Strictly speaking, "cash reserve" means only the first, but a banker usually has in mind both the first and second when speaking of his "cash reserve." He keeps on hand a supply of cash, either gold or Dominion notes, more than ample for the settlement of daily balances at clearing houses. The counter demand for cash he knows by experience can be met almost entirely by the use of the bank's own notes. In order to be prepared for any emergency that may arise, such as a panic in Europe or in the United States, the failure of a large customer, the suspension of a bank, an unexpectedly adverse balance of trade, any of which events might cause a demand for gold for export, he keeps some money on deposit in banks outside of Canada, lends some on call in New York City, and invests some in securities easily marketed. All these funds are thought of as part of the "reserve."

Although the law is silent on the subject, there is a tacit understanding or agreement among the banks that in ordinary times the cash assets of a bank ought to equal 15 per cent of its liabilities and that at least 8 per cent should be in cash on hand, the remaining 7 per cent being in balances due from other banks.

From the American point of view the Canadian banks carry a very small amount of cash. For example, on

January 1, 1906, it amounted to only $61,000,000, whereas the net liabilities, notes as well as all deposits being included, amounted to $610,000,000, the ratio of the cash on hand being only about 10 per cent. In November of the same year the cash on hand stood at $75,000,000

and the net liabilities at $705,000,000, the ratio of cash to liabilities being still only a little over 10 per cent.

For many years the cash-on-hand reserve of the Canadian banks has averaged between 10 and 12 per cent of the net liabilities. Some banks constantly keep on hand a higher ratio, and others a lower. The ratio varies with the same bank at different times. At one time a bank may feel abundantly protected with a cash reserve of 9 per cent; at another time its managers may see occasion for holding a larger amount of cash. Again a period of business depression, by lessening the demand for money, may cause cash reserves to increase more rapidly than satisfactory investment can be found in call loans or securities. This situation arose in 1908, when the cash reserve increased from $83,000,000 July 31 to $97,000,000 December 31. On July 31 of that year deposits were reported at only $568,000,000. By December 31 they had increased to $640,000,000. During these months the ratio of cash to net liabilities exceeded 12 per cent, and in the case of many banks was much larger than was necessary. As a result the banks added to their credit balances in banks and agencies outside of Canada, thus getting a low rate of interest on part of their surplus funds and increased their call loans in New York.

CALL LOANS IN NEW YORK CITY.

New York City is the favorite call loan market, and several Canadian banks find it profitable to maintain branches or agencies there. In the eyes of a Canadian

banker a call loan payable in New York City and secured by high-class collateral, is practically equivalent to cash on hand. In normal times he can convert the loans into money within twenty-four hours, adding to his cash on hand either by the sale of New York exchange or by an importation of gold. If times are panicky in New York and stock market prices are tumbling, the Canadian banker is among the first to get rid of all loans based on securities about which there is the slightest question. If the situation gets so bad that the New York banks decline to ship gold, as they did in 1907, the Canadian banks utilize their New York balances for the purchase of sterling bills and so transfer their accounts from New York to London, importing from Europe whatever gold they need.

The call loans in Canada the bankers do not rely upon as in any way equivalent to or as a substitute for a cash reserve. Call loans in Canada are really not payable on demand. The securities put up as collateral can not be quickly marketed without a sacrifice and bankers know very well that they can not rely on such loans as a means for increasing their cash in an emergency. Even though this were not the case, these loans could not be reckoned as a source of strength to the Canadian banking situation, for the payment of the domestic call loans would not add a dollar to the country's cash on hand. Its only effect, as events have often illustrated in a parallel situation in New York City, would be a reduction of bank deposits.

INVESTMENT SECURITIES.

In their choice of investment securities the banks are not hampered by the law. They may purchase not only government and provincial bonds, but also the stocks and bonds of both Canadian cities and cities of foreign countries, and the stocks and bonds of domestic and foreign railways and industrial corporations. On January 1, 1907, the Canadian banks held securities as follows: Dominion and provincial government securities, $10,300,000; municipal securities, $20,000,000; railway and other bonds and stocks, $46,000,000, making a total of about $76,000,000. The fluctuations in the amount of total securities held are not great or frequent. When the banks need a larger supply of cash, they prefer, as a rule, to reduce their call loans in New York rather than to sell securities. During the three years 1906-1908 the total amount of securities held by the banks ranged from $63,000,000 in March, 1906, to $74,000,000 in December, 1908. During eighteen consecutive months of that period the amount varied by only $1,000,000.

Bankers do not place much reliance upon securities as a part of the reserve. These constitute a sort of auxiliary reserve, on which the banks expect never to be forced to lean. But credit balances and call loans outside of Canada are "cash" to most Canadian bankers and are quite commonly included in what they call their cash reserve.

Some of the banks in calculating their reserve make a distinction between demand and time deposits, figuring that the time deposits are protected by the cash on hand

and the time deposits by credit balances and call loans outside of Canada. The manager of one of the largest and most conservative banks said to the writer:

"We aim always to have on hand a cash reserve equal to 33 per cent of the demand liabilities. We We carry also a reserve of about 25 per cent of the time deposits in the form of funds in New York and London, either balances in banks or call loans. We consider this a kind of secondary reserve."

Their call loans in New York subject the banks to considerable criticism. Some people assume that the money loaned in New York rightly belongs to Canadian industries, and that it would be loaned in Canada if only their bankers were not so eager to make "easy" money in Wall street. This criticism betrays ignorance of the nature of the Canadian banking reserve. If either the law or public opinion should prevent the banks from lending money in Wall street, Canadian borrowers would be no better off than now. The banks merely would be obliged to carry in their own vaults the money they now lend in New York. As their earnings would be less than now, quite possibly their equipment and facilities would also be less and the Canadian borrower not so well cared for as now.

The statistics furnished by the banks in their monthly returns to the government are shown in the following tables, which give the totals for the months of February and November, 1909.