Ignorance is Confidence, Fedtalk or Newspeak? Andrew Jackson on Repealing a Central Bank

Location: New York
Author: IRA Staff
Date: Tuesday, February 15, 2011

"Why were the rating agencies trusted? When they became required for Federal deposit insurance their incentives for upward bias was common knowledge. The requirement was attacked by a Chicago economist, Melchior Palyi, on philosophical grounds (the expertise is excessively secret) and technical (Moody‘s forecasts were inaccurate). The Federal government financed a massive study of bond ratings which developed a technical response to remove the bias. The study required a trade with the rating agencies so the authors wrote prudently to avoid offending the agencies. They disguised the meaning of their procedures and did not discuss the full dimensions of Palyi‘s challenge. When the technical methods failed, the loss of memory did not allow us to recover Palyi‘s warning about non-transparency."

“Prudence with Biased Experts: Ratings Agencies & Regulators”
David M. Levy, George Mason University
Sandra J. Peart, University of Richmond
September 2010

In this issue of The Institutional Risk Analyst, Richard Alford, Christopher Whalen and members of the Herbert Gold Society opine on the Fed's attitude toward veracity and transparency in an age when confidence is the paramount policy concern. In the process of seeking to restore and maintain confidence, in the financial system and in the Fed as an institution, the Board of Governors in Washington led by Chairman Ben Bernanke seem to follow the last of the three slogans of the Ministry of Truth in George Orwell's book, 1984: "Ignorance is Strength."The chief threat to the Fed's continued existence  is not the growing plurality in Congress who support such measures, but the refusal of the organization to disclose and describe its policies and operations to the American people in an honest, forthright fashion.

Fedtalk or Newspeak in the Age of Transparency

The current Fed emphasizes communication policy and transparency more than any of its predecessors. Despite the emphasis, however, the Fed continues suffer communications problems and is less than transparent as it employs “talk” to shape expectations and perceptions about the economy and policy. The content of monetary policy pronouncements and also the Fed’s financial disclosure offer two cases in point that suggest deliberate obfuscation has become acceptable and, indeed, standard operating procedure at the Fed.

Shortly after Chairman Bernanke’s second 60 Minutes appearance on December 5, 2010, commentators from Caroline Baum, in a Bloomberg News article, to Jon Stewart, on the Daily Show, criticized Bernanke for reversing his position regarding QE and the “printing of money.” During his first appearance Bernanke equated QE and the printing of money while on the second appearance he said QE was unrelated to money creation. Baum also found it difficult to stomach Bernanke’s newly found 100% confidence in his ability to forestall inflation in the future despite the ballooning of the Fed balance sheet. Baum summarized her misgivings about Bernanke’s second 60 Minutes appearance: “What’s so troubling about the Sunday interview is that it wasn’t Bernanke, the media-shy economist, talking. It was a politician attempting to bolster confidence in his constituents and support for his policies. That’s not an ideal character trait for a central banker….”

However, Baum as well as many other observers are woefully behind the times. Under Chairman Bernanke and even before, the central bank has defined “Fed talk” as a policy tool, a decision that makes Fed officials indistinguishable from the other paid agents who operate in Washington. For at least the last five years, “Fed talk” has consciously, continuously and publicly been aimed at managing expectations about policy, the future course of the economy, interest rates and inflation. In short, “Fed talk” is and has been for some time exactly that to which Baum objects.

Further, in the collective mind of the Fed, doing what Baum objects to is exactly the optimal role of a policy maker. Central banks have changed levels set for targeted variables; they have changed the variables that that they target; they have changed their operating procedures. Central banks have been criticized (almost continuously by one party or another) for these changes in policy, but few would disagree with the premise that policy should adjust in response to at least some changes in the economic and financial environment. To the Fed, the relevant criteria to be used in evaluating “Fed talk” is the standard used to evaluate any policy tool, i.e. does it promote the goals of policy. In such a framework, the truth becomes irrelevant from time to time.

At earlier points in time, Fed reports, speeches by FOMC members might have been viewed as attempts at honest descriptions of the economic environment, policy and the future course of the economy. This is no longer the case. Given that the goal of “Fed talk” is expectations management, the Fed has added itself and monetary policy to the list of agencies and governmental activities wherein repeatedly “spinning’ the truth has become part and parcel of the policy process. Or as our friend Bob Feinberg likes to say, Washington is a city where 90 percent of what people say is false and the people saying it knowingly prevaricate.

"Fed talk" may affect the markets from time to time, but it is not a policy tool. A wide variety of things can affect markets. They include fiscal policy, non-Fed talk about policy and rumors about a range of topics from the geo-political to the salaciously scandalous, but they are not tools of monetary policy. The Fed has a series of targets, money market, (e.g.. the Fed funds rate or quantity of reserves), intermediate targets (e.g., the structure of interest rates or the quantity of money) and longer run or ultimate targets (e.g., full employment and price stability). Open market operations on the other hand were viewed as tools of policy because, the Fed had complete controlled over them and hence controlled the money market targets with high degrees of precision.

Of course the Fed cannot control or anticipate the market reaction to Fed talk. Hence, “Fed talk” cannot be used to exercise control over expectations or any other target. The Fed clearly has a mandate to influence economic behavior through altering interest rates or measures of money and credit. At times, it may necessary or advantageous for the Fed to withhold information from the markets. The Fed should not reveal privileged or incomplete information especially if it might lead to an unnecessary market disruption. It is something very different, however, for a central bank in a democracy to manipulate the behavior of households and the economic agents through disingenuous misrepresentations of the effectiveness of past and present policy or the state of the economy. Is it acceptable for other government agencies, e.g. the Defense Department, the CIA, the IRS, SEC, CTFC, the FDA, or the EPA to manipulate/spin the truth to pursue a policy path of its own choosing?

Such manipulation, even when effective in altering expectations, does not always produce net benefits. For example, post the recession of 2001and in order to reinforce the recovery, the Fed sought to influence expectations of economic growth, inflation and interest rates by arguing that it had conquered inflation and ushered in the Great Moderation. However to the extent that Fed increased belief in the existence of the Great Moderation, it contributed to economic agents’ willingness to increase leverage and exposure to low quality credit risks. If the Fed had not been successful in convincing those economic agents that the Great Moderation would continue indefinitely, then the crash and the recession would not have been so severe.

On the other hand, if the Fed succeeds in achieving its dual mandate via manipulation of the traditional tools of policy, “Fed talk” will be superfluous as economic and inflationary expectations will be both well behaved. While mutually contradictory presentations of policy such as Bernanke’s 60 Minute appearances are thankfully rare, the Fed continues the pattern of being deliberately disingenuous and opaque through omission as well as official statements.

Accounting Changes to Hide Bailout Losses: Fed GAAP

In the opening paragraphs of the January 6, 2011, Factors Affecting Reserves Balances (H.4.1)the Fed announced an accounting change in carefully crafted Fedspeak. The change in the accounting regime will “result in a more transparent presentation of each Federal Reserve Bank's capital accounts and distribution of residual earnings to the U.S. Treasury.” Translated: As the Fed takes losses on its giant portfolio of RMBS acquired during round one of QE, the bank will decrease remittances to the Treasury, but will not take a capital loss.

Is the Fed’s presentation of its financial statements solely an accounting issue? What led to the change being made now? Does it have implications for policy or our understanding of the Fed’s balance sheet? How does one interpret this change in the absence of any context?

The change reflects the timing of when the Federal Reserve Banks adjust the balance in their surplus account to equate their surplus with their capital paid-in and at the same time also adjust their liability for the distribution of residual earnings to the Treasury. Previously these adjustments were made only at year-end. It is a question of timing. But why now? Because the Fed is about to recognize significant cash losses of some of these assets.

The balance sheet of the Federal Reserve System has recently ballooned in absolute terms as well as relative to paid-in capital of the Federal Reserve Banks. The asset side of the balance sheet also contains significant amounts of long duration debt instruments issued by parties other than the Federal government. This includes positions in mortgage back securities purchased as part of QEI and II and assets acquired as part of financial rescue packages, especially Bear, Stearns & Co.  Many of these positions have substantial unrealized losses.  The Fed is litigating over the performance of some of these assets and is seeking repurchase of securities which have suffered defaults from the issuers and/or their successors.

As a result of (1) the larger balance sheet and the longer duration, lower quality assets held, and (2) the daily accrual of mark-to market gains and losses, the swings in the surplus of the Federal Banks may be significantly larger relative to paid in capital than in the past. The January 6 accounting rule change will permit the impact of losses in the value of assets to be offset on a daily basis by reductions in the Banks liabilities to the Treasury Department. The Fed remits the “seigniorage” or excess earnings from its assets less operating expenses to Treasury. The accounting change will do nothing to the size of the swings, but will stabilize the surplus/capital of the Reserve Banks as is the stated objective in the H.4.1.

However, the change also underscores a key governance issue, namely whether the Fed has the unilateral right absent the consent of Congress to essentially ignore the most basic principles of accounting. Strictly speaking, the Fed should charge the cash losses realized on the RMBS portfolio and other assets against capital, then retain earnings to replenish the capital account. This is a decision for the Board of Directors of the Federal Reserve Bank of New York. The economic effect is the same as is the impact on cash remittances to the Treasury, but the two methods of presentation of the financials and disclosure to the public and Congress are worlds apart. This decision is bad for Fed transparency and reflects a weak corporate governance and internal controls regime inside the central bank. Simply stated, neither the auditors nor the Board of Directors of the FRBNY should have accepted this treatment of realized cash losses.

The accounting rule change also masks the extent to which Fed has changed and entered the realm of executing fiscal as well as monetary policy. Prior to the crisis fiscal policy was designed executed and paid for via decisions made the by the Legislative and Executive branches of government. However, since the crisis started, the Fed unilaterally subsidized JPMorgan's ("JPM"/Q3 2010 Stress Rating: "C") acquisition of Bear Stearns by taking on to the Fed’s balance sheet $29 billion of real estate loans JPM didn’t want.  The shareholders of Bear got $10 per share and the bondholders were paid in full, but now JPM must eat the legacy losses arising from the unliquidated claims against Bear for all manner of securities fraud. 

The Fed took it upon itself to finance the de facto nationalization of American International Group ("AIG") and eventually converted its creditor position into a 79.9% equity ownership interest, which thankfully the Treasury finally properly acquired from the central bank last month.  The Fed's financing roles in the JPM acquisition of Bear and the AIG bailout, in which Fed illegally funded the Treasury’s acquisition of assets without prior Congressional approval, stand in direct contrast to the conservatorships create via legislated appropriations for the packages for Fannie and Freddie, as well as for General Motors ("GM") and Chrysler. The Fed actions with respect to AIG and Bear Stearns were arguably unlawful, but neither Chairman Bernanke, former Treasury Secretary Hank Paulson, nor then-Fed of New York President Timothy Geithner have been truly called to account for this fact. See Greg Kaufman, The Nation, "Geithner's AIG Bailout."

By concealing the losses resulting from these bailouts, the Fed now seems to be engaged in a deliberate attempt to mislead the public regarding the cost of these unauthorized investments in subprime assets.  The Fed in the past held almost exclusively Federal government debt on its balance sheet. This was true for a number of reasons: the depth and liquidity of the Treasury market, a desire to avoid interfering with allocation of private capital, and a need to minimize possible losses. Hence the accounting change cited in the H.4.1, also reflects another aspect of Fed intrusion in to fiscal policy. The Fed has exposed the public purse to the risk of losses--smaller payments from the Fed to Treasury than otherwise would have been made. Losses that will realized should the MBS in the portfolio under-perform relative to the prices that the Fed paid for them. In that event Congress and the President will be faced with either reducing expenditures or running a larger fiscal deficit. This will occur despite the fact that there was no legislative roll in the decision to or the terms and conditions of the Fed participation in the AIG and Bear Stearns bailouts.  The Fed spent taxpayer dollars without the approval of Congress, then fought in the courts to avoid public disclosure of the information.

Other reasons notwithstanding, the announcement of the accounting change was quite disingenuous. Between the devious announcement and attempts to manipulate expectations and perceptions of policy, the Fed has journeyed far from both its legal mandate and the transparent institution that it purports to be. The duplicitous behavior of the central bank in its public communication strategy and financial disclosure only adds to the perception of a lack of accountability and transparency. This perception, in turn, gives the Fed’s opponents in Congress led by Rep. Ron Paul (R-TX) ammunition in their war to repeal the central bank. Chairman Bernanke and his colleagues may still think such an outcome is a remote possibility as the Fed nears its centennial, but it has happened before.

Below is an excerpt from the full text of the veto message to Congress of July 10, 1832 from President Andrew Jackson which effectively terminated the charter of the Second Bank of the United States. Taken from the Yale University Library,this declaration of independence from a government-sponsored central bank by America’s first popularly elected president is among the great libertarian statements in American history.

President Jackson's Veto Message
Regarding the Bank of the United States

WASHINGTON, July 10, 1832.

To the Senate.

The bill "to modify and continue" the act entitled "An act to incorporate the subscribers to the Bank of the United States " was presented to me on the 4th July instant. Having considered it with that solemn regard to the principles of the Constitution which the day was calculated to inspire, and come to the conclusion that it ought not to become a law, I herewith return it to the Senate, in which it originated, with my objections.

A bank of the United States is in many respects convenient for the Government and useful to the people. Entertaining this opinion, and deeply impressed with the belief that some of the powers and privileges possessed by the existing bank are unauthorized by the Constitution, subversive of the rights of the States, and dangerous to the liberties of the people, I felt it my duty at an early period of my Administration to call the attention of Congress to the practicability of organizing an institution combining all its advantages and obviating these objections. I sincerely regret that in the act before me I can perceive none of those modifications of the bank charter which are necessary, in my opinion, to make it compatible with justice, with sound policy, or with the Constitution of our country.

The present corporate body, denominated the president, directors, and company of the Bank of the United States, will have existed at the time this act is intended to take effect twenty years. It enjoys an exclusive privilege of banking under the authority of the General Government, a monopoly of its favor and support, and, as a necessary consequence, almost a monopoly of the foreign and domestic exchange. The powers, privileges, and favors bestowed upon it in the original charter, by increasing the value of the stock far above its par value, operated as a gratuity of many millions to the stockholders.

An apology may be found for the failure to guard against this result in the consideration that the effect of the original act of incorporation could not be certainly foreseen at the time of its passage. The act before me proposes another gratuity to the holders of the same stock, and in many cases to the same men, of at least seven millions more. This donation finds no apology in any uncertainty as to the effect of the act. On all hands it is conceded that its passage will increase at least so or 30 per cent more the market price of the stock, subject to the payment of the annuity of $200,000 per year secured by the act, thus adding in a moment one-fourth to its par value. It is not our own citizens only who are to receive the bounty of our Government. More than eight millions of the stock of this bank are held by foreigners. By this act the American Republic proposes virtually to make them a present of some millions of dollars. For these gratuities to foreigners and to some of our own opulent citizens the act secures no equivalent whatever. They are the certain gains of the present stockholders under the operation of this act, after making full allowance for the payment of the bonus.

Every monopoly and all exclusive privileges are granted at the expense of the public, which ought to receive a fair equivalent. The many millions which this act proposes to bestow on the stockholders of the existing bank must come directly or indirectly out of the earnings of the American people. It is due to them, therefore, if their Government sell monopolies and exclusive privileges, that they should at least exact for them as much as they are worth in open market. The value of the monopoly in this case may be correctly ascertained. The twenty-eight millions of stock would probably be at an advance of 50 per cent, and command in market at least $42,000,000, subject to the payment of the present bonus. The present value of the monopoly, therefore, is $17,000,000, and this the act proposes to sell for three millions, payable in fifteen annual installments of $200,000 each.

It is not conceivable how the present stockholders can have any claim to the special favor of the Government. The present corporation has enjoyed its monopoly during the period stipulated in the original contract. If we must have such a corporation, why should not the Government sell out the whole stock and thus secure to the people the full market value of the privileges granted? Why should not Congress create and sell twenty-eight millions of stock, incorporating the purchasers with all the powers and privileges secured in this act and putting the premium upon the sales into the Treasury?

But this act does not permit competition in the purchase of this monopoly. It seems to be predicated on the erroneous idea that the present stockholders have a prescriptive right not only to the favor but to the bounty of Government. It appears that more than a fourth part of the stock is held by foreigners and the residue is held by a few hundred of our own citizens, chiefly of the richest class. For their benefit does this act exclude the whole American people from competition in the purchase of this monopoly and dispose of it for many millions less than it is worth. This seems the less excusable because some of our citizens not now stockholders petitioned that the door of competition might be opened, and offered to take a charter on terms much more favorable to the Government and country.

But this proposition, although made by men whose aggregate wealth is believed to be equal to all the private stock in the existing bank, has been set aside, and the bounty of our Government is proposed to be again bestowed on the few who have been fortunate enough to secure the stock and at this moment wield the power of the existing institution. I can not perceive the justice or policy of this course. If our Government must sell monopolies, it would seem to be its duty to take nothing less than their full value, and if gratuities must be made once in fifteen or twenty years let them not be bestowed on the subjects of a foreign government nor upon a designated and favored class of men in our own country. It is but justice and good policy, as far as the nature of the case will admit, to confine our favors to our own fellow-citizens, and let each in his turn enjoy an opportunity to profit by our bounty. In the bearings of the act before me upon these points I find ample reasons why it should not become a law.

It has been urged as an argument in favor of rechartering the present bank that the calling in its loans will produce great embarrassment and distress. The time allowed to close its concerns is ample, and if it has been well managed its pressure will be light, and heavy only in case its management has been bad. If, therefore, it shall produce distress, the fault will be its own, and it would furnish a reason against renewing a power which has been so obviously abused. But will there ever be a time when this reason will be less powerful? To acknowledge its force is to admit that the bank ought to be perpetual, and as a consequence the present stockholders and those inheriting their rights as successors be established a privileged order, clothed both with great political power and enjoying immense pecuniary advantages from their connection with the Government.

The modifications of the existing charter proposed by this act are not such, in my view, as make it consistent with the rights of the States or the liberties of the people. The qualification of the right of the bank to hold real estate, the limitation of its power to establish branches, and the power reserved to Congress to forbid the circulation of small notes are restrictions comparatively of little value or importance. All the objectionable principles of the existing corporation, and most of its odious features, are retained without alleviation.

The fourth section provides " that the notes or bills of the said corporation, although the same be, on the faces thereof, respectively made payable at one place only, shall nevertheless be received by the said corporation at the bank or at any of the offices of discount and deposit thereof if tendered in liquidation or payment of any balance or balances due to said corporation or to such office of discount and deposit from any other incorporated bank." This provision secures to the State banks a legal privilege in the Bank of the United States which is withheld from all private citizens. If a State bank in Philadelphia owe the Bank of the United States and have notes issued by the St. Louis branch, it can pay the debt with those notes, but if a merchant, mechanic, or other private citizen be in like circumstances he can not by law pay his debt with those notes, but must sell them at a discount or send them to St. Louis to be cashed. This boon conceded to the State banks, though not unjust in itself, is most odious because it does not measure out equal justice to the high and the low, the rich and the poor. To the extent of its practical effect it is a bond of union among the banking establishments of the nation, erecting them into an interest separate from that of the people, and its necessary tendency is to unite the Bank of the United States and the State banks in any measure which may be thought conducive to their common interest.

The ninth section of the act recognizes principles of worse tendency than any provision of the present charter.

It enacts that " the cashier of the bank shall annually report to the Secretary of the Treasury the names of all stockholders who are not resident citizens of the United States, and on the application of the treasurer of any State shall make out and transmit to such treasurer a list of stockholders residing in or citizens of such State, with the amount of stock owned by each." Although this provision, taken in connection with a decision of the Supreme Court, surrenders, by its silence, the right of the States to tax the banking institutions created by this corporation under the name of branches throughout the Union, it is evidently intended to be construed as a concession of their right to tax that portion of the stock which may be held by their own citizens and residents. In this light, if the act becomes a law, it will be understood by the States, who will probably proceed to levy a tax equal to that paid upon the stock of banks incorporated by themselves. In some States that tax is now I per cent, either on the capital or on the shares, and that may be assumed as the amount which all citizen or resident stockholders would be taxed under the operation of this act. As it is only the stock held in the States and not that employed within them which would be subject to taxation, and as the names of foreign stockholders are not to be reported to the treasurers of the States, it is obvious that the stock held by them will be exempt from this burden. Their annual profits will therefore be I per cent more than the citizen stockholders, and as the annual dividends of the bank may be safely estimated at 7 per cent, the stock will be worth 10 or 15 per cent more to foreigners than to citizens of the United States. To appreciate the effects which this state of things will produce, we must take a brief review of the operations and present condition of the Bank of the United States.

By documents submitted to Congress at the present session it appears that on the 1st of January, 1832, of the twenty-eight millions of private stock in the corporation, $8,405,500 were held by foreigners, mostly of Great Britain. The amount of stock held in the nine Western and Southwestern States is $140,200, and in the four Southern States is $5,623,100, and in the Middle and Eastern States is about $13,522,000. The profits of the bank in 1831, as shown in a statement to Congress, were about $3,455,598; of this there accrued in the nine western States about $1,640,048; in the four Southern States about $352,507, and in the Middle and Eastern States about $1,463,041. As little stock is held in the West, it is obvious that the debt of the people in that section to the bank is principally a debt to the Eastern and foreign stockholders; that the interest they pay upon it is carried into the Eastern States and into Europe, and that it is a burden upon their industry and a drain of their currency, which no country can bear without inconvenience and occasional distress. To meet this burden and equalize the exchange operations of the bank, the amount of specie drawn from those States through its branches within the last two years, as shown by its official reports, was about $6,000,000. More than half a million of this amount does not stop in the Eastern States, but passes on to Europe to pay the dividends of the foreign stockholders. In the principle of taxation recognized by this act the Western States find no adequate compensation for this perpetual burden on their industry and drain of their currency. The branch bank at Mobile made last year $95,140, yet under the provisions of this act the State of Alabama can raise no revenue from these profitable operations, because not a share of the stock is held by any of her citizens. Mississippi and Missouri are in the same condition in relation to the branches at Natchez and St. Louis, and such, in a greater or less degree, is the condition of every Western State. The tendency of the plan of taxation which this act proposes will be to place the whole United States in the same relation to foreign countries which the Western States now bear to the Eastern. When by a tax on resident stockholders the stock of this bank is made worth 10 or 15 per cent more to foreigners than to residents, most of it will inevitably leave the country.

Thus will this provision in its practical effect deprive the Eastern as well as the Southern and Western States of the means of raising a revenue from the extension of business and great profits of this institution. It will make the American people debtors to aliens in nearly the whole amount due to this bank, and send across the Atlantic from two to five millions of specie every year to pay the bank dividends.

In another of its bearings this provision is fraught with danger. Of the twenty-five directors of this bank five are chosen by the Government and twenty by the citizen stockholders. From all voice in these elections the foreign stockholders are excluded by the charter. In proportion, therefore, as the stock is transferred to foreign holders the extent of suffrage in the choice of directors is curtailed. Already is almost a third of the stock in foreign hands and not represented in elections. It is constantly passing out of the country, and this act will accelerate its departure. The entire control of the institution would necessarily fall into the hands of a few citizen stockholders, and the ease with which the object would be accomplished would be a temptation to designing men to secure that control in their own hands by monopolizing the remaining stock. There is danger that a president and directors would then be able to elect themselves from year to year, and without responsibility or control manage the whole concerns of the bank during the existence of its charter. It is easy to conceive that great evils to our country and its institutions millet flow from such a concentration of power in the hands of a few men irresponsible to the people.

Is there no danger to our liberty and independence in a bank that in its nature has so little to bind it to our country? The president of the bank has told us that most of the State banks exist by its forbearance. Should its influence become concentered, as it may under the operation of such an act as this, in the hands of a self-elected directory whose interests are identified with those of the foreign stockholders, will there not be cause to tremble for the purity of our elections in peace and for the independence of our country in war? Their power would be great whenever they might choose to exert it; but if this monopoly were regularly renewed every fifteen or twenty years on terms proposed by themselves, they might seldom in peace put forth their strength to influence elections or control the affairs of the nation. But if any private citizen or public functionary should interpose to curtail its powers or prevent a renewal of its privileges, it can not be doubted that he would be made to feel its influence.

Should the stock of the bank principally pass into the hands of the subjects of a foreign country, and we should unfortunately become involved in a war with that country, what would be our condition? Of the course which would be pursued by a bank almost wholly owned by the subjects of a foreign power, and managed by those whose interests, if not affections, would run in the same direction there can be no doubt. All its operations within would be in aid of the hostile fleets and armies without. Controlling our currency, receiving our public moneys, and holding thousands of our citizens in dependence, it would be more formidable and dangerous than the naval and military power of the enemy.

If we must have a bank with private stockholders, every consideration of sound policy and every impulse of American feeling admonishes that it should be purely American. Its stockholders should be composed exclusively of our own citizens, who at least ought to be friendly to our Government and willing to support it in times of difficulty and danger. So abundant is domestic capital that competition in subscribing for the stock of local banks has recently led almost to riots. To a bank exclusively of American stockholders, possessing the powers and privileges granted by this act, subscriptions for $200,000,000 could be readily obtained. Instead of sending abroad the stock of the bank in which the Government must deposit its funds and on which it must rely to sustain its credit in times of emergency, it would rather seem to be expedient to prohibit its sale to aliens under penalty of absolute forfeiture.

It is maintained by the advocates of the bank that its constitutionality in all its features ought to be considered as settled by precedent and by the decision of the Supreme Court. To this conclusion I can not assent. Mere precedent is a dangerous source of authority, and should not be regarded as deciding questions of constitutional power except where the acquiescence of the people and the States can be considered as well settled. So far from this being the case on this subject, an argument against the bank might be based on precedent. One Congress, in 1791, decided in favor of a bank; another, in 1811, decided against it. One Congress, in 1815, decided against a bank; another, in 1816, decided in its favor. Prior to the present Congress, therefore, the precedents drawn from that source were equal. If we resort to the States, the expressions of legislative, judicial, and executive opinions against the bank have been probably to those in its favor as 4 to 1. There is nothing in precedent, therefore, which, if its authority were admitted, ought to weigh in favor of the act before me.

If the opinion of the Supreme Court covered the whole ground of this act, it ought not to control the coordinate authorities of this Government. The Congress, the Executive, and the Court must each for itself be guided by its own opinion of the Constitution. Each public officer who takes an oath to support the Constitution swears that he will support it as he understands it, and not as it is understood by others. It is as much the duty of the House of Representatives, of the Senate, and of the President to decide upon the constitutionality of any bill or resolution which may be presented to them for passage or approval as it is of the supreme judges when it may be brought before them for judicial decision. The opinion of the judges has no more authority over Congress than the opinion of Congress has over the judges, and on that point the President is independent of both. The authority of the Supreme Court must not, therefore, be permitted to control the Congress or the Executive when acting in their legislative capacities, but to have only such influence as the force of their reasoning may deserve.

But in the case relied upon the Supreme Court have not decided that all the features of this corporation are compatible with the Constitution. It is true that the court have said that the law incorporating the bank is a constitutional exercise of power by Congress; but taking into view the whole opinion of the court and the reasoning by which they have come to that conclusion, I understand them to have decided that inasmuch as a bank is an appropriate means for carrying into effect the enumerated powers of the General Government, therefore the law incorporating it is in accordance with that provision of the Constitution which declares that Congress shall have power " to make all laws which shall be necessary and proper for carrying those powers into execution. " Having satisfied themselves that the word "necessary" in the Constitution means needful," "requisite," "essential," "conducive to," and that "a bank" is a convenient, a useful, and essential instrument in the prosecution of the Government's "fiscal operations," they conclude that to "use one must be within the discretion of Congress " and that " the act to incorporate the Bank of the United States is a law made in pursuance of the Constitution;" "but, " say they, "where the law is not prohibited and is really calculated to effect any of the objects intrusted to the Government, to undertake here to inquire into the degree of its necessity would be to pass the line which circumscribes the judicial department and to tread on legislative ground."

The principle here affirmed is that the "degree of its necessity," involving all the details of a banking institution, is a question exclusively for legislative consideration. A bank is constitutional, but it is the province of the Legislature to determine whether this or that particular power, privilege, or exemption is "necessary and proper" to enable the bank to discharge its duties to the Government, and from their decision there is no appeal to the courts of justice. Under the decision of the Supreme Court, therefore, it is the exclusive province of Congress and the President to decide whether the particular features of this act are necessary and proper in order to enable the bank to perform conveniently and efficiently the public duties assigned to it as a fiscal agent, and therefore constitutional, or unnecessary and improper, and therefore unconstitutional.

Without commenting on the general principle affirmed by the Supreme Court, let us examine the details of this act in accordance with the rule of legislative action which they have laid down. It will be found that many of the powers and privileges conferred on it can not be supposed necessary for the purpose for which it is proposed to be created, and are not, therefore, means necessary to attain the end in view, and consequently not justified by the Constitution.

The original act of incorporation, section 2I, enacts "that no other bank shall be established by any future law of the United States during the continuance of the corporation hereby created, for which the faith of the United States is hereby pledged: Provided, Congress may renew existing charters for banks within the District of Columbia not increasing the capital thereof, and may also establish any other bank or banks in said District with capitals not exceeding in the whole $6,000,000 if they shall deem it expedient." This provision is continued in force by the act before me fifteen years from the ad of March, 1836.

If Congress possessed the power to establish one bank, they had power to establish more than one if in their opinion two or more banks had been " necessary " to facilitate the execution of the powers delegated to them in the Constitution. If they possessed the power to establish a second bank, it was a power derived from the Constitution to be exercised from time to time, and at any time when the interests of the country or the emergencies of the Government might make it expedient. It was possessed by one Congress as well as another, and by all Congresses alike, and alike at every session. But the Congress of 1816 have taken it away from their successors for twenty years, and the Congress of 1832 proposes to abolish it for fifteen years more. It can not be "necessary" or "proper" for Congress to barter away or divest themselves of any of the powers-vested in them by the Constitution to be exercised for the public good. It is not " necessary " to the efficiency of the bank, nor is it "proper'' in relation to themselves and their successors. They may properly use the discretion vested in them, but they may not limit the discretion of their successors. This restriction on themselves and grant of a monopoly to the bank is therefore unconstitutional....  

Experience should teach us wisdom. Most of the difficulties our Government now encounters and most of the dangers which impend over our Union have sprung from an abandonment of the legitimate objects of Government by our national legislation, and the adoption of such principles as are embodied in this act. Many of our rich men have not been content with equal protection and equal benefits, but have besought us to make them richer by act of Congress. By attempting to gratify their desires we have in the results of our legislation arrayed section against section, interest against interest, and man against man, in a fearful commotion which threatens to shake the foundations of our Union. It is time to pause in our career to review our principles, and if possible revive that devoted patriotism and spirit of compromise which distinguished the sages of the Revolution and the fathers of our Union. If we can not at once, in justice to interests vested under improvident legislation, make our Government what it ought to be, we can at least take a stand against all new grants of monopolies and exclusive privileges, against any prostitution of our Government to the advancement of the few at the expense of the many, and in favor of compromise and gradual reform in our code of laws and system of political economy.

I have now done my duty to my country. If sustained by my fellow citizens, I shall be grateful and happy; if not, I shall find in the motives which impel me ample grounds for contentment and peace. In the difficulties which surround us and the dangers which threaten our institutions there is cause for neither dismay nor alarm. For relief and deliverance let us firmly rely on that kind Providence which I am sure watches with peculiar care over the destinies of our Republic, and on the intelligence and wisdom of our countrymen. Through His abundant goodness and heir patriotic devotion our liberty and Union will be preserved.

ANDREW JACKSON

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