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  • Continental Divide:The Canadian Banking and Currency Laws of 1871 in the Mirror of the United States
  • Andrew Smith (bio)

In the wake of the 2008 financial crisis, international observers praised the stability of Canada's banks. When financial institutions in the United States and the United Kingdom collapsed, Canada did not experience any bank failures. The World Economic Forum's Global Competitiveness Report rated Canada's banking system as the most sound in the world.1 Historically, bank failures have been quite rare in Canada. Some authors argue that the stabilizing features of Canada's financial system were established in the first five years after the creation of the Canadian nation-state in 1867.2 This paper will examine the making of the Canadian banking law in 1871, an event widely regarded as a crucial turning point in Canadian financial history.

The 1871 banking law helped to set Canadian banks on a very different path from that of the United States. Economic and business historians frequently contrast Canada's banking sector with that of the United States.3 Whereas the United States had a large number of small banks, numerous bank failures, and many statutory restrictions on intrastate and interstate branching, a few large and stable firms with branches in every region of the country dominated Canadian banking. Canada had very few insolvencies after 1871 [End Page 455] and in most cases, the depositors and noteholders were able to get their money back. At times shareholders were even able to recoup part of their investments.4 Data from the early twentieth century show that Canada's banks were also more profitable than those operating in the United States's more competitive environment.5 The Canadian system of transcontinental branch banking helped protect depositors by ensuring that the viability of a bank was not tied to the fate of any single community. The same could not be said of the unit (single-location) banks so common in the United States. Not all economic historians agree that branch banking would have made the US banking system more resilient.6 However, Charles Calorimis has argued persuasively that the most important single cause of financial instability in the United States was state and federal regulations restricting branching. Such restrictions inhibit diversification and make banks more vulnerable to economic downturns, which in turn helps to explain why US banking failures and panics were both more numerous and more severe than banking downturns in Canada, Australia, the United Kingdom and other countries that permitted branching.7 Another advantage of the Canadian system of nationwide branch banking was that it efficiently moved capital from savers to areas of recent settlement where capital was needed.8 In contrast to the United States, where the absence of interregional branch banking resulted in major regional disparities in borrowing costs, bank branches throughout Canada charged similar rates, except in the sparsely settled northwest territories.9

The banking laws of 1871 integrated the financial systems of the previously separate colonies and became crucial parts of the project of making the Canadian nation state.10 William Marr and Donald Paterson have summed up the scholarly conventional wisdom as follows: "The Bank Act of 1871 was also critical in establishing control over the banking system, both in itself and because it became the model for subsequent Bank Acts."11 Technically, the "Bank Act of 1871" consisted [End Page 456] of several pieces of legislation passed in 1870 and 1871.12 This bundle of statutes laid the foundations for oligopoly, branch banking, and relative stability. By the 1890s, a few large corporations with branch networks extending from the Atlantic to the Pacific controlled Canadian banking. Their monetary and regulatory framework was informed by a Canadian financial orthodoxy that mandated oligopolistic banking, adherence to the gold standard, and interest charges set by market forces rather than by usury laws. Connected to these three principles was a vision of where Canada would obtain the capital needed to finance its development: Britain. Much of the Canadian political elite thought that Canada needed to align its financial laws with those of the mother country if the colony was to have access to British capital. The belief that British...

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Additional Information

ISSN
1467-2235
Print ISSN
1467-2227
Pages
pp. 455-503
Launched on MUSE
2012-08-28
Open Access
No
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