7:    The Bank of Canada and the Secret of Canada's Debt

John McMurtry

The search for the new Governor of the Bank of Canada is on. But there are few headlines. Not many know that the appointment could be as important as the next election.

For years now, Canada has had bank governors managing its monetary policies who might as well have been stand-ins from Wall Street. The last two governors—John Crow and Gordon Thiessen—have had different styles, it is true. John Crow aggressively imposed sky-high interest rates in the 1980s, and caused the worst country-wide recession since the 1930s.

But governor Crow was only applying the favourite medicine of his former employer, the IMF. He was also following the lead of the US Federal Reserve—at a 5% markup to show how tough he was. The over 20% prime rates he imposed on Canada were part of a world-wide program of "debt crises" led by the Reagan administration to ensure the downturn of social spending which was seen by the international financial and corporate elite.

For decades, Canada's bank governors have not wavered from conformity to current Wall Street dogma and its on-loan executives running the US Federal Reserve. Ayn Rand's favourite disciple, Allan Greenspan, is the chairman of the Fed, but no one notices the connections. Gordon Thiessen seems a relief after the fanatical John Crow, but he has continued to make the Bank of Canada a puppet of the ruling monetarist dogma that inflation is the only problem in the world, and that the only way to beat inflation is to raise interest rates. Higher interest rates to "cool the economy" have become such a knee-jerk reflex by central banks that electorates have come to accept them as akin to the movement of the tides.

But there are hard facts about the dogma's consequences which are kept hidden from view. Interest-rate escalations themselves fuel inflation by windfall revenues for money-lenders who produce no goods, increasing market demand beyond productivity. Cranked-up interest rates also ruin smaller businesses, disemploy workers, and risk society-wide recession. But because they do not harm the large transnational corporations which generally make more money from lending money than they do from making products, these problems do not register on financial rulers. Ever since Pierre Trudeau resigned, US-led monetarism has kept Canada's financial policies in a straitjacket.

Unfortunately, the Minister of Finance too seems to have been programmed by monetarist doctrine. Documents recently obtained by access to information laws show that in 1995 Paul Martin followed the prescriptions of the IMF in slashing healthcare, higher education and other transfers to the provinces (along with UI benefits and funding for social housing) by a total of over $29 billion. Canada has not yet recovered from this social infrastructure stripping.

Canada's Future

The Bank of Canada could be a hidden keel of Canada's faltering social union. Very few people know of its constitutional powers as a publicly owned bank, a hard-won status it gained during the Great Depression. Under Article 18 of the Bank of Canada Act, for example, the Bank can lend money to the federal government, its sole shareholder, in amounts up to 33% of annual federal revenue at any interest rate the government or the governor decides upon. The Bank can also lend to the provinces (or their municipalities) amounts up to 25% of their annual revenues—not by printing money, but by credit based on reserves. Instead of paying compounding interest on public debt to Wall Street bondholders and Bay Street banks, the federal and provincial governments could be borrowing from the Bank of Canada with all interest charges reverting to the public coffers.

Why has no recent Bank of Canada governor or finance minister considered this option while the "debt crisis" has been hollowing out Canada's social infrastructures? The answer is that the wrong people have been in charge. They have been monetarist clones, with no bank governor remotely knowledgeable or interested in the country's social capital which holds Canada together.

From Mulroney to Now

In 1991, the Mulroney government secretly phased out the requirement of Canada's banks to hold any currency reserves to cover the money they loaned out to governments and individuals at compound interest rates. The Bank of Canada pushed for this zero-reserve policy. Governor Gordon Thiessen still advocates it, repeating word-for-word the banks' absurd slogan that reserve requirements for the money the banks loan out at compound interest is "an unfair tax on the banks"!

Not even Wall Street or the German Bundesbank makes this claim. But the governor of Canada's public bank does year after year at an approximate cost of over four billion dollars annually to the public treasury—the basis of the record profits of the big six banks ever since the reserve requirement was covertly abolished in 1991.

A new Governor of the Bank of Canada could comply with the Bank of Canada Act and serve the public interest. There are qualified candidates to do it, like Judith Maxwell. But until the Bank of Canada does serve the social union our federal and provincial governments have agreed upon, Canadian public finances will continue to be the porkbarrel of its richest banks, while our social infrastructure will continue to be hollowed out by debt charges on credit money the private banks create. The time for a change is long overdue.

John McMurtry PhD. is Professor of Philosophy at the University of Guelph, a board member of the Committee on Monetary and Economic Reform, and the author of Unequal Freedoms: The Global Market as an Ethical System (Garamond, 1998).

—from Economic Reform, Oct. 2000