by karen flamme

The Federal Reserve Bank of San Francisco, along with the rest of the Federal Reserve System, celebrated its 85th anniversary on November 16, 1999. It was on that day in 1914 that the San Francisco office officially opened for business in rented quarters at the rear of the Merchants National Bank. The staff consisted of a couple dozen employees, many on loan from local banks. They initially busied themselves receiving and counting gold from member banks, recording capital stock subscriptions, and issuing capital stock receipts. Things were to change rapidly in the next few years as check collection began and as the Federal Reserve Banks played a critical role in securing the funds necessary to carry on World War I.

Prior to the establishment of the Federal Reserve System, banking was marred by periodic financial panics that contributed to bank failures, business bankruptcies, and general economic depressions. Locally owned, independent banks flourished, many with dangerously low reserves. In 1907 a particularly severe loss of confidence in the stability of some banks caused yet another bank run and panic. It had become clear to many that the country needed an "elastic" currency that could increase in volume when the demands on banks necessitated it. Without that, there was no way for banks to bolster reserves when confronted with exceptional demands.

Congress responded by creating the National Monetary Commission, chaired by Senator Nelson W. Aldrich, to conduct a comprehensive study and recommend necessary and desirable changes to the money and banking system of the United States. This task was not an easy one. Nevertheless, within a couple of years, reform plans began to emerge. There ensued lengthy debates with battle lines generally being drawn between the progressives, primarily representing the small town businessman and farmer, and the conservatives, mainly representing the powerful eastern business and banking establishment.

Contentious arguments sprang up with each new proposal, but President Woodrow Wilson and his advisers persevered in developing and securing congressional passage of a monetary reform plan that became known as the Federal Reserve Act and that was ultimately signed into law on December 23, 1913. The Act stated that its purposes were "to provide for the establishment 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 States, and for other purposes." The Federal Reserve Act combined central with regional power by dividing the country into 12 Federal Reserve districts, each under the supervision of a Federal Reserve Bank. At the apex of the new central banking system was the Federal Reserve Board in Washington, D.C., composed of the Secretary of the Treasury, the Comptroller of the Currency, and five others appointed by the President for 10-year terms. (Later, the Banking Act of 1935 changed the composition of the Board and renamed it the Board of Governors of the Federal Reserve System.)

All national banks in each district were required to join the Federal Reserve and those state banks that so chose could also join. (At the end of 1913 the U.S. had some 27,000 commercial banks -- more than twice as many state banks as national ones.) Member banks were required to invest six percent of their capital and surplus in their regional Reserve Bank. The Reserve Bank, in turn, could make loans to member banks by rediscounting their commercial paper, buy and sell government bonds, and issue a new currency -- Federal Reserve notes.

The Act stipulated that a nine-member board of directors representing the interests of banking, industry, commerce, agriculture, and the general public would govern each regional bank.

The summer of 1914 was a busy time for organizers of the Federal Reserve Bank of San Francisco. Directors were selected for the Twelfth District bank, office space was located, and a staff was hurriedly assembled.

The opening date for all Reserve Banks was set for November 16, 1914, in order to make the reserve provisions of the Federal Reserve Act effective even though it was clear that the banks wouldn't be ready for normal business transactions that quickly. War had broken out in Europe four months before the banks were set to open, and help from the banks was needed to alleviate the credit strain that was occurring.

When the doors first opened for business, it wasn't clear just what the business of Federal Reserve Banks would entail. There were no precedents to guide the banks, and each bank had to work out its own procedures.

In May of 1916 our Bank in San Francisco had 25 employees. The check collection operation started in July 1916, and by the end of that year the staff had more than doubled to about 60. In addition, U.S. participation in World War I put a tremendous workload on the Federal Reserve Banks as they carried out their role as fiscal agents of the government. The first Liberty Loan was floated in 1917, and the volume of work and number of employees increased rapidly. The Federal Reserve Banks actively promoted the sale of the four Liberty Loans and the Victory Loan, which were issued to raise funds to support the war effort.

The Bank also expanded geographically in 1917. In order to give good service to member banks throughout the District, the Spokane Branch was opened on July 26, followed by the Seattle Branch on September 19 and Portland on October 1. On April 1, 1918, the Salt Lake City Branch opened. It was nearly two years later -- January 2, 1920 -- that the Los Angeles Branch opened its doors. By May 1921 the District boasted a total staff of 1306 -- 637 at the head office and 669 at the five branches.

At the end of 1923 the San Francisco staff moved out of temporary locations and into the Bank's newly built headquarters at 400 Sansome Street, a location that it would occupy for the next 60 years. The Spokane Branch was closed in 1938, but the other branches remain in service to the present time.

Since those early days of central banking, further legislation has been enacted to clarify and supplement the Federal Reserve Act of 1913. Key laws that have affected the Federal Reserve are the Banking Act of 1935; the Employment Act of 1946; the 1970 amendments to the Bank Holding Company Act; the International Banking Act of 1978; the Full Employment and Balanced Growth Act of 1978; the Depository Institutions Deregulation and Monetary Control Act of 1980; the Financial Institutions Reform, Recovery, and Enforcement Act of 1989; and the Federal Deposit Insurance Corporation Improvement Act of 1991.

Today the Federal Reserve's duties fall into four general areas:

• conducting the nation's monetary policy by influencing the money and credit conditions in the economy in pursuit of full employment and stable prices;
  
  
• supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers;
  
  
• maintaining the stability of the financial system and containing systemic risk that may arise in financial markets; and
  
  
• providing certain financial services to the U.S. government, to the public, to financial institutions, and to foreign official institutions, including playing a major role in operating the nation's payments system.

The Federal Reserve System still operates as an independent agency of the United States government. In keeping with the founding philosophy that ensures autonomy and protects the central bank from short-term partisan political pressures, its operations are financed from its own resources. The entire System is subject to congressional oversight and makes regular reports to Congress on its activities and plans for monetary policy. However, the central bank's day-to-day policy and operational decisions do not require congressional or presidential approval.

The seven-member Board of Governors in Washington, D.C., oversees the Federal Reserve System. Its members are appointed by the President of the United States and confirmed by the Senate to serve 14-year terms, staggered so that one term expires each even-numbered year. The President designates a Chairman and Vice Chairman from the Board to serve four-year terms.

Each District Reserve Bank has a head office board of nine directors chosen from outside the Bank. Three directors are chosen by and represent banks that are members of the Federal Reserve System. The other directors, selected by District member banks or the Board of Governors, represent the general public.

Each of the Federal Reserve Bank of San Francisco's four branches -- Los Angeles, Portland, Salt Lake City, and Seattle -- has its own seven-person Board of Directors, four appointed by the head office board and three by the Board of Governors.

These boards provide the Federal Reserve System with a wealth of grassroots information on economic conditions throughout the Twelfth District. In addition, directors oversee the Reserve Bank operations, select the Bank's president and first vice president, and advise the Bank's president and the Board of Governors on the general direction of monetary policy by recommending the Bank's discount rate -- the interest rate a Reserve Bank charges eligible financial institutions to borrow funds on a short-term basis.

The discount rate, open market operations, and reserve requirements are the three tools the Federal Reserve uses to conduct monetary policy. The primary tool is open market operations, as managed by the Federal Open Market Committee (FOMC). The FOMC is composed of the Board of Governors and five of the 12 Federal Reserve Bank presidents. The president of the Federal Reserve Bank of New York is a permanent member, and the other presidents serve one-year terms on a rotating basis. All 12 presidents participate in every FOMC discussion, but only those serving as members may vote. The actions taken by the FOMC regulate the amount of reserves available to depository institutions, set ranges for the growth of the monetary aggregates, and direct operations undertaken by the Federal Reserve in foreign exchange markets.

Responsibilities of the regional Reserve Banks have expanded considerably over the past 85 years, as have the staffing levels. The way our work is done also has changed dramatically. While a banker in 1914 was well equipped to handle a day's work with adding machines, punched card tabulators, typewriters, duplicating machines, and basic check-writing equipment, today's banker operates in an electronic world.

Reserve Banks provide banking services to both depository institutions and the federal government. For depository institutions, the Fed maintains reserve and clearing accounts and provides such payment services as processing checks, electronically transferring funds, and distributing and receiving currency and coin. Fedwire electronic transfers of funds and securities in the District now average 118,400 per day, for a dollar volume of $124 billion. Check-processing machinery, operating at speeds up to 100,000 checks per hour, handles approximately 8.9 million checks per day, six days a week.

The Federal Reserve acts as the banker, or fiscal agent, for the federal government. It maintains the U.S. Treasury Department's transaction accounts; pays Treasury checks; processes electronic payments; conducts nationwide auctions of Treasury securities; and issues, services, and redeems U.S. government securities.

As the banking system has grown, so has the supervisory and regulatory role of the Federal Reserve. Fed personnel work in conjunction with other federal and state financial authorities to ensure the financial soundness of financial institutions and the fair and equitable treatment of consumers in their financial dealings.

From its beginning as the westernmost outpost of the Federal Reserve System, the Twelfth District has grown to rank first in the size of its economy. Its 53.2 million people account for 19.7 percent of the total U.S. population, and its $1.42 trillion annual personal income accounts for 19.9 percent of the nation's total personal income. And the District continues to grow.

In 1921 an employee writing in the Bank's employee publication reflected on the Bank's first seven years of growth and predicted, "In the expansion and development of the Federal Reserve System in the years to come there will be new and interesting problems with which to wrestle. In their solution will come opportunities for all thinking men of ability, energy, and vision." The author was wrong about gender, but got the rest of it right.