Throughout history, governments have used their ability to create money to fund public spending. While none of these policies were called, “People’s QE”, “Strategic QE”, “Sovereign “Money Creation”, or “Helicopter Money” (what Positive Money collectively refers to as Public Money Creation), they shared the common trait of using newly created state money to finance government spending, rather than relying on commercial banks to create new money through lending.
Significantly, the times when Public Money Creation has resulted in high inflation or even hyperinflation (inflation of over 50% a year) have been well documented. However, the times when governments have created money in a careful and responsible manner to grow the economy are usually ignored or overlooked. We want to set the record straight and bring to light the many case studies where Public Money Creation has successfully boosted the economy without leading to economic disaster.
In our previous posts on this topic, we showed that theory and analysis have been dispensed with at the expense of this widespread misconception. We also showed that misleading conclusions have been drawn from the case studies of Public Money Creation in Zimbabwe and the Weimar Republic. In this post, we look at case study evidence of state led money creation in Canada and New Zealand provided by the New Economics Foundation (NEF).
According to NEF (2013), the Canadian government performed a form of Strategic QE from 1944-1975, whereby the Canadian central bank would create new money and inject it into the Industrial Development Bank (IDB). The IDB would then use this money to lend to the productive sectors of the economy – namely small and medium enterprises (SMEs).
To help strengthen Canadian SMEs, the IDB was formed in 1944, as a primary subsidiary of the Canadian Central Bank. The purpose of the Bank was:
“To promote the economic welfare of Canada by increasing the effectiveness of monetary action through ensuring the availability of credit to industrial enterprises which may reasonably be expected to prove successful if a high level of national income and employment is maintained, by supplementing the activities of other lenders and by providing capital assistance to industry with particular consideration to the financing problems of smaller enterprises.”
NEF (2013) correctly points out that, as is the present case with UK banks, the Canadian private banking sector was hardly interested in providing the types of lending facilities that Canadian businesses needed. The economy suffered as a consequence. The IDB, using money created by the Canadian central bank, was established “to plug this financing gap and any business that requested funds would have to demonstrate that it could not attain them at reasonable rates from a commercial bank first.”
While there was much scepticism around the establishment of the IDB – that it would only lend money to unprofitable or failing businesses – the IDB was extremely successful in providing finance to SMEs, and helped the Canadian economy thrive. According to NEF (2013), in its 31 years of existence, the IDB provided over 65,000 loans to approximately 48,000 different businesses. The average loan size was $C47,000, while roughly 50% of loans were for less than $C25,000. In total, the loans amounted to over $C3 billion. More than 9 out of 10 loans were repaid, while it is estimated that over 900,000 people were employed as a consequence.
NEF (2013) cites former IDB employee E. Ritchie Clark who stated:
“The Bank assisted in just about every kind of business and program imaginable, from setting up a new pipe mill or refinery to helping a young lawyer acquire his own law library. It was active in every part of Canada, and in some remote areas such as the Yukon was a major factor in economic growth. The IDB was probably the most important source of financial support for commercial air services apart from the mainline operations, for motels and other kinds of tourist services, and for many kinds of manufacturing such as small and medium sized lumber operations and the production of hosiery”
Most importantly, the IDB was completely financed through the creation of central bank money. To begin with, the IDB was funded by the Bank of Canada buying $25 million of equity stock. NEF (2013) also notes that the Bank of Canada also purchased all bonds issued by the IDB in its 31 years of existence.
New Zealand (1935-1939)
NEF (2013) also points to the case-study of New Zealand, a British colony at the time. New Zealand was permitted by the British to establish its own central bank – the Reserve Bank of New Zealand (RBNZ). As a colony of Britain, New Zealand was heavily reliant on imports and exports from/to Britain and Australia. Accordingly, the New Zealand pound was pegged to sterling – and also subject to the volatility of prices in commodity markets.
In 1935, the new Labour Finance Minister, Walter Nash, wanted to use the RBNZ to help stimulate aggregate demand, increase employment, and get the economy going again. According to NEF (2013), the primary goal of the RBNZ was to undertake “credit creation for the real economy”.
The central bank was to primarily use its money creating powers in two different ways. Firstly, it would guarantee the prices of agricultural produce, where “shortfalls between market and guaranteed prices met by its (RBNZ) advances”. Secondly, Nash instructed the RBNZ to make £5million of loans available for the construction of social housing – aimed at providing low cost homes to poorer households.
NEF (2013) further suggests that the RBNZ also created credit to help finance a number of other public work projects. From 1936-1939, the RBNZ created roughly NZ £30 million (equivalent to around 5-7% of New Zealand’s GDP). According to NEF (2012) over this 4-year time frame, real GDP grew by 30%.
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