Canada's Bank System
( Originally Published 1918 )
The banking system of Canada is composed of thirty-four large joint stock commercial and industrial banks, privately owned and managed, but working under a uniform law and subject to the supervision of the Dominion government. No bank is chartered by the government with a capital of less than $500,000. The thirty-four central banks have 690 branches scattered over the whole Dominion. Banking is extended by increasing the branches, together with the capital resources of the existing banks. The Canadian Banking Act is revised every ten years, at which time all the bank charters are renewed.
Note Issues. The banks have the exclusive privilege of issuing bank notes of the denomination of $5 and multiples thereof. These are not legal tender. The small paper money is provided by the government. The bank notes are secured, first, by the double liability of the shareholders; second, by a first lien of the note holders upon the assets of the bank; third, by the bank circulation redemption fund; fourth, by 6 per cent interest accruing upon the notes of failed banks from the date of refusal to redeem to the date when readiness to redeem is announced.
The banks may issue notes without the deposit of bonds or without any restriction except those already mentioned. The amount is limited by the capital of the bank. The double liability of the shareholders and the first lien of the note holders upon the assets of the failed hank are similar to our own national bank act.
Redemption Fund. The bank circulation redemption fund is held by the minister of finance and draws 3 per cent interest. It is maintained out of contributions by the banks, and must always equal 5 per cent of their average annual circulation. It is especially set apart for the payment of notes of failed banks. No payments have been made from the fund since 1891. If the fund becomes impaired the banks may be called upon to contribute not to exceed 1 per cent of their circulation of the preceding year.
Notwithstanding their preference as to assets, before 1890 the notes of failed banks sometimes sank to less than fifty cents on the dollar before they were ultimately redeemed at par. The provision by which the notes of failed banks yield 6 per cent interest, holds them at par pending their redemption, for the reason that they become a very desirable investment for other banks. The law requires: "The banks shall make such arrangements as are necessary to insure the circulation at par in any and every part of Canada, of all the notes issued or reissued by them and intended for circulation; and toward this purpose the bank shall establish agencies for the redemption and payment of its notes at the cities of Halifax, St. John, Charlottestown, Montreal, Winnipeg, and Victoria, and at such other places as are from time to time designated by the treasury board."
All the banks keep out as many of their own notes as possible. Each pays out only its own notes, and sends the notes of other banks in for redemption as fast as they are received. Bank notes are redeemed in exactly the same way as checks are collected. Wherever there are clearing houses the notes appear in the collections the same as checks. Sometimes in the height of a crop-moving season some banks reach the limit of their own power of issue, and then pay out the notes of competitors; but as soon as the strain relaxes the safeguard resumes its normal function of limiting the volume of circulation to the actual needs of business at the moment.
The Greatest Virtue of Canadian paper currency is elasticity. It adapts itself to the needs of business. This keeps interest rates from fluctuating too widely and relieves business men of the apprehension of periods of stringency.
The banking laws of Canada do not require the banks to keep a minimum reserve.
Under the Canadian Branch Bank system, large capital is behind each branch. Customers of the smallest branch share in the security which a large capital offers. The branch banks have the further advantage of unity of policy on the part of the leading banks during a stringency.
The central banks have power to equip every branch with ample reserves for maintaining commercial credit by means of note issues. Thus the business needs of any community, no matter how remote, cannot outstrip the banking facilities. The resources of a branch bank can be quickly and indefinitely extended, and when the need for additional facilities has passed, the business of the bank can contract accordingly without loss.
Interest rates throughout the whole country do not vary more than 1 or 2 per cent between the large city banks and the frontier points.
Expert supervision of branch banks by the central office prevents bad banking. The board of directors of the large banks are responsible for all the branches.
Branches can be maintained in localities where the profit of the business would not justify the establishment of a separate bank with independent capital. The city banks can establish branches without any investment in additional capital. Branches can be established where the business is so small as to figure no more than the employment of one clerk in a rented office.
Moving the Crops. This operation is thus described in The Bankers' Magazine:
The greatest grain-producing district of Canada is the far inland section which forms the Provinces of Manitoba, Saskatchewan and Alberta. The larger part of the Canadian crop finds a market abroad and has to be transported to the Atlantic seaboard. In the case of grain grown in Ontario or the eastern provinces this is not a difficult matter, for the distance is shorter and the means of communication numerous. But between the provinces we have mentioned and the seaboard the only links of communication are one or two vast stretches of single track railroad supplemented by water communication from the head of the Great Lakes. But navigation usually closes in these northern waters during 'November, and the period between harvesting the crop and the close of navigation, after allowance is made for the time consumed in threshing and marketing the grain is short. Hence the rush to ship which takes place in the fall of each year, and hence, too, the immense storage elevators which have sprung up at the lake ports of " Port Arthur and Fort William at the head of navigation. Once these water outlets are closed there is nothing left but the long and expensive railroad haul.
Long before the crop movement is due the banks make arrangements to accumulate large supplies of notes at convenient points, Winnipeg being naturally the chief center for this purpose. It is at Winnipeg that the large milling and elevator companies which handle most of the grain crops have their headquarters, and it is the Winnipeg branches of the banks which are most conveniently situated to replenish the tills of the country branches and to provide funds for the country storekeepers who cash the grain tickets issued by the wheat buyers. Scattered along the railroad lines in the west at the little way-stations are the tall grain elevators, and here are to be found the buyers for the Winnipeg grain firms. To these the farmer brings his wheat, receives a voucher called a grain ticket specifying the weight of the grain he has sold and the price to be paid for it. These tickets are cashed at the local banks or, if there is no bank, by the country storekeepers, arrangements for supplying the latter with notes for this purpose having been made by the companies in Winnipeg. Checks are seldom used in trans-actions of this kind with the farmers. At this season of the year the business of a country branch, bank even in very small places will be very active, and large sums are daily paid out over the counters.
The Canadian banks are specially empowered under the bank act to acquire warehouse receipts and bills of lading as collateral security and to lend money to wholesale shippers of or purchasers of or dealers in agricultural products upon the security of such product. So the banks readily make advances to the grain dealers on the security of the grain in their possession. Then when it is shipped by the wholesale dealer the advances are retired by drafts on the purchasers, with bills of lading attached. If the grain is to be exported the bill of lading is usually replaced at the port of shipment by an ocean bill of lading, which is in its turn attached to a bill of exchange on the foreign dealer. This exchange is then purchased by the bank, the previous drafts having been retired, and forwarded to its correspondents abroad. The bank finally receives credit for the proceeds in London or some other European center.
By this time the bank notes originally issued for the purchase of grain have come in for redemption, and the issuing bank, to obtain funds to meet its clearing-house settlements, will be forced to sell sterling or New York funds or else to import gold. As the balance of trade between Canada and the United States, most of which is finally discharged in New York, is against Canada, there is a fairly steady demand for New York funds in the financial centers, and there will usually be found some bank willing to buy. But as the proceeds of the grain shipments are still in Europe, the selling bank will provide cover for its drawings on New York by selling sterling or other foreign exchange on that market against the credit balances acquired abroad by means of the bills of exchange drawn against the shipments of the very grain for the purchase of which in the first place its notes were issued. If gold is imported the resulting transactions are very similar, as New York is the point from which it is usually obtained. In this connection it is interesting to note that some of the Canadian banks are among the largest dealers in foreign exchange in New York, where the credit of their bills is unexcelled. So extensive are these foreign trans-actions that several of the Canadian banks maintain their own offices in New York, and even in London, for the purpose of looking after their own interests at these points.
The wide fluctuations in the volume of bank circulations come between January, the dull time when the lowest point is touched, to October and November of the same year, when it is highest. The term of rising expansion begins about August.