Why Did the Bank of Canada Emerge in 1935?

Abstract

Three possible explanations for the emergence of the Canadian central bank in 1935 are examined: that it reflected the need of competitive banking systems for a lender of last resort, that it was necessary to anchor the unregulated Canadian monetary system after abandonment of the gold standard in 1929, and that it was a response to political rather than purely economic pressures. Evidence from a variety of sources (contemporary statements to a Royal Commission, correspondence of chartered bankers, newspaper reports, academic writings, and estimation of time series econometric models) rejects the first two hypotheses and supports the third.

Has the Fed been a failure?

“…Wagster (2009), in contrast, concludes based on a different approach they were insolvent only during 1932 and 1933. 29 The Bank of Canada was established in 1935, not in response to the prior crisis but, according to Bordo and Redish (1987), to appease an increasingly powerful inflationist lobby. Canadian banks' relative freedom from restrictions on their ability to issue banknotes also contributed to their capacity to accommodate exceptional demands for currency.…”

Central Banks : past, present, future

“…In August, 1928, Canada suspended convertibility of the Dominion notes into gold and put tight controls on the export of gold. Bordo and Redish (1987) assess three competing explanations for the establishment of the Bank of Canada: the need for a lender of last resort, the need for a monetary authority to compensate for the suspension of the gold standard, and a political rationale. They find that the first two forces were relatively muted: There was no perceived need for a lender of last resort -particularly in an environment where the existence of a central bank in the US had not prevented waves of bank failures and many bank runs; the suspension of the gold standard was viewed as temporary and some argued that, in fact, the need for a central bank was greater under the gold standard.…”

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“…The institution emerged largely for political rather than economic reasons: the government established the Bank of Canada to assuage popular outrage over Depression-era deflation-a persistent rise in the purchasing power of money that burdened borrowers and, so, ostensibly benefitted private banking interests; the government also established the Bank so that Canada could help shape (alongside other central bankers) international monetary reform and coordination (Bordo and Redish 1987).…”