The political unification of Upper and Lower Canada that led to the creation of the Province of Canada on February 10, 1841 that came into existence in April 1842 brought about a new-fangled uniform evaluation coins in the recently integrated territory. The gold coins issued by the British imperial authorities were rated at one pound, four shillings and four pence vis-à-vis the local coins in circulation in the Province of Canada, while the US$10 gold eagle was assessed to be equivalent to two pounds and ten shillings. Both these coins were treated as official currencies. Even the Spanish silver dollar, including the ones issued by the Spanish colonial authorities, and the United States' silver dollars having the bare minimum weight of 412 grains were also adopted as official currencies with both possessing valued at five shillings and one penny. Interestingly, this valuation of the Spanish and the U.S. silver dollars is incredibly comparable to the previous Halifax rating.
Around the same time, the authorities of the newly-created Province of Canada endeavored to set up a monetary system founded on decimal as well as to launch a paper currency issued by the local government. The Governor General of the new territory, Lord Sydenham proposed in 1841 that suggested that the legislature of the Province of Canada set up a regional bank that would circulate a provincial paper currency assigned in dollars and up to a sum of £1 million. He further recommended that 25 per cent of the total sum of the paper currency would be supported, while the remaining sum would be backed by securities issued by the government. At the same time, Lord Sydenham further counseled that all notes previously issued by the by the chartered banks be banned. To all intent and purposes, the Governor General's suggestions hinted at setting up of a Canadian central bank.
In fact, the Governor General wanted two things. On the one hand, Lord Sydenham sought a paper currency that would ensure total currency exchange rate or convertibility; on the other hand, he was invigorated by a craving to acquire funds to fund different regional public utility projects as well as to attain proceeds arising out of the seigniorage (profits taken from the minting of coins) from issuing the paper currency. It was anticipated that the proceeds from the seigniorage would be to the tune of a minimum of £30,000 every year and had the possibility of increasing substantially as the issuance of the amount of notes enhanced.
Governor General Lord Sydenham's proposition received intense backing from a parliamentary select panel on banking and currency led by Francis Hincks which scrutinized it thoroughly. However, the proposal was rejected by the Province of Canada legislature apparently owing to stiff opposition to it by a powerful bank coterie. In fact, the management of the banks was particularly worried regarding the effect of such a move, which aimed at forfeiting their power to issue paper notes, on their profits. It is interesting to note that even the debtors were apprehensive that implementation of Lord Sydenham's proposal would mean absolute government control on the privilege to issue paper notes and this would eventually lead to more rigid borrowing stipulations. Some sections also feared that the powers of the government would increase extensively if it was entrusted with the sole right to issue paper currency. The rejection of the Governor General's proposal by the provincial assembly delayed the process of granting the government the exclusive right to issue paper notes by a quarter of a century and the setting up of the Canadian central bank was deferred by around 100 years.
In the wake of the Confederation in 1867, there was yet another proposition to empower the new federal government the exclusive rights to issue legal tenders in the form of paper currency as well as credit it with the seigniorage. However, the new proposal was different from the one put forward by Lord Sydenham as it suggested that the currency be founded on a decree and be exchangeable in gold. In addition, the new proposal made no specific mention of setting up a provincial central bank. According to the new proposition, the control of the new monetary system would be entrusted with a group of commissioners and the Province of Canada minister for finance of the Province of Canada would be a (ex-officio) member of this group by virtue of his official position. As the promoters of the new proposal seemed to identify the possible risks of vesting the government with too much power, they suggested that the minister of finance would serve as a link between the group of commissioners and the government. Although this proposal too was rejected, it definitely presaged the crucial aspects of the contemporary central banking system or a currency based on fiat where the government possesses complete domination vis-à-vis issuing paper currency, while the issuer of the notes is self-governing.
Although the efforts of Lord Sydenham to launch a government edition of paper money failed to materialize, throughout the 1850s, British North America witnessed an increasing endeavor for the introduction of decimal-based money. Especially, the efforts for the decimal-based currency picked up impetus during the reign of Francis Hincks, who assumed office as the Prime Minister in 1851. In fact, delegates from the Province of Canada, Nova Scotia and New Brunswick convened in Toronto in June that year to make a concerted effort in the direction of introducing the decimal money. Soon after this meeting, the Canadian legislative assembly enacted a law making it mandatory for maintaining all provincial accounts in dollars and cents. Despite the passage of the Act by the Canadian legislature, the British authorities were keen to establish a universal monetary system based on pounds, shillings all over the British Empire and pence and hence deferred the implementation of the law on technical grounds. Although the British government was prepared to let the establishment of the decimal-based money, it was still disinclined to allow Canada to accept the dollar. This was primarily owing to the fact that the British authorities considered the dollar to be an alien currency that had an objective to dominate the continental monetary system. Hence, as an alternative to the dollar the British government recommended the establishment of the 'royal' along with supplementary silver and copper coins to be respectively called 'shillings' and 'marks'. The 'royal' was actually a gold coin associated with the sterling. Though Prime Minister Francis Hincks was not opposed to the proposal mooted by the British government, the parliament rejected the proposition straight away.
Eventually, both the British colonial authorities in Canada as well as the British government in Great Britain arrived at a consensus and the Canadian legislature eventually passed conciliation Currency Act in 1853 and made it public on August 1, 1854. According to the new Currency Act, pounds, shillings and pence along with dollars and cents were adopted as the official currency units of Canada and they were to be made use of while maintaining the provincial accounts.
In addition, the new Currency Act established the evaluation of the British gold coins and the US$10 gold eagle, which were in circulation in the territory from the time when the Province of Canada came into existence in 1841. As per the stipulations set by the new law, the British gold coin was considered equal to one pound, four shillings and four pence the local currency or CAD 4.8666. Similarly, the U.S. gold eagle minted after 1834 and containing gold worth 232.2 grains was rated at CAD 10. All British coins, together with gold and silver, and the gold coins of the United States were considered as legal tenders or official Canadian currencies. Alongside, other foreign silver coins were also in circulation, though they were not accorded the status of legal tenders in Canada.
New Brunswick and the Province of Canada virtually had currencies similar in nature in circulation following the enactment and decreeing of the Currency Act in the Province of Canada as the British colonial authorities in New Brunswick had already endorsed a similar law in October 1852. In fact, both the regions had local currencies that were evaluated at par with the money in circulation in the United States. One U.S. dollar was considered to be equal to 23.22 grains of gold or every troy ounce of gold was at par with US$20.67.
Some years later, the efforts to introduce decimal-based money received another impetus. The Province of Canada amended the Currency Act in 1857 on the counsel of the public accounts committee enabling the authorities in the British North America to maintain the provincial accounts only in dollars from December 31, 1857 onwards. Accordingly, for the first time in 1858, the authorities issued silver and bronze coins assigned in cents and carrying the term 'Canada'. And with this, the characteristic Canadian money came into existence.
The decimalization took place in Nova Scotia on July 1, 1860. However, since the British colonial authorities in Nova Scotia evaluated the British gold coin at $5 against the rating of $4.8666 in Canada and New Brunswick, there was a lack of congeniality between the coins in circulation in Nova Scotia on the one hand and Canada and New Brunswick on the other. While the authorities of New Brunswick officially adopted the decimalized money on November 1, 1860 through the enactment of a law in this connection, Newfoundland too passed a parallel legislation in 1863. It may be mentioned here that as in the case of Nova Scotia, the currency of Newfoundland too was not compatible with the money circulating in Canada and New Brunswick. Soon after, several British colonies in North America began adopting the decimal-based currency. While the British colony in Vancouver Island decimalized its currency in 1863, British Columbia followed suit in 1865. Soon after its inclusion in the Confederation, Manitoba adopted the decimalized money in 1870 followed by the Prince Edward Island in 1871.
Having established a decimalized currency, Province of Canada once again witnessed the rekindling of endeavor by some quarters to establish a government version of paper currency during the later part of the 1850s and the early phase of 1860s. The political as well as the economic milieu was more amenable this time than it was in 1841.
Incidentally, with the disintegration of several banks during this time, the bank notes circulated by the chartered banks fell into disgrace. Two banks based in Toronto - the Colonial Bank and the International Bank - went bankrupt in 1859. Quick on the heels of this incident, came the news of the collapse of the Bank of Clifton and the Bank of Western Canada. The closures of the Bank of Clifton as well as the Bank of Western Canada were particularly sleazy. While the authorities of the Bank of Clifton acted as if they were converting the bank notes in Chicago, the Bank of Western Canada, which was held by a tavern-keeper, made futile efforts to circulate rubbish bank notes in the United States' Midwest.
It is important to note that the loss of trust on the notes issued by the chartered banks gave rise to a threat to the financial success of the region as these bank notes had been the major resources for making payments. In 1860, the Province of Canada Minister of Finance A. T. Galt recommended that the chartered bank notes be substituted by issuing government paper money as he felt that this would not only reinstate the faith of the people in the money as well as help the government collect funds for its operations. Even this time, the proposal met with stiff opposition from the lobby of the chartered banks who apprehended the impending loss of their exclusive right to issue paper notes and eventually the move had to be dropped promptly.
The situation, however, changed in 1866 when the Canadian government was once again confronted with an acute scarcity of capital heightening the need for identifying new sources of funding. The state of affairs turned out to be intense as both the domestic as well as the British banks were disinclined to make advance payments to the government or agree to continue with the existing loans. In addition, the provincial government in Canada was unsuccessful in selling bonds in London even at very steep rates of interest. As there were no options left before the Province of Canada government to acquire fresh funds, the officials of the province ultimately passed a contentious law issue provincial notes or legal tenders to the tune of $8 million. To a certain extent, these provincial notes were supported by gold and were to be paid on demand in gold in Toronto or Montreal. The gold backing of these provincial notes included 20 per cent for the first $5 million and 25 per cent for sums that were in circulation in surplus of $5 million. Finally, the British imperial authorities granted their assent the Provincial Notes Act on August 15, 1866.
The stipulations in the Provincial Notes Act were different from the proposal mooted by the Province of Canada Finance Minister A. T. Galt in 1860. Under the new Act, the chartered banks were not compelled to surrender their privilege to issue bank notes. However, the Act also did not encourage them to continue with their practice of issuing bank notes and offered recompenses for giving up the right. The payment for damages comprised reimbursement of five per cent of their mean notes in circulation and an additional one per cent every year for issuing and exchanging the provincial notes. However, only the Bank of Montreal, which was also the provincial government's monetary agent, accepted the proposal. Later, with the passage of the Bank Act in 1871, the Bank of Montreal also started issuing bank notes again.
On July 1, 1867, the Confederation ushered in far-reaching amendments to the banking and currency regulations in the Province of Canada, New Brunswick and Nova Scotia. The Confederation enacted the British America Act that vested the new Dominion with complete authority regarding currency and banking system. As a result, the Dominion Notes Act was implemented in 1868 and under the provisions of the new law, the Dominion assumed charge of the different aspects related to the issuance of provincial paper notes. Regional paper notes circulated in the Province of Canada were now re-christened as 'Dominion notes' and, apart from Toronto and Montreal, they could be exchanged in Saint John and Halifax. Later, the purview of the Dominion Notes Act was broadened to include the provinces like Prince Edward Island, British Columbia, Manitoba and the Northwest Territories.
The Dominion notes were somewhat similar in nature to the previously circulating provincial notes as to a certain degree; they were also backed by gold. The initially circulated Dominion notes worth $5 million were 20 per cent backed by gold, while the subsequent $3 million were 25 per cent secured by gold. In due course, there was an enhancement in the volume of authorized notes circulated. At the same time, there were some modifications in the percentage of the Dominion notes that were backed by gold. In 1913, the initial issue of $25 million Dominion notes possessed as high as 25 per cent backing in gold. In addition, it was mandatory to offer cent per cent gold backing to all notes issued in surplus of $30 million.
It is interesting to note that even though by 1868, the Dominion paper notes were exchangeable in Halifax; the province of Nova Scotia still kept hold of its individual money till the Dominion government enacted the Uniform Currency Act in April 1871. The currency of Nova Scotia that was still based on the Halifax rating at that point of time and could be converted to Canadian money at an exchange rate of 75 cents of the local Nova Scotia currency being equal to 73 Canadian cents.
The Uniform Currency Act further stipulated that the value of the Canadian money would be dollars, cents and mills with a mill being equivalent to 10 per cent of a cent. In addition, the new law set the value of a Canadian dollar both in terms of the British sovereign and the US dollar. While a Canadian dollar would be equivalent to $4.8666 vis-à-vis the British sovereign, it would be valued at $10 in comparison with the US$10 gold eagle. These rates were similar to the valuation stipulated by the Currency Act in 1853.
In 1871, the Dominion government also enacted a Bank Act that revoked all the regional laws which were in disagreement with the federal authority in matters relating to money and the banking system. As a result of the passage of the Bank Act, all the chartered banks in the four provinces ultimately were brought under the purview of a universal regulation. According to the provisions in the new law, the chartered banks could still issue paper notes having the lowest value of $4. This limitation was later raised to $5 in 1880. As a matter of fact, all these chartered banks possessed considerable funds in terms of Dominion notes and gold, but it was not necessary for them to back their notes by gold or any particular guarantee. However, the notes circulated by there banks were not permitted to go over their paid-in capital or the capital contributed by their stockholders. It may be noted here that as per the stipulations in the Bank Act (amendment) of 1880, the currency notes in circulation developed into the primary lien or claim in the event of the bank issuing the notes collapsed. Meanwhile, the Bank Act enabled the government to enjoy the exclusive rights to issue notes of smaller denominations. At the same time, the banks also issued notes of greater values which were to be primarily circulated among the different banks.
Fractional U.S. silver coins, such as the dimes, quarters and half-dollars, together with the British shillings were in unrestricted circulation in Canada throughout the middle of the 19th century. Following 1858, Canadian coins produced by the mints in the Province of Canada became a part of the prevalent currency in the region. It is interesting to note that the circulation of the U.S. coins in Canada enhanced greatly throughout the Civil War raging the United States between 1861 and 1865 because agents of the U.S. army purchased grain and cattle for the Union Army from Canada using their silver coins. During this period, Canada also witnessed a thriving brokerage business as the brokers imported huge amounts of the fractional U.S. silver coins.
Although the silver coins of the neighboring United States were not regarded as official money in Canada, they were widely accepted by the people in the beginning as there was a scarcity of smaller denomination coins for conducting petite business deals or in carrying out daily business that normally required amounts below one dollar. Owing to their acquaintance with the money of the United States, the Canadian public also had an inclination for the U.S. silver quarter vis-à-vis the Canadian 20 cents circulated in 1858. Despite the fact that the U.S. coinage was well received and at par with the Canadian coins by both the people as well as the business community in Canada, their worth in bullion was roughly 2.5 per cent lower than their actual price or financial value. Therefore, with the quantity of the United States silver coins in circulation in Canada growing rapidly, the local banks either declined to take them or received them at marked down prices. This trend, albeit for a short period, where the public as well as the traders accepted the United States silver coins at par with the Canadian currency, whereas the banks accepted them only at discounted rates, actually proved to be a significant botheration, particularly for the businessmen. However, they were prepared to put up with this practice owing to competitive forces, the regular acceptance of the U.S. coins in the same value and also due to the lack of a suitable substitute. It may be mentioned here that this problem primarily existed in the Province of Canada, including Quebec and Ontario, as the British colonies situated on the Atlantic coast had already enacted laws that stipulated rating the coins from the United States coins at 80 per cent of their actual price.
As the cut rate on silver in comparison to gold grew wider during the middle of the 1860s, people made petitions to the Parliament to initiate necessary actions to check the trend. With a view to address the problem, in 1868, the government of the new Dominion sent U.S. silver coins worth $1 million to New York through its financial agent, the Bank of Montreal. Nevertheless, this move actually proved to be inadequate to curb the development. As a result, William Weir, a prominent financer of Montreal, exported an additional $2 million worth of the U.S. silver coins in 1869. In fact, Weir ascertained the market hazards related to a potential unfavorable shift in the value of silver and also the price and perils linked with carrying the silver to the marketplace in New York. Therefore, with the backing of the merchants, William Weir bargained an arrangement with the Dominion Finance Minister Sir Francis Hincks to get rid of the left over U.S. coins still in circulation in Canada in 1870.
This move, however, met with intense opposition from the brokers who apprehended loss of business. Nevertheless, according to the agreement between William Weir and the Dominion Finance Minister Francis Hincks, it was decided that the banks in Canada would buy and bring together all the redundant U.S. silver coins and pay for them mainly with their respective bank notes. During the negotiations, it was also agreed that in return for their services, the government would pay the banks a small charge and also make deposits of up to $100,000 with each of them. The government had ascertained the carrying expenses as well as the market perils of sending the coins overseas and selling them for gold. In all, the new Dominion government shipped U.S. silver coins worth a little over $5 million to New York and London and exchanged them for gold at a marked down price of around five to six per cent with a net earning of around $118,000. In fact, William Weir alone exported additional U.S. silver coins worth $500,000, besides a significant quantity of over valued British silver coins that were also in distribution in the province.
Following this, the new Dominion government acted quickly to fill the void left by eliminating the foreign silver coins by issuing Canadian silver coins possessing values of 50 cents and 25 cents that would be considered as legal tenders amounting equal to $10 and also issues of $1 and $2 paper notes. With a view to augment the use of coins as well fulfill the trade requirements; the new Dominion government adopted a provisional measure by introducing 25 cent "shinplasters" (paper currency below the value of one dollar) which were exchangeable in gold. On the other hand, with a view to make certain that the devalued silver coins did not re-ender Canada, the new Dominion government also enacted a law stating that the U.S. silver coins should be considered as legal tenders in the country with a 20 per cent marked down payment from April 15, 1870. This rate was much lower than the bullion value of the U.S. silver coins and hence, their circulation in the province was put off.
Having resolved the issue of the U.S. silver coins in circulation in Canada, the new Dominion government now focused on restructuring the copper coinage in the country. In fact, it is worth mentioning here that the copper coinage in Canada too was in a mess at this point of time. Before the establishment of the Confederation, all the four provinces such as New Brunswick, Nova Scotia, Newfoundland as well as the Province of Canada has issued copper coins in small denominations. Despite this, a huge amount of token or symbolic copper pennies introduced by the different banks on the basis of the era before the decimalized currency was in widespread circulation in Canada. In fact, assortments of the United States and European copper coins were also in free circulation together with vouchers (tokens) issued by businessmen as well as private persons. It is interesting to note that such copper coinage also comprised brass buttons!
Acting on the advice of the financer William Weir, the new Dominion Finance Minister Francis Hincks empowered the government to accept the pennies and half pennies issued by the banks as two cents and one cent respectively in quantities equal to 25 cents. Hincks also persuaded the banks as well as the common people to accept them in the same manner. It was only in 1876 that the Dominion of Canada issued its individual one-cent coins for the first time ever.
It is important to mention here that the dual actions initiated by the government of the new Dominion helped greatly in promoting the circulation of a distinct Canadian currency. These two crucial steps undertaken by the government included getting rid of the silver coinage from the United States and Great Britain and the restructuring of the copper coinage in Canada. In effect, these moves actually revolutionized the monetary system in Canada.
