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rV D D Pv 1^: s s
r
(>V TIIK
BANKING SYSTEM OF CANADA
A\!> iiN TIIK
PI
ei
RESUMPTION 01^^ SPECII: PAYiMF^XTS
IN THE UNITED STATES,
Oclivci'ctl bcfoi'e 11(0 ]\c\y Yoi'k CiU|Vciilioi| o\ tlic
American Bankers' Association,
BY
Sir FRANCIS HINCKS. K. C. M. G-.
' iv
J'rfsiffcuf (if the (•ons(>Ti(hit<tl llnuk of Ctriiniln (iiu! 'die Finmici
Alinistcr of flic .Dominion.
^*^^
XKW YORK:
Pll!LISIIKI> liV TIIK AmEUICAN BANKKRf,' AsS' •( I ATH >.S ,
247 Bnmdwfiy.
1877.
ADDKI'SS or SIR FRANCIS IllNCKS.
-♦♦♦-
Mr. I*ri'.<i>tiiit mil} (Ifiilli'incii :
Wlicn 1 ift't Monlvcal ii IVw daysa^jo on a short tour, T liail no idea that I sliould
hav«' an (>in><)rtiinity of nttfiidin},' your Convt-ntion, and of taking' part in tlu- dis-
i'ussinn of (|U('stinns in wli'cli for ni)\V!irds of forty years I liave taken a dot'p inter-
est, and t«t tlx' study of wliicli I havr devoted luueli time and tluaiglit. IVruiit mo
to tliank you most sincerely for your eoiirteou.s invitation, and to assure yt)U that 1
hii^ldy appreciate it. In accordance witli the sup:fj;estion of your Secretary that I
sliould ]»refac(> tlie few olistiviitious that, Avitii your permission, I shall make on tho
.subject immediately tuider discussiun. with some aci-ountof our Canadian monetary
institutions, \ shall endeavor as fai as po:^sil»Ie, witliin the limits to which 1 am
nece.ssavily eoiitined, to touch on those ]i()iii1,s whicli seem to me worthy of notico.
Our Canadian banking' system was niodtlled on that whicli formerly prevailed voiT
f^enerally in tlm United States. P.anks wt'r<> ch-ot(n'(>d hy the Legislature, with
paid up capitals, aiul authority to issue notes redeemahle in .s]>ecie on demand.
The charters contained what was known as the double liability i-lause. each share-
holder beins liable to the creditoT's of the chartered Banks to an amount e«|ual to
his ])aid up stock. There was a small tax on basik issues and the banks were vv-
«piired to hold ten per cent, of their cai)i(al in (iovernnu'iit securities. A short
time prior to the Confederation of th(> ]i"'itish i'l'ovinces into the Dominion of
Canada in 1S(')7 an attempt was made by the (Jovfinment to .substitnt<^ a (.J over n-
ment pa])er curren(\v for that of the Hanks, and inducenKUits were held out to the
Chartered Hanks to surrender theii' rit^lit (?!' isscu . and to use tlu^ (foveriiment
notes, wliich were lepil lenders. I'lie liiink of ]Mo»itreal alone accei»ti'd the terms
proposed by the GovernuK'nt. In tiie year isCiJl the Bank <'hiirters expired, ami a
renew«'d attem]»t was made to com])el the l>iiiiks to base their issues on (H)vt>rMment
securities, very much on th(> jdan under vdiicli the National Bank issues of Ww.
United States are re:'ulated. When the Cioveriimeut pro])ositiou was submitted to
Parliament it was found that the op])ositioii to it. especially from the I'rovint'o <d"
Ontario, was so stronj^' that it would lie impossible to i-arry the bill, which was
tlu>refor(! withdrawn for the tinu', an<l tlu^ chartei-s were all renewed for ayt^ar. U
•was durin;;- the ree( ss of r.irliami'ut in I.S(;!t that I returned to Canada after an ab-
sence of about foui'teen years in the West Indies in the .service of the Crown, 'i'he
^rinister of Fin:inc<', Sir John Kose. had only a few weeks previously intimateil his
inti'nlion of withdrawiii';' from public life, and leaviuf^- Canada to i-eside perma-
nently in 1 «oudon. Other vacancies in the ( lovernment occuired about the samcr
time, and a few weeks after my return to C:inada, I was invited to jt»iu the Govern-
ment. When I c(<nsented to do so, I was in liopes that the Finance Department
would be tilled by a gentleman well (pialihed to deal with the banking (]",( stion, tho
settlemejit of vhicli could not be ]»ostp uied. When, however, the arrangements
wei-e completed, J became 3Iinister of Finance, an olTice which I had previously
tilled duiiufr a period of seven years, terminating about tifteeu years before the
time of my resuming it. I gave immediate attention to the Bank ituestion, and
nft(n- conferring frankly with tiu' reiiresentatives of the ]>rincipal banks, I was abh'
to mature measures which, having been sanctioned by the First Minister and my
otlurcoUeaguesin the(iovernment, wen- approved of by Parliament and became law.
The Dominion note system is so connected with the JJanking Act, which is ii gen-
oral mea.sure applicable to all the- (Chartered Banks, that it will be convenient to
notice them tog(>ther. Prior to lH(i!» the; G<»vernment had full authority to i.ssue
notes of all denominntions, but it had no means of circulating them, other than
under the then subsisting arrangement with the Bank of Montreal, which it was
desirable to terminate, as the other banks were unwilling to concur in it. I pro-
1 1 1 196
2
poHcd to tlio BimkH that thoy .should consfnt to give np their issues of smull notes
uuder 84, wliich should in futtire con-sist e.\<'hisively of Dominion nf»te«. I further
proi>os<?d tlmt instoiid of holding tlieir reserves exctlusively in gold, tliey sliould
hold one-jiidf, or never less than (Uie-tliird, in Dominion not<^s, it being under-
stood tlmt the (lovtrnnunit would not issue tlio denon.iniifions between 8'>(l iind #4.
The Government on its part agre(»d to al)andon the tax on bank issues, and idso tiie
reciuiroment that tim banks should hold government securities to the extent of one-
tuntli of their eupital. 1 may obsfsrve here that the tax on bank not<^s was the only
one imposed upon the banks l)ytlie Dominion Parliament, which never ent('rtain(>d
for a moment the itlea of taxing l)ank d(>posits or baidi cai)ital, nor, indeed, ami
aware that such taxes are in)posed in any other country but the United States. It
must be borne in mind that the ('anadiau bunks are not n-tpiired to iiold any special
percentage i»f their circulation and dc^tosits as a re.servi;. Stntements are made
monthly t<» the (rovernment, and puldisluid without delay, but theam<mntof re.serve
is left to the di.scr(>tion of each bank. The Dotninion legal tenders are reihsemable
in gold by Assi.stiint Heceiverdrenoral, at Montreal, Toronto, Halifax and St. John, N.
B. It may bt> .suppose»l that .such an nrrangement woidd be fouiul inconvenient, as the
Toronto notes are a legal tcnuler at Montreal, Halifax ami St. John, though only
redeemable in Toronto. In practice no inconvenienect has been felt, and though
I think a .single oftic(' of redempti(m has much in its favor, there seems nf> prob-
ability of the present arrangement Iteing disturbed. The Dtmiiniou $1 and $1 notes
are cinndatetl to tiie extent of about thre(> millions of dollars, but the larger noti'S are
kept by tlu» banks exclusively as reserves. The agijregate (rinndation (»f Dominion
notes is about .$1 1,2()(>,()(M>. S7,2()0,()()0 are bas»;d on Government securitie.s, and for all
the issues exceeding that If uit, the (lovernment is re([uired to lu»ld either gold
or bank deposit receipts, the latter being only ])ermitted when the gold is in
excess of the ptu'centage recjuired by law, widch varit^s from 2o per (rent, upwards,
increa.sing as the circulation increases. Tliere is not the .slightest tiuidency to infla-
tion in the Government circulation. The; banks naturally issue their own fives and
foui's in preference to the Dominion small Jiotes which onl}' circulate to the extent
of the jMiblic tlemand. The large notes ar<> not kept in ex<!ess of the recpiirements
of the banks. The eliiet point of ditl'en.'nce in our .sy.stem from yomvs, is that the
banks are aliowc'd to circulate notes to the extent of tlieir paid up eapibd, at their
discretion, and you will observe that the assets held against that liability, in excess
of the reserv<s con.sisi of " bills discoiuit(>d." The National Bank as.sets, held
agrtin.st their bank note liability, consist of (rovernment bonds depo.si ted with the
treasury. This will explain the objection (uitertained both by the banks imd the
public, to the various in'opo.sitii)ns made from time to time to substitutt; Govern-
ment ."Securities for commercial paper. Another important ditlerence in our .system
from j'ours is tliat ueaily all our banks have a large; numl)er of bninches and
agencies, while your practice; is to have no agencies. I note this dit1'eren(;e in our
.systtnu from yours, without attempting to di.scu.ss the merits of the two sy.stems.
The agiiicy .system nece.ssitates vigilant in.spiH'tion, and certainly has its w'eak
points, thongli it has likewise its advantages. A ccuisiderable bu.sinciss is done by
advances on warehouse reeeij)ts for produce purchased in the vicinity of the agen-
cies and delivered at <)ur c(tmniercial capital —Montreal. Our banks deal largely in
foreign exch:inge, and have nearly all London correspondents, whih' two ov three
have olfiees of their own in London and Xew York. With r<'gard to the relations
between the Government liud tlu* banks, I may mention that the bank of Montreal
has been for many years the li.scal agent of tlu; (rovernment, receiving the revenue
at all the principal ports of I'utry, and paying the Government cheques wherever
requir«;d. Tlu> Governnu-nt of Canada having charge of the construction of public
works, has l)een a borrower in London, ami consecpiently a drawer of exchange.
Its exchange is ofl'ered to public competition, and the proceeds are occasionally left
with the purchasing V)anks, or placed in special deposit at interest. The Govern-
ment is also a constant purchaser of exchange to meet the interest on its debt, and
this it likt^wise purchanes by tender from the banks. We have not yet introduced
the syst«'m of deai'ing house settlements in Canada. There are no special safeguards
of solvency, and notwithstanding constant complaint of the ruinous manage-
ment of estates by assignees, it strikes me that compositions with insolvents
are more rare with us than in England. Gur savings bank law was originally
modelled on yours, but was repealed a few years ago. We have an admirableiPost
f
on
eh!
bui
of
(Jo
m
1
a b
;^
at
resi
cin
§Bk
of
H
ha\
H
ber
H
ing
^H
stai
9
Un
1
ma
Hi
f smdll notes
'H. I furtlior
they should
M'iufj; iiiulcr-
i S.'iO 1111(1 #4.
iiiid iilso the
'wt«'iit of one-
wiis the only
V t'nt('Vtaiu(Hl
in<l('(Ml, iim I
il Stiites. It
(I liny .special
its lire made
lit of reserve
} redfsemuble
St. John, N.
■nient, as the
tlioujj;h only
and though
ns no lU'ob-
and $2 noten
^f emotes are
»f Dominion
's, and for all
either gold
' gold is in
at. ujjwards,
'ucy toinfla-
ivn fives and
o the extent
eciuirenients
i, is that the
tal, at their
iy, in excess
assets, held
led with the
nks and the
ut(! (lovern-
onr sy.stem
anches and
fi'Ucrc! in our
vo systems.
IS its \v<'ak
s is doiu- by
if the agen-
il largely in
wo or three
i<^ relations
>f Montreal
he rev(>nue
es wherever
n of public
'. ixehange.
ion ally left
'he (lovern-
s debt, and
introduced
1 safeguards
s man age-
insolvents
1 originally
iirable«Po8t
Offiee Savings Vmuk systoin, which is being gi'adnally extended. Several of the
chartered bunks Inivr Savings IJaidc d'-partinrntM, and then' are tlirec other savings
banks, one at >[oiitn'uh one at (j)ii<'b(M' and one at 'rorontu, which were, at tlie time
of tile repeal of tii(> ohl act, s])e('iiilly chartered. It was deemed (>x))edient by our
(biveninieiit aU'l Fiegislatun' that institutions receiving deposits from the poorer
clas,s<>s of soiMcty should givi^ the same set nrity as tiinse rect'iving tht; dei>o,sits of
tlu^ wealthier classes, and when the ol.i savings l»aid\ act expired, about six years ago,
it was not reiiewt'il, and tlic few existing institutions were given the oj)tion either
to amalgamate witli a chartered ba»k or t"> organizes with a large subscribed capital,
twenty-tive per cent, of which should be paid n\), or to wind ti[>. Of the live insti-
tutions then existing two wouml up. paying their dci)ositors in fidl, two organized
with a proprietary — one with a capitid of t\v(» millions, the other wit^li one million,
and one obtained a sjiecial temporary act to continue on its old footing. The
Canadian municipalities have a considerable indt'btedness, chietly owing to the
num(>rous bonu.ses given to railways. Tht\v are r.Mpiired to submit all iiy-laws for
creating these obligatitms for the approval of the tax-payers l)y speciid vote, and there
are stringent provisions in the municipal act for enforcing payment of siu^h ol)liga-
tionsby meansof rates leviable by th(^ sheritt's. I fear that [ have occupied too much
time with these i)reliminary observations, which I have mad<! in accordance with a
suggestion to that etTe<'t. Tlie immediate subject for j>resent discussion is the resump-
ti<m of .specie payments, and I can assure you that it is one in which your Canadian
neighbors feel a v«'ry deep interest. I have long ol).serve(l, with regret, that the
advocates of an inconvertible [)aper <*urrencv in'e l)oth numerous and active, whilo
on the other hand the advocati's of resumption seem to be <piite disunited, I am
not an inattentive ob.stu'ver of what is going on amor % '»u, l)ut I confess that I am
wholly unable to discover how the oj)ponents of resJnuption cxptH'i to rcali/c; th»!
advantages which it is their object to attain. They profess to a)»pri>heiid that the
con.se([uence of nisumption Avould 1k> a contraction of the currency, the etVect of
which would b(> to limit the loaning power of tin; banks. Now, I ap[)rehend that
the loaning ptnvjM- of th(^ National Banks is limittMl i)recisely as it is with us — by
the amount of their capital, deposits and circi ' ition. It is the interest of banks to
loan as much as they can do with safety. If the National JJanks were eiialded
to issue inconvertible notes very much at their discretion, as the old (ihar-
tered banks were during the snsp(>nsioii of !,s:J7. tliere would, of coinvse. be an
increase to their loaning powt>r ; but under the present .system, tiie National
Banks cannot increa.se their circulation, and it really is unimixirtant to them
whether they are bound to redeem their lialtilities in convertilile or incouvertiltle
It^gal tenders. I beli(;ve that the tendency of resumption woiild l»e to increase the
loaning ])ower of the National Banks. I assume tliat it is found protitaltle to issu(i
national l)ank notes on tli(( present basis, otherwise tliey would not !)e issued.
Now, I Itelieve that the tendency of resumption would l)e to cause a considerable
sub.stitution of National J>ank notes for legal t -nders. Under the ])resent .system
there cannot be a redundant issui' of National Bank notes, and on the assumption
that then' is a redumlant issu(^ of legal tenders, such i^siie <loes not incrciiso thu
loaning power of the b ndis, and as no commercial pajier is hehl against it, its in-
crciise or diminution would oidy be felt in an increase i>v redin-tion of the premium
on gold, which is, and must continue to be. lUitwitlistauiling any legislali<ni in a
contrary diivction, the real measure of value. The legal tender circulation is at
present about three hundred and fifty millions. If it were reduced, by any nuians,
to three humh'ed millions, g(dd would ]»roi»al)ly be at par. If it were increased by
fifty millions, there would l>e a consideral)lc incrcasi^ in the premium on gold. If
a bi-metallic stauihird were adopii'd, gold would be at a hitrher )»remium than it is
at present, but would not ceas(! to be the real stainlard. Among the a<lvocatt!s for
resumption there are .some who de.sire to withdraw the l(!gal tenders entirely from
ciroxilation. It seems probable that this pro})o,sition is sujjported in the interest
of the National BanLs. My own c(Uiviction is that under su(,'h a system as we
have in Canada, the National Banks as well as tln> people at large would materially
benefit l»y the retention of legal tender circulation. The chief object of maint.iin-
ing that circulati<m is to economi/e the use of gold or silver, if the latter
standard .should be adopted. If the legal teruii'rs wiu'c withdrawn every bank in the
United States would have to keep its reserves in coin to Tueet its liabilities on de-
mand, although in i>ractice the City of New York is the national clearing centre of the
Unitod states, as London is for the UnitcMl Kiiij^iloni. Tlio cost to tlio'nation of
maintaining' tlit'HH coin icscrvrs wonM Im- cnorniouH, hnt tlic inconvonifnco wcmld
be felt even inoH', and tills would lu- intcnsitlrd if it should la? nrcrssmv to move
silver instead of j^old. I lulirvc that if nil rlvalr^v Itctwem tlio fj;ovcrnnu'nt and tlu«
National Jlanks cotdd las rrniovrd, tho convenience to the latter of the Ic^jal trndei-
notes would indu<'e them to withiliaw all opposition to their issue, That it is poH-
sihle tt) avoiil liviili-y our Cauadian expericuce places Itevond n doultt. Were it not
for the small note issue for tJie KurrentUr of whii-h our hanks ^ot an equivalent in the
aholition of the hank tax, a ( lovernmeMt laite wouM never he seen hv the f^cneral
public in ("anadii. The notes from .■!:.')() to .'^l.tKMI nrcheld bv the baidis as resevvos,
and ('(Mistitute a nuu-h more convenient instrunu'iit than coin for settling Ital-
auces. I think that in the I'nited Stati'sit would be desirable that a mutuid under-
stantlinj,' shouhl be arrived at lietweeu the Treasury and the banks to the elVeet that
the former would issm^ no notes between either .SKMl cu- S."(). and a small lienomina-
ti<ui luuler 80. 'I'he National Haidvs slutuld be satislicd. I tliink, with the eireidation
of notes of sr* and upwards. The practical elVect would be that the ( iovernment
note eireidation would be limited to the reiiuirements of the banks for reserves, und
the notes uiiiler .S'». 1 believe that the elVeet of such a l)lau as [ have
indicated Would i»e to increase the National I'ank circulation and thereby the loan-
in^;' power of tlu- banks, and to Rive the nation a bank note ctirrencv superior to
that in any country in the world.
T am aware that duiine- tlie last two ye.irs there has been u reduction in the Na-
tional IJauk ( 'apital, aial this would lead to the inferi'iice that new capital would not
be subscribed even if it wi're to lead to an extended circulati«m. J do not think
such an iid'erence would be corr«>ct. The reduction of capital I attributi; to tho
policy of tlu' eov(>runient which is driviiifj; capital out of baidiin^ by excessive taxa-
tion. If national bank notes were obtainable (u* a deposit of -t per ci'iit. bonds,!
believe that they would be apl)lietl foi'. and taki> the place of le<,'al tenders t<( a
considerable extent. I have not adv/rteil to the mode of <'iVectin^' or pre]>aring
for lesumiition, and 1 labor under the disadvantajjfc* of beintj; unaware of the
impediments in the way of a {gradual substituticui of I'nited States interest-bear-
in{^' IkuuIs for any rcilunilaiit issues. The i)rice of ^old wiudil lead to tho in-
ference that the legal tender issues are not much, if at all, in excess of the public
re(|uirements. ^Monthly sales of United States 4 jier cent, bonds for lej^al tender
■would soon brine them to par, and if my oi)inion should i)rove correct that after
r(\snmption. National Dank notes would taki' the place of legal tenders to a considi-r-
abl(f extent, the practical c^Hect would be that I'nited States bonds would be dc-
l)ositcd for such increasi'd national issues, and would I'eplace the present legal
tenders. If it were ascertained, as it soon would be under a couvi-rtibk' system,
whatamoun; of legal lenders would be re<(uired lor public convenience, there would
be )io ditVirulty in maintaining an adeipiate reserve of coin at the oilice of redemption,
which should certainly b((iii New York and not in Washington. 1 nuiy litre obsirve,
that in tinu's of paiuc which, it may be feared. >vill occur from time to time in all
countries where extensive cr( dits ai'c given, there woidd b(> less danger of large
deniamls for gold in redem]ttion of k'gal tender notes in the United States, than iu
England. In the Uuitcnl States, and in Canada likewise, each bank keeps an ade-
(|uate reserve to meet its lialiilities, and would, for its own sake, endeavor to keep
that reserve as sti'oug as jjossible. in l-jigland, it is admitted by all the V)est writers
on the subject, that the banks generally rely on the Bank of England to carry the
connnercial clasM's through a ]»anie. That bank is t'ae custodian ci thi^ national
reserve, and any oju' who examines the bank's statements a wi'ck or two V)etore the
Ovcrend, (Jurney ic Co. failure in ISfiC) and those a fortnight kiter, will at once per-
ceive what a load that bank is obliged to carry at a ])criod of financial embarrass-
ment. In America tho bunion would fall on the banks generally, and wonld
certainly not be so embarrassing. I \m\o, I fear, trespassed too long on your atten-
tion, and liavt' to otTer my aiiologies for the dt'fects of this paper, wliich I have had
to i)repare (piitc nnexpoetedly, and without having had any opportunity to considt
nnthorities. I mnst, therefore, throw myseJf on your indnlgenee and have to thank
you for the opportunity of being present on such an interesting occasion.
I
' tli(>'nntiou of
.('liiriK'c Woiihl
I'Msjiiv to move
DMli'lit iillil tll(>
!<• If^'iil ti'iitlcr
riiiif it is poH-
Wi'ii' it ii(»t
uiMiliut ill tlio
hy I lie <4('iK!nil
ks lis rcsrrvoH,
sctMiiiK- liiil-
iiiiitiiiil uiidcr-
Jli.' HVfft tliiit
lall liciiniililiii-
\u' circulation
n (lONCi'limclit
VL'NcrVCS, Hlld
I us 1 Imvo
chy tli(> loiili-
!.V .siipriior to
oil in the Xa-
itiil Would not
«l" not think
trihiito to the
xct'ssive taxa-
'cut. I)ond,s, I
tondcrs t<» a
or pre] taring
Lwarc of the
intci'i'st-bc'jir-
d to the in-
of the puldic
• lejial tender
ect that utter
:o a consith'r-
ivonld be dc-
)re,sont legal
tilth' system,
there would
redoiuption,
lore observe,
o time in all
ger of Lirgc
ati's. tliau ill
eeps au ade-
avor to keep
best writers
to carry the
the national
bet'ori' the
at once i»er-
1 embarrass-
and would
your atten-
I have had
y to consult
ive to thank
I.