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The Development of Canadian Banking

by Barry Uman, used with permission, originally published in C.N.A. Journals 1976-77

During the French Regime the economy of New France was dependent on a few staples for export such as fur and fish. There were relatively few domestic industries, resulting in a need for importing most necessities from the mother country. Therefore because of this requirement to purchase its manufactured goods abroad, the merchant and importer played a dominant role. "And it was not long before our first bankers, the merchants of New France, appeared, extending credit, mortgaging lands, helping to alleviate somewhat the chronic scarcity of currency."1 Naturally the merchants' influence was overwhelming and this led to many conflicts between them and the habitant and fur trapper.

Because of the scarcity of money, the merchants complained that they were unable to collect their debts while the farmers in return protested that they were forced to become indebted to the merchants. The lack of a unit of exchange crippled New France in any hope it had to develop its industry and commerce especially in contrast to the American colonies which were thriving economically with adequate specie.

In order to solve this serious problem, the local government adopted the use of wampum as a temporary measure but the quantity was too small. Therefore the authorities imported coins and jetons from France but because the colony suffered from an unfavourable balance of trade, this supply was used to pay foreign debts. "To overcome the tendency of the money to leave the country, nothing better than to raise its current value was attempted."2 But this attempt was unsuccessful and its only effect was to restrict commerce in its infancy.Finally the administration forced to issue card money in order to pay its soldiers. But because of financial difficulties, corruption and the loss of supply ships, the card money depreciated in value and the population suffered. "Such experiences delayed the growth of confidence in paper money without which no banking system could develop."3 Thus the lack of money, poor administration and few exports hampered the early development of banking in New France.

During the early period of English rule economic conditions were not greatly improved in contrast to the French Regime, but the merchants and importers became stronger because they were now able to supply superior goods from England. "Merchants sometimes conducted a rudimentary banking business in connection with their main activity."4 It was only natural that the merchants would assume this important role, for they were the most important businessmen in the colony and the center of commercial activity.

The strength of the merchant lay with his contacts in England through a chain-like system of credit and finance. Because of the scarcity of specie, business was accomplished by the extension of credit from importer to merchant to settler. This chain began from British business houses which granted credits to their Canadian importers who in return extended credit to their agents and thence to local merchants. "This close alliance of finance and commerce which appears so early in our history was to be a factor of the greatest importance to the banking structure which began to take form in the early nineteenth century." 5

Like the French Regime, the settlers complained that they were in continuous debt and were unable to purchase their goods or sell their produce elsewhere because of this credit system. The lack of specie contributed to the merchant's monopoly and retarded growth and trade. "That kind of trade relationship called for the development of a banking system that could provide a generally acceptable medium of exchange in sufficient quantities."6 Now that there was a need for a better financial system, it would be but a short time in arriving.

The greatest American influence on Canadian banking was Alexander Hamilton, who undertook the founding of the First Bank of the United States in 1791. He used the Bank of England as his model and many features of this bank, such as its stabilizing influence and its concentration of financial power, impressed Canadian businessmen. Consequently the bank charters that were formulated were based on Alexander Hamilton's work. "Banking in British North America therefore came from a British source by way of the United States and its first Treasury head."7

Canada was faced with the task of building a nation despite geographical obstacle and the economic power of the United States, so it is no wonder that there were sur strong centralizing influences. "The difficulties of raising capital to finance necessa large-scale undertakings were so great as to make centralized organization essential in many parts of the Canadian economy." 8 Therefore it is no surprise that financially large banks developed in Canada as opposed to numerous smaller banks the United States.

The evolution of the Canadian banking system reflected British policies with its emphasis on stability and safety. There was better managerial handling of British capital as opposed to the United States where many banks failed resulting in a increased investment in Canada. "This fostered the conservatism of Canadian business which found itself backed by British conservatism particularly in banking."9 The English Colonial Office controlled banking and granted charters which imposed conservative financial principles so as to protect the population from experimentation that so disrupted the American system.

Because there were no commercial institutions, the merchants involuntarily assumed the role of bankers by extending credit, granting loans and accepting deposits. Therefore it comes not unexpectedly that the first unsuccessful attempts to establish banks in Canada were sponsored by merchants. Three merchant companies formed the Canadian Banking Company in 1792 but this premature move failed because the French population disliked paper money and preferred specie instead.

"The Canadians in these circumstances were not yet ready to sustain an institution specialized in banking but fell back upon the granting of credit by merchants and upon the use, for remittances, of the drafts drawn by them upon the merchants to whom they sent exports for sale."10

There were other attempts to establish banks in Canada but they were discouraged by the Colonial Government who feared speculation and gambling would be the only results.

The War of 1812 stimulated the colonies' trade and production especially when England established military bases which became a new market for Canadian goods. But the Canadian Government could not finance its war preparations under the present inadequate financial system, so it was forced to introduce Army Bills, which were accepted immediately by the people. The Army Bills could be redeemed any time and this enabled many people to pay their debts thus weakening any prejudice against paper money. "They had served as a stable and effective medium of exchange and it became apparent that recovery and continued progress rested upon the establishment of adequate banking facilities."11 But bank credit was essential for merchants and importers to finance purchases from their suppliers and therefore the need of a banking system soon became apparent.

"In these circumstances when the war ended in the winter of 1814-1815, prospects were more favourable for the establishment of banks in the Provinces than they had ever been; for the close of the war meant an end to the army bills, the need of a substitute for them and an opportunity for banks to provide it." 12

"In 1817 the first successful Canadian Bank, the Bank of Montreal, was formed, and in the following years the number grew." 13 The articles of association were derived from Alexander Hamilton which would become the basis for all later bank charters in Canada.

But there were criticisms in Lower Canada against inadequate tests for solvency and excessive banknote issues but it was passive rather than aggressive. The French Habitants preferred metal coins so that whenever they received any banknotes, they would convert it into specie immediately and this transaction was beneficial for the banks because it prevented excess notes until the banks gained experience. French Canadians furnished reserves and became stockholders for these early banks.

In Upper Canada there was a political and commercial conflict between the Family Compact at ork and the merchants at Kingston concerning the Bank of Upper Canada. The Family Compact opposed any opposition to its economic interests and therefore through unfair political manoeuvres, stole the Kingston merchants' bank charter. Despite the pressures from York, the merchants established their unincorporated Bank of Upper Canada, but it later became Canada's first bank failure in 1822. The Family Compact's Bank even attempted to monopolize its position by accumulating banknotes of its only competitor, the Bank of Montreal, and presenting them for immediate payment unsucessfully. This conflict between political and commercial interests harmed the development of banking in Upper Canada.

In the Maritimes, only a few banks were founded, causing very little political and commercial disruptions, while in Nova Scotia, the governor did not encourage banking as it would interfere with the province's issue of Treasury Notes.

The growth of branch banking in Canada was a most important step which distinguished Canada from unit banking in the United States. This system wasbeneficial to the settlers and merchants because it permitted the banks to extend their facilities and control throughout the colony where its branches served as clearing houses and promoted uniform currency and credit conditions. Because Canada was so large and its population so small, it was not economically feasible to establish different banks in each area. The banks therefore extended their control and services via branches immediately after they obtained their charters. "Not til 1841 apparently were banks in Canada proper given generally specific authority to maintain more than one office."14

Canada had always being susceptible to external influence and thus during the 1830's when England invested speculatively in North America, Canada received new investment. But when crisis conditions appeared in Britain, they quickly spread to Canada in 1837, complicating the political turmoil and existing economic structures."Although speculation had been less violent in Canada and the reaction less severe. Canadian banks were forced to reduce discounts and frequently to suspend specie payments."15 Canadian banks were forced to halt payments of currency for a few months without any bank failures.

When the crisis ended the agricultural and commercial interests demanded adequate safeguards to prevent a recurrence of this event. They insisted on a greater emphasis on liquidity and the restriction of credit during a financial crisis. But the protests against the existing close ties between financial institutions and the oligarchies was ignored and not corrected until responsible government was achieved.

Since the establishment of the first banks in Canada, the agrarian interests had demanded free banking and easy money, for they claimed that there was insufficient money and a lack of banking facilities in their areas. The farmers complained bitterly that they were being sacrificed for commercial interests and that their special need for credit had not been met by any financial institutions.

In Upper Canada this conflict was complicated by the political turmoil between the Reformers and the Family Compact bank. "The high profits of the Bank of Upper Canada attracted newcomers, but those who sought entry encountered strong oppositin and marked difference of opinion quickly became apparent. 16

Due to agrarian complaints and political agitation, the Canadian Legislature enacted a bill in 1850 to establish free banking but it had little success because it was opposed by the chartered banks, commercial interests and the imperial authorities. Canadian banks opposed free banking because they could issue banknotes only when bonds had been deposited and redemption centers set up.

"So long as there was a choice, a good banker was apt to prefer a special charter for besides the feeling that one conferred according to ancient practice by special legislative act had greater prestige than a new-fangled one handed out at a window by an administrative officer, the free-banking emphasis on note issue was either useless or burdensome." 17

Thus agrarian interests were again sacrificed for commercial support causing the Free Banking Act to be repealed in 1880.

Besides the agrarian and commercial disagreements, there appeared a conflict between the banks and government over authority to issue notes. The banknotes, which were backed by the bank's assets, provided an elastic currency which would affect the money supply during business cycles. The banks emphasized the advantages of this automatic system but its critics complained it would cause overexpansion during boom periods or contraction during recessions.

The government felt that falling prices were caused by insufficient money and that there was a need for adequate financing of Canada's development.

"A currency based on government bonds rather than commercial paper was proposed on the grounds of greater stability in the supply of currency would be achieved, and in the process a ready market would be created for the bonds of the hard pressed provincial government." 18

But the banks opposed this and all future legislation successfully as being detrimental to their interests and customer services. Even at Confederation when the Federal Government assumed jurisdiction of the financial system, the banks st issued paper money. "Bank notes were issued against general assets instead of against government securities."19 Both government and bank paper money circulated gether up to 1945, when the banks were forbidden to issue notes.

Now that Canada had matured as a dominion, many former Imperial responsibilities were now being transferred back to Canada. "On December the 31, 1931, the complete control of the Mint and personnel was taken over by the Canadian Government and the establishment became The Royal Canadian Mint."20 Thus Canada had acquired an important institution necessary for the control of her financial system.

Canada had followed the international gold system until the First World War, when it became impossible for other nations to continue and Canada was forced to abandon this system temporarily.

"As far as Canada was concerned, gold had long ceased to circulate as money to any extent, but the rule that Dominion notes were payable in gold on demand, that this gold could be freely exported and that increases in note issues were possible only in response to increases in gold reserves had made this method the basis of the national credit system. "21

The government now faced a grave problem in financing the war effort without the use of gold, therefore paper money was advanced to the banks. The gold system was soon re-established but because of a continuous gold outflow, it was finally terminated in 1931.

With so many banks in Canada, and the complications at fictitious paper money and bankruptcies, there arose an urgent need for the regulation of all legitimate banks.

"The Canadian Bankers' Association, formed as a voluntary organization in 1892, was given the status of a public corporation in 1900 and granted the power to establish and regulate clearing-houses for the banks in any part of the country." 22

Since the Federal Government did not yet feel it was its responsibility to supervise the monetary system, the banks were forced to assume these burdens.

The banks showed their ignorance of the banking system by denying that they could create money while the government refused to accept the responsibility as a manager of its financial system. But three major events compelled the authorities finally to act. First, the temporary measures taken to replace the gold standard during the 1914-1918 War were inadequate. Secondly, in 1923 the Home Bank failed despite previous warnings to the government and thirdly, the depression of 1929 jolted the population into realizing that a lack of monetary policy prolonged and intensified the depression. "Both the Conservative and Liberal Parties had originally opposed a central bank, but changed their minds under pressure of public opinion."23

By founding the Bank of Canada in 1933, Canada had achieved full maturity of her banking system despite opposition from the Federal Government and the banks. "The establishment of Canada's central bank rounded out in its essentials a structure which had been slowly evolving for over a century.” 24

Thus the development of banking in Canada is a story of many struggles between conflicting interests such as merchants and farmers, French and English, rural and urban dwellers, Banks and the government, Americans and British, reformers and the oligarchy. These antagonistic relationships between these groups has influenced and molded our banking system despite the acute shortages of specie, the lack of credit, the distrust of paper money, the competition among the banks and the problems of a growing country. It has taken Canada one hundred and fifty years to reach maturity in her banking system and despite the long period of time and the problems involved, we can be justly proud that Canadian banking has finally come of age.


1. W.T. Easterbrook and M.H. Watkins, eds., Approaches to Canadian Econom History, "Banking and Capital Formation" [Toronto: McClelland & Stewart, 1967

2. P.N. Breton, Popular Illustrated Guide to Canadian Coins, Medals, etc. p. 445.

3. J. W. O'Brien, Canadian Money & Banking, "History of Banking in Canada [Winnipeg Canadian Numismatic Publishing Institute, 1968), p.11. (Toronto: McGraw-Hill Co. of Canada, 1966), p. 169.

4. Ibid., p. 170

5. W.T. Easterbrook and Hugh G.J. Aitken, Canadian Economic History, "Money and Banking in Canadian Development" [Toronto: Macmillan Co. of Canada, 1967, p. 445.

6. O'Brien, p. 170

7. Easterbrook and Watkins, p. 160

8. Easterbrook and Aitken, p. 452

9. Easterbrook and Watkins, p. 163

10. Ibid., p. 138

11. Easterbrook and Aitken, p. 449

12. Easterbrook and Watkins, p. 141

13. O'Brien, p. 171

14. Easterbrook and Watkins, p. 159

15. Easterbrook and Aitken, p. 454

16. Ibid., p. 453

17. Easterbrook and Watkins, p. 165

18. Easterbrook and Aitken, p. 456

19. O'Brien, p. 175

20. H.C. Taylor and Somer James, The Guide Book of Canadian Coins, Currency and

Tokens [Winnipeg: Canadian Numismatic Publishing Institute, 1962], p. 18

21. Easterbrook and Aitken, p. 469

22. Ibid., p. 467

23. O'Brien, p. 189

24. Easterbrook and Aitken, p. 470


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