The Bank of Canada (in ) is Canada's central bank. It was created by the Bank of Canada Act of 1934, to "promote the economic and financial well-being of Canada." It is the sole issuer of banknotes in Canada, and the central bank for the Canadian dollar.

The bank's headquarters are located in the Bank of Canada Building at the corner of Wellington and Bank Streets in downtown Ottawa.

History

For many years, Canada did not have a central bank. Each of the nation's large banks issued its own currency and there was little government regulation of the nation's money supply. The federal finance department only issued small and very large denomination bank notes ($5 and under, and $500 and higher.) The Bank of Montreal, then the nation's largest bank, acted as the government's banker. Canada, with its extensive branch banking, had a very stable banking system. There was deemed to be little need for a lender of last resort and the banking system was not hit by the same seasonal liquidity problems as banks in the US. The banking system was regulated by the Canadian Bankers Association that worked in close concert with the government.

While there were some advocates for a central bank in the early part of the twentieth century, most notably farmers, the status quo remained unaltered. This changed with the onset of Great Depression. Many in Canada blamed the policies of the Canadian banks for aggravating the Depression. The money supply was contracting and deflation was common. The farmers were joined by manufacturing interests and other groups in demanding a central bank. Another major proponent was the Royal Bank of Canada, which wanted to see the government business taken away from the rival Bank of Montreal. The government also claimed it was constrained by its inability to deal directly with its foreign debts.

Prime Minister R.B. Bennett called a Royal Commission in 1933 and it reported in favour of a central bank. The bank began operations on March 11, 1935, after the passage of the Bank of Canada Act. Initially the bank was founded as a privately owned corporation in order to ensure it was free from political influence. In 1938, under Prime Minister William Lyon Mackenzie King, it became a Crown corporation, fully owned by the government - thus, in effect, by the Canadian taxpayers - with the governor appointed by Cabinet. The responsibility for creating small bills was transferred from the finance department and the private banks were ordered to remove their currency from circulation by 1949.

The bank played an important role in financing Canada's war effort during World War II. After the war, the bank's role was expanded as it was mandated to encourage economic growth in Canada. The subsidiary Industrial Development Bank was formed to stimulate investment in Canadian businesses. The monetary policy of the bank was geared towards low interest rates and full employment with little concern about inflation. When inflation began to rise in the early 1960s, the governor James Coyne ordered a reduction in the money supply. Prime Minister John Diefenbaker disagreed with this move, and ordered a return to the full-employment policies. Since the 1980s, keeping inflation low has been its main priority.