The Unexpected Renaissance of the Bank of Canada

Les Smith Commentary

The Bank of Canada (BoC) is experiencing a renaissance.

Canada’s Central Bank was established in 1935 under private ownership,
and during the Great Depression, by the administration of Canada’s tenth Prime
Minister, William Lyon MacKenzie King.

In 1938, by an amendment to the Bank Act, it became a publicly owned
institution.

The BoC exists to, “regulate credit and currency in the best interests
of the economic life of the nation.”

The 1938 nationalization allowed the central bank to finance federal,
provincial, and municipal infrastructure projects on a nearly interest-free
basis. The interest it collected, if any, went back to the federal treasury.

From 1935 to 1974, projects like the Trans-Canada highway system, the
St. Lawrence Seaway, universities, and hospitals, were all funded by
interest-free or nearly interest-free loans from the BoC. The central bank also
underwrote Canada’s Second World War effort.

This innovative system of central bank credit produced nearly four
decades of unusual growth, prosperity, and development in Canada.

But in 1974, Canada, under the leadership of Prime Minister Pierre Elliott
Trudeau, by Cabinet directive, but without and Act of Parliament, and for the
sum of $400 million ($2 billion today), joined the Bank for International
Settlements (BIS), the powerful private Swiss Bank, a kind of central bank of
central banks, which oversees (private) central banks across the planet. The
BIS insisted on a crucial change in Canada.

The BIS’s new Basel Committee, seeking to establish global financial
stability, encouraged the Canadian and other world governments to borrow from
private lenders and end the practice of borrowing interest-free from their own
central banks.

And that’s exactly what happened.

After 1974, the BoC stopped lending to federal, provincial, and
municipal governments forcing them to borrow from private and foreign lenders
at skyrocketing interest rates resulting in huge deficits and debt ever since.

Since 1974, COMER, the Toronto based Committee on Monetary and Economic
Reform, states that Canadians have paid about $60 billion yearly in useless
interest, or in excess of $2 trillion.

The Consolidated Financial Statements for New Brunswick for the fiscal
year ended March 31, 2019, shows a provincial funded debt of about $18 billion
excluding NB Power’s debt of $4.6 billion, an increase of $826 million over the
previous year.

Of this increase, $648 million was interest, or 78 percent.

Yes, we are borrowing to make our interest payments.

One of the most important legal cases in Canadian history was launched
in 2011 by COMER. The lawsuit required the publicly owned BoC to return to its
pre-1974 mandate and practice of lending interest-free money to federal,
provincial, and municipal governments for infrastructure and healthcare
spending.  Renowned constitutional lawyer
Rocco Galati took on the case for COMER.

Galati argued that from 1974 on, private banks became government’s
lender, contravening the Act that established the central bank.  He launched the legal action to rule on the
constitutionality of the central bank’s current role.  His argument was that private banks are
dictating the terms of Canadian debt, taking over the role of the BoC.

COMER’s lawsuit ended on May 4, 2017, when the Supreme Court of Canada
refused to hear a lower court appeal.

But what COMER and Rocco Galati could not achieve, the coronavirus did.

On March 24, 2020, the BoC announced a new program to support the
liquidity and efficiency of provincial government funding markets.

The Provincial Money Market Purchase (PMMP) program is an asset purchase
facility that will acquire provincially issued money market securities through
the primary issuance market. This program will support a liquid and well
functioning market for short-term provincial borrowing.

Under the PMMP, the BoC will purchase up to 40 percent of each offering
of directly issued provincial money market securities with terms to maturity of
12 months or less. This included treasury bills and short-term promissory notes
of all Canadian provinces. The 40 percent may be adjusted if market conditions
warrant.

I have personally maintained for many years that the BoC should be the
vehicle to provide monetary support to provincial funding markets. I am pleased
to state that this has now occurred.

It all came to a head when in March the province with Canada’s worst
balance sheet, Newfoundland and Labrador, had just been told that nobody wanted
to buy its bonds. The government’s attempts to finalize its short and long-term
borrowing had failed.

Said another way, Newfoundland and Labrador couldn’t get the money it
needed in the face of a pandemic. The government was on track to run out of cash
by mid April.

Newfoundland and Labrador were spared that fate just days later when the
BoC stepped in to buy its short-term provincial bonds.

This action by the BoC eased the financing constraints for the province giving
it predictability for its near-term cash flows.

The coronavirus pandemic has seen New Brunswick’s revenues decline
dramatically while expenditures for provincial services have continued their
upward climb. If the province should require financial assistance in the months
ahead, it’s good to know that the BoC will provide such support.

The BoC continues to closely monitor global and domestic market
developments and remains committed to providing all the liquidity the financial
system needs fulfilling its mandate to “regulate credit and currency in the
best interests of the economic life of the nation.”

Les Smith is a former President of the Fredericton
Chamber of Commerce and current member of the Coalition of Concerned Citizens.
He lives in New Maryland.

Related