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Popular opinion in 1914, at least of those skilled in the field of finance, held that the newly-formed Federal Reserve System should be concentrated in as few cities as possible, perhaps four to six. The country's attempts at central banking prior to 1913 were filled with the technical problems of managing operations over the wide expanse of America, and some were concerned about repeating past mistakes. Even so, Secretary of State William Jennings Bryan called for the formation of 50 banks—“a branch at every major crossroad,” such as crossroads were at the time. In the end, however, Section 2 of the Federal Reserve Act stated firmly, although somewhat indefinitely, that “not less than eight nor more than twelve cities” would be designated as Federal Reserve cities; and that those appointments would be made “as soon as practicable.”
A committee of three, consisting of the Comptroller of the Currency and the Secretaries of Agriculture and the Treasury, had the unenviable task of choosing those cities from a pool of 37 applicants, ranging from New York to Richmond, St. Louis, Omaha, Denver and San Francisco. Additionally, the committee, known as the Reserve Bank Organization Committee, had to contend with a popularity poll taken among the country's 7,741 banks, and it also had to draw district boundaries, a task that was perhaps as tricky as selecting the cities. In addition to regional requests for particular boundaries, the committee also had to ensure that each proposed district had a $4 million minimum capitalization; that is, each member bank was required to subscribe to its district Federal Reserve Bank (an amount equal to six percent of its own capital and surplus). According to the Federal Reserve Act the total capitalization for each district had to reach $4 million. That requirement proved to be an important factor in determining district boundaries—especially in western and southern districts, many of which had few wealthy banks and hence needed a larger number of banks to generate the necessary capital. The committee took just four months to sift through piles of requests and proposals to devise a 12-district, 12-city plan. Even though the committee tried to base its boundary decisions on the regional trade routes, it came as no surprise when some commercial banks protested. In total, there were seven petitions for review filed with the Federal Reserve Board—the only group with the power to alter the original plan. All those requests did more than stir up debate about district boundaries, they also rekindled the debate about the actual number of district cities. A group of three members of the Federal Reserve Board, appointed to study the requested petitions, wanted to reduce the number of district banks because about half of the banks were decidedly weaker than the other half. Three other board members remained staunch defenders of the original 12. That left one board member to break the tie. When it appeared that the final vote was likely to be cast with those who favored a reduction in the number of districts, one of the supporters of the original plan convinced the attorney general of the United States to issue an opinion claiming that the Board did not have the power to alter the original plan. Rather than attract negative publicity by haggling with the attorney general, the Federal Reserve Board accepted the opinion. Two more important opinions by the attorney general soon followed, one which squelched any plans to change the location of a Federal Reserve bank and another which disregarded the $4 million capital minimum—leaving only questions of redistricting for the governors to decide. Also resolved by the Reserve Board in the first years of the Fed's existence was the question of district branch banks. Large districts, particularly those in the south and west, urgently called for the formation of district branches to aid in carrying out the bank's business. Such requests were granted during the early years of the Fed, and eventually there were 25 district branches to go along with the 12 district banks. The issue of district lines held more importance in the early years of the Federal Reserve System than it does now. There was a strong idea in 1913 that district banks were to act with substantial regional independence—the notion was central to the System's formation. However, while the idea of changing boundary lines was raised occasionally after 1919, the issue has disappeared over time.
Hand-in-hand with the formation of the Federal Reserve System was the outbreak of war in Europe. World War I had a profound impact on the early years of the Federal Reserve Banks. Indeed, the very opening of the district banks was rushed by five months due to the fears of a possible panic because of the global conflict. At a convention in Washington, D.C., on Oct. 20 and 21, 1914, directors and officers of the Federal Reserve banks were advised to open their respective banks for business the following April. Almost immediately, however—upon return to their district banks—those plans were changed, and the banks were told to begin receiving payments from commercial banks on Nov. 2 for subscribed stock in the Federal Reserve, and to otherwise officially open on Nov. 16, 1914. In addition to speeding up the opening of district banks, World War I, and America's involvement in the war, had another practical effect on district banks, as well as on the entire social fabric of the country—it reduced the number of men available for labor. Likewise, finding qualified help in those years, at least from the traditional male labor pool, was complicated. For the first time, then—on a large scale—women were hired to do jobs traditionally performed by men. Another operational impact of World War I, and one that required district banks to increase their payroll, was the issuance of War Bonds, government securities that raised money to support America's efforts in the war. Patriotism ran high, for the most part, and many sectors of society did whatever they could to aid the war effort. Bonds were one element of that effort, and district banks became enthusiastic brokers of the bonds. Already, then, the Fed was changing. Just a few years after its formation, the Federal Reserve System, as an active participant in the war effort, was playing a more dynamic role than its founders had envisioned. But perhaps the biggest effect of World War I, at least on the business
of the Federal Reserve System, was the war's impact on the nation's money
supply. There was concern that the prosperity generated by the war would
degenerate into a speculative boom. Other than issuing warnings, however,
the Federal Reserve could do little else, for the Treasury Department
had virtually taken over the discount policy. The discount policy—or discount rate—is the interest rate the Fed charges to financial
institutions. That policy was not being determined by the condition of
the money market, but by the absolute necessity of aiding the Treasury
Department to float issues of long-term bonds and
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Glossary
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Annual Report
