The Online Library of Liberty

A project of Liberty Fund, Inc.

• Banking In the Latin Nations.
• Part I.: Banking In France.
• Chapter I.: Its Status Before the Revolution.
• Chapter II.: The Bank and “system” of Law.
• Chapter III.: The Discount Bank—la Caisse D’escompte.
• Chapter IV.: Assignats—the Basis of Their Issue.
• Chapter V.: The Bank of France.
• Chapter VI.: Banks and Bankers After the Revolution.
• Chapter VII.: Banking In the French Colonies.
• Part II.: Banking In Italy.
• Chapter I.: Primitive Banks.
• Chapter II.: Banking Under the Unification of the Kingdom.
• Chapter III.: Italian Co-operative Banks.
• Chapter IV.: The Bankers of Florence.
• Chapter V.: Banks and Bankers In Sicily.
• Part III.: Banking In Spain.
• Chapter I.: The Earliest Banks.
• Chapter II.: The Bank of Spain.
• Part IV.: Banking In Belgium.
• Part V.: Banking In Switzerland.
• Part VI.: Banking In Portugal, 1750 to 1891.
• Chapter I.: The First Great Banks.
• Chapter II.: The Bank of Portugal.
• Part VII.: National Bank of Roumania.
• Part VIII.: The Latin Monetary Union.
• Part IX.: Dynamics of Circulation.
• Part X.: The Banks of Alsace-lorraine After the Annexation. *
• Banking In Canada.
• Author’s Preface.
• Chapter I.: Currency Expedients.
• Chapter II.: 1817-1841. Banking Under Joint-stock Charters.
• Chapter III.: 1841-1867. Banking In Old Canada.
• Chapter IV.: Banking Under the Dominion.
• Chapter V.: Scope of Existing Laws.
• Chapter VI.: Land Banks—loan Companies.

CHAPTER IV.

BANKING UNDER THE DOMINION.

THE PRESENT ACT.

IN 1867, the Parliament of Great Britain, by a measure known as the British North America Act, empowered the various political divisions of British North America, or such of them as chose to do so, to confederate under the title of the Dominion of Canada. The province of Canada, which had been formed out of the older provinces of Lower and Upper Canada, was again divided into the present provinces of Quebec (Lower Canada) and Ontario (Upper Canada), and to these the maritime provinces of Nova Scotia and New Brunswick were added. Additions were rapidly made until the Dominion was formed as it now exists. It comprises the provinces of Quebec, Ontario, Nova Scotia, New Brunswick, Prince Edward Island, Manitoba, and British Columbia, and the Northwest Territories, which are divided into five districts.

Under the British North America Act, the Federal Government (the Government of the Dominion as distinguished from those of the various provinces) alone possesses the power of legislating as to coinage, currency, and banking. The situation as to banking which had to be considered by the new government, although rendered serious by the bank failures, was not very complicated. The two maritime provinces were not in their financial ideas very materially out of harmony with old Canada, and instead of being called upon to uproot the pernicious legal-tender system of Nova Scotia, the Dominion Government was, because of the recent act of old Canada, only too likely to continue the policy of borrowing money in such an easy manner. The banking acts passed in 1867, 1868, and 1869 need not detain us. They were in the main merely measures to continue under the authority of the Dominion and extend to its larger area the powers already enjoyed, harmonizing a few inconsistencies, extending until 1870 any charters which were at the point of expiry, and adopting on behalf of the Dominion the terms, with little alteration, of the Provincial Note Act. But although the author of the Provincial Note Act had found it necessary to resign because of its unpopularity and what was deemed to be his share in the bank failures, his successor was evidently possessed with the same mania. Early in 1868, he proposed to the House of Commons the creation of a Committee on Banking and Currency, and he, evidently with the aid of the Government’s bankers, strove hard to create a public opinion in favor of a system not essentially different from the old free banking system and its powerful and at that time apparently successful offspring, the National Banking System of the United States. The Committee on Banking and Currency obtained evidence from a large number of bankers and business men, the most valuable result being the recommendations made by them for the improvement of the then existing system, and not the evidence for or against the proposed scheme. And although the Minister of Finance offered his measure in Parliament, the opposition was of such a character that it was not thought expedient to press the matter at that time. Within a few months the new Minister of Finance also resigned.

The task of framing a general bank act for the Dominion now fell to a Minister who, although he had strong predilections in favor of the English Bank Act of 1844, was wise enough to realize that the practical bankers of the country, in their desire to curb their own weaker members, if for no other reason, were probably the best guides as to the wisest course to be followed. Conferences were held with them, and in the Minister’s remarks in introducing and debating the measure which he finally proposed, he admitted the inexpediency of adopting either the United States National Banking System or the older idea of a Government bank of issue; and in doing so he also admitted that the system of note issues not specially secured must be continued. But the act for the issuance of Government notes through banks, whose profits on their own issues, thus relinquished, had been replaced by a sum paid periodically by the Government in commutation thereof, created a difficulty which must first be disposed of. The Government’s bankers had alone been willing to enter into this arrangement, and it was therefore now terminated by a compromise. The banks were thereafter prohibited from issuing notes smaller than $4 (subsequently fixed at $5), being at the same time released from the tax on circulation of one per cent. per annum, and the attempt was made to force them to hold a minimum cash reserve against their liabilities, of which a certain percentage must be in legal-tender notes. The principle of a fixed reserve could not be carried, but the banks were required thereafter to hold in legal tenders a certain percentage of whatever reserve they did maintain.

With the power to provide all of the change-making notes of the country, and with the conviction that the banks must steadily hold in their reserves a considerable proportion of the issue, the Government felt safe in fixing the maximum of legal tenders, for the time being, at $9,000,000—an increase of $1,000,000 over the old provincial issue. The regulations with regard to reserves to be held by the Government were slightly altered. The portion covered by debentures was not to exceed eighty per cent., and specie must be held to cover the balance, with a provision that the proportion of specie must not go below fifteen per cent. Issues above $9,000,000 were to be covered entirely by specie.

There were other important discussions and some minor changes in principle, but, in the main, the way was paved for the adoption, pretty much as they stood, of the body of banking laws hitherto in force in the old province of Canada. In 1870, such an act was passed, but permitting the charter of a bank to be renewed by the Governor-in-Council on a report from the Minister of Justice and the Treasury Board assenting thereto. This was not regarded favorably by the banks, who preferred that Parliament should deal with the renewals as well as with the granting of charters. They also desired that regulations for the internal management of banks should be made uniform, and the Act of 1871, covering and thus extending the Act of 1870, was the result. It provided that all banks working under provincial charters might, when such charters expired, come under the Dominion Act, and that all charters under the Dominion Act should expire in 1881. Several special provisions had to be made to cover the few banks whose constitutions were not in accord with the majority of the provincial banks, but, as far as possible, an harmonious system was established. The practice was thus fairly settled, although not, we believe, asserted as a principle, of a decennial revision of the Bank Act accompanying decennial renewals of charters, and in 1880 and 1890 these revisions have taken place. In the interval, Parliament has made such changes as seemed expedient, although the implied agreement with the banks may be presumed to be that no radical changes will be made except at these decennial revisions.

Hitherto it has been convenient to follow events pretty much in their chronological sequence. But, since confederation in 1867, the growth of banking in volume, and the incidents of success and failure connected therewith, are not only quite beyond the scope of the present history, but have no special relation to its purpose, except in so far as they affect the principles with which it deals. The simplest plan, and that, we think, most agreeable to the reader, will therefore be to direct, without further remarks, his careful attention to the subjoined abstract of the present Dominion Bank Act, that of 1890. Every effort has been made to condense the matter and to avoid technical language, and it is hoped that, in connection with the explanatory pages which follow, it will set forth the principles of the act more clearly than a direct examination of the act itself.

ABSTRACT OF THE BANK ACT.

53 Victoria, Chapter 31, Assented to May 16, 1890, to Come in Force July 1, 1891.

STATUTE OF DOMINION OF CANADA.

Sections 1, 2. Title and Interpretation Clauses.

Application of Act.

Secs. 3, 4. Apply to thirty-six banks enumerated in Schedule A, and any banks incorporated in future, continuing all such charters until July 1, 1901, subject to provisions of this General Bank Act.

Secs. 5, 6, 7, 8. Special provisions for three banks, included in the thirty-six, whose charters differ materially from all other Canadian banks, and for one, not included in the thirty-six, the provincial charter of which, granted before confederation, had not at this time expired. (This bank is now working under the act.)

Incorporation and Organization.

Sec. 9. Act of Incorporation, for which form is supplied (Schedule B), must declare the name of bank, capital stock, place of chief office, and names of provisional directors.

Sec. 10. The capital stock of any bank hereafter must be not less than $500,000, with shares divided into $100 each.

Sec. 11. There must be not less than five nor more than ten provisional directors, who are to hold office until subscribers elect directors in accordance with act.

Sec. 12. Provisional directors may, after public notice, open stock-books for subscription of shares.

Sec. 13. When $500,000 has been bona fide subscribed, and not less than $250,000 actually paid to the Minister of Finance and Receiver-General, the provisional directors may, after four weeks’ public notice, hold first meeting of subscribers, at which meeting the subscribers shall elect qualified directors to the number of not less than five nor more than ten, replacing provisional directors, and name the date of annual meetings.

Sec. 14. Nothing in the nature of the business of banking shall be transacted until the regular board of directors shall have applied for and obtained a certificate from the Treasury Board permitting the bank to commence business. Breach of this constitutes an offence against the act. (See later as to punishment for offences against the act.)

Secs. 15, 16. Treasury Board shall not issue such certificate until all requirements of this act, and the special Act of Incorporation, have been fulfilled, especially as to the deposit of actual cash, to an amount not less than $250,000, having been made and still being in the hands of the Minister of Finance and Receiver-General. If certificate not issued before one year after passing of Act of Incorporation, all rights lapse.

Sec. 17. Upon issue of certificate, Minister of Finance and Receiver-General pays back all moneys deposited.

Internal Regulations.

Sec. 18. The shareholders may (instead of the directors) pass by-laws regarding the following matters:

Date of Annual General Meeting at which shareholders elect directors.

Regulations (subject to limitations mentioned in act) as to proxies, number, quorum, qualification, remuneration, etc., of directors.

Limit of loans or discounts to directors, or to any one person, firm, corporation, or to shareholders.

Authority to establish and contribute to guarantee and pension funds.

Secs. 19, 20. Affairs of bank intrusted to board of directors, eligible for re-election, who are elected annually by shareholders, subject to provisions regarding the minimum qualification in stock-holding, the proportion to be British subjects and the manner of election.

Secs. 21, 22, 23. Provide for chairmanship of board, by-laws by directors, employment of bank officers, and that these shall give security for faithful performance of duties.

Sec. 24. Provides for special general meetings, removal of president or director, etc.

Sec. 25. As to manner of voting by shareholders.

Capital Stock.

Secs. 26, 27. Manner of increasing capital stock and allotting shares.

Sec. 28. Manner of reducing capital stock.

Secs. 29 to 34 inclusive. Manner of subscribing for shares, making calls thereupon, etc.

Secs. 35 to 44 inclusive. Manner of transfer and transmission of shares.

Annual Statement.

Sec. 45. At annual meeting directors must submit clear and full statement of affairs (see act for details).

Sec. 46. Books, correspondence, funds, etc., at all times subject to inspection by directors.

Dividends. (Profits.)

Sec. 47. Dividends, unless not earned, to be declared not less often than half-yearly.

Sec. 48. Directors who knowingly join in declaring dividend or bonus which impairs paid-up capital shall be jointly and severally liable therefor.

If capital is impaired directors shall make calls upon shareholders to make good such impairment. Net profits must be applied for same purpose.

Sec. 49. No dividend or bonus, or both combined, exceeding eight per cent. per annum shall be paid unless the net rest fund, or surplus profit reserved, exceeds thirty per cent. of the paid-up capital.

Reserves.

Sec. 50. Of the cash reserves held by a bank (the proportion of such reserves to liabilities being entirely at the bank’s discretion) not less than forty per cent. shall be in legal-tender notes of the Dominion of Canada. Penalty for non-compliance $500 for each violation.

Note Issues.

Sec. 51. Banks may issue notes payable to bearer, on demand, and intended for circulation. No note smaller than $5, and all notes to be multiples of $5. Total issue shall not exceed the unimpaired paid-up capital. (A sub-section further limits the issues of two of the banks referred to in sections 5 to 8 inclusive.)

The following are the penalties for issues in excess of the amount authorized by this act:

Sec. 52. Bank shall not pledge its notes, and no loan thereon shall be recoverable from a bank. Any director or officer concerned in the pledging of a bank’s notes, and any person receiving such notes as security, shall be liable to fine, not less than $400 nor more than $2000, or imprisonment for not more than two years, or both.

Similar clause regarding fraudulent issue of notes, penalty being imprisonment for term not exceeding seven years, or fine not exceeding $2000, or both.

Sec. 53. Note issues are a first charge on the assets of the bank in case of insolvency; any debt due to the Dominion Government a second charge; and any debt to the Government of any province a third charge. Any debt due the Dominion Government at the time of insolvency for penalties under the act not payable until all other liabilities are paid.

The Bank Circulation Redemption Fund.

Sec. 54. Each bank shall maintain with the Minister of Finance and Receiver-General a deposit “equal to five per cent. of the average amount of its notes in circulation” for the twelve months prior to the preceding 1st July.

These deposits shall constitute “The Bank Circulation Redemption Fund,” which shall be held only for the purpose of redeeming the notes of banks which fail to redeem their issues in specie or legal tenders, and any interest due thereon. For all notes so redeemed the fund shall have the same rights against the estate of the failed bank as any other holder. The Government shall allow interest on the fund at three per cent. per annum. (A sub-section provides the manner of ascertaining the average circulation of each bank.)

If a bank suspends payment of its notes, interest accrues thereafter at six per cent. per annum, until a day named for their redemption, of which public notice must be given by the liquidator or other officer in charge; after which, so long as redemption of all issues presented is maintained, further interest on notes outstanding ceases. If, after the expiration of two months from date of suspension, the liquidator is not prepared to redeem, the Minister of Finance and Receiver-General may redeem out of the fund, after notice, whereupon interest ceases.

If payments made from the fund exceed the contributions of the particular bank whose notes are so redeemed, the remaining contributors shall recoup the fund pro rata to the amount at credit of each with the fund, for such excess, recoveries from the estate of the failed bank being of course distributed among such contributors in like proportion. Provided that no bank shall be required to pay in any one year more than one per cent. calculated on its average circulation.

In the winding up of a bank and upon satisfactory arrangements being made for the redemption of all outstanding notes with interest, the Treasury Board may return the sum at credit of the bank with the fund, or such part of it as may seem expedient.

The Treasury Board may make rules and regulations for the management of the fund.

The Minister of Finance and Receiver-General may take legal action to enforce payment of any sum due by a bank under this section.

Sec. 55. Banks are required to ensure the circulation of their notes at par in every part of Canada. This is at present effected by requiring each bank to have known redemption agents in the cities of chief commercial importance in each province, of which seven are named in the act.

Sec. 56. Although the notes of a bank are almost invariably payable only at its head office, its notes must be received in payment of debts at any of its establishments.

Sec. 57. In making a payment, a bank must, if required, provide Dominion legal tenders in denominations of one, two, and four dollars, not exceeding one hundred dollars in any one payment. No payment in legal tender or bank notes shall be made in torn or partially defaced notes.

Sec. 58. Provides that obligations under seal of the bank may be assignable by the indorsement of the person to whom made payable. Notes of issue to be binding without the seal of the bank, and may be assigned without indorsement. Proviso as to who may be authorized to sign notes of issue for the directors.

Sec. 59. Authorizes engraved signatures, provided there is at least one authorized written signature on each note.

Sec. 60. Penalty for issue of notes to pass as money except by a bank, and as to what shall be deemed such notes.

Sec. 61. Penalty for defacing legal tenders or bank notes.

Sec. 62. Instructions to officers receiving public moneys and to bank officers and bankers’ employees to stamp or write on fraudulent legal tenders or bank notes, such words as “counterfeit,” “altered,” or “worthless,” in accordance with the fact.

Sec. 63. Penalty for issuing advertisements in the form of legal tenders or bank notes.

Business and Powers of the Bank.

Sec. 64. The bank may open branches, agencies and offices, and may engage in and carry on business as a dealer in gold and silver coin and bullion, and it may deal in, discount and lend money and make advances upon the security of, and may take as collateral security for any loan made by it, bills of exchange, promissory notes and other negotiable securities, or the stock, bonds, debentures and obligations of municipal and other corporations, whether secured by mortgage or otherwise, or Dominion, Provincial, British, foreign and other public securities, and it may engage in and carry on such business generally as appertains to the business of banking; but, except as authorized by this act, it shall not, either directly or indirectly, deal in the buying, or selling, or bartering of goods, wares and merchandise, or engage or be engaged in any trade or business whatsoever; and it shall not, either directly or indirectly, purchase, or deal in, or lend money, or make advances upon the security or pledge of any share of its own capital stock, or of the capital stock of any bank; and it shall not, either directly or indirectly, lend money or make advances upon the security, mortgage or hypothecation of any land, tenements or immovable property, or of any ships or other vessels, or upon the security of any goods, wares and merchandise. (Quoted in full.)

Sec. 65. A bank has a privileged lien on shares of its own stock held by a debtor, or on dividends thereon, for any debt or liability of shareholder. Provision as to when bank may sell after default, and how to transfer title.

Sec. 66. Similar provision for sale of collateral securities when no agreement as to power of sale has been made.

Sec. 67. Bank may hold real property for its own use and occupation.

Sec. 68. Bank may take for a debt already contracted additional security by mortage on real or personal property.

Sec. 69. Bank may purchase real property sold under execution, etc., provided it already has a lien thereon as security for a debt.

Sec. 70. Bank may acquire title to real property on which it has a lien as security, by acquiring equity or by foreclosure. But no bank shall hold real property, except for its own use and occupation, longer than seven years.

Sec. 71. General clause confirming right of banks to hold real property and to convey same.

Sec. 72. Gives power to advance money for building ships and to take such security thereon as private individuals are permitted to take.

Sec. 73. Gives power to advance on ordinary warehouse receipts and bills of lading.

Sec. 74. (1) The bank may lend money to any person engaged in business as a wholesale manufacturer of any goods, wares, and merchandise upon the security of the goods, wares, and merchandise manufactured by him or procured for such manufacture;

(2) The bank may also lend money to any wholesale purchaser or shipper of products of agriculture, the forest and mine, or the sea, lakes and rivers, or to any wholesale purchaser or shipper of live stock or dead stock, and the products thereof, upon the security of such products, or of such live stock or dead stock, and the products thereof;

(3) Such security may be given by the owner and may be taken in the form set forth in Schedule C to this act, or to the like effect; and by virtue of such security, the bank shall acquire the same rights and powers in respect to the goods, wares, and merchandise, stock or products covered thereby, as if it had acquired the same by virtue of a warehouse receipt. (Quoted in full.)

Sec. 75. Bank may not hold warehouse receipt or bill of lading under Section 73, or pledge under Section 74, unless acquired at time of making loan, or unless a promise to give same was acquired or held at time of making loan. May exchange warehouse receipt, bill of lading or pledge for any other form of lien on the same goods. Penalty for false statement in warehouse receipt, bill of lading or pledge, or for alienating or removing goods covered by warehouse receipt, bill of lading or pledge, imprisonment not exceeding two years.

Sec. 76. Material or goods on which bank has a lien by warehouse receipt or pledge may be converted by manufacture without the bank losing its lien.

Sec. 77. All advances so secured under Sections 73 and 74 shall have priority to the claim of an unpaid vendor, unless he had a lien on such goods of which the bank was aware.

Sec. 78. How power of sale, in case of default, shall be exercised.

Sec. 79. Penalty to a bank violating any of Sections 64 to 78 inclusive, a sum not exceeding $500.

Sec. 80. Bank not liable to any penalty or forfeiture for usury. May stipulate for and recover, or may take in advance, any rate not over seven per cent.

Sec. 81. No negotiable instrument to be void on ground of usury.

Sec. 82. Bank in discounting bills payable at its own branches may not take commission in addition to interest beyond the following rates: Bills under thirty days, one-eighth of one per cent; thirty or over, but under sixty, one-fourth of one per cent.; sixty or over, but under ninety, three-eights of one per cent.; ninety days and over, one-half of one per cent.

Sec. 83. Bank in discounting bills payable at points where it has no branches may charge a commission, not exceeding in any case one-half of one per cent.

Sec. 84. Bank may receive deposits from any person, whether qualified by law to contract or not, and may repay unless the money is lawfully claimed by another. Proviso that deposits under this authority shall not in any one case exceed $500.

Bank shall not be bound to see to the execution of any trust in relation to such deposits.

Returns by Banks to Government.

Sec. 85. Monthly Returns: Banks must send to the Minister of Finance and Receiver-General a statement to the close of each month. (This return, the form of which will be found at Schedule D of the act, covers a very full statement of assets and liabilities under uniform headings, and is published in the Government Gazette.) Penalty, $50 per day for each day’s delay after 15th of subsequent month.

Sec. 86. Special Returns: The Minister of Finance and Receiver-General may call for special returns at any time. Penalty, after thirty days, $500 per day, unless the Minister of Finance extends the time.

Sec. 87. List of Shareholders: At the close of the calendar year each bank must supply to the Minister of Finance and Receiver-General a list of shareholders, with addresses and number of shares held. Penalty, $50 a day after twenty days.

Sec. 88. Unclaimed Moneys: At the close of the calendar year banks must make to the Minister of Finance and Receiver-General a statement of dividends and all other amounts which have been unclaimed, or regarding which there have been no transactions for five years, giving names and addresses in full. Penalty, $50 per day after twenty days.

The liquidator of a bank, after three years, shall pay over to the Minister of Finance and Receiver-General all such amounts remaining unclaimed, together with all interest due, and the Government shall hold these in trust for the owners, continuing interest, where this was contracted for by the bank, at three per cent. per annum.

The liquidator of a bank shall, also, after three years, pay to the Minister of Finance and Receiver-General an amount equal to the outstanding circulation to be held by the Government in trust for the holders of such notes.

Insolvency.

Sec. 89. If the assets are insufficient to meet the liabilities, shareholders, in addition to their liability upon unpaid shares, are liable for further payments to an amount equal to the par value of shares held.

Sec. 90. The liability of a bank for any moneys deposited, or dividends declared, continues notwithstanding any statute of limitations.

Sec. 91. Suspension for ninety days, either consecutively or at intervals during twelve months, constitutes insolvency, and forfeits charter, except for purposes of liquidation.

Secs. 92, 93, and 94. Manner of making and enforcing calls authorized by Section 89.

Sec. 95. As to liabilities of directors in event of failure.

Sec. 96. Shareholders do not escape liability under Section 89, unless shares transferred more than sixty days prior to suspension of payment.

Offences and Penalties.

Sec. 97. Any director or officer giving undue preference in any manner to any creditor of a bank is subject to imprisonment for term not exceeding two years.

Sec. 98. All penalties collected for violation of this act shall be for public uses of Canada, with power to Governor-in-Council to make exceptions.

Sec. 99. Any director or officer willfully making or signing a false return or statement of bank’s affairs is subject to imprisonment for term not exceeding five years, unless the offence is more serious than a misdemeanor under the act.

Sec. 100. Forbidding the use of the title “bank,” “banking company,” “banking house,” “banking association,” or “banking institution,” unless authorized by this act.

Sec. 101. Everything declared to be an “offence against this act” liable to fine not exceeding $1000, or imprisonment not exceeding five years, or both.

Public Notices.

Sec. 102. All public notices required by act shall, unless otherwise specified, be advertised in one or more newspapers where head office is situated, and in “Canada Gazette.”

Sec. 103. Banks must cash at par all official cheques of any department of the Dominion Government.

Sec. 104. Declares that act shall come into force July 1, 1891, and repeals other acts.

Schedule A. Names of thirty-six banks whose charters are continued.

Schedule B. Form of Act of Incorporation of new banks.

Schedule C. Form of Security under section 74.

Schedule D. Form of Monthly return to Government.