TREASURY DEPARTMENT,



TREASURY DEPARTMENT,

OFFICE OF THE SECRETARY,

Washington, December 16, 1916.

The SPEAKER OF THE HOUSE OF REPRESENTATIVES.

SIR: In the legislative, executive. and judicial appropriation act approved May 10, 1916, it is provided that –

“The Secretary of the Treasury is authorized and directed to report to Congress at the beginning of its next session which of the Subtreasuries, if any should be continued after the end of the fiscal year 1917, and if, in his opinion, any should be continued the reasons in full for such continuance; also, if any or all of said Subtreasuries may be discontinued, what legislation will he necessary in order to transfer their duties and functions to some other branch of the public service or to the Federal reserve banks."

In accordance with the above authorization and direction, I have the honor to report as follows:

There arc nine Subtreasuries located, respectively, in the cities of Boston, Mass.; New York City, N. Y.; Philadelphia, Pa.; Baltimore, Md.; Cincinnati, Ohio; Chicago, Ill.; St. Louis, Mo.; New Orleans, La.; and San Francisco, Cal. The Subtreasury system was authorized by the act of August 6, 1846, and subsequent acts amendatory thereof.

The duties and functions of the Subtreasuries may be stated generally

as follows:

Issue of gold order certificates on gold deposits.

Acceptance of gold coins for exchange.

Acceptance of standard silver dollars for exchange.

Acceptance of fractional silver for redemption.

Acceptance of minor coins for redemption.

Acceptance of United States notes for redemption.

Acceptance of Treasury notes for redemption.

Acceptance of gold and silver certificates for redemption.

Cancellation (before shipment to Washington) of unfit currency.

Laundering of unfit currency which permits of this process.

Exchange of various kinds' of money for other kinds that may be

requested.

Remittances from United States depositary banks of their surplus

deposits of internal-revenue, customs, money-order, postal, and similar

funds.

Deposits of postal-savings funds direct.

Deposits of money-order funds direct and indirect.

Deposits of post-office funds direct and indirect.

Deposits on account of 5 per cent redemption fund.

Deposits of interest on public deposits.

Deposits of funds belonging to disbursing officers.

Funds deposited for transfer to some other point through a payment

by a Subtreasury located thereat.

Encashment of checks warrants, and drafts drawn against the Treasury of the United States and presented at the Subtreasury for payment.

The payment of United States coupons and interest checks.

In addition to the foregoing the Subtreasuries have the custody of a

large part of the reserve and trust funds, consisting of the gold coin and bullion and silver dollars deposited to secure gold and silver certificates and greenbacks.

The receiving of deposits and payment of checks has been assumed to a large extent since the establishment of the Federal Reserve System by the designation of Federal reserve banks as Government depositaries in those Subtreasury cities where Federal reserve banks are located. Federal reserve banks are located in the Subtreasury cities of Boston, New York, Philadelphia, Chicago, St. Louis, and San Francisco. New Orleans has a branch of the Federal reserve bank of Atlanta, while neither Baltimore nor Cincinnati has a Federal reserve bank.

It has always been deemed advisable to deposit the gold reserve and trust funds of the Government in several places rather than to concentrate them in one, for reasons of security as well as public convenience.

The Federal reserve act does not expressly, or by implication, contemplate the substitution of the Federal reserve banks for the Subtreasuries, nor would it, in my opinion, be possible, or advisable if possible, to attempt such a substitution. While the general or current fund of the Treasury may, in the discretion of the Secretary, be deposited in the Federal reserve banks, the reserve and trust funds of the Government, viz, gold coin and bullion and silver dollars held in trust by the Government against outstanding gold and sliver certificates and greenbacks, are not included in this authorization. The gold coin and bullion held against gold certificates, amounting at present to more than $2,000,000,000, a considerable part of which is deposited in the Subtreasuries, should not, in my opinion, be committed to the custody of any private corporations – and the Federal reserve bunks are private corporations – but should be in the physical control of the Government itself. This applies with equal force to the $152,979,025 of gold reserve held against United States notes and Treasury notes of 1890 and the silver dollars held against silver certificates. If, however, it should be deemed advisable to transfer the custody of these trust funds to Federal reserve banks or to any other private corporation or corporations, it would be necessary to make a special deposit of such funds in vaults especially constructed for the purpose and to maintain a Federal guard or some form of adequate Government control over such vaults.

Since the Federal reserve banks are, as I have already stated, private corporations, just as are the national banks, the duty of providing the necessary storage vaults and of assuming the custody and control of these trust funds could not he imposed upon the Federal reserve banks by legislation. It could only be accomplished by negotiation and agreement, involving, necessarily, compensation for the service performed. Whether or not arrangements could be made with Federal reserve banks, or any private institutions, for the custody of these trust funds upon terms and under conditions satisfactory to the Government, and at a saving in cost over the subtreasury methods, while, at the same time, providing all of the conveniences in handling these funds and the same measure of security as now afforded by the subtreasury system, is a matter upon which I am unable to express an opinion. I desire to repeat, however, my earnest conviction that it would be unwise to commit the custody of these trust funds to any private institution or institutions. The custody of these trust funds, their maintenance, direction, control, and administration are distinctly a governmental function and should be exercised only by the Government.

Aside from the custody of the trust funds of the Government, the Subtreasuries perform a highly useful service to the public in making exchanges of money, supplying money and coin where needed, and reducing the cost and expense of shipments of money and coin from a common center. It is necessary to maintain the facilities and conveniences provided by the Subtreasuries in the large centers of business in the country, such as the cities in which the Subtreasuries are now located. Even if these particular functions could be transferred to Federal reserve banks where they exist, the services rendered by the substituted agencies would have to be compensated for. This would involve expenses to the Government, while, at the same time, the facilities provided might not be as thorough and satisfactory as those supplied by the Subtreasuries themselves.

It has been suggested that the Subtreasuries are merely conveniences and not necessities, and that their duties might be performed entirely by the Treasury in Washington. This is in a sense true, but the cost of handling all the business from a common center in a country so extensive as the United States, might be greater than the expense of the Subtreasury system, whereas the delays and inconveniences which the public would have to suffer might prove a very serious handicap upon business. It could with equal force be argued that internal–revenue offices throughout the United States could be abolished and all of the work done at Washington, and, in like manner, that many of the customs offices throughout the country could be abolished and all of the work done from Washington. It is the duty of the Government to provide adequate facilities to meet the convenience and necessities of the public in all parts of the country. And the problem must be considered as a whole and not merely in detail.

It may be possible to reduce the expense of administration of some, or all, of tile Subtreasuries. It has been only one year since the Federal reserve banks were made Government depositaries and fiscal agencies and the current or general funds of the Government in such cities transferred to Federal reserve banks. About that time I appointed an improvement committee (described in my annual report of 1915) to make a careful study of departmental methods in all directions and to report upon the best means of improving the general administration of the Treasury service in its various important branches. The administration of the Subtreasuries is one of the subjects for investigation, and I sincerely hope that within another year it may be found possible to reduce the expense of operating these institutions in some, if not in all, of the cities where they are now located.

The amount of the Government funds in each Subtreasury, the volume of the total transactions annually performed by them, and the cost of maintaining these institutions are set forth in the following table:

| |Government funds held June 30, |Total transaction, fiscal year |Expense of maintenance, |

|Subtreasury |1916 |1916 |fiscal year 1916 |

|Baltimore |$12,573,371.07 |$108,215,675.59 |$33,749.53 |

|Boston |34,452,695.24 |217,020,680.17 |52,051.29 |

|Chicago |120,537,589.79 |597,365,033.95 |84,325.04 |

|Cincinnati |31,388,654.90 |105,703,081.30 |28,819.14 |

|New Orleans |31,917,751.13 |73,990,519.44 |27,481.22 |

|New York |329,401,485.45 |2,464,715,492.12 |187,587.75 |

|Philadelphia |26,183,266.27 |473,623,903.18 |57,792.76 |

|St. Louis |48,629,847.19 |193,370,692.54 |37,385.63 |

|San Francisco |90,088,010.01 |291,058,033.53 |25,812.27 |

| | | | |

|Total |734,173,671.05 |4,525,063,111.82 |535,044.63 |

It will be seen that the cost of maintaining these institutions, treating the Subtreasury system as a whole, is only one one-hundredth of 1 per cent, approximately, on the total transactions involved – an insignificant sum compared with business done, the important service performed, and the conveniences afforded to the public. Aside from New York, the cost of maintaining the other eight Subtreasuries Is $847,416.88, which is a comparatively small sum to pay for the service and convenience they provide. If these institutions were abolished, the total cost of operating them would not be saved, as a counter expenditure by the office of the Treasurer in Washington, resulting from the increased work that would be thrown upon that office, would be entailed.

I am of the opinion that it would be inadvisable at this time to abolish all, or any, of the Subtreasuries. It is an important matter and should be considered deliberately. With the test of further experience it may develop that the functions of the Subtreasuries, or some of them, may be transferred to Washington, or to some other agency, but action should not be taken hastily or inadvisedly.

I regret exceedingly that my necessary absence from Washington, in connection with the establishment of the Federal farm-loan banks and other public business, made it impossible for me to submit this report to the Congress at an earlier date.

Respectfully, W. G. McADOO, Secretary.

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