Public Banking

This is a proposition garnering attention the world ‘round, as more and more people realize the inequities of our debt-based monetary system and push for reform.

I can’t even take credit for the idea, incumbent councillor Kristyn Wong-Tam already wrote an excellent article in the National Post about it.

I was a member and researcher for the Committee on Monetary and Economic Reform (COMER) for years, a group founded by the respected William Krehm. COMER also tried to take the Bank of Canada to court for not being used to full potential.

As it turns out, use of our public central bank is not a legal matter, but rather a political issue. We just need to elect a party willing to use it to full potential.

A Bank of Toronto:

There are two reasons I advocate for a public bank for Toronto:

  • So that we don’t rely on investors or senior levels of government for the money to fund our capital projects.
  • Because this year Toronto is paying over $600 million in debt charges.

For anyone keeping score, that’s 5.4% of our $11 billion operating budget, larger than a few city departments. Imagine what an extra $600 million this year could do for our city?

Where Does Money Come From?

Banking and monetary theory is a tricky subject to tackle with people unfamiliar with the topic. On one hand, I want to provide the loads of history and evidence in favour of the idea—much of which is from Canada’s own successful past history.

But at the same time, I don’t want to overwhelm people with information that will likely be so unbelievable they will discard it out of hand.

The best way to start is with the simple fact that approximately 97% (M0 divided by M3) of our money supply is created out of thin air by private banks, every time they make a loan. Yes, your mortgage, credit card, line of credit, and business loan were all created at the stroke of a keyboard.

Banks do not lend their own money, and they do not lend depositors’ money. They have the power to create digital money out of nothing, and lend it to you at interest.

If this sounds wild and fantastical (because on a certain level it is), don’t take my word for it. Here’s a brief excerpt from a federal website:

“However, it is important to note that money is also created within the private banking system every time the banks extend a new loan, such as a home mortgage or a business loan.

Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower's bank account, thereby creating new money (see Appendix B).

Most of the money in the economy is, in fact, created within the private banking system.”

This information is so foreign to most people’s concept of banking that they tend to reject it.

But it’s the simple truth, and has been since long before any of us were alive.

The Bank of Canada:

Let’s briefly talk about Canada’s #1 public bank, the Bank of Canada.

Here’s another key excerpt from the same government page:

“One difference between the two types of money creation is that there is no external limit to the total amount of money that the Bank of Canada may create for the federal government…. The Bank of Canada's money creation for the Government of Canada is an internal government process. This means that external factors, such as financial markets dysfunction, cannot cause the federal government to run out of money.”

This means the need for our federal government to go deeper in debt to cover deficits is false. Should they choose to do so, they could fund anything and everything they want using the Bank of Canada.

This is where the financial community would scream about inflation, but not only are such claims greatly exaggerated, most inflation in Canada is due to external sources, not domestic (an extreme example being the OPEC oil crisis, or a more recent possibility, trade disputes with the US).

Canada’s own history shows how the government funded many public works in the post-war expansion period without any significant inflationary effects.

More importantly, knowing that banks create money out of thin air when they make loans (including to buy government debt to cover the deficit), means that it’s impossible to claim creating money by the Bank of Canada is somehow inflationary. The claim that creating the same amount of money, to do the same public works, except created by private banks is somehow not inflationary, makes no sense.

I wrote a comprehensive letter about all of this to the Finance Minister when the Canada Infrastructure Bank was first being proposed, for those who wish to dig deeper into Canada’s monetary system.

Budgets Strained:

Toronto has been strapped for cash ever since the Harris cuts.

A big loss was the 50% operating subsidy of the TTC, and the burden of the downloading of services.

Toronto does not have the revenue generating powers of the province or the feds.

While the City of Toronto Act does give us some taxation powers that other municipalities do not enjoy, we are still mostly limited to property taxes and fees.

For example:

If Toronto creates more jobs, there is no direct benefit to city coffers, unlike the feds and province that can collect income taxes.

The city has dozens of council-approved capital projects that are left unfunded, not to mention the difficulties in funding large transit projects.

Not only could a public bank make low-cost loans to the city, it could also handle all the finances of the city instead of paying fees to private banks to do so. There is absolutely nothing in the way of accomplishing this, except the banking lobby and the politicians that cater to it.

If money is the lifeblood of the economy, then private banks are the heart pumping it through. Their power and influence cannot be underestimated, and it must be acknowledged that the arguments they provide against such ideas are self-serving and biased, because public banking threatens their power and profits.

A public bank would be a boon to Toronto, and as was asked of the former governor of the Bank of Canada once upon a time in the House of Commons, “Would you admit that anything physically possible and desirable, can be made financially possible? Mr. Towers: Certainly.”