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Historieal
• Beginnings ...
The Federal Reserve
by Roger T. Johnson

Federal Reserve Bank
of Boston

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Federal Reserve Bank of St. Louis

Roger T. Johnson served as bank representative for
the Federal Reserve Bank of Boston. Dr. Johnson has
also taught 20th century American history at The
Johns Hopkins University and Boston College, has
served as assistant editor of the Dwight D. Eisenhower
papers and has written editorial columns and book reviews for the Baltimore Sun. He is now in the commodities business on the Kansas City Board of Trade.
Edited by Mary Jane Coyle
Designed by Marilyn Rutland
Published by Banking and Public Services,
Federal Reserve Bank of Boston

First Printing, September 1977 SM

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COVER: The signing of the Federal Reserve Act by
President Woodrow Wilson, December 13, 1913, is depicted in this painting by Wilbur G. Kurtz, Sr. Commissioned by the Federal Reserve Bank of Atlanta in 1923,
the painting is presently on loan to the Federal Reserve
Board of Governors in Washington, D.C. from the
Woodrow Wilson Birthplace Foundation in Virginia.
While more people were present at the actual signing
of the Act, Mr. Kurtz chose to picture the following
men. Left to right: Lindley M. Garrison, Secretary of
War; Josephus Daniels, Secretary of the Navy; Franklin K. Lane, Secretary of the Interior; A.S. Burleson,
Postmaster General; Senator Robert Owen, Chairman
of the Senate's Banking and Currency Committee;
Champ Clark, Speaker of the House; William G.
McAdoo, Secretary of the Treasury; Woodrow Wilson,
President of the United States; Representative Carter
Glass, Chairman of the House Committee on Banking
and Currency; Representative Oscar W. Underwood;
and William B. Wilson, Secretary of Labor.
Courtesy, Woodrow Wilson Birthplace Foundation

INTRODUCTION

CHAPTER 1. EARLY EXPERIMENTS IN CENTRAL BANKING
1791: The First Attempt
1816: The Controversial Second Bank
1863: The National Banking Act
Banking Problems Persist

CHAPTER 2. FINANCIAL REFORM IN THE 20TH CENTURY
1908: The Monetary Commission
Bankers and the Aldrich Plan
The "Money Trust"
Back to the Drawing Board:
The Glass-Willis Proposal
Battle Lines Drawn
Political Compromises
Opposition from Bankers
Passage by Congress

CHAPTER 3. MAKING THE SYSTEM WORK
District Line Dilemmas
Opinion in Boston
Canvassing the Nation
Hello, Boston Goodbye, Baltimore
Crossfire
Getting It Together
Electing Local Directors
Wilson's Choices:
The Federal Reserve Board

7
7
9
11
13
16
17
19
20
22
24
27
30
31
35
37
39
41
44
47
52
54
55

FOOTNOTES

BIBLIOGRAPHY

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Introduetion
At 6:00 P.M. on December 23, 1913,
President Woodrow Wilson entered his
office . He was smiling as he looked
around the circle of friends and associates who had assembled there. Spotting
Carter Glass, the slightly built but exceedingly influential congressman from
Virginia, at the far end of the room, the
President beckoned him to join Senator
Robert Owen of Oklahoma at his side.
After shaking Glass's hand warmly, the
President sat down at his desk and, using
four gold pens, signed into law the Federal Reserve Act. As Arthur S. Link,
Wilson's principal biographer, has written, "Thus ended the long struggle for the
greatest single piece of constructive legislation of the Wilson era and one of the
most important domestic Acts in the
nation's history. "1

Federal Reserve Board members, 1914.
Seated left to right: C .S. Hamlin, Governor;
W.G. McAdoo, Secretary of the Treasury
and Chairman;
F .A. Delano, Vice Governor
Standing left to right: P.M. Warburg;
J.S. Williams, Comptroller of the Currency;
W.P. Harding; and AC. Miller
Courtesy, Federal Reserve Board of Governors,
Washington, D.C.

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With this law, Congress established
a central banking system which would
enable the world's most powerful industrial nation to manage its money and
credit far more effectively than ever before. As essential as our central banking
system appears to be in the complex
economy of the 1970s, the political and
legislative struggle to create the Federal
Reserve System was long and often extremely bitter, and the final product was
the result of a carefully crafted yet somewhat tenuous political compromise.

Indeed, until nearly the beginning of
the twentieth century the United States
had been a nation dominated by its frontier and its enormous expanse of rich and
fertile land. Born in the dawn of the modern age, the United States in its first
decades was a land of small farms and
nearby towns with few cities of any consequence, and the young nation seemed
far more interested in becoming a successful experiment in democracy rather
than an economic power. As a result, the
institutions necessary to a commercial society-large cities, a common medium of
exchange, and a mechanism to regulate
that medium-were greeted with indifference if not outright hostility.

State Street in
19th century, Boston
Courtesy, Boston Public Library,
Print Department

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Yet, America's very success as an
experiment in democracy, and its tremendous agricultural production, provided
the base for an urban and, ultimately, an
industrial society. "The United States
was born in the country and has moved
to the city," Professor Richard Hofstadter
wrote. 2 Yet, some of the young nation's
most eloquent leaders were strong champions of the agrarian way of life who disdained urban life, and the continuing conflict between rural values and urban
reality has been one of the most important themes of American history.

Chapter

Early Experi111ents
in Central Banking

1791: THE FIRST ATTEMPT
This conflict between rural values
and urban reality was sharply etched in
the first major political controversy following the ratification of the Constitution
in 1789, a controversy, in the first years
of George Washington's presidency,
which dealt with the myriad of issues regarding the monetary and fiscal powers
of the new federal government. Secretary
of the Treasury Alexander Hamilton advocated the creation of a central bank, a
Bank of the United States, to manage the
government's money and to regulate the
nation's credit. Secretary of State Thomas Jefferson strongly disagreed, arguing
that since the Constitution did not specifically empower the Congress to create a
central bank Congress could not constitutionally do so. Hamilton responded
that Congress could create just such a
bank under the constitutional clause
giving it all powers "necessary and proper" to the exercise of its specifically enumerated responsibilities; since Congress
had been given so many monetary and
fiscal powers, Hamilton argued, it would
be perfectly proper for it to create a central bank to carry them out. Hamilton
won the argument, and the First Bank of
the United States was created in 1791.

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N.C. Wyeth's Alexander Hamilton Mural,
painted for the Federal Reserve Bank of Boston in 19'22
Courtesy, Federal Reserve Bank of Boston

Alexander Hamilton

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Andrew Jackson

Thomas Jefferson

James Madison

Courtesy, Library of Congress

The First Bank of the United States
had a capital stock of $10 million, of
which $2 million was subscribed by the
Federal government, while the remainder
was subscribed by private individuals.
Five of the twenty-five directors were appointed by the United States government,
while the other twenty were chosen by
the private investors in the bank. It Wa.5
not only easily the largest bank of its
time, but it was also the largest corporation in the United States; it was a nationwide bank, headquartered in Philadelphia
but with branches in other major cities,
and it performed the basic banking functions of accepting deposits and issuing
bank notes, of making loans and of purchasing securities.
Its power made it useful to American commerce and to the Federal government but frightening to many of the
American people. Its charter ran for
twenty years, and when it expired, in

1811, Jefferson's Virginia colleague,
James Madison, was President. An opponent of the initial bill in 1791, Madison,
like many other Jeffersonian Republicans,
had changed his mind, and now subordinated his initial constitutional objections and favored the bank's recharter on
the grounds of economic expediency. The
vote in Congress was extremely close,
but the bill to recharter the bank failed in
both houses by the margin of a single
vote.
Chaos quickly ensued, brought on
by the disruptions of the War of 1812 and
by the lack of a central regulating mechanism over banking and credit. Statechartered private banks proliferated, and
issued a bewildering variety of bank
notes that were sometimes of little value.
Moreover, the federal government lacked
a safe repository for its own funds, a reliable mechanism to transfer them from
place to place, and adequate means to
market its own securities.

-1

1816: THE CONTROVERSIAL
SECOND BANK
By 1816, Madison's final year as
President, a bill to charter a Second
Bank of the United States was introduced in Congress. Henry Clay, Speaker
of the House, had opposed recharter of
the first bank five years earlier on the
grounds that Congress had no right to
charter such an institution. "The force of
circumstance and the lights of experience," Clay now said, persuaded him
that Congress did have this power.
Enough other congressmen felt the same
force and saw the same light so that the
bill chartering the Second Bank of the
United States narrowly passed both
houses and received the President's

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signature.
The Second Bank of the United
States was very much like the first, except that it was much larger; its capital
was not $10 million but $35 million. Like
the first, one-fifth of the stock was owned
by the federal government and one-fifth
of the directors were appointed by the
President; also, like the first, the charter
was to run for twenty years.
So powerful was the Second Bank
of the United States that many citizens,
politicians, and businessmen came to
view it as a threat to themselves and as
a menace to American ~emocracy. Andrew Jackson, who became President in

"The Downfall of Mother Bank"
Courtesy, New York Historical Society,
New York

1829 when the charter still had seven
years to run, made clear his opposition to
the bank and its recharter. Jackson has
occasionally been labeled an economic illiterate, and it does appear that he neither understood nor sympathized with
the functions of money and banking. Nevertheless, many diverse groups in the
nation feared the bank's power and supported Jackson's opposition to it. It was
essentially the bank's vast economic
power which made it politically vulnerable. State-chartered banks, farmers,
businessmen on the rise, and many politicians saw the bank as a giant monster
standing in their way.
Despite the deep opposition to the
bank, Henry Clay, Jackson's opponent in
the 1832 presidential election, was able to
push a bill through Congress to recharter
the bank and intended to use Jackson's
veto of the bill as a campaign issue.
Jackson's powerful veto message denounced the bank as unconstitutional
and described the dangers of "such a
concentration of power in the hands of a

Bank Note from Pawtuckaway Bank, Epping, New Hampshire
Courtesy, Federal Reserve Bank of Boston

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few men irresponsible to the people."
Though the President was on shaky
grounds in challenging the bank's constitutionality (the Supreme Court in the
famous 1819 case of McCulloch v. Maryland had specifically affirmed the constitutionality of the bank), his attack on
the bank's power touched a popular
nerve. Clay and his supporters widely circulated Jackson's veto message, but they
greatly misjudged the popular response to
it, and the President's impressive victory
in the election was the beginning of the
end of the Second Bank of the United
States. When its charter expired in 1836,
it ceased its role as America's central
bank.
For the next quarter century America's banking was carried on by a myriad
of state-chartered banks with no federal
regulation. Although in some areas of the
country such as New York, New England
and Louisiana, the area banking system
functioned with restraint, in other areas
of the country, banking was not so stable, and the difficulties in American finance hampered the stability of the
American economy. Under this system of
state-chartered banks exclusively, there
were often violent fluctuations in the
amount of bank notes issued by banks
and the amount of demand deposits (that
is, checking account deposits) held by
banks. The bank notes, issued by the individual banks, varied in quality from the
relatively good to the urbelievedly bad. Finally, this banking system was hampered
by inadequate bank capital, risky loans,
and insufficient reserves against the bank
notes and demand deposits.

1863: THE NATIONAL
BANKING ACT

During the Civil War Congress passed the National Banking Act of 1863,
along with major amendments in 1864
and 1865, and this legislation brought a
much greater measure of clarity and security to American banking and finance.
Basically, the legislation provided for the
creation of nationally-chartered banks (all
such banks are recognized by the word
"National" or the letters "N.A." - which
stand for "National Association" - in
their title), and, by effectively taxing the
state bank notes out of existence, the legislation in reality provided that only the
national banks could issue bank notes.
The legislation also provided stringent capital requirements for the national
banks, and mandated that the circulating
bank notes be backed by holdings of
United States government securities.
Other provisions dealt with lending limits,
examinations by the newly-created office
of the Comptroller of the Currency, and
reserves against both notes and deposits.
To the surprise of many who had supported the national banking legislation,
state-chartered banks were able to survive even though they no longer had the
incentive to issue bank notes mainly because the use of checks was increasing
rapidly. As a result, demand deposits
(checking accounts) and not bank note
issues became the most important source
of funds to the banks.

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The Abraham Lincoln Mural, by N.C. Wyeth
painted for the Federal Reserve Bank of Boston in 1922
Courtesy, Federal Reserve Bank of Boston

"The ten o'clock terrors
who never made errors":
check clearing in the 1860s
Courtesy, Boston Clearing House
Federal Reserve Bank of Boston Archives

Yet the national banking legislation
of the 1860s ultimately proved inadequate. Though it provided for the
national chartering of banks and national
bank notes, it still did not provide the essentials of central banking. Accordingly,
banking remained essentially a local function without an effective mechanism
which would regulate the flows of money
and credit and which would assure the
security of the nation's system of finance.
What institutional arrangements on a
national level that were to develop in the
next half-century (correspondent relationships and check clearing operations,
for example) grew up in the vacuum of
federal activity; such arrangements were
private and quite beyond the control or
regulation of national policy.

The first Wells Fargo office, San Francisco, California

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Courtesy, Wells Fargo Bank, History Room, San Francisco

BANKING PROBLEMS PERSIST
In the absence of a central banking
structure, America's financial picture was
increasingly characterized by inelastic
currency and immobile reserves. The
national bank note currency, secured by
government bonds, grew or contracted in
response to the realities of the bond market rather than in response to the requirements of American business. The
amount of currency in circulation, therefore, depended upon the value of bonds
which the national banks held rather
than upon the needs of the economy.
Such inelasticity in the currency tended
to aggravate matters rather than alleviate
them, causing the economy to gyrate
wildly and somewhat uncertainly between
booms and busts.

Courtesy, Philadelphia Record

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This Dakota bank, pictured
in 1877, was the forerunner
of the First National Bank
of the Black Hills,
Deadwood branch
Courtesy, West Glen
Communications, New York

Moreover, under the national banking system the bank reserves were
spread around the country, but they
tended to be immobile where they sat.
There were three types of national
banks: country banks, reserve city banks,
and central reserve city banks. Country
banks (and these were all national banks
located in places other than the fifty cities
which were reserve and central reserve
cities) had to keep part of their reserves
in the form of vault cash, and the rest in
the form of a deposit with a national
bank in a reserve or central reserve city.
Reserve city banks (and these were all
national banks located in 47 specific and
generally important cities) had to keep
part of their reserves in the form of vault

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cash, and the rest in the form of a deposit with a national bank in a central reserve city bank. Central reserve city
banks (and these were all national bank?
within only three cities: New York,
Chicago, and St. Louis) had to keep all
of their reserves in the form of vault
cash.
All this meant that fifty different cities in the nation served as reserve depositories. Even though the total of reserves in the national banking system
was very large, the economic value of
this reserve was largely mitigated because it was so spread out; it was as if
the American army were scattered all
over the country, with each soldier assigned to protect his own specific area of
several square miles. Such an army
would clearly be infinitely less powerful
than one whose forces were all gathered

Wall Street's curb market, 190'2
Courtesy, Library of Congress

in a few strategic locations. The reserves
of money could not be shifted easily to
areas of the country needing them.
Also, the fact that reserve city banks
held reserves for the country banks, and
that their own reserves were held by central reserve cities, meant that the central
reserve city banks, and particularly those
in New York, were unusually sensitive to
the demands for currency from the country banks. When the country banks needed currency, particularly during the crop
selling season, those banks would get
their currency by drawing down their reserve accounts with their reserve city
banks. Those banks, now with less vault
cash, were compelled to draw down their
own reserve accounts with their central
reserve city banks. It was much like a
whip, where a little force at one end
produced a tremendous force at the

other; demands for currency from the
country banks often put inordinate pressure upon the central reserve city banks.
As America's industrial economy became larger and more complex in the
waning years of the nineteenth century
and the early years of the twentieth,
these weaknesses in the national banking
system - inelastic currency and immobile reserves - became increasingly
more critical. It had become clear that
the national banking system did not provide the regulating mechanism for money
and banking that the two Banks of the
United States had provided early in the
nation's history. And as the American
economy became larger, more urban,
and more complex, the inelastic currency
and the immobile reserves contributed to
the cyclical pattern of booms and busts.
These wide gyrations were becoming

more and more intolerable.
Financial panics occurred with some
frequency, and they often triggered. an
economic depression. In 1893 a massive
depression rocked the American economy as it had never been rocked before.
Even though prosperity returned before
the end of the decade - and largely for
reasons which this nation could not control - the 1893 depression left a legacy
of economic uncertainty.

Chapt er

Fina ncia l Refor111
in the 20th Cent ury
In 1907 a severe financial panic jolt ed Wall Street and forced several banks
into failure. This panic, however, did not
trigger a broader economic collapse. Yet,
the simultaneous occurrence of general
prosperity with a crisis in the nation's fi.
nancial centers did persuade many Americans that their banking structure was
sadly out of date and in need of major
reform.

Bank run in
the early l 900s
Courtesy, Library
of Congress

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1908: THE MONETARY
COMMISSION
The initial response of Congress was
feeble. In 1908 it passed the AldrichVreeland Act, which was designed to
make the money supply somewhat more
elastic during emergency currency shortages. This was not financial reform but a
temporary palliative. Another provision of
the law created the National Monetary
Commission. This body, composed of
nine senators and nine members of the
House of Representatives, had the responsibility of making a comprehensive
study of the necessary and desirable
changes in the money and banking system of the United States.

many state governments and elected
many senators and representatives.
Though the progressive movement comprised a diversity of people and took a
variety of forms, its major purpose was
to limit and regulate the new aggregations of economic and political power
which the growth of industrial America
had spawned.
In the bitter controversies between
the progressives, who generally represented the small businessman and the
small town and farming population, and

The chairman and dominant member of the commission was Senator Nelson W. Aldrich of Rhode Island, the single most powerful member of the United
States Senate and a pillar of the eastern
establishment. Aldrich's prominence and
power sharply reflected the political controversies of the period. In the 1890s the
rural populists of the South and West
had challenged the institutions and the
power of finance and business, for they
felt that the wealth and "special privileges" enjoyed by the few were resulting
in the exploitation of the many.
In the first decade of the twentieth
century, the progressive movement more broadly based than the populists,
better educated, more urban, and more
sophisticated in understanding and in using political power - won control of

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"Some Horses Just Fear
A Bridle," by J. Darling
Courtesy,
Des Moines Register

in reforming the financial structure by
making the banking system less powerful.
The National Monetary Commission,
under Aldrich's direction, was empowered to undertake a broad study of
the nation's financial needs; while the
bankers generally applauded the Commission, the progressives viewed it with
suspicion, believing that anything that Aldrich and the banking community supported would serve their narrow interests
rather than the interests of the American
people.
Senator Nelson Aldrich
Courtesy, the Rhode Island
Historical Society

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the conservatives, who generally represented the most powerful business and
banking groups of the large eastern cities,
Aldrich was a central figure. The Rhode
Island senator was one of the most prominent critics of the progressives, and the
progressives, in turn, found Aldrich to be
one of the most bitter and stalwart champions of American conservatism. (The
marriage of Aldrich's only daughter to
John D. Rockefeller, Jr., further convinced many Americans that Aldrich was
the champion of the rich and financially
secure.)
In short, the need for financial reform had become most evident just when
the progressives were attempting to limit
the power of the financial community.
While most bankers were interested in reforming the financial structure of the
nation to make it more efficient and centralized, the progressives were interested

"It might help some if Wall Street
gave trading stamps,"
Puck Magazine
Courtesy, Boston Public Library

BANKERS AND THE ALDRICH PLAN
Over the following three years the
National Monetary Commission undertook a broad and exhaustive study of
America's financial needs and resources,
conducting investigations and hearings in
many American cities and visiting many
foreign banking institutions. In January,
1911, Senator Aldrich presented to a
group of businessmen in Washington his
plan for a reform of the nation's banking
and financial institutions. This plan,
which was so clearly prepared under the
influence of large bankers, was strongly
attacked by the progressives and never
appealed to the public. Moreover, the
conservative Republican Aldrich presented his plan just after the election of 1910,
in which the Democrats captured Congress for the first time in nearly two
decades while Republican President
William Howard Taft, supported by the
party's conservatives, was increasingly
besieged by the party's progressive wing.
In short, Aldrich presented his plan just
after his party had suffered a serious rebuff at the polls, and while a President
sympathetic to his views was under
growing attack within his own party.
The Aldrich plan provided for one
central institution, to be called the
National Reserve Association, with
branches all over the country and with
the power to issue currency, and to rediscount the commercial paper of member
banks. Control of the institution would
reside in a board of directors, the over
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whelming majority of whom would be
bankers.
The Aldrich plan received scant public support and aroused strong opposition. Many progressives protested
that the Aldrich plan would not provide
for adequate public control of the banking system, that it would enhance the
power of the larger banks and the influence of Wall Street; and that its currency reform provisions would be dangerously inflationary. "Big financiers are
back of the Aldrich currency scheme,"
William Jennings Bryan proclaimed. The
Nebraska populist, a three-time Democratic presidential nominee who had
based his campaign in 1896 on an attack
on the bankers and the deflationary impact of the gold standard, asserted that,
if the Aldrich plan were implemented, the
big bankers would "then be in complete
control of everything through the control
of our National finances."
Bryan's denunciation of the Aldrich
plan was shared by many leaders of the
progressive movement. Though this opposition signaled an early demise for the
kind of currency and financial plan that
the bankers wanted, two significant
events of 1912 helped to prepare the way
for passage of a banking and currency
reform program which the bankers in
general feared, but which the progressives wanted - a reform designed to
limit the power of the banking system
and put central banking under public,
rather than banker, control.

THE "MONEY TRUST"
The first significant event of 1912
was the hearings before the House Banking and Currency Committee, the socalled Pujo hearings, which examined the
control of the banking and financial resources of the nation. These hearings,
which continued into the early months of
1913, apparently persuaded most of the
American people that the ultimate control
over America's banking and financial system rested in the hands of a tiny group
-on Wall Street, the so-called "money
trust." In its report, issued in February,
1913, the committee said, "If by a 'money
trust' is meant an established and welldefined identity and community of interest between a few leaders of finance . . . which has resulted in a vast

President Wilson and President Taft
Courtesy, Library of Congress

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and growing concentration of control of
money and credit in the hands of a comparatively few men . . . the condition thus
described exists in this country today."
The second event of 1912, crucial to
financial reform, was the election of Democrat Woodrow Wilson to the Presidency. Elected on a progressive platform,
and with a record as a reformist governor of New Jersey, Wilson pledged himself to financial reform without the creation of a central bank. The new
President, however, knew very little
about banking, and he had to rely upon
others for advice on the shape of his reform proposal.
One leading public figure Wilson
could not ignore was William Jennings
Bryan, and Bryan's views were a strong
force in shaping the financial reform program that ultimately became the Federal
Reserve System. A three-time Democratic
presidential nominee, Bryan had a very
wide following in the rural states, and he
was a strong and vocal leader of the antiWall Street Democrats .•At the 1912 Democratic convention he dramatically threw
his support to Wilson and received much
of the credit for the latter's ultimate nomination. The new President named Bryan
his Secretary of State. For years Bryan
had a reputation as one of the nation's
most outstanding and enthralling public
speakers, but some people who knew
him best believed that the power of his
oratory concealed the paucity of his intellect. One of his cabinet colleagues later

sneered: "I discovered that one could
drive a prairie schooner through any part
of his argument and never scrape against
a fact or a sound statement." 1 As we
have already seen, Bryan had strongly
opposed the Aldrich plan as just an attempt to give the big bankers even more
power; to Bryan, currency reform and
curbing the power of the leading financiers were the very same thing. "The
currency can be given all the elasticity it
needs without increasing the privileges of
the banks or the influence of Wall
Street," he said at one point.

"He Loves Me, He Loves Me Not"
Puck Magazine
Courtesy, Boston Public Library

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Wilson had echoed Bryan's feelings
in the past. A year before his election
Wilson asserted, "The greatest monopoly
in this country is the money monopoly,"
and a few months later he declared that
the nation would not accept "any plan
which concentrates control in the hands
of the banks." It was probably a combination of political realities and his own
lack of knowledge about banking and finance that caused Wilson to reflect many
of Bryan's views, but after his election to
the Presidency, Wilson relied on others
for more expert advice on the currency
question. Two of his most important advisers were Representative Carter Glass
of Virginia, soon to become chairman of
the House Committee on Banking and Finance, and the committee's expert adviser, H. Parker Willis (formerly professor
of economics at Washington and Lee
University, and in 1912, associate editor
of the New York Journal of Commerce).
Throughout most of 1912, Glass and
Willis had conferred repeatedly on the
currency problem, and Willis finally completed a tentative draft of a bill by the
end of October - just a few days before
Wilson's victory.

BACK TO THE
DRAWING BOARD:
THE GLASS-WILLIS PROPOSAL

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On December 26, 1912, Glass and
Willis traveled to Princeton, New Jersey
to lay their plan before the Presidentelect. Wilson was suffering from a cold
and he canceled all of his other appo in tmen ts, but he insisted that Glass
and Willis keep their interview as scheduled. With great enthusiasm the two visitors presented to Wilson their plan for
reforming the financial structure (yet
avoiding the creation of a central bank
under banker domination) and remedying
the classic problems of immobile reserves
and inelastic money supply. The GlassWillis proposal called for the creation of
twenty or more privately controlled
regional reserve banks, which would hold
a portion of member banks' reserves,
perform other central banking functions,
and issue currency against commercial
assets and gold.
Wilson liked much of the Glass-Willis
proposal, but he wanted something else
added - a central board to control and
coordinate the work of the regional reserve banks, what he called the "capstone" to the entire structure. At first
Carter Glass was appalled by Wilson's
proposal, fearing that it would result in
the same centralization that he had so
disliked in the Aldrich plan, but he kept
his views fairly quiet and soon his fears
faded away. The "capstone" that Wilson
wanted - a Federal Reserve Board was to be a public agency unlike the

banker-dominated central bank of the Aldrich plan. The Glass-Willis proposal of
December, 1912, with Wilson's modifications, formed the basic elements of
the Federal Reserve Act signed into law
in December, 1913.
Nevertheless, from December, 1912,
when Wilson first talked with Glass and
Willis about currency reform, until December, 1913, when the President signed
the Federal Reserve Act into law, the
Glass proposal was attacked from two
sides: on one side, bankers (especially

Representative Carter Glass
Courtesy, Library of Congress

from the big city institutions) and conservatives thought that the bill intruded too
much government into the financial structure, while on the other side the agrarians and "radicals" from the West and
South thought that the bill gave the government too little authority over banking.
Bryan was the national spokesman for
the latter group, and it was his views that
Wilson had to face first.
The first action of the new Wilson
Administration upon taking office on
March 4, 1913, was to work for a downward revision of the tariff. Currency reform would follow as a second item of

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Federal Reserve Bank of St. Louis

business. The President recognized that it
would be a difficult struggle to get both
bills through the Congress, but the Democrats were somewhat more united on
tariff reduction than they were on currency reform and so it made political
sense to tackle the tariff issue first.
Throughout April, May, and June this issue dominated Congress and the President, and through the rest of the summer
high-tariff Republican senators (who generally favored the Aldrich plan) dragged
out the debate on the tariff in an attempt
to delay consideration of the banking bill.
On October 3 the major tariff reduction
bill was on Wilson's desk, and he signed
the new law much to the gratitude of the
Democratic progressives.

H. Parker Willis
Courtesy, Washington and Lee University

BATTLE LINES DRAWN
Although placated by Wilson's leadership in the tariff struggle, the Democratic progressives nevertheless were far
more concerned about the banking bill
that the President was preparing. By the
late spring of 1913, Bryan (who was supporting Wilson on tariff reduction) had
made clear his opposition to the Glass
bill and his determination to give government a larger role over banking and
currency than Glass contemplated. Specifically, Bryan thought that the bill gave
bankers too much control over the proposed Federal Reserve System, hence
failing to weaken Wall Street's credit monopoly, and he believed that the currency
should be issued by the government rather than by the reserve banks, as the
Glass bill proposed.

"Bryan versus Wilson "
Puck Magazine
Courtesy, Boston Public

Library

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Federal Reserve Bank of St. Louis

Buffeted by this conflict within his
Administration, President Wilson sought
a compromise that could please both
Glass and Bryan and then win the support of Congress, yet a compromise that
would genuinely resolve the banking and
currency problem. To sharpen his own
thinking, Wilson sought the advice of the
man whose opinions on economic matters he respected above all others, the
prominent attorney Louis D. Brandeis.
Brandeis, a man of undeniable brilliance,
sided with Bryan on two key points: first,
he believed that bankers must be excluded from control of the new system;
and second, he believed that the Federal
Reserve currency must be made an obligation of the United States government.
"The conflict between the policies of the
Administration and the desires of the financiers and of big business, is an
irreconcilable one," Brandeis told Wilson.
"Concessions to the big business interests
must in the end prove futile." 2
After several conferences, Wilson
met on June 17 with Glass, Secretary of
the Treasury William G. McAdoo, and
Senator Robert Owen of Oklahoma
(chairman of the newly created Senate
Banking and Currency Committee and a
supporter of Bryan's views), and he told
them that he would insist upon exclusive
government control of the Federal Reserve Board and would insist upon making Federal Reserve notes the obligation
of the United States. The former was
clearly a victory of substance for the

Bryan group, while the latter point was
merely a victory of form.
What Bryan and his followers really
wanted was the retirement of national
bank notes and their replacement by a
supply of paper money issued on the
initiative of public officials and backed up
only by the government's promise to pay.
What Bryan really got, however, was just
the addition of relatively meaningless language to the basic provisions of the Glass
bill; the Glass bill provided that Federal
Reserve notes would be issued by the
regional reserve banks against their own
commercial assets and a 33 1/3 percent
gold reserve, and the change which placated Bryan and other progressives was
the mere declaration that these notes
were obligations of the federal government. This additional language did not
change the essential character of Federal
Reserve notes as asset currency. Glass
had been initially disappointed with
Wilson's request for a public board to
control the new system, but seeing that
this was the absolute minimum that
Bryan demanded, Glass had no real alternative but to accept it.
On June 23, 1913, President Wilson
appeared before a joint session of Congress and presented his program for currency reform. With a united Administration now behind him, the President
pleaded for a banking system that would
provide for an elastic currency and that
would vest control in the government, "so
that the banks may be the instruments,

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Bryan tamed, "Ain't It Wonderful" Puck Magazine
Courtesy, Boston Public Library

not the masters, of business and of individual enterprise and initiative."
Most bankers did not like what they
heard. Particularly vigorous - and often
very bitter - in their opposition were the
big-city bankers, especially from New
York. Conservatives also lambasted the
bill as a radical break in the nation's
laissez-faire economic policy. The bankers speaking out in opposition, having
favored the Aldrich plan of a central
bank under banker control, disliked the
framework of government regulation,
dominated by political appointees. Bankers in the central reserve cities of New
York, Chicago, and St. Louis, as well as
many bankers in the forty-seven reserve
cities, disliked the fact that the new Federal Reserve banks would be the sole

Members of the
Boston Clearing House
Courtesy, Boston
Clearing House,
Federal Reserve Bank
of Boston Archives

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Federal Reserve Bank of St. Louis

holders of reserves for the national
banks. (It will be recalled that under the
national banking system, national banks
in central reserve cities and reserve cities
were reserve depositories for other
banks.)
Many bankers with nationally chartered banks disliked compulsory membership in the Federal Reserve System for
national banks, and they criticized the
bill's assault on "private rights." Finally,
many conservatives and bankers were
strong Republicans, and they termed the
bill a Democratic party measure for the
altogether logical reason that it wa.5 written and sponsored by a Democratic Administration, and a Democratic Administration apparently dominated by its
southern and western, and "anti-business" elements. The New York Times referred derisively to the "Oklahoma idea,

the Nebraska idea," clearly pointing to
Senator Owen and Secretary of State
Bryan who, as we have seen, played a
major role in writing the bill and adding
the government control, through the Federal Reserve Board, which bankers appeared to find most obnoxious.
Continuing its harsh criticism, the
Times said: "It reflects the rooted dislike
and distrust of banks and bankers that
has been for many years a great moving
force in the Democratic party, notably in
the Western and Far Western States.
The measure goes to the very extreme in
establishing absolute political control over
the business of banking." The New York
Sun, considered by many to be the
spokesman for Wall Street at that time,
called the bill "this preposterous offspring
of ignorance and unreason ... covered all
over with the slime of Bryanism."

POLITICAL COMPROMISES
Just as earlier in the year Wilson
had moved to still the opposition of
Bryan and many progressives, now the
President acted to attempt to reconcile
the banking community to his currency
bill. Accordingly, on June 25 - just two
days after the President had presented
his bill to Congress - Wilson, along with
Glass, Owen, and McAdoo, met with
four leading bankers, who represented
the currency commission of the American
Banking Association. As a result of this
conference some important modifications
were made in the bill. One provided that
national bank notes would be retired
gradually, hence protecting the banks'
large investments in the bonds that backed this currency; another weakened the
Federal Reserve Board's authority over
the rediscount rate, giving more responsibility in this matter to the regional reserve
banks; finally, the President agreed to accept a Federal Advisory Council, consisting of representatives of the banking
community, to serve as a liaison between
the reserve banks and the Federal Reserve Board. Despite Wilson's efforts, the
bankers at the conference were not satisfied, for they did not get what they wanted - a centralized structure under banker control - and the heart of the bill
retained what they did not want - a decentralized structure under public (or, as
the bankers put it, "political," meaning
Democratic) control.
The next day Glass and Owen introduced the revised Federal Reserve bill in

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the House and Senate. Despite the continuing banker and conservative opposition, the Wilson Administration was
in a strong position to get its currency bill
passed through Congress. The Administration was unified in support of the bill,
progressive opinion in the country
seemed to favor the currency program,
and the President's success in the tariff
issue demonstrated his strong control
over the Democratic majorities in both
houses of Congress. For the Democrats,
Wilson was their party's first president in
sixteen years, and they were reluctant to
embarrass him and themselves by resisting a major component of his
program.

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"Schoolmaster Wilson lays down the law to Congress "
Courtesy, New York Tribune

In fact, however, the following
months would demonstrate how difficult
it was for Wilson to unify his party in
Congress behind his program. Shortly after Glass and Owen introduced the bill, a

rebellion broke out among some Democratic congressmen from rural areas in
the South and West. Led by Representative Robert L. Henry of Texas (he was,
Carter Glass later recalled, "an ex ceedingly likable fellow; but he knew as
much about banking as a child about ~tronomy"), 3 this group demanded that the
Wilson Administration destroy the
"Money Trust" before setting out to reform banking and currency. Moreover,
these Democratic agrarians disliked the
Federal Reserve bill's provision for private
control of the regional reserve banks, believing that this would be a private financial trust operating under government
protection.

For a while it appeared that the
agrarian bloc might be able to kill the
Federal Reserve bill. In July they were
able to take control of the House Banking and Currency Committee, much to
Chairman Glass's despair. Yet the Henry
proposals were no more popular with the
general public than the Aldrich Plan had
been, and many people regarded them as
the wildest form of Populism.

Representative Robert L. Henry
Courtesy, University of Texas at Austin

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Federal Reserve Bank of St. Louis

hope of eliminating the state of debt that
had ensnared them since the aftermath
of the Civil War. "The bill as now written," Representative Henry said in July,
"is wholly in the interest of the creditor
classes, the banking fraternity, and the
commercial world, without proper provision for the debtor classes and those who
toil, produce, and sustain the country." 4
To sustain his objections, Henry introduced a series of amendments that would
prohibit interlocking directorates among
the member banks, weaken the structure
of the Federal Reserve Board, and alter
the currency issues in such a way as to
enable farmers to obtain money on far
more liberal terms.

Most important, however, the dissidents protested that the Federal Reserve bill made no provision of agricultural credit, giving the farmers little

Again, President Wilson moved
quickly to meet the opposition to the bill.
He invited the agrarian leaders to the
White House and mollified them, in part
at least, by agreeing to work for the prohibition of interlocking directorates
among the banks in his forthcoming antitrust bill. With a combination of pleas,
promises, and perhaps even threats
Wilson was able to beat back much of
the opposition from the agrarian bloc,

and in early August the House Banking
and Currency Committee reversed the direction it had taken a few weeks earlier
and overwhelmingly approved the Federal Reserve bill.
Though beaten in the committee,
Representative Henry did not yet give up;
he now worked to get the House Democratic caucus to kill or severely modify
the Federal Reserve bill. With the agrarian opposition still a threat to the passage of the bill, the most prominent
agrarian radical in the country - Secretary of State William Jennings Bryan moved dramatically to save it. Promising
that the Administration would work to
deal with the problem of interlocking directorates in the antitrust bill, Bryan
asked his friends to stand by the President and support his banking program.
Bryan's prestige was so great in the rural
areas that his forceful advocacy shattered the radical opposition within the
House, and the House Democratic caucus overwhelmingly approved the measure by the end of August. This approval
meant that the Federal Reserve bill was a
party measure, binding on all House
Democrats.
Formal approval by the House Democratic caucus greatly weakened radical
agrarian opposition, and was but one of
many indications that the Federal Reserve bill was coming to enjoy broader
public support. Progressive opinion, in
favor of banking and currency reform for
several years, endorsed the changes recently made in the bill. Additionally there

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Federal Reserve Bank of St. Louis

were strong indications of growing support for the bill among the nation's businessmen, with the small businessmen especially enthusiastic about it. Finally, and
perhaps most important, a few fissures
had begun to appear in the wall of opposition put up by the nation's bankers.
As early as June several leading Chicago
bankers had enthusiastically endorsed
the measure, and a significant number of
the small, country bankers in the South
and Middle West were giving the bill their
support. Nevertheless, the vast majority
of the nation's bankers - country and
city - still strongly opposed the bill, of ten
with the bitterest hostility; a San Antonio
banker, for example, called the bill a
"communistic idea."

Secretary of State William Jennings Bryan
Courtesy, Library of Congress

OPPOSITION FROM BANKERS

The 20th century banker
Courtesy, American Bankers Association

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Federal Reserve Bank of St. Louis

In fact, the strong banker oplX)sition
came sharply into view at just about the
time the House Democratic caucus was
approving the bill. Meeting in Chicago in
late August with a commission of the
American Bankers Association, the presidents of 4 7 state banking associations
and 191 clearinghouse associations raised
many objections to the Administration's
banking reform. They made it clear that
they wanted the Aldrich plan, with one
central bank generally controlled by
bankers and generally independent of
government regulation.
According to Wilson's major biographer, Professor Arthur S. Link, the
Chicago . conference decisively altered the
controversy over the banking issue, making the Administration more hostile to the
bankers publicly opposing the Federal Reserve bill. Until this time Wilson and his
major advisers had believed that the
bankers, despite their rhetoric, would in
the final analysis work responsibly for the
Administration plan. The Chicago manifesto appeared to kill that hope and
sharply etched the broad differences
between the majority of the banking community and the Wilson Administration.
From then until final passage of the Federal Reserve bill in December the Wilson
Administration tended to regard banker
opposition as essentially irreversible.

PASSAGE BY CONGRESS
With the hope that strong public
support for the measure would neutralize
banker opposition, Carter Glass began to
push the bill through the House in early
September, and on September 18 the
House overwhelmingly approved it by a
vote of 287 to 85. Though this vote was a
clear victory for Wilson, significant partisan division was also manifest; all but
three Democrats supported the bill, while
seven out of every ten Republicans opposed it. (It should be noted that most
far-reaching bills pass Congress with
some partisan division, but if the law
proves to be successful it ultimately
comes to command broad, bi-partisan
support; the Federal Reserve is certainly
no exception to this.)
Passage by the House was only half
the battle, and apparently the easier half;
indeed, the Senate scene was so confused that it was impossible to predict the
outcome. Senator Owen, chairman of the
Senate Banking Committee, was an uncertain reed of support for the Glass bill.
Originally he had surrendered his own bill
to co-sponsor the Federal Reserve bill
with Glass, yet at the time of the House
caucus in August he publicly assailed the
bill's regional basis and its provision for
mandatory membership for national
banks. Summoned to the White House
by Wilson, Owen publicly recanted his
criticism of the bill, but his erratic behavior gave the measure's supporters many
uneasy moments.
In addition to uncertainty about
Owen's support and doubts about his ef
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Federal Reserve Bank of St. Louis

fectiveness, the Administration was further weakened in the Senate because its
tactics backfired badly. Earlier in the session the Administration had gotten the
tariff bill through both House and Senate
without any committee hearings, on the
grounds that previous lengthy consideration of tariff reduction made more
hearings unnecessary. The Administration used the same argument on the
Glass bill, and it had worked in the
House where no hearings were held. The
Senate, however, rejected the Administration position and voted to hold fullscale hearings on the banking measure.
Not only would extended hearings delay
- and perhaps endanger - ultimate
passage of the bill, but the hearings
would be conducted by the Senate Banking Committee, where President Wilson
had less support among Democrats than
he had in the Senate as a whole.

Senator Robert L. Owen
Courtesy, Oklahoma
Historical Society

Indeed, three of the seven Democrats on the Senate Banking Committee
- Gilbert Hitchcock of Nebraska, James
O Gorman of New York , and James
Reed of Missouri - appeared ready to
combine with the Republican minority in
an effort to drag out the hearings and
perhaps ultimately kill the bill by slow
strangulation. As a result the hearings,
begun in September, wore on into October, and they became a forum for the
bill's opponents of both the right and the
left . Banker opposition was especially
vocal and vigorous. In early October, a
few weeks after the House had overwhelmingly approved the bill and while
the Senate hearings were continuing, the
American Bankers Association held its
annual convention in Boston and passed
1

Program cover,
American Bankers Association
meeting in Boston
Courtesy, Federal Reserve Bank
of Boston Archives

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Federal Reserve Bank of St. Louis

a series of resolutions denouncing the
Federal Reserve bill as socialistic, confiscatory, unjust, un-American, and generally wretched.
Wilson's perception of these events
was that the three Democratic senators,
the Republican minority, and the largest
bankers had joined in a conspiracy to kill
his banking reform plan. Despite his intense irritation at the obstructionist tactics of the three Democratic senators, the
President ultimately came to use the
same tactics on them that he had used
with such effectiveness on the House
rebels; he called them into personal consultation at the White House and used a
combination of pleas and promises to try
to win their support, or at least their neutrality. Wilson agreed with them that the
bill might have to be amended further,
and this helped mollify the dissident
senators.
In late October, and with dramatic
suddenness, Wilson's hopes for an accommodation were almost killed. Frank
A. Vanderlip, president of the National
City Bank of New York, appeared before
the Senate Banking Committee and proposed an entirely new banking and currency plan, which he had prepared at the
request of Senators Hitchcock, Reed, and
O'Gorman, the committee's three Democrats. The Vanderlip plan called for the
establishment of one Federal Reserve
Bank with the capital to be subscribed by
the public, the government, and the
national banks. The central Federal Reserve Bank would have twelve branches
around the country. Control of the bank
would rest entirely in the hands of the

federal government, and the bank could
issue currency against its commercial assets and a 50 percent gold reserve.
This bill managed to have an appeal
both to the agrarian radical opponents
on the left and the banker opponents on
the right. Many progressives and agrarian
radicals liked the thoroughgoing governmental control in the Vanderlip plan,
while many conservatives liked it because
it provided for just one central bank.
Some supported the Vanderlip plan because it appeared to restrict the power of
private bankers and Wall Street, while
others supported it because it appeared
to put the control of banking into the
hands of bankers. Finally, the fact that
the public could buy stock in this bank
(in contrast with the Federal Reserve bill,
which provided that only member banks
could buy capital stock in the regional
banks) gave the bill added public appeal.
Within a few hours of its introduction
eight of the twelve members of the Senate Committee supported the Vanderlip
plan.
Wilson voiced immediately his strong
and uncompromising opposition to the
Vanderlip plan, and, with his great popularity, this played a major role in weakening its public appeal. Under strong and
continuing Administration pressure,
O'Gorman and Reed were gradually
moderating their opposition to the Federal Reserve bill, and by early November
they finally came to publicly support its
main features. Ultimately, in late November, the Senate committee reported
two different bills to the full Senate - a
slightly amended Federal Reserve bill,

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and the Vanderlip plan. The result of this
maneuver was to break the hold which
the Senate committee had exercised over
the Federal Reserve bill.
Continuing public support for the
Federal Reserve bill hastened final Senate
action in December. Respected conservatives continued to speak in opposition
- Republican Senator Elihu Root of New
York called the bill "financial heresy" but they were overshadowed by the
steady support from Progressive leaders,
and the growing support for the bill
among organized business opinion and a
growing minority of bankers. On December 19 the critical vote was taken in
the Senate, and the Federal Reserve bill
was narrowly preferred over the modified
Vanderlip plan by a margin of only three
votes, 44 to 41. A few hours later the
Senate passed the Federal Reserve bill itself, 54 to 34. As in the final House vote

Frank A. Vanderlip
Courtesy, Citibank, New York

partisan division was evident, but it was
even sharper in the Senate; all Democrats supported the measure while all but
six Republicans opposed it.
The House and Senate versions of
the Federal Reserve bill varied slightly, so
the two bills went to a conference committee, composed of members from both
houses, to resolve the differences. For example, the House bill had provided that
at least twelve regional reserve banks be
created, but the Senate bill provided .that
the number of reserve banks be no fewer
than eight but no more than twelve; the

"PRESID[if8SiATURf -~
:
34

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Federal Reserve Bank of St. Louis

·ENACTS CURRENCY LAW.'..

Wilson Declares It the Fir;t of Series of .:

Constructive Acts to Aid Business. • •
------

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Makes Speech to Group of
Democratic Leaders. ·
Cool ere nee Report Adoptid in
Senate by VoteQI 43 to ?5.. •.
Banks All Over U!e Country Hasten to

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AFi.ieChristmas PresenL

:WILSON SEES DAWN OF HOME VIEWS OF FOUR PENS USED
; NEW ERA IN BUSINESS CURRENCY
ACT BY PRESIDENT
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Aims to Make Prosperity Free ta
Have Unimpeded Momentum.
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President Wilson signs the Federal Reserve Act
.

Courtesy, Boston Public Library

conference committee accepted the Senate version on this matter, yet the House
conferees prevailed on some other points.
In contrast with the months of congressional wrangling before the two bills
were passed, the conference committee
resolved the minor differences between
the two measures in only two days, and
both the House and Senate quickly approved the compromise measure.
On December 23, just a few hours
after the Senate had completed action,
President Wilson, surrounded by members of his family, his cabinet officers,
and the Democratic leaders of Congress,
signed the Federal Reserve Act. "I cannot
say with what deep emotions of gratitude .. .I feel," the President said, "that I
have had a part in completing a work
which I think will be of lasting benefit to
the business of the country."
The Federal Reserve Act was now
law, and of all the men who deserve
credit for this major reform of America's
banking and currency system - Nelson
Aldrich, Carter Glass, Robert Owen,
William McAdoo, H. Parker Willis, and
even William Jennings Bryan - none deserves more credit than President Wilson
himself. Withstanding the contrary demands of the private bankers on the one
hand and the agrarian radicals on the
other, the President had supervised the
development of a bill and had skillfully
commanded Democratic support for it
and led it through the congressional
thicket. The passage of the Federal Reserve Act stands as almost a textbook
case of wise and skillful presidential leadership over Congress.

Chapter

3
The passage of the bill, however,
was only the first step in the process of
creating the Federal Reserve System.
Now that Congress had acted, the
Wilson Administration had to take the
bare bones of the new law and put the
substance of a functioning institution
upon them. The number of regional reserve banks needed to be determined;
their location needed to be established;
lines of the various Federal Reserve districts needed to be drawn; the banks
thus created needed to be staffed and
opened for business; and finally, a Federal Reserve Board needed to be appointed. In appointing the Federal Reserve Board, President Wilson was to
have the primary responsibility, but in
establishing the regional reserve banks,
others in the Administration were to have
the central role.
The Federal Reserve Act designated
three federal officials - the Secretary of
the Treasury, the Secretary of Agriculture, and the Comptroller of the Currency - to serve as the Reserve Bank
Organization Committee. Their task was
to designate not less than eight but not
more than twelve cities to be the Federal
Reserve cities, and to divide the nation
into districts, each district to contain only
one Federal Reserve City. The only crite
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Making the
Syste111 Work
ria given the committee by the law declared that the districts should be drawn
"with due regard to the convenience and
customary course of business and shall
not necessarily be coterminous with any
State or States."
Wilson's nominee for Comptroller of
the Currency - John Skelton Williams
- would not be confirmed by the Senate
for several weeks, so the main burden of
the committee's work was carried on by
the other two men. The Secretary of the
Treasury, William G. McAdoo, had already played a major role in drafting the

Secretary of the Treasury William G. McAdoo

Courtesy, Library of Congress

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Federal Reserve Bank of St. Louis

Secretary of Agriculture David F. Houston
Courtesy, Library of Congress

bill and securing its passage through
Congress. McAdoo had been raised in
Georgia but had become prominent as a
very successful New York attorney. A
widower in his late forties, McAdoo married President Wilson's younger daughter
in the spring of 1914. Hard-working and
extremely able, McAdoo's mind was unencumbered by rigid theories, and he was
probably the dominant member of the
Wilson cabinet. He was also extremely
ambitious, but his strong desire to be
President (many thought McAdoo wa.5
obsessed by this objective) was never fulfilled, though he was to be a strong contender for the Democratic nomination in
1924. Secretary of Agriculture David F.
Houston, a brilliant classical economist,
had been president of Washington University in St. Louis when Wilson named
him to the Cabinet in 1913. Together,
McAdoo and Houston made the key decisions in choosing the Federal Reserve
cities and drawing the district lines, with
Williams joining in toward the end of the
final deliberations.

DISTRICT LINE DILEMMAS
In deciding on the number of Federal
Reserve banks and their locations, the
Reserve Bank Organization Committee
faced, in miniature, the same controversies that had deeply divided Congress on banking reform for several
years. "On no point," Parker Willis has
written, "had there been sharper controversy than as to the issue whether
banks should be four, eight, twelve, or
some other number ." 1
The law provided that there would
be at least eight regional banks, but
those who had favored the Aldrich plan
with one central bank believed that eight
regional banks was far too many. Since
the law was now on the statute books,
they insisted that the eight should be the
maximum number of regional reserve
banks, and they tried to get around the
spirit of the law by insisting that the Feder al Reserve Bank of New York should
be such a large institution as to truly
dwarf the other seven regional reserve
banks. In this way, the bank in New
York would be a central bank in substance if not in form.
According to this scheme, the New
York district would cover the entire
Northeast, with the major financial centers of Philadelphia and Boston serving
as branches. Smaller reserve banks
would be established in Chicago and San
Francisco, with even smaller banks to be
located in five other cities, but these seven would largely serve as satellites of the
giant institution in New York. By this approach those who had opposed - and

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Federal Reserve Bank of St. Louis

still opposed - the regionalism of the
Federal Reserve Act felt that they could
get much of the form of a true central
bank with a giant reserve bank in New
York, while giving the advocates of a decentralized system the appearance of
regionaiism.
On the other hand, the rural and
small town spokesmen, who had worked
so hard to guarantee public control over
the system, wanted to establish the maximum number of twelve regional reserve
banks. Even twelve, some of them
believed, might not be enough. In any

"New York and all the other Feds"
by Adam Redjinski

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Federal Reserve Bank of St. Louis

case, they also wanted all twelve of the
regional reserve banks to be approximately the same size, with no one of
them dominating the rest.
So, the controversies evident in the
writing of the Federal Reserve Act were
carried over into the selection of the Federal Reserve cities. Accordingly, McAdoo
and Houston decided to focus initially on
the determination of how many Federal
Reserve banks there would be and where
those banks would be located, and only
after they had reached those decisions
would they draw the district lines.
New York, then, became the early
focal point in the controversy, for the size
of the Federal Reserve bank to be established there (no one ever doubted that
New York would receive a reserve bank)
was a critical factor to both sides in the
dispute. In the first week of January,
1914, Secretaries McAdoo and Houston
spent four days in New York, hearing the
arguments of the city's financial leaders
for a truly gigantic Federal Reserve bank
there that would completely dwarf everything else in the system. J. P. Morgan,
perhaps New York's best known financier, argued that the Federal Reserve
Bank of New York should be of commanding importance so that it would receive due recognition from the central
banks of Europe, a view echoed by The
New York Times . Most of the New York
spokesmen wanted their bank's territory
to include New England and the states
just to the south of New York, while
some wanted the territory to extend as
far as Ohio to the west and Washington,

J.P. Morgan
Courtesy, Morgan Guaranty Trust Company

D.C. to the south. If the New York bank
were to be as large as the city's financial
leaders desired, it would have approximately half of the total capitalization of
the entire system.
From the outset it was clear that
McAdoo and Houston were not persuaded by the strong views of the New
York bankers. "The present disposition of
the organizers is to hobble New York,"
The New York Times lamented. The two
Secretaries took the position that their
purpose was not to hobble anyone but to
construct a coordinated system, and that
the central banks of Europe would deal
with the system as a whole rather than
with just one of its parts.

OPINION IN BOSTON
McAdoo and Houston then went to
Boston for two days and heard a somewhat different tune. Many of the leading
Boston bankers had championed the Aldrich plan with its single central bank, so
ideologically they had strong reason for
favoring a large New York bank of which
Boston would be a branch. Yet a combination of local pride and a belief that
their own financial problems should be
handled locally gave them strong reason
for favoring a regional reserve bank for
Boston. A director of one of Boston's major banks put the dilemma well in a private letter to Secretary Houston: "If
Boston were in the New York District,
we should have a larger and better bank
to rely on in time of stress. On the other
hand, a local bank, even if not so strong,
would perhaps be better acquainted with
local matters and local credits, and
would be more interested in helping out
the local difficulties, and so might be just
as useful as a stronger bank not so intimately connected with Boston." He
went on to point out that many Boston
bankers were perplexed by this dilemma,
with local pride and regional concerns
mixed with their perception of broader
national issues. "I don't think that any of
us are quite sure," he confessed.2
These doubts, however, were generally expressed in private rather than in
public, and in two days of open hearings
in Boston, McAdoo and Houston heard
many business and community leaders
urge the establishment of a reserve bank

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Federal Reserve Bank of St. Louis

Boston's financial district in the early 1900s
Courtesy, Boston Public Library, Print Department

in Boston. It was the business, political,
and academic leadership rather than the
Boston bankers who spoke out the most
forcibly on behalf of Boston's claims; J.
Randolph Coolidge, Jr., president of the
Boston Chamber of Commerce, and Professor 0. M. W. Sprague of Harvard
were among the most persuasive witnesses to testify before McAdoo and
Houston. William A. Gaston, president of
the National Shawmut Bank, also strongly championed the Boston position in
public testimony.
Connecticut banks and business
groups, on the other hand, made clear
their desire to be associated with a New

Members of the Boston
Stock Exchange
Courtesy, Boston Budget,
Federal Reserve Bank
of Boston Archives

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Federal Reserve Bank of St. Louis

York bank rather than with a bank in
Boston. The Hartford Clearing House
Association, for example, declined the invitation of the Boston Chamber of Commerce to visit Boston and testify in favor
of the city's claims before the Reserve
Bank Organization Committee.
McAdoo and Houston then returned
to Washington and heard testimony from
community and business leaders representing other major East Coast cities.
The argument for a large New York
bank usually included Philadephia as a
branch, but a delegation from the latter
city traveled to Washington to press their
own claims for a regional reserve bank.

CANVASSING THE NATION
On January 18, McAdoo and Houston left on a long cross-country trip that
ultimately covered 10,000 miles. They visited and held public hearings in Chicago,
St. Louis, Kansas City, Lincoln, Denver,
Seattle, Portland, San Francisco, Los Angeles, El Paso, Austin, New Orleans, Atlanta, Cincinnati, and Cleveland. At each
stop they invited local business and community leaders to testify, and they also invited spokesmen from nearby cities that
they would not visit. This well-publicized
trip fueled the already intense speculation
in the press and among America's bankers as to what cities ultimately would be
chosen. It was very clear that far more
cities wanted the honor of receiving a
reserve bank than the law would allow,
and the Reserve Bank Organization
Committee had to face the fact that no
matter what it ultimately decided, many
communities would be disappointed by
their exclusion.
As the two men traveled across the
country they heard the local, and often
parochial, pleas of more than forty cities,
each claiming that it should be the home
of a Federal Reserve bank. "Reserve Cities are springing up all over the United
States," Houston lamented to President
Wilson even before the committee formally began its work. "I think the Census
experts are mistaken as to the number of
cities in America. Certainly nobody could
have imagined that so many had strategic locations."3
For most of the cities making claims,
the key question was probably not

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Federal Reserve Bank of St. Louis

national economic considerations but local pride. As The New York Times said
editorially, "The hearings of the reserve
bank organizers, generally speaking, have
been more remarkable for the local jealousies they have disclosed than for the
perception that there was anything of
national significance in the new departure." One exception, however, appeared to be the West Coast, where Los
Angeles, Seattle, and Portland deferred
to San Francisco as the logical site for a

San Francisco's
financial district,
Bush Street
Courtesy, California
Historical Society,
San Francisco

Pacific Coast bank. McAdoo made several public statements suggesting that the
selection of the Federal Reserve bank cities was not nearly so important to the
particular cities named, or to their future
economic development, as most people
appeared to assume.
During their travels McAdoo and
Houston learned that many bankers outside of New York were not very enthusiastic about a gigantic New York
Federal Reserve Bank. Many of these
bankers had favored the Aldrich plan
proposing one central bank, but the Federal Reserve Act's provision of at least
eight reserve banks caused them to consider the factors of local pride and regional advantage.
St. Louis' business district
Courtesy, Missouri Historical Society

State Street, Chicago's financial district

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Federal Reserve Bank of St. Louis

Courtesy, Chicago Historical Society

Not surprisingly, bankers in Chicago
and St. Louis were especially outspoken
on this point. In 1914 there were three
central reserve cities: New York,
Chicago, and St. Louis. Generally speaking, the bankers in the latter two cities
opposed the idea of making the Federal
Reserve Bank of New York such a truly
gargantuan institution that it would dwarf
all other reserve banks. Perhaps most
bankers in Chicago and St. Louis believed that their status as a central reserve
city entitled them to a Federal Reserve
bank, and they wanted the bank located
in their city to be somewhat comparable
in size to the Federal Reserve Bank of
New York, but considerably larger than
the other Federal Reserve banks. Generally, the bankers in Chicago and St.

•

Louis wanted only eight Federal Reserve
banks.
Perhaps a majority of the bankers in
other cities, as well as country bankers
(especially those far removed from the
New York area), and those members of
Congress who had been the most ardent
champions of the regional approach of
the Federal Reserve Act favored the creation of twelve banks. They also wanted
the New York bank to be one of twelve
rather than the clearly dominant member. Some went so far as to suggest that
the Federal Reserve Bank of New York
should cover only the lower part of Manhattan Island, with the rest of New York
City belonging to other districts.
While the Reserve Bank Organization Committee was in the process
of selecting reserve bank cities, it was
very much concerned with the question
of membership in the Federal Reserve
System among the nation's commercial
banks. The Federal Reserve Act required
all national banks to join the system (or
forfeit their national charter), and it allowed state banks to join the system if
they wished and if they met certain requirements of liquidity and soundness.
Yet fresh in the memory of McAdoo,
Houston, and John Skelton Williams was
the fact that a majority of the nation's
bankers had opposed the Federal Reserve Act, many of them specifically opposing mandatory membership for the
national banks. They had reason to fear
that many of the national banks would
surrender their charters rather than join
the system.

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Federal Reserve Bank of St. Louis

Accordingly, the Reserve Bank Organization Committee was extremely solicitous of the opinion of the national
banks. E.arly in 1914 the committee polled
all the national banks in the country on
their preference for a Federal Reserve
city with which they would be affiliated,
giving them the opportunity to make a
first, second, and third choice. The
banks, of course, had no idea what the final Federal Reserve district lines might
be, so several of them selected as their
choice of location of a Federal Reserve
bank a city that was not in their final district. (Indeed, four banks in California list ed New York City as their second
choice.) There is strong reason to believe
that this poll of national banks was the
most important single factor in determining the cities that received Federal
Reserve banks.

Teller windows at the Union Trust Co~pany, San Francisco
Courtesy, Wells Fargo Bank, History Room, San Francisco

HELLO, BOSTON GOODBYE, BALTIMORE

Many minor cities received only a
scattering of votes (Sioux City, Iowa and
Springfield, Massachusetts, for example).
By weighing each national bank's preferences as to first, second, and third
choice, the committee finally came up
with a list of the twelve cities with the
most substantial support: Atlanta,
Boston, Chicago, Cincinnati, Dallas, Kansas City, Minneapolis, New York,
Philadelphia, Richmond, St. Louis, and
San Francisco.
On April 2, 1914 the Reserve Bank
Organization Committee announced its
decision. Eleven of the twelve cities attracting the greatest support in the
national poll received Federal Reserve

Boston's Park Street from the steps of the State House
Courtesy, Boston Budget, Federal Reserve Bank of Boston Archives

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Federal Reserve Bank of St. Louis

banks. The only city which did not was
Cincinnati, which was included in the district belonging to the Federal Reserve
Bank of Cleveland. Within each of the
newly designated Federal Reserve districts, the Federal Reserve city had received the most support from the national banks within its district, again with the
sole exception of Cleveland; within that
district both Cincinnati and Pittsburgh
had generated more support.
In an accompanying statement the
Reserve Bank Organization Committee
outlined the basic criteria with which it
justified its selections:
1. The ability of member banks
within the district to provide the
minimum capital - $4,000,000
- required for each Federal Reserve bank by the law.
2. The mercantile, industrial, and
financial connections existing
within each district.
3. The probable ability of the Federal Reserve bank in each district to meet the legitimate business demands placed upon it.
4. The fair and equitable division of
the available capital for the Federal Reserve banks among the
districts.
5. Geographical factors, and the
existing network of transportation and communication.
6. Population, area, and prevalent
business activities of the districts.

The fourth listed consideration the fair and equitable division of the available capital among the Federal Reserve
districts - was another way of stating
the committee's basic dilemma: the number of banks to be created and the size
of the New York bank. The rural and
agrarian spokesmen, as well as the smaller country banks and some big city institutions, had prevailed in their desire
that twelve banks be created and that
the size of the New York bank be somewhat limited. Even though the New York
bank was limited to New York State
alone (its district lines, and some others,
were slightly modified in the following
years), the New York bank with just over
$20,000,000 in capital stock had nearly
four times the capitalization of the smallest banks, Atlanta and Minneapolis with
just under $5,000,000 in capital stock.
Under the law each of the member
banks would subscribe to the capital of
its district Federal Reserve bank an
amount equal to six percent of its own
capital and surplus, and each Federal Reserve bank was required to have a capitalization of at least $4,000,000. If the
capital stock of each of the Federal Reserve banks had been made approximately equal, however, the New York
bank would have included only a small
part of Manhattan Island, and the already enormous geographical size of the
Atlanta and Minneapolis districts would

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Federal Reserve Bank of St. Louis

have been considerably larger. In such a
case, moreover, parts of New York City
would have been included in other districts (probably Boston, Philadelphia, and
Cleveland, at least), and the size and
shape of the other districts would have
probably been more grotesque than the
wildest dream of the most enthusiastic
gerrymanderer. Given the overwhelming
size of New York's financial resources, it
was quite impossible to prevent the New
York bank from being the largest and
most dominant bank in the system, but it
was considerably smaller than the New
York banking community had wanted.

"The wildest dream of the most enthusiastic gerrymanderer"
by Adam Redjinski

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Federal Reserve Bank of St. Louis

The Reserve Bank Organization
Committee's statement suggested that
the district lines had been drawn first and
the cities selected after that, but in reality
the process had been just the reverse:
the cities were selected and then the district lines were drawn around them.
There is also little indication that the
committee had ever seriously considered
choosing fewer than twelve cities. Given
the inclination of McAdoo and Houston
to disagree with the position of the New
York bankers, such a result was not surprising. Moreover, with more than forty
cities making strong claims to be designated, the committee was able to satisfy
more of them by choosing the maximum
number of cities allowable. In following
very closely the results of the poll among
national banks, the committee was in a
position to demonstrate that the new
Federal Reserve System was anxious to

work with bankers rather than to face
them in angry confrontation.
Naturally the smaller cities which
had been named were overjoyed by their
selection. "I have always said you and
Houston were great men," a prominent
Kansas City business leader told
McAdoo. "Now there isn't a man in Kansas City to dispute it." 4 Dallas and Richmond found their status in American
banking greatly enhanced by their selection. Under the national banking system there were three central reserve cities and 47 reserve cities; theoretically,
these fifty cities were the most import ant
in American banking, but among them
were, for example, Waco, Texas and Cedar Rapids, Iowa. Dallas and Richmond,
however, had not been reserve cities, so
their selection as sites for regional Federal Reserve banks increased their stature
as regional financial centers.

Downtown Kansas City

Courtesy, Kansas City Public Library, Missouri Room

CROSSFIRE
Yet in the wake of the committee's
announcement the voices which came
through most loudly were not of gratification but of outrage. Lincoln, Nebraska protested its exclusion, but no
one really paid much attention to that.
Far more significant complaints came
from two undeniably major cities which
had not been designated - New Orleans
and Baltimore. Both were considerably
larger than some of the smaller cities se1ec ted (Richmond, Dallas, Atlanta, Kansas City, and Minneapolis) and both res ponded to their exclusion with mass
protest demonstrations. New Orleans,
whose selection as a Federal Reserve city
had been expected by bankers from all
over the country, held a mass meeting on
Sunday evening, April 5, protesting the
committee's decision and demanding that
it be reconsidered so that New Orleans
could get a bank. Baltimore's protest was
perhaps even more spectacular. On April
15 the financial, business, and civic leadership of the city, along with hundreds of
others, crowded the Lyric Theatre and
heard the Mayor of Baltimore and the
Governor of Maryland vigorously denounce the committee's decision to pass
over their city and name Richmond
instead.
Not only did the Reserve Bank Organization Committee receive much criticism for the cities it did not name, but it
also heard loud complaints about some
of the cities it did select. H. Parker Willis,

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Federal Reserve Bank of St. Louis

who had assisted the committee in its
work, believed that Richmond was the
selection most difficult to justify. It was

tiUJeM-. ftracvuat.
X

ORLEAXS, MOX DAY. APRIL 6. 1914.

·~

-1IM·

-- -- ' ~ ~
-:~~'..-

.:--~ - ~
""

...... - ,_ , ..

HE MAKE T.HEM HEAR?
This cartoon of protest appeared in the New Orleans Daily Picayune
Courtesy, New Orleans Public Library

All Baltimore Demands
Justice Of The
Federal Reserve Board

BALTIIORE PROTESTS
WITH IIGHTY VOICE
Rqional Bank lnjUlticie Denounced And
Rebeari111 Asked At Oreat

Shall The Tail We& The Dog?
u

Lyric Meeting.

.,,,-' .:,.-• .,. .,.,.,.

HERSHEY RIDDLES RICHIOND'S CLAII
Oovemor.And Mayor Urce Baltlmore•• Rlpl To
Fairer Treatmen& - Jacob Epstein, Waldo
Newcomer And Others Put Foward Welchty
Arpmenta - Decision Declared Not
Warranted By Evidence.
Tht> Jlr•.tftt nr Raltimo"' ,:;rain~, ,h ..

,ti'! ltl (l " '

thf' t,'N4r1I Or-

\.'.&lli4tioA koar,I in rr;,.-hng 1t fnr lhr hmun(l u thf' 1it,• nf! dlf'" ,.. .
i,ioq11I han.k ttf thr Fifth ll111tr1rt " ' " ,·01N"d f"ffll'Jh,U1l"'1II~· l1111 n,i,:ht

,.t ohr uf tlw- "'""''

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Federal Reserve Bank of St. Louis

II YOB FOi FAIR PU I GOYER NOB OIGES WOii
Urpt-'fta\ fte llew C•l'HIICJ law hlarH lelti■- Jttt,a Ill tip\
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••I th,· 1'ftfflfflrh"11tl and pMf,..iC'lnal lifr " ' th111; ,-,..!J ar,d ·1K1•f'rful old
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11 ~ •

Baltimore protests the choice of Federal Reserve cities in the Baltimore Sun, April 16, 1914
Courtesy, Baltimore Public Library

one of the smaller cities so designated,
and many doubted the need for two Federal Reserve districts (Atlanta and Richmond) in the Southeast. Moreover, Richmond's selection lay open to the charge
that it was a case of political favoritism,
for Carter Glass was -a Virginian and
John Skelton Williams, Comptroller of
the Currency and one of the three committee members, was from Richmond itself. Cleveland's selection was questioned
because Cincinnati and Pittsburgh had
received more support from the national
banks within the district, and because it
was the home of Secretary of War
Newton D. Baker, an unusually promi-

nent member of the Wilson Cabinet.
There was some criticism of the selection
of both St. Louis and Kansas City because both are in Missouri, a state with
enormous political influence in the Wilson
Administration. The Speaker of the
House, Champ Clark, was from Missouri
(he had nearly beaten Wilson for the
Democratic nomination in 1912); Senator
James Reed, from Kansas City, was one
of the most prominent men in the upper
house; and Secretary of Agriculture
David F. Houston, one of the three members of the Reserve Bank Organization
Committee, came to his cabinet position
from St. Louis.

These questions of political favoritism in the selection of Federal Reserve
cities (especially Richmond and the two
in Missouri) led to several days of debate
in the House of Representatives. After
hearing much intense criticism, Carter
Glass sprang to the defense of the committee and its selections, and he sug gested that the importance of Federal Reserve banks to the cities in which they
would be located had been overemphasized. He also denied playing any
role in the selection of Richmond. President Wilson also came to the committee's
defense while stoutly maintaining that he
had offered the committee no
suggestions.
Stung by this criticism from around
the country and within Congress, the Reserve Bank Organization Committee

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Federal Reserve Bank of St. Louis

made public the poll of national banks,
hoping to demonstrate that any favoritism shown had not been to politicians
but to banking opinion. A few days later,
on April 10, the committee issued a
lengthy statement defending its choices.
Attempting to mollify the disappointed cit ies, the committee argued that designation or the failure to designate any particular city would not be important to that
city's future, and that the normal patterns of business and banking would not
be affected by the creation of the twelve
Federal Reserve districts. "Every city
which has the foundations for prosperity
and progress will continue to grow and
expand, whether it has such a reserve
bank or not, and well-informed bankers,
especially, are aware of this," the committee said.

This "Bank Street" is really the 1100th
Block of East Main Street, Richmond
Courtesy, Cook Collection, Valentine Museum,
Richmond, Virginia

Moving on to defend its most controversial selections, the committee suggested that it chose the twelve cities that
it did because they were the most important in terms of banking resources,
central location, and communication and
transportation facilities. Though Dallas,
Atlanta, and New Orleans had comparably sized bank business, the committee thought it especially noteworthy that
the banking business of both Atlanta and
Dallas had more than doubled in the past
decade while the banking business of
New Orleans had remained stable. In addition, Dallas and Atlanta were the overwhelming choice of the banks in their
regions, while it was generally only the
Louisiana banks that favored New Orleans. As for Richmond, the committee
pointed out that banks in the district preferred it over Baltimore, and that it was

An overall view of Dallas
Courtesy, Dallas Historical Society

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Federal Reserve Bank of St. Louis

more centrally located while Baltimore
was at the northern edge of the district
and very close to Philadelphia. While Baltimore's banking resources were clearly
greater than those of Richmond, the latter's had grown five times more rapidly
during the past decade. As for Kansas
City, the committee again pointed out
that it, far more than any other city in
the district, had been the choice of the
national banks. None of the other major
cities in the district - Denver, Omaha,
or Lincoln - even came close to the
banking resources of Kansas City.
The committee's statement contained some inconsistencies. On the one
hand it argued that failure to receive a
Federal Reserve bank did not mean that
a particular city lacked importance or
that its future growth would suffer; on
the other hand, the committee justified its

most controversial choices by arguing
that the cities selected were, in fact ,
more important in terms of location,
banking resources, and future potential
than their disappointed rivals.
Controversies about the cities selected and some of the district lines
would persist for several years. From
time to time the Federal Reserve Board
has slightly modified some of the district
lines, but none of these changes were
major. Perhaps the most noteworthy occurred in 1916, when the Board moved
Fairfield County, Connecticut from the
Boston district to the New York district,
and the northern New Jersey counties
from the Philadelphia district to the New
York district. This change was made at
the request of the local bankers, who had
been very unhappy about their exclusion
from the district of the Federal Reserve

Bank of New York. More important,
however, the twelve cities originally
named by the committee have retained
their Federal Reserve banks, and after
the System had been in operation for
only a few years no serious challenge
arose against any of them. In short, despite the outcry from many quarters, the
decision announced by the Reserve Bank
Organization Committee on April 2, 1914,
has not been changed.

GETTING IT TOGETHER

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Federal Reserve Bank of St. Louis

After choosing the twelve Federal
Reserve cities and drawing the district
lines, the Reserve Bank Organization
Committee had to bring the more than
7,000 national banks into formal membership in the new system, and it had to provide for the organization of the twelve
Federal Reserve banks. Also, the President had to nominate five members to
the Federal Reserve Board who would be
acceptable to the Senate. Until these major actions were taken America's new experiment in central banking could not
begin.
During the debate over the Federal
Reserve Act in Congress, and soon after
its passage, there had been many fears
that the vocal opposition of most of the
banking community would mean that
large numbers of national banks would
give up their charters rather than join the
Federal Reserve System. Yet these fears
never materialized. In fact, only a very
few national banks took this step. Following the passage of the Federal Reserve Act many bankers either reconciled
themselves to the new system, with the
determination to make it work well, or
came to accept that the Federal Reserve
Act contained many benefits and improvements that they had not fully appreciated before.
A few days after final congressional
passage of the bill, a director for a major
Boston bank expressed his own change
of opinion in a letter to David Houston: "I
hardly need to tell you that the attitude
of our Directors - and I presume this

has been the experience in every bank has changed completely in regard to the
currency bill. They started out with a
strong prejudice against it, and a feeling
that it would almost be necessary to
keep out of the system, even if that
meant reorganization [that is, replacing
the national charter with a state charter];
but the very great improvement which
the bill cannot help effecting in our currency situation has gradually impressed
itself upon us, and, in addition, the progressive changes which have been made
in the bill have created a very favorable
impression. I don't meet anybody now
who, whatever his views as to possible
dangers, does not feel that the advantages outweigh the dangers." 5
The Federal Reserve Act had specified that the national banks had sixty
days after the passage of the law to indicate their acceptance of it, and within a
month more than two-thirds of them had
done so. By the end of February, 1914,
just after the expiration of the sixty day
period, it was clear that more than 99
percent of the national banks had accepted the new law and had joined the
System in order to retain their national
charters. The Federal Reserve Act also
allowed state chartered banks to apply
for membership, but in 1914 the Organization Committee gave very little attention to this issue. By April, only seventy-three state chartered banks in the
nation applied for membership. It was not
until after the System actually began
functioning that the Federal Reserve

Board gave any serious consideration to
this question. In New England, there
were no state chartered members until
August, 1915.
Under the Federal Reserve Act all
member banks had to subscribe to an
amount of stock in their own regional
Federal Reserve bank equal to six percent of their capital and surplus. By May
5 national banks had subscribed the minimum required capitalization of
$4,000,000 in each of the twelve districts,
so the committee formally selected five
national banks in each district to or-

ganize the regional reserve bank and expressed the hope that the twelve banks
would be able to open for business by
August 1. In New England the five selected were: First National Bank, Bridgeport, Connecticut; Casco National Bank,
Portland, Maine; National Shawmut
Bank, Boston; First National Bank, Concord, New Hampshire; and the National
Bank of Commerce, Providence, Rhode
Island. It was up to the five banks in
each of the twelve districts to execute the
formal certificate of incorporation, and
this was done on or just after May 18 in
all twelve districts.

STON FEDERAL RESERVE BANK IS
TO BE OPENED WITHIN SIXTY DAYS

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Federal Reserve Bank of St. Louis

Newsclipping announces the
opening of the Boston Fed
Courtesy, Federal Reserve Bank of Boston Archives

ELECTING LOCAL DIRECTORS
The next step was for the member
banks to elect six of the nine members of
the Board of Directors for each Federal
Reserve bank. Following the specific provisions of the law, the Reserve Bank Organization Committee divided the member banks within each district according
to capitalization: the largest one-third in
one grouping, the middle one-third in a
second grouping, and the smallest onethird in a third grouping. Of the six direc-

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Governor Alfred L. Aiken,
Federal Reserve Bank of Boston
Courtesy, Federal Reserve Bank of Boston

tors elected by the member banks, three
were to represent the banks themselves
(Class A Directors) while the other three
were to represent the commerce, agriculture, or industry of the district while
having no connection with a commercial
bank (Class B Directors). Each of the
three groupings of member banks would
elect one Class A Director and one Class
B Director. In other words, each member
bank would have a vote in the selection
of only two of the nine members of the
Board of Directors.
The final three directors (Class C
Directors) for each Federal Reserve bank
were to be appointed by the Federal Reserve Board, one of the Class C directors
being designated chairman and another
Class C director being designated vice
chairman. Under the Federal Reserve Act
the Secretary of the Treasury arid the
Comptroller of the Currency were ex-officio members of the Federal Reserve
Board, while the other five members
were to be appointed by the ·President
and confirmed by the Senate for ten-year
terms. (The Banking Act of 1935 changed
the composition of the Board, which was
officially renamed the Board of Governors of the Federal Reserve System.
Under this new law the Board was to
consist of seven members, each of whom
would be appointed by the President and
confirmed by the Senate for fourteen-year
terms; the Secretary of the Treasury and
the Comptroller of the Currency no longer served on the Board.)

WILSON'S CHOICES:
THE FEDERAL RESERVE BOARD
President Wilson waited until the Organization Committee had selected the
cities and had drawn the district lines before he announced his choices for the
Federal Reserve Board. For one thing,
only one of the appointed members of the
Board could come from any one Federal
Reserve district, so clearly the lines had
to be drawn before the appointments
could be made. Moreover, Wilson's five
appointments were among the most important he had been called upon to make
in his presidency, and it took some time
for him to make his choices.
On May 4 the President sent his five
nominations to the Senate. They were:
Richard Olney, conservative Boston lawyer and Secretary of State under Grover
Cleveland twenty years earlier; Harry A.
Wheeler, Chicago businessman and
former president of the United States
Chamber of Commerce; Paul M. Warburg, partner in the Wall Street investment firm of Kuhn, Loeb & Company, and an opponent of the Federal
Reserve bill while it was before Congress;
Adolph C. Miller, a former professor of
economics at the University of California;
and William P. G. Harding, president of
the First National Bank of Birmingham,
Alabama, and a champion of his own city
as the site for a Federal Reserve bank.
Almost as soon as Wilson named his
choices he faced embarrassment. Olney
was probably the most prominent of the
nominees, but his stewardship of the

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State Department had been filled with
controversy, and, citing his advanced age
as the reason, he declined the appointment. Wheeler also turned down the
offer.
The President's embarrassment soon
turned into a nasty political confrontation
with the Senate. While Wilson's selections proved very popular among America's banking leaders, the President's natural political allies - the progressives were deeply and bitterly disappointed.
Within Wilson's official family Secretary
McAdoo strongly advocated the appointment of a Board which would work
with him to break what he considered to

Richard Olney
Courtesy, Library of Congress

be Wall Street's control over the nation's
credit. The President rejected McAdoo's
argument in favor of the position of Colonel Edward M. House, Wilson's most
important adviser. House advocated the
selection of men who would win the confidence and cooperation of the banking
community, and the President gave him a
free hand to consult widely among conservatives and among the banking leadership for suggestions.

Harry A. Wheeler
Courtesy, Library of Congress

Colonel Edward M. House
Courtesy, Library of Congress

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The progressives were appalled by
the nominations, and the pleasure expressed by bankers and conservatives
only deepened their suspicions. After Olney and Wheeler declined appointment,
Wilson on June 15 named in their place
Charles S. Hamlin, a Democrat from
Boston, and Thomas D. Jones, a businessman from Chicago. These replacements, particularly Jones, only angered the progressives further. Led by
Senator James Reed of Missouri, the progressives directed more of their fire at
Warburg and Jones. Warburg was suspect because he represented a prominent
Wall Street investment house and because he had been a strong champion of
that bete noir of the progressives, the Al-

drich plan. Jones was suspect because
he was a director of the International
Harvester Company, a trust which was
universally hated by the middle western
farmers and progressives, and which was
under both state and federal indictment
in 1914 as an illegal business combination
in restraint of trade. Wilson was particularly embarrassed and embittered by the

opposition to Jones, for the latter was an
old friend who had sided with him during
his controversies as president of Princeton University and who had contributed
large sums of money to his presidential
campaign of 1912. Moreover, Jones had
reluctantly accepted the appointment
only after Wilson had appealed to him on
the basis of their friendship.
President Wilson decided to fight vigorously for the Senate confirmation of his
five choices, and he came out with particular force for his old friend Jones. He argued that Jones, as a director of International Harvester, had been working to
end the activities which had brought that
company under indictment. In July, Jones
testified before the Senate Banking Committee, which was holding hearings on
the President's five nominations, and he
weakened his own case by showing more
sympathy with the policies of International Harvester than Wilson had suggested was the case. A few days later the
committee voted, seven to four, to disapprove Jones's nomination. Infuriated,
Wilson determined to carry his fight for
his friend's confirmation to the Senate
floor. Despite very heavy Administration
pressure, a number of Democratic senators normally aligned with Wilson refused to accept Jones. The President,
seeing that his friend could not prevail in
a Senate vote, asked him to withdraw his
nomination. Jones, who had not been eager to serve on the Federal Reserve
Board in the first place, gladly complied.
This was Wilson's first defeat at the
hands of either house of Congress.

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Thomas D. Jones
Courtesy, International
Harvester, Chicago

Paul M. Warburg
Courtesy, Library of Congress

As a replacement for Jones, the
President nominated Frederic A. Delano,
president of the Monon Railroad, and he
was easily confirmed by the Senate.
Meanwhile the Senate Banking
Committee had also requested Warburg
to appear before it. Warburg's pride was
so wounded by this request - he seemed
to feel that he was being asked to appear
at an inquisition - that he requested the
President to withdraw his nomination.
Wilson refused to do so and pleaded with
Warburg to appear before the committee
as Jones had done. Senator Hitchcock
assured Warburg that he would be
treated kindly. In early August, Warburg
finally consented to testify, and he was
promptly approved by the committee and
confirmed by the Senate. Apparently the
defeat of Jones, and Warburg's ultimate

Members, Federal Reserve Board. Left to Right: W.G. McAdoo,
John Skelton Williams, A.G. Miller; F.O. Delano, H. Parker Willis,
W.P.G. Harding; P.M. Warburg; and C.S. Hamlin
Courtesy, Federal Reserve Board of Governors, Washington, D.C.

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appearance before the committee, was
victory enough for the progressives, for
they made no serious attempt to block
confirmation of Wilson's three other selections. Perhaps most significantly,
Wilson's appointments to the Federal Reserve Board were very welcome to the
banking community, and they indicated
that the President wished to inaugurate
the Federal Reserve System in cooperation with the financial community of
the nation.
On August 10, 1914, the Federal Reserve Board was officially sworn into
office, with Charles S. Hamlin designated
Governor (i.e., chairman), and Frederic
A. Delano, Vice Governor, and it took
over the work that had been started by
the Reserve Bank Organization Committee. Two factors, however, were to delay
the opening of the new Federal Reserve
Banks. One was the slowness of the
member banks in electing the six Class A
and Class B directors. The other was the
beginning of World War I in _Europe; the
outbreak of war had such a profound impact upon American business and banking that it made it even more difficult to
open the reserve banks yet far more essential that they be opened as soon as
possible.
The newly appointed Board had to
appoint the three Class C directors for
each of the twelve banks. It also worked
on drafting by-laws for the twelve banks,
so that the banks could be as uniform as
possible. Many other details and technical considerations occupied the Board's
attention: the staffing of each of the

banks, with the selection of officers; the
provision of office space; precise guidelines for the kind of commercial paper
which member banks could rediscount,
and a workable mechanism for the rediscount of such paper; the design and
printing of the new currency, Federal Reserve notes; and finally, provision for the
transfer of reserves from the central reserve and reserve city banks to the new
Federal Reserve banks.
Some of the Federal Reserve banks
were moving ahead more rapidly than
others, and the Board seemed willing to
open each bank as it became ready.
However, Treasury Secretary McAdoo

decided that the banks should all open
for business at the same time. McAdoo's
determination put pressure on the Federal Reserve Board to name all of the Class
C directors speedily and on the slower
banks to prepare for an early opening.
On October 20, after all of the Class
C directors had been named, all nine directors from all twelve banks met in
Washington to prepare for the opening of
the banks. By this time the Federal Reserve Board had come to accept
McAdoo's determination that all twelve
banks open at the same date. The various directors, however, could not agree
what the specific date ought to be.

Directors from the twelve Federal Reserve banks meeting in Washington, D.C.
Courtesy, Federal Reserve Bank of Boston Archives

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ciitty-tQirb OI:ongnss of

t~t

~nittb itatrs of ~mcrua;

~t the ~econd ,i.cssion,
Bquu and held at the City of Washington on Monday, the lint day of Dccembt:r, one
thousand nine hundred and thiiteen.

AN ACT
To provide for the e11tal,li11lnnent of Federal reserve banks, to furnish an elastic
currency, to afford means of rediscounting commercial paper, to establish a
more effective supervision of banking in the United State11, and for other
purposes.
Be it enacted by tlie Senate and H1111se of Representatit-es of t/u,, United
State.s of America in Co11yre.ss <1SSRmbled, That the !!hort title of this Act shall
be the" Federal Re11erve Art."

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Vice Presuient of the United State.s and
President of the Senate.

F ilni m ile of purt iu 11s o f fin t il lld fi 11al f)il K<'S o f Ft' d erol R e.11•n e A c t of 1913

A few days after the Washington
meeting McAdoo himself publicly announced that the Federal Reserve banks
would all open on Monday, November
16. He also said that as soon as the
twelve banks were opened, the federal
government would transfer as much of its
government funds as possible to the various reserve banks.
On November 16 the twelve Federal
Reserve banks started operations with little fanfare and, in some cases, with less
business. In no case had permanent
quarters been arranged, and in many
quarters there was a very large question
of how long the Federal Reserve System
would last. In most of the banks a clerk
or two oversaw the small trickle of business, and their work was often seen
somewhat as a novelty. The Federal Reserve Bank of Boston began operations
in rented quarters at 101 Milk Street, approximately the location of the permanent building, with expansions, that
the bank was to occupy from the early
1920s through the middle 1970s.
Inauspicious as it was, November
16, 1914 - the opening of the Federal
Reserve Banks - marks the end of this
story. In the sixty years that have passed
those banks have remained in operation,
and their activities and responsibilities
have expanded enormously. With the
passage and implementation of the Federal Reserve Act, the United States had
initiated the central banking system
which persists today - to serve and add
stability to the commercial banking system and to monitor and influence the
American economy.

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Comptroller of the Currency, John Skelton Williams,
authorizes the Federal Reserve Bank of Boston
to commence business
Courtesy, Federal Reserve Bank of Boston Archives

Footnotes
INTRODUCTION
1. Arthur S. Link, Wilson: The New Freedom (copyright© by Princeton University Press), p. 238. Reprinted by permission of Princeton University
Press.
2.

Richard Hofstadter, The Age of Reform, New
York, Knopf, 1955, p. 23.

CHAPTER2

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1. David F. Houston Papers, Houghton Library, Harvard University, p. 37.
2. Link, op. cit., p. 212.
3. Link, op. cit., p. 218.
4. Link, op. cit., p. 220.

CHAPTER 3
1.

H. Parker Willis, The Federal Reserue System,
Washington, D.C., Board of Governors, Federal
Reserve System, p. 561.

Houston Papers, op. cit., letter from Roland W.
Boyden, a lawyer with Ropes, Gray and Gorham
and a director of the First National Bank of
Boston, to David F. Houston, December 27, 1913.

Houston Papers, op. cit., letter from Houston to
President Wilson, December 29, 1913.

4. William G. McAdoo Papers, Manuscript Division,
Library of Congress, Washington, D.C., letter from
William Rockhill Nelson to McAdoo, April 3, 1914.
5.

Houston Papers, op. cit., Roland W. Boyden to
David F. Houston, December 27, 1913.

Bibliography
Beckhart, Benjamin Haggott, Federal Reserve System,
New York, American Institute of Banking, 1972.

Link, Arthur S., Woodrow Wilson and the Progressive
Era, New York, Harper, 1954.

Sining, Arthur Cecil and Cochran, Thomas C., The
Rise of American Economic Life, 4th edition, New
York, Scribner, 1964.

McAdoo, William G., Crowded Years, Boston,
Houghton, 1931.

Coletta, Paolo E., William Jennings Bryan: Progressive
Politician, Lincoln, University of Nebraska Press, 1969.
Faulkner, Harold U., The Decline of Laissez Faire,
New York, Holt, Rinehart and Winston, 1951.
Glass, Carter, An Adventure in Constructive Finance,
Garden City, New York, Doubleday, Page and Co.,
1927.
Grantham, Dewey W., Jr., Hoke Smith and the Politics
of the New South, Baton Rouge, Louisiana State University Press, 1958.
Houston, David F., Eight Years with Wilson's Cabinet,
Garden City, New York, Doubleday, Page and Co.,
1926.
Laughlin, J. Lawrence, The Federal Reserve Act, Its
Origins and Problems, New York, The Macmillan
Company, 1933.
Kemmerer, Edwin Walter and Kemmerer, Donald L.,
The ABC of the Federal Reserve System, 12th edition,
New York, Harper, 1950.
Link, Arthur S., Wilson: The New Freedom, Princeton,
Princeton University Press, 1956. (Professor Link's
chapter, "The Federal Reserve Act," is the best scholarly account of the passage of the Act. His brief treatment of the appointment of the first Federal Reserve
Board is also excellent. His account, however, does
not cover the work of the Reserve Bank Organization
Committee.)

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Mason, A.T., Brandeis: A Free Man's Life, New York,
The Viking Press, 1946.
Miller, John C., The Federalist Era, New York, Harper,
1960.
Owen, Robert L., The Federal Reserve Act, privately
published, 1919.
Smelser, Marshall, The Democratic Republic, New
York, Harper and Row, 1968.
Smith, Rixey and Beasley, Norman, Carter Glass, New
York, Longmans, Green and Co., 1939.
Studenski, Paul and Kroos, Herman E., Financial History of the United States, 2nd edition, New York,
McGraw-Hill, 1963.
Taggart, Joseph H., The Federal Reserve Bank of
Boston, Boston and New York, Bankers Publishing
Company, 1938.
Underhill, Hurshel E., The Kansas City Federal Reserve District, Kansas City, 1940.
Urofsky, Melvin, A Mind of One Piece: Brandeis and
American Reform, New York, Scribner, 1971.
Van Deusen, Glyndon G., The Jacksonian Era, New
York, Harper, 1959.
Willis, H. Parker, The Federal Reserve System, New
York, The Ronald Press, 1923.

OTHER BIBLIOGRAPHY MATERIAL
The New York Times, 1913-1914
The Boston Globe, 1914
Records of the Reserve Bank Organization Committee,
Board of Governors of the Federal Reserve System,
Washington, D.C.

William G. McAdoo Papers, Manuscript Division, Library of Congress, Washington, D.C.
David F. Houston Papers, Houghton Library, Harvard
University, Cambridge, Massachusetts
Miscellaneous publications by Federal Reserve Banks
on the origin of the Federal Reserve System, especially
Reflections from History by Clarence W. Nelson published by the Federal Reserve Bank of Minneapolis in
1964 and A Christmas Present for the President by
Gerald T. Dunn, published by the Federal Reserve
Bank of St. Louis in 1964.

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Additional copies of this publication
are available upon request, from the
Bank and Public Information Center
Federal Reserve Bank of Boston
Boston, Massachusetts 02106

Full text of Historical Beginnings... The Federal Reserve

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