Bank Act of 1871
Need stability of financial institutions. After the second world war, the international monetary fund and
the world bank were formed. Trust and confidence were the most important fundamental building
blocks. Sir John A Macdonald was the prime minister. Sir Francis Hincks was the new minister of finance.
They both discussed the unsatisfactory state of the affairs in Canadian banking. Hincks recommends to
convert bank laws of four provinces into a contemporary banking act. New dominion government
should have exclusive authority over banking currency, interest, and related matters. Existing bank
charters would expire in 1871. Another challenge was to ensure a national currency and coinage. In
1869 Nova Scotia still had clung to sterling instead of dollars and still hadn’t settled the issue of
government issued currency instead of bank notes. Sam Abbott was a young lawyer from Kingston who
worked on several bank charters.
Recommendations for a sound system of currency and banking were:
1. Minimum capital of $500,000 of which 10% had to be paid up
2. Power to issue notes in denominations of $4 dollars or more, not to exceed paid up capital and
secured by gold or dominion notes.
3. Double liability on shareholders, to be paid before realizing on the assets of a failed bank
4. Total bank liabilities not to exceed three times the capital
5. Mandatory Decennial revision by parliament
6. One vote per share
7. Prohibition against extending credit on real property
8. Maintain 6% interest ceiling
Currency Issues - No National Currency, No Standard Currency Rates
Economic Issues - Lack of money for economic growth, Inability to Finance and get paid for Exports and
Imports, Flooded with U.S. Silver Coins.
Bank Issues - Banks in Britain were not very stable. Bank of Scotland in 1824 began a system of a few
large banks with many branches.
Canada’s First Bank - Bank of Montreal in 1817 – Funded mostly by wealthy U.S. Interests. Structured
based on Alexander Hamilton’s bank. This included an interest rate limitation of 6%.
Major Function of Bank and Issues - Function was the issuance of bank notes. Bank notes were
redeemable on demand. Limits placed on liabilities and how much they could exceed paid in capital.
Reserves Charter Limited to 10 years. Could not engage in any other trade or business and could not
extend credit for real property
Issue of Regional Banks and Reserve Issues/Bank Failures - Wars developed between Regional banks in
Lower and Upper Canada. Restrictions were place on markets. Political Issues for Prime Minister - John A Macdonald Looking to expand Canada. Disagreements
between Bank of Montreal – Gov. bank and the other banks. Provinces not happy with proposed bank
act. Maritime and Toronto Banks oppose a US type system
What recommendations went into the new Bank Act of 1871 – Answered above
What did the constitution say about responsibility for banking - Loss of British System due to
Who was responsible for currency - First Bank of the United States in Philadelphia 1791 - Became the
model of the first Canadian Bank Charters – Alexander Hamilton. It was a private bank with public
shares. Gov. owned 20%. It was modeled after the Bank of England.
Who opposed a National Bank - Opposed by Agarian States of the South Bankers of New York and
Who supported it - Supported by George Washington
What was 3 main roles - Depository of Tax Revenue, Made loans to the Federal Government, Allowed
Fed to oversee State chartered banks.
How did it oversee Charter Banks – Bank Notes were redeemable on demand. Fed bank would
accumulate notes of weak state banks and then would present them for redemption.
What Happened to the Fed. Bank - Was revived in the 2 Bank in 1816 but was again allowed to lapse in
1836. Therefore no National Banking System in U.S.
What was the consequence - Anybody could open a bank.
Canada VS US banking system
Canada had a few national banks with many branches. Federally chartered.
U.S. had no national banks, controlled by states anyone could open a bank resulting in thousands of
Canadian system regarded as more sound as the bank risk is spread across the country and across
branches. The U.S. has higher level of instability. Massey-Harris
Daniel Massey moves from NY State with his wife and children. Daniel Junior (his son) sees an
opportunity that had not been available to his father when his family came to Upper Canada. Daniel
continued in the business of making ready-made farms for new immigrant families. However, change
was coming, the market for trees and land buyers were declining. There was a machine called American
thresher and Daniel as a frequent visitor to NY learned of this machine in 1830 and decided to import it
into upper Canada. Daniel sold the farm to hart, his son. He bought his own foundry from where he
supplied farm implements by buying manufacturing licences for equipment designed in the US which
faced a tariff. He’s constantly seeking the latest machinery to import. The US wasn’t interested in trade
with Upper Canada. He was drawn to a reciprocity trade deal, one where parties would agree on some
goods they would trade amongst themselves, tariff free. Duties of 15% were made on manufactured
goods, imported into British North America. The reciprocity treaty allowed Massey’s firm to import
natural products such as timber from US, free of duty. Timber was important component of hart’s farm
business. Coal was included in the Treaty and benefited Massey because of steam- run machinery, if
farmers could afford coal, they could buy Massey machinery. Civil war caused high prices of wheat,
encouraging farmers to grow wheat. He developed innovative campaigns and distribution channels for
the equipment; advertising. Massey began thinking about business outside of Canadian borders. He was
chosen to represent Canada by some international exhibition. Massey still wanted to open up a US
branch (to avoid taxes) and also secure a rebate on the tariffs he had been paying.
To sum up the events:
In 1846, farming business was down.
It drove him out of farming and into manufacturing
Competitive advantage – he had lots of experience
Gave licence and paid loyalty and slightly modified it to Canadian
Population grew, as well as the number of farms
Change of leadership as his son took over the farm (sold to Hart)
Hart had sales technique, marketing, innovation, quality, efficiency, building the brand
There was free trading of lumber & wheat & steel & coal
1867, he expanded to Europe market
He moved the plant because demand was increasing
Demand increased, exports increased by 40%, paid tariffs
Government paid subsidy to company
Massey wanted to invade the US market Railway Case – CNR
Sir Wilfred Laurier – soon to become prime minister
Sir Robert Borden – Canada’s prime minister
Sir William Mackenzie – wealthy businessman
Donald Mann – entrepreneur and investor
Wilfred laurier was Canada’s 8 Prime Minister and its first French Canadian Prime Minister
Although Canada by the 1890s was traversed from sea to sea by the CPR, the issues of monopoly in the
West and of partisan politics federally led to further transcontinental ventures. The Canadian Northern,
founded by William MACKENZIE and Donald MANN, was begun with small Manitoba lines in 1895. In
1903 Sir Wilfrid LAURIER's Liberal government authorized the building of the Grand Trunk Pacific from
Winnipeg west to Prince Rupert, and of the National Transcontinental from Winnipeg east to Moncton.
All of these lines were financed by heavy borrowing and, when WWI diverted the credit of English banks,
the debt loads of these railways had to be absorbed through government nationalization.
Completion of government ownership in the early 1920s led to the appointment of Sir
Henry THORNTON as CN's first president. Despite an inherited debt of $1.3 billion, gross earnings that
barely covered operating expenses, and the difficulty of keeping the government at arm's length,
Thornton gradually established annual surpluses while drawing remarkable personal support from
among the 99 000 employees of CN.
Economic depression in the 1930s reduced traffic volume, leading to cuts in wages and dismissal of
employees. At the same time, highway and air travel diverted traffic away from the railway. In 1937,
however, under C.D.HOWE as minister of transport, CN organized formation of AIR CANADA, and in
1938 the federal government cancelled more than $1 billion of its inherited debt. As a result, before
WWII CN was able to purchase and to finish and service in its own huge shops at Pointe St-Charles,
Montréal, a large number of Canadian-built steam locomotives, in particular the 4-8-4 Northern type,
which hauled millions of tons of freight and thousands of troops during the war.
In the 1950s and 1960s CN was modernized under the dynamic presidency of Donald GORDON, who
rationalized 80 subsidiary companies down to 30, one of which, CN Marine, operates all ferry service in
the Atlantic provinces.
Two problems remain characteristic of CN as a huge crown corporation with profits in 1985 of $75
million. Financially, it has unt