Why the British government discouraged paper currency in the colonies in the early 19th century

21 07 2011
 A few days ago, I got the following email from a scholar in Canada.
“Do you know why the British government discouraged paper currency in the colonies in the early 19th century?”
Here is my reply to his question about the motives of the British government in wanting to limit the issue of paper money in British North America.

In the period between the Conquest and the War of 1812, the British government took little interest in Canadian currency matters. Its policy was one of benign neglect. That began to change in 1821, when the British returned to the gold standard, which had been suspended during the Napoleonic Wars. In 1825, Sir James Stephen, an official at the Colonial Office in London, wrote a long memorandum on the need to standardize the currency used throughout the British Empire. Thereafter, the Colonial Office began to take a more active interest in Canadian currency.

 This interest was most intense in the 1840s and 1850s. In the early 1840s, there was a heated debate in Britain about currency and banking that pitted advocates of an expansionist money supply against hard money people. The debate continued until Robert Peel’s 1844 Bank Charter Act, which quickly came to be regarded by the British as an appropriate role model for the entire Empire.

http://www.bankofengland.co.uk/about/legislation/legis.htm

In 1846, the Colonial Office issued a circular to governors throughout the empire that set forth certain principles for banking law that were incorporated into regulations all over the world. The underlying motive here appears to have been to prevent raw frontier colonies from going crazy and issuing lots of paper money.  In the early 1850s, the Canadian Minister of Finance fought a long battle with the British government over the name and denomination of Canada’s currency—should it be called the pound and be subdivided into 20 shillings or should it be decimalized and called the dollar. I suspect that the Colonial Office’s opposition to calling Canada’s currency was basically about symbolism rather than any practical economic consideration. Eventually, the British government gave in and in the late 1850s the BNA colonies adopted dollars and cents as their accounting units.

There are two basic ways of viewing the making of British government policy towards colonial currency. One is to assume that policymakers (e.g., the successive Colonial Secretaries and the civil servants at the Colonial Office who advised them) were motivated by some conception of the public interest and desire to promote the welfare of Britain and/or Canada.  The other starting assumption is that the Colonial Office’s efforts to influence the banking laws of the colony to pressure from special interest groups, such as London headquartered banks with branches in the colonies. (Keep in mind that in those days there were no conflict of interest regulations preventing civil servants from investing in banks or taking money from cronies).  The truth probably involves a mixture of these two approaches.

Adam Shortt (1859-1931), who wrote about this topic in the early 20th century, leaned toward the view that the actions of the Colonial Office are best understood with reference to conceptions of the public interest and the teachings of the economists of the day. Shortt doesn’t say that the Colonial Office was always right, but he suggests that its actions were motivated by a desire to advance the public interest.   At the very least, he discusses the British government’s actions on this file without once mentioning the possibility that there could have been lobbying from British bankers or other interest groups.

“Currency and Banking” by Adam Shortt, in Canada and Its Provinces 5, United Canada, 1840 – 1867 (Toronto: Edinburgh Univ. Press, 1914) vol. 5, 261-294.

Here are the relevant sections of Shortt’s essay. I have put the sentences that deal with motives in bold.

 

p.269

THOUGH, as we have seen, the recommendations of the British government, in dealing with the charters  of the Canadian banks, had been very largely adopted,  there was one feature to which the British authorities attached  great importance which the Canadian government, at the  instance of the Canadian banks and business interests, could  not be induced to accept, namely, the abolition of bank  notes under £1 currency. The object of this limitation was,  of course, as in Britain, to increase the volume of metallic  currency in circulation and in the vaults of the banks, with  a view to steadying the exchanges of the country and rendering the colonial bank issues more secure. Pressure had been put upon the Canadian government through the disallowance  of several amended bank charters, notably those of the Commercial Bank and of the Bank of Upper Canada. While  the principle contended for by the British Treasury was sound  enough in the case of countries conducting a large financial business, yet the situation in Canada differed greatly from  that in Britain. Here as yet there were very few purely  financial operations of a domestic nature. Practically all  the local and the greater part of the foreign exchange was  directly connected with trade and commerce, calling only  for the most convenient medium of domestic exchange. This  was undoubtedly furnished by the bank notes. To have  forced the substitution of an extensive metallic currency,  which must have been obtained from abroad in exchange for a corresponding amount of Canadian exports, would have  involved quite unnecessary expense. The special interest in  Canadian currency which was manifested by the home government in the forties was chiefly due to the fact that a very  vigorous and prolonged discussion of the whole currency and  banking question had been absorbing the attention of the  British authorities for some years, and had culminated in  Peel’s Bank Act of 1844. The principles of this act, it was

p.270

felt, were of universal application and must be enforced in all parts of the British Empire, regardless of their special  local conditions. This proposition was frankly declared in  the dispatch of 1846 instructing Lord Cathcart to have the  principles of the British measure introduced into all future  Canadian bank charters. Most of the essential features of  the new British act, with the exception of the high minimum  denomination for notes, had been accepted by the Canadian  legislation of 1841. The practical question was discussed  over the charters of two new banks in Eastern Canada, La Banq ue des Marchands, of Montreal, and the Quebec District  Bank. The Canadian government insisted upon the retention  of the privilege to issue one-dol1ar notes, and in the end the  home government gave way.”

 

End quote.

 

A very different theory of how the British government made colonial policy is provided in  Peter J. Cain and Anthony G. Hopkins. British Imperialism: 1688 – 2000. Harlow [u.a.]: Longman, 2009. They basically argue that British colonial policy was made largely with the interests of the City of London in mind.  Cain and Hopkins shows that the policymakers were frequently friends of prominent city financiers and linked to them by marriage, schooling, and, in some cases, investments.  Their theory of British imperialism emphasizes both the supremacy of London-based financial and mercantile interests in the formation of British policy towards the empire, and the separateness of City-based gentlemanly capitalists from mercantile and industrial interests based outside of central London.

 

My book on Confederation argued that the British policy of supporting Canadian Confederation (and of pressuring reluctant colonies such as Nova Scotia to join it) was influenced mainly by London bankers with substantial Canadian investments.  So I’m more sympathetic to the interest group approach, at least in principle. However, I haven’t done an archival investigation to try to see the extent to whether the London based bankers attempted to influence the 1846 banking circular or other British government actions re Canadian banking law in this period. I suspect that the Bank of British North America (founded 1836) would have been the company most interested in the Canadian banking laws, but this is speculative.

Anyone with more information on this topic is welcome to post here or to message me.

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