Can public money creation work? Some answers from Canadian history

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Is public money creation inflationary?


The theoretical and policy arguments for monetary reform are becoming more accepted by economists and establishment figures. The financial crisis blew apart the idea that deregulated private money creation by commercial banks leads to more efficient outcomes and allocation of capital, as has been noted by Martin Wolf of the Financial Times and Lord Adair Turner amongst others. Yet there are few examples of how public money creation – and its variants – can support economic growth without causing negative side effects, not least inflation.

Is monetary financing inflationary?In a new working paper, I examine the case of the Bank of Canada (the Canadian central bank) in the 1935-1975 period, perhaps the most interesting example of public money creation in the 20th century in the English speaking world. Throughout this period the Bank of Canada engaged in significant direct or indirect monetary financing of government debt. In other words, the central bank created new money that was credited to the government’s account either via purchase of government bonds or direct lending. On average about one-fifth of government debt was financed and held by the Central bank, with all interest returning to the state (figure 1).

Monetary financing

This monetary financing supported the Canadian state to recover from the Great Depression, fight World War II, enable post-war reconstruction and, in the 30 years following the war, enjoy the longest period of economic growth and high employment in its history. The Bank also created one of the worlds’ largest industrial development banks for the financing of small and medium sized enterprises (SMEs), eventually providing a quarter of all loans to SMEs, again funded via public money creation.

It is a remarkable story and one few economists or economic historians have examined. Even more remarkable is the fact that this vast monetisation program did not prove to be inflationary. As can be seen in figure 1, there is no relationship between the growth rate of consumer prices and the ratio of debt held by the Bank of Canada or the government. An econometric analysis of the relationship between monetisation and inflation and again found on evidence of a significant correlation- rather Canadian inflation was mainly influenced by U.S. inflation.

Interestingly the Bank of Canada was created in the mid-1930s not to support the financial sector but in response to a perceived failure of the banking system to provide sufficient credit to farmers suffering in the Great Depression. It was given a strong public service mandate and required to make interest-free loans to the government and municipalities for infrastructure. Which it duly did up to the mid-1970s. At this point, monetarist theory took over and the Bank sold off vast quantities of government debt to private investors.

Rocco GalatiCanadian monetary reform campaigners COMER recently hired a high profile constitutional lawyer, Rocco Galati, to sue the Bank of Canada for reneging on this commitment.


Whatever the outcome of the legal case, the example of Canada is a great reference point for monetary reformers. The Bank of Canada did not follow the prescriptions of mainstream monetary policy: it was not fully ‘independent’ of the government, it had a wide mandate focussing on full employment, support for small businesses and industry and the reduction of government debt and it used a number of different ‘tools’ including credit guidance and ‘moral suasion’ to influence the commercial banking sector.

At a time of high private and public debts, deflation and stagnant growth, monetary policy makers would do well to study the Canadian example and see how monetary financing is possible and has been successful in creating a vibrant and stable economy.


Download the working paper here.


Citation: Ryan-Collins, J. (2015) “Is Monetary Financing Inflationary? A Case Study of the Canadian Economy, 1935–75.” Levy Economics Institute, Working Papers Series, no. 848

[1] ‘Monetary financing ratio’ is the proportion of total public debt held by the Bank of Canada or government, sourced from Canadian Statistics, CANSIM Table 176-022,; Prices are the YoY growth rate of the Canadian Consumer Price Index (2010=100) from the OECD (2010) Main Economic Indicators:


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Josh Ryan-Collins (Guest Author)

Josh is Associate Director of the Economy and Finance team at NEF, a London-based think tank. He is leading a programme of research into reforming the financial sector and the economy to align with long term interests of society. The program incorporates research and advocacy in the areas of monetary policy, banking and credit, macroeconomics, the economics of land and housing, finance and ecological sustainability and complementary currency and payment systems.
  • Green_Lightning


  • Marco Saba

    Money creation accounting fraud at his best, here: “Nugan wrote the bank a check for $980,000, then covered it by writing a
    bank check to himself for the same amount. Through this elementary
    accounting fraud, Nugan could claim that the company’s paid-up capital
    was a million dollars.”

  • RJ

    Excellent article. thanks for posting

    This is what the UK Govt should do. It’s outlawed at present by the EU but could be easily got around. By for example selling bonds to the market and then buying them back by QE. Or just ignoring this rule.

    And if in particular the Govt uses this to invest in assets then what is the issue. But we collectively need to overcome fear of Govt debt. As Govts do not record assets in their books (historical reasons) Govt investing in assets still increase Govt debt even though the net debt stays the same

    Referring to Govt debt. Monetary sovereign Govts like the UK can spend without restriction as required when required. Its makes the non Govt sector wealthier 1 for 1. Fear of Govt debt is completely irrational. It’s this fear we must overcome if we want a fairer, cleaner energy world where we treat the less fortunate with respect and dignity.

  • Rory Short


    In my understanding the very heart of the financial problem, that is besetting us in South Africa, and all other countries which have a similar money system, is the inadvertent systemic attenuation if not the complete removal of the naturally inherited ‘economic agency’ of the individual.

    Voluntary exchanges of, goods and/or services, between two parties, is the basic economic event. The accumulation of such events creates an economy. Every person is born with the capacity to make such exchanges of goods and services with others, i.e. they are born with ‘economic agency’. Such exchanges are known as bartering and do not need any money.

    However money is a great facilitator of exchange and because of the very real difficulties of finding suitable exchange partners, to barter with, the exchange facilitation benefits that spring from the use of money in exchanges have naturally caused money to become an essential part of any exchange. The invention of money could not remove peoples’ natural ‘economic agency’ but the initiation of any exchange now required the possession of money in order to enter into the purchase half of the exchange. Consequently the exercise of peoples’ natural ‘economic agency’ became dependent on the possession of money, a man-made thing, not a natural one. Ideally therefore to complement our natural ‘economic agency’ every person should have access to money should they need it to enter into an exchange of goods and/or services.

    Unfortunately the way our money system has evolved has meant that the only sources of money available to individuals, who are short of money when they wish to enter into the purchase half of an exchange, are other individuals who already have money. Their options are;

    1. theft of money from others
    2. begging for money
    3. exchanging goods and/or services for money
    4. borrowing money from others
    5. qualifying for a government hand out, if there is one.

    Option 1 and 2 we can ignored.
    Option 3 only exists if the individual is within a context of individuals who already have money, not the case for individuals living in poverty stricken communities.
    Option 4 only exists if the individual is regarded as a good credit risk by those that lend money to others, e.g. banks, not the case for a poverty stricken individual.
    Option 5 only exists if the government has the money, taken in taxes from others, for handouts and the individual qualifies for one.

    What happens then to the individual for whom none of the above options is viable?

    Within the a cash based society, such as ours is, and with a money system that operates
    as ours does the individual has no choice but to become economically inactive. What a tragic and unnecessary waste of human potential.

    This need not be, however. We can change how our money system operates, if we wish. This is quite possible to do because we are on a fiat currency. The units of a fiat currency have nothing but a face value when first issued. They get their backing value once they have participated in a completed exchange. This opens up the possibility of an additional option, option 6.

    6. enable any individual, who has insufficient money to enter into the purchase portion of an exchange, to trigger the issuance of the necessary new money to complete the purchase.

    The new money would be recorded against the individual concerned as non-interest paying debt which would be settled as and when the individual concerned received payment[s] for goods and/or services which they had supplied to others. And to prevent free-loading on the community, which would manifest as inflation, a limit would need to be set on the amount of new money debt that any individual could hold at any point in time, that is all.

    A universal franchise became operative in South Africa in 1994, but 21 years on, economic freedom remains a distant mirage. Implementing Option 6 would give economic freedom to everybody.

    The banks as profit making institutions are clearly not interested in making Option 6 available. Long term they should benefit from it however because everybody will be economically enabled and therefore potentially a bank customer. Thus the State will have to take over direct responsibility for the issuance of new money, which should never have been handed to private interests in the first place. New money should only be issued when individuals need to use Option 6. Price inflation due to currency debasement should no longer occur. The handling of money in circulation can continue as at present but banks would, rightly, have nothing to do with the issuing of new money.

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