Story Case

The Federal Reserve Act of 1913 established a new banking system in the United States, to be used in combination and co-operation with the existing system of banks. It created a Federal Reserve Board over the whole country, and made twelve districts with a Federal Reserve Bank in each. Each Federal Reserve Bank is an incorporated bank, with many general powers, but its chief function is to hold the greater bulk of the cash reserves for all the national banks in its district, to hold deposits of its member banks, to buy or rediscount from them, when they need cash, the commercial paper which they have bought upon the market, and to issue circulating notes when there is need for currency or means of making payments. The capital of these banks is furnished by the member banks, each one supplying a certain proportion of its own capital. The act makes it compulsory for every national bank to become a member and to contribute its share of the capital. The National Bank of Venetian County refused to pay its share, alleging that the creation of the Federal Reserve Banks was beyond the power of Congress and that the requirement was, therefore, void. The Federal Reserve Board reported to the Comptroller of the Currency, recommending that he revoke the charter of the National Bank of Venetian County. The bank brought a suit in court, seeking to restrain the Comptroller from taking this action, because of the invalidity of the law. Should the bank be compelled to join the Federal Reserve Bank, or should the Comptroller be enjoined from carrying out the provisions of the law?

Ruling Court Case. The State Of Maryland Vs. Mccullough, Volume 4 Wheaton, United States Reports, Page 316

On the tenth day of April, 1816, there was passed by the Congress of the United States, an act entitled "An Act to Incorporate the Subscribers to the Bank of the United States." The president, directors, and company of the Bank of the United States, incorporated by the act above, organized and began business in Philadelphia, Pennsylvania. Thereafter, a branch of this bank was established in Baltimore, Maryland. McCullough was the cashier of this branch, and in pursuance of the authority granted by Congress, began the business of banking in Baltimore.

On the eleventh day of February, 1818, there was passed by the General Assembly of Maryland, an act entitled, "An Act to impose a tax on all banks, or branches thereof, in the state of Maryland, not chartered by the legislature of Maryland." In this law, it was provided that no such bank could do business without paying to the state of Maryland $15,000. It also provided a tax upon every bank note issued, and for failure to comply with the provisions a penalty was provided for each violation. McCullough, as cashier of the branch bank, refused to comply with these requirements. The State of Maryland, thereupon, sued McCullough for the penalties incurred by non-compliance with the laws of Maryland.

It was contended by counsel for the State of Maryland, that Congress was given no power by the Constitution to create a corporation. Therefore, the law in question was unconstitutional and void, and McCullough and others could engage in banking only with permission of the State of Maryland or pay such taxes and penalties as Maryland might impose.

Decision: It is true that the Constitution had in no place conferred upon Congress, in express terms, the power to create any corporation; but this does not mean that Congress does not possess this authority. Certain powers, though not expressly granted, are implied, when these additional powers are reasonably incidental in, and necessary to, the carrying out of those powers which are expressly granted to Congress. Now the Constitution gives Congress express power to levy and collect taxes, to borrow money, to declare and conduct wars. The court was of the opinion that the creation of a banking corporation was reasonably incidental to, and necessary in, carrying out these powers. Such being the case, the Bank of the United States did have a legal existence - an existence which came from the Federal government. This bank was a legal and Constitutional means employed by the United States to execute its Constitutional powers. The state governments have no right or power to tax the Constitutional means employed by the government of the Union. Therefore, these taxes and penalties were illegal, and cannot be collected from McCullough.

Mr. Chief Justice Marshall said: "Although among the enumerated powers of government, we do not find the word 'bank' or 'corporation,' we find the great powers to levy and collect taxes, to borrow money, to regulate commerce, to declare and conduct a war, and to raise and support armies and navies. The sword and the purse, all the external relations, and no inconsiderable portion of the industry of the nation, are intrusted to its government. It can never be pretended that these vast powers draw after them others of inferior importance, merely because they are inferior. Such an idea can never be advanced, but it may with great reason be contended that a government, intrusted with such ample powers, on the due execution of which the happiness and prosperity of the nation so vitally depends, must also be intrusted with ample means for their execution. The power being given, it is the interest of the nation to facilitate its execution. It can never be their interest, and cannot be presumed to have been their intention, to clog and embarrass its execution by withholding the most appropriate means. Throughout this vast republic, from the St. Croix to the Gulf of Mexico, from the Atlantic to the Pacific, revenue is to be collected and expended, armies are to be marched and supported. The exigencies of the nation may require that the treasure raised in the North should be transported to the South, that raised in the East conveyed to the West, or that this order should be reversed. Is that construction of the Constitution to be preferred which would render these operations difficult, hazardous, and expensive? Can we adapt that construction (unless the words imperiously require it) which would impute to the framers of that instrument when granting these powers for the public holding a choice of means? If, indeed, such be the mandate of the Constitution, we have only to obey; but that instrument does not profess to enumerate the means by which the powers it confers may be executed; nor does it prohibit the creation of a corporation, if the existence of such a being be essential to the beneficial exercise of those powers." Judgment was given for McCullough.

Ruling Law. Story Case Answer

The Constitution does not give to Congress the express power to incorporate for any purpose, much less the express power to incorporate a national bank. In 1789, when the present Constitution was adopted, the finances of the nation were in a very pitiable condition. Hamilton, that great genius, as Secretary of Treasury, immediately began reorganizing the financial conditions of the new nation. He proposed that Congress should provide for the incorporation of a United States Bank. His proposal became a law, but not until 1820 was it ever passed upon by the courts. In that year, Chief Justice Marshall pronounced the judgment in the case of McCullougJi vs. Maryland, which upheld the law. He admitted that Congress was given no express power to charter a bank. But it did have express power to levy and collect taxes, and to borrow money; it was also given express power to adopt necessary and proper laws in carrying those powers into effect. Having these express powers, the court decided that the incorporation of a bank was a reasonable and necessary law to carry into effect the power to borrow money, levy and collect taxes.

Although the Bank of the United States, as originally chartered, passed out of existence in 1837, yet the present system of national banks, provided for in 1867, is created under the same reasoning by which the United States Bank was created. They purport to serve the purpose of depositories of United States moneys, but were, in fact, created as a means of selling bonds. The credit of the country was demoralized by the Civil War, but by limiting the issue of circulating notes with a requirement that United States bonds be deposited as security for their redemption, large quantities of the bonds were required by the banks and much money raised for the government.

The new Federal Reserve system is primarily directed at the practical reform of the currency of the country. It has been quite conclusively established that a monetary system will not be efficient unless it automatically responds to the fluctuations of the business situation. This, however, is part of the science, not the law of banking. But the accommodation which the Federal Reserve banks offer to the national banks, and through them to the borrowers of the nation, are the incidental and mechanical channels (though none the less highly desirable) by which the amount of money in circulation is regulated. It furnishes also the means of reducing an inflated circulation, and of properly distributing funds from one part of the country to the other. These functions are clearly proper as a part of the Congressional power over money and the currency, and the court will not question the details where the device as a whole is proper and lawful. Since the system of reserve banks is lawful, the requirement of compulsory subscription by national banks will be enforced. The Comptroller will not be enjoined, but will be allowed to compel the contribution by the National Bank of Venetian County.