This blog is the second of a series of reprints from the policies of the Canadian Action Party. It is my opinion, as the author of this site, that Canada needs policies such as those stated in the CAP`s monetary policy.
Statutory Reserves Policy
A central bank (Bank of Canada) properly used in the sovereign best interest of a nations’ citizens requires the use of statutory reserves. Also previously known as fractional reserves, statutory reserves are an alternative to interest rates for regulating the economy.
Higher interest rates hit everything in the economy, and especially hurt the unemployed and do nothing to inhibit bank lending, which occurs whenever a profit is anticipated regardless of the rate of interest.
Statutory reserves, properly used, permit governments to exercise financial sovereignty in defense of society’s interest at minimum cost.
Statutory reserves can be applied to the economic sector that needs to be adjusted in order to permit the expansion and contraction of the money supply when and where it is required, and can be used effectively to inhibit inflation.
Statutory reserves give the government the use of interest free money to the extent permitted by the Bank of Canada Act.
Statutory reserves are an essential means of financing essential infrastructure for a modern society.
a) The reserves themselves do not finance infrastructure. Rather they allow the financing. The borrowing would still be done through the chartered banks at set interest rates, except in the case of a crown corporation, such as the almost defunct Canadian Central Housing Corporation.
b) Before the 1968 Bank Act changes, the rate of interest that a chartered bank could charge was 6%. In many cases they actually collected about 11% by levying the interest in advance for the entire period and collecting monthly payments. i.e., the borrower paid interest on the full amount, full term, but only had use of the 1st month amount for 1 month.
The statutory reserve is the requirement that banks deposit with the Bank of Canada a percentage of the [cash] deposits they received from the public. These statutory deposits do not earn the chartered banks any interest (i.e. the B of C does not pay out any interest to the charted banks on this reserve). The percentage rate of the reserve requirement can vary determined by an overheated economy. [See #3]
The purpose and effect of statutory reserves is to regulate the multiplier – the number of multiples of reserve that a bank can lend. That is, a fractional reserve of 8% would allow a Chartered Bank to lend 11.00 for every 1.00 of its cash reserve.
11 X 8 = 88.00 + reserve of 8.00 = 96.00
This provided the means of cooling off an overheated economy or stimulating a depressed economy without changing interest rates.
Statutory reserves were the basis of the most prosperous and productive quarter century in Canada’s history following WW2. (During this time Canada renewed and modernized it’s infrastructure that had been neglected during 10 years of depression and 6 years of war. New technologies were introduced and large numbers of refugees were assimilated and integrated into a higher and more productive standard of living, etc.).
The Chartered Bank Act pre 1968 limited the amount of interest that a Chartered Bank could charge at 6%. [See #5] Additionally, Chartered Banks could only lend for a period of 4 years. That’s why Trust Companies were the source of lending for mortgages of more than 4 years and most consumer loans (appliances) were for four years. Smart investors such as bank directors would borrow a few million from a Chartered Bank, and then deposit it in a Trust Company. The Bank of Canada was founded in 1935 under a Conservative government regime and was nationalized in 1938 under the Liberal government regime of William Lyon Mackenzie King by the purchase of 1200 private shares at a fair price.
Statutory Reserves were then and still are now an essential component of a sovereign banking system functioning in the best interest of the people of a nation. Following the nationalization of the Bank of Canada, the percentage of the federal debt ratio to the G.D.P. fell from 160% to 26%. The current proportion of the federal Canadian debt to the G.D.P. is 73.1%
Statutory Reserves in Canada followed the model established by President Roosevelt in the U.S.A. in 1935, in the U.S.A.’s The Bank Act of 1935.
The Statutory reserves were eliminated in Canada by the Mulroney Conservative government over two years beginning in 1991. Subsection (4) of Section 457 of Chapter 46 of the Statutes of Canada 1991 change the Bank Act to provide for the phasing out changes in the Bank Act respecting the requirement of our chartered bands to maintain reserves with the Bank of Canada (Meltdown William Krehm, p. 116).
Since the statutory reserves were eliminated, the percentage of the federal debt ratio to the GDP has escalated at incredible rates. (Chartered banks built up their holdings of government bonds, which no longer required cash reserves at the central bank, nor more capital of their own. Between December 1990 and August 1994, their portfolios of federal government bonds soared from $.5 billion to $35.6 G- i.e. by 900%. The total federal debt held by the banks increased by 300% to $80 B. (Meltdown William Krehm, 153) An important distinction exists between financial capital and real capital.
97% of financial capital is abstract, abstracted from the real capital that has been monetized as a debt. Real Capital is the knowledge, skills, accumulated tools and material resources referred to by Adam Smith, when he said in The Wealth of Nations that “the wealth of a nation depends upon the extent to which it supplies its own needs, with its own people, their skills and tools and its own material resources”. That is why education, as a prerequisite to training, is so important; not only how to work, but why to work.
The Canadian Action Party will re-institute the use of statutory reserves.
With the current cash reserve index (according to repeated references by Mr. Krehm) at about $350 – $400 to $1.00, the immediate or rapid introduction of the percentage of reserves proposed, the economy would deflate about 300 times the amount and speed it deflated in 1927 – 1929.
The Chartered Bank credit that is now extant would have to be slowly reduced. Since most of the collateral is now monetized, (commoditized, and the shortage is forcing the Bank Credit to seek public property – value) the demonetization would have to be carefully orchestrated. Either that, or as Solon did in Ancient Greece, simply cancel all debt and start fresh.
The banks will not be allowed to use the reserve requirements as a justification for increasing interest rates or transaction fees.