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Founding Father Edmund Randolph vs. The Federal Reserve After Congress passed a bill to establish the first national bank -- a forerunner of the modern Federal Reserve -- President George Washington asked Attorney General Edmund Randolph to prepare an opinion on the bill’s constitutionality. Randolph came down firmly against the measure, arguing that the Constitution didn’t delegate to Congress the power to charter corporations. Randolph was an attorney and statesman who played a crucial role in the early formation of the United States. He served as the seventh Governor of Virginia and was an influential delegate to the Philadelphia Convention that drafted the Constitution. He was one of four prominent lawyers who drafted the Constitution’s necessary and proper clause, along with John Rutledge, Oliver Ellsworth, and James Wilson, all three of whom were to later serve as Supreme Court justices. Although he initially refused to sign the Constitution, Randolph became a leading proponent of ratification during the Virginia ratifying convention. He later served as the first U.S. Attorney General under President George Washington and subsequently served as the second U.S. Secretary of State. Alexander Hamilton submitted a report to Congress recommending the establishment of the Bank of the United States in December 1790. In response, Sen. Caleb Strong introduced a bill to charter the bank. The bill passed the Senate on Jan. 20, 1791. The House passed the bill a month later, sending it to President Washington’s desk. As Washington considered whether or not to sign the bill, he discussed it with Randolph on at least two occasions between Feb. 8 and Feb. 11, 1791. At Washington’s request, Randolph provided a written opinion. In a cover letter sent with his draft dated Feb. 12, Randolph wrote that the “substance of the dispute … arises from an examination of the Constitution itself.” Randolph was considered one of the top legal experts in the country at the time. When Thomas Jefferson was out of the country, Randolph took over his clients. He also represented Washington in his business affairs. Randolph wrote two documents discussing the Bank Bill, the first outlining his own legal analysis and opinion on the bill’s constitutionality, and the second highlighting several arguments made both for and against the bill that he didn’t find cogent. In Randolph’s view, the central constitutional question surrounding the bank was whether the federal government was delegated the power of incorporation.
Randolph asserted “that the power of creating Corporations is not expressly given to Congress, is obvious.” [Emphasis in original] That being the case there were only three ways the federal government could legitimately exercise the power to charter a corporation.
Randolph proceeded to dismantle all three rationales. He quickly dismissed the implied powers doctrine, noting that, “To be implied in the nature of the Federal government would beget a doctrine so indefinite, as to grasp every power.” In other words, this implied power doctrine would give the federal government unlimited authority. But the Constitution clearly limits the scope of federal power.
But does the Federal government have a delegated power that could be construed to authorize chartering corporations?
Randolph noted that supporters of the Bank Bill justified it by arguing that a national bank would facilitate the execution of several specific delegated powers. The first was “in the power to lay & collect taxes &c.; because it facilitates the payment of them.” Similarly, the power to “borrow money” would be supported because a bank “creates an ability to lend.” Supporters of the bill also argued that a national bank would support “regulating commerce” because “it increases the medium of circulation; and thus encourages activity & industry.” Finally, advocates of a bank asserted that it would facilitate “disposing and regulating property” because “the contributions, and the interest of the United States in the Banks, are property of the United States.” But Randolph argued that construing any of these powers in such a broad way would effectively annihilate reserved powers, and create an all-encompassing federal authority.
In other words, the expansion of these four powers to justify a bank could be used to rationalize the expansion of every federal power to justify pretty much any federal action, leaving the states and the people no power at all. However, supporters of the Bank Bill argued that the necessary and proper clause justified a latitude of construction and provided the justification needed to charter a bank. Alexander Hamilton argued that necessary could be construed as “convenient.” In support of his bill, he wrote, “It is certain that neither the grammatical nor popular sense of the term requires [a strict] construction. According to both, necessary often means no more than needful, requisite, incidental, useful, or conducive to.” He continued, justifying his interpretation based on his view of the common usage of the word necessary. “It is a common mode of expression to say, that it is necessary for a government or a person to do this or that thing, when nothing more is intended or understood, than that the interests of the government or person require, or will be promoted by, the doing of this or that thing.” Randolph insisted this took the clause too far. As one of the primary drafters of the necessary and proper clause during the Philadelphia convention, Randolph was keenly aware of the fact that “necessary and proper” was based on the legal doctrine of “principles and incidents.” He explained this in a speech at the Virginia Ratifying Convention, arguing “that the incident is inseparable from the principal, is a maxim in the construction of laws.” But Randolph also argued that “a Constitution differs from a law.—For a law only embraces one thing—But a Constitution embraces a number of things, and is to have a more liberal construction.” In other words, the necessary and proper clause allowed for the exercise only of “incidental powers,” meaning a power that is necessary to achieve a specific purpose, even though it is not explicitly granted, but in a constitution, this should be construed more broadly than in a statute. Randolph’s view of the clause wasn’t as narrow as other opponents of the Bank. Jefferson and Madison took the position, as Jefferson put it, that “the Constitution restrained them to the necessary means, that is to say, to those means without which the grant of power would be nugatory.” Madison put it this way.
In effect, Madison and Jefferson both argued the clause was merely declaratory, or as Randolph described their view, superfluous. Randolph thought the clause offered more latitude than Jefferson and Madison claimed, but not nearly as much as Hamilton did. In his view, the exercise of “incidental” powers was broader than merely those which are absolutely necessary. He argued that “to be necessary is to be incidental, or in other words may be denominated the natural means of executing a power.” During the Virginia Ratifying Convention, Randolph called his view the “intermediate explanation” of the clause between an interpretation, like Jefferson’s, that Randolph argued made the clause superfluous and those, like Hamilton’s that made it “sweeping.” But despite his nuanced differences with Jefferson and Madison, Randolph insisted that supporters of the bank “ought not to claim any advantage from this clause.” And he warned a broad construction of incidental powers comes with great risk.
Randolph summed up his analysis by declaring that “so far as it incorporates the bank, he is bound to declare his opinion to be against its constitutionality.” While Randolph came down firmly against the Bank Bill on constitutional grounds, his position was more moderate and nuanced than more vocal opponents of the bank, including Madison and Jefferson. He allowed for somewhat more latitude in the exercise of federal power under the Necessary and Proper Clause, but not enough to justify incorporating a bank. Ultimately, he took a middle-ground position that still excluded the power to create a national bank. Ultimately, Hamilton won the day. Washington disregarded Randolph, Madison, and Jefferson's constitutional arguments and took the more pragmatic route. The First Bank of the United States got its charter and set the stage for the creation of the Federal Reserve more than a century later. But if Randolph and others who objected to a national bank on constitutional grounds were correct - and the weight of evidence says they were - then the Fed of today shouldn't even exist.
Mike Maharrey is a journalist and market analyst for MoneyMetals.com with over a decade of experience in precious metals. He holds a BS in accounting from the University of Kentucky and a BA in journalism from the University of South Florida.
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