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Not surprisingly, as the 1930s progressed with little sign that the Depression was ending, pressure began to mount on the government to do something. In addition to concerns about the adequacy of the Finance Act, there was also widespread public distrust of the banking system, largely because of the high cost and low availability of credit. Farmers, especially those in western Canada, who were suffering from a sharp fall in both crop yields and prices, were particularly critical of banks and consequently very supportive of the formation of a central bank. They hoped that a central bank would be a source of steady and cheap credit. With effective nominal interest rates on farm loans in excess of 7 per cent, real interest rates were very high—about 17 per cent in 1931 and 1932, owing to sharply declining consumer prices. But interest rates were high for everyone because of the high Advance Rate. The traditional rate for a prime commercial loan was 6 per cent, while the standard deposit rate was 3 per cent, until the latter was reduced to 2.5 per cent in 1933 with the approval of the federal government.
1930-39 | Views: 1148 | Added by: gogoshvab | Date: 2010-02-19

Despite mounting evidence that a major economic contraction was under way following the stock market crash in October 1929, the federal government took little in the way of monetary action to support the economy. Admittedly, the scope for policy action was constrained, since advances under the Finance Act were made at the initiative of banks, and there was no money market. Also, Canada was, at least notionally, still on the gold standard. Nonetheless, the government set the Advance Rate, and chose to hold it unchanged at 4.5 per cent from September 1928 to October 1931. As a result, questions were widely voiced regarding Treasury Board officials’ understanding of monetary issues.

1930-39 | Views: 557 | Added by: gogoshvab | Date: 2010-02-19