the gold-reserve requirement under the dominion notes act of 1870: how to deceive parliament

The Gold-Reserve Requirement under the Dominion Notes Act of 1870: How to DeceiveParliamentAuthor(s): George RichSource: The Canadian Journal of Economics / Revue canadienne d'Economique, Vol. 10, No. 3(Aug., 1977), pp. 447-453Published by: Wiley on behalf of the Canadian Economics AssociationStable URL: http://www.jstor.org/stable/134467 .

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Shorter articles and comments

The gold-reserve requirement under the Dominion Notes Act of 1870: how to deceive Parliament

GEORGE RICH / Carleton University

The purpose of this paper is to unearth a curious feature of the monetary legislation passed by the Canadian Parliament in 1870. As is well known, that year represents an important threshold in Canadian monetary history, for it wit- nessed the adoption of the first Canadian Bank Act, as well as a thorough revision of the legislation regulating the issue of government notes, circulating under the name of Dominion notes.

Although the existing literature (see Shortt, 1904a; 1922; Breckenridge, 1895) has examined in great detail the banking and monetary legislation in the early years of confederation, students of Canadian monetary history have uniformly failed to notice that the 1870 revision of the Dominion Notes Act involved, among other changes, the substitution of a highly ambiguous for a clearly worded gold-reserve requirement. The evidence suggests that the government deliberately introduced this ambiguity in order to use the Domin- ion notes as a fiscal expedient designed to alleviate the interest burden of the public debt.

With Confederation, the Dominion government acquired from the provinces the right of issuing notes. In 1868 the legislation regulating the note issue of the former Province of Canada was re-enacted at the federal level. The Domi- nion Notes Act of 1868 stipulated a gold reserve requirement of 20 per cent against outstanding notes of $5 million or less, and 25 per cent against issues in excess of $5 million, up to a limit of $8 million. Moreover, the notes were convertible into gold.'

In the early stages of confederation, the Dominion note system was a politi- cally contentious issue. As a result of budgetary problems caused by a mis- guided railway policy, the Dominion government had inherited from the Prov- ince of Canada a poor credit rating in the London capital market and was forced to pay an average interest rate on its bonds that exceeded by a substan-

Financial support by the Canada Council is gratefully acknowledged. I wish to thank the editorial staff of the JOURNAL and the referees for very helpful suggestions.

1 Statutes of Canada, 31 Vict. Cap. 46. The Province of Canada issued notes for the first time in 1866.

Canadian Journal of Economics/Revue canadienne d'Economique, X, no. 3 August/aouit 1977. Printed in Canada/Imprim6 au Canada.



448 / George Rich

tial margin the yield on British consols.2 To reduce the interest cost of the public debt, the government sought to substitute Dominion notes for the notes issued by the Canadian chartered banks.

However, the government's plans were strongly opposed by wide segments of the Canadian public, which feared that the abolition of bank notes would result in a large-scale shift of resources from the private to the public sector.3 The struggle between the supporters and opponents of government money came to a head in 1869 when the Conservative finance minister, Sir John Rose, submitted to Parliament a proposal which, for all practical purposes, would have entailed a government takeover of the bank-note circulation.4 The proposal was doomed to failure, encountering strong resistance not only from the Liberal opposition, which rejected in principle a system of government money, but also from Conservative members of Parliament. The government realized that the public was not prepared to tolerate anything beyond a compromise solution under which bank and Dominion notes would circulate side by side.

The compromise was negotiated by Sir Francis Hincks who succeeded Rose as finance minister in late 1869. Even though Hincks was a strong believer in government money, he dropped, for tactical reasons, the demand for a government monopoly over the issue of notes.5 Instead, he endeavoured to extract from Parliament concessions designed to widen the government's discretionary powers in managing the Dominion note system. Specifically, the finance minister argued that the government's ability to manipulate the official gold stock should be unfettered by a minimum gold-reserve requirement. He proposed that the Dominion Notes Act specify a ceiling of $9 million, beyond which the note issue should command a reserve of 100 per cent. However, as long as the issue was short of the ceiling, the government should not be expected to main- tain a minimum compulsory reserve. Such a requirement would merely force the government to hold excess reserves. The following statement aptly sum- marizes Hincks's views on the question of a reserve requirement: 'But the Government did not want to be bound down to a cast-iron system, because a necessary result of fixing the amount of specie reserve, which should never be varied, would be to compel them to keep an amount largely in excess, in order to meet exigencies' (Canada, Debates, 1870, 317).

Hincks's views were challenged by the opponents of government money,

2 In 1870 the yields on Canadian government securities, traded in the London market, and 3 per cent British consols amounted to 5.4 and 3.2 per cent respectively (Rich, 1976, Table 5; Homer, 1963, 196).

3 For a full discussion of these points, see Shortt (1904a). The opposition to government money was particularly strong in Ontario where notes represented an important source of funds for the banks.

4 Rose proposed to remodel the Canadian financial institutions after the us National Banking System. Under this scheme the banks would have been required to hold Dominion government securities to the extent of 100 per cent of their note circulation.

5 In principle, Hincks favoured a government bank of issue acting as the sole supplier of notes (Canada, Debates, 1870, 216). Under the compromise he negotiated, the banks were absolved from all obligations to hold government securities. In return, the government acquired a monopoly over the issue of small-denomination notes and compelled the banks to hold at least one-third of their cash reserves in Dominion notes.



Shorter articles and comments / 449

who insisted on a requirement along the lines of the existing Dominion Notes Act. Alexander Mackenzie, the opposition leader, was concerned that the gold stock which the government intended to hold would not suffice to safeguard the convertibility of the notes (Canada, Debates, 1870, 434). Hincks assured his critics that the government would always stand ready to redeem the Domi- nion notes. Even if unexpected redemptions were to deplete temporarily the official gold stock, convertibility would not be jeopardized, because the government could purchase gold abroad at any time.';

Why did Hincks place so much emphasis on discretionary management of the official gold stock? There is little doubt that the government, for fiscal reasons, intended to keep the gold reserve at the lowest possible level. Fearing adverse reaction from the opponents of government money, however, the finance minister did not openly admit that the objective of gold-reserve policy was to lighten the interest burden of the public debt. Instead, he shrewdly stressed the social benefits arising from such a policy. He argued that Canada would be able to gain resources if the banks were encouraged to hold their cash in the form of Dominion notes rather than gold. The Dominion note system 'would economize the use of much gold and the profit of that would go to the public' (Canada, Debates, 1870, 221 ). Needless to say, the public could not derive significant benefits from the Dominion notes if the government was compelled to hold a substantial gold reserve against them. In this event, an issue of Dominion notes would merely shift gold from bank to government vaults.

The evidence indicates that Hincks could not prevail upon Parliament to confer to the government unlimited discretionary powers in managing the official gold reserve. Because of 'the decided opinion expressed by the House,'7 he inserted in the Dominion Notes Act of 1870 a reserve requirement. Despite this concession, the finance minister managed to retain some discretion for manipulating the official gold stock. He relied on an ambiguity in the Act to accomplish this feat. A superficial reading of the Act suggests that it preserved in large measure the reserve requirement in existence under its predecessor. Dominion notes must be covered either by gold or government debentures. A gold reserve of 20 per cent must be held against note issues up to $5 million. For issues between $5 and $9 million, however, the Act mysteriously stipulated a gold reserve of 25 per cent against the notes and the debentures covering the notes.8 This requirement represents a mathematical impossibility. If the requirement had been 25 per cent against debentures, it could only have

6 To meet an unexpected demand for gold, the finance minister could avail himself of a line of credit with the fiscal agents in London. Glyn, Mills and Currie and Baring Brothers acted as the fiscal agents of the Dominion government in London (Canada, Public Archives, Finance Department records, RG 19, Hincks to London agents, 29 Nov. 1869, vol. 4060; London agents to Hincks, 15 Dec. 1869, vol. 1158.

7 Hincks explicitly made this point (Canada, Debates, 1870, 506). 8 Statutes of Canada, 33 Vict. Cap. 10, Sec. 4. Hincks explained the provision as follows:

An increase in the note issue above $5 million 'could not be authorized unless the Receiver-General held gold to the amount of one-fourth, not only of such increase, but also of the debentures already held by him' (Canada, Debates, 1870, 222).



450 / George Rich

amounted to 20 per cent against the notes, since the debentures themselves would have been equivalent to 80 per cent of the notes. Thus it was not clear whether the requirement for issues in excess of $5 million was supposed to be 20 or 25 per cent of the notes.9 To compound the complexity of the requirement, the Act further allowed the ratio to fall temporarily to 15 per cent.

One is hardly astonished to learn that Parliament was thoroughly bewildered by Hincks's financial machinations. Otherwise, it would be impossible to ex- plain why the debate on such a straightforward matter as a reserve requirement took up virtually all the time allotted to the Dominion Notes Act. Several members of the House expressed their unease about the suggested provision and asked the finance minister to clarify the nature of the requirement. How- ever, Hincks's extensive explanation did nothing to dispel the confusion surrounding the suggested requirement. Many members wondered why a normally articulate finance minister appeared incapable of untangling a simple arithme- tic problem. The comment by Alexander Galt, a former finance minister, offers a case in point: 'If the Finance Minister would only put into plain English the amount of specie security he will hold for every dollar issued in notes, then the House would be prepared to say whether the amount of security was large enough; and he could not see why the Government should show so much reluctance to consent to do this' (Canada, Debates, 1870, 660).10

In order to improve the wording of the Act, the Liberal opposition moved two amendments which would have specified unambiguously a reserve requirement in terms of the note issue. Hincks strongly opposed both amendments and mustered sufficient support to get them defeated. He claimed that his scheme would be 'safer' than the amendments proposed by the opposition.,' In an effort to justify his claim, he tabled in Parliament a set of statistical data designed to prove that under the government proposal the compulsory gold reserve would be larger than under the opposition amendments. A close scrutiny of the data, however, reveals a remarkable piece of fabrication.

The data concocted by the finance minister were intended to disguise the reason why the government opted for an ambiguous rather than precise specification of the reserve requirement. The statistical information submitted to Parliament is contained in two cryptic returns covering the period from 1 October 1869 to 1 February 1870. Employing data on the stock of Dominion notes outstanding during this period, the returns purport to compare the

9 It is not surprising that the existing literature offers a menu of alternatives as to the size of the required ratio: Shortt (1904b, 280): 25 per cent of notes; Breckenridge (1895, 252): 20 per cent of notes and 25 per cent of debentures; Beckhart (1929, 293): 25 per cent of notes; Easterbrook and Aitken (1956, 463): 20 per cent of notes.

10 Galt was responsible for the legislation authorizing the Province of Canada to issue notes (Shortt, 1904a, 18).

11 The first amendment, moved by Sir Richard Cartwright, stipulated a uniform requirement of 25 per cent against the note issue up to $9 million and allowed the requirement to drop temporarily to 15 per cent. The second amendment, moved by Alexander Mackenzie, incorporated the requirement under the Act of 1868 (Canada, Debates, 1870, 658-9, 664-5, 667-9).



Shorter articles and comments 1451

TABLE 1

Minimum required gold reserve and Dominion notes ($000)

Minimum required gold reserve

Date of return Dominion Revision proposed (1st day of notes Act of 1868 by government month) (1) (2) (3)

Oct. 1869 5,050 1,012 1,050 Nov. 1869 5,821 1,205 1,821 Dec. 1869 5,949 1,237 1,949 Jan. 1870 5,834 1,208 1,834 Feb. 1870 5,405 1,101 1,405

SOURCE: see n. 12.

minimum required gold reserve under the Act of 1868 with the hypothetical counterpart under the scheme proposed by the government.12 Since the requirements under the opposition amendments were equivalent or similar to the corresponding provision in the Act of 1868, the returns effectively con- trasted the compulsory reserve under the opposition andi government schemes. An abridged version of the returns is presented in Table 1. Column 1 displays the outstanding stock of Dominion notes. Columns 2 and 3 exhibit, respectively, the required reserve under the Act of 186813 and the government scheme, as calculated in the two returns.14

Even though the returns did not explicitly draw any conclusions from the data, the purpose of the statistical exercise was obvious. Taking a cursory glance at columns 2 and 3, the unsuspecting reader could not help concluding that the proposed revision of the Act would compel the government to augment the official gold reserve. The impression conveyed by the returns, however, was thoroughly misleading. The data shown in column 3 do not make sense unless we assume that the government, under the proposed revision, intended to hold a reserve of 20 per cent against note issues up to $5 million and 100 per cent against the remainder. While, admittedly, the Act of 1870 was worded in ambiguous language, it clearly did not by any stretch of the imagination

12 Canada, Sessional Papers, Session 1870, No. 16. Our discussion refers to the last two returns published in the Sessional Paper. The captions on the returns correspond to the description given by Hincks when he tabled the data in the House. Note that Hincks means the Dominion Notes Act of 1868 when he refers to 'the scheme of the member for Sherbrooke.' Galt represented the riding of Sherbrooke (CaInada, Debates, 1870, 659).

13 For the requirement under the Act of 1868, see the third paragraph of this note. 14 The government published two similar returns in the Canada Gazette (19 March 1870,

737) a few days before the House debated the opposition amendments. The returns in the Sessional Paper and the Canada Gazette are identical, save for the required reserve under the Act of 1868. The latter source assumes the requirement to amount to 20 per cent of the note issue, a figure which is incorrect! This error could only have compounded the confusion surrounding the proposed revision of the Dominion Notes Act.



452 / George Rich

stipulate that. Thus the returns grossly overstated the reserve the government was obliged to hold under the Act.

The data on the gold reserve actually held by the government after the legislation of 1870 had come into force further testify to the misleading nature of the information submitted to Parliament. According to the periodic returns on the official gold stock and Dominion notes, the government, from June 1870 onwards, assumed the reserve requirement to amount to a uniform 20 per cent up to the ceiling of $9 million.'5 Consequently, the 1870 revision of the Dominion Notes Act was accompanied by a reduction in the required gold reserve even though the returns tabled in Parliament made exactly the opposite claim."' The returns were no doubt designed to erect a smoke-screen around a gold-reserve policy that was not palatable to a majority of parliamentarians.'7

In retrospect, it cannot be argued that the deception was of great practical significance for the conduct of Canadian debt-management policy. In 1871 the stock of Dominion notes reached the ceiling of $9 million. At this point the covert cut in the requirement had released $200,000 worth of gold reserves, a minuscule sum compared with the aggregate debt of the Dominion government."8 The deception would have had a more significant effect on the interest cost of the public debt if the ambiguous requirement had eventually been extended to note issues in excess of $9 million. This was precisely the course of action which Hincks intended to follow, but Parliament upset his calcula- tions. In the spring of 1872 the finance minister asked Parliament to lift the ceiling. While Parliament, in principle, concurred in the request of the government, it decided, contrary to the wishes of the finance minister, to augment to 35 per cent the reserve requirement on issues in excess of $9 million (Canada, Debates, 1872, 90-4, 677-88, 713-14).19 By 1880 the lingering animosities

15 The Dominion Notes Act received royal assent on 12 May 1870. The periodic returns after this date show explicitly the required portion of the aggregate reserve. When the note issue reached the ceiling of $9 million, the required reserve was reported to amount to $1.8 million. For the data, see Canada Gazette, various issues.

16 Even future generations of Finance Ministers did not always understand the Act of 1870. When the Dominion Notes Act was revised in 1880, Finance Minister Tilley argued that Dominion note issues up to $9 million required a gold reserve of 25 per cent! He was corrected by Cartwright, who pointed out that the government, in fact, had held only 20 per cent (Canada, Debates, 1880, 1724-6).

17 On the issue of the Dominion notes, government and opposition could not automatically count on the support of their respective caucuses. For example, the result of the voting on the first amendment was 59-91: eleven Conservatives, representing chiefly Ontario ridings, voted for the amendment; eighteen Liberals, mainly from the Maritimes, voted against it. Calculated from Canada, Debates (1870, 664-5), and Johnson (1968).

18 On 30 June 1872 the aggregate debt stood at an estimated value of $91.6 million. This figure includes funded debt, Dominion and provincial notes, deposits in government savings banks, and banking liabilities, net of sinking funds, consolidated fund investments and banking claims. For data on banking liabilities and claims, see Rich (1976, Table 2). Data for the other components of the debt were obtained from Canada, Public Accounts for 1915, Sessional Papers, 1916, No. 2, 28, 30, 46.

19 In 1875 the Liberal government raised further the requirement on issues in excess of $9 million to 50 per cent (Canada, Debates, 1875, 305-6).



Shorter articles and comments /453

towards Dominion notes had subsided to such an extent that the Conservative government was able to secure parliamentary approval for a reduction in the requirement to a uniform 15 per cent against issues up to $20 million (Canada, Debates, 1880, 1724). Thus the government in due course accomplished through overt means what it had sought covertly a decade earlier.

REFERENC ES

Beckhart, B.H. (1929) The Banking System of Canada (New York: Henry Holt and Company)

Breckenridge, R.M. (1895) The Canadian Banking System 1817-1890 (New York: Macmillan; London: Swan Sonnenschein)

Canada, Parliamentary Debates, Session, 1870, 1872 Canada, Debates of the House of Commons, Session, 1875, 1880 Curtis, C.A. (1931) 'Statistics of banking.' In Statistical Contributions to

Canadian Economic History l (Toronto: Macmillan) Easterbrook, W.T. and H.G.J. Aitken (1956) Canadian Economic History

(Toronto: Macmillan) Homer, S. (1963) A History of Interest Rates (New Brunswick, NJ: Rutgers

University Press). Johnson, J.K. (1968) The Canadian Dictionary of Parliament 1867-1967 (Ottawa:

Queen's Printer) Rich, G. (1976) 'The federal budget as an automatic stabilizer: the evidence for

the period 1867-1913.' Carleton Economic Paper 76-07 Shortt, A. (1904a) 'The history of Canadian currency, banking and exchange:

Government versus bank circulation.' Journal of the Canadian Bankers' Association 12, 14-35

Shortt, A. (1904b) 'The history of Canadian currency, banking and exchange: the first General Bank Act for the Dominion,' Journal of the Canadian Bankers' Association 12, 265-82

Shortt, A. (1922) 'The legislative development of the Canadian banking system.' In V. Ross, ed., A History of the Canadian Bank of Commerce 2 (Toronto: Oxford University Press) chap. 7

Logit estimates of labour force participation based on census cross-tabulations

MORLEY GUNDERSON / University of Toronto

I N T R O D U C T I O N

The purpose of this paper is to analyse the determinants of labour force participation of married women in Canada as of 1971, and to illustrate a

This study is based on data from an earlier study (Gunderson, 1976) directed by Gail Cook and financed by Statistics Canada and the C.D. Howe Research Institute. Without implicating them for any of the conclusions, I would like to thank Greg Jump, Noah Meltz, Dale Poirier, Sam Rea, and the editors and referees for comments on an earlier draft of this paper. The financial support of the Canada Council is gratefully acknowledged.

Canadian Journal of Economics/Revue canadienne d'Economique, X, no. 3 August/aout 1977. Printed in Canada/Imprim6 au Canada.



the gold-reserve requirement under the dominion notes act of 1870: how to deceive parliament

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