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Bank of Canada

Central banks are mandated to balance the need for money growth and full employment with the need for currency stability. The Bank of Canada (BoC), for example, is the only entity that is legally entitled to create money. The BoC then licences this entitlement to private banks (literally, a bank licence), who create money as debt issue. The BoC, of course, is a non-profit entity, so when it creates money and lends it to the Federal government, the money is lent at an interest rate of just under 1% (enough to cover administrative costs). Hence, a federal debt-to-GDP ratio that was over 110% in 1945 shrank to just 16% in 1974, NOT through "debt retirement" (which is just a scheme to transfer public funds into private hands) but through running budgets with deficits under 3% and borrowing BoC money to fund expanded social programs like universal health coverage.

Unfortunately, the Central banks reneged on their commitment to growth and full employment in the mid 1970s and adopted monetarist policies which included leaving all money creation to private banks, pursuing high interest and low inflation rates, and allowing unemployment levels to rise, income growth to stagnate and total debt to increase dramatically.

Clearly, a money policy which focuses on full employment and real growth is preferable to a paper chain of debt and speculation with stagnating median incomes and relatively high unemployment. The Monetarist policies of 1981 and again in 1990 (at least in Canada) were devastating to the public, targeting the vulnerable for the worst "dislocations". What's more, since the government must also borrow on the open market, public debt has grown tremendously under monetarism and as much as a third (in Canada) of all public expenditures are now directed to debt maintenance. That is, a third of the tax money that is paid out each year goes right into the pockets of private creditors. This is a scandal which need not happen. As if this wasn't enough, governments suddenly have "no money" left to fund social programs, so the gulf between rich and poor widens further.

One way to ease the transition from a debt-addicted economy to a healthy, growth-oriented economy is to gradually increase the amount of money created by the central bank. One effective way to offset inflation is to concurrently raise cash reserve requirements for the private banks, so that debt issue shrinks at the same time as debt-free issue grows. The ultimate goal will probably not be 100% government created money, but a judicious mix of government and private money. This will force banks to lower their interest rates to remain competitive, and the cash reserve requirements will constrain borrowing beyond what the economy can produce.

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