Article Summary: Why Did the Bank of Canada Emerge in 1935?

Wednesday, October 5, 2011 HIST 113: Article Summary: Why did the Bank of Canada Emerge in 1935? The article, Why did the Bank of Canada Emerge in 1935, written by Micheal Bordo and Angela Redish, discusses the creation of the Bank of Canada in 1935. In a time where other westernized countries had already existing central banking systems, this article questions why the Bank of Canada emerged in 1935, and the authors question why it even emerged at all. The article looks at three major reasons for the creation of the Bank of Canada.It emerged because it was just another process in the evolution of the banking system; it was a substitute for the Gold Standard, and that political pressures/influences that surrounded it. The authors attempt to disprove the first two reasons, contrary to what many economists have claimed as reasons for the creation of a central bank in Canada, and offer evidence to support the claim that the Bank of Canada emerged due to political pressures. ?First, econo mists have assumed that the Bank of Canada came about in 1935 due the evolutionary process of the banking system.In many countries, a central bank is considered a â€Å"lender of last resort† to provide aid to citizens in times of liquidity crises and financial difficulty, enhancing a sense of control and balances of risks. The authors ague that this is not an acceptable argument, since the Bank of Canada rather came about as a favor to government. During the 1900’s, Canada had various banking institutions, with the Bank of Montreal being one in particular. It was able to fulfill some of the duties that a central bank would normally do.In addition, the concept of nationwide banking minimized the impact that liquidity and uncertainty had on consumer confidence and risks of crises. As a result, the emergence of the Bank of Canada was not influenced by its natural process of evolution, since institutions and services existed that fulfilled some of the responsibilities tha t a central bank would have. ? The second reason attributed to the emergence of the Bank of Canada was that it served as an important service to maintain convertibility to the gold standard.With the removal of the gold standard in Canada, the Bank of Canada would serve as an anchor to the money supply, the price level, and the exchange rate in its absence. With this in mind, a central bank with the ability to control money supply would yield differences in the way prices behaved without a central bank; therefore, data would reveal fluctuations in regression residuals for the time period near 1935, when the Bank of Canada emerged. However, empirical time-series data, looking back from 1920 to 1940, shows that macroeconomic variables were affected very little.In fact, any time eras where there are fluctuations in the data can be attributed to other events and circumstances. The third reason attributing for the emergence of the Bank of Canada was due to political forces that acted upon it. Due to the effect of the Great Depression, trust in the traditional market was decreased on domestic level. Citizens had less faith in traditional market system mechanisms and this left a requirement for the government to provide institutions and services.Pressures from the influence of the global community pushed for the emergence of a central bank because international monetary cooperation was said to be dependent on the existence of Central Banks. In addition, due to Canada’s recent independence from Britain in 1931, the emergence of the bank was a part of a general program to create more sovereign institutions to help Canada create its own identity. A banking system, where decisions regarding money supply were made independently by Canada, was something that emphasized sovereignty.