's open market trading desk. These 20 or so financial institutions buy Treasury bills sold at action and resell them to other major financial institutions, including large commercial banks.²⁰ As Senator Royal Copeland once put it, “When it became necessary to create a Federal Reserve system of banking, it was recognized that such a system could best be put into effect through the banking industry.”²¹

In sum, the Fed's original design was the product of a compromise be­tween those who wanted a centralized central bank and those who did not, those who advocated for private control and those who wanted public con­trol. The Fed still has many of the characteristics driven by this, now ob­solete, compromise. In today's economic and political context, what is the point of having privately owned reserve banks? What is the justification for having the CEOs of those banks create national monetary policy? Why pay dividends to member banks? Why aren't all banks, and bank-like entities, member banks? Why conduct monetary policy exclusively through primary dealers and member banks? Answers to these questions can be traced back to historical and political contingencies, but can any of them be traced to con­temporary democratic commitments, or described as the outcome of con­temporary democratic debate?

Then again, all institutions are a product of history. To point out this sim­ple fact in the case of the Fed might be of academic interest, but should it change anything about how we govern monetary policymaking? Every gen­eration inherits its institutions from the generations previous. I have out­lined the political roots of the Fed's contemporary institutional structure not merely to show the contours of the compromise that birthed it, but to dem­onstrate how remote that compromise is, both temporally and politically.

Jeremy Bentham derided the rule of the dead over the living.²² His warn­ing was not a call to burn down all existing institutions at the start of ev­ery generation. Instead, he wanted each generation to see itself as a source of democratic power, as possessing the capacity to rule its collective life together. Exhibiting such power does not require each generation to create new institutions from scratch. It does mean, however, that when existing institutions become mere relics of history rather than historical institutions that continue to serve the contemporary democratic will, the living must be willing and able to change them.²³ In 1927, a few senators extended the Fed's charter in perpetuity, making future alternations to the institution much more difficult to achieve. This is the decision we need to revisit.

Why Recharter? The Historical Case

Rechartering is one form of temporary legislation. Legislation designed to have a limited duration has been used for generations for two primary pur­poses. First, it can garner more political support than permanent legislation. When a bill is temporary, legislators are more likely to see it as a democratic experiment, one that will necessarily be reassessed, and could be reversed in the future. Second, temporary legislation has been used to allow democratic legislatures to maintain power over the administrative state. Temporary leg­islation establishes regularly occurring moments for the exertion of demo­cratic power, for the exercise of the legislatures' democratic muscle. Impor­tantly, rechartering provides a valuable form of legislative iteration. In this book, Dani Rodrik and Charles Sabel outline “an iterative model of strategic collaboration between private actors and the state” to develop “good jobs” in the context of pervasive uncertainty. The pervasive uncertainty they iden­tify in the labor market derivative of “differentiated local conditions, and the evolving nature of the goals” can also be found in monetary policy. Rechar­tering is an iterative approach to delegation that injects democratic flexibil­ity into monetary policymaking.

Perhaps the most well-known form of temporary legislation is the sunset clause. A recent example from American history is the Patriot Act. The Bush administration passed the law in the wake of the September 11, 2001, terrorist attacks, temporarily expanding criminal and intelligence search and surveil­lance authority. Some of these expansions were set to expire a few years after the bill passed. The moment of potential sunset, December 2005, sparked sig­nificant congressional and public debate about the programs set to expire.²⁴

In eighteenth-century England, “the use of sunset clauses was associated with Parliament's effort to control the growth of the administration.”²⁵ As Parliament sought to govern an increasingly complex society and economy, sunset clauses recognized the need for expertise and for democratic control of that expertise. Delegation might be inevitable, but it would also be tempo­rary.²⁶ Sunset clauses continued to play an important role well into the twen­tieth century.²⁷ The idea was that Parliament should have a “role in monitor­ing, scrutinizing, and affirming the continued effectiveness of legislation.”²⁸ Parliament iteratively monitored “the subordinated bodies and reaffirm[ed] their actions” to ensure debate about their powers and purposes was kept firmly within the sphere of democratic politics.²⁹ Sunset clauses also became popular in the US in the 1970s, “depicted as a cure-all to the ills of inefficient government.”³⁰

Rechartering forces elected representatives to confront the politics of an agency's decision-making publicly and to either endorse the approach ac­tively and publicly or to reject it, also actively and publicly. There have been three central banks in US history. All three were originally established with temporary charters. The first two were not rechartered. In 1811, Congress voted not to renew the charter of the First Bank of the United States by only one vote. In 1832, Congress voted to recharter the Second Bank of the United States only to have the bill vetoed by President Jackson.

The Federal Reserve Act of 1913 chartered the central bank for 20 years. The temporary charter aided the passage of the legislation by presenting the central bank as an experiment, one that would inevitably be reassessed and reevaluated and would not be allowed to continue on the basis of inertia or private interest alone. Legislators at the time came to the collective conclu­sion that the matter was too important, too contentious, and too uncertain to warrant indefinite support.

And yet, in 1927 Congress made the Federal Reserve's charter permanent. Between the founding of the Fed in 1913 and 1927, the US economy experi­enced rapid growth, stable interest rates, few crises, rising gold reserves, and increased international economic prominence.³¹ As H. H. Preston wrote in June 1927 in The American Economic Review, the Federal Reserve System “was held to have abundantly justified its continuance by its successful support of the American financial situation during the war and in the post-war period of economic readjustment.”³² Advocates in the Senate took advantage of the favorable economic and political conditions to add an amendment extend­ing the Federal Reserve System's charter in perpetuity to a bill that had al­ready passed the House, the McFadden Act.

The explicit aim of the amendment's advocates—led by Carter Glass— was to solidify the Federal Reserve's place in the administrative state in its current form.³³ While the banking and business communities supported the extension of the Fed's charter, Representative Louis Thomas McFadden was not pleased with the amendment. He did not oppose the Federal Reserve, nor an extension of its charter, but he was worried that adding what he took to be a highly consequential amendment to his bill might endanger its chances of passing.

There were others who objected to Glass's last-minute addition. Senator Burton Wheeler from Montana filibustered the bill unsuccessfully. Wheeler took issue with Glass's opportunism. He questioned the ad hoc nature of the amendment, arguing that an extension of the Fed's charter deserved more attention from both congressional chambers.³⁴ Furthermore, in concert with many others, he challenged the need to recharter the Fed years before its charter expired.³⁵ He suggested that “the reason that the life of the Federal Reserve Board is being continued here now in this fashion is so that it won't be discussed on the floor of the next session of Congress.”³⁶ Contemporary media came to the same conclusion:

The conservative element intends, therefore, to write the charter of the Fed­eral Reserve board into the law of the land where it will take an affirmative act of repeal to remove it, confident that it will take a much longer time to bring about such a step than a substitution of one economic theory for an­other, if the Federal Reserve charter should be allowed to lapse or approach an end.³⁷

Those in opposition to the amendment were fighting for flexibility; “the tie that binds all of these various elements in opposition to the Federal reserve system is the thought that by preventing long life for the existing scheme of things greater opportunity will exist for the substitution of some other plan when the sentiment can be crystallized in favor of it.”³⁸ Glass and his support­ers took advantage of the moment to cement their preferred version of the Fed in permanent legislation. “None of those who believed in the soundness of the present system of monetary control was willing to gamble that future Congresses—not even the Seventieth—would grant the authority now con­templated.”³⁹ Glass was successful.⁴⁰ The amended bill passed in the Senate with less controversy than expected.⁴¹

Notably, the McFadden Act did not merely extend the Fed's charter for another 10 or 20 years in light of what some saw at the time as the Fed's track record of success. It extended the Fed's charter in perpetuity. The democratic experiment, as such, was over. The implication was that advocates believed any future changes to the Fed need only be marginal. They had locked the Fed out of reach of conventional democratic opposition. Just a few months after the bill was passed, H. H. Preston again wrote, “If re-charter had been too long delayed, the question might have become a partisan issue. While the strength of the opposition does not now [June 1927] appear to likely have developed to a point where re-charter would have been defeated, it could have become a very disturbing influence.”⁴² The McFadden Act should not be seen as evidence of a deep and lasting social consensus behind the structure and aims of the Federal Reserve System. The charter was a late addition to an existing bill and received little attention or debate. If Congress had waited for the rechartering deadline in 1934, the debate would have taken place in the midst of the Great Depression, and one can only suppose that the debate, if not the decision, would have looked very different in that context.⁴³

Amendments to the Federal Reserve Act have passed since the charter was extended. None, however, have led to wholesale debate about the aims, tools, and failures of the Federal Reserve System, let alone wholesale change.⁴⁴ In contrast, monetary policy itself has changed dramatically since 1927: com­pare the activist policies of the postwar period, the anti-inflation battles of the 1970s and 1980s, and the “unconventional” monetary policies invoked in the wake of the Global Financial Crisis of 2007/2008. Central bankers them­selves recognize the dynamic character of monetary policy and the need for regular reassessments. Every five years the Canadian central bank takes a good look at itself, reassesses its performance, and discusses possible re­forms with the Canadian parliament.⁴⁵ The Norwegian central bank conducts regular reviews in which it engages external auditors to make an unbiased assessment.⁴⁶ In the summer of 2019, the Fed conducted an examination of its approach to monetary policymaking, and Chair Jerome Powell suggested that this will likely become a regular occurrence.⁴⁷

Internal reassessments are reasonable by all accounts. Central bankers have a hard job, and they have to conduct it in a changing world. Internal reassessments, however, are by no means comprehensive and they are hardly democratic. They take place within the confines of the central bank's con­gressional mandate and the existing institutional structures. The same is true of the Fed Chair's regular reports to Congress. Since 1978, the Fed Chair has delivered a semiannual report to Congress on the state of the economy and the progress of monetary policy. These reports should be seen for what they are, however: largely pro forma events. The Fed Chair comes to Congress to deliver a highly stylized report and take questions. In the question portion of the testimony, members of Congress are permitted to challenge the Fed Chair. But it is just that: Congress members challenging the Fed Chair, mak­ing their case for change or asking for clarification. The Fed Chair controls the room, explaining to Congress how the central bank seeks to maintain price stability and full employment.⁴⁸ In other words, the semiannual tes­timony of the Fed Chair is more of an expression of the Fed's power over monetary policy than it is an expression of congressional power over the Fed.

Contrast this with what history's most powerful theorists of democracy have considered necessary for a successful democratic society. Jean-Jacques Rousseau wrote, “The depositories of the executive power [the government] are not the masters of the people, but its officers; that the people can appoint them and dismiss them at pleasure; that for them it is not a question of con­tracting, but of obeying.”⁴⁹ Democracy is, at its very root, about empowering the people.⁵⁰ In a democracy, then, the people should hold ultimate decision­making power and experts should act as stewards or advisers. In Plato's Pro­tagoras (319c), Socrates explains that in technical subjects such as shipbuild­ing, the Athenians would call on those with expert knowledge:

If anyone else tries to give advice whom they do not consider an expert, however handsome or wealthy or nobly born he may be, it makes no differ­ence. The members reject him nosily and with contempt, until either he is shouted down or desists, or else he is dragged off or ejected by the police at the orders of the presiding magistrate. (Protagoras 319c).

The Athenians needed technical experts and scientific reasoning to identify points of choice and stakes in policymaking and yet insisted that control over these choices remained with the people. The role of technical experts in classical democracy was consultative, not determinative.⁵¹

The opposite seems to have developed in the case of contemporary cen­tral bank review processes. The Bank of Canada sets the questions, does the research, and then makes suggestions to the Canadian parliament. The Ca­nadian central bank has never proposed major changes.⁵² Even more insular, the Fed's recent review was conducted by the Fed for the Fed. The agenda was set by the Fed and the research was conducted and presented by academics at the invitation of the Fed.⁵³ Furthermore, any changes to future monetary policymaking processes will take place only if the Fed adopts them unilater­ally. In other words, even when it comes to the review process, ultimate, ef­fective decision-making power over monetary policy rests with central bank­ers rather than the democratic legislature.

All three American central banks were originally given temporary char­ters. This allowed advocates to fashion a broad coalition for what was, at base, a democratic experiment. In 1927, with the McFadden Act, Carter Glass and his supporters extended the Federal Reserve's charter in perpetuity. In so doing, they achieved their explicit aim in making it more difficult for demo­cratic politicians, for future Congresses, to make changes to US monetary policy.⁵⁴ The next section goes beyond the substantive reasons for reassess­ing the structure of the Federal Reserve System here and now, over a century after it was founded, to argue that regularly rechartering the Fed is itself a matter of democratic sustainability.

Why Recharter? Democratic Sustainability

To see the importance of rechartering the Fed, we have to take a deep dive into democratic theory. Jean-Jacques Rousseau distinguished between gov­ernment and sovereign. The democratic sovereign—the true possessor of political power—is the citizenry. The government is not “the masters” of the people but its “officers,” the set of officials who conduct society's day-to-day business within the remit set for them by the sovereign. Making this distinc­tion is what enabled Rousseau to uphold “democratic sovereignty” while op­posing “democratic government.”⁵⁵

Rousseau envisioned a polity in which the democratic sovereign delegated political power to the government.⁵⁶ Subsequently, the government would be provisionally empowered to make political decisions, exercise political judg­ment, and adjudicate political trade-offs. The sovereign's delegation of poli­cymaking power to the government was democratically legitimate, in Rous­seau's view, because the sovereign retained ultimate power, able to change or overrule the government at any time. Rousseau's theory can also be extended to a second moment of delegation: first, the democratic sovereign delegates power to a government, and then that government (specifically the legis­lature) delegates policymaking power to the administrative state, including the central bank. On Rousseau's theory of democratic legitimacy, the central bank, too, should be an officer of the democratic sovereign, not its master.

The democratic legitimacy of the sovereign's delegation is not related to how the sovereign delegated power, nor to whom it is delegated, nor to the nature of the delegated decisions. According to Rousseau, the democratic sovereign could legitimately delegate power to a single dictator-oracle—for instance, someone who makes all policy by appeal to their mystical whims. This would be democratically legitimate by virtue of the fact that the sover­eign could choose to revoke the delegated powers at any time.

Applying the same logic to the second moment of delegation, we can ar­gue that the legislature can legitimately delegate policymaking power to the central bank on any terms, provided the legislature maintains the power to revoke or change the terms of delegation at any time. In other words, it does not matter if the central bankers are experts or if their work is merely tech­nical. All that is required to maintain the continued democratic power of the legislature over the central bank is regular legislative engagement in the matter. We might ask, then, can the legislature maintain its power if it has delegated the responsibility for monetary policymaking to the central bank in perpetuity?

Rousseau worried about the government usurping the sovereign's politi­cal power.⁵⁷ He suggested a way to ward off usurpation: frequent citizen as­semblies in which the citizens, as sovereign, ask and answer two questions:

• Whether it pleases the sovereign to maintain the present form of government?

• Whether it pleases the people to leave its administration to those at pres­ent entrusted with it?⁵⁸

Regular democratic engagement in the policymaking process was required, according to Rousseau, to reassert the political power of the sovereign over the government, thereby preserving the democratic character of the state.⁵⁹

Rechartering the Fed would make institutional change more regular and more democratic. Rousseau recognized the democratic benefits of regularity in reassessments. He worried that the government would actively prevent the sovereign from assembling periodically to reassert its fundamental polit­ical power. For this reason, he thought that citizen assemblies would be more successful in warding off governmental usurpation of political power if they did not have to be formally convened because then the government “cannot interfere with them, without openly proclaiming [itself] a violator of the laws and an enemy of the state.”⁶⁰ In other words, regularity in democratic inter­ventions makes them more likely to occur and thus supports democratic ca­pacity by fighting atrophy. Regular exercise of the democratic muscle makes it stronger. Similarly, I suggest, regularity in rechartering would strengthen democratic power of the legislature over the Fed.⁶¹

Rousseau was not the only theorist or observer of democracy to think that exercising democratic power through regular reassessment mattered. This was a familiar idea in ancient democracies. An individual to whom power had been delegated would return to the assembly to be judged by the citi- zenry.⁶² This backward-looking assessment of delegated power necessitated a certain kind of risk, for there were no specified criteria against which to judge the success of the delegation. This allowed the delegate to adopt a cer­tain level of creativity, flexibility, and discretion. Modern forms of delegation are almost always forward-looking, resting on statutes or mandates defined by Congress. The Federal Reserve System is no different, mandated to pro­mote price stability and maximum sustainable employment. Within these guardrails, decision-making is left to the discretion of agencies.⁶³ There is no moment in which Congress is forced to look back and ask whether the delegation is serving the public good. Rechartering would reinstate a form of intentional, backward-looking assessment.

Economists today vehemently defend the delegation of monetary poli­cymaking power to independent central banks and argue that political in­volvement in monetary policymaking is inevitably detrimental. Setting aside the merits of their arguments, I simply observe that delegating monetary policy does not require doing so on one set of terms in perpetuity.⁶⁴ Politi­cal involvement in regularly rechartering the Fed is not the same as political involvement in making monetary policy.

Advocates of central bank independence like to invoke Ulysses tying him­self to the mast to motivate the claim that Congress might have good rea­son to restrict its own power over monetary policy through delegation to an independent central bank. Recalling Rousseau, however, if Congress does not revisit the conditions of delegation by untying itself from the mast on occasion to exercise its democratic muscles, then they will atrophy. As atro­phy sets in, untying oneself becomes increasingly difficult. In other words, delegating monetary policy may not in and of itself constitute a democratic ill; however, failing to regularly revisit the matter democratically does.

What Could Rechartering Bring?

So what could rechartering bring? First, it would create an opportunity to change those aspects of the Federal Reserve System that the Fed cannot change on its own, even if it wanted to: the structure of the regional reserve banks, the 6 percent dividend, the makeup of the boards, and so on. The only body who can make these changes is Congress. It would similarly create the opportunity to change those aspects of the Federal Reserve System that it would be ludicrous for the Fed to be responsible for addressing: How does the Fed, as it currently operates, meet the democratic needs, desires, and funda­mental values of the nation? Again, the only body that should address this is Congress.

It is, of course, possible that regularly rechartering the Fed could become a procedural rubber stamp. If the Fed's history and the “Audit the Fed” move­ment are anything to go by, however, that seems unlikely. Regularly rechar­tering the Fed could lead to major changes. It could help reinforce democracy by creating an institution through which “the people engage in collective action to govern ourselves and our larger political economy.”⁶⁵ In other words, it could become a tool for the construction of structural justice, as outlined by Sabeel Rahman in another chapter this book. In the remainder of this sec­tion I sketch one proposal for restructuring part of the Fed pursuant to these aims. This sketch is a provocation intended to push readers to consider the truly wide range of alternatives that might be considered in the course of regular rechartering.

Why not have Congress recharter the Federal Reserve System in such a way as to affect a transition of the privately held regional Federal Reserve Banks into regional state investment banks? These investment banks could be capi­talized using the same funds that the commercial member banks currently put into buying the stock of the regional banks. State investment banks are not a new idea.⁶⁶ They were particularly popular in the postwar era and some continue to flourish today.⁶⁷ Converting regional Federal Reserve Banks into state investment banks is a proposal worth considering for two reasons: first, because of the documented success of state investment banks and the op­portunities they offer for promoting wide-reaching economic health in so­ciety, and second, because of an amenable shift in monetary policymaking implemented in the wake of the Great Financial Crisis. I will consider these two reasons in reverse order.

Before 2008, monetary policy was largely executed through open market operations (OMOs): the FOMC would decide on a target for the federal funds rate—the interest rate at which banks lend to one another overnight, usually to meet reserve requirements. That rate was communicated in a directive to the Federal Reserve Bank of New York, which bought and sold Treasur­ies to and from primary dealers in order to hit the target rate. Things have changed.⁶⁸ Since 2008, the Fed has paid banks interest on the reserves they keep at the Fed. Monetary policy is now largely executed by the FOMC chang­ing the interest on excess reserves (IOER). In altering IOER, the Fed is able to (dis)incentivize private money creation, thereby influencing the price of credit on the market and, as such, inflation. In short, with the introduction of an IOER regime, the Fed is able to pursue its price stability aim without having to conduct any OMOs.⁶⁹

This has changed the landscape of monetary policy. As former hedge fund manager Angel Ubide writes, “With these changes, central banks sev­ered the link between monetary policy and inflation. Inflation is no longer a monetary phenomenon in the strict sense—different levels of money growth can deliver the same level of inflation.”⁷⁰ As a consequence, monetary poli­cymakers can hit their inflation target independent of the size of the bal­ance sheet. The supposition in conventional monetary policy circles is that this frees up balance sheet operations for addressing liquidity shortages. But note that, by this same sentiment, the IOER regime also frees up balance sheet operations for funding other projects, like a collection of regional state investment banks.

Now let us turn to how a network of state investment banks could cre­ate opportunities for promoting wide-reaching economic health in society. Credit provision in the United States today is biased. The poor, racial mi­norities, and women are all less likely to have access to good credit.⁷¹ Cred­itworthiness is a slippery concept, and its amorphous nature sustains this bias. Currently the Federal Reserve's approach to governing the money sup­ply depends on how commercial banks define creditworthiness.⁷² The Fed in­centivizes banks to lend, and banks lend on the basis of their own creditwor­thiness assessments. If state investment banks were free to allocate credit to individuals, businesses, or projects directly, this would change.⁷³ State in­vestment banks could define creditworthiness on their own terms, a chance for democratic engagement in the monetary policymaking process. As Julie Rose suggests in a chapter in this book, the collective aims for macroeco­nomic policies, including credit policies such as these, may be much broader than promoting aggregate economic growth. Congress could establish trans­parent, democratically specified standards for credit aimed, for example, at avoiding social, political, and economic domination.⁷⁴ Or regional invest­ment banks might focus their investments on tranches of assets that appeal to a wide variety state interests, perhaps related to a concept of flourishing, as outlined in another chapter in this book by Deva Woodly.

A web of regional state investment banks could also fight local disloca­tions resulting from federal policies. Recent research has reinvigorated the worry that globalization has led to local dislocations in the labor market. People are unemployed and unless they can easily retrain or are willing to move great distances they suffer. In view of this issue, politicians and econo­mists alike have advocated revisiting the idea of regional investment.⁷⁵ Re­gional state investment banks would be an ideal way to deliver the capital necessary for regional investment. They would be local entities with local knowledge and an expertise in assessing creditworthiness.⁷⁶ Finally, regional state investment banks would also provide an easy alternative mechanism for the FOMC to increase aggregate demand when necessary. Instead of con­ducting open market operations only through a narrow and concentrated set of primary dealers, the FOMC could use the regional investment banks, scattered across the country, as decentralized, public conduits for demand management.

This is just one suggestion. My aim here is not to offer a comprehensive defense of this alternative to the status quo. Rather, my goal is to demon­strate that the Federal Reserve, as currently constituted, is out of date. It was the result of a contingent political compromise in 1913. Over 100 years later, and many economies since, we still have yet to reevaluate our approach to governing the money supply comprehensively. This is inexcusable. Money is the stuff of our collective life. If democracy entails citizens collectively gov­erning their collective lives, then surely it requires democratic governance of the money supply. As I have argued here, by regularly rechartering the Fed, we can both move beyond the obsolete institution we currently use to govern our money supply and prevent democratic atrophy by exercising the demo­cratic power of the legislature over the central bank.

Climate Conclusion

Jens van 't Klooster wrote recently, “The question of how to design a central bank and its mandate cannot be decided in isolation from the broader eco­nomic policy goals of a government.”⁷⁷ He continued, “Even if the monetary policy goals agreed before the crisis were relatively uncontroversial then, this is no longer the case now.”⁷⁸ In other words, the aims, effects, context, and tools of monetary policy change over time. It seems ludicrous to suppose that despite these dynamics, the political stance on governing and conducting monetary policy should remain unchanged. Climate change is case in point.

To conclude the chapter, I would like to draw attention to the recent ef­forts central banks around the world have made to address the threats of climate change. There is now an organization called the Network for Green­ing the Financial System (NGFS) that includes 36 central banks—including most major central banks with, until very recently, the notable exception of the US Federal Reserve System.⁷⁹ The NGFS has set out to “introduce a series of practical actions aimed at ensuring climate risks are fully factored into future financial decision-making.”⁸⁰ Thus far, actions have included the de­velopment of a handbook on assessing and managing environment-related risks, integrating sustainability into central bank portfolio management, and data collection from financial firms on environmental aspects of finance. Some central banks have also started to promote the idea of climate stress tests, in which central banks test the macroeconomy's capacity to respond to climate shocks.

The efforts of central bankers to address climate change underline the oddity of the contemporary approach to governing the macroeconomy. The Network for Greening the Financial System has been careful to point out that they are on solid footing in addressing climate change: “Climate risks ulti­mately have a material bearing on financial stability. Therefore, supervising climate risks is a legitimate interest for central banks with a financial stabil­ity mandate.”⁸¹ This is, on one hand, a good sign. It means central bankers are attentive to their democratic legislative mandate.

On the other hand, the ease with which climate change is defended as within the jurisdiction of the independent central bank is revealing. Benoit Cffiure, former board member at the European Central Bank and former dep­uty governor of the Reserve Bank of Australia, said climate was likely to affect food and migration patterns (which affect macroeconomic variables), mak­ing them a monetary policy concern. If everything that influences food and migration patterns is within the proper remit of the central bank, however, one wonders what sits outside the set? After all, this would seem to include health policy, refugee policy, education policy, and much more.

Beyond this, consider the effects of having an independent central bank addressing the effects of climate change independently of the rest of the gov­ernment. Taking the Fed as our example, the central bank would address the effects of climate change on price stability and maximum sustainable employment, as that is its congressional remit. First, it is not clear how the “effects of cli­mate change” on price stability should be understood. This would of course depend on how one defines the effects of climate change, and what time ho­rizon one considers. If the actions taken thus far are any indicator, central banks seem to be most concerned with the risk climate disasters pose to the financial stability.

The state as a whole, in contrast, may wish to address broader climate concerns: the security of coastal communities, impending refugee crises, the threat posed by increasingly dangerous and erratic weather events on infra­structure and state security, and so on. These goals may come into conflict with the central bank's aim of price stability in two ways. First, focusing on price stability may lead central bankers to be increasingly concerned with systemic financial risk. The central bank might decide that banks should be less leveraged to protect the system against financial crises that may come downstream of climate disasters. This goal could conflict with the state's aim of increasing innovation and investment in safer infrastructure.

Second, the contemporary approach to conducting monetary policy pre­cludes the use of monetary policy tools in pursuit of anything but price sta­bility. Thus, they cannot be employed to prepare the nation for impending climate disasters or in support efforts to prevent them. Embracing a system of regularly rechartering the Fed could change this. If the Fed were regularly rechartered it would be easier for Congress to regularly adjust the aims and priorities of the central bank. As Julie Rose and Deva Woodly both argue else­where in this book, there are worthwhile social goals other than stable out­put growth. Regularly rechartering the Federal Reserve would allow Congress to explore this possibility. More specifically, Congress might ask itself: Does it make sense to prioritize price stability in light of the impending threats of climate change? Might we, perhaps, accept near-term price instability in exchange for a future in which the nation was better adapted to and prepared for climate threats?

Money is a reflection of what we value as a society. How we govern it re­flects our collective aims: what we wish to build, to promote, to protect, and to accomplish. As such, I have argued that money should be governed demo­cratically. What the climate change case underlines is that democratic pri­orities, needs, and desires all change over time.⁸² For money to be governed democratically, for monetary policy to be responsive to these changes, Con­gress must, from time to time, revisit the matter.

Notes

1. More precisely, it connects all members of a currency zone, or even more broadly, the web of all people with access to the particular currency. But as this chapter is about monetary policy, which is taken to be the practice of governing the currency from the perspective of a national currency, as such, I will stick to political boundaries.

2. I make no commitments about a timeline for rechartering. The original charter was for 20 years; given the dynamism of the contemporary economy, I have something shorter in mind.

3. Benoist (2011), 53.

4. James Livingston's history of the Fed argues that the Federal Reserve Act was a corporate effort to protect capital market from monetary instability. See Livingston (2006).

5. Prior to the centralization of reserves in the US system, there was a precari­ous three-tiered system of reserves. This system, or so Warburg and his com­patriots argued, led to an overabundance of reserves being held in vaults to hedge against the possibility of a bank run. As a result, reserves that could be “working” in the system (i.e., supporting more credit) were standing idle. For more on this, see Lowenstein (2015).

6. In his textbook on macroeconomics, Gregory Mankiw defends the inde­pendence of monetary policy as follows: “If politicians are incompetent or opportunistic, then, we may not want to give them the discretion to use the powerful tools of monetary and fiscal policy.” He continues, “Macroeconom­ics is complicated, and politicians often do not have sufficient knowledge of it to make informed judgments... the political process often cannot weed out the advice of charlatans from that of competent economists.” (Mankiw 2014, 389)

7. Owen himself fought against complete banker control. He argued for keep­ing “control of the credit system of America [in] the United States Govern­ment.” See “Owen Upholds Act of Reserve Board” (1927).

8. Brandeis is emblematic of this view. For more on this, see Peer (2019), 7.

9. For this reason, the populists of the day—with William Jennings Bryant as their figurehead—advocated bimetallism. They wanted a more elastic money supply.

10. This was a debate fundamentally about what should count as money in society. Nadav Orian Peer nicely explicates this using Christine Desan's work on money as a legal phenomenon. Desan emphasizes the importance of collective, democratic power in defining a unit of account and the major implications of how we choose to do this. When the central bank agrees to lend against particular types of collateral, it essentially converts that col­lateral into legal tender, thereby advantaging the members of society with such collateral. The Federal Reserve Act allowed member banks to transform illiquid collateral into newly issued Federal Reserve notes. Agricultural advo­cates wanted farmland and equipment to count as permissible collateral. For more on this, see both Peer (2019) and Desan (2015).

11. The two groups differed on their preferences for the powers, aims, and tools given to a centralized public bank. For more on this, see Peer (2019).

12. Garrett 1968, 8.

13. For more on the development of the Fed along the two axes, and the politi­cal game Wilson engaged in to pass it, see Conti-Brown (2016).

14. There are two primary moments of change in the structure of the Fed worth mentioning here: the Banking Act of 1935 and the Fed-Treasury Accord of 1951. The Banking Act of 1935, largely written and promoted by Mariner Eccles, increased the centralization of monetary policymaking power and located it in the federal government. It created the modern Board of Gover­nors and Federal Open Market Committee (FOMC), which is the American monetary policy authority. Eccles wanted to abolish the regional reserve banks to achieve complete centralization of the system, but Senator Carter Glass, still holding sway in Congress, fought to keep the regional reserve banks alive. In 1951, the Treasury and the Fed were locked in a battle over macroeconomic jurisdiction. The two institutions ultimately settled their differences with the (in)famous “Fed-Treasury Accord” in which the Federal Reserve and the Treasury agreed to a detente and, de facto, to central bank independence. For more on the accord, specifically the political nature of the battle that led to it, see Epstein and Schor (2011).

15. The following are the 12 cities that have Reserve Banks: Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco.

16. This last category is usually determined with heavy input from the Reserve Bank board (bankers and banker appointees).

17. The Dodd-Frank bill, passed in the wake of the Great Financial Crisis, altered the mechanism by which Reserve Bank boards elect a president. Those members of the board who occupy Class A are no longer allowed a vote in the election for the Reserve Bank president and CEO. All board members may still participate in removing a bank president and CEO.

18. Terms are almost never completed. These positions are often taken by for­mer and future bankers themselves. The FOMC is an active site of capture. For more on this, see Adolph (2013).

19. Open market operations (OMOs) used to be the primary means of monetary policy. Now, monetary policy is conducted by manipulating interest on excess reserves (IOER). But insofar as the Fed does still engage directly with economy through the market, it is done through primary dealers.

20. The list changes fairly regularly. Currently, primary dealers include BNP Paribas, Barclays, Bank of Nova Scotia New York Agency, BofA Securities, Citigroup Global Markets, Goldman Sachs, Credit Suisse, Deutsche Bank Se­curities Inc., HSBC Securities (USA) Inc., JPMorgan Securities LLC, Morgan Stanley & Co LLC, and Wells Fargo Securities LLC.

21. Senator Copeland, speaking on S. 2122, Congressional Record (January 10, 1926). CR-1926-0115, 69th Congress, 1st sess., Emphasis my own. There is not much written about why this is the case. My own view is that it is a histori­cal artifact. Central banks, all over but definitely in the US, began as private entities, owned by private banks. It therefore made sense in those times to disseminate liquidity through the member banks. When central banks were made public (or mostly public), the mechanisms of transmission were left unchanged.

22. He made this comment in discussing the worth of constitutions (Bentham 2002, 237).

23. Even conventional economists and practitioners like Lawrence Summers are beginning to outline the pitfalls, or “the suboptimality of our current monetary policy framework” (Summers 2018, 7).

24. See the report commissioned by Senator Diane Feinstein to assess the provi­sions set to expire: "USA Patriot Act: Sunsets Report” (2005).

25. Kouroutakis 2016, 62. Sunset clauses were also sometimes used to express opposition to a bill, when a dissenting minority could not stop passage but could insert a sunset clause.

26. Kouroutakis 2016, 66.

27. In the twentieth century, parliamentarians began to worry about the extent of delegation. In response, they set up a committee "tasked with investigat­ing the issue and exploring solutions on implementing safeguards against the abuse of the delegated powers.” The result was a report which stated that “delegating power to modify provisions of statute, should never be used except for the sole purpose of bringing an Act into operation and should be subject to a time limit of lone year for the period of its operation.” See Kouroutakis (2016), 69. There the author is quoting the Donoughmore Re­port, a report to Parliament on Minister's Powers in 1932 aimed at examining administrative law.

28. Greenberg 2018.

29. Kouroutakis 2016, 69.

30. Ranchordas 2014, 59. In 1969, Theodore Lowi proposed a “'Tenure of Statues Act' with sunset of five to ten years on the duration of agencies and their regulatory programmes in order to ensure their reassessment after a period of time” (Ranchordas 2014, 20).

31. It should be noted that this period was an economic boon from one particu­lar class perspective. It was also a time of immense strife in labor relations, including many violently suppressed strike actions.

32. Preston 1927, 216.

33. Glass may have also had personal reasons for so vehemently promoting the Bank's charter extension. He saw himself as one of the Fed's founders; extending its charter in perpetuity secured his legislative legacy. See Wasson (1927).

34. “In my judgement, 20 per cent of the senators in this body do not know what is in this bill and have not read it. There is no need to jam through this legislation in the closing hours of this session when it is not understood by the people, the nation, and even the members of the senate, not even the members of the committee which reported it out” (Baxter 1927).

35. “Reserve Bank Extension Opposed in Committee” (1926). The Wall Street Journal headline further noted that “House Group Would Eliminate Proposal to Extend Charters from McFadden Measure—Would Postpone Action.”

36. Baxter 1927.

37. Baxter 1927.

38. Baxter 1927.

39. Baxter 1927.

40. The agricultural advocates lost again. Senator Smith Brookhart of Iowa advocated fiercely on the Senate floor for a Federal Reserve System that was not so embedded in the banker community. Specifically, he advocated for

a cooperative banking system designed to promote farmers' interests: “I concede to the commercial interests the right to have their own competi­tive banking system with reserve bank and all under their own control; but I demand in behalf of the farmers and the people who labor with hand or brain the same right under the law to organize a cooperative system with cooperative reserve and all under their own control.” Senator Brookhart, speaking on S. 2120, Congressional Record (January 10, 1926). CR-1926-0115, 69th Congress, 1st sess. This argument belies how obvious it was at the time that the Fed was created by commercial bankers for commercial bankers.

41. “National Bank Branch Bill Passes Senate” (1926).

42. Preston 1927, 217.

43. In fact, we know it did, as the Banking Act of 1935 altered the structure of the Fed.

44. The most radical alterations were the Banking Act of 1935 and the Reform Act of 1977, frequently associated with the Humphrey-Hawkins Act of 1978. The most recent is the Dodd-Frank Act passed after the Great Financial Crisis. Dodd-Frank focused primarily on regulatory matters, with minimal adjustments to monetary policymaking with the exception of curtailing emergency lending eligibility (eligibility must be determined generally not specifically, and approved by the Treasury) and limiting who can access the discount window.

45. Fuhrer et al. 2018.

46. This is particularly odd if you think monetary policy should be democratic matter. See Norges Bank (2015).

47. “Fed Likely to 'Institutionalise' Policy Framework Review, Powell Says” (2019).

48. For an example, see Powell (2019) for Chair Jerome Powell's testimony before Congress on February 26, 2019.

49. Rousseau et al. 2002, bk. 3, chap. 18.

50. Ancient democracy was first and foremost a form of power (-cracy): the power of the people (demos). In the eighteenth century, this shifted with the development of representation.

51. Ober and Hedrick 1996.

52. Murray 2018.

53. It should be noted that the review included a set of nationwide events by the name Fed Listens, with the intention of reaching out to the community. These events were organized, executed, and analyzed by the Fed.

54. Glass and his supporters acted as handmaidens of the central bank, aiding in what Rousseau might have described as the central bank's usurpation of the legislature's political power. It is a concept that I will turn to in the next section.

55. Tuck (2015), 124-42.

56. To be precise, Rousseau rejected the possibility of “delegating” or “represent­ing” sovereign power altogether. Strictly speaking, I have anachronistically employed these terms here. However, it is my interpretation that Rousseau's theory is compatible with the concepts of delegation and representation as

I employ them. To defend this claim, I rely on Melissa Schwartzberg in her interpretation of Rousseau, seeing fundamental laws not as binding the sovereign but as enabling it—a model she adopts from Stephen Holmes. Schwartzberg (2003), 388.

57. Rousseau et al. 2002, chap. 18.

58. Rousseau et al. 2002, bk. 3, chap. 18.

59. “Assemblies of the people,” Rousseau writes, “are the shield of the body poli­tic and the curb of the government” (Rousseau et al. 2002, chap. 14).

60. Rousseau et al. 2002, chap. 18.

61. Why do we need formal rechartering rather than simply letting the legis­lature act to change the conditions of delegation when it feels it needs to? It takes more to get Congress to act to overturn actions than to pass basic legislation, for one. Second, Congress has reason to shirk its duty (Elgie and Thompson 1998). Furthermore, spontaneous legislative action is less likely to happen organically in a depoliticized environment like monetary policy. For more on this, see Hay (2007); Roberts (2010); Braun (2014).

62. This process is called euthuna, or “public audit”: “the examination of a public official's record and financial accounts at the end of his year in office.” See the glossary of Buckley (2006).

63. Under the prevailing Chevron doctrine, as long as the agency's interpreta­tion of the congressional mandate or law is “reasonable,” it cannot be legally challenged. This gives a huge amount of interpretive discretion to admin­istrative agencies. See McConnell (2018); “Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., et al.” (1983).

64. In fact, to continue to reap the benefits of delegating monetary policymak­ing power to experts, rechartering, or at least reevaluation will likely be required. For example, the contemporary approach to monetary policymak­ing was designed largely to fight inflation. Today, inflation is by no means central bankers' primary concern. Thus, the system needs to be revisited. We are seeing this in the myriad of internal reevaluations starting to take place recently in central banks all over the world, including but not limited to the Federal Reserve, the European Central Bank and the Bank of England. Important to note here is that these are internal reevaluations aimed at evaluating the technical approaches to seeking unchanged political aims. I am arguing for political reevaluation of both aims and practices.

65. See K. Sabeel Rahman's chapter in this book.

66. There are modern proposals not for state investment banks (SIBs) but rather for the Fed to allow citizens to hold accounts there, which is similarly radi­cal and could have some similar effects. See Ricks, Crawford, and Menand (forthcoming).

67. The existing German state investment bank was formed as part of the Mar­shall plan. In 2018, it was Germany's third largest bank by balance sheet. For more on state investment banks, see Ryan-Collins (2015).

68. To be precise, the bill that authorized IOER passed in 2006 and was not sup­posed to be implemented until 2011. In wake of the Great Financial Crisis, implementation was moved up to 2008.

69. This is true in theory. In practice, the Fed has a “leaky floor.” This means the IOER regime is not as effective as it might be because it does not apply to all depositors at the Fed; specifically, it does not apply to Government Spon­sored Entities (GSEs), which opens up an arbitrage opportunity and makes IOER policy less effective. This is largely understood in the literature as the result of an inefficient policy choice, one that could easily be rectified.

70. Ubide 2017, 72.

71. Sarah Quinn writes, “There has been no time period or region [in American history] in which credit distribution has not been distorted by racism.” For more on these biases, see Quinn (2019); Jacobs and King (2016). Under the current regime, the poor are much less likely to have permissible collateral. What defines permissible is central to the question of credit allocation. For the history of this debate see supra note 11.

72. The agricultural populists fought hard at the founding of the Fed to create a central bank that recognized farmland and farm equipment as permissible collateral.

73. Fannie Mae and Freddie Mac are good evidence of the US successfully do­ing this. Prior to the 2007/20008 financial crisis, they held high minimum standards for loan quality and were still able to support many in getting mortgages who would otherwise have been denied (Tooze 2018, 47).

74. In the same spirit as the defense of state investment banks outlined here, see Mazzucato and Penna (2016).

75. Cory Booker has promoted this idea by developing the concept of “opportu­nity zones.” See also Banerjee and Duflo 2019.

76. Again, creditworthiness would be defined politically, not by the profit mechanism.

77. Van 't Klooster 2020, 592.

78. Van 't Klooster 2020, 596.

79. It is worth noting that this is a voluntary body and that four-fifths of central bankers surveyed by Central Banking do not believe climate change poses a major risk to financial stability. See Jeffery (2019).

80. Jeffery 2019.

81. Jeffery 2019.

82. This point is further emphasized by the fact that central bank independence has been suspended in times of war and monetary policy employed as a state tool. This was particularly and explicitly true of monetary policy in the US during World War II. For more on the political battle to instate indepen­dence in the wake of WWII, see Epstein and Juliet Schor (2011).

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