Early Canadian banking system
Encyclopedia
The early Canadian
banking system (British North America
and New France
until 1763; then renamed Upper
and Lower Canada
) was regulated entirely by the colonial government. Primitive forms of banking emerged early in the colonial period to solve the drain of wealth caused by the application of mercantilist theory
. The drain of wealth translated into a complete lack of gold or silver bullion in the colonies, and thus, a complete lack of forms of economic exchange and payment.
, in addition to the coins introduced in the 1660s. However, the massive drain of wealth from New France to Europe
resulting from mercantilist trade policies made it impossible to back card money with gold bullion. Card money was thus essentially worthless. The card system collapsed in the 1690s, causing long-term suspicion of paper money on the part of the French settlers.
Card money was replaced in the 18th century by a type of promissory note
called bons, derived from the French phrase, bon pour, meaning good for the indicated amount. These were issued to a limited extent by French merchants, who, lacking in any other form of currency, were forced to create their own, and who consequently became the first Canadian bankers. The issue of bons spread rapidly into British North America after 1763, when New France became a British possession.
Bons persisted as the most common type of currency until 1812, along with the English pound, American
and Spanish
coinage, and the Halifax standard.
The British administration under Isaac Brock
introduced what became known as army bills in 1812, in order to finance the War of 1812
. The total value of these bills was 250 000 pounds. These were promissory notes issued directly by the government. They came into wide usage during the war (1812-1815) to make up for the lack of bullion in Upper and Lower Canada. Unlike the card money used in the late 17th century, army bills could be and were in fact exchanged for gold coin once the war had ended. The army bills had thus proven themselves reliable, eradicating any real stigma against paper currency.
In 1817, Montreal bankers were granted a charter
by the British government to open the first formal bank in Canada. This was the Bank of Montreal
. Under its charter, the Bank of Montreal was given a monopoly
on the right to issue promissory notes on the model of the army bills. Because of its monopoly rights, the Bank of Montreal essentially acted as a central bank
for both Upper and Lower Canada.
In the years after 1817, Britain granted several new bank charters, including a charter to the now-defunct Bank of Kingston, which was to act as a competitor to the Bank of Montreal in Upper Canada. The new chartered banks were required under the terms of their charters to recognise one another's currency, a practice that allowed for the development of long-distance trade within British North America. However, banking remained in private hands, which meant that the issue of currency was at the discretion of private bankers. This frequently led to high inflation
when the infant Canadian economy was in recession
.
The Provincial Note Act was passed in 1866 to link note issue to the needs of the British administration. This marked the beginning of an enduring policy of government intervention in the Canadian economy. The British North America Act of 1867 formally codified this policy, allowing for government control over coinage, currency, bills of exchange, promissory notes, banking, and incorporation of banks. This in turn allowed for the creation of a uniform currency across Canada. Official Canadian currency took the form of the Canadian dollar
in 1871, overriding the currency of individual banks.
Banking remained relatively decentralized until 1935, when the Bank of Canada
was founded in response to the economic instability experienced during the Great Depression in Canada
. First opened on December 5, 1980, Canada's Currency Museum
is located on the ground floor of the Bank of Canada
in Ottawa, Ontario.
Canada
Canada is a North American country consisting of ten provinces and three territories. Located in the northern part of the continent, it extends from the Atlantic Ocean in the east to the Pacific Ocean in the west, and northward into the Arctic Ocean...
banking system (British North America
British North America
British North America is a historical term. It consisted of the colonies and territories of the British Empire in continental North America after the end of the American Revolutionary War and the recognition of American independence in 1783.At the start of the Revolutionary War in 1775 the British...
and New France
New France
New France was the area colonized by France in North America during a period beginning with the exploration of the Saint Lawrence River by Jacques Cartier in 1534 and ending with the cession of New France to Spain and Great Britain in 1763...
until 1763; then renamed Upper
Upper Canada
The Province of Upper Canada was a political division in British Canada established in 1791 by the British Empire to govern the central third of the lands in British North America and to accommodate Loyalist refugees from the United States of America after the American Revolution...
and Lower Canada
Lower Canada
The Province of Lower Canada was a British colony on the lower Saint Lawrence River and the shores of the Gulf of Saint Lawrence...
) was regulated entirely by the colonial government. Primitive forms of banking emerged early in the colonial period to solve the drain of wealth caused by the application of mercantilist theory
Mercantilism
Mercantilism is the economic doctrine in which government control of foreign trade is of paramount importance for ensuring the prosperity and security of the state. In particular, it demands a positive balance of trade. Mercantilism dominated Western European economic policy and discourse from...
. The drain of wealth translated into a complete lack of gold or silver bullion in the colonies, and thus, a complete lack of forms of economic exchange and payment.
History
In New France, playing cards were issued as a method of payment in the 1680s by the Intendant of New FranceIntendant of New France
New France was governed by three rulers: the governor, the bishop and the intendant, all appointed by the King, and sent from France. The intendant was responsible for finance, economic development, and the administration of justice . He also presided over the Sovereign Council of New France...
, in addition to the coins introduced in the 1660s. However, the massive drain of wealth from New France to Europe
Europe
Europe is, by convention, one of the world's seven continents. Comprising the westernmost peninsula of Eurasia, Europe is generally 'divided' from Asia to its east by the watershed divides of the Ural and Caucasus Mountains, the Ural River, the Caspian and Black Seas, and the waterways connecting...
resulting from mercantilist trade policies made it impossible to back card money with gold bullion. Card money was thus essentially worthless. The card system collapsed in the 1690s, causing long-term suspicion of paper money on the part of the French settlers.
Card money was replaced in the 18th century by a type of promissory note
Promissory note
A promissory note is a negotiable instrument, wherein one party makes an unconditional promise in writing to pay a determinate sum of money to the other , either at a fixed or determinable future time or on demand of the payee, under specific terms.Referred to as a note payable in accounting, or...
called bons, derived from the French phrase, bon pour, meaning good for the indicated amount. These were issued to a limited extent by French merchants, who, lacking in any other form of currency, were forced to create their own, and who consequently became the first Canadian bankers. The issue of bons spread rapidly into British North America after 1763, when New France became a British possession.
Bons persisted as the most common type of currency until 1812, along with the English pound, American
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
and Spanish
Spain
Spain , officially the Kingdom of Spain languages]] under the European Charter for Regional or Minority Languages. In each of these, Spain's official name is as follows:;;;;;;), is a country and member state of the European Union located in southwestern Europe on the Iberian Peninsula...
coinage, and the Halifax standard.
The British administration under Isaac Brock
Isaac Brock
Major-General Sir Isaac Brock KB was a British Army officer and administrator. Brock was assigned to Canada in 1802. Despite facing desertions and near-mutinies, he commanded his regiment in Upper Canada successfully for many years...
introduced what became known as army bills in 1812, in order to finance the War of 1812
War of 1812
The War of 1812 was a military conflict fought between the forces of the United States of America and those of the British Empire. The Americans declared war in 1812 for several reasons, including trade restrictions because of Britain's ongoing war with France, impressment of American merchant...
. The total value of these bills was 250 000 pounds. These were promissory notes issued directly by the government. They came into wide usage during the war (1812-1815) to make up for the lack of bullion in Upper and Lower Canada. Unlike the card money used in the late 17th century, army bills could be and were in fact exchanged for gold coin once the war had ended. The army bills had thus proven themselves reliable, eradicating any real stigma against paper currency.
In 1817, Montreal bankers were granted a charter
Charter
A charter is the grant of authority or rights, stating that the granter formally recognizes the prerogative of the recipient to exercise the rights specified...
by the British government to open the first formal bank in Canada. This was the Bank of Montreal
Bank of Montreal
The Bank of Montreal , , or BMO Financial Group, is the fourth largest bank in Canada by deposits. The Bank of Montreal was founded on June 23, 1817 by John Richardson and eight merchants in a rented house in Montreal, Quebec. On May 19, 1817 the Articles of Association were adopted, making it...
. Under its charter, the Bank of Montreal was given a monopoly
Monopoly
A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity...
on the right to issue promissory notes on the model of the army bills. Because of its monopoly rights, the Bank of Montreal essentially acted as a central bank
Central bank
A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...
for both Upper and Lower Canada.
In the years after 1817, Britain granted several new bank charters, including a charter to the now-defunct Bank of Kingston, which was to act as a competitor to the Bank of Montreal in Upper Canada. The new chartered banks were required under the terms of their charters to recognise one another's currency, a practice that allowed for the development of long-distance trade within British North America. However, banking remained in private hands, which meant that the issue of currency was at the discretion of private bankers. This frequently led to high inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
when the infant Canadian economy was in recession
Recession
In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way...
.
The Provincial Note Act was passed in 1866 to link note issue to the needs of the British administration. This marked the beginning of an enduring policy of government intervention in the Canadian economy. The British North America Act of 1867 formally codified this policy, allowing for government control over coinage, currency, bills of exchange, promissory notes, banking, and incorporation of banks. This in turn allowed for the creation of a uniform currency across Canada. Official Canadian currency took the form of the Canadian dollar
Canadian dollar
The Canadian dollar is the currency of Canada. As of 2007, the Canadian dollar is the 7th most traded currency in the world. It is abbreviated with the dollar sign $, or C$ to distinguish it from other dollar-denominated currencies...
in 1871, overriding the currency of individual banks.
Banking remained relatively decentralized until 1935, when the Bank of Canada
Bank of Canada
The Bank of Canada is Canada's central bank and "lender of last resort". The Bank was created by an Act of Parliament on July 3, 1934 as a privately owned corporation. In 1938, the Bank became a Crown corporation belonging to the Government of Canada...
was founded in response to the economic instability experienced during the Great Depression in Canada
Great Depression in Canada
Canada was hit hard by the Great Depression. Between 1929 and 1939, the gross national product dropped 40% . Unemployment reached 27% at the depth of the Depression in 1933...
. First opened on December 5, 1980, Canada's Currency Museum
Currency Museum
First opened on December 5, 1980, Canada's Currency Museum is located on the ground floor of the Bank of Canada in Ottawa. It is the public face of the National Currency Collection, which contains over 100,000 currency-related artifacts from around the world...
is located on the ground floor of the Bank of Canada
Bank of Canada
The Bank of Canada is Canada's central bank and "lender of last resort". The Bank was created by an Act of Parliament on July 3, 1934 as a privately owned corporation. In 1938, the Bank became a Crown corporation belonging to the Government of Canada...
in Ottawa, Ontario.