ECO322H1 Lecture Notes - Lecture 11: Money Supply, Capital Market, Oligopoly
Lecture 11 – ECO322
11: The Canadian Monetary System and the Bank of Canada:
- Before 1866, only private banks issued notes
Banking:
1) Payment of gold on demand
2) Limitation of note issue to bank capital
3) Double Liability of shareholders
4) Government supervision: every month required asset/liability disclosure
- BMO was the government’s bank for many purposes
Bank Act of 1870:
- allows the government to issue legal tender so long as it is backed by 25% gold reserves
- codifies the banking regulations mentioned above; gave the world’s best banking system before
1935 with 90% private bank notes and no reserve requirements; strict government regulations
- 8k bank failures in USA, none in Canada
Differences between US and Canadian Banking System:
- multibranch banking meant that Canada had fewer oligopolistic banks that competed across the
country; the USA had small monopolistic banks in small towns which meant less asset
diversification
- Canadian banks had no reserve requirements; it was easier to issue notes when there was high
money demand
Finance Act (1914-1935):
- This act allowed the banks to borrow Dominion notes at pre-determined interest rates in
exchange for government securities
- this allowed for low interest rates for banks to borrow from the government, which meant lower
interest rates for citizens to buy war bonds to support the war effort
Explanations of the establishment of the Bank of Canada:
Lender of last resort:
- Many banking systems in Europe evolved as lenders of last resort, including the Federal
Reserve
- There was no need for a lender of last resort in Canada because:
1) Multibranch banking gave us a stable system
2) The size and strength of BMO’s competitors curtailed its power
3) Canadian banks had no rigid reserve requirements
4) Finance Act provided reserves in exchange for collateral
find more resources at oneclass.com
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Document Summary
11: the canadian monetary system and the bank of canada: Before 1866, only private banks issued notes. Banking: payment of gold on demand, limitation of note issue to bank capital, double liability of shareholders, government supervision: every month required asset/liability disclosure. Bmo was the government"s bank for many purposes. Allows the government to issue legal tender so long as it is backed by 25% gold reserves. Codifies the banking regulations mentioned above; gave the world"s best banking system before. 1935 with 90% private bank notes and no reserve requirements; strict government regulations. 8k bank failures in usa, none in canada. Multibranch banking meant that canada had fewer oligopolistic banks that competed across the country; the usa had small monopolistic banks in small towns which meant less asset diversification. Canadian banks had no reserve requirements; it was easier to issue notes when there was high money demand.
