The Constitution and the Fed

In light of all that is going on, and that we are presently discussing the powers of appointment and removal of Officers of the United States, I thought it would be worth sharing a great primer one of you (Jason Koch) provided me concerning the Federal Reserve Bank and the Open Market Committee. A question to ask yourself: how, exactly, is this arrangement constitutional? Honestly, I don't know the answer.

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In the case of the Federal Open Market Committee (a quasi-governmental body), Congress not only restricted the power of the President to appoint and remove officers, but delegated that appointment and removal power to private entities outside of the Federal Government. The Federal Open Market Committee and the Sharing of Governmental Power with Private Citizens, 75 Va. L. Rev. 111 (1989). In light of the separation of powers doctrine it appears the Federal Reserve Act (as amended) “[did] not merely usurp the [President’s] appointment power but misappropriate[d] it." Id at 138.

Private Representation on the Federal Open Market Committee

The FOMC is charged with governing open-market operations, "with a view to accommodating commerce and business and with regard to their bearing upon the general credit situation of the country." 12 U.S.C. Sect. 263(c), (1983). According the Federal Reserve Board’s website, “[o]pen market operations…are the Federal Reserve’s principal tool for implementing monetary policy.” Additionally, interest rates are established by the FOMC, contrary to the generally accepted notion that this duty belongs to the Board of Governors. Financial Liberalization, International Monetary Dis/Order, and the Neo-Liberal State, 15 Am. U. Int'l L. Rev. 1279 (2000). The FOMC is comprised of the seven members of the Board of Governors (appointed by the President, affirmed by the Senate, removable for “cause”) and five private members, four of whom are elected each year "by the boards of directors of the Federal Reserve Banks, which are privately owned" (the Federal Reserve Bank of New York has a permanent seat). Fragmenting the Unitary Executive: Congressional Delegations of Administrative Authority Outside the Federal Government, 85 Nw. U.L. Rev. 62 (1990). These latter members are not “directly accountable to any public official for their exercise” of power, and they owe their loyalty to the boards of the private Federal Reserve Banks they represent (indeed, only the presidents of the Federal Reserve Banks are considered for the appointments). 75 Va. L. Rev. 111. While the Board of Governors must approve the pool of candidates who may be elected, it does not decide which members are appointed; nor may the Board remove a private member from the FOMC except for cause. Id. By law, the Bank presidents are accountable to their shareholders, the member banks (i.e., private commercial banks). 15 Am. U. Int'l L. Rev. 1279

The Private Federal Reserve Banks

John Marshall noted that "the State does not, by becoming a corporator, identify itself with the corporation. The [bank] is not the [State], although the State holds an interest in it." Bank of United States v. Planters' Bank of Georgia, 22 U.S. 904, 907 (U.S. 1824). In Emergency Fleet, Brandeis made a similar observation: "Instrumentalities like the national banks or the federal reserve banks in which there are private interests, are not departments of the Government. They are private corporations in which the Government has an interest." Emergency Fleet Corp. v. Western Union Tel. Co., 275 U.S. 415, 425-426 (U.S. 1928). The Ninth Circuit held that the Federal Reserve Banks are not government agencies for purposes of the Federal Tort Claims Act. Federal tort liability requires that the principal is able to “control the actions of his agent, and not simply [that] the entity performs an important governmental function.” Lewis v. United States, 680 F.2d 1239, 1243 (9th Cir. 1982). The Lewis Court made a number of interesting findings about the nature of the Banks in reaching its conclusion:

Each Federal Reserve Bank is a separate corporation owned by commercial banks...The stockholding commercial banks elect two thirds of each Bank's nine member board of directors. The remaining three directors are appointed by the Federal Reserve Board. The Federal Reserve Board regulates the Reserve Banks, but direct supervision and control of each Bank is exercised by its board of directors [citation]....Each Bank is statutorily empowered to conduct [its] activities without day to day direction from the federal government....It is evident from the legislative history of the Federal Reserve Act that Congress did not intend to give the federal government direction over the daily operation of the Reserve Banks...

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The Banks are listed neither as “wholly owned” government corporations under 31 U.S.C. § 846 nor as “mixed ownership” corporations under 31 U.S.C. § 856....Additionally, Reserve Banks, as privately owned entities, receive no appropriated funds from Congress....[T]he Banks are empowered to sue and to be sued in their own name. They carry their own liability insurance and handle their own claims....[T]he Banks have defended against tort claims directly, through private counsel, not government attorneys...and they have never been required to settle tort claims under the administrative procedure of 28 U.S.C. § 2672…

Id., 4, 7-10.