toward its assets, it is exceedingly desirable that this contribution be made as large as possible, for, other things being equal, the strength of a bank varies with the amount of its capital. It is not unreasonable, therefore, to require that banks in return for the useful note-issuing privilege should be required to keep their capital resources large.

When a Canadian bank has reached the limit of its note issue-which has rarely happened-it begins at once to treat the notes of other banks very much as if they were its own. Instead of going to the expense of sending them in for redemption, it uses them as counter money, paying them out to depositors in response to their calls for cash. If all the banks in Canada should issue notes up to the limit, as some of them did during the exciting months of 1907, and if the current rate of interest did not warrant the issue of the taxed notes provided for by the amendment of 1908, the note circulation would immediately lose its elasticity. As further expansion would be impossible, the banks would have to meet any increasing demand for currency by paying out gold and Dominion notes, thus depleting their reserves. Such a situation would doubtless lead to a sharp advance in the discount rate and to the importation of gold.

THE PRACTICAL LIMIT UNDER THE LEGAL.

It should be noted that the practical limit of note issue is about 10 per cent below the legal limit. The manager of a bank having a paid-up capital of $1,000,000 begins to get nervous when his circulation equals $900,000. His office may be in Montreal and his bank may have branches

in the far East and in the far West and in the mining wilderness of the North. Some of these branches he can not reach by telegraph and some are distant a week by mail." He immediately sends warning to all the branches and cautions them against any large outgiving of notes and against entering into transactions which will be likely to lead to unusual demands for currency. On account of this situation, even in times of greatest pressure, the total issue of the banks is usually 10 per cent below the authorized limit.

Chart IV, on the opposite page, shows the circulation during the last ten years; also the comparative increase of the paid-up capital and the surplus. The reader will note that the amount of notes outstanding is invariably largest in November and smallest in February, and that the surplus has been increased at a more rapid rate than the capital.

a Said a general manager in Montreal: "We have trouble at times keeping exactly within the limit, and have to keep about half a million under it. Our branches always have on hand a stock of notes which if they were all issued would run the total outstanding above the limit. When the total approaches the limit, I notify the branches not to issue above a certain amount, say $10,000, without wiring me. It takes a week to hear from our Yukon branch."

The penalty for excessive issue of notes is severe. If the excess is less than $1,000 the penalty equals the amount of the excess. If it is between $1,000 and $20,000 the penalty is $1,000; if it is between $20,000 and $100,000, the penalty is $10,000; between $100,000 and $200,000, penalty is $50,000. If it exceeds $200,000, the penalty is $100,000. The fact that such large penalties overhang them explains why the maximum issue of Canadian bank notes is usuallv $10,000,000 under the authorized limit.

for their redemption. Since all notes in excess of $30,000,000 are secured by a deposit of gold in the Dominion treasury, their issue in no way increases the revenues of the finance department. The 40 per cent requirement, as a matter of fact, is entirely unnecessary; the notes, being in large denominations, are preferred by bankers to gold and would be utilized by them even though the law did not require it.

To American bankers, trained under the national bank act, the failure of the Canadian law to prescribe a minimum reserve undoubtedly seems a dangerous oversight. To many these questions will doubtless arise: What is to prevent a Canadian bank from assuming liabilities in excess of its redemption capacity? How, indeed, does the Canadian banker know whether or no he is carrying a sufficient reserve? Does not the failure of the law to require a minimum reserve encourage the development of speculative banking and a perilous expansion of credit on an inadequate basis of coin?

In Canada neither among the bankers nor in business circles are questions of this sort ever raised. Canadian bankers and many business men know a good deal about the national banking system of the United States, but they do not hold it in high esteem. On the contrary, they express surprise that a resourceful and intelligent people should have been content for so many years with a banking system so cumbersome and irrational. In their opinion, a law which fixes a minimum reserve against deposits and forbids the issue of bank notes, except on the deposit of government bonds, makes safe and sound banking absolutely impossible.

AMOUNT OF THE RESERVE FIXED BY EACH BANK.

It must not be supposed that the Canadian banks do not carry adequate reserves. On the contrary, every bank manager gives to this subject daily and most conscientious thought. To the Canadian banker the word "reserve" means a fund immediately available for the liquidation of liabilities. How much this fund ought to be depends altogether upon the amount and character of the liabilities to be protected. Theoretically, with respect to its time deposits, a Canadian bank is in the position of a savings bank and in order to be safe need not keep on hand for the liquidation of such deposits a very large amount of cash, but may rely upon investment securities to furnish whatever funds may be needed to satisfy unexpected calls from depositors. Practically, however, the Canadian bankers do not avail themselves of the privilege afforded by the law. All do not permit time depositors to check upon their accounts, but they do pay them on demand, and no Canadian bank would like to have it rumored that any of its depositors had ever had the slightest difficulty in obtaining funds when he wanted them. Apparently, therefore, all the deposits of a Canadian bank belong in the same class and are equally liable to become immediate claims upon the bank. As a matter of fact, however, this is not the case. The time depositor receives interest at the rate of 3 per cent under conditions which will cause him loss if he reduces his balance except on definite dates. A bank manager has learned by long experience when withdrawals of time deposits are to be