available , as did the grain speculators at the Winnipeg Grain Exchange . The Winnipeg leadership said a large cash infusion was required to keep the system solvent . The problem was that the Canadian banks ’ note circulation was limited to their paidup capital by legislation .
The first and most important response came from the Canadian Minister of Finance , the Honorable W . S . Fielding . Fielding was well qualified to deal with difficult financial issues . He had been Minister of Finance for over a decade , after serving as Premier and Provincial Treasurer ( Minister of Finance ) of the Province of Nova Scotia , a dual position he held for 12 years . Since 1896 , he proved to be an excellent Federal Minister of Finance and would go on to become Canada ’ s longestserving Finance Minister .
Fielding ’ s solution to the problem of limits on bank note circulation was to make special funds available to the banks to provide the required liquidity . This “ gentle intervention ” was all that was required to re-establish the flow of credit .
Although this action was done on November 12 , 1907 , it wasn ’ t revealed to Parliament until St . Patrick ’ s Day 1908 , when Fielding informed the House of Commons that he would be presenting amendments to the Bank Act which would permit banks to issue currency to the extent of 15 % in excess of their combined paid-up capital and reserve for a period from October 1 through January 31 , which was later extended to six months . The economic expansion of the country had expanded the note issue , so that it was pressing against the statutory limit — the paid-up capital . This amendment would provide the greater elasticity required during the harvest season by providing additional financial facilities for the quick transportation of Canadian farm products to world markets before the freeze-up of the St . Lawrence River in January . And since Fielding was also a politician , it would contribute to the strength of his party with an election coming up later in 1908 in the rapidly growing new provinces of Alberta and Saskatchewan .
Between 1905 and 1908 , there were three small bank failures and two larger ones . Research of causes finds phrases such as “ criminal mismanagement ,” “ the general manager is imprisoned ” and “ the director dies in prison .” In Canada , the solution to bank failures was a race to the top , rather than a race to the bottom . When a Canadian bank went down the bigger , stronger banks were expected to take over the failing bank .
A concrete instance of this can be found in the re-organization of the Sovereign Bank of Canada , the largest of the failures . The Sovereign was opened in 1901 with the support of J . P . Morgan and the Dresdner Bank . The bank expanded rapidly , had nearly 100 branches by 1907 and made many bad loans . The bank was suspended in early 1908 and was taken over by 15 other banks ; other banks subsequently absorbed its business without loss to depositors or creditors .
Post-1907
After 1907 , the Great Canadian Wheat Boom returned . By 1909 , production was at an all-time high and by 1911 it had more than doubled from 1905 . Both Canada ’ s population ( 15.2 % vs . 9.6 %) and GDP per capita increase ( 24.5 % vs . 16.2 %) significantly exceeded that of the United States between 1908 and 1913 . Canadian banks did well despite two failures . Deposits continued to pour in , increasing by 70 % in the period with the rapidly expanding branch network tripling on the Prairies The growth in deposits was so great it was sometimes difficult to find sound loans , although the Canadian banks were helped by an international presence that accounted for nearly 10 % of all assets .
In 1871 , the new Dominion of Canada had passed the Canadian Bank Act , which was considered a model at the time . One special provision , unique to Canada , was a requirement that the legislation was subject to decennial review , subsequently reduced to every five years . This legislation with its review provision has enabled adaptability in the system over the decades which have ensured that the Canadian banking system is consistently recognized as one of the best in the world .
The structure of Canadian chartered banks curtailed the bankruptcy tail of Canadian banks relative to the more regionally focussed American banks . Consolidation of banks , the extensive branch networks and moral suasion meant that Canadian banks could operate without a central bank . And the banks themselves were committed to seeing the system work properly because the system was regulated by the Canadian Bankers Association . In
1913 , the Bank Act was amended to provide for individuals to act as independent auditors of banks as a further safeguard .
In 1914 , war was declared between the Allied Powers ( excluding the United States ) and the Central Powers . That year was a bad year economically for both the United States and Canada ; both economies declined by 9.5 % in GDP per capita . In Canada , Parliament quickly passed a Finance Act — an emergency measure ending Canada ’ s gold standard and giving the Department of Finance new powers , including the power to act as a lender of last resort and a means for the government to set the advance rate . Canadians , concerned about how a government central bank could be independent on monetary policy , would not create a central bank until the Great Depression , more than two decades after the United States .
Joe Martin is the founding and current president of the Canadian Business History Association / L ’ Association Canadienne pour L ’ Histoire des Affaires and co author of From Wall Street to Bay Street : The Origins and Evolution of American and Canadian Finance . He recently stepped down as the director of Canadian Business History at the Rotman School of Management , University of Toronto . Prior to joining the Rotman School , he was a partner with the Canadian practice of Deloitte Consulting for nearly a quarter of a century .
Sources Canada , House of Commons Debates [ Hansard ]. 1907 , 1908 .
Denison , Merrill . Canada ’ s First Bank ; A History of the Bank of Montreal , Volume One . Toronto : McClelland & Stewart Limited . 1967 . Financial Post Corporation Service Cards Karn , Darren . The Forgotten Credit Crisis of 1907 . Toronto : Rotman School of Management , University of Toronto . 2014 .
Madison , Angus . The World Economy Historical Statistics . Paris : Development Centre of the Organisation for Economic Cooperation and Development . 2006 .
McDowall , Duncan . Quick to the Frontier : Canada ’ s Royal Bank , A History . Toronto : McClelland & Stewart Inc . 1993 .
Ross , Victor . A History of the Canadian Bank of Commerce , Volume II , Toronto : Oxford University Press . 1922 .
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