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The Independent Treasury System

While not a banking institution, the Treasury of the United States
handles its funds in such a manner and performs such functions with
reference to the currency that it has become an important part of the
banking system of the country.

Previous to 1840 the funds of the federal government were kept on
deposit in banking institutions, during the greater part of the time
in the First and Second United States banks. Friction between
President Jackson and the Second United States Bank resulted in their
withdrawal from that institution in 1834 and their deposit in selected
state banks, several of which failed and all of which suspended specie
payments during the crisis of 1837. The embarrassment which the
treasury experienced in consequence, combined with previous
unsatisfactory relations between the government and its depositories,
convinced President Van Buren that the Treasurer ought himself to keep
and to disburse the funds of the government. He made a recommendation
to this effect to Congress, which in accordance therewith enacted the
first independent treasury act in 1840. The revival of agitation for a
third United States Bank led to the repeal of this act the following
year, but in 1846 it was reenacted and with modifications has remained
upon our statute books to the present day.

In its original form this act provided for the acquisition of vaults
in certain cities, in which should be deposited the funds of the
government as soon as possible after they came into the hands of the
receiving officers, and out of which should be taken, upon drafts
issued by the Secretary of the Treasury, the money needed for the
payment of the government's obligations. It further provided that all
dues to the government in the future should be paid either in coin or
in currency issued exclusively by the government, and that all
expenses should be paid in the same forms of money.

Important modifications in this act were made during and after the
Civil War. In 1863 permission was granted the Secretary of the
Treasury to deposit in national banks funds accumulated in the
treasury, and derived from any source except duties on imports,
provided the banks selected for this purpose should deposit with him
government bonds for their security. Subsequently the discretionary
power of the Secretary in this direction was extended so that at the
present time he is authorized at his discretion to deposit in national
banks surplus funds derived from any source, trust funds alone
excepted, and to accept as security therefor other securities than
government bonds. Other laws have made national bank notes acceptable
for certain public dues, and have given the Secretary authority to
issue gold and silver certificates against gold coin and silver
dollars deposited in corresponding amounts, and to redeem United
States notes in gold coin and to keep on hand for that purpose a gold
reserve of $150,000,000.

In its operation, this independent treasury system affects the
reserves of the banks and through them their discounts and the
commerce of the country. Whenever the receipts of the government
exceed its expenditures, money accumulates in the treasury and the
reserves of the banks are diminished; and, under opposite conditions,
they are increased. The return of accumulated surplus funds to the
banks is possible when the Secretary of the Treasury decides that such
return is desirable or necessary and when the banks are able and
willing to supply the bonds demanded as security. In case a deposit is
agreed upon the funds go to a relatively small number of national
banks selected as depositories by the Secretary of the Treasury, the
amount allowed each depository also being determined by him.

Through its ability to issue gold and silver certificates, its
obligation to redeem United States notes in gold on demand, its
administration of the United States mints and assay offices and the
laws regulating the supply and distribution of subsidiary coin, the
United States Treasury cooperates with the banks in the supply and
distribution of the circulating medium of the country. The people
apply to the banks for the forms of money and currency desired and
these institutions meet the demand by means of the funds deposited
with them or by their exchange at the various subtreasuries, if the
forms of money deposited do not correspond with these demands.

Next: The Interrelations Of These Institutions

Previous: National Banks

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