The Federal Reserve Board and the Unitary Executive:

Marty Lederman and Jack Balkin recently took advocates of the unitary executive theory to task for downplaying the fact that their position implies that the Federal Reserve Board is unconstitutional. Michael Rappaport, a defender of the unitary executive theory, agrees that the Fed is indeed unconstitutional under his approach, but argues that courts should avoid invalidating it because of respect for a precedent that has attracted such broad support that a court decision striking down the Fed would probably lead to the enactment of a constitutional amendment. Just to clarify, Balkin, Lederman, Rappaport and I are all using the term "unitary executive" in the sense I expounded in this post (presidential control of executive branch personnel, including the ability to hire and fire at will), not in the sense sometimes used by the Bush Administration to mean an executive with virtually unlimited wartime authority. As I explained in the earlier post, the unitary executive is a theory of the distribution of executive power, not of its scope. It is perfectly consistent to believe (as I do) that executive power is strictly limited, but also concentrated in the hands of the president.

I think Balkin and Lederman are right in so far as the Federal Reserve really is unconstitutional if you believe in the unitary executive. That theory holds that all executive branch officials must be subject to the orders of the president and be removable by him. Under current law, members of the Federal Reserve Board need not obey presidential orders and can't be fired by the president except "for cause" (with refusal to obey presidential directives not considered a sufficient cause in and of itself).

However, I don't think that the unconstitutionality of the Fed is as powerful an argument against unitary executive theory as Balkin and Lederman suggest. There is good reason to believe that a judicial invalidation of the Fed wouldn't be nearly as harmful as conventional wisdom suggests.

First, as Rappaport implies, the independent Fed now has broad bipartisan support. Even under the highly restrictive requirements of Article V, it is likely that a constitutional amendment legalizing the Fed could quickly be enacted. Indeed, given how long it would take for a case to reach the Supreme Court, the amendment could well be enacted even before the hypothetical case got to the supremes.

Second, as Steve Calabresi has pointed out, even if the Fed were not formally independent, the president would come under heavy political pressure to minimize politicization of its operations. Any sign of presidential manipulation of the Fed would likely draw a negative reaction from the stock market and private banks, thereby increasing the risk of recession. In practice, presidents probably would sometimes try to intervene in Fed operations if they had the power to do so. But they wouldn't do it nearly as often as the doomsayers claim.

Finally, while I'm no monetary economist, I'm far from persuaded that the economy would suffer severe damage in the absence of an independent Fed. The Fed has made serious mistakes in its time, including those that likely played a major role in causing the Great Depression. I'm not at all convinced that giving a small group of insulated government technocrats control over such an important part of the economy as the money supply is really the best available option. No matter how skillful they are, there is always a serious risk that they will commit a devastating error, or even engage in deliberate malfeasance out of partisan motives. I may well be missing something. But I see no reason why socialist central planning of the money supply is likely to be much better than similar central planning of other parts of the economy. As I said, I'm no expert on the subject, but my libertarian instincts suggest that a system of competing privately issued currencies (as advocated by economists such as Lawrence White and F.A. Hayek) would be far less risky. Ineptness or misconduct by the issuers of any one currency could not bring down an entire economy based on free banking. Moreover, as White and Hayek argue, each issuing bank would have a strong financial incentive to maintain the value and reputation of their currency. Not so with our current system, where the errors of the Fed can indeed damage the entire economy, and the members of the Reserve Board cannot profit from making good decisions.