FEDERAL RESERVE DISTRICTS AND MEMBERSHIP The Federal Reserve Districts The Federal Reserve Act provides for the division of the country into not less than eight nor more than twelve Federal reserve districts, each with its own reserve bank, "individually controlled and holding the fluid funds of the region in which it is organized, and each ordinarily dependent upon no other part of the country for assistance." The factor of centralization is the Federal Reserve Board.
The regional idea is a fundamental feature of the system, and was hotly debated in Congress. Those in favor of the idea main tained that no area the size of the United States was or could be under one central bank without prejudice to some areas, since such wide diversities of banking needs existed, and that the regional plan would provide greater adaptation to regional characteristics and would give local control and responsibility, thus not only serving local financial needs better but being politi cally expedient since local control would allay jealousy of Wall Street and other distant money marts. The central banks of England, France, Germany, etc., correspond with the several federal reserve banks so far as area and local adaptations are concerned. Undoubtedly one deep-seated motive behind the federal reserve legislation was a decentralization of the money power centering in New York. The federation of the reserve banks in the Federal Reserve Board clothes the system with ample powers to give uniformity and unity of action where needed, and at the same time local autonomy enough to remove the system from politics, which defeated our two earlier attempts to found central banks.
The opponents of the regional plan argued that it could not effect uniformity of interest rates, equal facilities for discounting, nor uniform banking practice; that the banks would not work together; that, as the system would be unreasonably expensive, member banks would not get dividends on their stocks; that there were too many reserve banks; and so on. These arguments have since been disproved by actual operation.
Although the federal reserve system is regional, some com plaint has been raised that because the reserve banks are bankers' banks, which do not deal directly with individuals, the system is still too highly centralized and too remote from the people. This contention has some basis of fact, in so far as the depositors and customers of the reserve banks are mostly banks and the only direct dealings of the reserve banks with the people are the open market transactions in commercial paper, gold, and securities.
Certain European central banks, it may be noted, allow direct access to the public. In actual practice, however, the privilege is infrequently used in the case of those European banks, and the great bulk of private business is done with local banks. The com petition of our reserve banks with the local banks extends the benefits of a central bank to the public, for by going into the market the central bank can break any temporary obstacles to the flow of benefits from the local banks.
Boundaries of Federal Reserve Districts To put the federal reserve system into operation the Reserve Bank Organization Committee was constituted, consisting of the Secretary of the Treasury, the Secretary of Agriculture, and the Comptroller of the Currency. This committee made a trip through the United States for the purpose of hearing arguments and assembling data to determine the number and boundaries of the districts, as well as the federal reserve cities. Two provi sions of the law were: that the number of districts be not less than eight and not more than twelve, and that the districts con form to the convenience and customary course of business of the country.
The aim of the committee was to create a certain degree of equality or strength among the districts rather than to allow the New York district to overshadow weaker districts. As equality is impossible unless each district is laid out so that its area is in versely proportional to the number and strength of its banks, and as the minimum capitalization of a reserve bank was fixed by the act at $4,000,000, and was to be subscribed primarily on the basis of 6 per cent of the capital and surplus of the member banks, therefore in the South and West, where banks are small and few in number, the district had to embrace a large territory. The committee laid out the eastern districts on lines that will to a large extent probably prove permanent, but the western and southern districts will probably be rearranged as the country develops. In hearing arguments and assembling data the com mittee discovered an intense local jealousy among the candidate cities. To appease this jealousy and to effect as great local con trol as possible, the committee decided to establish twelve dis tricts, as nearly as possible in their final form, so as to allay efforts to divide and rearrange them later.