Bank of Canada
The Bank of Canada was chartered by and under the Bank of Canada Act on July 3, 1934 as a privately owned corporation. Its origin was due in large part to lobbying on the part of farmers and small business who had been given a hard time by the privately owned banks during the Great Depression that began in 1929. Prime Minister Bennett set up a Royal Commission to consider the question and it recommended a central bank.
The Golden Years of Canada
To our disadvantage, many Canadians are not well educated on the great economic and monetary advantage Canada had early on from 1939-1974. Canada was a thriving nation, until one individual unilaterally changed the rules without consulting Canadians and plunged our great nation into a huge multi-billion dollar deficit.
In 1938 the Bank was nationalized by Prime Minister William Lyon Mackenzie King largely as a result of lobbying on the part of one man, the former mayor of Vancouver, Gerry McGeer, who had been elected to the House of Commons. All the existing shares were acquired and the bank was officially designated as a federal crown corporation with all of its capital stock issued to the minister of finance to be held by the minister on behalf of Her Majesty in right of Canada. Its essential role was to “promote the economic and financial well-being of Canada.” The first governor of the bank was Graham F. Towers, a 37-year-old Canadian who had extensive experience with the Royal Bank of Canada, both in Canada and abroad. He served Canada well for 20 years.
The bank did very little until the Second World War broke out. Then it swung into action as promised by the governor when he appeared before the parliamentary committee on banking and commerce in 1939. At one point the questions turned to the impending war, and one of the members of parliament asked, “You have agreed that banks do create money. So as far as war is concerned, there will be no difficulty in raising the means of financing whatever the requirements may be?” The governor replied, “The limit of the possibilities depends on men and materials.” So in effect he made the point that the creation of money is flexible, but “should be largely dependent on the availability of men and materials” which is the fundamental tenet of bank reformers.
Towers was as good as his word. When war broke out in 1939, the Bank of Canada created very large sums of money for the government of Canada at near zero cost. This was used to exit the Great Depression, to help finance a war when Canada played a role far in excess of its population, and then after the war to help finance the great infrastructure program of that period. This included the St. Lawrence Seaway, the Trans-Canada Highway, new airport terminals, new ports, the Distant Early Warning Line (DEW Line), which was a very expensive radar system that went all around the periphery of the country, and many other public works both federal and provincial. Not only that, the Bank of Canada helped to finance a social security system which, at that time, was considered one of the best and admired by many.
In effect, during those years, the money creation function was shared between the government of Canada, through the Bank of Canada, and the private banks with Bank of Canada support. It was a system that worked like a charm, until 1974 when Governor General Bouey unilaterally, and without either consulting or advising the prime minister or parliament, changed the system. The Governor made a speech in Western Canada announcing that the Bank was adopting “monetarism,” without explaining any of the consequences.
The Turning Point
The consequences of adopting monetarism have been catastrophic and have transferred the power of the people to the rich 1%.
As it turned out, the Bank of Canada was abandoning its shareholders and being guided by the rules set by the Bank for International Settlements (BIS) located in Basel, Switzerland. The BIS is the bank for central banks and is controlled by the wealthiest banking families in the world. In practice, that meant that the Bank of Canada no longer provided cheap money to the Canadian government which was subsequently required to borrow in the market, at high interest rates. That year, 1974, was the year that everything changed and started going downhill. In 1974 there were virtually no men sleeping on the streets in Canada and there were no food banks. Today there are 2,065 food banks and the demand continues to rise.
Without access to cheap money the government had to borrow expensive money to cover its deficits, and accumulate considerable debt which it not had to do previously. Inevitably corners were cut, and essential services were subject to austerity budgets. The cumulative results of having to borrow in the market have been disastrous. From fiscal year 1974 /75 to fiscal year 2014/15 the Canadian people had to pay $1.17 trillion in interest on the money the government borrowed. And, of course, there was a huge remaining debt. We currently owe $615 billion at the federal level, and probably a similar figure if you add up the debt for provinces, territories and municipalities.
The sad fact is that for decades we have not had enough money available to meet the real needs of essential services including health care, education, the arts, infrastructure and the needs of our aboriginal brothers and sisters. The current government’s proposal to borrow more money in the market is the wrong way to go. There is no way that it can ever be paid off, and we will wind up paying an ever larger share of our income for interest.
The only common sense solution is for the parliament of Canada to use its exclusive powers over money and banking and have the Bank of Canada come to the rescue as it did in 1939. Our plan for “A New Social Contract Between the Government and People of Canada” is just a more sophisticated version of the system that worked so superbly for 35 years. To say that it would be inflationary is just a lie – a lie based on ignorance, perhaps; but nevertheless a lie. A significant infusion of government-created debt-free money is only common sense, and the only practical solution to Canada’s and the world’s financial woes.