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Monetary reform and Paul Hellyer's vision for a new social contract

Bank of Canada

Paul Hellyer is unquestionably a living political legend. In 93 years on the Canadian landscape Hellyer has ricocheted through virtually every party on the Canadian political spectrum (creating one enroute), serving in the cabinets of three Prime Ministers. Under Pierre Trudeau Hellyer was Senior Minister, the current equivalent of Deputy Prime Minister. At an age when most politicians have long departed their soapboxes, Hellyer continues to write books, forge political movements, and stump across the country consumed by a vision of making Canada a more just and equitable society.

For decades he has been an eloquent advocate for monetary reform, writing that "The present banking and financial system is, in reality, a global fraud, one giant Ponzi scheme," thereby drawing attention to the stunning inequality of wealth that has come to characterize our current age. In speeches he has been giving during his current cross-Canada tour (St. John's, Halifax, Fredericton, Winnipeg, Calgary, Edmonton, Victoria, and Vancouver) this fall (September 21 to November 1, 2016) Hellyer says:

"A couple of years ago I read a story reporting that 88 families owned half of all the world’s wealth. A year or so later that number was down to 82. A few weeks ago it was reported that now 62 families own half the world’s wealth. Can you imagine anything so incredible?"

The Money MafiaThe author of over a dozen books, most recently The Money Mafia: A World in Crisis, Hellyer is also a political outsider that few Ottawa mandarins pay any heed to, despite the fact that he is the longest serving member of the Privy Council of Canada. One reason why Hellyer may have difficulty getting MPs on Parliament Hill to return his calls is his belief in UFOs, extraterrestrials, and mysterious goings-on at Area 51 in Nevada where Hellyer believes the US military is spending large sums of money trying to reverse engineer the UFO that crashed at Roswell in 1947. Hellyer believes that at least four species of aliens have been visiting Earth for thousands of years, and some are living on Venus, Mars, and Saturn's moons. Hmm ….

As a scientist my view is that there is no credible evidence for any aliens having arrived on earth. Indeed, given what we know about physics and the galaxy, the chance of extraterrestrials every arriving in our solar system is infinitesimally small. However, Hellyer has the right to his own views on this matter, and after almost two-thirds of a century of public service I'm prepared to cut him some slack. 

Paul Hellyer: A life on the political stage

Born in 1923 on a farm near Waterford, Ontario, Paul Hellyer studied aeronautical engineering and was an artillery gunner during World War II. In 1949 he was elected to Parliament as a Liberal representing the riding of Davenport. At the age of 26 he was, at the time, the youngest MP ever elected to the House of Commons.

Paul Hellyer and Pierre TrudeauOver the years he served in the cabinets of Louis St. Laurent (Associate Minister of National Defence), Lester Pearson (Minister of National Defence), and Pierre Trudeau (Minister of Transport). In the Trudeau Cabinet, Hellyer was the Senior Minister. In 1969 Hellyer resigned from the Trudeau government over a dispute over housing and urban renewal policy and sat as an independent in Parliament (briefly attempting to form a new political party, Action Canada, that attracted some interest from members of the Social Credit Party) before joining Tory Opposition Leader Robert Stanfield's Progressive Conservative caucus in 1971.

Hellyer ran for the leadership of the PC party in 1976 but alienated many Tories with what were perceived as too right-wing views (including an attack on "Red Tories") and lost his bid to Joe Clark. In 1982 he rejoined the Liberal party before forming the Canadian Action Party (CAP) in 1997, an economic nationalist party that rejected globalization and embraced monetary reform. Neither Hellyer nor any other subsequent leader or member was ever able to win a seat under this banner. Between 2000 and 2004 Hellyer attempted to negotiate a merger between CAP and the New Democratic Party, an initiative that failed to bear political fruit. There are few politicians whose political peregrinations have spanned such a wide gamut of far-right to far-left concerns as have Hellyer's.

Monetary Reform

Canadian Bank Reformers logoHellyer is the driving force behind Canadian Bank Reformers, and for the last two decades he has been writing books, giving speeches, and travelling across the country in service of the cause of monetary reform. This is a central focus of many of his writings, including his most recent volume (published in 2014) The Money Mafia: A World in Crisis. Hellyer's concerns focus on two, relatively little known and seemingly wonkish matters, which are in reality critically important aspects of monetary policy that play a central role in shaping our economic landscape. These monetary issues contribute to the rapidly escalating economic inequality that we have witnessed throughout much of the world over the past half-century, and which has been documented in meticulous detail by economists such as Thomas Piketty (See: Thomas Piketty: Economics transfigured).

The Bank of Canada

Bank of CanadaThe Bank of Canada was created in 1934 (through the Bank of Canada Act) and was designated as a Crown corporation in 1938. The entire share capital of the Bank is held by the Minister of Finance (representing the Government of Canada), which in turn represents all Canadians. One of the powers granted the Bank of Canada [see sections 18(i) and 18(j)] is to make low- or no-interest loans to the Government of Canada or to any province.

This seems a sensible arrangement. Canadians have a national bank. If federal or provincial governments wish to undertake a project that requires financing, why shouldn't we finance this ourselves through our own state bank? And why should we charges ourselves interest for doing so? It would be nonsensical to do otherwise.

And indeed, from 1938 until 1974, this is precisely what the Bank of Canada (amongst many other things) did. And federal and provincial governments availed themselves of this source of financing, an activity which the Committee on Monetary and Economic Reform (COMER) says, "played a key role in creating Canada’s post-war prosperity and in making possible its cherished social programs." Consider initiatives like the Saint Lawrence Seaway and the DEW (Distant Early Warning) Line for example -- financed for Canadians by the Bank of Canada.

Then, for reasons that continue to remain murky, this practice greatly declined and Canadian governments (federal and provincial) began borrowing the money they required from commercial banks. The figure below shows the history of Canadian debt. At the time of Confederation, Canadian public debt was a mere $94 million. It slowly rose to $2.4 billion by the end of the First World War, to $5 billion during the Great Depression, and to $11 billion by the end of the Second World War. In 1962 it was $14.8 billion and by 1974 it was slightly over $20 billion.

Canada's Federal Debt, 1867-2015

Then look what happens after 1974 after the federal government began borrowing from commercial banks that charge interest. The federal debt skyrocketed -- literally exponentially. The Canadian Taxpayer's Federation's Debt Clock shows federal debt as over $633.8 billion and increasing every minute of the day.

 Debt Clock

Now it the case that the Canadian economy also grew over this time, and the debt to GDP ratio in 2015 (31.0 per cent) is very close to what it was in 1962 (33.0 per cent) [after having ballooned to 63.9 per cent in 1997]. Debt to GDP ratio is a much better metric of a country's ability to support its debt than simple net debt, however, the absolute cost of bearing this debt (even under present circumstances when interest rates are very low) is nontrivial. [Currently the prime interest rate charged by the chartered banks is 2.7 per cent. Contrast this to the Bank of Canada bank rate which is 0.75 per cent.] How nontrivial? In fiscal 2013-2014, the Canadian government spent $29.3 billion in interest payments. This is almost the same as the entire amount that the Canadian government spent on Old Age Security ($32.3 billion) -- a fair chunk of change.

Paul HellyerHere is a salient fact pointed out by Hellyer in his presentation in Halifax on September 23, 2016: between 1974 and 2014 (i.e., a span of 40 years) Canada paid a cumulative amount of $1.17 trillion in interest to commercial banks (this is in 2013-2014 dollars). This is a vast and utterly needless transfer of wealth from Canadian taxpayers to commercial banks. The scale of this is on the order of three-quarters of the entire GDP of the country (In 2015 Canadian GDP was $1.550 trillion). Imagine what could have been done to improve the fabric of Canadian society with such a colossal amount of money? Why would we pay $1.17 trillion to chartered banks for loans when we have a national bank that could provide this service at no or very low cost?

This is the question that Hellyer and the Canadian Bank Reformers are asking. It is also the same question that the Committee on Monetary and Economic Reform (COMER) is not only asking, but litigating. In December 2011 COMER filed a suit in the Federal Court of Canada alleging that the Finance Minister, the Minister of National Revenue, the Attorney General of Canada, and the National Bank of Canada have all failed in their constitutional and statutory responsibilities in implementing the Bank of Canada Act. The claim is that these actions have caused damage to Canada and Canadians and COMER is seeking to have the Bank provide interest-free loans to Canadian federal and provincial governments. An excellent summary and discussion of this case as it has been wending its way through the courts was provided by Rabble columnist Judy Kennedy in her article Money Matters: COMER v. Canada.

COMER Logo

Under the Harper administration, the Department of Justice attempted variously to derail this case. On February 8, 2016 there was a ruling to strike large portions of the claim, which was accepted by Justice Russell. Acting on behalf of COMER, constitutional lawyer, Rocco Galati filed an appeal to the Federal Court of Appeal on March 3, 2016 and says that, "If redress is not had at the Federal Court of Appeal, COMER is committed to then taking the case to the Supreme Court of Canada." It may be some time before these legal maneuverings conclude and/or there is finally a hearing on this case before the courts. Were COMER to win it would have a dramatic effect on Canadian politics, economics, and the financial sector.

The Money Supply

It is popularly assumed that banks take in and hold money on deposit that they then lend out to others who require it. Banks pay a small interest to those who have funds on deposit and charge a larger interest to those who borrow, making their profit on the so-called "spread" between these interest rates. In fact, the actual business model of banks is nothing at all like this: they manufacture money out of thin air, lend out this fictional money, charge interest on it, and profit thereby. If you or I were to do this we would soon find ourselves in prison as counterfeiters -- but not so the chartered banks.

In most countries banks are simply required to hold a "fraction" of the amount that they are permitted to lend. It varies from state to state but typically falls in a range between 2 and 15 per cent, although in a few countries it is higher [Nigeria: 20 per cent; Brazil: 45 per cent; Tajikistan: 20 per cent; Suriname: 25 per cent; Lebanon: 30 per cent.] In the United States the fractional reserve ratio is 10 percent (for financial institutions with more than $110.2 million in reserves.) A few countries -- Canada, the United Kingdom, New Zealand, Australia, and Sweden -- have no reserve requirements (Canada abolished reserve requirements in 1992).

New Social ContractThis means that in Canada, chartered banks can effectively create as much money as they like (although subsections 485(1) and 949(1) of the Bank Act require banks to "maintain adequate capital" which somewhat constrains their monetary profligacy. Where this has lead is that chartered banks have almost complete control over the Canadian money supply having created 97 per cent of what exists. Only some 3 per cent of Canadian money is actually backed by currency that has been printed by the Canadian mint. The rest exists as polite fiction in the account books of the chartered banks.

How you view this situation depends on your political perspective. Austrian School economists such as the Spanish professor Jesús Huerta de Soto and the late American economist Murray Rothbard, the founder of anarcho-capitalist economics, regard fractional reserve banking as a form of embezzlement; of financial fraud allowing powerful, rich bankers to co-opt the political power that properly ought to belong to governments, all the while adding to macroeconomic instability. They argue for a full, 100 per cent reserve banking system that would give governments absolute control over the money supply.

Hellyer takes a more moderate and pragmatic approach in his proposed New Social Contract between the government and people of Canada, proposing that cash reserve requirements for Canadian chartered banks should be increased at a rate of 5 per cent per annum until they reach a level of 34 per cent. This would still leave control of two-thirds of the money supply in the hands of the private banks. Says Hellyer:

"The division of the money-creation function between [the] governments 34 per cent and [the] banks 66 per cent (as opposed to the current 97 per cent) is a carefully reasoned estimate of what each requires to do its job adequately. The lower figure of 34 per cent each year for government should produce a cash stream adequate to allow governments at all levels to provide essential services with reasonable tax rates and still balance their budgets. At 66 per cent of new money creation banks will still be able to provide service to individuals and small business, and temporary assistance to big business, but not to finance hedge funds, finance giant takeovers, play at derivatives and other activities that have turned the world financial system into one giant casino."

Free Trade Agreements

The third plank of Hellyer's cross country tour is opposition to international "free trade" agreements such as CETA (Comprehensive Economic and Trade Agreement) [between Canada and the European Union; concluded in August 2014 but not yet approved by the signatories] and the Trans-Pacific Partnership (TPP) [currently awaiting ratification by twelve member Pacific-coast nations that signed the proposal on February 4, 2016.] These trade agreements are a large topic beyond the scope of this article. Suffice it to say that Hellyer, like many others, is concerned by the many ways that such agreements limit the freedom of governments to adopt economic, social, and environmental policies. Says Hellyer:

"The Prime Minister appears to be hell-bent to sign CETA on October 27th. This must not be allowed to happen! It would be the final victory of the world’s richest and most ruthless families against the 99 per cent of the people. CETA is both illegal and immoral because it unilaterally transfers power from Parliament to international bankers and transnational corporations."

CETA

In addition to being a race to the bottom in regard to wages and labour standards, the investor-state dispute settlement (ISDS) mechanisms of such "free trade" treaties, embed rights for investors to sue governments for what they construe as "treaty violations." These frequently take the form of litigation to recover conjectured "lost profits" as a result of governments taking actions that would limit the scope of activities of multinational corporations (for example, by enacting buy-local provisions). These cases are decided by panels of lawyers in what are frequently closed-proceedings and may not be subject to disclosure or appeal. 

Many progressive economists regard such agreements as chiefly -- indeed almost exclusively -- benefiting transnational corporations and the wealthiest 0.1 per cent of the population. In an article in the New York Times (See: On the wrong side of globalization) Nobel Prize winning economist Joseph Stiglitz wrote:

Joseph Stiglitz"There is a real risk that [The TPP] will benefit the wealthiest sliver of the American and global elite at the expense of everyone else. The fact that such a plan is under consideration at all is testament to how deeply inequality reverberates through our economic policies. Worse, agreements like the TPP are only one aspect of a larger problem: our gross mismanagement of globalization. 

"In spite of all this, there are those who passionately support the TPP and agreements like it, including many economists. What makes this support possible is bogus, debunked economic theory, which has remained in circulation mostly because it serves the interests of the wealthiest.

"Provisions already incorporated in other trade agreements are being used elsewhere to undermine environmental and other regulations. Agreements like the TPP have contributed in important ways to the [high level of economic] inequality. Trickle-down economics is a myth. Enriching corporations -- as the TPP would -- will not necessarily help those in the middle, let alone those at the bottom."

Where do we go from here?

"Free trade" agreements such as CETA and TPP are instruments that attempt to entrench the power of deregulated corporate capitalism and the neoliberal reasoning that underpins it. In the immediate term, it is vitally important to express our criticism of these treaties -- which, in fact, only concern themselves with trade to a relatively minor degree, and whose principal focus is investor-state dispute settlement mechanisms -- and urge the federal government not to ratify them.

They can undermine the judicial systems of member states and weaken important powers of governments to act and legislate with respect to public health, national security, environment, food and drug safety, and in response to economic crises. In my view, such restrictions to the sovereign powers of governments are incompatible with a 21st century society that values participatory democracy and the rights of citizens to determine their future.

Trans-Pacific Partnership

Perhaps good news is that in the United States both presidential candidates, Hilary Clinton and Donald Trump, for their own reasons, oppose TPP. So one might posit that whichever party wins the American election, TPP may not be ratified in the USA. And without American participation, TPP is surely dead in the water. We shall see.

In the longer term it is important to support COMER in its legal case.

Re-asserting public control over monetary issues is a vital democratic and economic issue. Corporate control of the money supply is part and parcel of the bleak neo-liberal economic vision that includes the demonization of taxation as a legitimate means whereby citizens join together to create a country that reflects their needs and values. It's also an adjunct to the blind faith (or at least propaganda to this effect) in "trickle-down" economics. In reality wealth moves up, not down, and in a torrent, not a trickle. The proscription against incurring "debt" is endlessly repeated by the adherents of austerity politics.

It is critical to expose the foundations of this vision, which is simply a screen for expanding and entrenching the power of deregulated corporate capitalism. If we are to break free from the half century of austerity that has poisoned the public sphere, we need (amongst other things) to take back control of our financial systems and their instruments. Reestablishing public control over the money supply and freeing the public purse from an endless indenture to commercial banks is an important step in this direction.

Christopher Majka is an ecologist, environmentalist, policy analyst, and writer. He is the director of Natural History Resources and Democracy: Vox Populi.

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