An Independent Federal Reserve Could Be Constitutional

T here is a renewed constitutional debate today over the legitimacy of federal entities designed by Congress to be insulated from political control, sparked by President Trump’s pursuit of unified executive power. One case currently before the Supreme Court, Trump v. Slaughter, questions the constitutionality of “independent agencies” whose leaders the president is restricted by statute from removing. Trump argues that such restrictions violate the separation of powers by denying the president full control of the branch he is tasked with leading.

A second firing case, Trump v. Cook, touches on a deeper question. The president is attempting to fire Lisa Cook from her position on the Federal Reserve Board of Governors. Although the Board is technically an independent government agency, the bulk of the Federal Reserve exists entirely outside the executive branch, and the law permits the president to remove a Fed governor only “for cause.” With its independence, the Fed exerts sweeping influence over the economy by unilaterally setting monetary policy.

This oddity in the constitutional order has raised questions, especially for opponents of a “living Constitution” that adapts to modern needs: How can a federal entity with vast policymaking authority exist outside the three branches of government and remain unaccountable to any democratic power? For the Federal Reserve to be compatible with the original design of the Constitution, does it need to be moved inside the executive branch?

Originalist jurist Michael McConnell gave a somewhat novel answer to these questions last year. He argued that the Federal Reserve, as currently structured outside of executive control, is indeed in conflict with the Constitution’s distribution of powers. This was not always so, however. When the Fed was created in 1913, it conducted monetary policy purely through voluntary transactions, such as borrowing from and lending to private banks. The constitutional problem, McConnell writes, is that “over the decades, Congress has vested the Fed with numerous regulatory powers and functions, in addition to its central bank function — such as making and enforcing consumer protection laws and regulating bank reserve requirements.”

These powers are coercive, as they bind private entities. Therefore, they are “undoubtedly executive in nature and thus must fall under the president’s control.” McConnell believes that the Federal Reserve’s independence could be constitutional once again if these regulatory powers were transferred to an agency accountable to the president, leaving the Fed as an enormously influential yet non-coercive governing body that uses voluntary monetary tools.

McConnell’s argument raises another question, rooted in his core assumption: Why do only the coercive functions of government need to be placed under executive control? In other words, what rule in the Constitution permits non-coercive bodies created by Congress to exist outside the structure of the three branches? There is no such rule in the document’s text, though there is also no explicit rule requiring governing entities to exist in the executive branch. Given this ambiguity, originalists may think it necessary to examine the history of this question around the time of the Founding to see if McConnell’s rule can be found anywhere.

One place to look is the earliest debates in the First Congress, where legislators were tasked with fleshing out the new constitutional architecture with concrete institutions. Coincidentally, the most famous constitutional debate of the time was over whether Congress had the power to charter a national bank. The proposed bank — what would become the First Bank of the United States — was very different from the Federal Reserve in its responsibilities, but similar enough to the reformed Fed that McConnell envisions for constitutional comparison.

Like today’s twelve Federal Reserve Banks, the First Bank existed outside the executive branch as a federally chartered corporation. It was owned by private shareholders, whereas Federal Reserve Banks are technically owned by private member banks. The First Bank’s directors were appointed by private stockholders and could not be removed by the president. Its executive officials were accountable only to these directors, not to any organ of government. Mirroring McConnell’s recommendation for the Fed, the First Bank was given no coercive regulatory power. It was empowered only to conduct voluntary transactions: holding deposits, making payments, issuing banknotes, and managing specie.

The First Congress debated the constitutionality of a national bank extensively, prompted by James Madison’s eleventh-hour objection. Yet the debate focused entirely on whether Congress had the power to establish a national bank whatsoever under Article I. No one made the argument that if Congress could create a national bank, it would need to exist within the executive branch (or its directors would at least need to be removable by the president) to accord with the Constitution’s separation of powers. If opponents believed that the First Bank’s independence presented a constitutional challenge, there was no reason not to say as much. But no such challenge was raised, and, after Madison’s limited view of congressional power failed to persuade enough members, the bank bill was passed into law.

Therefore, it appears that no one in the First Congress — which included several individuals who attended the Constitutional Convention — believed the national bank was unconstitutional because it was outside executive control. As to why the bank’s independence was such a non-issue, the terminology provides a strong clue. Throughout the debate, both proponents and opponents described the power to establish a bank as the power of “incorporation,” or to charter a corporation. Naturally, even as we conceive of corporations today, they are privately owned, distinct entities that exist outside formal government. The Founding generation had a still more precise legal definition of corporations that justifies how they could be originated by Congress yet placed beyond presidential control.

James Wilson, the Founding-era jurist and major participant in the Constitutional Convention, attempted to summarize prevailing American jurisprudence through a series of law lectures from 1789 to 1791. In one chapter, he discussed the nature of corporations. “A corporation,” he said, “is described to be a person in a political capacity created by the law, to endure in perpetual succession.” In America, such “corporations can only exist by the common law, or by virtue of legislative authority,” established to promote various purposes. Crucially, corporations were naturally vested with the power of self-government — performing legal acts, selecting their members, writing internal bylaws — but, as legally equivalent to persons, they possessed no coercive power upon other private parties. A corporation is “composed of individuals,” who have no greater or lesser right to engage in transactions than any other person.

This lack of coercive authority inherent to corporations explains why the First Bank’s independent structure did not set off alarms in the First Congress. The incorporation of non-coercive entities outside government was considered a mundane power at the Founding; the only concern was whether Congress had been vested with it.

Consequently, Michael McConnell indeed has a strong originalist argument that a modern independent bank with no coercive rulemaking authority would be constitutionally permissible under Founding-era standards, as vindicated by the quiet precedent of the First Bank of the United States. By the same token, it remains far from clear that the current Federal Reserve — furnished by Congress with myriad rulemaking authorities to regulate private banks — can be reconciled with an originalist account of the constitutional separation of powers.