From the 1840s until 1863 the Independent Treasury, as it was called, divorced the government’s fiscal operations from private sector banks. It accepted payment for public obligations—taxes—only in gold and silver specie and treasury notes, and operated its own depositories around the country. The Independent Treasury did not accept bank notes, and did not hold deposits in commercial banks. Its own depositories were separate from state banks.
The Independent Treasury was born of the freewheeling banking environment that flourished after the demise of the Second Bank of the United States. At first, the Treasury tried to supply a modicum of regulatory discipline by holding Treasury deposits in state banks and requiring special specie reserves for those deposits. The Treasury found, however, that its own deposits could be held hostage to overly aggressive lending policies of state banks, and on occasion the Treasury could not withdraw its funds. During this time gold and silver specie commanded a reverence in the eyes of a public that distrusted banks, bank notes, and even corporations themselves. Large segments of the public saw bank notes as a sham scheme of the “moneyed interests” to exploit the unwary, and the proponents of the Independent Treasury were “hard currency” people who wanted the government’s business separated from banks and corporations.
The Sub-Treasury Act of 1840 became law during the presidency of Martin Van Buren, a staunch advocate of the hard currency policies that marked the presidency of his predecessor, Andrew Jackson. Daniel Webster stood flatly opposed to the bill, remarking on 12 March 1938 that “[t]he use of money is in the exchange. It is designed to circulate, not to be hoarded. To keep it that is to detain it is a conception belonging to barbarous times and barbarous governments” (Chown, 1994). Opponents of the bill saw it turning the Treasury into a hoarder of gold and silver, and throwing the private sector into a deflationary spiral. Banks held gold and silver specie to act as reserves for the redemption of bank notes. If the government began absorbing gold and silver specie, banks would be forced to contract the supply of circulating bank notes.
After heated political combat, Congress enacted the Sub-Treasury Act on 30 June 1840. It provided that in the first year one-fourth of public obligations, that is, taxes, should be paid in specie, and by 1843 100 percent of public obligations should be paid in specie. In 1843 Congress repealed the first Sub-Treasury Act.
In 1846 Congress enacted a second Sub-Treasury bill. This bill required that government offices accept only gold and silver specie and treasury notes (nonlegal-tender paper money issued by the Treasury) in payment of public obligations. The Independent Treasury System lasted in some form until 1920. As early as 1863, however, the Treasury began to hold deposits in commercial banks.
In its pre–Civil War phase, the Independent Treasury proved that the fears of some of its critics were well founded. Problems arose because Treasury tax collections did not coincide with government expenditures. When tax collections rose above government payments, specie left private banks, and entered Treasury depositories, forcing banks to contract bank note circulation. When government payments overtook tax collections, specie flowed into the banking system, and banks issued more bank notes. The ebb and flow of specie from Treasury depositories imparted a cyclical motion to the supply of circulating bank notes, and acted to destabilize the economy. After the Treasury was allowed to maintain commercial bank deposits, the Treasury learned to conduct the government’s fiscal operations without rocking the banking system.
The Independent Treasury System represents another episode in the paper money drama that would eventually define the terms on which the public would come to accept paper money. It represented a phase in which societies had come to accept precious metal coins, something that could not be taken for granted in ancient societies. Despite the acceptance of precious metal coins, feelings about paper money ran high, and suspicion about paper money gained ground quickly in hard times. Distrust of paper money left a social seam, often hidden, but always threatening to rip open and become a power force in political life.