Financial History Issue 124 (Winter 2018) | Page 34
Evolution of
the Canadian
Currency
and Banking
Systems
By Christopher Kobrak
and Joseph E. Martin
Canada had banks and currency before
it had a formalized banking system and
before it became a country. Its pre-British
financial system was shaped by the fact
that among the French there was a deep
distrust of paper currency. When Canada
was a French colony, English sea power
often blockaded the St. Lawrence River.
In desperation, people used playing cards
for currency, from 1685 to 1719 and from
1729 to the 1750s, which led to significant
inflation which further undermined faith
in paper currency of any kind. While there
were no banks in 18th century British
North America, merchants played the role
of financial intermediaries.
After the passage of the Constitution
Act of 1791, there was some progress in the
standardization of currency among the
colonies. After a few false starts, a bank-
ing system was established. Dealing with
currency first, a specific problem was that
there were two different ratings for cur-
rency, one based on Halifax and one based
on York (modern-day Toronto), and both
were based on foreign coins. The Halifax
rating valued one Spanish silver dollar,
the most common coin in circulation at
the time, at five shillings. The York rating,
which was introduced into Upper Canada
by Loyalists arriving from the United
States, valued that same Spanish silver
dollar at eight shillings. Another issue
that emerged in the early decades of the
19th century was whether to use dollars
and cents, or pounds, shillings and pence.
As banks were incorporated, they tended
to use both currencies in the Province of
Canada, but the Atlantic colonies stayed
with pounds, shilling and pence.
On the banking scene there were two
early attempts to found banks in Canada
before the first bank, the Bank of Mon-
treal, was established in 1817. In 1792, a
group of Montreal-based merchants tried
to establish the Canada Banking Com-
pany. The attempt was premature in that
in Lower Canada there was an objection
among French Canadians, based on their
experience with playing card currency, to
any form of paper money. In the English
settlements, while there was need for a
bank, there was not sufficient stability.
In 1808, there was another attempt to
establish a bank, and the Montreal mer-
chants had support from Quebec City
merchants. This attempt failed as well, but
copies of the proposed charter survived
and were compared with those of the First
Bank of the United States (BUS) founded
by Alexander Hamilton.
Apart from commercial connections
and similar charter language, during the
32 FINANCIAL HISTORY | Winter 2018 | www.MoAF.org
early stages of Canadian banking, Canadi-
ans accepted several hallmarks of Hamil-
ton’s ideas without question. Meanwhile,
some of these ideas were only partly
accepted — or not accepted at all — by
Scottish and other banking systems. The
first was the importance of limited liabil-
ity, joint-stock banking. Well into the 19th
century, most countries allowed only part-
nerships, with full partner liability, to take
deposits and issue notes. Hamilton was
one of the first government regulators who
encouraged the formation of banks with
capital from shareholders, some of whom
were sufficiently passive and distant to
tolerate full liability for a bank’s actions.
Although American and Canadian
bankers instituted various schemes to
protect the interests of depositors against
unscrupulous or incompetent sharehold-
ers and managers, limited liability and
widespread shareholding was accepted
broadly in the United States and com-
pletely in Canada. The second key take-
away from Hamilton was the importance
of a national banking system. But whereas
throughout American history national
banking was only performed by a central
bank — and that only intermittently — in
Canada commercial banks were never
restricted to a region or province.
In contrast to the two earlier failed
attempts, a great deal of attention has