The Power and Independence of the Federal Reserve by Peter Conti-Brown

Author:Peter Conti-Brown [Conti-Brown, Peter]
Language: eng
Format: epub
Publisher: Princeton University Press
Published: 0101-01-01T00:00:00+00:00

Source: Board of Governors of the Federal Reserve System.

THE MYTH OF THE FOUR-YEAR TERM

As the Federal Reserve’s website quoted earlier explains, as the counterpoint to the insulation of a fourteen-year term for governors, the Federal Reserve Act gives the Fed chair a renewable four-year term. The idea, again, is to balance the independence of the governors with the accountability of the chair. In practice, here again the opposite has occurred. Because each Fed chair is also a sitting governor, she has two appointments: one a four-year renewable term as chair, the other a fourteen-year nonrenewable term as governor. Also, because the Federal Reserve Act allows each governor to serve the “unexpired term of his predecessor,” a governor can extend well beyond the fourteen-year tour of duty. Because of the high turnover mentioned above, there is never a shortage of these “unexpired terms.” Combine the two, and a Fed chair could serve for almost twenty-eight years, subject to presidential reappointment every fourth year.

In practice, the combination of these two features—doubling up the term for a governor and almost unlimited renewable terms for the chair gives the Fed chair the opportunity to engage in what some scholars have called “empire building.” When a Fed chair seeks reappointment, that person is a leading candidate for that reappointment, even if the initial appointment was by the sitting president’s political opponent. Because of the nature of past resignations and the interaction between the chair’s four-year term and the fourteen-year term of the governor who occupies the chair, the current situation is that the president will nominate a chair roughly halfway through the president’s term, usually when the chair is eligible for another four-year term as chair.18

The theoretical implications of this arrangements aren’t obvious. One could imagine that a Fed chair might constantly play nice with successive administrations to curry favor in hopes of near perpetual reappointments. In this way, the four-year term accomplishes its goal: the Fed chair is more dependent on politicians. On the other hand, one could imagine an ambitious Fed chair currying favor with other factions inside and outside government to tie the incoming president’s hands. In this way, the Fed chair becomes more independent of the president.

In the history of the Federal Reserve System, while there are examples of both dynamics, there are much more of the second. William McChesney Martin Jr. served through five presidential administrations, from Truman to Nixon. And at times, he conflicted intensely with the presidents who (re)appointed him. President Johnson found his intransigence in monetary policy vexing and sought to charm and then remove him as we saw in chapters 2. Martin himself nearly resigned but decided against it, lasting almost twenty years as Fed chair. While Martin has been criticized for the coziness of his monetary policies with those of the Johnson and Nixon administrations, his own diminishing base of support within the Board of Governors and his sense of powerlessness against the fiscal deluge brought on by the Vietnam War are better explanations for his late-term shift in more accommodation than even he thought wise.

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