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.

Connie Fogal

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