For the record, I do not make a habit of calling out 12 year-old girls on the internet. However, I believe this is one instance that occasions it.
You may have seen this video circulating on YouTube. It is entitled Corrupt Canadian Banking System. It features a 12-year old girl who opposes fractional reserve banking. It was posted on April 6. Right now it has almost 30,000 views. Here it is:
Kudos to this young girl for recognizing that there is a problem with Canada’s monetary system. She rightly points out that taxation, debt and inflation have enslaved Canadians. She also identifies the horror and absurdity of a fractional reserve banking system built on fiat money. The problem is that, like many girls and boys her age, she believes in fairy tales. I know this because the solution she proposes is based on magic.
Let’s begin by reviewing her proposed remedy:
If the Canadian government needs money, they can borrow it directly from the Bank of Canada. The people would then pay fair taxes to repay the Bank of Canada. This tax money would in turn get injected back into our economic infrastructure and the debt would be wiped out. Canadians would again prosper with real money as the foundation of our economic structure and not debt money.
Regarding the debt money owed to the private banks, such as the Royal Bank, we would simply have the Bank of Canada print the money owing, hand it over to the private banks, and then clear the debt with the Bank of Canada. And yes, we have the power and lawful right to do so.
Plain and simple, her solution is for Parliament to take full control of the printing press. Instead of the federal government borrowing money to finance its deficit spending, it should simply create all of the money it needs out of thin air, she says. We are told that this will lower interest payments on the debt. In fact, the debt will supposedly disappear once we locate sufficient ink to stamp “legal tender” on every last banknote entering circulation.
It should be obvious that this proposal is deeply flawed. First of all, in addition to that which is owed to the Bank of Canada, Canada’s federal debt consists of money owed to investors, both foreign and domestic. According to The Canadian Taxpayers Federation, domestic investors purchase Canadian federal debt through “banks, trust and loan companies, investment funds, insurance companies, pension funds and a myriad of other Canadian financial institutions.” In this process, money is loaned to Parliament in exchange for Treasury securities – promises to pay the loan principal plus interest to the creditor in the future.
There is no difference between this so-called “real money” created by government versus “debt money” created by banks insofar as both are conjured from nothing. With regard to the interest paid on borrowed money, this results from time preference and is an inescapable and essential part of lending. It is the discount of future goods against the same goods in the present. It is the reason why one would not trade ten gold coins today in exchange for a promise to repay one gold coin per year for ten years.
What happens if these creditors are repaid with freshly-printed fiat money? Answer: they are defrauded. Money that possessed a certain purchasing power when originally loaned is repaid with debased money that buys significantly less. This is outright theft perpetrated by government. It should not be encouraged.
As Dr. Gary North informs:
So, by forcing people to take paper money, governments create wealth as good as gold. This is something for nothing: wealth as good as gold out of pieces of paper and some ink. Government is magic. This is like alchemy: turning lead into gold, but better, because ink and paper are cheaper than lead. And only government can do this. A miracle!
Secondly, the government could not orchestrate this scheme without precipitating massive inflation. By 31 March 2013, Canada’s federal debt is projected to reach $602.4 billion. Using categorical data from 2009, approximately 90% of this debt is owed to creditors other than the Bank of Canada. Under our subject’s proposal, we would no longer roll over this Treasury debt at maturity. Instead, we would use printed money to repay the loans. This would eventually increase the monetary base – money in circulation – by over half a trillion dollars, not counting current and future deficits. What is Canada’s current monetary base? According to Statistics Canada: about $64 billion.
As a result of such action, the monetary base would be multiplied almost 7.5 times. More circulating money would bid up the prices of goods and services. Money would become progressively worthless.
Finally, this approach would surely lead to further out-of-control spending by politicians. As it stands, we are already operating on budget deficits. When the government spends more than it collects in taxes it must either borrow the additional money (with a promise to pay it back using future tax revenues) or inflate. Higher taxes and further borrowing are resisted by taxpayers who grow tired of having their wealth confiscated by politicians. On the other hand, inflation is an insidious process. It often goes unnoticed or is viewed as affecting everyone equally. Politicians would quickly identify the opportunity to win re-election through vote-buying with printed money without being forced to resort to tax increases in order to finance it. This is a recipe for additional currency debasement.
Regrettably, this speech is tainted by the sophistry of the Greenbacker movement. Ellen Brown is currently its most notorious spokesperson. She does not understand economics.
Dr. Gary North is the foremost expert on the Greenbacker movement and its harshest critic. He has compiled a laundry list of Ellen Brown’s errors in economic and monetary theory. You can read it here.
Gregory Cummings writes about Canadian monetary and economic policy. His writing has been featured at the Ludwig von Mises Institute of Canada and the Ludwig von Mises Institute's Mises Daily publication. Read more.