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IVIap&. pV TIIK BANKING SYSTEM OF CANADA A\!> iiN TIIK PI ei RESUMPTION 01^^ SPECII: PAYiMF^XTS IN THE UNITED STATES, Oclivci'ctl bcfoi'e 11(0 ]\c\y Yoi'k CiU|Vciilioi| o\ tlic American Bankers' Association, BY Sir FRANCIS HINCKS. K. C. M. G-. ' iv J'rfsiffcuf (if the (•ons(>Ti(hit liV TIIK AmEUICAN BANKKRf,' AsS' •( I ATH >.S , 247 Bnmdwfiy. 1877. ADDKI'SS or SIR FRANCIS IllNCKS. -♦♦♦- Mr. I*ri'.tiiit mil} (Ifiilli'incii : Wlicn 1 ift't Monlvcal ii IVw daysa^jo on a short tour, T liail no idea that I sliould hav«' an (>in><)rtiinity of nttfiidin},' your Convt-ntion, and of taking' part in tlu- dis- i'ussinn of (|U('stinns in wli'cli for ni)\V!irds of forty years I liave taken a dot'p inter- est, and t«t tlx' study of wliicli I havr devoted luueli time and tluaiglit. IVruiit mo to tliank you most sincerely for your eoiirteou.s invitation, and to assure yt)U that 1 hii^ldy appreciate it. In accordance witli the sup:fj;estion of your Secretary that I sliould ]»refac(> tlie few olistiviitious that, Avitii your permission, I shall make on tho .subject immediately tuider discussiun. with some aci-ountof our Canadian monetary institutions, \ shall endeavor as fai as po:^sil»Ie, witliin the limits to which 1 am nece.ssavily eoiitined, to touch on those ]i()iii1,s whicli seem to me worthy of notico. Our Canadian banking' system was niodtlled on that whicli formerly prevailed voiT f^enerally in tlm United States. P.anks wt'r<> ch-ot(n'(>d hy the Legislature, with paid up capitals, aiul authority to issue notes redeemahle in .s]>ecie on demand. The charters contained what was known as the double liability i-lause. each share- holder beins liable to the creditoT's of the chartered Banks to an amount e«|ual to his ])aid up stock. There was a small tax on basik issues and the banks were vv- «piired to hold ten per cent, of their cai)i(al in (iovernnu'iit securities. A short time prior to the Confederation of th(> ]i"'itish i'l'ovinces into the Dominion of Canada in 1S(')7 an attempt was made by the (Jovfinment to .substitnt<^ a (.J over n- ment pa])er curren(\v for that of the Hanks, and inducenKUits were held out to the Chartered Hanks to surrender theii' rit^lit (?!' isscu . and to use tlu^ (foveriiment notes, wliich were lepil lenders. I'lie liiink of ]Mo»itreal alone accei»ti'd the terms proposed by the GovernuK'nt. In tiie year isCiJl the Bank <'hiirters expired, ami a renew«'d attem]»t was made to com])el the l>iiiiks to base their issues on (H)vt>rMment securities, very much on th(> jdan under vdiicli the National Bank issues of Ww. United States are re:'ulated. When the Cioveriimeut pro])ositiou was submitted to Parliament it was found that the op])ositioii to it. especially from the I'rovint'o refor(! withdrawn for the tinu', anrincipal banks, I was abh' to mature measures which, having been sanctioned by the First Minister and my otlurcoUeaguesin the(iovernment, wen- approved of by Parliament and became law. The Dominion note system is so connected with the JJanking Act, which is ii gen- oral mea.sure applicable to all the- (Chartered Banks, that it will be convenient to notice them tog(>ther. Prior to lH(i!» the; G<»vernment had full authority to i.ssue notes of all denominntions, but it had no means of circulating them, other than under the then subsisting arrangement with the Bank of Montreal, which it was desirable to terminate, as the other banks were unwilling to concur in it. I pro- 1 1 1 196 2 poHcd to tlio BimkH that thoy .should consfnt to give np their issues of smull notes uuder 84, wliich should in futtire con-sist e.\<'hisively of Dominion nf»te«. I further proi>os(l iind #4. The Government on its part agre(»d to al)andon the tax on bank issues, and idso tiie reciuiroment that tim banks should hold government securities to the extent of one- tuntli of their eupital. 1 may obsfsrve here that the tax on bank not<^s was the only one imposed upon the banks l)ytlie Dominion Parliament, which never ent('rtain(>d for a moment the itlea of taxing l)ank d(>posits or baidi cai)ital, nor, indeed, ami aware that such taxes are in)posed in any other country but the United States. It must be borne in mind that the ('anadiau bunks are not n-tpiired to iiold any special percentage i»f their circulation and dc^tosits as a re.servi;. Stntements are made monthly t<» the (rovernment, and puldisluid without delay, but theamtion of each bank. The Dotninion legal tenders are reihsemable in gold by Assi.stiint Heceiverdrenoral, at Montreal, Toronto, Halifax and St. John, N. B. It may bt> .suppose»l that .such an nrrangement woidd be fouiul inconvenient, as the Toronto notes are a legal tcnuler at Montreal, Halifax ami St. John, though only redeemable in Toronto. In practice no inconvenienect has been felt, and though I think a .single oftic(' of redempti(m has much in its favor, there seems nf> prob- ability of the present arrangement Iteing disturbed. The Dtmiiniou $1 and $1 notes are cinndatetl to tiie extent of about thre(> millions of dollars, but the larger noti'S are kept by tlu» banks exclusively as reserves. The agijregate (rinndation (»f Dominion notes is about .$1 1,2()(>,()(M>. S7,2()0,()()0 are bas»;d on Government securitie.s, and for all the issues exceeding that If uit, the (lovernment is re([uired to lu»ld either gold or bank deposit receipts, the latter being only ])ermitted when the gold is in excess of the ptu'centage recjuired by law, widch varit^s from 2o per (rent, upwards, increa.sing as the circulation increases. Tliere is not the .slightest tiuidency to infla- tion in the Government circulation. The; banks naturally issue their own fives and foui's in preference to the Dominion small Jiotes which onl}' circulate to the extent of the jMiblic tlemand. The large notes ar<> not kept in exd." The National Bank as.sets, held agrtin.st their bank note liability, consist of (rovernment bonds depo.si ted with the treasury. This will explain the objection (uitertained both by the banks imd the public, to the various in'opo.sitii)ns made from time to time to substitutt; Govern- ment ."Securities for commercial paper. Another important ditlerence in our .system from j'ours is tliat ueaily all our banks have a large; numl)er of bninches and agencies, while your practice; is to have no agencies. I note this dit1'eren(;e in our .systtnu from yours, without attempting to di.scu.ss the merits of the two sy.stems. The agiiicy .system nece.ssitates vigilant in.spiH'tion, and certainly has its w'eak points, thongli it has likewise its advantages. A ccuisiderable bu.sinciss is done by advances on warehouse reeeij)ts for produce purchased in the vicinity of the agen- cies and delivered at <)ur c(tmniercial capital —Montreal. Our banks deal largely in foreign exch:inge, and have nearly all London correspondents, whih' two ov three have olfiees of their own in London and Xew York. With r<'gard to the relations between the Government liud tlu* banks, I may mention that the bank of Montreal has been for many years the li.scal agent of tlu; (rovernment, receiving the revenue at all the principal ports of I'utry, and paying the Government cheques wherever requir«;d. Tlu> Governnu-nt of Canada having charge of the construction of public works, has l)een a borrower in London, ami consecpiently a drawer of exchange. Its exchange is ofl'ered to public competition, and the proceeds are occasionally left with the purchasing V)anks, or placed in special deposit at interest. The Govern- ment is also a constant purchaser of exchange to meet the interest on its debt, and this it likt^wise purchanes by tender from the banks. We have not yet introduced the syst«'m of deai'ing house settlements in Canada. There are no special safeguards of solvency, and notwithstanding constant complaint of the ruinous manage- ment of estates by assignees, it strikes me that compositions with insolvents are more rare with us than in England. Gur savings bank law was originally modelled on yours, but was repealed a few years ago. We have an admirableiPost f on eh! bui of (Jo m 1 a b ;^ at resi cin §Bk of H ha\ H ber H ing ^H stai 9 Un 1 ma Hi f smdll notes 'H. I furtlior they should M'iufj; iiiulcr- i S.'iO 1111(1 #4. iiiid iilso the 'wt«'iit of one- wiis the only V t'nt('Vtaiu(Hl inf Montreal he rev(>nue es wherever n of public '. ixehange. ion ally left 'he (lovern- s debt, and introduced 1 safeguards s man age- insolvents 1 originally iirable«Po8t Offiee Savings Vmuk systoin, which is being gi'adnally extended. Several of the chartered bunks Inivr Savings IJaidc d'-partinrntM, and then' are tlirec other savings banks, one at >[oiitn'uh one at (j)ii<'b(M' and one at 'rorontu, which were, at tlie time of tile repeal of tii(> ohl act, s])e('iiilly chartered. It was deemed (>x))edient by our (biveninieiit aU'l Fiegislatun' that institutions receiving deposits from the poorer clas,s<>s of soiMcty should givi^ the same set nrity as tiinse rect'iving tht; dei>o,sits of tlu^ wealthier classes, and when the ol.i savings l»aid\ act expired, about six years ago, it was not reiiewt'il, and tlic few existing institutions were given the oj)tion either to amalgamate witli a chartered ba»k or t"> organizes with a large subscribed capital, twenty-tive per cent, of which should be paid n\), or to wind ti[>. Of the live insti- tutions then existing two wouml up. paying their dci)ositors in fidl, two organized with a proprietary — one with a capitid of t\v(» millions, the other wit^li one million, and one obtained a sjiecial temporary act to continue on its old footing. The Canadian municipalities have a considerable indt'btedness, chietly owing to the num(>rous bonu.ses given to railways. Tht\v are r.Mpiired to submit all iiy-laws for creating these obligatitms for the approval of the tax-payers l)y speciid vote, and there are stringent provisions in the municipal act for enforcing payment of siu^h ol)liga- tionsby meansof rates leviable by th(^ sheritt's. I fear that [ have occupied too much time with these i)reliminary observations, which I have madresent discussion is the resump- tiheiid that the con.se([uence of nisumption Avould 1k> a contraction of the currency, the etVect of which would b(> to limit the loaning power of tin; banks. Now, I ap[)rehend that the loaning ptnvjM- of th(^ National Banks is limittMl i)recisely as it is with us — by the amount of their capital, deposits and circi ' ition. It is the interest of banks to loan as much as they can do with safety. If the National JJanks were eiialded to issue inconvertible notes very much at their discretion, as the old (ihar- tered banks were during the snsp(>nsioii of !,s:J7. tliere would, of coinvse. be an increase to their loaning powt>r ; but under the present .system, tiie National Banks cannot increa.se their circulation, and it really is unimixirtant to them whether they are bound to redeem their lialtilities in convertilile or incouvertiltle It^gal tenders. I beli(;ve that the tendency of resumption woiild l»e to increase the loaning ])ower of the National Banks. I assume tliat it is found protitaltle to issu(i national l)ank notes on tli(( present basis, otherwise tliey would not !)e issued. Now, I Itelieve that the tendency of resumption would l)e to cause a considerable sub.stitution of National J>ank notes for legal t -nders. Under the ])resent .system there cannot be a redundant issui' of National Bank notes, and on the assumption that then' is a redumlant issu(^ of legal tenders, such i^siie v redin-tion of the premium on gold, which is, and must continue to be. lUitwitlistauiling any legislalie a consideral)lc incrcasi^ in the premium on gold. If a bi-metallic stauihird were adopii'd, gold would be at a hitrher )»remium than it is at present, but would not ceas(! to be the real stainlard. Among the a people at large would materially benefit l»y the retention of legal tender circulation. The chief object of maint.iin- ing that circulatiractice the City of New York is the national clearing centre of the Unitod states, as London is for the UnitcMl Kiiij^iloni. Tlio cost to tlio'nation of maintaining' tlit'HH coin icscrvrs wonM Im- cnorniouH, hnt tlic inconvonifnco wcmld be felt even inoH', and tills would lu- intcnsitlrd if it should la? nrcrssmv to move silver instead of j^old. I lulirvc that if nil rlvalr^v Itctwem tlio fj;ovcrnnu'nt and tlu« National Jlanks cotdd las rrniovrd, tho convenience to the latter of the Ic^jal trndei- notes would indu<'e them to withiliaw all opposition to their issue, That it is poH- sihle tt) avoiil liviili-y our Cauadian expericuce places Itevond n doultt. Were it not for the small note issue for tJie KurrentUr of whii-h our hanks ^ot an equivalent in the aholition of the hank tax, a ( lovernmeMt laite wouM never he seen hv the f^cneral public in ("anadii. The notes from .■!:.')() to .'^l.tKMI nrcheld bv the baidis as resevvos, and ('(Mistitute a nuu-h more convenient instrunu'iit than coin for settling Ital- auces. I think that in the I'nited Stati'sit would be desirable that a mutuid under- stantlinj,' shouhl be arrived at lietweeu the Treasury and the banks to the elVeet that the former would issm^ no notes between either .SKMl cu- S."(). and a small lienomina- tict. The reduction of capital I attributi; to tho policy of tlu' eov(>runient which is driviiifj; capital out of baidiin^ by excessive taxa- tion. If national bank notes were obtainable (u* a deposit of -t per ci'iit. bonds,! believe that they would be apl)lietl foi'. and taki> the place of le<,'al tenders t<( a considerable extent. I have not adv/rteil to the mode of <'iVectin^' or pre]>aring for lesumiition, and 1 labor under the disadvantajjfc* of beintj; unaware of the impediments in the way of a {gradual substituticui of I'nited States interest-bear- in{^' IkuuIs for any rcilunilaiit issues. The i)rice of ^old wiudil lead to tho in- ference that the legal tender issues are not much, if at all, in excess of the public re(|uirements. ^Monthly sales of United States 4 jier cent, bonds for lej^al tender ■would soon brine them to par, and if my oi)inion should i)rove correct that after r(\snmption. National Dank notes would taki' the place of legal tenders to a considi-r- abl(f extent, the practical c^Hect would be that I'nited States bonds would be dc- l)ositcd for such increasi'd national issues, and would I'eplace the present legal tenders. If it were ascertained, as it soon would be under a couvi-rtibk' system, whatamoun; of legal lenders would be re<(uired lor public convenience, there would be )io ditVirulty in maintaining an adeipiate reserve of coin at the oilice of redemption, which should certainly b((iii New York and not in Washington. 1 nuiy litre obsirve, that in tinu's of paiuc which, it may be feared. >vill occur from time to time in all countries where extensive cr( dits ai'c given, there woidd b(> less danger of large deniamls for gold in redem]ttion of k'gal tender notes in the United States, than iu England. In the Uuitcnl States, and in Canada likewise, each bank keeps an ade- (|uate reserve to meet its lialiilities, and would, for its own sake, endeavor to keep that reserve as sti'oug as jjossible. in l-jigland, it is admitted by all the V)est writers on the subject, that the banks generally rely on the Bank of England to carry the connnercial clasM's through a ]»anie. That bank is t'ae custodian ci thi^ national reserve, and any oju' who examines the bank's statements a wi'ck or two V)etore the Ovcrend, (Jurney ic Co. failure in ISfiC) and those a fortnight kiter, will at once per- ceive what a load that bank is obliged to carry at a ])criod of financial embarrass- ment. In America tho bunion would fall on the banks generally, and wonld certainly not be so embarrassing. I \m\o, I fear, trespassed too long on your atten- tion, and liavt' to otTer my aiiologies for the dt'fects of this paper, wliich I have had to i)repare (piitc nnexpoetedly, and without having had any opportunity to considt nnthorities. I mnst, therefore, throw myseJf on your indnlgenee and have to thank you for the opportunity of being present on such an interesting occasion. I ' tli(>'nntiou of .('liiriK'c Woiihl I'Msjiiv to move DMli'lit iillil tll(> !<• If^'iil ti'iitlcr riiiif it is poH- Wi'ii' it ii(»t uiMiliut ill tlio hy I lie <4('iK!nil ks lis rcsrrvoH, sctMiiiK- liiil- iiiiitiiiil uiidcr- Jli.' HVfft tliiit lall liciiniililiii- \u' circulation n (lONCi'limclit VL'NcrVCS, Hlld I us 1 Imvo chy tli(> loiili- !.V .siipriior to oil in the Xa- itiil Would not «l" not think trihiito to the xct'ssive taxa- 'cut. I)ond,s, I tondcrs t<» a or pre] taring Lwarc of the intci'i'st-bc'jir- d to the in- of the puldic • lejial tender ect that utter :o a consith'r- ivonld be dc- )re,sont legal tilth' system, there would redoiuption, lore observe, o time in all ger of Lirgc ati's. tliau ill eeps au ade- avor to keep best writers to carry the the national bet'ori' the at once i»er- 1 embarrass- and would your atten- I have had y to consult ive to thank I.