subtreasury n : a subordinate treasury or place of deposit
The Independent Treasury 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 systemAfter 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 systemIn 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the Independent Treasury Act was passed and approved by the President; however, the following year the Whigs repealed the law.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.
Although President Madison gave lectures in the senate concerning the descrepensies of the proposed act, it passed with the support of both the senate and the house. 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 demiseAlthough 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; this led to the passage of the Federal Reserve Act in 1913, which allowed the Federal Reserve Bank , a private corporation, to coin money and regulate the value of the common currency. 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.
- 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).