While the Canadian dollar soars, the Bank of Canada sleeps, seemingly oblivious to the impact on jobs and incomes of Canadians. The mainstream media look no further than bank economists for an explanation of why we need to keep interest rates high — to protect us from impending inflation. It seems that real wage increases are the source of the threat. That interest rates represent the price fetched by banks when they lend goes unnoticed by financial reporters, who also remain mute about why salary increases (including one hopes, their own), should represent a threat to Canadians.

The business press allows us to figure out for ourselves that the Bank of Canada’s main job is to fight the class war from above. About 20 years ago, without legislative approval, the Bank re-defined its legislated mandate: it was to fight inflation, and do nothing but fight inflation. Instead of taking responsibility for overall financial stability, improving economic prospects, maintaining high employment, and reducing economic disparities, the Bank decided to protect the wealthy from the re-distribution of income that occurs when inflation erodes the value of bank loans, bonds, and other financial assets. Inflation targeting remains their only stated objective, while keeping the rich happy is the secret objective.

The two main prices in a market economy are the rate of interest (the price of money), and the exchange rate (the price of U.S. dollars, and other foreign currencies). The Bank of Canada can exert control over both of these prices. In fact, under floating exchange rates, it is the rate of interest that has the most direct impact on the short term financial flows that most determine whether the dollar goes up or down, and the Bank sets short term interest rates.

When the Canadian dollar goes up it is because foreigners are buying it. Increased short-term holdings of Canadian dollars occur when interest rates in Canada are attractive compared to those in other currencies. At the moment U.S. speculators are buying Canadian dollars, driving up its value, confident that U.S. interest rates will continue to fall, driving down the U.S. dollar, and putting profits into the pockets of speculators when the currency trade is reversed.

The obvious thing for the Bank of Canada to do is to lower Canadian interest rates below U.S. rates to deter speculators who last week bid up the Canadian dollar by 3 per cent, to $1.07 U.S.

Instead, the Bank of Canada hides behind its stated policy of allowing the exchange rate to be set by the market, which amounts to indifference to manufacturing job losses, and factory closures. The Canadian Labour Congress reports that Canada lost 288,300 well paid manufacturing jobs between November 2002 and July 2007. By sitting on its hands the Bank of Canada can only promote an acceleration of this trend.

The current Bank Governor David Dodge introduced a policy, mimicking American practice, whereby interest rate changes are announced only at fixed intervals, six times a year. The next scheduled announcement is not until December 4. Speculators have at least until then to profit from their one-way bet, unless of course the government decided to tell the Bank of Canada to respect its legislative mandate, and protect the stability of the currency.

While the Bank of Canada remains dumb on the dollar, its rise has not had produced the fall in prices on goods imported from the U.S. that market theory predicts should occur. Books, cars, sporting goods, consumer durables continue to sell for significantly more in Canada even though our dollar is higher, and they should sell for less. Be sure though that goods made in Canada have increased in price in the U.S.

As Karl Polanyi pointed out, money, like labour and land, is a fictional commodity. Trying to pretend the value of a national currency can be established by allowing its price to be set by buyers and sellers is futile, and can be dangerous to the economic health of a nation.

The aim of the Bank of Canada should be to stabilize the currency, and it should lower interest rates to achieve that objective. Inflation should be dealt with through direct intervention by government, requiring monopoly producers to apply for price increases for instance, and funding active consumer price watchdogs.

Low interest rates can be beneficial for home-buyers, students with loans to repay, and everyone interested in the future. By contrast high interest rates favour those looking for current gains.

The best economic policy is one that keeps interest rates low, and regulates lending so as to penalize speculators and their bankers. We do not need lending for mergers and takeovers; we do need it for urban transit, and universal child care.

Who will wake up the Bank of Canada, before still more jobs and incomes disappear?

Duncan Cameron

Duncan Cameron

Born in Victoria B.C. in 1944, Duncan now lives in Vancouver. Following graduation from the University of Alberta he joined the Department of Finance (Ottawa) in 1966 and was financial advisor to the...