O mito da independencia do Federal Reserve - Book Review

Published by EH.Net (March 2018)

Sarah Binder and Mark Spindel:

The Myth of Independence: How Congress Governs the Federal Reserve

Princeton, NJ: Princeton University Press, 2017. xv + 282 pp. $35 (cloth), ISBN: 978-0-691-16319-2.

Reviewed for EH.Net by Joseph M. Santos, Department of Economics, South Dakota State University.

In the final months of 2017, everyone wondered whom President Trump would appoint, with Senate confirmation, to chair the Federal Reserve System. Would the next chair be a hawk or a dove? Would future U.S. monetary policy be politicized — left to pursue short-run macroeconomic objectives instead of low and stable inflation? Basically, observers believed the central bank’s independence from Congress and the White House was either immutable — and so monetary policy would be reliably conditioned on the chair’s relative aversion to high and variable inflation — or not.

Congress passed the Federal Reserve Act in December 1913. A relatively modern notion of independence — immutable or otherwise — emerged decades later with the Treasury-Federal Reserve Accord in March 1951. The two institutions agreed the central bank would not peg yields on Treasury bonds, which it had done since April 1942 in order to cap the cost of financing the U.S. war effort. In a narrow sense, then, the Accord recognized central-bank independence as a monetary policy framework for price stability. This is because the agreement restored monetary dominance over a deficit-spending fiscal authority that issued nominal debt. In practice, monetary policy remained largely discretionary, inflationary, and influenced by Treasury (Timberlake 1993, 339-40). Thus, at best, the Accord afforded the Federal Reserve System independence “within the government” (Meltzer 2003, 713).

According to Sarah Binder and Mark Spindel, the Federal Reserve System has never been independent, though its authority to manage the economy has increased over time. Rather, in The Myth of Independence, the authors chronicle a history of interdependence between the central bank and Congress, both federalist institutions that rely on the support of (necessarily overlapping) constituencies. End-the-Fed rhetoric notwithstanding, denizens of reserve-bank districts have resisted congressional restraints on their regional central bank. Meanwhile, the body politic has accepted congressional accusations that the central bank, broadly conceived, is alone responsible for poor macroeconomic performance. Thus, in the aftermath of macroeconomic troubles, Congress has often increased the central bank’s authority and, in turn, its culpability. Simultaneously, Congress has asserted, often in response to executive-branch meddling, the legislature’s ultimate control of monetary policy.

For evidence of this countercyclical “blame game,” the authors mine public-opinion surveys — public sentiment toward the Fed from 1979 to 2015 and Chair Janet Yellen in 2014 — and bills introduced in Congress from 1947 to 2014. Generally, controlling for respondents’ education, household income, and so forth, Republicans and retirees disproportionally disapprove of the Fed’s stewardship of the economy. Increases in unemployment, but not the inflation rate, drive the number of congressional bills targeting the Fed; though, macroeconomic performance is relatively weakly associated with Republican-sponsored bills. For politically vulnerable legislators who are members of the president’s party, the Fed is a particularly attractive target of blame. Meanwhile, calls to audit the Fed are countercyclical and longstanding — they have been around for over sixty years; so, yes, “the Pauls are newcomers to the campaign” (p. 43). In the postwar period, Democrats have sponsored twice as many such calls; and recent calls have come from the fringes of both parties.

The authors examine the origins and evolution of the Fed through this political-economic lens. The creation narrative is fairly conventional. To wit, the Panic of 1907 revealed the extant limits of governmental interventions, which were “precarious, primitive, partial, and probably illegal” (p. 55). Divided Republicans effectively afforded united Democrats the White House, the Sixty-Third Congress (1913-15), and the opportunity to drive currency reform. The central bank that emerged placated (Southern) Democrats, (Midwestern) Populists, and (urban) Progressives, who preferred a quasi-public structure and decentralized reserve banks. It also placated Republicans, who preferred a quasi-private structure and centralized governance. More broadly, Democrats and their political kin sought easier access to credit; Republicans sought greater financial stability. Neither party sought an independent monetary authority of the sort we imagine today.

Identifying the forces that determined the locations of reserve-bank cities (including two in Missouri) and the number of reserve-bank districts — operational features of the System that fell to the Reserve Bank Organization Committee (RBOC) — adds significant value to this book. In some instances, the RBOC assigned reserve banks based on the density of a region’s financial sector, of course. However, conditional on financial sector, the RBOC assigned reserve banks based largely on region (most likely, the South). The authors cannot say whether, in doing so, the RBOC responded to credit demands or constituents, because the relatively credit-starved South was then overwhelmingly Democratic. In any case, these early decisions to regionalize the System in this way “baked political support for the Federal Reserve into its statutory skeleton,” effectively assuring its survival, if not its absolute independence from Congress (p. 81).

This statutory skeleton fractured in the wake of the Great Depression, when Congress quickly passed a series of inflationary currency reforms: namely, the Thomas Amendment to the Agricultural Adjustment Act (1933) and the Gold Reserve Act (1934), including the latter’s Exchange Stabilization Fund provision. Broadly speaking, Democrats and agrarians favored these reforms; Republicans and manufacturers opposed them. The authors econometrically demonstrate this, and something else: states that were home to a Federal Reserve Bank were less likely to vote for these reforms — a manifestation of baked-in political support, presumably. Similar voting patterns emerged a short time later, when exigencies of war finance reduced monetary policy to ensuring a market for Treasury debt, sowing tensions that would culminate in the Accord of 1951. Why 1951? It’s complicated; chapter 5 is well worth a close read.

The Myth of Independence is a timely analysis of political and economic countervailing forces that render the Fed and Congress interdependent. Based, in part, on Fed and congressional archives, the authors cleverly marshal econometric evidence — estimated coefficients of categorical dependent-variable specifications, for the most part — to substantiate their claims, which do not easily lend themselves to quantitative-hypotheses tests. The book’s takeaway is cautionary, and aptly captured by Paul Volcker’s reflection on leading the Fed through the Great Inflation: “You just can’t go do something that is just outside the bounds of what people can understand, because you won’t be independent for very long if you do that” (p. 200). Hawks and doves, take note: ascend from the zero-lower bound in a way people can understand.

References:

Meltzer, Allan H. (2003) A History of the Federal Reserve, Volume 1: 1913–1951 (Chicago: University of Chicago Press).

Timberlake, Richard H. (1993) Monetary Policy in the United States: An Intellectual and Institutional History (Chicago: The University of Chicago Press).

Joseph M. Santos is the Dykhouse Scholar in Money, Banking, and Regulation in the Department of Economics at South Dakota State University, where he teaches and writes on macroeconomics, banking, and financial markets.

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