Front Page Titles (by Subject) CHAPTER VI.: LAND BANKS—LOAN COMPANIES. - A History of Banking in all the Leading Nations, vol. 3 (France, Italy, Spain, Portugal, Canada)
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CHAPTER VI.: LAND BANKS—LOAN COMPANIES. - 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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LAND BANKS—LOAN COMPANIES.
SAVINGS-BANKS—DOMINION NOTES—BANK FAILURES.
NO account of the joint-stock banks alone would consitute an adequate study of the banking of a country, yet it is impossible in this work to make more than the briefest mention of the land banks or building and loan companies and the savings-banks of Canada. A very complete account has, however, just been published in the third volume of the “Journal of the Canadian Bankers’ Association,” page 227, entitled “The Land Mortgage Companies, Government Savings-Banks, and Private Bankers of Canada,” by Massey Morris. From this we learn that the total banking assets of Canada, excluding private bankers, at the nearest date convenient for Mr. Morris’ purposes, were as follows:
LAND MORTGAGE COMPANIES.
The history of land mortgage companies in Canada dates back a little more than fifty years, the first legislation occurring apparently in Upper Canada (Ontario), in which province alone the system has largely developed. It is, however, clearly destined to have a large development in the new provinces of the Northwest. That the growth of this form of money-lending has been rapid is indicated by the fact that while the total loans in 1874 were only about $15,000,000, in 1893 they had reached $115,000,000. By a statement given later it will be seen that this growth is almost entirely in Ontario. Unfortunately, there is no general act, as in commercial banking, to which all must conform, and no single source of authority. Charters are granted both by the Dominion and Provincial Governments, while there are five companies working under Imperial charters, there being nothing to prevent foreign corporations from doing business in the country. As a consequence, complete statements are not yet placed before the public, although great efforts are made by the Dominion Government and that of the province of Ontario to obtain returns showing the operations of the companies. When Mr. Morris wrote the article referred to, he had before him a return to the Dominion Government covering the names of eighty-two companies, while another to the province of Ontario covered eighty-six. There are doubtless altogether not as many as one hundred companies, counting every variety, doing business in the Dominion. For the reasons given, there is considerable incongruity in the powers accorded to the various companies, and it is not easy to state the principles which actuated the different governments in granting charters. A few leading features, however, may be indicated. Loans must be confined to real property and bonds, stocks, and similar collaterals. There is a limit in proportion to capital to the amount of liability which may be incurred, although no settled rule prevails. There is no double liability resting upon the stockholders. The weakest feature is the permission to many companies to accept deposits which are practically repayable on demand. It must be clear that if a commercial bank whose deposits are repayable on demand, or on short notice, is restrained by law from lending on real property, a company lending on real property should be restrained from accepting deposits repayable on demand. Public opinion is moving rapidly in this direction, and many companies have as a matter of policy and wisdom withdrawn from acquiring deposits except in exchange for the time debentures of the company.
Thus far, the record of the land mortgage companies in Canada is excellent. Very few have failed, and in no instance have the creditors not been paid in full.
A statement taken from the article referred to is appended, to show the volume of business as far as it is disclosed by the imperfect returns at the Author’s disposal. The reader’s attention is drawn to the fact that while the deposits of Canadian banks are all practically made by Canadians, the land mortgage companies have, out of deposits amounting to about $80,000,000, borrowed about $50,000,000 in foreign countries, which, in the main, means Scotland.
In considering the savings-banks of Canada it is first necessary to bear in mind that they represent the savings to a moderate extent only of those who have money upon which they desire to earn interest, but which they prefer to intrust to a bank rather than invest in a specific security; in other words, the savings-bank class of depositors. Upon deposits of this class, no matter how small in amount, the ordinary Canadian banks are prepared to pay interest, and the banks, with few exceptions, have what are called savings-bank departments. Without estimating what proportion of the total deposits in the ordinary banks is of this character, it would be impossible to make use of the figures as evidence of the saving habits of the people.
Before confederation there were a few incorporated savings-banks in Lower Canada (Quebec) and Upper Canada (Ontario), but in the maritime provinces Government savings-banks had been established; not, however, on the plan of the post-office savings-banks of Great Britain. When the first Finance Ministers of the new Dominion came to face their financial difficulties, one of the expedients resorted to, in addition to the issue of legal tenders, was the establishment of post-office savings-banks, in the main following the plan in force in Great Britain. The Government also took over the provincial savings-banks already in operation in the maritime provinces, and it still carries on the two systems of savings-banks, although they are gradually being merged into a uniform post-office system. The incorporated savings-banks in the meantime have either taken on the powers of land mortgage banks or have practically disappeared, with the exception of two powerful institutions in Quebec, one at Montreal and one at Quebec City. We append a table taken from Mr. Morris’ article, which shows at once the growth since confederation and the division between the three classes of savings-banks. The third column consists almost entirely of the deposits of the two incorporated savings-banks in the province of Quebec already mentioned:
Whether the plan is destined to be permanent which was first adopted in Great Britain, and which has now spread to so many countries, of the Government taking the money of the people and allowing interest thereon, is beyond the scope of our inquiry. It has involved Great Britain in many very serious difficulties, and it cannot fail to cause considerable trouble to any government which endeavors by such means to occupy the place of bankers. But in Canada the reason moving the Finance Minister in 1867 was not philanthropical—he merely wanted money—and for many years it was a means of borrowing from the people—the rate of interest being higher than first-class banks could afford to pay. Even now, the rate paid is three and a half per cent. per annum, which is higher than the rate ordinarily paid by banks. For this rate no justification can be found. The Government is now in the highest grade of credit among British dependencies, and only two or three nations in the world can borrow at lower rates of interest, so that when to three and a half per cent. per annum is added the cost of maintaining about forty special offices and of gathering money at over 700 post-offices, the rate cannot be justified by any argument based upon the mere value of money. Theoretically, the intelligent and well-to-do are not supposed to take advantage of this species of public bonus given to encourage habits of saving, and of this paternal care intended to avert loss to depositors who lack intelligence. Therefore there is a limit ($1000) to the amount to be deposited in any single year, and another limit ($3000) to the total, which may stand at the credit of any one name. When this maximum is reached, however, if the depositor is not clever enough to adopt expedients for depositing his money in the name of another, he can convert his deposit into some other form of Government obligation, such as inscribed stock, and begin to deposit in the savings-bank again.
DOMINION NOTE ISSUES.
It will be remembered that when legal-tender notes were authorized, under the Dominion Note Act, to replace those formerly issued under the Provincial Note Act, the limit was placed at $9,000,000, issues in excess being permitted if an equal amount of gold was reserved. From time to time, however, the Government extended the limit of these notes, secured only in part by gold (with a minimum requirement of fifteen per cent. and Government bonds for the balance), until it was fixed at $20,000,000. But while these later issues were partly the result of the increase of the requirements of the country in change-making notes (those of smaller denominations than five dollars), they were mainly caused by the requirements of the banks in notes of large denominations used for making settlements, and therefore the Government found it expedient to keep much larger gold reserves than those named in the act. Now that the issues are likely to exceed considerably the limit of $20,000,000, the act has been amended and the Government has definitely avowed its purpose of keeping an equal amount of gold for all issues in excess of the limit named. With the growth of the change-making notes, which cannot well be presented for redemption on the one hand, and the increasing stock of gold as the issues reach higher figures, almost all danger from this bad system of financing will pass away, and Section 50 will, we hope, some day be removed from the Bank Act.
The statement below shows the amount of notes in circulation at the close of each of the months ending with March 31, 1896. It will be observed that about two-thirds of the entire issue is in large notes used almost alone by banks for settlement purposes. At the request of the banks the Government has consented to issue a special form of legal-tender note, negotiable only between chartered banks, in order to lessen the risk of loss by carrying large amounts to and from the clearing-houses or from bank to bank, and the danger of robbery or fraud in any other manner, always incident to notes payable to bearer. If, as it is hoped by many, this results in the conversion of the major part of the notes of high denominations now payable to bearer into notes only negotiable between banks, it will be made evident to all that the functions of the Dominion Note Act are sharply separated under two heads.
1st. To provide for the community, including the banks, the change-making notes required for the transaction of the business operations of the country, of which at any one time no considerable proportion could be presented for redemption.
2d. To issue notes of large denominations, almost all of which are held by the banks.
Insolvent Banks and those having gone into Liquidation since Confederation, 1867.
Although we have not been able to follow in detail the incidents showing the growth and fortunes of banking since confederation, we present in the preceding table a statement of the bank failures during the period 1867 to 1896.
Leaving out of consideration the Bank of Prince Edward Island, the provincial charter of which had not expired when it suspended, and which was not therefore a bank doing business under the Dominion Act, we find that out of fifteen failures, nine banks paid both note-holders and ordinary creditors in full, and four more paid note-holders in full. Of the four who paid note-holders in full but not ordinary creditors, one, the Commercial Bank of Manitoba, has paid eighty per cent. to ordinary creditors, and is still in process of liquidation. Another, the Central Bank of Canada, paid to ordinary creditors all but one-third of one cent in the dollar, and would certainly have paid all claims in full had not the liquidators been allowed quite too large fees for their services. A third, the Banque du Peuple, is now being liquidated, and it would not be proper for the writer to express at the present time an opinion as to the dividend the ordinary creditors are likely to receive. The point to be observed is, that it is a bank with an abnormal charter, under which there is no double liability on the part of the stockholders, although there is an unlimited liability on the part of the directors, and the results of its failure do not concern us in estimating the value of the present system. The remaining bank, which paid its note-holders but not its ordinary creditors, was the Maritime Bank of St. John, N. B. Its record is very bad. The claims of the Dominion and Provincial Governments, which rank next to the note-holders’, were paid in full, but the ordinary creditors received only 10.60 per cent. of their claims. The double liability failed to produce one-half of the face value of the shares at the time of suspension.
We have now left for consideration two banks which have paid neither note-holders nor ordinary creditors in full, and the fact that note-holders were not paid is, of course, of prime importance. Whatever care it may be possible for the State to take for the protection of depositors, no system, so far as the writer is aware, professes to do so absolutely, while it may be asserted that no system approaches perfection which does not absolutely protect the note-holder. The two failures referred to took place at a time when the notes were not a first lien on the estate of the bank, although it will be remembered that the bankers had suggested that the law be so made. When the Mechanics’ Bank was wound up, only fifty-seven and one-half per cent. was paid to note-holders and other creditors, and at the next revision of the act the change referred to was made. The other, the Bank of Acadia, has been described as a fraudulent affair, and it stands out conspicuously as an evidence of the value of two features of the present act—that a new bank shall have a sufficiently large capital to make it reasonably clear that it is a bona fide venture, and that the capital in actual cash shall be paid into the office of the Finance Minister before permission to begin business is granted. This bank had nominally a capital of $500,000 subscribed, and $100,000 paid up, but there appears to have been no real capital, or practically none. It existed for four or five months, paying a commission to float its notes, and then failed. Its notes had been redeemed by a bank correspondent, but to what extent they were in circulation at the moment of failure, or whether any dividend was paid, the writer, after several efforts, cannot learn.
To sum up the evidence from the foregoing facts, it appears that if the Bank Act had assumed its present shape at the time of confederation no holder of a Canadian bank note would have suffered loss.
RETURNS TO GOVERNMENT.
We will now close this study of Canadian Banking by appending a copy of the latest Government return, in the form in which it is condensed for the readers of the “Journal of the Canadian Bankers’ Association.” The writer once more expresses the hope that the comparatively unimportant scope of Canadian banking will not cause any reader to lay less stress upon the principles set forth. It does not, however, follow that a system of banking which suits admirably the environment in which it is placed can be transplanted. In banking, the most cherished dogma of one country may be rank heresy in another. The main point is that the Canadian banker has spent his energy to make perfect that which he had, rather than to
and that the people of Canada are satisfied that the result is good.