ABSTRACT
There have been three great inventions since the beginning of time: fire, the wheel and central banking.
(attributed to Will Rogers)
Introduction
It is fair to say that the arrival of central banking was greeted with reluctance and scepticism in both the US and Canada. Both the Federal Reserve and the Bank of Canada were born at times when existing financial institutions seemed incapable of providing monetary stability. While there is perhaps today widespread agreement that central banks are necessary institutions, there is considerably less agreement about the limits of their authority. The experience of the last three decades has led to the perception that central banks have tended to follow the monetary policy of their governments with the resulting inflation, stagnation, or both. This experience has reinforced in the public’s mind the impor tance of some form of price stability as a macroeconomic objective and central bankers seem to have triumphed, in the words of Paul Volcker (1994), in presenting themselves as the only guarantors of such a goal. The same realization was reached in Canada, as evidenced by the opin ions of a former governor of the Bank of Canada, John Crow, in his now famous Hanson Lecture (Crow, 1988), when he declared that a central bank’s sole responsibility should be the pursuit of price stability. The above considerations suggest that success at maintaining low and stable inflation rates during the late 1980s and throughout the 1990s was possible because politicians, chastened by their past excesses, gave their central banks the necessary statutory powers required to tame inflation permanently.
