The St. Louis Fed at 100: A Brief History of the Federal Reserve System
David Wheelock, vice president and deputy director of research for the St. Louis Fed, explains how St. Louis was chosen to be the site for one of 12 regional banks that were established as part of the new Federal Reserve System and what times were like when the St. Louis Fed opened its doors for business in the fall of 1914.
- Part 1: Martha Perine Beard, Introduction and Welcoming Remarks (10:35)
- Part 2: David Wheelock, A Brief History of the Federal Reserve System and How St. Louis Was Chosen as a Reserve Bank Location (28:44)
- Part 3: David Wheelock, The "Great Inflation" Period and the Emergence of the "Maverick" Reserve Bank (19:19)
- Part 4: Audience Q&A (34:26)
Dave Wheelock: Thank you very much, Martha, and good evening. Let’s see if I can get my show to run here. Very happy to be here this evening and to welcome you to the bank on behalf of the Research Division of the Federal Reserve Bank of St. Louis. I’m Deputy Director of the Research Division, and my boss is out of the country. Otherwise, he’d be up here talking to you this evening instead of me. So you’ll have to put up with me. But, fortunately, as Martha said, we do have Julie Stackhouse and Mary Karr waiting in the wings to answer all of the hard questions that you will undoubtedly be coming up with over the next 30 minutes or so.
Now, at the beginning of all our talks we always have to say that anything we say here are solely our own views and not official positions of the bank or of the Federal Reserve System. By the way, this cartoon is from the St. Louis Republic newspaper, circa 1914. That was a newspaper of David R. Francis. Francis, as you may know, was instrumental in bringing the 1904 World’s Fair to St. Louis. He had been a mayor of St. Louis. He was also instrumental in bringing the Federal Reserve Bank to St. Louis. And he was very proud here, and they published this editorial cartoon.
Now it’s hard to read, I realize, but on the chest it says Missouri. And then the gentleman there is smoking two cigars, one of them as a cloud that says St. Louis. That’s the one on the left. And the cloud coming out of the cigar on the right says Kansas City. And we were very proud because the state of Missouri was the only of the then 48 states to be chosen to have two Federal Reserve Banks. As Martha mentioned, there are 12 Federal Reserve districts. The Federal Reserve Act specified that at least 8 and no more than 12 Federal Reserve districts would be formed, each with a Reserve Bank.
And there was a committee selected, consisting of the Secretary of the Treasury, the Controller of the Currency, and the Secretary of Agriculture. And that committee went around the country and held hearings in various cities, including St. Louis and also Kansas City. And then they were charged with drawing the district boundaries and selecting the cities that were going to have Reserve Banks. And that committee chose both St. Louis and Kansas City for Federal Reserve Banks.
So, parenthetically, the Secretary of Agriculture in the Wilson Administration at that time, a man named David Houston, was on leave from Washington University here in St. Louis where he was chancellor. (Laughter.) Surely a coincidence, I’m sure. So Martha outlined the talk. Let me reiterate. I’m going to start by doing a thumbnail on why the Federal Reserve was established in the first place. Then I will talk a little bit about the process by which St. Louis was chosen to have a Reserve Bank.
And then I’m going to jump about 50 years forward, skipping over the Great Depression and a few other minor events like that, and talk about the period of the 1970s, which has been known by some as the Great Inflation. And that is when this bank developed its maverick reputation. Now Martha was giving out a lot of facts there. And I have some facts too, which I wrote down and immediately left on the podium, or on the table over here. As Martha mentioned, we’ve been commemorating the Fed’s centennial. But it’s a little bit ambiguous exactly when marked the centennial.
The Federal Reserve Act, as Martha mentioned, was signed by President Wilson on December 23, 1913, sometimes known as the Christmas present for the President. Then on May 18 of 1914, the Federal Reserve Bank of St. Louis was incorporated. That’s the date of our charter. So we’re very, very close to the 100th anniversary of the incorporation of this bank. Then on November 16, 1914, the Federal Reserve Bank of St. Louis and all other Reserve Banks opened their doors for business. And they opened their doors not in this building, but down the street in what is known as the Marquette Building. The St. Louis Fed had some rented quarters there.
Then they subsequently moved across the street to a building that no longer exists. It’s where Metropolitan Square is now. And then in 1925, this building, or the original building where you came in this evening, was opened for business, and the St. Louis Fed located here. It became permanent. Over time there’s been a couple of significant additions to the building. The auditorium we’re in here this evening is the latest addition. It was constructed five or six years ago.
As Martha mentioned, William McChesney Martin, Sr. was important in this bank. He was the first Chairman of the Board of Directors of this bank. Then in 1929, he became Governor of the Federal Reserve Bank of St. Louis. In those days each of the 12 Reserve Banks had a governor. They did not have a president. The chief executive officer of all the Reserve Banks had the title governor. And then, so Martin became governor in 1929. Then, thanks to the Banking Act of 1935, that act changed the titles in the system, and all of the governors of the Reserve Banks became presidents.
So Martin continued as president and served until 1941. And, parenthetically, the members of the Federal Reserve Board then assumed the title governor for the first time. Up to that point, only the Chairman of the Board in Washington had the title governor. Everyone else was just referred to as a member. But after that they all became governors, and the title of that group was changed to the Board of Governors, so a little trivia. One last name I’ll mention, Rolla Wells. Rolla Wells was the first governor of this bank, and he had been a former mayor of St. Louis. So we had quite a few luminaries, as I’ll talk a little bit further in the talk, who were supporting the location of a Reserve Bank in St. Louis. So…
And then in the last part of my talk, I’ll talk a little bit about our unique structure. Unlike any other Central Bank in the world, really, up to that point, the Fed was given a very unique structure befitting of our nation’s federal system with very strong state and local governments as well as a national government. And the Fed is modeled on that kind of federal-style structure. But first, the question is why was the Federal Reserve established in the first place. As I mentioned, it was established by an act of Congress signed by President Wilson in 1913. And the United States did not have a true Central Bank prior to that time.
There were a couple of efforts in the early part of the 18th century, the First and Second Banks of the United States, which in some sense were the first government-sponsored enterprises. Each of them lasted only 20 years, and they only were sort of proto-Central Banks. The countries of Europe all had Central Banks, unlike the United States. And the reason the United States ultimately got one was the instability of the banking and monetary system of the United States in the 19th century and early part of the 20th century punctuated by panics, crashes, crises of various sorts.
So when the Federal Reserve Act was signed, the preamble to the Federal Reserve Act says, among other things—the first thing it says is to furnish an elastic currency. So, obviously, their friends, founders, believed that one of the problems we had in the United States was with an inelastic currency. And, basically, what they meant by that was simply a money supply that was inflexible.
It failed to increase or decrease with changes in the demand for money, both as sort of a routine matter with—you can think of it in terms of a year, a cycle, an agricultural cycle, for example, where there’s a demand for money and bank loans in the spring by the farmers to plant the crops and then later in the fall to harvest the crops. But there’s this concentration of a demand for money and credit at certain times of the year, but against a rather inflexible total supply or total stock of currency and credit, which is relatively fixed.
The money supply before the Fed’s founding consisted of gold and silver coin issued by the national—by the U.S. Treasury and banknotes issued by national banks against reserves of gold that they largely held in their vaults. So supply of notes and currency and gold were relatively inflexible and did not go up and down with fluctuations in demand such as the seasonal cycle of agriculture.
So you’d have the demands for money and credit that would peak at different times of the year, and so everyone—all the farmers, for example, would want to borrow money in the spring for planting. They all go to the bankers. The bankers didn’t have enough reserves to meet the demand. Interest rates would spike. And there would be, you know, people left without the money that they desire to hold. So that was kind of the ordinary seasonal problem of the inelastic currency. But it was punctuated every few years by serious crises, bank runs.
The Federal Deposit Insurance Corporation did not get its start until the Great Depression. Federal deposit insurance is a product of the Depression starting in 1933. Before that time, there was no federal deposit insurance. So the United States had problems of depositor runs on banks that would occur from time to time. Usually, they would be touched off by the failure of a single bank or a large commercial house that would cause depositors to become nervous about their ability to withdraw their funds in good terms and the worrying that their banks were going to shut down, leaving them holding the bag.
And so you’d have these depositor runs. The banks, because they had loaned out a considerable part of their reserve base, did not have the reserve base in terms of gold and coin and currency to meet the demands of the depositors, and so they’d be forced to suspend payments. Some banks would fail. And it would result in a major financial crisis that, on at least a few occasions, resulted in very serious economic recessions.
And the basic problem was that the United States lacked a lender of last resort to the banking system. There was no mechanism by which to inject liquidity into the banking system to satisfy either the ordinary demands for liquidity or the extraordinary demands that would occur occasionally with these panic runs.
Another problem with the United States payment banking system was that it had a very inefficient method of transmitting payments across the country. We had a system comprised of something like 25,000 banks, but almost none of them had any branch offices. It was a unit banking system. And so to conduct business across the country, banks would have to work through correspondent networks, and that was a very cumbersome and slow process to make a payment.
So if your merchant’s in St. Louis, for example, and you wish to make a purchase of a good, you know, oranges from Miami, Florida, you’d go to your bank in St. Louis, and your bank in St. Louis would have to work with the correspondent. They probably wouldn’t have one in Miami, Florida. Miami wasn’t a very big place in those days. So they might have to go to a correspondent bank in Atlanta, for example, to effect the transaction. And then that bank in Atlanta would in turn work with the bank in Miami.
So it was a very inefficient system. It made it very expensive and inefficient to transact payments across the country. So the solution was not a Central Bank. The Fed’s founders were very emphatic that they were not creating a Central Bank, because in those days the word Central Bank connoted one of those banks in Europe like the Bank of England or the German Reichsbank, which were private corporations that served very concentrated banking systems comprised of just a few very large national banks.
There was very little desire for such a Central Bank in the United States, because there was a view that it would be captured by Wall Street. We had just gone through the Panic of 1907, the collapse of Wall Street, the organization of banks to try to end the panic by J.P. Morgan. The so-called money trust hearings had just concluded in Congress. And so there was no appetite for creating a bank that would serve the interests of the big banks on Wall Street like the Bank of England did in England or the Reichsbank did in Germany.
So the U.S., the Federal Reserve Act created a system that was a political compromise, as legislation typically is, between the interests of the major central city banks, major bankers on Wall Street or Chicago, or St. Louis for that matter, balanced against the interests of the smaller banks in the countryside. It was basically a Wall Street versus Main Street compromise that gave us a structure, a federal structure, where we had not one Central Bank, but in essence 12 Central Banks, a system comprised of 12 Central Banks, each for one of these various districts.
Moreover, it was an organization that was neither fully public and nor fully private. Again, the Central Banks of Europe were all private corporations. The 12 Federal Reserve Banks are also private corporations owned by our member banks that purchase stock in the Federal Reserve Bank. However, there is a public component to this system as well, and that is the Federal Reserve Board in Washington, which is a public government agency, if you will, that oversees the entire system. So, again, there’s a political compromise here between public versus private.
Now there was, as I mentioned, no appetite for creating a purely private organization. But nor was there an appetite for creating a purely public organization. The history of Europe had shown that when the kings controlled the printing press, they used the printing press to print lots of money to finance their wars and other spending. And the result is inflation, which tends to wreck an economy. So a check and balance was put into the system to remove the Fed a step away from the public purse, if you will, the ability to use the Fed as a printing press to finance government spending.
That was a check put in place by having a role for the private sector as well as the public sector. So we have this grand political compromise. Now this map shows the boundaries of the Federal Reserve districts as they were originally laid out and chosen by the Reserve Bank Organization Committee, that committee of the Secretary of Treasury, Agricultural Secretary, and the Controller of Currency. The boundaries are nearly the same today. There have been a few minor modifications over time.
For example, our friends over in Kansas City a few years ago stole a few counties from us and shifted this line a little bit eastward. But, otherwise, the boundaries have largely stayed the same. Now, why are all, or why are a majority of the districts located in the eastern half of the country? The answer, of course, is that’s where the population was. It’s also where the banks were. The district boundaries had to encompass enough banks and enough banking capital that they could be viable.
And so the districts in the western part of the country, like the 10th district, which is the Kansas City district, the Dallas district, the 11th district, and the 12th district headquartered in San Francisco, had to be large enough to encompass enough banks and enough banking capital so that they’d be viable, because if I put a map up here of where all the banks were located in 1913, the vast majority would be from Kansas City eastward. And that’s, again, where most of the population was as well at that time. Hence, that’s why the districts in the East are so much smaller than those in the Midwest, which in turn are smaller than those farther west.
So, what was created? A new currency. I mentioned the problem of an inelastic currency. A new currency was born, the Federal Reserve note. This is a picture of one of the very first Federal Reserve Bank of St. Louis notes. If you look at a $20 bill today, you will not see the Federal Reserve Bank of anywhere stamped on that note. There is a little code there, which, if you know the district numbers and letters, you can identify which Reserve Bank it’s associated with.
But early on, the banknotes were very much associated with individual Reserve Banks, down to the fact that the governor of the Reserve Bank, Rolla Wells in this case, signed the notes. He didn’t literally sign it himself, but it has his signature. The signature bears his name. A lender of last resort was born also with the founding of the Federal Reserve System. Fundamentally, the way that the Fed solved the inelasticity problem was through its discount window. The discount window is the facility by which the Fed makes loans to its member banks. Today it by law can lend to any depository institution.
But up until 1980, the Fed by law only lent to its member banks, which consisted of all banks with the word national in their title, all national banks, and state-chartered banks that chose to belong to the Federal Reserve System. So the mechanism, the way it worked is that the member banks would bring essentially the loans they had made to farmers and to commercial businesses, bring them to the physical location of the Federal Reserve Bank, hand them across the window, and essentially they served as collateral for the loans that the Reserve Bank would then give to the bank, either in the form of Federal Reserve notes or in terms of deposits at the Fed.
And then, lastly, by having this national structure, the Fed integrated the payment system, and not very far into that, we developed our first electronic payment system. So why did St. Louis get a bank? It wasn’t the arch. The arch came 50 years later. But St. Louis was a big deal. We of course had the World’s Fair in 1904. St. Louis was the fourth largest city, as the video mentioned. The cities marked with green there are the ones that got a Federal Reserve Bank. The ones in blue did not.
St. Louis was also a major manufacturing center. It was the fifth largest in terms of manufacturing output in 1910, having just been passed by Detroit, thanks to Henry Ford. But St. Louis also had another advantage. It was a major transportation hub. There were 20-some railroad lines that came through St. Louis. That was very important for getting money out to banks in the region as well as getting the payment system—getting the checks back and forth and so forth. So having a major transportation center was very important.
So here are the basic statistics. I won’t bore you with the numbers. But the slides give—you know, St. Louis was considerably smaller in population even in those days than New York and Chicago. But we were the fourth largest city, larger than Boston, larger than Detroit, larger than Minneapolis. San Francisco is not even on the chart. And then we were number five in terms of manufacturing output. We had a number of leading industries. Meatpacking was a very important industry in St. Louis. The manufacture of boots and shoes was very important in St. Louis. These were the major industries.
Of course, everybody knows about beer being important in St. Louis. And St. Louis was a major banking center. St. Louis was one of the three central Reserve cities under the National Banking Act, the other two being New York and Chicago. And those cities were the cities where banks from throughout the country kept their—a vast majority of their deposits as well. St. Louis actually had more correspondent balances than all but four other cities. We had 50% more than Kansas City. We had twice as many as San Francisco. So it was a major banking center, which was important as well.
Now when the RBOC, the Reserve Bank Organization Committee, was going around the country holding hearings, another aspect of their process by which they made the selection was to essentially take a poll. They asked all of the national banks in the country, which by law had to join the Federal Reserve System—they asked the national banks, “What city would you like to do business with in terms of having the Reserve Bank located where you will interact with?” That was a very awkwardly worded sentence, but I hope you got the idea. They voted for their first and second choices of where they like to do banking. Okay?
So they asked all the national banks, “Where would you like to do business?” St. Louis and also Kansas City received a large number of votes. Of course, New York and Chicago received a lot of votes. I think this vote was very important in selection of individual cities for Reserve Banks. St. Louis was not a controversial choice. Everybody expected St. Louis to get a Reserve Bank. As I mentioned, it was one of the three Central Reserve cities under the National Banking Acts. It was a major correspondent banking center. So it was a foregone conclusion that St. Louis was going to get a Reserve Bank.
That’s not true of Kansas City, which was, again, much smaller. It was a much younger city. But you can see, Kansas City got a lot of votes as well from banks as to where they would like to have a Reserve Bank located. Dallas received a lot of votes. I think that’s the reason why they got a bank, even though they were at that time a rather small and otherwise fairly inconsequential city. One city that really expected to get one and was disappointed was New Orleans. But they actually didn’t get very many votes. So New Orleans was disappointed.
Now, a few cities got a lot of votes and were shut out. Pittsburgh, Cincinnati, and Baltimore were all cities that were in the running. Louisville got quite a few votes. Memphis got a few. And Little Rock got one. But they ended up being our branch cities. Atlanta was another city that wasn’t very big in 1914 but got a fair number of votes and ended up getting a Reserve Bank. So I think that vote was very instrumental in the choice of the cities.
Now, it was very controversial. Perhaps more controversial than what cities would get Reserve Banks is where those district boundaries were going to be drawn. And there was a lot of lobbying going on, both in the hearings that were held in the various cities, where you’d have the business leaders and the bankers from that region coming in and saying, “Boy, St. Louis, we’re the major hub, and we really should have a Reserve Bank here. But we also think it should encompass a very large region.” Well, they were doing that in all the cities as well.
And so where you have—cases like Illinois is a good example where, clearly, Chicago was going to get a Reserve Bank as well, the second largest city and one of the other Central Reserve cities. But does that mean all of Illinois is going to be in the Chicago Federal Reserve district? Or will St. Louis get some of it? David Francis when he was testifying before the committee selecting banks argued that Springfield, the capital of Illinois, should be in the Federal Reserve Bank of St. Louis District. We have a lot of ties with people in St. Louis. They’re friends of ours. They would do business with them. Give us Springfield.
Well, the guys in Chicago thought all of Illinois should belong to the Chicago district. And one thing they did was send every bank in Illinois this piece of paper asking them to fill in the name of their bank and send it back in indicating their preference for being located in the Federal Reserve district headquartered in Chicago. A number of bankers in Southern Illinois, such as this banker from Exchange Bank of Milton, Illinois, would scratch out Chicago and write in St. Louis by hand and then send it in. So there was some of that going on as well. So we have some of those in the archives.
So, what was the St. Louis proposal? The St. Louis guys—and they were all guys—said, “You guys should only set up eight Federal Reserve districts.” Again, St. Louis was going to get one. So in order to get the biggest possible territory, there should be a small number of banks, the smallest number of banks as contemplated in the law, which was eight. So there should be only eight Reserve Banks. And I’m quoting, actually, from testimony in the hearings of various people here in St. Louis.
And that Eighth Federal Reserve—or what became the Eighth Federal Reserve District headquartered in St. Louis—should include, “The states of Missouri, Kansas, Nebraska, Texas, Arkansas, Oklahoma, Kentucky, Tennessee, Louisiana, Mississippi, Southern Illinois, Southern Indiana, with St. Louis as the Reserve Center.” And, oh, by the way, probably 10 or 15 branch offices as well. They wanted a really big territory headquartered in St. Louis.
And this map was an illustration showing approximately the region that the boosters from St. Louis thought should be the basis of a Reserve Bank, a Reserve district, headquartered in St. Louis. Now I know that there was an actual map. This is an actual map, but there was a map showing the specific proposal with the boundaries. But we’ve never been able to locate the one for St. Louis. However, I know this one is close.
This was a map created by a major hardware concern in St. Louis, a guy by the name of Shapleigh of Shapleigh Hardware. Maybe those of you who have been here long enough recognize that name. He was a significant booster in promoting St. Louis, and he was showing here in this shaded area the trade territory served by the St. Louis firms. And so this big, shaded area, he said, really ought to be the St. Louis district. And then these smaller areas would constitute regions, say, around Memphis, that might be branch regions, or around Kansas City, which might be a branch region.
His argument was that the Chicago territory really served a different market, as did the Minneapolis territory and so forth. The little picture on the right shows you the actual boundaries of the Eighth Federal Reserve District. It was a mid-sized district among the 12. It was certainly not the massive area that was requested by the St. Louis boosters. It was a medium-sized district with sort of a medium-sized number of banks. It was not a particularly wealthy district, however. The banking capital of our district, then as it is now, was probably in the lower half in terms of the total numbers.
So, that in a nutshell is how St. Louis got a district. And it’s basically the story of all of the other Reserve Bank headquarters, including Kansas City. They were very aggressive about going out and trying to get bankers from the very large areas to write letters and to testify and to argue that we should be in the Federal Reserve district headquartered by city X or Y or what have you. And, again, these border skirmishes were kind of hotly contested. So…
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