The Demise of Sir John A. Macdonald's Bank, the Commercial Bank, in 1867 (PART 1)
Winning the Lucrative Great Western Railroad Account from a Rival Bank, the Bank of Upper Canada, Turned into a Disaster for the Commercial Bank
From the point of view of economics and finance, the newly created Dominion of Canada, created on July 1, 1867, was a very sick patient struggling to survive on financial life support. “The new dominion,” according to Toronto lawyer and economic historian Max Magill, “was in fact broke and only viable” with the support of not only its London based backers, “Glyn Mills and Company and Baring Brothers and Company,” but also its domestic backer the “Bank of Montreal, to which it owed a very large sum and on which it depended for the success of the Dominion Note Scheme.”1
For the regular person, the economic situation was also bleak. The time period around Canadian Confederation is reminiscent of a scene from the Great Depression since a major bank had already failed, a “run on banks in the Toronto area” was occurring in October 1867, and another bank, the bank at the heart of this article, was just about to collapse as well. According to Andrew Smith’s account,
in fall 1866, the Bank of Upper Canada closed its doors. Its problems stemmed from a combination of the effects of a tightened money supply in Upper Canada, a series of bad loans that the bank had made for political reasons, and the transfer of the government’s lucrative account to its archrival, the Bank of Montreal. The achievement of Confederation on July 1, 1867, was swiftly followed by another banking crisis in Ontario, an October run on banks in the Toronto area.2
The story of the collapse of the Bank of Upper Canada in 1866 is summarized succinctly by Angela Redish in her review of Peter Baskerville’s book The Bank of Upper Canada. Even though my article is about the collapse of the Commercial Bank in 1867, I think it is vitally important for me to cite Redish’s synopsis because then I can point out the similarities between the demise of the Bank of Upper Canada and the demise of the Commercial Bank. Moreover, by citing her synopsis, I can also point out any differences that existed between the two events. Redish wrote,
The bank’s lengthy death act occurred in two scenes. In 1857 the bank was practically bankrupt. Its assets were tied up in (at best) illiquid real estate and the liabilities of the Grand Trunk Railway, which was itself bankrupt. In essence, the government bailed out the bank and in 1861 installed new management, which wrote down the capital stock, wrote off the many bad debts, and started again. Then in 1863 the Tory government was replaced by the Reform party, which gradually withdrew the government’s account (and gave it to the Bank of Montreal), removing necessary support from the Bank of Upper Canada. The bank’s final demise in 1866 was the price it paid for its close connection with the Tory party and their railroad connections.3
In a move reminiscent of President Lisa Simpson calling a “colossal salary grab” a “temporary refund adjustment,” the Bank of Upper Canada hid the true state of affairs from the public by using euphemistic phrases. In the bank’s 1859 annual report it mentioned that many of its customers were “connected with agriculture and the milling interests” but, as Adam Shortt sardonically pointed out, “connected with agriculture” is just a “euphemism for land and grain speculations” and has nothing to do with ordinary farming.4
In fact, “land and grain speculations” were one the key issues that differentiated the Bank of Upper Canada’s banking business from the business conducted by its competitors. The Bank of Upper Canada “was to a greater extent than most of the other banks,” according to Adam Shortt, “connected with the extensive speculation in land carried on throughout western Canada, now western Ontario.”5 Shortt was convinced that this approach to banking, the lending of money on the security of land, was unsound:
The experience of the Bank of Upper Canada constituted a prolonged justification of that principle of all sound banking that real estate is no proper basis for bank accommodation.6
In agreement with the opinion expressed by British Treasury officials, Adam Shortt explained why this approach to banking was bound to fail:
When the boom collapsed, they found themselves with great quantities of wild lands on their hands for which they could find little or no sale. The funds of the Bank were thus tied up, its proper function as a bank was paralyzed, and in the end it lost the greater part of its advances.7
Thankfully, the Commercial Bank, first known as the Commercial Bank of the Midland District and later known as the Commercial Bank of Canada,8 did not focus its business primarily on land speculation. The Commercial Bank “was but very slightly involved in the wild land and other real estate speculations which so greatly affected” the Bank of Upper Canada.9
Unfortunately for the Commercial Bank, it won the lucrative Great Western Railroad account in 1857 from the Bank of Upper Canada. A hasty and superficial analysis would, of course, assume that winning a lucrative new business account and winning it at the expense of a rival bank were both pieces of good news for the Commercial Bank. In fact, Ged Martin went so far as to describe this “apparent business coup” as an example of the city of Hamilton, through its Great Western Railroad, and the city of Kingston, through its Commercial Bank, ganging up on the city of Toronto as part of the Kingston versus Toronto rivalry over which city will become the dominant financial center of Ontario.10 Moreover, the Great Western Railroad certainly seemed like a great company to do business with. The Great Western was actively promoting the Detroit and Milwaukee Railroad, a proposed line to be 183 miles long running across the lower peninsula of Michigan. The financial ratios on the proposed Detroit and Milwaukee Railroad appeared to be very attractive. According to Archibald Currie's book, another railway operating west of Lake Michigan, the Milwaukee and Mississippi, was earning 17% on its investment. The Great Western believed that the Detroit and Milwaukee would earn slightly less, 16% per year. The plan was to tap Minnesota traffic before it reached the windy city of Chicago. Charles John Brydges, the General Manager of the Great Western, forecasted “that the combined roads would have a monopoly of the traffic of Wisconsin and Minnesota.”11
But obviously things did not go according to plan. To find out what happened to the Great Western, the Detroit and Milwaukee, and especially the Commercial Bank, you will need to read my next blog article. The best way to read my next blog is to subscribe for free, and Substack will email my next blog article directly to your email inbox.
Max Magill, “The Failure of the Commercial Bank,” in To Preserve and Defend: Essays on Kingston in the Nineteenth Century, ed. Gerald Tulchinsky (Montreal: McGill-Queen’s University Press, 1976), 178.
Andrew Smith, “Continental Divide: The Canadian Banking and Currency Laws of 1871 in the Mirror of the United States,” Enterprise and Society 13, no. 3 (September 2012): 483.
Angela Redish, review of The Bank of Upper Canada, by Peter Baskerville, Journal of Economic History 48, no. 3 (September 1988): 793.
Adam Shortt, “The History of Canadian Currency, Banking and Exchange: The Passing of the Upper Canada and Commercial Banks,” Journal of the Canadian Bankers’ Association 12, no. 3 (April 1905): 201.
Shortt, “The Passing of the Upper Canada and Commercial Banks,” 200.
Shortt, “The Passing of the Upper Canada and Commercial Banks,” 211.
Shortt, “The Passing of the Upper Canada and Commercial Banks,” 200.
Magill, “The Failure of the Commercial Bank,” 363n1.
Shortt, “The Passing of the Upper Canada and Commercial Banks,” 212.
Ged Martin, “The Kingston Economy and the Finances of John A. Macdonald,” Ged Martin Blog, https://www.gedmartin.net/2016-11-04-15-27-28/259-vii-the-kingston-economy-and-the-finances-of-john-a-macdonald (accessed August 15, 2022).
A. W. Currie, The Grand Trunk Railway of Canada (Toronto: University of Toronto Press, 1957), 171.
Very well researched, like a phD thesis!