LET'S START A WAR -- ON MEDIOCRITY
by Paul Hellyer
Paul Hellyer, a former member of the Pearson and Trudeau cabinets, is founder of the Canadian Action Party, dedicated to the reform of the Bank of Canada and changing Canada's monetary policy. The party's headquarters is located at 99 Atlantic Ave., suite 302, Toronto, Ont., M6K 3J8. Phone (1 416) 535-1008. Fax: (1 416) 535-6325.
Only one adult in every thousand knows what money is and where it comes from. No wonder we have problems with debts and deficits
When money is one of the subjects that people talk about most often, you might assume that they know everything there is to know about it. Unfortunately, that is not so. Adolescents know where babies come from, but only about one adult in every thousand knows what money is and where it comes from.
In the course of research for a book on the subject, I did an unofficial poll of more than 100 of my friends and acquaintances. The sample included newspaper publishers, editors in chief, financial writers and a whole range of professional and business people-- all solid citizens. As incredible as it may seem, there was not one person who had what you might call a working knowledge of the monetary system. Yet these are the people who advise governments on what they should do.
To begin with, my friends were uncomfortable with the question. When pressed, in a friendly way, they said the federal government prints the money. When I asked what percentage of new money the federal government prints, the guesses ranged from 60 per cent to 100 per cent. If that were so, it would be a very different system and we wouldn't have all the problems with debt and deficits that we do today.
In fact, nearly all of the new money created each year is created by the private banks. Banks manufacture money. As Graham Towers, the first and brightest governor of the Bank of Canada said, that is their business. Banks manufacture money the way steel companies manufacture steel.
They don't actually print it, as they did before the Bank of Canada was given exclusive responsibility for currency; they just create it out of thin air (subject to a small capital requirement) every time they make a new loan. You go to the bank to borrow money, provide adequate collateral, sign a note and, presto, new money is created. All it takes is a tap on the computer. Call it "printing," manufacturing or creating new money, it's all the same. The banks add to the money supply when they make new loans and "destroy" money (reduce the money supply) whenever they call a loan.
A principal problem of letting private banks create nearly all new money is that it is all created as debt. Furthermore, it is debt on which interest has to be paid. So if nearly all new money is created as debt on which interest has to be paid, and no one creates any money with which to pay the interest, what has to be done? We have to borrow more in order to pay the interest on what we already owe and go deeper and deeper into debt.
That is the reason most countries are so far in debt. It is not primarily the profligacy of succeeding generations of politicians, although some of them have been less than prudent on occasion. It is the fact that for 200 years, nearly all new money has been created as debt -- debt that can never be paid off and can only be dramatically reduced by another crash similar to the one in 1929.
Insisting that federal governments operate their budgets like household budgets only makes matters worse instead of better. This was the advice the "experts" gave in 1932. They said: "Reduce your deficits and balance your budgets." Sound familiar? Politicians "bought" their advice and the result was seven more years of massive unemployment and despondency.
It was only when the war broke out, and governments started letting contracts for ships and planes and guns, that jobs were created and the economy grew to its maximum potential.
This was made financially possible when the Bank of Canada entered the money-creation business in a major way. At one time it created more than half of all the new money. It was a process which allowed us to escape the Depression, finance the Second World War, and lay the foundation for the best 25 years Western capitalism has ever known.
In 1974, however, the Bank of Canada did an about turn and began to abdicate the money creation business in favour of the private banks. The Bank of Canada abandoned the system that worked for all Canadians and reverted to the one in effect in the Dirty Thirties. It is a system which has resulted in what Quebec economist Pierre Fortin calls "The Great Canadian Slump."
So what we need is another war. A war against poverty, illiteracy, ill health, pollution, inadequate housing, our decaying infrastructure, and above all, a war against mediocrity. These wars can be waged and won if the Bank of Canada is drafted to help win the peace, as it was to win the war.