Pierre Duguay: The quest for confidence: 400 years of money - from La
Nouvelle France to Canada today
Remarks by Mr Pierre Duguay, Deputy Governor of the Bank of Canada, to students and
faculty of Laval University, Quebec City, Quebec, 10 November 2008.
The original speech, which contains various links to the documents mentioned, can be found on the Bank of
Canada's website.
* * *
Good afternoon. It's a real pleasure to be here.
As we celebrate the 400th anniversary of the founding of Quebec, I thought it would be fitting
for me, as a central banker, to take a look at how money has evolved over part of the past
four centuries. As I relinquish my responsibilities for the issue of Canada's bank notes to
concentrate more fully on financial system stability, I welcome this opportunity to underline
recent progress in the fight against counterfeiting. But I'm getting ahead of myself. I'd like to
thank Laval University and professor Kevin Moran for making this event possible.
The history of money is fascinating. It reflects economic, political, and social history. The
history of money in Canada is particularly colourful. Here, as elsewhere, it is largely the story
of two opposing forces. On the one hand, there has always been a need for a secure and
sound
practical medium of exchange and store of value - that is, for money. Sound money is
money in which we can justifiably place our confidence. On the other hand, there have also
always been two main enemies of sound money - inflation and counterfeiting. It's an exciting
story, this contest between sound money and the forces that can undermine it.
Over the next 45 minutes, I'd like to tell you a bit of this story. I'll start by focusing on the early
days in la Nouvelle France, and then I'll mention two important developments in the 19th
century. I will then provide a context for understanding modern money by briefly describing
the role of the central bank. I'll conclude by covering a few recent developments in money,
particularly electronic alternatives. I'm going to illustrate my remarks with slides of material
from the National Currency Collection, which is maintained by the Bank of Canada. But
before I get started, I should say what I mean by "money."
Money is one of those things. Everyone knows what it is - until they study it - and then it
gets more complicated! The American writer Gertrude Stein said that it was the ability to
understand and count money that differentiated humans from other animals.1
A conventional definition of money is that it is a "medium of exchange" - we use it as the
basic tool to settle commercial transactions. Money solves the many problems that arise with
barter, such as the requirement for a "coincidence of wants." Money is also a "store of value."
It can be saved for future use, and, unlike a private IOU, it is readily accepted because it is
free from the risk of default. Indeed, modern economists would now argue that the main
reason for the use of money as a means of settlement is the risk of default.2 Finally, money
acts as a unit of account - it provides a uniform way to express prices, incomes, debts, and
assets numerically, which is useful for guiding production, consumption, savings, and
investment decisions.
One peculiar thing about money is that in most of its modern forms, it doesn't have much
intrinsic value - you can't eat it and you can't keep yourself warm with it. In fact, the bulk of
money nowadays does not even have a physical form. It consists of deposits in financial
institutions, which exist merely as data in computers.3 But money is nonetheless useful and
is
valuable to the extent that it a reliable store of value (because its value isn't being eroded
by inflation), and to the extent that it can be trusted and readily accepted (because the note
or coin can be ascertained as genuine). All to say, money is useful to the extent that people
confidence
place in it.
Now, let's go back in time . . . to the 17th century.4
The early days of money in Canada
Long before the Europeans arrived in North America, natives were engaged in commerce,
often using various "trade goods." Perhaps the most important trade good in this part of the
world was wampum. Wampum is a string of shells, usually from clams and whelks [image:
wampum beads].5 Its value came from its scarcity - it took a good deal of effort to produce.
In addition to its use in commerce, wampum had symbolic properties and was used in
ceremonies. In the absence of sufficient coinage, wampum was used as money after
European colonization. Indeed, for part of the 17th century, wampum was legal tender in the
Dutch and British-American colonies. But over time, the value of wampum "was reduced and
finally destroyed by cheap imitations imported from Europe"6 - an interesting early example
of the destructive power of counterfeiting.
In July 1608, Samuel de Champlain founded Québec with the goal of permanent settlement.
We don't know much about money during the first 50 years of the colony of Québec, but we
can surmise that the first settlers probably used credit for some of their trade. Credit makes
sense in a small community where everyone knows everyone. Beaver pelts were universally
accepted as a medium of exchange, and so it's fitting that the beaver can still be found on
our 5-cent piece [image: "beaver pelt and 5-cent piece"]. Wheat and moose hides also
served the same function.7 But for the most part, "internal trade was probably carried on by
barter and accounts kept with [trading companies]."8
The first modern money in the colony was coinage, initially the coins settlers brought with
them - French coins, mostly (deniers, doubles, liards, and douzaines), as well as
HispanoAmerican piastres and their divisions. When there were enough of them, these coins were
used for small, daily transactions. But two problems undermined their usefulness.
First, because there was a trade deficit, many of the larger-value coins that were brought to
the colony quickly disappeared. They were shipped to France in payment for supplies and
manufactured goods, and hoarded by colonists as a hedge against uncertain times. To
address the coin-shortage problem, the French authorities in Paris tried, unsuccessfully as it
turned out, in 1670 and again in 1721-1722, to issue coins exclusively for use in New World
colonies [image: 15 sols, 1670]. These experiments failed mostly because the coins could
not be used beyond the borders of the colony. To keep existing coinage in the colony, the
authorities in France also gave a higher value to "monnoye du pays" coins than "monnoye de
France" coins. The premium was initially set at one-eighth in 1664, but was later increased to
one third.9 The second problem was that coins were often "clipped" and therefore
underweight - which undermined confidence as to their worth.
Necessity being the mother of invention, promissory notes became popular. A promissory
note is an IOU. The note pledges that it can, at some specified date, be redeemed for goods
or services or for conventional money [image: promissory note]. Promissory notes have a
special place in the history of money. They are an early example of a great and enduring
invention - paper money - "the gift," according to John Kenneth Galbraith, "of Americans
and Canadians to the Western world."10
In the late 17th century, the American colonies faced similar problems and came up with the
same response: they issued promissory notes. While both the United States and Canada
were pioneers in developing paper money, the style of each country's first paper money was
quite different. In The Age of Uncertainty, Galbraith contrasted the "dull puritanical model of
Massachusetts" paper money with the "sparkling example" of New France11 [image: playing
card money and Massachusetts Bay note]. The "sparkling example" he was referring to was
playing card money, an ingenious solution to a difficult problem, and believed to be the first
paper money ever issued by a Western government.12
In 1685, Intendant Jacques de Meulles issued three denominations of playing card money
(15 sols, 40 sols, and 4 livres). Citizens were advised that the notes would be redeemed as
soon as funds arrived from France. Partly because refusal to accept them as payment was
punished with a fine, but mostly because they met a need, the cards circulated freely and
were a great success. So much so that even though they were redeemed with French money
later that year, more playing card money was issued the following year, and at various times
thereafter. Unlike coins, playing card money did not leave the colony, and in that respect,
represented a clear improvement.
The authorities in France, however, saw the idea as "extremely dangerous, nothing being
easier to counterfeit than this sort of money."13 In fact, it wasn't long before a conviction for
counterfeiting card money occurred. In 1690, Pierre Malidor, a "surgeon," was sentenced to
be "flogged on the naked shoulders by the King's executioner at the gate of the Parish
Church of Notre Dame in this town [i.e., Quebec City], and in the customary squares and
places, in each of which he shall receive six lashes of the whip . . . ." Poor Mr. Malidor was
also fined, bonded into "compulsory service," and banished from the city.14
This shows that
counterfeiting was perceived as a serious threat to the well-being of the colony - which it
was.
But in fact, it was that other enemy of sound money, inflation, that posed the greater threat to
card money. By the early 1690s, soon after it had been introduced, excessive issuance of
card money led to rising prices (or, from another point of view, to diminishing the value of
money). The problem became so acute that, in 1717, card money was redeemed at 50 per
9
The coin shortage "was not confined to Canada - there was a shortage of coin in the British colonies, in
Britain, and in France itself. The shortage in France was as acute as in Canada and economic conditions were
worse." McCullough, ibid, p. 34.
10
J. K. Galbraith, The Age of Uncertainty (Boston: Houghton Mifflin, 1977), p. 180.
11
J. K. Galbraith, ibid, p. 181.
12
The first paper money was issued in China, circa 650 AD.
13
A. Shortt, Documents Relating to Canadian Currency, Exchange and Finance during the French Period,
Volume I, quoted in J. Powell, op. cit., p. 5. Interestingly, playing card money was issued and used in France
some hundred years later during the Revolution.
14
A. Shortt, op. cit., p. 87.
BIS Review 135/2008
cent of its face value and withdrawn "permanently" - despite the reality that no one had come
up with a better medium of exchange.
Adding to the hardships of settlers, the colony itself lacked stable funding. In the 1720s,
"France's finances were still not strong and she could not always forward the necessary
money: in 1727 the colony received only 5,000 livres . . . to apply to a budget of 308,156
livres, and in 1728 and 1729 no specie at all was received."15 The (usually overspent) budget
had to be funded, so another form of promissory note, les ordonnances de paiement, was
issued by the Treasury in Québec in values ranging from 20 sols to 96 livres [image:
ordonnance de paiement].
But to meet the needs of daily commerce, a more practical form of money was required. So
in 1729, despite the "permanent" ban, and this time with the permission of the king, the
colonial government reintroduced card money. This was not playing card money, but money
on card stock of a similar size. Initially again, "Confidence in this new card money was . . .
high . . . . With issuance tightly controlled, card money traded at a premium for a while as the
government increased its issuance of Treasury notes to pay for its operations."16
In the late 1750s, the mounting costs of the war with the British, declining tax revenues, and
rampant corruption, led to rapid inflation. In April 1759, the Marquis de Montcalm noted that
necessities cost eight times more than when his troops had arrived four years earlier - that's
an annual inflation rate of almost 70 per cent! "People fear," he wrote, "I think without
foundation, that the government will . . . authorize a depreciation. This opinion induces them
to sell and speculate at an extravagant scale"17 And indeed, immediately after Montcalm's
defeat, paper money became all but worthless.18
Following the Treaty of Paris, and on into the 19th century, many different forms of money
circulated at the same time in Lower and Upper Canada, and in Nova Scotia and elsewhere.
A single transaction might involve a Treasury note, paper notes from different merchants,
gold, silver, or copper coins, and private tokens. Adding to the confusion, each colony
independently decided the value of the various currencies in circulation.
Following the political union of Lower and Upper Canada in 1841, two significant
developments helped to simplify things: decimalization and the introduction of government
notes. Decimalization - the introduction of dollars and cents as a unit of account - occurred
in the years just before and after Confederation, largely because the people of Canada
wanted it, despite the wishes of British authorities for Canada to stick to pounds, shillings,
and pence [image: example of dual currency note]. At that time, twenty shillings (or a pound)
was worth four dollars. And, interestingly, I might add, "trente sous," which today commonly
refers to 25 cents, was indeed worth one quarter of a dollar (or 15 pence).
It was the failure of two small Toronto banks in the late 1850s that led to a demand for
"improved government supervision" - does that sound familiar? - and thus paved the way for
government-issued notes.19 While the first commercial bank notes in Canada were issued as
early as 1817 by the Montreal Bank (later called the Bank of Montreal), the first government
notes were issued in 1866 [image: Province of Canada note]. These provincial notes
addressed two forms of uncertainty: uncertainty about the solvency of the issuer, and
uncertainty about the ease of redemption. Many notes issued by private banks could be
redeemed only within a limited area, and were subject to a discount that depended on the
distance between where it was redeemed and the bank's head office.
Before we move to the 20th century, I'll mention one of the most interesting and colourful
counterfeiting episodes in Canadian history. In this case, counterfeiting was a family
business: Ed Johnson, the "king of counterfeiting," engraved the printing plates by hand, his
five sons printed the notes, his two daughters forged the signatures on them, and his wife
sold the counterfeits to a wholesale dealer. The Johnsons were caught and served many
years in prison, but not before they had put a million dollars worth of counterfeit Canadian
and American currency into circulation - a significant sum in the 1880s. Banks accepted the
forged notes, not recognizing them as counterfeits, and even the men whose signatures
appeared on the notes couldn't distinguish the forged signatures from their own.
The Johnsons were tracked down and brought to justice by Ontario's first full-time detective,
the famous John Wilson Murray. Detective Murray travelled extensively in the United States,
trying to track down the Johnson clan, before finally catching up with them in Toronto. The
counterfeit notes were extremely well executed, but they "could be distinguished from
authentic notes because they were "too perfect" and lacked the engraving flaws present in
authentic notes."20 "Crime lost a genius," Murray said, "when old man Johnson died"21
[image: genuine note and Johnson counterfeit].
For the sake of brevity, I'm going to skip over some interesting history - Prince Edward
Island's "holey dollar," the paper 25-cent "shinplaster," the issuance of $6 and $7 bank notes,
the rise and fall of "phantom banks," among other developments. But I hope you're beginning
to see that money works only to the extent to which people have confidence in it, and why
the raison d'être of an effective monetary authority is always a "quest for confidence."
Before turning to the modern era, let me underline two lessons from this early period of
history:
• there's a basic need for money, and sound money makes business and commerce
much easier; and
• two main threats - counterfeiting and inflation - can undermine the soundness of
money.
Money and the central bank
To understand money in modern times, it's useful to know a bit about the role of the central
bank.
The Bank of Canada was created in 1934. Interestingly, proposals to establish a central
bank, or something akin to it, go back a long way in Canada - almost 200 years. In 1820, an
anonymous pamphlet published in Quebec "advocated the establishment of a
governmentowned national bank that would be the sole issuer of paper money."22 And in 1841, Lord
Sydenham, Governor General of the United Province of Canada, proposed the establishment
of a bank with many of the powers and responsibilities of a modern central bank. Such a
bank, he thought, could finance public works, generate seigniorage, and make paper money
more effective.
The Depression of the 1930s provided impetus for the creation of a central bank. A
widespread sense that the banking system was not serving the public very well - at a time
when the economy was contracting - led to support for the formation of a central bank.
The Bank of Canada's mandate is to promote the economic and financial well-being of the
country. The Bank does this in three important ways: first, by keeping inflation low, stable,
and predictable; second, by supporting a safe and efficient financial system; and third, by
issuing money that is safe from counterfeiting and readily accepted. These activities help to
provide a sound foundation for economic security and growth.
The Bank of Canada issued its first bank notes in 1935. Each denomination was issued in
separate French and English versions [image: 1935-issue bank notes]. This 1935 series was
the only Bank of Canada series to have a $25 denomination. If you want to buy one of these
notes, be warned: a single note can fetch up to $15,000 at auction! Since 1937, Canadian
bank notes have been bilingual.
To deter counterfeiting, the Bank has issued a new series of bank notes every 15 years or so
[image: $20 bank note over the years]. Anti-counterfeiting features have included intaglio (or
raised) printing, multicoloured tints, microprint, optical security devices, and fluorescent
fibres. But today's technology has increased the counterfeiting threat, and the Bank expects
to issue new bank note series every seven years or so in the future, with the intention of
taking advantage of advances in anti-counterfeiting technology.
In the summer of 2000, counterfeit $100 bank notes from the Birds of Canada series started
to show up in stores in the Windsor-Montréal corridor. They contained facsimiles of the
security devices found in genuine notes, and they were printed on high-quality paper. More
than $5,000,000 worth of these notes were put into circulation before the culprits were
arrested in July 2001, causing many retailers to refuse to accept any $100 bills - a vivid
demonstration of how counterfeiting undermines confidence and exacts many different kinds
of costs.23
This episode prompted the Bank to adopt a comprehensive strategy to deter counterfeiting.
The strategy involved intensified efforts to develop and issue bank notes with enhanced
security features, expanded education of retailers and consumers about bank note security,
and active promotion of law-enforcement and prosecution efforts [image: bank note security
features]. This strategy has proven very effective in dealing with a surge in counterfeiting
from 2001 to 2004 [graph: counterfeit notes detected per million notes in circulation], but we
remain very vigilant.
In 2006, we reinforced this strategy by setting a quantitative objective to bring the number of
counterfeit notes passed in a year to fewer than 100 for each million genuine notes in
circulation by 2009. Drawing on advances in science and technology, the Bank of Canada is
busily involved in developing its next series of bank notes for issue starting in 2011, with a
view to keeping counterfeiting below 50 parts per million.
Before I turn to the future of money, I'd like to say a few words about the exchange rate.
In New France and other North American colonies, the value of local currency vis-à-vis
foreign currencies was typically set by the government and altered in response to economic
imperatives. A similar approach characterized the Bretton Woods system of pegged but
adjustable exchange rates, which defined the international monetary order in the period
following the Second World War.
Canada was a pioneer in departing from that approach, by allowing its currency to float and
have its value determined by market forces. With the exception of a short eight-year hiatus
from June 1962 to May 1970, the Canadian dollar has floated freely since October 1950. As
a trading nation, and a producer of both commodities and manufactured goods, we learned
early on that a flexible exchange rate can facilitate economic adjustment.24 A floating
exchange rate sends important price signals to producers and consumers, prompting them to
adjust effectively to changing circumstances. It also permits monetary policy to focus on
maintaining the balance between overall demand and supply, and thus on controlling
domestic inflation.
So that's the context for understanding money in modern times. The central bank strives to
keep the enemies of sound money at bay by keeping inflation low and stable, and by making
it difficult and unrewarding to counterfeit money. It also strives to maintain a sound financial
system so that money can be effectively and efficiently saved, borrowed, invested, and
transferred.
The future of money
What will money look like a decade or two from now? Will there even be physical money? Or
will electronic alternatives replace money as we know it?
For many decades now, I've seen many premature predictions of the imminent "death of
cash," so I will remain cautious. We do know that despite the many and rapidly developing
alternatives to paper money, the demand for "old-fashioned" bank notes has continued to
grow fairly steadily, in line with the overall economy.
Having said that, it's useful to remember that bank notes and coins are simply a means of
payment, and "alternative" means of payment have been developed, and some of them are
gaining in popularity. Each means of payment has advantages and disadvantages in terms of
convenience, security, and financial cost. Because changes in means-of-payment
preferences can affect both the demand for bank notes and the overall costs of retail
payments, the Bank of Canada monitors and analyzes them carefully.25
At the retail level in Canada, credit cards, cash, and debit cards are all popular, with credit
cards representing roughly 48 per cent of transactions by value, debit card about 30 per cent,
and cash about 22 per cent. While in absolute terms, the use of cash remains fairly steady,
relative
there is clear evidence that it is in decline vis-à-vis the use of credit and debit cards.
But it is the use of cheques that has seen the largest decline, as a result of the increasing
use of debit cards.
Not surprisingly, payment method preferences are affected by an individual's age and
income. A survey conducted by the Bank of Canada shows that payment methods also
depend on the size of the purchase. For purchases under $25, Canadians generally prefer to
use cash. For purchases of $26 to $100, debit cards are the most popular means of
payment. For purchases over $100, credit cards are the most popular.26 Credit cards are
also a preferred means of payment across distances. Cash has one attribute that many
people find attractive - it offers privacy and protection against identity theft.
In coming years, we will likely see an increase in "contactless" payments using credit, debit,
and stored-value cards, including those made by cell phones. Such technology promises
convenience to consumers and retailers, but it also presents security challenges.
While it's difficult to predict the future of money, it's safe to say it will be determined largely by
people's preferences. We naturally gravitate towards a payment method that best suits our
needs.
Conclusion
With the limitations of this kind of presentation, I've really only scratched the surface of
Canada's monetary history. It is a fascinating and colourful story, and opens a window on our
social, political, and economic history.
Sound money is fundamental to our economic well-being. While counterfeiting and inflation
are ever-present threats to sound money, Canada has pioneered some important
innovations in deterring counterfeiting and in controlling inflation. The Bank of Canada plays
a vital role by keeping inflation low, stable, and predictable; by supporting the stability and
efficiency of the financial system; and by producing the currency we depend on in our
commercial lives. In other words, we try to earn your confidence - and that of all Canadians
- every day.
The next time you're in Ottawa, I encourage you to visit the Currency Museum [image:
Currency Museum]. It houses and displays some of the National Currency Collection, and it
tells many interesting stories about money. It's a wonderful showcase . . . and it's free! The
museum also has a terrific website, which you can easily find by visiting the Bank of
Canada's website, and clicking on "Museum" [image: Currency Museum web page].
Finally, if you'd like to learn more about money in Canada, I warmly recommend three books
published by the Bank of Canada [image: three books]: The Art and Design of Canadian
Bank Notes, which explains the art and science of bank note design, and celebrates the
beauty of Canadian bank notes; The History of the Canadian Dollar, which tells the
fascinating story of our dollar and its place in history, economics, and finance; and the next
book in our "souvenir" series: Beads to Bytes: Canada's National Currency Collection, which
will be available at the end of this month, and illustrates the role money plays in society with
some of the extraordinary trove of bank notes, coins, tokens, and related material to be found
in the National Currency Collection. All three books can be obtained at the Currency Museum
or ordered via the Bank's website.
Thank you for your attention. I'd be happy now to respond to any questions.