On balance, there is good reason to believe that the Fed is constitutional, even if there’s no single slam-dunk answer.
Charlie said on the Editors podcast that he doesn’t believe the Federal Reserve System to be constitutional, though this view displeases him, as he believes it to be a good system overall. “I don’t think it’s constitutional because I don’t think that there is any enumerated power that provides for the creation of the Federal Reserve,” he said.
I wish to soothe Charlie’s displeasure by pointing to a few different places to look to back up the Fed’s constitutionality. None of them is quite dispositive, and the constitutionality of national banking has been a hot topic in American history. But there is a clear winner in those contests of ideas, and it is that the such banks are constitutional.
The first place to look for authority to create the Fed is Article I, Section 8, where Congress is given the power “to coin Money” and “regulate the Value thereof.” As with Congress’s other powers, it can delegate this power to organizations that it creates, so long as that delegation is limited. The Fed does not have the power to coin money, but one could say it does have the power to regulate its value by targeting interest rates, which are the price of money. Congress also gave the Fed the task of maintaining price stability, which is an attempt to regulate the value of money. That seems like decent constitutional grounds for the Fed’s activities.
Another place one could look is earlier in Article I, Section 8, where Congress is given the powers to tax, spend, and borrow. That implies the power to tax, spend, and borrow with some kind of money, the regulation of which will be important. Banks are natural institutions that arise when money is in circulation, and it would be in Congress’s interest to have a central bank to help manage its activities.
This is the same conclusion reached by legislatures around the world, as central banks are commonplace. One could even argue that monetary policy is an inherent power of any sovereign state and therefore doesn’t need any specific authorization in the Constitution, though that is playing with fire.
To use a different example, the Constitution says Congress has the power to tax. It does not say Congress has the power to punish tax evasion. But punishing tax evasion is inherent in the taxing power. The power would be meaningless if nobody had to face consequences for failing to pay taxes.
In the same way, one could argue that the money-related powers that Congress has in the Constitution are meaningless without the power to create banks. And that’s technically all Congress did when it created the Federal Reserve System; it chartered the twelve regional Feds and created the Board of Governors to supervise them. The Fed is self-funded by the commercial banks that are members of the system, and the presidents and boards of directors of the regional banks are not appointed or confirmed by politicians. It’s a unique public-private system, and it’s not a government agency in the same way that the FTC or FBI are.
If we want to get really picky about constitutionality on monetary issues, paper money itself is probably unconstitutional. The Founders were not fans of paper money. They intentionally gave Congress the power to “coin Money,” with “coin” having been a carefully chosen word to indicate that the money be made of precious metals. An earlier draft of the Constitution also included the power to “emit bills of Credit,” but that language was struck before the final draft.
The government began issuing paper money anyway during the Civil War, and there was a series of Supreme Court cases, the Legal Tender Cases, that eventually upheld that power. I’m sure there are plenty of critiques of the Legal Tender Cases on originalist grounds, but are we really going to say it’s the conservative position that the U.S. can’t have paper money? I don’t think that makes sense.
What makes more sense is what Chief Justice John Marshall wrote in McCulloch v. Maryland in 1819. That case revolved around whether Congress had the power to charter a bank. The Constitution doesn’t specifically say Congress has the power to charter anything, but it has been issuing charters since the First Congress, for groups as varied as the Federal Reserve, the American Red Cross, American University, the American Legion, the Boy Scouts, the U.S. Olympic Committee, and the American Chemical Society.
The Supreme Court’s decision said:
If the end be legitimate, and within the scope of the Constitution, all the means which are appropriate, which are plainly adapted to that end, and which are not prohibited, may constitutionally be employed to carry it into effect.
The power of establishing a corporation is not a distinct sovereign power or end of Government, but only the means of carrying into effect other powers which are sovereign. Whenever it becomes an appropriate means of exercising any of the powers given by the Constitution to the Government of the Union, it may be exercised by that Government.
It is a legitimate end for Congress to want to control inflation and ensure a stable banking system so it can effectively carry out its enumerated powers of taxing, borrowing, spending, and issuing money. It created the Federal Reserve as an appropriate means to that end. The Constitution does not explicitly prohibit the creation of the Federal Reserve. Therefore, it is constitutional for Congress to have created it.
The very first Congress chartered the First Bank of the United States, whose constitutionality was upheld in McCulloch v. Maryland. It was very controversial and ultimately did not last, but it was permitted nonetheless. The Federal Reserve System has followed a similar path to constitutionality, while lasting for over 100 years.
Marshall was aware that these debates would continue. “The question respecting the extent of the powers actually granted is perpetually arising, and will probably continue to arise so long as our system shall exist,” he wrote in that landmark case. But on balance, there is good reason to believe that the Fed is constitutional, even if there’s no single slam-dunk answer.