A New Way Forward
A BRIEF SUBMITTED TO THE ROYAL
COMMISSION ON THE ECONOMIC
UNION
AND DEVELOPMENT PROSPECTS FOR CANADA
- by -
J. MARTIN HATTERSLEY, Q.C., M.A.,LL.B.
Former National Leader
Social Credit Party of Canada
Revised 1994, 2001
SUMMARY
In common with almost all countries of the world, Canada is affected by a
complex of economic problems, of which the most outstanding are those of
unemployment, price inflation, internal and international debt, trade
competition, and business collapse.
At the same time, immense improvement in techniques of production,
centred around the computer, the robot, and innovations in chemistry and
microbiology, are offering to mankind the prospect either of an immensely increased
standard of living – or of poverty as a result of unemployment.
The observation is made that modern manufacturing techniques involve
immense expenditures on research and development ahead of production. Production
itself takes place with a small labour force and large amounts of capital. Mass
employment on the production of consumer goods, as distinct from capital
developments, is becoming a thing of the past. This has created a situation
where the total output of consumer goods in the economy at any time has
become progressively less connected to the quantity of paid employment
distributing incomes to potential purchasers during the same period of time.
Therefore situation has arisen whereby an artificial pressure has been created
throughout the world’s economies to develop capital spending, including spending on
armaments, for the major purpose of distributing incomes to workers rather than for any other valid economic or political reason.
The generally accepted use of bank credit (which is effectively the creation
of new money) instead of personal savings for the purpose of financing capital
needs, leads to increasingly violent swings of the trade cycle, to a heavy burden of personal, corporate and government debt and debt service charges, and
to a lack of personal investment income to members of the general
public.
Certain changes to the existing fractional reserve system of banking are
therefore suggested to correct this situation. Suggestions are also made
for the electoral reforms necessary to make economic and political changes
feasible under our Parliamentary system.
I N D E X
SUMMARY . . . . . . . . . Page 2INDEX . . . . . . . . . Page 3
PRELIMINARY . . . . . . . . Page 4
ARGUMENT . . . . . . . . . Page 4
THE WORLD OF THE 1980′s . . . . . . Page 6
THE PROBLEMS WE FACE. . . . . . . Page 6
FLAT EARTH ECONOMICS. . . . . . . Page 8
Unemployment . . . . . . . . Page 8
Incomes . . . . . . . . . Page 9
Inflation . . . . . . . . . Page 10
The National Debt . . . . . . . Page 10
Foreign Trade . . . . . . . . Page 11
Productivity and Competition . . . . . Page 13
Wealth and Money. . . . . . . . Page 14OUR MONETARY SYSTEM TODAY. . . . . . Page 14
MONETARY INSTABILITY AND COST . . . . . Page 23
Instability. . . . . . . . . Page 23
A distorted economy . . . . . . . Page 25
Cost . . . . . . . . . . Page 27
Third world debt. . . . . . . . Page 29SOLUTIONS AND RECOMMENDATIONS . . . . . Page 30
Monetary Stability . . . . . . . Page 30
Debt . . . . . . . . . . Page 31
Foreign Exchange. . . . . . . . Page 32
Unemployment . . . . . . . . Page 34
Business and the Environment . . . . . Page 35THE POLITICAL ASPECT. . . . . . . Page 36
Recommendations . . . . . . . . Page 39
APPENDICES. . . . . . . . . Page 40
A. Statistical Approach . . . . . . Page 40
Actual and calculated Price Index changes,1926-1962 Page 42
B. Summary of recommendations . . . . . Page 46
ACKNOWLEDGEMENT The research assistance of MDI Foundation, and
the
financial assistance of Social Credit Publications Trust in the
preparation of
this brief are gratefully acknowledged.
PRELIMINARY
At the outset, I would like to express my pleasure that a Commission
such as
this has been set up.
Across the world today, and with distressing similarity to the Great
Depression of the 1930′s that struck the world some years after the boom
that
followed World War I, another Great Depression has begun to make its
appearance.
New technologies and immense progress in techniques of production should
have
made it possible to offer a fuller and more satisfying life for mankind
than
ever before – yet the chief reward to the average working person,
whether blue
collar or professional, has been the threat of lost employment and the
poverty
that derives from it.
“Poverty in Plenty” has once again become an everyday reality.
Nothing could
be more worth while at this moment in our nation’s history than to
seriously
study the condition and the great potential of our nation and map out
directions
for the future, and your Commission, with the broad terms of reference
it has
been given, and the wide view it has taken of its responsibilities,
will, I
hope, prove a worthy vehicle through which this can be done.
ARGUMENT
The argument I wish to present is that the immense progress in
techniques of
production and national wealth that has been made since the commencement
of the
Industrial Revolution two hundred years ago has been the result of a
number of
factors such as specialization of employment, the use of power, use of
tools of
progressively more complex types, and particularly, the development of
knowledge
and skills that have enabled human effort to be applied with
increasingly more
potent effect.
This progress is essentially the development of a system whereby a
single
person, instead of working on his own in a large number of fields with
limited
output to satisfy his various desires and needs, works to turn out a
large and
specialized output of goods and services in a very limited field,
exchanging his
surplus with the surplus production of many different specialists in
many
different areas.
The key to the efficiency and increased production of wealth that
comes from
this specialization lies in the efficiency of the process of exchange.
If the
system of exchange is efficient, then an immense degree of
specialization, both
in human activities and in machinery to assist these activities, is
possible. If
it breaks down (and many factors can cause it to do so: shortage or loss
of
confidence in the medium of exchange, government taxes, controls or
planning
contrary to market influences, breakdown of law and order and respect
for
private property) the standard of living of a whole community can be
impaired,
sometimes very suddenly and very drastically.
The institution of an effective money system has proved over history
to be
the best means of providing a system of exchange where seller and buyer
are able
with a minimum of friction, and with a maximum of efficiency and
satisfaction,
to exchange wealth of one kind for that of another. The particular
success of
Western capitalism over the past two hundred years has stemmed from the
development of an effective system of monetary exchange through its
joint stock
Banking system, which has provided a means whereby a supply of money (in
the
form of bank credit) has been made available for the development of
capital and
commerce, at far less cost than would have been the case if the money
supply had
depended solely on the supply of precious metals. Through the banking
system,
also, credit could be supplied in a quantity that the world’s gold and
silver
supplies could never have matched. The built in possibility of bank
failure
prevented the unlimited expansion of credit, which would have the effect
of
destroying the bank before it destroyed the value of the monetary unit.
This has
rendered Bank credit frequently superior to state created fiat money
(its
principal rival for acceptance as the monetary unit) in the past.
The general acceptance of private banking as the means for supplying
the
nation with its money supply, which is particularly the case in Canada,
should
not blind us, however, to a number of its shortcomings. Some of these
are:
- Difficulty in accurately controlling the total of the nation’s
monetary
mass.
- The cost to the business community and the consuming public alike
of
interest on credit created by the banking system and used as the prime
medium
of exchange.
- Difficulty in providing the economy with a sufficient monetary
mass in
times of recession when borrowing is unattractive or impossible from abusiness point of view.
- An immense burden of National, corporate and personal debt, which
cannot
be repaid without cancellation of most of the country’s money supply.
- The possibility of excessive Bank influence in both the political
and
economic spheres, through favouritism in the supply of credit.
- Capital financing for business from Bank sources rather than
through
personal savings, which leads to unhealthy debt/equity ratios,
inflation in
times of capital expansion, and devastating recession when it ceases.
- Possible loss to the public and economic collapse arising from
bank
failure occurring through dishonesty, imprudent investment, or other
cause.
The suggestion is therefore made to the Commission that the supply
of
Canada’s medium of exchange through the Chartered banking system
should be
controlled on the basis of a statistically calculated “fiduciary
issue” of
allowable Bank credit, rather than the present “fractional reserve”
system,
where the quantity of credit in circulation cannot be controlled other
than by
a vicious elevation of interest rates. It is further suggested that
the
activities of “near banks” – institutions of all kinds whose promises
to pay,
although not backed 100% by legal tender payable on demand, yet pass
from hand
to hand in settlement of debts – be similarly controlled.
It is further suggested that the enormous cost of Canada’s National
Debt
could by this means be almost entirely eliminated, since financing
could be
undertaken at cost (likely under 1% per annum) through the publicly
owned Bank
of Canada, once the threat of inflationary credit expansion by the
chartered
Banks under the fractional reserve ratio rules has been done away
with.
THE WORLD OF THE 1980′S
The preliminary outline of the Commission’s work raises the
question as to
whether the troubles of the present time are merely temporary
phenomena – or
whether they are signs of a deep seated change in the nature of the
economy
itself.
My reply to that question is certainly that we are at the beginning
of a
completely new era in the history of the human race: one that involves
such a
radical development of human capabilities that today’s resources and
social
institutions will look as restricted and hidebound to future
generations as
those of the Middle Ages look to ourselves – but yet this does not
mean that
the ordinary rules of mathematics or of economics have been repealed,
nor that
the situation that we find ourselves in is completely without
precedent.
Perhaps the closest parallel to the conditions of this, the second
Elizabethan era, is that of the time of the first Queen Elizabeth. In
those
days, the new frontier was the Americas: now it is outer space. In
those days,
the explosion of popular knowledge and informed communication was the
result
of the invention of the printing press: now it is that of radio, TV,
telecommunications and the computer. In those days, acute inflation
was the
result of quantities of precious metals brought back from the New
World: now,
it is from the abandonment of the Gold Standard in favour of money
existing
chiefly as computer information. In the England of those days, there
was
widespread unemployment and a flight to the towns by those who had
once been
independent yeomen, as a result of the development of land-intensive
sheep
farming requiring little labour, and the enclosure of lands previously
held in
common. Today, the intensive use of capital in production, and the
exhaustion
of free “homestead” land that was previously the new place to start
for the
economic failures of our system, is also creating a pool of urban
unemployed
that it may be very difficult to dissipate.
Another parallel with our times – they were ones of domestic
violence, and
international and civil wars. They were times when the conscience of
individuals enlightened by the new learning fought against and
eventually
achieved freedom from the control that tradition could once maintain
over the
ignorant. We too, in the twentieth century, are going through our
times of
passionate conflict of nation against nation, class against class, and
belief
against belief. Perhaps we too, in our time, (nuclear war permitting)
can hope
to win through to a new age of reason, where scientific enquiry will
replace
unthinking passion in the discussion of social and economic questions.
Perhaps
this Royal Commission has a place in this process.
THE PROBLEMS WE FACE
To itemize the most conspicuous economic problems we face, and have
faced
to a greater or lesser degree throughout most of this century, these
are as
follows:
- Unemployment. In many parts of Canada, and for many
years, there
have been substantial numbers of persons willing to work, but unable
to find
a suitable job. At times this could be rectified by movement to highemployment areas. At other times – such as the ’30′s and the
present, there
are no areas of high employment. Besides the personal
discouragement of the jobless, there is an obvious loss to the
community of
the output of services that the jobless could have provided to the
community, had they been employed. At the present time, an
unemployment rate
of over a million persons, and the cost to the Federal government ofunemployment insurance payments running into the billions of dollars
a year,
are matters of national crisis.
- Inflation. Apart from a time of marked price decline in
Canada
during the years of the 1930 depression, the level of consumer
prices has
been steadily rising in Canada throughout the period since World War
I – and
since World War II, has commenced to rise with alarming rapidity. In
the
past 25 years in Canada, the dollar has lost over 75% of its
original value.
Only extremely severe “tight money” policies, involving
unprecedently high
interest rates, and devastating effects in the health of business,
have been
successful in checking (but not entirely eliminating) this continual
fall in
the value of the monetary unit.
- National Debt. Since 1968, and particularly in the past
two or
three years, the federal deficit, and the cost of servicing it, has
climbed
to unprecedented levels – so much so that in this 15 year period,
the amount
of the federal deficit has climbed to a greater sum than the whole
of the
1968 budget. Provincial and Municipal budgets are under similar
stress, and
the load that these deficits are placing on the capital markets of
the
nation in turn makes it difficult for this market to service the
needs of
business at economic rates.
- International Trade. Much of Canada’s economic prosperity
depends
on finding overseas markets for primary agricultural and mining
production.
The acute budgetary problems of less developed countries makes the
continuance of these markets problematic. Furthermore, the
competition to
Canada’s industries from either hyper-automated industries such as
those of
Japan, or of low wage economies, such as those of Hong Kong, Taiwan
and
Korea, are creating devastating competitive pressures on Canadian
manufacturers that perhaps cannot be measured up to within Canada
except
through either a return to “sweated labour”, or a degree of tariff
protection.
- The environment. A further problem which is going to be
of
greater and greater concern in the world as frontiers and
undeveloped land
become exhausted, is the contamination of the world’s environment
with waste
of all kinds – organic waste, toxic gases, heavy metals, asbestos
dust,
radioactivity as well as insecticide and fertilizer residues and
other forms
of chemical pollution which could, if present trends are allowed to
continue
and if no proper countermeasures are taken, make the globe virtuallyuninhabitable within a short period of time. Environmental
protection costs
money, and the particular problem created by this situation is that,
in a
highly competitive world economy, the temptation is to cut corners
and
expenses by disregarding the problem – to the serious long term
detriment of
the human race. “Love Canal” and Minimata disease may only be the
forerunners of even more serious horror stories in the
future.
“FLAT-EARTH ECONOMICS”
When a problem goes unsolved in spite of many years of effort to
find a
solution, this often enough occurs because the framework of previouslyconceived ideas concerning the situation inhibits the radical change
in
viewpoint necessary to come up with an answer. Those who believe in
Phlogiston, for instance, will never be able to understand the
chemistry of
combustion. Those who believe that the world is flat are incapable of
understanding gravitation or the motions of the planets.
Our lack of progress in finding solutions to economic problems of
long
standing, therefore, should by now be prompting us to consider whether
it is
some wrong preconception of the economic situation – equivalent to the
belief
that the earth is flat to a would be space explorer – which is
preventing us
from sailing out in a new direction and discovering a new world of
economic
prosperity. And in fact, inspection does reveal, around each of our
major
problems, a conventional wisdom of “flat earth” ideas which explains
our lack
of success. These fallacies can be listed.
- “That automation destroys employment”. This is an
untruth. A
“job” is a standing order by an employer to an employee to supply
him on a
regular basis with one of the basic factors of economic production –
human
effort. With labour, as with any other of the traditional factors ofproduction, demand is a function of price. Automation, giving more
output at
a cheaper price, naturally tends to replace the direct use of labour
in
production – but if the price of labour were to fall to zero – if
people
were willing and able to work for free – jobs would appear from
everywhere:
the demand for labour would become almost limitless. The surplus of
unemployment that we see across the world today is not because there
is no
work to do. It is because labour cannot afford to work for employers
at the
price the employer can afford to pay, and at a price competitive
with the
machine for similar output.
The problem is one of the price of labour. Most of us, if someone
volunteered to work for us for free, would find no end to the useful
work
that could be done – care for the aged or for children and the sick,cleaning and improving the home, and when immediate needs had been
satisfied, in scientific research, education, or other cultural
activities!
We might find servants to pump gasoline, wait on us in retail
stores,
butlers and maids – services which have almost passed out of
existence as
labour costs have brought in the “serve yourself” society of today.
Unemployment is the failure of a potential worker to find some
person
willing to buy his labour, and the reason for unemployment is that
the price
of labour is too high compared with the resources of the employer topurchase it, and the value he can get from its use. This does not
necessarily mean that Canada’s million and a half unemployed should
go back
to work for starvation wages. However, if they did have alternative
sources
of income to supplement their wages, or if in some way, their living
and
especially their housing costs could be cut down, then wage rates
could be
reduced, involuntary unemployment could be eliminated, all without
any
sacrifice of the worker’s standard of living.
The above is of course purely theoretical. But it leads on to
another
“flat earth” fallacy.
- “That earned income is the only income.” Karl Marx paints
a
picture of the proletariat sweating under the capitalists of his
day, forced
to supply the greatest output possible on a wage which is the
minimum
necessary to keep body and soul together. In the atmosphere of
unrestricted
free enterprise of his time, of course, the capitalist could hardly
do
otherwise, or under the “iron laws of economics” his enterprise
would not
survive. Similarly, in today’s atmosphere of acute international
competition
for markets, Canada appears to be faced with the same dilemma – cut
costs
(including wages, and the government costs of the “welfare state”)
or go
under. Already, this has been the justification for severe cutbacks
in wages
and social services in British Columbia – it has, too, been to a
greater or
lesser degree the policy of the governments of both the United
Kingdom and
the United States in the past two or three years.
The purpose of the worker’s income is to make available to him
the food,
clothing and shelter and other things he needs for a reasonable
standard of
living. The problem of the proletariat is not necessarily that it isunderpaid, but that all it needs to survive in the world has to come
from
one single income source – the sale of labour. Yet the
requirements
of survival can come quite easily from several income sources, not
just
one:
- Ownership of consumption goods. Buying a car and paying
the
mortgage or the rent are two of the working person’s greatest
living
expenses: in many cases they amount to between a third and a half
of total
income. Those who own these assets outright receive a tax free
income of
value from this ownership that costs nothing in money, yet which
can
enable them to live at a higher standard of living than their
propertyless
neighbours, even when their money wage is lower.
- Ownership of productive assets. This may be the
increasingly
rare species – the businessman or farmer who owns his own
enterprise – or
it may be an investor who, directly or indirectly, has a share in
the
ownership of profitable productive enterprises which bring him an
income
without him having to do a hand’s turn of work. Some people may
regard
this as immoral. To me, it is a simple reflection of a phenomenon
that has
been with us ever since the Industrial Revolution. Output today
comes
primarily from the use of tools and machinery. Employment today
comes
chiefly from labour put out on the tools and machinery that will
create
the output at a future time. Investment is the tie by which those
who go
without consumption at one point, in order to make it possible to
manufacture the tools of production, are paid off handsomely in
the future
when that production comes about without their labour being
required.
- A third source of income is, of course, wages of
labour, which
will always have some, though not necessarily the first, place in
the
scheme of income distribution. In a world where labour demand is
increasingly tied to capital development, which tends to create
high
demand for short periods of time only, wages for work become more
and more
unreliable as a person’s major income source.
- Government handouts form a fourth source of income.
They have a
somewhat pejorative connotation, until we realize that these
`handouts’
reward Veterans and Senior Citizens with pensions, encourage
mothers to
bring up the next generation with Family Allowances, and stand
between the
unemployed worker and destitution in the case of Unemployment
Insurance,
to name only a few such programs.
Incomes, in fact, can come from many sources other than
employment – and
the more they come from such sources, the more the price of labour
can be
lowered, and with that, the level of employment restored.
- Ownership of consumption goods. Buying a car and paying
- “That inflation comes from governments printing money”.
This
hoary piece of conventional wisdom continues to hold its ground in
spite of
the fact that the Government of Canada has not printed any money at
all
since the “shinplaster” went out of circulation in 1935. It is a
fairy tale
a little similar to that which blames inflation on “world
conditions”,
sunspots, greedy capitalists and/or workers, or which says that
“inflation
is an incomprehensible plague that no-one can understand.”
The reason for this belief that, somewhere in the backrooms,
“governments
are printing money”, in spite of a complete absence of all the
evidence of
it that a normal enquirer would expect – government printed paper
money, for
instance – must surely be, firstly, the obvious fact that there is
much more
money in circulation than there was, say twenty-five years ago, and
secondly, another long standing fiction that Banks do not create
money -
they simply lend out their customers’ deposits”.
If there is a vast increase in the money supply of the
nation,
and if the Banking system does not create this increase, we
are
almost forced back on the legend that Governments are printing
money, in
spite of a total lack of evidence that this is the case. On the
other hand,
once we accept the fact that the major part of Canada’s money supplyoriginates from credit created by the Chartered Banking system,
which has
the right to issue “promises to pay” which pass as money to a value
of $1.00
for every five cents it holds in cash, then we can suggest that the
proper
dictum is that “Inflation is the result of the chartered banking
system
creating credit.”
Belief that this is in fact the case becomes stronger the more
one vainly
searches to find any depositor at any solvent bank who can say: “My
money in
the Bank is not available for me to use. The Bank has lent it out!”
So, too, let us dispense with the fiction that the rate and
manner in
which consumer prices have been rising is beyond human
comprehension. It is
possible to demonstrate from the published statistics that the
Consumer
Price Index varies almost exactly in accordance with the following
two
factors:
- Variations in the volume of money in the hands of consumers,
and
- The volume of retail sales.
A more detailed analysis of the computation of this relationship
applied
to Canadian statistics appears as Appendix “A” to this brief.
- Variations in the volume of money in the hands of consumers,
- “That money cannot be created without the creation of
debt.”
Incredible as it may seem, when the Federal Government finds its
income
running short in a year of recession when program needs are high and
taxes
cannot be raised, it considers no other alternative but to
borrow
the necessary shortfall.
The process of borrowing involves the Government printing paper
promises
to pay in the form of Treasury Bills, which it sells at a discount,
so
giving an “effective yield” to the purchaser. Some of these Bills
are
purchased by the Bank of Canada, a highly profitable Crown
Corporation,
which gives either credit in its books or legal tender Bank Notes to
the
Government in exchange for these Bills. The remainder of these bills
can be
purchased by financial institutions such as Chartered Banks.
Assuming that
the Bank of Canada has purchased a sufficient number of Treasury
Bills, and
the Government has spent the proceeds of sale on its salaries and
various
programs, these will have been deposited in the Chartered Banks by
the
recipients. In very round figures, every million dollars so
deposited gives
the Chartered Banks the opportunity to buy twenty million dollars ofTreasury Bills with “Bank Credit” – that is, with the Bank’s own
promises to
pay. This Bank Credit is secured by the impeccable reputation of
Canada for
paying its debts. Twenty one million dollars that never existed
before are
now in circulation. Canada is in debt an additional twenty one
millions of
dollars, and the interest burden of this (unless paid off in the
future)
will be an annual charge of three million dollars or so in taxes on
the
Canadian people, year after year after year.
Behind the promises of the commercial banks of this country, and
giving
us confidence in their ability to pay, stands the Bank of Canada.
Its Bank
Rate is an open offering to any bank in cash flow trouble to borrow
from it
at the stated rate. Behind the Bank of Canada stand the printing
presses of
the British American Bank Note Company, able to deliver legal tender
money -
almost the only legal tender money there is in Canada – in
quantities
sufficient to satisfy any conceivable demands for currency that the
public
might place upon it. Behind this paper of the Bank of Canada stands
the law
of the Canadian government – that the paper of the Bank of Canada is
lawful
money – legal tender for the settlement of debts. In financing the
National
Debt in the way it does, the Government is, at immense cost to the
Canadian
taxpayer, borrowing credit created by the Chartered Banking system
which
would be worthless paper if it were not for the Government’s own
guarantee
that it will never allow the Banking system to fail.
As an exercise in lunacy, this process takes the prize. It
enables, for
instance, insolvent Banks who have over-lent to insolvent Dome
Petroleum
Company to put together a package by which an insolvent Government
will give
them a guarantee, and all will be saved from failure. Canada must be
the
only place in the universe that three negatives can be assembled
together
and used to manufacture a positive!
Once upon a time, the Canadian Government issued Treasury notes –
without
debt. Even now, through the Royal Mint, it issues Canada’s coinage –
without
debt. Many nations, including particularly the early American
colonies,
issued paper money – without debt. Treated responsibly, it did not
lead to
runaway inflation. Adam Smith’s “Wealth of Nations” seems to
indicate that
in the American Colonies, it led to prosperity far beyond that of
the
Britain of his day. The creation of a nation’s money supply by
borrowing it
from the Chartered Banking system is a farce and an absurdity, which
not
only involves unnecessary levels of taxation and restriction of
social
services on the populace, but also prevents the economy having a
sufficient
supply of a cheap and credible medium of exchange to work at an
optimum
level of activity.
- “That prosperity depends on Foreign Trade”. This is
actually one
of a number of fallacies centering around the foreign sector. Some
others
related to it are:
- “We need foreign investment to set our industries to
work.”
- “Unless we are competitive in international trade, we are
doomed.”
- “Money is international, therefore Canada cannot follow an
independent monetary policy in today’s world.”
What confusion! Suffice to say that the firm attachment of
Canada’s
monetary authorities to the policies of Washington in the recent
period of
inflation, coupled with extensive Canadian borrowing in the U.S.A.
to
protect Canada’s exchange rate, has done more to destroy Canadian
business,
employment and prosperity in recent years than any other article of
monetary
policy in the past fifty years, home grown or imported.
The Canadian people only work for Canadian dollars. An “inflow of
foreign
investment”, therefore, is no more than the purchase by foreigners
of
quantities of Canadian currency with the foreign currency: the
currency
itself never crosses the national boundary. As was the case, for
instance,
in the Diefenbaker years, when U.S. investment in Canada’s oil
industry was
at its height, the major effect of such investment is the flattering
one of
driving up the exchange rate of the Canadian dollar. This in turn
makes
Canadian industry uncompetitive in world markets. Foreign investment
in
Canada therefore becomes the way by which we sell out the ownership
of our
industries, at the price of our own unemployment.
Money is not international – it is a call on the resources of the
persons
whose nation makes use of the money, nothing more. There is a real
danger in
all attempts to give the world an international currency, and
equally, in
removing all barriers to trade. The danger is one of speculation,
and of
competition. Speculation, because if a quantity of money can be
moved from
one end of the world to the other, faster than goods can be moved,
artificial fluctuations of the price level (particularly of
immovables such
as real estate) can easily be achieved. Competition, because Canada
is a
country that will always have non-competitive overheads built into
her
productive system, arising from climate and from geography. If we
cannot
sell anything without meeting the keenest of world competition, we
may as
well close down all our industries – they are heading in that
direction
already!
In fact, Canada should rather think in the reverse direction –
that the
area covered by her national banking system and her monetary unit
may well
be too big, leading to continual swings of prosperity as money moves
between
“have” and “have-not” provinces. The United States system of
localized
banking, and the success, for instance, of the Alberta Treasury
Branch
system in refloating the Alberta economy after the 1930′s
depression, may be
indicators that localized and not too mobile forms of credit may be
a
valuable tool in preventing excessive swings in prosperity between
the
regions of the Canadian economy.
Foreign trade is obviously also no complete source of answers to
the
world’s problems of underconsumption. If domestic consumers are
short of
purchasing power, then of course it is attractive to try and sell
abroad:
this is not for the purpose of exchange of commodities, but to
dispose of
surpluses which otherwise will not find a market. There is really
nothing
Canada wants from the Soviet Union in exchange for its wheat –
certainly not
Lada cars! It is for this reason that credit is extended to foreign
markets
by almost all nations including our own on almost irrationally
generous
terms. But all nations cannot solve their problems of lack of market
demand
in this way. Those who do succeed in so doing – like the Japanese –
can
become the workshop of the world. Those who do not – and even those
who do
chiefly by export of raw materials with little labour content, like
Canada -
had better think of some better way of maintaining domestic
employment
levels.
Those nations who invest substantially overseas – as was
Britain’s
situation in Victorian times, and that of the U.S.A. more recently –
obtain
very beneficial economic results. Their investment itself creates anartificially low exchange rate for their currency, which in turn is
extremely helpful in making them competitive in foreign markets.
Canada’s
penchant for borrowing capital abroad is the very reverse of this,
and
extremely harmful to the national economy.
- “We need foreign investment to set our industries to
- “That Productivity and Competition are the key to economic
renewal”. The suggestion is often encountered that if only
business
would become more efficient and competitive, we would not lose the
“international trade war”, and could set our industries humming once
again.
This is another variation of the theme that foreign trade will solve
all
problems. This, however, is really just as practical a suggestion as
saying
that only the runner who can win the race should be allowed to run
at all.
Only hares are allowed to participate: tortoises are barred. Common
sense
tells us, however, that in terms of total distance travelled, the
slowest
tortoise can still add something to the achievements of the fastest
hare!
Productivity in our modern world means getting more production
from fewer
workers. The workers not required go on the scrap heap. In the case
of the
individual company, this of course spells efficiency. In the case of
a
nation, where the net result is half the working population out of
work, and
the other half working seventy hour weeks to avoid the same fate,
the
situation becomes ludicrous. There is no more productivity in having
half a
nation out of work and the rest working at 100% efficiency, than to
have the
whole nation only working at 50% efficiency. The social cost of the
former
is actually higher than that of the latter.
Canada is a cold country with a scattered population. Moreover,
her
favourable endowment with natural resources means that, if these are
the
factor of production she best contributes on international markets,
then
other nations such as the Japanese will be the ones to add the
labour and
capital, and a competitive international environment will keep our
unemployment level uncomfortably high. (Britain has had the same
problem in
dealing with the wealth coming from the exploitation of North Sea
oil.)
Efficiency may be all to the good – but cheapness is not necessarily
the
same as efficiency. How much must we pay in terms of degraded
environment,
lowered quality of life, poor housing, dangerous or unhealthy work
environments, and general loss in the enjoyment of work itself, if
competition decrees that unless we are cheaper than any, we have no
right to
exist as manufacturers at all?
- “That producing wealth produces money.” A final and
related
misconception. The idea sometimes gets around that “If we produce
more
wealth we will have more money” – as if, for instance, growing a
bumper
wheat crop grew the dollar bills to buy it with. Of course this is
untrue.
The production of money is independent of the production of real
wealth -
and the bumper wheat crop simply leads to an “agricultural surplus”
unless
independent steps are taken to correct the monetary imbalance this
“overproduction” causes.
OUR MONETARY SYSTEM TODAY
The key to an effective economic system is effective exchange, and
the key to
effective exchange is an efficient, credible and inexpensive monetary
system.
Canada does not enjoy such a system, and this is at the root of our
economic
problems. I would therefore now like to move on to outline the way in
which our
monetary system is functioning today – and how it could be made to
function more
smoothly.
A monetary system can be examined from two standpoints:
- The source of the value of the credit of the nation as a whole,
and
- The source and cost of creation of the different dollar units made
use of
to draw on this credit.
The monetary mass – that is, the total volume of money of all kinds
circulating in a country at a particular time – has value because at any
single
point of time in Canada, there will be persons and businesses of all
kinds with
specialized skills or products surplus to their requirements, which they
wish to
“put on the market”. Even though they are owners of these skills and
products,
their interest is to find someone else willing to acquire ownership in
exchange
for dollars. The purpose of acquiring ownership of these dollars is in
turn to
exchange them for other products sold by other people, which the holders
of the
dollars with to take off the market for their own use.
The time frame within which all this takes place, and during which
the
average dollar makes a single revolution from consumers to business, in
savings,
purchases and investment, from there back to consumers (including
government) in
wages, taxes, rents and dividends, and from there to the point of
spending
again, is essentially determined by social conditions – general
frequency of
wage payments, tax structure, personal spending, investment and saving
habits,
and so on.
Nevertheless, as is set out in Appendix A, it is a remarkably
constant
percentage of total production. Statistics over many years show a total
of
currency outside banks and chartered bank deposits (M3) that does not
generally
vary outside the limits of a minimum of 35% and a maximum of 55% of
Gross
National Product. Put in another way, the time taken by the average
dollar to
pass through all the processes of the economy, from the time it is spent
by the
consumer to the time that the consumer is ready to part with it once
again,
varies from four to seven months, and is presently running fairly close
to a six
month, or 50%, ratio of money supply to annual G.N.P. Rarely is there
violent
fluctuation in this ratio from one year to another.
This very definite value of approximately one half year’s production
constitutes what one writer has called the “virtual wealth” of the
nation, and
others the “public credit”. It is the total value of all that Canadians
are
prepared to put “on the market” at one single point in time, for the
sake of
receiving dollars which give them the right to take other goods and
services
“off the market” when they are spent or invested later on.
Note first, that this public credit is of an identifiable quantity,
given
certain information about social conditions, price levels and the like.
Note
secondly, that the whole value of the public credit is generated by the
action
of Canadians putting goods “on the market” in order to acquire Canadian
dollars.
It is not generated by the actions of the financial institutions which
create
these dollars.
The value at any time of each Canadian dollar, regardless of its
origin, is
the quotient obtained by dividing the total value of Canada’s public
credit by
the total number of the dollars contained in Canada’s monetary mass.
Increasing
this number of dollars will tend to reduce the value of each individual
dollar.
On the other hand, shrinking the number of dollars will not always lead
to
falling prices and an increased value of the dollar. The manufacturer or
farmer
unwilling to sell below cost may instead shrink the size of the public
credit by
legally or illegally holding goods off the market, through cartels or
marketing
boards. Alternatively, he may go bankrupt or out of business. A
shrinking supply
of money will likely result in the nation’s Gross National Product
falling in
real terms below the reasonably possible productive power of the nation
expressed in physical terms.
Based on this line of reasoning, a prudent government would surely
cause the
quantity of monetary units within Canada to be regulated in accordance
with
physical possibilities in the most precise and scientific manner
possible, to
prevent either inflation of prices or decline in economic activity. It
is with a
sense of shock that one examines the grab-bag of monetary units of
different
types and origins that in fact make up the monetary mass of Canada, and
the
blunt and ineffective instruments that are all that are presently
available by
way of control either of quality or quantity.
Classically, Canada’s money supply consists of coins, Bank of Canada
Notes in
circulation with the public, and Chartered Bank deposits.
Coins are the most primitive form of money. Originally a
state-certified weight of precious metal, they have degenerated over the
years
to base metal of no particular weight, drawing value from the stamp of
the mint
on their face. The Royal Mint turns out coins from metal purchased on
the
market. It makes a profit, if the face value of coinage produced exceeds
the
costs of production. Coins do not form a major part of the nation’s
total money
supply.
Bank of Canada Notes are distributed through the Bank of
Canada, and
are the basic form of “legal tender” money. They form around ten per
cent of
Canada’s money supply. They are issued by the Bank of Canada in
accordance with
the policies of the Bank, in exchange for the debt either of the FederalGovernment or the chartered banking system. Because Bank of Canada notes
are the
major form of legal tender in the country, and the Bank Act requires
chartered
banks to hold prescribed reserves of legal tender (averaging perhaps 5%)
as
security that Bank Credit held by the public can be honoured in legal
tender
notes on demand, the volume of Bank of Canada notes, an of Chartered
Bank
deposits in the Bank of Canada, is the key instrument that the Bank of
Canada
has at its disposal in controlling the actual quantity of money in
circulation
in Canada at any time.
A third type of money – which constitutes perhaps 90% of Canada’s
money
supply – is Bank Credit. This is the “money in the bank” of all
who have
made deposits in chartered banks, or obtained a line of credit from
them.
Banking has descended in principle from the actions of the goldsmiths of
the
Middle Ages, whose notes, given as receipts for gold deposited with them
by the
public for safekeeping, passed into general circulation as money.
Goldsmiths
then began to issue more notes than the actual gold in their vaults,
“banking”
always on being able to satisfy the demands of depositors – something
they were
generally able to do unless they were destroyed by a loss of confidence
and so
by a “run on the bank”.
As time has gone by, the promises to pay of banks have been backed by
less
and less precious metal, to the point that nowadays, there is no gold
whatsoever
behind Canada’s money supply, and the security to prevent bank failure
has
become the guarantee of the state-owned Bank of Canada to lend legal
tender
paper in time of need. There has been an actual transformation in the
nature of
money itself. Over hundreds of years, it has changed from solid,
valuable metal
of defined quality and quantity, to nothing else than information
contained in
the accounting records of a limited number of privately held
corporations,
backed in value by State fiat and a printing press – and the credulity
of the
Canadian people!
Beyond Banking lie other, more shadowy forms of money which do not
always
appear in the statistics. Counterfeit money is prohibited by law, and in
general
is effectively suppressed. However Credit Unions, Trust Companies and
Treasury
Branches operate chequing accounts backed only partially by legal tender
money,
which have the same effect of inflating the national monetary mass as
bank
lending. Travellers cheques are prettily printed paper, passing as
money, backed
only by a promise to pay. The “plastic money” of a credit card is a
promise by
the grantor to make Bank Credit available on demand up to an assigned
credit
limit, backed by nothing except an estimate of demand. It adds to the
monetary
mass, yet is unrepresented in the statistics. Gresham’s law, that “bad
money
drives out good”, has indeed taken our monetary units a long way since
the days
when money was solid, measurable, and of intrinsic worth!
MONETARY INSTABILITY AND COST
The creation of Canada’s money supply in this haphazard manner has
two
principal consequences. Both of these are becoming so much more
oppressive at
the present time, that they threaten economic collapse.
The first of these is instability in the quantity of money in
circulation,
leading to uncertainty concerning the value of the dollar, and thereforeconcerning business profit levels, activity and costs.
The second is the cost to the nation of a rented money supply, having
regard
to the fact that money originally owes its value, not to any value given
it by
the creating institution, but to the people who will give the real
wealth of the
public credit in exchange for it.
(1) MONETARY INSTABILITY
In a situation where the greatest
amount of the
nation’s monetary mass is credit that has been created by the chartered
banking
system, the amount of that monetary mass is bound to be determined, not
by the
actual economic needs of the nation, but by the laws of “sound banking”.
The
loans creating the nation’s money supply will be made, not in accordance
with
the nation’s economic needs but by the question of whether, from a
banking point
of view, they are soundly enough secured to give a proper return on
investment.
A positive economic outlook, with the prospect of increasing sales,
steady
and high levels of employment, and rising prices (which guarantee the
soundness
of security based on real estate) leads to conditions encouraging an
expansionist bank lending policy. The credit so lent itself creates
effective
demand for products on the market, tending to the continuance and
increase of
these “boom” conditions. A situation of positive feedback develops, in
which
prosperity encourages lending, and lending creates prosperity, and, as
Canada
has recently experienced, it easily leads to a situation of runaway
inflation.
Conversely, if business is contracting, real estate prices are
falling,
unemployment is high, and business sales are slumping, then this is not
the
climate in which banks can be expected to lend. And the very reluctance
of banks
to lend in such an economic climate itself causes a contraction of
credit, and
conditions that make lending even more unwise from a banking point of
view.
A particular reason for this swing between boom and depression is the
purpose
for which business loans are advanced in the first place. It is
commonplace in
the business world for many items of capital – machinery, buildings,
office
equipment, vehicles and so on – to be financed either by direct bank
borrowing,
or indirectly, say by a lease agreement funded by bank credit. Suppose
such a
loan is for, say, an office computer system to lower costs by reducing
staff. An
initial study shows that the $300,000 capital cost of the computer
amortized
with interest at $10,000 per month over five years will replace staff
presently
employed for $20,000 per month. The financing of the system by bank
credit
creates new money which goes to the supplier of the system, and those
who work
on its assembly, during all the period that the system is being put
together.
Throughout this period, inflation is being caused, because a number
of
persons working in assembling this capital project are receiving
incomes, but no
new product is at that time coming on the market. Their pay packets,
therefore,
compete with those of all other consumers on the retail market, and tend
to
force up prices – particularly the prices of immovables, such as rents
and
housing.
As soon as the system is assembled and installed, two sets of people
lose
their jobs. One set is the persons working on the manufacture of the
equipment.
The other is the office staff replaced by the new technology. Yet at the
same
time, the owners of the system are under an obligation to start paying
back to
the Bank the credit that has been advanced to them to purchase it, by
sixty
monthly instalments of $10,000. They are now trying to draw credit out
of the
market for cancellation, at the very moment when the market is suffering
the
loss of the incomes of the staff displaced by the completion and
introduction of
the new machine.
This is not fanciful theorizing. In the heyday of the Alberta boom, a
million
dollars a day were pouring into Edmonton from the incomes distributed inNorthern Alberta through the Fort McMurray tar sands project. Rents and
property
values were continually rising. The whole economy was carried along on a
wave of
euphoria. It seemed that every project would turn to gold, and good
times would
never cease. When the day came that the project was complete and most of
the
construction staff were laid off, and next when successor mega-projects
such as
the Alsands plant were cancelled, the economy turned downwards with
lightning
rapidity. What is of the greatest concern in looking at future trends,
is that
the ever increasing use of ever more expensive and efficient capital forproductive purposes is likely to lead to ever more violent swings
between boom
and bust from this cause. The instability that comes from ninety per
cent of the
nation’s money supply depending for its existence on there being a good
economic
climate for bank lending is too great an economic threat for any prudentgovernment to allow, and demands new thinking.
More than this, such a situation causes distortions in the economy.
Projects
are approved for action, often by desperate governments, for the reason
that
they give an excuse for the manufacture of bank credit. Hopefully, this
will
convert a downward deflationary spiral into an upward boom of business
prosperity: (this is known as “priming the pump”). The economic worth of
such
projects is not their real motivation. Effectively, uneconomic projects
are set
on foot for the sake of their monetary consequences. All of them have
one of two
possible characteristics – either they distribute borrowed money to
potential
consumers, without at the same time placing consumer goods on the
domestic
market for sale, or else they reduce the amount of consumer goods coming
on the
market, relative to a stable quantity of purchasing power. Both of these
courses
have the effect of increasing money demand relative to quantity of
product on
the consumer market for sale. They increase the potential for business
profit,
and with profit, the potential for increasing credit creation and an
upturn in
the business cycle. This, however, is all at very serious cost in wastedresources and distortion of the economy. In the long run, the cure is
worse than
the disease!
Every sector of the economy can be used on these makeshift recipes
for
prosperity:
- The Government Sector
- by setting up government authorized cartels to restrict
production and
so maintain prices of “surplus” commodities – agricultural and
fisheries
marketing boards in particular. Governments can also engage in
- risky capital projects,
- an inflated civil service,
- deficit financing,
- overseas loan guarantees, and that granddaddy of all economic
revitalizers,
- rearmament and war.
- by setting up government authorized cartels to restrict
- The Business Sector
- with generous consumer credit,
- with mega-projects financed by borrowing rather than investment,
- with farm and businesses borrowing rather than making use of
equity for
capital expansion,
- with aggressive selling in foreign markets for credit rather
than
accepting foreign goods in return:
- by restrictive practices aimed at cutting down supplies in order
to
maintain profit levels by preventing “cutthroat
competition”.
- with generous consumer credit,
- The Personal Sector
- by financing living and capital costs through borrowing,
including car
and home purchases on longer and longer terms and with lower and
lower down
payments than ever before.
- By steering away from the old fashioned virtues of saving,
economy and
thrift, for the sake of immediate gratification in a “throw away”
society.
- by financing living and capital costs through borrowing,
- The Foreign Sector
- by exporting surplus products in exchange for foreign debt,
- by discouraging “cheap foreign competition” that might disrupt
manufactures at home.
- by exporting surplus products in exchange for foreign debt,
Every one of these nostrums yields a short term inflationary
consequence
which gives a little boost to the economy. My guess is that, repeatedly,
they
have been and will be recommended in briefs from many sources to your
Commission. Yet every one of them gives its short term shot in the arm
to the
economy, at the expense of long term consequences of ever increasing
severity.
“Government interference” and “Government waste” are proverbial, so
are
“Government boondoggles” that over and over again have wafted millions
of
dollars to feed the sacred cows of full employment and economic
development.
Farmers ruined by land prices driven up by easy farm credit; ruined by
quotas on
production: food prices kept artificially high by marketing boards while
the
quarter of the population living below the poverty line goes without -
culminating in the deliberate destruction of wealth as wheat is burned
and
coffee thrown into the sea. Consumers mired in a maze of “easy payments”
for
both the luxuries and necessities of life, living from payday to payday,
and
ruined if they lose their employment for as little as a couple of
months.
Businesses swinging on the teeter totter of highly leveraged financing,
and the
gradual but inevitable disappearance of the small entrepreneur and the
independent middle class.
Worse than all of these, the desperate need for all of the above to
have yet
another “fix” of credit, to stave off the always impending day when the
“buy now
- pay later” society has to start to pay.
(2) COST
The second factor is the cost to the world of renting most of its
money
supply from the chartered banks.
The “Canadian Banker” magazine a while back carried an extract from
the diary
of Samuel Pepys, who flourished in Britain in the years of the
Restoration,
about 1660. He was describing in surprised delight the new institution
of
Banking, by which the smart investor, instead of paying the goldsmith
for
warehousing his valuables, opened an account, and was actually paid
interest for
having his money looked after!
Who paid for Samuel Pepys’ remarkable new service? Basically, the
public did.
Pepys leaving his gold with the banker enabled the latter to lend it out
to a
third party. Pepys had his “money in the bank” and the borrower took the
gold.
The borrower naturally paid interest on the loan. Pepys received
interest on his
deposit. The same money being (notionally) in the possession both of
Pepys and
of the borrower meant an increase in the monetary mass of the nation.
All the
holders of money in the nation, therefore, had the value of their
holdings very
slightly diluted. There was a profit to the Banker on the “spread”
between
borrowing and lending rates. There was a profit to Mr. Pepys, who at one
and the
same moment had both money in the Bank and an interest bearing
investment. Yet
the borrower also profited. His loan would be at a lower interest rate
than that
on capital that had had to be saved up. `Smart’ bank financing put him
ahead of
conventionally financed competitors. All three parties gained, at the
expense of
the general public, the value of whose money was diluted through
inflation of
the monetary mass.
Skipping forward three centuries (past events such as the South Sea
Bubble,
tulip mania, the Railway boom and the 1929 market crash) we find that
the little
spot of inflation that Mr. Pepys indulged in has become a universal way
of life.
The extensive capital development of Canada in the post World War II
boom has
been largely financed, not by personal savings and investment, but by
the
inflation of the money supply. This has left the thrifty who invested
their
little savings from the hard times of the Great Depression in mortgages,
bonds
and Life Insurance deprived of most of the rewards of their thrift, and
has
caused the profits of inflation to benefit all who could borrow, build,
and then
repay their capital in deflated dollars later on.
I want to make it perfectly clear at this point that, although Banks
are
indeed one of Canada’s most prosperous businesses in a time of general
recession, the major profit from the business of banking does not go in
“Billions (of usury) to the Bankers”. The Banker runs a competitive
business,
and has to watch his “spread”, his risk, and his costs extremely
closely.
The profit from Banking goes to those who at one and the same time
are able
to have an interest earning investment – their savings account – and use
it as
if it were ready money. Secondly, and on a much greater scale, profit
goes to
all who can make use for speculative purposes of the fluctuations in the
price
level that bank financing creates. The profits are made at the expense
of the
investment holding public whose money is losing value to inflation.
If we are to prevent such profits being made at the public expense,
then we
must make it a law that in so far as money in the bank is a means of
exchange,
it should not and cannot be an interest earning investment. In so far as
a Bank
account is an interest earning investment, it should not be available
also on
demand to serve as money.
During the past forty years, the position of the old fashioned,
thrifty
Canadian, who saved for his old age in conservative investments in a
time of
inflation, has been that of a lamb ready for the slaughter. The fortunes
created
in the times of inflationary boom have been at the expense of his
diminishing
capital. He is like someone who kept his money in a mattress and whose
house is
robbed. His power to buy has been taken away from him. More than that,
because
his money is gone, he has nothing with which to go shopping – to the
financial
detriment of the storekeeper who had hoped to sell to him. The economy
eventually comes to a halt because the public’s purchasing power has all
been
stolen by inflation.
The long term result of Mr. Pepys’ experiment is an economy where
practically
all money has come into existence as the result of bank lending. In
order to
have a money supply at all, houses, cars, furniture, businesses –
anything on
which money can be raised is mortgaged. Interest on this debt is a first
charge
against the profits or the cost of living of all the mortgagors. The
rich, who
dabble in money, get richer. The poor, who generally speaking can only
get money
by working for it, get poorer.
An extension of this situation is the growing crisis of third world
debt,
caused by the extension of credit (debt!) to underdeveloped nations,
through the
activities of the International Monetary Fund and commercial Banks. The
worst
that the Social Credit Members of Parliament prophesied when they
filibustered
against the Bretton Woods agreement in December 1944 has come to pass.
The
extreme indebtedness of many national economies has not only brought
these
countries to ruin, but has even threatened the stability of the banks
who lent
on a large scale internationally to countries such as Mexico, Brazil and
Poland.If Canada genuinely wished to aid Third World countries, and its own
industries by providing them with export markets, how much more sensible
it
would be if Canada simply accepted the currency of third world countries
into
its own foreign exchange reserves in exchange for goods supplied.
Canadians, if
they found themselves with a surplus of foreign currency in their
possession,
would not be in a position to make impossible repayment demands on the
debtor
nation. They would simply have a large supply of its currency in their
possession, which they could either spend on imported products, or use
to invest
on an equity basis in the development of the country in question.
SOLUTIONS AND RECOMMENDATIONS
Based on the foregoing analysis, let me now suggest some means of
putting an
end to the problems that were outlined at the outset of this brief. For
the sake
of logical progression, they will be outlined in a slightly different
order.
MONETARY STABILITY.
- An immediate end must be made to the fluctuations in the
quantity of our
money supply. We do not have to live eternally with the results of
the
historical accident under which the rules of banking were invented.
We do
not have to let pass unchallenged the diversity of organizations who
for
private gain have taken it on themselves to create substitutes for
money
which circulate as effectively as legal tender.
- The Economic Council of Canada, in consultation with Statistics
Canada,
should be given the responsibility to produce on a regular basis –
probably
monthly – a figure for the National Credit of Canada. This will be
the
figure, based on current production and employment potentials, for
the
quantity of money which the Council estimates will maintain a
desirable and
attainable degree of activity in the Canadian economy, without
inflation of
the price level.
- A certificate for this figure – the total figure in the first
place, and
any changes upwards or downwards thereafter – should then be
deposited by
the Federal Government in the Bank of Canada. This will give that
Bank
authority to issue to the credit of the Federal Government in the
Bank, a
sum equal to the total amount so certified, less amounts of legal
tender
money – coins and Bank of Canada notes – already circulating with
the public
or held by banks.
- Any institution dealing with the public, which promises to pay
money on
demand to members of the public in excess of legal tender at that
time held
by it, should be deemed to have borrowed against the Public Credit,
and
should pay interest at a rate which shall be a percentage of the
amount of
credit made use of. Either the rate should be fixed by the Federal
Government, or it could be fixed by market forces through an auction
similar
to that presently held for the sale of Treasury Bills on Thursdays
by the
Bank of Canada. This auction, however, would be to determine how
much
financiers should pay the public for the use of the Public Credit –
not how
much the public should pay financiers for the servicing of the
Public Debt.
- The present system of fractional reserve banking (which, besides
giving
no protection against the Banking system’s inherent liability to
failure,
gives no effective control over the quantity of money in
circulation) must
be replaced by a system whereby banks wishing to extend credit
beyond their
actual reserves will apply to the Bank of Canada to issue loans
against the
Public Credit, and will pay appropriately for this privilege. Other
“near
banking” institutions, and issuers of travellers cheques and credit
cards,
must similarly be required to pay interest to cover the reserves of
Public
Credit being held against the credit limits they extend.
- Nothing in the above should be taken to restrict any institution
from
borrowing money from the public for definite periods of time, during
which
the investor has no right to its use, and lending this money out as
a loan
or investment. The public should, in fact, be encouraged to save,
and banks
encouraged to open “investment accounts” or make term certificates
available
to finance investment, for the express purpose of giving Canadians a
stake
in Canadian business, and providing capital and income for them from
a
source other than wage employment.
- The surplus of Public Credit not otherwise taken up should be
used to
reduce taxes, increase social allowances and to repay the National
Debt. It
is recommended that some fixed proportion of this surplus be made
available
to both Provincial and Municipal governments, so as to help them in
their
urgent financial needs, and spread the monetary tokens representing
the
credit of the nation into all parts of the country.
- An immediate end must be made to the fluctuations in the
DEBT
The entry of an asset of approximately $200 billions
as a
credit on the nation’s books is bound to have an immense and immediate
effect
on the debt situation in Canada. If the federal government makes use
of these
funds to reduce the National Debt, then by that amount the burden of
taxation
to pay interest can be lightened. In any case, since financial
institutions
making use of the Public Credit will be required to pay for this
privilege,
there will be a steady income to government from that source, again
reducing
taxes.
Pressure of government borrowing being taken off commercial markets
will
result in much easier financing conditions for Canadian business.
There will
also be a much greater effort to mobilize the savings of the private
investor
on a genuine long-term basis.
Interest rates must no longer be used as instruments to “control”
inflation. Since a tight control on the quantity of the medium of
exchange in
circulation can be counted on to maintain stable consumer prices,
interest
rates will in fact likely fall much closer to a “natural” level – that
is, one
that reflects the actual return on the money borrowed, after giving a
reasonable reward to the entrepreneur for his enterprise. This will
immensely
reduce the cost of debt for homeowners, renters, landlords and other
businessmen alike, and with it, the cost of living and the demands of
wage
earners for higher incomes.
FOREIGN EXCHANGE
- The Bank of Canada must abandon all attempts to “defend” a high
exchange
rate for the Canadian dollar, particularly if these involve foreign
borrowing or high interest rates to encourage purchase of Canadian
currency
with foreign funds. A low exchange rate for the dollar in comparison
with
Canadian prices makes Canadian exports competitive, discourages
importing
goods that can be produced at home, and so greatly assists Canadian
employment and business activity without the need for protective
tariffs.
- For the same reason, Canadians should be encouraged to invest
abroad,
and encouragement should not be given to foreign investment in
Canada.
Registered Retirement Savings Plans, for instance, could be
permitted to
invest in foreign securities without limit.
- Foreign investment should be encouraged on an equity rather than
a fixed
interest basis. This means that the lender shares the risk of an
unsuccessful investment, and avoids the pressure on a borrower
nation of
interest not balanced by productive and revenue earning investment.
- Financing of aid to the Third World should not be by way of loan
(even
interest free) but by currency exchange. This is another means by
which the
lending nation can be put under pressure to assist the borrower to
sell
internationally, and so make the investment profitable to all
participants,
not simply the investor.
- The Bank of Canada must abandon all attempts to “defend” a high
UNEMPLOYMENT
The cumulative effect of the policies
outlined above
will be to reduce unemployment.
If the essence of the unemployment problem is that labour costs
more than
it can deliver in value, then unemployment can be helped by reducing
the cost
of labour through the following measures:
- Greater government income and lower government costs from the
handling
of the Public Credit as an income earning national asset, leading to
reduced
taxes, and higher social and family allowances;
- Capital projects becoming more economic as interest rates fall;
- Industrial and agricultural demand becoming greater through a
low
foreign exchange rate policy;
- Personal debts becoming reduced, and personal investment
holdings
increased, so encouraging personal initiative and entrepreneurship.
- Retirement from the labour market of persons whose participation
at the
moment is the result of economic stress rather than
desire.
Economic stability, private investment, private avoidance of debt
and
private accumulation of capital assets, coupled with generally lower
wage
rates and lower levels of taxation, certainly are a way to encourage
employment and prosperity for the world of the future, where much
production
is going to be carried out by machine. However, attention has to be
paid in
the here and now to those who do not now have the means to acquire
those
resources, to give them an additional source of income to supplement
that
derived from their labour.
Even so small a matter as the mailing of income tax refunds in the
third
quarter of 1983 compared with the second quarter as was usual in
previous
years, has been enough to lead to an upturn in the economy strong
enough to
show in the statistics. This only goes to prove that nothing is more
practical
to solve the problem of poverty and business downturn than to provide
consumers with dollars to spend, within the limits of economic
prudence! Great
progress has in fact been made in this century in this direction, by
the
institution of Old Age Pensions and Family Allowances. Lately,
however, Social
Assistance has become more directed to the “means test” approach,
which pays
an income that is cut off from anyone who attempts to help himself. Itinvolves costs of administration of no benefit to the recipient, and
is a
demeaning and unsatisfactory method of making incomes available to
those in
need.
- Some part of the money reflecting Canada’s Public Credit must be
paid to
all citizens to supplement any other form of income they may have.
Since the
Public Credit is the reflection of Canadians’ willingness to work
for
Canadian money, and paper money, which costs little to create, is
simply the
reflection of this credit, there is no reason why a “National
Dividend”
based on this credit should not be paid as a basic right to every
Canadian
resident. How much this should be and how it is to be paid must be a
matter
of social policy, but to the extent that it is paid, it will not
only
guarantee some basic living standard to all, but will also enable us
greatly
to simplify the present cumbrous apparatus of the Welfare State, by
replacing other programs made unnecessary by this more comprehensiveapproach.
- It is my profound hope that in addition to the above policies,
the
Commission will recommend a thoroughgoing overhaul of all Federal
government
programs which in any way involve interference by government in the
operation of the private enterprise system determined in its actions
by the
mechanism of price. This includes tax incentives and disincentives,
grants
of all kinds for different purposes, marketing controls, tariffs,
“make
work” projects and a clutter of other “assistance” to business.
Government
is often enough not aware that the grasping of some new refinement
of tax
law, the filling in of yet another form, and the myriad of controls
in this
over-governed nation, in the end destroy the ambition of the
entrepreneur,
and with this, the jobs and the production which he otherwise would
have
achieved.
- Greater government income and lower government costs from the
BUSINESS AND THE ENVIRONMENT
The final recommendation that I wish to make in this section of my
brief is
that Canadians leave this country to the next generation in the state
they
would like to find it.
There are storm clouds on the horizon as far as the environment of
Canada
is concerned, and pretending they are not there for the sake of
“economy”,
“profit” and “competitive cost” is an unwise way of preparing for the
deluge
to come. Some of the most important areas of concern are:
- Exhaustion of agricultural and forest resources, through lack of
soil
management and reforestation procedures;
- Exhaustion of non-renewable resources because of excessive
consumption
in a “throw away” society, and failure to recycle wastes;
- Contamination of the atmosphere, particularly with dust and
toxic gases; - Heavy metal contamination, of rivers in particular;
- Toxic and radioactive waste disposal problems;
- Chemical residues in the environment from industrial and
agricultural
activity.
Governments who have made a serious effort to provide clean air and
otherwise improve the environment, have proved that determined efforts
are
often remarkably successful. However, some “business oriented”
Provincial
governments have a bad record of shuffling the long term problems
under the
mat. It will be for the good of us all for this Commission to place
the
environment problem firmly on the national agenda. Let not Canada’s be
one
more civilization that has begun in a forest – and ended in a
desert!- Exhaustion of agricultural and forest resources, through lack of
- POLITICS -
Although the principal thrust of this presentation has been on
economic
questions, I would like to make some comments at this point on the
subject of
the political process by which reform can be achieved.
Much of what appears in this brief is not new. In essence, it was
first
presented to the Parliament of Canada when Major C.H.Douglas appeared
before a
Parliamentary committee sixty years ago in 1923. Since that time, the
causes and
cures of the financial woes of the country have been analyzed and
presented to
Parliament on innumerable occasions through the “Ginger Group” of the
U.F.A.,
and after 1935, by the members of the Social Credit Association of
Canada and
the Social Credit Party of Canada, not to mention members with similar
views
from other parties. Regrettably, over all these years, the Social Credit
Party
has not been able to break through into the mainstream of national
politics -
and the economic disorders it has for so many years tried to correct
remain
uncorrected.
In his “Decline and Fall of the Roman Empire”, Gibbon makes the point
that
the continuing solidity of the structure of government in ancient Rome
was tied
in to the fact that all classes of persons – freed slaves, conquered
peoples,
foreigners and so on – were as a matter of policy always given the hope
of
having, either at once or in future generations, access to political
office. The
category of “citizen” was continually being enlarged through new blood.
In the
very brief history of the Athenian democracy, the reverse situation was
taking
place – the number of citizens directing the government of the city was
actually
shrinking. The lesson is drawn that a government will endure, and
citizens will
be loyal to it, so long as there exists a hope in the heart of the
citizen that
he or she will not be denied a chance of effective participation in the
governing process.
Canada should study this lesson with concern. Canada’s federal
Parliamentary
system, as an exercise in participatory government for a democratic
nation, is
programmed for failure. Federal politics in Canada, for long stretches
of time,
is not even a two party, but a “one-and-a-half” party system. The “first
past
the post” system of electing members of Parliament by constituencies
gives such
enormous advantage to any party in office that to establish effective
political
representation of radically new thinking in Parliament is virtually
impossible.
Less than 50% of support from the voters will give a government an
overwhelming
Parliamentary majority when the opposition is divided, yet introducing
new ideas
through a new political party by definition involves creating such a
division.
The New Democratic Party, for instance, has been underrepresented in
members
elected contrasted with popular vote for many years because of this
situation.
If voters, however, aiming to further their new and radical ideas,
join the
major opposition party to “throw the government out”, they create a new
problem.
They run the risk that their new ideas will be lost in the pursuit of
political
power. If the opposition succeeds in becoming the government, it will be
quickly
reduced to impotence because its electoral basis is such a grab bag of
ideas,
joined for negative rather than positive reasons, that it will be
incapable when
in government of formulating any policy directions acceptable to the
majority of
its supporters.
The problems of the minor party become compounded as voters
understand the
system, and refuse to vote for a party they are interested in, but which
they
believe “doesn’t have a chance”. Add to this one other compounding
factor – to
achieve any success at all, the minor party has to concentrate its
electoral
effort in a very intense campaign in a limited area where there is a
prospect of
success. If successful, the party immediately runs the danger that all
of its
policies will be unduly influenced by the regional attitudes of those
successful
enough to become elected. This in itself makes development of national
attitudes
and cooperation within the party even more difficult.
Not only minor parties are affected by this phenomenon. Despite quite
creditable Conservative minorities in Quebec, and Liberal minorities in
the
West, the Parliamentary representation in Canada is almost 100% Liberal
in
Quebec, and 100% Conservative in the West. Western and Quebec
regionalism are
both fostered by the situation.
Yet one further consequence of the situation is the immense power of
party
political machines in Canadian federal politics to influence the
Parliamentary
behaviour of Members. Members depend on party favour for nomination and
for
their livelihood after the next election, and the number of available
parties is
limited. It therefore requires more than ordinary courage in a Member to
defy
the dictates of his Party. No wonder that Members of Parliament often
enough are
seen to debate like children, feel themselves ineffective in their
position, and
are treated by the public and the Executive alike as “nobodies”. Sturdy
independence, and a care for country and constituents before party, are
not
encouraged by the system as we have it.
The indirect consequence beyond this is a failure of members of the
public at
large, who seek some sort of change, to believe that this can be
effectively
carried out through party political action. How much of the terrorism of
the
FLQ, for instance, in the crisis of October 1970, came from the fact
that Rene
Levesque, taking the electoral route towards power through the Parti
Quebecois,
and in spite of gaining 24% voter support, had at that time lost his
seat, and
his party had gained only 7 seats in the Quebec National assembly? The
position
of native groups and other minorities similarly, under present
conditions, makes
it virtually impossible for them to have effective political
representation of
their particular positions and viewpoints in Parliament. This creates a
situation of desperation: an open invitation to demonstrations and many
forms of
violent action in order to secure political recognition and change.
The classic purpose of the Upper House in a bicameral legislature is
to
provide representation for minorities, whose political importance is notsufficiently recognized in a unicameral legislature with representation
by
population. Canada’s Senate has never been effectively used for this
purpose,
although it well could be. Certainly, unless determined steps are taken
to
incorporate minority thinking into the processes of government in this
country,
we can expect a withering away of the Parliamentary system in Canada,
and the
further danger of such alienation of territorial, ethnic, political and
economic
minorities that these will be completely indifferent to the political
future of
Canada as a nation.
RECOMMENDATIONS
Three suggestions are made for changes in electoral law to rectify
this
situation.
- The size of Parliamentary constituencies should be increased so as
to
reduce the number of constituencies by 33%. One third of Parliamentary
seats
would then be voted on by the electorate “at large” on the basis of
slates of
their candidates prepared in preferential order by all recognized
political
parties. Voters would have two votes – for Party and for local member.
The
seats additional to those elected on a constituency basis would be
allocated
from these lists to each party running candidates in proportion to the
number
of votes cast for each party – about one seat for each 250,000 votes.
This
would have the effect of giving some representation to minority
parties which
do not have an established power base in a particular area. It would
also
enable established parties to fill in gaps in their territorial
representation
from this general list, contributing to a better balance of
territorial
representation for the government and major opposition party in all
parts of
the country.
- After this has been done, there should be redistribution of
Parliamentary
constituencies on a basis of “Number of square miles in Constituency
plus
number of electors equals 120,000″. This would give systematically
higher
representation to rural areas to compensate for travel difficulties.
In the
South of Canada, it would make a small but not too noticeable change
in the
distribution of seats. However, it would have the effect of adding
around 12
new seats to Parliament for different regions of the Northwest
Territories,
sufficient to give much more adequate representation to this
important,
ethnically diversified, rich, but lightly populated and very neglected
area.
- One third of the seats of the Canadian Senate should be filled by
appointment of Provincial governments. Another third should by
selected to
represent the most important minority groupings in the country. The
remaining
third of Senators could remain appointed by the Federal government as
at
present. This will strengthen the status and effectiveness of the
Senate in
protecting the position of minorities in Canada.
APPENDIX “A”
STATISTICAL
The purpose of this Appendix is to give the statistical backing to
maintain
certain points advanced in the text of this brief. These are:
- That the quantity of dollars in circulation is related in a
reasonably
constant fashion to the amount of the Gross National Product. From
this is
deduced the concept that the path of the “average dollar” through the
various
sectors of the economy back to its original starting place is a
measurable and
reasonably constant period of between four and seven months. This
concept is
used as the basis for the proposal that the amount of the National
Credit,
expressed as a dollar figure, is a precise and ascertainable amount.
- That the changes in the Consumer Price Index over time in Canada
have
varied annually by a factor that reflects increases or decreases in
the volume
of money in the hands of the Personal and Government sectors of the
economy,
and decreases or increases in the volume of sales by the Business
sector to
Persons and Governments.
The reason for the preparation of these tables is to justify, in a
world
where economists’ explanations of inflation are more numerous than the
angels on
the proverbial pinhead, the old fashioned concept that inflation of
prices is
indeed related to “too much money chasing too few goods”, and thereby
justify
the almost crudely simple proposals of this brief for control of
inflation by
quantitative control of the monetary mass.
Figures for the quantity of business sales to governments and persons
are
taken directly from items 24(a) and (b) of Table 11 on Page 44 of
“National
Accounts, Income and Expenditure, 1926-1956″, and continuation volumes.
Figures
for money supply are an average of the “Monthly Average” series for
Currency and
Notes in circulation plus Chartered Bank deposits (M3), supplied by the
Bank of
Canada (Statistical Summary Supplement, 1950 and continuation volumes).
Determination of changes in the quantity of money held by persons and
governments has been based on the following reasoning:
Sector accounts show the flow of value from all the various
sectors of the economy to each other, and each sector has an equal
balance of
value received and value spent. From these figures, totals of Gross
National
Product and Gross National Expenditure are prepared.
We know, however, that these sectors are not in exact balance.
Specifically, if the volume of money (credit) in circulation increases
or
decreases during a year, there will be an unexplained flow from the
National
Savings Account to or from the Business Sector or the Personal and
Government
sectors, or both.
In the case of this flow to the business sector, this is
represented by an
item of “Residual Error”. I am assuming that this is in fact not an
error at
all, but an actual imbalance caused by the creation or withdrawal of
new money
in the system, and its being held to a greater or lesser degree by theBusiness Sector.
In the case of flow to the Personal and Government sectors, I note
that the
figure for National Savings is actually a residual figure, which will
therefore mask with an error of its own any actual cash flows from
increases
or decreases in the money supply coming into the hands of consumers
and
government rather than business.
The figure assumed to come to these sectors is therefore the total
amount
of new credit in circulation, plus or minus credit assumed to have
passed into
the keeping of the Business sector as disclosed by figures for
residual error.As a commentary on this technique, I note that it implies that the
National
Accounts figures for personal savings in recent years of monetary
expansion
have been highly overstated. This, I believe, is true.
Predictions of Price Level changes are based on the formula:
I2 = I1 x (S2 + M2 – M1 – RE2) / S2Where I1 = Price Index, Year 1
I2 = Price Index, Year 2
S2 = Total Sales to Persons and Governments, Year 2
M1 = Average Currency outside Banks and Bank Deposits, Year 1
M2 = Average Currency outside Banks and Bank Deposits, Year 2
RE2 = Total residual error expressed as a cash flow from
Savings to Business, Year 2.
Pearson correlation of the above tables (where -1 indicates inverse
correlation, 0 indicates no correlation, and +1 positive correlation)
yields
correlations as follows:
- Table I (relationship Money Supply to G.N.P.)
+.98
- Table II (predicted and actual variations in consumer price
index, unaveraged) +.52
- Table III (predicted and actual Consumer Price Indices) +.97
- Table IV (predicted and actual variations in consumer price
index: 3 year moving average) +.73
TABLE I – QUANTITY OF MONEY CIRCULATING IN CANADA 1926-1982 AS A
PERCENTAGE OF GROSS NATIONAL PRODUCT
(1) (2) (3) (4) (5)
AVERAGE GROSS (2) AS A PERIOD OF CIRCULATION (MONTHS)
YEAR MONEY NATIONAL PERCENT
SUPPLY PRODUCT OF (3) 0….1….2….3….4….5….6….7
(M3)
1926 2153 5152 41.7 **************************1927 2283 5549 41.1 *************************
1928 2458 6046 40.6 *************************
1929 2498 6134 40.7 *************************1930 2326 5728 40.6 *************************
1931 2270 4699 48.3 *****************************
1932 2113 3827 55.2 **********************************
1933 2098 3510 59.7 ************************************1934 2129 3984 53.4 *********************************
1935 2249 4315 52.1 ********************************
1936 2395 4653 51.4 *******************************1937 2557 5257 48.6 ******************************
1938 2617 5278 49.5 ******************************
1939 2798 5636 49.6 ******************************1940 3009 6743 44.6 ***************************
1941 3361 8328 40.3 *************************
1942 3786 10327 36.6 **********************
1943 4583 11088 41.3 *************************1944 5410 11850 45.6 ****************************
1945 6235 11835 52.6 ********************************
1946 6908 11850 58.2 ***********************************1947 7222 13473 53.6 *********************************
1948 7600 15509 49 ******************************
1949 8265 16800 49.1 ******************************1950 8763 18491 47.3 *****************************
1951 8759 21640 40.4 *************************
1952 9307 24588 37.8 ***********************
1953 9789 25833 37.8 ***********************1954 9931 25918 38.3 ***********************
1955 10933 28528 38.3 ***********************
1956 11414 32058 35.6 **********************1957 11489 33513 34.2 *********************
1958 12545 34777 36 **********************
1959 13210 36846 35.8 **********************1960 13291 38359 34.6 *********************
1961 14165 39646 35.7 **********************
1962 15208 42927 35.4 **********************
1962 15981 45978 34.7 *********************1964 17202 50280 34.2 *********************
1965 18996 55364 34.3 *********************
1966 20441 61828 33 ********************1967 22874 66409 34.4 *********************
1968 25749 72586 35.4 **********************
1969 28492 79815 35.6 **********************1970 30081 85685 35.1 **********************
1971 35156 94450 37.2 ***********************
1972 40947 105234 38.9 ************************
1973 47035 123560 38 ***********************1974 55578 147528 37.6 ***********************
1975 66616 165343 40.2 *************************
1976 69985 191857 36.4 **********************1977 87641 210149 41.6 *************************
1978 105296 232211 45.3 ****************************
1979 122951 264279 46.5 ****************************1980 140606 296555 47.4 *****************************
1981 163183 339055 48.1 *****************************
1982 173149 356600 48.5 ******************************AVERAGE GROSS (2) AS A PERIOD OF CIRCULATION (MONTHS)
YEAR MONEY NATIONAL PERCENT
SUPPLY PRODUCT OF (3) 0….1….2….3….4….5….6….7
(M3)
TABLE II – PREDICTED AND ACTUAL CONSUMER PRICE INDICES,
1926-1982
(1) (2) (3) (4) (5) (6) (7) (8)
AVERAGE SALES RESIDUAL PREDICTED PREDICTED ACTUAL ACTUAL
YEAR MONEY BY BUS- ERROR CP INDEX % CHANGE CP INDEX CHANGE
SUPPLY INESS (x2) 1949=100 IN CPI 1949=100 IN CPI
(M3)
1926 2153 3511 312 78.36 70.71927 2283 3883 104 83.08 6.03 69.8 -1.27
1928 2458 4306 82 88.04 5.97 70.4 .86
1929 2498 4651 -55 87.76 -.32 71.2 1.141930 2326 4475 -49 83.42 -4.94 70.4 -1.12
1931 2270 3904 -228 77.35 -7.27 70.4 .00
1932 2113 3296 -146 70.24 -9.19 64.2 -8.81
1933 2098 3011 -154 66.30 -5.61 59 -8.101934 2129 3219 -202 62.78 -5.31 56.6 -4.07
1935 2249 3393 -199 61.32 -2.33 57.5 1.59
1936 2395 3604 -142 61.38 .11 58.8 2.261937 2557 3950 -141 61.71 .53 60.5 2.89
1938 2617 3980 -77 61.45 -.43 61.5 1.65
1939 2798 4064 -57 63.32 3.05 61.2 -.491940 3009 4823 -197 63.51 .29 63.8 4.25
1941 3661 5698 -149 65.77 3.56 68.3 7.05
1942 3786 7703 -200 67.69 2.92 71.5 4.69
1943 4583 7687 -262 72.40 6.96 73.5 2.801944 5410 8054 -299 77.15 6.56 74.3 1.09
1945 6235 7908 -395 81.34 5.44 75.2 1.21
1946 6908 8398 -62 87.26 7.28 77.8 3.461947 7222 10705 29 90.06 3.20 85.3 9.64
1948 7600 11824 212 94.55 4.99 96.5 13.13
1949 8265 13087 90 100.00 5.77 100.0 3.631950 8763 14410 7 103.51 3.50 103.7 3.70
1951 8759 16668 410 106.03 2.44 113.5 9.45
1952 9307 18782 24 109.26 3.05 116.2 2.38
1953 9789 20005 -159 111.02 1.61 115.8 -.341954 9931 20759 105 112.35 1.19 117 1.04
1955 10933 22424 76 117.75 4.81 117 .00
1956 11414 24516 -259 118.81 .91 118.9 1.621957 11489 26065 -46 118.94 .11 122.6 3.11
1958 12545 27699 -359 121.94 2.52 125.8 2.61
1959 13210 29366 -454 122.81 .72 127.3 1.191960 13921 30760 -391 121.58 -1.01 128.5 .94
1961 14165 32136 -284 123.81 1.84 129.3 .62
1962 15208 34060 251 128.51 3.80 131 1.31
1963 15981 36207 78 131.53 2.35 133 1.531964 17202 38982 -101 135.31 2.87 134.7 1.28
1965 18996 42305 -411 139.73 3.27 137.4 2.00
1966 20441 46638 -364 142.97 2.32 141.9 3.281967 22784 51125 -66 149.59 4.63 146.8 3.45
1968 25749 56388 -20 157.17 5.06 152.9 4.16
1969 28492 61733 886 166.41 5.88 158.8 3.861970 30081 66957 -690 168.64 1.34 164.5 3.59
1971 35156 73984 -1782 176.15 4.45 168.4 2.37
1972 40947 82499 -380 187.70 6.56 175.1 3.98
1973 47035 94315 89 199.99 6.55 187.9 7.311974 55578 111204 1259 217.62 8.81 209.1 11.28
1975 66616 130375 600 237.05 8.93 231.1 10.52
1976 69985 149982 -1014 240.77 1.57 250 8.181977 87641 166939 -2530 262.58 9.06 270.2 8.08
1978 105296 184304 3 287.74 9.58 290.7 7.59
1979 122951 204372 1224 314.32 9.24 317.7 9.291980 140606 230211 2286 341.55 8.66 352 10.80
1981 163183 261882 2222 373.89 9.47 392.6 11.53
1982 173149 286994 186 387.12 3.54 435 10.80(1) (2) (3) (4) (5) (6) (7) (8)
AVERAGE SALES RESIDUAL PREDICTED PREDICTED ACTUAL ACTUAL
YEAR MONEY BY BUS- ERROR CP INDEX % CHANGE CP INDEX CHANGE
SUPPLY INESS (x2) 1949=100 IN CPI 1949=100 IN CPI
(M3)
TABLE III – PREDICTED AND ACTUAL INDICES, 1926-1982
(1) (2) (3) (log scale) (4) (5)
PREDICTED 1 2 5 ACTUAL
YEAR CP INDEX 5 0 0 0 CP INDEX YEAR
1949=100 0……..0……..0………..0 1949=100
(*) (+)
1926 78.36 ******
+++++ 70.7 19261927 83.08 *******
+++++ 69.8 1927
1928 88.04 ********
+++++ 70.4 1928
1929 87.76 ********
+++++ 71.2 1929
—-
1930 83.42 ******* —-
—- +++++ 70.4 1930
—-
1931 77.35 ******
+++++ 70.4 1931
1932 70.24 *****
++++ 64.2 1932
1933 66.30 ****
+++ 59 19331934 62.78 ***
++ 56.6 1934
1935 61.32 ***
++ 57.5 1935
1936 61.38 ***
+++ 58.8 1936PREDICTED 1 2 5 ACTUAL
YEAR CP INDEX 5 0 0 0 CP INDEX YEAR
1949=100 0……..0……..0………..0 1949=100
(*) (+)
1937 61.71 ***
+++ 60.5 1937
1938 61.45 ***
+++ 61.5 1938
1939 63.32 ****
++++ 63.8 1939
—-
1940 63.51 **** (WAR & PRICE CONTROLS) —-
—- ++++ 63.8 1940
—-
1941 65.77 ****
+++++ 68.3 1941
1942 67.69 ****
+++++ 71.5 1942
1943 72.4 *****
+++++ 73.5 19431944 77.15 ******
++++++ 74.3 1944
1945 81.34 *******
++++++ 75.2 1945
1946 87.26 ********
++++++ (END OF PRICE CONTROL) 77.8 1946PREDICTED 1 2 5 ACTUAL
YEAR CP INDEX 5 0 0 0 CP INDEX YEAR
1949=100 0……..0……..0………..0 1949=100
(*) (+)
1947 90.06 ********
+++++++ 85.3 1947
1948 94.55 *********
+++++++++ 96.5 1948
1949 100.00 **********
++++++++++ 100 1949
—-
1950 103.51 ********** —-
—- ++++++++++ 103.7 1950
—-
1951 106.03 **********
+++++++++++ 113.5 1951
1952 109.26 ***********
+++++++++++ 116.2 1952
1953 111.02 ***********
+++++++++++ 115.8 19531954 112.35 ***********
++++++++++++ 117 1954
1955 117.75 ************
++++++++++++ 117 1955
1956 118.81 ************
++++++++++++ 118.9 1956PREDICTED 1 2 5 ACTUAL
YEAR CP INDEX 5 0 0 0 CP INDEX YEAR
1949=100 0……..0……..0………..0 1949=100
(*) (+)
1957 118.94 ************
++++++++++++ 122.6 1957
1958 121.94 ************
++++++++++++ 125.8 1958
1959 122.81 ************
+++++++++++++ 127.3 1959
—-
1960 121.58 ************ —-
—- +++++++++++++ 128.5 1960
—-
1961 123.81 ************
+++++++++++++ 129.3 1961
1962 128.51 *************
+++++++++++++ 131 1962
1963 131.53 *************
+++++++++++++ 133 19631964 135.31 *************
+++++++++++++ 134.7 1964
1965 139.73 **************
++++++++++++++ 137.4 1965
1966 142.97 **************
++++++++++++++ 141.9 1966PREDICTED 1 2 5 ACTUAL
YEAR CP INDEX 5 0 0 0 CP INDEX YEAR
1949=100 0……..0……..0………..0 1949=100
(*) (+)
1967 149.59 ***************
+++++++++++++++ 146.8 1967
1968 157.17 ***************
+++++++++++++++ 152.9 1968
1969 166.41 ****************
++++++++++++++++ 158.8 1969
—-
1970 168.64 **************** —-
—- ++++++++++++++++ 164.5 1970
—-
1971 176.15 *****************
++++++++++++++++ 168.4 1971
1972 187.70 ******************
+++++++++++++++++ 175.1 1972
1973 199.99 *******************
++++++++++++++++++ 187.9 19731974 217.62 ********************
+++++++++++++++++++ 209.1 1974
1975 237.05 *********************
++++++++++++++++++++ 231.1 1975
1976 240.77 *********************
+++++++++++++++++++++ 250 1976PREDICTED 1 2 5 ACTUAL
YEAR CP INDEX 5 0 0 0 CP INDEX YEAR
1949=100 0……..0……..0………..0 1949=100
(*) (+)
1977 262.58 **********************
++++++++++++++++++++++ 270.2 1977
1978 287.74 ***********************
+++++++++++++++++++++++ 290.7 1978
1979 314.32 ************************
+++++++++++++++++++++++++ 317.7 1979
—-
1980 341.55 ************************** —-
—- ++++++++++++++++++++++++++ 352 1980
—-
1981 373.89 ***************************
+++++++++++++++++++++++++++ 392.6 1981
1982 387.12 ***************************
+++++++++++++++++++++++++++++ 435 1982
TABLE IV – PREDICTED AND ACTUAL INDEX CHANGES, 1926-1982
(CHART)(3 year moving average
display)PREDICTED % CHANGE ACTUAL % CHANGE
1 minus 0 plus 1 1 minus 0 plus 1
YEAR ..0….5….0….5….0.. ..0….5….0….5….0..
| | | | | | | | | |
1927 **|****|****|****|* |6.03 **|****|****| | -1.27
1928 **|****|****|****| |3.89 **|****|***** | | .24
1929 **|****|***** | |0.24 **|****|***** | | .29
| | | | | | | | | |
1930 **|****|* | | -4.18 **|****|***** | | .00
| | | | | | | | | |
1931 **|*** | | | -7.14 **|****|** | | -3.31
1932 **|*** | | | -7.36 **|****| | | -5.64
1933 **|*** | | | -6.71 **|*** | | | -6.99
| | | | | | | | | |
1934 **|****|* | | -4.42 **|****|* | | -3.53
1935 **|****|** | | -2.51 **|****|***** | -0.07
1936 **|****|****| | |-.56 **|****|****|** | |2.25
| | | | | | | | | |
1937 **|****|***** | |0.07 **|****|****|** | |2.27
1938 **|****|****|* | |1.05 **|****|****|* | |1.35
1939 **|****|****|* | |0.97 **|****|****|** | |1.80
| | | | | | | | | |
1940 **|****|****|** | |2.30 **|****|****|****| |3.60
| | | | | | | | | |
1941 **|****|****|** | |2.26 **|****|****|***** |5.33
1942 **|****|****|****| |4.48 **|****|****|***** |4.85
1943 **|****|****|***** |5.48 **|****|****|*** | |2.86
| | | | | | | | | |
1944 **|****|****|****|* |6.32 **|****|****|** | |1.70
1945 **|****|****|****|* |6.42 **|****|****|** | |1.92
1946 **|****|****|***** |5.31 **|****|****|***** |4.77
| | | | | | | | | |
1947 **|****|****|***** |5.16 **|****|****|****|****|8.74
1948 **|****|****|***** |4.65 **|****|****|****|****|8.80
1949 **|****|****|***** |4.75 **|****|****|****|** |6.82
| | | | | | | | | |
1950 **|****|****|****| |3.90 **|****|****|****** |5.59
| | | | | | | | | |
1951 **|****|****|*** | |3.00 **|****|****|***** |5.18
1952 **|****|****|** | |2.37 **|****|****|****| |3.83
1953 **|****|****|** | |1.95 **|****|****|* | |1.02
| | | | | | | | | |
1954 **|****|****|*** | |2.54 **|****|***** | |0.23
1955 **|****|****|** | |2.30 **|****|****|* | |0.89
1956 **|****|****|** | |1.94 **|****|****|** | |1.58
| | | | | | | | | |
1957 **|****|****|* | |1.18 **|****|****|** | |2.45
1958 **|****|****|* | |1.12 **|****|****|** | |2.30
1959 **|****|****|* | |0.74 **|****|****|** | |1.58
| | | | | | | | | |
1960 **|****|****|* | |0.52 **|****|****|* | |0.92
| | | | | | | | | |
1961 **|****|****|** | |1.54 **|****|****|* | |0.96
1962 **|****|****|*** | |2.66 **|****|****|* | |1.15
1963 **|****|****|*** | |3.01 **|****|****|* | |1.37
| | | | | | | | | |
1964 **|****|****|*** | |2.83 **|****|****|** | |1.60
1965 **|****|****|*** | |2.82 **|****|****|** | |2.19
1966 **|****|****|*** | |3.41 **|****|****|*** | |2.67
| | | | | | | | | |
1967 **|****|****|****| |4.00 **|****|****|****| |3.63
1968 **|****|****|***** |5.19 **|****|****|****| |3.82
1969 **|****|****|****| |4.09 **|****|****|****| |3.87
| | | | | | | | | |
1970 **|****|****|****| |3.89 **|****|****|*** | |3.27
| | | | | | | | | |
1971 **|****|****|****| |4.12 **|****|****|*** | |3.31
1972 **|****|****|****|* |5.85 **|****|****|***** |4.55
1973 **|****|****|****|** |7.31 **|****|****|****|*** |7.52
| | | | | | | | | |
1974 **|****|****|****|*** |8.10 **|****|****|****|***** 9.70
1975 **|****|****|****|* |6.44 **|****|****|****|***** 9.99
1976 **|****|****|****|** |6.52 **|****|****|****|**** 8.93
| | | | | | | | | |
1977 **|****|****|****|** |6.74 **|****|****|****|*** |7.95
1978 **|****|****|****|****|9.29 **|****|****|****|*** |8.32
1979 **|****|****|****|****|9.16 **|****|****|****|****|9.32
| | | | | | | | | |
1980 **|****|****|****|****|9.12 **|****|****|****|****|* 10.54
| | | | | | | | | |
1981 **|****|****|****|** |7.22 **|****|****|****|****|* 11.04
1982 **|****|****|*** | |3.54 **|****|****|****|****|* 10.80
| | | | | | | | | |
PREDICTED % CHANGE ACTUAL % CHANGE
1 minus 0 plus 1 1 minus 0 plus 1
YEAR ..0….5….0….5….0.. ..0….5….0….5….0..
APPENDIX “B”
SUMMARY OF RECOMMENDATIONS
I. ECONOMIC
1. Control of monetary volume by quantitative control rather than
interest rate manipulation.
2. Quantity of the “Public Credit” to be certified to the
government
regularly by the Economic Council of Canada and/or Statistics
Canada.
3. The consequent Certificate of Public Credit to be deposited as
an
asset of the Federal Government in the Bank of Canada, and all forms
of
money issued in Canada to be entered as a debit against this
account.
4. Institutions promising to pay money to the public on demand in
excess
of actual currency reserves held by them to pay interest for use of
the
Public Credit.
5. “Fractional Reserve” Banking to be replaced by this system of
credit
control.
6. No restrictions on term investments in Banking institutions,
where
money is not repayable except on a fixed future date, and this money
is
loaned out on similar repayment terms.
7. Money (less amount of money and credit already in circulation)
may be
drawn from the Bank of Canada for Federal Government use up to the
limit of
the Public Credit as certified.
8. Such money to be used to reduce National, Provincial and
Municipal
debt and taxes, and finance government transfer payments.
9. Federal Government borrowing on the commercial market to
cease.
10. Interest rates to be set by market forces.
11. A policy of low foreign exchange rates for the Canadian
dollar.
12. Encouragement of Canadian investment abroad.
13. Equity preferred to debt as the vehicle for foreign
investment.
14. “Currency Swaps” with underdeveloped nations to avoid
burdening them
with debt from foreign loans.
15. A policy to supplement wage incomes by the following means:
- Reduction of personal taxes;
- Reduction of personal debt costs;
- Encouragement of personal savings and investment;
- A guaranteed basic income to all regardless of employment, in
the form
of a “National Dividend” paid on the Public Credit.
16. Overhaul of federal taxation and business incentive
policies, to
eliminate obstacles to efficient business operation.
17. Abandonment of welfare policies based on a means test in
favour of
those which do not discourage self-help.
II. POLITICAL
18. One third of House of Commons seats to be elected “at
large”, by
party rather than constituency.
19. House of Commons redistribution formula to include both
area and
population factors, so giving substantially increased
representation to
rural regions and Northern Canada.
20. Senators to be appointed one third Federally, one third by
Provincial Governments, and one third to represent important
Canadian
minority groups.
[NOTE:
Although the general situation in the
Canadian
economy, and the underlying causes and solutions to its problems,
have not
changed substantially in the years since the original drafting to
this
paper in 1983, the following matters should be noted:
1. The Economic Council of Canada has been dissolved.
2. Canada's National Credit has increased by about 50%, and
Canada's
National Debt has tripled.
3. "Fractional Reserve" Banking has been replaced by an even
shakier
system, where the limit on Bank credit creation depends on the
capital of
the Bank, rather than the ratio of deposits to reserves.
J.M.H. March 1995]
- Unemployment. In many parts of Canada, and for many
