by Bruce Cherney
In The Wealth of Nations, the famous 18th-century philosopher and economist, Adam Smith, said that “wealth consists of money ... when we have money we can more readily obtain whatever else we have occasion for ... The great affair, we always find, is to get money. When that is obtained, there is no difficulty in making any subsequent purchase.”
Today, the world is reeling from a tight money market brought on by the collapse of banks or the government bail-out of banks on the verge of collapse in many nations. The five biggest American banks have reportedly lost billions, and Citigroup Inc., the world’s largest bank, is bordering on being nationalized. The U.S. government has already spent $700-billion to bail-out American banks.
In Europe, the news is just as bad with Iceland’s three national banks failing, Irish banks facing bankruptcy as well banks in Austria, Germany and England reeling from the crisis and being bailed-out by their respective governments.
According to former U.S. Federal Reserve chairman Alan Greenspan, the subprime crisis (the high-risk “toxic assets” held by financial institutions which instigated the economic meltdown), and the collapse of the housing market coupled with the steep decline in equity prices has wiped out US $40 trillion of wealth across the globe.
In many countries, the resulting credit crunch is affecting people’s ability to obtain a loan to purchase a new car or a mortgage to buy a home. As Smith said in the 1700s, the “great affair ... is to get money. When that is obtained, there is no difficulty in making any subsequent purchase.”
Both companies and consumers now find their access to credit severely restricted. The result is a contraction in the economy and recession in the U.S. and other nations.
The one bright light in the international banking crisis is Canada. Our nation’s banking system, which mostly avoided the subprime fiasco and its “toxic assets,” is now being held up as the model to be followed to reform the world’s bank system.
“I think Canada has shown itself to be a pretty good manager of the financial system in the economy in ways that we haven’t always been here in the United States,” said U.S. President Barack Obama during his trip to Canada.
Unlike in the U.S., Canadian banks have not been bailed out by the government, but the government did initiate a program to buy $125-billion in mortgages from banks, all of which are insured by Canada Mortgage and Housing Corporation. It’s not a bail-out as CMHC is a government agency, but an infusion of cash in the manner cited by Smith to get the banks to recommence lending money to Canadians for major purchases such as a home or car.
Stricter government regulations and a conservative banking mentality have isolated Canada’s Big-5 banks from the worst of the world banking crisis.
“The fundamentals of our domestic economy, while stressed, appear stronger than in Europe and the United States,” Royal Bank of Canada CEO Gordon Dixon recently told the Globe and Mail, “having benefitted from a public policy that for many years valued prudent fiscal management.”
Irish Prime Minister Brian Cowen said Ireland’s new financial system will be based upon the Canadian model — a model now being touted as the best in the world. The Canadian banking system evolved over time and its modest beginnings are exemplified by how banking arose in Manitoba.
During the early history of European settlement in Manitoba, obtaining money to generate wealth — the raison d’etre of capitalism — was extremely difficult. In the first years of the Red River Settlement founded by Lord Selkirk, colonists effectively were “land rich” and “money poor” because of the lack of currency circulating in the community.
The Hudson’s Bay Company and Lord Selkirk — after his death in 1820, Lady Selkirk and her brother, Andrew Wedderburn Colville, executor of the Selkirk estate — recognized that the fate of the settlement rested in the economic well-being of the colonists, so early attempts were made to place money into the hands of the settlers.
Although it was regarded as an abysmal failure, before the Buffalo Wool Company (founded in 1821) went bankrupt after a very brief existence, its employees accumulated wealth in the form of higher-than-expected wages earned as a result of initial start-up funding and later a loan provided by the HBC. In turn, the hard currency earned was used to acquire cattle from the United States. As a result, the Prairie’s first farming community was never again without cattle, oxen, beef, milk, butter or cheese, saving the settlement from an uncertain future.
Until that time, grasshoppers had devoured whatever was planted, early frost killed crops and North West Company employees burned their fields. Compounding their hardship, Governor Robert Semple and 20 settlers were killed during the Battle of Seven Oaks in 1816.
Nearly half the settlers became so discouraged by the difficulties they encountered at Red River that they accepted the North West Company’s offer to fund their passage to Eastern Canada.
Until the arrival of cattle, the settlers lacked the wherewithal to feed themselves during the cruel winter months.
Once currency began to circulate in greater quantity, the foundation was laid for further accumulation of wealth.
Peruvian economist Hernando de Soto, who has achieved a rock star-like following in South America, said that capitalism is not functioning in the Third World, “because we missed some of the crucial elements that the Westerners had in the 18th and 19th centuries, like property rights ... What it (capitalism) has is the ability to pick up the value of people’s work. It has the ability to put on paper, to accumulate, to represent value, and to use it to further additional production.”
Red River settlers possessed title to land and livestock which could then be used as collateral for loans in other money-earning enterprises.
The initial paper currency of Red River was known as Hudson Bay Company “blankets,” which came in pound (£) notes much larger than today’s paper bills. The blankets were in denominations of £5, £1, five shillings and one shilling. The value of a £1 “blanket” is $5 today. In the days when the HBC dominated Red River, a shilling was 1/20 of £1 and there were 240 pence (pennies) to the pound note. Today, the English £ is equal to 100 pence (pennies).
Although the HBC was called the banker for the settlement, there were distinct disadvantages to operating within its monetary system. For example, the HBC’s banking policies could be used to enforce its fur trade monopoly. At first, the HBC only allowed petty trade to exist and clamped down on anyone who challenged its power to regulate trade to its advantage.
One of the people who picked away at the HBC monopoly was Andrew McDermot, a crafty merchant originally from Ireland, who was considered much fairer in his business transactions than the HBC. In 1824, he retired from the HBC and used his connections — including his friendship with George Simpson, its powerful governor — to use Company ships to import goods from Britain. McDermot and his partner, James Sinclair, then set up trading posts as far away as the Qu’Appelle Valley in present-day southern Saskatchewan.
The profits McDermot earned were invested in water mills and land in St. James, St. Charles and St. Boniface.
Once the HBC’s fur trade revenue began to decline, it began to clamp down on McDermot and Sinclair, who then turned to illicit trade with Americans for cheaper and more diversified goods and incurred the animosity of Simpson. The HBC governor vowed to “avert the blow thus aimed at the vitals of the Company’s trade and power.”
The HBC used the Council of Assiniboia and the courts, which it controlled, to enforce its monopoly. The Company had brought back Assiniboia, which included Red River, from the heirs of Lord Selkirk in 1836. Selkirk had bought 300,400 square kilometres of land from the HBC for £84,000 in 1811. It was returned to the HBC for 10 shillings more than its original purchase price 25 years earlier. The selling price in HBC shares, rather than cash, reflected the poor economic performance of the settlement, which had failed to pay a dividend to the Lord Selkirk estate. Two years later, Queen Victoria renewed the HBC monopoly that was due to expire in 1842.
But the HBC was only delaying the inevitable — the days of its stranglehold on local trade came to an abrupt end with the trial of Pierre-Guillaume Sayer. Although Sayer was found guilty in the HBC-controlled court, the intense public resentment against the HBC’s tactics prevented it from handing out a penalty to Sayer which effectively broke the monopoly.
Manitoba historian W.L. Morton (1908-80) said that “free trade could mean only the development of general commerce and the coming of the agricultural frontier and civilization.”
While the Métis benefited immensely by the advent of free trade as traders and freighters of goods via Red River cart, their economy, based primarily upon the buffalo hunt, was rapidly coming to an end.
Métis hunters had been suppliers of pemmican which provided the food that fuelled the men engaged in the fur trade. As both the fur trade and buffalo hunting faded in importance, the Métis economy in Assiniboia was replaced by a new mercantile and industrial class served by the institutions of capitalism.
Capitalism was also advanced by new technology such as steam power that turned the mills and propelled the boats that plied the rivers. By June 10, 1859, the first steamboat, the Anson Northrup, had arrived, ending the settlement’s virtual isolation from the outside world by linking it with St. Paul, Minnesota, and gave merchants and settlers access to an inexhaustible supply of American goods.
The community’s first newspaper, the Nor’wester, founded in the year the steamboat came to Red River, proclaimed Minnesotans were “untiring in their endeavours to break down the barriers to commerce which they found dividing the two countries,” adding there was “very agreeable evidence of the interest felt in our progress and the extended appreciation of our resources.”
To develop the resources of Red River and the settlements that were springing up across the plains through increased immigration from south of the border and Eastern Canada, a newer banking system was required.
At first, the wealthier businessmen of Red River used a system of neighbourliness whereby they used their surplus funds to provide loans to fellow settlers. The only limitation on this system was the amount of capital available. The common security offered for a loan was land, while the loans were themselves often short term, covering from three to six months.
After Manitoba became a province on May 12, 1870, the Canadian government set up a Dominion Savings Bank branch in Winnipeg. Across Canada — then only Manitoba, Ontario, Quebec, Nova Scotia and New Brunswick — the banks were operated out of federal post offices and land offices. Any person could deposit from $1 to $300 which earned an annual interest of four per cent guaranteed by the Dominion treasury. The primary role of the federal savings banks was to provide easily accessible funds for government-sponsored capital projects such as the Canadian Pacific Railway.
The limitation of the government banks was that they were only for personal savings and subsequent loans to Ottawa, and did not provide loans to individuals.
The first official bank in Winnipeg (the name Winnipeg had been used in the Nor’wester masthead in the 1860s, but the community was not incorporated as a city until 1873) was established in 1871. Until the arrival of charter banks, private banks played a stop-gap role, and were only limited in their ability to provide loans by the amount of capital entrusted to them by depositors. Since a private bank didn’t operate under a charter (chartered banks had to operate under stringent rules legislated by Ottawa), its owner could pick and choose whatever security he thought was required for the loan.
Alexander McMicken, who was born in Queenstown, Ontario (then Upper Canada), came to Fort Garry (Winnipeg) in 1871 to establish a private bank. Alexander was the son of Gilbert McMicken, Canada’s “spy master,” who had been sent west in 1870 by Canadian Prime Minister Sir John A. Macdonald to investigate the Red River Resistance (1869-70). A year later, he kept tabs on the farcical Fenian raid into Manitoba. In 1871, he was also appointed the Dominion Land agent for Manitoba.
When McMicken’s son, Alexander (1837-1916), arrived in Winnipeg, he assisted his father at the Dominion Savings Bank based in the land titles office.
The younger McMicken recognized that the community was lacking a true bank and set out to provide a remedy. Although his father is not mentioned in historical texts in connection with the private bank, he must have played some role in its establishment. In fact, there seems to be some confusion about who started the bank — some sources cite the father — but sources closest to the period all agree that it was the son, who in 1883 was elected Winnipeg mayor.
George Babington Elliott, accountant and correspondent for the Manitoba Free Press, wrote in his book, Winnipeg as It is in 1874: And as It was in 1860 (published 1875), that A. McMicken occupied a bank and residence erected at a cost of $10,000 on Fort Street. It was “a two-storey wooden building veneered with the popular white brick, and having a flat roof, and substantial door and window frames.”
Early Winnipeg historian George Bryce (1844-1931), a founding member of the Manitoba Historical Society in 1875, in a society presentation on May 13, 1894, said the McMicken Bank did a good business: “But the business of the country needed greater facilities, and on Dec. 14, 1872, the Merchants Bank of Canada was in a building on the west side of Main Street, near the corner of Bannatyne Avenue.”
The opening of the Merchants Bank, the first chartered bank from Eastern Canada in the West— established in Halifax, Nova Scotia, in 1864 and then later merged with the Royal Bank of Canada — was a momentous occasion for the embryonic city.
By 1875, the trail-blazing bank had outgrown its premises and begun construction on a new facility.
The September 25, 1875, Manitoba Free Press, announced that the new $15,000 building at Main and Post Office (Now Lombard) streets, built under the supervision of contractor R. Patterson, was a “source of pride to the citizens.”
“The building is of brick, faced with cut stone, is three storeys high, with basement, and in point of architectural beauty, is excellent.
“Entering the north door, from Main Street, the visitor passes through double doors, the inside one being glass, and finds himself in the banking office proper. The room is beautifully fitted up, with all the modern improvements and accessories to the business.
“The ceiling displays tasteful moulding and stucco work, executed by Messrs Harvey and Griffith, the subcontractors for the plastering. The counter is an exceedingly credible piece of work, in butternut and walnut, beautifully paneled and carved, surmounted with a finely designed railing of open scroll work. The inside of the counter is tastefully fitted with shelfs (sic), drawers, etc. Messrs Blackmore and Cadham are the subcontractors for the carpenter work.
“In rear of the public room is the manager’s private office, and off the hallway leading to the rear of the building is a neat washroom.”
To protect depositors’ money, the bank used a fireproof vault with double doors made by the Hall and Lock Company, founded in Cincinnati, Ohio, in 1848. By 1872, the company was producing 15 to 20 of its “burglar-proof” safes each day.
The two upper floors of the building were the residence of bank manager Duncan MacArthur.
MacArthur was born in Nairnshire, Scotland, on May 29, 1840, and entered service with the HBC in 1865. In 1872, he came to Manitoba and was appointed the manager of the local branch of the Merchants Bank, a post he held for 10 years.
Among the other employees at the new bank building were accountant Henry Thompson Champion, teller F.H. Morice, assistant-manager A.R.J. Bannatyne, ledger-keeper A.E. Hespeler and clerk C. Germain.
Champion, born in Toronto in 1847, was to have a long and significant career in the Winnipeg banking community. He arrived in the West in August 1870 with the Wolseley expedition. Prior to joining the Canadian militia sent to “keep the peace” in the Red River Settlement, following the resistance led by Louis Riel, he had been a clerk with the bank of Montreal in Perth, Ontario. He stayed with the militia in Winnipeg for two years before resigning his post and accepting the position of clerk with the Merchants Bank.
In 1879, he became of partner with William F. Alloway, who later established the Winnipeg Foundation, in the private banking firm of Alloway and Champion.
In 1878, Thomas Dowse, a “travel writer for hire” from St. Paul, Minnesota, said in the pamphlet Manitoba and the Northwest Territories: The Real Northwest, that Winnipeg was the “Gate City of the Northwest” filled with “closely-built blocks of business homes.”
Dowse’s pamphlet is filled with accounts of local businesses and industries, ranging from banks to flour mills to hotels to merchants to buggy makers.
“Perhaps the greatest necessity for successful business enterprise,” wrote Dowse, “mercantile particularly, in either an old or new centre, is proper banking facilities. For so young a city, Winnipeg is remarkably fortunate in this respect, having three solid and substantial (chartered) banks.” The Bank of Montreal and the Ontario Bank joined the Merchants Bank in Winnipeg by 1877.
Dowse said the Merchants Bank was then the most significant financial institution in the city, “occupying a prominent position in the very centre of the town ...”
By 1882, when the CPR tracks linked the city with Eastern Canada, there were eight chartered banks and seven private banks in Winnipeg, as well as 12 mortgage and loan companies.
Merchants Bank branches spread throughout Winnipeg and Manitoba in such communities as Portage la Prairie, Brandon, Woodlands and Carberry. On Main Street at Bannerman Avenue, a branch of the Merchants Bank (later converted into a Bank of Montreal branch) was erected prior to the First World War, the first banking branch to appear north of Redwood Avenue. Other branches included ones found on Main Street and McDermot and Corydon avenues.
At the corner of Main and Lombard, an Historic Winnipeg plaque has been erected, which says: “Merchants Bank Building 1900-02. These shards are from the Merchants Bank which was located on the southeast corner of Main Street at Lombard Avenue. The seven-storey building was Winnipeg’s first steel frame ‘skyscraper.’ It was designed by Montreal architects Taylor and Gordon and built by Black and Co. of Winnipeg. Also called the Lombard Building, it was demolished in 1966.”
On the site of the former main branch of the Merchants Bank now stands the Richardson Building.
The Merchants Bank, erected in 1875, was demolished to make way for the new bank built in 1900-02. By this time, Winnipeg had become the “Gateway to the West,” while members of the local business community, caught up in the enthusiasm of sustained economic growth, proclaimed the city as the “Chicago of the North.”
As the centre of the Canadian grain trade, financial institutions were in place to serve this trade as well as provide a source of capital for overall Western Canadian development.
As Winnipeg came of age, so did the banking system serving the community that started with one private bank and one chartered bank, although both banks eventually gave way to the might of the chartered banks that now exist through merger and acquisition.
Until the mighty Canadian financial institutions emerged, the two initial Winnipeg banks provided an invaluable service in the early economic development of Western Canada.