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The 1785 Struggle Over Concentrated Banking Power

How a farmer, a weaver, and a backwoods prophet took on the money interest in founding-era politics — and won.

One of the better-known episodes in American founding finance occurred in 1791, when Alexander Hamilton, the first Treasury Secretary, proposed forming the United States’ first central bank. James Madison of Virginia, serving in the House of Representatives, objected. Prefiguring the Republican lawmakers who recently pledged not to introduce legislation without first citing the constitutional provision enabling it, Madison asserted that because the Constitution doesn’t grant Congress a specific power to form banks, a national bank would be unconstitutional.

Hamilton famously responded by arguing that if a power to do something is constitutional, then powers necessary to doing it must be constitutional too, even when not enumerated. If Congress determines that exercising its power to do anything “necessary and proper” in the discharge of its duties calls for forming a bank, it can form a bank. Any unconstitutionality, for Hamilton, would require a specific prohibition against banks (”Congress shall make no law…,” etc.).

So that’s typically how history students and readers get introduced to a key founding moment in American public finance: ideologically, intellectually and legally, in the context of a constitutional dispute between the lions of ratification Hamilton and Madison, two thirds of the “Publius” who authored “The Federalist,” now coming at odds in the fledgling republic. Anyone hoping to find anything related to how money and credit might flow to ordinary Americans will be disappointed. Hamilton was arguing for the nationalist finance agenda he’d been pursuing since becoming a young protégé of the financier Robert Morris in the early 1780s. Democratic ideas about popular finance were just what Morris and Hamilton had been trying to quell. With a national government in place at last, central banking would be critical.

And in opposing central banking, Madison was arguing on behalf of security in property, limits on power, representative consent, and a land-based economy. He condemned Hamilton’s finance plan as crass, urban, and Yankee: un-republican, that is, to Madison. No democrat, Madison would never have endorsed paper currencies, legal relief for the debtor class, and demands by the less propertied for better access to the franchise — the program advocated by American populist regulators</a> in their struggle against elite finance. Madison’s famous “Federalist No. 10″ expresses a genteel revulsion for paper finance and social equality at least as deep as Robert Morris’s.

It’s therefore been easy for many well-regarded historians — riveted by great men, perpetually rehearsing the Hamilton-Madison binary — to dismiss founding-era democratic finance theory and practice. Robert Whitehill? Herman Husband? William Findley? Names rarely conjured. The irony is that to Alexander Hamilton and Robert Morris, those names were anything but obscure. Little-remembered today, they made Morris seethe with exasperation precisely over issues of central banking and public debt. Our founding egalitarians’ successes and failures complicate received historical binaries and offer intriguing models for today’s struggles over public and private finance.

Robert Whitehill was a farmer, Herman Husband a career activist, William Findley a weaver. All lived in western parts of Pennsylvania, where antipathy prevailed both for big planters tying up land and eastern slicksters tying up money and credit. Whitehill led an early 1770s movement for western independence from Philadelphia, as important to his constituency as American independence from England. Husband had led the North Carolina Regulation in the 1760s, barely escaping hanging; as a fugitive in the Pennsylvania wilderness, he experienced Biblical visions of a democratically ruled America, the New Jerusalem. Findley was a natural pol, anything but visionary: he thrived under Jefferson but exemplifies the rough-and-tumble politics of the Jackson era.

What the three shared, along with passion for democratic finance, was sudden electability under the new Pennsylvania Constitution, which in 1776 shocked famous founders from John Adams to Hamilton by smashing the old Whig connection between representative rights and property ownership. (Whitehill helped write it.) With the unpropertied voting in Pennsylvania, Husband entered the Pennsylvania assembly in the mighty year of 1776, Whitehill and Findley in the early 1780s. For the first time, democratic finance was no longer a crowd protest but a legislative effort.

Husband really was a prophet. He proposed such things anathema to the creditor class as going off the gold standard and managing a slow, deliberate rate of paper depreciation; imposing taxes on wealth and income; making those taxes progressive; and instituting programs for supporting the elderly after they could no longer work. Prefiguring Bretton Woods, the New Deal, and Great Society by nearly two centuries, Husband became known as “the madman of the Alleghenies.”

Whitehill and Findley attacked the bank that Robert Morris had founded in Philadelphia. Its charter belonged to the people of Pennsylvania, they asserted, not Morris, and the bank served no public function, existing only to enrich its founders. They proposed revoking the charter, establishing a land bank for small-scale lending, and issuing legal-tender paper to enable small transactions and debt relief. They wanted the electorate, via representatives in the assembly, to regulate public and private finance on behalf of ordinary working people.

Robert Morris himself was serving in the assembly, so floor debate was intense. His merchant constituents were panicking. Investors everywhere in America relied on the bank for gigantic, poorly secured loans to fund their speculations in the land bubble, the bond rollercoaster, and their own fabulous lifestyles. James Wilson, one of the bank’s directors, had personally borrowed more than $250,000 from the bank for the purpose of wild speculation. Wilson too served in the Pennsylvania assembly, and in hopes of saving the charter, he and Morris found themselves forced to duke it out with the low-rent likes of Whitehill and Findley.

In a stunning benchmark legislative victory for popular finance, the Pennsylvania assembly did revoke the bank’s charter. When the charter came up in the next session, the assembly refused to reinstate it. The people had won. Rich men far and wide gasped in fear of what a democratic American legislature might achieve. Morris announced that a mob was confiscating his property. But for once there was nothing he could do. In a democratic process of republican government, struggling against an enormously powerful money interest in politics, economic fairness had prevailed. That was 1785.

Skeptics of our early democratic finance point to Pennsylvania’s bumpy ride under its 1776 constitution, suggesting that the Whitehills, Husbands, and Findleys turned out to be naive in comparison to men like Morris, Wilson, and Hamilton — financial sophisticates who could quote the philosopher David Hume and the economist Jacques Necker. Morris was “financier of the Revolution,” after all. Wilson was the brilliant lawyer who helped author the U.S. Constitution.

So in judging the relative effectiveness of popular versus elite finance, it’s worth considering some outcomes. The sophisticates Morris and Wilson, like many of our best-certified wizards today, persisted in speculating well past the point where rationality would suggest stopping, often in manifestly dubious ventures. The unabashed scale and mounting danger of their adventuring will sound familiar. In a time of widespread economic depression, Morris at one point owned most of western New York and many millions of acres in Pennsylvania and the South. Wilson borrowed at rates of up to 30% to invest, among other things, in what turned out to be the Yazoo land fraud in Georgia.

And inevitably, just as today, it all came crashing down. Wilson was serving on the U.S. Supreme Court when his increasingly desperate throwing of good money after bad finally landed the great legal scholar in debtors prison. Our mighty founding financier Robert Morris? He ended up in debtors prison too. In 1800, the first Bankruptcy Act was passed — in large part to get Robert Morris out of jail.

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