Independent Treasury System

Independent Treasury System,

Origins of the System

After President Andrew JacksonJackson, Andrew,
1767–1845, 7th President of the United States (1829–37), b. Waxhaw settlement on the border of South Carolina and North Carolina (both states claim him). Early Career

A child of the backwoods, he was left an orphan at 14.
..... Click the link for more information.  vetoed the bill to recharter the Bank of the United StatesBank of the United States,
name for two national banks established by the U.S. Congress to serve as government fiscal agents and as depositories for federal funds; the first bank was in existence from 1791 to 1811 and the second from 1816 to 1836.
..... Click the link for more information. , 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 BurenVan Buren, Martin,
1782–1862, 8th President of the United States (1837–41), b. Kinderhook, Columbia co., N.Y. Early Career

He was reared on his father's farm, was educated at local schools, and after reading law was admitted (1803) to the bar.
..... Click the link for more information.  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legislation for an independent treasury was passed and approved by the President; however, the following year the Whigs repealed the law.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 TylerTyler, John,
1790–1862, 10th President of the United States, b. Charles City co., Va. Early Career

Educated at the College of William and Mary, he studied law under his father, John Tyler (1747–1813), governor of Virginia from 1808 to 1811, and was
..... Click the link for more information.  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 Aug., 1846, provided that the public revenues be retained in the Treasury building and in subtreasuries (see subtreasurysubtreasury.
After President Andrew Jackson vetoed (July 10, 1832) the bill to recharter the Second Bank of the United States, the deposits were removed and placed in state banks that came to be called Jackson's "pets.
..... Click the link for more information. ) 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.

Bibliography

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).