Bank of Canada


darkbeaver
#1
The Formation of The Bank of Canada
Until the BoC opened in 1935, The Treasury Board, which administered the Finance Act of 1923, had no responsibility to see that advances made to the banks answered the needs of the economy. The unsatisfactory nature of that arrangement was revealed during the Great Depression. In 1934 Parliament passed the Bank of Canada Act, and the bank itself was founded a year later. Since 1938 the bank has been owned entirely by a single shareholder- the federal government (i.e., Canadian taxpayers).
The Use of The Bank of Canada, 1938 - 1974
The 'nationalization' of 1938 perfected the mechanism that allows the central bank to create money to finance federal projects on a near interest-free basis . It may make loans to the Govt. of Canada or any province (BoC Act Article 18 (c), (i) (j) or guaranteed by Canada or any province (c). This is explained fully in our "Article 18" link (see left).

Initially, the bank fullfilled its mandate. It was of great assistance in getting Canada out of the Great Depression, financing the war, and building infrastructure and social systems in Canada into the 1970s. But then things began to change.

Next: The BoC 2

Global Changes in Monetary Policy
“Until the late 1960s central banks held inflation in check by one or a combination of several tools: (1) by raising rates for overnight loans to the chartered banks to help them meet their net cheque-clearance or other obligations; (2) by raising the statutory reserve requirement - the percentage of deposits made with the banks by the public that the banks had to redeposit with the BoC to back their chequing and other short-term accounts - such redeposits had earned the banks no interest; (3) by “jaw-boning), i.e. Advising the banks of regions or industries where they did not want bank credit increased or even maintained at its present level.
In the 70s the monetary policy of Monetarism was adopted; further, central banks worldwide began attempting to control inflation by reigning in the money supply without regard for the inevitable effects on interest rates.(Monetarists hold that the money supply alone determines price- and just about everything else!)
In mid-1991 a bill was slipped through parliament without debate or press release phasing out the statutory reserves over a two-year period (subsection 457 of Chapter 46 of the Statutes of Canada.) That left higher interest rates the only means of “fighting inflation.”


Interest rates, however happen to be the revenue of money- lenders as the sole way of fighting price rise which conventional economists identify with “inflation”. ( see - the social lien section). At the same time a campaign was launched to enshrine (1) the independence of the central bank from the government, though the BoC Act sets forth that all shares are owned by the federal government; that in the event of a disagreement on broad policy between the governor of the BoC and the Minister of Finance, the latter shall have the right, after thirty days written notice to conform, to dismiss the Governor. If that does not add up to the good old capitalistic definition of ownership, i.e. non-independence, what does?; (2) “zero inflation” a perfectly flat price level was proclaimed essential. Most of Canada’s federal debt was run up in the attempt to enforce these provisions, which contradicted the BoC’s charter. Such contradictions, however, did not deter Mr. Crow, and subsequent BoC Governors, from pursuing like policies to this day!

Next: Unbelievable!

Two Unbelievable Facts!
We now consider two unbelievable facts. They are so astonishing that most people simply won't believe them!! Indeed, they really do defy the imagination!
Unbelievable Fact # 1: How Money is Created.

Money is created out of nothing.
Myth: it's based on Gold: Not so! The Gold Standard was abondoned years ago.
-Well....it's not quite created 'out of nothing': it's created out of a faith based on the credit of a nation: otherwise, it would be worthless. If I give you a $20 bill, you believe (have faith) that you can use it as a medium of exchange to buy other goods or services. Moreover, there are two ways to create money (out of essentially nothing).

GCM (Government Created Money), created by the federal government. People understand this method. Most people when asked would say, "well, the government creates money." That's true. But how MUCH of the money supply each year does the government create? About 5%. That's all. So who creates the rest?

BCM (Bank Created Money): the private banking system. How does the private banking system "create" money? Simple! But unbelievable! Bear in mind that MONEY IS CREATED OUT OF NOTHING. So, when you make that $30,000 loan at your bank for a new truck, that amount is typed into you bankbook. Seconds earlier it didn't exist! Now YOU owe that money TO the bank, + interest!
Myth: the money for your loan is somehow "backed" by deposits on-hand in the bank where the loan is made... Not so!

You, as a citizen or a business, don't have a choice. Much though you might like to, you can't create money. You have to borrow your money from the private banks.

Unbelievable Fact # 2: The Government's Choice

But governments have a choice! The federal government can EITHER create its own debt-free and interest-free money (GCM) OR borrow it AS debt, and AT interest from the private banks (BCM). The provincial and municiple governments can choose to borrow, at low interest rates, from EITHER the Bank of Canada OR borrow from the private banking system at substantial interest rates.

GUESS WHICH CHOICE OUR GOVERNMENTS MAKE??
YOU GUESSED IT! Some 95% of our money is created as BCM
-UNBELIEVABLE!!

You may say, " -So what? Some abstract argument about 'how money is created' doesn't effect me, anyway..."
-Oh yes it does! You'd better believe it!

Next: Believe it!

/http://www.comer.org/
 
darkbeaver
#2
Example 1: Eliminating the GST





As the diagram shows , if the BoC were used intelligently, the first step towards eliminating the GST could be to reduce it to, say, 4%, while at the same time using the capacity of the BoC to shift a calculated proportion of the federal debt From the private banking system TO the BoC.


Secondly, monitor the effect on the economy: less GST would doubtless perk up the economy, bringing more revenue into the treasury. Then eliminate the remaining 3% GST.







This example could serve as a federal prototype for any area needing tending to in our economy: Kyoto, Health Care, Education, Social Programs, Military or Infrastructure programs, and so on. Moreover, it could be used at the provincial or municipal level of government in the same way, the only difference being that these lower levels of government would have to determine, in conjunction with the federal government, the level of interest payments required (this being so because they are not shareholders of the BoC) -in return, say, for abiding by federal standards pertaining to the Project in question.
-Exactly what's next: Examples of the use of the BoC at the municipal level (Use of the BoC at the provincial level would be similar). We have working examples in this instance...


Next: Example (2) of How the BoC may be used
 
Kreskin
#3
Why is gold worth anything and how is it's worth different from money?

If the government created interest free money it would be worthless. Who would want something that has zero return?
 
darkbeaver
#4
Sony=Standard Oil New York

So you don't agree with borrowing for public infrastructure at zero interest from the Bank of Canada , but would rather borrow privately and pay huge interest as well as having a permanent debt that can never be paid off.
Last edited by darkbeaver; Oct 8th, 2008 at 10:17 PM..
 
Kreskin
#5
Quote: Originally Posted by darkbeaver View Post

Sony=Standard Oil New York

So you don't agree with borrowing for public infrastructure at zero interest from the Bank of Canada , but would rather borrow privately and pay huge interest as well as having a permanent debt that can never be paid off.

What would zero interest borrowing do to the value of our currency on world currency markets? There is a cost or reaction to everything. Nothing in this world is free.
 
darkbeaver
#6
Quote: Originally Posted by Kreskin View Post

What would zero interest borrowing do to the value of our currency on world currency markets? There is a cost or reaction to everything. Nothing in this world is free.

NOTES RE BANK OF CANADA FINANCING
FOR MUNICIPAL INFRASTRUCTURE


by
Richard Priestman
President, Kingston Chapter, COMER
1. List of Municipal Resolutions

Municipalities that have formally passed resolutions on financing capital costs using the Bank of Canada:
March 1998 “Canadians for Constitutional Money”
  1. Metchosin BC (followed the Michael Journal format)
  2. Nanaimo BC (first Canadian municipality to follow the Sovereignty Loan Plan)
  3. Vernon BC (first Canadian municipality to vote on Constitutional Money)
  4. Ladysmith BC
  5. Lumby BC
  6. Colborne ON
  7. Haldimand County ON
  8. Cramore ON
  9. Colwood BC
  10. Midway BC
  11. Peace River Regional District BC
  12. View Royal BC
  13. Comox BC
Resolutions adopted since 1998:

14. Kingston ON, April 3, 2001
15. Squamish BC, April 17, 2001
16. Toronto ON, April 23 to May 2, 2001
17. Town of Lakeshore ON, June 11, 2004
18. Windsor ON, November 15, 2004
2. Kingston Resolution Adopted April 3, 2001
A. The City of Kingston request the Government of Canada,
(i) to instruct the Bank of Canada to buy securities issued by municipalities and guaranteed by the Government of Canada to pay for capital projects and/or pay off current debt; (ii) to refund to municipalities any interest paid by municipalities to the Bank of Canada;
B. That a copy of this motion be forwarded to the Federation of Canadian Municipalities, the Association of Municipalities of Ontario (AMO) for circulation to other Municipalities within the Province of Ontario with a population over 50,000, to the local MP and MPP, requesting their support and endorsement.
Moved by Councillor John Clements
Seconded by Councillor Leonore Foster
3. Toronto Resolution Adopted April 23 to May 2, 2001
May 7, 2001
The Honourable Paul Martin
Minister of Finance
Government of Canada
Sir:
I am enclosing for your information and any attention deemed necessary, Clause No. 2 contained in Report No. 6 of The Policy and Finance Committee, headed “Loans from the Bank of Canada,” which was adopted, without amendment, by the Council of the City of Toronto at its regular meeting held on April 23, 24, 25, 26, 27, and its special meeting held on April 30, May 1 and 2, 2001.
In so doing, Council requested that:
  1. The Federal Minister of Finance, in conjunction with the Province of Ontario, provide low cost, below prime, long-term loans to municipalities, such as through the Bank of Canada; and
  2. A copy of this request be forwarded to the Federation of Canadian Municipalities and the Association of Municipalities of Ontario.
Yours truly,
M. Toff/sb for City Clerk
4. FCM Resolution, September 8, 2001

FIN01.2.06CA Interest Free Loans Guaranteed by the Federal Government to the Municipalities
Be it resolved that the Federation of Canadian Municipalities urge the federal government to:
A. instruct the Bank of Canada to buy securities issued by municipalities and guaranteed by the federal government to pay for capital projects and/or to pay off current debt; and
B. refund to municipalities any interest paid by municipalities to the Bank of Canada.
5. Supporting Legislation

The Bank of Canada Act, Section 18
The Bank may,
A. buy and sell securities issued or guaranteed by Canada or any province;
(i) make loans or advances for periods not exceeding six months to the Government of Canada or the government of any province on the pledge or hypothecation of readily marketable securities issued or guaranteed by Canada or any province;
B. make loans to the Government of Canada or the government of any province, but such loans outstanding at any one time shall not, in the case of the Government of Canada, exceed one-third of the estimated revenue of the Government of Canada for its fiscal year, and shall not, in the case of a provincial government, exceed one-fourth of that governments estimated revenue 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.
It is section 18(c) which makes it possible for municipalities to sell their securities to the Bank if they are guaranteed by Canada or any province. This requires a willingness on the part of the government to do this a willingness which is not there and the co-operation of the Bank of Canada.
The world has been caught up in the extreme free market ideology since the 1960s. It provides a theoretical base for those who want removal of regulations which stand in the way of profits and privatization of government services and assets. By 1974 this ideology was adopted at the Bank of Canada, and the governments use of the Bank to finance public debt was reduced by increased financing through the private market. This resulted in an unnecessary increase in the federal public debt of over 3,000%, from $18 billion in 1974 to $588 billion in 1997, with a corresponding increase in provincial and municipal debt, and massive interest payments (in 2006 $32 billion for the federal government plus another $31 billion for provinces and local governments). The decision of 1974 has to be reversed if ever there will be enough funds for social needs. This wont happen easily, but municipalities working together might be able to influence the government to do so.
6. January 7, 2003

Letter from John Burrett, Manager, Economic and Social Policy, FCM.
Conclusions of the FCM research staff: “The current legislation does not allow loans directly from the Bank of Canada, nor is Bank of Canada lending interest free. Moreover, an in-depth study by the City of Toronto, in 2001, says: “Given that loans from the Bank of Canada are not interest-free and not available directly to municipalities under the Bank Act, we believe that the lowest cost of funds and most flexible terms can be achieved in competitive capital markets without resorting to federal loans or programs that could have higher interest rates and restrict the Citys future financing program.”
January 20, 2003
Reply to John Burrett from Richard Priestman: “the information received is misleading if not incorrect. First, section 18(c) (of the Bank of Canada Act) states that the Bank may buy and sell securities issued or guaranteed by Canada or any province, meaning that the mechanism is there for municipalities to get financing through the Bank of Canada if their securities were guaranteed by Canada or a province. Secondly, since the Bank of Canada is wholly owned by the government, any interest paid by the government to it is returned as dividends less the cost of administration. Rates could and should be low for provinces and municipalities, too, if the government were of a mind to refund the interest paid less the cost of administration.
7. From Richard Priestman to David Cohen

December 8, 2004
David Cohen, Director Federation of Canadian Municipalities
Dear Mr. Cohen:
You may recall my previous correspondence with you (6/12/02) regarding Bank of Canada financing for municipal capital works. I had been corresponding with John Burrett, but he informed me on May 29, 2004, that he is no longer managing FCM municipal finance work and referred me to you. Municipalities are becoming increasingly interested in this, the latest to adopt a resolution on this issue being the City of Windsor.
I was encouraged when the FCM Board adopted the resolution in September, 2001, urging the federal government to:
A. Instruct the Bank of Canada to buy securities issued by municipalities and guaranteed by the federal government to pay for capital projects and/or to pay off current debt; and
B. Refund to municipalities any interest paid by municipalities to the Bank of Canada.
However, in a letter to Kingston, January 17, 2002, the FCM stated that it had not yet received a response from the government. Hearing nothing more I wrote to you on December 6, 2002, stating that several municipalities wanted to pursue this matter and would like to know if the FCM had received a response from the government since the previous January. We also asked if the FCM would be suggesting to all the municipalities which are members of the FCM that they should write to the government in support of the resolutions, recognizing that the government is more likely to act on letters from a thousand municipalities.
On January 7, 2003, I received a letter from John Burrett confirming that no response had been received from the Government of Canada other than to acknowledge receipt of the letters received from the FCM. He also stated that the current legislation does not allow loans directly from the Bank of Canada, nor is Bank of Canada lending interest free, citing information received from the City of Toronto Chief Financial Officer, Wanda Lyczyk, and Bank of Canada staff who said they were not authorized to make loans to municipalities. Regarding the latter, it only requires a decision by the government to make use of the Bank for municipal financing in order for the staff to be “authorized.”
Ms. Liczyks information had been thoroughly discounted by William Krehm who wrote to her in response to a letter she had written on June 28, 2000, to explain where her information was wrong.
This information was given to John Burrett who replied in April that, “We will take your argument under advisement and will consider this as an option in our current research on methods of municipal finance. We will be issuing a report in September (2003), at an FCM-sponsored conference on municipal finance. I will pass this email on to our consultants.”
On May 27, 2004, I wrote to Mr. Burrett to learn what was decided at the September conference, which brings us full circle to Mr. Burretts letter of May 29. Can you tell me what was decided at the September 2003 FCM-sponsored conference on municipal finance vis-à-vis Bank of Canada financing for municipal capital projects?
Because of the keen interest in this matter by some members of Windsor Council I have forwarded a copy of this letter to them and other members of the Committee on Monetary and Economic Reform.
Richard Priestman, COMER, Kingston
cc: David Cassivi, Ken Lewenza Jr., Tom Wilson, William Krehm, Andre Marentette, George Crowell, Gordon Coggins
8. September 2005

Letter to DArcy Craig Milligan (-COMER) from Sylvie Delaquis, Assistant to the Director, Policy, Advocacy and Communications Department, FCM.
At its September 2005 meeting, the National Board of Directors reviewed resolution FIN05.3.06 Interest Free Loans to Municipal Governments, submitted by the Town of Ladysmith and the City of Port Alberni, British Columbia. This resolution was originally submitted in 2001 as Resolution FIN01.2.06CA (adopted as a Category A national municipal issues).
The Board subsequently re-categorized Resolution FIN05.3.06 as “C” not within municipal jurisdiction. It took into consideration a number of factors to arrive at this decision. In the past several years, the federal government has honoured its commitment to redefine and strengthen its relationship with municipal sector through the New Deal. Providing municipal governments with additional financial resources, starting with refunding 100% of the GST, and more recently, sharing a portion of the federal gas tax, are key elements of the New Deal. These investments are significant. Further FCM advocacy targeting additional federal financial support to the municipal sector will be focused on securing a long term national plan to eliminate the municipal infrastructure deficit.
(In FCMs most recent discussions with the Bank of Canada, the Bank clearly stated that it is not a commercial lending institution. The Bank described its role as one which directs national monetary policy and controls the money supply, and not that acts as a lender to governments except in the most unusual of circumstances. In one of the rare instances when the Bank did make loans to governments, it was to provincial governments in order to avert a liquidity crisis during the Great Depression. While the Bank could conceivably make a loan to a municipal government, it could only do so through a provincial government and only for short periods under terms acceptable to the Bank.)
Information from Gabriel Miller, Senior Policy Analyst, FCM, re benefits received through the “New Deal for Cities and Communities” February 15, 2007
“The 100% GST/HST rebate came into effect toward the end of 2003-2004, and the gas tax transfer began in 2005-2006, so neither of these initiatives delivered any financial benefits in 2001 or 2002.
The financial benefit to municipal governments of these initiatives up to and including 2005-2006 are as follows:
Gas tax: 2005-06 = $582M Total = $582M
GST Rebate: 2003-04 = $100M; 2004-05 = $582M; 2005-06 = $605M Total = $1,287M
Total Benefit = $582M + 1,287M = $1,869M
So up to and including 2005-06, the two initiatives have delivered about $1.87 billion in benefits to municipal governments.
It is important to note that projections in Budget 2006 show benefits of both initiatives running to at least 2009-10, and this fall the government committed to extend the gas tax transfer at least two more years beyond that (until 2011-12).
Compare the amount $1,869M to the $100,000M deficit, growing at $2,000M per year. It does not even cover the annual increase in the municipal deficit let alone the accumulated deficit of $100,000M.
The statement that the Bank is not a commercial lending institution has no bearing on the matter except that it may reflect the mindset of Bank staff who believe that government should borrow from the private sector. The statement that the role of the Bank is not “as a lender to governments except in the most unusual of circumstances” is simply not correct.
The Bank has consistently lent to the Government, although not enough in recent years to enable the government to fund capital infrastructure costs. The percentage of long-term federal debt held by the Bank ranged from 25% at the beginning of WWII to 12.8% by 1946 to 34% by 1952, going up and down and sitting at 21% in the mid seventies, then going down steadily to 5.8% and then gradually increasing to about 11% today.1 The Bank does not see its role today as a lender to government for capital investments, but surely that is a decision that should not be left to the Bank. Municipalities can help to change this by working together.
1. The Debt Management Report 2005-2006 Chart 19, from the National Balance Sheet Accounts, Statistics Canada, shows the Bank of Canada holding 10.9% of Government of Canada Market Debt.
 

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