First Donald Trump threatened to fire Jerome Powell. Then he backed down. Now he’s criticising him again. The President’s volatile bullying of the Chair of the Federal Reserve is not just political theatre — it may well decide the fate of the Fed and independent agencies more broadly.
Imagine how useful it would be for a President to have the power to open the credit tap and ease economic conditions by lowering interest rates. Now imagine how useful it would be to have these powers if you were a President who had just kicked off a tariff war that was going to be very painful for consumers. Trump wants that power, but Powell doesn’t want to give it to him.
The current bout of financial chaos is particularly interesting (if you’re a social scientist) or disturbing (if you’re almost anyone) because it has been brought about intentionally by an elected official. This puts the Fed in unusual territory. The central bank is meant to be apolitical, not passing judgement on the choices of the elected branches. However, it is also, at least in one prominent view, meant to secure the stability of the financial system. What, then, is the central bank meant to do when the political branches are intentionally exploding the stability of the financial system?
To answer, we have to go back to the roots of the Fed, for ambiguity has been baked into the institution from the start. Founded in 1913 in response to a series of financial panics and charged with furnishing an “elastic currency” necessary to underpin a stable financial system, the central bank was a compromise on all fronts. It was decentralised with a centralised capstone body; it was privately owned but had public powers. The Federal Reserve System is made up of 12 reserve banks placed around the country with one capstone body located in Washington, D.C. Each reserve bank was, and still is, owned by the private banks in the region and is run by a board made up partly of local bankers and their appointees. The Board of Governors in D.C. is appointed by the President and confirmed by the Senate.
Founded in this convoluted way, both endowed with the public power to govern the creation of money and established to underpin the efficiency and effectiveness of the private financial system, the Fed was born with a central tension that it has never resolved: is it an independent arm of the state acting in the public interest or a private organisation seeking to advance the interests of the financial system?
In 1927, when the Fed’s charter was extended in perpetuity, one Senator from Iowa protested:
“I concede to the commercial interest the right to have their own competitive banking system with reserve banks and all under their own control; but I demand on behalf of the farms and the people who labor with hand or brain the same right under the law to organize a cooperative system with cooperative reserve and all under their own control.”
In other words, if the Fed serves Wall Street, what about the interests of farmers or teachers? One clear implication being, the central bank was not designed to act in the public interest broadly construed.
This tension inherent in the Fed’s formation, between its role as a public institution and its aim to support the financial system, later emerged as friction between the Fed’s role in domestic policy and its role in the international financial system. Not long after the Fed opened its doors, the central bank was thrust onto the international financial scene. With the First World War came financial disruption, not least with the effective abandonment of the international gold standard. As a consequence, the President of the New York Fed, Benjamin Strong, and the Governor of the Bank of England, Montagu Norman, struck up a friendship. After the war, the two men worked hard to re-establish the gold standard on the belief that it was required for a healthy capitalist economy. Later, in 1930, they collaborated in founding the Bank for International Settlements (BIS), an international body established to coordinate German reparation payments and to act as the central node in what would become a global system of financial governance. Put simply, Strong was more interested in coordinating Fed policy with Norman than with any US Treasury Secretary.
The Fed’s ambiguous relationship to its international and domestic policy responsibilities would rear its head as the century progressed. In the Sixties, the Fed actively cultivated the birth of the Eurodollar market — the offshore currency that now acts effectively as an international currency. And only a decade later, it declared its intention, via the BIS, to informally backstop the Eurodollar market, which by then had effectively become too big to fail. Here was the monetary authority for the United States supporting the growth of an offshore market in its own currency. From the perspective of the Fed as a domestic policy institution this is hard to understand — it was promoting and supporting the expansion of an unregulated market in US dollars. From the perspective of the Fed as an international financial actor, however, it made more sense: Eurodollars had become a de facto international currency after the gold standard, and someone needed to backstop the market’s liquidity.
By the time the Great Financial Crisis arrived the Fed was comfortably established as the de facto central bank to the world, not least because of its role in backstopping the Eurodollar market. The Fed’s extension of international swap lines during the crisis and its high-profile bailouts of foreign banks, such as RBS (something that Andrew Jackson had worried about, and which motivated his veto of the second bank of the US), revealed how far the Fed was willing to go in its role of providing international financial support. But its justification was this: given the deep integration of the US financial sector with global finance (cultivated in part by the Fed itself), the Fed must seek the stability of the international financial system (or more precisely, some parts of it, just ask those nations which didn’t receive swap lines in the wake of 2008).
This sort of justification, and consequent action, stems from a particular understanding of the role of the central bank: that it has a public-spirited aim, dedicated to the stability of the domestic, and by proxy global, financial system. According to this view, a powerful international financial system is in the public interest.
This is quite different from the alternative view which sees the central bank as an independent agency of the state — like the EPA, the FTC, or the SEC — with the aim of executing monetary policy in the public interest. In this view, what is in the public interest, who is the public, and who gets to articulate its interests are all relevant questions. In other words, this alternative conception of the Fed puts it firmly in the context of domestic politics, and much less clearly in the position of backstopping international finance.
The tension at the heart of the Federal Reserve, then, is all about the public interest. What is it? Or more precisely, who gets to define it? One view of the Fed takes as given that the stability of the international financial system is in the interest of the American public. The other view sees defining the public interest as a matter of domestic politics.
“The tension at the heart of the Federal Reserve is all about the public interest.”
With this historical context in hand, we can see today’s battle over the Fed in a new light. Trump’s actions, not least in their undermining of Fed independence, have begun to upset the global financial governance arrangement. For the first time since at least the Sixties we are seeing cracks in the dominant view that the central bank should seek to preserve the effectiveness and efficiency of the domestic financial system and thus underpin the functioning of the international financial system. But if Trump’s actions are pushing the Fed away from the previous consensus, what are they pushing the central bank towards?
There are reasonable arguments for changing the contemporary structures of the Federal Reserve, and in particular its relationship to the international financial system. An international financial system based on the creation of unregulated domestic currency doesn’t seem sensible, and there have been many proposals over the years to change it. Furthermore, the shifting of financial global powers has led some to believe it may change anyway, even if not by design. But what about making the Fed into an agency concerned with the pursuit of monetary policy in the public interest as articulated by domestic politics? Arguments in favour tend to emphasise that any such monetary policy will have to be rooted in the policies of the nation state. But they clearly point toward more congressional, not presidential, control of the central bank. If the President’s actions elsewhere (crypto in particular) are any guide, Trump will seek to use the state’s capacity to create money and regulate the private creation thereof to fill his own coffers at the expense of everyone else. This was precisely the worry of the American founders, who explicitly put the power to regulate the value of money in the hands of Congress, not the President, as they worried that in such a case, he might fancy himself a king.
And Trump undoubtedly does. The question is, will this wannabe King prevail in a battle with the global financial system? The stakes are unquestionably high. But what lurks behind this battle is that longstanding, deeper question: who should define the public interest? The current debate pits Trump, the wannabe King, against Powell, the sensible preserver of international financial stability. There is no voice here for domestic, democratic politics in articulating the public interest, and that may be the most worrying thing of all.
