It is a relief that the U.S. Federal Reserve Board is not veering off into climate theology or other mission-irrelevant distractions. While recent comments of the Fed’s chair, Jerome Powell, were unequivocal, comments from the Bank of Canada have not been as definitive. Amelioration of real or perceived non-economic matters, such as largely social or cultural ones, should not have any share of these institutions’ attention.
Ensuring the soundness of Canada’s national currency, our beleaguered loonie, via shrewd and careful management of the supply of money should be the primary mission of our central bank. All too often since the Federal Reserve Board and the Bank of Canada were established, both have performed this function badly. Since the beginning of the 20th century, both the U.S. and Canadian dollar have lost over 95 percent of their initial values. Current stubborn inflation is but the latest episode.
Aside from managing the money supply, the main functions of a central bank, according to basic economics textbooks, include: lender of last resort, regulator of banks and similar entities, maintaining orderly financial markets, and being the “fiscal agent” for federal governments.
That last badly handled duty has put the BoC, the Fed, and other national central banks in deep trouble, by hurting savers, lenders, and borrowers; devaluing money; and damaging the standard of living of the citizens they (ostensibly) serve and protect. (Also, not to mention having severely damaged their own reputations of competence, professionalism, and ethics—along with their independence—all due to political, media, and pressure group influence.)
An elementary general lesson of basic economics is that, while the relationship is not precise, a given growth rate in the money supply exceeding economic growth will, roughly, cause a similar growth rate in inflation (money supply being physical money in circulation, and chequing and other easy-access bank accounts). There are exceptional temporary circumstances where this will not hold true, as in the deep deflationary plunge in the first year or two of the Great Depression of the 1930s, and in the enforced pandemic-panic lockdown of March–May, 2020.
In those sorts of cases, a lot of newly created money could and can be poured into the economy to improve liquidity (to save firms and people from penury). Normally, such times are of very short duration. In the case of the Great Depression not enough newly created money was poured in, and it and other mistakes prolonged the agony.
In this recent “flash depression,” too much newly created money was poured in, and for too long in duration, leading to remediation that was far too late. The highly educated technocrats at the BoC and the Fed either did not recognize, or refused to accept, that they were the enablers of profligate central government spending—the genesis of the inflation now plaguing North America and Europe.
A conceptual or perceptual dodge that governments and, sadly, central banks are too eager to accept is that the monetization of debt is largely, or even entirely, cost-free. The “fiscal agent” function in practice has central banks buying the debt the national government issues to fund itself. In this scheme, a central bank will create money “out of the ether.” The “new money, added to the then-existing money supply, was then spent by government on transfer payments to lower-income citizens, pay out subsidies and grants to businesses or non-profit organizations, and pay for programs and infrastructure.
Over the past three years, the increase in Canada’s money supply exceeded 25 percent, so it is not surprising that inflation over the 2020—2022 period was in that range.
This extravagant spending jamboree has now ended, which tempts politicians to make the Bank of Canada direct its attention to the federal government’s ill-conceived green transition, pursue environmental, social, and governance aims, or even contort itself in diversity, equity and inclusion knots. This reorientation is beyond its remit or competence, and would not aid its difficult central mission of ensuring sound money towards restoring Canadians’ confidence that prices and other economic metrics will become stable again.
Some politicians want to put all institutions at the disposal of their dubious utopian future. Neither the Bank of Canada nor the American Fed should participate.
