3:    The Pressure Mounts

Our Unasked and Unanswerable Questions

William Krehm

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%).

Interest Rates that Gobble  Up Infrastucture Maintenance

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.)

Priestman to the Honourable  Ralph Goodale -August 16, 2004:

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