Economics and Politics in Selecting Federal Reserve Cities : Why Missouri Has Two Reserve Banks

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