Canada’s federal debt
Source: Stats Canada Table 385-0010
The above chart illustrates the history of Canada’s federal debt; obviously something went terribly wrong after 1974. Over a 108 year period (1867-1974) the accumulated debt shows as nearly a flat line growing to only $21.6 billion. But around 1974, the debt began to grow exponentially and, over a mere 39 years, it reached over $600 billion in 2013.
So, what happened around 1974? In that year
the Basel Committee was established by the central-bank Governors of the Group of Ten countries of the member central banks of the Bank for International Settlements (BIS), which included Canada. A key objective of the Committee was and is to maintain “monetary and financial stability.” To achieve that goal, the Committee discouraged borrowing from a nation’s own central bank interest-free and encouraged borrowing from private creditors, all in the name of “maintaining the stability of the currency.”
The presumption was that borrowing from a central bank with the power to create money on its books would inflate the money supply and prices. Borrowing from private creditors, on the other hand, was considered not to be inflationary, since it involved the recycling of pre-existing money. What the bankers did not reveal, although they had long known it themselves, was that private banks create the money they lend just as public banks do. The difference is simply that a publicly-owned bank returns the interest to the government and the community, while a privately-owned bank siphons the interest into its capital account, to be re-invested at further interest, progressively drawing money out of the productive economy.1
Paul Hellyer,2 also notes that lobbying by the banks and adoption of monetarism — the idea that “markets know best” and should be without regulation, and that public services should be privatized — took hold.
So, around 1974, the Government of Canada began to borrow all of the monies to cover its shortfalls from the private sector at interest rather than creating money through the Bank of Canada interest-free. In other words, since 1974, the Bank of Canada has not been acting in the best interest of its shareholders: the people of Canada.
To understand how ridiculous the present situation is, consider the 1993 Auditor General of Canada report (Section 5.41)3 which states:
The cost of borrowing is the third area that affects the annual deficit. In 1991-92, the interest on the debt was $41 billion. This cost of borrowing and its compounding effect have a significant impact on Canada’s annual deficits. From Confederation up to 1991-92, the federal government accumulated a net debt of $423 billion. Of this, $37 billion represents the accumulated shortfall in meeting the cost of government programs since Confederation. The remainder, $386 billion, represents the amount the government has borrowed to service the debt created by previous annual shortfalls.
In other words, of the accumulated debt of $423 billion, the government really needed to borrow only $37 billion—accumulated over 127 years—to cover its shortfalls on real spending for goods and services. The rest of that accumulated debt was monies borrowed to service the debt, essentially a payment of interest on interest to the private sector when the government could have created the money to cover the shortfall at what amounts to be no interest.
According to Paul Hellyer, from 1974–1975 to 2010, Canadian taxpayers have paid one trillion, 100 billion dollars ($1,100,000,000,000) in interest on the federal debt to private lenders.4 In 2011, alone, Canadian taxpayers paid the private banks an estimated $37.7 billion to service the federal debt—over $103 million each and every day of the year!5 These are tax dollars that, ceteris paribus, could have gone towards infrastructure, health care, education, and other social needs (see examples in Table 1, below) if the Government of Canada used the Bank of Canada to create the money to cover its shortfall. Ultimately, the government could pay off the federal debt through the same means.
|Table 1. Examples of goods and services that $103 million could purchase. For example, $103 million--one day's interest on the federal debt--could pay the salaries of 1,550 nurses or 340 doctors.|
|25,750||People added to Canada Health Care roles|
|6,645||Students funded to attend university (tuition; room & board)|
And consider this: from confederation to 1974, Canada fought two world wars, went through a major depression, constructed major infrastructures such as the St. Lawrence Seaway, Trans-Canada Highway, International airports, Canadian National Railway, and brought in social welfare programs such as Family Allowance, Old Age Security pensions, Canada Pension Plan, Universal Health Care and wound up with a total accumulated debt of only $21.6 billion. Today our federal debt is approaching $600 billion and the government is continually cutting services while our infrastructure is not being maintained. Meanwhile, the private banks keep increasing their already obscene profits. This “subsidy” to the private banks must end.
What about inflation?
Those who are, for some inexplicable reason, opposed to having the government return to interest-free borrowing from the Bank of Canada, invariably bring out the red-herring argument that it will cause inflation. The following is from a letter the QI sent to the Minister of Finance encouraging him to re-examine Government monetary policy: specifically using the Bank of Canada to provide financing for the Government’s planned infrastructure investments as the BoC was established for that exact purpose. It negates the inflation argument.
“From 1938 to 1974 the BoC created and loaned money to the Government at no interest. The program helped finance some of Canada’s most valuable and productive major infrastructure projects without creating a compounding interest debt burden or unbridled inflation. In 1974 the Government decided to privatize its borrowing. Since that time Canada’s debt has grown exponentially, primarily from the accumulation of compounding interest charges3. Debt service cost (Federal, Provincial combined) has grown to become equal to the cost of public education6.
To borrow from the BoC or from private banks follows the exact same process. All banks (public or private) issue credit by creating new money from a simple asset/liability book entry. There is no difference except private banks charge interest for the service and to cover the risk of default. In the case of government borrowing there is a minimal risk and so the payment of interest— currently around $70 million each and every day7—amounts to a transfer of public money to the banks—real money that could be used to finance real public services.
Opponents to the concept of government borrowing from the BoC claim that it would be inflationary. This is a myth, unsupported by Canadian experience and unsupportable by any logic. For example, in the twenty-five year period prior to 1974, while the government was borrowing from the BoC, Canada’s average rate of inflation was 3.5%. As a comparison, the USA’s rate of inflation was 3.3% while the USA was financing its deficits through private borrowing. In the twenty-five year period after privatization, Canada’s inflation averaged 4.9%. The comparable inflation rate in the USA was 4.8%. When one considers that the Canadian economy and inflation rate closely parallel the USA in most aspects, it is clear that privatization of government borrowing had no beneficial effect on Canada’s rate of inflation.
In addition, the Bank of Canada Act has safeguards built in (Section 18 i and j) including the loans outstanding at any one time shall not exceed one-third of the estimated revenue of the Government of Canada for its fiscal year, and such loans shall be repaid before the end of the first quarter after the end of the fiscal year of the government that has contracted the loan. Other safeguards could be enacted as and when needed.
If the Government intends to pursue a program of infrastructure enhancement and if the Government must borrow in order to finance the program, then it makes good fiscal sense to borrow from the BoC. Newly created money will provide newly created jobs and the resulting economic stimulus will benefit the country as a whole. To commit to interest payments for which no commensurate service is provided places an unnecessary and unproductive burden on taxpayers. As long as newly created money is used for newly created jobs, within the available labour and resource capacity, there is no inflationary effect.”
The solution to this problem is simply for the government to stop borrowing money from the private banks at interest and borrow from the Bank of Canada at no interest. The private banks should also be prevented from creating money. That right should be returned to the People of Canada through the Bank of Canada.
Articles and Web Sites
- Public banking in America. A number of the associated videos also discuss the Canadian banking system.
Canada’s Federal Debt Timeline
Bank Of Canada Offers 0% Interest Free Loans