The Structure and history of Bank of Canada

Introduction of Bank of Canada

The banking sector of Canada is held in high regards by its worldwide counterparts, and this has especially been due to its stability it exhibited following the recent financial downturn. According to Coletti, Hunt, Rose and Tetlow (1996), the Canadian banking system is one of the safest. For the past six years, it has been reported to be the most sound banking systems. Among the highly performing banks in this country is the Bank of Canada. Indeed, it has been reported as one of those banks that have continued shaping the Canadian Banking industry. Given its importance, the Bank of Canada is the focus of the current study in which its history and the structure of the bank will be explored. Give its historical context and structure, it follows that the Bank of Canada is indispensable to the economy of Canada.

Bank of Canada history

Until the great depression that was experienced in 1930s, the need for a central bank in Canada had not been perceived. However, the Royal Commission, which was headed by Lord Macmillan, produced a report in which it was indicated that a central bank had to be established. Shortly after publication of the report, the then Canadian government adopted the recommendations.  Indeed, these very recommendations the framework of the Bank of Canada Act. The royal assent to this act was received in 1934, and this led to the establishment of the Bank of Canada in 1935. The bank began operating as a privately owned entity on rented premises on Wellington Street. The then Canadian government, which had just taken over, introduced a reform to the Bank of Canada Act. The aim of this amendment was to nationalize the entity. Towards the end of 1938, the Bank of Canada became public, which meant that the bank now had new functions and this implied that its own premises had to be build to accommodate them (Bolder & Gusba, 2002). The functions of the bank are defined by the Bank of Canada Act, which has been amended a number of times since early 1930s. While this is the case, its preamble has remained the same. As such, as the preamble defined, the bank was to exist to regulate credit, as well as, currency, however to the best interest of the Canadian economic life.

An essential part of the bank’s history is its role in the management of the Canadian economy. As Bolder and Gusba (2002) reported, the bank’s goals and objectives have experienced fundamental changes since its foundation. These can be dated back since the war years. After Canada declared war on Germany, it introduced foreign exchange controls with the aim of protecting the outflow of foreign currency. Towards the end of 1939, directed by the Government Order in Council, the Foreign Exchange Control Board was created and was headed by the Bank of Canada’s first governor. The bank played a role in the Canadian-Germany war; by extending cash advances to the Canadian government and by overseeing the sale of victory bonds, the bank successfully assisted in financing the Canada-Germany war (Hogan, Johnson & Laflèche, 2001). Following the war, the focus of the board shifted to stimulating of employment from funding the war. In early 1940s, the Industrial Development Bank, as subsidiary of the Bank of Canada, was established. The aim of the IDB was to stimulate investment in the manufacturing sector, especially in small and medium sized industries. As it attempted to stimulate employment, the Bank of Canada, through its monetary policy, was designed in a way that it kept the rates of interest down (Bolder & Gusba, 2002).

In the 1950s, a more active role in setting monetary policy was adopted by the bank and this was as a result of inflationary pressures. After several failed attempts to stop the pressure imposed on the Canadian dollar, the board decided to float the Canadian currency. The rates of inflation continued increasing and the board adopted a monetary restraint policy. In mid 1950s, the board decided to cause the rates of interest and at the same time cause a reducty6ion on the supply of cash reserves to the Canadian chartered banks. However, the policy was phased out in the 1960s as it was being perceived as limiting the economic activity and raising the rate of unemployment.  In 1962, the bank decided to return to the Breton Woods System.

All through to the onset of the 1970s, the bank attempted to attain a tradeoff between maintaining a healthy economy and achieving stability of price (Bordo & Redish, 1987). In the 1970s, a more autonomous monetary policy was resorted due to inflatory pressures, which had been caused by international events (Coletti, Hunt, Rose & Tetlow, 1996). Once again in 1971, the board opted to float the country’s currency in order to tame the pressures on it, which had been caused by foreign capital influx. In mid 1970s, the bank shifted a monetary gradualism monetary with the aim of coping with stagflation. The rate of money growth was lowered, however at a level that was just high enough that met the economic needs of Canada. Still in the same year, 1975, Wage and Price Controls were introduced. Between 1980 and 1988, the bank operated in absence of a particular monetary policy. This was detrimental as it increased the effects that external factors had on the economy of the country. It was announced before the end of that decade that the new objective of the bank would be to formulate a new monetary policy.

In the early years of 1990, inflation-reduction targets were introduced by the bank as the chief means for achieving price stability. It was expected that setting specified targets would assist in economic stabilization. However, in 1195, these targets were revisited and the targets set as 1 and 3%, characterized by a mid-point of 2%. Even as at today, price stability remains as the basic monetary policy of the bank. In 1996, the bank shifted to the Overnight Target Rate as a chief factor in an effort towards determining the rates of interest. In 2001, the bank altered the definition it gave to the manner in which Consumer Price Index was calculated. It did this in a way that assisted in mitigating the effect of volatile price swings in particular goods including gasoline (Hogan, Johnson & Laflèche, 2001).

Bank of Canada structure

The Bank of Canada has both internal and external structures. With regard to the internal structure, it is headed by the governor, a governing council, and a board of directors. The governor serves is the chief executive officer, and is often appointed to serve for a period of sevens, and is eligible for reappointment. The governing council is constituted of the governor, the senior deputy governor, along with deputy governors.  The board of directors is constituted of the governor, the senior deputy governor, alongside twelve outside directors, who are usually appointed from across Canada. These outside directors are  appointed on a period of three years and are subject to reappointment. The governor serves as the chairman of this board. As PPP revealed, power balance usually flow from top to bottom. The governor resides with the ultimate power. The role of the directors is to give an overview of economic conditions as they relate to their respective regions. The council could consider these perspectives  when they are creating monetary policy. However, it is not obliged to do so. The board of directors plays the role of organizing the administration and financial operations in the bank. While this is the case, the ultimate power over these two areas is maintained by the council. The board does not participate in the formulation of the monetary policy (Bolder & Gusba, 2002).

The role of the bank is to not only regulate but also protect the national, currency. Such a role implies that it is influential in the external organizations, which could be deemed as outside the main structure of the bank. These include the Canadian Payment association, the Business Development Bank of Canada, and the Canadian Deposit Insurance Corporation. The Bank of Canada does not own the CPA. However, the body’s Board of Directors is chaired by an officer from it. The CDIC usually provides investors with insurance on its deposits. The governor of the Bank of Canada is one of the CDIC;s Board of Directors. The BDC is formerly a subsidiary of the Bank of Canada. However, it is now independent. Therefore, the Bank of Canada’s governor no longer serves as the president (Hogan, Johnson & Laflèche, 2001).

Conclusion

The purpose of the present paper was to explore the history and the structure of the Bank of Canada. Deriving from its historical context, it is clear that the institution has continued to play a very essential role. This is especially so given that it has strived to create monetary policies, which are to the best interest of the economic life of Canada. However, this has been enhanced by the prevalence of a very clear and comprehensive structure. Therefore, the Bank of Canada is the foundation of the Canadian economy.