The Power and Independence of the Federal Reserve.

• Author: Blask, Ari

The Power and Independence of the Federal Reserve

Peter Conti-Brown

Princeton: Princeton University Press, 2016, 368 pp.

Why should the president and Congress defer to the Federal Reserve on monetary policy? One of the typical justifications for central bank independence is that politicians are liable to artificially juice the economy, especially before elections, boosting economic activity through an expanded money supply in the short run but causing inflation in the medium to long run. This conflict of interests necessitates insulating central banks from political pressure. It is what Peter Conti-Brown calls the "Ulysses/punch-bowl" justification of Fed independence. Like Ulysses tied to the mast, the Fed should be shielded from the siren calls of Congress and other elected officials and left free to follow former Fed chairman William McChesney Martin's ideal of taking away "the punch bowl when the party is really heating up," that is to temper money growth in economic expansion--a move short-term-minded politicians might oppose.

Conti-Brown's Power and Independence of the Federal Reserve is at heart an attempt to challenge the Ulysses/punch-bowl justification for the Fed's independence. In Conti-Brown's conception, while the Ulysses/punch-bowl reasoning might accurately explain the general need for insularity from politics in the conduct of monetary policy, it does not explain the extent and particularities of the Federal Reserve's specific power and independence. That's because the Fed, by practice and statute, does more than attempt to manage nominal income and inflation--Fed policymakers are also "recession fighters, bankers, financial regulators, bank supervisors, and protectors of financial stability."

It's worth asking at this point: Is Conti-Brown, in posing a justification of Fed independence that he himself knocks down, simply attacking a straw man? Even if the phrase "Ulysses/punch-bowl" is of Conti-Brown's own invention, it nevertheless captures a common perception of the Fed--namely, that its role in managing money specifically validates its unique autonomy compared to other government agencies.

Conti-Brown chose not to write an institutional or legal history of the Fed. Instead, he identifies a few key aspects of the Fed's structure and practical operation, which he then explores in detail. Conti-Brown attempts to use these selective inquiries to elucidate his main point: that the general need for central banks to conduct monetary policy independently from political pressure does not justify the degree to which the Fed is insulated from political oversight. He divides the book into four sections: (1) "The Federal Reserve Is a 'They' Not an 'It'"; (2) "The Five Hundred Hats of the Federal Reserve"; (3) "The Sirens of the Federal Reserve"; and (4) "The Democratic Demands of Fed Governance."

In the first section, Conti-Brown argues that none of the laws that codified the Fed's structure embodied any coherent logic regarding the need to separate monetary policy from politics. The Fed's structure is more a historical accident than intelligent design. According to Conti-Brown, the 1913 Federal Reserve Act (which established the Fed and remains the most important law shaping its structure) contained elements of influential German-American banker Paul Warburg's support for a powerful, privately managed central bank, Senator Carter Glass's preference for a decentralized set of regional banks, and President Woodrow Wilson's faith in technocratic expertise...