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“The Evolution of Money in Canada” PAGE:

The Evolution of Money in Canada

Introduction

The almost 150-year evolution of Canada’s currency from its colonial origins to the contemporary stage is a challenging subject worthwhile in-depth investigation. This research paper chronologically outlines main historic dates and facts of a Canadian dollar development, including bartering, coinage, bank notes, and paper money.

Colonial origins of exchange

The first dollars used in Canada were , eight coins issued by Spain and her colonies. Because the colonies used the system for accounting, it was necessary to set a valuation or rating for the Spanish dollar in £sd. Different ratings were used in the different colonies (Wikipedia, Para. 1 Spanish Dollars).

According to Adam Shortt, “the first regular system of exchange in Canada involving Europeans occurred in Tadoussac in the early seventeenth century. Here, French traders bartered each year with the Montagnais people (also known as the Innu), trading weapons, cloth, food, silver items, and tobacco for animal pelts, especially those of the beaver” (Powell 3). Interestingly, in 1608 the first colonial settlement at Quebec on the St. Lawrence River was founded by Samuel de Champlain. The beaver pelt was the main product of exchange in the infant colony, though wheat and moose skins were also legally tendered. Considering currency issue, French coins were then widely used as the colony expanded, and its economic and financial needs became more complex. It is noteworthy that coins were much more valued in the French colonies in Canada than in France owing to the risks related to the across Atlantic transporting of gold and silver, as well as attracting and retaining fresh supplies of coin (Powell 3).

The application with coinage on the then territory of Canada was added with the first issue of card money on 8 June 1685, which was not recognized as a medium of exchange until recently. Merchants and the general public readily accepted card money, which circulated freely at face value. “Given its acceptance as money, a significant proportion was not submitted for redemption and remained in circulation, allowing the government to increase its expenditures” (Powell 3). According to Shortt, in 1691, with yet another issue of card money, the Governor, Louis de Buade, Comte de Frontenac, acknowledged the useful role that card money played as a circulating medium of exchange in addition to being a financing tool.

While the authorities in France worried about the risk of counterfeiting and a loss of budgetary control, the colonial authorities successfully argued that the cards served as money in Canada just as coin did in France. Moreover, the Kingdom of France derived benefits from the circulation of cards, since the King was not obliged to send coins to Canada risking loss either from the sea or from enemies. Reflecting the mercantilist sentiments of the time, they less cogently argued that if coins were to circulate in Canada, some would be used to buy supplies from New England, resulting in considerable injury to France by the loss of its coinage and the advantage which it would produce among her enemies. (Powell 5)

Overall, the then tendency was such that the concerns of the authorities in France were not entirely misplaced. The first signs of inflation began to be noticed in the early 1690s as a consequence of the excessive issuance of card money. The stock of card money increased over time faster than demand, causing prices to rise, although cards continued to be redeemed in full upon presentation. Since the finances of the French government deteriorated during the first part of the eighteenth century, owing to European wars, financial support for its Canadian colonies was reduced. As a result, the colonial authorities in Canada relied increasingly on card money to pay their expenses. Eventually, in 1717, “with inflation rising sharply, it was agreed that card money should be redeemed with a 50 per cent discount and withdrawn permanently from circulation. At this time, Canada also adopted the monnoye de France” (Powell 6).

After the , Empire loyalists, settling in (), brought the (named after ) of 1 Spanish dollar = 8 shillings. This was officially outlawed (in favour of the Halifax rating) in 1796 but continued to be used well into the .During this period, many local banknotes were issued denominated in £sd, dollars, or both. The issued notes denominated in dollars in whereas the Atlantic colonies, with stronger ties to Britain and weaker ones to the United States, preferred the £sd system. Some dollar denominated banknotes bore a depiction of the Spanish dollar coin(s) they were equal to. However, few coins were issued, as the British authorities were unwilling to allow the colonies to mint their own coins. Various different bank tokens were issued in denominations of ½ and 1 penny. In the French speaking parts of Canada (, formerly , later ), the £sd and dollar system swiftly replaced the following the conquest by Britain. The dollar was called the piastre on some banknotes, whilst some bank tokens were issued in 1 and 2 denominations, equal to ½ and 1 penny (Wikipedia, Para. 1 Spanish Dollars).

The initial application of paper money

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The initial application of paper money

In spite of the fact that “Nova Scotia was little affected by the war, the colonial authorities developed a taste for paper money as a means of financing public works and continued to issue new series of Treasury notes after the war. The first issue was interest-bearing and redeemable in specie at par. In time, however, the backing of the notes deteriorated, and by 1826, the notes had become inconvertible. The amount in circulation also increased dramatically over time” (Powell 15). Furthermore, in 1832, measures were taken to introduce a sound currency in Nova Scotia and to strengthen the province’s credit standing. The stock of outstanding Treasury notes was reduced and all private notes issued by banks, firms, and individuals were required to be redeemable in specie in 1834. Consequently, “this sharp monetary contraction exacerbated a serious economic downturn in 1834” (Powell 16).

Some years later in 1861, the Colony of British Columbia issued Treasury notes, first seemingly in pounds and, subsequently, in dollars. These notes, which were used to finance public works, circulated freely, given a shortage of minted coins. Gold dust was also used as a medium of exchange in the colonies of Vancouver Island and British Columbia following the discovery of gold in the Fraser River in the late 1850s. And as Reid puts it, the use of gold dust was open to abuse, since the dust was of uncertain quality and had to be weighed. (Powell 16)

Introduction of bank notes

In 1817, the Montreal Bank (subsequently called the Bank of Montreal) issued the first bank notes in dollars in Canada. The newly incorporated banks after initial success of the Bank of Montreal, particularly: The Bank of Quebec in Quebec City and the Bank of Canada in Montréal, in 1818; the Bank of Upper Canada at Kingston, in 1819; the Bank of New Brunswick in St. John, in 1820; the Second or Chartered Bank of Upper Canada in York (Toronto), in 1822; the Halifax Banking Company, in 1825; the Bank of Nova Scotia in Halifax, in 1832; and the Bank of Prince Edward Island, in 1855, all issued their own bank notes.

Bank notes represented the principal liability of a bank and were redeemable in specie, upon demand. Banks committed themselves to maintain convertibility and, under their charters, restricted their total liabilities to a given multiple of their capital. The extent of their note issues was also limited by the public’s willingness to hold their notes. Unwanted notes were returned to the issuing bank and converted into specie. Bank notes were well received by the public and became the principal means of payment in British North America. The general acceptance of bank notes in transactions helped to mitigate the problems associated with having a wide range of foreign coins in circulation with different ratings. As new banks were incorporated in Upper and Lower Canada during the 1830s and 1840s, their bank notes were typically denominated in both dollars and pounds. These notes circulated freely in both parts of Canada and in the United States, although often at a discount, the size of which varied depending on distance, the name of the issuing bank, and the currency rating used. Dollar denominated bank notes issued by U.S. banks also circulated widely in Upper Canada during the early 1800s. In contrast, bank notes circulating in New Brunswick, Nova Scotia, Prince Edward Island, and Newfoundland were typically denominated in pounds, shillings, and pence. This reflected both the stronger ties these provinces had with Great Britain and their weaker commercial links with the United States (Powell 18).

In accordance with Shortt’s conclusion, “Canadian bank notes, denominated in dollars, were also widely accepted and circulated freely in the United States. Had Canada adopted the sterling standard, this circulation would have been lost, to the detriment of Canadian banks (Powell 19).

The chronology of Canadian Currency Act

10 gradual developments over 1840-50s influenced the evolution of Canadian Currency Act under which pounds, shillings, and pence, as well as dollars and cents, could be used in provincial accounts and were recognized as units of Canadian currency. McCullough stated that “the Currency Act confirmed the ratings of the British sovereign and the US$10 gold eagle that had been in place since the establishment of the Province of Canada in 1841. The British gold sovereign was rated at £1 4s. 4d. local currency or Can$4.8666, while the gold eagle (those minted after 1834 with a gold content of 232.2 grains) was valued at Can$10. British coins, both gold and silver, as well as U.S. gold coins, were legal tender. Other foreign silver coins, while not legal tender, continued to circulate” (Powell 24).

1) On April 27, 1842 the Currency Act of 1841 came into effect, making legal tender the British sovereign, and the American eagle ($10), dollar, and half-dollar coins. French crowns and half-crowns were no longer legal tender;

2) In 1850 Inspector-General for the Province of Canada, Francis Hincks, introduced a bill in Parliament, to amend the Currency Act of 1841, giving the Governor General the power to have coins struck for circulation in Canada. The parliament of the Province of Canada passed acts 13 and 14 to amend the Currency Act, allowing authorized banks to produce coins.

3) On August 10, 1850 an Act to amend the 1841 Currency Act received royal assent, with the signature of Lord Elgin, Governor General of Canada. The Act set the value of the American dollar in Canada at 5 shillings. The Act also gave Canada's Governor General the power to have silver coins struck for circulation in Canada, in denominations of 5 shillings, 2 shillings 6 pence, 2 shillings, 1 shilling 3 pence, 1 shilling, 6 pence, and 3 pence. These values corresponded directly to American currency values of $1, 50c, 40c, 25c, 20c, 10c, and 5c. Gold coins were also provided for, in values of 10 shillings, 12 shillings 6 pence, 1 pound, and 1 pound 5 shillings. The Act was set to become law on January 1, 1851;

4) On October 24, 1851 the British Treasury sent a memorandum to the Colonial Office severely criticizing Canadian Inspector-General Francis Hincks' proposed Currency Act of 1850, and demanding its disallowance. And on October 25, Colonial Secretary Earl Grey informed Lord Elgin that the Currency Act of 1850 should be disallowed, as it was not contingent on the acceptability of the British Government;

5) Yet in November, Francis Hincks replied to the British Treasury stating reasons for Canada to issue its own coinage, and that the Currency Act of 1850 should be allowed to stand, and let the legislature repeal certain sections if they are deemed inappropriate.

On December 5, Earl Grey wrote to Lord Elgin, agreeing with Francis Hincks that the Canadian Legislature should have an opportunity to amend the Currency Act of 1850;

7) On April 14, an Order-in-Council in England disallowed the Canadian Currency Act of 1850.

8) On August 30, the Canadian Currency Act passed, specifying a conversion to decimal currency as soon as is convenient, and making the dollar legal tender, up to $10 per transaction. The wording of the Act specified that any new coins struck for Canada would be done so under the approval of the British Government.

9) In November Francis Hincks introduced a new currency Act into the Canadian legislature. The Act specified that a dollar currency and a pound currency would both be valid.

10) A compromise Currency Act was finally passed in 1853 and proclaimed on 1 August 1854. (Polsson)

Following a recommendation from the public accounts committee, the Province of Canada revised the Currency Act in 1857 so that, from 31 December 1857, all provincial accounts would be kept in dollars. Consequently, silver and bronze coins, denominated in cents and bearing the word “Canada,” were subsequently issued for the first time in 1858. Prior to the establishment of the Ottawa Mint in 1908, coins used in Canada were minted in the United Kingdom. Sovereigns were he first gold coins minted in Canada, identical to those produced in the United Kingdom except for a small identifying “C.” Interestingly, “that it was not until May 1912 that the Ottawa Mint began to produce limited quantities of gold $5 and $10 coins. The Ottawa Mint became the Royal Canadian Mint in 1931, which marked the birth of a distinctive Canadian currency” (Powell 24).

The Period of Confederation

On 1 July 1867, confederation considerably changed to banking and currency legislation in the provinces of Canada, Nova Scotia, and New Brunswick. The government of the new Dominion under the British North America Act was given jurisdiction over currency and banking. The following year the Dominion Notes Act came into effect. The Dominion took over the various provincial note issues in the Province of Canada were renamed “Dominion notes” and were made redeemable in Halifax and Saint John along with Montréal and Toronto. The Dominion Notes Act was further extended to cover Prince Edward Island, Manitoba, British Columbia, and the Northwest Territories (Powell 27).

Like earlier provincial notes, Dominion notes were partly backed by gold. The first $5 million issued were 20 per cent backed, and the next $3 million, 25 per cent backed. Over time, the size of the authorized note issue was increased. There were also some changes to the percentage of notes backed by gold. By 1913, the first $30 million had a 25 per cent gold backing.42 Issues in excess of $30 million had to be fully backed by gold. Interestingly, although Dominion notes became redeemable in Halifax in 1868, Nova Scotia retained its own currency until April 1871, when the Dominion government passed the Uniform Currency Act.43 At that time, Nova Scotian currency, which was still rooted in the old Halifax rating, was converted into Canadian currency at a rate of 75 Nova Scotian cents to 73 Canadian cents.44 The Uniform Currency Act also established that denominations of Canadian currency would be dollars, cents, and mills (a mill equalled one tenth of a cent). Moreover, the Canadian dollar’s value was fixed in terms of the British sovereign at a rate of $4.8666 and the US$10 gold eagle at a rate of $10—the same rates established in the 1853 Currency Act (Powell 27).

Then the Bank Act was passed by the Dominion government in 1871, which repealed all provincial acts that conflicted with federal jurisdiction related to currency and banking. As a result, chartered banks in the four provinces eventually came under common regulation (Powell 28).

World War I Period

Prior to the declaration of war on 4 August 1914, there were heavy withdrawals of gold from banks. In accordance with the Macmillan’s Report of 1933, “in an atmosphere of incipient financial panic there were concerns about the possibility of bank runs. In the absence of a lender of last resort, this was potentially very serious, since banks were legally required to close if they were not able to meet depositor demand for gold or Dominion notes” (Powell 37)

On 3 August 1914, an emergency meeting was held in Ottawa between the government and the Canadian Bankers Association to discuss the crisis. Later that day, an Order-in-Council was issued that provided protection for banks that were threatened by insolvency by making notes issued by the banks legal tender. This allowed the banks to meet their depositor demands with their own bank notes rather than with Dominion notes or gold. (Powell 37)

The Bank of Canada

During the first fifty years of Confederation, Canada showed little interest in the establishment of a central bank. It was 1913 before Parliament formally discussed the subject, prompted at that time by W. F. MacLean, MP for South York. His plan, which called for a privately owned national bank subject to government control, was dismissed. Prime Minister R. L. Borden saw “no present necessity” for such a bank (Bank of Canada, Para 1. Who needs a central bank?)

The Bank of Canada Act received royal assent on 3 July 1934, and the central bank officially started operations on 11 March 1935. The Bank of Canada, like most central banks of the time, was initially privately owned. Bank of Canada shares had to be widely held; no individual could own more than 50 shares. In 1936, following a Liberal victory in the election of 1935, Mackenzie King’s government took control of the Bank through the acquisition of a second issue of shares and subsequently nationalized it in 1938. Graham Towers, who had been assistant general manager of the Royal Bank, became the central bank’s first Governor. To provide some practical central banking experience, J. A. C. Osborne, former secretary of the Bank of England, was made deputy governor. The Dominion Notes Act and the Finance Act were also repealed on 11 March. Dominion notes were quickly replaced by new Bank of Canada notes. A revised Bank Act governing the operations of the chartered banks also took effect in 1934. Revisions to this act initiated a gradual phase out of private bank notes in favour of Bank of Canada notes. With the conduct of monetary policy now in the hands of the Bank of Canada, a dedicated monetary institution, there were greater prospects for a more activist monetary policy. (Powell 49)

The Bank of Canada Act, which defines the Bank's functions, has been amended many times since 1934. But the preamble to the Act has not changed. The Bank still exists “to regulate credit and currency in the best interests of the economic life of the nation” (Bank of Canada, Para 3. Here to Stay)

The Canadian Dollar Today

Over 2000-2001 the Canadian dollar resumed its weakening trend, and touched an all-time low of US$0.6179 on 21 January 2002. The Bank of Canada reduced short-term interest rates by 375 basis points through 2001 and early 2002. Through 2002, the Canadian dollar stabilized and then began to recover as the global economy picked up and as the U.S. dollar started to weaken against other currencies. It appreciated sharply through 2003 and 2004, peaking at over US$0.85 in November 2004, a level not seen for thirteen years. This was a trough-to-peak appreciation of roughly 38 per cent in only two years. The Canadian dollar’s rise reflected a robust global economy, led by the United States and emerging Asian markets (particularly China), which boosted the prices of Canada’s commodity exports. As well, growing investor concerns about the widening U.S. current account deficit undermined the U.S. unit against all major currencies. While the Canadian dollar settled back somewhat during the first half of 2005 as the U.S. dollar rallied modestly against all currencies, underpinned by rising U.S.-dollar interest rates, it began to strengthen again through the summer, supported by rising energy prices. Strengthening against all major currencies, the Canadian dollar touched a high of US$0.8630 on 30 September 2005. In late October it was trading for the most part in S$0.84–0.85 range, off its earlier highs as energy prices retreated (Powell 83).

On world markets, the Canadian dollar tended historically to move in the same direction as the U.S. dollar, but less dramatically. A consequence is that at times an apparently rising Canadian dollar is often falling against most of the world's currencies, and vice-versa. However, during the relatively sharp rise of the Canadian dollar since 2002, it has "parted way" with the U.S. dollar and has gained value against it, while also rising against other major international currencies. Although there was a great deal of domestic concern when the Canadian dollar was trading much lower than the U.S. dollar, there is also concern among exporters when the dollar appreciates quickly. The rapid rise in the value of the Canadian dollar increases the price of Canadian exports to the United States, which make up a large part of the economy. On the other hand, Canadian industry enjoys advantages from a rising dollar, primarily in that it is cheaper to purchase foreign material and businesses (Wikipedia, Para 4. Value)

Conclusion

Over 150-year history Canadian currency has challenged many stages and changes in its development. There were many foreign influences on it on the part of the French, British and the U.S. counterparts throughout the years of gradual evolution. Nevertheless, today Canadian dollar remains stable and internationally recognized currency – a true example of nation’s welfare and economic growth.

Works Cited

Bank of Canada. “About the Bank” (2006): 3 pars. 22 Apr. 2006