LEVIATHAN – Rise of Central Banking, And: A retrospective analysis of the COVID-19 crisis

Written By: Sumeet Dhatt

“[Leviathan] comes into being when its individual members renounce their powers to execute the laws of nature, each for himself, and promise to turn these powers over to the sovereign—which is created as a result of this act—and to obey thenceforth the laws made by this sovereign.” – Britannica on Thomas Hobbes’ Leviathan [4].

During the COVID-19 pandemic, the role of the central banks across the world, for instance, the United States Federal Reserve and Canada’s Bank of Canada, became increasingly relevant to all of our lives. Central Banks are a core aspect of our economy, as such it is important to not only know their role within our economy and how their decisions impact us today, but also how and why they became prominent in today’s modern economy.

Historical Perspective

Leviathan – The Rise of Central Banking

In 1935, the Canadian Parliament, under the guidance of W.C. Clark (the Deputy Minister of Finance at the time) implemented the Bank of Canada Act, which cemented Canada’s commitment to central banking and officially left behind the gold standard. This decision to adopt a central bank was complicated, controversial, and years in the making [2].

Discussions on adopting a central bank in Canada began in 1931 when the Canadian economy was set adrift from both the United States and the British Empire, their closest economic partners. The discussion around adopting a central bank would put Canada in an interest position, essentially asking the nation whether they would prefer to be more dependent on the British Empire or the United States [2].

Although Canada had close ties to the British, since the turn of the 20th century, Britain’s influence over the Dominion had been declining—a somewhat universal trend for the Empire. Contrastingly, the United States, a growing power, had rapidly increased its ties with Canada—quickly rivaling the Empire in terms of total trade with the nation [2].

Generally put, Canada was faced with an interesting opportunity that would come to define the future of not only their economy, but the nation itself: they had the choice to determine whether they would strengthen their ties with Britain by joining the sterling area (and implementing a central bank) or if they would continue as is and fall under the influence of the United States—although this decision sounds simple, it was more complicated than meets the eye [2].

The Behemoth Falls – Leaving the Gold Standard

After witnessing the Great Depression, the British had officially decided to leave the gold standard. They strongly felt that the gold standard was not manageable unless there was global cooperation to ensure countries lookout for the interest of the international community—they felt that this was not possible due to the selfish gold hoarding of countries such as the United States and France. As a result, Britain had decided to leave the gold standard and implement a floating currency managed by the Bank of England [2].

Eventually, a major goal of the Bank of England would revolve around expanding the influence of the sterling through the sterling zone—a group of countries that held reserves in London and pegged their currencies to the sterling. An expansion of the sterling area would reinforce Britain’s dwindling power and restore its position within global markets[2].

The Sterling Zone [7]

The Order of the Phoenix – The British Empire’s Proposal

As a part of its proposal to Canada, the British Empire suggested that the Dominion establish a central bank in the same vein as the Bank of England—which focuses on supervising the economy and promoting stability, whilst also co-operating with Banks across the sterling area. These proposed banks would also control the money supply of the nation, hold private reserves, and act as a lender of last resort. There was an underlying assumption that the needs of the international area should be prioritized over domestic needs, with the Bank of England being the ultimate overseer due to its superior resources [2].

Although Canadian officials initially rejected this proposal due to worries about the unreliability of world markets, eventually a central bank somewhat faithful to the principles in the proposal was implemented through the Bank of Canada Act—which emphasized the Dominion’s ability to control domestic credit. The adoption of a central bank, although a somewhat contentious policy, was viewed by many parties as the best option—including commercial banks who viewed the British proposal of central banks to be the least intrusive on their independence. Generally, the implementation of the central bank is viewed as a success for the Dominion, as they used the Bank of England’s resources to ensure their success and growth—serving their own domestic interests rather than the Crown’s [2]. 

Modern Analysis

The COVID-19 Pandemic

Generally, central banks are tasked with maintaining low inflation and seeing that the GDP grows at a steady rate, typically through dictating monetary policy and controlling the money supply—as well through influencing interest rates, open market operations, and acting as a lender of last resort. However, the role of central banks, such as the Bank of Canada and the United States Federal Reserve, became increasingly relevant to our lives during the midst of the COVID-19 pandemic [6].

Although the crisis began as a health epidemic, it quickly spread its roots into all aspects of our society—including our economy. The economic impacts of the COVID-19 pandemic were initially cataclysmic with broken supply chains and record-high unemployment. Uncertainty was in the air and people felt that the day of doom was here, our global financial system, the capitalist system, had failed—’It is dead, it remains dead, and we have killed it.’ [3]

Fortunately, a crisis of that magnitude was avoided, partly due to the nature of the crisis itself. The COVID-19 pandemic was an external shock on the economy that broke global supply chains. With increased uncertainty in the air and businesses shutting down, the initial rates of unemployment were tremendous. However, as the economy began to regain certainty, we would see that much of this unemployment was temporary [3;1].

Canadian Employment [8]

One of the important roles of the central bank is to manage the money supply. Generally, the majority of money in the economy is created through commercial banks issuing loans, however, the Bank of Canada is also able to increase the supply through the purchase of assets—this was done on an unprecedented basis in an attempt to negate the impacts of the COVID-19 pandemic and raise inflation to the desired rate. The advantage of this method of money creation is that it is an internal process, and is isolated from the exogenous effects of external factors such as market dysfunction [5].

These policies, which prompted an inflationary market through increasing asset purchases, helped prevent a larger economic crisis from occurring early in the pandemic. The increase in the money supply allowed policymakers to focus on providing subsidies to households and businesses (although, the efficiency of the subsidies implemented may be argued). These funds and policies would help households and businesses avoid defaulting on their debts, and in some cases restore consumer demand. More generally, it seems that these subsidies helped the economy avoid a larger economic crisis being driven by increased defaults on debt and lack of demand, on top of the already raging supply-driven crisis [3;1].

Although this crisis was devastating, it had the potential to be much worse, economically. It is fortunate that policymakers and central banks had learned from previous economic crises, such as the Great Recession, and had implemented policies that directly helped the parties most impacted by the crisis—households and businesses. Had they reacted differently, it is difficult the imagine how and when the economy would have recovered.


With the advent of the COVID-19 crisis, our lives were changed forever—it felt as if we almost went through our own ‘blip.’ As of now, it seems that the worst of the crisis has passed—restrictions are being removed and the economy is re-opening. However, the COVID-19 crisis was not just a blip in our lives, it was a devastating event that has changed our world in many aspects, and hopefully, we remember the lessons we learned from this crisis and use it to prevent or lessen the impact of any future crises—and finally let’s not forget to stay hopeful and try to keep our expectations high, even when the future seems bleak.

“Yesterday’s price is not today’s price” – Pusha T

After a two-year pandemic, we are now dealing with highly inflated prices. Do you think the central bank is at fault—should they have acted differently? [9]


Works Cited

[1]: Albanesi, S., & Kim, Jiyeon. “Effects of the COVID-19 Recession on the US Labour Market: Occupation, Family, and Gender.” Journal of Economic Perspectives, vol.35(3)., 2021.

[2]: Cain, P.J., “Gentlemanly Imperialism at Work: The Bank of England, Canada, and the Sterling Area, 1923-1936.” The Economic History Review, vol.49(2), 1996.

[3]: Chetty, R. et al., “How did COVID-19 and stabilization policies affect spending and employment? A new real-time economic tracker based on private sector data.” National Bureau of Economic Research., 2020

[4]: “Leviathan.” Britannica. https://www.britannica.com/topic/Leviathan-by-Hobbes.

[5]: Stuckey, B. et al., “How the Bank of Canada creates money through its asset purchases” Parliament of Canada, 2021.

[6]: “What Central Banks do.” Inestopedia. https://www.investopedia.com/articles/03/050703.

Image References

[7]: “Sterling are functions similarly to the CFA…” Alternatehistory. https://www.alternatehistory.com/forum/threads/sterling-area-functions-similarly-to-the-cfa-franc.500907/.

[8] “Table: 14-10-0026-01.” Statistics Canada. https://www150.statcan.gc.ca/t1/tbl1/en/cv!recreate.action?pid=1410002601&selectedNodeIds=&checkedLevels=0D1,1D1,2D1,3D1&refPeriods=20200101,20210301&dimensionLayouts=layout2,layout3,layout2,layout2,layout2&vectorDisplay=false

[9]: “Very painful gas prie hikes to hit southern Ontario this week, expert warns.” CBC. https://www.cbc.ca/news/canada/toronto/gas-prices-ontario-increase-1.6369474

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