The U.S. Constitution does not mention the need for a central bank, nor does it explicitly grant the government the power to create one. Those who adhere to a strict interpretation of the Constitution believe the government does not have any authority not specifically listed as one of the Enumerated Powers of Congress. Critics also argue the Federal Reserve Bank violates the Constitution by being too closely tied to the private sector, and it lacks transparency and accountability.

Key Takeaways

  • Some people are opposed to the existence of the Federal Reserve, the central bank of the United States, arguing that it is unconstitutional.
  • Those opposed to the Federal Reserve note that the U.S. Constitution does not specifically say a central bank is necessary; it also does not say the government has the right to create a central bank.
  • Some critics think the Federal Reserve is too tied to the private sector to be constitutional, noting that the presidents of the 12 regional Federal Reserve Banks are appointed by a board of directors mostly drawn from the private sector.

Enumerated Powers

Article I, Section 8 of the U.S. Constitution lists most of what is commonly referred to as the Enumerated Powers of Congress. Among them are the power to borrow money on behalf of the United States and the power to coin money, establish currency and determine its value. Critics of the Federal Reserve point out that the Constitution makes no reference to a centralized bank to carry out these actions. The 10th Amendment also states the federal government is only to have those powers expressly granted to it. Therefore, it is argued the creation of the Federal Reserve itself was a violation of the Constitution.

Combatting Financial Collapse

The Federal Reserve was formed as the reaction to the Panic of 1907, the latest of what had been regular collapses of the economy. Prior to the creation of the Fed, private business owners were counted on to revive the economy during times of crisis. Critics argue the problems the Federal Reserve was created to fix are no longer relevant in the much larger and complex economy of 2019.

To get through the Panic of 1907, J.P. Morgan convinced other tycoons to join him in flooding the system with capital, helping banks and businesses survive; shortly after, the Federal Reserve was formed so that the next time there was a crisis, the government wouldn't have to again depend on private individuals.

Overseen by Private Board of Governors

Each of the 12 regional Federal Reserve Banks is overseen by a governor who sits on the Board of Governors of the Federal Reserve. This independent board and its chair are appointed by the U.S. president and are confirmed by the Senate. The presidents of the regional banks, however, are appointed by a board of directors comprised of mostly private sector representatives. Detractors argue these officials typically have close ties to the banks they oversee and are therefore more likely to look the other way when policing bad behavior.

Critics believe this system violates constitutional law because public policymakers are being picked by a quasi-private structure. Once officials are appointed, it is difficult for the government to remove them.

The policies created by the Federal Reserve influence the nation’s economy and financial dealings all over the world. Those who criticize the Fed want to see more transparency and accountability within the organization. The public, it is argued, plays a role in electing officials in every branch of the government, yet has no say in who is appointed to the Fed or how it manages the economy.

12

The number of regional Federal Reserve Banks, all of which are overseen by a governor who sits on the Board of Governors of the Federal Reserve.

Congress Seeks Transparency and Accountability

The House Financial Services Committee approved legislation in 2015 that requires the Fed to communicate its policy decisions to the American people. While the Fed Oversight Reform and Modernization, or FORM, Act makes no attempt to change the appointment process, it implements many changes critics have long requested. The Fed is required to disclose the salaries of employees and forces them to abide by the same ethical requirements as other federal financial regulators. Many critics feel the Federal Reserve is unnecessary and outdated.

This legislation is meant to modernize the Federal Reserve and provide more information to the public, thus improving communication and transparency. With more clarity in how the Fed operates, this legislation gives the public an opportunity to learn more about one of the most powerful financial institutions in the world. Even with these changes, critics will likely continue their calls to bring an end to the Federal Reserve on the grounds of its perceived unconstitutionality.