Region Focus

Spring 2005

Federal Reserve - New Times, New Functions

As the economy changes, so does the role of Federal Reserve Bank branch offices
By Jennifer Wang

Selecting Reserve Bank Cities

If the history of Federal Reserve Bank branches seems contentious, consider the original task of picking locations for its main bank offices. The job fell to the Reserve Bank Organization Committee. The three-member committee, made up of John Skelton Williams (Comptroller of the Currency), William McAdoo (Secretary of the Treasury), and David Houston (Secretary of Agriculture), met in December 1913 to prepare initial districting plans.

After months of deliberation – including a rigorous touring schedule to take testimony from 18 of the 37 petitioning cities – the committee, on April 2, 1914, announced its 12 final choices. They were and are: Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco.

Aware that locating the cities and districts would be a contentious issue, the committee cited clear preferences for cities with "a distinct leadership in matters of business" and "ease of communication." In addition, ballots were sent to thousands of nationally commercial banks to gauge city popularity.

Predictably, these actions did not avert the criticisms that arose after the decisions were made public. Chief among the complaints was the charge that political influences played a role in determining the number of districts established, as well as the naming of up to four cities as reserve bank sites. In a research paper on Federal Reserve districting, David Hammes, an economist at the University of Hawaii at Hilo, found that representatives of Baltimore, Denver, Pittsburgh and New Orleans, for instance, believed that variously, St. Louis, Richmond, Kansas City, Cleveland, and Atlanta were "indefensible choices."

Some of the accusations came from an unexpected source: Henry Parker Willis – one of the original architects of the Federal Reserve System. In a January 1914 meeting, Secretary McAdoo appointed Willis the chairman of a committee to draft a preliminary districting plan that would serve as the blueprint for the final discussions. Willis' report, complete with his personal recommendations, differed from the committee's preferences in two instances: He chose the cities of Portland and Cincinnati in lieu of Richmond and Dallas.

Shortly after Willis left the Federal Reserve for a full-time post at Columbia University, he published The Federal Reserve System, Legislation, Organization, and Operation (1923), in which he critiqued some of the committee's designations. According to his account, it was generally regarded that the political influence of Georgia Sen. Hoke Smith "turned the scale in favor of inclusion of Atlanta among the 12 cities," which might otherwise have been omitted. Willis also questioned the selection of Cleveland – home of Secretary of War Newton Baker.

And nowhere was the charge of politics heard more strongly than in the case of the Fifth District. Willis' commentary was particularly pointed: "Assuming that 12 places were to be designated as the headquarters of Reserve banks," Willis wrote, "only a casual survey was necessary to make it clear that there was a serious error in the attempt to insert a Richmond district."

Written records indicate that establishing a bank in Richmond was never "seriously considered" in the preliminary surveys of the situation. According to Hammes, however, Comptroller Williams (a native of Richmond), was "well known to be doing his utmost to forward its claims." In addition, Carter Glass, a Virginia native, chaired the House Committee on Banking and Currency at the time the Federal Reserve Act was signed into law.

Objections were rampant in the period immediately following the Committee's decision. But more than 90 years later, few are aware of the magnitude of the original controversy. Though the Federal Reserve System continues to restructure its branches and check-processing centers, the 12 Reserve Banks endure in the exact same cities where they were founded. Willis may have gone to his grave objecting, but even his account – made almost a decade after the fact – never spurred a significant initiative to reconsider bank locations.

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