In our last regular episode, we covered some of the final events of the second session of the first Congress and the mid-term elections that were held mostly in the fall of 1790.
Congress returned for a third session in December of 1790 which met back in Philadelphia.
Coast Guard
Before I get into the third session of Congress, I want to touch on one more event that happened in the second session back in New York. I discussed in earlier episodes that Congress had created a tariff package to begin raising revenue.
To get Congressional support, Hamilton had each cutter built in the state where it would be used, thus creating local government jobs. He also had the master of each ship oversee its construction.
These were relatively small ships. Hamilton limited the cost to $1000 each, although several of them exceeded that amount. They were designed to be fast, with shallow drafts, so that they could chase down ships anywhere along the coast. Each ship had a crew of ten and a few swivel guns to ensure compliance.
The US had no navy at the time, and these ships were not designed to confront warships. These were small coastal enforcement vessels under the authority of the Department of Treasury. They would take orders from the local customs house.
The main significance of the Revenue Marine is that they were a forerunner of the US Coast Guard. So the date of its creation: August 4, 1790 is used as the birth date of the US Coast Guard.
Return to Philadelphia
Congress returned for its third session in Philadelphia, in December, 1790. As I said last week, this was after most states had held elections for the Second Congress, so many of those attending this session were lame ducks, although that term was not in use yet. About one third of the House members had either retired or lost reelection, but still returned to continue their work in this First Congress.
When the Continental Congress had met in Philadelphia, they met in what we call today Independence Hall. At the time, it was the Pennsylvania State House. That is, where the state legislature met. It had also been used by Philadelphia city officials.
Because Pennsylvania was trying to convince the US Congress to remain permanently, they were doing everything they could to encourage Congress to stay and be comfortable in Philadelphia. The state had just completed a new county courthouse right next to the State House. They gave this building to Congress, Pennsylvania officials tried to set up the rooms similar to the way they had been in Federal Hall. New chairs and desks were laid out in a similar pattern as they had been in New York. The Senate was decorated with huge portraits of King Louis of France and his wife, Queen Marie Antoinette. These paintings were gifts from the King and Queen.
The House took over all of the first floor. The Senate needed only half of the second floor. Members of both bodies did not have separate offices. Rather, they had desks on the floor of the House and Senate, which they used to keep their papers. They generally sat on the floor all day when Congress was in session. In fact, members were required to remain seated unless speaking. They could not get up and roam around the floor.
The state legislature would continue to meet in the state house, the main building we call Independence Hall today. On the other side of the Hall, officials had built another building which would be used by the Mayor of Philadelphia and other city officials as the new city hall. So federal, state, and local governments all worked together on the same block. The Supreme Court ended up using City Hall when the Justices met in session.
Not only was Congress moving to Philadelphia, so was most of the new executive branch. This influx of people led to overcrowding. Landlords doubled their rental rates, and the city builders went on a housing boom.
Even before Congress arrived, government officials began carting government records and other items from New York to Philadelphia. The Pennsylvania legislature, still hoping to tempt the government to remain permanently, authorized the construction of a large presidential mansion with a dome on top. It was built on the western edge of town, on Ninth Street, about three blocks from Congress. They had gotten as far as setting the cornerstone before the federal government arrived, but the house was not completed for another seven years. It became less urgent when President Washington made clear that he would not live in the new house.
Instead, the President rented the House owned by Robert Morris. It was considered the nicest house in the city. General William Howe had occupied the home during the British army occupation of Philadelphia. The house was just one block north of Congress. Morris, perhaps the wealthiest man in America at the time, had purchased it in 1780. Washington had been a houseguest there during the Constitutional Convention. Morris offered the house to President Washington. Morris moved out entirely and took residence in the house next door. Washington agreed to rent the home. The State of Pennsylvania ended up paying the rent.
Washington’s personal secretary, Tobias Lear, oversaw the move of all of Washington’s furniture and other items, 58 wagon loads, from New York to Philadelphia, setting up the new presidential residence. Washington ordered considerable changes made to the house, including tearing down one wall to add large windows.
James Madison, still a bachelor, rented a room in a boarding House two blocks away from the President. Thomas Jefferson, a widower, also took a small room several blocks away. He rented a house in Market Street, using the upstairs as his residence. The ground floor became the offices for the State Department. Alexander Hamilton moved into a house with his wife and children on Walnut Street. He was only a block from the Treasury department, which continued to expand during the government’s time in Philadelphia. Secretary of War Henry Knox, who was quite wealthy, rented a larger house for his family. The War Department took up temporary quarters in several buildings, including a time in Carpenters Hall, where the First Continental Congress had met years earlier.
Pennsylvania leaders were doing everything they could to accommodate the new federal leaders. They hoped that they could convince them to remain in the city after the planned ten year period expired.
First Bank of the US
Meanwhile, Congress returned to work on December 6, 1790, to begin its third session. Well, it actually had to wait a day before enough members arrived to reach a quorum, but that was better than the weeks that they had to wait to begin the first session back in New York a couple of years earlier.
The biggest item on the agenda became Alexander Hamilton’s proposal to create a national bank. In the 1790s banks were a relatively new concept. The Bank of England was less than 100 years old. The first bank in America was Robert Morris’ Bank of North America, established in 1781.
Banks in this era were not commercial establishments for people to save money, as they are today. The Bank of England was designed to borrow funds from wealthy investors to finance wars or other major government expenses. Investors did not make deposits. Rather, they became shareholders by putting their money into the venture. Because the banks held a large amount of gold and silver, people would accept banknotes as currency, knowing that they could exchange their notes at any time for that gold or silver. The bank could issue more paper money, under the hope that not all note holders would try to exchange them for hard currency all at the same time. This allowed much more money to circulate.
The Bank of England had allowed the government a place to secure money collected from taxes, then borrow much larger sums during wartime to fund the increased costs of the war. It permitted Britain to sustain wars much longer than other European powers, who had to impose massive taxes during wartime.
The Bank of North America, established by Robert Morris and Alexander Hamilton in 1781 had tried to do the same thing in America to help finance the Revolution. Bank of North America banknotes held their value, unlike Continental Currency.
Initially, the Bank of North America held a charter from the Confederation Congress, but took criticism that Congress was overreaching its authority and that the bank gave too much power to a few wealthy men. To avoid the criticism of Congressional overreach, the bank got a new charter from the State of Pennsylvania. Even there it had problems as the populist government did not like the power that the bank gave to monied interests in the state.
By this time a second bank had opened in America. The Bank of New York was established after the war, in 1784. A group of New York investors saw how profitable the Bank of North America was in Philadelphia and how the bank made it easier to raise investment money for new commercial projects. Among the original investors in the bank were Alexander Hamilton, and Aaron Burr.
So when it came time to establish a financial system for the new federal government, Hamilton proposed creating a national bank, chartered by Congress. This bank would be set up in ways similar to earlier banks. It would acquire capital both from private investors and from government tax collections. The government could then use much of the money raised to begin paying off its war debt. The bank would also offer loans to private companies. It would provide a paper currency to circulate easily while retaining its value.
Hamilton’s Proposal
Hamilton based his proposal for a national bank based on these earlier models. In his report to Congress, he pointed out that money in the bank would be put to active use in the economy, unlike the traditional pattern of having merchants simply locking up their money in a chest and hiding it away. This would let other people make use of the money right away, while the owner of the money earned interest.
Another advantage would be that the government could gain access to capital very quickly if the need arose. It would make it easier for people to pay taxes. It would improve the credit reputation of the US among both the citizenry and foreign bankers. It would help to lower interest rates given the ease and availability of money available to borrow.
Hamilton wanted the bank to be a public-private partnership. The bank would hold specie from both private investors as well as government tax revenues. He envisioned a capital stock over ten million dollars, offering 25,000 shares in the bank valued at $400 each. Investors could use public debt, that is those old Continental dollars, to pay for up to three-quarters of the purchase price. The rest would have to be paid in specie (gold or silver). Investors would receive interest of 6% per year. That return would encourage investment. When paying out money, it would be in the form of bank notes, allowing the bank to retain specie to maintain public confidence.
Objections
Hamilton’s proposed bank had its opponents. Rather quickly Thomas Jefferson and James Madison became the leaders of the opposition. Neither of them were opponents of banking generally. Jefferson had actually been an investor in the Bank of North America. Madison had expressed some misgivings about the Bank of North America in the Confederation Congress, but ended up voting for it.
Jefferson and Madison had both acquiesced to Hamilton’s debt assumption plan in the earlier session, but both were growing increasingly concerned at just how powerful the federal government was becoming.
The main argument used by the opposition was that the Constitution did not authorize this. Madison reminded his colleagues that the Constitutional Convention had debated and rejected the idea of giving the federal government the power to grant charters or articles of incorporation. His view was that if the authorization for such a power was not in the constitution, then the government did not have that power. Supporters argued that the Constitution’s “necessary and proper” clause granted Congress the power to do anything necessary and proper to carrying out its other duties. Since Congress had authority to collect taxes, spend money, and pay off its debts, a bank would be a key component of that.
Jefferson also noted that the Tenth Amendment reserved undelegated powers to the states, not the federal government. But the Tenth Amendment also had not been ratified yet. The Jefferson-Madison view of interpreting the constitution became known as strict construction. If a power was not expressly delegated, then the government did not have that power.
Hamilton’s loose construction of the Constitution also set a dangerous precedent. If Congress could just make any argument for creating a new thing that had not been explicitly authorized by the Constitution, there would be no stopping point. The government could grow to do just about anything. Even most federalists who wanted a more powerful federal government after the Confederation, feared the idea of a national government with unlimited authority to do anything.
Beyond this legal argument, there were other reasons for opposing the bank. The post-war era had been rife with political dissension between farmers and working people against the wealthy merchants and bankers. This new bank seemed to give special privileges and advantages to a small group of moneyed interests at the expense of everybody else.
In particular, the bank would tend to benefit merchants and businessmen in the cities, at the expense of farmers and others. The vast majority of the population worked as farmers. They had come to see banks as their enemy, making this project highly unpopular. The south especially, where there was very little commercial activity outside of farming was concerned about how much power a bank would move toward northern interests. Some politicians also feared that establishing this bank in Philadelphia might end up being a reason why the government would not want to relocate to the Potomac after the agreed ten year period in Philadelphia.
Opponents also saw the bank as a source of political corruption. It was the case in Britain that members of Parliament often held stock in the Bank of England, which gave them a self-interests position in supporting anything that benefitted the bank. It would almost certainly be the case that members of Congress would invest in the bank and have that same conflict of interest. The idea that the bulk of the nation’s wealth would cause greater wealth to accrue to a small group of wealthy and powerful men, which would disadvantage everyone else.
A bank would also promote speculation. With so much money to be made through investment, Jefferson warned that people would turn their lives toward speculation rather than being productive workers. Speculation, unlike labor, had no benefit to the country and was essentially a form of gambling. It would be destructive of morality.
Debating the Bank
Hamilton had submitted his report in mid-December, 1790, at the beginning of the third session of Congress. The Senate took up the bill first, proposing a twenty year charter for the bank. A minority wanted to limit the charter to ten years, but that effort failed. Relatively quickly, by the end of January, the Senate passed the Bank bill by a vote of ten to six.
The House took up the bill at the beginning of February, when Madison rose to oppose it, raising the issues that I just outlined. Congress was under a pretty strict deadline. Since the first Congress had begun on March 4, 1789, the Congress had to wrap up by that date in 1791. Otherwise, members would serve longer than two years, in violation of the Constitution. At that point, they would have to be replaced by the members who were elected in the most recent elections.
The House debated the bill for just one week. At the end of the week, they called a vote passing overwhelmingly, by a vote of thirty-nine to twenty. Congress waited another week before presenting the bill to President Washington. Both sides used that extra time to draft arguments for their side. The day before the bill reached Washington’s desk Attorney General Edmund Randolph issued an opinion that the bill was unconstitutional.
The day after Washington received the bill, Jefferson presented his own argument that the Bank was unconstitutional. Washington, uncertain what we would do, asked Madison to draft a veto message in case he decided to veto the bill.
Hamilton, raced to complete his own lengthy argument on why the bank was constitutional. The president had ten days to decide whether to sign or veto. Hamilton finally submitted his arguments on day eight. Hamilton essentially argued that the president should defer to the legislature, and that Constitution gave the government power to create entities that were necessary and proper to carrying out their enumerated powers.
The debate over the controversial bill weighed heavily on President Washington. His thought were not really focused on whether the bank was a good idea. He was more concerned about whether he would be violating the Constitution by signing it, or being seen as not deferential enough to the legislature by vetoing it. The bill has passed with nearly two-thirds support in both houses, so an override was quite possible and would be embarrassing. The bill was also particularly unpopular in his home state of Virginia.
Washington considered his options waiting until the last possible minute, but he ended up accepting Hamilton’s arguments and signing the Bill. The Bank of the United States would begin operations a few months later.
Next Week: we take a look at the controversy over Vermont joining the Union as the fourteenth state.
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Next Episode 370 Vermont Joins the Union
Previous Episode 368 The Census of 1790
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Further Reading
Websites
US Revenue cutter service archives: https://nationalcoastguardmuseum.org/articles/filed-under/enforcers-on-the-seas/u-s-revenue-cutter-service
US Congress (1790-1800): https://philadelphiaencyclopedia.org/essays/u-s-congress-1790-1800
Hamilton Report on a National Bank: https://founders.archives.gov/documents/Hamilton/01-07-02-0229-0003
1791: Jefferson's Opinion on the Constitutionality of a National Bank https://www.battlefields.org/learn/primary-sources/jeffersons-opinion-constitutionality-national-bank-1791
“Opinion on the Constitutionality of the Bill for Establishing a National Bank, 15 February 1791,” Founders Online, National Archives, https://founders.archives.gov/documents/Jefferson/01-19-02-0051
“James Madison to George Washington, (draft veto message) 21 February 1791,” Founders Online, National Archives, https://founders.archives.gov/documents/Washington/05-07-02-0232
[A. Hamilton] “Final Version of an Opinion on the Constitutionality of an Act to Establish a Bank, [23 February 1791],” Founders Online, National Archives, https://founders.archives.gov/documents/Hamilton/01-08-02-0060-0003
Hamilton's Opinion as to the Constitutionality of the Bank of the United States: 1791 https://avalon.law.yale.edu/18th_century/bank-ah.asp
Dimmitt, Bradley T. Hamilton and the National Bank, East Tennessee State Univ. [Master’s Thesis], 2010 https://dc.etsu.edu/cgi/viewcontent.cgi?article=3043&context=etd
Free eBooks
(from archive.org unless noted)
Federal Reserve Bank of Philadelphia The First Bank Of The United States, 2009.
Brant, Irving James Madison: Father of the Constitution, 1787-1800. Bobbs-Merrill Co. 1950 (borrow only).Holdsworth, John Thom The First Bank of the United States, University of Pennsylvania [PhD Thesis] 1915.
Holdsworth, John & Davis Dewey The First and Second Banks of the United States, Washington: Government Printing Office, 1910.
Lewis, Lawrence A History of the Bank of North America, Philadelphia: J.B Lippincott & Co. 1882.
Books Worth Buying
(links to Amazon.com unless otherwise noted)*
Bordewich, Fergus M. The First Congress: How James Madison, George Washington, and a Group of Extraordinary Men Invented the Government, Simon & Schuster, 2016.
Chernow, Ron Alexander Hamilton, Penguin Press, 2004.
Chernow, Ron Washington, A Life, Penguin Press, 2010.
Chervinsky, Lindsay M. The Cabinet: George Washington and the Creation of an American Institution, Belknap Press, 2020.
Cowen, David J. The Origins and Economic Impact of the First Bank of the United States, 1791-1797. Garland Publishing, 2000.
Elkins, Stanley M. and Eric McKitrick, The Age of Federalism: The Early American Republic, 1788–1800, Oxford Univ. Press, 1993 (borrow on archive.org).
Ellis, Joseph J. Founding Brothers: The Revolutionary Generation, Knopf, 2000.
Ellis, Joseph J. The Quartet: Orchestrating the Second American Revolution 1783-1789, Alfred A. Knopf, 2015.
Evans, Stephen H. The United States Coast Guard, 1790 1915; A Definitive History, US Naval Institute, 1949.
Ferling, John Jefferson and Hamilton: The Rivalry That Forged a Nation Hardcover, Bloomsbury Press, 2013.
Hogeland, William Founding Finance: How Debt, Speculation, Foreclosures, Protests, and Crackdowns Made Us a Nation, Univ. of Texas Press, 2014.
Hogeland, William The Hamilton Scheme: An Epic Tale of Money and Power in the American Founding, Farrar, Straus and Giroux, 2024.
Hunger, Harlow Giles Mr. President: George Washington and the Making of the Nation's Highest Office, De Capo Press, 2013.
Meacham, Jon Thomas Jefferson: The Art of Power, Random House, 2012
Ostrom, Thomas P. The United States Coast Guard, 1790 to the Present, Red Anvil Press, 2004 (borrow on archive.org).
Randall, Willard Sterne Thomas Jefferson: A Life, Henry Holt and Co. 1993.
* As an Amazon Associate I earn from qualifying purchases.
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