The Problems with the “Loonies,” Part Three

The Problems with the “Loonies,” Part Three
Profile photo of Caleb McMillan

james-coyneThere was no period in history when the Bank of Canada issued “interest-free” loans to the government the way the Loonies imagine.

It’s as if Canadian infrastructure was given a “free lunch,” only to be eroded by the private interests of international banking cartels.

Sure, banks wield tremendous power vis-à-vis the common man. But there are countless historic errors with the Loonie conception of Canadian history.

The Bank of Canada was established during the Great Depression because Canadian policymakers thought it would be a solution to the problem the central bank of the United States had created.

At first, the commercial banks opposed the idea of a national newcomer on the scene. And originally, the Bank of Canada was privately owned. One-third of the 100,000 $50 shares were purchased by “housewives, ladies, nurses, and widows.”

Later, William Lyon Mackenzie King’s Liberal government nationalized the bank. During World War 2, it took on a more activist role than just setting the Bank rate.

The Bank of Canada ran the Foreign Exchange Control Board and exercised control over the newly created Industrial Development Bank, later called the Business Development Bank of Canada.

This is likely what Loonies are referring to when they speak about the government offering interest-free loans for such projects as the St, Lawrence Seaway, the Trans Canada Highway, Air Canada, the CBC and “indispensables” like hospitals, schools, and universities.

It is merely the development banking arm of the central bank acting as financial agents for the federal government’s infrastructure boondoggles.

The idea that the Bank of Canada was different from 1938 to 1974 is completely ahistorical. It is merely conspiratorial black-and-white thinking that permits this skewed vision.

As World War 2 ended, the Bank of Canada continued its’ interventionist streak into the economy, encouraging “business investment.”

Granted, they ended capital controls. But the upward pressure of speculative capital inflows made keeping the Canadian dollar fixed at the Bretton Woods agreement undesirable.

Years before it came fashionable to “float” exchange rates, and to the dismay of the IMF, the Bank of Canada and the federal government freed the Canadian dollar from Bretton Woods.

In the early 1950s, demand for Canadian resources made borrowing from foreign sources readily available and feasible. And therefore, Canadians, especially Canadian governments, took advantage of the newfound post-war prosperity.

The second Bank of Canada Governor, James E. Coyne, was not interested in “interest free loans.” He went to war with the Diefenbaker Conservative Government over inflation. He believed governments should balance their fiscal budgets.

In the 1954 economic downturn, Coyne actually slowed the money-supply growth. Often accused of pursuing a “tight-money” policy, Coyne would deny this, calling his measures “sound-money” policies. He was once said, “Inflation is particularly insidious in that it seems to some to encourage production and employment and expansion for a time, but it continually cumulates excesses, distortions, inefficiencies and injustices which in due course produce recession, loss of confidence, and contraction.”

James Coyne’s battle with the government and Keynesian academia culminated in the 1958 Conversion Loan scandal.

As agent to the federal government, Coyne’s BoC oversaw the federal government’s exchange of $6.4 billion of existing federal bonds for new ones on more generous terms.

The government didn’t pay for World War 2 using “interest-free loans.” They issued Victory Bonds, and in 1958, they were about to mature.

Wishing to eliminate a considerable debt overhang, the government offered bondholders cash payment and an interest rate of 4 1/2 per cent (up from 3 per cent) to convert to new 25-year bonds.

Easier monetary conditions and a massive propaganda campaign made the 1958 Conversion Loan a success, but afterwards Coyne went back to combating inflation and rose interest rates to record levels.

By the 1960s, Canadian university economists demanded Coyne’s resignation. The commercial banks were unhappy as well, meanwhile Coyne was openly criticizing the Diefenbaker’s fiscal policy in his speeches.

The government rammed a 25-word bill through the House of Commons effectively firing Coyne. The Senate rejected the bill.

Coyne resigned after giving a six-hour speech to the Senate. They exonerated him but the intellectual war against inflation was lost. Nearly 60 years later and not only is another Great Depression on our doorstep, but so is the return of asinine social credit philosophies.

What do the Loonies make of the “Coyne Affair?” They are silent and for good reason. The 1958 Conversion Loan goes against their narrative that the government gave Canadians a free lunch from 1938 to 1974.

Profile photo of Caleb McMillan

Caleb McMillan is a writer that lives in Vancouver, British Columbia.

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