Founding Father Edmund Randolph vs. The Federal Reserve

By Mike Maharrey at Money Metals 

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.

“It must be acknowledged, that, if any part of the bill does either encounter the Constitution, or is not warranted by it, the clause of incorporation is the only one.”

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.

1st because the nature of the Federal government implies it; or
2d because it is involved in some of the specified powers of Legislation: or
3. because it is necessary and proper to carry into execution some of the specified powers.

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.

“Governments, having no written Constitution, may perhaps claim a latitude of power, not always easy to be determined. Those, which have written Constitutions, are circumscribed by a just interpretation of the words contained in them—nay farther.”

Randolph went on to point out that the pending 10th Amendment made it clear Congress possesses and claims “no powers which are not delegated to it.”

He continued on these lines, noting, "While, on the one hand it ought not to be denied that the federal government superintends the general welfare of the states, it ought not to be forgotten, on the other, that it superintends it according to the dictates of the constitution."

But does the Federal government have a delegated power that could be construed to authorize chartering corporations?

“We ask then, in the second place, whether upon any principle of fair construction, the specified powers of legislation involve the power of granting charters of incorporation? We say charters of incorporation, without confining the question to the Bank; because the admission of it in that instance, is an admission of it in every other, in which Congress may think the use of it equally expedient.”

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.

“If the laying and collecting of taxes brings with it every thing, which in the opinion of Congress, may facilitate the payment of taxes: if to borrow money sets political speculation loose, to conceive what may create an ability to lend: if to regulate commerce, is to range in the boundless mazes of projects for the apparently best scheme to invite from abroad, or to diffuse at home the precious metals—if to dispose of, or to regulate property of the United States, is to incorporate a bank, that stock may be subscribed to it by them; it may without exaggeration be affirmed, that a similar construction on every specified federal power will stretch the arm of Congress into the whole circle of State Legislation.” [Emphasis added]

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.

"Its meaning must, according to the natural and obvious force of the terms and the context, be limited to means necessary to the end and incident to the nature of the specified powers."

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.

“However, let it be propounded as an eternal question to those, who build new powers on this clause, whether the latitude of construction which they arrogate, will not terminate in an unlimited power in Congress?”

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.

The Tenth Amendment Center contributed to this article.