A house of cards – The Canadian Financial System

I have for some time had an interest and have studied financial systems for Canada and America. At first my interest came when I worked for an online stock trading company, at which time I took the Canadian Securities course (CSC) which I never completed.

I learned so much about the “real” side of the system in those years (being included in conferences calls with brokers, etc). Since that time I have researched more heavily the history of the American and more recently the Canadian financial systems and have thus far concluded they are “By design” a disaster waiting to happen.

First allow me to discuss the Canadian side, the “Bank of Canada”. Taken from the Bank of Canada website here are some facts (irrelevant points skipped):

1.  What is the Bank of Canada?

The Bank of Canada is the country’s central bank. Its role, as defined in the original Bank of Canada Act of 1934, is “to promote the economic and financial welfare of Canada.”

3. Who owns the Bank of Canada?

The Bank was founded in 1934 as a privately owned corporation. In 1938, the Bank became a Crown corporation belonging to the federal government. Since that time, the Minister of Finance has held the entire share capital issued by the Bank.

4. Is the Bank of Canada a government department?

No, it is a special type of Crown corporation. The Bank has considerable autonomy to carry out its responsibilities.

5. Why do we need a central bank?

The Bank of Canada was created to be the sole issuer of bank notes and to facilitate management of the country’s financial system.

Having an independent monetary institution allows for the separation of the power to spend money from the power to create money.

Separating the central bank from the political process enables it to adopt the medium- and long-term perspectives essential to conducting effective monetary policy.

7. Can I file a complaint with the Bank of Canada regarding a bank?

No. The Bank of Canada does not play any part in the regulation or daily administration of commercial banks. To file such a complaint, contact the Financial Consumer Agency of Canada.

and last (but certainly NOT least)…

8. How does the Bank of Canada pay its operating expenses?

The revenues generated by the Bank each year greatly exceed its operating expenses.

The revenues derive from the Bank of Canada’s role as the issuer of bank notes to Canada’s financial institutions. Institutions pay the Bank when they withdraw bank notes from it. The Bank then invests these funds in government bonds and treasury bills. The interest earned on these investments is the Bank’s main source of revenue.

The difference between the interest the Bank earns and its operating expenses is its net profit, which is given to the federal government. In recent years this profit has averaged about $1.7 billion annually.

This process, whereby a central bank earns revenue in exchange for its role as the issuer of a country’s currency, is called seigniorage.

Here is some food for thought:

The purpose of the central bank in Canada is “to promote the economic and financial welfare of Canada.”. In 1938, the Bank became a Crown corporation belonging to the federal government. Is the Central Bank a government run department? No, it is a special type of Crown corporation. The Bank has considerable autonomy to carry out its responsibilities. The Bank of Canada was created to be the sole issuer of bank notes and to facilitate management of the country’s financial system.

In some ways this may sound very noble, but something just feels wrong. How does this central bank make money and how do the private banks make money and who is affected?

The revenues derive from the Bank of Canada’s role as the issuer of bank notes to Canada’s financial institutions. Institutions pay the Bank when they withdraw bank notes from it. The Bank then invests these funds in government bonds and treasury bills. The interest earned on these investments is the Bank’s main source of revenue.

So lets try to understand this. The central bank prints money (bank notes) and is the “sole issuer”. The more they print, the less each dollar is worth that is sitting in my bank account and my wallet (that is called inflation). Who creates inflation? The central bank does (not you and me). Why is our money worth less? Because each time they print notes, there is nothing backing the value of those notes (like gold or other real goods) so as they introduce more notes, it de-valuates the existing notes (like what happened in Germany during the world wars).

So the bank “issues” bank notes to “financial institutions”. What did it cost the bank to print these notes, or rather “issue” notes (think of the cost of introducing numbers into a computer). Almost nothing compared to the value of that note. It was virtually “for free” to create that money and lend it to private banks.

Now lets say the central bank lends $1.00 Canadian to a private bank and charges them $0.05 to do  so. In order for that bank to pay that fee and make profit, they lend it to you and me by charging the original fee of $0.05 + their profit margin (say $0.15) = the cost for you and I $1.20.

My question is why should these banks essentially “for free” make money from us? Why can’t we get in at the $0.05 on the dollar? Why are we dealing with usury middle-men who get the privilege of charging us for something they didn’t earn, they got $0.15 on the dollar for doing nothing! Further more when these banks fail, it almost always ends up with a bail-out of some kind (it HAS to since there is nothing to back these notes in the first place, unless you count the fact they liquidate all of your assets when you declare bankruptcy).

Next the central bank takes that $0.05 for each dollar lent to private banks and “invests” it in Bonds and T-Bills. These are primarily bought up my foreign investors and private banks. Essentially by design the central bank %100 relies on the private banks and the private banks %100 rely on the central bank. Each will NEVER allow the others to disappear. While the purpose of the central bank is to separate the politic process from the monetary system, its purpose is ALSO: Having an independent monetary institution allows for the separation of the power to spend money from the power to create money.

This separation clearly DOES NOT EXIST!

Perhaps another time I will discuss the American System, which might I say is “the cavalier of all systems”. Canada is quite mild in comparison to the American counterpart. For starters look here.


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