Banking
The American banking system has a tumultuous history of federalist compromise, devolution of authority, and federal preemption. The very conception and proposal of such an instrument of governmental and agency authority were met with debate and opposition as far back as our nation’s founding. Originally the brainchild of Alexander Hamilton, the idea of a central bank was a point of contention among many of the founders, especially Thomas Jefferson, who satirically commented that banking institutions were more dangerous than standing armies. Beginning with the Constitution, the history of banking is one of compromise between the federal and state governments. It is essentially a conflict over the devolution of authority and the definition of the role of federal and state policy makers.
The historical roots of the debate began with the Continental Congress and the founding of our nation. Unlike Alexander Hamilton and other Federalists favoring loose construction of the Constitution, Jeffersonians from agrarian backgrounds envisioned simplicity and strict construction, and argued that augmenting federal authority through the centralization of a financial institution ran contrary to the Tenth Amendment. This assertion of states’ rights and protest against centralization was countered by Hamiltonians who invoked the Elastic Clause, which authorizes Congress to use whatever means it deems necessary and proper to effectuate the use of any of its enumerated powers including, but not limited to, the power to coin money, lend money, and borrow money from foreign entities.
To the disappointment of Jefferson and other strict constructionists, the First Bank of the United States was established in 1791, but was short-lived. The bank was established primarily as a depository of funds and to assume the national debt. The nation’s first attempt at centralizing its banking operations failed because of the emerging role of states and localities vying for competitive positions in the field. When the time came, the First Bank’s charter was not renewed, and later a second attempt at centralization was made with the founding of the Second National Bank. The Second Bank was created to manage the debts incurred from the War of 1812 and to restore some measure of economic and monetary stability to the nation. Public sentiment favored centralization, which was legitimized by the landmark decision handed down by Chief Justice John Marshall in the case of McCulloch v. Maryland.
This landmark decision favored federal preemption and national supremacy. In this case, the State of Maryland attempted to tax a federal bank branch located within its borders, effectively endeavoring to destroy it and assert state authority. Federalists achieved a major victory with the Marshall’s decision that upheld the supremacy of the federal government in instances where state law conflicted with the federal exercise of power. McCulloch v. Maryland also laid the framework for a dual banking system.
A dual banking system, a curious relationship of both defined yet intertwined spheres of influence regulated by the federal and state governments, has been the prevailing arrangement in the area of banking from McCulloch v. Maryland to present day. This relationship has been marked by constant challenges to federal authority with calls for devolution of authority, answered in the majority of cases with federal preemption. The 1820s under President Andrew Jackson saw a move toward the strengthening of the states and a decentralization of federal authority in the banking sector with the establishment of various pet banks. Decentralization during this period led to the Panics of 1837 and 1847, which called for recentralization to establish uniformity and stability. Accordingly, various pieces of legislation were passed in an effort to achieve the stability and uniformity sought, including, but not limited to, the Independent Treasury Act of 1840, the Federal Income Tax Act, the Legal Tender Act of 1862, the National Currency Act of 1863, and the National Bank Act of 1864. In addition, the Office of the Comptroller of the Currency was created to establish and supervise national banks, as well as to stabilize our currency and economy. Throughout this emergence of a dual banking system, Federalist principles prevailed with power being firmly held in the hands of the national government, resulting in the establishment of uniform standards, rules, and national currency.
Vincenzo M. Mogavero
SEE ALSO: McCulloch v. Maryland