Negotiating the Lender of Last Resort: The 1913 Federal Reserve Act as a Debate over Credit Distribution

“Lending of last resort” is one of the key powers of central banks. As a lender of last resort, the Federal Reserve (the “Fed”) famously supports commercial banks facing distressed liquidity conditions, thereby mitigating destabilizing bank runs. Less famously, lender-of-last-resort powers also influence the distribution of credit among different groups in society and therefore have high stakes for economic inequality. The Fed’s role as a lender of last resort witnessed an unprecedented expansion during the 2007–2009 Crisis when the Fed invoked emergency powers to lend to a new set of borrowers known as “shadow banks”. The decision proved controversial and spurred legislative reform narrowing the Fed’s authority as well as an ongoing scholarly debate. Participants in this debate, the Article argues, limited their focus to financial stability considerations, thereby neglecting those powers’ considerable distributive implications. This Article contributes to the current literature by demonstrating the distributive stakes of lender-of-last-resort powers through a concrete historical example: the legislative debate around the 1913 Federal Reserve Act that established the Fed. During that time, three different groups debated the legal definition of “eligible collateral” that the Fed could accept from borrowers to secure emergency loans. The first group was corporate financiers, who were interested in supporting capital markets. The second group was the Democratic framers of the Act, who tried to divert credit away from corporate securities and into small businesses. The third group was farmers that needed credit for developing the agrarian periphery. I argue that each of these groups tried to shape the definition of eligible collateral in ways that would promote that group’s unique credit needs and reduce its borrowing costs. For us today, this history is an invitation to reconsider the distributive implications of the current lender-of-last-resort powers and revise them accordingly

Public Purpose Finance: The Government\u27s Role as Lender

This Article explores the workings of Public Purpose Finance, and its role within the U.S. political economy. “Public Purpose Finance” (PPF) refers to the broad range of institutions through which the government extends credit to private borrowers in sectors like housing, education, agriculture and small business. At a total of $10 trillion, PPF roughly equals the entire U.S. corporate bond market, and is around one half of the U.S. Gross national debt (2018 figures). The Article begins by surveying and quantifying the scope of PPF. It then demonstrates that PPF enjoys a considerable degree of insulation from the federal budgetary process. The heart of the Article is an attempt to explain the political logic behind the off-budget treatment that PPF enjoys. In a nutshell, while ordinary budget spending is ultimately funded through taxes levied across the tax base, government lending is funded through loan repayment by the borrowers themselves (A model formalizing these claims is available in the Appendix). This off-budget treatment makes PPF a powerful tool for upward mobility, but it also creates a democratic deficit, and has long been a driver of racial inequality. A key theme of the Article is the need to maintain the off-budget treatment, while developing alternative modes of political participation. Government lending, like the budget, should become a key tool for society to formulate its economic agenda

Corporate Climate Targets: Between Science and Climate Washing

The use of corporate climate targets has exploded in recent years. Over three thousand corporations, including the largest and most profitable in the world, have adopted corporate climate targets as commitments to align their actions with climate science and the Paris Agreement. However, the broad adoption of these targets raises important questions: are these commitments truly aligned with science in the way they are advertised, or do they raise “climate washing” concerns, i.e., do they exaggerate the benefits and significance of the climate targets? This Article investigates the role that science actually plays within targets, and explores potential theories of liability when commitments turn out to be exaggerated. The Article’s analysis focuses on corporate targets issued as part of the Science Based Targets Initiative (SBTi). SBTi is a standard-setting body that provides a detailed rule framework for the setting of corporate climate targets. The nonprofit has recently experienced spectacular growth, with companies representing some $38 trillion –one third of global market capitalization—now committing to targets under its seal. The Article finds that the role of science in SBTi’s rule framework is more complex than it first appears. SBTi rules employ a scientific concept known as the global carbon budget, but scientific knowledge cannot translate that carbon budget, which is indeed global, to company-level targets. When SBTi provides that translation in its rules, it is not merely deriving targets from science, but exercising considerable discretion. That discretion, and its distributive implications, are currently under-appreciated in both academia and practice. Building on this analysis, the Article turns to the issue of potential liability for climate washing in some companies’ SBTi targets. The key, it argues, is to move beyond the instinct that a target can only amount to climate washing if it is in direct conflict with science. Because science itself cannot determine appropriate company-level targets, it is necessary to identify alternative ways in which a given corporate target is problematic or misleading. To this effect, the Article suggests three avenues through which advocates may pursue climate washing liability. These include companies in non-compliance with SBTi criteria, statements that mislead consumer perception, and SBTi criteria that depart from expert consensus

Negotiating the Lender of Last Resort: The 1913 Federal Reserve Act as a Debate over Credit Distribution

“Lending of last resort” is one of the key powers of central banks. As a lender of last resort, the Federal Reserve (the “Fed”) famously supports commercial banks facing distressed liquidity conditions, thereby mitigating destabilizing bank runs. Less famously, lender-of-last-resort powers also influence the distribution of credit among different groups in society and therefore have high stakes for economic inequality. The Fed’s role as a lender of last resort witnessed an unprecedented expansion during the 2007–2009 Crisis when the Fed invoked emergency powers to lend to a new set of borrowers known as “shadow banks”. The decision proved controversial and spurred legislative reform narrowing the Fed’s authority as well as an ongoing scholarly debate. Participants in this debate, the Article argues, limited their focus to financial stability considerations, thereby neglecting those powers’ considerable distributive implications. This Article contributes to the current literature by demonstrating the distributive stakes of lender-of-last-resort powers through a concrete historical example: the legislative debate around the 1913 Federal Reserve Act that established the Fed. During that time, three different groups debated the legal definition of “eligible collateral” that the Fed could accept from borrowers to secure emergency loans. The first group was corporate financiers, who were interested in supporting capital markets. The second group was the Democratic framers of the Act, who tried to divert credit away from corporate securities and into small businesses. The third group was farmers that needed credit for developing the agrarian periphery. I argue that each of these groups tried to shape the definition of eligible collateral in ways that would promote that group’s unique credit needs and reduce its borrowing costs. For us today, this history is an invitation to reconsider the distributive implications of the current lender-of-last-resort powers and revise them accordingly

Money Creation and Bank Clearing

Like many other countries, the U.S. money supply consists primarily of deposits created by private commercial banks. How we understand bank money creation matters enormously. We are currently witnessing a debate between two competing understandings. On the one hand, a long-standing conventional view argues that bank money creation originates in individual market transactions. Based on this understanding, the conventional view narrowly limits the scope of banking regulation to market failure correction. On the other hand, authors in a new legal literature emphasize the public aspects of bank money creation, characterizing it as a “public franchise,” a “public-private partnership,” and part of the “social contract.” This new legal literature has a broader vision of banking regulation, and has raised ambitious proposals in areas including financial stability, civil rights, climate action, and financial technology. This Article bridges a gap in the new literature that has held it back from achieving its full potential. While the new literature recognizes bank money creation as public in important ways, it has dedicated little attention to the question of how banks are able to engage in money creation in the first place, thereby leaving key aspects of the conventional account unchallenged. The Article fills this gap by focusing on the process of clearing, through which banks pay trillions of dollars in obligations they owe each other every day. To assess the conventional account, the Article presents a case study of daily clearing practice in an environment that seems as market driven as possible: the New York Clearing House Association prior to the creation of the Federal Reserve system. Building on novel primary sources, the case study demonstrates that daily clearing presented NYCHA banks with serious challenges. Addressing these challenges required governance both at the level of the state, and through bank cooperation on nonmarket terms. These findings expand our understanding of how bank money creation occurs and how it should be regulated

Money Creation and Bank Clearing

Like many other countries, the U.S. money supply consists primarily of deposits created by private commercial banks. How we understand bank money creation matters enormously. We are currently witnessing a debate between two competing understandings. On the one hand, a long-standing conventional view argues that bank money creation originates in individual market transactions. Based on this understanding, the conventional view narrowly limits the scope of banking regulation to market failure correction. On the other hand, authors in a new legal literature emphasize the public aspects of bank money creation, characterizing it as a “public franchise,” a “public-private partnership,” and part of the “social contract.” This new legal literature has a broader vision of banking regulation, and has raised ambitious proposals in areas including financial stability, civil rights, climate action, and financial technology. This Article bridges a gap in the new literature that has held it back from achieving its full potential. While the new literature recognizes bank money creation as public in important ways, it has dedicated little attention to the question of how banks are able to engage in money creation in the first place, thereby leaving key aspects of the conventional account unchallenged. The Article fills this gap by focusing on the process of clearing, through which banks pay trillions of dollars in obligations they owe each other every day. To assess the conventional account, the Article presents a case study of daily clearing practice in an environment that seems as market driven as possible: the New York Clearing House Association prior to the creation of the Federal Reserve system. Building on novel primary sources, the case study demonstrates that daily clearing presented NYCHA banks with serious challenges. Addressing these challenges required governance both at the level of the state, and through bank cooperation on nonmarket terms. These findings expand our understanding of how bank money creation occurs and how it should be regulated

Corporate Climate Targets: Between Science and Climate Washing

The use of corporate climate targets has exploded in recent years. Over three thousand corporations, including the largest and most profitable in the world, have adopted corporate climate targets as commitments to align their actions with climate science and the Paris Agreement. However, the broad adoption of these targets raises important questions: are these commitments truly aligned with science in the way they are advertised, or do they raise “climate washing” concerns, i.e., do they exaggerate the benefits and significance of the climate targets? This Article investigates the role that science actually plays within targets, and explores potential theories of liability when commitments turn out to be exaggerated. The Article’s analysis focuses on corporate targets issued as part of the Science Based Targets Initiative (SBTi). SBTi is a standard-setting body that provides a detailed rule framework for the setting of corporate climate targets. The nonprofit has recently experienced spectacular growth, with companies representing some $38 trillion –one third of global market capitalization—now committing to targets under its seal. The Article finds that the role of science in SBTi’s rule framework is more complex than it first appears. SBTi rules employ a scientific concept known as the global carbon budget, but scientific knowledge cannot translate that carbon budget, which is indeed global, to company-level targets. When SBTi provides that translation in its rules, it is not merely deriving targets from science, but exercising considerable discretion. That discretion, and its distributive implications, are currently under-appreciated in both academia and practice. Building on this analysis, the Article turns to the issue of potential liability for climate washing in some companies’ SBTi targets. The key, it argues, is to move beyond the instinct that a target can only amount to climate washing if it is in direct conflict with science. Because science itself cannot determine appropriate company-level targets, it is necessary to identify alternative ways in which a given corporate target is problematic or misleading. To this effect, the Article suggests three avenues through which advocates may pursue climate washing liability. These include companies in non-compliance with SBTi criteria, statements that mislead consumer perception, and SBTi criteria that depart from expert consensus

Public Purpose Finance: The Government\u27s Role as Lender

This Article explores the workings of Public Purpose Finance, and its role within the U.S. political economy. “Public Purpose Finance” (PPF) refers to the broad range of institutions through which the government extends credit to private borrowers in sectors like housing, education, agriculture and small business. At a total of $10 trillion, PPF roughly equals the entire U.S. corporate bond market, and is around one half of the U.S. Gross national debt (2018 figures). The Article begins by surveying and quantifying the scope of PPF. It then demonstrates that PPF enjoys a considerable degree of insulation from the federal budgetary process. The heart of the Article is an attempt to explain the political logic behind the off-budget treatment that PPF enjoys. In a nutshell, while ordinary budget spending is ultimately funded through taxes levied across the tax base, government lending is funded through loan repayment by the borrowers themselves (A model formalizing these claims is available in the Appendix). This off-budget treatment makes PPF a powerful tool for upward mobility, but it also creates a democratic deficit, and has long been a driver of racial inequality. A key theme of the Article is the need to maintain the off-budget treatment, while developing alternative modes of political participation. Government lending, like the budget, should become a key tool for society to formulate its economic agenda