The Banks versus the Constitution

By Paul, Ron | Harvard Journal of Law & Public Policy, Spring 2010 | Go to article overview

The Banks versus the Constitution


Paul, Ron, Harvard Journal of Law & Public Policy


Some people say we are heading for socialism. I can see why they might think that: Since October 2008, the U.S. Treasury Department and the Federal Reserve have taken majority stakes in the country's largest commercial insurer (AIG), largest auto manufacturer (General Motors), and largest mortgage lenders (Fannie Mae and Freddie Mac, which were already government-sponsored). The bailouts that began under President Bush and Treasury Secretary Henry Paulson, and which have continued under President Obama and Treasury Secretary Timothy Geithner, have also seen the federal government take shares in banks like Citigroup and Bank of America. This is not capitalism, and it is not the kind of economy the Framers of the Constitution envisioned.

The truth is that we have been drifting away from the Framers' vision for a very long time. Even before the economic crash of 2008, we did not have anything resembling a truly free economy. One of the most important sectors of the economy, the banking sector, was already quasi-socialist or corporatist. (1) The Federal Reserve, with its monopoly powers and its chairman and governors appointed by the President, has been an extraconstitutional branch of government since its creation in 1913. The bailouts, and the government ownership that has come with them, are a direct result of the Federal Reserve's policies. At the same time, this government body has been eroding Americans' capacity for self-government by forcing them to adjust their lives to an overall inflationary economy. This is a vicious cycle: The central bank creates a series of booms and busts that makes business planning very difficult. As a result, more and more businesses fail and turn to government for bailouts. The public is told that capitalism is to blame and becomes accustomed to the idea that only government is capable of long-term planning. When the next bust hits, the cycle repeats.

The Constitution does not provide for the creation of a central bank. The Framers were well acquainted with the powers and practices of the Bank of England, and under the Articles of Confederation there had been a short-lived experiment in central banking. (2) Yet the Framers chose not to include a provision in the Constitution to create a central bank. Even if they had wanted to include such a provision, doing so might have jeopardized ratification. Americans were very suspicious of central banks, seeing them as a source of official corruption. (3)

The British government relied on the Bank of England to finance its national debt, and the debt was used to finance bigger armies and more wars. The debt had to be repaid eventually, which meant higher taxes for British subjects, including, before the Revolution, the American colonists. Historian John Remington Graham explains:

   The British people groaned under heavy taxes to pay the interest on
   the national debt without ever touching the principal due. Each war
   nudged the King and Parliament into an increasingly servile
   condition, ever more obliged to the huge financial network behind
   the East India Company and the Bank of England. So it was that
   these Interests were able to demand and obtain the legislation
   which ignited the American Revolution. (4)

Despite the lack of constitutional authorization for a national bank, the idea of central banking still appeals to politicians because central banks make financing wars and government growth much easier. Thus, Alexander Hamilton proposed the creation of such a bank to the first Congress, even though the Framers of the Constitution and the ratifying conventions would never have agreed to create one. (5) He got his wish, and the first Bank of the United States was chartered in 1791. Like the Federal Reserve, Hamilton's bank was in theory private, but the federal government provided its initial capital and from the outset owned one-fifth of the bank's stock.

Thomas Jefferson recognized the danger that the Bank of the United States posed to the Constitution.

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