The Federal Reserve enjoys extraordinary independence from the elected branches of government, based on the well-founded fear that politicians cannot be trusted with the power to print money and manipulate interest rates. While the Fed should be independent in setting monetary policy, its ever expanding regulatory powers, which have the force of law, entail a level of discretion that requires democratic accountability enforced by bipartisan oversight and transparency.
Because the U.S. was on the gold standard when the Federal Reserve was established in 1913, the Fed had limited control of the aggregate money supply. It acquired control with the effective demise of the gold standard in 1933. Recognizing the political implications of the central bank’s new power, Congress removed the secretary of the Treasury and the Comptroller of the Currency from the Federal Reserve Board in 1935.
During World War II, the Fed agreed to buy government debt to maintain a ceiling of 0.375% for Treasury bills and 2.5% for Treasury bonds. The inflation following the war—and the effort of the Truman administration to force the Fed to buy the bonds it issued to fund the Korean War—brought to a head the conflict between preserving stable prices and the Fed’s function as an agent of the Treasury. An agreement among Congress, the Treasury and the Fed produced the Accord of 1951, freeing the Fed from the necessity of supporting the market for federal debt.
Read the rest at The Wall Street Journal.
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