In the late 1850s and the early 1860s, efforts were renewed in the Province of Canada to introduce a government issue of paper money. This time, the financial and political environment was more receptive than had been the case in 1841.
(Bank of Montreal, 25 shillings or $5, 1852
This note is an example of the dual currency system that existed in the Province of Canada prior to decimalization in 1858.)
The collapse of a number of banks during this period brought bank notes issued by chartered banks into disrepute. In 1859, two Toronto-based banks, the Colonial Bank and the International Bank, failed. This was soon followed by the collapse of the Bank of Clifton and the Bank of Western Canada. The failures of these last two
banks were particularly scandalous, with the former pretending to redeem its notes in Chicago and the latter, owned by a tavern-keeper, attempting to circulate worthless bank notes in the U.S. Midwest. In his authoritative review of early banking in Canada, Roeliff Breckenridge wrote,
No great loss was caused to the Canadian public by their collapse, but the scandal and the ease of acquiring dangerous privileges which had led to the scandal, called forth bitter and general complaint.
(Bank of Clifton, $5, 1859
This note was issued by an early Canadian chartered bank, which was also known as the Zimmerman Bank. It became a "wildcat” bank, issuing large quantities of notes with no intention of redeeming them. The detailed engraving is typical of nineteenth-century bank notes. The coloured "Five” is an anti-counterfeiting device.)
Nevertheless, a loss of confidence in chartered bank notes, the principal means of payment, posed a threat to economic prosperity. To restore confidence in the currency and to raise funds for the government, in 1860 A.T. Galt, Finance Minister of the Province of Canada, proposed replacing chartered bank notes with an issue of government notes.39 Once again, the chartered banks objected strongly to the potential loss of their bank-note-issuing privileges, and the proposal was quickly withdrawn. In 1866, however, with the Canadian government again seriously short of resources, the need for a new source of funding became acute. Domestic and British banks were unwilling to advance new funds or roll over existing loans. Moreover, the provincial government was unable to sell bonds in London even at very high rates of interest. With all funding avenues apparently closed, the provincial authorities passed controversial legislation to issue up to $8 million in legal tender, provincial notes. These notes were payable on demand in gold in either Toronto or Montréal and were partly backed by gold—20 per cent for the first $5 million and 25 per cent for amounts in circulation in excess of $5 million. The Provincial Notes Act received royal assent on 15 August 1866.
(Bank of Montreal, $5, legal tender note, 1866
Once the Bank of Montreal agreed to act as the government’s banker in 1866, all of its note issues were overprinted to indicate government issue until newly designed provincial notes were received.)
Unlike Galt’s earlier proposal, chartered banks were not obliged to give up their right to issue bank notes although they were encouraged to do so. Compensation was offered, including the payment of 5 per cent of their average notes in circulation and a further 1 per cent per year for issuing and redeeming provincial notes. Nevertheless, only the Bank of Montreal, the government’s fiscal agent, took up the offer. It too resumed its bank note issue following the passage of the 1871 Bank Act.
(Province of Canada, $2, 1866
Produced by the British American Bank Note Company, which had offices in Montréal and Ottawa, this note was payable in Toronto.)