Emil Bjarnason is an economist at the Trade Union
Research Bureau in Vancouver. In this three-part series
he discusses the sources of high interest rates; their
relationship to inflation, production, jobs and spending;
and what can be done to reduce the disastrous effects.
This is Part 1.

Interest rates in Canada today are at levels which are
extraordinarily high in relation to all previous exper-
ience. Even Government of Canada bonds are yielding
from 15 to 18%, depending on the term for which they are
Written, and interest rates on commercial, and consumer

‘loans and mortgages even higher.

In these circumstances, banks and other short term
_ Money lenders are experiencing a bonanza, while people

_ who put their money into bonds, mortgages or other long

| term’securities at an earlier period when interest rates

Were lower, have suffered severe capital losses. More
importantly perhaps, ordinary working people have lost
any hope of being able to buy homes, or even, in many
Cases, to buy consumer durable goods on usual credit
terms.

In part, this ‘‘tight money”’ situation is the result of
deliberate government policy. Partly also, the govern-
Ment policy with respect to interest rates is an inevitable
result of its own failure to deal with inflation and balance
of payments problems, and also of the effect on Canada’
of the policies of the United States Government.

Government today is being bombarded with contra-
dictory advice from Keynesians and monetarists. Essen-

| tially, current policy in Canada, the United States and

Britain is based on the theories of the monetarists.

_ In general, interest rates tend to reflect the amount of
inflation in the economy. This is so, on the one hand,
because lenders demand a high enough interest rate to
compensate them for the fall in purchasing power of their
money while it is in the hands of the borrower, and on the
other because borrowers may perceive it to be to their
advantage to buy now and incur:a high interest rate
rather than to defer their purchase to a future period
when the price will be higher.

| What’s behind the high interest rates? ©

In the particular case of Canada, a further complica-
tion arises from the balance of payments situation which
has been generated by past policies of the government. 1)
Our very high foreign indebtedness, particularly to the
United States, dictates that unless Canada has a very
high favorable balance of trade, it must constantly im-
port capital from abroad (i.e., encourage foreign invest-
ment) to cover the interest and dividend payments aris-
ing from that indebtedness, Since, under the monetarist
policies of the U.S. Government, American interest
rates are at record high levels, investors will not buy
Canadian securities unless those securities pay at least as

high an interest rate as is available across the line. To
that extent, the Canadian interest rate is almost bound to
be high regardless of whether our inflation rate be high or
low. :

‘The Monetarist Illusion

The most vocal monetarists in Canada are the Fraser
Institute of Vancouver, and Gerald Bouey, Governor of
the Bank of Canada, both of which are disciples of Mil-
ton Friedman. :

e The monetarist theory holds that inflation is purely
the consequence of the government printing too much
money, and therefore that the remedy for inflation is to
reduce the issuance of money.

e However, the government is not the only agency
that creates money. Within limits that are to some extent
controllable by the government, the banks also create
money and, in a limited but very real sense, almost any
business can also create money of a sort by extending
credit to its customers.

e Moreover, the supply of money can be further in-
creased by the action of the population itself by with-
drawing idle funds from mattresses, safe-deposit boxes
or other places and spending it. =.

e Moreover, even if the number of dollars in cir-
culation were rigidly fixed, the population as a whole
could increase its inflationary effect simply by increasing
its rate of turnover, i.e., by spending it more quickly; one
million dollars changing hands once a week makes for
four times as big a volume of transactions as the same
million dollars changing hands once a month.

The monetarists therefore prescribe that in addition to
‘cutting down on the creation of new money and reducing
public spending, the government should discourage pri-
vate spending by raising interest rates. It is also fondly
believed that the supply of money in the hands of the
public can be reduced by raising interest rates because a
high rate of interest means a low price of bonds which,
theoretically should persuade people to part with their
money in exchange for government bonds.

It is a beautifully simply theory which, unfortunately,
is contradicted by the facts of everyday experience.

A new aggression against Vietnam?

A reader writes: ‘I am deeply con-
cerned by news items appearing in the
press of renewed Chinese military ac-
tivities on the China-Vietnam border. It
is my opinion that these activities follow

“a similar pattern prior to the Chinese ag- —

gression against Vietnam in 1979. What
do you think?”’

Po eet

There can be little doubt that the
Chinese leaders are preparing the ground
for a new assault against the countries of
Indochina — Vietnam, Laos and Kam-
puchea, with the main thrust being aimed
at Vietnam. The current stepped-up
armed incursions along the Vietnam-
China border, repeated violations of
Vietnamese airspace and territorial wat-
ers not only follow a pattern similar to

979, they are a continuation.
_ It should be remembered that the 1979
Invasion of Vietnam by the Chinese was
two-pronged. One front was opened up
In the southwestern region of Vietnam
from Kampuchea by the Peking leaders
acting through the genocidal Pol Pot-Ieng
ary regime. The other front was opened
against the northern part of Vietnam.
S two-pronged invasion was pre-
‘ceded by the same type of military and
destabilization activities the Chinese are
Currently employing.
* * *

Following defeat in its 1979 invasion,
hina entered into negotiations with
Vietnam. beginning April 1979. How-
€ver, during more than five months and
In the course of 12 sessions of negotia-

_ tions, the Chinese side rejected out of
hand the logical and reasonable pro-

posals advanced by the Vietnamese side;

such as: establishing a demilitarized zone.

to separate the armies, so as to prevent
the resumption of hostilities, and to keep

the way open for the normalization of
relations between the two countries.

Instead of negotiating in good faith,

Peking used that time to regroup its
forces with the stated aim of “‘teaching
Vietnam a second lession’’. It deployed
12 troop divisions along the Vietnam-
China border and more than five army
corps in- military regions adjacent to

‘Vietnamese territory. At the same time

Peking intensified its hostile acts against
Laos, massing many divisions of its
troops on:its borders with Laos. In Kam-
puchea, Peking persistently worked to
revive the last remnants of the Pol Pot
army forcing them to sabotage the peace-
ful reconstruction of that country.
* * *

In an address to the United Nations
Assembly, Vietnam Minister of Foreign
Affairs Phan Hien charged ‘‘that for a
long time Peking has been nurturing a
plan to bring Vietnam under its heel and

turn it into a tool of China’s hegemonistic
and expansionist policy in southeast Asi-
a.’’ He drew the Assembly’s attention to
the fact that those in power in Peking

" Marxism-Leninism Today

have always considered southeast Asia
as their natural zone of expansion, be-
cause they are small underdeveloped
countries rich in natural resources.

Phan Hien stressed that by its strategic
position, Vietnam constitutes for China
the natural access to squtheast Asia. He
said, ‘‘it is common knowledge” that in
the early 70s when the victory of the
Vietnamese resistance was certain, the
Chinese leaders made a deal with the
USA with a view to perpetuating the
partition of Vietnam and sharing zones of

- influence in that part of the world.

* * *

The Chinese Maoist leaders regard a
strong, socialist Vietnam, pursuing a pol-
icy independent from Peking’s, as an ob-
stacle hindering their expansionist plans
in southeast Asia. In keeping with this
view they consistently create problems
designed to hinder the building of social-
ism in that country, and plot incessantly

to isolate Vietnam from other southeast
Asian countries. This is true also of Pek-
ing’s attitude to Laos and Kampuchea, |
where the forces of socialism and
democracy have also won over feudal
reaction and imperialist aggression.
Peking’s view of Indochina and south-
east Asia is shared by U3S. imperialism
and the U.S. administration. At the Na-
tional People’s Congress in Peking in
February 1978, Hua Guofeng, a top Mao-
ist spokesman, declared that China and
the USA had common interests and
shared similar points of view in many
areas of international relations. And, at
the Washington session in 1979 of the
NATO Council, top U.S. leaders openly
proclaimed the identity of interests of
NATO and the Chinese leadership.

* * *

The only conclusion that can be drawn
from an examination of Peking’s policy
toward Vietnam, Laos and Kampuchea
is, that it is a calculated long-term policy
aimed against the interests of socialism,
peace and democracy in Indochina and
southeast Asia. It is a policy that is in
accord with China’s foreign policy in
general, which makes common cause
with world imperialism in its hatred of
real socialism, freedom and _ in-
dependence for all nations big and small.

We should make no mistake, Peking’s
currently stepped-up military provoca-
tions against Vietnam, Laos and Kam-
puchea have created a grave and ex-
plosive situation that could blow up at
any moment into a big war in the region
of Indochina and southeast Asia. The
time to protest through our own govern-
Ment is now, not after the explosion.

| Cte

PACIFIC TRIBUNE—JUNE 12, 1981— Page 5