The Role of Banking in Coordinating an Economy - Free Paper Sample

Introduction

Investment and saving in economies under capitalist is commonly organized around financial intermediation, whereby resources are allocated for investment. During a period of bankruptcy and financial distress, banks play a significant role in funding in terms of loans. In the 19th-century, the bank of Canada did not give deposits priority as their focus was majorly on merchants financed inventories, which facilitated payment internationally. It was insufficient to allow saving by households considering the salaries paid during the industrial revolution. World War worsened the situation as bank liabilities accounted for all the saving calling for the need for a different banking system to act as a remedy. In 1920 the saving of both the middle class and the working class was collectively considered as a Canadian industry source of finance to enable growth and development of the country.

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Banks in History

In the 19th Century, banks were structured in such a way that the central bank had branches to serve the Canadian operations in the firms. They were majorly financed through retained earnings, which involved the profits they retained on railways and intermediaries. New stock issues were brokerage leading to the Pan- Canadian business corporation that led prices setting and becoming British Empire wealthiest financiers (Lamoreaux, 2008). The building of the railroad that was trans-continental opened the country to trade, entrepreneurship, and the wheat boom, which led to Canada's economic growth, the solidity, and longevity of the financial system in the country. Due to the fluctuation in the usage of gold in the bank in 1931, crises occurred in the world monetary making Britain withdraws gold as a standard of exchange (Kolari & Anari, 2019). The reason behind the crises was attributed to the contrary holding of gold by France and the United States affecting British Canadian territory.

New York acted as a reserve to the Canadian bank as the United States economy was considered to be stable compared to the British counterpart hence giving the USA dominion over the source of the imported goods. The situation led to the suspension of Britain as an external creditor after the war. The same scenario occurred in the United States in 1929 that favored the British on the Canadian market (Tang et al. 2020). In the subsequent year, the Canadian dropped the gold standard and deployed the use of their dollar that was performing well compared to the United States dollar, making a drift from the economy that was dependent (Kobrak & Martin, 2018). As a result, the great depression affected the USA but did not affect Canada. Canadian geography was seen as supportive of their economic growth with the St Lawrence River's presence, which eased transportation from the east to west. Also, it made the trade of commodities such as animal product, flour, and lumber business that marked a long period of agriculture prosperity in the country.

Foreign Investments

Foreign investment was heavily made under mercantile. Assets were concentrated by the chattered bank that acted as a zone for industrial infrastructure development by offering credits largely on external capital. According to Eichengreen (2004), Canadian government practiced monopoly on small notes denomination that circulated in the economy, where banks issued notes which were limited to its capital. Also, legislation had to be enacted to ensure there were accuracy and reliability in the process. The period between 1890-1920, Canada, was concentrated on industrial volatility, where the country invested in its industrial value addition mainly in construction, manufacturing, mining, and agriculture (Davis & Gallman, 2001). Considering the early forms of business organization, it is evident that borrowing was given the priority that led to the growth of their territories as the influence of the mercantile helped to shape lending and capital contribution that was required in the organization formation. Flexibility in such a partnership was ensured as long as members were willing to cooperate.

Many organizations and businesses failed to pick up ones again due to the implications of the wars. Mass distribution was attributed to transportation cost, which came with the establishment of railroads and canals that ensured broader markets were easily tapped by the ease of movement of goods from the supplier to the market. In return, the business was able to enjoy the economy of scale. The 1890 period experienced a technological impact, which led to increased value addition to raw product (Cain, 1996). As illustrated, the manufacture of newsprint led to building mills, which were as a result of technology in new wood pulp manufacturing of paper to reach other economies as a result of being produced on a large scale. Having a restricted banking unit took care of the price level, bank liabilities output; hence they became less volatile.

Conclusion

Elasticity will occur in the event where there is a change in technology, but the prohibition of the banknotes is vital in dealing with volatility in the economy. Canadian act of doing away with some regulation has made the banking system to be considered stable, as well as instability in the banking, which has less to do with features inherent in nature in the sector.

References

Cain, P. J. (1996). Gentlemanly imperialism at work: The Bank of England, Canada, and the sterling area, I 932-I93. The Economic History Review, 49(2), 336-357.

Davis, L. & Gallman, R. (2001). Domestic savings, international capital flows, and the evolution of domestic capital markets: The Canadian experience. From evolving financial markets and international capital flows: Britain, the Americas, and Australia, 1865-1914 (345-470). Cambridge University Press.

Eichengreen, B. (2004). Viewpoint: Understanding the Great Depression. The Canadian Journal of Economics, 37(1), 1-27.

Kobrak, C. & Martin J. (2018). Two nineteenth-century emerging and maturing markets. From Wall Street to Bay Street: The origins and evolution of American and Canadian finance (92-319). University of Toronto Press.

Kolari, J., & Anari, A. (2019). Credit Intermediation Lessons from the Canadian Great Depression. Journal of Banking and Finance, 2(1), 21-36.

Lamoreaux, N. R. (2008). Entrepreneurship, business organization, and economic concentration. Cambridge University Press.

Tang, J. J., Quayes, S., & Joseph, G. (2020). Microfinance institutions, financial intermediation and the role of deposits. Accounting & Finance, 60(2), 1635-1672.