Preserving the Federal Reserve

Our story begins in lower Manhattan during October 1907.

A Bank Run

Anxious depositors could be seen camping overnight as they waited for the banks to open. Stuck for hours, they got food from friends and numbers from the police to establish their place in line. Meanwhile bank tellers were told to count out the money very, very slowly.

A failed attempt to corner the shares of United Copper had started the problems. When the news spread, depositors rushed to withdraw their money from the Knickerbocker Trust. Knowing that the Knickerbocker Bank had funded the disastrous maneuver, depositors feared its demise. However, they then hastened it by trying to withdraw more than the bank could give them. Soon, the fear moved beyond Knickerbocker to more banks and to less industrial production.

A good solution did not exist. At that time, the Knickerbocker and other ailing financial institutions had no way to get a cash infusion. With no central banking authority to connect them, healthy banks could not send cash to the sick ones. There was only J.P. Morgan. As a banking superpower, he gathered the resources that ended the panic.

The next part of our story takes place three years later.

Creating the Federal Reserve

At an elite and inaccessible club in Georgia, six leading financiers and bankers secretly met during November 1910. They were even told to arrive separately at a private train in NJ that took them to more than a week of non-stop work.

The club where they met:

Knowing financial panics could be controlled by a nationwide banking system, the Jekyll Island group sought to create one. Because a central monetary authority could respond to financial crises, they needed national control of the supply of money and credit. The answer was the Federal Reserve System.

Created in 1913 as an independent agency, the Federal Reserve is protected from political influence.

Our Bottom Line: Fed Independence

Like the role he played on The Apprentice, President Trump wants the unlimited power to fire federal employees. However, a Merit Systems Protection Board (MSPB) representative and a National Labor Relations Board member took him to court when he tried to remove them. The issues though extend far beyond two government employees.

In addition, they take us to the Fed’s independence.

A Supreme Court Case

This part of our story starts with a 1935 Supreme Court case. Through Humphrey’s Executor v United States, the Supreme Court affirmed laws that protected certain government employees. Those statutes said that, to be removed, employees had to have demonstrated “inefficiency, neglect of duty or malfeasance in office”.

If the current case reaches the Supreme Court, the nine justices will need to decide whether the 1935 decision prevents Mr. Trump from firing those two employees. The lower courts said the employees had to be reinstated.

The Fed’s Independence

Presidents rarely like elevated interest rates. As a result, political practicalities rather than economic logic could dictate their monetary policy decisions. Being able to replace a Federal Reserve chair with unappealing policies, the President would control monetary policy. And the Fed would no longer be an independent agency.

Its future might sit with the Supreme Court.

My sources and more: Increasingly, here, here, and here, the media has been looking at the 1935 Humphrey decision. Then, for more Fed history, I recommend their website.

Parts of today’s text came from a previous econlife post. Also please note that I made one factual correction after publication.