The Case Against Reinstating the Bank of Canada

There is a legal case against the Bank of Canada going on right now. It seems that “we” own the BoC and can have the government direct the Bank to loan money “interest free” to finance government’s activities. There are so many things wrong with this approach that I’m not exactly sure where to start. So let’s just jump in and begin:

The proponents of having a central bank loan fiat money to the government “interest free” are known as Greenbackers in the United States. For the purposes of this post, I will be calling the Canadian equivalents “Loonies.”

First Mistake: The Loonies assume that because the Bank of Canada is a Crown Corporation, “we” must own it. However “we” are not the government, the government is not “us.” Murray Rothbard summed up this point in his excellent essay Anatomy of the State,

The useful collective term “we” has enabled an ideological camouflage to be thrown over the reality of political life. If “we are the government,” then anything a government does to an individual is not only just and untyrannical but also “voluntary” on the part of the individual concerned….if the government conscripts a man, or throws him into jail for dissident opinion, then he is “doing it to himself” and, therefore, nothing untoward has occurred. Under this reasoning, any Jews murdered by the Nazi government were not murdered; instead, they must have “committed suicide,” since they were the government (which was democratically chosen), and, therefore, anything the government did to them was voluntary on their part.

Proponents of “reinstating” the Bank of Canada on the basis that “we” own the Bank must, if they are intellectually honest, logically come to this conclusion. Furthermore, if it is true that “we” own the Bank and that the government is “us” then nothing is wrong here and nobody is at fault. For if the Bank is loaning money to the government at high interest, and these interest payments are going to offshore bankers, then clearly this must be what “we” want. For if a nationalized institution is already disregarding the wishes of its owners, how would further nationalization fix this problem?

Second Mistake: Interest is not exploitation; it is the difference in the valuation of present goods and future goods. It is the discount in the valuation of future goods against present goods. As Ludwig von Mises said, “There cannot be any question of abolishing interest by any institutions, laws, or devices of bank manipulation…such decrees would bring about capital consumption and would very soon throw mankind back into the original state of natural poverty.”

Loonies don’t understand economics.

They believe that having the Bank issue interest-free loans to all levels of government is a proper way to fund social services, improve infrastructure and “create jobs.” They don’t follow Henry Hazlitt’s advice of looking not just at short-term effects on one group, but the long-term effects on all groups. Printing money, which is essentially what they are proposing, is inflationary and consumes capital. They don’t understand that interest, like prices, is a subjective valuation that begets an objective expression. It is not an exploitative illusionist trick of international money-lenders.

Furthermore, Loonies object to the accusation that what they advocate is inflationary. They claim that this was done in the past without inflation. They also claim that this was done to help “Canada to get out of the Great Depression, and to finance its participation in World War II.” Not only are they uneducated in economics, but they have a skewed view of  history as well. They also claim that this method, which helped finance war, is superior to all others.

Claims of inflation are counteracted still by referring to the amount of money the Chartered Banks print. Through fractional reserve banking, our current system is already inflationary. Therefore, according to the Loonies, “as the government through the Bank of Canada creates growing quantities of our money supply, the power of private banks to create money needs to be restrained.”

Third Mistake: Not taking the moral high ground.

Probably due to their lack of economic understanding, the Loonies don’t realize that money is property. By printing more of it, whether it is done by government or private banks, they are advocating theft. By calling on the government to act, they are in effect calling for violence. By advocating that we continue with a system where the government holds a monopoly on currency, they are advocating that men with guns use force to uphold a system that is immoral, corruptible and the antithesis of a free society.

Although claiming to speak for “civil society” the Loonies are just another special interest group looking to use state coercion as means to their end. In a free society, the Loonies would be free to set up their own central bank and print money “interest-free.” But likewise, I would be free to disregard their experiment and use the currency of my choice.

The kind of world the Loonies advocate can only be described as a lesser of two evils. Either we have Goldman Sachs running the central bank, or the self-serving bureaucrats of government. I prefer neither.

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17 Responses to “The Case Against Reinstating the Bank of Canada”

  1. Morris says:

    Spelling mistakes happen. Loonies can't handle it.

  2. Guggzie says:

    I tried Caleb, with replies to Redmond and Jim Miller, but whoever vets this site has declined to publish. Maybe, because the replies constitute some valid argument against the anarchocapitalist dogma of ""free markets" and the ridiculous proposition of relating a money supply to a hunk of useless metal.
    The fact that you can only criticise, and not offer any justification for the criticism, as well as misspell 'collocation', which is the word I think you may have been trying to use, tends to put you in the category of those with a closed mind.

    • James E. Miller says:

      That's funny Guggzie, those useless hunks of metal were used as money for thousands of years. Gold and silver were chosen as money by people voluntarily adopting their usage. Under the real gold standard (pre-1913), economic growth was at its peak in major industrialized countries; namely the U.S.. This is not an exaggeration, look at the statistics; namely Friedman's and Schwart's famous book on U.S. banking history or Rothbard's own book.

      The only people who have closed minds are those who want the state to impose their will on everyone. It's not just a closed minded position but one of incredibly immoral nature.

  3. Guggzie says:

    Under the current system, Governments borrow money from private sources and pay interest on the bonds they issue. This revised system would operate through modifying the role of the Reserve Bank of the nation. Specifically, their role would be to monitor the nation’s productivity factors and handle the sale of ‘new money’ on behalf of the people. Provided the Government is constitutionally constrained from creating ‘new money’ for themselves, a controlled fractional reserve ‘ponzi’ system is a way of increasing the money supply in keeping with the needs of a growing economy. Relating the increase in money supply to calculated and properly defined productivity measures would effectively control inflation as the volume of money would keep pace with the volume of goods and services available. The creation of a proper “People’s” Bank is a valid and rational concept, and it is the "loonies" who oppose the idea finding a way to get the people out of the yoke of perpetual debt that now enslaves them to the private banking system. Any nation that takes up this option would take them to the forefront of logical, rational and effective financial management. Initially, public finance would be reserved for the publicly owned National Bank which could provide the necessary investment funds, at cost to the Government and municipal organisations, in accordance with independently assessed cost/benefit analysis for any proposed projects. If this financing is coupled to the Constitutional constraints, as mentioned above, and taking into account currently outstanding loan commitments, the public sector would avoid the subsequent unnecessary interest charges relating to bond issues and borrowing from the private sector. This would have a major impact on the cost of Government and municipal services.
    Under this arrangement, the private banks could remain a supplier of credit for the private sector, and with healthy competition; the banking industry would be sufficiently controlled in regards to the fees and interest rates the Banks could charge. The threat of expanding the National Bank’s role into the private sector would have a sobering effect on excessive bank charges and high interest rates.
    To ensure the private banks operated in a prudent manner and for the benefit of the nation, there would be a clear understanding that the Government would not be a lender of last resort should a bank get into financial difficulties. Private Banks would take out a level of insurance cover to protect their customer’ deposits as part of their standard business practice. If a bank is properly managed, this should not present a problem.
    While the proper definition of financial Credit is a ‘monetisation’ of future effort, the advancing of credit will always carry an element of risk for the lender. This can be mitigated to a degree by due diligence analysis and/or a requirement of the borrower to supply some collateral.
    Theoretically, there would be no restrictions on how a private bank used their capital funds, other than those imposed by their shareholders. Any time private banks request additional ‘new money’ they would need to present an audited statement of their accounts showing their current assets and liabilities along with proof of their reserve holdings. Banks would not be permitted to use the ‘new money’ for ‘investing’ in their own name, unless it were based on exactly the same conditions of due diligence and collateral as applied to their customers. In other words, banks could use the ‘new money’ to expand their business by building branches and appropriate income producing facilities, but not for speculating in unproductive financial products which are at the root of much of the current financial malaise.
    While the banks would have no direct control over the way their client’s use any credit given them, that risk would, in part, be covered by the collateral held and the reliability of their customers. As the banks are fully aware they are entirely responsible for any financial risk involved, and cannot expect any bailout or rescue package from the Government, this should be sufficient for their shareholders to demand prudent management.
    Creating a brake to the unlimited creation of ‘new money’ which, to date, has been unrelated to any control mechanism apart from the futile and ineffective manipulation of interest rates by the Reserve Bank, would severely curtail the extent of gambling in foreign financial markets.
    From a practical sense, Australia’s financial system would be based on ‘sound’ currency and a completely adequate supply of ‘money tickets’ in keeping with the growing economy. This would radically reduce the need for foreign investment, and divorce the nation from much of the artificial boom and bust cycles associated with international finance.
    Speculation in hedge funds and overseas financial markets would become a policy issue for the private banks, subject to shareholder approval and acceptance of the risks involved.

    • Caleb says:

      This just proves my point that Loonies don't understand economics. Solve the economic caluclation problem, then we can discuss "independently assessed cost/benefit analysis for any proposed projects."

  4. Guggzie says:

    A SOLUTION FOR BANKING
    I don’t think there is any dispute that a growing economy requires an expanding supply of ‘money’ tickets.
    This increasing supply of money has to be related to the productive capacity of the goods and services required by the society. If this applies, then the new ‘money’ will be backed by physical assets, and thereby, constitute the creation of a ‘sound’ money supply. The contention that ‘sound’ money can only be created if it is related to gold or silver, is a spurious argument that only applies if ‘money’ is treated as a commodity rather than a ‘ticket’ system. In fact, it is quite ridiculous to say that a society can only create a money supply if it has a store of gold available to define how many ‘tickets’ can be created.
    A Government is in the position to establish a genuine, honest and practical banking system based on the creation of ‘sound’ money as defined above. The primary objective of this system must be to serve the needs of the public in providing effective banking services. This concept has been conclusively proven by the example of the original creation of the Commonwealth Bank of Australia from 1911 to 1923, The Bank was eventually undermined through the collusion between the private banking system and the Tory Government of the day.
    While the fractional reserve system is essentially a ‘ponzi’ scheme, if modified and properly controlled, it can be made to serve for the benefit of the society. Essentially, we need to reverse the current procedure. Instead of allowing the private banks to create ‘new’ money as they currently do, by advancing interest bearing credit out of thin air, the Government, on behalf of the people, should create this ‘new’ money and sell it to the private banks. The private banks would be set up in the same manner as presently in place, by obtaining capital from investors through the issuing of shares, debentures or bonds. As legitimate registered businesses, they would be eligible to apply for, and purchase, ‘new money’ from the government at a low rate of interest. The amount of ‘new money’ they request would be set as a ratio of their capital, plus money they hold in deposit from their customers. If the ratio is set at the current rate of 12.5:1, as used by the Bank of International Settlements, this would provide the banks with an adequate level of funds to use in supplying credit to their customers. As the economy grows so would the customer’s deposits, thus allowing the banks to apply for additional new money to support the continued growth. The necessary controlling regulations would be related to the nation’s productivity where the Government would be the primary source for the creation of new money. A loan is merely a legal agreement, and in the case of advancing credit, it is simply the ‘monetisation’ of future effort. The borrower promises to repay the loan at a later date from the fruits emanating from the advance. In this respect, all credit is really public property because only people are capable of producing products and services that will create the ability to repay the advance. The creation of credit should never have been handed over to the private banks in the carte blanc manner which applies today.

  5. Guggzie says:

    I personally, think that's the biggest heap of crap I've read for a while, and I've read a lot of crap by pseudo "economist" in recent times. Perhaps, the first step is to define what we mean by “government”. Good governments are supposed to be there to look after the welfare of their constituents through the protection of individual rights. Another primary purpose should be to ensure a free and open society where people can use their ability and enterprise to pursue a productive life without the fear of coercion. As a national government is accorded the monopoly for issuing fiat currency, society has granted it a priority charter to use that authority for the advancement of the public interest. In general, the advancement of public interest will provide a sound basis for private benefit because; the two are mutually, and irretrievably, related.
    Unfortunately, politics interferes with these proper roles, as all Governments become political beasts, peopled by professional incompetents who, almost exclusively, are unachievers with a lust for the ‘power’ to tell people how to run their lives.
    The party system of every form of Government, especially in a “democracy”, will not tolerate any semblance of independence from the party line. It will only support people who are prepared to, unquestionably, follow party policy as dictated by the hierarchy.
    The few competent people, who try to infiltrate the system in the hope of making a change, are soon overwhelmed by the host of incompetents whose primary qualification is their propensity for corruption and their common lack of experience with any form of productive free enterprise.
    Professional politicians are among the most dangerous species of mankind, as their real motivation is the lust for ‘power’, which they garner under a veil of deception, deliberate or otherwise, by espousing the aim of looking after people.
    Robert McNamara, the architect of the Vietnam War, is attributed with at least one worthwhile observation, “No man should stay in one job for more than seven years”. That should be a compulsory requirement for every politician.
    Because the economic woes of the world ultimately arrive on the doorstep of governments, some people have raised the question of whether or not a Government is necessary, or desirable. So far, there has never been any viable or workable alternative that would be compatible for the modern day, technological society.
    However, the question of whether Government has a solution, or more accurately, can provide the means for creating a harmonious and equitable society, is very much unresolved.
    History has not provided any proof that Governments can attain that goal, probably because; it is never their goal in the first place.
    All Governments are ‘power’ structures whose primary purpose is control of people. Political leadership cannot exist if there are no people to lead, and if the people do not do as the leader says then, either the leadership is ineffective, or the people must be made to obey. Human nature dictates that there will always be disagreement as to the best course of action in relation to any given situation. Hence, no Government will ever be able to come up with the ‘right’ solution to suit everyone. The old chestnut about ‘pleasing all the people all the time’ is an impossible task so; every Government is always left with ‘pleasing some of the people some of the time’. The fundamental problem with this option is that the decisions which please some of the people tend to affect all the people and thereby hangs the greatest hindrance to a harmonious and equitable society. Maybe, an answer lies in creating a truly national Bank owned by all the people and operated in the manner described below.
    However, for any government to work in the interests of their society two primary conditions must be put in place. The first is a proper "people's" Constitution that defines the parameters and limits the powers of the elected representatives. The next is an honest and truly impartial Constitutional Court to vet all legislation and confirm it is not in conflict with the Constitution.

    • James E. Miller says:

      Never in my life have I ever consented for was given a choice to consent to any governing constitution. Government was forced down upon me by men who lived decades before my time. You mention many of the problems related to the corrupt nature of governments yet see them as the only answer; neglecting the option of a free society where natural law and private property are respected.

      This post in particular can be summed up as follows:

      "Governments are wretched and force people into obedience. But they are still necessary because I say there are no alternatives. End of story. Oh, and I also believe that a Constitutional Court can be honest and impartial when it remains a state institution. Why? No reason given."

      • Guggzie says:

        BUT — who is going to create such a universal “ticket”? In a “free market”, it is hardly acceptable to allocate this responsibility to one person by giving them the opportunity to charge a fee for creating this “ticket”, and include a profit margin as well. Whatever costs involved in creating such a universal “ticket”, logically, should be shared equally by everyone in the society. The profit incentive doesn’t come into this “business” because it is undertaken as a service to the whole society.
        To me, setting up some basic rules for the way a “free market” will operate, and the creation of a common “ticket” system, is an automatic and essential first step of a management function. Part of the management function is the responsibility to ensure the rules are followed and, in our totally honest society, this would not present a problem as no infringement would occur and no action would be necessary. Of course, this raises the question of how the rules will be set and how the decision would be made on the form of the universal “ticket”. It is hard to conceive of these things happening by a process of osmosis, divorced from any concerted organisational effort by at least a portion of the community.
        This is very, very basic and, to me, represents the foundation for the argument of why leadership must evolve if a society is to coalesce into some form of workable and organised group. The crucial challenge for every society is the way they are going to control this leadership. Can they ensure it is there for their benefit, or will they let it degenerate into a force for its own benefit? Every society, “free market” or otherwise, has the choice to apply this control in one of two ways. Either they can do it by force or they can use a system based on rules and law.
        In a “free market” world there are things that the market cannot, or will not, supply. For example, the coastline of a nation is a highly valuable asset that has a huge impact on every aspect of a nation’s existence. The occasion of cyclones and oil spills provide the evidence for people to understand that it is in the common good — good for business and good for the economy — that coastlines are properly maintained. As an entity, a coastline is not something for which the “market” is prepared, or able to, take responsibility. The “free market” can certainly exploit those sections of the coastline that offer the opportunity for making a profit but they cannot, or will not, make an assessment of the impact of that exploitation on the associated environment. Most of the costs for maintaining such an asset could, rationally be argued, as a cost on the society as a whole.
        One of the earliest arguments for establishing a Government was to defend the society from outside aggression. Some “free market” advocates claim that the defence of a society can best be delivered by private enterprise. Of course, that defence would be on the basis of user pays and could only operate if it makes a suitable profit. Were an aggressor willing to offer a more profitable contract to the defence supplier, the society could be handed over on a platter without the need of forcing a destructive war. This could be rationalised as an outstanding benefit attributable to the “free market” system — the elimination of war!
        The principle reason society chooses to form a Government is to ensure a supply of, what they class as, “essential services”. These include such things as a drinkable water supply, a workable sewage system, a continuous and reliable electricity supply, a similarly reliable postal service and a convenient road and transport system. These are but a few of the essential services a modern society needs in order to function and is the reason society chooses to delegate the responsibility to a Governmental system to provide these essentials. To the extent that the private market can produce sensible and affordable services in selected and designated parts of these essential services, they are encouraged to do so. The private market’s main area of interest and responsibility is in the commercial enterprises of manufacturing, service industries, resource development, sales and marketing. In today’s world of Commercial businesses, everything is controlled by the bottom line and, consequently, anything that hinders the all consuming profit motive is abhorred. Things like regulations, unions and taxes.
        However, many citizens of a society understand the need for regulations, unions and the things taxes, if intelligently spent, can do for them. “If intelligently spent” are the key words in respect to the way the Government uses their income. It is in this respect that the people of a society will always get the Governments they deserve — UNLESS — the people control their Constitution which sets out the fundamental rules for regulating the way they allow their Government to operate.
        Only then will they have a chance to get the type of Government they WANT.”

        • James E. Miller says:

          You are hopelessly confused Guggzie. You mistake property rights for the free market. You speak of "ticket" but don't explain what the ticket is. You speak of a free society while simultaneously evoking national boundaries when nation-states and a free society are incompatible.

          Never in the history of mankind has a state been formed with good intentions or at the will of the people. They have always been and always will be agents with the monopoly of force that exploit people in a given area. Please point to me of one example in history where a whole society came to together to form a nation-state. And I mean where every single individual, including children, agreed to be be bound by whatever Constitution was sent forth and signed off on it. Please show me.

          The majority of your post can't be addressed because you speak incoherently. Societies choose nothing; only individuals do. Governments don't act, only those who occupy its offices do.

          One more point; markets regulate themselves through profits and losses. To say free markets have no regulation is a complete misunderstanding of how markets work and just plain economic ignorance.

      • Guggzie says:

        THE PURPOSE AND REASON FOR GOVERNMENT
        Whether we believe it or not, our lives are governed by philosophy.
        Each of us, whether we recognise it, whether we espouse it and, even when we don’t know it, – conduct our affairs on the basis of a philosophy. Philosophy, when it is all said and done, is nothing more than an idea – a concept – a suggestion of how we should live our lives. As a Human Being, we have the ability to choose any philosophy we like in determining how we want to live. Some people choose the philosophy that it is OK to lie, cheat, steal and murder if it is their best means of surviving. Other, and unfortunately, this is includes the vast majority of us, make the choice to accept whatever philosophy we are told is best for us.
        Philosophies have no intrinsic worth unless they are translated into some form of practical application. A philosophy must become a policy before it can be transformed into a system which will affect people. But why, you might ask, do systems, policies, or philosophies relate to people? The answer is – that only people – human beings – can philosophise – only people can translate philosophies into policies and create systems – and only people can run systems.
        If we want to live in a society – in a community – in a village- in a family – we have to have some system in place to let us know how we should relate to other people in those groups.
        Certainly, everyone could have their own system but, without some form of common agreement and common understanding, the end result, to say the least, would be chaotic.
        The fundamental reason we live in a society is because of the mutual benefits we get from cooperation, joint effort and mutual security.
        We should not live in a society that has no benefits for our mutual wellbeing and happiness but, unfortunately, through necessity rather than choice, many of us do.
        It comes back to philosophy – which philosophy should we adopt as the basis for establishing the systems that will create the type of society we prefer? If we are going to set up a system to establish the standards by which we wish to live together as a society, we need to ensure the primary purpose of that system is the protection of individual ‘rights’ for each of its citizens. In truth, the only ‘rights’ that can exist are those which can be sustained. The concept of ‘rights’ always involves the recognition of a responsibility to respect the ‘rights’ of other members of the society to which we belong.
        Once we abdicate the responsibility for determining the philosophy that is ‘best’ for us and our society and accept, without question, the philosophy someone else says is ‘best’ for us, we automatically establish a ‘power’ structure. Once this structure is in place its practitioners, inevitably, develop a lust to maintain and enhance the control over the people whom, rightfully, they should be there to protect. As far as I can see, if a society wishes to establish a set of standards aimed at harmonizing the cooperation and relationship between its members, it can only be achieved in two ways. I would prefer to see this done by means of the rule of law as the only other alternative is rule by force.
        The problem lies in finding the best way to translate the desired philosophy into a policy that can then be developed into a workable system for the benefit of people. The solution has been found totally elusive throughout the, relatively, short history of mankind.
        Even the philosophy of a ‘free market’ cannot exist without some standards being observed. That immediately raises the question of how any such accepted standards are to be maintained, implemented and, where necessary, enforced.
        Basically, this confirms that any philosophy is simply an idea that will remain meaningless until it is translated into a policy which can be converted to practical use as a system. Any system, applying to a group of people, automatically becomes a form of “government”.
        The way this “government” is set up needs to be spelled out so its limitations are clearly defined, and that is why I believe, the Constitution is of crucial importance if the people wish to live in a society based on rule of law.

        • James E. Miller says:

          Rules, customs, and laws can and have been established without Constitutions. They can be enforced through private arbitration and through simple social stigma.

          And markets are about mutual cooperation. They aren't about individual ruggedness. When I go to McDonald's to purchase a hamburger, I am cooperating with everyone around me, including the workers to make it happen. No force is involved whatsoever. The people choose to work, I choose to purchase their product. Simple as that. What the free market is is just people seeking to meet the demands of others. How you can't see that as providing for mutual well-being is something I can't fathom.

          You are correct that we govern our lives through philosophy. Here is mine in a gist: as a human being capable of rational and deductive thought, it is in my nature to protect myself and what I come into possession of. Because I regard threats or aggression against me as not only counterproductive to my own productive efforts but also wrong in an ethical sense since it goes against my own will, I regard violence as immoral. Hence, I support the volunteerism that the free market represents. The state, which uses violence against me to fund its own operation, is antithetical to my philosophy of peace and cooperation.

          So who is wrong? Me and my preference for liberty and peace? Or you and your preference for institutionalized violence and coercion?

          • Guggzie says:

            Thanks for responding to my posts James. I'm not sure how you extrapolate my preference for "institutionalised violence and coercion" because, they are certainly not my preferences at all.
            I suppose our fundamental difference come from the fact that I don't believe any society will exist without some form of "government". On that basis, there seems to be only two basic options – rule of law or rule by force. Hence, I opt for rule by law through a Constitution that limits the powers of government and backed up by a judiciary that will adhere to the Constitution. The evolution of any Constitution has to keep pace with the evolution of the society, and Constitutional changes would be by way of national referendums rather than judicial activism.
            Admittedly, my concepts are largely pipe dreams just as I categorise the concept of a truly "free market" society. I'd be quite happy with the latter, but i just don't see it ever happening. Unless we try and control the "government" which is created, we will be controlled by force, as is very much the present case.

          • James E. Miller says:

            Guggzie,

            You deny that society can be ruled by laws without the existence of the state. The state will always be institutionalized power. Business has now power; it only sells goods and services to voluntary buyers. The rule of law which holds the right to self-ownership as concrete can't be reconciled with the existence of the state.

            Just a few questions: can you name any point in history where a Constitution has actually limited the grasp of government? Or how can you assert that a judiciary, which is a functioning arm of the state, actually act in a way that is unbiased toward the institution that gives it power?

  6. Caleb says:

    Fixed. Thanks for the heads up

  7. There looks to be a typo (a missing "are"): "By advocating that we continue with a system where the government holds a monopoly on currency, they *are* advocating that men with guns use force to uphold a system that is immoral, corruptible and the antithesis of a free society."

    Great article otherwise!

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