Canada - Banking And Currency In British North America
( Originally Published Early 1900's )
THE Banking system of Canada is of no mushroom growth. It has been built up with the development of the country, and has, in the main, kept pace with its progress.
It may be said, generally, that all the joint stock banks of the Dominion carry on business under a general banking law. Although a joint-stock bank cannot be started without a special charter, yet all such charters are subject to the provisions of a law dealing with such matters as the rights, powers and responsibilities of all concerned. This law is limited in its operation to ten years, and the whole question of banking and currency must come up for discussion in the Canadian Parliament at decennial periods. By the British North America Act, the subject of banking is placed under federal, and not provincial, jurisdiction. The Canadian banking system is one of which the citizens of the country may be justly proud, and there can be no doubt that a system has been built up which has proved, in every respect, to be thoroughly adapted to the country, and to its expanding circumstances. The banks have followed the progress of settlement, and have grown with the country until to-day there are thirty chartered banks rendering monthly statements to the Department of Finance. These banks have hundreds of branches all over the Dominion, and have an authorised capital of 156,266,666 dollars paid up capital totalling nearly a hundred million dollars, and reserve funds amounting to nearly 80,000,000 dollars.
In the early days, for a very considerable time, the Bank of Montreal and the Quebec Bank were the only institutions that carried on business in what was then known as Canada (comprising now the Provinces of Ontario and Quebec). The business then was but a small one, and it may be mentioned that the Bank of Montreal, at its initiation, had a capital of 350,000 dollars only, and at the end of its first year, it laid by, as a reserve, the modest sum of 4,000 dollars. Now its capital is 14,000,000 dollars all paid up, reserve 12,000,000 dollars, and undivided profits are about 680,000 dollars.
The first bank established in Canada was the Bank of Montreal, in 1817, followed the next year by the Bank of Quebec. In 1821 the banks were granted a charter which does not differ much in form from those of the present day. The three special forms of banking were performed from the first, viz., receiving deposits, issuing notes and discounting bills. There was, however, one clause out of the common in the original charter of the Bank of Montreal. It was that officers of the bank guilty of secreting, embezzling or running away with bill, bond, obligation, money or effects, should, on conviction, be deemed guilty of felony, the penalty attached being death as a felon without benefit of clergy. Between 1821 and 1836 many banks were established, among them being the Bank of British North America, organised by Scottish and English merchants, and incorporated by Royal Charter.
In 1830 the Banking Act was amended, so that the total amount of notes of less sum than five dollars in circulation should not exceed one-fifth of the paid-up capital ; that no notes under the value of one dollar should be issued, and that all issues of less than five dollars might be limited or suppressed by the legislature. In 1850 an Act was passed which forbade the issue of notes by banks, other than those authorised by Act of Parliament or by Royal Charter. The tax on the circulation of the banks was abolished, and in lieu of those a deposit with the Government of provincial debentures was required, and according to a plan fixed by the legislature. Bank statistics to be monthly forwarded to the Government were required in that year.
The first legislation in the Dominion dealing with banking, was introduced in the year of Confederation 1867 but this Act did little more than continue for three years the charters of the incorporated banks then in existence. A measure was introduced by Sir John Rose in 1869 ; this was withdrawn, but, in the following year Sir Francis Hincks brought in an Act having many important features, the provisions of which have formed practically the foundation for most of the subsequent legislation on the subject. By this measure, it was provided that the banks should hold from 33 to 50 per cent. of their cash reserves in Dominion notes, and that the furnishing of monthly returns should be obligatory. It was enacted also that banks which were newly started should have a bona fide paid up capital of 200,000 dollars, and that the circulation should never exceed the paid-up capital. A subsequent Act, modifying and improving the last named measure, was brought forward by Sir Francis Hincks, who had, on this occasion, the benefit of the invaluable guidance of Mr. J. M. Courtney (then, and until 1906, Deputy Minister of Finance). This measure made a change in reference to the amount of capital, which was then fixed as it remains now, that the subscribed capital must be 500,000 dollars, with 100,000 dollars paid up, when a new bank was established, and 100,000 dollars more to be paid up within two years of the time of its opening business. Sir Francis also introduced a Currency Bill. Prior to the passage of this measure, Nova Scotia had a different par value of 1 to Upper and Lower Canada value. He also introduced a " Dominion Notes Bill," which, although often amended, laid the foundation of a good deal of subsequent legislation regarding Dominion notes.
The granting of charters to several banks between the years 1870-1880 led to a new Bank Act in 1880, which was introduced by Sir Leonard Tilley. This measure was, however, much on the lines of the previous Act, the only changes of note being that the Dominion notes to be held as reserves should not be less than 40 per cent., that the issue of four dollar notes be taken from the banks, that the privilege of issuing fives and multiples of fives be continued, and that notes have a preferential lien in order to give greater security.
In 1890, an amendment to the Bank Act was introduced by the Hon. George E. Foster. This measure was of the first importance, and embodied several amendments and additions as regards previous legislation. For instance, the banks were required to furnish to the Department of Finance, yearly, a list of balances in respect of which no transactions had taken place during the five years prior to the date of such return, and of all dividends remaining unpaid for the same period. This return, which is published by the Government in the form of a blue-book, provides a means of enabling persons to obtain particulars of moneys belonging to them, of which they would otherwise have no knowledge. The monthly form of return furnished by Banks was also altered. Previously, this return was based upon the balance in the possession of the Bank on the last day of the month. The new form called for daily amounts of specie and Dominion notes to be shown, to ensure that, in no one period of the month, did the banks infringe the Act. Mr. Foster, in introducing this Act, called attention to hardships which had arisen in cases of suspension of banks, to the holders of bills living in remote parts of the country. He stated that, although in only one case, had the notes secured by the banks failed to be redeemed at their face value ultimately, yet it had happened that persons had suffered because, they were forced by circumstances, and by reason of a general feeling of panic, to lose upon the notes they held. To meet this condition of affairs, the Act provided a fund should be formed by the banks, to be called the banks' circulation redemption fund." On the fund thus formed the Government proposed to pay interest at the rate of 3 per cent. per annum. This fund was to be used, upon suspension of a bank, and between the time of suspension and redemption for the purpose of redeeming, if necessary, the notes of the bank, and it was held that the knowledge that such a fund existed would keep the notes at par. To ensure greater care in the formation of new banks, it was provided that, although the amount of capital stock was not to be increased, yet, before any bank undertook business in Canada, 250,000 dollars should be bona fide paid in and deposited in the hands of the Minister of Finance. This provision, it was urged, would prevent any bank going into operation in Canada without giving a good guarantee that it was prepared to do business on a solid foundation.
In 1900 an amendment was introduced by the Hon. Mr. Fielding. By this it was provided that the Canadian Bankers' Association which has a Dominion charter should be incorporated in the Act, and duties were assigned to it in the case of the suspension of any bank. It was enacted that the Association should appoint competent persons to supervise the affairs of any such banks, and to have absolute supervision until they were removed from office, or until the bank resumed business, or a liquidator was duly appointed to wind up its business. The note issue of all banks, and all matters relating thereto, such as the cancellation of and the ordering of new supplies of notes, are watched over by periodical visits of the Secretary of the Association.
This legislation places the Association in a unique position, for in no other public Act has a private Association been brought in as part of the machinery of the Executive. The Minister of Finance said, in reference to this, that it was felt that as the banks were more or less partners as regards their note circulation, for the reason that they were responsible for, and all contributed to the circulation redemption fund, therefore they had a special interest in seeing that a bank which had suspended was conducted in the right way. This Act also provided that a bank which so desires may by a vote of two-thirds in value of all its shareholders, sell and dispose of all its assets to another bank, but that, if the assets happen to be very large, such as would require an extension of the capital of the purchasing bank, it is provided that the shareholders of that bank, also, should be consulted.
An Act should have been introduced in 1910, but its consideration was postponed until 1911. This Act is necessary, for the reason that the existing charters expire in 1911, and need to be renewed. There has been some talk of important amendments to the Act, but how far this is founded on fact remains to be seen.
The principal provisions of the Banking Act are as follows :
The capital stock of any bank shall be not less than 500,000 dollars, in shares of 100 dollars each.
500,000 dollars must be subscribed, and 250,000 dollars paid to the Minister of Finance, who is also Receiver-General, and a certificate of permission obtained from the Treasury Board before business can be commenced.
Bank directors must hold capital stock as follows : On a paid up capital stock of 1,000,000 dollars or less, stock on which 3,000 dollars has been paid up ; on a paid up capital stock of over 1,000,000 dollars and not over 3,000,000 dollars, stock on which 4,000 dollars has been paid up ; and on a paid up capital of over 3,000,000 dollars stock on which 5,000 dollars has been paid. A majority of the directors must be British subjects.
No dividends or bonus exceeding 8 per cent. per annum can be paid by any bank, unless, after deducting all bad and doubtful debts, it has a reserve fund equal to at least 30 per cent. of its paid up capital.
Every bank shall, subject to a penalty of 500 dollars for each violation, hold not less than 40 per cent. of its cash reserve in Dominion notes.
The amount of notes of any bank in circulation at any time shall not exceed the amount of its unimpaired capital, subject to penalties varying with the amount of such excess.
The payment of notes issued by any bank for circulation shall be the first charge on its assets in case of insolvency; any amount due to the Dominion Government shall be the second charge, and any amount due to any provincial government shall be the third charge.
Every bank shall pay to the Minister of Finance a sum equal to 5 per cent. on the average amount of its notes in circulation, such sum to be annually adjusted according to the average amount of circulation during the preceding twelve months. These amounts form a fund called " The Bank Circulation Redemption Fund," to be used when necessary, on the suspension of any bank, for the payment of the notes issued and in circulation, and interest. Payments from the fund are to be without regard to the amount contributed.
All notes issued for circulation shall be payable at par throughout Canada.
No bank may lend money on its own shares, or on those of any other bank, or upon mortgages of real estate, or on the security of any goods, wares or merchandise, except as collateral security.
Any rate of interest may be charged and allowed, but not more than 7 per cent. can be recoverable.
Monthly returns signed by the chief accountant, the acting president and the manager, shall be made to the Minister of Finance within the first fifteen days of each month, subject to a penalty of fifty dollars for each day's delay, such returns to be made in the form provided in the act. Special returns may be required by the Government at any time. All Government cheques are payable at par.
The following figures will show the progress made by the banks of Canada since 1868 In 1868 the paid up capital was 30,507,447 dollars, in 1909 it had increased to 97,329,333 dollars. Notes in circulation increased from 9,350,646 dollars to 73,943,119 dollars ; Totals on deposit from 33,653,594 dollars to 783,298,880 dollars ; Liabilities 45,144,854 dollars to 882,598,577 dollars ; Land assets from 79,860,976 dollars to 1,067,007,534 dollars.