CHAPTER IX.

CONCLUSION.

We have seen that the Canadian banking system possesses features of extraordinary merit, adapting it admirably to the needs of the country which it serves. It performs most efficiently the service for which banks are created, gathering up the country's idle capital and placing it in channels of useful employment. The assets of the banks are of high quality because of protection afforded by the law and because borrowers are prevented by custom from hawking their paper through brokers. The law leaves the banks such freedom in the use of their credit that business is never brought to a halt through lack of instruments of exchange; whether the need be for checks and drafts or for bank notes, the supply is always adequate. The redemption system insures perfect elasticity for both the note and deposit currency. The reserve seems to be abundant for the protection of the liabilities and to be composed of elements sufficiently liquid and available. Finally, on account of the extent to which the larger banks are interested in the trade and industries of all parts of the Dominion because of the investments made through their branches, the system possesses a solidarity that makes possible united action in the face of a common peril.

IS THERE A WEAK SPOT?

Would Canada's banking system stand a real strain? Is its gold reserve large enough? Does it not depend too

much on London and New York? If England should withdraw her invested capital, or send no more, would not this banking system break down? Questions of this sort, which are sometimes asked, imply that Canada's system contains a weak but hitherto undiscovered spot, and most of the critics are inclined to think it lies in the smallness

of the gold reserve. In the writer's opinion Canada's financial position is of the strongest. Comparatively little gold is needed for the reason that the banks have developed an almost perfect credit system. The people have unquestioning confidence in the credit instruments provided by the banks and never demand that they be converted into gold. Credit settles all debts between the banks and the public. Gold is used only between banks and in the foreign exchanges, and in the latter field a credit balance in London or New York is more useful than a stock of gold in Montreal or Toronto. If England and the United States some day suddenly stop sending capital to Canada, the country will undoubtedly suffer, but the notion that Canada will at once be called on to export large quantities of gold in payment for the imported merchandise now paid for with bills of exchange created by English investments, is crudely mercantilistic. ada's imports, of course, would decline the moment English capital ceased coming, and the present "unfavorable balance" of trade disappear. There is no likelihood, however, that Canada will cease to draw capital from abroad. It is estimated that England has sent her a round billion dollars in the last ten years, and prospects are much brighter now than they were in 1900.

Can

THE REST-FUND FAD.

The bankers of Canada may some day have cause to regret having allowed a condition to arise which made necessary the amendment of the bank act in 1908 permitting them to issue notes in excess of their paid-up capital, yet at the present time they seem rather complacent over their power to issue an "emergency" circulation. This is surprising, for it is in conflict with the principles upon which the Canadian system is based, and, furthermore, would have been entirely unnecessary if the banks within the last ten years had taken pains to see that the amount of their paid-up capital had increased in the same proportion as their business. In the ten years following 1899 the paid-up capital of the banks increased from $64,000,000 to $96,000,000, a gain of about 50 per cent. In the same period the deposits of the banks grew from $298,000,000 to $640,000,000, a gain of 115 per cent. The ratio of capital to deposit liabilities was suffered to decline steadily during this period. Meantime the rest or surplus was increased from $30,000,000, or about 50 per cent of the capital in 1899, to $74,000,000, or about 75 per cent of the capital, at the end of 1908. The banks have made the mistake of increasing their rest funds rather than their capital. During these ten years they added $44,000,000 to the rest or surplus. If half of this sum had been added to the capital, the banks would have had in 1907 a total paid-up capital of at least $115,000,000 and would have been abundantly able to satisfy the needs of that year. They would then not have been obliged to ask for the right to issue a taxed circulation and would not

have exposed themselves, as they have done, to the risk of having a tax imposed on all their notes. If it is right to tax the notes issued in excess of the paid-up capital, people are asking, why is it not right and proper that the banks should pay a tax on all their circulation?

Sentiment seems to have had most to do with the increase of the rest fund." There is a popular notion, and the banks have done a good deal to create it, that a bank's solidity and prosperity are somehow measured by the size of its rest fund, and the banks have engaged in unreasonable competition to bring their rests up to the highest possible amounts. Furthermore, bank directors and managers like to have the market prices of their stocks steadily climbing upward. If they divided part of their profits among stockholders in the form of a stock dividend, there has always been the fear that the market price of the stock in consequence would decline and the bank somehow be injured. Bank directors also take pride in the maintenance of a regular rate of dividend. If they can increase the rate and at the same time add a proper amount to their rest fund, well and good, but they shrink

a The general manager of one of the largest banks said to the writer: 'I consider the new emergency law allowing a bank to issue, during certain seasons of the year, 15 per cent of their capital and surplus in additional bank notes by paying a tax, as very unscientific. We have had no real need to increase our capital stock to supply additional notes. The only time there has not been an ample supply of notes was during the cropmoving season of 1907. This season and the panic came together; otherwise we could have handled the situation satisfactorily. Only five banks have ever taken advantage of the new law. With our present powers we have for the most of the year a large amount of our notes on hand that we can not keep in circulation. Then there is a tax on capital stock, so the greater our capital the greater the burden of taxes. The banks take pride in their surplus fund and do not want it disturbed. By adding to it we show that we are gaining in strength each year.”

from increasing the capital stock at the expense of the dividend rate. For all these reasons the Canadian banks during the last prosperous decade have failed to make their capital account grow with their business and are now paying the penalty, for there is no reason in the nature of things why a Canadian bank should be obliged to pay a high tax upon any portion of the currency which the country requires. It is quite possible, of course, that the banks are not paying their due share of taxes. But this possibility furnishes no excuse for a tax on circulating notes. Such a tax in the long run is always paid by the people. In one way or another, either by the exaction of a high rate of interest or by the imposition of unusually hard conditions, banks will probably force their customers to pay the tax on the emergency circulation. Nevertheless the banks will have the annoyance of payment, and few of them will realize that the tax is shifted.

It may occur to some readers that perhaps the government imposed a tax on the "emergency circulation" in order to compel its retirement at the end of the cropmoving season. Such a thought was in nobody's mind when the law was passed. Everybody knew that the notes, whether taxed or not, would be retired automatically in January. However, the country's business is growing so rapidly that some of the banks, if they do not increase their capital, may very soon have difficulty keeping their circulation within limits even during the dull months. Since the business of the banks, as indicated by their deposits and loans, is increasing at a much faster pace than their circulation, the natural and proper increase of the capital account should be sufficient in the future to permit an untaxed circulation adequate at all seasons of the year.