256 PA R T I I I Financial Institutions $5) notes, thereby giving the government a monopoly over small-denomination ($1 and $2) notes, the Dominion notes Although the Dominion Notes Act of 1870 did not set any reserve requirements, it required banks to hold at least half of their reserves in Dominion notes, thereby giving the government a share of the profits from the issuance of money, which is called seignorage The Dominion notes themselves were fractionally backed by gold, and in this sense the Dominion Notes Act of 1870 confirmed that Canada would operate under the gold standard, meaning that its currency was convertible directly into gold Canada operated under the gold standard, keeping its currency backed by and convertible into gold, until World War I During the years 1870 1935, Dominion notes increased in importance, but they never accounted for a major fraction of currency in circulation They were superseded, together with the banknotes, by Bank of Canada notes, soon after the creation of the Bank of Canada (Canada s central bank) in 1935 The First Bank Act, 1871 The first Bank Act came into effect in 1871 It was to be revised every 10 years, in light of experience and changing conditions; this sunset clause has effectively ensured that governments over the years paid periodic attention to banking reform The Bank Act set the regulatory environment for Canadian chartered banks and for the future development of Canadian banking practices The Act continued the legislative chartering of banks, with each charter running for a ten-year period, then to be reviewed and renewed New banks had to meet minimum capital requirements: $100 000 paid up before they opened for business against a total of $500 000 The banks note issue continued to be restricted to large-denomination (over $5) notes and limited to the amount of their paid-up capital plus reserves There were no reserve requirements, but one-third of a bank s cash reserves were required to be in the form of Dominion notes The Act continued the prohibition against mortgage lending and real estate loans, but it reinforced the commercial nature of banking by allowing banks to make loans on the security of most kinds of merchandise Also, for the greater security of the public, bank shareholders were liable for double the amount of their subscription Finally, each bank was required to submit a detailed statement to the government on a monthly basis, but there was no provision for government inspection or audit The Bank Act, 1881 1913 A depression followed Confederation and lasted from 1873 to 1879 During the depression years, the banks were hard hit and thirteen bank failures (four in 1878, five in 1887, and another four in 1890) wiped out the savings of many noteholders To prevent future losses from such failures, the early decennial revisions of the Bank Act, in 1881, 1891, 1901, and 1913 (postponed since 1911), were intended to provide better protection for the holders of banknotes, but the Act was not substantially changed In particular, in the Bank Act revision of 1891, the capital requirement was increased to $250 000 paid up, thereby restricting entry into the industry The proportion of Dominion notes in bank cash reserves was increased to 40%, and the notes of a failed bank were made a first charge against its assets in the event of liquidation Moreover, in the Bank Act revision of 1891, a Bank Circulation Redemption Fund was created, each bank contributing an amount equal to 5% of its average note circulation, to insure noteholders against loss