Introduction
Prior to 1935, Canada was without a central bank. Private banks decided
what cash they would obtain under the Finance Act of 1923 against their
collateral security. The unsatisfactory nature of this arrangement was
revealed during the Great Depression.
In 1934 Parliament passed the Bank of Canada Act, and the bank itself was
founded a year later. Since 1938 the bank has been owned entirely by
the federal government.
As the selected sections below indicate, the central bank may create the
money to finance federal projects on a near interest-free basis.
It may, if it wishes, lend money to the provinces and municipalities as
well.
The coupons paid on government debt held by the Bank of Canada find their
way back to the federal treasury with the rest of the bank's earnings. In
recent years this important function of the bank has been left, in
large part, to rust.
| The sections quoted below are readily available from the Bank of Canada Act, on the Dept. of Justice website. Commentary is added in red. Emphasis added by underlines |
Preamble
The preamble to THE BANK OF CANADA ACT (1935)
establishes its goal:
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...
GOVERNMENT DIRECTIVE
Article 14.
(1) The Minister and the Governor shall consult regularly on monetary
policy and on its relation to general economic policy. Minister's
directive
(2) If, notwithstanding the consultations provided for in subsection (1),
there should emerge a difference of opinion between the Minister and the
Bank concerning the monetary policy to be followed, the Minister may,
after consultation with the Governor and with the approval of the Governor
in Council, give to the Governor a written directive concerning monetary
policy, in specific terms and applicable for a specified period, and the
Bank shall comply with that directive.
Article 14 establishes the ultimate
responsibility of the Government for the general policy of the Bank.
In the event of a disagreement between the Finance Minister and the
Governor of the Bank, the minister need only give the governor 30-day
notice in writing of the course to be followed. If he does not comply,
he has his walking papers.
BUSINESS AND POWERS OF THE BANK
Article 18 sets out the Bank's powers of
lending to our governments.
Article 18 (c), dealing with funded debt- bonds or
treasury bills- authorizes the Bank to "buy and sell
securities issued or guaranteed by Canada or any province."
No restriction is set on such holdings; limits on
these powers must then be sought in the real economy- whether or not
further money supply created by such loans would add to the demand in an
economy already employing all available resources. Were the Bank to go on
increasing its lending to governments under such circumstances, it would
indeed be inflationary. But such a state of affairs has not existed for
decades.
(i) make loans or advances for periods not exceeding six months to
the Government of Canada or the government of any province on the pledge
or hypothecation of readily marketable securities issued or guaranteed by
Canada or any province;
(j) make loans to the Government of Canada or the government of
any province, but such loans outstanding at any one time shall not, in the
case of the Government of Canada, exceed one-third of the estimated
revenue of the Government of Canada for its fiscal year, and shall not, in
the case of a provincial government, exceed one-fourth of that
government's estimated revenue for its fiscal year, and such loans shall
be repaid before the end of the first quarter after the end of the fiscal
year of the government that has contracted the loan...
Article 18 (j) deals with unfunded loans to
governments- ie, advances against their income not formalized in security
issues.
The passage "but such loans outstanding at
any one time shall not..." clearly implies that such unfunded
debt may be rolled over when due.
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