“Money is like an iron ring we've put through our noses. We've forgotten that we designed it, and now it is leading us around.”

~ Bernard Lietaer, Belgian currency expert

Introduction

Where does your money come from? You do favours for other people, and in return they give you money. They in turn got their money by doing favours for people in return for money.

But where did the money come from in the first place? In Canada, it comes from two sources:

1. The Bank of Canada, owned by the federal government.
2. The chartered banks, such as the Royal Bank of Canada and the Toronto Dominion Bank.

Both these groups have the legal right to create money out of thin air without doing anyone a favour in return.

You were probably aware the Bank of Canada can just print money or create it by entering a line in a ledger, but you might be surprised to learn the chartered banks can do so as well. This was not always the case. Prior to Prime Minister Mulroney, banks were required to maintain an 8% reserve. This allowed them to lend the same money out 12.5 times. Mulroney dropped the reserve rate to 0%. This means banks can lend out as much money as they please, even if they have nothing to back it. (In the USA, reserves are 3% for current accounts and 0% for savings accounts).

When you consider how serious a crime counterfeiting is, it is rather odd for the government to have effectively handed over the printing plates so that banks can create money too. Unlike the Bank of Canada, the banks don't literally print money; they create it out of thin air with a ledger entry any time they lend money.

It is a strangely generous act of the federal politicians to the Canadian banks who were Canada's most prosperous institutions even before this boon.

Inflation

Isn't creating money inflationary? Yes, of course. Further, it does not matter who does the creating; both kinds of money, Bank of Canada and chartered bank, are equally inflationary. Not all inflation is bad; you need a certain amount of expansion of the money supply to allow an expanded economy to function. However, out of corruption and kickbacks, the federal politicians have handed over control of the money supply to the private banks. When the Bank of Canada creates money, the federal government gets to spend it on programs like education, health and defense, or debt reduction or reduced taxes. When the banks create it, the money goes to the bank shareholders.

The Sneaky Flat Tax

When the Bank of Canada prints money, it lends it to the federal government at some nominal interest rate. But since the federal government owns the Bank of Canada, it gets dividends, so effectively it gets the money and interest free. Releasing new money into circulation slightly inflates the giant pool of money in circulation, so, in effect, everyone who owns Canadian dollars already, pays for this new money through inflation of their slightly less valuable holdings. Printing money can thus be looked on a sort of sneaky flat tax you can't wriggle out of no matter how clever your tax lawyer.

The Banks’ No-Win Game

When banks create money, they effectively tax everyone to pay for it with inflation, the same as the federal government. But when they create money to lend they simultaneously put a debt on their books with the interest owed. So eventually they get that money back plus interest. Now imagine this game played over and over millions of times. For every $100 the banks create, they create say $150 in debt. Where is the money to come from to pay the interest? The banks create debt at a much faster rate than they create money. There mathematically isn't enough money in total to pay off all the debt. Somebody has to default! The banks have designed the system so that defaults and bankruptcies are mathematically inevitable. They usually come in waves we call recessions.

It is amusing watching the banks so vigorously go after deadbeat creditors for principle and interest, when the money the bank lent cost them nothing in the first place, and when they set up the rules by which a certain percentage of people mathematically had to default. It is a bit like a game of musical chairs.

The banks have the cheek to create the money they lend out of thin air, but insist on being paid back the principal and interest in real money, earned with the sweat of the brow.

How Crooked Are They?

Paul Martin, the Liberal Leader, had yet another sweetheart deal with the banks. Instead of “borrowing” money from the Bank of Canada at effectively no cost principle and interest, he borrows it from the chartered banks at the going interest rate. Presumably Stephen Harper is continuing the practice. Both cause equal inflation. Why would he blow billions of the taxpayers' money so needlessly? Just look at the favours the banks do Martin at election time to repay his generosity with your money.

LETS

In Argentina, the major banks such as Citibank and the Bank of Nova Scotia simply fled the country with the deposits and left everyone high and dry. The people turned to a local-currency barter system when the government peso failed. With computers, it is possible to streamline barter, using local electronic currency. There are many ways to set up a LETS (Local Exchange Trading System).

In one scheme, scheme, LETS money can be created simply with a transaction. When A sells B a good or service, A's account in incremented and B's is decremented by the amount of the sale. The total balance of all accounts is still 0, just like a bookkeeping general ledger.

One big advantage of a LETS scheme is that it recirculates money in the local economy and encourages people to buy locally produced goods and services. It can function no matter what the IMF, crooked politicians and big banks have done to the national currency.

The Way Out

Part of the solution is to make the banks retain reserves as they did prior to the corrupt Mulroney administration. The government should remain in firm control of the money supply. The bonanza from printing money should accrue to the taxpayers, in the form of reduced taxes or improved services. It should not be handed over to the private banks. They are powerful and rich enough. They got this bonanza through crooked means and it should be taken away.

The savings would be so drastic, that Canada could abolish the hated GST or institute a guaranteed annual income.

Nature teaches us that the more diversity there is in an ecosystem, the more stable it is. Nature teaches that if you want something not to fail, you have to have a backup system, and a backup system to that. Putting all your eggs in one basket is a recipe for disaster. So it seems to me, the solution is to develop and use three parallel currency systems: local, national and international.

Learning More

• Money: the documentary by Isaac Isitan and desperate people in Turkey and Argentina banking vainly on the bank doors that no longer return deposits. Shows the horrendous suffering when currencies collapse, including a woman in Turkey who set herself on fire at losing her life savings. It also shows various working LETS system, including Ithaca Hours.
• A Fish out of Water Look at Money
• The Mandrake Mechanism
• Cindy L'Hirondelle's Essay on the Guaranteed Livable Income
• The End Of Work
• Comer: The Committee on Monetary and Economic Reform, a left wing economics think tank.
• Canadian Action Party: a fringe Canadian federal political party that has economic reforms of the banking system as planks.