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In July, 1790, Congress approved removal of the national capital ten years hence from New York City to an as-yet undetermined location on the Potomac River. The vote was the result of a political maneuver to accommodate a matter of much more immediate impact, the realization of Alexander Hamilton’s economic salvage blueprint for the new nation. That blueprint proved crucial to the country’s economic and political fortunes. At the same time, it opened fissures of sectional conflict, constitutional theory, and political partisanship that had remained below the surface, if barely, during the preceding decade.
The impact of the first Secretary of the Treasury can hardly be overstated. His figure loomed so large over the country’s political and economic affairs even after he left office in 1795 that some historians have dubbed the era “Hamilton’s Republic.” It was a felicitous combination of man and office. The evolution of Anglo-American constitutional doctrine that emphatically placed the power over the purse in the legislature put the head of the treasury in a category distinct from the rest of the executive cabinet. Alone among those officers, he was required by law to issue reports directly to Congress. At the time, the Treasury Department had by far more officials in the capital and functionaries in the field than other civilian departments had.
Hamilton played into this role by treating the position as a sort of prime ministership, through which he would oversee the other cabinet heads under the reign and guidance of the president, as well as act as a liaison between the executive and legislative branches. The childless President George Washington, for whom Hamilton had become a surrogate son, abetted this stance. Washington not only typically took Hamilton’s side in political disputes, but also gave him tasks and requested his opinions in matters outside the Treasury Department’s domain.
Following a meteoric rise that saw him form his own New York militia artillery company at age 19, become adjutant to General Washington with the rank of lieutenant colonel at 20, command a critical assault at the Battle of Yorktown at 24, and found the Bank of New York at 27, Hamilton became Secretary of the Treasury at 32. In September, 1789, Congress requested that he prepare a series of reports on the credit of the United States. Hamilton delivered his recommendations to Congress in January, 1790.
The “Report on the Public Debt” proposed three broad policies: to fund the national debt (including interest payments in arrears) at par through 6% bonds, to assume payment of the remaining state war debts, and, in a separate report in January, 1791, to create a central banking institution akin to the Bank of England. Each policy engendered vocal opposition. As to the first, the debt was owed about one-third to European creditors. The rest was owed to Americans, typically merchants who had supplied goods and individuals who had supplied service, typically military, and been paid with these debt certificates. The value of the debt instruments had decreased significantly due to currency devaluation and the long-running uncertainty about the government’s ability to repay them at all. As a result, wealthy individuals had purchased much of the outstanding debt at deep discount from those holders who, over the years, needed cash. Many denounced Hamilton’s plan as a wealth transfer from the middle and lower classes, who would have to pay taxes needed to retire the debt, to the upper-class “speculators.” Their criticisms were not entirely unfounded, as Hamilton made clear in various statements. He believed that the success of the United States ultimately lay in tying the self-interest of the leading members of the community to the nation rather than their states. Nothing would do so more than to align their economic future with that of the general government and to direct their energy to expanding the country’s commerce and manufacturing. Repaying their financial bonds at par would, in turn, create personal and class bonds that would transcend state loyalties.
As to the second, Virginia and some other states objected because they had paid down, or even eliminated, their war debts through prudent financial policies. Those states saw the debt assumption by the federal government as rewarding profligacy and irresponsibility by debtor states and balked at the idea that their own citizens would now be taxed to cure the results of that mismanagement. Others viewed the assumption as creating a perception of a “bail-out” of abject states by a benevolent and efficient general government. Thus, they rejected the policy as a dangerous surrender of state power.
The establishment of the proposed central bank proved to be the most controversial of all, both as to the particular policy and the more general constitutional questions it raised. The Bank of the United States would be funded through the sale of stock, with 80% of the initial shares bought by private investors and the rest by the general government. Directors of the Bank would be selected in like proportion by the private and government interests. The Bank would act as a depository for government funds, and the government would draw on its account to pay its bills. Operating in various cities, the Bank’s prestige would attract private deposits and stock purchases throughout the nation. Foreigners also could buy stock but could not vote. Further, the Bank would extend credit to state banks under terms that would allow it eventually to control the national money supply as needed for economic stability. Through loans for large commercial or productive undertakings, the Bank could promote economic growth and internal improvements. Finally, its notes, backed by a reserve of gold and silver and circulated nationally, would provide a safe and effective medium of exchange.
Profits from its loans would be paid in dividends as a return on investment for the stockholders. The government’s share would be used to help pay interest and principal of all outstanding public debt. The Bank’s charter would expire after twenty years unless renewed.
The project was not novel. Hamilton had proposed such a system to the Confederation’s powerful Superintendent of Finance, Robert Morris, in 1781. Morris, who entertained similar ideas, set up the Bank of North America, chartered by the Congress under the Articles of Confederation. However, doubts were raised about that bank’s charter, because the Articles did not expressly confer such a power on Congress, and all powers not expressly given to Congress under that charter were reserved to the states. Hence, Morris also obtained a state charter for that bank from Pennsylvania. Four years later, the Pennsylvania legislature repealed that charter. Although the state reversed itself again in 1787, the damage was done. The vagaries of state legislatures undermined the very concept of a central bank. At the same time, the salutary effects on national finance demonstrated by that bank in its first several years affirmed Hamilton’s beliefs in the project. Hamilton himself had written about the issue of the public debt and generally admired Morris’s management of the matter. The admiration was reciprocated. President Washington first offered the Treasury position under the new government to Morris, who declined and recommended Hamilton–not that Washington needed much persuasion.
As with the Bank of North America, arguments quickly arose that Congress lacked the power to charter the Bank of the United States. After all, the Philadelphia Convention had rejected James Madison’s proposal to allow Congress to charter banks and corporations. Some had opposed this as a dangerous grant that would lead to a “consolidation” of the government in Congress. Others, looking at traditional English chartering of corporations, opposed it as unnecessary, because such a power already was inherent in sovereignty.
Faced with the controversy, Washington asked Madison, who served as a close adviser to the President even as he became a leader in the House of Representatives, to draft a veto message against the Bank Bill. In two speeches before the House, Madison opposed the proposal. He asserted that Congress could only exercise powers expressly granted or those that were a mere incident “evidently and necessarily involved in an express power.” Washington also submitted the issue to Attorney General Edmund Randolph and Secretary of State Thomas Jefferson. All three of his fellow-Virginians assured the President that the bill was unconstitutional in that Congress lacked the express authority to charter the Bank. Further, Congress could not rely on “implied” powers.
Jefferson delivered his opinion on February 15, 1791. He rejected arguments that the proposal could be upheld under Congress’s powers to tax, borrow, or regulate commerce. More significantly, he read both the “general welfare” language and the “necessary and proper” clause narrowly. The former was not a separate grant, but one tied to the taxing and spending power for Congress to spend only for the objectives listed in Article I, Section 8, of the Constitution. As to the latter, “necessary” did not mean mere “convenience,” but only “those means without which the grant of the [express] power would be nugatory.” Otherwise, “there is not one [non-enumerated power] which ingenuity may not torture into a convenience in some instance or other, to some one of so long a list of enumerated powers. It would swallow up all the delegated powers, and reduce the whole to one phrase,” namely, to give Congress “power to do whatever would be for the good of the U.S. … or whatever evil they pleased.”
Hamilton quickly drafted a 15,000-word response, which he delivered on February 23, 1791. He urged a flexible interpretation of Congress’s powers because of the “general principle [that] is inherent in the very definition of government … [t]hat every power vested in a government is in its nature sovereign, and includes, by force of the term, a right to employ all the means requisite and fairly applicable to the attainment of the ends of such power, and which are not precluded by restrictions and exceptions specified in the Constitution ….”
As to the “necessary and proper” clause, it was but a restatement of the “implied powers” principle and defined the means the government might choose to achieve its constitutionally authorized objectives. He rejected Jefferson’s restrictive interpretation as unprecedented and radical. The proper constitutional test, he wrote, was, “If the end be clearly comprehended within any of the specified powers, and if the measure have an obvious relation to that end, and is not forbidden by any particular provision of the Constitution, it may safely be deemed to come within the compass of the national authority.” Within those broad boundaries, all discussions were about expediency, not right.
Jefferson, Madison, and Randolph lost the argument when Washington signed the Bank Bill. Jefferson sarcastically characterized Hamilton’s views in a letter to Senator Edward Livingston in 1800, after Congress chartered a mining company. He derided the exercise by comparing the constitutional claims of the law’s supporters to a popular nursery rhyme: “Congress are authorized to defend the nation. Ships are necessary for defense; copper is necessary for ships; mines, necessary for copper; a company necessary to work the mines; and who can doubt this reasoning who has ever played at ‘This is the House that Jack Built’? Under such a process of filiation of necessities the sweeping clause makes clean work.”
It was clear to all that the debate was not just about the Bank, but about the extent of Congressional power and, indeed, about the nature of the Union itself. That debate would continue, although the forum shifted from the Congress and cabinet to the Supreme Court. The Bank’s charter expired in 1811, just in time for the War of 1812 to begin. The straightened financial situation in which the essentially bankrupt Madison administration eventually found itself stood in sharp contrast to the order that the Bank of North America had produced in the latter years of the Revolutionary War. Calls went out to charter the Second Bank of the United States. Even President Madison had once more changed his mind and, after one veto over practical objections, signed the bill to charter a new bank in 1816. Madison conceded that he repeated actions of the different branches of the government in support of the authority of the federal government to charter corporations had mooted his constitutional scruples over the matter, especially since those actions were supported “by indications…of a concurrence of the general will of the nation.” Jefferson never overcame his suspicion of the Bank, but, once retired from public office, agreed with Madison’s reasoning.
The Bank law was eventually challenged in McCulloch v. Maryland in 1819 and Osborn v. Bank of the United States in 1824. Chief Justice John Marshall, as was his wont in other important cases, once more borrowed extensively from Hamilton’s constitutional reasoning in upholding Congress’s power to charter the Bank. There the matter stood until the last round, between the Whig-controlled Senate and President Andrew Jackson in 1832. Jackson’s veto message was a ringing indictment of the financial interests that the Bank’s opponents since at least Jefferson had seen as the malevolent invisible hand directing the Bank’s actions. His economic provincialism favored hard money over paper. Moreover, Jackson dismissed the Supreme Court’s view on the constitutional issue as non-binding on him as the head of a co-equal branch. Finally, Jackson’s general inclination in favor of states’ rights and limited and defined powers of the central government made a central bank suspect.
The Jeffersonian strict constructionists of federal power thus won the battle over the central bank, a result not reversed until 1913 through the creation of the Federal Reserve Bank system. Of more significance and permanence, however, has been the across-the-board triumph of the Hamiltonian view of Congress’s powers. This is manifested not just in the broad reading of “implied” powers and the necessary-and-proper clause, but in the expansive reach of Congress’s express powers to tax and spend for the general welfare and to regulate interstate commerce. Add to that the general acceptance of broad implied powers for the executive branch, and it becomes obvious how thoroughly Hamilton’s nationalism has overwhelmed Jefferson’s romanticism about a republic of yeoman farmers and artisans governed by their state and local bodies and by a national Congress with strictly limited powers.
An expert on constitutional law, and member of the Southwestern Law School faculty, Professor Joerg W. Knipprath has been interviewed by print and broadcast media on a number of related topics ranging from recent U.S. Supreme Court decisions to presidential succession. He has written opinion pieces and articles on business and securities law as well as constitutional issues, and has focused his more recent research on the effect of judicial review on the evolution of constitutional law. He has also spoken on business law and contemporary constitutional issues before professional and community forums, and serves as a Constituting America Fellow. Read more from Professor Knipprath at: http://www.tokenconservative.com/.
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