There Was No Place Like Canada

Canada, banking system, currency
New York Times, January 14, 1906

Canada, banking system, currencySpeaking of myths about U.S. banking, another that tops my list is the myth that the Federal Reserve, or some sort of central-bank-type arrangement, was the best conceivable solution to the ills of the pre-1914 U.S. monetary system.

I encountered that myth most recently in reading America's Bank, Roger Lowenstein's forthcoming book on the Fed's origins, which I'm reviewing for Barron's.  Lowenstein's book is well-researched and entertainingly written.  But it also suffers from an all-too-common drawback:  Lowenstein takes for granted that those who favored having a U.S. central bank of some kind (whatever they called it and however they chose to disguise it) were well-informed and right-thinking, whereas those who didn't were either ignorant hicks or pawns of special interests.  He has, in other words, little patience with history's losers, whether they be people or ideas.  Like other "Whig" histories, his history of the Fed treats the past as an "inexorable march of progress towards enlightenment."

Don't get me wrong: I'm no Tory, and I certainly don't think that the pre-Fed U.S. monetary system was fine and dandy.  I know about the panics of 1884, 1893, and 1907.  I know how specie tended to pile-up in New York after every harvest season, and that by the time it got there not one but three banks were likely to reckon it, or make claims to it, as part of their reserves.  I also know how, when the harvest season returned, all those banks were likely to try and get their hands on the same gold, and how this made for tight money, if it didn't spark a full-scale panic.  Finally, I know that one way to avoid such panics, on paper at least, was to establish a central bank, or "federal" equivalent, capable of supplying banks with emergency cash when they needed it.

Yet I still think that the Fed was a lousy idea.  How come?  My reason isn't simply that the Fed turned out to be quite incapable of preventing financial crises, though that's certainly true.   It's that there was a much better way of fixing the pre-Fed system.  That alternative was perfectly obvious to many who struggled to reform the U.S. system in the years prior to the Fed's establishment.  It could hardly have been otherwise, since it was then almost literally staring them in the face.  But it should be equally obvious even today to anyone who delves into the underlying causes of the infirmities of the pre-Fed National Currency system.

What were these causes?  Essentially there were two.  First, ever since the Civil War state banks were prohibited from issuing circulating notes, while National banks could issue notes only to the extent that they backed them with specified U.S. government bonds.  Those bonds were getting harder to come by (by the 1890s National banks had already acquired almost all of them).  What's more, it didn't pay for National banks to acquire the costly securities just for the sake of meeting harvest-time currency needs, for that would mean incurring very high opportunity costs for the sake of having stacks of notes sitting idle in their vaults for most of the year.

The other, notorious cause of trouble was the fact that most U.S. banks, whether state or National, didn't have branch networks of any kind.  Instead, ours was for the most part a system of "unit" banks.  This was so mainly owing to laws that prohibited them from branching, even within their own states.  But even had branching been legal, the restrictions on banks' ability to issue notes would have made it less economical by substantially raising the cost of equipping bank branches with inventories of till money.[1]

That unit banking limited U.S. banks' ability to diversify their assets and liabilities, and thereby made the U.S. banking system much more fragile than it might have been, is (or ought to be) well-appreciated.  Unit banking also encouraged banks to deposit their idle reserves with "reserve city" correspondents, who in turn sent their own surplus cash to New York.  The National Banking Acts actually encouraged this practice by letting correspondent balances satisfy a portion of banks' legal reserve requirements.  The set-up kept money gainfully employed when it wasn't needed in the countryside; but it also made for a mad scramble when cash was needed back home.

Far less well appreciated is how unit banking also contributed to the notorious "inelasticity" of the pre-Fed U.S. currency stock.  Before I explain why, I'd better first lay another myth to rest, which is the myth that complaints concerning the "inelasticity" of the pre-Fed currency stock were a hobbyhorse of persons who subscribed to the "real-bills" doctrine  — that is, the view that the currency supply could and should wax-and-wane in concert with the total quantity of "real bills" or short-term commercial paper presented to banks for discounting.

It's true that many persons who complained about the "inelastic" nature of the U.S. currency system, including many who were instrumental in designing (and later in managing) the Federal Reserve System, also subscribed to the real bills doctrine, and that that doctrine is mostly baloney.  But that doesn't mean that the alleged inelasticity of the U.S. currency stock was a mere bugbear.  The real demand for currency really did vary considerably, especially by rising a lot — sometimes by as much as 50 percent — during the harvest season, when migrant workers had to be paid to "move" the crops.  And U.S. banks really were unprepared to meet such increases in demand by issuing more notes, even if doing so was only a matter of swapping note liabilities for deposit liabilities, owing to the legal restrictions to which I've drawn attention.  In short, you don't have to have drunk the real-bills Kool-Aid to agree that the pre-Fed U.S. currency system wasn't capable of meeting the "needs of trade."

How, then, did unit banking contribute to the problem of an inelastic currency stock?  It did so by considerably raising the cost banks had to incur to redeem rival banks' notes, and thereby limiting the extent to which unwanted banknotes made it back to their issuers.  In a branch-banking system, note exchange and redemption are mostly a local, and therefore cheap, affair; add a few regional clearinghouses to handle items not settled locally, and you've got all that's needed to see to it that unwanted currency is rapidly removed from circulation.

In the U.S., on the other hand, banks had to bear substantial costs of sorting and shipping notes to their sources, or to distant  clearinghouses, which costs were made all the greater by the sheer number of National banks — tens of thousands, eventually — and resulting lack of economies of scale.  These factors would normally have caused National banks to accept the notes of distant rivals at discounts sufficient to cover anticipated redemption costs, as antebellum state banks had been in the habit of doing.  The authors of the 1863 and 1864 National Banking Acts were, however, determined to give the nation a "uniform" currency.  Consequently they stipulated that every National bank had to accept the notes of all other national banks at par.  That got rid of note discounts, sure enough.  But it also meant that National banknotes would no longer be actively and systematically redeemed.[2]  As I like to say, any fool can fix most any problem — so long as he ignores the others.

If my dog is limping, and I discover that she's got a pebble wedged between her paw pads, I don't think of calling for a team of stretcher bearers: I just pull the pebble out.  In the same way any reasonable person, knowing the underlying causes of the infirmities of the pre-Fed U.S. currency system, would first consider removing those causes.  And that was precisely what many advocates of currency reform tried to do before any dared to suggest anything like a U.S. central bank.  That is, they tried to get bills passed — there must have been at least a dozen of them — calling for some combination of (1) repeal of the bond-backing requirement for National banknotes; (2) allowing National banks to branch, and (3) restoring state banks' right to issue currency.  The restrictions on note issue had, after all, been put into effect for the sake of helping the Union government fund the Civil War — a purpose now long obsolete.  The restrictions on branching, on the other hand, were widely understood to be another deleterious consequence of the unfortunate decision to model the National Banking Acts after earlier, state "free banking" laws.

Might deregulation  alone, as was contemplated in such "asset currency" reform proposals (so-called because they would have allowed banks to issue notes backed by general assets, rather than by specific securities),  really have given the U.S. a perfectly sound and stable currency and banking system?  Yes.  How can I be so confident?  Because it would have given the U.S. a currency system like Canada's.  And Canada's system was, in fact, famously sound and famously stable.[3]

"Don't mention the war!"  is what Basil Fawlty tells his staff, out of concern for the sensibilities of his German guests.  (Basil himself nevertheless can't help referring to it again and again.)  "Don't mention Canada!" is what a Whig historian of the Fed must tell himself, assuming he knows what went on there, lest he should broach a topic that would muddle-up his otherwise tidy epic.  For to consider Canada is to realize that there was, in fact, no need at all for all the elaborate proposals, hearings, secret meetings, and political wheeling-and-dealing, that ultimately gave shape to the Federal Reserve Act, if all that was desired was to equip the United States with a currency system worthy of a nation already on its way to becoming an economic powerhouse.  Like Dorothy's ruby slippers, the solution to the United States' currency ills had been there all along.  Legislators had only to repeat to themselves, "There's no place like Canada," while taking steps that would tap obstructive legal restrictions out of the banking system.

Of course that didn't happen, thanks mainly to a combination of banking-industry opposition to branch banking and populist opposition —  spearheaded by William Jennings Bryan — to any sort of non-government currency.  "Asset currency" was, if you like, "politically impossible."

So reformers at length turned to the alternative of a central bank.  And how was that supposed to work?  Though buckets of ink have been spilled for the sake of offering all sorts of elaborate explanations of the "science" behind the Federal Reserve, the essence of that solution, once considered against the backdrop of the "asset currency" alternative, couldn't have been simpler.  It boils down to this:  instead of allowing already existing U.S. banks to branch and to issue notes backed by assets other than government bonds, the government would leave the old restrictions in place, while setting up a dozen new banks that would be uniquely exempt from those restrictions.  If National banks (or state banks, if they chose to join the new system) wanted currency, but lacked the necessary bonds, they still couldn't issue more of their own notes no matter what other assets they possessed.  But they might now take some of those other assets to the Fed, to exchange for Federal Reserve Notes.  The Fed was, in short, a sort of stretcher corps for banks lamed by earlier laws.

To an extent, the more centralized reform resembled an asset currency reform one step removed.  But there were two crucial differences.  First, by setting the "discount rate" at which they would exchange notes for commercial paper and other assets, the Federal Reserve Banks could either encourage or discourage other banks from acquiring their notes.  Second, because member banks could count not just gold and greenbacks but Fed liabilities as reserves, the Fed's discount rates influenced the overall availability of bank reserves and, hence, of money and credit.  These differences, far from having been innocuous, were, as we now realize, portentous.

Still the Fed did have one incontestable advantage over previous reform proposals. For it alone was politically possible.  It alone was a winning solution.

But the fact that the Fed won in 1913 doesn't mean that other, rejected options aren't worth recalling.  Still less does it warrant treating the Fed as sacrosanct.  History isn't finished.  Just a few years before the Federal Reserve Act was passed, most people still believed that Andrew Jackson had put paid once and for all to the idea of a U.S. central bank.  Today most people still consider the Federal Reserve Act the last word in scientific monetary control.  As for what most people will think tomorrow, well, that's partly up to us, isn't it?

[1] Although they typically appreciate the debilitating consequences of unit banking, many U.S. economists and economic historians appear unaware of the crucial role that freedom of note issue played historically in facilitating branch banking.  That banking systems involving relatively few restrictions on banks' ability to issue banknotes, like those of Scotland before 1845 and Canada until 1935, also had extremely well-developed branch networks, was no coincidence.

[2]  On the limited redemption of National banknotes and attempts to address it see Selgin and White, "Monetary Reform and the Redemption of National Bank Notes, 1863-1913."  Business History Review 68 (2) (Summer 1994).

[3] For a very good review of the features and performance of the Canadian system in its heyday, see R.M. Breckenridge, "The Canadian Banking System, 1817-1890," Publications of the American Economic Association, v. X (1895), pp. 1-476.  Not long ago, when I spoke favorably of Canada's system at a gathering of economic historians, one asked afterwards, rather superciliously, whether I realized how large Canada's economy had been back around 1913.   Apparently my interrogator thought that Canada's small size made its success irrelevant.  I can't see why.  Nor, evidently, could the many persons who proposed and lobbied for various asset currency proposals over the course of over a decade or so.

  • Mike Sproul

    Your brief slap at the real bills doctrine fails to mention that it was developed by practical bankers over centuries of experience, and they used it because it worked, both in theory and in practice. By requiring that money is issued in exchange for short-term real bills of adequate value, the the real bills doctrine avoids maturity mis-matching by banks, assures an elastic supply of currency, and prevents inflation.

    Inflation is avoided by assuring that the assets of the money-issuing bank move in step with the quantity of money issued by that bank. Your refer to Thomas Humphrey's paper in support of your dismissal of the real bills doctrine, but Humphrey ignores the assets of the issuing bank. Instead, he mistakenly sees the real bills doctrine as a tool to make the money supply move in step with transactions demand. Humphrey thinks that more money, even if adequately backed, will cause inflation, which reduces borrowers' real debt, which allows them to borrow still more, which causes more inflation, etc. But on correct real-bills principles, the initial burst of extra money would have been adequately backed, and would not have caused inflation. So that self-perpetuating cycle of "more loans, more money, and more inflation" never gets off the ground.

    • George Selgin

      I was just checking to see if you were still reading, Mike! As you know, since we have gone back and forth on this, we must agree to disagree on the merits of the RBD.

    • Warren

      The RBD is pointless when you have a clearing system with aggressive competitors that want to deplete your gold reserve, your paper assets and your personal wealth and drive you out of business.

      This keeps banks from over issuing. No need for some complicated and semi-fetishistic ("the debt is extinguished by the sovereign gold coin of the buyer!" paraphrased from something Fekete wrote) regime like the RBD.

      Also no one on the free-banking side would tell you you couldn't patronize an RBD bank. I somehow doubt that that courtesy would be returned by the RBD folks.

      • Mike Sproul

        A bank following the RBD will have sufficient assets to buy back all the money it has issued, and so has nothing to fear from the depredations of competitors, or from depletion of gold reserves or paper assets (it can buy more).

        Over-issuing is beside the point. The RBD says that whether a bank issues $100 backed by 100 oz worth of assets, or $500 backed by 500 oz worth of assets, each dollar will be worth 1 oz.

        Speaking for RBD advocates, we certainly have our personal flaws, but we are no more inclined than others to tell you who you can patronize.

        • George Selgin

          Mike, if the value of assets that banks purchase never varied after the purchase, your argument would be valid; but then it would be true of all assets banks might acquire, since these are typically "worth" as much as a bank's liabilities at the time of their acquisition. In reality, however, and leaving aside the case of a "warehouse" bank that holds 100% reserves of the ultimate redemption medium, the value of a bank's assets can decline relative to that of its liabilities, and that is true for so-called "real bills" just as it is for the kinds of assets. True, such bills are less prone to capital loss than many other sorts of bank investments and loans. But they are not immune. On the other hand, there are today (unlike in Adam Smith's day), assets other than real bills, like U.S. Treasury bills, that are considered to be less risky than short-term commercial paper. During the recent crises the relatively risky nature of commercial paper became notorious:

          In stating that a bank adhering to the real-bills-doctrine "has nothing to fear from the depreciation of [its] paper assets," because it can always "buy more of them," you beg the question. A bank whose assets depreciate cannot solve the problem by simply "buying more" assets, for that increases equally the value of its assets and its liabilities, leaving the original gap perfectly intact.

          • Mike Sproul


            Nobody denies that if a bank's assets lose value, then liabilities issued by that bank (including money) will lose value. Even a 100% reserve bank is vulnerable if it is robbed. All bankers know that their activities involve a risk of loss. The RBD only offered a good way to carry on in the face of that risk.

            I said "depredations of competitors"; not "depreciation of [its] paper assets". My main point was that if a bank's assets are enough to cover its liabilities, then a rival bank can't hurt it by buying that bank's reserves.

            Bankers hardly ever followed the RBD so strictly that they refused to buy good quality government bonds when available for a good price. But they did find that if they focused on real bills, they would be less likely to be caught in speculative panics.

            To recap: The RBD says that banks should issue money in the discount of short term real bills of adequate value. By sticking to short term (<60 days) assets, the bank would match the maturity of its assets to the maturity of its notes, which typically had 60-day suspension clauses. By sticking to real bills, the bank avoided unwanted reflux of its notes, since it would tend to issue notes only when real activity picked up, and not during speculative bubbles. The "adequate value" thing is almost too obvious to mention, since no banker needs to be told not to issue $100 to someone offering bills worth only $99. But if we leave out the adequate value thing, it leaves RBD opponents thinking that the RBD claims to work simply by assuring that banks match the quantity of money issued to the the quantity of real activity, when it actually works by matching the quantity of money to the issuing bank's assets.

          • Warren

            Banks did discount bills but that's not all they did. They had a diverse set of assets they issued against. And they did fine.

            So what would be the point of restricting themselves to bills? How does that make them stronger? Would it really lead to results better than what we've seen?

            Here's the thing about RBD folks and the 100% reserve guys, they've become mono-focused on a particular (and ahistorical) business model and can't admit to the possibility that the bankers of the day knew what they were doing and were, in fact, very good at their jobs.

            Can you imagine these guys walking into a bank as consultants and explaining their "superior" ideas to the bankers? I would pay real bills to see that meeting.

          • Warren

            I forgot to mention that only issuing on bills leaves a lot people out in the cold.

            What about the person that is land rich but cash poor. He doesn't have any deliverables that can be made into a bill, so what if he wants a loan? Well, in an RBD only banking schema he can't get one.

            Or someone that has a variety of deliverables but they don't all fit into one 30-60-90 day bill redemption window and he wants a pile of money right now to take advantage of an opportunity? Sorry, dude.

            Or the widow who collects a pension or anyone else who has a stream of payments that are individually small but over the course of a few years can add up to a nice business-starting sum? Those don't fit into a bill either so they are out of luck.

            That's the great thing about issuing against many types of assets. It opens up the whole countryside to be monetized and enables almost every strata of society access to liquidity. And through follow-on effects even those who can't get loans end up benefiting from new products, services and jobs. Whereas the RBD constrains lending to a very narrow slice of society, many of whom already had access to liquidity providers anyway. Thus the follow-on effects are similarly muted.

          • Mike Sproul

            As I said above, bankers tended to issue their notes MOSTLY for real bills, but they would sometimes issue them in exchange for other assets, such as government bonds. As you point out, this allows many assets to be monetized.

            You have to remember that the RBD was developed in the era where banks commonly issued paper bank notes. A common annoyance for bankers was to issue a new note to a customer on Monday, only to have that same note return to the bank on Tuesday. Bankers found that this unwanted reflux could be avoided by issuing their notes in exchange for REAL bills. This way, new notes would tend to be issued to carpenters and farmers, as opposed to gamblers, spendthrifts, and speculators, and the quantity of notes would tend to be elastic, that is, it would move with real economic activity.

            The reason the RBD would sound silly to a modern banker is that modern bankers don't issue paper notes, so unwanted reflux of notes is no longer a problem. But bankers still have to match the maturities of their assets and liabilities, so the RBD's focus on issuing money (nowadays that mostly means checking accounts and credit cards) in exchange for short term assets is still important, and of course every banker accepts the RBD rule of only issuing new money in exchange for assets of adequate value.

          • George Selgin

            "Nobody denies that if a bank's assets lose value, then liabilities issued by that bank (including money) will lose value." I deny it, actually. Banks fail precisely because their assets are worth less than what they owe to their creditors. My point in my comment was precisely that the value of a banks assets can change independently of any change in the value of its liabilities, up to the point at which a bank's capital is wiped out, at which point the bank has of course failed. Although investment in real bills reduces the risk of failure compared to investment in some other sorts of assets, it doesn't eliminate it altogether.

          • Mike Sproul

            I don't know where you got the idea that the RBD eliminates risk altogether.

            The RBD says that money is priced like a bond, meaning that the value of the money will be unaffected by changes in the bank's net worth so long as that net worth is positive. But of course if net worth goes negative, then the value of the bank's money, just like the value of bonds issued by that bank, will change as net worth changes.

            I wonder if you're denying that money's value will be affected by net worth even when net worth is negative? That would put you in the company of most quantity theorists, who routinely say that a central bank could throw away all its assets, and the value of its money would be unaffected as long as money supply and money demand don't change.

          • Mike Sproul

            Typo: I don't know where you got the idea that the RBD CLAIMS to eliminate risk altogether.

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  • Steve Williamson

    "There's no place like Canada." Excellent. A question you could ask, is whether the Bank of Montreal acted much like a central bank prior to 1935. The Bank of England, of course, was a private financial institution until 1946, so how was that different from the Bank of Montreal pre-1935? Further, the pre-1935 Canadian monetary system could hardly be described as free banking. There were very high hurdles to obtaining a bank charter. So maybe franchise value played an important role (as it perhaps still does) in how this system performed.

    • George Selgin

      Thanks for the input Steve. Your own writings on the early Canadian system are among the few relatively recent ones that have drawn attention to its merits.

      Concerning entry barriers, you are absolutely right that they were an important departure from genuinely free banking–and one that would eventually have led to a de-factor central banking set up, thanks to attrition or mergers. Entry into the pre-1845 Scottish system was in contrast relatively open.

      Regarding the Bank of Montreal, I'm not aware that it enjoyed any statutory privileges such as might have allowed it to play a part similar to that which the Bank of England played in the English (and later British) system. It did not have a statutory monopoly of either note issue or joint-stock banking, even for any sub-region of Canada. Nor did it serve as a clearinghouse or have any other special responsibilities or duties compared to other banks. In fact, its charter and that of other Canadian chartered banks were essentially identical, all of them having been based, ironically enough, on that of the second Bank of the United States. The difference, of course, was that despite limited entry the Canadian system was competitive, or at least highly "contestible," thanks to branch banking, which gave every chartered bank access to every community. Consequently the Bank of Montreal's liabilities were never regarded as a reserve asset by other banks, but rather were routinely sent back to it for settlement. Neither it nor any other bank could lead the system, Pied-Piper like, in an excessive expansion (or contraction) of credit. The proof, of course, was in the pudding.

      • Steve Williamson

        This makes the Canadian system all the more interesting. The Bank of England gives us a nice story about the evolution of central banking. It starts with a symbiotic relationship between the crown and the Bank – the crown grants the Bank special privileges in exchange for a cheap way to finance a war. Then the Bank discovers crisis intervention, etc. But Canada is different. There's no monopoly on note issue, as you point out, and possibly there wasn't much loss due to the level of concentration in the Canadian banking industry. Further, a system with a few large note-issuers could actually be a good thing. So, in 1935, Canada seems to have had a good system working – a monetary system with a safe and elastic currency stock, and no financial crises (ever). So why did Canada opt for the Bank of England model instead?

        • George Selgin

          That last question is answered very well by Bordo and Redish (hint: it was all Major Douglas's fault):

        • George Selgin

          Also, bear in mind that the Bank of England only reluctantly took on the role of lender of last resort, and that when Bagehot recommended that it do so, he also made clear that the bank was itself to blame for causing the crises that made last-resort lending necessary. Bagehot preferred a "natural" systems, with many co-equal banks each keeping its own reserve; he considered his recommendation that the BofE act as a LOLR as a mere "palliative," which he offered only because he didn't think there was any chance of abolishing the Bank's privileges.

      • JP Koning

        If you ever want to investigate the Bank of Montreal's role, you probably can't go wrong with the "Centenary of the Bank of Montreal, 1817-1917":

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  • Kaleberg

    So the idea is to make the Bank Note Reporter relevant to currency users again. In the old days, you had to look up every bank note you received to get the latest scoop on the likelihood that you could eventually spend it. That really sounds like fun, especially if you are a con man. Nowadays, the Bank Note Reporter is a magazine for currency collecting hobbyists, It would be a good idea to keep it one and let the rest of us just assume that dollar bills will be worth a dollar even if the print shop goes bust.

    • George Selgin

      Sorry, Kaleberg, but you are wrong. Despite the multiple banks of issue and a geographically large but relatively meagerly populated nation, banknote discounts were entirely gone in Canada by the late 19th century, thanks to nationwide branching and several clearinghouses. Your assumption that multiple banknote brands=discounts and note reporters and all that is based on unwarranted generalization from antebellum U.S.. experience, when branching was for the most part unknown. Like all too many people, you identify problems in early U.S. banking, but overlook how restrictive regulations contributed to them, rushing instead to blame the free market. And also like many people, you don't know enough about the banking experiences of other countries, and so are inclined to treat whatever happened in the U.S. as typical and inevitable. Like Pope said, "A little knowledge… ."

      By the way, if you will take a look at my earlier post on "Real and Pseudo Free Banking," you will see that I refer there to U.S. banknote discounts, and to how low these had become by the early 1860s, even despite unit banking. It's amazing what a few railroads and telegraphs can do!

      • Kaleberg

        Clearly I am more than a few decades out of date. Of course, those new fangled railroads and telegraphs would make a difference. I imagine computers and secure communications protocols would allow this scheme to work without physical currency.

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  • Kurt Schuler

    Steve Williamson is wrong to write that "the pre-1935 Canadian monetary system could hardly be described as free banking. There were very high hurdles to obtaining a bank charter." The system has with good reason been characterized as a free banking system by quite a few who have studied and written about it, including George Selgin, Larry White, Kevin Dowd, Donald R. Wells, Steve Horwitz, and me. See, for instance, my essay "Free Banking in Canada" in the 1992 book The Experience of Free Banking, edited by Dowd.

    Charters were fairly easy to obtain by the 1830s, though before then some provinces tried to restrict competition with established firms. Eighty banks were chartered before confederation in 1867, of which 58 opened. A like number were chartered after confederation, though only about half opened. (Statistics are from articles by S. Sarpkaya in the Canadian Banker of October and December 1978.)

    The Bank of Montreal was the banker to the government for a long time, but unlike the Bank of England, it had no powers concerning note issue, limited liability, or number of shareholders that were denied to other banks. It was merely the largest bank for a long time, though in the early 20th century the Royal Bank of Canada surpassed it.

    The government itself issued notes as a way of raising some revenue. To suppress competition it forbade banks from issuing notes for less than $5. There was no public-good rationale for government note issue: the public readily accepted bank-issued notes, including those of low denominations until the government outlawed them.

    From 1914 until the end of competitive note issue in 1935 Canada was off the gold standard most of the time, and the resulting system was a strange hybrid with government notes as a potentially explosive monetary base.

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