In you were living in Canada between 1870 and 1880 there's a good change that you might have held in your wallet the odd beast that was the private $7 note pictured above. Below is a $6 note issued by Banque Nationale in 1870, a bank that continues to operate in Canada today.
The first striking aspect of the $7 note is that the issuer is Molsons, the very same Molsons that brews one of Canada's best selling beers. Molsons Bank would eventually merge itself with the Bank of Montreal in the 1920s.
Going back a bit in history, the brand name on these notes isn't so unusual. Most Canadians are probably not aware that the entrance of the Bank of Canada into the business of issuing paper money is relatively new. Established in 1935, the BoC has only been a money printer for 78 or so years. Private Canadian chartered banks, on the other hand, began to issue paper banknotes as early as 1819. Until they gave up their right to issue notes in 1935, these banks had been continuously issuing notes for some 125 years. So Molsons notes aren't an anomaly—if anything, they've been the norm up here in Canada, it's the BoC that's a bit weird.
So why would anyone want a $7 note? Why not just carry one $5 and two $1s?
First, we should note that issuing banknotes is a cost-effective way for an institution to fund itself. Why? Notes don't pay out interest. In comparison, bond or deposit funding are pricier funding alternatives since interest must be paid on outstanding obligations. Fierce competition emerged among early Canadian banks to see who could keep their notes in circulation and "enjoy the float". The float refers to seigniorage, or the difference between the cost of maintaining banknotes in circulation and the interest that can be earned by investing note proceeds.
While the Canadian government no doubt wanted to share in this interest-free financing, a proposal by Lord Sydenham in 1841 to end the private issue of notes and monopolize issuance at a central bank never got off the ground. The next effort to move into the business of note issuance did get traction. But rather than establish a monopoly central bank, the Provincial Notes Act of 1866 only allowed for the issuance of $8 million in Province of Canada Notes. These instruments would later come to be known as Dominion notes. Much like US greenbacks, Dominion notes were direct obligations of the government, not of a central bank, and they circulated in competition with the notes of private banks.
Having gained for itself a toe-hold in the banknote issuance business, the Canadian government proceeded to shoehorn its way into a more dominant position. In 1870, the Feds required banks to surrender the issuance of small notes, or any denomination below $4.
Without the ability to issue $1s and $2s, chartered banks could not legally provide the public with hand-to-hand payment media to facilitate transactions that totaled $6, $7, or $11, and made it inconvenient to reach amounts like $26, $32, etc. The response of the Canadian banks was rather cheeky—they decided to print out $6s and $7s ($4 notes already being widely used in Canada). These new denominations allowed a bank to provide its clients with convenient payment media sufficient to total any transaction that clients might incur. An outstanding debt of $26, for instance, could be settled with one $20 note and a $6 note rather than one $10 and four $4s.
In 1880 legislation was passed that raised minimum private denominations to $5 and only permitted multiples of five. Thus ended ten years of oddly-denominated Canadian private notes. From that point on, only $1 and $2 denominated Dominion notes could provide Canadians with the flexibility to meet odd payment amounts.
Canadian $6 and $7 are an early example of regulatory-inspired financial innovation. No doubt the clamping down on private $1s and $2s was justified at the time by an appeal to Adam Smith's Wealth of Nations. While Smith usually advocated the free-banking position, he favored banning notes in denominations below £5. Small denominations were typically used by poorer classes whose ability to monitor notes for credit quality might be less than adequate. Without proper due diligence, wrote Smith, issuers of these notes would be able to overissue and cause credit booms and busts, hurting those least able to afford it.
I don't know what portion of the Canadian government's motivation for pushing into the banknote business emerged from the regulator-as-wise-outsider view and what portion from regulator-as-profit-seeking-monopolist view. But it makes me wonder how much of modern banking regulation is motivated by well-reasoned economic thinking and a genuine Smithian concern for the poor, and how much is motivated by interest groups co-opting the state to provide them with monopoly rents. Perhaps a bit of both. In any case, we shouldn't naively assume that bank regulation will solve all our financial woes.
PS: Many of these facts come from Roeliff Morton Breckenridge's The Canadian Banking System 1817-1890
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