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