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The Canadian System

In important respects the Canadian banking system differs from those
of the European countries which have been described and from that of
the United States. It consists of a varying number of relatively large
institutions, each with several offices administered from a common
center, but without a central bank. For some time the total number has
decreased, since 1900 from thirty-six to twenty-seven, in spite of the
fact that the Canadian law, like that of the United States, provides
for the formation of new banks at any time, on compliance with certain
prescribed conditions, including a subscribed capital of at least
$500,000 and a paid-up capital of at least $250,000. The number of
branches, however, has increased rapidly, much more rapidly than the

The most noteworthy legal provisions pertaining to the banking
business in Canada concern note issues and loans and discounts.
Regarding the establishment of branches, the amount, and, with one
exception, the composition of the reserves, and many other matters
carefully regulated by law in the United States, Canadian bankers are
left free to follow their own judgment. Neither is there public
examination of banks in Canada. Reports must be regularly made to the
Minister of Finance, and he may call for special reports whenever he
desires so to do; but neither he nor any other public officer has the
right to examine a bank's books or to quiz its officers or directors.
In contrast with banking legislation in the United States, another
peculiar feature of Canadian law is the incorporation of the Canadian
Bankers' Association, an organization resembling in essentials the
American Bankers' Association, and the assignment to it of important
functions connected with the issue of notes and the winding up of the
affairs of failed banks.

Regarding note issues, the chief provisions of the Canadian law are as
follows: Each bank is permitted at any time to issue circulating notes
to the amount of its capital stock, and between October 1 and January
1 an additional amount, equal to fifteen per cent of its combined
capital and surplus, may be issued on payment of a tax to be assessed
by the Governor in Council, not to exceed five per cent per annum.
The notes are a first lien on all the assets of the bank that issued
them, and must be redeemed on demand at the head office and at such
other places as are designated by a committee of public officials
known as the Treasury Board. As such redemption centers, this board
has named Toronto, Montreal, Halifax, Winnipeg, Victoria, St. John,
and Charlottetown. Each bank must also deposit with the Minister of
Finance a sum of money equal to five per cent of its average
circulation. The aggregate of the amounts thus deposited by all the
banks is known as the "circulation redemption fund," and may be used
in the redemption of the notes of a failed bank. In case the fund is
so used, and the liquidated assets of the bank prove to be inadequate
for its complete replenishment, a tax sufficient to meet the deficit
is levied on the solvent banks in proportion to their circulation.

Regarding loans and discounts, the law aims rather to protect than to
restrict the operations of the banks. They may "deal in, discount, and
lend money, and make advances upon the security of, and may take as
collateral security for any loans, ... bills of exchange, promissory
notes, and other negotiable securities, or the stocks, bonds,
debentures, and obligations of municipal and other corporations,
whether secured by mortgage or otherwise, or Dominion, provincial,
British, foreign, and other public securities." The only important
restriction placed upon their loaning activities is the prohibition of
making advances on the security of landed or other immovable property.

In making loans to wholesale dealers and shippers of produce, the law
safeguards the banks by allowing them to take a blanket lien on the
goods dealt in by the borrower. This lien applies not only to the
goods in possession at the date of making the loan, but to any others
which may be substituted for them or manufactured out of them. This
lien is prior to that of any other unpaid vendor, except one acquired
before the bank's lien was established.

The chief officers of a Canadian bank are the general manager, the
chief accountant, the superintendent of branches, the inspector, and
the secretary, all connected with the head office, and the managers of
the branches.

The general manager is the chief executive and the chief in authority.
While he is subject to the board of directors, on account of his wide
experience and knowledge his judgment is usually followed. The other
officers are appointed by him with the approval of the board, but,
almost without exception, from persons who have served the bank in
subordinate capacities. The general manager himself is nearly always a
man who has passed through the hierarchy of positions from the bottom
up, and is therefore thoroughly familiar with every detail of the
bank's business and history. The inspector has charge of the
examination of the branches, and this work is so carefully and
thoroughly done that examination by public officials is not considered
necessary, or regarded as desirable by most Canadian bankers.
Regarding this matter, however, there are differences of opinion, and
changes in the near future are not improbable. The managers of the
branches are in strict subordination to the authority of the general
manager, though they are necessarily allowed a large amount of
discretionary authority in matters pertaining to the branch over which
they preside. Unless prevented by distance, they are in daily
communication with the head office or with one of its representatives.

In the operation of the Canadian system, noteworthy features are the
methods of controlling credits, of managing the issues and the
reserves, and of securing unity or at least harmony of action. It is
the usual practice in Canada for a business man to do all his banking
with one institution. This practice is rendered possible because most
of the banks are large enough to take proper care of almost any
business establishment in the Dominion, and because experience has
demonstrated its wisdom.

The banks compete vigorously for new business but do not attempt to
attract one anothers' customers. Indeed a customer who desires to
change his banking connections is looked upon with suspicion and is
subjected to a very careful examination by the bank that is asked to
take him on, including a careful discussion of all the aspects of the
matter with the bank he desires to leave. The result of this practice
is that a man's banker is thoroughly familiar with his affairs,
especially his credit relations, and at the same time feels under
obligations to render him such support and guidance as he deserves. On
account of this practice, also, commercial paper brokerage does not
flourish in Canada.

The notes of the Canadian banks constitute practically all of the
hand-to-hand money of the country in denominations above two dollars.
The one and two dollar denominations are supplied by Dominion
notes--all but $30,000,000 of which are represented by gold coin or
bullion--and the lower denominations by subsidiary silver supplied by
the government.

Each bank pays out its notes freely to supply the cash demands of its
customers, and receives from them on deposit, without hesitation or
depreciation, the notes of other banks as well as its own. The former,
however, are either sent in for redemption as soon as received or used
in making payments to the banks which issued them. Thus notes are
cleared as readily as checks and the volume in circulation expands and
contracts in automatic response to business needs. The fact that these
notes are neither legal tender nor guaranteed by the government does
not interfere with their circulation--daily clearings, the first lien
on assets, and the redemption fund amply protecting holders against
the possibility of loss--but does prevent their being hoarded as
reserves or for any other purpose and thus contributes towards their

The connection now established by law between the maximum volume of
bank note issues and the capitalization of the banks renders necessary
the increase of the latter in correspondence with the expansion of
commerce in order to prevent a contraction of credit. Present law,
however, does not provide for such an increase. It is left to the
voluntary action of the banks, which seem inclined to increase surplus
funds rather than capital. The permission granted in 1908 to extend
issues beyond the amount of capital during the crop moving season, on
payment of a tax, is a makeshift and not a solution of the difficulty,
since a tax on issues is a means of forcing contraction of credit and
not of adjusting issues to legitimate needs.

Since Canadian banks are able to meet the greater part of the public
demand for hand-to-hand money by means of their own notes, they do not
need to carry in their vaults large amounts of gold and silver coin
and Dominion notes. They keep on hand only so much as experience
indicates they are likely to be called upon to supply to their
customers, plus a reasonable margin for safety and for the payment of
clearing house balances. The greater part of their reserves consists
of balances in banks outside of Canada, especially in the United
States and England, call loans in New York City, and easily salable
securities. In case of an emergency of any kind these resources may be
transformed into gold or their customers supplied with foreign
exchange, which is often as much or even more needed. Gold can at any
time be exchanged for Dominion notes if that is the currency wanted.

The lack of a central bank and of a rediscount market is to a degree
compensated by unity of action among the banks. This is the result not
so much of law as of conditions, among which the most important are:
the fact that the six largest banks do fifty per cent of the business
and that one of these, the Bank of Montreal, holds most of the
deposits of the government and is generally spoken of as the
government bank; the fact that the general managers are experts, in
first-hand touch through their branches with business conditions in
Canada and other parts of the world, and in possession of the same
data concerning these conditions, and through the same kind of
acquired skill and similar experiences likely to draw the same or at
least similar conclusions from this data; common interests in the
prosperity of the country and in the prevention of speculative
excesses and mutual interdependence in the successful conduct of their
everyday business as well as in times of emergency and stress: and the
Bankers' Association, which through its journal gives authoritative
expression to the best banking opinion and actually acts for the banks
in many matters of common interest. To what extent this community of
action takes the form of rediscounts for each other in ordinary times
it is impossible for an outsider to say, but that it is operative in
times of stress is indicated by the manner in which the failures of
the Bank of Ontario in 1906 and the Sovereign Bank in 1908 were

In both of these cases the public was protected against loss and panic
was averted by the cooperative action of the other banks in assuming
the obligations of these institutions to the public, and in winding up
their affairs in such a manner as to occasion little disturbance.

While Canadian banks are free to carry on investment as well as
commercial banking operations, their published reports indicate that
they take care to avoid confusion of the two, or the infringement of
one upon the other. Their holdings of investment securities are kept
well within the limits set by their aggregate capital, surplus, and
savings funds, and their method of handling commercial business, based
as it is on accurate knowledge of their customer's operations and upon
the lien upon produce heretofore described, prevents their acceptance,
through ignorance, of investment securities under commercial

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