The Battle Over the First National Bank and Its Constitutional Implications

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What does a political battle waged over a bank in 1791 mean for Americans living in 2016? Quite a lot, it turns out. In a recent paper, America’s First Great Constitutional Controversy: Alexander Hamilton’s Bank of the United States, Professor Charles J. Reid reexamines one of the earliest and most momentous constitutional battles in the United States history. Therein, he analyzes each aspect of the constitutional arguments given by those who supported and those who opposed the bank, sourcing his research in the annals of Congress, written opinions of those involved, and other context. Most importantly, he draws important conclusions about what this incident meant for the development of American political thought. Taken as a whole, Reid’s work establishes that the result of the bank debate had considerable economic and constitutional ramifications.

Reid begins with a thorough examination of the American economic crisis of the 1780s, which in many ways laid the groundwork for the first American centralized banking system, the Bank of North America. Therein he considers the extent to which the economic doldrums inspired prominent American politicians and financiers, such as Robert Morris and Alexander Hamilton, to champion a British-modeled national bank. Economic matters of the day, such as paper vs. hard money, trade privileges, stay laws, and state debts all contributed, it seems, to the atmosphere that could produce such a monumental struggle over a bank.

Rather than confining the bank war to a straightforward political scuffle between Alexander Hamilton and Thomas Jefferson, Reid’s narrative does the reader an extraordinary deed by expounding upon the disposition of James Madison and his political collaborators in the House of Representatives, who vigorously attacked the constitutionality of the bank bill. Among them were James Jackson, William Branch Giles, and Michael Jenifer Stone, all of which were significant figures whose names are rarely invoked. Reid’s article breathes new life into the notion that those who opposed the bank bill made a persuasive case against the institution on grounds that ventured beyond the bill’s perceived lack of constitutionality. Instead, Reid demonstrates, those who opposed the bank in the House also attacked the institution on economic and empirical grounds. They espoused that the bank would dilute the value of hard coinage, liken the United States to a centralized monarchy, and magnify the destructive potential of bank panics.

This supplementary context does not take away from what Reid considers the heart of Madison’s case – the onslaught against the bank on the basis that it was wholly unconstitutional. Madison and his companions asserted that Congress lacked the power to charter corporations on a structural basis, and even pointed out that an attempt to add such a power was deliberately rejected by the Philadelphia Convention. They were suspicious of the very concept of “implied powers,” considering such an idea to be little more than an unfounded political ploy that could never withstand honest scrutiny. Reid notes that Madison also chided the idea that the congressional power to borrow money also gave it the ability to charter a bank that could lend and borrow.[1]

One of the most redeeming aspects of Reid’s article is the attention paid to the argument of Edmund Randolph, which is so often ignored in the bank debate. Randolph, who championed the cause of ratification in his own state of Virginia after refusing to sign the document in Philadelphia, served as Washington’s Attorney General. It may be impossible to determine whether Washington valued the opinion of Randolph any more or less than he did that of Jefferson or Hamilton, but nonetheless Randolph’s view on the matter is often neglected completely by historians. Appearing to provide a prophetic response to contemporary constitutional arguments, Randolph believed that the general welfare and necessary and proper clauses did not empower Congress to enact the type of unspecified, implied powers that Hamilton defended in his quest to establish the bank.

Of course, Reid also delves into Jefferson’s opinion on the constitutionally of the bank after an examination of Jefferson’s prior written works including his most famous work, Notes on the State of Virginia. Although Jefferson did not believe in a nonexistent state on a local level, he certainly thought the bank would violate the Tenth Amendment of the Constitution and the demarcation of powers between the states and general government – a principle Jefferson deemed to be the “foundation” of the federal Constitution. In Compact of the Republic, I wrote that Jefferson supported this belief by noting that the power to create a bank was not specifically enumerated, that the Constitution was sold as a document that only allowed specified powers to be executed, that the bank was unnecessary, and that its existence would allow for too much federal control.[2] Departing from this aphorism, Jefferson wrote, “is to take possession of a boundless field of power, no longer susceptible of any definition.”[3] Taken as a whole, Jefferson’s argument maintained a coherent narrative.

In the last section of the article, Reid elaborates upon the contrary constitutional argument, developed by Hamilton and his political allies in support of a national bank. In doing so, his extensive research and thorough examination of the First Congress is refreshingly exhaustive, and he successfully summarizes each element of this argument effectively. Tellingly, he also points out that Hamilton did not make any reference to the Constitution at all in his original proposal to Congress, instead making his case purely on the grounds of public policy alone. Only after being asked by President George Washington to produce a written opinion on the constitutionality of such a bank, did Hamilton craft a constitutional argument in support of his cause.

Still, in this area I believe he missed a valuable opportunity to revisit what Hamilton himself had said about the key elements of his argument, namely the necessary and proper clause and implied powers, during the ratification struggle. Making noticeable reversal from his position during the ratification struggle, Hamilton’s perspective in the 1791 bank debate seemingly contradicted his position in 1788. While Hamilton had in New York’s Poughkeepsie convention declared that the powers of the general government were “restricted to a certain sphere,” he now claimed that the necessary and proper clause opened up a reservoir of unstated, implied powers which could be used to justify a bank.[4] Beyond this, Hamilton devoted the entirety of The Federalist #33 to refute the prevalent allegation by opponents of the Constitution that the necessary and proper clause allowed for unlisted or implied powers. On the contrary, the Constitution only vested the general government with “certain specified powers,” Hamilton wrote. “This is so clear a proposition,” he continued, “that moderation itself can scarcely listen to the railings which have been so copiously vented against this part of the plan, without emotions that disturb its equanimity.” The necessary and proper clause, he alleged, only allowed “the power of employing the means necessary” to execute each enumerated power.[5]

Reid’s paper effectively chronicles Hamilton’s acute dispositional transition to the point where he now claimed “necessary” now meant “incidental, useful, or conductive to.”[6] In addition, he describes Hamilton’s ostentatious effort to refute Madison’s view. As in Hamilton’s case, during the ratification campaign Madison held during that “necessary” meant indispensable and did not allow Congress to extrapolate any new, unlisted powers. Despite these dynamics, Washington’s conscience was eventually satisfied by Hamilton’s position, and the president signed the bill into law. Despite the radical polarization of attitudes on the bank among the American political class, no one could have predicted the far-reaching implications of this decision. Toward the end of the paper, Reid establishes why this was perhaps the most crucial presidential decision in American political history.

Beyond illustrating how the arguments over the bank war impacted the development of the American political identify, Reid appropriately elaborates upon the degree to which various economic struggles influenced the founders’ positions on the bank. For instance, his recollection of the pervasive suspicion toward mercantilism and the controversial acts of the British crown is an exceedingly important factor that must be understood to obtain a sufficient grasp of the bank dispute. Additionally, an exploration of the common law system the founders were familiar with, the legal history of corporations, and the association with kingly power to establish such institutions, was greatly appreciated.

My first of two criticisms of Reid’s article centers upon the author’s perception of Madison’s theory regarding constitutional interpretation. Though Reid is correct to portray Madison’s opposition to the national bank at least partially as a matter of structure – because the power to establish corporations was deemed a reserved power not delegated to the general government – he omits Madison’s belief that the spirit of the debates and proceedings from the state ratification conventions should serve as an authoritative source regarding how the document should be interpreted. If the structure of the Constitution did not allow for a swift constitutional resolution, Madison believed in drawing context from what the plan’s advocates said about it when it depended upon the states for ratification. In his Report of 1799, which defended Virginia’s act of interposition against the Alien and Sedition Acts, Madison asserted that “the firm and pointed manner, in which it is asserted in the proceedings of the convention of this state,” should serve as the basis for constitutional interpretation. Madison professed that the Constitution was a compact among states, and that each state was entitled to its own constitutional opinion in the last resort – which could only have been derived from the understanding reached by those within the state that chose to adopt it.[7]

Even in old age, Madison insisted that an accurate interpretation of the Constitution depended on “the sense attached to it by the people in their respective State Conventions where it recd. all the authority which it possesses.”[8] Of course, this outlook does not square with Madison’s paradoxical decision to sign into law the Second Bank of the United States during his presidential term, but reliance upon structure arguments alone would have made such a judgment equally quizzical and inconsistent. Reid is absolutely right to suggest that structural arguments played a significant role in Madison’s theory of constitutional interpretation, which he demonstrated several times in various political offices, but this factor alone does not conceptualize Madison’s outlook.

After an examination of Reid’s article, it is also reasonable to take issue with the author’s perception of the Preamble’s constitutional significance in the context of the bank debate. The presence of the Constitution’s Preamble was indeed mentioned by Elias Boudinot of New Jersey, as part of his elaborate justification to support the implementation of the bank. However, Reid does a minor disservice by overemphasizing the Preamble’s original purpose and by failing to critique Boudinot’s train of logic. Although Boudinot admitted frankly that the power to create a bank “was not contained in express words” of the Constitution, he claimed that it was “necessarily deduced by the strongest and most decisive implication.”[9] However, this very idea was repudiated by the nature of preambles, the historical records of the Philadelphia Convention, and the attestation of some of most influential of the Constitution’s advocates.

Notably, preambles never transfer authority or delegate powers – they are cumulative statements that articulate the reasoning behind a document’s origin. A preamble’s purpose is to summarize events and provide reasoning for positive construction, typically using general terms. In the United States Constitution, the preamble was a statement of principles that had no structural implication whatsoever. Instead, it aggregated the reasons for its creation and described why the proposed the plan should be considered. In the Philadelphia Convention, this was confirmed from the notes of the Committee of Detail, which considered a preamble was proper, “not for the purpose of designating the ends of government and human politics,” but “insert essential principles only.”[10]

During the ratification conventions, none of the devoted Federalists that championed the new plan made an attempt to claim that the Preamble was a beacon of power to be cited to validate the implementation of law. On the contrary, on the question of what powers were allowed, supporters of the framework typically pointed to the enumerated list of powers in Article I, Section 8 and some other authority specified elsewhere. This was the case in Virginia, where Edmund Randolph claimed that the general government would endeavor to violate the constitution for exercising any power “not expressly delegated therein.”[11] In the same manner, Charles Cotesworth Pinckney of South Carolina opined that Congress had no right to “exercise powers not expressly delegated to it.”[12] Lending his hand to the cause of ratification in New York, in The Federalist #45 James Madison insisted that the powers delegated to the general government were “few and defined.” These testimonials, made to assure skeptics in some of the most polarized states, played an enormous role in securing ratification of the Constitution.

Reid also quotes three contemporary legal scholars, all of which are prominent figures, to assert that the Preamble was a momentous, transformational passage that “caused its readers to think of themselves as citizens first of the United States and only then of the separate states.”[13] In reality, it is instead quite clear that most Americans thought of themselves first as citizens of their own states, and the verbiage of the Preamble is largely incidental. This was because the Preamble’s text was originally written as “We the States,” after which was an itemized list of the several states.[14] This structure was modified to its current form because it was understandably impossible to know which states would ratify it, thus invalidating the structure and format. This change was made by the Committee on Style, without objection or debate, highlighting the lack of controversy involved in the change.[15] When opponents of the document raised objections to the style of this text, such as in Virginia and North Carolina, this circumstance was explained.[16] During the ratification conventions within the states, which eventually gave the Constitution its legal force through Article VII, no advocate of the Constitution pointed the Preamble as a fount of power. Rather than highlighting how the historical record conflicts with the orthodox contemporary thought on the Preamble, Reid faultily injects modern legal perceptions into the 1791 bank debate.

Reid’s article shines most by revealing how the culmination of the bank dispute so strongly affected the future of American government and competing American political philosophies. Serving as a forerunner that Hamilton’s political devotees would point to in order to justify their own aims, the bank undoubtedly catapulted the extension of the implied powers doctrine to far-reaching realms. Reid also accurately writes that the bank controversy contributed to the geographical rift between North and South and added to the polemic divide between commercial and agrarian interests.

In addition to the examples Reid cites, the 1819 McCulloch v. Maryland decision, which asserted that “necessary” does not mean “absolutely necessary,” played a strong role in legitimizing Hamilton’s position on the bank in the eyes of the federal government. A direct retort to Madison’s compact explanation, the Marshall Court alleged that the Constitution was instead ratified by “one people,” despite a candid protest by Luther Martin, who as a lawyer represented Maryland in the case. Martin defended the state tax on federal bank notes as a power reserved to the states:

“We insist, that the only safe rule is the plain letter of the Constitution, the rule…in the Tenth Amendment…that the powers not delegated to the United States nor prohibited to the states, are reserved to the states respectively, or to the people.”[17]

Unlike John Marshall, Martin had been in attendance at the Philadelphia Convention, and was considered one of the best and most persuasive lawyers of his time. Still, he was unable to sway Marshall and the other judges to his position. Ultimately, the McCulloch opinion served as a jurisprudential extension to the implied powers doctrine, and functioned to solidify the national bank on the basis of legal precedent.

A faithful adherent to Marshall’s legal theories, Joseph Story relied upon this abstraction in his famous 1833 work, Commentaries on the Constitution of the United States. From that point onward, earlier commentaries such as that of George Tucker have been forgotten and almost completely supplanted by the new narrative. The future Whig Party also adopted this view, calling for a three-point platform that advocated for internal improvements, high protectionist tariffs, and the reinstitution of a new national bank of the Hamiltonian variety. Indeed, Henry Clay could never have conceived of the American System in the first place without the germ of his ideology rooted in the principle of implied powers. Though Andrew Jackson eventually waged a political war to end the Second National Bank, and both Martin Van Buren and John Tyler successfully resisted efforts to enact a new bank charter, a new Hamiltonian bank ultimately emerged in the form of the contemporary Federal Reserve System. In this way, the debate over a national bank lasted long into the 20th century. Whether one comes to the conclusion that the First National Bank was constitutionally impermissible or not, these circumstances reveal that the sheer influence of the institution’s enactment is completely undeniable.

Reid concludes his work without taking a clear position on which side offered the more substantive and logical perspective on the bank, but he does leave the reader with some essential questions that should continue to be debated and researched by all Americans today. Specifically, is the Constitution a restraining or empowering text? What was the relationship of the states in contrast to the federal government? What of implied and constructive powers? Reid does not believe the 1791 battle over the bank definitively answered any of these questions. At the heart of all these inquiries, of course, is the central debate over what kind of Constitution the United States has. As a partial observer, I believe that an objective truth can be ascertained, but nonetheless the importance of this matter is unparalleled in the scope of American governance. Unfortunate as it is, this topic is almost never injected into modern political discourse, and is instead ignored almost entirely. Above all else, Reid’s work serves to illustrate that this negligence is at least partially the result of the bank debate’s resolution.

 

References:

[1] Charles J. Reid, “America’s First Great Constitutional Controversy: Alexander Hamilton’s Bank of the United States,” University of St. Thomas School of Law Legal Studies Research Paper, No. 16-21 (2016), 28-30.
[2] David Benner, Compact of the Republic: The League of States and the Constitution (Minneapolis: Life & Liberty Publishing Group, 2014), 208.
[3] Thomas Jefferson, Opinion on the Constitutionality of a National Bank, in Thomas Jefferson: Writings, ed. Merrill D. Peterson (New York: Viking Press, 1984), 416.
[4] For Hamilton’s statement in Poughkeepsie, see Jonathan Elliot, ed., The Debates in the Several State Conventions on the Adoption of the Federal Constitution (5 Vols., Washington: Taylor & Maury, 1861), II: 342.
[5] The Federalist #33, Alexander Hamilton, James Madison, and John Jay, The Federalist, ed. Jacob E. Cooke (Middletown: Wesleyan University, 1961), 206.
[6] Alexander Hamilton, Constitutionality of a National Bank, in Alexander Hamilton: Writings, ed. Joanne Freeman (New York: The Library of America, 2001), 618.
[7] J. W. Randolph, ed., The Virginia Report of 1799-1800, Touching the Alien and Sedition Laws, Together with the Virginia Resolutions of December 21, 1798 1798 (Richmond: J.W. Randolph, 121 Main Street, 1850),  223.
[8] James Madison to Thomas Ritchie, Sep 15, 1821, Madison Papers (Library of Congress, Washington, DC).
[9] John C. Rives, ed., Abridgement of the Debates of Congress, from 1789 to 1856 (New York: D. Appleton and Company, 1860), 287-288.
[10] Max Farrand, ed., The Records of the Federal Convention of 1787 (4 Vols, New Haven: Yale University Press, 1937), IV: 37.
[11] The Debates in the Several State Conventions on the Adoption of the Federal Constitution, III: 522.
[12] The Debates in the Several State Conventions on the Adoption of the Federal Constitution, IV: 315-316.
[13] Charles J. Reid, “America’s First Great Constitutional Controversy: Alexander Hamilton’s Bank of the United States,” 46.
[14] David Benner, Compact of the Republic: The League of States and the Constitution, 5.
[15] Max Ferrand, ed., The Records of the Federal Convention of 1787 (New Haven: Yale University Press, 1966), II: 590.
[16] The Debates in the Several State Conventions on the Adoption of the Federal Constitution, III:72-73 and IV: 15-23. In Virginia, Patrick Henry perceived the language as highly improper, believing it to signify a consolidated, nationalist government. In North Carolina, David Caldwell made a similar inquiry and was answered by Archibald McClaine, James Iredell, and William Richardson Davie.
[17] Henry Wheaton, ed., Reports of Cases Argued and Adjudged in the Supreme Court of the United States (4 Vols., New York: R. Donaldson, 1819), IV: 374.