It was November 1914 when the Federal Reserve Bank of San Francisco first opened its rented office in the back of the old Merchants National Bank. The Federal Reserve Act of 1913 called for the establishment of 12 Federal Reserve Banks throughout the nation in order to create a more stable and secure financial system. But how did San Francisco become the headquarters of the massive Twelfth Federal Reserve District? The Gold Rush, the 1906 Earthquake, San Francisco’s natural assets, and financial panics that make the Great Recession of the 21st century look like a blip—all of these contributed to San Francisco’s evolution as the top candidate to serve as district headquarters.
After The Gold Rush – Financial Panics and Instability
In the 50 years leading up to that November day, gold and currency accumulated in San Francisco for a variety of reasons. There was the Gold Rush, of course, and silver mining, which literally pulled money out of the earth and into San Francisco’s banks. But more important, these resource discoveries led to population growth in the Western states – from 1.3 million people in 1880 to 7 million in 1920 – which led in turn to the development of robust agricultural and manufacturing economies. The preponderance of single men with few dependents in the new population meant per-capita income was among the highest in the country.
The nation, of course, already had a banking system, but it consisted of independent state and national banks without a central structure to connect or supervise them. These banks were vulnerable to “runs” or “panics,” when individuals lost confidence in the bank and rushed to withdraw their funds, overwhelming the amount of cash that banks kept on hand and causing chains of bank failures.
Isolated from the established banking system in the East, the West built up its own capital and developed its own network of banks, centered in San Francisco. San Francisco banks acted as correspondents for banks located in the economic hinterlands, clearing checks, holding reserves, and negotiating loans and deposits. When the Panic of 1893 hit, this isolation proved protective; lacking connections to Eastern banks, Western institutions weathered the panic well.
But then came the Panic of 1907, and the Western region did not emerge unscathed. In fact, San Francisco may have had a central role in causing that panic, according to recent economic research. After the 1906 earthquake destroyed half the city, payments from British insurers caused a massive flow of gold from Britain to the United States, kicking off a chain of events that led U.S. manufacturing output to plummet by 40 percent and the economy to fall into a disastrous financial crisis. The Panic of 1907 swayed public opinion in favor of a central bank.
Over the next several years, reformers pushed for the creation of a central banking system to avoid future panics by increasing bank supervision and creating a more interlinked, sophisticated system that could respond to the needs of the nation’s developing economy.
The Federal Reserve Act – San Francisco Emerges as the Financial Center of the West
President Woodrow Wilson signed the Federal Reserve Act in 1913, creating a semi-centralized banking system, with the activities of each district grouped around its own Federal Reserve Bank. San Francisco was an obvious candidate for Western headquarters as it had already emerged as the Pacific center for export and trade because of its excellent natural harbor and easy coastal and river access to the agricultural and natural resource riches of the West. Its trade ties to other nations, notably Great Britain, had led to San Francisco’s development as a financial center. San Francisco was not the only candidate for Twelfth District headquarters; Portland and Seattle also applied. Participants from these two cities also proposed creating a separate district for the Pacific Northwest, arguing that the West’s northern states traded little with the southern states because of geographical barriers, and that they had established their own thriving ports and railroad links to the rest of the country. These efforts were unsuccessful because national banks in the Pacific Northwest were insufficient in size and number to meet capital requirements necessary to become headquarters or form their own district. Bankers in this region then threw their support behind San Francisco as District headquarters.
The Twelfth District was thus established, with its headquarters in San Francisco and serving the states of Arizona, California, Idaho, Nevada, Oregon, Utah, and Washington. It is the largest of the 12 districts in terms of population, economic and geographic size. Since the Twelfth District bank spanned vast distances, the Board of Governors of the Federal Reserve System also established branches. In 1917, the Spokane, Seattle, and Portland branches opened their doors, followed by the Salt Lake City branch in 1918, and the Los Angeles branch in 1920. Although the Spokane branch closed in 1938, all other branches remain today, including a cash processing facility in Phoenix. In addition, the San Francisco Fed now also serves Alaska, Hawaii, American Samoa, Guam, and the Commonwealth of the Northern Mariana Islands.
The Banking Act of 1932 – Evolution of the Federal Reserve System
At first, the 12 Federal Reserve Banks exercised more autonomy than they do today, setting their own loan discount rates to control the flow of credit in their districts. Sometimes the banks coordinated their efforts, but sometimes rates varied considerably from one district to the next. After the Great Depression, which was seen as stemming in part from the diffuse authority within the Federal Reserve System, the Banking Act of 1935 centralized monetary policy in the Board of Governors and the new Federal Open Market Committee (FOMC), with its 12 members, consisting of the Board of Governors, the president of the New York Fed, and a rotating group of four Reserve Bank presidents. At the same time, the system retained its decentralized network of 12 Federal Reserve Banks located throughout the country, which carried out much of the day-to-day operations of the system. This is the structure within which the Federal Reserve Bank of San Francisco works today.
The Federal Reserve Bank of San Francisco has come a long way from its beginning as a group of fewer than 25 employees in rented quarters. Today a staff of 1,705 work for the Federal Reserve Bank of San Francisco.