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The Political Economics of the Bank of Canada*

Published online by Cambridge University Press:  07 November 2014

H. S. Gordon  and
L. M. Read
H. S. Gordon
Affiliation:
Carleton University
L. M. Read
Affiliation:
Carleton University
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Extract

Central banks are unique institutions. Most of them, including the Bank of Canada, are endowed with powers and charged with responsibilities that are as heavy and as general as those of the most important departments of government. Yet, by contrast, they usually enjoy a legal status which provides them with a degree of autonomy that greatly exceeds that of any department. In a political system based on parliamentary and responsible government, a central bank is, indeed, almost a constitutional anomaly.

A central bank, uniquely constituted or not, is a necessary organ of any monetary system based on an inconvertible paper currency. When money has a marginal cost of zero, it is necessary that the amount of the issue be limited by some means or another if its average market value is not also to become zero. Both logic and history seem to indicate that this limitation is best achieved by placing a monopoly of the note issue in the hands of a central bank or a similar agency. The creation of such a monopoly does not, of course, provide any indisputable answer to the important question of the degree of discretion which such an issuing authority might be permitted to enjoy. There are still some economists extant who advocate that the central bank be bound to a prescription so rigid that its role in the monetary system would be entirely mechanical. However, this view has a rather archaic quality. The dominant current opinion is quite different. Most economists and monetary analysts regard the central bank as, properly, an instrument of monetary management operating in an economy that requires, if it is to be stable and efficient, the continuous discretionary influence of such a management authority.

Type
Research Article
Information
Canadian Journal of Economics and Political Science/Revue canadienne de economiques et science politique , Volume 24 , Issue 4 , November 1958 , pp. 465 - 482
Copyright
Copyright © Canadian Political Science Association 1958

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Footnotes

*

This paper was presented at the annual meeting of the Canadian Political Science Association in Edmonton, June 5, 1958.

References

1 Speech of Hon. Donald M. Fleming, Minister of Finance, to the Hamilton Junior Chamber of Commerce, April 21, 1958.

2 The Minister of Finance has himself recognized, in a subsequent address, the continuing danger of inflation (speech to the Dominion Mortgage and Investments Association, Waterloo, May 15, 1958), but has not, as yet, acknowledged that a tight money policy may be desirable under certain circumstances.

3 Page 36. See also p. 31 for a similar statement.

4 Pages 9, 16, 20, 23, 25.

5 Fortunately for our purposes, Wednesday data, which are available weekly, and month-end data, coincided for the two dates in question. July 31 was a Wednesday; December 31 was a Tuesday, but since the Wednesday of that week was January 1 and not a business day, the statistics for these two days are identical.

6 An exception is McIvor, R. C. Canadian Monetary, Banking and Fiscal Development (Toronto, 1958), in which (p. 180)Google Scholar federal government deposits with both chartered banks and the Bank of Canada are included in the “Total Volume of Money.”

7 Page 16; see also p. 9.

8 Since this paper was read to the C.P.S.A., the Minister of Finance has chosen to perpetuate publicly the misleading propaganda of the Bank of Canada. Addressing the Investment Dealers Association of Canada on June 19, 1958, Mr. Fleming noted with assurance that “monetary policy … changed in the latter part of 1957. The money supply was expanded rapidly after mid-August. …” It is quite clear that it was to the interest of both the Conservative Government and the Bank of Canada to spin the same myth about the monetary policy and events of the latter part of 1957. Evidently the Machiavellianism we attributed to the late Mackenzie King is not the exclusive property of either King or his party.