Edward Kellogg
A New Monetary System

Chapter III.
The advantages of the safety fund money over specie.

The following illustrations will show the different effects of a specie and a paper currency upon the prosperity of countries having materials for the formation of either.  Suppose two fertile islands to exist, each containing a silver mine as productive as the average of those now worked.  Two parties, of a hundred thousand settlers each, emigrate to these islands, taking with them implements of husbandry, a stock of cattle, merchandise, tools, etc., and provisions for a year, in procuring which they nearly exhaust their money.  Arrived at their respective destinations, they locate their lands, etc., and each party begins to make exchanges among its members.  The want of money is soon severely felt.  The inhabitants of one island determine to have a metal currency, and accordingly prepare to work their silver mine.  One-fifth of the whole population, i.e., twenty thousand, are men capable of labor.  Three thousand engage in working the mine, and with their families constitute a population of fifteen thousand, who consume the products of others.  Suppose each man to earn or make half a dollar a day;  total in a year four hundred and fifty thousand dollars.  This sum being exchanged by the miners for food, clothing, etc., goes into immediate circulation.  It will require nearly three years to supply the money necessary for their internal exchanges, say $12 for each inhabitant, i.e., $1,200,000;  and during this period money must be very scarce.  The shipment of any specie abroad to pay for goods, will increase the want of money at home.  Suppose the population to increase three percent, that is, three thousand a year, they must continue to mine $36,000 yearly, to maintain the proportion of $12 to each individual.

The inhabitants of the other island determine not to work their silver mine, but to establish a Safety Fund, and lend the paper money as heretofore stated.  All have the opportunity to borrow to one-half the value of their productive land.  This money costs nothing but the comparatively trifling labor of the paper and engraving.  If a surplus be in circulation, its owner can at any time payoff a mortgage to the Fund and stop the interest, or fund the money and receive interest.  The exact amount required will always be in circulation, and the interest being regular, the value of the money will be invariable.  The difference between the labor to mine and coin the silver money, and the labor to make and engrave the paper money, will be a clear saving to the island using the paper money;  and all this difference of labor can be applied to the production of articles for export.  The island using the paper money can export about as great an amount of products as the other island will coin in money.  If the latter island require the products of the former, and exchange coins for them, the former island will use the silver money for manufactures, or for export;  it cannot need them for money.  If the Fund lend at one and one-tenth percent interest, the island will always have an abundance of money at a low and uniform rate, so that every branch of industry can be carried on to the best advantage, and the property will be distributed to those whose labor shall earn it.  But the business and productive industry of the island using coins will be constantly retarded for want of money, and the high and fluctuating rates of interest will inevitably concentrate the wealth in the hands of a few capitalists, and leave the producers in poverty.  The people of the island using the paper currency will be rich, virtuous, and happy, while those using the silver money will be poor, wicked, and miserable, because poverty and avarice will lead to crime.  If the two islands, instead of trading with each other, maintain trade with other nations, it must be obvious that the one using the paper money will have a great advantage over the one using the silver money.

Suppose the same number of emigrants to settle on a third island, and borrow their whole currency of a foreign nation, say $1,000,000 in gold, silver, or paper money, at an interest of eight percent per annum, payable half yearly.  If their imports equal their exports, and they be obliged to issue bonds every six months at eight percent to pay the interest, in fifty-three years the island will become indebted to foreign nations $64,000,000;  $63,000,000 of which will be interest on the $1,000,000 originally borrowed.  The people must lose this amount in consequence of defective legislation.  If the emigrants through their government establish a Safety Fund, and provide their own currency, instead of importing it, they will save the whole interest, besides having great advantages by the abundance of money.

Paper money can be as easily made to exceed coins in value, as coins to exceed paper money, because the value of all money is governed by the percentage interest.  Let the Safety Fund lend paper money, and fund it with Safety Fund Notes bearing six percent;  let it lend coins, and fund them with Safety Fund Notes bearing but four percent, and the paper money will always be the more valuable, and command a premium in exchange for the coins.  The paper money will as certainly command a premium above the coins, as a ground-rent at six percent will command more than one at four percent.  If this nation had a sufficient quantity of specie for a currency, it would still be necessary to have an institution similar to the Safety Fund;  for the interest upon it could only be kept regular by the establishment of an institution to make loans at a uniform rate of interest whenever good security was offered, and to fund the specie whenever it was redundant.

A government may obtain an immense power over the property of the people by furnishing a paper currency at six percent interest.  Suppose our Government to establish a Safety Fund, and make its paper money the only tender in payment of debts.  Let the Safety Fund lend an amount equal to say $15 to each inhabitant for a population of 20,000,000, that is, $300,000,000, and money would become plenty.  This sum lent on double its amount of landed estate, would cover $600,000,000 worth of property.  If the Government should leave the principal outstanding during the regular payment of the interest, it would receive from the interest, after deducting say $1,000,000 for the expenses of the Safety Fund, an annual revenue of $17,000,000.  After a year or two let the Fund refuse to make further loans, and yearly collect its net gain of $17,000,000 for ten years, i.e., $170,000,000, and the whole business of the nation must be transacted with the remaining $130,000,000.  This would cause a great sacrifice of the mortgaged property and greatly depress the price of other lands and products.  In six years more, the Government would collect in $102,000,000 additional interest, thereby reducing the currency to $28,000,000.  The interest for two years more would amount to $34,000,000, but only $28,000,000 could be paid, because the whole amount of money would be exhausted.  By foreclosing its mortgages, the Government could buy the $600,000,000 worth of property for the $6,000,000 which would still be due.  Hence it is evident that the law has power to make paper money control property as effectually as gold and silver coins.