How to make money

Banks make money by creating it. By making money, I don’t mean that they earn it through fees and interest. And I don’t mean that they print it either  –that’s the job of the Canadian Bank Note Company.

The words How to Make Money on a chalkboard

No, I mean they literally create money: all 97% of it now in circulation. Author Peter Stalker exposes the trick: “Nowadays almost all money is created out of thin air when they make loans,” he explains in the New Internationalist magazine. It’s not how I thought it worked.

I thought that banks loaned out money that others deposited. It turns out that cash is only about one-tenth of the supply. In 1992, the Bank Act was amended to allow banks to keep only as much cash on hand as they deemed necessary.

This sleight of hand is best explained by an example. If I go to my bank and make a loan of $5,000, I don’t usually walk out with a wad cash. If I did, no money would have been created. Instead, an entry is made to my bank account; no cash is deposited to my account, simply an entry.

Suddenly, and with a stroke of a key, money that didn’t exist is there in my account. I can now write a cheque for $5,000 to buy a car from Fred. Fred can take my cheque and deposit it.

Now I owe the bank $5,000 (plus interest) and the bank owes Fred the same amount. All seems fair except for two things. The bank must keep $5,000 in reserve to pay Fred. Unless Fred withdraws the deposit as cash, the bank can do with it what it wants. If Fred uses the money for on-line bill payments, the newly created currency is passed around. And the bank collects $5,000 from me.

Pierre Parisien doesn’t think that’s fair because the $5,000 collected from me represents untaxed capital gains. He calls this bank reflux. A fairer system would be for the Bank of Canada to create all currency regardless of whether it’s banknotes or book entries.

“I suggest that the federal government be granted the exclusive right to create new money, whether in the form of currency, book entry, or even computer data. The Bank of Canada would be mandated to accommodate the chartered banks in the granting of credit, create the necessary funds, and loan them at zero interest to the banks. The banks, however, would have to repay this capital, thus giving the government the full benefit of the reflux.”

Another problem with banks creating money is that they encourage debt. When they can create money, why not persuade people to borrow in order to collect interest? However, as we found out in the Great Recession of 2008, too much easy money can drive borrowers into bankruptcy and the whole facade comes crashing down like a house of cards.

The profit motive is not the best way to create money. Switzerland recently considered a proposal to have the Swiss National Bank become the sole creator of money. Leonid Bershidsky suggests in Bloomberg that such a plan would reduce the money supply but that might be a good thing.


B.C.’s Carbon Tax not as advertised

B.C.’s carbon tax is praised nationally and internationally as achieving the best of both worlds: reducing CO2 emissions (GHG) without weakening our economy. I wish that it were true because I take pride in B.C.’s  leadership.

carbon tax

B.C.’s economy has not been hurt, but that’s because our carbon tax is small compared to other taxes.  The carbon tax is only 7 cents per litre compared to 30 cents per litre for fuel tax, excise tax, and GST.

The only way that B.C. meets its target for GHG reduction is by buying debatable carbon credits, not through the carbon tax. Marc Lee, senior economist for the Canadian Centre for Policy Alternatives, explains the mischief:

“The B.C. government makes the dubious claim that they met their interim GHG reduction target for 2012 of 6% below 2007 levels. Even then, B.C.’s numbers showed only a 4.4% drop, which, as noted, involves a one-time drop from 2008 to 2009. The claim of 6% reduction is based on the purchase of bogus carbon credits (offsets), making it more fiction than fact.”

The trouble with the purchase of offsets is that there is no detailed reporting on how offsets were used. The whole scheme suffers from “massive credibility problems” after a scathing report by the auditor general.

The 4.4 per cent drop in GHG wasn’t because of the carbon tax. It was because of the Great Recession of 2008 when the world saw a reduction because of slowing economies. Even the U.S. reduced GHG. Between 2007 and 2009, emissions fell by 10 per cent, half of it due to less coal burned, half due to the recession. The Smithsonian magazine says:

“In effect, more than half the carbon decline was due to a drastic drop in the volume of goods consumed by the U.S. population.”

Even the claim that B.C.’s economy was not hurt by the carbon tax is suspect; all of Canada’s economy grew. From 2008 to 2013, B.C.’s economy grew by 12.6 per cent while Canada was 15.1 per cent.

“If we go to constant dollars, there is a very slight edge to B.C. over Canada, but it works out to 0.07% per year in GDP growth rates.”

Our carbon tax could be something worth bragging about if it was significant. With relatively low fuel costs, now would be the time to increase them. If the tax was increased from the current $30/tonne to $200/tonne, fuel prices would only increase to what they were last year.

And since the carbon tax is revenue neutral, there would be no net increase in taxes. Even then, a better idea would be to invest the tax in renewable energy and public transit to lower GHG further. Meanwhile, let’s get real about our carbon tax.

“We need to stop telling fairy tales about the province’s climate action policies and its carbon tax (and I say this as a general supporter of carbon taxes).”

B.C.’s Premier Clark has a lot of explaining to do. Her proposed LNG project will result in the province exceeding targets. Clark’s new plan to be released by December will tell us whether our pride in the carbon tax is warranted.