Removing management of federal treasury funds from state-chartered banks to an independent treasury created a federal means of regulating the monetary system.

Creation of the Independent Treasury system in the federal government of the United States, finally achieved on August 1, 1846, was the outgrowth of the controversy arising from President Andrew Jackson’s refusal to accept recharter of the Second Bank of the United States Bank of the United States;and Treasury Department[Treasury Department] . In 1833, Jackson and his secretary of the Treasury, Roger Brooke Taney, determined to withdraw government deposits from the Second Bank and transfer them to state-chartered banks. Since there was a hint of political patronage in this process, the newly selected deposit banks were soon termed the “pet banks.” There was little oversight on how these banks were to operate. Treasury, U.S.
Banking law, U.S.;and Treasury Department[Treasury Department]
[kw]Establishment of Independent U.S. Treasury (Aug. 1, 1846)
[kw]Independent U.S. Treasury, Establishment of (Aug. 1, 1846)
[kw]U.S. Treasury, Establishment of Independent (Aug. 1, 1846)
[kw]Treasury, Establishment of Independent U.S. (Aug. 1, 1846)
Treasury, U.S.
Banking law, U.S.;and Treasury Department[Treasury Department]
[g]United States;Aug. 1, 1846: Establishment of Independent U.S. Treasury[2440]
[c]Banking and finance;Aug. 1, 1846: Establishment of Independent U.S. Treasury[2440]
[c]Government and politics;Aug. 1, 1846: Establishment of Independent U.S. Treasury[2440]
[c]Organizations and institutions;Aug. 1, 1846: Establishment of Independent U.S. Treasury[2440]
Clay, Henry
[p]Clay, Henry;and Treasury Department[Treasury Department]
Gordon, William Fitzhugh
Guthrie, James
Jackson, Andrew
[p]Jackson, Andrew;and Bank of the United States[Bank of the United States]
Polk, James K.
[p]Polk, James K.;and Treasury Department[Treasury Department]
Tyler, John
[p]Tyler, John;and Treasury Department[Treasury Department]
Van Buren, Martin
[p]Van Buren, Martin;and Treasury Department[Treasury Department]

The years between 1833 an 1836 were a time of economic boom. Gold flowed into the country in payment for cotton exports and as foreign investments. The gold entered bank reserves, and banks responded by expanding loans, note issues, and deposits. There was also a strong upsurge in sales of public lands by the government, bringing a flood of revenues and enabling the government to pay off the national debt. Government deposits expanded rapidly, and in June of 1836, Congress voted to distribute the surplus revenue to the states.

In 1837, however, a deflationary panic occurred, partly in response to the withdrawal of specie from banks to carry out the distribution of the surplus. The so-called Panic of 1837 Panic of 1837;and banks[Banks] and the depression that followed resulted in the failure of numerous banks, including some that held government deposits. Many banks continued to operate but refused to redeem their liabilities in specie. As the economic depression reduced government revenue, the Treasury was hard-pressed by the unavailability of its bank deposits. Furthermore, there was widespread public resentment against the banking system, which was blamed for the panic and depression. The Treasury found itself obliged to make some of its payments using depreciated notes of its deposit banks. An element among the Jacksonian politicians had long held the view that banks’ privilege to issue banknote currency Currency;U.S. should be curbed. This view was reflected in government directives restricting the acceptability of small-denomination banknotes in payments to the government, and in the Specie Circular of July, 1836, which ordered that payments to the government for public-land purchases be made in gold or silver.

The Panic of 1837 proved short-lived. Most banks resumed specie payments in the spring of 1838, a process facilitated by continued inflow of gold from overseas. Then, during 1839, deflationary conditions returned. This time, there were heavy gold exports and downward pressure on money and credit, leading to a 30 percent decline in prices between 1839 and 1843. Concern for the Treasury deposits and antibank sentiment combined to provide support for creating an Independent Treasury, one independent of the banks.

Proposals for an Independent Treasury system began as early as 1834 in Congress, Congress, U.S.;and Treasury Department[Treasury Department] when William Fitzhugh Gordon Gordon, William Fitzhugh , an anti-Jackson Democrat, introduced a measure to curb the potential political influence involved in relations with the “pet banks.” President Martin Van Buren Van Buren, Martin
[p]Van Buren, Martin;and Treasury Department[Treasury Department] , in a message to a special session of Congress on September 5, 1837, called for a specie currency, criticized the operation of state-chartered banks, and suggested a plan to open Treasury depositories independent of the banks. Congress debated the idea for the next nine years and finally passed the Independent Treasury Act on June 30, 1840 Independent Treasury Act of 1840 , only to repeal it on August 13, 1841. On August 1, 1846, such a system was enacted again. It served as the basis for managing government funds until the inception of the Federal Reserve System Federal Reserve System in 1913.

The Independent Treasury Act of 1840 reflected the antibank sentiments of Jacksonian Democrats. The election of 1840 Presidency, U.S.;election of 1840 shifted power to the Whig Party (American);election of 1840 Whigs, who repealed the 1840 law before it had had time to have much effect. The Independent Treasury was replaced as an issue by the efforts of Henry Clay Clay, Henry
[p]Clay, Henry;and Treasury Department[Treasury Department] and the Whigs to charter a new national bank. However, the untimely death of newly elected President William Henry Harrison in early 1841 brought John Tyler Tyler, John
[p]Tyler, John;and Treasury Department[Treasury Department] into the presidency. A strong proponent of states’ rights, Tyler vetoed two bills to create a new national bank. The election of James K. Polk Polk, James K.
[p]Polk, James K.;and Treasury Department[Treasury Department] in 1844 and the victory of the Democratic Party in 1846 allowed the reenactment of the Independent Treasury.

U.S. Treasury Building in Washington, D.C., around 1860.

(Library of Congress)

Under the new system, subtreasuries were established in six leading cities, with responsibility for receiving, safeguarding, and paying out government funds. The government’s mints, which produced the coinage Coinage, U.S. , participated in these operations. All government transactions were to be conducted either in gold and silver Silver;and U.S. Treasury[U.S. Treasury] coin or in Treasury notes. The latter were short-term, interest-bearing securities issued as part of the national debt. Some were issued with very low interest rates and were clearly designed to circulate as paper currency Currency;U.S. , even though they were not technically legal tender. The government now maintained no deposit accounts with banks and did not receive checks or banknotes for payments to the government.

Although technically independent of the banks, the Treasury’s operations soon displayed substantial influence on banking conditions. At times, government revenues exceeded disbursements, and specie accumulated in the Treasury offices, draining off reserves from the banks and putting banks under pressure to contract loans, with deflationary consequences. At other times, government deficits led to a net flow of specie from the Treasury to banks, with expansionary effects that were not always desirable.

Ingenious methods were devised by secretaries of the Treasury to try to prevent these operations from causing financial damage. During the early 1850’s, for example, boom conditions—arising in part from the California gold discoveries—led to a large increase in specie held in the Treasury. The national debt had increased substantially since 1836. This gave Secretary of the Treasury James Guthrie Guthrie, James the opportunity to buy government securities in the open market. These purchases helped transfer funds from the Treasury to the banks and relieve them from deflationary pressure. Such operations became an important element in Treasury operations during the remainder of the period until to 1914.

The Civil War (1861-1865) Civil War, U.S. (1861-1865);and banks[Banks] altered the character of the system. In 1863 and 1864, with the passage of the National Bank Acts, the government adopted a system of chartering local banks, to be called national banks. These were eligible to hold government deposits. Legal-tender government paper currency Currency;U.S. , “greenbacks,” were introduced in 1862. Both government and banks went off the specie standard until 1879, so government transactions were conducted with paper money. However, the subtreasuries continued to operate and to influence bank reserves and monetary conditions.

• Eichengreen, Barry J. Capital Flows and Crises. Cambridge, Mass.: MIT Press, 2003. Theoretical study examining the recurrent financial cycles in U.S. history, including the Panic of 1837. Requires some familiarity with economic theory.
• Hammond, Bray. Banks and Politics in the United States from the Revolution to the Civil War. Princeton, N.J.: Princeton University Press, 1957. The breezy narrative gives extensive attention to both the economic and political aspects of the Second Bank and Independent Treasury.
• Kaplan, Edward S. The Bank of the United States and the American Economy. Westport, Conn.: Greenwood Press, 1999. Overview of the role of the Bank of the United States in American economic history.
• McPaul, John M. The Politics of Jacksonian Finance. Ithaca, N.Y.: Cornell University Press, 1972. Shows the origins of the Independent Treasury idea in the conflicting elements among Jackson’s political supporters, some favoring relatively unrestricted banking and others opposing all bank operations.
• Schlesinger, Arthur M., Jr. The Age of Jackson. New York: Mentor Books, 1945. Devotes considerable attention to the financial policies of the 1830’s and 1840’s. Extremely pro-Jackson and economically naïve; written in a dramatic style.
• Seigenthaler, John. James K. Polk. New York: Times Books, 2003. Analysis of Polk’s presidency that regards his role in the establishment of the Independent Treasury one of the achievements that made him a successful president.
• Taus, Esther Rogoff. Central Banking Functions of the United States Treasury, 1789-1941. New York: Columbia University Press, 1943. Although pedestrian, probably the most complete description of the workings of the Independent Treasury system.
• Timberlake, Richard H. Monetary Policy in the United States: An Intellectual and Institutional History. Chicago: University of Chicago Press, 1993. A monetary economist examines the evolution of monetary thinking and policy during the 1830’s and 1840’s in chapters 4-6.

Second Bank of the United States Is Chartered

Jackson Vetoes Rechartering of the Bank of the United States

Panic of 1837 Begins

Congress Passes the National Bank Acts

“In God We Trust” Appears on U.S. Coins

“Crime of 1873”

Henry Clay; Andrew Jackson; Roger Brooke Taney; Martin Van Buren. Treasury, U.S.
Banking law, U.S.;and Treasury Department[Treasury Department]