david dodge : 70 years of central banking in canada remarks by mr david dodge, governor of the bank of canada, to the canadian economics association, hamilton, ontario, 27 may 2005. * * * it gives me great pleasure to be here today with you, and to chair this special conference session celebrating the 70th anniversary of the bank of canada. the bank opened its doors on 11 march 1935, at the height of the great depression, and immediately faced enormous challenges. in meeting those challenges, the new bank of canada drew on the experience of other, established central banks. it received valuable guidance in functions such as the issuance of bank notes, managing foreign exchange reserves, and promoting financial stability. however, such guidance did not prove to be much of an advantage in what has become the main function of the bank of canada - monetary policy. up to the time that the bank was founded, monetary policy had been subject to the tight discipline of the gold standard - a topic that angela redish has explored in her work. that discipline severely limited the authorities'room to manoeuvre. the notion that countries, acting through their central banks, might actually try to stabilize macroeconomic activity within their borders is a relatively new one. as a consequence, over the past 70 years, the bank of canada and other central banks have had to learn by doing - by experimenting and gradually refining the art and science of monetary policy implementation. we have received a great deal of help in this effort from the academic community, including the people here today. but it has not been an easy exercise - nor is it finished. monetary policy is still very much a work in progress. the evolution of monetary policy let me now briefly review some of the significant changes in monetary policy that have taken place over the past 70 years. the preamble to the bank of canada act states that the bank should : a€¦mitigate by its influence fluctuations in the general level of production, trade, prices and employment, so far as may be possible within the scope of monetary action, and generally to promote the economic and financial welfare of canada. seventy years later, this is still an accurate description of our goal. however, the act does not provide any practical guidance as to how this objective should be pursued. through the late 1930s and the early post - war period, the main concern of the central bank was to try to eliminate, and then to avoid a return to, the deflation and high unemployment of the depression years.

the government shared this preoccupation, as evidenced by the 1945 federal white paper on employment and income. things started to change in the late 1950s and early 1960s, when economists led authorities to believe that there was a permanent trade - off between a little bit more inflation and a little bit less unemployment. all authorities had to do, it was believed, was pick their preferred point on a downward - sloping phillips curve. but the bitter inflationary experiences of the 1970s and a belated recognition that the phillips curve might be vertical in the longer run - if not slightly upward sloping eventually led to an increased focus on price stability as the goal for monetary policy. we began to appreciate what olivier blanchard calls the " divine coincidence " - that is, the realization that aggregate demand - supply equilibrium and price stability are complementary objectives. we've realized that a low, stable, and predictable inflation rate is probably the best contribution a central bank can make to the economic welfare of the nation. since inflation was viewed as being " everywhere and always a monetary phenomenon, " monetary aggregates were used as intermediate targets. but eventually, they proved to be an ineffective anchor. as gerald bouey said, we didn't abandon monetary aggregates, they abandoned us. and so, at the beginning of the 1990s, in the search for a new policy anchor, central banks started to focus directly on inflation, either through implicit or explicit inflation targets. monetary policy transmission and policy effectiveness the instruments that we have used for the transmission of monetary policy have also changed over the years. in the first 35 years of the bank's existence, we relied on a " belt and braces " approach to policy execution, in the belief that credit was fungible and that every possible financial avenue had to be covered. the result was a complex mix of primary and secondary liquidity requirements, interest rate ceilings, quantitative limits, outright restrictions and prohibitions, foreign exchange market intervention, and when all else failed - a healthy dose of moral suasion. attempts to describe the conduct of monetary policy turned into a bewildering stream of arcane details that left listeners confused or - it was sometimes hoped - in awe of the economic alchemists who plied this mysterious craft. this started to change in the 1960s, particularly following the royal commission on banking and finance in 1964, chaired by chief justice of ontario dana porter. it would be hard to overestimate the impact of this analysis, and the sea change in official thinking