Wednesday, October 5, 2011
HIST 113: Article Summary: Why did the Bank of Canada Emerge in 1935?
The article, Why did the Bank of Canada Emerge in 1935, written by Micheal Bordo and Angela Redish, discusses the creation of the Bank of Canada in 1935. In a time where other westernized countries had already existing central banking systems, this article questions why the Bank of Canada emerged in 1935, and the authors question why it even emerged at all. The article looks at three major reasons for the creation of the Bank of Canada. It emerged because it was just another process in the evolution of the banking system; it was a substitute for the Gold Standard, and that political pressures/influences that surrounded it. The authors attempt to disprove the first two reasons, contrary to what many economists have claimed as reasons for the creation of a central bank in Canada, and offer evidence to support the claim that the Bank of Canada emerged due to political pressures.
First, economists have assumed that the Bank of Canada came about in 1935 due the evolutionary process of the banking system. In many countries, a central bank is considered a “lender of last resort” to provide aid to citizens in times of liquidity crises and financial difficulty, enhancing a sense of control and balances of risks. The authors ague that this is not an acceptable argument, since the Bank of Canada rather came about as a favor to government. During the 1900’s, Canada had various banking institutions, with the Bank of Montreal being one in particular. It was able to fulfill some of the duties that a central bank would normally do. In addition, the concept of nationwide banking minimized the impact that liquidity and uncertainty had on consumer confidence and risks of crises. As a result, the emergence of the Bank of Canada was not influenced by its natural process of evolution, since institutions and services existed that fulfilled some of the responsibilities that a central...
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