THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 416

384 PA R T V Central Banking and the Conduct of Monetary Policy This is a vague mandate, leaving a lot of room for interpretation To explore this subject, we discuss four functions of the Bank of Canada as they are mentioned in the Bank s webpage: bank note issue government debt and asset management services central banking services, and monetary policy management Bank Note Issue Before the creation of the Bank of Canada, the federal government and the early banks issued notes designed to circulate as currency The day it began operations, the Bank replaced the outstanding issue of federal government notes and provision was also made for the gradual removal of notes issued by banks By 1945 the Bank had a monopoly over note issue Although the original Bank Act required the Bank to redeem its notes in gold, this provision was never used In fact, it was removed with the 1967 revision of the Bank Act, thereby providing the Bank with unlimited powers to issue legal tender The Bank also conducts ongoing research, working closely with private-sector partnerships and note-issuing authorities in other countries, in order to improve cost-effectiveness, increase the durability of bank notes, and reduce counterfeiting In its role as provider of paper money, the Bank s overall objective is to preserve the integrity and safety of Canadian currency in the most economical and efficient manner possible Government Debt and Asset Management Services In its role as the federal government s fiscal agent, the Bank of Canada provides debt-management services for the federal government such as advising on borrowings, managing new debt offerings, and servicing outstanding debt Before 1995 these services were provided for all of the federal government s debt In 1995, however, a special agency of the Department of Finance was created, known as Canada Investment and Savings, to be responsible for the federal government s debt held by individuals, commonly known as retail debt Canada Investment and Savings handles government of Canada securities such as Canada Savings Bonds, treasury bills, and marketable bonds, and is also responsible for the development of new investment products and marketing initiatives The Bank of Canada, however, continues to be responsible for all of the government s securities after they are issued, administering millions of bondholder accounts and making payments on behalf of the federal government for interest and debt redemption In its role as fiscal agent, the Bank of Canada also manages the government s foreign exchange reserves held by the Exchange Fund Account of the Department of Finance In particular, the Bank assists the Department of Finance in investing these foreign reserves and in borrowing when necessary to maintain an adequate level of reserves The Bank also engages in international financial transactions, on behalf of the government, in order to influence exchange rates (We discuss the Bank s foreign exchange interventions more formally in Chapter 20.) Central Banking Services The Bank of Canada serves as the lender of last resort if a deposit-taking financial institution faces a liquidity crisis Because of its unique power to create base money, the Bank can ease the liquidity problems of any financial institution by extending advances, and therefore deter bank runs and panics Base money