4. Beginning with 1847, immediately after the establishment of the independent treasury, the public money was kept in the Treasury and subtreasuries, and no banks were used until after the establishment of the present national banking system in 1863. Since that time the depositary banks have supplemented the use of the subtreasuries as places for the keeping of the public money.

5. In the past one hundred and twenty years, therefore, there were only seventeen, 1847-1864, in which the government did not use depositary banks for keeping the public money.

6. The evidence therefore shows that there has been, uniformly, a strong tendency for the government, throughout its history, to use banks.

7. The causes of this tendency are shown to have been the greater convenience in the management of the public money, the desire of the Secretary and the public that government fiscal operations should interfere as little as possible with the monetary circulation and with business conditions, the necessities of the government, and pressure from banking and other interests.

8. Under the influence and pressure described, first the Secretary of the Treasury, and later Congress, have given way, and virtually abandoned the policy of independence in the keeping and management of public money which was established by the act of August, 1846. Congress authorized the use of national banks in which to deposit receipts from internal revenue. With some vacillations the extent of the use of the banks as depositaries for these receipts has steadily increased. By recent legislation receipts from customs may also be deposited in the banks. Under the first interpretation of the law permitting these deposits they could accrue only as the collecting officers placed the money received by them in the banks and not from the transfer of government receipts once deposited in the treasuries. By later practice the latter method of deposit has also been adopted and is claimed by some to be legal. Under present practice and legislation, therefore, the Secretary of the Treasury has a free hand to put any and all receipts of public money in the depositary banks. The independence of the Treasury depends entirely upon the will of the Secretary.

9. A further departure from the policy of independence is shown by the course of opinion and legislation concerning security for deposits. Under the law as passed public deposits were to be secured by United States bonds and otherwise. This was understood to mean

United States bonds in addition to a personal bond. Eight years ago the phrase was differently interpreted, and banks were permitted to secure deposits on the basis of other than United States bonds as security. The practice thus established was legalized between two and three years ago.

10. At first the banks which obtained public money on deposit were expected to keep a reserve against it, as provided by the law of their being. Some seven or eight years ago this practice was broken and the banks allowed to hold public deposits without protecting them by a reserve. The practice thus initiated was also later made legal.

II. Finally, with all these changes, the amount of public money deposited with banks has steadily increased, until at one time in recent years only a comparatively small working balance was kept in hand by the Treasury itself.

70. RESULTS OF THE ISOLATION OF PUBLIC FUNDS'
BY MURRAY S. WILDMAN

Since our federal revenue is so largely derived from indirect taxation, the streams rise and fall with the course of certain lines of trade and rarely coincide with disbursements over any considerable period. Owing to this uncertainty in the rate of income, there is nearly always a surplus and, normally, the excess of income over outgo determines the magnitude of the treasury hoard and the amount of the circulating medium of the country condemned to idleness.

These sums are significant from the point of view of their absolute magnitude and also from that of their variability. In all cases they consist of money capable of use as bank reserves. It is true that national banks may not count bank notes as part of their reserves, but since such notes are used as reserve by state and private banks the distinction may be ignored. It may be said also that the cash reserve of banks is made up of the surplus circulation of the country. So long as there is a deficiency of money for the needs of trade it will not be deposited, or if deposited will not remain in the hands of the bank. It follows that this entire sum, if not held by the Treasury, would be added to the bank reserves, eliminating exports of gold, and would increase the cash holdings of all institutions doing a banking

'Adapted from "The Independent Treasury and the Banks,” Annals of the American Academy of Political and Social Science, XXXVI (1910), 576–81.

business. The effect of such an increase in cash reserves would depend on various circumstances. In the case of some banks it would further establish the convertibility of their demand liabilities without affecting the magnitude of these liabilities. In the case of others, by increasing the lending power it would tend to decrease the the rate of discount and so the cost of conducting business in general. This diminution in the costs of competitive business, other factors remaining constant, would tend to lower prices of consumers' goods.

The first and most obvious objection to our practice is found in the social loss involved in the idleness of pecuniary capital.

The waste involved in the idleness of public funds is less objectionable than the successive expansion and contraction of reserves which result from the receipt and disbursement of revenue. One phase of this movement may be illustrated by the simple case of a pensión disbursement. On August 4 the Treasury drew pension checks amounting to $14,970,000 and distributed them throughout the country. About half of this sum was drawn upon the assistant treasurer at New York. Coming into the hands of country banks, cashed or deposited, these checks are mailed to New York correspondent banks for credit. In a few days this mass of checks is presented to the New York subtreasury through the clearing-house and an equivalent amount of money is transferred from the subtreasury to the banks, whose combined reserves, in the absence of countervailing debits, are increased $7,000,000. Without any alteration in the aggregate wealth of the country or even of New York City the lending power of New York banks is raised about $28,000,000. In order that this new source of profit may be utilized, since nothing in the situation operates immediately to stimulate the demand from commercial sources, the competition of banks in an effort to place their funds lowers the call-loan rate. This reduces the cost of carrying stocks and stimulates speculation for the rise in Wall Street.

To reverse the illustration, let us suppose that the collection of duties at the port of New York in a given week reaches the not uncommon sum of $10,000,000. This amount of money is drawn from local banks and trust companies and locked up in the subtreasury. In as far as the effect on reserves and lending power is concerned, it might quite as well have been sunk in New York harbor. The rate for call loans rises, stocks fall, or commercial paper which otherwise would have found a ready market remains unsold and the production and exchange of goods may be curtailed.

Unable to foresee these fluctuations in reserves and the consequent fluctuations in the lending power of his banker, the merchant is constrained to carry a much larger cash reserve (bank deposit) than would be carried otherwise, and the interest on this is the price he pays for this particular form of insurance, a charge that is ultimately shifted to the consumers of the goods he offers for sale or to the producer from whom he buys.. By the same token each banker in a system which presupposes independence and the absence of any joint responsibility carries a large fund of capital devoted to no more productive purpose than as an insurance fund. This fund of ready money tends to be largest in times of stress when the needs of commerce are greatest. This added cost to the banker's business is paid in higher discount rates and tends to shift to the price of commodities.

The largest source of revenue is in the import duties, amounting in the fiscal year ending in 1910 to $333,683,445.03. About twothirds of these duties are paid into the subtreasury at New York, mainly from the banks of that city, and a corresponding large part of the disbursements are made from the sub treasury and pass to the local bank reserves. It happens that gold drawn for export is taken from the same group of banks. New York bank reserves stand in a peculiar relation therefore to our foreign trade. When imports of commodities are heavy the payment of duties tends to coincide with a rise in foreign exchange and with threatened or actual gold exports, causing a double drain of bank reserves. In this situation it would be suicidal for New York bankers to purchase time paper with the same liberality as can be practiced by the bankers of Chicago or St. Louis. In order to protect themselves against this double drain of funds they must lend a large portion of their funds on call for use in stock exchange speculation, or else adopt the alternative policy of excessive reserves. Our fiscal system therefore is one of the instruments that promotes excessive stock exchange speculation in this country.

71. TREASURY AID FOR SEASONAL STRINGENCY'

A. THE AUTUMN OF 1912

An interesting economic condition due to the heavy business demands upon the banks is again seen in the reduction of reserves and the renewed appeal to the national treasury for help. Practically

'From "Washington Notes" in Journal of Political Economy, XX (1912),957.

since the end of August there has been very strong interest among bankers and the more foresighted business public with reference to bank conditions. It was early admitted that the large crop movement would necessitate the granting of extensive accommodation by the banks with corrresponding pressure on reserves. During the latter half of September the decline of reserves in the clearing-house cities had been very severe, and in several places the banks were forced close to the danger line. The consequence was a loud call for government aid. In deference to these demands, Secretary MacVeagh, who has had about $90,000,000 that might at a pinch have been deposited, had ordered an inquiry into the situation by officers of the Treasury Department. The outcome of this inquiry was an unofficial announcement at the opening of October that no Treasury deposits would be made, followed shortly thereafter by an equally unofficial statement of a plan for the limited relief of the national banks. This plan consisted in the placing with the banks of gold or gold funds equal to any amounts importation of which might be arranged for, such funds to be available as soon as provision should be made for the importations desired. This was practically a revival of the plan followed by Leslie M. Shaw when Secretary of the Treasury, whereby the banks were permitted to count as part of their reserves any importation of gold they might engage from abroad so soon as such arrangements had been entered into. The only difference between. the original Shaw plan and the present undertaking of the Treasury is that the latter takes the government gold from the vaults and places it in the hands of the banks as soon as officials are assured that they are protected by a bona fide arrangement made by the bank in question with a foreign shipper.

B. THE AUTUMN OF 1913'

Toward the latter part of July symptoms of uneasiness began to reappear. There was much talk about the difficulty of moving the fall crops, and the annual apprehension on this score began to stalk about the country with more than usual vigor. It is a characteristic of our imperfect and unsatisfactory banking system that the very prosperity of the country becomes, at times, a menace, because of the apprehended inability of the banks to meet the seasonal demand for the large amounts of money required to move a bounteous harvest. Conditions were again becoming acute when the Secretary determined

1 From Annual Report of Secretary of the Treasury, Finance, 1913, pp. 2–4.