15: The Municipalities Fight Back
Gordon Coggins & George Crowell
In our October issue we reproduced the crucial portions of the letter sent by the Honourable Ralph Goodale, minister of Finance of Canada, dated 16/08. This was in reply to a letter from Ms. Andrea Rivest, of the office of the Clerk, Belle River, Ontario, with copy to Mr. André Martenette, resident of that municipality and member of COMER, on loans from the Bank of Canada to municipalities for the construction and renewal of infrastructure. We publish below extracts from the submission of two members of Comer supporting Mr. Martenette, Gordon Coggins and George Crowell, both retired university professors, on the Minister’s reply to the municipality’s correspondence:
“If the Minister’s letter aims to confuse the issue raised by the Town Council – a request that he exercise his statutory authority under the Bank of Canada Act to instruct the Bank to make low-interest loans to municipalities for major infrastructure projects – it is eminently successful in its aim. Another interpretation of this letter is that the Minister himself is confused.”
Getting the Minister to Stick to the Problem
“Addressing the second possibility, we respectfully note the following:
1. The Minister says (paragraph 2): “the problem with this action is that to acquire government debt, the Bank of Canada would have to print new currency. The rapid growth in the money supply would eventually result in an increase in inflation and higher rates of interest.”
“There are two points here:
(a) “The Bank of Canada would have to print currency.” This is not correct; as paragraph 5 of his letter indicates, the Bank is totally empowered to create credit – that is, loans – as credit not cash.
(b)The “rapid growth of the money supply” is mostly rhetoric. First, the rate of growth of the money supply would be only as rapid as the Bank decided, in its wisdom and according to its mandate ‘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 generally to promote the economic and financial welfare of Canada.” (Bank of Canada Act, Preamble). The Bank would presumably be wise enough to set a reasonable cap on the amount at any given time. Further the municipalities making such a request are not asking for a government expenditure; they are asking for a Bank loan, which in due course would be repaid. As participating municipalities repaid their loans, new loans could be made to them or other municipalities for other useful projects, without an increase in the money supply beyond the initial cap.
Since the request is not for the creation of currency, but for the creation of credit, the references to the possible evils of currency creation – greatly exaggerated in any case – in paragraphs 3, 5, and 6, are irrelevant.
The “What if” case in paragraph 4 is a red herring. First, the municipalities are not asking for loans to the “Government of Canada,” but to the councils of municipalities. Secondly, it would be dumb indeed for the Bank to borrow money (perhaps from private banks, which already create more than 95% of the Canadian money supply) when it is empowered to create credit, and did so extensively during and after World War II. The war expenses ran up a national debt that was successfully paid down without inflation.
Paragraph 6 is essentially correct. Some nations have overdone the creation of money to meet government expenses. Others, Canada included as noted above, have made controlled use of credit creation without inflationary disaster. This is like saying, “if you eat too much you will make yourself sick, therefore you should not eat.” A further point compromising this comparison-based argument is the fact that not only does Canada own its own central bank, as the Minister acknowledges, but Canada is one of only three countries in the developed world which does. That should limit the comparison with other countries to Switzerland and England.
Paragraph 7 argues from a hypothetical supposition – “that the Bank of Canada did not want to change the total amount of loans it had outstanding.” We can suppose it, but we cannot imagine a reason for such a policy under the Bank’s mandate “to promote the economic welfare of Canada.”
Getting the Issues Straight
First, note once again that the municipalities are not asking for loans to the provincial government, but to municipal governments, for useful public infrastructure investment. Secondly, “federal taxpayers subsidizing provincial governments” is a curious and false distinction. There is only one taxpayer. Whether he or she pays to the municipal government, the provincial government or the federal government, is a matter of convention; and the redistribution of tax moneys is and has been since the founding of the nation, a major policy function of federal and provincial governments.
Incidentally, since the founding of the nation, municipalities have grown to be the predominant centres of population. It is a far different country from the Canada of 1867. The new political and economic reality needs to be faced: the now huge responsibilities of municipalities give them a respectable claim on a larger share of the tax pie than they had 175 years ago. But, note once again, the municipalities’ specific request is not for tax expenditure, but for loans that will be repaid.
The only negative effect of a moderate application of such a policy would accrue neither to the governments nor to the municipalities. Where a municipality, in its need for a particular project, was able to avoid borrowing money created by the chartered banks, but instead could access a well-managed Bank of Canada low-cost loan policy, the banks, of course, would be the losers. Obviously, the minister must expect some protest from their spokespeople when he instructs the Bank of Canada, either under his existing statutory authority or through legislation, to make such loans available to municipalities. A precedent for such legislation, incidentally, was part of the initial establishment of the government-owned Bank of Canada in 1938 – Bill 143, the Municipal Assistance Act.
Gordon Coggins, PhD George Crowell, PhD 9/29/04
Notice of Council Decision
Windsor City Council adopted the following resolution at its meeting held November 15, 2004:
1. THAT the report of the General Manager of Corporate Services and City Treasurer dated October 14, 2004, regarding Ontario’s Munic- ipal Taxation System and Loans from the Bank of Canada BE RECEIVED for information.
2. THAT the City of Windsor support initiatives such as interest free loans as part of a comprehensive “new deal” for Municipalities.
3. The City of Windsor requests THAT the Provincial Government consult with Ontario Municipalities and Municipal organizations, such as the Municipal Finance Officers’ Association of Ontario (MFOA), regarding future changes and improvements to Ontario’s Municipal Taxation System.
4. That copies of this resolution BE FOR- WARDED to the Association of Municipalities of Ontario (AMO), and to the Federation of Canadian Municipalities (FCM).
Carried, Councillor Jones was absent from the meeting when the vote was taken.
BASIS report Number 10928 AFT2004 12
Steve Vlachodimos, Manager of Council/Committee Services/ Deputy Clerk, November 16, 2004
– from Economic Reform, December 2004