Economics and Politics in Selecting Federal Reserve Cities: (2024)

Author

Listed:

David C. Wheelock

Registered:

David C Wheelock

Abstract

Missouri is the only state with two Federal Reserve Banks, and it has long been alleged that political influence explains why Reserve Banks were placed in both St. Louis and Kansas City. Both the Speaker of the U.S. House of Representatives and a powerful member of the Senate Banking Committee hailed from Missouri, which at the time was a solidly Democratic state. The committee charged with selecting cities for Reserve Banks and drawing the boundaries of Federal Reserve Districts claimed that its decisions were based solely on economic grounds, including existing banking and business ties, transportation and communications networks, and the convenience and preferences of the Fed?s future member banks. Both St. Louis and Kansas City were among the top choices of bankers, many of whom had established correspondent relationships with banks in the two cities. St. Louis and Kansas City also served distinct markets?St. Louis to the south and east, and Kansas City to the west and southwest. Moreover, Kansas City dominated its rivals for a Reserve Bank serving western states, especially in terms of banker preferences and railroad connections. Thus, while it is impossible to rule out a role for politics in the selection of either city for a Reserve Bank, let alone both of them, both cities were reasonable choices for Banks on the basis of the stated criteria of the System?s founders.

Suggested Citation

David C. Wheelock, 2015."Economics and Politics in Selecting Federal Reserve Cities: Why Missouri Has Two Reserve Banks,"Review, Federal Reserve Bank of St. Louis, vol. 97(4), pages 269-288.

Handle: RePEc:fip:fedlrv:00047
DOI: 10.20955/r.2015.269-88

Download full text from publisher

References listed on IDEAS

John A. James & David F. Weiman, 2010."From Drafts to Checks: The Evolution of Correspondent Banking Networks and the Formation of the Modern U.S. Payments System, 1850–1914,"Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(2‐3), pages 237-265, March.
- John A. James & David F. Weiman, 2010."From Drafts to Checks: The Evolution of Correspondent Banking Networks and the Formation of the Modern U.S. Payments System, 1850-1914,"Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(2-3), pages 237-265, March.
R. Glenn Hubbard, 1991."Financial Markets and Financial Crises,"NBER Books,National Bureau of Economic Research, Inc, number glen91-1, January.
Charles W. Calomiris & Gary Gorton, 1991."The Origins of Banking Panics: Models, Facts, and Bank Regulation,"NBER Chapters, in: Financial Markets and Financial Crises, pages 109-174,National Bureau of Economic Research, Inc.
- Charles W. Calomiris & Gary Gorton, "undated". "The Origins of Banking Panics: Models, Facts, and Bank Regulation,"Rodney L. White Center for Financial Research Working Papers 11-90, Wharton School Rodney L. White Center for Financial Research.
Mark Carlson, 2015."Lessons from the Historical Use of Reserve Requirements in the United States to Promote Bank Liquidity,"International Journal of Central Banking, International Journal of Central Banking, vol. 11(1), pages 191-224, January.
- Mark A. Carlson, 2013. "Lessons from the historical use of reserve requirements in the United States to promote bank liquidity,"Finance and Economics Discussion Series 2013-11, Board of Governors of the Federal Reserve System (U.S.).
O. M. W. Sprague, 1914."The Federal Reserve Act of 1913,"The Quarterly Journal of Economics, Oxford University Press, vol. 28(2), pages 213-254.
Matthew Jaremski & David C. Wheelock, 2015. "Banker Preferences, Interbank Connections, and the Enduring Structure of the Federal Reserve System,"Working Papers 2015-11, Federal Reserve Bank of St. Louis.
- Matthew S. Jaremski & David C. Wheelock, 2015. "Banker Preferences, Interbank Connections, and the Enduring Structure of the Federal Reserve System,"NBER Working Papers 21553, National Bureau of Economic Research, Inc.
Odell, Kerry A. & Weiman, David F., 1998."Metropolitan Development, Regional Financial Centers, and the Founding of the Fed in the Lower South,"The Journal of Economic History, Cambridge University Press, vol. 58(1), pages 103-125, March.
David Hammes, 2001."Locating Federal Reserve districts and headquarters cities,"The Region, Federal Reserve Bank of Minneapolis, vol. 15(Sep), pages 24-27,55-65.
McAvoy, Michael R., 2006."How were the Federal Reserve Bank locations selected?,"Explorations in Economic History, Elsevier, vol. 43(3), pages 505-526, July.
Bordo,Michael D. & Roberds,William (ed.), 2013."The Origins, History, and Future of the Federal Reserve,"Cambridge Books,Cambridge University Press, number 9781107013728, October.
Wicker,Elmus, 2000."Banking Panics of the Gilded Age,"Cambridge Books,Cambridge University Press, number 9780521770231, October.

Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

Cited by:

Mark A. Carlson & David C. Wheelock, 2018."Furnishing an “Elastic Currency”: The Founding of the Fed and the Liquidity of the U.S. Banking System,"Review, Federal Reserve Bank of St. Louis, vol. 100(1), pages 17-44.
Araujo, Luiz Nelson, 2016. "Dissemination of Information by the Federal Reserve System: An Overview and Benchmark,"MPRA Paper 73185, University Library of Munich, Germany.

Most related items

These are the items that most often cite the same works as this one and are cited by the same works as this one.

More about this item

JEL classification:

G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
N22 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: 1913-
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

Statistics

Access and download statistics

Corrections

All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedlrv:00047. See general information about how to correct material in RePEc.

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Scott St. Louis (email available below). General contact details of provider: https://edirc.repec.org/data/frbslus.html .

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

Economics and Politics in Selecting Federal Reserve Cities: (2024)

FAQs

Why should the Federal Reserve be independent from politics and be free from political pressures? ›

The primary justification for an independent Federal Reserve is that it's necessary to insulate system from short-term political pressures. Without a degree of autonomy, the Fed could be influenced by election-focused politicians.

Who is the reason Missouri has two Federal Reserve Banks? ›

Why does Missouri have two Reserve Banks – Kansas City and St. Louis? Locations of Reserve Banks were selected based on population distribution and where financial centers were in 1914. Government officials traveled the country early that year to visit potential Reserve Bank sites, including Kansas City and St.

Read On ›

Is the Federal Reserve influenced by politics? ›

The reality is that political ties are mixed on the central bank's Federal Open Market Committee, the group that decides monetary policy. Powell, for example, is a Republican who was appointed by Barack Obama to be a Fed Governor, and then by Trump to be Fed Chair, and re-appointed by Joe Biden.

Know More ›

What effects does the Federal Reserve have on the economy? ›

The Federal Reserve's primary purpose, as the central bank of the United States, is to ensure a stable financial system through monetary policy. The Fed's goals include promoting maximum employment and ensuring stable prices. It also supervises and regulates banks to ensure the safety of the banking system.

Explore More ›

Is the Federal Reserve politically independent? ›

The Federal Reserve, like many other central banks, is an independent government agency but also one that is ultimately accountable to the public and the Congress.

Discover More Details ›

What is the advantage of distancing the Federal Reserve system from politics? ›

Congress has determined the Federal Reserve can best achieve its mission of supporting maximum employment and stable prices as an independent agency that makes decisions based on the best available evidence and analysis, without taking politics into consideration.

Explore More ›

Who has control over the Federal Reserve? ›

The Board of Governors--located in Washington, D.C.--is the governing body of the Federal Reserve System. It is run by seven members, or "governors," who are nominated by the President of the United States and confirmed in their positions by the U.S. Senate.

Read The Full Story ›

Who is behind the Federal Reserve? ›

There is a common misconception that the Federal Reserve System is privately owned. In fact, it combines public and private characteristics: The central governing board of the FRS is an agency of the federal government and reports to Congress.

Learn More Now ›

Why is the Federal Reserve so controversial? ›

Critics have questioned its effectiveness in managing inflation, regulating the banking system, and stabilizing the economy. Notable critics include Nobel laureate economist Milton Friedman and his fellow monetarist Anna Schwartz, who argued that the Fed's policies exacerbated the Great Depression.

Find Out More ›

What are the two main goals for the Federal Reserve? ›

The Federal Reserve System has been given a dual mandate—pursuing the economic goals of maximum employment and price stability. It does this by using a variety of policy tools to manage financial conditions that encourage progress toward its dual mandate objectives—in other words, conducting monetary policy.

Read The Full Story ›

What are the negatives of the Federal Reserve? ›

Cons of the Federal Reserve

The Federal Reserve operates independently of the U.S. government, and its monetary policy decisions are not approved by Congress or the U.S. president. This independence helps the Fed operate free of political pressure, but it also limits the Fed's accountability.

Read The Full Story ›

What does the Federal Reserve use to control the economy? ›

The primary tools used by the Fed include interest rate setting and open market operations (OMO). The Fed can also change the mandated reserves requirements for commercial banks or rescue failing banks as lender of last resort, among other less common tools.

Get More Info Here ›

Why is it important to protect members of the Federal Reserve from outside political pressures? ›

Why is it important to protect members of the Federal Reserve Board of Governors from political pressures? Political pressures could cause them to make poor decisions.

Know More ›

Why should we keep the Federal Reserve? ›

The Federal Reserve is the Lender of Last Resort.

During financial crises, provision of lender-of-last-resort services can stabilize the financia l system.

Learn More Now ›

Why is the Federal Reserve remarkably free from political pressure quizlet? ›

The Federal Reserve is remarkably free from political pressure given that it gains revenue from its holdings of securities and, to a lesser extent, from its loans to banks.

Show Me More ›

Why is it important to protect members of the Federal Reserve Board of Governors from political pressure by appointing them instead of electing them to that position? ›

The purpose of the extended and staggered appointment terms of the members of the Board of Governors is to keep them as far away from political pressure as feasible. It assists the board in making objective policy decisions based only on economic considerations.