How Did the Federal Government Finance Itself Before the Federal Reserve?
After the end of the “first” and “second” Bank of the United States, the Federal government had no bank from which it could draw credit. This period began in 1836, after the charter of the “second” bank was not renewed.
In 1836, President Andrew Jackson wanted the United States to spend within its means and to not use credit from a bank. However, the bank interests were determined to revive the relationship between the U. S. Treasury and its dependence on credit. So, they waited for the next President to hear their proposals.
President Martin Van Buren rejected suggestions for a new bank, proposing instead the creation of a sub-Treasury system whereby the Treasury would require payment in gold and silver and collect its revenues directly, rather than through financial intermediaries. Van Buren hoped to advance the cause of hard money by completely separating the federal government from the banks.
The Independent Treasury Act of 1846 separated the Treasury from the banking system. The act instructed the Treasury Department “to keep safely, without loaning, using, depositing in banks” all the money it collected. All transactions with the Treasury were to be settled in either money or Treasury notes.
For the next 67 years, the United States financed itself using the Independent Treasury system. Prices were stable, the Federal government was small, and the standard of living improved dramatically during this period. The only disruption to the system occurred during the Civil War. However, it was quickly restored once the war ended. The United States government financed itself, without banks, for more than half-a-century!
In late December, 1913, the United States Congress passed the Federal Reserve Act. It spelled the end of the United States Treasury’s indepndence from banks. While the Independent Treasury Act was not officially repealed until 1920, it was effectively over once the Federal Reserve System became established.