BROADENING THE OWNERSHIP OF THE DEBT AND BANK RESISTANCE, 1935-1939
The major objectives of debt management after the Bank was created were to take advantage of lower interest rates, to establish a broader and deeper market for government debt and to encourage a more finely tuned, impersonal set of market relations. This meant an end to private consultations with the banks preceding new Dominion issues. The achievement of these goals was a sine qua non for monetary policy based on open market operations requiring a highly sensitive, broad market in government debt, which was lacking at this time. The goal of broadening the market for government debt was designed to drive an effective wedge between the Dominion as prime borrower and the institutional purchasers of bonds. According to Governor Towers
...our position versus the commercial banks and the security market is a very special one. For example, we can never obtain opinions from any outside source when we are formulating our advice to the Government regarding new issues. Thus we never enquire the views of anyone outside the bank A central bank must be independent and impartial, which means that on most occasions it must play a lone hand. 1
This "lone hand" effectively meant the elimination of the previous consultations or negotiations with the chartered banks. Henceforward, the Bank's policy initiatives and the Dominion's borrowing costs would be based on the central bank's policies in response to Government's needs (as interpreted by Finance and implemented by the Bank) and the movements of domestic and international financial markets. International financial conditions had a significant effect on the ability of the Dominion to borrow at lower costs in international markets. Looser monetary conditions in London and New York also assisted the Dominion in lowering domestic rates. From August 1935, when long-term rates neared 4 percent, rates fell gradually to near 3 percent during the summer of 1939 before inching up prior to the declaration of War.