Professional Documents
Culture Documents
System
A Critical Review
Introduction
All legislative powers herein granted shall be vested in a Congress of the United
States, which shall consist of a Senate and House of Representatives.
So how come the Federal Reserve (Fed), FDIC SEC, etc can make rules by way of
regulations as well as adjudicate disputes?
The answer lies in the non-delegation doctrine, which is explained on Answer.com1 as
follows (emphasis mine):
Before the New Deal, it was widely believed that Congress could not
delegate the power to make national policy to non-elected bodies
such as administrative agencies. This so-called non-delegation
doctrine kept administrative agencies small and weak. They could enforce
laws established by Congress but were unable to develop policy themselves.
In the New Deal, Congress created a number of administrative agencies to
regulate and set policy in their areas of jurisdiction. In order to maximize the
benefits of expertise and regulatory flexibility, Congress generally created
administrative agencies with the authority to regulate a given economic
activity.
In 1935, however, the Supreme Court in two cases struck down congressional
delegations of power. In Panama Refining Co. v. Ryan (1935), the Court
struck down portions of the National Industrial Recovery Act of 1933 as too
broadly delegating authority to the National Recovery Administration to
establish a code of fair competition for various industries. In Schechter
Poultry Corp. v. United States (1935), the Court considered the Act again
and struck it down in its entirety. One key defect in the Act was
Congress's delegation of policy-making power to private groups that
themselves were subject to the competition codes. These cases
established the legal rule that in order for a delegation to be
constitutional, Congress must define an intelligible principle to guide
administrative regulation and to limit administrative discretion
.
The principles of accountability and deliberation that provided the foundation
of the non-delegation doctrine continue to be important for administrative
agencies, though they are bolstered through other mechanisms. The norm of
accountability is protected with the use of internal procedures, for example
with the use of notice and comment periods in the drafting of regulations,
which gives interested parties the right to participate in the regulatory
process. Accountability is also protected because the president appoints the
heads of most agencies and can thus hold them accountable for the
You'll immediately note from that definition that legislative and adjudicative powers can
only be delegated to federal administrative agencies, not to private bodies.
In addition, you'll note that the delegation to a administrative agency must be valid, i.e.
it must conform to certain standards, and the exercise of such delegated powers must
also be done according to some standards which are also laid out above.
To determine the status of the Fed, we thus must answer the three following questions:
a) Whether the Fed is an administrative agency, i.e. part of the federal government,
or a private entity;
b) if the Fed is an administrative agency, whether the power has been properly
delegated to it; and
c) if the power has been properly delegated to the Fed, whether it is acting within the
authority delegate to it.
Such a discussion is useful to understand what reforms might be needed to avoid the
calamity of another financial and economic disaster.
Please note that, even though I have some legal education, I am not a lawyer. What I
write about legal issues usually lacks academic rigor required by academia. However,
reading other legal filings, claims complaints and judgments, I am remarkably often right
on the issues and probably would prevail on the merits.
According to its own words on the Federal Reserve Website2 (emphasis mine):
So the Fed sees itself as an 'independent entity within the government' and is, by it's
own admission and contrary to what it claims elsewhere, working for profit.
It must pay out a 6 percent dividend to its members every year. If that's not working for
profit, I don't know what is.
Others, most notably the Court of Appeals for the Ninth Circuit, don't share the Fed's
view. In Lewis v. United States, 680 F.2d 1239 (1982)3:
In both the Lewis and Orleans cases a test was performed to determine whether an
entity is a government agency. According to Lewis, the Fed then, is not a federal
government agency.
Since lawmaking power cannot be delegated to private, non-government controlled
entities (Schechter Poultry Company), it then follows, that no valid delegation of powers
exists. There is then no legal basis for the Feds actions and the Federal Reserve Act
(FRA) should be struck down by courts.
However, instead of relying on that and just stopping here, lets assume that the
delegation is still considered valid for some reason and see where this would get us.
To make this determination, we must look at the Federal Reserve Act of 19134 (FRA)
which established the Federal Reserve System.
The FRA has no preamble or purpose clause. Though not required, it is common to state
at the beginning of an act the purpose so as to lay out the spirit and purpose of a law as
well as to determine the rules of construction of the act.
Lacking such a provision, we must look throughout the act to find those guiding
principles. We find a rather general statement as to the purpose of the Board and the
FOMC:
The Board of Governors of the Federal Reserve System and the Federal Open
Market Committee shall maintain long run growth of the monetary and
credit aggregates commensurate with the economy’s long run
potential to increase production, so as to promote effectively the
goals of maximum employment, stable prices, and moderate long-
term interest rates.
These are very broad terms that describe what the Board and the FOMC is supposed to
be responsible for, it doesn't describe the power and limits thereof of the Federal Reserve
System as a whole.
Congress in essence says, “Manage the economy for us. Do so by maintaining long run
growth to promote maximum employment, stable prices and moderate long term interest
rates.” However, Congress fails to define what the terms long term growth, monetary and
credit aggregates, maximum employment, stable prices and moderate long-term interest
rates mean. Nor does it provide any guidance as to what is included in those terms an
what not.
This is a carte blanche delegation, that in essence tasks the Fed with running the
economy as they see fit by way of managing money and credit in the system. In
addition, it assumes that the goal is permanent growth of the economy, but fails again to
define growth (of what?).
It is completely up to the discretion of the Board and FOMC to define the meaning of
these terms.
4 http://www.law.cornell.edu/uscode/html/uscode12/usc_sup_01_12_10_3.html (as of
07/17/2009)
5 http://www.law.cornell.edu/uscode/html/uscode12/usc_sec_12_00000225---a000-.html (as of
07/17/2009)
Please note that the Fed chairman only reports to and is required to appear in hearings
before Congress. However, his obligations stop there. There is no possibility for Congress
to give directions to, overrule or censor the Chairman or the board or to remove a
Chairman (or other members of the Board).
There is no possibility of impeachment or other way to oust a board member of the Fed,
once they are elected they are untouchable for a period of 14 years. This is a highly
questionable practice, if we remember that even the federal judges hold their office only
during good behavior (U.S. Constitution Article III, section 17) and can be impeached by
Congress.
6 http://www.law.cornell.edu/uscode/html/uscode12/usc_sec_12_00000225---b000-.html (as of
07/17/2009)
7 http://www.law.cornell.edu/constitution/constitution.articleiii.html#section1 (as of 07/17/2009)
The Board of Governors of the Federal Reserve System shall annually make
a full report of its operations to the Speaker of the House of
Representatives, who shall cause the same to be printed for the
information of the Congress. [...]
The speaker's role here is reduced to having the Fed's report copied and distributed
among members of Congress. How telling is that of what the Fed thinks of the role of
Congress?
Now we look at the relationship between the Fed and the executive branch. After all, the
Fed – if it were a federal agency - would be part of the executive branch and work for
and be accountable to someone there, e.g. most likely the Secretary of the Treasury or
ultimately the President of the United States.
Here is what the Act says to that relationship (emphasis mine):
The Secretary of the Treasury does not have any supervision powers of the Fed either. In
fact, the section declares everything that has not been heretofore prescribed by law to be
under the jurisdiction of the Treasury to be in the Fed's realm of power. That is a massive
power grab.
8 http://www.law.cornell.edu/uscode/html/uscode12/usc_sec_12_00000247----000-.html (as of
07/17/2009)
9 http://www.law.cornell.edu/uscode/html/uscode12/usc_sec_12_00000246----000-.html (as of
07/17/2009)
I thus conclude, that the FRA assigns to Congress and the executive branch a purely
ceremonial and subservient role. The Fed wields the real power in this arrangement.
This subservient role of Congress and ultimately the people to the Fed is further
demonstrated in the issuance of money. This is a power assigned to Congress, according
to the U.S. Constitution, Article I, section 810:
To coin money, regulate the value thereof, and of foreign coin, and fix the standard
of weights and measures;
What does the FRA make of this? Looking at the issuance of currency provision (Federal
Reserve Notes11, aka Dollar):
In order to furnish suitable notes for circulation as Federal reserve notes, the
Secretary of the Treasury shall cause plates and dies to be engraved
in the best manner to guard against counterfeits and fraudulent alterations,
and shall have printed therefrom and numbered such quantities of
such notes of the denominations of $1, $2, $5, $10, $20, $50, $100, $500,
$1,000, $5,000, $10,000 as may be required to supply the Federal
Reserve banks. Such notes shall be in form and tenor as directed by the
Secretary of the Treasury under the provisions of this chapter and shall bear
the distinctive numbers of the several Federal reserve banks through which
they are issued.
The only power retained by the Treasury is that it can determine the design of the notes,
make the printing plates and print the notes. However, the Fed does determine all of the
other aspects of monetary – and with it economic – policy.
One does not get the impression, that the Fed is working for Congress, it is rather the
other way around.
Even though the physical dollar bills are printed by the Bureau of Engraving and Printing,
which is part of the Treasury and the Fed pays for that printing13, the control over the
amount of money to be printed is with the Fed. Congress or the Treasury has no way of
intervening. This is in direct violation of Article I, Section 8 of the U.S. Constitution.
Does this section of the FRA really satisfy the Constitution's Article 8? Hardly. Unless you
agree with the principle that the federal government is just an empty hull retaining some
formal 'power' while in fact the real power has been off-loaded to private entities. I am
certain, that this is not what the framers had in mind.
In addition, the Fed today 'prints' money by simply electronically crediting a member
bank's account at the Fed and doesn't even have to go to the Treasury for having printed
anything. In fact, in a world without any dollar bills, i.e. with everything electronic, the
Treasury would retain no power at all.
To understand whether the Fed's powers are limited in some significant way, we need to
look at the enumerated powers of the Board of Governors. Remember, the rule is if a
power is not listed, the Fed doesn't have the power. Thus if it acts without proper
delegation, it acts ultra vires and the acts can be challenged in court.
As a sidenote, we now may have learned why there was no preamble or purpose clause
in the FRA, which was written in 1913.
According to Answer.com15:
An ultra vires act is one beyond the purposes or powers of a corporation. The
earliest legal view was that such acts were void.
The easy way out, then, is to just not state at all or state in a very general way a
purpose in the 'articles of incorporation' (the FRA is just articles of incorporation of the
Federal Reserve System), so you can never be held to act ultra vires. This also means
that you have unlimited powers, i.e. you can do everything you want.
In addition, Congress cannot delegate more rights than it has been granted itself by the
Constitution's section 8. So let's look at the list of powers in the FRA (Excerpt only,
emphasis mine).
14 http://www.law.cornell.edu/uscode/html/uscode12/usc_sec_12_00000414----000-.html (as of
07/17/2009)
15 http://www.answers.com/topic/ultra-vires (as of 07/17/2009)
(m) [Repealed]
This is a good example of an enumeration that does not enumerate anything. The gist of
the provisions is that it is in the discretion of the Board to do or not do anything.
This becomes further clear in that the Fed can decide to audit itself, according to its own
terms.
The Board shall order an annual independent audit of the financial statements
of each Federal reserve bank and the Board.
Another thing that is striking is that there is no authorization in there – or anywhere else
in the FRA - for recent programs such as TALF, Maiden Lane, etc, unless you assume that
the FRA grants unlimited power to the Fed to do anything it chooses.
Lawmaking powers are granted exclusively to Congress by the Constitution of the United
States. A power that is delegated by Congress to any other government entity must be
delegated properly or it is not a valid delegation.
This power simply cannot be delegated in such a broad and inclusive way so as to
incapacitate Congress – and with it the people of the United States – of any further role
in the decisions and of any possibility to determine their own destiny.
It has also been duly established, that even if one assumes the FRA to be a valid
delegation of powers in principle, the provisions of the act simply do not limit the powers
of the Board or the Federal Reserve System in any significant way.
Congress's and Treasury's role are limited to spectators who can listen to reports and
serve the Fed in certain ways. They have no further possibility to determine or influence
policy.
It follows that even if the delegation of powers to the Fed were considered valid in
principle, the way the delegation was done is still invalid. It removes the delegated
powers completely from the jurisdiction of Congress and the people. This simple can
never be legal. If it were, the Constitution didn't mean anything.
In addition, the FRA makes the people of the United States even pay for this delegation
of powers by making them pay interest on the money that has been issued on its behalf.
The Fed has intentionally been placed outside the constitutional order and made exempt
from all interferences by the democratically elected bodies in government. It is an entity
under no ones control or supervision which works outside the structure provided by the
Constitution.
This is not legal at all. In fact it is the same issue as the one raised in Hamdan v.
Rumsfeld, 548 U.S. 557 (2006)16, in which Justice Kennedy (concurring) wrote:
In a democracy and a nation under the rule of law, there can be no such thing as an
“independent government” agency. Every government agency is accountable to the
executive, to the legislative branch and ultimately to the people.
It is just systemically impossible and not permissible to have an 'independent
government agency' outside of the legally defined structure and thus remove it from
public influence, accountability and review.