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The U.S. Constitution and Money Part 4 The First and Second Banks of the United States

The U.S. Constitution and Money Part 4 The First and Second Banks of the United States

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Published by michael s rozeff
The historic debates over the constitution and money that are discussed in this article are relevant to today's debates over money, credit, and banking. They are relevant to the choice between government control and free market dynamics in liberty. Part 4 of this series on the U.S. Constitution and Money, based on Edwin Vieira Jr.'s "Pieces of Eight", discusses in detail the First and Second Banks of the United States, the constitutionality of a federal power to incorporate these banks, whether or not the government emitted bills of credit through these banks, Hamilton's report on the bank, Hamilton's and Jefferson's opinions of its constitutionality, the Congressional debates on it including Madison's views, and Marshall's decision in McCulloch v. Maryland. The article explains and clarifies the financial side of the issues.
The historic debates over the constitution and money that are discussed in this article are relevant to today's debates over money, credit, and banking. They are relevant to the choice between government control and free market dynamics in liberty. Part 4 of this series on the U.S. Constitution and Money, based on Edwin Vieira Jr.'s "Pieces of Eight", discusses in detail the First and Second Banks of the United States, the constitutionality of a federal power to incorporate these banks, whether or not the government emitted bills of credit through these banks, Hamilton's report on the bank, Hamilton's and Jefferson's opinions of its constitutionality, the Congressional debates on it including Madison's views, and Marshall's decision in McCulloch v. Maryland. The article explains and clarifies the financial side of the issues.

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Published by: michael s rozeff on Apr 03, 2010
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07/27/2013

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This article has the usual disclaimer. While relying heavily on
 Pieces of Eight,
it does
1
not summarize everything in the book nor all of Vieira’s views and arguments. Neither does itclaim to reproduce all of his positions and emphases. The main effort hews closely to Vieira, butin order to produce a self-contained, compact, and coherent account of the most importantconstitutional and financial issues, I introduce arguments and analyses that are not in Vieira’s book.The Constitution (p. 261) provides “no ‘banking’ powers [to government]: no power to
2
loan; no power to create a paper currency or a deposit currency, redeemable in precious metals or not; no power to employ fractional reserves; and
a fortiori
no power to delegate such nonexistent powers to private parties...”
The U.S. Constitution and MoneyPart 4: First and Second Banks of the United States
 by Michael S. Rozeff 
Introduction
This article summarizes pp. 260-351 of Edwin Vieira Jr.’s legal history of the U.S. Constitution’smonetary powers and disabilities contained in his book 
 Pieces of Eight.
All page references in parentheses are to his book. Our concern here is primarily with the constitutionality of the first
1
and second Banks of the United States and secondarily with their political-financial nature. Thisleads into a discussion of the necessary and proper clause and the
 McCulloch v. Maryland 
opinion of John Marshall.In 1791 and 1816, Congress incorporated a Bank of the United States (BUS), each with twenty-year charters. Did it have constitutional authority to do so? Were the emissions of bills of credit by the two banks acts of the national government and thus unconstitutional?
2
We shall see that Congress had no authority to incorporate anything, a bank included, so that theacts that set up the first and second BUS were unconstitutional. Vieira argues that the banks werestructured so that their emission of bills of credit was not an act of the national government.Given that the banks existed, he concludes that their emission of bills was not unconstitutional.
Original Constitutional Meaning and Incorporation
There is no explicit power to incorporate banks or any enterprises in the Constitution. On thatthere is agreement. We must look to the original meaning and implied powers of the Constitutionto determine if the framers meant the federal government to have such a power.The power to incorporate enterprises goes back to English law. The pre-constitutional lawexplained in Blackstone’s
Commentaries
says that this power was primarily executive in natureand lodged in the king, although parliament confirmed his incorporations via statutes. Also, parliament at times originated incorporations that required the king’s assent. This provides
 
This discussion presumes legal continuity and legal change within legal continuity. There
3
is ample reason for this. Legal systems and traditions go back for hundreds and thousands of years. Even when there is a revolution, the new legal order may continue important elements of the old. The framers worked within
 some
legal order, and Blackstone was the common source of law at the time. Marshall, in his 1819 opinion on the BUS constitutionality, alludes to Englishlaw: “If we look to the origin of corporations, to the manner in which they have been framed inthat Government from which we have derived most of our legal principles and ideas...”In 1782, Hamilton left the military, became a lawyer in New York, became assistant to
4
Robert Morris, and was elected to the Continental Congress. Hamilton publically endorsedtheBank of North America, writing as the “Continentalist.”See Edwin J. Perkins,
 American Public Finance and Financial Services, 1700-1815
, pp.
5
113-114.See pp. 321-322 of Volume 2 of Max Farrand’s
The Records of the Federal Convention
6
of 1787,
availablehere.guidance to constitutional meaning. If the framers had wanted the legislature (Congress) to havethis power, it probably would have enumerated it as a legislative power, since it involved a break with the power of the Executive in English law.
3
The Articles of Confederation gave Congress no power to incorporate, but Congress, in the stressof war and problems of financing war, incorporated the Bank of North America in early 1781, promoted by Robert Morris, who was Superintendent of Finance of the United States and by thenLieutenant-Colonel Alexander Hamilton who was George Washington’s trusted aide-de-camp.
4
This was the first private commercial bank in the country. Incorporation at that time was notopen to all under general incorporation laws; it was a governmental franchise with certain legal privileges and goals. This initial act met with resistance in late 1781 at a new session of Congress. The federal incorporation was withdrawn and replaced by charters from individualstates. From 1783 onwards, the Bank operated in Philadelphia under a Pennsylvania charter.
5
This history suggests that the framers were well aware of the question of a power to incorporate.Because incorporation was not a routine event granted to anyone, but a political act, it suggeststhat,, if no federal power to incorporate is in the Constitution, the framers intended none. Thestates had this power and used it. Evidently, it was reserved to them under the TenthAmendment.During the Federal Convention in which the Constitution was drafted, a power to incorporate to be vested in the Legislature was considered in two separate clauses. One read “To grant charters
6
of incorporation in cases where the public good may require them, and the authority of a singleState may be incompetent.” The other read “To grant charters of incorporation.” Neither of thesemade it into the final draft of the Constitution. This is further evidence that the framers intended
 
I note that this is one of several critical cases in which holding a secret convention whose
7
mission lacked a clear legal basis had the effect of creating an ambiguous foundation for thecountry’s government. Debate after the Convention could not substitute for an official record of debates and arguments made during the drafting of the Constitution. The entire framework of theConvention and what it did were not above board, since it went beyond its appointed task. Inaddition, important constitutional ambiguities in specific clauses were built into the process of government from the outset. All of this was bound to lead to a series of shakeouts over manyyears in which politics built up the actual institutions of government. If the foundation of theConvention itself and the document it drafted had been more secure and known, aided by adocumentary record of Convention proceedings, debates over constitutional legitimacy andmeaning might have been more productive. WE THE PEOPLE might more broadly haveunderstood the document’s meaning. These debates continue to this day, Vieira’s and the currentwork included.Volume 2 of Farrand has Madison’s notes on pp. 615-616 and McHenry’s on p. 620.
8
that the federal government have no power to grant incorporations.
7
In addition, an attempt by Madison to get the first version passed in a more limited context of  public transportation also failed. The Constitution gives Congress the power “To establish PostOffices and Post Roads.” But in the Federal Convention at which the Constitution was drafted,the subject of adding a power to cut canals was also debated. We have the notes of both Madisonand McHenry on this. The McHenry note says that Franklin’s motion on canals led to Virginia
8
introducing a motion “To empower Congress to grant charters of incorporation in cases wherethe U.S. may require them and where the objects of them cannot be obtained by a State.” This isfollowed by a single word: “Negatived.”Madison records that he made the motion “to grant charters of incorporation where the interest of the U.S. might require & the legislative provisions of individual States may be incompetent.”This motion was in general terms, even though his specific purpose was to assure “an easycommunication between the States.” Delegates understood its general nature because Mr. Kingand Mr. Mason worried that such a measure would encourage those who wanted a Bank andmercantile monopolies. Mr. Wilson favored the power. The members decided not to pursue ageneral power of incorporation. They dropped Madison’s motion. He records “The motion beingso modified as to admit a distinct question specifying & limited to the case of canals,” the votewas 3 for and 8 against adoption.The debate shows that, on balance, the framers regarded incorporation and banking as a politicalhot potato that they preferred to avoid in light of their goal to get the Constitution ratified.Incorporation and banking were issues that were intertwined with attitudes toward banks and banking that vented in politics. Madison’s notes quote Mr. King on this score:“The States will be prejudiced and divided into parties by it – In Phila[delphia] & NewYork, It will be referred to the establishment of a Bank, which has been a subject of contention in those Cities...”

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