Bank of Canada - History

History

On March 11, 1935, the central bank began operations, following the granting of Royal Assent to 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. Earlier in 1933, Prime Minister R.B. Bennett called a Royal Commission and it reported in favour of a central bank. Its members consisted of Britain's chief propagandist during the early part of World War II, Lord Macmillan, who supported central banking, as well as various British and Canadian bankers. Gerald Grattan McGeer was one of the most forceful voices in Canada advocating government intervention in the monetary system and nationalizing the credit system. His vision of monetary reform predated the establishment of the Bank of Canada. Also involved was John Edward Brownlee, then Premier of Alberta, petitioning in favor of a central bank because western farmers wanted cheap credit. In 1938, under Prime Minister William Lyon Mackenzie King, it became "a special type of " Crown corporation, fully owned by the government; thus, in effect, by the Canadian taxpayers; with the governor appointed by Cabinet.

Prior to the creation of the Bank of Canada, the Canadian Treasury was responsible for printing Canada's bank notes. The Bank of Montreal, then the nation's largest bank, acted as the government's banker. A major proponent was the Royal Bank of Canada, which wanted to see the government business taken away from the rival Bank of Montreal. When the central bank was founded, the government claimed it was constrained by its foreign debts and it would be less costly to borrow money if it could be repaid in debased currency. The government also claimed it was constrained by its inability to deal directly with its foreign debts. The farmers were joined by manufacturing interests and other groups in favor of a depreciating currency, all demanding a central bank. The original name the Bank of Canada (commercial) was a private a bank and was renamed the Canadian Bank of Commerce. In 1949, the private banks were ordered to remove their currency from circulation and the central bank became the sole issuer of legal tender in Canada.

The bank played an important role in financing Canada's war effort during World War II by printing money and buying the government's debt. After the war, the bank's role was expanded as it was mandated to encourage economic growth in Canada. The subsidiary Business Development Bank of Canada (BDC) was formed to stimulate investment in Canadian businesses. Prime Minister John Diefenbaker central bank monetary policy was directed towards increasing the money supply to cause low interest rates, and have full employment. When inflation began to rise in the early 1960s, the governor James Coyne ordered a reduction in the money supply.

Since the 1980s, keeping inflation low has been the central bank's main priority. In the early 1990s the fractional banking rules of Canada were changed so the Bank of Canada could no longer dictate the amount of fiat currency reserves that Canadian chartered banks must own.