The Federal Reserve: Keeping America Drug-Free

Wait a minute: isn’t that supposed to be the DEA’s job? The Fed’s, according to the 1977 amendment to the Federal Reserve Act, is supposed to be achieving maximum employment and stable prices.

It appears, though, that Federal Reserve officials aren’t content with the job that Congress has assigned to them. You can hardly blame them, since that job has proven to be…well, not exactly the Fed’s cup of tea. There are all sorts of adjectives that might describe the state of employment in the U.S. since 2008, but “maximum” certainly isn’t one of them. As for keeping prices “stable,” well, if the Fed can claim to have generally done that well, it’s because, like Lewis Carroll’s Humpty Dumpty, it gets to make “stable” mean whatever it chooses it to mean.

So it’s only natural that the Fed should try its hand at something new.  Apparently it has decided to do its part to help win the war on drugs. Specifically, it has decided to help the Federal government keep a lid on legal marijuana production despite the steps some state governments have taken to allow it.

The Fed’s job is to see to the integrity of the monetary and banking system, not to hinder (legal) marijuana production.

Just how is the Fed helping? Like other businessmen, legitimate marijuana growers need bank accounts, so they don’t have to resort to the dangerous, inconvenient, and uneconomical alternative of dealing only in cash. Ordinary banks, already burdened by Dodd-Frank’s onerous reporting requirements, won’t open accounts for them for fear that doing so will subject them to even more scrutiny.

To get around this hurdle, some enterprising Colorado pot growers decided to form their own credit union. But to do that they needed the Fed’s permission to open a “master account” with it — that’s the account qualifying financial institutions must keep with the Fed in order to take advantage of its payment-related services, including check clearing and wire transfers. To contribute to the drug war, all the Fed had to do was to deny the request. And that’s just what the Kansas City Fed, whose territory includes Colorado, did last week when it refused to grant an account to Denver’s Fourth Corner Credit Union.

Now, you may not smoke dope, and you may even think it ought to be illegal. But pot isn’t the issue here. The issue is the Fed. For whatever you may think about marijuana, you should be appalled by the Fed’s flagrant abuse of its authority. The Fed’s job is to see to the integrity of the monetary and banking system, not to hinder (legal) marijuana production. It has been awarded the power to decide which firms bank with it, and which ones don’t, only for the sake of performing the tasks expressly assigned to it. If it denies a financial institution a master account, it ought to be because doing otherwise would somehow put other financial institutions, and hence the payments system, in harm’s way, and not for any other reasons.

Yet so far as anyone can tell, the Kansas City Fed’s action has nothing to do with concerns about the health of the banking system. (The Fed isn’t commenting on the matter, and a lawsuit is now pending.) Instead, and despite the requirement of the 1980 Depository Institutions and Monetary Control Act that it make its services available to all depository institutions, it insists that it’s within its rights. In other words, it claims the right to answer the 1980 ruling with what amounts to a Bronx cheer.

A Federal Reserve that’s capable of keeping a group of pot growers out of the banking business because it doesn’t like marijuana is capable of keeping anyone out, for any reason. The drug angle matters only because it has managed to draw attention to the extent of the Federal Reserve’s discretionary authority, and to its willingness to abuse that authority. This incident may or may not be the tip of a larger iceberg. But even if it’s unique, it ought to suffice to justify a Congressional inquiry into the Fed’s master-account approval procedures, with the aim of checking at least one small part of the Fed’s dangerously unconstrained powers.

George Selgin directs the Cato Institute’s Center for Monetary and Financial Alternatives.