Conti-Brown, The Power and Independence of the Federal Reserve

Protocol is important in Washington, a way of determining whether bureaucrats are “pale and distant stars, lost in a Milky Way of obscure officialdom” or whether they “swim in the luminous ether close to the sun.” The members of the early Federal Reserve Board were relegated to the Milky Way. They, said the keepers of the official protocol at the State Department, “would sit in line with the other independent commissions in chronological order of their legislative creation. That meant that the board would follow the Smithsonian Institution, the Pan-American Union, the Interstate Commerce Commission, and the Civil Service Commission.” This solution didn’t satisfy the “status-conscious members of the board,” and so the question was taken to President Wilson who, when pressed, said: “Well, they might come right after the fire department.” (pp. 40-41)

Peter Conti-Brown, in The Power and Independence of the Federal Reserve (Princeton University Press, 2016), recounts how “an institutional backwater gasping for recognition … became an institutional juggernaut that occupied a space apart from the rest of the government” (p. 41) and analyzes what it is that the Fed, “one of the most organizationally complex entities in the federal government,” (p. 8) actually does.

Conti-Brown, a lawyer by training and now on the faculty of the Wharton School, masterfully meshes accounts of Fed functions with leading personalities who perform(ed) those functions. For instance, he describes the roles of staff economists and lawyers within the Federal Reserve System, invoking by way of illustration “two senior staffers who have exercised enormous influence over policy making” (p. 86) at the Fed. Highlighting their relative importance, the salaries of senior staffers are higher than those of the governors, including the Fed chair.

The Federal Reserve Banks, which owe their existence to “a compromise long past that few understand and fewer can explain,” (p. 104) are constitutionally troublesome. Private corporations with stockholders (private commercial banks like Wells Fargo), over time they have become more like “public regulatory institutions.” Conti-Brown argues that “despite their near political invincibility,” the continued presence of the Reserve Banks, “in the form they are in, is one of the most important, least studied, and least defensible features of the governance of the Federal Reserve System.” (p. 126)

Throughout his book Conti-Brown advances arguments—“about law’s limited role in defining the boundaries between the Fed and the politicians, about the influence of ideology on technocracy, about the efforts of insiders and outsiders to dictate Fed policy” (p. 240)—to show how much personalities and, by extension, the appointment and removal process, matter at the Fed.

He suggests that the best kinds of reforms simplify the Fed’s governance, ensuring that “we know who is pulling which levers of Fed power, when.” (p. 241) He rejects two micromanaging proposals for reform—to audit the Fed and to subject the Fed to a default monetary policy rule (the Taylor Rule). With regard to the second proposal, Conti-Brown argues: “The better approach would be to focus on the more flexible appointment process. Perhaps the Taylor Rule is exactly the right approach to monetary policy. If that’s the case, … don’t amend the Federal Reserve Act; appoint John Taylor to the FOMC.” (p. 265)

As for the prevailing views of Fed independence, Conti-Brown contends that they are “insufficiently comprehensive to tell us much of anything about the Fed, its structure, and its functions.” Challenging these views “has required illustrating in three and four and five dimensions the contested spaces where the Federal Reserve makes its policies, separate and together with other actors inside and outside the government, by using technical skill and making value judgments, under legal and practical authority.” (p. 269) Conti-Brown may not have written the definitive book about the Fed, but he has successfully described it in a way that defies stick-figure characterization.