Sir John A. Macdonald and the Bank of Montreal

23 01 2012

Sir John A. Macdonald

11 January 2012 marked the 197th birthday of Sir John A. Macdonald,  the Dominion of Canada’s first Prime Minister. To celebrate the anniversary, the federal government named a former Bank of Montreal branch in downtown Ottawa the “Sir John A. Macdonald Building.” For the story, see here. For an image of the building, see below.

I understand the desire to honour the Dominion of Canada’s first Prime Minister. I also think that it is appropriate for Macdonald’s name to be associated with banking, since legislation passed by his government played an absolutely crucial role in the evolution of Canada’s financial sector. The system of trans-continental branch banking that had emerged by the time of Macdonald’s death in 1891 paralleled the political union that Macdonald had constructed between 1864 and 1873.  However, it is singularly inappropriate to name a former BMO branch after Macdonald, as the Bank of Montreal helped to bring down the Kingston-based  Commercial Bank, as this was the bank with which Macdonald was most closely connected.

The financial crisis of 2008 took out banks around the world, but Canada’s financial institutions weathered the storm. In a scholarly article that was published just a few days ago, I show that the foundation of Canada’s distinctive (and famously stable) banking system lies in a series of banking laws passed in 1870-1.

Former Toronto branch of the Commercial Bank. This branch is now within the atrium of BCE Place in downtown Toronto.

Photo of plaque taken by Alan L. Brown

A close examination of the rather murky politics of banking in the Confederation era shows that the policies of the Bank of Montreal, which involved a relatively restricted approached towards credit and the expansion of the money supply, helped to cause the October 1867 collapse of the Commercial Bank.  In the 1860s, Montreal and Toronto were engaged in a struggle to see which city would emerge as Canada’s financial capital. The Dominion was in its infancy and the stakes were high to see who would be dominant in the new nation.  This struggle pitted banks in the two cities against each other– and it also badly divided Macdonald’s own cabinet, since some of his supporters were from Montreal, others from Toronto. One victim of this struggle was the Commercial Bank, which was headquartered in Kingston, Macdonald’s own riding.

It is today generally forgotten that Confederation on 1 July 1867 was followed by an awful financial crisis that brought down the Commercial Bank a few months later. The new federal government could have used its resources to prop up this bank. Indeed, Macdonald probably would have done so had he  had a free hand in the matter. After all, he had reasons to feel grateful to the Commercial Bank, which had extended many soft loans to him. However, the supporters of the Bank of Montreal in Macdonald’s cabinet effectively vetoed the idea of a bailout for the Commercial Bank.

Similarly, Canada’s first Finance Minister, A.T. Galt, pressured the Bank of Montreal to contribute to a private-sector bailout package for the Commercial Bank, something that the Bank of Montreal refused to help out with.

The failure of the Commercial Bank forced Galt to resign his position as Minister of Finance because he had lost much of his personal fortune with it. (Galt was later able to rebuild his fortune).  It also devastated the city of Kingston, which henceforth was  a financial satellite of the major cities.  Macdonald managed to get through this crisis with his personal finances more or less intact. Most of Macdonald’s personal debts were owed to the Commercial Bank, which had long displayed a rather generous attitude when it came to their repayment, largely because of Macdonald’s political clout. When the Commercial Bank failed, Macdonald’s obligations to it were assigned to the Merchants’ Bank, a Montreal-based institution controlled by Sir Hugh Allan. This bank continued the Commercial Bank’s practice of allowing the loans to go unpaid.  It should be noted that  Macdonald’s government later awarded the lucrative contract to build Canada’s transcontinental railway to a syndicate that included Sir Hugh. Indeed, this contract was at the centre of the Pacific Scandal, the affair that brought down Macdonald’s first government.

There is a saying that laws are like sausages– those who like them shouldn’t watch them being made. The backroom political deals that resulted in the post-Confederation banking laws were sleazy by today’s standards. However, I would argue that these statutes were actually quite beneficial and paved the way for present-day Canada’s impressively stable financial sector. Thanks in part to the laws passed by the first post-Confederation parliament, Canada went on to develop a banking sector that was, in many ways, superior to that of the United States.

You can read more about this is my article “Continental Divide: The Canadian Banking and Currency Laws of 1871 in the Mirror of the United States” in Enterprise and Society: The International Journal of Business History. See here.

New Research on John A. Macdonald

24 12 2010

John A. Macdonald, 1875. Image from Library and Archives Canada

Ged Martin, Professor Emeritus at the University of Edinburgh has recently published a string of new research on Macdonald.  These include:

“Macdonald and his Biographers” [review article] BRITISH JOURNAL OF CANADIAN STUDIES, xvi (2001), pp. 300-19. Essential reading for all PhD students in Canadian history.

“Sir John Eh? Macdonald: Recovering a voice from History” BRITISH JOURNAL OF CANADIAN STUDIES, xvii (2004), pp. 117-124. In this article, Martin determines whether the adult Macdonald spoke with a Scottish accent, a more North American one, or something in between. Researching this paper required very careful archival research as no recordings of Macdonald’s voice exist.

“John A. Macdonald and the Bottle” JOURNAL OF CANADIAN STUDIES, xl (2006), pp. 162-185. This article on Macdonald’s drinking is always very popular with undergraduates. The students in my honours seminar voted it their favourite reading.

“John A. Macdonald: Provincial Premier” BRITISH JOURNAL OF CANADIAN STUDIES, xx (2007), pp. 99-122

“Archival Issues in John A. Macdonald Biography” JOURNAL OF HISTORICAL BIOGRAPHY, i (2007), pp. 79-155}

“John A. Macdonald: Scotsman or Canadian” (University of Edinburgh Standard Life Lecture in Canadian Studies, 2004.

“John A. Macdonald and Kingston Voters” HISTORIC KINGSTON, lviii (2010), pp. 56-63

I just finished reading Martin’s new book about Macdonald.

FAVOURITE SON? JOHN A. MACDONALD AND THE VOTERS OF KINGSTON 1841-1891  (Kingston, Ont., Kingston Historical Society, 2010, 214 pp.)

Martin’s book is local history at its finest. On one level, it isn’t really fair to call this “local history” since that term often conjures up images of antiquarians arguing about insignificant details. Martin’s book is essentially the study of the relationship between Macdonald, the creation of the Canadian nation state, and this particular community. The book deals with an interesting paradox in Macdonald’s career: as Macdonald’s national and international stature increased, he became progressively less connected to popular with Kingstonians. Kingston, a city in relative economic decline since the 1840s, ceased to be a focus of Macdonald’s energies. Macdonald relocated his law office and residence to Toronto. Kingston voters reciprocated his growing disengagement from them by voting Liberal, which forced Macdonald to seek nomination in safely Conservative ridings in distant parts of the country.

Martin’s book was interesting to me as a historian of Canada and its place in the North Atlantic world. One learns something about Canada’s relationships with the United States, the United Kingdom, and even the Vatican here. Don’t let the title fool you into thinking that this is a book just for residents of the city.

The parts of the book I liked the most were the sections devoted to Macdonald’s career as a businessman, in particular his involvement in Kingston-based Commercial Bank and the Trust and Loan Company of Upper Canada. The Commercial Bank failed in October 1867 in part because Macdonald’s government refused to provide it with the financial lifeline it needed to deal with a liquidity crisis. Macdonald, who owed a great deal of money to this bank, probably would have favoured government aid, but the members of his Cabinet who hailed from the financial centres of Toronto and Montreal were powerful enough to thwart this idea and Kingston’s sole independent financial institution was allowed to fail.

The case of the Commercial Bank raises the interesting question of what Kingston’s got from being represented in parliament for so many years by the Prime Minister. Very little, it would seem. Kingston, which had once been the largest city in Upper Canada/Toronto experienced relative economic decline through Macdonald’s political career. By the early twentieth century, it had become an economic afterthought halfway between the great economic centres of Toronto and Montreal. Kingston probably would have experienced relative economic decline regardless of who was the Prime Minister, since its backcountry consists of rocky soil and marginal farms. What is striking, however, is that Macdonald did so little to try to help the city’s economy aside from a few high visibility projects, such as the controversial dry dock built at the end of his career.

This raises another question for me– to what extent have the ridings/home towns of other Canadian Prime Ministers benefitted from pork barrel spending. When Jean Chrétien was Prime Minister, he arranged for theme park with a high observation tower to be built in the very centre of his riding, Shawinigan. This project created a local landmark, but only a few long-term jobs.

Similarly, Brian Mulroney arranged for a federal prison to be built in his riding, Baie-Comeau.

Baie-Comeau Prison

This provided a nice injection of cash into the local economy, but it certainly did not arrest the steady decline of that pulp-and-paper town, which has a declining population. It would seem that being represented by a Prime Minister does very little for the long-term economic prospects of a Canadian community.

It would be interesting to know whether the Canadian political system’s bias towards targetting public works spending to the ridings of Prime Ministers is stronger or weaker than the similar bias that undoubtedly exists in other countries? Has any political scientist has compared the level of pork-barrel spending in the ridings of Canadian Prime Ministers with similar practices in other Westminster-style democracies.

In the US, the districts of members of Congressional Committees tend to funnel lots of pork-barrel spending to this districts: the bias in military spending towards the districts of members of the Armed Services Committee is striking. According to political scientist Brian Roberts, when Senator Henry “Scoop” Jackson, the ranking Democrat on the Senate Armed Services Committee, died suddenly in September 1983, the share prices of arms merchants based in his home state of Washington declined. The share prices of contractors based in Georgia, the home state of the next-most-senior Democratic Senator on the committee, Sam Nunn, shot up.

Roberts, B.E. (1990) “A dead senator tells no lies: Seniority and the distribution of federal benefits” American Journal of Political Science 34: 31–58.

P.S. Arthur Milnes of Queen’s University has created a Macdonald-themed walking tour of Kingston. You download it to your Ipod and then walk the streets of the historic city centre. You can choose your narrator for the tour from a growing list that includes the Rt. Hon. Jean Chretien, the 20th Prime Minister of Canada, the Hon. Peter Milliken, 34th Speaker of the House of Commons and the local MP, and hockey personality Don Cherry. See here.