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In each instance the investment of these funds in interest-bearing public-debt obligations has been expressly authorized by the Congress. The rates of interest which the investments shall yield sometimes are and sometimes are not prescribed by the Congress. When the interest rates are not prescribed by the Congress they are fixed by the Secretary of the Treasury under the general authority to prescribe the terms and conditions of public borrowings given to him by the Second Liberty Bond Act, as amended.

The Congress has authorized the payment of interest to certain other trust funds on the amount of cash funds deposited in the Treasury without requiring the formality of investing these funds in interest-bearing public-debt obligations. The deposit liability for these trust funds is not included in the public debt and is not subject to the debt limitation; the interest on these funds is paid from various permanent appropriations other than the appropriation for interest on the public debt. The following table shows the balances in these trust funds at December 31, 1954, and the rate of interest paid on each fund.

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HANDLING PUBLIC FUNDS The power of the Congress to control the purse provided for in the Constitution is exercised, for the most part, through the medium of appropriations. The appropriation of funds by the Congress does not in itself create public funds; rather, it authorizes the various Government agencies to spend public funds. In the case of Government corporations and certain other Government agencies, congressional control of the purse may also be exercised by establishing borrowing authority and by imposing limitations on such authority and on expenditures for administrative expenses.

The cash balance maintained by the Treasury in general is based on the current disbursing needs of the Government; sufficient cash is not kept in the Treasury to meet all unexpended appropriations and other expenditure authority available to the various Government agencies. In determining what cash balances are to be maintained, consideration is given also to the effect the flow of ash in and out of the Treasury will have on the economy of the country.

Most of the public funds in the Treasury are held by or for the account of the Treasurer of the United States. Public funds are acquired mainly through (1) collections of tax and other revenues; (2) sales of public debt obligations; (3) collections of moneys held by the Government as trustee in accordance with the terms of a trust agreement or statute; and (4) miscellaneous reimbursements and refunds. Such funds may be deposited directly with the Treasurer in Washington, 1). C., or with Federal Reserve banks or commercial banks for the accountant of the Treasurer. Public funds are usually disbursed through the issuance of checks drawn on the Treasurer by authorized Government disbursing officers.

Public funds held by or for the account of the Treasurer, exclusive of foreign currencies, consist of funds deposited in Federal Reserve banks and commercial hanks located both within and outside the United States, gold and silver bullion, base coinage metals, coin, and currency. Following is a summary of such funds as of December 31, 1954, as reported in the Daily Statement of the United States Treasury. Bank deposits

$4, 618, 029, 000 Gold:

Total gold held by or for the account of
the Treasurer --

$21, 712, 306, 000
Less liabilities backed by gold.

21, 223, 532, 000

488, 774, 000 Silver :

Total silver held by or for the account of
the Treasurer.--

2, 497, 650, 000 · Less liabilities backed by silver...

2, 415, 141, 000

82, 509, 000 Minor coin and coinage metal.

5, 425, 000 Currency-----

78, 303, 000 Unclassified collections.--

62, 665,000

Free funds in Treasury available for Government expendi-
tures.

5, 335, 705, 000 Bank deposits

General.Bank deposits held for the account of the Treasurer at December 31, 1954, consisted of: Funds with Federal Reserve banks...

$673, 652, 000 Funds with commercial banks :

Deposited in tax and loan accounts with special depositaries.- 3, 460, 632, 000
Deposited in domestic general depositaries.

398, 199, 000 Deposited in foreign general depositaries..

85, 546, 000

Total.--

4, 618, 029, 000 Most receipts of the Government, other than those deposited in tax and loan accounts with special depositaries, are deposited for the account of the Treasurer with the Federal Reserve banks and branches. The funds held by the Federal Reserve banks for the account of the Treasurer provide the day-to-day working cash balance from which most checks drawn on the Treasurer are paid. As a general rule, the Treasury attempts to maintain a balance of about $500 million in the Treasurer's accounts with the Federal Reserve banks.

Tax and loan accounts.—There are about 10,500 commercial banks in the United States (out of a total of about 14,500) acting as special depositaries. The funds to the credit of the United States in these banks are acquired through collections of Federal income, social security, railroad retirement, and excise

tares and sales of savings bonds and notes and other public-debt obligations issued for cash. The accounts with the banks holding these funds are referrel to as tax and loan accounts. These accounts are divided into three groupsA, B, and X.

Deposits in groups A and B accounts arise from collections of withholding and excise taxes paid by customers of the banks and proceeds from sales of publicdebt obligations sold to the banks or their customers. For example, if a customer of a bank buys Treasury bonds through his bank and pays for them by drawing a check on his account with the bank, the bank charges the customer's account and credits the tax and loan account of the Treasurer. When a bank buys Gov. ernment securities for its own account it may also make payment by crediting the tax and loan account of the Treasurer. Also, when employers or vendors pay their withholding or excise taxes through their banks, the payments are credited to the tax and loan accounts by the banks.

Group X is a special classification of accounts established for use during periods of peak tax collections in banks holding funds in either group A or B accounts. During these periods when individual checks of $10,000 or more are received in payment of corporate or individual income taxes, amounts equal to the checks are deposited by the Treasurer in the group X accounts with the banks on which the checks are drawn.

The balances held in each group of accounts as of December 31, 1954, were:

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Funds in the tax and loan accounts are transferred to the Treasurer's accounts with the Federal Reserve banks as needed by the Treasury; there is no shifting of funds from the tax and loan account in one commercial bank to the tax and loan account in another commercial bank. The amounts to be transferred to the Federal Reserve banks are determined by the Treasury after consultation with the manager of the System open market account. Treasury Department policies with respect to withdrawals from the three groups of tax and loan accounts are as follows:

1. Group X accounts are usually drawn down before withdrawals are made from the other groups.

2. Group B accounts are usually drawn on daily.
3. Group A accounts are usually drawn on once a month.

Funds are withdrawn from the individual accounts in each group on a pro rata basis. Also an effort is made to equalize the pro rata amounts called from group A and group B accounts each month.

Although there are over 10,000 special depositaries, a large part of the funds in the tax and loan accounts is held by a relatively small number of banks. For example, at December 31, 1954, there were 54 banks holding funds in these accounts in excess of $10 million, and these banks held 42 percent of the total funds in the tax and loan accounts. The concentration of funds occurs because most of the Government receipts deposited in tax and loan accounts come from customers of these banks.

The principal reason cited by the Treasury for the use of tax and loan accounts is to minimize the disruptive effects the Treasury operations might have on the money market. Banks have not paid interest on funds deposited in these accounts since 1933 in accordance with section 11 (b) of the Banking Act of 1933 (12 U. S. C. 371 (a)), which provides that "no member bank shall, directly or indirectly, by any device whatsoever, pay any interest on any deposit which is payable on demand.” On the other hand, the banks perform various services for the Government for which they receive no compensation, such as the sale and issuance of United States savings bonds, the distribution of announcements and receipt of subscriptions for other Government securities, and the handling of remittances from employees of withheld income and socialsecurity taxes. The Treasury Department makes no attempt to determine the relationship between the cost to the banks of performing these services and the earning value to the banks of the tax and loan accounts. In discussing this subject, the Secretary of the Treasury in a letter to the Comptroller General dated December 3, 1953, stated that:

"With regard to your request for my views concerning the fact that these deposits are interest-free to banks and the relationship, if any, between the carrying of the accounts and the services rendered by the banks in connection with the handling of transactions involving withheld taxes and sales of Government securities, you are advised that quite aside from the question of interest and the cost of the services, the fiscal mechanism provided by the tax and loan accounts is essential to a proper administration of Treasury finances. Both deposits in and withdrawals from these accounts are so active and the balances fluctuate so widely it would be impracticable to evaluate the accounts in relation to the costs of the services rendered and the benefits which the accounts serve to the national economy. The accounts are maintained in the overall interest of the Government and not in the interest of the banking institutions. Serious disturbances would occur if money should be withdrawn from the commercial banking system and deposited in the Federal Reserve banks before it is needed for Government expenditure and no useful purpose would be served thereby."

Although there is a considerable fluctuation in the tax and loan accounts, there appears to be some question as to whether this fluctuation is so great as to preclude a determination as to whether the earnings by the banks on funds so deposited are greater or smaller than the cost to the banks of performing the services for the Government, particularly with respect to banks holding substantial amounts. The following table shows for selected months in 1953 and 1954 the maximum, minimum, and average daily balances in these accounts.

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The records of the Treasury relating to these accounts indicate that relatively stable minimum balances are maintained in these accounts which undoubtedly have an earning value to the banks.

General depositary accounts.---There are about 1,500 commercial banks and branches acting as general depositaries. A part of the funds with general depositaries are placed with the banks in order to make working cash balances readily available to Government agencies at locations some distance from Federal Reserve banks and branches. However, most of the funds are placed with the banks as a part of an arrangement under which the banks are compensated for various fiscal services rendered the Government by paying them interest on certain public debt obligations which they hold. Payment to the banks by this means usually is accomplished by depositing funds in the banks for the account of the Treasurer of the United States and allowing the banks to invest an equal amount in 2 percent depositary bonds or, in some instances, in other types of Government bonds. The funds (except for allowances for float and reserve requirements) are deposited with the banks for the purpose of compensating them for their services through interest earned on the bonds.

The Treasury Department uses this means to compensate banks for the following services:

1. Maintaining the general accounts of the Treasurer of the United States. 2. Providing banking services in foreign countries.

3. Providing banking facilities at military posts, naval stations, and other Government installations in the United States.

4. Maintaining State unemployment compensation benefit payment and clearing accounts.

5. Maintaining reterans unemployment compensation benefit payment accounts. 6. Cashing Government checks in the Washington, D. C., area. 7. Maintaining official checking accounts of postmasters.

The Treasury does not agree that it compensates banks for these services. The position of the Treasury on this subject was expressed by the Fiscal Assistant Secretary of the Treasury in a letter to the General Accounting Office dated July 28, 1952, in which he stated that the “Treasury does not pay banks for services,” but that it deposits Government funds with the banks to the extent that such funds "are warranted by the services performed by the banks.” Moreover, the maintenance of balances with the banks for this purpose does not *necessarily involve any expense to the Treasury."

In our opinion, the Congress under these procedures is not able to exercise its constitutional prerogative of determining whether public funds should be spent for any or all of the seven types of services performed by the banks and, if public funds are to be used, the maximum amount that should be spent for such services. The Treasury Department, rather than the Congress, now makes these determinations.

Moreover, under present procedures information is not available as to the cost to the Government of the services performed by the banks, either in total or by types of services, as the cost is included as part of the interest on the public debt. The closest available approximation to the actual total cost to the Government of all services provided by the banks is the amount of interest paid on depositary bonds—$8,440,000 for the fiscal year 19.54. However, this is not a precise measurement of the actual cost to the Government of the fiscal services because

1. The banks sometimes purchase Government bonds other than depositary bonds as collateral for the Government funds deposited with them. Interest paid on such bonds should be included in the cost of the fiscal services.

2. Depositary bonds are sometimes purchased by the banks without having any Government funds deposited with them. Only the amount of interest in excess of that which would be earned on Government securities normally purchased by banks would represent payments for fiscal services.

The total depositary bonds outstanding at December 31, 1954, amounted to $432,761,500. About $300 million of these bonds were held by banks providing banking facilities at military posts and other Government installations and banks providing banking services in foreign countries. However, information is not readily available in the Treasury as to precisely how much of the total depositary bonds outstanding at any time are allocable to each of the seven types of services listed above.

Treasury Department officials have cited the act of June 11, 1942 (12 U. S. C. 265), the act of June 19, 1922 (31 U. S. C. 473), and the Second Liberty Bond Act, as amended (31 U. S. C. 771), as authority for depositing funds in banking institutions for the account of the Treasurer. The Second Liberty Bond Act, as amended (31 U. S. C. 752), was cited as the authority for the issuance of depositary bonds.

We feel that some doubt exists as to whether the funds made available by the Congress for interest on the public debt are intended to be used to finance the cost of fiscal services rendered by banks to the Government and its employees in lieu of obtaining direct appropriations for such purposes. In our report on the audit of the Office of the Treasurer of the United States for the period June 21, 1949, through June 30, 1951, which was transmitted to the Congress on June 8. 1953, and again in our audit report for the fiscal years 1952 and 1953, transmitted June 14, 1954, we recommended that the Congress consider whether the Secretary should continne to finance the cost of fiscal services in this manner. The reports also brought to the attention of the Congress the equally doubtful question as to the propriety of expenditures by the Armed Forces and civilian agencies in furnishing adequate quarters, equipment, and related services, including guards for banking facilities, free of charge. Indications at certain installations are that such expenditures may be considerable.

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