war ” in successfully paying all domestic and military obligations , he further recognized the Sub-Treasury ’ s knack for managing the inflow of hard currency . Noting that $ 24 million in coin had been received by the Sub-Treasury ( substantially more than had ever been deposited ), Walker commented that “ instead of being converted into bank issues , [ it ] has been made to circulate directly .” To the Secretary this served , “ to a great extent , as a currency among the people .” The implication was that if banks had continued serving as government depositors , they would have distributed substantial amounts of paper currency that could have , most assuredly , led to inflation .
Economic studies have shown that the Mexican-American War proved a boon to US trade , adding to government coffers despite the presence of a Sub-Treasury . However , some financial historians deem the Treasury ’ s role indispensable . Chroniclers have noted that it contributed to no disruptions in the money market during the conflict with Mexico , while floating three major loans to finance the war .
For example , David Kinley opined in his 1910 publication , The Independent Treasury of the United States , that “ the Government had a beneficial influence on the currency by restraining bank issues .” He maintained that had federal monies been deposited in banks they would have , “ made it the basis of further issues of notes , forcing up prices and leading to an export of specie .” Kinley displayed consensus with Secretary Walker ’ s observation made some decades prior .
As a precursor to the Federal Reserve , the Independent Treasury , through its ability to issue and limit the circulation of Treasury “ notes ,” functioned as a central bank . Critics of the Treasury ’ s note usage opined that the Secretary of the Treasury would , as put by New York Whig Congressman W . S . Miller , “ hold in his hands the destinies of the trading community .” He also chastised proponents of the Sub- Treasury who pretended to adopt the idea of a metallic currency backed “… the actual issue of mere government paper .” Yet political and economic conditions would compromise the effectiveness of the Sub-Treasury System , allowing it to sometimes constrict bank lending activity when it needed to expand . Furthermore , the exigencies of the Civil War requiring substantial tax revenues and the ability to borrow from private banks challenged
Message from President John Tyler titled , “ Objections to the Bill to Incorporate the Fiscal Bank of the United States ,” 1841 .
the idea of a “ divorce ” between state and federal depositories .
A tax proposal by Congress in 1861 to raise $ 20 million also suggested the Treasury should deposit funds in private banks , presumably to deter the liquidity shortages banks could experience . However , Secretary of the Treasury Salmon P . Chase ignored their demand and continued the practice of the Sub-Treasuries collecting and paying specie . Nevertheless , when the Secretary requested that banks loan the Treasury $ 150 million to cover its operations , bankers stipulated ( for solvency purposes ) to hold government funds in their vaults . Furthermore , they requested as a condition for the loan that the Treasury cease issuing government notes redeemable at their banks . In essence , this would drain their reserves ( coin ).
Library of Congress
42 FINANCIAL HISTORY | Winter 2024 | www . MoAF . org