The Bank of Canada, wholly owned by the Government of Canada, is Canada's central bank or monetary manager. Established in 1935 after the passing of the Bank of Canada Act, it issues paper currency, acts as fiscal agent and banker for the federal government, sets the bank rate and implements and helps to formulate monetary policy.

As banker and fiscal agent, the Bank manages the issue and redemption of federal government securities and the payment of interest they accrue. It also operates in the foreign exchange market as the government's agent to exert a stabilizing influence on the Canadian dollar exchange rate. It does not engage in commercial banking activity.

In the Bank of Canada Annual Report 1997, the Governor stated that the Bank makes a commitment "to contribute to the economic well-being of Canadians by conducting monetary policy in a way that fosters confidence in the value of money, promoting the safety and soundness of Canada's financial system, supplying bank notes that are readily accepted without concerns about counterfeiting, to provide efficient and effective central banking and debt management services" and "to communicate our objectives openly and effectively and to be accountable for our actions."

Before 1995, the Bank required each chartered bank to maintain minimum cash reserves (computed as a percentage of its deposits) in the form of notes or deposits with the Bank of Canada. Each bank was also required to maintain secondary reserves in the form of excess cash reserves, treasury bills and day-to-day loans to investment dealers. The Bank never changed these reserve ratios to affect monetary policy and the requirement was phased out in 1994.

The 3 basic methods of implementing monetary policy are now cash management, open market operations and moral suasion.

Cash Management

The major method for influencing interest rates is the Bank's management of cash deposits in the banking system. Every day, the banks try to balance all cash flowing in or out of their accounts as closely as possible to avoid a positive balance in their clearing account at the Bank of Canada that earns no interest or a negative balance that incurs interest charges. The Bank of Canada can affect these balances by moving cash between federal government accounts at the Bank and demand accounts at the commercial banks. An increased positive balance tends to lower interest rates while an increased negative balance tends to raise rates.

Open Market Operations

If cash management does not achieve the desired effect, the Bank buys or sells 3-month treasury bills in the open market. A purchase, for example, is paid for by crediting the account of the seller at the Bank. This process is in essence printing money. The money supply is increased and the commercial banks have additional funds to expand their credit lines.

Moral Suasion

On rare occasions, the Bank has advised the chartered banks to alter a particular lending activity, to increase or decrease their lending activity or to work towards the desired level of interest rates.

The Bank of Canada has had eight governors: Graham F. Towers, James E. Coyne, Louis Rasminsky, Gerald K. Bouey, John W. Crow, Gordon G. Thiessen, David A. Dodge and Mark Carney. Although the Bank enjoys substantial independence, the Bank of Canada Act gives the finance minister the right to issue a formal, written policy directive to the Bank of Canada if, after consultation, disagreement on policy persists. It was the resignation of Coyne in 1961, over differences with the government, that influenced the introduction of the legal provision clarifying that ultimate responsibility for policy rests with the government.

The issue of the independence of the Bank resurfaced with the rapid decline in the value of the dollar in 1998 relative to all other major currencies in the world. At that time, the Bank of Canada, in its Monetary Policy Report of May 1998, stated that "the government and the Bank of Canada jointly reaffirmed that Canada's monetary policy can best contribute to good economic performance by remaining focused on inflation control." As long as inflation stayed low, the Bank was reluctant to raise short-term interest rates to support the dollar, yet it did so 3 times to little lasting effect.

The rapid decline of the dollar clearly indicated that a strong policy approach was needed, rather than futile efforts to slow the decline by operating in the currency markets. Effective monetary policy requires appropriate fiscal policies including the lowering of Canada's punitive tax rates, which are considerably higher than the average for developed economies. Lower taxes are essential to counter the slowing economy and the near certainty of sharply rising import prices, which will affect all Canadians.

The prime minister attempted to dodge responsibility for the situation by claiming that a declining dollar was either positive or inconsequential. He also stated that the governor of the Bank was responsible for daily decisions about monetary policy. Unstated was the fact that it is the federal government that determines overall monetary policy and the value of the dollar and has ultimate responsibility for the actions of the Bank of Canada.