Money generated heated debate and became the source of America’s first “cut-it-with-a-knife” political division. How to pay for the debts from the Revolution? How to stabilize the young economy and who, if anyone, would be willing to pay to make it so? Money–how to get it, how to grow it, and how to spend it–divided Americans politically in the 1790s (more complicated today with millions more people, billions more dollars, and trillions more debt).
In the Federalist Papers, which Hamilton and Madison wrote together to gain support for the Constitution in 1788, Madison signaled an opening for a central bank. But upon reflection, he denied that the Constitution granted the federal government powers not specifically enumerated there–like a national bank.
Hamilton felt confident that the Constitution DID grant Congress the right to pass any legislation deemed “necessary and proper,” including a central bank. In Article 1, Section 8, of the Constitution continues to be the go-to language Congress relies upon when it sees a need. Madison’s ire rose and he charged Hamilton and Congress with exploiting this power and “leveling all the barriers which limit the powers of the general government and protect those of state governments.”
Madison saw the vote for the national bank as marking Hamilton’s takeover of the delicate balance between executive and legislative power. First Chief Justice John Marshall marked this debate as the beginning of 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 (sic) center.”
Fearing Hamilton’s ability to turn a phrase and remembering the intellect of his Federalist partner, Madison swiftly moved to become a strict constructionist when interpreting the Constitution–allowing Congress to assume nothing not strictly mentioned in the Constitution.
The idea of a national bank experienced rough sledding, particularly among Southern legislators. Then the rural population composed 95 percent of the nation, according to the 1790 records. One Virginia planter said he would “no more get caught going into a bank than into a house of ill repute.”
Madison saw the role of the Secretary of the Treasury as a staff role to Congress, not as someone making reports, then drafting legislation to bolster weaknesses or solve deficiencies brought to light in the reports. Under Hamilton’s perspective, as part of the executive branch, he saw his role as being a proactive problem solver, able to give direction and propose policies.
Bank of United States: Opens Deep Rifts
Despite this division, the House approved Hamilton’s legislation 39-20, but it was lopsided with votes from most all congressmen north of the Potomac River with votes in opposition from the Southern contingent. The Senate had already approved it, so the Bank of the United States legislation went to President Washington’s desk.
Madison sought out the President to lobby him to veto the bill. Washington reached out to cabinet members Jefferson and Reynolds, seeking their opinions, which were negative. Washington questioned whether their responses were complete. He did what any self-respecting chief executive would do, he asked Hamilton for a full report. Of course Jefferson and Randolph did provide papers for Washington, but these weren’t nearly as comprehensive. Hamilton took ten days to complete a thesis-sized resonse.
Jefferson amended his criteria to expand the powers of Congress from what he called “just convenient” to truly “necessary.” He didn’t just disagree with the Bank and its central authority, he went much further and did not recognize the supremacy of the federal law over state law, a basic tenant of the U.S. Constitution.
A man who would become the President of the United States in 1801 and who was the prime author of the Declaration of Independence recommended to the chief architect of the Constitution, Madison, that ANY Virginia bank functionary who cooperated with Hamilton’s bank should be found guilty of TREASON and EXECUTED.
Hamilton’s Position Paper: 15,000 Words
” 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 referred to the U.S. Congress as a “foreign legislature” to support his position of state supremacy) 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 relations to it, shall be adjudged guilty of high treason and suffer death, accordingly by the judgment of the state courts.”
Hamilton didn’t play. He met with Philadelphia’s leading lawyer, William Lewis, to review his work, then recruited Mrs. Hamilton to stay up with him the ninth and final night to recopy his writing. Hamilton provided Washington with the ammo for a positive response. His Treasury Secretary no less brilliant than when he joined the General’s military staff at 21, but wiser now in the ways of politics and certainly finance. Washington realized the need to address the economic issues facing his nation if America would rise to fulfill its promise. It’s unlikely he read all 40 pages, but he read enough to feel confident in his support for the National Bank.
He explained how the central bank would enable the federal government to:
- Collect taxes;
- Borrow money;
- Regulate trade among the states;
- Support fleets and armies.
Another sore point for Jefferson: he did not want the federal government to have authority to create corporations, possibly thinking it would hamper Virginia’s rural agrarian economy. Hamilton pointed out that well-structured corporations were stronger and more adventageous than the private partnerships then in vogue. By limiting manufacturing opportunities, the new nation could be held hostage by more mature economies, like existed in Europe, depending on them for finished goods.
On July 4, 1791, the public forgot about the earlier controversy with the opening of subscriptions to stock in Hamilton’s central bank. Stock sold out in an hour as a money-hungry mob formed in Philadelphia.
As sales moved to New York, where Madison experienced the bedlam of speculation, he reported to Jefferson by mail, “The bank shares have risen as much in the market here as at Philadelphia,” terming it a “mere scramble for so much public plunder.”
This fever for money, like America had never seen before, took hold. To broaden ownership, Hamilton agreed to sell bank shares in the form of script in major East Coast cities. To broaden ownership, Hamilton agreed to sell bank shares in the form of script. Investors made a $25 down pament and were given a script entitling them to buy a set of shares, paying them off in 18 months. Trading went so well that many doubled their money in a few days–lending to the term–“scriptomania”–long before social media promoted such ideas.
Not every American banking venture in the last 230 years has gone flawlessly and a portion of Americans do not experience the full benefit of the economic engine, but the nation has led the world in gross national product because of the ingenuity of its people and the availability of working capital that got a jump start with Alexander Hamilton. The quest continues.
Come back next Friday to see how Hamilton immersed himself in personal quicksand while competing another massive visionary piece for President Washington.
“Reviewing the Constitution. . .it was not possible to discover in it the power to incorporate a bank.” Broadus Mitchell, Alexander Hamilton: The National Adventure, 1788-1804. New York: MacMillian, 1862, p.9
“necessary and proper” “Leveling all the barriers which limit the powers of the general government. . .” Papers of Alexander Hamilton, Ed Harold C. Syrett et al. vol. 8, p. 113, “Opinions on Constitutionality of an Act to Establish a Bank,” February 23, 1791.
“Complete organization of those distinct and visible parties which in their long and dubious conflict for power have. . . shaken the United States to their (sic) center.”The Reynolds Pamphlet, vol. 10, p. 253, August 1797
“no more get caught goiong into a bank than into a house of ill reprute.” John C. Miller, Alexander Hamilton: Portrait in Paradox. New York: Harper and Brothers, 1959, p. 727.
Madison saw the Secretary of the Treasury more in a staff role. Ron Chernow, Alexander Hamilton, New York: The Penguin Group, 2004. p. 351. Chernow noted that history has come to support Hamilton’s take on this.
Jefferson did not recognize the supremacy of the federal law over the state law. Chernow, p. 353. See next note for continuation. Papers of Alexander Hamilton, vol 12, p. 85, Letter from Thomas Jefferson to James Madison, October 1, 1791
“and whosoever shall do an act under the color of the authority of a foreign legislature (in this case the U.S. Congress) whether by signing (bank) notes, issuesing or passing them. . . shall be adjudged guilty of high treason and suffer death “Papers of Alexander Hamilton, vol 12, p. 85, Letter from Thomas Jefferson to James Madison, October 1, 1791
Mrs. Hamilton’s role and size of the report. Chernow, p. 353.
Work performed by the Bank, Papers of Hamilton, vol. 8, p. 97
“every power vested in a government is in its nature sovereign. . . Ibid.
A fever for money. . .Hamilton agreed to sell bank shares in the form of script. Chernow, p. 357.
“The bank shares have risen. . . a mere scramble for so much public plunder.”New York Historical Society Quarterly, October 1948, uncovered correspondence between Madison in New York and Jefferson in Virginia.