The Legality of the Federal Reserve System

The Legality of the Federal ReserveSystem

A Critical Review

Table of Contents

On the Legality of the Federal Reserve System..........................................................2Introduction......................................................................................................2The Legal Status of the Federal Reserve................................................................4Validity of Delegation of Rule-Making Power to the Fed............................................6Conclusion......................................................................................................14Abbreviations & Terms......................................................................................15Copyright Notice..............................................................................................16

On the Legality of the Federal Reserve System

Introduction

The U.S. Constitution states in Article I, Section 1:

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.com

1

asfollows (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-delegationdoctrine

kept administrative agencies small and weak. They could enforcelaws established by Congress but were unable to develop policy themselves.In the New Deal, Congress created a number of administrative agencies toregulate and set policy in their areas of jurisdiction. In order to maximize thebenefits 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 toobroadly delegating authority to the National Recovery Administration toestablish a code of fair competition for various industries. In

Schechter Poultry Corp. v. United States (1935)

, the Court considered the Act againand struck it down in its entirety.

One key defect in the Act wasCongress's delegation of policy-making power to private groups that themselves were subject to the competition codes

. These casesestablished the legal rule that

in order for a delegation to beconstitutional, Congress must define an intelligible principle to guideadministrative regulation and to limit administrative discretion

.The principles of accountability and deliberation that provided the foundationof the non-delegation doctrine continue to be important for administrativeagencies, though they are bolstered through other mechanisms. The norm of accountability is protected with the use of internal procedures, for examplewith 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 theheads of most agencies

and can thus hold them accountable for the

1http://www.answers.com/topic/nondelegation-doctrine(as of 07/17/2009)