During the first fifty years of Confederation, Canada showed little interest in the establishment of a central bank. It was 1913 before Parliament formally discussed the subject, prompted at that time by W. F. MacLean, MP for South York. His plan, which called for a privately owned national bank subject to government control, was dismissed. Prime Minister R. L. Borden saw "no present necessity" for such a bank.
Up to the time of the Depression, there was little apparent need for central banking in a scattered and mainly rural economy. The banking system that developed in Canada was quite different from that in the neighbouring United States. South of the border, a different philosophy encouraged the development of independent local banks, and a larger population, clustered in established communities, made it workable.
In Canada, the continuing British influence was reflected in the preference for a limited number of banks with multiple branches. In the years leading up to Confederation, small rural settlements spread over an extended area made branch banking a practical approach. In a relatively undeveloped economy, branch banks could be established with less capital and fewer skilled officers than would have been required for independent banks at each location.
The branch bank network was sufficient to the nation's needs for almost a century. The chartered banks provided the bulk of notes in circulation and could meet seasonal or unexpected demands. The larger banks were able to deal with government business without strain, and the branch network gradually developed a system for clearing cheques between banks.
By the early 1930s, however, the political climate had changed. A gathering depression and mounting criticism of the country's existing financial structure coincided with a specific concern of Prime Minister R. B. Bennett over the lack of a direct means in Canada for settling international accounts. In 1933, he set up a royal commission to study "the organisation and working of our entire banking and monetary system [and] to consider the arguments for or against a central banking institution..."
The arguments "for" won. The royal commission, headed by Lord Macmillan, recommended in its report that a central bank be established. A week after the report was made public, the Prime Minister announced that his government would adopt the recommendations.
In fact, an appendix to the report, titled "Suggestions as to some of the Main Features of the Constitution of a Central Bank for Canada," became the framework for the Bank of Canada Act, which received royal assent on 3 July 1934. In March 1935, the Bank of Canada opened its doors as a privately owned institution, with shares sold to the public.
The first Governor of the Bank of Canada was Graham F. Towers, a thirty-seven year old Canadian who had extensive experience with the Royal Bank of Canada both in Canada and abroad. He had appeared before the Macmillan Commission on behalf of the chartered banks. He would guide the Bank for twenty years.
Soon after the Bank opened, a new government introduced an amendment to the Bank of Canada Act to nationalize the institution. In 1938, the Bank became publicly owned and remains that way today.
The organization of the Bank integrated new functions with functions that already existed elsewhere. Bank note operations were transferred from the Department of Finance when the Bank opened, and the offices of the Receiver General across the country became the agencies of the Bank.
A new Research Division was established to provide information and advice on financial developments and on general business conditions at home and abroad. The Foreign Exchange Division and the Securities Division became operative almost immediately, though the transfer of the Public Debt Division from the Department of Finance was delayed until suitable quarters were available. This did not occur until 1938, following completion of the present Bank of Canada building at 234 Wellington Street. The same building, to which new structures have been added, houses the Bank of Canada today.
The Bank of Canada Act, which defines the Bank's functions, has been amended many times since 1934. But the preamble to the Act has not changed. The Bank still exists "to regulate credit and currency in the best interests of the economic life of the nation."