February 13, 2019 (published on Linkedin)
Canada, like most nations, is drowning in debt. These debts continue to mount for households, businesses and governments, alike, without any end in sight. The following graph shows the trends in Canada’s total debt per capita compared to Canada’s GDP per capita; the ratio of total debt to GDP reached 342% in 2018. The graph shows that something happened in 1974, a critical turning point when the ratio of debt to GDP started to grow exponentially. In 1974, the power of money creation was ceded from the Bank of Canada (our national public bank) to private banks.
Canadians have been saddled with government debt at all levels – debt that has risen exponentially since 1974. Over a 108-year period (1867-1974) the accumulated debt shows as nearly a flat line growing to only $18 billion.
But around 1974, the federal government debt began to grow exponentially and, over a mere 43 years, it reached to $719 billion by the 3Q of 2018.
However, if you add all of forms of debt (household, business, all levels of government), then in 2018 the total amount of outstanding debt had reached $7.756 trillion. This is roughly 11% of the total outstanding debt for the US which by the 2nd Quarter of 2018 stood at over $70 trillion.
One of the best explanation of what happened in 1974 is John Ryan’s article in Canadian Business in March 2018.
Ryan explains:
“The Bank of Canada was established in 1934 under private ownership but in 1938 the government nationalized the bank so since then it has been publicly owned. It was mandated to lend not only to the federal government but to provinces as well. To help bring Canada out of the Great Depression debt-free money was injected into various infrastructure projects. With the outbreak of World War II, it was the Bank of Canada that financed the enormously costly war effort – Canada created the world’s third largest navy and ranked fourth in production of allied war materiel. Afterwards, the Bank financed programs to assist WW2 veterans with vocational and university training and subsidized farmland.
For the next 30 years following World War II, it was the Bank of Canada that helped to transform Canada’s economy and lift the standards of living for Canadians. It was the Bank that financed a wide range of infrastructure projects and other ventures. This included the construction of the Trans-Canada highway, the St. Lawrence Seaway, airports, subway systems, and financial assistance to a corporation that placed Canada in the forefront of aviation technology – a project that was scuttled and destroyed by a controversial federal government decision
The critical point is that between 1939 and 1974 the federal government borrowed extensively from its own central bank. That made its debt effectively interest-free, since the government owned the bank and got the benefit of any interest. As such Canada emerged from World War II and from all the extensive infrastructure and other expenditures with very little debt. But following 1974 came a dramatic change.
In 1974 the Bank for International Settlements (the bank of central bankers) formed the Basel Committee to ostensibly establish global monetary and financial stability. Canada, i.e., the Pierre Trudeau Liberals, joined in the deliberations.
The Basel Committee’s solution to the “stagflation” problem of that time was to encourage governments to borrow from private banks, that charged interest, and end the practice of borrowing interest-free from their own publicly owned banks. Their argument was that publicly owned banks inflate the money supply and prices, whereas chartered banks supposedly only recycle pre-existing money.”
Ryan continues to explain what happened:
“From 1867 to 1992 the federal government accumulated a net debt of $423 billion. Of this, $37 billion is the actual debt, which represents the accumulated shortfall in meeting the cost of government programs since 1867. The remainder, $386 billion, represents the amount the government has borrowed to service the debt, essentially a payment of interest on interest to the private sector. If the government had borrowed, interest-free, from the Bank of Canada to service the actual shortfall of $37 billion, a debt to private sector and banks of $386 billion would have never been created.”
So why should Canada and the provinces consider moving back to a public banking model?And as public banking specialist Ellen Brown (author of The Public Bank Solution) states:
“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 reinvested at further interest, progressively drawing money out of the productive economy.”
“From 1867 to 1992 the federal government accumulated a net debt of $423 billion. Of this, $37 billion is the actual debt, which represents the accumulated shortfall in meeting the cost of government programs since 1867. The remainder, $386 billion, represents the amount the government has borrowed to service the debt, essentially a payment of interest on interest to the private sector. If the government had borrowed, interest-free, from the Bank of Canada to service the actual shortfall of $37 billion, a debt to private sector and banks of $386 billion would have never been created.”
The rest of the story? “After its meeting with the international bankers’ Basel Committee in 1974, the federal government proceeded to borrow the bulk of its needed money, with interest charges, from private investors including banks and dramatically reduced dealing with its own bank that had no interest charges. This was done in secret and without the approval of parliament.”
The US is in a situation virtually the same as Canada. In 2018, the US total outstanding debts from all sectors (household, business and government) exceeded $70+ trillion). The US total debt to GDP ratio at 363% in 2018 (2nd quarter). It has risen steadily since 1971 when Nixon removed the US$ from the gold standard. In 1951 the ratio was 133%. In 1968 it was 155%, the year US income inequality was the lowest in the US since WWII.
Canada like the US could avoid the growing challenge of private-debt by reinstating the power of public banks to create money in sufficient supply to fuel the economy without the burden of compound interest costs that will continue to grow consuming more of the nation’s economic output. Saving millions on interest charges by returning money creation back to public banks would be a good thing for all of us.
Most Canadians have no idea what it means to have had a central public bank that could create credit at no cost (interest) to Canadians. Imagine what could happen today if we returned the powers of the Bank of Canada to what it was before 1974? We might finance the pipelines we think we need or a truly renewable energy future for Canada.
Perhaps the most important public bank in North America is the Alberta Treasury Branch (ATB) in Alberta, founded in 1938. ATB has the full powers of a legally constituted public bank and can create credit against the full assets of the province. ATB serves as an important model for other provinces and US states, that could operate in harmony with a national public bank.
It’s time to think more creatively about a genuinely sustainable financial future.