Tuesday, September 9, 2008

How the Canadian Government Creates Debt Slavery

Richard Priestman

Comment September 7, 2008

Politicians avoid issue costing hundreds of billions of dollars

Taxes go up. Services go down. Pot holes get bigger.
Infrastructure deteriorates. Long term planning is postponed.

NOT ONE of the parties in parliament has been
willing to talk about the issue which has cost
Canadian tax payers hundreds of billions of
dollars. There was a lot of noise when the
$100-million sponsorship scandal took place, but
the mother of all scandals – which cost 600 times
as much as the sponsoorship scandal and continues
year after year – has receiived nary a
mention. This scandal is the failure of our
politicians to support use of the Bank of Canada
to finance government debt and the capital costs
of public infrastructure. It costs our
governments at all levels over $60-billion every
year. Journalists don't write about it and
politicians don't talk about it, yet it is one of
the main reasons why we don't have enough money
to pay for health, education, infrastructure and
all the other things we think of as necessary for
our society, why municipalities are almost
swamped with downloads and why property taxes are rising.

If a public capital acquisition (e.g. subway,
sewers, water system etc) costing $100-million
were amortized over 20 years at 6 percent (which
is what a private lender, bank or developer might
charge) the cost would be about $8.5 million per
year. If the facility has a life span of 50
years the payments, using the Bank of Canada,
could be amortized over 50 years and would amount
to $2 million a year plus the cost of
administering the loan ­ less than 11รข�„2 of 1
percent. In this example, financing public
infrastructure with our public bank would reduce
annual payments by about 70 percent.

The Bank of Canada was nationalized by Prime
Minister Mackenzie King in 1938. It helped to
finance WWII and all the enormous development
after the war until the mid 1970s. It did all
this without creating inflation, (inflation rate:
1950, 2.8; 1971, 2.9). One of the tools used to
control inflation was the "statutory reserve"
which was rescinded by Brian Mulroney and would
have to be reinstated. Policy changed as the
western world got caught up in the extreme
free-market ideology promoted during the
1960's. Privatization became the vogue,
including privatization of our money supply, as
government reduced its borrowing from the Bank of
Canada and increased its borrowing from the
private sector. Federal debt increased by 3000%,
from $18-billion in 1974 to $588-billion in 1997,
with huge increases in debt financing. To cope
with these costs the federal government reduced
transfer payments and downloaded programs and
services to the provinces which in turn
downloaded them to the
municipalities. Municipalities have had no
alternative except to raise taxes or cut services or both.

The usual excuse given by government for not
using the Bank as it has been and could be used
is that it would cause inflation – in spite of
the reecord to the contrary. Other possible
reasons (not mentioned by government)

- chartered banks, wealthy financiers
and some pension funds would howl at the loss of
easy guaranteed income from lending to the government;

- the free-market ideology mentioned above;

- central banks, coordinated by the BIS
(Bank for International Settlements) support current policies;

- the fear that if Canada's monetary
policy should veer substantially from the
free-market ideology, world financial interests
would come down hard on Canada, business would be hurt, jobs would be lost.

The fear of repercussions is like a straight
jacket limiting the actions of politicians. To
get out of the free-market straight jacket
requires politicians who recognize both the
problem presented by the way the Bank is
currently used and the strength which would come
from using the Bank as it could and should be
used. Canada has immense natural resources and a
well-educated work force. Through its Bank it
could finance infrastructure renewal, education,
health services, housing and other community
needs. The spin-offs from such activity would
stimulate the private sector and create many
well-paid jobs. The Canadian Labour Congress
should support this use of the Bank because of
the great benefit to Canadian workers.

The authority and power for doing all this comes from the Bank of Canada Act.

Section 18 (c) of the Bank of Canada Act states
that the Bank may buy and sell securities issued
or guaranteed by Canada or any province. This
means that municipal securities could be bought
by the Bank if they were guaranteed.

Section 17 (2) states that the capital (of the
Bank) shall be held by the Minister (of Finance)
on behalf of Her Majesty in right of
Canada. This means that the Bank is wholly owned
by Canada which receives as dividend the net
income earned from interest or otherwise. It
also means that interest paid by the Government
of Canada to the Bank is returned to it as
dividend less the cost of administration (very
minimal). Interest which might be paid to the
Bank by a province or municipality also becomes
part of the government's income. By agreement,
this interest could and should be returned to the
province or municipality less the cost of administration.

Section 14 states that the Minister and the
Governor (of the Bank) shall consult regularly on
monetary policy. If a difference of opinion
should emerge between the Minister and the
Governor concerning monetary policy, the Minister
may give to the Governor a written directive and
the Bank shall comply with that directive. This
means that the Bank is not independent.

There are no international laws that prevent the
Bank from being used to finance public debt or
infrastructure, but international agreements can
have the same effect as law if we do not
challenge them. Examples of such agreements are
those arrived at by the governors of the central
banks of the western nations during their
meetings organized by the Bank for International Settlements.

So, what to do? Vote only for candidates who
agree to support use of the Bank of Canada to
finance public debt and public infrastructure –
even if their parties have not included tthis in their platforms.

Richard Priestman
Kingston Chapter,
Committee on Monetary and Economic Reform (COMER)
604 Aylmer Crescent, Kingston, K7M 6H1

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