States Rights and the Federal Reserve
September 20, 2011
by William P. Meyers

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"Such is the character of human language, that no word conveys to the mind, in all situations, one single definite idea; and nothing is more common that to use words in a figurative sense."
—John Marshall in McCulloch vs. Maryland, 1819

If your knowledge of American history is shallow enough, you might think that the question of states' rights was answered by the Civil War. The Republican Party opined that for a state to secede from the Union was an act of treason. A lot of people died to make the point. Yet states did not become mere administrators of Federal law. They retained important rights and duties.

Before considering how the Federal Reserve fits into our system of governance, it is worth a bit of review about the Bank of the United States. America had no banks at all in 1776, which at least proves it is possible to get along without them. Great Britain had a number of banks, including the Bank of England, which had been created by the British government, but which had not branches in the American colonies.

The first Bank of the United States was chartered by the first Congress under the new Constitution in 1791 for twenty years, based on a proposal from Alexander Hamilton, the Secretary of the Treasury under President George Washington. Like the Bank of England, it was set up as a private company that would hold federal funds, but act as a bank to commercial enterprises. From the beginning some political figures (anti-federalists) opposed it and believed that its creation was not a power granted to Congress by the Constitution. In 1811 Congress refused to recharter the bank (by a vote of 64 to 65). The War of 1812 created such financial chaos in the United States that the bank was issue a new charter in 1816.

In 1818, to prevent the Bank of the United States from competing with local banks, the State of Maryland passed a tax on all banks not chartered by the State. The Bank cashier, McCulloch, refused to pay the tax. The Bank lost in the Maryland courts, but appealed to the Supreme Court of the United States. By a vote of 8 to 1 the Supreme Court found the Maryland law to be unconstitutional. [See McCulloch vs. Maryland, 17 US 316 (1819)]

In the ruling John Marshall discusses the nature of the federal system at some length. He discusses how sovereignty can be shared or split by states and the federal government. He discusses the phrase "necessary and proper" at some length. He also splits the hair of the 10th Amendment by noting that it differs by one important word from the wording of its predecessor in the Articles of Confederation.

Even Marshall, the federalist, noted that the Constitution gives the Congress some responsibilities, and prohibits certain types of legislation, while reserving others to the states. Two basic problems remain, even if you are convinced by Marshall's reading of the Constitution. You may not agree with how the Constitution divides up responsibilities between the states and federal government. That could be fixed by amendments, although amending the Constitution is difficult, and what is already in place is favored.

The more difficult question arises when specific situations cross multiple issues, or when there are shades of gray within a single issue. The Supreme Court itself has often made differing rulings on the same subject during different periods of American history.

President Andrew Jackson did not like the Bank of the United States; he thought its powers exceeded those grantable under the Constitution. Jackson, like most Americans, wanted states' rights when he agreed with the states, and was against states' rights when he wanted to impose his ideas on the entire nation. When the people of South Carolina nullified an oppressive tariff (import customers duty), Jackson threatened to use military force. But when George asserted states' rights to evict the Cherokee nation, and the Supreme Court backed the Cherokee in Worcester v. Georgia (31 US 515), Jackson (and later President Van Buren) refused to use federal troops to enforce the Supreme Court's decision. In 1833 President Jackson took federal money out of the Bank of the United States, and its charter was allowed to expire in 1836.

The Federal Reserve was controversial when it was created in 1913 it was no less controversial than the Bank of the United States. However, it did not compete directly with private commercial banks, instead using its function as a reserve bank to maintain a money supply consistent with economic health. Recently the Tea Party and Republican presidential candidates have been attacking the Federal Reserve. Partly the attacks are pragmatic, partly they raise yet again the ancient question of what are the powers of the federal government under the Constitution.

Anyone can criticize the Fed on pragmatic grounds. Take your choice: the Fed created too much money, or the Fed created too little money. Heck, the Fed insiders debate that question among themselves.

Questioning the Federal Reserve's constitutionality is wacky, except perhaps as an academic exercise. The Tea Party has no good answers for the reasoning in McCulloch vs. Maryland. Congress has the power to regulate interstate commerce and to establish a system of currency, both of which it chooses to do through the Federal Reserve. Congress has the power to change the Federal Reserve, to replace it with something different, or to abolish it outright.

Many in the Tea Party now hold there is an Original Constitution, written by God himself, and easily interpreted by anyone with a rudimentary knowledge of English and the Ten Commandments, about what you would get from their home schooling program. For them it is simple: the Constitution does not mention the Federal Reserve, so having one cannot be constitutional.

The first Congress (admittedly a rogue's gallery of corrupt men) chartered the Bank of the United States, and it was signed into law by George Washington. Who do you think is in a better position to opine on the meaning of the U.S. Constitution, the village idiots of the Tea Party, or the first Congress? The men who knew the men, sometimes even were the men, who wrote the Constitution, or Michele Bachmann?

We do not need to return to some mythic original Constitution. We need to amend the Constitution to bring it into line with what we, the people, have learned in the past 200 years. The problem with Congress is not that it has exceeded the power granted to it, though it probably has at times. The problem with Congress is that it has not done everything necessary and proper to "promote the general Welfare." Neither, for that matter, have the various state legislatures.