Panel 3 Necessary & Proper: Executive Power and the Economy

Kristin Wernig, Managing Editor for Submissions for the Government Law Review

Lincoln & the Birth of a National EconomyDr. Jenny B. Wahl, Professor of Economics, Carleton College

         Dr. Jenny Wahl opened the panel by pointing out that Abraham Lincoln could not have won the civil war and freed the slaves without the crucial step of figuring out how to finance that war.  When Lincoln began his term as President, he inherited a banking system that was in shambles and burdened by high debt.   It was the Civil War which exposed the country’s inability to deal with large scale expenditures and the need for change

        The financial system that existed at the beginning of Lincoln’s presidency had one significant restriction:  one could only spend what money he had on hand.  This type of system, known as a Fractional Reserve Banking system, as it existed at this time, worked “on faith”, meaning that its stability relied on the faith of the creditor that the bank could redeem their notes.  While this system allowed notes to circulate freely, if faith in the bank was lost and many creditors attempted to have their notes redeemed at the same time, the bank could default or go into insolvency.  Lincoln understood the problems with the system as it existed and knew that a change was necessary.  But as the war waged on and promises piled up, the need to fulfill these promises increased as did the need to finance these promises.

          It was the fall of Fort Sumter on April 13, 1861 and the events that followed, that gave Lincoln the opportunity he needed to bring change to the strained banking system.  The creation of greenback money eliminated the need for banks to keep full backing in reserve as with fiat money and the designation of them as legal tender eliminated the need for the various types of currency that had been circulating throughout the nation.  With the creation of a national banking system and the taxing of state bank notes, state banks were forced into the federal banking system, ensuring national implementation.

          The argument ensues, however, about who can take credit for this new national economy.  Many argue that it was Lincoln’s himself who is to be rewarded for this achievement, by his maneuvering of Samuel Chase, then Secretary of the Treasury, and his strong congressional support.  However others disagree and claim that Lincoln’s limited power demands that he alone cannot take all the praise.  Regardless of who is ultimately responsible for the national economy, it is clear that Lincoln was a key factor in this change and the birth of a national economy must inevitably be included as part of Lincoln’s legacy.

 Déjà vu All over Again: Financial Regulation in Times of Crisis – Raymond H. Brescia, Assistant Professor of Law, Albany Law School

         Professor Brescia pointed out that many may be tempted in this current economic crisis to ask “what would Lincoln do?”  While this phrase might sound silly at first, Professor Brescia points out that many of the features of the crisis faced by Lincoln are shared by today’s crisis and can provide lessons that President Obama could use to re-regulate the struggling financial system. 

         The financial panic of 1957 resulted in loss of faith in the financial system just as the current crisis has.  Both resulted from real estate speculation and over-leveraged investing.  In addition, de-regulation during the war, with the federal treasury acting completely separate from the state banks helped lead to the crisis of 1957, just as the excess de-regulation of the financial industry significantly led to today’s crisis.   Another plague of both crises is the mistrust of bank assets.  In 1957, there was no national currency, so an industry arose that placed trust on the notes of individual state banks.  Today, banks refuse to lend to each other, a necessity for the financial system’s functioning, because they are unable to value each other’s assets.  In addition, the need to finance the war required a change to the financial system of Lincoln’s time, as today’s crisis requires a change. 

          The administrative approach that Lincoln used to change the financial system can provide effective strategies that President Obama could implement in his efforts to re-regulate the financial system.  The first key feature of the approach is incrementalism.  Lincoln’s twin goals of a national currency and national banking system were not achieved in one movement, but through four separate pieces of legislation.  In addition, Lincoln’s approach involved what Professor Brescia refers to as the “use of carrots”, by luring state banks to the federal system by taking away their rights to issue national currency if they remained a separate state bank.  Similarly, Lincoln’s “use of stick” was exhibited by taxing state bank notes which ultimately put them out of existence, forcing states to succumb to the federal system.  The final key feature of Lincoln’s approach was his use of “sharp rhetoric” to bring the state banks into the federal system.  For example, Lincoln often likened support of the state banking system to support of the south and the Confederacy, something many did not want to be associated with at the time. 

           Professor Brescia suggests that President Obama should take a lesson from Lincoln and employ the same approach when attempting to re-regulate the financial system.  First, the change must not come all at once, but incrementally, in multiple pieces of legislation to ensure effectiveness.  Obama should continue his “use of carrots” to lure in more support, such as the use of the TARP system and funds.  Additionally, the “use of sticks” expand, in particular using the “too big to fail” idea to make changes that will deter financial institutions from retaining their current structure.  For example, a tax structure should be implemented on those institutions that are “too big to fail” that acts as an insurance fund for the systematic risks that these institutions create.  By identifying those institutions that create this systemic risk and imposing such a tax ensures that the taxpayer do not ultimately become responsible for this risk.

         Indeed, after this discussion it becomes clear that President Obama should be asking “what would Lincoln do?”

 Lincoln & the Patent System – Jeffrey M. Samuels, David L. Brennan Professor of Law, University of Akron School of Law

        One of Lincoln’s lesser known, yet still significant legacy, was his involvement with the patent system.  Not only was he involved in the patent system as an inventor, lecturer, lawyer and as the only President to ever be issued a patent, he also recognized the importance of the patent system to the national economy.

         At an early age, Lincoln showed a great aptitude for mechanical things and inquisitiveness, which continued through his adulthood.  As a litigator, Lincoln was involved in over four thousand law suits, twenty-five of which involved patent infringements or patents in some way.  He also was involved in many cases in agriculture inventions.  The patent case that Lincoln is probably most closely associated with, McCormick v. Manny[1] , is one in which he ultimately made little contribution to the outcome.  Lincoln was invited by Manny’s attorney, Peter H. Watson, to participate in the case as he was well-known and respected in the Chicago courts, where the case was being heard.  While Lincoln was preparing his closing argument, Watson travelled to Pittsburgh where he invited Edwin M. Stanton to make the closing argument in Lincoln’s place.  When the case was moved to Cincinnati, Lincoln learned of the arrangement, and although he was snubbed by the attorneys throughout, he still attended the trial. 

           Lincoln’s understanding of the important role of the patent system to the nation’s economy was manifested in a series of Lectures on Discoveries and Inventions which he gave between 1858 and 1860.  While these lectures did not gain the notoriety that the Gettysburg Address or his Second Inaugural did, they shed light on Lincoln’s views of human nature and economic development.  Lincoln began the lectures by noting thatall creation is a mine, and every man, a miner”, pointing out that the universe is an open field for al man to come up with inventions and discoveries to improve the human condition. 

       Professor Samuels concluded by noting that while much has been written about Lincoln’s life, his involvement with patents has largely been overshadowed by his more well-known achievements. 

[1] McCormick v. Manny, 15 F.Cas. 1314 (N.D. Ill. 1856).

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