Reconstructing the National Bank Controversy

Politics and Law in the Early American Republic

Eric Lomazoff

• Publisher: University of Chicago Press
• Year: 2018
• Print ISBN: 9780226579450, 9780226579313
• eBook ISBN: 9780226579597
• Topic: Politics & International Relations
• Subtopic: Banks & Banking
• Index: Politics & International Relations

The Bank of the United States sparked several rounds of intense debate over the meaning of the Constitution's Necessary and Proper Clause, which authorizes the federal government to make laws that are "necessary" for exercising its other powers. Our standard account of the national bank controversy, however, is incomplete. The controversy was much more dynamic than a two-sided debate over a single constitutional provision and was shaped as much by politics as by law.

With Reconstructing the National Bank Controversy, Eric Lomazoff offers a far more robust account of the constitutional politics of national banking between 1791 and 1832. During that time, three forces—changes within the Bank itself, growing tension over federal power within the Republican coalition, and the endurance of monetary turmoil beyond the War of 1812 —drove the development of our first major debate over the scope of federal power at least as much as the formal dimensions of the Constitution or the absence of a shared legal definition for the word "necessary." These three forces—sometimes alone, sometimes in combination—repeatedly reshaped the terms on which the Bank's constitutionality was contested. Lomazoff documents how these three dimensions of the polity changed over time and traces the manner in which they periodically led federal officials to adjust their claims about the Bank's constitutionality. This includes the emergence of the Coinage Clause—which gives Congress power to "coin money, regulate the value thereof"—as a novel justification for the institution. He concludes the book by explaining why a more robust account of the national bank controversy can help us understand the constitutional basis for modern American monetary politics.
 

Chapter One

Varieties of Strict Interpretation

The Conventional Wisdom

Despite a constitutional challenge from James Madison and several other members of the House of Representatives—a challenge rooted in a strict interpretation of the Necessary and Proper Clause—that chamber passed, in early February 1791, “[a]n act to incorporate the subscribers to the Bank of the United States.” Given the Senate’s passage of the same bill nearly three weeks earlier, it soon landed on the desk of President George Washington. The president, per Article I, Section 7 of the Constitution, had ten days to sign the Bank bill, return it to Congress with his objections, or let it become law via inaction. Sundays were constitutionally excepted from this window, and Washington understood his signature or veto to be due by the close of congressional business on Friday, February 25.1

By the time Washington received the Bank bill, two additional documents were already in his possession: short memoranda from Attorney General Edmund Randolph. Both were authored on February 12, both expressed doubt about congressional power to charter the Bank, and both did so along the constitutional lines traced by Madison and his House colleagues. Secretary of State Thomas Jefferson’s comparable constitutional qualms arrived in written form the following day. With his veto clock continuing to tick, on Wednesday, February 16, Washington forwarded the Randolph and Jefferson memoranda to Treasury Secretary Alexander Hamilton.2

Accompanying these memoranda was nothing less than an essay prompt for Hamilton and a fast-approaching due date. “[T]he Secretary of State and the Attorney General dispute the constitutionality of the act,” wrote Washington. “[B]efore I express any opinion of my own, I give you an opportunity of examining and answering the objections contained in the enclosed papers.” The opinions of Jefferson and Randolph having been “submitted in writing,” those of Hamilton were now required.3

On Monday, February 21—five days after receiving his prompt and mere days before Washington’s decision was due—Hamilton wrote the president with apologies, promises, and justifications befitting the modern undergraduate. Writing about himself in the third person, the Treasury secretary requested the president’s “indulgence for not having yet finished his reasons on a certain point. He has been ever since sedulously engaged in it, but finds it impossible to complete before Tuesday evening, or Wednesday morning early. He is anxious to give the point a thorough examination.”4

Unsurprisingly, the president saw nothing from his Treasury secretary on Tuesday night. The evening at 79 Third Street in Philadelphia was an especially long one, stretching well into Wednesday morning. Hamilton, of course, was laboring against a Friday constitutional deadline that offered neither sympathy nor the possibility of extension—nor much time for Washington to read and effectively grade his work. Accordingly, Eliza Hamilton “sat up all night” with her husband to help him defend a broad interpretation of the Necessary and Proper Clause. She copied out his writing—nearly 13,000 words, or enough to fill almost forty double-spaced pages in modern academic formatting—and had it ready for early-morning delivery. The note accompanying Hamilton’s submission captures the essence of the Early American Republic’s great all-nighter: “The Secretary of the Treasury presents his respects to the President, and sends him the opinion required, which occupied him the greatest part of last night.”5 Two days later, Alexander Hamilton received the only written feedback he desired: Washington’s signature on the Bank bill.

The foregoing account of the national bank’s 1791 journey from bill to law is far from novel. Though I supplied the ornamentation of academic life,6 a basic confrontation between strict and broad interpretations of the Necessary and Proper Clause is the constitutional core of an early Bank narrative widely shared among legal scholars, political scientists, and historians.7 The strict/broad dichotomy, however, ultimately obscures far more than it reveals.8

A careful rereading of the 1791 debates (in both Congress and the executive branch) reveals a surprising fact about the first iteration of the national bank controversy. Those who opposed the proposal for a Bank of the United States on constitutional grounds actually staked out a variety of positions respecting the meaning of the Sweeping Clause. That is to say, far from participating in an echo chamber that effectively recirculated a single strict interpretation of the provision, these elected and appointed officials invoked—sometimes alone, sometimes in combination—three different standards of constitutional necessity. I will refer to these as the functional, federal, and frequency standards.

When combinations of these three standards are considered alongside single-prong arguments, it becomes apparent that the six men who spoke and wrote against a national bank’s constitutionality in 1791 (House members James Jackson, James Madison, Michael Jenifer Stone, and William Branch Giles, along with Attorney General Edmund Randolph and Secretary of State Thomas Jefferson) actually offered three distinct interpretations of the Necessary and Proper Clause. In short, far from wielding a single interpretive weapon, the national bank’s opponents seemed inclined to throw everything but the kitchen sink at it.

This variation in constitutional argumentation has gone almost entirely unappreciated, and documenting it is the principal objective of this chapter.9 While recognition of constitutional history’s fine details is valuable in its own right, I have a second, forward-looking purpose in mind. A detailed accounting of the 1791 arguments will serve as a crucial (if partial) prologue to chapter 4, where I review the constitutional debate of 1811. That debate was anything but a simple rerun of its 1791 edition. It was far longer (more than thirty members of Congress gave floor speeches addressing the constitutional question), was conducted not against a clean slate but in the shadow of its predecessor, and saw most recharter opponents—all of whom were members of the Republican party, which formed not long after the 1791 debate—line up behind a single interpretation of the Sweeping Clause. This chapter, then, is designed to both record fine details and facilitate a later comparison between the constitutional debates of 1791 and 1811.

Improving Public Credit and Financial Administration

The federal government that first opened its doors in the spring of 1789 was hardly the picture of short- or long-term fiscal health. With respect to the former, though bills for basic operational expenses were entirely predictable, members of the First Congress spent their early days in office debating questions of procedure (e.g., how to address the president10) rather than procuring necessary revenue. In fact, it was not until July 1789 that Congress first flexed its most prominent new constitutional muscle: the power to lay and collect taxes. Two revenue bills were passed that month and signed by President Washington—the Tariff Act and the Tonnage Act11—but their initial yields were more trickles than streams. On September 13—just his third day in office as Treasury secretary—Alexander Hamilton had to ask the Philadelphia-based Bank of North America for a short-term loan to fund the federal government.12

Meeting basic expenses with new revenue, however, would solve only part of the new government’s fiscal problem. Long-unpaid debts from the Revolutionary War totaled roughly $79 million at face value, with $54 million owed by the United States and the balance by the thirteen states.13 The total figure, moreover, said little “about the actual market value of the debt,” since holders and potential purchasers had little knowledge of when interest on these securities (let alone the principal) would be paid.14 Primary and secondary sources estimate the market value of many forms of Revolutionary War debt in the mid- to late 1780s at somewhere between ten and twenty cents on the dollar.15

As Hamilton would write in early 1790, “immutable principles of moral obligation” compelled the federal government to repay those who had supported the war effort.16 However, there was also an important instrumental reason to service (and ultimately repay) these debts: protection of the federal government’s ability to borrow in the future.17 As any modern American will attest, one way to raise an individual credit score (and keep it elevated) is to consistently make payments on outstanding debt. Conversely, the road to poor credit—and its most natural consequence, difficulty in borrowing—lay in irregular debt payments (or none at all). In 1789, the aforementioned war debts left the new federal government with poor credit; though not technically bankrupt, it was certainly not in a position to borrow at favorable rates of interest.18

Wholly cognizant of the distressed state of public credit, the House (in late September 1789) directed the new Treasury secretary to “prepare a plan” for its improvement and deliver that plan at the next session of Congress.19 Hamilton’s resulting Report on Public Credit (January 9, 1790) offered three core suggestions for placing the federal government in a position to borrow—when borrowing became necessary—“upon good terms.” First, the unpaid war debts of the states should be “assumed” by the federal government. Second, provision should be made for the “funding” of all unpaid debts (i.e., the payment of regular interest on them). Finally, Hamilton counseled that only current holders of public securities should receive interest payments; Congress should not pay (or “discriminate” in favor of) war veterans or other creditors who had previously sold their continental or state securities at some fraction of their face value.20

Debate over Hamilton’s proposals commenced in Congress the following month and continued (off and on) until his scheme was effectively adopted in late July and became law in early August.21 This short, outcome-oriented summary hardly does justice to the federal government’s first great experience with fiscal politics. However, the frequently technical debate over debt funding—which ultimately (and famously) became intertwined with the question of where to locate the permanent national capital—has been aptly reviewed elsewhere.22 For my purposes, only the primary effect of Hamilton’s proposed-and-enacted scheme is relevant: a manifest improvement in the public’s credit. The price of public securities had already doubled over the course of 1789 (probably in anticipation of a congressional funding plan), and by November 1790, a federal bond paying 6 percent interest—the principal security created by the debt-funding legislation—was trading at roughly 70 percent of face value in Boston, New York, and Philadelphia.23

Seventy percent, however, was hardly satisfying to Alexander Hamilton. In fact, to a man who would later characterize the market price of a government’s bonds as “the thermometre of its credit[,]” this figure still suggested far-from-perfect health.24 How, then, could the remaining gap between market and par value be closed? The secretary organized his thoughts, put them on paper, and (on December 13) submitted to Congress his Second Report on the Further Provision Necessary for Establishing Public Credit.25

Hamilton’s submission, however, traditionally goes by a very different name: Report on a National Bank.26 This invites an obvious question: How would the chartering of a national bank help to raise the market price of federal bonds? Otherwise put—and to borrow Hamilton’s own language—how would a national bank “be of the greatest utility in the operations connected with the support of the Public Credit[?]”27 His answer lay in a specific feature of institutional design: the composition of the bank’s capital.

The Report on a National Bank called for an institution with $10 million in capital; that sum would consist of “Twenty five thousand shares, each share being four hundred Dollars[.]” The federal government would purchase five thousand of these shares for $2 million, leaving the remainder for individuals, private institutions, and other “[b]odies politic[.]” More importantly, Hamilton’s plan did not call for these investors to purchase their shares exclusively with gold and silver coin; while one-quarter of each share ($100) would need to be paid in specie, federal bonds paying 6 percent interest “could be tendered at par value” for the remainder.28

One clear purpose of the proposed purchase rule—certainly the one most connected with the public credit—was to stimulate demand for (and thus raise the price of) 6 percent federal bonds; Hamilton wrote that it would “in all probability . . . accelerate” a rise in securities prices “to [their] proper point” (i.e., par value).29 As it turned out, the mere prospect of this purchase rule was sufficient to further restore public credit; the 6 percent bond was trading at 70 (percent of par value) in Philadelphia on December 9, but rose to 75 by December 15 (two days after Hamilton’s report was submitted to Congress). By Christmas Day, it was trading at 90.30

In at least one respect, then, Hamilton’s bank was designed to serve as a fiscal auxiliary to the federal government: It would (by virtue of its capital) place the government in a position to borrow on more advantageous terms.31 However, the Treasury secretary was also clear that additional fiscal benefits would flow from its establishment.32 In this vein, he called the bank “an Institution of primary importance to the prosperous administration of the Finances[.]”33

The aids to public finance invoked by this remark—the bank’s ability to (1) circulate a convenient medium for tax payments, (2) make periodic loans based on the Treasury’s needs, (3) serve as a safe depository for federal revenue, and (4) complete basic transactions for the government (e.g., routine payments to bondholders and employees)—tend to be emphasized in chronicles of the institution’s birth (at least relative to its effect on public credit).34 This is hardly surprising, given that two of these four functions were integral to the 1791 constitutional debate. To that subject I now turn.

Three Standards of Necessity

With the core propositions of Hamilton’s Report on a National Bank now sketched out, readers should either revisit the vignette that opens this chapter or simply consult this abridged version of the ensuing constitutional drama:

The House considered a bank bill based on Hamilton’s report. Madison challenged its constitutionality, strictly reading the Necessary and Proper Clause. The bill nonetheless passed the House and (having already passed the Senate) headed to the president’s desk. Jefferson, advising the president in writing, echoed Madison’s concerns. Hamilton rebutted them both, broadly construing the same Article I provision. President Washington said nothing but signed the bill.

Given the ubiquity of this account—in either its skeletal or fleshed-out forms—a new rendering of the events from February 1791 is only warranted if something significant remains unsaid.35 This, I contend, is...

Table of contents

• Cover
• Title Page
• Copyright Page
• Dedication
• Contents
• Acknowledgments
• Introduction: Getting the Ship out of the Bottle
• 1.  Varieties of Strict Interpretation
• 2.  “Banco Mania” and Institutional Drift
• 3.  “The Great Regulating Wheel” and Institutional Conversion
• 4.  More Than a Constitutional Rerun
• 5.  The Compromise of 1816
• 6.  McCulloch (1819) in the Shadow of the Compromise
• 7.  A Tale of Two Clauses
• Conclusion: A Revisionist Bank Narrative—Lessons Timely and Timeless
• Notes
• Bibliography
• Index