Bank of Canada Operations and Policy
Book by University of Toronto Press, 1958

THE CONSTITUTIONAL POSITION OF THE BANK OF CANADA
The constitutional adjustments experienced by the Bank of Canada were not as great as those of some older central banks. 1 First of all, it began operations only in 1935 when the economic role of governments was already in the upswing. Nor did it ever enjoy that independence of action only possible under gold standard rules of thumb. And it was originally sponsored by government and very soon became a fully nationalized institution. However, the dilemma between the desirability of a central bank relatively free from partypolitical interference and the necessity of its ultimate responsibility to a party-political government, together with the problem of possible interference from other sectional interests, still remained, and could be resolved only through time. Indeed, the concept of an ideal position has changed remarkably from the time that the project for a central bank was first seriously considered. The Bank was originally thought of as being subject only to the ultimate supremacy of parliament, but the idea developed, in fairly distinct stages, that the Bank not only should be subject to the government of the day but should be, in fact, the instrument for implementing the policy of that government.

First Period--Attempt at Independence
The first period can be considered to extend from the middle of 1933 to late 1935, and was one which witnessed two events particularly relevant for this discussion. 2 The first was the completion of a Report by the Royal Commission on Banking and Currency in Canada on September 27, 1933. This Commission was appointed to consider, among other things, the advisability of establishing a central bank in Canada. 3 Not only did it recommend that a central bank be established forthwith but it also offered numerous opinions on central banking in general and suggestions concerning the form which the Canadian central bank might take. The Commission's ideas concerning the constitutional position of a central bank are important because of their influence on the later Bank of Canada Act. The Report reads: . . . The functions discharged by a central bank being of such vital importance to the economic and financial life of a country, it is perhaps natural to ask whether they could not be adequately performed by some direct organ of government. It has in practice been found that a central bank can give most effective service to the community if it is free from the fear of interference for political ends in operating the delicate mechanism of the national monetary and financial machine . . . it has been found that there are pre-eminent advantages to the state in entrusting the special and highly technical functions of a central bank to a body not subject to the vicissitudes of political life. (par. 219) This is not to suggest that the Commission ignored the obvious ultimate sovereignty of the state, for it pointed out that a central bank "is at the same time an instrument and a force. As an instrument it is the means by which the state--which must necessarily retain ultimate sovereignty in matters affecting the currency--can give effect to the national policy" (par. 207). It is clear that the Commission feared political interference primarily and that, while it recognized the ultimate sovereignty of the state, it did not recognize the right of the government of the day to interfere in the policy and operations of the central bank.

The Commission's ideas on the relationship between the central bank and the government become even clearer when its specific suggestions are examined. 1 It suggested that the capital should be offered for public subscription to all British subjects resident in Canada, with limitations on the size of individual holdings. This, of course, precluded government ownership; it also indicated that the Commission was not worried about other sectional interference, since the provision would allow even bankers to hold the stock. The only formal relationship between the central bank and the government, after the government had appointed the first governors and directors, was that the Governor-General in Council would approve all future appointments of Governor and Deputy Governor. All subsequent directors were to be elected by the shareholders even though the Commission recognized in the main body of its Report that in some countries certain directors were appointed by the government. Dividends of the bank were to be limited so that there would be no incentive to make large profits. Also this would make the bank's stock gilt-edged and so would avoid undue speculation. Excess profits were to go to the government.