History of Bank of Canada

Canada’s central bank, the Bank of Canada (BOC), was created in 1934 as a result of the Bank of Canada Act. On March 11, 1935, the bank opened for business. According to the Act, the Bank of Canada was founded “to promote the economic and financial welfare of Canada.” The BOC and its Governor are in charge of establishing monetary policy, creating money, and setting interest rates for Canadian banks.

The BOC has four key responsibilities: handling money, designing and producing Canadian bank notes, and monetary policy, which controls the amount of money circulating in the Canadian economy. The BOC is in charge of managing the foreign exchange reserves and public debt of the Canadian government.

The BOC’s main office is located at 234 Wellington Street in Ottawa. After multiple moves, the bank has been located here since 1980. Halifax, Toronto, Montreal, Calgary, Vancouver, and Calgary each have regional Bank of Canada offices.

Bank of Canada: History

A central bank has not always existed in Canada. Before any severe banking crises emerged and as the Canadian financial system grew in the 19th century, a central bank was not deemed essential. Instead, the Bank of Montreal, the biggest bank in the nation, served as the unofficial bank for the federal government. The 10-year review intervals were implemented by the federal government in the Bank Act (enacted in 1871) to oversee the banks, force change when necessary, and motivate the banks to control their risk-taking and act responsibly. The Act controlled both the functioning of the banks and the rechartering of each institution (which was changed to every five years in 1992). The paper money, or currency, that each bank created could be exchanged with the other banks.

The Bank of Canada Act was formally signed into law by William Lyon Mackenzie King, a former prime minister of Canada. The BOC was officially recognised as a federal crown company in 1938.

The BOC Governor is in charge of a lot of the bank’s operations. Graham F. Towers served for 20 years and he was the first Governor. The BOC Governor is chosen by the board of directors and serves seven-year terms. The bank’s 10th governor, Tiff Macklem, has served since 2020. The Governor-in-Council of Canada appoints the members of the board of directors, who serve for three-year terms each.

How the Bank of Canada was created

During the Great Depression, public pressure to establish a central bank rose, especially among struggling farmers. In response, the conservative administration of Prime Minister R. B. Bennett formed the MacMillan Commission, also known as the Royal Commission on Banking and Currency, in 1933. The Bank of Canada Act was approved in 1934, and the Bank of Canada opened its doors in 1935, as suggested in the commission’s final report.

The BoC became the officially recognised clearing house for all of Canada’s chartered banks which were obligated to gradually limit their use of their own currency and replace it with the Canadian dollar. This shift in authority over the printing of currency was made to satisfy popular demands to increase credit availability and the money supply, which mainly came from farmers.

The federal government boosted the money supply in the financial system through the BoC shortly after the BoC was established and during the Second World War to support the increased production of wartime supplies. It accomplished this by borrowing money from the banking sector through the BoC-managed issuance of federal government bonds.

BOC responsibilities

Interest rates

One of the BOC’s most significant responsibilities is setting interest rates. The monetary policy framework in Canada is intended to maintain low and stable inflation. The interest rate is determined eight times annually. The interest rate rose above 4% in 2007 before gradually declining to 1% in 2010. In 2015, the rate decreased twice to 0.5 per cent. This rate has increased three times since 2015, reaching 1.25% in April 2018 and 1.75% in January 2020. The rate is 0.25% as of December 8, 2021.

When banks lend money to one another, they charge each other an interest rate. The BOC often lowers interest rates to stimulate the economy.

Supply of money

The amount of credit and printed money in the economy can be altered by the BoC. The BoC purchases U.S. government bonds in the open market from private sellers and investors in order to expand the money supply. Since there is now more money available, more goods and services may be purchased, boosting economic activity. Price increases, or inflation can result from increasing economic activity. Deflation is the term for the decline in prices caused by this process in reverse. The BoC frequently releases figures that describe the amount of money available in the market.

The BoC is in charge of the creation, printing, and distribution of Canadian banknotes. The Royal Canadian Mint is in charge of coin manufacture, distribution, and design. It is the governor’s duty to issue currency that is hard to counterfeit and has a system in place for authenticating it. Canada hires an independent printing business to produce its currency. Every piece of Canadian paper money has the governor’s signature written on it.

Moral Conviction

The BoC, as manager of the banking sector, has the power to put pressure on chartered banks to modify their banking practices. For instance, in the middle of the 1950s, the BoC was worried about the considerable rise in consumer borrowing for the purpose of buying new durable items like washing machines, televisions, and vehicles and the impact this had on inflation. The BoC pressured banks to restrict lending to consumers and financial institutions to lower inflation. Recent concerns regarding the country’s overheating home prices and family debt levels were communicated to the banks by the BoC. This kind of pressure, known as moral suasion, is used by the BoC to convince the financial sector to take a particular path using both public and private methods. To support its programs, the BoC produces considerable economic studies.

More on the Bank of Canada operations

Throughout its activities, the BoC has established a number of distinct policy objectives, each depending on the changing domestic and international economic landscapes. The BoC maintained a fixed exchange rate with the US dollar during the 1950s and 1960s in an effort to boost commerce with that nation. Since it was creating such a large amount of short-term capital flow into the nation and pushing the Canadian dollar upward, the BoC felt it impossible to continue this strategy. As a result, it was abandoned in 1970. To lower the value of the Canadian dollar, the bank started issuing more money, but this, in turn, raised the demand for products, pushing up prices and inflation.

In an effort to better control inflation, the Bank of Canada said in 1975 that it would implement a new strategy that would target money supply growth. When the licensed banks implemented new financial technologies that enhanced the velocity of money—the rate at which money is spent in the economy—this task grew more challenging. In order to deal with inflation, the Bank of Canada declared in 1982 that it was giving up on setting growth goals for the money supply and switching to interest rate management instead. When John Crow took over as governor of the Bank of Canada in 1987, he strongly reaffirmed that the monetary authority’s top long-term policy objective would be price stability, which would be attained through interest rate control. The bank said in 1991 that it would start establishing inflation targets as one of its primary policy objectives if inflation continued to grow. At first, the target inflation rate would be set at 3%, but by the end of the decade, it would have fallen to 2%. Since then, the BoC has continued to adhere to this stance.

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