9: How the Debt-based Monetary System Functions in Canada
Presented by Connie Fogal, leader of the Canadian Action Party, at the Bromsgrove Conference in the UK in October
Recent figures from Statistics Canada and the Bank of Canada show that the total debt of all levels of Canadian government, individuals, and corporations is $2.27 trillion. Canada has a total money and near-money supply of 800 billion dollars. Therefore, the debt owing is three times the amount of money around with which to pay it off.
Of the $800 billion money supply, only $38 billion is legal tender (currency in circulation) created by the Bank of Canada interest free. The remainder is credit created by the major chartered banks as loans (mortgages, credit card loans, home equity loans, business loans, etc.) on which interest must be paid.
Thus the Canadian economy is run on a debt-based monetary system, where legal tender amounts to 5% of the money supply and credit amounts to 95%.
We must ask ourselves:
1. How do we pay off a $2.27 trillion debt with a total money supply of $800 billion of which only $38 billion is legal tender?
2. What would happen to the Canadian economy if all Canadians stopped borrowing and started saving instead at the same time?
Canada is part of a world debt-based monetary system controlled and managed by bankers rather than sovereign governments. It was that world debt-based monetary system that was responsible for the Great Depression of 1929.
In recent years, millions of the world’s people have lost all, or nearly all, of their retirement savings. Corporations and individuals have gone bankrupt. Millions have lost their jobs and homes. Governments have cut spending. Several nations around the world are trying to stave off banking and economic collapse. Over 4 billion people live on $3.00 a day or less.
By 1929, bankers, brokers, and corporate leadership ran the economic systems into collapse. In Canada, part of the solution was the nationalization of our Bank of Canada. The nationalized Bank of Canada did not materialize without work, struggle and deep political debate.
In Canada one such political person was Gerry G. McGeer. During 30 years of political life, he was a BC Liberal, a member of the BC Provincial Legislative Assembly, a Member of Parliament, a Senator. He was Mayor of Vancouver City in 1935 and 1936. In 1936 McGeer published a book called Conquest of Poverty, or Money, Humanity and Christianity.
Gerry McGeer — Trailblazer
In the preface of his book he wrote:
“Ever since the passage of the English Bank Act of 1844, the creation, issuance, and the regulation of the circulation of the current medium of exchange, though being duties that constitute the most conspicuous and sacred responsibilities of government, have been in large measure delegated in blind faith and absolute confidence to bankers and financiers.
“Necessity now compels all to recognize that the creation and issuance of the medium of exchange, the monetization of public credit, the circulation of the medium of exchange, and the general supervision of the monetary system must be restored to government.”
McGeer’s insight into the debt-based monetary system of the '20s and '30s and his persistent fight to change it was rewarded when the government of MacKenzie King in 1938 nationalized the Bank of Canada, returning to government the control of the creation of the nations’ currency and credit.1
The legislated mandate of the nationalized Bank of Canada states:
“It is desirable to establish a central bank in Canada to regulate credit and currency in the best interest of the economic life of the nation to control and protect the external value of the national monetary unit, and to mitigate by its influence fluctuations in the general level of production, trade, prices, and employment, so far as may be possible within the scope of monetary action, and generally to promote the economic and financial welfare of Canada.”
This mandate was followed from 1938 until the mid 1970s, Canada’s best financial years in the interest of the citizens in financing our infrastructure, housing, and all our proud social programs. In the mid 70s, a change of policy took place which gradually gave back the control and creation of credit to the private banks.
It was the Conservative governments of Brian Mulroney that initiated the erosion of the legislative mandate of our Bank of Canada in a number of ways, and successive Liberal governments continued the abuse. The powerful mandate still remains, but government practice refuses to honour it. To wit by the following:
1. Since 1975, our governments have decreased the use of our Bank of Canada to hold Canada’s debt. Result? A dramatic increase of unnecessary interest paid. In 1975 the total federal debt was $37 billion. By the year 2000 it was $585 billion. This dramatic increase was due to borrowing money from foreign and domestic banks at market rates of interest, rather than borrowing from our own Bank of Canada at nominal rates of interest, the payment of which come back into government coffers as dividends.
The Erosion of our Legislation
In 1975 our own Bank of Canada held about 22% of Canada’s debt. By 1991 it held only 8% of our debt. By 2000, only 5%. Borrowing at market rates ranging from 6% to 18% (in the 80s) rather than at about 1% from our Bank of Canada.
When the Liberals replaced the Conservatives in government in 1993, the debt was $408 billion. By the year 2000, the debt was $585 billion. By year 2004, the Liberals reduced the debt to $510 billion. To effect this reduction, the Liberals viciously slashed social program spending, and created surpluses which they applied against the debt. They starved the people to feed the banks.
2. In the mid 80s the Mulroney government initiated a policy of “Price Stability” through the increase or decrease of interest rates rather than requiring the banks to increase or decrease their cash reserves (statutory reserves) with the Bank of Canada.
3. During the Mulroney years, the government further deregulated the banks. That is, government removed the firewalls between banking, stock markets, real estate mortgages, and insurance. The regulations had been there since the mid-1930s to protect the public interest.
Deregulation allowed the banks to gamble in derivatives (an aspect of securities, instead of the securities themselves), merchant banking (trading and warehousing in entire non-banking companies), underwriting (guaranteeing the distribution of a new issue of stocks), stock brokering, and insurance.
With deregulation, banks could now access pools of capital previously unavailable to them. This process gave the banks inside information as a result of their now wearing many hats. Small business and farmers experienced increased difficulties in accessing loans, and local branches disappeared as banks chose to gamble in the great casino of international finance (except when they got burned and came back to peddle more credit cards at home).
4. It was to restore the capital that the banks had lost in their gambles that the Mulroney government eliminated the statutory reserves.
By law (statute) our chartered banks were required to deposit with our Bank of Canada a modest part of the short term deposits they received from the public. This “reserve” was the price that banks had to pay for the right to create most of our money supply as “near-money” (i.e., money bearing interest by its mere existence).
The reserves that were deposited with our Bank of Canada earned the banks no interest. Those reserves put at the disposal of our government over $120 billion of interest-free money that would grow from year to year with the economy (William Krehm, Economic Reform, Vol. 16, No. 1, January 04). The quantum was even more when the amount of reserves, i.e., percentage of deposits, was higher. Prior to 1980 there had been “secondary reserves,” income-earning securities required to support the deposits in chequing accounts.
To make matters worse, then Mulroney’s government, having lost the use of that reserve money, turned around and borrowed from those same banks, either directly or indirectly, the money it needed to make up for the loss of the statutory reserves. It began paying those same banks $5 to $8 $billion per year on that money that previously had been interest free (William Krehm, ibid.). Naturally these figures go up as the economy expands.
After depriving itself of the use of the statutory reserves, interest free, the Federal government cut grants to provinces who then cut grants to the municipalities.
Deregulation Leads to a Larger Bank Casino
5. Bank deregulation and bank gambling resulted in the bankruptcy of a number of small Canadian banks. In the early 80s a number of minor banks went belly up in a cloud of scandal: Canadian Commercial Bank, Northland, Unity Bank and others (Walter Stewart, Bank Heist, Chapter 9). Depositors were caught. Business loans were caught. The government bailed out the banks paying off the protected deposits by underwriting deposit insurance, and negotiated settlements with the depositors and other creditors (called workouts).
“Cooking the Books” — Thereby Undervaluing Canada’s Worth
6. “Cooking the Books” – thereby undervaluing Canada’s worth. Until 2004, the Canadian government was “cooking its books” – an accusation made by Canada’s own Auditor General in 1999. They used cash flow accounting when they should have been using accrual accounting (capital budgeting). They pretended that assets did not exist which did exist. For years, except for Crown corporations, governments did not show the full asset side of their balance sheet, thus exaggerating the net debt. Government was writing off assets like a bridge or a building in one year, and then showing them on their books at a token $1.00 value. It was by this method that government has sold off buildings, land, railways, to private parties at bargain basement prices.
In 1999 after a fight with the auditor-general of Canada who refused to sign off unconditionally on two years’ balance sheets Martin agreed eventually to using proper accounting procedures in two areas, environment and aboriginal matters. In the year 2004, our government has finally committed itself to eventually reporting all its physical assets as such Canada’s accounts. But this was not explained to the public or to Parliament. Nor was there a mention of the government investment in human capital – education, health and social services – which economists in the 1960s had recognized to be the most productive investments a nation can make.
Why have our governments been acting so contrary to the interest of its own citizens? It is because we have had leaders and parties in control who are part of and agree completely with the New World Order, i.e., globalization. They are willing participants and major players in the international financial regime being imposed on the world by the International Monetary Fund (IMF) and the World Bank They are submitting Canada to the regime of “structural adjustments” – the process of removing government from its role in the economy – and “privatization” – the process of wholesale sellout of public assets and government responsibilities.
In 1995 Paul Martin slashed federal health care transfers to the provinces by $28 billion. Sheila Copps, a former MP in the Chrétien government cabinet, recently revealed that in 1995 Paul Martin was lobbying the Chrétien government hard to scrap the medical care program. In the June 2004 election campaign, Martin promised to return a mere $9 billion to health care. Martin’s years of starving our once proud health care system are still ricocheting as provincial governments dismantle and privatize such services.
Between 1999 and 2003, in addition to slashing funding for health care, our Canadian government slashed funding for education, unemployment insurance and various other social pro- grams. The results for people have been deaths, debts, drop-outs, poverty, homelessness, marriage breakdown.
The result for government has been massive surpluses. Between 1999 and 2003, the Canadian government accumulated a surplus of $46.7 billion (Alternative Budget of the Canadian Centre for Policy Alternatives).
Canada is in the process of being “structurally adjusted.” It is just that the process cannot be accomplished so easily here as in underdeveloped countries. The phrase “structural adjustment” is a euphemistic one created by the IMF (International Monetary Fund). When countries need financial assistance they go to the IMF who in turn demand “structural adjustment” (the process of removing government from its role in the economy) and “privatization” (the process of wholesale sellout of public assets) in return for the money. This impoverishes the people as their resources are stolen out from under them. One structural demand is that national central banks be removed so that there is no national power to create and control their own money supply. Herein lies the explanation of why our governments refuse to use the power of our own Bank of Canada. They are complicit participants in the IMF regime and are moving Canada by stealth into the regime.
So what is to be done?
We have to inform people that they have a choice about money. Money can be their master, or money can be their servant. This will not change until we have politicians, i.e., true representatives of the interest of the people, who understand the issue of monetary sovereignty vs. monetary slavery; and more importantly, who have the will to say NO to monetary slavery.
1. The following interchange took place between McGeer and Graham Towers, the first governor of the Bank of Canada in 1938 when Towers, a former vice-president of the Royal Bank of Canada, testified before the Subcommittee of Banking and Commerce in 1939:
McGeer: But there is no question about it that banks do create the medium of exchange?
Mr. Towers: That is right. That is banking business in the same sense that a steel plant makes steel (p. 287).
Reproduced in Vol. 5, No. 10 of Economic Reform. Carried in Meltdown: Money, Debt and the Wealth of Nations, COMER Publications, 1999, selections from the first decade of Economic Reform, p. 117.
– from Economic Reform, December 2004