The Founders and Financeby Thomas K. McCraw
In 1776 the U.S. owed huge sums to foreign creditors and its own citizens but, lacking the power to tax, had no means to repay them. This is the first book to tell the story of how foreign-born financial specialists—the immigrant founders Hamilton and Gallatin—solved the fiscal crisis and set the nation on a path to long-term economic prosperity.
- Harvard University Press
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Read an Excerpt
From Part I, Chapter Ten: The Bank of the United States
The House passed Hamilton’s Bank bill by the one-sided vote of 39–20. After the Senate also passed the bill and sent it to Washington for his signature, the president asked Secretary of State Jefferson and Attorney General Edmund Randolph for their opinions. Jefferson, in addition to regarding Hamilton as an immigrant upstart, detested all banks, and opposed this one in particular on the additional grounds of unconstitutionality. Both he and Randolph returned a negative verdict. They argued that the Constitution said nothing about incorporating banks or any other kinds of business. In effect, they were recommending that Washington veto the Bank bill. Jefferson’s message was strongly phrased, and although he hedged a bit on the matter of a veto, there could be little question that this is what he wanted. Randolph and Jefferson were Virginians, and most politicians from their state opposed Hamilton’s Bank bill. Washington, also a Virginian but more of a nationalist than the other two, was genuinely undecided. As a contingency, he asked James Madison to draft a veto message.
The president then put the question to Hamilton, giving him the written objections from Randolph and Jefferson. After a week of feverish composition, the secretary produced a long and sophisticated response. He began by noting that the essence of both Jefferson’s and Randolph’s objections lay in their narrow interpretation of federal powers under the Constitution: “The objections of the Secretary of State and Attorney General are founded on a general denial of the authority of the United States to erect corporations.” From this beginning Hamilton constructed a step-by-step rebuttal of both the premises and specific arguments employed by Randolph and particularly by Jefferson.
“A strange fallacy seems to have crept into the matter of thinking & reasoning upon the subject,” Hamilton wrote. “An incorporation seems to have been regarded as some great, independent, substantive thing—as a political end of peculiar magnitude & moment; whereas it is truly to be considered as a quality, capacity, or mean to an end.” In other words, incorporation of the Bank of the United States was a type of measure clearly contemplated by the Constitution in its “necessary and proper” clause about what the federal government could or could not do.
If Jefferson’s reading of the Constitution were correct, Hamilton went on to say, it would be “as if the word absolutely or indispensibly had been prefixed” to the necessary and proper clause. “Such a construction would beget endless uncertainty and embarrassment. The cases must be palpable & extreme in which it could be pronounced with certainty that a measure was absolutely necessary, or one without which the exercise of a given power would be nugatory. There are few measures of any government, which would stand so severe a test.”
Furthermore, although Jefferson’s letter to Washington had referred to the adequacy of existing banks, his reasoning would prohibit not only the national government but also the states from incorporating a bank. “It is to be remembered, that there is no express power in any State constitution to erect corporations.” This was a telling detail that Hamilton knew from his research in drafting the charter of the Bank of New York in 1784, whereas Jefferson likely did not.
Meet the Author
Thomas K. McCraw was Straus Professor of Business History Emeritus at Harvard Business School and winner of the Pulitzer Prize for History.
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A great read about a subject that doesn't get much attention. It reminds us of the importance of capitalism in our past and future. Hamilton was truly a brilliant man.