Hamilton vs. Jefferson: Is the Federal Reserve Constitutional?

Money Metals Exchange

By Michael Maharrey , Money Metals Exchange

Is the Federal Reserve constitutional?

The Fed was conceived during a secret meeting of bankers and politicians at a private club on Jekyll Island, Georgia. Using a blueprint drawn up during this clandestine meetup, Congress created the Federal Reserve in 1913 via the Federal Reserve Act. Woodrow Wilson signed the bill into law on Dec. 23, 1913.  

The stated purpose of the legislation was to  "provide the nation with a safer, more flexible, and more stable monetary and financial system." In the years since its founding, the Fed’s role in banking and the economy has expanded exponentially.  

The Fed has become the nation's money printer, rapidly expanding the money supply using interest rate policy and quantitative easing. In other words, the Fed creates inflation. 

There is no question that the Fed has a pernicious effect on the economy. But there is an even more fundamental problem with the Federal Reserve - it is constitutionally dubious.

The Roots of Central Banking

We can trace the origins of this modern central bank back to the creation of the First Bank of the United States, chartered for a period of 20 years by Congress on Feb. 25, 1791.

A national bank was the brainchild of Alexander Hamilton. His rationale wasn’t much different from those who later came up with the Federal Reserve. Hamilton thought a central bank was necessary to stabilize and improve the fledgling nation’s credit and to better manage the financial business of the United States government. He also knew that his vision of a powerful national government was impossible without a central bank to backstop government borrowing.

So, how did Hamilton’s bank fit into the constitutional framework ratified just a couple of years earlier?

Simply put, it didn’t.

To justify his bank, Hamilton performed perhaps the greatest political flip-flop in American history. During the ratification debates, Hamilton promised that the federal government would remain limited to its explicitly delegated powers. But when it came time to charter his bank, Hamilton suddenly discovered “implied powers” buried in the text of the Constitution.

If supporters had taken this position during the ratification process, the states would have rejected the Constitution outright.

The arguments against the bank fit more closely with the vision laid out by supporters of the Constitution during the ratification debates, but ultimately, Hamilton won the day. The chartering of the First Bank of the United States not only set the precedent for government-controlled central banking that ultimately gave us the Federal Reserve; it also sent the United States down the path to ever-growing central power.

One of the most vocal opponents of the bank was Thomas Jefferson who argued that it was unconstitutional.

The Central Bank Debate

The debate was really about more than chartering a bank. At its core, it was an argument about the extent of federal power.

Jefferson stayed true to the constitutional vision cast by supporters of the Constitution during the ratification debates – that federal authority would remain carefully circumscribed by the enumerated delegated powers. Given that the Constitution doesn’t explicitly authorize Congress to charter corporations, much less a national bank, Jefferson argued that it was an unconstitutional act.

During ratification, Hamilton also insisted that the Constitution put strict limits on federal power. But he pivoted from this position and justified his project by invoking the doctrine of “implied powers.” His arguments foreshadowed how government people would justify federal policies of every imaginable stripe moving forward.

Arguably, Hamilton’s arguments for the First Bank of the United States set the foundation for much of the federal overreach we have today.

Jefferson and Hamilton both wrote documents making their cases for the establishment of the bank. Jefferson wrote his Opinion on the Constitutionality of a National Bank first.

He rested his argument on the Tenth Amendment.

“I consider the foundation of the Constitution as laid on this ground: That  ‘all powers not delegated to the United States, by the Constitution, nor prohibited by it to the States, are reserved to the States or to the people.’ [XIIth amendment.] To take a single step beyond the boundaries thus specially drawn around the powers of Congress, is to take possession of a boundless field of power, no longer susceptible of any definition.”

He then succinctly stated his conclusion.

“The incorporation of a bank, and the powers assumed by this bill, have not, in my opinion, been delegated to the United States, by the Constitution.”

Jefferson proceeded to outline the various clauses of the Constitution that supporters of the bank used to constitutionally justify its creation, and explained why they failed to bear the burden of that power.

Supporters of the bank primarily justified it based on the Commerce Clause, but Jefferson argued that “to erect a bank, and to regulate commerce, are very different acts.” Erecting a bank creates an institution of commerce, and as Jefferson pointed out, “to make a thing which may be bought and sold, is not to prescribe regulations for buying and selling.”

He went on to argue that if erecting a bank is an exercise of the commerce power, it would be void because it would also impact commerce within individual states.

“For the power given to Congress by the Constitution does not extend to the internal regulation of the commerce of a State, (that is to say of the commerce between citizen and citizen,) which remain exclusively with its own legislature; but to its external commerce only, that is to say, its commerce with another State, or with foreign nations, or with the Indian tribes.”

Next Jefferson tackled the General Welfare Clause, pointing out that Congress cannot lay and collect taxes for any purpose it pleases, “but only to pay the debts or provide for the welfare of the Union.” Likewise, Congress can’t do anything it pleases to promote the “general welfare.” It can only further the general welfare by laying taxes and acting within its enumerated powers.

“In like manner, they are not to do anything they please to provide for the general welfare, but only to lay taxes for that purpose. To consider the latter phrase, not as describing the purpose of the first, but as giving a distinct and independent power to do any act they please, which might be for the good of the Union, would render all the preceding and subsequent enumerations of power completely useless. It would reduce the whole instrument to a single phrase, that of instituting a Congress with power to do whatever would be for the good of the United States; and, as they would be the sole judges of the good or evil, it would be also a power to do whatever evil they please. It is an established rule of construction where a phrase will bear either of two meanings, to give it that which will allow some meaning to the other parts of the instrument, and not that which would render all the others useless. Certainly no such universal power was meant to be given them. It was intended to lacce them up straitly within the enumerated powers, and those without which, as means, these powers could not be carried into effect.” [Emphasis original]

Jefferson drove his point home by pointing out a very inconvenient fact for Hamilton – the Philadelphia Convention debated and rejected delegating the power to charter corporations.

On one of the final days of the convention, James Madison proposed the federal government be delegated the authority “to grant charters of incorporation where the interest of the U.S. might require & the legislative provisions of individual State may be incompetent.”

Rufus King of Massachusetts objected specifically on the grounds that “It will be referred to the establishment of a Bank, which has been a subject of contention in those Cities (New York and Philadelphia). He also warned that “In other places it will be referred to mercantile monopolies.”

George Mason of Virginia proposed limiting the power to charting corporations for the construction of canals. “He was afraid of monopolies of every sort, which he did not think were by any means already implied by the Constitution as supposed by Mr. Wilson.”

Ultimately, the convention rejected the proposal completely. Historian Dave Benner wrote, “This casts overwhelming doubt on the notion that the Constitution allowed Congress to form such monopolies. No enumerated power to grant monopolies and corporate charters was ever included in the document, and during the ratification campaign, none of the Constitution’s advocates cited the presence of such a power.”

But Hamilton’s arguments didn’t rely on the existence of any delegated power. Instead, he appealed to the existence of unwritten “implied powers.”

In response to Jefferson’s appeal to the Tenth Amendment and that the federal government can only exercise delegated powers, Hamilton affirmed it, and then effectively nullified its limiting force. He wrote, “The main proposition here laid down, in its true signification is not to be questioned.” But he continued, insisting, “It is not denied that there are implied well as express powers, and that the former are as effectually delegated as the latter.”

But who decides the extent of these implied powers? Who determines their limits? In effect, Hamilton sets up an almost unlimited reservoir of power the general government can dip into in order to take whatever actions it deems appropriate. This was a 180-degree reversal from the position he took during the ratification debates when he insisted that the new general government would only exercise limited powers.

Hamilton primarily based his defense of the national bank on the “necessary and proper clause,” citing it as the source of these “implied” powers. While Jefferson relied on a very narrow definition of “necessary and proper,” Hamilton used the phrase to milk implied powers out of the Constitution.

The debate centered on the meaning of the word necessary. Jefferson took a very narrow view, arguing that the government can carry out all of its enumerated powers without a national bank. “A bank therefore is not necessary, and consequently not authorized by this phrase.”

“It has been urged that a bank will give great facility or convenience in the collection of taxes, Suppose this were true: yet the Constitution allows only the means which are ‘necessary,’ not those which are merely ‘convenient’ for effecting the enumerated powers. If such a latitude of construction be allowed to this phrase as to give any non-enumerated power, it will go to everyone, for there is not one which ingenuity may not torture into a convenience in some instance or other, to some one of so long a list of enumerated powers. It would swallow up all the delegated powers, and reduce the whole to one power, as before observed. Therefore it was that the Constitution restrained them to the necessary means, that is to say, to those means without which the grant of power would be nugatory.”

Hamilton found this view too limiting. He wrote, “It is certain that neither the grammatical nor popular sense of the term requires that construction. According to both, necessary often means no more than needful, requisite, incidental, useful, or conducive to.”

“It is a common mode of expression to say, that it is necessary for a government or a person to do this or that thing, when nothing more is intended or understood, than that the interests of the government or person require, or will be promoted by, the doing of this or that thing. … To understand the word as the Secretary of State does, would be to depart from its obvious and 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 indispensably had been prefixed to it.”

Jefferson hit the problem with Hamilton’s view on the head. It opens up a door to virtually unlimited government power. This runs counter to James Madison’s assurance in Federalist #45 that “the powers delegated by the proposed Constitution to the federal government are few and defined.” [Emphasis added]

Under Hamilton’s “implied power” doctrine and his loose reading of the necessary and proper clause, there is very little the federal government can’t do. After all, virtually anything could be defined as “needful” or “useful” to the government. During the ratification debates, opponents of the Constitution worried that the necessary and proper clause would be construed exactly as Hamilton read it. At the time, Hamilton swore they had nothing to worry about. In Federalist #33, he wrote, “It may be affirmed with perfect confidence that the constitutional operation of the intended government would be precisely the same, if these clauses [necessary and proper and the supremacy clause] were entirely obliterated, as if they were repeated in every article. They are only declaratory of a truth which would have resulted by necessary and unavoidable implication from the very act of constituting a federal government, and vesting it with certain specified powers.” [Emphasis added]

Hamilton pivoted from “specified powers” in 1788 to “implied powers” just three years later.

In his push for a bank, Hamilton also invoked a rule of construction very favorable to the government. He wrote, “This restrictive interpretation of the word necessary is also contrary to this sound maxim of construction, namely, that the powers contained in a constitution of government, especially those which concern the general administration of the affairs of a country, its finances, trade, defense, etc., ought to be construed liberally in advancement of the public good.”

This was not “a sound maxim of construction” at the time.

St. George Tucker was an influential lawyer and jurist, and he wrote the first systematic commentary on the Constitution. Published in 1803, View of the Constitution of the United States served as an important law book, informing the opinions of judges, lawyers and politicians for the next 50 years. He explained that we should always construe federal power in the most limited sense possible.

 “The powers delegated to the federal government, are, in all cases, to receive the most strict construction that the instrument will bear, where the rights of a state or of the people, either collectively or individually, may be drawn in question.”

This is the exact opposite of Hamilton’s maxim. As “Light Horse” Harry Lee put it during the Virginia ratifying convention, “When a question arises with respect to the legality of any power, exercised or assumed by Congress, it is plain on the side of the governed. Is it enumerated in the Constitution? If it be, it is legal and just. It is otherwise arbitrary and unconstitutional.”

When political power resides in the people, the default position should always be to assume the most limited government power possible – not the most liberal reading as Hamilton insisted.

Later in his life, Jefferson made a similar point in a letter to William Johnson.

“On every question of construction let us carry ourselves back to the time when the Constitution was adopted, recollect the spirit manifested in the debates, and instead of trying what meaning may be squeezed out of the text, or intended against it, conform to the probable one in which it was passed.”

There was no probable construction authorizing charting a national bank.

Reading Hamilton’s arguments for the bank, it becomes clear he was trying to “squeeze” meaning – and power – out of the Constitution. Under the limited general government promised by supporters of the Constitution during ratification, including Alexander Hamilton, there would have been no national bank.

Hamilton’s twisting of the Constitution to wring out new powers set the stage for all the federal overreach that would follow. It was the “foundation” for the “living breathing” Constitution we live under today.

Originally Published on Money Metals Exchange.