Abstract
The Federal Reserve Act (1913) established the Reserve Board Organization Committee (RBOC) to determine the number and location of Federal Reserve districts and Reserve banks. Some scholars argue that the decisions were politically motivated but direct econometric evidence is lacking. A regression model utilizing solely political variables correctly predicts 11 of the 12 selected cities; the exception being Cleveland’s selection over Cincinnati. Our results present direct evidence of the importance of political determinants for RBOC selection.
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Notes
- 1.
The Federal Reserve Act of 1913 provided that the governor and vice governor were to be appointed by the president from among the Board’s members. The Banking Act of 1935 revised the Board by dropping the Secretary and the Comptroller, and providing for seven members, all called governors and appointed for 14-year terms. It also formalized the FOMC, with a majority from the Board (seven, with five Reserve Bank presidents), but otherwise left the structure of the Federal Reserve unchanged.
- 2.
The first action, from Section 2 of the Federal Reserve Act, required every national bank to subscribe to the capital stock of its Federal Reserve bank a sum equal to 6% of its own capital.
- 3.
C.H. Sloan, Republican congressman from Nebraska said the process lacked systematic, objective selection criteria. In some instances “the size of the cities did not control”; similarly with “the lines of transportation and the course of business, population, and banking preferences.” “I do not know a single basis or rule that controlled in one case which has controlled in another. [P]olitics [favoritism] must have had something to do with it” (U.S. Congress 1914, p. 6441). See also McAvoy (2006).
- 4.
It has been noted that Willis’ 1923 explanation of location choices emphasized politics more than his 1914 explanation, written while he was employed by the Federal Reserve (Hammes 2001).
- 5.
On New York and Cincinnati, see Reserve Bank Organization Committee (1914a, pp. 83, 4360–4364).
- 6.
The “Strong rule” is discussed by Chandler (1958, p. 240).
- 7.
In contrast, the “economic model” McAvoy promotes uses mainly city and county-specific independent variables, as well as twice as many total variables.
- 8.
Recall that both Kansas City and St. Louis are Federal Reserve cities, so the 12 cities represent 11 different states.
- 9.
County votes are taken from Dave Leip’s Atlas of U.S. Presidential Elections. In some cases, cities are not part of any county and the votes represent the city total exclusively. In all other cases, county level is the lowest level of aggregation available.
- 10.
The Federal Reserve Act made Fed membership of the more than 19,000 state banks voluntary, and few initially joined (Federal Reserve Board 1959, pp. 41–45).
- 11.
Los Angeles received the 25th highest total but ultimately did not apply to become a Reserve Bank city and is not part of our sample. Seattle was the last listed city with 98 votes. Thus the remaining nine applicant cities in our sample could have received anywhere from zero to 97 votes. None of them were selected by the RBOC.
- 12.
With of course the exception of Washington, DC which does not cast any ballots in presidential elections.
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Heckelman, J.C., Wood, J.H. (2018). Political Selection of Federal Reserve Bank Cities. In: Hall, J., Witcher, M. (eds) Public Choice Analyses of American Economic History. Studies in Public Choice, vol 35. Springer, Cham. https://doi.org/10.1007/978-3-319-77592-0_6
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