Just Politics
  COMER: Comment on Government not using The Bank of Canada - Sept 7, 2008

Committee on Monetary and Economic Reform: Comment on Government not using The Bank of Canada



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 sponsorship 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 11â�„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which was rescinded by Brian Mulroney and would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 record 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 this in their platforms.


Richard Priestman

Kingston Chapter,

Committee on Monetary and Economic Reform (COMER)


604 Aylmer Crescent, Kingston, K7M 6H1


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