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Canada's Federal Debt

Canada's federal debt from 1867 to 2015
Image from Fraser Institute Blog Mar, 9, 2016

Canada's federal debt problem

The above chart illustrates the history of Canada’s federal debt; obviously something went terribly wrong after 1974. Archived Stats Can content shows that 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, in a period of 49 years, it reached over $1.192 trillion in 2023.

So, what happened around 1974?

The Basel CommitteePrivate banks 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 much 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.

In 2021, alone,  Canadian taxpayers paid the private How much we paid

lenders an estimated $64.6 billion to service the federal debt—over $170 million each and every day of the year!

These are tax dollars that, ceteris paribus, could have gone towards infrastructure, health care, education, and other social needs  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.

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 $1.2 trillion and the government is continually cutting services while our infrastructure is not being maintained. This “subsidy” to the private lenders must end.

If the Canadian government had continued to finance its deficits by borrowing from the Bank of Canada at zero net interest after 1974, Canada would have nil, zero, nothing as a Federal debt today, all other things being equal.

What about inflation?

Those who, for some inexplicable reason, are 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. We have addressed this argument here.

The solution to Canada's federal debt problem

Canadas federal debt problem solution lies in Fed govt borrowing from Bank of Canada at zero interest
To reduce Canada's federal debt, only the Bank of Canada should be able to lend money to governments, at zero interest. Image courtesy of Shankar. s

The solution to this problem is simply for the government to stop borrowing money from private lenders 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.

To understand more about this issue, see the sites and articles below, watch the videos and see also Money Creation and Economic Growth on this web site.

Articles and websites

Stop ecological overshoot caused by economic growth

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