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|Headquarters||Ottawa, Ontario, Canada|
|Central bank of||Canada|
CAD (ISO 4217)
|Headquarters||Ottawa, Ontario, Canada|
|Central bank of||Canada|
CAD (ISO 4217)
The Bank of Canada (French: Banque du Canada) is Canada's central bank. The bank was founded by 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 monarch in right of Canada. The Minister of Finance holds the entire share capital issued by the bank. "Ultimately, the Bank is owned by the Minister of Finance on behalf of Her Majesty in right 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 issuing authority of Canadian banknotes; 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."
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 and 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 its rival. 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 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 bank notes 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. An Act of Parliament in September 1944 established the subsidiary Business Development Bank of Canada (BDC) 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.
The mandate of the Bank of Canada is defined in the Bank of Canada Act preamble and it states,
WHEREAS it is desirable to establish a central bank in Canada to regulate credit and currency in the best interests of the economic life of the nation, to control and protect the external value of the national monetary unit and to mitigate by its influence fluctuations in the general level of production, trade, prices and employment, so far as may be possible within the scope of monetary action, and generally 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, stable and predictable inflation; a safe and secure currency; a stable and efficient financial system in Canada and internationally; and effective and efficient funds-management services for the Government of Canada, as well as on its own behalf and for other clients.
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. The Bank of Canada periodically asks Statistics Canada to adjust the way the Consumer Price Index is calculated, a crucial factor in the calculation of inflation.
Historically, the Bank of Canada functioned as the financier of Canadian public deficits in the Federal, Provincial, and Municipal budgets providing loans to fund government spending at interest rates as low as 1%. This practice allowed for public debts to be repaid more quickly, but at the cost of higher inflation. The growth of the federal government through the 1960s led to rapidly increasing federal deficits. As these were covered by the Bank of Canada, inflation rose steadily from 2% in 1961 to a high of 12.5% in 1974. That year, with inflation at a 20-year high, the Government of Canada abandoned this method of financing in favor of borrowing from private banks at market rates on the reasoning that paying interest on its debt was less harmful to Canadians than high inflation - a policy now followed by most advanced economies. An alternative approach that was not chosen in Canada was to address the high rate of inflation by decreasing but not eliminating the deficit financed by the Bank of Canada.
It is important to distinguish between the right to "issue money," which is the 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.
The Bank is not a government department as it performs its activities at arm's-length from the government; it is a Crown corporation owned by the Government. Shares are directly held by the Minister of Finance on behalf of Her Majesty in right of Canada which are registered by the Bank in the name of the Minister in the books of the Bank at Ottawa, 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.
The Bank has a zero book value policy on its balance sheet—matching total assets to total liabilities—and transfers any equity above this amount as a dividend to the Government of Canada. The Bank of Canada owns C$61 billion in Government of Canada debt and had a net income in 2011 of $1.25 billion. The Bank of Canada matches its liabilities of $61 billion in currency outstanding—to its assets owning $61 billion in Government of Canada debt. The bank notes in circulation have changed from $55.4 billion in two years to $61 billion. In 2008, the Bank of Canada had its highest annual report total asset, total liabilities number at $78 billion. The Bank of Canada lists cash on its 2012 third-quarter balance sheet at $4.4 million in currency and foreign deposits. The Bank of Canada's books are audited by external auditors who are appointed by Cabinet on the recommendation of the Minister of Finance, and not by the Auditor General of Canada.
It is important to note, the balance sheet policy employed by the Bank of Canada is that this base money is not permanent, as for each created dollar of credit there is a matching liability created on the Bank of Canada's balance sheet—and is a zero sum once the debt is paid off. True money is only issued as reserve currency for commercial bank lending by the government. Also called high-powered money, this money can then be multiplied by a factor outside of government control through bank lending.
The Bank of Canada 2008 balance sheet expanded to $78.3 billion from $53.7 billion from the year previously. After the financial crisis, these emergency asset purchases were unwound and removed from the central bank's balance sheet. This specific quantitative easing represented a fifty percent increase in the size of the central bank's balance sheet. This central bank transaction was referenced under "securities purchased for resale" from Canada's major banks. It was termed advances to members of the Canadian Payments Association and were liquidity loans made under the Bank’s standing liquidity facility as well as term advances made under the Bank’s commitment to provide term liquidity to the Canadian financial system.
The head of the Bank of Canada is the Governor, 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. Canadian banknotes are signed by the governor and deputy governor of the Bank of Canada.
The Bank of Canada has a team of chemists, physicists, and engineers it had assembled for the development of the Canadian Journey Series who determine potential counterfeiting threats and assess substrate materials and potential security features for use in banknote designs. It is part of the "Four Nations Group" of central banks, which includes the Reserve Bank of Australia, the Bank of England, and the Bank of Mexico, that collaborate on banknote security research, testing, and development.