Vermont’s Pathway Toward Economic Independence

Part 2 of 2

Adrian Kuzminski

The profound implications of Edward Kellogg’s money system, formulated by Kellogg in the mid-19th century, cannot be overstated. There would not only be no controlling central bank in the modern sense, there would be no discretionary central issuance of currency by behind-the-scenes financiers, the government, or anyone else. The banking system would be set on its head. A bottom-up system of capital creation by demand would replace the old top-down system.
Most fundamentally, credit would be made available to the general public at a perpetually fixed, stable, and sustainable 1.1 percent interest rate on good collateral, instead of first being made available selectively to large institutions, who in turn lend it at their discretion to others — all in a usurious spiral benefiting creditors and sophisticated borrowers who can leverage their debts, leaving all others impoverished.

With interest eliminated as a factor in monetary policy, the principle engine of wasteful and compulsive economic growth – the forced repayment of loans in excess of their natural value in production and consumption — would be eliminated. There would be no need to labor frenetically to overcome the interest burden. Economic investment would be possible on the merits of the situation alone, not on a legal obligation or contract to meet an abnormally forced rate of return. A sustainable economics would become possible, for the first time since the pre-industrial age. And, not least, the widespread availability of capital to individuals, unknown since the closing of the Western frontier in America in 1890, would do much to overcome the vast and growing discrepancies of wealth which exist because of usurious interest rates.

Kellogg, it should be clear by now, envisioned a very different kind of money from that with which we are familiar:
“[I]f money were properly instituted and regulated,” he tells us, “there would never be such a thing as a money market. There would be a market for the productions of labor; and these would doubtless vary more or less in their market value or price, but there would be no variation in the market value of money. It is as unreasonable for people to gain great wealth by fluctuations in the market value of money as it would be for them to gain great wealth by fluctuations in the length of the yard.  Money is as much a standard of value as the yard is of length; and deviations in the market value of money are as much a fraud upon the public as deviations in the length, weight and size of other measures. No matter how long this gross wrong has been practiced upon all nations, it is no less an evil; and it has shown itself to be such by the centralization of wealth in every nation, and the poverty of the people whose labor has produced the wealth.”

If creditors are allowed to raise and lower interest rates more or less freely, as they have been for some centuries now with few exceptions, they have it in their power to favor some debtors and punish others, and to maximize their own profit by optimizing interest rates at what the money markets will bear: lower rates to stimulate borrowing and the economy, and higher rates to do the opposite. With no social responsibilities entailed by the decisions of lenders and borrowers, greed and fear are easily unleashed to cloud future estimates, leading to booms and busts, as we are now seeing once more today.
Unlike a central bank, Kellogg’s “Principal Institution” would not lend at interest at all, nor would it lend preferentially to some borrowers rather than others; nor would it have any discretionary power to manage the system, apart from enforcing uniform legal standards. Nor would there be any need for fractional or capital reserve lending. The Principal Institution, in short, would have no control over the money supply. Borrowers would be able to defer payment of the principal indefinitely, as long as they paid the interest:  “[W]henever a mortgagor shall have the means, he can pay off any part of the mortgage, and stop the interest.  But he will never be compelled to pay the principal as long as the interest shall be regularly paid.”

Kellogg, as we have noted, proposes that individuals be allowed to purchase public interest bonds from the branches of the Safety Fund – a system of public credit banks — at 1-percent percent interest, thus providing what he thought in his system would be a safe haven for parking one’s money. On the national level, we would no longer find a central bank in the modern sense. “The Safety Fund,” Kellogg tells us, “may consist of a Principal Institution with Branches,” and “the Principal Institution should issue money only to the Branches . . .”   The issuance of currency only to the branches is what would enable the Principal Institution to monitor local practices and enforce the law; it would also prohibit it from issuing money to anyone else. A branch found in violation of national monetary standards (perhaps by charging illegal interest rates, refusing loans on good collateral, or otherwise defrauding the public) could be deprived of new currency to issue until reorganized on a sound basis. A local federal credit bank issuing too many bad loans, or refusing loans to otherwise credit-worthy citizens, would presumably be subject to legal penalties, including closure and reorganization. Without such a provision, we would have an unregulated system of anarchic banking. The national monetary standards, in addition, would determine for the Safety Fund uniform rules of credit-worthiness, rules of local public management, and other technical matters.

In Kellogg’s words: “It is not intended that the Safety Fund and its Branches shall be made offices of discount and deposit. If they should be made such, they would more than double the amount of their loans; but the increase of loans would not augment the amount of money. They would lend the money left on deposit, and thus increase their income, as banks now lend their deposits and gain the interest.”

When he says that public credit banks should not be made offices of discount and deposit, he is telling us that they ought not to be in the traditional banking business of making loans on deposit at all, much less on the basis of fractional or capital reserve banking. Kellogg fears much harm not only in the prospect of reserve banking, but of any loans on deposits at all. For this reason he rules out making deposits at public credit banks, and recommends that those who wish to park their money do so by buying Safety Fund bonds at 1 percent. He does not address the need (not so much felt in his day) for simple, demand deposit accounts, in place of the inconvenience of buying bonds, and perhaps Safety Fund branches today could be open after all to such deposits, provided no loans were made on them and that they were simply kept for the safe-keeping of the depositors.
Kellogg’s 1.1-percent loans would put capital into people’s pockets and encourage, he thought, a personal productivity hitherto unknown. In his words:  “In the United States, if interest were reduced to one, or to one and one-tenth per cent., useful productions would probably increase from twenty-five to fifty per cent. The wealth, instead of being accumulated in a few hands, would be distributed among producers. A large proportion of the labor employed in building up cities would be expended in cultivating and beautifying the country.  Internal improvements would be made to an extent, and in a perfection unexampled in the history of nations. Agriculture, manufactures, and the arts would flourish in every part of the country. Those who are now non-producers would naturally become producers. The production would be owned by those who performed the labor, because the standard of distribution would nearly conform to the natural rights of man.”

And further, he adds: “The per centage income upon capital can only be paid with the proceeds of labor; therefore this reduction of the per centage income would be equivalent to the distribution of several hundred millions of dollars among the producing classes, according to the labor performed. The effect of so large an annual distribution among this class would be to diffuse, in a few years, competence and happiness where now exist only poverty and misery.”

The new prosperity envisioned by Kellogg is not a function of usurious economic “growth,” but rather of the “distribution” of capital widely among the population. The increase in “useful productions” follows from this wide distribution of capital; with capital concentrated in a few hands the same magnitude of production might occur, but only to the benefit of  a few, and thus not useful to the many.

Usury vs. democracy

Kellogg’s model of a decentralized but democratically regulated monetary system is worth pondering not only for financial and economic reasons, but for political ones as well. Democracy is necessarily a decentralized, face-to-face affair, and it cannot be successful unless its citizens personally enjoy relative economic independence in a relatively decentralized economy. Only then can they come together as equals in a free community. Providing capital directly to the people will, over time, reduce economic inequality. Most citizens today, by contrast, are economic dependents, having been forced into debt peonage by usurious interest rates for most of the basics of life (education, housing, transportation, etc.). Not being free economic agents, they cannot oppose the harsh and destructive economic system which oppresses them, nor the policies of those who control it. A key step in making possible greater political freedom is the realization that a decentralized, self-regulating, non-usurious monetary system of the sort outlined by Kellogg and advocated in part by Greenbackers, Populists, the Social Credit movement, and others since the 19th century, can provide the basis for widely distributing and conserving wealth, making possible a more sustainable and fulfilling way of life.

One may be tempted to dismiss Kellogg’s ideas as remote, even utopian. Kellogg was no idle dreamer, however, but a practical man who made his own way in the world; he was raised on a farm, largely self-educated, and successful in business. He took the long view and refused to conclude that the practical unlikelihood of ideas otherwise compelling was a fatal disqualification.
Let me give him the last word: “It may be admitted that the theory of the Safety Fund is good, but impracticable at present; it is calculated for some future generation, when men shall have become more intelligent and virtuous.  If the same faith shall be held by the generations which are to follow us, it will be difficult to point out at what period this desirable reformation will occur, because the evil of our present system will always be in the present, and the good of the plan proposed in the future.
“We are, however, persuaded that a large majority of the people are aware that their present depressed condition may and should be exchanged for something better, and the safety Fund will be regarded by them as neither too Utopian nor visionary to be made immediately operative for their benefit.  All the objections to the proposed currency, upon the ground that it will lessen the incomes of capitalists who are supported by the labor of others, only serve to show the true working of the Safety Fund system; for its object is to furnish a standard of distribution which will cause men to sustain such mutually just relations as to render it generally necessary for all to render an equivalent in useful labor for the labor received from others.”

If Vermont Were Sovereign

If Vermont were a sovereign state in control of its own destiny and currency, it would be free to establish a national system such as Kellogg’s. Such a system would guarantee access by all Vermonters with collateral to capital – that is, credit – on a nominal interest basis. It would create a Vermont currency, facilitate a sustainable economy, and avoid the compulsion to “grow” economically that arises out of the need to repay usurious debts. It would provide not only a medium of exchange, but a responsible way of incurring needed debt for large-scale projects not otherwise fundable — schools and roads and hospitals on the institutional level, and home ownership, education, and similar needs on a personal level.

It is important to understand that local currencies, such as BerkShares or Ithaca Hours, popular among many decentralists and valuable and popular experiments as they are, lack the key ingredient of a mature currency: being made available before rather than after the production of goods and services. They function as a medium of exchange but, not being available in advance of production, they have inadequate capacity as vehicles of future investment. They can only reflect past production, and so are of little help in financing projects we cannot fund out of current cash-flows. They are not a solution to the money question. If local currencies as we know them were the only money available, local economies would be starved for capital and gradually contract.

Kellogg’s monetary system avoids this fatal flaw. Our privatized, usurious financial system, which leads to debt peonage for most, remains for all its faults a mature system in the sense that it provides credit ahead of production. Kellogg’s system does the same, but without the burden of usury.

As long as Vermont remains part of the United States under the current Constitution, however, it is prohibited by Article 1, Sections 8 and 10 from issuing its own currency. There may be a way to get around this. A state-owned public bank could be established, along side the private banks. Operating in U.S. dollars, it would have to depart from some of Kellogg’s principles, though not his all-important 1.1-percent fixed interest rate. It could accept deposits from the state government (tax revenues) and from private individuals and institutions. A precedent is the state-owned Bank of North Dakota  — the only one in the United States. On the basis of its deposits and other capital, such a bank could lend to citizens of Vermont at something like Kellogg’s 1.1-percent rate. If it used fractional reserve banking on the collateral for its loans, it could lend out amounts considerably beyond the value of the collateral pledged to it. Kellogg disapproved of fractional reserve banking, but it might be necessary for a state bank in competition with private banks. It could also offer depositors a 1-percent rate of interest on their deposits.

The Federal Reserve notes being used would remain subject to inflation beyond the control of Vermont. The Bank of Vermont might have to calculate its rates (1.1 percent on loans and 1 percent on deposits) in terms of inflation-adjusted dollars. In the event of deflation, a similar calculation could be made. With a conservative collateral-reserve ratio, and perhaps other assets, along with a careful assessment of loan worthiness, this State Bank of Vermont could provide low-interest capital to citizens while ensuring a rate on deposits adequate to protect their value, especially from deflationary pressures. This in itself – breaking the monopoly on credit by private usurious lenders — might be sufficient to establish a non-usurious financial system.

But serious challenges would remain. Vermonters would still have the regular usurious financial system available to them. Some borrowers would be willing to take greater risks in hopes of greater gains through usurious loans, beyond what they could get on collateral through public loans. And some might borrow from the state bank, but leverage the borrowed money through the private banking system. Deposits, after all, would earn more interest in private banks. It would be unfortunate if a low-interest public bank ended up subsidizing the usurious private banking system.

If Vermont can’t abolish usury implicitly simply by breaking the private monopoly of usurious finance, it could still do so by explicitly outlawing usury within its borders. Such action appears not to be precluded in the prohibitions on the powers of the states listed in Article 1, Section 10 of the Constitution; and Article X of the Bill of Rights suggests it is in the power of the states: “The powers not delegated to the United States by the Constitution, nor prohibited by it to the states, are reserved to the states respectively, or the people.”

If usury were abolished by law in Vermont, depositors and investors would still have the option of going outside the state, and no doubt many would. But Vermont investors free to get usurious terms outside the state would bring that income back into Vermont, spending at least some of it at home. Vermonters would be, like the Israelites of the Old Testament, free in this approach to accept usurious income from outside, but prohibited from charging it of one another.  Under these conditions, if no other banks or institutions or anyone else in the state could offer interest inside the state at more than the same low, fixed rate of 1.1 percent, a significant, statewide, usury-free zone would be created, perhaps one sufficient to foster a viable low-interest, public credit economy, particularly among local producers.

The implications of abolishing usury are far-reaching, and there will be unintended consequences and important details to consider beyond the scope of this essay, but here is a path very much worth exploring. By abolishing usury, Vermont would take a powerful step toward exercising its sovereignty within constitutional bounds. It may not be political secession, but it may well be something just as important: economic secession.

Adrian Kuzminski, a research scholar at Hartwick College, is the author of Fixing the System:  A History of Populism, Ancient & Modern.  He can be reached at

Comments are closed.