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THE 
CANADIAN BANKING 
■ SYSTEM 



1817 



1890 



BY 



ROELIFF MORTON BRECKENRIDGE, Ph. B. 

Seligmnn Fellow in Economics 
Columbia College 



SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE 

Degree of Doctor of Philosophy 



IN THE 



University Faculty of Political Science 
Columbia College 



TORONTO 
1894 



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PREFACE 



If any were required, a reason — perhaps a sufficient reason — 
for the present investigation might be offered in the circum- 
stance that an essay to present in a systematic and fairly thor- 
ough manner the facts with which I have attempted to deal, 
has never yet appeared in print. The growth and improvement 
of the banking system are parts of the commercial and legislative 
history of Canada even less cultivated than the broader field of 
its economic history. Yet the course of the development ought 
by no means to be devoid of interest; the results in some re- 
spects are unique ; and where it is now carried on the Canadian 
system of banking is believed to be productive of the highest 
possible advantages. 

A second reason could well be found in relation with the 
banking situation of the United States. Observers in all quarters 
have noticed the growing necessity for reform in the currency 
and banking system of this country, and have remarked the de- 
monstration of the necessity in the frightful crisis precipitated by 
distrust in the value of the currency commonly used. They have 
noticed also, especially among those who are most deeply 
interested in the organization of credit, the growing conviction of 
this necessity — a conviction of which the last and most signifi- 
ficant expressions are the resolutions adopted on the nth Octo- 
ber, 1894, t>y the American Bankers' Association, in convention 
assembled at Baltimore. It is possible, at least, that from some 
account of the Canadian banking system an American will 
obtain instructive contrasts, as well in history, as in present 
organization and methods of operation, to the system of banking 
and bank legislation which has obtained in the United States. 

Of the few short summaries or historical sketches hitherto 



i 



Pre/ace 



published, the greater number are unreUable, even in respect to 
the facts which are included. The principal legal text on 
banking under Dominion legislation is not exempt from errors 
where the author has digressed to history, while certain others, 
who likewise affected the cursory style, have committed still 
more mistakes. Better types, or worse, of the current misstate- 
ments than are in the historical survey of Canadian banking 
prepared for the Statistical Year Book of Canada for 1893, could 
not be found. And this is a public document issued by the 
Department of Agriculture. But to indulge in polemic, or to 
correct such carelessness or untruth specifically, would be 
seriously to abbreviate the treatment of truths relating to the 
system. It has been necessary to restrict this essay, as far as 
possible, to exposition alone. 

The principal sources of the narrative are in the public doc- 
uments of the several British North American provinces and of 
the Dominion of Canada. The statutes passed from year to 
year ought to be named first, and then the legislative or parlia- 
mentary documents of Upper Canada, Lower Canada, Canada, 
New Brunswick, Nova Scotia, and the Dominion of Canada. 
Since the Confederation of the provinces in 1867, the collected 
debates of the Parliament of Canada — the Hansard's reports — 
have been of service. Prior to that time, debates were reported 
only in the newspapers of the day. It has been necessary to 
consult the files of various journals both for debates and for other 
questions arising at nearly every stage of the inquiry. Memoirs, 
biographies, and miscellaneous historical works have also been 
examined. 

For light upon matters within their recollection and for 
information as to the practical working of the Canadian banking 
system, 1 am indebted to the courteous and generous assistance 
of the many Canadian bankers to whom my queries have been 
put. Without their help the task of research would have 
been immeasurably more severe. Especial obligation must be 
acknowledged to Messrs. Jas. Stevenson, B. E. Walker, George 
Burn, H. S. Steven and Wm. Munro. To the Honorable 
George E, Foster, D.C.L., Minister of Finance and Receiver- 
General ; to J. M. Courtney, Esquire, Deputy Minister of 



\ 



Preface (( 

Finance, and to members of the permanent staff of the Finance 
Department; to Messrs. Martin O. Griffin, F. Blake Crofton 
and W. T. R. Preston, Librarians of the Library of Parliament 
and of the Legislative Libraries of Nova Scotia and Ontario 
respectively; and to the Editing Committee of the 'journal of 
the Canadian Bankers' Association, who have undertaken the 
publication of the essay in Canada, are also due the heartiest 
acknowledgments for assistance of various kinds. 

October, 1894. 



CORRIGENDA 



p. 85, note 2, 1. 2, for G. Poulette Lerope read G. Poulett Scrope. 

p. 97, 1. 25, for legislations read legislation. 

P- 97- 1 35) *dd is difficult to determine. 

p. Ill, 1. 16, for modifications read modification. 

p. 135. 1- 33. for has read /ur^/. 

p. 146, 1. 27, for Tic'o or three agents . . . o^f, read " Two or three 
agents . . . office." 

p. 152, note I, 1. 9, for 101 read 58 ; 1. 11, for 11 read 21. 

p. 156, note I, delete The charter 

p. 162, note I, add Exchange Bank of Yarmouth. 

p. 163, 1. 14, add Exchange Bank of Yarmouth 

p. 173, I. I, 2nd clause, for one read two. 

p. 173, note 2, 1. 2, after Windsor add and the Exchange Bank of Yar- 
mouth. 

p. 179, 1. 12, for question read questions. 

p. 224, 1. 26, for organized read recognized. 

p. 224, 1. 36, for w«rc read was. 

p. 253, note 4, 1. 8, for 14i read 3ii. 

p. 289, 1. 35, for arises read om<' 

p. 295, 1. 9, for i5s»f read use. 

p 295, 1. 32, for issued read »st(/. 

P 303. J 7. insert after August, l^'i'JJ-. 

p. 304, 1. 37, for balance read balances 

p. 305, 1. 19, for was read /"i. 

p. 308, 1. 3, for the first at rea.d for. 



TABLE OF CONTENTS 



Chapter I.— Introduction 

Chapter II.— The Early Banks in Lower Canada 
§1.— The First Banks 



§2 

§3 
§4 
§5 
§6 



— The First Charters 

— Characteristics of the Early Banking System 

— Environment of the Banks 

— Practice of the Banks 

— Further Legislation 



Chapter III. — Upper Canada, 1817-1839 

§7. — Establishment of the Bank of Upper Canada 

§8.— The " Pretended " Bank of Upper Canada at Kingston . . 

§9. — Economic and Political Environment of the Bank . , 

§10. — A Period of Expansion, 1830- 1837 .. 

§11. — Imperial Regulation of Colonial Bank Charters 

§12. —The Growth and Cure of the Banking Mania 

§13. — Practice of the Banks 

§14. — The Suspension of Specie Payments and the Crisis of 1837 

§15.— Effects of the Crisis and Suspension 

§16. — Incidental Details 

Chapter IV.— Province of Canada, 1841-1850 

§17. — The Bank of Issue Proposed by Lord Sydenham 

§18. — The Legislation of 184 1 and 1843 .. .. ,. 

§19. — Bank Returns for 1841 ; the Bank of British North America 

and La Banque du Peuple 

§ao. — Correspondence with respect to the Dollar Note Circulation 
§21. — Imperial Regulations of 1846 



PAOK 
ZI 



18 

22 

26 
28 

29 

35 



42 
4b 

48 
51 
53 
57 
6a 
fi8 
76 
83 



85 
88 

93 
94 
96 



§22. — 1847-1850 .. 99 



8 



Table of Contents 



Chattek V. — Provinck of Canada, 1850- 1867 p*gb 

§23. — The Free Banking Act of 1850 .. .. .. .. ., 103 

§24. — Amendments and Supplementary Measures . . . . 108 

§25. — Faults of the System .. .. .. .. .. .. iii 

*j26. —Statistical View of the Free Banks .. .. .. .. 113 

827. — Repeal of the Act to Establish Freedom of Banking, and 

Disappearance of Banks organized under it .. .. 115 

§28. — Continuation and Amendment of Bank Charters .. ., 117 

829.— 1857-1863 121 

§30. — Failure of the Bank of Upper Canada . . . . . . . . 126 

§31. — The Provincial Note Act of 1866 .. .. .. 136 

§32. — Effects of the Provincial Note Act .. .. .. .. 138 

• Note. —Relation of the Bank Note Issue to the Prerogatives of the 

oCaLC «• •• •( • • •• •• ■• •• ••1^1 



Chapter VI. — New Brunswick and Nova Scotia 

§33 — The Bank Charters of New Brunswick 

§34. — Nova Scotia 

§35. — Relation of Bank Legislation in the Maritime Provinces to 



Note. 



that of' the Dominion 
-The Treasury Notes of the Province of Nova Scotia 



155 

163 
167 



Chapter VII. — Banking Reforms, 1867-1871 

§36.— Preliminary Measures .. 
§37. — The Question of Banking Reform 



§38 
§39 
§40 

§41 
§42 



—The Case against Bank Circulation secured by Pledge of Bonds 

— Mr. Rose's Banking Scheme 

—The Banking Policy of Sir Fr.^ncis Hincks . . . . . . 

-The " Act respecting Banks and Banking," 1870 . . 
— The " Act relating to Backs ind Banking," 1871 



170 

172 
178 
184 
189 

195 
198 



Chapter VIII. — Banking under the Confederation, 1867-1889 
§43. — The Expansion between 1867 and 1873 



§44 
§45 
§46 
§47 
§48 
§49 



— Depression, 1874-1879 ,. 

— Bank Failures and Losses, 1874-1879 . . 
— The Bank Act Revision of 1880 

- Dominion Note Legislation 1872-1880 .. 
— 1880-1889 

— Bank Failures, 1883-1889 



203 
209 
214 
220 
226 
227 
233 



Table of Contents 



9 



Chapter IX. — The Revision op 1890 

§50. — Demands for Reform and their Causes 
§51. — Discussion Preceding Parliamentary Action 
§52. — Reforms Adopted by Parliament 
§53. — Summary and Review 



PAOE 

241 

244 
250 
268 



Chapter X.— On the Presbnt Working of the Systkm 

§54, — Characterization of the System . . . . . . . . . . 275 

§55. — The Principle of Large Banks 278 

§56.— The Principle of Branch Banking .. .. .. .. 286 

§57. — The Canadian System of Note Issue .. .. .. 294 

§58. — Advantages Incidental to the Canadian System of Issue . . 312 

§59. — Reserves .. .. ,. ., .. .. .. 321 

§60. — Bank Inspection and the Depositor . . . . . . . . 328 

§61. — The Shareholder and Borrower of the Canadian Bank . . 333 

§62.— The Business of Canadian Banks .. .. .. .. 341 



APPENDICES 

I. — Table showing the Grand Totals of the Liabilities and Assets of the 
Chartered Banks of the Dominion of Canada as reported to the 
Government, on the 30th June, 1867; the 31st December, 1868- 
1893 ; and the 30th June. 1894 347 



n — Sundry Items of the Statements of Liabilities and Assets furn- 
ished to the Department of Finance for the last juridical days of 
the months ending the 31st December, 1890-1893, and the 30th 
June, 1894, ^y Chartered Banks of the Dominion of Canada 
having Paid-up Capital Stocks of $500,000 or over 



III.— Table showing Grand Total of Notes in Circulation at the end 
of each Calendar Month, January, 1879, to June, 1894 • • 



351 



358 



IV.— Bibliography 



359 



"WW" ".■|i|"" IFM 



THE 

CANADIAN BANKING 

SYSTEM 

1817 - 1890 



CHAPTER I— INTRODUCTION 

The economic character of banking transactions varies little, 
wherever they may be concluded. To perform the functions of 
discount, deposit and note issue, to exchange rights to demand 
money for money, money for rights to demand it, and rights to 
demand money for other rights to demand it — from one 
point of view, that is the whole of banking. Banking systems 
differ, net so much in the character of their economic services, 
as in the degree of perfection with which those services are per- 
formed, the methods of accomplishing them, the principles on 
which banks are organized, the powers confirmed to banks by 
statute, and the «juagations and restrictions imposed upon them 
— the manner and completeness, in short, of the fulfilment of 
banking functions. Where, as in the territory which forms the 
present Dominion of Canada, banking has been subject to special 
enactments, since the time, practically, of its first introduction, 
it is possible to find in the statutes, or to infer from them, a 
tolerably accurate idea of that complex of business methods, 
principles of organization and legislative regulations which make 
up a system of banking. The purpose, therefore, of this investi- 
gation will be to trace the course of Canadian banking legislation 
from the grant of the first bank charters to the Bank Act of 1890. 
The purpose thus stated avoids the implication of an effort 
to give the banking history of Canada, while it by no means pre- 
cludes whatever reference to the political, economic^ or banking 
history of the country, may serve better to explain the measures 



12 



The Canadian Banking System, 1817-1890 



adopted by Legislatures. Government, post office or other sav- 
ings banks, or the so-called land banking, will not be treated, for 
the inquiry is limited to what, in the English sense, are denoted 
by the simple expression " banks," and what, in Canada, have 
been joint-stock banks of issue, discount and deposit, incor- 
porated or recognized by local legislative authority. 

The Parliament which now has exclusive jurisdiction in 
matters incident to banking, incorporation of banks, and the 
issue of paper money, is of as recent origin as the Dominion 
of Canada itself. Thirty years ago, neither were more than 
the proposals of a group of energetic and far-seeing colonial 
publicists. The territory now included in the Dominion was 
cut up into "x or more different jurisdictionsj those important 
for our purpose being the Provinces of Canada, Nova Scotia 
and New Brunswick. Fifty-four years ago, the Union of what 
are now the Provinces of Ontario and Quebec, had not been 
accomplished, and these parts of British North America were 
separat^y governed as the Provinces of Upper Canada and 
Lower Canada. The first part of the study, accordingly, will 
be based, not on the uniform legislation of a great Dominion, 
but on the independent and somewhat diverse statutes of four 
distinct colonies. But for reasons which will be explained in 
due time, events in the two Canadas and in the late Province of 
Canada are facts more essential to a right understanding of 
what may be called the national era of Canadian banking legis- 
lation, than the course of affairs in the maritime provinces of 
Nova Scotia and New Brunswick. So while significant 
phenomena in the latter colonies should not be neglected, the 
earlier inquiry must be mainly directed to the development of 
banking legislation in the Canadian provinces. The study 
will therefore be rightly entitled what it is, as well in its first 
part, as in the last. 

Canadian banking, both in the earlier periods of its growth 
and the present stages, has often been compared to Scotch 
banking. The analogy is better, no doubt, than that between 
Canadian banking and the few other systems, the statutory regu- 
lation of which, while establishing safeguards, has not hampered 
the prosecution of banking business in all its branches. It is 
peculiarly true of the Scotch banks that, untrammelled by re 



Introduction 



18 



strictions and unexploited by government, they acquired what 
are still their distinguishing characteristics, in the exercise of 
all the functions which, according to the Anglo-Saxon idea, 
belong to banking. The three great conditions of their devel- 
opment were freedom, competition, and the necessity promptly 
to perform banking contracts. The result was a system of 
banking whose principal features were the small number of 
banks, their large capitals, establishment and operation of branch 
banks, competitive issue of notes on the general credit of parent 
banks, payment of interest on deposits, and regular, frequent 
conduct of exchanges between the banks. It is true that both 
in the comparative freedom of its development, and in the char- 
acteristic features which it displays to-day, the Canadian system 
is very like the Scotch. 

Still, the economic needs and opportunities which led to the 
introduction of banking, and the policy of government towards 
this form of economic activity have not, of course, been exactly 
the same in one country as in the other. It is not to be expected 
that the analogy, however close, should be complete. Scotch 
banking is a development which may be described, with a toler- 
able accuracy, as indigenous. In Canada the needs were native, 
but the banking system was borrowed, copied, transplanted, if 
you like, from countries where it was already established. Eight 
of the present Scotch banks were originally private partnerships. 
All but four of the thirty-eight Canadian banks were from the 
outset corporations created by Legislatures or by Parliament. 
By Sir Robert Peel's measures of 1845, the freedom to issue 
notes was abolished in Scotland, and thereby a monopoly, both of 
the issue and of other departments of banking, established for 
the banks then in existence.^ Canada has preserved not only 
competition between the old banks, but also the possibility to 
found new ones, while the effective limitations upon uncovered 
note issue by those to whom the power is confirmed are not 
statutory, but economic. There is no requirement, as in 
Scotland, that gold shall be held in the banking reserves to an 
amount sufficient to cover circulation in excess of a certain fixed 
amount, and during the last forty years the total amount of 



1 Evidence taken before the Select Committee of the House of Commons on Banks of 
Issue, London, 1B75 ; replies to questions 954 and 955, 



14 



The Canadian Banking System, 1817- 1890 



notes outstanding has never reached the limit to which the 
barks might legally issue. The regulation of the bank note 
currency of Scotland by the Act of 1845, was prompted largely 
by the purpose of securing in that the same fluctuations as 
v/ould occur in a metallic circulation ; the precautions adopted 
in Canada were designed merely to insure the immediate converti- 
bility of bank notes at all times and places, and to make their 
ultimate payment certain. In their business one finds still other 
differences. The only variety of Canadian advance similar in 
farm to the Scotch "cash credit" is the overdrawn account, 
W'lich bankers are inclined to discourage, although in a 
different form, especially in their business with farmers, graziers 
and drovers, the Canadian banks lend freely for many of the 
purposes which the "cash credit" has served in Scotland. 
Further, the banking competition in Canada is more varied and 
intense. It prevents the adjustment of the minimum rate of 
discount and the maximum interest payable on deposits, to 
which Scotch banks regularly agree, and by which they stand. 

But in that banking operation that so immediately interests 
the whole public -the issue of notes to circulate as money — 
what was originally substantial identity has been altered by 
legislation. The early freedom and simplicity of the Scotch 
note issue has been taken away. Because the Act of 1845,* 
as already indicated, requires them to hold gold in their 
banking reserves equal to the circulation in excess of their 
authorized issue, the Scotch banks can no longer meet the 
temporary but periodical demands for expansion in the bank 
note currency without cost or inconvenience to themselves. 
Twice each year must they incur the expense of importing 
quantities of gold, leaving the parcels in their vaults unopened 
and unused, and exporting them again when the circulation has 
fallen to the lower level. But the chief burden which is thus 
imposed upon the Scotch Banks lies in this, that when the cir- 
culation reaches a certain point, its further temporary expansion 
is only effected at the expense of depleting their loanable funds 
to a like extent. Such restrictions the Canadian banks have 
escaped. They are, to be sure, subject to statutory provisions 



1 8 and 9 Vic, cap 38, An Act to regulate the Issue of Bank Notes in Scotland. 



Introduction 



U 



as to the total issue of each bank, the redemption of notes at 
par in every part of the country, the maintenance of a common 
fund to guarantee the circulation, and the prior lien of the 
note holder upon an insolvent bank's estate. To supply, how- 
ever, the recurrent need for added currency is to them a cause 
of no real cost, while to a much greater extent than in Scotland, 
it is a source of direct advantage. It is important to note that 
in both countries the public share this advantage ; through 
elastic issues upon their general credit, banks are enabled to 
minimize fluctuations in the rate of discount, to reduce or 
waive charges that otherwise they would be obliged to make, and 
also to maintain branch offices at small points which otherwise 
would be inevitably deprived of banking facilities. 

After all, however, what we particularly need to know in 
judging of a currency is comprised in the questions, "Is it ulti- 
mately secure ? Is it immediately convertible ? and, Is it elastic ?" 
Whether it relates to the bank notes of Canada or of Scotland, 
each of these queries may be answered in the affirmative ; that 
is to say, each country has a safe and inexpensive currency at all 
times adequate in volume and never inflated. 

When we come to view the services which each country 
has derived from its banking system, the analogy reappears. 
In Canada, as in Scotland, the history of banking records 
singularly few frauds upon the currency, and, so far as their 
creditors were concerned, the losses inflicted by insolvent bankers 
have been remarkably slight. In order to reform the system, 
it never became necessary to maim it ; in neither country has 
banking developed the abuses that, 

" diseases desperate grown 
By desperate appliance are reliev'd, 
Or not at all." 

Both Scotch and Canadian banks collect with astonishing 
efficiency the disposable capital of the communities in which they 
work, and utilize it in assistance of commercial, industrial and 
agricultural enterprise. Both enjoy the firm and judicious 
confiJence of the people whom they serve. Both have success- 
fully built upon the foundations of their capitals great structures 
of credit from which their clients get full benefit. Both groups 
conduct the multifarious exchanges of domestic and foreign 



16 



The Canadian Banking System, 1817-1890 



commerce and make them easy, quick and cheap. It may be 
said that these are the tasks of any banks. So, indeed, they are, 
but "in all economical and political things, questions of magni- 
tude and intensity are of vital importance; the question very 
often is, not what color a thing is, but what shade of color." ^ 
The real advantages of either system appear only after it is 
seen how thoroughly has its community acquired the depositing 
habit ; what support do bank customers get in times of crisis as 
well as in seasons of prosperity ; how nearly is the rate of interest 
uniform throughout the country ; and how low have charges for 
other banking services been reduced. 

Turning now to consider the scientific discussion evoked by 
each system, one no longer sees resemblance, but contrast, and 
that of the most marked sort. Among the banks of the old 
world none have received higher praise for their practical services, 
or more thorough approval for the theoretical excellence of their 
banking system, than the banks of Scotland. Sir Walter Scott 
wrote in defence of the system. Courcelle-Seneuil admired it. 
Dr. Adolph Wagner has praised it. And in every treatise on 
banking theory it occupies an important place. But outside of 
a few published addresses, occasional pamphlets, fugitive 
magazine articles, and the newspaper discussion of measures 
proposed to Parliament, the Canadian banking system, in 
scientific works at least, has remained unnoticed, undescribed, 
unjudged. Abroad it has been easily dismissed as *' colonial." 
At home it may well be that the very merits of the Canadian 
banks have been the cause of this neglect. To say that 
Canadians do not appreciate their banking system would be 
untrue ; they have repeatedly refused to give it up. But only of 
defective institutions do men complain and agitate for reform ; 
good ones they often accept as matters of course. 

The purpose of this monograph, however, is to describe facts 
relating to the Canadian banking system, rather than to eulogize 
its merits. It is proposed in the next two chapters to ex- 
amine the earlier le'^islation of the Canadian colonies and the 
forces at work in itb .^velopment, and to make some study of the 
crisis of 1837 and the suspension of specie payments. In subse- 



1 Walter Bagehot, Evidence, ut supra, Reply to question 7,976. 



Introduction 



17 



may be 
ley are, 
magni- 
jn very 
:olor."i 
jr it is 
positing 
crisis as 
interest 
rges for 

oked by 
ast, and 
the old 
services, 
: of their 
er Scott 
nired it. 
latise on 
itside of 
fugitive 
leasures 
em, in 
scribed, 
Dlonial." 
anadian 
ay that 
ould be 
only of 
reform ; 



quent chapters the reforms embodied in the bank charters passed 
prior to 1867 will be pointed out, and the efforts to introduce "free 
banking," as well as the reasons for their failure, will be detailed. 
In a fifth chapter the legislation of Nova Scotia and New Bruns- 
wick will receive the necessary attention. After 1867 the uniform 
and general Bank Acts of the Dominion will need extended notice. 
At the same time the various attempts to alter the character of 
the system will be described, together with the reasons for the 
policy which prevailed ; the growth in the number and resources 
of the banks will be illustrated, and from the banking history 
such facts will be given as will explain, in part, the measures 
adopted by Parliament. At the close of the historical part it is 
proposed to examine with greater thoroughness than was pre- 
viously possible, the characteristic features of the present 
Canadian banking system, and some of its practical workings. 

Before beginning to trace the development of seventy-seven 
years, we may so far anticipate as to quote certain American 
comments upon the result. 

♦* We know of no system that more closely conforms to the 
best and broadest economic ideals of banking; none better 
calculated to afford the largest possible public accommodation ; 
none better adapted to insure a safe utilization of the surplus 
balances of the people ; and none better qualified to supply the 
daily fluctuating wants of trade with a safe and convenient 
circulating medium."^ 



1 N. Y. Daily Commercial Bulletin, i8th January, 1890. 



be facts 
eulogize 
to ex- 
and the 
y of the 
n subse- 



I 



CHAPTER II 



THE EARLY BANKS IN LOWER CANADA 



§ I. — THE FIRST BANKS 

The cause of the first considerable effort to establish a 
bank of issue, discount and deposit in the present Province of 
Quebec, was the scarcity and variety of specie in circulation ; 
the scene, the city of Montreal; the time, i8th October, 1792. 
In the official Gazette of that date appeared the following 
circular : 

" The undersigned, having experienced great inconvenience in Canada 
from the deficiency of specie or some other medium to represent the increas- 
ing circulation of the country, as well as from the variety of the money now 
current, and knowing the frequent loss and general difficulty attending 
receipts and payments, have formed the resolution of establishing a Bank at 
Montreal, under the name of the ' Canada Banking Company.' 

" The business proposed by the Company and usually done by similar 
establishments, is : • 

" To receive deposits in cash. 

"To issue notes in exchange for such deposits, i 

"To discount bills and notes of hand. 

" To facilitate business by keeping cash accounts with those who choose 
to employ the medium of the Bank in their receipts and payments. 

" It is proposed to extend the operations of the Bank to every part of 
the two provinces where an agent may be judged necessary ; and it is pre- 
sumed that the institution will be particularly beneficial to the commerce of 
and intercourse with the Upper Province. 

•' (Signed) Phyn, Ellice & Inglis, 
"Todd, McGill & Co., 
" Forsyth, Richardson & Co." 

The firms who issued the circular did not carry out their 
plans. A private bank, chiefly of deposit, was the only result of 
their endeavors. ^ 

The unsatisfactory condition of the currency continued, 



1 Jas. Stevenson, " The Currency of Canada after the Capitulation," Transactions 
of the Literarv and Historical Society of Quebec, 1876-7, p. 132. 



Ii': 



The Early Banks in Lower Canada 



19 



aggravated somewhat by the export of gold to the United 
States. The rates in the colonial money of account, at which 
certain American, British, Portuguese, French and Spanish 
coins were legal tender, were altered in 1795, and the legal 
ratio of gold to silver somewhat bettered in order to keep the 
gold in the country. Some relief was afforded by the measure, 
but the commerce of the colony was growing. The enterprise 
of Scotch and English immigrants, as well as of refugees from 
the former colonies south of Canada, had assisted also in the 
considerable agricultural development. The new activities 
needed facilities for exchange, and the country, as yet, could ill 
afford the luxury of a metallic circulating medium. A second 
attempt to found a bank of issue occurred 6th March, 1807, at 
a meeting in the city of Quebec, assembled in response to a call 
in the Quebec Gazette of the 4th March. But no bank was 
established. 

The next year, in February, a petition of divers inhabitants 
of the cities of Quebec and Montreal, praying to be incorporated 
under the title of the " Canada Bank," was presented to the 
Provincial Legislature.^ A special committee to whom the 
matter was referred, reported favorably with a bill. Many 
objections were offered, most of them ill taken from a more 
modern point of view, and the bill failed to pass. 

From July, 1812, until the latter months of 1815, the Cana- 
dian colonists used a currency composed for the most part of 
promissory, legal tender *' Army Bills " issued by the Govern- 
ment as a financial aid in the war with the United States. This 
currency, though slightly depreciated, had the merit of being 
uniform and expressed in the convenient denominations of the 
colonial currency. Bills for $25 and over bore interest at 6 per 
cent. All notes were received for public dues and were con- 
vertible into Government bills of exchange on London at thirty 
days sight, at the rate of exchange as fixed by authority, or 
into cash, at the option of the commander of the forces. As 
the rate was fixed by commissioners whose duty was to make 
the fairest possible approximation to the market rate of ex- 
change, the holders of the Army Bills had slight cause for com- 



i Jas. Stevenson, ut supra, p. 1^2. 



20 



The Canadian Banking System, 1 817- 1890 



plaint. At the close of the war, the outstanding issues, amount- 
ing to ;^i, 249,996 currency in March, 1815, were reduced 
through rapid redemption to less than ;^20o,ooo currency by 
May, 1816.^ The office of issue was finally closed 24th 
December, 1820.* 

The contraction of the Army Bill circulation caused incon- 
venience in Upper Canada, and the Lower Province, with its 
greater trade, suffered still more. Soon after the redemption 
was practically complete, the bank question was revived. But 
the participants in the next attempt to establish a bank pub- 
lished no detailed exposi of their motives. Nor did they seek 
the preliminary consent of the Legislature. They simply began 
their business. On the 23rd of June, 1817, a company of per- 
sons met at Montreal and signed articles of agreement by which 
an association was formed, with a joint and transferable stock, 
limited to ;^25o,ooo3. Late in August, the new associa- 
tion opened an office as the Bank of Montreal. And this, the 
first bank of discount, deposit and issue to be established, either 
in Lower Canada, Upper Canada, Nova Scotia or New 
Brunswick, is to-day the greatest bank, not only in the 
Canadian Dominion, but in the whole of North America. 

An Act incorporating the association was passed at the 
next session of the Legislature, but was reserved by the Gov- 
ernor for the signification of the Royal pleasure. The Royal 
assent was withheld and the Bank of Montreal continued as a 
private partnership. • r: . 

The example set by Montreal was followed the next summer 
by citizens of Quebec. Articles of association of the Quebec 
Bank were signed 9th July, 1818. Directors were elected in 



> Canadian, currency, more often called Halifax currency, was an arbitrary money of 
account used in all the larger British North American Provinces until the decimalization of 
the currencies in the early fifties of the present century. The denominations were dollars, 
pounds, shillings and pence; the table izd. == i shilling, 20s. — £1, $s.= ii, the dollar being 
ori|;inally the Spanish pillar dollar, coined before 17^2 and containing 385 grains fine silver. 
This currency was established for the Province of^ Canada by an ordinance of 1765, which 
changed the monetary nomenclature from French to English, but adopted as money unit a 
shilling, equal in value to the old French livre, vide Stevenson op, cit. p. 124. The unit was 
often altered slightly, and, after the debasement of the American coinage in 1834, was reduced 
so that the dollar unit of the two systems would correspond. In 1841 the £ sterling was 
reckoned at '•4s. 4d. currency ; the dollar (U. S.) at 5s. id., but after 1850 at 5s. 

a For complete details respecting this issue, including all the important documents, 
vide Stevenson, "The Circulation of the Army Bills with some remarks upon the War 
of 1812," Transactions, ut supra, 1891-92, p. 30. 

« Journal, L. C, i820-i82i,p. 103. * 



SS:3KCi*E=is;i!ia!.'^taw^ 



The Early Batiks in Lower Canada 



21 



September,^ and this bank also started as a private partner- 
ship, its capital being Hmited to /"; j,ooo. The members of the 
association applied for incorpr.ation in 1819, without success, 
however, for the bill failed even to come before the committee 
of the whole House. 

A third bank was organized by another group of Montreal 
citizens on the 25th August, 1818, as the Bank of Canada, the 
capital limit of which was finally set at ;^2oo,ooo. This bank, 
too, applied for a charter, but failed to secure it." 

Finally, in the winter of 1820-21, the shareholders of each of 
the three banks thus established again petitioned the Legislature 
to be erected into bodies corporate and politic. They recited 
in effect that their capital stocks had been all subscribed, that 
the portion of which the payment was required by the articles 
of agreement had been paid in, that they had been engaged for 
some years in the business of banking, and that, without the 
benefit of incorporations, the beneficial purpose contemplated 
by the establishment of the banks would be imperfectly attained, 
and great inconveniences would be incurred in the conduct of 
their business.* They prayed, therefore, to be incorporated 
under regulations and provisions as nearly corresponding with 
the terms of their original association as might be, and under 
such other regulations and provisions as the Legislature might 
prescribe. 

The prayers of the petitioners were granted. On the 17th 
March, 1821, three charters incorporating the several banks 
were presented by the Legislature for the Royal assent. Being 
reserved by the Governor, the charters did not become law for 
over a year. " An Act to incorporate certain persons therein 
named under the name of * The Preside'it, Directors and Com- 
pany of the Bank of Montreal'" (i Geo. IV., cap. 25, L.C.) 
was proclaimed the 22nd July, 1822. Similar statutes respect- 
ing the Quebec Bank (i Geo. IV., cap. 26, L.C), and the Bank 
of Canada (i Geo. IV., cap. 27, L.C), were proclaimed on 
the 30th November of the same year.'* 



i The Shareholder and Insurance Gazette, September lath, 1890, " The Quebec 
Bank," by an anonymous writer, known, however, by me to have access to the records of the 
institution. 

» Journal, L. C. 1820-21, p. 40. 

s Ibid, pp. 40, 48, 103. 

4 Statutes of Lower Canada, Vol. XL, 1821-24, following p. 248. 



22 



The Canadian Banking System, i8 17-1890 



S 2. — THE FIRST CHARTERS 

Save ill regard to the amounts of their capital, the location 
of the banks and the conditions as to the residence of the 
directors, the provisions of the three charters were practically 
identical. The charter of the Bank of Montreal may be taken 
as the type. The preamble declared the " advancement of 
agriculture and commerce and the promotion of the prosperity 
of the province " to be the motives for the legislation. One 
hundred and forty-four persons, then the stockholders of the 
company, their successors and assigns, were created in this in- 
stance a dy corporate and politic, with corporate powers 
continuing to the ist June, 1831. Their capital stock was 
limited to ;^25o,ooo currency, the whole to be paid in by annual 
instalments of not more than 10 per cent, within nine years from 
the passing of the Act. 

Thirteen directors, British subjects, residents of Montreal 
for at least three years, or sometime residents of Montreal for 
three years, and of the provin "'^ l^r seven years, and holders of 
at least four shares each, were to be annually elected by such 
shareholders as were British subjects. Nine of the directors, 
including the President and Vice-President, were to be re-elected 
to the Board each year. The directors were forbidden to act as 
private bankers during their term of office, were to appoint the 
officers necessary for the bank, and to require of them bonds 
adequate to their trust. They were to receive no salary except 
by a vote of the shareholders in general meeting, to declare half- 
yearly dividends out of the profits of the bank, but never to 
encroach upon its capital, to keep a book for the registry of 
transfers of stock, to have the right to inspect the books, corres- 
pondence and funds of the corporation, and to present to the 
annual general meetings of the stockholders, exact and particu- 
lar statements of the 

Debts due to and by the bank. 

Amount of bank notes in circulation. 

Amount of probably bad or dcubtful debts. 

Surplus or profit, if any remaining, after deduction of losses 
and provision for dividends. 
The directors, further, were to be liable for the excess in their 



!' ," 



ii 



The Early Banks in Lower Canada 



2» 



(< 



(( 



natural capacities (i. e. individually and jointly), as well to the 
stockholders as to the holders of bank notes, in case the debts 
of the corporation by bond, bill or note, or any contract whatso- 
ever, should exceed treble the amount of the capital stock actu- 
ally paid in, over and above a sum equal to such money as might 
be deposited with the bank for safe-keeping. But individual 
directors in opposition might exonerate themselves from this 
liabiHty by publishing within eight days from the time of the 
illegal transaction, a statement thereof and their protest 
against it. 

The stock of ;^250,ooo was divided into 5,000 shares of £50 
each. The shareholders were to vote at all meetings in the fol- 
lowing proportions to stock owned : 

for 1-2 shares the holder had i vote, 
'• each 2 " from 3-10 shares, inclusive, i vote, 
i( « ^ It >( 11-30 '• " I 

.( a 5 .4 a 31-60 " •' I 

<* .. g a a 61-100 a a I 

The holders of 10 shares would thus have 5 votes, of 30, 10 ; of 
60, 15 ; of 100, 20 votes. No shareholder was to have more 
than twenty votes. Proxies for absent shareholders were per- 
mitted. This voting scale, designed to reduce the influence of 
large shareholders in the directorate, was adopted in all the 
charters granted by Lower Canada. After the first election of 
directors a share was not to entitle the holder to vote unless 
held for three months prior to the meeting. Fifty shareholders, 
having not less than 150 shares, might call a special meeting of 
shareholders, at which a majority might suspend or remove 
directors guilty of malfeasance. Transfers of stock were not to 
be valid and effectual unless registered at the office of the bank, 
nor until the transferor should have discharged all debts by him 
then due to the bank which might exceed the remaining stock 
belonging to him. Fractional shares were not transferable. 
Shares were made personal property and liable to bona fide 
creditors for debt. They might be attached and sold under a 
writ of attachment and execution served upon the cashier of the 
bank. Failure to pay the instalments on the shares as they 
became due involved a penalty in favor of the bank of 5 per 
cent, on the amount of the delinquent's stock, as well as upon 



24 



The Canadian Banking System, 1817- 1890 



his dividends due at the time, and those accruing before his 
payment of the instalment. But the shareholders were exempt 
from individual liability for the ' debts of the bank, even when 
these exceeded thrice the capital stock paid in plus the specie 
deposited for safe-keeping. The shareholders, therefore, were 
incorporated with limited liability, and enjoyed the extensive 
privilege of a liability Hmited, not to double the amount of their 
subscriptions, but merely to the amount of their subscribed 
shares. 

The Corporation thus created was empowered : 

to hold real estate to the value of ;^i,ooo yearly and 

no more, ,, 

to sue and be sued in the name of the President, 

Directors and Company of the Bank of Montreal, 

to issue promissory notes intended to circulate as 

money and payable on demand in gold and silver 

coin current by the laws of the Province, 

to receive deposits and to deal (a) in bills of exchange, 

(6) in discounting notes of hand and promissory 

notes and to receive the discount at the time of 

negotiating, (c) m gold and silver coin and bullion, 

and (rf) in the sale of stock pledged for money lent 

and not redeem/ed, 

to take and hold mortgages and hypotheques on real 

property for debts contracted to it in the ordinary 

-. , course of its dealings, but on no account to lend 

' . on land, mortgage or hypthhque, nor to purchase 

them on any pretext except as here permitted. 

Obligations, bonds and bills of the bank, whether obligatory 

or of credit, under its common seal, signed by the President or 

Vice-President, and countersigned by a Cashier, were assignable 

by endorsement of the person to whom they were made, any law, 

custom or usage to the contrary notwithstanding. And notes or 

bills, promising the payment of money to any person or persons, 

his, her or their order, issued by the order of the bank, and 

similarly signed, though not under seal, were to be binding and 

obligatory and assignable and negotiable, by blank or other 

endorsement, " in like manner," the charter reads, " as foreign 

bills of exchange now are." BiUs payable to bearer were assign- 



liuL 



■BMnmnMnvasM 



The Early Banks in Lower Canada 



25 



)re, were 



able by delivery only. These details, however, are but inciden- 
tal to questions of banking ; they belong rather to the law of 
commercial paper in which, at that time, the Legislature was 
obliged to establish some new precedents. 

The other restrictions upon the bank were very few. The 
prohibition of loans upon land and mortgage has been cited ; 
so too the limit upon the real estate whicii might be owned by 
the bank. It was forbidden to engage in business other than 
that specified in the grant of powers, i. e., the ordinary banking 
transactions. It might not demand or receive more than the 
lawful interest of six per cent, per annum in any of its dealings. 
The bank's total debts were not to exceed treble the amount ot 
the capital stock actually paid in, plus a sum equal to moneys 
deposited with it for safe keeping. It might not raise loans ol 
money or increase its capital, and upon pain of the forfeiture ot 
its charter the bank was forbidden to loan money to a foreign 
state. No penalty whatever was attached to the other prohibi- 
tions, save the individual liability of directors in case the aggre- 
gate debts of the bank exceeded thrice the paid up capital stock. 

" For the better security of the public," the Government, or 
either branch of the Provincial Parliament, was empowered from 
time to time to require from the bank statements, under oath, ot 
the capital stock, debts due to the bank, moneys deposited in it 
and notes in circulation. On the other hand, the Legislature 
provided, in the bank's behalf, extraordinary penalties, 

(rt) against forgery of the seal orbondsor bills of the bank, or 
kn(jwingly passing forgeries, viz., from six months' to six years' 
imprisonment at hard labor, or public whipping, or standing in 
the pillory, or one or more of the punishments at the discretion 
of the Court : 

(b) against making or engraving plates or tools for counter- 
feiting the bills, notes or undertakings of the bank, or having in 
one's possession plates, paper, presses or tools, with the inten- 
tion of so counterfeiting, viz., death as a felon, without benefit 
of clergy. 

The rights of the King and other bodies corporate and 
politic were saved by Sec. xvii. In Sec. xxi, the duration of the 
Act is limited to ist June, 1831, and it is further provided '♦ that 
if, before the expiration of that period, it shall, at any time, be 



26 



The Canadian Banking System, 1817-1890 



found expedient to establish a Provincial Bank in this Province, 
and that the same be so established by an Act of the Legislature, 
the corporation of the Bank of Montreal shall, from and after 
the expiration of seven years from the passing of such. Act, be 
dissolved." .•-'.■'".,:-;"''■.■,:'■' ,.u ■. .'"v^ ■,>-',:.'■■'■' \j':^ ,■ -v^ ' :*- -■ 

The Quebec Bank was incorporated with a capital stock 
limited to ^75,000 currency, in 3,000 shares of £25 each, all to 
be paid up within nine years ; the Bank of Canada, with a stock 
of ;^200,ooo, in 4,000 shares of ;^50 each. In other respects, the 
charters are substantially similar to that of the Bank of 
Montreal. 

§ 3. — CHARACTERISTICS OF THE EARLY BANKING SYSTEM '' 

From the preceding account it may be seen how simple, in 
many ways how lax, were the charters under which incorpor- 
ated banks first operated in Lower Canada. The shareholders 
were liable only for the amount of their subscriptions to the 
stock. There was no limit to the note issue other than the pro- 
vision restricting the aggregate of debts. There was no process 
whereby to establish the payment in specie of the capital 
stock. There was nothing to prohibit loans upon the security 
of the bank's stock, or to prevent the capital, once paid in, from 
being loaned out bodily to the directors. The publication of 
frequent and periodical statements of the condition of the banks 
was not required, nor, except in the case of loans to a foreign 
state, did the charters enforce by any penalty the prohibitions 
and restrictions that were laid down. 

It must be remembered, however, that the several charters 
were based upon articles of agreement drawn up by the parties 
petitioning for incorporation ; that Canadians in 1820 had had 
little cause for inquiring either into the theory of banking or the 
law which should govern banks. Any advantage in knowledge 
of this sort doubtless belonged to those who first entered the 
business. In drafting the articles so as best to further their profit, 
they naturally omitted many restrictions which, afterwards, and 
from a public standpoint, were found to be desirable. Either 
through ignorance or carelessness, the Legislature of 1820-21 
failed to fill up the gaps. But to criticize their action at this 



The Early Banks in Lower Canada 



27 



point will merely involve repetition. The whole subsequent 
history of Canadian banking legislation is a criticism upon these 
early charters, and a criticism derived, not a priori, but from 
experience. 

In their constitution and variety of function, in the sim- 
phcity of the law regulating them, the first Canadian banks 
more closely resemble the chartered banks of Scotland than any 
similar institutions then in existence. The likeness is due to 
more than the reliance which Canada has usually placed upc)n 
British precedents in matters as yet untreated in her own law. 
It must be explained, in large part, by the number of Scotch- 
men interested in these early banks.' Having brought from 
their native land the knowledge of such institutions, they sought 
in the colonies to extend and to perpetuate for the farmer and 
merchant the benefits and stimulus of a system the worth of 
which Scotland's prosperity could abundantly prove. 

That the early charters embodied many of the more essen- 
tial principles of Canadian banking and Canadian banking law 
will be recognized as we trace the later growth. One such prin- 
ciple is the issue of notes against the general assets of the bank, 
or in different phrase, on the general credit of the Bank ; another, 
the requirement of a large capital foundation, both to strengthen 
the credit of the bank by a heavy guarantee, and to provide 
sufficient funds for its operations. A third is the plan of grant- 
ing each new bank a separate charter, a method by which some 
assurance may be had that the incorporated are worthy of their 
privileges. Again, a fourth is the principle of accountability to 
the Government, destined to find, under the Dominion laws, 
complete and frequent expression in the requirement of a 
monthly return to the Minister of Finance. 

The banks themselves soon introduced some of the more 
fundamental features of Scotch banking. The Bank of Canada 
placed an agent at Kingston, in Upper Canada. ^ The Bank of 
Montreal established an office of discount and deposit at Quebec, 
and employed one agent at Kingston, and another, for the nego- 



I Among the one hundred and forty odd charter members of the Bank of Montreal 
there were at least ninety Scotch names. Of the eighty-nine incorporated as the Quebec 
Bault, no less than thirty were Scotch. Statutes ut supra, 

■i Journal, L. C, 1826, Appendix K. 






/ 



88 



The Canadian Banking System, 1817-1890 



tiation of sterling exchange, in the city of New York.^ The 
several banks were accustomed to receive in payment the notes 
of their competitors and other demands upon them, exchange 
these against claims on themselves and exact the payment of 
balances m specie as often as once a week. 2 Thus was begun 
the practice of branch banking, one of the most useful features , 
of the Canadian system to the public no less than to the banks, 
and the conduct of exchanges between the banks. By the latter 
Canadians have secured frequent and rigid tests of the solvency 
of the participants and an efficient limitation of the note issue to 
its natural volume. 

§ 4. — ENVIRONMENT OF THE BANKS 

To depict the condition of the country in which the per- 
sistent enterprise of the British colonists had at last secured the 
new banking institutions, is a task for the economic historian 
rather than for these pages. He may describe in detail its com- 
merce, and mark how far had proceeded its development in 
agriculture and manufactures. But whatever else may be told, 
it is certain, at least, that from 1820 to 1830, the Province of 
Lower Canada was not far advanced. In commercial activity 
and general economic development it was much inferior to the 
State of New York on its southwestern border, and the com- 
parison with Ohio in the later years of the decade would have 
been distinctly unfavorable. It had suffered from commercial 
restrictions, from the simplicity, ignorance and fixed habits of 
the French habitants, from its severe climate and from the 
checks imposed by an absorbing political strife. The cause of 
the last was the race question, the deep seated enmity between 
the British immigrants and the descendants of the conquered 
French. That enmity was embittered by the ascendancy 
which unjust favoritism of the Royal Governors had helped to 
give the British m the government and the profession of law, 
and which " their own superior energy, skill and capital, se- 
cured to them m every branch of industry." Continuing, in his 



I Journal. T,. C, 1830, Appendix K. 

t Journal, L. C, 1829, Appendix Hh., Resolve of the Boiiid of the Bank of Montreal, 
aSth January, iSao. 



k':;ri*^,Mii..i»i)iSfi;>iW«*iHiipA«t««fe~ii. 






The Early Banks in Lower Canada 



29 



:e issue to 



report of 1839, Lord Durham remarked that " they (the Eng- 
lish) have developed the resources of the country, they have 
constructed or improved its means of communication, they have 
created its foreign commerce. The entire wholesale and a 
large portion of the retail trade of the province, together with 
the most profitable and flourishing farms, are in the hands of a 
numerical minority of the population."^ 

The chief export trade of the city of Quebec was in timber, 
that of Montreal, in furs. Ginseng, potash and grain came next 
in importance. The imports consisted mainly of dry goods, hard- 
ware, spirits, sugar and such necessary commodities as the 
colonists were not in a position to produce for themselves. The 
total discounts of the banks, exclusive of the Bank of Canada, 
which did not report to the Legislature in 1830, were as follows : 



Year 


Quebec Bank" 


Bank of Montreal' 


1821 




£ 699,969 


1822 




1,120,649 


1823 


^221,252 


1. 173.467 


1824 


319-948 


1,705,163 


1825 


444,141 


I. 851.559 


1826 


456.538 


1,354,024 


1827 


• 438,134 


i,i74.97i 


1828 


430.094 


1.377.483 


1829 


484,611 


1.559.683 


1830 


526,870 





The colony was extremely dependent upon the mother 
country, and when crises or commercial disturbances occurred 
in England, Canada suffered sorely. A striking indication of 
this dependence is the fact that for two years after the disastrous 
English collapse of 1825 the Bank of Montreal was obhged to 
pass its dividends, owing to losses on merchants' exchange in- 
curred in the panic year.* 



k of Montreal, 



§5- 



-PRACTICE OF THE BANKS 



In exchange the Bank of Montreal was the largest dealer, 
though the Bank of Canada joined in the business of buying 
and selhng merchants' exchange and the commissariat bills of 



I Report on the Affairs of British North America, from the Earl of Durham, Her 
Majesty's High Commissioner, etc., Montreal, 1839, pp. 14 and 19. 

« Journal, L. C, 1831, Appendix M. 
a Journal, L. C, 1830, Appendix N. 
« Journal, L. C, 1829, Appendix Hh. 



80 



The Canadian Banking System, i8 17- 1890 



the Government, and of furnishing, when required, their own 
drafts upon London. ^ The former bank employed its New 
York agents for operations in the American market, frequently 
more favorable, in matters of sterling exchange, than that of 
Lower Canada. It also remitted bills direct to England against 
its own imports of specie, colonial imports of goods or adverse 
balances otherwise incurred. 2 

I have previously noticed the appearance in Canadian 
practice of the vital features of branch banking and a system of 
frequent exchanges and note redemptions conducted by the 
banks themselves. The plan of u ing New York as a market 
for sterling bills, a source for the supply of specie and a centre 
for the employment at call of portions of the bank's reserve 
funds, has been followed by the greater banks since its intro- 
duction. An idea of the extent, at least, of the business carried 
on by the three banks can best be conveyed by the following 
returns to the Legislature for 1824-1826, 1 829-1831 : 



1 Journal, L. C, 1823-24, p. 284. 

St For example the Bank of Montreal in its exchange business in 

1827 1828 1829 

Bought of the Government £47.000 £36,900 £145,000 

" " Private Bills 18,729 44.367 60,610 

Drew of its own Bills 40,951 62,472 100,581 

Sold of its own in the United States 16,000 42,200 58,800 

" the Government Bills 32,100 17,500 111,000 

The current rate of exchange on gold in those years ranged from 2 to 8 per cent, 
premium. Journal, L. C, 1S30, Appendix N. 



|- 



I 



■^rrasBw* 



The Early Banks in Lower Canada 



81 



their own 
d its New 

frequently 
an that of 
ind against 
or adverse 

Canadian 
1 system of 
:ed by the 
s a market 
id a centre 
k's reserve 
e its intro- 
ess carried 
e following 



i28 


1829 


),90o 


£145,000 


.367 


60,610 


S.472 


100,581 


1,200 


58,800 


'.500 


111,000 



to 8 per cent. 









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82 



The Canadian Banking System, 1817-1890 



Comparing these figures with the report of aggregate dis- 
counts on a preceding page, it will be seen that for the Quebec 
Bank the total discounts were from 3^ to 4^ times, for the Bank 
of Montreal from 3^ to 5^ times, the debts due to the banks 
respectively near January of each year. As the debts due 
undoubtedly included balances for which other banks were 
liable, the multiples just calculated should be increased some- 
what, justly to represent the frequency with which the banks' 
loanable funds were turned over. After making this correction 
it must be concluded that, on the whole, the two banks which 
survived had little of their capital locked up in overdue loans, 
and were making their advances upon short-time paper. Con- 
temporary evidence confirms the conclusion.' '' 

That the directors should be familiar with mercantile credit, 
the members of the board were generally merchants, and natu- 
rally they were not precluded from the advantages of bank 
credits. 2 The statement in the note below shows that directly 
or indirectly the directors both of the Quebec and Montreal 
Banks were liable for over a third of the debts due to each res- 
pectively in the winter of 1830-31. In 1834 the proportion of 
directors' liabilities to total discounts was ;^47,426 to ;^i 19,051 
for the Quebec Bank and ;^i6g,i2i to ;^579,729 for the Bank of 



» A petition to tiie Legislature of iSzg, attacking the Bank of Montreal, complains of 
" its resolution not to discount any bill for, or make any advances to, persons not directly en- 
gaged in trade; a rule which, while it cuts the bank itself off from a lucrative and secure 
branch of trade, deprives the public of those advantages which in countries where the 
banking system is better understood, are considered as important to the agricultural, pro- 
fessional and general interest as to that of the mercantile part of the community, and dis- 
plays the narrow, mistaken and selfish views of those who cannot drop the trades wIumi 
they assume to be bank directors." Journal, L.C., 1829, p. 354. 

« On 5th February, 1831, the Quebec Bank reported discounts to Directors 
or money loaned or for which they are security as promissors ^^23,002 



Total liabilities of Directors to the bank as Promissors 

As Endorsers 

As Security for officers 



£20-150 

45,713 

1,270 



Total £67,133 

Debts due to the bank gth Feb., 1831 ;fi6o,20i 

The Bank of Montreal reported for the i6th Nov., 1830: 

Discounts for Discounts 

Discounts or others, the Directors on Bills of 

Loans to Directors. being liable, Exchange. 

As Individuals £ 4,269 £ 241 

AsPartners 116,204 .S3.663 £6,666 



Total. 

£ 4.509 
176,533 



Total debts due to the bank Feb. 14th, 1831 
Journal L. C, i83i. Appendix M. 



jT 1 8 1, 042 
■ 499.001 



..iiiaMwiBSg Aw i M ifi 'hi *!' ■uk;«w> " «>' «' > '» «■»***' 



?90 



The Early Banks in Lower Canada 



88 



.ggregate dis- 
r the Quebec 
for the Bank 

to the banks 
16 debts due 

banks were 
reased some- 
:h the banks' 
lis correction 
banks which 
verdue loans, 
taper. Con- 

:antile credit, 
:s, and natu- 
res of bank 
that directly 
tid Montreal 
2 to each res- 
proportion of 
to ;^i 19,051 
the Bank of 



real, complains of 
ns not directly eii- 
rative and secure 
untries where the 
agricultural, pro- 
nmunity, and dis- 
) the trades when 



)irectors 

£23,002 

£20,150 

45,713 

1,270 

£67,133 

£160,201 



ints 
s of 
nge. 

)6 



Total. 

£ 4,509 
176,533 

£181,042 
• 499.001 



Montreal.' The large share which went to satisfy the directors- 
demand for discounts is more easily justified when one remem- 
bers the comparative wealth of these persons and the import- 
ance of their firms among the commercial houses of the city. 
Further, the rules adopted by the Board to govern dis- 
counts were by no means careless or imprudent. Discounting 
days were held twice a week. Questions of discounting were 
decided by ballot. No advances for over ;^io,ooo were allowed 
by the Bank of Montreal without the unanimous consent of the 
Board, and no discounts were granted without two responsible 
name's on the paper nor for more than ninety days. Two votes 
in the negative, or one if there were but five members present, 
were sufficient to reject a note or a proffered bill of exchange.* 

In other respects the returns are of use as showing the im- 
portance which deposits had already acquired for the Lower 
Canada banks, the modest limits within which the circulation 
was confined, and the large reserves or cash in hand, which the 
banks held against their demand liabilities. The proportions 
of cash to circulation and deposits were for the 

in 1824 1825 1826 1828 1830 1831 

Quebec Bank 28 percent. 25 29 19 25 17 

Montreal Bank 54" " 26 34 29 27 27 

These ratios, though not averages, may be presumed to be 
fairly representative. Their height can be accounted for by the 
situation of the banks, remote from the bullion centres either of 
America or Europe, and the consequent necessity of a large 
specie store to provide against possible demands. 

Beginning with 1825, there is to be noticed a rapid decline 
in the business of the Bank of Canada. The fall in its deposits 
from ;^i 1,000 in 1824 to ^^295 in 1825 seems to have decided the 
proprietors to wind up the bank. It nowhere appears that the 
bank defaulted in any of its obligations, but the management, 
undoubtedly, entertained rather faulty notions as to the privi- 
leges and duties of a bank. As early as 1820 they had incurred 
discredit by refusing to pay in dollars, and offering to cash tJie 
notes and cheques presented for payment by the other banks in 



> Journal, L. C, 1834, Appendix S. 
i Journal, L.C., 1829, Appendix Hh. 






lUwsJ 



84 



The Canadian Banking System, 1817-1890 



half crowns, small and much worn silver pieces, which, though 
current at an excessive rating by the law of the province, were 
not available for export. On the 28th January, 1820'; the Bank 
of Montreal resolved not to accept cheques upon the sister bank 
in the future, and in April the directors passed a similar resolu- 
tion respecting its notes. ^ It will be observed that the marked 
change in the account of the Bank of Canada came in the panic 
year. Then the capital stock which was ;^92,825 between 1824 
and 1826, was reduced to ;^30,025 in 1827, and by 1830 to ;^3,555. 
In 1831 the liquidator reported to the House of Assembly that 
the bank's charter having expired, all business was discontinued. ^ 

Erratic ideas upon the duties and powers of banks were not 
confined to the members of the Bank of Canada. The mer- 
chants of Montreal pray, in 1830, that if the Legislature renew 
the charter of the Montreal Bank, " care should be taken to 
protect the interest of the public by restricting the said bank 
from dealing in bills of exchange, and from issuing bills in small 
sums."* The first item of the complaint was of long standing, 
having been emphasized in 1823, by the charge that when the 
bank was buying foreign bills it ceased to discount. The char- 
tered bank, of course, was both a powerful and an unwelcome 
competitor to the old private dealers in exchange. For the 
second point, the Legislative documents afford no other proof 
than that all the banks, as they continued to do until 1870, 
issued circulating notes for sums as low as one dollar or five 
shillings currency. 

A branch had been established in Quebec by the Bank of 
Montreal with an allotment of ;^30,ooo capital, and ;^6o,ooo 
notes payable in that city. In the early years of the decade the 
Quebec? Bank displayed considerable dissatisfaction with this 
proceeding, animated, apparently, by the belief that incorpora- 
tion was intended to establish at Quebec a local monopoly of 
banking for its own benefit. Some feeling against the branch 
still existed in 1829. In a petition of merchants and others 
attacking the mother bank on the general ground that it had 
not acted in the public interest, there are found among other 



I Ibid. 

« Journal, L. C, 183 1. p. 18. 

» Journal, L.C., 1830, page 123. 



liWM>WH.«ljt«*k**'UaWi^^MtdJI^:iMr:«tAnM^^ 



The Early Banks in Lower Canada 



36 



irh, though 
vince. were 
)• the Bank 
sister bank 
jilar resolu- 
the marked 
n the panic 
tween 1824 
3tO;^3,555. 
embly that 
continued.^ 
ks were not 

The mer- 
it lire renew 
)e taken to 

said bank 
ills in small 
ig standing, 
.t when the 

The char- 
unwelcome 
. For the 
other proof 
until 1870, 
>llar or five 

he Bank of 
nd ;^6o,ooo 

decade the 
n with this 

incorpora- 
nonopoly of 
the branch 

and others 

that it had 
mong other 



specific f;harges, the assertions that the Bank of Montreal had 
no right to estabHsh a branch at Quebec, that it refused to re- 
deem its own notes at that city when they were not stamped 
" payable at Quebec," and that the Quebec office bought up at 
a discount the notes issued from Montreal. This was the same 
document in which was criticised the practice of the bank to 
loan chiefly on paper arising from commercial transactions. 

The charges were serious enough for investigation. But 
the committee who tried the case acquitted the Montreal 
Bank of the monstrous anomaly of trading in its own notes. 
They found in respect to the other charges, (a) that the office 
at Quebec had been highly advantageous to commercial and 
agricultural interests, particularly to those of the city and 
district of Quebec, having caused a desirable competition 
between the two monied institutions, and that the affairs of the 
bank had been conducted on fair and honorable principles ; 
(6) the charter did not prohibit the establishment of agencies ; 
(c) to redeem notes at the branches v/as not the practice of the 
Bank of England, the Bank of Scotland, or the Bank of the 
United States ; {d) the Quebec office had not refused to redeem 
its own issues ; {e) the bank had not traded in deteriorated 
coin, but had discountenanced the practice at considerable 
expense; (/) the bank had taken every prudent measure to 
stop the counterfeiting of its notes. 

§ 6. — FURTHER LEGISLATION 

The practical monopoly of issue was conferred upon the 
chartered banks by an Act of 1830. (10 & 11 Geo. IV., cap. 5, 
sec. ii.) On penalty of forfeiture of the amount involved, it 
forbade that any note payable to bearer or under the value of 
five dollars should be offered or given in payment, except such 
notes as might be issued by banks incorporated by law in 
Lower Canada. 

In the same year, the charter of the Bank of Montreal was 
continued to the ist June, 1837, and amended in some important 
respects. (10 & 11 Geo. IV., cap. 6.)^ (a) It had been found 
expedient that more explicit statements should be required. 



» Provincial Statutes of Lower Canada, 1830, p. 571. 



*''",i? 



86 



The Canadian Banking System, 1817-1890 



A new form was adopted, the changes being such as to show 
among other items the state of the balance sheet of the banks 
reporting. (/>) The total amount of notes in circulation for 
less than £1 5s. ($5) currency, was limited to one-fifth of the 
capital stock paid in, and notes for less than 5s. were prohibited. 
The Legislature reserved the power to suppress or further to 
limit the circulation of notes under five dollars, and added 
the penalty of forfeiture of charter for the violation of either of 
the restrictions already imposed, (c) In order to preserve a 
competition in banking, it was provided that the charter should 
determine in ten months from the expiry of the charter of the 
Quebec Bank, unless that were likewise continued, or some 
other bank incorporated in Lower Canada. '' 

The next year, however, the Quebec Bank secured a 
renewal of its charter to the ist May, 1836 (and by a subse- 
quent Act, to the 1st June, 1837), with amendments similar to 
those imposed upon the Bank of Montreal.' (i Wm. IV., cap. 
13.) It was permitted to add to its capital stock not more than 
;^i 50,000, the whole to be called up within five years, in instal- 
ments of not less than 10 per cent, per annum. 

On the 5th February, 1831, a petition of Montreal mer- 
chants praying for the incorporation of a new bank in their 
city, was presented to the House of Assembly. There was but 
one bank there, they recited, " whose capital is altogether inade- 
quate to the circulation of the valuable articles of import and 
export which its geographic position naturally brings to it, and 
which has the effect of retarding the development of all the com- 
mercial and agricultural resources of which it is susceptible. 
Though as yet no improper influence may have resulted from a 
banking monopoly in Montreal, the most effectual preventive 
of such an evil is the admission of reasonable competition with 
its counteracting influence."^ In compliance with their prayer 
the Legislature passed an Act to incorporate the president, 
directors and company of the City Bank. On the question 
raised by this single successful proposal, between 1821 and 
1 841, to establish a new bank in Lower Canada, twenty-one 



1 Provincial Statutes of Lower Canada, 1831, p. loa. 
» Journal, L.C., 1831, p. 88. 



30 



The Early Banks in Lower Canada 



87 



1 as to show 

if the banks 

culation for 

;-fifth of the 

i prohibited. 

or further to 

and added 

of either of 

preserve a 

arter should 

larter of the 

ed, or some 

: secured a 
by a subse- 
s similar to 
n. IV., cap. 
t more than 
rs, in instal- 

ntreal mer- 
nk in their 
re was but 
2ther inade- 
import and 
3 to it, and 
111 the com- 
iusceptible. 
Ited from a 

preventive 
stition with 
leir prayer 

president, 
e question 
182 I and 

wenty-one 



French members of the Assembly were against the measure, 
and a mixed party of twenty-seven French and English for it.* 
The ballot is good confirmation of Lord Durham's remarks upon 
the French prejudice against banks. ^ 

Before the charter of the City Bank reached the 
Imperial Government, reforms had been effected in the 
English law against forgery. After 1832 it was not a capi- 
tal crime, and the charter from Lower Canada failed of the 
Royal assent because of its severe and inconsistent penalties 
against forgery. With a change in this regard the bill was re- 
enacted in 1833, to continue until the ist June, 1837, and be- 
came law on the 3rd May. (3 VVm. IV., cap 32.) 

The only novel features in this charter weie the provisions 
concerning the first organization of the bank. Those who peti- 
tioned for incorporation had not begun a banking business; 
indeed, in 1833 they had still to secure a capital in order to meet 
the requirements of the Act. The capital stock was limited to 
;f 200,000 in 8,000 shares of £2^ each, all of which must have 
been subscribed and ;^40,ooo paid in, and " held by and in the 
actual possession of the corporation in gold and silver coin cur- 
rent in this province," before any note or bill might be issued. 
To raise the capital, subscription books were to be opened after 
a public notice for four successive weeks. After the amount was 
subscribed, and a notice published for three weeks, a meeting of 
the subscribers for the election of directors to serve until the 
next Monday in June, might be called. Five per cent, of the 
subscription was to be paid down at the time of subscribing, the 
remainder in instalments not greater than ten per cent, and on 
thirty days' or more notice from the directors, the whole capital 
to be paid in within four years from the passing of the Act. 



1 Ibid, p. 439. 



■t " The Hngiisli population, an immigrant and enterprising population, looked on the 
North American provinces as a vast field for speculation and settlement, and in the common 
spirit of the Anglo-Saxon inhabitants of that continent, regai'ded it as the chief business of 
the Government to promote by all possible use of its legislative and admiuijtrative powers, 
the increase of population and the accuuiulation of property. They wished to form them- 
selves into companies for the establishment of banks and the construciion of railroads and 
canals, and to obtain the power necessary for the completion of such woiks wiih funds of 
their own. ♦ * * ♦ -j-jig applications for banks, railroads and canals were laid on one 
side until some general measure could be adopted with regard to such undertakings, but the 
geiieral measure thus promised was never passed. In all these decisions of the Assembly, 
in its discussions and in the apparent motives of its conduct, the English population per- 
ceived traces of a desire to repress the influence and success of tlieir race." Report, 
Mt supra, p. 19. 






1' 

I ! 



I'll 



■ftil:, 



88 



The Canadian Banking System, 1 817- 1890 



The annual meeting of the shareholders was appointed for the 
firpt Monday in June. At these meetings were to be elected the 
eleven directors, five or more being annually re-elected. In 
other respects the charter of the City Bank presents no sub- 
stantial difference to the amended charters of the other two 
banks. 

The mention of two more measures will be necessary to 
complete the sketch of the banking legislation in the old Pro- 
vince of Lower Canada. 

The charter of the Bank of Montreal expired on the ist 
June, 1837. It was not renewed at the time because of the 
failure of Parliament to act in the case. The bank continued its 
business^ without an incorporation until its old charter was re- 
enacted for four years by the Special Council, the 4th May, 1838. 
The Quebec Bank and the City Bank met the same difficulty by 
securing Royal Letters Patent, 2 by which their corporate ex- 
istence was continued for one year after the termination of the 
first session of the Provincial Parliament that should be held 
after the 31st May, 1837.^ The conditions of these charters 
were practically those under which the banks had acted since 
1833. The years 1837, 1838 and 1839 were marked by great dis- 
turbances in the Lower Province and the suspension of 
the constitutional government established in 1792. In its 
place was a temporary government known as the " Special 
Council of the Province of Lower Canada.""* This body ex- 
tended the charter of the Quebec Bank until the ist Nov., 
1842, continuing also the Royal permission to add ;^i5o,ooo to 
its capital stock." This is the first of the measures referred 
to. The second is " an ordinance to regulate private banking 
and the circulation of the notes of private bankers," i.e., notes 
not of any bank chartered, authorized or recognized by the Legis- 
lature of Lower Canada, or competent authority in any part of 
Her Majesty's dominions, or in the United States. The law 



1 Ordinances of the Special Council of Lower Canada, 1838, p. 50, i Vie, cap. xiv. 

» 7 VVm. IV. assented to 31st May, 1837. 

» The Revised Acts and Ordinances of Lower Canada, 1845, p. 320, 

♦ Created by the Imperial Act of i Vic, passed loth July, 1838. 

« Acts and Ordinances, ut sutra: "An ordinance to prolong the term of the Royal 
Charter incorporating the Quebec 6ank, and to make further provision for the government 
and management of the aatd Bank." 2 Vic, (3), cap. xziv. 



4 



Tke Early Banks in Lower Canada 



89 



forbade the unlicensed private issue of notes under £^ currenc)% 
on a penalty of three times the nominal value of the notes, or of 
£^ currency for each offence if the notes should be for less than 
5 shillings. Licenses were to be granted under the authority of 
the ordinance for one year, and published in two newspapers 
in each of the cities of Montreal and Quebec. Licensed banks 
were obliged to transmit statements of their affairs to the Gov- 
ernment or forfeit their licenses. Notes for less than $5 
were not to exceed one-fifth of the bank's capital. Severe pen- 
alties were also imposed for giving or receiving in payment such 
notes as were denounced by the Act. 

From all internal evidence this ordinance was a temporary 
expedient for the suppression of the numerous irresponsible 
issues of promissory notes for circulation that are wont to 
appear in situations such as then existed in Canada. The only 
issues that could have come within the purview of the ordinance 
were of slight importance. None of the concerns thus subjected 
to regulation and supervision survived until 1^41. 

Both the ordinances described were products of a time of 
excitement, agitation, disorder and violence, succeeded by the 
rule of martial law. But the Rebellion of 1837, the second out- 
break of insurrection in the following year, the mission of the 
Earl of Durham and the attempted solution of the race and 
political problem by the union of the Canadas, events which 
absorbed the attention of the colonists between 1837 and 1840, 
cannot receive more than mention here. The instability and 
prostration caused by party feuds, by civil war, military rule 
ami -constitutional change, involve for the commerce and bank- 
ing of a country consequences which, though overshadowed by 
political events, are often costly and significant But any such 
results experienced in Lower Canada, the effects of the financial 
crisis of 1837, and the suspension of specie payments induced 
by the commercial and political confusion, can best be dis- 
cussed m connection with the similar difficulties encountered in 
the same years by the banks of the Upper Province. 

' Before taking up the early banking in Upper Canada, it is 
necessary to notice the appearance in Montreal of a bank which 
has ever since retained the unique characteristics of its constitu- 
tion. The French banking firm of Viger, De Witt et Cie., other- 



L» — -J 



f^^ 



■ 



m 



The Canadian Banking System, 1817-1890 



wise known as La Banque du Peuple, began its business in 1835. 
It was a co-partnership in commendam or en commandite, com 
posed of some twelve principal partners or members and an 
indefinite number of commanditaires or partners in commendam. 
Of the principal partners was required a considerable contribu- 
tion of capital in each ca^e ; in them exclusively was vested the 
manaf^ement of the bank, and against them ran a joint and 
several liability for all the debts of the bank. The commandi- 
taires had no voice in the management of the bank, were exempt 
from any liability beyond the amount of their subscribed stock, 
and were entitled to dividends on their contributions of paid-in 
capital at the same rate as the principal partners. Concerning 
this bank Lord Durham remarked : " The establishment of the 
Banque du Peuple bj^ French capitalists, is an event which 
may be regarded as a satisfactory indication of an awakening 
commercial energy among the French, and it is, therefore, very 
much to be regretted that the success of the new enterprise was 
uniformly promoted by direct and illiberal appeals to the 
national feelings of the race."^ 

Statements of the chartered banks of Lower Canada are 
appended for 1831 and 1834, the last statement published 
before the Rebellion that ! have been able to procure. 



1 Report, p. 15. 



■'Ipi 



The Earlv Banks in Lower Canada 



41 






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CHAPTER III 
^ UPPER CANADA. 1817-1839 

S 7. —ESTABLISHMENT OF THE BANK OF UPPER CANADA 

The question of incorporating a bank first came before the 
House of Assembly of Upper Canada in 1817, the same year, in 
fact, as the matter was broached to the Legislature of the 
Lower Province. On the 5th March, the " Memorial of the 
merchants and others of the town of Kingston " was presented. 
It showed that the *' memoriahsts, having taken into consider- 
ation the great utility and advantage of banks to a commercial 
people, which has been evinced by the number which have been 
established in England, and the United States of America since 
the Revolutionary War, and feehng the benefit which the latter 
derive from the ready aid afforded them by their banks to carry 
on their establishments and improvements in their western 
territory, which, although of a more recent date, is in a more 
flourishing state than any part of this province, are of opinion 
that if found so beneficial in those countries they cannot fail of 
tending to the prosperity of this province. The want of such an 
establishment was severely felt before the late war, and there is 
hardly any doubt but that the same inconveniences will very 
shortly occur, whereas a well regulated bank would obviate all 
these difficulties by keeping up a circulating paper to meet every 
public demand." They prayed, therefore, for incorporation as 
the Bank of Upper Canada, with a capital of ^100,000.^ 

The Act of incorporation passed by the Assembly and 
Legislative Council was reserved by the Lieutenant-Governor 
for the signification of the Royal pleasure. Assent was granted, 
but as notice of it arrived too late for promulgation within the 
period established by the charter for the bank to begin business, 



I lournal of the House of Assembly of the Province of Upper Canada, 1817, p. 106, 
of the MS, copy ia the Library of Parliament, Ottawa, Canada. 



upper Canada, 1817-39 



m 



are-enactment was necessary to make the charter available.^ 
The inhabitants of Kingston again petitioned in June, 1819. 
On the 1 2th July, an " Act to incorporate sundry persons under 
the style and title of the President, Directors and Company of 
the Bank of Kingston " became law. (59 Geo. III., cap, 15, U.C.) 
This charter was forfeited by non-user till the ist Jan., 1821. 
The reason of so extended a reference will presently appear. 

In the meantime merchants and residents of the Home 
District (the site of the present city of Toronto) prayed for 
incorporation as the Upper Canada Banking Company. They 
supported their request by reference to the want of a circulating 
medium before the Army Bills were issued, and to the prospect 
of a like disadvantage soon becoming oppressive. The charter 
passed for their benefit was reserved for the Royal pleasure by 
Sir Peregrine Maitland, 12th July, 1819.^ As before, the receipt 
of the Royal assent was much delayed, and on the 5th April, 
1 82 1, the House of Assembly adopted the following resolutions : 

" I. Resolveu, that it is the opinion of this House that the establish- 
ment of a Provincial bank, under proper restrictions, would be beneficial to 
the country, by remedying the great want of specie by securing to ourselves 
whatever advantages are to be derived from the issue of a paper currency, 
and by establishing a circulating medium of known security, instead of the 
paper of private banks, uncontrolled by any charter or legislative provision, 
and which from being rejected by the Public Receivers, does not answer 
effectually all the purposes of trade." 

"2. Resolved, that it is the opinion of this House that a Bill should 
be brought in for establishing a Provincial bank by the incorporation of such 
persons as shall become stockholders under the provisions of the Act ; the 
system to be as similar as circumstances will permit to that contained in the 
Bill formerly passed for establishing a bank at Kingston, except that to insure 
its going into operation, the amount of stock and deposit, and consequently 
of paper to be issued, should be reduced." » 

But the Act to incorporate the Bank of Upper Canada became 
law by the proclamation of the Royal assent on the 21st April, 
1821, and a new Act became unnecessary. (59 Geo. III., cap. 24,. 
U.C.)* 



» Journal, U. C, ut supra, 1819, p. 19. 
« Ibid, p. 419. 

8 Journal of the House of Assembly 01 the Province 01 Upper Canada, Kingston, 
U. C, 1821, p. 196. 

♦ Revised Statutes of the Province of Upper Canada, Kingston, 1831, p. 26a. 

3 



i 



(^! 



JLii_uiflT" 



44 



The Canadian Banking System, 1817-1890 



From the foregoing it can be seen with what force, greater 
even than in Lower Canada, the need of a reform in the cur- 
rency prompted the estabHshment of the first bank in the Upper 
Province. In the m<)ving cause of its origin this institution 
differed Httle from the old banks of Amsterdam, Hamburg and 
Italian cities, the effort to escape the evils of a varied and fluctu- 
ating circulating medium being of chief importance in each of 
these undertakings. In Upper Canada, there were also 
the need of an instrument of exchange less costly than 
specie, and a hope, by the introduction of credit organization 
in some form, to promote the prosperity and advantage of com- 
merce and agriculture. This purpose, apparently so dear to 
provincial assemblies, was suggested as much by the example of 
the United States as of the mother country. Of the instances 
of American influence that we shall have to note this is by no 
means the last. 

But in its constitution, and in the charter restrictions under 
which it was to act, the Bank of Upper Canada presents few 
remarkable variations from the Lower Canada banks incorpor- 
ated in 182T. The first five section? of the Act are chiefly con- 
cerned with provision for the concluct of subscription to the 
bank's capital. The limit setlin i\^2i was ;^2oo,ooo, divided 
into shares of ;^I2 los., of whiph £1,0,000 were to be subscribed 
and ^20,000 in specie to be 'paid in before the bank should 
begin business. On account of the,scarcity of coin, the require- 
ment of specie payment was red'uced in 1822, to ;^io,ooo. 
(2 Geo. IV., cap. 7, U.C.) In i823> the capital limit had been 
found greater than the circumtfJnces and commerce of the 
province required. At the requesy of the bank, it was reduced 
to ;^ioo,ooo and "the whole amount of the property, stock and 
estate," of the bank limited to ;^ioo,ooo. The latter is a curi- 
ous provision whose only effects must have been to prevent the 
increase of capital and the accumulation of a reserve fund or 

rest out of profits. 

' ' ' V 

The important differences, in effect, from the Lower Can- 
ada charter we have described, will be found in the following 
details : 

(a) The bank was to be established at the seat of govern- 



upper Canada, 1817-39 



m 



ment of the province, with express authority, however, to 
establish branches. ' ' 

(b) Notes under five shilHngs were forbidden. 

(c) Four of the fifteen directors were each year ineUgible for 
re-election. 

(d) Directors absent when the transaction was authorized 
could avoid the personal liability for the excess of debts of the 
bank over thrice the paid-in capital stock, plus deposits of 
money, by immediate notice to the stockholders in general 
meeting, instead of by published newspaper notice. 

(e) The bank could lawfully hold only such real estate as 
was necessary for the convenient transaction of its business, but 
no limit was imposed on the annual value of such property. 
The provisions as to land mortgaged to the bank by way of 
additional security, etc., present no variations. 

(/ ) On refusing payment of its bills in specie, the bank was 
obliged to cease banking operations, on pain of forfeiting its 
charter, until specie payment should be resumed. 

(g) An annual return, properly sworn to, was to be made 
to the Provincial Le^jislature. 

The charter was to remain in force until the ist June, 1848. 

The new bank began its business on the ist July, 1822. 
The chronic scarcity of specie in the Province and the Govern- 
ment's power to subscribe for stock have lent color to the story 
of an unauthorized advance of coin from the military chest, with- 
out which the bank would have been unable to start. ^ But the 
evidence for this has not yet been advanced. The Government 
did subscribe for the 2,000 shares allotted to it by the charter. 
When the required capital was reduced in 1823, the Government, 
thus becoming the owner of a fourth of the entire stock, was 
authorized to appoint four of the fifteen directors " for the better 
security of the public interest."" Thus situate by law at the 
seat of Government, and with the Government entitled to share 
in its management as well as its profits, the Bank of Upper 






1 Vide Haoue, G., "The Banking System of Canada," in Canadian Economics, Mont- 
real, 1883, p. 226. 

» 4 Geo. IV., cap. xi. 



I 






l.\:' 



HI 

i ! 



Hi 






m 



The Canadian Banking System, 1817-1890 



Canada became both in law and in fact a " Provincial Bank." 
A practical monopoly of note issue was conferred upon it in 1823 
by an Act prohibiting banks not redeeming their notes in specie 
within the province from carrying on business there. (4 Geo. IV., 
cap. 13.) 

§ 8. — THE " PRETENDED " BANK OF UPPER CANADA AT KINGSTON 

It will be remembered that difficulty in securing the re- 
quired capital caused the charter of the Bank of Kingston to be 
forfeited for non-user. Nevertheless some ten residents of 
Kingston clubbed together in 18 19, formed an association in 
direct violation of the law, invited persons to subscribe to the 
stock, and opened an office in Kingston as the President, 
Directors and Company of the Bank of Upper Canada.^ Their 
own subscriptions they paid chiefly in stock notes, but in one 
way and another a paid-up capital of about ;^i 2,000 was 
secured. '^ By 1823 the pretended bank had issued notes for 
;^i8,997 14s. 3d., and by means of these or of its stock, had be- 
come the debtor of a great portion of the inhabitants of the 
Province. 

If rightly conducted, the enterprise might have been pro- 
fitable, but the management had neither honor nor honesty. 
They soon attempted to loot the bank. Two directors alone 
borrowed a sum equal to the paid-in capital. Later, the Presi- 
dent and a confederate on the Board of Directors opened a 
shaving shop for lending the bank's funds to individuals at 
double interest. This aroused the jeajousy of the other 
directors, and Whitney, the President, was suspended in August, 
1822. ;^8,ooo of redeemed notes were lying with the Montreal 
agent of the bank. Whitney forthwith left for Montreal 
and arrived before the news of the trouble was come by post 
from Kingston. He asked the cashier of the Bank of Canada 
for the parcel of notes and received it, to return to the Kingston 
bank's cashier. Whitney used the notes for his own purposes. 
When the quarrel, the abstraction of over ;^i,ooo from the 
parcel, and the refusal of Whitney to give up the remaining 



i 4 Geo. IV., cap. xxiii., Preamble. 
9 Journal, U. C, 1825. Appendix B. 



Upper Canada, 1817-39 4T 

notes, became known in Kingston, a run upon the bank was 
started. Its small store of specie was soon exhausted. Ignor- 
ance only added to the popular alarm, and intensified the 
demands for payment. Note-kiting or reciprocity in indorse- 
ment had been practiced freely by the directors, and renewals 
granted without discretion. The locked up funds could not be 
realized upon. About the 23rd September, 1822, the bank 
failed. 1 

The condition of the debts and property on the 6th 
February, 1823, was as follows: 

Stock paid-in : 

Directors /3.240 

Others 7,896 

/".136 

Notes unredeemed 18,176 

Deposits goo 

Less Directors' stock 3,240 

Amount to be paid ;^26,97o 

Debts due to the Bank by bond and note /22,227 

Book debts 1 ,000 

Deficiency to be made up by the cashier 5.884 

Total assets £'29> m 

Instead of enabling the shareholders to enforce debts due 
to the bank and thus to wind up the concern, the Legislature, 
in 1823, vested the stock, debts, bonds and pro^ erty of the bank 
in the hands of commissioners for the benefit of the creditors. 
(4 Geo. IV., cap. 22.) The commissioners reported claims ex- 
isting against the bank the 3rd January, 1825, as ;^26,698, of 
which £11,136 were for stock. The assets amounted to ;£'i8, 718. 
There was a possibility (not, however, realized) of recovering 
from the sureties for the bank officials the ^"5,884 considered as 
an abstraction from its funds. ^ In the opinion of the commis- 
sioners the whole capital would bs sunk, and, even then, all 



1 Journal, Legislative Council, U.C., 1823, p. 113 ; also, Journal, U.C., 1823, pp. 187-201, 
of the type-written copies in the Legislative Library, Toronto; also, Statement of the 
affairs of the Bank of Upper Canada at Kingston, taken from authentic document!!, 
Kingston, 1840, pp. 13, et seq. 

2 A statement of the a£fairs of the late pretended Bank of Upper Canada at Kingston, 
York, 1827, pp. 16, et seq, 







The Canadian Banking System, 1817-1890 



claims would not be satisfied. Their forecast was correct. The 
Legislature tried to remedy the defects of the first Act by 
measures passed in 1824, 1828, 1829 ^^^ 1836. Liquidation 
dragged along, the commissioners made mistakes, by one of 
them losing a suit in which a claim for ;^io,ooo was involved, 
and by the arbitration which debtors might demand under the 
law of 1829, many claims were reduced to less than a fifth of 
their original amount.^ But in 1839 the legal debts due from 
the former bank had been reduced, by payment or scaling 
down, to less than ^5,000, and, after an unimportant Act of 
1841, the matter remained untouched by legislation (4 & 5 Vic, 
cap. 29, Can.). 

This first bank failure in Canada, though comparatively 
small amounts were involved, caused widespread loss. Much 
grievous mjary was inflicted by the extreme delay in liquidation. 
The better provision was made for the notes issued by the bank, 
;^i 1,500 having been retired in various ways by 1825.2 As the 
worst sufferers were the dupes whose money had been secured 
for stock and then manipulated by the directors, that extreme 
suspicion of banks of issue which frauds upon their paper cur- 
rency made well nigh universal among Americans, was not 
excited in the minds of Canadians. Thus they were left free to 
consider more fairly the general question of banks and bank 
regulation, a fact not without its importance in the subsequent 
history. 

§ 9. — ECONOMIC AND POLITICAL ENVIRONMENT OF THE BANK 

The economic conditions in which banking began in Upper 
Canada receive some notice in the petitions for incorporation. 
In prosperity and development, e.g., the western territory of the 
United States is said to be further advanced than the Canadian 
Province, yet surely no one in 181 8 could claim much in these 
respects for Indiana and Illinois, or Michigan and Ohio. 
Twenty years later, Lord Durham, reviewing the history of the 
Province, said with reference to the geographical character of 



I Ibid, p. 2. 

» Journal, U.C., 1825, Appendix B. 



Upper Canada, 1817-39 



id» 



the country : " Its inhabitants scattered along an extensive 
frontier with very imperfect means of communication and a 
limited and partial commerce, have apparently no community of 
interest or opinion." The Province had no great centre with 
which all the separate parts were connected, nor was there an 
habitual intercourse between the inhabitants of different sec- 
tions. Deep seated impediments blocked the way of industrial 
progress. "Avery considerable portion of the Province has. 
neither roads, post offices, mills, schools or churches. The 
people may raise enough for their own subsistence," the Report 
continues, *' and may even have a rude and comfortless plenty, 
but they can seldom acquire wealth."^ 

After the depression of 1825 and 1826 in England, the 
population was suddenly doubled by immigration. The value 
of all species of property rose and the resources of the province 
were rapidly, and for the old inhabitants profitably developed.^ 
A series of canals, designed to render navigable the whole 
course of the St. Lawrence, was begun in 1825, the colony con- 
tributing lavishly by subsidies and expenditures on its own 
account. The Welland Canal was completed and the Cornwall 
Canal far advaticed. But the utility of the works was dimin- 
ished and almost annihilated by the failure of the Lower Pro- 
vince to assist by the construction of such part of the projected 
system as lay within its borders. Upper Canada incurred in 
the fifteen years following 1825 a debt of nearly a million pounds 
sterling. Such an expenditure, added to the other capital in- 
vested in the various undertakings, had a powerful effect on the 
market for labor and for goods. But the only ports of entry 
for Upper Canada were in the Lower Province. Navigation on 
the St. Lawrence opened several weeks later than goods could 
be obtained through the United States, if the use of New York 
as a port of entry had been allowed. Merchants, therefore, 
were obliged to submit to injurious delays in their business, or, 
by importing in the autumn, have their capital lying dead for 
six months. The mischief was aggravated by a monopoly of 



^% 






1 Lord Durham's Report, p. 70. 
» Ibid, p. 59. 



il i 



50 



The Canadian Banking System, 1817-1890 



freight forwarding existing between the River St. Lawrence and 
the Rideau Canal. ^ 

The imperial regulations with respect to trade were another 
impediment ; goods that the colony most needed were heavily 
taxed, while the staples of the U ' States, the same as its 
own products, were duty free. T) .nore settled districts had 
the stronger representation in the assembly, and it is said that 
members, in disposing of the funds voted for roads and like 
improvements, were chiefly intent by this means to strengthen 
their influence with their constituents. The waste lands of the 
Provmce had been cut up and close settlement obstructed by 
the reservation, due to Mr. Pitt, of an eighth of every grant 
"for the support of a Protestant clergy."* Many of the best 
tracts, lying on the natural lines of settlement, were refused by 
the authorities to intending purchasers and given over to a land 
jobbing company which held them waste while speculating for a 
rise. ^ Politics in the Province were lent and bitter, the struggle 
of a Reform party against the ^rvatives. At the centre 

and head of the Conservatives was ihe '• Family Compact," a 
Junto armed with official patronage and influence, strengthened 
by the control of the Crown Lands, and intrenched in Church, 
Bar, Bench and Government.* Furthermore, the revenues of 
the Province were deficient, scarcely meeting the interest on the 
public debt. Work upon the canals eventually lagged for want 
of the funds, and the means of internal improvement became 
available only by a system of special assessments." 

In the political struggle, the Bank of Upper Canada cast 
its lot with the Government and the Family Compact. It had 
the custody of the moneys of the provincial treasury ; it was 
the depository of the Welland Canal Company. It was accused 
of distributing its patronage according to the partisan activity, 
rather than the business ability of candidates for position, and 



1 Ibid, p. 71. 

« GoLDwiN Smith, "Canada and the Canadian Question," p. 112. 

8 Journal, U. C, 1835, Appendix, Vol. I„ First Report of the Select Committee on 
Trade and Commerce. 

4 Lord Durham's Report, p. 56. 

» Ibid, p. 58. 



upper Canada, 1817-39 



51 



of discriminating, when it granted credit, in favor of the domin- 
ant party.' There is reason to beheve that, though preferred 
by a partisan committee, these charges contained a large 
measure of truth.'' The shareholders of the bank were, to a 
great extent, members of the compact. The bank thus had 
some influence upon legislation. In 1830 and 1831, the Legis- 
lative Council rejected a bill proposing to incorporate a com- 
petitor to the bank. And af^ain, in 1833, it rejected two 
charters passed by the Assembly. ^ 



§ 10. — A PERIOD OF EXPANSION, 1830-37 

Some indications of a change in the Upper Canada condi- 
tions have been given in the remarks designed to supply an 
idea, necessarily inadequate, of the economic situation in which 
the bank first carried on its business. In 1830 and 183 1 the 
prosperity of the province was appreciably enhanced.* Towards 
this, without doubt, the immigration of 182 and 1827 had 
contributed, as well as the expenditures on public works 
and the stimulus to trade and industry which they afforded. 
But the rise of land values, the more active operations in real 
estate, the unwonted readiness to engage in other transactions, 
and the intense demand for capital to assist the extension of 
trade and agriculture, point to the conclusion that the change 
in Canada was, to no slight extent, a part of the upward move- 
ment then affecting the whole North American Continent. 

One effect of the new prosperity was the creation of more 
banking capital. The process was furthered by borrowers for 
the increased facility in obtaining loans at the legal rate of 
interest, by investors, for the large dividends derived from bank 
shares. The paid-in capital of the Bank of Upper Canada, 
reported at the modest sum of ^10,640 in 1823, had risen to 



1 Journal, U. C, 1835, Vol. I., p. 82, Seventh Report of the Committee on Grievances, 
Appendix xi. 

« A select committee on the subject of banking quite as partisan, but on the other 
side, declared, however, in 1834, that " there was never the slightest foundation for the 
insinuation that the Bank of Upper Canada was a dangerous engine in the hands of the 
Government, against either the Bank or the Government. Journal, U. C, 1833-34, Appendix, 
p. 166. But c/. Lord Durham's Report, p. 56. 

8 Journal, U. C, 1835, itt supra, p. 2. 

♦ Journal, U. C., 1833-34, Appendix, p. 162, Testimony of Benj Thorne. 



n 






,!( 



I 



' » 



52 



The Canadian Banking System, 1 817- 1890 



;^54,037 in 1826 and ;^ioo,ooo in 1830. At various dates the 
bank reported to the Legislature as follows : 



Funds \ 

and property.. / 

Capital stock paid in 

Debts due to the 

bank 

Debts due by the 

bank 

Bank notes in cir 

culation 

Specie in vault .... 



15th Dec.i 

1826 



£ 
38,391 
54.039 

107.598 
19,484 

87,339 
19,066 



2nd Feb.* 
1828 



£ 
36,765 
72,067 

171,869 

32,376 

122,858 
21,177 



3rd March 3 
1829 



£ 
47.271 
72,410 

180,854 

35.102 

140,488 
23.190 



2nd Feb. 4 

1830 



£ 
26,412 

6.571 
77.462 

214,045 

38,303 

156,296 
33,134 



ist Jan.'. 
1831 



£ 
15,618 

6,715 
100,000 

260,557 

33.621 

187,039 
42,664 



It had paid regular dividends at 8 per cent, per annum, amount- 
ing at the close of 1831 to ^41,669, and two bonuses of 6 per 
cent. In all it had distributed some ^5 1,000 to its shareholders/' 
In the session of 1831-32 the Legislature authorized the addition 
of £100,000 to its capital in shares o^ £12 los. each, and by the 
same Act forbade the bank to loan on its own stock on pain of 
forfeiting its charter. (2 Wm. IV, cap. lo.) An Act incorpor- 
ating the Commercial Bank of the Midlaad District, rejected by 
the Legislative Council the two preceding years, was passed in 
the same session. The p/incipal office of the Commercial Bank 
was to be at Kingston, its capital stock ;^ioo,ooo. Returns 
were henceforth required of both the banks in somewhat greater 
detail, and in the form of balance sheets ; save in this important 
respect the new and amended charter presented no essential 
differences to the old one. 

When books were opened to receive subscriptions to the 
new and additional capital thus authorized, the public displayed 
the utmost eagerness to obtain shares. The demand is the less 
surprising when one recalls the high profits paid by the Bank of 
Upper Canada without the assistance of a rest or reserve fund. 
The books for subscription to its 8,000 shares of additional stock 



> Journal, U. C, 1826-7, p. 13. 
a '• " " 1828, p. 61. 
" " 1829, p. 67. 
4 " " " 1830, p.— 
* " " " 1831, p. 31. 
n Journal of the Legislative Assembly of the Province of Canada, 1841, Appendix O. 



Upper Canada, 1817-39 



68 



were closed after a single day at York, the head office, and as 
soon as the mail could reach the other offices. No person was 
permitted, in the first instance, to subscribe for more than 
eighty shares. Yet in so short a time subscriptions were 
received for 25,679 shares, or ;^32o,987 los.^ In 1832 it was 
able to pay out of the premium on the new stock, a bonus of 18 
per cent, to the holders of the original shares, and still earn its 
regular dividend of 8 per cent.** So far as the anxiety of the 
public to secure stock was concerned, the experience of the 
Commercial Bank was precisely the same. 



§ II. — IMPERIAL REGULATION OF COLONIAL BANK CHARTERS 

In August, 1833, after both banks had been operating undei 
the Acts of 1832 for over a year, rumors of a Royal disallowance 
of the Acts became current. The banks then had, in all, fifteen 
or sixteen offices and agencies, had discounted paper to the 
amount of ;^45o,ooo, and issued some ;^3oo,ooo of notes. A 
temporary panic was the result of the rumor, for debtors of the 
banks greatly feared the withdrawal of their credits. In some 
places mass-meetings protested against a disallowance, and 
petitions to the King were drawn up. In several instances 
small runs were started. The banks ceased discounting for a 
time, but soon began again. Thus, in the language of the day, 
they restored mercantile confidence, and saved many from 
bankruptcy.^ • . 

The Committee of the Privy Council for Trade had adopted 
in 1830 a series of regulations appl3'ing to colonial bank charters 
and devised for the protection of the public interests. They 
were, it was said, " precautions rendered more necessary by an 
experience of the prejudicial effects which have, in former 
periods, resulted from the extension of the banking system in 
the neighboring States without the restrictions they impose."* 
The regulations were transmitted by the British Colonial Office 



I Journal, U.C., 1833-1834, Appendix, pp. 162 et seq., Report of the Select Committee 
on the Subject of Banking. 

» Journal, Canada, 1841, Appendix O. 

' » Journal, U.C., :833-34, ut supra, Evidence of Mr. Cartwhight. 

♦ Journal, U. C, 1833-34, p. 153. 



64 



The Canadian Banking System, 1-17-1890 



pi 



in Downing street, with instructions for their observance in all 
Acts for the extension of the capital of existing banks or the 
creation of new banks in Upper Canada. The Acts of 1832 did 
not embody the provisions. The Committee for Trade, in a 
letter of the 9th May, 1833, objected to this omission; their 
recommendations were sanctioned by the threat to advise the 
exercise of the Royal prerogative to disallow the bills, in case 
they were not properly amended. The news of this action was 
the cause of the temporary panic, the protests and petitions in 
Upper Canada. 

An explanatory letter from the secretary to the Lords Com- 
missioners of the Treasury, dated 30th October, 1833, announces 
the partial relaxation of some of the provisions in behalf of the 
Bank of Upper Canada, but insists that the regulations specified 
should be added to the respective charters. For the Commer- 
cial Bank these were, briefly : 

1st, the charter of the bank to be forfeited by a suspension 
of specie payments for more than sixty days, consecutively or 
during the year ; 

2nd, the notes for circulation to be dated at the place of 
issue and to be payable upon demand, in specie, at the place of 
date and issue, as well as at the principal office of the bank, it 
being, however, expressly understood that it is not intended 
that any branch shall be called upon to pay the notes, either of 
the principal bank or other branches ; 

3rd, one-half the capital stock to be paid in forthwith, and 
the moiety at the discretion of the bank ; 

4th, the Directors as drawers, acceptors or indorsers, not to 
have more than one-third of the total discounts of the bank. 

5th, the bank not to hold its own stock or to advance money 
on the credit of its stock ; 

6th, half yearly statements of the average assets and liabili- 
ties to be prepared from weekly balance sheets kept at the 
bank, and these, together with a statement of the rate and 
amount of the dividend and of the amount of reserved profits, to 
be furnished to the Government and published; further returns 
to be furnished if called for, and if required, to be verified upon 
oath ; 



upper Canada, 1817-39 



66 



7th, the shareholders to be respectively liable for the en- 
gagements of the company, to the extent of twice the amount of 
their subscribed shares, that is, to the amount of their sub- 
scribed stock, and to an equal amount in addition ; 

8th, the bank not to loan or make advances on lands or 
other property not readily available to meet its engagements ; 
but to confine its transactions to what are understood to be the 
legitimate operations of banking, viz., advances upon commer- 
cial paper or government securities, and general dealings in 
money, bills of exchange and bullion. 

The second, fourth, sixth and eighth provisions were to be 
applied to the Bank of Upper Canada ; the third and seventh to 
the new shareholders only.* 

This correspondence was referred, in January, to a select 
committee of the House of Assembly. Bankers and merchants 
were called on to give evidence and criticise the regulations. 
On the 17th February, 1834, the committee reported that both 
the banks enjoyed the perfect confidence of the public, and had 
confined themselves strictly and honorably to the limits of their 
charters. The committee agreed that banks with large capital 
were preferable in point of security, and believed that in a 
future distribution of bank capital it would be better to increase 
that of existing institutions than to create new ones. They 
criticised the regulations with vehemence, particularly the first 
two, and the sixth ; on the seventh they failed to come to a 
decision, but the eighth was provided for in existing charters. 
The third, fourth and fifth regulations were already observed in 
the practice of the hanks. Generally, much discontent was 
exhibited at the Imperial interference. In the meantime, how- 
ever, the President of the Commercial Bank, to avert, he said, 
" the ruin and distress " which immediate dissolution of the 
bank would cause the shareholders, agreed to accept the 
imposition of the double liability. The committee accordingly 
reported a bill applying this and the third, fourth and fifth pro- 
visions to the Commercial Bank only. They also proposed an 
address to the King, emphatically lauding the chartered banks, 
deploring the exercise of the Royal veto, and praying that the 



> Journal, U. C, 1833-34, p. 63, Letter from the Hon. J. K. Stewakt to R. W. 
Hay, Esq. 



Mv. ! 



m 



i!i 



ill 



56 



The Canadian Banking System, 1817-1890 



introduction of the new provisions into the charters should not 
be insisted on. The address was passed the 3rd March, 1834, 
by a vote of thirty-one to one. Action on the bill reported was 
postponed. In view of the sentiments expressed by the colonists 
in numerous petitions, of the excellent practice of the two 
banks, and of the long time that the Acts of 1832 had 
been in force, the Treasury forebore to advise their dis- 
allowance.^ 

The next bank charter passed in Upper Canada embodied 
the second, fifth, seventh and eighth of the regulations suggested 
by the Committee for Trade. Thus, for the first time in the 
Canadas, the public security was guarded by subjecting the 
shareholders of an incorporated bank to the double liability. 
But for penalties for the suspension of payments during any 
lengthened period, for restriction in the amount of discount to 
the directors, for periodical publication of accounts, for the pay- 
ment of more than ;^i 0,000 of its capital, and subscription to 
more than ^"40,000, no provision was made. This was the Act 
passed in 1835, incorporating the Gore Bank, situate at 
Hamilton, and having a nominal capital of ;^ioo,ooo, to which 
the Royal assent was promulgated the 27th October, 1835. 
(6 Wm. IV,, cap. 34.) To secure its independent manage- 
ment, incorporated companies were made incapable of holding 
stock in the Gore Bank, except such as should be conveyed to 
them in satisfaction of debts previously contracted. And upon 
such stock they were not entitled to vote. Otherwise the charter 
was like the laws governing the existing banks. 

The Commercial Bank had found more capital necessary. 
During the same session it secured the power to double its 
stock, i. e.f to raise it from ^100,000 to ;^2oo,ooo. The fourth 
and fifth of the Treasury regulations were applied to the Com- 
mercial by this Act ; the eighth provision already existed in 
the original charter. But no precautions were taken to pro- 
vide for the subscription and payment of the additional capital, 
the publication of accounts, the personal liability of share- 
holders, or the forfeiture of charter upon suspension of specie 



• Journal, U.C, 1835, P» 63, Letter of the 23rd May, 1834, trom E. G, Stanley. 



H iiii 



* i 



upper Canada^ 1817-39 



47 



redemption for more than sixty days. (6 Wm. IV., cap. 33.) 
The omission of the regulations mentioned was repugnant to the 
principles laid down in England with respect to the establish- 
ment of banking corporations. Had he been governed by con- 
siderations of commercial policy alone, said Lord Glenelg, he 
could not have advised the confirmation of these Acts in the 
form in which they passed. But aware of the importance 
attached to their confirmation in the Province, and unwilling at 
that time to advise the disallowance of Acts which had received 
the colonial sanction, he decided not to enforcs those principles, 
in the present instance, against the judgment of the Provincial 
Legislature.^ Although the improvement of the Acts was 
recommended to the next session, the banks first established in 
Upper Canada were not subjected to all the Treasury regula- 
tions until five years later, when, in 1841, the new suggestions 
of the Imperial authorities were aaopted, practically in full. 

§ 12. — THE GROWTH AND CURE OF THE BANKING MANIA 

The demand for accommodation was not to be satisfied, 
apparently, even by these additions to the banking capital of 
the Province. Another phase of the speculative movement and 
general expansion was inaugurated by a group from the Reform 
party. The faction in control of the Government, and ail-power- 
ful, likewise, in the chartered banks, favored limiting their num- 
ber and requiring legislative sanction for each incorporation or 
addition to capital. Not so the Reformers. In 1831 and 1831-32 
they had proposed to the Assembly general banking laws, in 
1833-34 a bill " to make general the privilege of banking," in 

1835 another " to establish an uniform system of banking," in 

1836 a third " for the better regulation of banks and for pro- 
tecting the interests of the public. "^ They displayed generally 
the desire to open the bus'ness to all who should wish to enter 
it. 

The legal obstacles to such a freedom were not particularly 



) Journal, U.C, 1836, p. 264, Despatch of nth Sept., 183}. 
t Vide Journal, U.C, for the years mentioned. 






m 



68 



The Canadian Banking System, 1817-1890 



difficult even as the law stood. British statutes of 15 and 17 
Geo. III. prohibiting certain small notes and inland bills of 
exchange, were declared of no force in Upper Canada by an Act 
of 1821 (2 Geo. IV., cap. 12), and though the lack of cor- 
porate powers to sue was inconvenient, a joint stock association 
could carry on its business and even issue notes without much 
danger of legal penalties. A private bank started by two part- 
ners in 1834 was, in fact, taken over by the group of Reformers 
and organized under a deed of settlement as the Farmers' Joint 
Banking Company. They began business in September, 1835, 
with a paid-in capital which never rose above ;^5o,ooo. But as 
the President and Solicitor were both elected from the dominant 
party, the disappointed Reformers left the bank, and in Decem- 
ber, 1835, started a similar company called the Bank of the 
People.^ Twelve months after this bank opened its doors with a 
paid-in capital of about ;^i 3,000, the Niagara Suspension Bridge 
Bank was established by a party of Americans. Though it 
kept agencies in Chippewa, and in Lockport, New York, its 
capital was even less. Meanwhile, Capt. Geo. Truscott, R.N., 
and one J. C. Green, an ex-conimissariat officer, the former pro- 
prietors of the Farmers' Bank, started a weak-kneed concern 
under the name of the Agricultural Bank. 

But it was not long before an Act of 1837 (7 Wm. IV., 
cap. 13), laid down the principle, ever thereafter to obtain in 
Canada, that it is " inconsistent with a due regard to the protec- 
tion of commerce and the welfare and security of the people, 
that any person or number of persons, some of whom may be 
of doubtful solvency, should be allowed, without legislative 
authority, to issue their promissory notes for circulation as 
money." A summary stop was put to the increase of such banks 
by making unauthorized note issue a misdemeanor after the 
ist July, and contracts concerning the notes null and void. 
Exceptions were granted in favor of the four private banks just 
mentioned and the Bank of British North America. Other 
banks were enabled by 7 and 8 Wm. IV., cap. i., to collect their 
debts, enforce the payment of stock subscriptions, and close up 



» "Reminiscences of liis Public Life," by Sir Francis Hincks, p. ii, and Journal, 
U.C, 1837-38, Appendix, p. 223, also Journal, U.C., 1837, 2nd Session, Appendix. 



upper Canada, 1817-39 



59 



their affairs through commissioners appointed under provincial 
authority. 

The mention of certain attempts to alter the legislation 
dealing with them conveys no idea of the craze for banks and 
the excitement on banking questions which spread through 
the Province at this time. A better indication is the fact that 
between 1831 and 1840 no less than twenty-five public bi'ls on 
the subject, which eventually failed of passing, were brought 
before the Assembly, and received more or less consideration. 
Naturally an agitation carried so far, carried on largely in the 
interests of borrowers, and carried on in a time of unusual 
activity, over-trading ^ and land speculation, 2 was not entirely 
for measures recommended by prudence or sound policy. In 
1833 the House of Assembly passed a bill to enable the Receiver- 
General to issue bank notes chargeable on the public. A select 
committee in 1835 reported in favor of establishing a provincial 
bank on the basis of loans guaranteed by the Province, the 
profits to pay the interest on the public debt.^ 

Such " simple fiscal arrangements " found no favor with 
the Colonial Office in London. In a despatch dated the 31st 
August, 1836, Lord Glenelg, His Majesty's Principal Secretary 
of State for the Colonies, radically altered the manner in 
which the Acts passed by the Legislature of Upper Canada 
with respect to banking and currency, acquired statutory force. 
For ten years, at least, the Lieutenant-Governor, unless there 
were peculiar reasons for reserving it, had granted the Royal 
assent to such measures at the close of the session in which they 
were passed. Thus they became law immediately. If the 
measures were unsatisfactory to the Colonial Office, the 
remedy was to advise the Royal disallowance, after, perhaps, 
numerous and important engagements had been entered into 
under the Acts. But now the Lieutenant-Governor was in- 
structed not to permit any Act, ordinance or regulation touching 









1 Journal, U.C, 1837-38, Report of the Select Committee upon the Subject of Banking, 
Appendix, p. 212. 

a Journal of the Legislati- e Council of the Province of Canada, 1837, Appendix A., 
Evidence of Mr. Cartwright. 

3 Journal, U.C, 1833, Appendix iii. 



M« 



I 



i '! 



H 



i 



I 



.,1 



60 



The Canadian Banking System, 1817-1890 



the circulation (if promissory notes or the local legal tender, to 
come into operation in the colony, without having first received 
the Royal sanction conveyed to him by the Secretary of State. ^ 
The As'embly, at this, passed resolutions ; with the Legislative 
Council, they adopted a joint address to the King. In this they 
affirmed that bills for establishing banks were purely local, and 
though acknowledging the constitutional right of His Majesty 
to act his pleasure upon any bill, strongly deprecated the exer- 
cise of that right upon matters of a local nature. 2 

The Ministers of the Crown, however, had observed the 
progress of commercial speculations, particularly in North 
America. They saw only too much reason to anticipate the 
rapid approach of a period in which the multiplication of ill- 
secured representatives of coined money would involve the Brit- 
ish American colonies in most serious financial difficulties. Their 
single resource to avert the danger was the Royal power of dis- 
E^Uowance, but the exertion of this was always reluctant ; when 
large capitals had been embarked, and many contracts made, it 
was extremely difficult. The reservation of the laws for the 
imperial sanction before they came into effect was, therefore, 
the only practicable plan. But the instructions were not the 
outcome of occasional motives only, or of a policy merely tem- 
porary. They were prompted by the permanent purpose not to 
allow the creation of corporate bodies, permitted to issue a 
paper currency, " without all the necessary limitations upon its 
extent and legal character." ^ 

Events proved that Lord Glenelg's instructions were well 
advised. During the session of 1836-37 the banking mania 
seems thoroughly to have infected both the Legislature and the 
whole Province.* Bills were passed to increase the aggregate 
capital of the chartered banks in this province of 400,000 people, 
from ^500,000 to ;^4, 500,000, and to confer a power of issuing 
notes to the extent of £13,500,000.° Nine new banks were a 



1 Journal, U.C, 1837, p. 321. 

» Journal, U.C, 20th January, 1837, pp. 321, 322. 

3 Journal, U.C, 1839, p. 40 u. Despatch of the 28th December, 1839. 

« C/. The Patriot newspaper, Toronto, issue of 8th November, 1836. 

» Journal, U.C, 1837-38, p. 208. 



Upper Canada, 1817-39 



61 



part of the scheme, another feature of which was to make the 
Province a large shareholder in the Bank of Upper Canada. 
The effect of the latter would have been to render the bank one 
of the chief departments of the local administration. According 
to instructions, the Lieutenant-Governor reserved the bills, and 
sent them on to England. There they met the scathing 
criticism they deserved. The Imperial authorities, nevertheless, 
were willing neither to disallow the whole series nor to pick out 
the unobjectionable measures worthy of passing. Decision was 
suspended for the time being. None of the Acts were allowed 
to take effect, but all were referred back to the colonial legisla- 
ture for more sober consideration. Before Parliament again 
met in regular session, events in Canada somewhat calmed the 
banking excitement. Not a single one of the reserved bills was 
re-enacted. In December, 1837, a second series of rules, 
drawn up by the Committee for Trade, and recommended by 
great experience and much careful reflection, were forwarded 
by Lord Glenelg, with the advice that they should be adopted 
by the Local Legislature for its own guidance, and as terms to 
be insisted upon in all charters for the incorporation of banking 
companies. The instructions so disliked by the colonists, the 
occasional motives for them having disappeared, were with- 
drawn at the same time. ^ 

Only the insistence of the imperial authorities secured to- 
Upper Canadians the additional safeguards in the bank Acts of 
1835. In 1836 and 1837, only the firm restraint and cool judg- 
ment of these officials saved Upper Canadians from the conse- 
quences of their banking frenzy. The instructions of August 
prevented the establishment of banks with a nominal capital of 
over four millions sterling, on the eve of the most disastrous 
crisis which North America had ever experienced. They miti- 
gated in great degree, though they could not avert, the calamities 
which were soon to befall the provincials in consequence of 
their own mistakes, and suspension of specie payments in the 
United States. Where supervision by the Colonial Office over 



• Journal, U.C, 1839, p. 40 v. 



^'.' 




r 


' I ' 


i 








. i 




; 


iji 






' 1 



The Canadian Banking System, i8 17- 1890 

colonial legislation, and Treasury regulation of colonial bank 
charters again appear in our narrative, there will be found 
additional proof of their beneficial influence upon the Canadian 
banking system. 



§13. — PRACTICE OP THE BANKS , v 

The details in which ^he business carried on by the Upper 
Canada banks in t-ho thirties, differs from that of the Ontario 
banks of to-day, were due partly to conditions, partly to prin- 
ciple. Slow communications, e.g., caused exchanges between 
the banks to be less frequent ; they were effected weekly inste^d 
of daily. But settlements were made in drafts on Montreal or 
New York, or in specie, practically as they are to-day.^ The 
small amount of good collateral security, bonds and stocks in 
the Province, caused more loans to be made upon personal 
security, i.e., notes with one or more endorsements, and fewer 
.loans secured by documents. In the scarcity of marketable per- 
sonalty, the banks suffered great temptation to loan upon real 
estate security, in forms more or less disguised. Events proved 
that not all of them resisted. The Commercial Bank intro- 
duced a system of cash credits, in imitation of the Scotch practice. 
Where a bank's customers have little other wealth than land, 
this is a pretty close approach to loaning upon the security of 
land. It is doubtful, too, whether proper conditions for extend- 
ing cash credits existed in Canada. Certainly there was no 
analogy between the constant market for Scotch real estate and 
the occasional opportunity to sell Canadian lands. And yet 
the price under the auctioneer's hammer is the only test of the 
immediately available value of land 

Up to 1832, the Bank of Upper Canada, having no local 
competitors to present its notes for redemption, was able to keep 
out a larger circulation. And with the help of this it could dis- 
count for ninety days with leave to retire by payments of one- 



1 Journal, U.C, 183;, and Session, Appendix, Report of tlie Select Committee to which 
was referred the Subject of the Monetary System of the Province. 



Upper Canada, 1817-39 



68 



fifth every three months, the term of credit being fifteen months. 
The extent of its operations in those pahny days has been indi- 
cated by the returns already given. 

In 1836 the three chartered banks reported : — ' 





Bank of Upper 


Commercial 


Gore Dank. 




Canada, 


BanU. 


ith Nov., 




i6th Nov., 1836 


7th Nov., 1836 


1836 


Liabilities (shillings and pence 








omitted). 








Caoital stock oaid in 


;^200,000 


;^i86,450 


;^6l,005 


Notes in circulation, $5 and up- 


wa- ds 


180,826 


119,873 
55.250 


1,617 
27.913 


Notes in circulation under $5. . . . 


45,828 


Balances due to other banks .... 


4.362 1 






Balance due to agencies (in trans- 




10,834 




itu) 


788 






Cash deposited, including all sums 








not in the foregoing heads and 








not bearing interest 


154.604 


29,165 


6,241 


Cash deposited, bearing interest . . 


3,016 


4.201 


1.053 




;^589.426 


;^405.774 


/96.'-'.--: 


Resources of the bank. 








Gold, silver and other coined me- 








tals in the vaults of the bank 


^63,796 


;^46,935 


;^20,832 


Real estate and bank furniture . . 


8,880 


3.729 


847 


Bills of other banks 


18,045 


5.318 


2,642 


Balances due from other banks 


and foreign agencies in Lon- 








don and New York on Ex- 




^ 1 




change transactions 


84,728 


18,082 


3.385 


Amount of all debts due, including 








notes, bills of exchange, and 


\ 


_'('/, ■■''■; 




all stock and funded debts of 








every description, except in 








the balances due from other 








banks 


413.976 


331,709 


68,504 




Total resources 


;^589.426 


/405.774 


/■96.2I2 


Miscellaneous. 








Amount of reserved profits after 








declaring the last dividend . . 


;^l 1.073 


;fl,9I2 




Overdue debts 


56,355 


11,582 


/I.324 





1 Journal, U.C, 1837, pp. 73, 89, 128. 



64 



The Canadian Banking System, 1817-1890 



ill 



In 1837 the principal items for the chartered as well as 
private banks were on the 15th June :* 



Bank of Upper Canada 
Commercial Bank .... 
Gore Bank 



Total chartered banks 



Farmers' Bank 

Bank of the People. 
Agricultural Bank . 
Niagara S. B. Bank. 



Capital 

stock 

Paid-up 



Note in 
Circula- 
tion 



Specie 



;f 200,000 ;ri68 906] 

196,5071 116.092; 

80,381 34,246 



/37.«50 
23,102 

17.932 



Deposits 



;^ 1 58.548 

37644 

8.379 



Toval private banks 



^476.978 

/38,22I 

12,375 

39.727 
7,700 

/98.023 



;^3i9'244 £7^,^84 



Grand total /575.001 



;^23,8oo 
12,633' 
18,612 
16,103! 



;^7i.i48 
;^390,392 



;^5.66o 
2,890 

3.544 
2.363 

;^i4.457 

/93.341 



;^204.57i 



;^7.330 
3.500 
1.598 



;^I2,328 
;^2 16.899 



Loans 

and 

Discounts 



;r444,958 
344,088 
105,993 



;i(^895,039 

;^50 316 
23,896 

51.181 
18,235 



;fi43.7i8 
;^-.039.757 



The value of competition in banking was well illustrated 
when the Commercial Bank entered the Upper Canada field. 
It was active in presenting the notes of the competing bank for 
redemption. With its circulation thus forced in, the Bank of 
Upper Canada found it necessary to limit tlie term of credits to 
nine months, i.e., to allow renewals of 90 day discounts on the 
payment of not less than one-third of the original grant. The 
result was good, for the term during which merchants were 
responsible as indorsers was lessened ; they were able more 
accurately to provide for their liabilities ; and persons of 
moderate means borrowed less than before, and not more than 
could be paid in the shorter time.^ The further advantage of 
securing frequent tests of the convertibility of bank notes, by 
actual redemption, need only be mentioned. / 

Chartered as well as private banks established no branches 
in the sense that their notes were payable at any other place 
than their principal establishments. ^ The plan of redeeming 
bank notes at but one place, and that the bank's head office, 



I Ibid. 

k Journal, U.C, 1833-34, Appendix, pp. 169, et seq. 
Except tlie Niagara Suspension Bridge Banlc, which Issued some notes payable at 
Locki-jft, N. Y. 



upper Canada, 1817-39 



65 



permits an economy of specie, a strong central reserve, a 
stability and security in the bank's own procedure that would be 
impossible, with the same rate of profit, were it necessary to meet 
demands for redemption at all the offces of the bank. Of 
what were technically termed offices of discount and deposit, 
but really branch banks in all save the function of issue, the 
Upper Canada Bank had four in 1837, the Commercial three, the 
Gore none. Of agencies, chiefly employed for payments, collec- 
tions and the purchase of exchange,^ they had one, 2 eleven and 
none respectively.' 

A liberal foreign correspondence had been established and 
funds deposited in London, New York City and Montreal, 
against which the banks drew exchange, usually with a material 
profit.* The balance of trade with Lower Canada and the 
United States was adverse in both cases.* To meet this diffi- 
culty and to acquire funds in New York at the least cost, certain 
of the banks discounted, to some extent, American bills payable 
in that city.^ A balance there was always desirable, for sterling 
exchange could sometimes be bought at three to four per cent, 
under the Canada rate.' The banks also discounted large 
amounts of merchants' and shippers' bills drawn against con- 
signments of wheat, flour, pork and other produce. Th'^ means 
for extending to lumbermen and produce buyers the five or six 
months credit needed during the winter and early spring, and 
waiting for repayment out of the proceeds of sales in foreign 
markets, were much desired, but the banking capital was 



1 More specifically, an agent's business was to discount bills on Lower Canada, New 
York, or any part of the Province, to receive bills of individuals for collection, to receive 
deposits and to forward and advise on notes offered to him for discount by peisonsinhis 
district, to pay the proceeds when discounted, to receive payments when due, and generally 
to do anything required by the bank. He had balances on hand and drew upon the principal 
bank. It was his duty to use its notes in his disbursements, and on all payments he received 
one-quarter of one per cent, commission. The offices had boards appointed from the local 
shareholders and exercised their own discretion, subject of course to instruction, in dis- 
counting. Upper Canada King's Bench Reports, 6 Wm. IV. to 2 Vic, p. 541. 

2 It is probable that the number of agencies established by the Bank of Upper Canada 
is misstated in the document cited in note 3 ; and that it had at least as many as the Com- 
mercial Bank. An advertisement in the Kingston Fatriot, 17th July, 1832. mentions four 
agencies. 

a Journal, U.C, 1837-38, Appendix, pp. 221, 225 and 229. 

♦ Journal, U.C, 1833-34, Appendix, pp. 162, ct seq. 

» Journal Legislative Council, U.C, 1837, Appendix A, p. 4:. 

« Journal, U.C, 1837, Appendix, Mt supra, p. 18. 

T Ibid, p. 37. 



[T^i 



1 






I nil 



i! 



A 



66 The Canadian Dankins; System, i8i 7-1890 

quite inadequate to such support.* It was, perhaps, quite 
as well that even leading trades should supply their own 
capital. ' '■':' ^u 

The note circulation bore a much higher ratio to capital 
during the first decade of the Bank of Upper Canada's ex- 
perience than f:ver afterwards. The proportion fell from 250 
per cent, in 1826 to 187 per cent, in 1831. After the competition 
of the newer banks became eflfective it fell still more, and in 
1834 to 1836 seldom rose more than 20 per cent, above the paid- 
in capital. The total circulation of the chartered banks was 
on the 

♦ ■ 

1st January, 1834 , ^267, 209 

i«35 • 333.715 

•« " 1836 332,178 

•• " 1837 404.823 

On the latter date, the four private banks had ^85,451 out- 
standing, making the total circulation of the province ^490,274. 
This excludes the notes of Lower Canada banks, whicli had 
some currency in spite of the law against them. (4 Geo, IV., 
cap. 13). It includes, on the other hand, the considerable 
circulation of small notes in the United States, especially in the 
western counties of New York and those bordering on the River 
St. Lawrence. 2 The banks were afterwards to find their Ameri- 
can circulation a source more of trouble than of profit. Already 
some of the bankers in the Western States found it cheaper, by 
using the private banks as brokers, to get gold on the notes of 
Canadian chartered banks than to bring specie from the sea- 
board.'^ For purposes of redemption and shipment, recourse 
was had to the specie markets of Montreal and New York. The 
silver circulation was composed, for the most part, of coins 
struck in the mint at Philadelphia. These facts led one of the 
ablest witnesses before the Committee of 1837 to call the province 
" a limb of the monetary system " of the United States.* Five 



I Journal, U.C., 1833-34, Appendix, p. 170, Testimony of Thos. G. Ridout. 

» Report of the New YorU Rank Commissioners, 1835. 

» Journal, U.C, 1833-34, "' iupra. 

* Journal, U.C, 1837, Report of the Select Committee to which was referred tt-e 
Subject of the Monetary System of the Province, Appendix, p. 34, Evidence of Bbnj. Thorne. 



upper Canada, 1817-39 



67 



hundred and fifty thousand pounds currency, $2,200,000, were 
imported by the banks between 1830 and i«36.i'- 

The directorates enjoyed no such large proportion of the 
discounts as those in the Lower Provinces. In 1834 the 
accommodation extended to the directors had never exceeded 
one-sixth of the total discounts. The directors of the Bank of 
Upper Canada had never had more than the twentieth part, 
either as promissors or indorsers. 

In their general business of loaning, the banks doubtless 
supplied a market wider, in some respects, than tliey do to-day. 
Other forms of credit institutions were not yet developed. So, 
in 1835, the cashier of the Bank of Upper Canada said, "In my 
opinion, every farmer or person in trade or in reputable circum- 
stances, who can give unexceptionable personal security, has a 
right to secure from the public banks reasonable accommodation 
in proportion to his means, without being considered to ask 
for favors. "3 The period was one in which politicians, lawyers, 
estate owners and adventurers were able to secure generous 
grants from the loanable funds of the banks. The banks did 
not, as now, observe the principle that credit should be based 
either on an excliange of conmiodities or an increase of com- 
modities. The effort to adapt the Scotch cash credits to 
Canadian conditions has been mentioned. Yet the essential 
characteristics of Scotch banking were not generally appreciated 
in the Upper Province, nor its traditions followed. The banks 
were not, as now, predominantly commercial and industrial 
banks. Indeed, when the Bank of Montreal proposed, in 1839, 
to extend its operations to the Upper Province, the plan was 
welcomed by informed observers as promising essential benefits, 
" for in a short time it would instruct our directors in the 
system of commercial banking, which very few of them under- 
stood."* 

Were many more charges laid against them, it would be 



I Journal, CanadR, 1841, Appendix O. 

« The Bank of Upper Canada imported £465,000 of tiio sum mentioned. Nine-tenths 
of this, they estimated, was issued to the private Sanlts, the greater part of which was sold 
at a small advanre in the United States, journal, U.C., 1837, Appenaix, p. 37. 

a Journal, U.C., 1835, Appendix iii.. Evidence of Thos. G. Ridout. 

4 Journal, U.C., 1839, Appendix, Vol. II., pjirtii., Third Report of the Select Committeo 
on Banking, p. 771, Evidence of Francis Hincks. 



IFfT 



68 



The Canadian Banking System, 1817- 1890 



necessary still to acknowledge that the banks were of great, of 
incalculable service to the colony. In a young, thinly settled, 
scarcely exploited, but advancing country, there ought not, 
perhaps, to be enforced the maxims and limits of banking 
applicable to a wealthier community with a credit organization 
developed on many sides. Elsewhere, certainly, the rigid rules 
have not been enforced, through periods of which every reader 
can provide examples. The contrast with contemporary Ameri- 
can banks and American practice, even in the State of New 
York, is, in respect at lease to stability and the public security, 
entirely in favor of the Upper Canadian institutions. For over 
forty years not a single bank chartered by Upper Canada failed. 
During that time, they earned good dividends for their share- 
holders, and, by increasing their capital and establishments, 
kept pace with the growing needs of the Province. The period 
marked by wreck and ruin in the States on the south, they sur- 
vived with numbers intact and solvency unimpaired. 



lil! 



§ 14. — THE SUSPENSION OF SPECIE PAYMENTS AND THE CRISIS OF 1837 

The suspension of specie payments by the American banks 
on the nth and 12th May, 1837, and the following days, neces- 
sarily affected the banks in Lower Canada. The more active 
and pressing demand for specie in the markets of the United 
States immediately caused a heavy drain of pecie upon their 
vaults. Sterling exchange was risen to a figure where anything 
but the export of specie would have been ruinous to the remitter. 
The reserves could not be augmented by imports in time to 
meet the extraordinary proportion of demand claims that were 
presented for payment. It was necessary to do something to 
save what gold they still had, and to prevent the contraction of 
circulation and discounts which, though essential to the main- 
tenance of specie payments, would have been disastrous in the 
involved condition of the cumniercial community. The Lower 
Canada banks suspended on the iSth May, 1837.' 

For Upper Canada this seemed like an added blow. Its 
people had not yet awakened to the situation. They were still 



I Journal. Can., 1859, Report and Proceedings of the Committee on Banking and Cur- 
rency, Appendix, number 67. 



upper Canada, 1817-39 



69 



reat, of 
settled, 
It not, 
)anking 
lization 
id rules 
' reader 
Ameri- 
of New 
ecurity, 
''or over 
a failed, 
r share- 
hments, 
e period 
hey sur- 



)F 1837 

in banks 
, neces- 
re active 
i United 
ion their 
inything 
remitter, 
time to 
hat were 
sthing to 
action of 
he main- 
US in the 
le Lower 

DW. Its 
were stil' 

ting and Cur- 



scheming to secure more banking capital. They generally 
misinterpreted the causes of the movement of the precious 
metals toward the United States and London. The converti- 
bility of Upper Canada bank paper, said an official report, was 
vested on the good faith of the Governments of the United 
States, Lower Canada and Upper Canada in preserving the 
equal value of their common currency.^ This was their 
euphemism for the fact that New York and Montreal were the 
specie marts for Upper Canada, and that the price was then 
higher than the Provincials cared to pay. They failed also to 
realize the necessity for a general contraction, once the crisis 
had come. The leader of the Reformers, however, Wm. Lyon 
Mackenzie, was guilty of instigating a run on the Bank of Upper 
Canada. But the bank paid the notes in silver and kept friends 
at the counter who, at night, trundled the specie back in a 
wheelbarrow. 2 ' 

By the 15th June the effect of the specie drain had been 
considerable, as the statement of circulation and specie will 
show. 3 • 



Circulation 


Chartered 
Banks 


Private 
Banks 


Total 


ist lanuarv. 18^7 


;^404.823 
423.401 
319.244 


;^85,45i 
85.495 
71.148 


/490.274 
So8,8q6 


I sth Mav. 18^7 


15th June, 1837 


390.392 


Difference between May and June. . 
Specie. ' 

15th May. 1837 

I sth Tune. 18^7 


;^I04,I57 

^107,334 
78.884 


;^I4.347 

;^I3.455 
14.457 


/•i 18,504 

;ri20,789 
9^.^41 






Difference between May and June.. 


;^28.450 


;^1.002 


;^27.448 



But the Bank of Upper Canada had imported specie for 
;^40,ooo between the two dates. The total loss of specie, 



1 Journal, U.C., 1837, 2nd session, Appendix, Report of the Select Commiitee on the 
Monetary System. 

' Charles Lindsev, "The Life and Times of Wm. Lyon Mackenzie," Toronto, 1863, 



P-34. 



» Vidt note i. 



^ 






ii SI 



''I 
^1.1 



II 



70 



The Canadian Banking System, 1817-1890 



therefore, was £6y,^^8 instead of £2y,/\.^8, and yet on the 20th 
June the banks were still maintaining payments, and their 
notes were at par with specie. To do this, they had been 
obliged to call in their discounts and suffer a contraction of 25 
per cent, in the note circulation. So far as the granting of 
credit was concerned, banking operations had practically ceased. 

The withdrawal of the credit accommodation usually ex- 
tended to merchants was not the sole cause, or the deepest, of 
the commercial embarrassment. The wet harvest of 1835 and 
the reduced value of wheat in that year had lessened materially 
the wealth in the hands of the farming community. They com- 
prised at least two-thirds of the population. They had suffered 
from the short crops of 1836, and had fixed rather rash propor- 
tions of their capital in land and improvements. Other debtors, 
having invested sums obtained from bank discounts in long specu- 
lations, now found it impossible to retire their paper. ^ The ship- 
ments of wheat, flour, pork and other produce to Lower Canada 
were less in the spring of 1837 than in former years. The practice 
being to draw against such shipments to pay for the purchases 
of the preceding year, the merchants had less wherewith to meet 
accrued claims against them. The balance of trade was thus 
still more heavily against Upper Canada, and in favor of the 
Lower Province and the United States. The consequences 
were, increased tendency to export specie and intensified 
demand for discount accommodation from the banks. 2 The 
house of Thos. Wilson & Co., London, bankers, and financial 
agents for the province, stopped payment the 2nd June. Bills 
of exchange drawn upon them went to protest, and about 
;^83,ooo stg., the balance of provincial moneys still in their 
hands, appeared to be in jeopardy. ^ 

The Legislature of Upper Canada met in extraordinary 
session the 19th June. Its business was with the financial and 
commercial difficulties that distressed the province. The 
Lieutenant-Governor, Sir Francis Bond Head, opened the 
ses<;ion by an eloquent speech, in which, quite naturally, he 



with interest 



1 Journal, U.C, 1837-38, Appendix, p. 212. 
» Journal, U.C, 1837, Appendix, ut supra, 
a Journal, U.C, 1837-38, Appendix, p. 122. But the sum was afterwards recovered 



Upper Canada, 1817-39 



71 



discussed the drain of specie suffered by the banks, and their, 
as yet, undoubted solvency. Sir Francis himself opposed a 
suspension of specie payments while the coffers of the banks 
were still full of coin, first, as impolitic, imperilling the confi- 
dence of the British public, whose wealth the colony needed, 
and, secondly, as dishonorable, involving breach of faith with 
the public creditors. He put the alternatives squarely, fraud or 
honor, suspension with full or with empty specie chests ; and 
then urged the Legislature, '• like Britons, to be true and just in 
all their dealings." He spoke in vain. The Assembly passed 
a bill autiiO'''':ing the banks forthwith to suspend specie pay- 
ments. As amended in important details by the Legislative 
Council, passed on the loth and approved on the nth July, the 
measure applied only to the chartered banks and the four 
excepted private banks. Provided the authority to suspend 
was first obtained from the Governor-in-Council, the banks 
were relieved from the legal incapacity to carry on banking 
operations when not redeeming notes in specie. The Lieuten- 
ant-Governor might impose conditions supplementary to the 
Act, and call for returns. Actions brought against banks, 
unless to liquidate claims or otherwise to further justice, were 
suspended during the term of the suspension of payments. 
Courts before which actions should be brought might stay pro- 
ceedings on the application of the defendants and hearing of 
the parties. Suspension was to be optional, not compulsory 
upon the banks. The expiry of the law was fixed for the end 
of the then next session of Parliament. During this period no 
suspended bank was to issue notes in excess of paid iti capital 
stock, or to dispose of its specie otherwise than in paying 
fractional paits of a dollar, or in redeeming dollar notes. (7 & 8 
Wm. IV., cap 2.) 

It was said at the time this measure was being debated, 
"the commercial interests of the country require immediate 
accommodation of the l^inks, and that cannot be afforded with- 
out suspension or by giving the community a substitute for 
specie." ^ In other words, it was feared to precipitate the mer- 
cantile bankruptcy which refusal of the usual support of bank 



taj 



1 Journal, U.C, 1837, Appendix, p. 26, evidence of Mr. Proudfoot. 



r ' 



ill 



t ' i 



iiiii 



1 m i 



till IK 

i! 



m\ 



i: ^1 U 



wm 



jiiill 



Ml 



72 



The Canadian Banking System, 1817-1890 



loans was likely to cause. To maintain redemption the banks 
would be obliged to contract both discounts and circulation. 
To maintain payment also involved for them the losses due to 
the cost of getting specie. And aided by a certain fogginess of 
provincial ideas upon monetary questions, the combination of 
bank and borrowing interests carried the bill through. The 
sequel shows how few of the anticipated results were 
gained. 

The Commercial Bank of the Midland District was the 
only chartered bank soon to avail itself of the Act. Its suspen- 
sion was authorized the 29th September, 1837.^ The Lieuten- 
ant-Governor imposed, with his permission, the condition that 
notes of a suspended bank should not be used in Government 
transactions. By this means the large military outlay, soon to 
occur, was prevented from being an instrument for the inflation 
of an inconvertible currency. The Agricultural Bank practically 
suspended, and in November, 1837, failed utterly. Its partners 
decamped. Green was arrested in Buffalo. Truscott sailed for 
Europe " to negotiate the American securities of the bank." 
The precious pair left behind them about ^"20,000 of notes 
utterly unprovided for, and claims of depositors for over ;^i8,ooo, 
against which but ;^7,ooo of commercial paper could be found.* 
The Farmers' Bank suspended for only two months at the 
close of 1837 ; the Bank of the People not at all in that year. 

The Bank of Upper Canada much desired to suspend, and 
the cashier, Thos. G. Ridout, rather pressed their wishes upon 
the Lieutenant-Governor. Wearied and impatient, Sir Francis 
summarily closed the discussion by exclaiming, " Sir, the prin- 
ciple of monarchy is honor I The Bank of Upper Canada is 
the Government bank. To maintain its honor the bank must 
redeem in specie !" And until the 5th March, 1838, it con- 
tinued so to redeem, in spite of the reduction of circulation from 
;^2i2,ooo in May to ;^8o,ooo in December.^ The Gore Bank 
stood with the Government institution. 



I Upper Canada Gaxttte, Vol. XII., No. 3i. 

a Journal, U.C, 1837-38, Appendix, pp. 212 et stq. 

» For the figures the reader is referred to Journal, U.C, 1839, Appendix, Vol. II., part 
ii., pp. 607 et %eq. For the incident related the authority is unquestionable, but I am not at 
liberty to cite it. 



upper Canada, 1817-39 



78 



The situation in Lower Canada was complicated by the 
appearance of armed insurrection on the 17th November. 
The trouble was not wholly unexpected. Before the close of 
navigation the banks at Montreal had transferred their specie 
to Quebec, and, like the Quebec Bank, deposited it for safe 
keeping in the citadel. Activities not connected with the hos- 
tilities were pretty much suspended while the latter endured. 
But the last party of rebels surrendered the 15th December, 
and on the 26th February, 1838, though the military were still 
on the alert, a public thanksgiving for the restoration of order 
was held.^ The large expenditures of specie made by the 
British commissariat were of material assistance at this crisis, 
and made the resumption of specie payments on the 23rd June, 
1838, comparatively easy for the Lower Canada banks. ^ 

■ On the 4th December, 1837, the first movements of a 
similar rebellion, partly sympathetic and partly independent, 
occurred near Toronto (formerly York), the capital of the Upper 
Province. In this case, however, the insurgents were chiefly 
Reformers of Anglo-Saxon blood, instead of disaffected French. 
Within ten days the main force of rebels at Toronto, and the 
other party near London, had submitted 10 the Government 
or fled the country. Peace was again broken by the so- 
called American invasion, beginning the 13th, the capture of 
Navy Island in the Niagara River, and the bombardment of 
Chippewa, a town on the Canadian shore. Then the steamer 
" Caroline " was destroyed by the Canadian militia, and the 
invaders defied the authorities on either side of the line.^ To 
quell the present and prevent future disturbance it was now 
necessary to quarter a considerable force of troops in the Upper 
Province. The Commissary-General was unable, however, to 
meet the large outlay of money which this required. By 
December, the Bank of Upper Canada had accumulated 
;^i4o,ooo in specie. It advanced ;^5o,ooo to the Government in 
dollars, and offered to furnish the money for military disburse- 
ments in all parts of the province where posts were established. 



I Robert Christie, History of Lower Canada, Vol. IV., pp. 448 et seq. 

» Journal, Can., 1859, Appendix, No. 67, p. 17, Evidence of the Bank of Montreal. 

a Journf.l, U.C, 1837-38, p. 55, Despatch of F. B. Head, Lieutenant-Governor, to 
H. S. Fox, British Minister at Washington. 



~1 



74 



The Canadian Bankifig System, 1817-1890 



'! 'I 






In the first quarter of 1838, it did advance some ;^2 19,000 on 
treasury bills on London. The bank's circulation rose to 
;^i 54,000, its specie fell to ;^6o,ooo. The suspended banks took 
advantage of the large issues, collected the notes for redemption, 
and refused their own in exchange. The disturbed state of the 
American frontier made the import of specie from New York 
impracticable. To supply the whole country with specie was 
something that the Commissary-General and bank combined 
could scarcely undertake. On the 5th March, 1838, the Bank 
of Upper Canada applied for authority to suspend. The per- 
mission was granted immediately.^ The suspension of the 
Gore Bank was authorized on the loth of March. 

On the 6th March, also, was approved an Act (i Vic, cap. 
22, U.C.) extending the limit of note issues during the sus- 
pension to twice the paid-in capital of the suspended banks. 
The clause which forbade the banks to dispose of their specie 
was repealed. 

Owing to the opposition of the Bank of Upper Canada, 
none of the banks in that Province joined in the general resump- 
tion by the banks of the United States and Lower Canada in 
June, i838.'*' ^ The Lower Canada chartered banks did not 
long continue a specie redemption. A second insurrection in 
the following November obliged them again to suspend, the 
suspension being authorized and facilitated by an ordinance of 
the Special Council passed the 5th November.* Circulation 
during the suspension was limited to the paid-in capital stock, 
and the banks were obliged to retain the specie held by them, 
and not to sell it except to the Government. The ordinance 
applied also to the Bank of British North Ameiica and La 
Banque du Peuple. During the authorized suspension bank 
notes became a legal tender in stay of proceedings at law. 

On the 17th July, 1838, the new Lieutenant-Governor of 



1 Journal, U.C, 1839, .\ppendix. Vol. II., part 2, pp. 607 et seq., Correspondence on the 
subject of the suspension of specie payments; also Upper Canada Gazette, Vol. XII., No. 45. 

4 Ibid, Letter of the Bank of Montreal. 

a Vide Ordinances of the Special Council, L.C., 1838, p. 142, for the law respecting 
suspension and resumption. 

4 Ordinances of the Administrator of the Government and Special Council, L.C, 1838, 
p. 10, a Vic, cap. i. 



upper Canada, 1817-39 



75 



Upper Canada, Sir George Arthur, intimated to the banks of 
the province the pecuhar interest taken by H. M. Government 
in the state of the currency in all parts of the empire, and urged 
upon them the propriety of again paying in specie. Exchange 
was low, the country quiet, and much specie had been im- 
ported for the use of the Government. The times were pro- 
pitious, and he tried to arrange an early and simultaneous 
resumption by all the banks. ^ The Gore Bank was willing to 
enter into communication with the other banks, with a sincere 
wish to give effect to the plan. The Commercial Bank was 
prepared to resume as soon as the other institutions named a 
day for the purpose, so that a simultaneous resumption should 
occur. 2 The Bank of Upper Canada replied in a long letter, 
dwelling on the public inconvenience and distress which it 
feared would attend a resumption. The bank tried to throw the 
responsibility of the postponement upon the Commercial Bank, 
and then counselled waiting until the heavy crop of wheat had 
been harvested and brought to market. But when that time 
arrived, there was increased hostility on the American frontier. 
Specie could not be imported safely, and Sir George forbore to 
urge resumption. In May, 1839, the Bank of Upper Canada 
again opposed resumption with the Lower Canada banks. The 
renewal of the stay law was secured to the ist November, 1839. 
(2 Vic, cap. 13, U.C.) Then the bank practically refused to 
resume until the statutory authority for suspension had expired. 
The Lieutenant-Governor could exercise no coercion under the 
law, and the advantage of the Government deposits enjoyed by 
the Bank of Upper Canada compelled the other banks to follow 
in its wake. 3 

Aided once more by the expenditures for military purposes, 
and with no practical injury or check to trade, the banks of 
Lower Canada resumed specie payments on the ist June, 1839 ; 
those of the Upper Province, the law having expired, on the ist 
November of the same year. 



1 Ihid, p. 609, Circular of Sir George Arthur. 
« Ibid, p. 614. 
I Ibid, p. 619. 



, 'III 



Ml 



I 111 



t ' ;} 



^iv 


ti' 


■J 


>! 


■ -i 


i 


: ' 1 


1 


f 


I 



76 



The Canadian Banking System, 1817-1890 



8&6 


8&6 8&6 8&4 


8 6&16 7 


6 


6 


• ••• •••• •••• 


4i 8 6 


7 


8 


8 8&4 8 


8 8 8 


8 


4 


8 8 8 


7 7&6 4 


8 



g 15. — EFFECTS OF THE CRISIS AND SUSPENSION 

s 

According to instructions from Downing Street, ^ the Upper 
Canada Act continuing the stay law had forbidden the payment 
of dividends during the suspension. But as this endured for only 
six months, the regular distribution of profits was little interfered 
with. The affairs of the banks in both provinces were conducted 
with great caution and prudence. Partly for this reason, partly 
because of the depression in Canadian export trades which fol- 
lowed the crisis of 1837 in Great Britain and the United States, 
the bank profits during the suspension were not excessive. Fol- 
lowing are the rates of the dividends declared by four of the 
banks between 1832 and 1840.' " • 

1832 1833 1834 1835 1836 1837 1838 1839 1840 

per cent. 

Bank of Montreal 7 & 5 

Quebec Bank 6 

Bank of Upper Canada 8 & 18 
Commercial Bank 

The Bank of Montreal therefore distributed 54 per cent, on 
its capital in the four years preceding suspension, and 43 per 
cent, in the four years mcluding it (1837-1840). But the latter 
figure should be diminished by the 16 per cent, premium on new 
stock paid to the old shareholders in 1838. The Bank of Upper 
Canada divided 36 per cent, in the earlier, 32 per cent, in the 
later period; the Commercial, 28 per cent, and 32 per cent. 
From the last, however, must be deducted 6 per cent, premium 
paid for new stock to the original proprietors, and some amount 
to represent the cost of starting the bank in 1832 and 1833. 
The Quebec Bank, through exceptional causes, passed its 
dividends in 1834- 1836, and is not properly included in the 
exhibit. The capital of the Bank of Montreal, /'250.000 in 
1837, was increased to ;^483,689 in 1840 ; that of the Commercial 
Bank from ;^ioo,ooo in 1835, to nearly ;^2oo,ooo in 1838. It 
has been said that, as a rule, suspensions of specie payments 
are highly profitable to banks of issue. And yet our corrected 
comparison between a period of specie payments and one 
chiefly of suspension, affords no proof of the principle in point 



J Journal, U.C, 1839, Appendix, p. (iog. 
« Journal, Can., 1859, Appendix No. 67. 



ir! I] ■' :■ I 



upper Canada^ 1817-39 



77 



either of aggregate profits of the banks, or the ratio of their earn- 
ings to capital. One cause of the exception was doubtless the 
cautious management of the banks ; other and more explicit 
reasons appear to have been the restraints imposed upon the 
banks by law, by circumstances, and by their own mutual 
competition. 

The legal restraints, such as prohibition of the use of incon- 
vertible notes in Government transactions and the limitation of 
issues, are already familiar. The second group must be dis- 
cussed in connection with the benefits derived by the public from 
the suspension. Properly to estimate these will be difficult, for 
they are mixed with evils, misfortunes and loss brought by re- 
action from the fever of speculation. 

The political situation in Lower Canada had destroyed 
confidence in the security of property, depreciated its value and 
arrested the improvement and settlement of the country. 
Landed property had declined to an alarming extent. In the 
first year succeeding the crisis the timber trade had suffered 
little, but the province, instead of exporting, was obliged to im- 
port grain. The number of immigrants arriving at Quebec, no 
less than 52,000 in 1832, fell to 5,000 in 1838. This loss also 
checked the advance of the province.^ Upper Canada had ex- 
perienced similar insecurity and depreciation. By August, 
1838, goods, chattels, lands or houses would not bring at forced 
sale a third of the former prices, confidence was sadly lacking 
in trade, thousands of settlers were leaving the province. The 
inconvertibility of property left debtors without the means of 
meeting the engagements, and liabilities comparatively trifling 
were often found sufficient to ruin those who had justly 
thought themselves opulent. The ordinary influx of immigra- 
tion and British capital had been suspended, and work on 
public improvements stopped." 

In the opinion of one bank " the suspension enabled the 
Canadian banks to afford requisite facilities to customers and 
the public. This could not have been done had specie payment 



1 Lord Durham's Report, p. 2i. 

•I Journal, U.C. 1839, Appendix, Vol. II., part 2, p. 544. 



il 



78 



The Canadian Banking System, 1817-1890 




been compulsory."' But all the banks were burdened by many 
debts overdue, the result of the liberal discounts that preceded 
the crisis being locked up, in part, in long speculations by the 
borrowers.' The Bank of Montreal wrote that "to a con- 
siderable extent banking facilities, by a forced system of re- 
newals, were confined to the class chiefly indebted to the banks 
at the time of suspension, "^ Similar testimony was given by 
the other banks. And when the law was about to expire the 
cashier of the Bank of the People (afterwards, as Sir Francis 
Hincks, Finance Minister of the Dominion,) acknowledged 
before a committee of the Assembly that the suspension had not 
enabled the banks to extend their accommodation.* 

In one case, at least, the contrary result occurred. The 
Bank of Upper Canada had the Government deposits, was the 
medium of the Government's disbursements, was under large 
advances to the Province, and dealt largely in Government 
exchange on London. It acted, therefore, rather as an organ 
of financial administration than as an institution for the assist- 
ance of agriculture and commerce. In 1837, its profits on 
sterling exchange exceeded the whole, in 1838 the half, of its 
declared dividends. The board of directors stopped discounting 
at the otfices, and compelled all dealing to be done directly with 
the head office. Their refusals of discount accommodation 
caused merchants and others accustomed to depend upon it not 
only great inconvenience, but also serious injury.* From the 
weight of evidence we are obliged to conclude that the Canadian 
public did not derive additional benefits in the way of discounts 
from the suspension of specie payments. The reports of 
amounts discounted each month before, after and during the 
suspension, show that in both provinces the average of amounts 



t Journal, Can., 1859, Appendix, No. 67, Replies to Question 17. 

» Journal, U.C, 1837-38, Appendix, pp. 212 et seq, 

s Journal, Can., 1859, ut supra. 

* Journal, U.C, 1839, Vol. II., part 2, page 770. Cf. also p. 763, Evidence of Mr. 
Proudfoot, President of the Bank of Upper Canada. 

» Ibid, pp. 619 et seq., Letter from the Bank of Montreal. 



Upper Canada, 1817-39 



79 



discounted each month were considerably less during the sus- 
pension, than either before or after it.* 



I The following tables compiled from the Committee Reports of 1837, 1837-38, 1841 and 
1859, comprise the available statistics on this point :— 



in 
H 
Z 

3 
O 

u 
1/1 

Q 













00 






•s <« 










'»■ 


m 














N 


00 




• 


• • 


• 


• 




M 


«n 


• 




, 


• 




• 


t^ 


* 










^ 


M 








N 




n 





m 




M S 




■<1- 






in 


n-l 











fO 


r-. 


00 




















CQ 


, 


n" : 


^ 





00 


ro 


^ 




oo 




•«1- 


m 


m 











VO 


t^ 









S^ 


























« 




in 


1- 














m 















00" 





• 


• 




• 


• 


gwoa 




M 

















00 














o> 


m 












ank 

the 


00 


m 












rrt 


: 00 


• 


• 


• 




• 


!«oa: 


N 


M 












s^ 






• 










VO 


■<t 












^U 


M 


l^ 












m 


00 












bcQ 





'■% 


• 
• 


• 


'' 


• 


* 


ts: 


s^ 
















ro 


00 


N 








Tj- 


9jt 


8; 


•-4 










8 


OS 


■n 


! <:^ 


00 


• 


• 


• 


rn 





00 


•^ 








VO 




S^ 















■3 


00 


VO 




M 


a- 





U1 






S 


E rt 
ECQ 






• • 


'. '. CO 

fO 






S^ 










00 


vO 


^ 


N 


w « 

111 


>o 


ro 


VO 


00 







00 

N : 


! ! vo" 


^ 


>-4 


Ht 


00 


CQ-'O 


"^ 


N 


N 


M 



o 



t^ 

ro 

00 



10 . O . vO 



^■ 
ro 

00 



s. 

(A 

9 
CA 

I kT 00 in 00 



C • 
.2 • 

c „ 
0) 00 

</] 00 



S 00 

3 ro 

w 00 

D i-i 



a 
o 

c 
u 



M O ^ 



a 

m en 



a 
o 

a. 

E 

Ov 3 
ro ») 






00 in 



M JJ 00 « 00 



03«^t.MwTS 



aiJja 



c y 



«T3 



o «- o 






"O 



i?o Ao o o o o 





c 


^50 




5^ 


w "J-Oi f 


mvo 00 00 


ro N *ir c^ ', 




s^ 


:3 


ov'* 00 In 

«0 Ci ro 


Sffl 













Tj- 00 t^ 


Bank of 

Upper 

Canada 


000 00 00 


00 (->.■* 
d N<» in ! 


t^ meo M 


ro N <!< ro 








M C« 








06 oj d 








ro«>5 'J- 

• " • 








ja'ti 0" 








^^(S 








-S 
















t^S '^ 








tr,'^ _rO 








« K >• 








5 a 








-^:5^ 






vo 50 r^oo in 




- ^«( CO op f< 




N Cj 00" 04 N 


« r^QO 0> 




S^ 


■> 




T^>^t •^os u 


u 


■<J-!>5 Ov"S VO 


-Sa 


vO '-1 N ^ t^ 


<u ti 


iniO 00 ^» rj 


=•03 


m^K ■rtJo ^ 


01^ 


V} 




N ^ ^0> ro 


(« 


ini-H t/~<!4 00 


Jid V 


t^oo mt^ ov 


<< 2 


t^trs -"t-QO m' 


CQ § 


ro'* mi-^ in 


N C>J N <>« N 


Sj 




e» « * « \ 




'- --^ 00 ^^ « 


as 




- - tH - . 


H u 


•^ ''^ • 'N ti 


Sg 


rfl ^ -M- ?s U 


,^ ..- -^ lU 


- ^r« 


^^ - -=> 




0^000 






< 


c 


->?S"— >< 1- 





o 



« 

> 
l« 

V 

_^ 

■4) 

u 
v 

s 

in 

V 

Ji 



a 
o 

a 



a 

3) 

5 

a 
o 

% 

•3 

ac 
c t 

C Q, m 
V V) v 

E«-.> 
>.o so 

o a . 

o ■">« 
(U BOO 



"HQCQ 



^ f 



. 



!! ? 



'I: u 



80 



The Canadian Banking System, 1817- 1890 



It will be remembered that the Commercial Bank and Gore 
Bank were calling up their stock in this period, and so do not 
show in their return the unmixed effects of the suspension. The 
Montreal Bank, also, was calling up added stock. Its figures, 
therefore, furnish specially strong confirmation of the conclu- 
sion in the text, for even with its means thus increased its dis- 
counts were less. 

The fact is, the banks were compelled by circumstances to 
redeem their liabilities in foreign exchange. For a short time 
the Bank of Upper Canada refused to give anything for its 
notes. But after causing great inconvenience it gave up the 
experiment.' Complete suspension would have been ruinous. 
This the banks appreciated. Redemption in exchange was 
still redempt.jn, and the need to maintain it, as well as its 
maintenance, checked excessive issue of notes, and compelled 
the usual care to loan, not only safely, but so that new credits 
should be speedily available and well in hand. But in redeem- 
ing by exchange there was an opportunity to exploit the public 
in charges for premium that the banks sometimes improved.' 
In this respect the effects of the suspension were, mstead oif 
benefits, only added expense to the public, while the ban'^^ were 
able to recoup themselves for some of the losses incurred in the 
crisis. 

The highest rate, in suspended bank paper, for sterling 
exchange, was reached in Montreal, in July, 1837, viz., 122^. 
Toward the end of the month it reached 123 in Toronto, par 
being 109.59.* At the same dates the Bank of Upper Canada 
was selling bills on London for 115 to 116 in specie. This 
depreciation of inconvertible bank notes continued through 
1837, the rate averaging 6^ to 7^ per cent., but in August 
touching 10 per cent.* 



I Journal, U.C., 1839, Vol. II., part a, p. 770, 

• Ibid. 

• Journal, TJ.C, 1837-38, Appendix 3rd, Report of the Select Committee on Finance, 
p. 96. 

• The accompanying table of rates of premium on sterling exchange will lllustmti; tiic 
dcgreeii of depreciation. Up to March, 1838, tiie quotations uf ttie Bank of U])|>er Canada 
furnish the specie prices. Then irom June to October, inclusive, 1838, and from Juno to 
December, inclusive, 1839, tl Uank of Montreal provides the specio rate of sterling exchange 



upper Canada, 1817-39 



81 



The depreciation fell in January, 1838, to 2 percent., or less. 
But goods and produce could usually be bought on equal terms 
with either the notes of a specie paying or a non-specie paying 
bank.* In August the banks in Upper Canada were redeeming 



u^oii London. The depreciation is approximately expressed by the difterence between the 
liiKher and the specie rate, the selling rate in one Province being always cunipared with the 
selling rate in the othei, or the buying rate with the buying rate : 





Bank of Montreal. 


Bank of Upper Canadx. 












Depreci- 
ation 












>^ 


Buying 


Selling 


Buying 


Selling 






Premium 


Premium 


Premium 


Premium 


. 




% 


% 


% 


% 


% 


i'^J7-Jan 


11 


11/2 


9>^ 


viY^ 




Feb 


II 


12/2 


10 


12;^ 




Mar 


r. 


I2>^ 


10 


viy^ 


, , 


Apr . . 


12 


13/2 


10 


i^Vz 


• • 


May .... 


13X 




II 


12K 


2% 


_ une .... 
uly 


16 


. • 


13 




3 


22 


20-22>^ 


13 


M 


6-8)i 


Aug . . : . 


.20 


ii'A 


12 


16 


6% S 


Sept 


21 


21-18 


12 


15 


3-" 


Oct 


13 


i8-i5>^ 


10 


12/2 


3-5 'i 


Wov 


1.5 


16-17 


8 


I2>^ 


.S% '\% 


. JGC • • • • 


12 


18 


8 


I2>^ 


S/z 


,8j8— Jan 

Feb 


10 


i5-i2>^ 


8 


li'A 


o-i% 


^Vz 


9)4-11 


8 


iiA 


o-% 


Mar 


1% 


»y2-9 


7% 


11% 


■ • 


Apr 


6^ 


8-7 


V/2 


12^ 


• • 


May .... 


%% 


j'A-^'A 


8 


12..^ 


• • 


une .... 
' uly 


10 


8;4-i2 


10 


12 A 


^•4 


\\% 


II 12 


10 


nA 


iA-'% 


Auk 


"X 


io}4-ii'4 


lo;^ 


12A 


1-2 


Sept 


io>^ 


ioYj-iiYj 


II 


12'A 


1-2 


Oct 


\o% 


IO^-II>i 


II 


I2>4 


1-2 


Nov ...... 


9^< 


Il>^-12 


II 


li'A 


• • 


Dec 


lo^A 


12-12^ 


11 


'4 


• • 


1839— Jan 

Feb 


9}i 


12 


<i. 


^3A 




10 


11-12 


IT 


13 


, , 


Mar 


9H 


io^-ii>4 


11 


12;^ 


, , 


Apr 


9)4 


IO>^-II 


10 


^2A 


■ • 




May 


9 


10 


10 


12% 


• ■ 




une .... 


«¥ 


10 


10 


I2>^ 


2% 




-ly 


9 


10 


10 


^2% 


2% 


Aug 


9 


io>4 


10 


^2% 


2% 


Sept 


syi 


loA 


10 


12% 


2% 


Oct 


9'A 


12 


\0)^ 


I2>4 


2 


Nov 


• 8 


10 


\oA 


II 


t ■ 


Dec 


8 


lO-II 


IO>^ 


12% 





1 Journal, U.C, 1837-38, Appendix, p. 96, 3rd Report of the Select ^'immittM on 
Finance. 



\: 



'I 

f I 



\ 



82 



The Canadian Banking System, 1817-1890 



their notes in any amount by bills of exchange on London and 
New York, and within i per cent, of the rate at Montreal (then 
on a specie basis).' The Commercial Bank afterwards made a 
practice of redeeming for its customers only. A curious but 
profitable business was carried on in Lower Canada on the basis 
of the 2 per cent, discount on the inconvertible Upper Canada 
notes circulating in the province. The Bank of the People was 
somewhat weakened after the defeat of the insurgent section of 
the Reform party. Some time in 1838 it was sold to the Bank of 
Montreal, who, though empowered by the Province in 1837 to 
collect debts due them, notwithstanding the expiry of their 
charter, were legally incapable of establishing an office of their 
own in Upper Canada. They worked under the name of the 
Bank of the People, and besides the usual profits, acquired added 
gain by the easy process of buying up the People's notes, really 
their own, at the discount in Lower Canada, and remitting them 
to the Upper Province for re-issue. 

The restraint imposed by the mutual competition of the 
banks was exercised through the weekly exchanges carried on 
between them. Now a regular redemption effectively prevents 
inflation of a bank note currency, and imposes upon the partici- 
pating banks, if they are to continue in existence, the necessity 
of prudence in their conduct. The experience of New England 
with the Suffolk banking system has proved this and proved it 
for all time. The power to refuse at the counter the notes of a 
suspended bank was a power of coercion. The banks of Upper 
Canada employed it to enforce the settlement of the weekly 
balances in exchange. In Lower Canada, also, the specie pay- 
ment of balances could not be exacted, and notes could not be 
received because they were not redeemable. But redemption 
was obtained nolwithstandmg. The debtor banks were forced 
to hand over in settlement some of their best discounted paper. 
And these notes were redeemed in due time, by the makers, 
leading export merchants, by sterling bills drawn against ship- 
ments of grain, potash, ginseng and timber. 

The good effects of their careful policy, and the restraints 
imposed by law, by circumstances and by their mutual compe- 



• Note I., p. 136, Letter of the Bank of Upper Canada, p. 6ii. 



upper Canada, 1817-39 



89 



tition, were evident in the strength and stability of the banks, as 
well in the depression that followed the crisis as in the revival 
of commerce and agriculture that finally came. The four fac- 
tors have served now to explain the moderate dividends paid 
during the suspension, because in 1837, 1838 and 1839 they 
served to prevent an immo'''»'"ate expansion. With this m their 
favor, the banks found th • umption comparatively easy, the 
country, innocuous. 



§ 16. 



-INCIDENTAL DETAILS 



The Government of Upper Canada was in far worse straits 
during the suspension than the banks. It was reduced to the 
negotiation of its debentures through the local banks, who 
remitted the securities to various English houses, and drew 
sterling exchange against them. The proceeding provoked the 
protests of the Barings, across whose counters the interest was 
payable, and who objected, as they wrote, to " having our 
names inscribed on stock, the issue of which had not our pre- 
vious knowledge and consent." ^ Various proposals to issue 
inconvertible notes for circulation on the credit of the Govern- 
ment were defeated in 1837 and 1838. In reply to Sir George 
Arthur's letter of the 20th November, 1838, Lord Glenelg ad- 
vised him that it was impossible to grant him provisional 
authority to give the Royal assent to an enactment permitting 
the issue of such notes, even though the proceeds were intended 
for public works or local improvements.' The second financial 
measure of 1839, however, was an Act authorizing the issue of 
Treasury notes for £1 each to the amount of ^250,000 stg. 
Concerning this Act Lord John Russell wrote to the Governor- 
General, " Her Majesty cannot be advised to confirm it. The 
issue of such an amount of small, inconvertible currency, as a 
. resource for sustaining the public credit, is not to be justified 
even by the present exigency of affairs. * * * * * ." 

" It is of great importance that the scheme devised to meet 
the pressure of the passjing day should not be such as to pre- 
clude the early return to a more salutary course of financial 
operations."' 



« Journal, U.C., 1839, Appendix, Vol. I'., part 2, p. 5-57. 
■i Ibid, p. 553, Letter of the 3131 Januar), 1839. 
s Journal, Can., i84i,p. 39;. 



I : 



I 



il 

Is ; 



MM 



i 



I' '. 



84 



The Canadian Banking System, 1817-1890 



It had been necessary, some time previously, to authorize 
the Receiver-General to secure a loan on the Government's 
stock in the Bank of Upper Canada, (i Vic, cap. i, U.C., 
Assented to 6th March, 1838.) In 1840 the Act was repealed 
and the Receiver-General authorized to sell the stock, with the 
sanction of the Governor-in-Council. Since 1822, the Province 
received in dividends and bonuses ;^38,3i5 on its subscription to 
2,000 shares of the par value of ^25,000.^ It received in 1840, 
;^25,250 for its stock. 2 The authority of the Lieuienant-Gov- 
ernor annually to nominate four of the fifteen g rectors was 
repealed, and the Bank of Upper Canada lost, in law, its official 
connection with the Government. 

This was one of the measures preparatory to the Union of 
the Canadas, the constitutional change which, since the restora- 
tion of peace, had been undertaken as the plan most likely " to 
relieve the financial embarrassments of Upper Canada, to enable 
her to complete her public works, to enable her to develop her 
agricultural capabilities, to restore constitutional government 
to Lower Canada, to establish a firm, impartial and vigorous 
government for both, and to unite the people, within that one 
common feeling of attachment, to British institutions and 
British connection."* On the fifth of February, 1841, the dis- 
appearance of the Upper and Lower Provinces, the birth of a 
new Province of Canada, the creation of a common Legislature 
and the completion of the political revolution known as " Res- 
ponsible Government " were proclaimed by the Governor-Gen- 
eral to take effect upon the tenth. In the next chapter we shall 
discuss the course of banking and bankmg legislatijn in the new 
Province down to 1850. 



i! 



1 Journal, Can., 1841, Appendix O. 

* Ibid, Appendix B. 

a Journal, U.C., 1839-40., p. 17, Message of His Excellency the Governor-General, 
dated the 7th December, 1839, 



i 

|l i 

i 



CHAPTER IV 



PROVINCE OF CANADA, 1841-1850 



§ 17. — THE BANK OF ISSUE PROPOSED BY LORD SYDENHAM 

Among the questions which came before the first Parha- 
ment of the Province of Canada were provision for the general 
revenue and for the completion and extension of the public 
works. The Governor-General, Lord Sydenham (Charles 
Poulett Thompson), was a friend of Mr. Samuel Jones L.oyd 
(Lord Overstone), and had shared his peculiar theories upon cur- 
rencies and their regulation.^ The eminence and intluence of 
the author, and the connection of the effort with the movement 
which, in England, culminated in Peel's Bank Act of 1844, 
demand that the financial and monetary expedient devised at 
this juncture by Lord Sydenham, should receive explanation iu 
some detail. 

With the professed objects of obtaining (a) a paper cur- 
rency perfectly secure of convertibility into the value it repre- 
sented, and free from injurious fluctuations ; {b) the whole 
profit of the issue for the benefit of the state (some ;^30,ooo to 
^35,000 yearly, and capable of increasing to double or treble 
the amount); (c) not less than ^750,000 to be placed at the- 
disposal of the state for the public works ; he suggested to the 
Select Committee on Banking and Currency a series of resolu- 
tions. * In them was outlined the scheme by which the objects 
were to be attained, viz. : — 

(a) the establishment of a Provincial Bank of Issue under 
three commissioners, who should be vested with the sole power 
of issuing notes payable on demand ; 

(6) for sums of $1 and upwards to an aggregate issue of 



< " Reminiscences of his Public Life." by Sir Francis Hincks, K.C.M.G,, Montreal, 
1884, p. 69. 

a " Meiitoir of the Life of the Right Honorable Charles, Lord Sydenham, with a narra- 
tive of his administration in Canada," edited by G. Poulkttk Lerope, London, 1844, p. 314. 



8G 



The Canadian Banking System, 1817 1890 



111' i 



;^i ,000,000 currency, and in excess of that amount only to re- 
deem notes or to purchase bullion or coin ; 

(c) one-fourth of the issue to be against bullion or coin, and 
three-fourths against Government securities purchased by the 
bank or paid into it, the interest on securities to be used for 
management, and the balance remaining after meeting expenses 
to be paid into the public account ; 

(rf) no bank to issue notes after the ist March, 1843 ; 

[e) 2^ per cent, on their circulation to be paid yearly to 
banks with charters expiring after the ist March, 1843, for the 
term of their charters ; should such term be less than five years 
after the ist March, 1843, then for ten years ; 

(/) charters expiring before the ist March, 1843, to be 
continued with the power of issue to that date, but after that 
date without the power of issue; 

{g) the Bank of Issue not to discount, receive deposits or 
deal in exchange. 

In a message of the 20th August, 1841, Lord Sydenham 
proposed to the Legislative Assembly the assuiTiption by the 
Province of the issue of notes payable on demand. The acqui- 
sition '* 3f a capital representing a revenue of not less than 
;^35,ooo," is here advanced, as the most considerable result of 
the plan.' But in private letters, the noble Lord had described 
his purpose as " the establishment of a perfectly sound paper 
currency by means of a State Bank of Issue, the principle, in 
short, for which I contended in the Cabinet, in the first instance, 
in 1833, and which Sam. Loyd has since so ably supported in a 
pamphlet. "2 This acknowledgment forms conclusive evidence 
that the resolutions of 1841 were neither more nor less than a 
plan to establish in Canada the methods of note regulation 
advocated by the British " Currency School." 

It is no part of our purpose to discuss here the causa celebre 
of " Currency Theory " verr^us *' Banking Principle." But it 
must be said that so far as the experience of either Upper or 
Lower Canada taught anything, it was that their bank note 
currency was satisfactory, worked well, and was safe. The 



I Journal, Can., 1S41, p. 398. 
» HiNCKS, ut supra, p. 69. 



Province of Canada, 1841-50 



87 



freedom from liuctuations would have attracted Canaihans of 
that day as little as it would those of the present. What they 
wanted, what in fact they had, was a bank note currency that 
would fluctuate in correspondence with the number and amount 
of transactions wherein it was used. Compared to this, the 
rigidity and inelasticity of a Government issue were distinctly 
objectionable. The promised security was merely a promise. 
Government currencies had hitherto been proposed in the 
Canadas only when the Governni'/nt was in financial straits. 
For the currency to be secure, the issuer, either of the notes or of 
the security, must be solvent. The banks had come out of the 
crisis well enough. None had defaulted on their notes. Never 
had a chartered bank failed in the Canadas. Never, except in 
a time of war and commercial disaster, had their notes fallen 
below par with specie. For Upper Canada, at least, it was 
acknowledged that by completely stopping discounts for a time, 
the banks need not have suspended then. 

Notwithstanding, the Committee, the chairman of which, 
Mr. Francis Hincks, was a warm advocate of the Governor- 
General's views, reported to the Assembly in favor of the reso- 
lutions. The measure there met opposition. It involved 
private and class interests. It attacked the chartered banks, 
who were strong in the assembly. They fought it because the 
loss of the issue privilege would lessen their profits, force them 
to reduce the number of their branches, and diminish the loan- 
able credit at their command, li would cause distress more or 
less serious to their customers, the commercial classes, through 
the curtailment of discount accommodation thus rendered 
necessary. Farther, it was feared that a provincial bank would 
materially increase the power of the executive. The effect of 
political feeling was joined with the efTorts of the bank interest. 
Conservatives, French Canadians and some recalcitrant Re- 
formers, ^ united in Committee of the Whole House to pass 
the resolution of the 31st August, "that it is inexpedient to take 
into further consideration during the present session the estab- 
lishment of a Provincial Bank of Issue, or the issue, in any 
way, of a paper currency on the faith of the Province."'* 



1 Hincks, ut supra, p. 70. 
* Journal, Can., 1841, p. 464. 



■■ I 



88 



The Canadian Bankinpr System, 1817-1890 



As a fiscal measure, partly in lieu of the defeated expedient, 
the Legislature that session decided to impose upon the bank 
notes issued and circulating in the Province a duty or rate of 
I per cent, per annum. (4 & 5 Vic, cap. 29.) The tax was 
levied on the average of circulation as shown by statements of 
the notes outstanding at the end of each month, and furnished to 
the Receiver-General on the 15th May and the 15th November 
of each year. Those making wilful, false statements, were liable 
to the penalty for perjury, while refusal or neglect to furnish 
statements incurred a fine oi £i,ooo^ 



I 



§ 18. — THE LEGISLATION OF 184I AND 1843 

In their final report (27th August, 1841), the Select Com- 
mittee on Banking and Currency expressed themselves in favor 
of adopting some uniform system of banking in the Province. 
They recommended, therefore, that the prayer of the petitions 
from the chartered banks of the Province, for an extension of 
their capitals, should be complied with under certain restrictions, 
most of which had been recommended in a despatch from H.M. 
Principal Secretary of State for the Colonies." This despatch 
was the circular of thie 4th May, 1840, issued over the signature 
of Lord John Russell, with the expectation that provision for 
the observance of the regulations it contained, should be made 
in all colonial bank charters. Among British North American 
documents, the Assembly Journal of New Brunswick is the only 
one to contain the original circular. ^ The report which the 
Canadian Committee based upon it is worthy of full description 
here as the first group of principles adopted by the Province as 
the norm for its banking legislation. In connection with the 
circular of the 30th May, 1846, the regulations of 1840 furnish 
the key to nearly the whole development of banking law in Brit- 
ish North America, from the date of their publication to the 



I The revenue derived t rom the rate was in 1841-42, £9,560; 1842-43, £7,572; 1843-44, 
/;io,484; 1844-45, £13-020; 1845-^6, £15,899; 1845-47, £16,06:1; 1847-48, £12,473. Return to iiii 
Address ot the Hongrable Legislative Assembly, d'tted the agfh January, 1849. Journal, 
Can., 1849 Appendix. In most cases the duty was equivalent to a net income tax of 7 to 8 
per cent. 

4 Journal, Can., 1841, Appendix O. 

» Journal of the House of Assembly of the Province of New Bnmswick, 1841, p. 41 



! UK 11 I.- Mi m, 



Province of Canada, 1841-50 



89 



period of confederation. Following are the restrictions recom- 
mended by the committee : 

I St. The amount of capital of the company to be fixed ; and the whole 
of such fixed amount to be subscribed for within a limited period, not greater 
than 18 months from the date of the charter or the Act of Incorpxjration. 

2nd. The bank not to commence business until the whole of the capital 
is subscribed, and a moiety at least of the subscription paid up. 

3rd. The amount of the capital to be paid up within a given time from 
the date ot the charter or Act of Incorporation, such period unless under 
particular circumstances to be not more than two years. 

4th. The debts and engagements of the company on promissory notes 
or otherwise, not to e.\ceed at any time thrice the amount of the paid-up 
capital, with the addition of the amount of such deposits as may be made with 
the company's establishment by individuals in specie or Government paper. 

5th. All promissory notes of the company, whether issued from the 
principal establishment or from the branch banks, to bear date at the 
place of issue, and to be payable on demand in specie at the place of date. 

6th. Suspension of specie payments on demand at any of the company's 
establishments, for a given number of days (not in any case exceeding 60) 
within any one year, either consecutively or at intervals, to forfeit the 
charter, 

7th. The company shall not hold shares in its own stock, nor make 
advances on its own shares. 

8th. The company shall not advance money on security of lands, or 
houses, or ships, or on pledge of merchandise, nor hold lands or houses, 
except for the transaction of its business ; nor own ships or be engaged in 
trade, except as dealers in bullion or b'lls of exchange ; but shall confine its 
transactions to discountmg commercial paper and negotiable securities, and 
other legitimate banking business. 

gth. The dividends of the shareholders are to be made out of profits 
only, and not out of the capital of the company 

loth. The company to make and publish periodical statements of its 
assets and liabilities (half-yearly or yearly), showing under heads specified in 
the annexed form, the average of the amount of its notes in circulation, and 
other liabilities at the termination of each week or month, during the period 
to which the statement refers, and the average amount of specie or other 
assets that were available to meet the same. Copies of these statements are 
to be submitted to the Provincial Government, and the company shall be pre- 
pared, if cf.lled upon, to verify such statements, by the production, as confi- 
dential documents, of the weekly or monthly balance sheets from which the 
same are compiled And also to be prepared upon requisition from the 
Lords Commissioners of Her Majesty's Treasury, to furnish in like manner 
such further information respecting the state or proceedings of its banking 
establishments as their Lordships may see fit to call for. 

nth. No by-law of the company shal! 1-e repugnant to the conditions 
of the charter or Act of Incorporation or the statutes of the Province. 






T 



90 



The Canadian Banking System, 1817-1890 






I i 



V 



i 









'■ I ■ 



ff" M 



1 2th. * • * « • The provisions of charters or Acts of Incorpor- 
ation should be confined as far as practicable to the special powers and pri- 
vileges to be conferred on the company, and the conditions to be observed 
by the company, and to such general regulations relating to the nomination 
and power of the directors, the institution of by-laws, or other proceedings of 
the company as may be necessary, with a view to public convenience and 
security. 

13th. No company shall be allowed to issue promissory notes on 
demand for an amount greater than its paid up capital. 

Form of Return . 

Return of the average amount of the Liabilities and Assets of the Bank 

of during the period from to 

Promissory notes in circulation not bearing interest. . £ 

Bills of exchange in circulation " " " . . 

Bills and notes in circulation bearing interest 

Balances due to other banks 

Cash deposits not. bearing interest 

*' " bearing interest 

Total average liabilities £ 

Coin and bullion £ 

Landed and other property of the corporation 

Government securities 

Promissory notes or bills of other banks 

Balances due from other banks 

Notes and bills discounted or other debts due to the 
corporation not included under the foregoing 

heads 

Total average assets 



The second general law enacted in the Province with res- 
pect to banks was an Act to authorize the banks previously 
chartered by Acts of either of the la*e provinces to carry on 
their business throughout the new province. (4 and 5 Vic, 
cap. 99.) The condition was that notes of Upper Canada 
banks issued in Lower Canada should bear date at the place of 
issue, and be payable there as well as at the principal establish- 
ment of the corporation. 

The three Lower Canada banks petitioned in 1841 for the 
renewal of their charters, and permission to increase their 
capital stocks. Other petitioners sought incorporation for a 
proposed Bank of the Niagara District. The Acts passed in 
answer to the several prayers embodied all the provisions and 
restrictions laid down in the committee's report, continued the 
charters and extended the corporate powers of each bank to the 
whole province. The definition of the powers was strict, 
though not, perhaps, too severe when the conditions and tempta- 



Province of Canada, 1841-50 



91 



tions in which the banks worked are considered.^ It was 
enacted that no bank officer should act as proxy, that the bank 
should not hold the stock of other banks, except when taken for 
6o«fl^r/g debts contracted in the usual course of business, and 
that no notes under five shillings should be issued. It was 
further enacted that notes under £1 should not exceed one-fifth 
of the paid-up capital, and that the total circulation, on pain of 
charter forfeiture and the joint and several liability of the 
directors, both to the public and the shareholders, should not 
exceed the capital stock paid-in. ^ Branch banks were per- 
mitted and subjected to the restrictions as to note issue.' A 
considerable holding of paid-up stock was continued as a quali- 
fication for the directorate. Charters were to expire at the end 
of the first session of Parliament after the ist June or ist De- 
cember, 1862. The renewed charters, it will be observed, 
continued in force all the provisions for the public security 
previously adopted in either Lower Canada or Upper Canada. 
Among these were the prohibition of loans to a foreign state, 
and of voting by alien shareholders, the cessation of business 
by way of discount or otherwise during a suspension of 
specie payments, the enforcement of subscriptions to capital 
stock by requiring an immediate payment of 10 per cent., 
the penalties in the bank's favor for default upon calls, and 
the bank's prior Hen upon stockholders' debts. For the Lower 
Canada banks the most important, and probably the most 



1 The clause was in effect : " And be it enacted that the said corporation hereby con- 
stituted shall not either directly or indirectly hold any lands or tenements (save and except 
such as by the first section of this Act, they are specially authorized to acquire and hold,) or 
any ships or other vessels, or any share or shares of the capital stock of the corporation or of 
any bank in tl. is Province ; nor shall the said corporation, either directly or indirectly, lend 
money or m.Ke advances upon the security, mortgage, or hypothecation of any lands or 
tenements, or of any ships or other vessels, nor upon the security or pledge of any share or 
shares of the said corporation, or of any goods, wares or merchandise; nor shall the said 
corporation, either directly or indirectly, raise loans of money or deal in. the buying, selling 
or bartering of goods, wares or merchandise, or engage or be engaged in any trade whatever 
except as dealers in ^old and silver bullion, tiills of exchange, discounting promissory notes 
and negotiable securities, and in such trade generally as appertains to the business of bank- 
ing. Provided always, that the said corporation may take and hold hypotkeques and mort- 
gages on real estates and property in this province, |by way of additional security, for debts 
contracted to the corporation in the course of their dealings." 

* The Bank of the Niagara District was permitted to issue notes for less than £i to }( 
of paid-in capital, 4 and 5 Vic, Cap. 96, § xiii. 

* The notes of the Quebec Bank were to b< payable at the place of date and issue as 
well as at the head office of the bank. In 1849 this provision was amended to conform to 
that in the other bank charters. Aftei 1842, the greater number of what had been, techni- 
cally, offices of discount and deposit, were changed into branches, i.e., banks in every sense 
of the term. The head otfices ceased to be the sole places of date and issue, but notes other- 
wise issued were payable only at the branch where they were dated and not at the principal 
office. 







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92 The Canadian Banking System, 1817-1890 

objectionable innovation, was the imposition of the double 
liability upon their shareholders, a restriction which they 
had escaped at the time it was required of the younger 
banks of the Western Province in 1833-34. 

The Royal assent to the four laws was not proclaimed until 
the 27th April, 1842. In October assent was granted to Acts 
extending, on similar conditions, the charters of the Bank of 
Upper Canada and Commercial Bank of the Midland District, 
permitting additions to their capitals and subjecting their share- 
holders, like those of other banks, to the double liability. The 
increased banking capital thus authorized was for the — 

City Bank, - 4 & 5 Vic, cap., 97 /loo.ooo 

Quebec " - " " " 94 i50,ooo> 

Bank of Montreal " '* '' 98 250,000 

BankofN. D. " " " 96 100.000 

Commercial Bank, 6 " " 26 300,000 

Bank of U. Canada, 6 " " 27 300,000 

Total /i, 200,000 

Total existing capital, ist July, 1841, say ^'1,985, 000 

In 1842, certainly, there was no monopoly of banking invest- 
ments. Whoever wished might buy. Nor was there other 
monopoly. The freedom with which charters were afterwards 
gr-'.nted shows that the business was opened to more promoters 
than could provide the capital wherewith legally to qualify to 
enter it. 

The Lower Canada banks and the Bank of the Niagara 
District had been granted but two years within which to secure 
the new capital authorized. The other Upper Canada banks 
got five years, and in 1846 the term was extended to 1850. (9 
Vic, caps. 86 & 87.) In 1846 these two, together with the 
Bank of the Niagara District, were authorized to set aside 
;^i 50,000 each and ;^5o,ooo of stock respectively, to be known 
as *' English stock," the dividends to be made payable in Lon- 
don and books to be opened in that city for the transfer of 
shares. (7 Vic, cap. 62.) This is a second indication of the re- 
viving prosperity of the Province and the demand for loanable 



I Already authorised by Royal Charter. 



Province of Canada, 1841-50 



98 



capital of which one of the first signs is the increase of stock 
authorized in 1841 and 1842. 



§ 19. — BANK RETURNS FOR 1S4I ; THE BANK OF BRITISH NORTH AMERICA 
AND LA BANQUE DU PEUL'LE 

Altogether there were ten banks that reported to the com- 
mittee of 1841. One of these, the Bank of the People, in Tor- 
onto, had already been sold to the Bank of Montreal, and re- 
ported only the amount of its stock. Two others, the Farmers' 
Joint Stock Banking Company and La Banque du Peuple, were 
private banks acting under a deed of settlement and articles of 
co-partnership, respectively. A fourth, the Bank of British 
North America, was a company formed in 1836, with a nominal 
capital of /"i, 000,000 stg., by British capitalists interested in the 
prosperity and commerce of the North American colonies.^ 
;^690,ooo of the capital were at first paid up and employed from 
1836 to 1840 in a banking business extending to both the Can- 
adas. New Brunswick, Nova Scotia and Newfoundland, 2 An 
Act of the Imperial Parliament authorized the bank to sue and be 
sued in the name of an officer in England, and similar Acts were 
obtained from the provincial Legislatures in 1837 and 1838. ^ The 
Nova Scotia Act recites that the company had introduced the 
system of cash credits and of allowing interest on deposits, 
usually known as the Scotch system of banking. To obviate 
the difficulty of acting under many different statutes, the direc- 
tors applied for a Royal Charter in 1840. They obtained it, 
one condition bemg that the capital of a million pounds should 
be fully paid up, and another, that no notes under the value of 
£1 currency should be issued. The liability of the stockholders 
was limited to the amount of their subscriptions. 

The condition of the banks on days near the ist July, 1841, 
was as follows : — * 






I 



*t 



1 Vide R. M. Martin, History, Statistics and Geography of Upper and Lower Canada, 
London, 1838. On p. 277, the author claims for himself and a Wm. Medley, Esq., the credit 
of first proposing and of interesting others in the establi';hment of the British Banlc. 

s Journal of the House of Commons of the Dominion of Canada, 1869, Appendix I, p. 67. 

3 7 Wm. IV., cap. xxxiv., U.C. ; 8 Wm. IV., cap. xvi., N.B. ; i Vic, cap. xxiv,, N.S. ; i 
Vic, cap. XXV., L.C. 

4 Journal, Can., 1841, Appendix O, statement F. 



i ''i 



I' ' i! 



94 



The Canadian Banking System, 1817-1890 



July I, 1841 : 



Banks 



Bank of B. N. America. . 

Montreal Bank 

Peoples', Toronto. ...... 

City Bank 

Banque du Peuple 

Com.Bk of Midland Dist. 
Bank of Upper Canada. . 

Farmers' Bank 

Gore Bank 

Quebec Bank 

Total currency 



Capital 


Circulation 


Total Specie 


Deposits 

1 


/ 


£ 


£ 


£ 


690,360 


50.564 


45,828 


184,899 


500,000 


227,048 


125,175 


234,686 


50,000 


.... 


.... 


.... 


200,000 


108,572 


20,378 


50,700 


"5.759 


58,211 


8,170 


25,360 


200,000 


205,429 


82.890 


98,671 


200,000 


142,849 


55.125 


144,093 


45,122 


14.350 


7,867 


3.079 


100,000 


77.177 


26,385 


14,481 


75,000 


37.787 


15,069 


55.2W 


2,325450 


921,991 


386,891 


811,191 



Discounts 

£ 
575.752 

936,553 

340,391 
183,378 
461,615 
406 927 
54.281 
165,236 
145.362 

3.269,499 



Viger, De Witt et Cie., the French partnership in conimen- 
dam, were incorporated in 1843 as ^' La Banque du Peuple." The 
principal office was to be as formerly in Montreal, and the 
authorized capital ^200,000, the full payment of which was re- 
quired within two years from the passing of the Act. (7 Vic, 
cap. 66.) The character of the partnership and the division 
of powers, profits and liabilities between the two cla'^'^es of 
partners have been sufficiently described near the close of 
chapter II. This peculiar constitution, in its origin a mediaeval 
device to evade the prohibition of usury, was continued by the 
charter, and the stockholders have obstinately clung to it ever 
since. The qualification of the principal partners or " mem 
bers " was the ownership of not less than forty shares each, of a 
total value of ;^5oo. New members might be admitted and oM 
ones withdraw, proper notice being given of the change, but 
the total number of members was never to be less than seven 
nor more than fifteen. The corporation as thus constituted was 
subjected to the same restrictions as to note issue, total liabili- 
ties, suspension of redemption in specie, etc., and granted the 
same powers, as the joint-stock banks. 




I 20. — CORRESPONDENCE WITH RESPECT TO THE DOLLAR NOTE CIRCULATION 

The circular of Lord John Russell contained certain regu- 
lations respecting the issue of bank notes under £1 currency, 



Province of Canada, 1841-50 



d« 



which had been embodied neither in the Committee Report of 
1841, nor in charters passed in that year. But as those Acts 
had been fully considered by the local Legislature and the Gov- 
ernor-General, as a disallowance might have caused embar- 
rassment in Canada at the time, and as the power of regulating 
the note issue in the future was reserved by the charters to the 
Legislature, the Queen was advised to confirm them.^ Her 
Majesty's Government, the Governor-General was informed, 
attached great importance " to the early reduction of that small 
paper circulation to which the Acts in question give encourage- 
ment," and it was hoped " that the Canadian Legislature will at 
an early period revise this part of the system of banking in the 
province, and secure to the people of Canada the benefit of a 
metallic circulation, which is incompatible with the circulation 
of paper of this description. "2 

A charter was passed in 1846 the effect of which would have 
been to extend the small note circulation. The Imperial 
authorities felt that the Canadian Government had had in four 
years ample time for considering the tendencies of their system of 
banking, that the reasons of temporary expediency entertained 
in 1842 for waiving their objections to five sh.lling bank notes 
did not equally apply to the new measure, and that the existence 
of rights of issue formed no reason for the concession of similar 
rights to new establishments. Pvivileges of issue by banks in 
the United Kingdom before the Acts of 1844 and 1845, had been 
withheld from banks formed after a certain date. They believed 
that a dollar note circulation was unsound and dangerous. The 
same reasons which prompted the abolition of £1 notes in 
England, called, in their opinion, for the restriction and ulti- 
mate discontinuance of the dollar notes in Canada. ^ Earl 
Grey, however, was unwilling that the bill should be abruptly 
disallowed. Accordingly he referred it back to Lord Elgin and 
the executive council of the province, v 1th the promise that if 
they thought a change Inexpedient the Royal assent would not 



I Journal, Can., 1843, p. 49, Despatch, No. 103. 

« Ibid. 

a Journal, Can., 1847, Appendix W, Despatch respecting the Bill of last session 
incorporating La Banque des Marchands. 






Hi.: 



V i ' v> 



f ■ f I 



mirr 



96 



The Canadian Banking System, 1817-1890 



be withheld. The Canadians favored the retention of their dollar 
notes and assent to the bill was promulgated in Jan., 1848. 

This was the last noteworthy endeavor of the Lords Com- 
missioners of H. M. Treasury, acting through the Colonial 
Office, to substitute " a currency founded on a sound and 
metallic basis " for the dollar notes issued by the Canadian 
banks. Those notes, though objectionable from a theoretical 
standpoint, were not the cause of practical inconvenience or 
loss. The dangers of an excessive issue were averted by the 
limitation of notes under £1 to one-fifth the paid-in capital stock 
of the issuing bank, and the active system of redemption 
between the banks. And when, in 1870, the banks finally gave 
up the small note issue, Canadians did not dispense with paper 
of such denominations — they simply transferred the issue to the 
Government. i 

§ 21.— IMPERIAL REGULATIONS OF 1846 

The despatch quoted in § 20 called attention to other 
deviations from the last regulations respecting colonial banks. 
These provisions, somewhat different from those of 1840, were 
communicated in 1846, together with the following self-explan- 
atory letter : — ^ 

Circular, 30th May, 1846, with Revised Regulations to be observed in incor- 
porating banking companies in the Colonies. 

My Lord,— On the 4th of May, 1840, Lord J. Russell transmitted to 
you a copy of certain regulations, the observance of which, in all charters or 
Legislative enactments relating to the incorporation of banking companies 
in the Colonies, Her Majesty's Government then considered of much i n- 
portance. The correspondence which has since taken place on subjecla of 
this nature, and the arrangements adopted by Parliament in regard to Banks 
of Issue in the United Kingdom, appear to Her Majesty's Government to have 
rendered necessary some modification of those regulations, with a view to 
bring them into exact correspondence with the principles on these subjects, 
established in this country. • ♦ ♦ • 

These regulations are forwarded to you, not, of course, as inflexible 
rules to be in all cases insisted on, but as embodying the general principles 
to be observed in the preparation of Colonial Acts for the incorporation of 
banking companies, and Her Majesty's Government consider a compliance 



I Journal, Can., 1847, Appendix W. 




Province of Canada, 1841-50 



97 



with all the more material conditions and restrictions of much importance 
to the security of the communities in which such banks may be estabUshed, 
and more especially to the poorer classes of such communities. I must, 
therefore, impress upon you the necessity of using all your legitimate 
influence to procure their introduction into any Bills which may be brought 
into the Legislature of the Colony under your Government, for the incorpor- 
ation of banking companies ; and with this view it might be well that you 
should communicate with the promoters of any such Bills, in which these 
considerations may be omitted, and point out to them that the instructions 
which you had received from Her Majesty's Government would place you 
under considerable difficulty in assenting to any such Bill, should it pass the 
Legislature in its actual form. I can hardly doubt that such a communica- 
tion, aided by an explanation of the grounds on which Her Majesty's Gov- 
ernment have proceeded in drawing up these regulations, would have the 
desired effect ; but if not, and you should nevertheless feel it your duty to 
assent to the Act, it would be necessary in transmitting the Act for the signi- 
fication of Her Majesty's pleasure, that you should accompany it by a full 
report of the grounds on which you have proceeded. 

I have, etc., 

W.E.Gladstone. 
Lieutenant-General, 

The Earl OF Cathcart, K.C.B., etc, etc., etc. 

Following Mr. Gladstone's letter are twenty regulations. 
The essential variations from the report of 1841, and the exist- 
ing legislations, are : 

(a) When shares are transferred between the period of the 
grant of the charter and the actual commencing of business by 
the bank, the responsibility of the original holder to continue 
for six months, at least, after the date of the transfer, § 8. 

(6) The total debts of the company not to exceed thrice the 
paid in stock, " over and above the amount of deposits or 
banking accounts with the company's establishments," § 13. 
(The expression in the report is " deposits of specie and Gov- 
ernment paper.") T he utility of this provision particularly 
after circulation was limited to paid-in capital. 

(c) No promissory note to be issued for less than £1 
Halifax currency, and none for fractional parts of such pound, 

§ 14- 

(rf) Breach of the special conditions upon which the com- 
pany is empowered to open banking establishments, or to issue 
and circulate promissory notes, to forfeit those privileges, which 



m 






r> 



i 
^ 



-t^- 



1 tl 



'11 



r 



98 



The Canadian Banking System, 1817- 1890 



shall cease and determine upon such forfeiture as if the period 
for which they had been granted had expired, § 18. 

(e) The charter or Act of Incorporation may provide for 
additions to the capital of the company, within specified limits 
with the sanction of the Lords Commissioners of the Treasury, 
such additions to be subject to all conditions and regulations 
applymg to the original capital, § 20. 

The retention in Canada of notes under ^i, and the waiver 
of their objections by the Lords of the Treasury, have been 
noticed in § 20. The Legislature did not venture to per- 
mit increase of capital stocks without its express authority 
for each instance. But the provision of regulation number 8 
was embodied in subsequent charters as a necessary safeguard 
against subscriptions in bad faith or decoy subscriptions to the 
stock of new banks. So, too, penalties of charter forfeiture were 
imposed for breach of the various conditions on which corporate 
powers and privileges were granted, just as that penally had 
been attached to the condition that no suspension of specie 
payment should exceed sixty days, consecutively, or during 
the year. ^ 

The document just described concludes, for the present, 
the account of the relations of the Lords of the Treasury to the 
legislative development of the Canadian banking system. It 
has been shown that three of the most important groups of 
restrictions were not imposed upon Canadian banks until after 
the Treasury regulations of 1833, 1840 and 1846, respectively, 
had been transmitted to North America. It has appeared that 
certain new precautions substantially similar to those recom- 
mended were taken with regard both to existing banks and new 
establishments soon after the Treasury circulars were received, 
via Downing Street. In the sketch of the banking systems of 
Nova Scotia and New Brunswick, it will appear that, about 



1 C/. 10 and II Vic, cap. iia, an Act to incorporate the District Bank of Quebec. 
18 Vic, cap. 202, an Act to incorporate the St. Francis Bank. 

18 Vic, cap. 202, an Act to Incorporate the Molsons' Bank. 

ig Vic, cap. 76, an Act to amend and consolidate the several Acts incorporating 
and relating to the Bank of Montreal. 

19 and 20 Vic, cap. 120, an Act, etc., (similarly for the Commercial Bank). 

ig and ao Vic, cr.p. 121, an Act, etc., (similarly for the Bank of Upper Canada). 



<«■ ,: Kt. 



^:«P' 



Province of Canada, 1841-50 



99 



the same time, like restrictions were adopted by those colonies 
for the government of their incorporated banks. The corres- 
pondence of 1833-1834 with Upper Canada, the protest of the 
colonists that banking is a local matter, the subjection of the 
Gore Bank to the double liability and other provisions, the 
supervision of legislation in the years immediately before and 
after the crisis, finally the action in 1841 of the Select Com- 
mittee upon Banking, are pertinent incidents, but they form 
only links in the chain. It must be remembered that before the 
Banking Acts of 1841 and 1842 came into effect they were sub- 
mitted to British inspection, and that the regulations of 1846 
were, in due time, enacted as Canadian law. From evidence so 
varied, forcible and clear as the facts presented, two conclusions 
are not to be avoided. One is, that through the Lords of the 
Treasury the ripe experience of Britain in matters of banking 
was used for the direct advantage of the colonists ; the other, 
that in 1850 the more important safeguards in British American 
bank charters were primarily due, not to the wisdom of local 
legislatures, but to the judicious intervention of the Imperial 
Government. 




§ 22.— 1847 - t8«;o . '. • 

Canada ha shared, to a considerable degree, the commer- 
cial recovery from the trying losses of 1837- 1839. Indications 
of this were apparent as early as 1841, when the banks secured 
provision for the increase of their capitals. The business of 
1843 was described as sound and legitimate, with few and unim- 
portant failures.^ The improvement in 1844 was still more 
active, and the banks were able profitably to employ the large 
amounts of capital which had been at low interest the year pre- 
ceding.^ The growth proceeded, and in 1846 a considerable 
extension of commerce and agriculture to new districts was a 
feature of the situation, 'n February the bank note circulation, 
only ;^953,9i6 four years before, touched ;^i, 681,248, nearly the 



« Binkers' Magaxinc, Vol. j, London, 1844, p. 325. 

« Ibid, Vol. 3, Report of the MeetiaK of the Bank of British North America. 






\ 



V 



u 



iiii 

! if 



I, II 




5 '•': 
S (5 



I'h 



5 



! 



ill: 



100 



The Canadian Banking System, 1817-1890 



highest amount reached during the period 1841 to 1848.* But 
the money pressure in England was felt, and though the state 
of trade seemed satisfactory, shrewd onlookers of Canadian 
events had some apprehension for the near future. * The im- 
portations of 1847 were excessive. The consternation caused 
by the English railway crash spread to Canada. Numerous 
commercial failures occurred involving large liabilities. Lower 
Canada, or Canada East, as it was now called, suffered the most, 
partly because the previous expansion had there been more pro- 
nounced. Extreme depression followed in 1848. The effects 
of the free trade policy of Lord John Russell and his party were 
first felt in their full force. Canada had lost the partial mono- 
poly in timber and other natural products established in its 
benefit by the old protective system. The exports of pease fell 
25 per cent., of wheat 60 per cent., flour 40 per cent., oats 
over 75 per cent., barley nearly 80 per cent., and pork 45 per 
cent. The stop put to British railway extension especially 
afifected the timber trade. A large stock of timber was wintered 
at Quebec ; in every article but white pine, the exports of 1848 
fell from those of 1847 by percentages ranging from 14 for deals, 
25 for elm, 33 for ash, to 50 per cent, for oak timber.* The 
imports of 11848 fell to ;^2,958,798, ;^837,049 less than in 
1847. ; : 

Such an economic shock reacted, of course, upon the banks- 
Their circulation, which stood in March, 1847, at ;^i, 684,413, 
had diminished by ^"32 1,000 on the 31st December, and fell to 
;^i, 1 14,208 in June, 1848. They could have accepted this con- 
traction alone, without complaint. It was, however, accom- 
panied by losses of other kinds. In 1848 and 1849 the Bank of 
British North America was obliged to set aside ;^43,ioo for bad 
debts, reduce its dividend to 5 per cent., and take ;^6,ooo from 
its rest.* The City Bank wrote off a rest of £2'j,^j$, the Gore 



> Journal, Canada, 1849, Appendix, Return to an Address of the Legislative Assembly, 
dated 29th January, 1849. 

« Bankers' Magaxine, Vol. 6, p. 106. 

• Journal, Can., 1849, Appendix Z. Montreal Brokers' Circular, ajth March, 1S49. 

■I Bankers' Magaxine, Vol. lo, p. 443. 



Province of Cnnada, 1841-50 



101 



Bank lost the whole of its rest.^ In 1849 thf; capital of the 
Gore Bank was reduced from ^100,000 to ^80,000, on account 
of the losses it had suffered (12 Vic, cap. 149); and that of 
the City Bank from ^500,000 of authorized stock to ^375,000, 
the paid in stock from ;f 294,000 to ^"22 1,000, the value of each 
share from £"25 to £18 los. (12 Vic, cap. 145). The Quebec 
Bank paid dividends of only 3, 2, and 4 per cent, in 1848 to 
1850. The dividend of the Bank of Upper Canada was reduced 
from 7 per cent, to 4 and 4^ in the years succeeding the crisis, 
and more than ;^6,ooo was deducted from its rest. The Bank 
of Montreal suffered more after the fashion of the Lower 
Canada banks, reducing its rest by ;^6o,ooo, and its dividend 
from 7^ per cent, in 1846, to 6 per cent, in 1849. 

But not a single chartered bank failed, specie payments 
were maintained throughout, and the losses suffered were borne 
by the shareholders alone. 

In 1848 the Legislature had passed Acts permitting various 
additions to the capitals of the Montreal, Quebec and City 
Banks, and in 1849 to that of the Gore Bank. Additions amount- 
ing, in all, to ^750,000, were authorized, and in the latter year 
the time for paying up these as well as the additions previously 
permitted to the Bank of Upper Canada, and the Commercial 
Bank, were extended to April, 1852.* 

A general Act of 1850, concerning the chartered banks, de- 
clared their right and power to take, hold and dispose of mort- 
gages and hypothlques upon personal, as well as real property, 
by way of additional security for debts, contracted to them in 
the course of their business. They were authorized to purchase 
lands or real estate offered for sale under execution at the suit 
of the bank purcVasing, or exposed for sale under a power of 
sale given t^ the bank. The banks might finally acquire and 
hold an absolute title, either by release of the equity of re- 



' < (-[pi 

: 'i':- 

- 'M 



I Journal, Can., 1859, Appendix, No. 67. 

• 10 and II Vic, cap. 115, Provincial Statutes of Canada. 

10 and II Vic, cap 114, " 

10 and II Vic, cap. 116, " 

la Vic, cap. 149, " 

12 Vic, cap. 170, " 

12 Vic, cap. 184, " 

u Vic, cap. 185, " 



Si 



'^tfi^* 




102 



The Canadian Banking System, 1817-1890 



demption or foreclosure in the Court of Chancery. (13 and 14 
Vic, cap. 22.) This legislation is to be explained not as an 
extension of the loaning powers of the banks, but as protection 
to them against loss upon overdue debts. It is best understood 
in connection with the agitation for increased banking facilities, 
and greater assistance to the less important communities, the 
discussion of which is reserved for the next chapter. 



CHAPTER V 



PROVINCE OF CANADA, 1850-1867 



§ 23. — THE FREE BANKING ACT OF 1850' ' • 7 

In the session of 1850, the Honorable William Hamilton 
Merritt introduced in the Legislative Assembly a bill " to 
establish Freedom of Banking in this Province, and for other 
purposes relative to Banks and Banking." 

The group of large chartered banks which* had hitherto 
carried on the banking business of the Canadas seemed to the 
general public to be insufficiently equipped with capital. Their 
efforts, indeed, during the eight years preceding to secure 
additional capital authorized by the Legislature, had met 
only a partial success. The new banks incorporated in 1841 
and 1847, three in all, had failed to secure the capital required 
by law before they could begin operations, and had forfeited 
their charters by non-user. These facts were not considered as 
evidence to the effect that Canada already had all the banking 
investments it could attract. Complaints of a lack of banking 
facilities were frequent, and there was a wide-spread agitation 
for an increase of bank capital, for the territorial extension of 
banking facilities, and particularly for the incorporation of small 
banks in the lesser towns, where local opportunities for accom- 
modation were much desired. 

Important safeguards in the existing system were the large 
capital stocks of the banks, the small number doing business, 
the broad fields from which they drew their business, and the 
prudent and cautious manner in which that business was, as a 
whole, conducted. It was thought that in maintaining the sys- 
tem it would be very difficult for the Legislature to refuse to in- 



1 §§ 23-27, inclusive, have been re-written from tiie article " Free Banking in Canada," 
published in the Journal of the Canadian Bankers' Aswciation for March, 1894. 

8 



■ H 






i|i;if 



i; 






104 



The Canadian Banking System, 1817-1890 



corporate small banks for the small towns. But to allow such 
institutions the important privileges of the chartered banks, 
especially that of circulating notes as only a general charge 
against assets, seemed too great a risk. If small banks were to 
be established, it was necessary to devise some other plan for 
issuing a sound currency.^ There was no bank of such pre- 
dominant position that to it alone, as to the Bank of England, 
the function of issue could be entrusted ; after the failure of Lord 
Sydenham's proposals of 1841, there was no probability of estab- 
lishing a Government Bank of Issue ; and the Government itself 
was in such pressing financial need that any step towards relief 
would be welcome.^ 

The Banks of Montreal and British North America then 
(June, 1849) exclusively had the account of the Government. 
The one refust;d absolutely to furnish exchange for ;^io,ooo on 
the three months' note of the Receiver-General, to meet interest 
payments in England ; the other, in respect to a similar sum, at 
first demanded collateral security, and finally also refused. But 
when the specie, come by lucky chance into the Government 
chest, was produced, both banks found the required exchange. » 

Already, in 1830, it had been proposed to establish a 
" system of banking founded upon capital invested in perma- 
nent securities, and limited according to amount of capital stock 
so invested." The plan was then rejected as '• too difficult in 
the present state of the Province."* Canadians in the mean- 
while had noticed the evils sustainec' by the public of the United 
States from systems of banking which resembled their own, in 
so far, at least, as each were chartered systems. More particu- 
larly had they observed the banking legislation of New York. 



I Journal, Can., 1851, Appendix Ll, p. 202, Memorandum of the Inspector-General 
upon 13 and 14 Vic, cap. 31. 

» The whole period, 1847 to 1852, was one ot severe depression for Canada, who had 
lost, by the free trade policy 0/ Great Briiian, the advantages enjoyed in the era of protection. 
"Thteefouiths," it was said, " of the commercial men are bankrupt owing to fee trade." 
They had been stripped of their partial monopoly in such commodities as Canada produced. 
Tlie people v/eie economically desperate, and hiKhlv susceptible to fomentation into political 
discontent. In order to meet just demands upon tne Pi ov'ncial Government, for wljich the 
public funds were insufficient, it became necessary in ii34^ to issue six per cent, debentures 
payable in one year after date, and for sums as low as (10 (£2 jos.). (13 Vic, cap. 5.) At the 
time, of course, these were negotiable only under par. 

» Vide "Reminiscences, etc.," Hincks, pp. 188, 197, and Journal, Can., 1854, Ap- 
pendix, E.E. 

« Journal, U.C«, 1831, Appendix, p. 201,2nd Repoitof the Select ComiTiittee on Currency. 



Province of Canada, 1850-67 



1 ,<i. 



106 



Thus Mr. Francis Hincks, while advocating in 1838 a general 
banking law, commented upon the recommendation contained 
in the last message of the Governor, and endeavored to show an 
analogy between the situation there and in Canada. The " free 
banking " law of New York had been in force since 1838. 
After a costly experience, the statute had been so altered and 
amended that in 1850, with only United Stf'^tes or New York 
securities receivable on deposit with the State, with a system of 
immediate note redemption, with each bank confined to a single 
place and obliged to exercise there the discount and deposit, as 
well as issue functions, and with the stockholders subjected to 
double liability, it presented a carefully wrought out system of 
banking law. 

The commeicial relations between the Upper Province and 
New York had long been close and important. When the 
economic conditions of the two countries were compared, New 
York, no doubt, appeared to marked advantage. The legisla- 
tion of New York, therefore, was not unlikely to be regarded by 
Canadians as recommsnded by the success, prosperity and credit 
of the State in which it was in force. Its influence was not 
necessarily the weaker because the judgment as to results was 
not entirely logical. The emphatic adherence given to tree 
banking ^ by Millard Fillmore, as comptroller of the State for 
1849, was followed by the adoption of laws drawn on the New York 
model, in Massachusetts, Ohio, Vermont, Wisconsin, and other 
American States. 2 Canadians also remarked that the system 
had worked satisfactorily and that its effect had been to raise 
the value of public securities very materially. ^ 

They overlooked the fact that in New York the free bank- 
ing system had been established primarily as (a) an escape from 
the complete monopoly of banking, discount and deposit, a-i 
well as issue, conferred upon the chartered banks in 1818, and 
(6) a remedy for the shameless, corrupt and unendurable prac- 
tice of regarding bank charters as spoils for the victorious 
party to deal out as rewards for partisan services.* The char- 



» Report of the CompiroUer of the State of New York, 1849, pp. 55, 56. 
a Report of the Comptroller of the Currency, Washington, 1876, p. 35. 
Journal, Canada, 1851, ut supra. 
* Comptroller's Report, N.Y., 1849, p. 54. 












: . 1. 



f-:- 






■ 




106 



The Canadian Banking System, 1817- 1890 



tered banks of Canada, on the other hand, enjoyed no exclusive 
privilege save in the function of issue. Even in that there was 
abundant competition. Nor was there then the suspicion even 
of corruption or partisanship in the distribution of bank charters. 
But in spite of the lack of analogous conditions, in spite of the 
facts that twenty-nine New York banks had failed in the first 
five years of the law's operation, and that the special deposits of 
securities realized but 74 per cent, of the defaulted notes,' 
Mr. Merritt's bill was modelled after the free banking laws of 
New York. Its objects are sufficiently described as (a) to pro- 
vide for the establishment of small banks, (6) properly to secure 
their circulation, (c) to relieve, in part at least, the financial 
difficulties of the Government by widening the market for its 
securities, and at the same time so stimulating the demand as 
to raise their value. • 

The measure as passed (13 & 14 Vic cap. 21) first repealed 
the old laws of Lower Canada (Ord. L.C. 2 Vic. (3), cap. 57), 
" to regulate private banking and the circulation of the notes of 
private bankers," and of Upper Canada (7Wm. IV., cap 13), 
"to protect the public against injury from private banks." 
Henceforth it became lawful only for chartered banks or other 
corporations or persons authorized under the new Act to issue 
circulating notes, which were to be of the value of 5 shillings or 
over. Notes under 5 shillings were prohibited. So also circu- 
lation by unauthorized persons was forbidden on penalty of fines 

of ;^IOO. -' 

The significant provision of the Act is the extension of the 
privilege of note issue " to other persons or corporations thereunto 
authorized as provided for herein." Individuals or general partners 
might establish banks, or joint stock companies might be formed 
to carry on the business, but in any case the bank was to have 
an office in but one place, and in but one city, town or village. 
Of the companies was required a minimum capital stock of 
;^25,ooo, divided into shares of ;^io or more. Articles of agree- 
ment in notarial form, showing the name, place of business, 
capital stock, number of shares, names and residences of the 
shareholders and the time when the company should begin and 



m^^ 



I Report of the Comptroller of the Currency, 1876, p. 33. 




^4Ur^ ^ ?!"!*> " 



Province of Canada, 1850-67 



107 



end, were the legal basis for organization. After the articles were 
duly filed in stipulated courts of record, the companies became 
incorporated, and the liabilities of the shareholders limited to 
double the amount of their subscribed stock. The total liabili- 
ties of a joint stock bank were not allowed to exceed three times 
its capital stock. Every institution working under the Act was 
required to keep bond fide an office of discount and deposit, at all 
times to keep exposed in its place of business a list of its part- 
ners or shareholders, and to make detailed semi-annual returns 
to the Inspector-General, as well as to submit to official in- 
spection at the discretion of the Government. 

In order to issue notes the banks thus formed were each 
obliged to deposit with the Receiver-General provincial securi- 
ties for net less than ;i^25,ooo currency ($100,000), par value, in 
pledge for the redemption of their notes. Interest on the securi- 
ties was to be paid to the depositor as it accrued, and against 
the bonds the Receiver-General was authorized to deliver to 
the bank an equal amoimt of registered notes, printed from 
plates furnished by the bank upon paper selected by the Receiver- 
General. When signed by the proper officer these notes were to 
become notes of the bank. In every case they were to be pay- 
able in specie on demand at the bank's place of business. They 
were to be marked " Secured by provincial securities deposited 
with the Receiver-General," and were to be receivable for all 
duties and sums due to the provincial Government, so long as 
the issumg bank redeemed its notes. These registered notes 
were exempt from the rate of i per cent, per annum levied upon 
the average monthly circulation of the chartered banks. The 
third or fiscal object of the Act is especially plain in that clause 
which permits the chartered banks to surrender their right of 
circulation against assets, and to secure from the Receiver-Gen- 
eral registered notes in return for deposits of securities. Any of 
the corporations within the purview of the Act might deposit 
additional securities from time to time, and withdraw sums of 
not less than ;^5,ooo, provided that like amounts of the notes 
were returned to the Receiver-General and the required deposit 
of ;^25,ooo maintained. 

If, in case of suspension of specie payment and protest of the 
notes, the paper was not paid with interest at 6 per cent, within 



y^ 



. ii 




108 



The Canadian Banking System, 1 817- 1890 



i^i 



ten days after the requisition issued by the Inspector-General of 
the province upon receipt of the protested notes, that officer was 
commanded to close the institution and wind up its affairs, should 
it have no valid excuse to offer for the default. The process of 
liquidation was to be completed by a Receiver appointed by the 
Receiver-General. His duty was^rs^ to pay off the notes from 
the proceeds of the securities on deposit. The remaining pro- 
ceeds were then to be applied with the other assets to settlement 
of the remaining debts of the bark. But if insufficient funds 
were realize'." *"rom the sale of the securities, the general assets of 
the bank wi-re tu be applied to the payment of the notes before 
they were used for the other claims. This is the first appearance 
in Canadian legislation of that principle of making bank notes a 
preferred claim, which, 30 years later, was embodied in the Bank 
Act of the Dominion. . 




§ 24. — AMENDMENTS AND SUPPLEMENTARY MEASURES 

The *' Act to establish Freedom of Banking " could hardly be 
called perfect. Time proved it ill-calculated to promote the ends 
of the Legislature which passed it. The amendments passed in 
the following years show that certain of its defects were recog- 
nized. From the very first it suffered severe criticism on the 
part of the English Lords of the Treasury. The most serious 
defect of the Act, in their opmion, was the lack of guarantee for 
the immediate convertibility of the notes on demand. Against 
the fancied completeriess of Government obligations as " se- 
curity," they cite the fall of Exchequer bills to 35 shillings dis- 
count in 1847. Anxious as always that the financial and mone- 
tary systems of the colonies should be sound, they warn the 
Canadian Government against the reverses foUowmg too great 
an extension of the facilities which may be afforded by the use of 
paper money. The measure might cause Canadian securities 
to rise temporarily, but they would also be exposed to the risk of 
depreciation should it become necessary to throw them into the 
market in order to provide for the payment of bank notes. In 
the opinion of the Lords of the Treasury, the great protection 
against over issue was the constant maintenance of a propor- 
tionate reserve of specie against the outstanding circulation, with 



Province of Canada, 1850-67 



109 



i.i: 



i 1; 



Government supervision and frequent publication of bank state- 
ments. They recommended the requirement of a specie reserve 
of one-third of the notes issued, and of monthly statements.* 

The following year, accordingly, an amendment was passed 
requiring monthly statements from the free banks. (14 and 15 
Vic, cap. 69.) It is plain that half yearly returns provided 
a basis for intelligent criticism to neither the Government nor 
the public. The period of one year in which to retire their 
circulation and begin operations under the new plan accorded 
by the Act of 1850 to banks or companies whose authority to 
issue notes had been withdrawn, was increased to five 
years, provided that in each year of the next four they 
should retire one-fourth of the average circulation, during 1850, 
of notes not secured by a deposit of bonds. The requirement 
of a specie reserve of one-third was not adopted. 

In the same session, the Assembly passed another Act with 
a view "to encourage the chartered banks to adopt as far as 
conveniently practicable, the principles of the General Banking 
Act in regard to the securing of the redemption of their bank 
notes." (14 and 15 Vic, cap. 70.) The real purpose, of course, 
was a further sale of bonds. The means were (a) a remission 
during the next three years of one-half the tax on circulation to 
those banks willing forthwith to restrict their circulation to the 
highest amount shown in the last sta^^ement, and at the end of 
three years to three-fourths of the average for 1849 and 1850; 
(6) at the end of the three years, entire exemption from the tax 
to banks with note circulation thus restricted; (c) permission 
to such banks to issue in excess of the restricted circulation 
further notes to the amount they should hold of gold or silver 
coin or bullion, or debentures of any kind issued by the Receiver- 
General, the value of such securities to be reckoned at par ; id) 
exemption of these banks from the requirement to deposit the 
debentures and to secure registered notes. But if failures 
occurred the proceeds of bonds thus held by the banks were to 
be applied exclusively to the redemption of outstanding notes. 
Finally, the Act imposed upon the chartered banks the obligation 



Ml 



' I -1! 






ll!!J 



»'•! 



» Journal, Canada, 1851, Appendix, Ll, Letter of C. E. Trevklyan, June 11, 1851. 



jt" 



I 






110 



The Canadian Banking System, 1 817- 1890 



to return monthly, instead of half-yearly, statements of assets 
and liabilities- 

The Act of 16 Vic, cap. 62 (session of 1853), was an attempt 
further " to encourage the issue by the chartered banks of notes 
secured " in this manner. They were permitted to issue notes 
in excess of the limit laid down by their charters, i. e., the 
amount of their paid up capital stock, to the amount of the sums 
held by them in specie or debentures receivable in deposit by 
the Receiver-General, although the deposit of the securities was 
not required. The i per cent, tax upon circulation, also, was 
to be calculated only upon the sum by which the average during 
any period of the outstanding notes of a bank should exceed the 
average of the securities and specie which the bank had on hand. 

For thtje supplementary measures, the only analogy in New 
York legislation is the law of 1849, which permitted the Safety 
Fund banks to continue their business after the expiry of their 
charters, on condition that they should deposit securities with 
the Comptroller and reorganize under the general banking law.^ 
The Canadian measures, however, seem strongly to reflect the 
influence upon the Legislature of Sir Robert Peel's Bank Act of 
1844, and the statutes of 1845, which dealt with the Scotch and 
Irish banks. The plan of restricting that part of the circulation 
*' unprotected " by special security, the extension to the banks 
of the privilege of indefinitely increasing circulation beyond 
that limit, provided equivalent values in specie or debentures 
were held, and the repeated efforts to provide as much as pos- 
sible of the fiduciary currency with bond security, are not, to be 
sure, conclusive evidence of this influence. Such regulations 
might have been adopted after independent consideration, or to 
reach other ends than those sought by Lord Overstone, Sir 
Robert Peel and their followers. In Canada too the financial 
purpose, though the laws failed to afford the anticipated help, 
was highly influential. ^ 

But the inference that English example was followed is 
greatly strengthened when v.'e revert to the position of Mr. 
Francis Hincks as Inspector-General at this time and mem- 



1 Bink Statistics, 1849-50,3131 Congress, ist session, H. R. Executive Documents, 
No. 68, p. 132. 

* Journal, Can., 1831, pp.309 and 216. 



iplil!^ 



Province of Canada, 1850-67 



111 



ber of the Executive Council, and to the influence he enjoyed in 
the Legislative Assembly. Ten years before he had supported 
the proposals of Lord Sydenham to regulate the Canadian note 
circulation by means similar to those suggested by Lord Over- 
stone.^ He wrote an energetic defence of Peel's Bank Act 
m 1847.3 As late as 1870 his views were unchanged.^ Mr. 
Hincks, as one of the leaders of the Government, was chiefly 
responsible for the legislation of 185 1- 1853.* The inference is 
practically confirmed by the fact that in June, 1851, the colonial 
office itself advised the Canadians to adopt, as far as possible, the 
principles of Peel's Bank Act in their regulation of banking and 
currency. In Sir C. E. Trevelyan's letter for the Lords of the 
Treasury, transmitted through Downing Street, it is remarked : 
"Although the establishment of a bank in connection with the 
Government appears to have been impracticable or inexpedient, 
it does not follow that some modifications of the scheme adopted 
in the United Kingdom with respect to the circulation, the lead- 
ing feature of which is a limitation to the amount of notes issued 
on the credit of securities, and the maintenance of a deposit of 
specie equal to all issues exceeding that amount, might not still 
be attainable in Canada."* The authority of the officials in 
Downing Street and the promptness with which their recom- 
mendations were usually carried out in the Province leave no 
doubt of the marked effect of this factor on the supplementary 
legislation iit regard to " freedom of banking " 

§ 25. — FAULTS OF THE SYSTEM ' 

The possible dangers or faults of the original Act, pointed 
out for the Lords of the Treasury in the same letter, and noted by 
us on a preceding page, were not, on the whole, the source of 
much trouble in the working of the system. Very few banks, in 
fact, began operations under the law. The system of chartered 
banks remained predominant and characteristic. The obstacles 



I " Reminiscences of Ills Public Life," by Sir Francis Hincks, p. 6g. 

» Montreal Pilot, 23rd October, 1847. 

8 Parliamentary Debates of the Dominion of Canada, Vol. I., p. 216. 

* Journal, Canada, 185 1, p. 209; 1853, p. 1040. 

i Journal, Canada, 1831, Appendix Ll. 



IP 


K '[}. ■d 



■ii 



;; !j 



k 

At 



tr, 



• I, ■ 

■■ ■: I 






, I ..i 









112 



The Canadian Banking System, 1817-1890 



to a thorough trial of the so-called " free banking" were, first, the 
diminution rather than increase of banking facilities which 
its introduction would have brought about, and, second, the in- 
ferior opportunity which it offered for banking profits. The 
obstacles will be examined in their order. 

The bonds receivable on deposit as note securit)' bore interest 
at 6 per cent. The minimum deposit for a bank beginning busi- 
ness was ;^25,ooo currency, or $100,000. The small banks, 
however, which it was expected to establish under this Act, 
would seldom need a capital greater than ^25,000, and, even if 
they needed it, a greater sum would be hard to get m the locali- 
ties whence the demand for such institutions came. But before 
a bank could begin business this hardly-gained capital was to be 
removed from the locality and locked up in debentures. In re- 
turn for these, the free bank was to receive an equivalent amount 
in registered circulating notes. A chartered bank, on the other 
hand, acquired by the privilege of circulation a power of loaning 
to the community, in addition to its capital stock, the amount of 
its authorized note issue. To meet the needs of its district the 
free bank in our example was to derive from capital and circula- 
tion combined a fund of only ^25,000, i.e., the amount of its 
note issue, or rather so much of it as could be kept in circula- 
tion, a proportion which rarely reached 90 per cent., and in 
some cases did not exceed 50 per cent. In brief, ;^25,ooo of 
the capital of the district was to be taken bodily away and re- 
placed by notes, of which only a part were available for loaning 
purposes. If carried out, the scheme to provide banking facili- 
ties for poor communities was destined actually to diminish the 
loanable funds in the districts for whose benefit it was devised.* 

Intimately connected with this fault is the fatal defect of 
the Act — the slight inducement to investment afforded by its 
provisions. With its capital locked up ia debentures there re- 
mained to the free bank, besides its deposits, which need not 
be considered here, the ;^25,ooo of registered notes for sccom- 



> C/., the remarks of Washington Hunt tn an official letter from the office of the 
Comptroller of New York, dated ist May, 1849. "The tendency of the chaime (from the 
Safety Fund system to Free Banking) is to diminish materially the banking facilities en- 
joyed by the comnmnity. To the extent that the charte'ed banks are required to transform 
thitir present capital into permanent securities, as a pledge for the redemption of their bills, 
they must depiive themselves of the means now employed in the regular operations of 
banking." Quoted in Bank Statistics ut supra, p. 139. 



Province of Canada, 1850-67 



118 



niodation of the local public. Of these, we have seen that only 
50 to 90 per Cfiiit. constituted the actual loaninpf fund which 
cou d be turned over several times a year in banking operations, 
and from which could be derived the additional and incidental 
profits that banks, in spite of usury laws and other hindrances, 
will contrive to secure whenever the markets permit. From an 
equal sum invested in one of the chartered banks could be 
gained the banking profit on the capital itself, and the circula- 
tion issued upon the credit of that capital. The advantage, in 
favor of the chartered bank, apart from the important consider- 
ation of its control of much larger means — none of its capital 
being locked up in debentures — was approximately the differ- 
ence between the banking profit on the amount of its capital and 
the interest on an equal amount invested in Government se- 
curities. In other words, the chartered bank would get the 
greater return from both circulation and capital ; the free bank 
from circulation alone, its capital being invested, by law, at a 
lower rate of interest. 

This higher gain to be had from employing their funds in 
their own business, also caused the chartered banks, as a rule, 
to reject the encouragement offered by the Legislature so to in- 
vest those funds in debentures as to make them practically a 
permanent loan to the Government. And in a country where 
the best bank profits were moderate, other investors were slow 
and unwilling to engage in a form of banking in which the 
chances for gain were still more restricted.^ 

§ 26. — STATISTICAL VIEW OF THE FREE BANKS 

Among the chartered banks the Bank of British North 
America alone appears in the statements pubHshed according to 
the free banking laws. A supplementary charter enabled it to 
enjoy under these enactments a valuable privilege withheld from 
it by the original Royal charter, but exercised by the other banks 
under their colonial charters since the time of the first incorpor- 



i Cf. on this point, the remarks of Mr. Merritt, the author of the bill, on the 4th March, 
1859, in the Legislative Assembly; "The cause why the banks have not succeeded under 
the Free Bankmg Act, vtras because h<s (the Minister's) predecessors had abandoned tlie 
policy they had commenced ♦ ♦ ♦ Why did not other banking companies seek charters 
under the Free Banking Act ? Simply because they made more money under the old system.' 



im 



HM 



it; I 
■ a 111 



114 



The Canadian Banking System, 1 817- 1890 



ation. This was the right to issue notes for less than four 
dollars. Until the banks surrendered their small note issue in 
1870, the British Bank appears to have continued its issues 
under this Act. At the close of 1854 three other banks were 
doing business under the Act. Following is the return : — ' 





Bank of 

British 

Norih 

America 


Molsons' 

Bank, 
Montreal 


Niagara 
District 

Bank, St. 

Catherines 


Zimmer- 
man 
Bank, 
Clifton 


Total 


Capital in Provincial T~)eben- 
tures deposited with the 
Receiver-General 

Amount of registered notes 
outstanding and delivered to 
the banks by the Inspector- 
General 


£ 
162,125 

153.750 


50,000 

50,000 
37.861 

85,446 
136,840 


£ 
50,000 

49.999 
46,169 

67,615 
101,642 


£ 
25,000 

24,500 
22,000 

29,321 
49.931 


£ 

287,125 

f :..''. ' •■ ■ ■' 

278,249 


Circulation 




Liabilities, including circula- 
tion ... 


« 


Assets 


f''' .' ■ ■ ■ ', 







The next year operations reach the highest figure in the 
whole history, though only four banks appear in the Statement.* 



Capital in Provincial Deben- 
tures deposited with the 
Receiver-General 

Registered notes outstanding 

Circulation 

Liabilities 

Assets 



Bank of 




Niagara 


Zimmer- 


B. N. 


Molsons' 


District 


man 


America 


Bank 


Bank 


Bank 


£ 


£ 


£ 


£ 


170,708 


50,000 


50,000 


40,000 


169,750 


49.794 


49.999 


40,000 




24.332 


69,0508 


40,000 




24.332 


77,761 


48,817 




79,100 


133.285 


54.585 



Total 



£ . 

310.708 
309.549 



After 1855 there was a steady falling off in the amount of 
securities deposited, notes outstanding against them, and notes 
in circulation. In the statement of 1856 the Provincial Bank 
and the Bank of the County of Elgin first appear, the former 
with a deposit of securities for $120,000 and notes for the same 



1 Public Accounts, Province of Canada, 1854, p. 223. 

« Ibid. 1855, p. 264. 

3 Also issues under charter. 



Province of Canada, 1850-67 



llff 



amount, the latter with securities for $100,000 and notes for 
$79»950- The Molsons', Niagara District and Zimmerman 
Banks, which were chartered in 1855, appear to have been re- 
tiring their secured notes. The total bond deposits are 
$1,114,633.33 (^'278, 658) and notes outstandmg $1,080,684 
(;^27o,i7i).^ In 1857 the figures have fallen to $770,319.33 and 
$769,730.2 In 1858 they are $730.503-33 and $729,53!' and 
the Molsons' and Zimmerman Banks disappear from the 
list. In 1859 the bond deposits are $730,503.33, and notes out- 
standing, $699,531 ; in i860, $562,603.33, and $495,631, of 
which the British Bank stands for $440,933.33 and $373,964, 
about $100,000 less than in the statements for 1857 to 1859.^ 

By December, 1861, the Niagara District Bank had nearly 
withdrawn its provincial securities, and the Provincial and 
County of Elgin Banks had only $2,000 and $20,440 of bonds, 
respectively, on deposit.* At the end of 1862 the British Bank 
held securities for $436,933.33 ; its registered notes amounted to 
$336,964, of which $130,505 were in circulation.* But the Pro- 
vincial Bank had deposits and circulation of only $9,729, and 
the Bank of the County of Elgin had disappeared both from the 
Government statement and the world of business. To all 
intents and purposes, free banking in Canada had run its 
course. 

„ . , ,y , , 

§ 27. — REPEAL OF THE ACT TO ESTABLISH FREEDOM OF BANKING, AND 
DISAPPEARANCE OF THE BANKS ORGANIZED UNDER IT 

The failure of the system had received the attention of the 
Legislative Assembly at least five years before. On March 
6th, 1857, the Hon. Wm. Cayley introduced a bill to discon- 
tinue the incorporation of joint stock banks and the issue of re- 
gistered notf ". The merchants and monied men of the pro- 
vince were generally in favor of the old chartered system, he 
said, and even in 1855, the Assembly had decided to perpetuate 



I Ibid, 1856, p. 237. 
» Ibid, 1857, part ii., pp. 94-95- 
s Ibid, i860, part ii., p. 88. 
* Ibid, 1861, partii., p. 94. 
» Ibid, 1862, part ii., p. 96. 



i 'm 



*iii 
T^ 



!; 





116 



The Canadian Banking System, 1817-1890 



it. Its decided superiority had been shown by the action of the 
three banks which had retired their registered notes and con- 
tinued their busitiess under charters. • Wm. Hamilton Merritt 
was still in the Assembly, and in reaffirming his responsibility 
for the first free banking Act, he declared with a lofty disdain 
of the facts, that it was the •* best system adopted in any coun- 
try from the beginning of the world to the present time." ** The 
sole cause of its being inoperative in Canada," he contended, 
" was that it had not been honestly carried out."' Mr. Cayley's 
bill did not come up for the third reading, for what reason the 
debates give no evidence. 

The Minister of Finance, the Honorable A. T. Gait, pro- 
posed the repeal of the law in i860, but the other proposals to 
which this was coupled were so radical and far-reaching that 
action upon the whole group was indefinitely postponed.* Six 
years after this, and sixteen years after its first passing, the "Act 
to establish Freedom of Banking " was finally repealed by the 
l*rovincial Note Act of 1866. (29-30 Vic, cap. 10, § 16.) 

Six banks in all had taken advantage of the Act. To one 
Oi these, the Bank of British North America, the privileges ac- 
quired under the Act were doubtless of considerable value. 
The others did not thrive. Two of the companies working 
solely under the free banking laws wearily struggled for three 
years (1856 to 1858) against the competition und prestige of the 
chartered banks, and then began to retire their issues and wind 
up their business. The three banks earliest started under this 
Act soon applied for charters and secured them. (18 Vic, cap. 
202-204.) 

Of these, the Zimmerman Bank had the shortest life. 
Founded in 1854 by a person of means, it was, to an unusual 
degree, the creature of one man. It seems to have been well 
and honorably managed by the capitalist whose name it bore, 
but after his death in December, 1857, the notes and debts of the 
bank were redeemed by his executors and the stock and plates 
transferred to a Chicago firm of the name of Hubbard & Co. In 



1 1 oronto Globe, 7th March, 1857. 

» Ibid. 

8 Thompson's Mirror of Parliament, i860, pp. 22, et seq. 



Province of Canada, 1850-67 



117 



1858 the charter of 1855 was amended by changing the name of the 
institution to the "Bankof CUfton," and extending the time for 
the subscription and payment in full of its capital stock. (22 Vic, 
cap. 129.) The extraordinary privilege "that the bank notes and 
bills in circlation shall be of whatsoever value the Directors 
shall think fit to issue the same, but none shall be under the 
value of 5 shillings ($1)," was a feature of the amended charter. 
In 1863 its charter was repealed for reasons which will presently 
appear. (27 Vic, cap. 45.) 

The Bank of the Niagara District, with its head office in 
St. Catharines, Canada West, found difficulty from the first in 
securing the capital required by its charter. The Act of 1855 
required subscription and payment in full of the million dollars 
in five years. In 1857 an indulgent Assembly extended the 
term to 1861 ; in 1861 to 1866 ; in 1863 the capital stock require- 
ment was reduced to $400,000, and the time for paying it up 
extended to 1865. The bank had a fairly successful career until 
it suffered large losses through the failures of Jay Cooke & Co., 
and others, in 1873. Hardly able longer to carry on an independ- 
ent business, it was amalgamated early in 1875 with the Imperial 
Bank of Canada. The shares of the Niagara District Bank 
were exclianged for those of the Imperial, according to the 
relative value of the two stocks, and thereafter thts former bank 
disappeared as a separate institution. 

Out of the five originally " free banks," but one, the Mol- 
sons' Bank, of Montreal, has survived, and is now an institution 
of standing and importance. 

§ 28. — CONTINUATION AND AMENDMENT OF BANK CHARTERS 

As early as November, 1854, there came before the Legis- 
lature the question of permitting the chartered banks to increase 
their capital stocks. In this connection Mr. Francis Hincks 
admitted that the public had not shown any great disposition 
to take advantage of the free banking law. He said further : 

" First. He thought that the public wanted a large incre£Cse of banking 
capital. 

Second. There was not money in Canada to furnish that capital. 
Third. The country must get this capital from foreigners, and the 



'." 









V H 



118 



The Canadian Banking System, 1817-1890 



, ! 



people of Canada would have to consult foreigners as to the manner in which 
it should be done. 

Fourth. The county knew that no English capitalist was disposed to 
furnish money to Canada through the agency of private banks. But Engli:;h 
capitalists would recognize the large chartered banks, because these banks 
had been known for many years as a safe means of investing capital. » » * 
Capitalists had confidence in them, but they would not have confidence in 
private banks established under a new banking system. If the people wanted 
to increase their banking capital they must do so through the existing 
banks." 

The question as thus presented was in essence the alterna- 
tive whether or no to retain the old system and give up the new. 
Banks with a "secured" circulation cannot long survive, in a 
time of specie payments, the competition of banks issuing notes 
upon their general credit. They have not the earning power 
to maintain the contest on equal terms. This principle was 
illustrated in Massachusetts, it was acknowledged in New 
York,^ it was recognized in the United States, it has been 
proved in Canada. After 1854, ^^^ ^"^^^ ^^ ^"^^ ^^^^ banks was 
inevitable ; the Assembly decided not to give up the chartered 
system which had served so well. 

Accordingly bills were passed permitting additions to capital 
stock amounting to ;^2,oio,ooo for the six banks who applied 
(18 Vic, cap. 38 to 42, inclusive). A few amendments were 
added to the charters. The Bank of Montreal, e.g., taking 
warning from a case decided shortly before, ^ secured the right 
to hold mortgages on ships, steamships and other vessels by way 
of additional security. The shares necessary to qualify as a 
director were raised to twenty, and discoints bearing names of 
directors were limited to a tenth of the total discounts. Provi- 
sions permitting the transfer of shares and the payment of divi- 
dends in Great Britain were included in most of the Acts. 
Ostensibly as a security to the public, really us a brace to the 



1 C/. Mr. Fillmore's remark ; " It cannot be expected that banking under this (the 
free) system will be as profitable as under the Safety Fund system." Report of the Comp' 
troller at N.Y., 1849, p. 57. It will be reniembtred that the latter system, the banks of which 
had a privileRe of issue similar to that of the Canadian chartered banks, disappeared from 
the St ite, not through the action of competition, but berause the State ceased to grant 
charters and those expiring after 1849 were not renewed. The banks were forced to re-or- 
ganizc under the general banking law or go into liquidation The principle referred to iti 
the text received most striking recognition by the United States in the 10 per cent, tax upon 
State bank notes imposed in 1865, 13 U. S. Statutes at Large, p. 469. 

a McPonald vs. the Bank of U.C, U.C.y.B., Hilary Term, 13 Vic, p. 264. 



-4iill| 



Province of Canada, 1841-50 



111? 



debenture market, all the banks were required, in case they 
availed themselves of the permission to increase their capitals, 
to invest one tenth c*^ their paid-up capitals in debentures of the 
Province or of the Consolidated Municipal Loan Fund. The 
charters were continued to the ist January, 1870, and the end of 
the then next session of Parliament. 

Again in 1855, when the tide of sudden and remarkable pros- 
perity which followed the Reciprocity Treaty of 1854 was be-, 
ginning, the Legislature decided to increase the number of char- 
tered banks. The Molsons', Zimmerman, Niagara District, and 
Eastern Townships Banks were incorported with authorized 
capitals of;^25o,ooo each, ^50,000 to be paid in each case before 
the bank should begin business, and the whole in five years. The 
St. Francis Bank was chartered with a capital stock of ;^ioo,ooo» 
and the Bank of Toronto with ;^5oo,ooo. In these charters it 
was provided that, instead of voting by scale, the shareholders 
should have as many votes as shares. But in the Acts to amend 
and consolidate the charters of the Bank of Montreal, Bank of 
Upper Canada, and Commercial Bank, passed in 1856 at the 
request of these corporations, the old voting scale was retained. 
(19 Vic, cap. 76, 120, 121.) The Quebec Bank obtained a similar 
Act in 1858 (22 Vic, cap. 127) ; the City Bank in 1863, (27 Vic, 
cap. 41). The directors were in each case limited to one-twentieth 
of the total discounts. By another Act of 1856 chartered banks 
were permitted to charge not more than one-half of one per cent, 
on ninety day paper, in addition to the legal rate of discount, for 
the expenses of agency and collection, when the security was 
payable at a place different from that where it was discounted. 
(19 Vic, cap. 48.) 

Penalties upon usury had been abolished in 1853 by a 
law according to which contracts and securities were to be void 
with respect only to the excess of interest above six per cent. 
(16 Vic, cap. 80.) But the Act did not apply to the banks or to 
the corporations, such as loan companies or building societies, 
authorized to borrow or lend at a higher rate. Until 1858, 
hanks taking or accepting or receiving the rates higher than six 
per cent, were liable to forfeit treble the value of the money 
lent or bargained for, half to the Crown and half to the person 
suing for the penalty. The Act 22 Vic, cap. 85, however, per- 

9 






=1 H ^ It 




120 



The Canadian Banking System, 1817-1890 



mitted, in general, that any rate of interest agreed upon might 
be exacted, but prohibited the banks from taking or stipulating 
for a higher rate than seven per cent, per annum. When the 
paper discounted was payable at another of the bank's own 
offices, the charges for agency and collection on paper payable 
at another place than that where it was discounted, were re- 
duced for short time discounts to correspond with the rate of 
one-half of one percent, for securities payable in 90 days. 

In 1859 another general Act applying to the chartered banks 
was passed for the avowed purpose of granting additional facili- 
ties in commercial transactions. The measure had been strongly 
urged by the banks. ^ It was the first step of the legislation, 
afterwards much developed, enabling the chartered banks, in 
discounting bills of pvchange or notes, to take as collateral 
security bills of lading, specifications of timber, or receipts given 
by carriers, whether on land or water, keepers of coves, wharf- 
ingers and warehousemen. The banks were empowered to 
acquire title to the grains, goods, wares or merchandise described 
in the face of the instrument, by indorsement of the owner or 
person entitled to receive them, subject, of course, to the right of 
the indorser, upon his paying the debt, to have the title 
re-transferred. 

In case the debt were not paid when due, they were author- 
ized to sell the commodities, deduct their claim, costs and 
interest, and return the remaining proceeds, if any, to the 
indorsor. But no such transfer of title was permitted unless the 
bill, or note, or debt was negotiated at the same time with the 
indorsement of the collateral security. The bank might not 
hold the goods for more than six calendar months. In case 
they were to be sold, it was obliged to give ten days notice to 
the indjrser. The important restrictions were the last two but 
one. These, it was believed, were sufficient to keep the banks 
from engaging in trade or risking their capital by speculative 
investments in graded merchandise. 

Seven more bank charters were added to the list ir 1856 
and 1857. The authorized stocks amounted to ;^2 ,966,666 
currency, thus making a total of twelve banks incorporated be- 



I Journal, Can., 1839, Appendix No. 67, Evidence of the Bank of U.C, Banic of Mont- 
real, Bank of B.N. AmetiCa and Commef-cial Bank. 



Province of Canada, 1841-50 



121 



tween 1855 and 1857 inclusive, and of ;^6, 326,666 currency 
added to the authorized banking capital of the province. This 
was more than double the total paid-up capital of the banks in 
1851, and nearly equaUo their actual capital in 1861. These fig- 
ures indicate the manner in which the expansion and speculative 
movements were affecting people and Legislature. Events soon 
proved that so many banks were not needed. The Union Bank 
and St. Francis Bank never began business, and three other 
charters granted in this period were repealed in 1863, the banks 
having failed to fulfil the duties required by law. For the 
banks which managed to survive, the Legislature was obliged 
to relax its policy of requiring from each bank a capital stock of 
^250,000, and greatly to extend the time for paying up the re- 
duced stocks. 



§ 29.— 1857 - 1863 

One explanation of the large increase in banks has already 
been given in the mention of the great agricultural and commer- 
cial changes which were plainly apparent in 1855. The Reci- 
procity Treaty, in furnishing the Canadians with a large market, 
easily reached, for the products of their fisheries, farms and 
forests, was undoubtedly a powerful factor in the new prosperity. 
But long before the success of Lord Elgin's diplomacy, foreign 
capital was beginning to come into the colony, agriculture was 
reviving in the West, population was increasing rapidly, vast 
public works were started, large additions to the railway system 
wore commenced.^ Government assistance was granted to the 
trunk lines. The Grand Trunk Railway, the Great Western 
Railway and some eastern roads together effected an increase 
of 1,563 milei of road between 1852 and 1858. The railway 
mileage of Canada was increased over 1,500 per cent. The 
better prices for produce obtained after the Treaty turned the 
attention of investors to land speculation. Excessive prices 
were given for wild lands. Schemes for new villages and towns 
were everywhere afloat. Harvests were abundant in 1853, 
1854, 1855; the price of breadstuffs high ; and yet, in 1857, the 



1 



m 



« Cf. Bankers' MagaMtne, Vol. a, p. 441 ; Vol, la, p. 368 ; Vol. 13, p. 538. 






i'li! 



122 



The Canadian Banking System, 1817-1890 



farmeis were more deeply in debt than in 1853. They had sold 
for cash, and bought largely on credit. Considerable additions 
were made to improved farming lands, but many tied up their 
capital by speculating in unproductive real estate. Trade was 
stimulated to an unprecedented degree, and bank accommoda- 
tion stretched to the utmost limit. Excessive and extravagant 
importations occurred in 1856 and 1857. The Municipal Loan 
Fund, a scheme whereby the Province guaranteed the borrow- 
ings of the towns and counties, served to swell the inflation. 
The pressure for money was very strong in 1856; there was a 
prospect that both public works and railway expenditures 
would soon be ceased. 

Then came the bad crop of 1857. The commercial crisis in 
Great Britain, Europe and the United States was at its height. 
The suspension of specie payments in New York on the 14th 
October compelled the Canadian banks to guard against an ex- 
traordinary drain of gold. They ceased discounting. Some 
five or six weeks elapsed before they could safely gran^ the 
advances necessary to bring the crops of the year to market. ^ 
This delay of produce operations alone caused great loss. As a 
result of the crisis elsewhere the Canadians next suffered a 
heavy falling off in the demand for their grain, ashes, timber, etc. 
Then followed numerous commercial failures, a fall in all values, 
the collapse of the real estate boom, a contraction of credits, a 
second bad harvest in 1858, and two years of black depression. =* 

But in 1859, the Provincial Parliament was again addressed 
by petitioners for new bank charters. To secure evidence by 
which to guide the policy of the House with respect to banking, 
a select committee on banking and currency was struck on the 
motion of the Minister of Finance, Mr. A. T. Gait. In the evi- 
dence presented by this committee, and chiefly obtained from 
the leading bankers, there was much pointed criticism of the 
existing banking system. It was objected, e.g., that the law 
had allowed the creation of banking capital beyond the needs of 
the country. The privilege of circulation was conferred without 
the necessary safeguard. A dishonest bank could begin business 



> Thompson's Mirror of Parliament, i860, 27th March. 

» Journal, Can., 1859, Appendix No. 67, Report and Proceedings of the Committee on 
Banking and Currency, is the leading authority for the facts detailed in the last two paragraphs. 



iii: 



Province of Canada, 1850-67 



123 



merely by investing ;^io,ooo in debentures ; there were no 
means to assure the full payment of the required capital, and 
this minimum was often too small. There was no obligation 
to publish the names of stockholders. The plan of limiting cir- 
culation to the paid-in capital, plus specie and debentures, was 
delusive, as either of the latter could be gotten only by purchase 
with capital or deposits. If capital were used, then so much of 
the capital was displaced. The law thus treated as distinct 
from capital what was really a part of it. If deposits were used, 
then the bank was allowec^ to base an additional liability upon 
what it was already bound to pay. 

There was insufficient motive provided for an active interest 
on the part of the directors. It was urged that a larger holding 
of paid-up stock should be exacted of them. 

The effects of the crisis had been aggravated somewhat 
by the restriction on the rate of discount chargeable by the 
banks. The banks could give no warning of approaching diffi- 
culty by raising the rate. It was necessary peremptorily to 
refuse discounts to some applicants, and to confine their accom- 
modations, as far as possible, to wealthy and independent cus- 
tomers, and those with " valuable accounts," i.e., customers from 
whom mcidental advantages of exchange, agency charges, large 
deposits, undoubted security, and the like might be derived. 
The result was that inferior customers, and those who, very 
possibly, most needed the assistance to tide them over, were the 
least likely to get it. 

But it also appeared that in every district of any import- 
ance the banks had planted agencies and brought to the door of 
such communities liberal advantages, with the power and 
security of the same large monied corporations which served 
the cities. The branches had not indeed quieted the demand 
for small banks. But small banks, so the experience of the 
United States seemed to teach, were unsafe. Besides, it was 
perceived that the cry for small banks was one seldom voiced 
by the lending part of the community. As a Province, Canada 
very properly refused the eternal task of quieting borrowers' 
claims. The Minister himself acknowledged that as a rule the 
banks had been well and wisely managed. ^ During the panic 



1 Thompson's Mirror of Parliament, i860, p. at. 









124 



The Canadian Banking System^ 181/-1890 



i:fii 




in the United States, Canadian notes were received there with 
the same readiness as specie in payment of notes which the local 
banks were called on to redeem.^ And yet the Minister was 
not satisfied. He had used the committee to conceal the pur- 
pose which he revealed in i860. 

This was the establishment of a Bank of Issue, or Treasury 
Department, for which he introduced resolutions on the 27th 
March. He wished, he said, "to put the currency on a per- 
fectly sure and safe footing, by separating it from the banking 
interest, and by removing it from the possible suspicion of being 
affected by political exigencies." But his solicitude was insin- 
cere, his monetary theories false. His ultimate object was 
assistance to ihe Provincial finances; his proposed means, the 
emission of legal tender, though convertible, Government notes 
as the sole currency. The resolutions found slight approval as the 
order for their consideration in committee was discharged the 
i8th May. 2 They are interesting now only as the forerunner of 
the Provincial Note Act of 1866, the provisions of which were 
largely due to the monetary fallacies and financial exigencies of 
the same Minister. 

The policy of the Legislature was steadily to extend the 
system of chartered banks on the old lines. In 1858 the Bank 
of Canada (afterwards the Canadian Bank of Commeice) was 
incorporated. (22 Vic, cap. 131.) In 1859, three charters were 
granted, among them that of La Banque Nationale, situate at Que- 
bec. (22 Vic, cap. 102-104, 2nd sess.) In 1861, the Merchants' 
Bank and La Banque Jacques Cartier were created in answer to 
the petitions of Montreal capitalists. (24 Vic, cap. 89 and 90.) 
The Royal Canadian Bank was chartered in 1864, the Mechanics' 
Bank, the Union Bank of Lower Canada and one other concern 
in 1865, and two more still in 1866. Fourteen charters and 
amending acts, authorizing capital for $19,460,000, were the 
record for the nine years, 1858 to 1866. Payments amounting 
to $1,475,000 were required on the twelve charters before the 
banks could begin business. ^ Only the seven banks named in 



1 Journal, Can., 1859, Appendix, No. 67. 

» Journal of the Legislative Assembly of the Province of Canada, i860, pp. 114, 45a. 

» After 1857 the denominations of the decimal currency are used almost exclusively in 
Canadian legislation. 



Province of Canada, 1850-67 



120 



the text took advantage of their charters and began a corporate 
life of some duration. The charters of the Banks of CHfton and 
of Western Canada, Hke those of the International and Colonial 
Banks, were repealed in 1863. The International and Colonial 
Banks had failed in 1859, without, however, inflicting much 
loss.i AH had suspended their payments and discontinued 
operations, and the Legislature then deemed it advisable to pre- 
vent their resumption on the terms and conditions embodied in 
their charters. (27 Vic, cap. 45.) 



I Thus the last return made to the Government by '.he Zimmerman Bank (changed to 
the Bank of Clifton), was for October, 1857, ot the Colonial and International Banks (situate 
at Toronto) for October, 1859 : 



Average of the Assets and Liabilities of the 



Liabilities 



Capital Stock paid-in. 



Notes in circulation 

Balances due to other banks.... 
Cash deposited not bearing interest 
Cash deposited bearing interest. 



ASSKTS. 

Coin and bullion 

Landed property 

Government securities 

Notes and bills of other banks. 
Balance due from other banks. 
Bills and notes discounted 



Zimmerman 
Bank, for 
Oct., 1857 


Colonial 
Bank, for 
Sept., 1859 


International 
Bank, for 
Sept., 1859 

$132,500 

119,021 
5.097 
9,968 


Bank ot 

Western 

Canada, for 

June, 1861 


$453,500 

33.991 
27.711 
10,809 
99,200 


$II2,0O0 

75.300 

3,061 
21,517 


$101,750 

5,210 










*i7i,7»2 


$99,878 


$134,087 


$106,960 


$2,723 

1.463 

35,000 

" 936 
1 573 
1 596,559 

1 . . 


$18,769 

262 
13.200 

5.928 

54.713 

119,245 


$20,030 

2,423 
15,000 

9,990 

19,011 

201,875 

$268,331 


$1,115 
3.871 

12,000 
3.786 

25, 00 

61,186 


$636,254 


$212,118 


$106,960 



Vide Canada Gazette, vol. xvi., p. 2,678. 
" " " vol. xviii., p. 2.497. 

" " " vol. sx., p. 1,624. 

The Bank of Clifton, as such, never made any returns to the Government. Hubbard 
of Chicago was succeeded by one Callaway, formerly of Toronto, as President. Some 
circulation for its notes was obtained in the Western States by advertising in a bank note 
Reporter that the " notes of the Bank of Clifton, incorporated by the Parliament of Canada," 
would be redeemed at a broker's office in Cliicago. Emuj^h notes were paid to get credence 
for the statement and then the supply of funds was stopped. Over $5,000 of the paper thus 
repudiated was sent to Clifton, but there was no money to meet it. The Bank of Western 
Canada was controlled by one Paddock, a New York tavern keeper, who, by paying for his 
stock, secured a respectable old man at Clifton to act the stool pigeon as President of the 
bank ^ but he had no check on the issue of notes. Efforts were made to float them in 
Illinois, Wisconsin and Kansas, with some success, but the notes were never redeemed. 
Reed, of Lockport, N.Y., a man of bad repute, owned nearly the whole stock of the Inter- 
national Bank in Toronto when it failed, and was connected also with the Bank of Clifton. 

.\ committee of the Assembly reported in 1862 that the position of the two banks first 
named was such that it was discreditable to the Legislature to allow their charters to 
remain in existence any longer. Action was postponed, however, till a committee of 1863 
reported that " consiiierations of public policy imperatively demand the immediate repeal of 
the charters of these four banks." Vide Journal, Canada, 1863, p. 109 ; ibid, 1862, Appendix 
No. 4. 



126 



The Canadian Banking System, 1 817- 1890 



None of the charters granted between 1858 and 1866 per- 
mitted the beginning of business with less than $400,000 capital 
subscribed and $100,000 paid up. As evidence of its bond fide 
payment, it was usually required that before the new bank 
should issue notes, its paid-in capital should be deposited, as 
specie, in some existing chartered bank of the province. One 
year from the passing of the Act was the ordinary time in which 
a charter became forfeited by non-user. In some cases the limit 
of one-fifth the paid-in capital stock was imposed upon the cir- 
culation of notes under five dollars; in others, of those under 
four dollars. Differences are also to be noted in the application 
of a scale, or the rule of one for each share, to the voting oi the 
shareholders. In requirements of larger stock investments by 
the directors, proof that capital is actually paid in, and the like, 
the charters embody important corrections suggested to the 
Committee of 1859. It hardly need be said that they contained 
all the safeguards and provisions previously adopted, in compli- 
ance either with Imperial recommendations or the teachings of 
colonial experience. 

It was impossible, even for the seven banks finally started, 
to secure the payment of their capitals in the time limited by 
their charters. The Parliament accordingly consented to 
relax these requirements in a manner very like that in 
which we have seen it indulge the Niagara District Bank. 
The laws of 1858 had contained no less than five extensions 
of the times prescribed for banks previously chartered, to 
secure full subscription and payment of their stocks. And simi- 
larly, between 1862 and 1865, the Merchants' Bank, the Cana 
dian Bank of Commerce, the Eastern Townships Bank and the 
Quebec Bank were all obliged to secure extensions of the 
periods in which the payment of their original or additional capi- 
tals was required by the Acts authorizing them. 



§ 30 — FAILURE OF THE BANK OF UPPER CANADA 



The period between 1852 and 1857 was a time not only of 
great economic expansion but also of great economic change. 
The development had been over discounted by sanguine 



Province of Canada, 1850-67 



127 



Canadians, and hence values collapsed when the crisis arrived. 
Of the long depression that followed a leading cause must be 
sought in the slowness and difiiculty of the adjustment to new 
conditions brought by the introduction of railways, extension of 
public works, roads and bridges, shifting of the routes of com- 
merce and alterations in the chief industrial pursuits of im- 
portant districts. The statement may be made with especial 
force, of Upper Canada, or Canada West, where the real estate 
excitement had been higher and the increase of railways greater. 
Many of the towns placed for water communication were left on 
one side by the railways or deprived of their importance. Co- 
bourg, Sandwich, Dundas, Burlington, Kingston, Niagara, 
Brockville and others, once the centres of flourishing trade, 
either failed to recover from the depression or lost heavily to 
more favored situations. Lumber getting and real estate im- 
provement were pushed backward and northward to make room 
for more settled industry. 

In the early days of the province the Bank of Upper 
Canada had been the provincial bank. It had given assistance, 
comparatively enormous, to the development and commerce of 
the country. Land was then the single valuable security 
possessed by its customers in any quantity. It was therefore 
necessarily more or less a land bank in a disguised form. Its 
managers and clerks were often British immigrants who lacked 
the intimate knowledge of Canadians and Canadian trade that 
life-long familiarity would have given. In many instances, too, 
they failed to exhibit acquaintance with the simplest of banking 
principles. Discounts were freely extended to lawyers and 
legislators, the gentry and professions. " Accommodation " 
paper was common. Loans were made to civil servants and to 
politicians. No one will den}' that the bank was guilty of much 
bad practice, that it paid high rates of dividend when it could 
ill afford, that it failed to write off accrued losses, that it im- 
paired its capital by extravagant bonuses, that its internal 
organization was defective, and that its management was often 
blind, reckless and ignorant. 

Still the bank survived. It was invested with the dignity. 






128 



The Canadian Banking System, 1817- 1890 




it enjoyed the prestige, of a Government institution. Its credit 
was always high, its *' green notes " held in great esteem. 
Quantities of notes issued twenty years before, and as bright a«; 
they came from the press, were found in due time stored away, 
like gold itself, in the chests of Canadian farmers. Fcr them 
the bank was as the Bank of England. A position in its service 
was a post of honor and consequence. Its name was the very 
synonym of strength. The confidence of the public was rein- 
forced by their gratitude. The bank had been the instrument of 
men of broad ideas and large purpose, ambitious, enterprising, 
hopeful pioneers. The good they did lived after them, but at 
the time of the bank's demise it had not reached the enjoyable 
stage. 

Up to 1857 the Bank of Upper Canada had grown steadily. 
Dividends of 6, 7, 7, 8, 8, and 7 per cent, were paid in 1852- 
1857. The capital was increased in 1855, and a 12^ per cent, 
bonus paid to the old shareholders. In 1858 the capital paid in 
amounted to $3,118,000. The dividend that year was 8 per 
cent, and the rest was reduced but $40,000, to meet the losses 
of 1857. For a bank which had worked in the midst of the 
land speculation, had undoubtedly joined in it, and lost heavily 
when property taken as additional security fell to the lower 
values, this was utterly inadequate.^ Their mistake was recog- 
nized by the directors m 1861. Thos. G. Ridout, cashier since 
1822, retired, and Mr. Robert Cassells, a banker of high reputa- 
tion and eminent ability, was employed at the salary of $ 10,000 
per annum, in the hope that he would succeed in saving the 
Bank. In compliance with his suggestions, perinission was 
obtained of the Legislature to reduce the paid-up stock to some- 
thing over $1,900,000, the par value of the paid-up shares from 
$50 to $30. (25 Vic, cap. 63.) For twelve years or more the 
bank had kept the Government's account. During this time it 
was usually a considerable debtor to the Treasury. But the 



X Twenty years and more after the event Senator Alexander revealed an incident in 
urther explanation of the bank's losses. In 1838 or 185^ the Grand Trunk Railway Com- 
pany were indebted to contr'ictors to the ex ent of a million dollars. To enable the Com- 
Eany to pay these claims the b nk was indui-ed to make advances of that amount on two 
ills of exchan'.'e for £ioo,coo each, drawn upon the Railway Company's London bankers, 
the Barings and Glyns. These houses, however, had closed down upon the Company, and 
the bills were dishonored, the result being that ? good part of the million was wholly lost, — 
Debates of the Senate of Canada, 1885, p. 35. 



HHiMli 



i Ai]|i ' -C*i!l i llJ-t> 



Province of Canada, 1850-67 



129 



debt to the Government was fixed by an Order-in-Council of 
the 1 2th August, 1863, at $1,150,000, and transferred to a 
special account.^ Some slight general deposits were allowed to 
remain, but most of .he Treasury balances were, by November, 
transferred to the Bank of Montreal, which became henceforth 
the Government's banker. 

The deep rooted belief in the bank entertained by the 
public was still strong, but after i860 the monthly 
returns give unmistakable signs of retrogression on the part 
of the bank itself. The general business had fallen off heavily 
as the old towns in which the bank was established lost 
their prosperity to the centres growmg up in the new industrial 
districts and along the altered routes of trade. Another cause 
of the reductions is to be found in the efforts of the new man- 
agement to get the business down to a solid basis. Its circula- 
tion, which averaged over $2,100,000 between 1857 and i860, 
fell in February, 1862, to $1,696,000, and in August, 1865, 
to $988,000. Non-inlerest bearing deposits dropped from 
$1,920,000 in February, 1862, to $640,000 in August, 
1865 ; deposits at interest from $2,644,000 to $1,959,000 ; 
discounts from $6,186,000 to $3,231,000; but the landed 
or other property of the bank rose frcjm $503,000 to $1,473,000. 
In this last item we find the prime cause of the trouble, the col- 
lapse of 1857-58, in the real estate of Canada West." Neither 
in 1864 ^^^ ^" ^^^5 were any dividends paid. The task of saving 
the bank was become clearly impossible ; some of the assets were 
worthless, some locked up in land. By an Act approved the 
15th August, 1866, permission was granted further to reduce 
the capital to $1,000,000, in fully paid-up shares of $20 each. 
Before this could be acted upon, the bank was further weakened 
by the withdrawal of deposits, and its stock fell to $3 per share. 
The loan of $100,000 obtained from the Government on special 
securities in the first fortnight of September was of slight avail. ^ 
On the 1 8th the Bank of Upper Canada stopped payment. 



» Sessional Papers, Canada, 1867-68, No. 27. 

a See Note i, page 130. 

3 Sessional Papers, Canada, 1867-68, No. 27, 



k:i 




180 The Canadian Banking System, i8i 7-1890 

On the 12th November the bank, by the consent of the 



■i\ 



* The course of the bank's business can best be judged by the following table for 1837 
to 1866, compiled from the Canada Gatettt : 

Average Monthly Statemknt of the Bank of Upper Canada for the months of August 
and Febiuary, trom 1837 to 1866 mcluslve, from the Canada Gatette. 



U) O 

< o 



S)388B ie)ox 



CO o o\oo 



g^^ 









10 t^ 'O 0< •^00 N 

6 6 6 o\ 6\ 6\ 6\ d\oo' t>. r>.vo' 10 "o in "S 



m m t^ mvO vo 00 wi n 

in N rooO t>. M N vo vO 
•^ N vO N moo t^ ir» ro 



japun p3pn[3U! 
)0U )(UEq 9qi o) 
anp stqap jaq)o 

paiunoosip 
siijq puB sajojvi 



« ^5?:g 



N 'J- 
VO M f< 00 
ui N O\00 


M vo Tj-00 t>.o '*-*>n 
t^ t-^ o_ q^ q. o>oo 00 00 

M M H M 



_ ^ ^ O t^ ro ' 

y^rno q>T'0<?<?c^ mo oononmnn-i^-oom 
t^ t^vo t^oo » i^ t^ too o\<) o n n tn po m moo 00 

•*• N iM N ^ t ^ 'O t^ '^^ '"^ "!} 't '^ 

vo" uSvo* o' vo" vo" Tf T^ ro on N N N of 



8)iueq laqjo 
uiojj anp saaueiBg 


0> fo •«*■ r^ H 00 invo ' ■ t^ t^oo n n rnr-fnci nvo m 
<A N mvb t^M po ov ov vo (Ti moo m m fn N n m 

vo t^vo 'OvOvOvONmrrTfrnN'-l-Mi-tM 


sjjueq 
jaqiojo si|iq jo 
sa)ou /(jossiiuojj 


POOO 'f t^vO OVVO >-iOO fn^CTlO N M QN'*>-l N 

4«. N m mvo vo « oioo n t^ o\ t^ 00 t«.vo 00 vo « 

NmmmmNNmNNmi-imihm 


sappnoas 
)uauiujaAOO 


ro M 00 t^OO Ov ■TvO t^ ro ro t^ ro rn IT) t^vo vO vO vO 

«». t^ T T}- POOO MMMMOOOOGOCiCJiOvOvOv 

NPOOimOVNrOPOfOfONNNMNNMi-iMHll-l 



JJUBQ 

aq) JO X)jadojd 
jaqto JO papuBq 



•TOO 

4^ M M 



O N 
N N N 



Th Ov moo ro Tf CTi Ov N w 
rf u-| t^oo N O M O rO fOOO vo 



N m CO T m t>-oo 00 Ov N 



•T fn m N rovo 
- i~^ M m r^ t>. 
■T T mvo vo vo 



uojiinq puB U103 



fin 

PS 
5 'a 

S o 

J 8. 



sapinqBii i«»ox 



N IT) M vo t^OO N t^ ro l>>vO fi m OvvO m N lo t^ T T 

,^ f t^ M 00 M w N t~~vo 00 rnvo m o Tt- Ti- M tvo t o 
**> T T TvO m m c^ T Tvo vo mt^mTmTroroN m 



O O O N fO n-iOO O m T vj- TOO m m m 
,„ rO N O OVOO Tt^C^vO m!S Oit^N OVVO 

w- mMoo M mM m— potvo moo c^ t m 

iri in mvo" t>. tCvcT r>. tAvo" vDvovo'mmmTfrofOPoro 



N O m m w 
t^ N m m o 
rnoo t^ m T»- 



isajaiai 3u|jBaq 
pajis'odrfp qsB3 


N M vo 0\ fO m OivD -TO rnvo Ovt^fnOvO TO> 

vo TrnmMoo M toitc^ -' rnmm moo m m 

(^(N w w (Ncv.mrnmM\ovo_m mvo_ t^ T qvoc 00 r^vo__ 

w N w" c[ n" PO m" n n" N m n" n" t-T w" M m" m" 


)sajn)ui 
9uuBaq ;ou 
pajis'odap q8B3 


N t^ N moo mvo Oi i-i vo n vo -"i-vo m t^ m h 
w -1 moo Tt^M 6 IAN moi ■^vq vo t t t-- 1^ •-• 
^vo tv. qv o_^ >-<_ o_^ Ov N M o\ N r-« N o_ 00 00 vo 00 vo mm 
M H* M m' cT n m n" n h" m' M N N 


sjjUBq jaqjo 
0) anp saoueiBg 


T.ov r^ fovo m Oi Ov mvo m 00 vo m m n Oivo vo 

Oi M vo t-» t^vO OvrnOV"" O OoO T OvoO TVO >-' t^ 
f^OO NTTTw rnt-iMi-it^mTt^t^t^'-ifnT'^ 

MM M 


)saja)ui 9u! 
-aBaqjou'uoii 
-Bjnojto ui sajON 


m N M 00 Oivo t-« m mvo t^ n m t^ m ovoo too m T 

vO m t^vo M t^vo 00 Ov m Ov M moo too moo m m 

^'^ *":: " 1 "^ '^. '^ ^. "-I)*^. '^ '^- "i?^ m M_ o_ Ov Ovoo 00 t^ 

n" ci ci N N n" n" m" l-T M m' m" M w m" m" 



ui-piBd 
}loo)s 'lB>!dB3 



o o mo m m o 

Ov m moo M 00 T 

m N N Oi N T N 



«s.TO00 Tt^QvOOO O OVM m 
'"^dvM M N N rr, "'I '*') t^vO O m 



0000 moo o 
N r>. o vo TvO m 
m N vo •*• m N oo_ 

Noo" 

N N 



N M r>. t^ 

O O 00 X) 
H T N IN 

N vb 01 dv 

tf^ rr\ tf^ rr^ 



OvOvOiOvOvOvOvOv 



m m 

T T 
00 00 

dv 6\ 
m m 

ov OV 



mert(nrrirr,frtrrier,rr,tr,\ 



60X1 WJ3 Wja bf^ bc,Q boja ^X^ ticja m^ ^^boo. 



58 

00 



t--00 


Ov 





M 


N 


m 


T 


m 


m m 


m 


vo 


VO 


VO 


vo 


VO 


vO 


00 00 


00 


ao 


00 


00 


00 


00 


00 






Province of Canada, 1850-67 



181 



shareholders in general meeting, was assigned to trustees. 
Previously to the 9th of the same month reductions from the 
average liabilities of August had been effected as follows : 



(000.00 omitted) 


Average 

for Aug., 

1866 


Actual condition, 
9th Nov., 1866 


Reduction 


Notes in circulation .... 

Balances due to other 

banks 


$813 
416 

571 
1.754 


$722 
299 

1 Due to the Government 1,149) 


$91 
117 

781 


Deposits not bearing in- 
terest ... 

Deposits bearing interest 


Total 


$3,555 


$2,566 


$989 





Which was evidently provided for as follows : 



Coin and Bullion, or 










cash in banks .... 


$244 


: 


$42 


$202 


Landed or other pro- 










perty ] 


[,673 




1.673 


• • • • 


Govt, securities 


196 


'..''■■ , ■ . '.■ ^■ ■". 


17 


179 


Notes and bills of other 










banks 


61 


''•■■- ' ■-"' " ^' '■■■■.■ 


.... 


61 


Balances due from other 










banks 


26 




• • . • 


26 


Notes and bills 










discounted . .$2,488 




/Bills and judg- 






Other debts due 




ments $2 


,225 




to the bank . . 874 




- Railway and 






.'-•; 


3.362 


other bonds 
Mortgages . . 


35 
62 
— $2,322 


1,040 


. . $5,565 


$4,056 


$1,509 



The statement for the 9th November may be taken very 
nearly to represent the condition of the bani' at the time of its 
failure. Liquidation of the estate proc ded slowly. In 
December, 1867, the trustees were incorporLtcd, and provision 
made for the appointment by the Government of two trustees, 
to represent the interests of the creditors, and of one by the 
shareholders to act in their behalf. (31 Vic, cap. 17.) The three 
new trustees took hold of the estate on the i6th March, 1868. 
In December, they reported ihat no steps had been taken to 
enforce the double liability, and that the apparent surplus of 






If W '■ t'l! 
i', : ' ". 



H 



132 



The Canadian Banking System, 1817-1890 



assets over liabilities had been reduced from $1,375,797 in 
March to $477,161 on the 31st December, through the following 
operations : 

Written off as irrecoverable debts $ 623,076 51 

Losses on lands assigned to Glyn & Co. and sold by their trustees 111,918 87 
Net loss on lands sold by the Bank of Upper Canada Trustees. . 93.411 83 
Sundry items 70,228 34 

$ 898.635 55 

This loss had been incurred in realizing about $307,998 upon 
$1,266,633 of the assets as they had been valued in March. It 
was expected that $1,019,000 of bills and judgments would pro- 
duce some $513,000; that real estate valued at $979,000 would 
net say $588,000. A deficiency of nearly $500,000 would 
probably occur, ^ and the trustees believed that the trust could 
not be profitably closed up before five years. Meanwhile it was 
costing the estate $14,280 a year, besides the interest on certain 
outstanding debts. , s 

. " No creditor of the bank has been paid the amount of his 
claim, either in full or in part, excepting some trifling sums that 
could not otherwise be disposed of," the trustees reported. 
According to the deed of assignment, they were compelled to 
receive claims against the bank at their full value in payment 
of debts due to the bank ; but as an inducement to facilitate the 
negotiation of real estate, after the i6th March, 1868, claims 
were received at from 66 to 75 per cent, of tlieir par value, in pay- 
ment of lands taken in settlement by the bank's creditors. ^ The 
trustees continued their operations until the whole estate and 
powers vested in them were transferred to the Crown by an Act of 



I Sessional Papors, 1869, No. 6. Correspondence, Bank of Upper Canada. 
« Ibid, p. 6. 



1 m 



Province of Canada, 1850-67 



133 



1870, approved the 12th May (33 Vic, cap. 140). The following 
table will indicate the progress of the liquidation down to 1882: 



i 

1 


;»^ 


000 00 




C^ ONVO 


in 




<< 


■<f f 00 




K 


1 6 ro t^ 


M 






. . i^vo • • • 

^'^ ; : 00" 0" uS : ; ; o* vo* 




d^ ! ! in : N N 



d 


^ 


. . •«J- M M . , . ^ 




p* 


- - . N m 


00 


1 


\o 


ro 




Tt- 1 M N 


ro 


1 


M 








M 


M 




4-t 


t^O'<*- en ^ o\ rf M a\ f 


, 1 


M M (O 0> ro 




^^o 


MTj-PT) OMMUINI- 


re 


(O M ro 6 M 


'J- 




. . vo vo m • mvo Tj- T^lO n v£ 


't- rn . oo_^ TfO O^oc 


q 




^3 K. 

<:oo 


***■ ; : ■<?■ d cji ; M rf Tt- N di - 


^- 


tv. ro * in tJ- N d^ oc 


in 




. • M -^ . M 00 vo t-^ M 


«> 1 H 


^ . m t^ N m 1- 


vo 




m 


VO rr) M 


M 


ro 1 MM 


■t 




M 






H 


M 


M 


13 

V 





KM 't' >o rno 




4-1 

lU 

c 




o\oo in f M 


a 







NC^'t^*:* .Tt--t^a\o 




p 


O>00 -^ M 0^ . . 


Tl- 


^ rn in • -"t-^. -00 •oo_oo Tf 
00" N. ! N "n ; fo ; cAid rC 




T 
K 


in m" d> pT vd^ I I 


vq 
00* 


a 


t. Ct M 

<u " 


^ " ^ 8 ^ C^ M 






00 ro t^ N 
VO N N M 


00 


V 


" s 


m" 




H 






0, 


Q 


II II 1 1 ++ 




1 


1 I + 1 1 


1 


< 

Q 




N M 10 t^ CTi 




H 


tv iH in in a> 


g^ 


< 


6 




^ 


00 m Tj-00 ro 


z 


IT 4) 00 


■ • 00 oo_ • t^ • t^oo_ T^ 




c 


t^ M VO VO • • 


Ov 


< 


4} 00 


*"■ ("o ; ; N d> ; di ." -^-o' r^ 




1/ 


^ 0" N dvd N 1 ■ 


t-^ 


mQH 


W . .MM .c^,iriO>M 




c 


n M M ro N N . 


M 




o_ 0\ 




H 


M M N M M 


t^ 


IK 


4-( 














M 




^ 


M 


M 


0. 


to 


















c* 


1 O^0O 00 





b 




VO fO t^ 




X 


- \0 vo ro 

N N ■ tC ro ■ ■ 


00 









^ 

H 


in 


N « M 


N . . N . NO . ro . ; 




lO 


VO 00 . ro . . 


00 


Z 


■s 


00 f*^ M 




f* 


1 N ro N M 


O} 


^ 




. M m" 




(Y 


S m" 


M 
1 




1 


(^ M N CTi fn 




H 


lo 00 


VO 




Q 


'TO 00 VO N 00 




a 


1 00 Tf ro 


in 


[I. 





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134 The Canadian Banking System, 1817-1890 

It appears from this that the liabilities of the bank to the 
Canadian public (deposits and note circulation) stood in Novem- 
ber, 1866, at $1,117,826, and were reduced by the end of 1868 
to $468,583 (including certificates of deoosit issued by trustees); 
by 1870 to $99,161, and by 1882 to ' 000 (estimated). The 
Government continued to redeem its liabilities at 75 cents on 
the dollar after the property was vested in the Crown. Sup- 
posing the redemptions previous to December, 1868, to have 
been at the average rate of 70 per cent., regarding only the 
direct capital loss, and making no allowance for the extra dis- 
counts to which needy note holders or depositors were obliged 
to submit, I calculate that the Canadian creditors of the Bank 
of Upper Canada lost at least $310,000 by the failure. The 
stockholders lost the whole of a capital which was once 
$3,170,000; the Government, and through it the taxpayers, lost 
all but $150,000 of deposits amounting to over $1,150,000.^ 
For proprietors and creditors combined the results of the failure 
was the disappearance of a principal which cannot be reckoned 
at less than five millions of dollars, a sum equal to 17 per cent, 
of the tn^^ire banking capital of the Province. Such a loss to 
the Canada of tnose days, and to Canada West, where the 
larger amounts were involved, was not merely severe ; it was 
enormous. 

One of the questions suggested by the facts I have recounted 
is, " Why was not the double liability of the shareholders 
enforced ? " But the true answer will not be found in the docu- 
ments. The trustees reported on the three thousand share- 
holders in December, 1868, thus : — * 

Stock 

Executives, guardians and minors $129,360 

Trustees 3J7.5oo 

Municipalities 12,810 

Females and persons living abroad 585,165 

Residents in Canada, not known 172,220 

" " " believed to be bad 139,900 

" " " including females, believed to be good. . 562,890 

$1,939,845 
It is true that loss had fallen upon many of those least able 



1 Sessional Papers, Canada, 1882, No. 108 a. 
a Sessional Papers, 1869, No. 6, p. 5. 



Province of Canada, 1850-67 



185 



to bear it, widows, orphans, women and aged investors of small 
means, who had put their little all into the stock of what was 
once the Government Bank, and suddenly found themselves 
stripped both of principal ^nd income. It is true that the Gov- 
ernment, as the largest creditor of the bank, had secured the 
"opinion of the best legal authority" that any contribution 
from the shareholders under the double liability clause could 
not be enforced by law until the entire estates had been realized. 
For that process, it was thought, in 1868, that five more years 
would be needed. It is also true that the Government care- 
fully abstained from an effort to secure judicial decision upon 
the question. And there is no doubt that the Government of 
the years in which the Bank of Upper Canada was still sol- 
vent, and the knowledge of its losses had not reached the 
public, having the bank at their mercy in consequence of the 
heavy indebtedness to the Treasury, abused their position, and 
compelled the bank to make many advances for political 
reasons which resulted in very heavy losses.* It is not denied, 
of course, that there must have been grave mismanagement to 
bring the bank into a condition in which it had to submit to 
such demands, or that the chief cause of the failure was the 
collapse in Ontario in 1858. There is no doubt that all four 
factors, the contributory responsibility for the failure which 
the Government could scarce avoid, certain political motives, 
never yet revealed, of the party in power, the distressed condi- 
tion of m.any shareholders, and the opinion of the Government's 
legal advisers, combined to prevent the effort to enforce the 
double liability. 

Instead tremendous efforts were put forth to prevent a 
full inquiry, attempts were made to silence the press, and 
they were not without success.' The liquidation under 
trustees was costly, absorbing, in all, some $90,000 a year. The 
Government, although the largest creditor, has received no divi- 




! !" 



1 I do not pretend to cite the documents for this or for a number of other statements 
made in relation to the Bank of Upper Canada ; but I have them from contemporary 
authorities as credible as exist in the Dominion of Canada, and members, some of o e, some 
of another party. Many of the bank's book? were destroyed after the failure, and 
legal evidence of the misdoings referred to is not procurable. Very few of those who 
could speak from personal knowledge are now living. 



• MoHttary Times, Vol. Ill,, p. 126. 



10 



186 



The Canadian Banking System, 1 817- 1890 



i 



dend on its claim, the assets were insufficient to meet the liabili- 
ties of the bank. But it was thought that the Government, 
having no taxes to pay, and being able to wait, would succeed 
in securing more from the real estate than could be had by 
private manipulation. Accordingly the Act of 1870, already 
mentioned, was passed. In 1871 not more than $250,000 were 
placed at the disposal of the Governor-in-Council to pay off 
claims upon the bank, provided its assets contained ample se- 
curity for reimbursement. (34 Vic, cap. 8.) Eleven years later 
$5,000 more were similarly voted. The course of the subsequent 
liquidation is familiar. It remains now merely to remark some 
of the valuable effects of the failure. Blind popular belief in the 
safety of banks as banks, was corrected, and a popular criticism 
was created and thereafter applied to the management and ac- 
counts of the banks which served the province. To managers 
and directors it gave a wholesome warning, not only to look to 
the inner organization of their banks, but also to guard against 
loans whatsoever on real estate security. Finally it opened the 
way for two or three clean-handed young banks, who were des- 
tined, partly in filling the Upper Canada's place, to take rank 
among the leading banks of the Dominion. 

§ 31. — THE PROVINCIAL NOTE ACT OF 1866 ' 

The Government in which the Honorable (afterwards Sir) 
A. T. Gait acted as Minister of Finance was obliged, in 1866, to 
raise some $5,000,000 to discharge the floating debt. The credit 
of the Province had suffered in the English market, on account 
of the renewal, from time to time, of the balances in arrears. 
The Minister averred that the Canadian banks were unwilling to 
extend to the Government a loan amounting to 15 per cent, of 
their capital.^ The Bank of Montreal was already a creditor 
for $2,250,000, and was pressing for payment. The Government 
would not trust to the chance of meeting the engagements of the 
country by large loans at high rates of interest. " The Govern- 
ment," said Mr. Gait, " should resume a portion of the rights 
which they had deputed to others, and meet the liabilities of the 



1 Toronto Globe, 4th August, 1866, Ottawa Times, 4th August, 1866, 



Province of Canada, 1850-67 



187 



country with the currency which belonged to it." In short, he 
acknowledged the primary cause of all paper currencies emitted 
by governments — government needs. But he professed to offer 
to Parliament the choice between issuing two year debentures 
at 7 per cent., receivable for public dues, and establishing a 
Government currency. The offer of the alternative was as 
insincere as his solicitude, in i860, for the security of the bank 
note circulation. It was- asserted in Parliament, and not denied, 
that note plates had been engraved two years before the bill 
was introduced, and that clerks were actually engaged in sign- 
ing the notes while the bill was under discussion. The pro- 
posal to issue debentures was a sham and a delusion. ^ Further- 
more the Minister's justification of his real plan was unsound. 
For those who wish it, the discussion of this contention will be 
found in the note at the end of the chapter. 

In Canada, a proposal to establish a provincial monopoly 
of the note issue would have conflicted with the convictions of a 
people inveterately suspicious of all monopolies, and taught by 
long years of colonial struggle to be particularly jealous of the 
executive. The Minister, accordingly, did not dare to propose 
the complete and instant abolition of the bank note currency 
used by the people for forty years. But he had his party behind 
him, he had pressing demands to meet, and he lacked, apparently, 
the courage to borrow, at the market rate of interest, the neces- 
sary funds. Shorn of the fallacy and verbiage with which he 
introduced it, his plan was simply to extend the activities of the 
Government in the economic field, by assuming the right to 
issue, under the authority of the Governor-in-Council, not more 
than $8,000,000 of provincial notes, payable on demand in specie 
at Toronto or Montreal, as they might be dated, and legal tender 
except at those offices. The Act received the Royal assent the 
15th August, 1866. (29 Vic, cap. 10.) The compulsory retirement 
of the bank note circulation provided for in the original Bill was 
struck out in the House of Commons. Partly in its stead were 
adopted provisions for inducing the banks to surrender their cir- 
culation and to take up the issue and redemption of provincial 
notes The consideration offered was the payment of 5 percent. 



> Ottawa Times, 4th December, 1867. 



138 



The Canadian Banking System, 1817-1890 



per annum on the amount of notes outstanding the 30th April, 
i866, until the expiry of the charter of any bank which might 
accept the conditions of the Act and withdraw its own circula- 
tion before the ist January, 1868, compensation to be paid from 
the date of such withdrawal. For the service of issue and re- 
demption, one quarter of one per cent, was to be paid at the end 
of every three months, upon the average amount outstanding 
during that period of provincial paper issued by the bank. As 
a further inducement, banks giving up their issue rights were 
accorded exemption from the obligation to invest ten per cent, 
of their paid-up capital in provincial debentures, and were 
allowed to exchange them at par for provincial notes. The last 
was the offer of a decided bargain, for debentures were then 
worth not more than 83. The Receiver-General was obliged to 
hold specie for the redemption of the notes to 20 per cent, of the 
circulation under $5,000,000, and 25 per cent, for the circulation 
in excess of $5,000,000. He was to issue and hold provincial 
debentures for the full amount by which the reserve of specie 
should fail to cover the circulation outstanding. Proceeds from 
the issue operations were to be turned into the Consolidated 
Revenue Fund, and expenses lawfully incurred under the Act 
were to be charged upon it. The Free Banking Act was re- 
pealed save as to the privilege of issuing one and two dollar 
notes enjoyed under it by the Bank of British North America, 
and all the chartered banks were relieved from the penalties re- 
tamed in the Act of 1858 for taking interest above 7 per cent.^ 



§ 32.— RFFECTS OF THB PROVINCIAL NOTE ACT 

The condition of the money market and ot trade in the 
autumn of 1866 was such that all but one of the banks were 
unwilling to reduce their resources by that retirement of their 
notes from circulation which acceptance of the Government's 
oflfer would have rendered necessary. * That single bank was 

t These penalties were those imposed by the Acts 51 Geo. III., ca{>. 9, U.C., and 17 
Ceo. III., cap. 3, L.C.. viz., For taking, exacting, accepting or receiving interest above the 
authorised rate, forfeiture of thrice the value of the money, goods, wares or march indi&e 
sent or bargained for, one-half to the Crown (later to the support of the Civil Government of 
the Province), and one-half to the person suing therefor. Since 1866. the only statutory 
restriction upon the rate of interest chargeable by the banks has been the impossibility of 
collecting at law the excess above legal rate. 

• Parliamentary Debates, Canada, Vol. I, p. 80a. 



Province of Canada, 1850-67 



189 



the Bank of Montreal. As fast as it withdrew its own notes it 
was able to replace them by notes of the Province.* Tliese 
were set off against the two and a quarter millions owed by 
the Government, the previous locking up of which may be pre- 
sumed seriously to have crippled the operations of the bank. 
Or they may have been obtained in exchange for the if»6oo,ooo 
of debentures, worth about 83, formerly held by the bank 
according to charter, but now redeemed by the Government at 
par. The position of the Bank of Montreal was unquestionably 
improved by the change. Nearly three millions of assets, 
which for some time had been unavailable for immediate pur- 
poses, were put mto liquid condition. 

The effect on the total circulation in the hands of the 
public during the first year of the Bank of Montreal's opera- 
tions under the Act, was inconsiderable. It received compen- 
sation upon $3,130,818, the amount of its outstanding issues 
on the 30th April, 1866 ; from November, 1866, to the 31st 
December, 1867, the average of provincial notes in circulation 
was $3,147,180.3 The profit to the Government during this 
period and the following year was also inconsiderable ; according 
to some calculations, a direct loss was incurred under the Act, 
but this point is not now pertinent. 

What was the effect of the Act upon the banks and the 
country ? A general answer must be postponed until the re- 
sults of this legislation have been studied in detail. 

First, then, while assets amounting to some $2,800,000 had 
been locked up in Government debt, the Bank of Montreal, it 
was said, had been sorely pressed by the Quebec and British 
Banks and La Banque du Peuple.* After the passing of the 
Provincial Note Act, it was put in a position to use its strength. 
It had been the practice to settle balances arising from the ex- 
changes between the banks and branches in different parts of 
the country by drafts on Montreal or Toronto. Owing to its 
possession of the Government accounts, these balances were 
usually in favor of the Bank of Montreal. As the arrangements 



I Journal of the Senate, Canada, 1867-68, Appendix i, p. y. 

• Monttary Tinui and Insurance Chronicle, Toxonio, Vol. I., p. 369. 

• ibid, p. loi. 



, 



i ! , 



il'l 



i 



ill! 



140 



The Canadian Banking System, 1817-1890 



for balances were merely conventional, it had the power in this 
case to exact gold, unless its debtors happened to be stocked 
with legal tenders. But that was unlikely, as the demands on 
bank reserves were largely for export, and for this they needed 
gold. When the balances were against them the Goveriiment's 
bankers could pay in gold or in legal tenders. They had a direct 
interest in getting as many of the latter into circulation as they 
could. By threatening to exact settlements at all points in 
money, instead of in drafts upon the financial centres, the 
Bank of Montreal was able to coerce sundry of its competitors 
into holding regularly at least $1,000,000 of Provincial notes in 
sums ranging from $50,000 to $200,000, under arrangements 
which practically set these sums apart from the funds available 
for banking purposes. ^ For those who yielded to the threat the 
diminution of banking resources was considerable if viewed in 
relation to specie reserves, inconsiderable if in relation to their 
funds for discounting, but still a diminution. Banks with many 
agencies who refused to enter such arrangements were obliged 
either to hold larger reserves and distribute them more widely, 
while pari passu their power to discount was diminished, or to 
restrict their business to the volume which, under the new con- 
ditions, could be safely based upon the old reserve.'' 

Second, ** the Bank of Montreal, having withdrawn its 
own notes from circulation, and substituted for them the notes 
of the Province, it was no longer interested, in common with the 
other kindred institutions, in maintaining unimpaired the credit 
of all ; the effect of that Act (the Provincial Note Act) was to 
place the interests of the Bank of Montreal, the most powerful 
monied institution in Canada and the fiscal agent of the Govern - 



1 Journal of the Senate, Canada, 1867-68, Appendix I, pp. 3, 7, 14, 19, 24. The Bank of 
Toronto held $100,000 of notes which could not be presented for redemption without fifteen 
days' notice, " to promote the financial interests of the Government and to secure favorable 
arrangements with the Bank of Montreal a-, to the settlement of balances," p 7. 

The tj(20o,ooo held by the Bank of British North America under a formal arrangement 
with the fiscal agents of the Government was available at all times for ordinary business, 
but "it must be made good in twenty-four hours and paid for by excHange, gold drafts on New 
York, or specie." It was terminable on seven days' notice and "was entered into to facili- 
tate settlement of balances throughout Canada with the financial agents, and because it was 
agreeable to the Government," p, 28. The italics are my own. 

« Mr. James Stevenson, cashier of the Quebec Bank, said that ordinarily one-fifth 
of the circulation and deposits, and one-seventh the amount of time deposits, wert; sufficient 
money reserve, but that a demand for settlement in gold or legal tenders at all the agencies 
of an extended bank would compel the bank to keep at least one-fourth of the circulation 
and ordinary deposits as a reserve. Ibid, p. 24. . 



Province of Canada, 1850-67 



141 



ment, in antagonism to those of the other banks." ^ This con- 
clusion of a Select Committee of the Senate is not refuted by 
the returns made by the several banks to the Government. 
Between the 30th September, 1866, and the same day of 1867, 
the proportion of specie or its equivalent held by the Bank of 
Montreal against immediate liabilities had fallen ; the amount 
of notes issued by it and outstanding in the hands of the public 
had decreased, and so had the bank's public deposits. ^ The 
aggregates of the other banks showed an increase in each of 
these items. Assuming that there had been a general stagna- 
tion in business prior to October, 1867, the Bank of Montreal, 
compared to the other banks, was unprepared to meet heavy 



« /6ti, pp. I, 2. The document cited is the second report of the Select Committee 
upon the Causes of the Recent Financial Crisis in the Province of Ontario. 

« The foil wing figures are taken from a Government return dated nth March, 1868, 
quoted in the periodical named below, and the usual " Statements of banks acting under 
charter," in the Canada Gazette : 

Extracts from the Statements of Chartered Banks in the Province of Canada for 30th 
September, 1866, and 30th September, 1867, exclusive of the Bank of Upper Cauada 



Immediate Liabilities 


Bank of 

Montreal 

1866 


Bank of 

Montreal 

1867 


Bank of 

Montieal 

as Gov't 

Bank, 

1867-71 


Other 

Banks, 

1866 


Other 

Banks, 

1867 


Bank notes in circulation 


3.187995 


657.862 


$ 


$ 
6,716,324 


8,477.058 


Provincial notes in circulation 


2,000,000 

385.693 
1,000,000 


" " in Bank of Montreal... 










*• " other banks 










DeDosits bv the Dublic 


8,078,762 
1.015,052 


7.505.201 


14,648,883 


19,651,188 


" " government ■... 




" " provincial 
notes on haad 




2,120,987 
351.995 






Deposits by the government on issue 
account 








Due by Commercial Bank on loan 




300,000 


Due foreien banks 






j 


84,279 






' 


1 Total 


12,281,809 
1.845.325 


10,636,045 


3.385.693 

$ 

677.138 


21,365,207 
3,479,260 


28,512 525 


Quick Assets 
Snecie 


545.308 


4.334.454 


Specie held for redemption of provin- 
cial notes 


Provincial notes 








1 ,000,000 


Notes and cheques of other banks 

Due by Commercial Bank 


324-325 


379.438 
300,000 




1.095.425 


1.559.212 


■ 


" Foreign banks 


885,736 


976, 26 J 




1.541,383 












3.055.386 


2,201,006 


677.138 


6,116,068 


6,893,666 


Percentage of specie or its equivalent. 
Chancre in soec e. 1866-1867 


25% 


19% 
-^622,879 

- 530,133 

- 573.561 


29% 


24% 
+#855,194 
+1,760,734 
+5.002,305 


■' in circulation 








" in Dublic deoosits 


















; I 



142 



The Canadian Banking System, 1 817- 1890 



1 I' 



demands by the public. But if we adopt the Committee's con- 
clusion and assume that there was general prosperity and sound- 
ness in trade, involving increased circulation and heavy 
deposits, the bank's position was such that, provided confi- 
dence in itself were undisturbed, a, general discredit of the other 
banks would be, a /r/or/', not only desirable but profitable.* 
Such a discredit would tend to increase the circulation of pro- 
vincial notes, to attract depositors to the security of the 
Government bank, and to bring the *' valuable accounts" of 
merchants to the great institution that could afford them 
discounts. 

Third. In 1858 and 1859 the Commercial Bank furnished 
large advances for the current expenses and completion of an 
American railway, the Detroit and Milwaukee R.R., on the faith 
of a grant of ;^250,ooo stg., secured from the London Board 
of the Great Western Railway. The bank supposed that the 
loans were made to the Great Western Railway, but under the 
Commercial's system of cash credits evidences of that corpor- 
ation's liability were not secured at the time of each advance. 
** The advances were made by overdraft on current account, 
and the headings of the ledger as made by a clerk, as he carried 
the account from folio to folio, were so indefinite as to leave 
room for endless dispute."^ The agreement was that traffic 
receipts of the D. & M. should be deposited with the bank, and 
exchange on the London Board of the G. W. R. Co. given 
monthly to cover deficiencies. Only about ;^82,62o stg. of this 
exchange were drawn. By the end of 1859 there was a large 
balance in favor of the bank. The Great Western's London 
directors contended that the credit was given to the D. & M., 
or to their own Canadian colleagues, who were managing the 
American enterprise, as individuals. Suit for a million odd 
dollars was brought against the English company in 1862.* 
The Court of Queen's Bench decided in favor of the bank. On 
appeal it was held, in 1864, that so much of the ^250,000 loan 



1 Cf. the arRuments In the Monetary Times, Vol. I, p. 419. 

« Bullion cr- Banking, with notes and observations by a Canadian banlc manager, 
Toronto, 1876, p. 44, note. 

» 33 U.C. Queen's Bench Reports, p. 285. 



Province of Canada, 1850-67 



148 



as had not been drawn for could be recovered by the bank, that 
the lower court should have so declared the liability of the 
Great Western Company, and that, as it had not done so, there 
should be a new trial, unless the parties settled on this footing 
or ascertained the amount by a referee.* 

During the litigation the capital, of course, was still locked 
up, and neither principal nor interest was settled for until the 
autumn of 1866. The bank then obtained $1,770,000 of Detroit 
& Milwaukee 30-year bonds, bearing interest at 7 per cent., 
$100,000 of which were payable annually." But instead of sell- 
ing them promptly the bank waited to realize upon the bonds, 
and thus failed to set free its locked up funds. The community 
suspected that the capital had been impaired. Distrust, in- 
spired by the failure of the preceding year, was still strong. It 
became known that the bank had been obliged to give security 
to several of its largest depositors. A run was then started 
upon the deposits. A loan of $300,000 upon collateral, se- 
cured by the help of the Government's request from the Bank 
of Montreal, averted immediate danger. This was the i6th or 
17th September, 1867. A month later another run upon de- 
posits was begun. The representatives of all the banks in 
Canada West met at Montreal the 21st October. The Com- 
mercial Bank asked for an advance of $750,000, one-half at four, 
and one-half at six months, and offered the D. & M. bonds as 
security. A discussion ensued as to the amount to be contri- 
buted by each bank, the representatives of the Bank of Montreal 
and the Bank of British North America contending that the shares 
should be in proportion to circulation and deposits; the others 
for contributions in proportion to capital. The Bank of Montreal 
offered to advance two-thirds of the money necessary to sustain 
the Commercial, provided the other banks would guarantee it. 
The British Bank offered the other third on the same terms. This 
plan was rejected by the other banks. The two Montreal banks 
then withdrew from the meeting, the Bank of Montreal agree- 
ing in the meanwhile not to discredit the Commercial, but re- 
fusing, practically, to grant assistance on the same basis as the 
other banks. An unsatisfactory understanding reached at noon 



» a Error and Appeal, p. 285. 

9 Toronto Globe, aard October, 1866. 



144 



The Canadian Banking System, 1817-1890 



I :ii 



was objected to by some of the head offices at five o'clock. 
Then the Bank of Montreal declined to accept the responsi- 
bility of taking in hand the affairs of the Commercial and pro- 
tecting the creditors.^ The Government was anxious to avert 
the failure, but as they were again owing the Bank of Montreal 
two millions and a half, they could not urge it to act. It is not 
B ent from the returns or circumstances that the latter had 
ai-^ interest in maintaining the credit of the Commercial or 
of other banks. The Privy Council did not feel justified further 
to interfere, and on the morning of the 22nd October the Com- 
mercial Bank of Canada stopped payment. ^ 

Over $2,000,000 of notes and deposits were paid in the 
thirty-five days after the 19th October. By the 31st December 
its total liabilities, averaging $4,657,000 in September, were re- 
duced to $1,871,173. The amalgamation of the Commercial 
with any other bank or banks was authorized by the Dominion 
Parliament the 21st December, 1867. (31 Vic, cap. 17.) The 
cr-ntract with the Mrjrchants'Bank of Canada, by which the share- 

ers got one share in the Merchants for three in the Commer- 
,vas confirmed the 22nd May, 1868. (31 Vic, cap. 84.) All 
its liabilities were redeemed in full. The rapidity of this redemp- 
tion, as well as the course of the bank previous to the sus- 
pension, can best be read in the table appended. ^ 

Its shareholders lost two-thirds of their investments, and 
another of the Upper Canadian banks succumbed to the fate which 
overtook them all. But the failure of the Commercial Bank was 
honorable. It was the result, as we have seen, partly of one 
large and bad account, partly of the suspicion caused by the 
bank disaster of the year before. If, however, we accept the 
explanation given by its President, it must be said that the 
♦* real and ultimate cause was the measure which had been in- 
flicted on all the banking institutions of the country."* 



I Toronto Globe, aSth October, 1867. Ottiwa Times, 13th December, 1867, Mr, Gait's 
explanations respecting the Coil nercia' Bank failure. 

1 Ibid. 

» See Table next page. 

•♦ Ottawa Times, 4th December, 1867, Speech of Sir Richard J. Cartwright, upon the 
Commercial Bank Bill. I have hesitated to use this quotation because, though none other 
were published, the press reports of the debates in these years are somewhat unreliable. 
The distinguished speaker gave evidence to the Committee of the House of Commons in 
1869, in which he remarked : " No appreciable disturbance was caused by the effects of the 
Act, the failures of the Bank of Upper Canada and of the Conimercinl Bank being clearlv 
traceable tc causes wholly unconnected with and unaffected by that measure." Vide Journal, 
1869, App. I, p. 41. 



'11;! 



Province of Canada, 1850-67 



146 



AvKHAGK MoNTHi.v STATEMENT of the Commercial Bank of Canada for the months oi 
August and February, from 1857 to 1867 inclusive, from The Canada GaxtUt. 



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146 



The Canadian Banking System, 1817-1890 



Fourth. As the event was not altogether a surprise, the ex- 
citement occasioned by this failure soon subsided. But shortly 
after the Commercial suspended, the Bank of Montreal sent a 
confidential telegraphic caution to its branch managers against 
some of the western banks who, as individual concerns, were not 
in the strongest possible condition. On the 24th October a run 
was started on several of the Ontario banks. It increased the 
next day, the Royal Canadian being the most affected and the 
Gore next. Towards the afternoon of the 26th the run nearly 
ce sed. Then came the alarming report that the Government's 
bankers were refusing the notes of the Upper Canadian banks 
except for collection. The panic returned with increased 
violence. Money rose from 9 per cent, to 12 per cent, in Mon- 
treal, The Royal Canadian managed to meet all the demands 
upon it, paying out over $400,000, but the panic abated only 
after the Government agents in all parts of the country had been 
instructed by telegraph to receive the notes of all chartered 
banks except the two that had failed (Upper Canada and Com- 
mercial). 

The rumor that revived the panic was not, to be sure, ex- 
actly correct. The explanation of the action by the Bank of 
Montreal, cT-icd through its General Manager, Mr. E. H. 
King, ./as that none of their agents had refused the notes of 
specie paying banks of Upper Canada, '^ where they had 
agencies,^ except the manager of our Kingston branch, who 
acted under misapprehension and was immediately corrected by 
telegraph."'' Two or three agents did decline to receive, except 
on collection, notes of the Royal Canadian Bank at places 
where they had no office. ^ The notes at Kingston had been 
thrown out of the deposit of a railway company, whose agent 
immediately warned all the officers on its line not to take the 



» The italics are mine. 

» The news of the action of the Bank of Montreal reached the Government at 3.30 
p.m., 26th October ; that of the correction of the Kingiston Manager, eiven by the Bank's 
nead office, at 3.43 p.m. the same day. Ottawa Times, 13th December, 1867, loc cit. 

» Journal of the Senate, 1867-68, App. I, p. 34. As a matter of fact, the notes of the 
Royal Canadian Dank were lefusea. except for collection, by agents of Mr. King's bank at 
Belleville, Brockville, London, St. Mary's, Brantford and Stratford, as well as at Kingston. 
Toronto Globe, 28th and 30th October, 1867. 



Province of Canada, 1850-67 



147 



•# 



1P 



paper of that bank.^ The damage was doi.>. long before the 
correction from the Bank of Montreal could reach Kingston. 

Those who gave evidence to the Senate Committee of 
1867-68 were nearly unanimous in testifying that trade from the 
ist of September to the middle of October was in a very satis- 
factory state ; the yield of staple crops, if a little less than tlie 
year before, was still good, and the quality excellent, prices were 
high, money plentiful, and importations not excessive. The 
timber trade was somewhat quiet, but not enough so to afifect the 
general prosperity. After the bank failure and the subsequent 
panic, uncertainty as to the attitude and intentions of the Gov- 
ernment's fiscal agent, compelled the other banks, in great 
measure, to withhold the advances obtained in the autumn by 
produce dealers and others. Yet at this time of the year an ex- 
pansion, both of discounts and circulation, was not merely 
normal, it was economically necessary. Trade, therefore, 
suffered ; produce operations were suddenly interrupted ; money 
was scarce and held at high rates ; the value of the staple pro- 
ducts of the Province was depreciated. The business activity 
of September was changed in November to business stagnation » 
If the failure of the Commercial Bank is counted the third of 
these results to which the Provincial Note Act contributed, the 
situation in which the panic was revived and commercial de- 
pression induced, must be taken as the fourth. 

Fifth. The panic, I have said, was quieted by the action 
of the Government. The larger number of runs resulted in 
drains of not more than three per cent, of the total liabilities of 
the several banks affected. In the heaviest run, not more than 
ten per cent, of such total was called for. It is not to be supposed, 
however, that distrust vanished immediately. In this connec- 
tion a comparison of the bank statements for the 30th Septem- 
ber and 30th November will be instructive. The table herewith 
indicates the changes in each direction to be noticed in the 
November statement from that of two months previous. 



I Ibid, p. 13, Evidence of Mr. Woodsidb. 



I 



i 



111 



148 



The Canadian Banking System, 1 817- 1890 



DiFFERtwTiAL COMPARISON of the Statement of Banks acting under charter in 
Ontario and Quebec, for the months of September and November re- 
spectively, 1867' 





Bank of Montreal 


Other Banks 


Liabilities 


Increase 

$679,997 
502,540 


Decrease 


Increase 


Decrease 


Gov't deposits on General Acct. . . 

'' "on Provincial Note 

Account 














Notes in circulation 


*I13.365 




«3i7.594 
1.842,818 

300,000 


Denosits bv the oublic 


1,201.424 


Due by Commercial Bank on special 
loan 






Balances due to other banks 






$420,590 
558,860 


Assets 

Specie and provincial notes 

Government securities 


1,447,869 


766,239 

300,0(,'3 


56,672 


Commercial Bank loan reoaid .... 






Due by other banks 

Notes and hills discounted ........ 


464,228 
1,304,134 








2,103,827 









The increase and decrease in the immediate liabilities and 
quick assets of the Bank of Montreal and the other banks of 
Ontario and Quebec (Upper and Lower Canada), were as follows : 

Aggregate changes from the September average in the 
November average 





Circulation 


Deposits 


Discounts 




Increase 


Decrease 


Increase 

$ 

410,502 

i,88i,400» 


Decrease 


Increase 


Decrease 


Other specie- 
paying banks* 
Bank Montreal.. 


9 

533.753 
389,184=' 


8 

851.347 


2,253,289 


749,506 
I.304.134 


8 

2,853,333 



We have seen that in the months from September to De- 
cember, there was, between the Bank of Montreal and the other 
banks, a difference of responsibilities, interests and position. The 
Government was depositing large sums in the Bank of Montreal, 



> C/. The Monetary Times and Insurance Chronicle, Toronto, 1867, Vol. I., p. 457, 

s Exclubive of the Commercial Bank. 

» As the provinrial note circuktion was profitable to the Bank of Montreal, it figures 
under the item of ciiculation as the bank's own, and is, by consequence, deducted from the 
deposits made by Government. 



Province of Canada, 1850-67 



149 



there to let them rest for sometime.' The consequence of the 
distrust prevailing in the months mentioned is plainly apparent 
from the tables. The gain of the one bank, the loss of the others, 
must be reckoned the fifth result for which, in great measure, the 
Provincial Note Act was directly responsible. 

The remoter consequences of this law will occasionally 
appear in subsequent pages. The more immediate effects de- 
tailed above were well summarized in a single sentence 
by Sir Richard J. Cartwright, delivered in the Dominion House 
of Commons the 3rd December, 1867 .^ " A statute more offen- 
sive, or more deliberately mischievous, or more calculated to 
prejudice Upper Canada, it was impossible to conceive." 

In the discussion just concluded I have ventured spmewhat 
beyond the strict limits of this part of our history. The Pro- 
vince of Canada came to an end the ist July, 1867, when the 
territory which it comprised was divided, under the British 
North America Act of the Imperial Parliament, into the Pro- 
vinces of Ontario and Quebec, and these two were united with 
Nova Scotia and New Brunswick into the Colonial confedera- 
tion of the ** Dominion of Canada." 

To sum up the growth of the banks under the Union, a 
comparative table for 1841, 1851, 1861, and 1867 is annexed. 



1 Statement of average daily bal- 
ances for month at credit of the 
Receiver-General in the Bank of 
Montreal 

1867— June * 875,372 

July 363,277 

August 639,137 

September 1,653,482 

October 1,977,619 

November 2296986 

December 1,728,622 

1868 — January 1,010,247 

February '.33'. S" 

Match 1,816,591 

April 1,632,148 

May 1,932.985 

June 1,510,214 



Average weekly balances of the 
Receiver-General's Issue Account 
with the Bank of Montreal 



Credit 

I 164,800 
345,393 
336,995 
230,195 

742,793 
802,734 

893,034 
1,186,742 

517,034 

293,090 

28,500 



Debit 



•305,840 



152,740 



Sessional Papers of the Dominion of Canada, 1870, No. 38, pp. 6-8, 
» Reported in the Ottawa Times. 



160 



The Canadian Banking System, 1817-1890 



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Province of Canada, 1850-67 



161 



Note. — relation of the bank note issue to the prerogatives of the 

STATE 

The right to issue promissory notes, payable on demand, for circulation 
as money, was not originally a Government or Crown prerogative either in 
Great Britain or the colonies. It was the common law right of any one who 
chose to exercise it. The prerogative of drawing cheques or bills of exchange,, 
of giving deposit receipts or promissory notes payable at a time future, 
could have been claimed just as logically as that of issuing bills for circula- 
tion. These instruments are all the documentary evidence of rights to 
demand, and all are available, all are used to effect transfers of rights to 
money or to goods expressed in terms of money. They are distinguishable, 
not by their function, but merely by their form and the different degrees of 
credit and transferability with which the different forms are endowed. The 
differences in the legal rules respecting them rest on the differences in the 
place, time and manner of payment, the persons to whom the payment is 
made, and the persons immediately or secondarily liable fcr that payment. 
In questions touching the economic essence of transactions in such paper, the 
legal rules are the same. Thus, e.g., where the transfer is without indorse- 
ment, whether it be a sale of the bill or note, or an exchange, or by way of 
discount, or where the assignee agrees expressly to take it in payment, he 
can neither recover against the assignor upon the bill, nor recover back the 
amount given for it, on account of failure in the consideration, unless, indeed, 
the assignor knew the bill or note to be that of an insolvent when he assigned, 
it.' The same principle obtains with regard to bank notes.* 

But the difference between the notes of a solvent bank and coined 
metal or a legal tender Government currency, is one that cannot be too often 
or too strongly insisted upon. The one is an instrument of credit, a mere 
representative ; the others, lawful money, the legal standard of value and the 
legal means of payment. Bank notes circulate and are used in money's 
stead, with like effect, only by virtue of convention. Current bank notes 
are a lawful tender in payment of debts only when the creditor does not 
object to them, as not money, and demands payment in coin. But an offer 
of current coin or Government currency endowed with forced circulation, 
whether or no it be convertible into specie, is a legal tender unconditionally. 
In short, bank notes may be, money must be accepted as payment. There 
is, therefore, no true analogy between the issue of promissory notes, payable 
on demand, and the determination and issue of the standard of value and 
the legal tender, as an exercise of the State's sovereign power. To premise 
such an analogy and to deduce from the mint prerogative the exclusive right 
of the State to issue a convertible fiduciary currency, is a process, specious 
perhaps, but illogical, unhistorical and dangerous. The true explanation 
of State interference with matters of banking and the issue of bank notes is 



I Daniel on Negotiable Instruments, Fourth Edition, New York, 1891, S 739- 
» Ibid, i 1677. P/> also. Weir, The Law and Practice of Banking Corporation!; 
under Dominion Acts, Montreal, 1888, pp. 148-163. 

II 



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The Canadian Banking System, 1817-1890 



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to be found in the general powers of supervision and regulation exercised by 
Government in the supposed interest of the public, and in the conditions 
which Government has been able to exact in return for the concessions sought 
by the banks. ' 

It follows that two of tbe propositions implied by Mr. Gait when he 
urged that the Government should resume a portion of the rights which they 
had deputed to others, were radically incorrect. These propositions were : 
first, that the right of the banks to issue notes had been originally derived 
from the Government ; and, second, that the prerogative of ispuing a fiduciary 
currency pertained to the Government. 

The right to issue bank notes existed and was exercised both in Lower 
.•and Upper Canada before banks ever became a subject of legislation. It was ex- 
■ercised by private banks, and without legislative sanction, for a considerable 
period after the early charters were granted. And in 1837-38 both Pro 
vinces interfered with the private note issue, not as an infringement on Gov- 
ernment prerogative, but as a menace to the public security. Upper Canada 
recognized the worthy private banks and permitted them, under supervision, 
to continue their business. Lower Canada, through the Special Council, 
prohibited only such banks as would not obtain licenses, furnish and publish 
returns, and submit to the regulations imposed by law. The chartered banks 
had accepted Government regulation in return for the concessions of incorpor- 
ation, the currency of their notes in the revenue, assured protection against 
forgery, the power easily to enforce stock subscriptions, and the like. The 
charters confirmed and limited the right to issue notes, but they could not de- 
pute it. For the Lower Canada banks, at least, it was a pre-existing right 
which they had already exercised. The first proposition implied by Mr. 
Gait is, therefore, not to be accepted. « 



I Chitty on the Law of the Prerogatives of the Crown (London, 1820) contains no 
mention whatever of prerogatives in respect to the currency other than the establishment of 
the standard of value and the minting of specie. The lack of ihe prerogative of note issue 
in the positive public law of Great Britain was satisfactorily est blished by Tooke, in his 
History of Prices. C/. also, Wagner Die Geld u. Credii-theorie der Peel'schen Bank Acte, 
Wiei, i86i, pp. 65, 73, 74. 

Conhrmation of the principles just formulated in the text will be found, for the 
first, in the preamble of the Act to protect the public against injury from private banks, 
quoted on p. loi ; for the second in the statements of the petitions for incorporation pre- 
sented to the Legislature of Lower Canada in 1821, and in the preambles of the charters 
passed in answer to the prayers, p. 11, supra. 

» I am aware that this position is quite opposed to that held by the late Premier of the 
Dominion, Sir John A. Macdonald. Speaking to the House of Commons, tlie 4th April, 1880, 
in reply to Mr. Mills, of Bothweil, upon the currency resolutions brought down by the Min- 
ister of Finance, Sir Leonard Tilley, he said " If it was admitted that the same power, 
sovereignty and nation had the right to issue gold or any other circulating medium, it must 
of necessity have the right, if it chose to claim it, of issuing what was equal to uold and 
silver." Then, after a reference to the undisputed prerogative of the State to prepare or 
cause to be prepared coins of gold, silver, coppi^r or what not, and »;ive them legal cunency, 
" if paper promises to pay were accepted as equal to gold and silver, the argument was 
clear." He had always thought the people and the government synonymous. The banks 
had no vesteil riuht to issue, the right to make money is in the Crown— in the people. " It 
was a matter of grace, of expediency, of legislation, by which the Crown gave up a portion of 
its exclusive right to issue what was called money to the banks, whether private or public." 
But it is easy to judge from this how, bv a false analo^iy, the great statesman confused money 
with those instruments of creitit which, in a popular sense, are often spoken of as mnncy, 
and are conventionally used in substitution for it Resting, as it does, upon this ;'. ''acy, 
even Sir John Macdonald's reasoning cannot be approved. We must still reject the ilieory 
of a Crown prerogative of issue. 



Province of Canada, 1850-67 



163 



.:!i 



In the second place, the power to issue a fiduciary currency concurrently 
with the banks, or even the right to emit a legal tender paper, had never been 
independently exercised by a Canadian Government either before or after the 
Union. The Army Bills of 1812-15 are not a pertinent case, inasmuch as in that 
affair the initiatory steps were taken by the commander of the troops, sent out 
from England, and the transactions conducted largely under his direction. 
What the local legislatures did was to give the bills currency. I will not deny 
that the right existed, for in Nova Scotia there were some ;^ioo, 000 of legal ten- 
der provincial notes in circulation. But to the theory of its possession by the 
Upper Province before the Union, the refusal of the Imperial authorities in 
1839 to allow the issue of legal tender notes payable in one year after date, is 
a serious obstacle of fact. Lord Sydenham's proposals in 1841 were for the 
creation of a Bank of Issue, not of a currency issued directly by the Govern- 
ment. The nearest approach to Mr. Gait's scheme was the device employed 
by Sir Francis Hincks in 1848-49, viz. , the payment of current debts of the 
Government in short date, interest-bearing debentures for small sums, nego- 
tiable only under par. Yet this, or anything else revealed by rather careful 
research into the history of Canada previous to 1866, will not satisfactorily 
establish the actual existence of a government right to emit fiduciary cur- 
rency. Much less will it justify the pretence of a government prerogative of 
note issue. The second proposition implied by Mr. Gait fails as completely 
as his first. 

For the discussion of a bank note currency, or of any currency, it is in- 
dispensable to rest upon the correct theoretical and legal basis. Once it is 
recognized that the business of issuing notes for circulation, promising pay- 
ment, and payable upon demand, is essentially similar to any other business 
in instruments or forms of credit — once it is seen that, historically and prac- 
tically, note issue is no more a prerogative of Government than life insurance, 
receiving deposits at call, or drawing foreign exchange, the way is barred to 
many a fallacy and delusion. The cry that " the profits of the circulation 
should belong to the Government," then appears no less ridiculous than the 
plaint, " the profits of the flour mills, the shoe factories, the building societies, 
should belong to the Government." The business of note issue, rightly con- 
ducted, requires capital just as other economic activities ; like them, it pays 
profits, for the saving of the interest on a currency of intrinsic value ac- 
crues, in the first instance, directly to the issuers. The public, however, 
derive advantage from this saving, as they gain from other economies 
and improvements in production, viz., through the reduced costs of produc- 
tion and the consequent lower prices to consumers. Those who deal with 
the banks get their services at rates which, without the issue profit, would be 
impossible. With those who do not so deal, the gains of those who do are 
divided through the cheapening of the commodities exchanged or produced 
with the assistance of the banks. Under a regime of competition, the capital 
invested in a bank issue cannot, in the long run, earn a higher return than 
other capital invested at equivalent risks. 

The contracts which result from issue operations, must be enforced. 



hi. 



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II I' 



'i u 



4\'- 



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1 















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ii. 



154 



The Canadian Banking System, 1817-1890 



like other contracts, by the legal and judicial organization of the State. To 
provide for the security of such contracts, prevent frauds and avert public 
injury, the Government may regulate and supervise the note issue as it does 
the operations of common carriers, insurance companies and monied corpora- 
tions of other kinds. The gain from the note issue, in common with other 
income, will be a legitimate subject for taxation, but not for such as violates 
the canons of equality and uniformity. If a necessitous government is con- 
strained to derive greater revenue from the note issue than is possible by 
leaving it in private hands, it may by the exorcise of sovereign power, exclude 
all but itself from this department of economic activity. This practically is 
what many European states have done. But those who guide a nation's 
policy may well weigh carefully the commercial disadvantages attending such 
a usurpation, and the tendencies towards forced circulation, fiat money, 
depreciation and repudiation which it is likely to release. 



i > 



CHAPTER VI 



NEW BRUNSWICK AND NOVA SCOTIA 



Hi 



§ 33- — THE BANK CHARTERS OF NEW BRUNSWICK 

The first bank established in this Province was chartered 
as the President, Directors and Company of the Bank of New 
Brunswick, by an Act of the local Legislature, which received 
Royal assent the 25th March, 1820. As expressed in the pre- 
amble, it was the opinion of the House of Assembly that " the 
establishment of a bank in the city of St. John will promote 
the interests of the Province by increasing the means of circu- 
lation." (60 Geo. III. cap., 13, N.B.) The capital stock was 
limited to ;^5o,ooo, and the payment of the whole required 
within eighteen months. In 182 1 the stock limit was reduced 
to ^30,000, and four years later raised again to ;^50,ooo, on 
"account of the increase of the trade o the Province." The 
President, Directors and Company of the Charlotte County Bank, 
to be situate at St. Andrews, were incorporated in 1825, with a 
capital stock of ;^i5,ooo, all to be paid up within a year and a 
half. (2 Geo. IV., cap. 20.) Both these banks were smaller 
than those established in Montreal, Quebec and York in 
1817, 1818, and 1822, and it is manifest that they were 
intended to be local affairs, but the New Brunswick charters 
are different m only a few essential respects from those passed 
in Upper and Lower Canada. The limitation upon the total 
debts which might be owed by these corporations was more 
strict, being twice the amount of their paid-in capital stock, and 
the term of their charters was twenty years. In 1834 the Cen- 
tral Bank of New Brunswick was incorporated, and provision 
made for establishing it at Fredericton. (4 Wm. IV., cap. 44.) 
The Act of incorporation contained a number of new provisions 
similar in effect to those recommended by the Committee for 
Trade of His Majesty's Privy Council in 1830 and 1833. 

No bank bill, «.g^., was to be issued until £'j,S^o (one-half 



I *' 



!i: 






I 



166 



The Canadian Banking System, 1817-1890 



the authorized stock) were paid in. The Governor was em- 
powered to appoint commissioners who should count the money 
in the vaults and ascertain whether it were bona fide capital. 
(This authorized stock was raised in 1836 to ;^5o,ooo.) The 
stockholders were made chargeable in their private and indi- 
vidual capacities for the payment and redemption of any bills 
issued by the corporation, and for the payment of all debts at 
any time due from the corporation, in proportion to the stock 
they should respectively hold, but not to excted the amount of 
the stock actually held by them, nor in exemption of the joint 
stock of the corporation from liability for its debts and engage- 
ments. Loans on the pledge of the bank's own stock were for- 
bidden. Provisions were introduced with respect to the distri- 
bution of the capital stock and prohts among the shareholders in 
case of dissolution of the bank, and to the continuation of their 
liability to redeem the notes in circulation for two years and no 
longer after the date of the dissolution. Debts of the directors 
to the bank, either as principals, sureties or indorsers, were 
limited to one-third of the paid-in capital stock, and semi- 
annual returns to the Secretary of the Province were required. 
No note or bill offered for discount was to be excluded by a 
single vote. A list of the delinquents was to be furnished to 
the Board upon discount days, and the presence of his name in 
the list was to disqualify any director from sitting on the Board. 

In 1834, the Commercial Bank of New Brunswick was in- 
corporated by Letters Patent,' The charter of the St. Stephen's 
Bank passed in 1836 (6 Wm. IV., cap. 32) created a corpor- 
ation capitalized for ;^25,ooo, and subjected to the provisions 
already described. It added the rules that no stockholder 
should own more than twenty per cent, of the capital stock and 
that " no action shall be brought or maintained upon any bank 
bill or bank note issued by the corporation, before such bill or 
note shall have been presented at the bank for payment, and 
default in payment thereupon shall take place." Upon shares 
seized and sold under execution, the bank did not enjoy the 
prior claim for stockholder's debts which it could enforce be- 



> The Charter Acts ot the General Assembly of the Province of New Brunswick, 
1853. p. 81. 



New Brunswick and Nova Scotia 



167 



fore transfers of stocks in other ways became valid. The limi- 
tation upon total debts was altered by excluding deposits from 
the amount which should exceed twice the capital stock paid- 
in. The City Bank was incorporated the same year. Its loca- 
tion was to be St. John ; its capital ;^ioo,ooo, half to be paid 
in one year, and half within five years. But the City Bank had 
a short existence. The Bank of New Brunswick received per- 
mission to doub . its capital in 1837, and was subjected to new 
provisions similar to those detailed. (6 Wm. IV., cap. 57.) By 
an Act of 1839 the City Bank was united to the Bank of New 
Brunswick and merged within it. (2 Vic, cap. 26.) 

The year 1837, however, was not altogether one of dimin- 
ished banking competition. The Legislature in this session 
granted the Bank of British North America powers to sue and 
be sued in the name of a local officer, and facilitated its busi- 
ness in other ways. (8 Wm. IV., cap. 16.) Afterwards, be- 
tween 1841 and 1866, various additions to the capital stock of 
the four existing banks were permitted, and their charters ex- 
tended to dates between 870 and 1876. The Shediac Bank 
was incorporated in 1856 (19 Vic, cap. 66), the Miramichi Bank 
in 1857 (20 Vic, cap. 28), and the People's Bank of New 
Brunswick in 1864. The Miramichi Bank was proposed for 
Chatham, N.B., and the authorized capital was ;^2o,ooo. The 
People's Bank was established at Frederict'^i with a capital 
stock of $60,000. 

In this and the subsequent legislation, provision was made 
for increasing the capital stock of the banks upon the initiative 
of the shareholders and without further legislative sanction. 
New stock was always, according to law, to be disposed of at 
auction, and the premium paid upon it divided pro rata among 
new and old shareholders. But in other respects the bank 
charters granted in 1856, 1857 and 1864 are in no way different 
from those of 1834 and 1836. All the banks, however, had been 
forbidden by an Act of 1838 (i Vic, cap. 18), to issue notes of a 
less denomination than five shillings or notes of denominations 
not multiples of that sum. For violation of the Act there was 
imposed a penalty of £2^, recoverable in courts of competent 
jurisdiction by the fir^t person suing therefor, one-half for him- 
self and one-half to the use of the Province. Receiving the 



Wi- i[ 



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■i' :if 



■ 'iM 



^ ' .'. i 










\l 



168 



The Canadian Batikinf( System, 1817-1890 



notes and checks dtuoiinccd by the Act rendered one liable to 
forfeit a sum equal to the nominal value of the instrument 

Some years previous to 1865, the Charlotte County Bank 
ceased its operations and business and paid off, so far as they 
had been presented, all claims upon it. In the year named it 
was authorized, after newspaper notice for twenty-four months, 
to wind up its affairs, and divide the assets remaining among the 
shareholders, the further liability of whom for the debts of the 
bank was thereupon to cease and determine. (28 Vic, cap. 44.) 
A similar Act was passed in 1868 with respect to the Central 
Bank of New Brunswick. (31 Vic, cap. 56.) In the sessions of 
1865 and 1867, on the contrary, the establishment of a number 
of new corporations was authorized ; the Albert Bank, the 
Woodstock Bank, the Northern Bank, the Merchants' Bank of 
New Brunswick and the Eastern Bank of New Brunswick were 
all granted charters. I am not aware, however, that to any of 
these undertakings was subscribed and paid the capital required 
by law before they could begin business. In this they 
were as unsuccessful as the Miramichi and Shediac banks of 
the preceding decade. 

At the time that New Brunswick entered the Confederation 
the Bank of New Brunswick, the Commercial Bank of New 
Brunswick, the St. Stephen's Bank and the People's Bank were 
in operation, the Westmoreland Bank in liquidation, and the five 
other charters just named were still available. 

§34. — NOVA SCOTIA 

The banks in Nova Scotia were neither so many nor so old. 
The establishment of a bank at Halifax had been mooted, to be 
sure, in 1801, and ^30,000 of the capital subscribed, but it was 
proposed in this connection that no other bank should be estab- 
lished by any future law of the Province during the continuation 
of the corporation. The feature of monopoly was probably fatal 
to the plan's success,^ as the bank was not started. Another 
project for a joint stock bank was published by the Halifax Com- 
mittee of Trade in February, 181 1, but no action was taken in 



» Murdoch, History of Nova Scotia, Vol. 3, p. 205. 






New Brunswick and Nova Scotia 



169 



the matter by the Assembly.^ In 1825, however, a private bank 
of issue, discount and deposit, was started in Halifax, the adver- 
tisement of opening, upon the 3rd September, being signed by 
eight partners.'' This was the Hahfax Banking Company, 
which in 1872 was sold out to the present chartered bank of the 
same name. 

There can be little doubt that the extension of the banking 
system was somewhat delayed by the circulation, as money, of 
the Treasury notes of the Province. Since 1812 the Province 
had had in these a paper currency which was seldom, in large 
amounts, immediately convertible into specie, and never, in 
point of elasticity, comparable to a bank note circulation. Yet 
it sufficed to work a certain economy of specie, to give some 
help to the Treasury, and to serve the colonists as a medium of 
exchange at a time when the specie circulation was neither 
abundant, uniform, nor satisfactory, ^ 

Finally, the Legislature became convinced that the '* estab- 
lishment of a public bank will be greatly itdvantageous to trade 
and commerce, and otherwise advance the interests of the Pro- 
vince by increasing the circulating medium of business, and 
promoting a more extensive and beneficial employment of the 
resources and industry of all classes of its inhabitants."* 

To further such purposes, and to grant the prayer of certain 
petitioners, the Bank of Nova Scotia, the first chartered bank 
in the Province, was incorporated by an Act approved the 30th 
March, 1832. (2 Wm. IV., cap. 50, N.S.) Its authorized stock 
was ;^ioo,ooo in 2,000 shares of £c^o each. Business might 
begin when ;^50,ooo were subscribed and paid up in specie or 
Treasury notes. Land might be owned in fee simple to the value 
of ;^5,ooo. But loaning upon the bank's own stock, upon mort- 
gage or upon real estate, was prohibi^^ed. Each director was 
required to hold twenty shares, and might not be a director in 
any other bank either within or without the Province. Share- 
holders with one to two shares had one vote. For more than 



1 Ibid, p. 308. 

« Ibid, p. 538. 

» The principal details ot the Treasury Notes leRislation are given in the note at the 
end of this chapter. 

« Vide preamble, a Wm. IV., cap. 50, N.S. 






i ( 



1 



i 



i" 



160 



The Canadian Banking System, 1817-1890 



two shares they voted according to a scale, by which the holder 
had one vote for each two shares above two and not above 
twelve, for each three above twelve and not above thirty, one 
vote, and for each five above thirty, one vote ; but no share- 
holder was allowed more than fifteen votes, or to hold more 
than three proxies. 

In case of loss or deficiency in the capital stock of the bank 
on account of the official mismanagement of the directors, the 
shareholders were liable for debts of the bank in their private 
and individual capacities, but not liable to pay a sum exceeding 
the amount of stock actually held by them respectively, in addi- 
tion to the stock so held. This was the Nova Scotian expres- 
sion for the double liability of stockholders, adopted by New 
Brunswick in slightly different phrase a few years later. The 
debts of the corporation, exclusive of the sum due on account 
of deposits, were limited to thrice the amount of the capital 
stock paid in. As in New Brunswick, this restriction was the 
only limit upon the amount of the notes which might be issued. 
In case of excess, both the corporate property, and the directors 
in their individual and several capacities, were to be liable. 
The bills and notes of the corporation were to ^e payable on 
demand in gold and silver. Notes for less than twenty-six 
shillings were forbidden. If the bank should refuse to redeem 
its notes in specie, it incurred the penalty of paying interest at 
twelve per cent, per annum upon their face value, from the time 
of refusal to the time of payment. A statement of the bank's 
affairs was to be made to the annual meeting of the shareholders, 
and a copy sent to the Secretary of the Province. Either by 
order of the Governor-in -Council or by a joint committee of the 
Legislative Council and House of Assembly, the bank might be 
investigated. And if it should then appear that the capital 
stock had been diminished by loss and bad debts to half the sum 
subscribed, it was provided that the corporation should be dis- 
solved. 

Such were the important provisions of the first bank charter 
passed in Nova Scotia. The structure of the corporation, its 
powersandthe restrictions upon it were of the same general type 
as of the banks of the other Provinces. There is no need to 
describe in complete detail legislation so like that already fami- 



li 



New Brunswick and Nova Scotia 



ICl 



liar. But in (a) the stipulations for payment of capital, (b) the 
double liability of shareholders, (c) the minimum placed upon 
the denomination of bank notes issued, {d) the penalty for 
suspending specie payments, and in (e) the provision for wind- 
ing up the bank in case the stock were badly impaired, the 
charter is distinctly in advance of any previously passed by other 
British North American Provinces, and in force in 1832. In the 
first three of these peculiar restrictions, the reader will unques- 
tionably detect the influence of the suggestions made by the 
Committee of the Privy Council for Trade in 1830. The pur- 
pose of the fourth and fifth is evidently the same as that sought 
by the Imperial authorities, viz., maintenance of redemption and 
preservation of a capital guarantee, but the means most closely 
resemble those adopted in the legislation of Massachusetts. 

For five years the Bank of Nova Scotia was the only char- 
tered bank in the Province. In its first ten years it divided 
among the shareholders profits at the average rate per annum 
of 8.9 per cent, of its capital and increased that capital to 
^140,000.' After 1842, however, dividends rarely exceeded 
6 per cent. 

One reason was the competition of the Bank of British 
North America, which had begun business in Nova Scotia in 
1837, and secured the right to sue and be sued in the name of 
a local officer in 1838. (i Vic, cap. 24.) Then there was the 
statute of 1834 (4 Wm. IV., cap. 24), which prohibited the issue 
of bank notes for sums less than £5, and thus closed to the 
banks the profitable and important business of circulating the 
one and two pound notes necessary for retail exchanges. It 
also provided that all bank notes should be made payable in 
gold and silver to the amount of their face value to the bearer 
or holder of the undertaking and upon demand, or bear interest 
at 12 per cent, per annum from the day of refusal to the day of 
final payment. Notes payable to real or fictitious persons and 
transferable by indorsement were made negotiable by delivery 
merely and the indorsement declared unnecessary. The pen- 
alty of ;^io imposed for each note, bill of exchange, draft or 
check issued for less than £5, was recoverable by acHon for debt, 



I Journal of the House of ABseinbljr of the Province of Nova Scotia, 1846, Ap|>endis 18. 



162 



The Canadian Banking System, 1817-1890 



one-half to the prosecutor and one-half to the Crown. Forgery 
of the notes was punished by not more than seven years in the 
Bridewell at hard labor, and all the costs of prosecution ; theft, 
by the same penalties as were imposed for stealing other things 
of equal value. 

Another cause of the lower profits of the Bank of Nova 
Scotia may be found in the constitutional struggle which was 
carried on in the Province in the earlier part of this period, and 
the commercial disturbances due to it. To comptl the Execu- 
tive annually to convene it, the Legislature adopttd the policy 
of continuing necessary Acts for one or two years only. Be- 
tween 1 841 and 1846 ihe charter of the Bank of Nova Scotia and 
the amending Act of 7 Wm. IV., were thus continued no less 
than five times, in order annually to prevent their expiry. 

At last, in 1847, the charter was continued for lo years. 
The form of semi-annual returns to the Government recom- 
mended by the Lords of the Treasury was adopted, and the 
penalty of charter forfeiture imposed for note issue in excess of 
the statutory limit (thrice the capital stock paid up). (10 Vic, 
cap. 57, N.S.) The charter was again extended in 1856 for a 
period of 15 years, and permission granted to increase the capi- 
tal stock to ;^^oo,ooo. (19 Vic, cap. 95.) By another Act of 
the same session, the Legislature incorporated the Union Bank 
of Halifax. In 1859 the Bank of Yarmouth was chartered ; in 
1864 the People's Bank of Halifax, and the Mutual Bank of 
Nova Scotiw. ; and in 1865 the Commercial Bank of Windsor.^ 

These later charters repeated almost verbatim the provi- 
sions of the amended Act governing the Bank of Nova Scotia. 
The banking system as originally worked out caused so few 
difficulties and promoted so much the convenience and pros- 
perity of the colonies, that they felt very little temptation to 
change it. The banking history of Nova Scotia, therefore, is 



1 For these banks the charters provided 

Authorized Charter 

Capital Expiies 

Union Bank of Halifax 1^230,000 1871 

Bank of Yarmouth 30,000 1871 

People's Bank of Halifax 11400,000 1879 

Mutual Bank of Nova Scotia 1,000,000 1869 

Commercial Bank of Windsor 300,000 iUb3 



Required to 
be paid up 
before begin- 
ning business 
£50.«>o 

I3,50<1 

$160,000 

330,000 

30,000 



New Brunswick and Nova Scotia 



168 



not eventful. The private banks carried on all branches of 
banking, including note issue, in competition with the chartered 
banks. Their proprietors were men of wealth ; they enjoyed 
the confidence of the community, and conducted their business 
according to recognized banking principles. The currency law, 
with its penalty for suspending specie payment, sufficed to keep 
the note circulation secure and within proper bounds. Down 
to 1873 a bank had never failed in the Province of Nova Scotia, 
nor had the finger of suspicion been pointed at any of them, 
either chartered or private.^ When the province joined the 
Confederation five banks were acting under local charters, viz., 
the Bank of Nova Scotia, Bank of Yarmouth, People's Bank of 
Halifax, Union Bank of Halifax, and Merchants Bank of 
Halifax ; the charter of the Commercial Bank of Windsor 
was still available. 



§ 35. — RELATION OF BANK LEGISLATION IN THE MARITIME PROVINCES TO 
THAT OF THE DOMINION 

I. In the two greater Provinces whose bank charters have 
been discussed, we found that the first legislation was shaped 
on almost the same lines as that of the Canadas. Still, the 
banking history of Nova Scotia and New Brunswick is much 
simpler. The system originally established was subjected to 
no such energetic and repeated attacks, either by scheming in- 
dividuals or by the Government of the day, as we m et in the 
Provinces of Upper Canada and Canada. On the other hand, 
we may detect a certain similarity in theforces moving in the later 
stages for the improvement of the system. Whether the safe- 
guards latterly inserted in bank charters were a purely local 
development, is a question that hardly needs to be raised in the 
cases of New Brunswick and Nova Scotia. The constitutional 
governments of these Provinces were in no substantial respects 
different from that of the Canadas. The Eastern colonies 
were kept in pretty much the same sort of tutelage by the 
Colonial Office in Downing Street as those in the West. We 
know that the Treasury regulations were transmitted, as cir- 



> Journal of the House of Commons, Canada, 1869, Appendix I., p. 63, Evidence of 
Messrs. Rowlky, Killam and Lewin. 






164 



The Canadian Bankinfr System, 1817-1890 



culars, to the colonies generally, with instructions for their 
observance. Lord John Russell's despatch of 1840 appears in 
the legislative documents of New Brunswick. Reference to 
the actual statutes shows that subsequently to the receipt of the 
Treasury regulations, provision was made in bank charters that 
the spirit of the more essential rules should be observed. 

II. As Newfoundland is no part of the Dominion, it is un- 
necessary to treat of banking there. Prince Edward Island, 
though within the Confederation, is of no such importance that 
its banking laws could have affected the measures adopted by 
the Dominion. We may, accordingly, disregard the banking 
history of this colony until it becomes a part of the broader 
study. 

III. Even Nova Scotia and New Brunswick, before the 
Confederation, were, in great measure, self-contained com- 
munities. Though exporting some natural products and buy- 
ing manufactured supplies abroad, they were not, on the whole, 
strongly affected by the commercial movements in other parts 
of the world. Nova Scotia, for instance, suffered practically 
nothing from the crises of 1837 and 1857. New Brunswick, 
however, experienced severe commercial depression in 1848, in 
consequence of heavy importations during the preceding period, 
and a falling off in the demand for its principal exports. 

Banking was chiefly confined to the cities of St. John and 
Halifax, and two or three of the seaports next in importance. 
The other towns carried on their business through the cities. 
Branch banking had not yet received that extension which, 
since Confederation, has brought the office of a strong bank to 
every town and almost every considerable village. Besides the 
ordinary business of receiving deposits, issuing notes, and dis- 
counting for local purposes, the banks enjoyed a profitable busi- 
ness in exchange. The trade with Upper and Lower Canada 
was small, but they bought and sold large amounts of bills upon 
Boston, New York and London. During the period of Recipro- 
city the American trade was especially important, as that mar- 
ket for fish and timber was wide and active. Indeed, the prin- 
cipal business of Nova Scotia at this time was shipping fish and 
timber to the West Indies and the United States. The returns 
from these shipments were mostly in sterling exchange, which 



1 



New Brunswick and Nova Scotia 



166 



was sent to London and drawn against to pay for dry goods, 
hardware, and other colonial necessities. The banks also ob- 
tained large amounts of sterling bills from the Imperial authori- 
ties at Halifax, in exchange for specie to pay the troops and buy 
supplies for the garrisons. 

The growth of business between 1832 and 1841 was especi- 
ally remarkable in New Brunswick, It is best illustrated by the 
returns made to the Provincial Governments in these years. 
For purposes of comparison, returns for 1851, 1861 and 1867 are 
given in the same table. Such returns of Nova Scotia banks as 
I have been able to secure are also given. They are few, as 
there appears to have been no regular publication of statements 
from the chartered banks of Nova Scotia, either in the legisla- 
tive documents or the Royal Gazette of that Province. 



1 



166 



The Canadian Bonking System, 1817-1890 



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and the Canada Gasettt. 



New Brunswick and Nova Scotia 



167 



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ectively, 



IV. Finally, the Provinces of Quebec and Ontario were to 
enjoy in the councils of the Dominion a certain preponderance^ 
as well on account of their greater wealth, population and trade,, 
as of their larger representation in Parliament. Where the prece- 
dents and laws of the Maritime Provinces differed from those of 
the Province of Canada, the legislation of the Dominion was 
generally drawn up according to the Canadian lines. Especi- 
ally is the effect of this tendency to be remarked in the legislation 
with regard to the banks. Those in Canada, both in the aggre- 
gate, and for the most part individually, were superior in power, 
resources and influence, to those of the Maritime Provinces ;. 
their efforts to preserve the continuity of their own development 
were destined to prevail over similar attempts by weaker rivals- 
It is the more necessary, accordingly, to know well the charters 
granted in Canada, and the forces there at work. This study 
was the purpose of the chapters II to V. 

For the four reasons offered in the preceding paragraphs, a 
further study of the banking history of the Maritime Provinces 
need not be undertaken. It cannot materially serve our present 
purpose to trace the development of the banking system which 
prevails in Canada to day. 

NOTE. — THE TREASURY NOTES OK THE PROVINCE OF NOVA SCOTIA 

The Treasury Note issues began in 1812. The first amounted ta 
;^i2,ooo of notes bearing interest at six per cent., receivable at the Treasury 
for public dues and not re-issuable. "Warrants on the Treasury were made pay- 
able in gold, silver or Treasury notes, at the option of the payee. (52 Geo. III. 
cap. 7, N.S.) The subsequent legislation is an example, in many ways, of the 
course usually run by fiduciary issues of governments. The ultimate re- 
demption, however, was somewhat more creditable than the average. 

This issue of 1812 was withdrawn in 1813 and a new issue authorized of 
/'2o,ooo in non. interest bearing and re-issuable notes. There were provisions 
for funding the notes in amounts of not less than /loo, by interest-bearing 
certificates, in case the Treasury had no gold. The notes issued under this 
statute were not payable on demand in specie until three years after the date 
of publication of the Act. (53 Geo. III., cap. 15.) Thus in the second year 
of its existence this government currency became irredeemable on demand. 

In 18 1'' a new issue of ;^50,ooo was authorized, the notes bearing date 
the 30th April, and being payable on demand in gold or silver after the 31st 
December, 1817. They were non-interest bearing, fundable quarterly and 
re-issuable in like manner as the preceding issue. (57 Geo. III., cap. 17,)- 
;f lo.ooo more notes of denominations of £1, £2, and £s were authorized in. 

12 



I I I 

I i 1 



I 



i 



III 



168 



The Canadian Banking System, 1 817- 1890 



1819. Loan offices, under the direction of commissioners, were established 
at Annapolis, Halifax and Kings, for loaning in amounts of not more than 
;f 200 to each borrower, the notes upon real estate security at the interest of 
6 per cent. Repayment of one third of the principal was to be exacted at 
the end of three, six and nine years after the 31st December, 1819. Loans 
were made only upon unencumbered estates of treble the value of the sums 
secured. Provision for funding the notes at six per cent., after 1822, and 
cancelling all thus retired, was included in the statute. Notes unpaid or un- 
funded after the 31st December, 1820, were made payable on demand in gold 
and silver, and thereafter not re-issuable. 

The next year (1820) an issue of /2o,ooo more was authorized, the 
notes 'being payable the 31st December, 1822. At the same time the total 
circulation was limited to ;^7o,ooo. (60 Geo. IIL, cap. 18.) During the 
session of 1820-21, the circulation was further limited to ^66,227 in notes for 
five shillings, ten shillings, £1, £2, and £^. The notes bore no interest, were 
to be dated on the first Monday in January or July, according to the half year in 
which they were issued, were re-issuable and payable on demand in specie after 
three years from the day of date. The Treasury being then unable to pay it 
in gold and silver, was empowered, as usual, to fund the notes with certifi- 
cates at 6 per cent, (i and 2 Geo. IV., cap. 4.) In 1826, new commissioners 
were appointed to issue some ;^40,ooo of Treasury notes and to cancel the old 
ones in circulation. These were also re-issuable, receivable for public dues, 
and fundable after thr^se years. But the notes were now made payable in 
payment of warrants upon the Treasury, whenever the Treasury should not 
have the needful gold and silver. The payee being deprived of his 
election between specie and Treasury notes, the notes, therefore, became a 
legal tender in discharge of Government debts. (7 Geo. IV., cap. 14.) Two 
years later the Provincial Treasurer was directed to apply what gold and 
silver should come into his hands exclusively to the payment of the funded 
debt. In 1829 the limit of the circulation fixed at ^40,000 in the preceding 
year was raised to ;^55,ooo, and in 1832 to /^8o,ooo. (9 Geo. IV., cap. 3 ; 10 
Geo. IV., cap. 43 ; 2 Wm. IV., cap. 64.) 

The next year the defective state of the currency and the desire to pro- 
vide for its specie redemption led the Legislature to enact that the payment 
of customs duties should be in gold and silver alone. The Treasurer was in- 
structed, whenever he had the specie, to pay treasury notes in sums of £10, 
upon presentation ; when notes in sums of /'loo or over were presented for 
payment, and sufficient gold or silver were lacking, the holder was entitled to 
rticeive interest bearing certificates for like amounts. When the Treasurer 
laicked both specie and notes, the commissioners provided for the payment of 
Government dues, certificates of funded debt which bore interest at 4 per 
c6tit., and were limited to an outstanding total of/'2o,ooo. The commissioners 
ihight issue new notes for amounts equal to those retired by certificates, and 
these new notes were payable in discharge of warrants upon the Treasury. 
<3 Wm. IV., cap. 38.) 

According to an Act of 1834, the notes were received for customs duties 
at Ihe rate of i6s. cy. per £ stg. (4 Wm. IV., cap. i.) In 1835 the interest on 



New Brunswick and Nova Scotia 



169 



certificates by which the notes were funded was reduced by statute from six 
to five per cent., while the interest on ;^ii,5oo of the certificates of f mded 
debt, issued under the Act of 1833, was raised to five per cent. The Legisla- 
ture further provided for funding the notes, prohibited the re-issue of notes 
funded, and limited the amount of certificates issued under the Act and out- 
standing to ;^i8,5oo, while pledging the payment of the whole sum by the ist 
January, 1838, or as soon as possible thereafter. (5 Wm. IV., cap. 22,) The 
province was still liable in 1846 for some ;^30,ooo upon certificate.!, a large 
amount of Treasury notes were outstanding, and the Government owed ^27,000 
to the Savings Bank at Halifax. The former laws relating to Treasury notes 
were repealed, and the substitution of a new issue for the notes in circulation 
authorized. But according to the new statute, the notes were still payable to 
holders of warrants upon the Treasury, if there should be no gold or silver 
available. They might be re-issued. The amount in circulation was limited 
to its then figure. Notes were receivable at the Treasury, and by Collectors 
of imposts and light duties at their par value. Customs duties were payable 
in gold, silver and Treasury notes only. (9 Vic, cap. 14.) This, apparently, was 
discrimination against bank notes. The banks, indeed, already suffered some- 
what by the partiality of the Legislature for Treasury notes, for they were 
prohibited by an Act of 1834 (4 Wm. IV., cap. 24). from issuing notes for less 
than £^ currency. 

Under the law of 1846, notes were issued down to the time of Confeder- 
ation. Assistance granted to railways in 1854 was the excuse for an addition of 
;^50,ooo in notesof 20 shillings, to the /loo.ooo currency, or thereabouts, already 
in circulation. (17 Vic, cap. 3.) These, like the issue of 1846, were nominally 
payable on demand in gold or silver. The form of the note was as follows : — 

One /■ One 

Pound. * Pound. 

Province of Nova Scotia — The bearer hereof is entitled to receive at the 
Treasury, Twenty Shillings. 

Dated at Halifax the day of 18.. .. 

I Commissiotiers. Treasurer. 



u - ' )'i 



m 



But practically the Treasury notes of Nova Scotia were irredeemable ; large 

sums could not be converted into specie at the option of the holder ; nor 

could they, for example, be safely used by banks as a part of their reserves. ' 

The only transactions in which, so far as I can discover, they were legal 

tender, was in payment of warrants upon the Treasury, when there was in- 
sufficient gold or silver to meet the debts of the Government. A qualified 
redemption was kept up by the possibility of using the notes at their par 
value in payment to the Govsrnment ; but this did not suffice at all times to 
prevent a depreciation. The indebtedness of the Province upon this paper 
was assumed by the Dominion of Canada in 1867. The amount was then 
$605,859.12. Redemption was so rapid during the next five years that by 
1872 only 961,685 were still outstanding, and by 1890, 939i743. (Public Ac- 
counts, Canada, 1890, p. 38.) 



> Journal of the House oi Commons, Canada, 1869, Appendix I, p, 46, Evidence of 
A^ESSRS. LtwiN and Rowley. 



IT .' 






i ;i 



CHAPTER VII 
BANKING REFORMS 1867-1871 

§ 36. — PRELIMINARY MEASURES 

By the British North America Act of 1867, the ParHament 
of Canaaa was given exclusive legislative authority in all mat- 
ters coming within the subjects of currency and coinage, 
banking, incorporation of banks and the issue of paper money, 
savings banks, bills of exchange and promissory notes, interest 
and legal tender.* 

♦'An Act respecting Banks" (31 Vic, cap. 2), was the 
earliest statute enacted under these powers which concerns the 
present study. This was merely a temporary measure, the 
expiry of which was fixed for the end of the first session of Par- 
liament, after the ist January, 1870. Yet some interest 
attaches to it as an early indication of the force with which Can- 
adian precedents influenced the legislators of the Dominion. 
It first extended the powers of banks previously incorporated by 
any of the Provinces to the territory of the whole Dominion. 
Banks in Nova Scotia and New Brunswick were subjected to 
the tax of one per cent, upon the excess of their average circula- 
tion, above the average weekly amount of coin and bullion kept 
in their vaults, and reported, with other items, semi-annually to 
the Dominion Government. The remainder of the law is prac- 
tically a re-enactment for the Dominion of Canada of the general 
legislation upon banks previously in force in the province of 
the same name. Banks were empowered to hold and dis- 
pose of mortgages taken as additional security for debts trans- 
acted in the usual course of their business, to purchase and hold 
lands thus mortgaged to them, to bid in lands as auctioned at 
their suit, acquire absolute title therein, to act on power of 
sale, etc., etc. 

The Dominion Parliament also adopted the law as to loans 



> Imperial Statutes, 30 and 31 V., cap. 33, section gt, clauses 14 to 16, 18 to zo inclusive. 



Banking Reforms, 1867-71 



171 



on warehouse receipts, described in the last chapter hut one. 
The period for which the banks might liold the commodities 
ilescribed by the instrument washmitedto six mouths, except in 
the case of timber, when a twelve months' holdinj? was allowed. 
Section 9 of the Act provided for the case where the warehoiise- 
man and the borrower were one and the same person ; section 10 
declared that advances granted by banks upon the security of 
warehouse receipts, bills of lading, specifications of timber, and 
the like should have priority over claims of the unpaid vendors. 
Both these features had been added to the Province of Canada 
statute in 1861, the first because the courts had decided that the 
warehouseman, etc., must be the bailee and not the owner of the 
goods; the second, in order to make the law certain, as the un- 
paid vendor previously had the prior lien in some cases.' All 
banks were exempted from penalties for usury, but were not 
permitted to recover at law any higher rate than 7 per cent. 
Graduated charges for the expenses of agency and collection, 
not to exceed one-half per cent, for ninety day paper, were per- 
mitted to banks discounting notes payable at some office of 
their own, other than the place of discount. The usual charge 
of one-half per cent, in addition to the regular rate of discount, 
was permitted when the note should be payable at any other 
place and not at a branch of the same bank. 

A second re-enactment of Canadian legislation occurred in 
1868 : '* An Act to enable Banks in any part of Canada to issue 
notes of the Dominion instead of issuing notes of their own." 
(31 Vic, cap. 46.) It was the Provincial Note Act of 1866, 
phrased in the same general terms, extending the same general 
ofiTers. But aside from its fiscal object, it was manifestly in- 
tended merely to continue the arrangements with the single 
bank which already had charge of the Government issue under 
such an agreement that, even had they wished, it would have 
been impossible for other banks to take advantage of the 
Government's ostensible offer. 2 The eight millions of Province 



'i'-f 



iiHii? 



*'i(; 



I The whole development is fully treated by Z. A. Lash, '' Warehouse Receipts, Bills 
of Lading, and Securities under Sec. 74 of the Bank Act," Journal of the Canailian Bankers' 
Association, Vol. IL, p. 54. The work first came to my notice after this and the subsequent 
references were written. 

» Journal of the House of Commons, Canada, 1870, Appendix 2, p. 5, A Letter of Sir 
Francis Hincks, Minister of Finance, to R. B. Angus, Esq., General Manager of the Bank of 
Montreal, 14th February, 1870. 



m 



I 



1- 



ll I 



172 



The Canadian Banking System, 1 817- 1890 



of Canada notes prepared in 1866, and the 'ive millions thereof 
in circulation in 1868, were declared to be Dominion notes, for 
which the Dominion alone should be responsible. It was also 
provided that the Governor might, in his discretion, establish 
branches of the Receiver-General's department in Montreal, 
Toronto, Halifax and St. John for the issue and redemption of 
Dominion notes, or might make arrangements therefor with any 
chartered bank or banks, and allow for such services a com- 
mission of not more than one-quarter of one per cent, for every 
three months upon the average amount of notes in circulation 
during that period. Owing to the difference of currencies, notes 
made payable in Halifax were legal tender in Nova Scotia only, 
and at the rate of $5 per pound sterling. 

In 1869 their charters being about to expire, the Parlianifnt 
continued till the end of the first session of Parliament, after the 
ist January, 1870, the corporate existence of the Quebec Bank, 
City Bank, Banque du Peuple, Bank of Toronto, Ontario Bank, 
Bank of Brantford, Canadian Bank of Commerce, Royal Cana- 
dian Bank, La Banque Nationale, the Gore Bank and Niagara 
District Bank. 

§ 37- — THE QUESTION OF BANKING REFORM 

By the measures of 1867 69, time was gained to consider 
the great problem of assimilating the currency and banking 
systems of the several provinces, and of creating out of the 
diversity one general, uniform system for ,the whole country. 
Upon the day that Confederation became a fact, there were 
eighteen banks carrying on business in Ontario and Quebec, 
under charters granted by the Province of Canada, five working 
under Nova Scotia charters, and four under Acts passed by 
New Brunswick.* The Bank of British North America, acting 
under its Royal charter, operated in all the Provinces, but it 
also was to be subject to such Dominion legislation as did not 
interfere with the single liability of its shareholders, and a few 
other peculiar features of its constitution. Of charters granted, 
^lot yet forfeited for non-user, and still available for future oper- 



See Note i, next page. 



Banking Reforms, 1867-71 



iflJ 



ations, there were in Canada three, in Nova Scotia one, in New 
Brunswick five. 2 If the interested banks were to continue 
their business, the renewal of seventeen of these charters woul^ 
become necessary before the ist July, 1871. 

But the problem confronting Parliament, and interesting 
people, was more than the renewal of certain bank charters. 
In the case of new banks, it was more than the passing of cer- 
tain private Acts, framed on the lines which hitherto had been 
followed in the several Provinces. It was more, indeed, than 
the amendment of charters in such manner and details as 
experience might have suggested. The creation of the Con- 
federation and the establishment of a united Parliament marked 
the close of one period of Canadian history. Acts and decisions 
immediately subsequent, and the earlier legislation passed by 
authority of the British North America Act, became, to a 



1 Ontario and Quebec Capital Paid-up 

Bank of Montreal t6,ooo,ooo 

Quebec Bank 1,476,250 

Commercial Bank of Canada 4,000,000 

City Bank , i,aoo,ooo 

dure Bank 809,280 

Bank of British North America ...., 4,866,666 

Banque du Feuple 1,600,000 

Niagara District Bank 

Molsons' Bank 

Bank of Toronto 



279.376 
1,000,000 

800,000 

Ontario Bank 1,999,100 

Eastern Townships Bank . 



375,386 
Banque Nationale^ i,oco,ooo 

953.135 
941,182 
806,626 
748.865 

227.725 
384.181 



Banque Jacques Cartier 

Merchants' Bank of Canada 

Royal Canadian Bank 

Union Bank of Lower Canada 

Mechanics' Bank 

Bank of Commerce 



Nova Scotia 



f 29,467,773 



Bank of Yarmouth ... 

Merchants' Bank 

People's Bank .. 

Union Bank 

Bank of Nova Scotia 



9128,600 

64,000 

309.789 

400,000 

560,000 

• 1.552.389 

$600,000 

600,000 

200,000 

80,000 

#1,480,000 

* These were, in Canada, the charters of the Bank of Northumberland, the Bank of 
London and the Bank of Simcoe; in Nova Scotia, the Commercial Bank of Windsor; in 
New Brunswick, the Albert Bank, the Woodstock Bank, the Merchants' Bank of New 
Brufiswick, the Northern Bank and the Eastern Bank of New Brunswick. Vide suprfi. 
Chapters V. and VI. 



New Brunswick 

Bank of New Brunswick .. 

Commercial Bank of New Brunswick 

St. Stephen's Bank 

People s Bank 



n i -.; 






I 




I :i 






174 



The Canadian Banking System, 1817-1890 



great extent, precedents for guidance of the future. No 
stronger example could be adduced than the statutes with res- 
pect to banks. The question, therefore, as it appeared to the 
first Parliament of the Dominion, was serious, difficult, moment- 
ous. Upon their decision depended not only the temporary 
continuance of the banks, and the security of the public's 
claims, but also the permanent efficiency of the system, the later 
policy of the Government and the future development of bank 
legislation. 

The discussion by people and press had been stimulated 
by the failure of the great Commercial Bank, and the financial 
crisis that followed in October, 1867. We are already familiar 
with the result of the meeting of representatives from the 
various banks held upon the 21st of that month, with the hope 
of arranging for some plan to assist the Commercial Bank and 
prevent its failure. The official account of this meeting was 
published upon the 28th.' But it did not disarm popular and 
newspaper criticism of the Government's fiscal policy. The 
Hon. A. T. Gait, Minister of Finance for the Dominion, hecrme 
convinced that public opmion in Ontario to some extent held 
him responsible (or the loss which had been suffered by investors 
in the Commercial Bank ; he felt that his usefulness was 
marred, and that he could not expect the same support from 
representatives of Ontario tha*^ he had previously been accord- 
ed." On the 7th November, 1867, he resigned his seat in the 
Privy Council. 

On the 15th November appeared explanations which the 
Board of the Bank of Montreal had embodied in resolutions 
adopted the 4th. ^ The directors, apparently, had felt con- 
strained to publish them with some hope of mollifying the 
hostility to their bank, which the events of the autumn had 
only served to increase among the people of Ontario. The 



I Toronto Globe, aStli October, 1867. 

« Ottawa Timts,M\ November, 1867, 

H Most of these uxplnnations, to be sure, were denied by the President of the City 
Hunk. Mr. WilHam Workman, in a letter published in the Toronto Olobe of the 14th Novt ni- 
ber, just as the Ministerial explanations were criticised and riddled on their api)ear' 
ance. The sources for an account of the Commercial failure and the action of tl)e banks 
and the Government in regard to it, are more contradictory ihnn the evidence in a case at 
admiralty law. Their further consideration would be interesting doubtless, but not particu 
Jarly advantageous. 



Danhing Reforms, 1867-71 



176 



original cause of the unpopularity, no doubt, was the restrictive 
policy followed in Canada West after 1862-3, ^^ *he instance 
of the extraordinarily able man then at the head of the 
bank, Mr. E. H. King. The western business was regarded as 
thorouf^hly unsound, being based on accnmmodalion paper. 
Mr. King had no reverence for "names" upon securities 
offered for discount ; he resolved to bring the business down to a 
solid basis. And so he did, although at the cost of more than a 
million dollars, written off between 1863 and 1866, by the Bank 
of Montreal on account of bad and doubtful debts in Upper 
Canada. Canada West also suffered by the process, and much 
of its loanable capital, accumulated as deposits in the Bank of 
Montreal, was drained away from the producers of the Province 
either to supply the importing merchants of Montreal, or to be 
sent to New York, there to serve the bank's exchange and gold 
speculations in Wall Street.^ 

In spite of these facts, the influence and i)ower of the l)ank 
were relatively enormous. Two nt its great competitors, the 
Commercial Bank and the Bank of Upper Canada, had fallen 
victims to the stress of events and 'heir own mismanagement. 
The Bank of Montreal had nearly a fourth of the total paid-up 
banking capital in Ontario and Quebec ; its assets were 19/72 
of a like total, over a fourth ; and its liabihties by circulation, 
deposits, etc., were nearly a third of the f 39,000,000 owed by 
all the banks. By adding to these, the facts that the bank was 
the Government's depositary and fiscal agent, and that it en- 
joyed peculiar advantages as the sole issuer of provincial notes, 
one has ample explanation of the remarkable prestige enjoyed 
by the Bank of Montreal and its leadmg officers. 

Now, at the same meeting of the 4th November, the Board 
had approved a nieniorandum of a proposed system of banking 
submitted by the General Manager, E. H. King. '• The Gen- 
eral Manager," it ran, " believes that the interests of the coun- 
try will be best served by the diffusion of banking interests in 
different localities, leaving to the greater banks, in large measure, 
the care of the mercanti'e and foreign trade of the country, and 
to the lesser in their own districts the care and support ot local 



i « 






I The Shareholder, Munireul, jth Scpieinber, 1890, Reprint of the article 011 the Bank 
of Moniieul, Toronto Globe, 15th November, 1867. 



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176 



The Canadian Banking System, 1817-1890 



enterprise. He sees no reason why there should not be perfect 
freedom and equality in banking, and why the greater and 
smaller banks could not exist in harmony, each within its own 
sphere contributing to the general prosperity."* The sugges- 
tion of " free bankmg," given in these words, becomes unmis- 
takeable as the scheme is unfolded. It was to extend the Gov- 
ernment's issues ; to deprive the banks of their powers of circu- 
lation ; to allow only the issue of notes prepared by Govern- 
ment, and delivered to banks only after the deposit of Dominion 
Government bonds, to be held as special security for the circu- 
lation ; to permit the establishment of local banks with small 
capital in each county ; and to provide for elasticity of the cur- 
rency, by means of maximum deposits of bonds as note security, 
and by the periodical movement of currency from east to west, 
as in the United States. 

The author of this scheme was not the only Canadian to be 
won over to the National Banking System. To bring 1,600 
banks and 1)420,000,000 of banking capital under uniform legisla- 
tion and to achieve the reforms which the founders of the National 
System could justly claim, had been no mean task. So far, more- 
over, the system had worked well. There was a decided attrac- 
tion in the much vaunted security of the National Bank note, 
an attraction that often overshadowed the rigidity of such a cir- 
culation, and the lack of any daily test of convertibility. Then 
the pleasant notion that a local bank, founded on local capital, 
and managed by local magnates, is best able to assist the local 
interests, had often appeared in Canada as an argument for in- 
creasing the number of banks, and received frequent acceptance, 
particularly among the more needy borrowing classes. Further- 
more, the National Banking Law had created a market for 
nearly $340,000,000 of United States bonds. Free Banking was 
believed to have increased, in New York, the demand for the 
State's securities, and thus to have raised the price. Canadian 
leaders were anxious in every possible way to strengthen the 
credit of the new Government, and they were inclined to 
favor any practicable plan for the creation of new financial 
resources. 



I Toronto Gtobt, 15th November, 1867. 



Bauktug Reforms, 1867-71 



;?7 



The Select Committee of the Senate struck in the session 
of 1867-68, roundly condemned in their report the Bank of Issue 
system, started under Mr. Gait, and recommended the return to 
the system of banking that obtained previous to 1866. Whether 
they were miluenced by the scheme of Mr. King, or converted 
by the American experience, it is needless now to enquire ; as a 
pis aller, however, they did approve of the American plan. It 
will be best to quote literally the statement of their position. 
•* Your Committee recommend that if the financial requirements 
of the Dominion should induce the Government to desire the 
introduction of a new system, including the taking possession of 
the currency of the country (which your Committee would 
strongly deprecate), the issue of a paper currency be based upon 
the deposit with the Government of the public securities of the 
Dominion under a system analogous to the National Banking 
System of the United States, but redeemable on demand, the 
Government regulating the issue under the authority of Parlia- 
ment ; the banks through which the notes are issued Icing re- 
sponsible for their instant redemption."^ 

On the 14th April, 1868, the Hon. John Rose, successor to 
Mr. Gait as Minister of Finance, proposed to the House of Com- 
mons the appointment of a Select Committee upon Banking 
and Currency. It would be the duty of the committee, he said, 
to inquire into the position and circumstances of all the banks 
in the Dominion. Mr. Rose himself anticipated that the House 
would agree upon at least two great fundamental principles, 
viz., that the amplest security should be given, not only for the 
circulating medium in common use, but also for the deposits 
confided for safe keeping. He proceeded then to review the 
charters in force in the different provinces, and the questions 
growing out of them. In neither part was his speech distin- 
guished for accuracy as to facts or correctness in theory. But 
his committee was struck, and the Minister appointed 
chairman. The Committee then drew up questions covering 
subjects as follows : the past services of the existing banking 
system ; expediency o*^ iosaing Government paper, practicability 



) Journal of the Senate, Caouda, 1867-8, Appendix I. 



il- 




ll 



I 



m 



] 



178 



The Canadian Banking System, 1817-1890 



and advantages of introducing a system of banks issuing cur- 
rency based on deposits of Government securities analogous to 
the American system ; the practice and business of the Cana- 
dian banks ; the delects of the Canadian system, and the means 
of improvement. Among others, eleven high bank officials, in- 
cluding one president and ten cashiers, three eminent public 
men, three boards of trade, and five capitalists and leading 
business men, replied to the questions submitted by the com- 
mittee. The testimony was by no nieans unanimous, but the 
weight of it was no wise in favor of the system of specially 
secured bank issues, for the introduction of which events 
proved the Committee to have been barely more than a 
cloak. 

We need no more than mention the faults they found with 
the plan of Government issues suggested by the questions ; the 
temptation to extravagant expenditure arising from such sudden 
and easy sources of financial aid ; the principle that the Gov- 
ernment should borrow in the open market at fixed times of 
maturity, for which provision could be made without disturb- 
ance ; the fact that every existing Government currency was 
then at a discount ; the absence of any sympathy between the 
demand for currency and a bureaucratic source of supply, Gov- 
ernment issues being ordinarily emitted in payment for public 
works, or, perhaps, the current expenses of the state, rather 
than in provision for exchanges about to occur; the fact that 
Government issues are not subjected to the regular redemption 
made necessary for bank notes by the daily repayment of loans, 
the accumulation of deposits, and the competition of the 
issuers ; that the convertibility of the Government issue is pro- 
tected by no regular replenishment of the reserves or constant 
liquefaction of the assets of the issuer, as in the case of bank 
notes; and that, finally, to abolish the bank circulation would 
lead to a great contraction of discounts. > , ,.- 

§ 38. — THE CASE AGAINST BANK CIRCULATION SECUHED BY PLEDGE OF BONDS 

In their criticism of existing charters, the bankers were even 
more explicit and full than when testifying to the Senate Com- 
mittee of the previous session, but this was constructive criticism, 



Banking Reforms, 1867-71 



179 



to follow which would have been to better Canadian banking law.* 
Against the implied proposals of the Committee, on the other 
hand, they objected that the system of banking and currency 
there suggested was costly, rigid, comparatively inefficient and 
calculated to diminish rather than increase the loanable funds 
ordinarily at the disposal of the commerce and industry of the 
country. The question now was not one of bank extension, 
and the creation of local facilities, nor did it turn particularly 
upon the functions and prerogatives of Government. So it was 
necessary to urge the more strictly economic objections 
against " free banking," and that possibility of a further 
increase of Government paper which the question also implied. 

As an economic question it was of the highest significance. 
In their business of issuing notes, receiving and employing the 
spare funds of the people, discounting commercial paper and 
bills of exchange, and making miscellaneous advances, the 
banks were in close relations with nearly all classes: of the pro- 
ducing, trading, and lending communities which then made up 
Canada. The loanable funds of the banks were derived from 
their capital, deposits and circulation. To force the banks to 
furnish bond security for the notes previously issued upon their 



» The following are the chief improvements suggested by the bankers, the list being 
compiled, for the most part, from the replies of Mkssrs. Cartwrioht, Haguk, Lkwin and 
Stevenson ; the replies of any one witness, of course, never comprising the whole list. 

(«) To establish a minimum capital to be required from newly chartered banks, and to 
limit the number of branches in proportion to the paid-up capital stock. 

(b) To prevent the beginning of business until a certain part of the capital stock is paid 
up, held in specie, and the fact certified to by a Government officer. 

(c) To make the double liability available in case of need within a reasonable period, 
V.J?., by assessment of sharehok'^trs for the deficiency at the end of say six months after sus- 
pension, and by proviiiion that the subsequent proceeds form the dividend ot the sharehold- 
ers, rather than the creditors. 

{li) To make transfers within three months of the suspension, and at any time there- 
after, void. 

(e) To require such statements of accounts as would check illegitimate operations. 

(/) To prohibit an^ but moderate dividends till a reserve fund should be accumulated, 
such to be made good if impaired. 

(/,') To make the circulation a first charge upon the assets of an insolvent bank. 

(h) To prohibit the issue of notes for less than four dollars. 

(J) To require a certain proportion of demand liabilities to be held in specie, say 
twenty per cent. 

(/■) To limit the circulation to paid up capital stock and Government securities, and 
provide that any excess should be covered by specie in hand over and above the amount re- 
quired to 'ulfil the previous recommendatiois. 

(lis) To require each half year the publication of a certified list of the shareholders. 

(0 To prohibit the reduction of capital stock, and to compel the stock-holders to make 
good the capital if it should be impaiied.— Vide Journal of the House of Commons, Canada, 
i86g. Appendix I. 



fi 



m 









180 



The Canadian Banking System, 1817-1890 



1 1 



general credit, would be to close one of the sources of supply, 
and by consequence to diminish the amount of capital employed 
in furthering commercial eiiterpiise. For in order to get the 
bonds, value of some sort must be given — and the portion 
available for loans, either of capital or deposits, would inevi- 
tably be lessened, even though circulation remained at the 
same height. Bank profits, probably, after paying the first cost 
of adjustment to the new conditions, would not materially suffer. 
The rate of discount would rise sufficiently to recoup the loss of 
working in less favorable circumstances. But the financial 
interests of the country, the shipping and the railways, the com- 
merce, domestic and foreign, the industries of the farms, fac- 
tories, fisheries, forests and mines, were too closely and strongly 
connected with the banks, too dependent upon them, to be 
unaffected by the conversion of eight to ten millions of dollars 
of active banking capital into Government debt. 

So far as men could foresee, the change was altogether 
likely to produce a commercial stringency, and the mercantile 
failures that follow a great and swift contraction of credit. A 
complete recovery would scarcely be possible. From the trade 
and the development of the country there would have been 
withdrawn a part of the accustomed measure of bank accommo- 
dation. Should the change be gradual, a positive diminution 
of banking funds might not occur, e.g., should the completion 
of the chanije be delayed till capital stock plus deposits should 
equal the total (in 1868) of capital stock plus deposits plus circu- 
lation. The pressure in this case would be more slowly applied, 
and naver so great at a given instance ; but during the period 
of transition, the business of the country would be deprived 01 
all benefits from that increase of accumulation which is a feature 
of any progressive national economy. Increasing bank capital 
during such a period would not make up the deficiency. The 
moneys available for the purpose, it was argued, were already 
help by the banks as deposits. To take from deposits to add to 
capital stock would hardly improve the financial situation.^ 

Under the system of issue against special security, less 



« Vide Monttary Times and Insurance Chronicle, Vol, 2, p. 614, Resolutions adopted 
at a meeting of bankers, held in tlie Merchants Banlc of Canada, on the 17th April, 1869. 



Banking Reforms, 1867-71 



181 



attention is apt to be paid to the safeguard of requiring a large 
paid-up capital from each bank within the Legislature's juris- 
diction. The tendenc)' is to permit the establishment of small 
companies, who often lack the means to extend their business 
beyond the locality of their principal office, and frequently have 
no wish to do so. By the original free banking legislation, 
branches were forbidden. Less stable, more dependent upon 
the prosperity of the single district whence comes their sup- 
port, less ably managed, because the salaries paid by a great 
bank would be ruinous to a small one, the little local banks are 
more likely to suspend their payments, and more likely to be- 
come insolvent in times of difficulty, than larger, stronger insti- 
tutions. Americans need but r'^call the crisis of 1893 to find 
the statement of the Canadian bankers confirmed. The risk 
from loose banking is merely shifted from note holders to the 
depositors and other creditors ; it is not avoided. Then, too, 
the Canadian Government would be liable under the proposed 
system to redeem the notes of failed banks, by no means a fri- 
volous obligation when the needs arising from a crisis should 
drive in the notes to be exchanged for gold, and the call for 
ready money was breaking the market even for the Government 
securities held against the bank circulation. 

A stronger argument than the insufficient guarantee for the 
immediate convertibility of bond-based bank notes and Govern- 
ment issues, was the lack of elasticity in such systems of cur- 
rency. This objection, presented by the bankers and others 
with especial force in 1869, has since been emphatically proven 
by the experience of the United States during the last two 
decades with National Bank notes. The tendency of him who 
issues bond secured notes is to invest only so much of hi? 
capital in bonds as will, with his capital otherwise invested, 
bring in the maximum profit on the whole amount. The motive, 
therefore, to the issue or retirement of notes is only remotely 
governed by the number and amount of payments to be effected 
by this medium of exchange. On the contrary, the motive is 
directly dependent upon the rate of interest borne upon bonds 
receivable on deposit — a rate determined by the Government, 
and in large measure arbitrarily determined. 

For the automatic expansion of a currency issued upon the 



i 1 



182 



The Canadian Banking System, 1817-1890 



general credit of the issuer, the attendant profit, always equal, 
practically, to the market rate ot' interest, is an infallible impulse. 
It is doubly effective, because it permits an increase of his 
credit, and thereby an added gain to the issuer, which generally 
could not otherwise be enjoyed. But when the commercial 
rate of discount is higher than the interest paid on the Govern- 
ment debt, the banker has no inducement to divert his capiial 
to the purchase of bonds to exchange for notes. Nor will he 
have until the supply of loans shall have been so increased by 
proffers of capiial and the loanable credit which is based upon 
capital, and utilized, e.g., by the creation of deposits, that the 
rate of discount falls to a point equal at most to the interest 
borne by the bonds. This contingency has seldom happened 
where a Government is solvent and in good credit. The con- 
sequence is, as in New York and the United States, that the 
bankers working under free banking laws retire almost as many 
notes as the law will permit, in order more profitably to use the 
capital by which they were secured. Expansion of the bank 
note currency then occurs only in circumstances of peculiar 
stringency, when, as in 1893, a money famine forces the banks 
to use every available device for increasing the currency, 
though not so much for profit as to oblige their customers. 

With the currency system reorganized on the American 
plan, there would be no satisfactory provision for the periodical 
expansion and contraction, the causes of which were con- 
veniently summarized as " moving the crops." Mr. King, to 
be sure, relied upon a regular movement of money from East to 
West and back again, such as occurs each year in the United 
States. But this plan concentrates large sums in the financial 
centres at one time, and stimulates speculation, only to draw 
them off at another, and tighten money. The process is costly, 
and highly artificial. It cannot be used without considerable 
friction. The tasks of moving the crops and meeting other 
periodical demands of the community for increased currency 
and credit, e.g., for marketing the wool clip, paying import 
duties, negotiating the lumber cut, buying the cargoes 01 the 
fishing fleet, paying dividends, etc., were not those which would 
employ through the whole year the funds of the banks who 
undertook the work. In each of the provinces the demands 



Banking Reforms, 1867-71 



188 



caused by the harvest and the fall trade were the greatest, and 
the circulation liighest, in October, November or December. 
The difference between the highest and lowest amount of notes 
outstanding at any time during the year, was from twenty to 
fifty per cent, of the minimum. 

The ability of the banks to meet these brief but periodical 
and heavy demands was derived from the elastic qualities of the 
form of credit in which the advances to lumbermen, farmers, 
produce buyers and the like were made. Deprived, however, of 
the advantages arising from an expansion of their circulation, 
the banks would have slight inducement to provide for a busi- 
ness active during only three months of the year. That they 
should, for this purpose, be content to receive during eight or 
nine months the meagre rate of interest paid by Government on 
an amount of capital equal to this expansion and invested in 
bonds, was not to be expected. Yet this was the essence of the 
proposed provision for elasticity by deposit of government 
securities to cover the maximum circulation. The banks would 
find more attractive investments in the commercial paper of 
manufacturers and importers engaged in a steady business, and 
usually requiring money throughout the year. The larger banks 
might still have the money for moving the crops, in the heavy 
reserve funds kept m London and New York, but they were un- 
likely to withdraw these sums unless moving the crops were more 
profitable than loaniiig at call in New York or London. Dur- 
ing the autumn of 1868, gold was worth 1/16 to i per cent., per 
diem, in New York.^ The substitution of a bond-based for a 
credit currency, and the forced retirement of the latter neces- 
sarily involved comparative rigidity and lessening of discount 
accommodation. For *^^he farmers and those dependent upon 
them, the most important class, numerically at least, in the 
whole community, these results meant scarcity of money during 
harvest time, reduced prices for cereals and other products, and 
serious annual injury. 

In yet another way were the interests of the farming com- 
munity opposed to the introduction of the American system. 
Upon this point I prefer to quote the admirable discussion by 



I /6t(f, reply of Mr. Jambs Stevknson to question 9. 



13 



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I 



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184 



The Canadian Banking System, 1817-1890 



Mr. George Hague : " The question of bank circulation is essen- 
tially a question for the agricultural districts, and the small 
towns and villages which derive their existence and support 
from them. Withdrawing bank circulation or covering it with 
Government securities, would be felt far more severely in such 
districts than in commercial centres. There is no considerable 
volume of circulation in large towns and cities, either in Canada 
or anywhere else ; business being transacted mostly in cheques, 
and the system of depositing in banks being almost universal, 
very little interruption would be caused to business there by the 
withdrawment of circulation, except by reaction from the smaller 
towns. But in the country districts bank circulation is a mat- 
ter of vital importance, for the bankmg facilities which are 
essential to their development are largely derived from it. In 
case of an alteration of the currency laws, there can scarcely be 
a doubt that the loans of the banks in country towns would be 
largely cut down. Many agencies would become so unprofitable 
under this process that they would be discontinued altogether, 
and all of them would be injuriously affected."^ 

§ 3g. — MR. rose's banking SCHEME 

It would be hard to estimate in what measure the Minister 
of Finance was influenced by the evidence obtained through his 
Committee. The characteristic points of the currency and 
banking resolutions, which he presented to the House of Com- 
mons on the 14th May, 1869, were decided upon, it is highly 
probable, before the origmal Committee was struck. The reso- 
lutions had been prepared under the supervision of Mr E. H. 
King, and as in the memorandum approved by his Board of 
Directors a year and a half before, the leading feature was the 
reconstruction of Dominion bank law upon the model of the 
'« National Bank Act " of the United States.* 

The Government proposed to leave the banks alone until 
the ist July, 1871, but after that (a) to oblige them gradually to 
reduce their unsecured circulation by 20 per cent, a year, until 



1 Ibid, Reply to question 2. 

I Letter of Mr. George Hague, Montreal Gazette, 30th January, iSgo. 



Banking Reforms, 1867-71 



185 



the whole should be retired ; (6) to permit the banks to issue 
instead, up to the amount of their capital stock paid in, notes of 
uniform appearance, furnished by the Government, and bearing 
on their face the statement of their being secured by the deposit 
of Dominion securities; these notes were to be procurable by 
the deposit of gold or Dominion notes with the Government, 
whose officers were, in return, to furnish the hank with notes to 
an equal amount, and to hold against them securities issued for 
the purpose, and bearing interest for ten years after the ist July, 
1871 ; (c) to make the secured notes, so long as they were 
redeemed in sp>ecie, legal tender throughout the Dominion, 
except at the office of the issuing bank, and a redemption office 
to be established and kept at Montreal, or the capital city of the 
province in which the bank should be situate ; (d) to require 
the banks to hold reserves of specie equal to 20 per cent, of the 
secured notes in circulation, and one-seventh of the deposits at 
call; (e) to make the notes the first charge upon the assets 
of the bank in case of insolvency, the deposits at call and not 
bearing interest, the second charge ; (/) to impose upon the 
banks a variety of safeguards and restrictions similar to those 
already in force, and to others recommended by the bankers ; to 
prohibit note issue, except by incorporated banks and the Govern- 
ment, to grant no new charter, and to renew no old one except 
upon the Conditions set forth in the resolutions.^ 

In the speech introducing his resolutions, Mr. Rose averred 
that the Government had no hostility towards the banks, and 
felt that for the important commercial operations essential to 
the country's prosperity, it was indispensably necessary ihat 
the banks should be prosperous. The Government, he said, 
had no especial object of its own to gain by the substitution of a 
system of banking different from that then existing. For the 
proposals which I have included under group " f," there is 
neither time nor need to analyze his arguments. These ques- 
tions must be treated further on. With respect to the proposed 
changes in the system of note issue, the Minister declared that, 
*' It is the duty of the Government not to interfere with bank- 
ing proper, but to see that the circulation which the public at 



1 Hamilton Spectator, 17th May, 1869. 



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TEST TARGET (MT-S) 





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186 



The Canadian Banking System, 1817-1890 



large is bound to take, should be placed on as sound and whole- 
some a footing as possible." Or again, '• It is of essential im- 
portance to the interests of the country that the circulating 
medium should be placed on a sound and uniform basis."* If 
the conclusions of Chapter V.,* aii to the legal and economic 
character of bank notes, are correct, we cannot accept the Fi- 
nance Minister's implication that the rote issue is not a func- 
tion of banking in the strictest sense of the term.. As to his 
protest that " the Government has no especial object of its own 
to gain ; the Government is not embarrassed by any pressing 
wants," it will be well to remember that, by the terms of the 
British North America Act, the Dominion was obliged to 
construct the Intercolonial Railway between Quebec and the 
Maritime Provinces. The twelve millions odd which could 
have been obtained by requiring the currency of the country 
to be covered by Government bonds, may or may not have 
affected the attitude of the Minister of Finance towards the 
banking system. The reader can judge. 

Further than that the currency of Canada should be secured 
and uniform throughout the Provinces, Mr. Rose found httle to 
say. These desiderata were certainly important, and we may 
acknowledge now that during the next twenty years they would 
have been more nearly gained under his plan than under the 
policy that hnally prevailed. But they would have been secured 
at the cost of elasticity and adequacy in the currency, relative 
shrinkage of discount accommodation, and artificial rise in the 
average rate of discount. So great a cost can hardly be com- 
pared with the few losses caused by the nominally unsecured 
currency that Canada retained. 

Some intimation of the Government's plans had gotten out 
before the resolutions were presented. On the 17th April, 1869, 
the banks of Ontario and Quebec adopted resolutions, — " That 
in any renewal of the charters, it is important for the best inter- 
ests of the public that no changes of fundamental character be 
made in the system, and particularly that the note circulation be 



I Ottawa Times, ijih May, 1869. 
« Vide Note at end of Chapter V, 



Banking Reforms^ 1867-71 



187 



preserved." 1 On the same day the Halifax banks declared 
that the system in force in Nova Scotia had proved satisfactory, 
that any change was neither asked for nor desired. During the 
session, some seventy-two petitions, either against the resolu- 
tions of Mr. Rose, or, " that no changes of a fundamental char- 
acter be made in the present system of banking," or, " that the 
circulation of the banks may be preserved on substantially the 
present basis," were presented to the House of Commons. Of 
these petitions, some ten, to be sure, came from the banks ; the 
others were from the leading towns, cities, boards of trade, 
and the like, throughout the Dominion, and respectable as well 
for the number of signatures as for the character and influence 
of the signers. i >■ * • 

On the ist June, the resolutions came up for consider- 
ation. Mr. Holton believed that such radical changes in the 
long-established banking system of the country should not be 
made without mature deliberation in Parliament and in the 
country. He immediately moved, in amendment, to postpone 
the consideration of the resolutions until the next session.^ 
The delate that followed was acrimonious, able and suggestive. 
Mr. Mackenzie seconded the motion, and bore witness to the 
nearly unanimous opposition of the press to Mr. Rose's policy. 
As a whole, the scheme had been universally condemned. ^ 
Mr. Cartwright conceded the few tolerable arguments that 
the Government had urged, and thus conceded all they were to 
urge, for in his first speech Mr. Rose quite exhausted his arsenal. 
But, Mr. Cartwright objected, the plan involved a radical 
change. If the Government should issue new securities to cover 
the notes, the loan was practically compulsory. The measure 
would especially affect Ontario, where the annual expansion of the 
currency and the need for it were the greatest. The proposal 
utterly wanted provision for elasticity. Mr. Rose had miscal- 
culated the amount necessary, after his plan became law, to 
restore the banks to their previous position. In Ontario, alone, 



! ii 



,.»e 
3 



1 Monetary Times and Insurance Chronicle, Vol. II., p. 614, 

• Hamilton Spectator, and June, 1869. 

• Ottawa Times, 4th June, 1869. 



1 



1 



i 



188 



The Canadian Banking System, i8i 7-1890 



it would need eight or nine millions.^ Mr. Gait argued that the 
National Banking System had never been tried by the sufficient 
test of working on the gold basis. He objected to the plan for 
maximum deposit of security as unlikely to work, and declared 
the time unpropitious for so radical a change. Friends of the 
Government, among them Mr. Tilley, spoke in reply. Debate 
was continued with spirit until midnight. General and strong 
opposition to the plan, even by staunch supporters of the Gov- 
ernment, was thoroughly and ably manifested. 

The next day the resolutions were considered in the Privy 
Council, and rumors of a cabinet disagreement became current 
in Ottawa.^ Certain it is that during the next fortnight, many 
of the earlier converts lost faith in the banking theories of Mr. 
Rose. The Government had more important ends than forcing 
a rejuvenated currency scheme upon the country, approved 
though it was by their own Finance Minister, by the general 
manager for their fiscal agents, and even by worthy statesmen 
in the great republic on their south. They could ill afford to 
imperil their majority, and they left the banking question 
undisturbed until the 15th of June. The Minister of Finance 
then announced to the House of Commons that " the Govern- 
ment would have been glad if there had been a ready acquies- 
cence in the principles involved in the resolutions. But, believ- 
ing as ihey still did, that the reforms embodied in th,..m were 
such as to meet with the general acceptance of the countrj'," 
the Government was willing temporarily to withdraw their pro- 



) In case the plan was carried through, and the banks accepted it, said Mr. Rose, 
they would need, to cover niasinium circulatic;i, as 

On the 31st October, 1868 $15,120,000 .i, > ? 

20 per cent, of tlie inaximuni circulation 10 be held as specie 

reserve 3,024,000 ; 

1/7 of deposits at call, not bearing interest, to be held as specie 

reserve 1,968,000 

^20, 1 1 2,000 
Less specie. Dominion notes and Government debentures, 

already held by thebanks 11,785,000 



Difference under Mr. Rose's plan IP 8,327,000 

equivalent to 7.05 per cent, upon the highest circulation, for seven years (the period of transi- 
tion), or 2.03 per cent, upon the highest figure yet reached by the item of diiicounts (Ottawa 
Times, 15 h May, 1869,) 

Mr Rose, however, omitted all account of the large amounts of unissued notes, which 
as till money in the hands of branches, were ample and costless substitutions tor equal 
amounts of specie, and yet never appeared in the returns of the " Notes in Circulation." This 
advantaj^e would have been lost under hisschemo, as well as the peculiar brnehts derived by 
country districts from branch banks and the note issue according to the existing system. 

* Hamilton Spectator, 3rd June, i86g. 



Banking Reforms, 1867-71 



189 



posals. " In the next session of Parliament the Government 
would again bring before the House the consideration of these 
resolutions."^ 

Two and a half months later, the Hon. John Rose had 
resigned the Ministry of Finance. Upon his departure from the 
Government, the defeat already inflicted on the dangerous bank- 
ing policy which he advanced, became certain and, in great 
measure, permanent. 

§ 40. — THE BANKING POLICY OF SIR FRANCIS HINCKS 



Neither the precedents of Mr. Gait nor the plans of Mr. 
Rose vere followed by the next Minister of Finance. Sir Fran- 
cis Hincks, having spent the preceding fifteen years as a 
Crown (iovernor in the British Colonial service, was now 
returne i to Dominion politics, and had accepted a seat in the 
Cabinet. Sir Francis resolved to consult the banking experts 
before he prepared his proposals for a general Dominion Bank 
Act. In the conferences which were held the bankers found 
opportunit)' to express their views directly to the Government. 2 

What, probably, was the attitude of the bankers towards 
the question in 1870 ? They believed, presumably, that good 
banks were conducive to the general well-being of the country, 
that upon this well-being their own prosperity was largely 
dependent. The natural and preferable view is that the prin- 
cipal object of the bankers was to secure the revision of banking 
law best calculated to promote the soimdness, security and 
efficiency of the banking system. Whatever their ultimate pur- 
poses in 1859, 1868 and 1869, it was not the advantages which 
they m.ight themselves enjoy under carelessly constructed legis- 
lation that appeared to determine the proposals for reform sub- 
mitted by the several banks. It was the desire for restrictions 
upon loose, unsound and illegitimate practice by their rivals and 
competitors. The same remark is true for 1880 and 1890. One 



> HAvaWton spectator, i6th June, 1869. 

t I am informed by tha Department of Finance that of these meetings no minutes 
were kept. From the student's point of view, the lack of such records is most unfortunate. 
They would, no doubt, have filled many volumes ; a vr.st amount of contemporary evidence 
upon that stage of Canadian banking would have been preserved, and much light thrown 
upon the real position both of the bankers and of the Government. 



1 




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r/ig Canadian Banking System, i8i 7-1890 



may conclude, therefore, that had their tnds in 1869-71 been 
purely selfish, the practical action of the bankers would have 
been no different from what might have been expected according 
to our other view of their motives. We should have had then an 
apt Canadian example for Adam Smith's observation of man's 
strife for pt^rsonal gain : •' By pursuing his own interest, he 
frequently promotes that of the society more effectually than 
when he really intends to promote it." ^ • ■= 

The policy of the Government was indicated in the speech 
with which the Governor-General opened Parliament, the i6th 
February, 1870: " A measure intended to secure safety to the 
community, without interfering with the legitimate operations 
of the banks, will be submitted for your consideration, and w^ill, 
I trust, be found calculated to place these important interests 
upon a sound and stable basis "2 On the ist March, Sir Francis 
Hincks brought down to the House of Commons his Resolu- 
tions o" Banking and Currency.^ In the speech introducing 
his measures the Minister of Finance emphasized the need of 
adopting a general and uniform banking law for the whole 
Dominion, a need rendered the more imperative by the charters 
about to expire, and the petitions then before Parliament for 
new incorporations. The safeguards about the currency were 
different in the different Provinces, and the limitations upon 
issue different. Experience taught that the note holders 
should have greater security. Yet the people were used to the 
credit accommodation based upon the note issue, there being 
not less than eight or nine million dollars of such loans in On- 
tario and Quebec alone. Owing to the necessity, under the 
Auierican system, to withdraw this accommodation, it was not 
expedient to have the currency covered by deposit of Govern- 
ment securities. Public opinion, said Sir Francis, was against 
a Government Bank of Issue, and he disclaimed any plan of 
that character. He deprecated appeals to sectional feeling. 



» Wealth of Nations, B)i. IV., Chap. II. 

« Parliamentary Debates, Canada, Vol. I., p. 27. This is the first of the two volumes 
of reports published as a private undertaking before the official series began, and ordinarily 
known as " Cotton Debates." 

* The resolutions are to be found in the Canadian newspapers of the 2nd March, 1870, 
and in the report of the Debates for the previous day. 



i 



of 



Banking Reforms, 1867-71 



191 



And that they might be brought to tlie greatest possible per- 
fection, he urged the House to treat the resolutions in an un- 
partisan spirit.^ 

The debates in the House turned mostly upon questions of 
minor detail. It is characteristic of ministerial government that 
the trenchant and decisive discussions are frequently carried on 
and concluded in council chambers or departmental offices long 
before the final measure is submitted to the Legislature. Under 
Sir Francis Hincks, moreover, the banking policy of the Gov- 
ernment had been almost completely reversed within the year. 
The retention of the bank note issue against general credit, for 
which the Opposition fought in 1869, was now conceded. Still, 
the resolutions were in some respects a compromise, and, as a 
compromise, open to objections. ,,, - 

One of the more important contests occurred over the 
minimum of capital on which a bank should be permitted to 
begin and to continue its business. This discussion was 
stimulated by Sir A. T. Gait, who objected to the original pro- 
posal of the Minister to require $1,000,000, of which $200,000 
should be paid up before the beginning of business, and twenty 
per cent, in each year thereafter. Branch banks, he said, were 
not the best provision for rural districts ; in times of pressure 
the larger banks contract their rural loans to meet urban 
drains. Others said that managers of local banks are more in- 
terested in the welfare of the surrounding country, and know 
more of rural necessities. Local banks, they thought, better 
serve the country. Rural districts cannot raise the larger 
capital, and have no business which requires it. 2 To permit 
the existing small banks to go on, and not to provide for new 
ones, was to perpetuate an objectionable anomaly. ^ 

Sir Francis replied that it was necessary, under the system 
of note issue adopted, to provide the security of a large paid-up 
capital. Any person desiring to invest in banks would have no 
difficulty in obtaining shares in some of the established banks. 
*' There was no difficulty in establishing agencies in all places 



t This condensed exposi of the Minister's principal motives is collated from his intro- 
ductory speech, and the remarks afterwards made by him in the course of the debate. 

t Debates m< supra, pp. 265, 267, 311, Msssrs. Galt, Colbv and Pickard. 

s Ibid, Messrs. Mackenzie and Cartwright. 



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The Canadian Banking System, 1817-1890 



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where agencies should be established. His impression was that 
both in the United States and in this country, where yon found 
in any district a demand for small banks with small capital, the 
truth was the people who wanted it were borrowers and not 
lenders. * * '■"• * "■' Existing banks could get their char- 
ters renewed without increasing their capital."^ Small banks, 
he concluded, were always looked upon with a certain amount 
of suspicion. But in the Maritime Provinces, local banking 
was in more general favor and better established than in Ontario 
and Quebec. Chiefly to meet their needs, Sir Francis Hincks 
conceded the reduction of the minimum authorized capital to 
$500,000, the payment of 40 per cent, of which was required be- 
fore the corporation should begin business. 

The clause of the resolutions limiting the total liabilities of any 
bank to thrice the paid-up capital stock, plus its specie and 
Government debentures, was withdrawn. It was not the same 
restriction upon the debts of a bank which appears in the Pro- 
vince of Canada charters and the circulars from Downing Street^ 
for, according to that, deposits with the bank were expressly ex- 
cluded from the reckoning. The sole effect, had it been retained, 
would have been to prevent a large accumulation of deposits in 
one bank. Depositors are influenced by the bank's reputation ; 
to limit the amount of deposits ^ 'd have been to impair the 
motive to enhance that reputation u ireful management. 

When he first took up the quesiion, Sir Francis Hincks 
believed that the banks should be required to hold as minimum 
reserves an amount of specie equal to a fixed proportion of their 
liabilities. But in the conferences with the bankers, the Finance 
Minister was convinced by the unanimous opinion and strong 
arguments offered against such a provision. The regulation was 
omitted from the resolutions, and the omission justified by the 
principle that a reserve which must not be used is no reserve at 
all, that if the proportion required were only moderate, the ten- 
dency would be to regard that as sufficient, and that all of the 
immediately available funds of a bank, e.g., the New York and 
London balances, are not specie. ^ 



1 Ibid, p. 310. 

• George Hague, "Bank Reserves," Journal of the Catiadian Bankers' Association, 
Vol. I., p. 107 ; Debates, ut supra, p. 217. 



Banking Reforms, 1867-71 



193 



The scheme to give increased security to the note holders 
by making its notes a first lien upon a bank's assets in case of 
insolvency, was also rejected. The bankers had officially sug- 
gested it in their resolutions of the 17th April, 1869 ; they had 
mentioned it in evidence given to several of the Parliamentary 
Committees. It was also approved by such publicists as the Hon. 
R. J. Cartwright and Sir A. T. Gait. Sir Francis Hincks held to 
the view that through such a provision the stability of the banks 
would be jeopardized by the tendency of depositors to start runs 
in order to convert their ordinary claims into privileged liens. 

Some objections were madt- to the plan by which the banks 
lost the right to issue notes for sums under .$4, but the banks 
deliberately and avowedly surrendered this right for valuable 
considerations, to wit : abolitii n of the tax of one per cent, per 
annum upon their note circulation, and repeal of the require- 
ment to keep one-tenth of actual capital in Dt>minion securities. 
For some years, moreover, the bankers had not thought tiie 
privilege an unmixed benefit. In times of difficulty the small 
notes always gave the most trouble. The majority of holders 
were usually poor, ignorant, or easily alarmed ; a run upon a 
bank once started, they always joined the attack in great num- 
bers, and among them the fear of loss reached its most violent 
manifestation. The restriction had been frequently urged by 
bankers themselves as a necessary reform. 

r The severest struggle of the whole debate occurred on the 
question suggested by the preceding change, and closely con- 
nected with it. Pursuant to his policy of placing all the banks 
upon the same footing, the Minister, on the 14th February, 1870, 
notified the Bank of Montreal of the Government's desire to 
terminate at the end of six months the arrangement made with 
it for the issue and redemption of provincial notes. The plan 
of paying for that service by commission was disadvantageous 
to the Government.' Sir Francis now proposed that the Govern- 



1 He had further freed the Government from the agreement of the gth November, 
1865, by which they were obliged to keep from §400,00010^500,000 at their credit in the Bank 
of Montreal without interest, not to retire their account without six months' notice, not to 
give such notice while the bank was under advancts to the Government, and not during the 
same term to deppsit the public moneys elsewhere than in the Bank of Montreal. To Sir 
Francis Hincks is also due the competition in buyinK or selling Government exchange, 
established by the practice of inviting telegraphic tenders from all the banks. Previous to 
this one bank had enjoyed a scarcely qualified monopoly. Vide Journal of the House of 
Commons, Canada, 1870, Appendix 2, pp. 4, 5 and 10. 



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The Canadian Banking System, 1817-1890 



nient should assume the issue, as Dominion notes, of the paper 
curi'ency under $4, and that the banks should be required to 
hold 50 per cent, of their cash reseves in Dominion legal tenders. 
He had devised a system of regulating the Dominion note issue 
different from the one in force. 

The principle of this regulation was that admired and 
advocated by the Minister, even before it was adopted by Sir 
Robert Peel in the Bank Act of 1844. He beheved that the 
" functions of the Issue Department should be automatically 
confined to the exchange of gold for notes, and vice versa : 
that an amount can be established which, may, with perfect 
safety, be issued upon public securities, and all beyond that 
fixed amount should be held in gold."^ The practical measures 
embodying this principle were : 

(a) The management of the Dominion note circulation directly by the 
Government ; 

(b) The establishment of branch offices of the Receiver-General's De- 
partment in Montreal, Halifax, St. John and Toronto, for the issue and re- 
demption of notes ; 

(c) The authorized extension, by Order-in-Council, on report of the 
Treasury Board, of the issue to $9,000,000, in amounts of not more than 
$1,000,000 at a time, and at intervals of not less than three months ; 

(d) The requirement that the Receiver-General should hold specie and 
Dominion debentures to cover the outstanding circulation ; the debentures 
to be issued and held for the purposes of the Act, or to be disposed of tem- 
porarily or absolutely in order to provide specie for redemption ; the deben- 
tures not to exceed 80 per cent, of the circulation ; the specie, 
as a rule, to be a sum equal to 25 per cent, of the debentures, and never less 
than 15 per cent. 

(e) Provision for the issue of any amount required by the public con- 
venience, so long as the excess over $9,000,000 should be covered by equiva- 
lent amounts of specie.* 

The Opposition favored the provision concerning bank re- 
serves as little as they did the phn to augment the legal tender 
issue. Mr. MacKenzie advocated the policy of non-interference 
by Government, emphasized the tendency of Government issues 
to depreciate, and accused Sir Francis of resorting to the pro- 
posed increase as a help in concealing the million dollar deficit 



» Monete.ry Times and Insurance Chronicle, Vol. VII., p. 725, Letter of Sir Francis 

HiNCKS. 

« Siolutes, Canada, 1870. p. 41, 33 Vic, cap. 9, " An Act to amend the Act 31 Vic, cap. 
46, and to ref^ulate the issue of Dominion notes. 



Banking Reforms, 1867-71 



196 



which Mr. MacKenzie detected in the country's finances.* 
Mr. Carlwright objected to the first proposal, because, first, it 
tended unduly to diminish the amount of gold reserves which 
should be held in the country ; second, it was a scheme to 
borrow a large sum of money at call, or at short time ; third, it 
appeared to him to be an expedient of somewhat objectionable 
morality in a political sense. Others complained that the rule 
would be simply a means of forcing from the banks a permanent 
loan equal to half their reserves. Their arguments will be more 
or less approved according to the reader's point of view. | 

In any case these measures of the Government must be re- 
garded as a fiscal expedient rather than a banking refurm. The 
Government, without doubt, was obliged to do something with 
Dominion notes already in circulation. The Minister's plan for 
regulating the issue was a marked improvement on that adopted 
by his predecessors. Even had he so wished, he would have 
scarcely been able to provide the means for redemption of this 
debt. Furthermore, the banking interests demanded certain 
privileges, among them, a monopoly of the circulation of the 
country. Sir Francis felt obliged " to contend in the interests 
of the public at large, that they were entitled to some share in the 
profits of the circulation." Though, in the preceding pages, we 
have not accepted this view of the State's relation to the cur- 
rency, it must be said, nevertheless, that to many the reserve 
requirement seemed only a fair price for the concessions 
granted by the Government to the banks. The regulation was 
modified slightly while under discussion and finally adopted by 
Parliament in the following form : •' The bank shall always 
hold, as nearly as may be practicable, one-half of its Cash 
Reserves in Dominion notes, and the proportion of such reserves 
held in Dominion notes 'lall never be less than one-third 
thereof." (33 Vic, cap. 2, ^ 5.) 

§ 41. — THE " ACT RESPECTING BANKS AND BANKING," 187O 

The " Act respecting Banks and Banking," embodying the 
resolutions prepared by the Minister, was passed by the House 



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The Canadian Banking System, 1 817-1890 



of Commons the 5th April, by the Senate upon the 12th, and re- 
'.eived the Royal assent the 12th May, 1870. (33 Vic, cap 2.) 

It provided that in any Act estabhshing a new bank, or 
renewing the charter of any existing bank, the following restric- 
tions should be incorporated, certain exceptions being granted 
in order to confirm peculiar features in the charters of the Bank 
of British North America and La Banque du Peuple : 

(a) The bank shall not issue notes or begin a banking business till 
$200,000 of its capital shall have been bona fide paid up, and the fact certi- 
fied to by the Treasury Board. 

(b) Twenty per cent, of the subscribed capital shall be paid each year 
after the beginning of business. 

(c) The notes in circulation shall not exceed the amount of the bank's 
unimpaired paid-up capital, and no note shall be issued for less than $4.' 

(d) Notes of the bank shall be received in payment at any of its offices, 
but shall not be payable in specie or Dominion notes at places other than 
where they may be made payable. One of such places shall always be the 
bank's chief seat of business. ■' ' '• ' ' 

(«) Usually half, and not less than one-third, of the cash reserve shall 
be held in Dominion notes. 

(/) No loans or discounts shall be made on the security of the bank's 
own stock, but the bank shall have a privileged lien for any overdue debt on 
the shares and unpaid dividends of its debtors, and may decline to transfer 
such shares until the debt is paid. 

(g) The paid-up capital shall not be impaired by any division of profits. 
Directors concurring in such impairment shall be individually liable for the 
amount as for a debt due to the bank. Capital lost shall be made up forth- 
with by calls on the shareholders for any unpaid portion of the subscriber's 
capital stock, and by application of all net profits. * * * (This clause 
was designed to prevent that reduction of capital stock on account of losses 
which had been a potent source of evil in the past.) 

(A) No division of profits by way of dividend or bonus shall exceed 8 
per cent, per annum until the rest or reserve fund, after deducting all bad 
and doubtful debts, shall equal 20 per cent, of the paid-up capital stock. 
■* * "' (An obstacle to such extravagant and disastrous divisions by way 
of bonus as characterized the policy of the Bank of Upper Canada.) 

[i) Suspension of payment of any liabilities as they accrue, continuing 
for ninety days, shall constitute the bank insolvent and determine its charter, 
except for the purpose of making certain calls, and for winding up the 
business. 

(j ) The property and assets of the bank being insufficient to pay its 
liabilities, the shareholders shall be liable for deficiency to the amount of 



I By a separate statute, the b inks in Nova Scotia acting under provincial charters, 
were empowered to issue notes for .'84 and upwards, *20 having been the lowest denomina- 
tion permitted by the laws of the Province. (33 Vic, cap. 12.) 



11 i 
HI! 



Banking Re/ortns, 1867-71 



197 



their respective shares, in addition to any amount on those shares not yet 
paid up. This liability shall be enforced to the extent that the directors 
deem necessary to pay all the debts of the bank, without waiting for the 
collection of debts to the bank, or the sale of its property. The directors 
shall make calls for not more than 20 per cent, of each share at intervals of 
thirty days, and on notice given thirty days prior to the day on which the 
call shall be payable, as soon as the suspension shall have continued for six 
months, the first call to be made within ten days after the expiry of six 
months. Shareholders failing to pay any call as it becomes payable shall 
forfeit any claim in the assets of the bank without preventing the recovery of 
such a call, or of further calls. In the case of a bank en commandite, the 
unlimited liability of the principal partners shall accrue against them imme- 
diately, without waiting for any preliminary proceedings whatever. * * 
(This improvement in the double liability clause, largely one of procedure, 
was a highly important reform, the need for which had been well taught by 
the failure of the Bank of Upper Canada. Under the amended law, it be- 
came possible immediately to enforce the liability of shareholders, and 
promptly to pay ofT the debts of the banks. The hardship of waiting for 
dividends had formerly oppressed the bank's creditors ; it was now justly 
transferred to the bank's proprietors.) 

(k) Upon shares the transfer of which shall have been registered within 
a month of the bank's suspension of payment, the liability of the transferors, 
saving their recourse against the transferees, shall continue as if the shares 
had not been transferred. Directors, refusing to make and enforce calls, or 
to concur in such action, shall be guilty of misdemeanor, and persoially 
liable for damages suffered by their default. 

(/) The bank shall be subject to any general winding up by Act passed 
by Parliament. 

(wi) Each shareholder shall have, whenever shareholders' votes are 
taken, one vote for each share held by him during the previous three months. 
No person, not a shareholder, shall act as proxy, and no bank employe shall 
hold proxies or vote in person or by proxy. 

(?j) The shareholders shall have power to regulate, by by-law, matters 
incident to the management and administration of the bank, but the directors 
shall not be less than five, or hold in the aggregate less than one per cent, of 
the paid-up stock. They shall be elected annually by shareholders, and be 
eligible for re-election, and the discounts or advances to any director, or firm 
of which the director is a partner, shall not e.\ceed one-twentieth of the total 
discounts of the bank at the same time. 

(0) Certified lists of shareholders, the stock respectively held by them, 
and their residences, shall be transmitted to the Minister of Finance each 
year before the day appointed for opening of Parliament 

(p) The monthly returns to the Government of bank's assets and liabili- 
ties shall be made according to an expanded and improved form.* 



' The form of these returns appears in Appendix I. 



:: 11 



ji 



198 



The Canadian Banking System, 1817-1890 



{q) The making of wilfully false statements in such returns shall be a 
misdemeanor, and bank officers signing, approving, or concurring therein, 
with intent to deceive anv person, shall be responsible for damages sustained 
by him in consequence 

(r) Giving unfair preference to any creditor sl.all be a misdemeanor on 
the part of an officer of the bank. 

(i) The charter of the bank shall run to the end of the session of Par- 
liament next after the first of January, 1881, and no longer. 

The directors of any existing bank were permitted, ori 
authority of the shareholders given in general meeting, to apply 
for an extension of its charter with amendments subjecting the 
bank to the first eighteen restrictions outlined above. The 
Governor-in-Council was empowered, upon favorable report of 
the Minister of Justice and the Treasury Board, to continue the 
amended charter, by Letters Patent, from the date of its expiry 
to the established date in 1881. The charter was to take effect 
either from the date of its expiry, or, the shareholders consent- 
ing, from any earlier time fixed for its commencement. If it 
were shown, at the time of the application for the renewal, that 
the capital stock of the bank was impaired, the Governor-in 
Council might permit a reduction, not to exceed 25 per cent, of 
the amount paid-up, and not to reduce that amount below 
$200,000. This regulation, apparently a reminiscence of the 
free banking which he supported twenty years before, was a part 
of his policy specially favored by the Minister. He insisted 
upon it as essential to his banking measures, and also wished to 
provide for granting new charters by Letters Patent. But 
Parliament would not consent thus to strip itself of jurisdiction 
in the matter. 

The monopoly of issuing notes for circulation was assured 
to the banks by imposing on private or unauthorized issue a fine 
of $400, recoverable with costs in any court having civil juris- 
diction, one-half for the person bringing suit, and one-half for 
the public uses of the Dominion. Previous legislation in con- 
flict with the present Act was repealed, and the " Act respect- 
ing Banks " of 1868 continued to .the end of the session of 1872. 

§ 42.— "THE ACT RELATING TO BANKS AND BANKING," 187I 

The account of Sir Francis Hincks' banking policy is 



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policy 



IS 



Banking Reforms, 1867-71 



199 



incomplete without some reference to his financial measures. 
He was a Minister fertile in schemes to keep the Treasury full. 
One of his measures, for the passing of which he relied, proba- 
bly, more upon a disciplined majority than on the arguments ad- 
vanced in its behalf, I have already noticed in his increase of 
the Dominion note circulation. The cognate plan to secure the 
permanent loan of one-half the cash reserves of the banks in the 
Dominion is also familiar. Another device, iidopted in 1871, 
was the assumption of the Government savings banks estab- 
lished in the maritime provinces before Confederation. He 
further provided for starting new offices, and for converting 
Savings Bank deposits into five per cent, debentures. (34 Vic, 
cap. 6.) Post Office savings banks had been provided for 
under his predecessors. 

The competition of the Government savings banks was a 
serious factor in the general banking situation for many years. 
The high interest (4 to 4^ per cent.) paid on deposits, and the 
lack of adequate restriction on the amount which individuals 
might deposit, diverted a considerable part of the sums ordin- 
arily kept by the banks to the chests of the Government. Only 
in 1886 were precautions taken to correct these faults and limit 
the banking functions of the Government to custody of the 
savings of the poor, ignorant, and those unable to judge for 
themselves as to the security of their investments. 

By a third scheme, chartered savings banks were now 
obliged to reorganize under general legislation, to provide a 
comparatively large paid-up capital, and to invest it in Govern- 
ment debentures. (33 Vic, cap, 7.) Insurance companies, both 
domestic and foreign, had been compelled in 1868 to maintain 
deposits with the Minister of Finance. All these measures were 
supported by the plausible plea of guarding the public interest, 
but it is not unlikely that they served that interest as much 
by helping to find the Government of the day with ample funds 
as by protecting individuals from loss. 

The last item of the list, though hardly a financial measure, 
is quite as germane to our subject. In a statute of 1871 (34 
Vic, cap. 4), provision was made for (a) expelling from the 
circulation the large amount of American silver by which Can- 
ada had been flooded since the suspension of specie payments 

14 



the 
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' 49 
«5 






The Canadian Banking System, 1817-1890 

in the United States; (6) substituting therefor, the Canadian 
silver coinage in pieces of five, ten, twenty-five and fifty cents^ 
and copper coinage in pieces of one cent, the silver being 
legal tender to $10, and copper to twenty-five cents; and (c) 
for establishing throughout Canada as the compulsory money 
of account, an uniform currency in the denomination of dollars, 
cents and mills, at the equivalence of $10 Canadian = the 
American eagle, coined since 1832, and weighing 10 dwts,, 18- 
grs. Troy, and $4.86f Canadian = the British sovereign, the two 
coins mentioned and fractions thereof being made k legal tender 
in Canada. 

On the 3rd March, 1871, the Minister explained to the 
House of Commons that in only one single instance had a 
charter been renewed according to the Act of the previous year. 
" Banks," he continued, '• almost unanimously expressed them- 
selves in favor of having Parliamentary charters. When this, 
was ascertained, and it was only quite recently, the Govern- 
ment determined that they would endeavor to embody in one 
general banking Act, not only the provisions of the previous Act 
of the last session, but also the general provisions of what he 
might term the internal regulations of banks, and which they 
themselves seemed desirous should be, as nearly as possible^ 
assimilated. This was the extent of the Government's inten- 
tions, but there seemed to be a very general desire that in the 
Bank Act the charters should be extended for ten years." ^ 

The Act drafted in accordance with this purpose was passed 
with very slight discussion in either House, and, on the 14th 
April, received the Royal assent. (34 Vic, cap. 5.) This statute 
was the first general law under which the banks really worked, 
and may be regarded as practically the first Bank Act of the 
Dominion. Still, the measure of 1870 contained the essence of 
the Government's policy. We have to note one change in the 
capital requirement, no new bank being now permitted to issue 
notes or begin business with less than $500,000 capital bond fide 
subscribed, and $100,000 similarly paid-up. The payment of a 
further sum of $100,000 was required within two years from the 
beginning of business. An idea of the comprehensiveness of the 



I Parliamentary Debates, Canada, Vol. II., p. 255. 



Banking Reforms, 1867-71 



101 



Act may be gained from the titles, General Regulations §§ 4 to 
16, Internal Regulations §§ 17 to 29, President and Directors 
§5 30 to 38, Powers and Obligations of the Bank (loan«^, interest, 
advances on warehouse receipts, etc.) §§ 39 to 54, Fank Notes, 
Bonds, etc. §§ 55 to 56, Insolvency §§ 57 to 59, OiFences and 
Penalties §§ 60 to 67, Notices § 69, Future Legislation §§ 70 
to 71, Special Provisions as to certain banks §§ 72 to 75, Re- 
pealing and Saving Clauses §§ 76 to 77. 

The law as to loans on warehouse receipts and similar docu- 
ments was thoroughly revised, difficulties of procedure removed, 
and some amendments added. A considerable advance was 
made here in the legislation which allowed banks making advances 
to take, instead of personal security, the security of commodities 
stored against the time to market them, passing into, out of, or 
through Canada, or undergoing conversion from the raw state to 
products such as pork, bacon, hams, malt, flour and sawn lumber. 
How important this possibility was, not only to the development 
and maintenance of the country's trade, but also to the safe con- 
duct of banking, will appear as the careful attention to the 
" warehouse receipts " clauses and the wide extension of the 
underlying principle, are noticed in later pages. 

It was also declared that the bank might acquire and hold 
as collateral security for any advance, •' shares in the capital 
stock of any other bank, the bonds or debentures of municipal 
or other corporations, or Dominion, Provincial, British or foreign 
public securities." If the original debt were not paid when due, 
the bank might dispose of such collateral after thirty days' notice 
to the debtor. 

A further discussion of the statute is unnecessary. It would 
be tedious to repeat at length the substance of its seventy-seven 
sections, and twenty-four octavo pages ; to amend the Minister's 
description of its purpose would be difficult. And in the end, we 
should have discovered almost no provision completely unfamiliar, 
a large part of the Act being devoted to the re-enactment and 
consolidation of legislation with respect t ks already in 

force. Aside from certain technical amenduiciits in 1872, 1873, 
and 1875, the Bank Act remained without change until 1879. 

The achievement of first bringing the Canadian banking 
system into the form on which later legislators merely built, has 




'. u 



the 
ble 




I 



I ; 



aoa 



The Canadian Banking System, 1 817- 1890 



frequently been ascribed to Sir Francis Hincks. It is true that 
he proposed certain reforms to ParHament, that his Resolutions 
were adopted with little substantial change, that the Act of 
1871 is still the basis of the statute governing banks and bank- 
ing. But the characteristic provisions of the Acts of 1870 and 
1871 did not originate with Sir Francis Hincks. One of the 
few features for the invention of which the Minister was respon- 
sible, viz., the renewal of charters by Letters Patent, failed 
within the year ; another, the reduction of the minimum capital 
to $100,000, adopted probably for political reasons, was after- 
wards changed, and was never found to exact sufficient cash 
guarantee of intention to carry out a bond fide business ; a third, 
the power to loan upon stock of other banks, was proved per- 
nicious in less than three years, and was repealed in less than 
eight. The bank reforms of practical value which he introduced, 
had all been suggested and justified by bankers, investors in 
banks, and business men, some one, some two, and some eleven 
years before they were adopted by the Government. To unify 
the banking system, the Minister extended the law of old 
Canada to the Provinces of Nova Scotia and New Brunswick ; 
to reform it, he followed, not original schemes of his own, but 
the suggestions of the bankers called in consultation. Yet the 
banking policy of their successor formed a distinguished and 
admirable contrast to Mr. Gait's injurious attempt to establish 
a currency of Government paper, and to Mr. Rose's effort to 
revolutionize the system of bank note issue. They wished to re- 
model it according to personal hobbies ; he allowed the Cana- 
dian banking system to keep to the natural lines of its growth. 
Of the wisdom of his decision, each year of the twenty-three 
since elapsed has afforded new and stronger proof. 



■■!' ■■ »:, 



CHAPTER VIII 



BANKING UNDER THE CONFEDERATION, 1867-1889 



§43. — THE EXPANSION BETWEEN 1867 AND 1873 

The economic history of Canada since the Confederation of 
the Provinces presents several well-defined periods, of which 
the first includes 1868-1873, the second 1874-1879, and the third 
extends from the autumn of 1879 to nearly the close of 1883. 
The most interesting of the three, probably, is the first, but 
even a cursory description .would need the whole of a separate 
paper ; to mention a few of the phenomena, and some of the 
general results, is all that respect for the limits of the present 
essay will permit.^ The period was one of growth, great appar- 
ent prosperity and general expansion. Thus, the total debt of 
the Dominion was increased from $93,000,000 in 1867 to 
$141,000,000 on the 30th June, 1874 ; the net interest charge rose 
from $4,300,000 to $5,100,000. The receipts of the Treasury 
rose from $13,600,000 to $24,200,000, and the expenditure in 
similar ratio. Fifteen ano a-half millions of dollars were spent 
upon the Intercolonial Railway, one million and a-half on the 
canals, a million on the Canadian Pacific Railway. Twelve 
njillions of the debt increase was in Dominion notes, the circula- 
tion of which was quadrupled from 1867 to 1874. The total 
exports of the country, $57,000,000 in 1868, were $89,000,000 in 
1874; *'^^ imports, $73,000,000 in 1868, were $128,000,000 in 
1873-4. Extension of the railway system was begun in 1871 ; 



-Ua 



i' i 



fthe 

jl^ff-i'ible 

iikr cc 



1 It might well be desii ed that some account of the commercial growth and economic 
development of British North America were available. A most careful search has revealed 
no such work, and it is impossible to refer tlie reader »o a convenient and full discussion of 
questions which can barely be touched here. 

15 



I g ' 186 
,149 

:^ |i; 1890,1! 



204 



The Canadian Banking System, 1 817- 1890 



ii ii 



by 1875 the mileage was doubled, being 4,826 miles as against 
2.497 in 1870. The figures serve to indicate what other evidence 
p' oves to have been true. 

There was heavy immigration into the country. The area of 
settlement was extended. In the west, the new Province of 
Manitoba was established. The supply of agricultural produce 
was much increased, and a powerful impetus given to the busi- 
ness in produce. Building operations in Canada and the United 
States, and the rapid additions to the railway system in either 
country, raised the price of lumber. With the increase of other 
foreign demands, they stimulated the timber trade, and caused 
abnormal inflation. The speculation extended to timbered 
lands ar.d timber limits. All sorts of manufacture were pushed 
to bounds, which, in 1875, were acknowledged to have been 
unreasonable.' Municipalities of every grade caught the infec- 
tion and adopted the pernicious system of granting bonuses to 
manufacturing companies proposing to estabhsh themselves in 
the district of the grantors. The whole series of years was 
marked by general growth of commercial operations, expansion 
of credit in its various forms, and large additions to the class of 
small shop-keepers doing business on long time. Except where 
related to timber production, the values of real estate were 
much less affected by the upward movement than other invest- 
ments. The time is best described as one of increased activity 
in manufacture, transportation and excbringe. The great land 
boom had occurred in 1857 and preceding years. 

The banks, it may be expected, shared in this expansion. 
From May, 1868, to June, 1874, twenty-eight new charters were 
granted by the Dominion Parliament, tlie record for each session 
being as follows : 1868 one, 1869 two, 1871 four, 1872 ten, 187.3 
nine, 1874 two.^ After 1870, the charters usually provided that 
if $100,000 of the new bank's capital were not paid in to some 
existing chartered bank, and the fact certified to within one year 



1 The Monetary Times, the contemporary newspapers, other financial and monetary 
publications, and the statistics prepared for the Dominion Government, are the chief sources 
for the facts of this period. 

s See Note i, next page. 



' m 



Banking under the Confederation, 1867-89 



205 



from the date of incorporation, the charter should be forfeited 
for non-user. Provisions as to the payment of an additional 
$100,000 varied, the term being fixed at from one to three years 
after the beginning of business. In four cases the time for 
commencing operations was extended to the end of the second 
year. The work of founding a bank was by no means finished 
by the passing of the Act of incorporation, and some of the 
charters were forfeited. Nevertheless, nine.:2en new banks 
came into existence and entered the competition for Canadian 
business before the end of 1874, but only nine of these were 
making returns to the Government by the end of June, 1873, 
The Commercial Bank of New Brunswick, the Commercial 
Bank of Canada, the Gore Bank, and the Mercnants Bank 
(acting under a Nova Scotian charter in 1867), whose com- 
bined capital in 1867 was a little over $6,100,000, had disap- 
peared from the return. So the total number of banks in the 
four provinces, acting under charter, appeared in the Bank 
Statement for June, 1873, ^s thirty-three, a net increase of five 
since June, 1867. . 



1868 
1869 

ti 

1871 



1872 



1873 



18^4 



1 These were as follows : "."'"- 

Site of Principal 
Office 

Bank of Agriculture* Hamilton, Ont. 

The Merchants' Bank of Halifax HaMfax, N.S. 

The Dominion Bank Toronto. Ont. 

The Metropolitan Bank Montreal, Que. 

The Bedford District Bank* Waterloo, Que. 

The Western Bank* Yarmouth, N.S. 

The Bank of Liverpool Liverpool, N.S. 

The Exchange Bank of Canada Montreal, Que. 

Banque Ville Marie Montreal, Que. 

The St. Lawrence Bank Toronto, Ont. 

The Bank of Hamilton Hamilton, Cnt. 

The Halifax Banking Co Halifax, N.S. 

The Bank of Acadia Liverpool, N.S. 

The Bank of St. John* St. John, N.B. 

The Maritime Bank of the Dominion of Canada. .St. John, N.D. 

1'he Superior Bank of Canada Toronto, Ont. 

The Bank of Manitoba* Fort Garry, Man. 

La Banque d'Hochelaga Montreal, Que. 

The Three Rivers Bank* Three Rivers. Que. 

La Banque de Saint Jean St. Johns, Que. 

The Stadacona Bank Stadacona, Que. 

The Imperial Bank . Toronto, Ont. 

The Victoria Bank of Canada* Montreal, Que. 

Pictou Bank Pictou, N S. 

La Banque de St. Hyacinthe St. Hyacinthe, Que. 

The Central Bank of Canada* Montreal, Que. 

The London and Canada Bank* Toronto, Ont. 

The Bank of Ottawa Ottawa, Ont. 

♦ Charter forfeited for non-user. 





Act of 




Incorporation 


31 


Vic. 


cap 


85 


32-33 






59 


32-33 






bo 


34 






39 


34 


<( 


41 


40 


34 






41 


34 






42 


3f> 






40 


3.1 


It 


ff 


51 


35 




«l 


52 


35 






42 


35 






54 


35 




II 


55 


35 


It 


II 


56 


35 






58 


35 






59 


35 






60 


36 


U 


II 


13 


36 


II 


It 


14 


36 


It 


II 


15 


36 






73 


36 


41 


t* 


74 


36 


II 


ll 


75 


36 


11 


II 


76 


36 


II 


If 


77 


36 


II 


II 


78 


37 


*l 




55 


37 


«l 


l( 


56 



) 

( 

7 
2 
6 

7 
,2 



' y thf! 

able 

ice 
■ I 




Ij 3 1890, t 



906 



The Canadian Banking System, 1817-1890 



The totals of the various items included in the return were 
as follows : — \ ^ . • 



Liabilities 



Number of banks in operation 

Capital authorized , 

Capital paid-up 

Promissory notes in circulation 

Due to other banks in Canada ) 

Due toother banks or agents not in Canada) 
Government deposits payable on demand ' ) 

Other deposits payable on demand ) 

Government deposits payable after notice* ) 

Other deposits payable after notice / 

Liabilities not included above 

Total liabilities to the public 



30th June, 1867 



28 

$32,500,162 
10,102,439 

2,984,344 

14.935.213 
16.727,378 



30th June, 1873 



$44,548,376 



33 

$64,766,666 

55,102,959 

24,956,046 

1.807,404 

2.496,969 

7,261,273 

31,074,316 

4,451.017 

25.890.531 
319.821 



$98,296,677 



Assets « 



Specie [ 

Provincial or Dominion notes j 

Notes of and cheques on other banks 

Balances due from other banks in Canada. 1 
Balances due from other banks or agents V 

not in Canada ) 

Government debentures or stock 

Loans to the Government 

Loans, etc., to corporations 

Notes and bills discounted and current 

Notes and overdue debts not specially se- 
cured 

Overdue debts secured 

Real estate other than bank premises — . . | 

Bank premises [ 

Other assets not included above 

Total assets 



1867 



$8,200,229 
1,806,052 

5.345.372 
6,277.593 

54,899,142 



1,628.249 
2,618,021 



$80,772,834 



1873 



$6,829,226 
8,353.290 
4-57I.650 
3,095,220 

11,879,044 

1,324,761 

107,869 

2,431,710 

121,977.754 

1,242,897 
1,298,356 

934.841 
2,186.780 
2,286,355 



$168,519,746 



About $364,000 of the Gore Bank's capital was written off 
when it disappeared from business, and t\70-thirds of the capital 
of the Commercial Bank. If this is added to the capital of the 
Commercial Bank of New Brunswick, the sum of |^3, 630,666 is 



> This item in 1867 is classed as " Deposits not bearing interest." 

« In 1867, " Deposits bearing interest.'' * 

s Owing to incompleteness in the return of the assets of one of the Nova Scotia banks, 
the figures under this head for 1867 are approximate merely. 



I J 



Bunking under the Confederation , 1867-89 



207 



obtained as the gross reduction of banking capital between 1867 
and 1873. ^^^ gross increase, therefore, will be $55,102,959 
paid up capital on the 30th June, 1873, ^^^s $32,500,162, the like 
total in 1867, plus $3,630,666, or $26,233,463, an increase of 
over 80.71 per cent. More than fifteen million dollars of this 
increase was contributed by the shareholders of the Bank of Mon- 
treal, the Merchants' Bank of Canada, and the Canadian Bank of 
Commerce, in nearly equal proportions. The remaining eleven 
millions were added to the capitals of twenty other banks, in 
amounts ranging from $70,000 to $1,130,000. The increases of 
over a million dollars were those of the Royal Canadian Bank 
and the Union Bank, while the Quebec Bank, Molsons Bank, 
Bank of Toronto, Ontario Bank, Banque Nationale, Banque 
Jacques Cartier, Merchants Bank of Halifax, and the Bank of 
New Brunswick each added $400,000 or more to their stock. 

The competition between the ambitious and enterprising 
gentlemen who guided the three larger banks, Mr. E. H. King, 
Sir Hugh Allan, and the Hon. William McMaster, respectively, 
did not end before the capital of the Bank of Montreal was 
brought to an even $12,000,000, that of- the Merchants' to 
$9,000,000,^ and that of the Bank of Commerce to $6,000,000. 
Even then they strove each to accumulate the larger rest. The 
Bank of Montreal, however, had at the start an advantage of 
almost six millions more capital, and the management of the 
Government account ; it was never overtaken, much less out- 
stripped, by its rivals. 

Naturally, with so many banks yet to be opened, the in- 
crease of capital did not stop with tlie date in 1873 ^^ which I 
have chosen to consider it. Nearly the highest point reached 
between 1870 and 1890 was in June, 1876, when the official 
return for forty-one banks showed the total paid-up capital to 
be $67,199,051.2 The most of this extension was undoubtedly 
genuine. Yet banks were empowered, by the Act of 1871, to 
loan upon shares of the capital of other chartered banks. On 
December 31, 1873, $3,800,000 of loans were secured by such 



t ! •: 




f 



anks, 



1 $498,950 of this were not paid up. The capital of the bank has since been reduced 
and is now S6,ooo,ooo. 

> Statistical Year Book of Canada, 1893, p. 516. 






I 



I 
'I 



i ! 



208 



The Canadian Banking System, 1817-1890 



shares, the aggregate of banking capital then being almost sixty 
million dollars ; on the same date of 1875, $5,300,000 of loans on 
bank shares were current, total capital being then sixty-three 
million dollars. To the extent of such loans, and of a good part 
of the loans granted by the several banks to their own stock- 
holders (an item, however, which does not appear in the return), 
these additions to capital were practically fictitious. And to that 
extent, too, the banks were trading on fictitious capital, a prac- 
tice the faults of which are too obvious to require explanation. 
Speculation in bank stock was promoted, a large business on 
margins developed, and, in the end, widespread and heavy losses 
caused among the participants. 

But, from the mass of evidence examined, I cannot conclude 
that a greater part in furthering the expansion of the period must 
be attributed to the banks than to any other important members 
of the organization of production and exchange. The commerce 
of Canada was under the influence of much the same tendencies 
as were acting throughout the civilized world ; the returns show 
that the banks followed rather than stimulated the upwaid move- 
ment. The number and extent of the simpler exchanges 
increased by reason of the growth of population, higher wages, 
and greater activity in retail trade. The bank note circulation, 
wherewith they were effected, also rose, as our comparison shows, 
from $10,100,000 to $24,900,000 on the 30th June, 1873. Six 
months later it was .$29,016,659. The new commercial enter- 
prises, the greater operations in produce, the processes of railway 
construction, and the swollen volume of general business, caused 
a new dem.and for loanable capital. The rate of interest rose. 
The banks supplied the need by expanding their discounts and 
other Canadian loans from some $54,000,000 in June, 1867, to 
,$127,000,000 in June, 1873, ^"*^*^ $157,000,000 on the 31st 
December, 1874, an increase between the extreme dates of 
$103,000,000. Only $18,000,000 of this was derived from circu- 
lation ; the remainder from additions to capital, amounting to 
$31,000,000, and an increase of deposits of all sorts amounting 
to $54,000,000. For a more extended statistical comparison, 
there is no present opportunity, but the figures already quoted 
will suggest the conclusion which such a comparison would 
establish, viz. : that the extension of banking was not out of 



Banking under the Confederation, 1867-89 



209 



proportion to the growth of export and import trade, or to the 
development of the internal commerce of Canada, and the means 
of conducting it, or to the apparent increase of accumulation, as 
indicated by the total deposits in the chartered banks. 



§ 44— DEPRESSION, 1874-1879. 

That the growth exhibited in the preceding section was 
accomplished without loss or cost to the banks, is an inference, 
probably, that no one will make. Yet no panic, in the accepted 
sense of the term, occurred in Canada in 1873, nor is it easy to 
discover the phenomenon designated by the broader expression 
'* commercial crisis.'" Relaxation from the tense activity of the 
preceding period began in the fall of 1873, and continued 
through 1874. Thus the change was gradual, though none 
the less complete for that. Before, however, the effect upon 
the banks is discussed, a digression to certain losses of an 
earlier date may be allowed. 

By the amalgamation of the old Commercial Bank with the 
Merchants' Bank of Canada, the shareholders of the former re- 
ceived about one-third of the par value of their paid-up capital. 
Another of the old Upper Canada corporations was the Gore 
Bank, established in Hamilton in 1833. At the tim.e of its 
failure, the Bank of Upper Canada had charge of the Montreal 
account of the Gore Bank, and owed it about $78,000. The 
bank was embarrassed in the next year by the failure of the 
Commercial Bank, to which the Montreal account had been 
transferred. Then a committee of stockholders reported that 
three of the agencies should be closed, that another was loaded 
with bad debts, and that its funds had been misapplied by the 
manager. The system of inspecting the agencies was neither 
efficient nor regular. The staff was needlessly large. Heavy 
losses incurred long previously (principally after the collapse of 
1857), had never been written off. The deposits of the City of 
Hamilton were withdrawn, and though they were afterwards 
restored, the action injured the bank. The fears of the public 
were aroused, and a heavy drain started upon the bank's 
liabilities. Between June, 1867, and June, 1868, its deposits 
were reduced by $760,000, its circulation by over $330,000. 



1: 



I 



I 



I 



210 



The Canadian Banking System, 1 817- 1890 



The price of stock in the Gore Bank, which stood at 92^ tn 
October, 1867, fell to 80 in December, 70 in April, 60 in May, 
50 in June, and in October, 1868, to 30 and 35. The Bank of 
Montreal temporarily advanced $150,000 to help, and other On- 
tario banks some $200,000. This enabled the Gore Bank to 
keep on. In June, 1869, the reduction of its stock in the ratio of 
40 to 24 was authorized by Parliament. (32 and 33 Vic, cap. 
54.) The bank was still solvent, but rather than continue the 
struggle alone, the shareholders decided to accept for their paid- 
up stock in the Gore Bank fifty-five cents on the dollar in shares 
of the Bank of Commerce, then worth 105^. On the 27th 
August, its debts and property were taken over by the Canadian 
Bank of Commerce. The old bank was amalgamated with the 
new, and the . sole survivor of the banks chartered by Upper 
Canada, apparently doomed to perish like the others, lost its 
identity and separate existence. * ' . 

Of the Commercial Bank of New Bruswick, which sus- 
pended payment on the loth November, 1868, no more need be 
said than that ils noteholders, depositors, and other creditors 
were paid in full, and a dividend saved for the shareholders. 
The Westmoreland Bank, another New Brunswick concern 
which failed about the time of Confederation, was also credit- 
ably wound up, the double liability of the shareholders being 
successfully enforced. 

In 1871 the Bank of Liverpool, situated at Liverpool, N. S., 
was chartered by the Dominion Parliament, and in the follow- 
ing year the Bank of Acadia, located in the same town. (34 
Vic, cap. 42 ; 35 Vic, cap. 55.) Both concerns were involved 
with a Boston firm of rather doubtful credit. The Americans 
had taken one-fourth of the Liverpool's stock, and one-eighth 
of the Acadia's, and paid for it by promissory notes." In con- 
nection with lumbermen and ship owners of Liverpool, they got 
some advances by a system of mutual indorsement, and other 
credits on bills of exchange drawn on the American house and 
supposed to be covered by lumber shipments, but met really by 



1 Monetary Tinits and Insurance Chronicle, Vol. II., pp. i6a, 167, 398, 468, 525, 867 ; Vol. 
III.,p. 36. 

^ Ibid, Vol. VI., p. 915 ; Vol. VII., p. 22a. 



Banking under cue Confederation, 1867-89 



211 



the proceeds of similar new bills. The funds thus obtained 
were used to increase the lumber plant of the ring, rather than 
to discharge their debts, or to pay for the quantities of mer- 
chandise purchased in Montreal, Boston and Halifax. Liver- 
pool and the surrounding country enjoyed a season of high 
prosperity. But early in 1S73, acceptances of the American 
house went to protest, the principal Liverpool firm succumbed, 
and with it dragged down the banks. The Liverpool failed on 
the nth April, the Acadia, after a business life of four months, 
on the i8th. Dun, Wiman & Co. reported failures for liabilities 
of $3,000,000 in Nova Scotia during 1873, and the prospect that 
creditors would get 30 to 33 per cent, of their claims. One-third 
of the amount involved was owed by parties in the neighbor- 
hood of Liverpool.^ There the pinch was severe, and the losses, 
compared to the resources of the community, heavy. The Bank 
of Liverpool ultimately resumed ; the Bank of Acadia never 
resumed and paid almost none of its debts. But iis total lia- 
bilities at the time of suspension were only $106,914, and the 
loss directly due to this bank failure was slight. 

Reverting now to the more general aspects of Canadian 
banking, we have to observe, m the summer of 1872, a slight 
stringency in the money market, and the rise c^ the rate of dis- 
count to 10 per cent. Discounts, however, increased, as indeed 
they continued to increase, until the end of 1874. The addition 
was doubtless partly due to the speculative efforts of traders in 
wool, produce, lumber and timber, to hold the stocks they had 
bought for a rise, or manufactured in hope of large profits. A 
subsequent increase of loans on bank stock is similarly to be 
explained. In the early months of 1873 activity still prevailed 
in all directions. But by March the banks, in spite of advancing 
prices, began the policy of restricting discounts. In May, the 
large American lumber company of Dodge & Company failed. 
Its connections with Canadian houses were close and many, and 
numbers of operators in timber and sawn lumber were forced to 
the wall. The deep depression in products of the Canadian 
forests dates from this point. Then came the American crisis. 
But confidence in the banks was strong. It was strengthened 



li 



I Ibid, Vol. IX., p. 549- 






I 



212 



The Canadian Banking Svstem, 1 817- 1890 



I 



i i 



by full explanation as to their escape from losses in the States. 
The condition of Canadian producers was improved by the 
higher grain prices, due to the scarcity in England. And, 
except for a slight but rapid decline in bank stocks in September, 
and a small run on two or three of the banks, no critical features 
appeared in the situation, and the country escaped the evils of a 
banking panic. 

During the next year th2 banks enforced the restrictive 
policy with what strength they could. The absolute increase in 
their total advances was due in a measure to the necessity of 
supporting the operations of many of their debtors until the 
assets of these parties could be better realized. The real 
stringency did not occur until January to March, 1875. In 
these three months, the deposits of banks in Ontario and Quebec 
were reduced by $8,500,000 to $70,800,000, and their circulation by 
$3,900,000 to $2i,5co,ooo. They met this drain of $12,500,000 
by drawing on English correspondents for $2,300,000, calling in 
funds, chiefly from the United States, for $2,500,000, reducing 
their outstanding loans by $2,300,000, and by parting with cash 
to the net amount of $1,700,000. New stock for $1,300,000 
was paid up during the period, and the liabilities of the larger to 
the smaller banks, for whom they were agents, increased by 
$1,800,000. A test no less severe was stood by the banks in 
1893, and, as in 1875, passed without exciting the public or 
precipitating bank suspensions. 

Of commercial failures, on the other hand, the record for 
1875 shows an enormous increase, 1,968 as against 966 in 1874, 
and 994 in 1873, ^^d for liabilities of $28,843,967, as against 
$7,696,765, and $12,334,191, in the two preceding years. The 
record for 1876-78 is nearly as bad, but hardly suggests the full 
severity of the hard times through which the people of the 
Dominion were passing.^ In the winter of 1876, the depression 
reached what was, probably, the lowest depths. The carrying 
trade between foreign ports had fallen off, and the ships had 
been brought home to compete with coasting vessels for the 
diminished volume of Canadian trade. The lumber and timber 
trade was suffering from lessened demand in England and the 






' See Note i , next page. 



Banking under the Confederation ^ 1867-89 



218 



United States, from reduced prices, and from the increased com- 
petition of the products of Michigan and Wisconsin forests. 
Stagnation in the lumber trade left many of the laborers usually 
employed in it without work. Farmers and others who supplied 
them were affected, and in great sections of the country, 
dependent for prosperity on the lumber business, the stimulus 
to active industry was withdrawn. 

The long credits, easily obtained from English houses, had 
induced persons to enter the wholesale business, ill-equipped 
either with capital or experience. Imports were purchased in 
excess of the actual needs of the country. To get rid of them, 
long credits were granted in turn to retailers. The wealth of the 
country had increased at best not more than five per cent, 
per annum, but imports more than thirteen per cent. The 
conclusion from this and the annual difference betv/een the 
exports and imports, was that the country had bought in excess 
of its power to pay. The annual interest charge upon the forei^.n 
mercantile debt alone, then about $78,000,000, was $4,000,000. 
Added to this were payments upon railway. Dominion, Provin- 
cial and agricultural debts held abroad, a total burden that 
served sorely to intensify that mercantile distress for which the 
system of long credits was largely responsible. 

Ship-building and agriculture felt the troubles in less degree ; 
like the agricultural implement industry, they were compara- 
tively prosperous. Iron manufacturers lost by stoppage of the 
railway enterprise, and coal, cotton, salt and slate industries were 



„ i: 



I The following is Dun, Wiman & Co.'s list of failures in Canada for the years 
in question: 



1879. 
1878. 

1877. 
1876. 

1875- 
1874. 

.S73. 



Year 



Monetary Times, Vol. XII., p. 1303. 




Liabilities 



$11,648,697 
23,152,262 
25.510,147 
25.517.991 
28,843,967 

7,69(3,765 
12,334,191 

4134,704,000 



'I; 



214 



The Canadian Banking System, 1817-1890 






all more or less depressed, the shrinkage in their business being 
pioportionate to that in other lines. ^ ' - 

After their experience early in 1875, the banks had the dis- 
agreeable task of appraising their mistakes, and reckoning their 
losses in the " era of remarkable prosperity " which had been 
brought to a close. Certain items of their assets underwent 
striking changes. " Notes and debts overdue, and not specially 
secured," rose from $1,141,410 on the 31st December, 1872, to 
$4,436,636 at the end of 1875. "Overdue debts, secured by 
mortgage or other deed on real estate, or by deposit of, or lien on 
stock, or by other securities," rose from $1,455,385, in Decem- 
ber, 1873, to $4,057,591 in December, 1877, while " real estate 
(other than bank premises)" increased from $586,996 in 1873, to 
$2,383,454 at the close of 1879. " Notes and bills discounted 
and current," on the other hand, fell from $139,379,457 in De- 
cember, 1874, to $97,603,688 in December, 1879, circulation 
from $28,465,192 to $22,352,761, and all classes of deposits from 
$85,600,000 to $79,370,000. The reduction of deposits, it will 
be observed, was comparatively slight, the reason, of course, 
being that in hard times idle money is placed with more atten- 
tion to the safety than the profit of the investment. The last 
change to be noted is that in paid-up capital. The item stood 
at $66,800,225 on 31st December, 1875 ; four years later it had 
fallen to $60,351,505, within $700,000 of the lowest point reached 
after 1874. -^1' these changes, however, are better studied from 
the table given in the Appendix I. ; 



§ 45. — BANK FAILURES AND LOSSES, 1874-1879 

The reduction in the banking capital of the country was 
effected in four ways : I — the reduction of capital stock by resolu- 
tion of the shareholders of the bank under authority granted by 
Parliament ; II — the amalgamation of banks according to special 
Act of Parliament, and reorganization on a reduced capitalization ; 
III — voluntary liquidation and retirement from business ; IV — 
and compulsory winding up. 



1 " Report of the Select Committee on the Causes of the Present Depression of the 
Manufacturing, Mining, Commercial, Shipping, Lumber and Fishing Interests," printed by 
order of Parliament, Ottawa, 1876, sections 3 to 15. 



Banking under the Confederation, 1867-89 



215 



I. (a) The capital of La Banque Jacques Car tier was suc- 
cessively reduced frorr. $2,000,000 to $1,000,000 in 1877, and from 
$1,000,000 to $500,000 in 1879. (40 Vic, cap. 55 ; 42 Vic, cap. 
54.) The policy of the bank in the preceding period was described 
as enterprising and aggressive. It had no branches and the losses 
were due to the poor management by which many ill-advised 
loans became lock-ups. The cashier was afterwards convicted for 
falsifying returns. 

(b) The President and General Manager of the Merchants' 
Bank of Canada resigned in February, 1877. A new Manager 
took hold of the bank in March. At his suggestion, the stock- 
holders secured authority in 1878 to reduce its stock in the ratio 
of three to two. The reasons assigned for the reduction were 
bad and doubtful debts previously unprovided for, losses in the 
New York office by gold transactions in a falling market, the 
reduced market value of the Detroit and Milwaukee bonds pur- 
chased at the time of the Commercial failure, expenses and losses 
incurred in disposing of certain Quebec securities, and provision 
for contingencies likely to arise in the business of a widely ex- 
tended bank, whose organization was lacking both in strength and 
centralization. The reduction effected was almost $3,000,000, 
the capital being brought from nearly $9,000,000 to a little less 
than $6,000,000. 

II. {a) The Niagara District Bank, one of the survivors of 
" free banks," lost heavily from the failure of American corres- 
pondents in 1873. It is probable that the decaying fortunes of 
St. Catharines, the city in which the bank was established, also 
afiected it. The paid-up capital in June, 1873, was $356,000. 
The bank was amalgamated in 1875 with the Imperial Bank of 
Canada (38 Vic, cap. 61), and an exchange of shares made on 
the basis of the relative value of the two stocks. Certain assets 
of the Niagara District Bank were excluded from the reckoning 
for realization in exclusive behalf of the original proprietors. 

(6) In 1876 the St. Lawrence Bank, of Toronto, was re- 
christened the Standard Bank of Canada, and shares of the old 
bank's stock of the par value of $100 exchanged against new 
shares worth $50, at the ratio of one to one and a half. This 
operation, nominally an amalgamation, was really a stock reduc- 
tion (amounting to not more than $150,000), by which the bank 



1-- 





!■■■ 

f:' 


'-''[ 5 


;, ^ f^ 


fc 


Li .1 


1 ' 




1 




f . „ 


5 


■ 1 ' ■: 


'• 



(;: 






i! 



216 



The Canadian Banking System, 1 817- 1890 



could start on a new basis, and escape whatever associations 
may have been attached to the name St. Lawrence. (39 Vic, 
cap. 45.) 

(c) At the instance of the City Bank, then under the presi- 
dency of Sir Francis Hincks, that corporation and the Royal 
Canadian Bank agreed to unite in September, 1875. The agree- 
ment was confirmed by Parliament in 1876, and the two rein- 
corporated as the Consolidated Bank. (39 Vic, cap. 44.) No 
reduction of capital occurred at this time, but rather an increase. 
The reasons for the union are obscure ; the subsequent history 
of the united bank pertains to another part of the section. 

III. (a) The Metropolitan Bank of Montreal was one of the 
banks chartered in 1871. From the first it engaged largely in 
loaning upon bank stocks, and taking exceptional transactions 
at high rates of interest.^ It was young and ambitious, and its 
officers, no doubt, fancied their methods modern. When the 
turn came in 1874-5, the bank's affairs took a different aspect. 
Instead of profits there were large losses. In May, 1876, it held 
$121,150 of its own stock, over 15 per cent. It had been forced 
to re-discount in October, 1875, $425,000 ; in May, 1876, $187, 
690. As given in the Return for October, 1876, the assets of the 
bank were $314,000 less than the liabilities to the public and 
shareholders. In June, 1877, authority having been obtained 
from Parliament, the shareholders resolved gradually to wind up 
the bank, pay off its debts, and save their investments from 
further depreciation. The reduction of paid-up banking capital 
due to this action was $800,170. 

(6) Like the Metropolitan, the Stadacona Bank of Quebec 
was one of the younger corporations. And like those of the 
MetropoHtan, its shareholders, discouraged by adverse fortune, 
decided to wind it up. Voluntary liquidation was begun in July, 
1879. Within two years the proprietors had recovered about 
90 per cent, of their investments, and the prospect for further 
returns was good." By this action, $990,000 were withdrawn 
from the banking capital of the country. 

IV. So far a gross reduction of $6,500,000 in capital alone 



1 Monetary Times, Vol IX., p. 1129. 
» Monetary Times, Vol. XIV., p. 70. 



Banking under the Confederation^ 1867-89 



217 



has been accounted for, without mention of the other ways in 
which, to meet their losses, the banks were obliged to reduce the 
valuation of their resources. To investors, of course, reduction 
of rests or reserve funds, the application of earnings to prevent 
the impairment of capital, and the falling off in dividends, was 
almost as serious as actual impairment of capital. The average 
rate of dividend paid in 1874 by banks in Ontario and Quebec, 
was 8.76 per cent.; in 1878, 6.46 per cent.; in 1879, less still. 
The shrinkage of the market value of bank shares in four years 
was estimated in 1878 at not less than $17,000,000. In 1879 
Sir Francis Hincks reckoned the shrinkage at $25,000,000. 

From the standpoint of the banking interests, the year 1879 
was the most disastrous of the five. On the 28th May the 
Mechanics' Bank stopped payment; on the i6th June, La 
Banque Jacques Cartier ; on the ist August, the Consolidated 
Bank ; on the 7th, the Exchange Bank ; on the 8th, La Banque 
Ville Marie ; and in October, the Bank of Liverpool. All save 
the last named had their head offices in Montreal. Naturally 
the public were alarmed by so many suspensions, and began to 
wonder where difficulty would next arise. But the condition of 
the failed banks, if the decline of stocks is an indication, had 
been suspected for some time. Many former creditors had 
transferred their trust to banks in better esteem. Moreover, 
it was known that the Exchange, Ville Marie and Jacques 
Cartier Banks would soon be enabled to resume. The press and 
financial leaders pointed out the exceptional circumstances of 
the banks in trouble, and urged the people to maintain a sober 
calm. Runs started upon some of the solvent banks were 
cordially met, and in one way and another a bank panic was 
again averted. 

(a) The first of the failures was the worst. The Mechan- 
ics' Bank had been a blot on the Canadian banking system for 
years, and it died at last because it was too corrupt to live. 
The support accorded for a time by the Molsons' Bank was 
withdrawn in 1876. The Mechanics' was then obliged to reduce 
its capital by 40 per cent. Its subsequent existence was main- 
tained by means neither worthy nor legitimate. The managers 
had almost no suiport from reputable business men, their dis- 
count business was small and confined to the most undesirable 



218 



The Canadian Banking System, 1817-1890 



I 



classes. The circulation, on the contrary, was higher in pro- 
portion to capital than that of any other bank in Montreal, but 
it was kept up by artificial and improper methods. Brokers in 
Montreal, and agents on the steamboats and at the hotels, were 
used by the Mechanics' Bank to change its notes for other paper, 
and were paid for the service. After its failure, the sharehold- 
ers were forced to contribute the whole of the double liability. 
Even then but forty-five cents on the dollar of the bank's debts, 
either by notes or deposits, had been paid in 1882, and in the 
end only 57^ per cent, of its liabilities were redeemed. The 
principal sum thus lost by the creditors was not less than $240,- 
000; the reduction of the banking capital of the Dominion, 
caused by its losses and disappearance, about $450,000. 

(b) From the failure of the Consolidated Bank, on the con- 
trary, the public lost nothing beyond the discount of 10 to 25 per 
cent, to which the note-holders, wishing to realize soon after the 
suspension, were obliged to submit, and the interest upon claims, 
the payment of which was postponed until the bank's assets 
could be liquidated. To analyze the causes of this failure, it 
would be necessary to examine the comparatively weak con- 
dition both of the City and Royal Canadian Banks at the time 
of amalgamation in 1875, their small rests and mediocre earning 
power, the evils of the double-headed system of management 
adopted, the incompetence of certain higher employes of the 
bank, unjustifiable advances to firms of small calibre in Montreal 
and elsewhere, and the unhealthy condition of Canadian business 
in general at the lime the Consolidated met its heaviest losses. 
In May, 1879, authority was granted to reduce its paid-up cap- 
ital, then about $3,500,000, by 40 per cent. (42 Vic, cap. 53.) 
A new manager and three new directors discovered other losses 
amounting to $1,420,000. Soon after the bank failed. In 1881 
a Montreal stock broker offered to give $260,000 for the Con- 
solidated's assets, and pay what debts were still outstanding. 
He was accepted by the stock-holders. Including the 10 per 
cent, dividend already declared, the stock-liolders thus recovered 
about twenty-three cents on the dollar of their reduced stock. "^^ 

(c) The Bank of Liverpool failure differed from that of the 



1 Monetary Times, Vol. XV., p. 127. "The Canada Securities Company" was the 
formal title of the purchaser of the C msolidated's assets. 



Banking under the Confederation^ 1867-89 



219 



Mechanics', in degree rather than kind. After the suspension 
of 1873, the stock had been transferred to new holders, the bank 
and business reorganized. Further losses were suffered, which 
in 1876 reduced the value of the capital to $100,000. It man- 
aged, nevertheless, to survive till the autumn of 1879. It failed 
in October for total liabihties of $136,000. The Bank of Nova 
Scotia bought its assets, and paid the $4,000, or less, of notes 
which had been issued. The stock-holders successfully evaded 
the efforts to collect the double liability down till 1890. As the 
item in the balance sheet of the Dominion, termed '* Bank of Liver- 
pool Liquidation Account," still stands at $84,996, the exact 
amount shown in "Government Deposits" in the last statement 
returned by the bank before its suspension, one may conclude 
that its debts have not been reduced in the last four years. If 
this be so, the creditors have lost $132,810, and the interest for 
fifteen years ; $35,053 of the principal was owed to other banks, 
and $12,761 to the general public, the rest to the Government. 
The shareholders, of course, lost all their investment, in round 
numbers, $370,000. ' 

The Liverpool's was the last of this series of failures. In- 
cluding the debts of the Bank of Acadia, the ultimate loss of 
principal by creditors from the three disasters was less than 
$500,000.^ The losses inflicted upon shareholders by the 
various operations detailed in this section were far heavier, not 
less, probably, than $12,000,000.2 Upon the banking system 
of Canada the general effect must be regarded as hygienic and 
highly salutary. The business was purged of well-nigh 
twelve badly invested millions.* The excessive baiiking com- 



1 Or, precisely, according to the most careful calculation, $482,300. 

< The materials for these calculations and the statistics as to banks failed or going 
into liquidation, were mostly derived from an unprinted "Return to an Order of the Ho ise 
of Commons, dated the 23rd January, 1890," Sessional Papers, Canada, 1890, Vol. XV., 30 c. 
Other sources were the Monetary Times, various daily newspapers containing repoits of 
shareholders' meetings, etc., the "Statement of Hanks acting under Charter," published in 
the Canada Gazette, and for some facis, private letters from persons acquainted with them. 
Part of the Return cited, it should be said, is printed in Garland, ut supra, p. 42 ; but this 
quotation contains at least two serious errors, namely, as to the dividends paid to depositors 
in the Bank of Liverpool and in the Exchange Bank of Canada. In neither case w^s the 
payment as Mr. Garland has it, made in full, but the dividend from the former bank to 
creditors, not noteholders, was practically nothing; from the latter, about 66 per cent. 

3 Cf. The remarks of the General Manager of the Bank of Montreal, on the 4th June, 
1878: "There is, perhaps, no department of business where competition is more keenly felt 
than in banking. We have, perhaps, as great an excess of banking capital as in any other 
line of business. We have to compete not only with the capital wielded by our neit;hbors 
in Canada, but also with the very cheap money of Great Britain, which is finding its way 
more and more into this country. "—Motutary times, Vol. XI., p. 1,433. 

16 



; K 





gil-' 



T 



220 



The Canadian Banking System, 1817-1890 



petition so conducive to the unsound trade, exaggerated 
"enterprise," and speculation on borrowed capital that had 
festered in the country's commerce, was palliated. Mindful of 
the lessons taught by five years of depression, and animated by 
the resolve to buy less and produce more, to live economically 
and work hard, Canadians were now prepared to turn to best 
advantage the changes that were about to come in their 
affairs. The banks, too, reheved in great degree of the incubus 
of inflated assets and capital beyond their needs, were now in 
the best of condition to extend their business in safe directions, 
and in so doing, to lend their countrymen whatever help should 
be deserved. 

In October, 1879, the tide finally turned. The prices of 
wheat and flour rose by nearly 33^ per cent. The iron market 
improved. Breadstuff's, groceries and dairy products increased 
in value. The market for timber and sawn lumber revived, and 
exports increased. The grain crop was good, and the farmers 
soon disposed of it. The entire commercial organization felt the 
new impulse, manufacturers, importers, exporters, wholesalers, 
retailers. With the entry of a new party to the control of the 
Government, the scheme for a transcontinental railroad was 
pushed forward. Millions on milhons were brought into the 
country in the next few years to build the Canadian Pacific 
Railway towards the western coast. Settlement in Manitoba 
had been started some years before 1879. Immigration now in- 
creased rapidly. Canadians also took a part in the development 
of the West. Extraordinary activity in real estate began along 
the line of the new railroad, and indeed, throughout the more 
accessible portions of Manitoba. But this is material for the 
historian. We must turn to 



§ 46. — THE BANK ACT REVISION OF 1880 

Such changes as were made in the banking law of the Do- 
minion after 1872, were designed to correct defects of detail rather 
than alter general principles. In 1873 the form of the monthly 
return was expanded in the manner shown by the table in 
Appendix I. (36 Vic, cap. 43.) An Act of 1875 relaxed the clause 
by which the bank was unconditionally forbidden, directly or 



Banking under the Confederation, 1867 89 



221 



indirectly, to deal in shares of its capital stock, an exception 
being granted for the necessity to realize upon such shares held 
by the bank as security for any pre-existing and matured debt.* 
The form of the monthly return was again amended, and a state- 
ment of the direct and indirect liabilities of the directors required. 
(38 Vic, cap. 17.) In 1876 a general Insolvent Act, passed the 
year before, was applied to incorporated banks, with modifications 
for their peculiar powers and circumstances. (39 Vic, cap. 31.) 
By 1879 the evils of permitting the banks to loan upon shares in 
other chartered banks were become too manifest longer to be tol- 
erated. The clause permitting loans upon shares was stricken 
out by an Act taking effect upon the 15th November, 1879. (42 
Vic, cap. 45.) The lien in favor of the banks upon shares held 
as security for such loans then current, or for renewals thereof, 
was declared to cease with the end of the Parliamentary session 
of 1880. To enforce the prohibition, banks were required, under 
penalty, to number their shares, while in all contracts for the .>ale 
of bank stock, made after the ist October, 1879, it became neces- 
sary to specify the numbers of the shares convey«-d. Not to do 
so was made a misdemeanor. 

The expiry of all bank charters had been set for the ist 
July, 1881. In accord with the policy adopted a decade before. 
Ministry and Parliament took up, in the session of 1880, the 
question of what changes to make in the system at the time of 
the first decennial renewal of charters. 

They were anticipated both by the public and banks. 
Among the people, much dissatisfaction had been caused by the 
bank suspensions of the preceding year. The notes of only one 
of the failed banks were finally redeemed at less than their nomi- 
nal value, but at that time liquidation in several cases was still 
incomplete. To change the notes of failed banks into convert- 
ible paper, the holder had to submit to a discount, and the 
brokers who t* ok the risk exacted ample pay for it. Many of 
those holding notes at the times of suspension had only the 
option between this loss and physical want. They were forced 
to realize at the time when the credit of their debtors was at the 



1 • 



■ rl 
i \ it 
'II: 






1 The expression "Bank" is defined to mean any bank to which the Act applies. 
(33 Vic, cap. 5, sec. 2.) 



i Ei-'^ 



222 



The Canadian Banking System, 1817-1890 



lowest ebb. They could not even wait until the fears of the 
first week were quieted, much less till the day of final payment. 
And upon other scores, the failure of the Mechanics' Bank, the 
shameful inadequacy of its assets, and the pitiful dividends paid 
to its creditors, gave every one just cause for complaint. 

The bankers understood the popular discontent with the 
security of the currency. They saw their own interest, and the 
country's interest, no doubt, in calming it. For them, their 
privilege of circulation provided an easy, convenient, and useful 
means of profit; to the country, it gave an elastic currency, 
increased sources of discount, and through the system of branches 
promoted by it, widespread and accessible banking facilities. 
To make the currency more secure would be a help to the bank- 
ing interest no less than to the people ; the one would be 
strengthened m credit, and the other protected from loss. 

Sir Samuel Leonard Tilley, of New Biunswick, was then 
Minister uf Finance. To him the bankers piesented, as with 
one voice, their proposals for reform. Among them was the 
plan to make the notes issued by a bank the first charge upon 
its assets in case of insolvency. It was believed that by this 
plan the ultimate payment of all bank notes in full would be 
assured. For the total assets of each bank were from six to ten 
times Its debts on notes, and it was thought impossible for a 
bank to keep in business until its entire assets were wtjrth but 
one-sixth or one-tenth their nominal amount. Beyond the 
assets, there was the reserve liability of shareholdeis, equal 
always to the highest limit of the authorized note issue. That 
limit might be exceeded, but not without fraud. To prevent 
such fraud, the fear of punishment was believed effective. Even 
the most reckless bank operator would know that the world is a 
small place for the criminal, and the arm of the law surprisingly 
long. 

Against the scheme, revived apparently by the bank 
troubles of 1879, to remodel Canadian charters on the plan of 
the National Banking System of the United States, the bankers 
exerted an energetic opposition on grounds with which we are 
long familiar. Another proposal was to establish a Government 
bank inspection, or to provide for the appointment of an audi- 
tor by shareholders. Some of the banks had been grossly 



Banking under the Confederation, 1867-89 



228 



neglectful of proper inspection, and difficulties arising between 
1876 and 1879 were clearly traceable, in certain cases, to the 
failure promptly to detect and acknowledge the character of 
questionable assets. But the bankers argued that on account of 
its many branches, and the multiplicity and variety of the com- 
mercial paper in its assets, it would be impossible for a Govern- 
ment inspector, or an auditor, properly to inspect a Canadian 
bank. It was far better to rely on the careful organization of 
the banks, the vigilance of the directors, and the inspection by 
trained men of its own staff, who, travelling the year round from 
branch to branch and reporting to the General Manager, would 
have nought to gain by concealing the truth, and everything to 
lose. Then if a bank upon which the report of the Govern- 
ment inspector had been favorable should fail, many of those 
who had made their deposits on the strength of the official 
report would certainly hold the Government responsible for 
such loss as they might incur. The Minister decided in favor 
of all three of the contentions of the bankers. 

The resolutions for the Banking Act Amendment Bill brought 
down by Sir Leonard Tilley, were adopted by the House with- 
out much objection, and after very short debate. The principal 
proposal, further to secure the note circulation, was objected to 
by Liberals, as likely to increase the danger of runs from deposi- 
tors, if from no other motive than a desire to convert his ordinary 
claim into a privileged lien.^ This, it will be remembered, was 
the view taken by Sir Francis Hincks in 1870, a Minister to 
whom they were also in opposition. But what really deprived 
the criticism of its force was the fact that the proposal now came 
from banks. The Bill itself was presented on the 27th April, 
1880. It passed the House oii the 5th May, the Senate on the 
7th. On the same day it received the Royal assent. (43 Vic.,, 
cap. 22.) 

The charters of the thirty-four banks still in operation were 
continued to the ist July, 1891, and those of four others until their 
liquidation should be completed. Besides establishing a prior lien 
in favor of the holder of an insolvent bank's note, the Act pro- 
hibited the issue or re-issue of notes for sums less than $5, or 



X ■ j_i'' 



1 Debates of the House of Commons, Canada, 1880, Vol. II., p. 1,729, Remarks of Sir 
Richard Cartwright. 



jr 



924 



The Canadian Banking Systew, 1 817- 1890 



sums not multiples of $5, and called for the retirement of all $4 
notes as soon as practicable. The banks were obliged, when 
making any payments, to pay the sum at the request of the payee, 
or so much thereof, not exceeding $50, as might be requested, in 
Dominion notes for one or two dollars each, at the option of the 
receiver. The proportion of cash reserves, to be held in Domin- 
ion notes, was. raised from one-third to 40 per cent. Proxies 
not made or renewed in writing within three years next preced- 
ing a meeting of shareholders were declared invalid for purposes 
of voting. • 

Persons holding stock as representing others, if so declared 
in the bank's books, were exempted from liability on such stock, 
recourse being reserved against the estate and funds held in 
trust. The form of the monthly return was again expanded, 
partly to secure more complete details of the position of the 
several banks, partly to remove the ambiguities in the return, 
by which criminal prosecutions under the Bank Act had been 
lost by the Crown in 1879.^ As a safeguard against invest- 
ments of too great permanence, the period for which the bank 
might hold real property not required for bank premises, was 
limited to seven years from the date of acquisition. The 
assumption by any firm or bank of the title of " bank " without 
authority under the general banking laws of the Dominion, was 
made a misdemeanor. The purpose of the clause was to guard 
the public from misplacing their confidence on the supposition 
they were dealing with estabhshments organized by Parliament ; 
one result was to confirm to the chartered corporations exclusive 
privileges in the name. The requirement that bank shares 
should be numbered, and the numbers specified in contracts for 
the sale of shares, was repealed. It had interfered with 
legitimate trade in bank stock, while the brokers, against who > 
it was aimed, had successfully evaded it. The sections of tn ') 
Bank Act dealing with loans upon warehouse receipts, etc., 
were again amended. Besides timber, all sorts of lumber, all 
agricultural produce, and other articles of commerce, the 
expression "goods, wares and merchandise," were extended to 
include petroleum and crude oil. A bank, upon shipment of 



■ Morgan, The Dominion Annual Register, Montreal, 1879, p. 320. 



Banking under the Confederation, 1867-89 225 

goods, was permitted to surrender the warehouse receipt for 
them, and receive in exchange a bill of lading, or upon delivery 
and storage of the goods, to surrender the bill of lading received 
as security, and take a warehouse receipt in exchange. 

Some further changes were made in 1883, with the purpose 
of more effectually enforcing the prohibitions, restrictions, and 
duties already imposed on the chartered banks. Most of these 
had hitherto been sanctioned by the penalty of charter forfeiture. 
Experience had proven that this was insufficient by reason of its 
excessive severity. The banks had imposed somewhat upon the 
unwillingness of the Government to punish a ^rlight transgression 
by depriving the guilty corporation of its existence. So, while 
the penalty of forfeiture was held in reserve, money penalties 
were now adopted to bring the banks to time. For each day's 
delay, after the opening of Parliament, in transmitting to the 
Minister of Finance the certified Hst of shareholders, a fine of 
$50 was imposed. The penalties laid upon note issue in excess 
of capital stock paid-in, were as follows : 

for an excess not exceeding $20,000 $ 100 

for excess between $20,000 and $100,000 1,000 

for an excess between $100,000 and $200,000 5,000 

for an excess not exceeding $200,000 10,000. 

Other fines were : for each time that the Dominion notes in the 
cash reserve should be less than 40 per cent, thereof, |)25o ; for 
each day of neglect to send the return within twenty days of the 
end of each calendar month, $50 ; for each contravention of the 
sections limiting the business of the bank to certain transactions 
and classes of loans, $500. The form of the return was amended 
to show the amount of the rest or reserve fund, and the rate per 
cent, of the last dividend. The last change to be mentioned was 
opposed by friends of the many private banks, but was become 
necessary, further to prevent the public from being misled.* The 
use of the titles, " Banking Company," " Barking House," 
"Banking Association," "Banking Institution," or "Banking 
Agency," by bankers, not working under the Bank Act, was 
made a misdemeanor, unless the expression "not incorporated," 
were added to the title. (46 Vic, cap. 20.) 



1 Debates of the House of Commons, Canada, 1883, pp. 99 etseq., i83. iqi, Remarks of 
Sir Leonard Tilley, Messrs. Blake, Fairbank and Casey. 



♦9 
25 



226 



The Canadian Banking System, 1817-1890 



§ 47. — DOMINION NOTE LEGISLATION, 1872-1880 

Though one of them was explained as response to public 
complaint of difficulty in securing Dominion notes, the new 
clauses of the Act of 1880 in regard to these legal tender issues 
were altogether in the interest of the Government. Likewise 
in the interest of the Government, was the provision by which 
the banks were deprived of the right to issue notes for $4. For 
it was intended partly to refill their place in the circulation by 
Dominion notes, and to increase the issue in other ways. 

Under pressure from friends of the Government, Sir Fran- 
cis Hincks had reluctantly consented in 1872 to mar the beauti- 
ful analogy to the Enghsh system he had devised in his first 
Dominion Note Act. The reserve of specie required against 
issues in excess of nine million dollars was reduced from dollar 
for dollar to '* not less than 35 per cent, of the excess." (35 Vic, 
cap. 7.) Prior to 1874 there was frequent criticism of the 
inadequacy of the reserve held against the notes, and complaints 
that the requirement as to bank reserves had diminished the 
amount of gold in the country. One also finds protests that the 
Government should cease to issue from Toronto, notes payable 
at Montreal, or vice versa, and that when called on for specie to 
ship for New York, it should desist from paying out sovereigns 
instead of eagles, and thereby forcing American gold to a pre- 
mium, often one-eighth of one per cent. Nothing has yet 
appeared to justify the opinion that these criticisms, complaints 
and protests were without good cause. 

When the Liberals came into power they improved the law 
in accord with the sound monetary theories of their Minister of 
Finance, Sir Richard J. Cartwright. By the amending Act of 
^^75 (38 Vic, cap. 5), the Receiver-General was required to hold 
against the outstanding circulation in excess of $9,000,000 and 
less than $12,000,000, fifty per cent, in specie; and against any 
excess over $12,000,000, specie to the full amount. In 1876 the 
^aws respecting Dominion notes were extended to the Provinces 
of Prince Edward Island, British Columbia and Manitoba, and 
the Governor authorized to establish branch offices of the 
Receiver-General's department at Charlottetown, Victoria and 
Winnipeg. 



Banking under the Confederation, 1867-89 



227 



Sir Leonard Tilley now proposed to extend the limit of notes, 
only partially covered by specie, to $20,000,000, the circulation 
to be increased by not more than $1,000,000 at a time, or more 
than $4,000,000 in any one year. At the same time, he proposed 
to reduce the strength of the specie reserve by providing that a 
minimum, equal merely to 15 per cent, of the amounts outstand- 
ing, shjuld be covered by gold, by this gold and Dominion 
securities guaranteed by the Government of the United King- 
dom, not less altogether than 25 per cent., and the remaining 75 
per cent, or less of the issue by Dominion debentures, issued for 
the purpose, and held by the Receiver-General. The project 
was strongly opposed by the minority in Parliament. It was 
the rallying point of the whole debate upon questions of banking 
and currency. The Minister, however, beheld the prospect of 
added financial aid ; he heard, perhaps, the clamors of the " rag 
baby " as well among the people as in Parliament. He was 
confident his bill would find favor among the friends of Govern- 
ment paper. His party was always ready to follow Sir John 
Macdonald, and Sir John strongly supported the bill. It passed, 
as a matter of course ; but the victory was one of votes rather 
than reason. (43 Vic, cap. 13.) 






§ 48.— 1880. 1889 

Two of the general measures relating to banks, and passed 
by Parliament in these years, have been mentioned. The only 
other important laws in the group were three Acts respecting 
corporate bankruptcy ; '* an Act respecting Insolvent Banks, 
Insurance Companies, Loan Companies, Building Societies, and 
Trading Corporations," passed in 1882, another of the same 
title in 1886, and the " Winding-Up Amendment Act " of i.'^Sg. 
(45 Vic, cap. 23 ; 49 Vic, cap. 129 ; 52 Vic, cap. 32.) To des- 
cribe these measures in their entirety would involve too long an 
excursus into bankruptcy law, and only seven of the one hun- 
dred and tweiry-three sections of the statute in its final form 
appHed exclusively to banks. 

Private Acts respecting individual banks were far more 
frequent. There had been two new charters granted between 
1875 and 1879, to wit: in 1875 to the *• Banque Saint Jean 



the 

Me 



IK4 
1H6 
14'} 



I 



228 



The Canadian Banking System, 1817-1890 



i I 



Baptiste," of Montreal, and " The Chartered Bank of London 
and North America " in 1876. (38 Vic, cap. 59; 39 Vic, cap. 
40.) The latter bank had as charter members, two bank 
presidents, one a member of the House, the other of the Senate, 
the Mayor of Toronto, and three other senators . but they failed 
to attract the $250,000 required before the bank could begin 
business. Like the project of the " London and Canada Bank," 
whose charter was extended a further year in 1876, it was the 
expression of an effort to secure more English capital for Can- 
adian uses, by means of a colonial bank with an agency estab- 
lished in London, England, under a local board of directors. 
The charter was revived, amended, and the name of the pro- 
posed concern changed to the " Chartered Bank of London and 
Winnipeg " in 1880. But neither of these projects to introduce 
methods so closely resembling those of the Australian banks, was 
ever successfully carried out. 

Thirteen new banks were incorporated between 1882 and 
1886. There were four in 1882, ^ three in 1883,* four in 1884,* 
and two in 1886.* Of the four proposed for Winnipeg, Mani- 
toba, one started, the Commercial Bank of Manitoba. Of the 
two for Montreal, for one of which, the " Planters' Bank of Can- 
ada," it was planned to have branches and local directors in the 
United Kingdom and the West Indies, neither began business. 
Of the two for London, Ontario, only the " Bank of London in 
Canada" was established. Of the three whose head offices were 
to be in Toronto, two, the " Central Bank of Canada" and the 
'* Traders' Bank of Canada," secured the necessary capital. One 
other corporation, the " Western Bank of Canada," opened in 
Oshawa, Ontario. Out of the thirteen, eight charters were for- 
feited for non-user, in spite of the extension, in four instances, of 
the time limit fixed for payment of the capital required before the 
charter could be used. 

Another, and rather farcical, episode of the Parliamentary 
history of banking in this decade was the agitation carried on by 
a few strong-lunged members from the rural ridings. They 
wanted " Farmers' Banks," increased issues of legal tender paper, 



I 45 Vic, cap. 61-64. 
» 46 Vic, cap. 5o-5a. 
« 47 Vic, cap. 48-51. 
« 49 Vic, cap. 64-66. 



Banking tinder the Confederation, 1867-89 



229 



and the allied measures which have been most favored in the 
United States by the Greenback Party and PopuHsts. Similar 
proposals had been advanced in 1878 by Mr. Thompson, of Wel- 
land.i But the movement was begun on more definite lines in 
1884. The motion for a Select Committee to consider means of 
giving farmers better banking facilities was supported by Dr. 
Orton in a speech which still fills five pages of the debates. 2 His 
complaint in behalf of the farmers against the extortions of 
private money lenders, or note shavers, was probably well founded. 
Then, too, the preliminary expense of search of title, law fees, 
etc., made the cost of short time loans on real estate excessively 
high; yet how the issue rf Dominion notes, secured by first mort- 
gage on farms, and redeemable only by four per cent, bonds, 
could mend matters, he failed to make clear. There was as little 
reason in the other proposals, e.g., to establish farm, or real estate 
banks on capitals consisting of farm mortgages. Government 
bonds, and gold, to permit them to deposit the capital with the 
Government, and secure paper Government money in return, to 
permit these banks to charge no greater mterest on ordinary loans 
than 6 per cent., and on mortgage loans than 5 per cent., and 
to deprive the chartered banks of their power to issue. Under- 
neath the plan, as one may see, lurked hostility to the banks, 
and the so-called " money power." The notions entertained by 
the speaker on interest, capital, money and banking were per- 
verted, while he was strongly influenced by a penchant for 
irredeemable paper currency, and a simple faith in the universal 
efficacy of legislation. 

The next year he drafted resolutions for a Bill, and was 
helped in support of them by the advocates of small local banks, 
admirers of currency secured by bonds, and believers in the 
issue of paper currency exclusively by Government. No less 
than Sir John Macdonald himself closed this debate, and in 
words of honeyed ambiguity, soothed, even consoled the agi- 
tator, while not committing the Government.' In 1886 the 
question was again introduced, a new Bill prepared, and the 



1 Debates, House of Commons, Canada, 1879, p. i,aii. 
a /6>d, 18S4, pp. 211-215. 
a Ibid, 1885, pp. IIS-I20. 



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The Canadian Banking System, 1 817- 1890 



measure acturlly brought to the stage of consideration in com- 
mittee. There it stopped for good.^ In 1885 some of the Op- 
position asserted that the apparent willingness of the Govern- 
ment to devote time to the discussion was really a bit of fence 
repairing for the next election. Those less swayed by party 
feeling will doubtless prefer to explain it by the broad and tol- 
erant spirit for which the Premier and his colleagues were dis- 
tinguished. 

The story of the banks themselves during this decade has 
fewer sensational features, and no such strong contrasts as that 
of the preceding ten years. In mosi cases the end of the term 
found the banks with increased business rather than capital. 
The total capital in 1889 was $60,289,910, $70,000 less than in 
1879. The total deposits, payable on demand to the general 
public, rose from $42,000,000 on the 31st December, 1880, to 
$55,000,000 on the last day of 1889 ; deposits payable after 
notice or on a fixed day, from $37,000,000 to $71,000,000; the 
total liabilitiesof all the banks from $121,000,000 to $171,000,000. 
Loans on stocks, bonds, etc., rose from $8,000,000 to $13,000,000 
between the two dates ; loans, discounts or advances on current 
account to corporations other than municipal, from $4,000,000 
to $23,000,000; current loans, discounts and advances to the 
public, from $105,000,000 to $150,000,000 ; and the total assets 
of the banks, from $192,000,000 to $252,000,000. A larger pro- 
portion of the funds of the banks were invested in Canada on 
the latter date. " Balances due from Agencies of the Bank, or 
from other Banks or Agencies in Foreign Countries," were only 
$10,729,877, as compared with $19,313,588 on the 31st Decem- 
ber, 1879, and $27,041,608 a year later. 

For this heav)^ increase of business on both sides of the 
account, there are two causes at least, close at hand. The one 
is the growth of Canadian trade and industry ; the other the 
policy by which the number of branches was increased, and the 
banks brought into closer relations with the country's needs, 
particularly to those of the agricultural sections. This last may 
have been partly prompted by the evidences of discontent 
with their banking facilities among the farmers. But two 



1 Ibid, 1886, pp. 427, 432-437i 571-585- 






Banking under the Confederation, 1867-89 



281 



other strong inducements were also effective, the fiist being the 
chance profitably to employ funds in the assistance to agricul- 
ture and the industries that thrive by its side ; the second, the 
opportunity for increasing the note circulation that a country 
business always affords to a bank. 

As a general rule, the practice of the banks was marked bv 
greater caution and prudence than in 1870 to 1875. More 
attention was paid to the soundness and security of business 
taken in hand. Inquiry as to the application of means became 
more searching. As a result, advances c(tnverted by borrowers 
into real estate, improvements, or plant, or used as permanent 
capital, became fewer, the losses and lock-ups less serious. A 
share in this bettering of the discount business must be ascribed 
to changes m the persoxinel of the staff of the banks. Whether 
their first training had been received in Britain or in Canada, 
nearly all the higher officers of the banks had now enjoyed a long 
Canadian experience. To the admirable traditions of Scotch 
and English banking, they added a minute and extensive 
knowledge of Canadian conditions, a double equipment which 
redounded largely to the advantage of their employers. A 
keener appreciation of sound banking principles may be 
remarked in the declarations of managers and presidents in 
their published speeches; to shareholders; it may be inferred 
from the fewer losses and bad debts incurred by the banks as a 
whole. This progress was furthered by the memories of 1874 
and 1879, and regret for many costly mistakes m the time of 
expansion. It was also promoted by the penalties imposed for 
violation of the Bank Act, and the amendments in the Return, 
calculated more fully to expose a bank's condition to the watch- 
ful criticism of the public. 

It is not to be supposed from this that the course travelled 
by the banks was one of unbroken prosperity, or that the state- 
ments, generally true, were without exception. The recovery 
from the depression of the seventies was slow, and as late as 
1881 it became necessary for the Exchange Bank and the Banque 
Ville Marie to reduce their capitals each by one-half a million 
dollars. (4.; Vic, cap. 35-36.) They, however, were exceptions, 
the other banks having met their losses years before. The 
banks generally shared in the better times of 1880 to 



"if 






m 



282 



The Canadian Banking System, i8i 7-1890 



1883; they felt the reaction in 1884-1887; their business, hke 
that of the rest of the country, again displayed normal activity 
in 1888. The periods named can be understood in only the 
most general way; conditions varied in different parts of the 
country, and changes did not come at precisely the same time. 

Probably the most striking conditions and changes were to 
be found in the "Prairie Province," Manitoba. There the rail- 
way, immigration, settlement and trading in real estate between 
1879 and 1 88 1, developed a land boom of the first order. The 
price of building lots in Winnipeg^ the Provincial capital, rose 
above the value of land as centrally located in Toronto and 
Montreal, All kinds of land schemes were started, and there 
was a corresponding expansion of enterprises of other sorts. 
Thousands of persons in Ontario had sold the solid securities 
which often comprised their entire fortune to put the proceeds 
in lands in prairie villages of which the ink on the first survey 
was hardly dry. As others lost, they lost. The upward flight of 
values was high, but it was brief. The end came late in the 
autumn of 1882. Millionaires in prospect found themselves 
paupers in fact. The inflation was tolerably thorough throughout 
the Provmce, and when land values fell, a good part of the com- 
munity became insolvent forthwith. Their ruin caused other 
failures, and so on, until those were also brought down who had 
thought themselves, and were thought by othersj perfectly inde- 
pendent of the turn taken by the market for real estate. 

It was on this account, and not because they had loaned on 
land or encouraged the inflation, that the chartered banks who 
had established agencies in Manitoba lost heavily. Of the five 
banks earliest to enter the field, three dismissed their Winnipeg 
managers. This will indicate how grave were the losses, but 
not how great. To know that, one would need for some years 
to have attended the regular board meetings of at least seven 
different banks. None of these institutions were compelled to 
suspend payments. One advantage of branch banking is the 
possibility under it to spread and differentiate risks; the gains 
of a bank and the safety of its loaning business as a whole does 
not depend on the ups and downs of a single community or 
commercial and industrial group. Having staked but a part of 
their funds in Manitoba, the banks passed through the trouble 



Banking under the Confederation, 1867-89 



283 



with their entire resources lessened, no doubt, but by no means 
destroyed, and from gains in the East they were enabled to meet 
losses in the West. The only outward signs of loss were lower 
dividends, reduction of, or smaller additions to rests and in 
one or two cases, reduction of capital stock. 

Between 1882 and 1888 six of the banks which are still in 
existence, provided for losses incurred in their loaning business 
by reduction of capital, under authority of Parliament, amount- 
ing to $4,070,000. Although they occurred in a time of general 
trial, the causes of these reductions were, as a rule, peculiar to 
the situations, mistakes, or management of the individual janks. 
To examine them here would need inquiry altogether too par- 
ticular and minute.^ 



§ 49. — BANK FAILURES, 1883-1889 

Reduced to its last analysis, the economic function of bank- 
ing is to facilitate that exchange of commodities against 
commodities which is the essence of modern commercial credit. 
The ease, cheapness and thoroughness, the efficiency, in short, 
with which that service is performed for other members of the 
economic organization, is the first great point in the criticism 
of any banking system. The second point is the security 
afforded to those who must become creditors of the banks in 
order to utilize their services. Shareholders are obviously 
excluded from this class. Their investments are commercial 
ventures, subject to commercial risks. The description applies 
only to note holders, depositors and creditors on other evidences 
of debt given by banks. The security afforded tiiem is measured 
by the extent to which the obligations of the banks are re- 
deemed in full, a proportion best asceriamed by computing the 
more or less of debts which are npt paid, and the amounts 
ultimately lost. The data as to such losses are to be had only 



» These reductions were : 

Year Amount of Reduction 

1882 Ontario Bank 93iOoo,ooo to $1,300,000. 

1882 Exchange Bank of Yarmouth... 350,000 to 280,000. 

1885 La Banque du Peuple 1,600,000 to 1,200,000. 

1886 Union Bank of Canada 2,000,000 to 1,200,000. 

1886 Bank of New Brunswick 1,000,000 to 500,000. 

1888 La Banque Nationale 2,000,000 to 1,200,000. 



45 Vic, cap. 57. 
45 Vic, cap. 60. 
48-49 Vic,, cap 8. 
49 Vic, cap. 58. 
49 Vic, cap. 59. 
51 Vic, cap. 48. 



li 








f 


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1 




1 







284 



The Canadian Banking System, 1817-1890 



from study of bank failures. The efficiency of the Canadian 
system has been reserved for principal treatment in the chapter 
next but one. Facts relating to its security, on the contrary, 
must be examined in more or less close connection with the 
conditions from which they arise. 

I. The first of the events now to be considered is the 
failure of the '* Exchange Bank of Canada," of Montreal, an in- 
stitution chartered in 1872. In August, 1879, it was obliged to 
suspend payment, but resumed in November ; $500,000 were 
written off its capital stock in 1881. The directorate was 
wealthy, and their standing, combined with manipulation of the 
stock, kept the shares of the bank high in the public esteem. 
Within a year of the failure stock was sold for $179 a share. 
But the management was bad, and after 1881 it showed no 
improvement. In April, 1883, the bank came to the Govern- 
ment for help. A deposit of $200,000, bearing interest at 
5 per cent., and payable at thirty days' notice, was made with 
the Exchange Bank. In May, $100,000 more were granted on 
the same terms, the personal security of one of the directors of 
the bank, a Conservative Senator, being taken as a guarantee of 
repayment. Over ont -half the stock was then owned by prom- 
inent Conservatives. The collapse of the North- West boom 
was still troubling men's thoughts, and many felt that the coun- 
try was about to experience a serious crisis.^ The crisis might 
be precipitated by the sudden stoppage of a single bank, and 
end in the failure of several. ^ The advances, the friends of the 
Government afterwards said, were made to prevent a run on the 
Exchange Bank, and so toward off the crisis. The other side 
thought they might well have been made to enable friends of 
the Government to escape from the double liability of their 
stock. In 1885 the Hon. Edward Blake called the concern a 
political bank, and an example of the disasters awaiting a 
political bank. 3 

In the four months following the advances, the condition of 
the bank grew worse and worse. Except for $120,000, its lia- 



> Debates, House of Commons, Canada, 1885, pp. 382, 383, Mr. White. 
I Ibid, ibSi, p. 161, Sir Leonard Tilley. 
■ Ibid, 1885, p. 378, Hon. Edward Blake. 



Banking under the Confederation, 1867-89 



286 



bilities were as high in September as in March. More than the 
current rate was paid for deposits, money was borrowed in 
large amounts, and used for advances of the most reckless and 
desperate sort. The Managing Director of the bank appears 
to have lacked all sense of responsibility or httnor. With some 
of his colleagues on the Board, he used the funds in his charge 
to manipulate a block of 1,000-1,200 shares of the bank, about 
one quarter of the whole stock. He entered other unlawful and 
personal speculations, made entries in obscure parts of the books, 
and kept papers pledging the bank's credit in his private 
drawer.^ When the bank failed on the 15th September, 1883, 
he owed it ij5226,ooo. When wanted in December, he was not 
to be found. 2 The total liabilities of the bank at the time of 
suspension were about $2,430,000, the nominal value of the 
assets $3,335,907. The notes for $380,218 then in circulation 
never sold for much less than ninety cents on the street ; within 
two months the liquidator was ready to pay them, and all pre- 
sented were ultimately redeemed in full. Upon the other debts, 
after a capital of $500,000 and a rest of $300,000 had been 
wiped out and the double liability of the shareholders collected 
from all who could pay, only 66^ per cent, was returned to the 
creditors. Their loss of principal was thus a trifle less than 
$690,000; that of the shareholders, at one time and another, may 
be estimated at from $1,600,000 to $1,800,000. But the share- 
holders could not blame commercial conditions, defects of the 
banking system, or the hostility of their competitors, for the 
loss. It was due to shameful malversation and disregard of 
duty on the part of the management. The Government 
endeavored to establish a preferential lien, for the collection of 
its debt, but their suit was lost because the common law priority 
of the Crown did not exist in the civil law of Quebec. The 
" Exchange Bank Liquidation Account " still stands in the 
Dominion Balance Sheet for 1893, as an asset of $77,337, the 
cost, less interest, of Sir Leonard Tilley's salvation of the 
country. It is true that while the failure caused great scandal 
and indignation in Canada, it started no panic. The prices of 



I Ibid, 1885, p. 308, Mr. McMaster. 

« Monetary Times, Vol. xvii., issue of the i2th September, 1879, 



17 






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The Canadian Banking System, 1817-1890 



bank stocks generally were unaffected, the course of the 
Exchange Bank, according to the President of the Bank of 
Montreal, having been known, and its suspension discounted.' 
The scandal was aired in Parliament in 1884, and resolutions 
condemning the advances to the Exchange Bank were moved 
in the House of Commons by prominent Liberals. The Gov- 
ernment received full measure from the country's vial of wrath, 
but were sustained when it came to a vote, by 97 against 60. 

II. The next failure was that of the "Maritime Bank of 
the Dominion of Canada," situated in St. John, N.B. It also 
was chartered in 1872. In its first eight years it had lost nearly 
$600,000, the probable reason being that those in control, instead 
of scattering risks, preferred to make loans en bloc. Its president 
was described as a merchant, manufacturer, politician and banker, 
a man of large ambition and small capital, always ready to play 
high, especially when staked with the money of others. 2 The 
bank was reorganized in 1883-4, P^^ ^^ more careful hands, and 
the paid-up capital reduced by 64 per cent, to $247,000. In 
spite of the fact that large Provincial and Dominion deposits 
were made with the bank, its subsequent course was not pros- 
perous. In 1887 it had accounts overdrawn for $650,000, of 
which $350,000 were against the assets of bankrupts. Advances 
far in excess of its capital were locked up in a series of lumber 
accounts, which, though under different names, were really 
against a single concern. The bank became a party to kiting 
sterling bills of exchange, in order to sustain itself. When it 
stopped payment on the 8th March, 1887, its liabilities were 
about $1,826,000. The $3 14,000 of notes in circulation were the 
first charge on its assets, and so far as presented, were paid in full, 
though only after more than two years were elapsed. On the 28th 
February, the Dominion had $70,735 deposited with the bank, 
the Province of New Brunswick $205,180 ; each Government 
succeeded in enforcing the Crown priority, and thus escaped 
practically all loss. The other creditors have been paid divi- 
dends of 6 and 3 per cent., and will receive, the liquidators say, i 
or 2 per cent. more. Should the total dividend amount to 11 



t Montreal Gazette, i8th September, 1883, Letter of Mr, Smithers. 
» Monetary Times, Vol. xiv., p. 418 ; Vol. xv., p. 731. 



Banking under the Confederation, 1867-89 



287 



:o II 



per cent., the creditors » f the bank will have lost about $750,000 
of the principal of their claims. Assuming that the collection 
of the double liability was fairly successful, the shareholders 
lost by the bank's failure and the previous reduction of stock, a 
sum nearer a million than 1^950,000. 

III. Through the failure of some of its largest debtors, 
the " Pictou Bank," of Pictou, N.S., suffered dangerous lock- 
ups between 1884 and 1886, amounting to over $220,000.^ No 
dividends were paid after January, 1884, and in 1886 twenty 
per cent, of its paid-up capital was written off by authority of 
Parliament. (49 Vic, cap. 62.) The next year it became 
necessary to suspend banking operations. The shareholders 
secured a permissive Act, and in September, 1887, the bank 
being still solvent, they voluntarily put it into liquidation, paid 
their debts in full, and saved from 30 to 40 per cent, of their 
reduced capital (1^200,000). 

IV. The Bank of London in Canada was established in 
1883. After a brief life of four years, it suspended payment on 
igth August, 1887. The fortunes of the bank were blighted by 
the sinister influence of a speculative President. He had drawn 
largely on its resources, and had involved its funds with the 
affairs of an insolvent loan company, ** The Ontario Invest- 
ment Association," then under his control. On the eve of com- 
pleting arrangements for selling the business of the Bank of 
London to the Bank of Toronto, he had decamped to the United 
States. The paid-up capital of the bank was $241,101. Some 
$90,000 of this was saved, after payment of all debts in full. 

V. The liquidation of the Central Bank of Canada was not 
quite so creditable. This bank was another young concern 
chartered in 1883. It suspended payment on the i6th 
November, 1887, and ceased a business which, for a year at 
least, had been distinctly discreditable. It placed stock in towns 
outside of Toronto by promising to establish branches if certain 
amounts wen^ subscribed for. It had pushed business tending 
to increas.e the note circulation. It had even paid brokers for 
help in keeping out its issues, and in order to get money, it sold 
them certificates of deposit at a discount. Its comparatively 






1 Monetary Times, Vol. xx., p. 125. 



288 



!■:! 



The Canadian Banking System, i8 17- 1890 



large deposits were acquired by paying one or two per cent. 
more than the current ra;e. A few large customers, a clique of 
directors, and certain brokers, got advances utterly out of pro- 
portion to their credit. Through their schemes, and in methods 
still more scandalous and dishonest, the capital of $500,000 and 
the proceeds of the double liability to nearly an equal sum, were 
wholly sunk. N<jte holders were paid in full ; other creditors 
99i P^'^ cent., the loss thus inflicted on the public being about 
$14,260. 

VI. The last event of this series was a voluntary liquidation 
rather than a bank failure, but as a bank " misfortune " it is 
most conveniently treated with the others. 

The Federal Bank of Canada (originally called the 
Superior Bank) was incorporated in 1872, but did not open 
its head office in Toronto until 1874. Under enterprising and 
ingenious management the capital of the bank was doubled 
in 1882-3 to $3,000,000. In July, 1883, its stock sold 
at 1581^; on the 26th June 1884, when the General Manager 
resigned, it brought 80^. From the investigation then made, it 
appeared that the bank held no less than 6,000 shares of its 
own stock. Most of these had been seized as additional security 
for advances, originally on overdrawn and unsecured account, 
or mere promissory note, to the Commercial Loan and Stock 
Co., an inside corporation, which was used to borrow the bank's 
funds, either to loan upon stock in the Federal, or purchase i1: 
in order to keep up the price. ^ The scheme, at its best, was a 
highly disreputable evasion of the prohibition in the Bank Act, 
against loaning on bank stocks. A run was started on the bank 
in the last days of June and the first week in July, but was 
successfully met by help of the other banks, who offered tem- 
porary advances for $2,000,000, and made arrangements for 
transfers of discount accounts. ^ Under the new Manager ap- 
pointed, the "little machine " through which $600,000 of capital 
had been given fictitious existence, was promptly wound up. 
In 1885 authority was secured to cancel 5,000 of the shares held 
by the bank, and to reduce the remaining capital to $1,250,000, 
on account of losses from Michigan lumber transactions and 



1 Monetary Times, Vol. xviii., pp, 571, 576. 
« Ibid, p. 576. 







Banking tinder the Confederation, 1867-89 



280 



loans in Manitoba. (48 & 49 Vic, cap. 8.) In spite of such 
drastic treatment, the Federal Bank did not recover its pros- 
perity, or the full confidence ordinarily placed by the public in 
its banking institutions. Bank stocks fell generally in the 
autumn of 1887, and the Federal dropped below par. The bank 
was thus discredited, and between the 31st October and the 25th 
January its situation again became critical. It had been called 
on to pay $210,693 of notes, and $1,421,393 of deposits, a t»jtal 
drain of $1,632,085. 

Representatives of the banks having offices in Toronto met 
upon the Federal's case, and examined the condition cf its 
assets. As the result of this examination they offered to 
advance enough money to pay off the entire liabilities of the 
bank, and to wait for repayment from the liquidation of its 
assets, on condition that the bank should be wound up with 
open doors. The step was decided on because the condition of 
the bank's affairs was found to be such that its continuance in 
business was not possible, and because the plan proposed and 
finally adopted would avoid the panic which the Federal's sus- 
pension, after the uneasiness due to the Central and London 
failures, was Hkely to cause. The amount of the contribution 
agreed upon was $2,700,000. By this undertaking they ran 
the risk of being forced to reduce their reserves to a point 
beyond that ordinarily thought safe. But Canadian bankers 
believe that a reserve is for use rather than display. Their 
prompt and courageous use of their ready cash at this juncture, 
undoubtedly prevented conditions in which thrice or four times 
the amount of their reserves would have been needed to still 
the popular clamor for payment. It saved the shareholders of 
the Federal bank from the sacrifices of a compulsory liquidation, 
and allowed them to realize their assets at the most advantageous 
times, and lastly, it protected the business of Ontario fn^m the 
costly derangement incident to a banking panic, and a sudden 
contraction of discounts. 

Here ends, for the present, the account of bank failures in 
Canada. If any conclusion may be drawn from the study, it is 
that the disasters have been due to faults of practice, rather 
than defects in the system. It is clear that legislation, scienti- 
fically framed, has not prevented poor management, bad man- 



lif' 




240 



The Canadian Banking System, 1 817- 1890 



agement, or fraud. No one, probably, ever expected it would. 
It is clear also that it has not saved shareholders from loss. A 
careful estimate shows that, by reductions of capital, liquida- 
tions, failures, and contributions on the double liability, share- 
holders have sunk at least $23,000,000 in Canadian banking 
since the first of July, 1867. This sum, more than 37 per cent, 
of the present paid-up banking capital, is independent of the 
losses provided for out of profits, or met by reduction of rests. 
The security of a group of banks, however, must be judged, not 
by the losses of their proprietors, but by those of their creditors. 
Wemayseenowhow well the Canadian system has minimized the 
creditor's risks. Out of the 56 chartered banks, some time in 
operation in Canada since the ist July, 1867, just 38 survive. Ten 
of those gone before have failed. But the total loss of princi- 
pal inflicted during twenty-seven years on njte holder, depos- 
itor, Government, or creditor whomsoever, has not exceeded 
$2,000,000, or less than one per cent, of the total liabilities of 
Canadian banks on the 30th day of last June. 






CHAPTER IX 



THE REVISION OF 1890 



§ 50. — DEMANDS FOR REFORM AND THEIR CAUSES 

Before the time for renewing the charters for another ten 
years was arrived, criticism of the Canadian banking system as 
amended in 1880 and 1883, had pointed out several unqualifiojd 
defects. 

I. One of those which most affected the general public, and 
prompted the demands for reform coming from that quarter, 
was the discount on the notes of a failed bank, in the interim 
between its suspension and the beginning of its liquidation. 
Though by the prior lien given to note holders, final payment 
in full was certain, it was not always definite. If he wished to 
realize immediately after the failure, the last holder of the note 
during its currency was forced to submit to a discount. 
Although the liquidators were ready to redeem within a month, 
the discount on the notes of the Exchange Bank after its fail- 
ure rose as high as five or ten per cent. Redemption of the 
notes of the Maritime Bank, though finally in full, was delayed 
for nearly three years after the failure, and in the meanwhile its 
issues sold for as low as forty cents on the dollar. ^ In notes of 
the Central Bank of Canada, Americans near Sault Ste. Marie 
found a profitable speculation by buying them up after the fail- 
ure, at 10 per cent, discount. 

II. Another cause of complaint was the operation of ihe 
statute of limitations, or the law of prescription, upon the out- 



I Montreal Gazette, a7th February, 1890. 






>>t1 



; 






I 



{ 



i 



;ii 



242 



The Canadian Banking System, 1817-1890 



standing notes of a liquidated bank. The winding-up Acts 
passed by Parliament ordinarily required the liquidators of a 
bank which had failed, or decided to retire from business, to 
make all reasonable efforts to call in and redeem the outstand- 
ing liabilities. Reserved dividends sufficient to cover any un- 
discharged and unclaimed debts, were required to be deposited 
at interest with some trustee, ordinarily a bank. After two, or 
three, or five, or ten years, and a month's notice in the Canada 
and provincial Gazettes, as well as in a newspaper of each 
place where the bank had an agency, it was allowable to distri- 
bute the surplus of this fund, together with the accrued interest, 
among the shareholders. Thenceforward, both notes and other 
claims against the bank were barred and extinguished. Such 
a time limit was quite too brief. It worked injustice to those 
holders of notes who were unmindful, or ignorant for the time 
being, of the character and life of the currency in their pos- 
session. The notes of a bank were never entirely called in be- 
fore the limitation came into effect. In 1882, sixteen years after 
the failure of the Bank of Upper Canada, ^43,301 of its notes 
were still outstanding. $39,000 had been redeemed by the 
Government in the twelve years after 1870.^ 

III. Of a third defect in the currency, some notice was 
taken in 1869, Avhen Sir John Rose proposed regulations to make 
it circulate at par in every part of the country. Down to 1889, Can- 
adian bank notes lacked that quality. Although the bank was 
required to receive its own notes at any of its offices, it was 
obliged to pay them only at offices where they were made pay- 
able, one of such offices being always the bank's principal sent 
of business. Some banks dated part of their issue at branches, 
others did not. That was a mere question of book-keeping, 
some managers desiring such a test for the profits of branches 
by circulation and others not esteeming it. In any case, the notes 
of a bank without a branch in the neighborhood did not circulate 
at their par value in localities remote from the offices where they 
were payable, or in localities whose trade centre was different 
from that of the bank whence they were issued. As communi- 



1 Sessional Papers, Canada, 1882, io8a. 



The Revision of 1890 



248 



cation between them became easier, as a larger trade gr w up, and 
closer relations in all ways were established betweei -he east- 
ern, central and western provinces, a larger number of bank 
notes appeared in the circulation of places distant from their 
domicile. Occasion for the discount for geographical reasons 
arose more frequently, and the annoyances from it were rather 
aggravated. 

The public sense of the first two defects in the circulating 
medium was undoubtedly quickened by the bank troubles of 
1883, 1887, and 1888, and since the stock example of an issue 
secured by bonds is open to none of the three criticisms, the de- 
sire of the people for reform was strengthened by their com- 
parisons of Canadian bank notes with those circulating in the 
United States. In each case, as the Minister of Finance 
remarked of the last, there was " a well founded desire that 
such an anomaly should cease." ^ 

IV. A second lesson, emphasized for all observers by the sus- 
pension of two bankschartered in 1883, was the failure ofthe Bank 
Act to exact what Sir Francis Hincks had termed " the secur- 
ity of a large paid-up capital." It was too easy to get a charter 
for a proposed bank, and the requirement of $100,000 of paid- 
up capital before the beginning of business was too slight a bar- 
rier round the field of joint-stock banking to prevent the entrance 
of speculators and untrustworthy adventurers. 

V. The beginning of a movement on still different lines 
was what an American politician, speaking of the revision of 
1890, would call the first gun of the campaign. In the annual 
meeting of its shareholders on the ist June, 1885, Mr. Smithers, 
President ofthe Bank of Montreal, gave new expression to the 
favor with which the officers of that institution had long regarded 
the plan to secure bank notes by the deposit of Government 
bonds. Premising that his Directors were in accord with him, 
he said : " I am prepared to advocate the policy of putting the 
banks on the American system, and requiring them to secure 
their issues by a deposit of Government bonds. It was not 
pressed at the last revision, not because the Bank of Montreal 



' he 
le 



I Debates, ut st'^ra, i8go, p. 2235. 



m 



244 



The Canadian Banking System, 1817-1890 



was not quite ready for the change, but out of consideration for 
the views of other bankers. It would do away with the neces- 
sity for the voluminous statements, for, if the safety of the cur- 
rency was fully assured, all the statement required could be 
furnished in half a dozen lines, as I hold that, when the Govern- 
ment has provided the country with a thoroughly sound cur- 
rency, its duty is discharged. I maintain that it is the duty 
and privilege of every man to look around and satisfy himself 
as to the bank he will deposit his money in. * * * * f^e 
same is true of the shareholder in selecting his investments. 

'•' * It may be said that the people of the United States are 
looking round for a substitute for the National Banking Law, 
but if they are, it is not because it has not been a success, but 
because the supply of bonds is likely to run out, a contingency 
which is not likely to arise in this country for some time to 
come."^ Ten days later the project was effectively disposed of, 
so far as reason and expediency were concerned, by an editorial 
in the Toronto Week, presumably from the pen of Professor 
Goldwin Smith. The General Manager of the Merchants' Bank 
of Canada, Mr. George Hague, also answered it at the annual 
meeting of his bank on the iSth June. 2 



§ 51. 



-DISCUSSION PRECEDING PARLIAMENTARY ACTION 



I. For a long time, no amount of argument appeared to 
shake the faith of the advocates of bond secured circulation. 
In 1890, for instance, the President of the Bank of Montreal, Sir 
Donald Smith, pronounced the opinion that the " true system of 



1 Monetary Times, Vol. xvui., p. 1,365. 

• 

i Monetary Times, Vol. xviii., p. 1,427. 

In h" reply, however, Mr. Hasue provisionally suggested as a cure for unsound 
banking, regulations similar to Sir Robert Peel's treatment of the Scotch and Irish banks 
in 1845. Now the principles underlying Feel's restrictions of 1845 were those on which 
he framed the Bank Act of 1844. The Bank of Montreal wanted currency regulation 
similar to that in force in the United States, liut the National Bank Act of that country 
was modelled after the "free banking" laws of the State of New York, the identical statutes 
that were copied in drafting the Canadian " Act to Estab'ish Freedom of Banking, etc.," of 
1850. That measure was supported in the Monti eal Filot, then the organ of Mr. Francis 
Hmcks, as a step in the direction of Sir Robert Peel's policy. The systeiii, it was urged, is 
" as near in principle a Bank of Issue as the circumstances and position of the country will 
permit." So far as it related to the currency, therefore, Mr. Hague's proposal was hardly 
different in theory from the plan which he opposed. 



The Revision of 1890 



246 



banking for this country would be very much that which has 
worked so well on the other side of the line, that is, that each 
bank should guarantee its own circulation." ^ The proposal of 
Mr. Smithers seems to have been advanced in the belief that its 
adoption would prevent the formation of small weak banks ; 
the attitude of two of the banks in 1890 is best explained by their 
unwillingness to assist in securing, through the Bank Circulation 
Redemption Fund, not their own notes, but those of other banks, 
especially of the smaller or weaker institutions. The fund, as 
we shall see, was calculated to invest the notes of the latter with 
practically the same credit as the public attached to the paper of 
the strongest or largest banks. 

II. The newspapers took up the question early in 1889, 
discussing and emphasizing all the points detailed in the pre- 
ceding section. In order to the absolute security of the 
currency, and its circulation at par all over the country, some 
of them favored the introduction of the American plan. The 
policy was supported with particular insistence by the Montreal 
Gazette, in a series of leading articles appearing from time to 
time in 1889. Besides the ordinary arguments for covering 
bank notes by bonds to their full amount, the Gazette presented 
possible modifies, dons of the scheme, described the device for 
giving elasticity by means of maximum deposits, advocated the 
requirement of a minimum reserve, dwelt on the financial ad- 
vantages had by the Government under the American system, 
and argued that "it was favored by many of the larger banks." ^ 
The position taken by this journal was strongly opposed, and most 
of its arguments successfully demolished, by a number of excellent 
journals in which another view of the banking question was 
taken. 

III. On the 15th December, 1888, a circular letter was 
addressed by the head of one of the Ontario banks to a number 
of the other banks of the Dominion. After referring to the causes 
of the criticism generally passed on the bank note currency, the 






1 Garland, Banks, Bankers, and Banking in Canada, p. 307. 
« Vide Montreal Gazette, 27th November, 1889. 



246 



The Canadian Banking System, 1 817- 1890 



author of the circular suggested that if they desired to retain 
their powers of issue, it would be expedient for the banks not 
only to organize, but also, toward disarming their critics, to 
prepare against the time for renewal of charters any proposals 
for reforming the banking system upoi? which they could 
agree. Then followed the outlines of plans to keep bank 
notes at par, however far they might be from the place of issue, 
and to estabUsh a safety fund, contributed from all the banks, 
whereby to ensure prompt and full redemption to the holders 
of notes of a suspended bank At various times in 1889, most 
of the banks in different provinces completed arrangements 
to carry out the first suggestion. The banks usually worked 
towards the purpose in twos, each engaging to perform the ser- 
vice of redeeming the other's notes in its own neighborhood, 
on consideration of a like service by the other in its district. 
On the notes of banks who became parties to redemption agree- 
ments, this simple device quite prevented the discount for 
geographical reasons. 

Upon the nth January, 1890, the representatives of the 
chartered banks met in Montreal and resolved to request an 
interview with the Hon. George E. Foster, D.C.L., who, as 
Minister of Finance and Receiver-General, had charge of the 
banking measures of the Government. Their request was 
granted. On the 25th the representatives of twenty-four banks 
met the Minister in Ottawa. The minutes of this meeting, and 
of the subsequent meetings on the nth and 12th February, if any 
were kept, have never been published, and neither from news- 
papers of the day, nor from public documents, is it possible to 
learn just what occurred at them. It is understood, how- 
ever, that at the first meeting, the bankers inquired the inten- 
tions of the Government with respect to the Bank Act Re- 
vision, and that the Minister, while refusing to make such an 
announcement at that time, expressed his willingness to learn 
their views on certain points. Among these appear to have been 
the questions, 

(a) of making the Bank Act a permanent statute, and thus 
avoiding a revision every decade ; 

(b) of preventing the discount on the current notes of a sol- 
vent but distant bank ; 



1: !■ 



The Revision of 1890 



247 



• ' (c) of preventing any discount whatsoever on the notes of a 
bank, whether it be solvent, awaiting hquidation, or liquidated, 
or in other words, of improving the security of bank notes ; 

(d) of further limiting its powers of circulation to 60 or 70 
per cent, of each bank's paid-up capital, or to the average 
amount of notes outstanding during the three years preceding ; 

{e) of fixing the minimum proportion which the cash re- 
serve of a bank shall bear to its liabilities, and 

(/) of requiring a larger paid-up capital for new banks. 

In regard to the second point (b), the bankers remarked 
the arrangements already made for that purpose, and expressed 
a wish that the Bank Act should require every bank, on pain 
of forfeiting its charter, to make arrangements for the redemption 
of its notes at par, in the commercial centre of each province. 
To oblige each bank, after the American plan, to receive at par 
the notes of other banks of the system, would be unjust, for the 
duty of redemption ought to fall, not upon its competitors, but 
upon the bank which gains from the circulation. As to the last 
(/), in common with the rest of the country, they thought that 
more substantial guarantee should be required from bank pro- 
moters. Tothefomth {d), that of further limiting the powers 
of circulation, they probably objected. Among those represented 
weremany banks with an active business of the sort which requires 
large, though fluctuating amounts of currency, and for them the 
restriction would work hardship. Then, too, were they to be 
restricted to the average oi the past three years, many banks 
would be disabled for meeting the periodical expansion, and 
obliged to close some of the'r agencies. The first point was a 
matter of detail, and judging from the Bill he brought down 
was soon rejected by the Minister himself. 

The question of requiring a fixed reserve was discussed in 
connection with increased security. So far, the Government 
had given no indications of a purpose at this revision to require 
deposits of bonds against the note issue. But as everyone 
afterwards learned. Mr. Foster was strongly in favor of oblig- 
ing each bank to hold a sum of specie and Dominion notes 
which should never be less than 10 per cent, of the amount 
of its debts. Newspaper writers had favored the proposal as 
likely to keep such a stock of specie in the bank, that, in case 



248 



The Canadian Banking System, 1817-1890 



it should fail, there would be still enough for the redemption 
of notes as fast as they might come in. The rule of a fixed 
reserve had been adopted by the United States, and a number of 
the great European banks were subject to restrictions with 
respect to the proportion of specie held against outstanding 
notes. For a long time, moreover, four or five of the Canadian 
banks had incurred just criticism for allowing their reserves, 
not merely of money, but also of the more liquid assets, to remain 
below the point which, from the practice of other banks, seemed 
safe or prudent. 

We know that th-^ same arguments against the measure as con- 
vinced Sir Francis Hincks twenty years before, were presented 
to Mr. Foster. 1 The bankers' case was strengthened by refer- 
ence to the experience of the American banks with such a 
requirement since 1870. They could point to the repeated vio- 
lation of the law to which the National banks had been forced, 
and at which the authorities could only connive. They could 
show how it induced extreme fluctuations in the interest rate at 
the financial centres, how it hampered that annual westwa'-d 
movement of currency on which Americans chiefly relied tor 
elasticity in their money system, how it crippled the powers of 
the banks at critical moments, and caused greater instability in 
the organization of credit. That the reserve requirement had 
forced some American bankers to keep a provision for their lia- 
bilities approximately adequate, would nowise have damaged 
the Canadian arguments. The American banks were local, 
numerous and comparatively small ; in not a few cases, either 
the desire or ability to carry on sound banking was correspond- 
ingly slight. In framing the National Bank Act, the elasticity 
of the currency had been sacrificed for its security, the estab- 
lishment of a scientific banking system for the success of a 
financial expedient. That the fixed reserve was of qualified 
benefit under one system, was no reason for transferring it to 
another, different in traditions, principle and practice. 

In subsequent contention against the proposal of the Min- 
ister of Finance, the bankers urged that it was peculiarly 



I George Hague, "Bank Reserves," Journal of the Canadian Bankers' Association, 
Vol. I., p. 107. 



il 

li 



The Revision of 1890 



249 



unsnited to Canadian conditions. In Canada the customer 
is expected to keep his account with but one bank. At the 
beginning of his year he makes a confidential exhibit of his 
financial condition, and obtains a '* line of credit," i.e., the 
bank's assurance that up to the amount fixed, his position 
remaining satisfactory, it will find him in funds as they are 
needed. It frequently happens that at no time in the year does 
the borrower avail himself of the whole of his credit. But the 
duty " to take care of its customers," places the bank under 
large obligations to advance money at times which it cannot 
exactly forecast. Exceptional conditions of trade, unusually 
late opening of navigation, stringency in the money market, 
or a variety of other complications, often cause large groups of 
customers to need the entire amount of their credits, and .some- 
times a little more, to carry them through. Or again, produce 
buyers, grain shippers, farmers and dairymen require of the 
bank enjoying their custom, larger advances at one season than 
at another, and in different years amounts which vary according 
to the success of the season's work. Or once more, as hap- 
pened at the time of the Federal Bank's difficulties, it sometimes 
becomes desirable, nay necessary, to make sudden and heavy 
outlays of hard cash in order to avert a serious panic. 

Under the law of 1880, all these contingencies could be met 
by the banks without other disturbance or evil than a tem- 
porary reduction of their reserves to a point comparatively low. 
But with the requirement of a minimum reserve, a bank might 
be obliged to look out for its cash ^nd let the customer go to the 
wall. It would be forced to hold a useless amount of 
money during nine months of the year, or forego accommodat- 
ing during three months the agricultu'^al industries relying on 
its support. And in times of impending trouble, the banks 
would have to choose from the double dilemma, to take 
the wise and courageous course of forestalling difficulty, 
and deliberately break the law ; or, on the other hand, 
to maintain their reserves and endure with Mahometan indiffer- 
ence, the harm needlessly suffered by themselves and by the 
country. 

Such were the arguments used by the bankers against an 
arbitrary fixed reserve. As a better scheme, they proposed the 



\i 



Jgo, tl 



260 



The Canadian Banking System, 1817-1890 



formation of a safety fund, under regulations very like those 
ultimately adopted by the Government. 

But Mr. Foster was not convinced by their argu- 
ments. The representatives of the chartered banks then 
appealed to the Privy Council for a hearing. This was ac- 
corded, and on the 22nd February, tV.^i eighteen members of the 
Government assem) 'led to be addressed by the representatives 
of the chartered oanks, for whom Messrs. George Hague, 
B. E. Walker and Thomas Fyshe acted as spokesmen, the bur- 
den of the argument being sustained by Mr. Walker. ' Once 
again, their case against an arbitrary reserve was argued, and at 
this trial the bankers won. The resistance they had offered to the 
measure was earnest, strenuous, united. It may have been 
selfish, but it was a case where the interest of the banks was 
that of the people. Defeated in the Council Chamber, they 
would, no doubt, have raised the issue in Parliament, fought it 
through the press, and carried it before the country. Fortu- 
nately, however, the banks had no need l^ u^e their excellent 
organization and wide influence in a general election. Sir John 
Macdonald, and his colleagues, adopted the views presented by 
the bankers, and the Bill which Mr. Foster proposed to the 
House of Commons on the 20th March, 1890, contained no men- 
tion of a fixed reserve. 



§ 52. — REFORMS ADOPTED BY PARLIAMENT ' 

The debate upon this banking measure forms one of the 
most admirable chapters in the history of Canadian legislation. 
The description noway implies that former discussions in the 
House of Commons were marred by extreme ignorance or ex- 
cessive partizanship ; since the Dominion Parliament first 
met, its action upon matters relating to banking has been open 
to no such criticism. But now a Bill, to which long study and 
the attention of the ablest experts in Canada had already been 
given, was presented to a House comprising many of the first 
men of the country in law, commerce and public life. Using 



1 The Week, Toronto, aqth September, 1893, " A Bit of Canadian History." An ac- 
count of the argument before the Privy Council by J. T. P. K., a Halifax Bank Manager. 



The Revision of 1890 



261 



all the resources of their rich experience and excellent theoreti- 
cal equipment, they took up the question without a trace of 
party feeling, and earnestly, ably, thoroughly worked to bring 
the Bank Act as near as might be to the perfection of a scientific 
ideal. 

As he presented the Bill, the Minister of Finance reviewed 
the banking legislation in force at different times since 1867, 
and outlined the objections held by the Government to the 
several plans suggested for the revision. The first, for the 
Dominion to assume the whole of the t ;rculation, involved with 
the duty of redemption, responsibilities too difficult, delicate 
and dangerous. The second, for the Government to guarantee 
the circulation to the country, require the banks to deposit de- 
bentures with them for a certain percentage of their issues, and 
to retain the first lien against their assets, would place the Gov- 
ernment under a heavy contingent liability, which they might 
not at all times be able to meet. The third plan, to require 
bond security for the whole circulation, was inexpedient ; 
it would reduce the capital used for the progress and develop- 
ment of the country. The fourth plan, the plan which the 
Government had adopted, was to keep the existing system, but 
to improve it, obviate the objections and difficulties, and estab- 
lish new safeguards.^ 

The fate if the proposal for a fixed reserve was shared to 
some extent by two other improvements suggested by the Min- 
ister of Finance. They were severely criticized in Parliament, 
and either withdrawn or modified. The one withdrawn was a 
project for an audit system, not of the Government — but yet 
compulsory — an audit of the shareholders. Tne machinery was 
described by Mr. Foster thus: "The shareholders shall, at 
their annual meeting, elect two or more auditors ; those 
auditors shall, during the year, have the opportunities which 
are necessary for an auditing of all the accounts, and all state- 
ments ; that they shall present this report, and their audit of the 
Director's report, at the yearly meeting, and that a copy of this 
shall be lodged with Minister of Finance and Receiver-General." 
Against this, it was successfully objected that it is impracticable 



»i, I 



1 Debates of the House of Commons, Canada, 1S90, p. 2,235, «' s<9' 



18 



fen n 



1ill 



252 



The Canadian Banking System, 1817-1890 



for an auditor to ascertain the value and character of a bank's 
discounts, that his inspection provides no efficient check, that 
the public may be lulled into security by unjustified faith in the 
reliability of the auditor's statement, that inspection is a ques- 
tion for a bank's administration, and not for the Government, 
and that the audit was an answer to no general demand. 

I. The modified clause originally required from each bank 
an annual return of dividends unpaid for five years, or balances 
due to whomsoever in respect to which no transaction had 
occurred, or on which no interest had been paid during the five 
years preceding. The statement was to set forth the name and 
last known address of the shareholder or creditor, the amount 
due, and the date and agency at which the last transaction took 
place. Dividends unpaid, and balances unclaimed for three 
years after the first report on them, were to be paid to the Min- 
ister of Finance for the public uses of Canada, subject, however, 
to the right of a person establishing his claim to the satisfaction 
of the Treasury Board, to be repaid the principal of the sum due 
him, and, in case it were payable by the bank, the interest 
thereon at three per cent, for not more than six years after the 
transfer of the amount from the bank to the Government.^ 

The argument for the introduction of the provision had been 
skilfully and strongly prepared by a member of the permanent 
staff of the Finance Department. It was shown that in India, 
the Barbadoes, and some of the Australian Colonies, unclaimed 
balances in certain cases go to the State. Dividends of the 
Bank of England unclaimed for ten years are applied to the 
payment of the national debt. In the Cape of Good Hope 
Colony the law was almost identical with that proposed. The 
Montreal Board of Trade had adopted resolutions in April, 
1889, calling for a return to the Government of unclaimed debts 
owed by trustees and other depositors. It may have been a 
popular notion that the banks held vast sums which they never 
e:.pected to pay, because the existence of the debts being for- 
gotten or unknown, no one would come to collect them. The 
Government certainly believed that theheirsof persons who were 
moved away from the place where they made the deposits or 



I Bill No. 127, 1890, An Act respecting Banks and Banking, 89, (1-3). 



The Revision of 1890 



258 



subscribed to stock, were often prevented from enforcing their 
rights by ignorance of their existence. As a matter of fact, page 
after page of accounts in the bank ledgers show balances ranging 
from one cent to ten dollars, with the majority of sums less than 
two dollars. Every effort to close them up having been unsuccess- 
ful, the banks were obliged to carry forward the accounts from 
folio to folio, in order to balance the books. As debts due to 
customers or proprietors, no bank would have dared to plead the 
statute of limitations against just calls for payment of these 
balances. The entire indebtedness of the chartered banks, 
either on account of unpaid dividends or unclaimed balances, 
was only $300,523 in 1891.' 

The plan of the Government was rather roughly welcomed. 
It was opposed as a scheme to alter the devolution of personal 
property and an invasion of the rights of the provinces. 2 But 
Sir John Thompson defended its constitutionality by the same 
principles as were later approved by the Judicial Committee of 
the Privy Council in Tennant vs. the Union Bank.^ Others 
insisted that the banks were good enough trustees of the money, 
and that there was no reason for their transfer to the Govern- 
ment. Save the observance of foreign precedents, all but the 
fiscal purposes of the clause could be gained by simply requiring 
each bank to report to the Government bv the 20th January in 
each year, the amount of unpaid dividends and unclaimed 
balances with respect to which no transaction has occurred, or 
on which no interest has been pa'd during the five years pro- 
ceding. This view was accepted, and the clause, w'lile still re- 
quiring complete details, was amended to conform to it. (53 Vic, 
cap. 31, § 88, 1-3.) 

With the exception of four or five admirers of the American 
banking and currency legislation,* the members of the House 

I This excludes $146,705, owed by two chartered savings banks in the Province of 
Quebec, and it includes the $75,200 owed by the Bank of Montreal, 

t Debates of the House of Commons, Canada, p. 3,816, Remarks of Mr. Edward Blake. 
• C/. Journal of the Canadian Banken' Association. Vol. I., p. 201. 

« Mr. White, Card'.vell, hoped that banks securing circulation by deposits of Dominion 
bonds would be exempted from the requirements of the Bank Circulation Redemption Fund. 
Ibid, 3,817. 

Mr. Casey, West Elgin, moved " that the Government should issue or guarantee the 
absolute soundness of all paper currency issued or circulated as money," p. i8g. 

Sir Donald Smith, Montreal, wished a " thoroughly secured currency," p. 3828. This 
remark should be read in connection with his speech, as President, to the shareholders ot 
the Bank of Montreal, in June, supra, 144. 

Mr. Hesson, North Perth, believing that no necurlty Is as satisfactory to the people as 
that of the Government, wanted a national currency, p. 3,838. 



ili: 



264 



The Canadian Banking System, 1817-1890 



i! 



of Commons did not object so strenuously to the other banking 
proposals of the Government. 

The principal reform, chief by reason of its novelty, effi- 
cacy, and consequences, was the formation of the Bank Circu- 
lation Redemption Fund, by which to guarantee the payment 
of the notes of any failed bank within sixty days of its suspen- 
sion, and with interest at 6 per cent, per annum, from the day 
of failure to the day of redemption. This fund, which first 
reached its normal amount in July, 1892, was contributed by all 
the banks, each depositing with the Minister of Finance before 
the 15th July, 1 891, a sum of money equal to 2i^ per cent, of the 
average amount of its notes in circulation during the preceding 
twelve months, and such further sum before the 15th July, 1892, 
as was necessary to make the total contribution of each bank 
equal to 5 per cent, of the average amount of its notes in circu- 
lation during the twelve months preceding the last date named. 
The purpose of the fund, in brief, is wholly to prevent discount 
upon bank notes, whatever the condition of the bank which 
issued them ; that is, to make the security of the Canadian cur- 
rency indisputable, permanent, complete. The means are best 
described in the careful language of the Act itself. 

§ 53. The payment of the notes issued or re-issued by the bani< and 
intended for circulation, and then in circulation, together with any interest 
paid or payable thereon as hereinafter provided, shall .be the first charge 
upon the assets of the bank in case of its insolvency ; * » » • 

§ 54. (4) ' The Bank Circulation Redemption Fund,' — * * shall 
be held for the following purpose, and for no other, namely : In the event of 
the suspension by the bank of payment in specie or Dominion notes of any of 
its liabilities as they accrue, for the payment of the notes then issued or 
re-issued by such bank, and intended for circulation, and then in circulation, 
and interest thereon ; and the Minister of Finance and Receiver-General 
shall, with respect to all notes paid out of the said fund, have the same rights 
as any other holder of the notes of the bank : 

(5) The fund shall bear interest at the rate of three per cent, per annum, 
and it shall be adjusted, as soon as possible after the thirtieth day of June 
in each year, in such a way as to make the amount at the credit of each bank 
contributing thereto, unless herein otherwise specially provided, equal to five 
per cent, of the average note circulation of such bank during the then next 
preceding twelve months : 

(6) The average note circulation of a bank during any period shall be 
determined from the average of the amount of its notes in circulation, as 
shown by the monthly returns for such period made by the bank to the Min- 



The Revision of 1890 



265 



ister of Finance and Receiver-General ; and where, in any return, the 
greatest amount of notes in circulation at any time during the month is 
given, such amount shall, for the purposes of this section, be taken to be the 
amount of the notes of the bank in circulation during the month to which 
such return relates : 

(7) In the event of the suspension by the bank of payment in specie or 
Dominion notes of any of its liabilities as they accrue, the notes of such 
bank, issued or re-issued and intended for circulation, and then in circula- 
tion, shall bear interest at the rate of six percent, per annum, from the day 
of such suspension to such day as is named by the directors, or by the liqui- 
dator, receiver, assignee or other proper official, for the payment thereof,— of 
which day notice shall be given by advertisement for at least three days in a 
newspaper published in the place in which the head office of the bank is 
situate ; but in case any notes presented for payment on or after any day 
named for payment thereof are not paid, all notes then unpaid and in circu- 
lation shall continue to bear interest to such further day as is named for 
payment thereof, — of which day notice shall be given in manner above 
provided : Provided always, that in case of failure on the part of the 
directors ot the bank, or of the liquidator, receiver, assignee or other 
proper official, to make arrangements within two months from the day of 
suspension of payment by the bank as aforesaid for the payment of all of its 
notes and interest thereon, the Minister of Finance and Receiver-General 
may thereupon make arrangements for the payment of the notes remaining 
unpaid, and all interest thereon, out of the said fund, and shall give such 
notice of such payment as he thinks expedient, and on the day named by him 
for such payment all interest on such notes shall cease, anything herein con- 
tained to the contrary notwithstanding ; but nothing herein con diaed shall 
be construed to impose any liability on the Government of Canada or on the 
Minister of Finance and Receiver-General beyond the amount available from 
time to time out of the said fund : 

(8) All payments made from the said fund shall be without regard to the 
amount contributed thereto by the bank in respect of whose notes the pay- 
ments are made ; and in case the payments from the fund exceed the amount 
contributed by such bank to the fund and all interest due or accruing due to 
such bank thereon, the other banks shall, on demand, make good to the fund 
the amount of such excess, pro raid to the amount which each bank has at 
that time contributed to the fund ; and all amounts recoveied and received 
by the Minister of Finance and Receiver-General from the bank on whose 
account such payments were made shall, after the amount of such excess has 
been made good as aforesaid, be distributed among the banks contributing to 
make good such excess pro rata to the amount contributed by each : Pro- 
vided always, that each of such other banks shall only be called upon to 
make good to the said fund its share of such excess, in payments not exceed- 
ing in any one year one per cent, of the average amount of its notes in circu- 
lation, — such circulation to be ascertained in such manner as the Minister 
of Finance and Receiver-General decides ; and his decision shall be final : 



\ \r 






'•'i;r 



266 



The Canadian Banking System, 1817-1890 



(9) In the event of the winding up of the business of a bank by reason of 
insolvency or otherwise, the Treasury Board may, on the application of the 
directors, or of the liquidator, receiver, assignee or other proper official, and 
on being satisfied that proper arrangements have been made for the payment 
of the notes of the bank and any interest thereon, pay over to such directors, 
liquidator, receiver, assignee or other proper official, the amount at the credit 
of the bank, or such portion thereof as it thinks expedient : 

(10) The Treasury Board may make all such rules and regulations as it 
thinks expedient with reference to the payment of any moneys out of the 
said fund, and the manner, place and time of such payments, the collection of 
all amounts due to the said fund, all accounts to be kept in connection there- 
with, and generally the management of the said fund and all matters relating 
thereto : 

(11) The Minister of Finance and Receiver-General may, in his official 
name, by action in the Exchequer Court of Canada, enforce payment (with 
costs of action) of any sum due and payable by any bank under the provi- 
sions of this section. (53 Vic, cap. 31.) 

As complements to the safety fund thus established, action 
was taken in response to the second and third general demands 
for reform. 

III. It was required that each bank shall make arrange- 
ments to ensure the circulation of its notes at par, I'l all parts of 
Canada, and towards the purpose it shall estabUsh agencies for 
the redemption and payment of notes at the commercial centre 
of each Province, viz., Halifax, S\ John, Charlottetown, Mon- 
treal, Toronto, Winnipeg and Victoria. (51 Vic, cap. 31, § 55.) 
Under the Suffolk system, a redemption office in Boston was 
found sufficient to prevent the discount on " foreign bank notes" 
from any part of New England,^ and the redemption agencies 
of the Dominion Government at the provincial capitals had kept 
the notes of the Dominion at par. There was no reason why a 
similar arrangement should not have like effect on the notes of 
the chartered banks. The requirement of redemption also re- 
moved an element of danger which the establishment of a fund 
might otherwise have introduced. Having received increased 
credit from it, the notes were likely to remain in circulation 
longer, and it was necessary to counteract the qualified tendency 
toward inflation by improving the faciHties for redemption. 

IV. Banks going into Hquidation under a general wind- 



D. R. Whitney, "The Suffolk Bank;" Cambridge, 1878, pp. 46, 60, 



The Revision of 1890 



267 



ing-up Act, or becoming insolvent, were not only deprived of 
the benefits originally enjoyed under the statute of limitations, 
but were obliged to yield to the Government whatever advan- 
tages may still be had by solvent banks from the loss or des- 
truction of notes.' Moneys which are payable by the liquidator 
to shareholders and depositors, and which have remained un- 
claimed for three years after the suspension or beginning of the 
winding-up, or until the winding-up is complete, if that occurs 
before the expiry of three years from the time it is begun, are 
required to be paid to the Minister of Finance. He holds them 
subject to the claims on behalf of any person other than the 
bank. Such claims being established to the satisfaction of the 
Treasury Board, the moneys are repaid to the person entitled to 
them. If interest was payable by the bank, the Minister of 
Finance also pays interest at three per cent, for not more than 
six years from the date he received the unclaimed balances. 

(§88, (4).) _ . ,:. ^ 

By a similar provision, it was enacted that the liquidator 
shall, before the final distribution of assets, or within thrse yeari 
of the date of suspension or winding-up Act, pay to the Minister 
of Finance a sum equal to the amount of the notes of the bank 
intended for circulation, and then outstanding. The bank and 
its assets are then relieved from further liability upon its 



ft'.' 
■ii 



1 The profit from notes lost or destroyed, has no such importance as the public com- 
monly impute to it. The practice of hoarding savings in bank notes is practically obsolete in 
Canada. A person may as well trust a bank in another way and get interest on his credit, 
i.e., by making a deposit. So the possibility that notes thu« held may be destroyed by fire or 
what not, has no bearing on the question. The loss by accident, theft, robbery, etc., also has 
no effect on the bank. Its debt simply falls into other hands ; the evidence of it still exists. 
The only possibility of profit lies in the complete destruction of notes, or such loss as makes 
recovery by whomsoever, utterly impossible. There are, it is true, quantities of notes which 
for some time disappear from active circulation, for so long, in fact, that an inexperienced 
observer would think they must have been lost. It was this tardiness in coming back for 
redemption of which winding up Acts enabled banks in liquidation to take advantage, and it 
was the extinction of the holder's claim on such paper that prompted the second general de- 
mand for reform above noted. In former years the board of many a bank still in existence, 
have decided, after profound and solemn deliberation, to write off a certain amount from the 
issue account for destroyed notes which they never expected to see again, and to add the 
same to the credit of profit and loss. Subsequently, they have been obliged, somewhat more 
solemnly, we may safely say, to write the amount back again. The notes supposed to be lost 
persistently returned for redemption. Banks which have taken over the business of other 
banks, have been called on to redeem more notes of the amalgamated banks than were out- 
standing when the union occurred. Figures furnished me by bankers, show that of the one 
and two dollar notes in circulation on the 3rd June, 1871, less than one per cent, are still out- 
standing, of the four dollar nutes in circulation on the 30th June, 1881, which the banks 
were instructed thereafter to call in, less thar two per cent, are outstanding, the proportion 
unredeemed being as low as 1.4 per cent, in some cases, and in others less than .2 per cent. 
For some banks, we may say that the interest on the amount of destroyed notes might, pos- 
sibly, pay the mere co.<t of printing involved in the maintenance of a circulation. The ex- 
perience of many others would not warrant the statement that there is any appreciable gain 
through the destruction of notes not presented for redemption. 



268 



The Canadian Banking System, i8i 7-1890 






notes, as the Minister of Finance is required to apply the sums 
so received to the redemption of the bank's notes as they are 
presented, without interest. (§ 88,(5).) The first provision was 
explained as solatium for the Minister's previous concessions in 
the matter of unclaimed balances. By this, together with the 
exception of a solvent bank's debts from the statute of limitations, 
and the requirement that the amounts and owners of unclaimed 
balances shall be published, the purposes of his original proposal 
were pretty well attained. The justice of the second requirement 
is manifest. Without it, the stray notes that were slow to come 
in would be a charge upon the funds contributed by the other 
banks. The bank whence they issued was obliged to take care 
of its outcast children — foundlings the other banks refused to 
rear. 

Four effects of the Bank Circulation Redemption Fund and 
the complementary requirements deserve immediate mention. 
First, the united credit of all the banks of the system was placed 
back of the currency issued by any one of them. Second, the 
interest of six per cent, on the notes of a failed bank provided 
an incentive for the liquidator promptly to redeem them ; it was 
an inducement to solvent banks to receive them from their cus- 
tomers, and it was a protection to all holders from loss. Third, 
it made it impossible that the notes of a failed bank should fall 
below par, for besides the liability of the shareholders and of 
the assets of the issuing bank, there was pledged to their redemp- 
tion within sixty days at loi, an accumulated and available fund 
of over $1,800,000. Fourth, the bank note currency of Canada 
acquired a thoroughly national character ; since 1890 it has cir» 
culated from one end of the country to the other, never causing 
loss to the holder, yet keeping unimpaired the qualities for 
which, in its less perfect state, Canadians had again and again 
refused to give it up. 

The origin of the measure is more difficult. The plan 
had been quietly worked out by an Ottawa banker in the sum- 
mer of 1888 ; it had occurred about the same time to a banker 
in Toronto as an excellent modification of the New York 
Safety Fund, the device of which Millard Fillmore said, 
•' It is therefore apparent that the Safety Fund would have 
proved an ample security to the bill holder, had it not been 



M 



The Revision of 1890 



259 



applied to the payment of other debts of insolvent banks than 
those due for circulation."^ On the other hand, the Minister of 
Finance has kindly assured me that it was no adaptation, but 
quite an independent Canadian development, designed to meet 
Canadian needs. And I am informed that after the bankers 
laid before him their plan for a " Security Fund," as it was 
first termed, Mr. Foster told them that the scheme was about 
what he had thought of. 

Upon such high and diverse evidence, one cannot be ex- 
pected to determine the original invention of this excellent feature 
of the pr-^sent Bank Act. A safe theory, doubtless, is that of a 
contemporaneous invention by several persons more or less 
influenced, though not always consciously, by the reminiscences of 
the New York Safety Fund system still frequent in discussions 
of banking, and by the knowledge of the fund for the redemption 
of National bank notes kept in the United States' Treasury 
under somewhat analogous regulations.* Mr. Foster did 
not adopt the plan exactly as the bankers suggested it. 
There was no maximum established in his bill for the amount 
which a bank might be obliged to contribute to the fund within 
the course of a year. The representatives of the Bank of Mon- 
treal very properly objected to the proposal in this form, for 
under certain circumstances, as they conceived, their bank 
might be involved in a liability limited only by the circulation of 
the other banks in the Dominion and its own ability to pay.* 
The Government consented to remove the dangerous feature, 
and in Committee of the Whole the amount payable by a bank 



» Report of the Comptroller of the State of New York, 1849, p. 29. 

* To trace the origin of the plan in the State of New York, it will be necessary to 
revert to the legislation of 1829 bv which the "Safety Fund" was first established. The 
first proposal of the scheme must be ascribed, not to the Governor at that time, Martin Van 
Buren, but to one Joshua Forman, whose suggestions the Governor merely recommended 
to the Assembly. The real author describes ttie origin of the plan thus, "The propriety of 
making the bauKs liable for each other was suggested by the regulation of the Ho.ig merchants 
in Canton, where a number of men, each acting separately, have by the grant of the Govern- 
ment the exclusive right of trading with foreigners and are all made liable for the debts of 
each in case of failure. The case of our banks is very similar ; they enjoy in common the 
exclusive right of making a paper currency for the people of the State, ana by the same rule, 
should be in common answerable for that paper. This abstractly just principle which has 
stood the test of experience for over seventy years, and under which the bond of a Hong 
merchant has acquired a credit over the whole world not exceeded by that of any security, 
modified and adapted to the milder features of our republican institutions, constitutes the 
basis of this system." Vide Van Buren, "Message, made to the Assembly, January 36th, 
1829," Albany, 1829. 

» Garland, op. cit., p. 308. 





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260 



The Canadian Banking System, 1 817- 1890 



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within a year was fixed at one per cent, of its circulation. This 
provision for maintenance was beHeved to be quite ample. The 
experience of twenty-three years showed the improbability of 
one of the overwhelming banking catastrophes, without which a 
long impairment of the fund would be impossible. 

V. The fourth criticism remarked in § 50 was met by 
requiring from each new bank subscriptions to $500,000 of its 
stock and payment of $250,000. No new bank is permitted to 
begin its business or issue notes until $250,000 of the capital 
shall have been deposited in specie with the Minister of Finance 
for a period of at least four weeks, or until a certificate permit- 
ting it to do so shall have been issued by the Treasury Board. 
The certificate may not be granted until they are satisfied that 
the requirements as to capital payment, election of directors, etc., 
have been complied with, nor after twelve months from the day 
on which the Act of incorporation came into effect. (53 Vic, 
cap. 31, §§ 10, 13-16.) 

VI. The payment of any amount due to the Government of 
Canada, in trust or otherwise, was made the second charge on the 
assets of an insolvent bank, and any amount due to the Gov- 
ernment of any of the provmces a third charge, the note holder 
being still assured the first right of preference. (The 
Bank Act, § 53.) This was merely the embodiment in 
the Bank Act of the Crown priority at English common 
law. The Minister of Justice, Sir John Thompson, explained 
the action thus ; " We seek to put it on the face of the 
Bill, first, because we are endeavoring to adopt an Act with 
respect to banks and banking, which will embody as much of 
the common law, as well as of the statute law, as we can con- 
veniently embody in a Bill of this kind ; second, in order that 
the public shall know what the law is with respect to the rights 
of the Government, what the rule is that prevails with respect 
to the prerogative of the Crown in relation to its debts." ^ The 
law was not the same in the different provinces, and although 
the attempt to enforce it in order to the recovery of deposits 
with the Maritime Bank was successful, the Quebec courts had 



I Debates, 1890, p. 3,966. 



imv 



The Revision of i8go 



261 



declined to sustain the prerogative in a suit at the civil law of 
that province. Some objected that the priority would diminish 
the security afforded to the depositor. The Minister, in justify- 
ing the prerogative, inquired, " Is it not vain to talk about the 
necessity of private individuals trusting the banks of the coun- 
try ? They trust them for their own accommodation, for their 
own business and profit." *' We are collecting revenue in 
Canada under the authority of this Parliament, over a wide 
extent of country, by a large army of officers of the Customs 
and Inland Revenue, from penalty collecting officers, from 
magistrates who collect penalties due to us, from agents collect- 
ing moneys to be applied to the Crown, and the only hands we 
have for the receipt of this revenue, or of any moneys payable to 
the Crown, are the banks wherever they are established. It is 
impossible that officers >!=**# can have vaults of their 
own in which to store money. We must resort to the banks, 
not only for the convenience of making deposits, but for trans- 
mission, and to that extent, necessarily, the Government is an 
involuntary creditor of all those institutions — those banks which 
are the creatures of this Parliament and of this Government. 
* * * Perforce we are obliged to avail ourselves of these 
monetary institutions ; and the same privilege should be given 
to the Crown in regard to its moneys, as is given to the Crown 
in regard to the discharge of the duties of its officers, for the 
very analogous reason that the Crown, being obliged to dis- 
charge its functions of government by a great army of officers 
throughout the country, is relieved of responsibility for the negli- 
gence of its officers."* Others denied the application of the re- 
marks to the provinces, which had no such difficult task in col- 
lecting their revenue. Mr. Weldon acutely noted the distinc- 
tion between the Crown priority for moneys collected as public 
revenue, and for money which the Government chooses to loan 
to a bank in order to obtain interest. Sir John Thompson re- 
fused to accept the distinction, in replying, " The Government 
stands in precisely the same relation with regard to large classes 
and sums of money (not revenue), as it does in relation to 



1 Ibid pp. 3,966, 3,967, 3,973- 



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The Canadian Banking System, 1817-1890 



revenue, such as security from contractors, and deposits from 
insurance companies." Tiie result of such a distinction would 
be that the Government could not distribute the funds in its 
keeping and spread the risk, while at the same time preserving a 
lien. Sir John Macdonald remarked that " the banks, no doubt, 
would infinitely rather run the liability than lose the Govern- 
ment deposits. A bank is at liberty to post a notice saying it 
will not receive Government deposits on the second lien footing. 
Bat the shareholders would say, at the next meeting, that the 
Directors had thus injured the bank's standing and prestige." 
It is apparent that the criticism of Mr. Weldon was evaded 
rather than refuted. His remark applied to the case of Govern- 
ment assistance to a bank, whether for the public good, or the 
advantage of the Government's friends. 

In a debate upon bank inspection, occurring in 1885, Sir 
John Macdonald had stated the Government's poHcy thus : " It 
is sometimes in the interests of the Government (and the Gov- 
ernment have no interest except that of the public) to strengthen 
banks by making deposits. It has bsen, in my experience, look- 
ing back, found requisite or expedient by several Governments, 
in times of great depression, to prevent universal ruin, universal 
panic, to come to the help of some of the bank institutions. 
Governments have on occasion prevented universal panic by 
acting in concert with strong banking institutions, in helping to 
sustain banks which were not quite so strong."^ The certain 
establishment of the right of the Crown to preference, tends, it 
would seem, to induce a Government to assist a weak bank, 
particularly when they are unduly pressed, and there are good 
chances of bringing it safely out by that means. But since one or 
two painful experiences, the Governments of Canada and of the 
provinces have been chary of being caught in a failed bank. In 
stormy times the funds of the State appear to desert the frailer 
craft, to seek safety in the staunchest and strongest of the banks. 
The attitude of the people was clearly indicated after the Ex- 
change Bank failure. Politicians will not willingly provoke a 
like explosion of criticism. Public opinion is a mighty correct- 



> Debates, House of Commons, 1885, p. 85. 



The Revision of 1890 



208 



ive for any such abuses as granting loans or unduly heavy 
deposits to a favored bank, but in the later years of Canadian 
b-»nking its effect has been potential. The need for its active 
exertion has not arisen. 

VII. By a seventh series of new clauses, the loaning powers 
of the bank were extended, the law as to warehouse receipts, 
etc., recast, and the proceedings under it simplified. The prin- 
ciples already recognized that a bank may advance money in 
certain cases to aid in the manufacture of goods, and may keep 
its claim on the material security during and after transformation 
from the raw material to the finished product, were made 
general in the following clauses : 

" § 74. The bank may lend money to any person engaged in business 
as a wholesale manufacturer of any goods, wares and merchandise, upon the 
security of the goods, wares and merchandise manufactured by him or pro- 
cured for such manufacture : 

" 7.. The bank may also lend money to any wholesale purchaser or ship- 
per of products of agriculture, the forest and mine, or the sea, lakes and 
rivers, or to any wholesale purchaser or shipper of live stock or dead stock, 
and the products thereof, upon the security of such products or of such live 
stock or dead stock and the product thereof: 

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

*' § 76. If goods, wares and merchandise are manufactured or produced 
from the goods, wares and merchandise, or any of them, included in or 
covered by any warehouse receipt, or security given under section seventy- 
four of this Act, while 30 covered, the bank holding such warehouse receipt 
or security shall hold or continue to hold such goods, wares and merchandise, 



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J Following is the form given in Schedule C. : 

In consideration of an advance of dollars, made by the [name of bank) 

to A. B., for which the said bank holds the following bills or notes (describe fulh the bills or 
notes held, if any), the goods, wares and merchandise mentioned below are hereby assi^ined 
to the said bank as security for the payment, on or before the day of 

of the said advance, together with interest thereon at the rate of per cent, per 

annum from the day of (or ot the said bills and notes, or renewals 

thereof, or substitutions therefor, and interest thereon, or as the case may be.) 

This security is given under the provisions of section seventy-four of " The Bank Act," 
and is subject to all the provisions of the said Act. 

The said goods, wares and merchandise are now owned by and are now in 

possession, and are free from any mortgage, lien or charge thereon (or as the case may bt) 
and are in iplace or places where goods are), and are the following : (particular descrip- 
tion of goods astigntd). 

Dated at i8 . 



;(■ 



264 



The Canadian Banking System, 1817-1890 



I ' i. 



n'\m 



■ft' 



I: 






during the process and after the completion of such manufacture or produc- 
tion, with the same right and title and for the same purposes and upon the 
same conditions as it held or could have held the original goods, wares and 
merchandise." 

The word *' manufacturer " was extended to include •* maltsters, 
distillers, brewers, refiners and producers of petroleum, tanners, 
curers, packers, canners of meat, pork, fish, fruit, or vegetables, 
and any person who produces by hand, art, process or mechani- 
cal means any goods, wares or merchandise." {§ 2. (/).) 

The new clause made it possible to dispense with the legal 
fiction by which the bank was allowed to lend directly on the 
security of goods by taking a warehouse receipt or bill of lading 
therefor from any person engaged in the ostensible business of 
keeper of a yard, cove, wharf, or harbor, or of warehouseman, mil- 
ler, sawmiller, maltster, manufacturer of timber, wharfinger, mas- 
ter of a vessel or other carrier by land or by water, or by both, 
curer or packer of meat, tanner, dealer in wool, or purchaser of 
agricultural produce, even though the grantor of the document 
was the owner of the goods. Provision for making such advances 
directly was now supplied by § 74, without the rather clumsy 
device of dividing the borrower into two persons in order to his 
concluding a transaction with himself. Henceforth, persons 
owning the goods could not grant a warehouse receipt or bill of 
lading for them. The acquisition and holding of the warehouse 
receipt, bill of lading, or the security above described, are for- 
bidden the bank, unless the debt which these secured is negotia- 
ted at the same time as they are taken, or upon the written 
promise that such security will be given the bank. Renewals 
of loans thus made can be granted without affecting the security. 
The bank may surrender a warehouse receipt for a bill of lading, 
and vice versa ; it retains the prior lien over the unpaid vendor ; 
it may sell the goods on non-payment of the debt without the 
consent of the pledgor, but must dispose of them at public 
auction, after due advertisement, and in the case of timber or 
lumber, must give thirty days' notice of the sale, by registered 
letter to the pledgor, and in case of other goods, etc., ten days' 
notice. The penalties for misdemeanor and not more than two 
years' imprisonment, are established for giving false receipts, etc.; 



The Revision of 1890 



266 



for alienation of the goods described in the instrument, by the 
bailee, before the debt is paid and without the consent of the bank 
given in writing ; or for withholding from the bank possession of 
the goods after default has occurred in payment. 

We have here the last stage of a development outlined in 
Parliament, thus : 

(a) only the bailee gives a warehouse receipt ; 

(6) warehouseman gives a receipt for his own goods ; 

(c) abatement of the requirement that the grantor of the 
receipt should be a warehouseman.^ The new principle was 
defended by Sir John Thompson as a measure for the conveni- 
ence of manufacturers and producers, and the security of the 
banks. It was calculated to enable those carrying large stocks 
m course of manufacture to get the support of the banks on the 
same terms as are made to other applicants for unexceptionable 
advances. 

As first brought down, the bill authorized the bank to loan 
on the security given by any person engaged in business as a 
wholesale manufacturer or producer of goods, wares and mer- 
chandise. The expression " producer" was criticized as includ- 
ing the farmers, whose general credit with merchants and others 
rests largely on the visible possession of certain personal 
property, — such chattels as grain, cattle, and implements. An 
assignment of these according to the form prescribed by the Act, 
would not, like a chattel mortgage, become notorious, and the 
basis of the farmer's credit would be badly impaired, no creditor 
being able to know whether the ownership of property is in the 
person whom he is asked to trust, or in some bank. Many 
farmers, moreover, wish not to borrow on the personal security, 
but to retain and use it as a basis for credit in ordinary trans- 
actions. The security afforded to the bank would be partly 
fictitious, for between a bank and a farmer there are almost no 
such opportunities to watch the proceedings of a debtor, to 
enjoy his confidence, and to meet him in daily transactions, as 
there are between a bank and a manufacturer, miller or produce 



1 Debates, 1890, pp. 4,279 et seq., Remarks of Mr. Blake. 



i 1 



1 


■' ! 


1 


|:: 


1 


i\ 


1 


I 


I 


I; 


;"i\ 


vi 




■ 1 
• 1 




■' i 



260 



The Canadian Banking System^ 1817-1890 






i 



I i>l t - 






I; 



If 



shipper. As the Government had no intention of including 
farmers, the objectionable phrase was expunged.' 

The debate aroused some of the champions of the farming 
interests against private money-lenders, and the expense of bor- 
rowing on mortgage, but they were well answered by Mr. Blake : 

" You have had the proposition for a land bank, the proposition for a 
farmers' bank, the proposition for a National currency based upon land or 
irredeemable currency, you have had numerous proposals to help the farming 
community to cheap and easy money, but the conditions upon which cheap 
and easy money are to be obtained are absolutely opposed to the principles 
which, in regard to the production and manufacture of goods, are found to be 
sustained by this House and by this country, at the present day. • • » » 
The moment the farmer can show that he can give the same prospect of a 
return, with the same advantage, with the same security that other competi- 
tors for the stock of available money can give, he will get all the money he 
wants ; and to the extent he cannot show that, he never will get it."« 

VIII. In the work of revising and consolidating the Bank 

Act, and in putting into statute form as much as possible of the 

common law on the question, a number of slighter changes were 

made. Among the new features of the Act, one finds that each 

director of the bank shall hold paid-up stock to the amount of 

$3,000 when the paid-up capital of bank is $1,000,000 or less. 
4,000 " '' " " between $1,000,000 and $3,000,000 

5,000 " " •• " over $3,ooo,ooo. 

In deference to the convenience of banks near the north-eastern 
frontier of the United States, only a majority of the directors of 
a bank were required to be British subjects. Its shareholders 
were permitted to increase or decrease the stock of the bank by 
by-law passed in general meeting, provided that no such by-law 
should come into effect until approved by the Treasury Board. 
The amount at which the rest must stand before division of pro- 
fits exceeding 8 per cent, per annum are allowable, was raised 
from 20 to 30 per cent, of the paid-in capital stock. The privi- 
leged lien enjoyed by the bank on shares of its stock held by 
debtors was retained ; in case of default, the bank was com- 
manded to sell the shares, after notice, within twelve months after 



I 






» Ibid 4,27Q, 4,308, Sir J. Thompson, Sir D. A. Smith, Sir R. J. Cartwright, and 
Messrs. Blake, Kirkpatrick, Sproule, Landerkin, Daly, Watson, Waldie and Mitchell. 

» Ibid, p. 4,295. 



The Revision of 1890 



267 



the debt is accrued and become payable. The entire exemption 
from all penalties upon usury was retained, and the banks 
allowed to take in advance any rate of interest up to seven per 
cert. A highci rate is not forbidden, though it is not recover- 
able. The liability of banks to repay moneys deposited with 
them, and to pay dividends declared and payable on its capital 
stock, was declared to continue, notwithstanding the statute of 
limitations. The liability of the transferor was made to con- 
tinue, saving his recourse against the transferee, on all shares 
in the bank, the transfer of which is registered within sixty days 
of the bank's suspension. The former period was thirty days. 
Besides the monthly return, banks are obliged to make special 
returns whenever called on so to do, and to furnish an annual 
list, duly certified, of their shareholders, places of their residence 
and amount of stock held by each. The making of false 
returns or wilful concurrence therein is an offence against the 
Bank Act. The use of the titles " Bank," " Banking House," 
etc., without authority under the Bank Act, was made an offence 
against it, whether or no the expression " Not Incorporated" is 
added. Persons committing an offence against the Bank Act 
are liable to a fine, not exceeding $1,000, or imprisonment not 
exceeding five years, or both. Finally, the penalties against 
circulation in excess of paid-up capital were increased in 
severity. To the absolute consideration of making them more 
effective was added the necessity of protecting the contributors 
to the fund guaranteeing the bank note currency. For issue 
exceeding the amount of the paid-up capital by not more than 
$1,000, the fine imposed is equal to the amount of the excess. 
Where issues exceed the amount of paid-up capital by 

$ 1,000 to $ 20,000 the fine is $ 1,000; 
for excess between 20,000 and 100,000 " 10,000; 

'* " 100,000 " 200,000 " 50,000; 

" over 200,000 " 100,000. 

The reforms adopted by the Canadian Parliament in the 
session of 1890, and embodied in the "Act respecting Banks and 
Banking" (53 Vic, cap. 31), are the last Canadian legislation 
with which our historical study is concerned. This forms the 
present banking law of the Dominion, common and uniform for 

19 



iffn 



268 



if 






ij'! 



ill 



The Canadian Banking System, 1817-1890 



every province from Prince Edward Island to British Columbia. 
The corporate lives of the thirty-six banks working under Can- 
adian charters, were continued by the Act of 1890 to the ist 
July, 1901 ; means were provided for bringing the Merchants' 
Bank of Prince Edward Island under its operation, the special 
features of La Banque du Peuple were again confirmed, and the 
two banks workmg under Royal Charter, the Bank of British 
North America and the Bank of British Columbia, were given 
the same privileges, and subjected, with but few exception^,, to 
the same restrictions and duties as their competitors of cis-at- 
lantic origin. From the last and in some respects the most sig- 
nificant of a long series of statutes dealing with banking, we may 
properly turn to a brief review of the leading facts to tracing 
which these pages have been devoted. ' 



4 ill 



§ 53. — SUMMARY AND REVIEW 

I. Three facts have usually appeared as precedent to the 
incorporations granted by the Legislatures of the British North 
American Colonies to joint-stork banking companies ; the lack 
of a satisfactory circulating medium, the enterprise of private 
capitalists, and the desire of the Legislature to facilitate assist- 
ance to the commerce and agriculture carried on by their con- 
stituents. The banks thus chartered secured the right to per- 
form, withm the Legislature's jurisdiction, all the functions 
pertaining to bankmg in its full and free development, and to 
carry on their business with very few restrictions. As in the 
legislation which first governed the'.n, British precedents were 
followed, so their practical banking was a copy in many respects 
of British banking — Scotch examples being specially affected 
in Lower Canada. And as in Scotch banking, the simple prin- 
ciple of paying debts in specie on demand, enforced by mutual 
competition of the banks, and sanctioned as it was by the capi- 
tal punishment of charter forfeiture, proved a conserving factor 
of great power, little noticed by the public, no doubt, but con- 
stant and relentless in its operation. Down to 1850, if we except 
the season of banking agitatic.i in Upper Canada preceding the 
crisis of 1837, there seems to have been very little original. , 



If' u 



The Revision of 1890 



269 



among the colonists in regard to their banks. A new charter 
was granted from time to time, and the old ones renewed, but 
the new restrictions embodied in the legislation were of British 
origin, opposed in most cases by Legislatures as well as the 
banks, and adopted only after peremptory instructions from the 
Colonial Office in Downing street. It was through these 
authorities also that the antidote was provided for the leading 
example of perverted activity in currency regulation and the 
establishment of banks — the Upper Canada banking mania of 
1833 to 1837. 

In 1850, however, hard times, one or two persevering agi- 
tators, and about the same number of self-confident theorists, 
induced the law makers of Canada to try a system of banking 
quite alien in principles to those by which the eight existing 
banks were governed, and performed their functions. The effort 
was proven hopeless in four years, the plan having lost on its 
faults. The Legislature gave up the new and returned to the 
old lines in the provision then made for increasing the number 
of banks. At the same time the Provincial Governuient 
enlarged on the policy of exploiting the banks, begun by the cir- 
culation tax of 1 84 1, by requiring new banks, and those whose 
capitals were increased, to invest a part of their capital in 
debentures of the province. The earliest real reforms of un- 
questionably Canadian invention are met in 1859, when the first 
measures respecting warehouse receipts were passed at the sug- 
gestion of the banks. On three occasions the character of the 
currency was menaced by change; in 1841, when Lord Syden- 
ham's prop«.,3aIs for a bank of issue were overcome largely 
through the influence of the vested interests ; in i860, when the 
maiden effort of Sir A. T. Gait at currency regulation was pre- 
sented, but was rejected for its preposterous nature ; in 1866, 
when their friends and the friends of sound policy successfully 
resisted that part of the same Minister's project by which the 
banks were to be deprived of the right to issue their own notes. 
The local Legislatures passed the laws, that is understood, 
but we may say — without, however, that minute inquiry into 
causes which may prompt criticism for a priori speculation — 
that for the body of legislative restrictions under which Canadian 



f 



PI 



t 



270 



The Canadian Banking System, i8i 7-1890 






banks were working in 1867, British precedent (by that is meant 
Scotch as well as English), and Imperial regulation were chiefly 
responsible. The same remark applies with almost equal force 
to Nova Scotia and New Brunswick bank charters. 

F. hatever of soundness or of weakness there was in their 
practic .16 banks, of course, had to praise or blame themselves 
and the conditions where they worked. Those conditions were 
such that men thought the development of the country, the 
opening of its resources, the first, practically, of all economic 
considerations. Toward these, the Canadian banks rendered 
yeoni m service, increasing their capital, and extending their 
field of operation as fast, probably, as the growth of the country 
warranted. The great Bank of British North America, which 
had entered all the provinces in 1837, rendered incalculable 
benefit to colonial development by liberal administration of the 
one million pounds sterhng which formed its capital ; to colonial 
banking by the conservative character of its management, and 
by the sound banking traditions brought by its officers from the 
schools of their training, the Scotch and English banks. In 
1869 the chief offices of eleven Canadian banks were filled by 
sometime employes of the Bank of British North America. The 
practice of commercial banking, to which the Bank of Montreal 
had steadily adhered, was not without its influence. It was a 
simple principle, bat usually trustworthy, viz., to require that 
the paper on which loans are granted shall represent an ex- 
change of commodities, or an increase of commodities. At the 
last, because, perhaps, it is chief, must be named the fruits of 
over forty years of local experience The British North American 
banks displayed extraordinary stability through the commercial 
crises and financial panics, which left such serious traces in the 
United States;, but they met their losses^ and the warnings of 
1837-39, 1848 50, 1857-59 were all for the safe and prudent con- 
duct of business. 

The one bank in Cana la, which, relying in the prestige of 
its name and its connection with the Government, followed in 
the midst of the competition of 1856, the same policy as in the 
days when alone, autocratic, and all powerful, it dispensed 
accommodation to Upper Canadian gentry, land speculators. 



The Revision of 1890 



271 



and British factors, soon met its just fate, And subsequent 
years brought retribution or misfortune to others, so that of the 
eight banks in Canada in 1851, only four remain ; of the five in 
New Brunswick, three are left. But we should add that it was 
the shareholders who suffered. In examining the question of 
the security offered by Canadian banks, it has appeared that, 
since Confederation, the total loss of principal ultimately suffered 
by creditors of banks working under Dominion legislation, has 
been less than $2,000,000. The record for the years preceding 
1867 is hardly less admirable, there being no failures in Nova 
Scotia or Lower Canada, while in New Brunswick the double 
liability of shareholders saved the banks' creditors, and in Upper 
Canada the failure of the Bank of Upper Canada was the only 
one which inflicted considerable loss. 

The efficiency of the banks during this period, their services 
to the country, have received about all the positive description 
that the subject permits. An opinion might be reached by con- 
sidering the friction with which their operations were carried on, 
much as the security afforded is estimated by the loss inflicted, 
but for this opinion there can be no exact expression. Spread 
over so lovrr a period, the study might become a justification of 
banks. vith the ethics of the question, we are not concerned ; 
for us it is sufficient that banks are established in almost 
every community where there is accumulation, commerce and 
credit. The fact that they get business and pay profits, indi- 
cates the need for their services, and their value. In the next 
chapter, moreover, the important aspects of the question of 
efficiency ought to appear in an examination of the character- 
istics, practical working and possibilities of the Canadian bank- 
ing system as it is now established. 

II. In reviewing the history of banking legislation since 
Confederation, an American is at once impressed by the free- 
dom from partisan purposes or sectional feeling displayed in 
the treatment of banking questions. Without that freedom, it 
would have been difficult fairly to weigh the evidence collected 
by the committees of 1867-69, and the discussion carried on in all 
parts of the country. Without it, it w<)uld have been difficult also 
to defeat the dangerous and reactionary proposals of the Gov- 



272 



The Canadian Banking System, 1 817- 1890 



eminent in which Sir John Rose was Minister of Finance. 
Theirs was a strong party, and had the party discipHne been 
perfect, it would have carried the Minister's measures through 
to the statute book. Three other forces appear to have had a 
beneficial influence. 

(a) Competition has quickly exposed weak, careless or un- 
trustworthy management ; it has hastened the withdrawal or 
loss of imprudently invested capital ; it has made the conditions 
of success more severe, and so has immensely increased the 
necessity for vigilance, caution and care. Especially through 
the requirement of daily settlements has the stake depending on 
the constantly liquid character of a bank's assets been inde- 
finitely raised, {b) The salutary effect of competition has been 
aided by the trenchant criticism which the increasing clearness 
and fulness of the monthly return has facilitated, criticism by 
each banker upon the others, and by the public upon them all. 
Public opinion, moreover, has been extremely sensitive to the 
defects that bank failures have exposed in the established 
system of safeguards. And after such events as those in which 
the Mechanics* Bank or the Central and London Banks figured, 
public demands for reform have been prompt, general and em- 
phatic, (c) The third force is in the action of the bankers, par- 
ticularly at the time of the Bank Act revisions. They, appar- 
ently, have been influenced by appreciation of their own 
privileges, remembrance of certain painful but beneficial 
experiences in tir.ies of depression and trouble, and a desire to 
remove from the banking system the causes of popular dissatis- 
faction. Their own suggestions in the direction of improve- 
ment, and the reasons they gave for keeping the important 
features of the bank charters and banking system in force 
when the Confederation began, have been described at some 
length. The united efforts of the bankers as individuals, and as 
representatives of their customers and shareholders, have cer- 
tainly been productive of some results. Their services will be 
esteemed according as one approves the banking system which 
they have helped to preserve. 

We cannot rightly conclude as to the attitude of Parliament 
towards Canadian banking in its national period from the 



u\ 



The Revision of 1890 



27S 



debates alone, or from the numerous projects that have been sup- 
ported at different times in the House of Commons. As the 
statesman is judged, not by what he says, but by what he does, 
so, to a great extent, must we conclude as to Parliament. Its 
action was satisfactorily described by Mr. Foster in i8go : •* It 
seems to have been the purpose of Parliament not to interfere 
violently with what we may call the natural growth of the bank- 
ing system in this country." " It also appeared to be the desire of 
Parliament to hedge around the banking system which then 
prevailed by severer conditions of charter, by regulations which 
should be especially restrictive upon the dealings of banks, 
especially with their own stock, and with the stock of other 
banks, to foster the laying by of reserve capital, and by a 
judicious requirement of returns, to perfect the system and ren- 
der it as .^afe as possible without interfering voluntarily with the 
general principles upon which banks had been operated from the 
earlier time."^ 

One of the strongest contrasts which this whole record pre- 
sents to such a history of banking as that of the United States, 
is in the continuity of the progress. There has been no recur- 
ring struggle to establish a great Government bank, no epidemic 
of wild-cat banking, no rejection of one system for experiment 
with another. A certain continuity, without doubt, can be dis- 
covered in the history of any banking system. Men do not 
wholly break with the past, or build on foundations entirely new. 
But down to the present day, Canadians have always held to 
the plan on which were framed the statutes governing their first 
banks. Additions have been made, new safeguards against 
public loss introduced, limits restraining corporate activity have 
been narrowed in some parts and widened in others, a few 
arrangements for the advantage of the Government have been 
attached, but never has there been a successful attempt to tear 
down the fair work of the first builders and out of the ruins con- 
struct anew. When defects have appeared in its structure, 
Canadians have not forthwith condemned the heritage of the 
past, and petulantly, illogically swept it away to make room for 



11 



ll 



i It- 



1 Debates, ut supra 1890, pp. 2,233 et uq, 



I 



11 

I 



274 



The Canadian Banking System, 1 817- 1890 



some new, untried aiFair, arranged on different lines ; after study 
of the trouble they have endeavored by some slight strengthen- 
ing, some little alteration, to keep and enhance the certain 
benefits of what they already possessed. The present Bank 
Act is unquestionably better, more careful, more strongly and 
scientifically drawn than any previous legislation, the banking 
practice is more sound — the steady improvement, save with 
respect to investors' profits, is hardly less remarkable than the 
continuity discernible in its development — yet the economic 
character of the functions permitted the banks, and the methods 
of their fulfilment, are the same under the Dominion system of 
1890, as under the Provincial charters of 182 1. 



CHAPTER X 



ON THE PRESENT WORKING OF THE SYSTEM 



J. 



In following the course of banking legislation in Canada, it 
has been necessary to give only such occasional reference to 
questions of banking history and the economic history with which 
it is interwoven, as was essential to an understanding of the 
main object of the inquiry. The fourth part of a complete study, 
so far as it relates to existing conditions, will form the theme 
of this chapter; It is proposed now to look at the Canadian 
banking system in its present development, to examine some of 
the principles of its organization and consider certain of its prac- 
tical workings. 



iJi 



§ 54. — CHARACTERIZATION OF THE SYSTEM 



The group of thirty-eight joint-stock corporations chartered 
by the Parliament of Canada and now in operation, may be de- 
scribed as a decentralized system of relatively large, joint-stock, 
commercial and industrial banks, privately owned and managed, 
but working i. nder a uniform law, and subject to the supervision 
and discipline of the Dominion Government. They have the 
power to establish branches. They have the privilege, exclusive 
as against individuals and other corporations, of issuing promis- 
sory notes in denominations of $5 and multiples thereof, for circu- 
lation as money ; but they issue them subject to the prior lieii of 
the note holder against the whole of the bank's assets, and the 
double liability of its shareholders, and under special restrictions 
as to the immediate and ultimate payment of the notes and their 
redemption at par at various points throughout the country. 
They have the usual powerij to carry on business in discount, 

20 



276 



The Canadian Banking System, 1 817- 1890 




deposit, exchange, other negotiable securities, coin and bullion. 
They are given wide privileges in the matter of loaning upon 
the security of commodities in process of manufacture, in store, 
on the way to market, or passing into, out of, or through the 
country by land, rail or water ; they may loan upon the collat- 
eral security of the bonds, stocks and debentures of municipal 
and other corporations, or public securities of any description ; 
but they may not loan upon the security of stock of their own 
or any other Canadian bank, or of real estate or mortgages or of 
completed ships. 

Their joint and transferable stocks, and the limited liability 
of invesiors in these corporations, have an obvious explanation. 
Without them it would be impossible to secure the capitals on 
which the banks are grounded. As it is, their capital comes 
from all parts of the British dominion, the stock lists showing 
that some is held at the very antipodes, in India, the Cape 
Colony, and Australia, as well as in Great Britain. That each 
bank is chartered was partly due, originally, to the desire of 
proprietors to secure the limitation of their liability for the debts 
of the bank to the amount of their subscriptions merely. The 
liabiHly was extended, as we have seen, to twice the amount of 
subscribed shares, in compliance with Imperial regulations re- 
specting Colonial banks, and the requirement was afterwards 
modified and improved under Confederation as a safeguard for 
their general creditors. Where the shareholders are exempt 
from the additional liability, as in the case of the Bank of British 
North America and the French Bank en commandite (princi- 
pal partners liable to an unlimited extent, commanditaires to 
the amount of their subscriptions only), the precaution is taken 
of requiring that note issue in excess of 75 per cent, of the unim- 
paired paid capital shall be covered by debentures or money 
deposited with the Dominion Government. 

That each bank must be separately chartered, though all 
are subject to the same general Bank Act, is due partly to the 
historical tendencies in Canadian legislation with respect to 
banks, partly to "-^^ principle generally followed by English 
Governments, to restrict the issue of notes, intended to circu- 
late as money, to those to whom the power is expressly con- 
firmed. We have inquired into the origin of this power of 



On the Present Working of the System 



277 



Canadian Governments, and found that, rather than from the 
Mint prerogative, it is probably derived from the general powers 
of supervision and regulation exercised by the State, and tht 
conditions which Parliaments have been able to exact in return 
for the concessions desired by bank promoters. In Canadian 
law, all companies established under Dominion legislation are 
incorporated by special charter, although in some cases the 
charters of a group of similar corporations are continued by a 
general Act applying to the whole group. The disposal of 
bank charters has never been marked by the fraud or partizan- 
ship which make the record of some of the American common- 
wealths so discreditable in this respect, and caused the people 
of others also to forbid to their legislatures the establishment of 
banks of issue, ^ to require referendum of the question at the 
next general election,* or to make all but adaptations of " free 
banking," to regulate the note issue, unconstitutional.* Yet char- 
ters have been easily obtained, too easily obtained. Since Con- 
federation forty-four charters have been granted, and only five 
proposed charters reported on adversely by the Commit- 
tees on private bills. Twenty of the forty-four have been for- 
feited for non-user. Moreover, the authorized banking capital 
of Canada has never been fully subscribed during the last 
twenty-seven years, or entirely paid-up. Any new bank may 
now be chartered so soon as the projectors convince the disinter- 
ested committee of Ministers and heads of departments known 
as the Treasury Board, that their intentions are honest and that 
they have financial backing. A favorable report by the Treasury 
Board or the House Committee on Banking and Currency 
makes the bill a Government measure and ensures its passing. 
The Canadian banks have enjoyed no monopoly against the 
entrance of new competitors bond fide into banking, nor have 
the shareholders profited from investments in stocks which 
others might not obtain. That it has been difficult for enter- 
prising but needy speculators to start a " bank " in order to 



ii'~ 



I Arkansas, California, Oregon, Nevada, Texas and Washington. 

a Illinois, Missouri, Iowa, Kansas, Micbigan and Wisconsin, 

a New York, Pennsylvania, Indiana, Illinois, Michigan, Iowa, Kansas, North and 
South Dakota. ( /. John De Witt Warner, "Ten per cent, tax on State bank notes," 
Speech In the House of Representatives, 2nd June, 1894, Washington, pp, 36, 38. 



[i i 

It ii 

I ■ 

ill 
lit 

|i El' 



278 



The Canadian Banking System, i8 17- 1890 



borrow the money of others for their own purposes, or that 
investors have gained from the increased prosperity and im- 
proved business which time and wise management brought to 
the bank they helped to start, are two facts resembling the 
effects of exclusive privileges, to which probably no one will 
object. 

The " commercial and industrial" characteristics of the 
chartered banks are the result as well of the restrictions in the 
statutes governing them, as of the traditions of Scotch and Eng- 
lish commercial banking, which were early brought over to 
Canada and eventually became well established principles of 
Canadian banking practice. 

The early charters limited the value of real estate which 
the banks might hold, and ever since the law has forbidden banks 
to engage in trade or to take mortgages or lands except as ad- 
ditional security for debts previously contracted. In the sense 
in which I shall use it, industrial will also connote what is some- 
times expressed as agricultural. The Canadian banks are 
agricultural quite as much as they are commercial, but their 
loaning to farmers is ordinarily conditioned by the prospect of an 
increase of commodities upon which it will be possible to realize 
soon, or of such sales as result in speedy returns. In land bank- 
ing the chartered banks do not engage. The ultimate reason, of 
course, is in the necessity for banks of issue and deposit to invest 
their funds only in easily and quickly convertible securities. 
The best form of such assets are producers' and traders' notes 
and bills of exchange, given for loans of circulating capital, 
wherewith to assist production, facilitate exchange and anticipate 
returns. Another cause is the differentiation of credit institutions. 
There are obvious advantages to all concerned in leaving land 
banking to the specialized skill and experience of loan companies 
and building societies. 

§ 55. — THE PRINCIPLE OF LARGE BANKS 

The Canadian banks are few in number, but as individuals 
their establishments are many, their business and capitals large. 
In the United States, which has a population something over 
thirteen times as numerous as that of Canada, there are in 



On the Present Working of the System 



279 



operation about 3,796 banks of the National system alone, ^ that 
is to say, one hundred times as many banks as in Canada. 
Their average paid-up capital is only $143,648; that of the 
Canadian hanks, !^i,6i9,986, or twelve times (11. 9) as large; 
their total capital is $545,288,782, not quite nine times that of 
the Canadian banks on the 30th June, 1894, $61,559,473. 

The figures will indicate the meaning of large as used in 
this connection. The adjective adopted applies particularly to 
the banks domiciled in Ontario and Quebec. The twenty-four 
corporations whose Head offices are in these provinces have a 
total authoriiied capital of $56,716,666, of which $52,389,417 are 
paid-in. '-' Seven of these, five being French banks in the Pro- 
vince of Quebec, have capitals of less than a million dollars, and 
of the French banks, four have less than $500,000. Of the 
larger banks, four have capitals of more than four and a half 
millions and a total of $28,866,666; eight, between $1,400,000 
and $2,500,000 and a total of $14,441,023; and five between 
$1,000,000 and $1,250,000, with a total of $5,850,000. Nova 
Scotia has two banks capitalized for more than a million, the 
sum of the two being $2,600,000 ; three foi $500,000 and over, 
total, $1,700,000, and three for $260,000 to $300,000, total 
$809,788. The three banks domiciled in New Brunswick have 
a total capital of $880,000 ; the one in British Columbia, $2,920,- 
000, and the two in Prince Edward Island, $247,388. Twenty 
of the thirty banks in operation the ist January, 1894, controlled 
$54,677,689, i.e., 88.67 P^'^ cent, of the total banking capital of 
the Dominion, then $61,546,593. The eighteen smaller banks 
are partly due to incorporation of the small local institutions of 
the Maritime Provinces with the system of the Dominion after 
Confederation, partly to the demand for banks of a local char- 
acter, strengthened as it has been by municipal pride and ambi- 
tion, partly to the endeavors, which those who made them 
would doubtless call patriotic, to establish banks in the Pro- 
vince of Quebec, owned and officered by persons of French 
blood, and finally to the energy, but rather qualified success, of 



1 Report of the Comptroller of the Currency, 4th December, 1893, Washington, 1893, 

p. 72. 

2 The statistics are from "jReport of the Chartered Banks, etc.," for the month ending 
the 31st December, 1893, and are for the last business day of that month. 



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280 



The Canadian Banking System, 1817-1890 



I'l 



certain ambitious persons in starting and carrying on a bank 
under their own direction and management. 

In the main, therefore, the system is one of a small number 
of large banks. The increased capital requirement of the Act of 
i8go is a legal step in the direction of making the organization 
of new banks more difficult. No new bank has entered the 
field since 1885. Investors prefer the stock of the older banks 
that have the advantages of large rests, wide connections and 
firm public confidence. Of the fourteen banks chartered in 1883 
to 1893 inclusive, only five could comply with the requirements 
of the Bank Act and actually began business ; three of the five 
have already been put in liquidation, two in 1887 ^"^ ^^^ i" 
1893. It miy be expecteti that hereafter both people and Par- 
liament will be disposed closely to scrutinizeapplications for new 
charters. The enthusiasm for new banks prevailing in the fifties, 
the early seventies and in 1882- 1886, has abated. Compared to 
accumulations and the supply of loanable capital, there is less 
intense demand for it. Security and the motives of the depositor 
ar.; now weighty considerations. Assistance to production and 
the development of the country's resources have lost their former 
predominant importa ce. The tendency of the number of banks 
to remain stationary, or even to diminish, so pronounced in 
English and Scotch banking, is thought a factor of considerable 
influence in the present Canadian situation. If the existing 
banks keep pace with the development of the country by placing 
branches in the new and growing districts, it is highly probable 
that in the future increased needs for banking capital will be 
supplied through them ; that banking extension will be chiefly 
effected by additions to the capital stocks already established, 
rather than by the formation of new ones. ' ^ , 

The almost absolutecertaintyofsuch a development is, on the 
whole, reassuring. As banks grow older they usually gain in 
strength and stability. Eight of the ten failures since 1867 have 
been of lately organized banks ; only one had had a life of fifteen 
years, one of nine, another of eight, three of four years and one 
of four months. The principle of large banks, furthermore, has 
been adopted by almost all the countries of Europe. It is exem- 
plified in the United Kingdom, as well by the Bank of England, 
as by the joint-stock and Irish and Scotch banks. It is, with- 



On the Present Working of the System 



281 



out doubt, necessarily connected with branch banking ; in 
Europe and England the plan of avoring large banks is usually 
combined with the establishment of ?4 single predominant central 
bank, enjoying |Special privileges and close relations with the 
Government, and in a greater or less degree under its manage- 
ment or control, in some countriv^.s, e.or., Russia, wholly owned 
by the State. In the continental sense the Canadian banks are 
not " large"; there is not la unite des banques, but la pliiralite 
(Vemission. There is no privileged bank, the monopoly feature 
is absent ; between the banks there is a constant competition. 
As Sir Francis Hincks phrased it, " they are all on the same 
footing." The Government stands ti)wards the banks in a 
supervisory, regulative, and if need be, disciplmary position. 
Supervision must not, however, be confused with the technical 
inspection or with the power to interfere with bank manage- 
ment and legitimate business. The only bases for Government 
action are the monthly returns, the special returns that may be 
called for, and the penal provisions of the Bank Act. Cana- 
dians have thought that the strict observance of this statute, 
and certain punishments for violating it, are best secured when 
Government is independent of the subjects of supervision and 
uninterested in their gains. There is then no National or Gov- 
ernment bank ; the Bank of Montreal is merely the depository 
of the Government, their bankers and fiscal agents. The 
banks are all privately owned and managed in the interests of 
their shareholders by officers whom the several boards of 
directors appoint. 

It is in connection with management that one finds a 
marked advantage in large banks. Organization and 
consolidation tend to increase efficiency, and lower the cost of 
individual services, as well in banking as in other activities. A 
large bank with large funds is able to spend whatever may be 
necessary to secure men well endowed with talents of manage- 
ment. Under their guidance, at the head, it can employ in the 
management of its branches men who, acting on their own re- 
spcnsibilities, e.g., as managers of local banks handling no 
greaier funds, might be unequal to their tasks. There is added 
efficiency at the centre, a saving in expense at the branches. 
And of this double gain a large part is not infrequently devoted to 



mt 

MW 



^ 



282 



The Canadian Banking System, 1817-1890 



further acquisition of marked banking ability, whereby still to 
increase the efficiency of the bank's organization, the safety of 
its business and the prchts which the other results will promote. 
Then again, the directorate of a large bank is more likely to con- 
tain a greater proportion of quite wealthy men than a small 
one, and these, presumably, are somewhat abler, as careful busi- 
ness financiers, than others with less tangible evidences of 
economic success. A large bank, finally, has access to a wide 
territory and a great variety of conditions in which to train its 
officers. By transfer from one branch to another they gain in 
experience and versatihty, are freed from local prejudice, acquire 
familiarity with the different kinds of customers and securities 
with which the diversified business of the bank is concerned, and 
present to the bank itself a wider choice of well known men 
from whom to select incumbents of its higher offices. ^ 

A second advantage of large banks is their great command 
of capital, their power to take whatever proper business may be 
offered them, their ability to accommodate their customers to 
any necessary amount. With this comes the practical pos- 
sibility of restricting a customer to one bank, of requiring that 
his banking account be kept with but one institution. Whatever 
advantage accrues from restricting the credits of manufacturers 
and merchants to the limits which bankers well acquainted with 
the financial position of their customers decide are safe, may be 
fully realized in a system of large banks. If the customer is 
dissatisfied with the regular line of credit granted to him, he 
may remove his account to another bank. A Canadian bor- 
rower who secures advances from two or more banks is regarded 
with suspicion and is likely to have his custom refused by some 
of them when his practices, as they must be, are discovered. 
Under a system of small banks, such as the National banks of 
the United States, the practice of banking with a single concern 
is often impossible. The legitimate needs of a single born*wer 
often exceed the funds at the disposal of local institutions, and 
should these be adequate, the National bank is forbidden to lend 
more than ten per cent, of its paid-up capital stock to any per- 
son, firm or corporation, except on bills of exchange and com- 
mercial paper owned by the borrowers. The National banks, 
9.ccordingly, are obliged in some cases to rediscount the com- 



Oh the Present Working of the System 



288 



mercial paper offered them, in others to submit to their custom- 
ers having more than one banker. A third escape is opened to 
the borrower in the possibility of forwarding his paper to some 
bill-broker in the nearest large city, or in New York, and getting 
it discounted there. In any case there is a complication added 
to the artificial structure of credit, and incompleteness in the 
knowledge which the lender should have of the debtor's position. 
In the first and last cases, an intermediate series of debtors and 
creditors may enter between the original borrower and the ulti- 
mate lender. This exaggerates the sensitiveness of credit by 
widening the area of interdependence, a result quite unnecessary 
in a system of large banks. 

Third, large banks have great stability and strength. The 
security they afford to note holders, depositors and other credi- 
tors is usually superior. The proportion of capital, rest and re- 
serve liability of shareholders to the bank's general liabilities is 
not necessarily greater than in the case of small banks. There 
is no reason why public confidence in the large institution, as 
expressed by note circulation and deposits, should be less, pro- 
portionately, than it is in the small bank. The liabilities of 
the Canadian banks to shareholders and public are about 4.94 
times their paid-in capital, those of the National banks 4.58 times 
their capital. The chances are, as English experience shows, 
that the larger bank will enjoy the greater business for each unit 
of capital foundation. Only one of the ten insolvent Canadian 
banks had a capital of over a million dollars. Four had capi- 
tals of $600,000 or less, and the other five capitals of less than 
$400,000. The comparison of 248 insolvent National banks out 
of the 4,930 organized with the ten insolvent Canadian banks 
out of 55 some time in operation since 1867, is no comparison 
at all. The thirty-eight surviving banks have over 500 differ- 
ent establishments, and to be fair, the comparison must be 
made between the number of establishments affected by insol- 
vency. With one exception the Canadian banks in question 
were small and their branches few in number. It is because the 
management of a large bank is presumably able, and their stake 
depending on care and caution so great, that the creditorsof a large 
bank enjoy a high degree of security. Every instinct of self pre- 
servation demands that unusual risks or speculative investments 



a: 'i i;' 



■ il 



284 



The Canadian Banking System, 1817-1890 



be avoided ; that safe rather than brilliant banking be the guiding 
policy. When losses are incurred, a large bank can bear and 
write off defaults that would definitely swamp a small bank. Take 
for example the occasions on which the Bank of Montreal, though 
not explicit as to the amounts, has acknowledged the loss of a 
million dollars, the time that the Merchants' Bank reduced its 
stock from nine million to six, or that the Ontario Bank wrote 
$1,500,000 from its capital, or again the reduction of $1,100,000 
on account of bad debts made in the rest of the Canadian Bank 
of Commerce in 1887. 

Lastly, public criticism, a valuable restraint in any system, 
is more acute and concentrated when banks are large. Confi- 
dence, as a condition precedent of banking development, should 
be well founded and reasonable. The monthly exposure of each 
bank's condition by the publication of its report to the Govern- 
ment has been required since 1854. The continued expansion 
of the Return by requirement of more thorough analysis and 
minute details is sufficient evidence of the benefits obtained 
from this device. To-day, not only the character of each bank's 
assets and debts, how many are secured by real estate, how 
many are overdue, etc., practically its exact condition, but also, 
in great measure, their relations to each other, may be ascer- 
tained from the " statement of banks acting under charter." 
The publicity makes Government supervision possible, and, in 
many cases, forms a difficult obstacle to violation of charter 
restrictions. Public, press and competitive banks are watchful 
critics of the Return, and conclusions reached by outside 
observers or the newspaper writers are given prompt and full 
expression each month. But where banks are small and many, 
the attention of the critics tends to be dissipated, their interest 
to be diminished. To concentrate criticism its objects must be 
few, and if the banks are few they must be large. 

A comparison of the banks of Canada and those of the 
United States in the respect just discussed would not, it is likely, 
be a very serious arraignment of the American plan. For the 
last sixty years at least, the American development, though its 
tendencies have been unique, seems to have been steadily on the 
lines of local, particularistic banking, the different parts of the 
monetary and credit organization being united, of course, through 



On the Present Working of the System 



285 



an intricate system of exchanges, the minor centres in the 
clearing house and redemption cities, and the great centre in the 
city of New York. The American National banks would 
suffer most from the comparison with respect to the command 
of funds and the power to accommodate customers pertaining 
to individuals of the system. They are not subject to such 
widespread or keen public criticism, but this is offset by the 
useful though sometimes misleading official inspection, a safe- 
guard which is practicable in any sense only where a bank is 
confined to one locality and office. Then, too, the creditors of 
most of the banks are chiefly local, and persons in other districts 
are comparativel)' uninterested in their condition. For stability, 
if that is to mean the continued solvency of all the banking 
offices of a system, and the continued power to protect solvent 
and worthy customers at critical moments, the Canadian banks 
have a somewhat better record. As to security, an exact com- 
paris )n on the basis of loss suffered by creditors is not possible. 
The affairs of 123 insolvent National banks are not yet finally 
closed.^ Even if the proportion borne by total loss of principal 
in thirty years to the total liabilities of the existing banks of the 
National system, should appear to be less than that borne by 
Canadian losses in the last twenty-seven years to the present 
liabilities of the Canadian banks to the public, the conclusion 
as to security would not be unreservedly in favor of American 
banking. Operation under State laws has usually been a 
resource for those who felt hampered by the severer conditions 
of the National Bank Act. In Canada, however, theconduct of 
joint-stock banking in all its branches is possible only under the 
legislation of the Dominion. A rather careful estimate, more- 
over, points to the probability that when ascertained, the pro- 
portion borne by loss suffered from banks under Federal laws 
is higher than that borne by the loss suffered from Canadian 
banks subject to the Bank Act.^ Another aspect of the question 



ril 



I* 



1 Comptroller's Report, 1893, pp. 206-213. 

» The proportion of approved claims against insolvent National banks which will 
never be paid, will not fall short, probably, of .'?25, 000,000 The liabilities of the National 
banks, less capital stock and surplus fund, were $2,284,272,164 on the 31st October, 1803. Our 
computation of Canadian losses since 186; was #1,922,000; the total liabilities of the banks to 
their creditors on the 31st December, 1893, $218,662,965. The percentage in the first case is 
1.094, in the second .874. 



286 



The Canadian Banking System, 1817-1890 



of stability comes to view in the fact that since 1837, there has 
been no general suspension of specie payments in Canada, or 
need for resorting to such devices as clearing house certificates, 
checks payable only through the clearing house, or the 
unauthorized issue of scrip. 

§ 56 — THE PRINCIPLE OF BRANCH BANKING 

For the purposes of this section, branch banking may be 
defined as the prosecution, under the control of the parent bank, 
and upon its general capital and means, of a business in banking 
credits, at offices established m places other than the domicile 
of the parent bank. It is most practicable and profitable when 
the parent bank is large, and when it enjoys the privilege of 
issuing notes upon its general credit, e.g., the Scotch banks, the 
Australian banks, the two Banks of the United States. The 
Canadian statutes which permit it, and the Canadian practice of 
using the power to establish branches, agree with the principal 
banking systems of Europe, of Great Britain, and the British 
colonies. Branch banking has been widely extended in Canada ; 
on the ist June, 1894, there were, exclusive of city branches, 465 
establishments of the chartered banks, in 259 different localities.^ 
The number of branches established by each bank varies some- 
what, according to its capital, the character of its business 
and the policy of its management. The Bank of Montreal has 
thirty-eight branches in Canada, and New York, Chicago and 
London offices ; the Bank of British Columbia has ten branches, 
of which four are in the United States. The Canadian Bank of 



I The territorial distribution of these branches is best indicated specifically : 



No. of Offices 

243 

82 

63 

31 

7 



Branches in 

Ontario 


Places 

134 

47 

^i 
i6 


Quebec 


Nova Scotia 


New Brunswick 


Mani toba 


8 


British Columbia 

Northwest Territory 


7 
6 


Prince Kdward Island 


■I 








259 



465 



The Banhir's Register, Chicago, i»94, pp. 346-355. 






m 



On the Present Working of the System 



287 



Commerce has fifty-one branches and an agency in New York ; 
the Merchants' Bank of Canada has thirty branches and a New 
York agency. The Bank of Nova Scotia has twenty-six estab- 
hshments in Canada, an agency in Chicago and another in King- 
ston, Jamaica. The Molsons' Bank has twenty-three branches; 
the Merchants' Bank of HaHfax and the Imperial Bank of Can- 
ada, each twenty-two agencies. Twenty-two of the banks have 
ten or more offices, eight but one each, and eight from two to 
nine offices. 

Certain advantages both to the Canadian public and to 
their banks of which branch banking is productive, may be sum- 
marized under the following heads. 

I. The collection and distribution of loanable capital from 
and to different parts of the country are accomplished at the 
minimum of expense an'^ with the maximum of thoroughness. 
When the instrument of both the services is a single organization 
such as a large bank with numerous branches, the task is better 
performed, it would seem, and certainly at less cost than when 
two or more banks are necessary to the same series of services, 
and each must be rewarded for its part. The same Canadian 
bank that collects capital from the older, accumulating districts 
in the form of deposits, transfers it to the centres of industry 
and commerce, or to those districts for whose development and 
activities more capital is needed ■ can be supplied from the 
local stock. The process of intelligv . "^ distribution is facilitated 
by the knowledge of local conditions had by the parent bank 
from the officers of its branches, and the consequent ability to 
loan when the demand is great, with the same safety as a local 
lender. Where the banks are merely local, the specialized 
knowledge frequently lacks the necessary funds. The banks of 
Massachusetts, e.g., may have hard work to find satisfactory 
investments at 4 per cent., while Colorado banks are offered 
more good discounts at 10 per cent, than they can take. The 
following table of the rates of discount on good paper in differ- 



*.,■•' ■%\ 
■ ■ '11 






III,: 



Iffil 



288 



The Canadian Banking System, 1817-1890 



ent parts of the United States at arbitrary dates in 1891, 1892, 
1893, is a further illustration : 

Rates of Discount charged on time loans in different cities in the United States during 
the weet< preceding the day on which they were reported in Bradstreet's : 



Boston 

Philadelphia .... 

Chicago 

St. Louis 

Detroit 

Kansas City .... 
New Orleans... 

St. Joseph 

Memphis 

Portland, Ore. , 

Galveston , 

Seattle 

Louisville 

Milwaukee 

Cincinnati 

Providence , 

Omaha 

Baltimore 

Pittsburg 

San Francisco 

St. Paul 

Houston 

Denver 



1890 
27th Sept. 



6 

U 



@ 7 
6 

@ 8 

(^. 8 

@ 7 

(Qi 10 

8 

@ 8 
8 



5^ 
6 



@7 
7 
6 

@ 6^ 
8 

@ 6 
@ 7 
7 
8 
8 



1891 



30th May I 2ist Nov. 



d 



@ 



8 

7 

8 
6 (0} 8 

8 (<«i ID 

8 



4 # 6 

6 
6 @ 8 



8 (S JO 



7 
6 

5 @ 
1% @ 



H 

@ t< 

& 7 

@ 8 



6 @ 7 
« 

8 ({5 10 

7 (ffi 8 



7 

6 

8 



C @7 
7 



1892 
i6th Apr. 17th Dec 



4 @ 6 
3ji & 5 

5 @ 6 

6 @ 8 



6 

4 @ 6 

8 
6 @ 7 



8 



7 
6 @ 7 

5 (^ 6 

6 @ 7 



6 
6 

4^ 



10 



# 7 

7 
(§ 8 

@ 8 
(S! 7 
7 
8 
& 
8 
(S5 
7 
7 



10 



12 



6 

8 

5% @ 

5 @ 

6 @ 
6 @ 

8 
10 



1893 



2jth Mar. 2nd Sept. 



6 



6 

6 

@ 
7 



6 @ 

6 # 
8 

8 @ 

7 (g 
10 @ 

7 
7 

6 @ 

6J^ 

8 

6 

6 

6 @ 
8 
8 
10 



7 C'l 8 

10 («' 12 

7 

6 (M 8 

7 

7 © 8 

8 @ 10 

7 
7 
8 



7 

10 @ 



8 
8 
10 
& 8 



@ 



12 

8 

7 

6 @ 8 

7 ifS 754 
8 

6 
6 (?) 7 

8 c". 10 
8 

8 
10 



Differences in the United States would probably be much 
greater were it not for the action of western banks as agents in 
placing loans for sister banks in the east ; between the rates in 
western towns of less importance and those in the financial cen- 
tres of the east, the differences are much greater than the above 
figures for the larger markets indicate. 

But the Canadian banks are not local ; their interests and 
their activity are bounded, not by the confines of a single town, 
but by the borders of an entire province or of the Dominion 
itself. They borrow capital where they can get it and loan it 
where it is needed. ** So perfectly is this distribution of capital 
made, that as between the highest class borrower in Montreal 
or Toronto, and the ordinary merchant in the Northwest, the 
difference in interest paid is not more than one to two per 
cent."^ On loans of equal security the interest charged will 
not vary one" per cent, the country over, whether the debt is 



1 B. E. Walker, "Banking in Canada," in J'owma/ of the Canadian Bankers' A isocia- 
tion, Vol. I., p. 18. 



wm 



On the Present Working of the System 



289 



ipital 



contracted in Halifax, Quebec, Hamilton, Calgary or Van- 
couver. 

This unqualified advantage may be summed up as a national 
equalization of the rate of interest through economies in the cost 
of transferring capital, and a highly effective system of arbitrage. 

n. Ample facilities are afforded to small towns, isolated 
borrowers and the country generally. For the purposes of good 
investment a branch has resources limited only by available 
funds of the great bank of which it is a part. The petroleum 
producers, the great wheat farmers in the Northwest, the distillers 
in small Ontario towns, or the packing houses and lumber firms 
in little New Brunswick villages, have, almost at their doors, 
agencies of the greatest banks in the Dominion, ready and able 
to advance on the security of unmarketed products or goods in 
course of manufacture, to buy their sterling exchange or to dis- 
count the pap&i arising from other transactions already concluded. 
Produce shippers have access to like conveniences, no matter, 
practically, how remote or unimportant the district in which 
they operate. No worthy industry, whatever its distance from the 
centres, need droop for lack of banking facilities. The agricul- 
tural districts are provided with places near at hand for the de- 
posit of their savings, and they are given liberal accommodation, 
at seed time, before harvest and whenever else there is a pros- 
pect that the use of the loan will provide the means for its pay- 
ment. The degree in which the description " agricultural" applies 
to Canadian banks is seldom noticed in accounts of the system, 
but it is increasing from year to year. In 1881, when there 
were only two less banks than now, the number of branches 
was 287.' In 1890 there were 444 branches, and 225 of these 
were in towns without the office of another chartered bank. 2 
Correct judgment, it is believed, will acknowledge from the Can- 
adian banks services to the agricultuial development of their 
country as great as those for which the Scotch banks have been 
universally esteemed. 

As from the first, there arises from this group of advantages 



m 






. I' 



"i ^^ 



I George Hague. "Banking in Canada," in Proceedings of the Convention of the 
Araeric&n Bankers' Association, New York, 1881, p. 99. 

^ « Garland, ut iupra, p. 35. 



290 



The Canadian Danking System, 1817-1890 



^i'': ill 



due largely to branch banking, a levelling of tlie rate of interest, 
and also increased economies of time in the transportation and 
marketing of goods. 

III. The risks of investment are distributed and varied, 
and the banks are more certain of regular profits. Unlike that 
of the National banks, their prosperity is not largely dependent 
upon the fortunes of single towns or sections. Nothing is more 
emphasized by Canadian bank managers than the inevitable 
condition of a bank's gain or loss, viz., the prosperity of its cus- 
tomers as a whole. Under the branch system, however, the 
losses, bad harvests, or depression in one part of a bank's terri- 
tory are set off against the good crops and more successful issue 
of the year's business in another. This, to a great extent, was 
the case with losses incurred by the banks with branches in 
Manitoba, after the Northwest boom collapsed in 1882, and 
dozens of other examples might be cited from the reports of 
shareholders' annual meetings. It may be objected that all this 
involves having too many irons in the fire, just as it may be said 
that in affording ample facility to the borrowers of his neighbor- 
hood a branch manager may exceed the limit of safety. But 
the first objection will not hold if the organization of the bank 
is thorough ; the second will be due to faults in judgment from 
which no man is sure to be free. Branch banking is still a case 
of not carrying all the eggs in one basket ; the gain in stability 
and the strength to survive local disasters is enormous. 

IV. The establishment of branches gives the parent bank 
opportunities to extend its note circulation. As circulation is 
issued as a general charge against assets, country banking 
thus makes possible a special addition to the credit loaning 
powers of the banks, which in so far economises material 
capital without loss of its beneficial effects. The banks gain 
further from the slightly higher rate of interest (an extra ^ to 
i^ per cent.), Sfccu ed from country customers, partly because 
of the technical inferiority of the security they offer, partly be- 
cause of the less severe competition in such localities. Yet, 
va.'uable as their services are to the community, many of the 
country offices jturn but slight profit. Many could not be kept 
up were it not for the increase of circulation which they promote 
and the possibility of saving interest on till-money by usin 



On the Present Working of the System 



291 



unissued notes for the purpose. These features of bank note 
issues like the Canadian will be discussed more fully in § 58. 

V. A fifth advantage lies in the centralization of bank man- 
agement, and nationalization, so to speak, of banking policy. 
I have called the Canadian system decentralized, because there 
is no enormous ceiUral bank domineering over all the others, 
and because there is competition, much of it, too, in every de- 
partment of banking. In another sense the banks are centred ; 
seven of them with capital of $14,560,958, have their head 
offices in Toronto ; eight, with capital of $27,756,266, in 
Montreal ; three banks with capital of $4,900,000 are domiciled 
in Quebec, and five, with stocks amounting to $4,300,000, 
have their head offices in Halifax. Twenty-three banks with 
a total capital of $51,517,224, are superintended from the four 
focusing points of Canadian commerce and finance. Their sup- 
erintendence, however, is not more concerned for the advantage 
of traders and producers in these localities than of those else- 
where. The business of the banks comes from every part of the 
country ; the obligation to *' take care of customers " is as 
strong in a lumber village of northern Ontario as in St. James 
street, Montreal. Here comes the nationalization of banking 
policy ; the interests and responsibilities of the banks are wide ; 
the measures they take at one time and another must be broad 
of purpose and generally beneficial to correspond. In times of 
stringency or impending panic they must heed the welfare of 
their province or of the entire country ; upon it depends their 
own. The branch system, moreover, prevents to a great degree 
the antagonism of interests in a panic or time of contraction 
between a great number of establishments, each selfishly intent 
on self-preservation, and anxious to store away all possible cash 
against the threatened day of trial. The reserves of branches 
are the reserves of parent banks ; the country offices have the 
same interests as the city establishments ; the branches, further, 
are subject to orders from the head offices at the centres. 
There may be hoarding, but reserves are not scattered through 
the country ; they are kept at the centres where the heaviest 
payments are eventually set off against each other. There is 
no parallel in Canadian experience to the American crisis of 
1893, and so far as that action at cross purposes by city and 



i. i|: 
I; r 






.1 



21 



Hi 



111 




Hi 



292 



The Canadian Banking System^ 1817-1890 



country banks which preceded the culmination of the difficulty 
is concerned, a parallel would be impossible. 

VI. Branch banking tends to promote more judicious and 
impartial administration of the lending powers of the bank than 
local banking. The confidential character of banking transac- 
tions is better secured. The manager of a branch, has ordinarily 
received his training in a variety of situations. He is likely to 
deal as a hanker with the clients of his branch and not to be 
exposed, not to be subject, to the influences of friendship, family 
ties and business connections; \\i all important questions he 
must consult his head office. Instead of having his affairs dis- 
cussed by his acquaintances, perhaps by bis competitors on the 
board of a local bank, the applicant for credit receives impartial 
treatment from the remote and disinterested general manager 
on the basis of his own and the branch manager's statements of 
the facts necessary to a decision. 

VII. The educative effect of this type of bank organization 
is not without importance. A certain improvement in the com- 
mercial habits of the people with whom the business is carried 
on is usually ascribed to the introduction of any sort of banking. 
They show greater promptness in discharging payments and 
other contracts, more careful calculation of business chances 
and stronger habits of thrift. The familiar example of the 
Scotch has been over-used perhaps, although their banking 
system seems peculiarly calculated to promote these results. 
What special benefits of this character the branch system favors 
have been touched upon in the preceding paragraph ; they are large- 
ly due to the excellent training of branch managers, their lack of 
prejudice and the possibility through them to bring close to the 
people the exact and thorough methods of the highest type of 
urban banking. Nearly every Canadian bank conducts a 
" savings department " as an important part of its mechanism 
for the collection of the spare capital of the country. They also 
pay interest on deposits, seldom on current balances of active 
accounts, but always practically on deposits which, being pay- 
able after notice or on a fixed day, are regarded by the makers 
in the light of investments. These deposits, on the 31st Decem- 
ber, 1893, were to deposits payable on demand as 1,078 to 625. 
By this means the inducements held out to thrift are immensely 



,1,:- 



On the Present Working of the System 



298 



strengthened, the depositing habit is cultivated, and both the 
country and the banks gain from the utiHzat'on of well nigh 
every dollar not required for the immediate purposes of the 



owners. ,. 



The principles of branch banking and of large banks, and 
the advantages to which they conduce, are not, as the reader 
has doubtless already complained, without their reverse side. 
But certain evils arising in a system of which they are charac- 
teristic have been noticed in the historical sketch of the preceding 
chapters. To realize the possibilities of the Canadian system, 
each bank must have a strong and thorough central organ- 
ization, able, cautious, and vigilant management, a trained 
and disciplined staff, rigid inspection by officers of the 
principal establishment, specially detailed for the purpose, 
and the purpose both to observe the Bank Act and otherwise to 
keep within the bounds of safe and legitimate banking. Where 
any of these are unduly deficient, the shareholders are sure to 
suffer loss, but through competition and other safeguards, it 
will become so soon apparent that, as a rule, the creditors of 
the bank will be saved from injury. 

Another caution may be ventured with regard to the atten- 
tion given to banking profits under the Canadian system. The 
apparent one-sidedness disappears when it is seen that the advan- 
tage of the banks is also, in the truest sense, the advantage of the 
pubHc. Ministers and legislators have often remarked, *' Banks 
are chartered for the benefit of the public." They find the real 
justification of their banking system, without doubt, in the effi- 
ciency with which it promotes that benefit, not in the success 
with which the banks amass gains for their shareholders. 
Banking in Canada, we must repeat, is no monopoly. To bring 
forward the services which banks afford, at least the normal 
return from enterprises of like difficulty and risks must be assured 
to investments in their stock. Whatever increases the security 
of banking investments and thus diminishes the premium for 
risk, whatever extends the fields from which the banks can re- 
ceive their profits, or increases the efficiency of capital by per- 
mitting a larger volume of credit to be based upon it, diminishes, 






p 






i 



294 



The Canadian Banking System, 1817-1890 



pro tanto, the cost of the individual services which the banks 
afford. The competition between Canadian banks is of the 
most free and active variety. The value of the bank's services, 
therefore, cannot rise above their cost, — the lowest return 
which will induce sufficient expenditure of capital and labor 
in the production of such services. That cost is expressed 
for the public by the rate of discount. Reduced cost 
means reduced rate of discount, and in this great respect, 
at all events, the interest of the banks and the interest of the 
public are one and the same. 

§ 57. — THE CANADIAN SYSTEM OF NOTE ISSUE 

i 

Each Canadian chartered bank has the power to issue its 
promissory notes, payable to bearer on demand, for circulation 
as money. The exercise of this power is restricted by no re- 
quirement to hold a minimum reserve against the notes issued, 
or to secure them by the pledge of definite assets ; but it is 
confined to the corporations to whom the power is expressly 
confirmed, and they may not issue in excess of their unimpaired 
paid-up capital stock. Except in so far as they are the first 
charge upon all the assets of an insolvent bank, the notes form 
a liability indistinguishable in its essence as a debt, from such 
other liabilities as deposits payable on demand. In one sense 
it is a matter of indifference to Canadian bankers whether their 
liabilities to the public are incurred by issuing notes, or giving 
book credits to their depositors. As Alexander Hamilton clearly 
proved, at almost the very inception of American banking, it is 
the interest on the securities purchased by his credit, that con- 
cerns the banker, not the particular form in which that credit 
is used.^ 

From the general economic and legal standpoint, these bank 
notes must be viewed as a part, and only a small part, of that 
vast volume of bills of exchange, cheques and other instruments 
of credit or evidences of rights to demand money, which are more 
and more used in convenient and economical substitution for 



1 Report on a National Bank, i3tb December, 1790. Clark and Hall, Legislative 
and Documentary History of the Bank of the United States, Washington, 1833, p. 16. C/. 
Dunbar, Chapters on the Theory and History of Banking, New York, 1891, p. 36. 



mm 



lit ^ 

If I 



anks 
; the 
aces, 
eturn 
labor 
essed 
cost 
spect, 
of the 



sue its 
ulation 
no re- 
issued, 
ut it is 
Lpressly 
-npaired 
:he first 
;es form 
)m such 
ne sense 
ler their 
,r giving 
n clearly 
ing, it is 
hat con- 
lat credit 

lese bank 
t, of that 
struments 
1 are more 
tution for 



X, Legi«lative 
832, p. 16. Cf 
.56. 



On the Present Working of the System 



295 



the coined precious metals as media of exchange. Bank notes 
are only one type of the devices by means of which modern 
commerce is becoming more directly the baiter of goods lor 
goods, and through which the use of money itself^ as a means 
of transferring value, is being constantly economized. When 
subject to no other regulation than that of the commercial law 
enforcing the obligation of which they form the evidence, the 
extent to which these various instruments of credit are issued or 
retired is dependent on the need for their issue ; in other words, 
the circulating medium which they compose is naturally elastic. 
The person who accepts them in satisfaction of a debt, does so 
at his own option, and, though protected in many cases by the 
continued liability of the transferor, at his own risk. Wherj 
bank notes are regarded merely as a liabiUty no different in 
substance from deposits, it is quite true that depositors seem to 
have a " claim (or equal consideration " with the note holders. 
At all events, there is no reason why that part of the circulating 
medium composed of notes should be less elastic than that 
based on deposits, and given form as cheques. 

A high American authority has said that legislators have 
generally failed to perceive the similarity of the two kinds of 
liability ; that the appropriate measures for the protection of 
note-holders are more obvious, and of easier application; and 
that depositors, as a rule, are better informed, can more easily 
protect themselves, and so have less claim on the guardianship 
of the legislature. 2 I apprehend, however, that the real reason 
lies deeper. Of all the substitutes for money, bank notes are 
the nearest like money. They are transferred by delivery 
merely, they pass from hand to hand without indorsement, they 
are issued in convenient and even denominations, and they are 
legal tender if not objected to as money. Where the greater 
part of the circulating medium issued in the small exchanges is 
composed of bank notes, many creditors have practically no 
option whether or not to accept in payment these conventional 
substitutes for money. A retail trader, e.g., is forced to receive 



I Money is here used as denoting only precious metals, coined by the State, and the 
fiduciary or hat issues, whether of the State or its creatures, which are established as the 
legal tender in payment of liquidated debts. 

1 Dunbar, ut supra, p. j8. 





296 



The Canadian Banking System, 1817-1890 



the notes by custom, and the probability of having to wait for sat- 
isfaction, if he does not take it when and how it may be offered. 
It may be objected that the smallest shop-keeper or humblest 
laborer has the right to refuse paper which will not be redeemed 
at its face value. With regard to the notes of a particular 
bank, the objection holds. But on the one occaoion when a 
general suspension of specie payments was permitted Canadian 
banks, inconvertible notes were taken by traders at the same 
value as paper paid in ^pecie. In the great majority of cases, 
the bearer of a bank note holds a debt, which, though not of his 
own seeking, it was conventionally necessary to accept. Apart 
from the precepts of economic policy, justice to the note-holder 
as a quasi-involuntary creditor, must always be a valid and 
effective reason for special legislative action to make his claim 
secure. 

The quality of security is necessarily associated with that 
of convertibility. If it were impossible to change the note for 
the money promised on its face, the creditor's claim would not 
be secured. But security and convertibility, as the people of 
the United States ought to have learned in the last fourteen 
years, are not the only desiderata in a circulating medium so 
like money, and used in substitution for it. It is ".n accepted 
doctrine of monetary theory that the amount of metallic money 
in a country is so regulated by the action of the international 
exchanges, that it tends constantly to the point where its effect 
upon prices will not disturb the balance of trade, or as it has 
been called, the equilibrium of international payments.' If a 
metallic currency is to be partly replaced by a quantity of bank 
notes, the substitute, to be perfect, ought to be as elastic, at least, 
as that part of the circulating medium instead of which it is 
used. If, further, the volume of the bank note circulation is so 
elastic that it easily and automatically corresponds not only to 
what the trade of the country ought to have in the long run, 
but also to the frequent rhythmic rise and fall, which is 
especially marked in the commercial activity of communities 
largely agricultural, the advantage of the substitution is greatly 



I J. E. Cairnes, Some Leading Principles of Political Economy newly expounded, 
part iii., chapter iii., i 3. 



On the Present Working of the System 



297 



enhanced. By means of bank notes, there is attained a 
more exact adjustment of the currency to the need for currency 
than was possible when the medium used in the exchanges 
effected by bank notes was wholly metallic. 

The need that the bank note currency should be secure, 
convertible, and elastic in this second sense, is so nearly a 
generally accepted doctrine as to preclude the demonstration 
here. Besides, the proof can be found in almost any received 
work on banking theory. But the methods by which these 
desiderata are obtained in Canada present some unique devices 
and deserve examination. 

First, then, as to ultimate security. Subject to the excep- 
tions already noted, and the provisions that no bank may issue 
notes promising the payment of sums of money less than five 
dollars, or not multiples of five dollars, the Canadian bank note 
issue is free and plural. Though altogether arbitrary, the maxi- 
mum limit is, in effect, a restriction upon individual banks rather 
than on the currency as a whole. The total authorized circula- 
tion on the 30th June, 1894, was $61,559,473, the amount out- 
standing $30,241,719.1 The bank note circulation has never 
exceeded $40,000,000. Not more, probably, than four of the 
banks with a moderate paid-up capital and a relatively large and 
active business, find their authorized circulation inadequate in 
the most active season of the year 

The security for the ultimate payment of this liability is the 
prior lien given to the holders of its notes, upon all the assets of 
any insolvent bank. The notes were first made a preferred claim 
in 1880. Since then there have been four bank failures, and in 
every case all the notes presented have been paid in full. It 
will hardly be possible in the future for any bank to play the 
losing game so long that, when it is forced to withdraw, its pro- 
perty will not be enough to discharge its liabilities on notes. On 
the ist January, 1894, the Canadian banks held assets, presum- 
ably good, averaging $8,809 ^o^ every dollar of their notes in 
circulation. Of individual banks, there was only one whose 
assets bore as low a proportion as $3.56 to $1 of notes ; only 



ii-^ 



! 



I The figures are obtained by deducting from the grand total given in the statements 
of bunks acting under charter, the authorized and outstanding circulation of the defunct 
Commercial Bank of Manitoba. 






i::l 



298 



The Canadian Banking System, 1 817- 1890 



two others who held less than $6 against every note issued.* 
One bank shows as high a proportion as $10.91 of assets per 
dollar of notes, another $11.03, and another still $12.40. But 
this is not the only guarantee. The notes are a first charge, not 
only upon the $302,991,544 of assets, but also upon the double 
liability and unpaid stock subscriptions of shareholders to the 
amount of $63,313,315 more. The average guarantee behind 
each dollar of the circulation is, therefore, nothing less than the 
extraordinary sum of $10.65. For the Bank of Montreal, the 
proportion rises to $13.29, for the Dominion Bank to $14.40, and 
for the Quebec Bank to $15.42. The average, however, is one 
of the few that are really representative. By the Bank Circu- 
lation Redemption Fund, the note issue of any bank is become 
a debt which all the banks may be called on to redeem, an 
amount equal to 5 per cent, of the circulation being immediately 
available after a failure, and one per cent, in each subsequent 
year. ,. . ,,,•.;,■, • ... „• ../,■... 

Suspension of the payment of any of its liabilities, as they 
accrue, if continued for ninety days, consecutively or during the 
year, constitutes a bank insolvent, and forfeits its charter, 
except for the purpose of collecting its debts and winding u}) 
the estate. Practically though, a bank fails on the day it stops 
payment. Its notes bear interest at six per cent, per annum 
from the day of suspension to the day of payment. In all pro- 
bability, those in charge of a suspended bank's estate will be 
able to begin redemption within sixt}' days of the failure. The 
interest which the notes bear until redemption has begun rather 
tends to hasten the efforts of liquidators. But if they do not 
make arrangements for paying these claims, and do not publicly 
announce within the sixty days that such arrangements have 
been made, the Minister of Finance may make arrangements 
for the payment of the notes, with interest, out of the Bank Cir- 
culation Redemption Fund. Interest in this case also ceases 
after the day set for redemption. 

This Fund, as we have seen, has been deposited with the 
Governr t for the very purpose of ensuring prompt redemp- 
tion of the notes of an insolvent bank. It has been contributed 



I These banks have issued about $40,000, .fii.oso.ooo, and $120,000, respectively. 



mmm. 



On the Present Working of the System 



299 



by all the banks in sums equal to five per cent, of the average 
circulation of each during the twelve months preceding the 15th 
July, 1892. It is annually adjusted, and bears interest at 3 
per rent. If it be depleted by operations of redemption, each of 
the solvent banks must contribute to make it good, by annual 
payments not exceeding one per cent, of its average circula- 
tion. With respect to notes paid out of the Fund, th(3 Minister 
of Finance has the same prior lien upon the assets of the issuing 
bank as any other note holder, and if such notes or any number 
of them are redeemed, he is under obligation to return the pro- 
ceeds, pro rata to the amount of their contributions, to the 
banks who helped to restore the Fund to its permanent level, 
i.e., five per cent, of the total bank note circulation. The lia- 
bility of the Government is limited to the amount of the Fund. 
Neither in the matter of ultimate security, nor of redemption in 
case of insolvency, does the Canadian State become responsible 
for the notes. The holder must look to the pledge of the banks 
first, last, and for all time, as the only guarantee of the credit 
currency. Experience proves that tht first lien is ample ultimate 
security for the notes. By agreeing to maintain the Redemption 
Fund, the banks have bound themselves so long as they are 
solvent, to see to the payment of the notes of any bank of the 
system that may suspend.^ 

So far as the circulation is concerned, the Bank Act of 
1890 does for the banks what the British North America Act of 
1867 accomplished for the Canadian provinces. In either case con- 
federation is now an accomplished fact. But the highest benefits 






If 



I 



the 



1 Suppose, however, that one very bad failure should exhaust the Fund, and that 
another bank, quite able to pay its debts and even return a dividend to proprietors, should 
fail or necide to wind up its business before the assessment to make the Fund good had been 
levied by the Treasury Board, would the second bank be liable to contribute ? The case is 
nowhere treated in the Bank Art; the contribution would not be one of the penalties which 
are a last charge on the assets of an insolvent bank, and section 54 provides only for repay- 
ment /rom the Fund to the banlt in liquidation, not from a bank in liquidation to the Fund. 
It is conceded that this hypothesis is a bit extreme. Suppose, attain, a general financial and 
commercial crash, in which several banks should go down ; what then would become of the 
Fund ? Three of the banks have each a circulation equal to twice or thrice the amount of 
the Fund, whi:e the notes of any two of twelve others, if falling upon the Fund for payment, 
would wholly deplete it. What would happen in case of the third failure ? If, of cours*', 
such a catastrophe were probable, the criticism would be good. Laws must be passed with 
a view to what is likely to happen, and not to meet everythins! imaginable. The very banks 
whose failures are supposed to deplete the Fund, are among those notoriously well nianasjed, 
stable and strong. In the worst failure that ever happened in Canada the assets of the bank, 
if notes had only then been a preferred claim, would have been enough and more to pay 
them in full. 



Ii 



i' 



!'■■ 



800 



The Canadian Banking i>ystetn, i8i 7-1890 



of the bank federation are indirect. The Bank Circulation Re- 
demption Fund is the latest, the strongest, the outermost safe- 
guard set up about the circulating medium of Canada. The 
service of the Fund as a preventive, practically absolute, of dis- 
count on the notes of a suspended bank, provides the best of 
reasons for undisturbed confidence in bank paper. Formerly, 
it was necessary to keep telling the Canadian public that the 
currency was good ; now they are convinced. The Fund pro- 
tects the note holder from loss, however ignorant he may be, or 
however humble or helpless his condition. It protects the 
banks against needless runs from this class of creditors, and 
materially strengthens their credit. It is to be admitted that 
the new security for the circulation somewhat strengthens that 
tendency of depositors to convert their claims against a sus- 
pected bank into a prior lien upon its assets, which is illustrated 
by the increase of circulation and the decrease in demand de- 
posits shown below in statements of the Commercial Bank's 
condition.^ But the impulse to change deposits into notes is 



' The chief use of the Fund appeared after the failure of the Commercial Bank of 
Manitoba on Monday, the 3rd July, 1893, Induced by the interest and protected by the 
guarantee fund, the banks in Winnipeg and throughout Manitoba " accepted the notes 
after suspension freely, relieving the public from all inconvenience and fear." The notes 
never fell to a discount, and on the i6th September those held by the public were 
redeemed. The liquidator, finding he could better realize upon the estate by waiting a 
little, made arrantiements to continue paying interest upon notes held by the banks until 
he should have the funds to redeem them. Tnus, at the end of September, the circulation, 
which had been S4i9,i35 on the 3rd July was #163, 225; a month later 1883,365; and on the 
last day of November 1*31,835, from which point it has fallen to $12,440, in June, 1894. 

The Commercial Bank of Manitoba was the third of the banks started in the eighties to 
close its doors. In 1884 it had succeeded, as an incorporated bank, to the business of 
Macai thur, Boyle and Campbell, private bankers and financial agents at Winnipet;. Always 
extremely subject to local influences, usually, from all appearances, run with as much of a 
view to the development of the country as to the conduct of a safe and sound banking busi- 
ness, and resorting to such methods to obtain business as prudent bank^^s disapproveri, the 
Commercial met a fate by others, at least, not unexpected. It had been indebted to its 
Montreal correspondent, on secured loans, since 31st January, 1892. Beginnir;: at the 
modest figure of $25,000, the debt rose by the next January to $125,000, and by March to 
*i66,290. Durin!< this period, settlements with the Commercial were difficult, and some 
banks in Winnipeg had regularly required the payment of balances in legal tenders, or, if 
accepting the bank's draft on Montreal, fore-assured themselves of its acceptance. The 
winter of 1892-3 was a hard one for the concern, and the spring quite as severe. In 
May, a drain of its deposits payable on demand was begun. It contmued in June, with 
force much increased towards the end of the month. The treater part of the run was met 
by paying out notes. Thus, on the ist July, $38,752 of deposits were called for, and .1^22,245 
of notes paid out. Between the 3rst May and the 3rd July, demand deposits were reduced 
$189,813, circulation increased by .'8140,605. The principal provision ior the other ^^g,ooo 
drawn out is be&t explained by the increase of $42,000 in secured loans from other banks. 
The process of paying out notes to anxious deposits rs had to stop, of course, as soon as the 
paper fell into the hands of other banks. The Commercial, having only $4,130 of money 
left in its vaults, could not redeem its paper, and was forced to suspend. Ttie following 
table shows the state of the Bank at different times preceding the failure, and the effect of a 
year's liquidation : 



^ J.. 

"I 



On the Present Working of the System 



801 



only slightly stronger than when, before the establishment of 
the Fund, the notes were already the first charge against a failed 
bank's assets. The plan of meeting a heavy run by paying out 
notes is practicable only so long as the circulation is within the 
authorized limit, and does not come back for redemption. All 
the banks, except the five or six with largest capitals, have a 
very small n)argin between outstanding and authorized circula- 
tion ; at best, therefore, a weak bank in serious diffi- 
culty could not pursue the poHcy for more than forty-eight or 
seventy-two hours. In the first place it would too soon exhaust 
its authority to issue notes, and further emission would subject 
its estate to heavy fines. Then persons who had once acquired 
the depositing habit would not keep notes thus received in their 
pockets or their safes. They would pay them in to other banks, 
and the demands for redemption pressed by these creditors 
would precipitate the failure of the suspected bank. The Com- 
mercial Bank of Manitoba withstood the extreme pressure but 
one day. ■-'■ '""^ '■' ■>■''■■■-'■■'■■''• '■■■' '^-^ • 

The metallic materials of redemption — the money in which 
bank notes are payable — are American gold coins of the present 



Condensed Statement of the Assets and Liabilif'es of ttie Commercial Bank of 
Manitoba : 



Liabilities 
(cents omitted) 


31 May, 1893 


30 June 


3 July 


30 June, 1894 


Notes in circulation 


■« 
278,530 

85.117 
685,695 

148,357 

160,000 
1,709 


396,890 
69,646 

534.634 
167,176 

172,583 
320 


419.135 

84.294 

495.882 

137.176 

202,583 
5.197 


8 
12,440 


Due Provincial Government 


Deposits payable on demand 

do. after notice 


557.393 
22,920 


Loans from other banks in Canada, 
secured 


Other liabilities 


3.042 




Total 

Assets 
Specie and Dominion notes 


1,360,470 

23.273 
19.750 
27915 

48,449 

1,714,192 
68,005 
31,828 
12,398 
10,150 
10,741 


1. 341. 25 1 

4.130 

19.750 

. 72.997 

26,480 
1,649,059 
104702 
41.158 
12,122 
10,150 
10,599 


1,344,269 

4.130 
19.750 
85.795 

26,308 
1,636,260 
104,702 
41.158 
12,122 
10,150 
13.789 


595.796 


Deposit for note circulation 


14,750 


Deposit in other banks 


81,045 

4.484 
536,790 


Notes, cheques and balances due of 
other banks 


Current loans 


Overdue debts 

Real estate 


465.536 
32,501 


Mortgages on real estate held 

JRank premises 


14,221 
11.832 


Other assets 


10,063 






Total 


1.967,708 


1.051.151 


1.954. 167 


1,171,225 



11 



802 



The Canadian Banking System, 1817-1890 




weight and fineness, the eagle being legal tender for $10 in Can- 
adian currency, and the British sovereign and a half thereof, 
the unit being legal tender for $4.86! in Canadian currency. 
Silver coins of 5, 10, 25 and 50 cents in Canadian currency, 
struck by the British mint, are legal tender up to $10; copper 
or bronze cents to 25 cents. The Dominion also issues a legal 
tender paper currency, redeemable in gold, in denominations of 
I, 2, 4, 5, 10 and 20 dollars and upwards. These, with bank 
notes, constitute practically the whole currency of the country, 
except that which is used in making fractional change. The 
larger part of the Dominion note circulation among the people 
consists of one, two and four dollar notes, payable on demand by 
the Assistants Receiver General at the commercial centre of any 
province; the balance of the circulation, from 50 to 70 per cent., 
is held by the banks. Upon the request of the payee, a bank is 
required, in making a payment, to pay not to exceed $100 of the 
amount thereof in Dominion notes of the smaller denominations. 
The chief variations in the amount of Dominion notes outstand- 
ing are due to the rise and fall of the large note circulation, and 
are dependent upon variations in the reserves held by the banks. 
The legal reserve against the Government issues not in excess 
of $20,000,000 is composed of (a) specie and Dominion deben- 
tures guaranteed by the Government of the United Kingdom to 
an amount equal to 25 per cent, of the total circulation, of which 
15 per cent , at least, shall be in specie ; (6) Dominion debentures, 
issued by authority of Parliament, to cover. Issues in excess of 
$20,000,000 are covered by equal amounts of specie. In practice, 
considerably more specie and guaranteed debentures are held 
than the law requires ; the practice now conforms to the original 
policy of Sir Francis Hincks, i.e., to establish, after experience, 
a minimum to be covered by securities, and to hold for all issues 
in excess of the minimum, equal amounts of specie. If the un- 
guaranteed debentures were sold to provide specie for redemp- 
tion purposes, they would become liabilities quite as much as the 
notes themselves. The one difference now is that the notes have 
been issued to the public; the debentures may be issued. The 
supposition that the one " secures " the other form of liability 
is palpably absurd. The requirement that such debentures 
shall be held in amounts equal to the outstanding circulation not 



i! 1 m 



I ^1 



On the Present Working of the System 



808 



otherwise covered, originated, no doubt, in the idea that the 
Government would thereby be prevented from incurring debt on 
Dominion notes without the authority of Parliament. The only 
real reserve held against the notes consists ot specie and 
guaranteed debentures. This need be but 25 per cent., but 
ought to be much more. Latterly it has been higher, in June, 
July and August, the specie alone reaching nearly 50 per 
cent. 

There is high authority for the rule that the lowest denomi- 
nation of bank notes should not be less than five dollars. If a 
small note circulation is necessary, or is preferable to a metallic 
currency, it is expedient, probably, that the Government should 
be responsible for it. Yet the small note circulation of Can- 
ada is ol comparatively minor consequence. The amount of 
Dominion notes in the hands of the people, i.e., outside the 
banks, has never been more than $8,000,000 ; $6,000,000 
is nearer the usual figure. The total circulation outstand- 
ing is much larger, and now amounts to more than $20,000,000. 
Why ? The obvious explanation is : — By compelling them to 
hold not less than forty per cent, of their cash reserves in 
Dommion notes, the Government has forced from the banks a 
permanent loan without interest which has varied in the last 
five years between ten and fourteen million dollars. Yet the 
credit of Canada is good ; its securities, though bearing extremely 
low rates of interest, are highly esteemed by British investors. 
Its Government can borrow all that they need in the open 
market. The justice of a forced loan for 16 to 22 per cent., the 
entire banking capital of the Dominion, need not be examined. 

It is enough that the reserve provision is injurious. It pre- 
vents the use of gold, or gold certificates, in exchanges between 
the banks at the centres. In a single day a bank might acquire, 
by collecting its just debts, so great a sum of specie thai its 
total stock would rise above the proportion fixed by law, and 
sanctioned by a penalty of $500 for each violation. It dimin- 
ishes the amount of gold held in the country. It impairs 
the ultimate banking reserve of the Dominion. That reserve 
is not at all times instantly available in its nominal strength, as 
it would be were the banks perfectly free. The cash which 
they hold consists, in part, of mere promises, and they are under 



I ! 



304 



The Canadian Banking System, 1817-1890 



constant oblij^ations as to the proportion which such promises 
shall bear to the entire amount. If the banks had only Can- 
adian payments to make, the objections to the requirement 
would be less serious. In Canada, Dominion notes are money. 

But the liabilities of the Canadian banks are by no means 
merely Canadian. They are due in the United States, in the 
United Kingdom, Hong Kong, Australia The really heavy 
demands upon Canadian banks have always been for settle- 
ment of balances abroad. To meet them they need the 
international money, and that is gold alone; for international 
payments, Dominion notes are just about as available as 
American silver certificates. It is true that there are 
ledemption offices at Toronto, Montreal, Halifax and St. John, 
but when called upon to redeem quantities of their notes, past 
Governments, if specie was wanted for shipment to New York, 
have repeatedly paid out sovereigns ; if it was needed for export 
to England, they have redeemed in eagles, and the coins desired 
have consequently cost a premium of one-eighth to one-quarter 
of one per cent. And in order to *' protect the reserve," or 
"correct the sitr'^wioii," it is quite possible that authorities, 
within the next ten years, may again exercise this option to the 
cost and hurt of the honest commerce of the 'country. 

The immediate redemption, the convertibility of Canadian 
bank notes, is ensured by their character as debts due on de- 
mand, for the payment of which the entire estate of the issuer 
is liable. The note must be paid when presented at the place 
of payment, else the bank whose promise it bears confesses in- 
solvency and destroys its credit. A daily test of this converti 
bility is made wherever there are two or more offices of different 
banks. Bank notes aro legally payable only at the offices where 
they are made payable, and at the redemption office which the 
Bank Act obliges each bank to establish at the trade centre of 
each province. That office may be a branch of the issuing bank, 
or an office of another bank which undertakes the service. The 
notes, however, must be received in payment at any office of 
the bank which issues them, and banks, in practice, do receive 
the notes of other banks. The balance due after the daily ex- 
change of notes and other liabilities made between bank offices 
outside of the three principal cities, are settled by drafts on 



On the Present Worktti^ of the System 



ii05 



Montreal, Toronto and Halifax. In these three cities there are 
clearing houses, and the balances remaining after the daily 
offset of claims due by the banks against claims due to them, 
are settled in legal tenders of the highest possible denomination. 
In consequence, the country through, there are frequent and 
thorough tests of the possibility to convert bank notes into the 
money promised by them. The public take little active part in 
this ; the banks do the work by presenting for payment what- 
ever notes they receive in the course of their day's business. 
Of these, the notes of local competitors will stand for the largest 
sums ; notes of banks without a branch in the locality are for- 
warded to the nearest redemption office, and presented there 

The possibility and enforcement of the immediate re- 
demption of bank n(tes have an important bearing upon the 
elasticity of this form of circulating medium. I have already 
taken for granted the desirability of elasticity, and I waive now 
the discussion v/hether as high a degree of elasticity can be 
secured through the emission of fiduciary paj lir by other agencies, 
as when it was issued by banks. Canadian Governments and 
bankers have thought not ; American bankers, at their last con- 
vention, have come to the same conclusion ; and the views of all 
accord with the conclusions of what may safely be called the 
received theory of credit. But 1 shall endeavor to show that the 
Canadian banks do provide a medium of exchange, the volume 
of which exactly corresponds to the need for it — the need depend- 
ing upon the number and amount of the transactions in which 
it is used — and that with profit and honor, the banks cannot do 
otherwise under the present system. 

First let us look at the logic of the case. The funds at the 
command of a bank, its lending power, or its purchasing power 
as a buyer of negotiable securities, are based on the capital fur- 
nished by proprietors, the money deposited with it by customers, 
and such rights to demand money as will be accepted from the 
banks in lieu of money itself. Whatever expands the credit of 
the bank, i.e., the extent to which rights to demand money from 
it will be accepted, permits the increase of its profit. Whether 
this be done by giving the person to whom money is due a credit 
in its books, or by paying him in notes, is, in some respects, a 
matter of indifference. Every book credit accepted in lieu of 



i: 



806 



The Canadian Banking System, 1817-1890 






money payment, every note in circulation, by augmenting the 
purchasing power of a bank, becomes tantamount to a loan, 
in the latter case always without interest, had by the 
bank from the public. This need nowise imply that the 
issuers of notes do not share their gain with the people, 
and it does not imply that banks alone reap the advan- 
tage of economizing the $30,000,000 or more of real cap- 
ital which, without some other substitute, would be needed to 
effect the Canadian exchanges in which bank notes are now 
used. But it does make it plain that each bank has a direct and 
powerful motive for expanding its note circulation by whatever 
lawful and reputable methods it may. 

A little examination ought to make it equally clear that the 
possibility of this expansion is dependent upon the needs of 
bank customers. Canadian banks are prohibited by law from 
pledging, assigning or hypothecating their notes, and advances 
or loans made on the security of its notes are not recoverable from 
a bank. The only way for a bank to get its notes in circulation 
is to pay them over its counter in the ordinary course of busi- 
ness. It may exchange them for gold, pay with them the 
demands of depositors, or other creditors, or make advances in 
that form of its credit. Where the practice of keeping deposits 
with banks is common, and especially where interest is paid on 
deposits, the bank's customers are prevented by motives of pru- 
dence or profit from drawing out more notes than are required 
for their immediate purposes. No man will procure twice the 
amount of notes he needs to meet his payments, and run the 
risk of losing the unused half, when, by calculating his wants, 
he would avoid the risk and either save interest on the unneces- 
sary part of a loan, or, in some cases, receive interest on the bal- 
ance he leaves with his bank. Where, further, the banking 
habit is strong and banking facilities are as well distributed as 
they are in Canada, the customers of banks and those in 
exchange relations with them, comprise practically the entire 
commercial, agricultural and industrial community. The means, 
for instance, which three or four hundred laborers need for 
their weekly or monthly purchase of groceries, and other goods, 
are provided at one stroke in supplying a manufacturer or con- 
tractor with notes for his pay roll. The bills which the farmers 



m 



On the Present Working of the System 



307 



of a certain district use to buy their winter supplies, or in which 
they realize upon their grain, are issued through a few advances 
to the produce shippers operating in that district. Since the 
process is quite the same in an indefinite number of other cases, 
the whole country secures whatever expansion of the circulation 
may be required. The banks clearly have every motive to meet 
the need for increased note issues ; it is quite as clear they can- 
not issue in excess of that need. 

In no country, however, are the number and amount of the 
exchanges effected by bank notes in constant augmentation. 
The upward movement, if there be one, is not steady. The 
need for circulating medium at a given time may be greater 
than it was shortly before, exactly the same, or less. Particu- 
larly in North America, where the supply of important market- 
able commodities varies with the seasons of the year, are there 
marked differences between the commercial activity in different 
months, and extreme variations in the need for the means of 
payment. Contraction is an element as important to elasticity 
as expansion. In Canada, while the influence of foreign 
exchanges and international trade is not without force, the im- 
mediate causes of contraction are different, but quite as effective 
and automatic, and even more prompt. No man who keeps a 
bank account is going to hold bank notes or any other negotiable 
instruments of credit payable on demand, after the need for 
their use in exchange is passed. Either he wishes to avoid the 
risk of losing them, desires to convert them into interest bearing 
deposits, or with them discharges some obligation to the bank 
on which he is paying interest. In any case he has substantial 
motives of gain for bringing the notes to the bank which has 
his account. The action of a note holder, who has no bank 
account, may be disregarded ; if a bank note is used in making 
payments, it is destined, with all necessary promptness, to reach 
the hand of some one who has a bank account, and will deposit 
the note to his credit if he feels no need for its present use. 

The next and final agents in the process of contraction are 
the banks themselves. Though it is not obliged to do so, any 
Canadian bank will receive in payment the notes of any other 
bank of the system. In so doing, the bank is protected from 
loss, and is able to serve not only the customer's convenience, but 

22 



808 



The Canadian Banking System, 1817-1890 



M 



also its own advantage. The total amount of notes outstanding 
at any one time is limited, as we have just seen, by the needs of 
the public of that form of circulating medium. If there were no 
other substitute for money, the extreme limit of the note circu- 
lation during a given period would be the total amount of ex- 
changes then to be performed, divided by the average amount of 
payments effected by a given sum of bank notes. But there are 
other substitutes for money and the actual limit is considerably 
less. A comparison of the facts in different countries, e.g., Eng- 
land, France and Scotland, shows that, while the amount of 
the exchanges varies with the condition of trade, in what ex- 
changes a community may use bank notes depends upon the tra- 
ditions, prejudices and habits (as accommodated to legislation) — 
the business custom, in short — prevailing within it. Business 
custom changes, without doubt, but the changes are so slow and 
comparatively slight as to permit us to conclude that for any one 
time the limit of a bank note circulation is not only predeter- 
mined, but also practically independent of the amount of other 
money substitutes in use. 

From the banker's point of view, the note circulation is a 
form of credit through the enjoyment of which his interest bear- 
ing investments may be increased. His note issue is the source 
of a profit, which, at a given time, could not be obtained in any 
other way. This being the case, it is to the undoubted advan- 
tage of any one of the thirty-eight banks now doing business in 
Canada, to supply, so far as the law allows it, the hmited and 
predetermined demand for bank note currency with its own 
issues. Now, the bank's only way to put notes in circulation is 
to pay them over its counter. It receives each day, however, 
the notes of other banks, paid in as deposits, or in liquidation of 
loans. Such notes are evidences of non-interest bearmg debt. 
The bank finds it essential to convert the debt either into cash, 
or into some productive investment. The notes may be col- 
lected either by presenting them for redemption, or by paying 
them out to the public. On the latter supposition the public 
reimburses the bank by exchanging for the notes, either pay- 
ment, or some other right to demand payment. 

But for the Canadian bank there is a more important con- 
sideration than mere repayment. The circulating medium of 



»'mm 



! 1 



On the Present Working of the System 



809 



a is a 

3ear- 

ource 

n any 

dvan- 

ess in 

d and 

5 own 
ion is 
ever, 
ion of 
debt, 
cash, 
e col- 
aying 
pviblic 
r pay- 

it con- 
hum of 



the country, so far as it consists of bank notes, constitutes a 
volume of credit for which each bank is competing to get the 
largest possible share, in order to obtain in this form the largest 
possible loan without interest. The manifest policy of the bank, 
therefore, is not to collect the debt from the public, but to pre- 
sent the notes for redemption by the bank which issues them. 
By this means, the bank can cause a slight contraction in the 
total note circulation, and gain the chance to use its own paper 
in meeting demands for expansion. Sheer self-interest impels 
each bank to demand prompt and daily redemption of all the 
notes of other banks that have come into its tills. Unlike some 
benefactions, the act of paying the notes of another bank to 
the public has a real and measurable value. When the amount 
of its own notes outstanding approaches the authorized maxi- 
mum, and further issue makes the bank liable to a fine, it has 
the option of paying out all the paper that comes into it, or to 
circulate exclusively the notes of some one bank whose issue is 
further v/^ithin the legal limit. If the latter course is adopted, 
it receives compensation for the service in some form, the usual 
method now being for the bank whose notes are circulated to 
allow the circulating bank to delay the deposit of funds in ex- 
change, for a period of two weeks after the paper was received. 
As the average *' life " of a note — the time elapsing between the 
issue of a note and its redemption — is probably in the neighbor- 
hood of four weeks, the profit on the circulation is thus 
divided, the bank which is obliged to circulate another's notes 
seldom receiving more than one-half. To pay out his com- 
petitor's notes in the ordinary course of business is to act as 
a broker without charge, or .it a reduced charge ; to hold them 
is to loan to his competitor v/ithout interest. Either service 
is a form of altruism in which the Canadian banker will never 
indulge so long as he can issue notes of his own. 

Thus the machinery for expansion and contraction of the 
Canadian bank note currency is efficient, automatic and com- 
plete. The impulse in either direction is the silent, certain force 
of self-interest. The banks gain in supplying the public's need 
for augmented circulation ; the public gain in returning unneces- 
sary notes to the banks ; and whenever such notes are not those of 
its own issue, each bank finds its profit in presenting them for re- 



! 



' it' 



«-i 



If 



310 



The Canadian Banking System, 1 817- 1890 



demption. Every one of the five hunr'-ed branch banks in Canada 
is a competitive agent for expansion ; every one, from like motives 
of gain, is an active worker for contraction. In either direction 
the operations of the banks are v^^holly dependent on the needs 
•or action of the public with whom they are so closely in touch. 

What may logically be expected of the Canadian system of 
issue is confirmed by examination of the facts as to the notes 
of chartered banks in circulation at different dates since the 
31st December, 1878. In Appendix III there is a table show- 
ing the exact amount of the total bank note circulation reported 
to the Government on the last juridical day of each month 
since the 31st January, 1878. But every immediate purpose of 
the table is served, in a more graphic and comprehensive way, 
by the chart opposite, showing the varying heights of the circula- 
tion on the last day of each month of the last fifteen years, by 
means of points taken on the vertical axes, and connected by 
lines for the sake of clearness. A casual glance proves perfectly 
the rhythmic fluctuations of the circulation in harmony with the 
movements of Canadian trade. It shows how the general level 
of the cuculation rises or falls in accord with the general pros- 
perity and activity ci commerce, how the expansion to meet the 
needs of the autumn and early winter are greater in one year 
than another, how quickly and regularly the volume of the 

•currency is contracted in January, how it remains stationary or 
gradually falls still further in the months of the spring and early 
summer, and how, from the end of July on, the process of 
" moving the crops " is facilitated by an expansion in the bank 
note circulation, usually from 19 to 24 per cent., but sometimes 
as low as 14 and as high as 42 per cent, of the minimum during 
the year. 

As they represent only the circulation on the last day of each 
calendar month, the figures do not, as a rule, exhibit the maxima 

'Or minima actually reached, and so do not fully show the elasticity 
of the currency. They are, further, merely typical, and do not 
represent the average circulation in the months with whirh they 
are connected. They fail, also, to indicate the different move- 
njents in different provinces. But separate tables for the banks 

■ domiciled, ^.^., in Quebec, Nova Scotia or New Brunswick, would 



^ Ik 



fAllVmL\ 




llll^'d 



) 

If I 



t\ 



fa 



'1 



iwm 




< 

i 

t 



r 

I' Is 

111 



1: 

i 

1 

si 
tl 
b 

i 

II 

Tit' 

i 

Hi 

tl 

•c 

g 

•s 

(( 

n 
a 



•c 
m 



On the Present Working of the System 



311 



be just as useless for this purpose. The business of many of the 
banks is carried on in several provinces. Their activity more 
or less covers the entire national field, and the circulation of a 
single bank is often affected by as many compensatory or opposite 
influences as the total circulation of the whole banking system. 
Moreover, there are no banks with head offices in Manitoba 
or the Northwest Territories, and only one, with six offices, has 
its principal Canadian establishment in British Columbia. Yet 
there are seven other branches in British Columbia, each issuing 
the notes of its parent bank, nineteen branches in Manitoba and 
eight in the Northwest Territories. A table by provinces would 
be utterly misleading. 

In one respect the arbitrary choice of the days for which 
the circulation is indicated ought to lend some interest. When 
we speak of a late or early season we might say, more clumsily 
no doubt, that the beginning or end of the agricultural, fishing 
or lumbering year has not coincided with the usual point in the 
calendar year. The differences in the lines of the, chart for dif- 
ferent years show that the movements of currency are auto- 
matically adjusted to the needs of the particular times in the 
industrial year which happen to correspond with the last day of 
each calendar month. The proof of elasticity is varied, cumu- 
lative and conclusive. 

It is precisely in point of elasticity that the Canadian bank 
note currency is superior to such a circulation as the bond- 
secured notes issued by the National banks of the United States. 
The rigidity of the latter currency, the almost complete lack of 
relation between its volume and the currency requirements of 
commerce, have been too frequently pointed out in the preced- 
ing pages, and are too notorious facts to need elaboration. The 
proof can be found in almost any treatment of the question ; the 
pages of the Proceedings of the American Bankers' Association 
have bristled with it for five years and more ; the statistics in 
the Reports of the United States Comptrollers of the Currency 
estabUsh it beyond a doubt ; and in these last days, the Ameri- 
can bankers themselves have united to agitate the reform of 
their own upon the lines of which the Canadian system of issue 
is one of the best examples anywhere to be found. 



I'l 






812 



The Canadian Banking System, 1 817- 1890 



Yet every good quality characteristic of the National bank 
note pertains to the Canadian issues. They circulate at par 
throughout the land, not because they are a legal tender to any 
bank, but because (a) the bank which issues the note must pro- 
vide for redemption at a convenient and accessible point in each 
of the seven provinces of the Dominion, and (b) the possibility of 
converting a note is subjected to the daily test of actual redemp- 
tion. The notes of a failed bank, whatever the condition of its 
estate, will be redeemed, with interest at six per cent, per 
annum, within ten weeks of the day of its suspension. The 
notes of a failed National bank pass at par because their ulti- 
mate payment is certain ; other banks are obliged to take them, 
and the process of retirement is practically the same as when the 
bank was solvent ; those of an unfortunate Canadian bank are 
accepted because their prompt redemption with interest is guar- 
anteed. Before the estate of a bank in liquidation, whether for 
insolvency or otherwise, is wound up, and the last dividend, if 
there is any whatever, is paid to the proprietors, money must 
be deposited with the Government in sufficient amounts to re- 
deem, with interest for the first two months after suspension, all 
of its notes not yet presented and still outstanding. This regu- 
lation, so far as it prevents the operation of the statute of limi- 
tations upon bank notes, is similar to the requirement that 
National banks shall pay enough money to retire their circula- 
tion to the Treasurer of the United States, before they may 
withdraw the bonds which secure it. 

To the holder of the Canadian bank note, therefore, it is a 
matter of indifference whence or when it was i&sued. The paper 
of the smallest bank is as good as that of the greatest. At all 
times, in every part of Canada, and under any circumstances, 
the note is not only worth its face value but will also be received 
at that by any bank. Security and convertibility are the great 
and really only merits of the National bank note currency. The 
Canadian paper has these, and it has, besides, the invaluable 
quality of elasticity. 

§ 58.— ADVANTAGES INCIDENTAL TO THE CANADIAN SYSTEM OF ISSUK 

As obtained by the Canadian system of issue, elasticity in- 






.,. , . 



On the Present Working of the System 



818 



volves far more than the advantage of having a currency at all 
times adjusted to the need for it. Elasticity in currency means 
elasticity in the loaning powers of the banks. The need for 
augmented circulation is ordinarily coincident with an increased 
need for capital, either in production or in the operations of ex- 
> change. Particularly is this true of a country whose principal 
I industries are extractive, a country, e.g., in which agriculture 
and lumbering are relatively more important than manufactures. 
As economic instnments for the collection, safe-keeping and 
employment of capital, banks are ordinarily entrusted with funds 
not required for the immediate purposes of the owners. When 
more capital is needed in production or in carrying goods with 
the intention to market them, a part of it is obtained from the 
banks through the withdrawal of deposits by those to whom 
they are due. Another part is obtained from loans negotiated 
with the banks by those who prefer or are obliged to operate on 
borrowed capital. At the same time, however, banks are under 
advances to persons engaged in branches of industry or com- 
merce in which the need for capital is comparatively steady. 

One source from which banks supply borrowers' needs, the 
capital of their proprietors, is also comparatively steady. An- 
other source, the money entrusted by depositors, varies accord- 
ing to the wish or interest of the depositors, and, for reasons just 
pointed out, in times of increased activity on certain lines is 
likely to be lessened. The banks may use a third source, 
roughly speaking, in two ways : they may give borrowers book 
credits for the amount of their loans, or supply ;hem with notes. 
Instead of capital owned by the bank, the borrower is usually 
willing enough to borrow of its credit, or the depositor to accept 
of its credit in payment, provided he can get the credit in a 
usable form. 

But book credits will not serve the purpose. From pre- 
judice, habit or well founded preference, the lumberman wishes 
his monthly pay, the harvest hand his season's wages, and the 
farmer the proceeds of his grain and produce, in a convenient, 
unquestionable and easily transferable form. Money will satisfy 
them, but cheques, the value of which depends on the genuine- 
ness of signatures, and, to a certain extent, upon the unknown 






M 



I V 



814 



The Cnttnd'tnn Bntiking; Sysieni, 1817- 1890 



V ! 



personal credit of the maker rather than on the well-known and 
ample credit of a bank, will not be readily taken. Bank notes, 
the title to which passes by simple delivery and the value of 
which is dependent on the credit of the public bank whose name 
they bear, are the only instruments of credit available for large 
classes of the transactions necessary, e.g., to moving the crops or 
getting out the lumber cut. To meet the periodical and tempor- 
ary demands for added capital caused by such operations, the 
banks must either pay out money or issue their promissory notes. 
The abstract statement of the conditions is easily con- 
firmed. The table below shows that in the first two months 
(August and September) of the annual expansion in Canadian 
trade, bank deposits payable on demand — the basis, that is, 
for bank credit circulating in the form of cheques— usually 
remain stationary or diminish, while the amount of current loans 
and notes in circulation rises until, at the end of October, both 
are considerably above the figures for the 31st July. For every 
year since 1889, the increase in each has been at least 153,000,- 
000, except in 1893, when exceptional conditions, due to the 
American crisis and the contraction in many branches of 
Canadian trade, caused a diminution in current loans. ^ The 



• Table for Comparison of the amount of notes in circulation, deposits payable on demand 
and after notice, and current loans, at the end of months prior to, during and after the an- 
nual period of greatest expansion in the Canadian bank note currency (iw.ooo omitted) : 



1890 

Notes in circulation 

Deposits payable on demand 

" " after notice or on a fixed day 
Current loans 

1891 

Notes in circulation 

Deposits payable on demand 

" '" after notice or on a fixed day 
Current loans 

1892 

Notes in circulation 

Deposits payable on demand 

" " after notice or on a fixed day 
Current loans 

1893 

Notes in circulation 

Deposits payable on demand 

" " after notice or on a fixed day 
Current loans 



July 



3>-2 

54-6 

76.6 

150.8 



30.6 

59.0 

84.6 

184.5 



32.5 

66.5 

93.8 

189.5 



33.6 

64.6 

106.4 

206.9 



Aug. I Sept. 



32.7 

33.8 

77.1 

151.2 



32.0 

58.5 

85.5 

184. 1 



33.3 

61.4 

105.0 

205.9 



35-5 

54.7 

77.7 

153.1 



34-1 

59-6 

86.0 

185.9 



32.6 


34-9 


64.7 


65.7 


98.0 


98.8 


186.3 


1 88. 2 



35.1 

61.2 

104.0 

204.6 



Oct. 



S 

365 
57-5 
78.2 

153.0 



37-2 

58.5 

88.5 

188.7 



38.7 

66.4 

99.9 

194.1 



36.9 
62.5 

103.5 
204.8 



Nov. 



9 

36.3 

53.1 

79-9 

1535 



374 
60.4 

893 
187.8 



37.1 

68.3 

101.2 

197.1 



35-1 
62.9 

104.4 

202,0 



Dec. I Jan. 



» 


« 


35.0 


31-7 


53.7 
80.3 


81.7 


i53'2 


15M 


35.6 
62.6 


32.7 
58.6 


90.1 
186.6 


92-3 
184.0 


36.2 
68.7 


32.8 
67.4 


101.5 


102. 1 


198.5 


197.2 



34-4 

62.6 

107.9 

200.4 



30.6 

60.1 

108.9 

198.0 



8.y 
8.0 



On the Present Working of the System 



815 




figures, of course, are only for the last day of each month and 
they represent only net results. The item of deposits, for ex- 
ample, would be much less if the figures reflected the entire 
amount of funds withdrawn. The apparent effect of the ten- 
dency of depositors is somewhat reduced by the practice of 
borrowers to leave negotiated loans on deposit with the banks 
until they need to use the funds. For some borrowers the 
season of active operation arrives later than for others. 

What would happen if the banks were obliged to provide 
money, or notes (like national bank notes) which have cost 
them value to an equal or greater amount, is well illustrated 
year after year in the United States. In the autumn those who 
trade on their own capital draw on their deposits with the 
banks ; the needs of the large class of steady discount custom- 
ers remain about the same ; and at the very moment when deposits 
are faUing off, new needs for advances arise from the greatly 
augmented activity of trade in grain, pork, cotton and produce. 
The banks, in short, find the demand for loans strengthened ; 
their ability to meet it, at the best unimproved, and more than 
likely, much impaired. Under such conditions the rate of dis- 
count inevitably rises. Fluctuation in the rate of discount is 
only one phase of the ensuing inconvenience and expense ; 
there are, besides this, the annual flow of currency inland from 
New York, that costs at least one-tenth per cent, of the amount 
of the remittances, the currency famine frequently arising in 
that city during the movement of crops to the markets, and in 
consequence, as frequent arrests of the forward movement of 
products, hardly less complete and sudden than those due to 
freight blockades or railway strikes. 

In Canada, on the contrary, banks are able to supply the 
fluctuating demands of depositor and borrower with bank credit 
in a form that can be used. Each is paid in notes ; resources 
employed in the less variable departments of discount business 
are nowise diminished. The purchase, transportation ai \ 
marketing of the crops are accomplished without loss or cost .^ 
the banks, without the rise of the rate of discount, and with a 
high degree of efficiency, economy and promptness. The annual 
expansion in the country's business tends rather to ease the 
situation than to tighten loan markets. The goods are brought 



n: 



(,' 



i: 



\i 



816 



The Canadian BaHking System, 1817-1890 



forward so rapidly and realized on so soon that the banks, 
whose loans to grain buyers, produce shippers, millers, etc., are 
generally secured by such documents as warehouse receipts and 
bills of lading, find that these advances, as a class, are among 
the most quickly repaid of any they make. 

So when the circulating notes in which the advances were 
made begin to come in, the banks, if redemption should be 
called for, always have the means to meet it. Borrowers have 
already discharged their debts by drafts on the Canadian pro- 
duce markets, or if they happen to be in the export trade, by 
exchange upon American and British correspondents. In 
actual practice, however, the additional circulation is returned 
to the banks in the form of deposits. The public do not 
demand a money redemption. No bank, to be sure, receives 
only its own notes from these depositors. What notes of its 
own are received, are retired by a simple credit to him who pays 
them in. The notes of other banks thus acquired are used to 
offset those of its own which they may receive from their cus- 
tomers and present in the daily exchanges as claims agamst the 
issuing bank. The process of contraction, therefore, is almost 
as easy and as costless to a well managed bank as that of 
expansion. Final payment of the autumnal increment to 
liabilities is brought about, not through immediate redemption 
in hard money, but through the gradual withdrawal for the 
owners' uses of the deposits by which the notes were first retired 
from circulation.^ 

Compared to the other liabilities on which banks trade, the 
note circulation, it is true, seems of minor importance. During 
the last four years, for example, the highest amount outstand- 
ing has never been much more, and usually less, than a fourth 
of all the public deposits in the banks at corresponding periods. 
At first thought it seems unnecessary to emphasize so strongly 
the advantages derived from the n^'e issue as a means of ex- 
panding loanable credit. But the answer to the objection 
lies in the simple fact that the autumn needs form the last in- 



1 For illustration of tliis last fact, tlie table lately given does not include a sufficient 
number of months. Tlie other statements, however, may be verified by it, although it must 
again be remembered that the fiiiures represent only net results, are affected by a variety 6f 
influences only remotely connected with the forces here discussed, and refer only to seven 
days arbitrarily chosen In each year. 



! t 



1 



On the Present Working of the System 



817 



crerrent of demand in the loan market. If the banks were 
unable to supply it with notes, this demand would be turned 
upon discount resources already employed, and the cost of 
loans would be higher for the time, not only to new borrowers, 
but to all the old ones as well. 

There are still other reasons why elastic issue upon their 
general credit is one of the most beneficial functions of the Can- 
adian banks. The remark is offered with all regard to the ex- 
traordinary growth of deposits exhibited in Appendix I, and to 
the fact that in April, May and June, 1894, the circulation fell 
below the average for fifteen years. It is perfectly true that in 
the most progressive Canadian communities, cheques payable 
to order, as safe, convenient and efficient media of exchange, 
are fast supplanting bank note currency; that the establish- 
ment of clearing houses facilitates the process ; and that the 
profit from circulation paid out in the chief cities is consider- 
able only by reason of the large volume of retail transactions in 
which bank notes are still the medium. The average life of the 
notes issued in cities is comparatively short ; a bill paid over 
the counter of a Toronto or Montreal office one day, is tolerably 
certain, in two cafes out of five, to come against the issuer in 
the exchanges of the next day but one. But banking facilities 
are not required by the most progressive communities alone ; 
they are at least proportionally essential to districts less ad- 
vanced. 

In many of the less advanced or less wealthy communi- 
ties, there is still the discount business, accumulation of 
deposits, rind other sources of banking profits that would be 
sufficient to support local banks. What additional advantages 
are derived from the establishment of branch banks to meet 
these needs have been pointed out in § 56. There are many other 
Canadian communities, however — communities which we may 
describe as on the margin of the supply of banking facilities — in 
which the profits of the loaning business and the brokerage on 
deposits combined would not pay the expenses of a local joint- 
stock bank. The conditions on which, through the establishment 
of branch banks, they do secure the facilities necessary to their 
development, are the peculiar possibilities of profit and economy 
under the Canadian system of issue. 



li 



' l! 



818 



The Canadian Banking System, 1817-1890 



Where notes are based on the general credit of the promis- 
sors, an increase in a bank's circulation is a means of additional 
profit. Now, where there are no banking facilities in the 
immediate neighborhood — in villages and the sl "nding 
country whence both villages without banks, and the 
smaller towns where branches have been placed, chiefly derive 
their support — payments are very seldom made in cheques. 
The credit economy of such localities and districts, is still, to a 
great extent, in the first stages of development. Among their 
people and in retail trade, promises have supplanted money 
only in the form nearest like money, viz., bank notes. Access 
to banks is less convenient. Persons receiving notes are often 
unable promptly to make a deposit, or prefer to hold a certain 
quantity of thir- currency in provision against payments for 
which distance from the bank, custom or the preferences of the 
payees, make cheques unsuitable. Then, too, the habit of 
relying upon banks for the safe-keeping of spare cash is less 
strong. So the " life " of a note is much longer in the country 
and country towns than in the cities. While the amounts circu- 
lated by branches in sparsely settled or newly opened dis- 
tricts, are small compared with the payments made by city 
offices, considerable proportions of the bills issued for use, e.g., 
in paying the wages of farm hands and lumbermen, are neither 
seen nor heard of for average periods of from two to six months. 

By establishing offices in the country districts and newly 
settled towns, and by supplying the local need for loans, cashing 
drafts and otherwise assisting in the transfer of money, a parent 
bank is able to get this longer, larger and more profitable circu- 
lation for its own paper. Through judicious support of the local 
trade and industry, the branch at the same time extends the 
field for safe and profitable discount operations. The greater 
number of exchanges consequent on this development improves 
in a manner the opportunity for increasing the note circulation ; 
by providing a place of security for spare cash, and by paying 
interest on sums entrusted to it, the bank stimulates accumu- 
lation and promotes also the growth of its deposit business. 

The possibility of economy under the Canadian system of 
issue and of branch banking lies in the use of unissued notes as 
till money. The Canadian note, like others based on the credit 



Oft the Present Working of the System 



819 



•f> •> 



of banks and not secured by the pledge of particular assets, has 
no value, except the cost of printing, while in the possession of 
the bank whose promise it bears. It is the evidence of a contract 
to which, as yet, the promissor is the only party. Unissued 
notes represent no more expenditure, no more wealth, than the 
result of a morning spent m writing lOU's with the intention 
some time to exchange them for value. Yet unissued notes, ex. 
cept as small change, and for the purposes of the customer who 
occasionally requires a gold piece, serve every use obtainable by 
any branch bank from money itself. 

Banks have two principal classes of payments to meet, pay- 
ments to the public and to each other. Except when situate at 
the financial centres, Canadian banking offices usually settle 
with each other by means of drafts upon correspondents in those 
centres (Toronto, Montreal, Halifax). They need, then, no 
localized supply of monej' for these paym.ents, but a sufficient 
reserve or balance in the place where drafts are due. Payments 
to the public are of two sorts. Payments required for the pur- 
pose of remitting funds to outside localities are made by drafts 
upon the place to which the remittance is desired, or by drafts 
upon the financial centres. The only purpose for which actual 
money would be used, i.e., payments to the public in the locality 
where the branch is situate, is satisfactorily served by bank 
notes, a form of payment which costs the bank nothing to keep. 
The security of this circulating medium is so complete that 
notes are freely accepted by the public, even at times of runs 
upon deposits. Note redemption is brought about either by 
deposits of its own notes made with the bank, or through the 
settlement of balances exacted by competitive banks. The one 
method merely effects the metamorphosis of the credit accorded 
the bank by its customers. When balances in the daily bank 
exchanges are against it, a solvent bank in good repute can 
always effect redemption in the other method by drafts upon 
the financial centres. 

Under the Canadian system of issue, therefore, banking is 
carried on without the necessity and expense of localizing at 
each office a money reserve, and sufficient till money of intrinsic 
value, to guard against all contingencies. It does not follow 
that the reserves are weaker ; on the contrary, they are quite 






320 



The Catiadiaji Banking System, 1817-1890 



likely to be stronger. Placed, as they are, at the centres, re- 
serves are available in their entire strength for meeting demaiids 
wherever such arise. Furthermore, settlements between the banks 
are accomplished with a higher economy of the use of money. 
Practically none passes between the banks outside the centres, 
and at the centres money payments are only used to discharge 
balances. The gain in efficiency of the reserves is supple- 
mented by economies in their maintenance. Where the market 
for securities is strong and active, part of the reserves may be 
invested in first class bonds and stocks, or loaned at call on the 
pledge of such bonds or stocks. The cost of holding large 
amounts of idle cash as protection against possible dangers is 
thus materially reduced in a way scarcely possible when reserves 
are localized ; local markets could seldom be relied upon for the 
prompt conversion of securities. 

' How great is the saving of interest on the hard cash which, 
without the ability to use unissued notes, the banks would be 
obliged to hold as till money, is not particularly difficult to cal- 
culate. A " suit of notes," i.e., the quantity of bills prepared, 
signed and delivered to the various offices of a bank, is, as a 
rule, from one and a half to two times as great as the highest 
proportion thereof ever in circulation. The advantage to the 
banks, and here also, to the public, is not due to a new profit, but 
to the economy of real capital possible by use of notes as till 
money. If the banks were deprived of this advantage, it is safe 
to say that they would be obliged to withdraw some $10,000,000 
to $15,000,000 now employed in the trade and industry of Can- 
ada.^ This, be it understood, is quite independent of the $30,- 
000,000 to $38,000,000 more that the banks would necessarily 
withdraw if they were obhged to secure their notes by pledge of 
bonds, or were subjected to almost any other regulation under 
which it would cease to be practicable or advantageous to use 
unissued notes to fill their tills.'* Without the saving on till 



1 Cf. R. H. Inglis Pai-grave, " Analysis of the Evidence talten before tlie Select 
Committee of the House of Comnions on Banks of Issue, 1875," London, 1876, p. 11; also 
Replies to Questions 3801-3,4408-9, in the evidence itself. 

» Under the so-called " Baltimore plan " lately approved by the American 
Bankers' Association, the American banks and public would enjoy the increase of 
loanable funds possible under a system of issue against the general credit of the 
promissors, but many of the banks would be prevented by the very activity of their 



On the Present Working of the System 



321 



money and the extra gain from rural circulation, the banks 
could not serve the country so cheaply as they do now. With 
the sources of their advances partly diverted to other purposes 
and partly dried up, they would be obliged to raise the rate of 
discount or begin a long course of personal discrimination in 
supplying the needs of their customers. 

Many communities enjoying the support of banks as 
wealthy, well managed and strong as those in the largest cities, 
could no longer have such faciUties within their midst. De- 
posits at places " on the margin of supply " are often insignifi- 
cant and the brokerage on them trifling : the profit on loans 
and discounts, even with the additional charge of one-half 
to one and a half per cent, on account of the inferiority of 
the local security, is comparatively slight. Unsupplemented 
by profit on circulation and diminished by interest on till money, 
the two together would often fail to pay the salaries, postage 
and rent of a branch. Without the saving and the extra gain 
effected under the Canadian system of issue, the extension of 
branch banking would have been neither so wide nor so thor- 
ough as it has been.^ PecuHar possibilities of profit have in- 
duced the banks to establish new branches, and competition 
between the banks has forced them to divide the profit with the 
public. 



§59. — RESERVES ' 

;■<• Gold, as we have seen, is no part of the mechanism of Can- 
adian banking operations outside the centres. Except for mak- 
ing change under five dollars, there is a like economy of other 



business, from sharing the advantage of costless till money naturally incident to 
such a system. Each bank would receive only the amount of its authorized circu- 
lation in bills prepared by the United States Government, and as the limit pro- 
posed for each is only half the amount of its paid-up capital stock, it is probable that a 
great many of the banks would be able to circulate up to their limit and thus have no notes 
left for their tills. One w»y to secure the advantage would be to transform the " surplus," 
in many cases now very large, into capital. But when a bank's operations are confined to a 
single locality and one office, till money becomes practically indistinguishable from cash 
reserve. The importance of economies in till money is not -so great as under a system in 
which the issue of notes against general credit is scientifically combined with branch 
banking. 

» B. E. Walker, " Banks, Canada," in Inglis Palgravk's " Dictionary of Poli- 
tical Economy," New York, 1894, Vol. I., p. 100. "'The proportion of deposits to 
capital is still so small * * that branch banking could not have reached its present com- 
paratively perfect development, but for the note issues being specially secured. It has been 
argued that if this power was taken away or replaced by a specially secured issue, perhaps 
one-half of the branches would have to be closed." 



fM 



It ':' 



822 



The Canadian Banking System, 1 817- 1890 



kinds of money, e.g.. Dominion nott"^s, for which gold or its 
equivalent must be given. We have seen further that the chiei^ 
banking reserves of the country, as in Great Britain and the 
United States, are concentrated and kept in the principal money 
markets of the land. Five-eighths of all the banks in Ontario, 
and Quebec have their head offices either in Montreal or Tor- 
onto, and five-eighths of the Nova Scotia banks have their prin- 
cipal establishments at Halifax. The proportion of banking 
capital managed from the centres is much greater {vide § 56), 
So, too, with reserves. Though it was more or less distributed 
among their branches, these twenty institutions controlled $17,- 
003,686 of the $20,978,623 of specie and Dominion notes held 
by all the banks in the country on the 31st December, 1893. 
On the 30th June, 1894, ^^e proportion was $17,647,555 to 
$21,455,217. Banks with head offices elsewhere situate either 
have branches of their own in one or more of these cities, or 
keep balances on deposit with other banks there. ^ Four banks, 
one in Toronto, two in Montreal and one in Halifax, apparently 
have the lion's share of the business as bankers' banks. On the 
31st December, 1893, they had $1,845,057 of the $2,420,874 
reported as '* Deposits payable on demand, or after notice, or 
on a fixed day, made by other banks m Canada " ; on the 
30th June, 1894, $i)8oo,2i4, out of a total of $2,352,505.2 



I This statement, like many others of a similar generality, needs some qualifacatton. 
The banking development of Canada is not altogether homogeneous, any more than the 
climate, the race types, the trade and economic interests in different parts of the country are 
cast in one mold. The trouble is, the very distance of the several provinces and of the areas 
of thickest settlement, one from the other, presents a serious obstacle to Canadian unity. 
In many respects the old Provincial separation still survives, and there are a few banks tlie 
farthest limit of whose operations are the boundaries of their respective provinces. The 
business of the Maritime Provinces is quite distinct in numerous important details from 
that of Quebec, and in spite of their long union, Ontario and Quebec could not, without 
exceptions, be described as one undivided tield of activity. Of really characteristic banks 
of the Canadian system, however, every one of the larger provinces, except New Brunswick, 
perhaps, and Manitoba, has one or more principal establisliments. These corporations 
have placed offices in provinces other than the site ol their head offices, and some of them have 
opened up in British Columbia, Manitoba or New Brunswick ; others again hi two or three 
provinces besides their own. It is chiefly such banks of a national or semi-national activity 
and importance that should be kept in mind while the Canadian banking system as a whole 
is under discussion. Still, remarks about them, except those relating to territorial extension, 
generally apply with scarcely diminished-force to Canadian banks of a more local character. 
a The proportions for each of the four banks were : 

on the 31 

Dec, 1893 30 June, 1894 

Bank of Montreal $695,644 $703,460 

Canadian Bank of Commerce 275,966 273,748 

Merchants' Bank of Canada 753.66i 588,601 

Merchants' Bank of Halifax 119,786 2341405 

Total, 4 banks $1,845,057 $1,800,214 

Totil, 39 " 2,420,874* 2,352,405 

* Less Commercial Bank of Manitoba, $520 

How far the Bank of Montreal is the Canadian Bank of England," appears in respect 



On the Present Working of the System 



828 



or 
the 



;ation. 
the 
:y are 
areas 
unity. 
; the 
The 
from 
ithout 
banks 
swick, 
ations 
have 
three 
ctivity 
whole 
insion, 
racter. 



But there is this difference, already noted in another connec- 
tion, between the Canadian organization of credit and that of 
Great Britain or the United States. The centrahzation of banking 
management permits practically the same disposition of the bank- 
ing reserves during critical periods as in ordinary times. Con- 
flict of interest between urban and rural banks, and the institution 
of dangerous inland drains, are evils of panicky times in these 
other countries that Canadian banks are usually able to escape. 

The arguments for requiring banks always to hold money 
reserves equal, at least, to a fixed proportion of their liabilities, 
are hardly a part of our proper subject. There is no such obli- 
gation laid on the Canadian banks. It rnay be possible, by 
regulations of this type, to compel certain loosely managed 
banks to keep on hand more nearly an adequate supply of cash, 
but behind the policy there lurks the theory that legislators 
better understand the right conduct of banking than bankers 
themselves. The arguments, valid in Canada, against a fixed 
reserve, have been given at length in our statement as to certain 
proceedings preliminary to the Bank Act revision of 1890. To 
recapitulate here, the most obvious is the principle that a bank- 
ing reserve is a resource to be used rather than to be gloated 
over and talked about, just as fresh troops, if available, are used 
to turn the tide of a hard fought and undecided battlg. The 
military analogy is clear. Aside from this consideration we 
have to note the false security induced ; the fact that the require- 
ment has not been lived up to in the United States ; the rise of 
the rate of interest occurring when reserves, e.g., in the city of 
New York, are reduced to near the legal minimum ; the neces- 
sarily somewhat greater instability of commercial confidence 
under such regulations ; and the sufficiency, proved by Can- 
adian experience, of the first lien as security for the ultimate 
payment of note holders. 



respect 



to the item of hankers' balances from the figures just given. It is, to be sure, the oldest and 
l>y far the largest bank in Canada. It is the Government's depository and fiscal agent ; in 
the money markets of Chicago, New York and London, the three great centres of commerce 
for English speaking races, it is a factor whose importance may justly be termed con- 
siderable. In Canada its control of enormous resources makes the Bank of Montreal a 
tower of strength to the banking system. It commands the highest respect, the unwavering 
confidence and the implicit reliance of the entire country. But it has no peculiar privileges, 
no qualified monopoly like the Bank of England, and its former predominance is somewhat 
lessened by the fact that there ate now two other banks whose combined resources are 
nearly equal to its own. Many of the other banks also, are now richer and more powerful, 
compared to the Bank of Montreal, than were its competitors, e.g., in 1867. 

23 



i-! 



t 



824 



The Canadian Banking System, 1817-1890 



Some illustrations have been given of the manner in which 
the reserves of well managed banks vary in height at different 
times. They also vary in composition according to the circum- 
stances of different banks. A bank with its head office in 
Hamilton, Ottawa or Sherbrooke, needs to keep its principal 
reserves, not as money at its principal establishment, where pay- 
ments to the public are chiefly in notes and to the banks in drafts, 
but as a balance in Montreal or Toronto, where the principal 
demands upon its reserves are payable. And among banks 
situate in the centres, there is the greatest diversity as to busi- 
ness. St)me specialize in agricultural business ; some have a 
high proportion of lumber accounts ; some enjoy the custom of 
large importing houses with heavy customs duties to pay from 
time to time ; others may be characterized as largely tradesmen's 
banks, and others are heavy dealers in exchange, or again, the 
proportions in which various banks combine such classes of 
trade are different for each one. Some banks have enormous 
balances loaned at call in the United States, others hardly any 
whatever. For some the amount of deposits payable after 
notice or on a fixed day, is twice, for some thrice, for others four 
times, the amount payable on demand. Some have issued notes 
close to the authorized limit, two or three circulate barely one- 
fifth of ^hat they lawfully may. One bank, at least, has heavy 
Government deposits, and is constantly called on for large pay- 
ments of hard cash ; others have no Government account what- 
ever, or only the small deposits they have obtained as temporary 
keepers of revenue where the fiscal agent has no office. 

What legislator, then, what banker, or what convention or 
committee of bankers can rightly fix the proportion of specie 
and Dominion notes a bank shall always hold against its liabili- 
ties ? The true proportions are as many as the banks them- 
selves, as diverse as the character of their business on both sides 
of the account, and as changing as times and circumstances. 
At best the establishment of a minimum reserve is an attempt 
to do by legislation what legislation cannot accomplish. Laws 
may forbid corporations to engage in any but a strictly banking 
business, but for the wise conduct of that business, the only real 
provisions are the bank's instincts of self-preservation, and the 
enlightened self-interest of shareholders and directors in choos- 



On the Present Working of the System 



825 



ing efficient, experienced men to manage their trust. Upon 
directors and managers alone depends the choice of a bank's 
investments ; according to the wisdom or folly of their choice — 
the value and Uquid nature of its loans, or the depreciation and 
fixity of its investments — the bank will prosper or perish.^ 

For the four and one-half years preceding the ist July, 1894, 
the amounts of specie and Dominion notes held by all the char- 
tered banks at the end of each calendar month have averaged 9. 11 
per cent, of their total liabilities on corresponding days. The 
lowest percentage shown by the Bank Statement was 8. ; the 
highest, 10.08 per cent. This, it will be observed, is quite as 
high as the proportion of money kept on hand by the English 
joint-stock banks, although for most of them gold and its prac- 
tical equivalent, Bank of England notes> are the only till-money 
and form parts of their business machinery. Of the entire banking 
reserve, it is needless to say, money forms only a part ; the 
immediately available assets held by the Canadian banks, like 
those held by the English banks, are in much higher ratio to 
the total liabilities of the system. Thus, the items which may 
be taken, in a rough way, as constituting the banking reserve of 
all the Canadian banks were reported at the following amounts : 



^1 



H 



I C/., on the question of reserves, the general principles laid down by the eminent 
German authority, Dr. AnoLi'H Wagner, in his treatment of " Der Kredit u. das Bank Weseii." 
First as to the reserve of the banlc of issue : " The only theoretically and practically correct 
covering for notes (deckung) is the one obtained by banking operations, (bank mttssige) ; 
that is, the covering with cash in prooer combination with easily realized, short term, rights 
to demand, i.e., discounted notes. at the correct height of the specie reserve, or its mini- 
mum, cannot be determined for the bank of issue either in absolute figures or as a proportion 
of the outstanding circulation. It depends on the general conditions of credit, on the credit 
of the bank, on the state of the money market, on the conditions of industry, commerce and 
politics, on the course of foreign exchange, on the periodical need of commerce for currency 
— upon which the value of the smallest notes is also influential. The cash reserve must also 
sumce for any unusual return of notes to the bank for redemption. It can never be con- 
sidered alone, but only in connection with the other assets, especially the discounts, and must 
naturally be higher for a bank of issue, when at the same period it holds large amounts of 
deposits either on time or at call." 

Next, as to the cash or money reserve: " The Cash Reserve. Its pioper amount is 
dependent upon the time which the bank's liabilities have to run, — as to those due on 
demand (notes and deposits), upon their variable amount and the time of the actually result- 
ing demands— and further upon the demands for credit to which the bank must, in the 
course of business, regularly respond. With deposits at call or short notice, the reserve 
must be larger than with deposits at long notice. Further, the conditions of the time, the 
state of politics, of the money market, the course of the foreign exchanges, etc., etc., are to be 
regarded. Now a larger, now a smaller reserve need be maintained, especially when the 
other assets are easily and speedily available (realizable). * * * * The cash reserve at 
any one time really adequate can only be determined by the bank itself.'' 

Firfe ScHttNBERG (editor), "Handbuch der Poiitischen CEkonomie:" Tubingen, i8qo> 
Vol. I., pp. 462 and 438. 



826 



The Canadian Banking System, 1817-1890 



1. Specie and Dominion notes 

2. Balances due from agencies of the bank or from 

other banks or agencies in foreign countries 

3. Balances due from agencies ol the bank or from 

other banks or agencies in the United Kingdom 

4. Dominion Government debentures or stock. . . . 

5. Canadian municipal securities and British pro 

vincial or foreign or colonial, public securities 

6. Canadian, British or other railway securities 

7. Call loans on bonds or stocks , 

8. Deposits payable on demand, or after notice or 

on a fixed day made with other banks in Can 
ada 

Total 

Total liabilities 

Percentage of reserve to liabilities 



31st Dec, 1893 


30th June, 1894 


$30,978,623 


$2T,455,2II 


18,229,248 


16,650,82a 


3,540,220 
3.191.383 


3,086,167 
3.157.413 


9,981,680 

6,692,856 

14,236,629 


10,859.394 

8 240,707 

14,600,915 


3.630,883 


3.287,255 


$80,481,522 

218,622,965 

3685 


$80,337,784 
221,292,707 

36.30 



As might be expected, the proportion of the various components 
to the whole reserve, and of the reserve to total Habilities, varies 
widely as between different banks. Rather interesting compari- 
sons and a substantial basis for criticism could be derived from 
a table showing month by month for a series of years the pro- 
portion of quick assets held by the several banks against their 
total debts. 

There are two objections, however, to the inclusion of such 
a table here, its great bulk and the ambiguity of certain items in 
the form of the statement to the Government. Some call loans 
e.g., may be speedily realized only at a considerable cost. Only 
for the bank to which they belong is it possible closely to 
estimate the amount of its assets immediately available, either 
for conversion into cash in Canada, or in the United States and 
Great Britain, as a balance against which to draw bills of 
exchange. This view of the question is admittedly some- 
what doubtful. Any banker whom one addressed would 
probably deny its pertinence to his own bank and aver that the 
quick assets held by his institution were of the gilt-edge type 
throughout. Very properly, too, he might express ignorance as 
to the position of his competitors in this respect. A more rea- 
sonable view of the question would be to take it for granted that 
public securities, railway bonds and call loans are worth 



On the Present Working of the System 



827 



approximately what they are set down for, and usable when- 
ever required. 

On this supposition I have made a study of the Bank State- 
ment for the last five years, with particular reference to reserves. 
For most of the banks the results form highly creditable indica- 
tions of the watchful care of managers in guarding the stability 
of their institutions and in keeping ample provision for every 
contingency. But the reserves of a few banks have almost 
regularly been below the point which the managers of other 
banks, not too dissimilarly situate, have seemed to regard 
as both prudent and safe. This fact — the common pro- 
perty of all who take sufficient interest in banking, carefully 
to study the monthly statement — is one reason for the opinion 
elsewhere advanced (§ 55), that the number of Canadian 
chartered banks may be less in the future than it is to-day. 

One of the most beneficial minor effects of the Bank Circu- 
lation Redemption Fund has been the new community of interest 
among banks which grows out of their common liability with 
respect to the currency. It is believed that this advantage is 
hardly less than that derived in the United States from the 
plan of combined reserves, but it is realized in a somewhat dif- 
ferent way. The effects of the fund chiefly appear in the greater 
interest taken by banks in each other's welfare, the stronger 
solidarity in maintaining confidence, the inclination more 
promptly to grant deserved assistance, and the more powerful 
motive to act as mentor in recalling somewhat errant banks to 
the paths of sound policy. The strong banks have themselves 
the power to bring flighty ones to time, e.g., in the last resort, by 
refusing to take cheques upon them. Other sanctions are 
less severe ; banks not relatively so strong are frequently in 
need of loans or other accommodation, and a word or two from 
the grantor of the accommodation is generally sufficient. 

But the day may come when a bank or banks, who have 
heeded neither friendly warnings nor safe principles, and who have 
long lacked reserves by others thought adequate, will be unable 
without help to make the payments so rigidly exacted by Cana- 
dian banks in settlement after the daily exchanges. And then 
it can hardly be expected that other banks will consent to pro- 
long the existence of competitors who have constantly borrowed 



.1 



11 






828 



The Canadian Banking System, 1817-1890 



at more and loaned at less than the current rates, who have 
'• persistently built upward and outward the fabric of credit 
while persistently whittling away its base." In a system where 
the security of banking operations, within, of course, the field 
where banks may work, is almost entirely dependent on the skill 
and sagacity of banking management, the presence of institu- 
tions in anywise badly managed is an annoyance to well gov- 
erned banks, and n menace to the stability of commercial con- 
fidence. It nc ly aggravates banking competition, but it 
keeps a host of ^nworthy or incapable traders on their feet 
long after they ought to have been turned down. 

I repeat, therefore, as my own empirical and independent 
opinion, that the probability of strong banks advancing funds to 
tide such banks over failure, is extremely dubious. As to 
what steps they may take, one possibility can be inferred 
from the action of the other banks in giving help that the 
Federal Bank might be wound up with open doors. Another 
course would be to let the involved bank go down in unqualified 
failure, as the Commercial Bank of Manitoba was allowed to 
go. When the •'ondition of a badly managed or unprosperous 
bank is tolerab nderstood by the public, this course is the 
most convenieni , .e public forewarned, are forearmed, and no 
panic whatever follows the failure. A third course would affect 
only the bank in trouble and seme one of the othets. The 
trouble might be so far anticipated that shareholders could 
agree to reduce the nominal value of their stock, and ratify pro- 
posals for amalgamation with another bank. By any course of 
the three, the number of banks would be reduced. * - ' 



S 60. 



-BANI INSPECTION AND THE DEPOSITOR 



I. According to the opinion of Canadian legislators, as im- 
plied in the Bank Act, the depositor with a chartered bank is a 
person capable of looking out for himself. There is no require- 
ment of a fixed reserve for his protection, no Government 
inspection. The reasons for the latter emission, if such one 
chooses to call it, have already been detailed. They may be 
summarized here as (a) the impracticability of efficient Govern- 
ment inspection where banks are as complex and their business 



^ 



On the Present Working of the System 



829 



as widespread as under the Canadian system, and (b) the pro- 
vision for inspection already adopted by the banks themselves. 

Inspection is an integral part of a Canadian bank's admin- 
istrative routine, the need for which has been proved in a nega- 
tive way by the experience of banks who have neglected it. 
Looked at from another side, it is essential to sound manage- 
ment upon a full knowledge of a bank's liabilities, assets and 
circumstances. A bank with a number of branches usually 
employs at least one officer exclusively for the service of inspec- 
tion. In the larger banks he ranks third in the hierarchy, 
coming next to the assistant general manager or assistant cashier, 
reports to the general manager or cashier, and is under his 
direction. It is the duty of the inspector, with his assistants 
(who in some banks may be three or four in number), to 
make the round of the branches each year, or oftener, if 
possible, to pass upon the value and character of the commer- 
cial paper and other negotiable securities composing the bank- 
ing assets of the offices, to check over the books and otherwise 
to verify accounts, to inquire into the general working, prospects 
and business of the several branches, and to furnish detailed 
statements of his finding; criticisms and recommendations to 
the general manager. 

The general manager has his own opinion, he has informa- 
tion as complete as they can make it from branch managers ; he 
needs the result of the inspector's observations as to the value 
and character of his bank's assets, and it is given him with ful- 
ness, courage and independence. By comparing the three 
views, the general manager has a proper basis for deciding the 
policy he will pursue, the provision for bad debts he will 
recommend, and the curtailment or extension of the oper- 
ations of the respective branches. The inspector, as his rank 
indicates, must be a banker of the first class. In order to the 
just appraisal of the bank's loans, his experience must be wide 
and his judgment trustworthy. When the inspection staff is 
large, the work of the chief inspector and his assistant is con- 
fined to this problem, and the equally difficult task of reporting 
on the general policy, prospects and position of the branches. 
Counting cash "nd checking books is left to the routine inspector 
and the inspection clerks. 



I 



r-ii 



ft: I'l 



I: 



1. ! - 
1::' l;:; 



830 



The Canadian Banking System, 1817- 1890 



There is an obvious propriety in the inspector's reporting 
to the chief administrative officer of the bank, rather than to the 
president or board of directors. Should he report to them, 
the strained relations likely to arise between manager and board 
or manager and inspector, would be intolerable. Then, too, the 
data obtained by inspection are essential to the management of 
the bank rather than to the supervision exercised by the 
advisory committee of shareholders. Cases of collusion be- 
tween a general manager and inspector are rare. The latter is 
always a banker who has his own ends, reputation and future. 
He would not gain by stultifying himself. If the bank should 
fail, the facts would be certain to leak out. His name would be 
tarnished ; his career ruined. Besides, the public are critical. 
They have seen and learned that in the long run a bank which 
fails, fails because of bad debts. They have also come to believe 
that efficient inspection is the only possible means for a bank 
promptly to acquire knowledge of its bad debts and provide for 
them in time. The public will gossip of a bank as of a woman. 
If its inspector is a weak man, of slight ability or bad character, 
unscrupulous, a mere cioik, connected by family ties with the 
general manager, or otherwise likely to be too close to him, the 
public will say •' there's no inspection whatever of that bank," 
and act accordingly. 

So the depositor, if he chooses to seek it, can still have the 
security of inspection, not, to be sure, carried on for his special 
protection, but of an inspection more expensive, thorough and 
capable than the work of Government officials well could be. 
He enjoys, it is true, no preferred claim upon the assets of an 
insolvent debtor, even though his deposit bear no interest. In- 
deed, three classes of creditors — note holders, the Dominion 
Government and the Provincial Governments — must be paid in 
full before he gets a cent. The real security of the depositor is 
found in the large capitals and reserve funds of the banks, their 
prudent, careful management, the double liability of shareholders 
and the personal joint and unlimited liability of directors guilty 
of violating provisions of the Bank Act. It has been argued 
that, taking the system as a whole, shareholders must lose 
$63,000,000 of subscribed capital, $63,000,000 more of double 
liability and $27,000,000 of rest, $193,000,000 in all, before 



On the Present Working of the System 



881 



depositors can lose on their claims for $174,000,000.* The 
security afforded depositors by individual banks is more or less 
than the average indicated by these figures ; but it is high in 
every case. The experience of twenty-seven years with failed 
banks shows that where depositors and all other creditors have 
lost one dollar, sharel olders have lost twelve. 

To guide his cho xe of a bank, thf. depositor has the infor- 
mation obtainable from the monthly bank statement, the com- 
mon reputation of the different corporations, the general opinion 
passed upon their officers and the criticisms of newspapers and 
financial journals. li through ignorance or excessive timidity, 
he is inclined to distrust his judgment, the Government is always 
ready to borrow his money through the Post Office or Govern- 
ment savings banks, and to pay at least the current rate of 
interest on time deposits. Well-informed persons, however, 
especially those to whom time and the constant availability of 
their funds are considerations, object to the inconvenient restric- 
tions and red tape apparently necessary to deposits in and 
withdrawals from the Government banks, and prefer to leave 
their money with the chartered banks. ^ 

If the depositor will agree to leave his money with the bank 
for a specified time, or not to withdraw it without giving notice, 
usually of ten to fifteen days, the chartered bank will pay him 
an interest, the current rate now being 3 to 3^ per cent. The 
higher current rate is paid when the period is one of three to six 
months, or when thirty or sixty days' notice of withdrawal is 
agreed upon. 

Deposits of this class figure in the return as "deposits 
made by the public, payable after notice or on a fixed day." 
Their large amount, $109,924,925 on the 30th June, 1894, well 
indicates the efficiency of the Canadian system in gathering up 



fi 



; ■.!! 



I B. E. Walkkr, "C&nadlan Banking," Journal of tht CanadiaH Banktn' Association, 
Vol. I., p. 20. 

t Still, the balances due by all the Government banks have risen, almost steadily, from 
•5.230,733 on the 30th June, 187a, to §43,036,630 on the 30th June, 1894. (Public Accounts, 
Canada, 1893,0.76, ana Canada Gaxttte, Vol. XXVIII., pp, 302,303.) Twenty-five millions 
($25,257,868) of this was owed by the Post Office banks and #15,803,209 by the Government 
Savings banks, the latter beinp mostly in the Maritime Provinces. The funds thus obtained 
are not immediately invested in securities, as they are in Great Britain, The Government 
acts more as a borrower than as a trustee. Deposits made with its banks pass into the 
Consolidated Revenue Fund, and interest and withdrawals are a charge upon the revenue. 
Both items appear in the Budget. 



882 



The Canadian Banking System, 1817-1890 






the spare cash of the people and in quickening the flow of 
capital disbursed among laborers, farmers, artisans and others, 
back to the channels of commerce. It must be remembered 
that the sum is almost entirely of Canadian c )ntribution. The 
discount rate has long been so low in Canada as to preclude the 
profitable employment of British funds bearing the interest 
which other colonial banks are able to offer. Canadian banks, 
therefore, have not developed a British business ; their foreign 
liabilities chiefly arise from transactions in exchange. Interest 
bearing deposits are regarded by the Canadian depositors in the 
light of investments; by the banks, as among the most satisfac- 
tory and least troublesome of their liabilities. They are 
evidenced either by deposit receipts, or, when made through 
*' Savings Bank Departments," by entries in the pass-book of 
the creditor. As in other countries, the notice of withdrawals 
required from depositors of the latter sort is designed to protect 
the bank at critical times ; ordinarily the money is paid over 
as soon as the depositor signifies his wish for it. The more per- 
manent character of such deposits lies in the intentions of the 
makers rather than in the practical conditions of their with- 
drawal. 

The person who wishes to retain complete control over his 
moneys, deposits them on demand. Competition formerly led 
the banks to pay interest on the balances of active current 
accounts. Now, however, the custom is nearly obsolete among 
wdl managed banks. In rare cases, when the balance of the 
depositor is large, has a permanent character, or promotes, as 
an account, important incidental advantages, the bank may still 
allow an interest. Aside from the convenience of making pay- 
ments through the bank and the security of funds left with it, 
the depositor on demand generally expects to derive certain 
other benefits from the bank in his relation to it as a borrower. 
He cannot, therefore, exact so much as the customer who 
merely expects the bank to hold his savings safe, and to whom 
interest is paid, partly as a just compensation for the use of his 
money, partly as a means to the important economic end of 
utilizing all the available capital of the community in the opera- 
tions of trade and industry. 



On the Present Working of the System 



883 



§ 6l. — THE SHAREHOLDER AND BORROWER OF THE CANADIAN BANK > 

I. As guarantors of its liabilities, the shareholders of a 
bank are liable not only for the amount of their subscriptions to 
stock, but also for an equal amount in addition. The very fact 
that close to five-sevenths of the total resources of Canadian 
banks are derived from sources other than their proprietors, 
makes patent the necessity for some such guarantee. Various 
precautions are established by the Bank Act in order that the 
liability of shareholders shall be real and available. A new 
bank may not start without giving substantial evidence of a 
capital foundation contributed bond fide. Subscribers refusing 
or neglecting to pay calls made by directors, forfeit ten per cent, 
of their shares; they may not vote at meetings while calls, then 
due by them, are still unpaid ; calls may be enforced by suit ; or 
sufficient of the holders' stock may be sold to provide the 
amount necessary, after deduction of expenses and penalties, 
to pay up their remaining shares. The provisions for promptly 
enforcing the double liability include, among others, entire for- 
feiture of claims to dividends on refusal to pay calls, the recov- 
ery of calls by suit, and the continued liability of the transferor 
on shares the transfer of which shall have been registered within 
sixty days of the bank's suspension of payment. A further 
safeguard, effective chiefly as an exhibit of the character of each 
bank's proprietary and the changes occurring therein, is the 
requirement of an annual return to the Government of the names 
of the shareholders of each bank, their places of residence and 
the amount of stock held by each. 

Other clauses of the Act, dealing with the transmission of 
shares, declare no transfer valid unless registered, and accepted 
by the person to whom it is made, nor unless the person making 
the transfer, if so required by the bank, has discharged his debts 
to the bank exceeding the value, at the current rate, of the re- 
maining stock belonging to him. The bank has a prior lien on 
shares of persons indebted to it, a security on which it must 
realize by selling the stock within twelve months after the debt 
becomes due and default occurs in payment. Partly, it is sup- 
posed, to prevent speculation m shares, no contract to transfer 
shares is valid unless the person making the transfer is the 






i? 






884 



The Canadian Banking System, 1 817- 1890 



registered owner of the shares, or has the owner's consent to the 
sale and specifies the distinguishing numbers,* if any, of the 
shares transferred. * * * Under these and a number of 
other restrictions for the most part only of technical legal interest, 
his position as a guarantor and the liabilities of the shareholder 
are fixed and certain ; if he have visible wealth other than his 
stock, they are practically inevitable. 

As a proprietor, or rather as an investor, his position is not 
always so certain. Buying or subscribing to bank stock is a 
business venture, subject to the business risk. The profit from 
the investment depends, more or less, upon the sagacity and 
prudence with which the risk is placed. Passages in the histori- 
cal chapters of this investigation have shown how, in former 
years, shareholders have borne well nigh the whole burden of 
loss caused by careless, unsound, dishonest or imprudent bank- 
ing, a loss that can be estimated at nothing less than $23,000,000 
in twenty-seven years. What has happened will happen here- 
after. The first purpose of successive improvements in Bank 
Acts must be to minimize injury to bank creditors, rather than 
to bank proprietors. Still, Canadians frequently remark that 
faults in banking management are fewer now than they were in 
earlier years, or that the business is conducted on safer lines 
than ever before, and they believe that the future will bring 
further improvement. Evils have never been more than spora- 
dic. A number of banks have enjoyed a steady growth from 
the time they were started ; in bad times they have, perhaps, 
slightly reduced their dividends, but they have always been able 
to provide for losses from the balance at credit of profit and loss. 
A number of others, not quite so fortunate, while obliged to 
trench upon reserve funds, have never had their capital stock 
reduced and have never passed their dividends. 

If his choice is judicious, the bank investor can find plenty 
of stocks on which the payment of the semi-annual dividend is 
as nearly sure as commercial ventures well can be, and from 
which he is likely to gain in the added value, '* the unearned 
increment " usually accruing to the stock of a well-managed 
bank, as it grows older and shares in the advancing prosperity 



I It is not the custom of Canadian banks to number their shures. 



On the Present Working of the System 



886 



of its customers. In 1893- 1894, six o^ the banks have paid 
dividends of 6 per cent., seven of 7 per cent., two of 7^ per cent., 
nine of 8 per cent., two of 10 per cent, and two of 12 per cent. 
The dividends paid by the principal banks in the last four years 
appear in Appendix II. 

Partly to protect the shareholders from fluctuations in the 
rate of dividends, it is provided by the Bank Act that no division 
of profits exceeding eight per cent, per annum of the capital 
stock shall be declared until the rest or reserve fund (" surplus" 
in the United States) shall equal thirty per cent, of the paid-up 
capital of the bank. By avoiding changes in the dividend rate, 
this accumulation of earned profits left with the bank also tends 
to minimize the fluctuation in the value of shares that stimu- 
lates speculation. Canadian bankers think it desirable to have 
their stock held by investors bond fide, and for years some of 
them have congratulated their shareholders upon the diminu- 
tion of speculative holdings.* It is hardly necessary to add 
that the rest furnishes an additional guarantee to the creditors 
of a bank ; while undivided, it is strictly corporate property ; its 
existence nowise diminishes the liability of stockholders, 
although it does furnish them with a substantial protection 
against the possibility of being called on for further contri- 
butions. 

As a matter of fact, rests are much larger in many in- 
stances than the proportion mentioned in the Bank Act. Any 
addition to the fund is ordinarily reflected in the price of the 
stock, for the rest increases the earning power of the bank which 
holds it. It costs neither dividends nor interest, and most man- 
agers and proprietors believe that higher returns are obtained 
from profits thus undistributed than could be secured by pro- 
prietors if the fund were divided among them. The Bank of 
New Brunswick, therefore, has accumulated a rest of 105 per 
cent, and pays a 12 per cent, dividend ; the Dominion Bank has 
one of 100 per cent, of its capital and pays 12 per cent.; the Bank 
of Nova Scotia, one of 80 per cent, and pays 8 per cent. ; the 



■ ■ 

,1' 



1 In the small number of transactions in shares Indicated by the market reports, it is 
possible to see how complfctely, at the present day, bank t-tock has passed into the hands of 
permanent holders. There is no better or stronger evidence of the confidence placed by the 
public in the solidity of the banks than its appreciation of bank shares as investments. 



jf:' 



886 



The Canadian Banking System, 1817- 1890 



Bank of Toronto, one of 90 per cent., and pays 10 percent. 
The Imperial Bank, the Bank of Hamilton, Standard Bank, 
Bank of Ottawa, Bank of Montreal, Banque du Peuple, Mol- 
sons' Bank, Merchants' Bank of Halifax, Merchants' Bank 
of Canada, Halifax Banking Company and the People's Bank 
have each a rest equal to 50 per cent, or more of their paid-up 
stocks. 

Too seriously to emphasize the liabilities of shareholders in 
the Canadian banks will be to make a grave mistake. Investors, 
no doubt, take a certain account of the liability, but in respect 
to eleven-twelfths, at least, of the subscribed banking capital of 
the Dominion, the probability of occasion arising for its enforce- 
ment is so remote, so slight, that the liability is practically dis- 
regarded. The stock in well managed banks is esteemed one of 
the safest and best commercial investments in Canada. Stocks 
yield to the buyer from 4 to 6 per cent, on the market value 
of his purchase. It may be worth while to note that the lowest 
yield is usually obtained from stocks commanding the highest 
premium. The accumulation of a rest makes property in a bank 
somewhat more secure, and the firm establishment of banks 
which have been able to acquire large rests rather improves the 
prospects of regular and uniform or gradually rising dividends. 
Other factors in the market estimate of a stock, are that growth 
of a bank's good-will, the increase of its credit and the formation 
of a clientele — for all of which time and good management are 
necessary. 

These considerations make shares in particular banks 
especially desirable investments, and help to raise their price, 
even considerably above the point at which the rest would be 
fully provided for in the value of the stock, or at which the 
''ield to the investor would be as high as from the stock of banks 
less favorably situated. Shareholders exclusively get the bene- 
fit of any such increment of value accruing during the period of 
their proprietary. To realize it, either they may sell their hold- 
ings, or in case it is decided to increase the capital of the bank, 
they may sell the new shares allotted to them. It is provided 
by the Bank Act that bank directors shall not require from 
holders to whom allotments are made, a rate of premium on new 
shares exceeding the percentage then borne by the rest of the 



'T 



On the Present Working of the System 



837 



bank to its capital stock. The holder gains the difference be- 
tween this price and the higher market price. 

II. The position of the borrower has received some atten- 
tion in the discussion of large banks, branch banking, and the 
Canadian system of issue. I have pointed out there the wide 
and thorough distribution of banking facilities, the equalization 
of discount rates, the avoidance of periodical fluctuations in the 
cost of loaua, and the extensive control of funds exercised by 
the Canadian banks wherever their establishments are in opera- 
tion. A consequence of this control, which has also been pre- 
viously noted, is the ability of each bank to supply whatever 
may be judged the needs of its own customers, and to enforce 
the rule of •' one customer, one bank." 

The natural, desirable and usual corollary to this rule is the 
establishment of confidential relations by the borrower with his 
banker, as a condition precedent to any advance. The bor- 
rower lays before the banker the state of his business, usually 
by means of an actual balance sheet ; he explains to the 
banker the purpose for which the advance is required, 
and gives such general information as to his prospects, 
condition and business as can assist the lender in judging 
as to the expediency of granting the amount asked for, the sin- 
cerity of the borrower's explanations, and the probable produc- 
tivity of the advance. As a rule, the discussion of the balance 
sheet is required each year, and the banker sets a limit or 
** grants a line of credit " up to which he agrees to supply the 
borrower as needs arise in the course of his season's operations. 
The general possibilities of the mentorship, the restraint on 
speculation and the check on over-expansion which can be 
exercised by cautious, far-seeing and sagacious men as bank 
managers under such conditions, have been reasoned out to the 
conclusion that the country in which they are thoroughly 
realized will enjoy practical immunity from commercial crises.^ 
The experience of Scotland for a long period of years, and of 
Canada since 1879, would seem to confirm the writer's views. 
At any rate bankers do not so often discover that they " have 






'I 



; $ 



> Cf. S0MER8, The Scotch Banks and System of Issue, pp. 113-114, on Scotland's 
escape from crises. 



888 



The Canadian Banking System, 1 817- 1890 



unwittingly been booming a corner lot, building a mill or help 
ing to float a company."* 

As the Canadian corporations are predominantly commer 
cial and industrial banks, we may disregard, for th; present 
loans made on the security of bonds and stocks, temporary and 
unsecured advances to persons of great wealth and high credit 
and occasional suppHes to shareholders merely, e.g., on unin 
dorsed promissory notes. 

Borrowers in general, whose purposes are approved by the 
banks, seek advances to anticipate returns from sales of com- 
modities already concluded, to make, to move or to carry com- 
modities for the purpose of selling them. In other words, 
banks as a rule will extend credit only when there is a prospect 
that the use of the advance will provide the means for its pay- 
ment. Otherwise they incur losses and lock-ups. It is, further, 
a well established principle of Canadian practice that advances 
shall be secured. ,.; , ' . 

Those who borrow to anticipate returns from concluded 
sales are technically the discount customers of the banks. The 
security they give is the two-name paper purchased by the 
bank, i.e., promissory notes indorsed by the payee, time accept- 
ances of debtors for which the drawee is still liable, or indorsed 
bills of exchange. The bank thus has two guarantors of repay, 
ment, the one directly liable, the other by way of recourse, and 
both commercial houses who must meet such obligations in 
order to preserve their solvency. Another class of discount 
customers are farmers, who usually borrow on their promissory 
notes, indorsed by one or more of their neighbors. 

Persons making commodities for sale are usually expected 
to secure the banks which assist them in the method provided 
by those clauses of the Bank Act of 1890 which relate to the secur- 
ity given by wholesale manufacturers, millers, distillers, packers, 
etc. {Vide § 52.) The security given by those engaged in 
shipping goods to market or holding them for the purpose of 
sale, is likewise, in many cases, the material security of valuable 
goods, and the rules for its assignment are provided by the 



1 B. E. Walker, "Canadian Banking, "Journal of the Canadian Banken' Association, 
Vol. I., p. 22. 



f 



On the Present Working of the System 



889 



'«. 



Bank Act in the clauses dealing with warehouse receipts, bills 
of lading, specifications of timber and the like. Under the same 
category (of persons carrying goods with intent to sell them), 
come many wholesale houses, importers, exporters, dealers in 
general merchandise and a large variety of retail traders. It is 
usually necessary to give the bank collateral security, if it exists, 
but where no collateral is at hand, the borrower, according to 
the best practice, is required to furnish the bond of other respon- 
sible parties, to secure the repayment of his banker. In their 
essence, all the transactions mentioned in the paragraph are loans, 
but in form they frequently appear as discounts. Canadian 
bankers prefer to make advances on negotiable instruments, 
rather than overdrafts, even though the promissory note taken 
from the customer for loans is nothing more than an evidence 
of the bank's claims. 

The rule as to renewals no longer shows the same simplicity 
as when Upper Canada was a separatel}' governed province. 
Whether a renewal is permitted now depends upon the purpose 
for which the advance was made and the pertinent circum- 
stances. Produce buyers and grain shippers or others f^r whom 
the season of operations and sales is brief, would hardly be 
allowed renewals. 

Customers obtaining the discount of paper payable at 
places other than the place of discount, are subject to an addi- 
tional charge for the expenses of agency and collection not 
exceeding one-half of one per cent,, when the paper is payable 
at the office of a bank other than the one discounting. When 
the paper is payable at another office of the same bank, the 
charge permitted by the Bank Act, which may not exceed one- 
half of one per cent, for paper payable in ninety days or over, 
is proportionally less for shorter term advances. These pro- 
visions, intended to assure to banks in certain cases somewhat 
more than the interest at seven per cent, per annum they are 
permitted to deduct at the time of discounting or recoyer by 
suit, are not of particular importance under the ruling condi- 
tions. The rate of discount on first-class commercial paper 
does not usually exceed 6^ per cent, in any part of Canada 
except British Columbia. 

The borrower whose accovint is •* valuable" is likely to se- 



iHh 



n 



- !i f»-| 



.*rl 



840 



The Canadian Banking System^ 1 817- 1890 



cure favbrable rates on the additional charges for agency. If, 
for example, he usually keeps a large balance at his credit, if he 
receives or uses a large amount of exchange in his business and 
sells or obtains it through his bank, or if, again, he uses quan- 
tities of bank notes in his disbursements, the bank which has the 
account can afford to perform services for him at lower rates 
than for those whose custom opens no such incidental sources 
of profit. He is likely to be accorded somewhat greater facilities 
in the matter of loans. What extra gain the banks obtain in 
one way, competition generally compels them to return in 
another. 

A question as to the borrower's position which we have yet 
to e::amine, is the treatrrent he receives from his bank when the 
money market tightens, the financial horizon becomes obscured 
and every one begins to prepare for trouble. Is the borrower 
allowed to carry through the undertakings begun on an under- 
standing as to loans ? Or is he sacrificed to the exigencies 
of the time and forced to realize at a loss, in order to pay a 
debt ? What is the meaning of the banker's proposal " to take 
care of his customers?" For an answer, we need only to 
recall the spring and summer of 1893. 

In the first half of that year many an agent of first rate 
American houses, provided with unexceptionable securities, 
offering paper at all the way from 8 to 14 per cent., and pro- 
mising permanent custom if immediate needs were supplied, 
was sent away begging from one Canadian bank to another. 
But even then Canadian customers of these banks got advances, 
if they needed them for legitimate purposes, up to the full 
amounts of their credits, and at rates no higher than seven per 
cent. The banks had to import more than $8,000,000 to do it, 
they had to reduce their American balances at a time when the 
reduction was most difficult and unprofitable, they lost safe 
chances for high though temporary profit, but they were under 
obligation to support their customers and they did support 
them. Current loans were increased by over eleven millions 
between the last day of January and the first of July, although 
between the last of January and the last of August, barely half 
a million was added to circulation, and deposits on demand 
were reduced by more than six millions. I" the table below 



On the Present Working of the System 



841 



appear the changes occurring in the significant items of the bank 
statement, month by month, from January to December.* Noth- 
ing could better illustrate the protection enjoyed by the wor- 
thy customer under the Canadian system of banking. In criti- 
cal periods, his accommodation is not ruthlessly curtailed, nor 
the price of it excessively augmented. 

§ 62. — THE BUSINESS OF CANADT\N BANKS 

In revi' wing the important or interesting facts relating to 
note holders, depositors and borrowers under the banking 
system of Canada, in discussing reserves, inspection and other 
points, many of the salient features of the miscellaneous banking 
business carried on with the Canadian public have already been 
more or less fully explained. A second explanation in this 
connection would be repetition from a different point of view, 
rather than the formulation of new material. The proportions 
of various items in their assets and liabilities to their capital 
stocks, and sundry other facts respecting the several banks, 
appear in Appendix II. . ^ , 

Aside, however, from those commonly denoted by discount, 
deposit and issue, the business of the Canadian banks includes 
other types of transactions. The Canadian chartered banks 
perform nearly every variety of the mercantile banking services 



I 



il 
'I 






_ 






.s. 


2S 


a 




is 


2 S 






01 


1 


B 



•a <2 


^•s 


§5 


Si-S'2, 


•§]§ 






(n 


CA 

a 


§ 


a 



3 



ia 


"■a 

b 


It 


Balances d 

Agencies 

United Kin 


M 

S,a 


a hi} 
(4 C 


Balances du 

Agencies 

United Kin 


•a 





i 

u 




• 


t 


« 


s 


» 


* 


S 


9 


$ 


$ 


e 


te. 


32.831 


67.459 


102,097 


81 


4,100 


19,695 


21,626 


1432 


14,606 


18,833 


197.256 


32,978 


66,822 


103,140 


87 


4.766 


19.791 


21,397 


1,159 


14,264 


19.456 


197,709 


Mar. 


33.340 


64.536 


103,700 


127 


6,412 


17,857 


20,539 


375 


14.395 


17,655 


204.903 


Apr. 
May 


32.633 


64.542 


104,216 


139 


6,101 


19.378 


17.165 


2.324 


14.306 


i6,46q 


206,789 


31.927 


64.859 


105,581 


163 


5,504 


19,230 


17,814 


1,182 


14787 


15,213 


207,685 


une 
uly 


33.483 


64.975 


105,841 


210 


4.751 


18,547 


17.331 


1.587 


14,786 


14,880 


208,793 


33.573 


64,563 


^06,563 


124 


4,600 


19.205 


15,616 


3,860 


15,080 


15 141 


206,937 


Aug. 


33.308 


61,437 


105,015 


169 


5.538 


20,456 


13.562 


3,364 


15,377 


14.398 


205,956 


Sept. 


35.128 


6 ,245 


104,004 


221 


5.31a 


20,214 


13451 


4,243 


15,562 


14,960 


204,654 


Oct. 


36,906 


62,524 


103,577 


179 


4.966 


20,588 


14.839 


3,918 


15.446 


14,681 


204,854 


Not. 


35iiao 


62,926 


104,414 


131 


4419 


80,630 


16,242 


4.827 


X6,439 


14,465 


201,996 


Dec. 


34.418 


62,594 


107.785 


166 


4.151 


20,P'8 


18,229 


3,540 


16,573 


14,236 


200,397 



:i 



] "t 



842 



The Canadian Banking System^ 1817-1890 



I 



required wherever there is sufficient business to support an 
agency or branch. Quite all the trade they do not enjoy. In 
collecting deposits, e.g., they have as competitors both the Gov- 
ernment savings banks and the loan, mortgage and investment 
companies, as well as some building societies — the latter being 
corporations that loan money on real estate — most of whom 
receive deposits at interest. There are also a number of private 
bankers who receive deposits, conduct a loaning business in 
places where no chartered bank is established, and frequently 
place money elsewhere, in such amounts or on such security as 
would make the transaction unacceptable to a chartered bank. 

But of incorporated savings banks, such as one finds in al- 
most any American city of twenty thousand inhabitants, there 
are not more than five in the whole country. With two excep- 
tions these are in the cities of Montreal and Toronto. " The 
Savings Bank Department" usually attached to the branch 
offices of chartered banks forms a place of safety for the spare 
earnings of the people, and is now opened in many a locality 
where a mere savings bank could not eke out existence. The 
practice of banks in computing interest upon deposits varies in 
different parts of the Dominion ; in some districts interest is 
paid from the day of deposit to the day of withdrawal; in others, 
it is computed on the minimum monthly balance, though when 
this is the case, the rate allowed is often somewhat higher than 
when interest is paid on the daily balance. What proportion 
the mass of small accumulations thus acquired and eventually 
devoted to productive purposes, bears to the total deposits at 
interest with the chartered banks, there are no official statistics 
to indicate. 

In addition to Canadian collections and transactions in 
domestic exchange, many of the banks undertake the negotia- 
tion of municipal debentures, city bonds, and occasionally pro- 
vincial securities. They do not act as brokers, but buy the 
securities outright, after the manner of specialized bond dealers 
in the United States. Some banks issue commercial credits 
available in whatever parts of the world the importers and trad- 
ers among their customers are likely to require funds. They 
also issue travellers* credits and circular notes, these also being 
available in any part of the world with which a banking corres- 



On the Present Working of the System 



848 



pondence can be established. Not all the Canadian banks 
engage in this class of business ; not all the banks are examples 
of what may be termed the Canadian type. There are still 
some banks, ten in all, perhaps, whose interests are at most but 
sectional, and whose business is chiefly confined to discount, 
deposit, issue, and such transactions in domestic exchange 
as may be required within the sections where the banks work. 
The typical Canadian bank, however, is a corporation con- 
trolled from one of the centres, and capitalized for a million or 
more, which has its branches at a number of points in one or 
more provinces, its correspondents in London, England, in 
numerous cities of the United States, and at different European 
and Oriental marts, and consequently the facilities for practically 
any kind of safe transaction that may be offered it. 

Four of the banks have agencies of their own in the city of 
New York, one a branch at Chicago, another an agency 
there as well as at Kingston, Jamaica, and another still, 
branches in San Francisco, Portland, Tacoma and Seattle.* 
With the exception of the agencies in New York, the American 
agents are engaged in a miscellaneous banking business, the 
amount of which cannot be inferred from the bank statement, 
because the parent banks are required to report merely the 
balances due by agents, agencies or other banks in foreign 
countries. 

New York city is used by all the larger Canadian banks as 
a place to keep parts of their reserves. When the bank has 
no agency of its own there, it can arrange with some local bank 
to loan its moneys at call, or it can get a certain interest by 
depositing a balance with one of the local banks. The balance 
may then be used as a basis for drawing New York exchange, 
or as a means of purchasing needed sterling exchange when 
the New York market is more favorable than the Cinadian, 
or as a means to purchase specie when it is necessary to 
import gold to Canada. Banks which had their own estab- 
lishments at New York in 1873, used their agents for the 



■y 

g 



I The Bank of British Columbia, controlled, like the Bank of British North 
America by a Court of Directors sitting in London. Both are institutions acting under 
Royal Charter, but subject to the regulation of the Canadian Parliament. The latter 
bank also has an agency at San Francisco, 



• 



Hi 



The Canadian Banking System, 1817-1890 



employment of portions of their funds until required else- 
where. An agent employed money forming part of the general 
fund reserved by his bank to meet shortly maturing or unex- 
pected liabilities, partly on loans maturing on demand, for which 
no vouchers were received (call loans on bonds and stocks), 
and partly in loans payable at specified times, for which he 
received notes, drafts and other commercial paper. ^ Even then 
the Bank of British North America and the Bank of Montreal 
had long been two of the "five great names" of the sterling 
exchange market. 

At present the New York offices very seldom loan on time, 
• though when good rates are offered and no funds are required, 
either in Canada or abroad, they are willing to make an occa- 
sional time loan. But their principal business is loaning at call 
on negotiable securities to stock brokers and ethers, the purchase 
and sale of sterling exchange, and making transfers of money by 
cable. Their British correspondents, in two cases, maybe their 
own London offices, but both for these and the other banks 
are usually such institutions as the Clydesdale Bank, Limit>3d, 
the Bank of Scotland, the London and Westminster Bank, the 
Union Bank of London, the banking house of Messrs. Glyn & 
Co., or the British Linen Company Bank. Correspondents else- 
where are of equal standing, so that wherever it is payable, the 
bill drawn by a Canadian bank is of the highest class. The 
New York agencies do not receive deposits or discount notes. 
They have no considerable liabilities and practically the whole 
amount of their funds is always available. 

What use is occasionally made of this reserve may be illus- 
trated by the action of the banks during the Canadian stringency 
of early 1875, and still more graphically by the net decrease of 
the ** foreign balances" (which really mean, for the most part, 
American balances), by over eight million dollars between the 
last of January and the last of August, 1893. Yet the advantage 
of their establishments in the United States is not by any means 
confined to the Canadian banks. In New York, the sellers of 
cotton bills, with whom their transactions are enormous, doubt- 
less feel that the benefit is mutual. So, too, the great grain 



I New York Supreme Court Reports (T. ft C), p. 639. 



On the Present Working of the System 



345 



iin 



merchants in the export trade. Many a dealer in stocks has 
had occasion to thank these foreign corporations at times when, 
just as many banks were calling in their loans, and it seemed 
that borrowing from others would soon be ruinous or impossible, 
the agents of Canadian banks have come into the Stock Ex- 
change with offers to advance freely as long as the security was 
good. Farther west, large sums of surplus Canadian money 
are employed in the grain markets of Minneapolis, Duluth and 
Chicago. On the Pacific slope, where the Bank of British 
Columbia is established, it ranks as one of the most important 
corporations of the kind. In San Francisco the other British 
bank has an office in which is carried on a heavy business in 
exchange and such other transactions as circumstances permit. 

New York, of course, is not the only scene of the transac- 
tions of the Canadian banks in sterling exchange. Nearly 
every one of the chartered companies has its London correspon- 
dent, and deals in sterling bills. The rate of interest in com- 
paratively quiet periods is so low in London that it is more 
profitable for a bank to hypothecate a part of its securities, bear- 
ing interest say at 4 per cent., than to keep a cash balance 
loaned out at call there. Consequently the Canadian barkj are 
usually somewhat in debt to their London correspondents. By 
reason of the branch system and the presence of a number of 
banks well equipped for such transactions, there is plenty of 
competition in the Canadian exchange market, and a buyer or 
seller is always near at hand. The Government takes advan- 
tage of this when negotiating London bills by inviting tenders 
from all the banks. 

What particular gain there may be in making foreign pay- 
ments or collections through the agencies employed in the 
manifold exchanges of domestic trade, I do not purpose to 
examine. The convenience, doubtless, is greater. The banks 
of New York City and the National banks generally — with 
marked exceptions in Chicago and California — have left the 
business in foreign exchange and a number of other banking 
operations, to houses specializing in those lines, chiefly private 
or foreign bankers. National bankers lack both the facilities 
and training for such business. Particularly for dealing in 
exchange, the operator needs habits of close observation, acute 



-ft 

I'* 



846 



The Canadian Banking System, 1817-1890 



reasoning faculties, prudence, caution, decision, a varied experi- 
ence and thorough technical training. The Canadian chartered 
banks can successfully undertake the business, for it is exactly 
these qualities in its servants that the Canadian banking system 
is admirably calculated to develop. 



Further details belong to the technique of banking pratctice 
or to the minutiae of banking law. How far the principles on which 
the Canadian banks are organized, by which ihey are regulated 
and according to which they are managed, are of general ap- 
plication, is a question to be decided as the banking system 
conforms to the general economic tests. How the Canadian 
banks economize capital ; how they utilize and distribute it ; what 
is the security, convertibility and elasticity of the circulating 
medium they supply ; how thoroughly are their creditors pro- 
tected against loss ; how low and how nearly equal are the rates 
of interest in different parts of the country ; how cheaply are 
other banking services sold; how easy of access are banking 
facilities; what support have worthy customers in critical times, 
and how far does the system promote the stability of commercial 
confidence: these are questions to which, perhaps, this chapter 
forms an answer. According to the true response, the merits of 
the Canadian Banking system must be judged. If the present 
answer be sufficient, the reader may draw his own conclusions. 



"**""^^^n!Himi*iP9n9ISi 



I 
I 



APPENDIX I 

TABLE SHOWING THE GRAND TOTALS OF THE LIAHILITIFS 

AND ASSETS OF THE CHARTERED BANKS 
Of the Dominion of Canada as reported to the Government on the 30th 

June. 1867; the 31st December. 1868-1893; and the 30th |une. 

1894. 



Itui 



re 
Go 



Prov 



jy.^_ 



Table showing the Grand Totals of the Liabilities and Assets o 



Number 

of 

Banks 

reporting 

to the 
Gov'ment + 



28 



39 
39 
39 

11 



38 

I! 

3« 



38 
39 
39 
99 



1867, 
1868, 
1869 
1870 



1871. 
1872. 



1873 
1874 
1875 
1876, 
1877 
1878, 
1879, 



1891 

189a 

1893 

30tn June, 1894. 



Capital 

Authorized 

by Act 



$41,066,666 
42,166,666 
40,566,666 



852,113,998 
65,666,999 



1880, 
i88t. 
1882. 
1883 
1884, 
1885. 
1886. 
1887, 
1888 
1889 
1890 



868,766,666 
73,566,666 
77,266,666 
71,966,666 
74,266,666 
72,766,666 
67,266,666 



$66,766,666 
66,266,666 
68,146,666 
69,396,666 
71,896,666 

74.179.999 
79,579,666 
76,079,999 
75.779.999 
75.779.999 
75,008,665 



$75,758,665 
75,958,685 
75.458.685 
75.458,685 



Capital 
Subscribed 



$42,157,656 
57,881,216 



$63,782,916 
69.376,976 
71,999,321 
70,129,766 
69,127,566 
67.426,557 
63,106,633 



$62,359,533 
62,176,933 
63,822,183 

63.555.133 
64,685,933 
65,720,299 
64,276,699 
62,944.399 
62,254,599 
62,378.499 
61,253.73s 



$62,674,953 
63.169.643 
63.170.654 
63,171,952 



Capital 
Paid-up 



$32,500,162 
30,451.519 
33.794.989 
33.449,963 



$41,668,729 
50,954.099 



•57,931,359 
63,212,027 
66,800,225 
66,137,315 
63,756,861 
64,257,010 
60,351,505 



$59,819,603 
59,677,363 
61.039,657 
61,451,733 
61,605,520 

61,763,279 
61,230,370 
60,352,092 

60,233,459 
60,289,910 
60,057,235 



$61,299,303 
61 ,938,5 '5 
62,099,2*3 
62,112,883 



Reserve 
Fund 



• 17457.718 
18,339. "9 
17,803,766 

17.930.14i 
17,793.814 
19,050,565 
20,371,332 
21,940,369 



Promissory 

Notes in 

Circulation 

not bearing 

interest 



Amount of 

Rest or 

Reserve Fund 



$23,666,827 
25,086,613 
26,459,815 
27,157,706 



4 



$10,103,439 
10,137,483 
11,421,641 
18,526,212 



Notes in f 
Circulatior^y 



$24,480,637 
27,930.172 



$29,016,6591 
28,465,19a 
23.237,721 
23.275,70» 
21,794,31a 

31,455.641 
a3,a3a,7ox 



$27,328,33 
32,358,84 
36,301,69 
33,589,45 
31.935.93 
32,363,99 
34.578,34 
34,354,5S 
34.785.48l 
33.577.700 
33,oo6,274 



$35,634,129 
36,194,023 
34418,936 
30.254,139 



* The figures for 1868 to 1889 are taken from the compilation of Garland, Banks, Bankers and Banking in Can. 



\ Prior to 18 
Provincial charters 



75, the returns published in the Canada GaxttU are so frequently incomplete that It Is impossible 
had expired, banks working under them were not obliged to make returns. 



' ^1 

'I 



APPENDIX I 

Table showing the Grand Totals of the Liabilities and Aasats nl 4V i-u . j r, i r ,. ^ . . 

w x^iHuiuues ana Assets ol the Chartered Banlts of the Dominion of Canada, as re 



Number 

of 

Banks 

reporting 

to the 
Gov'raent t 



88 



39 
39 
39 
39 
36 



36 
36 
36 
36 
38 
41 
4J 
38 
38 
38 
38 



38 
39 
39 
39 



1867 
1868. 
1869 
1870, 



1871. 
1878., 



1873 
1874 

1875 
1876 

1877 
1878 
1879 



1880. 
1881. 
1882. 
1883. 
1884. 
1885. 
1886. 
1887. 
1888. 
1889 
1890. 



i8gi 

1892 

1893 

3otD June, 1894. 



Capital 

Authorized 

by Act 



$41,066,666 
42,166,666 
40,566,666 



$58,ii3,<)98 
65,666,1)99 



868,766,666 
73,566,666 
77,266,666 
71,966,666 
74,266,666 
72,766,666 
67,266,666 



866,766,666 
66,866,666 
68,14*^,666 
69,396,666 
71,896,666 

74.179.999 
79,579,666 
76,079,999 
75.779.999 
75.779.999 
75,008,665 



$75,758,665 
75.958.685 
75.458.685 
75,458,685 



Capital 
Subscribed 



$42,157,656 
57,88i,8i6 



$63,782,916 
69,376,976 
71,999,321 
70,189,766 
69,187,566 
67.4*6,557 
63,106,633 



$68,359,533 
62,176,933 
63,822,183 

63.555.133 
64.685,933 
65,720,399 
64,876,699 

62,944,399 
62,254,599 

62,378.499 
6i,a53,73a 



Xil^BZX.I'rX 



$63,674,958 
63.169,643 
63,170,654 
631171.95a 



Capital 
Paid-up 



$32,500,163 
30,451,519 
33.794.989 
33.449.963 



$41,668,729 
50.954.099 



•57.931.359 
63,218,027 
66,800,225 
66,137,315 
63,756,861 
64,257,010 
60,351,505 



$59,819,603 
59,677,363 
61,039.657 

61. 45 J. 733 
61,605,520 

6i,763.a79 
61,830,370 

60,352.092 
60,833.459 
60,389,910 

60,057,235 



$61,399,305 
6i,938.5«5 
62,099,243 
62.112,883 



Reserve 
Fund 



•17.457.718 
18,339,129 
17,803,766 
17.930.141 
17.793.814 
19,050,565 
40,371,333 
ai. 940,369 



Amount of 

Rest or 

Reserve Fund 



$43,666,837 
25,086,615 
86,459.815 
27.157.706 



Promlssor) 

Notes in •. 

Clrculatioi) 

not bearin* 

interest , 



$io,io8,43( 
10,157,48. 
11,431,04 
18,536,81 



Note* in 
Circulation 



$24,480,62! 
a7,930.i7| 



$29,016,659 
38,465,192 
a3,257,72i 
a3.275.701 
3i,794.aia 
ai.455,6.»i 
33,358,761 



$27,328,35 
32.358,84 
36,501,69 

33,589.45 
31.935.93 
32,363.99 
34.578,34 
34.354,59 
34.785,4» 
33.577.70< 
35,006,37- 



$35,634,129! 
?6, 194,083 
34,418,938 
30,254.«59 



♦ The fiRures for 1868 to 1889 are taken from the compilation of Garland, Banks, Bankers and Banking in Can 
t Prior to 1875, the returns published in the Canada Gaxttte are so frequently incomplete that It is impossible 
Provincial charters had expired, banks working under them were not obliged to make returns. 



•* 

Government 


) 

Government 








Deposits 


Deposits 
payable after 








payable on 








demand 


notice 








$3,177,039 


$6,084,865 




4,139.606 


3.768.599 










Dominion 




Dominion 


Government 




Provincial 


< 


Government 


Deposits 




Government 




Deposits 


payable after 




Deposits 


f 


payable 


notice or 




payable 




on demand 


on a 




on demand 






fixed day 








$4469,800 


$8,424,850 


$ 801,179 




5,875,707 


5.709,172 




1,671,609 




3,580,159 


8,309,109 




1,639,063 




3,918,509 
5,121,890 


3.5:40 307 

1,821,700 




1,346,511 
730,290 




4,437,841 


, 425,314 




473.798 




3.700,777 


6,607,047 




482,307 




'^ ^. 










; 




Dep's held as 








sec'y for ex'n of 










Dom'n Gov't 






/ 




contracts and 








for insurance 






$5,807,010 


$2,085,252 


companies 


$1,729,033 




$ 992,786 




6,591,901 


4.968,516 


838,186 


1,364,817 




3,393.963 


5,074,264 


i,i4>.053 


773.737 


.1. 


3,729,445 


3.308,965 


988,067 


741.733 




4.685.635 


130,000 


575.113 


700,099 




6,076,031 


100,000 


736,534 


1,015,124 




5.445,998 


100,000 


539 019 


765,481 




5,240,386 


100,000 


451.176 


793,347 




6,755.245 


5,008,324 


337.833 


667,558 




4,848,523 




190,672 
110,078 


687,957 
498.248 




3,524,884 






1 




I 


Balance due to the Dominion Government 




after deducting advances for 


Pro vine 


credits, pay lists, etc. 


Governmi 


•3.238.857 




$2,6.14,73 


4.409.130 




S,988,^g( 


3,399,290 




2,977,9« 


4,798,075 




3,82i,76( 



a. pp. 49-59; those for 1867 and 1890-1894, from the Canada Gaxttte. 
supplement Mr. Garland's compilation by showing the number of ban 



N>iM 



APPENDIX I 
>ominion of Canada, as reported to the Government on the 30th June, 1867, the 31st December, 1868-1893, and the 30th June, 1894" 
XjZ.A.BZXiZ'Z'ZES 



ep's held as 
'y for ex'n of 
om'n Gov't 
ntracts and 
r insurance 
lompanies 



992,726 
828,186 

i|i4'.053 
988,067 

575.113 
736,534 
539 019 
45>.i7'5 
337.833 
190,672 
110,078 



irernment 
or 



Provincial 

Government 

Deposits 

payable 

on demand 



8 801,179 

1,671,609 

1,629,062 

1,246,311 

730,290 

473.798 

482,307 



•1.729.033 
1,364,817 

773.737 
741.733 
700,099 
1,015,124 
765.481 
793.347 
667,558 
687,957 
498,248 



Provincial 
Government 

Deposits 
payable after 

notice or 
on a 

fixed day 



•2.321.729 

3.254.76? 

2.932.747 

3.236,912 

505.954 

296.348 

"6,374 



I 596.107 

711.157 
1,418,307 

2,434.596 
1,893,511 
1.475,129 
508,929 
1,169,213 
1,907,809 
2,004,104 
1,636,915 



Balance due to 

Provincial 
Governments 



•2,644,73a 
3,988,496 
2.977.986 
3,821,766 



Cash 

Deposits 

not uearing 

interest 



• 14.935.213 
16,888,417 
18,802.310 
19.159.645 



Other 

Deposits 

payable on 

demand 



•29.194.107 
30,479.309 



•30,952,01a 
35.624.746 
34.020,524 
35,071,764 
35,408,612 

35.120.759 
37,889,163 



842,179.627 
45.958.529 
47.457.360 
44.594.648 
42,904,831 
52,119,199 
50,750,882 
48,981.273 
55,725,682 
55,224.648 
53,668,396 



Deposits by 

the public 

payable 

on demand 



862,649,358 
68,694,266 

62,594.075 
65,006,011 



Cash Deposits 
bearing 
interest 



• 16,727,378 
22,640,394 
28,773.736 
32.897.546 



Other Deposits 

payable 

after notice 



•21,080,063 
23.377.579 



Other Deposits 

payable 
after notic! or 
on a fixed day 



•26.954.561 
33.483.718 
26,084,999 
28,576,990 
28,360,041 
31.285,757 
30,597.257 



•37.059.788 

43.637.079 
49,422,184 
52,015,098 
49.405.oj9 
49.748.93 1 
54,020,047 
56,618,392 
66,152,756 
71,019,107 
80,265,132 



i 90,158,184 
101,526,186 

107,885, t49 
109.924.925 



Balances due 

to other 

Banks 



82.984.344 
1.322.379 
1,407,206 
1,910,645 



Due to other 
Banks in 
Canada 



• 1.157.092 
1,094,102 



• 1,549,207 
2,059,647 
2,017,040 
1,586,835 
2,152,402 
1,828,410 
3,093,306 



Loans from or 

Deposits made 

by other B'nks 

in Canada, 

secured 



Deposits by the 

public payable 

after notice 

or on a 
fixed day 



14,000 
310,295 



352.f27 
30,000 
154,000 



Loans from or 

Deposits made 

by other B'nks 

in Canada, 

unsecured 



•1,848,184 
1.776.977 
1,092,865 
1,183,288 
1,1x3,220 
1.246,377 
1,559.473 
2,180,130 
1,770,067 

1.791.409 
1,460,702 



Dep'sits pay'ble 
on demand, or 
after notice, or 
on a fixed day, 
made by other 
B'ks in Canada 



8 42,129 
150,000 

116,265 



•3.830,933 
2,764,171 
2,421,394 
2,352.405 



Due to other 

Banks in 

Canada 



•1 180,508 
1.071,797 
1.577,020 
1.254.321 
I 074,531 
1,645,316 

845.195 
890,960 

933.203 
736.893 
617,600 



Due to other 
Banks or 
A{;encies 

not in Canada 



• 997,941 
2,102,887 



Balances due 

to Agencies of 

the Bank or to 

other Banks or 

Agencies in 

foreign 

countries 



• 820,656 
833,871 
193.223 
1.033,016 
180,362 
289,123 
75,984 



Balances due 

to other 

B'ks in Canada 

in daily 

exchanges 



8133.279 
118,811 
200,476 
168,796 



8168,651 

171.521 

211,375 

155,141 

60,104 

112,512 

124,409 

89,433 

93,529 

79.174 

125,410 



Balances due 

to Agencies of 

the Bank or to 

other Banks or 

Agencies in 

the United 

Kingdom 



•4.781,957 
9,235,920 
1.896,921 
1,730,332 
1,206406 

1.317.139 
587,194 



•216,374 
127,480 
166,966 
121,213 



• 295.940 

585.702 

1.349-442 

1,430.171 

339.653 

472,895 

916,040 

1,927,013 

1,503,311 

1.057 030 
1,412,382 



• 1,416,382 
4,120,696 
4,151,804 
5.521.705 



Liabilities 

not included 

under the 

foregoing 

heads 



8300,240 
322,561 



•519.299 

443.240 
230,239 
272.34" 
294.154 
402,409 
400,645 



•260,534 
321.278 
336.265 
378,906 

306,977 
338,207 
364,638 
422,679 
368,101 
437.161 
346.524 



8487,391 
474,426 

446,796 
207,385 



'P 



Total 
Liabilities 



•44.548,376 
51,008,675 
61,482490 
72,494,049 



886,484,726 
93,350,100 



• 104,526,166 
126,090,487 

97.363.173 

101,192,533 

96,976,027 

97.332,543 
105,802 831 



8121,471,722 
140.346,311 
149,749,536 
145,812,744 

135,374,937 
147,440,352 

150.51W.455 
153,218,603 
176,360,938 
171,684,384 
178.826,551 



•199.453,832 
221,567,771 
218,662,965 
221,293,707 



894, from the Canada Gazette. 

n by showing the number of banks reporting to the Goverrment. Down to 1890, there were always more chartered banks in operation than those reporting to the Dominion Government. 



Until all the 



Jk. S S 3D 1? B — Appendix 



i867t 
1868.. 
1869.. 
1870.. 



1871.. 
187a., 



1880.. 
1881.. 
i885t.. 
1883.. 
1884.. 
1885.. 
188C. 
1887., 
1888.. 
1889.. 
1890., 



Coin, Bullion 

and 

Provincial 

Notes 



1873. 
1874 

J875 
1876 
1877 
1878 
1879 



1891 

*■ 189Z 

; 1H93 

30th June, 1894. 



• 8,300,339 

11,820,726 
IJ, 101,094 

14,018,073 



Specie 



Provincial 

or 

Dominion 

Notes 



•8,755, «3« 



$7,163,297 
7,483,118 

6,879,37a 
5,176,104 
6,127,739 
5,623,005 
6,809,029 



•5.965.«70 
6,561,619 
6,555.761 
7.325.552 
7469.756 
6,710,058 

5.891 576 
6,037.563 
7.372.'32 
5,967,665 
6,650,948 



•6,902,369 
8,219,723 



Dominion 
Notes 



•9,109,386 

9.590.454 
8,544,621 
8,318,113 
8,896,455 
8,098,205 

9.136,439 



•5.769.313 
6,720,500 

7.69'.33i 
7.438,513 



$10,520,302 
9.856.837 
10,463,842 
11,176,840 
11,007,629 
12,446,829 

9.405.594 
10,030,196 
10,671,722 
9,117,810 
9,678,322 



$10,113,040 
12,381,108 
13,287,292 
14,016,698 



Promissory 

Notes or 

Bills of 

other Banks 



$1,806,053 
2,021,713 
a.393.075 
9.440.570 



Notes of 

and 

Cheques on 

other 

Banks 



$3,028,031 
3.953.65a 



$4,580,294 
5.629.737 
4.578.143 
4.187,075 
4,417,169 
4,381,070 
4.566,554 



Deposits 

with 

Dominion 

Governm'nt 

for 

security 

of note 

circulation 



» 843,075 

1.761.259 
1,818 571 

1.831,979 



$4,565,005 
5.835.4»6 
6,765,973 
7,288,367 
6,100,270 
7.869.777 
7.'35.076 
6,474.758 
8,257.385 
7 826,325 

7.7 '4.5*5 



•9.119.736 
8,746 293 
8,333,753 
6.463,944 



Balance 

due 

from other 

Banks 



•5.345.37a 
8,617,330 

7.043.847 
9.887.577 



Loans to or 
Deposits 
made in 

other Banks 
secured 



Balances 

due 

from other 

Banks 
in Canada 



$2,023,839 
a,034,74« 



$2,650,784 
3,808,632 
3.476.582 
3,608,437 
3,523,669 

4.489.333 
4,743,016 



Loans to or 

Deposits 

made in 

other Banks 

unsecured 



•334.101 
493.894 
172,198 
J3'.502 
164,904 

557.793 
290,708 
404,888 



• 43.706 
150,000 

go,ooo 



$683,070 
882,567 

379.457 
235508 
247,614 
679,542 
464,014 
274.536 
105,000 
200,738 
55,000 



Balances due from 

other Banks 

|iot in Canada 



$14,416,313 
10,815,174 



Balances 

due from 

Agencies of 

tne Bank 

or from 

other Banks 

or Agencies 

in fotaign 

countries 



• 6,378,954 
8,888,003 
K,i82,257 
5.948.860 
4.685.860 
5.803.848 
19.3j3.503 



Balances 

due 

from other 

Banks in 

Canada 



•3.363.553 
a.555.a6o 
3.331,531 
3,307,283 

a,33«.3'7 
3,204,023 
3,007,886 
3.855.311 
3.605,991 
3,183,252 
3.335 9go 



Deposits 
payable on 
demand or 
after notice 
or on a fixed 
day, made 
witll other 

Banks 
in Canada 



$3,289,518 

3.616,137 
3.630,883 

3.387,355 



Balances 

due 

from other 

Banks in 

Canada 

in daily 

exchanges 



Govern- 
ment 
Securities 



•6,377.593 
3,608,939 

6,027,533 
4,847,448 



Govern- 
ment 
Debenture* 
or 
Stock 



Balances 

due from 
Agencies of 
the Bank or 
from other 

Banks or 
Agencies in 
the United 

Kingdom 



$3,403,461 
1.558,037 
1,601,275 
3,395,383 
3,385,357 
1,290,501 
5,287,245 



$27,041,608 
19.776.513 
ii.UOfiTi 
18 060,156 
12,411,217 
16,098,643 
15.446.375 
13.097.795 
18,993,815 
10,739,877 
9.199.504 



•356,657 
140,885 

173.697 
328,399 



$18,464 364 
31,688,396 
18,329,248 
15,650,823 



•4.714.434 
5,814,626 

1.813,335 
4.335.913 
5,118,913 

3.936,556 
2,511,665 
3,268,154 
3.703,936 
3.961,996 
4,031,652 



•6,337.591 
1.036.344 
3,540,220 
3,086,167 



$1,437,870 
1,449.836 



• 1.373.19s 
1,204,843 

1,331.151 
1,280,590 
2,682,262 
2,303,179 
3,086,933 



Dominion 
Govern- 
ment 
Debentures 
or Stock 



$1,133,109 

1.099.822 

1,006,869 

900,722 

1,405.435 
4,317,070 
4.438,638 

3,699.679 
3,045,076 
3,603,236 
3,462,347 



$3,061,793 
3,328,082 
3,191383 
3.157.413 



Loans, dis- 
counts or 
adv'nces for' 
wh. shares 
of the capit'l 
stock of any 
other Bank 
are held as 
collateral 
security 



Provincial, 

British or 

Foreign 

or Colonial 

Public 
Securities 
other than 
Canadian 



Loans, disc'ts or 
adv'nces for wh. 
bonds or deb'n's 
of municipal or 
othercorp ns, or 
iDom'n, Prov'l, 
Brit, or Foreign 
public see's are 
held as collater- 
al securities 



$3,812,914 
5,308,810 
3,976,651 
2,829,588 
2,091,529 
2,580,616 
1,200,446 



•1,565,543 
1,802,504 
1,285,079 

1.335.044 
1,612,985 
3.351.106 
3,046,210 
3,659,640 
4.475,133 
5.550,051 
6,141,090 



Canadian 
Mun'l See's, 
and British, 
Prov'nc'ljOr 
Foreign, or 
Col'n'I Pub 
See's (other 
than 

Dominion) 



82,503.653 
5,606,816 
3,531,986 
6,814,100 
5,506,701 
5,782,760 
5,894,212 



Loans, disc'ts or 
adv'nceF for wh 
stock, bonds or 
deb's of mun'cpl 
or oth'r corp'ns, 
or Dom., Prov 
Brit, or Foreign 
or Col'n'I public 
securities, other 
than Canadian, 
are held as col 
later'l securities 



Canadian, 
British 

and other 
Railway 

Securities 



$6 438,105 
8,614,936 
9,981,680 

10,859,394 



$4,825,965 
6,243.333 
6,693,856 
8,240,707 



$ 8,011,068 
13.976.340 
16,861,583 
10.415.155 
11,929,655 
13,556.050 

13.153.174 
10,451,761 
11.737.187 
13.516.388 
13440,019 



Call Loans on 

Bonds and 

Storks 



$14,401,695 

19.957,943 
14,236,629 
14,600,915 



+ For 30th June, 1867, the ainounts given for total Assets are approximate, the return for Nova Scotia lacking details for one Bank, 



. a S U T S — Appendix I — {Continuid) 



























Other Debts 








Notes and 






. 










Landed or 
other 




due to the 
Bank not 

Included un- 
der fore- 
going beads 








Bills 
discounted 
















Property 
of the 
Bank 




Total 
Assets 


•54,899.142 


$1,628,249 


$2,618,021 


$ 80,772.834 






53.652.499 
02,879,202 
















1,667,650 




3,803,862 


85,192,931 




















1,696,805 




4.^17.4'3 


99.159.030 






75.673.476 








Notes, etc., 
overdue 
and not 
speciallv 
secured 








1.684,497 




2,421,668 


•••.973.3«5 




Loans, discouiitt 


Notes and 

Bills 

discounted 

and 

current 






Real Estate 






Other 
Assets not 






or advance!' 
on current account 


Loans to the 
Governments 




Overdue ; 
Debts 
secured 


other than 
the Bank 




Bank 
''remises 


Included 
under the 






to Corporations 








Premises 






foreiioing 
beads 

$2,320,293 




•2,103,189 


i 89,764,279 


♦ 1,30! 


,218 


$1,406,543 


$i.347.i62 


$856,581 


$1,760,663 


$136,016,959 
• 57.639i8'6 




a,449.59" 


ii3,384,i04 


543,583 1 


• ,i4i.4^o 




• ,553.863 


797.790 


8,022,943 


3 300,764 


Loans, dis- 


Loans, disc'is or 








O'dueDi l)ts 






counts or 


adv'nces for wh. 














secured by 










adv'nces for.bonds or deb'n's 

wh. shares nf munir.inal nt* 






Loans to 


Loans to 


Notes and 
Bills 




mortga' 1^ or 
other ill i;d 
on real 1 <t., 
or by ,1< sit 
of or I-i 11 i:m 
stock. ■ l>y 
other iir- 


Real Estate, the property 








of the capit'l 
stock of any 
other Bank 
are held as 
collateral 


other corpns, or 
Dom'n, Prov'l, 
Brit, or Foreign 
public see's are 
held as collater- 






the 

Governin'nt 

of the 

Dominion 


the 
Provincial 
Govern- 
ments 


discounted 
overdue 
and not 
specially 
secured 




of the Bank (other than 

Bank premises), and 

Real Estate sold 

by the Bank 








security 


al securities 


$2,919,798 
3,468,054 


♦ 119,647,350 










it- 
$',455,385 




$2,359,793 


$2,639,465 




03,812,914 


82,503,652 


$244,766 


$ 19,507 


$1,651,500 


$ 586,996 


$^72,736,9n3 


5,308,810 


5,606,816 


•39.379.457 


144,660 


20,8 10 


1,494,808 




•,597.524 


575.449 


2.785.297 


2,455.836 


200,905,145 


2,976,65' 


3.531,986 


3,228,274 


119,402,322 


56,955 


•47,561 


4,436,636 




2,775.862 


853.498 


3.059.97« 


3,248401 


'2''li"'"i3 


3,829,588 


6,814,100 


4,734,335 


122,562,334 


97.I47 


277.089 


3.>85.63^ 




3.2^8,985 


1,067,029 


3.^74.299 


2,103,104 


181,880,1161 


2,091,522 


5,506,701 


3,581,615 


116,475,030 


192,9H4 


8^3.349 


3.^33.>76 




4.057.591 


1,242.171 


3,300,292 


2.35 '.W 
2,316,814 

4.428,196 


176.364,764 
178,138,495 


2,580,616 


S.782,760 


3,794,9" 


I •7.556.3^9 


77.654 


•,838.724 


2,666,20 > 




3.774.681 


2,141,827 


3.5^8.848 


1,200,446 


5,894,212 


4,454,973 


97.603.688 


80,699 


574.5^5 


2,921,818 




3.474.920 


2.383,474 


3,342,966 


178,302,684 


Loans, disc'ts or 


i 


% 




Notes &bills 








adv'ncef for wh. 
















disc'td over- 












stock, bonds or 
deb's of mun'cpl 


Loans, dis- 
counts 


Loans, dis- 


Other current 








Other 


due & other 
o'due debts 


Real Estate, 
the 


Mortgages 










or oth'r corp'ns, 


or advances 


or advances 

on current 

account 

to other 

Corporations 


loans, 








overdue 


secured by 










or Dom., Prov., 
Brit, or Foreign 
or Col'n'l public 
securities, other 
than Canadian, 


on current 
account 

to 

Municipal 

C'rp'rat ons 


discounts 

and advances 

to the 

public 








debts 

not 

specially 

secured 


mortgage or 
oth. dfeed on 
real est., or 
by dep'sit of 
or lien on 


property 

of^the Bank 

(other than 

Bank 

premises) 


on 

Real Estate 

sold by 

the Bank 










are held as col- 
















stock, or by 














later'l securities 








$ 609,220 


$ 632,137 


$l.783.07^ 




oth'rsec'lies 






$3.^40.523 


$3,691,930 




9 8,011,068 


9 690,384 


t 4.325.660 


$105,587,672 


$217,603 


•3,015,209 


$1,998,311 


$393.7^3 


$•92,337,574 




•3.976,340 


646,350 


7.750.527 


123,710,008 


895.998 


823,765 


1.107,207 


212,304 


2.174.37c 


1,718,830 


505,087 


3,020,158 


2.861,979 


213.588,098 




16,861,583 


1,988,916 


•2.153.532 


144,414.108 


651.952 


911,523 


i.3^o.435 


141,262 


•,679,854 


1,409.835 


693.763 


3,116,247 


3,600,379 


230,675,211 




•0-4«5.i55 


1,259,904 


•5.254,866 


•33.378.550 


825,182 


1,696,007 


2,100,756 
3,222865 


•75.524 


2,120,018 


1,096,893 


848,013 


3.061.835 


1,881,452 


228.193,650 




11,939.655 


1,331,802 


•5.878 352 


122,109,496 


1.517.432 


8-,. ,898 


122,677 


3.07^,569 


1,219.421 


834.350 


3.188,745 
3.3^7.86o 


2,291,199 


215.787.5" 




1a.556.050 


1.578.397 


14,070,831 


125,493.660 


•.•70.642 


1,296,190 


r.545,858 


98,688 


2,022,278 


• .379.820 


661,118 


3,886,342 


327.863.546 




13.153.174 


2,144,802 


•4.855.133 


135.632,631 


1,083,783 


1,5^4,284 


1,109,611 


80,178 


• .452.275 


1,331,261 


821,281 


3 569.524 


2,923.999 


231,300482 




10,451,761 


2,813,823 


•5.871.454 


138.398,246 


1,004 181 


2,065,674 


1,412,603 


52,120 


•.857,944 


1,218,352 


673,457 


3,659,014 


3-535,9i7 


232,576.983 




",737,187 


3,706,035 


•9.252,233 


•45.750,485 


1,246,447 


582,834 


969,029 


•44.^52 


1,499,100 


989 540 


6964H9 


3737.699 


5,248,889 


'"'3^2'«' 




«3,5J6,388 


•,655,171 


23,209,430 


150,422,602 


• ,036,390 


927,100 


1,072,996 


63.328 


1,611 284 


990,080 


714,489 


3.957.^22 
4.i87,572 


3.559.61a 


352,166,663 




13440,019 


2,690,187 27,268,006 


•53.236,184 


923.739 


•.742.3^3 


1.429,783 


65.579 


1,263,029 


1,027,107 


7,6,451 


2.453.o^5 


3(50,137,159 


Canadian, 






— r 










1 














British 

and other 

Railway 


ChII Loans on 
Bonds and 

SIO'^Ur 




Current 
Loans 




/ 






Overdue 
Debts 














Securities 










i 










1 












»4,825,965 


$14,401,695 




$186,590,602 




1 




$ 322,013 




$2,656,588 
2,387,268 




$I,144.39» 


$785,7^3 
798,699 


$4,463,619 


$1,537,649 


$380,754,661 


6i*43,333 


•9,957,943 




198,532,160 




M 




2,447,234 






1,007,287 


4,661,621 


1,711,416 


305,730,910 


6,692,856 


14,236,629 




200,397,498 




M...-' 


i 2,163,712 
^ 487.093 




3.040,078 




834480 


636,640 


5.^32.^56 


• .129.385 


304,231,696 


8,240,707 


14,600,915 




306,958 912 




M 


»» 




a.811.395 




928,151 


623,800 


5.365.^88 


l.4^3.954 


307,542,429 



APPENDIX II 



SUNDRY ITEMS OF THE STATEMENTS OF LIABILITIES 

AND ASSETS 

Furnished to the Department of Finance for the last juridical days of 
the months ending the 31st December, 1890-1893, and the 30th 
June, 1894, by Chartered Banks of the Dominion of Canada having 
Paid-up Capital Stocks of $500,000 or over. Compiled from the 
Canada Gazette. 



862 



The Canadian Banking System, 1817-1890 



(000 omitted) 










Deposits 
by the 


DcpositB by 
the public 




Year 


Capital 


Rnftt 


Circula- 


public 


payable 


3iit Dec. 


paid-up 


I\CSl 


tion 


payable 


after notice 






" 






on 
demand 


or on a 
fixed day 


Hank of Montreal, 


1890 


912000 


96000 


•5332 


» 9994 


•10782 


Montreal 


iSgi 


12000 


6000 


5 1 ^'3 


13249 


1 1 124 




1892 


12000 


6000 


5327 


13597 


12475 




1893 


12000 ' 


6000 


5056 


13428 


15086 


30th June 


1894 


12000 


6000 


4542 


13740 


13780 


Canadian Bank of Com- 


1890 


6000 


800 


2942 


4115 


8547 


merce, Toronto 


1891 


6000 


900 


2992 


4942 


10227 


■ 


1892 


Oooo 


1000 


3255 


5775 


II322 




1893 


6000 


HOC 


3061 


4862 


I1252 


30th June, 


1894 


6000 


1200 


2545 


5105 


1 1 656 


Merchants' Bank of Can- 


1890 


5799 


2335 


3107 


3143 


5981 


ada, Montreal 


1891 


5799 


2510 


3461 


3797 


6756 


. 


1892 


6000 


2725 


3474 


3831 


6755 




1893 


6000 


2900 


2927 


3261 


6352 


30th June, 


1894 


6000 


3000 


2393 


3826 


6610 


Bank of British North Am- 


1890 


4866 


I24I 


1280 


2087 


6294 


erica, London, Eng., and 


1891 


4866 


1289 


1193 


2201 


6879 


Montreal* 


1892 


4866 


1289 


"73 


2327 


7153 


', ■■ 


1893 


4866 


1338 


1084 


2239 


6735 


30th June, 


1894 


4866 


1338 


1015 


2070 


6345 


Bank of British Columbia, 


1890 


2920 


973 


1 106 


2004 


315 


Victoria and London, 


1891 


2920 


1070 


1065 


2389 


283 


Eng. 


1892 


2920 


1266 


848 


2707 


602 




1893 


2920 


1314 


886 


2481 


896 


30th June, 


1894 


2920 


1338 


800 


2772 


954 


Quebec Bank. 


1890 


2500 


500 


568 


3875 


1421 


Quebec 


1891 


2500 


500 


648 


4331 


1380 




1892 


2500 


550 


704 


4481 


1778 




1893 


2500 


550 


826 


4316 


1872 


30th June, 


1894 


2500 


550 


642 


4622 


2269 


Bank of Toronto, 


1890 


2000 


1500 


1591 


3909 


2842 


Toronto 


1891 


2000 


i6qo 


1699 


5191 


2947 


. * • 


1892 


2000 


1700 


1771 


5425 


3213 




1893 


2000 


1800 


1591 


5132 


3330 


30th June, 


1894 


2000 


1800 


1254 


5434 


3129 


Molsons' Bank, 


1890 


2000 


1 100 


1913 


3637 


3054 


Montreal 


1891 


2000 


1 100 


1828 


4345 


3575 




1892 


2000 


1 1 50 


1868 


5429 


3785 




1893 


2000 


1200 


1761 


4806 


3516 


30th June, 


1894 


2000 


1200 


1535 


5010 


3872 


Imperial Bank of Canada, 


1890 


1500 


700 


1416 


2494 


3371 


Toronto 


1891 


1909 


954 


1516 


2981 


4448 




1892 


1947 


1023 


1592 


3197 


5007 




1893 


1953 


IIOI 


1503 


2608 


5565 


30th June, 


1894 


1954 


1152 


1220 


2459 


5660 



> The return from the Bank of British North America includes Canadian business only. 



Appendix II 



868 



315 
283 
602 
896 

954 



2842 

2947 
3213 
3330 
3129 

3054 

3575 
3785 
3516 
3872 

3371 
4448 
5007 

5565 
5660 









Balances due 














from agencies of 






Rate 


Total 


Specie 


Dominion 


the bank, or f om 


Current 


Total 


per cent. 


Liabilities 


Notes 


other banks or 


Loans 


Assets 


of last 








aeeiicies in 
foreign countries 






dividend 














$28700 


$2221 


»^399 


» 4553 


•28406 


•47978 


10 


32439 


1695 


2142 


9871 


28687 


51405 


10 


35427 


3073 


3157 


"395 


29484 


54432 


10 


36007 


2760 


2207 


10854 


28831 


55212 


10 


36269 


2704 


2910 


7356 


33060 


55560 


ID 


16074 


438 


466 


759 


16796 


.1. 23061 


7 


18841 


392 


587 


2227 


16298 


25926 


7 


21748 


396 


714 


3404 


17774 


28924 


7 


20695 


399 


780 


1716 


19664 


28016 


7 


20743 


361 


693 


1683 


19021 


28001 


7 


13255 


452 


468 


512 


16283 


21664 


7 


15163 


320 


566 


1 103 


16653 


23765 


7 


15586 


299 


673 


1335 


16393 


24507 


7 


14139 


382 


859 


1053 


16703 


23258 


7 


14010 


386 


1082 


726 


16725 


23102 


7/2 


9788 


383 


859 


677 


9306 


14285 


1% 


10382 


320 


668 


623 


9061 


12179 


VA 


10738 


348 


712 


692 


9321 


13122 


1% 


10103 


362 


701 


693 


8626 


11964 


iVz 


9483 


346 


628 


881 


8545 


12024 


7% 


4530 


186 


231 


133 


4265 


5125 


6 


5486 


212 


218 


76 


5340 


6188 


6 


5759 


429 


794 


69 


5039 


6689 


6 


5742 


512 


797 


• • 


5384 


7001 


6 


6075 


408 


675 


62 


5838 


7287 


6 


5913 


73 


432 


77 


5998 


9030 


7 


6424 


80 


356 


79 


5356 


9528 


7 


73H 


79 


287 


67 


6418 


10411 


7 


7116 


90 


557 


56 


^200 


10248 


7 


7767 


96 


520 


87 


7027 


10950 


1 


8409 


308 


431 


185 


9264 


12188 


10 


9956 


338 


695 


594 


9861 


13806 


10 


10546 


356 


587 


546 


1 1278 


14550 


10 


10157 


542 


1112 


399 


10412 


14238 


10 


9959 


547 


1154 


420 


9934 


13989 


10 


8858 


257 


357 


72 


9518 


12186 


8 


9971 


201 


551 


197 


10206 


13349 


8 


1 1470 


206 


503 


197 


"137 


14984 


8 


10326 


121 


691 


97 


10449 


13890 


8 


10732 


140 


613 


151 


10777 


14335 


8 


7704 


300 


699 


270 


6152 


10055 


8 


9077 


293 


648 


461 


7128 


12156 


8 


10033 


288 


688 


469 


7805 


13232 


8 


10218 


358 


1 174 


285 


7110 


13435 


8 


9845 


384 


1028 


331 


7190 


13097 


8 



854 



The Canadian Banking System, 1817-1890 



(000 omitted) 






I 




Deposits 
by the 


Deposits by 
the public 




Year 


Capital 


Rn«t 


Ciroula- 


public 


payable 
after notice 


3' 


St Dec. 


Paid-up 


I\(>ai 


tion 


payable 












on 


or on a 












demand 


fixed day 


Dominion Bank, 


1890 


$1500 


91300 


$1292 


»2739 


?5335 


Toronto 


1891 


1500 


1350 


1226 


2828 


5796 




1892 


1500 


1400 


1132 


3525 


6140 


» 


1893 


1500 


1450 


1036 


2776 


6376 


30th June. 


1894 


1500 


1500 


943 


2961 


7008 


Bank of Nova Scotia, 


1890 


II14 


700 


1307 


1265 


4061 


Halifax 


1891 


1500 


1000 


1 187 


1013 


4375 




1892 


1500 


1050 


1 128 


1256 


4300 




1893 


1500 


1200 


1 163 


1 180 


4553 


30th June, 


1894 


X500 


1200 


1 148 


1261 


4543 


Ontario Bank, 


1890 


1500 


250 


964 


1532 


2785 


Toronto 


1891 


1500 


28c 


1032 


1624 


3014 




1892 


1500 


315 


1056 


1852 


3475 




1893 1 


1500 


345 


901 


1382 


3462 


30th June, 


1894 


1500 


345 


900 


1379 


3574 


Eastern Townships Bank, 


1890 


1487 


550 


782 


589 


1884 


Sherbrooke 


1891 


1487 


f)00 


774 


568 


1989 




1892 


1499 


625 


780 


552 


2236 




1893 


1499 


650 


761 


544 


239C 


30th June, 


1894 


1499 


^^So 


814 


523 


2369 


Hank of Ottawa, 


i8qo 


1000 


425 


870 


709 


^094 


Ottawa 


1891 


1204 


587 


1007 


8ig 


2115 




1892 


I T2 


710 


I 12 


I "82 


2458 




1893 


148; 


847 


1030 


1032 


3067 


30th June, 


1894 


1489 


848 


825 


810 


3340 


Bank of Hamilton, 


1890 


"45 


515 


1103 


"53 


2458 


Hamilton 


1891 


1239 


614 


"75 


1383 


3074 




1892 


1250 


1 650 


1161 


1487 


3525 




1893 


1250 


650 


"45 


1250 


3623 


30th June, 


1894 


1250 


f^75 


886 


1286 


3590 


Banque dii Peuple, 


1890 


1200 


400 


756 


1423 


2160 


Montreal * 


1891 


1200 


425 


748 


1246 


2400 




1892 


1200 


480 


810 


'542 


3372 




1893 


1200 


550 


825 


1499 


3')2S 


30th June 


1894 


1200 


600 


787 


2168 


4391 


Banque Nationale, 


1890 


1200 


100 


632 


1 683 


"47 


Quebec 


1891 


1200 


.... 


1 710 


; 705 


"39 


», 


1892 


1200 


.... 


1 937 


744 


'474 




i8.)3 


1200 


30 


1 1054 


842 


1735 


30th June 


T8y4 


1200 


30 


! 852 


787 


1717 


Union Bank of Canada, 


i8go 


1200 


200 


103C 


854 


2195 


guebec 


1K91 


1200 


225 


1117 


looC 


2310 




1892 


1200 


225 


1 130 


1048 


2758 




1893 


1200 


250 


1 160 


735 


j 2952 


30th June 


, 1894 


T200 


280 


939 


939 


2971 



Appendix II 



865 



1147 
1139 
'474 
1735 
1717 

2IQ5 

2310 

275« 
2952 

2971 





• 




Balances due 




- 




' 






from agencies of 
the bank, or from 






Rate 


Toul 


Specie 


Dominion 


Current 


Total 


per cent. 


Liabilities 


Notes 


other banks or 


Loans 


Assets 


of last 








aeercies in 
foreiifn countries 






dividend 














»9394 


• 187 


•344 


• 811 


»74I5 


$13407 


10 


'J9S5 


197 


349 


1390 


6766 


13055 


10 


11054 


223 


611 


1399 


7299 


14178 


10 


10243 


227 


442 


1 106 


6996 


13423 


10 


10936 


240 


653 


1033 


7202 


14076 


12 


70S9 


292 


377 


108 


5554 


8911 


7 


7300 


261 


451 


309 


6445 


0809 


8 


7505 


378 


492 


240 


6468 


IU058 


8 


7739 


299 


565 


309 


6191 


1044 1 


8 


8295 


179 


443 


941 


6400 


1 1038 


« 


.55"f> 


176 


347 


88 


5152 


7384 


7 


5779 


160 


360 


117 


5292 


7715 


7 


6685 


170 


372 


175 


6045 


8636 


7 


6180 


180 


302 


77 


5869 


8134 


7 


6223 


181 


319 


143 


6024 


8180 


7 


3305 


117 


97 


164 


4550 


5493 




3366 


123 


99 


194 


4110 


5569 


7 


3625 


107 


92 


214 


4458 • 


5879 


7 


3766 


117 


98 


411 


4528 


6050 


7 


3810 


91 


104 


163 


4774 


6060 


7 


4010 


116 


94 


42 


4683 


5534 


8 


4228 


117 


122 


269 


5011 


6125 


8 


5055 


114 


123 


217 


5895 


7235 


8 


5368 


120 


169 


312 


6164 


7813 


8 


5287 


130 


186 


289 


5902 


7798 


H 


4930 


183 


186 


23 


4996 


6719 


8 


5721 


159 


220 


47 


5779 


7706 


8 


6375 


170 


188 


131 


5"3 


8401 


8 


6551 


»73 


238 


35 


5881 


8558 


H 


6408 


182 


301 


37 


5893 


8395 


8 


4651 


44 


146 


4 


5201 


637' 


6 


4617 


47 


184 


45 


4993 


6305 


6 


6029 


97 


172 


33 


5853 


7786 


6 


^574 


50 


191 


3 


6706 


8391 


f) 


7530 


48 


438 


75 


6947 


9308 


6 


2562 


87 


112 


96 


2785 


3997 


6 


2634 


67 


59 


92 


2639 


3966 


6 


3246 


74 


105 


38 


2918 


4593 


6 


3721 


61 


191 


87 


3772 


5116 


() 


3530 


61 


109 


75 


3901 


4838 


6 


4851 


31 


174 


30 


5435 


6419 


6 


5086 


28 


194 


66 


5698 


6655 


6 


581 1 


38 


226 


8 


6023 


7397 


6 


5^'45 


24 


174 


25 


5742 


7177 


6 


5731 


30 


229 


63 


6028 


7266 


6 



I 



1 
















• 


IB! 














■:-■", 


^: 


•; .■ 








• 






Is' 


■■■:,.;■' ■ - ■ 












■ :''•. ■ ; 


1 


366 The Canadian Banking 


System 


, 1817-I 


890 






1 


(ooo omitted) ' , 








Deposits 
by tiie 


Deposits by 
the public 


'.'. 


H 


. -I'.,;:'-: -■■■ ' :.':''' Year 


Capital 


Rest 


Circula- 


public 


payable 




M 


; ^ ■ . 3, St Dec. 


paid-up 


tion 


payable 


after notice 


Lii 


I 


•"',■".'"■•*."'-"*"'■'*■ 








on 
demand 


or on a 
fixed day 




I 


Merchants" Bank of Hali- 1890 


^IIOO 


» 375 


$ 996 


$ 945 


82242 


» 


^H 


fax, Halifax 1891 


1 109 


450 


949 


993 


2514 




IH . 


1892 


1 100 


510 


1020 


1391 


2842 




Hh 


1893 


IIOO 


600 


1013 


1222 


3001 




B 


30th June, 1894 


IIOO 


600 


932 


1 187 


3384 




1' 


Standard Bank, 1890 


1000 


460 


815 


1465 


2183 




^1' 


Toronto 1891 


1000 


500 


926 


1782 


2656 




^|: 


1892 


1000 


525 


911 


1802 


3038 




^■i 


1893 


1000 


550 


835 


1640 


3254 


■ 


H' 


30th June, 1894 


1000 


600 


580 


1325 


3554 




H 


Banque d'Hochelaga, 1890 


710 


160 


581 


447 


989 




Hh 


Montreal 1891 


710 


160 


589 


620 


1380 




^H 


1892 


710 


200 


566 


598 


1947 




^B 


1893 


710 


230 


641 


680 


2570 


• 


B 


30th June, 1894 


710 


270 


634 


641 


2457 


- 


^H| 


People's Bank of Halifax, 1890 


600 


70 


433 


215 


502 






Halifax 1891 


680 


90 


490 


291 


580 


] 


^^^^H t 


1892 


700 


"5 


428 


227 


930 


] 


^Hi 


1893 


700 


130 


441 


360 


810 


] 






30th June, 1894 


700 


160 


438 


440 


834 


] 


H 




Traders' Bank of Canada, 1890 


592 


20 


i76 


724 


1163 


a 


^H 


Toronto 1891 


604 


35 


591 


995 


1555 


3 


^H 


1892 


607 


55 


590 


856 


2200 


3 


^H 


I8r3 


607 


75 


600 


768 


2451 


4 


H 


* ■ 30th June, 1894 


607 


85 


565 


726 


2607 


4 


^^m\] 


Bank of Nev Brunswick, 1890 


500 


440 


455 


674 


836 


2 




St. John 1891 


500 


500 


435 


508 


1079 


2 


^■i: 


1892 


500 


525 


444 


656 


1131 


2 


^H;, 


• 1893 


500 


525 


453 


591 


"43 


2 


1 


30th June, 1894 


500 


525 


463 


624 


1142 


2 




Union Bank of Halifax, 1890 


500 


70 


335 


227 


631 


I 


^H ' 


Halifax 1B91 


500 


90 


-^78 


352 


595 


I 


^^^Hi 


1892 


500 


no 


'-^74 


353 


449 


I 


^^^■' ' 


1893 


500 


120 


302 


440 


566 


I 






30th June, 1894 


500 


140 


331 


467 


697 


I 


H 




Halifax Banking Company, 1890 


500 


170 


489 


411 


1429 


2 


^O' 




Halifax 1891 


500 


210 


463 


384 


1543 


2 


^H, 




1892 


500 


210 


450 


444 


1538 


2 


^H| 


1 


1893 


500 


210 


455 


,09 


1588 


2 


^^Hi 




30th June, 1894 


500 


250 


485 


^'«3 


1590 


2. 


^H^H 1 




Banque Jacques Cartier, 1890 


500 


150 


413 


1013 


645 


2 


^^■' 


^ 


Montreal 1891 


500 


150 


419 


575 


1390 


2< 


j^li 




1892 


500 


»75 


403 


598 


1858 


2< 


^H i 


1893 


500 


215 


402 


747 


1964 


3: 


1' 




30th June, 1894 


500 


225 


427 


636 


2113 


3. 


^^B 






' 


•' 















Cp' ■ 


• Appendix II 


•" ■ 




1 

i 
' 367 


posits by 


"- i- -i^lt 


' >' - * 'i ^-' ' 


r." '.,.\i. ,•:,•" 


Balances due 








e public 

1 1 








from agencies of 






Rate 


ayable 


Total 


Specie 


Dominion 


the bank, or from 


' Current 


Total 


per cent. * 


er notice 


Liabilities 


Notes 


other banks or 


1 Loans 


Aksets 


1 of last ' 


r on a 








agencies in 


1 




dividend 


<ed day 








foreign countries 






1 > 


82242 


*4374 


1 

»I43 


»398 


«l68 


! «4553 


$5849 


6 ' 


2514 


4714 


145 


455 


87 


4261 


6264 


' 6 - ' • ; 


2842 


5991 


138 


544 


170 


4794 


7601 


6 . 


3001 


"41 


187 


465 


no 


5130 


7641 


7 ' 


3384 


■So 


143 


402 


108 


5497 


7936 


' 7 ; 


2183 


4488 


141 


210 


15 


3689 


6052 


7 


2656 


5440 


140 


247 


86 


3550 


7048 


8 ' 


3038 


5939 


138 


274 


127 


3604 


7576 


; 8 > 


3254 


6236 


145 


295 


31 


1 4398 


7807 


8 


3554 


5928 


149 


298 


25 


4533 


7550 


8 


989 


2097 


65 


151 


51 


2095 


2975 


• 


1380 


2659 


68 


"3 


71 


2261 


3591 


6 


1947 


3222 


58 


130 


50 


3186 


4214 


6 


2570 


3974 


54 


233 


61 


3353 


5032 


C 


2457 


3845 


66 


117 


148 


3365 


4856 


6 


502 


1210 


35 


35 


9 


1534 


1931 


6 


580 


1371 


30 


45 


I 


1932 


2216 


6 


930 


1611 


25 


III 


79 


2044 


2488 


6 


810 


1655 


26 


113 


34 


2207 


2572 


6 


834 


1733 


24 


121 


77 


2206 


2658 


6 


1163 


2530 


72 


140 


16 


2371 


3166 


6 


1555 


3470 


68 


147 


5 


2905 


4141 


6 


2200 


3960 


79 


132 


69 


2920 


4661 


6 


2451 


4188 


lOI 


221 


24 


2979 


4901 


6 


2607 


4271 


114 


194 


23 


3140 


4982 


6 


836 


2038 


108 


200 


67 


1993 


3070 


12 


1079 


2087 


99 


172 


70 


2271 


3122 


12 


1131 


2317 


182 


162 


75 


2347 


3379 


12 


"43 


2291 


156 


168 


69 


2274 


3372 


12 


1 142 


2347 


167 

1 


238 


299 


1915 


3439 


12 


631 


1390 


24 ' 


40 


« 


I35f> 


1991 


5i 


595 


I412 


25 


70 


I 


1502 


2041 


6 ^ 


449 


1277 


24 


33 


12 


1325 


1925 


6 


566 


1513 


25 


84 


9 


1670 


2179 


6 


697 


170 


27 


98 


19 


1769 


2420 


6 


1429 


2380 


34 


68 


28 


2722 1 


3075 


6 


1543 


2552 


22 


86 


32 


2966 


3262 


6 


1538 


2519 


30 


236 


I20 


2701 


3253 


6 


1588 


2501 


49 


189 


54 


2712 


J298 


6 


1590 


2565 


49 


"3 


93 


2801 


3406 


6 


645 


2145 


42 


30 


13 


1866 


2841 


7 


1390 


2468 


29 


118 


31 


2050 


3174 


7 


1858 


2945 


29 


98 


34 


2514 


3^85 


7 


1964 


3221 


30 


65 


37 


2952 


4023 


7 


2113 


3300 

• 


29 


155 63 1 


3081 


4069 ! 


7 ■>■: 

1 



OtfcO 



The Canadian Banking System, 1 817- 1890 



• APPENDIX III V 

Table showing grand total of Notes in Circulation at the end of each 
calendar month from January, 1879, to June, 1894, from "Report 
. of the Chartered Banks of the Dominion of Canada," published as 
supplement to the Canada GaM$tt«: 





1879 


i88<> 


1881 


1882 


1883 




$ 


$ 


$ 


$ 


$ 


an .. . 


19985958 


20393301 


26010035 


31946809 


33722447 


Feb . . . 


19014558 


20495219 


26169190 


32524142 


34044909 


Mar . . . 


19193485 


20793775 


26439316 


32947269 


34517813 


Apr . . . 


18162105 


19864343 


26044888 


32712335 


33082658 


May . 


; 17479608 


19612921 


25575729 


3 I 86 I 044 


31 301075 


une 


I80908I4 


20186176 


26102368 


32229937 


32212240 


uly . . . 


16956630 


20186470 


26047733 


31729233 


32093938 


Aug . . . 


! 17258597 


21397953 


27481218 


31458191 


321 18943 


Sep . . . 


20004989 


2436c»7g8 


31753589 


33953387 


33145845 


Oct . . . 


23201007 


27981567 


35034308 


37940516 


35563243 


Nov . . . 


21827712 


27745597 


33145292 


37180399 


34007350 


Dec .. . 


i 22252761 


27328358 


32358844 


36501694 


33589454 



-«' 





X8S4 


1885 


1886 


1887 


1888 




i $ 


$ 


$ 


$ 


$ 


}an . . . 


1 30031076 


29689046 


29845735 


32110620 


31952132 


Feb . . . 


1 29576177 


30166082 


29691347 


32304887 


31363400 


Mar. . .. 


1 30197882 


29791262 


29959916 


31521420 


31985285 


Apr . . . 


: 29239635 


28491692 


29281603 


30467891 


30742577 


May . 


28449049 


29124205 


28900765 


30086803 


29278074 


une 


29654511 


29692803 


29200627 


30438152 


30444643 


uly . . . 


28063301 


29607902 


28882843 


30845304 


30241455 


Aug . . . 


i 29137301 


30108359 


29515389 


31666467 


30448815 


Sep . . . 


31456024 


31334621 


31927050 


33765609 


32913526 


Oct ... 


; 33988079 


34576246 


35322015 


37012342 


36246775 


Nov.. . 


33653945 


33702934 


35260345 


35163321 


36060933 


uec • • • . 


i 31935933 


32363992 


34578347 


34354595 


34785486 





1889 


1S90 


1891 


1892 


1893 


1894 




$ 


$ 


$ 


$ 


$ 


$ 


Jan 

Feb .. 


31592372 


30870961 


31662099 


32705400 


32831747 


30571375 


31866151 


30627074 


31925749 


32711015 


32978840 


30603267 


Mar .. 


32471522 


31704281 


33020661 


32483965 


33430883 


30702607 


Apr .. 


31299842 


30671938 


30904096 


31496369 


32633073 


29996472 


May . . 


30012900 


30831914 


309172T4 


31383218 


31927342 


28467718 


June .. 


31209972 


32059177 


3^379886 


32614699 


33483413 


30254159 


July .. 


30343413 


31167628 


30579968 


32488718 


33573468 




Aug .. 


31090284 


32718363 


32012196 


32646187 


33308967 




Sep.... 


: 32888429 


35522319 


34083051 


34927615 


35128926 




Oct 


I 35233310 


36480649 


37182768 


38688429 


36906941 




Nov .. 


I 34899830 


36344546 


37430690 


37124505 


35120561 




Dec .. 


1 33577700 


35006274 


35634129 


36194023 


34418936 





APPENDIX IV 



BIBLIOGRAPHY 



Acts of the General Assembly of H. M. Province of New Brunswick from 

26 George III. to 6 William IV. Fredericton, 1838. 
Ibid. (Separate volume for each session^. Fredericton, 1837-1867. 
Acts of the General Assemblv of the Province of Nova Scotia. Halifax. 18^6- 

1867 ; (another title is Provincial Statutes of Nova Scotia). 
Acts of the Parliament of the Dominion of Canada, 1867-1894, 27 sessions. 

Ottawa, 1867- 1894 (The Acts of each session are divided into two 

volumes, " Public General Acts," and " Local and Private Acts."') 
Bagehot, Walter. Lombard Street New York, 1892.. 
Bankers' Magazine, Vols, i-xvii. London, 1843-1856. 

Bowles, William C. General Index to the Journals of the House of Com- 
mons of the Dominion of Canada and to the Sessional Papers of Parliament, 

1 867- 1 876. Ottawa, 1 880. 

. The same, 1877-1890. Ottawa, 1891. 

Bullion, Thomas (George Rae). The Internal Management of a Country 

Bank, with notes and observations by a Canadian Bank Manager (Georgb 

Hague). Toronto, 1876. 
Canada Gazette, The (Dominion). Vols, i-xxvii, Ottawa, 1867-1894. 
Canada Gasette, The (Province). Vols, i-xxvi, 1842-1867. 
Canada, Public Accounts /or the fiscal year ended 30th June, 1893, printed by 

order of Parliament. Ottawa, 1893. 
Canadian Journal of Commerce, Finance and Insurance Rcvierv, The. Vols. 

i-xxxiv, Montreal, 1876-1892. 
Chittv, JosEP'i. A Treatise on tht Law of the Prtrogatives of the Cioutn. 

London, 1820. 

History of Lower Canada. Montreal, 1866. 
Legislative and Documentary History of th^ Bank nf the 
Washington, 1832. 
" Canadian Bank Note Circulation" in Proceedings of 

the Convention of the American Bankers' Association. New York, i8gi, 

pp. 82 to 90. 
Couhcelle-Seneuil, J. G. Traitc des Operations dc Banque. Cinqui^me 

edition. Paris, 1871 
Daniel, John W. A Treatise on the Law of Negotiable Instruments. Fourth 

edition, New York, i8qi. 



Christie, Robert. 
Clark and Hall. 
United States. 
Cornwhll, Wm.C. 



860 



The Canadian Banking System, 1817-1890 



Dawson, S. E. " Old Colonial Currencies." The Canadian Antiquarian and 
Numismatic yournal, Vol. i, No. i. Montreal. 1872. 

Debates of the House of Commons of the Dominion of Canada. Second session, 
jrd Parliament, to 3rd session, 7th Parliament. Ottawa, 1875-1893. 

Debates of the Senate of the Dominion of Canada. Ottawa, 1875- 1893. 

Dunbar, Charles F. Chapters on the Theory and History of Banking. New 
York, 1891. 

. Laws of the United States relating to Currency, Fin- 
ance, and Banking from 1789 to 1891. Boston, 1891. 

Durham, Earl of. Report on the Affairs of British North America, from the 
Earl of Durham, Her Majesty's High Commissioner, etc., etc. Montreal, 
1839. (Ordered by the House of Commons to be printed, nth Feb- 
ruary, 1839.) 

Eckels, James H. Annual Report of the Comptroller of the Currency. 
Washington, 1893. 

Fillmore, Millard. Report of the Comptroller of the State of New York, 
1849. Albany, 1850. 

Gallatin, Albert. Considerations on the Currency and Banking System of 
the United States. Philadelphia, 183 1. 

. Suggestions on the Banks and Currency of the several 

United States. New York, 1841. 

Garland, N. Surrey. Banks, Bankers and Banking in Canada. Ottawa, 
1890. 

(compiler). Report of Dividends remaining unpaid and 

Unclaimed Balances in Chartered Banks of the Dominion of Canada for 
five years and upwards, prior to 31s/ December, 1892. Ottawa, 1893. 

Gormully, J. J., and Sinclair, R. V. Banks and Banking. Ottawa, 1892. 

Hague, George. "Bank Reserves" in Journal of the Canadian Bankers' 
Association, Vol. i, pp. 107-111. 

. " Banking in Canada." Proceedings of the Convention 

of the American Bankers' Association. New York, 1881, pp. 98-105. 

. "One Name Paper " Ibid, 1884, pp. 64-70. 

. . "The System of Branch Banking." Ibid, 1884, PP- 

73-81. 

. Banking in Canada, its Progress and Development (a 

lecture reprinted from the Shareholder). Montreal, 1884. 

Hamilton, Alexander. Report on a National Bank, i^th December, 1890. 
Vide Clark and Hall, supra. 

HiNCKS, Sir Francis. Reminiscences of his Public Life. Montreal, 1884, 

Hunt, Washingion. ' Letters and Reports " from the office of the Comp- 
troller of the State of New York, in Bank Statistics, iS^g-^'^, 2^st Con- 
gress, ist Session, H. R. Exec. Document No. 68, pp. 133-139. 

yournal of the Canadian Bankers' Association. Vol. i, No. 1-2, Montreal, 
1893 ; No. 3-4, Vol. II, No. I, Toronto, 1894. 

yournal of the House of Assembly of the Province of Lower Canada, 1792-1836. 

yournal of the House of Assembly of the Province of Nova Scotia, 1832-1866. 



Appendix IV ' 



J- ' i' 



861 



yournal of the House of Assembly of the Province of New Brunswick. Fred- 

ericton, 1820-1867. 
Journal of the House of Assembly of Upper Canada. Kingston, 1821 ; York 

and Toronto, 1825-1840. 
Journal of the House of Assembly of Upper Canada, 1816-1824, typewritten 

copies in the Legislative Library at Toronto, and MS. in the Library 

of Parliament, Ottawa 
Journals of the House of Commons of the Dominion of_ Canada. Vols, i-xxvii, 

Ottawa, 1868-1893. 
Journals of the Legislative Assembly of the Province of Canada. 26 volumes, 

1841-1866. 
Journal of the Legislative Council of the Province of Upper Canada. Toronto, 

1837- 
Journals of the Senate of the Dominion of Canada. Ottawa, 1867- 1893. 
Knox, John Jay. Annual Report of the Comptroller of the Currency. Wash- 
ington, 1876. . ■ • • * 
LiNDSEY, Charles, The Life and Times of Wm. Lyon Mackenzie. Toronto, 

1862. 
Mackenzie, William L. Sketches of Canada and the United States. Lon- 

don, 1833. 
MacLeod, H. D. The Theory and Practice of Banking. Fourth edition, 

London, 1886. 
Martin, R. Montgomery. History, Statistics and Geography of Upper and 

Lower Canada. London, 1838. 
(McViCKAR.) Hints on Banking, in a Letter to a Gentleman in Albany, by a 

New Yorker. New York, 1827. 
Monetary Times, Trade Review and Insurance Chronicle, The. Vols, i-xxvii, 

Toronto, 1867-1894. 
Morgan, Henry J. The Dominion Annual Register and Review. Montreal, 

1878-1886. 
Murdoch, Beamish. A History of Nova Scotia or At adia. Halifax, 1867. 
Noel, Octave. Les Banques d^kmission en Europe. Paris, 1888. 
Pai. {AVE, R. H. Inglis. Analysis of the Minutes of Evidence taken before 

the Select Committee of the House of Commons on Banks of Issue, 1875, 

with a selection from the Evidence. London, 1876. 
(editor). Dictionary of Political Economy. London 

and New York, 1894. ^*^^ Walker post. 
Parliamentary Debates, Dominion of Canada. Vols, i-iii, Ottawa, 1870 1873. 
Provincial Statutes of Canada, The. Kingston, 1841, 1842, 1843; Montreal, 

1845, 1846, 1847, 1848, 1849 ; Toronto, 1850, 1851 ; Quebec, 1853, 1854, 

1855; Toronto, 1856, 1857, 1858, 1859; Quebec, i860, 1861, 1862, 1863, 

1864, 1865 ; Ottawa, i866. 
Provincial Statutes of Lower Canada. Vols i-xv, Quebec, 1792-1836. 
Public Accounts, Province of Canada. 1854-1862. 
Rae, George. The Country Banker, his Clients, Cares and Work. Fiith ^ . 

edition, London, 1886. 



m 



862 



The Canadian Banking System, 1817-1890 



Report of the Select Committee on the Causes of the Present Depression of the 
Manufacturing, Mining, Commercial, Shipping, Lumber and Fishing 
Interests. Ottawa, 1876. 

Revised Acts and Ordinances of Lower Canada. Quebec, 1845. 

Robertson, W. J. A brief historical sketch of Canadian Banking and Cur- 
rency, the Laws relating thereto since Confederation and a Comparison with 
British and American Systems. Toronto, 1888. 

Scott, Sir Walter (Malachi Malagrowther). Three Letters on the Pro- 
posed Change of Currency. Edinburgh and London, 1826. 

ScROPE, G. Poulett (editor). Memoir of the Life of the Right Honourable 
Charles, Lord Sydenham, with a Narrative of his Administration in 
Canada. London, 1844. 

Sessional Papers, Dominion of Canada. Vols, i-xxvii, Ottawa, 1868-1893. 

Smith, Adam. The Wealth of Nations. Seventh edition, London, 1793. 

Smith, Goldwin. Canada and the Canadian Question. New York, 1891. 

SoMERs, Robert. The Scotch Banks and System of Issue. Edinburgh, 1873. 

Statement of Banks under Charter, 1867-1894. Vide The Canada Gazette. 

Statement of the Affairs of the Late Bank of Upper Canada at Kingston, taken 
from Authentic Docv '.nts. Kingston, 1840. 

Statutes at Large passed i the several General Assemblies of H. M. Province of 
Nova Scotia, The. Vol. 11, 1805-1816, Halifax, 1816; Vol. iii, 1817-1826, 
Halifax, 1826; Vol. iv, 1827-1835. Halifax, 1835. 

Statutes of H. M. Province of upper Canada. Fifth session, 7th Provincial 
Parliament, York, 1820; ist-4th session 8th Parliament, York, 1821-1824 ; 
ist-4th session 9th Parliament, Kingston, 1825 ; York, 1826, 1827, 1828 ; 
ist-2nd session loth Parliament, York, 1829, 1830; ist-4th session nth 
Parliament, York, 1831, 1832, 1833, Toronto, 1834; ist-2nd session, i2th 
Parliament, Toronto, 1835, 1836; ist-5th session, 13th Parliament, Tor- 
onto, 1837. 1837, 1838, 1839, 1840. 

Statutes of the Province of Upper Canada, revised by James Nickalls. King- 
ston, 1 83 1. 

Stevenson, Jas. " The Currency of Canada after the Capitulation." Trans- 
actions of the Literary and Historical Society of Quebec, 1876-7. Quebec, 
1877. 

. " The War of 1812 in Connection with the Army Bill Act." 

Ibid, 1891-1892. Quebec, 1892. Another title is " The Circulation of 
the Army Bills, with some remarks upon the War of 1812." 

Thompson, S. Canadian Mirror of Parliament. Quebec, i860. 

Todd, Alfred. General Index to the jfournals of the House of Assembly of the 
late Province of Upper Canada, 1825-1840. Montreal, 1848. 

. General Index to the journals of the Legislative Assembly of 

Canada, 1841-1851. Montreal, 1855. 

. The same, 1852-1860. Ottawa, 1866. 

Upper Canada Gazette, The. Vols, i-xiv, York and Toronto, 1827-1840. 
Van Buren, Martin. Message of His Excellency, the Governor, on the subject 
of Banks, with t he plan suggested to place them under proper regulations, 



Appendix IV 



368 



secure the public from loss by failure, and furnish a sound, well regulated 
currency, made to the Assembly, fanuayy, 26th 1829. Albany, 1829. 
(Contains Joshua Forman's original proposal of a Safety Fund.) 

Wagner, Dr. Adolph. Die Geld-und Credit-theorie der Peel'schen Bankacte. 
Wien, 1862. 

• " Der Kredit und das Bank Wesen." In Schon- 

BERG, G. Handbnch der PoUtischen CEkonomie. Tiibingen, 1890, Vol. i, 
PP 397-496. 

Walker. B. E. The Canadian System of Banking and the National Banking 
System of the United States. Toronto, 1890. 

. " Banking in Canada," in World's Congress of Financiers and 

Bankers, Chicago. 1893, pp. 169 et seq., and Journal of the Canadian 
Bankers' Association, Vol. i, pp. i, ct seq. 

. " Banks, Canada," in Palgrave. Dictionary of Political 

Economy, pp. 100-102. 

Warner, John De Witt. Ten per cent. Tax on State Bank Notes and Cur- 
rency Expedients used in the Crisis of 1893 {Speech in the House of Repre- 
sentatives of the 2nd yune, iSg^). Washington, 1894. 

Weir, Frank. The Law and Practice of Banking Corporations under Domin- 
ion Acts. Montreal, 1888. 

• Memorandum on the Bill respecting Banks and Banking now 

before Parliament. Montreal, 1890. 

Whitney. D. R. The Suffolk Bank. Cambridge, 1878. 

Wilkie, D.R. " Advantages of the Canadian Bank System," The Forum, 
Vol. xiii. New York, 1892, pp. 324, et seq. 

Wilson, James. Capital, Currency and Banking. London, 1847. 

Wolcott, Edward (compiler). The National Bank Act and other Laws 
relating to National Banks. Washington, 1882. 



Educational Institutions attended by the Author: 

The high school of Norwalk, Ohio, from which a diploma 
was received in 1888. ... •• 

Cornell University, Ithaca, N.Y., 1888-1892. 
The University of Chicago, Chicago, 111., 1892-1893. 
Columbia College, New York, N.Y., 1893-1894. 

Degrees and Honors Conferred upon the Author : 

Ph. B. (with Special Mention in English) by Cornell Univer- 
sity, 1892. . 

Seligman Fellowship in Economics, by Columbia College, 

1893-1894. ..■■:: V, ' • . ■ ^ 

Other Publications by the Author : 

«' On the Style of Webster," Cornell Magazine, 1892. 

" Paper Currencies of New France," jfournal of Political 

Economy, 1893. ^ 

•' Free Banking in Canada," jfournal of the Canadian Bankers 

Association, 1894.