The Unexpected Renaissance of the Bank of Canada

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.”