Author
1988-1989 Student Essay Contest Question
Is the Federal Reserve Too Independent?
"One matures over time."
That was Paul Volcker's response when he was reminded that he once suggested the Federal Reserve System should be placed under the direction of the Treasury Department.
The former Federal Reserve Board chairman made the suggestion about 40 years ago in an undergraduate thesis.
That public reminder of Volcker's college thesis was all in good fun, but the issue of external control is no laughing matter for the Fed. It's been a matter of contention since passage of the Federal Reserve Act in 1913 and strikes at the heart of 76 years of debate.
In that spirit of debate, and to commemorate the Fed's 75th anniversary, the Minneapolis Fed sponsored an essay contest for Ninth District high school students last fall. The 90 participants, whose entries were reviewed by a panel of district educators and economists, addressed this question:
Should the current structure and independent status of the Federal
Reserve be maintained, or should it be modified to give Congress more
control?
While the majority of students said the Fed should remain independent,
some echoed Volcker's earlier sentiments and suggested that the Fed has
too much unsupervised power.
Indeed, one of the winners, Julian Dolby of Ham Lake, Minn., who supports the idea of Fed independence, posed this question:
"Does this mean I think this is the best Federal Reserve possible? Not at all." Dolby went on to explain that he supports change in the way monetary policy is formed, and he encouraged greater cooperation among the Fed and other branches of government. But, he added, "Keep the Federal Reserve independent of all branches of government, particularly the U.S. Congress."
Dolby shared second-place honors with Erin Magnus of Bovey, Minn., and her conclusion reflects the majority opinion:
"The loss of independence to the Fed would deal a serious blow to the American economy. Monetary policies would be subject to political browbeating and games-playing. The notorious red-tape delays of Congress would seriously hamper the effectiveness of the Federal Reserve that had lost its autonomy."
The first-place essay, submitted by Pam Bernicke of Eau Claire, Wis., argues that the Fed's independence is essential for establishing long-range economic policies.
Bernicke, Bond, Magnus and each of the 31 finalists received US savings bonds as prizes, along with an invitation to spend a day at the Minneapolis Fed for an educational workshop. The students' teachers and parents were also invited to the program.
Independent and Effective
Pam Bernicke
Eau Claire Memorial High School
Eau Claire, Wisc.
The year 1913 led to the formation of a system which has guided our country from the woes of recession to the joys of prosperity. It is what we commonly refer to as the Federal Reserve System. While it has served as a barrier against numerous economic catastrophes, many are questioning its effectiveness as complex economic issues and problems confront our country's citizens. Complaints are being voiced against the System's structure and independence as some argue that more government involvement in the Fed would be advantageous. However, these critics fail to realize that throughout its existence this system has proven effective and is held accountable to Congress. Even though the Federal Reserve System may make erroneous judgments from time to time, our country should strive to maintain the structure and independence of an organization which has served us well.
Opposition to the Fed stems from two basic arguments. Some feel its structure is undemocratic and gives no guarantee of wise decisions and policies. Other critics contend that a system which holds so much power needs to be held directly accountable to Congress. These critics feel too much independence is being given to an organization which affects our entire country. California Sen. Alan Cranston summarizes these beliefs with his observation of policies being "made for 232 million Americans by seven unelected, unaccountable, and for the most part unknown individuals (with) awesome power and answerable to no one."
While these ideas may appear reasonable, they simply do not justify changing a system which has given us 75 years of basic economic soundness. With the Fed trying to battle inflation rates, promote economic growth and maintain a stable currency, all goals might not be fully met. As Preston Martin, former vice-chairman of the Fed's Board of Governors, states, "Not even a genius can come up with an answer to (all) the problems of today." The complexity of the modern economic situation accounts for whatever past errors the Fed might have made. It is important, however, that we look past these mistakes and focus on the larger picture of a system which has curbed inflation, firmed the dollar, and continually battles for achievement of national economic goals.
Besides focusing on the "big picture," we must recognize the superiority of the Federal Reserve System as opposed to the alternatives. Although the Fed is not democratic in the sense that US citizens directly elect its members, adequate standards do exist concerning appointed members. The System has a blend of quality individuals at all levels which ensures productive economic policies. One example of this efficiency can be found with the input of Reserve Bank directors. By constantly being on top of conditions in their own communities, an important economic network has been established. All of this information can then be regularly funneled to the prestigious Board of Governors and the chairman for consideration, but even the chairman's ideas do not go unchecked. Former Chairman Paul A. Volcker found this out when he lost a vote to cut the discount rate.
Perhaps no aspect contributes more to the Fed's efficiency than that of its independence within government. By remaining separate from the Treasury, the Fed also remains separate from shifting political pressures which could result in unsound economic policies. Remaining distinctly separate from Congress enables the Fed to pursue long-term, beneficial policies. It makes no sense to grant control of our nation's banks to a government that cannot control its own spending and whose debts have already interfered with the central bank's role. Today's economy needs a Fed which will stand against the irresponsibility that short-term political desires create. As New Wave economist Robert Lucas humorously put it, "Since nobody understands very deeply how the economy responds, it's best not to try anything fancy." While not put in the most eloquent of words, this statement does make a point. We cannot further subject our economy to shifting political winds which constantly turn in different directions and toward different goals.
The Fed's independence, however, does not mean that it rules with unchecked or unlimited power. The president, with Senate approval, appoints the governors, and Congress can always exercise its power to change and amend the System's constraints. Periodic testimonials to Congress by board members also ensure that the economy's best interests are being pursued as well as the soundness of our financial system.
There is no justification for changing a Federal Reserve System which has supported and furthered the best interests of our economy and all that it affects. It continues to pursue policies from an independent status which enables it to see past short-term interests and on to matters of long-term financial stability. The United States is very fortunate to possess a Federal Reserve System which, so uniquely and effectively, can deal with all of the concerns our modern-day world presents to central banking systems.
