Canada and the Canadian Question/Appendix A

The Canadian Banks hold their franchises by virtue of an Act of the Dominion Parliament, which expires periodically and has just been renewed, extending the Bank Charters for ten years from July 1891.

The Bank of British North America, and the Bank of British Columbia are incorporated by Royal Charters, but are subject to the provisions of the Canadian Act in all respects, except as to the double liability of their Shareholders. The system of Banking modelled upon the plan of the Scotch Banks with Branches, has proved admirably suited to the wants of a new country, and although the management generally has not been conspicuous for ability transcending that of all the other commercial enterprises of the country, the failures and consequent losses to the public have been neither numerous nor large. The tendency of the management is towards a legitimate banking business conducted upon well-established principles.

The provisions governing the creation of new Banks are not too onerous to prevent their increase as the needs of the country may require. Under the new Act the safeguards and restrictions are increased, and they are now severe enough to discourage speculative schemes, a substantial paid-up capital, and a contribution to the fund in the hands of the Government guaranteeing the circulation, being requisite before power to issue notes is granted.

The list of Shareholders published annually as a Government return, and presented to parliament, shows that the Shareholders are chiefly residents in Canada, with a few in Britain and the United States. The liability of the Shareholders in case of failure in further amount equal to the amount of the shares held is no doubt a deterrent to foreign investors. The Banks are permitted to issue their own notes in denominations of $5 and upwards in multiples of $5 to the extent of their bona fide unimpaired ​paid-up capital. Under the new Act, which comes into force in July 1891, they deposit with the Government a sum equal to 5 per cent upon the average circulation of the Bank during the previous year; and this fund is held as a guarantee against loss to the public from the circulation of their note. Any impairment is to be made up by proportionate contribution from each Blank, in payments not exceeding in any one year 1 per cent of the average amount of its notes in circulation. Experience has shown that the risk of ultimate loss on the circulation through the failure of a Bank is infinitesimal, and in order to prevent temporary depreciation to holders of bank notes on the suspension of a Bank, it is provided that they shall bear interest at the rate of 6 per cent per annum until the process of redemption is resumed, either by the bank or by the Liquidator. It is also incumbent upon the Banks to make provision for the redemption of their notes at a central point in each Province, which ensures their passing at par from end to end of the Dominion. The circulation constitutes a first lien upon all the assets of the Bank, including the reserved liability of the Shareholders. It may therefore be affirmed that there is a circulating medium in Canada adequate to all the requirements of the business in it, which cannot be forced upon the community in excess of the daily need, because it is undergoing redemption daily at three central points, and possessing the essential element of elasticity. From the monthly return made to the Government by the Banks, it is shown that the maximum of Bank circulation for the past year (1889) was $33,577,700, and the entire assets, including the Shareholders' Capital and Reserve Food and double liability of Shareholders standing between the public and loss upon it, was $397,300,000 ample security in the aggregate. The guarantee fund in the hands of the Government, amounting to about $1,700,000, with the obligation to contribute to any impairment of it to the extent of 5 per cent upon the average annual circulation of each Bank, is regarded as sufficient to meet loss in any case of failure. The system, however, has its chief recommendation in the element of elasticity, enabling the Banks to meet any extra pressure for money, in moving the crops for instance, by an increase in their circulation without causing a stringency, raising rates of interest, or reducing loans to their regular customers. In this respect it is regarded as superior to the system in the United States, where the circulation of each Bank is secured by Government Bonds deposited with the Government against the notes issued. Here the element of elasticity is entirely wanting, and the market value of the bonds makes it unprofitable for the Banks to hold them, and a stringency ensues upon any abnormal demand for money.

In addition to the notes of the Chartered Banks, the Dominion Government issues legal tender in $1, $2, $4 bills, and those of larger ​denominations, and this is authorised by Act of Parliament to the extent of $20,000,000, but limited at present by order in Council to $19,000,000. The average circulation of those notes for the past year has been about $16,000,000; and, although the Chartered Banks are not compelled to keep any fixed amount of cash in their Treasuries as Reserves proportioned either to their Capital or Liabilities, not less than 40 per cent of their Cash Reserves must be in these Dominion notes. By this means a certain volume of circulation is secured. A forced loan is thus obtained by the Government from the Banks without interest.

The Reserves held by the Minister of Finance are regarded by competent authorities as wholly inadequate, viz. 15 per cent in gold: 10 per cent in Canadian Government securities guaranteed by the British Government; and the remaining 75 per cent in Dominion debentures. To prevent the defection of its Gold Reserves by a demand for export to New York when it would be profitable to send gold there British sovereigns are paid out, and American gold, which could be negotiated without discount or depreciation, refused. The Government circulation is further stimulated by making certain proportions of it redeemable only at certain cities. It is of course a legal tender in every part of Canada.

The system of Banks with large capital, having their head offices in the commercial centres and extending their operations by means of branch offices at various points, is admirably suited to a new country. and in this respect is also regarded as superior to the National Bank system of the United States, where branches are forbidden and the operations of each lank are restricted practically to the locality in which it is established. In Canada the savings of the people are gathered up at points where they can be attracted in amounts sufficient to warrant the opening of a Branch Bank, and if the local loaning business offered is small or undesirable, the funds are employed in commercial and industrial centres, and the value of money is thus equalised, or nearly so, all over the Dominion. It is assumed that in the hands of a Bank with large capital are a liberal reserve fund deposits are safer than when entrusted to a smaller institution whose opportunities of doing a safe, legitimate, and profitable business are restricted to the discounts offered in a single locality.

Four of the largest Banks in Canada have offices in New York, one has an office in Chicago, and one in San Francisco, where they do a large business in Foreign Exchange, and employ their Reserves on call and short-date loans, so that they may be immediately available in cases of emergency. Further than this, and with the exceptions of the ordinary items sent from and to either side for collection, the Banks in Canada and the United States have no relations with one another.

The Government of Canada has been an active competitor with the ​Chartered Banks for the savings of the people, through the agency of the Post Office and Savings Banks. Of the former there are 463, with a balance at the credit of depositors of $23,000,000, and in Savings Banks $20,000,000. These sums have been obtained by a rate of interest being paid at a higher rate than the largest Chartered Banks found it necessary to pay.

The Building Societies and Loan Companies which have the power to take deposits have also been active competitors with the Banks in this department, and, since 1867, the deposits in these institutions have increased from $577,290 to $17,757,376 in 1889. The managers of such companies are beginning to realise that there is danger in borrowing on call and loaning on land security without adequate reserves immediately available being retained. A run upon one company in troublous times would probably precipitate disaster, and efforts are being made to convert call deposits into true debentures when opportunity offers.

The Chartered Banks are not allowed to loan money on the security of their own stock or on real estate. The monthly return of their assets and liabilities, made to the Finance Minister, is elaborate, but serves a useful purpose, and as published is carefully studied and commented upon in the financial papers.

The rate currently paid by the Banks for deposits is from 3 per cent to 5 per cent. A rate of interest so high has attracted large deposits: in 1867 the total amount at the credit of depositors was $30,652,193; in 1889 it was $126,243,755. The rate on loans and discounts varies from 6 per cent to 8 per cent, according to the character of the business, and dividends are paid from 6 per cent to 13 per cent, according to the running capacity of the Bank, and the skill with which it is managed, The Dominion Bank, whose head. quarters are in Toronto (Capital $1,500,000 and Rest $1,300,000), pays dividends of 10 per cent per annum, and their shares of $100 are sold for $230. The Bank of Toronto (Capital $2,000,000, and Rest $1,400,000), also pays dividends of 10 per cent per annum, and their shares are quoted at 224 per $100. The Bank of Montreal (Capital $12,000,000, and Rest of $6,000,000), pays 10 per cent, and the market value of their shares is 229 per $100. Most of the other Banks in the Province pay a yearly dividend ranging from 6 to 8 per cent, after carrying, in many instances, a substantial amount to the Rest Account and providing for contingencies. The more substantial Loan Companies pay an annual dividend of 10 per cent, and frequently with a bonus to their stockholders. The Dominion "Statistical Abstract" gives the total amount of money on deposit in 1889, in the Chartered Banks, Post Office, and Government Savings Bank, and in the hands of Loan Companies, as upwards of $207,000,000, equal to the sum of $40 per head of the population.