THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 414
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PA R T V
Central Banking and the Conduct of Monetary Policy
close to 20%. The Great Depression involved not only the largest decline in the
level of economic activity in the history of Canada, but was also followed by an
extremely slow recovery. Being such a cataclysmic event, the Great Depression
contributed to significant changes in government policy, including fiscal policy,
monetary policy, banking policy, and international policy.
In particular, as the depth of the Great Depression was blamed on the operation of the monetary system, in 1933 the federal Conservative government established a royal commission to study the problems of the Great Depression. Based
on a recommendation of the royal commission, Parliament passed the Bank of
Canada Act in 1934 and the newly founded Bank of Canada started operations on
March 11, 1935. By this time, most other countries already had a central bank (see
the Global box, Establishment of Selected Central Banks). Although the primary
motivation for the formation of the Bank of Canada was economic (or monetary),
other motives within the government included the need for Canada to reflect its
growing political independence from Britain and the need to coordinate its international economic policy.
Initially the Bank of Canada was a private institution but was nationalized in 1938,
so it is now a national institution with headquarters in Ottawa. The Bank also has
regional offices in Toronto (for Ontario), Vancouver (for British Columbia and the
Yukon), Calgary (for the Prairies, Northwest Territories, and Nunavut), Montreal (for
Quebec), and Halifax (for Atlantic Canada), and in 2002 the Bank also established
a post in New York to enhance communication with the world s largest financial community. Unlike a private bank that operates in pursuit of profit, the Bank of Canada
is responsible for the country s monetary policy and for the regulation of Canada s
deposit-based financial institutions.
GLOBAL
Establishment of Selected Central Banks
Canada did not have a central bank for almost
the first 70 years after Confederation. By the
time the Bank of Canada began operations
in 1935, most other countries already had a
central bank. In fact, as you can see in the
table, Sweden and the United Kingdom created their central banks back in the seventeenth century. These early central banks,
however, were initially privately owned
and gradually evolved into modern publicly
owned central banks.
Country
Sweden
United Kingdom
France
Belgium
Germany
Japan
Italy
Switzerland
United States
Canada
Year central bank
was established
1656
1694
1800
1850
1875
1882
1893
1905
1913
1935
Source: Forrest H. Capie, Terence C. Mills, and Geoffrey E. Wood, Central Bank Dependence and Inflation
Performance: An Exploratory Data Analysis, in Varieties of Monetary Reform: Lessons and Experiences on the Road to
Monetary Union, ed. Pierre L. Siklos (Dordrecht, The Netherlands: Kluwer Academic Publishers, 1994), pp. 95 132.
Reprinted with permission of the publisher.
