On Thursday, Hillary Clinton endorsed a banking reform idea that is more progressive than anything she backed during her long primary battle with Bernie Sanders. Compared to high-profile proposals like breaking up the banks, the plan Clinton backed is a narrow change, but an important one that nerdy liberal activists have been championing for years. Put simply, Clinton wants to shift the balance of power at the Federal Reserve away from private banks in favor of democratic accountability.
The Fed is the most powerful economic institution in the world, and perhaps the strangest. The central bank's Board of Governors in Washington, D.C., is a government entity run by presidential appointees who must be confirmed by the Senate. But the 12 regional Federal Reserve Banks that perform the bulk of the central bank's grunt work -- handling and processing reserves -- are technically owned by banks. This ownership doesn't mean much in terms of direct earnings; the banks can't sell their Fed stock, and the regional Fed banks don't turn a profit.
The trouble is that the regional Fed banks have a lot of power over the Federal Open Market Committee -- the key panel that sets interest rates, directing a tremendous amount of U.S. economic activity. Private banks do have a lot of influence over who manages the Fed's regional outposts through board of director positions. Directors selected by bankers help choose the president of each Fed outpost. These presidents, in turn, serve on the key committee that sets interest rates. On Thursday, Clinton called for getting bankers out of that process.
If it all sounds terribly complicated, it is. But the bottom line is that Clinton called to replace one form of banker influence over public policy with a system of democratic accountability. That would be a concrete, progressive change to the status quo. And despite her rhetoric on the campaign trail, the key element of Clinton's financial platform has been to implement existing law.
The battle between banker influence and political control at the Fed has been going on since before the central bank was even founded, as journalist and author Roger Lowenstein discusses in the latest episode of the HuffPost politics podcast "So, That Happened." Lowenstein's latest book, America's Bank: The Epic Struggle To Create The Federal Reserve, details more than a decade of early 20th-century political combat between Democrats and Republicans, populists and progressives, agrarians and urbanites that culminated in the formation of the U.S. central bank. It sounds, in other words, quite a bit like contemporary politics -- with the caveat that Congress did actually get something done at the end.
"When I started this book, it was right after, in the aftermath of our most recent disaster with mortgages and bailouts and everything," Lowenstein said. "I wanted to know how we came through a somewhat similar crash a century ago without a Fed, and why it was that we didn't have one. Because even at that time, we were the only nation in the developed world that was trying to run their economy on this extreme laissez-faire basis."
Listen to Lowenstein's comments in the podcast embedded above. The discussion begins at the 37:00 mark.
Nobody in his or her right mind would design the Federal Reserve system from scratch as a way to manage the economy. And Lowenstein shows that nobody, in fact, did such a thing. Creating the Fed was both a political dogfight and a balancing act, with different factions being placated in different ways, resulting in a bizarre public-private hybrid that somehow seems to work.
But the battle to shape the Fed didn't stop once the system got up and running. The American central bank has been overhauled several times, most notably during the Great Depression, but also during the 1980s and after the 2008 crash.
Clinton's call for further changes is just the latest in a century of struggle over how to govern the world's most potent economic power.