Nearly 70 years after its Confederation, Canada finally recognized the need for a central bank and subsequently established The Bank of Canada. In the nation's early years, due to its large size and scattered population, Canada relied on several banks with multiple branches and the largest of these banks would serve the government in times of need. However, with the onset of the Great Depression and the economic woes brought with it, the need for a central bank to control the national monetary policy became apparent. In 1933, then Prime Minister R. B. Bennett set up a commission to evaluate the need for a central bank, and this commission was the groundwork for the Bank of Canada Act, which passed in 1934.
When the bank initially opened its Ottawa headquarters in 1935, it was a privately owned institution and its shares were sold to the public. However, in 1938 the government amended the Bank of Canada Act and nationalized the bank. Although it remains a Crown Corporation and is owned by the federal government, the bank does enjoy a certain degree of independence from the government. For instance, its leaders, the governor and senior deputy governor, are appointed by the bank's Board of Director's and not by the government to a term of seven years. Also, even though the government is represented on the Board of Directors by the Deputy Minister of Finance, he does not have a vote and, therefore, cannot directly influence their decisions. On the whole though, the government maintains a strong influence over the bank, as it sets the annual inflation target for the bank to meet. The Minister of Finance often consults with the bank's governor on the direction of monetary policy. The ultimate sign of government dominance over the bank is evidenced by the fact that if the Minister and Governor were to disagree on the direction of monetary policy, then the Minister has the power to issue a directive forcing his position onto the bank. This has never actually occurred and in practice the governor of the bank determines the nation's policy.
While the government sets the inflation target for the bank, it is the
Bank’s Governing Council who administers it. The Governing Council is comprised of the governor, the senior deputy governor, and four deputy governors. In addition to administering monetary policy, the Council is in charge of the financial system and operating the bank. Decisions of the Council are reached through a consensus and not by an individual vote. Governance and other specific administrative duties are controlled by the bank’s Board of Directors, which includes the governor, senior deputy governor, and 12 directors from outside the bank. The 12 directors are appointed by the Minister of Finance to a term of three years and originate from various locations throughout the country in order to provide a link between the bank and their respective regions.
The Bank of Canada’s main role is to support the economic and financial health of Canada. In order to achieve this objective, the bank conducts several operations, including monetary policy. The purpose of monetary policy is to meet the government’s inflation target (currently 2%) by adjusting the interest rates. The bank's narrow objective in its conduction of monetary policy is often criticized and its critics believe that minimizing unemployment should be included as well. Other tasks of the bank include issuing bank notes, running the financial system, managing funds, and conducting retail debt services.
Oil and the Canadian Dollar
The Canadian dollar ("CAD") is heavily influenced by the price of oil. Since Canada is one of the world's largest oil producers and is responsible for the majority of the United States' oil imports, a shift in the price of the commodity can affect the overall economic health of the country, which in turn will alter its exchange rate. The price of oil is one explanation for the recent surge in the CAD's value. Due to the dramatic rate effects caused by oil, the CAD is often referred to as a 'commodity currency.'
Current Governor: David Dodge
In February 2001, the Board of Directors of the Bank of Canada broke a longstanding tradition and for the first time appointed a bank outsider, David A. Dodge, to the post of governor. Mr. Dodge, born in 1943, was serving as the Deputy Minister of Health when he was recommended by his long-time friend and past boss Paul Martin to head the bank. Mr. Dodge, known for his balding plate and avid pipe-smoking, was born in Toronto and loves to walk, once spending several months with his wife walking around Southern France. He received his first degree from Queens University and after receiving a PhD in economics from Princeton University in 1972, he began an illustrious teaching career at several well-known universities.
After teaching for several years, Mr. Dodge turned his focus to public service in which he has excelled. He served in several senior government positions and often demonstrated a knack for tackling delicate issues. For example, in the 1970's he did research for the anti-inflationary board and in the 1980's was instrumental in setting up Canada's controversial Goods and Services Tax (GST). Also, in the early 1990's, as the Deputy Finance Minister, he was a critical member of the team in charge of slashing the Liberal government's $40 billion debt. Although he ended up balancing the books, he drew criticism for slashing popular benefits, such as health care. His boss, then Minister of Finance and future Prime Minister Paul Martin, was very impressed by Mr. Dodge's brilliance and outspoken personality and later on recommended him as governor.
Many people were concerned by Martin's recommendation of Mr. Dodge as head of the bank. They believed that Mr. Dodge was selected merely as a political favor and questioned his ability as a bank outsider to run its operations. They feared that his relationship with government leaders would reduce the bank's political independence. As time has shown, their fears were unfounded and Mr. Dodge has fostered a strong, booming Canadian economy. Buoyed by oil prices, the economy continues to grow at a greater then expected pace and in 2006 the CAD rose to new highs versus the U.S. dollar.
The CAD's exchange rate versus the USD has been a hot topic in Canada for many years. When the CAD reached new lows of $.62, people began to clamor for an abandonment of a floating currency. Instead they believed that the CAD should be fixed to the USD in order to control the relative value of their money. Some people even suggested the radical idea of abandoning the CAD altogether and adopting the USD as Canada's official currency. However, Mr. Dodge was vehemently opposed to changing the exchange rate policy and has recently been rewarded with a strong Canadian economy and dollar.
Proving the impossibility of pleasing everybody and confirming the difficulty of running an economy, many exporters are now upset with the currency's high value and want Mr. Dodge to lower interest rates in order to depreciate the CAD and help their businesses. So far he has rejected their pleas, claiming that monetary policy is meant to control inflation and to benefit the entire Canadian economy and not just one business sector. His deft handling of potential controversies and his steering of the Canadian economy to newfound glory silenced his original doubters and made him one of the most well respected economists in the world.
