Foe and Friend are Beginning to Recognize the Key Forgotten Role of the Central Bank

To unions:

Further to my earlier letters advocating use of the Bank of Canada to carry public debt, you will be interested in the report from the C.D. Howe Institute, now recommending the same. Although the Institute’s goal is limited to getting more cash into financial institutions, the process is the same for getting interest-free cash to our three levels of government to invest in public works of all kinds. It fits in with the goal of stimulating the economy to provide good jobs for all workers. It also lessens the influence lenders have on government policy – making it easier for social policies to be adopted. – Richard Priestman

Well! Wha’d’ya know? Even the C.D. Howe Institute says the Bank of Canada should buy Government of Canada securities (C.D. Howe Monetary Policy Council report – 16/4/09), or to put it another way the government should borrow from the Bank of Canada. When the government sells a bond it is borrowing from the purchaser of that bond, and when the government borrows from the Bank of Canada there is effectively no interest on that debt because interest paid comes back to the government as dividend. In this way, the government can borrow whatever is necessary to get the economy moving again without hanging a huge debt burden on the necks of future generations. We pay enough interest now on the debts of our three levels of government (over $63-billion a year) for money borrowed privately instead of from the Bank of Canada. We don’t need any more privately financed public debt!

“A strong majority” of the Monetary Policy Council “favoured purchases of Government of Canada securities…rather than purchases of private securities.” While their goal is more cash for financial institutions, the same procedure can be used to provide cash for our three levels of government to invest in public services such as housing, infrastructure, education, research, the CBC, health care, recreation facilities, etc. Investments of this nature provide big dividends, some of the biggest coming from education and research. Among others who support government investment in public works to get out of the recession is David Dodge (former Governor of the Bank of Canada).

With unemployment climbing by the tens of thousands in a month, much more needs to be done than is. Some will balk at the thought of taking on more debt, not fully understanding that investments in public service using interest free money pay off in future dividends. Others balk at it because of an ideological commitment to smaller government and privately run services. Public financing of public works not only would make it possible to do what needs to be done, it would also lower taxes and, more importantly, reduce the influence of lenders on government! The legislation for using the Bank to finance government debt exists in the Bank of Canada Act.

Key Institution for Economic Recovery is Being Rediscovered

Now that the C.D. Howe Institute supports use of the Bank of Canada to buy government securities, maybe the CCPA (Canadian Council on Public Policy) will say more about it.1 They used to include a statement on it every year along with their “alternative budget,” but have said very little in this regard for the past several years. The Council of Canadians adopted a resolution on this at their 1994 annual meeting, but never acted on it. Likewise the NDP adopted a resolution on it at their leadership convention in 1995, then promptly ignored it. Maybe it, too, will talk about it. Maybe even the Liberals and Conservatives will support the idea. And maybe the CLC (Canadian Labour Congress) will talk about it at the rallies they are organizing all across the country in their “campaign for change.”

If enough Canadians say that public debt should be financed by our public bank, the political party(s) which support this policy will have the best chance of getting elected at the next federal election.

Richard Priestman

1. The CCPA has changed its policy in a big way. William Krehm has been asked by its editor in chief to contribute an article on the subject.

- from Economic Reform, May 2009