Alexander Hamilton: “Opinion as to the Constitutionality of the Bank of the United States”

Context

The American Revolution was one of the longest-fought wars in American history, certainly the longest on North American soil, and one of the most costly. Immediately following the battles of Lexington and Concord, Massachusetts, in 1775, delegates to the Second Continental Congress made several fateful decisions regarding the future of the war, such as the choice to fight the British using conventional means, including a large standing army of regular troops. A national army, of course, would necessarily be armed, fed, clothed, and housed at the Continental Congress's expense.

Congress financed the Continental army by issuing a variety of debt instruments to be liquidated after the war by redemption and taxation. Congress also created a fiat currency of “continentals,” which were declared legal tender by Congress without the backing of specie. As the war dragged on, Congress simply issued more currency and debt instruments, creating an inflationary spiral as leaders tried printing their way out of the financial crisis. The value of the currency and debt instruments both plummeted, leaving Americans the victors in war but nearing financial catastrophe.

By early 1786, a national solution appeared to be a lost cause, and debt holders increasingly turned to the state governments for assistance. In that year alone, interest on half of the total debt was paid by the states of Pennsylvania, New York, and Massachusetts. With the states now leading the way toward eliminating the Continental debt, nationalists feared for the worst, as they had planned to use that issue to grant more power and authority to the central government. Fortunately for the nationalists, the states failed to satisfy all creditors, to address British threats on the western frontier, or to squelch Shays's Rebellion in Massachusetts. Enough people were frightened by the circumstances to warrant the calling of a national convention in Philadelphia in 1787, where delegates boldly proposed a new federal government strong enough to gain economic controls over the states.

However, the framers did not want the new government's economic power to be absolute. On September 14, James Madison, of Virginia, moved to amend Article I, Section 8, “to grant charters of incorporation where the interest of the U.S. might require & the legislative provisions of individual States may be incompetent” (Madison, p. 638). In the ensuing discussion, at least one delegate stated that such wording could be construed to mean that Congress could charter a bank. Madison's motion was soundly defeated, with only the Pennsylvania and Georgia delegations voting in favor.

Following the ratification of the U.S. Constitution, Congress and President George Washington spent most of the first session, in 1789, creating the federal bureaucracy and tax structure. With those tasks completed, the newly minted secretary of the treasury, Alexander Hamilton, pressed for a major fiscal program for the new government. Commonly called “Hamiltonian finance,” his plan was laid out in a series of reports issued between 1790 and 1791. The “Report on the Public Credit” (January 9, 1790) called on Congress to pay off all of the remaining Revolutionary War debt—including that of the states—at face value by issuing new federal debt certificates. Interest on and the principal of this new national debt would be paid by direct taxes (especially on distilled spirits like whiskey), a tariff, and land sales. The “Report on a National Bank” (December 13, 1790) defended the chartering of a federal bank that would issue a paper currency ostensibly based on its specie holdings, be a lender to the national government, and facilitate the collection of taxes. The “Report on the Subject of a Mint” (January 28, 1791) proposed the creation of a mint to coin gold and silver for national circulation. Finally, the “Report on the Subject of Manufacturers” (December 5, 1791) suggested that the government dispense direct subsidies to stimulate domestic industry, but Congress decided against the recommendation.

While Hamilton feared that too much political control could hamper economic progress, he did not favor free markets and unfettered capitalism. He viewed economic exchange as inherently unstable—indeed, chaotic—without the overarching hand of governing institutions, led by something like the Bank of England. Rather than simply trusting rural property holders like planters and yeoman farmers, Hamilton placed his faith in a commercial class of merchants like those who dominated British politics during the eighteenth century. Economic progress meant international trade and local commercial development, not the sprawling agrarian society envisioned by men like Thomas Jefferson. A national bank would encourage the creation of commercial banks, which would then lend funds to merchants and urban businessmen. In turn, the economy would prosper as these figures invested in foreign trade, manufacturing, and transportation improvements.

Opponents of the proposed national bank drew heavily on classical liberal political economy as well as on the history of the Bank of England to show that a national bank's inflationary policies, though perhaps funding an initial boom for the economy, would surely bring a financial crash. Defenders of the national bank wavered in the face of such attacks but eventually argued that regardless of the long-term consequences, the government would be more effective with a bank than without one. The dynamics of the debate shifted away from economic considerations to political ones, leading both sides to support their positions with constitutional claims.

Defenders relied on the “necessary and proper” clause of the Constitution (Article I, Section 8). They believed that anything allowing the federal government to more easily meet its delegated powers was constitutional; the preamble of the Constitution gave the government the power to promote the general welfare of the country, which is exactly what they expected the bank to do. A national bank would ease government functions by providing a national currency, making the collection of taxes easier, and providing the federal government with loans when needed. Thus, bank supporters resorted to an “efficiency” defense.

Opponents believed that the purpose of the U.S. Constitution was to carefully delineate those powers expressly granted to the federal government by the states and by the people. They rejected the arguments of bank supporters as mere semantics that could be used to justify virtually any prerogative. To opponents, “necessary” meant “absolutely indispensable,” and efficiency was not as important as “limitation.” Those against the bank relied upon the explicit wording of Article I as well as on the Ninth and Tenth Amendments.

Congressional debate on the bank's constitutionality stalled, giving way to a free-for-all, as fledgling party newspapers assaulted and mercilessly slandered their opponents. The coalition built by Hamilton began to fragment, and with it the bank bill's chances of being passed dwindled. It was in the midst of this crisis—the first genuine political deadlock faced by Congress—that President Washington requested written positions from three of his cabinet members: the attorney general Edmund Randolph, Hamilton, and Jefferson. Randolph opposed the national bank on constitutional grounds, but the low caliber of his treatise warranted scant attention, thus placing the focus on Jefferson and Hamilton. The treatises then written by these two men are among the first attempts to interpret the Constitution in light of a policy issue not directly addressed in the text.