H. Clare Pentland – The Role Of Capital In Canadian Economic Development Before 1875

This discussion of capital grows out of investigation of the history of labour in Canada. Four major systems of organizing labour for the production of goods may be distinguished in the course of Canadian history. Each of these involved its peculiar methods of production, of organizing the labour market, and its characteristic attitudes of employers and employees. The change from one system to another is what is meant by economic development in this paper. The questions inevitably arise, why a period features one type of labour organization rather than another and why one system is displaced by another. These questions have led to concern with capital accumulation, importation, and investment, for it would appear that the availability and uses of capital are crucial to the answers. The role of capital is important, no doubt, to other fields of study as well. Many useful things about capital have been said by Canadian scholars, but no broad and coherent review of the whole subject appears to exist. The present is an exploratory paper, covering approximately two of the stages of development remarked above, and the change from one to the other.

About the middle of the nineteenth century, the Province of Canada was transformed from a raw, staple-producing area to a rounded, integrated economy that might be called metropolitan. Signs of the change were visible in 1830, unmistakable in 1840. By 1850 change had gone too far to be turned back, and 1860 and 1870 can denote only the filling out of the home-market exchange economy already implicit. Purely extractive industry was overlaid with a secondary development involving an elaborate transportation system, a capitalistic agriculture, an extensive list of manufactures that appear to have been efficient in their day, and a creditable financial structure. Probably the most telling evidence of the transformation was the fact that this colony, so recently at the mercy of the fluctuations of imperial markets for one or two commodities, could undertake successfully to swallow an empire of its own in the years after 1867.

This development had been brought about by the application of capital and labour, mostly imported, to the preexisting wealth of natural resources. It was capital that set the pace. When capital was found for development, a commensurate labour supply was not far behind, if it was not already there. Complaints of labour shortage are frequent in Canadian history, and this seems to imply that it was labour supply that limited expansion. It is true that there was a general labour shortage during the great boom of 1854-5, and perhaps on some other occasions, but when the context is examined, the labour shortage thesis loses most of its force. Complaints usually dissolve into claims that going wage rates were too high, or going labour quality too low. Taking supply to mean supply at going wage-rates, the truth is that Canadian employers commanded throughout the nineteenth century a virtually inexhaustible labour reserve. Unused surpluses on the farms of Lower Canada occasioned comment from the eighteenth to the twentieth centuries. More modest surpluses soon existed in Upper Canada; and American supplies also were available, for a price. The great reserve, however, was the immigrant stream. Frequently it exceeded Canadian requirements, and flowed on to the United States. Whenever jobs were plentiful in Canadawhenever, that is, capital was found for large construction projectsimmigration swelled to an appropriate volume.1 As one Canadian official, the Hon. R. B. Sullivan, put it, in reply to a proposal to supply British labourers for road-making, “The delay in making these roads is not caused by a want of an adequate supply of labourers, but by a want of money.”2 Kinds and quantities of skilled labour not at once available could be got from the United States for a little money, or from the United Kingdom for a little trouble. The Great Western Railroad, like the Grand Trunk, brought its skilled labour from Great Britain en masse; but it first hired American railroaders to run its trains and to instruct the immigrants in North American methods.3 The Americans were readily available; the British were cheap. It was periodic difficulty in borrowing or accumulating capital that limited development, rather than labour supply.

The capital with which this paper is concerned is real capital, spare resources, available either to carry on production over time, or for investment in fixed equipment by means of which productivity may be enhanced. The traditional names of Circulating and Fixed Capital will be used for these two categories. Any device that mobilized existing surpluses, or freed resources from consumption in Canada and made them available for these purposes, was a device for accumulating capital. Loans from abroad served this purpose if they permitted investment in Canada. Not all of the processes with which we are concerned yield to a money measure, however. Perhaps the most costly investment required of a society, the investment in the skill of its labour force, is easily overlooked just because it is so diffused, and scarcely subject to quantitative measurement. Canada escaped much of this cost because foreign skilled labour, ready-made, was always at hand. When it is remembered that a working lifetime may hardly suffice to introduce new skills,4 the enormity of this advantage will be apparent.


The first point that commands attention, because it is in sharp contrast with later experience, is that the provision of capital in Canada does not appear to have been a serious problem until about 1815. This is the more striking when it is recalled that, though the traders who descended on Montreal after the Conquest brought capital with them, some of the most successful, as well as the disappointed, early withdrew with much of their substance. So far as this movement of traders with their capital is concerned, capital exports probably exceeded capital imports. To quote the Hon. R. B. Sullivan again, “The profits of the great branches of Canadian trade, such as the fur trade, the timber trade, the shipping trade, and even the import trade, have been concentrated or become fixed capital in the Mother-country. The merchants who have accumulated fortunes here were partners in English or Scotch houses, who have generally returned home to enjoy the fruits of their labour.”5 Despite this, Montreal merchants give evidence about the end of the eighteenth century of surpluses of wealth that embarrassed them. The merchants had been hard pressed at times, particularly to provide for the expansion of the fur trade to the North-West;6 and Canada owed to these men the important system of long credit on England that was fundamental to trans-Atlantic trade for decades. But the traders seem to have made a lot of money in a short time, more than enough for the operations of the fur trade, and sought to diversify their holdings. The wholesale purchase of seigneuries noted by Lord Durham had already occurred before 1804.7 The engrossing of the public lands about the end of the century must have entailed some expense.8 The most important shift was the natural one into importing, with credit extension into the interior. This involved exporting and river transport; and it is significant that these men proposed to provide substantial sums to build the first Lachine Canal in 1819.9 Merchants acquired the St. Maurice Forges in 1775 (their failure to do so earlier suggests that their wealth was new) and constructed the wholly new Batiscan Forges in 1794. A paper mill was built in 1803, and American immigrants with capital were at this time supplying Upper Canada with grist and saw mills. Why did this happy surfeit not accomplish more? Why did it not continue?

For one thing, the sharp curtailment of government spending after the War of 1812-14 had a blighting effect. Money poured into Canada on military account was almost as important as the fur trade in the balance of payments,10 it was fundamental to the early prosperity of Upper Canada,11 to the growth of import trade, and it may be suspected that it provided even more profits than the fur trade to the commercial community. The circulation of army bills, which were fully redeemed, secured the acceptance of a paper currency in Canada. But war prosperity had encouraged indebtedness at every hand, and the end of the war left a chain of frozen debt from Upper Canada to London. War had greatly dislocated production, and there is evidence of a disinclination on the part of the debtors to take it up again.12 Again, the war reversed the flow of American immigrants who had not only enterprise, but capital; and government policy was to discourage any resumption of the original flow. The Montreal fur trade was in its last stages. The timber trade had just started, and by comparison, it was always a poor thing. Yet the basic cause of the doldrums, the famine of capital, that plagued Canada after 1815 goes much deeper. The fact is that a structural change was beginning, a change from a sea-coast economy of surface exploitation to an integrated continental economy; and the capital requirements of the new economy were very different from the old. Agricultural settlement, facilitated by the timber trade, was the agency of the change.

So long as economic life in Canada consisted in the looting of surface resources (furs, seals, timber) capital requirements were limited to the provision of short-term mercantile capital, circulating capital. It is true that staple production demands a heavy and perilous commitment of resources in one direction; but it did not, at this period, involve more than the barest provision of fixed capital investment. Long-term commitments, horror of the mercantile system, could be avoided. While turnover was quick and profits promising, circulating capital was likely to appear readily. The mercantile community was well equipped for its task of gathering up and exchanging surface products. But the nature of this system was not such that surplus funds could turn easily to meet long-term investment needs in Canada.13 Nor, indeed, is this to be laid solely to mercantile prejudice. Before 1800, no European country had really learned to exploit colonies on any other than a looting or tribute basis. Great Britain was the most advanced country of the age, but it is truer to say that she was becoming a great manufacturing country, than to say she had become one. Nor should British import requirements be exaggerated. British officials long were unable to think of any import requirement that Canada might supply except hemp. Their interest in Canada’s potential food surpluses was notoriously sporadic. This was the era of the local market. Capitalists could see that there was a surplus of labour on the St. Lawrence, but they could see also that the local market was very limited. There was not even much promise of a food surplus in Canada; and food surplus is very nearly, if not quite, essential for an area proposing to enter on industrial development. Finally, the weight of Empire was all against manufactures. If it is recalled that at this very period larger and wealthier American cities, with richer hinterlands, were experiencing indifferent success in converting themselves into manufacturing centres, in spite of intense public pressure,14 the hesitation of Canadian merchants to risk their money out of trade will not be surprising.


The extension of agricultural settlement in Canada implied real, and especially potential, surpluses of food of which it was increasingly difficult to dispose. At the same time, capital investment in improved farm lands opened a sink that was not to be filled for a century. This was the primary source of that capital shortage that was the constant complaint of the next decades. Indeed, to anticipate briefly, this continental economy was in serious danger of complete stalemate in the thirties; a fate from which it was rescued by the injection of large sums of imported capital. These eased the problem of long-term capital for agriculture, and allowed an increasing margin for other long-term investments.

The economy of the twenties and thirties was supported by the timber trade, with habitant agriculture vegetating in Lower Canada, and capitalistic agriculture rising in Upper Canada. Whatever the case with the English timber buyers at Quebec, the timber trade was a capital-poor industry in the interior. Throughout its career it was rampant with capital-saving devices: employees without families, long deferment of wages, truck pay, and other ingenious credit mechanisms. At best it produced moderate fortunes and numerous losses. Meanwhile, the agriculture of Lower Canada had ceased to produce surpluses, fundamental to capital formation. Here population pressure brought a cry for more land under seigneurial tenure. Seigneurial tenure was a system of land holding that entailed almost no capital outlay on the part of the habitant; but habitant agriculture produced no surpluses either. This was, of course, why the habitant was so insistent on seigneurial tenure, and precisely the reason that officials opposed its extension.

English-speaking farmers shared in the accumulative instinct conquering Europe; indeed, this instinct was greatly sharpened in North America.15 That the farmer did not accumulate more rapidly was owing, first, to the discouragement resulting from his stalemated position. The pioneer was slow to turn potential surpluses into actual surpluses until there was someone to buy them. But this, in turn, discouraged the growth of home and export markets.16 It is in cutting such knots as this, in part, that construction and war booms have such momentous effects. With a solution to the market problem in the forties and fifties, the farmer became fully capitalistic and acquisitive. Increasing emphasis fell on improvement and mechanization, hard work and the dignity of labour, thrift and temperance. That the farmer did not show more of his accumulation in cashthe aspect of the case that appears to have impressed British observersresulted simply from the tremendous investment demands of the frontier.17 “In Canada the increase of wealth has been very rapid . . . but . . . the Savings of an Agricultural population have been expended in fixed property and Stock instead of in those commercial enterprizes in which the Savings of other classes are more generally invested.”18 The investment in cleared land, estimated on the basis of $10 per acre, was put at £1,800,000 from 1827 to 1837; and at £2,670,000 from 1837 to 1847.19 An equalitarian distribution of wealth also militated against speedy accumulation. Both American and Canadian history demonstrate that in a frontier society where each has something, stratification of wealth makes slow headway. There was no mechanism to curtail the consumption of the poor that it might reappear as the surplus of the rich. English planners thought to overcome this difficulty by limiting access to land and independence, but the open frontier of the United States defeated these proposals.

Investment, then, was large; but it was in the form of hard work and self-maintenance translated into improved farm land. Few acquired fortunes, and those who did frequently left the country. The rarity of rich men is illustrated by William Hamilton Merritt’s difficulty in financing the first Welland Canal. Despite the low estimates of the cost (the first estimate was $55,000) Merritt in 1824 could raise only £1,500 in Upper Canada, £7,000 in Montreal, and £4,000 in Quebec. The last came largely from government officials.20 Similarly, the many Canadian railroads projected in the 1830’s were rarely started, let alone finished.

Into this society of poor men came suddenly vast sums for the construction of public works. Two periods of canal construction, followed by an era of railroad development with two peaks, brought prosperity, though there was economic prostration between times. It is familiar ground that the capital for the trunk canal and railway lines had to be found in Great Britain and that they failed either to pay for themselves or to divert American trade to the St. Lawrence. While these were the major considerations to Canadian merchants and British capitalists, it is the unintended effects of transportation development that concern us here. The canals and railway systems, designed to intensify staple production and inter-continental division of labour, had precisely opposite effects in the end. They represented, first, a commitment of fixed capital, overhead costs, and permanent staffs, that are the essence of metropolitan economies. By integrating the Canadian market, they opened the way for Canadian manufacturers to conquer it. Most important, the inflow of foreign capital into Canada made it possible at the second and third remove for Canadians to amass funds which could be invested in new enterprises. The water-power sites created by the canals, the metal industries necessarily introduced by the railroads, and the mass of labour with urban preferences drawn by the construction work, all had the same result. Ironically, the strain put upon provincial finances by the failure of canals and railroads to pay invited that incidental protection that hastened the broadening of Canadian production.

To get at the rate at which expenditure on public works permitted private accumulation in Canada, it is useful to know the size and timing of capital imports. The data are too skimpy and undependable to permit precision in such calculations, but it is thought that they permit estimates which show the order of capital imports with some accuracy. The most serious deficiency of such calculations is the difficulty of making even a good guess of the sums brought in by immigrants. This factor, along with immigrant remittances and most other invisible items, is ignored here. On the other hand, the conditions of the period simplify the problem in some respects. In the nineteenth century, techniques scarcely existed for private absentee lending. A capitalist proposing to invest privately in Canada was almost compelled to follow his capital, a circumstance to which Canada owes the presence of many wealthy and enterprising families.21 The significance of this fact in the present case is that private Canadian firms could not draw on the London money market, excepting only quasi-public bodies such as banks and railroads. Indeed, conditions were such that it was hard even for the government of a small and little known colony to make any impression on the London money market. The net result of these conditions is that government borrowing plus railroad borrowing can be taken as very nearly synonymous with total borrowing before 1875.

The first period of canal construction lasted from 1827 to 1837. The Rideau Canal took £800,000, entirely provided by the British taxpayers, and the St. Lawrence canals left Upper Canada with a sterling debt of £870,000. The currency debts of Upper and Lower Canada, also for improvements, and probably also largely held in Great Britain, amounted to £328,000.22 During this period the Canada Company began operations, and Merritt obtained some New York money for the Welland Canal. Still, it seems reasonable to set the total capital imports for the period at just about two million pounds.

In the second canal period, from 1841 to 1849, the original impetus was provided by the guaranteed loan of 1841. The increase in the Canadian public debt from the Union until July, 1850, practically all from the London market, was just over three million pounds.23 Other capital imports were so inconsequential that it seems safe to ignore them, and take three millions as the figure for the period. That the impact of the funds was sharper than had been the case in the earlier period, despite rapid population increase, is to be explained by the concentration of construction over a short time. Two million had been spent by the end of 1846, mostly in the preceding three years.

From 1850 on, statistics and estimates become somewhat more plentiful; and while these do not agree in detail, they confirm the order of capital imports fairly well. During the first railway era, 1850-1859, capital imports on public and private (railroad) account, nearly all from Great Britain, were approximately $100 million.24 The leap from $10 million and $15 million in the canal periods to $100 million in this one is sufficient explanation, though it is not the whole explanation, of the roaring boom of the fifties.25

Estimating for the period after 1860 is fraught with increasing difficulty. Private borrowing was becoming more frequent and more devious. Moreover, the unit changed from the Province of Canada before 1867 to the Dominion of Canada after 1867. Some guide to capital imports by the Province between 1861 and 1867 is provided by the deficit on commodity trade. This amounted to $46 million for these years, a figure in keeping with the equivocal nature of economic activity. Confederation permitted a new guaranteed loan to build the Intercolonial Railroad, and the new Dominion felt something of the old surge. The Dominion’s capital imports from 1867 to 1875, again based on commodity trade figures, may be put roughly at $200 million.26 Though spending was concentrated in the early seventies, the boom failed to reach the proportions of the one in the fifties.27 That this was so, despite the larger sums involved, is to be accounted for not only by diffusion of the funds over a wider area, but by maturing of the economy. Canada could now take in her stride sums that would have been exhilarating earlier. The capital injections that spurred development may be put roundly, then, at $10 million from 1827 to 1837, $15 million in the forties, $100 million in the fifties, and $200 million from 1867 to 1875. With each dose, the effect lessened proportionally as the economy grew and broadened. The peak effect was experienced in the middle fifties.

So much for the amounts. For the most part, capital went into the Canadian transportation system; but direct importation of capital equipment was, of course, a minor part of the total. Most of the funds passed to workmen and contractors, and then to other Canadians, before it was paid for imported commodities. Some of the hands through which the money passed released much less than they received. The next question is, how capital imports from Britain produced rich men in Canada.

A preliminary guide to the rate of private accumulation is provided by changing modes of financing. Canals were built by governments; railroads by private corporations with the aid of government grants and guarantees. This pattern should not be thought in any way unusual. Arrangements were almost identical in the United States and elsewhere;28 only in Great Britain could private capital tackle giants like canals and railroads. Hartz, in his study of Pennsylvania (much wealthier than Canada), has indicated the relation of private financing to canal and railway construction. In the canal era, wealthy men were not wealthy enough to build canals themselves. Moreover, they doubted whether they would pay. Hence, they influenced the state to build them. But canal spending allowed rich men to become much richer. In the first railroad age, these men still could not finance whole railroads. But they could go a good part of the way; and since they expected railroads to be enormously profitable, they prevailed upon the state to create and assist private railroad corporations. These facilitated still more rapid stratification of wealth, and a new scale of business organization.29 If a time differential of ten or fifteen years is allowed, this is a pretty accurate description of Canadian events.

Private accumulation was facilitated because those best able to take advantage of the incoming funds were neither farmers nor business men confined to the mercantile groups. It is true that importers were bound to do well, and the wholesale business remained the most lucrative in Canada through most of this period. It is true, also, that merchants were putting down roots along with the economy, and were less disposed than formerly to retire to Great Britain. Perhaps this is no more than to say that they were beginning to put their surplus funds in permanent investments which could not be turned easily into liquid forms. Merchants played the leading part in banking; they provided much of the financing for the local railroads of the sixties; and they dabbled even in manufacturing. Bankers, as such, profited by the booms, but appear to have found it hard to hold their gains in the intervening depressions. Government officials fared well from high salaries before 1850, and perhaps better from bribes afterwards. Most of the mining concessions granted in the forties went to officials; evidence not only of abuses of position, but of substantial savings, for mining ventures were expensive. The group of greatest interest, however, are the contractors, because their experience is an illustration of the progress of accumulation, and because they were usually ready to put their gains into new enterprises.

Contractors do not appear to have made much money in Canada before 1850. There are many references in the Provincial Secretary’s correspondence to bankrupt contractors, particularly from 1837 when all contracts were suspended. Hamilton Killaly, chairman of the Board of Works through the heyday of canal building in the forties, listed among his difficulties that of keeping contractors to their engagements when they had taken work too cheaply, which he said was “very often the case.”30 Such a state of affairs might be expected, because contractors were just learning their business, and because bidding for contracts was on a cut-throat basis. The same extreme competition and ruinous bidding appears to have been general in the United States at this time.31 Hence, contractors accumulated little because they made little. This conclusion must be modified to allow for one practice of the times. Frequently contractors were invited or required to take a substantial part of their payment in stock. This device of capital-poor economies went back to New England, where in some cases entire factories were built in this way, with each participant, down to the plainest labourer, taking his pay in stock.32 The Welland Canal, the Great Western, the St. Lawrence and Atlantic, all made use of this expedient. While this forced accumulation upon the contractor, it sometimes led to his bankruptcy, whereupon the forced saving was passed along to artisans and labourers.33

Railroad construction after 1850 transformed the nature of contracting. Both British and American experience had demonstrated that the real money in railroads was to be made, not from owning and operating them, but from building them, provided the matter was handled properly.34 This lesson was soon mastered in Canada. The larger resources required of railroad contractors facilitated collusive and exorbitant bids, in place of the old competitive system. Usually the system required that the contractor and his friends collect sufficient funds to take control of a projected railway, though it was customary to dispose of the stock when the contracts were safe. One master of this technique was the American contractor, Samuel Zimmerman, manipulator of the Great Western and other railroads, and reputed political boss of Canada.35 Much more solid were the fortunes accumulated by Casimir Gzowski and his associates out of the Grand Trunk. The fruits of their contracts, besides supporting the numerous activities of the Galts, permitted Gzowski and D. L. Macpherson to establish the extensive Toronto Rolling Mills, and Macpherson to head a syndicate that proposed to construct Canada’s transcontinental railroad.36 Contractors and others newly rich made an imposing combination. Masters says appropriately of Toronto about 1860 that “the most striking [development] was the increasing prominence and activity of the rising capitalist class.”37 The observation would seem as true of other cities as of Toronto.

As capital was accumulated, it showed itself increasingly in fixed investments, especially in manufacturing. The marked shift to manufacturing in the 1840’s is not significant only for its promise of permanence and depth of production. It provided also a way to neutralize climatic disadvantages that had commonly limited the productive period to a few months of the year. Moreover, it marked a narrowing of the extreme risks associated with investment in new countries, countries which are not, as Professor Innis remarks, “in a position to ask whether capital investments are sound in the long run.”38 It should be kept in mind that new manufacturing enterprises are a guide to the accumulations of local capitalists. Neither the prevailing investment techniques nor the scale of operations favoured distant investment in tanneries, machine shops, or even cotton factories. Lord Elgin declared that the flour mills and grain elevators built to take advantage of the favourable Corn Law of 1843 had “fixed all the disposable capital of the Province.”39 In fact, however, there was also a blossoming of lake shipping, tanneries and shoe-making establishments, iron and wood working shops. By 1846, men were ready to sink funds into the Sherbrooke and Thorold cotton factories. In 1846, also, Canada’s first mining boom of a modern type got under way, based on the copper and other minerals alleged to lie around Lakes Huron and Superior. By 1848, twenty-two mining locations had been taken up, and the largestBruce Minesemployed 163 men.40 The limits to the resources of Canadian capitalists must also be noted. While it was possible to start the Sherbrooke cotton factory, it was not possible to pay up the capital stock at a rate sufficient to keep the mill out of difficulty.41 Most telling is the record of railroad development. It had become possible in the 1840’s to pay for surveys but not yet to build railroads. Only the St. Lawrence and Atlantic could make a start, and then only after great exertion by the wealthiest and best-connected of Canadians.42

Much of the hopeful investment of the forties soon was turned to misinvestment by unexpected blows. The end of the colonial system left a pall of gloom and bankruptcy. Shortly after, the new railways doomed many establishments located with reference to the old waterways. It was reported that ships visiting Dundas had declined from 103 in 1854, just before the railroad opened, to 27 in 1858, and that the town was dying.43 But there were gains also from these developments. The dismissal of Canada from the colonial system greatly intensified public support for the promotion of a broader economy, by means of manufactures and tariffs.44 What was lost by towns on waterways was more than made up by “the sudden and unparalleled increase in population and wealth of the towns through or near which [the Great Western Railway] passes.”45 The railroads themselves provided important nuclei of urban permanence in their shops. The Grand Trunk shops at Montreal employed about 3,000 men, and the Great Western shops at Hamilton from 500 to 600. These shops both built and repaired equipment, and the Hamilton shops are credited with the construction of the first North American sleeping and dining cars. In general, the railroads provided a basis for a marked expansion of iron and machine industries.

The heavy import of capital in the fifties permitted accumulations for wider purposes than these, and other factors were favourable. To the nineteenth-century mind, a plentiful supply of cheap wage-labour was an essential condition for industrialization. The city-loving Irish Catholic immigrants who had come first to work on construction projects provided such a labour force. Skilled workmen also came to Canada in larger numbers than formerly. This growth of city population, and the incorporation of rural areas into exchange economy by the railroads, provided something of a mass market at home. Accordingly, the industrialization of the fifties and sixties showed a concentration on consumer goods. Before the end of the fifties, Hamilton, besides its locomotives and railroad cars and foundry products, was turning out ready-made clothing, tobacco products, and sewing machines.46 The expansion was geared to investment in labour-saving machinery, involving growth of the cities at the expense of village handicraft. The brash Report of the [Toronto] Board of Trade with a Review of the Commerce of Toronto for 186147 put the matter as follows:

THE CLOTHING INDUSTRY. The year has been a prosperous one for this branch of [Toronto] trade, which is rapidly increasing in importance. The cheap labour which in a large city like Toronto can always be commanded, and the use of the best description of sewing machines, enables manufacturers successfully to compete with country establishments, while the possession of ample means enables them to buy cloth in the English market on the very best possible terms. …

[And of the Boot and Shoe Industry] now grown to be a very important element in the trade of the city. . . . The country is gradually absorbing more of the city manufactured work. The large shoe shop in each village, where from five to ten men were wont to be employed, and where boots were made for the surrounding country, is being replaced by the well stocked store.

A similar story is told for candles and soap, whose Toronto producers have “all the latest labour saving appliances.” It is hardly necessary to remark that these developments were facilitated by the movement for protective tariffs, which in their turn imply the availability of funds for investment in manufacturing. John A. Macdonald reported in 1861 that, “The success of our Policy [protection] . . . is already shown by the numerous manufactories of every description, which have sprung up in both sections of the Province… We hear of hundreds of industrious mechanics and artisans combining together to establish woollen and cotton mills, &c.”48 However accurate the declaration of Isaac Buchanan that the 1858 “Association for the Protection of Canadian Industry” was a meeting, not of manufacturers, but of those anxious to bring manufacturers into existence,49 there can be no question that the similar meeting in 1866 was attended by very real manufacturers, including those of wool and knit goods, cottons, linens, boots and shoes, furniture, tobacco, paints and oils, glass, sewing machines, and iron products.50

Meanwhile, cities invested, providing themselves with gas and waterworks. Urban construction became comparable to farm improvement in its search for funds, and took most of the smaller urban savings, in which even manual labourers shared by the fifties. Favourable cash markets for farm produce in the mid-fifties had unlocked at last the laborious investment in improved farms; but farmers plunged at once into a new long cycle of investment. Mechanization of agriculture and the shift to livestock were responsible for this, and the farmers’ thirst for capital was as acute as ever. Only after 1875, when supplies of British capital became available for agricultutre at the same time that demand slackened, is there evidence in falling interest rates that the more urgent demands had been caught up.51 The power of local capitalists was demonstrated in their capacity to sponsor many small railroads. Nothing, however, evidences the new level of capital accumulation in the fifties, and after, as well as the tendency that arose to misdirect investment. In new countries, much mis-investment is unavoidable from the uncertainties that surround development; but avoidable mis-investment risked deliberately and unnecessarily is suited to richer economies than these. One such risk arises out of the excessive duplication of manufacturing facilities. The classical resolution of this problem, that the strong will survive, is not well adapted to new countries still required to eke out their capital. Yet by 1860 at least one industry, leather manufacture, was grossly overexpanded in relation to the home market.52 It was railroads, however, that raised this problem most urgently. Here the units of investment were far too large to permit indiscriminate waste, if this could be avoided. Yet in the fifties rival railroad capitalists sought continually to destroy each other by means of duplicating lines. In this, they were all too successful. The fact demonstrates how much more plentiful was capital than a decade before, when the problem was to find capital for one railroad, not to prevent its being squandered on two.

By 1875, the advancing pace of accumulation and investment had produced a broad economy with several new strings to its bow. Wholesale merchants who had dominated Canadian affairs were slipping into the background before the advance of industrialists. Railroads were shifting their allegiance to the latter group. A significant new interest had appeared in the organized trade-union movement. The home market, which had scarcely existed at the beginning of the century, was now the vital market. Farm and factory each steadily increased its capacity to produce surpluses, and to consume the surpluses of the other. The overhead costs of a large fixed investment guaranteed that this market would not be surrendered lightly. The pressure instead was for a larger market over which to spread the overhead costs. The continuance of capital accumulation, facilitated by stratification of wealth, worked in the same direction.


Commercial banking53 seems usually to be thought of as well-nigh indispensable to the accumulation and investment of capital. There appears to be a belief, also, that current canons of banking have always been in effect, and writers of banking history are inclined to be apologetic or denunciatory when they encounter early deviations from these norms. It may be useful, therefore, to conclude this paper with some observations on the role of banking in nineteenth-century Canadian development. Banking undoubtedly facilitated the expansion of exchange economy, regularized currency exchanges, assisted in mobilizing capital, and created capital. Nevertheless, it failed to fit into the developing Canadian economy in a wholly satisfactory manner.

The possibilities of banking commended themselves to North Americans in the last two decades of the eighteenth century. Plans to found a bank in Montreal in 1792 were abortive; but several were launched in the 1780’s in the seaboard commercial cities of the United States. The nature of these banks is instructive. They represented a permanent, as against the earlier temporary, pooling of the funds of seaboard merchants. The eighteenth-century merchant had had to arrange for his own funds, advances, and exchanges; that is, every merchant was also a banker. Under the new arrangement, each merchant fully anticipated that he would borrow back at least the whole of the capital he had subscribed, and perhaps more, but his funds now would be earning a return on those occasions when he did not require them. It was foreign to the notions of these early bankers that loans should be on a non-discriminatory basis; it was clearly understood that shareholders came first, up to the amount of their share capital. As for the emphasis on short-term investments which looms so large in banking precept, this arose from no conviction of the goodness of short-term loans, and the badness of long ones, but simply from the fact that if some merchant-shareholders had permanent accommodation, others would have to go short. Banks in North America always arose from a shortage, not from a surplus, of funds. It is hardly necessary to add that deposit business was an afterthought that long remained inconsequential, and that it was only when the sum of deposits overtook the total note circulation, about 1860, that men began to think of the deposits, rather than the capital, as the source of the funds.

The chronic adverse balance of payments of North America and the chaotic state of the Canadian currency provided a lively and profitable exchange business for early bankers. Still, it was fundamental to the banks to keep their notes in circulation; however much note-holders benefited from the availability of this medium of exchange, it was they who provided bankers with control over resources. This appears to have been the rock on which the first Canadian bank foundered, for the Canadian population was still distrustful of any money but specie. The influx of English-speaking settlers and the redemption of the army-bills of 1812-14 overcame this prejudice. The first successful Canadian bank, as we are frequently reminded, prudently began after this, in 1817. The banks of the twenties and thirties were creations of merchants, for merchants, like the American ones noted above.54 Loans were restricted largely to the provision of short-term mercantile credit, and directors and shareholders were the chief beneficiaries. In the early thirties discounts to directors were about a third of the whole in Canada.

Now, it was not in the least apparent to North Americans of the early nineteenth century that short-term credit was of greater worth than long. In the United States, even the banking merchants had no objection to permanent loans to early factories, or to the state. Their antipathy to loans on real estate arose purely from the practical experience that real estate was risky security. However pertinent this proof, it carried no weight whatever with a numerous body of citizens, the farmers. American farmers rather favoured having no banks at all, but if there were to be banks, their first duty was to cater to the famine of capital in agriculture. Since merchants were often rich, and farmers usually poor, the contest tended to become one between classes. The course of this battle, marked by charters granted and charters cancelled, by land banks and free banking, is perhaps sufficiently familiar. In the end the farmer who had believed in hard money became a green-backer, while the merchant-banker who had favoured unlimited paper currency became an advocate of “sound money.”

This conflict was muted somewhat in Canada, but it appeared nevertheless. In 1829 and in 1831 the French party attacked the Lower Canadian banks in the Assembly for their neglect of agriculture.55 Agitation was rather more vigorous in Upper Canada, and it led to the appearance in the early thirties of several unincorporated banks more or less responsive to farm needs. Free banking, the grant of bank charters to all comers, also was proposed by the Reformers. At the same time, the chartered banks were becoming involved in the provision of farm capital despite themselves. “The Commercial Bank introduced a system of cash credits in imitation of the Scotch practice. Where the bank’s customers have little other wealth than land, this is a pretty close approach to loaning upon the security of land.”56 Long-term advances to farmers, but especially to speculators and politicians, plagued the banks for some decades. In 1850 a Free Banking Act was carried through the Canadian legislature in apparent imitation of American practices. After the depression of 1837, the “long term credit interest”57 established Free Banking in New York, and it spread rapidly through the northern states. However, the Canadian Act was geared to the needs of a borrower still more importunate than the farmer, the state. Few banks were formed under it, and they did little good to the farmer. The farmer’s situation was eased somewhat in the fifties by the rise of new institutions that mobilized the funds of small savers, but was not really met until farm mortgage companies arose late in the century. Meanwhile, the chartered banks took advantage of the rise of new instruments to retire firmly to the short-term loan business after 1862.58

In North America, the state has been as eager a suppliant for long-term credit as the farmer. It was for this reason that early bank charters were granted. The bank, a monopoly, was recognized by all to be a quasi-public body. In return for the prestige of incorporation, the privilege of having its promissory notes circulated as money and, frequently, a contribution of capital by the state, the bank was expected to make substantial long-term advances to its creator. There is no evidence of concern on this score, least of all because the advances were long-term. In the United States, banks were expected to go further than the financing of the state, to assist in financing quasi-public enterprises like themselves. The provision of capital to establish manufacturing establishments was perhaps regarded as most important, but the principle applied to canals and railroads. Indeed, banks were specifically created to finance not only these, but gas companies and fishing undertakings.

Similar practices are evident in Canada. The Bank of Upper Canada, the “Government Bank,” is the clearest example. The government created the bank and contributed a substantial part of its capital; the bank assisted the government and the friends of the government, and was assisted in its turn. Lord Sydenham and Francis Hincks thought in 1841 to extend the principle, to take the whole gain from the note-issue privilege to provide long-term credit for the public works, by establishing a government Bank of Issue. The commercial banks were able to defeat the plan then and later, but it was often heard. Merritt’s Free Banking Act of 1850 was simply a device to get long credit for the state from note-holders. Sydenham’s plan was revived by A. T. Galt in 1860, and the essential part of Canadian Free Banking, putting the note-issue privilege on the basis of holdings of government debentures, was partially restored by Sir John Rose and E. H. King of the Bank of Montreal in the late sixties. Throughout, the state had many calls to make on the banks; the King-Rose legislation arose out of the large advances which the Bank of Montreal had made to the government. Meanwhile, though banks hardly spread their favours so far as in the United States, there were substantial long-term advances to quasi-public bodies. The fall of the great Commercial Bank in 1867 was a consequence of its large advances to the Great Western Railway.59 Many of these advances might have been deemed unwise by contemporaries, but there was little or no complaint on the score of their length.60

This recital will have failed in its purpose if it has not been remarked that it was long-term credit, after all, that was the crying need in North America in the nineteenth century. Banks were drawn into the provision of it, because there were no other facilities, but they came awkwardly and grudgingly. They could neither keep sufficiently to short credit to ensure solvency, nor provide enough long credit to make their contribution worthwhile. Theirs was a mechanism well adapted to the exchange of commodities already produced, but unsuited to the task of production itself. For the most part, Canadian banks did not force capital accumulation in the way common in the United States, squeezing it out by a tax in the form of depreciated currency. This usually has been counted an advantage, and would seem one particularly when it is considered that the forced saving in the United States was concentrated on the poorest citizens. But it means that Canadian banks contributed even less to fixed capital investment than American ones. On the whole, it seems regrettable that Canadian development in the nineteenth century had to be undertaken with the aid, alone, of so unsuitable a financial instrument as the commercial banking system. Its control of resources, and preference for short advances, tended to perpetuate an extractive economy at the expense of agricultural and industrial development.

1The close connection between jobs on the public works and the volume of employment is put forcefully in a statement by D’Arcy Magee, 1863, quoted in V. C. Fowke, Canadian Agricultural Policy: The Historical Pattern (Toronto, 1946), p. 136.

2The Elgin-Grey Papers, 1846-1852, edited by Sir A. G. Doughty (Ottawa, 1837), vol. IV, p. 1437.

3Statement of William Scott, late Western Division Engineer of the Great Western Railway, to the Shareholders and the Public of North America (Detroit, 1854); also Report of the Directors of the Great Western Railway to the Shareholders, upon the Report made by the Commission appointed to enquire into certain accidents (n.p., April, 1855). (Uncatalogued pamphlets, Public Archives of Canada.)

4A. L. Dunham, “Industrial Life and Labor in France, 1815-1848,” Journal of Economic History, vol. III, Nov., 1943, pp. 128-9.

5The Elgin-Grey Papers, vol. IV, p. 1438.

6R. H. Fleming, “McTavish, Frobisher and Company of Montreal,” Canadian Historical Review, vol. X (1929), pp. 136-52; “Phyn, Ellice and Company of Schenectady,” Contributions to Canadian Economics, vol. IV (1932), pp. 7-37; A. L. Burt, The Old Province of Quebec (Toronto, 1933), p. 147.

7Public Archives of Canada, Lord Selkirk Diary, vol. III, p. 146.

8Burt, Old Province of Quebec, p. 346.

9It is not easy to discover exactly what the canal cost, or how much private capitalists stood ready to provide. John MacTaggart gives £130,000 as the total cost (Three Years in Canada . . ,London, 1829, vol. 1, p. 166). It appears that the private subscriptions in 1819 totalled just short of £50,000 currency. Of this, by 1821, only £35,000 was still “efficient” (Journal of the Assembly, Lower Canada, 1820-1, p. 90 and pp. 132-3, 162, 200, 263-4, 334; and 59 Geo. III, c. 6 (24 April, 1819) establishing the LaChine Canal Company). Partners of the Northwest Company were prominent in the Company, and it may be that the pending amalgamation with the Hudson’s Bay Company was more important than financial difficulty in fostering their desire to return the project to the government.

10Todd and McGill estimated Canada’s balance of payments in 1804 as follows: Imports, £500,000; Fur exports, £250,000; Payments on military account in Canada, £150,000 or £200,000. Lord Selkirk Diary, vol. III, pp. 121-30.

11Public Archives of Canada, C series, vol. 108, p. 127, R. Hamilton to the Military Secretary, June 11, 1803.

12John Howison, Sketches of Upper Canada (Edinburgh and London, 1825), pp. 94-7.

13“There are a good many ways of employing capital, but few which will ensure such a speedy return, as would in general be considered necessary. The mercantile business is already overdone. Merchants swarm in every part of the Province.” Howison, Sketches of Upper Canada, p. 275.

14Samuel Reznick, “The Rise and Early Development of Industrial Consciousness in the United States, 1760-1830,” Journal of Economic and Business History, Supp. to vol. IV, no. 4, Aug., 1932, p. 784.

15John Rae, The Sociological Theory of Capital, Being a Complete Reprint of the New Principles of Political Economy, 1834, edited by C. W. Mixter (New York, 1905), p. 219. J. S. Mill’s Book I, chap. XI (“Of the Law of the Increase of Capital”) is taken almost bodily from Rae. The book has had less notice than it deserves as a work of Political Economy. But what is of more importance here, it was written by a Scot resident in Canada, and is based largely on observation of Canadian conditions.

16Howison, Sketches of Upper Canada, p. 129; Elgin-Grey Papers, vol. IV, pp. 1345-6.

17Rae, Sociological Theory of Capital, pp. 119-24.

18Elgin-Grey Papers, vol. IV, p. 1429.

19Ibid. R. L. Jones, History of Agriculture in Ontario, 1613-1880 (Toronto, 1946), p. 67, puts the minimum investment per farm at £100 currency in addition to the price of the raw land. Note Professor Fowke’s thesis (Canadian Agricultural Policy: The Historical Pattern, p. 107): “Whatever may be the essential features of the agricultural frontier for the historian, the sociologist, or the political scientist, for the economist the frontier’s essential features are its investment opportunities.”

20J. L. McDougall, “The Welland Canal to 1841,” M.A. thesis, University of Toronto, 1923, pp. 15, 37. Funds were a great deal more plentiful in Upper Canada after canal construction began, as bank subscriptions attest (Adam Shortt, “History of Canadian Currency, Banking, and Exchange,” Journal of the Canadian Bankers’ Association, April, 1901, pp. 227- 43), but scarcely of the order to finance railroads.

21C. K. Hobson, The Export of Capital (London, 1914), pp. 28-9, 124-5.

22Canada, Sessional Papers, 1841, App. B.

23Ibid.f 1850, App. HH.

24This is the figure given by H. A. Innis and A. R. M. Lower, Select Documents in Canadian Economic History, 1783-1885 (Toronto, 1933), p. 655. Commodity trade figures from the same source (p. 644) give a deficit of the same order, $85 million, for the decade 1851-1859. However, Scobie and Balfour’s Canadian Almanac for 1857 asserted that £20 million of railway capital had already been invested by the end of 1856. About 400 miles more were built before 1860.

25See Adam Shortt, “Railroad Construction and National Prosperity: an Historical Parallel,” Transactions of the Royal Society of Canada, Series 3, vol. VIII (1914), Section II, pp. 295-308.

26The figures for 1861-7 are from Innis and Lower, Select Documents, 1783-1885, pp. 644-5. Commodity trade figures for the period 1868-75 have been presented in various forms by the Dominion Bureau of Statistics. Unfortunately, the Bureau’s explanation of the meanings of some of these figures is not at all clear (Canada Year Book, 1916-17, pp. 294-5; 1920, pp. 336-7). The figures used by Jacob Viner (Canada’s Balance of International Indebtedness, 1900- 1913, Cambridge, Mass., 1924, p. 36) are the old “Total Imports” and “Total Exports” figures presented until 1917. Besides a standard correction for Canadian exports to the United States assumed not to have been declared, they include specie movements and all foreign produce as imports and (when re-exported) as exports. These appear to be the appropriate figures for calculating capital movements (Viner, chap. II). These data give a deficit of exactly $200 million on commodity trade for the years 1868-75. The figures in Innis and Lower, Select Documents, 1783-1885, pp. 810-15 are the same except that they follow the procedure of the Bureau of Statistics after 1917 of excluding foreign produce not entered for home consumption from import figuresbut not from export figures. Hence figures from this source underestimate the commodity trade deficit by the amount of foreign (bonded) produce that was counted in exports but not in imports, i.e., by $26 million, 1868-75.

27That very delicate indicator of economic activity, the volume of immigration, demonstrates that the seventies were less active, proportionally, than the fifties. Peak year figures (for the area of the Dominion) are given as follows:

1854 — 37,000 1872 — 37,000
1857 — 34,000 1873 — 50,000
1874 — 39,000


28Public Archives of Canada, E.C.O. Put By No. 302 and E.C.O. Put By No. 176 are memoranda on the assistance by European and American state governments to railroads in the forties and fifties. They were filed on behalf of the Grand Trunk and Great Western, respectively, and the first is by Thomas Brassey. J. B. Rae, “Federal Land Grants in Aid of Canals,” Journal of Economic History, Nov., 1944, p. 167, gives useful information on American canal policies.

29Louis Hartz, Economic Policy and Democratic Thought: Pennsylvania, 1776-1860 (Cambridge, Mass., 1948), pp. 290, 297.

30Public Archives of Canada, E.C.O. 1847, No. 272.

31F. W. Stevens, The Beginnings of the New York Central Railroad (New York, 1926), p. 244.

32Oscar and Mary Handlin, Commonwealth: A Study of the Role of Government in the American Economy: Massachusetts, 1774-1861 (New York, 1947), p. 134.

33There are some examples in McDougall, “The Welland Canal to 1841,” pp. 20, 25, 26.

34L. H. Jenks, The Migration of British Capital to 1875 (New York, 1927), p. 149.

35Ibid., p. 205; Gustavus Myers, History of Canadian Wealth (Chicago, 1914), vol. I, pp. 183-6.

36O. D. Skelton, The Life and Times of Sir Alexander Tilloch Galt (Toronto, 1920), pp. 104-5; D. C. Masters, The Rise of Toronto, 1850-1890 (Toronto, 1947), pp. 75, 112.

37Ibid., p. 73.

38H. A. Innis, Problems of Stable Production in Canada (Toronto, 1933), p. 56.

39Elgin-Grey Papers, vol. I, p. 256.

40Canada, Sessional Papers, 1847, App. AAA; Public Archives of Canada, E.C.O. 1849, No. 80.

41Canada, Sessional Papers, 1846, App. I.

42Skelton, Life and Times of A. T. Galt, pp. 68-70. The Montreal and Lachine Railroad was completed in 1848, but its total cost was only £62,000.

43Board of Railway Commissioners of Canada, Report of Samuel Keefer, Esq., Inspector of Railways, for the year 1858 (Hamilton, 1859).

44The rapid spread of the gospel of self-sufficiency in Canada in the late forties has been overshadowed by other questions, but it was of great significance to later developments.

45Scobie and Balfour, Canadian Almanac, 1857, p. 32.

46Hamilton Spectator, “Saturday Musings,” various issues (Hamilton Public Library Collection).

47By E. Wiman, Commercial Reporter for the Globe, Toronto, n.d.

48Address of the Hon. John A. Macdonald to the Electors of the City of Kingston, with Extracts from Mr. Macdonald’s Speeches, Delivered on different occasions in the Years 1860 and 1861 (Pamphlet, P.A.C.), pp. viii-ix, 70.

49Isaac Buchanan, “No Confederation Possible without a Confederate Patriotic Policy,” 1877 (Buchanan Papers, P.A.C.).

50Association for the Promotion of Canadian Industry, Its Formation, By-Laws, &c (Toronto, September, 1866). Pamphlet.

51W. T. Easterbrook, Farm Credit in Canada (Toronto, 1938), pp. 26-8.

52Annual Report of the Board of Trade … of Toronto for 1861.

53For the early history of Canadian banking see R. M. Breckenridge, The Canadian Banking System, 1817-1890 (New York, 1895); Victor Ross, History of the Canadian Bank of Commerce, vols. I and II (Toronto, 1920 and 1922); and the writings of Adam Shortt, particularly “The Early History of Canadian Banking,” Journal of the Canadian Bankers’ Association, vol. IV, nos. 1-4 and vol. V, no. 1 (October, 1896 to October, 1897) and “The History of Canadian Currency, Banking and Exchange,” Journal of the Canadian Bankers’ Association, vol. VII, nos. 3 and 4, vol. VIII, nos. 1-4 (April, 1900 to July 1901). An interpretation of American banking which is here adapted to Canada is found in Bray Hammond, “Long and Short Term Credit in Early American Banking,” Quarterly Journal of Economics, vol. XL, Nov. 1934, pp. 79-103; also Hammond, “Banking in the Early West: Monopoly, Prohibition, and Laissez Faire,” Journal of Economic History, May, 1948, pp. 1-25.

54Except for the Bank of Upper Canada, in which merchants played a minor part.

55Innis and Lower, Select Documents in Canadian Economic History, 1783-1885, pp. 373-4.

56Breckenridge, The Canadian Banking System, p. 79.

57Hammond, “Long and Short Term Credit” in Early American Banking, p. 95.

58Easterbrook, Farm Credit in Canada, p. 21.

59Breckenridge, The Canadian Banking System, pp. 185-8.

60“It was popularly assumed in both [Canada and the United States] that the chartered banks were intended to act as public servants, for the general benefit of those engaged in trade and industry.” (Shortt, “History of Canadian Currency, Banking and Exchange,” Journal of the Canadian Bankers’ Association, January, 1901, p. 146.) The anti-trust element that sought to outflank the chartered banks with a publicly-owned Provincial Bank on one hand, and “Free Banking” on the other, based itself on the failure of the banks to recognize their public responsibilities. W. H. Merritt, who took a leading part in both types of attack, undoubtedly was influenced by the failure of the banks to assume their duties to that quasi-public institution, the Welland Canal Company. See Upper Canada Sundries: W. H. Merritt to J. Joseph, April 29, 1836; W. Allen to J. Joseph, May 3, 1836; J. H. Dunn to J. Joseph, May 6, 1836 (P.A.C.).


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