Free Banking and Economic Growth in Lower Canada, 1817-1851

16 Pages Posted: 20 Aug 2014 Last revised: 29 Aug 2014

Mathieu Bédard

Montreal Economic Institute; Aix-Marseille University - Aix-Marseille School of Economics

Vincent Geloso

Texas Tech University

Multiple version iconThere are 2 versions of this paper

Date Written: August 28, 2014

Abstract

Generally, the historical literature presents the period from 1817 to 1851 in Lower Canada (modern day Québec) as one of negative economic growth. This period also coincides with the rise of free banking in the colony. In this paper we propose to study the effects of free banking on economic growth using theoretical and empirical validations to study the issue of whether or not economic growth was negative. First of all, using monetary identities, we propose that given the increase in the stock of money and the reduction in the general price level, there must have been a positive rate of economic growth during the period. We also provide complementary evidence drawn from wages that living standards were increasing. It was hence impossible for growth to have been negative. Secondly, we propose that the rise of privately issued paper money under free banking in the colony had the effect of mitigating the problem of the abundance of poor quality coins in circulation which resulted from legal tender legislation. It also had the effect of facilitating credit networks and exchange. We link this conclusion to the emergence of free banking which must have been an important contributing factor. Although we cannot perfectly quantity the effect of free banking on economic growth in Lower Canada, we can be certain that its effect on growth was clearly positive.

Keywords: Economic Growth, Free Banking, Price Level, Private Money

JEL Classification: N11, N21, E31

Suggested Citation

Bédard, Mathieu and Geloso, Vincent, Free Banking and Economic Growth in Lower Canada, 1817-1851 (August 28, 2014). Available at SSRN: https://ssrn.com/abstract=2482313

Mathieu Bédard (Contact Author)

Montreal Economic Institute ( email )

910, rue Peel, bureau 600
Montreal, Quebec J7R 6Y9
Canada
514 273-0969 (Phone)
514 273-2581 (Fax)

HOME PAGE: http://www.iedm.org/

Aix-Marseille University - Aix-Marseille School of Economics ( email )

2 rue de la Charité
Marseille, 13236
France

Vincent Geloso

Texas Tech University ( email )

1901 University Avenue
Lubbock, TX Texas 79410
United States

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