ECON 3P04

Money and Banking II

Assignment

Due: Friday, July 3 by 11:59pm on Sakai in Dropbox.

Your assignment is to analyze the assignment article using the economic concepts and theories covered in ECON 3P04.

You may use any style you prefer, such as MLA, APA, etc. You can use other resources in your answer, but they must be cited properly. Your assignment should be thousand words.

Article: Radical economic policies are working and show a future path

ByLinda McQuaig

"Nobody told us we could do that!" exclaimed a startled British commentator when Britain suddenly abandoned the gold standard in the depths of the 1930s Depression.

The move came as a shock because everyone had assumed the gold standard an international agreement linking currency rates to gold was an immutable law of nature, along with much else about the economy.

And then, just like that, it was gone.

That sense of shock is probably not unlike what many people are feeling today as all our long-held assumptions about how the economy works and what is and isn't possible suddenly seem no more certain than when we'll be able to get our next tattoo.

For years, we've submitted to the economic orthodoxy dictated by Bay Street: that governments must deliver balanced budgets and low spending or economic disaster will follow as surely as gravity will bring a heavy object plunging to the ground.

Then along came thepandemic. Suddenly the Bank of Canada is creating vast amounts of money, which the federal government is distributing to Canadians across the country.

Nobody told us we could do that!

In fact, it's just what's needed. To prevent an economic collapse,our central bankis buying $5 billion a week in government bonds, which is effectively creating money out of thin air.

Private banks have done this all the time; they effectively create money whenever they issue a loan. It's one of the reasons banking is such a lucrative business.

Now, the Bank of Canada is creating enormous sums of money to help pay for the federal government's huge increase in spending during the pandemic.

Bay Street financial interests are grudgingly accepting this, given the emergency, but they want it to stop as soon as possible.

But wait! Not so fast! Now that we see how it can be done, one is tempted to ask: could this be a way to pay for increased government spending on future things we truly need like building hospitals and public transit and investing in renewable energy?

This is the sort of dangerous thinking that a phalanx of powerful interests from the Fraser Institute to the financial press are keen to crush, realizing it could spread more easily than coronavirus at a crowded, maskless beach party.

But, as economistJim Stanford suggests, "the genie is out of the bottle."

Bay Street is determined to return to low government spending and to ensure that the recovery focuses, not on new aspirations, but on restoring the corporate world so that it's as rich and dominant as it was before the crisis.

As the Fraser Institute's Jason Clemens insists, the priority must be on tamping down government intervention and encouraging entrepreneurial innovation, while avoiding tax hikes.

In other words, resurrecting the old orthodoxy and making sure the rich aren't asked to pay a penny more.

This is exactly what financial interests urged during the 1930s Depression and it only prolonged the downturn.

The brilliant British economist John Maynard Keynes pointed out at the time that private enterprise wasn't investing during the Depression because, with everyone out of work, there was little prospect of making a profit. He argued that the only solution was for government to step in and spend massively on needed projects.

"We have the savings, the men and the material," he declared. "The things are worth doing."

Keynes said that putting people back to work would create productive capacity the very source of wealth: "It is utterly imbecile to say that we cannot afford these things. For it is with the unemployed men and the unemployed plant, and with nothing else, that these things are done."

Keynes' point was proved when U.S. president Franklin D. Roosevelt's vast government spending on New Deal projects put millions of Americans back to work building roads and power plants, and helped kick-start the recovery.

Roosevelt also defied economic orthodoxy by dramatically raising taxes on the rich.

Certainly, today, nobody is telling us we can do that!

But then, under the new reality of the pandemic, that looks like another bit of economic orthodoxy that now seems so 24 hours ago.