CURRENCY AND BANKING, 1840-1867 I LORD SYDENHAM AND CANADIAN BANKING W" 7ITH the union of the two Canadian provinces and the establishment of an administrative government responsible to a majority of the House of Assembly, the banking system of Canada called for some definite government policy. Lord Sydenham, who had taken a prominent part in the discussion of banking problems in England, devoted special attention to the banking and currency system in Canada. In connection with the promotion of a comprehensive system of internal transportation, he proposed the establishment of a provincial bank of issue, which would give the government entire control of the provincial paper currency. Hitherto the privilege of issuing paper money had been enjoyed by the banks, most of which had recently passed through a period of suspended specie payment. By transferring to the government the sole right to issue paper money it was estimated that the provincial Treasury would be benefited to the extent of about £35,000, or $140,000, per annum. The proposed provincial bank under the management of a special commission would be authorized to issue notes of one dollar and upwards, to the aggregate amount of £1,000,000 currency. As security for its issues the bank would hold one quarter of the amount in circulation in legal tender coin or bullion, and three-quarters in government securities. After two years the existing chartered banks were to relinquish their right to issue notes, but were to receive in lieu of this privilege for ten years, or the unexpired terms of their charters, an allowance of two and a half per cent on their average note circulation. On depositing with the bank of issue, coin or bullion, or government securities approved by the commission, the existing chartered banks might receive for circulation an equivalent amount in notes of the bank of issue. Holding in coin or bullion twenty-five per cent of its proposed note issue, the provincial bank would be able to place the remainder at the disposal of the government for public works. This would represent a saving of interest of from £30,000 to £35,000. It was expected that the provincial bank note issue would ensure stability and would prevent the customary fluctuations between a plethora and a scarcity of circulating medium. Approaching the Canadian currency problem with a background of British rather than Canadian experience, it was natural that Lord Sydenham should over-estimate the possibility of establishing a comparatively stable currency medium alike as to quantity and quality. The natural circumstances of Canada, however, both as to seasonal variations and the fluctuating values of the staple Canadian exports of grain and lumber, required that the Canadian medium of exchange should be capable of expanding and contracting with trade, without too great a capital outlay on the part of the banks in order to increase their circulating medium, or too heavy a sacrifice of income through having their capital tied up in low-interest-bearing securities when the circulating medium was not in demand. Under the usual conditions of Canadian trade, the chartered banks would be apt to find the notes of the proposed bank of issue at once expensive to procure and unprofitable to hold in idleness. Under such circumstances the banks would endeavour to operate with as little circulating medium as possible, while they would also more or less promptly convert their notes into bullion when trade conditions did not call for them, the bullion being of service in international exchange. It appeared to be certain that the bank of issue would find its circulation more limited than anticipated, while the amount of bullion required to be kept on hand to meet the note redemption would be considerably larger than anticipated. In consequence, the |