L’Encyclopédie de l’histoire du Québec / The Quebec History Encyclopedia
History of the Canadian Currency
[This article was written by C. A. Curtis and was publihed in 1948. For the full citation, see the end of the document.]
Currency. The two important functions of money are to act as a standard of value and as a medium of exchange. Some forms, however, may serve only one function. Money may be metallic or paper, but generally the standard money is metallic, while the circulating medium is paper and subsidiary (metallic) coins. The history of the Canadian currency shows the gradual evolution of metallic and paper money into these positions. The development of Canadian standard money is the story of the transition from the French silver écu to the Spanish silver dollar and later to the American gold dollar. The main characteristic in the evolution of the circulating media has been the transition from a metallic to a paper circulation.
The metallic currency of New France consisted mainly of French silver coins imported from France and Spanish silver coins obtained from illicit trade. The issuance, in 1686, of the famous card money - that is, playing cards cut up - was the first case of paper money in the colony; but, later, paper money called ordonnances, in the form of government promissory notes payable on demand, became so common that the currency was in a deplorable condition. The financial pressure of the Seven Years' War led to larger and larger issues of paper money, until by 1760 it was estimated that some 80,000,000 livres were in circulation. Upon the conclusion of peace, in 1763, an agreement was made for the redemption of this paper at a fraction of its face value, but the terms of the agreement were never carried out, and the paper was never redeemed.
With the cession of Canada, in 1763, to the British, the problem of the currency was before the new régime. The metallic circulation was comprised of all sorts of coins, the Spanish silver dollar being one of the most important. In Massachusetts and Nova Scotia this dollar was rated at 5s., but in the New York colony it was rated at 7s 6d., and a little later at 8s. These ratings were introduced into Canada by merchants from these colonies. The former rating was common in Quebec, where it was known as Halifax currency, and the latter at Montreal, where it was called York currency. About all that the new administration could do was to establish official ratings in British currency of all the coins in circulation, and in 1764 Governor Murray passed an ordinance setting out such ratings. The Spanish dollar was given a value of 6s. The values given to the various coins, however, were not consistent, for the French coins were deliberately overrated in order to attract them out of hiding and into circulation.
The fractional currency was a problem, as there was very little of it in the colony, and the current practice was to cut the larger coins into pieces, which led to fraud and was later prohibited. An informal paper currency - issued by merchants in the form of due bills called "bons" - was introduced to meet this need and helped to pave the way for the subsequent issues of bank notes.
In 1777, the Spanish dollar was given a rating of 5s., which meant the establishment of the Halifax currency as the standard for the colony, but the York currency was still used in Montreal and in Upper Canada. In 1791 Canada was divided into two provinces, Upper and Lower Canada, each one having jurisdiction over its own currency. In 1821, owing to legal difficulties, the York unit was deprived of all legal recognition in Upper Canada, although it remained for many years afterwards as a popular unit of account with the rural population; the French livre played a similar rôle in Lower Canada. It should be clearly understood that the Halifax and York currencies were purely units of account and that no coinage representative of them ever actually existed. The coins in circulation came from all over the world, and the use of the Halifax currency merely meant that the various coins had legal tender power at the designated value. In 1808, further adjustments were made in the value of gold coins, as the adoption of decimal coinage by the United States caused much of its miscellaneous old. silver to go to Canada, where it was over-rated and where almost anything was welcome.
The War of 1812 resulted in large expenditures being made in Canada by the British government. In order to pay for purchases and services, the military administration issued "army bills", which were simply orders, stated in convenient standard amounts, on the British Treasury. Most of these bills bore interest, although some of the smaller denominations did not. There was, of course, little specie in the colony, and because of the risks involved very little was imported. Thus, while some of the smaller bills were redeemed in specie, the general practice was to convert them into bills of exchange on England . Although the bills were a little different from the usual paper currency, they were paper and made the people familiar with a safe paper circulation. As the war did not touch the colony seriously, the general economic result was a period of prosperity in which the usual cry of the shortage of circulation was no longer heard.
The British government had not at first taken much interest in the monetary standards of the colony, but later the problems involved in paying its troops and making general disbursements forced the matter to its consideration. In 1816, Great Britain had in effect demonetized silver, and in 1821 had resumed a single gold standard. The operation succeeded well in Great Britain, and it was decided to introduce similar measures into the colonies. In 1825, the Lords of the Treasury decided that the sterling standard should be applied to Canada ; this was to be done by the government establishing a rate of £100 sterling in London for £103 in Canada , and by the Canadian provinces using English silver and copper coinage. This was the first attempt to join Canada to a sterling bloc-a matter to be the subject of much discussion more than a century later.
The British government had virtually given, by order-in-council, British silver unlimited legal tender power in Canada at certain designated rates, and this clashed with Canadian legislation on the subject. When the governor in Lower Canada attempted to carry out his instructions, he was told that it would be an infraction of the Canadian Act, and the legislature refused to alter the law. Canada was ready enough to accept the British coins sent out, but it declined the British monetary system. By this time the use of the dollar and the decimal system was very common (the bank notes were printed in this form), and a change was not welcome to the commercial and financial interests. Thus, although the plan was reasonable enough from the British viewpoint, it failed to be successful, largely because it left out of consideration the peculiarities of the Canadian situation.
Undaunted, however, by this reverse, the British government tried to use its power over the exchanges, which it practically controlled through its large re mittances. This device had the very opposite effect to what was intended; for it turned out that it was cheaper to export coin than to buy exchange at the rate of 103 in Canada for 100 in England, and thus the British silver was all exported to England . The exchange rate was subsequently lowered, but the effort to force Canada to a sterling standard was given up.
From this time until the union of the provinces in 1841, the unsatisfactory nature of the Canadian circulation, due in part to the dumping of discarded American coinage, led to many proposals for paper currencies. The notes of the chartered banks were in circulation, and while they were supposed to be redeemable at par they were in fact redeemable only at a heavy discount, and the desire was to establish a standard money into which the other money would be convertible with more convenience. Also, the bank circulation fluctuated with the volume of bank credit and general economic conditions, and always contracted at the very time when the public felt that more currency was needed. The banks, of course, were severely criticized for their restrictive policies, but this could not meet the public desire for more currency.
Soon after the union of the provinces was consummated, Lord Sydenham introduced his scheme for a government bank of issue, which was a banking as well as a currency measure. The endeavour was not successful. Apart from the banking problem, however, the United Province had the matter of currency standards to decide. The situation in 1841 was that all sorts of silver, and to a lesser extent gold, coins made up the actual circulation and had unlimited legal tender power at certain specified rates; there was no Canadian coinage and no Canadian standard money in the usual sense of the term. Moreover, the ratings applied to the different coins had varied from. Upper to Lower Canada , and this was a constant source of confusion and trouble in interprovincial relations.
The Legislative Assembly's committee on banking and currency (1841), which considered Sydenham's bank proposal, had also the task of dealing with currency standards. Opinions were obtained from bankers and business men, who in general supported the. decimal system and standard, because of its convenience, and also because of the close financial and commercial relationships with the United States. Francis Hincks, the chairman of the committee, supported this view strongly, and the Currency Act, of 1841, embodied his views to a considerable extent. Because it had to pass both chambers of the legislature and receive British assent, the measure was something of a compromise and did not settle the matter of the ultimate standard. But it did clarify the situation greatly, for it selected certain gold and silver coins to have unlimited legal tender, others to have limited legal tender, and it specified the rates. The task of establishing ratings in Halifax currency for the various coins was difficult and cumbersome, and strengthened the feeling for an outright decimal system. However, the benefits of uniform currency standards were soon realized and appreciated.
In 1850, the United States changed the value of certain silver coins, and this made necessary similar action on the part of Canada. The Currency Act was amended to do this and also to permit the issue of Canadian silver coins of one dollar, fifty cents, twentyfive cent, or smaller. This meant a further step towards a decimal system, and the British government was inclined to protest the Act. Hincks argued the Canadian case with great competence, and was fully supported by the legislature and by commercial and financial opinion. Although the Act was disallowed on some technical grounds, the British government realized that with all the business of the country being done on a decimal basis there was little hope of Canada's adopting the sterling standard. Indeed, this was the last occasion on which Canadian jurisdiction over its currency was ever seriously questioned.
Hincks now entered into correspondence with the other North American provinces with the object of getting a uniform decimal system accepted. Although he obtained a measure of support, the other provinces appear to have done nothing at this time. However, in 1851, he introduced a series of resolutions which provided for a complete decimal system and a corresponding coinage. An Act based on these resolutions was passed and provided for a decimal system of dollars and cents with both gold and silver coinage, but gold was to be the standard. The British sovereign was the standard coin and was rated at $4.86%, but various American gold coins were given unlimited legal tender power. The British government accepted the decimal system, but a clerical error led the Act to be returned, and the British government took the opportunity to send a last minute plea-in the form of a memorandum from the Treasury-not to accept outright the American system, but to base the decimal system on the pound sterling. Hincks was inclined to accept this compromise, but public opinion was strongly in favour of the original plan, and the compromise was not accepted. In 1853, another Act was passed which embodied the main features of the returned Act of 1851, and, as this Act was finally accepted by the British authorities, the single gold standard in Canada may be said to date from this time.
No coins were struck immediately under the Act of 1853. In 1857, an Act was passed which required the government accounts to be kept in dollars and cents. This Act came into force on. January 1, 1858, and the Canadian decimal system dates from this time.
In the middle of the year the first shipment of Canadian coins was received from the British mint and started the Canadian coinage on its way. No changes were made in the standard until after Confederation.
In 1859, A. T. Galt, who was then minister of finance, introduced an Act which provided for a government note issue much along the lines of Sydenham's earlier proposal. It was severely criticized, and under this criticism Galt abandoned the project for the time. In 1866, however, he revived the plan, which in a modified form became the Provincial Notes Act of 1866. By this Act the government was authorized to issue notes not to exceed $8,000,000 in amount, which were redeemable on demand in specie in Toronto and Montreal. Against the first $5,000,000 a specie reserve of 20 per cent. was to be held, and against an excess of more than this amount a reserve of 25 per cent. Public securities were to be held for the circulation in excess of the specie. Provision was made for compensation to any bank which would retire its issue and substitute provincial notes, but only the Bank of Montreal did this. The government did not issue the notes directly, but used the Bank of Montreal. The Act had been passed mainly because of the financial needs of the government, and its use was conditioned upon the failure of the government to raise a loan. The government found itself unable to raise the loan, and the notes were then issued. Confederation took place the following year, and with it new legislation on this subject.
The history of currency in the Maritime provinces is very similar in its main outlines to that of the central provinces ; and practically from the first settlement until Confederation it was the common story of a polyglot currency with the consequent problem of determining ratings in the unit of account.
In Nova Scotia all sorts of coins had circulated from earliest days, but the Spanish dollar, which was obtained through the trade with the West Indies , was one of the commonest coins and even at one time was imported by the British government to pay its troops. Various Acts and regulations dealing with the currency were passed from time to time, but in 1834, owing to a change in the United States coinage, an Act was passed which made a more systematic effort to establish standard values in the unit of account (the Halifax currency) for such coins as were legal tender. In 1860, the decimal system, which had existed in common use with the other, was extended to the keeping of public accounts, but the currency still remained on the old Halifax basis of $5 = £ 1, which was different from that of the central provinces. This was the situation which existed at Confederation.
The province of Nova Scotia first issued government paper in 1812, and from this time until Confederation government notes, under varying conditions of issue, had been kept in circulation. Sometimes the notes were redeemable and sometimes they were not, but they were always kept in circulation, and their history was, even with all its vicissitudes, more creditable than that of most paper currencies. At Confederation this issue was assumed by the Dominion, and was rapidly retired.
New Brunswick was part of Nova Scotia until 1785, and until this time its currency was thus the same as that of its neighbour. In 1786, an Act was passed which established ratings for the various coins in circulation and which practically set the Spanish pistareen as a "shilling") as the standard. Various changes were made from time to time, and in 1828 further changes were made in the ratings, with the result that New Brunswick appears to have practically adopted the American basis with its over-valuation of gold. In 4852 an Act was passed which gave legal permission to use dollars and cents in accounts, although the "pound currency" was still the unit of account. But the American eagle was still the standard. wherein New Brunswick differed from Nova Scotia . In 1860, the decimal system was definitely adopted, and arrangements were made for the striking of some local subsidiary coin. This was the situation which existed at Confederation.
With the federation of the provinces, in 1867, jurisdiction over the currency was given to the federal government. The first legislation on currency matters was in 1868, when an Act was passed assimilating the currency of Upper and Lower Canada and New Brunswick to that of the United States . This Act was based on the assumption that, as a result of the International Monetary Conference of 1867, at Paris, the United States currency was about to be changed and that the Canadian currency must conform. The proposed change in the Canadian standard appears to have contemplated bringing the pound into the system-only as a unit of account-although the decimal system was to be retained. This Act, however, appears never to have been effective.
The first important Act dealing with the monetary standard was the Uniform Currency Act of 1871, which extended the decimal system to Nova Scotia, allowing for the adjustment of old contracts, and which in effect continued the earlier system of the central provinces. The British sovereign, rated at $4.86%, became the standard coin, although American gold coins were given unlimited legal tender. The Canadian dollar thus had the same gold content as the American dollar. Provision was made for a Canadian gold coinage, which was never carried out, as well as for a Canadian subsidiary silver and bronze coinage. In 1881, the scope of the Act was extended to include Prince Edward Island and British Columbia , which had come into the federation in the meanwhile. The metallic currency system established by this Act remained practically unchanged until 1910, when a new Currency Act was passed.
In 1908, a branch of the Royal Mint was established in Ottawa. Originally the costs of the Mint were paid by Canada , but the British government retained jurisdiction over it. In 1931, the Mint was taken over by the department of finance, which operates it as the Royal Canadian Mint. Prior to the war, the main function of the mint had been the coining of the subsidiary coins and gold sovereigns, which were distinguished by having a small "C" on them, but no gold pieces have been struck since 1919. During the Great War a refinery was set up and enlarged (some 20,000,000 ounces of South African gold passed through it then), and at the present time its main activity is refining gold, although it still makes the subsidiary coinage.
The Act of 1910 did not alter the structure of the system established in 1871, but it did make the standard a certain weight of fine gold rather than the British sovereign, as before. The sovereign now became one of the gold coins-along with the American pieces and was unlimited legal tender. Gold bullion, rather than the gold sovereign became the standard. Provision was made for a Canadian gold coinage, but only something under $5,000,000 in 5-dollar and 10-dollar pieces was ever coined. At no time in recent years has gold circulated to any extent, and its main use has been in the reserves of the government and the banks.
The present currency standard of Canada is -under ordinary conditions gold, 900 fine (23.22 grams equal one dollar); and the British sovereign and the American eagle, half-eagle, or double eagle are legal tender. The subsidiary coinage consists of 50-cent, 25-cent, and 10-cent silver pieces, 800 fine (it was reduced from 925 in 1920), which are legal tender to the amount of $10. The statute made provision for a silver dollar which has fever been coined, except as a jubilee coin in 1935; and the 5-cent silver piece has been discontinued. A pure nickel 5-cent piece is legal tender up to five dollars, and a 1-cent bronze, coin up to 25 cents. There is no provision for the redemption .of the subsidiary coinage except on old and worn pieces, which makes it possible at times for a large amount to pile up in the banks, which are unable to do anything with it.
The central bank Act of 1934 did not alter the basis of the standard money, although it has affected the actual operation of the system. Under this statute Canada has adopted the gold bullion standard, which means that, even under gold standard conditions, one can get geld only in minimum amounts (in bars) of 400 ounces. This does not affect the nominal content of the gold dollar, but it does mean that a gold coinage will never circulate even as little as it has in the past. Thus gold coins in circulation are now but a memory.
The history of government paper currency must next be traced. The second piece of legislation, in 1868, dealing with the currency, was an Act which practically repeated the provisions of the Provincial Notes Act of 1866, and which merely substituted the term "Dominion" notes for "Provincial" notes. It also extended the provisions of the Act to all parts of the Dominion and made provision for the issuance and redemption of notes in the standard currency of Nova Scotia . The receivergeneral was authorized to open offices in the main city of each province for the purpose of issuing and redeeming notes; in the meanwhile the actual work was still. left with the banks.
In 1870, the Act was changed to allow for an issue of $9,000,000 against a 20 per rent specie reserve, but the whole amount could be issued only when the specie reserve amounted to $2,000,000. Notes could be issued in excess of $9,000,000 when backed dollar for dollar with gold. This Act also repealed the first seven provisions of the earlier Act, which allowed the banks to give up their circulation and substitute Dominion notes. Thus the Dominion note issue became simply a government currency circulating in part side by side with the bank note issue and with no idea of completely supplanting it. Thus the aims of Sydenham and Galt were abandoned for ever. The special arrangements with the Bank of Montreal were also abrogated, and arrangements were made for the government to handle directly its own note issue. In 1872, an amendment was made which allowed notes issued in excess of $9,000,000 to be issued against a 35 per cent. specie reserve. In 1875 the Act was again altered to allow notes in excess of $9,000,000 and under $12,000,000 to be issued against a 50 per cent. reserve; over this amount a 100 per cent. reserve was required. The scope of the Act was extended in 1876 to cover the new provinces, which had entered the federation after 1867.
In 1880 the basis of the recent system was established. The Act of this year raised the partially-covered issue to a maximum of $20,000,000, against which a 25 per cent. reserve in specie and guaranteed (by the United Kingdom ) debentures had to be held. Dominion securities had to be kept for the "uncovered" 75 per cent. More than the $20,000,000 notes could be issued without limit against a 100 per cent. specie reserve. In 1894, the partially covered issue was raised to $25,000,000, but in the following year it was again reduced to $20,000,000. The Act was again amended in 1903 to require the minister of finance to hold a 25 per cent. reserve in gold and guaranteed debentures for the first $30,000,000, and a 100 per cent. specie reserve for! issues of. more than this amount. This was the situation which existed until 1914, when the exigencies of war-time finance caused further changes in the system.
By 1914, the amount of Dominion notes issued against a 100 per cent. gold reserve was relatively so large (and the 25 per cent. reserve was practically all gold), that Dominion notes were very nearly gold certificates. The reserve ration was approximately 82 per cent. Only the small 1-dollar and 2-dollar notes circulated widely, for the larger notes were held by the banks as reserve money, and for meeting clearing-house balances, as experience had demonstrated that the notes were more convenient than gold to handle and could be turned into gold upon demand. Thus the Dominion note issue performed two very dissimilar functions. The small notes served as a hand-to-hand currency and were rarely presented for redemption. But the main function of Dominion notes was to serve as reserve money for the banks, which made them particularly susceptible to redemption. When gold was needed for export, the usual practice was for the banks to cash Dominion notes and export the proceeds; when gold was imported the reverse procedure occurred. Thus the functions of the government in handling the issue were almost automatic-an exchange of gold for notes and notes for gold.
At the special war session of 1914, the partially-covered issue was raised to $50,000,000. Also $16,000,000 of notes were issued against railway securities. This was really a loan to the Canadian Northern Railway and the Grand Trunk Railway system, reserving $10,000,000 for general governmental purposes, against which. nothing was held. Thus there was $26,000,000 with no specie reserve at all, $50,000,000 with a 25 per cent. reserve in specie, and the balance with a 100 per cent. reserve in gold. In the same year the Finance Act was passed. This Act allowed Dominion notes to be issued to the banks against the pledge of approved securities. The notes so issued required no specie reserve, but were undistinguishable from the notes issued in any other way. Thus the war legislation permitted a drastic dilution of the whole issue.
At the outbreak of war, in 1914, the gold standard, which had been maintained without a break since 1853, was abandoned, and was not resumed for twelve years. The necessities of wartime finance made a substantial inflation inevitable, and the Finance Act was an important mechanism in bringing this about. With the resumption of the gold standard on July 1, 1926, Canada attempted to resume her prewar monetary standard, but the Finance Act was an entirely new factor in the situation, and all experience with it had been obtained during a period of inconvertible paper money. Under the Dominion Notes Act, the issue of Dominion notes-with respect to specie reserves-was most carefully guarded, but under the Finance Act identical notes could be issued with no gold reserve required. Thus one door was carefully locked while the other was left wide open. The result was that less than two and a half years' operation of the Act under gold standard conditions brought about an informal abandonment of the gold standard. Since 1929, Canada has not adhered strictly to the gold standard, although in the earlier period this was not so obvious. In October, 1931, gold exports were prohibited by order-in-council, but as the legal basis for this action was not too clear an Act was passed in 1932 specifically giving the government power to take such action.
Because of the establishment of the Bank of Canada; the Finance Act was repealed in 1934,1 along with a number of other Acts, such as those of 1914. In 1934, the Dominion Notes Act was amended so that the partially covered issue was raised to $120,000,000, but included in this amount was the $26,000,000 issued under the Acts of 1914. Thus the net increase in the partially-covered issue was $44,000,000, which was used for public works. Under the terms of the central bank Act, the Dominion note issue was to be taken over by the central bank. But inasmuch as the government had to give the central bank 3 per cent. bonds for the amount by which the Dominion note issue exceeded the gold held against it, the financing of public works by the creation of $44,000,000 of notes was illusory. A little later these notes would have to be retired with bonds, which would mean that the public works were really financed with a bond issue. The establishment of the central bank meant the disappearance of a currency which, despite its somewhat disreputable origins, has on the whole had a long and honourable history, much more so than most government currencies.
Since the first bank of issue began in 1822, bank notes have been an important part of the circulating media in Canada . From almost the very beginning Canadian banks have had the right to issue bank notes (to the amount of the paid-up capital) as freely as they could create deposits. This meant that the bank circulation was elastic in that the amount of it depended upon the capacity of the bank to grant credit accommodation and not upon some extraneous cause. The bank-note circulation did not press upon the paid-up capital limit until early in the first decade of the present century. This situation was met in 1908 by giving the banks permission to issue notes to the amount of 15 per cent. of their combined capital and surplus (reserve fund). The "excess" issue was taxed at a rate of 5 per cent., which tended to restrict its use. In 1913, the creation of the central gold reserves offered a more permanent solution.
Under this provision banks were allowed to issue notes in excess of their paid-up capital be depositing Dominion notes or gold in this reserve, which was located in Montreal, and which was under the control of four trustees-one appointed by the minister of finance and three by the Canadian Bankers' Association. This practice, however, ended the vaunted elasticity of the bank circulation, for it made it directly dependent upon the supply of legal money. Consequent upon the establishment of the central bank, the Bank Act was amended in 1934, to provide for the gradual extinction of the bank circulation so that by 1946 the banknote issue will be only 25 per cent. of the paid-up capital.
Despite the fact that, at least in the early period, the banks could create note liabilities as easily as deposit liabilities, the circulation did not become redundant because of the practice of clearing notes. Each bank collected the notes of the other banks and presented them for payment through the clearing-house, which prevented any bank from getting a redundant circulation. At the same time this practice tended to make the nominal circulation larger than it really was, through the banks storing the notes of other banks.
Because the circulation was a first claim on the assets of a bank and the Circulation Redemption Fund - in effect a mutual guarantee of bank notes - the Canadian bank note was a convenient and safe medium of exchange. Relative to the period of its existence, it served the public well, and the Canadian people suffered little from the system. It filled a distinct place in the economic life of the community at a time when such a medium of exchange was capable of its greatest good. With a more developed economy, the place of the bank note relative to the deposit has become of much less significance, and the disappearance of the chartered banks' notes is now a matter of relative unimportance.
The establishment of the central bank has altered the structure of the Canadian currency system in many ways. The Dominion note issue, and all the incidental legislation dependent on it, has been wiped out. The banks' note issue is . to be reduced to a fraction of itself, and doubtless in time the surviving vestiges will be eliminated too. The gold specie standard has been supplanted by the gold bullion standard. Possibly it is no exaggeration to say that never before have so many significant changes been made at one time in the Canadian currency system.
See Robert Chalmers, History of currency in the British colonies (London, 1893), and James Bonar, The courage of Canada since Confederation (Journal of the Canadian Bankers' Association, 1918), as well as references under the heading of Banking.
Source : W. Stewart WALLACE, ed., The Encyclopedia of Canada, Vol. II, Toronto, University Associates of Canada, 1948, 411p., pp. 159-167.
© 2004 Claude Bélanger, Marianopolis College