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Purchasing bonds to prop up the banking system

Posted on August 26, 2014 by 40 Mile Commentator


In 1938 the Government of Canada became the owner of the Bank of Canada. The first notable action of the Governor was to buy a half billion dollars of Government bonds which brought us out of the Great Depression and allowed us to finance the WWII by the fractional reserve system which allowed the banking system to create 16 2/3 times the original amount. The next action by the Bank was to buy a small amount of the refinancing of the war debt in about 1957. The debt which had been financed at a small interest was refinanced at about 50% more at that time.

In the 1970s the Governor of the Bank refused to believe that the Bank had bought a half billion of bonds and proceeded to abolish the Reserve system. The National Debt went up more than ten times in ten years leading to the problems in 2008. In 1973 a budget had been proposed by John Hotson, a professor of Economics at Waterloo University suggested that the Government should finance the budget by borrowing the money from the Bank of Canada at a fraction of a percent. Instead, they were actually paying 20.8 percent on short term loans. He pointed out that the Bank should require 100% reserves which simply means that when a bank loans you money they actually have the money. Instead, after 1995 they could loan any amount they could get someone to take.

Around the world central banks have purchased bonds to prop up the banking system – in the U.S. about $3 trillion – in Canada $114 billion – in Europe $713 billion plus $661 billion in 2011. The C.P.A. magazine poses the question – what happens when we go back to normal times? And who are we protecting? Well central government have a habit of protecting the banking system, even if owned by the government.

The amount stated above adds up to about five trillion which is about seven hundred dollars for every person on earth, this would represent double the yearly income for much of the world. That it might have an effect on what happens in the next few years should be apparent.

J.M. Hopkins

Bow Island

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