Front Page Titles (by Subject) CHAPTER II.: 1817-1841. BANKING UNDER JOINT-STOCK CHARTERS. - A History of Banking in all the Leading Nations, vol. 3 (France, Italy, Spain, Portugal, Canada)
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CHAPTER II.: 1817-1841. BANKING UNDER JOINT-STOCK CHARTERS. - Editor of the Journal of Commerce and Commercial Bulletin, A History of Banking in all the Leading Nations, vol. 3 (France, Italy, Spain, Portugal, Canada) 
A History of Banking in all the Leading Nations; comprising the United States; Great Britain; Germany; Austro-Hungary; France; Italy; Belgium; Spain; Switzerland; Portugal; Roumania; Russia; Holland; The Scandinavian Nations; Canada; China; Japan; compiled by thirteen authors. Edited by the Editor of the Journal of Commerce and Commercial Bulletin. In Four Volumes. (New York: The Journal of Commerce and Commercial Bulletin, 1896). Vol. 3 (France, Italy, Spain, Portugal, Canada).
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1817-1841. BANKING UNDER JOINT-STOCK CHARTERS.
LEGISLATION BY THE PROVINCES.
EXPERIENCE OF TREASURY NOTES.
WE are now approaching the period of joint-stock banking, and it will have been noticed that we have dealt with the currency history of only one portion of the present Dominion of Canada, that now known as the province of Quebec. In considering the conditions of banking preceding the confederation of the British North American provinces and territories, which took place in 1867, we shall have to deal with the portions of the present Dominion now known as Quebec, Ontario, Nova Scotia, and New Brunswick, but before doing this it is necessary to refer briefly to the early conditions in Nova Scotia.
In 1801 an attempt was made in that province to obtain the monopoly of banking for a proposed company with a capital of £50,000 currency, but without success; and in 1811 an effort by the Halifax Committee of Trade to found a bank also failed. In 1812 the Treasury, however, made an issue of £12,000 currency of notes bearing interest at six per cent. and not reissuable. This was a simple and apparently harmless borrowing expedient, but, perhaps because of the absence of a sound bank of issue, the province went early astray. This issue was redeemed, but in 1813 it was followed by an issue of £20,000 currency not bearing interest and reissuable. From this year until confederation, in 1867, Nova Scotia never ceased to issue currency, and when its debts were assumed by the Dominion the total outstanding in this form amounted to £605,859. After 1812 the notes were not redeemable in gold unless it suited the Treasury, the option of funding them in interest-bearing notes being the alternative, and a date was fixed, generally three years from the date of the notes, before which redemption in any form could not be exacted.
In 1819 the Government tried the experiment, though in a very cautious manner, of lending on land through loan commissioners. Loans were not to exceed £200 currency on real estate supposed to be worth three times as much, repayable in three, six, and nine years, with six per cent. per annum interest.
In 1826 the Government took a further downward step by providing that notes must be received by the public in payment of warrants on the Treasury, whenever the Treasury was not in possession of coin with which to make such payments. The next step, naturally, was to require the Treasury to retain all coin in order to make payments in connection with the funded debt, and this was soon followed by the requirement that the public must pay customs duties in coin. In 1834, the latter provision was somewhat ameliorated by permission to pay in Treasury notes—the pound in paper money being reckoned at sixteen shillings for customs payments. Various efforts at reform were made, and by 1846 customs duties were payable in coin and Treasury notes, but not in bank notes; and in order to aid in floating the Treasury issues, banks were not allowed to issue notes smaller than £5 currency ($20). The remaining evil features were not removed by the legislation of 1846, and practically continued until the redemption of the whole by the Dominion Government, beginning in 1867.
CREATION OF BANKS IN LOWER CANADA.
Returning to the province now called Quebec, it will be remembered that from 1815 to 1820 the army-bill issues were being retired. The people had experienced the benefits of a well-regulated and elastic paper currency, but it was based upon the war requirements of the Government, and not upon the requirements of trade; these war requirements being at an end, trade must get along once more with the miscellaneous coinage of foreign countries, unless a basis for paper money issues could be found. The outcome of this fact was the Bank of Montreal, now possessing a capital and surplus of $18,000,000 and enjoying the distinction of being the most important monetary institution in North America. Without awaiting the consent of Parliament, articles of association were signed June 23, 1817, under which the capital was to be limited to £250,000 currency. In August, the Bank commenced business, and at the next session of the Legislature, an act incorporating it was passed, but was withheld by the Governor in order to obtain the royal assent. This was refused. In Quebec (city) another bank was founded on June 9. 1818, called the Quebec Bank, which is still doing a large business. Its capital was limited to £75,000 currency. It also began as a private bank, applied for incorporation in 1819, and, like the Bank of Montreal, failed to obtain it. A third bank, not now in existence, was established in Montreal in 1818, called the Bank of Canada, which also failed at this time to obtain incorporation. Its capital was limited to £200,000 currency.
During the session of 1820-21, however, the Legislature was again asked to grant charters to these three banks in conformity with their articles of association, and with such further regulations as Parliament might impose. The application was successful, and charters were granted by the Legislature in 1821, but did not receive the royal assent until 1822.
CHARTERS GRANTED TO THREE BANKS—THEIR PROVISIONS.
As regards the development of banking, what we are most interested in at the present time is the nature of the charters granted to these three banks. They were all practically alike, and that granted to the Bank of Montreal may be taken as the type. It may safely be said that these first charters are the substructure on which all subsequent improvements have been built, and that no very radical changes have been at any time necessary. Indeed, there are very many provisions in these charters which were subsequently included, almost unchanged, in the general Banking Act. Among the provisions, which are not essentially different in principle from the present act, are the following:
1. The charter was to continue for ten years.
2. The directors were to be British subjects. The qualification in stock-holding was quite small, viz., four shares of £50 currency each, or $800 par value. The directors were not to act as private bankers. They were to be remunerated only by compensation voted by shareholders at an annual meeting.
3. The directors were to appoint the officers of the bank and to take surety bonds for faithful performance of duties. They were to declare dividends, when profits were earned, as often as half-yearly. They must not, in paying dividends, encroach upon the capital. They must keep proper stock-books. They had the right to inspect all books, correspondence, and funds of the bank. They were obliged to submit a clear annual statement of the bank’s position to the shareholders at the annual meeting.
4. The bank might receive deposits, deal in bills of exchange, discount notes, buy gold and silver coin and bullion, etc.; but might not engage in business other than banking.
5. It could not lend money directly upon real property. It could, however, take such as further security for loans already made. It was not permitted to lend money to a foreign country.
6. It could issue notes to circulate as money, but with no limit other than the general limit for all obligations.
7. The Government might require at any time, for the protection of the public, a statement, under oath, of the position of the bank.
8. Transfers of shares in the bank were not valid unless registered in the stock-book of the bank, and the bank had a prior lien on the stock for ordinary debts due by the holder.
The following regulations, on the other hand, are different in principle from the general act now in force:
1. The total liabilities were not to exceed three times the capital stock actually paid in, and directors were personally liable if they permitted such excess. Any director might save himself by publicly protesting within eight days after the transactions causing the excess took place.
2. The shareholders were exempt from any liability except that of payment for the stock for which they had subscribed, with a penalty of five per cent. for non-payment after installments matured.
3. Voting by shareholders was not, as now, in exact proportion to shares held, the number of votes diminishing by a scale as the holdings increased; so that while one share gave one vote, ten shares gave only five, and thirty shares only ten. No holding gave more than twenty votes.
The banks soon opened branches and agencies, and, imperfect in detail as it was at this time, the present system of banking began its career. From the first the banks exercised, under the scrutiny of Government and press, the great franchise of note issues unsecured by any special pledge; they possessed the identity given by separate charters and clearly distinguishing titles; they opened branches and assumed the widest functions of banking without discussing the precise powers accorded by these charters. Possessing capital quite as large relatively to the community as they have now, they assumed, without hesitation, a national position as clearing-houses for the exchange of the country’s products.
BANKS FOUNDED IN UPPER CANADA.
Leaving the province of Lower Canada (Quebec) and turning to Upper Canada (Ontario), we find that the people clearly saw the benefits of the paper issues of the War of 1812, and were strongly influenced by the growth of banking in Great Britain and the United States. In March, 1817, the House of Assembly was asked by the business men of Kingston to incorporate the Bank of Upper Canada; so that the people of this province were not behind those of Lower Canada in seeking such privileges. The act was passed by the Provincial Parliament, but was reserved by the Lieutenant-Governor in order to obtain royal assent. This was not granted until April 21, 1821. Because of this delay the people of Kingston asked in June, 1819, for the incorporation of the Bank of Kingston, which was granted so far as the Provincial Parliament was concerned; and the people of what is now Toronto, in July, 1819, asked for the incorporation of the Upper Canada Banking Company, which was granted, but reserved for royal assent. The delay still continuing, the House of Assembly, on April 5, 1821, passed resolutions looking to the establishment of a Provincial Bank; but the assent to the charter of the Bank of Upper Canada being proclaimed on the 21st of that month, no further action was necessary. In the nature of its charter, the Bank of Upper Canada did not differ materially from the banks of Lower Canada. Its capital was, after some discussion, settled, in 1823, at £100,000 currency, of which only a small proportion was actually paid in specie. Its head office was to be established at the seat of government, and the power to establish branches was directly stated. It became a semi-State institution by the fact that the Government subscribed for 2000 shares (£12 10s. 0d. currency each), thus owning one-fourth of the stock, and was allowed to name four of the fifteen directors. The Bank could buy real estate only for its own use, whereas in Lower Canada there was only a provision as to the annual value of real estate held by a bank. Inability to pay its notes in specie involved stoppage of business or forfeiture of charter until payments were resumed. The return to the Government was periodic instead of occasional, but was required only once a year. The charter extended to June 1, 1848.
In 1818, apparently, while awaiting a charter for the Bank of Upper Canada, the promoters in Kingston established a private bank under that name, as had been done by the originators of the Bank of Montreal and the Quebec Bank. When the charter was finally granted, the Provincial Government had subscribed for shares, and other changes had taken place, so that the chartered institution did not take over the business of the private bank, and the latter has, for this reason, been called the “pretended” Bank of Upper Canada. These two ventures are all, however, that resulted at the moment from the desire on the part of the people of Upper Canada for bank accommodation.
BANKS ESTABLISHED IN NOVA SCOTIA.
Early in 1820, royal assent was given to a charter for the Bank of New Brunswick at St. John, with a capital of £50,000 currency. In Nova Scotia, although there had been, as we have said, agitation for a bank early in the century, the issue since 1812 of a Government currency acted as a deterrent, and it was not until 1825 that the Halifax Banking Company commenced business. It did so as a private bank, although since 1872 it has been a regularly chartered body, and it was not until 1832 that the first joint-stock bank, the Bank of Nova Scotia, was chartered. The capital of this bank was to be £100,000 currency, of which £50,000 was to be paid in in specie or Treasury notes before it commenced business. The important feature in which its charter varied from those granted in Lower and Upper Canada was in the introduction of the double liability of shareholders, or the liability, in the event of failure, to pay assessments sufficient, after exhausting the ordinary assets, to meet all liabilities, provided such calls in the aggregate did not exceed the original amount of capital paid in. It was prohibited from issuing notes under 26 shillings, in order to preserve to the Government the exclusive issue of its notes for denominations from $5 downward.
We have now referred to three banks chartered in Lower Canada, one private and one chartered bank in Upper Canada, one chartered bank in New Brunswick, and one private and one chartered bank in Nova Scotia—in all, six chartered and two private banks. Of these several ventures, two, the Bank of Canada in Lower Canada, and the private or “pretended” Bank of Upper Canada, passed out of existence in a few years, so that banking in the various provinces now merged in the Dominion was practically inaugurated by the following institutions: the Bank of Montreal, the Quebec Bank, the Bank of Upper Canada, the Bank of New Brunswick, the Halifax Banking Company, and the Bank of Nova Scotia, and these are all successful institutions to-day except the Bank of Upper Canada, the failure of which in 1866, after a career of half a century, is the most serious calamity in the history of banking in Canada.
When we look at the map, the extent of country to be served by these six banks seems very great, but when we consider the population and the nature of the commerce, it is difficult to understand how they managed to survive. A scanty population settled here and there at seaside ports and on the shores of rivers and lakes, without means of communication worthy the name, without manufactures, with agriculture so little advanced that the products of the chase and the forest were still more important as exports than the results of farming, there was but little basis for sound banking, and its development lacked interest until many years after this period. In Lower Canada the volume of business considerably more than doubled, apparently, between 1820 and 1830, but in the latter year the figures, exclusive of the Bank of Canada, which was almost liquidated, were very trifling. The resources were as follows: Capital, £304,000; notes in circulation, £217,000; deposits, £163,000, while other items made the aggregate a little more than £700,000 currency. The assets to represent this were loans, £602,000, and cash, £103,000. In the same year a return of the one bank in Upper Canada shows resources as follows: Capital, £77,000; notes in circulation, £156,000; deposits and other debts due, £38,000, making an aggregate of less than £275,000 currency. This was represented by loans of £214,000, cash £23,000, and other assets of about £30,000.
GROWTH OF BANKING IN THE VARIOUS PROVINCES.
We will now make a rapid survey of the growth of banking in the various provinces, pausing only to note the additions to the principles of banking, which were gradually being built up by experience. We have referred to the creation in 1820 of the Bank of New Brunswick; in that province the next charter was granted, in 1825, to the Charlotte County Bank at St. Andrew’s, with a capital of £15,000 currency. These charters were for twenty years, and the total liabilities were restricted to twice the paid-up capital, instead of three times, as in the other provinces. Otherwise they did not differ materially from those granted elsewhere. In 1834, the Central Bank of New Brunswick, at Fredericton, obtained a charter which contained the following conditions, resulting, apparently, from the recommendations of the Committee for Trade of His Majesty’s Privy Council for 1830 and 1833:
1. No bank notes to be issued until one-half of the authorized capital stock was paid in (in the case of this bank this amounted to only £7500 at first, the capital being but £15,000, but in 1836 the capital was increased to £50,000).
2. Public commissioners to count the cash in the vaults and ascertain that it was actual capital paid in.
3. The principle of double liability of stockholders, which had already been introduced in Nova Scotia.
4. Loans on pledge of Bank’s own stock forbidden.
5. Liabilities of directors, directly or as sureties, limited to one-third of the paid-in capital.
6. Semi-annual returns to the Government.
7. No bill offered for discount to be refused by vote of a single director—a very doubtful provision.
8. A director with debts in default to Bank not to attend board meetings.
While these were very considerable changes from the charters previously granted in New Brunswick, they did not materially advance the principles of banking, as most of these conditions already existed in one form or another in other provinces. In the same year, the Commercial Bank of New Brunswick, and in 1836 the St. Stephen’s Bank, were created. In the charter of the latter it is provided that no stockholder should own more than twenty per cent. of the capital stock, and that the lien for a debt due the Bank upon shares in the Bank owned by the debtor shall not have priority to that of a creditor who seizes and sells under execution. The limitations as to proportion of the aggregate of debts to capital were materially altered by excluding deposits from the liabilities to be considered. In the same year authority was granted to the City Bank, with a head office at St. John, and a capital of £100,000, but it merged, in 1839, with the Bank of New Brunswick, which in 1837 had doubled its capital.
From this time until confederation, in 1867, the banking legislation of New Brunswick has little interest for us. Existing banks renewed their charters, accepting the new provisions, and sometimes increasing their capital, new banks were authorized, few of which actually began business. The result was that in 1867, when the province gave up its power to legislate regarding banking, there were in existence four banks, while there were five available charters not put in actual operation.
The history of banking in Nova Scotia prior to confederation is even more barren of incident than that of New Brunswick, but it is interesting because of the interference by Government in the business of banking in order to keep in circulation the Government issues already referred to, and the development of private banking, owing, doubtless, partly to the restrictions imposed by the Government in granting charters. Except that, in 1837 and 1838, the Bank of British North America, to be referred to hereafter, obtained permission to do business in New Brunswick and Nova Scotia, respectively, the latter province for many years depended for banking on the Bank of Nova Scotia and the private banks, and for currency on the issues of the Government, the Bank, and the private bankers. The private bankers were apparently only restricted in issuing notes by the condition that no note should be for less than £5 currency, which restriction was created by a statute of 1834 and also applied to the Bank of Nova Scotia. From 1841 to 1847, the charter of the Bank of Nova Scotia was several times extended for periods of one or two years at a time, and in 1847 it was renewed for ten years, the main addition being the penalty of loss of charter for an issue of bank notes causing the liabilities to exceed the legal limit of three times the paid-up capital. In 1856, it was again renewed for fifteen years and the authorized capital increased to £400,000 currency. Between this year and confederation, several charters were granted, but as they did not differ in principle from that of the Bank of Nova Scotia we need not refer further to them. At the time of confederation (1867) there were five banks doing business under charters from the province and one charter not yet in use.
It will have been observed that there was during the period of provincial charters very little growth in banking principles in these two provinces, and it will not be necessary in a mere history of development to refer to them again.
NEW LEGISLATION RELATING TO NOTE ISSUES.
In 1841, the provinces of Lower and Upper Canada (Quebec and Ontario) were united in the Province of Canada; but before considering the growth of banking under the legislation of that province, we must refer to facts of considerable importance which took place from about 1830 to 1841 in the two old provinces.
In Lower Canada, in 1830, an act was passed prohibiting, under forfeiture of the amount involved, the issue or use in payment of any note payable to bearer or for less than five dollars, except by a chartered bank. In renewing the charter of the Bank of Montreal in this year, which was only extended to 1837, there were also some interesting additional provisions. No notes were to be issued of less denomination than five shillings ($1), and the total of notes for smaller denominations than £1 5s. od. currency ($5) were not to exceed one-fifth of the capital stock. The Legislature might also at any time further restrict the issue of these small notes or suppress them entirely. The penalty for violating these two restrictions was forfeiture of charter. Improvements were made in the form of the return to Government, and in order that the province might not be left with a chartered institution enjoying the monopoly of banking, it was provided that in the event of the charter of the Quebec Bank not being renewed, the charter of the Bank of Montreal should also cease. These were somewhat illiberal provisions, and not very creditable to the legislators who imposed them. In 1831, the charter of the Quebec Bank was renewed until 1836, and later this was extended to the same day in 1837, on which that of the Bank of Montreal expired. The new provisions in the charter of the latter bank were also added, and it may be well to notice here that thus early there is the tendency to make all charters of banks expire at the same time—a feature, whether wise or not, which is very conspicuous in the present system.
Thus far, while the Bank of Montreal had a branch in Quebec, the Quebec Bank had no branch in Montreal, and in order to avoid monopoly, in 1831 a charter was asked for the City Bank. From the date of the founding of the original banks until Lower and Upper Canada merged in the Province of Canada, in 1841, this was the only proposal to establish a new chartered bank in Lower Canada, and yet it met with opposition, almost strong enough to defeat it, from the French members of the House of Assembly, whose naturally conservative instincts were still strongly averse to banks of issue. For reasons not material to our subject, royal assent was not granted until 1833, and the charter was to expire on the same day as those already granted—June 1, 1837. The conditions only differed from previous charters regarding the manner of paying in the capital, the two banks in existence having commenced as private ventures. The capital was to be £200,000 currency, and before commencing business must all be subscribed and £40,000 currency be paid up and actually in possession of the Bank in current coin of the province. The whole capital must be paid within four years.
Owing to the Rebellion of 1837, there was created a body known as the “Special Council of the Province of Lower Canada,” which, for the time being, governed the country. There was therefore no Parliament in 1837 to renew the three charters. The difficulty was got over by the Bank of Montreal continuing for a short time without incorporation and then having its charter extended for four years by this Special Council, while the other two banks secured royal letters patent, which continued their existence until one year after the next session of Parliament. The Quebec Bank subsequently obtained from the Special Council an express extension of its charter until 1842.
It will be remembered that private bankers, of whom there were doubtless many of one kind or another by this time, were forbidden to issue notes in Lower Canada intended for use as money. But the disorganized state of trade and finance, consequent upon the rebellion, had, notwithstanding the penalty, caused a flood of paper issues by private bankers and merchants, and the Special Council endeavored to improve the situation temporarily by granting licenses to issue such notes, for one year, to private bankers who complied with certain regulations. The issue of such illegitimate currency and the suspension of specie payments at this time, which will be referred to elsewhere, are, I believe, the only evidences which can be quoted of failure on the part of the bank note issues, taken as a whole, to provide adequately for the currency requirements of the country, and these defects were entirely the result of the disorganization growing out of the rebellion.
BANKS WITH EXCEPTIONAL CHARTERS.
We have next to refer to the creation of two institutions with charters possessing unusual features. When a general banking act was considered by the Dominion Government after confederation, these banks were the subject of various exemptions and requirements, because of the peculiar nature of the privileges they had already obtained. In 1835 a private banking firm was formed called Viger, DeWitt et Cie., also known as “La Banque du Peuple.” It was simply a partnership of a kind frequently found in Europe. The twelve principal partners, who alone were to manage the business, were subject to the unlimited liability of ordinary partners in any firm, but they could have an indefinite number of special partners, or “commanditaires,” whose liability ended with the payment of whatever shares in the venture they subscribed or accepted by transfer. This institution eventually became one of the chartered banks, but, as we have indicated, without losing its peculiar features. The “twelve principal partners” became practically the directors, retaining their unlimited liability, and the “commanditaires” became shareholders, without the double liability which inhered to stock held in other banks chartered by the Canadian Parliament. After a career of sixty years, this bank suspended in July, 1895, and having practically retired its note issues is, at the moment, endeavoring to arrange with its depositors to form a small bank of the ordinary character, thus removing from our system one of the few remaining anomalous features inherited from the legislation preceding confederation. In 1836 a bank was formed in England to do business through branches in the various North American provinces, a thing not done at the moment and which would require legislation in each of the provinces. Partly in order to avoid this, it secured a royal charter and thereafter obtained whatever local legislation was at the time necessary, and began business as the Bank of British North America, with a nominal capital of £1,000,000 sterling, which was eventually paid up in full, but without double liability of shareholders, and with power to issue no notes smaller than £1 currency.
BANKING PROGRESS IN UPPER CANADA.
In Upper Canada we have to deal with very different conditions and a different people. At present the wealthiest of the provinces, it was at the time of the founding of the Bank of Upper Canada little more than a primæval forest, broken along the lakes and rivers by a few communities where the people struggled bravely for a livelihood, for the most part without the aid of roads or any public improvements. They were not, like their French-Canadian brothers, unwilling to try joint-stock banking; they were only too willing to try anything which promised to oil the wheels of trade. In this spirit they began in 1825 the building of that series of canals which aided so much in making the lakes continuously navigable, and while they had to wait many years for the realization of their schemes, the expenditure of so much money and the immigration which at this time flowed in from Great Britain gave a great impetus to the development of the province. As might be expected, it was the day of strong rather than of scrupulous men. The government was in the hands of a powerful clique bent on controlling the religion, education, and the settlement as well as the legislation of the country. With this body the Bank of Upper Canada was closely allied, and, whether justly or not, was accused of using its power in politics. Be this as it may, in 1830-31 a bill for the creation of a bank was rejected by the Legislative Council, which is said to have been controlled by this clique, and in 1833 two bills were also rejected after having been passed by the Assembly. But the paid-up capital of the Bank of Upper Canada, which in 1823 was only £10,640 currency, had been increased until in 1830 it had reached the limit of £100,000 currency. It had paid dividends at eight per cent. per annum and had twice paid bonuses of six per cent. While the Legislative Council refused charters to new corporations, this one bank was permitted in 1831-32 to increase its capital by another £100,000 currency. At the same time one of the bills referred to above as having been rejected was passed, creating the Commercial Bank of the Midland District, with its head office at Kingston and an authorized capital of £100,000 currency. The improvements in principle in the bills passed at this time, regarding the two banks, were not very important. They were forbidden to lend on their own stock on penalty of forfeiting their charters, and more elaborate returns to Government were required than hitherto. So ready were the people to aid in extending banking that the subscriptions for the £100,000 currency of new stock of the Bank of Upper Canada, the books being open for but one day and no subscription permitted for more than eighty shares (£12 10s. od. currency, or $50 each), amounted to £320,987 10s. od. currency. The premium received was sufficient to enable a bonus to be paid to original shareholders of eighteen per cent. in addition to the ordinary dividend of eight per cent.
We have already referred in dealing with New Brunswick to certain recommendations of the Committee for Trade of the Privy Council made as early as 1830, regarding colonial bank charters. These had not been considered in the recent bank legislation of Upper Canada, and there was in consequence a threat of royal disallowance unless the proposed conditions were added. But the banks had acted for a year under the new legislation and had already as many as fifteen or sixteen branches or agencies, with discounts amounting to £450,000 currency and notes in circulation of about £300,000 currency, so that the mere possibility of disallowance caused financial trouble. The people protested and petitioned the King, and in the end a compromise was reached. The recommendations, mostly excellent in themselves, were in substance as follows:
1. Bank charters to be forfeited by suspension for sixty days consecutively, or during a year.
2. Note issues to be dated where issued and to be redeemed in specie there and at head office. No branch need redeem notes issued at another branch or at head office.
3. One-half of capital to be paid in at commencement, the remainder at discretion.
4. The directors not to become liable on obligations to bank exceeding one-third of the total discounts of bank.
5. Bank not to hold its own stock or lend money thereon.
6. Half-yearly statements to Government of average assets and liabilities made from weekly balance-sheets, with particulars of dividends and reserved profits. Special returns might be called for and must be verified under oath if required.
7. Shareholders subject to double liability.
8. Banks not to lend on real estate.
These were referred to a special committee of the Upper Canada House of Assembly, who heard bankers and merchants in evidence and eventually reported strongly against the interference, particularly against the 1st, 2d, and 6th of the recommendations. On the 7th they did not agree, and the 8th was already incorporated in existing charters, while the 3d, 4th, and 5th were admitted in principle and acted upon. With the concurrence of the new Commercial Bank, a bill was reported adding to its charter the 3d, 4th, 5th, and 7th provisions, but at the same time an address to the King was prepared deploring the royal veto and praying that the new provisions be not required. As the address passed by a vote of thirty-one to one, action was delayed on the bill amending the Commercial Bank charter, and in consequence of the feeling aroused, the original legislation was not disallowed. What is noticeable at this time is not the rejection by the Upper Canadians of recommendations good enough in themselves, but their intelligent appreciation of the value of banks and their determination to manage their own affairs.
In 1835, the Gore Bank was incorporated, with its head office at Hamilton, and an authorized capital of £100,000 currency. In its charter the 2d, 5th, 7th, and 8th of the recommendations were included, and royal assent was promptly given. In the same year the Commercial Bank increased its authorized capital from £100,000 currency to £200,000 currency, and the 4th and 5th recommendations were added to its charter, the 8th already being included. The others were not included, yet the legislation was not disallowed.
These evidences of growth do not represent fully the desires of the people at this time, but rather the meagre extent to which a powerfully intrenched government chose to meet the public demands. The opposition apparently clamored for legislation to make banking “free.” In 1831, 1831-32, 1833-34, 1835, and 1836, measures were proposed looking toward uniformity in the system of banking and freedom to all to engage in the business who should conform to the proposed laws. But it was still quite easy to establish a private bank which might issue notes, no act prohibiting private issues being yet in force in Upper Canada. Aided by this fact, in 1835 some politicians opposed to the present banking system organized, by a deed of settlement, a private bank known as the Farmers’ Joint-Stock Banking Company, with a capital not larger than £50,000 currency; and later, in the same year, the Bank of the People, which, in the course of a year, got together a capital of about £13,000 currency, began business. At the same time some Americans opened the Niagara Suspension Bridge Bank, with an agency at Lockport, N. Y., and one in Canada, at Chippewa, and with even less capital than the last-named concern. Messrs. Truscott & Green also began business as the Agricultural Bank. Very naturally, this brought forward for prompt consideration the question of private note issues, and in 1837 legislation was obtained prohibiting the issue without legislative authority of notes intended to pass as money. It was found expedient, however, to make an exception in favor of the four private banks above referred to.
PUBLIC CLAMOR FOR MORE BANKS—RESTRAINT FROM THE COLONIAL OFFICE.
The people of the province were in many ways contributing toward the creation of the commercial panic of 1837, which left its mark for many years on the trade of North America. They were speculating in land, making public improvements on an ambitious scale, attempting to manufacture a few articles, and trading generally much beyond their financial capacity. They were, therefore, in the state of mind which has so often characterized American communities when deeply in debt—they wanted banks, because they thought that the creation of such institutions would make it easier to borrow, and they wanted paper money, of any sort, for equally unsound reasons. During the ten years preceding the union of Lower and Upper Canada, in 1841, there were about twenty-five public bills in Upper Canada on the subject of banking and currency which did not pass, while in 1833 the Assembly did pass a bill authorizing the Receiver-General to issue currency, and in 1835 a committee reported favorably on a plan for a provincial bank, which was to issue notes based on the public debt and use its profits to pay the interest on the same. Fortunately, these schemes did not become law. In 1836-37 bills were passed which, if assented to, would have increased the banking capital from £500,000 currency to £4,590,000 currency, and have added nine new banks to the number doing business in a province which contained only about 400,000 people. The province did not as yet enjoy the benefits of home rule, and consequently resisted bitterly all interference on the part of the Colonial Office in England, but every intelligent Canadian must now see quite clearly that had we been allowed our own way in banking and currency legislation at this time, we should doubtless have tried, one after the other, the entire round of unsound experiments, and would to-day be perhaps not very anxious to discuss the soundness of our banking system. When bills were passed in the various provinces they were given the force of law by the Lieutenant-Governor, without waiting to ascertain whether or not they were to meet the fate of royal disallowance, and, consequently, contracts having been entered into on the faith of the legislation, it was found impracticable, or at all events unwise, to insist on disallowance. To avoid this difficulty the Colonial Office, in 1836, succeeded in having instructions sent out to the Lieutenant-Governor not to permit legislation bearing upon any kind of notes intended to pass as money to go into effect without first receiving the royal assent. The House of Assembly, of course, resisted, and the home authorities were very conscious of the danger of interference; but any student of joint-stock banking in England will understand how honestly alarmed the British authorities must have been at the wild pace of joint-stock banking throughout North America at this time. The Colonial Office therefore persisted in demanding a reference of such measures for royal allowance before legislation was put in force, and as a result, the extraordinary Acts of 1836-37 were not allowed, but were referred back for further consideration by the Upper Canadian authorities. None of the bills were again approved in Canada, the period of inflation having passed its meridian. The Government of Upper Canada having refused to be guided by the series of recommendations by the Committee for Trade (of which an abstract has already been given), and being deeply irritated by the instructions to refer all currency measures for royal allowance before putting such legislation in force, the Secretary of State for the Colonies forwarded a second series of recommendations by the Committee for Trade, upon the observance of which by the Canadian Parliament reference for royal assent in advance of action upon legislation became no longer necessary.
There is little to be learned by a study of the kind of business transacted by the banks of Upper Canada at this time. In the nature of things, it was not very sound banking. The people were chiefly concerned in actually clearing up the forest or in improving the first rude conditions of settlement. Therefore, the results were apt to show mainly in connection with real property, and there were not only too many loans asked and granted where there was no intention of creating or moving merchantable products with the money, but there must have been a constant tendency for loans made on the basis of creating or moving merchantable products to drift into loans resting on real property. Still the fact remains that there had not been, nor was there destined to be for many years to come, a failure of a joint-stock bank in this province. The system was in many respects bad, but there must have been more good than bad in an actual practice of banking which, for the first forty years of its history, escaped the disgrace of failure. That this was partly due to the high credit enjoyed by the few joint-stock institutions, especially when compared with the private concerns, there is little doubt. The volume of business in 1837 was as follows: Capital stock paid up of the three chartered banks, £476,978; of the four private banks, £98,023; notes in circulation respectively, £319,244 and £71,148; deposits, £204,571 and £12,328; specie, £78,884 and £14,457; loans and discounts, £895,039 and £143,718. If we multiply the paid-up capital of the three chartered banks by three, we find the aggregate of their permissible liabilities to be £1,430,934, and as their deposits amounted to only £204,571, there was left the sum of £1,226,363 to cover debts due to foreign correspondents and notes in circulation. Their debts to foreign correspondents, if any, were inconsiderable, and, therefore, while they had legal power to circulate notes to the extent of £1,000,000 to £1,250,000 currency, they had notes outstanding for only £319,244. In 1826 the Bank of Upper Canada was able to keep out notes to the extent of two and a half times its capital; by 1831 this had fallen to one and seven-eighths, and by 1837, because of the competition of other banks, and doubtless also because of better means of communication, all of the banks circulated much less than the amount of paid-up capital. None of the banks issued notes payable at any point except at the head office, but there were seven branches in existence performing the same functions as branches do now, while there were agencies with limited functions numbering at least twelve, and probably several more. These were all connected with the Bank of Upper Canada and the Commercial Bank, the Gore Bank having as yet opened no branches or agencies.
THE PANIC OF 1837.
This was the condition of banking in Upper Canada when it was called upon, in common with Lower Canada, to meet the financial troubles arising from the rebellion at home and the business panic in the United States in 1837. Early in May, 1837, there was a general suspension of specie payments in the United States, and, within a week, the banks in Lower Canada also suspended payments in specie. There had been a great expansion of credit throughout North America, and now that the inevitable contraction had set in, gold was required for export. Canada already made a large proportion of its sterling purchases and other money settlements in New York, and was at once affected by the collapse of credit and consequent suspension of payments in exportable money. But in Upper Canada, whether from ignorance, sentiment, or intelligent courage, the banks continued to redeem. By the middle of June the circulation of the three chartered and four private banks had fallen from £508,896 on May 15th, to £390,392, while in the same month the specie fell from £120,789 to £93,341, although the Bank of Upper Canada had imported £40,000. At this time, the public, suffering from two bad harvests, unable to obtain any discounts from the banks, or advances on products shipped to Lower Canada, were in a bad way; and to add to their troubles, the fiscal agents in England of the province failed. On the 19th of June a special meeting of the Legislature was held because of the financial situation. Sir Francis Bond Head, the Lieutenant-Governor, urged that the banks pay in specie until forced to stop. He begged them not to yield to what he believed to be dishonorable and a breach of contract. But the Legislature, by the 11th of July, passed a measure of relief for the entire seven banks, chartered and private. On procuring from the Governor-in-Council an order of authority, a bank was relieved from the necessity of closing its doors on refusing to redeem its notes. The bank might be forced to expose fully to Government the state of its affairs, and special conditions might be imposed in the discretion of the Lieutenant-Governor. The suspension might last until the end of the next session of Parliament, and during this period banks were not to issue notes beyond the amount of paid-up capital, and were to use all specie in their possession for purposes of redemption excepting only what might be necessary for change-making purposes.
SUSPENSION OF BANKS AND POPULAR REBELLION.
But the banks did not hasten to take advantage of the offered relief, and it is evident that they intended to pull through, if at all possible, without discredit. In September, however, the Commercial Bank took advantage of the act and was permitted to suspend payments in specie. In November, the private bank of Truscott, Green & Co., known as the Agricultural Bank, failed, the partners leaving the country. Later in the year, the Farmers’ Bank suspended for about two months. The Bank of Upper Canada and the Gore Bank still continued to pay, although the notes of the former in circulation fell from £212,000 in May to £80,000 in December. Apparently, they were now anxious to suspend, but the Lieutenant-Governor was obstinate regarding the Bank of Upper Canada, claiming that it was, in a sense, a Government bank, and the Gore Bank desired to act in harmony with its more important neighbor in that part of Upper Canada. In November there was actual armed rebellion in Lower Canada, which, however, was put down by the middle of December. Early in December there was similar trouble in Upper Canada, which lasted only a few days. This was followed by an invasion by Americans, also of small proportions, but sufficient to cause the Government to require large advances from the Bank of Upper Canada. The Bank stood up for a time against the strain, but early in March, 1838, it received permission to suspend specie payments, in which it was immediately followed by the Gore Bank. At the same time, an act was passed extending the limit of note issues to twice the paid-up capital and permitting the disposal of specie for other purposes than the redemption of notes.
RESUMPTION OF PAYMENTS.
By June, 1838, the banks in the United States and in Lower Canada, generally, resumed specie payments, but the Bank of Upper Canada objected to such an early resumption in the province of Upper Canada. By November there was another rebellion in Lower Canada, necessitating another suspension there. After much discussion resumption was effected in Lower Canada in June, 1839, and in Upper Canada in November of that year. During the periods of suspension there was evidently considerable practical redemption by the sale of bills of exchange on England, although the rate charged amounted to redemption at a discount of one to two per cent. and for some months at three to eight per cent., and while discounts were by some banks much restricted, the business interests of the country were at no time actually paralyzed, and the banks continued to earn handsome dividends. Nevertheless, all the usual facts concurrent with rebellion and panic had to be borne, such as a general decline in exports, a fall in prices, stoppage of immigration, etc.
During 1838, the Bank of Montreal, at this time legally incapable of doing business in the province of Upper Canada, purchased the private bank known as the Bank of the People, and thus began the enormous business now done by the former bank in the province now called Ontario.
The Government was not altogether free from the desire to issue paper currency during this trying period, but, owing to the determination of the home authorities, such proposals failed to obtain royal assent and no such issues were made. The Government was obliged during this period to borrow on its stock in the Bank of Upper Canada, and in 1840 the Receiver-General was authorized to sell the stock, thus ending the connection of the Government with the Bank so far as holding stock is concerned. In February, 1841, the provinces of Lower and Upper Canada were united in the “Province of Canada.”