Click Here

Notes on Shooting the Hippo

by Linda McQuaig, 1996

The thesis of this book is that the Bank of Canada under John Crow ignored the Bank’s mandate to strike a balance between the eternally conflicting interests of creditors and debtors—that is between inflation control and economic growth—and tilted heavily in favour of those with financial assets.  The result of his tight money policies is that we are mired in recession.  According to McQuaig’s sources this recession is responsible for 70 percent of our debt growth with social spending only accounting for 15 percent.  Were it not for the recession, she asserts, Canada’s tax revenue would be more than adequate to support the level of social spending—modest by the standards of many nations—to which Canadians have been accustomed.


The anti-deficit campaign has been portrayed as a non-ideological battle against a common foe.  The statement, “The debt problem has become so extreme that we have no choice but to cut social spending” is presented as an objective assessment of our situation.  But can you imagine a media commentator making the following assertion?  “The debt problem has become so extreme that we have no choice but to raise taxes on the rich.”

Statistician Hideo Mimoto (chief of the social security section at Statistics Canada) calculated that only 1 percent of the debt growth was due to unemployment insurance, 4.5 percent was due to welfare programs, 6 percent was due to the old age pension, and 3.4 percent was due to housing programs.  He also found that the amount we spent on social programs had not been growing any faster than the growth in the overall economy.

In deciding to actively pursue the goal of price stability the Bank of Canada, headed by John Crow, was serving the interests of the financial elite.  In calling for inflation to be reduced to 3 percent by the end of 1992 and 2 percent by the end of 1995 Crow ended up by overshooting the targets.  In the spring of 1994 inflation had dropped to zero and the country was mired in a lingering recession.  The dream of price stability had come to fruition.

Recall that Hideo Mimoto calculated that unemployment insurance increases accounted for only 1 percent of the growth of the debt.  By comparison, his calculations showed the rising cost of interest payments accounted for a staggering 70 percent of the debt growth.  The baffling phenomenon of higher taxes, fewer services and rising debt isn’t magic.  It’s the effect of high real interest rates.

Under Crow’s tight money policies during the 1990-92 period the real interest rate (the interest rate minus inflation) went up to 8 percent.

In 1981 Ontario Hydro issued a thirty-year bond with an interest rate of 17.5 percent.

No group in the world loves misery more than bondholders.

From the creditor’s point of view preserving the value of existing wealth is more important than economic growth.

In 1975 U.S. economist and Nobel laureate Robert Solow outlined in detail how the costs of recession were simply much greater than the costs of inflation.

During the Great Depression unemployment reached 25 percent in 1932, and there was no unemployment insurance.

Echoing Adam Smith the eminent economist Alfred Marshall, writing in the 1890s, argued that capitalist economies usually achieve full employment as long as governments don’t interfere with the marketplace.

Benjamin Franklin noted that inflation amounted to a “tax” on those who held money.  He wrote, “Thus inflation has proved a tax on money, a kind of property very difficult to be taxed by any other mode: and it has fallen more equally than other taxes, as those people paid most who, being richest, had most money passing through their hands.”

When the Farmers Exchange Bank of Rhode Island failed in 1809 an investigating committee set up by the state legislature discovered that the bank had loaned $580 million worth of banknotes, even though it only had a capital base of $3 million to back up the loans.

The basic issue is whether the financial elite or the government on behalf of the people should have the profit from creating money.

Historically the financial system has been structured in favour of moneyed interests, that is, creditors.

Ordinary people have been convinced, to their disadvantage, that the world of money and banking is far too complicated to understand.

When they attain power reformist parties and movements usually become friendly to the big business interests they had once denounced.

C. D. Howe, after whom the Howe Institute is named, was a dominant figure in Canadian politics from the mid-thirties to the late fifties.  He was a tireless champion of unfettered free enterprise throughout his long career.

Throughout much of the inflation ridden 1970s bondholders were actually receiving negative rates of return.

Until the 1970s Keynesian economics worked well.  There was a trade-off: higher unemployment meant lower inflation, and vice versa.  Later there would be both high unemployment and high inflation.

In an attempt to reduce inflation The Federal Reserve (U.S.) jacked up the interest rate to 14.9 percent by February 1980.  Following the U.S. lead Bank of Canada president Gerald Bouey cranked up Canada’s prime interest rate to 22.5 percent in the summer of 1981.

The idea that achieving full employment should be the government’s top priority fell increasingly out of favour among those running the country.  In the spring of 1989 John Crow made it clear in an address that the real goal of the Bank of Canada was to protect the value of investor’s financial assets.  “People do care about the value of their assets, and they should care,” he said.  “In my view the most important thing that monetary policy can do is to make sure that people can maintain the value of their assets.” ...“People hurting, people with lousy jobs; what am I going to do about it?” Crow shrugged.

The `recession method’ of inflation control was to become the supreme law of the land, and part of the Mulroney government’s political agenda.

That a strong anti-inflation policy has the effect of driving up unemployment and reducing economic output is one of the best established relationships in economics.  But the people at the C. D. Howe Institute preferred to see no connection.

Those investors who reaped enormous rewards from the anti-inflation war are considered to have no responsibility for the debt.  They are suddenly invisible in the ongoing deficit drama, having taken their money and disappeared.

Pierre Fortin, president of the Canadian Economics Association concluded in a lengthy technical study in 1994 that the country’s deficit problems were almost entirely the result of the recession.  He argued that Canadian policy “should be more concerned with the welfare of Canadians that with the welfare of foreign investors.”

The free market is notorious for distributing resources in a highly unequal manner, with great concentrations of wealth at the top and poverty at the bottom.  Our social programs, modest compared to those of many other Western countries, play an important role in redistributing some of those resources from the haves to the have-nots.

A tight-money policy reinforces inequality in two ways.  Its high interest rates disproportionately reward the rich, and the resulting unemployment disproportionately punishes the poor.

Our tax revenues are more than adequate to pay for our government programs—when we are not mired in recession.

For society to function some kind of reasonable balance has to be stuck between the competing interests of creditors and debtors.  Although the mandate of the Bank of Canada was to maintain a delicate balance between encouraging growth and fighting inflation, the Bank opted to focus exclusively on fighting inflation.  In doing so it came down heavily in favour of those with financial assets to protect, and against those whose primary need was employment.

Return to Previous Page

Click Here