Defining the districts: where to draw the lines?

Excerpt from Reflections from History:
The Minneapolis Federal Reserve Bank


Clarence W. Nelson
February 1973

As soon as practicable the Secretary of the Treasury, the Secretary of Agriculture, and the Comptroller of the Currency, acting as “The Reserve Bank Organization Committee,” shall designate not less than eight nor more than twelve cities to be known as Federal reserve cities, and shall divide the continental United States, excluding Alaska, into districts, each district to contain only one of such Federal reserve cities ...

With these words of Section 2 of the Federal Reserve Act, a committee-of-three was designated to choose cities and draw lines. “Not less than eight,” the law read, “nor more than twelve.” Actually most of those versed in the technical problems of central banking operations preferred fewer regions—four or six—on the basis of efficiency of operations or balance of banking strength among the districts. It was said that William Jennings Bryan wanted fifty banks—with “a branch at every major crossroad” if necessary. Out of the variety of ideas and opinions came the compromise in the 1913 law with its eight-to-twelve option.

Certainly New York, Chicago, and San Francisco would each house one of the Reserve Banks. And the large cities of Boston, Philadelphia, and St. Louis each had a strong edge in the competition. But the choosing of other cities and the drawing of boundaries required hard deliberation. The Organization Committee launched into an intensive study through the first three months of 1914. Enjoined to apportion the districts “with due regard to the convenience and customary course of business,” the Committee held public hearings in eighteen cities throughout the country, and received evidence from more than two hundred cities through their clearinghouse associations, chambers of commerce or other representatives. Thirty-seven cities—among them St. Paul and Minneapolis—asked to be designated as the site of a Federal Reserve Bank. In addition, a ballot of preferences was taken among the country's 7,471 national banks that had formally assented to the provisions of the Federal Reserve Act. So the contestants for Federal Reserve sites were also judged by popularity poll.

St. Paul and Minneapolis each made strong pleas for a separate Northwest district. Perhaps the leading alternative to a separate Northwest district was the reasonable possibility that it simply be made part of a larger Chicago district served locally by branches where needed.

One of the requirements of the law was a specification of minimum bank resources for the districts. Capital stock for each Federal Reserve Bank had to be subscribed by its member banks in the amount of 6 per cent of each member's respective capital and surplus. The Act required each Federal Reserve Bank to have a minimum of $4,000,000 in subscribed stock— a requirement that proved an important practical constraint in determining district boundaries.

Messrs. McAdoo, Houston, and Williams, the Reserve Bank Organization Committee, rendered their final decision on districting on April 2, 1914. The case for a separate Northwest district with a bank in the Twin Cities was evidently well enough argued, for the Committee defined the Ninth Federal Reserve District, with Minneapolis designated as Federal Reserve city. The district lines were drawn so as to exclude those parts of the Pacific Northwest the Minneapolis and St. Paul commercial interests separately had asked for; and, on the other hand, it included some parts of Wisconsin and Michigan around which the Twin Cities interests had not really built their case. The additional area had been included at the initiative of the Organization Committee to ensure that the new Minneapolis district, one of the two leanest in financial resources, would garner the necessary $4,000,000 in subscribed stock as required by law. However, many of the banks in Wisconsin and Upper Michigan felt that the lines had not been drawn with “due regard to the convenience and customary course of business.”

The Federal Reserve Board was given the authority to review the determinations made by the Organization Committee if appeals should arise. By November 16—the date on which all twelve Federal Reserve Banks opened for business—no less than seven separate petitions for review had been filed with the Board. Hearings on these petitions took place from the middle of January to the middle of February 1915, and even as the Board was deliberating on this group of hearings an eighth petition arrived—this one from the banks in a group of Wisconsin counties requesting that their area be reassigned from the Minneapolis to the Chicago district.

In its January-February deliberations the Federal Reserve Board ruled on some of the petitions, postponed others for further study, and decided that the whole matter of districting ought to be studied more broadly. The press of other matters forced the Board to delay work on district consolidation until late 1915. But finally on October 19 the Board voted to refer the question of redistricting to a special committee consisting of Mr. Delano, Mr. Harding, and Mr. Warburg, all members of the Federal Reserve Board.

The appeal of the Wisconsin banks to transfer out of the Minneapolis district and into the Chicago district was, of course, still pending before the Board. In December the Committee asked the Attorney General for two further opinions to guide it in making recommendations on the remaining unresolved petitions:

(1) Can the Federal Reserve Board legally change the present location of any Federal Reserve Bank?...

(2) Must the Federal Reserve Board, in exercising its admitted power to readjust preserve the $4,000,000 minimum capitalization required of each Federal Reserve Bank as a condition precedent to the commencement of business?

The Attorney General, in his opinion to the President on April 14, 1916 answered “No” to both questions. The response to the first question put an end by denial to two pending petitions, those of the cities of Pittsburgh and Baltimore asking to be named Federal Reserve cities. With this ruling the only legitimate changes the Federal Reserve Board could make in reviewing appeals were redistricting changes, that is, shifting the district lines to accord more closely with “the convenience and customary course of business.”

Part 2 of the opinion had direct relevance for the Wisconsin petition since a large block of counties with substantial bank resources was involved in the requested shift out of the Minneapolis district. The ruling indicated, of course, that it was no longer necessary to preserve the original minimum capitalization, the $4,000,000 minimum pertaining only to the time at which operations initially commenced. Thus in principle a transfer of banks could be made even if it resulted in reducing the Minneapolis Federal Reserve Bank capital below $4,000,000.

By the spring of 1916 the Wisconsin petition was the only unresolved appeal before the Board. On October 13 the Board finally cleared it up with the following order:

... it appears to such Board that the convenience and customary course of business and the best interests of the Federal Reserve system will be served by a readjustment of the geographical limits of districts Nos. 7 and 9...

Of the petitioning Wisconsin counties, twenty-five were granted transfer while the nine northernmost counties and the petitioning Michigan banks were denied transfer (see Figure 1). This decision of October 13, 1916 is pertinent because it established the geographical outline of the Minneapolis district as it stands today.

Interesting, and perhaps a bit ironic, were some of the arguments presented in the final brief of the petitioning Wisconsin banks. These arguments were obviously aimed at quelling fears over the proposed removal from the Minneapolis district of a part of that district's already near-minimal bank capital. Senator Paul O. Husting of Wisconsin testified at the rehearing on behalf of the petitioning banks:

...We all know that the Northwest has just started to grow. There is not any doubt in my mind, and I do not think there is any doubt in the mind of this Board, that in the next twenty or twenty-five years,—well in fact, there is no use in setting any time limit on it,—from now on, that great Northwest Empire is going to become one of the most populous and richest regions of the United States, and consequently that this particular bank, this regional bank that is Just starting Out now, under favorable auspices, will become one of the strongest and most influential banks in the United States. Right on the Mississippi Valley, this great empire, as I say, to the northwest, is hardly touched. There is every reason to suppose that in a very short time, continually for scores of years, and centuries, we hope, this great section will continue to grow more populous and richer all the time.

Senator Robert M. LaFollette, one of the Badger State's most famous Senators, said at the same hearing:

Now, then, they [the remainder of the Minneapolis district] do not need us. Business all up in this great wonderful region off to the north and west of St. Paul and Minneapolis goes right that way. You can not send it in any other direction. Montana, the two Dakotas, northern Iowa, and Minnesota all gather right in here. You know the vastness of that country, and the richness of it, and it is imply on the edge of its production at this time.

Such optimism about the future of the Minneapolis district might well have reflected the opinions of many residents of the Northwest as well. However, this promise of greater parity of financial resources still eludes the Ninth District. Growth has occurred, of course, but the Minneapolis district still remains among the smallest of the twelve districts in financial resources.

The question of district size, and even the question of district boundaries, had special importance early in the System's history. Integral to the initial “decentralization architecture” was the idea that Federal Reserve Banks were to act with substantial regional independence. Stress on the policy-making importance of individual Reserve Banks led one faction of the Federal Reserve Board to favor consolidation of small districts, if only on the grounds that small banks might not be able to attract qualified leaders or otherwise achieve high operating efficiency. With the same architecture in view, a second faction opposed consolidation on the grounds that the greater in number the autonomous banks, the harder it would be for any single sectional group or special interest to gain control of the System. Because this second faction felt that maximum decentralization was so important, the Minneapolis district—small though it might be—won a “guaranteed” existence.

But with the gradual abandonment of the earlier design of regional independence, the matter of district size became progressively less important. Even district boundaries are less significant than they once were. Yet despite these changes, proposals for redrawing district lines have continued to be made over the years.

 
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