Bank of Canada
Encyclopedia
The Bank of Canada is Canada's central bank
and "lender of last resort". The Bank was created by an Act of Parliament
(the Bank of Canada Act
) on July 3, 1934 as a privately owned corporation. In 1938, the Bank became a Crown corporation belonging to the Government of Canada
. The Minister of Finance (on behalf of Her Majesty in right of Canada) holds the entire share capital issued by the Bank. "Ultimately, the Bank is owned by the people of Canada."
The role of the Bank is to "promote the economic and financial well-being of Canada."
The responsibilities of the Bank are: monetary policy; sole issuer of Canadian banknotes
and currency; the promotion of a safe, sound financial system within Canada; and funds management and central banking services "for the federal government, the Bank and other clients."
The Bank headquarters are located at the Bank of Canada Building
in the nation's capital Ottawa
.
, then the nation's largest bank, acted as the government's banker. Canada, with its extensive branch banking, had a very stable banking system. There was deemed to be little need for a lender of last resort
and the banking system was not hit by the same seasonal 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 bankers and the government, 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, as the economy corrected from the high inflation in the 1920s. 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. A 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 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.
Prime Minister
R.B. Bennett called a Royal Commission
in 1933 and it reported in favour of a central bank. Its members consisted of Britain's chief propagandist during World War I, 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.
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 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. 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. It is important to distinguish between the right to "issue money," which is the sole right of the Bank of Canada, and the ability to "create credit," which, through legislation and regulation enacted by Parliament, is largely done by commercial banks through the issuance of loans. While all of Canada's money is created by the government through deficit spending, if "money" is thought of as the combination of issued money and bank-created credit, then presently, the Bank of Canada "issues" less than 5% of Canada's money, with the remainder (95%) being "created" by commercial banks through the process of fractional-reserve banking
. (It is important to note, however, that this "money" is not permanent, as for each created dollar of credit there is a matching liability and is a zero sum once the debt is paid off, interest charged by the creator of the credit not withstanding. True money is only issued by the government.)
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 Industrial Development Bank
was formed to stimulate investment in Canadian businesses. The monetary policy of the bank was geared towards increasing the money supply to cause low interest rates, and have full employment
with little concern about rising prices. 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. Since the 1980s, keeping inflation low has been its main priority.
The bank's Ottawa headquarters building is the site of the Currency Museum
, which opened in December 1980.
In practice, however, it has a more narrow and specific internal definition of that mandate: to keep the rate of inflation
(as measured by the Consumer Price Index
) between 1% and 3%. Since the Bank's creation, the average annual inflation rate was 3.13%. The most potent tool the Bank of Canada has to achieve this goal is its ability to set the interest rate for borrowed money. At one time the Bank of Canada could dictate the amount of reserves that Canadian chartered banks must keep but that power was removed in the early 1990s.
Since 1998, the Bank's policy has been to intervene in the foreign exchange market
only under exceptional circumstances. In this sense, the Canadian dollar's value is determined by the market supply and demand for Canadian currency.
, who is appointed by the Bank's Board of Directors. The Governor is appointed for a seven-year term, and can 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. This has never actually happened in the history of the Bank to date. In practice, the Governor sets monetary policy
independently of the government.
Central bank
A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...
and "lender of last resort". The Bank was created by an Act of Parliament
Act of Parliament
An Act of Parliament is a statute enacted as primary legislation by a national or sub-national parliament. In the Republic of Ireland the term Act of the Oireachtas is used, and in the United States the term Act of Congress is used.In Commonwealth countries, the term is used both in a narrow...
(the Bank of Canada Act
Bank of Canada Act
The Bank of Canada Act is a piece of Canadian federal legislation, adopted in 1934, which created the Bank of Canada, the cornerstone of central banking system in Canada.The act is part of the Statutes of Canada....
) on July 3, 1934 as a privately owned corporation. In 1938, the Bank became a Crown corporation belonging to the Government of Canada
Government of Canada
The Government of Canada, formally Her Majesty's Government, is the system whereby the federation of Canada is administered by a common authority; in Canadian English, the term can mean either the collective set of institutions or specifically the Queen-in-Council...
. The Minister of Finance (on behalf of Her Majesty in right of Canada) holds the entire share capital issued by the Bank. "Ultimately, the Bank is owned by the people of Canada."
The role of the Bank is to "promote the economic and financial well-being of Canada."
The responsibilities of the Bank are: monetary policy; sole issuer of Canadian banknotes
Canadian banknotes
Canadian banknotes are the banknotes of Canada, denominated in Canadian dollars . In everyday usage, they are called bills. Currently, they are issued in five, ten, twenty, fifty, and hundred dollar denominations. All current notes are issued by the Bank of Canada, which released its first series...
and currency; the promotion of a safe, sound financial system within Canada; and funds management and central banking services "for the federal government, the Bank and other clients."
The Bank headquarters are located at the Bank of Canada Building
Bank of Canada Building
The Bank of Canada Building is the head office of the Bank of Canada, located in Ottawa, Ontario, Canada.Built from 1937-1938 by architect S.G. Davenport of Montreal and completed by the Toronto firm of Marani, Lawson and Morris, it replaced the Victoria Building to the east of this building on...
in the nation's capital Ottawa
Ottawa
Ottawa is the capital of Canada, the second largest city in the Province of Ontario, and the fourth largest city in the country. The city is located on the south bank of the Ottawa River in the eastern portion of Southern Ontario...
.
History
For many years, Canada did not have a central bank. Each of the nation's large banks issued its own currency and there was little government regulation of the nation's money supply. The federal finance department only issued small and very large denomination bank notes ($5 and under, and $500 and higher.) The Bank of MontrealBank of Montreal
The Bank of Montreal , , or BMO Financial Group, is the fourth largest bank in Canada by deposits. The Bank of Montreal was founded on June 23, 1817 by John Richardson and eight merchants in a rented house in Montreal, Quebec. On May 19, 1817 the Articles of Association were adopted, making it...
, then the nation's largest bank, acted as the government's banker. Canada, with its extensive branch banking, had a very stable banking system. There was deemed to be little need for a lender of last resort
Lender of last resort
A lender of last resort is an institution willing to extend credit when no one else will. The term refers especially to a reserve financial institution, most often the central bank of a country, intended to avoid bankruptcy of banks or other institutions deemed systemically important or 'too big to...
and the banking system was not hit by the same seasonal liquidity problems as banks in the US. The banking system was regulated by the Canadian Bankers Association
Canadian Bankers Association
The Canadian Bankers Association is a financial lobbying group that works on behalf of 52 domestic banks, foreign bank subsidiaries and foreign bank branches operating in Canada and their 267,000 employees. The CBA was organized in Montreal in 1891, making it one of Canada’s oldest interest...
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 bankers and the government, the status quo remained unaltered. This changed with the onset of Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
. Many in Canada blamed the policies of the Canadian banks for aggravating the Depression. The money supply was contracting and deflation
Deflation (economics)
In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% . This should not be confused with disinflation, a slow-down in the inflation rate...
was common, as the economy corrected from the high inflation in the 1920s. 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. A major proponent was the Royal Bank of Canada
Royal Bank of Canada
The Royal Bank of Canada or RBC Financial Group is the largest financial institution in Canada, as measured by deposits, revenues, and market capitalization. The bank serves seventeen million clients and has 80,100 employees worldwide. The company corporate headquarters are located in Toronto,...
, which wanted to see the government business taken away from the rival Bank of Montreal. 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.
Prime Minister
Prime Minister of Canada
The Prime Minister of Canada is the primary minister of the Crown, chairman of the Cabinet, and thus head of government for Canada, charged with advising the Canadian monarch or viceroy on the exercise of the executive powers vested in them by the constitution...
R.B. Bennett called a Royal Commission
Royal Commission
In Commonwealth realms and other monarchies a Royal Commission is a major ad-hoc formal public inquiry into a defined issue. They have been held in various countries such as the United Kingdom, Australia, Canada, New Zealand, and Saudi Arabia...
in 1933 and it reported in favour of a central bank. Its members consisted of Britain's chief propagandist during World War I, 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
John Edward Brownlee
John Edward Brownlee was the fifth Premier of Alberta, Canada, serving from 1925 until 1934. Born in Port Ryerse, Ontario, he studied history and political science at the University of Toronto's Victoria College before moving west to Calgary to become a lawyer...
, then Premier of Alberta
Alberta
Alberta is a province of Canada. It had an estimated population of 3.7 million in 2010 making it the most populous of Canada's three prairie provinces...
, petitioning in favor of a central bank because western farmers wanted cheap credit.
The bank began operations on March 11, 1935, after the passage of the Bank of Canada Act
Bank of Canada Act
The Bank of Canada Act is a piece of Canadian federal legislation, adopted in 1934, which created the Bank of Canada, the cornerstone of central banking system in Canada.The act is part of the Statutes of Canada....
. Initially the bank was founded as a privately owned corporation in order to ensure it was free from political influence. In 1938, under Prime Minister William Lyon Mackenzie King
William Lyon Mackenzie King
William Lyon Mackenzie King, PC, OM, CMG was the dominant Canadian political leader from the 1920s through the 1940s. He served as the tenth Prime Minister of Canada from December 29, 1921 to June 28, 1926; from September 25, 1926 to August 7, 1930; and from October 23, 1935 to November 15, 1948...
, 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. 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. It is important to distinguish between the right to "issue money," which is the sole right of the Bank of Canada, and the ability to "create credit," which, through legislation and regulation enacted by Parliament, is largely done by commercial banks through the issuance of loans. While all of Canada's money is created by the government through deficit spending, if "money" is thought of as the combination of issued money and bank-created credit, then presently, the Bank of Canada "issues" less than 5% of Canada's money, with the remainder (95%) being "created" by commercial banks through the process of fractional-reserve banking
Fractional-reserve banking
Fractional-reserve banking is a form of banking where banks maintain reserves that are only a fraction of the customer's deposits. Funds deposited into a bank are mostly lent out, and a bank keeps only a fraction of the quantity of deposits as reserves...
. (It is important to note, however, that this "money" is not permanent, as for each created dollar of credit there is a matching liability and is a zero sum once the debt is paid off, interest charged by the creator of the credit not withstanding. True money is only issued by the government.)
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 Industrial Development Bank
Business Development Bank of Canada
The Business Development Bank of Canada is a crown corporation financial institution wholly owned by the Government of Canada. BDC plays a leadership role in delivering financial and consulting services to Canadian small business, with a particular focus on technology and exporting.BDC's debt...
was formed to stimulate investment in Canadian businesses. The monetary policy of the bank was geared towards increasing the money supply to cause low interest rates, and have full employment
Full employment
In macroeconomics, full employment is a condition of the national economy, where all or nearly all persons willing and able to work at the prevailing wages and working conditions are able to do so....
with little concern about rising prices. When inflation began to rise in the early 1960s, the governor James Coyne
James Coyne
James Elliott Coyne, BCL, BA was the second Governor of the Bank of Canada, from 1955 to 1961, succeeding Graham Towers. During his time in office, he had a much-publicized debate with Prime Minister John Diefenbaker, a debate often referred to as the "Coyne Affair" .-Life and career:Coyne was...
ordered a reduction in the money supply. Prime Minister John Diefenbaker
John Diefenbaker
John George Diefenbaker, PC, CH, QC was the 13th Prime Minister of Canada, serving from June 21, 1957, to April 22, 1963...
disagreed with this move, and ordered a return to the full-employment policies. Since the 1980s, keeping inflation low has been its main priority.
The bank's Ottawa headquarters building is the site of the Currency Museum
Currency Museum
First opened on December 5, 1980, Canada's Currency Museum is located on the ground floor of the Bank of Canada in Ottawa. It is the public face of the National Currency Collection, which contains over 100,000 currency-related artifacts from around the world...
, which opened in December 1980.
Roles and responsibilities
The principal role of the Bank of Canada, as defined in the Bank of Canada Act, is "to promote the economic and financial welfare of Canada." The bank's current mission statement 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.
In practice, however, it has a more narrow and specific internal definition of that mandate: to keep the rate of inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
(as measured by the Consumer Price Index
Consumer price index
A consumer price index measures changes in the price level of consumer goods and services purchased by households. The CPI, in the United States is defined by the Bureau of Labor Statistics as "a measure of the average change over time in the prices paid by urban consumers for a market basket of...
) between 1% and 3%. Since the Bank's creation, the average annual inflation rate was 3.13%. The most potent tool the Bank of Canada has to achieve this goal is its ability to set the interest rate for borrowed money. At one time the Bank of Canada could dictate the amount of reserves that Canadian chartered banks must keep but that power was removed in the early 1990s.
Since 1998, the Bank's policy has been to intervene in the foreign exchange market
Foreign exchange market
The foreign exchange market is a global, worldwide decentralized financial market for trading currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends...
only under exceptional circumstances. In this sense, the Canadian dollar's value is determined by the market supply and demand for Canadian currency.
Type of government institution
The Bank is not a government department as it performs its activities at arm's-length from the government; it is claimed to be a Crown corporation owned by the Government. Shares are directly held by the Department of Finance, and the bank's earnings go into the federal treasury. The Governor and Senior Deputy Governor are appointed by the Bank's Board of Directors. The Deputy Minister of Finance sits on the Board of Directors but does not have a vote. The Bank submits its spending to the Board of Directors, while federal departments submit their spending estimates to the Treasury Board. Its employees are regulated by the Bank and not the federal public service agencies. Its books are audited by external auditors who are appointed by Cabinet on the recommendation of the Minister of Finance, not by the Auditor General of Canada.Governor
The head of the Bank of Canada is the GovernorGovernor of the Bank of Canada
The Governor of the Bank of Canada is chief executive officer and the chairman of the board of directors of the Bank of Canada; the incumbent governor is Mark Carney, who has served since 1 February 2008. The governor is appointed by the Minister of Finance, with the advice of the bank's board of...
, who is appointed by the Bank's Board of Directors. The Governor is appointed for a seven-year term, and can 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. This has never actually happened in the history of the Bank to date. In practice, the Governor sets monetary policy
Monetary policy
Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment...
independently of the government.
Bank of Canada Governors
- Mark CarneyMark CarneyMark J. Carney is the eighth and current governor of the Bank of Canada and the Chairman of the Financial Stability Board, an institution of the G20 based in Basel, Switzerland. These appointments were on October 4, 2007 , and on November 4, 2011...
(2008–Present) - David A. DodgeDavid A. DodgeDavid A. Dodge, OC, FRSC is a Canadian economist. He served a seven-year term as Governor of the Bank of Canada from February 1, 2001 to January 31, 2008. He was succeeded by Mark Carney. On September 12, 2008 he joined Bennett Jones LLP, a leading Canadian law firm, as a senior advisor in their...
(2001–2008) - Gordon ThiessenGordon ThiessenGordon G. Thiessen, OC was the sixth Governor of the Bank of Canada from 1994 to 2001, succeeding John Crow. He was succeeded by David A. Dodge....
(1994–2001) - John CrowJohn CrowJohn William Crow was the fifth Governor of the Bank of Canada from 1987 to 1994, succeeding Gerald Bouey. He was succeeded by Gordon Thiessen....
(1987–1994) - Gerald BoueyGerald BoueyGerald Keith Bouey, was the fourth Governor of the Bank of Canada from 1973 to 1987, succeeding Louis Rasminsky. He was succeeded by John Crow....
(1973–1987) - Louis RasminskyLouis RasminskyLouis Rasminsky, CC, CBE was the third Governor of the Bank of Canada from 1961 to 1973, succeeding James Coyne. He was succeeded by Gerald Bouey....
(1961–1973) - James CoyneJames CoyneJames Elliott Coyne, BCL, BA was the second Governor of the Bank of Canada, from 1955 to 1961, succeeding Graham Towers. During his time in office, he had a much-publicized debate with Prime Minister John Diefenbaker, a debate often referred to as the "Coyne Affair" .-Life and career:Coyne was...
(1955–1961) - Graham TowersGraham TowersGraham Ford Towers, CC was the first Governor of the Bank of Canada from 1934 to 1954.Born in Montreal, Quebec, educated at St. Andrew's College in Toronto, he graduated from McGill University in 1919. During World War II, he was Chairman of the Foreign Exchange Control Board and Chairman of the...
(1934–1954)
See also
- Canadian dollarCanadian dollarThe Canadian dollar is the currency of Canada. As of 2007, the Canadian dollar is the 7th most traded currency in the world. It is abbreviated with the dollar sign $, or C$ to distinguish it from other dollar-denominated currencies...
- List of banks in Canada
- Canada Deposit Insurance CorporationCanada Deposit Insurance Corporation-External links:*** Official CDIC site*...