Set Up to Fail

By John Steele Gordon

There once were two brothers. When they grew up, one went to sea and the other became vice president. Neither was ever heard of again.

OK, it’s an old joke, but it illustrates a constitutional reality: American vice presidents have no power. Other than being first in line if the president should die or resign, their only constitutional duty is to preside over the Senate and break any tie votes. But when they do break a tie, they invariably vote the way the president wants them to. By Senate custom they do not even take part in debate.

Just once in American history did a vice president take it upon himself to decide how to vote to break a tie. Unfortunately, that vote gravely damaged the American banking system for more than a century.

There had been no banks in the American colonies because Britain had forbidden them. By the time the Constitution came into effect in 1789 there were three. The new secretary of the treasury, Alexander Hamilton, confident that many more banks would soon be formed, wanted to establish a bank regulatory system that would keep the money supply safe and facilitate interbank transfers and the government’s borrowing needs. In other words, he wanted a central bank.

He proposed that the federal government charter the Bank of the United States, modeled on the Bank of England. But Thomas Jefferson, the secretary of state, denounced the plan as unconstitutional because the Constitution does not specifically grant the federal government the power to charter a corporation.

This sort of constitutional analysis became known as “strict construction.” But Hamilton argued that since the constitution granted Congress the power to regulate the money supply, it was up to the federal government to decide how best to do so unless there was a specific constitutional prohibition against that means, a doctrine now known as “implied powers.”

President George Washington sided with Hamilton and the Bank of the United States was chartered for a period of 20 years in 1791. The bank was a great success and the American banking system flourished under its control. By 1811 there were more than 100 state banks in operation.

By the time came for the renewal of the charter, President James Madison, who had originally opposed the bank, had come to understand how useful it was, both for the federal government and for the banking system. He asked Congress to renew the charter.

Because the Bank of the United States was the only bank that operated interstate, it could discipline the state banks by refusing to accept their bank notes if it felt they were over leveraged or engaged in other unsound banking practices. Needless to say, the banks resented this power and lobbied to have Congress reject the new charter.

The House opposed a preliminary motion on the bank, but that was not thought fatal. However when another preliminary motion came up in the Senate, that body tied 17 to 17. It was now up to Vice President George Clinton to decide. Clinton, a fierce anti-Federalist, had opposed the Constitution itself as giving too much power to the federal government, and had sided with Jefferson regarding the bank. He voted against the motion and the bank was dead.

This meant not only the end of the bank, but the end of banking discipline in the United States. Of the banks founded between 1810 and 1820, half had failed by 1825, and that ratio would continue. Thanks to Vice President George Clinton, bank failure became as American as apple pie. After a year without a single bank failure—2018, the first year since 2006 that no bank failed—this may seem odd, but waves of failure would continue until effective central banking returned in the 20th century.