Edward Kellogg
A New Monetary System

Chapter V.
The amount of a currency should be limited only by the wants of business.

It is indispensable to the regulation of the currency that the amount of money should be limited only by the wants of business.  It has been already shown that the value of money is determined by its income, or rate of interest.  This proposition being established, it follows, that if the interest be regularly maintained, the amount of money may be unrestricted without decreasing its value.

The following illustration will show, that no laws against usury can prevent the oppression and evil consequent upon a limited amount of money.  Suppose one hundred thousand persons forming a nation to frame their own government and laws.  They make gold and silver coins the legal currency, and fix the rate of interest at six percent.  Severe penalties are affixed to the exaction of a higher rate, and to the exportation of money from the country.  This nation has in coin $12 to each inhabitant;  probably as much as any people, however wealthy, can keep in active circulation.  The specie in the nation amounts to $1,200,000.  Twenty men become worth $100,000 each, together $2,000,000.  One million is loaned on bond and mortgage and business notes at the legal rate.  When all the money of the nation is in active use, the twenty men determine to call in thirty percent of their loans, and hold the money for a week or a month in order to make a more profitable reinvestment.  This takes out of circulation $300,000, one-fourth of the whole circulating medium, and causes a great scarcity of money.  One-fourth of the debts in the nation lie over unpaid, for all the money was before required to meet contracts.  The twenty men hold only their own money, and no law can, or should compel them to use it.  They do not take more than the legal rate of interest.  Let these men hold their money for six months, until the unpaid debts are mostly collected by suits at law, and the twenty men and other owners of money can buy the property of debtors at less than half its value.  All securities depreciate, and confidence is lost in the value of property, and in the ability of debtors to discharge their obligations.  Yet no money leaves the country, nor is any change made in the rate of interest.  Twelve hundred thousand dollars is an abundance of money for a population of a hundred thousand persons.  If we allow it to pass from one individual to another three times a week, (and money passes much oftener in cities,) the $1,200,000 would pay $3,600,000 of debts every week, and in a year $187,200,000.  Notwithstanding this abundance, these few individuals can easily affect the money market, and greatly increase their wealth by purchasing property at reduced rates, and selling it when the depression ceases.  If the amount of money for each inhabitant were increased to $20, the aggregate amount would be but $2,000,000, and the twenty men would be worth as much as the whole currency of the nation, and could easily keep enough in their own possession to effect the same results.  The government is powerless to prevent these evils, for the amount of money is limited, and a few individuals have the control of it.

In the United States within a few years, in times of scarcity of money, cows were sold at sheriff's sale at from $2 to $5;  good horses at from $3 to $10;  and cultivated lands for a few cents an acre, when they cost their owners nearly as many dollars.  When money became plenty again, these cows, horses, and lands rose to perhaps quite their former price.  No nation should fix upon a standard of value of limited amount.  For a limited amount of money, even at a uniform interest, will enable the owners of money to monopolize the property of the nation.

The State of New York has a population of 3,500,000.  Multiply this by 12, and we have $42,000,000, a much larger sum, doubtless, than is kept in active circulation in our State.  Still, there are probably two men in the State who are worth more than this sum;  and who can, whenever they choose, affect not only the money market of this State, but also that of every State in the Union.  Neither the State government, nor the General Government has power to prevent it, nor to relieve the people.  A comparatively small sum of money must pay all the debts now existing in the country.  It must also pay for the year's crops.  When the crops arrive in market they are no more money than while they were in the hands of the farmers, and if they will not sell for money the debts cannot be paid with them.  Neither labor nor the products of labor are any salvation from a money crisis.  A power is given to money that is totally different from all other powers, and this does not seem to be at all understood.  There is not a particle more natural power in the gold, silver and paper out of which money is made, than there is in iron, tin and wood.  Consequently the power of money is not in its material substance, but in its immaterial legal authority, which constitutes both its power and market value.  The material part of the money only represents the immaterial, and this immaterial power is exerted to an enormous extent where there is nothing in the shape of money to represent it.  Hence this power is woefully oppressive;  it calls for a material substance, and there is no material substance in existence to meet its demands;  and the labor and property must be diminished in their market value so as to conform to the material quantity of the money.  Money has legal authority to crush the value of labor and property, but property and labor have not a particle of legal authority over money.

When a national government has established money as a standard of value, so far as the jurisdiction of the laws extend, the money is clothed with an omnipresent power, such as no other earthly thing possesses.  This omnipresent power of money is used a hundred times more in the entire absence of its material substance than it is when and where the material substance is present.  Manufacturing companies, in this country, mostly send their goods to commission merchants in the city.  These goods are credited to the manufacturers, who draw upon the merchants at such dates and times, and for such amounts as are agreed upon between the parties.  These goods are sold on four, six, eight and ten months' credit to jobbers in the city, who sell them again to merchants in the country, upon perhaps equally long credits.  All these sales are founded upon money, and yet all these agreements are made without any use of the material substance of the money.  The material substance is not necessary in making these sales.  In running accounts at stores, the goods are extended, summed up, and the amount is a balance against the debtor of so much money but not the labor of the debtor nor any product of labor has legal authority to pay this balance.  There is a certain amount of money due, which the creditor can force the debtor to pay, no matter how much the latter may have to sacrifice, of his labor or products in market in order to exchange them for money.  Yet in incurring the indebtedness, not a penny of the material substance of money may have been used.  It is simply the legal authority and power of money which are used in making all these obligations and agreements;  but in order to pay these debts money must be had in its material form.

It is obvious that all agreements for the sale of property and labor are founded upon money, and that no price could be fixed upon any property or labor without first having a standard of value.  When this standard is established, it is not a matter of choice but of necessity that the people use it in all business transactions.  If individuals barter one kind of property for another, they fix a price for each kind of property, and they must use the power of money in order to estimate the value, so that even in a barter, where not a dollar of the material substance of money is present, its power is used;  and the balance may be adjusted by the addition of more property on one side or the substitution of less on the other;  but if a balance be left unsettled, the creditor can compel the debtor to pay it in money.

Again, the banks in the city of New York publish weekly statements of the amount under discount, the amount of specie on hand, of money on deposit, and of banknotes in circulation.  These weekly statements are given under oath of the officers of the banks, and the people suppose there is actually so much money deposited in the banks belonging to depositors.  Now, are these deposits all money ?  If they are, the power of money is not in its material substance, for all the specie and all the banknotes held by the banks would not, in ordinary times, pay even one-half of these deposits as reported.  Then in what does the other half consist?  It consists in a mere balance of accounts;  and if these balances are money, it follows that the power of money is not in its material substance.  But this power has the ability to call for the material substance to satisfy its requirements.  Let the banks in the city of New York curtail their discounts, so that they shall not exceed the actual amount of their specie and the banknotes which they have received from the Comptroller, and it would paralyse the business of the nation, and make a far more ruinous crisis than that of 1837, or the one of 1857.  The property and labor of the country would sink into insignificance before this overwhelming power of money.  The usurers would get almost any price they chose to charge for the use of money, and thus monopolize the great wealth of the nation without even lifting their hands in any productive labor.  Under our present monetary laws the people would be compelled to submit to these extortions;  for the money has the legal power, but property and labor have no legal authority over the money.  The holder of a mortgage for $1,000 on property worth $50,000, if the mortgagor could not pay the money, might buy in the property worth $50,000 for even $100, and enter up a judgment against his debtor for $900.  A debtor placed in these circumstances would doubtless try his best to borrow the $1,000, even if he had to pay one or two percent a day, in order to prevent this great sacrifice of his property, and in the hope that there would be more ease in the money market.  This endowment of money with an immaterial, omnipresent power, which can be, and is, used to any extent without the presence of the material substance, and this immaterial power having the legal right to call for money in its material form to fulfil its requirements and satisfy its demands, when the government has neglected to provide the necessary material substance, is a gross outrage upon the rights of the people.

A certain amount of money is required to fulfil the business engagements of a nation.  If one-fourth of that amount be withheld from circulation, one-fourth of the contracts must remain unpaid.  A high price charged for the remaining three-fourths, will not enable them to supply the place of the absent one-fourth, which is indispensable to the prosperity of business.  No country can be prosperous, while capitalists can cause a scarcity of money.  Their legal right to withdraw: their money from circulation cannot be denied;  but the exercise of this right should not operate to the injury of others.  Some public means must be devised whereby the requisite amount of money for the people may always be supplied, at the legal rate of interest.  No government should make a currency of a material of which it cannot supply a quantity adequate to the wants of the people, for it cannot be necessary to have a representative of value scarce so long as there is an abundance of actual value susceptible of representation.  It will be hereafter shown, that in all sections of the country, a certain part of the actual value of the property may be so represented by money as to supply an abundant, uniform and good currency, and that a rate of interest may be adopted and maintained, which will reward labor and promote the public welfare.