Supreme Court Ruling Upholds Federal Reserve Independence

The Federal Reserve Bank of Dallas, one of the 12 regional banks of the Federal Reserve, plays a crucial role in the decentralization of the US banking system. This decentralization was designed to distribute the Fed’s power across regions, reflecting economic diversity and insulating monetary policy from concentrated political or financial influence. The strategic placement of these regional banks, including the one in Dallas, was intended to prevent the centralization of financial power, whether in New York or Washington DC.

Dallas, despite being perceived as a financial backwater by some, was chosen as a site for a regional Federal Reserve bank in 1914. At that time, its population of 131,278 made it the 58th-largest city in the US. The city's unique characteristics, such as its leadership in the manufacture of cotton gin machinery and harness and saddlery, highlighted its differences from New York and contributed to its selection. The Dallas Fed initially hired a staff of 27 to provide centralized check-clearing for the region, supply currency and coins, and set local interest rates. The banknotes ordered and circulated by the Dallas Fed prominently feature the letter “K” on the front, signifying its status as the 11th of 12 regional Fed banks.

Initially, regional Federal Reserve banks had significant independence, setting their own lending rates for banks in their region. However, this practice proved unwieldy and was ended in 1935 by the Banking Act, which granted the Board of Governors in Washington DC the authority to set a single interest rate for the entire country. Despite this, regional banks retained a say in rate decisions. All 12 Federal Reserve bank presidents attend FOMC meetings to represent their region’s interests, and a rotating group of four regional presidents (excluding New York) have a vote on the FOMC. This semi-decentralized structure limits the ability of a president to bully the Fed, as seven of the 12 FOMC members are presidential appointees with staggered, 14-year terms designed to limit the influence of any single president over monetary policy.

The recent Supreme Court ruling that the president does not have the power to remove the Fed chair or any other board members of the Federal Reserve underscores the importance of this decentralized structure. The ruling found that the president likely does have the authority to fire appointees at federal agencies like the NLRB and MSPB, but the Federal Reserve is exempt due to its unique structure as a quasi-private entity following the historical tradition of the First and Second Banks of the United States. This structure ensures that the Fed can resist political pressure and maintain its independence in setting monetary policy.

However, the Fed ultimately reports to Congress, which could rewrite the law that grants it independent control over monetary policy. This raises concerns about the Fed's ability to hold the line on dollar devaluation in the face of increasingly irresponsible fiscal policy. The recent strength in gold and bitcoin reflects investor concerns about the potential for a fully decentralized currency to take the place of the US dollar if the Fed is unable to maintain its monetary policy. The House budget and Supreme Court ruling serve as reminders of the importance of the Federal Reserve's decentralized structure in defending the dollar and maintaining economic stability.