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Bank of Canada

From Academic Kids

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BankofCanadabuilding.jpg
The Bank of Canada Building in Ottawa

The Bank of Canada is Canada's central bank. It was created by the Bank of Canada Act of 1934, to "promote the economic and financial well-being of Canada."

The bank's current statement of its goals is:

The Bank of Canada's responsibilities focus on the goals of low and stable inflation, a safe and secure currency, financial stability, and the efficient management of government funds and public debt.

It is the sole issuer of banknotes in Canada.

The bank's headquarters are located at the corner of Wellington and Bank streets in downtown Ottawa.

Contents

History

For many years Canada did not have a central bank. Each of the nation's large banks issued their own currency and there was little regulation of the nation's money supply. The federal finance department only issued small denomination bills. The Bank of Montreal, then the nation's largest bank, acted as the government's banker. Canada, with its elaborate branch banking system, had a very stable banking system. There was little need for a lender of last resort and the banking system was not hit by the same season liquidity problems as banks in the US. The banking system was regulated by the Canadian Bankers Association that worked in close concert with the government.

While there were some advocates for a central bank in the early part of the twentieth century, most notably the farmers, the status quo remained unaltered.

This changed with the onset of Great Depression. Many in Canada blamed the policies of the Canadian banks for aggravating the depression. The money supply was contracting and deflation was common. The farmers were joined by manufacturing interests and other groups in demanding a central bank. Another major proponent was the Royal Bank of Canada, which wanted to see the government business taken away from the rival Bank of Montreal. The government also felt constrained by its inability to deal directly with its foreign debts.

Prime Minister R.B. Bennett called a Royal Commission in 1931 and it reported in favour of a central bank. The bank began operations on March 11, 1935, after the passage of the Bank of Canada Act. Initially the Bank was founded as a privately owned corporation in order to ensure it was free from political influence. In 1938, under Mackenzie King, it became a Crown corporation fully owned by the government with the Governor appointed by the Prime Minister.

The responsibility for creating small bills was transferred from the finance department and the private banks were ordered to remove their currency from circulation by 1949.

The Bank played an important role in financing Canada's war effort during the Second World War.

After the war the Bank's role was expanded as it was mandated to encourage economic growth in Canada. The subsidiary Industrial Development Bank was formed to stimulate investment in Canadian businesses. The monetary policy of the bank was geared towards low interest rates and full employment with little concern about inflation. When inflation began to rise in the early 1960s the governor James Coyne ordered a reduction in the money supply. Prime Minister John Diefenbaker disagreed with this move and ordered a return to the full employment policies. This caused a brief crisis as Bank was supposed to be an arms length organization not under political control. Coyne resigned and was replaced by Louis Rasminsky.

The bank gradually moved to a more anti-inflation policy and since the 1980s keeping inflation low has been its main priority.

Governor

The head of the Bank of Canada is the Governor who is appointed by the bank's board of directors. The governor is appointed for a seven year term and cannot be dismissed by the government. In case of a profound disagreement between the government and the bank, the Minister of Finance can issue written instructions for the bank to change its policies. In practice, the governor sets monetary policy independently of the government.

Bank of Canada Governors

External link

Template:Canadian currency and coinagepl:Bank of Canada

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