Chapter 13

institutions, and governing boards; and upon security, as before mentioned, to furnish payments, and make orders or conveyances on the branch banks or on correspondents.

e. Upon prior security, to buy on behalf of outside parties, effects of all kinds, including the precious metals; and after delivery to sell the same.

f. To receive money for circulation or on deposit, with or without interest, the sum of interest-bearing deposits not to exceed that of the capital stock and reserve fund.

g. To accept the custody or other management of objects of value.

Besides the Imperial Bank there are in Germany eight very large and powerful banking institutions and a considerable number of smaller and less powerful ones. The eight great ones have each its head office in Berlin, and connections, through branches, agencies, and controlled institutions, in other parts of the Empire, the German colonies, and foreign countries. Together they control about eighty per cent of the entire banking capital of the Empire. In reality they are federations of banking institutions, many of which were once independent, and some of which were promoted and established in the interests of the group.

While these eight institutions are primarily engaged in commercial banking, they are also promoters on a large scale of German industry and commerce, both at home and abroad. Through interlocking directorates, stock ownership, and in other ways, they are closely allied with the leading industrial and transportation interests of the Empire, and they have been and are leaders in the promotion of these interests in other parts of the world, notably in the Orient, South America, and Africa. They are, therefore, leaders on the stock as well as the discount markets of the country, and are widely influential in investment as well as commercial banking affairs.

These, as well as the other commercial banks, consisting for the most part of local institutions and those catering to special interests, use the Imperial Bank for rediscounts, for transfers of funds between different parts of the country, and as a depository for surplus funds. They do not normally keep on hand more cash than is needed for till purposes. Being in easy reach of an office of the Imperial Bank, supplies can be obtained at any time by checks drawn against credit balances or through rediscounts of commercial bills. Special accounts are carried for transfer purposes and are used even in the transfer of funds between different offices of the same institution.

On account of its right to issue notes against commercial securities, the Imperial Bank has the power to meet the demands made upon it and to supply the country with an elastic medium of exchange. The levy of a tax upon the excess of the issues above a prescribed maximum prevents perfect elasticity, unless this maximum be kept above the highest point which the circulation would normally reach, since the actual levy of the tax forces the rate of discount to such a point as to seriously restrict commercial operations. However, since the line between commercial and investment banking is not drawn by the great Berlin banks with the care that is desirable, and since they have been able at times, especially on account of their foreign connections, to embarrass the Imperial Bank in its efforts to maintain adequate specie reserves, such a tax is probably a desirable safeguard against over-expansion of credit.

_5. The Canadian System_

In important respects the Canadian banking system differs from those of the European countries which have been described and from that of the United States. It consists of a varying number of relatively large institutions, each with several offices administered from a common center, but without a central bank. For some time the total number has decreased, since 1900 from thirty-six to twenty-seven, in spite of the fact that the Canadian law, like that of the United States, provides for the formation of new banks at any time, on compliance with certain prescribed conditions, including a subscribed capital of at least $500,000 and a paid-up capital of at least $250,000. The number of branches, however, has increased rapidly, much more rapidly than the population.

The most noteworthy legal provisions pertaining to the banking business in Canada concern note issues and loans and discounts. Regarding the establishment of branches, the amount, and, with one exception, the composition of the reserves, and many other matters carefully regulated by law in the United States, Canadian bankers are left free to follow their own judgment. Neither is there public examination of banks in Canada. Reports must be regularly made to the Minister of Finance, and he may call for special reports whenever he desires so to do; but neither he nor any other public officer has the right to examine a bank's books or to quiz its officers or directors. In contrast with banking legislation in the United States, another peculiar feature of Canadian law is the incorporation of the Canadian Bankers' Association, an organization resembling in essentials the American Bankers' Association, and the assignment to it of important functions connected with the issue of notes and the winding up of the affairs of failed banks.

Regarding note issues, the chief provisions of the Canadian law are as follows: Each bank is permitted at any time to issue circulating notes to the amount of its capital stock, and between October 1 and January 1 an additional amount, equal to fifteen per cent of its combined capital and surplus, may be issued on payment of a tax to be assessed by the Governor in Council, not to exceed five per cent per annum. The notes are a first lien on all the assets of the bank that issued them, and must be redeemed on demand at the head office and at such other places as are designated by a committee of public officials known as the Treasury Board. As such redemption centers, this board has named Toronto, Montreal, Halifax, Winnipeg, Victoria, St. John, and Charlottetown. Each bank must also deposit with the Minister of Finance a sum of money equal to five per cent of its average circulation. The aggregate of the amounts thus deposited by all the banks is known as the "circulation redemption fund," and may be used in the redemption of the notes of a failed bank. In case the fund is so used, and the liquidated assets of the bank prove to be inadequate for its complete replenishment, a tax sufficient to meet the deficit is levied on the solvent banks in proportion to their circulation.

Regarding loans and discounts, the law aims rather to protect than to restrict the operations of the banks. They may "deal in, discount, and lend money, and make advances upon the security of, and may take as collateral security for any loans, ... bills of exchange, promissory notes, and other negotiable securities, or the stocks, bonds, debentures, and obligations of municipal and other corporations, whether secured by mortgage or otherwise, or Dominion, provincial, British, foreign, and other public securities." The only important restriction placed upon their loaning activities is the prohibition of making advances on the security of landed or other immovable property.

In making loans to wholesale dealers and shippers of produce, the law safeguards the banks by allowing them to take a blanket lien on the goods dealt in by the borrower. This lien applies not only to the goods in possession at the date of making the loan, but to any others which may be substituted for them or manufactured out of them. This lien is prior to that of any other unpaid vendor, except one acquired before the bank's lien was established.

The chief officers of a Canadian bank are the general manager, the chief accountant, the superintendent of branches, the inspector, and the secretary, all connected with the head office, and the managers of the branches.

The general manager is the chief executive and the chief in authority. While he is subject to the board of directors, on account of his wide experience and knowledge his judgment is usually followed. The other officers are appointed by him with the approval of the board, but, almost without exception, from persons who have served the bank in subordinate capacities. The general manager himself is nearly always a man who has passed through the hierarchy of positions from the bottom up, and is therefore thoroughly familiar with every detail of the bank's business and history. The inspector has charge of the examination of the branches, and this work is so carefully and thoroughly done that examination by public officials is not considered necessary, or regarded as desirable by most Canadian bankers. Regarding this matter, however, there are differences of opinion, and changes in the near future are not improbable. The managers of the branches are in strict subordination to the authority of the general manager, though they are necessarily allowed a large amount of discretionary authority in matters pertaining to the branch over which they preside. Unless prevented by distance, they are in daily communication with the head office or with one of its representatives.

In the operation of the Canadian system, noteworthy features are the methods of controlling credits, of managing the issues and the reserves, and of securing unity or at least harmony of action. It is the usual practice in Canada for a business man to do all his banking with one institution. This practice is rendered possible because most of the banks are large enough to take proper care of almost any business establishment in the Dominion, and because experience has demonstrated its wisdom.

The banks compete vigorously for new business but do not attempt to attract one anothers' customers. Indeed a customer who desires to change his banking connections is looked upon with suspicion and is subjected to a very careful examination by the bank that is asked to take him on, including a careful discussion of all the aspects of the matter with the bank he desires to leave. The result of this practice is that a man's banker is thoroughly familiar with his affairs, especially his credit relations, and at the same time feels under obligations to render him such support and guidance as he deserves. On account of this practice, also, commercial paper brokerage does not flourish in Canada.

The notes of the Canadian banks constitute practically all of the hand-to-hand money of the country in denominations above two dollars. The one and two dollar denominations are supplied by Dominion notes--all but $30,000,000 of which are represented by gold coin or bullion--and the lower denominations by subsidiary silver supplied by the government.

Each bank pays out its notes freely to supply the cash demands of its customers, and receives from them on deposit, without hesitation or depreciation, the notes of other banks as well as its own. The former, however, are either sent in for redemption as soon as received or used in making payments to the banks which issued them. Thus notes are cleared as readily as checks and the volume in circulation expands and contracts in automatic response to business needs. The fact that these notes are neither legal tender nor guaranteed by the government does not interfere with their circulation--daily clearings, the first lien on assets, and the redemption fund amply protecting holders against the possibility of loss--but does prevent their being hoarded as reserves or for any other purpose and thus contributes towards their elasticity.

The connection now established by law between the maximum volume of bank note issues and the capitalization of the banks renders necessary the increase of the latter in correspondence with the expansion of commerce in order to prevent a contraction of credit. Present law, however, does not provide for such an increase. It is left to the voluntary action of the banks, which seem inclined to increase surplus funds rather than capital. The permission granted in 1908 to extend issues beyond the amount of capital during the crop moving season, on payment of a tax, is a makeshift and not a solution of the difficulty, since a tax on issues is a means of forcing contraction of credit and not of adjusting issues to legitimate needs.

Since Canadian banks are able to meet the greater part of the public demand for hand-to-hand money by means of their own notes, they do not need to carry in their vaults large amounts of gold and silver coin and Dominion notes. They keep on hand only so much as experience indicates they are likely to be called upon to supply to their customers, plus a reasonable margin for safety and for the payment of clearing house balances. The greater part of their reserves consists of balances in banks outside of Canada, especially in the United States and England, call loans in New York City, and easily salable securities. In case of an emergency of any kind these resources may be transformed into gold or their customers supplied with foreign exchange, which is often as much or even more needed. Gold can at any time be exchanged for Dominion notes if that is the currency wanted.

The lack of a central bank and of a rediscount market is to a degree compensated by unity of action among the banks. This is the result not so much of law as of conditions, among which the most important are: the fact that the six largest banks do fifty per cent of the business and that one of these, the Bank of Montreal, holds most of the deposits of the government and is generally spoken of as the government bank; the fact that the general managers are experts, in first-hand touch through their branches with business conditions in Canada and other parts of the world, and in possession of the same data concerning these conditions, and through the same kind of acquired skill and similar experiences likely to draw the same or at least similar conclusions from this data; common interests in the prosperity of the country and in the prevention of speculative excesses and mutual interdependence in the successful conduct of their everyday business as well as in times of emergency and stress: and the Bankers' Association, which through its journal gives authoritative expression to the best banking opinion and actually acts for the banks in many matters of common interest. To what extent this community of action takes the form of rediscounts for each other in ordinary times it is impossible for an outsider to say, but that it is operative in times of stress is indicated by the manner in which the failures of the Bank of Ontario in 1906 and the Sovereign Bank in 1908 were handled.

In both of these cases the public was protected against loss and panic was averted by the cooperative action of the other banks in assuming the obligations of these institutions to the public, and in winding up their affairs in such a manner as to occasion little disturbance.

While Canadian banks are free to carry on investment as well as commercial banking operations, their published reports indicate that they take care to avoid confusion of the two, or the infringement of one upon the other. Their holdings of investment securities are kept well within the limits set by their aggregate capital, surplus, and savings funds, and their method of handling commercial business, based as it is on accurate knowledge of their customer's operations and upon the lien upon produce heretofore described, prevents their acceptance, through ignorance, of investment securities under commercial disguise.