Organized Crime

Much has been written about the famous debate between Thomas Jefferson and Alexander Hamilton over the constitutionality of America’s first central bank, the Bank of the United States (BUS). This was where Jefferson, as secretary of state, enunciated his “strict constructionist” view of the Constitution, making his case to President George Washington that since a national bank was not one of the powers specifically delegated by the states to the central government, and since the idea was explicitly rejected by the constitutional convention, a central bank is unconstitutional. Treasury Secretary Hamilton notoriously responded by inventing the notion of “implied” as opposed to explicit, delegated powers in the Constitution.

George Washington signed legislation creating the BUS not because of the strength of Hamilton’s argument but because of a shady political deal. The nation’s capital was being relocated from New York to Virginia, and Washington wanted the border of the new District of Columbia to abut his property at Mount Vernon. In return for redrawing the district’s border (presumably enhancing his property value), Washington signed the Federalists’ legislation creating the BUS.

America’s first central bank was borne of a corrupt political deal, but that particular act of political chicanery pales in comparison to what Hamilton and his fellow nationalists really had in mind for the country. As Murray Rothbard wrote in The Mystery of Banking, Hamilton and his political compatriots, especially the politically-connected defense contractor Robert Morris, wanted

to reimpose in the new United States a system of mercantilism and big government similar to that in Great Britain, against which the colonists had rebelled. The object was to have a strong central government, particularly a strong president or king as chief executive, built up by high taxes and heavy public debt.

An especially important part of what Rothbard called “the Morris scheme” was “to organize and head a central bank, to provide cheap credit and expanded money for himself and his allies.”

Hamilton was essentially Robert Morris’s plant in the Washington administration whose assignment was to create a British-style “mercantilist” economic system that would primarily benefit plutocrats like Morris at the expense of nearly everyone else. As explained by historian Douglas Adair, an editor of The Federalist Papers:

[W]ith devious brilliance, Hamilton set out, by a program of class legislation, to unite the propertied interests of the eastern seaboard into a cohesive administration party, while at the same time he attempted to make the executive dominant over the Congress by a lavish use of the spoils system. In carrying out his scheme . . . Hamilton transformed every financial transaction of the Treasury Department into an orgy of speculation and graft in which selected senators, congressmen, and certain of their richer constituents throughout the nation participated.

What Professor Adair is talking about here is how Hamilton went about nationalizing the old government debt. New government bonds were issued and the old debt was to be cashed out at face value. This plan immediately became public knowledge in New York City among all the political insiders in and around the government, but news of it “spread only slowly, via horseback and sailing vessel, to the rest of the country,” wrote John Steele Gordon in his book, Hamilton’s Blessing.

Thus, a tremendous arbitrage opportunity was created for the New York/Philadelphia political insiders like Robert Morris and his business and political associates, including many members of Congress. In his classic book, Jefferson and Hamilton, historian Claude Bowers described how many members of Congress and other political insiders took advantage of hundreds of unsuspecting Revolutionary War veterans who had been partly paid for their service in government bonds by purchasing the bonds from them for as little as two percent of par value. As Bowers described the scene,

expresses with very large sums of money on their way to North Carolina for purposes of speculation . . . splashed and bumped over wretched winter roads. . . . Two fast-sailing vessels, chartered by a member of Congress . . . were ploughing the waters southward on a similar mission.

Many members of Congress became instant millionaires, according to Bowers. Robert Morris is said to have made millions on the scheme, and Hamilton himself participated in it.

Upon observing this Hamiltonian caper, Jefferson came to the conclusion that Hamilton was intentionally creating a system of institutionalized corruption in order to purchase the political support in Congress for his party’s big-government mercantilist agenda of protectionist tariffs, corporate welfare, and central banking. In a February 4, 1818 essay written long after Hamilton’s 1804 death, Jefferson claimed that “Hamilton’s system had two objects. 1st as a puzzle, to exclude popular understanding & inquiry. 2ndly, as a machine for the corruption of the legislature.” With regard to the corruption accusation, Jefferson explained that Hamilton had

Avowed the opinion that man could be governed by one of two motives only, force or interest: force he observed, in this country, was out of the question; and the interests therefore of the members [of Congress] must be laid hold of, to keep the legislature in unison with the executive. And with grief and shame it must be acknowledged that his machine was not without effect. . . . Some members [of Congress] were found sordid enough to bend their duty to their interests, and to look after personal, rather than public good.

“Men thus enriched by the dexterity of a leader [like Hamilton],” Jefferson wrote, “would follow of course the chief who was leading them to fortune, and thus become the zealous instruments of all his enterprises.”

But the problem facing Hamilton, Jefferson believed, was that the political support which he “purchased” with the public debt arbitrage scam was only temporary. “It would be lost with the loss [by retirement or death] of the individual members [of Congress] whom it had enriched.” Therefore, Jefferson reasoned, “some engine of influence more permanent must be contrived.” This permanent engine of “influence” or corruption, he said, “was the Bank of the U.S.” A central bank, once established, would instantly create a political constituency behind it and would be difficult to destroy. Jefferson feared that it could become a permanent engine of political bribery and corruption in the service of expanding the size and scope of government beyond the bounds of the Constitution. Thomas Jefferson concluded that “Hamilton was not only a monarchist, but for monarchy bottomed on corruption,” with a central bank being the centerpiece of the kind of corrupt regime that Hamilton aspired to create.

Jefferson came to this conclusion based on Hamilton’s behavior, and on his words as well. In his February 4, 1818 essay Jefferson recalled a personal conversation involving himself, Hamilton, Secretary of War Henry Knox, President John Adams, and Attorney General Edmund Randolph in 1791, the year the BUS came into being. He recalled how President Adams said of the British constitution, “purge that constitution of its corruption, and give to its popular branch equality of representation, and it would be the most perfect constitution ever devised by the wit of man.”

Hamilton then objected to this statement by saying: “Purge it of its corruption, and give to its popular branch equality of representation, & it would become an impracticable government; as it stands at present, with all its supposed defects, it is the most perfect government which ever existed.”

Thus, to the Machiavellian Hamilton the existence of corruption in the British government was a good thing, not a bad thing, for it helped to centralize political power in the executive. Hamilton was “so bewitched & perverted by the British example,” Jefferson wrote, “as to be under thoro’ conviction that corruption was essential to the government of a nation.” And the creation of a central bank was the essential ingredient of such corruption.