Author ORCID Identifier : Muharem Kianieff

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Queen's Law Journal



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This article outlines the legal and historical experience of the rise and fall of privately issued paper money in Canada against the backdrop of the development of paper currency in Europe, and it reviews the reasons why the right to issue currency was ultimately transferred from private banks to the Bank of Canada. The article opens with a discussion of the monetary regime that developed in Europe and was imported into Canada well before Confederation. The value of medieval coins was based on the value of the precious metals in them, and fluctuations in the price of those metals led to a chronic shortage of small-denomination coins. Expanding commerce required a reliable money supply, and that need was gradually met by private notes issued by goldsmiths and banks. In pre-Confederation Canada, problems with the supply of money also led to the issuing of private notes, first by merchants and then by newly established banks. From Confederation to the 1930s, federal banking and finance legislation tried to come to grips with the need for a secure currency and for the expansion of credit, but with only limited success. The financial system's failure to respond adequately to the challenges of the Depression led to the establishment of the Bank of Canada in 1935, over the objections of many private bankers. The legislation that set up the Bank of Canada provided for the gradual phasing out of private banknotes and their replacement by notes issued by the Bank of Canada. The events that led to the move away from privately issued currency, and to the advent of a central bank, played an important role in helping to shape the economy of the young country. A review of the historical record casts doubt on the views of economists who have argued for a return to a system of privately issued currency, and it can provide guidance to those responsible for formulating policies to meet our currency needs in the future.