No, the Fed Was Not ‘Independent’ before Trump
Donald Trump’s attempts to dismiss one of the Fed members is part of a long history of political interventionism. Nevertheless his actions remain unprecedented.
There are myths big and small that persist unchallenged. Few are as big and long-standing as that of the “independence” of the U.S. Federal Reserve, the country's central bank.
As Donald Trump attempts to fire Lisa Cook, one of the members of the Federal Reserve Board of Governors, concerns are being raised on both the right and the left: Trump is threatening to bring to an end to the strict separation that exists between politics and the central bank. If the situation truly constitutes the umpteenth test of the scope of presidential powers since the start of his second term, it does not, however, represent the end of the Fed’s “independence.”
For the simple reason that this “independence” never existed.
Since its inception at the end of the 18th century, the United States has been divided by an intense debate on the centralization of powers. How much power (if any) should institutions have over the entire country? Which of them should be left to states, cities, communities, or even families and individuals?
Monetary policy did not escape this rift. The first half of the 19th century was marked by an epic battle between the central bank at the time — the Second Bank of the United States — and Democratic President Andrew Jackson; then, in its second half, by no central bank at all.
Jackson, the first real populist to occupy the White House, saw the bank and its president, Nicholas Biddle, as aristocratic vestiges with no concern for the well-being of farmers and other “ordinary citizens.” After years of fighting, Jackson managed to dissolve the bank at the end of his presidency in 1836. This led to a long period dubbed the “Free Banking Era,” which lasted some three quarters of a century.
This period was marked by an explosive growth of the American economy, notably driven by the Industrial Revolution, and a series of extraordinarily destabilizing financial crises. The last, dubbed the “Panic of 1907,” frightened public policymakers enough to establish a central bank that would ensure the creation of an “elastic currency” to react to credit demands in times of crisis.
But, again, there was division. On one side were private bankers who insisted on themselves managing any entity that might control the American economic system; on the other, supporters of a more active and interventionist central government who pushed for full governmental control. The “compromise” inspired the core of the law (the Federal Reserve Act) that established the Federal Reserve: a structure of semi-private regional banks positioned in strategic locations, such as Boston, Chicago, Dallas and New York, to intervene in the event of a crisis.
However, this compromise was not enough for the president at the time, Woodrow Wilson, who wanted to add a layer: a bank in Washington that would act as a central nervous system for the entire body of regional institutions on which the Treasury Secretary, a presidential cabinet member, would have a seat, and whose board members and chair would be nominated by the U.S. president.
The stated objective could not be more clear: to ensure that the president has a voice in monetary policymaking!
Nowhere in the law is it stipulated that the Fed is an institution “independent” from politics. If a certain form of independence has nevertheless emerged, it is due to a kind of social pact adopted by the two major parties in Washington, which consisted of limiting the politicization of the institution to ensure its perpetuity. Still, numerous presidents have since actively tried — and, in some cases, clearly succeeded — to influence monetary policy decisions.
The myth of a “Wall of China” between the central bank and politics is perhaps, from an economic point of view, necessary to reassure markets. But it simply does not reflect the historic and political reality.
Does that mean that what Trump is doing right now is not unusual? On the contrary, it is literally unprecedented!
Never in the 112 years of the Fed’s existence has an American president targeted members of the institution in such an aggressive and personal manner. And never before has a president attempted to fire a governor in this manner.
Perhaps Cook really did commit financial fraud, as critics allege, which would give Trump a reason to fire her. But she has not yet been charged, indicted or found guilty.
And should that day come, Cook will join a club of which Trump, himself, has been a member — for two years.
*Editor's note: On Wednesday, Sept. 10, a federal appeals court ruled that Lisa Cook could remain in her job while she fights President Trump's attempts to fire her. The Trump administration immediately moved to appeal this decision.
There are myths big and small that persist unchallenged. Few are as big and long-standing as that of the “independence” of the U.S. Federal Reserve, the country's central bank.
As Donald Trump attempts to fire Lisa Cook, one of the members of the Federal Reserve Board of Governors, concerns are being raised on both the right and the left: Trump is threatening to bring to an end to the strict separation that exists between politics and the central bank. If the situation truly constitutes the umpteenth test of the scope of presidential powers since the start of his second term, it does not, however, represent the end of the Fed’s “independence.”
For the simple reason that this “independence” never existed.
Since its inception at the end of the 18th century, the United States has been divided by an intense debate on the centralization of powers. How much power (if any) should institutions have over the entire country? Which of them should be left to states, cities, communities, or even families and individuals?
Monetary policy did not escape this rift. The first half of the 19th century was marked by an epic battle between the central bank at the time — the Second Bank of the United States — and Democratic President Andrew Jackson; then, in its second half, by no central bank at all.
Jackson, the first real populist to occupy the White House, saw the bank and its president, Nicholas Biddle, as aristocratic vestiges with no concern for the well-being of farmers and other “ordinary citizens.” After years of fighting, Jackson managed to dissolve the bank at the end of his presidency in 1836. This led to a long period dubbed the “Free Banking Era,” which lasted some three quarters of a century.
This period was marked by an explosive growth of the American economy, notably driven by the Industrial Revolution, and a series of extraordinarily destabilizing financial crises. The last, dubbed the “Panic of 1907,” frightened public policymakers enough to establish a central bank that would ensure the creation of an “elastic currency” to react to credit demands in times of crisis.
But, again, there was division. On one side were private bankers who insisted on themselves managing any entity that might control the American economic system; on the other, supporters of a more active and interventionist central government who pushed for full governmental control. The “compromise” inspired the core of the law (the Federal Reserve Act) that established the Federal Reserve: a structure of semi-private regional banks positioned in strategic locations, such as Boston, Chicago, Dallas and New York, to intervene in the event of a crisis.
However, this compromise was not enough for the president at the time, Woodrow Wilson, who wanted to add a layer: a bank in Washington that would act as a central nervous system for the entire body of regional institutions on which the Treasury Secretary, a presidential cabinet member, would have a seat, and whose board members and chair would be nominated by the U.S. president.
The stated objective could not be more clear: to ensure that the president has a voice in monetary policymaking!
Nowhere in the law is it stipulated that the Fed is an institution “independent” from politics. If a certain form of independence has nevertheless emerged, it is due to a kind of social pact adopted by the two major parties in Washington, which consisted of limiting the politicization of the institution to ensure its perpetuity. Still, numerous presidents have since actively tried — and, in some cases, clearly succeeded — to influence monetary policy decisions.
The myth of a “Wall of China” between the central bank and politics is perhaps, from an economic point of view, necessary to reassure markets. But it simply does not reflect the historic and political reality.
Does that mean that what Trump is doing right now is not unusual? On the contrary, it is literally unprecedented!
Never in the 112 years of the Fed’s existence has an American president targeted members of the institution in such an aggressive and personal manner. And never before has a president attempted to fire a governor in this manner.
Perhaps Cook really did commit financial fraud, as critics allege, which would give Trump a reason to fire her. But she has not yet been charged, indicted or found guilty.
And should that day come, Cook will join a club of which Trump, himself, has been a member — for two years.
*Editor's note: On Wednesday, Sept. 10, a federal appeals court ruled that Lisa Cook could remain in her job while she fights President Trump's attempts to fire her. The Trump administration immediately moved to appeal this decision.
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