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ANp

i4 COMPARISON

WITH BRITISH AND AMEWCAK sVsrEMs:

W. I. ROBERTSON. B.A.. LL.B

#jiPA!^sdRK,y) BEFORE TMw u*oW.,^.

SCiENrp fac^; fl'STORlCAL AND POLITICAL

SCIENCE ASSOCIATION OF THE PNIV^RSITV ^
O*^ TOhONTO. FEt%rH. rtgg.

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A BRIEF HISTORICAL SKETCH

. I

Canadian Banking and Currency

THE LAWS RELATING THERETO SINCE CONFEDERATION,

AND

A COMPARISON

WITH BRITISH AND AMERICAN SYSTEMS.

W. J. ROBERTSON, B.A., LL.B.

(Examiner in Political Economy, Toronto University)

A FAFER READ BEFORE THE HISTORICAL AND POLITICAL

SCIENCE ASSOCIATION OF THE UNIVERSITY

OF TORONTO, FEB. 4TH, 1888.

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TORONTO :
William Briggs, 78 & 80 King Street East.

W. CoATES, Montreal.

S. F. HuESTis, Halifax.

1888.

Explanatory.

A SHORT time ago, I wtis requested to prepare a brief out-
line of our .S3\stem of bankinjjf and currency, for the benefit
of the members of the Historical and Political Science Associa-
tion of Toronto University. The object sought, was to give a
few of the students of the University, interested in political
economy, a general idea of the nature of banking, and, in
particular, of Canadian banking and currency. It was sug-
gested to me, that a comparison of our Canadian system with
the British and United States systems, would add to the value
and interest of the paper, and the suggestion, as the following
pages will show, was partially carried out.

After the paper was read, several gentlemen, holding respon-
sible positions, expressed a desire to have it issued in pamphlet
form. In deference to that desire the present pamphlet ap-
pears.

In preparing this sketch, information and assistance were
received from several gentlemen of banking experience, and, in
particular, from H. W. Darling, Esq., President of the Bank of
Commerce ; D. R. Wilkie, Esq., Cashier of the Imperial Bank ;
and W. L. Trenholm, Esq., Comptroller of the U. S. Currency
To these and other gentlemen, who responded so promptly to
my requests for information, I wish to express my apprecia-
tion of their kindness.

W. J. ROBERTSON.

St. Catha&ines, March 8th, 1888.

59031

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Canadian Banking and Paper Currency.

AT the request of your President I have prepared a paper on
the leading features of Canadian Banking and Paper
Currency. No limits have been assigned me, so that in selecting
some parts of the subject for fuller discussion than others, I
have been guided by what it may be possible to overtake in a
limited time, and by what may be useful to stud<^nts desiring
a general knowledge of the principles of the system of banking
existing in our land.

Modern systems of banking have much in common, and this
is specially true of what may be termed English systems, in-
cluding under this designation those prevailing in the United
States and British Colonies, as well as those in Great Britain
and Ireland. In discussing, then, Canadian banking and cur-
rency, we cannot well avoid referring frequently to British and
American systems, and it is desirable that these references
should take the form not only of explanation, but of comparison.
In fact, our Canadian banking system, like our Canadian
political constitution, is a compound of British and American
elements, with a few native ingredients intermingled, and
rendered necessary by our peculiar circumstances.

By way of preface, I may observe that the subject of bank-
i ng is not ide ntical with that of currency. A bank may issue
its own notes m tlie form of a currency, but it is not necessary
that it should do so. Nevertheless, it must be admitted that
in Canada and the United States the majority of banks have
been wont to issue their own notes, and the effect of the prac-
tice has been to create a general impression on the mind of the

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American people that a bank's chief function is to provi«le a
currency. Indeed, so closely are banking and currency connected
in our commercial life and habits, that it would be utterly im-
possible to give a clear idea of the one without treating of the
other.

WHAT IS A BANK?

A bank is iiii institution which deals in niuney and debts.
It buvs debts with its own credit, antl thus creates new debts.
It borrows the capital not needed by one man, and lends it to
another who does need it. It thus transfers capital from place to
place, and from person to person. Its disposab le n^eans are : —
The ^pital paid in by the .shareholders or partnei s, the depo sits
of its customers, the am ount of its own notes it can keep out
in_^£irculation, and the mon ey in the cour.se of transmis.'^ion
through it. It uses these means in disco unting bills, in making
loans, in the purchase of Govenmu^nt and other .securities, and
in maintaining Tn its~Eni*a' suflUcTent (Quantity to meet current
deman ds. It <ioes not neces,sarily, in <liscounting bills an<l
making loans, use money or bank notes. A very large part of
the business of connnercial centres is carried on without the
intervention of a single bank note or a particle of gold or silver
coin. This is accomplished by the extensive use of cheques,
billsof exchang e, drafts, and book c redits. To take a familiar
case by way of illustration : — A .sells 1,000 bushels of wheat to a
merchant B for S750. B gives A a bill or note, payable in one
month. This note A takes to a banker and di.scounts it, but
instead of taking away the present worth in bank notes or
coin, he leaves it as a deposit in the bank. If A keeps an
account with 6*, the proceeds of the note will be placed to A's
credit in the books of the bank. A can now draw on the
bank for any sum he wishes short of the amount to his credit.
If A wishes to make a payment he will not go to the bank and
get coin or bank notes, but will give a cheque to his creditor
instead, and when this cheque is presented for paynsent by, .say
D, it may in turn be placed to the creilit of D's account in the
bank. If now we go back to B, whose bill becomes due in one

'er

month, we find that another saving of bank notes or money
may be made. When the banker C demands from B the pay-
ment of his bill, B may give him a cheque on his own bankt-r
for the amount. This cheque will be presented to B's banker
by G, and in all probability C will find that B's banker hoUU a
cheque of an e(|ual amount against him. Thu.se two cheques
will then be set off", one against the other, and no money will
pass. The cheque of B's banker may have been originally
ba.sed on the sale of a quantity of lumber to a customer of C,
so that we find, in the long run, wheat has been exchanged for
lumber. The result of this analysis of a very simple transaction
has been to .show that business is largely carried ou by means
of the instruments of credit which a bank employ . If w<i
iumgine such a tran.saction as I have sketched to he multiplic«l
and varied many thousand-fold, and not two Jy, but many
banks enga^^ ' n the work of discounting bills, issuinir che(jues.
grant''^<:f book credits, making loans, and caii^-elUng their
cheques against each other T)y means of a clearing-house, we
will to a certain extent realize the enormous savin*' made not
only in coin, but also in paper currency, by our modern banking
systems. In fact, the transactions performed by means of
cheques and book credits, drafts, etc., very far exceed those
carried out by' paper and metallic currency combined. In
Lon3on over ninety per cent, of a banker's transactions take
place in cheques and bills. A bank, however, does frequently
pay its cheques with its own notes, and often makes advances
in the form of loans in the same fashion. The point to be
noted in connection with .such advances is that the bank is
using a general form of credit for a special one. The bank, by
issuing its notes, is lending its credit to the borrower, and
thus enabling him to secure from the public wealth or capital
which his own credit at the time will not enable liim to obtain.
If a banker pays a checjue with his own notes he merely ex-
changes one instrument of credit for another. To the public and
banker, however, it makes a considerable difference ; for, inas-
much as a bank note is likely to remain longer in circulation
th«,n a cheque, it will give the banker a larger profit, and will

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accomplish far more in the exchange of commodities. Cheques
and drafts, or inland oills of exchange, are used to transfer
capital or wealth from one part of a community to another ;
. foreign bills of exchange transfer capital to foreign countries.
^^y Bankers have found by long experience that of the large
amounts deposited with them, a comparatively small percentage
is demanded back from day to day. Also, of the notes they
issue, the public generally keep the bulk in circulation, so long
as no excessive issues take place and the general management
of the bank is judicious. Under these normal circumstances
the banker finds he may employ nearly all the capital at his
disposal in loans, discounts, and other banking transactions,
reserving a small quantity to meet any demands that may arise
for a withdrawal of deposits or redemption of notes. One of
the mo t important questions, then, in connection with banking
iSjWhat regulation or regulations should be made by the State
to con trol banks in the management of their business, so as to
secure noteholders, depositors and other creditors from loss in
ease of bank failures. Should the State interfere at all in the
management of a bank, any more than it interferes with manu-
facturers or wholesale merchants in the management of their
business? There are writers on banking and currency that
oppose State interference with the management of banks ; but
the almost unanimous opinion of the best authorities is that
experience has shown that the effects of banking, whether for
good or evil, on the prosperity of a State, are too important and
far-reaching to allow individual enterprise to pursue its own
methods without Government control. In some countries,
especially in Scotland, banking is conducted with great caution
and sagacity, and few losses have resulted from allowing a
great latitude in the private management of these institutions.
In others, however — notably in the United States, prior to the
introduction of the National Bank system — free banking was
an intolerable evil, owing to its reckless management. Bankers
are like other business men — fallible, and liable to be over .san-
guine, to make injudicious loans, to maintain inadequate re-
serves, and to fail in reading the signs of coming commercial

";i:i

storms and panics. The management of a bank in times of
national prosperity, and under normal conditions of trade, is an
easy matter, and little danger exists in maintaining a small
reserve. It is another thing to pilot a bank through a crisis,
when the fears of the public are unreasonably excited, when
failures of commercial houses are daily taking place, and credit
is scarce. It is against these frequently-recurring crises and
panics that legislation for banks is required. To attempt to
describe the various devices that legislators have called into
existence. to give banks and paper currency a secure place in
the public confidence would be utterly out of the question.
Those wishing an excellent summary of the dift'erent methods
of regulating bank issues would do well to consult Prof. Jevjins*
admirable work on " Money." The principal methods in Eng-
lish systems of securing a currency are : (1) The maintenance
of a proportional reser ve ; (2) a minimum reserve; (3) the de-
posit or Government securities wiiH^ tlie State ; (4) a reserve of
coin equal in amount to notes issued ; (5) no reserve at all, but
f liability ot shareholders, eitHer limited or unlimited ; (6) the
rl.iVd issueoTaTl notes through banks by the State; (7) a maximum
is.sue. In some countries two or more of these systems are
combined. It will be part of our task, now, to find out what
principles have guided Canadian legislators in the establish-
ment and control of our banking and currency system.

Before proceeding to an examination of our system of bank-
ing and currency, it will be desirable to give a brief historical
sketch of its growth and development since the confederation
of the Provinces. The different kinds of banks in the old Pro-
vince of Canada may be classified as follows :

1. Private banks — that is, banks the property of individuals
or partners associated together, subject to the laws applicable
to ordinary co-partnerships.

2. Ba nks i ncorjtorated by royal charter or legislative enact-
ments. These were mainly joint stock in their nature.

3. Savings bank s incorporated according to legislative en-
actments.

Of these banks the second kind alone was empowered to

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I issue notes or paper currency. The charters of these banks of
issue differed in important details, but they all contained pro-
visions which made it necessary that a deposit of public
securities with the Receiver-General should take place before
notes were issued, and that notes could not be circulated in
excess of the securities deposited, or that the aggregate issue
should be limited by the paid-up capital. If notes were issued in
excess they were to be covered by gold and silver or debentures.
These seem to have been the only securities possessed by the
public that bank notes would be redeemed when presented for
payment, except the security known as^the double liabilitii of
shareholders. Each shareholder was held liable for double the
par value of the stock he held in the bank.
r^ In the se ssion of _186.6-G7, the Government took to itself
y power to issue Provincial notes to the amount of $8,000,000 ;
\ $5,000,000 being for general, and $3,000,000 for special purposes.
In consequence of this legislation $8,000,000 of notes were
\engraved and prepared for issue — the greater portion being
/actually issued. In 1868, after the consummation of Confed-
1 eration, an Act was passed declaring these Provincial notes to
be Dominion notes, and redeernable as such. Power was also
taken under this Act to enter into arrangements with the
banks for the surrender of their right to issue, the banks to be
recouped by an annual payment of not more than five per cent,
on the amount of their issues surrendered, until the expiration
ef their charters. The Government bound itself to maintain,
as a reserve for the rede nption of their notes, twenty per cent,
of the amount in circulation, so long as that amount did not.
exceed $5,000,000. For any siim in excess of $5,000,000 twenty -
five per cent, was to be held ; but the total issue must not
exceed $S,000,000. Government debentures were to be held
by the Receiver-General for the amount not covered by specie,
and these debentures could be disposed of if necessary in order
to redeem the Dominion notes. We have in this legislation
/ihe initial steps taken in the direction of a national currency.
(^ATwo years later this Act was repealed so far as it gave power

jto

the Government to make arrangements with the banks for

the surrender of their right to issue. Also, the limitation of
the amount of Dominion notes to $8,000,000 was removed, and
the maximum amount that could be put in circulation placed at
$9,000,000. But the issue was carefully guarded by the follow-
ing restrictions:

1. It must be secured by debentures and specie equal to it in
amount ; the debentures not to be more than eighty per cent, of
the amount held for redemption.

2. Not more than $1,000,000 at one time, and at intervals of
not less than three months, could be issued.

3. No increase in the issue could take place until the Re-
ceivercGeneral held specie equal in amount to twenty-five per
cent, of the aggregate of the increas^e and of the debentures
already held by law. - .

4. The maximum amount of issue, $9,000,00(,', could not be
reached unless the Receiver-General held specie to the amount
of $2,000,000.

5. Monthly statements of the notes in circulation, and the
specie and debentures to cover them, must be published by the
Receiver-General.

In the same session a Banking Act was passed, its purpose
being to secure a measure of uniformity in the laws relating to
the different banks. The principal clauses in this Act requiring
notice are as follows :

1. The amount of notes intended for circulation issued by a
bank, and outstanding at any time, must never exceed the
amount of the unimpaired paid-up capital, and no note must be
for a less sum than $4.

2. The bank must always hold, as nearly as may be prac-
ticable, fifty per cent, of its cash reserves in Dominion notes,
and the proportion of such reserves in Dominion notes must
never be less than thirty-three and one-third per cent.

3. Double liability of sharehoklers was continued.

4. Banks were to be exempt from taxation on their notes in
circulation. There had been a tax of one per cent.

5. Only chartered banks were allowed to issue notes, an
exception being made in favor of the Halifax Banking Co.,
which was allowed to issue until 1874.

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6. Banks could not commence business until $200,000 capital
was paid up.

7. Twenty per cent, at least of the subscribed capital must be
paid each year after banking has commenced.

8. Banks must not make loans or grant discounts on the
security of their own stocks.

9. No dividend exceedin^j eight per cent, must be paid until
there is a rest of twenty pei* cent, of capital.

10. Discount to directors must not exceed one-twentieth of
total of discounts made by the bank.

11. Monthly returns of assets and liabilities, according to a
prescribed form, must be made by each bank.

12. Bank charters were continued until 1881.

13. The Bank of British North America must not issue notes
of a less denomination than $4 after 1871.

In 1871 further legislation in the direction of uniformity
took ]>lace. Banks were allowed to est ablish branches and
inc rease their capital stock. They were not to commence busi-
ness until $500,000 capital had been subscribed and $100,000
paid in, which sum had to be increased to ^$200,000 within two
years. Discounts to directors were to be regulated by by-law
(a change for the worse). Loans on lands and tenements were
not permitted. Mortgages could, however, be taken as col-
lateral security. Savings banks could be established, but could
not issue notes.

The Act of 1870 was repealed in 1872, so far as it related to

issuing notes beyond $9,000,000. The specie to be held for any

f^ excess above $9,000,000 was fixed at a maximum of thirty-

\ five per cent. Inl87o a Dominion Notes Act permitted an

"^ issue of $12,000,000! Ttlvas enacTed that if the issue exceeded

j $9,000,000, but fell below $12,000,000, the amount of the excess

( above $9,000,000 must be secured by a specie reserve of at

least fifty per cent. Any excess above $12,000,000 was to be

covered by an equal amount of specie.

Bankinof lejjislation now ceased until 1880, when it became
nece ssary to ren ew the bank charters which expired in 1881.
Meanwhile, Canada had made a sweeping change in her fiscal

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85 om. Protective duties had, in 1879, taken the place of a
revenue tariff, as the result of the election of 1878. It was
quite natural that the interest and excitement aroused by a long
and bitter controversy over the relative merits of free-trade
and protection, should extend to other <|uestions of national
finance. Hence, no sooner had protection triumphed, than
many of its votaries began to agitate for a national currency.
For a time the agitation seemed on the fair road to success, for
it was urged, with considerable plausibility, that a national
policy of protection would not be complete without a national
currency.

The advocates of a national currency were not at all united
in their demands. The more moderate and conservative desired
a currency issued by the Government through the banks and
redeemable in specie on demand, all bank issues to cease.
The great majority, however, of the currency doctors wished
a circulating medium not redeemable in specie, but legal tender
for taxes. The basis of such a currency was not settled — some
advocating one thing, some another. There was, as might be
expected, for a brief period, considerable alarm in business and
banking circles, and this alarm was not lessened by the measures
relating to banking and currency, introduced by Sir Leonard
Tilley in the Session of 1880. The whole drift of the changes
then introduced, seemed to be in the direction of " rag-money;"
and sober men strongly suspected the Government of giving a
sop to the advocates of an inconvertible currency. The change.^,
as we now look back, '"ere not of a very radical nature, con-
sist!. ij^ in the main, of an extension of the issue of Dominion
notes, and a lessening of the ratio between the Government
reserve and its note circulation. A more detailed account, how-
ever, of these measures is necessary, as no change of any im-
portance has since taken place, and their provisions, which were
ably and exhaustively debated in Parliament, now regulate in
the main our system of banking and currency.

The resolution relating to Dominion notes was as follows :
" That it is expedient to provide that the amount of Dominion
notes i.s.%ued, and outstanding at any one time, may be increased

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to $20,000,000, provided that the Finance Minister shall always
hold for the redemption of such notes an amount in gold, or in
gold and Dominion securities guaranteed by the Government
of the United Kingdom, equal to no less than twenty-tive per
cent, of the total amount of such notes then outstanding, and
that at least fifteen per cent, of the total amount of such out-
standing notes shall be so held in gold."

The change made by this resolution was two-fold :

1. It authorized an increase in the Dominion note circulation
from $12,000,000 to $20,000,000.

2. It lowered the percentage of gold reserve to fifteen per
cent, on the total issue. The practical effect was to reduce the
gold reserve from about $4,000,000 to a little over $1,800,000
on the notes then outstanding, thus leaving over $2,000,000
of gold available for other purpo.ses. If the Government should
succeed in increasing their issues to $20,000,000, the gold re.serve
would still be less than that previously required, and the great
advantage would be gained of obtaining an additional loan of
$8,000,000 from the public.

As a complement of this resolution, the Banking Act wa.s^
amended the same session in several important particulars.

To ensure an increase in the issue of Dominion notes, banks
were now compelled to keep forty per cent, of their reserves in
Dominion notes, and were not allowed to issue their own notes
of a less denomination than $5. The minimum reserve in
Dominion notes prior to this was thirty-three and one-thii'd per
cent.
•-y Notes^were made a first charge on assets. Dominion notes
in denominations of $1 and $2, to the amount of $50, could be
demanded from a bank by anyone receiving payment of that
or a greater sum. This clause also had for its object the in-
crease of Dominion notes in circulation. Banks were given a
privileged lien on stocks and dividends for debts and overdue
accounts. What was then considered by the Finance Minister
as an important piece of legislation, but which has not met
public expectation, was the introdu.Mon of a clause rendering
it imperative on banks to make more detailed monthly returns
of their liabilities and assets. — ■ ~

i.ii'

ion

wa»

Having thus imperfectly and briefly sketched the principal
changes, from time to time, made in the laws relating to our
banking and currency, I will now endeavor to describe the iv / fl
prominent features of the system as it stands at present. (

In the first place, it is to be noticed that Canadian banks, as
a rule, are bank s of issue, and as such derive their privileges
from^the^P^mmion Pajliament, not from the Local Legislatures
of the different Provinces. The right to issue their notes ia
given by charter — the present charter expiring in 189L '

In Canada there are few private banks, most of our banks
being joint-stock in their nature. The distinction between a
private bank and a joint-stock bank, consists mainly in the
facts that the number of partners in a private bank is generally
small, and the liability of each partner unlimited. Each part-
ner, too, may have a share in managing the business of the
bank, and the bank is liable for contracts and engagementg
entered into with the public, by any or all of its partners,
as partners. Joint-stock banks, on the other hand, may have
any number of partners, and the liability of each partner or
shareholder is generally limited. The business of such banks
is managed by a board of directors, elected by and from the
shareholders, and the bank is bound only by such engagements
as are made by the directors and managers. The withdrawal
or insolvency of one member of a private bank les.sens the
capital of the bank, but the shares of a joint-stock bank are
transferable, and the partners may be constantly changing, and
yet the bank continues its corporate existence, and retains its
capital unimpaired. Private banks in Canada are not allowed
to issue notes, this right is confined to joint-stock banks alone.

Again, the right of a Canadian bank to issue notes, or paper
currency, is r estric ted to the amount of its unimpaired paid-up
capital, and no note can be issued of a less denomination than
$^ Notes of a smaller denomination are i.ssucd by the Dominion
Government. Our currency, then, is of a mixed character —
partly national, partly what may be tkrmeiVcorp'oriRe. Bank
notes are not legal tender — Dominion notes are. Of the whole
amount of our paper currency, by far the greater portion con-

sists of bank notes, Dominion notes beinj]f used chiefly for
small payments, change, and bank reserves.

It may be asked what security is furnished by banks to note-
holders and depositors ? There is a common impression abroad
that a cash reserve of twenty-five to thirty-three and one-third
per cent, of the amount of notes in circulation must be kept by
a Canadian bank to meet all demands for coin. This is a mis-
take. The law does not compel a bank to maintain any reserve
whatever as a security for note-holders and depositor"^. It
must keep forty per cent, of its reserves in Dominion notes ;
but this does not fix the minimum amount of the total reserve.
Public opinion, however, is such that a bank with a reserve of
less than twenty-five per cent, is looked upon with suspicion,
and its credit is likely to suflfer in conset^uence. As banks are
compelled to make monthly returns to the Government of their
circulation and deposits, and also of the amount of their reserves,
any bank attempting to lessen its reserve below a certain
minimum percentage of its circulation would speedily Icse
public confidence. Note-holders are secured (1) by the law
forbidding a bank to issue' fiotes greater ih amount than its

/n unimpaired paid-up capital, (2) by making shareholders liable
for double the amount of the par value of their shares, (3) by

"Xl making the redemption of notes the first charge on the assets
I of the bank. The wisdom of the clause giving note-holders
^the first lien on a.ssets has often been called in question. It is
contended that it is unfair thus to discriminate against de-
positors and other creditors. Besides, the tendency of this law
is to make ^' expositors, if suspicious of the solvency of the bank,
draw their deposits in the shape of notes, in order to be on a
footing of equality w)th the note-holders, and, by so doing,
intensify public suspicion. (See Note A, Appendix.) Deposi-
tors, however, have not been wholly overlooked in the Banking
Act. Realizing the fact that one of the great dangers incurred
by a bank is the locking up of its banking capital in .securities
not readily realizable, our legislators have prohibited the loan
of money on the security of real estate — that is, on land and
tenements. Mortgages cannot be taken as security for a loan,

although after the loan has been made they can be taken &s col-
lateral security. Nor can a bank hold any real estate for more
than seven years, except such as may be required for banking
uses. As a further precaution in the interests of the public, loans
cannot be made on the security of stocks and dividends ; but a
bank has the lirst lien on them for debts and over-due accounts.
The whole tenor of these restrictions is to prevent investments
not readily realizable being made, and to discourage stock-
gambling. Still further to ensure confidence, banks have to
make monthly statements to the Government, and these state-
ments mui^t exhibit in considerable detail their liabilities and
assets.

If a bank suspends payment for ninety days it loses its
charter, and its affairs are wound up. It can no longer issue
notes or contract liabilities. There are a number of other regu-
lations of considerable importance affecting the management of
a bank. Such are those prescribing the amount of capital that
must be paid up before banking can commence — the quali-
fication and election of directors, discounts and loans to
directors, etc.

As already stated, our currency is partly national, for the Act
of 1880 allows the Issue of Dominion notes to the amount of
$20,000,000. The notes are secured by coin and Government
debentures. The coin must be, at least, fifteen per cent, of the
issue ; and of the Government debentures, ten per cent, must
be guaranteed by the Imperial Government. The guaranteed
debentures are considered as good as gold, so that it is claimed
our Dominion currency is secured by a cash reserve of twenty-
five per cent. — one sufficient for all probable demands.

Dominion notes obtain circulation chiefly through the banks,
and constitute a considerable portion of their reserves. It is in
the interest of a bank to issue as few of these notes as possible,
for they must be purchased with gold or specie before they can
be issued. To prevent the suppression of the circulation of its
notes, the Government retains the right to make issues for sums
less than $5, and compels a bank to pay as much as $60* in

* In 1882, amount was increased from $50 to f60.

Dominion notes of SI and $2 or $4, if the person to whom
payment is made should so demand. Of course, the Govern-
ment could issue its notes directly, by payinf^ its indebtedness
to contractors, Indian subsidies, and other claims against it, in
Dominion currency ; and, no doubt, in a very sniall measure,
Dominion issues do thus take place. The great bulk, however,
of Dominion notes are issued to banks, which hold them as a
reserve instead of coin. Over $8,000,000, out of a total issue
of some SI 5,000,000, is thus retained.

Let us now proceed to make some comparisons with the .sys-
tems of banking and currency in Great Britain and the United
States. , .

BRITISH BANKING.

^ .^' English banking, so far as it relates to currency, has for its
|i]^' basis the Bank Charter Act of JLS'*^. This Act had for its
principal object .^Ke regulation of the currency, _so that the
amount at any time in circulation should correspond exactly
wi th what would be in existence were there a currency coni-
pose d entirely of gold and silver coin. If gold were plentiful,
the currency would increase, if scarce, there would be a corres-
ponding diminution of the amount in circulation. To attain
this end, the Bank of England was divided into two depart-
ments, an Issue Department and a Banking Department. The
Banking department was allowed to issue £14,000,000 of notes
on certain securities, the greater portion of which was a debt
due the Bank by the Government. All issues above this amount
could take place only by paying into the bank an equal amount
of gold. The Issiie Department was restricted to giving notes
for gold, a nd gold for notes — this was and is its sole function.
In fact, the Issue Department is a department of the Govern-
ment, and as such is the issuer of a national currency. The
Act also provided that a large portion of the profits arising
from the circulation of the issue of £14,000,000 should go to
the State.

At the time of the passing of this Act, there were a large
number of joint-stock and private banks issuing notes on their

^v"

4 ^

M/ c

own credit. Rightly or wrongly, these banks were considered
to have failed in providing a sound currency, and were charged
with issuing their notes injudiciously, thus causing inHation.
speculation, and a host of kin<lred evils. It was not deemed
prudent to take away at once from these banks their right to
issue notes ; but their circulation was restricted to what the
average had been during the twelve weeks preceding the
passage of the Act. No new banks of issue were permitted to
be established. It was expected that many of the existing
banks would, in time, surrender their right to is.sue, or become
insolvent. In such cases it was provided that their circulation
should lap.se, and the Bank of England might then, if so dis-
posed, issue uncovered notes in excess of £14,000,000, to the
extent of two-thirds of the lap.sed circulation.* The profit from
this increased circulation was to go to the Government. As a
consequence of this regulation, the Bank of England is now ^'
entitled to issue nearly £15,000,000 of notes, uncovered by gold. 0^ :* ^ ^' ^ ^^

For a long time, in England, joint-stock banks were not per- tl-h^ c<H-L-iM
mitted by law to i.ssue their own notes — banks issuing notes ^"^
being limited to those having not more than six partners. i

Finally, in 1826, permission was given to establish banks of
issue with more than six partners, but these banks were not to
be established within sixty-five miles of London. In the same
year £1 notes were suppressed, and the lowest denomination
that could be issued fixed at £5.

Banking in Scotland differs in some important respecta from
English banking : —

1. Scotch banks are all joint-stock banks. > ,

2. They are nearly all banks of issue,

3. They generally have b ranches. Most of the private
banks, and many of the joint-stock banks in Englaml have
no branches.

4. Scotch banks issue notes of a denomination as low as £1.

* Note. — It was supposed that banks maintained a reserve of at least one-
third of their circulation, so that if a bank's circr.iation should cease, the
amount of currency would be diminished by two-thirds of the lapsed circula-
tion. •

There are other differences which time will not permit me
to mention.

Scotch banking is regulated by an Act passed in 1845.
By this Act the right to issue is confined to such banks as ex-
ercised this right in the year preceding May, 1845, and the
amount each bank is entitled to issue, uncovered by gold, is
limited to the average amount in circulation during the same
year. Scotch banks, however, unlike English banks, can issue
in excess of this amount, provided each note in excess is
covered by an equal amount of gold and silver coin. Bank of
England notes are not legal tender in Scotland — they are in
England, save at the bank itself.

It is evident from this brief outline of English and Scotch
banking, that few points of similarity exist between the Bank
of England as a bank of issue, and our Canadian banks. The
Issue Department of the Bank of England should be recognize<^
by law as a bureau of the Treasury, and then it would
clearly seen by the public to be what it really is, an issuer or
an English national currency.

Comparisons, then, with English and Scotch banking institu-
tions, to be of much value or interest, must be made with the
private and joint-stock banks. As to po dnts of similar ity be-
tween our banks and British banks, we may notice that —

1. All Scotch, and many English, banks are joint-stock.

2. They are limited in their issues.

3. They are not compelled by law to keep any cash reserve.

4. Scotch banks, like Canadian banks, have numerous
branches, and issue notes of low denominations.

■— The following are some of the p rincipal differe nces : —

1. In England there are numerous private banks of i.ssue.
In Canada there are none.

2. English and Scotch banks are limited in their issues in a
different way from Canadian banks. Canadian banks are
limited by the amount of their unimpaired paid-up capital.
English banks cannot increase their issues under any circum-
stances, while Scotch banks can do so only by covering the
increase with an equal amount of coin.

3. English banks cannot issue notes of a lower denomina-
tion than £5.

4. The shareholders of British bank» have an unlimited
liability with respect to the notes in circulation. Canadian
shareholders a double liability.

From this comparison it will be readily seen that our system
of banking considerably resembles the Scotch, and there can be
little room for doubt that Scotch enterprise and influence are
felt as strongly in Canadian banking as in Canadian politics.
It would, however, be well for Canada if the judiciousness-
which characterizes Scotch banking were equally manifest here.
The excellent results of this judiciousness are seen in the confi-
dence with which bank notes are taken in Scotland, and the
consequent popularity of its paper currency.

AMERICAN BANKING AND CURRENCY.

Turning away, <ow, from British systems, let us briefly
examine t^'at of our neighbors, the people of the United States..
Here we lind a truly national currency, and no currency that
is not national. Previous to the civil war the United States^
had a great variety of banks of issue, holding their charters
under State Laws, and issuing their notes with the greatest
license. In 1862, the financial necessities of the Northern States
compelled them to issue a national paper currency, which was
not immediately convertible into specie, and which, in conse-
quence of over-issue and lack of confidence in its ultimate
redemption, was for a time considerably depreciated. But in
1879, the United States Treasury began to redeem its notes in
coin, and ever since United States notes or greenbacks have
been on a par with gold. These notes were made legal tender
for all debts, public and private, except duties on imports and
interest on the national debt. In 1863 it became necessary to
organize the banks on such a basis as would make them instru-
ments in the hands of the Government in floating its bonds
and circulating its notes. After much discussion the Free
Banking System was abolished, and all banks of issue wera

^.^-

^ '■'

', Oi,*

compelled to become national banks. The new system, which
in all its essential features still exists, may be described as
follows:

An official, called the Comptroller of the Currency, is appointed
in connection with the Treasury Department, and placed under
the authority of the Secretary of the Treasury. Associations
formed for banking purposes must satisfy the Comptroller thai
they have met the requirements of the law relating to the
formation of banks, after which he is authorized to issue notes
to them in amounts not exceeding ninety per cent, of the par
value of the United States bonds they deposit with the Treasury
as security for the redemption of the notes so issued. Banks
with a capital not exceeding $150,000 are compelled by the Act
of 1882 to deposit bonds equal in amount to one quarter of
their capital. No note is issued by the Comptroller until the
necessary bonds are deposited. In addition, five per cent, of
the amount of notes in circulation must, in the form of United
States notes or greenbacks, be deposited with the Treasury to
take up such bank notes as may be presented to the Treasury
for redemption. Having made this deposit, a bank is not com-
pelled to maintain any reserve whatever to redeem its notes in
circulation, but must keep a reserve in United States notes of
fifteen per cent, of its deposits, of which the five per cent
deposited with the Treasury is considered a part. In certain
large centres, such as New York, Philadelphia, Boston, and
Chicago, banks must keep a reserve of twenty-five per cent, of
their deposits. (See Note B, Appendix.) An exception to these
rules is made in the case of banks which are organized to issue
notes redeemable in gold. These gold banks, as they are called,
must maintain a cash reserve of at least twenty-five per cent,
of their outstanding circulation, and must deposit with the
Treasury United States bonds, for which they are entitled to
receive notes to the extent of eighty per cent, of the pai' value
of the bonds.

National bank notes, when issued to the banks, have printed
on them the statement that they are secured by United
States bonds deposited with the Treasury, so that these notes

bear on their face a certificate of their convertibility and sound-
ness. Still further, to ensure their ready circulation, these
notes are stated to be legal tender for all public dues, except
duties on imports, interest on national debt, and redemption of
Ijiiited States notes.

A distinction must, however, be drawn between United States
notes and national bank notes. The former are called " legal
tenders," and are such for all debts, public or private, except
duties on imports and interest on national debt. Since cash
resumption took place in 1879, United States notes are fre-
quentl}' taken in payment of customs, and are now treated by
the Treasury as equivalent to coin. On ihe other hand, bank
notes are not made legal tender except for public dues. Bank
notes were primarily redeemable in United States notes, which
in turn were redeemable in specie ; but now no distinction is
drawn between specie and United States notes by the Treasury.
Bank notes, therefore, may be redeemed immediately in specie.

As a matter of fact bank notes are just as sound, if not
sounder, than United States notes, although for various obvious
reasons they are more frequently redeemed

Besides these two kinds of paper currency, there is now in
circulation two other kinds of paper currency, viz.: gold cerU- .] '
ticat^s, and ^^ilver coHiftcates. These are in form much like [\f\.x~t'^
United States noTes ana"bear upon their face the promise to pay yj^ ■

.^N

I )

on demand acertain numberof goldand silverdollars respectively.
They are issued in return for the deposit of gold and silver
with the Treasury ; and thus resemble very strongly Bank of
England notes, which are paid out by the Issue Department in
exchange for a deposit of gold.

No notes a:e issued by banks working under State charters,
simply because the United States law imposes a tax of ten per
cent, on all such notes in circulation. This tax effectually pre-
vents them from being issued.

The Government of the United States pays the Banking As-
sociations interest on the United States bonds deposited with it
as security, and in return, collects from the banks each half
year, one-half per cent, of the average of the amount of their

notes in circulation ; one-fourth per cent, of the average of their
deposits, and one-fourth per cent, duty on the capital stock in
excess of the amount invested in bonds.

The leading features of the American system can, then, be out-
lined in a few words. The banks receive their notesfrftna. the
United States Treasury in return for deposits o f Unite d Statea
bonds bearing interest: the bonds being greater in amount than
the notesjthe^jyiijjBK.- The Treasury is pledged to redeem these-
notes, so that note-hol9STTarepM?ectly secure. At any time
bahlTnot'es are" redeemable in United States notes, which are
themselves redeemable in gold or silver. The banks lose a con-
siderable portion of the profit on their circulation, but are par-
tially recouped by receiving interest on the bonds they have
deposited with the Treasury. On the other hand, the Tresusury
gains a small profit on the bank circulation, deposits and
capital, in the form of a small tax. From this sketch, it cannot
fail to be observed that our currency, so far as it consists of
Dominion notes, seems to owe its origin to the influence of
American legislation and public opinion upon our own. So
far back as 1866-67, we find a proposal made to issue Provincial
notes, and in 1868, our legislators gave power to the Go\ ern-
ment to make arrangements with the banks for the surrender
of their issues. Step by step, the amount of Dominion notes
permitted to be issued, has been increased, unt'l now we have
reached a maximum limit of $20,000,000. A marked difference,,
however, exists between the relations cur banks bear to the
Government, and those existing between Americrn banks and
the Treasury Department. American banks receive interest on
the bonds they deposit, Canadian banks must purchase the
Dominion notes they issue with gold or equivalent specie.
Here the advantage is entirely with the United States banks.
On the other hand, these banks must pay a tax on their circu-
lation, deposits, and perchance part of their capital. Canadian
banks pay no tax whatever to the Dominion Government on
their circulation, deposits and capital. But, whatever advan-
tage the United States national banks possess over Canadian
banks, by reason of the interest they receive on the bonds they

deposit, is more than neutralized by the liberty enjoyed by
Canadian banks to issue their own notes. And, as already
stated, the amount of notes of Canadian banks in circulation,
far exceeds that of the notes of the Dominion. From the stand-
point of the bankers, then, it would seem that our system is pre-
ferable to the American. If, however, we look at the two systems
from another standpoint, that of the good of the public, it is
not so apparent that we have reason to congratulate ourselves
on the wisdom of our banking legislation. United States cur-
rency, whether greenback or national bank note, possesses the
putlic confidence in a measure ours cannot pretend to enjoy.
No one questions for one momjnt, the ability of the United
States Treasurj' to redeem its notes or those of the national
banks. It is a pity that we cannot say the same of our banks.
Although it seldom happens that a Canadian bank cannot
sooner or later redeem its notes in full, yet the fact that insol-
vencies are by no means uncommon, and that holders of the
notes of insolvent banks are frequently compelled to, or do,
part with them at a sacrifice, has left an impression of insecurity
on the minds of many people which it would be well for our
legislators to remove.

In addition to note-holders, there is another important class
of the community whose interests must be considered, viz., the
depositors. Depositors in Canadian banks_L.iii the case of insol-
vency, have to take what they can get after note-holders have
been sa£isfi&3. American banks must keep a reserve '£o~par-
tml^Jy 'cover their deposits ; also, all the resources of the banic,

•I

e xcept the deposite d bonds, are available for depositor.s "^h?!"
other creditors, since note-holders are secured by the bond.s^
deposited with the United States Treasury. Canadian banks
are not compelled to maintain any reserve to cover deposits,
although the demands of safe banking, and the force of public
opinion, generally cause *hem to keep a small reserve. Experi-
ence, however, has show.i that the shareholders and depositors
of Canadian banks only too frequently suffer heavily from

bank failures. '

In some respects our banking laws are almost identical with

IS" si

•1

those of the United States. There is the same double liability
of shareholders ; the same first lien on assets in favor of note-
holders, and very much the same restrictions against loans to
directors, and on unrealizable security. The first lien on assets
referred to is practically an unnecessary piece of legislation, so
far as American banks are concerned. When a bank fails, if
its circulation exceeds the deposits of lawful money it has made
with the Treasusy to redeem its notes, a sufficient amount of
its bonds are sold to make up the deficiency. Should the sale
of all the bonds it has deposited not prove sufficient, then the
Treasury can fall back on its 'irst lien on assets. If, however,
we consider that United State bonds are considerably above
par, and that the circulating notes of a bank can never ex-
ceed ninety per cent, of the par value of the deposited bonds, it
is at once seen that the first lien clause is not required. In
Canada, on the other hand, it is very frequently needed, and
provides one of the best securities for the redemption of bank
notes.

Thus far the comparison has been favorable to the Americai^
system of banks. There is, however, another side of the ques-
tion worth considering. Mo.st American banks, unlike Cana-
dian and Scotch banks, have few branches and small capitals.
Out of 3,019 banks recently reported by the Comptroller of the
Currency, 2,150 have a capital of $150,000, or less ; that is two-
thirds of the American banks have capitals so small as to render
it inevitable that numerous failures must take place through
financial mismanagement, or on the occasion of any serious dis-
turbance in the trade of the community. Statistics show that
bank failures in the United States are much more numerous
than in Canada, although the losses are necessarily confined to
depositors shareholders and creditors, other than holders of
bank notes. Again, the present basis of American bank issues
must be very soon radically changed, if the banks are to con-
tinue to issue notes. United States bonds are no longer a pro-
fitable investment for banks, owing to their high price, and the
low rate of interest they bear. Year by year witnesses a rapid
decrease of national bank notes, and a corresponding increase

of a paper currency known as the " silver certificate." Besides/
the United States Government, owing to the high rate of. taxa-
tion on imports, is enabled to redeem its bonds in large quanti-
ties each year, thus cutting away the basis of the United States
national banks with alarming rapidity and certainty. (See
Note C, Appendix.)

The question of ^.en arises, why we have not adopted a na-
tional banking system, and a national currency. It cannot be
said that this is a subject of merely speculative interest, for
recent bank failures have revived the demand for a national
currency, and for a revision of our banking legislation. It
may, also, be said that the drift of our legislation has been for
years towards a system of national currency. Meanwhile the
powerful and conservative influence of our banking institutions
is opposed to the Government assuming the sole right to issue
a paper currency. And not the banks alone are found in opposi-
tion. Many are afraid that if this power were given to the
Government it would be grossly abused. It would be so easy,
it is contended, to borrow from the public by simply issuing a
quantity of paper, practically costing nothing, that few Gov-
ernments have sufficient self-control and political virtue to
refrain from over-issues when sore pressed for funds. Thi.s ob-
jection would be well taken, were it proposed to issue an in-
convertible paper currency; but would not apply to a currency
readily convertible into specie. It may also be pointed out
that it is not necessary that an issue of national currency
should take place in exchange for specie ; it might be circulated
through the agency of banks, the banks receiving the notes in
exchange for a depo.sit of Government securities of a greater or
less amount.

There are others who object to the withdrawal of bank notes
on the ground that national currency would not be sufficiently
" elastic " for the varying wants of the trading classes.

At certain seasons of the year, it is urged, there is a demand
for increased banking accommodation to move the crops and
perform other services incidental to an increased trade. This
accommodation, it is said, can best be given by means of an

I ■

increase in the issue of bank notes. The banks beinof left free
to issue their notes at pleasure, can satisfy the wants of mer-
•chants, traders and speculators during t' ese seasons of commer-
cial activity. But had we a national currency, an increase of
notes could be obtained by the banks only by buying them
with their resources, so that the banks would have to call in
their loans in one quarter, to lend them in another. In this
there would be no increase of accommodation to the public.
As the demand for increased accommodation is generally tem-
porary, there is necessarily a surplus of currency after the
demand ceases, and this surplus under our present system finds
its way back to the banks in the form of deposits, repayment
of loans, etc. Bankers then, under a free-banking system, ad-
vance the additional currency needed by traders and others dur-
ing busy seasons, in the full expectation that after a short time
their notes and the resources to meet them will flow into tueir
•coflfers, until a fresh demand arises for another increased issue.
A bank that CLn issue notes, only by first buying them with
^old. or dep ositing 'Securities, is not likely to make an etfort to
increase its issues ; so that the mercantile classes, under a na-
tional cui'rency, at certain seasons of the year, would find them-
selves seriously hampered in carrying on their busine'^s.

In reply to this, the strongest objection that can be urged
■against a purely national currency, it has been said that the
same objection was raised against the United States national
currency ; but the logic of events has shown that no serious
•diflSculty or inconvenience is experienced by the trading classes
of the United States during busy seasons. When, in the fall
and winter, the crops have to be taken to market, instead of
bank notes, short-date bills of exchange are used, and no diflS-
culty in consequence is felt. Besides, the temporary demand
for an increased accommodation may be met by a freer use of
cheques and other forms of banking credit. Those that advo-
cate the utmost freedom in the issuing of bank notes to meet
the requirements of trade, generally contend that when these
notes are readily convertible, no more will stay in circulation
than the wants of the community demand. Such is the view

of one school of thinkers, of which Prof. Bonamy Price was ar>
ornament. On the other hand, good authorities like Prof^
Jevons and Francis A. Walker, think that inflation is possible,
even when notes are readily convertible, and that the right of
banks to issue freely has frequently been the cause of specula-
tion, inflation, over-trading, and other economic evils. Between
such authorities it is prudent not to express an opinion, but
I am disposed to think that the facts are with Jevons and
Wallcer, although this is an open question in political economy^

I refrain from entering into the discussion of the right of a.
bank to coin notes, as John Law expressed it, or the right of
the public to reap the profits arising from the circulation of a
paper currency. It appears to me that there is no abstract or
absolute right one way or the other. Such questions as the
form or nature of a currency, who shall issue it, and who shall
derive the profit from its circulation, are matters of expediency.
The principal oi>jects to be attained are absolute security for
holders of the currency, and adaptability to the varying wants
of the community.

To conclude, our system of banking has been conducted with
considerable prudence, although rash and ill-advised ventures —
not to use harsher terms — are by no means uncommon in our
banking history. Free banking has not worked so well in
Canada as in Scotland ; and, in consequence, we have not the
same confidence in Canadian bank notes that a Scotchman feels
in the notes of the banks of his own country. On the other
hand, there have been relatively few excesses, such as charac-
terized banking in the United States prior to the introduction
of the National Bank System.

Whether Canadian banks have unduly encouraged specula-
tion by an over-issue of notes, and too free discounting and
loaning, is open for discussion. Certainly their sins in these
directions are not very heinous.

With respect to " elasticity," our banks satisfy the public
requirements fairly well — better probably than a purely national
system would do.

The great defects of our system — defects which will probably

%^^

lead to its serious modification, if not to its abolition, is its
f ailure to inspire the public with full confi deqce in t he ready
cojjj^grtibiiitj of the bank issues — and the ins ufficient sec urity
possesse d by shareholders and depositors against fraud and mis-
rAlinagement.

The Canadian people, scattered as they are over such an im-
mense area of territory, demand for commercial purposes a cur-
rency which will be taken without doubt or hesitation from one
end of the Dominion to the other. Such a bank currency we have
not — such a currency the State alone can supply, and ere long
probably will, in response to the demand of public opinion,
which on this question is rapidly ripening. But that such a
currency will be modelled after the American is not at all likely,
nor indeed is it desirable.

1. is its
le. ready
security
<nd mis-

an im-
* a cur-

om one
ve have
re lonw
pinion,
such a
likely,

APPENDIX

NOTK A.

The reason generally assigned for giving note-holders a first lien on assets
is, that bank notes, although not legal tender, are taken in payment of debts by
a great many people as a matter of necessity. Theoretically, no one is com-
pelled to accept a Canadian bank note ; practically, notes on banks of supposed
solvency are accepted as freely as gold or silver. On the other hand, no one is
compelled theoretically or practically to deposit his surplus capital in a bank.
It is entirely a matter of choice with the depositor whether he plices his money
in a bank or invests it some other way. This is the usual argument for pre-
ferring note-holders before other creditors. Against this may be quoted the
following from the recent report of the Ctimptroller of the U. S. Currency:
" The issue of preferred notes . . . would probably cripple fatally the general
credit of the bank with prudent depositois. . . It is much more important to
the banks as a body to retain and uuj^ment their deposits than to acquire the
power to issue more currency, and tiie public have even a greater interest than
the banks in the preservation of tlii.s condition of things, because the credit
that attracts deposits is always better founded than that which floats currency,
and is also more jealously guarded by the banks enjoying it, and is therefore
less likely to be abused. It is, indeed, doubtful whether any really strong and
prudent banks would like to risk their credit with depositors by issuing notes
as a first lien on their assets. ... In times of panic now banks (American)
have to take care of their depositors only, . . . but when there is no special
security behind these notes the case will be very dilFerent ; every rumor of
monetary trouble will bring both note-holders and depositors clamoring for
payment, and just when there is most need of money to pay them with, the
currency will be contracted by the discredit of national bank circulation."
(Pages 123-4.)

It can scarcely be said that our experience of the first lien principle has
been such as to fulfil the forebodings of the Comptroller. It is true that
depositors have lost heavily in some instances, but it is equally true that
" strong and prudent" banks have experienced no difficulty in securing very
large deposits in spite of the operation of the first lien principle.

NoTK U.

The following from Laughlin's recent manual on Political Economy, will
explain why banks in certain large cities require to maintain a larger reserve
than fifteen per cent, of their deposits: " Certain cities named by Congress are
calle d reaerv^ cities, and all banks in these places are requir ed to keep a reserve
on hand equal to twenty five per cent, of their deposits. Banks outside of

e^t-|Vt''

.1^

I* i

these cities (known as
cent, of their deposits.

country banks') need keep a reserve of only fifteen per
Ther. the country banks may pul'ITrree-liTths of tlieir
reserves on deposit in some bank in a reserve city ; and banks in a reserve city
may keep one- half of their reserves in a bank in New York city, the place of
the central reserve. (Xote. — An Act has just been passed by Congress to
establish other central reserve cities)." (Pages 341, 342.)

Note C.

Referring to the difficulty of obtaining bonds as a basis of national bank
circulation, the Comptroller remarks: " One effect of this condition of thing»
is to make the obligation to deposit bonds a serious obstacle to the formation of
new banks in the sections where they are most needed, and to the increase of
capital on the part of those banks of which the capital does not already exceed
$150,000.

"The public needs and demands a continual increase of banking facilities,
and to supply those facilities it i i necessary to have not only more banks, but
banks in a greater number of loculities, and also some increase uf capital among
banks previously established.

" The need of such increased facilities is coextensive with ihe country, but
it is most pressing in those aections where the growth of population and the
expansion of industry are year by year outstripping the measure of accommo-
dation afTorded by local capital.

" To such communities the national bank system affords opportunities other-
wise unobtainable for bringing to the development of their resources supplies
of capital from the remote centres of cheap and abundant money; hence, any
obstacles to the growth of this system in our newer States and Territories is a
more serious matter than it is elsewhere.

"Another effect of the laws as they now stand is to deprive the national
bank circulation of the little elasticity possible to it, because the volume of this
circulation varies with the amount of bonds held by the banks, und not only
are bonds too scarce and dear to be freely bought and sold, but the inducement
to banks to reduce their holdings of bonds to the minimum prescribed by law
is constant and of growing intensity, while theie are no inducements to an
increase of such holdings; consequently there is neither elasticity nor steadiness
in the volume of bank notes, but only a continuous contraction of circulation
that year by year more than overcomes the annual expansion due to the forma-
tion of new banks, and keeps the public mind in a state of feverish anxiety,
always easily excited into alarm.

"Still another effect is to render the banks very sensitive to every system
made towards reducing the bonded debt of the Government." (Page 125,
Iteporf. )