The Founding Fathers' Economic Bailout
Given Recent Headlines on Government Bailouts and GSE Fannie Mae and Freddie Mac the Founding Fathers Offer an Interesting Conversation on National Banks, Regulating Commerce, and Erecting Corporations
Congress has been busy the last few months passing legislation to help bailout and stimulate the economy. Financial enterprises and automotive companies show up on the doorsteps of the Capital looking for help. The largest owners of mortgages in the United States, Government-Sponsored Enterprises Fannie May and Freddie Mac helped cripple the housing market and subsequently needed assistance from the government. Each debate on helping the respective entities contains fierce arguments for and against the assistance packages, leaving many confused whether the government “needs to” and is “responsible for” helping these corporations and our economy.
Nearly 220 years ago a similar discussion took place in the United States. George Washington, Thomas Jefferson, Alexander Hamilton, and James Madison were a few of the major participants in the discussion centering on the need for a National Bank.
In 1781, under the Articles of Confederation, The Bank of North America was established acting as a fiscal agent for the Government. Following the Revolutionary War the Articles of Confederation were abolished and replaced with the United States Constitution during the summer of 1787. Being a child of the Articles of Confederation, The Bank of North America soon disappeared.
The ratification of the Constitution was extremely sensitive. No mistakes would be permissible if the Constitution was to be ratified. While many desired to have a National Bank outlined in the Constitution, most knew it would only hinder its possible ratification. Secretary of Treasury (1788-91) Alexander Hamilton (who advocated a strong central treasury) reflected, “Some, again, allege that it was disagreed to because it was thought improper to vest in Congress a power of erecting corporations. Others, because it was thought unnecessary to specify the power, and inexpedient to furnish an additional topic of objection to the Constitution.”
“Robert Morris proposed to give Congress a power to establish a national bank. Gouverneur Morris opposed it, observing that it was extremely doubtful whether the constitution they were framing could ever be passed at all by the people of America; that to give it its best chance, however, they should make it as palatable as possible, and put nothing into it not very essential, which might raise up enemies; that his colleague (Robert Morris) well knew that ‘a bank’ was, in their State (Pennsylvania) the very watch-word of party; that a bank had been the great bone of contention between the two parties of the State, from the establishment of their constitution, having been erected, put down, and erected again, as either party preponderated; that therefore, to insert this power, would instantly enlist against the whole instrument, the whole of the anti-bank party in Pennsylvania.”
Feelings toward government-sponsored corporations were so feared that many states proposed amendments against them: “FIFTHLY, That Congress erect no Company or Merchants with exclusive advantages of Commerce.”
It was only a short time later in 1790 Alexander Hamilton proposed a new bill to Congress outlining a National Bank to be erected. Hamilton argued that it would provide “short term credit” to the government and an instrument that will help “strengthen the economy.” James Madison and Thomas Jefferson (both key organizers of the Republican Party in opposition to the Federalists Party) lobbied President George Washington to veto the bill if passed by Congress.
In opposition to the “Bank Bill,” Thomas Jefferson (who then was the Secretary of State) wrote a lengthy letter to the President that neatly summarized each of the Bill’s proposed benefits and then aggressively tore apart each point. He said, “The incorporation of a bank, & the powers assumed by this bill, have not, in my opinion, been delegated to the U.S. by the Constitution,” and feared, “I consider the foundation of the Constitution as laid on this ground that ‘all powers not delegated to the U.S. by the Constitution, nor prohibited by it to the states, are reserved to the states or to the people’ to take a single step beyond the boundaries thus specially drawn around the powers of Congress, is to take possession of a boundless feild of power, no longer susceptible of any definition.”
Jefferson also discussed in this same letter that “to erect a bank, & to regulate commerce, are very different acts,” and “a bank therefore is not necessary, and consequently not authorised by this phrase.” He concluded by emphasizing, “The Negative of the President is the shield provided by the constitution to protect against the invasions of the legislature 1. the rights of the Executive 2. of the Judiciary 3. of the states & state legislatures. the present is the case of a right remaining exclusively with the states & is consequently one of those intended by the constitution to be placed under his protection.”
Alexander Hamilton, upset by the logic used by his contemporaries responded with a letter of his own to the President. Hamilton countered, “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 soverign 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, and which are not precluded by restrictions and exceptions specified in the Constitution, or not immoral, or contrary to the essential ends of political society....”
Hamilton’s Letter also highlighted “that a bank has a natural relation to the power of collecting taxes -- to that of regulating trade -- to that of providing for the common defense.”
Similar to today’s discussion on government-sponsored organizations and inefficiencies in competition due to them, Hamilton resolved, “It has been stated as an auxiliary test of constitutional authority to try whether it abridges any preexisting right of any state, or any individual. The proposed investigation will stand the most severe examination on this point. Each state may still erect as many banks as it pleases. Every individual may still carry on the banking business to any extent he pleases.”
Madison and Jefferson were unsuccessful and The First Bank of the United States was chartered from 1791-1811. President Washington approved of the charter and was pleased “they erected a National Bank.”
The Founding Fathers appear to have had a remarkable understanding of economic theory given they trailed Adam Smith’s “The Wealth of Nations” by only a few years. Many of the same arguments heard today appear to be mere echoes of Thomas Jefferson and Alexander Hamilton.
The Constitutional Sources Project
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