In the Invention of Money, a Planet Money feature on This American Life last month, the reporters peel back the layers on the terrifyingly crazy fiction called money. But, in doing so, they are surprisingly quick to uncritically repeat another fiction: the idea that some government agencies somehow aren’t really part of the government. During his intro to this fascinating piece on the Federal Reserve’s response to the financial crisis, Ira Glass explains that “though the Federal Reserve’s name includes the word ‘Federal’ it is not actually part of the Federal government. It is an independent institution.”
I’m not the only one who picked up on this theme. Over at a Ron Paul fan site, a blogger took away that the show “explains what the Fed is, not related to the Federal Gov, etc.” A commenter on this post concluded “3) the Fed is not part of the government.” This is, of course, not really true.
The Federal Reserve is part of the federal government. It is an “independent institution” primarily in the way that many other federal independent agencies are independent — the heads of the agency can’t be fired at will by the President and the agency has some additional forms of insulation from political forces like a protected revenue source. (Some helpful background). The Fed does have a more complicated, and perhaps more effective, insulation structure than many other agencies but that shouldn’t lead to the conclusion that it isn’t part of the government.
The Fed itself says it is an “independent central bank because its decisions do not have to be ratified by the President or anyone else in the executive or legislative branch of government.” The Fed explains further, “[T]he Federal Reserve must work within the framework of the overall objectives of economic and financial policy established by the government. Therefore, the Federal Reserve can be more accurately described as ‘independent within the government.’” (My emphasis).
I’m bothered that the Planet Money team would repeat this myth uncritically in part because their show often thoughtfully tackles the legal and economic fictions which make up our economy. But more important than intellectual consistency, there is danger in perpetuating the myth that the Fed is an unaccountable, boundless force totally apart from government. Congress and the President made the Federal Reserve in 1913, and Congress and the President could unmake the Federal Reserve tomorrow. How do I know that? Because the Fed has authority to act in the name of the United States and make U.S. money only because a law says so. (This one.)
Unlike the Ron Paul fans seizing on the idea of a Fed beyond all government control, I don’t actually want Congress to make the Fed disappear. There are good reasons to insulate some monetary decisions from day-to-day and year-to-year political influences. But at the same time, as citizens we have to remember that the Fed is, and can only be, as “independent” as our elected representatives allow.