What played a bigger role in selecting the 12 Regional Feds? Economics or Politics?

Three posts in St Louis Fed Blog look at the question.

There was a Regional Bank Organisation Committee which tried to ensure the selection is as much on economics:

The article’s author, Vice President and Deputy Director of Research David Wheelock, noted that the Reserve Bank Organization Committee (RBOC) was given little guidance on structuring this network of banks. Among the guidance actually given:

  • Each Reserve bank needed a minimum capitalization of $4 million, paid by member banks.
  • Eight to 12 Reserve banks would be established.

The RBOC also established criteria to guide its selections:1

  • “Fair and equitable division of the available capital for the Federal Reserve banks among the districts created”
  • Importance of the “mercantile, industrial and financial connections existing in each district and the relations between the various portions of the district and the city selected for the location of the Federal Reserve bank”
  • Importance of “the general geographical situation of the district, transportation lines and the facilities for speedy communication between the Federal Reserve bank and all portions of the district”

Wheelock noted that the capital requirement helped explain why districts in the Northeast cover much smaller areas than those in the West and South. Since the Northeast had many banks and some of the largest banks, less area was needed for a district that could meet the capital requirements. Conversely, more area was needed in the West and the South.

The RBOC also conducted a survey of national banks to help with its decisions. Banks were asked for their top three choices for the location of their Reserve bank and for eight to 12 recommendations for Reserve bank locations across the country.

…..Soon after the announcement, the RBOC issued a report explaining the criteria behind the committee’s decisions, including addressing some of the most controversial. As Wheelock wrote: “The report, not surprisingly, claimed that economic considerations alone had guided the committee’s decisions.”

The criteria for selection is interesting. Lots of history anf geography at work here..

There is another post on whether both St Louis and Kansas from Missouri deserved to have 2 Regional Feds. Was it more to do with politics than economics?

Wheelock noted that the support for St. Louis receiving a Reserve bank was not surprising. St. Louis was the nation’s fourth largest city at the time and was one of three cities to be designated a central reserve city (along with New York City and Chicago). Wheelock also noted that Reserve banks needed strong transportation and communication services to serve their member banks. He wrote: “At the confluence of the Missouri and Mississippi Rivers and with service from 26 trunk rail lines, St. Louis was one of the nation’s premier transportation hubs.”

A survey conducted by the RBOC also appeared to heavily influence the locations of Reserve banks. National banks were asked to name their top three choices for the location of their Reserve bank, as well as eight to 12 recommendations for Reserve bank locations throughout the country.

St. Louis was in the top 10 in first-choice votes, received the third-most first-, second- and third-place votes overall (behind Chicago and New York City) and was named first-choice by banks in 11 states (also third-most behind Chicago and New York City). (For more details on the results of this survey, see Wheelock’s paper “Economics and Politics in Selecting Federal Reserve Cities: Why Missouri Has Two Reserve Banks.”)

St. Louis’s selection may not have been surprising, but Kansas City’s selection was somewhat controversial. After the RBOC announced the locations of the Reserve banks, it followed up with a report focusing on some of the most controversial decisions, including selecting Kansas City over Denver, Omaha or Lincoln.

Kansas City received considerable support from bankers according to the RBOC’s survey. Wheelock wrote: “The extensive support for Kansas City, however, was viewed as something of a surprise.” It received the fifth-most first-choice votes (506) among all cities, well ahead of its chief rivals Denver (136 votes), Omaha (218) and Lincoln (22).3

Wheelock also noted that Kansas City had better transportation linkages and business connections within its district than its rivals. Kansas City was close to St. Louis in terms of transportation, with 16 trunk rail lines, 32 subordinate lines and 260 daily passenger trains. Also in its favor, Wheelock noted that Kansas City was a correspondent banking center.

Wheelock concluded: “We’ll never know the extent to which political considerations played a role in the selection of Kansas City, St. Louis, or both cities for Reserve Banks, but on the basis of both the preferences of bankers and the economic criteria for the placement of Reserve Banks, both cities deserved serious consideration.”

Interesting bit. Keeping criticism of Regional Feds aside all this about how geography and history shape banking centres is fascinating stuff.

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