Confederation
Confederation on 1 July 1867 brought
sweeping changes to banking and currency
legislation in the provinces of Canada, Nova Scotia,
and New Brunswick. Under the British North
Province of Canada, $2, 1866
Produced by the British American Bank Note Company,
which had offices in Montréal and Ottawa, this note was
payable in Toronto.
40. This shortage partly reflected support given to the failing Bank of Upper Canada, the government’s agent (until the end of 1863). The Bank of
Upper Canada lost heavily on loans extended to the Grand Trunk Railway. In 1861, because of the tight links between the government, the bank,
and the railway, the government agreed to maintain a minimum deposit of $1.2 million in the bank. The bank failed in 1866, with government losses
amounting to about $1.3 million (Shortt 1914b, 289).
41
. Chartered banks were required to give up their own note issues in order to acquire the right to issue provincial notes on behalf of the government.
Bank of Montreal, $5, legal tender note, 1866
Once the Bank of Montreal agreed to act as the government’s
banker in 1866, all of its note issues were overprinted to
indicate government issue until newly designed provincial notes
were received.
A History of the Canadian Dollar 27
America Act, the government of the new Dominion
was given jurisdiction over currency and banking.
The Dominion Notes Act came into effect the
following year. Under this legislation, the Dominion
took over the various provincial note issues.
Provincial notes issued in the Province of Canada
were renamed “Dominion notes” and were made
redeemable in Halifax and Saint John in addition to
Montréal and Toronto.
The Dominion Notes Act
was subsequently extended to cover Prince Edward
Island, Manitoba, British Columbia, and the
Northwest Territories.
Like earlier provincial notes, Dominion
notes were partly backed by gold. The first $5 million
issued were 20 per cent backed, and the next
$3 million, 25 per cent backed. Over time, the size
of the authorized note issue was increased. There
were also some changes to the percentage of notes
backed by gold. By 1913, the first $30 million had
a 25 per cent gold backing.42 Issues in excess of
$30 million had to be fully backed by gold.
Interestingly, although Dominion notes
became redeemable in Halifax in 1868, Nova
Scotia retained its own currency until April 1871,
when the Dominion government passed the
Uniform Currency Act.43 At that time, Nova
Scotian currency, which was still rooted in the old
Halifax rating, was converted into Canadian
currency at a rate of 75 Nova Scotian cents to
73 Canadian cents.44
The Uniform Currency Act also established
that denominations of Canadian currency would
be dollars, cents, and mills (a mill equalled onetenth of a cent). Moreover, the Canadian dollar’s
value was fixed in terms of the British sovereign at
a rate of $4.8666 and the US$10 gold eagle at a
rate of $10—the same rates established in the
1853 Currency Act.
42. Legally, the 25 per cent reserve could be held in the form of gold or guaranteed debentures. In fact, the reserve was held entirely in the form of gold.
43. The Dominion government circulated a special issue of $5 notes in Nova Scotia, with the legend PAYABLE AT HALIFAX/ONLY printed vertically
on them. These notes, issued in Nova Scotian currency, were worth only $4.86 in the rest of Canada (Haxby 1975).
44. There was considerable opposition to this change in Nova Scotia, given its continuing strong links to Great Britain. In Nova Scotian currency, a
sovereign had conveniently been worth $5 instead of $4.8666 (Flemming 1921, 132).
Newfoundland’s currency was also not compatible with that of
Canada. The Newfoundland dollar was worth roughly $1.014 Canadian dollars. Newfoundland’s currency was made consistent with Canada’s in 1895
(McCullough 1984, 223). The colony entered Confederation in 1949.
Dominion of Canada, $1, 1870
Printed by the British American Bank Note Company and
featuring a portrait of Jacques Cartier, this was part of the
first series of notes engraved for the new Dominion. These
notes were redeemable at the Office of the Receiver
General in Ottawa or at the branch indicated on the back.
28 A History of the Canadian Dollar
The Dominion government also passed the
Bank Act in 1871, which repealed all provincial acts
that were in conflict with federal jurisdiction over
currency and banking. Consequently, chartered
banks in the four provinces eventually came under
common regulation.45 Chartered banks were
allowed to issue notes with a minimum denomination of $4 (raised to $5 in 1880).
Although banks,
as a matter of course, held substantial reserves of
Dominion notes and gold, they were not required
to secure their note issues either by gold or by
specific collateral. Note issues could not, however,
exceed a bank’s paid-in capital.46 (Under the 1880
Bank Act revision, notes in circulation became a
first lien on the issuing bank’s assets in the event
of failure.47) The government preserved the
issuance of smaller notes for itself. It also issued
notes in larger denominations to be used mainly for
transactions between banks.
The silver nuisance and
a question of copper48
During the mid-nineteenth century,
U.S. silver fractional coins—dimes, quarters, and
half-dollars—circulated freely in Canada, alongside
British shillings and, after 1858, Canadian coins
minted by the Province of Canada. U.S. coins in
Bank of Montreal, $4, 1871
In the late nineteenth century, banks regularly featured images
of their senior officers on their notes. Pictured on the left is
R.B. Angus, General Manager (1869–79), and on the right,
E.H. King, President (1869–73).
United States, half-dollar, 1859
Images representing Liberty figured
prominently on American coins
during the nineteenth century. Here,
Liberty is a young woman seated
and holding a staff topped with a
Phrygian cap, a symbol of freedom,
with a shield at her side emblazoned
with the stars and stripes and a sash
reading “Liberty.”
45. Banks chartered before Confederation continued to operate under their provincial charters until those charters expired. They subsequently received
federal charters.
46. This was modified in 1908 to allow banks to increase their notes in circulation beyond the usual limits (on a temporary basis) during the harvest
season. In the 1913 revision of the Bank Act, banks were allowed to issue notes in excess of their paid-in capital, provided that the excess note issue
was secured by gold or by Dominion notes (Beckhart 1929, 381).
47. Under the 1890 Bank Act, a Bank Circulation Redemption Fund was established by the government to give added protection to bank notes in case
of insolvency. Banks maintained an amount equivalent to 5 per cent of their average annual circulation of notes in the fund and received 3 per cent
interest. Banks were also required to establish redemption offices for their notes across the country. This meant that, for the first time, a bank’s notes
were circulated throughout the country without a discount (Helleiner 2003, 126).
48. This section draws on Weir (1903), Shortt (1914b), McCullough (1984), and Esler (2003).
A History of the Canadian Dollar 29
circulation increased significantly during the U.S.
Civil War (1861–65), as U.S. Army agents used silver
to purchase Canadian grain and cattle to supply the
Union Army. A substantial brokerage business also
flourished, with Canadian brokers importing large
quantities of fractional U.S. silver coins.
Initially, the U.S. silver, while not legal
tender in Canada, was well received because of a
shortage of small coins for small transactions;
day-to-day transactions typically involved amounts
less than one dollar.49 Canadians also preferred the
U.S. silver quarter over the Canadian 20-cent piece
issued in 1858, given their familiarity with U.S.
coinage. But, although U.S. coins were accepted at
par by individuals and merchants, their bullion
value was approximately 2.5 per cent less than their
face value.50 Consequently, as the amount of U.S.
silver coins in circulation began to increase, banks
either refused to accept them or accepted them only
at a discount. The acceptance of U.S. silver coins
at par by merchants and individuals but only at
a discount by banks was a considerable nuisance,
especially for merchants. They were, nonetheless,
willing to tolerate the practice because of competitive pressures, the customary acceptance of U.S.
coins at par, and the lack of an acceptable alternative. This problem was largely confined to the
Province of Canada—Ontario and Quebec—since
the Atlantic colonies had passed a law valuing U.S.
coins at only 80 per cent of their face value.
20-cent or 25-cent coin?
In 1858, the Province of Canada issued silver
coins in denominations of 20 cents, 10 cents,
and 5 cents, in addition to 1-cent bronze coins.
The Toronto Leader, a newspaper linked to the
government, argued that a 20-cent coin was a
logical choice since it was consistent with the
Halifax shilling, and five Halifax shillings
equalled one dollar. The newspaper also
contended that a 25-cent coin was just a
“convenience of habit” and was not a necessary
feature of a decimal coinage. Regardless,
Canadians disliked the 20-cent coin since it was
easily confused with the similar-sized U.S.
quarter. William Weir noted, “I never heard what
fool in the Finance Department suggested the
twenty cent piece, for in spite of the special
pleading of the Leader, everyone saw it was a
mistake . . .” (Weir 1903, 135–136). The 20-cent
piece was withdrawn from circulation after
Confederation and replaced by a Canadian
quarter, first minted in 1870 (Weir 1903, 164;
see also Cross 2003, 52).
49. During the 1860s, a dollar had considerable purchasing power. See Appendix A, page 88, on the purchasing power of the Canadian dollar.
50. In 1853, the U.S. government reduced the silver content of its fractional (i.e., less than one dollar) silver coins (McCullough 1984, 111).
With the discount on silver relative to gold
widening in the mid-1860s, there were appeals to
Parliament to do something. In 1868, the new
Dominion government exported $1 million worth
of U.S. silver coins to New York through the Bank
of Montreal.
But this move was insufficient. The
following year, William Weir, an important Montréal
financier, exported a further $2 million. Weir
assumed the market risk associated with a possible
adverse move in the price of silver, as well as the
costs and risks associated with transporting the
silver to market in New York. In 1870, Weir, backed
by merchants, negotiated a deal with Sir Francis
Hincks, the Dominion Finance Minister, to
eliminate the remaining U.S. coins circulating in
Canada. Despite considerable resistance from
brokers who stood to lose business, it was agreed
that banks would purchase and collect the unwanted
silver coins, paying for them largely with their own
bank notes. They would also receive a small
commission from the government, as well as
a government deposit of up to $100,000. The
government assumed the transportation costs and
market risks of exporting and selling the coins for
gold. In total, the government shipped to New York
and to London slightly more than $5 million in
coins, sold at a discount of 5 to 6 per cent, at a
net cost of roughly $118,000. Weir himself
exported a further $500,000 in U.S. silver coins, as
well as a considerable amount of overrated
British silver coins that were also in circulation
(Weir 1903, 159–160).
