The Independent Treasury System was a system for the retaining of government funds in the United States Treasury and its subtreasuries, independently of the national
banking and financial systems. In one form or another, it existed from 1846 to 1921.
Origins of the system
After President Andrew Jackson
vetoed the bill to recharter the Bank of the United States, he transferred (1833) government funds from the bank to state banks
(the “pet banks”). Those banks, however, used the funds as a basis for speculation, which was already rampant and was soon to be
further increased by the distribution of the federal surplus among the states. The situation was brought to a head by Jackson’s
issue of the Specie Circular (1836), which led to a drain on the “pet banks” and their
collapse in the Panic of 1837. President Martin Van
Buren then proposed that an independent treasury be set up that would be isolated from all banks. The proposal met
considerable opposition and failed to pass the House of
Representatives in 1837 and again in the sessions of 1837–38 and 1838–39.
Creation of the system
In 1840 legislation the Independent Treasury Act was passed and approved by the President; however, the following year the
Whigs repealed the law. The intention of the Whigs was to establish a new
central bank, but the objections of President John Tyler on constitutional grounds prevented
the creation of another Bank of the United States. The Democrats won the
presidential election of 1844, and measures were inaugurated to restore the Independent Treasury System.
The act of August 1846, provided that the public revenues be retained in the Treasury building and in subtreasuries in various
cities. The Treasury was to pay out its own funds and be completely independent of the banking and financial system of the
nation; all payments by and to the government, moreover, were to be made in specie. The separation of the Treasury from the
banking system was never completed, however; the Treasury’s operations continued to influence the money market, as specie
payments to and from the government affected the amount of hard money in circulation.
Problems and its demise
Although the independent Treasury did restrict the reckless speculative expansion of credit, it also tended to create a new
set of economic problems. In periods of prosperity, revenue surpluses accumulated in the Treasury, reducing hard money
circulation, tightening credit, and restraining even legitimate expansion of trade and production. In periods of depression and
panic, when banks suspended specie payments and hard money was hoarded, the government’s insistence on being paid in
specie tended to aggravate economic difficulties by limiting the amount of specie available for
private credit.
The most serious weaknesses in the system were revealed during the Civil War;
under the pressures created by wartime expenditures, Congress passed the acts of 1863 and 1864 creating national banks.
Exceptions were made to the prohibition against depositing government funds in private banks, and in certain cases payments to
the government could be made in national bank notes.
After the Civil War, the independent Treasury continued in modified form, as each administration tried to cope with its
weaknesses in various ways. Secretary of the Treasury Leslie M. Shaw (1902–7) made many
innovations; he attempted to use Treasury funds to expand and contract the money supply according to the nation’s credit needs.
The Panic of 1907, however, finally revealed the inability of the system to stabilize the
money market; agitation for a more effective banking system led to the passage of the Federal Reserve Act in 1913. Government funds were gradually transferred from subtreasuries to district banks, and an act of Congress in 1920 mandated the
closing of the last subtreasuries in the following year, thus bringing the Independent Treasury System to an end.
References
- See D. Kinley, The History, Organization, and Influence of the Independent Treasury of the United States (1893, repr.
1968) and The Independent Treasury of the United States (1910, repr. 1970);
- D. W. Dodwell, Treasuries and Central Banks (1934)
- P. Studenski and H. Krooss, Financial History of the United States (1963).
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