In a previous chapter reference was made to the clumsy and archaic system of conducting the financial operations of the Government through the Independent Treasury system, The United States is the only important country in the world that has a Treasury system of this sort, and practically all plans of banking reform that have been proposed in recent years have contemplated its abolition. The chief criticism of the Treasury system has been that it locks up great quantities of money at seasons of the year when the banks and business need it most and releases money to the banks in times of depression when business is sluggish and the banks already have large supplies of idle funds. This condition is not deliberately brought about by the Treasury officials, but is the result of the unscientific fiscal operations of the Government. In recent years, however, successive heads of the Treasury Department have adopted methods designed to correct the most serious defects of the system. More liberal regulations have been made, permitting the use of certified checks in payments to the Treasury instead of cash, and the Treasury has kept a Considerable amount of its free cash in the national bank depositaries.
The Independent Treasury system is retained under the new law, which, however, makes possible radical changes in treasury practices. Section 15 of the Act provides as follows: "The moneys held in the general fund of the Treasury, except the five per centum fund for the redemption of outstanding national bank notes and the funds provided in this Act for the redemption of Federal reserve notes may, upon the direction of the Secretary of the Treasury, be deposited in Federal reserve banks, which banks, when required by the Secretary of the Treasury, shall act as fiscal agents of the United States; and the revenues of the Government or any part thereof may be deposited in such banks, and disbursements may be made by checks drawn against such deposits.
"No public funds of the Philippine Islands, or of the postal savings, or any government funds, shall be deposited in the continental United States in any bank not belonging to the system established by this Act: Provided, however, That nothing in this Act shall be construed to deny the right of the Secretary of the Treasury to use member banks as depositaries." As this section shows, the Secretary of the Treasury is given the widest latitude in depositing government funds, except that the funds deposited to redeem national bank notes and Federal reserve notes'must be kept in the vaults of the Treasury, and that no government funds may be deposited in banks not members of the system. The Secretary may, thedefore, keep government balances in the Treasury as formerly, or with the national banks as has been the more recent practice, or with the Fededal reserve banks. Furthermore, he may at any time transfer all or any part of the general funds of the Government from one depositary to another. It is obvious that with Treasury funds arrge-gating at present between $150,000,000 and $200,00,00 at his disposal, the Secretary of the Treasury may exercise a very potent influence upon the operations of the new system.
It is assumed that the major part of these funds will be deposited with the Federal reserve banks, but this is a matter entirely at the discretion of the Secretary. He is given supreme authority by the following provision of the Act: "Nothing in this Act contained shall be construed as taking away any powers heretofore vested by law in the Secretary of the Treasury which relate to the supervision, management and control of the Treasury Department and bureaus under such department, and wherever any power vested by this Act in the Federal Reserve Board or the Federal reserve agent appears to conflict with the powers of the Secretary of the Treasury, such powers shall be exercised subject to the supervision and control of the Secretary." In view of the possibility that the Federal reserve banks may be used as fiscal agents of the Government and of the probability that vast amounts of government funds will be kept with these banks, thus bringing them into daily and intimate touch with the Treasury Department, it is apparent that sound judgment and sympathetic cooperation must be exercised by both reserve bank officials and Treasury officials if their mutual operations are to work without friction.