Sir John A.’s bank job
July 1, 2017, marks the 150th anniversary of Confederation and Sir John A. Macdonald becoming the first prime minister of the new Dominion of Canada. Macdonald is recognized for many things both good and bad, but he is rarely recognized for the acquisition of Rupert’s Land and never for the passage of Canada’s first Bank Act, which, 136 years later, would help Canada avoid the worst excesses of the 2007– 08 global credit crisis.
Macdonald’s government acquired Rupert’s Land in 1870 for the bargain price of $ 1.5 million plus some property. The purchase was the largest real estate transaction in history, nearly twice the size of the Louisiana Purchase. It increased the size of Canada six fold and led to the admission of Manitoba as a province in 1870, the first new province after the original four.
In addition, Macdonald’s involvement in making banking a federal responsibility in 1864 and overseeing the selection of Sir Francis Hincks as minister of finance in 1869 were crucial elements in the passage of a Bank Act, which was a world model at the time and has served Canada well ever since.
Macdonald arrived at the conferences leading up to Confederation with a belief in a strong central government. In terms of financial stability, he and the other Fathers of Confederation were well aware that the United States was notoriously prone to financial crises, which occurred with remarkable regularity. The Fathers, Macdonald chief among them, sought to avoid American flaws. Therefore, when Canada was created, “Banking, Incorporation of Banks, and the Issue of Paper Money” were made constitutionally federal functions, in contrast to the American constitution that did not mention banking.
The second decision that saved Canada from the problems that plagued the United States was the passage of the Bank Act of 1871. At the time of Confederation, Canada (more specifically, what is now Ontario) had experienced the failure of two of the three largest banks in the country, both of which were Ontario- based. How to avoid bank failures was very much top of mind for the prime minister and his colleagues. Among the many tasks Macdonald faced in creating a new country, a sound banking system was a high priority.
His first choice for minister of finance to handle the banking system was Alexander Tilloch Galt who, unfortunately, was a shareholder in one of the failed banks. Disappointed when Mac- donald’s government would not give the bank a bailout, Galt resigned four months and one week after Confederation. Macdonald chose as his successor John Rose, a great friend of his, who prior to becoming minister of finance had been on the board of the Bank of Montreal, one of the largest banks in North America at the time, and also sat on the boards of few other major corporations. Rose was one of those rare individuals in politics, more a businessman than a politician. Not surprisingly, Rose brought the views of the Bank of Montreal into his legislation, basing it both on the 1863 National Bank Act of the U. S. and the views of BMO president Edwin Henry King, and ignoring the concerns of the Ontario banks and farmers. Rose wanted the government to take over the issuance of all currency from the banks, who had been in charge of it until then. He also wanted to reduce the role of all banks — other than the Bank of Montreal — to local county banks. It didn’t fly, Rose’s act ended up stillborn, and he and his former colleague Edwin Henry King both left their jobs and left Canada.
Forced to a ppoint a third minister of finance 27 months after the birth of the country, Macdonald wisely chose Sir Francis Hincks, a former minister of finance of the Province of Canada. Hincks consulted far and wide and only six months after his appointment a Bank Act received third reading in the spring of 1870. With some minor modifications that became the Bank Act of 1871, with one unique provision: regular reviews of the Bank Act would be mandatory.
A consequence of this provision is that Canada has been able to take an evolutionary approach to banking legislation rather than the sporadic approach taken by the United States. This evolutionary approach has served Canada well. This is not to say there have been no other contributory factors to Canada’s success in avoiding the general meltdown that occurred in the U. S. and other countries in 2008; certainly those would also include the housing policies adopted by the government of R. B. Bennett in the 1930s and the Mulroney government’s creation of the Office of the Superintendent of Financial Institutions in response to the Canadian bank failures of the 1980s. But the roots of Canada’s success date back to the early response to the major bank failures of the mid-1860s. For that John A. Macdonald deserves full credit.
THE BANK ACT BECAME A WORLD MODEL AT THE TIME AND HAS SERVED CANADA WELL EVER SINCE.