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The Founding Wizard
Two hundred years ago the United States was a weakling republic prostrate beneath a ruinous national debt. Then Alexander Hamilton worked the miracle of fiscal imagination that made America a healthy young economic giant. How did he do it?
July/august 1990 | Volume 41, Issue 5
Hamilton proposed a capitalization of ten million dollars, a very large sum when you consider that the three state banks in existence had a combined capital of only two million dollars. The federal government was to subscribe 20 percent of this, but Hamilton intended the bank to be a private concern. “To attach full confidence to an institution of this nature,” Hamilton wrote in his “Report on a National Bank,” delivered to Congress on December 14,1790, “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 ; which would be supposed to be, and, in certain emergencies, under a feeble or too sanguine administration, would really be, liable to being too much influenced by public necessity .”
To make sure that the private owners of the bank did not pursue private interests at public expense, Hamilton wanted the bank’s charter to require that its notes be redeemable in specie, that 20 percent of the seats on the board of directors be held by government appointees, and that the Secretary of the Treasury would have the right to inspect the books at any time.
There was little political discussion of the bank outside Congress, which passed Hamilton’s bill, the House of Representatives splitting cleanly along sectional lines. Only one congressman from states north of Maryland voted against it, and only three from states south of Maryland voted for it.
Hamilton thought the bank was a fait accompli , but he had not reckoned on Thomas Jefferson and James Madison. Jefferson, the lover of rural virtues, had a deep, almost visceral hatred of banks, the epitome of all that was urban. “I have ever been the enemy of banks,” he wrote years later to John Adams. “My zeal against those institutions was so warm and open at the establishment of the Bank of the U.S. that I was derided as a Maniac by the tribe of bank-mongers, who were seeking to filch from the public their swindling, and barren gains.”
Jefferson and Madison, along with their fellow Virginian Edmund Randolph, the Attorney General, wrote opinions for President Washington that the bank bill was unconstitutional. Their arguments revolved around the so-called necessary and proper clause of the Constitution, giving Congress the power to pass laws “necessary and proper for carrying into execution the foregoing Powers.”
The Constitution nowhere specifically authorizes the federal government to establish a central bank, they argued, and therefore, one could be created only if it were indispensably necessary to carry out the government’s enumerated duties. A central bank was not absolutely necessary and therefore was absolutely unconstitutional. This line of reasoning is known as strict construction—although the phrase itself was not coined until the 1840s—and has been a powerful force in the American political firmament ever since.
President Washington recognized the utility of a central bank, but Jefferson and Randolph’s arguments had much force for him. Also, it is possible that like most Southerners he was none too anxious for a central bank, useful or not. Further, he may have worried that if the bank were established in Philadelphia, the capital might never make its way to his beloved Potomac. He told Hamilton that he could not sign the bill unless Hamilton was able to overcome Jefferson’s constitutional argument.
With his doctrine of implied powers, Hamilton made the Constitution into the dynamic instrument that has survived two centuries of tumult and change.
To counter Jefferson’s doctrine of strict construction, Hamilton devised a counterdoctrine of implied powers. He said that if the federal government was to deal successfully with its enumerated duties, it must be supreme in deciding how best to perform those duties. “Little less than a prohibitory clause,” he wrote to Washington, “can destroy the strong presumptions which result from the general aspect of the government. Nothing but demonstration should exclude the idea that the power exists.” Further, he asserted that Congress had the right to decide what means were necessary and proper. “The national government like every other,” he wrote, “must judge in the first instance of the proper exercise of its powers.”
Hamilton’s complete response to Jefferson and Randolph runs nearly fifteen thousand words and was written under an inflexible deadline, for Washington had to sign or veto the bill within ten days of its passage. Hamilton thought about his response for nearly a week but seems to have written it in a night. To read it today is to see plain the extraordinary powers of thought—the wizardry—possessed by Alexander Hamilton. Even John Marshall was awed. “To talents of the highest grade,” the great chief justice wrote, “he united a patient industry, not always the companion of genius, which fitted him in a peculiar manner for the difficulties to be encountered by the man who should be placed at the head of the American finances.”