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1934 – Bank of Canada: Creating a Central Bank

Hard to imagine now, but not too long ago paper money in Canada was issued by commercial banks. That was before 1934, when the Bank of Canada Act established a central bank with the sole right to issue paper money. It was just one of the many roles the Bank of Canada would take on.

Creating a central bank was one of the first major things Canada did on its own after becoming more independent of Great Britain in 1931 (with the Statute of Westminster). But the Bank of Canada was not established just to assert our independence. Instead, Prime Minister R.B. Bennett was frustrated that there was no way for Canada to settle international accounts with England. A central bank could do that.

The time was ripe to set up a central bank. During the Great Depression, Canadians had criticized and mistrusted the commercial banking system. They had doubts about the efficiency of Canada’s financial structure. (See 1929 - 1939—The Great Depression.) Pressure also came from outside our borders to create a central bank to help settle international accounts. There was no independent agency issuing notes or managing government banking.

Prime Minister Bennett accepted the recommendation of a royal commission that a central bank be established. He wanted to boost Canada’s prestige on the world stage and to respond to the international pressure to create a central bank.

Not everyone embraced the idea. Commercial banks were generally opposed, since they would lose some of their responsibilities and control over the financial system. But the idea carried enough momentum, and so the Bank of Canada came into being.

The Bank began in 1935 as a privately owned corporation but was nationalized in 1938. According to the Act, the Bank’s purpose is “to regulate credit and currency in the best interests of the economic life of the nation.”

It was given many roles. One was to maintain financial stability and regulate the money supply. It would influence interest rates and the value of the Canadian dollar. Another role was to stimulate the economy by exercising its monetary powers. It also created a means of settling international accounts and achieving monetary co-operation. In Canada, it would be a lender of last resort to other banks.

Today, the Bank of Canada plays a major role in Canada’s economy. For example, it is currently committed to keeping inflation within a 1% to 3% target range, and so it influences interest rates accordingly. The Bank can also change the money supply by buying and trading government bonds. (See 1941—Wage and Price Controls: Managing a Wartime Economy.)

Though it does work closely with the Ministry of Finance, the Bank of Canada is a largely autonomous Crown corporation.

In fulfilling its mandate, the Bank of Canada’s goal is to contribute to solid economic performance and improved living standards for Canadians. The Bank’s responsibilities focus on the goals of low and stable inflation, a safe and secure currency, financial stability, and efficient management of government funds and the public debt. It also conducts economic research, works to promote the detection and prevention of counterfeit notes, and is a repository for gold reserves.

Links

Bank of Canada Homepage
Source: Bank of Canada
http://www.bank-banque-canada.ca/en/

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