The Fed’s Independence Goes Back to the Founding

The business community has long viewed the independence of the Federal Reserve (the Fed) as essential for a strong economy and financial stability. The independence of the Fed has a long tradition, that has served the country well for 250 years. Interfering with it now would imperil the smooth functioning of the monetary system and threaten the long-term economic growth of the nation.

While the Fed was founded in 1913, its ability to set monetary policy free from political interference traces back to the 1790s. The founders knew monetary policy had to be free from political pressure because they had seen firsthand in England how government control of the money supply could be manipulated to the benefit of those with influence over its setting. The King’s ministers often diverted resources for their own short-term political benefit, which would not necessarily be to the benefit of the people.

Citizens of the nascent United States were aware of this English experience and cognizant of the executive branch’s incentive to spend and put more money into circulation than economic circumstances would necessitate. The Framers also appropriately saw that setting monetary policy and establishing financial stability were not traditional executive functions.  

Historical Significance

The Framers, including James Madison and Alexander Hamilton, wrote in the Federalist Papers about the value of independence for those tasked with setting monetary policy. They acted accordingly in designing the new government. At the same time as they were establishing the executive branch, the Framers insulated monetary policy and the promotion of financial stability from direct presidential control. They designed a sensible system that first combined executive and legislative oversight and later included the government and the private sector working in partnership. None of these iterations supposed that monetary policy was the exclusive purview of the executive branch. 

The predecessors of the modern Federal Reserve were the original sinking fund proposed by Hamilton in 1790, followed by the First Bank of the United States, and later the Second Bank of the United States. As originally proposed, the sinking fund would have been administered by a commission of five members, three of whom were outside the direct influence of the President; even after the initial proposal was amended, two of the members were independent.  

The First and Second Banks of the United States were similarly established to administer monetary policy while remaining outside presidential control. The first bank, like today’s Fed, had government and private shareholders. And instead of placing appointment of the bank president in the U.S. President’s control, Congress prescribed who could serve as a director. The First Bank’s shareholders selected these twenty-five directors, who then chose its president. The First Bank was thus privately controlled, though Congress authorized the Treasury Secretary to inspect the Bank’s books and remove government deposits at any time. 

Naming Leadership

The Second Bank’s structure differed from the First’s in a key respect: Congress empowered the President to appoint five of the Second Bank’s twenty-five directors with the Senate’s advice and consent.

Still, the twenty directors not nominated by the President were elected each year by the private stockholders. And as with the First Bank, the President of the Second Bank was not nominated by the U.S. President, but chosen by the bank’s directors.

Setting Monetary Policy

The legacy of the National Banks established a historical practice of employing a public-private hybrid institution to set monetary policy. Like the Banks of the United States, the modern-day Fed is a synthesis of the public and private sectors, tasked with setting monetary policy and stabilizing the financial markets.

The Federal Open Market Committee (FOMC) is the group within the Federal Reserve System that sets monetary policy. The FOMC consists of the seven Board Members of the Federal Reserve—which includes the Fed Chair—and five of the 12 heads of the Federal Reserve Regional Banks.

The President nominates the Fed Chair and the other Fed Board Members, with the advice and consent of the Senate, while the heads of the regional banks are appointed by the private shareholders of those banks. The Fed Chair and the other members of the Fed Board thus set monetary policy in cooperation with their private sector colleagues.

Bottom Line

The historical record clearly shows that the founders always recognized the importance of placing the institution responsible for setting monetary policy outside the executive branch to ensure its independence. That tradition has fostered economic growth and created the most stable and trusted financial system in the world. There is no reason to change it now.

About the authors

Neil Bradley

Neil Bradley is executive vice president, chief policy officer, and head of strategic advocacy at the U.S. Chamber of Commerce. He has spent two decades working directly with congressional committee chairpersons and other high-ranking policymakers to achieve solutions.

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Curtis Dubay

Curtis Dubay is Chief Economist, Economic Policy Division at the U.S. Chamber of Commerce. He heads the Chamber’s research on the U.S. and global economies.

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