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Delegated Sovereignty and Economic Fascism: McCulloch v. Maryland (1819)
July 2, 2012
In 1791, the United States government created the Bank of the United States. It was a privately owned central bank. It was a monopoly. It bought government bonds with counterfeit but legal money. It earned money on the interest payments. It was not re-chartered in 1811.
In 1816, a second Bank of the United States was created. It was the same scam: counterfeit money to buy government bonds and anything else it wanted to buy. It earned money on the interest.
The state of Maryland imposed a tax on its Baltimore branch. An official named McCulloch refused to pay it. The state sued him. The case went to the Supreme Court.
In late February 1819, two teams of lawyers appeared before the U.S. Supreme Court to argue McCulloch v. Maryland.
Representing the Second Bank of the United States: Daniel Webster, William Wirt (U.S. Attorney General), and William Pinckney. Representing the State of Maryland: Luther Martin (Maryland State Attorney General), Joseph Hopkinson, and Walter Jones. These were heavy hitters.
Luther Martin had been one of the attendees of the Constitutional Convention. He was one of the Convention's most vociferous critics. He left in disgust before it ended, because of the centralization of the proposed Constitution. He wrote an account of the proceedings, but -- as with all other attendees -- he remained silent about what had happened. Only after Madison died in 1836 was Martin's account published (1838), as was Madison's two years later. Madison was the last attendee to die. Then the accounts were published: Robert Yates', Martin's, and Madison's.
The central issue of the case had to do with judicial sovereignty.
The textbooks say this was the issue of final judicial sovereignty. Chief Justice John Marshall decided that the U.S. government possesses this final sovereignty. But this was not the central issue of the case. The state of Maryland did not argue that it was. Webster did, and John Marshall framed it this way.
Far more important was the issue of delegated sovereignty: the right of Congress to delegate its sovereignty to a private, profit-seeking corporation of investors.
This is the supreme judicial issue associated with central banking. Marshall sided with the Bank.
The Bank was chartered by Congress. Maryland asked: Did this include the right of the Bank, on its own authority, to set up branch banks outside of Pennsylvania? By what authority? By what sovereignty? Were these branches immune from regulation and taxation in states other than Pennsylvania? In his opening statement, Hopkinson went directly to this issue.
The original text has no paragraph breaks. I have added them only for easier reading.
This is from the text of the Court's opinion, written by Marshall. It summarized both sides of the argument.
What you are about to read is unknown even to specialists in nineteenth-century American financial history.
Here are Maryland's arguments.
The first argument related to branches of the Bank in states. This Bank was not limited to Washington, D.C., which was the federal government's lawful jurisdiction. Branches were being set up in trading cities. The Bank was a competitor to state banks, which were taxed. This Bank said it was immune from state taxes. The states could not regulate the branches.
This power to establish branches, by the directors of the bank, must be maintained and justified, by the same necessity which supports the bank itself, or it cannot exist. The power derived from a given necessity, must be coextensive with it, and no more.
We will inquire, 1st. Does this necessity exist in favor of the branches? 2d. Who should be the judge of the necessity, and direct the manner and extent of the remedy to be applied?
Branches are not necessary for any of the enumerated advantages. Not for pecuniary aids to the government; since the ability to afford them must be regulated by the strength of the capital of the parent bank, and cannot be increased by scattering and spreading that capital in the branches. Nor are they necessary to create a circulating medium; for they create nothing; but issue paper on the faith and responsibility of the parent bank, who could issue the same quantity, on the same foundation; the distribution of the notes of the parent bank can as well be done, and in fact, is done, by the state banks. Where, then, is that necessity to be found for the branches, whatever may be allowed to the bank itself?
This Bank was owned by shareholders, not by the U.S. government. Profits went to them. The directors made the decision to set up branches. The Congress did not.
It is undoubtedly true, that these branches are established with a single view to trading, and the profit of the stockholders, and not for the convenience [17 U.S. 316, 335] or use of the government; and therefore, they are located at the will of the directors, who represent and regard the interests of the stockholders, and are such themselves. If this is the case, can it be contended, that the state rights of territory and taxation are to yield for the gains of a money-trading corporation; to be prostrated at the will of a set of men who have no concern, and no duty but to increase their profits? Is this the necessity required by the constitution for the creation of undefined powers?
It is true, that, by the charter, the government may require a branch in any place it may designate, but if this power is given only for the uses or necessities of the government, then the government only should have the power to order it.
In truth, the directors have exercised the power, and they hold it, without any control from the government of the United States; and, as is now contended, without any control of the state governments. A most extravagant power to be vested in a body of men, chosen annually by a very small portion of our citizens, for the purpose of loaning and trading with their money to the best advantage!
The Bank says it is immune to state regulation or taxation. This violates state's rights. All other banks are taxed and regulated. This Bank's owners are sailing under Congress's flag, but Congress is not making the decsions or the profits.
A state will not suffer its own citizens to erect a bank, without its authority, but the citizens of another state may do so; for it may happen that the state thus used by the bank for one of its branches, does not hold a single share of the stock. 2d. But if these branches are to be supported, on the ground of the constitutional necessity, and they can have no other foundation, the question occurs, who should be the judge of the existence of the necessity, in any proposed case; of the when and the where the power [17 U.S. 316, 336] shall be exercised, which the necessity requires? Assuredly, the same tribunal which judges of the original necessity on which the bank is created, should also judge of any subsequent necessity requiring the extension of the remedy.
Congress is that tribunal; the only one in which it may be safely trusted; the only one in which the states to be affected by the measure, are all fairly represented. If this power belongs to congress, it cannot be delegated to the directors of a bank, any more than any other legislative power may be transferred to any other body of citizens: if this doctrine of necessity is without any known limits, but such as those who defend themselves by it, may choose, for the time, to give it; and if the powers derived from it, are assignable by the congress to the directors of a bank; and by the directors of the bank to anybody else; we have really spent a great deal of labor and learning to very little purpose, in our attempt to establish a form of government in which the powers of those who govern shall be strictly defined and controlled; and the rights of the government secured from the usurpations of unlimited or unknown powers.
If the Bank were confined to Washington, D.C., it would not be very intrusive into state's affairs.
The establishment of bank in a state, without its assent; without regard to its interests, its policy or institutions, is a higher exercise of authority, than the creation of the parent bank; which, if confined to the seat of the government, and to the purposes of the government, will interfere less with the rights and policy of the states, than those wide-spreading branches, planted everywhere, and influencing all the business of the community. Such an exercise of [17 U.S. 316, 337] sovereign power, should, at least, have the sanction of the sovereign legislature, to vouch that the good of the whole requires it, that the necessity exists which justifies it. But will it be tolerated, that twenty directors of a trading corporation, having no object but profit, shall, in the pursuit of it, tread upon the sovereignty of the state; enter it, without condescending to ask its leave; disregard, perhaps, the whole system of its policy; overthrow its institutions, and sacrifice its interests? . . . .
This Bank is not a bank of the United States, except in name. It is privately owned.
2d. Is it then exempt, as being a bank of the United States? How is it such? In name only. Just as the Bank of Pennsylvania, or the Bank of Maryland, [17 U.S. 316, 340] are banks of those states. The property of the bank, real or personal, does not belong to the United States only, as a stockholder, and as any other stockholders. The United States might have the same interest in any other bank, turnpike or canal company. So far as they hold stock, they have a property in the institution, and no further; so long, and no longer.
Nor is the direction and management of the bank under the control of the United States. They are represented in the board by the directors appointed by them, as the other stockholders are represented by the directors they elect. A director of the government has no more power or right than any other director.
As to the control the government may have over the conduct of the bank, by its patronage and deposits, it is precisely the same it might have over any other bank, to which that patronage would be equally important. Strip it of its name, and we find it to be a mere association of individuals, putting their money into a common stock, to be loaned for profit, and to divide the gains. The government is a partner in the firm, for gain also; for, except a participation of the profits of the business, the government could have every other use of the bank, without owning a dollar in it.
It is not, then, a bank of the United States, if by that we mean, an institution belonging to the government, directed by it, or in which it has a permanent, indissoluble interest. The convenience it affords in the collection and distribution of the revenue, is collateral, secondary, and may be transferred at pleasure to any other bank. It forms no part of the construction [17 U.S. 316, 341] or character of this bank; which, as to all its rights and powers, would be exactly what it now is, if the government was to seek and obtain all this convenience from some other source; if the government were to withdraw its patronage, and sell out its stock.
This privately owned Bank is claiming a judicial sovereignty that is possessed only by Congress. This is a subterfuge.
How, then, can such an institution claim the immunities of sovereignty; nay, that sovereignty does not possess? for a sovereign who places his property in the territory of another sovereign, submits it to the demands of the revenue, which are but justly paid, in return for the protection afforded to the property. General Hamilton, in his report on this subject, so far from considering the bank a public institution, connected with, or controlled by, the government, holds it to be indispensable that it should not be so.
It must be, says he, under private, not public, direction; under the guidance of individual interest, not public policy. Still, he adds, the state may be holder of part of its stock; and consequently (what? it becomes a public property? no!), a sharer of the profits. He traces no other consequenee to that circumstance. No rights are founded on it; no part of its utility or necessity arises from it.
Can an institution, then, purely private, and which disclaims any public character, be clothed with the power and rights of the government, and demand subordination from the state government, in virtue of the federal authority, which it undertakes to wield at its own will and pleasure? Shall it be private, in its direction and interests; public, in its rights and privileges: a trading money-lender, in its business; an uncontrolled sovereign, in its powers? . . . .
The government must stick to the Constitution. The powers enumerated in the Constitution may not be extended to a private institution.
But we contend, that the government of the United States must confine themselves, in the collection and expenditure of revenue, to the means which are specifically enumerated in the constitution, or such auxiliary means as are naturally connected with the specific means.
But what natural connection is there between [17 U.S. 316, 365] the collection of taxes, and the incorporation of a company of bankers? Can it possibly be said, that because congress is invested with the power of raising and supporting armies, that it may give a charter of monopoly to a trading corporation, as a bounty for enlisting men? Or that, under its more analogous power of regulating commerce, it may establish an East or a West India company, with the exclusive privilege of trading with those parts of the world? Can it establish a corporation of farmers of the revenue, or burden the internal industry of the states with vexatious monopolies of their staple productions? There is an obvious distinction between those means which are incidental to the particular power, which follow as a corollary from it, and those which may be arbitrarily assumed as convenient to the execution of the power, or usurped under the pretext of necessity. . . .
If the federal government must have a bank for the purposes of its revenue, all collision will be avoided, by establishing the parent bank in its own district, where it holds an exclusive jurisdiction; and planting its branches in such states as shall assent to it; and using state banks, where such assent cannot be obtained. Speaking practically, and by our experience, it may be safely asserted, that all the uses of the bank to the government might be thus obtained. Nothing would be wanting but profits and large dividends to the stockholders, which are the real object in this contest. (emphasis added)
John Marshall replied that Congress does possess this power of incorporation. Congress did transfer its judicial sovereignty to a private corporation. The Bank can therefore not be taxed by a state.
It is objected, that this act creates a corporation; which, being an exercise of a fundamental power of sovereignty, can only be claimed by congress, under their grant of specific powers. But to have enumerated the power of establishing corporations, among the specific powers of congress, would have been to change the whole plan of the constitution; to destroy its simplicity, and load it with all the complex details of a code of private jurisprudence. The power of establishing corporations is not one of the ends of government; it is only a class of means for accomplishing its ends. An enumeration [17 U.S. 316, 358] of this particular class of means, omitting all others, would have been a useless anomaly in the constitution.
It is admitted, that this is an act to sovereignty, and so is any other law; if the authority of establishing corporations be a sovereign power, the United States are sovereign, as to all the powers specifically given to their government, and as to all others necessary and proper to carry into effect those specified. If the power of chartering a corporation be necessary and proper for this purpose, congress has it to an extent as ample as any other sovereign legislature. Any government of limited sovereignty can create corporations only with reference to the limited powers that government possesses.
The inquiry then reverts, whether the power of incorporating a banking company, be a necessary and proper means of executing the specific powers of the national government. The immense powers incontestably given, show that there was a disposition, on the part of the people, to give ample means to carry those powers into effect. A state can create a corporation, in virtue of its sovereignty, without any specific authority for that purpose, conferred in the state constitutions. The United States are sovereign as to certain specific objects, and may, therefore, erect a corporation for the purpose of effecting those objects.
It was a great decision for the shareholders. Congress did not regulate the Bank in any way. So, there were lots of profits. Owning a central bank is a license to print money -- literally.
Jackson and a majority of Congress did not vote to extend the Bank's charter in 1836. But the pathway to chartered profits was open to incorporate a new Bank, and so the federal government did in the final days of 1913, just before Christmas break, when the Senate was nearly empty.
Merry Christmas, big bankers. And a Happy New Year!