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Much has been written about the famous
debate between Thomas Jefferson and Alexander Hamilton over the
constitutionality of America's first central bank, the Bank of the United
States (BUS). This was where Jefferson, as secretary of state, enunciated his
"strict constructionist" view of the Constitution, making his case
to President George Washington that since a central bank was not one of the
powers specifically delegated by the states to the central government, and
since the idea was explicitly rejected by the constitutional convention, a
central bank is unconstitutional.
Treasury Secretary Alexander Hamilton
notoriously responded by inventing the notion of "implied" as
opposed to enumerated powers of the Constitution.
George Washington signed legislation
creating the BUS not because of the strength of Hamilton's argument but
because of a shady political deal. The nation's capital was being relocated
from New York to Virginia, and Washington wanted the border of the new
District of Columbia to abut his property at Mount Vernon. In return for a
redrawing of the district's border, Washington signed the Federalist's
legislation creating the BUS.
America's first central bank was borne
of a corrupt political deal, but that particular act of political corruption
pales in comparison to what Hamilton and the Federalists really had in mind.
As Murray Rothbard wrote in The Mystery of Banking (p. 192), Hamilton and his political
compatriots, especially defense contractor/Philadelphia congressman Robert
Morris, wanted :
to reimpose in the new United States a system of
mercantilism and big
government similar to that in Great Britain, against whichthe colonists
had rebelled. The object was to have a strong central
government,
particularly a strong president or king as chief executive, built up
by high
taxes
and heavy public debt.
An especially important part of what Rothbard called "the Morris scheme" was
"to organize and head a central bank, to provide cheap credit and
expanded money for himself and his allies."
Hamilton was Morris's Machiavellian
string puller in the Washington administration. As explained by Douglas
Adair, an editor of The Federalist Papers (1980 Penguin Books edition,
p. 171),
with devious brilliance, Hamilton set out,
by a program of class legislation,
to unite the
propertied interests of the eastern seaboard into a cohesive
administration party, while at the same
time he attempted to make the
executive
dominant over the Congress by a lavish use of the spoils system.
In carrying
out his scheme … Hamilton transformed every financial transaction
of the Treasury Department into an orgy
of speculation and graft in which
selected
senators, congressmen, and certain of their richer constituents
throughout the nation participated.
What Adair is talking about here is
how Hamilton went about nationalizing the old government debt. New government
bonds were issued and the old debt was to be cashed out at face value. This
plan "immediately became public knowledge in New York City," wrote
John Steele Gordon in Hamilton's Blessing (p. 25), "but news of
it spread only slowly, via horseback and sailing vessel, to the rest of the
country." Thus, a tremendous arbitrage opportunity was created for the
New York/Philadelphia political insiders like Robert Morris and his business
associates. This was the first instance in US history of political insider
trading.
The political insiders, including many
members of Congress, immediately swung into action to purchase as many of the
old government bonds as they could from unsuspecting Revolutionary War
veterans for as little as 2 percent of par value. As historian Claude Bowers
described the scene in his book, Jefferson and Hamilton,
expresses with very large sums of money on their way to North
Carolina
for purposes
of speculation… splashed and bumped over wretched winter roads….
Two fast-sailing
vessels, chartered by a member of Congress … were ploughing
the waters
southward on a similar mission.
(p. 47)
Among the men who became instant
millionaires were "leading members of Congress who knew that provision
for the redemption of the paper [at face value] had been made," wrote
Bowers (p. 48).
Upon observing this caper, Hamilton's political
nemesis, Thomas Jefferson, came to understand that Hamilton was intentionally
creating a system of institutionalized corruption in order to buy the
political support in Congress for his party's big-government
mercantilist/imperialist agenda — the very kind of political system the
colonists had waged war against. In a February 4, 1818, essay (in Thomas
Jefferson: Writings, pp. 661–696), written long after Hamilton's
death in 1804, Jefferson recalled what Hamilton was up to: "Hamilton's
financial system had two objects. 1st as a puzzle, to exclude popular
understanding & inquiry. 2ndly, as a machine for the corruption of the
legislature" (emphasis added).
With regard to the latter
"object," Jefferson explained that Hamilton:
avowed the opinion that man could be governed by one of two motives
only,
force or interest: force he observed,
in this country, was out of the
question [note: this
was pre-Lincoln]; and the interests therefore of the
members [of
Congress] must be laid hold of, to keep the legislature in unison
with
the executive. And with grief and shame it must be acknowledged that
his
machine was not without effect.… Some members [of Congress] were
found sordid enough to bend their duty
to their interests, and to look after
personal,
rather than public good.
Jefferson then described the very same
scene mentioned above in the quote from Claude Bowers:
The base scramble began. Couriers
& relay horses by land, and swift sailing pilot boats by sea, were flying
in all directions. Active partners & agents were associated &
employed in every state, town and country neighborhood, and this paper was
bought up at 5 and even as low as 2% in the pound, before the holder knew
that Congress had already provided for its redemption at par. Immence sums were thus filched from the poor and
ignorant.
"Men thus enriched by the
dexterity of a leader [Hamilton]," Jefferson wrote, "would follow
of course the chief who was leading them to fortune, and thus become the
zealous instruments of all his [political] enterprises."
But the political power created by
such graft was only temporary, said Jefferson. "It would be lost with
the loss [i.e., retirement or death] of the individual members [of Congress]
whom it had enriched." Therefore, Jefferson reasoned, "Some engine
of influence more permanent must be contrived." This permanent engine of
corruption, said Jefferson, "was the Bank of the U.S." A central
bank, once established, would be very difficult to destroy, and would
inevitably become a permanent source of financing for political bribery and
manipulation. How prescient.
Jefferson concluded that
"Hamilton was not only a monarchist, but for a monarchy bottomed on
corruption," with a central bank being the financial centerpiece of the
corrupt regime. He arrived at this conclusion based on observing Hamilton's
behavior as Treasury Secretary, as well as a personal conversation involving
himself, Hamilton, Secretary of War Henry Knox, President John Adams, and
Attorney General Edmund Randolph in 1791, the year the BUS came into being.
Jefferson recalled how President John Adams said of
the British constitution, "purge that constitution of its corruption,
and give to its popular branch equality of representation, and it would be
the most perfect constitution ever devised by the wit of man." To which
Hamilton objected,
Purge it of its corruption, and give to its popular branch equality
of
representation, & it would become
an impracticable government;
as it stands at present, with
all its supposed defects, it is the most
perfect
government which ever existed.
Hamilton was "so bewitched &
perverted by the British example," wrote Jefferson, "as to be under
thoro' conviction that corruption was essential to
the government of a nation" (p. 671). Hamilton viewed "his"
bank, the Bank of the United States, as being absolutely essential to his
Americanized version of "the most perfect government which ever
existed."
Thomas DiLorenzo
Thomas J. DiLorenzo is professor of economics at Loyola College in
Maryland and the author of The Real Lincoln; Lincoln Unmasked: What
You’re Not Supposed To Know about Dishonest Abe and How Capitalism Saved America. His latest book is Hamilton’s Curse: How
Jefferson’s Archenemy Betrayed the American Revolution – And What
It Means for America Today.
Article originally published on www.Mises.org. By authorization of the author
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