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32X

ON BANKS AND BANKING IN

CANADA:

A STUDY OF THE BANK RE I'URNS WITH REFERENCE TO
PROPOSED CHANGES IN THE BANK ACT.

Il'vciitlsc:

"^^BY J. //. MW^IEjS, KC.7I.

WHH PAPKRS IN RKl'LY BY

^n. GEORGE HAGUE, GENERAL liJANAGER I^ERCHANTS BANK OF CANADA,

AND OIHKRS.

RKAl) liKKORt; IHK

^notitutc of <ShartcrcD ^fccoiintanf© of ©ntario,

PRICE TWENTY-FIVE CENTS.

\ ' - TORONTO :

r \ WILLIAMSON AND COMPANY

MONTREAL:
DAWSON H ROT HERS.

MAIL JOU PRINT

^ J\^

•

/■

ox BANKS AND BANKINC IN

CANADA:

A srri»\' oi niK hank ki:TrRNs wiiii ni i iki:n( i: lo

I'ROl'OSKI) CHANOKS IN Till: i;\NK ACT.

i'vcatisc :

Willi l'\!-|U'- IN kl I'l \ BN

P GEORGE HAGUE, GENERAL I^ANAGER I^ERCHANTS BANK OF CANADA,

AND iilMKKS.

RK.VK HI.K)I<K II IK

'^n&titiit*? of (Shartcreil '?l'iccoimtante of ^ntciiio,

T" r I^ ^ IT T C 2.-: -A. ■jr :l r t l- =\. r- ii. Z. — r. f\. , - O G G .

TORONTO:
W I I, L I A M SON AND C O M I' A N N

MONTKKAL:
DAWSON 11 KOI II K K S.

IV\%

Entered ac.r li,„ ,., Act ,., .,.. ,.,.,i,„.,., .., e,„^,,,_ „^ „^^ ^^.^^ _^^^
Nr. .(. .\kM..es. It the- Department „i AKricuIture.

INSTITUTE

- (.1 —

Chartered Accountants of Ontario.

In otf'iiaUd I'V S'atiitt- of Oiita>i,<. j(> I'i,., Ci/-. h^.

/Iiumitiin.

/'tVOIlfO.

I oroiito.

OKI I( I.K>.

\V. F. I'iNhi w, l-.C.A., AccDiintatit

II. \V. IIkhis, F'".C. A., Accountant

J. T. Mdokk, I-'.C.A., Manaj^lni; l)lrL-cl)r Saskaichcw.in I.an.l and il(.nusiei)cl
Company

(OINCIL:

Wii.i.iAM McCaiu:, K.C'.A., I'.I.A., I-.S.S., Knjj., Manajjinj; Direct. .r Nurtli

American Life Assurance Co

E. K. C. <■ I. A KKsoN, I.e. A., Accountant

S. H. Makman, !".C.A., D.C.L , City Treasurer

K. T. CoAiiv, K.C.A., Assistant ( ity Treasurer

W. II. Cross, I'.C.A., Mercliant

H<iN. S. C. Wood, Manager l-'rcehold Loan ami Savinj^s Co

K. 11. ToMi.isso.N, .Man.ager British Canadian Loan and Inve>lnitnt Co ••

I'. (J. Koi Til, Accountant "

llticii .Scori, Insurance Underwriter "

K. Jknkins, Accountant ••

W. I'ouis, F.C.A., .Accountant "

J. J. Mason, F.C. A., Accountant Hamilicu.

A. (). Kamsay, K.L.\., Kng., Managing I)ir(.-(tor CMunda Life In^. Co " .

K. L. (Ji'NN, Accountant , "

(\. V, Jkuki.i., F.C. a., Accountant I.otidon.

J. W. Johnson, K.C.A., Principal Ontario Husincss Collfge Helleville.

Ilv. LvF., Accountant and Fire Adjuster Cobou>«.

C. A. Ki.kmim;, Principal Northern Business College (hceu Sound.

ACDITOKS:
j. McArtiu'k (Jrii I nil, T. II. Monk.

SIXKKTAKY AND TRKASURKK:
I. IL Mk.nzies, F.C. a., Accountant 'Joton/o.

Qn I^cinks and J^ankinn in Canaihi.

'HI'. ACCOM TAN YIN'Ci Analysis* embraces :iil the moiv important
features of the Returns furnished to (lovemment hy the hanks. The
fullowin{4 ohservations on the purport of its ne\erai columns are
offered as a contribution towards the ehu idation oi a subjetl of interest not
merely to baniters and bank stockholders, but to every < onunercial man in
the country ; for no business is (]uite independent of the banking system.

Financial cjuestions are the practical issues of the day : and it behooves
those who are com|)eteni to ileal with them, (jr with any branch of them, to
give the country any advantage their special knowledge may be worth. In
this view the present paper has been written. It iloes not pretend to exhaust
the subject, but merely to furnish some material for discussing it understand-
ingly, in order i)Ossil)ly to the removal of any defe<ts and the after-construc-
tion of a perfect banking practice.

COLUMN ()NK of the .\nalysis shows the extent to which the banks
approach the limit of issue ($100 for every $ioq of paid up Cajtital)
allowed I)y the Hank Act.

B.vsis oi Ciki 11 A HON.

'I'nK Si AM'roKV limitation of the Circulation of the banks to the amount of
their unimi)aired paid-up Capital is a purely arbitrary one, apparently
grounded on no appro])riate principle. It is attempted to justify it on the
principle, sound in itself, that C'redit should be based on Capital. But while
credit taken by the banks in the form of Circulation is so limited in amount,

* At page 44. In general, the references are to ihe January Returns of the Canadian hanks. .Analyses
of the Returns for FeUruary anil March are adde;l ; and also for comparison in some particulars a similar
Analysis of th"! Returns of a group of Knglish banks — all the l.onilnn Joint Stock hanks furnishing sulVu i>-tit
<.lata for the purpose, whose combined paid-up capital approximates to that uf the Canadian lanks.

notwiihsli'ndiiiL; that paMiit u is guar;intcc(l hy a first lien on the assets, no
liniitalion is set to the ainoiinl of Deposits — that other form ot trcdit taken
hv the hinks without any such guarantee, \vhi( h is the source from which all
legitimate Circulation llows as a stream tlows from an iii)i)cr lake. Thus the
reservoir may without (heck l>e filled to oveitlowinu, while the caiarity of the
ronduit is to he regulated, and wholly without resi)ect to the volume to be
discharged through it. But a hank is authorised to issue ("ir( ulation, not l)\
any means because it has an amoiuit in\ested as bank Capital (for that would
warrant the establishment of pure ba.iks of issue, and indtJeii involves the
'concession to ( iovernment of a right to monopolise the currenf y, but lor the
piupose of su]>i)lying the country with a suitable currem y. The Ciniilaiion
of a bank is connected, not with the amount of its paid up Capital, but with
the amount (^f I )eposits it holds. A Circulation is created naturally oi.ly
through the activity of the Deposit accoimt ; and the greater the amount of
Deposits, es])ecially Deposits made up of the proceeds of discounts ami of
business balances, the greater will be the normal Circulation.

In an essay recently ])ublished by Mr. \V. ^\'. Klannagan. Cashier ot ihe
Commercial National Bank, New York, on T/if Xcicssi/y /<>>■<} /uiii/s('ifrit/n/ii'!i,
banks and bankers are most aptly styled "dealers in credits.' "They
handle money as well."' says Mr. l-lannagan, "but the oi)erati()ns in credits
form such a large proportion of the business of banking that it is strictly
accurate to say they are dealers in credits ; the money handled being only
the reserve or foundation on which the business is < onducted. What is
classified in a bank statement as 'Dei)osits' does not necessarily mean
money therein deposited. On the contrary, a very small proportion of
'I)ej)osits' represents money dejiosited. A deposit often is, and usually
arises from a mere exchange of credits ; this exchange may [)e by checks or
drafts on some other banker, or it may be in the nature of a discount, as
when the banker takes the ' [)romise to pay ' of his customer which he lists
among his assets as ' Bills Discounted,' and gives in exchange therefor his
' jiromise to ])ay' which he classes among his liabilities as ' Deposits.'
The result is the exchange of one credit payable in the future for another
payal)le on demand. I'his 'promise to pay' or credit, or deposit, when put
into negotiable form so as to pass by delivery without endorsement, is called
b.ink Circulation. It requires no argument to show, for it is a|)parent in
the mere assertion, that Circulation being one form of credit, and bank
Deposits another, the demand for the negotiable form, Circulation, will

increase //v rata with the amount in the form of Deposits Hank

credits put into the shape of checks and drafts constitute tlie great bulk of
the c-irculating medium of the country, but the minor operations of trade
must necessarily be done with money or bank credits in the form of money
(Clirculation), and these minor operations keep/z'v' rata pace with the larger

■' assets, no
-redit taken
n which all
Thus ihc
;if'ity of th<.>

I unit' to \)c
Jcn, n(j[ In
tliat would
ivolves the
hut for the
'i'< ulation

Inii with
rally otjy
•inount iti
ts ami of

<-■'■ ot I he

>'ii(hUii>!i,

" 'I'hey

II credits
s strictly

ng only
What is
■ mean
tion of
usually
ecks or
:)unt, as
he lists
for his
posits.'
nother
en put
called
ent in
>ank
1, will
liank
ilk of
trade
loney
arger

transactions. .So tint to the extent that Deposits in l)anks increase, to the
same extent is there a correspondinij deinaiul for Circulatioii."'*

While a bank may have a Circulation in due proportion to its Deposits,
and only adetpiate to the currency needs of its ( ustomcrs, the amount may yet
f.ir exceed wliai is allowed hy the Hank .\( t. If the I)eposits in the ("an.i-
dian banks were as large in proportion to the ("ajiital as are the Deposits in
the I'Jiglish and .Australian banks (to he referred to later), a limitation of
the amount of hank Circulation to the amount of paid up Capital would be
altogether inadecjuaie to the currency needs of the (ountry. in default
of gold and silver coin : as Deposits grow with llie development of the
resources of the country, Circulation will grow /<//■/ /'./>>//. .Aiul from this
it would appear that C'apital alone may not be the i>ropcr standani t(} regu
late (.'irculation by ; it might be better, as it would be according to a truer
jirinciple, that the legal limit of Circulation should bear a certain proportion
also to the amount of Deposits. L'nder eijually good manaijement and in
like circumstances, all banks show a pretty uniform pro|iorii(!n of Deposits
to Capital, and the Circulation being naturally in />/>■ viita proportion to
Deposits, it follows ultimately that Circulation also bears a regular proportion
to (Japital ; and so an objection to the present preferential lien of note-
holders, that in case of failure it may absorb an altogether undue prop(;rtion
of the assets, is obviated.

An indispensable condition should be that adequate Reserves be kept
against (Circulation as well as Deposits. That would lend suj'port to both,
and on such a [)asis a bank might safely hold any reasonable amount of
Deposits with a corresponding Circulation, while restraint would be put on
inflation generally, and especially woukl intlation of Circulation by tlie
discount of bills in order to increase the Deposit account be prevented.
With legitimate business methods, the resources ol a bank in si)ecie and
marketable securities ought to keep pace with the growth of De|)osits, and

■ The liank liilU tnainliiineil in (.'irculation in ( anaiia arc mainly in tin- hands nf (i| Farmers and luni-
liermen. and <lealcrs in auricullural and dllicr natural prodints: Ki\ Kmploycrs I'f iai'or on maniilai-tiires,
and industrial employer^ ^jftierally : (il Sh ipk-eepcis ; .iiid (4! 1 !ie well t'l do clas-cs.

AH these except the last two clasi'- Rii the liank lidl^ direitly or iiulirettly from the liaiiks, generally
1>V w.iy of advani cs or discounts, sometiuKs asdrafts on ai tual deposits ; the wtU-to-d" classes get them as
drafts on similar deposits, or if in hiisiness, alsn liy way uf discounts : city shopkee|)ers. who liold a very larjie
Mini in the aggrejjale (this in the ni.iin is the I'lrcuialion ireateil l^y iiiaiiiifactiirers and importers), get
Ihein from workpeople and from the welltndo classes : country shopkeepers ^i-t them from farmer?.

It is the aggre^ateof these sums, kept llo^.titm at an averaue iiUMunt liy the aiti\itics cjf husiness,
operating through the Deposit account of liie hanks, that constitutes tlie hank Cirrulation.

I'he Deposit account consists of fixed ileposils, the proceeds and halances of proceeds of di-i ■niiils, aii'l
current deposits.

.Ml these constitute the fund from which the hanks make advances to the puhlii for use in the domestic
tra<le of the country ; and these advances, wiili the drafts .if the owners of actual deposits, are paid III In
I heipies to pav meri'antile indehtedne^s ; (.•! la hmk hills ami ch.in;;e ( Dominion notes .uid silvei), to pay
l.ihjr in factories, shops, and for industrial dislnir- -nients generally ; for purchases of .igricultiiral ,ind other
n.itiiral products ; and for pocket money.

Hink hills , ire reill y change for. and convenient her.iiise divisible substitutes for, cheques, iiist as the
smaller Dominion notes and silver is change for bank bills,

Manifestly the volu iie of C'irculalion 1! spends altogether on the activity o' the I leposit account, through
which the fund of tivcd ileposits is m.idc llii'^nt. with the other deposits, thiefly by the granting uf loans as
advances and disc ounts.

therefore ol Circulation. And as the credit that attracts Deposits is usually
l)etter founded than that which floats currency, the Circulation, while
bearing a due projiortion to the Deposits, would generally correspond
in some measure to the standing of the bank of issue ; and fluctuating with
the Deposits as the public gained or lost confidence in the institution, the
amount at risk by noteholders would in normal circumstances be automatic-
ally adjusted to the degree of credit enjoyed by the bank.

The purpose of Mr. I'lannagans paper is to show that the financial
stringency in the States is due, not exclusively or even puncipally to an
excessive Treasury surplus, as is generally supposed, but in a greater mea-
sure to a contraction of bank Circulation the commercial interest of the
country bemg for( ed under the National bank system to base its medium
of exchange, not on the necessities of trade, but on the amount of the de-
creasing National Debt. And the theory as to the close connexion
between Deposits and (Circulation appears to be confirmed by a comparison of
the figures of tiie Canadian bank Deposits and Circulation, which since
< onfederation have shown — save in the years of financial inflation and dis
turbance, 1871-74 a toleiably uniform proportion the one to the other, as
may be seen by the following table, prei)ared from the Covernment Returns
as given in The Statistical Abstract and Record, 1S86 :

Percentage of Circulation to Deposits.

June 30, 1 868.... 25. 3 June 30, 1875 J7.8 June 30, 1S82 .... 28.3

" 18O9 20.8 " 1876 27.2 " 1883 30.

" 1870 28. " 1877 25.6 '• 1884 27.8

" 1871.... 32.9 " 1878 27. " 1S85... 28.4

" 1872.... 38.7 " 1879 25.3 " 1886.... 25.8

" 1873 42.8 " 1880 23.8 " 1887 26.6

" 1874... 33.7 " 1881 27.7 Mch. 31, 1888 28.

Daring this period, 1868-1888, the Deposits increased from $32,808, 103
to $1 1 3,938, 206, an increase of 248 per cent. ; while the Circulation increased
concurrently from $8,307,079 to $31,985,285, an mcrease of 2S4 per
cent. It appears to be a fair conclusion, therefore, that the normal bank
Circulation will in general bear a regular proportion to the amount of
the Deposits ; and in the annexed analysis of the February and March ]iank
Statements I have given the percentage of the one to the other shown by
the Returns of the several Canadian banks. This additional column, which
I consider the better test of the position of the banks in respect of Circula
tion, will be found a useful corrective to the one now under notice, whose
figures might otherwise, in some cases, convey an erroneous impression ot
undue inflation of Circulation.

1 1

• .\o.
■ .27..S
2H.4

■ -'5-«
. 26.6

. .'8.

COLUMN TWO shows the i)ro|)ortion of Rest to Capiial. Ihis
column should be read in connexion with Column One. A high per-
centage of Circulation as compared with Capital ought in general, for
legal requirements, to be arcompanied by a high peicentage of Rest.
-Manifestly, where there is little or no Rest, it is impossible, in view ot the
probable extent of the bank's investments in trade discounts and advances,
to ^rm tl.at the Capital is unimpaired, unless it is known for certain that all
depreciation has been written off ; and there-tore in such a case of doubt
the legal limit of Circulation ought not to be approached very near, lest the
liank Act be contravened.

Resi'.s.
Thk vai.uk of the Rests of Canadian banks depends largely upon the value
of the discounted bills, and this it is diflicult, perhaps impossible, for one
not familiar with the condition and circumstances of each individual
dis<:ount account to ascertain.

A genuine Rest is usually of slow growth, the result of a cautious and
prudent policy steadily pursued ; and its function is to su])plenient deficient
dividends in times of bad business, so as to insure a regular rate of interest
to stockholders. To fulfil this purpose properly, however, a bank Rest
should be invested, perhaps sjiecifically, in securities other than discounted
bills and trade advances : where the nrofits reserved as Rests are re|)resented
by securities of so doubtful a value, they are for the most part but a.ssumed
profits, liable to disappear just when a Reserve fund is most needed. In
l)resent conditions, indeed, a Canadian bank Rest may usually, to the extent
of a 'certain percentage of the discounted bills, be pioperly considered as
a doubtful surplus reserved against possible bad debts.

The Rest, when realised, if invested as suggested and represented
on the other side of the account by an indisputably good asset, might also [)e
made/rr? /<?«A> a guarantee to the stockholders against the possibility m case
of disaster of being called upon to pay the amount of th,ir double liability.
The double liability is a Reserve of Capital, kept beyond the control of the
Management, though not of the bank's creditors, that might be provided
against by a special investment ; and if the Rest, in whole cr in part, as it
accumulated, instead of being divided among the stockholders, as might be
done if it were a realised surplus, were invested by statutory authority — vested
in trustees, perhaps— for the security and benefit of the stockholders, without
depriving the bank of its use in certain investments, of the revenue earned
by it, or of any prestige the accumulation of such a fimd might afford, such
investment, a more tangible security than the double liability resource, being
also beyond the control of the Management would be available at need,
without further call on the stockholders, to satisfy the double liability claim.

So sure a provision against the hazard of this contingent liability might he
expected by attracting investors to have a steadying and most beneficial effect
on the price of bank stocks ; and, as I shall i)resently show, a Rest so in-
vested may be a vastly better security to the creditors of the banks than the
double liability fund.

Dori'.i.K l.iAiiii I rv. ^

It ^^.\^ be doubted whether the security afforded to creditors by subjecting
bank stockholders to a double liability is at all commensurate with the injury
lo the public interest caused by what is also a discouragement to investments
in bank stocks. The United States ("omiHroller of the Currency states in
his Report for nSS;, that the total assessments made in respect of insolvent
banks, under the double liability clause, since the institution of the National
bank system, have produced only about 47 per cent, gross, the net amount
realised to creditors havmg been under rather than over 40 per cent. It
is probable, therefore, that in Canada, where are a much similar body of bank
shareholders, the double liability security cannot be counted on as worth
on the average more than 40 cents on the dollar, instead of the assumed 100.
Unquestionably, that often calamitous contingent liability strongly
repels investors, and is probably a main reason why so much bank stock
floats unabsorbed about our stock markets. It certainly is not that more
capital stock has been issued than the needs of the country warrant : but,
rather, more has been issued than the investing public will absorb. .And
until it be absorbed, it cannot be kept off the Stock Exchange, and stock-
brokers cannot be prevented from using it for purposes of speculation : often,
possibly, in times of distrust, to the injury of the banks themselves ; at any
rate, to the injury oi bona fide investors, the value of whose property fluctuates
with the price of this floating surplus.

COLU.MN THRKE shows the extent of depreciation in the value of the
discounted bills that would absorb the Rest.
This column obviously is one of great importance in estimating
the condition of the banks ; but all that can be prudendy said about it is
said under appropriate headings elsewhere.

/^Ol.UMN FOUR shows the extent of depreciation in the value of the
I discounted bills that would absorb the Capital as well as the Rest.

^"^ If the volume of the discounted bills bore a regular proportion to

the other assets throughout the series of banks (which, however, it does not,
according to Column Six), this column would indicate also the earning
power of each bank. To ascertain this, Column Six must be taken into

' might he
ficial effect
<est so in-
:s than the

subjecting
the injury
vestments
■ states in

insolvent

National
!t amount
cent. It
y of bank

as worth
lied loo.

strongly
nk stock
lat more
nt ; but.
And
stock-
often,
at any
ictuates

' of the

niatmg

Ut It IS

of the
t.

ion to
s not,
irning
into

account with this column. Obviously the larger the amount of business a
l)ank can safely do in proportion to the amount of paid-up C'apital and Rest,
the better the result to the shareholders.

OF-UMN FIVE shows the proportion of the working resources of the
banks supplied respectively by the stockholders and by the noteholders
and the depositors.

EAKNINt; I'OWKR.

A CoMP.xRisoN of the figures of the (Canadian and the l''.nglish l)anks dealt
with in the Analyses exhibits the vastly greater earning power enjoyed by the
latter. While the paid-up Capital of the Canadian banks is eiiual to five-
sixths the amount of that of the English banks, the Deposits of the Canadian
banks amount to little more than one-sixth of the sum held by the English
banks. While, too, more than one-half the Deposits in the Canadian banks
bear interest, fully two-thirds, in some cases three-fourths, of the Deposits in
the i^nglish banks are free of interest, l-'or example, in the case of the London
and County l>ank, having a paid-up Capital of ^,"2,000,000 stg., the Deposits
amount to over ^"39,000,000, at least ^,'20,000,000 of which is non interest-
bearing ; and thus every rate of one per cent, per annum earned by employ-
in j this enormous fund yields a dividend of ten per cent, on the paid-up
Capital of the Bank. It must be noted, however, that the expenses of such
a bank, with its many branches, are proportionately great, amounting in the
present case to nearly as much as the dividend paid — 20 per cent, per
annum ; so that to pay that dividend the Hank must earn a gross profit of
near 40 per cent, on its paid-up Capital.

As a partial offset to this advantage of large free Dejjosits in the ICnglish
banks, the (Janadian banks have a Circulation amounting at jnesent to .^2
million dollars, which sum, however, added to the amount of their Deposits,
still leaves the balance of advantage in favor of tlie ICnglish banks as nearly
four to one. In these favorable circumstances the l^nglish hanks can well
afford to dispense with the profit of a Circulation, especially as they are
thereby free from the obligations it might entail.

Owing to the great multitude of the hanks in the United States, and the
different and differing banking systems there in vogue, we are prevented from
drawing any close comparison between the condition of the banks of the two
countries in this particular of Deposits: Mr. I'lannagan, however, informs
us that in August, 1887, the National hanks, in number about three thousand
(about one-ihird of the total number of banks in the country), with a paid up
Capital of $572,000,000, held Deposits to the amount of $1,285,000,000.
To compare the banks of a comparatively new and poor country like Canada

with those of an old and rich one like England, is to com|)are the affairs of
an old-established merchant with the affairs of a new-beginner. And if we
turn to our only important sister-colony, Australia, in the endeavor to draw
a more t'(|ual com])arisun, we turn to even a richer country than England :
where, so grea. is the realised wealth, that banks fre(|uently show Deposits
to twelve or fifteen- fold the amount of their paid-up ('apital. During the
past year the bank Deposits there were increased by 38 million dollars, the
amount standing to-day at about 470 million, with a pojuilation of two and
a halt million, against our Deposits of 110 million dollars, with a population
nearly double that of Australia.

Such differences illustrate the enormous disadvantages that Canadian
banking labors under — a state that would not be improved by an increase of
banking capital.

C^OI.l'MX SIX shows the proportion of the total resources of the banks
employed in discounting bills and in trade advances, thus indicating
the relation that mode of investment bears in the practice of the anks
to other more readily convertible investments.

It is desirable that the amount of trade discounts and advances should
not be in excessive proi)ortion to other investments, nor of course should it
exceed the retpiircments of a healthy state of trade.

C'^O^U.\iN SI'IN'EN is a measure of the gold-paying ability of the banks,
showing the extent of their resources in specie and its equivalents, in
funds held abroad, and in securities convertible into gold, available
against the possible demands of noteholders and depositors.*

■ In proiluciiig tiie rigure> of tlii'. column there have been con-.iileic(l, on liie one h.iiid —
Circulation,

Other Deposits payiilile on dem.ind .iiul after notice.
Less Note< and cheilites of oilier hanks.

Balances due froMi other hanks in Canada.

Less Balances due to other banks in Canada.
I>oMiinion (loverrnnent Deposits payable on demand and alter nulice.

I^exs Loans to Dominion Covernincnt.
Provincial Ciovernment Deposits payable on demand and after nolii e.

I.is$ Loans to Provincial tlovernments.
Loans from or Deposits made by other banks in Canada, unsecured.

/.CSS Loans to and Deposits made in other hanks in Canada, unsecureil.
And on the other hand —

Specie and Dominion notes.

Balances due from Agencies or other banks in foreign countries.

Less Balances due to .\geiicies or other banks in foreign countries.
Balances due from .Agencies or other banks in the United Kingdom,

Less Balances due to .Agencies or other banks in the United Kingdom.
Dominion Government Debentures or Slock.

Provincial, British, Foreign, or Colonial Public Securities other than Canadian,

Loanp, Discounts, or Advances for which stock, bonds, or debentures of Municipal or other Corporations,
or Dominion, Provincial, British, or other Public Securities other than Canadian, are held as collateral
security.

porations.
collateral

On March 31. the Canadian banks altogether held, as far as is visible

from the Returns, 34. S per cent, of such resources against their lia[)ilities tor

I )ei)osits and Circulation.

Rkskrves.

'I'lii'. Canadian banking system is peculiarly an edifice of credit, the mctallir
base en which it rests - the reserve of specie held by the banks in general
bearing but a trifling proportion to the liabilities, while other Reserve
securities are not in plenty.

While an adequate reserve of gold and equivalent securities is the very
corner-stone of safe banking, and the obligation to maintain it must he kept
in view constantly, it would yet be a waste for a bank in the circumstances
prevailing in Canada to hold in its vaults an excessive amount of specie or
bullion, the surpliis of which might be invested in interest-bearing securities
readily enough available if need should arise.

It is interesting to note how in the practice of commercial peo[)les the use
of credit-money is superseding the use of coin and bullion. Mr. John
Thompson, Vice-President of the Chase National Bank. New Vork, tells us,
in a pamphlet lately issued, that (what he ap])ropriately calls 1 token
money, that is, drafts, checks, letters of credit, etc., now constitutes nineteen-
twentieths of business transactions in the States ; and Mr. (iairdner, (ieneral
Manager of the Union Hank of Scotland, recently pointed out in a paper
read before the economic section of the Clasgow Philoso])hical Society that
the Reserves in coin and bullion held by all the banks in the L'nited Kmg-
dom, against liabilities amounting to ^^613 million sterling, amounted to
only ^,27 million — or about 4'.- per cent, of the liabilities. This sum was
all that was available to meet demands for inland coin circulation, foreign
exchange, and private hoarding. Hut there was also held by the banks docu-
ments representing commodities and securities to the value of ^£"586 million
sterling, which would readily enable the banks to increase their stock of gold
if need were. So we see that British banking is also in a way no less an
edifice of credit. Credit, indeed, and not gold and silver, is the true
Reserve of civilisation.

Among the assets of most Canadian banks, it is proper to observe, are
considerable amounts of Call Loans and loans at short notice, usually amply
secured by convertible securities, part of w^hich, being t'rom lack of dis-
crimination buried in the discounted bills account, are not disclosed by the
Returns, but which, nevertheless, ought to be reckoned as readily available
against the demands of noteholders and depositors, and added to the percent-
age of resources shown in Column Seven.

The specie held by all the Canadian banks amounts to six million dollars,
and Dominion notes, ten million (out of a total issue of sixteen million, the

balance being all the legal tender notes in actual circulation). A net sum of
about twelve million dollars is due from agencies in the United States, where
that fund is usually em|)loyed securely as well as profitably, and a further net
lour million is due from agencies in the United Kingdom. The total of
such resources so far as visible is $32,356,000 ; the English banks under
notice hold of cash $71,500,000, and Money at Call and short notice
$77,000,000 — a total of $148,500,000.

Of investments in (Government and Public Securities, available in any
condition of affairs, the Canadian banks hold to the value of about $6,000,000,
the English banks $132,500,000 ; which large holding in this case is partly
due to the increasing scarcity of trade bills in England (the plethora of
money there telling strongly of late in favor of cash transactions or short
credits I, and to the prevailing low rates of interest. In these circumstances
investments in high class securities are found to prove more jjrohtable than
trade advances ; and hence we see that while the discounts and advances of
all sorts made by the Canadian briiks to the public amount to $167,759,000,
these ICnglish banks, with their vastly greaterresources,showonly $418,000,000
of such advances.

Thk Banks a\d rHK Prkvailing Commkrciai. Svsik.m.

Ai'ARi" from Call and Short Loans and bills representing produce and
raw materials, the greater portion of the discounted bills held by the Cana-
dian banks may be assumed to be paper rei)resenting imports of manufac-
tured goods, and home manufactures. Largely in the purchase of foreign
manufactured goods — still more largely in the em[)loyment of labor at home
and in fostering home industries, has gone the Capital of the banks and the
contributions to their resources made by the public by way of Circulation
and I )eposits; and but a part of this investment is now producible as a lic[uid
asset. L'nciuestionably, however, property representing it is here in a multiform
variety of imports and home manufactures, but not in a shape to be readily
converted into gold, to increase the Reserves, except in so far as the goods
or representative securities, being still within the control of the banks, may
be marketable abroad.

The production of a greater surplus of commodities — of home manufac-
tures and natural products for export, with the open foreign markets our
connexion with Eiigland may give us, seems to afford the best means of increas-
ing the present bank reserves of gold and equivalent securities. However
words may be multiplied theorising about the effect of the Balance of Trade,
the elementary truth subsists that a continual excess of Canadian imports
over exports certainly tends, Canada being a comparatively poor country
with a hv\iit' foreign indebtedness, to drain the country of gold ; and this is evi-

sum of
i, where
ther net

total of
s under
: notice

e in any

000,000,
is partly
jthora of
or shcn
instances
able than
vances ot
,759,000,
5,000,000

luce and
the Cana-
manufac-
f foreign
r at home
s and the
irculation
s alitiuid
multiform
[be readily
[the goods
nks, may

manufac-
rkets our
f increas-
However
I of Trade,
imports
r country
his is evi-

dent from the condition of the (Canadian hank Reserves as compared with the
Reserves of the ICnglish banks. And one effect of this condition is, that pre-
cisely when ampler accommodation is re(iuired from the Canadian l)anks to
pay for these excessive im])orts — which in default of exports has to be done
in gold — and to meet the other demands of a .eemingly tlourishinu stale of
trade, the resources of the banks being diminibhed they arc com[ic(led to
curtail their advances, and the Circulation shrinks correspondingly. The
excessive imports of i<S7o-3, for instance, were followed in the next few years
by an absolute decrease in the amount of bank Circulation of 40 per cent.

An apparent illustration of this disabling effect is brouLjht out by ccm-
l)aring the rates of excess of Canadian imports over exports for the jieriod
since Confederation, with the Circulation of the banks for the same period.
'I'aking the figures of the (lovernmcnt Returns, as given in Tlw Statistical
jlhstract before (pioted, and assuming, as from a consideration of the
general course of trade I think we are fairly entitled to do, that such an
effect on the business of the banks as I have indicated would not in the
nature of things show itself till about the second year after the cause — the
over-importation — had come into oi)eration, we find that in every year, save
one — 1SS4, when no marked change took place, the effect perhaps not ap-
pearing till the next year— an increase or decrease in the excess per head
of population of imports over exports — in other words, a worsening or better-
ing of the balance of foreign trade — has been invariably followed by a more
or less corresponding decrease or increase in the (Circulation of the banks, as
compared with the Capital.*

As comi:)ared with the Deposits it will be seen that there are exceptions
to this rule at three periods — in 1873, when an increase of Circulation took
place, notwithstanding an increase in the rate of excess of imports the
previous two years, which was doubtless due to the great inflation of busi-
ness that prevailed at that time ; in 18S0, when the contrary i)rocess took
place, the Circulation decreasing with a decrease in the rate of excess of
imports the previous two years, which may fairly be attributed to the depres-
sion in business that reached its height at that date ; and in 18S3-5-6, when
it is probable the normal Circulation was affected without much respect to
the amount of Deposits in the banks by the vast extra expenditures attend-
ing the railway works in progress and finishing about that time. It will be

It is not the volume of imports tliat is detrimental, but a continual and great Excess of imports over
exports, which must be paid for in gold or by contracting foreign deot. lo be profitable to both parties
there should be no great dissimilarity in the nominal value of imports over exports. I he larger the volume
of exports, the larger, naturally, will be the volume of imports, and the richer will the country grow by such
activity of trade. And the fiscal efiect of the volume of exports cannot be considered alone without reference
to the volume of imports, nor vice versa ; for they are iiitcr-dependent, iniiuattly to-related, and exercise a
trong reciprocal influence the one upon the other.

observed, however, that since 1S75, the end of a period of financial disturb-
ance, the percentage of Circulation to Deposits has been much more uniform
the one being in closer agreement with the other, than the percentage of
Circulation to Cap.tal.

I'oUowing is th^ table of calculations exhibiting this assumed cause
and effect, whose showing certainly does not bear the appearance of a mere
coincidence of figures :

YKAir.

K^te^•• of
1 III pons over

K<(|>orts. I
F'er Heail of
Population.

I'kki KNiAi.E (II Dank

ClMCLLATION

Capital.

I lepositK.

27,
26,

fun(

30,

1868

$ 4

t 4

1 869

f •

1870

1871

1872

•■^73

?,?,

1874

1S75

1 1

1876

1877

1878

3«

1879

1880

3'*

1 88 1

188:;

1883

1884

43 '■

1 885

1 886

-3-3

20.8
28.

329

387
42.8

>}>■) • 7
27.8
27 . 2
25.6

27-

25-3
23.8

27.7

28.3

30-
27.8

28.4

25.8

26.6

28.

VKAR.

1 868.

June 30

1869

1870

1871

• i

1872

1873
1874
1875

1876

1877

1878
1879
18S0

i88[
1882
1883
1S84
1885
1886
18S7
188S

u
t(
11
u
1(
u
11
11
1(
(I

Maich 31

' Ivxcess of Ivxports.

A consideration of the large place occupied by trade discounts and ad-
vances among the assets of the Canadian banks, of the state of affairs in
general produced by the prevailing commercial system, and a referf nee to
Columns Three ^nd Four of our Analysis, which show in what a degree the
maintenance of the Rest and the non-impairment of the Capital of the banks is
dependent on the non-depreciation in value of the trade securities they hold,
ought to make hesitate those among us who are agitating for a sudden
reversal of our present commercial policy, a change which, if effected with-
out due preparation extending over years, must, in throwing down a barrier

•9

lind ad-
Efairs in
Ince to
ree the
lanks is
hold,
ludden
with-
harrier

against the inllow of foreign manufactures and natural products, administer
a check to the growth of many Canadian industries. However beneficial to
Canada as developing her great natural resources might be the effect of
reciprocal Free-trade with the States in the natural products of each
country — and that it would ultimately be beneficial is not denied,- no
one of experience in business affairs ran doubt that the oj^ening of the
Canadian markets to the free sale of Anifican manutactures and imports
— to the suri)luses of goods that American manufacturers and importers,
supplying sixty million consumers, could usually afford to sell much
below cost abroad, if by that means they could maintain the price of
the bulk in the home market, securing besides a convenient outlet
in a near foreign market for all such surpluses, — would, to say
the least, disturl) commercial values here and endanger investments in
factories and plants. And if any depreciation in the values of commodities or
fixed investments -however partial its scope or brief its duration— should
take place, the shock to general credit, for the effect could not be confined
to the particular interests involved, would be so heavy, that, from the nature
and extent of the interest of the banks, enormous and in some cases per-
haps irreparable injury must inevitably result to them.

A SkCURED ClRCn.ATION'.

IT is difficult to see how, in view of the small proportion of the assets of
the Canadian banks held in investment securities, a natural condition
in a young commercial country, they can be reciuired, as is sometimes
suggested, to deposit (lovernment bonds as security for the redemption of
their Circulation. For they have no funds available for investment in bonds.
In most cases no part of the Reserves could be spared ; the only source from
which the funds could possibly be provided are the Loans and Discounts to
Municipal and other Corporations (amounting to 19 million dollars), Call
and Short Loans, and other Loans and Discounts to the public. But is it
advisable, supposing it possible, to withdraw the large sum necessary to cover
the Circulation with Coverninent from municii)al uses and the commerce of
the country ?

The idea of a Government Bond security for Circulation is borrowed
from the National bank system of the United States, in which it is inherent.
But the National bank system is a peculiarity — distinctly a product of the
financial necessities of the civil war, just as the establishment throughout the
whole Western world of a mono-metallic standard was a war measure of Lord
Liverpool's. The purpose of the provision requiring National banks to
deposit Government bonds to cover their Circulation was, not to provide a
guarantee for the redemption of the Circulation, but to provide a market for

(i(n'ernn)ent hnids. It was a measure passed in ihe stress of war. to sell
tie l)r)iuls of the (l.)vernment, not to secure the Circiilatum of the hanks;
and periiaps its sole effect for <^ood has heen that, on the strength of the
se( urity afforded, the National bank notes arc current at a uniform value
throuj^hout all the States.

.\nother effect of this particular fealuie of the National bank system
has been what might have been expected from acting on the principle of
regulating the amount of credit Circulation — purely an affair of trade — by so
unconnected a thing as the volume of the National l)v.bt; for that is what
the Act does. No inconvenience was felt at first, while the Debt was suflici
ently large to afford a satisfactory basis for the amount of bank Circulation
needed in trade ; but as the Debt diminished and bonds were redeemed, the
horizon of the banking world grew dark and troublous; and Mr. Flannagan
tells us in his pajjcr, that, whereas in iS66 the amount of bank Circulation
was $215 million dollars (and in 1.S79, ^00 million), in 1S87, by reason of
the reduction of the Debt, the Circulation had been reduced to 169 million :
while, on the other hand, the Deposits had increased since 1.S66 by 150 per
cent.

With the reiluction of the Debt, indeed, the bank Circulation has come
to occupy a (piite subordinate place in the national currency ; and but a very
insufficient substitute for it has been su|)plied in a larger store of
gold and silver bullion, whose use, however, as a distinct retrogression, is
ijuite unsuited to the habits of the American })eopie : and this is clearly shown,
while the truth of Mr. l'"lannagan's contention that the diminished (juantity of
bank Circulation is not sufficient for the business requirements of the country
is incidentally proved, by the singular eagerness with which an issue of silver
certificates has been absorbed by the public — 52 million dollars worth 1 in
ones, twos, and fives) having gone into circulation within 17 months.

With the extinction of the Debt, the rnisoii d'itrc of this security provi-
sion, as indeed of the National bank system itself, will cease. It is question-
able if the National bank system, at least in its present sha])e, will survive
the Debt. Already the older and freer system of State banks (whose Circu-
lation has been taxed out of existence in order to foster the National bank
system), being more accordant with the genius and political habit of the
American people, is reviving and making its way again in the world, not-
withstanding the disadvantages of mere local credit and difficulty in ex-
changes that must necessarily attend the operations of the banks of thirty-
eight several States mostly dissimilar in laws.

An attempt may be made to preserve the security feature of the National
bank system by permitting the substitution of other securities for Government
bonds : but it is doubtful if that be feasible or if it would be convenient and

•, tl) sell

hanks ;

I uf the

n value

syslciii
iciple Of
: — by so
t is what
,s sutlici-
culation
iiied, the
annaijan
rculalion
eason of
million :

150 i.cr

has come
ut a very

store of
:ssion, is

y shown.

antity of
roimtry

of silver

[worth I in

|ty provi-
juestion-
il survive
;e Circu-
lal bank
It of the
irld, not-
|y in ex-
»f thirly-

lational
Jernment
lient and

sufticienl ; for it were a troublesome ta^k to both banks and (lnvernmcrt
to keep the new securities, of many descriptions and tlucluatmi^ values, ni( ely
adjusted si) as to cover, and not more than cover, the amount re([uired by
law.

The Circulation of the (Canadian banks is already \erv well secured by
beinj; made a preferential charge on all the assets ; and ro loss can now
likely accrue to any noteholder by failure, unless he be rompeiletl by neces-
sity to part with his notes before sufticienl assets can be realised to redeem
them. 'I'hat has been felt as a hardship ; and if it be thouglii nt;ce>sary and a
point of good policy to prevent it, this may |)erhaps be done without dis
turbance to the existing system by some such means as the taking l)y ( lov-
eminent of a statutory lien on the first realised assets, on the investments
representing Rest, if separate, on the security attaching to the i »ouble i.in
bility. or on any similar resources; and then, on the failure of a bank,
redeeming its Circulation forthwith. The (lovernment would thus be aiii|)I\
se( ured, and much suffering might be spared innocent noteholilers : but the
elitliculty here is that some reserve fund must be provided, available ai slDit
notice, to meet any such contingent demand.

( )n the whole, there seems to be no inducement to transplani this evoti(
of a National bank system into Canada ; and to engraft its secuiity feature
— ^a matter of mere local expediency on the (.'anadian system, would be
both inexpedient and without reason, for the circumstances of banking in
Canada are quite different.

(loVKKNMKNT OR BaNK ClRRI.N(\ ? ,

T T 7 ]"'. hear it proposed that the Canadian banks shall be deprived ot the
XIXj right to issue Circulation ; that the right of issue shall be vested
in Ciovernment alone, who shall issue a "National"' currency in ex
change for and interchangeable with (lovernment bonds, or in payment for
public works as they progress, or on some such basis. lint for any (lovern
ment to attempt to so monopolise the currency of a country b\ a purely
Government paper issue, in an arbitrary volimie, at the will or according to
the needs of (iovernment and without respect to the needs of commerce,
would be to mistake the functions of (lovernment : what might come of it may
be seen in the case of the Russian i)aper rouble, which, partly it is true from
the fall in the price of silver, but chiefly from having been over-issued by
way of (iovernment loans, is to-day worth little more than one third its
nominal amount. Such errors in finance must always end in mischief or dis-
aster. That was the case in I'rance with her (jss/'xfmfs, and in the United
States with their continental money. A vast amount of Debt for which no
value was given was incurred during the four years of the American civil

^m^mm

war, atii] great disturbance of values took place, owing to the depreciation
of the greenbacks issued by the (iovernment after the suspension of specie
l)ayments in 1861 ; which, liecause issued in quantity necessary to carry on
the war without respect to the commercial needs of the country, rapidly de-
clined in purchasing power, prices of everything (lovernment had to buy,
including gold, as rapidly rising. (Government issues, indeed, while arbitrary
in volume cannot be suitable to the requirements of commerce : in the most
favorable circumstances they \n ill be rigid in amount where they ought to be
expansive, and usually will exceed or fall short of the (juantity actually
needed.

In general, it may be said, the less legal-tender money there is, with a
forced circulation, the better. A commercial ])eople requires an expansive
credit-money, flowing naturally and as a consequence from commercial trans-
actions and circulating by the free will of the people, and while not abso-
lutely ecjuivalent to gold yet sufficiently supported by a gold reserve. l'"or
gold must for safety sake be behind every paper currency as well as ulti-
mately behind every bargain in trade. Su^h and so supported is our present
bank Circulation ; which, moreover, in point of elasticity is a highly efficient
commercial currency, i)artaking more of the nature of bills of exchange, or
the cheques of individuals, than of legal-tender money. On the other hand,
the futility of attempting to circulate Government legal-tender paper money
in a commercial country, otherwise than to meet the demands of commerce
and through the proper commercial channels, may be seen by the fate of the
Dominion note issue, two-thirds of which is constantly helj by tlie banks in
their vaults as Reserves. As Reserves these notes are an eminent success,
supplying the ])lace of gold to the banks and saving by their use the interest
on so much gold to the country. But they fail as a currency, except as
resi)ects the small notes used as change, — a failure that, however, is only in
obedience to the natural law under which a cheap money always drives a
dearer one out of use, and a credit-paper money drives out coin.

"A Government ' promise to pay,' as Mr. Flannagan says, "may and has
been unconstitutionally given the function of money [in the States] by being
clothed by statute with the legal-tender quality ;" but any such issue, there or
here, being based, not on any form of property, but by a strange anomaly
on a National Debt, and not receiving currency through the natural channel
of the banks, must be entirely inadequate to the purposes of a commercial
cutrency, and should be limited in amount so as to be only subsidiary to the
Circulation proper — that sup])lied by the banks. The National bank Circu-
lation being issued only against the deposit of Government bonds, although
not leg?l-tender, is essentially a Government currency. It is in consecjuence
wanting in fluent ([uality and adaptability to local requirements. Lately,

in parts of United States territory contiguous to the Canadian border,
especially in Maine, the notes of Canadian banks have been a chief circula-
ting medium, because by the operation of the National bank system an excess
of currency is caused in the neighborhood of cities where banks are clustered
in plenty, and a deficiency where they are few or of small capital — as in these
border districts, which naturally need more instead of less currency than
city neighborhoods on account of the lack of facilities for doing business by
means of token-money — checks, drafts, etc. Hence the late attempted taxa-
tion of Canadian bank notes, notwithstanding that manifestly the National
bank Circulation is inadequate to the business done in such districts as these.

(iovernment being outside of and unconnected with the sphere of com-
merce, cannot with advantage to commerce assume one of the functions of
banking unless it assumes all. This was clearly recognised many years ago
by both British and American Commissions on the currency. The Hon.
Willis S. Paine, Superintendent of the lianking Department of the State of New
York, says in his report for last year :— "The advocates of a fixed (iovern-
mental issue of circulating notes in preference to that of banks seem to forget
that as the business of the {Government is distinct from that of the mercantile
community, it cannot well carry on that portion of the business of banking
unless it undertakes all of that business, for the reason that Circulation is
needed in proportion to the amount of credit reciuired ; circulating notes are
simply credits in a negotiable form." "A bank circulation is a necessity,"
says Mr. l-'lannagan further, " unless the Government undertakes, either
thiough a Government bank, or by some other mode yet to be ascertained,
to grant commercial credits. The r.^lation l^etween the Circulation and
commercial credits is so intimate that if the Government assumes such con-
trol of the former as to practically prohibit its issue, it necessarily limits tiie
latter." The main stream of Circulation must, in fact, in any commercial
country tlow from the public Dej^osits, making current so much of their
amount as is needed to carry on the minor operations of business. 'I'hai
practically is what takes place in the great monetary centres of Europe. The
French and the German Governments, it is true, control the ])aper Circula-
tion of France and of Germany, but they do it only through the Banks of
France and (Germany, which each grants credits and issues notes, not at the
will of the Government, but in response to the demands of commerce. 'I'he
Bank of England does the same, maintaining the most intimate terms with
the commercial world ; and though part of its note Circulation, being issued
against Debt due to the Bank by Government, may be considered a (Govern-
ment currency. Government is kept at arm's length by the whole currency
being dealt with through a separate Issue Department.

Apart from th? objection that all plans for a Government currency in

^i! i

(Janada take little or no account of the true principle — the supply of a com-
mercial demand — on which alone a paper currency should be issued, it is
difficult again to see how, things being as they are, the Canadian banks can
be recjuired to withdraw their discounts and advances to the public to so
great an extent as the amount of their present Circulation. That is what such
proposals involve, and the thing is ([uite impossible in the circumstances;
while, on the other hand, in putting into circulation, as the banks do, as much
of their Deposits as is re(iuired for the acconiuiodaiion of trade, they but
fulfil a legitimate function of banking, that ought not lobe interfered with by
(iovernment. Government has alreadx invaded one province ot banking,
and so sensibly contributed to the high rates of interest prevailing, m estab-
lishing the Post-office and Ciovernment Savings Banks, through which the
large sum of 40 Uiillion dollars ot the working capital of a comparatively poor
commercial peoi)le — ccjual to more than one-third the total Deposits held by
the bariks — has been injuriously diverted from commerce, from .aiding in de-
veloping the resource.s of the country, lint suf h a violation of economic prin
ciple, tolerated though it may be in England, where is an over-abundance ol
realised wealth, is not to be excused, much less extended in practice, in
Canada, where more, not less, capital than we have is needed in commerce.

The Canadian bank Circulation is practically the whole paper currency ol
the country (the Dominion notes current, to the amount of about 5 million
dollars in small denominations, being used only as change): and this state ol
the currency, sanctioned by long usage, is a natural circumstance of the con-
dition of the country, the course of whose fiscal policy and development of
whose banking system has not, like that of the States, been disturbed by the
necessities of a nation at war. That this Circulation is and has been a
suitable one and of very great utility, free as a whole from the tamt of inila
tion, which, indeed, is imjjossible with it as a whole, is clearly shown by tlie
absence of any violent spasms or crises in the home money market, or marked
fluctuations in the prices of commodities, and the generally uniform rates of
interest ; for if the rate of interest has at times been high, that has been
caused, in its origin, by over-importations and a consequent low state of the
Reserves, a scarcity resultmg of course in dearness of money.

There is no better banking system than the Scotch — a system that has
aided immensely in the development of the agricultural and mercantile in-
terests of Scotland, while the banks themselves have benefited etiually,
through being constantly ada])ted to local and contemporaneous circum-
stances. A distinguishing feature of that system has always been the
granting of cash-credits, resting on bank Circulation, without which indeed
the credits would have been im|)ossible in the poor circumstances of the
country ; and to this is directly due so flourishing a state of Scotch industries

jf a corn-
sued, it is
tanks can
)lic to so
what such
iistances ;
), as much
they but
id with by
banking,
m cstab
vhich the
vely ]j001
;s held 1)\
ing in de-
)mic ]mn
fidance of
ictice. in
Dmnierce.

irrency ot

5 million

s slate ot

thu ron-

jment of

d by the

been a

of inila

n by the

marked

rates of

las been

e of the

that has
ntile in-
eriually,

circum-
een the

indeed
i of the
dustries

and so great a development of the resources of the country, that the prin-
ciple involved in Sir Robert Peel's Acts of 1S44-5, the substitution of the
legal-tender issue of the 15ank of Imgland and of specie tor the present
bank ( "irculation, is now regarded as adoptable, or at any rate as the de-
velopment towards which Scotch banking must api)roach when it next
moves. But without the beneficial nursing the industries and resources of
Scotland have enjoyed for a hundred and sixty years by means of these
bank credits affortled by the use of bank Circulation — the only vay, I repeat,
such aid could have been rendered— no such progress could have been
made, and no such end would be in sight.

Such an end i- to be kei)t in sight in Canada also ; but Canada is to-day
.It much the same stage of fiscal and industrial development that Scotland
wis in the earlier days of her banking system, when, like Canada now, she
most needed its aid ; and it can only be after a similar nursing of (Canadian
resources under a native banking system, that has its counter|)art to the Scotch
cash-vTedits in the lines of discount granted to traders, with the use of an
elastic bank Circulation, that Canada can hope to reach an etjually good
[wsition

ThF, RiVAI, MoNKTARV ST.WDAiaiS.

^L THOUCH a consideration of the universal standard question df)es
not properly lie within the scope of this paper, yet perhaps it may be
useful to trace its salient features in rough outline, in order that tlie
])osition of Canada in the currency question may be the better understood.

A-

In brief, then, we have before us a world whose ancient and customary
currency, as far as civilisation has extended, has always been silver. lUit in
the early part of this century, that condition was disturbed by England, who
then, for the first time in history, set up gold as the Western standard of value ;
and this measure being followed by a policy of ]'ree-trade, which gave her
the advantage of a start in business over every other nation, all of whom she
forestalled by investing largely in foreign markets when stocks were cheap, Eng-
land soon became the banker of modern I'.urope, reaping an enormous harvest
from her investments, as the first in the field usually does, and becoming the
creditor-nation of the whole world. I'he debts due her being stipulated to
be paid in gold, it has fallen out that this one of the precious metals, a
commodity that England owns most of, alone of all commodities in general
use has not depreciated in value, doubtless chiefly because it cannot be
produced in any considerable quantity or by cheajier methods— a circum-
stance that, with its convenient r)ulk, gives it an unrivalled utility as a perma-
nent debt-paying instrument — and in part perhajjs through having been

given an added importance by being made a i)rincipal standard of value.
So that, while during the past few years all other commodities, includ-
ing the other precious metal, silver, have from a cheapening in cost
of production (in the case of silver from having been demonetised
also) depreciated some 30 per cent, in value, gold has if anything rather
appreciated ; and thus the hundreds of millions of foreign gold-bonds owned
by England have had near a third added to their value, while the thousands
of millions of gold securities owned by the great army of mortgagees, bond-
holders, debenture-holders, bank, loan, and insurance company shareholders,
have increased by as much, in as far at least as their funds have been kept
invested in gold securities. And on the other hand the debtor classes — the
people who owe this money, the landlords, the farmers, the manufacturers,
in England, as well as the wheat, beef, cotton, and produce grower abroad,
have to give one-third more of their produce than they did fifteen years ago,
to iiquida e an equal amount of indebtedness for principal or interest.

Still, this disturbance is only local to the Western world. In the far East,
where the improve nents in methods of production and distribution that
have revolutionised prices in the West are for the most i^art yet unheard of,
the old range of prices still prevails in all domestic trade, and silver seienely
reigns supreme, its purchasing power quite iin^fTected by the fall in its price
elsewhere. And the reason is, because, great as has been its production in the
West, suffi:ient to force down its price there, where it is merely a commodity,
it has not yet been and ])robably never can be imported into India, China,
and the Ivast generally, where ii is not merely a commodity, but the currency
in use by Soo million people, in (juantity sufficient to api)recial)ly disturb
current values. If, indeed, silver were poured into these countries (which
could only be done, however, in exchange for exjjortable commodities, a
process to which there is a visible limit), the people would grow richer of
course, but not much effect would jirobably be produced on the currency :
for, following the habit engendered by centuries :f insecurity, the extra
wealth would be hoarded. No serious monetary disturbance, indeed, is
likely to take place in the ICast unless silver should be ])roduced in such
over-abundance as to cause a dislocation of its value there and the value of
other commodities, similar in extent, though reverse in direction, to the dis-
location in the relative values of gold and other commodities in the West. It
is only when silver has to be exported from the East to pay gold debts in
luirope that this currency experiences a depreciation : Indian civil servants
and other luiropeans paid in silver who have to remit money to Europe
lose a third of their income in doing so ; and so with gold investments in
banks and commercial establishments in the East, in as far as their invest-
ments are now represented by securities payable in the currency of the

i of value.
3s, includ-
ig in cost
^monetised
ing rather
nds owned
thousands
;ees, bond-
ireholders,
been kept
asses — the
ufacturers,
er abroad,
years ago,
rest.

e far Ivast,

Lition that

nheard of,

r seienely

n its i^rice

tionin the

•nimodity,

ia, China,

currency

disturb

s (which

odities, a

richer of

urrency :

the extra

ndced, is

i in sucli

value of

^ the dis-

iVcst. It

debts in

servants

l^urope

ments in

r invest -

of the

East they have depreciated in value, to the European owner, to the same
extent.

But, on the other hand, the depreciation of silver in tlie West with increased
transit facilities and cheaper ocean freight have vastly stimulated ICastern
foreign trade, because the lower prices obtained for produce in the P^uroptan
markets are compensated for by a corresi)ondingly increased (juantity of
silver obtained in exchange ; so that practically the East, while using a
silver currency maintaining its value for internal trade and yet at a discount
abroad, does not suffer from the prevailing low range of produce prices.

Very different, however, is it with this continent. Here the domestic
currency is on a gold basis ; and the agricultural producer is not enabled,
like the Asiatic, to obtain an increased quantity of currency to compensate
him for the fall in the value of his produce. He sells for gold at the reduced
jj.ices prevailing, and no comi)ensating source of profit being available, he
has to give an increased (luantity of produce to liciuidate his indebtedness to
the creditor-classes — the moneyed institutions of the Eastern States chiefly,
which as gold owners occupy much the same position towards this continent
that England does towards the world. Nevertheless, despite this disadvantage
as compared with the Indian wheat-grower, the American agriculturist is able
to m.ike headway, because from the extension of railway facilities, the cheapen-
ing of freights, and the improvements in agricultural implements and labor-
saving methods, the saving effected of late years in the cost of American
wheat laid down in England is greater than the total amount of the depreci-
ation in price, enormous as that has been.

Thus we see the Ivastern world se])arated from the Western — ^and as
respects India, the iiritish Empire cut in twain — by a line of fiscal cleavage
of Iiritain's own creation. Through this, however, the trade and productive
resources of India have been developed enormously of late ; wliile, on the
other hand, it is doubtful if the check that would be administered to the
industrial prog-^ss of the East by the reverse step of remonetising silver in
the West, wor.ld at all correspondingly benefit the agricultural interest of this
continent. l''or though with the appreciation of silver the present premium to
Indian exporters would disappear, all that could be gained by the American
exporter would be the disappearance of one competitor out of several in the
British markets ; and that competition had better be met by further impro\ed
business methods.

But as respects Canada particularly — who is interested in this silver
question, not like the United States as a i)roducer or a user of silver, but
only as an agricultural country and another competitor in wheat-growing
with India, — it is certain that, occupying a quite subordinate place in the

finaiK^ial world, no other course is open to her than to follow others, iiiakuig
the best of the situation she finds herself in, while going whither she is led.
There is no panacea at hand for the trouble of low prices : seventy cents
worth of either wheat or silver cannot be made worth a dollar by simply
marking it as worth that. But a manifest duty that lies at our statesmen's
hands is, besides promoting every means of cheap transport to enable
Canada to compete successfully with India in the l.nglish markets,
to maimnin the currency on so sound a basis as not at any rate
to impede the develojjment of trade. .And that end will not be at-
tained by a forced issue of (lovernmeni paper, or by hami)ering the
banks and the romnit-Tce of the country by causing the withdrawal
of a further thirty milHon dollars from trade for investment in (iovern-
ment bonds. I'o i;-.<Tease the volume of ("anadian exports, it cannor
be too strongly urged, is an end to be kept steadily in view : our exports
must be piade to rovei our imports; and this can be done best with an
elastic I'urrency free from redundancy on the one hand, which tends to
artihcially raise prices above the exp~>rting point, or from deficiency on the
other, which ei|ually disturbs trade by lowering prices and so discouraging
s|.)eculation.

1-or near twenty years, I'.ngiand, while engaged in her terrible struggle
with Napoleon, carried on all he home Industrie? successfully on a paper
currency, producing sufficient to pay for all her imports and to yield a balance
of gold in her favor ; and the attainment ot a sirnila*- '•esult in Canada, while
ail-imporiant in the struggle with competition, it bUiely as possible in our
circumstances. It is essential, however; that perfeci •' onfidence be felt in the
currency — a good, probably the sole good, that would be conferred with the
legal-tendei quality. It is also desirat>le that it pass current without dis-
count everywhere in Canada: bur this advantage, though urged as a principal
reason for a national currency, is hardly of sufficient weight to counter-
balance the consideration that legal- tender money is generally unsuitable to
a commercial people : while neither clicques and other bills of exchange, nor
gold and silver coin, can be sent free of exi)ense from one end of Canada to
t"' ^ ' r, why should the currency, which is simply one of the convenient
•lU'.SLi.M ■■ lor coin ?

Sno'-' . currency, I conclude, bearing a constant ratio in volume to the
volij iv - 1 'ide, can best be procured by the natural process of issuing it
through the banks; and only, I am ptrsuaded, through the export trade that
will be fostered by a suitable currency can the fund of bank Deposits be
largely increased, the investments already made in Canadian industries be
strengthened, and a solid available Reserve of gold equivalents be accumulated
in greater abundance in our banks.

rs, making

she is led.

enty cents

by simply
talesmen's
to enable

markets,

any rate
lot be at-
)ering the
^•ithdrawal
I Ciovern-
it cannor
ur exports
t with an

tends to
icy on the
con raging

: struggle
1 a paper
a balance
ida, while
le in our
"elt in the

with the
:hout dis-
principal

counter-
litable to
inge, nor
Canada to
mvenient

ne to the
issuing it
rade that
)osits be
stries be
imulated

(JovKkNMKM 15ank InsI'KC mon.

S banks of issue supplying ])ractically the sole cu.rency in use by the
people, who thus become from habit often involuntarily, and indeed
unknowingly, creditors of the banks whose bills they receive, the
Canadian banks might reasonably, i)crhaps, be required to submit to some
degree of (lovernment supervision in resi)ect of their Circulation, liut full
Ciovernment inspection, as generally understood and occasionally advocated
in Canada, is again an idea taken from the States, where it was instituted
with the establishment of the National bank system, not, however, in order
that a Government supervision over the general business of the banks should
be exercised, but to ensure the carrying out of certain provisions of the Bank
Act— respecting the holding of real estate, loans on which, as in Canada, are
prohibited: the limitation of the amount of loans to any one borrower ; and
the keeping of a sufficient Reserve. Afterward, this inspection, apparently
proving a useful check, grew into favor, until the public, coming in time to
regard the National banks as in some sort (lovernment institutions, national
in everything as well as in name, came also to look to Government to su])er-
vise and control the conduct and policy of the bank officials ; which it did :
and so well did the performance of this extra function recommend it, that a
similar provision has been adopted by a few of the States in respect of State
banks, mortgage, loan, and guarantee companies, and other private corjjora-
tions, together with the county treasuries and other public offices, all of whose
accounts are regularly inspected by State examiners.

Doubtless, owing to the great number of banks in the States, where a
bank may be organised and set in operation onacapital of a fewthousand dollars
only, some degree of Government supervision is there necessary. Possibly
also, the United States system of bank inspection may have done good :
the knowledge that speedy exposure must follow wrong-doing might some-
times act as a wholesome deterrent, i)reventing wrong-doing : though from
the many banks that have failed disastrously soon after undergoing successfully
the ordeal of an examination, it is evident this safeguard is very inefficient.
13ut however that be, is it advisable to transplant the system here, where the
conditions of banking are very different, and where its chief function as now
understood, to ensure the proper conduct of the affairs of private corpora-
tions, is not usually considered the business of Government ? This function
surely savors too much of paternal Government, and can be little agreeable to
the taste and habits of our people, who usually wish above all things for free-
dom from (iovernnient interference in private trading. The complaint is not
unheard in the States that appointments to the office of bank examiner are
made sometimes— rarely, it is to be hoped— not because the appointees are
competent bank examiners and accountants, but because they have been useful

politicians; \vhi( li is a danger not to be lost sight of even in Canada. It can-
not he considered the duly of (lovernnient to prevent dishonesty among bank
ofticials ; tliat, according to Canadian ideas, is the duty of the Directors.
Moreover, a (lovernment guardianship is apt to lull those concerned into a
security that can safely be indulged in only in reward for the constant exer-
cise of individual caution and watchfulness, and may thus work positive harm
instead of gooil, if it cause shareholders to cease to maintain the lively inter-
est in their affairs essential to continued success. And, finally, if (lovern-
ment Hank Inspection be introduced into Canada, it must be after the pattern
of the State laws, not the National bank Acts, so as to include in its opera-
tion every loan or other company receiving Deposits ; for otherwise the osten-
sible purpose of protecting the people will not be fulfilled.

There is reason, no doubt, in the contention that (lovernment should
have power to satisfy itself that the provision of the Bank Act sanctioning
the issue of Circulation has not been contravened by over-issues, that the
Capital of the banks has not been imi)aired by bad investments, in order to
assure the noteholders. JJut this result may be attained otherwise than by
so radical a measure as (lovernment bank inspection : if (lovernment
required Bank Returns and Statements to be certified by professional
auditors, a sufficient assurance would be afforded noteholders. As between the
banks and their depositors no good reason can be given for (lovernment
intervention : depositors entrust their money to the banks voluntarily, in open
day ; it is a mutually free transaction between both parties ; and therefore
with that Government has no right to interfere. And it surely is not the
business of (lovernment to interfere between the shareholders and their exe-
cutive officers, which appears to be the sole other possible ground for
action.

Professionai. Aldit.

^'^HE system of inspection now in use in Canadian banks serves merely
I as a check by the Management on the internal economy of the
banks and the operations of the branches. It leaves the operations of
the Management itself untouched, and affords no assurance whatever to the
shareholders or the public that the affairs of the bank as a whole are properly
conducted. In every one of the more important cases of bank mismanage-
ment or failure that have occurred in Canada of late years, while the busi-
ness was shown to have been regularly inspected by the appointed officials,
little or nothing of the trouble was in any case divulged outside the bank
walls— till disaster did it.

In view of this repeated warning, it is somewhat remarkable that bank
shareholders, partners in the most considerable business concerns of the

country, have not long ago jierceived the necessity and advantage of apply-
ing to those concerns a rule that I suppose every one among them of any
business exjierience applies to the ])ettiesl of other corporate affairs he has to
do with. From these, as a matter of course, he recjuires the assurance of
the true condition of their affairs afforded by an audit independent of the
Management: then why not the same from banks ? If when the Management
and the Directorate rendered an account of their stewardship to the
shareholders, these received it through one — whether appointed by Man-
agement, Directorate, or Shareholders, is not important— whose particular
business it was to deal with accounts, and whose duty it was as Auditor to
"listen," as it has been happily expressed, not with the ears of the Manage-
ment or of the Directorate, but of the Shareholders, an assurance would be
conveyed of the correctness of the accounts that is wholly lacking now.

There is no real obstacle to a sufficient audit of the affairs of a bank. The
number of the branches in most cases may be thought to be one : in the
States, banks have no branches, each bank's business being contained within
its four walls, which is held to account for the feasibility of Government
hank inspection there, and, by parity of reasoning, to show that where the
business is spread among many branches Inspection or Audit is ditticult or
impossible. But auditing is universally practised in England, by statutory
requirement, and there several of the banks have many more branches than
have Canadian banks. The London and County Bank, for instance, has
167 ; yet we find the annual statement of its affairs to be certified by two
professional auditors, who declare that they have " examined the balance-
sheet and profit and loss account, and verified the cash balance at the Bank
of England, the stocks there registered, and the other investments of the
Bank." They have also " examined the several books and vouchers showing
the cash balances, bills, and other amounts set forth," the whole of which
they declare are correctly stated ; and they are of opinion that the balance-
sheet and profit and loss account "are full and fair, properly drawn up, and
exhibit a true and correct view of the Company's affairs as shown by the
books of the Company." The last t^uoted clause is the auditor's certificate
required under "The Companies' Act 1879 ; " and surely as much as that at
least could be required in Canada.

In Australia also, where the banks have also many more branches than
the Canadian banks, professional auditors are employed ; we find the
annual report of the Commercial Banking Company of Sydney certified to by
two auditors, who say thsy have " examined the securities, compared the
balances, and counted the coin," which they find as specified on the balance-
sheet. And in China even, a similar practice is in use; the last statement
of the Hong Kong and Shanghai Banking Corporation has appended the

certificate of two auditors, who say they have "compared the above state-
ments with the books, vouchors, and securities at the head office, and with
the returns from the various branches and aj^encies," finding all correct.

^Vhat is being done elsewhere may be done in Canada. Unquestionably,
a bank statement, ecjually with a statement of the afifairs of any other cor-
poration, ought to be attes; d by a competent auditor, one in this case
familiar with the theory and ractice of banking, besides being an exi)ert
accountant, who would be ii lependent of the bank, and whose profes-
sional reputation would be at stake in his work. A competent and discreet
man so ciualified, knowing exactly what particulars of the business were
essential to a sufficient audit, would be able to select these for examination
without needless intrusion elsewhere. An audit though partial may be per-
fect so far as it goes, and fully answer the i)urpose intended. The auditor
need not necessarily go mmutely into every detail of the business : there
must be a limit to investigation if practical work is to go on. An accountant
cannot be [ierj)etually testing the accuracy of his Interest Tables : he must,
if he is to get his work done, place some degree of faith in their statements :
and in like manner an auditor, when he examines the accounts of a factory
or a warehouse does not usually '* take stock " himself, but is content to
rely on the correctness of the stock-sheets signed by the persons in charge or
cognizant of the facts. Surely he can put the same measure of faith in a
banker or a merchant that he puts m a mechanic ; and '^o in a bank audit he
may usually rely for much on certificates or statements signed by more
than one officer or a committee of Directors.

Me might also be able to render good service to the institution by direct-
ing attention to any dangerous, yet unsuspected, tendencies in practice,
which a trained and fresh mind i"rom outside would be ([uick to perceive :
and a more ostensible advantage of his employment would be that by it much
current hostile criticism would be disarmed, and the popular feeling that
seems always to run against banks might be stemmed. This feeling, some-
times righteous perhaps in its origin, though unreasoning in its application,
cannot otherwise fail in the long run to be prejudicial to every bank : it is the
root of the cry for Clovernment Bank Inspection and Government Security
— ^demands the like of which are far from men's thoughts in England be-
cause auditing has been there brought to so great perfection and its practice
is so general, that no other safeguard is felt to be needed,

A professional audit, indeed, on a clear survey of the whole field we
have traversed forcibly suggests itself as a chief thing wanting in the
Canadian banking system — a desideratum that, if adopted, would, as nothing
else could, convince the public that whatever might be amiss in that system
would be rectified, and ensure that the practice of Canadian banking should
always be equal to the really great goodness of its theory.

.■>.>

IHAX'E done. If I cannot say also c'cst Jini—'\i my undertaking cannot
be considered as al all a finished performance, even within its limits, I
beg it to be remembered that the subject is a wide one, on which few
perhaps could say the last word as well as the first. At any rate, all cannot
well be said at once. What I have been able to accomplish, however, I now-
most willingly submit to the criticism of the profession, of bankers, and
of publicists, that it may receive the correction and enlargement^ the im-
provement and fuller illustration, that the product of any one mind cannot
fail to receive from the richer and more varied experiences of many others.
My desire has been to arrive at the truth — not to urge any particular theory or
view of my own. I have endeavored to state the case plainly and as con-
cisely as possible, in a business-like way and without rhetoric — a mode of
treatment which may sometimes have the appearance of dogmatism ; but I
have no wish to speak dogmatically ; on the contrary, I invite criticism and
correction, and shall be grateful for any such furtherance to the common
object we all have in view.

There are aspects of the subject with which I have not dealt : upon such
points of the Returns, for instance, as lay outside the scope of my argument,
or that I thought called for no comment, I have made none. So far as 1
have gone, however, I trust I have treated the subject with candor and
without prejudice : my concern has been with a system, not with particular
instances of its operation ; and while pointing out the purport, as it ap-
peared to me, of the several features of the Returns, I have, as will have
been observed, carefully refrained from applying any of the tests supplied by
the Analysis, it might be invidiously, to any particular institution. That I
consider outside the province of this paper.

I had no purpose to serve in undertaking this task beyond the ascertain-
ment of the fitness of the principles that seem to lie at the foundation
of the Canadian banking system, and the illumination of a subject that is
evidently obscure to many people. In dealing with it, however, I venture
to think that I have been able to furnish a something that may at least serve
as a help to a more scientific framing of the Bank Returns, for the better
information of the public ; and perhaps as material for the amendment of
the Bank Act in the direction of a new constructive policy in some depart-
ments of banking.

The Canadian banking system has been developed to its present stage
by progressive changes in the commercial condition of the country, growing
with the growth of the country, and being constantly adapted to new wants
as they arose. In this lies its great strength and value, that it is not a symmetri-
cally finished system incapable of alterat'.on, imposed from without, but a
native of the soil, capable of further growth in any direction it may be

desired lo train it. Upon Parliament rests the duty of periodically recon-
sidering the condition of this system — of seeing that it keeps i)ace in de-
velojiment with the progress of the country, and is constantly kept adjusted
to all new needs of a growing commerce. And it is of the utmost importance
that all changes made shall be in accordance with sound economic
principles.

Regard should he had by our legislators rather to the example set by Eng-
lish banking legislation than by American, notwithstanding that the American
system may be thought to be more akin to our own. ]*"or in the United
States, from the day when (leneral Jackson marred an otherwise successful
career by his vengeful and disastrous treatment of the Bank of the United
States, with but few intervals of better treatment the (lovernment has gen-
erally failed in its banking legislation, because sound princijile has usually
been made to give way, in that as 'p, other legislation, to political expediency.
^Vhilc, on the other ' md, in ICngland, the reitiarkable success that attended
the introduction and after-development of all Sir Robert Peel's fiscal policy,
due to his grounding it on the best theoretical knowledge of his day, is
eminently consi)icuous in the enduring character of his banking legislation,
which has successfully passed through the trying ordeal of a sheer revolution
in values and busmess methods — not confined to one country but world-
wide — brought about by improvements in methods of production and in-
creased facilities of distribution and business communication. And it is
hard to conceive of higher i)raise of any fiscal policy than the praise that may
be justly accorded to this, which in the midst of so shifting a scene, has stood
firm for more than forty years, scarcely needing the smallest revision.

Let us hope Canadian statesmen, building upon an equally sure founda-
tion, may be able to carry the structure of Canadian banking to as high a
l)itch of excellence.

MKMORANDA

WITH hk(;ai;|) to mi;, mknziks i'apki: on iianks

AM) HAM<IN(i.

N<'II - I hr |>.i|ii.-r'> In tins .ipprMilix vM-ri- uiittcii In r* iu\ i.' ihf r'tr^l tir.ift *>t tlir trtati^'; vtlihli v\,is r«\i<>e*l .tin! die

.ir^'iiniiMit .ini|ilih>'>l hrfiTi' I'Cint; tr.i'l,

(I.) In the optMiini: |)arai.'r;iiih reference is made to i/('. /<;/ kiioicl<'tii;e of the sul)jt('t.
This is most pertinent. There is nn .suliject in which a want of special knowiedfje is more
likely to lead a person astray. Special knowleoj;e should be not merely of sets of timires,
luit of what lies heliind the lij;iires, in the complicated masses of business which they
represent.

(2.) It is Stated tliat the limitation ol Circulation to(.'apital is appareiul\' grounded on no
principle. This remark is incorrect. Circulation is Credit, taken hy a lianker, ami j;iven
to him by the pul)lic. It is a universal principle, well justified by h^np, experience, that
C;'a//V should be based on Capital. To base the circulation of Hanks on their cn])ilai is
therefore rational, and in accordance with the teachinjjs of experience.

(3.) The relations of (Jirculation to Deposits are evidently entirely misunilerstood, both
by the writer and by the New \'ork authority whom he quotes. The latter has evidently had
no ]irac 'cal experience of Circulation, and neither understands how it arises nor on wlial it
rests. This is not remarkable, seeing that New \'ork Hankers have no experience, properly
speaking, of Circulation at all. The Hankers there do not redeem their own notes. Kr-
denij)tion is the keynote of the whole system of a projier Circulation. It is only by the
function of redcemiitg notes, day by day, and seeing that other I'anks redeem them, that
any practical experience in Circulation can be had.

This gentleman apparently knows nothing of the distinction between lixed Deposits
and floating Deposits. He evidently does not see also that Circulation and Deposits arc
rather antagonistic than co-related.

When 15ank notes are paid in, Circulation decreases and Deposits increase. When a
Deposit is withdrawn, it is withdrawn generally in notes; then Circulation increases but
Deposits decrease. ^Ioreover, a large amount of Dejiositsare \a a fixed character. What-
ever their origin, they remain stationary, and have no influence whatever \ii)<)n the moving
tide of Circulation, either outward or inward.

(4.) The proposal to base the Circulntion on Deposits is unsound in thcoiy, and would
be unworkable in practice. Deposits are the debts of a Hanker; so are his Circulating notes.
To propose that because he is in delit in one direction, therefore he is to get into debt in
another direction, without any regard to his cajiital, is manifestly unsound,

(5.) The Banking Act very properly requires a considerable cajii'al to be paid up, before
Circulation can be issued at all. Any person can take Deposits, if the public will trust him :
but to issue Circulating bills is a function rerpnring a careful foundation, strict limifatiors,
and the imposition of reasonable safeguards. Kxperience tends in the direction of refpiir-
ing a far larger amount of capital to be paid up, before circulating notes can be issued.
This is my own opinion. Otherwise a Hank with a small paid-up capital, say $50,000,
might attract twenty times that amount of Deposits by offering high rates of interest. If,
then, it could issue a circulation c( one-half or ore-third of its Deposits, a superstructure of
credit would be raised which the least breath would topple over.

Rut such a proposal would be unworkable in practice. The whole of the current
Deposits of a Canadian Bank are the sums flowing out and in, at from ten to thirty places
over the whole extent of the Dominion : and the amount is beyornl the Banker's control.
It would be utterly impossible for him to keep Circulation, which is itself a fluctuating

<|iuintily, in regular correspondence with another fluctuating ([uantity. Such a proposal
could only by any possibility be carried out, where the whole business of a Bank was done
in one Office.

(6.) With regard to the Rest. The proposal to insist upon Hanks investing the amount
of their Rest in other securities than discounted bills and trade advances, sounds well, but
it is not practical.

A Banker has always out a large line of liabilities which are payable on demand, and
D'.hers payable at a very short notice. The payment of his liabilities on demand is the foun-
dation i)rinciple of his l)usiness. The moment that is impaired, a Bank ceases to exist as an
active institution. Everv consideration, therefore, shows that in any investing or disposing
of his assets, the first and fundamental principle to be kept in view is the i)eing able to
command resources wherewith to meet h.is liabilities. If then the Rest were by statutory
authority placed beyond his disposal, his power to meet his obligations daily would be
imperilled — a position which no lianker would consent to.

'I'he proposal to place such enormous sums of money as are represented by Bank
Rests, in the hands of jjersons outside the Banks, is really so unbusinesslike that it can
hardly be treated seriously. Who are to be the tri?stees for the Seventeen Millions of
money re])resented bv the " Rests '' of the Canadian I'anks ? Is it possil)le to suppose
that the Bank of Montreal would trust any person outside its own circle with the sum of
•Six Millions ; or that the Merciiants Bank of Canadri. would trust any such person with
nearly Two Millions; or the Bunk of Toronto One and a Half Millions? The idea is
absurd .

{7.) Douiii.K LiAr.ii.iTV.— The author of this paper is constantly quoting United
States authorities. They have really scarcely any bearing on the Canadian position.
Banks there are radically different institutions, founded on different principles, governed
by (lilferent methods, in many respects far behind the advanceil and improved methods
current in England, Scotland, and Canada. The little petty institutions, scattered all
over the country, dignified by the name of lianks, would not be endured for one moment
in Canada.

As to the contingent liability repelling investors, I am not aware that any enc|uiries
have ever been inaile on the subject. The opinion of the writer is, therefore, basetl on no
f(Hindation .

The writer remarks that Column 3 shows the extent of depreciation in the value of
discounted i)ills that would absorb the Rest.

A practical man — a man with "special knowledge" — would have dwelt largely upon
this. In the absence of special knowledge remarks would be dangerous. But it is in one
respect the most important column of all.

(8J E.\KN1N<; PowKK. — The writer's remarks with regard to the Deposits of English
and Canadian Banks respectively are worthy of note. But —

1. These remarks ha'e been made repeatedly for the last 20 years in the financial
journals, and number- of illustraiions thereof given.

2. The writer does not seem to know the difference between London Banks, which
have not and never had circulation, and the Scotch and Irish Banks, which have a
circulation, as well as nur .oers of the Country 15anks of England itself. That the Scotch
and English Banks value their circulation is evidenced by the strenuous fight they made for
it at the time when Sir Robert Peel proposed to deprive them of it.

3. The statement that the Australian Ban'.cs commonly show Deposits of twelve or
fifteen-fold the amount of their paid-up capital is a little exaggerated ; but the writer is
apparently not aware that many of these Australian Banks have their head office in
London, England, and receive Deposits there, attracting them by offering higher rates of
interest than are current with the purely London Banks.

These Banks will often offer 2 per cent, more for money in London for a time
Deposit than a London I5ank will. Moreover, the Governments of Australasia are not
competitors in the Banking field. It is perfectly true, however, and it has often been
referred to in our financial journals, that Australia has vastly more money on Deposit than
Canada has.

{9.) The Canadian Banking system, it is said, is peculiarly an edifice of Credit. Why
peculiarly? This remark not only fails to be true, but it is the exact opposite of the truth ;
for the author has just been showing that the Canadian Banks take far less Credit from the
public than almost any other Banks in the world. In no country in the world is there more
JJanking capital in proportion to Banking credit than in Canada.

The note under the head of Column 7 is a peculiar instance of the want of special

knowledge. Every Brink has arrangements with regard to certain of its resources, which
are an essential element in considering its position. A calculation of these resource-
would, in some cases, make the Reserves stronger, in others not so good.

(lo.) The author is in error in stating that Call Loans, and Loans at short notice, are
buried in the Discounted Hills Returns of the Canadian Banks. The greater part of them
is under the head of Loans on Stocks and Bonds.

(II.) The author constantly uses tlie term, "The English Banks" do this, or th.it,
when comparing them with the Canadian Banks- a most misleading use of language, fur
the English Banks referred to are only the thirteen Joint Stock Banks of London, not
including the Bank of England.

Even in London there are large and powerful Banking firms, whose credit and business
are on a par with that of the Joint Slock Banks. Moreover, the Bank of England is en-
tirely omitted — a huge omission, certainly — and the whole mass of ]5anks throughout all
England, except London, and the Banks in Scotland and Ireland. These also are not taken
into account.

To say, therefore, that the English llanks 'nve Loans of $418,000,000, against
Canadian $167,000,000, is so grossly inaccurate i-iut it is astonishing that any sensible
man could commit himself to it.

(12.) .Some of the remarks under the heading of "The Prevailing Commercial
System " show a certain want of acquaintance with the subject. There are times during
every year when the remarks of the writer are true and pertinent. There are other periods
of the year, and of every year, in which such remarks are entirely beside the mark, as the
vast amount of funds advanced by the Banks are in steady process of realization day by
day, and in that very liquid shape which the author denies them to be.

Thir remarks as to the connection between the balance of trade and the Circulation are
really only to be compared to the sage observation that the tendency of rivers is to run
past great cities. When there is a heavy production of exportable commodities, Bank
Circulation flows out in the country and backwoods districts in the purchase of them.

The importing business of a country, immense as it is, gives rise to no Circulation at
all. The manulacturing business gives rise to very little. It is the jnirchase of agricultural
and other natural products that gives rise to large Circulation. When these articles go
abroad they tend to create a balance in favor of Canada. Whether imports come in, or
do not come in as a consequence, has little effect upon Banking Circulation. If the next
year'- production is large, Circulation will still keep up ; if it is small, it will undoubtedly
go down, and so it will go on year after year. The table given under this head is a very
striking example of non siujiiittir.

(13.) The remarks as to a reversal of our present commercial [lolicy are sound and
judicious.

(14.) .So also are the general remarks on a secured Circulation. But it is not very
likely that Government would consent to become a Trustee for note-holders in the manner
proposed.

(15.) GOVKRNMF.NT CURRENCY. — The remarks of the author under this head are
generally sound and judicious : but they have been broui^ht befori' the public on more th.nn
one previous occasion, and notably in the replies of Hankers to the questions of a Com-
mittee of Parliament, previoiis to the renewal of Bank Charters in 1S71, when the whole
suliject was exhaustively discussed.

What is said as to the disadvantage of (Jovernment Currency is highly appropriate,
There are some points of detail, however, which re(|uire correction. It is stated that the
British, French, and Ci'-rman Goveinments control the Paper Circulation, by the Banks of
England, F"rance, and (Germany.

The luiglish Government has no more control over the Bank of England than it has
over any other Bank. The limit of the Bank of England Circulation, and every other
Bank in Great Britain, is fixed by Act of Parliament. .So is the limit of Canadian B".nk
Circulation.

It is constantly overlooked by those who have no special knowledge of this matter
that the whole of the Banks of .Scotland have a Circulation ; so have the whole of the
Banks of Ireland, and a large number of the Banks of England and Wales.

(16.) The remarks made with regard to (jovernment Savings Banks are most sound
and judicious, though both these and the following part of the Treatise are marred by the
reference again to the unreasonable idea that Circulation should be regulated by Deposits.

3«

(17.) Rival Monktaky Si andakiis.— A discussion on this point is interesting in
theory, but it has no practical bearing on the Canadian position, so far as legislation is
concerned.

Canada has always been on a Ciold basis, and it will be a pitiful descent indeed if she
ever ad(jpts any oiiier. The United States are indeed in jireat danfjer of faliinp to a Silver
Standard, and Canadian lianks require to keep this constantly in view. In fact they do
so, often making special arrangements that any Loans or liills domiciled in the United
Stales shall bi payable in gold and not in Currency.

(18.) GovKKNMKNT BANK Insi'KC I'lON. — The remarks here are also pertinent, and
the danger and imperfection of (iovernment Inspection well pointed out.

The difficulty of keeping such a system pure and free from partisan influences would
be almost insurmountable. It is not, however, pointed out, as it should be, that the
advantages sujiposed to be secured in the United States by a system of Bank examiners are
much exaggerateil. It is known that these examinations are olten <>{ a |)erfunctory kind.
Re|)eated instances have shown that a Bank may be in a rotten condition and yet pass an
examination, failing disastrously within a few weeks after being certified to as sound and
correct by the Government itself. But it is well observed tha^ all arguments drawn from
Inspection by Government officials in the United States are entirely inapplicable to
Canada, owing to our diversified system of Branches.

(19.I l'm)KKSsiON'Al. .VUDU'.— It is evident that the writer has in view that kind of
[)':rfunctory examin:ition of a Bank statement which could be had by examining in the
Head Oltice the general Balance .Slieet of a B.xnk, and checking it by Returns furnished by
the Hraaches. lie ajipirently perceives clearly enough that no other audit is possible.
That this is neither aa Inspection nor a proper Audit goes without saying. It would
amount to nothing except to lull stockholders into a fancied security which really did not
exist.

It is generally forgotten by persons unfamiliar with the subject, that a constant audit
of a really effjctive character is going on all the year round in every Canadian Bank, and
that the elaborate Returns furnished to the Government have all been prepared on models,
the result of years of discussion and experience and that they are examined in a Depart-
ment of the Government. It is sometimes forgnten, too, that no persons are so deeply
iiii.ereste.l in the correctness of Bank Returns and Statements as the Directors of a Bank,
who, by their very office, must be large stockholders, liut most of all it is forgotten that
any audit of a Canadian Bank, to be really efficient, must be of a vastly more compre-
hensive and expensive character than is imagined.

A complete and efficient audit of the position of the Bank of Montreal alone would
re(juire the services of > staff of experienced officials, who could not possibly finish the
work under six or eight months ; indeed, it would be more correct to say, under twelve
months, which is as much as to say that it should be perpetual. This staff would recpiire
to be within the walls of the B.inking Office of the Bank itself during the whole of this
lime, which is obviously impracticable.

Any other audit than this would, and must, be of a perfunctory character. It would
amount to nothing ; it would prevent no disaster; it would expose no wrong doing. A
Bank could be rotten to the core, yet such an audit would not reveal it, just as examinations
in the United States have failed to reveal rottenness. And if the idea of wrong doing and
fraud entered into the minds of the higher officers of the Bank, and they desired to conceal
the true position, they would smile at the idea of outside jirofessional auditors finding out
what was going on, notwithstanding their efforts to conceal it.

The author unconsciously admits the impracticability of a really efficient audit, by
stating that in such a one as he proposed he must rely very much on certificates or state-
ments signed by more than one officer, or a committee of Directors. This gives away the
whole case. It must necessarily be so indeed. But this is exactly what the public have at
present, under the terms of the Banking Act.

G. IIAGUF.

Montreal, Muy r^lh, rSSS.

OBSERVATIONS BY MR. CROSS.

and

I have had the privilege of watching the growth of this Kssay from week to week, and
know something of the labor and care bestowed upon it. The attempt is made to deal
with princi| ''-'s, and to this end facts have been carefidly collected, and their important and
necessary features have been faithfully stated ; the conclusions ofTerod are confined to tliose
statements. The best feature of the work consists in the honesty which has led the writer
to sacrifice his preconcejftions when facts have opposed them. This method is entitled to
the support of this Institute. We may each find something to dissent from perhaps, but
we are placed under an obligation to clearly reveal the grounds upon which we base our
•dissent, and any additional matter should have the same support. It is not enough that
this subject should be understood by Bankers ; the more thoroughly the principles are under-
stood by the general public, the better for all concerned. Mystery and ignorance are the
only conditions that render panics possible. To no single person is the Canadian public
more indebted for his efforts to spread accurate information in this department of National
Economy, than to Mr. George Hague. He has often treated the subject as a publicist as
well as from a mere Banker's point of view, and upon this account his comments are
entitled to all the respectful consideration which they have received.

The proposal to base Circulation on Deposits is doubtless an unworkable one, and Mr.
Menzies has not succeeded in showing that it is sountl in theory, neither has Mr. Hague
shown its unsoundness ; there is little diftererce between fixed and floating Deposits from
the moment the former are made active, and the proceeds of the bills discounted are credited
to a "floating" account. This money of' accouut is the principal medium by which
Exchangesaremade, and our three classes of Circulation proper are becoming; to an ever in-
creasing extent of lesser importance, in fact they acrpure their own currency chiefly as
change for cheques which themselves are only one form of inotiev of anounl. Many of .Mr.
Hague's subsequent objections seem to show that the views given are bounded by personal
•experience, and they illustrate the difference between ihe Arts and the Sciences, l-lxperi-
ence is indispensably necessary to success in the Art of Banking, not so a thorough know-
ledge of the principles that underlie the Art. The .Science of Banking rests upon a broail
consideration of the necessities which keep it in existence as an implement of civilization,
and the mere experience of any individual cannot furnish these. Indeed the duties of a
great trust make such claims upon time and attention that they tend to convert one who
woukl otherwise be an impartial observer into an advocate. This tendency explains the
advantage enjoyed by a Board of Directors who are not Bankers in dealing with large
questions of policy, though they rarely have the Banking experience of those whom they
direct. It has been said that if a proposition in Kuclid happened to lie adverse to the interests
or cherished speculations of a class, arguments would be invented either to confute or to
show its inexpediency. If Mr. Hague could sjiare a little atientinn to the Scottish or
Australian Bank returns, it is probable that he would revise much that he has said, and
it may be, withdraw some of the objections made.

The Union Bank of Australia, one of six larger Banks, in I.S76 had a reserve oi
two millions m dollars, and paid a 16"; dividend. In iS.Sj it paid iS°^, and had a reserve
of over four and a half millions. This reserve having increased at a smaller ratio last
year, only 13% dividend was paid. It is obvious that had a 10",, divitlend been paid during
these dozen years and the remainder invested in (jovernment securities, and these dejiosited
with an appropriate State Officer, there would have been a fund in reserve against Share-
holders' liability of some five millions of dollars, and the active resources of the Bank
would be just what they are lo-day.

The Commercial of Sydney, dating from 1834 (three years earlier than, and having
only two-fifths the amount of paid-up capital of, the last named), pays 25",, on three
millions of capital. It has a circulation of nearly five millions and discounts of more than
forty millions, yet it has stood the ups and downs of fifty years without "toppling over."
It has a reserve one and a cpiarter times greater than its capital, and holds twelve and
ii half millions in coin and Government securities. It owes the public sixteen times the
amount of its Capital.

A still smaller institution, only 25 years old, The Australian Joint Stock Hank, owes
the public fourteen times the amount of its capital. It holds nearly lour millions in coin
ami bullion alone, and over five millions, still speakin.; in dollars, of convertible securities,
piys lai-^Vo dividend, and its rest is nearly 70"o of its capital.

Owing to the peculiar position of Canada in being directly connected with two great
rtnancial centres, ours cannot, like the Scotch, Irish or Australian Hanks, take their cue
from London only ; due regard must be, and always has been, had to what is going on in
New Vork. Large metallic reserves are less needed by us, for it is certain that Exchange
on those two cities will alone keep our currency on a par with gold so long as the Govern-
ment shall refrain from competing with the Banking trade. There are many reasons why
it should step aside, and it is satisfactory to find from the Finance Minister's remarks on
the Savings i'anks in his budget speech on 27th ult, that the Government is not unconscious
of some of them. It is to be regretted that no data are before us showing the effect of the
legal tender issue. The ten millions held by the Banks is made to do national clearing
house work on inter-bank settling days, and if it has the effect of saving the country the
expense of a gold coinage it is economically expedient that it should be continued. The
sm illness of the issue has certainly prevented it from interfering with the condition des-
criiie 1 in that well established axiom of political economists, that "a circulation should
vary in amount and value exactly as the currency would do were it metallic."

Sir Rol)irt Peel's Acts, referred to in the final paragraph with approval, h.ad the merits
of carefully guarding all existing rights and privileges, and whilst permitting entirely free
banking of^ framing a few easily understood jirovisions, affecting Banks of issue. The Act
of iS\\ liinite I [hs privileiTo of issuing not»s to those who then possessed it. That of 1S45
enacted that all issues beyond the average about that time must be suppoited by a reserve
of gold coin equal in amount. The minting arrangements were left untouched, otherwise
the control of the Circulation was exclusively confirmed to the Banks. Should it appear that
ojr existing biuks cm do the work, those Acts furnish a precedent for confining the
privilege to them. Should provision be made for the deposit with the Auditor or Receiver
(jineral of Government Securities for future reserves or any jjortion th^^reof as a security
in lieu to that extent against double liability, the right of issue should be by that amount
enlarged, antl in this way a provision would be made for future expansion should its
necessity "rise.

As the existing Rests it is obviously unwise that their present employment should be
disturhsd, but a sug'^estion founded on the new departure of the present (Government with
regird to the people's savings may be hazarded. Since the fust Act establishing Savings
Banks passed the British Parliament in 1817, it has been recognized that such institutions
shodd not be reijarded as depositories for ;ifr/«.z«6"«/ investments. The State undertakes,
on the ground of good policy, to receive the savings of the working classes and to return
money on ilemand. The only Chancellor of the Exchequer who ever attempted to depart
from this was Mr. I^owe and his proposals were withdrawn. In England, as has been the
case in Canada, the State made large losses in interest, but when the Post Office Savings
p'an wis ado;)teil the rate of interest from the first was fixed at 2 'a percent. Our Govern-
ment have it in their ])jwer to make two sound departures simultaneously. They could
deposit with each Bank such a p:)rtion of these moneys as equalled its actual rest and
oblige the Bank to hold Dominion bonds to the amount thereof. This would be more than
a mere matter of book-keeping. It would place the onus of providing money for with-
drawals up^n thoie whose business it is, and upon whom it would actually devolve were
the withdrawals at once large and sudden,

W. II. CROSS, F.C.A.
Toronto, 23nd May, rSSS,

REPLY IN SO FAR AS THE PAPER REFERS TO THE

ISSUE OF CURRENCY.

Under the heading " Basis of Circulation " our worthy friend states that " the
statutory limitation of the Circulation of the banks, to the amount of their unimpaired
paid-up Capital, is a purely arbitrary one, apjiarently grounded on no principle."

I think that there is a i)rinciple involved, and a very important one, and that the
restriction by law is a very wise one.

If — and I would very strongly emphasize that if— the banks are to be allowed to con-
tinue to be banks of issue, they should certainly be restricted in the exercise of this
privilege, and I cannot conceive of any index as to the extent of this limitation on any
sound principle other than in direct proportion to unimpaired paid-up or accumulated
Capital. Surely a bank having an unimpaired paid-up Capital of $i0,cx)O,oc)O may be
allowed an issue of ten times that of one with only $1,000,000 of Capital. The business
done, and the nature of it, will be the measure of the capacity of any bank to exercise
this privilege conferred upon it. No bank, however, any more than any other public com-
pany or any private individual, should be able to obtain credit in ]iroportion to the business
it wishes to do, or its customers want it to do, without regard to its own Capital invested
in the business.

The public have confidence in becoming the creditors of the banks, as holders of the
bills in circulation, because of the limitation imposed in restricting issues in proportion to
Capital.

If the Capital, Rest, Cash Deposits, and authorized Ciiculation together fall short of
supplying funds for the legitimate wants of the customers of any bank, the same course is
open as in the case of other monetary or commercial enterprises, viz., to increase the
Capital. If this be not done, the ordinary course of events is that more banks are
organized.

The lending of money, especially on personal security, is attended with risk of loss.
It is well, therefore, in the interest of the shareholders as well as the public at large, that
the expansion of business by way of the issue of currency should be restricted in proportion
to Capital.

If this country has not enough of circulating currency it certainly cannot be owing to
over-restriction of the issue of the banks by legislation, for we find that the larger banks
have not half the issue in circulation which the law allows them, and that of the existing
Government issue a large proportion is not in circulaticm.

As regards, therefore, the amount of the Circulation, there can be only one or other
of two conclusions, either we have under the present restriction as much currency as is
nfeeded, or else that as yet the source of the issue of our currency is not such as meets the
true objects of a circulating me<iium in providing the true ideal of a thorough and elastic
means of substitute for barter.

I have come to the latter conclusion in my mind, whether right or wrong. I am con-
vinced that the Government of a country should take the matter of the issue of currency
entirely into its own hands, under wise an<l comprehensive legislation,

I shall not stop to discuss whether the issue of currency by the (iovernment, instead of
banks, would or would not increase the Circulation. I shall not even deal with the question
as to whether a larger Circulation is needed in the country or not. I desire rather to point
out a system of currency, which, in my o|)inion, would adjust itself, in an elastic way, to
the wants of the people, and solve, in its operation, many vexed fjuestions, which other-
wise may well puzzle the most astute and the most experienced to come to any intelligent
conclusion.

I am indebted to Mr. Buchanan, of the Dominion Lands' Department at Ottawa, for
the suggestion that legal-tender notes issued by the Government to replace bank issues be
redeemable on demand in interest-bearing Consols of the Dominion. That these Consols
be redeemable on demand in legal-tender currency. The Circuli.tion would thus never be
arbitrary in volume but would be perfectly elastic and adjust itself to the requirements of
the public.

As regards the details involved in placing such a currency in circulation, it would not
1)0 difficult to adjust a suitable scheme.

Of course the banks should be duly considered, and a period of ten or more years
given them for the gradual withdrawal of their issues or the equivalent by way of interest
paid them by the Ciovernment in the event of the immediate assumption by the Govern-
ment of the entire Circidation.

It is only necessary for the present argument to mention two ways in which the Gov-
ernment could effect such an issue of currency. It might simply supply the banks with all
the currency needed under suitable restrictions regarding the respective banks, or it might
issue directly a currency in payment for products of the country exporting the same and
obtaining gol<l for it. I am in favor of the latter.

We nave a vast wheat-growing district in the North- West. The producers the'^re labor
under great disadvantages in disposing of their crops. If the Government of the Dominion
should contract for the purchase of the bulk of the wheat grown there, and shiji to a foreign
market by the Canadian Pacific Railway and its connecting lines, paying therefor both the
price and the freight in a new issue of le^al-tender Dominion notes, obtaining gold fur the
products purchased, this might he 'i< v >i.r after year until the bank Ciiculation were
entirely replaced. The debentui ■ de' .1" Dominion could be redeemed to the amount

of such issue, the interest being savei' ■■.1 , linion. Hj' redeeming the Circ\ilation by
Consols, and redeeming Consols b}- r.i\,u,aiu.i, the (Government would always save the
interest on the amount actually needed in Circulation, but no more and no less. The time
would not be far distant when the " almce of the Dominion debt, outside of circulatini;
currency, would be owing almost en irely ^ ban' . d others in the Dominion, and the
demand would be such that our Consols couki reid'ly he snVl for foreign exchange or in a
foreign market at par or its equivalent.

I conce-ve it to be within the true functions of a Government to encourage in every
way practicable the development of the resources of the country. Obviously, if from any
cause the banks curtail the advances made to producers or middlemen, the producing or
purchasing power in the country is lessenetl. This may happen concurrently with a good
demand in some foreign country for the very commodity sought to be produced or moved.
A Government purchasing products of any kind to meet the launching of a direct issue
of Government currency would naturally and necessarily be guided by foreign markets
as to the nature and extent of such purchases. This power wisely exercised would give a
stimulus to the production in the Dominion of commodities in active demand in various
parts of the world.

Under the system I have indicated, the amount issued for payment of products need
not be restricted to the amounts of the curtailment of bank issues, because, directly the Cir-
culation became inflated beyond need, holders couid invest in National funds. On the
other hand, if the opportunities of purchase of products did not admit of getting into
circulation as much as was needed to replace bank issue, the Government could deposit
with (he banks the required amount of currency to bear interest at the same rate as was paid
on Government Consols.

The instances cited by Mr. Menzies of the issue of National currency have no bearing
whatever upon the (juestion of a Dominion of Canada currency such as I have suggested.
It would be fruitless to discuss them.

Mr. Menzies' allusion to the existing Government issue is wide of the mark ; the fact is,
that these notes i)eing equal to specie in Canada are principally held as such by the banks.
If the circulation used by the banks was all of the same nature, a certain amount would
naturally be held in the same way.

That the withdrawal of the bank Circulation would be an inconvenience to the public,
because of the curtailed power of the banks to make advances, assumes that it is impossible
to multiply the numbers of banks, or to increase the capital of those existing, a fallacy
which needs no remarks.

In conclusion I would say that if the banks be deprived of their present privilege of
issuing circulating currency, the imposition of double liability of stockholders could be
abolished as there could then be no jiretext for such a law.

I would remark incidentally that if it be deemed expedient to require that bank ac-
counts be audited, the auditors should in my opinion be appointed by the stockholders
and not by the Government.

I have endeavored to be very brief in my remarks, but I trust that I have said enough
to open up a discussion on one branch of the subject of Mr. Menzies' paper.

WM. POVVIS, F.C.A.

Toronto, isth May, iSSS.

POSTSCRIPT BY THE AUTHOR.

On the eve of pul)lication I have received the Hanking Supplement issued with the
London Economist of May 19, from which I learn that eijjhteen banks in Kngland and
Wales, one in the Isle of Man, two in Ireland, and two in Australia hold their Rests, or
«' Reserves," invested specifically, separate from their other assets. These Rests aggregate
28 million dollars. Chief among the banks so dealing with their Rests are the—

Bank of Ireland $5, 170,000

Union B. of London 4,250,000

•Union B. of Australia 4,287,000

B. of Australasia 2,500,000

Birmingham Joint Stock B 2, 149,000

Wilts and Dorset B. Co 2,000,000

London and Provincial B 1,548,000

National B. of Ireland 1,157,000

Birmingham B. Co 1, 146,000

The amount of bank Capital paid up in the United Kingdom is ^70 million sterling ;
its market value £\<^o million. The balance of Capital subscribed, callable and reserved,
amounts to ^170 million; the Reserve fund, dividends, and undivided profits amount to
£li,' million. The total amount of Deposits held by all the banks in the United King-
dom, private as well as joint stock, is estimated to be ;^57o to ;^58o million.

Of the sixteen Australasian banks, three show Deposits to twelve-fold the amount of
their Capital, one to thirteen-fold, and one to fifteen-fold.

ANALYSIS OF BANK STATEMENTS, 31st JANUARY, 1888.

BANKS.

(In order of atiioiiiit of paid-up

Caiiital.)

Montreal 44-^

Commerce 4'-3

Merchants' ' 53'

British N. America , 21.9

(2uebec 27.2

Toronto 57-^^

Molson's I «7-6

Nationale 24.6

British Columbia ! 38.5

Dominion ' 86.9

Imperial 81.6

Ontario 65.4

Eastern Townships 56.9

Du Peuple 64.8

Union of Canada 70.7

Nova Scotia ; loo.i

Standard ! 65.3

Hamilton i 03.8

Ottawa

Merchants' of Halifax

Hochelaga

People's of Halifax....

Traders'

New Brunswick

Jacques Cartier

Halifax Banking Co...

Union of Halifax j 29.7

Ville Marie

Western

Yarmouth

Commercial of Manitoba

St. Hyacinthe

Comm'l of Windsor, N.S
Exchange of Yarmouth...

St. Jean .•••

St Stephen's

LONDON JOINT-STOCK BANK STATEMENTS, 31st DECEMBER, 1887.

BANKS.

PKRCKNTAGE OF

Capital and
Rost to

Caviital and

Rest to

Deposits.

Cash. Monev

at Call, anil

Investiiifnta

Deposits.

London & Westminster...

London Joint Stock

Vnion

(ilyn, Mills, Cunie,& Co..!

City

Imperial

Alliance

■Consolidated

Central

London & South-Western.

London & County

Lloyds, Barnetts, & Co...
London & Provincial....

MEMORANDUM OF TOTALS.

BANKS.

Capital
Paid-up.

Rest.

Deposits.

Cash.

I Advances
Securities, i and

! Discounts.

36 Canad'n
Banks ...

13 London
Banks ...

$58,865,000!$ 1 7,649,000 $1 10,5 13,000 $ 32,356,000 $ 5,960,000 $167,752,000

I 1 !

7o,5oo,oooi 34,ooo,oooi 612,000,000 148,500,000 132,500,000 418,000,000

ANALYSIS OF BANK STATEMENTS, 29th FEBRUARY, 1888.

BANKS.

(In order of ainoiiiit of paid-up

Capital. J

PERCENTAGE OF

Cir-
culation

to
Capital.

Montreal >

Commerce

Merchants'

Uritish N. America

Quebec

Toronto

Molson's

Nationale

Uritish Columbia

Dominion

Imperial

Ontario

Eastern Townships

l)u I'euple

Union of Canada

Nova Scotia

Standard

Hamilton

Ottawa

Merchants' of Halifax ....

Hochelaga

People's of Halifax

Traders'

New Brunswick

Jacciues Cartier

Halifax Banking Co

Union of Halifax

Ville Marie

Western

Yarmouth

Commercial of Manitoba.

St. Hyacinthe

Comm'l of Windsor, N.S..
Exchange of Yarmouth....

St. Jean

St Stephen's

Circulation

to
Deposits.

454
39.8
53-2
22.4
26.2
59.8
85.5
25.6

35-9
86.2
79.6
68.1*
57.2
66.8

72-3
94.6

62.5

88.9

77-

93-2

76.2

22.1

90.7

84.9
81.8

923

28.7

86.

87.1

20.5

99 I
68.7
21. 1

14.1

27.1
83.6

27.
23.1
37.9
17.4

15-3

22.7

26.8

33-1

27.8

18.1

22.4

22.

38.1

24.9

454
25.6

18.7
37-2
39- 1
37.8
54.8

27-3
53-8
327
35-3
34-1
26.5

53-7
42.
18.5
64.8

35-6

27.2

62.7

134.2

1 19.6

Rest

to
Capital.

Rest

Disc'nts.

Capital

and

Rest

Disc'nts.

Cash and
Convertible
Securities

:o
Cirrui.ition

and
Deposits.

50-

8.3
293
24.1

'3-
62.5

437

26.7

71.3
36.7

35-
29.

25.

4.2

35-9

34.

34-

3J-

16.

14.1

7-5

70. j

28. j
20.

4.2 I

10.6 I

10. I

7-2 :

25- I
12.2

44
12.5

35.9

13.3

15-
6.1
16.6
10.4

40.2

15-5
II. 7
102
1 1.6
7.2

1.4
12. 1

99
10. 1
11.6

5.8
5.6

5-
7

22,7
12.

57
1.9

37
5.8

18.5

1 1.9

3.9

5-5

107.8
48.5
58.6

77-3
527
43-1
34-1
66.8
190.8
37-2
43-5
39-3
52.
36.2

357
45-9
39-2

397
48.8
42.1

45.1
71.8
33-8

55.1
54.8

30.5
76.6
48.

38.3
64.

443
37.2

927

109.5

91.2

49.9

63.5
297
3'-5
43-2

23.5
30.2

16.8

21.3

48.2
40.4

40.3-
28.5
15.2
24.6
7-3
39-9

33-
iS.
22 8
42.

23.
50.5
15 I
56.4
22.9
10.3
67.1
12 9
9.8

274
26.8

9-3
129

72.7

22.

10.6

ANALYSIS OF BANK STATEMENTS, 31st MARCH, 1888.

HANKS.

(In Older of amount of paid-up

Capital,)

PKKCENTAGE OF

Montreal

Commerce

Merchants'

Hritish N. America

Quebec

Toronto

Molson's

Nationale

British Columbia

Dominion

Imperial

Ontario

Eastern Townships

Du Peuple

Union of Canada

Nova Scotia

Standard

Hamilton

Ottawa

Merchants' of Halifax ...

Hochelaga

People's of Halifax

Traders'

New Brunswick ,

Jacques Cartier

Halifax Banking Co

Union of Halifax

Ville Marie

Western

Yarmouth

Commercial of Manitoba.

St. Hyacinthe

Comm'l of Windsor, N.S..
Exchange of Yarmouth....

St. Jean

St Stephen's

Cir-
culation

to
Capital.

46.2
40. 8
53-8

23-3

2S.7
5S.2

«2.5

25.2
26.9
86.6

79-9

72.2

57.7

79.8

72.5

97.1

61.7

87.0

83.6

95.6

85.9

22.3

87.6

95-
95.1

88.

30.4
91.
83.2
24.1

934
74-

22. Q
14.2
24.9
84.2

Circulation Rest

to to

Deposits. , Capital.

27.8
233

! 387
I '8.3

I '5-7
i 21.8
25.3
27.9
27.9
18.2
22.7

23-5
39-6

30-4
40.
27.5
18.8

37-3
42.6
38.8
56.9
30.6

499
40.7
40.9

3^-7
28.3

56.8
40.9
19.2

57.1

36.6

29.8

60.5
121. 6
144.9

1 50.

8.3
1 29.3
I 24.1

I '3-
j 62.5

437

20.

7t.3
367
35-
28.9

25-

4.2
35-9
34.
34-
31-
16.
14.1

7-5

2.
70.
28.
20.

4.2
15.2
10.

7.2

25-
12.2

12.5

K.'st
to

Capital
and
Kest

Casli and
Convertible
Securities

Disc'nts.

to
Uisc'nts.

Cirt ulation
aiiil

Deposits,

354
3-6

I 13-5
14.8

I 15.6

10.2

38.9
'57

113

9.9

".5
7.1
14

II. 2

9.6
9.9 '
10.8
5.6 I

5.3 I

4-9

7
21.7

II. 5

5-2

1.9

5.2

5.8

177
II.4

3.6

^•6

106. 1
46.6

597
76.2
51.2
40.5

I 334

i 65.

2337
I 377
I 42.1

38.

5'i

35-3

35-6

42.4

38.

39-

45-5

40.7

42.8

70.8

35-
52.8

527
311

70.7

47.3

39-3
64.

44-5
35-1
88.4
104.7
86.2 ,
51-

59-5

3!.

32.1

44-5
25.4

25.6

16.6

22.8

44-9

41.

38.8

27.5
14.2
24.

17.

35-9
30.2
14.6
22.3

39-5
23.2

40.6
22.1
50.4
20.1
11.7

51-5
n.9

'93
32.8

247
10.
12.8
67.1

177
8.5