In Canada, new money comes from two places: the Bank of Canada (BOC) and chartered banks such as the Toronto Dominion Bank (TD) and the Royal Bank of Canada (RBC). The Canadian banking system is one of the most respected and stable banking systems worldwide. The Canadian government and central bank have managed the aftermath of the 2008 financial crisis more effectively than most of the other developed nations in the world.
The Bank of Canada
The BOC was chartered under the Bank of Canada Act of 1935, initially as a privately owned corporation. It was legally deemed a federal Crown corporation in 1938, its shares being owned by the Canadian government.
The central role of the BOC is to maintain the financial and economic health and stability of Canada. Specifically, it is responsible for formulating monetary policy and managing funds and banking services for the federal government. It is the sole authorized issuer of Canadian currency, among other things.
Both chartered banks and the BOC have a legal right to print new money without a specific reason. The BOC has held the ability to print new money since its inception; however, chartered banks did not always have this right. Before the leadership of Canada’s 18th Prime Minister, Brian Mulroney, from 1984 to 1993, all banks in Canada were required to maintain at least an 8% reserve. This allowed the banks to lend out the same money approximately 12 times over. Mulroney dropped the required reserve rate to 0%. Thus, banks can lend out any amount of money, whether they have something in the way of reserves to back it or not. Though the Bank of Canada is the only institution that can print money, chartered banks can create money by entering it into a ledger when they issue a loan.
The creation of money is inflationary, whether the BOC or a chartered bank create it. A certain amount of inflation is considered necessary to allow for an expanded economy to function. However, the federal government has effectively also given private banks some control over the money supply without accompanying government control. When the BOC creates money, the federal government can utilize the funds for various programs, including education, health, and defense. The funds can also be spent on the reduction of debt and taxes. When chartered banks create money, it goes primarily to the bank’s shareholders.
The BOC prints money and then lends it to the federal government at a very low-interest rate. Because the federal government owns the BOC, it receives dividends, meaning it obtains the loan essentially interest-free.