Part One
In a recent post, http://formulafordebt.blogspot.com/2010/11/look-at-bank-of-canada.html, I asked a few questions in reference to some points of the following email originating from a Bank of Canada official. In this post I will deal with the questions asked relating to question 4 below in green.
Sent:
To:
Subject:
I hope the following answers the questions in your E-mail of March 14 to Bank of Canada Public Affairs.
1. The Bank is not a public corporation. All shares are held by the Government of Canada.
2. The Bank of Canada Act does not provide for the appointment of elected representatives to the Board of the Bank.
3. The Bank has no powers under section 18 to make loans to the federal government and to Provincial governments. It is not the Bank’s role to be a source of financing for Governments and this power has only rarely been exercised (on two occasions that I am aware of, when a government has been in dire financial straights.)
To explain this let’s start somewhere close to the beginning. Imagine entering a Chartered Bank and requesting a loan of twenty thousand dollars to purchase a new car. The first thing that the bank loan manager will do is ask that you fill in a loan application form. So you do that and place your signature on the bottom line and guess what? You just created the money that the bank will then print for you. The bank did not have this money prior to your signature being placed on the application form. They don’t even have it now that your signature is on the application form; you have to slide the application form across the desk first. You don’t know it but you have just given the Chartered Bank the asset that they will use to “buy” the needed money to “lend” to you so that you can buy a new car. Put simply, you gave the Chartered Bank the money that they will now “lend” you. You have to not like how this is sounding already. We know that this must bring up many questions for you but let’s stay with the application for now.
david.ealing@gmail.com 4. The Bank issues notes by selling them at face value to financial institutions, who then put the notes into circulation. What does a financial institution use to pay for a $20.00 bill? A $20.00 bill????
The Bank also buys surplus notes from financial institutions What does the Bank of Canada use to buy these surplus note? Does it buy a surplus $20.00 bill with a non-surplus $20.00 bill? Something sounds fishy here. and destroys notes which are of poor quality. Each note is a claim against the Bank. The Bank accounts for notes on its balance sheet as liabilities.
The Bank also buys surplus notes from financial institutions What does the Bank of Canada use to buy these surplus note? Does it buy a surplus $20.00 bill with a non-surplus $20.00 bill? Something sounds fishy here. and destroys notes which are of poor quality. Each note is a claim against the Bank. The Bank accounts for notes on its balance sheet as liabilities.
5. Subsection 23(b) means that the Bank may purchase shares of the BIS or make loans on the security of BIS shares. It does not authorize the Bank to borrow from the BIS.
I hope this information is of help to you.
On the surface it wouldn't seem strange that any business would sell what they produce and that the selling price would be related to the value of the product. But in this case it seems that what is being sold and what is being used to purchase that product is the same. It sounds like their selling a pound of potatoes for a pound of potatoes. But the Bank of Canada is not selling potatoes, it's selling money at face value.
4. The Bank issues notes by selling them at face value to financial institutions, who then put the notes into circulation. What does a financial institution use to pay for a $20.00 bill? A $20.00 bill????
Again, on the surface it sounds like the Bank is selling a $20.00 note for a $20.00 note and a $100.00 note for a $100.00 note, etc. And the truth is, it is. But the financial institution does not give the Bank of Canada $20.00 in return for $20.00. The financial institution submits a promise to pay a $20.00 note in return for a $20.00 note. Another word for a promise to pay is a bond. A bond is just a promise to pay a specific amount of money in a specific amount of time and with a specific amount of interest.
So does that mean that a financial institution, in order to "buy" money from the Bank of Canada, issues a promise to pay; a bond? The answer is no. The financial institution simply uses yours! Surprised?
You’ve been told, or maybe just lead to believe, that banks have a vault full of money ready to lend to all credit worthy clients. That is simply not the case. The Bank of Canada, believe it or not, is merely a printing house. It has no money to lend at any time. Chartered Banks merely offer you a computer terminal to transfer funds from one account to another. They have no money to lend.
You’ve been told, or maybe just lead to believe, that banks have a vault full of money ready to lend to all credit worthy clients. That is simply not the case. The Bank of Canada, believe it or not, is merely a printing house. It has no money to lend at any time. Chartered Banks merely offer you a computer terminal to transfer funds from one account to another. They have no money to lend.
To explain this let’s start somewhere close to the beginning. Imagine entering a Chartered Bank and requesting a loan of twenty thousand dollars to purchase a new car. The first thing that the bank loan manager will do is ask that you fill in a loan application form. So you do that and place your signature on the bottom line and guess what? You just created the money that the bank will then print for you. The bank did not have this money prior to your signature being placed on the application form. They don’t even have it now that your signature is on the application form; you have to slide the application form across the desk first. You don’t know it but you have just given the Chartered Bank the asset that they will use to “buy” the needed money to “lend” to you so that you can buy a new car. Put simply, you gave the Chartered Bank the money that they will now “lend” you. You have to not like how this is sounding already. We know that this must bring up many questions for you but let’s stay with the application for now.
What is a loan application form?
A loan application form is a bond or a promise to pay. A bond is simply a promise to pay. By filling out a loan application form you are issuing a bond; issuing your promise to pay. Literally, you are creating money. A promise to pay is just a note signed by one individual that promises to pay a specified amount, thing or service to another individual. A Government Bond is an example of a promise to pay. Your loan application is a promise by you to pay the amount of the loan as well as any stipulated interest charges to the bank at some future date. Your credit worthiness determines if your promise to pay has any value. Once the bank assures itself that you will fulfill your promise the application (your promise to pay) is accepted as valuable. The value of your bond (your promise to pay) is set at the amount you have promised to pay.
What happens next proves your promise to pay has value. The Chartered Bank submits your promise to pay to Canada’s central bank, the Bank of Canada, and purchases, that’s right, the Chartered Bank buys the funds you requested from the Bank of Canada!...and buys them with your promise to pay!
The Bank of Canada accepts your promise to pay as security for printing the $20,000 you requested. The actual printing necessary to facilitate your request will probably be less than one hundred notes that may total $2,000. The rest will be transferred through computer entries...electronically. It costs about five cents per note so the total cost associated with the printing of the bills necessary to fulfill your request to the Bank of Canada will be a grand total of five dollars ($5.00).
The Bank of Canada then transfers these funds, $20,000, to the Chartered Bank. Now with a simple computer entry the Chartered Bank credits your account with $20,000. Now with another computer entry (debit card transfer) the $20,000 is transferred to the auto dealership and you drive away with your new car. The only thing left is for you to fulfill your promise to pay by making your monthly payments. As you return each payment to the Chartered Bank they in turn return that payment to the Bank of Canada. Each payment reduces the value of your promise to pay by the amount of the payment. When you have discharged your total obligation by making all your payments the value of your promise to pay is zero.
Now let’s assume that the total interest you were charged for these funds is 7%; the Chartered Bank interest charge is 4% and 3% is charged by the Bank of Canada. Seven percent on $20.000 equals $1,400, so the total cost of your new car will be $21,400 and you’re happy, right? But should you be?
Let’s look at what the Chartered Bank actually did to receive the four hundred dollars it “earned”. Do you see what the Chartered Bank actually did? All it did was provide you with a computer terminal and a web site to transfer funds from one account to another. It provided no money, it printed no money. It merely charged you $800 for the use of its computer for probably less than an hour. What a great business!
Now let’s look at what the Bank of Canada did for the $600 it “earned”. It spent at the most $5.00 to print a few bank notes. And it gets to keep the $20,000 you returned to it. Now this is a great business! Actually, it’s a scam, a fraud, disguised as an honourable business.
You’ve merely been programmed to believe that banks “give” you something. The only giving in this arrangement comes from you. Both the Chartered Bank and the Bank of Canada had no money before you applied for this loan. Now the Chartered Bank has $800 and the Bank of Canada has $600 plus the $20,000 created by your promise to pay. This is money laundering at its finest!
What we as Canadians need to realize is that this is the only way money enters our economy; it's borrowed into existence. And as loans are repaid money is removed from our economy and is kept by the Bank of Canada. No money is ever made within our economy. It may appear that money is made when a company produces a product for $10.00 and then sells it for $20.00. It is true that this company has increased its wealth, but it has not created or added this wealth to the economy. It has merely accumulated preexisting money, money someone else has borrowed. Each one of these preexisting borrowed dollars are registered with some one's promise to pay and as long as this company holds them someone will fail in their attempt to fulfill their promise to pay.
The economic system the Bank of Canada operates is called the Private Debt Money System. The Bank of Canada claims to be a public bank owned by the people of Canada. If this were true it would operate under a Public Credit Money System. Why would a public bank that claims, "Our principal is "to promote the economic and financial welfare of Canada." operate an economic system that guarantees Canada will one day be obliged to apply for welfare from the International Monetary Fund (IMF)? The dominoes are falling in Europe and despite what our economist Prime Minister tells us, Canada's domino is in that line.
Click this link for part two:
Comments to the author are welcomed.
