Bill Totten's Weblog

Monday, January 05, 2009

The Fleecing of a Nation

by Antony Black

PACfiles (March 2004)

There was no joy in Mudsville that day. The till had been robbed. It was theft considerably 'over'. And with much gnashing of teeth and writhing of hands the media pundits had converged hyperbolically on a glaring, if isolated, new truth. To wit: our honourable leaders, steely-minded financial wizards one and all, had, indeed, been busy little bees, bending their wizardry to the tidy task of taking the poor unwashed multitudes to the cleaners to the tune of a cool hundred million smackers.

Still, all was not lost. Investigations would be launched. Heads would roll. Purification and redemption would follow as surely as day follows night. Peace and trust would be restored. There would be joy in Mudsville again ...

The problem with this little fable, of course, is that by centering our attention on a rather minor peripheral crack in the national financial landscape - an egregious pothole which, nevertheless, can easily and conspicuously be 'fixed' - it serves merely to distract from and gloss over the tectonic fault lines running straight down Main street.

Much more instructive would be to do a little forensic accounting of our own. So why don't we take a peek, as it were, at Mudsville's 'books'? You know, the 'other' books, the real ones?

Hmm ... Where to start ... Ah! Here we go ... It seems that back in 1950 the total share of federal income taxes collected in Canada was split roughly evenly between corporations and individuals. Fifty - fifty. That sounds fair. Oh, but look ... by 1992 an astonishing shift had occurred: the proportion of such revenue from corporations had dropped to less than ten percent while that from individuals had risen to over ninety percent. Now let's see, add to this the Goods and Services Tax (GST) which transferred billions of dollars of additional tax burden away from the corporations onto Canadian citizens ... and ...

....yes, the tens of billions of tax dollars that, through corporate tax deferrals (deferred indefinitely, apparently), tax credits, tax exemptions et cetera, are, every year, never collected ... and the vast haemorrhaging accruing from the tax havens outside the country .... and, of course, the various tricky-dicky tax dodges like transfer pricing (which allow corporations with operations in the US to 'transfer' their profits south of the border) ... Goldarned, it looks like we're talking perhaps over a hundred billion big ones a year gone AWOL.

I wonder if that's why 'there is no money' for health care and education and such? Perhaps an oversimplification. After all, what about our humungous national debt?

Thereby, as they say, hangs an interesting tale. It seems that in the three decades from 1965 to 1995 our 'excessive social program spending spree' added $40 billion dollars to the national debt, but the ruinous interest rates charged by the commercial banks added roughly $490 billion to that debt. So social spending only accounted for less than eight percent of it ... Now this doesn't make sense to me. After all, why would we, the citizens of Canada, be borrowing money from the private banking industry at usurious rates of interest when we could be borrowing from the Bank of Canada at rates as low as one percent with all the interest, in any case, remitting back to the country itself? Perhaps we better go further back and get a little more context ...

It appears that the Bank of Canada was started up in 1935 in response to the pressures of the Great Depression ... you know, at a time when all that the corporate world could do was run around demanding that spending be cut when, in fact, MORE spending was exactly what was called for. The idea seems to have worked too. During the Second World War the Bank was able to multiply the monetary base eightfold by financing annual deficits that amounted to a quarter of the Gross National Product at interest rates of between 0.4% and 2.5%. Unemployment was virtually wiped out. The land was awash in credit. The Bank instituted wage and price controls combined with foreign exchange controls to control inflation. Following the war the Bank shrewdly started to 'dry up' the excess liquidity in the economy.

The Bank of Canada, it seems, was acting as it was designed: that is, as a regulator of the national economy. Expanding when necessary, contracting when necessary. There was peace in Mudsville in those days ...

But then something strange happened on the way to the modern era. In 1967 an amendment to the original Bank Act (of 1934) - militated for, among others, by the commercial banks - effectively cleaved the Bank's responsibility to and control by the Canadian government ... and thereby the citizens of Canada. The Governor of the Bank of Canada would thenceforth have almost complete independence from the Minister of Finance. The reasoning given then (and now) for this about-face in the control of the Bank was to 'avoid political influence' on the Bank.

Now you have to understand, the central bank of any country is ALWAYS a political institution. The only question is: In whose interests are the bank's policies to serve? Clearly, prior to 1967 the Bank of Canada was serving, more or less, the interests of the citizens of Canada. Afterwards it became, unequivocally, a creature serving the interests of the chartered banks, the wealthy elites and foreign bondholders. It seems the Bank had been, well, hi-jacked ...

No doubt about the results either. During the 1980's, for instance, real interest rates in Canada were several points higher than in previous decades; higher, indeed, than any of our trade competitors and among the highest in the developed world. These excessively high interest rates, apart from transferring billions of dollars every year from those who could not afford to save to those who could, served also to stall the economy in mid-flight and create massive unemployment ... Such was part and parcel, it appears, of a new economic creed called 'monetarism' which became enshrined shortly following the hi-jacking of the Bank.

Monetarism, in brief, holds to two principal notions: one, that 'free markets' are self-regulating and two, that the key to determining economic activity is through the control of the money supply.

Now the problem with the first notion is that the 'free market', as it might have been understood, say, in the 12th century, is an economic fiction. We live in a system of highly regulated markets mediated by oligopolies and monopolies. As for 'self-regulating', if anything is clear over the last 800 years or so, it is that markets, when left to themselves, are entirely unstable causing massive social and economic upheaval and disruption.

The problem with the second notion is that much of the so-called money supply today is, itself, entirely fictional ... It's made up. Just figures tapped into a computer somewhere. Indeed, contrary to the belief of many, only five percen or so of the money creation in this country comes in the form of the actual crinkly stuff printed in the government mints. The vast bulk (95%) of the money is, instead, created virtually out of thin air within the bowels of the computers of the five major chartered banks.

It's not quite that simple, of course. Among other snags there is (or at least, used to be) a natural break on all this hocus-pocus. These are the banks' 'reserve requirements', the monies that the banks have legally had to keep on hand to cover daily transactions. Traditionally the 'reserves' have equalled eight percent or so of total deposits. The banks have never liked these and not just because it limited how much they could "lend", but because, in the magical world of smoke and mirrors that is the basis of our 'fractional reserve banking system', it limited how much money they could "create".

This it did by limiting their notorious 'money multiplier'. I say 'notorious' because it is 'official' ideology today that the multiplier doesn't actually exist. It used to exist in the textbooks of former days, you understand. Now, under 'monetarism' ... it doesn't.

In truth it does. When the Bank of Canada decides to 'float' money into circulation, it deposits the money in, say, commercial Bank A which lends it out to Bank B and so on, such that at each 'lending' the bank in question merely extends a line of credit LIMITED ONLY BY THE LEGAL RESERVE REQUIREMENT. The eventual cascade through the system results - after having 'used up' the initial 'float' in the reserve holdings of the successive banks - in the creation of a multiple (of credit) of from fifty to 100 times the original amount. Puff! Seems like magic ....

But the effect is real. We know it's real because numerous studies have ascertained that the monies loaned out every year by the banks far exceed the monies deposited by a considerable factor. Now the upshot of all this is that when in the 1970s and 1980s the chartered banks were charging us all outrageous interest rates - including on the national debt - the excuse that they were just 'passing along' the rate of inflation was just a bunch of hooey. For if the money was, for the most part, just made up on the premises (that is, didn't cost them anything) the 'take' was all gravy. It also, by the by, made nonsense of monetarism's second pillar - the 'control of the money supply - since no one today can remotely tell what the money supply really is.

In a final twist, the commercial banks, not happy with the traditional reserve requirements, were able, in 1991, to slide through, in the dead of night, a profound amendment to the Bank Act which essentially rid them of much of the pesky reserve requirements. More precisely this new 'risk-based capital reserves' regime, apart from releasing the ('non-existent' you understand) money multiplier genie from its cramped quarters, also effectively served to induce the private banks to further load up on government securities, that is, on the nation's debt.

So there we have it Mudvillians ... well, not entirely ... The 'second set of books' are deep. There's another little item over here about how the entire provincial and federal sales tax structure could be replaced by a teensy one quarter of one percent tax on all financial transactions. A sector of the economy that has hitherto escaped the taxman completely - whilst we poor yobs are paying fifteen percent through the nose day in and day out. Then there's ...

... Oh, but I hear the bells ringing. Rosy dawn has returned. There is the clamour of happy voices. Joy has returned to Mudsville ... It appears that ...

... a pothole has been fixed.


Antony Black is a teacher and freelance writer based in Hamilton, Ontario. He has written for the independent (and on occasion, the mainstream) print and on-line media for the past two decades. Antony is also the global affairs editor and monthly columnist for Mayday a local progressive magazine sponsored by the Skydragon Cooperative.

Mr Black wrote this piece in March 2004 for his local Ontario Secondary Teacher's Federation (OSSTF), District 21 (Hamilton) political action committee publication, PACfiles, in response to an ongoing government financial scandal (the 'sponsorhip' scandal) involving some $100 million.

Bill Totten


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