By John Steele Gordon
With the establishment of the federal government on April 30, 1789, the first priority was to get the country’s disastrous fiscal situation under control. How important this was is evident from the fact that the Treasury Department, under Alexander Hamilton, soon had 40 employees, while Thomas Jefferson’s State Department had only five.
Hamilton soon submitted bills to Congress to establish a tax system and to rationalize the public debt. But Hamilton also wanted to charter a “Bank of the United States” (BUS) to act as a central bank, modeled on the Bank of England. It would act as the federal government’s fiscal agent, provide discipline to state banks by refusing to accept their paper money if they overleveraged, and serve as the federal government’s means of borrowing when necessary.
Congress passed the bill granting the bank a 20-year charter over Jefferson’s adamant opposition. He loathed commerce in general and large, powerful banks in particular. And while 20 percent of the stock of the BUS would be owned by the government under Hamilton’s plan, and it would appoint 20 percent of the directors, the rest of the stock would be in private hands. Hamilton thought — quite correctly given human nature — that if the government itself had the power to print money, it would soon abuse that power rather than raise taxes or cut spending, which are always politically unpopular.
The Constitution gives Congress the power “to coin Money, regulate the Value thereof, and of foreign Coin,” but it says nothing about chartering a bank in order to do so. Jefferson, a “strict constructionist,” argued that the federal government had only the powers explicitly granted to it by the Constitution and so argued to President Washington, urging him to veto the bill.
Hamilton wrote a 15,000-word response, apparently in one night (and with a quill pen!), advocating a doctrine of “implied powers.” He argued that if the Constitution granted the government the power to do something, such as to regulate the money supply, only an express prohibition would prevent it from choosing the means of exercising that power. He convinced Washington, who signed the bill.
Under Hamilton’s program, the fiscal situation of the federal government rapidly improved and by 1800 it had what today would be called a very high credit rating. The banking system also flourished under the BUS. There were only three banks in the country in 1789, by 1800 there were 29, by 1810 there were more than 100.
But when the bank’s charter came up for renewal in 1811, Jefferson’s malign, anti-commerce influence was still powerful. President James Madison, who had opposed the bank’s original charter, favored its renewal for the simple reason that the bank had worked so well. But when it came up in the Senate, Vice President George Clinton, broke a tie by voting no.
So the BUS died, and with it the government’s primary means of borrowing money. The next year, Congress, without making any provisions whatever to pay for it, declared war on the only country in the world capable of attacking the United States, Great Britain. War, of course, is by far the most expensive of all government operations.
While there is much competition for the title of most irresponsible act of Congress in U.S. history, refusing to recharter the Bank of the United States is surely in the running. It would continue to have adverse consequences right down to the present day.
