Breaking the taboo: a history of monetary financing in Canada, 1930–1975

Abstract

Monetary financing - the funding of state expenditure via the creation of new money rather than through taxation or borrowing - has become a taboo policy instrument in advanced economies. It is generally associated with dangerously high inflation and/or war. Relatedly, a key institutional feature of modern independent central banks is that they are not obligated to support government expenditure via money creation. Since the financial crisis of 2007-2008, however, unorthodox monetary policies, in particular quantitative easing, coupled with stagnant growth and high levels of public and private debt have led to questions over the monetary financing taboo. Debates on the topic have so far been mainly theoretical with little attention to the social and political dynamics of historical instances of monetary financing. This paper analyses one of the most significant twentieth-century cases: Canada from the period after the Great Depression up until the monetarist revolution of the 1970s. The period was a successful one for the Canadian economy, with high growth and employment and manageable inflation. It offers some interesting insights into the relationship between states and central banks and present-day discussions around the governance of money creation.

Climate change challenges for central banks and financial regulators

“…84 Over time, the responsibilities of central banks have transformed in response to economic events and changing monetary practices. For the majority of the 20th century central banks had a larger range of objectives than today, including high or full employment, exchange rate stability, management of government deficits and support to strategic industrial sectors (in particular in the post-World War II period 85 ). With the consent of national governments, they have also often implemented policies supporting or repressing specific sectors of the economy, sometimes stretching beyond their usual boundaries of operation.…”

Towards an institutional “landscape” view of modern money creation mechanisms and some reflections on their ecological significance

“…Governments meanwhile had a debt (the government bond) that was previously owed to a private investor (the pension fund) transferred over to the books of the central bank, which may not demand that the government pay it back (Gabor 2021 ). This overall process has been termed “indirect monetary financing” (of government spending) 13 (Ryan-Collins 2017 ).…”

The advantages and disadvantages of relying solely on currency financing to fund government expenditures

“…The Federal Reserve's misjudgment of the situation further contracted the money supply, intensifying the severity of the Depression. Canada used currency financing to overcome the economic crisis and maintained high economic growth, high employment rate, and controllable inflation from 1930 to 1975 [8]. Monetary financing is particularly beneficial during economic downturns, as governments can increase spending to stimulate the economy without worrying about funding sources.…”