Friday, March 13, 2015

Corporations in the Early United States, Part IV: War, Panic, and the Laws of Mr. Marshall

The dissolution of the Bank of the United States in 1811 left a void in the American financial system that state banks and their supporters were only too eager to fill. Whereas between 1790 and 1811 a little over seventy banks sprang into existence in the United States (including Hamilton’s BUS), in the five year period that followed the number jumped to well over two hundred. In addition to providing government credit, a task now made available by the disintegration of a centralized banking system, these state-chartered institutions catered to the multitude of different economic interests that existed in the towns and cities across the (as of April, 1812) eighteen states of the Union. These included providing short-term credit for urban merchants, as the Bank of North America had commonly done in the 1780s, as well as long-term loans for prospective industrialists and farmers looking to expand their businesses. In order to ensure that the latter elements of American society were being adequately serviced, many state governments began to require new provisions to be incorporated into bank charters. Some of these regulations sough to ensure that at least a portion of the directors of the proposed institution were farmers, mechanics (workers or artisans) or manufacturers by trade, or that the bank in question lent a set percentage of its credit to persons living outside of major urban areas. While the purpose of these sorts of guidelines had been to enable useful financial services to be extended to as many people as possible, they had the side effect of familiarizing more Americans with banks and the services they offered than ever before.

            The service these banks provided that was perhaps most instrumental to their success and acceptance was the printing of paper currency. As the United States Constitution forbids state governments from issuing bills of credit on their own authority (as they’d done to excess during the Revolution), banks were the only source of daily circulating cash for the vast majority of Americans in the early 19th century. Though these notes were redeemable for their equivalent in specie (gold or silver), the fact that they usually remained in circulation allowed banks to print papers bills far in excess of the hard currency they possessed in their reserves. This created, along with the explosion of chartered banks, an explosion of paper currency that facilitated rapid expansion in a variety of economic areas. While at times this shift towards widespread speculation and investment did lead to its fair share of overextension and abuse – a bank in Rhode Island was forced to close in 1809 after it issued over $600,000 in paper currency while only holding $86 in specie – the benefits of abundant credit and ready cash were widely felt by urban as well as rural Americans. To this Presidents Jefferson and Madison no doubt looked with pride; the republicanisation of the American corporation had succeeded, perhaps beyond what they could have predicted. When, at the culmination of a series of diplomatic, political and economic disagreements stretching back decades, the United States declared war on the United Kingdom in June, 1812, matters became somewhat more complicated.

            While the pervasiveness of state banks in the years leading up to 1812 proved highly beneficial for a great number of Americans, the post-BUS status quo presented its share of problems as well. As most of the banks granted state charters operated on a local or regional level only, a person or organization desiring to transfer large sums of money over significant distances would potentially have to resort to converting their funds into specie and physically moving it from place to place. This manifest inconvenience was compounded by the inability of state-level banks to lend sums of money beyond a legislated upper threshold because of their limited capitalization. Without a centralized banking system to facilitate borrowing, such as was anchored by the now-defunct Bank of the United States, the federal government was forced as hostilities with Britain mounted to rely on taxation (which under the Republicans was severely limited) and the sale of Treasury Bonds (a form of private lending) to pay the costs of outfitting and provisioning an army and navy. As the war progressed into 1813 and 1814 the nation’s financial situation became increasingly tenuous. The Federalists of New England, long the centre of America’s merchant wealth, largely refused to purchase government bonds in an attempt to register their dissatisfaction with a conflict that was wreaking havoc with their shipping interests. This forced the sale of Treasury Bonds at exorbitantly high interest rates in order to attract any source of funding and led to the resignation of the Treasury Secretary George W. Campbell, who stated in October, 1814 that the United States was in need of $50 million and had no way to raise it. His replacement, Alexander Dallas, recommended a sharp increase in federal taxes (notably including a tax on whiskey even harsher than the Federalist-backed excise that had sparked the eponymous rebellion in 1794) and the chartering of a second national bank. Though the new taxes were approved the bank proposal was put on hold by members of a Republican-controlled Congress who were not yet ready to tarnish the memory of their victory in 1811.

            Fortunately for the United States government hostilities with Britain came to an end less than six months later with the signing of the Treaty of Ghent. The taxes proposed by Secretary Dallas proved successful in sustaining the American war effort in the interim, and the victory of the American defenders at New Orleans in February, 1815 put the Republicans in a celebratory mood. Under their guidance the United States had faced down the greatest empire then in existence for the second time in less than fifty years, achieved a respectable string of military victories, and managed to avoid sacrificing their dearly-held principles in the process. Meanwhile the Federalists, who had opposed the war from the beginning and had assembled a convention in Hartford, Connecticut with reportedly seditious intent, found themselves roundly castigated and discredited in the eyes of the voting public. America was on the cusp of what came to be known as the “Era of Good Feelings,” a period in the nation’s political history marked by external consensus and internal factionalism. Federalism was on its last legs, and the Republican administrations of James Madison and James Monroe sought to usher in an era of national unity. This aim was frustrated, however, by the policies they respectively endorsed and the reactions they provoked among the Republican faithful. Madison in particular, who’d started his political career in the 1780s as a federalist and became an advocate for states-rights in the 1790s, felt compelled by the turmoil of the war and the rush of positive feeling in its aftermath to ensure that his fellow Americans absorbed what he believed where the proper lessons. As it happened, many of these lessons had a distinct Federalist bent to them.

            In December, 1815, just short of a year after the conclusion of hostilities with Britain, President Madison presented his seventh annual message to Congress (or State of the Union Address). Among other things, including discussions of the successful conclusion of recent conflicts between the United States and certain North African nations and of a round of negotiations between Britain and the U.S. concerning the normalization of trade relations, it laid out a series of policy proposals that spoke to some of the weaknesses that the War of 1812 had exposed. These included establishing a strong tariff in order to protect and encourage American manufacturing and make the United States less dependent on British trade, the promotion of federal infrastructure programs (what where then called “internal improvements”) that would help foster transportation, communication and commerce, and (most relevant to our discussion) the chartering of a second national bank as a means of establishing a uniform national currency. There can be little doubt that these initiatives were indeed responding to some of the causes of recent hostilities with Britain and to certain of the nation’s financial and logistical limitations that the pressures of war had brought to the surface. They were also, however, as a whole quite similar to the centralising program that had been the brainchild of arch-Federalist Alexander Hamilton, and which many ardent Republicans had believed banished by the election of Thomas Jefferson to the presidency in 1800.

            This circumstance met with particular ire from the so-called “Old Republicans,” a sub-faction of the larger group who claimed to support adherence to the principles on which the Republican faction had originally been founded in the 1790s. Led in the House of Representatives by the vociferous Virginian John Randolph, the Quids (as the Old Republicans styled themselves) echoed the claims previously made by Jefferson that a national bank would exist as a privilege of the wealthy, that commerce and manufacturing created relationships of dependence and were inherently anti-republican, and that increased federal authority meant decreased individual authority. Unfortunately for the Quids, many of whom also countered with the assertion that the chartering of a national bank was as unconstitutional in 1816 as it had been in 1791, the majority of the Republicans elected to the 14th Congress were nationalists who had little trouble squaring Madison’s proposals with their own ideological scruples.

Even Jefferson himself, the purported founder of the Republican ideology, had shifted his stance in response to the events of the war. In a letter to Benjamin Austin dated January, 1816, Jefferson reflected that much had changed since his years spent in opposition to the Federalist economic program. In spite of his belief in the power of free trade to compel nations to peace and cooperation, “We have experienced what we did not then believe, that there exists both profligacy and power enough to exclude us from the field of interchange with other nations.” If that was to be the case, if the United States could not depend on other nations to conduct their commerce openly and honestly, than it was clear that, “to be independent for the comforts of life we must fabricate them ourselves. We must now place the manufacturer by the side of the agriculturalist.” This admission, though delivered without a great deal of fanfare, is highly significant. If Thomas Jefferson, the old radical who had spoken at length about the evils of commerce and banking and founded an entire political movement in order to ensure that they not come to dominate society, could bend to circumstances and endorse their utility, then perhaps the overall American conception of public utility and the public good really was changing.

In Madison’s defence, the policy program that he laid out in his seventh annual address to Congress was not the shameless imitation of Hamiltonian nationalism that his critics made it out to be. Where Hamilton had intended the national debt to remain a permanent means of enlisting the support of the American commercial elite Madison still intended that it be paid off in full, desiring in the meantime only that the revenues capable of being raised be put towards strengthening the national defense and funding a series of public infrastructure projects. Rather than abandon Republican principles, he sought to harness the strong nationalist sentiment and abundant goodwill the war with Britain had generated as a means of creating a stronger, more self-sufficient, and more integrated nation that could better stand as the equal of any European power who dared threaten its prerogatives. Like Hamilton, however, Madison also framed his proposals in terms of promoting of the public good; a national bank no less so. The loss of hard currency brought about by the war with Britain, he wrote in his 1815 address, was thankfully a temporary ill, but one in need of remedy in the immediate. To that end it devolved on, “the wisdom of Congress to provide a substitute which shall equally engage the confidence and accommodate the wants of the citizens throughout the Union. If the operation of the State banks cannot produce this result, the probable operation of a national bank will merit consideration.” Rather than stand on principle, as Jefferson had done when he weakened the Bank of the United States and allowed its power to be usurped by the state banks, Madison acted with utility in mind. A national bank was a corporation – a grant of exclusive privilege to a select few – but one whose existence benefited far more Americans than it harmed by helping promote commerce and regulating the at-times volatile American economy. So Hamilton had argued in 1790, and so Madison repeated nearly thirty years later.

Again, some source texts:

And for good measure, Madison’s Eighth State of the Union:   

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