Bill Totten's Weblog

Tuesday, May 19, 2009

The Bank of Canada Tutorial

Welcome to our Bank of Canada Tutorial!

One of the major problems facing Canadian policy makers and activists today is a misunderstanding of or refusal to consider the uses of The Bank of Canada (BoC). This problem is exacerbated by a media blackout on information about the Bank's uses - which will be discussed in the tutorial.

This problem exists in all G-8 countries!

Our tutorial details the nature of the problem in Canada, and how it may be resolved.

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 (that is, 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 Government of Canada or any province (BoC Act Article 18 (c), (i) (j) or guaranteed by Canada or any province). This is explained fully in "Article 18" (below).

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.

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", that is, advising the banks of regions or industries where they did not want bank credit increased or even maintained at its present level.

In the 1970s 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". At the same time a campaign was launched to enshrine 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, that is, non- independence, what does?.

A "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!

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 Number One: 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 five per cent. 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, plus 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 Number Two: 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.


YOU GUESSED IT! Some 95% of our money is created as BCM.


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!

Believe It!

It is important to realize that this is not some abstract, intellectual exercise. It's YOUR money!

You are being flim-flammed! Year after year after year...

Your LARGEST expenditure - (The so-called "public debt interest", that is, "paying down the debt") is to the private banking system!

Net Government Expenditures

26% Public debt interest
23% Transfers to persons
15% Transfers to governments
13% Other transfers
15% Operating and capital
06% Defence
02% Crown Corporations

But it doesn't have to be that way!

Your (our, Canada's) money could be going towards social programs, health care, education, and so on (through Transfers, Operating and Capital Expenses, et cetera) IF a larger portion of GCM existed.

The question then is: why do governments borrow AS debt and AT interest moneys which they could create on behalf of Canadians debt and interest free?


The concept of 'Dominant Revenue' (DR) put forward by Francois Perroux (1903-1987), a leading figure of the French school of economics during the sixties, is helpful. In every historic period the revenue of a particular group is taken to be the Dominant Revenue.


"During a specific period of development the dominant revenue is that one to which the others adapt themselves..It is presented as the revenue that, by the rate and mass which it achieves, determines whether the given economy functions properly.

In the institutional framework corresponding to the given dominant revenue, that is in fact the case; but in another context, it would be otherwise."

To put it another way: the Dominant Revenue could be seen to operate as a barometer of the well-being of the population as a whole. But one can see that this barometer may not necessarily be accurate! Perroux also maintained that a distinct economic theory was associated with each successive Dominant Revenue {1}:

Merchant Capitalists maintained that value lay primarily in the net flow of precious metals. This notion closely resembles Monetarism, referred to earlier in our tutorial. Monetarism was in vogue from the mid-1970s to the early 1990s.

Early Industrial Capitalism abided by Laissez-faire economic theory, which stated that economic systems function best when there is NO (government) interference in the marketplace. This remains an integral part of Dominant Revenue rhetoric today.

Advanced Industrial Capitalism adhered to The Market Theory of Value (or marginal utility theory) as the Dominant Revenue theoretical framework.

Financial speculation (out-and-out gambling!), made possible by Deregulation and Globalization, has been the Dominant Revenue for much of the last decade!

The point is, Dominant Revenue 'economic theories' are used to give voice to and to legitimate the claims made by the Dominant Revenue stakeholders. Today, these stakeholders are primarily national and international banks and related financial institutions, transnational corporations, and global organizations which regulate and police monetary (bank) and economic (political) policy.

Policymakers must take Dominant Revenue claims into account when assessing any economic theory, no matter how wonderful it might be or sound! The crisis of modern-day economics springs from a quixotic attempt to understand a mixed economy in which profit is no longer the Dominant Revenue - in terms of a theory based on the assumption that it is. (For more information, we refer you to our Tutorial on Economics, or our video, "Towards a Mixed Economy".)

But there's more. Media consolidation further legitimates the claims of Dominant Revenue interests by reducing information and debate about the issues raised in this tutorial.

Historically, progress has always been founded on open discussion and debate, not closed meetings or silence. Today, social systems worldwide present an all but solid front: of press, television, Dominant Revenue "think tanks", et cetera, which, without much questioning, uphold Dominant Revenue perspectives. The point being: any effort to refute Dominant Revenue claims are dismissed as ill-informed, or frivolous. But is this so?

Article 18

In spite of what Dominant Revenue spokespeople might say, the Law is the Law! In this section, we refer to Article 18 of The BoC Act {2}, listed under BUSINESS AND POWERS OF THE BANK. Our commentary is added in italics; emphasis by bold characters.

We mentioned earlier that since 1938 the BoC has been owned entirely by the federal government. It is essential to understand what this means, in order to understand the full significance of the powers of the BoC.

In a word, the BoC may create the money to finance federal projects on a near interest-free basis. It may, if it wishes, lend money to the provinces and municipalities as well.

It works this way: the coupons paid on government debt held by the Bank of Canada find their way back to the federal treasury with the rest of the bank's earnings. In recent years this important function of the bank has been left, in large part, to rust.

Article 18 sets out the Bank's powers of lending to our governments.

Article 18 (c), dealing with funded debt - bonds or treasury bills - authorizes the Bank to "buy and sell securities issued or guaranteed by Canada or any province".

No restriction is set on such holdings; limits on these powers must then be sought in the real economy - whether or not further money supply created by such loans would add to the demand in an economy already employing all available resources. Were the Bank to go on increasing its lending to governments under such circumstances, it would indeed be inflationary. But such a state of affairs has not existed for decades.

(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;

(j) 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 government's 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 ...

Article 18 (j) deals with unfunded loans to governments - that is, advances against their income not formalized in security issues.

The passage "but such loans outstanding at any one time shall not ..." clearly implies that such unfunded debt may be rolled over when due.

Example 1: Eliminating the General Services Tax

As the diagram shows {3}, if the BoC were used intelligently, the first step towards eliminating the General Services Tax could be to reduce it to, say, four per cent, 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 General Services Tax would doubtless perk up the economy, bringing more revenue into the treasury. Then eliminate the remaining three per cent General Services Tax.

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 ...

Example 2 (a)

At a meeting of the national board of the Federation of Canadian Municipalities (FCM) held on September 8 2001, two resolutions (from Kingston, Ontario and Squamish, British Columbia) were passed concerning financing for municipalities through the Bank of Canada; The FCM forwarded these resolutions to the federal government.

Referring to these resolutions, Richard Priestman (COMER, Kingston), writes to David Cohen of the FCM:

"Some background information will help you to appreciate the importance of these resolutions. Since 1974 the government has not being using the Bank of Canada (BoC) to finance public capital expenditures as it did in the previous 35 years, using private banks and other private investors instead. As a result national and provincial debts have climbed to enormous heights. Interest paid by the three levels of government amounted to over $76 billion in 2000, $73 billion in 2001 and is expected to be over $70 billion in the current year in spite of lower interest rates. The share paid by local municipalities was $3.9 billion in 2000 and $3.2 billion in 2001. Funds borrowed from the BoC by the federal government cost less than one half of one per cent.

"The government could and should allow municipalities the same privilege and reimburse them for the interest they pay to the BoC minus the cost of administration. The cost of borrowing privately can double the cost of a project (depending on the rate and the term) because interest compounds over time. More than that, the amount budgeted for capital projects can be many times higher than it would have to be if the projects were financed through the BoC and paid back over the expected useful life of the projects (for example, a sewer's life might be fifty years or more).

"For example, Kingston's current debt stands at $50 million, financed through ten-year debentures at an average interest rate of seven per cent. Principal payments amount to $7 million per year and interest is $3 million for a total of $10 million per year. On the other hand, if the estimated life of the city's projects was fifty years and was financed at low interest through the BoC, the cost could be spread over the fifty years and would be reduced to $1 million per year plus the cost of administering the loan. (Whenever the principal is reduced significantly it is reborrowed for new capital projects.)"

(In a letter to Kingston, January 17 2002, the FCM stated that it had not yet received a response from the government.)

Example 2(b)

Toronto attempted to secure financing through the BoC for the Sheppard Subway - without success.

Ms Liczyk, Toronto's Chief Financial Officer, referred to Article 18 (j): "we have been informed by the BoC staff that the bank rate would be used and is currently set at 5.50% per annum". The idea was felt to be unfeasible ... "Given that loans from the BoC are not interest-free, not available directlly to municipalities and are short term".

Mr Krehm, of COMER (Toronto) replied by noting that "18(c) ... provides a means of handling the long-term financing of such projects at less than market rates".

Concerned citizens in several municipalities want to pursue this matter and would like to know if the FCM has received a response from the [federal] government ... We also would like to know if the FCM will 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.

A Vision for Canada

Let us stretch our horizons a bit before concluding.

5 Health Care
2 Education
2 Affordable Housing
1 Kyoto Fund
2 Municipal Infrastructure
3 Armed Forces
15 Total ($billion / year)

Just suppose the money-creation function were split equally between the government of Canada (GCM), on behalf of the citizens of Canada; and the private banking system (BCM). This would release approximately$15 billion per year to be used for the needs of Canadians.

More good news! This would:

* Reduce unemployment

* Increase the GDP

* Increase tax revenues for all governments, so making funds available for other projects.

It would create a win-win situation! The people of Canada would benefit immensely, and on an ongoing basis; and the private banking system would still be making considerable profits.

Would it 'cause inflation'?

Absolutely not! It is the total amount of money which determines prices, not who creates it.


None of what we have been saying is all that hard to understand; nor is our 'Vision' impossible, untenable, or out of reach. But ideological persuasion is strong, especially when supported with the full force of media. Even many activists and investigative journalists appear to be unaware of the importance of uses of national Central Banks.

On the basis of the information given in this tutorial, you can see that what is desperately needed in Canada (and in all G-8 countries!) is for the federal Finance Minister to direct the Governor of the central bank (in Canada's case: The BoC) to create a larger percentage of what constitutes the money supply each year.

If this were done, we would have a national (and global) social structure quite different from the one we have today! The tragedy is that this could be done - today - given the political will to do so. The hope is that, someday, it will be done.

We hope that YOU will do what you can to make it come to be, through educating others about the powers and capacities of national central banks.

If you have any questions or comments about our tutorial, please contact us!





Bill Totten


  • With a new generation waking up to billions of dollars in national debt (not to mention thousands of dollars in student debts) plus uncensored information via the internet, the regime of private interest banking is coming to an end.

    It won't be tomorrow, nor a year from now. But eventually we will triumph.

    Hell, Ron Paul's Bill to audit the Fed is already gaining momentum down South. He's got 175 co-sponsors in the House of Reps, one of them being a major Democrat.

    Keep up the good work Bill, more Canadians need to clue into this scam.

    By Anonymous Anonymous, at 5:02 AM, June 17, 2009  

  • Hi Bill

    Nicely said. I'm writing a book, parenting actually and I'm trying to quote the 2009 statistic for how much money is made by the Bank of Canada. Is it 5% as you've quoted as I've heard it's as low as 2%? Do you know of anywhere I could get the correct percentage for my book.

    Many thanks
    Annie (Peak Oil Parenting)

    By Anonymous Annie Lussenburg, at 8:13 AM, June 23, 2009  

  • Rick Potvin was here.

    Bill, I can't find your email and your webpage is gone. The hijacking of the money supply business by private banks charging too high an interest for long term national development has been done by a very specific group of people. We all know who they are. Until we expose them, they will continue to work their fraud in secrecy, a secrecy protected by them by law created by them.

    By Blogger Rick, at 9:35 PM, November 05, 2012  

Post a Comment

<< Home