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The Business Operations of the Treasury

THE BUSINESS OPERATIONS OF THE TREASURY are intrusted to two officers: 1. The Treasurer of the United States, who is the fiscal agent of the department.

2. The Register of the Treasury, who is the bookkeeper of the department.

This cursory analysis of the organization of the Treasury Department shows fairly well the manner in which its work is carried on. The Secretary, and the heads of most of the important bureaus or offices which in the practice of the United States are regarded as political, are changed from ad ministration to administration. It would seem that this prac tice might prevent a continuous policy in the orderly routine of business, but as a matter of fact precedents are easily estab lished and fairly well observed. The Secretary has large dis cretionary powers in the administration of his department; and, although his nomination by the President must be con curred in by the Senate, when once appointed he is responsible to the President alone, except he be guilty of some mal feasance of so grave a nature as to warrant impeachment. It would be difficult to imagine a more highly centralized organi zation than the Treasury Department of the United States, or of a position which imposes greater personal responsibility than is imposed upon the Secretary of the Treasury; and it is not improbable such excellence of administration as the history of this department discloses is in large measure due to this fact.

It will be observed from the above analysis that the Secre tary of the Treasury is spoken of as the Commissioner of Customs. There is no legal warrant for this expression. Until 1894 there was an officer known as Commissioner of Customs, whose duties, however, pertained to those of a comptroller rather than those of an administrator. The prac tice is for the Secretary to exercise personal supervision over collection of customs duties. He performs the duties which the Commissioner of Internal Revenue performs with regard to excise and internal duties. So important is the administra tion of the customs laws that it seemed proper to recognise the function as a distinct office.

The Comptroller of the Currency, who has general ad ministrative jurisdiction over the national banking system, is properly classed among the administrative officers of the Treasury Department. It is true that many of the duties he is called upon to perform are semi-judicial in character, but it must be remembered that the word adjudication when used in connection with the organization of the Treasury De partment is strictly confined to the adjudication of accounts.

Among the miscellaneous bureaus which report directly to the Secretary may be mentioned the Lighthouse Establish !tient, Life-saving Service, and the Coast and Geodetic Survey.

Previous to 1894 the accounting division of the Treasury Department was a complex and somewhat cumbersome affair. It embraced six auditors and three comptrollers, and it was the theory of the department that every claim or account should be examined both by the auditors and by the comp trollers. By an Act of July 31, 1894, the offices of the second comptroller and of the Commissioner of Customs, who, by the analogy of the duties imposed upon him, should have been called the third comptroller, were abolished, and the first comptroller was made the sole comptroller of the Treasury Department. The object of this change was to secure greater expedition in the settlement of claims, and to centralize re sponsibility for the adjustment of accounts and for the proper interpretation of laws providing for expenditure. Under the present practice the decision of an auditor is accepted as final, except the claimant make appeal to the comptroller, or except the comptroller himself has reason to believe that the audit is for any reason unsatisfactory. The decision upon the le gality of a claim lies now, as formerly, with the comptroller, and it is in the comptroller's office, also, that the authoritative account is kept with the appropriations made by Congress. The books of the comptroller open a credit with every depart ment, bureau, or service immediately upon the passage of ap propriation bills. The comptroller then notifies the officer in charge of the several departments or bureaus of the amount which Congress has placed at its disposal. All warrants for the payment of moneys from these appropriations, when duly attested, are debited to the appropriation, and it is one of the responsibilities assumed by the comptroller that the warrants issued shall in no case exceed the appropriation. Speaking concisely, therefore, the auditors are responsible for the examination of accounts and claims which in any way involve the payment of public moneys; the comptroller is responsible for the proper interpretation of the law authorizing the pay ment, for the assignment of the payment to the proper appro priation, and for limiting the payments for any service to the moneys appropriated.

All payments of money must be made by warrants drawn by the Secretary of the Treasury, which warrants must be i countersigned by the Comptroller of the Treasury. These war -, rants are of two classes. The first, which are called " countabl .6 f' '''' warrants," are addressed to the Treasurer of the United directing him to pay money to the disbursing officers of the various departments. These warrants are based upon re from the heads of departments having charge of ser vices for which moneys have been appropriated. The pay ment of moneys due individuals is made by the disbursing officers of the bureaus or departments. It may be in the form of cash, of a check or draft against a private deposit, or, under some conditions, of a draft drawn on the Treasurer of the United States. The second class of warrants, which are called " statement warrants," are drawn in favour of indivi duals, corporations, firms, etc., and are issued in satisfaction of services rendered or of other miscellaneous demands. In this case the payment is commonly made in the form of a draft on the Treasurer of the United States.

The office of Treasurer of the United States was estab lished by an Act of Congress September 2, 1789. His duties, while of a varied character, are in the main those of a receiv ing and disbursing officer of a corporation. He is the agent of the United States for the issue of United States notes, for the redemption of the notes of national banks, and for the pay ment of interest on the public debt. He receives the deposit of bonds used by the national banks as security for their cir culation or as security for public moneys deposited with them. He is the custodian of most of the trust funds, such as the Pacific Railroad Sinking Fund and the Indian Trusts. He is also the collector of the tax imposed upon the national banks.

It is through the Treasurer that the receipts of all moneys from customs duties, internal revenue, sales of land, and mis cellaneous sources are "covered " into the Treasury. Upon the receipt of money by any officer or agent authorized to re ceive the same a certificate of deposit is issued in favour of him who makes the payment. This certificate is commonly issued in duplicate, one copy of which is forwarded to the Secretary of the Treasury, who issues a warrant covering the amount into the Treasury. It is not until this warrant is issued that the money is available for the payment of appro priations. It thus appears that moneys covered into the Treasury, as well as moneys paid out of the Treasury, are upon warrants issued by the Secretary of the Treasury.

The office of Register of the Treasury was established at the same time as that of the Treasurer. He is the public bookkeeper for the cash account, as the comptroller is the public bookkeeper for the appropriations. He also has charge of the official records of the Treasury Department, and as such is called upon to perform many various and dissimilar duties.

It is evident from the foregoing survey that while the as sigmnent of duties and functions may have been more or less accidental (as most of the critics of the organization of the Treasury Department aver) no pecuniary claim can be paid without careful scrutiny, and that the general operations of the Treasury Department are such as to guarantee that the moneys appropriated by Congress will be expended as Con gress intended. The method of procedure is simple. The duties assigned to the many officials are clearly expressed, and, in the main, experience justifies the confidence which the public has in the administration of the Treasury Department. Doubtless there are imperfections, but these may be left for the correction of those intrusted with the treasury manage ment when such imperfections do as a matter of fact embar rass the operations of the department. Since it is not our intention to consider this question in detail, it will not be necessary to present the corresponding organization for the management of fiscal affairs in other countries. In one way or another they all secure the same general results. The above analysis was presented in order to leave upon the mind of the student the impression that the financial operations of the government are in all particulars subject to the same;necessities as the organization for the financial administration of a business or a corporation.

From the care which the Treasury Department takes in providing against false claims, and for establishing checks against the illegal expenditure of moneys, it would seem that no further attention need be given to the matter by any of the other departments of government; and, for the most part, such is the settled practice in this country. An individual has, of course, the right of appeal to the Court of Claims, this being the court provided by the government in which suits against itself may be tried; nor is it an uncommon thing for the treasury officials themselves to cause a case to be brought in the Court of Claims so that the decision may be final in its character. Moreover, an individual has always open to him the right of petition to Congress against an improper decision of the Treasury Department. To this extent the settlement of accounts in the Treasury Department is subject to revision; and, although the right of petition is frequently abused, it would be unwise to deny or to curtail it, for it serves as a wholesome check on what might otherwise become an arbi trary and unwarranted adjustment of private claims.

As between the Treasury Department and the other departments of government it is now pretty well settled that the Secretary of the Treasury has exclusive juris diction. The case that led to a definite law upon this point arose when Mr. Stanton was Secretary of War. In September, 1866, the Attorney-General gave an opinion " that he [the Secretary of War] had authority to with hold his signature from the requisition for an amount which he believed to be not properly due, though certified to by the accounting officers of the Treasury Department." Act ing upon this opinion, Mr. Stanton refused to make requi sitions for amounts in excess of what he believed to be due, although the amounts had been duly allowed. The issue thus raised led to considerable discussion, which was finally settled by the Act of March 2, 1868, which asserted that the Treasury Department has final jurisdiction over accounts, subject only to revision by Congress or in the proper court. It is difficult to see how any other decision could have been arrived at without bringing the accounts of the government into in extricable confusion.

The success of the plan of giving the Treasury Department such extended control over the settlement of accounts is at tested by the fact that the House of Representatives has not seen fit to continue its experiment with what perhaps may be termed a legislative auditing committee. In 1814 the House created a Committee on Public Expenditures,t whose duty it was to " examine into the state of the several public depart ments, and particularly into the laws making appropriations of money, and to report whether the moneys have been dis tributed conformably with such laws; also to report from time to time such provisions and arrangements as may be necessary to add to the economy of the departments and the accounta bility of their officers." The practice of maintaining a legis lative auditing committee is quite general in one form or another among Continental governments, but it does not seem to fit into the general scheme of a government of divided func tions, like that of the United States. The auditing of accounts is strictly administrative in character, and, provided the legis lature exercise care respecting the form in which current reports are issued, it is believed that better results will fol low the assignment of this duty to the Treasury Depart ment. This does not mean that treasury officials are superior to investigation, for Congress always has the right of calling for special reports or of sending a committee for special in vestigation, and this is a right frequently exercised in the United States. The treasury officials feel that they may be subjected to an investigation at a moment's notice, and it must be that this fact exercises a wholesome influence upon the manner in which they conduct their respective offices.

35. Conoerning the Theory of Public Accounting. Of greater importance is the question respecting the theory of 'accounts to which the books of the public treasury are ad justed. This has little to do with what is ordinarily called " bookkeeping," and, so far as the methods of entry are con cerned, or the form in which blanks are drawn, or the wording of receipts and warrants, or other similar details, the expe rience of the officials charged with the work may be relied upon for appropriate results. It is a matter of scientific in terest, however, to inquire what conception may with pro priety be accepted as the basis of the accounting system. Two methods of accounting present themselves for approval : the one asserts that accounts should be kept on the basis of ac crued assets and accrued liabilities; the other presents cash receipts and cash expenditures as the more appropriate basis of accounting. The first of these methods is followed by France, the second by England and the United States.

(s) Comparison of the French and English Methods. The significant feature of the French method of accounting is, to employ Bastable's phrase, that " the financial year is invested with a kind of personality." Instead of recording the actual receipts and actual expenditures of a definite period and ac cepting this statement as a final financial report they assign to a year whatever income springs from the laws in force during the year, whether this income is covered into the treasury during the year or not; they charge also to the year all ex penditures that arise on account of appropriations for the year, whether the accounts are settled and paid within the year or not. It is impossible under this method to close the accounts of any particular year until some time after the year itself is passed. This method of accounting is what is known in the language of French finance as the " exercice financier " as con trasted with the " gestion annuelle." The account is kept with the execution of laws, rather than with the cash transactions of the treasury.

The claim made for this method of accounting is that, al though the result at which it arrives may be delayed, it is never theless accurate. It does not permit an expenditure incurred during one year to be charged to the year following; nor does it allow that delinquency in the payment of taxes should result in decreasing the income of the current year to the advantage of the year following. It is the design of such bookkeeping to show the financial standing of the government as affected by the operations of the year, and this it does by striking a balance between the assets that have accrued during the year and the liabilities that have accrued during the same period, and for this reason are properly charged to the assets.

The significant feature of the English system, on the other hand, is that immediately upon the close of the fiscal year the Treasury Department counts its cash. It sets down what has been received and what has been expended during the twelve months, and if receipts plus the balance on hand at the begin ning of the year, reduced by the amount of formal payments, equal the cash on hand, the fact is accepted as proof that the accounts are correct. No notice is taken of the fact that part of the moneys received during the year become assets to the government on account of the operations of laws during the previous year, or that part of the moneys paid were to satisfy debts left over from the year before. Only upon the assump tion that the credits and obligations that the current year take over from the year previous are about equal to the credits and liabilities passed over to the year following can it be said that a cash statement presents a true idea of the financial standing of the nation; and, even admitting this assumption, it cannot be denied that the cash statement destroys the sig nificance of the fiscal period, since it includes the results of operations that did not take place within the period for which it pretends to report.

An English writer thus expresses the difference between the English and the French system of government accounts, and although he wrote in 2866 his statement represents fairly well the present situation, except so far as certain minor de tails are concerned. His statement is as follows : " The French budget attempts three things which the Eng lish does not: (i) First, it takes up what we may call the real revenue of each year and the real expenses of each year. The English system is very rough. We only regard (technicalities apart) what revenue is received at the head treasury during the year, and what money has been issued from the head treasury for services and payments during it. It is in principle a cash account of income and a cash account of outgoing. But the French are more elaborate. They impose a certain set of taxes for the year, but the whole of these taxes may not come to hand for months after the year. Our income tax, as every one knows, is very often months in arrear, and it is so with many taxes in all countries. Credits, for example, are given (like our malt credits) to various taxpayers, who are not ex pected to pay, and do not pay, till that credit is expired. Now all such outlying moneys, say of the year 1866, the French financiers treat as belonging to the year 1866; they are not, indeed, received during it, but still they belong to it. Some one, during r866, became liable to pay, either at the time or hereafter, those sums, and so the State got richer. Just so on the other side of the account. Liabilities may have been in curred by the State for work done during the year, and those debts to pay are to be reckoned against the debts to come in. (2) And again, the French financier follows the expenditure to subordinate dispensers. Although the money may have been drawn from the head treasury, it may be lying in a minor one, and this, if not wanted for a liability of 1866, a French financier would not treat as an outgoing of 1866. Why should he? he would ask. It is a transfer, so to say, of a sum of money from a head office to a branch office. The accounts, therefore, of the Imperial Government resemble nothing so much as the accounts of careful shipowners. In these there are various ' voyages ' open at once, and money is not treated as actually expended merely because the captain has drawn for it; the voyage account stands open till all the freight earned has come in, till all the incurred liabilities are dis charged, till the captain has accounted for all the money he drew from England and repaid the balance, if any. Substitute the ' exercise' of the year for the voyage of the ship and you have the Paris account-books with 1864, 1865, and 1866 all open at once. (3) Again, the French try to show, not what their casual income and casual outgoing for the year is, but how much of each is due to permanent and how much to tem porary causes. . . .

" Every one who knows anything of the difficulty of ex plaining at all effectually even simple matters of accounts will know that such elaborate figures as these can never be under stood by many persons, and that even among those persons there are sure to be many wranglers about them. . . . The political effect is that the French nation can form no opinion about its finance. It is told too much, and in too abstract a form, and so knows nothing. The English Chancellor gives every year a rough popular account of the general state of things, and this can be broadly criticised and dealt with. And it is only so that a free nation can judge of its finance. If it attempts precision it insures failure." The writer of the above seems to admit that the English cash statement cannot give a correct statement, but he asserts that it is preferable to the French system because it leaves an intelligent impression upon the mind of the ordinary citizen. Mr. Wilson, writing at a much later period, urges the same consideration. He says : " Under arrangements of this kind [that is, the French system of accounting] the greatest confusion may easily pre vail, and it is always three or four years before the nation can know what the definitive expenditure of a given year is. In deed, it is quite possible to hide that important fact from the people altogether. . . . Even in France, with its carefully chosen budget committees, the true state of the national balance-sheet is often hard to discover. Arrears of taxes in one year overlap with those of other years, credits old jostle credits new, and amid the confusion the truth is smothered." The comparison thus drawn between the English and the French method of accounting presents a question that must be decided one way or the other, for whatever the decision it will influence the character of public accounts even to their most minute details. In England and the United States all financial statements are based on cash receipts and cash ex penditure, or, to be more accurate, upon receipts " covered " into the treasury and upon payments from the treasury as evidenced by the " issue " of duly attested " warrants." Such a statement has the merit of simplicity and of providing a balance with sufficient promptness to be of some importance to the legislative body in its discussion upon financial matters. As we learned when considering the rules for making esti mates, the receipts and expenditures of the first three months of a current year are known and are made use of in estimating the probable deficiencies in authorized appropriations, and the probable income and expenditures for the year to be covered by current legislation. While this is undoubtedly a great ad vantage, it must nevertheless be admitted that a cash statement of receipts and expenditures arbitrarily closed at the expira tion of the fiscal year is not, and, from the nature of the case, cannot be, a truthful financial exhibit. The French are cer tainly right in asserting that the year which is made the unit for a long series of minutely described appropriations does possess a certain personality, and that a much more intelligent appreciation of the character of financial legislation may be obtained if the results of the fiscal legislation of each year are grouped together than if the income and expenditures incident to that year are permitted to overlap and intermingle with the accounts of subsequent years. It seems, then, that each of these methods as practised by the governments in question has its peculiar advantage and its peculiar disadvantage, and on this account the suggestion presents itself whether some means cannot be devised for combining celerity in the closing of accounts and clearness of statement with the preservation of the personality of the fiscal period. To this end it will be necessary to inquire a little more carefully what is implied in the adjustment of an accounting system to the theory of " accruals." Should we turn our attention from public accounting to the best corporation accounting one will discover that " earn ings and expenses " have almost universally supplanted the older bookkeeping phrases of " receipts and expenditures." The idea seems to be that liabilities should be balanced against assets, and not payments out against payments in. The evil of the cash system is that it cannot make a true ex hibit of the condition of affairs, because it confines the record to accomplished financial events. It presents no guarantee that a company is solvent even though it shows thousands as cash on hand, for how can one know that obligations that ought to be charged against this balance have been paid? The only way of making an intelligent statement, by which is meant a statement that shows upon its face the standing of the business to which it pertains, is to accept as the basis of the statement assets as accrued and liabilities as accrued at the date of the report.

What, then, is an accrual? By an accrual is meant the size or the amount or the stage 3f growth of an orderly in come or of a constantly accumulating expense. The design of accounting on the basis of accruals is to get at the present worth of assets and the present amount of liabilities at the time a balance is struck. An accrual undertakes to measure the .results of a gradual and orderly procedure on both sides of the account, to credit to each month (or period) the earnings of that month, and to charge to that month the expenses in cident to the earnings. Should an accountant charge against the earnings of the present month the expenses of the previous month, or should he carry them over into the accounts of the month following, it would be impossible for the manage ment to localize divergencies from the ordinary course of events which in the grand result are responsible for the deficit or for the surplus.

The exact nature of an accrual will be made clear by an illustration. Suppose the government has issued $to,000,000 in bonds and that the contract calls for quarterly payments of interest, the dates for payments being July 31st, October 31st, January 31st, and April 3oth. The fiscal year closes, let us say, June 3oth. It is evident that two months will have elapsed since the last payment of interest at the time the treasurer must make up his report. Shall he take any account of the interest that has been growing since April 3oth, the date of the last payment, and set it down as a sum for which the government is liable, or shall he ignore this liability and bring it into his accounts for the first time when, a month later, the three months' interest is paid in lump? Bookkeeping on the basis of accruals will charge up the two months' interest as a liability of the year ending June 3oth, and this is manifestly where it belongs. To carry it over to the next year would re sult in burdening that year with a legacy of obligation from . which it should be freed. An accrued asset chargeable to a definite period, on the other hand, is the earnings of the indus try during the period, and it is the design of bookkeeping according to the theory of accruals to set the liabilities of a definite period against the earnings of the same period.

The following are the advantages of this system of ac counting: It allows a 'true statement of the operations of the period covered by the report.

It shows the financial standing of the corporation so far as affected by the operations of a definite period.

It permits the localization of any particular influence by which operations'are affected.

It permits a quicker and more accurate determination of the influences at work during any particular period.

(2) Is Public Accounting on the Basis of Accruals Prac ticable f—It must certainly be admitted that accounting on the basis of accruals is a refinement upon the simple cash balance. Can it be applied to public accounting? Without expressing a positive opinion upon this point, it is difficult to say why government accounting cannot be car ried on successfully on the basis of accruals. There is nothing in the nature of public expenditures which would render this more difficult for the government than for a railway corpora tion. The income of government arises from taxes or from services. Taxes are an asset to the State when legally as sessed, while the earnings from a public service are in all re spects like the earnings of the private corporation. There is no more difficulty in reporting customs duties accrued from day to day than in reporting moneys received from day to day. Internal revenue, also, being an excise duty, grows from day to day with the process of manufacture, and reports might be made by internal revenue officers at sufficiently frequent in tervals to enable the treasurer to maintain a current oversight over public assets from this source. The assessment or ap portionment of direct or property taxes, it is true, occurs but once a year, but a clearer idea of the business of levying and collecting taxes could be obtained were this amount set up on the books of the State as an asset (deficiencies in collection being accounted for as a corporation accounts for bad debts) than by the present method of taking into consideration nothing but amounts actually paid. There is no difficulty in applying the theory of accruals to public income.

The expenditures of the State, also, permit of their being charged when accrued instead of deferring the charge until the payment is actually made. The pay-roll of the State is like the pay-roll of a corporation and represents a constantly accruing obligation. It is an " operating expense." Interest upon a debt accrues with mathematical precision, and may be taken up on the books without reference to the date of ma turity or the time of payment. The obligations arising from contracts are perhaps a little more difficult to handle, but the same problem is solved successfully by corporation account ants. There is nothing in the nature of public income or of public expenditure to prevent the adjustment of public accounting to the theory of accruals.

Why, then, it may be asked, do England and the United States hold to the cash statement for public accounts? Many reasons might be given in explanation of this fact. Their con tentment with the cruder method of accounting may in part be traceable to the confusion which exists in public finances in France, where it is attempted to realize the theory of ac cruals. But an examination of the subject would show that this confusion is due to the failure of the French people to apply strictly the theory of accruals. Accounts are kept open unduly long in order that special services may be made the basis of special reports, a practice which is condemned by the theory of accruals as well as by the theory of a cash statement. The accounting system strictly adjusted to the theory of accruals should permit a cross-section to be cut anywhere and at any time in fiscal operations. The French have not worked out the idea which they profess to have accepted. Mr. Wilson's criticism quoted above is sound when addressed to what the French do, but it is not final when addressed to what they might do.

Speaking for our own country, there are two reasons why it would be difficult to secure the adoption of what is here claimed to be the better method of accounting. In the first place, public servants are not accustomed to the discipline essential to secure accurate and prompt returns, and it is not sure that this discipline can be secured until the civil service and tenure in office are more firmly established than at the present time. In the second place, the plan of accounting proposed would require a higher degree of centralization in the administration of public accounts than is provided for by the present organization of the Treasury Department. It has been suggested by some writers that the accounting depart ment of the Federal Government should be a separate and in dependent department. Without conceding the necessity of so radical a change, it is believed that decided advantage would arise should the duties imposed upon the comptroller's division of the treasury be made more comprehensive. Every disbursing officer and every collecting agent in the land should report to this division; at least such a provision would be necessary if the business of government is to be recorded after the manner of the accounting of the best organized business corporations. The wisdom of undertaking a reform in treasury accounting must be left to the decision of the practi cal statesman, and he must decide it in view of the shifting character of the civil service and of the popular prejudice against too great centralization in administrative authority.

Much might be learned by a study of the practice of pri vate corporations besides the fact that a balance of assets and liabilities is superior to a balance of receipts and expenditures; but our inquiry in this direction must content itself with a single suggestion. Public accounts make no difference be tween expenditures for the support of current services and expenditures that are in the nature of public investments, from which it follows that public accounts do not show how much it costs to run the government. It is not possible in the mixed statements which are presented to the public to find out exactly what the current operating or working expenses are. No great harm arises from this so long as nothing in the nature of commercial enterprises or investments is under taken by the State. But at present the tendency seems to be toward experimentation with such enterprises, a tendency that shows itself most clearly in the case of municipal corpora tions. Public water-works, public lighting, and public street railways are growing in favour; and, whatever the final con clusion may be as to the expediency of such investments, it is certain that municipal governments will have more to do with these matters before they have less. If a valuable and per manent lesson is to be learned from these experiments it is essential that the capital account of municipal corporations should be kept separate from the current expenses account. One cannot measure in his imagination the mischiefs that may result from the so-called reports of water-works commis sioners, public-lighting commissioners, or street-railway com missioners, which fail to separate operating expenses and expenditures in investment, or which fail to make proper recognition of the depreciation in public property. It is believed that municipal corporations, if not, indeed, all grades of government, should carry their accounting so far as to declare a balance-sheet from year to year; a consideration of this point, however, would carry us too far from the main line of our discussion.

The impression left by this cursory consideration is that in no particular does government so much resemble a busi ness as in the matter of its accounts. True accounting rests upon scientific classification; and, while public officials ought perhaps to take the lead in the development of conclusive and authoritative bookkeeping, the fact is that the organization of government for the purpose of auditing accounts is, in this country at least, unscientific, and the classifications which have been adopted are inadequate when compared with the best accounting of the most progressive corporations. This remark is more pertinent when addressed to the bookkeeping of municipalities than to that of the Federal Government. But the reports of all grades of government might be made truer, clearer, and more scientific by conformity, so far as pos sible, to the accounting of the most carefully administered corporation.

36. How should Public Moneys be Kept I—This question, like that of the theory of public accounts, involves broad and comprehensive interests. A general survey of the practice of governments shows two pretty well-defined policies for keep ing the funds of imperial or national governments. The ques tion of local or State financial management need not here be considered. The first is illustrated by the practice of Eng land, France, Germany, and, indeed, of most of the European countries, and consists in the establishment of a bank in the management of which the government exercises a directing, if not a controlling, influence, and of which the government makes use in most of its fiscal transactions. The second po licy is the one practised by the Federal Government of the United States, and consists in the establishment and exclusive management of an independent treasury. The aim of this policy is to separate the transactions of the State from commer cial transactions. With this end in view the government pro vides its own vaults for the safe keeping of its funds, covers the money which it receives by receipts which it issues to its own officers, and distributes its funds by drafts and checks which it draws against itself.

It is manifest that the appropriate method of keeping pub lic funds should be determined in view of two quite distinct interests. On the one hand, the government must be guaran teed the safety of its funds, and provide for their disposal in such a manner that they may be employed with convenience and despatch; on the other hand, inasmuch as the govern ment makes use in its exchanges of the same medium of pay ment as individuals, and since the transactions of the govern ment are greater than those of any other single corporation or business, it is essential that these transactions should be carried on in such a manner that the quantity of money in cir culation should not, on their account, be subjected to sudden and arbitrary fluctuations. The significance of this latter requirement will be appreciated if the amount of annual govern mental expenditures be compared with the volume of cur rency. In the United States, for example, the volume of cur rency is perhaps $1,7oo,000,000, while the public expenditures, all grades of government being taken into consideration, are slightly under $1,000,000,000. Should, now, the public income be in excess of public expenditures, or should income and expenditure be so adjusted that the latter follows tardily upon the former, it is evident that the volume of currency in circulation might be so far reduced as to seriously embarrass the orderly payments of commerce. It might, to use the com mon phrase, produce a stringency in the money market.

This danger of a monetary stringency is increased by the fact that a commercial demand for money is not the same for all times of the year; and should it happen that a surplus in public revenue takes place at a period of unusual commercial demand the business world would feel the pressure, although the amount locked up in the public treasury were compara tively small. It thus appears that the question which asks how a government should keep its funds is one that demands broad and comprehensive commercial considerations, as well as a consideration of the safety and convenience in public transactions.

(i) Practice in England, France, and Germany. As already remarked, most of the European states solve this problem by the establishment of a national bank. Speaking generally, and without any particular banking institution in mind, a na tional bank is an institution which, in return for some special privileges granted by the government, agrees to become the custodian of the public funds, and to serve as the fiscal agent of the State in formal business transactions. In England, for example, all public moneys received from taxes are paid into the Bank of England or of Ireland, and credited to the ac count of the public exchequer. The bank transacts the entire business of the government. " She acts not only," says Adam Smith, " as an ordinary bank, but as a great engine of State." Accounts and audits are controlled by the government, but the business is transacted over the counter of the bank. At the bank, however, the government is on the same footing as other depositors; and, since the money deposited can be loaned out in the ordinary course of business, there is no danger that fluctuations in the receipts and payments of government will occasion a fluctuation in the volume of currency available for trade; for, although the money is at the credit of the government, it is available to meet business demands. In Germany the business of the government is done through a bank whose board of directors is appointed by the govern ment and in whose profits the government participates. This institution is called the Imperial Bank of Germany. It is re quired to receive and make payments, and to conduct financial operations for the Imperial Treasury without compensation, and to manage, free of cost, the receipts and payments of the several states of the empire. Since, however, the Imperial Bank of Germany performs the ordinary function of a private bank of discount, it follows that the public funds are never withdrawn from the channels of trade. The Bank of France, according to Professor Dunbar, is an " institution subject to control and made subordinate to the needs of the government of to-day." The government keeps its money in the bank, and the treasurer maintains a running account at the bank. In addition to the amount on deposit the government is at liberty to make overdrafts upon the bank to the amount of 6o,000,000 francs. The important point, however, is that in France, as in Germany and in England, the business of the country is in large measure free from the disturbances which follow the accumulation of large sums in the public treasury. There is no danger in these countries that the government may bring about commercial disturbances because its payments happen to be badly timed or its receipts are temporarily in excess of expenditures. The money taken from circulation in the form of taxes may be returned to circulation either by the payment of public dues or by deposit.

A careful study would show that the most significant feature of these national or imperial banks is their connection with the established systems of currency. The higher the grade of commercial organization the greater need is there for elasticity in the currency. The demand for money is a fluc tuating demand; and, by giving to the banks the exclusive right to issue notes, and placing at their disposal unusual amounts for the discount of commercial paper, it is believed that the government can, acting through the banks, prevent the appearance of a serious commercial stringency, or, if that is impossible, prevent the extreme disasters of a commercial panic. In England commercial pressure which threatens to exhaust the resources of the bank is met by an order front the government to issue notes for the discount of commercial paper without bullion security. In France there is no limit placed to the issue of notes, and the bank itself determines when unusual issues shall be made. In Germany the situa tion is practically the same, except that the tax on circulation increases with the size of the issue, a provision which works to limit the amount of notes in circulation to the needs of com merce. It thus becomes clear that for these nations the ques tion of how public moneys are kept is subordinated to the question of the control of the country's circulation; and that, baying decided to attain elasticity by a more or less direct regulation of discounts, the entire business operations of the State are brought into as close touch with the commercial world as possible. It is necessary to grasp this fact in order to apprehend the theory upon which the opposing policy of governmental isolation rests, a policy formally adopted by the United States when it established the independent treasury or sub-treasury system.

(2) Practice in the United States. It may be well to say a word, by way of a prefatory observation, respecting the man ner in which the United States Government kept its funds be fore the formal establishment of the independent treasury in 1846. The common impression seems to be that during the existence of the first and second national banks these insti tutions were made the fiscal agents of the government, receiv ing its deposits and disbursing its funds. This, however, is an erroneous impression. There is nothing in the charter of the first National Bank which goes to show that it was designed to be the depository of the public funds. This could not have been done had it been regarded as desirable, for communica tion between the different parts of the country was so difficult and uncertain, and local jealousies were so strong, that a finan cial institution under the patronage of Congress with branches in all parts of the country would have been an impossibility. Private banks were, therefore, used, and there is no indication that the public bank had precedence over private banks in any matter that pertained to deposits or disbursements. The charter of the second National Bank was drawn with the idea of securing a centralized control over public deposits; but it was never intended that this institution should have ex clusive use of public moneys. Private banks were always used as depositories, but, at first, under rules prescribed by the directors of the National Bank. The difficulties that arose on this account, and which led the bank in 1818 to give notice that it would no longer act as the agent of the government, present considerations too minute for the present broad writ ing. The significant fact is that the Federal Government tried the experiment of a bank of the European type, so far as that was possible under the conditions which then existed for trans portation and communication. The experiment seemed to fail, and for that reason Congress undertook to solve the prob lem in another way. Provision was made for public deposits by building vaults and establishing sub-treasuries; for collec tions and disbursements by making use, so far as possible, of its own machinery for the transfer of value; and for an elastic currency either through the agency of State banks, as was the case prior to 1863, or, as at present, by means of a system of national banks. The Government of the United States does not acknowledge its responsibility for providing funds to meet unusual commercial demands. It is its aim rather to keep itself separate from the flurries and panics of the commercial world.

The title of the law which declared the policy of indepen dence is " An Act to provide for the better organization of the Treasury, and for the collection, safe keeping, transfer, and disbursement of the public revenue." The quarrel of Presi dent Jackson with the second National Bank, the withdrawal of public deposits from this bank and their distribution to State banks, the consequent expansion of State banking, the increase of speculation, the extension of public improvements under the insane enthusiasm of State governments and private corporations, the commercial panic of 1837 and the banking panic of 1843 which resulted from this unhealthy commercial ac tivity, the losses sustained by the Federal Government through its deposits with State banks, the difficulties encountered by the public treasury on account of the great variety of money offered for the payment of public dues, the embarrassment to business occasioned by the desire of the Federal to maintain a specie basis for its receipts and expenditures these, and all other facts of that period of commercial disas ter and financial disgrace from 183o to 1845, are well known to the student of American history. The policy of depositing public funds in State banks without the restraining influence of a national bank over their issue of notes, and without ade quate provision for the proper use of public funds and their prompt repayment, could no longer be supported by public opinion. On the other hand, so great was popular prejudice against Federal interference with local affairs that it was im possible for the Federal Government to establish a banking institution which should be the exclusive depository of public funds, and which should have adequate power to establish and maintain a uniform currency throughout the United States. It must be understood that the design of the sub-treasury system is the absolute separation of the treasury from business affairs. Not only was the influence of the treasury in com mercial affairs regarded with suspicion by the merchants, and the creation of the Federal bank regarded as an encroachment upon the rights of the State by the people, but the Federal Government, on its part, feared to trust its funds to commer cial agencies for temporary use lest it should be subjected to loss. In such a state of affairs nothing remained but the establishment of an independent treasury system.

The policy of separating public from private business hav ing been formally established, what can be said of the result? Is it possible for a government which handles from three to four hundred millions of dollars a year, and which is imposed with the duty of providing a circulating medium, to evade the necessity of performing banking functions, even though it refuses to assume responsibility for the administration of a banking corporation? The experience of the United States upon this point will perhaps be more instructive than an at tempt at theoretical consideration. Three facts may be noticed as bearing upon this question : First. It was a part of this scheme of separation that the government should employ specie in its own transactions to the exclusion of all other forms of currency. The notes of the State banks were not only unsafe, but they 'lacked the uni formity of a national currency. The only stable and uniform money was gold and silver; and the government, having trans ferred to the States all control over banking, chose to confine itself to that form of money over which, by the Constitution, it was obliged to retain exclusive jurisdiction. This phase, of the general policy of treasury isolation was not attended with any marked degree of success. Not only was it impossible for the government to transact its business in conformity with the rules laid down by the " specie circular "; but, in so far as it was able to command specie, it embarrassed the operations of the State banks, which relied upon the fund of specie in the country for their reserves, and rendered them less safe than they otherwise might have been. Dr. Colton, writing in 1856, said : " This government institution [the independent treasury], therefore, thus becomes an interfering power with the banking operations of the country to disturb and embar rass them." We admit this to be a curt disposal of a ques tion which at the time was the subject of extensive and bitter controversy; but the simple fact is that the attempt to separate the fiscal transactions of the Federal Government from the commercial transactions of industry is one that can not be realized. A sovereign State cannot evade its responsi bility for establishing and maintaining a national currency, and any attempt to do so not only occasions loss to itself by its use of local currencies, but it results in general commercial embarrassment.

Second. In the second place, the Federal Government has, contrary to the theory of independence, seen fit to establish a note-issue business, and to this extent has converted the Treasury Department into a banking organization. Reference is here made to the fact that the treasury notes issued during the War of the Rebellion, and which in 1879 were brought to par value with specie by the policy of " resumption," have since then been sustained in circulation by the maintenance in the Treasury Department of a gold reserve. The notes thus sustained constitute twenty per cent of the currency in circu lation. To this extent the currency is fixed and inflexible. Whether or not this is wise we shall not undertake to discuss, nor shall we venture to inquire whether the issue of notes can appropriately be undertaken except in connection with the banking functions of exchange and discount; our only point is that in this particular, also, the theory of independence does not seem to have sustained itself. The exigencies which the treasury has met have proven stronger than the theory.

Third. Finally, the government, contrary to the theory, has been forced to assume responsibility for the bullion re serve of the country, and by so doing to acknowledge that a country whose commercial life rests on a highly organized system of credits requires of its government that the standard of values upon which credits are based, and in conformity with which contracts are drawn, cannot be a matter of indifference to the State. This duty of guarding the specie reserve is recognised as the most significant, if not the most impor tant, function of a national bank like that of England, of France, or of Germany; and nothing could more clearly indicate the inadequacy of the policy of fiscal isolation than the fact that the United 'States Government has been forced to assume the task of protecting the bullion reserve of the country against the drains of an adverse trade.

If it be impossible, as the experience of the United States seems to indicate, for a sovereign government to withdraw itself from the circle of commercial interests, it seems wise to conclude that the means for exerting this influence should be direct in order to be effective. The independence of a pub lic treasury is a policy that cannot be maintained except in the most formal and superficial manner.

This discussion has been carried on in view of the responsibilities that necessarily come to a sovereign State; with local governments the situation presents no difficulties. A municipality, a county treasury, or even a State will find that the most convenient method of transacting business will be through the agency of local banks. The experience of busi ness corporations in the disposal of their funds may be ac cepted as pertinent for minor public corporations. It is the broad commercial policies and monetary problems involved that make this question a serious one for national govern ments, and with these local governments are not concerned.

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