As I recall I've mentioned
previously, the financial situation in the United States during the years of
the Revolution and its immediate aftermath was more than a little precarious.
In the interest of providing a bit more depth on certain topics, a brief
overview of the American experience with banking in general up until 1790 will
follow.
In order to purchase supplies abroad the
Continental Congress was forced to borrow millions of dollars from its European
allies (France and the Netherlands chief among them) while at the same time
possessing no obvious mechanism to repay the debts that resulted. At the same
time domestic costs were paid for by the issuance of Continental Currency, a
type of paper bill printed on the authority of Congress and totalling, by the
end of the war, almost $250 million. Unfortunately, because Congress wasn't
able to control the supply of money by either taxing it or selling bonds, the
value of the Continentals depreciated rapidly. This loss of value was aided by the
fact that the states themselves issued bills of credit in their own names, and
by successful British attempts to counterfeit the Continentals and pass them
into circulation from their headquarters in occupied New York City. By the end
of 1778, three years after their first issue, the Continentals had lost all but
1/5 of their value; by 1780 they’d sunk to 1/40.
In 1782 an attempt to remedy the
situation materialized in the form of the Bank of North America. The brainchild
of Superintendent of Finance Robert Morris and his ally and confidant Alexander
Hamilton, the purpose of the bank was to help fund the war effort by establishing
a stable national currency in the United States. The bills of credit issued by
the bank were to be backed by a public offering of 1000 shares at $400 each. In
addition to those purchases made by private citizens, most of the shares were
paid for by Morris with hard currency either loaned from France and the
Netherlands or contributed from his own personal fortune. The paper currency
that was issued by the bank as a result was then permitted to be used as
payment for taxes owed to either the federal government or many of the state
governments. This created a mechanism of control over the money supply in order
to prevent the runaway inflation that had plagued the Continentals. Unfortunately
the Bank of North America operated under a distinct set of limitations that
prevented it from becoming the national institution its federal charter
envisioned. For one, it didn't operate in more than a handful of states.
Controversy over the legality of Congress incorporating a national bank led to
the BNA seeking charters from the states instead. Subsequently in its
day-to-day operations the Bank of North America operated more like a commercial
bank that happened to be headquartered in Philadelphia. This tendency was
amplified by Morris’ dominant role as the institution’s chief financial backer.
In an effort to prevent inflation Morris recommended that Bank of North America
notes should not be used in private transactions, and in high risk situations
even took to issuing bills of credit backed by his own fortune rather allow
potential harm to come to befall the bank’s credit. Public use of BNA notes was
thus far more limited than originally intended. When the Revolutionary War
concluded in 1783 Congress removed its deposits and the Bank of North America
reverted to the status of a Pennsylvania-chartered state bank, which in many
ways it had always been.
While the Bank of North America
succeeded in securing some much-needed funding for the American war effort
during the latter years of the Revolution, it failed to alleviate the financial
woes that plagued many of the states. Congress as well as the various state
governments remained severely in debt, and because of the weaknesses inherent
in the Articles of Confederation there existed no way for the federal
government to reliably collect taxes in order to pay off its obligations. At
the same time, the limited scope within which the Bank of North America
operated ensured that most Americans continued to be unfamiliar with the
fundamental principles behind banking and the day-to-day realities of how such
financial institutions operated. Unlike in Great Britain, where in the 18th
century a multitude of private and county banks flourished, people living and
working in the United States in the 1770s and 1780s existed in a world where,
in addition to coined metal, private wealth was the basis of most transactions.
Between merchants, bills of credit were often issued in exchange for goods or
services rendered with the understanding that they would be paid at a set date.
These bills could be passed on to others as payment for additional goods or
services, and in essence functioned as a form of paper money. Those individuals
who had accrued large sums of money over the course of their career likewise
provided most of the loan capital and subsisted on the accumulated interest. Banking
in the European tradition, as facilitated by a mix of private and public
corporations, only became necessary in the United States during the
Revolutionary War with the need to very quickly raise very large sums of money.
As the delicate economic
situation of the United States had been a chief motivator for the calling of
the Philadelphia Convention of 1787 and the drafting of a new federal
constitution, providing a remedy was among the first major efforts the
newly-formed government attempted. Alexander Hamilton, delegate to the
Philadelphia Convention from New York and Robert Morris’s erstwhile
collaborator, was appointed the first Secretary of the Treasury in 1789 and
very quickly brought to the attention of Congress a set of linked proposals he
believed would stabilize the economic prospects of the United States. Among the
measures he suggested, in his Second
Report on Public Credit, was the incorporation of a national bank.
For the record, nowhere in the
United States Constitution are the words “bank,” “charter” or “incorporate”
utilized. Indeed, the very concept of Congress or any other branch of the
federal government possessing a right to issue charters of incorporation is
entirely absent. This became an issue for those who considered themselves
strict constructionists, believing that that meaning of the Constitution was
best determined by as plain a reading of the text as possible. Thomas
Jefferson, then Secretary of State, was chief among them, and pointed out at
length that the incorporation of a national bank was fundamentally beyond the
remit of Congress. Many present at the Philadelphia Convention, however, likely
took it for granted that the power of a governmental body to issue such
charters was among the standard legislative repertoire that had been established
during the colonial era. That the government framed by the Constitution, about
as robust as most Americans had ever seen, would lack such a basic legal
prerogative would doubtless have seemed strange to some. To this it should be
added that the Constitution explicitly states that Congress possesses the right
to, “borrow Money on the credit of the United States,” “coin Money, regulate
the Value thereof, and of foreign Coin,” and, “provide for the Punishment of
counterfeiting the Securities and current Coin of the United States.” While Jefferson
claimed that the Treasury Department could have accomplished these things
without the need for a national bank, Hamilton and his supporters once more
drew on the Necessary and Proper Clause for validation. This sentence at the
end of Article I, Section 8 states that, in addition to all of the rights
already declared, Congress also has the ability, “To make all Laws which shall
be necessary and proper for carrying into Execution the foregoing Powers and
all other Powers vested by this Constitution in the Government of the United
States, or in any Department or Officer thereof.” A national bank, Hamilton
argued, was necessary (“needful, requisite, incidental, useful, or conductive”)
to the accomplishment of the stated aims, and was at the same time not strictly
prohibited by the text of the Constitution.
On their own, Hamilton’s arguments in favour of
a national bank are numerous, and in all likelihood could be collected into a
not insubstantial volume. That being the case, and the theme of this series
being specifically the opinions expressed by the Founders vis-à-vis
corporations, I’ll restrict the spotlight I choose to shine to those
contentions that I feel touch upon that topic. In that spirit I turn first to
the aforementioned Second Report on
Public Credit.
The first of three reports
delivered to Congress concerning the economic prospects of the newly formed
United States government, Hamilton’s Second
Report was presented to that legislative body in December, 1790. A lengthy
and well-argued document, befitting the meticulous Hamilton, it argued strongly
in favor of the formation of a national bank on the grounds that, among other
things, it would increase the productive capital of the United States, decrease
incidents of various financial calamities, and strengthen the federal
government by making it easier to collect tax revenues and receive foreign
loans. Amidst the various points that Hamilton brought to bear was the common
refrain that a national bank was a public entity whose primary beneficiaries
would be, directly or indirectly, the citizens of the United States. The
institution that Hamilton proposed was not just another commercial bank, of
which the United States possessed a good number already, but a “national bank,”
or “public bank,” that would become a “nursery of national wealth,” render
financial assistance to the federal government in times of emergency, and
facilitate the payment of federal taxes by making loans available for that
purpose. He made no secret of the fact that it was a species of corporation he
was promoting, and went into significant detail describing the sale of shares,
the circumstances of annual shareholder meetings and the distribution of
dividends, but the greatest benefits he seemed keen to reserve to the United
States government and the American public.
The capital of the national bank,
meaning the sum total of currency it would be entitled to loan out as a factor
of the total amount of hard currency it possessed, was one of the things which
critics of the proposal believed was most rife for abuse. Paper money printed
in excess without being backed by a form of stable, material wealth (in the 18th
century, gold and/or silver), they argued, could lead to rapid devaluation,
rampant speculation, and general economic calamity. Hamilton’s Second Report responded to this claim by
once more pointing to the degree of public accountability under which the
proposed national bank would function. It would be the domain of the legislature
that created the bank, he stated, to set or adjust the limit of its capital in
such a way as to both facilitate the expansion of business and trade as well as
provide for the security of the public. Another criticism levelled at the model
Hamilton proposed was the degree to which it would allow foreigners to purchase
shares of the bank and thereby benefit from or influence the financial affairs
of a country not their own. Admitting that foreigners would be entitled to both
own bank stock and collect half-yearly dividends as a result, Hamilton asserted
in his Second Report that the
benefits these alien investors brought with them would be far in excess of what
they might potentially extract. Purchases of bank shares by any source would
bring in hard currency (again, gold and silver) that would serve to increase or
at least solidify the institution’s existing capital; this capital in turn
would be at the behest of American citizens whose economic activities directly
enhance the overall wealth of the United States. While in either case,
concerning overall capital or foreign investors, there existed the potential
for abuse Hamilton believed this was hardly reason for outright disapproval.
“If the abuses of a beneficial thing are to determine its condemnation,” he
wrote, “there is scarcely a source of public prosperity which will not speedily
be closed.” Though a national bank would inevitably benefit certain individuals
more than others, and even generate a degree of harm if improperly managed, to
Hamilton it was still a source of, “general profit and advantage.” The American
public, he seemed keen to point out, would still exercise control over certain
aspects of the proposed bank, and would draw the greatest share of the
advantages it promised.
The number of times that Hamilton
returned to this chorus, of public oversight and public benefit, in his
proposal for a national bank would seem to indicate that his conception of the
purpose of at least some kinds of corporations was based on the concept of
public utility. A national bank, he wrote, would protect merchants from
unforeseen economic shocks (by providing credit), increase the quantity of hard
currency in the United States (by facilitating foreign trade), and stamp out
the speculation and financial instability of the post-Revolutionary era. Amidst
these claims there was little talk of customers, private property or
shareholders and a great deal of public good, public accommodation and the,
“security of the community.” Though again Hamilton made no effort to obscure
the fact that the proposed bank would be privately administered and financed by
primarily private capital, he stated with equal candor that, “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.” Accepting the fact that
Hamilton may have simply been phrasing his proposal just so as to assuage the
fears of those who were unfamiliar with banking or felt the practice was
inherently corrupt, it would at least appear that his take on the mixed
public/private corporation that is the national bank leaned heavily in the
direction of the public aspects.
From where Hamilton derived his
particular conception of national banks, and perhaps of nationally-chartered
corporations in general, is also evident in his Second Report. Near the end of his lengthy proposal, after
explaining the utility of allowing the bank to accept United States public debt
as payment for bank shares, Hamilton saw fit to put forth an example of a
similar national institution which functioned successfully on the same grounds.
Specifically he referred to the Bank of England, chief financial institution of
the Government of Great Britain. Like the proposed Bank of the United States,
the Bank of England was a privately owned corporation (charted in 1694) that
provided government access to credit and issued bank notes. The very existence
of the Bank of England, Hamilton was keen to point out, was based on a loan to
the British government and the resulting debt (£1,200,000). That this same
institution, in the decades that followed, was able to augment its capital to
something on the order of £12,000,000 while at the same time helping to propel
Great Britain to the status of unequivocal world power was doubtless considered
by the Treasury Secretary as a mark in its favour, and cause for emulation. This
unabashed praise of the Bank of England by Hamilton would seem to be the most
revealing of all the argument he put forth in his Second Report. While most Americans in the 1770s and 1780s would
have been at least somewhat familiar with the type of corporations that had
typically been chartered during the colonial era in order to provide building
or maintenance services, they might only have had limited knowledge of the more
complex, explicitly profit-driven corporate institutions that were the mainstay
of European empire, such as national banks or trading companies. Hamilton was
doubtless familiar with both, but it was the latter that were most essential to
his vision of the potential and prosperity of the United States of America.
Though they had doubtless
facilitated their share of abuses, and would go on to do so, the Bank of
England or the British East India Company were primarily sources of wealth,
prestige, and power for Great Britain during the 17th, 18th
and 19th centuries. By allowing the personal wealth of their
shareholders to primarily finance their activities they allowed Britain to
expand its economy and trade network at a relatively low cost to the government
and the average British taxpayer. Hamilton, it seemed, envisioned something similar
for the United States; the use of private resources backed by government
approval, used to accomplish public ends. While some might have questioned the
propriety of placing control of national monetary policy in private hands, or
giving what was essentially carte blanche to a group of independently-minded
entrepreneurs, Hamilton likely saw the utility of nationally-charted
corporations as being rather obvious. Something of an anglophile – a fact which
often played to his detriment – his estimation of the surest path for the
United States to pursue toward power and prestige on the world stage was very
much rooted in the model set by Great Britain during the 17th and 18th
centuries. At the core of this model was the creating and expansion of a
national banking system along with a stable currency. At the same time there
was also inherent in the United States Constitution, which had recently been
adopted and which Hamilton had a hand in shaping, a realist and utilitarian
approach to some of the less flattering aspects of human nature. Just as the
notion of creating a strict separation of powers was an attempt to channel
personal ambition in such a way as to ensure that no one branch of government
was able to dominate the others, the chartering of corporations on the British
model was a means of utilizing the inherently avaricious qualities of
capitalism for the benefit of the public.
Though he was but one of the many
prominent individuals whose efforts shaped and guided the direction of the
United States during its early decades, Alexander Hamilton was in many ways the
exemplar of a highly influential intellectual strain of American nationalism.
An arch-Federalist, realist, utilitarian and anglophile, Hamilton believed in
strong central government, regarded manufacturing and other mercantile
interests as the key to sustainable economic growth, and saw corporations as
essential tools in achieving both of these ends. Certainly, he granted, the
shareholders of these corporate entities stood to profit to a greater extent
than the average citizen, and may even abuse the privileges granted them via
incorporation, but this was hardly cause to abandon the scheme altogether. Public
good was public good; so long as a corporation served that end, be it by
issuing paper currency, distributing loans, conducting foreign trade or
building a bridge, it fulfilled its purpose and justified its existence. If it
did not; if its net benefit to society at large was negligible and a grant of
corporate privilege would only serve to enrich private wealth further, then no
such grant was called for. It was not a perfect arrangement – Hamilton being a
man who seemingly did not believe in perfection – but its success was proven by
experience.
Mr. Jefferson, as was
so often the case, did not agree.
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