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Second of three posts on Hamilton’s financial program, 1790-1791.
Last week’s post, the introduction to this series, included a chronology of Hamilton’s major writings as secretary of the Treasury and an outline of Hamilton’s First Report on Public Credit, submitted to Congress on January 9, 1790. This week I’m tackling:
- The Second Report on the Further Provision Necessary for Establishing Public Credit, referred to here as Report on a National Bank, submitted to Congress 12/13/1790
- The Report on the Establishment of a Mint, submitted to Congress 1/28/1791
- An Opinion on the Constitutionality of an Act to Establish a Bank, submitted at Washington’s request on 2/23/1791
And, just to repeat from last week: I’ve narrowed my focus to sketching Hamilton’s political and economic context, and outlining what he advocated in his official writings as secretary of the Treasury. I’m not looking at modern implications or consequences of his policies.
Here’s the context of Hamilton’s reports on a national bank and a mint, plus Hamilton’s premises about them. For more on the context (government debt and money in circulation), see this section of last week’s post.
In 1790, the money circulating in the United States consisted of foreign coins such as these. (More on that in last week’s post under circulation.)
The official currency of the United States since 1785 (under the Confederation) was the dollar, but the Confederation government never operated a mint and never settled on the amount of silver or gold that a one-dollar coin would contain.
The mint Hamilton proposed in January 1791 was to issue only gold and silver coins, not paper money.
Under British rule, Americans were not allowed to open banks. It was one of the privileges – like manufacturing – that was reserved for the mother country. In 1781, at Superintendent of Finances Robert Morris’s instigation, the Bank of North America was chartered by the state of Pennsylvania, and headquartered in Philadelphia. (See Rappleye’s Robert Morris, Chapter 10: The Office of Finance.) In 1784, immediately after the war ended, two more banks were established: the Bank of Massachusetts and the Bank of New York (of which Hamilton was one of the founders).
In 1790, Hamilton proposed a bank with a federal rather than state charter. Private individuals would be in control, but the government (owning a maximum of 20% of the stock) would have the right to check the books. Hamilton seems to have conceived this mixed ownership as a form of checks-and-balances: in the outline of the Report on a National Bank, below, see III.A, III.C, and IV.A.
Hamilton’s bank is often referred to as a central bank. Here’s Wikipedia’s list of a central bank’s functions:
- Manages a state’s currency, money supply, and interest rates
- Oversees the commercial banking system
- Has a monopoly on increasing the monetary base in the state
- Usually prints the national currency (legal tender)
Hamilton’s national bank did not perform a single one of those functions. Nor did it have a monopoly on banking: the Bank of New York and others continued to exist, and by 1800 the U.S. had 28 banks (per Sylla p. 127). Each of those banks was allowed to issue as many bank notes as their stock of specie made prudent.
A corporation is a group of individuals who for legal purposes are authorized to act as a single entity; the entity continues even as the members change. Until the mid-nineteenth century, corporations had legal existence only if chartered by the government. (Today creating a corporation doesn’t require an act of the legislature, but it does still require registration with the government.)
In the United States, a bare handful of corporations had been chartered by 1790. All were granted existence by state legislatures – even the Bank of North America, a “national bank” that was the brainchild of the U.S. Superintendent of Finances.
Result: in Hamilton’s time, a corporation – for banking or any other purpose – was an exotic critter that few Americans would ever have encountered. Many were suspicious of it. (See Hamilton’s Opinion, III.A below.)
Hamilton is seeking a charter from the federal government in order to keep the bank out of the control of any particular state.
Here’s the outline of Hamilton’s Report on a National Bank. As usual, I’ve included excerpts that make important points, and elsewhere given you a few words so that if you want to read more, you can find the right section in the online version.
Report on a National Bank, 12/13/1790: outline
Congress asked for further measures to establish public credit. Hamilton states that a national bank is essential (see First Report, VI.E.3).
That from a conviction (as suggested in his report No. 1 herewith presented) That a National Bank is an Institution of primary importance to the prosperous administration of the Finances, and would be of the greatest utility in the operations connected with the support of the Public Credit, his attention has been drawn to devising the plan of such an institution, upon a scale, which will intitle it to the confidence, and be likely to render it equal to the exigencies of the Public.
II. Prelims: advantages & disadvantages of a national bank, and why we need one
A. Advantages [Begins: “The following are among the principal advantages of a Bank”]
- Having a bank augments the amount of capital in circulation. [See last week’s post.] For example:
Gold and Silver, when they are employed merely as the instruments of exchange and alienation, have been not improperly denominated dead Stock; but when deposited in Banks, to become the basis of a paper circulation, which takes their character and place, as the signs or representatives of value, they then acquire life, or, in other words, an active and productive quality. This idea, which appears rather subtil and abstract, in a general form, may be made obvious and palpable, by entering into a few particulars. It is evident, for instance, that the money, which a merchant keeps in his chest, waiting for a favourable opportunity to employ it, produces nothing ’till that opportunity arrives. But if instead of locking it up in this manner, he either deposits it in a Bank, or invests it in the Stock of a Bank, it yields a profit, during the interval; in which he partakes, or not, according to the choice he may have made of being a depositor or a proprietor; and when any advantageous speculation offers, in order to be able to embrace it, he has only to withdraw his money, if a depositor, or if a proprietor to obtain a loan from the Bank, or to dispose of his Stock; an alternative seldom or never attended with difficulty, when the affairs of the institution are in a prosperous train.
Hamilton goes on to explain why banks with good reputations can circulate a greater sum of bank notes than they hold in gold and silver.
2. Via a bank, the government can more easily seek financial aid in an emergency. [Begins: “Secondly. Greater facility”]
3. Having a bank facilitates the payment of taxes: it can make loans to those who need it, and it ensures that there’s not a shortage of money to pay the taxes. [Begins: “Thirdly. The facilitating of the payment”]
B. Disadvantages: objections that others raise to banks, and Hamilton’s answers [Begins: “Their disadvantages, real or supposed”]
- Objection: Banks tend to increase usury [i.e., charging a high rate of interest]. Answer: a bank allows greater predictability in the supply of money. Lenders won’t charge an exorbitantly high interest if they have confidence that they’ll be repaid.
As far therefore as Traders depend on each other for pecuniary supplies, they can calculate their expectations with greater certainty; and are in proportionably less danger of disappointments, which might compel them to have recourse to so pernicious an expedient, as that of borrowing at usury.
- Objection: Lending by banks impedes lending by anyone else. Answer: The bank’s charter specifies how much the total invested in the bank will be. Once shares for that amount have been sold, no more money goes into the bank. Other people will also become lenders.
- Objection: Banks tempt people to overtrade. Answer: You can’t condemn something because some people might abuse it. [Another eternal truth!]
If the abuses of a beneficial thing are to determine its condemnation, there is scarcely a source of public prosperity, which will not speedily be closed. In every case, the evil is to be compared with the good; and in the present case such a comparison will issue in this, that the new and increased energies derived to commercial enterprise, from the aid of banks, are a source of general profit and advantage; which greatly outweigh the partial ills of the overtrading of a few individuals, at particular times, or of numbers in particular conjunctures.
4 & 5. Objections: Banks help ignorant adventurers who disturb the normal course of trade, and make bankrupt or fraudulent traders appear trustworthy. Answer: It’s in the self-interest of bankers to be extremely cautious.
The practice of giving fictitious credit to improper persons is one of those evils, which experience guided by interest speedily corrects. The bank itself is in so much jeopardy of being a sufferer by it, that it has the strongest of all inducements to be on its guard.
6. Objection: Banks tend to banish gold and silver from the country. Answer: Banks increase the flow of gold and silver into a country by increasing trade and industry.
A nation, that has no mines of its own, must derive the precious metals from others; generally speaking, in exchange for the products of its labor and industry. The quantity, it will possess, will therefore, in the ordinary course of things, be regulated by the favourable, or unfavourable balance of its trade; that is, by the proportion between its abilities to supply foreigners, and its wants of them; between the amount of its exportations and that of its importations. Hence the state of its agriculture and manufactures, the quantity and quality of its labor and industry must, in the main, influence and determine the increase or decrease of its gold and silver.
If this be true, the inference seems to be, that well constituted Banks favour the increase of the precious metals. It has been shewn, that they augment in different ways, the active capital of the country. This, it is, which generates employment; which animates and expands labor and industry. Every addition, which is made to it, by contributing to put in motion a greater quantity of both, tends to create a greater quantity of the products of both: And, by furnishing more materials for exportation, conduces to a favourable balance of trade and consequently to the introduction and increase of gold and silver.
1. Banks are useful and important in the administration of finances and political economy. Other factors (discussed in II.B) have sometimes made banks look bad, but those don’t apply here.
2. We need banks because we have so little gold and silver in circulation.
a. Printing government-issued money is not a solution. When states printed money during the War and the Confederation period, it rapidly lost its value. Money printed by the federal government is also bad:
The emitting of paper money by the authority of Government is wisely prohibited to the individual States, by the National Constitution. And the spirit of that prohibition ought not to be disregarded, by the Government of the United States. Though paper emissions, under a general authority, might have some advantages, not applicable, and be free from some disadvantages, which are applicable, to the like emissions by the States separately; yet they are of a nature so liable to abuse, and it may even be affirmed so certain of being abused, that the wisdom of the Government will be shewn in never trusting itself with the use of so seducing and dangerous an expedient. In times of tranquillity, it might have no ill consequence, it might even perhaps be managed in a way to be productive of good; but in great and trying emergencies, there is almost a moral certainty of its becoming mischievous. 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, in the employment of that resource, to avoid as much as possible one less auspicious to present popularity. If it should not even be carried so far as to be rendered an absolute bubble, it would at least be likely to be extended to a degree, which would occasion an inflated and artificial state of things incompatible with the regular and prosperous course of the political œconomy.
Among other material differences between a paper currency, issued by the mere authority of Government, and one issued by a Bank, payable in coin, is this—That in the first case, there is no standard to which an appeal can be made, as to the quantity which will only satisfy, or which will surcharge the circulation; in the last, that standard results from the demand. If more should be issued, than is necessary, it will return upon the bank. Its emissions, as elsewhere intimated, must always be in a compound ratio to the fund and to the demand: Whence it is evident, that there is a limitation in the nature of the thing: While the discretion of the government is the only measure of the extent of the emissions, by its own authority.
b. We can’t require tax payments in specie, because that money would go out of circulation until tax payments were made. Bank notes are better.
D. Given that a national bank is desirable [Begins “Assuming it then as a consequence, from what has been said”]
- Is there already an institution that can function as a national bank?
- If there is none, on what principles should one be established?
III. The Bank of North America [Begins: “The Bank of North America originated”]
The Bank of North America [established in Philadelphia by Robert Morris in 1781] won’t work as a national bank for several reasons.
- The Bank of North America was chartered by the state of Pennsylvania, which recently reduced its stock from $10 million to $2 million. “So small a capital promises neither the requisite aid to government, nor the requisite security to the community.”
- The Bank’s charter is only valid for 14 more years.
- The directors and stockholders of Bank of North America are responsible for deciding whether to increase the capital of the bank. They’re likely to refuse because it would dilute the value of their shares. [NOTE: In this section, we see why Hamilton doesn’t want the bank to be entirely under private control.]
[T]he interest and accommodation of the public (as well individually as collectively) are made more subordinate to the interest, real or imagined, of the Stockholders, than they ought to be. It is true, that unless the latter be consulted, there can be no bank (in the sense at least in which institutions of this kind, worthy of confidence, can be established in this Country) but it does not follow, that this is alone to be consulted, or that it even ought to be paramount. Public utility is more truly the object of public Banks, than private profit. And it is the business of Government, to constitute them on such principles, that while the latter will result, in a sufficient degree, to afford competent motives to engage in them, the former be not made subservient to it. To effect this, a principal object of attention ought to be to give free scope to the creation of an ample capital; and with this view, fixing the bounds, which are deemed safe and convenient, to leave no discretion either to stop short of them or to overpass them.
The directors of the Bank of North America are not subject to rotation, which means they may plot to back a particular party or set of men. “The continual administration of an institution of this kind, by the same persons, will never fail, with, or without, cause, from their conduct, to excite distrust and discontent.”
C. Foreign investors
The BNA charter provides no protection against foreigners becoming directors of the Bank, or investing large sums in the Bank and influencing it by their votes as stockholders. “It is to be considered, that such a Bank is not a mere matter of private property, but a political machine of the greatest importance to the State.” [See II.A.3 above.]
IV. Proposed rules for a national bank
A. What a national bank should not have [Begins: “The order of the subject leads next to an inquiry”]
- The bank should not have many branches, at least at first. Getting sound directors for one branch will be difficult enough.
- The bank should not immediately loan money to buy land, because that would tie up money rather than letting it circulate.
- The bank should not be wholly owned by the government; it must have private directors, so the government can’t abuse it. The federal government can own shares, but not a majority. It should not participate in the direction of the bank. It should, however, have the right to inspect the bank’s books, since bank-issued notes will circulate as money and play a major role in the economy. [NOTE: And this is why Hamilton doesn’t want the bank to be run by the government, either: see III.A.3 and III.C above. He’s trying to set up checks and balances.]
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; 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. The suspicion of this would most probably be a canker, that would continually corrode the vitals of the credit of the Bank, and would be most likely to prove fatal in those situations, in which the public good would require, that they should be most sound and vigorous. It would indeed be little less, than a miracle, should the credit of the Bank be at the disposal of the Government, if in a long series of time, there was not experienced a calamitous abuse of it. It is true, that it would be the real interest of the Government not to abuse it; its genuine policy to husband and cherish it with the most guarded circumspection as an inestimable treasure. But what Government ever uniformly consulted its true interest, in opposition to the temptations of momentary exigencies? What nation was ever blessed with a constant succession of upright and wise Administrators?
The keen, steady, and, as it were, magnetic sense, of their own interest, as proprietors, in the Directors of a Bank, pointing invariably to its true pole, the prosperity of the institution, is the only security, that can always be relied upon, for a careful and prudent administration. It is therefore the only basis on which an enlightened, unqualified and permanent confidence can be expected to be erected and maintained.
B. Rules that a national bank should operate by [Begins: “Abandoning, therefore, ideas, which however agreeable”]
Hamilton submits a plan for the consideration of the House of Representatives that includes the following.
- The bank’s shares will total no more than $10 million. Those who wish to buy stock will pay 25% in gold and silver, the rest in government IOUs. The whole sum will be due in 4 payments 6 months apart. [For why the government IOUs are involved here, see the section beginning, “The combination of a portion of the public debt”]
- The bank will be incorporated, and will remain in existence until the final part of the public debt it owns is redeemed [in 20 years].
- The bank will not lend the U.S. government more than $50,000. It will not lend to foreign governments unless authorized by the U.S. government. [For more on this, see the section beginning, “The interdiction of loans on account of the United States”]
- The head of the Treasury Department can ask (weekly at most) for a statement of the bank’s capital stock, debts, monies deposited, and cash in hand.
- No other national bank (“no similar institution”) will be established in the United States while this one is functioning.
- The bank can have additional branches “for the purposes of discount and deposit only.”
- The U.S. will subscribe a maximum of $2 million (out of $10 million) to the bank, from the public debt.
- Interest rates: should they be high or low? Hamilton says low is better. “The natural effect of low interest is to increase trade and industry; because undertakings of every kind can be prosecuted with greater advantage.”
- Conclusion: If the Bank of North America’s charter is adjusted to meet the requirements Congress sets for the bank (as outlined above), it can be the national bank again.
Response to the Report on a National Bank
The Senate passed the bill authorizing a national bank on 1/20/1791. The House of Representatives passed the bill on 2/8/1791, and sent it to Washington for his signature.
Washington, concerned about whether Congress had the authority to create a bank, asked for a written opinion from Edmund Randolph, the attorney general (Randolph’s cover letter was 2/12/1791; with a first and second enclosure). Randolph acknowledges that the only possible objection to the bank bill is that it creates a corporation. He argues that the Constitution does not grant Congress the power to do that.
Washington also asked for Jefferson’s opinion (submitted 2/15/1791). Jefferson listed nine ways in which the proposed bank would violate existing laws.
On 2/16/1791, Washington sent Randolph’s and Jefferson’s comments to Hamilton for his response. A week later (2/23/1791), Hamilton sent Washington his Opinion on the Constitutionality of a National Bank.
Here’s the outline of that essay.
Opinion on the Constitutionality of a National Bank
Hamilton is eager to reply to the objections to a national bank for personal reasons (his Treasury Department will suffer if the bank is not created) and for a more pressing reason:
But the chief solicitude arises from a firm persuasion, that principles of construction like those espoused by the Secretary of State and the Attorney General would be fatal to the just & indispensible authority of the United States.
II. Jefferson’s and Randolph’s major objection [Begins: “In entering upon the argument it ought”]
Jefferson and Randolph object to the bank on the grounds that the federal government doesn’t have the authority to create a corporation.
Hamilton’s answer: The creation of a corporation is inherent in the definition of government: it’s a means to an end.
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; and which are not precluded by restrictions & exceptions specified in the constitution; or not immoral, or not contrary to the essential ends of political society.
This principle in its application to Government in general would be admitted as an axiom. And it will be incumbent upon those, who may incline to deny it, to prove a distinction; and to shew that a rule which in the general system of things is essential to the preservation of the social order is inapplicable to the United States.
The U.S. has national and state governments: each has the above power with respect to its own sphere. So the federal government has the power to create a corporation: but when?
This general & indisputable principle puts at once an end to the abstract question—Whether the United States have power to erect a corporation? that is to say, to give a legal or artificial capacity to one or more persons, distinct from the natural. For it is unquestionably incident to sovereign power to erect corporations, and consequently to that of the United States, in relation to the objects intrusted to the management of the government. The difference is this—where the authority of the government is general, it can create corporations in all cases; where it is confined to certain branches of legislation, it can create corporations only in those cases.
Neither Jefferson nor Randolph discussed this; it ought to settle the question; but Hamilton will [for the other 90% of the essay] answer their specific objections.
III. Answers to Jefferson’s objections [Begins: “For a more complete elucidation”]
A. Jefferson’s general objections
- Jefferson says: The creation of a corporation is not among Congress’s enumerated powers; therefore it belongs to the states. Hamilton’s answer: the Constitution gives both enumerated and implied powers (“It is not denied, that there are implied, as well as express powers, and that the former are as effectually delegated as the latter.”) Hamilton points out that a corporation isn’t some new sort of monster.
A strange fallacy seems to have crept into the manner of thinking & reasoning upon the subject [of corporations]. Imagination appears to have been unusually busy concerning it. An incorporation seems to have been regarded as some great, independent, substantive thing—as a political end of peculiar magnitude & moment; whereas it is truly to be considered as a quality, capacity, or mean to an end. Thus a mercantile company is formed with a certain capital for the purpose of carrying on a particular branch of business. Here the business to be prosecuted is the end; the association in order to form the requisite capital is the primary mean. Suppose that an incorporation were added to this; it would only be to add a new quality to that association; to give it an artificial capacity by which it would be enabled to prosecute the business with more safety & convenience.
2. Jefferson says that in the “necessary and proper” clause, “necessary” implies “absolutely necessary” [i.e., can’t be accomplished without it]. Hamilton says: Wrong.
The whole turn of the clause containing it, indicates, that it was the intent of the convention, by that clause to give a liberal latitude to the exercise of the specified powers. The expressions have peculiar comprehensiveness. They are—“to make all laws, necessary & proper for carrying into execution the foregoing powers & all other powers vested by the constitution in the government of the United States, or in any department or officer thereof.” To understand the word as the Secretary of State does, would be to depart from its obvious & popular sense, and to give it a restrictive operation; an idea never before entertained. It would be to give it the same force as if the word absolutely or indispensibly had been prefixed to it.
BTW, says Hamilton, if the federal government has no absolute necessity for corporations … neither do the state governments.
3. Jefferson: This bill is calculated to extend the federal government’s sphere in to the sphere of the states’ governments. Hamilton’s answer:
The truth is that difficulties on this point are inherent in the nature of the fœderal constitution. They result inevitably from a division of the legislative power. The consequence of this division is, that there will be cases clearly within the power of the National Government; others clearly without its power; and a third class, which will leave room for controversy & difference of opinion, & concerning which a reasonable latitude of judgment must be allowed.
But the doctrine which is contended for is not chargeable with the consequence imputed to it. It does not affirm that the National government is sovereign in all respects, but that it is sovereign to a certain extent: that is, to the extent of the objects of its specified powers.
It leaves therefore a criterion of what is constitutional, and of what is not so. This criterion is the end to which the measure relates as a mean. If the end be clearly comprehended within any of the specified powers, & if the measure have an obvious relation to that end, and is not forbidden by any particular provision of the constitution—it may safely be deemed to come within the compass of the national authority. There is also this further criterion which may materially assist the decision. Does the proposed measure abridge a preexisting right of any State, or of any individual? If it does not, there is a strong presumption in favour of its constitutionality; & slighter relations to any declared object of the constitution may be permitted to turn the scale.
B. Jefferson’s particular objections
- Jefferson says the proposed corporation is against the laws of alienage, mortmain, descents, forfeiture, &c. &c. &c. Hamilton’s answer:
It can therefore never be good reasoning to say—this or that act is unconstitutional, because it alters this or that law of a State. It must be shewn, that the act which makes the alteration is unconstitutional on other accounts, not because it makes the alteration.
- Jefferson says the bank is illegal because it creates a monopoly. Hamilton’s answer:
[T]he bill neither prohibits any State from erecting as many banks as they please, nor any number of Individuals from associating to carry on the business: & consequently is free from the charge of establishing a monopoly: for monopoly implies a legal impediment to the carrying on of the trade by others than those to whom it is granted.
- Jefferson: The bill gives the bank the right to make laws that supersede those of the states. Hamilton: A bank must obey both state and federal laws. If the bank’s rules are contrary to state laws, the bank’s rules are void. But if the state law is contrary to a federal law, then the federal law takes precedence.
- Jefferson: The Convention decided not to write into the Constitution that Congress could authorize corporations; therefore, they didn’t want Congress to have that power. [Jefferson did not attend the Constitutional Convention; presumably he was told this by Edmund Randolph or James Madison, who did attend.] Hamilton’s answer: What matters is not what the Convention discussed, but what they actually wrote into the Constitution.
The Secretary of State will not deny, that whatever may have been the intention of the framers of a constitution, or of a law, that intention is to be sought for in the instrument itself, according to the usual & established rules of construction. Nothing is more common than for laws to express and effect, more or less than was intended. If then a power to erect a corporation, in any case, be deducible by fair inference from the whole or any part of the numerous provisions of the constitution of the United States, arguments drawn from extrinsic circumstances, regarding the intention of the convention, must be rejected.
IV. Randolph’s objections [Begins: “Those of the Attorney General will now”]
A. Power to create a corporation
Randolph says the power to create a corporation is not expressly given in the Constitution. Hamilton’s answer: As an example, the federal government has all rights within the federal district [i.e., the future Washington, D.C., when it’s finally built]: those rights must include the creation of corporations.
B. What would justify Congress in creating a corporation?
Randolph says if Congress can create corporations, it’s because 1) the nature of the federal government implies that, or 2) such creation is involved in some of the specified powers of legislation, or 3) it is necessary and proper for carrying out some of the specified powers. Hamilton’s answer: Randolph is tackling the wrong issue. The federal government does not have the right to create a corporation in all cases, but it does in specific cases.
[T]he doctrine is stated with this express qualification, that the right to erect corporations does only extend to cases & objects within the sphere of the specified powers of the government. A general legislative authority implies a power to erect corporations in all cases—a particular legislative power implies authority to erect corporations, in relation to cases arising under that power only.
C. Not one of the enumerated powers, or their subcategories
Randolph says the power to create a corporation is not among the Congressional powers enumerated in the Constitution. He lists these as: to lay and collect taxes; to borrow money for the U.S.; to regulate commerce with foreign nations and the states; to make rules and regulations regarding the territory or other property of the U.S. Under each of these, he lists the actions that he conceives necessary: e.g., under borrowing money, Congress has the power to stipulate a sum, determine whether interest is to be paid (and the amount), and specify the terms of repayment.
Hamilton’s reply: That’s a very incomplete list! And he proceeds to dissect the errors and omissions in Randolph’s list. [Begins: “The truth of this inference or conclusion must depend on the accuracy of the enumeration”]
V. Why Congress can create a corporation [Begins: “It shall now be endeavoured to be shewn”]
The only question is whether a corporation, not a bank, is legal. In order to prove that it is, Hamilton will show its relation to the specified powers of government.
B. The creation of a corporation is related to …
- Collecting taxes, because it is related to the circulation of money and the medium of exchange. This section includes Hamilton’s definition of a bank and his definition of a corporation:
[T]he simplest and most precise idea of a bank, is, a deposit of coin or other property, as a fund for circulating a credit upon it, which is to answer the purpose of money. …
[T]he true definition of a corporation seems to be this. It is a legal person, or a person created by act of law, consisting of one or more natural persons authorised to hold property or a franchise in succession in a legal as contradistinguished from a natural capacity.
- The creation of a banking corporation is related to borrowing money, “because it is an usual and in sudden emergencies an essential instrument in the obtaining of loans to Government.”
- The creation of a banking corporation is related to regulation of trade, because it produces a medium of exchange and keeps money in circulation.
- The creation of a banking corporation is related to the common defense, because it will help provide money for defense of the frontier.
C. A banking corporation is legitimate with respect to the rules and regulations governing federal property
Hamilton says the creation of a bank is in “within the operation of the provision which authorises Congress to make all needful rules & regulations concerning the property of the United States.” Randolph asserts that the government’s property can’t include tax money, because “the disposal & regulation of money is the final cause for raising it by taxes.” Hamilton replies:
[I]t would be more accurate to say, that the object to which money is intended to be applied is the final cause for raising it, than that the disposal and regulation of it is such. The support of Government; the support of troops for the common defence; the payment of the public debt, are the true final causes for raising money. The disposition & regulation of it when raised, are the steps by which it is applied to the ends for which it was raised, not the ends themselves. Hence therefore the money to be raised by taxes as well as any other personal property, must be supposed to come within the meaning as they certainly do within the letter of the authority, to make all needful rules & regulations concerning the property of the United States.
D. Re taxing ad lib
Jefferson says that Congress can’t tax at will – only to pay debts and for the welfare of the Union. Hamilton says the test is whether Congress is using the money for general rather than local purposes.
The welfare of the community is the only legitimate end for which money can be raised on the community. Congress can be considered as under only one restriction, which does not apply to other governments—They cannot rightfully apply the money they raise to any purpose merely or purely local. But with this exception they have as large a discretion in relation to the application of money as any legislature whatever. The constitutional test of a right application must always be whether it be for a purpose of general or local nature. If the former, there can be no want of constitutional power. The quality of the object, as how far it will really promote or not the welfare of the union, must be matter of conscientious discretion. And the arguments for or against a measure in this light, must be arguments concerning expediency or inexpediency, not constitutional right. Whatever relates to the general order of the finances, to the general interests of trade &c being general objects are constitutional ones for the application of money.
A Bank then whose bills are to circulate in all the revenues of the country, is evidently a general object, and for that very reason a constitutional one as far as regards the appropriation of money to it. Whether it will really be a beneficial one, or not, is worthy of careful examination, but is no more a constitutional point, in the particular referred to; than the question whether the western lands shall be sold for twenty or thirty cents [per] acre.
VI. Additional cases
Hamilton lists more cases where the federal government might exercise the power of creating corporations.
VII. Assorted arguments in favor of a bank
Supplementary arguments in favor of a bank, including the test of whether it abridges the rights of any state or individual, and whether it’s more relevant to the federal than local level.
And on to the next report. Hamilton submitted the Report on the Establishment of a Mint to Congress on 1/28/1791, midway between the Report on a National Bank and the Opinion on the Constitutionality of a National Bank. I’ve switched the order in this post because I wanted to keep the bank reports together.
Report on the Establishment of a Mint
A. What the mint affects
A plan for an establishment of this nature involves a great variety of considerations, intricate, nice, and important. The general state of Debtor and Creditor; all the relations and consequences of price; the essential interests of trade and industry; the value of all property; the whole income both of the State and of individuals are liable to be sensibly influenced, beneficially, or otherwise, by the judicious, or injudicious regulation of this interesting object. It is one likewise, not more necessary, than difficult to be rightly adjusted; one which has frequently occupied the reflections and researches of politicians, without having harmonised their opinions on some of the most important of the principles, which enter into its discussion. Accordingly, different systems continue to be advocated, and the systems of different Nations, after much investigation, continue to differ from each other.
B. Do we really need a mint?
- Our affairs are currently in disorder: the value of a dollar has diminished by 5%.
- If we don’t mint our own currency, we are subject to another nation’s mint and regulations. [It was not uncommon for a king to decree a devaluation of his country’s currency by stating that henceforth a gold coin of a certain denomination would contain less gold.]
- Trade is confusing, because different coins are given different values in various states.
- A mint can protect against counterfeiting and against base currencies.
II. Particulars to be discussed: 6 items [Begins: “In order to a right judgment”]
A. The nature of the monetary unit.
Hamilton advises the dollar. He includes a long discussion of Spanish dollar (a.k.a. a “piece of eight,” as close to a worldwide currency as existed circa 1790) and what amount of silver ought to equal $1.
B. Gold and silver coins [Begins: “The next enquiry towards a right”]
Should coins be gold or silver?
- The value of gold is more stable, but if we eliminate either gold or silver, we diminish the amount of money in circulation. Gold is best for large transactions, silver for smaller ones.
- If both gold and silver are minted, what should be the proportion: how much gold and how much silver equals $1? If we get this wrong, the metal that’s undervalued will disappear from circulation. [Because if the coin’s worth less as a coin than as a puddle of gold, you’ll melt it down, right?]
- Our choices: we can use the mean or average of the value of gold and silver in the commercial world, OR the proportion that’s currently used in the United States. Hamilton favors the market prices:
There can hardly be a better rule, in any country, for the legal, than the market proportion; if this can be supposed to have been produced by the free and steady course of commercial principles. The presumption, in such case, is that each metal finds its true level, according to its intrinsic utility, in the general system of money operations.
C. Proportion of alloy to gold or silver [Begins: “A further preliminary to the adjustment”]
The proportion of alloy to gold or silver should be the same as in the coins of our trading partners.
D. Paying the expense of minting coinage [Begins: “A third point remains to be”]
It costs money to run a mint. Should the expense be absorbed by the government, or paid out of the material itself, by including less gold or silver in the coins than the face value of the coins? European countries have used both methods.
- The expense should not be defrayed by reducing the amount of metal in the coins. Prices would simply rise to allow for the debased value of the coins.
[T]he quantity of Gold and Silver in the National Coins corresponding with a given sum cannot be made less, than heretofore, without disturbing the balance of intrinsic value; and making every Acre of Land, as well as every bushel of Wheat, of less actual worth than in time past. If the United States were isolated, and cut off from all intercourse with the rest of mankind, this reasoning would not be equally conclusive. But it appears decisive, when considered with a view to the relations, which Commerce has created between us and other Countries.
It is however not improbable, that the effect meditated would be defeated by a rise of prices, proportioned to the diminution of the intrinsic value of the coins. This might be looked for in every enlightened commercial Country; but perhaps in none with greater certainty than in this; because, in none, are men less liable to be the dupes of sounds—in none has authority so little resource for substituting names to things. …
Among the evils, attendant on such an operation, are these—Creditors both of the Public and of individuals would lose a part of their property—Public and Private Credit would receive a wound—the effective revenues of the Government would be diminished. There is scarcely any point, in the œconomy of national affairs of greater moment, than the uniform preservation of the intrinsic value of the money unit. On this the security and steady value of property essentially depend.
- A difference between the value of gold or silver in coin vs. bullion form cannot be maintained.
Whenever a foreign Merchant is the carrier of his own commodities to France for sale, he has a strong inducement to bring back specie, instead of French commodities; because a return in the latter may afford no profit, may even be attended with loss, in the former, it will afford a certain profit. … The principal question with a Merchant naturally is—In what manner, can I realise a given sum, with most advantage, where I wish to place it? And in cases, in which other commodities are not likely to produce equal profit with bullion, it may be expected, that this will be preferred; to which the greater certainty attending the operation must be an additional incitement. There can hardly be imagined a circumstance, less friendly to trade, than the existence of an extra inducement, arising from the possibility of a profitable speculation, upon the articles themselves, to export from a Country its Gold and Silver, rather than the products of its land and labor.
If the difference in coins vs. bullion alters patterns of trade, that’s a Bad Thing.
Nothing which contributes to change a beneficial current of trade, can well compensate, by particular advantages, for so injurious an effect. It is far more easy to transfer Trade, from a less to a more favorable Channel, than when once transferred, to bring it back to its old one. Every source of artificial interruption to an advantageous current is, therefore, cautiously to be avoided.
- Hamilton suggests that a coin be worth .5% more than the equivalent weight of bullion. That will make people reluctant to melt down coins, since the same amount of gold or silver would be worth less as bullion.
- Why shouldn’t we make up for the cost of minting coins by adding more alloy to the coins [so a coin would have less silver or gold]? Because opinion will lower their value.
The effects of imagination and prejudice cannot safely be disregarded, in any thing that relates to money. If the beauty of the coin be impaired, it may be found difficult to satisfy the generality of the community, that what appears worse is not really less valuable; And it is not altogether certain, that an impression of its being so may not occasion an unnatural augmentation of prices.
E. Back to our first question: what amount of gold and silver should be in $1? [Begins: “It is now proper to resume and finish”]
Answer: $1 should equal 24 3/4 grains of pure gold and 371 1/4 grains of pure silver. The alloy should be 1/12 of the total weight, bringing $1 in gold to 27 grains (1.7 g), $1 in silver to 405 grains (26 g).
F. What should the coins be? [Begins: “With regard to the number of different”]
- We should use the decimal system established in 1786.
With regard to the number of different pieces which shall compose the coins of the United States, two things are to be consulted—convenience of circulation and cheapness of the coinage. The first ought not to be sacrificed to the last; but as far as they can be reconciled to each other, it is desireable to do it. Numerous and small (if not too minute) subdivisions assist circulation; but the multiplication of the smaller kinds increases expence; the same process being necessary to a small as to a large piece.
2. Our first coins: $10 gold piece, $1 gold piece, $1 silver piece, 10 cent silver piece, 1 cent copper piece, 1/2 cent copper piece.
3. Why coin both a penny and a halfpenny?
The largest copper piece will nearly answer to the halfpenny sterling and the smallest of course to the farthing. Pieces of very small value are a great accommodation and the means of a beneficial œconomy to the Poor; by enabling them to purchase, in small portions, and at a more reasonable rate, the necessaries of which they stand in need. If there are only Cents, the lowest price for any portion of a vendible commodity, however inconsiderable in quantity, will be a Cent; if there are half Cents, it will be a half Cent; and in a great number of cases exactly the same things will be sold for a half Cent which if there were none would cost a Cent. …
- What should the size and thickness of the coins be? As thick “as may consist with neatness and good appearance.” Thinner means more surface area to wear away.
- What should the design of the coins be?
The devices of the Coins are far from being matters of indifference, as they may be made the vehicles of useful impressions. They ought therefore to be emblematical, but without losing sight of simplicity. The fewer sharp points and angles there are, the less will be the loss by wearing.
G. Foreign coins
Hamilton wants to end use of foreign coins, preferably within three years. Of course, they must continue to circulate until the mint is up and running. Tax payments made in foreign coins will be melted and reissued as U.S. coins.
III. Jefferson’s suggestions about the dollar [Begins: “The Secretary for the Department of State”]
In his “Plan for Establishing Uniformity in the Coinage, Weights, and Measures of the United States,” submitted to Congress 7/13/1790, Jefferson suggested that the dollar correspond with the unit of weight, i.e., that it have 376 grains of silver. Hamilton had proposed 371.25 grains, and notes that adding 5 grains to the weight of a silver dollar would change its value – and that would negate the advantage of keeping the dollar as the currency.
IV. Organization of the mint [Begins: “The organization of the Mint”]
Hamilton names all the persons to be employed, from the director to a porter. The number will vary depending on the amount of work to be done.
V. How do we correct errors in the weight and alloy of coins? [Begins: “The remedy for errors”]
Hamilton describes the process in England by which the Lord Chancellor and others periodically check the coins produced by the British mint.
- For a few bibliographical references, see the end of last week’s post.
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