Chase ’ s refusal to compromise forced the banks into funding the loan ; military setbacks exacerbated the problem , since the Treasury had little money to repay the banks . With the government continuing to issue Treasury notes to finance the war and the public using the notes for legal tender , lending suffered . The public hoarded gold ; consequently , banks had fewer specie deposits for lending and could not count on the Treasury for repayment . The shortfall in loan volume and dearth of bank capital brought on by the Treasury ’ s insistence on the usage of hard currency highlighted a material flaw of the Sub-Treasury system . However , the Secretary ’ s proposal for a national banking system would , though indirectly , further erode this “ divorce ” between state banks and the feds . The National Bank Act of 1863 — proposed by Secretary Chase in late 1862 — created the first national bank regulator ( Comptroller of the Currency ) and a nationwide currency ( national bank note ), while permitting nationally chartered banks to serve as depositories for government funds other than customs dues . By allowing banks to hold federal deposits , the act recognized the efficacy of having the Treasury play a more active role in the economy .
Subsequent to this policy modification , the Treasury had even greater influence over the economy throughout the late 19th century . With the passage of the Bland- Allison Act of 1878 , it began purchasing $ 2 to $ 4 million of silver per month as a means of stimulating the money supply .
At times , the outflow of gold — with increased imports — witnessed the Treasury holding more silver , yet it remained steadfast by ensuring the public that banks would accept silver for deposit . Committed to the gold standard but recognizing the popularity of silver , the Treasury soon permitted the circulation of silver currency or “ silver certificates .” To further reassure the public , the Treasury under the Sherman Silver Purchase Act of 1890 increased the amount of Treasury purchases to $ 4.5 million per month . From this act a new currency , the “ Treasury note ,” redeemable in either gold or silver , now circulated as a medium of exchange .
Under succeeding Treasury Secretaries , the Sub-Treasury would only strengthen its role as central banker during times of financial instability . Secretary Leslie Shaw , whose tenure spanned from 1902 – 1907 , increased the deposits held at banks to a record $ 150,216,599 . Additionally , he expanded the number of depository institutions to 577 , over 100 more than had ever been recognized up to that time . As a means of placating money markets ( those markets existent for short-term funding ), Shaw ruled that funds might be transferred from the Treasury to depository banks and back again at the discretion of the Secretary . Shaw further allowed banks to pledge municipal and railroad debt as reserves .
Still , no matter how innovative or prompt in responding to the financial calamity at hand , inevitably the Sub-Treasury would encounter drains upon its deposits . Furthermore , by insisting on banks holding reserves at the various Sub- Treasuries , banks could not lend ; when these reserves were released , banks often had excess funds for loans . Either way , the money supply either contracted or expanded during the most inopportune periods .
During the Panic of 1907 , then Secretary George B . Cortelyou injected substantial deposits into nationally chartered banks . Nonetheless , by that fall , the Treasury held only $ 5 million to meet day-to-day operations , disabling its ability to alleviate the panic any further . After the panic abated , progressive reformers would target the money interests of Wall Street , and those government institutions deemed illprepared to assuage any future market disruptions . Consequently , the Sub-Treasury ’ s multivariate functions of regulating banks , controlling the money supply and holding reserves would soon end .
By 1908 , the Aldrich-Vreeland Act created the National Monetary Commission , which recommended the creation of a central bank , an institution that could respond to the currency needs of the banking system and help alleviate future panics . It would serve as a lender of “ last resort ” free to constrict and expand the money supply when necessary , and not one given to the manipulation of bank reserves . When established in 1913 , the Federal Reserve Bank rendered the Sub-Treasuries defunct with their deposits transferred to Federal Reserve district banks by 1921 .
A new era of cooperation would exist among the federal government , nationally chartered banks and those members of the
Federal Reserve System . Though the Fed has an imperfect history in responding to inflationary spirals , overall it has contributed to public confidence in the banking system and trust among the banks in its capabilities . Such fiduciary responsibilities render the 19th century notion of “ divorce ” between government and financial institutions both impracticable and unrealistic .
Ramon Vasconcellos is a history professor and lecturer in Accounting and Economics at Barstow Community College in Barstow , CA . He has published numerous biographical and topical articles on the history of the West , particularly related to finance . He has also taught economics and history at the University of London .
Note
1 . On one occasion , in New York City , gas lights were extinguished by conservative Democrats when they were about to speak . Consequently , they used primitive matches called “ Lucifers ” or “ Loco Focos ” to light candles and illuminate the meeting hall . As a result , for the remainder of the 1830s , the term applied to that element of the Democratic party critical of bankers and corporatism .
Sources
Andrew , A . Piatt . “ The Treasury and the Banks under Secretary Shaw .” Quarterly Journal of Economics . Vol . 21 , No . 4 . August 1907 .
Kinley , David . The Independent Treasury and the United States and its Relations to the Banks of the Country . National Monetary Commission , 61st Congress , 2nd Session . 1910 .
Kinley , David . “ The Influence on Business of The Independent Treasury .” The Annals of the American Academy of Political and Social Science . Vol . 3 . September 1892 .
Polk , James K . “ First Annual Message .” December 2 , 1845 .
Timberlake , Richard H . Jr . “ The Independent Treasury and Monetary Policy before the Civil War .” Southern Economic Journal . Vol . 27 , No . 2 . October 1960 .
Tyler , John . “ First Annual Message .” December 7 , 1841 . The American Presidency Project . ucsb . edu
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