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

The Second Bank of the United States met the Panic of 1819 with a series of austerity measures that ultimately saved the institution while possibly deepening the recession and raising the levels of resentment felt towards the Bank to new heights. This resentment found perhaps its most significant contemporary expression in the 1819 Supreme Court case McCulloch v. Maryland, wherein the role of the 2^nd BUS as an appendage of the federal government was put to a definitive test. While the precedents that said case established were mainly constitutional in nature, the implications for the relationship between the United States government and nationally-chartered corporations was nonetheless profound.

Among the first victims of the Panic was William Jones, who resigned his post as President of the Second Bank in response to accusations of mismanagement. His replacement, former Speaker of the House Langdon Cheves, proceeded to drastically curtail the lending practices that many blamed for precipitating the recession in order to create an institution that was more economically conservative. These efforts at self-correction also had the effect of staving off possible federal intervention in the proceedings of the Second Bank. This pleased the corporation’s directors, who greatly valued their autonomy and would have been loath to sacrifice it. Thanks to Cheves’ stern hand at the tiller, the Banks managed to shed a sizeable portion of its debt – to the tune of $6 million – as well as increase its specie reserves from $2.5 million in 1819 to $8 million by 1821 and reduce the quantity of BUS notes in circulation by $23 million in 1820. Unfortunately for the majority of Americans, however, the contraction of credit that resulted from Cheves’ efforts to save the central bank essentially magnified the effects of the recession. Predictably, the causes that had brought on the crisis worsened; crop prices and land values plummeted, foreclosures were rampant, and credit dried up further. The process of Westward expansion came to a grinding halt as people simply ran out money with which to purchase property, and indebted landholders took to trying to return their acquisitions to the federal government in return for having their debts cancelled. Without ready access to loans the economy stagnated and inflation was widespread. In some states banks attempted to counter the contraction by suspending specie payments yet again and issuing large quantities of bills that were only theoretically tied to hard currency reserves. Banks in other states took a more conservative approach and put in place regulations that required a fixed ratio of capital to credit.

The response of the federal government, meanwhile, was decidedly non-interventionist. This was made possible at least in part by the fact that an economic recession on the scale of that which occurred in 1819 was an entirely new phenomenon in the history of the United States. Previous financial crises had affected only certain regions or commodity markets, or had been caused by easily discernible factors like war, bad harvests or adverse weather. The idea that complex economic systems sometimes undergo natural cycles of expansion and contraction was an entirely foreign concept. Failing to understand the cause, then, the American people were unsure of who to blame. The Monroe Administration and the Republican-controlled 15^th Congress were thus able to avoid widespread public criticism or expectations of a drastic response. Rather than enforce new banking regulations in an attempt to prevent future overextension of credit, as might be expected today, they instead limited themselves to passing some debt relief legislation, agreeing to allow the suspension of specie payments, and ceasing the sale of federal land on credit. The 2^nd BUS instead took on the greatest share of liability for the Panic, in part due to the vast overextension of credit overseen by William Jones, but also because of prominent examples of mismanagement at many branch offices and even criminal behaviour on the part of certain of its employees.

The Maryland branch of the Second Bank was particularly notorious on this count. In addition to badly mishandling their local response to the Panic, employees of the branch office in Baltimore embezzled something on the order of $1.5 million (roughly $20 million today). The government of Maryland responded by levying a sizeable tax in the branch office which they subsequently refused to pay. More specifically the tax was directed against any bank that was not incorporated within the State of Maryland, and which did not make use of specially stamped paper for its banknotes that was to be provided by the office of the state treasurer. The punishment, or the price of exemption, was $15,000, with an additional $500 for every specific offence and $100 from every officer of the bank responsible for aiding said offences. While the directors of the Baltimore office of the 2^nd BUS admitted that they were not specifically authorized to operate in Maryland, tax-except status had been guaranteed to tributaries of the Second Bank in its congressionally-granted charter. As Maryland had ratified the United States Constitution it was thus bound by the laws approved by Congress, in keeping with the so-called Supremacy Clause (Article VI). The Maryland state legislature countered by filing a lawsuit against one of the accused embezzlers, branch cashier James McCulloch. After the Baltimore County court ruled against McCulloch the suit was subsequently appealed to and upheld by the Maryland Court of Appeals. Upon further appeal the case found its way before the United States Supreme Court and the awaiting judgement by the venerable Chief Justice John Marshall.  

Sixteen years on the job and still acting to maintain a strong Federalist influence on the United States government, Marshall was called upon in 1819 to render his opinion in McCulloch v. Maryland because one of the principles was a state (in which case original jurisdiction was rendered to the Supreme Court). The particular circumstance McCulloch v. Maryland lay before Marshall were complicated, or perhaps enhanced, by the fact that the Maryland Court of Appeals had decreed that because the Constitution did not make explicit mention of banks or corporations of any kind the chartering of the Second Bank of the United States was fundamentally unconstitutional. It thus fell to Marshall to reach beyond the particulars of the case itself and once again address the meaning of the nation’s foundational document. This he did with his usual aplomb. At this point I’ll decline to go into the specifics of the constitutional arguments he employed, impressively delivered though they may be, simply because they don’t apply directly to the topic now under discussion. Suffice to say Marshall found in favour of McCulloch, and ruled that because the Constitution declared federal statutes to be the supreme law of the land, and because the Necessary and Proper Clause left it to the discretion of Congress to determine which means were required accomplish a given constitutional responsibility, the 2^nd BUS was constitutional and Maryland’s taxing of one of its branches was not.

What does bear closer examination are some of the comments that Marshall made during his constitutional ruminations. Specifically the Chief Justice put forth numerous statements that testify to his conception of the purpose of a national bank and of corporations more generally. Granted, these statements were made in order to lay the groundwork for a larger argument pertaining to the nature of American federalism. Nevertheless, because they originated from the chief judicial authority in the United States, and a man whose decisions in that capacity influenced subsequent American history in ways difficult to calculate, I feel they ought to be taken into account.

As to the constitutionality of corporations, Marshall freely admitted in the text of his McCulloch v. Maryland decision that the United States Constitution made no mention of either the words “bank” or “incorporation.” That same document did proclaim, however, that it was responsibility of the United States Government to lay and collect taxes, borrow money and regulate commerce. The creation of a corporation, in this case a national bank, could have facilitated the exercise of all of these responsibilities, on which the, “happiness and prosperity of the Nation so vitally depends.” Though such a prerogative was not, once again, specifically granted by the Constitution, Marshall argued that it could not have been the intention of the Framers to, “clog and embarrass [the federal government’s] execution by withholding the most appropriate means.” A national bank was thus not an end in itself, but merely a means to accomplish a stated objective(s) that was itself of national importance. Speaking to these objectives Marshall wrote that,

The exigencies of the Nation may require that the treasure raised in the north should be transported to the south, that raised in the east conveyed to the west, or that this order should be reversed. Is that construction of the Constitution to be preferred which would render these operations difficult, hazardous, and expensive?

These words are significant to the present discussion because they demonstrate Marshall framing the chartering of a corporation in terms of responding to national priorities. The Bank of the United States was thus to the Chief Justice not chiefly a mechanism for generating profit, but first and foremost a tool deployed by a government to meet the “exigencies of the Nation.” As Alexander Hamilton had argued in 1790 so Marshall repeated nearly thirty years later; the Constitution did not prohibit the creation of a corporation if, “the existence of such a being be essential […] to the beneficial exercise,” of the powers said Constitution conferred upon the federal government. By using words like “essential” and “beneficial,” Marshall seemed to frame the existence of corporations in America as responding to and supplying national needs before all else.

In the paragraph that followed these passages in the text of his decision Marshall delved into what he believed to be the essential sticking point that prevented the State of Maryland from simply accepting the existence of a national bank on the basis of utility. The foundation on which one of the main arguments of opposing counsel rested, he claimed, was that the creation of a corporation was a essentially a grant of sovereignty, an act not explicitly accorded to Congress by the Constitution. This, he admitted, was true; corporations existed as partial extensions of the sovereignty of the state that created them. Since all legislation implied a similar exercise of sovereignty, however, Marshall wondered how it would have been possible for the federal government to accomplish anything at all if such a strict interpretation of its powers were to be applied. Putting aside the question, the fact that the State of Maryland and the Chief Justice of the Supreme Court both agreed that incorporation involved a transfer of sovereign authority is highly significant to understanding how Americans in the early 19^th century conceived of corporations.

Though,as mentioned in a previous post, general incorporation laws had begun to appear in the United States beginning in the late-18^th century (in North Carolina in 1795, followed by Massachusetts in 1799 and New York in 1811), it was still not considered the norm in 1819 for corporations in America to come into existence without some kind of act of government. Today, states effectively compete with one another in offering the most favourable incorporations laws as a means of attracting corporations and soaking up the resulting tax revenues (Delaware being by far the most successful). Questions of public utility are answered, in theory, by the fact that the funds levied by states from corporations go to pay for any number of public programs, initiatives or projects. The services that said corporations provide are largely incidental, and thus there is a tacit understanding that they’re chiefly money-making institutions which are shaped more by the needs of their customers than of governments. For Chief Justice Marshall, however, and indeed for many Americans who lived and worked in the early-19^th century, corporations had to much more directly justify their existence as fulfilling some kind of public need. Though it may not have been the case in North Carolina, Massachusetts or New York, most states in 1819 (as well as the federal government) required incorporation to proceed via an act of legislation. This meant that many Americans of the era were still accustomed to seeing corporations as the creations of government, and as a result possessed a more direct understanding of the transfer of sovereignty Marshall described in his McCulloch v. Maryland decision. 

“Delegation” might be another way to describe the act that the Chief Justice perceived as having taken place when the United States Congress granted a charter of incorporation to the 2^nd Bank of the United States. Certain powers inherent in the sovereignty of the United States of America were delegated to the directors and shareholders of the 2^nd BUS in order so that it might pursue some of the responsibilities granted to the federal government by the Constitution. Within this framework it was the dividends collected by the shareholders that were incidental, rather than the services that the bank provided. As Marshall saw it, corporations are, “never the end for which others powers are exercised, but a means by which other objects are accomplished.” Considered alongside Marshall’s other major decision in 1819, Dartmouth College v. Woodward, it would appear that although the Chief Justice was willing to argue that corporate charters were a form of contract and thus the private property of their holders, he also believed that the creation of corporations was still a process ruled by considerations of public need. Dartmouth College may have been a private entity, wholly-owned by its trustees and incapable of being materially altered or confiscated by the state without proper compensation. Nevertheless, as Marshall stated in his McCulloch v. Maryland decision, “no seminary of learning is instituted in order to incorporated, but the corporate character is conferred to serve the purposes of education.”

Reading over these last few paragraphs, I realize that it may seem like I’m repeating myself; I probably am. I apologize for any unnecessary tedium, though I hope that the point I’m trying to make has gotten across. Corporate law was in its infancy in the United States in the early-19^th century. While the tide was certainly turning in the direction of general incorporation and the proliferation of corporations that it entailed, there were still many Americans as late as 1819 that clung to the idea that corporate entities were still chiefly tools of state policy. The decision made by the Supreme Court in McCulloch v. Maryland made this fact quite clear. Chief Justice John Marshall, as influential a figure as they come in the history of American jurisprudence, considered incorporation, “a means, to be employed only for the purpose of carrying into execution the given powers,” of a government. Though he certainly agreed that the shareholders of corporations possessed certain rights inherent in their status as owners of property, the existence of said corporations were rightly based on an assessment of their being, “an appropriate mode of executing the powers of Government,” and in the case of a national bank, “a convenient, a useful, and essential instrument in the prosecution of its fiscal operations.” At the time that Marshall’s decision was handed down the Monroe administration seemed to more or less agree with the Chief Justice’s assessment. Dissenters in Congress and the states aside, the Republicans had come to appreciate the need for the economic oversight that a central bank provided.  The decades that followed would prove to be somewhat more complicated, however, as the outward political consensus that dominated the post-War of 1812 era well and truly fractured, and the American political mainstream entered a period of radical, reactionary, democratic transformation.

As per usual, the Court’s Opinion in the matter of McCulloch v. Maryland: http://en.wikisource.org/wiki/McCulloch_v._Maryland/Opinion_of_the_Court 

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

The Second Bank of the United States, chartered for a twenty year period beginning in February, 1816, combined aspects of what were increasingly being thought of as two distinct forms of corporation, public and private. It was initially granted a capitalisation, meaning the total amount to be held in reserve, of $35 million, $7 million of which was to be provided by the United States government. This mirrored the basic framework of First Bank of the United States, of whose $10 million capitalisation the federal government provided $2 million (amounting to a 5% share). In both cases the remainder of the needed capital was to be provided by private individuals, entitling the purchasers to part-ownership of the institution, the receipt of  half-yearly dividends, and a vote(s) corresponding to their percentage of ownership (for the 1^st BUS, not exceeding thirty votes) in the selection of the board of directors and president. Shareholders could be United States citizens or foreigners; either could collect dividends, though only resident citizens were entitled to a vote. Taken together these various elements paint the 1^st and 2^nd BUS as mainly private corporations; though they were both created and defined by acts of federal legislation the majority of their respective capital came from private sources, their major officers were elected exclusively by shareholders, and formal government oversight extended only as far as permitting the Treasury Secretary to conduct (up to) weekly inspections of relevant financial records (not including the private accounts of individuals). This was indeed was Hamilton had intended; guaranteeing the autonomy of a national bank was a means to attract investors, accumulate capital, and ensure a degree of prudent management. If the capital that the institution’s directors were responsible for administering came mainly out of their own coffers, and if an adequate performance of their duties would ensure a healthy dividend, so much the better. As he had done before with admirable skill, Hamilton determined in his framing of a national financial institution to channel the ambitions, and even avarice, of certain classes of Americans towards a larger public good.

            That being said, there were public aspects to the First and Second Bank of the United States as well. With both iterations of the BUS the United States government contributed five percent to the overall capital. It was thus left to the President to appoint commissioners to sit on the Banks’ board of directors and preside over the government’s shares. This allowed the federal government to maintain direct representation in the institutions’ day to day affairs, gave them a vote in the election of certain officers, and provided them a degree of input into the policies that were discussed and/or adopted. In the case of the 1^st BUS President Washington appointed three commissioners in 1791: Thomas Willing, a Pennsylvania merchant, David Rittenhouse, an inventor, mathematician and surveyor from Philadelphia, and Samuel Howell, one of the Revolution’s leading financiers. Willing was elected the first president of the bank and served in that role until 1807, while Rittenhouse became the first Director of the United States Mint. The dividend that accumulated from the shares over which these men presided was pledged toward a fund set aside for the payment of the national debt. Thus it was that public funds were to be put towards a private purpose, with an outcome benefiting the public good.

 The 2^nd BUS had a twenty-five member board, of which the President appointed five (subject to Senate approval). Of the three presidents that the shareholders of the Second Bank of the United States elected over the course of its twenty year history (1816-1836), two, William Jones and Nicholas Biddle, where government appointed directors. As with the 1^st BUS, the 2^nd was subject to inspection by the Secretary of the Treasury. The federal government was also able to exert control over the Second Bank of the United States by charging it a fee of $1.5 million for the use of interest-free public funds in its private ventures. Just as a national bank could claim authority over state banks by controlling a portion of their debts so too could the United States over the 2^nd BUS. The Second Bank, headquartered as the First had been in Philadelphia, was also permitted to open branch offices wherever it believed was necessary and operate them free of state taxation. This preferential treatment, the kind of donation of sovereign authority that incorporation at its root always implies, can be viewed as both an incentive to the Second Bank to extend its authority over the widest possible expanse of the United States, and as a signifier of the importance that the federal government placed on the Bank’s regulatory function.

Indeed, providing federal regulation of the American currency market was one of the most important duties that the Second Bank of the United States performed over the course of its twenty year lifespan. As mentioned previously, the decentralisation of the American banking system that followed the failure to re-charter the 1^st BUS in 1811 resulted in a drastic increase in the availability of credit and an accompanying explosion in the circulation of paper currency. The state banks that accomplished this feat together helped finance perhaps the most momentous period of economic growth America had yet witnessed, but the lack of coordination between them and of the enforcement of basic standards of operation created their share of problems as well. When, during the war with Britain, the United States government turned to the state banks for much needed loans the resulting flurry of paper currency created a fundamental fiscal imbalance. Banks with more conservative lending policies (located mainly in New England) began to soak up the credit issued by newer banks in the West, and in turn accumulated much of the hard currency that had previously acted as the lending capital of these newer institutions. Because the state banks located in New England were mostly controlled by Federalists who were opposed to the war they were accordingly less inclined to offer loans to the federal government on favourable terms. At the same time, the depleted capital of the Republican-friendly banks made it harder for them to continue their generous lending practises and threatened a sudden credit crunch.

In order to avert this potentially disastrous outcome the Madison Administration agreed to allow the state banks to cease paying out precious metals in exchange for their bills of credit. This allowed the banks to continue to print large quantities of paper currency and offer loans without having to worry about an accompanying depletion of their specie reserves. While this may have been a useful measure in the immediate it resulted in mounting inflation and presaged eventual crash if/when specie payments were resumed. The Second Bank of the United States was intended to solve this particular issue by regulating the currency distribution of the various state banks. This was made possible, first by the 2^nd BUS’s acceptance of state-bank printed bills of credit in the form of interest payments and federal taxes, and second by collecting on said bills in the form of specie. This created an effective hurdle to extensive lending by rewarding the state banks’ wide extension of credit with an eventual decrease of their specie reserves and a resultant restriction of their lending abilities. State banks that refused to bow to the pressure of this steady capital drain would, in theory, no longer have their bills accepted by the federal government, severely decreasing their value and undermining the legitimacy of the banks themselves. To accompany these regulatory duties the 2^nd BUS proposed to greatly enlarge the scale of its own lending practises – a proverbial “democratization of credit” – whereby it would offer long-term loans to farmers, small-scale manufacturers and the various types of entrepreneurs who had fallen outside of the client base of the 1^st BUS. Along with federal investment in infrastructure and government protection of domestic manufacturing, the financial stability that the Second Bank was purported to encourage were intended to foster widespread and sustainable economic growth. This three-part federal program, supported by the “New Republicans” under Madison and his successor James Monroe, subsequently became known as the “American System.”

I apologise if this seems rather dense, but I feel it’s important to understand how fundamental the operation of the Second National Bank was to the mainstream Republican platform after the War of 1812. For a faction that had once taken as its orthodoxy a belief in the sacred primacy of agriculture and the inherent corruption of commerce this represented a stunning about face and a major re-articulation of the role that the Republican elite envisioned certain corporations playing at the highest levels of American society. There were, or course, opponents to this newly emerging status quo. The Old Republicans, still led by Virginia’s John Randolph, maintained their opposition to the chartering of a second national bank on mainly constitutional grounds and lamented the growing influence that commerce and manufacturing were apt to enjoy thanks to the policies of the American System. State banking interests were similarly disenchanted. The extensive profits they’d been able to collect thanks to their unregulated lending practises were set to be severely curtailed by the creation of a central financial authority whose ties to the federal government and accompanying privileges were nearly impossible to counter. Granted, certain kinds of financial institutions could and did operate outside the oversight of the 2^nd BUS – non-chartered banks that offered credit on a small enough scale that their bills never found their way into the hands of federal tax collectors – but they were hardly poised to offer much resistance to the Bank’s overall regulatory supremacy. Indeed, when the Second Bank of the United States did eventually meet with crisis it came from within rather than without.

Under its first president, former Secretary of the Navy William Jones, the 2^nd BUS got off to a rather inauspicious start. Responding to a proposal put forward by a coalition of state banking interests, Jones and Treasury Secretary William Crawford agreed in February, 1817 to delay the resumption of specie payments to the Second Bank for a further five months until July 1^st. Along with an expansion of the central bank’s credit this allowed the state banks to reverse the flow of hard currency so that gold and silver moved from the reserves of the 2^nd BUS to their own. This effectively strengthened the state banks’ paper currencies and expanded their ability to extend credit while it devalued the bills to be printed by the central bank. This imbalance was exacerbated by the fact that, in keeping with Republican principles that valued limited federal oversight, the 2^nd BUS branch offices which subsequently opened in most states operated with little, if any, main office supervision. This became a problem during the Western land boom that followed, during which said branch offices printed excessive quantities of paper currency in order to keep up with the demands of farmers and speculators. At times Western branches of the Second Bank even used their own notes to transfer specie out of the vaults of their Northeastern counterparts and into their own reserves in order to bolster their capital and continue their disproportionate lending practises. The result was a dangerous overextension of the Second Bank’s credit and a breakdown of its regulatory competence. By July, 1818 the Bank had lent out $22.4 million while holding only $2.4 million in specie, double the 5 to 1 ratio of capital to credit that was considered sustainable. Meanwhile the state banks had come to hold such large quantities of Second Bank paper currency that it would have been pointless for the central bank to attempt to collect on the state bills they had accumulated; specie would have moved in both directions to little effect.

Across the Atlantic in Europe, several years of poor harvests brought on by a series of volcanic eruptions in 1815 finally gave way in 1817 to bumper crops. American farmers had benefited greatly by the sudden increase in demand for the staple produce they could provide, and many had taken out loans and expanded their holding in order to boost production. The rapid drop in agricultural prices that followed delivered a serious blow to the mainly agrarian American economy and set in motion a sharp contraction of credit (farmers being unable to repay their long-term loans and banks being unable to lend in the meantime). In October, 1818 the United States Treasury requested that the 2^nd BUS transfer $2 million in specie out of its reserves in order redeem the fifteen-year bonds that had been sold to pay for the Louisiana Purchase in 1803. Unable to part with such a large percentage of their capital, the directors of the central bank attempted to collect the required sum from the state banks whose bills had been collected in payment of federal taxes. The state banks were similarly unable to cover the steep request for hard currency and in turn began calling in the loans they’d granted during the agriculture and land boom and foreclosing on the properties of those that couldn’t pay. When, in January, 1819, news arrived that the value of cotton, an American staple crop, had plummeted 25% overnight due to the emergence of India as a major source of the commodity for Britain’s textile mills, panic ensued and the United States entered what would become the first of many full-blown economic recessions.

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 19^th 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 14^th 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:

Madison’s Seventh State of the Union: http://en.wikisource.org/wiki/James_Madison%27s_Seventh_State_of_the_Union_Address

Thomas Jefferson to Benjamin Austin, January 1816: http://www.let.rug.nl/usa/presidents/thomas-jefferson/letters-of-thomas-jefferson/jefl238.php

And for good measure, Madison’s Eighth State of the Union: http://en.wikisource.org/wiki/James_Madison%27s_Eighth_State_of_the_Union_Address   

Corporations in the Early United States, Part III: Hamilton, Jefferson and the Bank of the United States, contd.

When considering the proposal put forward by his Treasury Secretary for the formation of a national bank, President Washington requested that certain other members of his cabinet weigh in before making the final decision himself. Thomas Jefferson, newly appointed Secretary of State and a fellow Virginian, was among those whose opinion weighed particularly heavily with the president and was likely considered by Hamilton to be the major obstacle to seeing a national bank incorporated. Jefferson’s resultant evaluation of the prospect of creating a national bank was delivered to President Washington in 1791, and unsurprisingly presented an overwhelmingly negative evaluation of the constitutionality and desirability of Hamilton’s scheme.

Much like with Hamilton’s Second Report, most of Jefferson’s rebuttal had to do with constitutional principles rather than with corporations more broadly. Just as the Secretary of the Treasury took the opportunity to sketch out the framework of what would become the principle of implied powers, so too did the Secretary of State lay the groundwork for strict constructionism. That being said, there are certain elements of the opinion Jefferson rendered that suggest what his position on the purpose and ideal structure of corporations likely was.

For instance, Jefferson began his evaluation by providing a list of legal principles which he felt the establishment of a national bank would have violated. These included mortmain, alienage, descents, forfeiture and escheat, distribution, and monopoly. The average reader can be forgiven for not recognizing most of these; I didn't either. They’re concepts deeply rooted in the English Common Law tradition that are mostly concerned with property. The law of mortmain (literally “dead hand”) was usually intended to refer in the negative sense to a prohibition of property being held in perpetuity by a legal entity that was independent of its administrators. Prohibitions against mortmain were common dating back to the medieval era, though church lands were typically held to be exempt. The law of alienage was intended to prevent land within a given legal realm from being owned by a citizen or citizens of a foreign realm, while descents and distribution both concerned the proper dispersal of property that was not specifically accounted for in a legal will and testament. The law of forfeiture entitled a legal authority to seize the property of an individual if that individual had failed to fulfil an agreed-upon obligation or condition, and escheat directed the state to take possession of property whose previous owner(s) had perished without any legal heirs being discovered. The law of monopoly, probably most familiar to the modern mindset, prevents any one person or group from becoming the sole supplier of a given commodity, and thereby controlling the market for that commodity.

Most, if not all, of these principles effectively deny the legality of granting charters of incorporation of any kind. In its most basic sense a corporation is a legal entity that can theoretically exist in perpetuity (in violation of mortmain) and own property (in potential violation of descents, distribution, escheat and forfeiture). The national bank that Hamilton described in his Second Report would have additionally allowed for foreign ownership of shares (in violation of alienage) and possessed singular authority on all matters of national finance (in violation of monopoly). While it seems on the one hand curious that the normally Anglophobic Jefferson would have clung so tightly to principles rooted in the English legal tradition, I nevertheless perceive an intent that is not altogether inconsistent with the Sage of Monticello’s established political and philosophical outlook.

Though the principles just described are indeed distinctly English in origin, the contemporary England that Jefferson would have been familiar with in the late 18^th century was awash in corporate entities of various sizes and compositions. From the Bank of England that Hamilton exalted to the East India Company, down to the innumerable local banks and similar financial institutions, British society in the 1780s seemed unconcerned with honouring some of the basic concepts rooted in its legal heritage. Doubtless Jefferson believed that this disregard for established law in pursuit of profit and convenience was at the heart of the corruption he and many of his fellow Americans perceived as endemic to British politics. In spite of his oft-expressed hostility towards Britain and its at-times abusive relationship with the nascent United States, however, Jefferson was from time to time still willing to invoke legal or philosophical concepts native to the English tradition. As I tried to point out in my inaugural set of posts his Declaration of Independence owed much to both the English Bill of Rights of 1689 and the writings of John Locke. Taking these facts into account I'm forced to wonder whether Jefferson was attempting to harken back to what was in his mind an earlier, simpler, less corrupt and business-oriented version of Britain. I say this because the principles Jefferson invoked in his 1791 reply to President Washington are all rooted in the medieval era, while the Bill of Rights and the writings of Locke both date from the late 17^th century. Since the Bank of England wasn't chartered until 1694, and the explosion of merchant banks that accompanied the beginning of the Industrial Revolution in Britain arrived only around the middle of the 18^th century, it seems at least possible that Jefferson’s antipathy was perhaps directed towards the commercial England under whom he and his fellow colonists had suffered in the 1760s and 1770s rather than the England of Locke, the Glorious Revolution, and the supposed restoration of ancient rights.

This is, I suppose, a rather lengthy way of saying that Jefferson’s sentiments were generally anti-corporate. This was no doubt aided by the fact that the Thirteen Colonies, while corporations themselves, were comparatively sparse as to the larger, nationally chartered variety that Hamilton considered the key to Britain’s abiding success and Jefferson its entrenched corruption. Indeed, I think it fair to say that Jefferson regarded the proliferation of corporations in 18^th-century Britain as one of the elements most offensive to his (and many of his contemporaries’) republican sensibilities. As previously discussed many Americans in the post-Revolutionary era considered incorporation – the granting of certain legal privileges to a specific group – to be an unnecessary and undesirable type of social distinction that conflicted with their hard-won sense of egalitarianism. I have no trouble imagining that Jefferson was chief among this group. More than just about any of his contemporaries Jefferson was keenly interested in reforming the political and cultural fabric of the United States in an attempt to create a new type of society that would be free of the abuses of the Old World. Accordingly his attempts at reform touched on such diverse areas as education, inheritance law, religion, and the criminal justice system. It seems hardly any kind of stretch to suggest that Jefferson might also have desired to modify the established laws and conventions that governed the existence of corporations in furtherance of his ultimate goal of creating a more thoroughly republican society.

That being said, Jefferson was not as a rule opposed to the existence of all banks, or of all corporations in general. In his reply to Hamilton’s Second Report he argued, among other things, that the creation of a national bank wasn't necessary because the existing state banks were more than capable of facilitating trade and commerce. Not only had said institutions, he asserted, fulfilled that very purpose during the years of the Revolution and its aftermath, but the existence of multiple banks ensured that no one of them would be permitted to dominate the American financial market. The resulting competition would help make cheap credit accessible to as many people as possible, rather than only those wealthy or connected enough to avail themselves of the services offered by Hamilton’s national bank. This admission seems to lend a vaguely utilitarian tinge to Jefferson’s usual idealism. Though the proliferation of corporations may have to some degree galled his republican scruples, he was willing to admit that they could, and did, serve a useful purpose. In what to me seems a somewhat more remarkable acknowledgement, Jefferson also coupled together the utility of corporations with the benefits of competition. Though it’s surely anachronistic to say so, this would appear to be a primitive form of American capitalism, whereby competition among corporations occupying the same market space is seen to benefit consumer choice and aid the public good by keeping prices low. I doubt very much that this is what Jefferson envisioned in 1791, but it does seem to locate him as among those post-Revolutionary critics of corporations who wished to temper the exclusivity of incorporation by encouraging a much broader granting of charters within the same field.

It’s also possible that Jefferson encouraged state banking and wider access to credit for reasons that were somewhat more personal. As a member of Virginia’s planter class he’d inherited a lifestyle that was at times defined more by conspicuous wealth than anything else. Owning land, livestock, and slaves, maintaining decent crop yields, and preserving a gentlemanly appreciation of art and culture and a sense of economic self-sufficiency was often an economically trying pursuit and necessitated what some might have considered to be excessive borrowing. As a consequence Jefferson and other men of his social standing were chronically in debt, often to the merchants that supplied their more extravagant tastes. This led many among the Southern planter class to develop a general dislike of commerce, as well as of the banks, which they perceived as perpetuating debt. This resentment was also felt among the less wealthy agriculturalists – the yeomanry that Jefferson so often championed – throughout the United States. Land rich but cash strapped, American farmers often borrowed as a means of both countering their persistent cash-flow problems and facilitating investments in new tools, better seed, and more land. A national bank, Jefferson doubtless suspected, would end up doing most of its business among the merchants and burgeoning industrialists that Secretary Hamilton favoured. State and local banks could conversely provide loans to the landowners that needed them on a much wider basis and at lower interest rates. Jefferson’s somewhat schizophrenic view of corporations, as both deplorable and grudgingly necessary, was thus perhaps based as much on personal experience as philosophical principle. It’s worth noting, however, that President Washington, also a member of the Virginia planter class, disagreed with his Secretary of State’s suggestions and signed the Bank of the United States into law in February, 1791.

Upon his inauguration as president in 1801 Jefferson, now head of the most powerful political faction in the United States and eager to reform what he perceived as the corrupt and tyrannical influences present in the federal government, set his sights on the national bank once more as a principle engine of anti-republicanism in America. The state banks that he had recommended ten years prior had multiplied in the interim – from only four in 1790 to almost thirty in 1800 – and were more capable than ever of shouldering the burden of providing for the nation’s financial needs. For their part the proprietors of the state banks were in perfect agreement. They had always resented the status enjoyed by the Bank of the United States as the sole holder of government deposits and during the 1790s had been forced to suffer the Bank’s efforts to restrict their ability to issue bills of credit. Accordingly Jefferson ensured that the authority of the Bank was significantly weakened, allowing state banks to proliferate like never before. As a result, there was little enthusiasm behind renewing the charter of the BUS as it neared its expiration date in 1811. Jefferson’s Secretary of the Treasury, the Swiss-born Albert Gallatin, pleaded that the national bank had justified its existence by facilitating twenty years of economic stability, and that passing authority over to the state banks would severely weaken the ability of the federal government to exercise any control over the national financial system. His cautions would prove of no avail. Backed by the state banking interests, the Republican-controlled 11^th Congress declined to renew the charter of the Bank of the United States.

At this point in American history the years of the Revolution had begun to fade into memory and the number of corporate charters being issued in the United States fairly exploded, yet conflict was still taking place at the highest levels of government over the utility, legality and desirability of certain types of corporations. The five years that followed, from 1811 to 1816, would prove exceptionally tumultuous, and necessitate yet another revaluation of the purpose and limits of republican government and the size and scope of corporate America.

As always I endeavour to provide links to the source texts.

Hamilton’s Second Report on Public Credit:

http://memory.loc.gov/cgi-bin/ampage?collId=llsp&fileName=009/llsp009.db&recNum=68

Jefferson’s rebuttal: 

http://en.wikisource.org/wiki/Opinion_against_the_Constitutionality_of_a_National_Bank