Eighty years ago, Canadians stood in queues at local post offices to buy Victory Bonds; it was civic participation made financial. Between 1941 and 1945, nine successive campaigns raised nearly $12 billion to fund the Second World War. Remarkably, it was civilians who provided half of that total, often saving their modest wages just to lend to the government. Today, that same shift of financial mobilization is returning to Ottawa, but the target audience has shifted. The federal government is no longer looking to family stamp books, but to institutional investors and global capital markets. This article argues that this time, the answer may be a new multilateral bank, one designed to keep the financing out of Canadian pockets.
The scale of commitment came into sharp focus in June 2025 at the North Atlantic Treaty Organization (NATO) Summit in The Hague. There, allies committed to a new spending benchmark of 5% of their national Gross Domestic Product (GDP) on national defence by 2035. This new benchmark comprises two categories: at least 3.5% of GDP for core defence requirements under NATO’s traditional definition and up to 1.5% for broader security-related spending such as infrastructure and cyber defence. For context, Canada only just reached the previous 2% target in March of 2026 after years of “falling short”. That means even the core component of the new commitment represents a 75% increase on what Canada has only just achieved. Meeting a 5% target requires a level of mobilization not seen since the Cold War. With Canada’s GDP of approximately $3.279 trillion CAD, moving from 2% to 5% could mean roughly $98 billion CAD in additional annual defence-related spending, a sum that exceeds any single federal budget commitment. Prime Minister Mark Carney has acknowledged that such a massive increase will require difficult “trade-offs” and “compromises” in other public spending. What forms those trade-offs, and who ultimately bears the cost, remains an open and consequential question.
History provides a stern warning about the costs of rapid rearmament, as war has always forced governments into risky financial decisions. During World War One, Canada faced an economic crisis driven by wartime production demands like scarce labour, rising interest rates and shortages of consumer goods. These pressures, not the bond program itself, drove inflation to 18% by 1917. In fact, bond programs work in the opposite direction: by encouraging citizens and institutions to lend money to the government rather than spend it, they absorb money from the economy and help ease inflationary pressure. In the Second World War, the Bank of Canada took a more direct role, operating the Foreign Exchange Control Board and the War Finance Committee, both of which raised funds through the Victory Bond program and managed financial and foreign exchange dimensions of the war effort. To keep costs manageable, the Bank of Canada fixed interest rates at artificially low levels, with some below 1%. While artificially low rates kept government borrowing costs down, they were one contributing factor among several to the inflationary pressures following the war. The lifting of wartime price controls and a surge in pent-up consumer demands played an equally significant role in driving postwar price increases. Canada has since built a monetary framework explicitly designed to prevent that outcome. The Bank of Canada today operates under a formal inflation-targeting mandate where it keeps consumer price inflation close to a 2% benchmark. That institutional protection did not exist in 1941, but it does exist today.
The risk of repeating that inflationary pattern is not merely theoretical. Canada is currently navigating its own inflationary pressures, compounded by trade uncertainty and rising defence commitments. This vulnerability makes the question of how to finance rearmament, not just how much to spend, so important. One proposed alternative to deficit-financed rearmament is the Defence, Security and Resilience Bank (DSRB). This new multilateral financial institution, owned by member nations, is designed to finance rearmament through capital markets rather than through national government deficits. By pooling the credit strength of multiple allies, the DSRB aims to achieve a AAA credit rating, which is the highest possible quality for investment-grade bonds. Investors treat AAA-rated institutions as exceptionally low-risk, accepting lower returns, which means member governments receive lower interest rates. The DSRB structure is intended to fund military expansion without triggering the inflationary spikes that typically accompany massive government deficit spending. Whether that structural guardrail is sufficient remains to be seen. Support for the DSRB within Canada is already established. As of early 2026, all six of Canada’s major banks, including the Royal Bank of Canada, have signed on as partners in the project. Canada hosted the DSRB founding negotiations in Montréal, bringing together representatives from eighteen countries to draft the institution’s charter. If those negotiations succeed, Canada could find itself with a credible mechanism to meet its NATO spending commitments without driving up national debt.
One capitalization proposal, advanced by the Atlantic Council, would fund the DSRB partly using the approximate €190 billion in frozen Russian central bank assets held at the Euroclear depository. In effect, the proposal would make Russia pay for the armament of the alliance it now poses the most significant threat to. The proposal sits within a broader debate among Western allies about whether to seize Russian sovereign assets at all. Proponents, including former U.S. Treasury Secretary Larry Summers, argue that the move could set a healthy precedent against “cross-border aggression”. Critics, including the European Central Bank, warn that confiscating sovereign assets could prompt countries like China to withdraw reserves from Western financial institutions entirely, possibly destabilizing the broader international monetary system.
Canada currently finds itself in a precarious economic position. The Bank of Canada is struggling to manage inflation and economic stress driven by the United States’ tariffs on steel, aluminum and autos. These trade measures have already slowed economic growth and put upward pressure on the cost of imports. Federal spending increases for defence are expected to add further demand pressure to this fragile environment, though the Bank of Canada has noted their full impact will take some time to be felt. If Ottawa chooses to fund its full 5% commitment through direct government spending, it risks repeating the inflationary conditions of 1941, which were so severe that governments were forced to institute price and wage controls as a preventative measure to stop wartime spending from undermining the broader economy. The DSRB offers an alternate path, rerouting the financial burden through private capital markets instead. Yet, it is worth noting that the DSRB is still being negotiated, its charter is still unfinished and its governance has not been tested. It appears to be a promising architecture, but not yet a proven one.
The historical evidence and modern dilemma leave policymakers facing an unresolved tension. In 1941, the answer to security financing was found in a stamp book and a post office queue. In 2026, the answer is being negotiated in boardrooms by international financiers and diplomats. Yet, while the scale, institutions and geopolitics of 2026 bear little resemblance to 1941, one question has endured: who bears the cost of national defence, and how? As the 5% deadline approaches, that question is still a constant for Canadians.
Photo credits: “A 1918 poster from the Archive of Ontario promoting the sale of victory bonds during the First World War” (1918), by The Archives of Ontario via https://www.cbc.ca/news/politics/ndp-victory-bond-program-1.7500789. Licensed under CC Archives of Ontario
Disclaimer: Any views or opinions expressed in articles are solely those of the authors and do not necessarily represent the views of the NATO Association of Canada.
