They wish to thank Greg Bloss and Shirley Haun for research assistance and the Bank of Nova Scotia Archives for access to their material. Helpful comments on an earlier draft were supplied by Lance Davis, Steven Easton, Steven Ferris, Debra Glassman, Charles Goodhart, Mark Rush, Anna Schwartz, Ronald Shearer, Charles Stuart, Dean Taylor, Kenneth White and participants at the Fourteenth Annual Conference of the Use of Quantitative Methods in Canadian Economic History. The usual disclaimer applies.Google Scholar

¹ See Smith, Vera, The Rationale for Central Banking (London, 1936);Google ScholarHayek, Friederich, Denationalization of Money, (London, 1976) for the view that central banks were primarily a response to political and historical forces;Google Scholar and Goodhart, Charles, The Evolution of Central Banks: A Natural Development? (London, 1985) for the natural evolution hypothesis.Google Scholar

² The traditional explanation given for the establishment of the Bank of Canada in the 1930s is the failure of the prevailing set of monetary arrangements to increase the money supply during the Great Depression. See for example, Noble, S. R., “The Monetary Experience of Canada during the Depression,” in Gayer, Arthur, ed., The Lessons of Monetary Experience (New York, 1937).Google Scholar

³ Goodhart, The Evolution of Central Banks.Google Scholar

⁴ Smith, The Rationale;Google Scholar and Friedman, Milton and Schwartz, Anna J., “Has Government Any Role in Money?” Journal of Monetary Economics, 17 (01. 1986), pp. 37–62.CrossRefGoogle Scholar

⁵ Watts, George S., “The Origins and Background of Central Banking in Canada,” Bank of Canada Review (05 1972), P. 18.Google Scholar

⁶ Chisholm, Derek, “La Banque de Canada était-elle nécessaire?” L'actualité économique, 59 (09. 1983), pp. 551–74,CrossRefGoogle Scholar argues that the Bank of Canada was equally unnecessary in the 1930s, since the government of Canada had shown that it could manage the Canadian currency both before and after the suspension of free gold convertibility.

⁷ See Friedman, Milton, A Program for Monetary Stability (New York, 1959).Google Scholar For the counter argument that competing banks would provide a determinant price level, see Klein, Benjamin, “The Competitive Supply of Money,” Journal of Money, Credit and Banking, 6 (11. 1974), pp. 423–53.CrossRefGoogle Scholar

⁸ Bordo, Michael and Redish, Angela, “The Supply of Inconvertible Money in the Absence of a Central Bank: Canada's Interwar Experience” (unpublished manuscript, University of British Columbia, 1985).Google Scholar

⁹ Royal Commission on Banking and Currency: Evidence [henceforth RCBC], p. 3225.Google Scholar

¹⁰ RCBC, p. 3063.Google Scholar

¹¹ Report of the Royal Commission on Banking and Currency in Canada (Ottawa, 1933), p. 59.Google Scholar This view found support from both bankers and academics. See, for example, the evidence of Gregory, T. E., (RCBC, p. 2995) and J. A. MacLeod, (RCBC, p. 50).Google Scholar

¹² The active circulation of Bank of Canada notes in March 1935 was double the Dominion notes in the hands of the public in February 1935, which we attribute primarily to a change in measurement rather than a doubling of currency holdings.Google Scholar

¹³ The data sources are as follows: Canadian wholesale price index—Prices and Price Indexes, Dominion Bureau of Statistics, Canada; the exchange rate—monthly average noon buying rate for the Canadian dollar in New York from U.S. Board of Governors of the Federal Reserve, Federal Reserve Bulletin; U.S. wholesale price index—Department of Commerce, Statistical Abstract of the U.S., Washington; Ml and M2—calculated from the returns published in the Canada Gazette (available from the authors on request). All data were seasonally adjusted using the SAS X-11 program.Google Scholar

¹⁴ Box, George E. P. and Jenkins, Gwilym M., Time Series Analysis (San Francisco, 1976).Google Scholar

¹⁵ One interpretation of the “studentized” residuals is as follows: If the regression were rerun with a dummy variable for the ith observation, the t-statistic on the coefficient of the dummy variable would be the same as the “studentized” residual for that observation. See Belsley, David A., Kuh, Edwin, and Welsch, Roy E., Regression Diagnostics (New York, 1980), p. 20.CrossRefGoogle Scholar

¹⁶ The lag lengths were determined by the method of Mishkin, Frederic S., A Rational Expectations Approach to Macroeconomeirics (Chicago, 1983), P. 22.CrossRefGoogle Scholar

¹⁷ M1 comprises Dominion notes in the hands of the public, chartered bank notes in circulation, plus public (including provincial government) demand deposits. M2 includes Ml and notice deposits.Google Scholar

¹⁸ Bank of Canada, Annual Report of the Governor of the Bank of Canada (Ottawa, 1935).Google Scholar

¹⁹ Ibid., p. 12.

²⁰ Ibid., p. 13.

²¹ Ibid., pp. 423–53.

²² Ibid., p. 16.

²³ Maclean's Magazine, 1 July 1933.Google Scholar

²⁴ Vancouver Province, 30 December. 1935.Google Scholar

²⁵ Stokes, Milton L., The Bank of Canada (Toronto, 1939), p. 62.Google Scholar

²⁶ Creighton, Donald, Canada's First Century (Toronto, 1970), P. 215.Google Scholar

²⁷ Department of Political and Economic Science, Queen's University, “The Proposal for a Central Bank,” Queen's Quarterly, 40 (08. 1933), p. 439.Google Scholar

²⁸ We would like to thank historian Fred Armstrong at the University of Western Ontario for pointing out this argument.Google Scholar

²⁹ Cited in Creighton, Canada's First Century, p. 215.Google Scholar

³⁰ Cited in Stokes, Bank of Canada, p. 65.Google Scholar

³¹ Bryce, Robert B., Maturing in Hard Times (Montreal, 1986), p. 82.Google Scholar

³² Letter from MacLeod, J. A. to Hector Maclnnes 25 Aug. 1933. Archives of the Bank of Nova Scotia. B.N.S. does Sec.#8, File 3. Earlier in August, a newspaper report stated that Eastern financial circles were taking it for granted that a central bank would be created and that the banks would lose their rights to note issue. Vancouver Sun, 11 Aug. 1933.Google Scholar

³³ Statues of Canada, 1934, “An Act to Incorporate the Bank of Canada,” 24–25, George, V, chap. 43, preamble.Google Scholar