Bank of Canada Act

Bank of Canada Act

Bank of Canada Act, 3 July 1934, created the Bank of Canada 1935 in response to the 1933 Royal Commission on Banking and Currency. The Bank of Canada was at first privately owned, but was nationalized by 1938. The Act and associated revisions to the Bank Act also changed the legal framework for Canada's chartered banks, which were now obliged to maintain a specified ratio (not less than 5%, usually 10%) between liabilities to the public (current and savings accounts) and their claims on the national monetary authorities (Bank of Canada paper currency, plus deposits with the Bank of Canada).

The banks lost the right to borrow on demand from the government as had been permitted under the 1914 Finance Act. Instead they could borrow from the Bank of Canada, which would also hold the main accounts of the Dominion and lend to it, while in general managing the national monetary system. It would do this by issuing paper currency, by changing the rate of interest at which it would lend to the chartered banks, by buying and selling bonds in the securities markets so as to affect the supply of credit and the demand for it, or by buying and selling gold and foreign monies so as to affect the demand-supply balance in the foreign-exchange market, where Canadian dollars are exchanged for foreign monies. Through such operations the Bank of Canada can and does affect the cost and availability of credit, but it has never fixed interest rates for the public at large or rationed the supply of credit directly.

During WWII it helped the Dominion in financing the war effort. Under later legislation its powers were extended and modified, but not changed in essentials. It also acquired a subsidiary, the Industrial Development Bank, est 1945. The Bank of Canada may be called Canada's central bank, because of its special functions in relation to the chartered banks, the international environment and the federal government.