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Comparing Canada and United States Banking System


Comparing Canada andUnited States Banking System

History of the useof currency

The use of currency in Canada has evolved much over time, startingfrom the early 1600s to date. This is also the same period thatAmerica started using currencies. In the early 1600s, in Canada,beaver pelts were the universally accepted medium of exchange. In themid-1600s, Wampum made from shell beads replaced the beaver pelts asthe country’s currency. The country introduced its first card moneythat was printed on playing cards on June 8, 1685. However, the cardmoney was criticized because it was relatively easy to counterfeit.In 1722 Copper coins replaced the card money. At the beginning of the18th century, the colony was faced with the challenge ofthe lack of a standard currency because of the many coins in usewhich hindered trade. Consequently, in 1817, the Montreal bankdeveloped the first bank notes. Between 1854 and 1914, the Dominionof Canada had a single gold standard, which was later replaced by thedollar (Girant &amp Nearly, 2011).

On the other hand, in 1690, Americans in the Massachusetts Bay colonydeveloped the first currency that took the form of paper money inresponse to the shortage of coins. The paper money was first used topay for military expeditions. In 1734, Benjamin Franklin startedproducing colonial notes that could not be counterfeited. In 1775,the continental currency was developed, but it lost its value becauseit was easy to counterfeit (TheU.S Currency Education program, 2015). One year later,the first $2 note was produced. In 1861, the need to finance theCivil War resulted in the Congress authorizing the issuance of thenon-interest-bearing Demand Notes. Consequently, the first $10 noteswere produced with the portrait of President Lincoln. 1862 marked thefoundation of the modern design of the American dollar (TheU.S Currency Education program, 2015).

The evolution and nature of commercial banking system

In 1871, The Bank of Montreal became the first bank of deposit anddiscount to be established in Canada followed by the Quebec Bank oneyear later. On the other hand, the Bank of North America was thefirst bank to be established in the United States in 1781. It wasfollowed by other banks such as the Bank of New York (1784), TheMassachusetts Bank (1784), the Bank of Maryland (1791) and the Bankof the United States (1791) (Federal Research Bank of Minneapolis,2013).

The banking system in Canada is regulated by both the federal andprovincial governments. Historically, the Canadian financial systemwas founded on the five principal groups: Security dealers, theco-operative credit movement, trust and loan companies, charteredbanks, and life insurance companies(Freedman, 2011).The federal government supervises thechartered banks which specialize in issuing residential mortgages andpersonal loans. The trust and loan institutions deal with depositsand residential mortgage lending. Some of the trust and loaninstitutions are federally supervised while others operate underprovincial charters. Similarly, a large number of the insurancecompanies are federally supervised, and only a few of them operateunder provincial regulations. The co-operative credit movementfunctions under the provincial jurisdiction and traditionally, theyhave specialized in personal loans and residential mortgages. Lastly,the securities dealers are controlled by the legislative frameworkdeveloped by the provincial governments(Freedman, 2011).

On the other hand, the America’s banking system is regulated at thestate and federal level. After 1800, the number of commercial banksin America grew rapidly. Before 1838, a specific Act was requiredfor the establishment of a bank. However, in the same year, the NewYork State enacted the Banking Act that permitted any person to forma bank provided he/she complied with specific charter conditions. The Free banking policy spread across the country and between 1840and 1863, the state institutions were responsible for charteringbanks. This created numerous problems which resulted in the Congressenacting the National Bank Act that required the banks to receive acharter from the federal government (Federal Research Bank ofMinneapolis, 2013).

The Evolution and nature of central banking system

Both the Canadian and American central banking systems are similar.This is because Canada inherited the United States’ free bankingsystem in the 1850s. In 1854, the Canadian government amended thecharter for the Bank of Montreal to incorporate changes that were tobe implemented by all other banks (Marianopolis College, 2016). Forexample, every bank had to submit a monthly return to the government.The 1867 constitutional amendment mandated the Dominion government tocontrol the country`s currency and banking system. In 1891, theCanadian Bankers Association was established whose role was toestablish a structure that the Dominion government would use tocommunicate with banks. In 1900, the National government enacted theBank Act that made it mandatory for every bank in the country to be amember of the Canadian Banker Association. In 1935, the central Bankof Canada was established (Marianopolis College, 2016).

On the other hand, the central banking system in American dates backto 1775-1790. During this period, the Congress authorized theprinting of the country’s first paper money to fund the AmericanRevolution. When the revolutionary war ended, the country had a hugedebt. A significant portion of the debt was issued to the federalgovernment by the individual states. During this period, there was nocommon currency because most States had their own money.Consequently, Alexander Hamilton, who was serving as the country’streasurer thought about having the federal government taking over thestate’s debts (Federal Research Bank of Minneapolis, 2013). In1790, the Bank of the United States was established. After thenational debt had been cleared, the Congress failed to renew thebank’s charter hence it ceased from operating. However, the war of1812 resulted in the rise in federal debt leading to theestablishment of the second Bank of United States. President Jacksonrefused to renew the charter for the second national bank, hence itscollapse in 1836. The outbreak of the Civil war renewed the people’sdesire to have a national bank modeled on the free banking system.Under this system, banks were allowed to choose between a state and anational charter. In 1913, the Federal Reserve was established (TheFederal Reserve Bank of Minneapolis, 2013)

In conclusion, as compared to the America, Canada has a few banks,and this is one of the reasons its financial system is more stable.Additionally, the Canadian banks are more diversified with expansioninto deposits and loans, wealth management, brokerage services andinsurance services. Additionally, the government is heavily involvedin the regulation of Canadian banks compared to the US. However, thetwo banking systems share several similarities such as the adoptionof the free banking policy at some point in their evolution. In theU.S, banks are regulated at federal and state level. On the otherhand, banks in Canada are regulated at federal and provincial level.The two countries also shared the same path and challenges in theprocess of developing their current currencies.


Federal research Bank of Minneapolis. (2013). a History of CentralBanking in the United States.” Accessed on November 19, 2016. https://www.minneapolisfed.org/community/student-resources/central-bank-history/history-of-central-banking

Freedman, C.(2011).&nbspTheCanadian Banking system.Ottawa:Bank of Canada. Accessed on November 19, 2016.http://www.independentinvestor.info/PDF-Downloads/STUDIES-ACADEMIA-06/doc.204-%20freedman%201998%20banks%20canada.pdf

Girant, T., &amp Nearly, C. (2011). A Brief History of the CanadianDollar. Accessed on November 19, 2016.http://www.theglobeandmail.com/report-on-business/economy/a-brief-history-of-the-canadian-dollar/article1366590/

Marianopolis College. (2016). History of the Banking System ofCanada. Accessed on November 19, 2016.http://faculty.marianopolis.edu/c.belanger/quebechistory/encyclopedia/BankinginCanada-CanadianBanks-CanadianHistory.htm

The U.SCurrency Education program. (2015). The History of the AmericanCurrency. Accessed on November 19, 2016.https://uscurrency.gov/content/history-american-currency