This criticism refers to the Independent Treasury System which has been in vogue in the United States since 1844. The United States government, after the closing of the second United States Bank in 1836, was seriously-pressed at times because of the failure or suspension of some of the state banks that had acted as depositories for the federal government. In self-defense the Independent Treasury System was organized, but, as the finances of the federal government developed and involved heavier and heavier sums, the collection of the revenue and the disbursement of the public funds resulted in arbitrary interference with the money market. Moreover, the maintenance in the treasury of a large average balance meant an economic loss. In the later years, as the criticism itself indicates, the Independent Treasury System was modified, but much was left to the discretion of the Secretary of the Treasury, and in the exercise of that discretion the secretary was occasionally accused of discrimination and favoritism.

Narrow restriction of real estate loans

Independent treasury

As a result of these criticisms the National Monetary Commission formulated recommendations for the reorganization of the country's banking system. A complete scheme of bank reform, known as the Aldrich scheme, was presented to Congress and to the country at large. The Aldrich scheme was pushed by bankers and business men, but there was considerable opposition to it owing to the fact that popular control of the banking system was not sufficiently safeguarded, and owing to the further fact that the reserve institutions, for which it provided, were in the main to function primarily as emergency institutions. There were also some criticisms of detail, but of these it is not necessary to speak in this place. Suffice it to say that the Aldrich scheme was not adopted. With the election of a democratic president in 1912, the democratic majority in Congress turned its attention to a new scheme of banking reform. After various hearings and joint discussions the Federal Reserve Act was presented to Congress, and, after debate and amendment of the act in both houses of Congress, the proposed law was referred to a conference committee, whose report, as usual, was adopted. This gave us the Federal Reserve System which, with some amendments, is the system that we have today.

Selected References

George E. Barnett, State Banks and Trust Companies Since the Passage of the National Bank Act (Volume 7, Publications of National Monetary Commission).

C. F. Dunbar, Chapters on the .Theory and History of Banking (1906), Chapter X (Requirements Of A Good Banking System).

J. H. Hollander, Bank Loans and Stock Exchange Speculation (Volume 20, Publications of National Monetary Commission).

David Kinley, Independent Treasury of the United States (Volume 7, Publications of National Monetary Commission).

Laws of the United States Concerning Money, Banking and Loans, 1778-1909 (Volume 2, Publications of National Monetary Commission).

J. L. Laughlin, Editor, Banking Reform (1912), Chapters I-IV inclusive.

George Paish, The Trade Balance of the United States (Volume 20, Publications of National Monetary Commission).

C. A. Phillips, Readings in Money and Banking (1916), Chapter XXX.

O. M. W. Sprague, Crises Under National Banking System (Volume 5, Publications of National Monetary Commission).

P. M. Warburg, "Defects and Needs of Our Banking System" (in Essays on Banking Reform in the United States, 1914).

Samuel A. Weldon, Digest of State Banking Laws (Volume 3, Publications of National Monetary Commission).