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.

Creation of the system

In 1846, the Independent Treasury Act was passed. However, the following year the Whigs repealed the Act. The Whigs

Whig Party (United States)

The Whig Party was a political party of the United States during the era of Jacksonian democracy. Considered integral to the Second Party System and operating from the early 1830s to the mid-1850s, the party was formed in opposition to the policies of President Andrew Jackson and his Democratic...

 wanted to establish a new central bank, but were prevented by President Tyler

John Tyler

John Tyler was the tenth President of the United States . A native of Virginia, Tyler served as a state legislator, governor, U.S. representative, and U.S. senator before being elected Vice President . He was the first to succeed to the office of President following the death of a predecessor...

 who objected on constitutional grounds.

The Democrats won the election of 1844, and re-established the Independent Treasury System.

The Act of August 1846 provided that the public revenues be retained in the Treasury building and in sub-Treasuries 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 were to be made in either specie

Coin

A coin is a piece of hard material that is standardized in weight, is produced in large quantities in order to facilitate trade, and primarily can be used as a legal tender token for commerce in the designated country, region, or territory....

 or Treasury Notes. 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

American Civil War

The American Civil War was a civil war fought in the United States of America. In response to the election of Abraham Lincoln as President of the United States, 11 southern slave states declared their secession from the United States and formed the Confederate States of America ; the other 25...

; 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

Panic of 1907

The Panic of 1907, also known as the 1907 Bankers' Panic, was a financial crisis that occurred in the United States when the New York Stock Exchange fell almost 50% from its peak the previous year. Panic occurred, as this was during a time of economic recession, and there were numerous runs on...

, however, finally revealed the inability of the system to stabilize the money market; this led to the passage of the Federal Reserve Act

Federal Reserve Act

The Federal Reserve Act is an Act of Congress that created and set up the Federal Reserve System, the central banking system of the United States of America, and granted it the legal authority to issue Federal Reserve Notes and Federal Reserve Bank Notes as legal tender...

 in 1913, which allowed the Federal Reserve System

Federal Reserve System

The Federal Reserve System is the central banking system of the United States. It was created on December 23, 1913 with the enactment of the Federal Reserve Act, largely in response to a series of financial panics, particularly a severe panic in 1907...

 to issue Federal Reserve Notes (the powers of coining money and regulating its value were retained by the U.S. Mint and the Congress, respectively). Government funds were gradually transferred from subtreasuries to district bank

District Bank

District Bank was a British retail bank which operated in England and Wales from 1829 until its merger into the National Westminster Bank in 1970; it remains a registered company but is dormant...

s, 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.

External links

• First and Second Banks of the United States – a digital collection of the original documents related to the formation of the First (1791–1811) and Second (1816–1836) Banks of the United States, as well as documents relating to the Independent Treasury System set up after the close of the Second Bank of the United States, digitized by the Federal Reserve Bank of St. Louis.