Monday, October 5, 2009

Pen Meets Paper Oct. 5 '09

Opinion by Helge Nome

Most of us, at one time or another, have probably gotten the response: “Money don’t grow on trees, you know”, when asking a sibling, or close relative for some of that elusive stuff. So where does it grow?
If not on trees, it has to be grown somewhere, somehow? Otherwise there wouldn’t be any money, surely?
What about the Bank of Canada? If they don’t have piles of money, who has?

So, what would happen if we show up on the front steps of that venerable institution with a wheelbarrow and asked for some. After all, we, the people of Canada are its legal owners.
Well, if the on-duty security guard had a sense of humor, he might go upstairs and fetch the petty cash tin and give us some money to get him a cup of coffee around the corner. And he would be perfectly truthful in saying that the petty cash tin contains all the money in the Bank of Canada.
What about gold? That solid fortress-like building would surely have some in the basement?
It does not have to. The world got off the gold standard a long time ago because it was too hard to find and too heavy to cart around with you. Some people put it into their teeth but tended to get a sore neck after a while for the same reason. Besides, they increased their chances of “getting their teeth kicked in” by opportunists.

So, where does money come from?
Well, this is how it should work: As productive economic activity increases in a nation over time, new money is needed, in addition to what is already in circulation to give people the tickets (money) to buy what is produced without running short of the stuff. In our case, the Bank of Canada, based on a formal request from the Government of Canada in the form of, say, Treasury Bills (IOUs), could create and deposit x number of dollars into the government’s bank account. From there the government would decide on how to distribute that new money into the economy in order to maintain healthy economic activity.
Is that what happens? Not quite. The Bank of Canada is tied into a global banking network at the apex of which is the Bank for International Settlements in Basel, Switzerland, and from where it receives direction as to what it can do and not do.
That usually means that the Government of Canada has to borrow money from some private source, at interest, when new money is needed for whatever reason.

And when we need some new money, just like the government, we might as well park the wheelbarrow back in the garage, and go to the local bank manager and beg for some - at interest.
So where does he get it from?
Like most bankers, he is allowed to make it up out of thin air, as long as he doesn’t overdo it. Contrary to popular belief, he does not lend out your hard earned cash in your deposit account. If that was all the money he could play with, the bank would go broke in short order.

Ask yourself this question: Why, in a sovereign nation, should its government go hat in hand to some onshore or offshore bankers and borrow a bunch of numbers at interest that could be created by its own central bank with a few keystrokes?

P.S. If you would like to learn more about the Bank for International Settlements, check out this video:

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