It has generally been recognized that no reform of our banking and currency system can be adequate which does not take the United States Treasury out of the banking business. The independent treasury system was established in 1846 after the experiences of the panic of 1837 had demonstrated the unwisdom and insecurity of keeping public funds in the state banks. The Government then resolved to keep its funds in its own vaults, and sub-treasuries were established at convenient points in which government receipts should be deposited and Prom which disbursements should be made - in short to be its own banker. Since the adoption of the national banking system various modifications have been made in this original plan, but until recently the essential features remained.

Perhaps the most fundamental defect of the independent treasury system in its relation to the business of the country in the past was due to the fact that payments to the United States Government had to be made for the most part in actual money which was not disbursed again promptly, but was stored in the Treasury or the sub-treasuries to lie idle for weeks or months, after which it might be paid out rapidly and in only a few centers. Private individuals, corporations, municipalities, state governments and the governments of all other countries deposit their funds in the banks from day to day. No great government but ours has held to the mediaeval custom of keeping its funds stored away in vaults. This system of hoarding by the Treasury is particularly wasteful because under our present method of taxation, payments to the Government are likely to be heaviest at those seasons when banks need additional reserve money in order to extend loan accommodations to business concerns. Importation of foreign goods is usually heaviest in the late summer and early fall. To pay the customs duties importers must withdraw funds from the banks and pay them into the Treasury. Just at this time banks in these customs ports are being called upon to meet the interior demand for funds with which to move the crops. The result is a curtailing of the power of the banks to grant the credit needed for legitimate enterprise. Generally large disbursements from the Treasury are not contemporaneous with these large receipts. The heaviest treasury disbursements occur on the first of January and of July, when bond interest is paid, and in early summer when new appropriations go into effect.

Not only are the receipts and disbursements of the Treasury irregular in time, but under our unscientific budget system, which fails to secure an approximate balancing of revenue and expenditure, the balance sheet of the Government shows a heavy deficit one year and a large surplus the next. These wide variations in the annual balance seriously disturb the money market and the business of the country and "force the Secretary of the Treasury to enter actively into the money market as a paternal overseer of the machinery of credit." In the face of this situation with government revenues and expenditures " teetering " up and down with alternate surpluses and deficits the Secretaries of the Treasury in recent years have adopted, among other expedients, the practice of depositing a considerable proportion of the general funds with selected national banks on condition that they turn over to the Government approved bonds to an amount equal to the money thus deposited. In December, 1907, following the panic, the special deposits of public funds in the banks reached a total of $265,000,000; three years later they were reduced to $4,000,000. In the fiscal year, 1908-1909, the Treasury withdrew $100,000,000 from the banks. This practice is objectionable not only on the ground that it involves injustice and inequality in the treatment of different banks, but it gives to the Secretary of the Treasury the dangerous power of influencing the money market by depositing or withdrawing public funds. This power of regulating the discount rate is the proper function of the banks and not of a government bureau which because of its lack of contact with the daily currents of business is entirely unqualified to regulate a matter so closely interwoven with the needs of credit and business. The Treasury should be absolutely divorced from the money market and the banking business.

From the foregoing analysis of the chief defects of our banking and currency system, it is apparent that adequate banking reform must include a plan to mobilize bank reserves; to establish a broad discount market for commercial paper; to establish an elastic currency; to abolish the clumsy sub-treasury system and to release the Government's surplus hoardings for commercial use; to provide facilities for financing foreign trade and an agency for, regulating the international flow of gold; and to establish among our 25,000 banking institutions a cooperative system which while preserving to them independence and open competition in all local affairs will give unity and solidarity in matters affecting the banking and credit operations of the country as a whole. To what extent these reforms have been provided for in the Federal Reserve Act will be considered in the next chapter.