Before the Bank of Canada was formed, each of the nation’s major banks and financial institutions introduced their own currency. The money supply in the economy had very little regulation from the government and there was a feeling that the national banking system was in a stable equilibrium. Need was felt for a mother lender and liquidity problems stayed to banks in the neighboring US. The onset of great depression shook this belief. This was the biggest reason behind a national solution to banking of some kind. The cash flow was quickly shrinking and there was an overcorrection from the hyperinflation prevalent in the 1920s. Many lobbying groups, fed up with localized banks clamored in favor of a unified banking system. These factors led to the creation of the Bank of Canada.
Bank of Canada implements the national monetary policy using its inflation control system—the goal of which is to stabilize inflation at about 2 percent. The reason behind this is that inflation prediction is more accurate and the effectiveness of the monetary policy can be easily gauged. Now the Bank reacts promptly to any changes in inflation.
The only way the Bank can act is by manipulating the interest rate against borrowed capital. In order to implement an expansive monetary policy the Bank would use the tool to encourage growth. Thus it will seek to lower the interest rate for borrowed capital, this will encourage lending practices and consumer spending is increased as the economy expands. On the other hand the Bank may levy higher interest rates against borrowed capital to curb lending and slow the pace of the economy, bringing down consumer spending. This is done in times of hyperinflation as part of a contracting monetary policy. The reduced spending leads to a gradual reduction in commodity’s market prices.
