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

population.



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

elasticity.



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

handled.



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

disguise.