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THOMAS JEFFERSON AND THE FINANCIAL
ARISTOCRACY
Great corporations exist only because they are created and
safeguarded by our institutions; and it is therefore our right and
our duty to see that they work in harmony with these institutions.
—Theodore Roosevelt, State of the Union message,
December 3, 1901
Suspicion of large, powerful banks is as old as the United States, dating
back at least to Thomas Jefferson—author of the Declaration of
Independence, secretary of state under President George Washington, third
president of the United States, and staunch proponent of individual liberty.
Although Jefferson is one of the most revered founders of the republic,
according to conventional wisdom he was not much of an economist.
Jefferson believed in an agrarian society with decentralized institutions and
limited political and economic power. He was deeply suspicious of banks
and criticized them in vitriolic terms, writing, “I sincerely believe, with you,
that banking institutions are more dangerous than standing armies.”
In a
letter to James Madison, Jefferson even suggested, quite seriously, that
anyone who cooperated with a federally chartered bank was guilty of
treason and should be executed.
The United States, however, did not turn out to be a decentralized
agrarian society, in part because finance, commerce, and industry have also
had their supporters throughout American history. Jefferson was opposed by
Alexander Hamilton, Washington’s secretary of the treasury, who favored a

stronger federal government that actively supported economic development.
In particular, Hamilton believed that the government should ensure that
sufficient credit was available to fund economic development and transform
America into a prosperous, entrepreneurial country. This would require the
introduction of modern forms of finance opposed by Jefferson. This tension
between Jefferson and Hamilton has endured to the present day.
Hamilton favored a publicly chartered (though largely privately owned)
bank modeled on the Bank of England, which would manage the federal
government’s money and provide an important source of credit to the
government and the economy. Legislation to create the (First) Bank of the
United States passed Congress easily in 1791. Jefferson lobbied hard for
President Washington to veto it, however, arguing that the power to charter
a bank was not expressly granted to Congress by the Constitution and
therefore remained with the states under the Tenth Amendment (“The
powers not delegated to the United States by the Constitution, nor
prohibited by it to the States, are reserved to the States respectively, or to
the people”).* Washington went so far as to request that James Madison
(principal author of the Constitution and the Bill of Rights) draft a veto, but
he also allowed Hamilton the opportunity to respond. Hamilton’s

fifteenthousand-word memo, largely written at the last minute, convinced
Washington that a federal bank was a “necessary and proper” application of
Congress’s power and responsibility to promote fiscal stability and regulate
trade by supporting the broader commercial system. The president signed
the legislation without allowing Jefferson a rebuttal.
After all the furor and rhetoric, the immediate historical aftermath was
rather dull. The Bank of the United States functioned broadly as advertised
by Hamilton, managing the government’s incoming revenues and outgoing
payments and facilitating payments across an otherwise small-scale and
fragmented financial system.
It won over many supporters, although not
Jefferson and Madison (at least at first), who formed the Democratic

Republican Party to oppose Hamilton’s Federalist Party, in part because of
the Bank of the United States.
When it came to the basic economic issues, Hamilton was right.
Economic development in the early United States depended heavily on the
creation of a well-functioning financial system, as shown by modern
scholars such as Richard Sylla and Peter Rousseau. The United States in
the 1780s “lacked nearly all the elements of a modern financial system,

13 Bankers: The Wall Street Takeover and the Next Financial Meltdown by Simon Johnson and James Kwak