Why doesn’t the Bank of Canada acknowledge how the money creation process works in a clear and transparent way?
Over time spanning from Nov. of 2013 to as recently as June of 2019 I have attempted to get Canadian authorities to acknowledge how the money creation process works. Below are three different email threads, two to the Bank of Canada (BoC) and one to the Office of the Superintendent of Financial Institutions (OFSI).
Bear in mind that I am corresponding with representatives of these institutions and these people may not have an intimate understanding of how the money creation process works. They are just people doing a job and I think they answer my questions to the best of their ability. However, one gets the sense that they are being instructed what to say.
1. In the first email thread to the BoC I pose the question; “Given that in the private sector if I was to secure a loan at a private bank, the bank would create that money by typing it into their data base, in essence the bank would be creating new money. What restricts the amount new money that can be created by a private bank?
In response she contradicts herself within the first three paragraphs where the text is highlighted.
“Financial institutions are not given “the right to create money.”
“The ability of commercial banks to create money through the issuance of loans is a key function of any banking system in a modern society.”
To insure I am not taking anything out of context read the whole thread and I will respond to any questions you have.
2. The question, “I was hoping to verify Bank of Canada operations with regard to auctions of government securities (Bonds and Treasury Bills). In previous correspondence I asked the question, do commercial banks use the same money creation process to purchasing securities at BoC auctions as it does when granting loans to private individuals?”
In response she states, “The “money creation” process does not apply.”
My response, “Thank you for your response. I have a follow-up question with regard to the Bank of Canada operations in securities auctions. While commercial banks do not employ the money creation process (Temporarily accepting this is true) , does the Bank of Canada use this process when acquiring treasury bills and bonds in non-competitive bids from the federal government?
I am familiar with the “Statement of Policy Governing the Acquisition and Management of Financial Assets for the Bank of Canada’s Balance Sheet” and know that generally, the Bank of Canada’s holdings of financial assets are driven by its role in issuing bank notes. According to the latest published BoC Assets and Liabilities: Month End, the BoC holds approx. $25,638,000,000.00 in Treasury Bills and $79,197,000,000.00 in Government of Canada Bonds in assets, while its liabilities in bank notes stand at $88,728,000,000.00.
In other words, the BoC holds a little over 104 billion dollars in Government of Canada debt.
Her response, “In reply to your follow-up question, no, we do not use the money creation process to buy government securities at auction. We use our own funds.”
After a couple of exchanges I reply, “The BoC purchases bank notes from the Canadian Bank Note Company at whatever the production costs are (much less than the face value of the notes). Then commercial banks purchase those same bank notes for the face value and the cash is circulated throughout the economy to whoever wishes to use it. In exchange for the banknotes commercial banks forward a digital entry into the BoC cash account. Currently, there is approx. 89 billion dollars in cash circulating in commercial banks and the public. Then this 89 billion dollar digital entry in the cash account of the BoC can be used to purchase government securities. Following that the bank’s portfolio of government securities generates interest revenue known as seigniorage. How can one say that this is not money creation that can be used to purchase government securities?
Privately owned commercial banks have been given the right to create digital money through the issuance of loans. Once a loans officer in a commercial bank is satisfied the customer is a good credit risk he or she simply type that money into existence. When the loan is paid back the bank keeps the accrued interest (or the spread in bank parlance) and then can use those funds to purchase securities.
Commercial banks and the BoC purchase government securities using their “own funds”. However, they gather those funds using two different types of money creation described above, which can be used to purchase whatever the banks desire.”
Her response, “While we appreciate your interest in the Bank of Canada, we have responded to your line of questioning and provided suggestions as to other avenues and resources you could pursue.
The Bank receives a great deal of correspondence from Canadians, and we endeavor to respond to each and every request with the same care and attention we have given to yours. As such, we can only devote a certain level of resources to each inquiry. Therefore, no further response will be forthcoming from the Bank on this matter.”
My final response, “I apologize for the overload; I really shouldn’t need to ask these questions. The Bank of Canada website is an excellent source of information nonetheless it falls short on the subject of money creation. The Bank of Canada is a public institution, information on money creation and our banking system should be readily available and transparent. However, when it comes to money creation there seems to be an aversion by authorities to acknowledge the reality of it.
Europe looks to be several years ahead of us in this regard. One example of this is provided by the Bank of England in a quarterly bulletin published in 2014, “Money Creation in the Modern Economy.” https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy”
Read the whole thread.
3. To the OSFI, “Can you direct me to a section of the Bank Act or other law that allows privately owned commercial banks the right to create digital money through the issuance of loans?
The OSFI, “This confirms that the Bank Act does not have any information on “money creation”.
Given that in the private sector if I was to secure a loan at a private bank, the bank would create that money by typing it into their data base, in essence the bank would be creating new money. What restricts the amount new money that can be created by a private bank?
I was hoping to verify Bank of Canada operations with regard to auctions of government securities (Bonds and Treasury Bills). In previous correspondence I asked the question, do commercial banks use the same money creation process to purchasing securities at BoC auctions as it does when granting loans to private individuals? Linda Groulx, Tue 2013-11-26, 12:36 PM replied, “When a commercial bank buys bonds issued by the Canadian government, it has to pay for them with its own funds, just as an individual has to pay for Canada Savings Bonds with her own money.” However, according to a document from the Library of Parliament entitled, “How the Bank of Canada Creates Money for the Federal Government: Operational and Legal Aspects”, publication no. 2015-51-E, 10 August 2015, money is created the same way privately owned commercial banks do when issuing a loan to a business or a person. Could you please clarify?