Edward Lotterman

Seven weeks from inauguration, Donald Trump and his aides are issuing blizzards of announced nominations to key positions and of policy measures that will be taken quickly. Most are controversial.

Mindful of political advice coined eight years ago that Trump should “be taken seriously but not literally,” citizens can make their own decisions about the prudence and credibility of all this foreshadowing of his second administration.

If most are carried out, the U.S. and world economies will be highly agitated by summer. One key issue remains undefined, however. Will the returning president initiate measures to gain control of the Federal Reserve and monetary policy? Threats to do so were floated weeks ago — and during Trump’s first term. These largely faded into the backdrop of late as more controversial appointments and policy positions took front and center.

The fact that the issue lies quiet does not mean it is dead. Trump could do few things with greater impact than upending 90 years of established economic policymaking with regard to the Fed. So what should citizens think about?

• The underlying issue is one of checks and balances to ensure prudent governance without the undue sway of politics. This is a basic issue in our U.S. Constitution, one to which our nation’s founders gave great attention.

• What actions, if any, a president can take toward the Fed is the key statutory issue.

• Precedents from past cases in which presidents tried to sway the Fed are relevant to the wisdom of any Trump moves, to any legal challenges to the same, and to reactions in financial markets.

• If Trump initiates measures arguably counter to U.S. statutes, who has legal “standing” to challenge these in federal court?

The founders of our republic, including Ben Franklin, John Adams, James Madison, John Jay and Alexander Hamilton, all understood the inherent tensions that arise when politics and governance clash. Greeks and Romans debated this challenge millennia ago, but it remains a white-hot issue today. Governments need power to act in the public interest, but unchecked power inevitably leads to abuse. Politics is a means of attaining and retaining power.

How then, in our democracy, could just and coherent government be insulated from short term swings in politics? In “The Federalist No. 51,” a position paper instrumental to our founding institutions, Madison argues that the new Constitution had to establish checks and balances in which component parts of our government had powers to countervail dangerous lurches by another.

In a Nov. 17 column, “The Senate’s Madisonian opportunity on those nominations,” conservative Washington Post columnist George Will lays out Madison’s argument admirably. Concerned citizens from both parties should read it and then go to the 1,925-word Federalist 51 itself. Will wrote specifically in response to Trump’s (now withdrawn) nomination of former Florida Rep. Matt Gaetz to be attorney general. But Will’s exposition of Madison’s insights pertain to virtually all of Trump’s forthcoming agenda, nominations and policy.

The idea that an independent central bank is necessary for ensuring economic stability was largely unknown in the 1780s. Hamilton, who emerged as the first Secretary of the Treasury, understood the issues. He got Congress in 1791 to establish a first “Bank of the United States” that had some central bank characteristics. An incompetent Congress let its charter lapse in 1811. This caused enormous funding difficulties during the War of 1812.

A second Bank of the U.S. was chartered in 1816. However, frontier populist President Andrew Jackson vetoed its extension in 1836. This touched off economic turbulence and 78 years of inflations and crushing deflations. There was no way to protect commercial bank depositors by stabilizing the financial system in periodic financial crises. Deep divisions between those who opposed control of monetary policy by powerful private financiers in New York and those who feared partisan political control from Washington perpetuated the deadlock.

Two destructive panics, in 1893 and in 1907, forced compromise. The result was the creation of a decentralized system of “reserve banks” in 12 cities around the country. Only one was in New York. There was a largely symbolic board in Washington.

The new system was an improvement, but its leaders mostly misunderstood why and how to prevent financial crises. It stumbled in 1920, touching off a rural depression, and failed catastrophically in 1929, causing the global Great Depression.

Reactions to the failure included a bi-partisan 1935 reform that created a new seven-member Board of Governors. Presidents would appoint these and the Senate would have to confirm them, but all within an elaborate structure to avoid any control by either branch. Importantly, all monetary policy-setting would be done by the regional Fed district banks, with presidents of just five of these rotating in the key Federal Open-Market policy committee. Again, the whole focus was to effectively control policy and maintain banking system stability in a complex economy without political interference or giving a single person or region too much power for too long a time.

So no single U.S. president was to be able to appoint a majority of governors until their eighth year in the Oval Office. There is no provision in the law for the president to remove any governor or the chair. A clause says the chair can be removed “for cause,” but the entire history surrounding this provision makes clear this only could be for some act of moral turpitude and not to change policy.

No president has ever openly tried to fire any governor or chair. But there also is no legal precedent as to who would have legal “standing” to challenge such a move if tried.

Some presidents wanted control. In December 1965, Lyndon Johnson summoned Chair William McChesney Martin to Texas for a red-faced, screaming, spittle-flying chewing out. Johnson yelled Martin was causing “deaths of American boys in Vietnam” by not cutting interest levels. But Martin and the Fed stood firm.

Martin also faced down a GOP challenge. Shortly after inauguration in 1969, Richard Nixon told Martin to resign so he could appoint Arthur Burns, a gifted economist but political crony, as chair. Martin refused, noting the law gave him 11 more months in his job. Nixon backed down. However, after appointment in 1970, Burns’ policies touched off the great inflation of that decade.

G. William Miller, Jimmy Carter’s first appointee, perpetuated inflation. Carter kicked him upstairs as Treasury Secretary. He then courageously appointed Paul Volcker, who quashed rising price levels brutally.

Volcker’s toughness angered Ronald Reagan’s economic staff, who engineered a revolt. Reagan named two new governors who specifically promised to defy Volcker. The is the closest we ever came to what Trump wants now. But when Volcker stood firm, Reagan’s team folded until the chair’s term expired.

How might Trump try grabbing control of money policy? He might invoke the ambiguous “for cause” provision in law despite the clear prohibition that this could not include money and interest rate decisions.

If he does that or asserts some other control over the Fed, who could challenge him in federal court?

There is a clear answer: While the Governors in Washington are appointed by presidents and confirmed by Congress, the 12 regional district banks, including Minneapolis, legally are not part of government in any way. These are private corporations with presidents selected by corporate boards. Commercial banks that are members of the Fed system — effectively all — symbolically own these corporations’ stocks.

Neither the president nor Congress have any way to influence these 12 district banks, “autonomous within” the Fed system, without amending the Federal Reserve Act. Moreover, because any White House usurpation of Fed Board powers would deeply affect these 12 legally private banks, they can and will legally challenge any Trump coup attempt.

In the end, however, the ultimate arbiters are impersonal “bond markets” or “financial markets.” These are not “Deep State” actors manipulating power from behind a curtain; they are thousands of money managers looking to make a profit in whatever way they can. And because freedom of the U.S. Fed from political manipulation is a cornerstone of the world’s financial system, regardless of whatever political contribution individual Wall Streeters have made, markets there, and in London, Frankfurt and Tokyo, will react sharply and collectively to any move by Trump or his coterie of followers to tip that status-quo.

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St. Paul economist and writer Edward Lotterman can be reached at stpaul@edlotterman.com.