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Central Banking and Government Policy: Canada, 1935

W.E.A. International conference, July, 1992

Overview
In early 1990s discussions about the functions of central banks, two principal positions came to the fore: the Charles Goodhart and the Vera Smith positions.

With some risk of over simplification, the Vera Smith position was that central banks were founded to be instruments by which, through inflation, governments could extract revenue from private sector activities. The Charles goodhart position was that central banks were founded to be instruments by which, through control of the money supply, monopolistic private banks could be prevented from inflating their profits by inflating their currencies.

In the late 1980s, Michael Bordo and Angela Redish selected the Bank of Canada as a case in which the Vera Smith position was born out. To show this they presented time series of monetary aggregates in Canada before and after the founding of the Bank in 1935.

Whatever the merits of the Bordo-Reddish quantitative approach, those who were most influential in the formation of the Bank of Canada were adamant in their assertions that the function of the Bank was to stabilize the money supply and to prevent inflation. What they claimed to be doing, therefore, was in keeping with the Goodhart position. Evidence that this was the case is thick upon the ground of monetary thought in Canada in the period leading up to and immediately following the founding of the Bank.

This contradiction in regard to the fundamental purpose behind central banking in Canada may be resolved with reference to the special characteristics of banking in a small, open economy. The adoption of central banking in response to international pressure in a number of such economies between the two world wars entailed a different motivation than did the adoption of central banking in other countries at other times.

The approach taken in what follows is not quantitative, and one may wonder at a different approach generating a different conclusion. Is it possible that the policy goals of those who supported the founding of the Bank in 1935 could not be achieved with the instrument that they chose, and the result was the time series from which Bordo and Reddish could draw their conclusion? Was it that the quasi-Goodhartian intentions of the founders of the Bank of Canada generated Vera Smithian effects in related time series of monetary aggregates? These question are not answered in what follows.

The Purposes of Central Banks
Whether central banks were founded to supply revenue to governments or to stabilize the value of currencies is a question of historical fact, and the answer is as simple as history itself. At some times and in some places they were founded for the one purpose, and in other times and other places they were founded for the other purpose, and over time in almost all places they attempted to serve both purposes.

The questions and answers of history emerge from the circumstances of particular times and places. In the industrializing nations of the nineteenth century, whether actively or passively, governments became involved in building up the overhead of economic activity. The exigencies of national policy in these circumstances generated demands for government ownership of or control over the investable surplus of economic activity. In Canada, for example, from the Act of Union in 1841 to Confederation in 1867, there were recurring attempts to establish a "provincial bank of issue". Given the uneven pace of industrialization, however, there emerged a second demand for government policies that would adjust the quantity of currency to alternating periods of economic expansion and collapse. Out of these two kinds of demands rose the contending schools of monetary theory in Britain, the United States, and Canada in the mid nineteenth century.

A Quasi Vera Smith Period in Canada
The main lines of monetary debate in Canada were set by Governor General Lord Sydenham very shortly after his arrival in Canada in 1841. A banking crisis in 1837 had been the occasion of rebellion in both of the Canadas, and allegations of injustice in the granting of bank charters and in the behavior of the banks had been among the rebels's complaints. In England, Sydenham, as George Poulet Thompson, had been responsible for the substance of what was to be the British Bank Act of 1844. As Governor of the newly united Canada, he proposed to reform the banking system by setting up a "provincial bank of issue" based on the principles of the English Currency School on which the British Act would be based. His proposal was not accepted in Canada, but, in certain Canadian quarters, his idea of a government bank was accepted, and there were further attempts to establish a public monopoly of the currency by this means in 1860, 1866, 1871, and 1880. Thereafter, until 1914, the proposed provincial bank of issue (central bank) and fiat government currency, was of interest only to a few monetary heretics and some Prairie homesteaders.

An important motivation in proposing the provincial bank of issue had been the large capital that the scheme would have put at the disposal of the government. The provinical bank would have taken in a certain amount of gold from the chartered banks, and used only a fraction of it to back its paper issue to the private sector, the rest would be available to support public development projects. Following another financial crisis in 1847, the Canadian government established free banking on the New York plan. This allowed the "free" unit banks to issue currency up to the value of their holding of government bonds. It was another way to put the capital invested in banking at the disposal of the government. By tying up their capital in low return, government issued assets the scheme so reduced the free banks's ability to compete that they were eventually absorbed into the established chartered banks.

The next two attempts to establish a provincial bank of issue were really stages in a nineteenth century attempt to set up a centralized, national banking system in Canada. the chartered banks had over expanded in size and number during the railway construction boom of the 1850s. They were to suffer the consequences. At the end of the boom in 1858 there was yet another financial crisis. Once again the government was fiscally embarrassed, especially since its own bank, the Bank of Upper Canada, was similarly embarrassed. The bank could hardly assist the government when it was desperately relying on thge deposit of taxes just to stay afloat. In return for a sizable loan, the government switched its account to the Bank of Montreal. The Bank of Upper Canada failed in 1866, and in the ensuing crisis the Commercial Bank of Kingston failed. The two bank failures bracketed Confederation in time. Twice during this period the Minister of Finance, A.T. Galt, introduced legislation to establish a provincial bank of issue. His first bill was defeated. His second bill passed the House, but was rendered relatively ineffectual by the non-cooperation of most of the chartered banks. Immediately after Confederation, at the time of the first decennial Bank Act, Galt's successor, John Rose, with the support of E.H. King, General Manager of the Bank of Montreal, made yet another attempt to establish the proposed government bank. Once again the measure was defeated by the combined political power of the other chartered banks. More than loss of their ability to issue currency, the banks feared the centralization that would have been a concurrent effect. Most especially, the interests of Toronto would not tolerate raising the Bank of Montreal to the position of a central bank. Established regionalism in the existing banking system triumphed over the centralized, national banking system proposed by the Government and the Bank of Montreal. The idea of a central bank as an instrument to produce government revenue failed in Canada in 1871. It was to fail again, more definitively a decade later.

The End of the Quasi Vera Smith Period
Mackdonald's Conservative Party won the election of 1878 on a National Policy platform.
Two closely related policies ... came to the front when the depression was at its maximum. Both came from the United States ... The first, which in theory was simplicity itself, and in practice appealed directly to primative individual selfishness, was the National Policy as to the tariff, and the second, which grew out of it by natural logic, but was later in the field and necessarily involved more technical terms and ideas, was the national currency policy (Shortt, pp. 707-708). ... when, in the first session of the new parliament, in 1879, the national tariff policy was introduced, there appeared also, from the same side of the House, the national currency policy (shortt, p. 710).
An important element in the currency legislation was a regulation raising the chartered banks's required reserves of Dominion notes. In explanation, the Finance Minister said,
"They never can hold less than 40 per cent., therefore, whatever they require to hold leaves the chance less that they will call upon the Government at any time for a larger amount of gold." Thus the Government, while confessedly seeking to enlarge its own issues as far as possible, and while reducing the specie reserves of the banks by drawing them into its own coffers by means of a forced loan, was anxious to prevent any call being made upon itself for specie; in other words, the note issue policy of the Government was to secure the maximum of profit with the minimum of responsibility (Shortt, p. 721).
So a makeshift substitute for a central bank as a source of revenue was in fact put in place in Canada in the nineteenth century. It was not, however, used to a significant degree to finance the economic development of the country, or, in fact, to generate revenue for any purpose.

The steady expansion of Canadian trade was accompanied by the continued development of modern methods of exchange and investment, through other mediums than paper or metallic money. Thus, while the total amount of currency was increasing, it was steadily diminishing in proportion to the amount of business done and to the other instruments of credit and exchange. However legitimate, therefore, the fears expressed in 1870 and 1880 as to the consequences of the policy upon which the Government was embarking, there being neither a special agitation for its continuance nor any need on the part of the Government to seek forced loans of this description, the policy was not followed up. (Shortt, p. 724).

Indeed, it would have been futile to have actualized the policy. It is inconceivable that, by any means whatsoever, the four original provinces in Confederation could have generated sufficient surplus to finance development of the transcontinental economy that took shape under Canadian jurisdiction in this period.

An investable surplus had to come from outside the economy. Given the demands of "the New Imperialism" of the 1880s, Britain supplied it. By 1870 it was becoming evident to the British that they could fall behind in relation to developments in Europe and in the United States. In response, Prime Minister Disraeli's new defensive strategy sought to unify the Empire against economic and military advances in the new transcontinental economies based on railway transportation. The Canadian Pacific Railway, in this view, was not a national work, but part of a world circling band of steel rails and steamships intended to hold the Empire strong against emerging rivals. Caught up in the New Imperialism, the immediate goal for Canada was the integration of British North America. To meet this goal the economy had to be expanded and restructured in a way that exceeded its domestic capabilities. Of course, there were other forces a work. The regional demands of the federation had to be met, because the former colonies entering into Confederation hoped to gain by the development of their combined territories. But they dould not manage the development on their own. There had to be external capital and external markets. Given its increasingly threatened position, Britain was willing to supply both.

There were, then, two factors closing the quasi Vera Smith period in Canada. At the critical moment in 1871, when a central bank and a national banking system were proposed in the House of Commons, regionalism defeated the motion. But, even if a central bank had been established, it could not have been given the task of financing the development of the nation. The national currency policy of 1878 was enacted insofar as provision was made for a virtually unlimited issue of practically inconvertable Dominion notes. (The notes were formally convertable into gold, but there was no mechanism for converting them. That is to say, no agency of government was given responsibility for their conversion. There was no central bank.) During the period between 1880 and 1884, when the Canadian Pacific Railway was completed, the volume of Dominion notes expanded in relation to economic activity. After that, however, the opposite was the case; and the currency expansion of 1880-1884 was not critical in financing economic development, though it may have molified factions that thought it should have been. By the late nineteenth century what obtained in Canada was an increasingly hard currency dispensed to the public by a decentralized, conservative, privately owned commercial banking system. It was an arrangement produced by economic and political regionalism, on the one hand, and by dependence on external capital for development and growth, on the other.

A Quasi Goodhartian Period in Canada
The private chartered banks provided Canada with a sound currency between 1870 and 1914. They did it without a central bank, and despite a record for insolvency that was worse than that of any other financial institution in Canada. There were several reasons for their succcess. Their inability to take responsibility for financing the bulk of economic expansion left them with less risky, though not risk-free, fields of endeavour. They grew in lock step with GNP. Their relatively large size as indivdual anks, based on the national span of their branch systems, gave them a degree of protection from localized declines in business activity. Stability in the system as a whole was maintained by the most successful among them absorbing the less successful before any formal bankruptcy occurred. The number of banks declined steadily from 48 in 1878 to 10 in 1928. Lastly, some of their success can be attributed to their use of the New York money market as a place of short term deposit on which they could draw in times of stringency. That is, the new York money market was a substitute bankers's bank for the Canadian banks.

Gradually, however, the pieces of a Canadian central bank came into existence. The lobby formed by Toronto and the regional banks to defeat the central bank proposal in 1871 constituted itself into a voluntary organization for interbank cooperation in 1892. In 1900 this body, the Canadian Bankers Association, was empowered to operate clearing houses for interbank debt. In 1908, 1912, and 1913, following similar moves in the United States, the Canadian banks were permittted to exceed their reserve limits during the crop moving season from September to January.

Despite pressures from western farmers to increase the money supply, or at least to make it more responsive to the needs of the West, Canada did not follow the United States in 1913 when that country established its central bank, the Federal Reserve System. During the war, when foreign sources of capital dried up, Canada, like other belligerents, abandoned the gold standard. The Finance Act of 1914 allowed the Department of Finance to issue Dominion notes, without gold backing, to the chartered banks. The war effort was, in part, financed this way. In this instance the Canadian government did use an element of central banking to supplement tax revenues, and, to some, it began to look like Vera Smithian policies would be revivied. Following the war, when it became evident that the operation of the Finance Act constituted a means by which the money supply could be controlled by domestic interests, such as the inflationists in the West, the Bank of Canada was established to forestall that possibility. The architects of the Bank intended to ensure the continuance of a monetary system that would respond to conditions in international markets, and would not undertake independent manipulation of domestic price levels.

That this was the case at the founding of the central bank in Canda is attested to by all four authoritative accounts of what happened at that time, those of Stokes, Plumptre, Neufeld, and Watts. Consider, for example, the Stokes account.

M.L. Stokes
Stokes is clear about his perception of monetary policy in Canada prior to the First World War.
In the pre-war period the only monetary objective thought of in Canada was the maintenance of the exchanges (p.8) ... Adherents of the banking principle rather than the currency principle, Canadian bankers disclaimed any control or degree of management over the volume of credit. ... They placed an exaggerated and unwarranted emphasis on the automatic action of the gold standard in regulating the volume of currency (p. 10).

Stokes is alo clear about the difficulties facing the proponents of internal and external price stability after the First World War. The world had abandoned the gold standard during the war, and so had Canada. The Finance Act of 1914 allowed the government to advance funds without gold backing. This Act was continued by legislation in 1923, thereby continuing subversion of the gold standard system. But this was only one aspect of the problem. A movement of monetary radicalism, with strong roots in western Canada, clamoured for the "equalization" of wheat prices, some degree of inflation, and for a central bank similar to the Federal Reserve Board in the United States (Stokes, pp. 44-57).

Both sides, according to Stokes, those favouring price stability and those favouring inflation, could see a solution to their liking in the establishment of a central bank. E.L. Pease, one time President of the Royal Bank of Canada, suggested that a central bank would eliminate government interference in banking, and so would prevent inflation and distortion in the allocation of capital (Stokes, p. 31). A resolution passed by the World Economic Conference in 1933 stated

... in order to provide for an international gold standard with the necessary mechanism for working ... independent central banks ... should be created ... (Stokes, p. 71).
Stokes noted that the political opportunity was not lost on the leaders of either of the two major parties.
A farmer-labour party of the extremely radical variety, the Co-operative Commonwealth Federation, had developed considerable strength in the West and was spreading rapidly as far eastward as Ontario. It threatened for a time to hold the balance of power between the two old parties, and even to come into power itself. The views of this party, consequently, carried considerable weight. This party, like its friends in the United States, advocated the "socialization of credit". In Canada the emotional appeal was strong, for there had been in fact a concentration of commercial banking power in fewer and fewer hands (Stokes, p.63).
The impulse that moved the two older parties to change their views relative to the establishment of a central bank in Canada was probably twofold: a gradually formed conviction that such an institution would be desirable, and a desire to meet public opinion (Stokes, p. 63).
Mr. King inferred that the recent conversion of Mr. Bennet was founded on politcal expediency. This would seem to be true. The same thing could be said with equal truth about Mr. King and most of the Liberals. The establishment of a central bank would effectively spike the guns of the third party (Stokes, p. 66).

What is evident in Stokes account is not so much that the Canadian government was under pressure to maintain the external and internal value of the Canadian dollar, because clearly, in Stokes's account there were also pressures for devaluation and inflation; but that, if the goal was external and internal stabilization, a central bank was perceived as a means to that end, with the great advantage that it could be put in place without a clear statement condemning the opposing policy.

The Purposes of the Central Bank in Canada
In the late 1920s and early 1930s, a good deal of disatisfaction arose over the monetary management in Canada, under the Bank Act, and the Finance Act. The analysis and critiques were developed mainly by academic economists. Much of this came from Queen's University, by Mackintosh, Clifford Curtis, and Frank Knox. ... These criticisms occurred at a time when North American economists were taking increasing interest in business cycles and in active interventions by monetary policy to stabilize economic conditions. The work of Mitchell, Burns, and Fisher is still relevant today. The important point for our purposes is to note that O.D. Skelton, Clark, Mackintosh, Curtis and Knox all did their graduate studies in Economics at Chicago and Harvard, not at British universities (Slater, pp. 3-4).

Curtis, Knox, Mackintosh and Clark were directly responsible for convincing the Government that a central bank was necessary, for advising it on when and how the bank should be set up, and for writing the legislation and seeing to its implementation. There were others involved: O.D. Skelton, and Wynn Plumptre, and two subsequent Governors of the Bank, Towers, and Rasminsky, but the four here listed were those most immediately responsible

W.A. Mackintosh
W.A. Mackintosh, who wrote on money and banking in the 1920s, left an account of the intellectual and political pressures of the time with respect to the payments system. Despite evidence that the presumed benign automaticity of the combined gold standard and "real bills" mechanisms was not being realized, he offered in their defence a statement that, when temporary circumstances passed, it would be.
In may, 1920, wholesale prices turned definitely downward, and different classes of people were variously affected.. . ...there came the demand for calling before the Banking Committee of the House of Commons, three gentlemen, Professor Irving Fisher, Major C.H. Douglas, and Mr. George Bevington ... (Mackintosh, 1923-24, pp. 63-64).

With respect to domestic monetary policy Mackintosh wrote:

One cannot agree with Professor Fisher that the project should be adopted in Canada singly, for the reason that the most significant price fluctuations, those of the agricultural commodities which we export, originate in world markets which a stabilization of Canadian currency would not affect (Mackintosh, 1923-24, pp. 63-64).

With respect to "real bills" he wrote:

Does ... an extension of bank credit ... entail a rise in prices? ... If such a line of credit were used to purchase an automobile or furnish a house it would tend to raise prices. if, however, it is used as bank credit is supposed to be used and as the careful banker insists that it be used, to finance the marketing of goods, there is no necessary rise in prices. Purchasing power has been increased but goods have also increased (Mackintosh, 1923-24, pp. 65-66).

There is no reason for believing that anything different [from an inflationary process] would happen under [the monetary radical,] Mr. Bevinton's project unless the forms of security accepted by the Treasury were so selected that they represented goods in or near the marketing process. From the standpoint of a banker ("one who knows a note from a mortgage") real estate is not good security because it is not liquid, it is not saleable. From the point of view of economic principles, however, bank credit "created" on the security of real estate, of government credit, or any basis not specifically related to the selling of goods in production where the production process is short, is likely to produce inflation and its inevitable concomitant, deflation. Mr. Bevington and those who agree with him should note that in the case of the Federal Reserve Banks of the United States, which to some extent have suggested some features of his plan, the central banks may be drawn on only through the medium of commercial paper rediscounted (Mackintosh, 1923-24, p. 67).

With respect to the gold standard he wrote,

There seems to be, therefore, no sound reason for assuming that the world's supply of monetary gold has become inadequate to maintain a stable level of prices though it may be that in the present decade it may become so. Why then the disastrous collapse of prices in the last few years? ... The recent drastic price declines are, in brief, a phase of a violent international readjustment, the accumulated total of the posponed readjustments of the past decade (Mackintosh, 1931, p. 110).

Mackintosh eventually adopted a Keynesian view of all these matters (Mackinsosh, 1936), but gave no hint of Keynesian influence at the time of the founding of the Bank in 1933 (Brecher, p. 98). Others, however, without being Keynesian, were not so sure that fundamental, long run changes had not taken place.

C.A. Curtis
In 1930 C.A. Curtis deplored the effects of increased issues of Dominion notes through the operation of the Finance Act. The consequent "great exapnsion of credit" had caused
... a substantial price inflation, and the virtual abandonment of the gold standard (Curtis, 1930, p. 109).
A year later he proposed a central bank to correct this situation.
...what will happen when business improves and another "upswing" of the buniness cycle occurs, and the banks need more reserves to extend credit? Presumably, the events of 1928-29 will repeat themselves. ... How can the situation be corrected? ... the government might be required to keep on hand an excess stock of gold which could be used to support additional issues of Dominion notes. This process, however, would be expensive. Another possibility, and in my opinion the only satisfactory permanent solution, would be the creation of a central bank which would do the same thing, but which would be administered in keeping with the accepted principles of central banking. ... If Canada is to be a gold standard country it must for two reasons hold firmly to the customs and conventions of that standard. The financial integity of Canada can never be upheld in the markets of the world by such practices as those which have occurred in the last two years, and which are primarily the results of Canadian policy. Secondly, from the point of view of the local interests of the citizens of Canada, the most satisfactory policy and the one which in the end will give the best return to Canadians is to allow the gold standard to operate freely in accordance with its designs and purposes (Curis, 1931, pp. 119-120).

When the MacMillan Commission brought the debate to a boiling point in 1933, Curtis reiterated his stand.

The fundametal function of a central bank is to maintain the standard which has been selected by the country in question. ... In my opinion there is no proper machinery in Canada to carry on a monetary standard and it is this condition which justifies a central bank (Curtis, 1933, p. 245).

Frank Knox
Frank Knox presented an historical explanation of the malfunctioning of the domestic and international payments systems after 1913, and he made a direct statement as to what the policies of a central bank ought to be in the light of the problem. Specifically, he explained the unwokabilty of the gold standard system (Knox, 1934, pp. 298-299, 1936-46, p. 17-28), and the failure of the existing banking system as a joint means of monetary control, especially in the United States (Knox, 1936-46, pp. 146-150), but also in Canada (Knox, 1936-46, p. 79) where the real bills doctrine more closely described what had happened (Knox, 1936-46, p. 136). Under the circumstances he saw no alternative but to establish a central bank to achieve what the gold standard system and the operation of the real bills mechanism had failed to achieve: a stable exchange rate and an elastic issue of the means of payment that would contract when foreign markets failed and expand when they opened up. the idea that the money supply could be adjusted to domestic conditions in isolation was, in his view, a kind of monetary heresy, characteristic of "the democracy" in the United States, from which Canada had been saved, until 1913, by historical circumstances (Knox, 1936-46, pp. 78-89, 176-78).

With respect to the practical policy of the Bank of Canada, he wrote

It is to be regretted that the MacMillan Commission which investigated the Canadian monetary and banking system during the summer of 1933 interpreted its terms of reference so narrowly. The government sought guidance on both financial structure and monetary policy. The Commission confined its attention to structure. The central bank which was its chief recommendation is about to be created, but neither legislation nor discussion in parliament give any hint as to the monetary policy which is to be pursued (Knox, 1934, p. 189).
... it would be unwise ... for a country so largely dependent on international trade and having such a large volume of foreign capital invested within her borders, to pursue a policy designed solely to promote domestic stability. It will be necessary to adjust Canadian economic life continually to changing international conditions and to promote the interest of the exporting industries at as small an expense as possible by way of domestic disturbance. Such an objective calls for an elastic monetary policy and continual control. ... There should be created also an exchange stabilization fund financed by the federal government by which a desirable day-to-day stability of foreign exchange rates may be attained without formal adherence to an international monetary standard. ... Canada should not consider a return to the gold standard not because monetary management is in itself desirable, particularly for a coountry with little experience of it, but because it is forced on us (Knox, 1934, pp. 304-305).

W.C. Clark
It may be that William Clifford Clark was the most influential of the four Queen's men. Next to O.D. Skelton, he was closest to power in Ottawa, and most responsible for bringing other intellectuals into the civil service. In 1931 he was introduced at the annual convention of the Professional Institute of the Civil Service of Canada with the flollowing words.
Last year he [Clark] was signally honoured by being appointed by President Hoover as a member of his emergency committee on unemployment. He was also elected for the committee of the National Conference on Construction, which was under the auspices of the President of the United States and the Secretary of Commerce. Later in the year he was asked by the National Bureau of Economic Research in New York City to join a committee of experts to investigate the business depression (Clark, 1931(a), p. 2).
Clark introduced his own comments on the depression by comparing the economy to an ill-designed automobile.
But - if I may state a conclusion dogmatically without attempting proof at this time - the machine, in my opinion, is not incapable of repair. ... The brakes need relining and a more powerful system of headlights needs to be installed if we are to drive again at the pace of 1929. ... With such a thorough overhauling and such improvement in control, it will still probably be found that the "old bus" is still without an equal, still superior to the only competitive model which has yet appeared, ... (Clark, 1931(b), pp. 2-3).

That Clark was a fiscal conservative seems evident from a comment ascribed to him, that "Frivolous or excessive government spending would only aggravate an already serious problem." (Owram, p. 218). His position on monetary policy is evident from his understanding of business cycles and from his comment on the "flight from the gold standard" in 1930.

The present depression [1921] is, therefore, the result not so much of an industrial reaction as of a price collapse following a period of madness to imagine that we can escape paying a high price for our follies of the last few years (Clark, 1921, p. 83).

With respect to Britain going "off gold" and devaluing the pound in 1931, he wrote

By force majeure England has been pushed off the gold standard and sterling exchange was left to find its own level. A new era has dawned. ... On the negative side of the argument [for devaluation] are disadvantages whose gravity would seem to outweigh the anticipate gains (Clark, 1931(b), p. 753) . ... If international price stability is to be achieved, then either the gold standard must be saved and modified to meet present world conditions or a suitable substitute must be devised. The policy of separate national gold reserves and independent gold policies has broken down under the terrific task of post-war adjustment. This has not necessarily meant that the gold standard is impractical. It may mean that these condistions, chiefly the political results of a stuborn nationalism, cannot be reconnciled with the economic forces which tend to make the world one, and that they must be radically changed if we are to retain the benefits of economic specialization, mutual exchange of products, and a common monetary standard (Clark, 1931(b), p. 762).
With respect to the Canadian situation he stated,
In view of the circumstances the decision to prohibit gold exports is probably a sound one. ... We would be in a sounder positio, however, if we had central banking machinery properly equipped and definitely responsible for the control of credit in an emergency of this character instead of the present anomolous condition of division of responsibility between the banks and the government and lack of special equipment or traditions in the Department of Finance (Clark, 1931(b), p. 761).

The Four Queen'smen
The nature of the information environment from which the Bank of Canada emerged may have been more than adequately characterized by what has been presented here already, however, it may be best to drew upon one last source. In 1933, when the MacMillan Commission was deciding to recommend the formation of a central bank in Canada, Queen's Quarterly carried an article entitled "The Proposal for a Central Bank". This classic piece was ascribed to the Departments of Economics and Political Science at Queen's University. It was, then, in all likelihood, subject to the influence of the four Queen'smen whose works have been cited here. The opinions expressed in that article bearing on the reasons for the establishment of the Bank of Canada have to be given special weight. The article speaks for itself.
There is no reason to believe that credit would be more plentiful after a central bank had been added to our monetary machinery than before. ... It is safe to say that a great many of the advocates of a central bank in Canada will be disappointed with the operation of such a bank when and if it is established (p. 425).
Our economic welfare will be best served by keeping open the channels of trade with other countries: to this end stability of the foreign exchange value of the Canadian dollar is essential. ... the monetary policy of a country may require not that price levels shall be maintained stable, but that the foreign exchanges should be stabilized. ... (P. 434-435).
As experience with their operations grows, central banks in the larger countries may assume other tasks such as price stabilization and busness cycle control, but in a country economically dependent as is Canada, such experiments are, probably for the near future, out of place (p. 435).

Conclusion
It would seem, then, that the Vera Smith hypothesis, that central banks were founded to be instruments of revenue, was not born out in Canada in 1935. Had the attempt to found a provincial bank of issue (a central bank) been successful in nineteenth century Canada, the Vera Smith hypothesis would have received some support. In fact, it is supporte by the expansion of Dominion notes under the Bank Act of 1880, and by the operation of the Finance Acto after 1914. In those instances, however, there was no central bank, only elements of central banking. In 1935, intentions were quite different. Those who were most influential in establishing the Bank were explicit about using it to forestall inflationary solutions to economic problems. The idea that the bank might be used to generate capital for expansion, the idea that inspired the movement to found a central bank in the previous century, wa simply absent from discussions surrounding the founding of the Bank of Canada in 1935.

Can it be said, then, that the Goodhart hypothesis is supported by the Canadian experience of 1933-1935?

Certainly those most influential in the formation of the Bank of Canada were intent on using the Bank to prevent inflation. But this was not, as Goodhart would have it, a case of government intevening to moderate the ambitions of a monopolistic, private banking system, at least not in the way Goodhart had envisioned. Tt is true that, by 1910, the banking system in Canada was a classic oligopoly, but it was also a conservative and derivative system. Its function was to accomodate the economy by facilitating commerce and exchange. It did not have the task of funding economic development and growth. That was left to external capital. Accordingly, the Canadian banks remained hightly sensitive to fluctuations in external capital and commodity markets, for reasons of self preservation. They expanded and contracted their loans with the rise and decline of international economic activity. The price stabilization sought through the central bank was not an act of control over the Canadian commercial banks as they had operated until the Finance Act of 1914. It was an act to control government as embodied in the Finance Act, and thereby to achieve stabilization of the sort associated with the customary operations of the banks under the real bills mechanism and the gold standard prior to 1914. It was a case of putting in place a set of government institutions that would not be open to the inflationary policies of certain sectors and regions of the nation.

Strictly speaking , neither the Vera Smith nor the Charles Goodhart hypotheses with respect to the purposes of central banks is born out in the Canadian case. Both assume a relatively homogenious, independent and closed economy with a well developed capital market. Canada was a regionalized, relatively dependent and open economy with a very underdeveloped capital market. the Canadian economy had no existence outside of the broader Euro-American economic community, of which it was a small, satellitic part. Its economic institutions had been formed to meet the exigencies of that situation, a situation not addressed by either Goodhart or Smith.

REFERENCES AND BIBIOGRAPHY

Bordo, M., (and Angela Reddish),
1987, "The Rationale for the Founding of the Bank of Canada, Journal of Economic History, vol. 47, pp. 405-413.

Brecher, L.,
1957, Monetary and Fiscal Thought and Policy in Canada: 1919-1939, University of Toronto Press, Toronto.

Chisholm, D.,
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