The Canadian dollar as it exists today came into existence in 1934. Prior, the Department of Finance issued currency in competition with chartered banks, which at the time were more numerous. Each bank would issue its own currency, sometimes backed by commodities such as gold or silver. Competing currencies kept inflation in check, but only to a degree. The federal government and the federally chartered banks eventually monopolized the market. The Bank of Montreal’s cosy relationship with Ottawa gave way to Ottawa’s very own central bank: The Bank of Canada.
Like all banks, the BoC owns assets and issues liabilities. These liabilities are the pieces of paper called Canadian dollars. They also exist as credit on a computer screen. The difference between assets and liabilities is the Bank’s capital. For the BoC to be considered a “safe bank,” it must have sufficient capital. Although official accounting numbers suggest good things, bloggers have been commenting on the Bank of Canada’s growing balance sheet. Simon Black reports that the Bank of Canada has an equity of 0.532% – one of the worst in the world.
A crisis with the Bank of Canada would require a federal government bailout. Well actually, it wouldn’t require anything. The best thing would be to end the BoC’s monopoly on currency and let them go bankrupt. But since we live in the times we do, the establishment would justify the bailout as a necessary and beneficial action. In reality, it would prompt up an unsustainable crony-capitalist system.
Of course, the Bank of Canada may not fail at all. Unlike Chartered Banks, the Bank of Canada can issue its own currency. And unlike other organizations – governments can force you to use their products. In other words, the Bank of Canada may decide to increase its liabilities until they completely lose value. This is what the Federal Reserve is doing – printing money until it isn’t worth anything.
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