Bank Power in Canada
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DID YOU EVER WONDER HOW THE
BANK TOWERS GOT SO TALL?

Old-Fashioned Assumptions

Most Canadians assume the greatest concentration of power in our country vests in the Prime Minister and his cabinet and caucus, and in the Premiers and their governments. We understand that the opposition parties wield some power and can sometimes determine the success of political initiatives. We know that the Senate has legislative power, and are often concerned it is archaic and unrepresentative. We know that over the course of our history many concessions have been made to accommodate and accord power to the sizable French minority, a foundational part of our political history and an integral and vibrant element of Canadian culture and identity. We take pride in our constitution, mainly for the guarantees we perceive in the Charter of Rights and Freedoms as protecting our individual interests against majority tyranny. We expect the constitutional judgments of the Supreme Court of Canada to be honoured by the government and enforced when necessary by our police. We have faith in our governing institutions because of their dedication to the rule of law, perceiving as most of us do a morality and noble cause in the strict adherence by all, but especially those who hold political and law enforcement power, to pre-established legal procedure.

Misdirected Consternation

Many will acknowledge that the reality is far more intricate than this. We will point to the influence of special interest and lobby groups. Those on the right may complain about the detrimental effect of trade unions on the freedom of our economy, while those on the left may condemn the long reach of corporate influence into our legislative agendas. Those further radical in both political directions may criticise the cultural underpinnings of our social, political and economic structures. Many ordinary Canadians will profess to being cynical about the adequate diffusion of political power to the common citizen on account of outmoded or unfairly weighted electoral arrangements. Feminists may point to the unbalanced gender representation in most fields of public life, international relations academics to the global effects and constraining influences of world affairs on Canadian politics. Many may question the fairness, diversity and independence of our mainstream media voices. We are, after all, an intelligent and occasionally articulate public entitled to our individual opinions. But whatever our gripes, almost none of us will go so far as to argue that our traditional conception of the supremacy of Canada’s political and legal institutions and their ultimate accountability and responsibility to the voting public is fundamentally inaccurate.

The Real Deal

Most would probably object reflexively to the suggestion that our institutions of political and legal power are mere nods to history and the briefly enlightened masses who demanded and were granted political determination according to high-minded principles of fair administration, social justice and equalised opportunity. We would probably not accept without challenge that our popular representatives have become instead representatives answerable to a propertied super-elite, a quietly emergent class of oligarchs who exercise power shadily from the sidelines, via intermediaries, by subtle webs of influence, propaganda and through legal channels. And we would probably be wrong. For veto power over Canadian legislative direction appears to have fallen into the hands of wealthy financiers. Freedom of expression and investigative journalism in popular media have become carefully delineated by the requirement of Canadian bankers for social stability and lack of effective dissent. The integrity of our liberal democratic political organisation and the legitimacy of its institutions and officers are under threat from many directions.

Good Corporate Citizens?

Notwithstanding the participation of our forbears in decimating native American life, an important ingredient in Canada’s distinct culture has long been our commitment to social justice, sound and orderly public administration and the maintenance of a high standard of living for all citizens. The members of Canada’s banking establishment have long appeared to be loyal to these same values, and to have helped in their own quiet but profound ways to make Canada the beacon of peaceful prosperity which it is to much of the world. We can only say “appeared” because the veil of secrecy which shrouds the banking establishment is so tightly wrapped as to permit scant insight into what really transpires in the padded, high altitude offices on Bay Street, Place Ville-Marie and Burrard Street. The top five of these private institutions (Royal Bank of Canada, Toronto-Dominion Bank, Canadian Imperial Bank of Commerce, Bank of Nova Scotia and Bank of Montreal) account for more than ninety percent of all the monetary wealth possessed in Canada, and are subject to no effective transparency requirements with respect to the decisions made within their walls which really count. And Canadian bankers’ altruism towards the depositing and borrowing public may be far more limited than it appears.

Impotent Oversight

Whereas with respect to banks’ day-to-day retail practice, the Financial Consumer Agency of Canada and the Ombudsman for Banking Services and Investments are mandated respectively to oversee and encourage fair business practice and help resolve consumer complaints extra-judicially, there is no similar oversight for banks’ larger scale operations, which can affect, sometimes overnight by their size and sweep, the nature of economic life in Canada. The cut-off value, for instance, above which the Ombudsman will not entertain complaints, is $350,000. Considering that the market capitalisation on the Toronto Stock Exchange of the five big banks combined is well above $200 billion, and their aggregate asset base in the vicinity of $1.8 trillion, such oversight of individual complaints is not of any great moment. As veteran editor and journalist Walter Stewart pointed out in an Empire Club speech nearly twenty-five years ago, “Canadians who want to complain about their treatment at the hands of a bank are invited to take their case to the Inspector General, who will deal with the problem in one of two ways. If it is a minor matter – mere insolence of office, or the loss of a few hundred dollars – he turns it over to the bank complained of… But if the matter is really serious, he does nothing at all.” Although now regulated in more detail, the situation has changed very little in substance since then. The Office of the Superintendent of Financial Institutions is concerned with limiting the risk of drastic financial loss to which Canadian investors are exposed. It functions by demanding sound business practice is adhered to by banks within the existing framework. It is not mandated to question the role of banks in our economic system more generally.

Our Illusions

Two prevailing illusions among the public about the big five are that they are fundamentally in competition, and that they are substantially accountable, if to no one else, then at least to shareholders. While the big five appear to be competing with colour-coded branding, claims of greater expertise, attention to customer service and promotions for new depositors and borrowers, these are superficial features that do not affect the bulk of bank business. Most bank business is, plainly put, cooperative money creation and management and, especially in times of economic recession, the acquisition of physical assets and control over the means of production. Banks create money, the primary facilitator of trade and measurable economic activity and thus a commodity with tremendous social and economic value. Traditionally, Canadian banks did this according to a reserve ratio. They were entitled to lend money which, prior to the execution of the lending agreements by which each loan was transacted, did not exist, but not more than a fixed multiple of the cash they actually held in reserve or on deposit with the Bank of Canada. But between 1991 and 1993 the reserve requirement was phased out altogether under the Bank Act. Banks no longer need to demonstrate that they hold reasonably safe reserves of money to justify their lending. This may be viewed as a show of confidence for the discipline with which Canadian banks claim to have conducted themselves and promise to continue conducting themselves, or it may be a manifestation of the overwhelming ability of Canadian banks to get their way in the halls of political power and remain unrestrained thanks to the absence of accountability mechanisms. It is suspicious that in 1999 the section of the Bank Act which mandated the reserve requirement elimination was deleted pursuant to the Miscellaneous Statute Law Amendment Act. Reading any current version of the existing bank legislation in Canada one would find no record whatsoever of the reserve requirement ever having been discarded. The Miscellaneous Statute Law Amendment Act is not recorded to have been discussed in any House of Commons or Senate debate or committee meeting. It was passed rapidly, deemed read by the House of Commons Committee of the Whole, meaning it was not actually read, and entered into law exactly as government draftspeople wrote it.

The Money Cartel

The vast majority of Canadian money in circulation originates in loans from Canadian banks, by which money is created as if from thin air. A lesser amount is created, also out of nothing, by the Bank of Canada through its open market operations to prop up failing markets and stimulate economic activity. Only a small amount of money in the Canadian money supply is cash printed by the Bank of Canada and entered into the Bank Note Distribution System, or coined by the Royal Canadian Mint, for the social and economic function of providing the public with a convenient mechanism of exchange. In order to profit from this money system Canadian chartered banks cannot be fundamentally in competition. Instead they must act somewhat in the fashion of a cartel. If an employee banks at Scotiabank and his employer at BMO and the employee deposits his paycheque into his bank account, he hands over to Scotiabank a promise to transfer a portion of BMO’s daily money pool into Scotiabank’s daily money pool. This then becomes a liability of Scotiabank to the depositing employee and results in the discharge of a portion of BMO’s liability to the employer. Because all Canadian banks are clearing each other’s cheques and direct debit authorisations at the same time, they must act in unison like one bank transferring claims between its various borrowers and depositors. Because nearly all Canadian money in circulation originated as entries in the receivables columns of bank ledgers, and because most of this loan-created money circulates among Canadian banks, none of these banks can lend any significant quantity of money or afford to pay interest on deposits at more favourable rates than any other lender. If any bank did, the system would lose its equilibrium. The entirety of rational bank clientele would gravitate to the banks with more favourable rates. The other banks would be unable to meet their obligations at the end of each business day when cheques are processed through the Automated Clearing and Settlement System and the balances evened out. In the words of John Maynard Keynes, “there is no limit to the amount of bank-money which the banks can safely create provided that they move forward in step… If all move forward together, no one is weakened.” Banks thus have a natural incentive to tend towards amalgamation for business reasons. Indeed, there is continual political pressure emanating entirely from consensus within the Canadian banking industry to allow further bank mergers which would reduce the big five to the big two or three, and save the banks plenty of the operating cost which attends coordinating deposit and loan activity and pretending to be in competition.

Their Own Masters

Although banks have chosen to present themselves as ordinary public corporations, it is an illusion that they are dependent on the financing achieved through public stock and bond offerings. They style themselves corporations and thus have some public relations interest in appearing to be performing well to Bay Street analysts, maintaining favourable “management ratios” of return on debt to return on equity. But the big five do not need to be invested in to raise money quickly. They need only to lend to each other and sell government securities to the Bank of Canada, which they do every night, buying back government bonds each day at favourably prearranged prices. Many of the shares banks do issue are tax-efficient “preferred shares”, which they transfer to their top staff as a performance incentive. Banks thus need not be accountable in a business sense to public shareholders, are not accountable to governments, and are accountable in the courts under laws which they are often able, being the dominant economic institution in our land with theoretically unlimited purchasing power, to shape. Proponents of further bank merger may argue it has to be done to keep up Canadian banks’ competitiveness in global finance. They will, however, avoid mentioning that Canadian banks are already among the largest financial operators in the world, in the same league as ING, Swiss Bank, Credit Lyonnais and Wells Fargo. Nor are they likely to have a convincing explanation as to how our banks’ increased global competitiveness would benefit the Canadian public.

There has been the odd instance of government opposition to chartered banks’ march towards all-encompassing, inescapable economic power, most notably in recent years Finance Minister Paul Martin’s refusal in 1998 to countenance the mergers of RBC with BMO and CIBC with TD. But few in government ever challenge fundamentally the social value of chartered bank dominance of the money supply and effective control of Canada’s monetary policy. The FCAC is not mandated to oversee the pricing of premiums and fees nor, crucially, loan and credit granting policies. Major policy choices affecting the entire Canadian economy, and international investment decisions with the potential to cause large amounts of Canadian money to evaporate if they fail, are taken in private or in consultation with the Bank of Canada. The latter, although a public institution which is still independent and dedicated nobly “to contribut[ing] to solid economic performance and rising living standards for Canadians by keeping inflation low, stable, and predictable,” has been eclipsed increasingly over the last decades by the growing clout of the big five.

Requiem for the Bank of Canada

Like the Federal Reserve System in the United States, the Bank of Canada was founded by private investment, although two decades later than its American counterpart, during the implementation of Franklin Roosevelt’s New Deal economics south of the border. It replaced the Bank of Montreal as official lender to the federal government, and was viewed by many as an institutional answer to depression woes. It was founded in the public interest by Act of Parliament and able to finance government spending on social programs even as chartered banks were maintaining a tightened money supply. It also existed, perhaps more fundamentally, to support the security and efficiency of the Canadian banking industry by being available as lender of last resort to chartered banks in distress, and to provide overnight lending to the banks to cover discrepancies in their balance of liabilities to each other. Three years after its opening the Bank of Canada became a wholly government-owned institution by the transfer of all of its shares to the Minister of Finance and with a governor appointed by the federal cabinet, but with no formal accountability to any elected or unelected representatives, which remains the case today.

The Bank of Canada lends money to the government, again created out of thin air as receivables entered into the bank’s ledger, securitised against nothing more than government promises to pay, in order to maintain a decent standard of living for Canadians. While this practice is inflationary, the Bank of Canada has always taken great pains to keep inflation capped at three percent annually, with a target rate of two percent, albeit according to a consumer price index which many argue leaves us with a flawed and understated representation of actual inflation. However, disciplined inflation control by the Bank of Canada has not meant that taxation has ever been the overwhelming portion of government revenue, a third great misconception common to Canadians with respect to their economic system. As inflation targets are purportedly met and lending rates lowered, the government is able to refinance itself more cheaply by borrowing at the new rates. Much of our governments’ money is borrowed, not raised by taxation, and interest on the public debt is paid as a significant portion of government budget outlays, over sixteen percent in 2005-6 for the federal government. So long as the lending institution to which the government is indebted is dedicated wholly to the public interest, as the Bank of Canada is supposed to be, government borrowing may be politically acceptable to most Canadians, although perhaps perceived as fiscally irresponsible. However, since the elimination of the reserve requirement for chartered banks in the nineties, government borrowing from the Bank of Canada has fallen to less than ten percent of its overall borrowing. Government borrowing is now mainly from the big five, who purchase government bonds and resell them to investors with commission. A very large part of the present Canadian public debt of more than $700 billion, including provincial government debt, is owed in a government bond market dominated heavily by the private Canadian banking establishment.

Systemic Manipulation

This raises the concern that governments and the public are beholden to the banks in a socially, economically and politically systemic way, and not just because the banks have mortgages and liens on many of our homes, cars and working lives. These latter facts can be blamed largely on undisciplined economic activity by Canadian citizens, however encouraged we may be by bank propaganda and the proliferation of corporate advertising and media control (corporate activity at today’s giant scale being entirely dependent on big banks and the money system). And if we are beholden to banks systemically it might be prudent to ask what banks might want of us. The answer is probably that they would like us simply to continue behaving as we already do, a mass of statistics next to their account ledgers promising ever increasing riches, and not ask too many questions or engage is social, economic or political organisation which may threaten their statistical models. The exercise of bank power is reactive to economic activity, parasitic on the ambitions of would-be political and business leaders, and dependent on the greed and envy of the common citizen. Private bankers are very seldom tempted to engage in the universally unpopular and politically dangerous activities of governing and public administration. They aim instead to steer law and politics to their advantage by back-channel influence, manipulation of political culture, and limiting large-scale financing to those in whose conformity to the status quo and support for the existing monetary framework they have confidence. They benefit from a public distracted by the politics of right and left, so long as none of the political options threaten the banking system. It is thus, and through the promotion of a sympathetic and highly dependent corporate establishment that they amass wealth, control and fatness well out of the limelight, with the least work possible, for the most gain possible. As Mayer Amschel Rothschild, a founder of modern finance banking and ranked by Forbes Magazine as the seventh most influential businessman ever, is reputed to have said around the time of the Napoleonic wars, “let me issue and control a nation's money and I care not who writes its laws.” Little has changed.

Rule by Reclusive, Unpatriotic Profiteers

The passivity and publicity-shyness of banks’ power exercise means bankers are content for the institutions of Canadian government to appear to form the paramount power sphere in Canada. So long as it is in banks’ power to decide how and when credit is granted and thus money created they will be more powerful economically than governments and non-bank corporations. They will control the business cycle, although with more difficulty now that their activities have become far more globalised and the ramifications of their investment activity far less predictable (itself a great danger to the Canadian public as huge amounts of our assets are invested in high-risk international derivatives markets and hedge funds). They will maintain an exclusive grip on the valves to the mains of economic lubricant and growth fuel, money. They will promote irregular and unsustainable economic growth in order to have opportunities both to make economic profit during boom phases and to take over the means of production during bust phases as investors and businesses go bankrupt and foreclose. Since the 1930s, Canadian banks have not succeeded in doing this to the extent practiced in the United States. (South of the border a more swashbuckling business environment prevails, the Federal Reserve System remains privately controlled and the gyrations in money supply are more wild and socially destructive. This is notwithstanding the grandfatherly, candy distributing, inflationary policy presided over by Alan Greenspan for so many years.) Our banks are, however, deeply invested in the American banking establishment and stand to benefit from the protection of American banking interests. American banking success and economic stability, considering the gravely precarious value of the American dollar today, may well depend on the guarantee of affordable access by American producers to Canadian resources. The position of Canadian banks in this situation presents what would be, were they considered public sphere actors committed to Canadian wellbeing and sovereignty as opposed to unaccountable private institutions, an intolerable conflict of interest.

The Bankers’ Thinktanks

Canadian establishment thinktanks like the Fraser Institute and the C D Howe Institute vigorously advocate North American currency union, which would reduce Canadian sovereignty and decrease our economic self-determination. If the American dollar were replaced by a joint currency or a fixed exchange rate implemented, Canadian producers, and soon the entire Canadian economy, would shoulder much of the burden of American monetary irresponsibility, itself a result largely of the high cost of propping up a military-industrial economy and the readiness of the American bankers and public to go to war. Canadians perhaps deserve to be leaned on ruthlessly by American importers on account of our own complicity in rapid petroleum depletion and enthusiastic participation in the high-consumption, luxury lifestyle of the average American consumer. We have contributed by our habits to the supposed economic justification for overseas military activity by Americans. Our ready if unintentional encouragement of American military growth has been the result of our extensive economic interaction with the United States. But if we take any interest in the maintenance of our economic, and ultimately political, sovereignty, or in the dedication to social justice, orderly administration and equalised opportunity traditionally associated with Canadian identity, we might do well to shine brighter lights into the inner workings and macroeconomic activity of the Canadian banking establishment. We might discourage bank practices and political influence which threaten to undermine those very Canadian values. We might follow the money and note that the C D Howe Institute, incidentally also in favour of further big bank mergers, is financed by the membership dues of the big five and of corporations and law, insurance and accountancy firms financed directly and indirectly by the big five. The Fraser Institute also receives the majority of its funding from corporations and foundations, many of which are “charitable” shells by which banks and other corporations can fund their favoured causes with the appearance of remaining at arm’s length from the end recipients.

We’re All in Bed Together

The power structure of Canada is not what most Canadians assume it to be. Many of us have strong opinions concerning corporate greed, our population’s over-consumption of global resources and Canada’s role in spreading a sober and corrective spirit in these matters to other parts of the world. Many of us have nagging suspicions that the powers that be care more about themselves than the public they are mandated to serve. But few of us are aware of just how and to what extent the popular image of the Canadian power structure is distorted. There is great cause for suspicion when our political representatives, and thus the massive civil service which they are entrusted to steer, including our defence and intelligence establishment, foreign service, and media regulators, owe much of their public favour to the unaccountable leaders of private institutions who prefer that their great power remain secret. These senior bankers are the most powerful of our leaders, the maintenance of their economic system depends on social stability and so they do have an interest in keeping the Canadian public happy. Unfortunately, maintaining a comfortable Canadian public is often achieved indirectly by financing exploitative global corporate activity and Canada’s participation in the American war economy. It is thus that the ordinary Canadian, perhaps unwittingly, but with responsibility nonetheless for benefiting and not asking too many questions, is involved in the perpetration of injustice outside Canadian borders. But if half of the responsibility lies with thirty-three million complacent members of the Canadian public, half must also lie with a small handful of banks which spread quicksand in the way of political leaders intent on gaining independence from the financiers and muddy the information sources of conscientious members of the public who, if they could piece together the bigger picture, would likely demand change.

Knowing Where We Stand

The aggregate power of Canadian citizens is greater than that of banks, but not unless we are united and organised for the achievement of our goals. We must ask ourselves whether banks therefore have an overwhelming interest in preventing not only popular organisation on matters of credit and the money system, but even in preventing the seeds of awareness of these topics from germinating in anyone’s thoughts. We must ask whether it is not tempting for banks, in order to avoid and stifle popular dissent, to tap into the power infrastructure of corporations wholly financed by and dependent on banks, rely on public education by bank-financed government, employ highly sophisticated public relations mechanisms, use informal social power networks, and partner with corporate media and perhaps even the secretive intelligence establishment, so closely connected to the Anglo-American intelligence establishment and world of global finance. We must ask whether politics are, from the perspective of elite bankers, much more than diversions good for preoccupying the public mind with matters of administration which have no material effect on bank activity other than to keep the people from causing the banks trouble. We might also ask whether it is not time to return our political representation to a state of independence from the banks and oversized corporate interests by insisting on the transfer of money creation and management in Canada to the complete control of an institution wholly dedicated to the public good and accountable to popular representatives and just laws. And if we are not interested in tampering with the power structure, content to carry on as usual and leave matters of power legitimation to more ambitious souls, we must at least not make the undignified mistake of believing that the heads of our modern liberal democracy answer ultimately to us, the voting public.

Toronto
September 2007

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