In 1791, the first Bank of the United States was established to serve
as a central bank for the country. It was a place for storing
government funds, collecting taxes, and issuing sound currency. At the
time it was created, the government was in its infancy and there was a
great deal of debate over exactly how much power the national government
should have. Some people, such as Alexander Hamilton, argued for the
supremacy of the national government and a loose interpretation of its
powers, which would include the ability to establish a bank. Others,
such as Thomas Jefferson, advocated states' rights, limited government,
and a stricter interpretation of the national government's powers under
the Constitution and, therefore, no bank. While Jefferson was President,
the Bank's charter was not renewed. After the War of 1812, President
James Madison determined that the country could utilize the services of a
national bank to help fulfill its powers listed in Article I, Section 8, Clause 18 of the Constitution. In response to his suggestion, Congress proposed a Second Bank of the United States in 1816.
President Madison approved the charter and branches were established
throughout the United States. Many states opposed opening branches of
this bank within their boundaries for several reasons. First, the Bank
of the United States competed with their own banks. Second, the states
found many of the managers of the Bank of the United States to be
corrupt. Third, the states felt that the federal government was exerting
too much power over them by attempting to curtail the state practice of
issuing more paper money than they were able to redeem on demand.
One state opposed to the Bank of the United States was Maryland. In
an attempt to drive the Baltimore branch of the Bank of the United
States out of business, the Maryland State Legislature required that all
banks chartered outside of Maryland pay an annual tax of $15,000. There
was a $500 penalty for each violation of this statute. James McCulloch,
cashier of the Baltimore branch of the Bank of the United States,
refused to pay the tax.
The State of Maryland took him to court, arguing that because
Maryland was a sovereign state, it had the authority to tax businesses
within its border, and that because the Bank of the United States was
one such business, it had to pay the tax. Luther Martin, one of the
attorneys for Maryland, reasoned that because the federal government had
the authority to regulate state banks, Maryland could do the same to
federal banks. Besides, he argued, the Constitution does not give
Congress the power to establish a Bank of the United States. McCulloch
was convicted by a Maryland court of violating the tax statute and was
McCulloch appealed the decision to the Maryland Court of Appeals. His
attorneys, who included Daniel Webster, asserted that the establishment
of a national bank was a "necessary and proper" function of the
Congress. Webster stated that many powers of the government are implied
rather than specifically stated in the Constitution. Furthermore, he
argued, Maryland did not have the authority to levy the tax, because
doing so interfered with the workings of the federal government.
After the Maryland Court of Appeals upheld the original decision
against McCulloch, he appealed again. The case was heard by the Supreme
Court of the United States, then headed by Chief Justice John Marshall.
Questions to Consider
What are the advantages for the federal government of establishing a
national bank? Read through Article I, Section 8, Clause 18 of the U.S.
Constitution to determine which functions of Congress might be helped
by such a bank.
Why would states feel threatened by a national bank?
In your opinion, does the United States government have the
authority to establish a national bank? Provide justification for your
answer. You may want to review Article I, Section 8, Clause 18 of the Constitution to see what powers it specifically gives Congress.
If the United States does have authority to establish a bank,
does Maryland have the authority to tax that bank? Why or why not?
Why do you think the Supreme Court of the United States agreed to hear this case? What larger principles were at stake?