As discussed yesterday, banks actually charge you interest on money that hasn’t been created yet, and never will be. Banks are allowed to create new ‘money’ so to speak in the form of customer held debt. The amount of debt, or credit, that they can extend used to have everything to do with how much hard currency the banking sector had from customer deposits.

That was until 1991 when legislation was passed to quietly remove required cash reserves. It was, at one point, that the banking system could provide $900 in credit to its customers for every $100 in deposits that it held, or a ratio of 1:10. This climbed after WWII, but was never more than 1:15 for the first half of the 1900’s. The Bank of Canada Review shows that this ratio had skyrocketed to 1:358 by September 1988.

The implications of this? A country full of citizens mired in debt, resulting in massive amounts of personal bankruptcies, and a banking system with the ability to make almost as much money as they wanted.
Since the banks no longer needed a certain amount of deposits on hand to extend credit, their need of your deposits were not as important to them.

This resulted in a plunging of rates for those who had savings, a catastrophe for our elderly, many of whom scrimped and saved their whole lives, and were now living off of the interest earned. Interest paid on savings accounts has been flat for years, and since required cash reserves were eliminated, the spread between what rate is paid to you for lending the bank your money and what you pay them to borrow ‘no one’s’ has widened.

According to the Bank of Canada and the report on Canada’s banks released in December 2003 by the Department of Finance, prior to the early 1990s rates paid on savings accounts tended to move with the Bank of Canada rate. The report also states that “more recently, however, banks have not increased savings rates with increases in the Bank Rate.”

In simple terms, the banks just reduced what they had to pay out, and increased what we had to pay them. For those of you who put your faith in banks over the span of a lifetime, you are out in the cold. Interest income is a thing of the past for most of our elderly citizens who have their money stashed in savings accounts.