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1 2 3

THE
CANADIAN BANKING
■ SYSTEM

1817

1890

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

_ J '

{

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

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

26
28

42
4b

48
51
53
57
6a
fi8
76
83

85
88

93
94
96

§22. — 1847-1850 .. 99

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

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

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

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,

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

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

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

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-

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

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.

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

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.

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

!' ,"

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

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

)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

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

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.

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

: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.

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.

■^rrasBw*

The Early Banks in Lower Canada

their own
d its New

frequently
an that of
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or adverse

Canadian
1 system of
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k's reserve
e its intro-
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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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■O-O'TJ

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

..iiiaMwiBSgAwiMifi'hi*!' ■uk;«w>"«>'«' >'»«■»***'

?90

The Early Banks in Lower Canada

.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.

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

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

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?

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.

The Early Banks in Lower Canada

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.

I !

I'll

■ftil:,

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.

Tke Early Banks in Lower Canada

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^^

■

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

tr,

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•.;ifcl

;

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

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.

(^!

JLii_uiflT"

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

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

(b) Notes under five shilHngs were forbidden.

(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.

l.\:'

i !

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

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

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.

,!(

' »

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

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.

The Canadian Banking System, 1-17-1890

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

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. !

i!i

ill

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

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.

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

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 '!

.,1

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

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.

^'.'

' 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

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.

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

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

I nil

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

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

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

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

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

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: ^1 U

jiiill

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

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.

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

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

I 111

t ' ;}

^iv

ti'

■J

■ -i

: ' 1

The Canadian Banking System, 1817-1890

8&6

8&6 8&6 8&4

8 6&16 7

• ••• •••• ••••

4i 8 6

8 8&4 8

8 8 8

7 7&6 4

g 15. — EFFECTS OF THE CRISIS AND SUSPENSION

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

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.

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

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

•s <«

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•

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•

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ank

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mvo 00 00

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Tj- 0 00 t^

Bank of

Upper

Canada

000 00 00

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'I: u

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

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

i'^J7-Jan

11/2

9>^

viY^

Feb

12/2

12;^

Mar

I2>^

viy^

, ,

Apr . .

13/2

i^Vz

• •

May ....

13X

12K

_ une ....
uly

. •

20-22>^

6-8)i

Aug . . : .

.20

ii'A

6% S

Sept

21-18

3-"

Oct

i8-i5>^

12/2

3-5 'i

Wov

1.5

16-17

I2>^

.S% '\%

. JGC • • • •

I2>^

S/z

,8j8— Jan

Feb

i5-i2>^

li'A

o-i%

^Vz

9)4-11

iiA

o-%

Mar

»y2-9

11%

■ •

Apr

8-7

V/2

12^

• •

May ....

j'A-^'A

12..^

• •

une ....
' uly

8;4-i2

12 A

^•4

\\%

II 12

iA-'%

Auk

io}4-ii'4

lo;^

12A

1-2

Sept

io>^

ioYj-iiYj

12'A

1-2

Oct

\o%

IO^-II>i

I2>4

1-2

Nov ......

9^<

Il>^-12

li'A

• •

Dec

lo^A

12-12^

• •

1839— Jan

Feb

9}i

<i.

^3A

11-12

, ,

Mar

io^-ii>4

12;^

, ,

Apr

9)4

IO>^-II

^2A

■ •

May

12%

• ■

une ....

«¥

I2>^

-ly

^2%

Aug

io>4

^2%

Sept

syi

loA

12%

Oct

9'A

\0)^

I2>4

Nov

• 8

\oA

t ■

Dec

lO-II

IO>^

12%

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

f I

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

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 :

Is ;

I' '.

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.

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,

|l 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.

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

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

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^

§ 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

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.

The Canadian Banking System, 1817-1890

I 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

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.

IMAGE EVALUATION
TEST TARGET (MT-3)

I.U |30 '■■ i

II I.I

11.25

140

2.2

2.0

1.8

U IIIIII.6

K°

^i li

|i!

lilt"

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

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 : — *

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!

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

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

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

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.

§ 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

i
^

-t^-

1 tl

'11

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

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.

iiii

! if

I, II

5 '•':
S (5

I'h

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, "

'^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.

■ H

i|i;if

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.
0 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

. 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

' I -1!

ll!!J

»'•!

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

jt"

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.

K '[}. ■d

■ii

;; !j

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.'

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

170,708

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-

=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

« 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

iAi]|i'-C*i!lillJ-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- 0 0
VO M f< 00
ui N O\00

M vo Tj-00 t>.o 0 '*-*>n
t^ t-^ o_ 0 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 0 mvb t^M po ov ov 0 vo 0 (Ti moo m m fn N n m

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

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

POOO 0 'f 0 t^vO OVVO >-iOO fn^CTlO N M QN'*>-l N

4«. N m mvo vo « 0 oioo n t^ o\ t^ 0 0 00 t«.vo 00 vo «

NmmmmNNmNNmi-imihm

sappnoas
)uauiujaAOO

ro M 0 00 t^OO Ov ■TvO t^ ro ro t^ ro rn IT) t^vo vO vO vO

«». t^ T T}- 0 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 0 TO>

vo TrnmMoo M toitc^ 0 -' rnmm moo 0 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 0 0 vo n vo -"i-vo 0 m t^ m h
w -1 moo Tt^M 6 IAN moi ■^vq 0 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 0 r^ fovo m Oi Ov mvo m 00 0 vo m m n Oivo vo

Oi M vo t-» 0 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 0 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.

t--00

m m

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

'..''■■ , ■ . '.■ ^■ ■".

179

Notes and bills of other

banks

''•■■- ' ■-"' " ^' '■■■■.■

....

Balances due from other

banks

• • . •

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', : ' ".

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:

;»^

000 00

C^ 0 ONVO

■<f f 0 00

1 6 ro t^

. . i^vo 0 • • • 0 0

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

d^ ! ! in : N N

0
d

. . •«J- M M . , . ^

- - . N m

Tt- 1 M N

4-t

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

, 1

M M (O 0> 0 ro 0

^^o

MTj-PT) OMMUINI-

0 (O M ro 6 M

'J-

. . vo vo m • mvo Tj- T^lO n v£

't- rn . oo_^ TfO O^oc

^3 K.

<:oo

***■ ; : ■<?■ d cji ; M rf Tt- N di -

tv. ro * in tJ- N d^ oc

. • M -^ . M 00 vo t-^ M

«> 1 H

^ . m t^ N m 1-

VO rr) M

ro 1 MM

■t

KM 0 't' >o rno 0

4-1

o\oo in f M

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

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*

t. Ct M

0 <u "

^ " ^ 8 ^ C^ M

0 00 ro t^ N
VO N N M

" s

II II 1 1 ++

1 I + 1 1

N M 10 t^ 0 CTi 0

tv iH in in a>

00 m Tj-00 ro

IT 4) 00

0 ■ • 00 oo_ • t^ • t^oo_ T^

0 t^ M VO VO • •

4} 00

*"■ ("o ; ; N d> ; di ." -^-o' r^

^ 0" N dvd N 1 ■

t-^

mQH

W . .MM .c^,iriO>M

n M M ro N N .

o_ 0\

M M N M M

4-(

1 O^0O 00 0

0 VO fO t^ 0

- \0 vo ro

N N ■ tC ro ■ ■

N « M

N . . N . NO . ro . ;

VO 00 . 0 ro . .

■s

00 f*^ M

1 N ro N M

. M m"

S m"

M
1

(^ M N CTi fn 0

lo 0 00

'TO 00 VO N 00

1 00 Tf 0 ro

[I.
0

*"■ m' tA ; lA in ; ro I m" ; '.

h 0 t^ • ro Tl- . .

N in ; » d I !

vO"

-4- M . m N . r^ . vo . .

N 'q

ts,ro N M

N M*

g-^jE^iuS .o«>-mc

;

•
«

••"^ 0 0 0 0 9 ?

1 "fl

Jg M N nS ri- uSvd t^oo d» d M f

tfl M M f

i 0

0 T

t- 5 "^^ t^oo d> d 1-

4 H

< 1-

< <MMMM«NP

*•*

0
<>

-o

E-

(«

«rf

-a

•0

« i, M

Ui O "^

o «) "
o "^ el

»»•« s

&
•a

a
o

O Qt n

in M
"Soo

lis

II t

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.

186

The Canadian Banking System, 1 817- 1890

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

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

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

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August and February, from 1857 to 1867 inclusive, from The Canada GaxtUt.

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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

•#

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.

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..

533.753
389,184='

851.347

2,253,289

749,506
I.304.134

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.

l-!'i

1^^ •

'Mi

iV\

152

The Canadian Banking System, 1817-1890

: I '

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.

II I'

'i u

4\'-

1 ><

' :
'•I

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

§ 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:

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[

■i' :if

■ 'iM

^ ' .'. i

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 (

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-

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

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.

166

The Canadian Bonking System, 1817-1890

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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.

I I I

I i 1

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

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.

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

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.

^Vf

I
%

I ., i

r i

! I

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-

]

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.

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.

I 1

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.

IMAGE EVALUATION
TEST TARGET (MT-S)

1.0

I.I

1.25

■50 ■^~

2.2

1.4

1.6

«^.^^

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.

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.

r"^*^

i i

lift

19C

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.

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.

■r (1

ij »;

i, iK

I 'm

m'. u —
fl#o.i

TB"

192

The Canadian Banking System, 1817-1890

r{i

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.

■ivl

?;*«.«

'■', 'i.

194

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

:i'!:

-\:M

he
1e

1 Debates ut supra, pp. 256 and 822 ; ibids p. 304.

8< 890,1

106

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

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

hall be a

therein,

sustained

leanor on
n of Par-

it ted, on
to apply
:ting the
/e. The
report of
tinue the
ts expiry
ike effect

consent -
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/ernor-in
ir cent, of
nt below

e of the

as a part
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ished to

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Irisdiction

Is assured
me a fine
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-half for
In in con-
respect-
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policy

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

the
»lc
e

' 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 ;

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.

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

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

Vic.

cap

32-33

3f>

3.1

«l

)

(

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

$32,500,162
10,102,439

2,984,344

14.935.213
16.727,378

30th June, 1873

$44,548,376

$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 ! •:

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 !

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.

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

I Ibid, Vol. IX., p. 549-

212

The Canadian Banking Svstem, 1 817- 1890

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

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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

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. "^^

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.

; K

gil-'

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.

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

IK4
1H6
14'}

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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^'^ f

•^■1^1

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P i

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230

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

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.

ai -

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,

.,:

.. .^

[

?;^

^-X

'r'

i' -

!, :

230

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

;

{

;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.

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.

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

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'

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

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 :

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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'.'
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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

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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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.

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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 .

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The Canadian Banking System, 1817-1890

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■ft'

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.

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The Canadian Banking System^ 1817-1890

I i>l t -

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

» 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

iffn

268

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

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

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

i It-

1 Debates, ut supra 1890, pp. 2,233 et uq,

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

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,

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.

IMAGE EVALUATION
TEST TARGET (MT-3)

^5^ ... £^

I/.

.6>

1.0

1.1

8:4 12.8

|50 ^"

2.5

112

1.8

L25 i 1.4

'/]

>T^^

<^^' ^^/.^

'<^

'^^

%^.

i" C^

L^-

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

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

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

Branches in

Ontario

Places

134

^i
i6

Quebec

Nova Scotia

New Brunswick

Mani toba

British Columbia

Northwest Territory

7
6

Prince Kdward Island

■I

259

465

The Banhir's Register, Chicago, i»94, pp. 346-355.

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.

@ 7
6

@ 8

(^. 8

@ 7

(Qi 10

@ 8
8

5^
6

@7
7
6

@ 6^
8

@ 6
@ 7
7
8
8

1891

30th May I 2ist Nov.

8
6 (0} 8

8 (<«i ID

4 # 6

6
6 @ 8

8 (S JO

7
6

5 @
1% @

@ t<

& 7

@ 8

6 @ 7
«

8 ({5 10

7 (ffi 8

C @7
7

1892
i6th Apr. 17th Dec

4 @ 6
3ji & 5

5 @ 6

6 @ 8

4 @ 6

8
6 @ 7

7
6 @ 7

5 (^ 6

6 @ 7

6
6

# 7

7
(§ 8

@ 8
(S! 7
7
8
&
8
(S5
7
7

5% @

5 @

6 @
6 @

8
10

1893

2jth Mar. 2nd Sept.

@
7

6 @

6 #
8

8 @

7 (g
10 @

7
7

6 @

6J^

6 @
8
8
10

7 C'l 8

10 («' 12

6 (M 8

7 © 8

8 @ 10

7
7
8

10 @

8
8
10
& 8

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.

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

. 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

111

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,

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

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.

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

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.

!'■■

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..

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

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

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

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

808

The Canadian Banking System, 1817-1890

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

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

iwm

I' Is

111

si
tl
b

Tit'

•c

•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

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.

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.

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

(,'

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

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.

' 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."

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.

i-!

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 :

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

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.

r-ii

ft: I'l

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

; ■.!!

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

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

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

; $

> 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.

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

- !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

il
'I

.s.

0 a

2 S

B
0

•a <2

^•s

§5

Si-S'2,

•§]§

a
0

3
0

"■a

Balances d

Agencies

United Kin

M 0

S,a

a hi}
(4 C

Balances du

Agencies

United Kin

•a

•

te.

32.831

67.459

102,097

4,100

19,695

21,626

1432

14,606

18,833

197.256

32,978

66,822

103,140

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

] "t

842

The Canadian Banking System^ 1817-1890

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

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,

•

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

Banks

reporting

to the
Gov'ment +

39
39
39

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

$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

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

Banks

reporting

to the
Gov'raent t

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

Government

Provincial

Government

Deposits

Government

Deposits

payable after

Deposits

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

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

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

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

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

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

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

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)

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

British

and other

Railway

ChII Loans on
Bonds and

SIO'^Ur

Current
Loans

Overdue
Debts

Securities

»4,825,965

$14,401,695

$186,590,602

$ 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

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

»»

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

32439

1695

2142

9871

28687

51405

35427

3073

3157

"395

29484

54432

36007

2760

2207

10854

28831

55212

36269

2704

2910

7356

33060

55560

16074

438

466

759

16796

.1. 23061

18841

392

587

2227

16298

25926

21748

396

714

3404

17774

28924

20695

399

780

1716

19664

28016

20743

361

693

1683

19021

28001

13255

452

468

512

16283

21664

15163

320

566

1 103

16653

23765

15586

299

673

1335

16393

24507

14139

382

859

1053

16703

23258

14010

386

1082

726

16725

23102

7/2

9788

383

859

677

9306

14285

10382

320

668

623

9061

12179

10738

348

712

692

9321

13122

10103

362

701

693

8626

11964

iVz

9483

346

628

881

8545

12024

4530

186

231

133

4265

5125

5486

212

218

5340

6188

5759

429

794

5039

6689

5742

512

797

• •

5384

7001

6075

408

675

5838

7287

5913

432

5998

9030

6424

356

5356

9528

73H

287

6418

10411

7116

557

^200

10248

7767

520

7027

10950

8409

308

431

185

9264

12188

9956

338

695

594

9861

13806

10546

356

587

546

1 1278

14550

10157

542

1112

399

10412

14238

9959

547

1154

420

9934

13989

8858

257

357

9518

12186

9971

201

551

197

10206

13349

1 1470

206

503

197

"137

14984

10326

121

691

10449

13890

10732

140

613

151

10777

14335

7704

300

699

270

6152

10055

9077

293

648

461

7128

12156

10033

288

688

469

7805

13232

10218

358

1 174

285

7110

13435

9845

384

1028

331

7190

13097

854

The Canadian Banking System, 1817-1890

(000 omitted)

Deposits
by the

Deposits by
the public

Year

Capital

Rn«t

Ciroula-

public

payable
after notice

St Dec.

Paid-up

I\(>ai

tion

payable

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

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

1 1054

842

1735

30th June

T8y4

1200

! 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

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

'J9S5

197

349

1390

6766

13055

11054

223

611

1399

7299

14178

10243

227

442

1 106

6996

13423

10936

240

653

1033

7202

14076

70S9

292

377

108

5554

8911

7300

261

451

309

6445

0809

7505

378

492

240

6468

IU058

7739

299

565

309

6191

1044 1

8295

179

443

941

6400

1 1038

.55"f>

176

347

5152

7384

5779

160

360

117

5292

7715

6685

170

372

175

6045

8636

6180

180

302

5869

8134

6223

181

319

143

6024

8180

3305

117

164

4550

5493

3366

123

194

4110

5569

3625

107

214

4458 •

5879

3766

117

411

4528

6050

3810

104

163

4774

6060

4010

116

4683

5534

4228

117

122

269

5011

6125

5055

114

123

217

5895

7235

5368

120

169

312

6164

7813

5287

130

186

289

5902

7798

4930

183

186

4996

6719

5721

159

220

5779

7706

6375

170

188

131

5"3

8401

6551

»73

238

5881

8558

6408

182

301

5893

8395

4651

146

5201

637'

4617

184

4993

6305

6029

172

5853

7786

^574

191

6706

8391

7530

438

6947

9308

2562

112

2785

3997

2634

2639

3966

3246

105

2918

4593

3721

191

3772

5116

()

3530

109

3901

4838

4851

174

5435

6419

5086

194

5698

6655

581 1

226

6023

7397

5^'45

174

5742

7177

5731

229

6028

7266

•

IB!

■:-■",

•; .■

•

Is'

■■■:,.;■' ■ - ■

■ :''•. ■ ;

366 The Canadian Banking

System

, 1817-I

890

(ooo omitted) ' ,

Deposits
by tiie

Deposits by
the public

'.'.

. -I'.,;:'-: -■■■ ' :.':''' Year

Capital

Rest

Circula-

public

payable

; ^ ■ . 3, St Dec.

paid-up

tion

payable

after notice

Lii

•"',■".'"■•*."'-"*"'■'*■

on
demand

or on a
fixed day

Merchants" Bank of Hali- 1890

^IIOO

» 375

$ 996

$ 945

82242

fax, Halifax 1891

1 109

450

949

993

2514

IH .

1892

1 100

510

1020

1391

2842

1893

IIOO

600

1013

1222

3001

30th June, 1894

IIOO

600

932

1 187

3384

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

■

30th June, 1894

1000

600

580

1325

3554

Banque d'Hochelaga, 1890

710

160

581

447

989

Montreal 1891

710

160

589

620

1380

1892

710

200

566

598

1947

1893

710

230

641

680

2570

•

30th June, 1894

710

270

634

641

2457

^H|

People's Bank of Halifax, 1890

600

433

215

502

Halifax 1891

680

490

291

580

]

^^^^H t

1892

700

428

227

930

]

^Hi

1893

700

130

441

360

810

]

30th June, 1894

700

160

438

440

834

]

Traders' Bank of Canada, 1890

592

i76

724

1163

Toronto 1891

604

591

995

1555

1892

607

590

856

2200

I8r3

607

600

768

2451

* ■ 30th June, 1894

607

565

726

2607

^^m\]

Bank of Nev Brunswick, 1890

500

440

455

674

836

St. John 1891

500

435

508

1079

^■i:

1892

500

525

444

656

1131

^H;,

• 1893

500

525

453

591

"43

30th June, 1894

500

525

463

624

1142

Union Bank of Halifax, 1890

500

335

227

631

^H '

Halifax 1B91

500

-^78

352

595

^^^Hi

1892

500

'-^74

353

449

^^^■' '

1893

500

120

302

440

566

30th June, 1894

500

140

331

467

697

Halifax Banking Company, 1890

500

170

489

411

1429

^O'

Halifax 1891

500

210

463

384

1543

^H,

1892

500

210

450

444

1538

^H|

1893

500

210

455

,09

1588

^^Hi

30th June, 1894

500

250

485

^'«3

1590

^H^H 1

Banque Jacques Cartier, 1890

500

150

413

1013

645

^^■'

Montreal 1891

500

150

419

575

1390

j^li

1892

500

»75

403

598

1858

^H i

1893

500

215

402

747

1964

30th June, 1894

500

225

427

636

2113

^^B

•'

Cp' ■

• Appendix II

•" ■

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

dividend

<ed day

foreign countries

1 >

82242

*4374

»I43

»398

«l68

! «4553

$5849

6 '

2514

4714

145

455

4261

6264

' 6 - ' • ;

2842

5991

138

544

170

4794

7601

6 .

3001

"41

187

465

5130

7641

7 '

3384

■So

143

402

108

5497

7936

' 7 ;

2183

4488

141

210

3689

6052

2656

5440

140

247

3550

7048

8 '

3038

5939

138

274

127

3604

7576

; 8 >

3254

6236

145

295

1 4398

7807

3554

5928

149

298

4533

7550

989

2097

151

2095

2975

0 •

1380

2659

2261

3591

1947

3222

130

3186

4214

2570

3974

233

3353

5032

2457

3845

117

148

3365

4856

502

1210

1534

1931

580

1371

1932

2216

930

1611

III

2044

2488

810

1655

113

2207

2572

834

1733

121

2206

2658

1163

2530

140

2371

3166

1555

3470

147

2905

4141

2200

3960

132

2920

4661

2451

4188

lOI

221

2979

4901

2607

4271

114

194

3140

4982

836

2038

108

200

1993

3070

1079

2087

172

2271

3122

1131

2317

182

162

2347

3379

"43

2291

156

168

2274

3372

1 142

2347

167

238

299

1915

3439

631

1390

24 '

I35f>

1991

595

I412

1502

2041

6 ^

449

1277

1325

1925

566

1513

1670

2179

697

170

1769

2420

1429

2380

2722 1

3075

1543

2552

2966

3262

1538

2519

236

I20

2701

3253

1588

2501

189

2712

J298

1590

2565

2801

3406

645

2145

1866

2841

1390

2468

118

2050

3174

1858

2945

2514

3^85

1964

3221

2952

4023

2113

3300

•

155 63 1

3081

4069 !

7 ■>■:

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

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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.

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Bagehot, Walter. Lombard Street New York, 1892..
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Bowles, William C. General Index to the Journals of the House of Com-
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Bullion, Thomas (George Rae). The Internal Management of a Country

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Canadian Journal of Commerce, Finance and Insurance Rcvierv, The. Vols.

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Chittv, JosEP'i. A Treatise on tht Law of the Prtrogatives of the Cioutn.

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History of Lower Canada. Montreal, 1866.
Legislative and Documentary History of th^ Bank nf the
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" Canadian Bank Note Circulation" in Proceedings of

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Couhcelle-Seneuil, J. G. Traitc des Operations dc Banque. Cinqui^me

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Daniel, John W. A Treatise on the Law of Negotiable Instruments. Fourth

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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
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Debates of the House of Commons of the Dominion of Canada. Second session,
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Debates of the Senate of the Dominion of Canada. Ottawa, 1875- 1893.

Dunbar, Charles F. Chapters on the Theory and History of Banking. New
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. Laws of the United States relating to Currency, Fin-
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Durham, Earl of. Report on the Affairs of British North America, from the
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Eckels, James H. Annual Report of the Comptroller of the Currency.
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Fillmore, Millard. Report of the Comptroller of the State of New York,
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Gallatin, Albert. Considerations on the Currency and Banking System of
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Garland, N. Surrey. Banks, Bankers and Banking in Canada. Ottawa,
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(compiler). Report of Dividends remaining unpaid and

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Gormully, J. J., and Sinclair, R. V. Banks and Banking. Ottawa, 1892.

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. Banking in Canada, its Progress and Development (a

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Hamilton, Alexander. Report on a National Bank, i^th December, 1890.
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HiNCKS, Sir Francis. Reminiscences of his Public Life. Montreal, 1884,

Hunt, Washingion. ' Letters and Reports " from the office of the Comp-
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yournal of the Canadian Bankers' Association. Vol. i, No. 1-2, Montreal,
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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-

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Journal of the House of Assembly of Upper Canada. Kingston, 1821 ; York

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Journal of the House of Assembly of Upper Canada, 1816-1824, typewritten

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Journals of the House of Commons of the Dominion of_ Canada. Vols, i-xxvii,

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Journals of the Legislative Assembly of the Province of Canada. 26 volumes,

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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-
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LiNDSEY, Charles, The Life and Times of Wm. Lyon Mackenzie. Toronto,

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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

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Monetary Times, Trade Review and Insurance Chronicle, The. Vols, i-xxvii,

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Morgan, Henry J. The Dominion Annual Register and Review. Montreal,

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Murdoch, Beamish. A History of Nova Scotia or At adia. Halifax, 1867.
Noel, Octave. Les Banques d^kmission en Europe. Paris, 1888.
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with a selection from the Evidence. London, 1876.
(editor). Dictionary of Political Economy. London

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Parliamentary Debates, Dominion of Canada. Vols, i-iii, Ottawa, 1870 1873.
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862

The Canadian Banking System, 1817-1890

Report of the Select Committee on the Causes of the Present Depression of the
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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.

•

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