Borrowing Trouble

Why not use the Bank of Canada to carry government debt?
October 1, 2009

Broadly speaking, a division exists between those supporting a society led by élites who command or control most of society’s wealth and use it in their own interests, and those supporting a society led by progressively-minded individuals who want society’s wealth used in the interests of the members of society as a whole.

In my experience campaigning for the NDP, the explanation I most often heard at the door for not voting NDP was very straightforward: “The NDP (and by extension all ‘left’ parties) don’t know how to handle money and would bankrupt us.”

In the 2004 election, after years of letter writing and urging by some members of the Committee on Monetary and Economic Reform (COMER), the NDP platform included a simple statement that the NDP would use the Bank of Canada (the Bank) to carry some of the public debt, as it used to do (prior to 1974). The NDP General Secretary wrote to me on May 12, 2004, to say that “the platform had been set in February, ’04, and use of the Bank of Canada was not included and would not be.”

The next day, NDP Finance critic Judy Wasylycia-Leis wrote to thank me for the information I had sent on the Bank and said it would be included in the platform – and it was, but nary a word about it passed the lips of Jack Layton during the campaign. Nevertheless, because it was in the platform, I felt free to talk about it while campaigning myself.

The area in which I was campaigning had many Liberal supporters and usually voted Liberal. However, in 2004 many of the Liberal supporters I spoke to were in a quandary; they didn’t want to vote for Paul Martin because of the sponsorship scandal and would not vote for Stephen Harper. They did not know what to do, so I said, why not vote NDP? When they replied that the NDP didn’t know how to handle money and would bankrupt the country doing all the things it said it would do, I referred to the NDP platform plank on use of the Bank of Canada, explaining that the Bank was owned by the government and that all the interest paid into it was returned to the government minus a small amount for administration. In this way, an NDP government could do the things it said it would do without building a huge interest-bearing debt.

In contrast, I told them how Liberal and Conservative governments had increased the federal debt over 3,000% ($18 billion to $588 billion) between 1974 and 1997, during which time the government did not use the Bank to carry public debt as it had prior to 1974, and that we were paying over $63 billion a year on interest as a result. (I also mentioned that $63 billion is 630 times the $100 million sponsorship scandal that was getting so much attention, and briefly talked about reinstating the statutory reserves to control inflation.) I was pleasantly surprised at how quickly the basic concepts were grasped and, later, that the results for that particular poll showed a marked increase in NDP support.

What this says to me is that the ”left” could get a lot more support if it showed how it could achieve its goals by using the government’s own bank to finance public investment. There is much irony in the NDP’s neglect to implement, or even talk about, the resolution adopted at its 1995 leadership convention to increase Bank of Canada funding of public debt. We have to ask: who is running this ship; who is pulling the strings? Why do political leaders appear to be afraid to even talk about using the Bank to finance public debt? Why aren’t more economists talking about it? What are they afraid of? Why aren’t unions demanding that the Bank be used to finance massive public infrastructure development and investment in education and health services? Surely the jobs so created and the increased skill development would dramatically reduce unemployment.

It is ironic that the NDP’s pursuit of power federally has failed, election after election, to win enough voter support, while the resolution on the Bank, which would show Canadians that the NDP does understand money and how to control its supply, is ignored. More ironically, the Liberals and Conservatives, who are responsible for putting the nation into a deep financial hole, have somehow convinced Canadians shown that they do know how to manage money.

Other organizations which also shy away from discussing use of the Bank to finance public investment include the Council of Canadians, the Federation of Canadian Municipalities, the Canadian Labour Congress, and the Canadian Centre for Policy Alternatives.

At its 1994 annual general meeting, the Council of Canadians resolved to carry out “an education and lobbying program on economic issues, including the links between economic policy and social and environmental issues and the need to reassert control over our financial sector.” Among other things, the resolution referred to the “explosion of debt” resulting from “loss of public control over the Canadian financial system,” linking the attack on social programs to the demands of the financial sector.

However, like the NDP, the Council has ignored its resolution. It has campaigned on issues of economic policy and its relationship to social programs, employment, the environment and public pensions, how tax cuts undermine the ability of our governments to provide social services, protect the environment, and stop the growing polarization between rich and poor; but it has avoided the one step which would remove the influence that private money has over government decisions: use of the Bank of Canada to finance public debt – not only for the federal government, but for provinces and municipalities, too.

The Federation of Canadian Municipalities (FCM) adopted a resolution in 2001 on using the Bank to finance municipal infrastructure. It stated—

That the Federation of Canadian Municipalities urge the federal government to: a) instruct the Bank of Canada to buy securities issued by municipalities and guaranteed by the federal government to pay for capital projects and/or to pay off current debt; and b)refund to municipalities any interest paid by municipalities to the Bank of Canada.

 Weeks and then months went by. Follow-up letters were sent to the FCM by some COMER members. Then, in September, 2005, the Board of the FCM rescinded its earlier resolution by re-categorizing it as “not within municipal jurisdiction,” adding that the government was “providing municipal governments with additional financial resources, starting with refunding 100% of the GST... and sharing a portion of the federal gas tax... key elements of the New Deal.”

It further stated that, ”In FCM's most recent discussions with the Bank of Canada, the Bank clearly stated that it is not a commercial lending institution and does not act as a lender to governments except in the most unusual of circumstances... While the Bank could conceivably make a loan to a municipal government, it could only do so through a provincial government and only for short periods...”

As a member of the FCM board remarked on hearing that the resolution was “not within municipal jurisdiction,” “If getting loans for its infrastructure is ‘not within municipal jurisdiction,’ what the hell is?” As for the statement ascribed to have come from the Bank:

  • no one has suggested that the Bank is a commercial lending institution;
  • the Bank has consistently purchased government securities, ranging from a low of 3.7% in 1936 to a high of 20.8% in 1975, and continues to do so today; and
  • the Bank’s admission that, “while it could conceivably make a loan to a municipal government, it could only do so through a provincial government ,” serves only to confirm that financing for municipal governments through the Bank can be done. Furthermore, the Bank of Canada Act Section 18(c) does not limit loans to short periods.

Regarding the “new deal,” the FCM calculated that, up to and including 2005-06, the two initiatives had provided about $1.87 billion to municipal governments, adding that both initiatives would continue to at least 2009-10 while the gas tax transfer would continue for two years beyond that. Contrast this amount to the more than $123 billion municipal deficit, reported in the November, 2007 Municipal Infrastructure Report, which shows the deficit increased from $60 billion in 2003 to $123 billion in 2007.

The Canadian Labour Congress represents 3.2 million Canadian workers. It has organized a campaign for change to “amplify the voices of the... victims of this crisis until our governments hear them and... give people an outlet for their anger and frustration.” Through its president, Ken Georgetti, the CLC has written extensively about the 1.6 million unemployed and part-time workers. It wants the government to “launch a major public investment program to create good jobs in infrastructure, manufacturing and public services, and link this program to a made-in-Canada procurement policy,” but there has been little impact to date from the federal government's stimulus package on the unemployment numbers.

Government funding for such a program is not sufficient to provide the massive investment needed for infrastructure renewal (e.g., $123 billion for municipal infrastructure). Added to this are the billions needed for education, retraining, health services, and social support services such as EI.

The government has used the debt and interest as an excuse for not putting up more money, but so far the CLC has not supported use of the Bank of Canada to carry public debt.

Not too many years ago, the Canadian Centre for Policy Alternatives would include in its annual Alternative Federal Budget (AFB) a statement about using the Bank of Canada to carry some of the government’s debt. In 1999, for example, it spoke of the benefits from “refinancing of a share of outstanding debt (2% per year for 5 years) through the government’s own bank, the Bank of Canada, instead of relying on commercial lenders.” After 1999, however, I have not seen any mention of this alternative, so I wrote and asked why. The reply was that “There is plenty of money in the system, and discussion of using the Bank of Canada would only confuse the issues.” This ignores the fact that the government uses the debt and the huge interest costs as an excuse for cutting more social programs – and is left vulnerable to pressures from banks and large corporations..

When the government sells a bond, it is borrowing from the purchaser of that bond; it is as simple as that! 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, and inflation can be controlled through reinstatement of the statutory reserves. We pay enough interest now on the debts of our three levels of government (over $63 billion a year, or $175 million a day) for money borrowed privately instead of from the Bank of Canada. We don’t need any more privately financed public debt.

(Richard Priestman works with the Committee on Monetary and Economic Reform in Kingston, Ontario.)