20A Great Forgotten Son of Canada
In many respects we have been deprived of a crucial part of our history. The best way to describe our plight is by comparing it on a monumental scale with our computer swallowing our key files. Practically, all public and university libraries, coast to coast, have purged their shelves of crucial books that offend the mighty on important matters. That has been the fate of one of the most gifted men to have come from Canada, Gerald G. McGeer, Mayor of Vancouver, member of the Canadian and British Columbian legislatures and the federal Senate. He was the man who in the depth of the Great Depression of the 1930s raised the banner of monetary reform. More than anybody else he was responsible for pressuring Prime Minister William Lyon Mackenzie King into nationalizing the Bank of Canada some four years after it was founded.
It wasn’t cheaply that Canada bought out the 12,000 shareholders of the central bank. The knowledge of what Canada got back from that deal has been buried deeply beneath the sod. Life rolls on as we repeatedly go on bailing out our deregulated banks as though Canada’s purchase of the Bank of Canada had never happened. Yet the repurchase of those shares helped save this land during the war. During the three decades after that conflict, it financed much of Canada’s transition from a semi-rural into a developed land. Since the 1980s and especially the 1990s it is never mentioned by the government though the Bank of Canada Act, is still intact on our law books, unused, when it comes to the crucial matters for which it was nationalized.
Today, for example, our government is selling off its choicest urban real estate because "it cannot afford to maintain it properly" even though it has not only a bank, but a central bank at its orders. Subsection 14(2) of the Act makes clear who has the final word in such matters. After the sales of these properties it is leasing them back on 25 years leases. With the second major bailout of our banks in little more than a decade, we should try foreseeing what form the next apparently inevitable bank bailout will take. It could be the reprivatization of the Bank of Canada on the US model. Today, accordingly, Canada needs McGeer’s books more than it even did in 1935.
McGeer’s achievements began with a lengthy, warming-up battle against the railways to curtail the injustice in the rates charged British Columbia under the Crow’s Pass system. Right from the beginning you sense that behind the man, his several publications, and his practical politics lay a rarely gifted mind mated to an exceptional valour.
I have spent close to a half century engaged in monetary reform. Never, however, had I quite encountered McGeer’s ability to concentrate in a single phrase what banking or many other matters are about. The banks, said he, "sold the public what they didn’t have, or in other words they sold money short. And for that the only thing needed is the absence of a conscience, since it transforms on a potentially ever larger scale the need of the borrower to surrender to the creditor." Try to improve on that!
A High School Dropout with a Mind on Fire
I have encountered elsewhere that type of gifted mind, where its owner as an adolescent becomes impatient with school courses, and before you know it has dropped out of school to learn better alone, entrusting to his own scouting what course to take, where, and when. That happened to McGeer in his mid-teens and he went to work as a metal moulder, and even became a militant member of the moulders’ union. But then he realized that to effect social change, he needed a position of some influence. So then in a few months he prepared for university and took a law course. He did a similar job on monetary theory, and came under the spell of the late President Lincoln, author of the Civil War greenbacks, paper money bills with nothing except everything behind them, that is the government’s entire credit.
Even today McGeer’s books – brilliantly and leanly written – leave an opponent floored bleeding with cutting insights. They are, however, not to be found on even Vancouver public library shelves, either academic or municipal. Yet they brought this land the nationalization of the Bank of Canada, largely because Prime Minister Mackenzie King, leader of the opposition during much of the Depression, could simply not withstand the dynamism and passion of McGeer’s mind. How much Mackenzie King appreciated what McGeer was talking about, apart from its immediate political convenience, is open to discussion. The Canadian Cooperative Federation, forerunner of the present NDP, should rate higher in this regard, but never risks mentioning the important role of its predecessor in supporting the nationalization of the central bank. That, however, alone made possible the transformation of Canada into an actively social-minded democracy during at least three decades of the post-war.
It was due to him as much as to any single person that the Bank of Canada financed 16% of Canada’s war expenses virtually interest-free through the federal bank – a considerably larger percentage than either the UK or the US, both of whose central banks were privately owned at the time. The US Fed still is.
Occasionally his writings may be possibly too laden for our generation’s secular taste with Biblical references to usury, and to Christ casting the usurers out of the temple. Yet that is a sin readily to be forgiven when the suppressed message is so important for saints and sinners alike. I owe the copy of his The Conquest of Poverty that I am reviewing to a loan from Betsy Wood who runs a small non-commercial private library of McGeer and works to keep his flame glowing. The tales that McGeer tells in it are simple, unadorned, overpowering. No wonder those in the saddle want to avoid encountering them on the printed page, in their sleep, or in libraries, before or after sunset.
Learning How to Finance Peace from the Lessons of War
Here is an early sample, on Financing War, that leaves no doubt about how to finance a durable peace: "Just twenty years ago the governments of the leading nations of the world were confronted with the problem of financing a war to the fabulous sum of $400,000,000,000 in direct governmental expenses and an additional $400,000,000,000 of loss due to the destruction of property and the curtailment of productive activity. When the war commenced, many laboured under the delusion that it would not continue indefinitely simply because the cost would exceed all the money in existence. As it turned out, the longer the war continued and the greater the expense grew, the easier the problem of financing it became.
"During the war some 65 million men were mobilized as combatants, and all were carried on governmental pay-rolls. Another army even greater was engaged in producing army supplies and war materials. Yet there was never any shortage of money to meet the current cost of the War. For a period after the war, prosperous times continued. Eleven years after the Armistice was signed, however and just four years after the gold standard was reestablished in Great Britain the world’s most tragic depression commenced. From one end to another of Christendom, governments acknowledged bankruptcy. Debt repudiation became the order of the day. Huge armies of unemployed and destitute workers appeared everywhere and democratic government fell into a condition of impotence. Strange, is it not, that while there was a plentiful supply of money for the war, that with peace a shortage of money for peace should everywhere appear?
"Thus we see that the comparative shortage of money which we now suffer in peace as contrasted with its abundance in war time, is due to a definite and specific change in monetary policy. These extraordinary results have been accomplished by the simple process of suspending and restoring the gold standard to create an abundance of money. Surely if money can be provided when the primary purpose was to finance war, there can be no good reason why there should be a shortage of medium of exchange required to finance the production and distribution of wealth for work in the advancement of a cultural civilization. War-time and post-war policies prove that is the most important and far-reaching of all the powers of modern government."
Let us move on to yet another overpoweringly simple treatment of an ancient cliché by McGeer: our inescapable, old friend, Supply and Demand (p. 4): "The law of supply and demand is a fundamental law of nature. But, like money, its real meaning and true purpose are little understood. Of course, everybody is subconsciously aware that no one can survive who does not eat, drink and shelter the body and throw off the materials required to sustain life, that the instinctive drive to live creates. This determines that the demand for life’s requirements will always be satisfied by human intelligence from whatever supply there is of life’s necessities.
"[But] while progress is dependent upon the demands of the human family for necessities, it is possible to interfere with this law so that progress may be delayed, notwithstanding that both supply and demand do exist. An improper administration of the monetary system produces this evil result, let us examine the part that money should play in helping the law of supply and demand really function.
"During civilization’s progress, mankind has moved from a condition of natural existence, when the business of life’s existence was purely an individual enterprise, until today, when individualism has ceased to exist and life now depends on collective effort. When advancing intelligence made life more secure and comfortable and convenient living became possible that created a demand for a medium of exchange.
"Money was invented to satisfy this demand. It is therefore a simple tool of trade, man-made and man-controlled. It was invented to assist the law of supply and demand in the realm of progress. Primarily it should serve the purpose of helping unlimited numbers of people create and distribute wealth in human service through an effective division of labour and intelligence.
"Like water in an irrigation system, money must be circulated in the social system as the means of sustaining the production and development of life’s needs…. Today, however, under the private monetary system it is primarily used for acquiring wealth. The private money system has changed from a simple tool of trade into a power that negatives the law of supply and demand, and appropriates to the service of the few the entire wealth-creating power of modern civilization.
"The power to create, issue and circulate the medium of control, which should be recognized as the supreme prerogative of government, now forms the stock-in-trade of the business of our super-banking system. This functions as the servant of usury in the realm of high finance.
"No factor has played so great a part in this unfortunate development as that of the gold standard. It was designed to prevent governments exercising their power to issue currency as a medium of exchange serving human needs. The production of gold, and not human needs, fixed the volume of currency in issue. The supply of gold, as this depression has compelled us to realize, bears no relation whatever to the capacity of the people to create and distribute wealth in the service of mankind.
"Fortunately for humanity, such monopolies are always blind. Dominated by greed, they invariably sow the seeds that produce their own destruction. The private money system, having secured the power to limit the supply of money so that all – government, corporation and individual – would have to borrow at interest, proceeded to pyramid obligations into a mountain of unpayable and inextinguishable debt claims. The private money system having thus made progress impossible, it must now give way to a governmental administration of the monetary system."
A Hard Look at What WWI Taught Us About Deposits
Since the war, bank deposits have been much more carefully considered than ever before. The bankers have as a result been able to create bank deposits by the simple process of making credit entries in their own books. (See Table 1.)
Thus during the war period the banks more than doubled the total amount of moneys alleged to be on deposit.
In Economic Reform I have written on this phenomenon: "The bank multiplier gets applied to the liquidity pools of each type of non-banking corporation in turn. As a result money creation at the previous level becomes mixed up with the legal tender or near-money base at the next level. Hardly surprising then that the multiplier I had tracked down mounted from the 12 in 1939 to 376 in mid-1998. But that of course was before even relatively simple derivatives had been brought in to befuddle the figures further. In view of the commotion around the millennium change, I threw in the sponge around 2000 in trying to identify the rapid growth of the bank multiplier – because the difference between denominator and numerator of the key ratio had become too indistinct. But given the notable structural developments since then, every glimpse of the clefts opened up in our economy, becomes informative."
McGeer’s observations on the changed role of taxation in a society that has learned to handle its monetary system could not be clearer:
"Here then we observe that the power of the government to create money places it in a position to finance all public enterprise without cost to the taxpayers. But there is something even more important than that. By this course the government is able steadily to increase the volume of consumers’ buying power required to serve the demands of progress. For example the $100,000 the government has spent in payment for, say, a school has gone into circulation. It has been used by all those engaged in providing the material and labour out of which the school was created with buying power. They in turn have bought the needs and comforts and conveniences of existence. The social system is thereby enriched by an added volume of medium of exchange put into circulation as a result of the creation of the real wealth of the school. The community at large has a school representing real wealth in the value of $100,000 and $100,000 in buying power. The books are balanced.
"There is the cost of maintaining and operating the school, of course. But when the government creates its own paper money or credits in a national banking system to finance the school’s operation, a continuous stream of purchasing power is put into circulation. That increase is required to support the greater demand for the increased buying power needed to purchase the increasing supply of comforts and conveniences which educated people desire.
"Now let us assume that all the public works and social services now being maintained on a niggardly basis by national, provincial, state and municipal authorities were financed by the issue of national currency and credit and the government were under no obligation to arbitrarily withdraw from circulation any sum other than the power necessary to maintain the effective buying power of the exchange medium. Governments could then usher in an era of progress in governmental service to the people that would eliminate any suggestion of unemployment. Wages could be maintained at all times and in all circumstances. People could be paid to go to school if there was nothing else for them to do."
No Government Need Suffer Bankruptcy While Its Power to Create Currency Is Not Fully Used
"No government need suffer bankruptcy while its powers in the realm of currency and credit remain unused. To save itself from destruction by the dictatorship of the Money Power, democratic government must establish a national banking system. In making the change, it should be recognized that national banking and commercial banking are and should be treated as separate and distinct functions in the monetary system. The national banking system should be confined in its operation to the creation, issue and regulation of the circulation of the domestic and international medium of exchange necessary to maintain government and the trade and commerce of the nation. The merchant banking system should be confined to the business of serving the private commercial needs of the nation. The former is essentially a private enterprise, while the latter is a normal part of the private enterprise of a capitalistic system."
In his work published at the depth of the Depression McGeer avoids stepping into prophet’s. robes, and keeps the basic economic implications of money in mind. To achieve this, he makes a rational distinction between public and commercial banking.
It was his clear thinking on the subject that made possible his break-through in his campaign to nationalize the central bank. A central bank requires a different type of person and organization than one that looks after the affairs of the country as a whole from the commercial needs of individuals and commercial corporations. And commercial banking in turn is developing apart from consumer banking payments such as credit cards not only for the benefit of financing companies’ but for individuals’ purchasing funds and financing. To thrust this onto a single breed of executive is to play with fire. To begin with these consumer financings require a different technology, which can be very costly Not only more costly, but the private banks kept out of banking proper will have to make up with higher fees, or openly or hidden higher interest charges. This will have to be collected whether they appear as interest or as straight fees. Entrust that to a government bank, not only with different technologies, but with technologies that are changing all the time, could only mean that the effective commercial interest charges will move up We would be wise to consult McGeer on this matter while reclaiming the social advantage of his great legislative victory.
First he settles accounts with the gold standard as a useful means of handling any contemporary social problem (p. 57): "We have learned that the promise that economic and social security could and would be sustained by the management of the private money system cannot be fulfilled. In addition to that, we have been compelled to recognize that the international gold standard is not an effective means of regulating international trade and that the adverse balances which unmanaged international trade develops cannot be paid out of the gold reserves available. In the future we must, therefore, segregate monetary from non-monetary factors and recognize that monetary management, other than providing the economic power which an effective circulation of the medium offers, should have little or nothing to do with the control and regulation of factors and institutions which are purely social, economic and political. In the past, our inability to segregate and administer monetary and non-monetary factors has been very largely responsible for the impotence of government and the failure of our monetary system."
Enter a Hint of Systems Theory Before Its Day
This approaches the basic view of "systems theory," long familiar to scientists and academics. This regards society and the economy, too, as a structured complex of systems composed in turn of subsystems, each with its own code that must be respected for the entire super-system to function. Clearly this was incompatible with the official economic doctrine that sees everything in the economy determined by a "pure and perfect market," defined as of such infinitesimal size that nothing done by individual agents can affect price. All this, of course, was in order to apply some infinitesimal calculus which is mistaken per se as a guarantee of scientific validity.
Let McGeer himself tell his tale (p. 59): "Communal life is sustained in much the same way [as that of private citizens]. An inexhaustible supply of the medium of exchange must be established. This is now available. The means of maintaining the medium of exchange in circulation must be developed. Wages and consumers’ buying power must be sustained and new capital must be issued as required from time to time. Once this has been done, the monetary system can begin its work. What they will produce, how they will use it, the type of social system they maintain and the cultural progress they achieve, depend upon the intelligence and industry of the leaders in the innumerable structures of the social system. The work of national, provincial, state, county and municipal government must be coordinated to the end that all contribute towards achieving ordered progress.
"Governments with power to create and issue money and credit need not borrow capital. By the adoption of a sane attitude towards money and credit, the financing of public works and social services can be changed from one of disastrous expense to the taxpayer into the general betterment of the social system, In making the change, it should be recognized that national banking and commercial banking are, and should be treated as distinct functions in the monetary system. The national banking system should be confined in its operation to the creation, issue and regulation of the domestic and international medium of exchange necessary to maintain the government, trade and commerce of the nation. The merchant banking system should be confined to the business of serving the private commercial needs of the nation.
"I am fully aware that the reconstruction of the private money system is not in itself a panacea for all economic problems that confront us. We have been compelled to recognize that the international gold standard is not an effective means of regulating international trade and that the adverse trade balances which unmanaged international trade develops cannot be settled by the gold reserves available. In the future, we must then segregate monetary from non-monetary factors and recognize that monetary management, other than providing the economic power which an effective circulation of the medium of exchange offers, should have little or nothing to do with the control and regulation of factors and institutions which are purely social economic and political. Much of the failure that now exists is due to the fact that we have assumed that progress could be controlled by those empowered to regulate the flow of the medium of exchange in the social system. We should have known that progress is wholly dependent upon education, for it is upon the advancement of intelligence that we must depend to provide administration with increasing efficiency."
Here you have the view that investment in human capital – in education, skills, and hence in the preservation of the vessels holding these valuables – human beings – is the most productive investment a country can make. Theodore Schultz reached that conclusion in the 1960s based on his own mistaken forecast and those of hundreds of other American economists sent to defeated Japan and Germany to predict how long it would be before those two powers would once again become formidable industrial competitors on the world market. Schultz concluded some 20 years later that he and his colleagues had guessed so wrong because they concentrated on the physical destruction and ignored the fact that the highly educated labour forces of those powers had come out of the war essentially intact. It netted Schultz a so-called Nobel Prize from the Bank of Sweden, but after a decade or so his achievement was forgotten, After all, at that time governments were still and more desperately writing off even their physical investments – roads, bridges, battleships, buildings in a single year since it helped create misleading deficits on their books to push down labour costs. And here was McGeer some thirty years earlier having reached the same key conclusion without the guidance of a world war! It was a conclusion that could have saved anything positive that came out of WWII. Instead we seem well launched towards the next world conflict.
A Chat of Roosevelt with Abe Lincoln
In the McGeer book being reviewed, there is a reference – during a long imagined interview between President Franklin Roosevelt and Abraham Lincoln who did issue his paper greenback money with no gold or silver reserves. In this McGeer pursues the main purpose of counselling the new President of the United States Franklin Roosevelt through the mouth of Abe Lincoln who may not have thought out monetary theory in all its scope as McGeer did.
Mr. Roosevelt is presented asking of Mr. Lincoln filling in for Mr. McGeer: "Other than your speeches and messages to Congress, have we available any authoritative modern opinion that now endorse and recommend the ideas you proposed to Congress during your Presidency?
Mr. Lincoln: "Yes. The Committee of the Committee on Finance and Industry appointed by the British Government under date of November 5, 1929, which sat under the chairmanship of the Right Honourable H.P. Macmillan, KC, now Lord Macmillan, filed with the British Government under date of June 23, 1931. It ruthlessly exposes the misguided nature of the fundamental fallacies that bankers and financiers have tried to maintain. The report recommended an entire change in monetary management by stating: ‘It is not advisable or indeed practical to regard the monetary system as an automatic system grinding out the right result as an automatic system of natural forces aided by a few maxims of general application and some well-worn rules of thumb. The main objectives of a sound monetary policy which are, among others, the maintenance of a parity of the foreign exchange without unnecessary disturbance of domestic business, the avoidance of the credit cycle and the stability of the price level, cannot be obtained except by the constant exercise of knowledge, judgment and authority by individuals placed with all the resources and every technical device at their disposal.’
"The report was made at a time of great uncertainty, when the people of Great Britain feared the consequences of abandoning gold. For that reason the report was guarded and less pointed than if it were by the same men today. However, from the main report and the observations filed by Committee members, an almost complete scheme of managed currency, and planned economy and regulated trade may be secured.
"Let me draw to your attention the following observations to be found in the report.
"1. The Bank of England ought to be formed into a public corporation. (p. 240)
"2. The vicious circle is now complete. The decline of new enterprise has reacted adversely on profits and prices, and the low level of prices stands in the way of new enterprise. It is for this reason that some of us think it may be necessary to invoke governmental enterprise to break the vicious circle. (Section 316)
"3. The best hope of a remedy lies in a policy designed to increase the volume of purchasing power.
"4. It is not necessary that the volume of note issue (a fortiori, of the creation and the issue of national bank credit) should continue to be regulated as now by reference to the amount of gold held in reserve. (Section 148)
"5. Since the bankers as a whole under banking practice maintain a cash proportion of not the amount of gold which may be held in reserve (i.e., the legal tender paper money borrowed from the Bank of England or the Department of Finance in Canada [the Bank of Canada was still not founded even as a private institution at this time]), the bulk of the bank deposits arise out of actions of the banks themselves, for granting loans, allowing overdrafts and purchasing securities, as banks create a credit in their books which is treated as the equivalent of a deposit of money. (Sectors 71-74 inclusive)
"6. The theory that government expenditure in the promotion of public enterprise and social services is restricted to the accumulated savings available for investment, is erroneous. When governments distribute wages by financing public enterprises with national currency and credit, the volume of capital for investment is increased. (Section 47 of Addendum I, page 203 and section 24 of Main Report)
"7. If governments pursue an inflationary policy, i.e., meet expenditures not out of revenue, but by the issue of paper currency (or the creation of credit in a national banking system) forces are set in motion increasing profits and wages and additional spending arises. (Section 24)
"8. Gold reserves are held solely to meet temporary deficiencies in the balance of international payments. (Section 340)
"9. The circulating media consist overwhelmingly of paper money and bank deposits. It is this volume of purchasing power that deeply affects the price level and not the amount of gold which may be held in reserves. (Section 45)
"10. There is nothing inherently impractical in the government’s power to deliberately control the price level. We should be ready to attempt the task to gain experience by practice. (Section 210)
"11. International trade can and should be regulated and controlled by deliberate management. (Section 41, Addendum I, page 201)
"In the broad principles and administrative policies laid down by the Macmillan Committee, there is nothing proposed that is either unique or new. The recommendations it offers are based on the truths that the ancient Hebrew writers recorded as the inspired laws presented to humanity under the direction of God. They recommend the management of the medium of exchange."
Are We Preparing the Ground for WWIII?
There was something that at first sight seemed unbelievable. Here in our enlightened land there had been a native son – remote from the great centres of learning – had on his own, disentangled better and earlier than John Maynard Keynes himself the mysteries of money. For during the first year or two after the crash of 1929 – as in his Treatise on Money published in 1930 – Keynes was still considering using interest rates "a l’outrance" before abandoning that omnibus prescription of equilibrium theory. And by then McGeer must have been deeply involved in rethinking the whole corpus of economic theory, let alone putting it into Biblical terms and into the mouth of Abe Lincoln. It was only with his final magnum opus, The General Theory of Employment, Interest and Money that first appeared in 1936, that Keynes finally parted way with benchmark interest rates to keep society on the straight and narrow path.
That difference between continuing suppressing the work of McGeer and giving it the attention that it so dramatically had earned could be no less than World War III!
But before I chose that conclusion, I felt I had some checking to do. Why did Keynes and other distinguished university-trained economists tarry so long even after the 1929 crash and the Depression, which had driven industrial magnates espousing 100% money? Why did bank and academic economists still cling to interest rates as the means to a balanced economy?
A couple of hours at the University of Toronto Library confirmed that the books of McGeer are distinguished absentees from its shelves. Two copies of his Conquest of Poverty have received shelter at the University’s Catholic college, St. Michael’s, undoubtedly because of its heavy use of the Scriptures.
I sought out the standard literature on Keynes seeking how the great Keynes had come so badly behind this self-taught man from beyond those Great Waters and high mountains. I reviewed works that I had not consulted for many decades. The work of D.E. Moggridge, a Cambridge economist particularly close to Keynes, but sufficiently independent to appraise him in all his strengths and weaknesses. Keynes’ great gifts were handicapped by his social milieu. McGeer’s encouraged the development of his highly independent mind.
Moggridge in his book Keynes (University of Toronto Press, Toronto and Buffalo, third edition) paints a picture of the academic society in which Keynes grew up and worked. His father, a distinguished economist and university official, was part of that formative setting. Keynes saved his most cutting criticism not for the "self-balancing market" prophets who were his teachers and colleagues, but for the politicians who negotiated the Peace of Versailles who were without an inkling of the transfer problems that could not be dealt with unless the Germans were allowed to earn the foreign currency by helping to reconstruct the damage they had wreaked in France and Belgium. But to fill his lungs with really fresh air, he relied largely on the Bloomsbury set of writers and painters, rather than on economists. But rather than risking a clean quick break with the economic school of Alfred Marshal, friend of his family and his own teacher, he just naturally watched his manners as a well-bred English lad should. He simply had to "ooze" out of the world of Marshall. And that does takes time. Unfortunately the world was kept waiting until Gerry McGeer came along. But instead of celebrating what he put on their law books his fellow countrymen have put him under wraps.
Table 1: Bank Deposits
UK Canada US
1914 5,000 1,000 18,000
1920 11,500 2,400 37,000
Increase 6,500 1,400 19,000
– from Economic Reform, October
(Shortened; see www.comer.org for full article)