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.