Front Page Titles (by Subject) CHAPTER V.: SCOPE OF EXISTING LAWS. - A History of Banking in all the Leading Nations, vol. 3 (France, Italy, Spain, Portugal, Canada)
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CHAPTER V.: SCOPE OF EXISTING LAWS. - Editor of the Journal of Commerce and Commercial Bulletin, A History of Banking in all the Leading Nations, vol. 3 (France, Italy, Spain, Portugal, Canada) 
A History of Banking in all the Leading Nations; comprising the United States; Great Britain; Germany; Austro-Hungary; France; Italy; Belgium; Spain; Switzerland; Portugal; Roumania; Russia; Holland; The Scandinavian Nations; Canada; China; Japan; compiled by thirteen authors. Edited by the Editor of the Journal of Commerce and Commercial Bulletin. In Four Volumes. (New York: The Journal of Commerce and Commercial Bulletin, 1896). Vol. 3 (France, Italy, Spain, Portugal, Canada).
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SCOPE OF EXISTING LAWS.
TERM OF CHARTER—INTERNAL REGULATIONS—CIRCULATION—BUSINESS AND POWERS—PENALTIES, Etc.
BY Section 4 of the Banking Act, the charters of all banks existing at the time of its enactment are extended for ten years, or until July 1, 1901, while the charter of any new bank created during the period expires at the same time. Thus the life of a bank, apparently, is only ten years, and as all charters come to an end at the same time, it might be possible for the country to be suddenly left without any authorized banks. Practically, the results are in every way beneficial. Bankers, as a rule, think the period too short; and now that the principles of Canadian banking appear to be firmly settled, the period might reasonably be extended to twenty years. It is the effect of all charters expiring together to which the reader’s attention is asked. This arrangement ensures a complete review of the principles underlying the act, and of the details connected with the working of it, once in ten years. In the interval the banks are almost free from attempts by demagogues or ambitious but ill-informed legislators to interfere with the details of the system; but during the session of Parliament preceding the date of the expiry of the charters they must defend the system against the demagogue, the bank-hater, the honest but inexperienced citizen who writes letters to the press, sometimes the press itself—indeed, against all the kinds of attack to which institutions possessing a franchise granted by the people are subject when they come before the public to answer for their stewardship. But while resisting the attacks of ignorance, they are, of course, called upon to answer such just criticism as may arise from the existence of defects in their system made evident by the experiences of time. Or, perhaps, as when the act was under discussion in 1890, they may see the defects even more clearly than the public, and may themselves suggest the remedies. Whatever may be said for or against these decennial contests, the product of each discussion is a banking act improved in many respects by the exchange of opinion between the bankers and the public. The banking system is thus brought at each period of renewal to a higher degree of perfection through having been subjected to unsparing analysis by an unusually enlightened people—perhaps too democratic in tendency and too jealous of every privilege granted, but anxious to build rather than to destroy.
There is a peculiar charm in the ownership of a corporation which owes its existence and its privileges to a special Act of Legislature, and if its privileges cover anything in the nature of a monopoly the charm is heightened. In Canada, we have had one section of the people who have been so enamored of freedom that they have desired to see banking as well as other privileges reduced to the mere necessity of applying for incorporation under a general act, together with the subscription of the smallest amount of capital which it seemed possible to propose. But, as a rule, people of British origin want merely all the liberty which is compatible with freedom from license. So that while, in the main, Parliament has clung to its prerogative of refusing a charter if it chose to do so, during fifty years at least, it would not have dared to exercise the power except in the event of a clearly fraudulent application for a charter. Nor would it dare, although it has the power, to give special privileges to any one bank. In the United States, a certain number of individuals having complied with certain requirements—more numerous and complicated, by the way, than the Canadian requirements—become thereby an incorporated bank, if we regard the consent of the Comptroller of Currency as a matter of form. In Canada, when a certain number of individuals have complied with certain requirements, they are supposed to have applied for a charter, which Parliament theoretically might refuse, but which, as a matter of fact, would not be refused unless doubt existed as to the bona fide character of the proposed bank. Then, as in the United States, on complying with certain other requirements and obtaining consent of the Treasury Board (performing in this case the same function as the Comptroller of Currency in the United States), the bank is ready for business.
What has given Canadians more concern than the manner of incorporation is the means of determining that each proposed bank is a genuine business venture, with enough capital at the back of it to ensure this fact, and to warrant the extension to it of the franchise of issuing notes against its general estate. As early as 1834, a New Brunswick act, adopting the recommendations of the Committee for Trade, already referred to, required that public commissioners should count the cash in the possession of a proposed bank in order to ascertain if the actual capital had been paid in, and that no notes should be issued until one-half of the capital was actually paid in. But there was no requirement as to a minimum capital, and in the case of the particular bank to which the act applied the amount paid up was very small indeed. Nor was there any time fixed for the payment of the remainder of the subscribed capital. In the report of the first committee on banking and currency appointed after the union of Lower and Upper Canada in 1841, it was recommended that the amount of capital be fixed (Parliament presumably to judge in each case as to what was sufficient), and the whole to be subscribed within eighteen months from the date of the charter; the bank was not to begin business until the whole was subscribed and one-half paid up, and the whole must be paid up within two years from date of charter. In the year after confederation, that is, in 1868, the committee on banking and currency received, it will be remembered, certain advice from prominent bankers and others. One of the recommendations was that a minimum of capital to be subscribed be named, and that whatever portion had by law to be paid up before business was commenced should be certified to by a Government official as held in specie. When in 1870 the first discussion of the principles of an act took place, the Minister of Finance wished this minimum to be placed at $1,000,000, with at least $200,000 paid in before business was transacted, the balance to be paid at the rate of twenty per cent. each year. After discussion the minimum was fixed at $500,000, of which $200,000 should be paid before business was transacted. But this was modified next year to a requirement that only $100,000 be paid up at the commencement and another $100,000 within two years. It was about this time that the three largest banks increased their capital to $12,000,000, $9,000,000, and $6,000,000, respectively; and while these were figures quite unnecessarily large, the contrast with some of the banks, which had been allowed to come into existence under provincial charters with a capital of $100,000 or $200,000, was very great indeed. It will be seen that in the Act of 1890 (Sections 10, 13, 15, and 16) the conditions are more stringent than at any previous time; and notwithstanding the rapid growth of democratic sentiment, the disposition of the country appears to be now pretty much settled against the creation of small banks. The bona fide subscription of $500,000 of stock must be secured, and of this $250,000 must be at once paid up, and the actual cash placed temporarily with the Minister of Finance and Receiver-General, before the final certificate is obtained to the effect that all the conditions required by law have been complied with. In the history of Canada, as in other new countries, the placing of the capital stock of new banks has been accompanied by all sorts of abuses. The so-called “cash” with which a bank has begun business has sometimes turned out to be largely composed of shareholders’ notes of hand, or any one of many other devices has been resorted to to make a “brave outside” for the public to look at. No restrictions will altogether prevent the occurrence of some form of deception; but, without doubt, the present conditions are most carefully devised in order that it may be reasonably certain that each new bank authorized by Parliament will be an honest business venture.
The regulations concerning the relations between the shareholders and the directors set forth in Sections 18 to 25, inclusive, are, with a few exceptions, such as might be adopted in the management of any large corporation, and have therefore little value in connection with a study of the practice of banking. That the directors should not have power to remunerate themselves, except under authority of the shareholders (Sec. 18), was a provision of the earliest charter in old Canada—that granted to the Bank of Montreal in 1821, several years after it commenced business. That the directors, or a majority, shall be British subjects (Sec. 19), and that directors shall be responsible for the employment of bank officers, and shall require them to give security for faithful service (Sec. 23), were also features of the same charter. The matter of loans to directors has always been, and still is, a difficult question, for which no more satisfactory solution has been found than to permit comparative freedom, except that in the monthly return the aggregate of loans to directors must be shown. In the recommendations of the Committee for Trade, it was provided that directors were not to borrow more than one-third of the total amount lent by the bank. This was adopted by New Brunswick as early as 1834, with the proportion applied to the capital of the bank instead of to the total amount lent. But as one bank has $12,000,000 of capital while another may have $500,000, such an attempt at limitation would now be worse than useless. We have not got further than to empower shareholders, by passing a by-law to such effect, to restrain the board of directors to the extent that they see fit in making such loans. Two points in this connection are clear. If a bank has a board consisting entirely of directors who do not borrow, it runs great risk of not being in touch with the active business community; because, until Canada is a much richer country, the business men still in the prime of life are likely to be borrowers. On the other hand, as long as directors are allowed to borrow from the bank at whose board they have a seat, there will be losses, and, occasionally, losses not justifiable.
Under Section 18, banks may establish and contribute to funds in order to insure the fidelity and provide for the superannuation of their officers, or otherwise assit the families of their officers. In the majority of banks, officers are no longer permitted to secure their fidelity by bonds of private individuals, and instead of purchasing insurance from the ordinary fidelity or guarantee companies, several banks have funds of their own, created by contributions from both bank and officers. This might not be practicable in a very small bank, but it has proved absolutely successful for many years past in some of the large banks. Pension funds, based generally upon the system in use in the British and Canadian Civil Services, are in operation in several banks.
Section 19 opens by stating that “The stock, property, affairs, and concerns of the bank shall be managed by a board of directors, etc.” Management “by a board of directors” is, of course, a phrase of very variable meaning; and in Canada it ranges from the practice of a large English or Scotch bank, where the oversight of the board is very general indeed, to that of some American banks where the board really may be said to manage the bank directly and where the president is actually the chief executive officer. There are no longer in Canada special “discount days” on which the board sits and discusses the bills offered. It is necessary now to empower the agent at the smallest branch, by instructions given in advance, to transact the business of his established customers. New customers, if proposing important business, must await the decision of the board, but old ones, if in good standing, are not usually willing to do so. The board, as a rule, sits once a week, and is asked to approve of the more important lines of credit. The president may be in such close touch that he knows the business almost as well as the general manager; but this, as a rule, he cannot be, and the latter is the real chief executive officer. The president, however, is in daily contact with the general management, and is fully able to judge as to whether the bank is being soundly and honestly managed, while the board, by the nature of the business discussed every week, should also be in a position to know whether the affairs of the bank are prospering or not. More than this is impossible on the part of a board of directors in the present complicated nature of the business of a large bank.
Section 25 contains six sub-sections covering elaborate provisions as to voting at shareholders’ meetings, for information regarding which we must refer readers to the actual text of the act. In the earliest acts, voting was arranged by a scale, so that while one share gave one vote, ten shares gave only five and thirty shares only ten, while no holding gave more than twenty votes. This practice was considered fair, and was followed in many charters; but in granting new charters in 1855, the Legislature of old Canada changed this to the practice which has been followed since—of one vote for each share.
Sections 26 and 27 deal with the manner of increasing and allotting capital stock, and 28 with the reduction of capital. The capital can neither be increased nor decreased except by the consent of a majority of the shareholders, obtained at an annual or special meeting, and the subsequent consent of the Treasury Board. New or unsubscribed stock (Sec. 27) must be allotted pro rata, and any premium fixed thereon must not exceed the percentage which the reserve fund (surplus) bears to the paid-up capital stock. The consent of the Treasury Board cannot be obtained to a reduction of the capital until statements of the condition of the bank setting forth “the reasons and causes why such reduction is sought” are submitted. The reduction of the capital stock in the manner indicated does not diminish the liability of the shareholders to the creditors of the bank existing before such reduction is formally legalized. The capital stock cannot be reduced, if the bank remains in business, below the sum of $250,000.
Sections 29 to 44, inclusive, deal with the following subjects: subscription for shares (29); payment of calls on new shares (30 and 31); enforcement of same (32, 33, and 34); conditions under which shares may be transferred (35); provision that a list of transfers shall be made daily and exhibited for information of shareholders (36); provision to prevent the selling of stock by others than the actual owners, such as the sale of shares not owned, with the expectation of purchasing later at a lower price (37); manner of transferring shares sold under execution (38); in cases of death, bankruptcy, insolvency, or marriage of female shareholder (39.40, 41, and 42); provision that bank is not bound to see to the execution of trusts (43); provision that executors and trustees shall not, when the real owner is indicated in the books of the bank, be subject personally to liability on the shares so standing in their names as executors or trustees;—(if the actual owner is living and competent, he is liable as if the shares stood in his name, and if dead or incompetent, his estate is liable (44). The sixteen sections here referred to are very lengthy and are elaborately worked out, but have little to do with the study of banking. One provision, however, may interest bankers in the United States. It is imperative, under Section 35, that the transferee of shares shall actually accept the same on the books of the bank, in person or by attorney, and thus formally admit his double liability.
The very natural provisions in Sections 45 to 49, inclusive, call for little comment. Sections 45, 46, 47, and 48 were substantially included in the first charter granted (1821), while the principle of Section 49 was covered by the recommendations of the bankers made to the committee on banking and currency (1868-69).
When the Government abandoned hope of creating a bank of issue or a national currency, it imposed, as will be remembered, upon the banks the condition that they must carry in their reserves a certain percentage of legaltender notes of the Dominion. This is a distinct blot upon the Banking Act; but as the banks carry much more than the percentage required, it probably might now be removed from the act without causing the Government inconvenience. In its early years, the Dominion had its credit to establish, and was called upon to make expenditures in public works, at a very heavy cost, for a new and sparsely settled country, and it was obliged to resort to several financial expedients which with its present high credit would be not only unnecessary but very unwise.
It will also be remembered that, in proposing this feature, the Minister of Finance coupled with it the requirement that banks should hold a minimum cash reserve against all liabilities. This was strenuously objected to by the bankers and was not insisted upon. In the revision of the act in 1890, the Government again proposed the principle of a minimum reserve, and again the bankers were able by their arguments to demonstrate the unsoundness of such a requirement.
The mere statement of the reserve in cash held by a particular bank, or the average held by the banks of an entire country, conveys little idea as to whether prudence is observed or not. In Canada, the average, for some years, of actual cash held in gold and legal tenders as against all liabilities to the public, is about ten per cent. But, owing to the system of bank note issues, very little of this is required for daily use, the tills of bank offices being filled with the bank’s own notes, which do not appear in its statements as cash because they are not in circulation. Practically, the business across the counter, when not transacted with other paper instruments, is served by this till money; the settlements of balances with other banks are made in legal tenders, or by drafts on the chief commercial centres; while the main reserve may be, in the case of small banks, represented by their loans at call or short date on stocks and bonds and by their balances in the hands of correspondents at Montreal and New York. In addition to such sources of strength, the more important banks have agencies in the United States, and the bulk of the capital employed there can be made available without any delay, while practically all can be liquidated within a few months at most.
The Canadian bankers have always been ready to discuss the relative merits of a minimum reserve fixed by law as against perfect freedom to banks in the management of their reserves, the overwhelming majority being in favor of the latter course as the only practicable system if stringency and panic are to be averted.
To the foreign reader, Sections 51 to 63, inclusive, are, doubtless, the most interesting in the act. In Canada, we began with the very simple and obvious theory that, without the existence of laws to the contrary, an individual had the right to issue his promise to pay in any form, the only deterrent to the exercise of such a luxury being the difficulty of inducing anyone to accept it in payment. We have seen that, for a considerable period, the law did not interfere with the exercise of this power, and in collections devoted to historical objects many curious specimens of money issued by private business as well as private banking firms may be found. Indeed, in refusing for such a long time to grant the privilege to an incorporated bank, the first Legislature of Lower Canada was, doubtless, moved only by the fear that, because of the express authority of law, the bank might be able to float an undue amount of such money. In the present act, the mere right, apart from subsequent qualifications, is expressed in a few simple words: “The bank may issue and reissue notes payable to bearer on demand and intended for circulation” (Sec. 51).
The first qualification (Sec. 51) is that it must not issue notes of smaller denominations than five dollars, and must issue all notes in multiples of five dollars. The history of this restriction has been given. The Government desired to provide, out of its legal-tender issues, the entire change-making paper currency of the country, and first fixed the lowest note issuable by a bank at $4 (the old currency pound), and subsequently at $5.
Section 51 also provides that the entire circulation of a bank shall not exceed its unimpaired paid-up capital, imposing enormous fines for breaches of the provision; and further limiting to seventy-five per cent. of the capital the notes of two banks having special charters, because in both cases the shareholders are not subject to the double liability. These banks may issue up to the full unimpaired paid-up capital by depositing cash or Government bonds for the amount issued over the seventy-five per cent. In the early banking of a new country, few deposits can be obtained, and the main object of organizing a bank is to secure the privilege of note-issuing, the profit on lending the capital, plus the notes in circulation, being at such a time a sufficient inducement. The first charter (1821), so often referred to, contained no other restriction upon the volume of note issues than that the total of all liabilities to the public must not exceed three times the capital stock actually paid in, the directors being personally liable if they permitted an excess. For many years, this was the general principle followed, although it was varied somewhat in its application and modified in some of the provinces as time went on. We find the bankers who offered suggestions to the banking and currency committee of 1868-69, asking that the power to issue be limited to the paid-up capital, plus Government securities and specie held, but in the legislation which followed it was limited as in Section 51; no limit being placed, however, upon the total liabilities of a bank.
Section 53 makes the note issues a prior lien upon the estate of the bank, prior even to a debt due to the Crown. This was one of the recommendations of the bankers to the banking and currency committee of 1868-69, and it is very much to be regretted that it was not embodied in the first general bank act of the Dominion. But the Minister of Finance failed to recognize the difference between an involuntary holder receiving a note in the course of business and a depositor who selects a particular bank to which he gives credit in the form of his deposit. Between 1874 and 1879 there were serious bank troubles, in some cases ending in failure, and in one case, a particularly discreditable failure, the creditors—note-holders as well as depositors—recovering, after exhausting the double liability, only fifty-seven and one-half cents in the dollar. The bank was of little importance directly, having few notes in circulation, but the result of the liquidation was a great shock. As a consequence, at the revision of 1880 the principle of Section 53 found a place in the act. Thus, while it will always be a matter of regret that any note issued under the laws of the Dominion should not have been eventually paid in full, it is to be remembered that if the views of the bankers expressed in 1869 had been acceded to, the record to-day would show that, without further security than that of being a prior lien upon the general estate, the note issues had been always redeemed in full.
But there were still two minor though serious defects in the system. It was frequently alleged by those who admired the National Bank Act of the United States, that while the currency created by it might not be elastic, the notes could not for any reason fail to be paid in full, and to circulate throughout the entire area of the United States, while in Canada no similar boast could be made. The area of Canada is enormous relatively to population, and the notes of banks in one province certainly passed at a discount in some of the others, a recurrence in a less aggravated form of the defect in the old State-bank issues of the United States. And while it might be confidently asserted that all bank issues secured by being a first lien on the estate of the banks would be eventually paid in full, it was nevertheless true that because of doubt and delay the notes of a suspended bank always fell to a discount for the time being. To meet these two defects, the bankers, in the revision of 1890, proposed the principles set forth in Sections 54 and 55, borrowing their ideas once more from the larger experience of banking in the United States.
The distinctive features, therefore, of the bank note issues of Canada are: They are not secured by the pledge or special deposit with the Government of bonds or other securities, but are simply credit instruments based upon the general assets of the bank issuing them. But in order that they may be not less secure than notes issued against bonds deposited with the Government, they are made a first charge upon the assets (Sec. 53).
To avoid discount at the moment of the suspension of a bank, either because of delay in payment of note issues by the liquidator or of doubt as to ultimate payment, each bank is obliged to keep in the hands of the Government a deposit equal to five per cent. on its average circulation, the average being taken from the maximum circulation of each bank in each month of the year. This is called the Bank Circulation Redemption Fund, and should any liquidator fail to redeem the note of a failed bank, recourse may be had to the entire fund if necessary. As a matter of fact, liquidators are almost invariably able to redeem the note issues as they are presented, but in order that all solvent banks may accept without loss the notes of an insolvent bank, these notes bear six per cent. interest from the date of suspension to the date of the liquidator’s announcement that he is ready to redeem (Sec. 54).
To avoid discount, for geographical reasons each bank is obliged to arrange for the redemption of its notes in the commercial centres throughout the Dominion (Sec. 55).
The remaining sections, 52 and 56 to 63, inclusive, require no comment.
BUSINESS AND POWERS OF THE BANK.
Under this heading there are twenty-one sections in the act, containing about 330 lines, as compared with a few lines in the first charter. The disposition of Canadian bankers in earlier times was to assume that they had power to do anything in the nature of banking not prohibited by their charter or by the general Bank Act, if there was one. Now, however, the act is broad enough to leave no doubt. In Section 64 it expressly permits branches and agencies, without any condition as to whether they are to be confined to Canada or not, and while it tries to describe fully the business of banking, it ends the description with a phrase wide enough to include any species of banking not directly prohibited in the act itself. The section covers three prohibitions, two of which appear in the first charter (1821). A bank must not engage in any species of business except banking, and it must not lend money on the security of real estate or other real property. The third provision, to the effect that a bank must not lend on its own stock, was one of the recommendations of the Committee for Trade, and was adopted by New Brunswick in a charter granted in 1832. For a few years, this provision was relaxed under Dominion legislation, but it was again enforced, and is now regarded as a principle firmly fixed in the act.
Section 65 gives a bank a first lien on shares of its own stock, or any dividend due thereon, when the stock is owned by a debtor. This also appeared in the first charter (1821). With the system of transferring shares in the United States such a lien might work unjustly, but in Canada it is a very natural provision which cannot operate unfairly to any third party. No stock certificate, as the phrase is understood in the United States, is ever given by a bank. A holder may obtain, if he so desires, a certificate which is generally called a “stock certificate,” but which simply asserts that he owns so many shares transferable only on the books of the bank. Under no circumstance is he called upon to return this document. It is a mere letter of advice upon which no one would lend anything.
Section 67 contains the usual provision that a bank may hold real property for its own use; and 68, that although it cannot lend on real property, it may take such to secure a debt already contracted. It cannot, however, through the medium of Section 78, practically secure real estate for a new advance, the decisions being quite clear that there must have been no agreement or understanding when the loan was made that the real estate was to be given as security for it.
Sections 66, 69, 70, and 71 merely enable banks to realize on securities pledged to them or to complete their title to same.
Section 72 came into operation at a time when it was thought desirable to facilitate ship-building, but to the writer it seems very doubtful banking. In any event, it is probably not of much avail in these days, iron ship-building having nearly ended wooden ship-building in our maritime provinces.
Section 73 confers the ordinary power of lending on warehouse receipts and bills of lading. A warehouse receipt upon which a bank in Canada is allowed to lend money, must be given by someone other than the owner of the goods.
Sections 74 to 79, inclusive, give facilities to banks not enjoyed by private money-lenders. In early days, when banks were called upon to lend large sums for the moving to market of raw products, the manufacture of lumber, etc., it was strongly felt that there was the need of some simple means by which the title in the property thus purchased or manufactured with its money could be held by the bank. In 1859, in old Canada, a banking bill was passed mainly to facilitate commercial transactions and giving the powers indicated above. While the principle has been extended since, the main features of the present act are not essentially different. The courts having decided that the warehouseman giving a receipt upon which a bank might lend money must be a bailee and not the owner of the goods warehoused, the principle was extended in 1861 so as to cover certain cases in which the warehouseman was also the owner. The Dominion Act adopted this legislation with little change, but the last act, that of 1890, alters the form of procedure when advances are being made upon the security of goods in the owner’s possession, and banks are given power in such cases to take a direct pledge upon raw and manufactured products to the extent set forth in Section 74, which is quoted without abbreviation.
The reader who desires to study fully these sections is referred to a paper entitled “Warehouse Receipts, Bills of Lading, and Securities under Section 74 of the Bank Act,” read by Mr. Z. A. Lash, counsel for the Canadian Bankers’ Association, at its annual meeting in 1894, and published in the journal of the association, volume ii, page 54.
Sections 80 to 83, inclusive, are certainly not very creditable. Prior to 1858, usury laws existed in Canada, and these sections are an inheritance from that period. For all practical purposes, they might as well be stricken from the act. In 1853, while the law only permitted the collection of six per cent. per annum interest, the penalty for receiving more was removed; but this did not apply to banks or land mortgage companies. In 1858, the right to contract for any rate was given, but again not to banks, except that they might take seven instead of six per cent., with such provisions as are indicated in Sections 82 and 83 as to commissions.
The Dominion Act repeats these provisions with little change, except the important one that all banks are now free from penalty for usury (Secs. 80 and 81). For fuller information regarding the history of Canadian usury laws and of the present legal rate of interest where no contract has been made, the reader is referred to an article in the third volume of the “Journal of the Canadian Bankers’ Association,” page 277, entitled “The Legal Rate of Interest.”
STATEMENTS BY BANKS TO GOVERNMENT.
From the simple provision in the first charter that the Government might at any time require for the protection of the public a statement under oath of the position of a bank to the last revision in 1890, there has been a steady amplification of the information given by banks to the public. The nature of the present monthly returns (Sec. 85) cannot be better indicated than by the subjoined list giving the forms of the headings of the various columns:
Deposits with Dominion Government for security of note circulation.
Notes of and cheques on other banks.
Loans to other banks in Canada, secured.
Deposits, payable on demand or after notice, or on a fixed day, made with other banks in Canada.
Balances due from other banks in Canada in daily exchanges.
Balances due from agencies of the bank, or from other banks or agencies in foreign countries.
Balances due from agencies of the bank, or from other banks or agencies in the United Kingdom.
Dominion Government debentures or stocks.
Canadian municipal securities, and British, provincial, or foreign, or colonial, public securities (other than Dominion).
Canadian, British, and other railway securities.
Call loans on bonds and stocks.
Loans to the Government of Canada.
Loans to provincial governments.
Real estate, the property of the bank (other than the bank premises).
Mortgages on real estate sold by the bank.
Other assets not included under the foregoing heads.
Aggregate amount of loans to directors and firms of which they are partners.
Average amount of specie held during the month.
Average amount of Dominion notes held during the month.
Greatest amount of notes in circulation at any time during the month.
To the Public.
Notes in circulation.
Balance due to Dominion Government, after deducting advances for credits, pay-lists, etc.
Balance due to provincial governments.
Deposits by the public, payable on demand.
Deposits by the public, payable after notice or on a fixed day.
Loans from other banks in Canada, secured.
Deposits, payable on demand or after notice, or on a fixed day, made by other banks in Canada.
Balances due to other banks in Canada in daily exchanges.
Balances due to agencies of the bank, or to other banks or agencies in foreign countries.
Balances due to agencies of the bank, or to other banks or agencies in United Kingdom.
Liabilities not included under foregoing heads.
To the Shareholders.
Capital paid up.
Amount of rest or reserve fund.
Rate per cent. of last dividend declared.
The publication of the statement first appears in the official gazette and it is immediately thereafter republished, in whole or in part, by almost all the financial journals, while the changes indicating the conditions of finance and trade are commented on by all important daily newspapers. As the banks are few in number and possess extended interests both as to geographical territory and capital employed, they live at all times in the keen sunlight of publicity. In any event, with the information given in such a manner that comparison between one bank and another may be made without effort, it would be hopeless to expect to conceal general weakness, no matter how much it might be concealed in detail.
Under Section 86 the Minister of Finance is given wide powers in order that he may obtain any information he desires from a bank should he suspect weakness in its position or inaccuracy in its monthly returns.
The list of shareholders required under Section 87 is not by any means a perfunctory matter. The information when obtained from all banks is published in a blue-book and is at least examined by many investors who try to judge by the changes from year to year as to the estimation in which certain banks are held.
In accordance with a policy gradually being recognized throughout the world, an addition was made in the act of 1890 by which banks are required to report to Government the unclaimed moneys in their hands (Section 88). These statements also appear in a blue-book for the information of the public.
INSOLVENCY OF BANKS.
The first of the insolvency clauses is that fixing the double liability (Section 89), while Sections 92, 93, 94, and 96 are devoted to elaborate provisions for enforcing it. It will be remembered that the early banks in old Canada had no provision for a double liability of shareholders, but that the charter of the Bank of Nova Scotia (1832) contained the provision, while the Committee for Trade recommended its adoption by old Canada, and long before confederation (1867) it was recognized as a principle.
There was a time when many doubted the practical value of the power to call on shareholders in the event of failure for a second payment to the extent of the face value of their shares. Questionable things were done without hesitation to avoid paying, and many in earlier days could not pay. Shares were transferred by the knowing ones just before failure to others who were, perhaps, incompetent to contract or from whom money could not be collected. Or it was found that the real holder was already a debtor to the bank and could not meet this in addition to his other liabilities. But we have, of late years, had failures in which every species of bad management and misrepresentation has occurred, yet the percentage of the double liability collected has prevented the creditors from suffering. Indeed the conditions laid down by the act make it almost impossible to avoid payment for any reason except inability. Section 90 was inserted in the act of 1890 in order to make it clear that the statute of limitation does not run in favor of a bank in the matter of dividends and deposits. The principle of Section 91 was suggested by the Committee for Trade owing to the difficulty of determining what constituted insolvency in a bank; otherwise, a bank might remain for an indefinite time in the state of suspension.
OFFENCES AND PENALTIES.
A careful perusal of the actual text of the act will show that it bristles with penalties, both in the shape of fines and imprisonment. In enforcing promptitude in making returns they are certainly effective, and the enormous fines under Section 51 for over-issues of circulation will doubtless be sufficient for the purpose.
Section 100, the principle of which was introduced in 1880, is intended to prevent private bankers from using titles which might convey the idea of incorporation. In common with many other details of the act, it was borrowed from the United States. The remaining sections of the act are likely to be without interest to the reader.
GENERAL REMARKS ON THE ACT.
In dealing with the features of the act which are not disclosed in merely commenting upon its main sections, the Author feels that he cannot do better than repeat, with little alteration, portions of an address to the Congress of Bankers at Chicago, delivered in June, 1893; which was itself based largely upon a pamphlet by the writer, published in 1890, as a defence of the Canadian banking system, regarding which it was feared attempts would be made to assimilate it to the National Banking System of the United States.
What is necessary in a banking system in order that it may answer the requirements of a rapidly growing country and yet be safe and profitable?
1. It should create a currency free from doubt as to value, readily convertible into specie, and answering in volume to the requirements of trade.
2. It should possess the machinery necessary to distribute money over the whole area of the country, so that the smallest possible inequalities in the rate of interest may be the result.
3. It should supply the legitimate wants of the borrower, not merely under ordinary circumstances, but in times of financial stress, at least without that curtailment which leads to abnormal rates of interest and to failures.
4. It should afford the greatest possible measure of safety to the depositor.
In Canada, as in the United States, the resulting difference in business transactions, after cheques and all other modern instruments of credit have been used, is almost entirely paid in paper money. It is therefore of the greatest importance that the amount of this paper money existing at any one time shall be as nearly as possible just sufficient for the purpose. That is, that there shall be a power to issue such money when it is required, and also a power to force it back for redemption when it is not required.
It may therefore, we think, be safely asserted that: (1) There should be as complete a relation as possible between the currency requirements of trade and whatever are the causes which bring about the issue of paper money; (2) and, as it is quite as necessary that no over-issue should be possible as that the supply of currency should be adequate, there should be a similar relation between the requirements of trade and the causes which force notes back for redemption.
Now, certainly, one of the causes of the issue of bank notes is the profit to be derived therefrom, and it is clear that an amount sufficient for the needs of trade will not be issued unless it is profitable to issue. Likewise it is clear that it should not be possible to keep notes out for the sake of the profit if they are not needed.
In Canada, bank notes, as we have seen, are secured by a first lien upon the entire assets of the bank, including the double liability, the security being general and not special—not, for instance, by the deposit of Government bonds. Therefore it is clear that it will always pay Canadian banks to issue currency when trade demands it. Because bank notes in Canada are issued against the general estate of the bank, they are subject to actual daily redemption; and no bank dares to issue notes without reference to its power to redeem, any more than a solvent merchant dares to give promissory notes without reference to his ability to pay. The presentation for actual redemption of every note not required for purposes of trade is assured by the fact that every bank seeks by the activity of its own business to keep out its own notes, and therefore sends back daily for redemption the notes of all other banks. This great feature in the Canadian system, as compared with the National Banking System, is generally overlooked, but it is because of this actual daily redemption that there has never been any serious inflation of the currency, if indeed there has ever been inflation at all. Trade, of course, becomes inflated, and the currency will follow trade, but that is a very different thing from the existence in a country of a great volume of paper money not required by trade. It is hardly necessary to discuss at length this quality of elasticity in the system, because it is generally admitted. But some critic may endeavor to show that a similar quality might be given to a currency secured by Government bonds, and it may be well to make it clear that such elasticity as is required in North America is impossible with a currency secured by Government bonds. In the older countries of the world it may be sufficient if the volume of currency rises and falls with the general course of trade over a series of years, and without reference to the fluctuations within the twelve months of the year. In North America it is not enough that the volume of currency should rise and fall from year to year. In Canada we find that between the low average of the circulation during about eight months of each year and the maximum attained at the busiest period of the autumn and winter there is a difference of twenty per cent., the movement upward in the autumn and downward in the spring being so sudden, that without the power in the banks to issue, in the autumn serious stringency must result, and without the force which brings about redemption in the spring there must be plethora. As a matter of fact, it works automatically, and there is always enough and never too much.
If the currency were secured by Government bonds, the volume in existence at any one time would be determined by the profit to be gained by the issue of such bond-secured currency. It would, therefore, be necessary to fix a maximum beyond which no currency could be issued, but as such an arbitrary limit would be mere legislative guess-work, it would be productive of the evils incident to all efforts to curb natural laws by legislation. As we know, when the National Bank charters were offered by the Federal Government to the State banks, the bonds of the United States bore five to six per cent. interest, and the business of issuing currency against such bonds was so profitable that a maximum such as that referred to was fixed, with an elaborate provision stating how the banking charters were to be distributed as to area, in order that each State or section of country might have a fair share. This was followed by several adjustments, the last limit fixed was $354,000,000, all who wished the privilege were dissatisfied with the limitation of issues, and the cry of monopoly was frequently heard. Subsequently the attempt to fix a maximum was abandoned; indeed, the business of issuing notes against Government bonds had become unprofitable, and there was no longer any fear of inflation.
The condition in the United States under which the issue of currency was unduly profitable, and the fear of inflation was present, did not actually last many years, but it lasted long enough to create in the people a hatred of banks which does not seem yet to have passed away. The condition which followed showed conclusively, it seems to us, the unsoundness of the system in the matter of providing an elastic currency—a currency at all times adequate in volume. The currency wants of the country increased with the great increase in business and population, but the volume of National Bank currency decreased, because by the repayment of the national debt and the improvement in the national credit the bonds which remained outstanding yielded so low a rate of interest as to make the issue of National Bank notes unprofitable.
The writer hopes he has made it clear that if the business of issuing currency against Government bonds were profitable, too much currency would be the result; and if it were unprofitable, too little would be issued. We would require to have a condition of things under which the profit of issuing notes would at all times bear an exact relation to the amount of currency required by the country, the profit therefore changing not only as the currency rises and falls over a series of years, but at the time of the sharp fluctuations within each year, already referred to. No such relation, however, could very well exist with an issue based upon Government bonds.
The next quality in a currency to be considered is that it should be readily convertible into specie. We do not propose to discuss this at length. The assurance of convertibility lies in the actual daily redemption to which we have referred. This is the best possible safeguard against suspension of specie payments.
THE BORROWER AND THE BRANCH SYSTEM.
In the banking systems of older countries, the borrower is not often considered. Men must borrow where and how they can, and pay as much or as little for the money as circumstances require. We believe too strongly in the necessity for an absolute performance of engagements to think it necessary that any banking system should render the path of the debtor easy. But in America the debtor class is apt to make itself heard, and the writer wishes to show what the branch system, as compared with the United States National Banking System, does for the worthy borrower.
In a country where the money accumulated each year by the people’s savings does not exceed the money required for new business ventures, it is plain that that system of banking is the best which most completely gathers up these savings and places them at the disposal of the borrower. This practically means that the savings of slow-going communities are applied to other communities where the enterprise is out of proportion to the money at their own command. In Canada, with its banks with forty and fifty branches, we see the deposits of the saving communities applied directly to the country’s new enterprises in a manner nearly perfect. One bank borrows money from depositors at Halifax and many points in the maritime provinces, where the savings largely exceed the new enterprises, and it lends money in Vancouver or in the Northwest, where the new enterprises far exceed the savings. Another in the same manner gathers deposits in the unenterprising parts of Ontario, and lends the money in the enterprising localities of the same. The result is that forty or fifty business centres, in no case having an exact equilibrium of deposits and loans, are able to adjust the excess or deficiency of capital, the depositor obtaining a fair rate of interest, and the borrower obtaining money at a lower rate than borrowers in any of the colonies of Great Britain, and a lower average rate than in the United States, except in the very great cities in the East. So perfectly is this distribution of capital made, that as between the highest class borrower in Montréal or Toronto and the merchant in the Northwest, the difference in interest paid is not more than one to two per cent.
In the United States, banks have no branches. There are banks in New York and the East seeking investment for their money, and refusing to allow any interest because there are not sufficient borrowers to take up their deposits; and there are banks in the West and South which cannot begin to supply their borrowing customers, because they have only the money of the immediate locality at their command, and have no direct access to the money in the East. To avoid a difficulty which would otherwise be unbearable, the Western and Southern banks sometimes rediscount their customers’ notes with banks in the East, while many of their customers, not being able to rely upon them for assistance, are forced to float paper through Eastern note-brokers. But the Western and Southern banks wanting money, and the Eastern banks having it, cannot come together by chance, and there is no satisfactory machinery for bringing them together. So it follows that a Boston bank may be anxiously looking for investments at four or five per cent., while in some rich Western State ten and even twelve per cent. is being paid. These are extreme cases, but we have quoted an extreme case in Canada, where the capital marches automatically across the continent to find the borrower, and the extra interest obtained scarcely pays the loss of time it would take to send it so far were the machinery not so perfect.
As we have indicated, it should be the object of every country to so distribute loanable capital that every borrower with adequate security can be reached by someone able to lend, and the machinery for doing this has always been recognized in the banks. That is surely not a good system of banking under which the surplus money in every unenterprising community has a tendency to stay there, while the surplus money required by an enterprising community has to be sought at a distance. If by paying a higher rate of interest, and seeking diligently, it could always be found, the position would not be so bad. The fact is that when it is most wanted, distrust is at its height, and the cautious banker buttons up his pocket. When there is no inducement to avert trouble to a community by supplying its wants in time of financial stress, there is no inclination to do so. Banks with small capital and no branches are not apt to have a very large sense of responsibility for the welfare of the country as a whole, or for any considerable portion of it. But the banks in Canada, with thirty, forty, or fifty branches, with interests which it is no exaggeration to describe as national, cannot be idle or indifferent in time of trouble, cannot turn a deaf ear to the legitimate wants of the farmer in the prairie provinces, any more than to the wealthy merchant or manufacturer in the East. Their business is to gather up the wealth of a nation, not of a town or city, and to supply the borrowing wants of a nation.
There was a time in Canada, about twenty years ago, when some people thought that in every town, a bank, no matter how small, provided it had no branches, and had its owners resident in the neighborhood, was a greater help to the town than the branch of a large and powerful bank. In those days, perhaps, the great banks were too autocratic, had not been taught by competition to respect fully the wants of each community. If this feeling existed to any extent, it has passed away. We are, in fact, in danger of the results of over-competition. There are, indeed, few countries in the world so well supplied with banking facilities as Canada. The branch system not only enables every town of 1000 or 1200 people to have a joint-stock bank, but to have a bank with a power behind it generally twenty to fifty times greater than a bank would have such as is found in towns of similar size in the United States.
The legal position of the depositor is about the same in Canada as it is in the United States. The note-holder’s claim is preferred to his. We must not, however, expect that any government will relieve a depositor from the necessity of using discretion as to where he places his money. Governments never have done and never can do that. Men must use their intelligence, and after measuring the security offered, judge where they should intrust their money. It is perhaps easier for a man with limited intelligence to make a selection if the banks have large capital and are of semi-national importance, provided, of course, the basis of the system is not unsound, as it is, for example, in Italy and Australia. In Canada, we do not obtain deposits from abroad, although we might not object to do so if money could be obtained at low enough rates of interest; and we do not lend on real estate, as banks do in Australia. The Government statement of March 31, 1896, shows that before depositors having claims amounting to $187,000,000 can suffer, shareholders must lose in paid-up stock and double liability as much as $125,000,000, and $26,000,000 of surplus funds; in all, $151,000,000. There are probably few countries in the world where greater security is offered to depositors.
When the bank charters were under discussion in 1890, the writer had occasion to make publicly a statement which, in view of the several failures of branch banks in Australia since, might now excite more criticism than it did then. In making a comparison between individual banks with small capital and banks with branches and large capital, it was urged that “the probability of loss to the depositors in one bank with several millions of capital is less than the probability of loss to some of the depositors in ten or twenty small banks having in the aggregate the same capital and deposits as the large bank.”
The retort will be quickly made, “But if the large bank fails, the ruin will be just so much the more widespread.”
This is quite true, but it is not an answer to the point, although it may appear to be so. If the conditions of two countries are about the same, and the ability of the bankers and the principles of the banking system are in other respects equally excellent, it must still remain true that the probability of loss to some of the depositors in the ten or twenty small banks is greater than the probability of loss to any of the depositors in the one large bank.
In the closing chapter, a statement of the failures of banks in Canada since confederation in 1867 is given, and from this the loss to depositors may be estimated.
We have in Canada no public bank examiner as in the United States, nor are the annual statements of banks audited as in Australia. When the audit system was proposed by the Government, the bankers resisted because they felt that it pretended to protect the shareholders and creditors, but did not really do so. If an audit would not really protect the shareholders and creditors, it seemed better that they should not be lulled by imaginary safeguards, but be kept alert by the constant exercise of their own judgment. So far as the bankers have ever discussed with the Government the question of public bank examiners, they have confined their arguments to pointing out the impracticability when banks have many branches. This may, in the minds of some, constitute an argument against branch banking. We simply state the facts. But bankers say that while it might be very well to have public examiners for the protection of the people—if it really would lessen bank failures—it is much more necessary with branch banking to have bank examiners, or, as they are called, inspectors, on behalf of the executive of the bank. When it comes to the quality of the work done by such trained inspectors, it would not be too much to assert that it is almost certain to be better than that of a public official. In the larger banks the inspection staff consists of several men who are actively engaged for the whole year in completing one tour of the branches. Some of these officers devote themselves to the routine of the branches, verifying the cash, securities, bills, accounts, etc., testing the compliance of officers with the regulations of the bank, reporting on the skill and character of officers, etc., while the chiefs devote themselves to the higher matters, such as the quality of the bills under discount, loans against securities—indeed, the quality and value of every asset at the branch. They also deal with the growth and profitableness of the branch, its prospects, etc. These matters have already passed the judgment of the branch manager, and the more important have been referred to and approved by the executive, so that it may be said that three different judgments are passed upon the business of the branch. But it will be said that the chief inspector may be under the sway of the executive and his reports a mere echo of the opinion of the latter. This is quite true—the reports may be dishonest. Our bankers do not tell the public that the inspector is specially employed for its protection. He, like the general manager, is merely a part of the bank’s machinery for conducting its business, and the public is left to judge of the bank by its chief officers, its record in the past, its entourage.