Open Letter To Jack Layton, Leader Of The NDP

These statutory reserves served two vital purposes: (1) they provided more elbow room for the federal government to finance its capital projects from the BoC within the constraints in force on an interest-free basis; and (2) they offered an alternative to raising the benchmark rate of interest set by the BoC for overnight loans between chartered banks to help them meet their cheque clearing obligations. Once these reserves were phased out over a two-year period in the 1991 revision of the Bank Act, higher interest rates became “the one blunt tool” for “controlling inflation.” The result: by the mid-1970s the Bank of Canada had held well over 20% of the federal debt. Within a few years it was down to almost 5%.

We note that the NDP did include bringing back the statutory reserves among its policy options. More than that, it is an absolute necessity to reverse the trend of Canadian politics towards disaster bred by greedy privilege.

The NDP could reclaim the traditions of Tommy Douglas, by proposing a gradual reintroduction of the statutory reserves, say over a three-year period. Neither the UK nor the US ended reserves as Canada and New Zealand did. In Britain they were simply reduced to 0.35 of one percent but are still on the books; in the US they also remain but have been reduced to irrelevance by the shifting of deposits from reservable accounts to non-reservable accounts at the close of bank hours, and back to reservable accounts when the banks open their doors again. Bringing the reserves back in Canada to their former levels over a two or three-year period would give the banks an ample opportunity to readjust to the return to a statutory reserve regime. This is of particular importance since the Bank of Canada is in the process of pushing up interest rates again despite the limp state of the economy.

I would be happy to meet with you to elaborate on our proposal.