Confederation in 1867 saw Canada’s first prime minister, Sir John A. Macdonald, initiate a fractious debate on banking. Three years and as many finance ministers later, Macdonald settled on a system with two primary goals: satisfying a new country’s demand for credit while ensuring Ottawa couldn’t be held responsible for banking failures. It didn’t have the money to bail out banks. The Bank Act of 1870, and 1871 codified it, offering up aspirational standards with no oversight.
In March, 1910, the New Brunswick-based St. Stephen’s Bank crashed. It was an example of what a feeble Bank Act permitted. Its liquidator told the finance department that the bank had been managed “by what might be called amateurs, who had no banking experience, and did not understand what are a bank’s functions in lending money.”
Troubled from the day it opened in 1908, the 10-branch Bank of Vancouver was in desperate shape by November 1914. Its executives went to White seeking Finance Act moneys to keep it solvent. But the bank had no liquid assets White could use to secure a Finance Act loan against. By early December the Bank of Vancouver was out of business and its depositors out $550,000 .
In November 1921, one of the largest banks, the Merchants Bank of Canada, with 400 branches across the country, was suddenly sold to the Bank of Montreal.Two Merchants Bank officials faced trial in March 1922 for submitting false financial statements to the Finance Department, only to be completely exonerated. One newspaper at the time declared the Bank Act a “dead letter so far as protecting the shareholders was concerned.
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