Chapter Six

THE ANTE-BELLUM PERIOD

Martin Van Buren, as next President and party designee, expected to continue Jackson's policies. The Van Buren administration (183741) began with a financial crisis for the Federal government. The decline in government revenue caused by the depression of 1837 turned the recent Federal budget surpluses back into a deficit, and the last distribution of the surplus to the states had to be cancelled. Because of the crisis, state banks suspended payment of notes with hard money. Since Federal law prohibited the Treasury from depositing government funds in any bank that did not pay its notes in hard money, revenue agents were forced to store funds in the mint or temporarily in strong-boxes and vaults.

Van Buren Administration/Independent Treasury Act of 1840

Van Buren called a special session of Congress in September 1837 to deal with the crisis. He dismissed any possibility of forming a new central bank and considered it impossible to use state banks. To provide a vehicle for disbursing and collecting government funds, Congress passed the Independent Treasury Act of 1840, which provided that government funds would be kept in its own sub-treasuries. 1 This new measure would not be implemented for several years.

In the next election, Van Buren was replaced by William Henry Harrison and, after his death a month after inauguration, by John Tyler (1841-45). With a new party in power, change was anticipated. The Independent Treasury Act was repealed before it ever became operable.

1 Studenski and Kroos, Financial History U.S., 110-112.

Fiscal Bank of the United States

By 1844 government funds were being deposited in 39 different state banks. The Congress, now controlled by the Whig Party, passed a bill to create a new National Bank along the lines of the second Bank of the United States, to be called the Fiscal Bank of the United States. The bill was vetoed by Tyler, much to the surprise of his party. The bill was reintroduced with a name change to Fiscal Corporation of the United States, as a way of side-stepping Tyler's mistrust of banks, but he again vetoed it. During the Van Buren and Tyler years, deficits totalling $25 million accumulated, financed by long and short term notes carrying interest of 5 percent to 6 percent.

Second Independent Treasury Bill

The Democratic Party returned to office with the election of James K. Polk in 1844. Among its first acts was passage of a second Independent Treasury bill in 1846, creating a system that remained in place until 1921. Under its provisions, money due the government had to be paid in specie or Treasury notes, and government funds were to be kept in sub-treasuries around the country. Revenue agents were forbidden to deposit any funds in private banks. In this way, the groups most distrustful of banks had their way, and government fiscal operations were separated, at least in theory, from the banking system. When Congress neglected to authorize funds to pay for the construction of facilities for holding government revenues, Treasury agents reverted to using banks as depositories. This was especially true in New York, where two-thirds of government revenue was collected at the Customs House. The hard money had to be transported to the rest of the country for disbursement. A decade later facilities for holding Treasury deposits were still lacking, and often, as in one case in Indiana, being nothing more than a wooden enclosure located next to a tavern. 2

War with Mexico-1846

The country went to war with Mexico in May 1846 over the issue of the annexation of Texas and California. The total cost of the war was

2 Meyers, A Financial History, 132.

estimated at $64 million, of which $49 million was borrowed and $15 million paid out of current revenue. The war lasted only two years and did not allow for any substantial increases in taxes to catch up with the rapid escalation of military expenses. As part of the settlement ending hostilities, the U.S. paid the Mexican government $15 million and received land comprising California, Nevada, Utah, New Mexico, Arizona and portions of Wyoming, Colorado and Texas. In addition, the U.S. agreed to take over about $3.5 million in debts owed to U.S. citizens by Mexico, as had been established by a treaty in 1839. 3

Congress decided to authorize additional debt in order to meet all these obligations. For the first time, the Treasury acted on its own in selling bonds. This put the Independent Treasury to a severe test, as Treasury Secretary Robert J. Walker pointed out, "During the last eleven months the Government has received, transferred, and disbursed more specie than during the whole aggregate period of fiftyseven years preceding-since the adoption of the constitution." 4 Walker therefore initiated an innovative policy to help in placing this loan. As he put it,

It had been usual heretofore with my predecessors, in advertising for loans, to emit no sum to any individual under $25,000; but with a view to insure the largest possible subscription, and at the best rates, and so diffuse the loan as far as practical throughout all classes of the community, bids were authorized to be received by the advertisement as low as the lowest denomination of Treasury notes permitted by law-namely, 50 dollars. 5

Here in embryonic form is the concept that would later underlie the Savings Bond program. As a result of this campaign, the Treasury was able to sell its entire loan for hard money at a price above par. By the end of 1849, the debt totalled $63.1 million, but interest payments on the debt amounted to little more than 6 percent of expenditures.

Despite this increase in Treasury responsibilities, the scale of operations in the government remained very small by today's standards. President Polk, for example, retained an interest in government functions sufficient to cause him to write to Treasury Secretary Walker, reminding Walker, "There is no duty which appears to me more imperative, than to take care that officers who

3 Alexander DeConde, A History of American Foreign Policy, (New York: Charles Scribner & Sons, 1963), 196-205.

4 Secretary, Annual Report, 1847 129 and 135. 5 Secretary, Annual Report, 1847, 129 and 135.