1. Introduction

In an intelligent study of the Canadian banking system particular stress should be laid on the fact that the system has been evolved, not made; that it has grown up with the country, suffered with it, prospered with it and, since the Confederation, been the backbone of commerce and agriculture. The careful decennial revisions of the banking laws have kept the system continually in touch with the requirements of Canada's constantly altering conditions. In fact, in no other country does the history of bank-ing support so forcibly the contention of Horace White in his "Money and Banking":

The principles of banking are the outgrowth of experiment. They must be learned from the history of banking and particularly from the laws that have been enacted from time to time. These laws are the crystallization of ideas dominant at given periods.

The history of banking in Canada may be roughly divided into four periods:

New France.....................1608-1763

British Occupancy ...............1763-1817

Provincial Banking...............1817-1867

National Banking System.........1867

2. New France

During this period (1608-1763)-Canada had its first, and it is to be hoped its last, experience in "fiat" money. In lieu of a better circulating medium, beaver and other furs, wheat and tobacco were accepted in trade, and tho at first the issue of government obligations in the shape of "or-donnances" and card money were a welcome relief, the scandalous abuse of this privilege quickly brought it into disrepute, for no matter in what form, or under what conditions these obligations were issued, they all traveled the same road to ultimate depreciation.

The country found itself at the time of the capitulation, in 1760, loaded with a tremendous debt of over 80,000,000 livres outstanding, of which some 34, -000,000 livres were in ordonnances, 7,000,000 in card money and treasury bonds and the balance in other forms of obligation. This formed one of the most difficult problems that confronted the British government and, notwithstanding the impoverished condition of France, the British insisted upon a definite basis of settlement. Accordingly, a convention was signed in 1766 under which bills of exchange and kindred obligations were to be redeemed by the French government at 50 per cent of their face value, and ordonnances and other forms of debt at 25 per cent. Owing to circumstances which need not be entered into here, the unfortunate holders eventually received only a moiety of this settlement.

The history of this period presents an instructive lesson on the evils of money issued on credit only, even tho the credit is that of a government. There is no doubt that Alexander Hamilton had the sad experience of New France before him when he made his severe stricture on government issues based on credit. In his report on banking in 1790, he said:

The emitting of paper money by the authority of the government is wisely prohibited to the individual states by the national constitution, and the spirit of this prohibition ought not to be disregarded by the government of the United States. Tho paper emissions under a general authority might have some advantages not applicable and be free from some disadvantages which are applicable to the like emissions by the states separately, yet they are of a nature so liable to abuse, and it may even be affirmed so certain of being abused, that the wisdom of the government will be shown in never trusting itself with the use of so seducing and dangerous an expedient.

3. British Occupancy (1763-1817)

The British government found the country practically without any currency, and immediately took steps to place the finances of the colony on a stable foundation by establishing an equitable and permanent standard of value for the various coins which now became current in Canada. The government imported and paid out large quantities of Spanish milled dollars at 4s. 6d. per dollar or $4.44% per pound sterling, the old par of exchange. These were used for the payment of the army and the purchase of public supplies.

In 1791 representative government was established and during the next few years several unsuccessful attempts were made to obtain charters for banks of issue.

4. Army Bills

In 1812, during the war with the United States, the British government, finding itself hampered by a serious lack of currency, met the difficulty by the passage of the Army Bill Act. Under this act the Army Bill office was established and empowered to issue bills of various denominations. These bills were readily absorbed by the people, who were quick to realize the advantage of a system of financing so carefully thought out with a view to prompt and satisfactory redemption, and with that quality of elasticity which later became such a prominent feature in the bank note circulation of Canada.

5. Provincial Banking (1817 - 1867)

The contraction of the Army Bills circulation naturally caused great inconveniences to the public; the principal business centers, Montreal and Quebec, being the greatest sufferers. The bills filled a long-felt want and in May, 1817, to supply their place, the Montreal Bank, now known as the Bank of Montreal, was founded, followed by the establishment of other banks under charter from the various provinces. Between 1817 and 1825 two banks were established in Lower Canada (Quebec), and one each in Upper Canada (Ontario), New Brunswick and Nova Scotia. There was no attempt at uniformity in the conditions of the various charters, but little attention having been paid in those days to the theory of banking. As a rule, the charters were based upon the articles of agreement as drawn up by the incorporators and, as might be expected under such circumstances, many of the clauses were dictated by selfishness or originated in a total misconception of the functions of a bank.