Money has at least three functions: it serves as a medium of exchange; a measure by which prices, debts and wages are expressed; and a store of value. These functions are interdependent, although some theorists (eg, Keynesians, Marxists) stress that money must have intrinsic value (eg, GOLD or SILVER) that represents labour, while others (eg, monetarists) emphasize that the most important characteristic of money is its acceptability as a means of exchange.STATE (see COINAGE). The 17th-century development of goldsmith BANKING in Europe marked the transition to paper money. Goldsmiths issued paper bills backed by the gold in their vaults. During the 18th and 19th centuries, European states established central banks to regulate their monetary systems; by the turn of this century most states had taken over the issuance of paper money backed by bullion. Today, however, none of the major state currencies is officially backed by bullion (see GOLD STANDARD).
Money in Early Canada
The First Nations in North America had been trading and bartering for goods and services long before European contact. Objects made of copper, precious metal, furs and other resources formed the basis of an early monetary system. In particular, the WAMPUM belt has become an enduring symbol of early native currency, and at the time of European contact wampum belts were also used to symbolize agreements of mutual respect and peace between First Nations and European newcomers.
New France's first paper money was playing cards, specially cut and signed by the governor and issued in 1685 to supplement the chronically short supply of French and Spanish silver coins then used as the main medium of exchange in New France (see PLAYING-CARD MONEY). The playing cards had no intrinsic value, but their inscribed value was supposedly guaranteed by the colonial government. In an attempt to pay for the Seven Years' War the government then issued vast amounts of paper money, the worth of which it could not guarantee. The result was rampant INFLATION.
After the Conquest (1759-60), the British introduced sterling and for almost a century pounds, shillings and pence were official money in Canada. In practice this meant setting a sterling value for the various kinds of money in existence. The Spanish dollar was rated at 5 shillings, which meant there were 4 to the pound, a value first established by Halifax merchants. Dollar banknotes were printed, including a $4 denomination to conform to the official value of the pound, a value which made it different from the British pound. British money never became dominant, however, and a hodgepodge of money circulated in Canada in the first half of the 19th century, including Nova Scotia provincial money, American dollars, Spanish dollars, American gold coins and "army bills" used by the British forces to buy supplies in the War of 1812. The use of the army money accustomed Canadians to reliable paper money.
The decision to reject British money and adopt a decimal system like that in the US was made in the 20 years before Confederation. In 1858 a law required that accounts of the government of the Province of Canada be kept in dollars instead of pounds. At the same time, the government began to issue its own money to circulate alongside the bills issued by the BANK OF MONTREAL and other banks. In the first decades after Confederation, most Canadians simply assumed that a dollar was a dollar, whether it was issued by the government in Washington or Ottawa or by a bank. Canada's monetary system always paralleled that of the US, with some notable differences. In 1870 the Dominion government issued SHINPLASTERS (25-cent government notes) to counteract the effect of an overabundance of American silver coinage in Canada that was worth only 80¢ against the Canadian dollar at that time.
The Dollar in the Twentieth Century
Canada's monetary system is closely linked to the international system, which has undergone serious crises since the GREAT DEPRESSION of the 1920s. These crises have manifested themselves in high rates of inflation, even hyperinflation in many countries, high interest rates, erratic gold and silver prices and a Third World debt problem of seemingly unmanageable proportions.
The American and Canadian dollars first diverged seriously in the period of high inflation that followed WWI (see EXCHANGE RATES). The Canadian dollar dropped to $US 0.84 in 1920, but quickly recovered and was steady at about $US 1.00 in the last half of the 1920s. With the Great Depression, the Canadian dollar dropped to about $US 0.80, a record low until recent times, but the dollar recovered before the economy and was as high as $US 1.04 in the mid-1930s. During WWII the value of the Canadian dollar was fixed at about $US 0.91. From 1952 to 1962, when the Canadian dollar was allowed to "float" rather than having a fixed value in American dollars, it was often worth more than the US dollar because of the flood of American investment in Canada.
A dollar crisis hit Canada in the midst of the 1962 federal election campaign and the dollar was pegged at $US 0.925. In 1970 the Canadian dollar was again set free to float and quickly rose to be worth more than the US dollar, but this strength was deceptive and the 1976 election of the Parti Québécois in Québec triggered a fall which took it to a low point of $US 0.69 on 4 February 1986.
It recovered from that point, in large part because of the Bank of Canada's use of high interest rates to eliminate inflation, reaching $US 0.87 in 1991. However, with the fall in interest rates during the recession plus renewed fears about the future of Québec , the currency again began losing value against the US dollar. In 1998 the dollar weakened dramatically, a victim of the spreading Asian financial crisis and the ensuing plunge in prices for commodities which Canada exports. It hit an all-time low closing rate of $US 0.63 cents in late summer, at which time the Bank of Canada, despite evidence of a slowing economy, boosted the bank rate by a full percentage point to bolster and restore international confidence in the currency. At the end of 1998, with commodity prices still depressed, the dollar was worth about $US 0.65.
The 1970s revived interest in the old idea that inflation was essentially caused by too much money and attempts were made to try and limit the money supply in the economy (see MONETARY POLICY). The money supply (total amount of money) includes cash, bank deposits, deposits in financial institutions, certain kinds of short-term notes and sometimes credit cards.
The Bank of Canada has several operational definitions of the money supply. M-1 (currency in circulation outside of the chartered banks, ie, the actual cash in people's pockets and bank deposits that can be withdrawn without notice) is the most narrow definition. However, it does not correspond to the US definition of M-1 (in Canada, M-1B, which equals the Canadian M-1 plus chequable savings deposits, is the equivalent of the US M-1). The Bank of Canada had tried prior to 1982 to regulate the supply of M-1 (which amounted at that time to about $30 billion, $13 billion of which was currency) to restrain the money supply in an attempt to lower inflation, but the introduction of computer banking made it difficult to determine if M-1 could accurately measure the existing money supply.
The next widest definition of money supply, M-2, includes M-1B, nonchequing personal term and savings deposits and some corporate chequable and nonchequable notice deposits. Canadian M-2 corresponds to the American M-2. The broadest definition of money supply is M-3; it consists of M-2 and nonpersonal term deposits, including certificates of deposit held by business corporations. The total money supply consists of M-3 plus Government of Canada deposits in chartered banks.
Dollars and Cents in the Modern Era
Though Canadians have increasingly relied on electronic banking in recent years, money's physical presence continues to be significant. Bills and coins themselves underwent changes over the past century in response to commemorative events or simple economic realities. The first dime came into circulation in 1858 and the first quarter arrived in 1870, but the Royal Mint (now ROYAL CANADIAN MINT) issued the first Canadian-minted coin in 1908. It originally bore the likeness of King Edward VII but was modified in 1910 to represent King George V, and then changed again in 1953 when Queen Elizabeth II ascended the throne. The penny was introduced in 1920 and the nickel came into circulation in 1922. The first "loonies" were minted in 1987, replacing the paper dollar, followed by the "toonie" in 1996, a $2 coin that replaced the paper bill. Canada's bills circulated in their commonly-known denominations in as early as the 1850s, beginning with the $1 in 1858 followed by the $2, $50, $500 and $1000 notes in 1887. Founded in 1934, the BANK OF CANADA continued to print in denominations issued by the Dominion of Canada but added a $20 note.
Perhaps the most noteworthy changes to bills and coins in recent years were the introduction of polymer bills in 2012 and the penny's abolishment in 2013. Thought to be a more durable bill with fewer counterfeit risks, the Bank of Canada began issuing polymer money in $100 and $50 denominations in 2011, followed by the $20 in 2012 and the $5 and $10 in 2013. However, Canada's most widely-circulated bill, the $20, received mixed reviews. Consumers soon discovered that it could melt near heat sources and it often became lodged in banking machines.
But consumers were less opposed to the government's decision to cease production of the penny. In 2012 the federal government announced that it intended to abolish the coin, citing that inflation had eroded its value and that its production and use actually amounted to 1.5 cents. Moreover, a senate financial review committee revealed that, on average, each Canadian has approximately 600 pennies tucked away in homes, cars and pockets. The Royal Canadian Mint printed its last penny on May 4, and in February 2013 all pennies were taken out of circulation.
The process of monetary evolution which began several thousand years ago is still under way. The exact direction it will take is impossible to predict, but some elements of the functions of money as a store of value, measure of value and medium of exchange will be retained.
Author D. MCGILLIVRAY
Links to Other Sites
Royal Canadian Mint
The official web site of the Royal Canadian Mint. Check out the online Museum and other multimedia features.
Canadian Bankers Association
The website for Canadian Bankers Association. Features a list of domestic and international banks operating in Canada, timeline of the banking industry, useful consumer information, a glossary, and related resources. CBA is the main representative body for banks in Canada and is the country’s oldest industry association.
The Canadian Numismatic Association
Comprehensive site devoted to the collecting of currency in Canada.
This Bank of Canada website offers current and historical information about Canada's paper currency. Also includes tips for recognizing genuine Canadian bank notes.
The website for the "Currency Museum" offers a fascinating online exhibit about the history of money. Features an extensive image database of notes, documents, coins, and tokens from Canada and around the world. Also provides an interactive timeline and other learning resources for students and their teachers. From the Bank of Canada.
Use this online calculator to perform quick conversions to and from Canadian dollars. From the Bank of Canada.
Backgrounder: Withdrawing the Penny from Circulation
An illustrated feature about changes that might impact consumers when the Canadian penny is withdrawn from circulation. From Department of Finance Canada.
The War of 1812, in connection with the Army Bill Act
An analysis of the impact of the events of the War of 1812 on commerce and the economy within Canadian territory. From the Literary & Historical Society of Quebec.
Canada's 1936 Dot cent a puzzling rarity
This article unravels the mystery behind Canada’s 1936 Dot cent. From coinworld.com.
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