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CASE 7.docx

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Administrative Studies
ADMS 1010
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CASE 7: THE ‘COYNEAFFAIR’AT THE BANK OF CANADA STATE OF THE CANDIAN ECONOMY - In the 1950’s, Canada was emerging from the post-war, post-depression era - Economy was stable but the GDP/capita was low until 1960s - 1950s, saw 3 cyclical expansions o 1949-53: boom of commodities due to Korean war, domestic demand pressures were strong, coming from unfulfilled wartime demand for consumer goods, infrastructure, expenditure, housing and immigration, inflation was high while employment was low o 1954-57: short-lived, sharp recession before entering into the second era of expansion- driven by strong investment in the resource sector, government investing heavily in defence, and infrastructure in the St. Lawrence Seaway, rapid population growth drove the housing sector aided by government incentives; inflation picked up and so did unemployment o 1958-60: Canadian dollar appreciated in value, inflation was low but unemployment was rose to a post-war high, ‘60’s: consumer prices rose but unemployment was rising higher ROLE OF THE BANK OF CANADA - Bank of Canada opened in the mist of the Great Depression o Its role was to regulate credit and currency, to control and protect the external value of the national monetary unit and to mitigate by its influence fluctuations in the general level of production, trade, prices and employment o Coyne was the first governor of the bank to actively pursue monetary policy using the bank rate  Within the first 18 months, raised the rate 6 times • Soon the bank rate became a floating rate adjusted weekly MONETARY POLICY OF THE DAY - Coyne used the bank rate regularly in his effort to manage the money supply; wanted to keep inflation in check thus having a tight money policy o Saw this as leading to growth and stability of consumer prices - Concerned about low saving rates of Canadians and the high rate of foreign investment in Canada; considered this linked o ‘capitalist system requires savings, either you do the savings or you borrow from other countries who will do it for you COYNEAND THE BANKERS - Introduced a minimum 15% liquidity ratio for charted bank holdings o Designed to increase the effectiveness of monetary policy in moderating a too rapid expansion of credit -
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