I’ve referred often in these pages to the virtues of Canada’s late 19th-century currency system, with its heavy reliance upon circulating notes issued by several dozen commercial banks, most of which commanded extensive nationwide branch networks. I’ve also lamented the fact that so few monetary economists today, let alone members of the general public, seem aware of that arrangement, the superiority of which, both absolutely and compared to its U.S. counterpart, was once widely celebrated. For I’m certain that, if more people were aware of it, the scales might drop from their eyes, plainly revealing the gigantic blunder our nation (and most others) committed by entrusting the management of paper currency to a government-sponsored monopoly managed by bureaucrats.

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If more people were aware of Canada’s currency system, the scales might drop from their eyes, plainly revealing the gigantic blunder our nation committed in its own system.

So you might expect me to be jumping for joy after seeing this new Bank of Canada Staff working paper by Ben Fung, Scott Hendry, and Warren E. Weber, on “Canadian Bank Notes and Dominion Notes: Lessons for Digital Currencies.” But no such luck: instead, after reading it, I’ve been in a blue funk.

How come? Because, instead of drawing badly needed attention to the substantial merits of Canada’s private currency system, Messrs. Fung, Hendry, and Weber focus on its shortcomings, claiming that it suffered from serious flaws that only the government could fix. They then go on to argue that government intervention may also be needed to keep today’s private digital currencies from displaying similar flaws. In short, according to them, Canada’s experience, instead of casting doubt on the desirability of special government regulation of private currencies, supplies grist for regulators’ mill.

Is their perspective compelling? I don’t think so. As I plan to show, and as even a cautious reading of Fung et al.’s own assessment will suggest to persons familiar with other nations’ experiences, the imperfections of Canada’s private banknote currency were minor ones, especially in comparison to those of the concurrent U.S. arrangement. Nor is it even clear that they were genuine flaws, in the sense that implies market failure. The reforms that eventually eliminated the imperfections were, in any case, not imposed on Canada’s commercial bankers against their wishes, but instigated by those bankers themselves. Finally, the suggested analogy between Canada’s 19th-century banknotes and modern digital currencies, far from supplying solid grounds for supposing that unregulated digital currencies are likely to exhibit the same (real or presumed) shortcomings as their 19th-century Canadian counterparts, is so forced as to be utterly unconvincing. For all these reasons, those seeking to draw useful lessons from Canada’s private currency experience will be well-advised to look for them elsewhere.

Because there’s so much I feel compelled to say about Fung et al.’s paper, I’ve decided to devote several posts to it. In this one, I’ll assess that paper’s claims regarding the supposed shortcomings of Canada’s private banknote currency. In the follow-ups, I’ll address the claim that it took government regulations to perfect that currency and their claim that Canada’s experience with private banknotes points to the likely need for government intervention to correct inherent shortcomings of today’s digital currencies. Finally, I’ll share my thoughts regarding the real lessons to be learned from Canada’s 19th-century currency system.

Supposed Shortcomings of Canada’s Private Currency

After 1867, Canada’s currency consisted mainly of the circulating notes of a couple dozen commercial banks.

Following Canada’s Confederation in 1867, the country’s paper currency consisted mainly of the circulating notes (or “bills,” as the Canadians called them) of a couple dozen commercial banks, plus some government-issued paper money known as “Dominion” notes. Although Dominion notes were made legal tender, both they and banknotes were payable on demand in specie.

Unlike the notes of U.S. national banks, which had to be secured by certain U.S. government bonds, Canadian banknotes were backed by their issuers’ general assets. Canada’s banks were also free, unlike their U.S. counterparts, to establish note-issuing branches anywhere in that country, and even beyond it (several had New York City branches). Nor were the banks required to maintain any specific amount of cash reserves. After 1871, banknotes were limited to denominations of $4 or more; and in 1880 that minimum was raised to $5. The banks’ charters also limited their circulation to their paid-in capital; however that restriction didn’t become binding until the outbreak of the U.S. Panic of 1907. In short, the supply of Canadian banknote currency came very close to being completely unregulated.

That lack of regulation, according to Fung et al., caused Canada’s private banknote currency to go awry in several ways. It was, they say, subject to “considerable” counterfeiting. And prior to the passage of the Bank Act of 1890, it was also neither perfectly safe nor perfectly uniform. Bank failures sometimes exposed note holders to long delays in payment, if not to outright losses; and banknotes sometimes traded at a discount from their face values.


How serious were these imperfections? Although Fung et al. speak of “considerable” counterfeiting, the adjective merely means that, at one time or another, attempts were made to counterfeit most of them, and that now and then substantial amounts of counterfeits were produced. It doesn’t follow that the counterfeits in question were capable of fooling experienced bank tellers (Fung et al. themselves recognize that many were of “poor quality”) much less that they were a serious menace to legitimate banks of issue (if they were, the record is silent about it). Still, counterfeits had their victims, and as such were a blemish on the Canadian system’s record.


Regarding banknotes’ safety, Fung et al. note that of 55 Canadian banks that operated at some time between 1867 and 1895, only three wound up without paying their noteholders in full. The Bank of Acadia, which failed in 1873, left most of its outstanding notes unpaid, whereas the Mechanics Bank of Montréal, which failed in 1879, and the Bank of Prince Edward Island, which failed in 1881, paid 57½ and 59½ cents on the dollar, respectively.

Considering the size of the banks that failed, as measured by their total note circulation, these already very modest losses appear even less significant. At the time of its failure, the Mechanics Bank of Montréal had only $168,132 in notes outstanding. The circulation of the Bank of Prince Edward Island, at $264,000, wasn’t all that much greater. The Bank of Acadia, finally, was an outright fraud, for which no actual circulation figures exist. Assigning to its circulation the almost certainly too generous value of $50,000, and allowing for a total circulation of all Canadian banks of about $25 million, the notes of the three failed banks made up less than 2 percent of the total. Not perfect, to be sure, but not bad at all.

Between 1867 and 1900, the grand total of losses of all creditors of failed Canadian banks amounted to less than 1 percent of the banks’ obligations.

Stepping back to take in a still bigger view, the Canadian banks’ record looks even better: in all, between 1867 and the end of

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