cato-journal-v34n2

Cato Journalsomething about this, maybe we need a central bank, a governmentagency that can address the problem of financial panics.’”Independence“Most studies of central bank independence,” a San Francisco Fedpublication informs us, “rank the Fed among the most independentin the world” (FRBSF 1999a). The Fed’s independence is supposedto allow it to “conduct monetary policy with relative autonomy fromthe federal government,” especially by insulating it’s decisions “fromshort-term political influence” (FRBA3; see also Board of Governors2013b). Particular arrangements that supposedly rule-out such“short-term political influence” include the fact that members of theBoard of Governors serve staggered 14-year terms and the fact thatthe Fed, instead of relying on Congress for funding, uses its seignoragerevenue to cover its costs and pay shareholder dividends (Boardof Governors 2013a, 2013b; FRBD2).But despite these arrangements, and no matter how independentthe Fed may be compared to other central banks, the truth isthat it has always conducted monetary policy with an eye towardsatisfying the desires of the general government. That the Fed wasa mere handmaiden to the Treasury before 1951 is sufficientlyobvious that at least one official Fed educational document concedesthe point. “From its founding in 1913,” a Philadelphia Fedpublication recognizes, “to the years up to and following WorldWar II, the Fed largely supported the Treasury’s fiscal policygoals” (FRBP2).Until 1935, the Secretary of the Treasury and his second-in-command,the Comptroller of the Currency, served as the chairman andvice-chairman, respectively, of the Federal Reserve Board. Althoughthe Banking Act of 1935 removed Treasury representatives fromwhat then became the Board of Governors, while establishing thepresent terms of appointment, it did not end the Treasury’s influence.On the contrary, that influence actually increased. “From 1935to 1951,” Richard Timberlake (n.d.) observes, “the secretary of thetreasury, with the compliance of Fed Board Chairman MarrinerEccles, continued to dominate Fed policies.” During World War IIespecially, and for some years afterwards, monetary policy againbecame entirely subordinated to the Treasury’s wants, with the Fedholding down interest rates on government securities by serving, in236