THE BANK OF CANADA

THE BANK OF CANADA: A REVIEW OF THE HISTORY AND DEVELOPMENT OF CANADA'S CENTRAL BANK

This research reviews the history and development of the Bank of Canada. The review addresses motivations for creating the central bank, the legislated roles of the Bank of Canada, the significance of the central bank's creation, and the functioning of the Bank of Canada. The review concludes with an assessment of the success of the Bank of Canada in fulfilling its public policy purpose.

Motivations for Creating the Bank of Canada

The Bank of Canada Act of 1934 provided for the creation of the Bank of Canada. The central motivation for the creation of the Bank of Canada, which occurred in 1935, was to mobilize a Canadian economy mired in depression. Although Canada was not the only country mired in economic depression, it was an industrial country without a central bank to support, promote, and facilitate domestic economic development (Crowell, 1995).

The Preamble of the Bank of Canada Act of 1934 expresses motivations for creation of the Bank of Canada, as well as specifying societal roles for the institution. The Preamble states in part:

� it is desirable to establish a central bank in Canada to regulate credit and currency in the best interests of the economic life of the nation, to control and protect the external value of the national monetary unit and to mitigate by its influence fluctuations in the general level of production, trade, prices and employment, so fa

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and longer than was necessary. At that time, the Bank of Canada did not exist. Dowd (1989), therefore, holds that central banking should be abolished, not just discretionary central banking. Dowd (1989) argues that banks should be allowed to fail, and that both the banking system and the economy will be stronger over the long-term. In contrast, Goodhart (1985) argues that central banking is necessary to preclude the development of adverse economic consequences stemming from the flow of funds from weak banks to stronger banks. Goodhart (1985) argues further that a central bank will "aim to prevent, or if that fails, to recycle such flows, subject to such safeguards as it can achieve to limit moral hazard and to penalize inadequate or improper managerial behavior" (pp. 101-102). Goodhart (1985) contends that such action on the part of a central bank is required because of the "important distinction between banks and other financial intermediaries � in the characteristics of their asset portfolio, which, in turn, largely determines what kind of liability they can offer � " (p. 102). Banks, according to Goodhart (1985), offer fixed-value liability, while collective-investment funds offer market-value liability. Goodhart (19

Category: Economics - T