bank of canada. class 8:canada expands outcomes expected able to discuss the importance of bank of...

Bank of Canada

Class 8:Canada Expands

Outcomes Expected

• Able to discuss the Importance of Bank of Canada

• Able to discuss the framework of how the Financial System Works

• Able to discuss the differences and roles of Fiscal and Monetary Policy

• Difference Between Bank of Canada and US Federal Reserve

• Group Assignment

Class 7 :The Rise of the Canadian Consumer and Canadian Retail

The Concepts of Capitalism

Refers to an economic system where the means of production, or capital, is owned primarily by individuals.

Economic decisions are made by market forces.

The Concept of Capitalism

Focus is on an open system of: Pricing Profits and Losses Private Property Ownership Capital Movement

Nature of Competitiveness

THE CONCEPT OF THE CONCEPT OF COMPETITIVENESSCOMPETITIVENESS

“… “… the ability to design, produce and market the ability to design, produce and market goods and services, the price and non-price goods and services, the price and non-price characteristics of which form a more attractive characteristics of which form a more attractive package than those of competitors”package than those of competitors”

From:From: The World Competitiveness Report, The World Competitiveness Report, World Economic Forum and the World Economic Forum and the International Management Development InstituteInternational Management Development Institute

Copyright © Captus Press Inc., 2009 Copyright © Captus Press Inc., 2009

Perfect Competition

1. There are many sellers of the product so that no individual seller produces a significant share of the quantity available to the market.

2. All firms produce exactly the same product. The products of all firms are similar.

3. All buyers given full information about the market.

4. Productive resources are perfectly mobile.

Desirable Conditions for Workable Competition

1. A market structure with at least two buyers and two sellers, but preferably more

2. A mixture of large and small firms

3. No collusion or coercion among sellers

Desirable Conditions for Workable Competition

4. As much market information as possibly is available to buyers and sellers

5. No barriers to entry and exit

Eaton’s Case

Key Players

Timothy Eaton John Craig Eaton Robert Young Eaton John David Eaton Edgar Burton General Robert Wood H.H. Stevens R.B. Bennett

Eaton

Entrepreneurial Line of business - Low Priced Wares and clothing Key Success Factors

– - Cash Only – One Price Only – Satisfaction guaranteed or money refunded

Innovations?– Launch of the Eaton’s Catalogue in 1884. – Started to make his own goods 1890 – Vertical Integration– Equate to today. – Private Brands– Had his own foreign buying office.

Competitive Scene

Simpson’s 1870 – Similar Business Model Independents

The Depression 1929-1939

Economic

27 June 2011Alison Kemper ADMS 101016

Economic

Government

P.M. Richard Bennett1930-35

H.H. StevensMinister of Trade and Commerce

1934

•Department stores sought to cut costs – Squeezed Suppliers

•Difficult retail environment for independent retailers•Small business owners were force to close•Wages were forced down in factories. •Eatons found to be paying less than minimum wage

Price Spreads Commission 1934

Stevens was responsible for the striking of the Royal Commission on Price Spreads and Mass Buying attacking corporate interests accusing them of price fixing and called for radical reform.

Stevens saw Department stores destroying manufacturers and forcing workers to live on subsistent wages especially young women

Stevens tried to destroy public image of big department stores by blaming them for social evils of the time.

Eaton’s financials were exposed showing many employees making less than minimum wage

H.H. StevensMinister of Trade and

Commerce 1934

Price Spreads Com. Eaton’s Reaction

What did Eaton’s do? – Eaton’s felt it needed to protect its public image– Large advertiser - Used the media to attack

commission. – Prices were being kept low to lower the

cost of living for the public

What was the outcome?1 – Most recommendations ignored – Eatons wanted to avoid any future investigations

created a philosophy of low profit margins 1-2%.

Eatons and Corporate Interest Groups

While many benevolent and charitable interest groups do exist, perhaps the most influential and best funded interest groups are those run by the business community.

Why do they lobby?

Business have a great deal of common interests that they may work together on.

These include, political stability, legal rights, macro-economic stability, lowering taxes, and access to foreign markets.

In the areas of common interest business are usually represented by umbrella groups such as the Ontario Chamber of Commerce or the Association of Canadian Bankers

In the areas of conflicting interests companies often seek advice from either an in house government relations specialist or an outside government relations firm.

27 June 2011Alison Kemper ADMS 101022

A New Retail Age

• World War II• Impact on Industry? Why?

• Post War - 1945-1952• Changes to Economic Landscape • What changes to Retail Landscape• Eaton’s Strategy

Competition Scene Changes

Simpson’s/Sears JV– How was it

structured– What were the roles– What made it

different from Eatons

Changing Retail Landscape

How were downtown stores perceived?

•Suburbs began to grow, Why? • What changes were taking in society?• What impact did technology have?

Consumerism

A social and economic order that encourages the purchase of goods and services in ever-greater amounts.

It is the concept that an ever-expanding consumption of goods is advantageous to the economy.

Competition Scene Changes

Simpsons-Sears– How did their business

strategy work?

Eaton’s – How did their business

strategy work?

End Game

Canada’s Changing Retail Future

The US Retail Invasion and its impact on Canada

In 1985, there were only 10 US based retailers operating in Canada.

By 2003, this number had grown to 185. 11 of the top 20 retailers in Canada were US

owned. US firms make up 75% of foreign-owned

retail operations in Canada.

Impact of the Canadian Dollar on Retail

Canadians have always enjoyed cross-border shopping– Prices in Canada are often higher than those in

the US, due in part to such differences as tax structures or the economies of scale enjoyed by retailers in the larger US market.

Canadian consumers get even better deals when our dollar is high.

THE BANK OF CANADA: FINANCIAL INSTITUTIONS, LAWS AND POLICIES IN CANADA

Bank of Canada

Bank of Canada

Created in 1934 as a private bank and in 1938 became a Federal Crown Corporation

The responsibilities of the Bank are: monetary policy; sole issuer of Canadian banknotes and currency, the promotion of a safe, sound financial system within Canada; and funds management and central banking services "for the federal government, the Bank and other clients.

Bank of Canada History

1. The Bank of Canada Act received Royal Assent on 3 July 1934; the Bank began operations on 11 March 1935 and issued its first bank notes. Since then the Bank has issued five more series of bank notes, with the next to be launched in 2011.

2. The Bank of Canada began as a privately-owned institution, with shares sold to the public at a par value of $50. In 1938, all shares were purchased by the Government of Canada and the Bank became a Crown corporation.

3. During World War II, the Bank of Canada's nine victory Bond campaigns raised almost $12 billion for the war effort. After the war, the program was continued with Canada Savings Bonds.

4. During World War II, vaults deep beneath the Bank of Canada's headquarters provided a safe haven for tons of gold secretly moved from European central banks.


5. During World War II, vaults deep beneath the Bank of Canada's headquarters provided a safe haven for tons of gold secretly moved from European central banks.

6. The Canadian dollar was allowed to float on currency markets (rather than being pegged to the US dollar) in September 1950. The dollar's exchange rate was fixed again from 1962 to 1970; it has floated ever since.

7. In the mid-1950s, the Bank began to develop a market for government bills and bonds in Canada.

8. In 1961, a fundamental disagreement between the then-Governor of the Bank, James Coyne, and Finance Minister Donald Fleming led to Parliamentary debates and hearings and Coyne's eventual resignation. The "Coyne affair" led to an amendment to the Bank of Canada Act in 1967 enshrining the Bank's operational independence and creating a mechanism for resolving policy disagreements between the government and the Bank.


9. The Currency Museum opened in December 1980 to house Canada's National Currency Collection, which consists of about 100,000 bank notes, coins, tokens, and other artifacts.

10. In February 1991, the Bank and the federal government introduced targets aimed at reducing inflation to 3 per cent by late 1992 and 2 per cent by late 1995. The 2 per cent target was achieved more quickly than expected and the inflation-targeting agreement has been renewed four times.

11. The Bank's Governing Council was created in 1994 to take collective responsibility for monetary policy decisions.

12. Starting in December 2000, the Bank began making interest rate announcements on eight pre-specified dates per year.

Economic Principles

Monetary Policy

In any currency there is a supply of money, and an interest rate, the price at which money can be borrowed.Monetary policy uses a variety of tools to control one or both of these, to influence outcomes like economic growth, inflation and unemployment.

In Canada, monetary policy is the responsibility of the BANK OF CANADA, a federal crown corporation that implements its policy decisions largely through its ability to alter the Canadian money supply.

INTEREST RATEINTEREST RATE

Refers to the cost of moneyRefers to the cost of money Higher rates discourage both investment and Higher rates discourage both investment and

consumptionconsumption Timing is crucial in monetary policyTiming is crucial in monetary policy

– 4-6 quarters before monetary policy takes effect4-6 quarters before monetary policy takes effect


Overnight Interest Rate

This is the rate that banks use to borrow and lend to each other in short term transactions.

Each day, banks have numerous business transactions. At the end of the day, depending on the day’s activity, they may end up with a surplus or a deficit.

Banks with surpluses lend to those that have deficits.

The Bank of Canada sets this target 8x a year on fixed dates.

Overnight Interest Rate

The Overnight Rate is directly tied to the liquidity of the economy; i.e. the more money available in the economy, the lower the rate is. This is determined by Bank of Canada

Liquidity is the access to cash or credit. The Overnight Rate ends up affecting the entire

spectrum of interest rates:– The lowered overnight rate increases the demand for

credit.– Banks give out more credit.– The reverse is also true.

Increasing/Decreasing Credit Levels

The more credit available, the more financial transactions occur for goods and services.

The more that people are buying, the more physical money is needed.

The less credit available the less people buy.

INFLATIONINFLATION

General rise in pricesGeneral rise in prices– Measured by an index with constant basket of goodsMeasured by an index with constant basket of goods

Cause:Cause:– Excessive growth of the money supplyExcessive growth of the money supply

Growing faster than real economic growthGrowing faster than real economic growth– Excess money growth lowers the value of outstanding Excess money growth lowers the value of outstanding

moneymoney

– Overly strong demand vs supplyOverly strong demand vs supply


Inflation

Inflation is the rise in the cost of goods and services in the economy over a period of time.

If the cost of goods goes up faster than the rise in wages, the consumers buying power is less than it was previous.

High inflation is bad for the economy. An excessive growth in money supply can cause

inflation. If money supply occurs faster than economic growth, inflation will result.

Is inflation good or bad?

Inflation – Normal part of the market but needs

Hyperinflation: Too much of a bad thing

BATTLE AGAINST INFLATIONBATTLE AGAINST INFLATION

Inflation:Inflation:– Weakens currencyWeakens currency– Hard on people on fixed incomesHard on people on fixed incomes– Leads to market inefficiencyLeads to market inefficiency– Discourages long-term financingDiscourages long-term financing

Removing inflation from economy painfulRemoving inflation from economy painful– Lag between decrease in inflation and decrease in Lag between decrease in inflation and decrease in

interest ratesinterest rates Investment and consumption do not recover immediatelyInvestment and consumption do not recover immediately

– Need to raise taxes, reduce government spendingNeed to raise taxes, reduce government spending

Inflation in Canada very lowInflation in Canada very lowCopyright © Captus Press Inc., 2009 Copyright © Captus Press Inc., 2009

Milton Freidman (1912-2006)

Expansion of money supply leads to inflation; governments should focus on price stability.

Felt that changes to real wages and real interest rates initially generated by monetary policy are offset by market adjustment in response to excess supply or demand.

His views on monetary policy, taxation, privatization and deregulation formed the policy of many neo-conservative governments.

Fiscal Policy

Fiscal Policy refers to the federal government's use of its annual budget.

The budget strategy can also influence the achievement of the government's objectives of internal and external balance and economic growth.

The two main instruments of fiscal policy are: – government spending– Taxation

Changes in the level and composition of taxation and government spending can impact

– Aggregate demand and the level of economic activity – The pattern of resource allocation – The distribution of income.

Money, Business and Federalism

Canada’s Financial Institutions

Sector Number of active firms Employment1

Banks 69 237,000

Credit unions/caisses populaires

1,298 53,000

Trust companies 29 n/a

Life and health insurance companies2 108 118,000

P&C insurance companies 230 100,000

Mutual fund companies3 270 70,0004

Securities dealers3 207 37,000Finance and leasing companies

250 n/a


Under the constitution the federal and provincial governments share jurisdiction over the financial services sector.The Government of Canada has sole jurisdiction for banks while credit unions/caisses populaires, securities dealers and mutual funds are largely regulated by provincial governments.

Credit Unions have been given the right to seek national charters bringing them under Federal Control when they do.

Both levels of government regulate insurance and trust and loan companies. Market conduct is regulated at the provincial level and companies that are federally incorporated are regulated by the Federal government.

Ontario no longer provides for the incorporation of new trust and loan companies in its jurisdiction.


The Government of Canada provides prudential oversight of banks through the Office of the Superintendent of Financial Institutions (OSFI).

Federally incorporated Trust and Insurance Companies are regulated the Trust and Loan Companies Act.

the Canada Deposit Insurance Corporation (CDIC), a federal Crown corporation, insures deposits in banks and trust and loan companies against loss in the event of member failure up to $100,000[3] per depositor in each member institution

The legislation governing Canada's federally regulated financial institutions is subject to review every five years.

Consumer Protection

the Canada Deposit Insurance Corporation (CDIC), a federal Crown corporation, insures deposits in banks and trust and loan companies against loss in the event of member failure up to $100,000[3] per depositor in each member institution

The Deposit Insurance Corporation of Ontario (DICO) is an Ontario Provincial Agency established under the Credit Unions and Caisses Populaires Act, 1994. All eligible deposits are insured up to $100,000 per depositor in each organization and fully insures all eligible deposits in registered accounts (i.e. RRSP’s).

Fractional Reserve Banking

Banks maintain a portion (fraction) of their total customer’s deposits at the central bank in the form of a reserve.

The central bank requires that banks keep a minimum amount in reserve, to cover the normal demand for withdrawals.

The central bank oversees the activities of the commercial banks, provides deposit insurance to consumers and acts as a lender of last resort to commercial banks to bail them out in a time of crisis.

Bank Deposit Reserve Loan

Bank #1 $100 $10 $90

Bank #2 $90 $9

Bank #3 $81 $8.1 $72.9

Bank #4 $72.9 $7.3 $65.6

Bank #5 $65.6 $6.6 $59

Bank #6 $59 $59$0$81

Total $468.5 $100 $368.5

Fractional Reserve System

Fractional Reserve System

History of Banking

The problem with Fractional Reserve Banking is that if people lose faith in the bank and try to redeem their notes all at once, the bank is unable to pay.

This is because the actual wealth the bank controls is not stored in one physical location, but is dispersed throughout the various borrowers.

If everyone tries to get their money out at once, this situation is called a bank run.

The History of Banking

In order to protect from this type of occurrence, governments began to create central banks.

What is a central bank?

A central bank is a government created public institution that:

– Issues currency– Regulates money supply– Controls interest rates– Has certain powers over the banking industry

Can Regulates them Can Imposes reserve requirements Can act as a lender-of-last-resort to mitigate things like bank runs

– Is usually separate from government to protect it from political interference

Issuing currency

Money has a long history as a means of exchange. The value of money was formerly tied to the value of the metal it was made out of (i.e. copper, silver or gold).

Paper notes eventually replaced coinage as the main source of money, mainly because the weight of coins made them cumbersome for usage when large amounts of money were required.

Currently, the central bank holds assets (foreign exchange, gold or other valuable assets).

Based on the value of these assets, and on the sale of bonds to the public, currency notes are issued.

Money Supply

Money supply is the total amount of money available in the economy.

Money supply data is recorded at the central bank.

This can be modified by purchasing financial assets or lending money to financial institutions.

Commercial banks then increase this through fractional reserve banking.

The Bank of Canada

Canada followed the British banking system, with a limited number of larger banks with multiple branches.

In the US independent local banks was the norm.

With our relatively small population spread out in rural centres, the British model made more sense:– Branch banks required less capital than a full

independent bank.

The Bank of Canada

The branch banking system lead for a very stable banking system since the branches spread the risk around the country.

There was little need for a lender of last resort:– In the US, with its small banks they would often

find themselves with seasonal cash flow problems, and a central bank (the United States Federal Reserve) was a necessity.

The US Federal Reserve System

The US Federal Reserve System (The Fed)was set up in 1913. The Fed was set up in part due to a financial crisis in 1907

(called the Panic of 1907).– The New York Stock Exchange fell 50% in trading.– Bank runs were numerous.– Many regional banks had invested money in the larger NYC banks.

When they started to struggle the smaller banks joined the bank runs.– Many regional banks and businesses declared bankruptcy.– New York financiers (led my JP Morgan) invested their own money to

keep the banking system from collapsing.– A central bank was needed to prevent this from happening in the

future.


Duties of the US Federal Reserve:– maintain employment– keep prices stable– keep interest rates at a moderate level by

regulating monetary policy – supervise banks– provide financial services– conduct research on the United States economy

and the economies in the surrounding region


The Board of Governors is appointed by the President.

It has both private and public components. It is independent from government; its policy

decisions do not have to be approved by the President or Congress.

http://www.archive.org/details/gov.frb.pa.today

Canada vs US Banking System

Key Area United States Canada

Number of Banks Over 8,500 Approx. 70

Nationwide Branching Effectively Limited to Regions Full NationwideInterest Paid on Corporate Checking Accounts NO YES

Foreign Currency Accounts NO YESNumber of Bank Relationships per Company Many One

Check Usage Very High Medium

Check Clearing Times 1-3 Days Same Day

Check Conversion Initiatives YES NO – Not NeededGovernment Operation of Clearing System Very High Low“Unbundling of Banking Services” YES YES

Coyne Affair

Key Players

• James Coyne• Graham Towers• Louis St. Laurent• John Diefenbaker• Donald Fleming• Howard Green• Louis Rasminsky

Coyne Affair

Political

• Liberal government of Louis St. Laurent defeated by Conservative John Diefenbaker in 1957 and again in 1958. • Conservative government start spending heavily on defense. • Conservative government campaigned against tight monetary policy of bank.

Toronto Star http://www.thestar.com/business/article/836718--the-lonely-giant

Coyne Affair

Economic

• What was Canada’s Economy like when Coyne took office? • What factors had affected it?


Coyne Affair

Political – Role of Bank and Coyne’s Actions as Governor

• What was the role of the Bank of Canada ?• Key goal ?• Key tools in doing this ? • What did Coyne do that was different from Towers?• Why was Coyne more active • What were Coyne’s three goals?• What was his 3 main concern?

•What business group did Coyne anger and why?

Coyne Affair

Political – Issues• Who in he government supported Coyne? Why?• Why was he unsuccessful in supporting Coyne? • What did Diefenbaker accuse Coyne of doing?• What else did Coyne do that upset the

government ? • Who else was upset with Coyne? Why? What

did they want the government to do?

Coyne Affair

• The Affair • Diefenbaker accuses Coyne of raising his

own pension. Demand resignation• Coyne refuses to resign under these

allegations which he claimed were false• July 6, 1961 Conservatives declare the

position vacant and pass a bill in the House of Commons

• On July 13, 1961 The Senate defeats the bill killing it.

• James Coyne resigns on July 14, 1961.

Coyne Affair

• The Aftermath • Who took over? • What were his conditions• What did the new governor want to

ensure.

Coyne Affair

As the second governor of the Bank of Canada, Coyne established the autonomy of the central bank. It has been protected from political interference ever since Coyne was ousted from the commanding heights of the economy in 1961 by the addled government of John Diefenbaker.With his unprecedented outspokenness, Coyne reinvented the role of central bankers worldwide. …In unprecedented fashion, Coyne took to the speaking circuit to excoriate the Diefenbaker government for its perilous accumulation of monstrous deficits. The spectacular blundering by which Diefenbaker and his finance minister, Donald Fleming, went about ousting this relentless irritant revealed the eccentric Dief to be, at times, only marginally sane.


bank of canada. class 8:canada expands outcomes expected able to discuss the importance of bank of...

Documents

economic slide

bennett slide

eatons case slide

bank of canada slide

canadian retail slide

minimum wage slide

price spreads commission

price fixing