The National Bank That Breached the Articles of Confederation

By: Mike Maharrey

 

Despite having no express authority to do so, Congress created a national bank under the Articles of Confederation by invoking an invented doctrine of “inherent sovereign authority.” The episode reveals that even under a framework built on explicit and limited delegation, government still finds ways to expand its power.

Many argue that the Constitution either created or enabled the massive federal government we live under today – a government with nearly unlimited power – and that a very different United States might have emerged if the union had remained under the Articles of Confederation instead.

Yet even under the Articles, those in power found ways to bypass constitutional constraints in the name of “necessity.”

James Wilson emerged as a central figure defending the bank’s legitimacy. Foreshadowing Alexander Hamilton’s later discovery of “implied powers” in the Constitution to justify his own national bank project, Wilson invented a new doctrine out of thin air, claiming that congressional authority to charter a bank derived from powers outside of the Articles of Confederation. This novel doctrine was known as “inherent sovereign authority.”

Wilson later backed away from this position when arguing for the ratification of the Constitution, but the precedent was set.

CRISIS AND CREATION

Like so many expansions of government power, the Bank of North America was born out of a perceived crisis and justified by “necessity.”

By 1780, the prospects for American independence looked bleak. The war effort teetered on the verge of financial collapse. Continental paper currency had become virtually worthless.

Beginning in 1775, the Confederation Congress issued millions of dollars in Continentals to fund the war effort. The Continental was a fiat currency backed solely by the promise of future tax revenue. With no gold or silver backing, Congress issued the notes without restraint. Each new issue worsened inflation, and purchasing power plummeted.

Rampant British counterfeiting, aimed at undermining confidence in the Continental currency, further fueled inflation in the colonies.

Lacking a reliable funding mechanism, the Continental Congress tapped Robert Morris as Superintendent of Finance. He quickly drafted a proposal to charter a national bank to support the war effort.

MORRIS’S PROPOSAL AND A BRITISH MODEL

Morris drew on ideas he had sketched out in correspondence with Alexander Hamilton. His goal was to restore credit, revive faith in the paper currency, and stabilize the economy.

On May 17, 1781, Morris submitted a formal proposal to Congress for a national bank funded by private subscription. The first article declared, “That a subscription be opened for four hundred thousand dollars, in shares of four hundred dollars each, to be paid in gold or silver.” 

The proposed institution would issue circulating notes redeemable in specie and operate under the direction of the Superintendent of Finance. Morris’s proposal implied that Congress would issue the charter, though it made no explicit reference to any constitutional authority.

Morris modeled the bank after the Bank of England, a centralized financial institution many American colonists deeply distrusted. It was privately owned, operated in close partnership with the British government, and held a monopoly as the only limited-liability bank in Britain. This monopoly gave it the exclusive privilege of circulating its paper notes as money.

This model stood in stark contrast to the explicitly limited federal authority established by the Articles of Confederation.

In a letter to Benjamin Franklin, Morris wrote:

“I mean to render this [the Bank of North America] a principal pillar of American credit, so as to obtain the money of individuals for the benefit of the Union, and thereby bind those individuals more strongly to the general cause by the ties of private interest” 

Nevertheless, Congress approved the charter in December 1781. To help launch the institution the following year, Morris’s associate Dr. Hugh Shiell purchased £5,000 worth of capital stock.

The bank charter stipulated, “That the notes hereafter to be issued by the said bank, payable on demand, shall be receivable in payment of all taxes, duties, and debts, due or that may become due or payable to the United States.”

The authority to create the bank was contested from the outset. While some, including Hamilton and Morris, saw it as a necessary response to wartime economic turmoil, others believed Congress had overstepped its limits set by the Articles of Confederation.

Supporters of the bank were clearly aware of the constitutional questions it raised. As early as 1782, Wilson acknowledged that the charter touched on “great and leading questions concerning the constitution of the United States, and the relation, which subsists between them and each particular State in the union.”

CONSTITUTIONALLY DUBIOUS

While a central bank may have been crucial to the war effort, its charter was constitutionally dubious – and supporters knew it. To get their bank, supporters invented a novel theory of extra-constitutional power to justify Congress’s action.

The Articles of Confederation did not explicitly delegate to Congress any authority to charter corporations. Furthermore, the Articles expressly stated, “Each state retains its sovereignty, freedom and independence, and every Power, Jurisdiction and right, which is not by this confederation expressly delegated to the United States, in Congress assembled.”

With no expressly delegated power, how did Congress justify issuing a corporate charter and founding a national bank?

James Wilson, a Pennsylvania delegate and investor in the bank, defended its legitimacy by inventing the doctrine of “inherent sovereign authority” – a theory that justified additional congressional powers beyond those found in the Articles.

This wasn’t the application of any accepted constitutional interpretation. It was a radical assertion of untapped government authority, invented out of thin air to justify the bank. Wilson wasn’t merely reinterpreting the Articles. He was rejecting them as the sole source of congressional authority.

Wilson argued that Congress possessed a reservoir of undelegated powers flowing from “national independence.” This novel doctrine unlocked undefined powers that could be invoked to justify the bank.

Wilson conceded the plain language of the Articles. But he insisted the United States possessed powers of its own that were not delegated by the states.

“Though the United States in congress assembled derive from the particular states no power, jurisdiction, or right, which is not expressly delegated by the confederation, it does not thence follow, that the United States in congress have no other powers, jurisdiction, or rights, than those delegated by the particular states.” [Emphasis original]

He went on to assert, “The United States have general rights, general powers, and general obligations, not derived from any particular states, nor from all the particular states, taken separately; but resulting from the union of the whole.”

Wilson’s entire argument rested on denying that states could reserve powers that were never theirs in the first place. He based his argument on the premise that the United States was not merely a confederation of sovereign states, but for many purposes “are to be considered as one undivided, independent nation; and as possessed of all the rights, and powers, and properties, by the law of nations incident to such.”

As an independent nation, Wilson argued, “Whenever an object occurs, to the direction of which no particular state is competent, the management of it must, of necessity, belong to the United States in congress assembled.”

As an example, he cited “the purchase, the sale, the defense, and the government of lands and countries not within any state.” He argued, “An institution for circulating paper, and establishing its credit over the whole United States, is naturally ranged in the same class.”

Wilson invoked the Declaration of Independence to support his argument. He asserted that the union inherent in the Declaration created a new political society, and “rights may be vested in a political body, which did not previously reside in any or in all the members of that body. They may be derived solely from the union of those members.”

Wilson likened this to individuals uniting along a navigable river, a metaphor he borrowed from Burlamaqui.

“It belongs to none of them; it belongs not to them all, for they have nothing in common. Let them unite; the river is the property of the united body.”

Furthermore, he argued that the union “was not intended to transfer any of those powers or rights to particular states, or any of them. If, therefore, the power now in question was vested in the United States before the confederation; it continues vested in them still.”

Constitutional scholar Robert Natelson summarized Wilson’s argument.

“Wilson argued that upon adoption of the Declaration of Independence, the Second Continental Congress assumed full sovereignty over all matters in which individual states were not competent. The Confederation Congress inherited this sovereignty from the Second Continental Congress. The states did not reserve authority over such matters when they ratified the Articles, because the states did not have that authority to reserve; it already was vested in Congress.”

At its core, Wilson’s argument went beyond constitutional interpretation. He was asserting the existence of power outside any ratified legal instrument.

This claim marked one of the earliest formal assertions of government supremacy unbound by delegated authority. Wilson’s reasoning laid the intellectual groundwork for the expansive reading of powers seen in Hamilton’s “implied powers” doctrine a decade later.

The fears of those who believed the bank would open the door to further federal expansion were eventually vindicated. The Pennsylvania legislature revoked the bank’s state charter in 1785 amid growing concern that it wielded too much centralized power and operated without sufficient accountability. This move underscored the deep distrust of centralized power held by many in the founding generation.

OPPOSITION

Wilson’s novel argument stretched the plain language of the Articles, and opponents viewed it as a dangerous departure from the principle of strictly limited constitutional authority.

These concerns were evident in the steps Congress took to appease critics and sidestep constitutional objections. It appealed to the states for political cover – tying the bank’s legitimacy to the willingness of individual states to grant it a wartime banking monopoly within their borders.

To address legal objections, Congress also added an amendment to the charter: “Provided, always, that nothing herein before contained, shall be construed to authorize the said corporation, to exercise any powers in any of the United States, repugnant to the laws or constitution of such State.”

Members of Congress clearly recognized they were exceeding their constitutional bounds, and they tried to paper it over by recruiting state support for their workaround after the fact.

James Madison was a delegate to the Confederation Congress. In a letter to Edmund Pendleton, he acknowledged that “the competency of Congress to such an act had been called in question.”

Ultimately, these objections “did not prevail,” and Congress caved to expedience. Twenty delegates approved the resolution, with only the Massachusetts delegation, along with Madison (unsupported by his Virginia colleagues), withholding support.

According to Madison’s account, the majority of delegates knew full well they were exceeding their constitutional authority.

“On the last occasion, the general opinion though with some exceptions was that the Confederation gave no such power and that the exercise of it would not bear the test of a forensic disquisition & consequently would not avail the institution.”

Reflecting on events years later, Madison reiterated that the bank charter exceeded Congress’s authority and was merely a concession to wartime expediency.

“The power of Congress was measured by the exigencies of the war, and derived its sanction from the acquiescence of the States.”

Madison added that even after the war, “habit and a continued expediency, amounting often to a real or apparent necessity, prolonged the exercise of an undefined authority; which was the more readily overlooked.”

He cited the Bank of North America as perhaps the “most memorable” example of this utilitarian overreach.

“The incorporating ordinance grew out of the inferred necessity of such an Institution to carry on the war, by aiding the finances which were starving under the neglect or inability of the States to furnish their assessed quotas. Congress was at the time so much aware of the deficient authority, that they recommended it to the State Legislatures to pass laws giving due effect to the ordinance; which was done by Pennsylvania and several other States.”

Thomas Jefferson shared Madison’s view. In a letter to G.K. Van Hogendorp dated August 25, 1786, Jefferson called the Confederation Congress’s bank charter “perhaps the only instance of their having done an act which they had no power to do.”

He asserted, “Necessity obliged them to give this institution the appearance of their countenance, because in that moment they were without any other resource for money.”

Jefferson and Madison both cited this episode as a warning against expansive interpretations of federal power – an argument they would return to during the First Bank debate in 1791.

WILSON SINGS A DIFFERENT TUNE

When the Philadelphia Convention proposed a new Constitution in 1787, James Wilson emerged as a leading figure in the ratification effort. His State House Yard Speech played a key role in shaping the public debate.

He understood that the Constitution would not be ratified if the people believed it would create a consolidated national government. He likely also recognized that his earlier doctrine of inherent sovereign authority provided a blueprint for federal overreach.

Wilson attempted to close that door, assuring the people that no such doctrine would exist under the proposed Constitution. He insisted that federal authority would be limited to the powers delegated.

In his speech, Wilson affirmed that the general government would exercise only delegated powers – there would be no claim of “inherent sovereign authority.”

He began by observing that the people had delegated broad powers to their state governments.

“When the people established the powers of legislation under their separate governments, they invested their representatives with every right and authority which they did not in explicit terms reserve.”

However, Wilson argued that “in delegating federal powers, another criterion was necessarily introduced.”

He insisted that “the congressional authority is to be collected, not from tacit implication, but from the positive grant expressed in the instrument of union. Hence it is evident, that in the former case everything which is not reserved is given, but in the latter the reverse of the proposition prevails, and everything which is not given, is reserved.” [Emphasis added]

As Natelson bluntly put it, “Wilson implicitly renounced his theory of inherent sovereign authority.”

A BLUEPRINT FOR POWER

Although Wilson ultimately renounced his novel constitutional innovation, he could not roll back human nature or the tendency of government power to expand. His willingness to manufacture a justification in the name of necessity has echoed through American history.

The unconstitutional chartering of the Bank of North America became a blueprint for future federal expansion and overreach – when in doubt, invent a justification.

Ironically, one of the earliest challenges to constitutional limits centered on chartering a national bank. Like Wilson before him, Alexander Hamilton discovered “implied powers” to justify his own national bank project.

The Bank of North America’s charter also revealed one of the earliest examples of a recurring pattern: in times of crisis, constitutional limits often yield to expediency.

Establishing the Bank of North America shows that this tendency didn’t begin with the Constitution – it was already present under the Articles of Confederation.

The doctrine of inherent sovereign authority – fabricated to justify the bank – was a warning shot. It underscores a permanent truth: constitutional boundaries are only as strong as the willingness of the people and their representatives to enforce them.