John Hotson Vindicated

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By David Gracey, 2021

At the first COMER meeting that I attended, some forty years ago, I met one of the founders, Professor John Hotson. It was there that I heard his dictum that no sovereign government should borrow from private banks when it had the option of borrowing from its own bank.

This was a revelation to me as I knew nothing of the history of the Bank of Canada under its first governor, Graham Towers. As COMERites know well, the BoC was used to fund deficits during the Depression and WWII and for many years thereafter. This practice ceased with the rise of monetarism and the agency of the Bank of International Settlements.

As inflation rose and the economy faltered, the Federal Reserve and the Bank of Canada jacked up interest rates in accordance with monetarist dogma. These punishing rates, in turn, caused deficits and debts to escalate. A study by Stats Canada found that 90% of the increase in the national debt during this period was – due to interest – much of it paid to private banks.

So, I wrote a letter to John Crow, then governor of the BoC, asking if the Bank could buy more government debt. He replied that it was impossible because it would excessively enlarge the balance sheet. The national debt continued to grow and led eventually to Paul Martin’s austerity policy, with its devastating impact on health and social programs.

Many decades have passed and the world has changed. To quote the Toronto Star, January 21, “central banks are buying massive amounts of government bonds, effectively printing new money to do so – and have poured $5.6 trillion US into the global economy.” This, of course, was in response to the coronavirus pandemic. Here in Canada our central bank has been purchasing $4-5 billion of bonds per week. Mr. Crow would be appalled to learn that the BoC now holds government bonds in excess of 20% of GDP – up from 5% before the pandemic.

As usual, the US was ahead of us. The Federal Reserve reacted to the 2008 financial crisis by creating several trillion dollars. Some were used to bail out financial institutions (including foreign ones), some to buy up dubious securities and some to purchase government debt. This saved the financial system without causing inflation. That success led many to advocate using the Fed to attack problems such as climate change and infrastructure deficits.

Fortuitously, New Monetary Theory (NMT) has come along to provide a rationale. Stephanie Kelton argues in her book The Deficit Myth that government money-creation is what we need to achieve full employment and reduce inequality. Some of the tenets of NMT are contentious, but it is clear that sovereign money has served us well during the present crisis.

The corporate media is not on board. Pierre Poilievre, the Tory finance critic, has accused Trudeau of using the BoC for nefarious purposes. The deficit hawks are fearmongering about the burden we will leave to our grandchildren. The banks don’t approve because it reduces the space for their own money creation. When the pandemic ends we can expect a strong push for cutbacks and austerity.

Fortunately, as economist Jim Stanford put it so well, “the genie is out of the bottle’. John Hotson was right. He and COMER deserve credit for helping to move the mountain. The challenge ahead is to ensure that this instrument is used for the benefit of all.

Our Comment

Dave Gracey, retired principal of an alternative secondary school in downtown Toronto, was one of the earliest to enlist in COMER, and has, over the years, submitted many pithy articles to the ER. He has been a tremendous supporter of COMER in every way.



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