----Original Message-----
From: Bob Olsen <bobolsen@interlog.com>
To: act-cuts-ont-l@list.web.ca
Date: Saturday, March 24, 2001 8:08 PM
Subject: Interest-free municipal financing

The Federation of Canadian Minicipalities (FCM) has asked its members  "to submit resolutions on subjects of national municipal interest."

Using the Bank of Canada to finance municipal debt.

March 7-10, National Board of Directors
May 31-June 3  FCM Annual Conference


"Without government creation of money, talk of sovereignty and democracy is futile".
     William Lyon MacKenzie King


Date: Mon, 22 Jan 2001 20:55:46 +0000
Subject: FCM meetings
From: "Richard Priestman" <rdpriest@kingston.net> President, Kingston Chapter, COMER  634-0237


Greetings to COMER members and other interested parties:

You may be aware that the Federation of Canadian Minicipalities (FCM) has asked its members  "to submit resolutions on subjects of national municipal interest for debate either at the March 7-10.. meeting of the National Board of Directors, or at the FCM Annual Conference.....May 31-June 3". 

Getting monetary policy changed so that municipalities could finance their capital projects through the Bank of Canada at nominal interest (enough to cover the cost of administering the loan) fits the criterium of "national municipal interest".   It will be
unfortunate for all of us if municipalities miss this "window of opportunity"   to take action on this national issue.

Municipal governments are struggling to carry the unfunded responsibilities down-loaded on them, and without some form of relief, municipal taxes will climb and/or services will decline.   One way of getting relief is to reduce the amount of tax dollars transferred to banks as interest payments, which could be done by using the Bank of Canada more than we are to finance
government debt (a small, but significant step).

To convince the government to do this will require immense political pressure.  Such pressure could be generated by municipalities working together through their provincial and federal associations.  In view of the heavy burdens downloaded on them they have a very strong incentive to collaborate on this.

COMER members should not let this opportunity pass to get this issue before their local councils and to encourage them to bring it to the FCM meetings. It's a small step on the road to a changed monetary policy, but it is an important one.

Richard Priestman
Kingston Chapter, COMER


For your information:

We have sent the following letter to the Department of Economics and the School of Business, Queens, in the hopes that some of the professors will speak out in support of monetary policy change.  If any do, we will let you know.  In the meantime, feel free to use the ideas in a letter to the university in your own area if you think it might help.

To the Faculties of Economics and Business
Queens University

Monetary Policy, Infrastructure and the Bank of Canada

Municipalities are faced with much heavier responsibilities and debt loads as a result of downloading.   Changes in municipal financing - specifically, using the Bank of Canada to finance municipal capital projects -   could save the people of Kingston millions of dollars a year in local taxes.   The Kingston Chapter of the Committee on Monetary and Economic Reform has spoken to Council twice, has written numerous letters to the newspapers, provided written materials and pamphlets, held public meetings and has regular monthly meetings which are open to anyone interested. 

The ideas we present are dismissed by some and accepted by some, but there are others who, while they see the logic, need assurance from those who have professional credentials that what we are saying is reasonable.  For that reason we are
sending the following information which contains many validating references to the faculties of the School of Business and the Department of Economics at Queens University, asking them to consider whether they could support the view expressed and, if so, to write to Council and/or the newspapers.  

Some may wonder why they should get involved with this question.  The answer is straightforward.  While we don't mind paying taxes for useful services, none of us wants to pay unnecessary taxes for unnecessary expenditures.  Paying interest on capital expenditures falls in the latter category when we realize that a change in monetary policy allowing municipalities to obtain
credit for the financing of public capital projects through the Bank of Canada could save 1/2 to 2/3 of the cost of a project.  Such a saving would facilitate the reconstruction of the community's infrastructure, provide extra funds for services and likely result in lower taxes as well.

As Michael Rowbotham says in his book, The Grip of Death, (p.323),

"There is perhaps one group of people alone who can help monetary reform break through the credibility gap from which it has always suffered. Ironically, these have usually been the very people to denounce the ideas first, and most vehemently.  These are our economists, the majority of whom have viewed monetary reform as pure heresy, since it questions many central tenets of economics as it is traditionally understood, and approaches the whole discipline from a different perspective." 

We hope that you will seriously consider acting on our suggestion.  Please read on.

Richard Priestman,
President, Kingston Chapter, COMER  634-0237


STATEMENT

Background

When Bert Meunier presented his budget to city council in February (1999), he clearly raised the spectre of higher taxes, higher utility costs and reduced services in order to pay the "$468 million dollars to repair and upgrade decaying streets, buildings, pipes and wires".  Amortized over 30 years at 6% the additional cost amounts to $33,670,000 per year for a total
cost of more than $1 billion.  Amortized over 50 years at 6% it comes to $29,563,000 per year for a total cost  of almost $1.5 billion.

However,with a change in monetary policy allowing municipalities to borrow funds through the Bank of Canada at zero or very low interest rates, the final cost would be the same as or much closer to the original.  It is the doubling and tripling of the costs which is pushing our taxes ever higher.

Assuming that 50 years is a reasonable time to depreciate the cost of the new infrastructure, the $468M borrowed through the Bank of Canada would cost as low as $9.4M per year instead of $29.6M, and the total cost would be as low as $468M instead of $1.5 billion.

Inflation

   
Some fear that using the Bank of Canada in this way will cause inflation.  Let's look at the facts.

In 1939, after years of destructive monetary policy in which tens of thousands of people were pauperized and 15 - 20% of the population depended on relief for survival, the government changed monetary policy, expanding the money supply to finance the war.   Suddenly the depression was over; there was full employment. (1)

For the next 30 years, the government borrowed heavily to finance first the war then the reconstruction of roads, water lines and treatment plants, sewers, housing, medicare, education, research and more.  During this time the Bank of Canada held a significant portion of this debt - as much as 25% - paying for it by expanding the money supply.   According to some we should
have experienced record inflation during this period, but we did not. (2)

For example, in 1952 the inflation rate was 2.4%, and while it rose and fell over the years it was never very high, being only 3.2% in 1971 (just before the sudden increase in oil prices).  Mortgages of 25 and even 35 years were obtained, indicating a stable dollar.  Not only was inflation low, but interest rates were too, (except for a short time when James Coyne was Governor of the Bank of Canada) and jobs were plentiful (2).

During the war inflation was kept under control through a variety of means including some, such as rationing, which would not be acceptable in normal times.  After the war it continued to be controlled in spite of the reconstruction mentioned above and in the absence of any price controls.

By the late 1970's and into the 1980's the Bank of Canada (BoC) had changed its policy, reducing the proportion of federal debt it held from the 20 to 30% range in the 1960's to less than 10% in the 1980's, thereby decreasing the amount of (BoC) money in circulation.(3)  If, as argued, increasing the amount of (BoC) money in circulation causes inflation, we would expect that decreasing the amount of (BoC) money in circulation would reduce inflation. Instead, inflation increased from 6.4% in 1978 to 10.4% in 1982 along with a corresponding increase in unemployment (which reached 11.9% in 1983) (4) and a huge jump in the national debt due mainly to compound interest.(5)

Elsewhere the story is similar.  For example, from 1970 to 1994 Germany increased its national debt from 18% to 64% of GDP; Japan increased its national debt from 11% to 75%, and the USA increased its from 28% to 81%.  Yet average inflation in these three countries was among the lowest in the world over that period, being 3% in Germany, 5% in Japan and 5% in the USA.  As well, the annual deficit was consistently in excess of any rise in output.  According to the "too much money chasing too few goods" theory, inflation should have gone through the roof, but it did not.   Furthermore, from 1985 to 1995, the USA national debt increased from $1.5 trillion to $5 trillion, rising from 37% GDP to 81% GDP, yet inflation was only 3%.  In
contrast, the national debt of the UK fell from 77% of GDP in 1970 to 39% of GDP in 1990 while suffering double-digit inflation. (6)

These figures show that there is not a simple relationship between increases in the money supply and inflation, that other factors affect this relationship - some which have the effect of increasing inflation and others which keep it in check.   In any case, borrowing from a private bank or borrowing from a central bank such as the Bank of Canada has the same effect on the money supply.  Private banks create money in the same way the Bank of Canada does - by making an entry in the account of the borrower.(7)   However, borrowing from a private bank has a more serious effect on inflation because interest is added to the cost.

References
(1) The Deficit and Debt Management: An Alternative to Monetarism Harold Chorney, Concordia University   April, 1989
pp. 12 and 17
(2)  Ibid  pp.  40, 42 and 68
(3)  Ibid  p. 40
(4)  Ibid  p. 29
(5) Maclean's, November 20, 2000, p.16
  "Fiscal Management",  Don Peacock, Waterton, Alberta

"The Mimoto analysis of federal spending issued by Statistics Canada in June, 1991, showed that neither inflation nor program spending caused debt to rise. High-interest-rate monetary policy did. High interest rates, it summed up, 'bloated government spending on debt charges in the 1980s.' "

(6)   The Grip of Death: A study of modern money, debt slavery and destructive    economics, 1998 Michael Rowbotham
  p. 299
(7) It's Your Money, 1997  William F. Hixson Chapters 2, 3, 7, 8, 9, 11 and Appendix I A Power Unto Itself: The Bank of Canada,1993  William Krehm  pp. 55-57   The Grip of Death:  pp. 4, 5, 10-15
      
Legal Authority

Does the Bank of Canada have the authority to do this?
The Bank of Canada Act states:

Section 18  The Bank may (c) buy and sell securities issued or guaranteed by Canada or any province; (i) make loans or advances for periods not exceeding six months to the Government of  Canada or the government of any province on the pledge or hypothecation of readily marketable securities issued or guaranteed by Canada or any province;

(j)make loans to the Government of Canada or the government of any province, but such loans  outstanding at any one time shall not, in the case of the Government of Canada, exceed one-third of the estimated revenue of the Government of Canada for its fiscal year, and shall not, in the case of a provincial government, exceed one-fourth of that government's  estimated
revenue for its fiscal year, and such loans shall be repaid before the end of the first quarter after the end of the fiscal year of the government that has contracted the loan;

William Krehm, Chair, Committee on Monetary Policy, explains in a letter to Wanda Liczyk, Chief Financial Officer, City of Toronto on September 28, 2000:

"Section (j) deals with unfunded debt, but though these provisions are important for interim financing of capital projects, more to the point is Section 18 (c) which states that the Bank may 'buy and sell securities issued or guaranteed by Canada or any province'. That provides a means of handling the long-term financing of such (municipal) projects at less than market rates."

Although the Act does not mention municipalities, municipal debt could be (and in fact is) funded by the Bank of Canada if guaranteed by Canada or any province.  Quoting again from the letter to Ms. Liczyk, Mr. Krehm points out that  "BoC figures .... under the heading 'Less Liquid Canadian Dollar Assets -  Provincial/Municipal Securities' "  show that "loans by the Bank
to municipalities and provinces" increased from $2.6B in October, 1989 to $14.9B by February, 1999.

The Bank of Canada would issue a loan in the same manner as any private bank would, by crediting the account of the borrower.

Changing Policy

Since this idea is not Bank of Canada policy now, how could change in policy be brought about?

The answer is both straightforward and very difficult.  It will require immense political pressure to convince the Federal government to do this.  Such pressure could be generated by municipalities working together through their provincial and federal associations.  In view of the heavy burdens downloaded on municipalities they have a very strong incentive to collaborate in this.  Resistance will be extreme, but it will be overcome if there is the political will.  Quoting once more from Krehm's letter to Liczyk,

" What must not be lost sight of is that the senior levels of government -- particularly the federal  government -- are responsible for the extent of the crisis in municipal finances, and must participate in a lasting solution of it."

Some have said it's a good idea, but it won't "fly in Ottawa".  Others have said we'd like to know if it will "fly in Ottawa" before we support it.  We ask you, as impartial observers, to decide whether these ideas are economically sound, and treat the question of political feasibility as a separate but related issue.  Some local politicians have said that although the idea sounds good they do not know enough about the subject and depend on direction from those who are more familiar with it.   That is why they need to hear your opinion.  If municipalities across the country become convinced of the soundness of the proposal and decide to work together to get the policy changed, it will be changed.

The proposal put to Kingston Council on June 27, 2000, but not voted on was as follows:

KINGSTON RESOLUTION

Moved by Councillor Clements
Seconded by Councillor Foster

Whereas the cost of repairing and upgrading the infrastructure of the City of Kingston is substantially over $200 million, and
Whereas financing costs will double or triple the original costs, depending on interest rates and the length of the amortization period, and
Whereas these added costs will constitute a very heavy burden on the
citizens of Kingston, and
Whereas the Bank of Canada Act (Section 18) empowers the Bank of Canada to buy and sell securities "issued or guaranteed by Canada or any province", and
Whereas since Canada is the sole shareholder of the Bank of Canada any interest paid to the Bank by a municipality becomes revenue for the Government of Canada and could and should be returned to the municipalities which paid it, and
Whereas responsibility for setting monetary policy rests with the Governmentof Canada, and
Whereas a collective effort of municipalities across Ontario and Canada is more likely to persuade the Government to instruct the Bank of Canada to provide loans guaranteed by the Government to municipalities,

Therefore be it resolved that

a) the City of Kingston request the Government of Canada
i)  to instruct the Bank of Canada to buy securities issued by municipalities and guaranteed by the Government of Canada to pay for capital projects and/or to pay off current debt;
ii) to refund to municipalities any interest paid by municipalities to the Bank of Canada;

b) a copy of this motion be forwarded to the  Federation of Canadian Municipalities, the Association of Municipalities of Ontario (AMO) for circulation to other municipalities within the Province of Ontario with a population over 50,000, and to the local M.P. and M.P.P. requesting their support and endorsement.

Bank of Canada Independence

If the Bank of Canada did not agree to such a policy change, could the Government force it to do so?

The short answer is "yes".  Diefenbaker did so in 1959 with the result that the Governor of the Bank resigned.  Section 14 (2) of the Bank of Canada Act states:   "If...........there should emerge a difference of opinion between the Minister (of Finance) and the Bank concerning the monetary policy to be followed, the Minister may............give to the Governor a written directive concerning monetary policy........and the Bank shall comply with that directive".  It is a question of political will and what is in the best interests of the people of Canada as a whole.   

Differences between the Bank and the Government have occurred when the Government wanted interest rates lower than what the Governor thought they should be to protect the value of the currency.  However, the Bank's purpose is not just to protect the currency.   The preamble of the Bank of Canada Act describes the purpose of the bank as "to regulate credit and currency in the best interests of the economic life of the nation, to control and protect the external value of the national monetary unit and to mitigate by its influence fluctuations in the general level of production, trade, prices and employment, so far as may be possible within the scope of monetary action, and generally to promote the economic and financial welfare of Canada".  

Money/Credit Creation

How do banks create money/credit?

We know that governments create money by minting coins or printing bills.  The Bank of Canada creates money when it makes an entry in the ledger of the Government of Canada.

To-day, that process has been streamlined  by the use of computers which print a number in the ledger.  Private banks operate in the same way by making entries in the ledgers of those who take out loans.

In 1939 Graham Towers, the Bank of Canada's founding governor, appeared before Parliament's Banking and Commerce Committee to explain, among other things, how the Bank creates the money it uses to buy government bonds.

Extracts from his testimony follow:
"Q:But there is no question about it that banks do create that medium of exchange?
A:That is right.  That is what they are there for....That is banking business, just in the same way that a steel plant makes steel.
Q:Ninety-five per cent of all our volume of business is being done with what we call exchange of bank deposits - that is, simply bookkeeping entries in banks against which people write cheques?
A:I think that is a fair statement.
Q:When the government delivers a $1,000 bond to the bank, what does the bank use to purchase it with?  Is it the creation of additional money?
A:It is the creation of additional money." (1)

Michael Rowbotham describes it as follows:

"Money loaned by a bank is not a loan of pre-existent money; money loaned by a bank is additional money created."

"None of the people with deposit accounts is sent a statement telling them that their money is temporarily unavailable because it has been lent to someone else...,    because it hasn't.  All the original deposits remain in tact because all they consist   of is figures in personal accounts, and a guarantee to honour them." (2)

Referring to a time when banks printed their own bank notes, William Hixson describes money creation :  "Starting with $50,000 in coin there would be nothing wrong in issuing $50,000 in bank-notes.  But to issue more than $50,000 was to create new paper money - was to bring about an increase in the nation's money supply."   "The most notable function of a bank was not receiving deposits and then lending them, but creating money and lending it - printing bank-notes and lending them." (3)  "Whereas....banks made loans by printing and lending bank-notes,........ (today) banks make loans by giving the borrower a slip of paper saying that the amount of the loan had been deposited in the borrower's account.....   Instead of banks now creating money by creating bank-notes,........ they create money by creating bank deposits". (4a);  see also (4b)

(1) A Power Unto Itself: The Bank of Canada,1993  William Krehm  pp. 55-57
(2) The Grip of Death: A study of modern money, debt slavery and destructive    economics 1998  Michael Rowbotham
  pp. 4, 5, 10-15
(3) It's Your Money, 1997  William F. Hixson pp. 37
(4)  a) Ibid  pp. 41-42, 58-59  and Appendix I

"The commonly held view is that bank deposits come into being by people carrying    legal tender to the teller's window and making  deposits, but this is a profound misconception.  The reality is that deposits are Bank-Created Money....."   p.42
        
(4)  b) Modern Money Mechanics:  A Workbook on Bank Reserves and Deposit Expansion 1994 The Federal Reserve Bank of Chicago

"....bankers discovered that they could make loans merely by giving their promises    to pay, or bank notes, to borrowers.  In this way, banks began to create money."

"Transaction deposits are the modern counterpart of bank notes.  It was a small    step from printing bank notes to making book entries crediting deposits of    borrowers, which the borrowers in turn could 'spend' by writing checks, thereby   'printing' their own money." p.3

"...(banks) do not really pay out loans from the money they receive as deposits.   If   they did this, no additional money would be created.  What they do when they make   loans is to accept promissory notes in exchange for credits to the borrowers'   transaction accounts." p.6
 
"Once a nation parts with control of its currency and credit, it matters not who    makes that nation's laws.  Usury, once in control, will wreck any nation. Until  the control of the issue of currency and credit is restored to government and recognized as its most conspicious and sacred responsibility, all talk of the sovereignty of Parliament and of democracy is idle and futile. "

William Lyon MacKenzie King, campaigning to become Prime Minister of Canada in a radio address August 2, 1935.
 
(Short form)
"Without government creation of money, talk of sovereignty and democracy  is futile".


Date: Wed, 14 Feb 2001 20:00:27 +0000
Subject: Federation of Canadian Municipalities Conference
From: "Richard Priestman" <rdpriest@kingston.net>

To COMER Members

You may be aware that the Federation of Canadian Municipalities (FCM) has asked its members  "to submit resolutions on subjects of national municipal interest for debate either at the March 7-10.. meeting of the National Board of Directors, or at the FCM Annual Conference.....May 31-June 3".  This presents a great opportunity to encourage municipal councils to ask the FCM to put the question of BoC financing of municipal capital projects on their agenda.  The following letter is being sent to Kingston councillors.  If it contains ideas which you could use with your own councillors, feel free to plagiarize.  If the question does get on the agenda I hope that COMER will be well represented to speak to it.
Richard

To Councillors, City of Kingston

You are aware that the Federation of Canadian Municipalities (FCM) has asked its members   "to submit resolutions on subjects of national municipal interest for debate either at the March 7-10.. meeting of the National Board of Directors, or at the FCM Annual Conference.....May 31-June 3".  Getting monetary policy changed so that municipalities could finance their capital projects through the Bank of Canada at nominal interest (enough to cover the cost of administering the loan) fits the criterium of "national municipal interest".  It will be unfortunate for all of us if municipalities miss this "window of opportunity"  to take action on this national issue.

Municipal governments are struggling to carry the unfunded responsibilities down-loaded on them, and without some form of relief municipal taxes will climb and/or services will decline.   One way of getting relief is to reduce the amount of tax dollars transferred to banks as interest payments, which could be done by using the Bank of Canada more than we do to finance
government debt.

To convince the government to do this will require immense political pressure.  Such pressure could be generated by municipalities working together through their provincial and federal associations.  In view of the heavy burdens downloaded on them they have a very strong incentive to collaborate on this. A motion by Councillors Clements and Foster in support of collective action by municipalities all across Canada to get monetary policy changed was brought before Council in  June, 2000, but voting on the motion was deferred because the Councillors knew it wouldn't pass. 

Some who wouldn't support it believed that using the Bank of Canada in this way would result in extreme inflation; others could not understand where the Bank would get the money; some say that they don't know enough about the subject and depend on others with more knowledge about it to advise them. 

The record shows that the Canadian Government used the Bank of Canada extensively from 1939 to the early '70's without any more inflation than we have today.  In 1975 the Government decided to use the Bank of Canada less and to borrow more from private banks and other private lenders, with the result that we spend much more on interest.  It is time that policy was
changed so that municipalities could finance their capital projects through the Bank of Canada.  Savings to Kingston taxpayers would amount to millions of dollars every year. 

It can be argued that public bodies like municipalities should have the right to use our public bank (The Bank of Canada) to finance public works, and receive a rebate of the interest paid less the cost of administering their loans, because it makes no sense to borrow privately at commercial rates when the same financing could be obtained at a nominal rate of
interest.

Where would the Bank of Canada get the money to lend?  It would create it in the same way that private banks create money when the Government (or anyone else) borrows from a bank.  This is a hard concept for most people to grasp because we have been told over and over that "you can't just print money", but that is what happens.  A book published by the Federal Reserve Bank of Chicago says it very succinctly:   "They (banks) do not really pay out loans from the money they receive as deposits.  If they did this, no additional money would be created.  What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers' accounts."

Some Councillors may feel uncomfortable with this issue because they don't know enough about it, but there is enough evidence to justify proposing to the FCM that the matter be put on the Conference agenda where it can be fully debated by people with expertise in this field.   We hope that you will not let this opportunity pass to get this issue before the FCM.  Should you have any questions or want more information, please call or write.

Richard Priestman
Kingston Chapter,
Comittee on Monetary and Economic Reform (COMER)
634-0237;  rdpriest@Kingston.net
..........................................
Liberate democracy from corporate control
Bob Olsen, Toronto     bobolsen@interlog.com
   ............................................