The First National Policy, which can be dated at 1878, was a natural entailment of Confederation in 1867. The two were related, but the relationship was extremely complex. Both the Maritimes and British Columbia accepted Confederation in the expectation that railways would be built uniting their regions to pre-Confederation Canada. They anticipated, or certain factions in them anticipated economic policies and economic developments that turned out to be not reflective of their needs and circumstances; but were, rather, reflective of the needs and circumstances of the Montreal--Ontario economy. The potential for dissension in this situation became evident when central Canada, having achieved a substantial part of its Canal Era aspirations with respect to policy in 1878, soon had its achievement adulterated by the presence of the two disappointed coastal economies and of the Prairie economy in Confederation. The core of the problematic situation is not laid bare, however, until it is recognized that it was largely the aspirations of Imperial authorities that were realized in the political economy of British North America in the second half of the nineteenth century; more so than the aspirations of any of the British North American provinces. Not a generation after the fact, both Ontario and Quebec joined the chorus of the disillusioned demanding changes in the Confederation dispensation.
Canada was part of the British Empire throughout the nineteenth century. If it became more independent within the Empire at mid century, it did so within the context of a permissive Imperial policy. Confederation, Dominion Status, transcontinentalization and the First and Second National Policies were North American elements in the general evolution of the British Empire.
The First British Empire, ending in 1783, was mercantilist, political, and expansionist. The Second British Empire was Whiggish economic, and expansionist. The Third British Empire, beginning about 1883, was protectionist (mercantilist?), vestigially political, economic, and expansionist.
The Second Empire spanned the Canal Era and the Industrial Revolution in Britain. Its policy has been called Free Trade Imperialism, because in the period of the Second Empire Britain adopted free trade to accommodate its industrialization. It has also been called Railroad Imperialism, because Imperial policy favouring colonial railway expansion began in this period of relative laissez faire. In this period, in those cases in which colonial governments could be trusted to carry out the policies favoured by the Empire, Imperial aims were realized by relatively independent colonial governments. A greater degree of independence for British North America in a federated Canada was, then, an expression of the substance of Imperial policy. The First National Policy, was not Imperial policy, but it was consistent with the colonial independence that was the substance of Imperial policy in the British North American case in that period. In the subsequent period, during the Third Empire, the Second National Policy was both consistent with and an integral part of a `New [Railway? Financial?] Imperialism'.
What is called national policy in Canada has always been the historical outcome of interplay between regional interests and international interests, Imperial or continental. The simply national character of national policy has always been in doubt, and the National Policy of 1878 was not simply a national policy. It was a central Canadian regional policy, adopted nationally in a period in which Imperial policy, continental North American entanglements, and the policy aspirations of the other regions of Canada did not stand in the way.
What has to be shown, then, if the First National Policy is to be understood, is the nature of the Montreal-Ontario economy as it approached Confederation and the formation of economic policy in the new nation.
It is impossible to recount events in the primary sector of the economy without referring to other sectors.
Developments in lumbering were dependent on the expansion of rail transport. In fact, the North American forest frontier extended itself from New York up the Ottawa Valley and west across southern Ontario with the extension of canals before 1850, and the extension of railways thereafter.
After 1866, when the geographical advance of settlement in central Canada can be said to have temporarily ceased, the number of lumber mills in the province also ceased to grow, while their size increased. The steam engine, the circular saw, the water turbine as opposed to the water wheel, all contributed to the larger size and greater output of individual mills. The number of mills in the lower Great Lakes region as a whole continued to grow, because the forest frontier did not stop at the Canada-United States boundary. Having come up against the Laurentian Plateau in Canada, agricultural settlement pushed west into Michigan, and then north, taking the forest frontier with it. By 1890, with increasing demand for pulp wood, pulp, and news print new products in the forest products industry, the front re-entered Ontario on the north shore of Lake Superior.
Mining in southwestern Ontario developed in tandem with similar enterprise in the United States. In the 1860s, oil was discovered in Canada West at the same time that it was discovered in Pennsylvania. Drilling for oil uncovered deposits of salt. United States interests and capital were involved in salt as well as oil extraction, and the major export markets for salt were in Milwaukee and Chicago. Initiatives were largely Canadian, however, and there were domestic markets, especially for oil. An attempt to penetrate the British market for oil failed due to the uneven quality of the Ontario product with respect to smell.
Both oil and salt had forward and backward linkages in refining, in the production of barrels, and in the extension of rail lines. In both cases professional scientists working in universities were instrumental in assessing the quality of the raw product and in developing refining processes. This was the evident beginning in Canada of a direct relationship between research in the natural sciences and technological advance in industry.
Advances in science were extremely important in determining the growth path of primary product activities in the emerging Ontario economy. In the 1830s and 1840s, Michael Faraday had experimented with electricity and with that most difficult of metals, nickel. After noting Faraday's discovery that electricity ceased circulating at all points of a wire at the same time, Samuel Morse returned to the United States to set up telegraph communications between Philadelphia and Washington. Subsequent increased demand for copper wire, to be used in telegraph control systems for railways, and to communicate information for newspaper copy, led to mining of high grade copper at the west end of Lake Superior, and to prospecting for further deposits on the Canadian side of the border. When copper ore samples from the Sudbury Basin, along the main line of the Canadian Pacific Railway, were first sent to New York for assessment, they were judged to have too little copper to be worth mining. In time, however, electricity doubled back on itself, and an electronic process for refining Sudbury's complex nickle-copper ore was developed.
Both English-speaking and francophone Canada turned to cattle and dairy products. In particular, after 1863, following the migration of production technique from the United States, hard cheese became a specialization. With the invention and adoption of the cream separator, in the 1880s, cheese became a significant export to Britain.
Increasing use of labour saving farm equipment, parallel to developments in the United States, entailed substitution of horses for human labour, and called for an increasing portion of acreage in hay and oats throughout Quebec and Ontario.
There were differences between the two provinces. Ontario continued to be more productive, both overall and with respect to the efficiency of inputs. Between 1850 and 1880, for example, the manpower requirement for threshing in Ontario fell by a factor of eight, and, with drain tiling of wet lands, the number of acres of improved land continued to rise despite a fall in the rate of settlement. Between 1860 and 1870, Quebec experienced an overall decline in farm output, but output increased about twenty percent per decade between 1870 and 1900. Quebec remained a net importer of agricultural produce. This may be accounted for by a continuing high percentage of relatively self-sufficient, that is relatively non-market-related farms, and by the growing number of new farms on the Laurentian Plateau.
It is an interesting question whether the decline of `wheating' in Ontario, after 1868, was a consequence of local or extra-regional circumstances, because the answer has a bearing on the extent and continuity of Canada's alleged reliance on a wheat staple export. Western Canadian wheat did not come onto the market in any significant quantity until the late 1880s or even the 1890s. Western Canadian wheat could not have ween the cause of the shift out of wheat in Ontario. Between 1866 and 1886, when there was no substantial agricultural frontier in Canada, the North American frontier continued to advance across the Great Central Plain south of the Upper Great Lakes. Whatever happened in Canada, North American wheat output continued to grow. If Southern Ontario was not isolated from the United States grain market, it may have been United States wheat, forcing a decline in Ontario prices, that made the difference. Whatever the cause, however, it was a shift in relative prices within Ontario that restructured the choice of crops. The arrival of frontier wheat from the Prairies was not a factor.
The shift out of wheat in Ontario was not the occasion of an agricultural crisis, as it was alleged to have been in Lower Canada in the 1830s. There was no major structural wrenching. The Montreal-Ontario economy was never reliant on wheat exports in the way that the southern states had been reliant on tobacco exports, the West Indies on sugar exports, or in the way in which the Canadian Prairies were to become reliant on wheat exports in the twentieth century.
An economic crisis followed the ultimate dismantling of the First Empire's mercantilist structure. Montreal's merchant community, seeing its fortunes bound up with arrangements characteristic of the old Empire, registered its complaint by torching the Legislature and issuing an Annexation Manifesto. The Reciprocity Treaty (1854--1866), eliminating all tariffs on a list of United States `natural products' appeased Montreal, once again, by giving it its desired access to the United States Midwest.
When the old mercantilist arrangements were dismantled in the 1840s, it seemed to the Montreal elite that a policy of laissez-faire was not a good thing for the colonies. After reciprocal elimination of tariffs on natural products, in 1854, however, Canada once again enjoyed economic advance. British capital flowed into a railway construction boom. The value of exports of lumber and agricultural produce to the United States rose to unprecedented heights. The value of wheat exports rose to unprecedented heights. Indeed, the money value of all commodities, exported or not, rose to unprecedented heights. Considering events up to 1857, one might very well have concluded:
The essential requirements were a market for staples together with adequate transportation facilities; and given these two things and some outside capital now and then, all was likely to be well. Laissez-faire, therefore, justified itself ... (Tucker p.~218.).
In searching for an answer to the question, `What have been the very long-run economic factors in the disintegration of Canada?', it is tempting to seize on this export staple theory of the Reciprocity period. The proposition seems to be that elimination of barriers to integration of the North American economy produced prosperity. But, economic integration of Canada and the United States, with consequent dominant north-south trade flows, would seem to be a major factor in the disintegration of the east-west flow of trade that would make Canada an independent, integrated economy. The interpretation is tempting. It is, however, only one among several possible interpretations of the period.
In 1860, in an attempt to counter the protests of British manufacturers against Canada's 1858 increase in tariffs, Canada's Minister of Finance argued that improvements in transportation had been undertaken to lower shipping costs between Canada West and Britain. An economic downturn following the end of the Crimean War, in 1856, made it necessary to raise tariffs to meet international financial obligations associated with the improvements. Tariffs had to be raised against British manufactures to pay for the expansion of railways and canals. Those same manufacturers, however, would benefit from the lower transportation costs following the expansion.
The commercial crisis of 1857 following the reduction of railway expenditure on the completion of the greater part of the works, and accompanied by a deficient harvest, caused a serious falling off in the revenue of that year ... . It became necessary, in 1857, to assume the payment of interest on the railway advances, .. and also to advance the interest upon the municipal debt ... . It is true that another course was open; and that was, to exact the terms upon which the railway advances were made; and to leave the holder of the municipal bonds to collect their interest, ... it would have been at the expense of the English capitalists who had placed their faith in the fair treatment of her Government and Legislature. ... The fiscal policy of Canada has invariably been governed by considerations of the amount of revenue required. It is no doubt true that a large and influential party exists, who advocate a protective policy; but this policy has not been adopted by either the Government or Legislature ... . The new tariff was designed certainly with the intention of obtaining an increased revenue of about 100,000 [pounds] on the estimated importations of 1859, but the real increase was looked for from a revival of trade; ... . It was believed that the completion of our canal and railroad system, together with the improvements in the navigation of the Lower St. Lawrence, justified the belief that the supply of Canadian wants might be once more made by sea [from Britain], and the benefits of this commerce obtained for our own merchants and forwarders (Galt, pp.~35--54.).
This interpretation states or implies, that Canada was exporting primary products and importing manufactured goods. It differs from the previously mentioned interpretation insofar as it assumes British markets to be most important, whereas the previously mentioned interpretation assumes United States markets to be most important.
A third interpretation depicts a situation characterized by a more complex set of relationships.
The [Reciprocity] [T]reaty influenced two aspects of trade between the colonies and the United States. To a considerable extent it increased the consumption in each of the other's products. But it also fostered the use by each of the other's transportation lines for the purpose of re-exportation to outside markets. (Masters, p.~106.) The commerce developed under the treaty was largely ... commerce of convenience. ... most of the enumerated articles were common to both countries, although not common to all sections of either. It was often more convenient for portions of Canada to obtain supplies from the adjoining states rather than from more remote districts of Canada itself, and more convenient for parts of the United States to obtain supplies from Canada ... (Masters, p.~109.).
The most striking example of the working of the principle of convenience was the trade between the United States and the colonies in flour and grain, particularly wheat. It may be noted that wheat and flour were by far the greatest Canadian exports to the United States, and in 1856 comprised over two-thirds of the total American imports from the province. The position of Canada West as a wedge between the North-Western States and the Eastern United States made it inevitable that wheat gathered at Chicago, Milwaukee, Detroit and Toledo should be exported to Canada at its western extremity and should appear later, supplemented by Canadian wheat, or until 1858, manufactured in Canada into flour, at Buffalo, Oswego, Ogdensburg and Cape Vincent to reach New York by the Champlain Canal and the Hudson River or Boston and Portland by rail. A greater quantity of wheat from the American West entered Canada at Kingston and continued its journey to Montreal. Out of a total reported export of 11,655,641 bushels in 1857, Edward Wilkins, the British Consul at Chicago, asserted that nearly a million bushels were shipped from Chicago for Kingston and Montreal. The returns indicate that in 1856 Canada imported nearly three million dollars worth of grain from the United States and exported wheat and flour to the approximate value of eight and four million dollars respectively. ... Much of the flour with which the Americans supplied the Lower Colonies was of Canadian origin and shipped through Boston and Portland (Masters, pp.~110--111.).
This interpretation suggests that the Reciprocity boom in British North America was not so much a consequence of increased primary product exports, but rather of a general increase in all types of economic activity in the lower Great Lakes areas of both Canada and the United States. Further, there was a large deficit in commodity trade in Canada. Imports exceeded exports by about one third between 1850 and 1859. From this it might be concluded that the increase in trade, being a much greater increase in imports than exports, was as much a consequence as a cause of prosperity; and that a primary product export explanation of expansion might not be appropriate at all. Indeed, there is yet another authoritative interpretation of the period that comes to this conclusion.
Mainly through the enterprising activity of Mr. (afterwards, Sir) Francis Hincks, Canadian Minister of Finance, the first Canadian railroad policy was worked out. The object of this was to supply Canada with an adequate railway system connected, on the one hand, with the Western American lines, and on the other, furnishing a continuous connection with Atlantic ports open to navigation throughout the year. This first provincial policy was introduced through the medium of the Act of 1849, which contemplated assistance from the British Government for the frequently discussed project of an Intercolonial Railway, linking Canada with the Maritime Provinces, and furnishing through them communication with the Mother Country, over British territory, at all times in the year. ... The title of the Government measure of 1849 sufficiently indicates the nature of the new policy. Its object was `To provide for affording the guarantee of the province to the bonds of railway companies on certain conditions, and for rendering assistance in the construction of the Halifax and Quebec Railway'. The government assistance indicated was a guarantee, at six per cent, of the bonds of railway companies, to the extent of one-half the cost of construction for lines of seventy-five miles and upwards (Shortt, p.~297.).
Owing to the very success which attended the offers of assistance on the part of the Government, it was found necessary to modify the offer of financial assistance and to confine it to a trunk line, at first from Quebec to Toronto, but ultimately extended from Riviere du Loup on the East to the St. Claire River on the West. This change was provided for in the new act of 1851, making provision for the establishment of a central trunk line. At the same time, since the Great Western Railway and the Northern Railway had already taken advantage of the Act of 1849, the promised assistance was continued in their cases. ... The prospectus of the Grand Trunk Railway was issued in April, 1853. From a financial standpoint it was undoubtedly a work of art. The Grand Trunk Railroad was presented as an undertaking of national importance, with the Canadian Provincial Treasury as its chief partner. A member of the Canadian Government, the Hon. John Ross was elected President of the Company; and five other prominent members of the Government, including Mr. Hincks, were on the Canadian Board of Directors; while the heads of the two noted firms of Baring Brothers and Glyn Mills and Company, the financial agents of the Canadian Government, were prominent on the London Board of the Railway. The line was to be constructed on a basis of efficiency [read inefficiency] quite unknown in America, and on this ground American experience as to the cost of operation and maintenance was ignored (Shortt, p.~298.).
In the meantime the Government had authorized municipalities, both urban and rural, to take stock or bonds in such secondary railways as might receive charters from the Government and be designed to open up important sections of the country and serve as feeders for the Trunk System of railroads. In order to aid the municipalities in borrowing capital on the British market, the Consolidated Municipal Loan Fund was established under an act of 1852. Through this many additional millions of capital were brought to the country, becoming the basis for further stock issues and borrowing on the part of a number of subsidiary railroad companies. (Shortt, p.~299).
Real estate speculation, starting from a genuine need for civic expansion, but afterwards feeding on its own growth, resulted in ever extending subdivisions, incessant transfers of property and the visible growth of more or less mushroom fortunes. ... Laborers had flocked in and found immediate employment at high rates of wages, while every article for their support and for the construction of the railroads had commanded high prices. ... The influx of British capital was increased by municipal expenditure on public utilities, the investment of large sums on corporate and private account in the building of towns, and investments in real estate. ... In 1857 the railroad mileage constructed and in operation amounted to 1,653, with 344 miles still under construction. This meant that within eight years Canada had constructed nearly two thousand miles of railway at a cost of nearly one hundred millions. ... the profits so confidently promised in the name of the Canadian Railroads would not be forthcoming. ... As the Government ... found it necessary, through implied partnership, to come to the rescue of the Grand Trunk Railway and of the municipalities, its credit correspondingly suffered (Shortt, pp.~302--307.).In this view, the `prosperity' of the 1850s is primarily to be accounted for by government sponsored overinvestment in transportation, and associated over expansion in other sectors of the economy, not by autonomous increases in primary product exports. That is, the growth path of the Canadian economy, in this period, cannot be accounted for by a staple export theory of economic development.
Railway expansion increased manufacturing by creating larger markets. The manufacture of labour saving agricultural implements in Canada is a case in point. An upswing in the use of labour saving implements began in the United States in the 1830s, at the latest. Their manufacture in Canada, encouraged by high transportation costs and cheaper British iron and steel, during the 1840s and early 1850s, was further encouraged by a protective tariff and cheaper transportation within Canada after 1858. For example, with respect to mechanical reapers,
After the railway construction of the 1850s reduced transport costs, firms started to specialize and to sell outside their immediate neighbourhood. during the 1860s this coincided with a high increase in demand for reapers. The industry's sales grew from $413,000 in 1861 to $2,685,000 in 1871 (Pomfret, p.~126.).
Perhaps the most telling evidence of the growth of manufacturing as a separate sector of the economy, in the 1850's, was the emergence of organizations representing both labour and capital.
Organization of manufacturers, as manufacturers, rather than as
employers, grew, like the organization of labour, out of common need.
Expansion during the railway boom of the mid 1850s led to excess supply in
the depressed conditions between the Crimean War and the United States
Civil War, just when advances in transportation improved the
competitive position of foreign producers. In 1858, a newly formed
Association for the Promotion of Canadian Industry issued the
proceedings of its first meeting, calling for,
Whatever Galt alleged with respect to his motivation in bringing
in the tariff of 1858, the Association for the Promotion of Canadian
Industry got the policy it wanted, and, with some faltering,
eventually built it into the National Policy of 1878. In 1866, with
the American Civil War ending, and Confederation imminent, objections
to the Canadian tariff on manufactured goods came from the United
States, from Britain, from the staple-producing sections of British
North America, and from the Grit agricultural ridings led by George
Brown in Canada West. These pressures contributed to a reduction in
the level of protection. This, in turn, revived the Association for
the Promotion of Canadian Industry. Co-ordinated political action
began with the return to `hard money' and falling prices after 1871.
Following a general meeting of the Manufacturers Association of
Ontario, in 1875, every means possible was used to bring about what the
Association called a `national policy'. One of these means was a
series of letters in The Montreal Illustrated News.
.
In 1876, the Toronto Board of Trade came out in favour of the policy
proposals of the Manufacturers Association. In the same year the
Dominion Board of Trade rejected by only one vote `the adoption by
Canada of a national policy'. When it met the following year it
adopted the policy. Two years later, in a national election, the
National Policy was adopted by the entire country.
Revenue generation was not the defining characteristic of the
tariffs of 1858 and 1878. It is true that failure of land sales to
generate revenues, after 1840, forced the Canadian government to
borrow, and then to use the tariff to pay off its debt. The revenue
generating function of the tariff cannot be denied, but that was a
matter of after-the-fact expediency, and it was nothing new. What was
new, distinctive, and intended, with respect to the tariff, after 1858,
was its developmental and protective function. The distinctive
economic conditions of late nineteenth century central Canada, its
balanced growth, emerging in manufacturing and financial sectors,
produced a National Policy of economic independence. When Macdonald
introduced the policy, in 1876, he made no mention of supporting
railways or of developing Prairie or even Ontario agriculture. Quite
the contrary. He spoke of manufacturing and urban development (
Debates of the House of Commons, March 7, 1876.).
The number of chartered banks grew relatively rapidly over the
period. In part, this was a consequence of government policy. When
Sydenham arrived as the first Governor of the united Canadas, he
proposed a government owned, provincial bank of issue: a government
monopoly of the issue of currency. This would have allowed the
government to appropriate the capital and profits of banking for use in
economic development schemes. Having failed in this in the early
1840s, the Canadian government, under the financial management of
Francis Hincks in the early 1850s, adopted free banking on the New
York plan. The so-called free banks were allowed to issue currency to
the extent that they used their reserves to purchase government debt;
which gave the government, in the case of free banks, the capital it
had failed to appropriate from the entire system in 1842. This
constraint on the lending of the free banks eventually inhibited their
growth. While a number of them came into existence, thereby
increasing the number of banks, all were wound up or merged with
hartered banks before 1871.
In part, the growth of banking was a consequence of a natural
over-enthusiasm for banking, an instrument that seemed to generate
capital, in a growing, frontier economy. This cause of the increase
in the number of banks was reflected in the number of bank failures.
It has been asserted that the massive failure of Canadian banks was
a direct result of their attempting to act as though Canada was
developing in a balanced way, when, in fact, it was developing through
unbalanced reliance on primary product exports. That is, it is
alleged that short run commercial capital, rather than long run
manufacturing capital, was needed; and many banks made the error of
supplying the latter. If that was the case, the high rate of
insolvency in the banking community could be taken as evidence that
there was not balanced growth in Canada in the period. In fact, however,
concentration on long run loans was not the cause of the banks'
difficulties.
Throughout the nineteenth century, until and including the First
National Policy, prominent members of Canadian Governments attempted
to seize control of banking for the purpose of generating revenue.
The experiment with free banking was a passing success in this regard.
Following the economic downturn of 1857--58, the government, in the
person of A.T. Galt, again attempted to establish a central bank, a
`provincial bank of issue', that would give the government prior
access to the economy's savings. He made the proposal in 1860, and
again in 1866. He was successful only in establishing a government
monopoly of the issue of one and two dollar bills.
Opposition to the government was two sided. A small but
influential group, the Financial Reform League, wanted a fiat currency
that could be expanded to encourage economic growth. Canada was not
officially on the gold standard, but some metallic reserve was the rule
in practice, and Galt was not proposing that this be changed. The
established banks also opposed the proposed central bank, but for
different reasons. In the first place, the banks were loath to
relinquish the right to issue their own currencies. Until checking
deposits became a common substitute for currency, at the end of the
nineteenth century, currency issue was the principle means by which
bank loans were made effective. In the second place, the banks were
apprehensive about the government's ability to engage in inflationary
finance, once it had the sole right to issue.
In the end, it was neither the Financial Reform League nor the
specific concerns of the chartered banks that prevented adoption of a
national currency; and therein lies the key to the nature of the
First National Policy, and of the Canadian economy at the time
of the First National Policy. The story is as follows.
In the speculations during the railway expansion of the 1850s, the
Bank of Upper Canada overextended itself. It was the government's
bank, and should have been a support for the government in the
government's times of need. The Bank's non-performing loans were so
extensive, however, that it was barely surviving with the support of
deposited government revenue. The government was supporting the Bank,
rather than the Bank supporting the government. In 1863, when L.H.
Holton was replacing Galt as Minister of Finance, and the Bank of
Upper Canada was unable to respond to the government's needs, the Bank
of Montreal was approached by the Canadian government for a loan. The
General Manager of the Bank of Montreal, E.H. King, granted the
request on condition that his bank replace the Bank of Upper Canada as
the province's fiscal agent. A year later, with the economy turning
down again, and the Bank of Upper Canada staggering under its burden
of unprofitable loans, the government moved its account to the Bank of
Montreal. Despite repeated appeals from `western bankers', King
refused to support the Toronto banks, all of which were threatened
with a run if the Bank of Upper Canada failed. The Bank of Upper
Canada did fail, and, in the ensuing run, the Commercial Bank of
Kingston eventually failed.
The crisis generated calls for banking reform. Taking advantage of
the climate of opinion, E.H. King approached Galt, once again Minister
of Finance, suggesting that the entire note issue be replaced by an
irredeemable government issue, and that certain other fundamental
changes be made.
Galt then resurrected his proposals for a provincial bank of
issue. He was attacked in the Legislature from all sides. Isaac
Buchanan, spokesman for those wanting a national fiat currency,
accused him of attempting to establish British style `hard currency'.
Francois Vezina, spokesman for the savings banks of Canada East,
accused him of attempting to finance a spend thrift policy by debasing
the currency. The chartered banks objected, as they had before.
Galt's main proposal was defeated in 1866, but he succeeded in
passing legislation that allowed the government to issue sufficient
small denomination notes to meet its financial needs. Following practice
in the United States, the government sold bonds and then issued
currency on the security of the bonds it had sold. Only the Bank of
Montreal purchased the bonds and received the notes. Since the
government was already in debt to the Bank of Montreal, the Bank's
purchase of the bonds was largely a matter of converting an existing
short term asset into bonds, and putting the bonds up for security.
This effectively liquidated the government's debt to the Bank.
Besides, it put the Bank of Montreal in a position to issue currency
for which it did not have to maintain a reserve of gold: a position of
considerable strength in relation to the other banks, which were
required to redeem in gold on demand.
All of this notwithstanding, King had not achieved the sort of
legislation he thought appropriate. He was part way there, but
now the western banks viewed with alarm the growing hegemony of the
Bank of Montreal.
This was how matters stood, when the Legislative Assembly of Canada
dissolved itself before reconvening as the House of Commons of the
new, federated, Dominion of Canada. When it reconvened, banking was
one of the first items of business. At this time, a reasoned
explanation of the nature and appropriateness of King's proposals was
given by King himself; and by the Minister of Finance, John Rose, when
the matter was introduced in Parliament. The explanation ran as
follows: the nature of the Canadian economy was changing and so was
the business of banking. Manufacturing and railroading were becoming
more important. [The Bank of Montreal, for example, was turning away
from the old mercantile type of business. Its profits in the foreign
exchange market had declined significantly. Corporate debentures
were growing as a portion of the collateral against its loans, and it
was increasing its involvement with the Grand Trunk Railway.] It was
appropriate, therefore, to adjust the organization of banking to suit
the economic conditions of the new nation.
King proposed reorganization into a three tiered system of banks.
The Bank of Montreal, as the government's bank, would hold a special
position similar to that of the Bank of England. [It would be a
central bank.] The large mercantile [chartered] banks would serve
commerce, especially international commerce, as before. A third tier
would be made up of local, unit banks, on the United States model, to
look after [one presumes] manufacturing and farming. The entire
currency would be irredeemable [as were United States green backs] and,
[following United States practice,] issued by all banks on condition
that they held government debt.
The proposal was doomed from the start.
During the credit stringency of the mid 1860s, when the Bank of
Montreal refused to support the Bank of Upper Canada, a group of
Toronto wholesalers and millers, led by William McMaster, set up their
own bank using an idle charter, that of the Canadian Bank of Commerce.
McMaster had been an employee of the Bank of Montreal until resigning
over the Bank's attitude toward the West, alleging that it had
exhausted its resources in foreign exchange dealings in New York. The
Bank of Montreal, in response, alleged that it had exhausted its
resources in propping up the Canadian government in the critical years
just before Confederation. Whatever the truth in this matter, western
banks and western business in general viewed the new banking proposals
as a deliberate move on the part of the Bank of Montreal, and of
Montreal interests in general, to reduce the West to economic
vassalage. The Bank of Commerce, under McMaster, became a symbol of
Toronto's struggle against Montreal.
The Canadian Bank of Commerce was hardly established when the Bank
of Upper Canada failed. Galt used public concern at that time to
introduce the proposals of 1866, and, subsequently, the compromise that
was accepted only by the Bank of Montreal. Then came Confederation.
When the new government of Canada assembled in July, 1867, Galt was
once again Minister of Finance; and William McMaster was a Senator and
Chairman of the Senate Committee on Banking. On November 8, the
Commercial Bank of Kingston failed, a delayed consequence of the
failure of the Bank of Upper Canada. Galt resigned from the Cabinet
during the critical days before the second failure, because his
colleagues, in his view, reneged on a promise to offer government
support to the troubled institution. He was succeeded by John Rose, a
lawyer who was closely associated with a number of Montreal interests
and who was, in fact, an officer of the Bank of Montreal.
So it was, that John Rose of the Bank of Montreal presented to the
House of Commons legislation that would give the new Dominion a
national banking system. When the proposed legislation appeared to
favour the King scheme, McMaster and his associates interpreted it as
just one more attempt on the part of Montreal interests to control the
economy of Toronto and the West.
McMaster's own hands were tied. His newly founded Bank of Commerce
was a success, but its authorized capital had to be increased if it
was to continue to succeed. Any interference by McMaster with Rose's
legislation would have brought retaliation in the form of an attack on
the necessary enabling bill for the Bank of Commerce. Under the
circumstances, the task of organizing resistance to Rose's bill fell
to George Hague, former Cashier of the Bank of Toronto. So successful
was Hague in forming a lobby of the commercial banks, excluding the
Bank of Montreal, that Rose was forced to resign. Prime Minister
Macdonald was not unaware of the massing of power: Halifax, Quebec
City, and Toronto against Montreal. Rose was replaced in Cabinet by
Francis Hincks, an Upper Canadian well connected with banking and
wholesale interests in Toronto, and a constant champion of the
interests of the West. In short order, a `compromise' was struck and
legislated in the Bank Act of 1871.
p
The Bank Act of 1871 reestablished the pre-Confederation order of
things. The Bank of Montreal [formally] lost its privileged position
as the government's bank. No provision was made for local unit banks.
The Dominion government continued as sole issuer of small denomination
notes. No reasons were proffered for the retreat from reorganization.
Historic, inter-regional rivalries were such that an integrated,
centralized national financial structure was a political impossibility.
More to the point, the vestiges of the Age of Sail and of the Canal
Era, in the form of distinct regional economies, militated against the
formation of a national policy in banking.
In the [perceived] depressed economic conditions of the 1870s
these incipient forces opposing the First National Policy were muted.
Macdonald announced his policy of balanced growth in 1876. It was
not a new idea. Issac Buchanan claimed to have begun the campaign for
the National Policy in 1837. Tupper claimed to have coined the phrase
and fathered the idea immediately after Confederation. D'Arcy McGee
had elaborated his scheme for a national economic policy in the
1857--1858 editorials of the New Era. In McGee's scenario
railroads were to integrate the colonies, and the tariff was to
enforce their integration. Immigration was to provide population for
the new nationality which, according to McGee, could not be a separate
country if it did not have its own economy. There was no thought of
reliance on staple exports on the part of Buchanan, Tupper, or McGee.
Macdonald gave Galt credit for first enacting the policy in 1858, and
Macdonald did not proffer a vision of Canada growing on the basis of
primary product exports. His vision reflected the economic
characteristics of the Montreal-Ontario region in the last years of
North America's Canal Era and the earliest years of its Railway Epoch.
Enthusiasm for the tariff, in 1878 and 1879, was accompanied by
enthusiasm for a national currency. When the Conservatives came to
power there were two elements in the National Policy: a national
tariff and a national currency. In 1879, following a preliminary
meeting in St. Catherines, a meeting was held in Albert Hall in
Toronto. Five Conservative members of the House of Commons were in
attendance. Isaac Buchanan was there, but, by this time, he was a
grand old man rather than a moving force. William Wallace was the
principal spokesman for the group. At the meeting a Financial Reform
League was formed to lobby for the establishment of a national fiat
currency, to supplement the tariff in the generation of balanced,
independent growth.
Great pressure was put on the Government to enact appropriate
legislation in 1881. It did not. All the commercial banks, now
solidly united in what was to become the Canadian Bankers Association,
were opposed to the League's proposal. Besides, by then, the United
States had returned to convertibility. Indeed, by then, the whole
Euro-American world, in practice, had adopted the gold standard. In
1871, an opportunity to establish a central bank in Canada to issue a
fiat currency had been lost to the forces of regionalism. By 1881,
the opportunity had passed. Whether for good or ill, another such
opportunity did not arise again until the 1930s.
The nature of what was lost, and the implications for the
nature of the Canadian economy are not in doubt.
In these statements Adam Shortt (1989, pp.~707--708) captured the
essence of the policy that grew out of the Montreal-Ontario, Canal Era
economy. Like the adjoining United States, Montreal-Ontario
experienced economic growth in the Smithian sequence of gathering,
agriculture, commerce, manufacturing and finance. It was not
fundamentally a staple exporting economy. The policies that emerged
from this circumstance, Adam Shortt's disapproval notwithstanding,
on Shortt's own testimony, were the same on both sides of the United
States--Canada border.
That this first National Policy was not suited to Canada's emerging
transcontinental economy, was not averted to in the depressed period
prior to its adoption, but it was not suited on two counts. First,
the eastern and western regions of the federation were growing on the
basis of primary product exports, and the newly annexed North West
Territories would also develop on that basis. Second, the capital
required to build the transcontinental economy was well beyond what
could be generated domestically in Canada. Aspirations to
independent, balanced growth for the whole of transcontinental Canada
were unrealistic in the extreme after 1873.
The first casualty of the underlying regionalization of the new
Canadian economy was the National Currency Policy. The second was the
policy of balanced development behind a national tariff. Still,
balanced growth remained typical of the Montreal-Ontario economy, and,
with qualitative differences, typical of the francophone Quebec
economy. As a consequence, compromises reached at the level of
national policy failed to satisfy any region, and the process of
political disintegration, having begun immediately after the Act of
Union in 1841, continued into the twentieth century.
Buchanan, I., 1864, The Relations of the Industry of Canada with
Clark, S.D., The Canadian Manufacturers' Association, Toronto.
Craven, P., 1987, (and Traves, T.) `Canadian Railways
Denison, M., 1966, Canada's First Bank, Toronto.
Galt, A.T., 1860, Canada: 1849 to 1859, London.
McCalla, D., 1993, The Planting of the Province: the Economic
McInnis, M., 1982, `The Changing Structure of
Marr, W.L., 1981, `The Wheat Economy in Reverse:
Masters, D.C., 1963, The Reciprocity Treaty of 1854,
Phelps, E., 1967, `Foundations of the Canadian Oil Industry,
Piva, M., 1992, The Borrowing Process: Public Finance,
Pomfret, R., 1981, The Economic Development of Canada,
Roman, D.W.,
1991, `Railway Imperialism in Canada: 1847--1865',
Rose, Hon. J., 1869, Speech by the Honourable John Rose,
Shortt, A., 1998, Adam Shortt's History of Canadian Currency
1914, `Railroad Construction and National Prosperity: an
Tucker, G.N., 1936, The Canadian Commercial Revolution:the admission
duty free or at low rates of duty, [of] raw materials for manufacture not
produced in the Province; the admission free of duty or at low rates,
of articles entering largely into general consumption and not
competing with the natural products of Canada; and the leveling of
higher duties upon articles entering into competition with articles
manufactured or which, with due encouragement, may be manufactured by
our people (Buchanan, p.~488.).
Government bonuses to railways correspond exactly with the
principle of protection to home manufactures. ... What is called
Free-Trade might be called foolish-trade. It is bad economy. It
looks only to immediate savings and profits. ... Protection in a
country like this puts every industry into healthy operation. It
brings more immigrants than all the agents Government could employ.
Better still, it keeps them here when they come. ... I will now
call home manufactures a rule in national discipline ... The
advocate of the national policy is usually a safe sentinel (May 30,
July 4 and 13, 1874.).
While the
boast of the Secretary of the Manufacturers Association was that to
the organization of the Manufacturers Association was mainly due the
triumph of this policy in 1878. ... In the actual framing of the
tariff of 1879, the Association played an important role. At a
meeting in Toronto, the members of each manufacturing industry retired
to a separate room and drafted a tariff covering their own articles.
A similar scheme was adopted at a meeting of manufacturers in
Montreal. The two groups then met in Ottawa and agreed upon a tariff
which was submitted by Edward Gurney, the Association's President, to
Sir Leonard Tilley with the advice that it be adopted as it stood.
`With very few exceptions', the Secretary claimed later, `the tariff
which was proposed by Sir Leonard Tilley in his budget speech that
session was the same as that suggested by the Manufacturers'
Association (Clark, pp.~6--7.).
There has been much debate over the nature of the Canadian tariff
in the second half of the nineteenth century. In his search for very
long run economic factors in the integration and independence of
Canada, H.A.~Innis focused on Galt's explanation of the tariff as a
revenue device to pay for transportation improvements. This allowed
Innis, in his concern with a later period of development, to associate
the tariff of 1878 with subsequent transcontinental railway
construction and the export of wheat from the Prairies; and,
incidentally, to suggest that there was a continuous development from
the tariff of 1858 to the early twentieth century western wheat
economy. That is, it allowed Innis to interpret the tariff into a
staple theory of Canadian economic growth, and to associate the
National Policy of 1876 with factors integrating the economy. Others,
however, have considered Galt's explanation to have been just `the
economic double talk of a suave politician' (Dales, p.~145.).
Banking and Financial Institutions
Between 1850 and 1880, all financial institutions in Canada:
insurance companies, mortgage and building companies, stock markets
and bond brokers, continued to reorganize to accommodate the deepening
capital structure of the economy. The most interesting developments,
however, were in banking, not least because banking was an instrument
of economic development coveted by governments.
The large increases in the number of active chartered banks
occurred in several distinct periods: from 1831 to 1836, when they
increased from 6 to 21; from 1854 to 1858, a period of intense
speculative economic activity, when they increased from 16 to 30; and
from 1870 to 1874, when they increased from 34 to the record number of
51. After that failures and mergers exceeded new formations
While the record of terminating building societies prior to
Confederation, as well as of savings banks prior to Confederation, is
worse than that of the chartered banks, it appears that as a group the
chartered banks have a record for solvency after Confederation that is
more tarnished than that of any other financial intermediary examined
(Neufeld, pp.~76--81).
It was hardly ever a case of having made good
long-term loans which could not be realized when depositors and
note-holders for extraneous reasons demanded legal tender; but rather
it was usually a case of having made imprudent loans (sometimes of a
short-term, other times of a long-term, nature) which subsequently led
to loss of confidence (Neufeld, p.~104.).
The First National Policy
Depressed conditions returned in 1873, reviving the Association for
the Promotion of Canadian Industry. The manufacturers again called for
a protective tariff. But circumstances were not those of 1858.
Confederation was now an accomplished fact. The Maritimes, the North
West, and British Columbia had to be taken into account, and already
there were doubts about the appropriateness of a policy of
independent, balanced growth with respect to those regions. Tupper
still clung to the idea of iron and coal based manufacturing in the
Maritimes, but he was not the only Maritime voice. Joseph Howe's
Anti-Confederation League was convinced that the Maritimes was about
to become an economic colony of the Canadas. In British Columbia, the
group that had followed Amor de Cosmos into agricultural protection
and to the doorstep of industrial protection, just before entering
Confederation, took a second look. When exports of fish, forest
products and coal began to substitute for fur and gold in the
Province's economy; that is, when the substance of the region's
economy again appeared to be primary product exports, and when Prime
Minister Mackenzie reneged on the promised railroad, the idea of
balanced growth in Confederation lost its appeal on the West Coast.
Every reservation or qualification of a popular policy
weakens it in the eyes of the multitude, who find mental peace and
moral comfort in bold and clear cut propositions supported by dogmatic
and uncompromising assertion. ... Two closely related policies of
this description came to the front when the depression [of the 1870s]
was at its maximum. Both came from the United States, where they had
done excellent service for their political exploiters. The first,
which in theory was simplicity itself, and its practice appealed
directly to primitive individual selfishness, was the National
Policy as to the tariff, and the second, which grew out of it by
natural logic, but was later in the field and necessarily involved
more technical terms and ideas, was the National Currency
Policy.
REFERENCES
Armstrong, R., 1984, Structure and Change, and Economic
History of Quebec, Gage
with Great Britain and the United States, Montreal.
as Manufacturers: 1850--1880', in D. McCalla, ed.,
Perspectives on Canadian Economic History,
Copp, Clark, Pitman, Toronto, pp.~118--143.
History of Upper Canada, 1784--1870,
University of Toronto Press, Toronto.
Canadian Agriculture', Journal of Economic History,
vol.~82, pp.~191--198.
Ontario's Wheat Production: 1887--1917', Canadian Journal
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McLelland and Stewart, Toronto.
1850--1856', in Ontario Historical Society,
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Methuen, Toronto.
in Robinson, R.E., Davis, C.B., and Williams,
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Minister of Finance, Canada, on introducing the
Resolutions on Banking and Currency, Ottawa.
and Banking: 1660--1880, Canadian Bankers
Association, Toronto.
Historic Parallel', Proceedings and Transactions
of the Royal Society of Canada, ser.~3, sec.~II,
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1845--1851, Yale University Press, New Haven.