by Ron Chernow
For political and legal reasons, Hamilton had to address the loaded subject of paper money. The Constitution outlawed the issue of paper money by states; everybody remembered the worthless Continentals printed by Congress during the Revolution. Should the federal government now issue paper money? Fearing an inflationary peril, Hamilton scotched the idea: “The stamping of paper is an operation so much easier than the laying of taxes that a government in the practice of paper emissions would rarely fail in any such emergency to indulge itself too far.”16 As an alternative, Hamilton touted a central bank that could issue paper currency in the form of banknotes redeemable for coins. This would set in motion a selfcorrecting system. If the bank issued too much paper, holders would question its value and exchange it for gold and silver; this would then force the bank to curtail its supply of paper, restoring its value.
Hamilton wanted his central bank to be profitable enough to attract private investors while serving the public interest. He knew the composition of its board would be an inflammatory issue. Directors would consist of a “small and select class of men.” To prevent an abuse of trust, Hamilton suggested mandatory rotation. “The necessary secrecy” of directors’ transactions will give “unlimited scope to imagination to infer that something is or may be wrong. And this inevitable mystery is a solid reason for inserting in the constitution of a Bank the necessity of a change of men.”17 But who would direct this mysterious bastion of money? Its ten million dollars in capital would be several times larger than the combined capital of all existing banks, eclipsing anything ever seen in America. Hamilton, wanting the bank to remain predominantly in private hands, advanced a theory that became a truism of central banking—that monetary policy was so liable to abuse that it needed some insulation from interfering politicians: “To attach full confidence to an institution of this nature, it appears to be an essential ingredient in its structure that it shall be under a private not a public direction, under the guidance of individual interest, not of public policy.”18
At the same time, Hamilton worried that the bank would be so well buffered from public control that abuses might occur. To safeguard the public interest, the government would become a minority stockholder in the bank and able to vote for directors. Of the ten million dollars in capital, the president would be authorized to buy up to two million in bank stock—a stake presumably large enough to give the government substantial leverage, while not so large that it could dictate self-serving policies. The treasury secretary could also receive weekly reports on bank activities and retained the option of inspecting its books.
It was in the nature of Hamilton’s achievement as treasury secretary that each of his programs was designed to mesh with the others to form a single interlocking whole. His central bank was no exception. Of the eight million of its capital that would be subscribed by private investors, three quarters would be paid in government securities. Thus Hamilton finely interwove his bank and public-debt plans, making it difficult to undo one and not the other. The byzantine, interrelated nature of his programs made him all the more the bane and terror of opponents.
On January 20, 1791, a bill to charter the Bank of the United States for twenty years virtually breezed through the Senate. At that point, nothing presaged the chasm about to yawn in American politics, one that was to create the first political parties. Only as the House mulled over the bank bill in early February did it become palpable that the amity between Hamilton and Madison, briefly restored by the excise tax, was about to shatter, this time irrevocably. Once again, Madison’s dissent was partly local in origin. Some central-bank critics thought the institution would aggrandize northern merchants at the expense of southern agrarians, and Madison came from the largest rural state. Hamilton denied any urban bias, telling Washington that where banks had been established “they have given a new spring to agriculture, manufactures, and commerce.”19 Even if this were true, Hamilton had to reckon with the fact that farmers were debtors by nature and hence contemptuous of bankers and other creditors. Southern planters especially hated bankers. “Holding banking to be no more than the prostitution of money for illicit gain,” historian John C. Miller has written, “one Virginia planter swore that he would no more be caught going into a bank than into a house of ill fame.”20
Hamilton wanted the new bank in Philadelphia. “It is manifest that a large commercial city with a great deal of capital and business must be the fittest seat of the Bank,” he told Washington.21 Madison fretted that placing the bank in Philadelphia might plant the national capital there permanently, reneging on the promised move to the Potomac. Congressman Benjamin Bourne of Rhode Island surmised that Madison might not have spoken against the bank had not “the gentlemen of the southward” viewed it as “adverse to the removal of Congress” to the Potomac.22 For this and other reasons, Patrick Henry denounced Hamilton’s economic program as a “constituent part of a system which I have ever dreaded—subserviency of southern to n[orther]n interests.”23
Overshadowing this geographic split was the fundamental question of whether the Constitution allowed a central bank. While writing The Federalist, Madison had subscribed to an elastic interpretation of the charter. Now, speaking on the House floor, he made a dramatic turnabout, denying that the Constitution granted the federal government powers not specifically enumerated there: “Reviewing the Constitution . . . it was not possible to discover in it the power to incorporate a bank.”24 Hamilton turned to article 1, section 8, the catchall clause giving Congress the right to pass any legislation deemed “necessary and proper” to exercise its listed powers. Madison accused him of exploiting that power and “levelling all the barriers which limit the powers of the general government and protect those of the state governments.”25 Afraid that the agile Hamilton would dream up limitless activities and then rationalize them as “necessary and proper,” Madison re-created himself as a strict constructionist of the Constitution.
For Madison, Hamilton was becoming the official voice of monied aristocrats who were grabbing the reins of federal power. He felt betrayed by his old friend. But it was Madison who had deviated from their former reading of the Constitution. To embarrass Madison, Elias Boudinot read aloud in Congress some passages about the “necessary and proper” clause from Federalist number 44, notably the following: “No axiom is more clearly established in law or in reason than wherever the end is required, the means are authorized; wherever a general power to do a thing is given, every particular power for doing it is included.”26 Hamilton probably tipped off his old friend that Madison had written these incriminating words.
On February 8, the House passed the bank bill by a one-sided thirty-nine to twenty, giving Hamilton a particularly sweet triumph. For a fleeting moment, his mastery of the government seemed complete, but the victory raised troublesome questions. Almost all congressmen from north of the Potomac had stood foursquare behind him, while their southern counterparts had almost all opposed him. As philosophical views increasingly dovetailed with geographic interests, one could begin to glimpse the contours of two parties taking shape. Individual issues were coalescing into clusters, with the same people lining up each time on opposite sides. In his Life of Washington, Chief Justice John Marshall traced the genesis of American political parties to the rancorous dispute over the Bank of the United States. That debate, he said, led “to the complete organization of those distinct and visible parties which in their long and dubious conflict for power have . . . shaken the United States to their center.”27
Hamilton’s seeming omnipotence unnerved Madison because it further skewed what the latter deemed the proper balance between executive and legislative power. For many delegates at Philadelphia in 1787, Congress was supposed to be the leading branch of government, the guardian of popular liberty that would prevent the restoration of British tyranny. That was why legislative duties were spelled out in article 1 of the Constitution. Consistent with this view, Madison thought the treasury secretary should serve as an adjunct to
Congress, providing legislators with reports from which they would shape bills. Jefferson likewise balked at the way Hamilton both submitted reports and drafted bills based on them. Hamilton, in contrast, envisioned the executive branch as the main engine of government, the sole branch that could give force and direction to its policies, and time has abundantly vindicated his view.
Hamilton had not foreseen the looming constitutional crisis that his bank bill was to instigate. Jefferson and Madison grew fearful that Hamilton was not simply building a structure that dashed their principles but sculpting his creations in stone. His expansive vision of federal power filled them with foreboding. Precedents were being set that would be very hard to revoke later on. Hamilton admitted in retrospect that the new central bank represented his greatest stretch of federal power. The new government had reached a defining moment.
Madison wanted Washington to spike Hamilton’s bank bill and cast the first veto in American history. To figure out whether the bill squared with the Constitution, Washington canvassed the members of his compact cabinet. First, he solicited the opinion of Attorney General Edmund Randolph, who wrote a weakly reasoned piece contending that the bank was unconstitutional. Washington then turned to Jefferson, who had long detested monopolies and chartered companies as privileges conferred by British kings; he could not reconcile a central bank with true republicanism. Jefferson was also increasingly irked by his relative impotence in Washington’s cabinet and worried that the mercantile north, under Hamilton’s auspices, was gaining the upper hand over the rural south. He told George Mason: “The only corrective of what is corrupt in our present form of government will be the augmentation of the numbers in the lower house so as to get a more agricultural representation, which may put that interest above that of the stock-jobbers.”28
In a concise opinion, Jefferson blasted the Bank of the United States as unconstitutional on the grounds that Hamilton was perverting the necessary-and-proper clause. To pass the constitutional test, Jefferson said, a measure had to be more than just convenient in executing powers granted to the federal government: it had to be truly necessary—that is, indispensable. Taking literally the Constitution’s recitation of congressional powers, he prophesied that “to take a single step beyond the boundaries thus specifically drawn . . . is to take possession of a boundless field of power, no longer susceptible of any definition.”29
Just how vehemently Jefferson opposed the new bank can be inferred from a firebreathing letter he sent to Madison the following year. Governor Henry Lee wished to open a local bank in Virginia that would act as a counterweight to a branch of Hamilton’s national bank. Jefferson worried about any measure that might confer legitimacy upon the central bank. From his letter, it is clear that he did not recognize the supremacy of federal over state law, a cardinal tenet of the Constitution:
The power of erecting banks and corporations was not given to the general government; it remains then with the state itself. For any person to recognize a foreign legislature [Jefferson was talking about the U.S. Congress] in a case belonging to the state itself is an act of treason against the state. And whosoever shall do any act under color of the authority of a foreign legislature— whether by signing notes, issuing or passing them, acting as director, cashier or in any other office relating to it, shall be adjudged guilty of high treason and suffer death accordingly by the judgment of the state courts. This is the only opposition worthy of our state and the only kind which can be effectual.... I really wish that this or nothing should be done.30 [Italics added.]
In other words, the principal author of the Declaration of Independence was recommending to the chief architect of the U.S. Constitution that any Virginia bank functionary who cooperated with Hamilton’s bank should be found guilty of treason and executed.
Though inclined to support the bank, Washington was shaken by the negative verdicts rendered by Jefferson and Randolph, and on February 16 he rushed them to Hamilton for comment. Washington had ten days to sign or veto the measure. The document that Hamilton wrote in response, says one of his editors, is “the most brilliant argument for a broad interpretation of the Constitution in American political literature.”31 As always, Hamilton wanted to bury his foes beneath an avalanche of arguments. After gathering his thoughts, he consulted William Lewis, one of Philadelphia’s foremost lawyers, and the two men spent an afternoon pacing Lewis’s garden and reviewing Hamilton’s arguments. In slightly more than a week, Hamilton, the human dynamo, elaborated a treatise of nearly fifteen thousand words that covers almost forty printed pages in his collected papers. On Monday the twenty-first, he reported back to Washington that he had “been ever since sedulously engaged” in preparing his defense and would send the results on Tuesday evening or Wednesday morning. With comical understatement, he said that he wanted to give the issue “a thorough examination.”32 He went right down to the deadline with his treatise. Upon delivering it to Washington on Wednesday morning, a frazzled Hamilton noted that the final draft had “occupied him the greatest part of last night.”33
Eliza Hamilton remembered the sleepless night when her husband gave immortal expression to a durable principle of constitutional law. As an ancient lady garbed in widow’s weeds, she told the story to a young man who recorded it this way in his journal:
Old Mrs. Hamilton ...active in body, clear in mind... talks familiarly of Washington, Jefferson, and the fathers. I told her how greatly I was interested ...on account of her husband’s connection with the government. “He made your government,” said she. “He made your bank. I sat up all night with him to help him do it. Jefferson thought we ought not to have a bank and President Washington thought so. But my husband said, ‘We must have a Bank.’ I sat up all night, copied out his writing, and the next morning, he carried it to President Washington and we had a bank.”34
Hamilton’s own allusion to staying up “the greatest part” of that night also attests to some electrifying finish, some final, brilliant burst of inspiration that completed his stupendous feat. As with many of his intellectual exploits, they were almost feats of athletic prowess as well.
Hamilton lent his opinion the erudition of a treatise and the warmth of a manifesto. The essence of it was that government must possess the means to attain ends for which it was established or the bonds of society would dissolve. To liberate the government from a restrictive reading of the Constitution, Hamilton refined the doctrine of “implied powers”—that is, that the government had the right to employ all means necessary to carry out powers mentioned in the Constitution.
In drafting his opinion, Hamilton claimed that minutes of the Constitutional Convention could provide “ample confirmation” of his liberal interpretation of the necessary-and-proper clause. Reluctant to break the convention’s confidentiality oath—or perhaps afraid that Madison might play the same game—he then expunged the passage and let the Constitution speak for itself. He told Washington that, if adopted, “principles of construction like those espoused by the Secretary of State and the Attorney General would be fatal to the just and indispensable authority of the United States.”35 Then, in blazing italics, Hamilton trumpeted his main theme: “Now it appears to the Secretary of the Treasury that this general principle is inherent in the very definition of government and essential to every step of the progress to be made by that of the United States: namely that every power vested in a government is in its nature sovereign and includes by force of the term a right to employ all the means requisite and fairly applicable to the attainment of the ends of such power.” If Jefferson’s and Randolph’s views were upheld, “the United States would furnish the singular spectacle of a political society without sovereignty or of a people governed without government.”36
Hamilton waved away complaints that the Constitution did not explicitly mention a bank: “It is not denied that there are implied as well as express powers and that the former are as effectually delegated as the latter.”37 To argue, as did Jefferson, that all government policies
had to pass a strict test of being “absolutely necessary” to the performance of specified duties would paralyze government. How could one say with certainty what was absolutely necessary? Hamilton pointed out that, in setting up the Customs Service, he had overseen construction of lighthouses, beacons, and buoys, things not strictly necessary, but useful for society all the same. He was crafting a rationale for the future exercise of numerous forms of federal power.
The Bank of the United States would enable the government to make good on four powers cited explicitly in the Constitution: the rights to collect taxes, borrow money, regulate trade among states, and support fleets and armies. Jefferson wanted to deprive the federal government of the power to create any corporations, which Hamilton thought could cripple American business in the future. At the time, few corporations existed, and those mostly to build turnpikes. The farseeing Hamilton perceived the immense utility of this business form and patiently explained to Washington how corporations, with limited liability, were superior to private partnerships. In the end, his bank argument was predicated not only on his interpretation of the Constitution but on his reading of history: “In all questions of this nature, the practice of mankind ought to have great weight against the theories of individuals.”38
After writing this magisterial defense, Hamilton packed it off to Washington before noon on Wednesday, February 23. The next day, Washington studied the opinion and, despite lingering doubts, was sufficiently impressed that he did not bother to send it to Jefferson. The day after that, he signed the bank bill.