“The process by which banks create money is so simple that the mind is repelled,” famed Canadian economist John Kenneth Galbraith once wrote.
With last month’s announcement that the Bank of Canada will offer the federal government at least $5 billion per week in what are essentially interest-free loans, Canada’s neoliberal political class is counting on Galbraith’s statement being true. After all, if too many Canadians start asking questions about our government having access to interest-free sources of financing, many of the truths that neoliberals hold to be self-evident — that we have been living beyond our means and therefore austerity is a virtuous inevitability — risk being exposed as fraudulent.
Indeed, the announcement was buried in a press release whose headline was about interest rates dropping to historic lows.
Most of the media coverage of this release dutifully stuck to the issue of interest rates. A CBC radio report mentioned in passing that the Bank of Canada would be engaging in a kind of “alchemy” to help the federal government without saying much about what exactly that means. One would think that if the government had suddenly discovered a magical source of revenue, this would warrant more than a few seconds of explanation.
In fact, there is nothing magical about what the government is doing with its central bank. The so-called alchemy is simply the Bank of Canada buying government bonds. These bonds are registered by the Bank of Canada as an asset, and the equivalent amount is credited into the government’s accounts. Because the Bank of Canada is a Crown corporation, this essentially amounts to one part of the federal government creating money and loaning it to another part.
This practice seems magical because it has a number of remarkable advantages compared to borrowing from private sources. First and foremost, unlike every other form of borrowing, these loans are interest free. Another advantage is that unlike funds borrowed from private sources, there are no intrinsic limits to the amount that the government can borrow. Finally, with the right mix of accompanying economic policies, repayment of some of these loans can be deferred indefinitely with few negative consequences.
Of course, those steeped in mainstream economic orthodoxy will be quick to warn that governments “printing money” will inevitably lead to unmanageable levels of inflation. The runaway inflation of Weimar Republic Germany is frequently evoked as a cautionary tale of what can happen when governments begin creating money.
However, Canada’s own economic history tells quite another story. From 1938 to 1974, Canada borrowed heavily from the Bank of Canada. These interest-free loans were the driving force in pulling us out of the Great Depression, helping us defeat the Nazis, financing most of Canada’s modern infrastructure and stimulating post-war prosperity. It is no exaggeration to say that the country’s middle class was created by interest-free loans from the Bank of Canada. Not only did this era see massive improvements in the living conditions of Canadians, it also saw extremely stable rates of both government debt and inflation.
In other words, Canada’s own economic history is proof that large-scale borrowing from one’s own public bank need not lead to economic ruin. By strictly regulating the creation of money by private banks and taxing the wealthy in order to extinguish some of its debts (both of which slow inflation), Canada’s own history shows it is more than possible to keep the Weimar Republic bogeyman at bay and use these interest-free loans as an engine of both prosperity and transformative change.
Since 1974 Canada has drastically reduced the extent to which it uses the Bank of Canada as a source of financing. Consequently, when government has had spending needs not covered by its tax base, it has turned to private lenders. The interest accrued on these loans has eaten into Canada’s revenues and served as justification for the many rounds of cuts to our social safety net — cuts that, among other things, closed thousands of hospital beds and left our health care system woefully unprepared for the COVID-19 pandemic. This crisis is making clear for all Canadians what marginalized communities have always known: the implications of neoliberal austerity are deadly.
The fact that the government has now returned to large-scale borrowing from the Bank of Canada should raise a number of questions for Canadians: If the government suddenly has access to billions in interest-free loans in times of crisis, why not other times? Why did we ever have to endure austerity at all? Why aren’t we making this an engine of meaningful reconciliation by investing massively in the social and economic infrastructure of Indigenous communities? Why aren’t we using this to finance a Green New Deal? Why aren’t we extending no-interest financing to provincial governments and cash-strapped municipalities, as was done in the past?
Those who want to see Canada transition off fossil fuels in a way that leaves no one behind and prioritizes reconciliation with Indigenous people must see this moment as one that is ripe with possibilities. However, we should not be under any illusions that Trudeau’s recent moves are some kind of panacea. Like any economic tool, monetary policy is not divorced from power. It can be used to entrench the powers of environmentally destructive economic elites or to liberate society from them. Trudeau’s plan to provide a massive bailout for the fossil fuel industry is a perfect example of a terrible way to use this tool.
In this time of social need and economic freefall, we must demand that our government use this extraordinary economic tool to give birth to the kind of Canada we all want to see: a Canada that takes care of its most vulnerable; a Canada that follows its nice words about reconciliation with concrete investments in Indigenous communities; a Canada whose public infrastructure is not in a state of decay and is ready for the challenges posed by a changing climate; a Canada whose social services are equipped to care for us in good times and times of crisis; a Canada whose economy will not threaten our children with a future of ever-worsening ecological crises.
In turning to the Bank of Canada, Trudeau has made painfully clear what has been true all along: every single one of those things is possible. It is not the means that we have lacked to achieve these goals; all we have lacked is the political will. This crisis must be a catalyst to change that. Alchemists for a Canadian Green New Deal unite! — at a safe distance of course.