Are Central Banks ‘Necessary & Proper’?

by | Aug 10, 2021

Are Central Banks ‘Necessary & Proper’?

by | Aug 10, 2021

john marshall by henry inman, 1832

Enumerated Constitutional Powers and the First Bank of the United States

Article I, Section I of our Constitution states that “All legislative powers herein granted shall be vested in a Congress of the United States.” In other words, if a legislative power is not enumerated somewhere in the Constitution, the Congress does not have that power.

Most of Congress’ enumerated powers can be found in Article I Section 8 which lists seventeen separate clauses. The power to incorporate a bank cannot be found in the first sixteen clauses of Article I, Section 8. Only Clause 17, the Necessary and Proper Clause, could possibly empower Congress to incorporate a bank.

In the 1790s members of Congress and officers in the executive branch debated about an important Constitutional question: is it necessary and proper for Congress to charter a bank in order to execute its powers to collect taxes, borrow money and regulate commerce?

Unlike the Federal Reserve Bank that exists today, private investors held stock in the first national bank. Was it proper to grant monopolies to such favored individuals? Opponents of the bank feared creating a privileged, monied aristocracy of the type that existed in Europe. These populist concerns created a white-hot political debate, and soon the controversy about the bank’s constitutionality focused on Congress’ power to grant such a monopoly.

Representative James Madison delivered an important speech before Congress. He argued that the power to incorporate a bank was not incidental to any of the enumerated powers. Therefore the power to charter the bank was a “great and important power” that needed to be enumerated in the text of Article I.

In addition, Madison contended it was not necessary to incorporate a bank in order to collect taxes, borrow money, or regulate commerce. He concluded that Congress lacked the power to incorporate the bank.

Despite his dissent, Congress approved the bank, and President Washington asked members of his cabinet for their opinions on it’s constitutionality.

Secretary of State Thomas Jefferson took an even more stringent view of “necessary” than did Madison. Jefferson contended that, “When the Constitution restrained Congress to the necessary means of executing its powers this was limited to those whose means without which the grant of power would be nugatory…Because its goals can be accomplished in other ways, it was not necessary to charter a bank.”

Alexander Hamilton, the Treasury secretary who first proposed the idea of a national bank, strongly rejected Jefferson’s strict reading of “necessary.” Instead he defined necessary as “needful, requisite, incidental, useful or conducive.” In other words, if it is useful for Congress to charter a bank in order to collect taxes or borrow money, then Congress has the power to do so.

But while Hamilton rejected any test of constitutionality that rested on the degree in which its measure is necessary, he did not go so far as to say that Congress had the discretion to adopt any means that in its sole judgement would be convenient. Instead Hamilton offered the following test:

The relation between the measure and the end; between the nature of the means employed toward the execution of a power, and the object of that power must be the criterion of Constitutionality.

Today we would call this “means” and “scrutiny.”

President Washington, split in agreement with Hamilton and Jefferson’s interpretations, deferred to Congress. In 1791 he signed the bill into law, chartering the first bank of the United States

would either agree with Hamilton’s constitutional interpretation or he agreed with Jefferson that, because the decision was a close one, he should defer to Congress; because in 1791 he signed the bill onto law chartering the First Bank of the United States which would remain in business for two decades.

The Second Bank of the United States

After its lapse in 1811, Congress chartered a Second Bank of the United States five years later.

That the bill was signed into law by President James Madison has given rise to the question of whether he had changed his mind about the meaning of the Necessary and Proper Clause from what he originally articulated as a congressman. In private correspondence Madison defended the consistency of his approach by contending it was proper of him to defer to the judgement of several Congresses on the question of whether the bank was truly necessary to execute its powers, especially given what he said was the bank’s almost necessity.

But the bank soon became very unpopular.

In 1818 the Maryland General Assembly imposed a tax on its branch of the Bank of the United States in Baltimore. The bank’s cashier, James William McCulloch, refused to pay the tax. Maryland sued McCulloch to recover the money. The Maryland Court of Appeals ruled for the state. McCulloch then appealed the case to the Supreme Court, arguing that a state cannot tax a federal institution. However, before the Court could decide if the state tax was constitutional, they had to first decide if Congress had the power to charter the federal bank in the first place.

The debate that had originated a quarter century earlier between Jefferson, Madison, and Hamilton would now be resolved by the Supreme Court in McCulloch v. Maryland. Chief Justice Marshall, writing for the majority, rejected Maryland’s very narrow reading of “necessary.” Though Marshall did not cite Hamilton, the Chief Justice copied several portions of the Treasury Secretary’s opinion on the bank almost verbatim.

The Court’s Opinion

Marshall used Hamilton’s four precise words (“needful, requisite, incidental, useful”) and added a fifth (“convenient”) at several junctures in his opinion, a term that Hamilton did not use as a synonym for necessary. That is, Marshall could be read as saying that Congress could do whatever is convenient in order to execute its other enumerated powers,

Indeed, Marshall described the creation of the bank as a “convenient, useful and essential instrument in the prosecution of fiscal operations and an appropriate mode of executing the powers of government.”

He rejected the notion that it must be an absolute, physical necessity. Marshall put forward the following test, which to this day is relied on by the Supreme Court to determine the scope of Congress’s implied powers:

Let the end be legitimate, let it be within the scope of the Constitution, and all means which are appropriate, which are plainly adapted to that end, which are not prohibited, but consist with the letter and spirit of the Constitution, are constitutional.

Arguably the criterion of means, which are plainly adopted to the ends, includes the sorts of means and scrutiny that had been advocated by Hamilton, but this is not entirely clear.

The bottom line is the Court in McCulloch held that the Necessary and Proper Clause gave Congress a power sufficient to incorporate the bank. As a result, Maryland cannot tax the federal bank because, “The power to tax involves the power to destroy.” Marshall rejected the objection that the Constitution did not specify powers to create a bank on the grounds that such specificity would “partake of the prolixity of the legal code.”

Instead he declared, “We must never forget that it is a Constitution we are expounding,” adding, “Our Constitution is intended to endure for ages to come, and consequently, to be adapted to the varied crises of human affairs.”

In other words, to avoid soon growing outdated, the Constitution speaks in more general terms. Marshall’s opinion in McCulloch became so controversial that he defended it in the editorial pages of two Virginia newspapers in a series of pseudonymous columns. To rebut the charge that the Court had read the Necessary and Proper Clause to authorize “unlimited power of Congress to adopt any means whatsoever,” Marshall highlighted a portion of his opinion that does not always receive attention.

“[S]hould Congress, under the pretext of executing its powers, pass laws for the accomplishment of objects, not entrusted to the government,” then the Court would have to invalidate the law.

Thirteen years later in 1832, President Andrew Jackson vetoed a renewal of the Second National Bank. Unlike Marshall, Jackson found the bank was not necessary to the execution of Congress’ enumerated powers and was therefore unconstitutional.

Necessary and Proper Clause In Its Original Public Meaning

The Congress shall have Power To…make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers, and all other Powers vested by this Constitution in the Government of the United States, or in any Department or Officer thereof. (Article I, § 8, Clause 18)

The delegates to the 1787 Constitutional Convention declared by resolution that Congress should possess power to legislate “in all Cases for the general Interests of the Union, and also in those Cases to which the States are separately incompetent, or in which the Harmony of the United States may be interrupted by the Exercise of individual Legislation.” It was left to the Committee of Detail—a distinguished body consisting of four prominent lawyers (Oliver Ellsworth, Edmund Randolph, John Rutledge, and James Wilson) along with a prominent businessman (Nathaniel Gorham)— to translate that resolution into concrete form. At the Constitutional Convention, the Committee of Detail took the Convention’s resolutions on national legislative authority and particularized them into a series of enumerated congressional powers. This formalized the principle of enumerated powers, under which federal law can govern only as to matters within the terms of some power-granting clause of the Constitution. By including the Necessary and Proper Clause at the conclusion of Article I, Section 8, the Framers set the criteria for laws that, even if they are not within the terms of other grants, serve to make other federal powers effective.

Although modern scholars often express bafflement at the Necessary and Proper Clause, the meaning and purpose of the clause would actually have been clear to an eighteenth-century citizen. The enumeration of congressional powers in Article I, Section 8 is similar to the enumeration of powers that one would find in an eighteenth-century private agency instrument or corporate charter. That is not surprising, as the Founders viewed the Constitution as, in the words of James Iredell, “a great power of attorney,” in which the principals (“We the People”) grant power to official agents (the government). Eighteenth-century agency law understood that grants of power to agents generally carried implied powers in their wake: the enumerated, or principal, granted powers were presumptively accompanied by implied, or incidental, powers that were needed to effectuate the principal powers. As William Blackstone wrote, “[a] subject’s grant shall be construed to include many things, besides what are expressed, if necessary for the operation of the grant.” Agency instruments accordingly often referred to “necessary,” “proper,” or (most restrictively) “necessary and proper” incidental powers of agents. A Committee of Detail composed of lawyers and a businessman would have written, and a public accustomed to serving as or employing agents in a wide range of everyday affairs would have recognized, the Necessary and Proper Clause as a provision clarifying the scope of incidental powers accompanying the grants of enumerated (or principal) congressional powers.

Three Great Purposes

So understood, the Framers crafted the Necessary and Proper Clause to serve three great purposes. The first was to facilitate organization of the government, such as empowering Congress to organize the judicial department and to create executive offices. The second was to help effectuate the other enumerated powers of Congress. The third, and most general, was to define the limits of these implied or incidental powers.

As to the first purpose, the Constitution could not prescribe all points of government organization, so Detail Committee member Edmund Randolph proposed empowering Congress to “organize the government.” James Wilson proposed the “necessary and proper” clause as a substitute, authorizing laws “for carrying into Execution” the “other” federal powers. The committee, and then the Convention, approved. The organizational function of this clause was recognized from the outset. Among Congress’ first acts was establishing executive departments and staffs, determining the number of justices on the Supreme Court, and allocating the judicial power among federal courts. The Supreme Court has acknowledged the Necessary and Proper Clause as the source of Congress’ power to legislate about judicial process and procedure.

As to the second and more significant purpose, the clause also supports laws for carrying into execution “the foregoing Powers,” that is, those specified for the legislature itself in Article I, Section 8. It thus enhances the other powers given to Congress. During the ratification debates, opponents dubbed it the “sweeping clause” and the “general clause,” arguing that it subverted the principle of enumerated powers by giving sweeping general legislative competence to Congress. The Anti-Federalist Brutus, for example, said it “leaves the national legislature at liberty, to do every thing, which in their judgment is best.” Defenders of the Constitution strongly disagreed. At Pennsylvania’s ratification convention, James Wilson, the author of the clause, explained that the words “necessary and proper” are “limited and defined by the following, ‘for carrying into execution the foregoing powers.’ It is saying no more than that the powers we have already particularly given, shall be effectually carried into execution.” It authorizes what is “necessary to render effectual the particular powers that are granted.” Congress thus can make laws about something otherwise outside the enumerated powers, insofar as those laws are “necessary and proper” to effectuate federal policy for something within an enumerated power.

The third purpose has the broadest implications for constitutional law. The Articles of Confederation expressly forbade any inference of incidental powers by specifying that “[e]ach state retains . . . every power, jurisdiction, and right, which is not by this Confederation expressly delegated to the United States, in Congress assembled.” The Constitution contains no such clause, and it is therefore appropriate to find some measure of implied congressional powers. Had the Constitution been silent about implied powers, the ordinary back-ground rules of agency law would have mandated inferring some measure of such powers to effectuate the enumerated powers, but would have left uncertainty about how broadly or narrowly to construe the implied powers. By selecting a relatively restrictive phrase—“necessary and proper,” in the conjunctive—to describe the range of implied congressional powers, the Constitution eliminated that uncertainty by limiting implied powers to those that bear a close relationship to the principal powers.

Accordingly, every law enacted under the Necessary and Proper Clause must meet four requirements: (1) it must be incidental to a principal power; (2) it must be “for carrying into Execution” a principal power; (3) it must be “necessary” for that purpose; and (4) it must be “proper” for that purpose. And, because the clause provides that all such laws “shall be” necessary and proper for executing federal powers, rather than prescribing that such laws “shall be deemed by Congress” to be necessary and proper, these inquiries are all objective, contrary to Brutus’s suggestion of unreviewable congressional discretion.

The Role of the Necessary and Proper Clause in McCulloch

In McCulloch v. Maryland, Chief Justice John Marshall confirmed the original understanding of the clause. He noted that other grants of power by themselves “according to the dictates of reason” would “imply” a “means of execution.” He went on, however, to declare that the Constitution “has not left the right of Congress to employ the necessary means for the execution of the powers conferred on the Government to general reasoning.” For the Chief Justice, the Necessary and Proper Clause makes express a power that otherwise would only have been implied and thus might have been subject to cavil. By implanting the clause among the powers of Congress, the Framers confirmed that Congress may act to make the constitutional plan effective. In his parsing of the words of the clause, he concluded that the Necessary and Proper Clause authorizes laws enacted as means “really calculated to effect any of the objects entrusted to the government.” Arguments for laws that lack this crucial means-to-end characteristic find no support in Marshall’s opinion or in the Necessary and Proper Clause.

While modern case law does not fully reflect the original meaning of the Necessary and Proper Clause, it has moved significantly towards conformance with original meaning in recent years, at least with respect to several of the clause’s requirements. Most notably, the modern Supreme Court has recognized, after a long period of neglect, the requirement that laws under the Necessary and Proper Clause be incidental to a principal power, as Marshall emphasized in McCulloch. The McCulloch case concerned in large measure whether the Necessary and Proper Clause authorized Congress to incorporate a national bank, given that neither the power to create a corporation nor the power to create a bank is among the principal (enumerated) powers of Congress. The Chief Justice devoted the bulk of his opinion to explaining why the power to incorporate a bank was incidental, that is, not as great as a principal power. He said that incorporation was “not, like the power of making war, or levying taxes, or of regulating commerce, a great substantive and independent power, which cannot be implied as incidental to other powers,” but rather “must be considered as a means not less usual, not of higher dignity.” If a power is not incidental—if it is of the same “dignity” or (as founding-era agency lawyers would say) as “worthy” as the principal enumerated powers—then it cannot be implied under the Necessary and Proper Clause, no matter how convenient, useful, or even indispensable it might be to effectuation of a principal power.

This basic idea played a key role nearly two centuries later in Chief Justice John Roberts’ decisive opinion for the Court in National Federation of Independent Business v. Sebelius (2012), in which the Court upheld the Patient Protection and Affordable Care Act (PPACA) provision known as the “individual mandate” to purchase government-approved health insurance under the taxing power but found the mandate unsupportable by either the Commerce Clause or the Necessary and Proper Clause. In explaining why the mandate was not authorized by the Necessary and Proper Clause, Chief Justice Roberts wrote, extensively quoting McCulloch, that the clause “vests Congress with authority to enact provisions ‘incidental to the [enumerated] power’…Although the Clause gives Congress authority to ‘legislate on that vast mass of incidental powers which must be involved in the constitution,’ it does not license the exercise of any ‘great substantive and independent power[s]’ beyond those specifically enumerated.” He concluded that a governmental power to force people to buy a product could not be “‘incidental” to the exercise of the commerce power, but “rather, such a conception of the Necessary and Proper Clause would work a substantial expansion of federal authority.” Accordingly, it is now clear that any power claimed by Congress under the Necessary and Proper Clause must be incidental—meaning that it must not be the sort of power that an ordinary reader would assume must be enumerated as a principal power in order to exist.

In addition to being incidental to a principal power, any law enacted under the Necessary and Proper Clause must be “for carrying into Execution” some other federal power. The Necessary and Proper Clause allows Congress to decide whether, when, and how to legislate “for carrying into Execution” the powers of another branch; but it respects and even reinforces the principle of separation of powers. Unlike Randolph’s authorization to “organize the government”—which the Committee of Detail replaced with Wilson’s more exacting phrase “laws…for carrying into Execution” the powers reposed in another branch—can only mean laws to help effectuate the discretion of that other branch, not laws to control or limit that discretion. It gives Congress no power to instruct or impede another branch in the performance of that branch’s constitutional role. For example, Congress could not, under the guise of this clause, dictate to courts how to decide cases, United States v. Klein (1871), or tell the president whom to prosecute. Of course, when the clause is invoked to effectuate ends within Congress’ own powers, it compounds Congress’ discretion: not only the selection of means, but also the selection of policy ends, rests in Congress’ own discretion.

Incidental laws that carry into execution federal powers must also be “necessary” for that purpose. The requirement of necessity entails some degree of causal connection between the implementing law and the implemented power. The degree of that required causal connection between the means chosen and the particular “end” sought, i.e., the specific enumerated power, has been a contentious issue for more than two centuries. Thomas Jefferson, and the state of Maryland in McCulloch, famously argued that a “necessary” law must be indispensable to the achievement of a permissible governmental end. Alexander Hamilton argued that necessity in this context meant merely that a law “might be conceived to be conducive” to a permissible end. And somewhat less famously, but no less importantly, James Madison trod a middle ground, describing necessity as requiring “a definite connection between means and ends” in which the executory law and the executed power are linked “by some obvious and precise affinity.”

In McCulloch, Chief Justice Marshall upheld the Second Bank of the United States, utilizing the very rationale that Secretary Hamilton, and James Wilson before him, had employed. Marshall rejected Jefferson’s view that the clause limits Congress to “those means without which the grant of power would be nugatory.” That would have precluded Congress from deliberating alternatives, and the Court read the clause instead as vesting “discretion, with respect to the means by which the powers it confers are to be carried into execution.” McCulloch countenanced “any means calculated to produce the end,” giving Congress “the capacity to avail itself of experience, to exercise its reason, and to accommodate its legislation to circumstances.” According to McCulloch, unless otherwise inconsistent “with the letter and spirit of the constitution,” any law that is “appropriate,” “plainly adapted to that end,” and “really calculated to effect any of the objects entrusted to the government” is valid under the Necessary and Proper Clause. For the judiciary “to inquire into the degree of its necessity,” Marshall wrote, “would be…to tread on legislative ground.”

So long as a law promotes an end within the scope of some enumerated power, extraneous objectives do not render it unconstitutional. Indeed, one means might be preferred over others precisely because it advances another objective as well. For example, besides helping Congress effectuate various enumerated powers, a bank could make private loans to augment business capital or to satisfy consumer wants; while these extraneous ends could provide no independent constitutional justification, Hamilton urged them as principal reasons why Congress should incorporate a bank.

Record-keeping and reporting requirements regarding drug transactions, if apt as means to enforce federal taxes on those transactions, are no less valid because crafted for police ends that are not within any enumerated power. Extraneous objectives are constitutionally immaterial; but to invoke the Necessary and Proper Clause, a sufficient link to some enumerated-power end is constitutionally indispensable.

McCulloch remains the classic elucidation of this clause, but it has been elaborated in many other cases, such as in the proceedings concerning the Legal Tender Act of 1862. Congress, in an effort to stabilize commerce and support military efforts during the Civil War, determined that new paper currency must be accepted at face value as legal tender. The Supreme Court, in the Legal Tender Cases (1871), affirmed Congress’ discretion to choose among means it thought conducive to enumerated-power ends. The Court upheld Congress’ choice, even though better means might have been chosen, and though the legal tender clause proved to be of little help. “The degree of the necessity for any Congressional enactment, or the relative degree of its appropriateness, if it have any appropriateness, is for consideration in Congress, not here,” said the Court.

After the Preamble, the very first sentence on the Constitution reads: “All legislative powers herein granted shall be vested in a Congress of the United States…” Therefore, evaluating whether a federal law is constitutional must begin with whether Congress has acted within one the enumerated powers it is granted in the Constitution. Identifying the meaning of an enumerated power, however, is only part of what is required to establish that Congress is or is not acting constitutionally within its delegated powers. We must also reach a conclusion about the meaning of the Necessary and Proper Clause. The meaning we attach to that clause not only determines the scope of congressional power, but determines as well the degree of deference that courts owe a congressional judgment that it is acting within its powers. If you take the view attributed to Marshall that “necessary” means merely convenient or useful, then courts are generally unqualified to second-guess a congressional determination of expediency. On the other hand, if the clause requires (a) a showing of means-ends fit—as per Madison, Jefferson and even Hamilton—together with a showing that (b) the means chosen do not prohibit the rightful exercise of freedom (or violate principles of federalism or separation of powers) and (c) the claim by Congress to be pursuing an enumerated end is not a pretext for pursuing other ends not delegated to it (as per Marshall in McCulloch), then an inquiry into each of these issues is clearly within the competence of courts.

The meaning one attributes to the terms “necessary” and “proper” is, therefore, enormously important because the nature and scope of judicial review turns on which meaning one adopts. The evidence presented in this article should be significant to the many who believe that the answer to this interpretive question turns in whole, or in part, on the original meaning of the Necessary and Proper Clause.

Law school constitutional law courses sometimes treat McCulloch the same way. But with all respect, this approach is the product of historical ignorance. Those who depict McCulloch as a “big government” decision are generally unaware of how the Founders understood the Necessary and Proper Clause and how the bank debates of 1791 focused on the details of incidental powers law. They usually are unaware of critical changes in the English language—such as the fact that when Marshall’s used the words “convenient” and “appropriate” they embodied narrower and tougher standards than they do today. Without that kind of historical perspective, McCulloch is a difficult case to understand. And if you read McCulloch in isolation, you might think Marshall’s rejection of narrow interpretation meant he favored broad interpretation. But as Marshall’s other writings make clear, his standard was fair construction: He believed we should interpret the Constitution as its ratifiers understood it—neither more narrowly nor more broadly.

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