The Vanished Clause and the Senator Who Noticed It
This week, President Donald Trump fired Federal Reserve Governor Lisa D. Cook, igniting a discussion about the legal implications of that action. Specifically, it raised questions about the notion that a Fed governor can only be dismissed “for cause.”
But what happens if that rule simply disappears? It’s not just hypothetical; something similar occurred in 1933. Amid efforts to stabilize the crumbling banking system, Congress quietly removed the phrase “for cause” from the Federal Reserve Act of 1913. For nearly two years, appointed members served at the president’s pleasure, seemingly without anyone noticing.
The situation came to light in 1935 during a Senate hearing on another major banking bill. The committee, presuming that the “for cause” language was still intact, proceeded as if that were the case for weeks. Legal discussions internally assumed that the president couldn’t dismiss Fed officials without valid reasons.
However, it was on May 15th that Winthrop Aldrich, son of Senator Nelson Wilmers Aldrich, and a prominent figure in central banking, pointed out to the committee that current laws no longer included that requirement. Senator Carter of Virginia, another architect of the federal system, seemed to have overlooked that change.
Aldrich highlighted the risks of “hasty laws” but hinted at something more unsettling happening behind the scenes. “I don’t know if it was simply negligence or something more secretive,” he remarked.
1935: Challenging Courts and Scrutinized Fed
This period was also marked by a significant debate over the banking bill, with Democrats holding a strong majority in both chambers—69 out of 96 Senate seats and 322 out of 435 House seats. Franklin Roosevelt enjoyed popularity despite the ongoing depression, but many lawmakers across party lines criticized the Fed’s early policy responses, claiming they worsened the economic crisis.
At the same time, the Supreme Court was actively dismantling Roosevelt’s agenda. Various cases invalidated key aspects of his New Deal policies. Facing such challenges, Hill Democrats were wary of creating another avenue for judicial interference by allowing unelected justices to question whether the president had “sufficient” cause to remove Fed officials.
Humphrey’s Enforcers Change the Game
In May 1935, the Supreme Court’s ruling in Humphrey’s Executor vs. United States struck hard during the deliberations on banking reforms. The case revolved around Roosevelt’s attempt to fire a Federal Trade Commissioner. The court stated that officials could be removed only for incompetence, neglect, or misconduct.
The Court upheld this strict criterion and denied Roosevelt’s dismissal action. This ruling presented a clear template that Congress could have adopted, but they chose a different path.
When drafting the new legislation, lawmakers restored the removal protection but kept it vague: the Fed Governor could be “removed for cause by the President.” No specific reasons were listed, nor were there formal procedures for notification or hearings. It was intentionally minimalistic.
The Implications of “For Cause”
Senator Carter Glass articulated Congress’s position, asserting that the Fed should not be entirely insulated from political oversight. If the board acted in a way that significantly damaged public interest, the president could remove its members to change policy.
This standard necessitated more than a mere whim from the president; reasons had to be stated. According to Glass, the president needed to provide a written explanation to the Senate but did not have to initiate a formal indictment or hearing process.
In essence, lawmakers opted for political checks that required Senate confirmation over judicial oversight. They rejected the preceding model found in Humphrey’s Enforcers and created structural safeguards to ensure institutional independence.
Instead of relying on courts to defend the Fed’s autonomy, Congress focused on institutional design and unique powers. The 14-year terms prevented any single president from taking control. The Senate’s confirmation was required for appointments, and the Federal Open Market Committee was structured to balance the interests of the Washington-based governor with those of the regional reserve bank presidents.
A Historical Perspective on Today’s Debate
Looking back to 1935 helps frame current discussions. The Fed operates differently than other institutions; the president must articulate a cause, with arbitrary dismissals off the table. The “for cause” clause was shaped to be flexible, not a rigid checklist.
In 1935, lawmakers established removal guidelines based on a democratic assembly facing an unpredictable Supreme Court. They intentionally wrote rules that would limit political dismissals. They reinstated the “for cause” requirement, emphasizing the need for written justifications while relying on structural safeguards for financial independence.
Today, this history is essential in understanding the ongoing discourse around Lisa Cook. The legal basis gives more discretion to the President, moving away from judicial oversight concerning central bank staffing, aligning more with the principles of accountability laid out by Congress decades ago.
