Closer Relation between Treasury and the Banks

Suspension of Specie Payments

The close connection between the Treasury and the banks, brought about by the exigencies of a great war, have continued to the present time, and even grown stronger and more intimate as the financial operations of the government have expanded in recent years. In 1879 the sub-treasury at New York became a member of the bank clearing house. This connection with the banks proved to be very important and valuable to the government just prior to and during the period of the resumption of specie payment, in 1879, for it relieved the sub-treasury of the necessity of making coin payments to any large extent, since the clearing house agreed to accept legal tender notes in payment of all balances due from the government to the associated banks. Indeed, if the Treasury had attempted the resumption of specie payments at that time without the aid and co-operation of the banks, it is almost certain that the attempt would have proven a failure because the banks held the chief supply of gold. Since the resumption of specie payments the policy of the government with reference to the Treasury has remained practically unchanged to the present time. Upon the Treasury depends the stability of our entire financial system, and upon this largely depends the prosperity of the nation.

Having now sketched briefly the history of the Independent Treasury system, we shall proceed to examine into its character and organization. The Treasury is the agency whereby the financial operations of the government are carried on. It is the means by which a uniform standard of value is given to our currency, a system of coinage is maintained, our banking system is controlled, and the revenues of the government are collected and disbursed. The Independent Treasury consists of the Treasury Department at Washington and nine sub-treasuries, located in Baltimore, Boston, Chicago, Cincinnati, New Orleans, New York, Philadelphia, San Francisco and St. Louis. In addition to these the government has established at various places, where there are no sub-treasuries, depositories for the receipt and payment of government funds.

The United States Treasury holds a reserve of $150,000,000 gold for the purpose of maintaining the credit of the government and establishing confidence in its ability to redeem its paper currency in specie on demand. This reserve supports obligations equal to nearly ten times its amount, so great is the faith of the people in the ability and integrity of the government. The outstanding obligations of the government, which rest in whole or in part upon this reserve, and are kept on a par with gold by it, amounted on December 31, 1902, to $1,375,347,166, as follows:

United States notes (greenbacks)....$343,783,541

National bank notes......... 371,552,495

Silver coin (standard silver dollars)... 78,700,912

Silver coin (subsidiary) ........ 93,082,863

Silver certificates .......... 463,304,840

Treasury notes of 1900........ 24,922,515

Not only are all forms of money in the United States maintained upon a uniform gold basis and made interchangeable by the redemption system of the government, thus causing $1,375,-347,166 in credit money to circulate as the equivalent of gold, but the Treasury is constantly redeeming the currency presented to it, and issuing new bills instead, thus freeing the paper circulation from old and tattered bills. The government also receives deposits of gold coin or bullion and issues certificates against these in equal amount. Of these there were outstanding on July 1, 1901, $247,036,359, representing that amount of gold in the vaults of the Treasury.

The business of the nine sub-treasuries consists in receiving deposits from collectors of customs in the ports of entry, internal revenue officers, national banks for their annual tax, postmasters for account of the post office department, also patent fees, deposits for transfer to other points by banks or other corporations and individuals. The payments consist of pensions to soldiers and their widows, and the warrants or checks of disbursing officers such as paymasters, quartermasters and others. All mutilated currency such as United States notes or bank bills that have become unfit for circulation, are replaced at the sub-treasury free of charge. United States notes are redeemed in gold, and one kind of money is exchanged for another. Gold certificates are issued for deposits of not less than twenty dollars of gold coin. Silver certificates are issued for silver dollars, and vice versa. Thus the sub-treasury is a money-receiving, money-paying and money-exchanging establishment. Its accounts are balanced at the close of each day and a summarized statement of the day's business is forwarded to Washington.

Some of our ablest financiers and students of the subject are now criticising and condemning the Independent Treasury system, on the ground that it interferes with the normal operation of the business interests of the country. The principal objection lies in the fact that it locks up in the sub-treasuries large volumes of money in the form of customs at certain times or seasons, thus contracting the money in circulation, when the business interests of the country may require all the circulating medium. Prof. David Kinley, in criticising the system, says: "The action of the Independent Treasury is such as to vary the amount of money in circulation. At one time it absorbs, at another disburses, considerable sums. There is nothing in the nature of the sub-treasury that makes its receipts and payments necessarily concomitant with a free and stringent condition of the money market respectively." Its action is independent of the money market. Were it possible that the Independent Treasury could absorb and withhold funds when not needed in business channels, and disburse it freely when business interests required a larger circulating medium, it would afford elasticity to the currency and prove a great benefit, but unfortunately it is liable to act in exactly the opposite direction, and thus aggravate the money stringency. Then the Secretary of the Treasury must needs go outside of the law and use his prerogatives to assist the financial interests of the country by the purchase of bonds so as to release some portion of the money in the Treasury for general circulation and use.

By withholding money from circulation as the Treasury does at times, the effect is to lower prices of commodities generally, and at other times large disbursements by the Treasury tend to raise prices by making money more plentiful, thus in both instances unsettling values, to a slight extent. The remedy advocated is to abolish the sub-treasuries and deposit the government funds with the national banks, where it can be used in the channels of trade and commerce.