Finance Minister Bill Morneau on the Dangers of Bank of Canada Funding

A guest blog post from Larry Kazdan, publisher of the “Modern Monetary Theory in Canada” blog:

Under legislation that came into effect in December 2015, e-petitions that garner at least 500 on-line signatures and that are sponsored by an MP can be tabled in Parliament. The federal government is then required to provide a written response, also posted online, within 45 days.

Below is an e-petition regarding the Bank of Canada and the reply provided by Finance Minister Bill Morneau. Morneau maintains that low-cost financing of public infrastructure through the BoC would be inflationary, but apparently his own plan – an Infrastructure Bank that would reward investors with 7 – 9% returns and whose costs would be passed on to consumers through tolls, fees, or taxes – does not seem to cause him the same concerns.

The contentions of the finance minister on a number of issues should be challenged. Below is my open letter addressed to him and sent to the media. Please add your own thoughts in the comments section below and be sure to forward them directly to Mr. Morneau who can be reached at House of Commons, Ottawa, ON K1A 0A6 (no postage required) and email at


Petition to the Government of Canada


  • Since 1974 Canadians have been paying billions in needless interest to international financiers called the Bank of International Settlements;
  • Before this, the publicly-owned Bank of Canada had a mandate and practice of lending interest-free money to federal, provincial, and municipal governments for infrastructure and healthcare spending;
  • Since this switch Canadian taxpayers have been needlessly paying anywhere from $20 billion to $60 billion a year in compounded interest; and
  • This is money that could have been used to better the lives of every single Canadian, and instead we have been needlessly paying large sums of money with no gain and massive losses for Canada.

We, the undersigned, citizens of Canada, call upon the Government of Canada to restore the use of the Bank of Canada to its original purpose, by exercising its public statutory duty and responsibility. That purpose includes making interest free loans to the municipal, provincial, and federal governments for ‘human capital’ expenditures (education, health, other social services) and/or infrastructure expenditures.





Government of Canada marketable debt, which includes treasury bills and marketable bonds, is distributed through competitive auctions to Government Securities Distributors, a group of banks and investment dealers in the Canadian market. These Government Securities Distributors then resell securities bought at auctions to their wholesale and retail clients in private sector markets. Ultimately, Government of Canada marketable securities are mostly held by Canadians, and can be found in retail and institutional investment portfolios, insurance and pension funds, as well as a variety of other investment vehicles. For more information, you may review the Debt Management Report 2014-2015 on the Department of Finance Canada website at http:

It is sometimes suggested that the Government of Canada should fund part or all of its debt by borrowing from the Bank of Canada at a low or zero interest rate, rather than by borrowing in private sector markets.

This approach would require the Bank of Canada to either borrow the funds that it loaned to the Government, or create new Canadian currency.

If the Bank of Canada borrowed the funds for the loan, it would have to pay whatever interest rates that prevailed in private sector markets to obtain the funds. Accordingly, it could not afford to re-lend the funds to the Government at lower or zero interest rate.

Alternatively, the Bank of Canada would have to create new Canadian currency, which could lead to adverse economic conditions and costs. The experience of many nations has demonstrated that relying on domestic currency creation to finance government expenditures results in excessive inflation, erodes the value of a country’s currency and often leads to a misallocation of scarce resources.

Since 1991, the Government and the Bank of Canada have jointly agreed that the central objective of monetary policy should be for the Bank of Canada to target an inflation rate of 2 percent. This is the best contribution monetary policy can make to solid economic performance.

Canada’s policy of low, stable and predictable inflation has served Canadians extremely well. This policy has contributed to creating a more stable economic environment relative to that of previous decades and has allowed households and businesses to make better long-term financial plans.


Open letter to Finance Minister Bill Morneau


In your official response to petition 421-00858, you claim that public financing of infrastructure through Bank of Canada low-cost loans would be inflationary.

But does real-world evidence support your contention when applied to advanced countries with large unused productive capacities and that issue their own currencies, such as Japan or Canada?

According to Australian economist William Mitchell, “…the Japanese experience with sustained high fiscal deficits, the world’s largest public debt to GDP ratio, close to zero interest rates, and deflation, was totally at odds with (neo-liberal) economic theories. It was a mind-boggling failure to explain reality.”

The New Economics Foundation recently published “Is Monetary Financing Inflationary? A Case Study of the Canadian Economy, 1935–75”. The report concludes “The 1935?70 period saw the Canadian economy recover quickly from the Great Depression, weather the Second World War, make a rapid transition from war to peace, and then enjoy a 25-year period of relatively stable and high growth with rapid industrialization….. The Bank of Canada played a key supporting role by directly and indirectly financing government debt.”

Under your proposed Infrastructure Bank, investors are expecting a minimum return of 7 – 9%, and it is clear that low and middle class Canadians will bear the brunt of higher costs through tolls, user fees and increased taxes. That is inflationary.

Canadians deserve a finance minister who will challenge economic myths propagated by financial elites who claim no alternatives exist to their high-cost lending.

Mr. Morneau, whose interests will you serve?


1. William Mitchell is a Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the University of Newcastle, NSW, Australia

The incommensurate aims of the Greek people

“When QE was first introduced in Japan in the 1990s, mainstream economists rushed to predict that the massive expansion in central bank reserves would be inflationary.
Students in every mainstream macroeconomics class, and that means almost all students, would have predicted, based on the nonsense they were learning, that the high deficits and high public debt ratios in Japan at the time, should have driven interest rates sky high, that bond markets should have stopped buying government bonds, that the government should have run out of money, and all the time that these disasters were unfolding, that inflation should have been be galloping towards hyperinflation.

Nothing like that happened.

Neo-liberal economists wrote off their mistakes by claiming that Japan is ‘so strange’ that it is a ‘special case’ and therefore not generally applicable.

Their ad hoc defense was convenient because the Japanese experience with sustained high fiscal deficits, the world’s largest public debt to GDP ratio, close to zero interest rates, and deflation, was totally at odds with their economic theories.

It was a mind-boggling failure to explain reality.”
2. Is Monetary Financing Inflationary? A Case Study of the Canadian Economy, 1935–75
As shown in figure 1, between 20–25% of Canadian public debt was financed and held by the central bank and government from the end of World War II up to the early 1980s but inflation was below 5% right up until the early 1970s…………..
….in the period 1945–70….Federal government capital expenditure funded highways, airports, bridges,schools, hospitals, and other physical infrastructure.
During the period 1960?75, the federal government also introduced virtually all of the major policy innovations that make up Canada’s system of social programs: Canada-wide Medicare, universal pensions, the modern unemployment insurance system, and cost-sharing with the
provinces for higher education and welfare.
For the majority of the period, the Bank was not independent of the government andits primary objective was full employment and growth rather than price stabilization.

3. Economist John Hotson
“When the Bank of Canada encourages the Canadian government, provinces, and municipalities to borrow in New York and Tokyo it is a betrayal of Canada. Where should they borrow when new money is needed for government spending? They should borrow at the government owned Bank of Canada, paying near zero interest rates-just sufficient to cover the Bank’s running expenses.”




  • Through the big banks the Bank of Canada is providing all the money to finance the housing bubble, but everyone assumes privite businesses are always responsible.

  • Mr. Morneau, I personally provided you with “the straight
    goods” YOU ,as well as each MP and each Senator.!
    UNDERSTAND that material to counter the misinformation you are receiving from the hireling economists that the bankers and your department staff are telling you, and act accordingly. YOU have that responsibility entrusted to you on behalf of every Canadian –including ME

  • Have a look at for the level of federal debt through the forties to the mid-seventies; see the spike in the curve at that point to a high level that has been maintained ever since How do you explain that, Mr. Morneau? What happened then?

    Apparently that is when Canada stopped borrowing from our own bank – whose shares are all in your name, sir – to borrow instead from private banks and financial institutions – at compound interest!

    And you say that “no interest” is inflationary! Your evidence?

    Thanks Larry Kazdan for stirring this pot!

  • Many infrastructure projects could be financed by Canadian pension funds, many of which are underfunded, struggling and would love to have investments with almost guaranteed 7% to 9% yields in their portfolios. This wouldn’t be inflationary and the “profits” would fund pensions of Canadian workers who would spend most of their pension incomes in Canada and create domestic economic activity. The government could facilitate this simply by restricting investors in some projects to Canadian pension funds.

  • Irene Brooks-Matheson

    It strikes me that economics is ideologically rationalized to support unsupportable policies. Privatization means fees, tolls, penalties, charges and interest, does the Finance Minister imagine that these costs do not represent an inflation to the cost of living.

  • I believe it is important to switch our focus from financial assets to real assets – both physical infrastructure and the human assets of a well-educated, healthy and fully-employed workforce.

    Historically, hyper-inflation has always been related to an interruption in the supply of real goods, with monetary impact as an effect rather than a cause. The Weimar Republic suffered hyper-inflation because the French occupation of the Ruhr cut off Germany’s main source of industrial goods. Zimbabwe suffered hyper-inflation because the policy of dividing the land of large white-owned, export-oriented farms among supporters of the regime led to a collapse in the country’s foreign trade.

    Future generations of Canadians will not suffer any ill effects from an expansion of interest-free federal government debt owed to the Bank of Canada. They will suffer miserably from the decay of public infrastructure, the erosion of public health and education services, and the demoralizing impact of chronic unemployment and under-employment.

  • Mr. Morneau’s, response is the same tired collection of non consequential reasons that the Ministry of Finance shovels out door, when questioned about their dismal failing policies. Most probably this reasoned diatribe was taken off a dusty shelf being the same response which the Ministry has been using for the last fifty years.
    It is not Mr. Morneau who wrote this response but some shallow thinking and narrow economist type steeped in the failing neo-liberal policies of the last 50 years and whose training in Neoclassical economics has blunted their perception of reality.
    It represents more evidence of the Minister’s unfortunate dependence upon his economist minions. Minister Morneau, as well as his Economists in the Ministry, continue to exhibit their lack of knowledge Canadian Economic and Finance history.

  • Although I don’t pretend to understand all the ‘ins & outs’
    of banking, public financing, etc., it seems to me to be self-evident that if Canadian governments at all levels were able to borrow, at low or preferably no interest rates, to finance infrastructure projects and other issues such as health care and education, rather than indebting Canadians in perpetuity in order to pay big interest payments to the
    greedy Big Banks, it would ultimately be in the best interests of most ordinary Canadians. I understand that the Saint Lawrence Seaway was financed through the
    BoC during the time when that was possible. Why can’t we do that again, with other important national projects? Why should the Big Banks be allowed to profit, yet again, on the backs of ordinary Canadian citizens?

  • The claim that funding infrastructure by the Bank of Canada is a red herring argument because there is absolutely no evidence of that. Those arguments are sometimes bolstered by the nonsense about Germany’s hyperinflation of the 20s. But that was a deliberate political policy by Germany who was facing huge reparations payments — especially to France the main creditor at the time. Inflated dollars are actually of lower value with the same nominal value. This then caused France to experience depression along with several other factors related to money flows from the US investors changing etc.

  • I don’t think the scheme of funding that Morneau describes would necessarily be inflationary. Bad, sure, but what with the tolls and fees going from the pockets of spenders to the pockets of private-sector savers, it could well be deflationary or neutral.

    I’m surprised to see you concerned about issuing government debt, which is, after all, people’s savings. Isn’t the real problem the government’s fear of intervening in the economy directly despite the crying need to crowd in emissions-reduction and climate-change-adaptation spending? In other words to reduce the misallocation of Canada’s resources effected by laissez-faire capitalism?

  • Wow! I started this petition and wasn’t at all satisfied with the response. Thank you so much for this follow up. I see Paul Hellyer has more to say now too. Awesome work everyone.

  • Billy is just showing his true colours.
    I hope that the Comer case will be successful.

  • Inflation is caused by money supply, not necessarily where it is created. If the moey supply is constant, then there can be no inflation. The BoC creates money every year to compensate for a growing economy, and keep inflation at around 2%. The only difference, I think, would be who gets to spend it first.

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