Trump Establishes Committee to Investigate Federal Reserve Governor Lisa Cook
A President’s Interest-Rate Litmus Test Is Not Justice but Policy by Inquisition
When the power to fire a central banker is yoked to demands for lower interest rates, the inquiry ceases to be about fraud and becomes a tax on the public’s trust in money itself.
The present controversy needs no abstruse learning to be understood. A head of state, long dissatisfied with a member of the central bank’s governing board, has renewed efforts to remove her, this time by convening a special committee to examine mortgage-fraud allegations predating her appointment. The official in question is given twenty-one days to reply, four hours of hearing within the walls of the executive mansion, and the promise that the committee will advise whether there is cause to dismiss her under law. We are told that an earlier attempt to remove her was blocked by the courts, and that the underlying accusations remain contested. Thus an old quarrel reappears, now dressed in the robes of judicial decorum.
Were this all, the impartial spectator might suspend his judgment, for fraud in financial dealings is no trifle. The stability of credit rests upon the veracity of those who sign their names to contracts; if a governor of the institution managing the nation’s money were proven to have deceived her own creditors, her continuance in office would justly shock the public. In such matters the sovereign, who must secure both defence and the exact administration of justice, may not stand idle. Yet the same reports inform us that this sovereign has declared he will appoint only those central bankers who agree with him upon cutting interest rates. The investigation thus proceeds not in a clear sky of disinterested justice, but under clouds raised by an avowed policy test that touches directly the governor’s proper functions.
Here the economist in me pricks up his ears. In the work I called an Inquiry into the Nature and Causes of the Wealth of Nations, I observed that the whole produce of the land and labour resolves itself into wages, profit, and rent, and that the price system is the instrument by which this distribution is continually adjusted. The rate of interest is a central price in that system; to bend it toward the convenience of the government of the day, rather than to the higgling and bargaining of borrowers and lenders under known rules, is to tax some without debate and enrich others without avowal. Those who live by wages, and have neither great fortunes to lend nor fine houses to mortgage, are rarely consulted before such a hidden imposition is laid upon the value of their pay packets.
I have never supposed that the governors of banks are angels. Self-interest, when bounded by justice and channelled through general rules, conducts each man to serve the needs of others whom he never sees. In this sense, as I once remarked of merchants preferring domestic to foreign trade, he is led by an invisible hand to promote an end that was no part of his intention. But when the magistrate proclaims that only counsellors devoted to cheaper credit shall be admitted, and then assembles a tribunal over a troublesome counsellor while litigation over her removal is yet unresolved, self-interest changes its aspect. The incentives actually before the parties are no longer those of truth and falsehood, but of favour and disgrace. A process which requires uncommon heroism from all involved, in order to remain impartial, is a process ill suited to ordinary mortals.
In my Theory of Moral Sentiments I entreated the reader always to consult the impartial spectator, that man within the breast who sees our situation without sharing our passions. That spectator, apprised that fraud allegations are as yet unsubstantiated, that previous judicial review has checked an earlier dismissal, and that the sovereign has publicly tied future appointments to a particular stance on interest rates, will ask a simple question: is this truly an inquiry into character, or an inquisition into policy? If the same conduct in mortgage forms, committed by a political ally or a known dove on interest rates, would be passed over as a venial confusion, then to single out this governor is not to administer justice, but to practise what I once called the vile maxim—everything for our friends and nothing for our adversaries.
The danger is not confined to one office or one person. The central bank in your age has become a great public work, a sort of lighthouse for the whole credit system, whose utility is manifest and whose profits could never tempt a private undertaker to supply it on the same footing. To subject such an institution to the daily tempests of political favour, and to make accusations of private misconduct the convenient oar with which to row against judicial decisions one dislikes, is to unsettle the expectations on which trade, saving, and employment rest. When the labouring poor cannot know whether today’s interest rate is fixed for the public safety or for next year’s election, they pay in lost jobs and dearer necessities for the drama of their rulers.
I would not deny that true fraud, if proved after calm and regular inquiry, may justly disqualify even the ablest of financial magistrates. But here the haste of the committee, the setting of the hearing within the sovereign’s own house, the unresolved state of prior litigation, and the openly declared desire to replace the accused with a more compliant voice on interest rates, all counsel the most suspicious attention. Justice, to command confidence, must not only be done but appear to be done; when it is yoked too visibly to the policy preferences of the day, it ceases to be a shield for the weak and becomes another weapon in the armoury of power.
From the works cited
- An Inquiry into the Nature and Causes of the Wealth of Nations — The sovereign's three duties (defence, justice, public works and institutions, including education for the common people) and the four maxims of taxation: equality, certainty, convenience, economy.
- An Inquiry into the Nature and Causes of the Wealth of Nations — Prices resolve into wages, profit, and rent — and each class's interest relates differently to the public's, so testimony from a class about the public good must be discounted accordingly.
- The Theory of Moral Sentiments — Judge conduct by the impartial spectator: what would a well-informed, disinterested observer feel about this action? Praise-worthiness matters more than praise; to be loved without being lovely is worth nothing, and to be blamed unjustly stings less than to deserve blame.