District was incorporated in Kingston . It became one of the two major banks in Upper Canada for the next 45 years .
Five years later , the Bank of British North America , a Montreal-based British bank with a royal charter , arrived on the scene . It quickly established branches in all of the colonies . The Bank of British North America was an example of a British overseas bank , a free-standing company . Many others existed elsewhere in the Empire . The Colonial Bank , for example , was established at the same time but focused on the West Indies with agencies in Saint John and Halifax . These British overseas banks were created in the 1830s . The owners were largely based in the United Kingdom and the goal was to establish overseas branches that were managed from London .
Other Canadian banks were incorporated . Some failed , while others had their charters repealed . By 1840 when the Act of Union was passed , there were 10 banks in the Canadas — five based in Upper Canada and five in Lower Canada . The two largest banks were BMO and the Bank of British North America with branches throughout British North America . Each of these banks had £ 500,000 plus , in paidup capital . In the next tier with £ 200,000 in paid-up capital were Ontario ’ s Bank of Upper Canada and the Commercial Bank of the Midland District and Montreal ’ s City Bank . BMO had three branches in 1840 : Quebec City , Kingston and Ottawa , having closed its Toronto branch in 1823 . In the 1840s , it added 12 more branches . By way of comparison , in 1837 America had 729 banks for 16 million people , but Canada ’ s bank capital of $ 12.5 million was roughly equal to that of the United States on a per capita basis , a trend that would continue into the future .
From 1791 to 1841 , the Treasury Lords in the United Kingdom controlled colonial banking laws , although in British North America the reporting format was based on the common practice used in Massachusetts . This inevitably led to slow decision making and inappropriate decisions because of lack of understanding of local conditions .
The year 1837 was a difficult time in North America . President Andrew Jackson ’ s decision to veto the extension of the Second Bank of the United States led to loose lending practices in the United States and a significant economic downturn . The contagion spread to Canada , accompanied by poor harvests and political insurrections . As a consequence , banks in Lower Canada , like banks in the United States , suspended specie payment . This lack of convertibility came to Lower Canada earlier and lasted longer than it did in Upper Canada , although no longer than in the United States . However , the Canadian banks did contract credit , which contributed to the economic downturn .
As the period of the separation of the two Canadas drew to a close , the government of Upper Canada made an important decision : it sold its Bank of Upper Canada stock and thereby severed its formal link with that institution . The government did so because it was extremely hard pressed financially and needed the money from the sale of the stock .
But in the third and fourth decades of the 19th century , the Canadian banking system had other , broader problems . Many observers noticed great differences in the availability of credit , population density and property values between New York State and Lower Canada , some of which probably resulted from banking practices . Lower Canada ( Quebec ) suffered from severe money shortages . There , bank notes did not circulate beyond towns , interest payments were still forbidden by priests and specie hoarding was commonplace . The British Governor General blamed Canada ’ s backwardness on its financial system , singling out the French influence .
With political union in 1841 , currency reform proceeded more quickly . This led to a new standardized rating in 1842 for both a British gold sovereign and a US $ 10 gold eagle . But two other questions emerged . Should Canada adopt a decimalbased currency , and should governmentissued paper currency replace or be used side by side with chartered bank currency ? In the early 1850s , the colonies decided to keep government accounts in decimal currency , but the British government delayed passage of the legislation until 1854 . In the end , the legislation actually allowed both decimal and British units , but it was amended four years later to permit dollars and cents only . The other British North American colonies followed suit , and by 1871 decimalization was the rule .
In 1841 , Governor General Lord Sydenham proposed a government issue of paper money , but the proposal was rejected by the Assembly . Since Canada had achieved responsible government , the decision of the elected Assembly overruled the wishes of the British Governor General . In 1860 , Alexander Galt , Finance Minister for the Province of Canada , again attempted to establish a government currency , but he was unsuccessful due to lack of support in the Assembly . However , in 1866 , the measure was approved , but in a somewhat different form and with strenuous opposition .
Unlike Galt ’ s 1860 proposal , in this case the banks were not required to give up issuing their own currency . Reform leader George Brown strongly opposed this measure because he felt it would be “ ruinous to banks … It was far more important that capital should be easily available to ‘ industrial interests ’ than it be kept for the exchequer through the government note scheme , just so that the finance minister need not borrow abroad .”
In 1850 , Francis Hincks , the Inspector General and future Minister of Finance of the new Dominion of Canada , followed the example set in New York State by introducing free banking into Canada . Free banking permitted the establishment of a bank with no branches without an examination of the suitability of the applicant . This was frowned upon in the United Kingdom , and few such banks were established . But the failure of free banking in Canada compared to its success in the United States relates less to Imperial influence and more to the fact that in Canada free banks had to compete with chartered banks ; in America they did not . Another indication of the growing autonomy in the Canadian colony was Galt ’ s decision to appoint a select committee on banking and currency in 1859 .
Canadian banks experienced two major economic downturns during this time — the crisis of 1847 and the collapse of 1857-58 . While there were no banking failures in 1848 , the banks ’ cautious approach to lending during the crisis contributed to hardships felt by farmers and merchants . Blame was cast on the banks . The Collapse of 1857 and the following depression of 1858 is often referred to as the first worldwide depression . The boom in the mid-1850s and the subsequent crash in 1857 took a particularly harsh toll on banks in Canada . The banks restricted their operations , which allowed them to avoid or delay suspensions .
34 FINANCIAL HISTORY | Winter 2018 | www . MoAF . org