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Independent Treasury System

Problems and Its Demise

Although the independent Treasury did restrict the reckless speculative expansion of credit, it also tended to create a new set of economic problems. In periods of prosperity, revenue surpluses accumulated in the Treasury, reducing hard money circulation, tightening credit, and restraining even legitimate expansion of trade and production. In periods of depression and panic, when banks suspended specie payments and hard money was hoarded, the government's insistence on being paid in specie tended to aggravate economic difficulties by limiting the amount of specie available for private credit.

The most serious weaknesses in the system were revealed during the Civil War; under the pressures created by wartime expenditures, Congress passed the acts of 1863 and 1864 creating national banks. Exceptions were made to the prohibition against depositing government funds in private banks, and in certain cases payments to the government could be made in national bank notes.

After the Civil War, the independent Treasury continued in modified form, as each administration tried to cope with its weaknesses in various ways. Secretary of the Treasury Leslie M. Shaw (1902–7) made many innovations; he attempted to use Treasury funds to expand and contract the money supply according to the nation's credit needs. The Panic of 1907, however, finally revealed the inability of the system to stabilize the money market; agitation for a more effective banking system led to the passage of the Federal Reserve Act in 1913. Government funds were gradually transferred from subtreasuries to district banks, and an act of Congress in 1920 mandated the closing of the last subtreasuries in the following year, thus bringing the Independent Treasury System to an end.

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The Columbia Electronic Encyclopedia, 6th ed. Copyright © 2012, Columbia University Press. All rights reserved.

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