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The question as to the legal status of the Federal Reserve System
is a many-sided question.

It involves the question as to the status of

each of its parts - the Board of Governors, the FOMC, the Federal Reserve
Banks, and the Federal Advisory Council - in relation to the Federal Gov­

It involves the question as to where each of these parts of the

System should be placed in the three "branches" of the Government.


involves the relation of each of these parts to the other parts of the

Finally, it involves the nature of the System's "independence"

within the Government - the bases of that independence, the merits of
proposals for modification of that independence, and, inherently and
fundamentally, whether the System's independence can be justified.
The principal purpose of this paper has been to present these
questions objectively from both legal and historical viewpoints and with
copious quotations, so that the reader may form his own conclusions.


following summary reflects only the writer's views, with which the reader
is free to differ.
no dissent:

There is at least one proposition as to which there can be
the Board of Governors of the Federal Reserve System is an

independent establishment of the Federal Government, "a part of the
Government itself."

This proposition was firmly established by the

Attorney General in 1914.

It was temporarily challenged in the late

1930's when the D. C. Government attempted to tax the Board's building
and when the Bureau of Employees* Compensation questioned whether the
Board's employees were employees of a Government agency; but those


questions have long since been laid to rest.

The members of the Board

are appointed by the President; the Board's employees are employees of
the Federal Government; and the Board, under statutes of Congress, exer­
cises what are clearly governmental functions.

The Federal Open Market Committee, like the Board of

Governors, is an agency of the Federal Government, despite the fact that
five of its twelve members are not appointed by the President of the
United States.

In the exercise of its statutory authority to regulate

the open market operations of the Federal Reserve Banks, the Committee
has control of one of the most important tools of monetary policy and
unquestionably performs governmental functions.

The Federal Advisory Council is likewise an agency of the

Federal Government even though none of its members is appointed by the

Its legal status, however, is relatively unimportant, since

it has only advisory powers.

Contrary to statements frequently made by members of

Congress, Federal Reserve officials, and others, to the effect that the
Federal Reserve is an "arm of Congress" and not in the executive branch,
it is the writer's opinion that the Board of Governors and the FOMC are
agencies in the executive branch of the Federal Government.

Both are

creatures of Congress but no more so than any of the old line "executive"

The fact that the Board is required by statute to make

annual reports to Congress is not conclusive; such a requirement applies
also to agencies that are clearly in the executive branch of the Govern­

Although the Board and the FOMC, in issuing regulations, exercise

quasi-legislative functions, they do not make laws; and, although the


Board, in passing upon applications by bankd and bank holding companies,
exercises quasi-judicial functions, the Board is not a court in a con­
stitutional sense.

Other agencies of the Government that are obviously

in the executive branch likewise perform such quasi-legislative and quasi­
judicial functions.

Although the Board and the FOMC legally are in the executive

branch, they are not subject to direction or control by the President in
the performance of their statutory functions.

In this respect, they are

like all other agencies in the executive branch, including the Executive
Departments, except that Department heads, unlike members of the Board
and the Committee, serve at the pleasure of the President.

In addition,

specific provisions of the Federal Reserve Act have the effect of insu­
lating the Board from pressure or influence not only by the President
but by the Congress as well.

The Federal Reserve Banks are corporate instrumentalities

of the United States established and operated for public purposes and
not for private profit.

Although the stock of each Reserve Bank is

wholly owned by its member banks and six of its nine directors are elected
by the member banks, the operations of the Reserve Banks are in no way
subject to direction or control by the member banks.

On the other hand,

the Reserve Banks are not parts of the United States Government in the
same sense as the Board and the FOMC; and Reserve Bank employees are
not employees of the United States.

Whether the Reserve Banks are

"agencies" of the United States is a debatable question; its determina­
tion for purposes of Federal statutes must depend largely upon the nature
and intent of the particular statute involved.



Those who make the erroneous assumption that the Federal

Reserve is not in the executive branch apparently believe that this is
the basis for the so-called "independence" of the Federal Reserve.


ally, there is no connection; whether or not the System is in the execu­
tive branch has nothing to do with its independence.

As. an agency in

the executive branch, the Board of Governors shares with other executive
agencies freedom from direction by the President in the performance of
its statutory functions; but the Board enjoys an additional degree of
independence by virtue of specific statutory provisions enacted by Con­

Moreover, it should be emphasized again that, by virtue of other

statutory provisions, the Board also enjoys a high degree of independence
from the Congress itself.

The bases for Federal Reserve independence are

summarized below:
(a) The original Federal Reserve Act gave appointive members
of the Board terms of 10 years, with the term of one member expiring
every two years.

The deliberate purpose was to give Board members a high

degree of independence, to take them out of politics, and to preclude a
new President from "packing" the Board.

Since 1936, the seven members

of the Board have been appointed for 14-year terms.

Consequently, in

the absence of deaths and resignations, a new President may appoint only
two of the seven members during his first term of office.
(b) If a Department head acts contrary to the wishes of the
President, he may be summarily dismissed by the President.

Under the

Federal Reserve Act, a Board member may be removed by the President only
"for cause", which is understood to mean incompetence, neglect of duty,
or malfeasance in office.


( j Although the statemeht of economic pdlicy (contained in the
Employment Act of 1946 applies to the Board and the FOMC as well as to
other Federal agencies, specific economic policy goals or targets set
by the President in his annual economic report to Congress are not bind­
ing upon the System.

In other words, the President cannot direct the

Board or the FOMC as to how they should use their monetary policy tools
in order to achieve the objectives of the Employment Act.
(d) Employees of the Board are specifically exempted by the
Federal Reserve Act from the classified civil service.

This means that

the Board's employees are not subject to the Classification Act or to
regulations of the Civil Service Commission thereunder.
(e) One of the most significant reasons for the System's inde­
pendence has been the fact that, unlike most Government agencies, it has
not been dependent upon Congressional appropriations.

Under provisions

of the original Federal Reserve Act that have never been changed, all
expenses of the Board are defrayed from assessments on the Reserve Banksj'
which, in turn, derive their earnings principally from purchases and
sales of Government securities - earnings sufficient for the expenses
of the Reserve Banks as well as those of the Board.

Indeed, such earn­

ings have been so sufficient that millions of dollars have been paid into
the U. S. Treasury pursuant to voluntary action by the Board under pro­
visions of section 16 of the Act.

Moreover, section 10 of the Act since

1933 has exprsssly provided that funds of the Board shall not be regarded
as "appropriated moneys"; and, consequently, the Board is not subject to
many statutes of Congress that obviously apply only to agencies that
operate with appropriated funds.


(f) While the funds of the Board derived from assessments on
the Reserve Banks are not appropriated moneys, they were held by the
Attorney General in 1914 to be "public" moneys and therefore subject to
audit by the Treasury Department; and, after 1921, they were subject to
audit by the General Accounting Office.

In 1933, however, Congress pro­

vided that the Board's funds should not be regarded as "Government funds";
and, as a consequence, the Board has not been subject to audit by GAO
since that time.
(g) Another important basis of Federal Reserve independence is
a provision of the Federal Reserve Act, added in 1933, that authorizes
the Board to determine the manner in which its obligations shall be in­
curred and its expenses paid and that makes the employment, compensation,
leave, and expenses of its employees subject solely to the provisions of
that Act and regulations of the Board.

Because of these provisions, the

Board is not subject to various Federal statutes relating to Government
contracts and expenditures and to salaries, leave, and employment of
Government employees.
(h) Finally, under a 1934 amendment to the Federal Reserve Act,
the Board has "sole" control of its building and space therein - a pre­
rogative of no little importance.

As a practical matter, the independence of the Federal

Reserve is not unlimited.

In the national interest, the monetary poli­

cies of the Federal Reserve and the fiscal policies of the Treasury must
be coordinated; and there have been occasions, as during wartime, when
Federal Reserve policies have been influenced strongly or dominated by
the overall policies of the current Administration.

Moreover, the System


is under continuous scrutiny by the Congress, which at any time can act
to restrict the System's independence.

Of the various proposals that have been made over the years

for changes in the Federal Reserve System, some would significantly dimin­
ish if not destroy the System's independence from the President.


the President's ability to control the Board would be increased if he were
given power to remove Board members at pleasure, or if the number of Board
members were reduced and the length of their terms were substantially
shortened, or if the Secretary of the Treasury were again made an ex
officio member of the Board, or if the economic targets set by the Presi­
dent were made mandatory upon the System.

One proposed change in the law - that the term of the chair­

man of the Board as chairman be made approximately coterminous with that
of the President - might actually enhance the Board's influence in the
determination of national economic policies without lessening the Board's

The Federal Reserve's independence from Congress would be

substantially reduced if the System should be made dependent upon Con­
gressional appropriations, if it should be subjected to audit by the
General Accounting Office, or if the System should be obliged to operate
under a specific statutory economic policy mandate.

To a lesser degree,

the flexibility of the System's operations would be hampered by repeal
of present provisions of law under which the Board's employees are
exempted from the classified civil service and the Board is given sole
discretion as to the manner in which its expenses are incurred and as to
the employment, compensation, and leave of its employees.



Adoption of proposals to abolish the Federal Open Market

Committee and transfer regulation of open market operations to the Board
of Governors, to change the procedure for the selection of Reserve Bank
directors, or to retire Reserve Bank stock now owned by the member banks
might not affect the independence of the System.

On the other hand, by

eliminating participation by the Reserve Bank presidents in the formula­
tion of monetary policies and by minimizing the corporate relationship
between the member banks and the Reserve Banks, adoption of such proposals
could give the impression, both at home and abroad, that the System was
being "nationalized" and at the same time tend to impair the traditional
strengths of the System - its unique blending of governmental and private
interests and its combination of regional administration with centralized

In the final analysis, the underlying and fundamental ques­

tion is whether the independence of the Federal Reserve System is justi­

On the one hand, there are those who contend that such independence

is ridiculous; that there is no sound reason why the Federal Reserve should
not, like other Federal agencies, be subject to appropriations and GAO
audit; and that determination of monetary policies by the Federal Reserve
without control by the President and the Congress is "undemocratic",
frustrating, and contrary to the overall national interest.

On the other

hand, those who defend the System's independence argue that the country's
"central bank" must be free from all political pressures because its
decisions in the long-run public interest may be politically unpopular.
On balance, and despite the views of Representative Patman, it
is the writer's opinion that the degree of independence presently enjoyed


by the SyStem is afe u c right*

At the same time, this conclusion would

not rule out the adoption of the proposal that the terms of the chairman
and vice chairman of the Board should be made generally Coterminous with
the term of the President; nor does the writer believe that the Systfem'fe
independence would be seriously threatened by transfer of regulation of
open market operations from the FOMC to the Board of Governors, by a
change in the method of selection of Reserve Bank directors, or by re­
tirement of Reserve Bank stock.

In any event, maintenance of the System’s

independence should not be regarded as incompatible with the continuation
of informal procedures designed to coordinate monetary policies of the
Federal Reserve with fiscal policies of the Treasury.

The System, in

its own interests, cannot afford to operate in "splendid isolation".
Perhaps the best expression of the writer's opinion was con­
tained in the 1952 Report of a Subcommittee of which Representative Patman
served as chairman. That Report said:
"The final aim, of course, is not that the Federal Reserve
System should be independent, but that the country should have
a sound economic policy. The independence of the Federal Reserve
System is a relative, not an absolute, concept. It is.good inso­
far as it contributes to the formulation of sound policy, and
bad insofar as it detracts from it. Measured by this standard,
the Subcommittee is inclined to believe that a degree of inde­
pendence of the Board of Governors about equal to that now
enjoyed is desirable. Many of the policies which the Federal
Reserve must advocate to maintain the soundness of the dollar
during times of inflationary pressures are unpopular; yet it
is necessary that they have a strong advocate in order to avoid
a built-in inflationary bias in the economy. This end is best
served by endowing the Board of Governors with a considerable
degree of independence - thereby enhancing its bargaining power
in the determination of over-all policy. But, the Board of
Governors, like all other parts of Government, must play as
part of a team, not as an outside umpire, and must ultimately
abide by the decisions which are made by Congress."

443/ 1952 Patman Subcommittee Report, pp. 52, 53.