[The following applies to Canada; but it compares with the idea behind recent Early Day Motions to our Parliament, proposing an increase in government-created money for spending on public projects. – see for example SustEc 12/2 page 42. – BL]

14:    New Deal for Municipalities

Gordon Coggins and George Crowell

Virtually all ideologues, of any variety, are fearful and insecure, which is why they are drawn to ideologies that promise prefabricated answers for all circumstances. Every society contains such people. But they can exert considerable power only when they control public purse strings.” – Jane Jacobs, Dark Age Ahead (2004)

Two COMER members were recently asked to address the Town Council of the Municipality of Lakeshore in southwestern Ontario on the subject of the Bank of Canada loans to municipalities. The following is the text of their address.

There is no reason why the Bank of Canada cannot make loans to municipalities for major projects.

There are three things you need to know about the Bank of Canada:

1. It is owned by the Government of Canada.

2. It has the sovereign power to create money and lend it; in fact 3-5% of the Canadian money supply is created by the Bank of Canada.

3. There is provision (1938) in the legislation that set up the Bank of Canada to make loans to the Federal government, loans to the Provinces, and loans to the Municipalities. Whether it does so or not, is totally a matter of government policy.

Let us elaborate a little on these three points.

1. The Bank of Canada is one of only three central banks among the rich nations which are owned by their national governments. An earlier private Bank of Canada was nationalized by the Mackenzie King government in 1938. Since then, all 100,000 shares of the Bank are held by the Minister of Finance for the Government of Canada. Further, the Bank of Canada Act, Article 14, provides that the Governor may be dismissed by the government if he does not comply, as James Coyne was by the Diefenbaker government in 1961.

2. Although the Bank of Canada now creates only 3-5% of the Canadian dollar supply, that, too, is a government policy decision. The bulk of the Canadian money supply is now created by the chartered banks. And – something else you need to understand – they do it only by making loans. That is, over 95% of our money supply is created by and loaned to us by the chartered banks, and we pay rent to use it. That has been a government policy decision, implemented bit by bit, over the last 50 years.

The Legislation

3. Article 18c of the Bank of Canada Act, 1938, says the Bank “may buy and sell securities guaranteed by Canada or any province.”

Article 18j says the Bank ‘may make loans to the Government of Canada or the government of any province.”

Accompanying that 1938 Act was Bill 143, called the Municipal Improvements Assistance Act.

That act provided for:

1. Loans to any city, town, incorporated improvement district and even unincorporated districts administered by a province.

2. For such things as the renewal of a municipal waterworks system, a municipal gas plant, a municipal electric light system, or other municipal project.”

There were two provisos:

1. “Provided, however, that the pro¬ject...will be a self-liquidating project”. That means that it will earn money sufficient to pay the loan. Under these terms a sports complex, which was designed to charge for use until the loan was paid off, would qualify, or a sewer line, if it was to be paid for by a levy on the users, and
2. Provided that the government of the Province backs the loan.

That Municipal Improvements Assistance Act has since been rescinded. Its specific details would be obsolete today anyway. But there is no reason that a new Municipal Assistance Act, in some form or other be re-instated, if the government chooses.

The Opportune Time

Now is a very good time to try to get this policy re-instated. The municipalities have been starved for nearly a decade. During the election, at least two of the major parties talked about “a new deal for the cities.” They promised that specified taxes – on gasoline, or on cigarettes, or the GST – could be transferred to municipalities. But direct loans from the Bank of Canada would be “revenue-neutral.” That is, the government would not be giving up any tax revenue. Because the government owns the Bank of Canada, the Bank’s profits are returned to the government. So interest rates for loans to municipalities could be set low enough to cover only the costs of administration, and it would cost the government nothing. That is a very persuasive argument.

The Obstacles

So what are the obstacles to municipalities getting Bank of Canada loans?

There is only one.

Private bankers and their spokes-people always get edgy when anybody breathes the idea of money creation by government. They always respond by warning of the horrors of inflation. So you can be sure that any Finance Minister who wishes to use the Bank of Canada to make loans – even for such a good purpose as building municipal infrastructure – will get a lot of pressure in private from lender lobbyists. And the public – that’s you – will hear a great deal about it being inflationary! Exclamation point.

The real motive for this objection is pretty obvious. If municipalities can borrow cheaply from the Bank of Canada they won’t borrow from the private banks.

Tailoring the Argument

You do need to understand, however, why Bank of Canada loans in such a case are, in fact, not inflationary. If it is merely a substitution of Bank of Canada loans for what would other-wise be private bank loans, the total money supply will remain the same. That is not inflationary. The history of the Bank of Canada supports that.

So what can a municipality do?

1. Remind the party leaders of their pre-election promises. Insist that the government re-establish Bank of Canada loans to municipalities.

2. Do what other municipalities are doing, such as Toronto, Kingston, Squamish, BC. Forward to provincial and federal governments municipal council resolutions urging the practice of Bank of Canada loans for capital projects.

(And, we would add, in your resolution or covering letter be sure to emphasize two things: (1) that such loans will not be inflationary; and (2) that they will be revenue neural for the government.)

The Bank of Canada does have the power under the Act to make loans to municipalities, and, whatever anybody may say, it is totally a government decision whether they can do it or not.

This simple presentation, which is not ideological, apparently made sense to the Lakeshore councillors. They passed a resolution petitioning the federal and provincial governments “to instruct the Bank of Canada to buy securities issued by municipalities to pay for infrastructure and other capital works projects; and to refund to municipalities any interest paid.”

The request is a reasonable one. In the two-thirds of a century since the founders of the Bank of Canada devised this simple, practical mechanism for assisting in a small way the country’s cities and towns, Canada has undergone a vast urban transformation. Reinstatement of the policy of Bank of Canada loans to our revenue-restricted municipalities is now timely and practical. It remains to be seen whether ideology and interest will yield to logic and public need.

Gordon Coggins and George Crowell

–from Economic Reform, August 2004