Ellen Brown (of "The Web of Debt" fame) has a nice piece on the Common Dreams website that has a look at some of the attempts to quash Victoria's arguments. Here's what she has to say:
"Basically, her message was that banks create money “out of thin air” and lend it to people and governments at interest. If governments borrowed from their own banks, they could keep the interest and save a lot of money for the taxpayers.....
But critics said, “Not so fast.” Victoria might be charming, but she was naïve.Point taken. Thanks Ellen.
One critic was William Watson, writing in the Canadian newspaper The National Post in an article titled “No, Victoria, There Is No Money Monster.” Interestingly, he did not deny Victoria’s contention that “When you take out a mortgage, the bank creates the money by clicking on a key and generating ‘fake money out of thin air.’” Watson acknowledged:
Well, yes, that’s true of any “fractional-reserve” banking system. Even before they were regulated, even before there was a Bank of Canada, banks understood they didn’t have to keep reserves equal to the total amount of money they’d lent out: They could count on most depositors most of the time not showing up to take out their money all at once. Which means, as any introduction to monetary economics will tell you, banks can indeed “create” money.What he disputed was that the Canadian government’s monster debt was the result of paying high interest rates to banks. Rather, he said:
We have a big public debt because, starting in the early 1970s and continuing for three full decades, our governments spent more on all sorts of things, including interest, than they collected in taxes. . . . The problem was the idea, still widely popular, from the Greek parliament to the streets of Montreal, that governments needn’t pay their bills.That contention is countered, however, by the Canadian government’s own Auditor General (the nation's top accountant, who reviews the government’s books). In 1993, the Auditor General noted in his annual report:
[The] cost of borrowing and its compounding effect have a significant impact on Canada's annual deficits. From Confederation up to 1991-92, the federal government accumulated a net debt of $423 billion. Of this, $37 billion represents the accumulated shortfall in meeting the cost of government programs since Confederation. The remainder, $386 billion, represents the amount the government has borrowed to service the debt created by previous annual shortfalls.Mr. Watson’s final argument was that borrowing from the government’s own bank would be inflationary. He wrote:
In other words, 91% of the debt consists of compounded interest charges. Subtract those and the government would have a debt of only C$37 billion, very low and sustainable, just as it was before 1974.
Victoria’s solution is that instead of paying market rates the government should borrow directly from the Bank of Canada and pay only token rates of interest. Because the government owns the bank, the tax revenues it raises in order to pay that interest would then somehow be injected directly back into the economy. In other words, money literally printed to cover the government’s deficit would be put into circulation. But how is that not inflationary?Let’s see. The government can borrow money that ultimately comes from private banks, which admittedly create it out of thin air, and soak the taxpayers for a whopping interest bill; or it can borrow from its own bank, which also creates the money out of thin air, and avoid the interest.
Even a 12 year old can see how this argument is going to come out."
It's interesting that the early 70s was also the time when the French government unilaterally decided to start borrowing money from commercial banks and running up huge interest charges instead of using the Banque de France to create the same money interest free. According to a number of authors, the change was made with the passing of the 1973 Loi du Finance, signed by the then French Président Georges Pompidou (who had previously worked for the Rothschild bank) and future Président Valérie Giscard D'Estaing. The law effectively made it illegal for the French government to borrow interest free from the Banque de France. You can read about the law here.
Is it just a coincidence that 1973-4 was the time when both the Canadian and French governments decided to start borrowing exclusively from commercial banks rather than using their own public banks to create the money needed by the economy interest free? How many other countries did the same thing?