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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 atthe beginning of its next session which of the Subtreasuries, if any should be continuedafter the end of the fiscal year 1917, and if, in his opinion, any should be continued thereasons in full for such continuance; also, if any or all of said Subtreasuries may bediscontinued, what legislation will he necessary in order to transfer their duties andfunctions 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 wasauthorized by the act of August 6, 1846, and subsequent acts amendatory thereof.

The duties and functions of the Subtreasuries may be stated generallyas 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 similarfunds.

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.

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Encashment of checks warrants, and drafts drawn against the Treasury of theUnited 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 largeextent since the establishment of the Federal Reserve System by the designation ofFederal reserve banks as Government depositaries in those Subtreasury cities whereFederal reserve banks are located. Federal reserve banks are located in the Subtreasurycities of Boston, New York, Philadelphia, Chicago, St. Louis, and San Francisco. NewOrleans has a branch of the Federal reserve bank of Atlanta, while neither Baltimore norCincinnati has a Federal reserve bank.

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

The Federal reserve act does not expressly, or by implication, contemplate thesubstitution of the Federal reserve banks for the Subtreasuries, nor would it, in myopinion, be possible, or advisable if possible, to attempt such a substitution. While thegeneral or current fund of the Treasury may, in the discretion of the Secretary, bedeposited 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 againstoutstanding gold and sliver certificates and greenbacks, are not included in thisauthorization. The gold coin and bullion held against gold certificates, amounting atpresent to more than $2,000,000,000, a considerable part of which is deposited in theSubtreasuries, should not, in my opinion, be committed to the custody of any privatecorporations 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 1890and the silver dollars held against silver certificates. If, however, it should be deemedadvisable to transfer the custody of these trust funds to Federal reserve banks or to anyother private corporation or corporations, it would be necessary to make a specialdeposit 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 fundsupon terms and under conditions satisfactory to the Government, and at a saving in costover the subtreasury methods, while, at the same time, providing all of the conveniencesin handling these funds and the same measure of security as now afforded by thesubtreasury system, is a matter upon which I am unable to express an opinion. I desire to

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repeat, however, my earnest conviction that it would be unwise to commit the custodyof these trust funds to any private institution or institutions.The custody of thesetrust 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, supplyingmoney and coin where needed, and reducing the cost and expense of shipments of moneyand coin from a common center. It is necessary to maintain the facilities andconveniences provided by the Subtreasuries in the large centers of business in thecountry, such as the cities in which the Subtreasuries are now located. Even if theseparticular functions could be transferred to Federal reserve banks where they exist, theservices rendered by the substituted agencies would have to be compensated for. Thiswould involve expenses to the Government, while, at the same time, the facilitiesprovided might not be as thorough and satisfactory as those supplied by the Subtreasuriesthemselves.

It has been suggested that the Subtreasuries are merely conveniences and not

necessities, and that their duties might be performed entirely by the Treasury inWashington. This is in a sense true, but the cost of handling all the business from acommon center in a country so extensive as the United States, might be greater than theexpense of the Subtreasury system, whereas the delays and inconveniences which thepublic would have to suffer might prove a very serious handicap upon business. It couldwith equal force be argued that internalrevenue offices throughout the United Statescould be abolished and all of the work done at Washington, and, in like manner, thatmany of the customs offices throughout the country could be abolished and all of thework done from Washington. It is the duty of the Government to provide adequatefacilities 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 tileSubtreasuries. It has been only one year since the Federal reserve banks were madeGovernment depositaries and fiscal agencies and the current or general funds of the

Government in such cities transferred to Federal reserve banks. About that time Iappointed an improvement committee (described in my annual report of 1915) to make acareful study of departmental methods in all directions and to report upon the best meansof improving the general administration of the Treasury service in its various importantbranches. 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 theexpense of operating these institutions in some, if not in all, of the cities where they arenow located.

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

SubtreasuryGovernment fundsheld June 30, 1916

Total transaction,fiscal year 1916

Expense ofmaintenance,

fiscal year 1916

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

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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 57,792.76St. 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 theSubtreasury 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 fromNew 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 theseinstitutions were abolished, the total cost of operating them would not be saved, as acounter expenditure by the office of the Treasurer in Washington, resulting from theincreased 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. Withthe test of further experience it may develop that the functions of the Subtreasuries, orsome of them, may be transferred to Washington, or to some other agency, but actionshould not be taken hastily or inadvisedly.

I regret exceedingly that my necessary absence from Washington, in connectionwith 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.