Library

Accountability of the Fed

%7B%22status%22%3A%22success%22%2C%22updateneeded%22%3Afalse%2C%22instance%22%3A%22zotpress-d27d2d72b471b213f1de75c55c76aa19%22%2C%22meta%22%3A%7B%22request_last%22%3A0%2C%22request_next%22%3A0%2C%22used_cache%22%3Atrue%7D%2C%22data%22%3A%5B%7B%22key%22%3A%22ZRNFC3SH%22%2C%22library%22%3A%7B%22id%22%3A2920058%7D%2C%22meta%22%3A%7B%22creatorSummary%22%3A%22Wray%22%2C%22parsedDate%22%3A%222014%22%2C%22numChildren%22%3A2%7D%2C%22bib%22%3A%22%3Cdiv%20class%3D%5C%22csl-bib-body%5C%22%20style%3D%5C%22line-height%3A%202%3B%20padding-left%3A%201em%3B%20text-indent%3A-1em%3B%5C%22%3E%5Cn%20%20%3Cdiv%20class%3D%5C%22csl-entry%5C%22%3EWray%2C%20L.%20R.%20%282014%29.%20Central%20Bank%20Independence%3A%20Myth%20and%20Misunderstanding.%20%3Ci%3ESSRN%20Electronic%20Journal%3C%5C%2Fi%3E%2C%20%3Ci%3E791%3C%5C%2Fi%3E.%20%3Ca%20href%3D%27https%3A%5C%2F%5C%2Fdoi.org%5C%2F10.2139%5C%2Fssrn.2407707%27%3Ehttps%3A%5C%2F%5C%2Fdoi.org%5C%2F10.2139%5C%2Fssrn.2407707%3C%5C%2Fa%3E%3C%5C%2Fdiv%3E%5Cn%3C%5C%2Fdiv%3E%22%2C%22data%22%3A%7B%22itemType%22%3A%22journalArticle%22%2C%22title%22%3A%22Central%20Bank%20Independence%3A%20Myth%20and%20Misunderstanding%22%2C%22creators%22%3A%5B%7B%22creatorType%22%3A%22author%22%2C%22firstName%22%3A%22L.%20Randall%22%2C%22lastName%22%3A%22Wray%22%7D%5D%2C%22abstractNote%22%3A%22It%20is%20commonplace%20to%20speak%20of%20central%20bank%20%5Cu201cindependence%5Cu201d%20%5Cu2014%20as%20if%20it%20were%20both%20a%20reality%20and%20a%20necessity.%20While%20the%20Federal%20Reserve%20is%20subject%20to%20the%20%5Cu201cdual%20mandate%2C%5Cu201d%20it%20has%20substantial%20%5Cndiscretion%20in%20its%20interpretation%20of%20the%20vague%20call%20for%20high%20employment%20and%20low%20inflation.%20Most%20important%2C%20the%20Fed%5Cu2019s%20independence%20is%20supposed%20to%20insulate%20it%20from%20political%20pressures%20coming%20from%20Congress%20and%20the%20US%20Treasury%20to%20%5Cu201cprint%20money%5Cu201d%20to%20finance%20budget%20deficits.%20As%20in%20many%20developed%20nations%2C%20this%20prohibition%20was%20written%20into%20US%20law%20from%20the%20founding%20of%20the%20Fed%20in%201913.%20In%20practice%2C%20the%20prohibition%20is%20easy%20to%20evade%2C%20as%20we%20found%20during%20World%20War%20II%2C%20when%20%5Cnbudget%20deficits%20ran%20up%20to%20a%20quarter%20of%20US%20GDP.%20If%20a%20central%20bank%20stands%20ready%20to%20buy%20government%20bonds%20in%20the%20secondary%20market%20to%20peg%20an%20interest%20rate%2C%20then%20private%20banks%20will%20buy%20bonds%20in%20the%20new-issue%20market%20and%20sell%20them%20to%20the%20central%20bank%20at%20a%20virtually%20guaranteed%20price.%20Since%20central%20bank%20purchases%20of%20securities%20supply%20the%20reserves%20needed%20by%20banks%20to%20buy%20government%20debt%2C%20a%20virtuous%20circle%20is%20created%2C%20so%20that%20the%20treasury%20faces%20no%20financing%20constraint.%20That%20is%20what%20the%20%5Cn1951%20Accord%20was%20supposedly%20all%20about%3A%20ending%20the%20cheap%20source%20of%20US%20Treasury%20finance.%20Since%20the%20global%20financial%20crisis%20hit%20in%202007%2C%20these%20matters%20have%20come%20to%20the%20fore%20in%20both%20the%20United%20States%20and%20the%20European%20Monetary%20Union%2C%20with%20those%20worried%20about%20inflation%20warning%20that%20the%20%5Cncentral%20banks%20are%20essentially%20%5Cu201cprinting%20money%5Cu201d%20to%20keep%20sovereign-government%20borrowing%20costs%20low.%20%5CnThis%20paper%20argues%20that%20the%20Fed%20is%20not%2C%20and%20should%20not%20be%2C%20independent%2C%20at%20least%20in%20the%20sense%20in%20which%20that%20term%20is%20normally%20used.%20The%20Fed%20is%20a%20%5Cu201ccreature%20of%20Congress%2C%5Cu201d%20created%20by%20public%20law%20that%20has%20evolved%20since%201913%20in%20a%20way%20that%20not%20only%20increased%20the%20Fed%5Cu2019s%20assigned%20responsibilities%20but%20a%5Cnlso%20strengthened%20congressional%20oversight.%20The%20paper%20addresses%20governance%20issues%2C%20which%2C%20a%20century%20after%20the%20founding%20of%20the%20Fed%2C%20remain%20somewhat%20unsettled.%20While%20the%20Fed%20should%20be%2C%20and%20appears%20to%20be%2C%20insulated%20from%20day-to-day%20political%20pressures%2C%20it%20is%20subject%20to%20the%20will%20of%20Congress.%20Further%2C%20the%20Fed%20cannot%20really%20be%20independent%20from%20the%20Treasury%2C%20because%20the%20Fed%20is%20the%20federal%20government%5Cu2019s%20bank%2C%20with%20almost%20all%20payments%20made%20by%20and%20to%20the%20government%20running%20through%20the%20Fed.%20As%20such%2C%20there%20is%20no%20%5Cu201coperational%20independence%5Cu201d%20that%20would%20allow%20the%20Fed%20to%20refuse%20to%20allow%20the%20Treasury%20to%20spend%20appropriated%20funds.%20Finally%2C%20the%20%5Cnpaper%20addresses%20troubling%20issues%20raised%20by%20the%20Fed%5Cu2019s%20response%20to%20the%20global%20financial%20crisis%3B%20namely%2C%20questions%20about%20transparency%2C%20accountability%2C%20and%20democratic%20governance.%22%2C%22date%22%3A%222014%22%2C%22language%22%3A%22en%22%2C%22DOI%22%3A%2210.2139%5C%2Fssrn.2407707%22%2C%22ISSN%22%3A%221556-5068%22%2C%22url%22%3A%22http%3A%5C%2F%5C%2Fwww.levyinstitute.org%5C%2Fpubs%5C%2Fwp_791.pdf%22%2C%22collections%22%3A%5B%222D58W7HX%22%2C%225VAMIJWQ%22%5D%2C%22dateModified%22%3A%222021-04-22T17%3A24%3A04Z%22%7D%7D%5D%7D

Wray, L. R. (2014). Central Bank Independence: Myth and Misunderstanding. SSRN Electronic Journal, 791. https://doi.org/10.2139/ssrn.2407707