The traditional forces rejecting a central bank were not gone however, and so Woodrow Wilson’s 1913 Federal Reserve Act represented a compromise: not a single central bank, but a central banking system with the Federal Reserve Board in Washington, D.C. and twelve regional Federal Reserve Banks, each of which initially could set its own discount rate. The position of the central Board was further curtailed by the Secretary of the Treasury as well as the Comptroller of the Currency having a seat on the Board as ex-officio members. The peculiar structure of the Federal Reserve and its decentralized decision-making process were direct results of a compromise between the interests of the urban, financial community and mostly rural groups harboring concerns about a central bank due to its dubious democratic legitimacy.
Although the Great Depression, due to its importance for 20th-century U.S. history, has been analyzed in depth by historians and economists alike, scholars nonetheless still debate the responsibility of the Federal Reserve for the crisis. But whatever the Federal Reserve’s precise role in the Great Depression, its legitimacy in the eyes of the American population suffered massively. President Franklin D. Roosevelt used this fact, and broke the Federal Reserve’s resistance to his New Deal by fundamentally reforming the Federal Reserve System. The Banking Act of 1935 turned the Federal Reserve Board into the Board of Governors and strengthened it by removing the Secretary of the Treasury and the Comptroller of the Currency from it. The central bank’s decision-making process was further centralized by investing the Federal Open Market Committee, in which the Board enjoyed a majority over the regional Federal Reserve Banks, with the sole authority over the Federal Reserve System’s monetary competencies.
Although public opinion clearly favored reforming the Federal Reserve, Roosevelt drew heavy criticism for the Banking Act of 1935. Many Americans thought the reform was headed in the wrong direction. Instead of strengthening the regional Federal Reserve banks, which had the image of being more favorable to the general public and less under Wall Street’s spell, Roosevelt had centralized the Federal Reserve’s powers in the Board. The concept of democratic legitimacy had thus played a key role during the Great Depression. It enabled Roosevelt to break the Fed’s resistance to his policy by arguing that he as the directly elected representative of the people enjoyed a higher degree of democratic legitimacy. Yet the Great Depression also highlighted the complexity of democratic legitimacy because the specifics of Roosevelt’s reform provoked a political backlash that was itself based on that very concept.