National Banks. DECEMBER TERM, 1869. The First National Bank of Louis- In error to the ville, plaintiff in error, court of appeals of the State of Kentucky. The Commonwealth of Kentucky. States are as supreme as before they entered into | On the Right of the State Governments to Tax the Union, and are entitled to the unrestrained exercise of them. The question as to the taxation of the powers and faculties belonging to governments is not new in this court. The bonds of the federal Government have been held to be exempt from State taxation. Why? Because they were issued under the power in the Constitution to borrow money, and the tax would be a tax upon this power; and, as there can be no limitation to the extent of the tax, the power to borrow might be destroyed. So, in the instance of the United States notes or legal tenders, as they are called, issued under a constructive power to issue bills of credit, as no express power is given in the Constitution, they are exempt from State taxation for a like reason as in the case of Government bonds; and we learn The suit is brought, according to the practice from the opinion of the court in this case that of the courts of that State, by a petition, setting one step further is taken, and that is, that the forth the amount of the tax, and claiming a judg notes of the national banks are to be regarded ment for the same. The answer, by the same as bills of credit, issued indirectly by the Gov-mode of practice, sets up four distinct defenses to ernment; and it follows of course from this the action. These are: that the banks used as instruments to issue and put in circulation these notes are also exempt. We are not complaining of this. Our purpose is to show how important it is to the proper protection of the reserved rights of the States that these powers and prerogatives should be exempt from federal taxation, and how fatal to their existence if permitted. And also that, even if this tax could be regarded as one upon property, still, under the decisions above referred to, it would be a tax upon the powers and faculties of the States to create these banks, and therefore unconstitutional. It is true that the present decision strikes only at the power to create banks, but no person can fail to see that the principle involved affects the power to create any other description of corporations, such as railroads, turnpikes, manufacturing companies, and others. This is an action brought by the State of Kentucky in her own courts against the First National Bank of Louisville to recover the amount of a tax of fifty cents per share on the shares of its stock. The case resulted in a judgment in favor of the commonwealth in the court of appeals, to which this writ of error is prosecuted. 1. That defendant is not organized under the law of the State, but under the bank act of the Jnited States, and is not, therefore, subject to State taxation. 2. That it has been selected and is acting as a depositary and financial agent of the Government of the United States, and, therefore, is not liable to any tax whatever, either on the bank, its capital, or its shares. 3. That its entire capital is invested in securities of the Government of the United States, and that its shares of stock represent but an interest in said securities, and therefore are not subject to State taxation. 4. That the shares of the stock are the property of the individual shareholders, and that the bank cannot be made responsible for a tax levied on those shares, and cannot be compelled to collect and pay such tax to the State. This taxation of the powers and faculties of In the several recent decisions concerning the the State governments, which are essential to taxation of the shares of the national banks, as their sovereignty and to the efficient and inde- regulated by sections forty and forty-one of the pendent management and administration of their act of Congress of June 3, 1864, (13 U. S. Stats., internal affairs, is for the first time advanced as 111,) it has been established as the law governan attribute of federal authority. It finds no ing this court that the property or interest of a support or countenance in the early history of stockholder in an incorporated bank, commonly the government or in the opinions of the illus-called a share, the shares in their aggregate totaltrious statesmen who founded it. These states-ity being called sometimes the capital stock of men scrupulously abstained from any encroachment upon the reserved rights of the States, and within these limits sustained and supported them as sovereign States. We say nothing as to the purpose of this heavy tax of some sixteen per centum upon the banks, ten of which we cannot but regard as imposed upon the power of the States to create them; indeed the purpose is scarcely concealed in the opinion of the court, namely, to encourage the national banks. It is sufficient to add, that the burden of the tax, while it has encouraged these banks, has proved fatal to those of the States; and, if we are at liberty to judge of the purpose of an action from the consequences that have followed it, it is not, perhaps, going too far to say that these consequences were intended. [I am instructed to say that Mr. Justice Davis concurs in this opinion.] the bank, is a different thing from the moneyed capital of the bank, held and owned by the corporation. This capital may consist of cash, or of bills and notes discounted, or of real estate combined with these. The whole of it may be invested in bonds of the Government, or in bonds of the States, or in bonds and mortgages. In whatever it may be invested it is owned by the bank as a corporate entity, and not by the stockholders. A tax upon this capital is a tax upon the bank, and we have held that when that capital was invested in the securities of the Government it could not be taxed, nor could the corporation be taxed as the owner of such secu rities. On the other hand, we have held that the shareholders or stockholders, by which is mean t the same thing, may be taxed by the States on stock or shares so held by them, although all the capital of the bank be invested in federal securities, provided the taxation does not violate the rule prescribed by the act of 1864. It is not intended here to enter again into the argument by which this distinction is maintained, but to give a clear statement of the propositions that we have decided, that we may apply them to the case before us. If, then, the tax for which the State of Kentucky recovered judgment in this case is a tax upon the shares of the stock of the bank, and is not a tax upon the capital of the bank owned by the corporation, the first, second, and third grounds of defence must fail. There are, then, but two questions to be considered in the case before us: 1. Does the law of Kentucky, under which this tax is claimed, impose a tax upon the shares of the bank, or upon the capital of the bank, which is all invested in Government bonds? 2. If it is found to be a tax on the shares, can the bank be compelled to pay the tax thus levied on the shares by the State? The revenue law of Kentucky imposes a tax "on bank stock, or stock in any moneyed corporation of loan and discount, of fifty cents on each share thereof, equal to one hundred dollars of stock therein, owned by individuals, corporations, or societies." anything else than a tax on these shares. It has been the practice of many of the States for a long time to require of its corporations thus to pay the tax levied on their shareholders. It is the common, if not the only, mode of doing this in all the New England States, and in several of them the portion of this tax which should properly go as the shareholders' contribution to local or municipal taxation is thus collected by the State of the bank and paid over to the local municipal authorities. In the case of shareholders not residing in the State, it is the only mode in which the State can reach their shares for taxation. We are therefore of opinion that the law of Kentucky is a tax upon the share of the stockholder. If the State cannot require of the bank to pay the tax on the shares of its stock it must be be cause the Constitution of the United States or some act of Congress forbids it. There is certainly no express provision of the Constitution on the subject. But it is argued that the banks, being instrumentalities of the federal Government, by which some of its important operations are conducted, cannot be subjected to such State legislation. It is certainly true that the bank of the United States and its capital were held to be exempt We entertain no doubt that this provision was from State taxation on the ground here stated, intended to tax the shares of the stockholders, and this principle, laid down in the case of Mcand that if no other provision had been made Culloch vs. The State of Maryland, has been rethe amount of the tax would have been prima-peatedly reaffirmed by the court. But the docrily collectible of the individual or corporation owning such shares, in the same manner that other taxes are collected from individuals. It is clear that it is the shares owned or held by individuals in the banking corporation which are to be taxed, and the measure of the tax is fifty cents per share of one hundred dollars. These shares may, in the market, be worth a great deal more or a great deal less than their par or nominal value, as its capital may have been increased or diminished by gains or losses, but the tax is the same in each case. This shows that it is the share which is intended to be taxed, and not the cash or other actual capital of the bank. It is said that there may be, or that there really are, banks in Kentucky whose stock is not divided into shares of $100 each, but into shares of $50 or other amounts, and that this shows that the legislature did not intend a tax of fifty cents on the share, but a tax on the capital. trine has its foundation in the proposition that the right of taxation may be so used in such cases as to destroy the instrumentalities by which the Government proposes to effect its lawful purposes in the States, and it certainly cannot be maintained that banks or other corporations or instrumentalities of the Government are to be wholly withdrawn from the operation of State legislation. The most important agents of the federal Government are its officers, but no one will contend that when a man becomes an officer of the Government he ceases to be subject to the laws of the State. The principle we are discussing has its limitation, a limitation growing out of the necessity on which the principle itself is founded. That limitation is, that the agencies of the federal Government are only exempted from State legislation so far as that legislation may interfere with or impair their efficiency in performing the functions by which they are de But the argument is of little weight. What the legislature intended to say was, that we im-signed to serve that Government. pose a tax on the shares held by individuals or other corporations in banks in this State. The tax shall be at the rate of fifty cents per share of stock equal to $100. If the shares are only equal to $50, it will be twenty-five cents on each of such shares. If they are equal to $500, it will be $2 50 per share. The rate is regulated so as to be equal to fifty cents on each share of $100. But it is strongly urged that it is to be deemed a tax on the capital of the bank, because the law requires the officers of the bank to pay this tax on the shares of its stockholders. Whether the State has the right to do this we will presently consider; but the fact that it has attempted to do it does not prove that the tax is Any other rule would convert a principle founded alone in the necessity of securing to the Government of the United States the means of exercising its legitimate powers into an unauthorized and unjustifiable invasion of the rights of the States. The salary of a federal officer may not be taxed; he may be exempted from any personal service which interferes with the discharge of his official duties, because those exemptions are essential to enable him to perform those duties. But he is subject to all the laws of the State which affect his family or social relations or his property, and he is liable to punishment for crime, though that punishment be imprisonment or death. So of the banks. They are subject to the laws of the State, and are governed in their daily course of business far more by the laws of the State than of the nation. All their contracts are governed and construed by State laws. Their acquisition and transfer of property, their right to collect their debts, and their liability to be sued for debts, are all based on State law. It is only when the State law incapacitates the banks from discharging their duties to the Government that it becomes unconstitutional. We do not see the remotest probability of this in their being required to pay the tax which their stockholders owe to the State for the shares of their capital stock, when the law of the federal Government authorizes the tax. If the State of Kentucky had a claim against a stockholder of the bank who was a non-resident of the State it could undoubtedly collect the claim by legal proceeding, in which the bank could be attached or garnished, and made to pay the debt out of the means of its shareholder under its control. This is, in effect, what the law of Kentucky does in regard to the tax of the State on the bank shares. It is no greater interference with the functions of the bank than any other legal proceeding to which its business operations may subject it, and it in no manner hinders it from performing all the duties of financial agent of the Government. A very nice criticism of the proviso to the forty-first section of the national-bank act, which permits the States to tax the shares of such banks, is made to us, to show that the tax must be collected of the shareholder directly, and that the mode we have been considering is by implication forbidden. But we are of opinion that while Congress intended to limit State taxation to the shares of the bank as distinguished | from its capital, and to provide against a dis crimination in taxing such bank shares unfavorable to them, as compared with the shares of other corporations and with other moneyed capital, it did not intend to prescribe to the States the mode in which the tax should be collected. The mode under consideration is the one which Congress itself has adopted in collecting its tax on dividends and on the income arising from bonds of corporations. It is the only mode which, certainly and without loss, secures the payment of the tax on all the shares, resident or non-resident, and, as we have already stated, it is the mode which experience has justified in the New England States as the most convenient and proper in regard to the numerous wealthy corporations of those States. It is not to be readily inferred, therefore, that Congress intended to prohibit this mode of collecting a tax which they expressly permitted the States to levy. It is said here in argument that the tax is void, because it is greater than the tax laid by the State of Kentucky on other moneyed capital in that State. This proposition is not raised among the very distinct and separate grounds of defence set up by the bank in the pleading. Nor is there any reason to suppose that it was ever called to the attention of the court of appeals, whose judgment we are reviewing. We have so often of late decided that when a case is brought before us by writ of error to a State court that we can only consider such alleged errors as are involved in the record and actually received the consideration of the State court, that it is only necessary to state the proposition now. As the question thus sought to be raised here was not raised in the court of appeals of Kentucky, we cannot consider it. The judgment of that court is affirmed. LII. PRESIDENT GRANT'S FIRST ANNUAL AND SPECIAL MESSAGES AND PROCLAMATION. President Grant's First Annual Message, DECEMBER 6, 1869. whole, they have been more successful than could have been reasonably anticipated. Seven States which passed ordinances of secesTo the Senate and House of Representatives: sion have been fully restored to their places in In coming before you for the first time as Chief the Union. The eighth, Georgia, held an elecMagistrate of this great nation, it is with grati- tion at which she ratified her constitution, repubtude to the Giver of all good for the many bene-lican in form, elected a governor, members of fits we enjoy: we are blessed with peace at home, Congress, a State legislature, and all other officers and are without entangling alliances abroad to required. The governor was duly installed and forebode trouble; with a territory unsurpassed the legislature met and performed all the acts in fertility, of an area equal to the abundant sup- then required of them by the reconstruction acts port of five hundred millions of people, and of Congress. Subsequently, however, in violaabounding in every variety of useful mineral in tion of the constitution which they had just ratiquantity sufficient to supply the world for gene-fied, (as since decided by the supreme court of rations; with exuberant crops; with a variety of climate adapted to the production of every species of earth's riches, and suited to the habits, tastes, and requirements of every living thing; with a population of forty millions of free people, all speaking one language; with facilities for every mortal to acquire an education; with institutions closing to none the avenues to fame or any blessing of fortune that may be coveted; with freedom of the pulpit, the press, and the school; with a revenue flowing into the national treasury beyond the requirements of the Government. Happily, harmony is being rapidly restored within our own borders. Manufactures hitherto unknown in our country are springing up in all sections, producing a degree of national independence unequaled by that of any other power. These blessings and countless others are intrusted to your care and mine for safe-keeping, for the brief period of our tenure of office. In a short time we must, each of us, return to the ranks of the people who have conferred upon us our honors, and account to them for our stewardship. I earnestly desire that neither you nor I may be condemned by a free and enlightened constituency, nor by our own consciences. the State,) they unseated the colored members of the legislature and admitted to seats some members who are disqualified by the third clause of the XIVth amendment to the Constitution, an article which they themselves had contributed to ratify. Under these circumstances, I would submit to you whether it would not be wise, without delay, to enact a law authorizing the governor of Georgia to convene the members originally elected to the legislature, requiring each member to take the oath prescribed by the reconstruction acts, and none to be admitted who are ineligible under the third clause of the XIVth amendment. The freedmen, under the protection which they have received, are making rapid progress in learning, and no complaints are heard of lack of industry on their part where they receive fair remuneration for their labor. The means provided for paying the interest on the public debt, with all other expenses of government, are more than ample. The loss of our commerce is the only result of the late rebellion which has not received sufficient attention from you. To this subject I call your earnest attention. I will not now suggest plans by which this object may be effected, but will, if necessary, make it the subject of a special message during the session of Congress. Emerging from a rebellion of gigantic magnitude, aided as it was by the sympathies and as- At the March term, Congress by joint resolusistance of nations with which we were at peace, tion authorized the Executive to order elections eleven States of the Union were four years ago in the States of Virginia, Mississippi, and Texas, left without legal State governments. A national to submit to them the constitutions which each debt had been contracted; American commerce had previously, in convention, framed, and subwas almost driven from the seas; the industry of mit the constitutions, either entire or in separate one-half of the country had been taken from the parts, to be voted upon at the discretion of the control of the capitalist and placed where all Executive. Under this authority elections were labor rightfully belongs in the keeping of the called. In Virginia the election took place on laborer. The work of restoring State govern- the 6th of July, 1869. The governor and lieuments loyal to the Union, of protecting and fos-tenant governor elected have been installed. tering free labor, and providing means for paying The legislature met and did all required by this the interest on the public debt, has received am-resolution and by all the reconstruction acts of ple attention from Congress. Although your Congress, and abstained from all doubtful authorefforts have not met with the success in all partic-ity. I recommend that her senators and reprelars that might have been desired, yet, on the sentatives be promptly admitted to their seats, and that the State be fully restored to its place in the family of States. Elections were called in Mississippi and Texas, to commence on the 30th of November, 1869, and to last two days in Mississippi and four days in Texas. The elections have taken place, but the result is not known. It is to be hoped that the acts of the legislatures of these States when they meet will be such as to receive your approval and thus close the work of reconstruction. Among the evils growing out of the rebellion, and not yet referred to, is that of an irredeemable currency. It is an evil which I hope will receive your most earnest attention. It is a duty, and one of the highest duties, of government to secure to the citizen a medium of exchange of fixed, unvarying value. This implies a return to a specie basis, and no substitute for it can be devised. It should be commenced now and reached at the earliest practicable moment consistent with a fair regard to the interests of the debtor class. Immediate resumption, if practicable, would not be desirable. It would compel the debtor class to pay, beyond their contracts, the premium on gold at the date of their purchase, and would bring bankruptcy and ruin to thousands. Fluctuation, however, in the paper value of the measure of all values (gold) is detrimental to the interests of trade. It makes the man of business an involuntary gambler, for, in all sales where future payment is to be made, both parties speculate as to what will be the value of the currency to be paid and received. I earnestly recommend to you, then, such legislation as will insure a gradual return to specie payments and put an immediate stop to fluctuations in the value of currency. accomplish this it may be necessary to authorize the interest to be paid at either of three or four of the money-centers of Europe, or by any assistant treasurer of the United States, at the option of the holder of the bond. I suggest this subject for the consideration of Congress, and also, simultaneously with this, the propriety of redeeming our currency, as before suggested, at its market value at the time the law goes into effect, increasing the rate at which currency shall be bought and sold from day to day or week to week, at the same rate of interest as Government pays upon its bonds. The subjects of tariff and internal taxation will necessarily receive your attention. The revenues of the country are greater than the requirements, and may with safety be reduced But, as the funding of the debt in a four or a four-and a-half per cent. Ioan would reduce annual current expenses largely, thus, after funding, justifying a greater reduction of taxation than would be now expedient, I suggest postponement of this question until the next meeting of Congress. It may be advisable to modify taxation and tariff in instances where unjust or burdensome discriminations are made by the present laws; but a general revision of the laws regulating this subject I recommend the postponement of for the present. I also suggest the renewal of the tax on incomes, but at a reduced rate, say of three per cent., and this tax to expire in three years. With the funding of the national debt, as here suggested, I feel safe in saying that taxes and the revenue from imports may be reduced safely from sixty to eighty millions per annum at once, and may be still further reduced from year to year, as the resources of the country are devel The methods to secure the former of these re-oped. sults are as numerous as are the speculators on political economy. To secure the latter I see but one way, and that is, to authorize the treasury to redeem its own paper, at a fixed price, whenever presented, and to withhold from circulation all currency so redeemed until sold again for gold. The vast resources of the nation, both developed and undeveloped, ought to make our credit the best on earth. With a less burden of taxation than the citizen has endured for six years past, the entire public debt could be paid in ten years. But it is not desirable that the people should be taxed to pay it in that time. Year by year the ability to pay increases in a rapid ratio. But the burden of interest ought to be reduced as rapidly as can be done without the violation of contract. The public debt is represented in great part by bonds, having from five to twenty and from ten to forty years to run, bearing interest at the rate of six per cent. and five per cent., respectively. It is optional with the Government to pay these bonds at any period after the expiration of the least time mentioned upon their face. The time has already expired when a great part of them may be taken up, and is rapidly approaching when all may be. It is believed that all which are now due may be replaced by bonds bearing a rate of interest not exceeding four-and-a-half per cent., and as rapidly as the remainder become due that they may be replaced in the same way. To The report of the Secretary of the Treasury shows the receipts of the Government for the fiscal year ending June 30, 1869, to be $370,943,747, and the expenditures, including interest, bounties, &c., to be $321,490,597. The estimates for the ensuing year are more favorable to the Government, and will no doubt show a much larger decrease of the public debt. The receipts in the Treasury, beyond expenditures, have exceeded the amount necessary to place to the credit of the sinking fund as provided by law. To lock up the surplus in the Treasury and withhold it from circulation would lead to such a contraction of the currency as to cripple trade and seriously affect the prosperity of the country. Under these circumstances the Secretary of the Treasury and myself heartily concurred in the propriety of using all the surplus currency in the Treasury in the purchase of government bonds, thus reducing the interestbearing indebtedness of the country, and of submitting to Congress the question of the disposition to be made of the bonds so purchased. The bonds now held by the Treasury amount to about seventy-five millions, including those belonging to the sinking fund. I recommend that the whole be placed to the credit of the sinking fund. Your attention is respectfully invited to the recommendations of the Secretary of the Treasury for the creation of the office of commissioner of customs revenue, for the increase of salaries to certain classes of officials, the substitution of |