Authored by Bryce McBride via The Mises Institute,
In the current Ontario election campaign, the Progressive Conservatives are hoping that a focus on the corruption scandals of the governing Liberals will deliver them the keys to Queen’s Park. This is a proven winning strategy as corruption (defined as the abuse of public office for private gain) is an issue that enrages people worldwide.
Just last month the International Monetary Fund, under the leadership of Christine Lagarde, committed to tackling corruption on a global level as, in her words, “By siphoning off precious reserves of trust, corruption makes it harder for society to take the collective decisions needed to advance the common good.”
However, the corruption of the Liberal Party (and of other governing political parties elsewhere), while obvious, is an almost insignificant distraction compared to the pervasive and absolutely ruinous corruption of the currency which has taken place at an ever-accelerating rate over the past 50 years at the hands of the banking system.
Amazingly, this corruption of money has been performed in so subtle a fashion as to be almost imperceptible, even as the harm it has inflicted on most of us is all too obvious. How has this monstrous fraud been perpetrated undetected?
The first step was to break the connection between our currency and its tangible backing. Until 1967, coins had an intrinsic silver value and bills had an implied value in gold. A Canadian silver dollar contained six tenths of an ounce of silver, a quarter contained a quarter of this amount (15 hundredths of an ounce) and a dime a tenth (6 hundredths of an ounce). Canadian paper money, meanwhile, could be valued in terms of gold, as under the terms of the Bretton Woods agreement the price of gold was fixed at $35 US dollars an ounce.
Starting in 1968, though, the silver content of Canadian coins was reduced and finally eliminated while in 1971 the United States Treasury ‘temporarily suspended’ the convertibility of dollars for gold at $35/ounce. As the temporary suspension has now lasted 47 years, it should be clear that the currency now in our wallets and chequing accounts will never have any value over and above the value we give it by continuing to accept it in payment for goods and services.
This severing of the connection between our currency and hard to acquire (and hence valuable) precious metals set the stage for radical changes in both central and commercial banking. No longer was the quantity of money issued by the Bank of Canada limited by the quantity of gold and silver available to back bills and mint coins. Perhaps even more importantly, no longer were banks constrained in their ability to make loans by the amount lent to them by depositors.
Consequently, from the early 1970s onwards the amount of money circulating in the Canadian economy (using the M3 measure) has grown immensely, from just under $38 billion in 1970 to a current figure approaching $2.5 trillion. This represents a staggering 65-fold increase.
Some of this money was created by the Bank of Canada to buy government bonds. Federal government debt has risen from just over $20 billion in 1970 to over $700 billion today. However, the scale of money creation by the Bank of Canada pales in comparison to the scale of money creation by Canada’s commercial banks.
Over the same period of time, the level of private debt in Canada has risen from under $100 billion to almost $4 trillion. This phenomenal increase reflects an enormous change in the power of banks in our society. Whereas before 1970 banks were merely the custodians of their depositors’ savings, since the 1970s they have been empowered to create money out of thin air. As explained by the Bank of England economist Andy Haldane in 2014, in his article Money creation in the modern economy:
“Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.”
Take a moment to reflect upon this. In the past, when a bank granted you a loan, it was acting only as an intermediary to give you the use of the hard-earned savings of your neighbours. The money itself came into existence only through the toil and enterprise of gold and silver miners.
Now, however, it is the bank’s granting of the loan which itself creates the money that is being lent. The bank does not need to attract the hard-earned savings of depositors in order to have the means to extend the loan because it can simply create the money with a few quick taps on a computer keyboard.
However, while the banks can make money come into existence without any effort simply by making loans, those to whom the loans are issued are expected to work hard producing valuable goods and services in order to earn the wages and profits needed to repay them.
Such staggering unfairness has had predictably deleterious consequences. As the quantity of money in circulation has mushroomed so have prices. Higher costs of production for businesses (which include the higher taxes needed to pay the increased cost of providing public services), higher asset prices for the rich and higher living expenses for the poor have made the economy both more stagnant and more unequal. Further, growing inequality has been exacerbated by the fact that those permitted to create money from nothing (government and the banks) have been enriched the most. As the economist John Maynard Keynes put it:
“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth.”
The populist revolts of the past few years (Brexit, Trump, and perhaps now Ford) have drawn much of their strength from the betrayal felt by many ordinary workers and citizens who have every reason to question the equity of the existing distribution of wealth. However, governments on their own are only responsible for a small portion of the corruption which has delivered anaemic growth, rising inequality and recurring financial crises.
As the 18th century German banker Mayer Amschel Rothschild was purported to have said, “Permit me to issue and control the money of a nation, and I care not who makes its laws.” Sadly, while the upcoming provincial election may change who sits where in the legislature, it will in no way address the corruption of the monetary system which continues to undermine not only our prosperity, but more importantly (as Ms Lagarde put it), our ability to trust one another enough to act collectively to advance the common good.
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