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Home -> Orville Marcellus Powers -> Commerce and Finance -> Chapter XXVI

Commerce and Finance - Chapter XXVI

1. Chapter I

2. Chapter II

3. Chapter III

4. Chapter IV

5. Chapter V

6. Chapter VI

7. Chapter VII

8. Chapter VIII

9. Chapter IX

10. Chapter X

11. Chapter XI

12. Chapter XII

13. Chapter XIII

14. Chapter XIV

15. Chapter XV

16. Chapter XVI

17. Chapter XVII

18. Chapter XVIII

19. Chapter XIX

20. Chapter XX

21. Chapter XXI

22. Chapter XXII

23. Chapter XXIII

24. Chapter XXIV

25. Chapter XXV

26. Chapter XXVI

27. Chapter XXVII

28. Chapter XXVIII

29. Chapter XXIX

30. Chapter XXX

31. Chapter XXXI

32. Chapter XXXII

33. Chapter XXXIII

34. Chapter XXXIV

35. Chapter XXXV

36. Chapter XXXVI

37. Chapter XXXVII

38. Chapter XXXVIII

39. Chapter XXXIX

40. Chapter XL

41. Chapter XLI

42. Chapter XLII

43. Chapter XLIII

44. Chapter XLIV

45. Chapter XLV

46. Chapter XLVI

47. Chapter XLVII

48. Chapter XLVIII

49. Chapter XLVIX

50. Chapter L

51. Chapter LI

52. Chapter LII


As before related, President Jackson removed the government
funds from the United States Bank in 1833, and placed them in
various state banks, located in various parts of the country,
on the plea that the bank was unsafe. .This he did, not by
actually removing the money, but by a process which resulted
the same depositing all fresh receipts of cash in the state
banks and drawing all government warrants for payments of
money against the balance in the United States Bank until that
balance was exhausted. Prior to this time the government
had kept its funds in its own banks, or those which it virtually
controlled, with the exception of an interval of five years (1811-
1816) between the expiration of the charter of the First and
the formation of the Second United States Bank. These gov-
ernment banks had, during a period of nearly forty years (1789
to 1811 and 1816 to 1833) performed two highly useful and
important functions in connection with the financial system of
the country they had acted as the fiscal agent of the govern-
ment in collecting and disbursing the public revenues, and they
had maintained a uniform standard of value in
the^Jposits the m o n ey of the country. During the period
(1811 to 1816) when there was no government
bank as a "regulator of the currency" the people suffered severely
through the uncertainty of credit and the effects of a depreciated
and fluctuating currency. It was political strife that brought
about the removal of these deposits, and not economic reasons.
The state banks at that time were generally conducted with the
utmost disregard for not only safe banking methods, but very



frequently 'the principles of honesty as well. They were so far
removed from the direct control of the government that the
finances of the country, when dependent upon them, were left in
a state of uncertainty and demoralization. To make matters
worse the treasury department on September 26, 1833, followed
up the transfer of its deposits by issuing a circular to the deposit
banks in which occurred the following statement: "The deposits
of public money will enable you to afford increased facilities to
commerce, and to extend your accommodations to individuals."
Acting upon the hint, the banks loaned out the government
deposits, the era of speculation set in, the state banks inflated
their currency with greater issues of bank notes, and things ran
riot until the culmination was reached in the panic of 1837.
Nearly all the banks failed. They held $32,000,000 of govern-
ment deposits, a large portion of which was lost.

It then became apparent that the government must keep its
money in its own vaults. Two attempts had been made at the
policy of entrusting them to the state banks (1811-1816 and
1833-1837) and both had proven disastrous. Van Buren was
the president. He was the political heir of General Jackson,
and owed his election largely to the influence of the latter. Ac->
cordingly he shared General Jackson's antagonism to a United
States Bank, and was averse to chartering a third bank, and
yet there was no means available for the safe keeping of the
government funds or the establishment of a stable and uniform
currency except for the government to undertake the matter
Establishment itself . After several years of weary dissensions and
enf^wu P ry nd " wrangling in which the great leaders, Webster,
system Clay, Calhoun and others, participated, in speeches

of the power and brilliancy which usually characterized these
eminent orators, the independent treasury, sometimes called the
sub-treasury system, was worked out, and in August, 1846,
became a law. Thus was begun the policy of the independence
of the government from the banking system of the country. The


"divorce of bank and state" advocated by Jackson and urged
by Van Buren had become a fact under Polk. Whatever objec-
tion there may be to the independent treasury system at the
present time, its establishment in 1846 was probably the best
way out of a difficult and perplexing situation.

The law begins by defining the treasury as follows: "The
rooms prepared and provided in the new treasury building, at the
seat of government, for the use of the Treasurer of the United
States and his assistants and clerks, and occupied by them, and
also the fire-proof vaults and safes erected in said rooms for the
keeping of the public moneys in the possession and under the im-
mediate control of said treasurer, and such other apartments as
are provided for in this act as places of deposit of the public
money, are hereby constituted, and declared to be, the treasury
of the United States." Branches or sub-treasuries were pro-
vided for in the law, to be established in New York, Phila-
delphia, Boston, New Orleans, Charleston and St. Louis, each
under the immediate direction of an assistant treasurer. The
places selected for the location of sub-treasuries were cities in
which the government was presumed to have extensive trans-
actions, either as ports of foreign commerce, or, as in the case
of St. Louis, a convenient point for the sale of the vast domain
of government lands. These were the cities in which the
government deposits had been kept, principally, in the state

The Independent Treasury Act further provided "That the
treasurer of the United States, the treasurer of the mint of the
United States, the treasurers and those acting as
such of the various branch mints, all collectors of
the customs, all surveyors of the customs acting
also as collectors, all assistant treasurers, all receivers of public
moneys at the several land offices, all postmasters, and all public
officers of whatsoever character be and they are hereby required
to keep safely, without loaning, using, depositing in banks, or


exchanging for other funds than as allowed by this act, all the
public money collected by them, or otherwise at any time placed
in their possession or custody." Thus the purpose of the act
clearly was a complete separation of the government finances
from the banking system of the country. Even though the sub-
treasurers and collectors in various parts of the country may
not at first have been provided with suitable vaults or safes
for the safe keeping of the public money, nevertheless they were
expressly prohibited from depositing in the banks. Taken in
connection with the law authorizing the emission of treasury
notes* as currency, the independent treasury and its branches
became in effect a gigantic bank.

One of the most important features of the Independent Treas-
ury Act was the special clause which required all payments of
public dues and also all disbursements to be made in gold or
silver coin or treasury notes, and all exchanges of funds to be
made upon a gold and silver basis. This clause placed the
country on a specie basis, and kept up a specie circulation which
gave a sound basis to the whole country. All customs, the pro-
ceeds of the sale of public lands and other public dues were paid

in gold, silver or treasury notes, and all disburse-
specie clause mcnts f or salaries of government officials, public

improvements and expenses of the Mexican War
were paid in the same. The Independent Treasury system had a
beneficial effect by restraining the issues of state bank currency.
Considerable difficulty was experienced in transferring funds
from one depository or sub-treasury to another without the aid
of the banks, necessitating the movement of the actual money in
many instances, involving both expense and risk, but a system
of drafts was adopted that worked well.

*Treasury notes were first issued during the years 1812-13-14-15 as a
means of carrying on the war against England. They were again issued
during the panic period, 1837-1843, and again during the Mexican War,
1846-1847. They were usually in denominations of $100, payable to order,
and bore interest.


The Independent Treasury system seemed to meet every re-
quirement. The Mexican War had been financed successfully by
the government issuing $20,000,000 of interest-bearing treasury
notes at par and contracting a $28,000,000 loan, its bonds com-
manding a premium. Business was good. Foreign commerce
had increased and the fiscal machine^ of the new system
seemed to do its work with little friction. In his report of
December, 1856, the Secretary of the Treasury declared "that the
independent treasury, when over trading takes place, gradually
fills its vaults, withdraws the deposits, and, pressing the banks,
the merchants and the dealers, exercises that temperate and
timely control which serves to secure the fortunes of individuals
and preserve the general prosperity." He thus believed that the
Independent Treasury would act as a check on over trading and
a balance wheel to our commercial prosperity a prediction
which has not been altogether verified by time and experience.

The great crisis in our history, which occurred in 1861,
changed the executive officers of the government and placed at
the helm a class of men who were the political descendants of
the old Whig party, of which Webster and Clay were leaders.
Lincoln and Chase were not so particular to maintain the com-
plete separation of the Treasury from the banking system, and as
the exigencies of a great war confronted them, they turned at
once to the banks for loans. Between the panic of 1857 and the
outbreak of the war the country had been prosper-
The War crisis ous, and the banks had accumulated a strong
specie reserve, while the expenditures of the gov-
ernment during this time had exceeded the revenues and left
the treasury empty, the deficit having been met by bond issues
amounting to $90,000,000. The government needed gold and
the banks had large quantities of it. Accordingly Secretary Chase
in July, 1861, applied to the banks for a loan of $50,000,000.
This was the first friendly act or overture made to the banks
since the "divorce of bank and state" in 1846. It was the first


step away from the principle on which the Independent Treas-
ury was founded the complete separation of the Treasury from
the banking system of the country. Between August 19 and
November 19, 1861, Secretary Chase borrowed over $140,000,000
from the banks.

Loaning their gold reserve to the government, the banks
were unable to redeem their notes, and in December, 1861, were
forced to suspend specie payment. Being sorely pressed for
funds with which to carry on the war, the government had issued
large volumes of "greenbacks/' which by a legal provision were
forced upon creditors. Not having a reserve sufficient to support
suspension ^ s P a P er circulation, on January 6, 1862, the
of specie government also suspended specie payments. Thus

the "specie clause," one of the most pronounced
features of the Independent Treasury Act, was made of no effect.

Next came the National Banking Act, by which the banking
system of the country was linked to the Treasury Department,
to be controlled by it. Banks were made depositories of public
funds and authorized to act as financial agents of the government
in receiving subscriptions to government loans and the collection
of internal revenue taxes. So close was now the relation be-
tween the banks and the treasury that the law of 1846 had be-
come practically a dead letter, and the very purposes for which
closer Relation the independent treasury system was established
Treaty and separation from the banks and the maintenance
the Banks of specie payments were both abandoned owing to

the stress of circumstances. By the same act which formed the
national banks the state bank currency was driven out of circula-
tion and the issues of the national bank notes were regulated
and controlled by the treasury. These banks aided the Treasury
in placing and carrying the immense loans necessary to maintain
the armies and fleets in active service for four years. It would
indeed have been very difficult if not impossible for the govern-
ment to carry the war through to its close without the aid and
co-operation of the banks.


The close connection between the Treasury and the banks,
brought about by the exigencies of a great war, have continued
to the present time, and even grown stronger and more intimate
as the financial operations of the government have expanded in
recent years. In 1879 the sub-treasury at New York became a
member of the bank clearing house. This connection with the
banks proved to be very important and valuable
to ^ ne government just prior to and during the
period of the resumption of specie payment, in
1879, for it relieved the sub-treasury of the necessity of making
coin payments to any large extent, since the clearing house
agreed to accept legal tender notes in payment of all balances
due from the government to the associated banks. Indeed, if
the Treasury had attempted the resumption of specie payments
at that time without the aid and co-operation of the banks, it is
almost certain that the attempt would have proven a failure
because the banks held the chief supply of gold. Since the
resumption of specie payments the policy of the government
with reference to the Treasury has remained practically un-
changed to the present time. Upon the Treasury depends the
stability of our entire financial system, and upon this largely
depends the prosperity of the nation.

Having now sketched briefly the history of the Independent
Treasury system, we shall proceed to examine into its character
and organization. The Treasury is the agency whereby the
financial operations of the government are carried on. It is the
means by which a uniform standard of value is given to our
currency, a system of coinage is maintained, our banking system
is controlled, and the revenues of the government
are collected and disbursed. The Independent
Treasury consists of the Treasury Department at
Washington and nine sub-treasuries, located in Baltimore, Bos-
ton, Chicago, Cincinnati, New Orleans, New York, Philadelphia,
San Francisco and St. Louis. In addition to these the govern-


inent has established at various places, where there are no sub-
treasuries, depositories for the receipt and payment of govern-
ment funds.

The United States Treasury holds a reserve of $150,000,000
gold for the purpose of maintaining the credit of the govern-
ment and establishing confidence in its ability to redeem its
paper currency in specie on demand. This reserve supports
obligations equal to nearly ten times its amount, so great is the
faith of the people in the ability and integrity of the government.
The outstanding obligations of the government, which rest in
whole or in part upon this reserve, and are kept on a par with
gold by it, amounted on December 31, 1902, to $1,375,347,166,
as follows:

United States notes (greenbacks) $343,783,541

National bank notes 371,552,495

Silver coin (standard silver dollars) 78,700,912

Silver coin (subsidiary) 93,082,863

Silver certificates 463,304,840

Treasury notes of 1900 24,922,515

Not only are all forms of money in the United States main-
tained upon a uniform gold basis and made interchangeable by
the redemption system of the government, thus causing $1,375,-
347,166 in credit money to circulate as the equivalent of gold, but
the Treasury is constantly redeeming the currency presented to it,
and issuing new bills instead, thus freeing the paper circulation
from old and tattered bills. The government also receives de-
posits of gold coin or bullion and issues certificates against these
in equal amount. Of these there were outstanding on July 1,
1901, $247,036,359, representing that amount of gold in the
vaults of the Treasury.

The business of the nine sub-treasuries consists in receiving
deposits from collectors of customs in the ports of entry, in-
ternal revenue officers, national banks for their annual tax, post-
masters for account of the post office department, also patent


fees, deposits for transfer to other points by banks or other cor-
porations and individuals. The payments consist of pensions to
soldiers and their widows, and the warrants or checks of dis-
bursing officers such as paymasters, quartermasters and others.
All mutilated currency such as United States notes
or bank bills that have become unfit for circula-
tion, are replaced at the sub-treasury free of
charge. United States notes are redeemed in gold, and one
kind of money is exchanged for another. Gold certificates are
issued for deposits of not less than twenty dollars of gold coin.
Silver certificates are issued for silver dollars, and vice versa.
Thus the sub-treasury is a money-receiving, money-paying and
money-exchanging establishment. Its accounts are balanced at
the close of each day and a summarized statement of the day's
business is forwarded to Washington.

Some of our ablest financiers and students of the subject are
now criticising and condemning the Independent Treasury sys-
tem, on the ground that it interferes with the normal operation of
the business interests of the country. The principal objection
lies in the fact that it locks up in the sub-treasuries large
volumes of money in the form of customs at certain times or
seasons, thus contracting the money in circulation, when the
business interests of the country may require all the circulating
medium. Prof. David Kinley, in criticising the system, says:
"The action of the Independent Treasury is such as to vary the
amount of money in circulation. At one time it absorbs, at
another disburses, considerable sums. There is nothing in the
nature of the sub-treasury that makes its receipts and payments
necessarily concomitant with a free and stringent condition of
the money market respectively." Its action is independent of
the money market. Were it possible that the Independent Treas-
ury could absorb and withhold funds when not needed in busi-
ness channels, and disburse it freely when business interests
required a larger circulating medium; it would afford elasticity


to the currency and prove a great benefit, but unfortunately it is
liable to act in exactly the opposite direction, and thus aggravate
the money stringency. Then the Secretary of the Treasury must
needs go outside of the law and use his prerogatives to assist
the financial interests of the country by the purchase of bonds
so as to release some portion of the money in the Treasury for
general circulation and use.

By withholding money from circulation as the Treasury
does at times, the effect is to lower prices of commodities gen-
erally, and at other times large disbursements by the Treasury
tend to raise prices by making money more plentiful, thus in both
instances unsettling values, to a slight extent. The remedy
advocated is to abolish the sub-treasuries and deposit the govern-
ment funds with the national banks, where it can be used in the
channels of trade and commerce.

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