Rise and Fall of the Canadian Movement for Monetary Sovereignty

* Article: The Canadian Movement for Monetary Sovereignty: Rise and Fall. By Ellen Brown. COMER, THE JOURNAL OF THE COMMITTEE ON MONETARY AND ECONOMIC REFORM, Vol. 25, No. 6 • June 2013

URL = http://comer.org/archives/2013/COMER_June2013.pdf

Chapter 17 of a new book by Ellen H. Brown, The Public Bank Solution

Excerpt

Ellen Brown: ? "T?he government of Canada devised its innovative system of state-bank-created credit in the 1930s, and drew freely from it for nearly four decades of unusual prosperity, growth and development. Then in the 1970s, Canada joined the Basel Committee of G10 countries at the BIS. A change in economic policy followed that cut the government off from its own state bank funding, subjecting it instead to the skyrocketing interest rates of private international credit markets. Canada is now struggling with debt and deficits along with most of the rest of the Western world. While Australia’s innovative central bank was being reined in by the City of London in the 1930s, Canada’s was just getting started. Before 1935, the Canadian government did not have a central bank. It had to borrow from private banks that issued their own banknotes, with the country’s largest private bank, the Bank of Montreal, serving as the government’s de facto banker.

But in the throes of the Great Depression, this private system had failed. The money supply had collapsed, forcing businesses to close and unemployment to soar. The banks were blamed for making conditions worse by failing to extend loans; while for the government, a national debt to private banks meant a mounting interest burden.

By the eve of the depression, interest on Canada’s public debt had reached an alarming one-third of government expenditures; and many officials believed that the government needed a central bank to generate its own money. In 1933, a Royal Commission was put together to look into creating such a bank. A major debate then ensued over whether it should be public or private. William Lyon Mackenzie King, elected prime minister in 1935, thought the bank should be public.

He admonished:

- “Until the control of the issue of currency and credit is restored to government and recognized as its most conspicuous and sacred responsibility, all talk of the sovereignty of Parliament and of democracy is idle and futile.”

...

The Bank of Canada opened in 1935 under private ownership; but in 1938, the Bank Act was amended to make it a publicly-owned institution. According to William Krehm in A Power Unto Itself: The Bank of Canada, the 1938 nationalization allowed the central bank to create the money to finance federal projects on a nearly interestfree basis. The bank could also lend to the provinces. The interest it collected went back to the federal treasury.

In creating the credit to finance federal, provincial, and municipal projects, the Bank of Canada was doing what private banks do every day; but it was doing this in the public interest. In parliamentary hearings in 1939, Graham Towers, the first governor of the Bank of Canada, confirmed that banks routinely create credit with accounting entries.

...

“In the years 1935 to 1945, Canada’s monetary base – that is, the supply of legal tender – was increased from $259 million to $2,017 million. M1 – all currency and non-interest-bearing deposits – rose from $742 million to $2,956 million. Because the central bank created most of the money itself and lent it to the government in the form of treasury bills at rates as low as .37 percent, the bank was able to keep the interest paid on Canada Savings Bonds bought by the public to 3 percent or less. Without the low-rate financing provided by the central banks, the Allied powers could not have won the war.”

According to the late Will Abram in Money: The Canadian Experience with the Bank of Canada Act of 1934 (2009), the Canadian government first showed what it could do with its own central bank during World War II, when Canada ranked fourth among the Allies for production of war goods. Under the Returning Veterans Rehabilitation Act of 1945, some 54,000 returning vets were given financial aid to attend university. The Department of Veterans Affairs provided another 80,000 vets with vocational training, and the Veterans’ Land Act helped 33,000 vets buy farmland. After the war, the Industrial Development Bank, a subsidiary of the Bank of Canada, was formed to boost Canadian businesses by offering loans at low interest rates. The Bank of Canada also funded many infrastructure projects and social programs directly. Under the Trans-Canada Highway Act passed in 1949, Canada built the world’s longest road and the world’s longest inland waterway (a joint venture with the United States), as well as the 28-mile Welland Canal. Senior citizens, regardless of income or assets, received a modest allowance from the government under the Old Age Security Act; and children under 15 got one as well.

In 1957, funding from the Bank of Canada helped launch the Canadian federal health care system. A Hospital Act was passed under which the federal government agreed to pay half its citizens’ bills at most hospitals, and a Diagnostic Services Act gave all Canadians free acute hospital care, as well as lab and radiology work. In 1966, the Hospital Act was expanded to cover physician services. In 1984, the Canada Health Act ensured that no medically-necessary care would include private fees or a charge to citizens.

From 1939 to 1974, Canada financed these projects largely through its government-owned central bank, without sparking price inflation or driving up the federal debt. (See Figure 9 on page 4.) From 1935 to 1939, the Bank of Canada issued most of the nation’s credit, and it issued 62 percent of the credit during the last years of World War II. Until the mid-1970s, the Canadian government continued to create enough new state money to monetize 20 percent to 30 percent of the national deficit. It advanced money at low interest, forcing commercial banks to keep interest rates low in order to compete.

This four-decade run of prosperity came to an end, however, when Canada abandoned its successful experiment in selffunding and began borrowing heavily on the private market. This change in policies occurred when the Basel Committee was established by the central-bank Governors of the Group of Ten countries of the Bank for International Settlements in 1974, and Canada joined it.11 A key objective of the Committee was and is to maintain “monetary and financial stability.” To achieve that goal, the Committee discouraged governments from borrowing from their own central banks interest-free and encouraged them to borrow instead from private creditors, including large international banks.12 The proffered justification for the policy was that borrowing from a nation’s own central bank, which had the power to create money on its books, would inflate the money supply and prices, while borrowing from private creditors would not. Overlooked or concealed was that private banks create the money they lend just as public banks do. The difference is that a publiclyowned bank returns the interest to the government and the community, while a privately-owned bank siphons it into private coffers, progressively drawing money out of the productive economy. ? The change in government borrowing policies was justified as being necessary to fight “stagflation” – rising prices accompanied by high unemployment – which had set in during the late 1960s. Under the sway of the classical monetarist theories promoted by US economist Milton Friedman, the phenomenon was blamed on governments either issuing money too freely or borrowing too freely from their own central banks. Overlooked was that the stagflation was global, and that Canadian prices had remained stable and the national debt had been low for decades, although the Bank of Canada had been steadily increasing the monetary base. Paul Hellyer, former Defense Minister of Canada and founder of the Canadian Action Party, maintains that elevated prices in the 1970s were the result not of government money creation but of “cost-push” inflation, triggered by big labor unions, big government, and big corporations negotiating top dollar for their contracts.

According to William Engdahl in The Gods of Money (2009), there was another cause of cost-push inflation in the early 1970s, and this one was intentionally engineered: the skyrocketing cost of oil. When Nixon took the US dollar off the gold standard in 1971, the dollar dropped precipitously in international markets. US Secretary of State Henry Kissinger and President Nixon then held a clandestine meeting in 1972 with the Shah of Iran, who was offered any weapons he wanted from the US arsenal except nuclear bombs. He would need vastly greater income to pay for them, but the revenue was soon provided. Engdahl cites evidence that in 1973, a group of powerful financiers and politicians met secretly in Sweden to discuss how the dollar might effectively be “backed” by oil. An arrangement was then finalized in which the oil-producing countries of OPEC would sell their oil only in US dollars, and the dollars would wind up in Wall Street and London banks, where they would fund the burgeoning US debt. For the OPEC countries, the quid pro quo was military protection, along with windfall profits from a dramatic boost in oil prices"