With headlines captivated by the current conflict between the president and the Fed, I thought it would be worth taking a step back for brief look at the history of the creation of the Independent Treasury. The legislative battles surrounding its creation and since remind us that battles between presidents, Congress and control over economic policy is not unique, nor is the partisan rancor surrounding policy proposals to deal with the economic challenges the country faces today. Indeed, it suggests instead that we are amidst one of the nation’s periodic partisan battles over defining the government’s role in the economy and society, and it also comes amidst a realignment of the party coalitions.President Martin Van Buren signed the Independent Treasury Act in 1840, a bill that “divorced” the federal Treasury Department from its relationship with all banks. While the deeply partisan battle for the Independent Treasury’s establishment would continue for six more years, the legislation marked a significant triumph in Jacksonian laissez faire philosophy and the assertion of States’ Rights and Supremacy.
The Independent Treasury Act was a response to the Panic of 1837, which was triggered by the Deposit Act of 1836 and the collapse of state banks, which had been using funds distributed by President Andrew Jackson from the Bank of the United States as a basis for speculation. With the collapse of credit, banks could no longer redeem currency notes in gold and silver despite demand for it. Meanwhile, the situation was exacerbated by a depression in England, which ended British loans to the United States and forced the price of cotton to drop. The United States had also accumulated debts and unemployment rates were high. Although President Jackson used popular opinion to attack the national banks and although he extended executive power as a bulwark of popular rights against moneyed interests, the bottom line in 1837 was that the American economy was unstable.
In response to the economic crisis, President Van Buren, a proponent of Jacksonian laissez faire philosophy, called for a special session of Congress to deal with the government’s financial situation. Van Buren opposed the establishment of a new central bank, arguing that the American people had spoken against it in the previous two elections. Further, he argued that it was not government’s business to regulate “domestic exchange.” Instead, Van Buren proposed a policy that would completely separate the government from banks. In addition, the government would collect, keep and disburse it’s own funds independent of the national banking and financial system. (Senator Gordon of Virginia had made a similar proposal in 1836.)
The proposal met considerable opposition and failed to pass the House of Representatives in three sessions of Congress from 1837-1839. Opponents argued that it would give the president too much power and increase executive patronage. Advocates, however, argued bank actions had made it necessary for the government to separate from them. They also argued that the government should manage its own finances and not rely on banks that ran the risk of failure. Finally, proponents said the system was much simpler and truer to the Constitution. The bill finally passed in the House of Representatives 1840 after a long and bitter debate and by only a small majority of 17 votes. President Van Buren signed the bill on July 4. He certainly deserves credit for his persistence in advocating a “hard-money” system. However, fiscal policy also cost Van Buren the 1940 election and threw the Independent Treasury System into question. After capturing Congress and the White House from the Democrats in the 1840 election, the Whigs repealed the law with the intention of establishing a new central bank. Democrats won the presidency in 1844 and the Independent Treasury System was re-established by Congress in 1846 by a vote of 123-67 in the House and 28-24 in the Senate.
As David Kinley wrote in 1893, the Independent Treasury System was established on the “violence of partisan feeling.” According to Kinley:
It was a question on which parties lost and won; a question on which great statesmen changed their opinions, and parties shifted their ground; on which there was a flux and reflux of public opinion and governmental policy, until it was settled at last, nearly a half a century ago, more as a party issue than a question of scientific economics; a vindication of party strength, and a necessary outcome of the drift of practical politics rather than a triumph of economic and financial truth over fallacy, or the consensus of concerted and convinced opinion as to the merits of the question.
Indeed, while the system restricted speculative expansion of credit, it also created a new set of economic problems. As revenue surpluses accumulated in the Treasury during economic booms, hard money circulation was reduced, credit tightened, and trade and production restrained. In economic busts, banks suspended payments in metallic currency for paper notes and hoarded hard currency, thus aggravating economic difficulties. Furthermore, under pressures created by wartime expenditures in the Civil War, Congress had to act to make exceptions to the prohibition against depositing government funds in private banks. The system finally ended in 1920 when Congress mandated the closing of subtreasuries after the Independent Treasury was unable to stabilize the money market in the Panic of 1907. Progressive Era reformers began agitating for a more effective banking system and the Federal Reserve Act of 1913 created a system that further extended the powers of the federal government while mixing private and public entities. (I’ll save development from here for a future post.)