3: The Pressure Mounts
Our Unasked and Unanswerable Questions
This is an unusual issue [of ER]. It is an attempt to understand why so many unanswered, and indeed, unasked questions are leading the world where it does not choose to go. The most astounding answers are coming out of the woodwork.
We were all shocked by the last US presidential vote recount that placed a candidate with the minority popular vote in the presidency. But didn’t Clinton-Gore do something not dissimilar when the world financial system was saved in stealth by a limited unacknowledged introduction of capital accountancy that responsible accountants and economists had been advocating for generations? Instead, the universities were cleansed of tenured help who advocated the proper keeping of the government’s books at the very time that the groundwork for bigger and better Wall St. scams was being laid. The result: the mega scam of Globalization and Deregulation that has made its contribution to the Iraq adventure. In the present and recent election campaigns on either sides of our border, the two major parties haven’t dared question the mandatory goal of balancing budgets that cannot and should not be balanced.
When are we going to learn the lesson that we cannot come clean only on matters that we choose to come clean on; that it is the issues that we choose not to face on which governments take the fatal turns? And these are kept under wraps because they may lose the political centre for our professional politicians. And the political centre – defined as what will enable parties to pay for prime-time advertising on the boob-tube – is the surest pass to hell.
From the most sophisticated business press, we have chosen a mere handful of suppressed issues that are coming out of the closet with an ominous force that simply will not be denied. Rationed openness, at a time like this, becomes tantamount to betrayal.
July 28, 2004 -City of Kingston
Mayor Harvey Rosen and Council
There is another choice for financing municipal infrastructure other than borrowing at commercial rates or entering into public-private partnerships as suggested in the Whig newspaper report, May 26, but it would require the co-operation of the federal government. For several years municipalities across Canada (including Kingston and Toronto in 2001) adopted resolutions asking the federal government to allow them to get financing from the Bank of Canada.1 Financing public debt through the Bank is not a new idea. The government did this for 35 years – 1939 to 1974 – during which time we fought a war and afterwards built houses, water lines, hospitals, universities, sewer systems, roads and other infrastructure. Except for the war period, debt never grew very large because the government financed part of it through the Bank at very low cost (as low as 0.37%).
Because the federal government owns the Bank of Canada, any interest paid to it comes back to the government as a dividend minus the cost of administration. If municipalities were allowed to borrow from the Bank of Canada they would benefit not only from low rates, but also from a long amortization period which could and should be set at the expected life of a given project.
For example, a sewer costing $50 million with a life expectancy of 50 years would be amortized over 50 years at an average cost of $1.6 million a year including a 1% cost of financing. If funded through a public-private-partnership the cost would depend on the terms of the contract, but would likely be higher than either of the other methods of financing because on top of the cost of money there would be the added cost of profit.
Municipalities have sent their resolutions either directly to the government, as Toronto did, or to the Federation of Canadian Municipalities (FCM), as Kingston did; FCM in turn forwarded them to the federal government. However, the government refuses to return to the way the Bank was used prior to 1974, taking the position that using the Bank of Canada to finance government debt would be inflationary, in spite of 35 years of evidence to the contrary. In fact, inflation only became a serious problem after the government reduced its use of the Bank to finance long term debt. During the ‘50’s inflation averaged 2.4%; during the ‘60’s it averaged 2.5%; during the last half of the ‘70’s the average climbed to 8.9% and peeked in 1981 at 12.4%. Today it is low again. The simplistic view that using the Bank of Canada to finance government debt will cause inflation does not hold water. There are other factors at work.2
The decision to reduce the Bank’s holdings of government securities had other devastating effects. To begin with, because the government was financing long-term debt after 1974 almost entirely through the private sector, its debt ballooned when interest rates went through the roof in 1980 and ‘81 and again in 1989-90, reaching $588 billion in 1997. Interest on this debt amounted to between $40 and $50 billions all during the ‘90’s and is still around $35 billion per year. On top of this is the interest paid by provinces and municipalities amounting to as much as $32 billion a year.
It is because of this interest that there is not enough money for infrastructure – or anything else. It is a deep hole out of which our governments will never climb unless they make use of our national bank by gradually transferring to it at least some of the public debt.
Municipalities have had heavy responsibilities dumped on them as a result of the decision to reduce the use of the Bank for long-term financing, and would be justified in demanding that the government allow them to get financing from the Bank of Canada for capital expenditures. No one is saying that it will be simple, but we have the competence to do it and we should.
There has been enough shilly-shallying, procrastination and disinformation. Municipalities should act now! The financial system is sucking us dry. Kingston could provide leadership through the new group of small city mayors, Municipalities United for a New Deal, headed up by Mayor Rosen. If municipalities do not act in their own interests to get financing through the Bank of Canada, it is quite clear that no one else will do it for them.
We would be pleased to provide more information or come before Council to answer questions if that is your wish.
Richard Priestman, President, Kingston Chapter, Committee on Monetary and Economic Reform
(Inflation averages were provided by Garth Rutherford.)
The Honourable Ralph Goodale
Minister of Finance
Government of Canada
Re: The suggestion that governments borrow funds directly from the Bank of Canada to finance public capital expenditures in Canada.
Dear Mr. Minister:
Thank you for your letter of June 14 replying to my earlier correspondence with the Honourable John Gerretsen, Minister of Municipal Affairs and Housing for the Province of Ontario.
I regret to say that I am deeply disappointed, even shocked by your statement that using the Bank of Canada to finance capital expenditures of Canadian governments would be inflationary, a position which is contradicted by our history. I expected that our Minster of Finance would be better informed. This misinformation is hurting Canadians by supporting a system which is draining $65-billion a year from their pockets in unnecessary interest – money which could be used for much better purposes.
For 35 years, 1939 to 1974, Canada used the Bank to finance a significant portion of its debt, and during that time inflation never got out of control. 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. Mortgages of 25 and even 35 years were obtained, indicating a stable dollar. After 1974, Canada’s use of the Bank to finance long-term debt for public capital expenditures was reduced, yet inflation was severe, increasing from 6.8% in 1978 to 11.4% in 1980. Today it is low again: the simplistic view that using the Bank of Canada to finance government debt will cause inflation does not hold water. There are other factors at work.
The Committee on Monetary and Economic Reform would like to see the Government support use of the Bank as it previously did for 35 years, and encourage provincial and local governments to use it as well. The savings which would ensue could then be used for health, education, infrastructure and other essential needs.
I have attached a letter recently sent to Mayor Harvey Rosen of Kingston, and information prepared by William Krehm of Toronto, Committee on Monetary and Economic Reform.
Richard Priestman, Committee on Monetary and Economic Reform, Kingston
cc: The Honourable Paul Martin, Prime Minister; The Honourable John Gerretsen, Minister of Municipal Affairs and Housing, Province of Ontario; Mayor Harvey Rosen and Council
Note from Richard Priestman: Congratulations to Gordon Coggins and George Crowell for their presentation to the Town Council of the Municipality of Lakeshore. Also to be recognized is Andre Marantette who helped to get them on the agenda by connecting their presentation to his on the Municipal Property Assessment Act (MPAC). If your municipality has not yet passed a resolution in support of using the BoC to finance municipal capital projects, maybe you can help them to do so. Let’s keep the ball rolling.
1. Resolutions passed by Kingston and Toronto:
Kingston, April 3, 2001
(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 pay off current debt;
(ii) to refund to municipalities any interest paid by municipalities to the Bank of Canada;
(B) That 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, to the local M.P. and M.P.P., requesting their support and endorsement.
Toronto – April 23 – May 2, 2001
The Policy and Finance Committee recommends that:
(1) The Federal Minister of Finance, in conjunction with the Province of Ontario, be requested to provide low cost, below prime, long-term loans to municipalities, such as through the Bank of Canada; and
(2) A copy of this request be forwarded to the Federation of Canadian Municipalities and the Association of Municipalities of Ontario.
2. One of the other factors which helped to avoid inflation was the system of statutory reserves by which the government was able to require the commercial banks to put some of their cash in reserves with the Bank, thus reducing the amount of credit they could create and therefore the total amount of credit money in circulation. These reserves were abolished by Brian Mulroney in 1991 and would have to be reinstated.
– from Economic Reform, September 2004