Building the Bank

Building the bank: people and plant

Excerpt from Reflections from History:
The Minneapolis Federal Reserve Bank

Clarence W. Nelson
February 1973

With lines drawn and cities picked, the Reserve Bank Organization Committee turned in the spring of 1914 to its other statutory tasks under the Federal Reserve Act; among them, seeing that each Federal Reserve Bank got established as a franchised corporation, complete with stockholders, a board of directors, and a nucleus of operating personnel. From then on it would be up to the twelve banks, their directors, and the Federal Reserve Board in Washington to build the System and develop its operations according to the Congressional blueprint.

Since Congress had chosen to design the Federal Reserve Banks along the organizational lines of a private corporation, the early organizational work involved legal steps by stockholders-to-be, namely the member banks. The Organization Committee simply supervised these procedures, starting, as directed in Section 4 of the Act, with the mailing of application forms for membership to eligible banks. The Committee then proceeded to oversee that the member banks in each district (1) carried out incorporation proceedings for the district's Federal Reserve Bank; and (2) elected a board of directors to the Bank.

A word about the directors: the Act provided for nine of them for each Bank, six to be elected by the member banks of the district, and three (including the chairman) to be appointed by the Federal Reserve Board. Compromise of federal interest and regional control is evident in this arrangement. Other provisions were written into the law to insure that the bank-elected directors represented no single interest in the district: three directors (Class A) could be bankers and were to represent the banking community; three directors (Class B) had to be “actively engaged in commerce, agriculture, or some other industrial pursuit” and were to represent the commercial community. Furthermore, the voting banks were grouped according to size—small banks, electing two directors (one from each class); medium-sized banks selecting another two; and large banks, another two. Three other directors (Class C) were to be appointed by the Federal Reserve Board to represent the public at large.

Within this framework the Reserve Bank Organization Committee took steps during April 1914 to incorporate the Minneapolis Bank and elect six directors. The election was set up with the aid of an informal committee of thirty-six bankers representing the six district states. Meeting in St. Paul on April 24, the committee agreed upon a pattern of geographic representation within the district that has been observed ever since. The Bank was incorporated on May 18, 1914, and election of directors, held during the summer, resulted in the following initial slate:

Minneapolis Fed First Board of Directors
Class A:
(elected by member
banks to represent
J. C. Basset
Bank president Aberdeen,
E. W. Decker Bank president Minneapolis, Minn.
L. B. Hanna Bank president Fargo, N.D.
Class B:
(elected by member
banks to represent
credit users)
F. R. Bigelow Insurance company
St. Paul, Minn.
F.P. Hixon Lumberman LaCrosse, Wis.
N. B. Holter Hardware merchant Helena, Mont.

By October 1, 1914 selection of the board of directors of the Minneapolis Bank was finally completed with the naming of the following Class C directors by the Federal Reserve Board:

Class C:
(appointed by the Federal Reserve Board to represent the public)
J.W. Black Wholesale coal merchant Houghton, Mich.
P. M. Kerst Clearing house examiner St. Paul, Minn.
J.H. Rich* Manufacturing executive Minneapolis, Minn.
*Chairman and Federal Reserve Agent

We have already met three of the nine directors in our survey of the monetary reform movement of the National Citizens' League. John H. Rich had been president of the Minnesota chapter, Norman B. Holter had been president of the Montana chapter, and North Dakota Governor L. B. Hanna had been president of that state's chapter.

Meeting in Minneapolis for the first time on October 14 and 15, 1914, the board of directors adopted by-laws, set up an executive committee, appointed Theodore Wold chief administrative officer of the bank (with the title, “Governor”), and made other organizational decisions, largely in accord with the organizational procedures suggested by the Federal Reserve Board.

Shortly after their first meeting, the directors and officers of the Minneapolis Federal Reserve Bank joined with their counterparts in the other Federal Reserve Banks and with the Federal Reserve Board in an historic conference on October 20-22 in Washington, D.C. As a result of these meetings the decision was made that the banks would open for business in approximately five months. But, within five days, on October 26, Secretary of the Treasury McAdoo informed the banks that the opening date would have to be hastened because of the war in Europe. He instructed all banks to begin receiving payments from member banks for stock subscriptions on November 2, and to open their doors to receive and discount commercial paper on November 16. Since at that point the Minneapolis Bank had neither doors nor staff, a staggering job confronted its organizers.

In order that the Bank could begin receiving stock subscription payments, temporary offices were opened on October 28 in the directors' room of the Minnesota Loan & Trust Company at Fifth and Hennepin where Wold had held a directorship. On November 14 the Bank was notified that its organization certificate had been executed that day in Washington by John Skelton Williams, Comptroller of Currency. Now legally qualified to commence operations under the provisions of the Act, the Bank duly opened for business on November 16, 1914, in temporary quarters in the Lumber Exchange building at Fifth and Hennepin, using rented vault space in nearby commercial banks. With a tiny nucleus of personnel the Federal Reserve Bank of Minneapolis now stood ready to rediscount commercial paper for member banks of the district. Initially, the demand was light and operations were limited to a few “courtesy” borrowings by banks wishing to familiarize themselves with the new institution and to acquaint the public with the new Federal Reserve currency. But by year's end the Minneapolis Federal Reserve Bank had made a modest beginning on the great variety of functions envisioned for it in the Owen-Glass blueprint.

In mid-January of 1915 the Bank's eighteen employees and officers moved into more permanent quarters that had been leased in the New York Life building at Sixth Street and Second Avenue South. During the next two years staff and facilities of the Bank gradually increased to perform a growing number of reserve banking functions. The entry of the United States into World War I caused rapid expansion—with a peak of more than 500 employees in 1918—to meet the needs of the Treasury for war financing.

By 1919 the initial, formative era of the Minneapolis Bank's history was drawing to a close. The Minneapolis “Fed” was now a going institution with a wide array of reserve bank functions— though much was yet to be learned about central banking and many legislative changes were still to be made. The Bank had organized a full complement of departments to carry out its work, assembled a capable staff, and secured (even outgrown) workable quarters in the Minneapolis financial district.

Administrative leadership in the early years

An intriguing and sometimes puzzling aspect of the organizational blueprint for the twelve Federal Reserve Banks was an unusual “duality” of leadership. In the Minneapolis Bank, for example, authority was vested jointly in John H. Rich as federal reserve agent and in Theodore Wold as governor.

The major responsibilities of the two posts were fairly clear: the governor was placed in charge of the internal administration of the Bank as well as the conduct of its day-to-day relations with its members. The federal reserve agent was given a broader, though less well defined, “public” responsibility and was to serve as liaison between the Federal Reserve Board and the Reserve Bank.

Yet there remained undrawn (or undrawable) lines in these first organization charts. By law the federal reserve agent had an office in the Bank, and was the Board's representative at the Bank. But the Act did not make it clear just what the “supervisory” powers of the Federal Reserve Board over the banks amounted to. This ambiguity had been present in the System's architecture from the very beginning and it resulted from the need to reconcile the conflicting desires for central control and for regional autonomy. This arrangement gave rise in a few of the Reserve Banks during these early years to frictions between the federal reserve agent (interpreted by some as the more important officer in the Bank), and the governor (assumed by others to be fully in charge).

In the Minneapolis Bank a relatively smooth working relationship between the agent and the governor was established from the outset, and both of these early leaders, Theodore Wold and John H. Rich, devoted their respective talents fully to the Bank's early efforts at organization and development.

The Governor

In Governor Wold the board of directors had chosen an able administrator well versed in banking. While the Federal Reserve Bank was to have different objectives from those of the commercial banks with which Wold had been associated, its technical operations would resemble those already well developed in commercial banks. Wold, who was 46 years old when he joined the Minneapolis Federal Reserve Bank, had had twenty years banking experience in several Minnesota communities (including Elbow Lake, Little Falls, and Winona), and had been president of the Scandinavian National Bank of Minneapolis since 1910. His principal responsibility was to assemble and organize the Bank's staff, build the several departments into smoothly- working operations, coordinate the work of this Bank with that of the other Federal Reserve Banks, and to gear into the over-all operations each of the statutory reserve bank functions as they were developed or expanded. Needless to say, the great demands for Treasury financing brought on by the war severely complicated his job.

It was natural for the leaders of the Federal Reserve Banks in the early years to be drawn from management ranks of the commercial banking system, and a number of them after serving the “Fed” for a time returned to the more lucrative field of commercial banking.

Federal reserve agent: the man and the job

John H. Rich had been president of the Goodhue County National Bank of Red Wing, Minnesota, for fifteen years. On more fundamental matters, he had already demonstrated his ability to bring to the job not only a broad understanding of the problems of finance and commerce but a more compelling quality of dedication to civic duty and principle. His broad business background gave him clear and direct grasp of the businessman's side of the financial problem. He had founded the clay pipe industry that flourished at Red Wing, Minnesota, and had been its president for twenty years and mayor of Red Wing.

Late in the summer of 1911 he was persuaded by a group of Twin Cities bankers and businessmen to take over the formation and direction of the Minnesota chapter-to-be of the “National Citizens' League for the Promotion of a Sound Banking System.” Thus, at the age of 54, he turned from his business interests to embark on a new venture, dedicating himself energetically and wholeheartedly to the cause of monetary reform. By the time the Federal Reserve Act was passed, John Rich's public leadership abilities were widely recognized because of the success and support attained by the Minnesota Citizens' League.

These qualifications made John H. Rich a natural candidate for federal reserve agent. He was appointed to that post (thus also the chairmanship of the board of directors of the Federal Reserve Bank of Minneapolis) on October 1, 1914. His subsequent record in the Federal Reserve made it clear that Rich not only had dedication and vision but also that he was practical and discerning.

From the outset he understood the fundamentals of monetary reform well enough to realize that the Owen-Glass blueprint was far from perfect and that amendments to the law would be necessary before the System could be made truly effective:

After more than 60 years of debate, experimentation and discussion, there at last has been created in the United States a banking system which I do not hesitate to say places this country on a parity with the principal nations of the old world. So far as any single measure can, it satisfies the best opinion of banking experts, economists and financiers. I would not assert that it is perfect at all points or that it is not susceptible of beneficial amendment. So great a piece of constructive legislation was necessarily the product of argument and compromise. It is my sincere conviction that the Federal Reserve Act, while not yet perfect at all points, embodies all of the important principles and provides the facilities which have so long been demanded by our best financial and economic opinion in the United States...

His convictions that the Federal Reserve Bank of Minneapolis had to be guided by principle running above sectional view or special interest were summarized in the same 1915 speech:

The practical functions of the Ninth Federal Reserve bank in relation to its member banks, must be performed at all times in consideration of the nation-wide purposes which lie back of the founding of the new banking system, and cannot yield wholly to the influence of district, state or local conditions...

I wish to place great emphasis upon the public service which these banks are destined to perform. Merely to satisfy the technical requirements as indicated in the act will not entitle them to the full confidence of the public. Their purpose was not alone to make banking a safe business but to provide and guarantee safe conditions under which the business man and farmer may continue their activities...

In his role as Federal Reserve Agent during the formative years of the Bank's initial era, John Rich carried out fully the organization consultants' earlier injunction to “be a Government representative and spend his time in furthering the interests of the public at large...” And he did this by programs designed to (1) acquaint member banks with their opportunities and responsibilities under the System, (2) persuade nonmember state- chartered banks to join the System, and (3) inform the public about the nature of the System and what it would mean to them.

In his role as “public representative,” Rich had another important job—answering the inevitable criticisms of the newly established System and of the Federal Reserve Bank of Minneapolis. Direct criticisms of the Bank and its functions up to the end of the formative era in 1919 were relatively few and mild; public acceptance of the Federal Reserve, due at least in part to the efforts of John Rich, himself, was generally very good.

But in 1919 a new era of challenges and problems was beginning. Roy Young had just assumed administrative direction of the Bank after the resignation of Governor Wold. John Rich was continuing as federal reserve agent, destined to face perhaps the most rewarding and certainly the most trying portion of his Federal Reserve career.

Through the year 1919 and a part of 1920, a postwar inflation continued to rage. But by summer of 1920, prices— especially farm prices—had suddenly and drastically collapsed. The ensuing depression, which hit agriculture even harder than it hit industry, brought a nationwide clamor against the Federal Reserve. Main theme of the criticism was that the Federal Reserve Banks had pursued a deflationary policy which had in turn caused price collapse and brought on farm depression. While the facts of the case did not support the criticisms, hostility was so great that a strong and convincing defense of the System was crucial to its very survival. Most of the defense, of course, had to be made at the national level.

Yet, the Minneapolis Bank with its heavily agricultural district faced more than its share of criticism in its own back yard. Rich accepted the challenge and proceeded with eloquence and determination to explain the position and the accomplishments of the Federal Reserve Bank. To bring the case for the “Fed” to the local level, he and his staff prepared hundreds of speeches and articles, and organized a series of Farmer-Banker Conferences throughout the district.

Providing for a permanent home

During the “Second Era,” the Federal Reserve Bank of Minneapolis undertook to construct a distinctive and well designed bank building. If it seemed to be a logical, indeed even routine, next step when the process was started in 1919, this notion was to be shattered in the episodes soon to follow.

All twelve Reserve Banks were experiencing the overcrowding that resulted from wartime expansion, and, after the Armistice of 1918, the Federal Reserve Board recommended that each bank investigate construction of permanent quarters and obtain land for future construction. Congress in early 1919 provided for the financing of such construction by amending the Federal Reserve Act so as to permit the banks to increase their surpluses by 100 percent “for buildings and other purposes.”

Shortly thereafter the board of directors of the Minneapolis Bank appointed a special building committee. John Rich was named chairman, and to the project he applied his characteristic singleness of purpose. Indeed, apart from efforts to defend the public image of the “Fed,” the design and construction of the new building became John Rich's major preoccupation during his remaining years with the Bank. From the very first he was determined that the building would embody all the Bank stood for: it would have strength; it would have dignity; it would be a public monument to the people of the Ninth District. And it would be second to none in its physical serviceability.

During the closing months of 1919, the building committee purchased a tract of land at Fifth Street and Marquette Avenue, one block from its rented quarters. It selected as architect Cass Gilbert of New York, a distinguished architect who designed the Minnesota state capitol in St. Paul.

A branch at Helena

Meanwhile, the Minneapolis Bank was expanding in another direction by establishing a branch in Helena, Montana. The idea had been proposed in 1919 by the Bank's director from Montana, Norman B. Holter. Holter was prompted to make the suggestion to Chairman Rich and the other directors of the Minneapolis Bank after he learned that a number of branch banks had been set up in other districts. Formal presentation was made subsequently by a group of Montana bankers, and the plan for a Helena Branch was approved, first by the directors at their November 1919 meeting, and then by the Federal Reserve Board. 0. A. Carlson, manager of the Bank Examination Department, was named manager of the Helena Branch.

Of plans and protests

With the Helena Branch now inaugurated, the management of the Minneapolis Bank faced 1921 with high hopes: construction work on the head office building should soon get under way. But, while the Branch project had proceeded fairly smoothly, no such course lay ahead for the Minneapolis building. By 1921 prices had collapsed and sharp depression had begun. Their ardor cooled, both Congress and the public were ready to be far more critical of anything the Federal Reserve Banks did. Prime targets for criticism became the banks' building programs, many of which were by that time already committed. Responding to the mood of the times, the Federal Reserve Board, too, grew more sensitive to expenditure proposals such as that by the Minneapolis Bank.

Early in 1921, Rich and Gilbert called at the Federal Reserve Board and outlined the plans for the Minneapolis building. At that time the Federal Reserve Board raised no special objection. Full details were outlined to the Minneapolis board of directors, who, with minor questions and directives for changes, approved the general plan at their May 9 meeting. Initial contracts were negotiated to cover construction work up to street level, building permits were secured, and public announcement of the building plans was made.

The board of directors intended to let contracts for construction above street level by the end of 1921. But in late summer opposition arose from the Federal Reserve Board. Final go-ahead on the Minneapolis building was delayed nearly a year because of objections on two grounds: design and cost. This came, of course, as a hard blow to John Rich, who had conceived the structure, and to Cass Gilbert, who had spent two years in developing the design.

But they pressed their argument with the Board and with the Board's architectural consultant, Mr. Trowbridge. Gilbert presented drawings, diagrams, and a plaster scale model to illustrate the building's concept and its structural and architectural details. The Board feared that cost per cubic foot for the seemingly elaborate Minneapolis plan would be too high compared with cubic footage costs of other Federal Reserve Banks.

By January 1922, strong attacks were being made on the Federal Reserve both in and out of Congress. Some of the criticism was specifically directed at the current building programs—especially that of the New York Federal Reserve Bank. Among proposals introduced into Congress was the Harris Bill, which would have required express Congressional consent for any building construction in excess of $250,000 by a Federal Reserve Bank.

When January 17 came around, Senator Glass made his historic defense of the Federal Reserve before the Senate. He defended the System in general, and specifically justified the Federal Reserve building programs as necessary and economical.

The Harris amendment passed, and although its provisions did not apply to any building actually under construction, it did nonetheless represent a kind of mandate to the Board to scrutinize minutely any proposed expenditures. Little else could be done in the Minneapolis case but scale down the proposed structure.

Thus, with some modifications, John Rich's dream of a Federal Reserve Bank building embodying the essentially fortress- like character and neoclassical design that he had admired in the Bank of England, now stood approved in Washington. New bids were obtained on the revised plans, and the Minneapolis board of directors finally approved the revised building program on May 22, 1922, with only minor reservations. Estimated cost including land was slightly more than $3 million. With no major obstacles remaining construction began in September 1922.

On April 9, 1923 the cornerstone was laid. Exterior structural work was almost completed by the end of 1923, another year being required to complete the interior.

These few episodes about men and materiel have spanned only the initial decade of the Federal Reserve Bank of Minneapolis. Yet within that decade, the Bank—expanded to offer a full range of departmental services at its two geographic sites—had “come of age.” From then on it was a process of building upon that which had already been established.