----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
............................................