Free banking and economic growth in Lower Canada, 1817 to 1851

My colleauge Mathieu Bédard and myself submitted one of our working paper as a conference paper on the issue of free banking in the Lower Canada (Quebec before confederation). Here is the abstract :

Generally, the historical literature presents the period from 1817 to
1851 in Lower Canada (modern day Quebec) 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 eff ects 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 e ffect of mitigating the problem of the
abundance of poor quality coins in circulation which resulted from legal
tender legislation. It also had the e ffect 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 e ffect of free banking on economic growth in Lower
Canada, we can be certain that its e ffect on growth was clearly positive.


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