Agenda Today

• Part I: The Federal Reserve - fact and fiction

• Part II: War Powers

• Both parts will be a mix of lecture, questions, and discussion

Upcoming Dates

• Semester Drawing to a close

• Module 3 Quiz August 3

    - Study Guide due Friday
    - Journals Due Monday
    - Connect Due Monday

• Module 4 Quiz August 4

    - Everything for Module 4 due Tuesday

• All late work due August 6

• Finals - August 5 and 6 per HCC schedule

Finals Schedule

• Monday-Tuesday 8 AM class: August 5, 7 AM — GRRRRRRR!

• Monday-Tuesday 10:30 AM class: August 6, 9 AM

• Monday-Tuesday 1 PM class: August 6, 1 PM

Final Exam Rules (be on time!)

• If no one is here within 10 minutes of start time, I will leave
• Once the first student finishes, no one else will be allowed to start the exam
• The time limit will end after 1 hour 50 minutes to allow the next class to enter
• There will be sufficient time for accommodations for people who arrive on time - it is your responsibility to do so

I. Core Functions of the Federal Reserve

Monetary Policy

• FOMC sets target range for federal funds rate
• Influences rate via interest on reserves, ON RRP, open market operations
• Dual mandate: maximum employment + stable prices
• Discount rate set directly by Fed (collateralized discount window lending)

Bank Supervision and Regulation

• Oversees bank holding companies and state member banks
• Shares landscape with OCC, FDIC, CFPB, and state regulators

Payment Systems and Financial Services

• Historical check clearing; now Fedwire, FedNow, other settlement systems
• Critical payment-system infrastructure

Lender of Last Resort

• Discount window: short-term collateralized liquidity
• Collateral always required (securities + loans)
• Expanded in crises (2008, 2020); never eliminated

Fiscal Agent for the U.S. Treasury

• Maintains Treasury account, issues/redeems securities, processes tax payments
• Historical parallel: Bank of England (1694) after Glorious Revolution
  • Credible public debt → lower borrowing costs → capital-market development (North & Weingast)
• Current relevance: helps keep government borrowing costs lower amid high federal debt

II. Monetary Policy Independence — Why It Matters

• Congress sets goals; Fed decides day-to-day means
• Designed to reduce short-term political pressure on rates
• Comparison to judicial independence:
  • Governors: 14-year staggered terms (cross administrations)
  • Chair: separate 4-year renewable term (often begins mid-presidential term; frequently continues into next administration)
  • Unlike life-tenured judges: limited terms + ongoing accountability to Congress
• “Independent within the government,” not outside it

III. Addressing Major Conspiracy Theories

Theory 1: “Private bank owned by bankers / foreign elites / Rothschilds for private profit”

• Grain of truth: Member banks hold non-transferable stock; Reserve Banks have private-sector directors
• Reality:
  • Hybrid created by Congress (Federal Reserve Act 1913)
  • Board of Governors = federal agency (presidential appointment + Senate confirmation)
  • Stock: mandatory, limited statutory dividend (6% smaller banks; lesser of 6% or 10-year Treasury yield for larger), no residual ownership
  • Excess earnings remitted to Treasury
  • No credible evidence of Rothschild/foreign family control

Theory 2: The “Audit the Fed” Conspiracy Theory

(“Secret, unaccountable, never audited”) - Grain of truth: Monetary-policy deliberations insulated from direct GAO evaluation of judgments; 1910 Jekyll Island meeting was secretive - Reality: - Annual independent external audits of Board and Reserve Banks - Board OIG ongoing audits/investigations - Frequent GAO reviews of operations, supervision, emergency facilities - Weekly balance sheet; semiannual Monetary Policy Report; regular congressional testimony - FOMC minutes released ~3 weeks after meeting - Full transcripts + staff materials released after 5-year lag - “Audit the Fed” proposals usually seek to remove the monetary-policy carve-out - Outside analysis and criticism of data/actions/outcomes already continuous

Theory 3: “Created in bankers’ conspiracy (Jekyll Island) to engineer inflation / boom-bust cycles”

• Grain of truth: 1910 Jekyll Island meeting secretive + involved leading bankers; pre-Fed panics (e.g., 1907); monetary policy affects inflation and cycles
• Reality:
  • Draft substantially modified, publicly debated, enacted by Congress under Wilson
  • Progressive-Era compromise: fear of centralized power vs. need for lender of last resort + elastic currency
  • Excess profits to Treasury, not private shareholders
  • Independence, long terms, multi-layered audits designed to limit capture
  • Policy mistakes real and debated; hidden-cabal claim unsupported by design or fund flows

IV. Closing Bridge to Discussion

• Hybrid, imperfect institution created by and accountable to Congress
• Actual structure (public Board + regional banks + limited stock + Treasury remittances + audits/disclosure) best antidote to conspiracy claims
• Discussion prompts:
  • Which parts still seem opaque or problematic?
  • How does the independence trade-off compare to other institutions?

I. Opening Frame

• Article I (Congress declares) vs. Article II (Commander-in-Chief)
• War Powers Resolution 1973: attempt at “collective judgment”
• Five decades of practice: executive expansion, congressional difficulty reclaiming authority
• Today’s cases: Venezuela (Jan 2026) first, then Iran (Feb 2026–)

II. Case Study 1: Venezuela Operation (January 2026)

What happened

• Military operation inside Venezuela
• Capture of Nicolás Maduro and Cilia Flores
• Transfer to U.S. for federal criminal charges
• Kinetic strikes; significant reported casualties

Administration framing

• Law-enforcement action facilitated by military
• Article II authority + national interests
• Claims it did not fully constitute “war” or “hostilities”

Precedent: Operation Just Cause (Panama, Dec 1989)

• Capture of Manuel Noriega on drug-trafficking charges
• Mix of criminal-law goals + military force to remove head of state
• Justifications: protect Americans, democracy, drug trafficking, canal treaties
• Practical precedent later administrations have echoed

War Powers issues

• Did it trigger 48-hour report and 60-day clock?
• Link to earlier Caribbean boat strikes (drug/terror designations)
• Later arguments that some remote/drone strikes fell below “hostilities” threshold (low risk to U.S. personnel)
• Multiple congressional resolutions seeking termination; some bipartisan, none veto-proof

Teaching points

• Blurred line: law enforcement vs. use of force against a state
• Historical precedent undercuts pure novelty claims
• Post-Chadha: concurrent resolutions = political signal, not enforceable command

III. Case Study 2: Iran Conflict (February 2026–present)

Timeline

• ~28 Feb 2026: major strikes begin; 48-hour reports under Article II
• May 2026: administration claims hostilities “terminated” after April ceasefire (attempt to stop/reset 60-day clock)
• Both chambers pass concurrent resolutions directing withdrawal (first time for ongoing conflict; still non-binding)
• June–July 2026: renewed strikes; new 48-hour reports citing Iranian attacks on shipping in Strait of Hormuz

Core disputes

• Does a ceasefire truly terminate hostilities for the clock?
• Continued reliance on broad Article II “respond to threat” claims
• Weakness of concurrent resolutions after Chadha

IV. Broader Patterns

• Narrowing of “hostilities” (risk to U.S. personnel, no ground troops, remote ops) — Libya 2011 as key precedent
• 60-day clock more reporting/political deadline than automatic off-switch
• Courts largely treat disputes as political questions
• Both parties expand executive latitude when in the White House

V. Bridge to Discussion

• 1973 statute applied to capture ops, maritime interdictions, precision strikes, protracted campaigns
• Congress still has tools (funding, new AUMFs, joint resolutions) but rarely the political will or super-majorities
• Move to discussion questions (esp. 60-day clock as limit/license; modern definition of hostilities; declarations vs. open-ended AUMFs)

Authorship and License

Cover image created with Imagen 3.0, part of Google’s Gemini.

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• Author: Tom Hanna

• Website: tomhanna.me

• License: This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.