When the rule-maker needs rules of its own

National Review makes a case I find genuinely worth engaging: that the Federal Reserve must possess discretionary authority because major economic events arrive without warning, and a central bank shackled to a mechanical rule cannot respond to what it did not foresee. The argument has real force. No standing instruction, however carefully drafted, can anticipate every convulsion of credit, every sudden disruption of trade, every cascade of insolvency that begins in one corner of the market and floods the rest.

And yet I feel the pull of the counter-argument with equal strength. Discretion, exercised by any powerful institution, is only as trustworthy as the character and independence of the people who hold it. The merchant who sets his own prices, judges his own quality, and writes his own weights is not a man the consumer should trust — not because merchants are villains by nature, but because the situation removes the friction of accountability. A central bank that may do as it judges best, without clear criteria by which the public can assess whether it has done well or badly, is in a structurally similar position.

I would have said, in my own time, that what makes any institution honest is not the virtue of the individuals within it but the framework around it — the transparency of its deliberations, the visibility of its reasoning, the capacity of informed critics to challenge its conclusions. The question the National Review piece should press harder is not simply whether the Fed should have discretion, but what institutional scaffolding surrounds that discretion. Who audits the judgment? Who holds the discretion-holder to account when the emergency reasoning conveniently favors one class of creditor over another?

History — and here I speak only by inference from the broad pattern of political economy, not from events I witnessed — suggests that monetary authority, when exercised in crisis, tends to protect those with the most sophisticated access to the sovereign's ear. The great merchant houses have always understood that proximity to the lender of last resort is itself a form of capital. A rule-bound framework, even an imperfect one, at least places the small borrower and the large bank on the same publicly visible footing.

My conclusion is neither a simple defense of rules nor a simple endorsement of discretion. It is a demand for institutional architecture: genuine independence from short-term political pressure, transparent reasoning published promptly, and a clear public mandate that names the constituencies the central bank serves — the whole of the laboring and consuming public, not merely the financial sector that speaks most fluently in its corridors. Discretion without such architecture is simply power. And power, as I argued long ago in a different context, tends to be exercised by those who already have it, in ways that benefit those who already have it — unless some honest, public-facing framework holds it to account.