for release on delivery 4 : 30 p. m. edt march 28, 2017 america ’ s central bank : the history and structure of the federal reserve remarks by jerome h. powell member board of governors of the federal reserve system at the west virginia university college of business and economics distinguished speaker series morgantown, west virginia march 28, 2017 i am delighted to have this opportunity to speak at west virginia university. thanks to brian cushing for inviting me here today. 1 gathered in this part of west virginia, we are located in the fifth federal reserve district, which stretches down from here to south carolina and east to the atlantic ocean ( figure 1 ). more than 100 years ago, the organizers of the federal reserve system divided the country into 12 of these districts, each with its own federal reserve bank. together, the board of governors in washington and the 12 reserve banks are the key elements of the federal reserve system. today i will discuss how the federal reserve came to have this unique structure. the fed ’ s organization reflects a long - standing desire in american history to ensure that power over our nation ’ s monetary policy and financial system is not concentrated in a few hands, whether in washington or in high finance or in any single group or constituency. rather, americans have long desired that decisions about these matters be influenced by a diverse set of voices from all parts of the country and the economy. the structure of the federal reserve was designed to achieve this broad representation and promote a stronger financial system to build resiliency against the sort of periodic financial crises that had repeatedly damaged the country in the 19th and early 20th centuries. this structure was forged from compromise ; the result of that compromise was a vitally needed central bank whose decisions take into account a broad range of perspectives. my remarks today reflect my own views and not necessarily those of the board of governors of the federal reserve system or the federal open market committee. - 2before the federal reserve the question of how to structure our nation ’ s financial system arose in the early years of the republic. in 1791, congress created an institution known as the bank of the united states, often considered a forerunner of the federal reserve. the bank was created in part to assist the federal government in its financial transactions, a typical responsibility of central banks at that time. it was also designed to help america ’ s financial system meet the needs of a growing economy - - the same purpose behind the founding of the federal reserve more than 100 years later. the most

##ity to the system. central banks have a particularly important role in avoiding or mitigating extreme demands for liquidity during financial crises. they do this by making loans to solvent financial institutions so they can meet their liquidity demands and avoid forced sales of their assets. these ideas about central banks ’ lending role were developed over the course of the 19th century but not yet implemented in the united states, which at the time remained without a central bank. 8 by the beginning of the 20th century, the united states was behind the game. relative to the rest of the world. as a result, interest rates on american commercial paper ( a key rate affected by international financial conditions ) rose following poor harvests, stock and bond prices fell, and deposits flowed out of the new york banking system. industrial production decreased as well, with a lag. this set of effects created tight financial conditions of the sort that could lead to financial crises. ( see christopher hanes and paul w. rhode ( 2013 ), “ harvests and financial crises in gold standard america, ” journal of economic history, vol. 73 ( march ), pp. 201 - 46. ) other scholars focus on business cycle downturns as creating conditions favorable to financial crises, as depositors viewed the downturns as affecting the solvency prospects of their banks, leading to withdrawals and panics. ( see gary gorton ( 1988 ), “ banking panics and business cycles, ” oxford economic papers, vol. 40 ( december ), pp. 751 - 81. ) see walter bagehot ( [ 1873 ] 1897 ), lombard street : a description of the money market ( new york : charles scribner ’ s sons ). - 6the final catalyst leading to the creation of the federal reserve was the severe panic of 1907, which caused inflation - adjusted gross national product to decline by 12 percent, more than two times the decline recorded during the great recession of 2007 to 2009. 9 after the panic ended, there was a broad sense that reform was needed, although consensus on the exact nature of that reform was elusive. some called for an institution similar in structure to the bank of england at the time, with centralized power, owned and operated by the banking system. some wanted control to be lodged with the federal government in washington instead. others proposed that power be distributed to regional bodies with no central or coordinating board. still others resisted any sort of central bank. 10 this debate reflected the many and diverse interests