The Independent Treasury (IT) 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
The Democrats won the election of 1844 and re-established the Independent Treasury System in 1846.
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 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 expansion of credit, it also posed a new set of economic problems. In periods of prosperity, revenue surpluses accumulated in the Treasury, reducing hard money circulation, tightening credit, and restraining inflation 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 act of 1863 and act of 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 (1902–1907) 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 System 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 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).
- H.A. Scott Trask, Ph.D.,The Independent Treasury: Origins, Rationale, and Record, 1846–1861 Kurzweg Fellow, Von Mises Institute, Presented at the Austrian Scholars Conference, March 2002 pdf
- 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.