Treasury, Department of the
TREASURY, DEPARTMENT OF THE
TREASURY, DEPARTMENT OF THE. At its inception in 1789 the U.S. Treasury Department quickly came to dominate the executive branch. Alexander Hamilton, the first secretary of the treasury, became a virtual prime minister in the Washington administration. Although the department's role diminished somewhat under future secretaries, it remained the cabinet branch most central to the operation of the federal government.
The administrative reach of the Treasury Department is enormous. Early Congresses mandated that the department create and oversee the U.S. Customs Service, the Internal Revenue Service, the U.S. Mint, the Coast Guard, and the First Bank of the United States, along with other responsibilities. This oversight meant that Secretary Hamilton and his successors guided fiscal policy and influenced foreign trade; collected and disbursed the revenue of government; maintained the stability of the national currency; were responsible for funding the national debt; made the lion's share of federal appointments in the new nation; influenced the development of American manufacturing; and policed America's territorial waters.
The Treasury Department's reach and authority changed over the next two centuries, depending on both the forcefulness and personality of the incumbent secretary and the addition or subtraction of a particular responsibility. But within the cabinet framework of constitutional executive power, the department always remained at the center of domestic policy, foreign and domestic commerce, and national fiscal oversight.
Hamilton's goals were two fold: shift the equilibrium between states' rights and federal authority created by the Constitution to the advantage of national power, and diversify the American economy, making it more balanced by augmenting dependence on agriculture with strong encouragement of elite commercial and manufacturing interests. He achieved both goals and in doing so he set the terms for a national debate that endured into the twentieth century. He funded the national debt, a product of the Revolution, in a way that immediately shifted power away from the states; he created the First Bank of the United States in 1791, both consolidating federal control over fiscal policy and stimulating foreign trade. His 1791 Report on Manufactures established a standard that engaged the federal government on behalf of eliteled industrialization over the next quarter-century and beyond. Using the Treasury Department as the instrument of his will in implementing his vision of a strong diversified economy in a nation led by a landed and moneyed gentry, he also renewed the ideological debate over the very shape of the republic established by the American Revolution.
Even when Hamilton's enemy Thomas Jefferson became president in 1801, and despite his agrarian and democratic rhetoric—echoed faithfully by his secretary of the treasury, Albert Gallatin—Hamiltonian economic reforms, and the ideology behind them, endured. Gallatin served two presidents (Jefferson and James Madison) for fourteen years with great ability. But his department legacy, sometimes in conflict with his own and his administrations' principles, was to implement and solidify Hamilton's vision of America. Gallatin's 1810 Report on Manufactures to Congress, building on earlier submissions, encouraged American industrial development. President James Madison completed his own version of Hamiltonian treasury policies in 1816, when he signed bills chartering the Second Bank of the United States and introducing America's first protective tariff. These measures had the cumulative effect of strengthening the Treasury Department's hand in shaping government policy.
Under Andrew Jackson's strong executive leadership, the Treasury Department was at the forefront in 1830s attempts to reverse Hamiltonian policy. Treasury secretaries Louis McLane and especially Roger Taney carried the banner in assaulting what Jacksonian Democrats saw as entrepreneurial excess and economic elitism. The Second Bank of the United States in particular was seen to drain federal control of fiscal policy, foreign and domestic commerce, and even westward expansion of America's farmers. It was Roger Taney who drafted Jackson's famous and ideologically crucial 1832 message vetoing the recharter of the Second Bank of the United States. And it was the Treasury Department that ultimately inherited the residue of bank power over American fiscal and economic policy when the Independent Treasury was legislated in 1840. It was the Treasury Department that issued the Specie Circular of 1836, granting enormous financial leverage to Jackson's state-oriented "Pet Banks," meant to oversee the financing of a more rapid and democratic agrarian expansion into the west. So the department during the 1830s became the chief executive means of implementing populist, agrarian Jacksonian Democracy.
Civil War. The practical result of Jacksonian policies, however, was to unwittingly open the door to unrestrained free enterprise and industrial expansion. Jacksonian ideology finally undermined the Treasury Department's role in controlling economic development. Until the Civil War restored its centrality, the department shared the fate of the executive branch as a whole as its power to exercise leadership dwindled under the weak presidents who presided through the 1850s. Abraham Lincoln's secretary of the treasury, Salmon P. Chase, was an able administrator and politically a powerful and well-placed Republican Party leader. Facing the crisis of the Civil War, he quickly moved to restore the fiscal health of the department and find the revenue and credit needed to prosecute the war. He used the power of the department to collect the new taxes mandated by Congress; and he restored the authority of a Customs Service fractured by secession. Chase also used Treasury Department guarantees to borrow large amounts of money from private capital sources to finance the war until his tax policies could kick in; and via the National Bank Acts of 1863 and 1864, drafted by him and passed at his urging, he reformed the nation's truncated banking system by, among other things, eliminating competition for borrowed funds by taxing the state banks to the breaking point. The national banks already chartered were forced by the new laws to invest one-third of their capital in government bonds to help finance the war, a provision made possible by the weakening of the state banks and thus the elimination of competition from that source.
But Chase's restoration of the Treasury Department to something near its former eminence was short-lived and did not survive much beyond the Civil War. In the post-war nineteenth century the department shared the fate of a weakened presidency in general, and it mostly failed to exercise much fiscal or economic restraint on the Gilded Age.
Progressive Era. Efforts to correct the economic, political, and social excesses of the late nineteenth century also began the process of restoring the Treasury Department to its earlier eminence in directing domestic executive policies. It remained at the center of government for much of the twentieth century. The Federal Reserve Act of 1913, part of the Progressive reform package delivered by Woodrow Wilson, was the most important piece in the puzzle. William McAdoo was secretary of the treasury from 1913 to 1918, and he oversaw both its complicated passage through Congress and its implementation. The fact that he was Wilson's son-in-law did not hurt his leverage. The Federal Reserve Act created a new and original banking system.
While after the 1960s the Federal Reserve Board created by the act achieved a greater degree of autonomy, the board started life under the Progressives as very much the creature of the Treasury Department. Both the secretary and the comptroller of the treasury were voting members of the board, as were six regional directors appointed by the president of the United States. For at least a half-century the secretary of the treasury wielded immense de facto authority over economic policy, interest rates, currency (via federal reserve notes), and commercial paper through his ability to move the Federal Reserve Board. Even later, more conservative administrations fell in line as bankers admitted that the Federal Reserve introduced a financial stability to the nation that it had not seen since the tenure of Alexander Hamilton.
Progressive impetus also achieved final ratification of the Sixteenth Amendment, making constitutional the passage of a graduated federal personal income tax. This opened the door to a resurgence of Treasury Department authority. First introduced in the waning days of Teddy Roosevelt's administration, the amendment was ratified in 1913, in time for the Wilson administration to implement a graduated income tax. While it did not dramatically result in a "soak the rich" policy, it did increase the amount of federal funds overseen by the Treasury Department, and it significantly increased the bureaucracy within the department through the revitalization of the Internal Revenue Service, which dated back to 1791. In general, as federal oversight of economic and social conditions increased in the twentieth century, the Treasury Department's role in that oversight increased as well.
This became evident immediately following the Progressive Era. Both the politically conservative 1920s and the dramatically liberal 1930s made clear the strong resurgence of the Treasury Department at the center of domestic policy. Two powerful secretaries oversaw this comeback: Andrew Mellon and Henry Morgenthau. The ideological divide between the two men was immense.
Secretary from 1921 to 1932, Mellon successfully lobbied Congress to reduce taxes for the wealthy, whether they be individuals or corporations viewed in law as individual entities. In an era of fiscal speculation, Mellon's department gave corporate America free rein in generating stock market–oriented wealth. Mellon espoused the theory of "trickle down economics," which held that wealth at the top would filter down to the lower classes. So the secretary was instrumental in gutting even the modest graduation of the new income tax, and he almost entirely removed the tax burdens the Progressives had imposed on the well-to-do. Mellon's popularity soared until 1929. He was seen as the architect of the theory, best enunciated by President Calvin Coolidge, that "the business of government is business." The secretary of the treasury was the spokesman for the "New Prosperity" of paper profits generated by Wall Street, gains that fueled the Roaring Twenties mentality of easy wealth for the upper-middle classes and new rich. And Mellon was, with President Herbert Hoover, the fall guy on whom the Great Depression of the 1930s was blamed after the stock market collapse of 1929.
The Great Depression and the New Deal. The depression discredited the conservative economic leadership of the 1920s. Under the New Deal, which began with Franklin Delano Roosevelt's election in 1932, Secretary of the Treasury Henry Morgenthau oversaw the strongly liberal policy of government intervention on the side of labor and the small farmer. He was no less an icon of what a modern secretary of the treasury should be for the rural and urban working classes than Mellon was for capitalists and entrepreneurs. Secretary from 1934 to 1945, Morgenthau was one of a cadre of important liberals responsible for the legislation that transformed Mellon's policy of government hands off free enterprise to a dramatically new policy of welfare capitalism, invoking vast government control over the private sector of the economy. Some argue that the New Deal destroyed real capitalism in America; others claim that FDR and his administration saved capitalism from failing completely. However one reads the record, the Treasury Department was at the center of New Deal domestic policy.
In drafting most depression-era legislation, Morgenthau was secondary to New Dealers like FDR guru Harry Hopkins, Labor Secretary Frances Perkins, and Brain Truster Raymond Moley, but the Treasury Department was central to its revolutionary implementation. And in a few areas, the treasury did find legislative solutions as well. In 1935, for example, Morgenthau came up with the plan to find the vast funding needed to secure passage of the Social Security Act. He convinced the president to levy a payroll tax to build up the trust fund that made Social Security a self-financed old-age benefit independent of congressional budgeting. Initially, he argued in the midst of vast unemployment, financing would come from taxes only on those working, a de facto elite in the 1930s. The secretary was a key player too in shaping legislation for a graduated corporate income tax that included those holding companies far removed legally from their profitable corporate subsidiaries.
When recovery foundered in 1937, Morgenthau was instrumental in convincing FDR to move more conservatively in the economic sector, advice that FDR heeded in launching what historians now call "the second New Deal." There followed a renewed increase in deficit spending as the administration once again pumped money into public spending designed to increase employment. The Treasury Department was at the center of this "second New Deal," as it had been at the center of the first. The radical reforms of the first New Deal were consolidated, insuring that "welfare capitalism" (conservatives were already calling it the welfare state) would remain a permanent part of twentieth-century economic and social policy.
For twelve critical years the treasury remained front and center in guiding domestic policy. Even post–World War II Republican secretaries were unwilling(or unable) to undo New Deal economic and social reform. In the years between the New Deal and Lyndon Johnson's Great Society newly created cabinet-level departments, especially Health, Education, and Welfare and Housing and Urban Development, siphoned off some of the near monopoly the treasury had exercised over domestic affairs. In the 1980s Ronald Reagan's conservative policies cut taxes and returned to the massive deficit spending that marked the New Deal. This effort thrust the treasury once more into the center of executive branch oversight; the arrival of Robert Rubin, secretary of the treasury beginning in 1993 during Bill Clinton's administration, cemented the treasury's central role in domestic policy yet again.
Balanced budgets and free trade. Rubin first pushed successfully to balance the budget, largely by means of more disciplined spending, trimming back federal bureaucracy, and tax reform that increased revenue by imposing more taxes on the well-to-do and corporate America. These were openly acknowledged to implement Rubin's vision. The Treasury Department then moved to restore American and global economic health by moving America rapidly toward free trade through NAFTA (North American Free Trade Agreement); expansion of most-favored-nation status for China; and closer cooperation with the European Union as it moved toward full economic integration. The Treasury Department, working with the Federal Reserve (still nominally under its jurisdiction), oversaw a long period of prosperity lasting into the new millennium. It did this while both keeping inflation in check and balancing the budget. Like a few earlier secretaries, Rubin, who served through nearly two terms under Bill Clinton, won enormous public confidence in personal terms. Thus his support and that of his department translated into bipartisan popular and congressional support for any policies they espoused. Rapidly rising stock markets, dynamic expansion of stock investments by the public at large, growing employment opportunities, massive gains in the new high-tech economy and low inflation all contributed to sustaining perhaps the longest period of uninterrupted prosperity in the nation's history.
One major result of America's domination of a new global economy was to elevate the Treasury Department to virtually the same supreme driving force in government in the 1990s that it had enjoyed two centuries earlier under the aegis of Alexander Hamilton.
Sellers, Charles G. The Market Revolution: Jacksonian America, 1815–1846. New York: Oxford University Press, 1991.
Walston, Mark. The Department of the Treasury. New York: Chelsea House, 1989.
Carl E. Prince
See also Bank of the United States ; Coast Guard, U.S. ; Crédit Mobilier of America ; Customs Service, U.S. ; Debts, Revolutionary War ; Gilded Age ; Granger Movement ; Great Society ; Railroads ; Tariff .