Note 203 — Chapter XXII · CURRENCY, BANKING, AND CREDIT

The establishment of this second bank led to the raising of a very important constitutional question. The constitution, as has been said, contains not a word about banks. Hence the power to establish banks might be assumed to remain entirely with the states in view of the rule that powers not delegated to the nation by the constitution, nor prohibited by it to the states, are reserved to the states respectively, or to the people. Congress having gone ahead, however, and established a bank, the State of Maryland proceeded to levy a tax on the bank’s paper money. This tax the cashier of the Baltimore branch of the bank, McCulloch, refused to pay, whereupon he was held liable by the courts of Maryland and appealed to the Supreme Court. The latter tribunal went into the whole issue thoroughly and rendered one of the most important legal decisions ever given in this country.

The decision in McCulloch vs. Maryland was that Congress, having been given by the constitution the express power to collect taxes, to borrow money, and “to make all laws which shall be necessary and proper for carrying into execution the foregoing powers,” was thereby vested with implied authority to establish banks as a means of facilitating the collection of taxes or the borrowing of money. This being so, the Supreme Court decided, no state can be permitted to interfere with an instrumentality through which the national government is legally carrying on its work. They must not interfere by taxation or otherwise. “The power to tax involves the power to destroy,” declared Chief Justice Marshall in rendering this decision. If the states could tax one agency employed by the national government in the execution of its powers, the chief justice explained, they could tax every other one. They could tax the post office, the custom houses, the forts, the ships of war. By taxing these things heavily enough they could cripple the national government and eventually drive it out of existence altogether. The court was unanimous in affirming that Congress had the right to establish banks and that with such action no state could interfere.