The Myth of Independence: How Congress Governs the Federal Reserve

by Sarah A. Binder, Mark Spindel

Born out of crisis a century ago, the Federal Reserve has become the most powerful macroeconomic policymaker and financial regulator in the world. The Myth of Independence traces the Fed’s transformation from a weak, secretive, and decentralized institution in 1913 to a remarkably transparent central bank a century later. Offering a unique account of Congress’s role in steering this evolution, Sarah Binder and Mark Spindel explore the Fed’s past, present, and future and challenge the myth of its independence.

Binder and Spindel argue that recurring cycles of crisis, blame, and reform propelled lawmakers to create and revamp the powers and governance of the Fed at critical junctures, including the Panic of 1907, the Great Depression, the postwar Treasury-Fed Accord, the inflationary episode of the 1970s, and the recent financial crisis. Marshaling archival sources, interviews, and statistical analyses, the authors pinpoint political and economic dynamics that shaped interactions between the legislature and the Fed, and that have generated a far stronger central bank than anticipated at its founding. The Fed today retains its unique federal style, diluting the ability of lawmakers and the president to completely centralize control of monetary policy.

In the long wake of the financial crisis, with economic prospects decidedly subpar, partisan rivals in Congress seem poised to continue battling over the Fed’s statutory mandates and the powers given to achieve them. Examining the interdependent relationship between America’s Congress and its central bank, The Myth of Independence presents critical insights about the future of monetary and fiscal policies that drive the nation’s economy.

Genres: Economics, Politics, History, Finance, Political Science

296 pages, Hardcover

Published September 5, 2017

Reviews

[Frank Stein · Rating 4 out of 5]

This is a well done overview of the Federal Reserve's relationship to Congress over the Fed's 100 year history. The authors show that Congressional politics helped determine the layout of Federal Reserve districts and the placement of Federal Reserve Banks, which were especially overrepresented in the South, and that the location of those banks later created local political supporters who defended the Federal Reserve in Congress (again and again). Although the Federal Reserve often kowtowed to the President, the transcripts show they more often worried about how Congress could change their statutes and take away their revered "independence." In practice, this meant agreeing to whatever Congress seemed to want. As Binder and Spindel show, that is a funny kind of independence.

[Ryan · Rating 3 out of 5]

This book is a sort of history of the Fed with a focus on the political forces that have driven its evolution. Relative to other histories of the Fed, this one has more quantitative analysis of the drivers of Fed-related legislative outcomes, with varying degrees of persuasiveness (pretty small samples and a lot of discretion in operationalizing variables). But the broader point of the book is in the title: the authors argue that the notion of a independent Fed is a "myth" because Congress and the presidency have shaped Fed policy and structure over time.

My main complaint about the book is that it is sort of premised around a straw man. The authors basically argue that the Fed is accountable to Congress, which everybody already knows. When people--especially economists--say that a central bank is independent, they've never meant that the central bank is all powerful and completely immune to the power and authority of politicians. Central bank independence has more precise definitions that have had wide use in the literature, and the authors of this book give those definitions nearly zero attention.

More specifically: on page 229, as the authors review Fed efforts to explain its Great Recession actions to the public, they say, "A truly autonomous central bank should have felt little compulsion to do so." This is such a strange claim. When people say "independent central bank," they don't mean "truly autonomous." In loose terms, they mean independence compared to history (or perhaps other countries). In specific terms, when people talk about independence they are referring to some particular form on independence, like target independence or instrument independence. People might be referring to the fact that the central bank's senior management can't be automatically replaced every time a new party comes to power. These are significant markers of independence compared to previous eras and many other central banks.

So to really make the case that the Fed's independence is a "myth" in any meaningful and nontrivial way, as the present authors want to do, they need to delve into "compared to what" analysis, whether international or historical. And they need to be more specific about what independence means to them and why that's a useful meaning. Does independence mean that politicians *never* revise the central bank's mandate or change rules for central bank accountability or transparency? That the central bank *never* finds it useful to publicly explain or defend its actions? That seems to be the definition of independence that the authors use, but I would call it a pretty high bar indeed. The authors say that Bernanke's understanding of the importance of political feasibility "buries the notion of Fed independence" (232), but what is really going on here is that the authors have adopted a straw man version of independence that is, frankly, not very useful to anyone. If independence means that the central bank is accountable to nobody in any way, then yes, the Fed is not independent; but that kills the usefulness of the term "independence" and differs wildly from how most observers and scholars of central banking use the term.

So the central theme of the book is not terribly useful or persuasive. That said, I liked the book and found much of value in it. In particular, I think the authors insightfully tell the Fed's history as a tug of war between Congress and the executive. The famous Fed-Treasury Accord of 1951, they argue, was more about Congress taking control of the Fed back from the White House than it was about the Fed gaining more independence generally.

The authors also do a good job of persuading readers that perceptions of Fed independence are highly valuable to legislators; Congress can count on the Fed to enact countercyclical policy so that Congress doesn't have to do it, and no matter what happens, Congress can blame the Fed when things go wrong. In that sense, Congress has little incentive to compromise the Fed's reputation for independence.

So I have mixed feelings. A lot of the theorizing in the book is vague enough to be nonfalsifiable; then the authors do a few little logit regressions and claim verification. The central idea about independence being a myth really boils down to a semantic point in which the authors differ from practically everyone else who studies central banking. But I'm glad I read the book and suspect others will find it useful, provided they already have enough background in related literature to sort the good from the bad. I would say this book would not be an ideal first introduction to central banking.

[Jeffrey · Rating 4 out of 5]

This is a good book if you are looking for a book on the FED that analyzes it from how policy, institutions, and the public all mix together to create new institutions and manage them over time and how endogenous and exogenous forces work over time on institutions. No institution is independent, and Sarah Binder explicates the multi-varied ways the FED is contingent upon multiple other institutions.

[Ken · Rating 4 out of 5]

Fed Independence is both real and fake.

The Fed must be independent to give politicians a reason why the economy is doing bad. Most central banks only have mandate which is price stability. The U.S. central bank is unique in its dual mandate of price stability and employment.

[Matthew · Rating 4 out of 5]

If you want to understand the history of the Federal Reserve and particularly the Fed's place in politics, this book gives a very good overview.

[Jessica · Rating 4 out of 5]

Fascinating look at the political economy of central banking.

[JC NoKey · Rating 2 out of 5]

By the end of the war, the federal government owned some 40 percent of the nation's capital assets (Katznelson 2013, 345).