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BROMFIELD & CO. 1869. •** \ 4 db ii{lipil[f;aM(Pi;iiimfT«FWTr<- (^0 ShUI A LETTER TO TDK HONORABLE JOHN ROSE, MINISTER OF FINANCE, CANAi>A, &c. &c. &0. ^n tht m^ttt ti §mUn% mA (Sinxttnt^, FROM THE HON. D. L. MACPHERSON, SENATOR OF THE DOMINION OP CANADA, PROM ONTARIO. TORONTO: E„ T. BBOMFIELD & CO. 1869. i I ^"^WW^'BPPi^P'""^ .'•■ fN'^": ISimifL 2 .(I .lUu dHT s-^^^i TO THE HONORABLK JOHN KOSK, MINISTER OF FINANCE. &('. Toronto, 6th July, 18H9. Sia, — 1 take leave to address you upon the subject of the Banking and Curroncy Rot-olutiona submitted by you to l^rliauient last session. 1 plead as my excuse the great public importance of the subje<'ts, and my belief that they re((uire much discussion to be well and thoroughly understood. I adopt this mode of presenting my views to yoursi^lf, and through you to the country, as being the only one open to me ; for, as the Resolutions were withdrawn iu the House of Commons, I had not the opportunity of speaking upon them from my place iu the ISenate. I am also influenced by the further consideration, that up to this moment your own speech, when introducing the Resolutions, is all that has gone to the country from Parliament, on the subject, with the exception of telegraphic summaries of the able speeches of Messrs. Cartwright, Hillyard Cameron, Gait, Morris, and Gibbs, against the measure. Their speeches have not appeared in full, although it was understood verbatim reports were taken. It is 10 be hoped these, will yet be givep to the public. However, I do not consider that any apology is due for addressing you on so paramount a question as the currency, which affects the affairs and condition of every individual in the State. No one is rich emmgh or poor enough to be beyond its influence. The universality of its interworking s eloquently described in the following words of one who for years was admittedly the first statesman of England ; '* It enters into every transaction of which money forms a part. '• There is no contract, public or private — no engagement, national or " individual, which is unaffected by it. The entcrprizes of commerce, " the profits of trade, the arrangements made in all domestic relations "of society, the wages of labor, pecunit-iry transactions of the highest " amount and of the lowest, the payment of the national debt, the pro- •' vision for the national expenditure, the command which the coin of " the smallest denomination has over the necessaries of life, are all *' affected.' iivSS Bcfori! discussing the hcIioiiio proposed by the (lovornment, I will conhidcr briefly tho working of the oxi«ting bnnkiug sy^itcnl. Modelled after the Scotch sjstem, it hap existed "ory much us it now is since Banks were first established in the country. It is universally udmitted to have been, on the whole, eminently successful. It has supplied tho country witli a currency, redeemable in gold on demand, satb beyond that of any other country during the same period. It has contributed largely to the development of the resources of the country Its elasticity permitted it tu expand und contract, according v the trade of the country required. Its peculiar adaptability to the wantn of the country was universally recognized by the people, and it had come to be regarded by them with pride and as really national. Until the failure of the Bank of Upper Canada in 1866, no institution ranking as a Canadian bank had become insolvent;'*^ and it is the only instance — if it be one — in which note-holderH need be losers, and that only to a very small amount. The causes of its failure are too well known to require me to dilate upon them. I must, however, in justice to that bank say that the losses by its failure are insignificant when considered against the benefits it coa- ferred upon the country. Many wealthy families in Ontario owe their prosperity to assistance rendered them in former years by the Bank of Upper Canada. Much of the business done then would not be con- sidered strict banking now. But the circumstances of the country were entirely different, and it was not loans such as I refer to that brought ruin upon the Bank of Upper Canada. The Commercial Bank of Canada suspended in 1867, but it wom not insolvent ; it was amalgamated with another bank ; and no loss was incurred by any of its creditors. The Royal Canadian Bank was also under the necessity of sus- pending recently, and although it never occupied the high position in the public estimation that the Bank of Upper Canada and the Com- mercial Bank did, its notes have been in demand at from 2 to 4 per cent, below par. These facts prove that, in the past, the circulation has been well secured. Notwithstanding that our system has worked so safely and satisfac- torily for about half a century I do not say that it is perfect, but I do The " International," the " Colonial," and one or two other similar oonoerni not deterring the name of banks, attempted to get a footing in the ooautry but failed. any, thnt. with n f"W atnendninnt? ffuz^cstcd by experience, the noteholders would, under it, W n\(>ro .sociiro th:m under any other nystem yet sug- gested ; while no other yet propounded possesHCS the quality of clusticity whieh is so iiuportant, I m'ly say, indispensable, in thin Dominion, especinlly in the t;reiit nu^ricultural Prnvine*' of Ontario. It is noteworthy that no Solvent Bank suspended in Canada until after the '■ Provineial Note Act," eommonly known as the " Legal Tender Act," fouTid :i place in tho Statute Book. Many are of opinion, and I confess I .^h.-ire in that oj)inioii, that but for that Act no solvent Bunk would have suspended to this day ; and tliat the Bank of Tpper Canada would have been the solitary instance of failure. Considerinj" the true merit.s of our system, exemplified in the country's <;reat prospc^vity and progress, to which our Banking system has been the hand-maiden, I think you might well have withheld the jidverBo criticisms in wliich you indulged in regard to it; and refrained from suggesting that I'rauds might bo committed under it. which never had been con^siiitted, or attompted. and which could very easily be rendered impossible. It w;is no light matter for one in your high position, to utter words calculated to shake the confidence of the people in the currency of the country ; and in my opinion, it would have been wiser, and more for the interests of the public, to have amended and impi'oved what was known to possess so much that was sound and suitable io tlic country. ln.-fl would oontinuo to enjoy the privilege of fixing the price of their commoditief, whether Billn of Exchange, wheat or nierchandiHe, according to tho value of the currency in which they were to be paid for the same : and they would tako care to increase their price not leis than enough to cover the depreciation of the currency, whether legal tender or not ; and to compel particH to accept a depreciated currency, in payment of debts, would be so un- just that 1 will not believe Parliament will enact auioasurc to enforce it. With respect to securing the note-holder, of course it sliould be done abHolutely, but I fail to discover anything iti the past experience of the country to call for the extraordinary provisions apparently intended to secure this end, set forth with romarkuble prounncnce in the Government Resolutions. Tt is undeniable that under our existing system there has been less loss to the note-holder than under imy in Europe or America. If it be deemed advisable to increase the security of the note-holder, and I think it should be done, so as to render the currency safe and immediately redeemable beyond peradventuro, it can be effected by simply declaring the notes a first charge on the assets of the Bank, including the double liability, and by providing an efficient Grovernment inspection. If the same rule would apply in thi.s as in the ordinary aflFairs of life — and I know of nothing to withdraw it from the influence of that rule — I submit that the most effectual way of securing the currency would be l»y strength- ening the institutions through which it is put in circulation, and which are responsible for its redemption, viz: — the Bank.^. Instead of doing this, or at least leaving their strength unimpaired, you proposed to weaken them most seriously by withdrawing from them their capital to an amount equal to their circulation, the result of which would certainly be to in- crease the risk of their suspension or failure without increasing in the least the ultimate security of the Bank notes. The reasons are very obvious. The banks, instead of having their capital in hand as they have now. would have a large portion of it locked up in Government securities, inconverti- ble, so long as they were able to keep their doors open — and they would thus be reduced to carrying on thoir business mainly upon their de- posits, that is upon their liabilities, payable on call or very short notice. Could anything be more unsound or perilous 'f We know, how in the cases of the Commercial and Royal Canadian Banks, the suspicion or knowledge that a portion of the capital was lost or locked up. excited alarm and produced a run upon them by both noteholders and depositors. i: 8 How much sooner would this be the case under a system that required the locking up of a large portion of the capital in an inconvertible shape. Banks having control and possession of their capital, can readily in times of financial stringency strengthen themselves by diminishing temporarily their discounts or^loans. Their current loans and Bills Receivable ma- ture from day to day, their assets flow in to their relief, and their posi- tion at once becomes safe and eatiy. But under the system proposed by the Grovernment the sound and proper relation between maturing assets and maturing liabilities which exists in all well managed concerns, whether banking or other, would be destroyed ; the loans, being made, not out of share capital, but out of deposits, that is, debts due by the Banks, might not mature fast enough to meet the demands of depositors and noteholders ; demands stimulated perhaps by some unlooked for cause or rumor, and, if not instantly met, insolvency or at least suspension would be inevitable. Depositors would take the alarm much earlier, knowing that the capital was locked up, and that if liquidation ensued, noteholders would be preferred to depositors, and deposits payable without notice preferred to those requiring notice before withdrawal. This last feature I will remark upon further on. What would be thought of the Directors of a now Bank, who, before commencing business and issuing notes, invested an amount of its capital equal to its intended circulation in unquestionable mortgages and placed those mortages in the hands of an Official Assignee with instructions to realize them for the benefit of the noteholders, depositors, and general creditors respectively, provided the Bank failed to do so ; reserving in tbeir own hands only 20 per cent of their capital in gold, and a further moderate percentage for general business? Would they command credit from the public ? Would they deserve it ? And yet, if you will read " Government debentures "for " mortgages " and the " Re- ceiver General" for the "Official Assignee"you cannot fail to recognize the chieffeatures of the Government measure. You may, perhaps, say that mortgages are not Government securities, nor equal to them, but I maintain that first-class mortgages are second to no other security ; and if it became necessary to convert them in times of panic, and it is in times of panic they would most likely have to bo converted — I am inclined to think the Official Assignee would find them quite as easy of realization as the Receiver General would the Government securities. The Assignee would sell without hesitation ; the Receiver General might, from consideration for the public interest, be unwilling to have sales, made 1!: 9 under authority of the Government, quoted at reduced prices; and yet in times of tinuncial pre?!*ure they could only be sold at reduced prices. Iti this, I think, is disclosed the germ of a most objectionable centrali- zation. To many persons a currency issued on credit of Government securi- ties seems plausible. At one time I myself looked upon it with some favor, but investigation and study have satisfied me, as I am sure they will all who devote their minds without prejudice to the subject, tliat that principle is entirely delusive and pernjcious. In England, where it has been partially in operation since 1844, the system brought the Bank of England, the most powerlul nionied institution in the world, to the very verge of suspension upon three different occasions; catastrophes only averted by the Government authorizing the Bank to increase its issues in violation of the provisions of its charter. Had the porticn of the capital of the Bank of England which is loaned to the British Government, (upwards of £11,000,000 sterling,) been employed in legitimate Banking Loans, maturing from day to day to meet liabilities, who can doubt that the Bank and the country would have been spared the danger and much of the loss that resulted from the crises of 1847, 1857, and 1866? The fundamental feature of your project is analagous to the English system in so far as that is worked through the Bank of England, namely, resting the circulation upon Government indebted- ness, and, after the Government appropriating an amount of the banking capital equal to the circulation, calling the circulation by the pretentious title of " Government-Secured Currency." If the powerful l^ank ol' England would have had to succumb under the system, but for the intervention of the Government, what prospect would there be for our Banks under it ? The British Government might come to the relief of Chv wealthy Institution, with a rich and influen- tial proprietary like the Bank of England, but would it be possible in this country for our Government to do so with many Banks con- cerned ? And would it be desirable or judicious to inflict upon this country, with its limited accumulation of capital, and dependence upon credit, a system that, in the opinion of many of thebest infornu^d upon the subject in the mother country, has brought heavy disasters even upon England, with all her wealth ? Why should we be asked to sub- stitute for our own, that has worked so well and beneficially, a system that is widely condemned, and that is not likely to remain long unchanged ? / 10 ' It is well known that Government securities constitute the basis of the bank note circulation of the United States, but it is equally well known that in that country the bank note circulation is redeemable, not in {^old but in Government notes, co;amonly known as ' greenbacks.' The ' greenbacks ' and bank notes are alike depreciable, fluctuating constantly in nominal value, causing the value of all property in the country, moveable and immoveable, to be unstable and precarious. The financiers of highest repute among our neighbors are agreed in opinion that the only remedy for the deplorable depreciation of their currency is to be found in a return to specie payments. t' ' ♦ Until they accomplish this, and demonstrate that their present system can be worked successfully and advantageously for the country on a gold basis, it would be better not to be tempted to imitate it in part, lest we should be drawn on, and finally — unable to retrace our steps — be compelled to adopt it altogether, and discover when too late that we had exchanged our own excellent system of currency for an irredeemable and depreciated one, under which our bank notes would be convertible, not into gold, but into Dominion ' greenbacks,' also inconvertible and of course depreoiated. Instead of attempting to describe the evils of an irredeemable paper currency, in words of my own, I shall quote those of a gentleman, lately occupying the highest official position in the Finance Department of the United States — the late Secretary of the Treasury, in his report to Congress in December last. This was his opinion after he had had for years the best opportunities of observing the effects of this system : "The financial difficuJties under which the country (United States) is labouriuj;; niaj-^ he traced din'ctly to the issue, and coutitiuance in circulation, of irredeemable promises as lawful monej'. The country will not ho really and reliahly prosperous until there is a return to specie paynjents. The question of a .solvent convertible curreury, underlies all other financial and economical questions. It is in fact a fundamental question, and until it is settled, and settled in accordance with the teachings of experience, all attempts at other financial and economical reforms will either fail aljsolutcly or be but partially successful. A sound currency is the life blood of a com- mercial nation. If this it. debased, the wliole current of its commercial life must be disordered and irregular. Our debased currency must be retired or raised to the par of specie, or ceasi' to be lawful money, before substantial progress can be made. The provision in your Resolutions to secure Deposits on call over those requiring notice before being withdrawn, is to me as unaccount- able as it seems objectionable. Why prefer Depositors who can remove : :,• '.\, ..'■- }:■ . 11 their money without a moment's notice, to those who must j^ive 10, 20 or 30 days' notice before reniovinc; it, no matter how c;rave and well- founded their appi'ehcnsions may be respecting the stability of the Institution in which their money is deposited ? It is well known that the Deposits of the former class consist mainly of merchants' balances, varying from day to day, while the others consist largely of the savings or the industrious and frugal. If either class should be preferred, surely it should be the latter, but in my opinion neither should. It would be unsound and unjustifiable ; an improper interference with the business of Banking, and a meddling with individual aflfairs that should be eschewed by Government and F*arliament. If enacted into Law, I fear this objectionable provision would tend to divert deposits from the Banks, and, to whatever extent it might do so, from the pursuits of Commerce and enterprise, where money is so much needed. Another very great objection to the (iovernment scheme, and one that certainly would not only deter many from becoming shareholders in banks, but cause many to transfer the capital they now hold in that form to investments less promotive of the common weal, is that, with a large portion of their capital locked up beyond recall, in Government securities, they would be exposed not only to the hazards and vicissi- tudes that attend the business of banking, but also to those to which the public finances are always liable. The value of Government securi- ties would necessarily be an element for consideration in determining the value of bank stock. 1 have now placed before you my reasons for believing that the objects the Government profess to have in view would not be attained by the means proposed for their accomplishment. That first, the establishment of a currency, uniform in value from British Columbia to Newfoundland, reifeemable oi ly at certain points far dis" tant from each other, would be an impossibility, and that to make this currency a leg;il tender, would bo unjust : and secondly, that the main feature of your plan does not really add anything to the security of the note-holder, but on the other hand detracts from it ; that, in short, a bank note circulation cau be rendered perfectly secure by means much more simple and much less prejudicial to tlit" public interests than those you propo.se. Under what may be called the Canadian system, amend-^d as suggested, the notes of our Bauks would continue in favor as here- tofore, circulating freely, atid be as much of the legal tender, practically, as any bank note can justly be made. I will now proceed to ?ot. before you what, should your scheme receive the assent of Parliament, I believe would bo the consequences • to the public ; the effect upon the volume of capital available for the purposes of trade ; and also upon its price, for I think we may fairly assume that, under any system, the banks will manage to obtain from the public — from borrowers — rates of interest sufficient to remunerate them. The question is one, therefore, that affects the people much more than it docs the banks. Whatever renders money f'carce, must render it dear. The price of money, like that of other things, is regulated by the law of supply and demand. , '' ' "' ■ -''^ ' The circulation of Ontario and Quebec together, including Dominion notes, in October 1868, was in round figures $16,000,000. which would be the sum to be transferred to the public chest for invest- ment in notes countersigned by Government (less 84,000,000 already paid for the Dominion notes now in circulation). The banks issuing the notes would be bound, however, to redeem them on demand, out of what might remain of their capital. To meet all demands beyond what would be suificient to satisfy this requirement they would be dependent upon their deposits, which are in fact demand liabilities, and so liable to be with- drawn at any moment. Your scheme contemplates that the absorption of this amount of $1 2,000,000 would be gradual, extending over five years, from 1872 — but I fear that it would be much more rapid in its operation. As soon as two kinds of currency began to circulate, one represented i\s secured, the other as not secured, the secured would be stipulated for, and banks would be forced to provide themselves with the secured cur- rency more rapidly than the law required ; and it may be doubted if this process would be objected to by the Government of the day. Owing to the fact that Ontario requires a much larger proportion than Quebec of the aggregate circulation of both Provinces, it becomes necessary to consider what the effect of the proposed scheme would be upon her interests. It is impossible to arriv,, at the precise circulation of each Province; but that of Ontario is little — if any — under four-fifths of the whole, so that her contribution to what, disguise it asycu m.ay, would be neither more nor less than a compulsory loan, would be about nine and a-half millions of dollars. All the means now in the bauds of the banks — capital, deposits and circulation — are employed in the business of the country, less the need- IS ful reserve, and tho. amount, required to put in operation the scheme of the Guvernmcut could only be obtained by contracting the loans now out, Id discounts or otherwise, to the merchants and manufacturers of the country — by, in short, withdrawing these nine and a-half millions of dollars from where they are now employed in the industrial pursuits of Ontario, to invest them in Government securities, there to remain, at interest it is true, but inconvertible to the amount of the circulation. You assume in your speech that a smaller amount of specie reserves would suffice under the proposed system than under the existing one, and that this would mitigate the effect of the withdrawal of capital — but the evidence of almost all the practical bankers given in answer to the queries of the Banking Committee of the House of Commons, of which jou were Chairman, is opposed to your view on this point. I cannot see why smaller reserves should suffice than at present, for all familiar with the business of the country are well aware that heretofore Bank Notes were not returned for redemption from any lack of confidence in them, but simply in the ordinary transactions of business, the payment of debts, and the investment of accumulations. Under the proposed system, gold will continue to be the standard, and notes would be exchanged by the Banks daily as at pre^^ent. It therefore could make no differ- ence in the amount of the reserves, and we may safely assume the Banks did not hold more in that unprofitable form in the past than experience taught them was essential to safety. In order to show, again, how unequally and oppressively the proposed measure would bear upon Ontario, as compared with Quebec, I would point to the fact that the circulation of the five Banks which may be said to confine their business to Ontario, viz., Bank of Toronto, Ontario Bank, Canadian Bank of Commerce, Royal Canadian Bank, and Nia- gara District Bank, averaged in October last upwards of 110 per cent, of their capital, while the circulation of the five Banks, — Banque du Peuple, Molson's Bank, Banque Nationale, Barque Jacqueb Cartier and The Union Bank of Lower Canada, — which confine their business to the Province of Quebec, averaged at the same period less than 10 per cent, of their capital. Is it necessary to say more to prove that a change, which might be introduced into the one province without inconvenience, would be disastrous if forced upon the other ? In the Province of Quebec, the Banks doing buuness exclusively I r- H ' i: i: I! thcrciu would only have to cxchan;rf: the Government Debentures, which they hold under their present cliartcrs for an equal amount in the proposed Bank notes. But consider how different it would be in Ontario ' The reason Ontario re((uires so much more circulation than Quebec is eswily found. It is because the one is chiefly aj^ricultu- ral, and the other chiefly commercial. A town in Ontario, the centre of a good wheat growing district, may re(juire a lar;^er amount in bank- notes, in its daily business, at certain seasons, than the city of Montreal. The a;.'gregatc of the transactions of the former would be very small compared with those of the latter, but in the one case all would be carried on with bank notes, and in the other almost entirely with merchants' cheques. T would not have you imagine that 1 am opposed to the invest, ment of a portion of our wealtli as it accumulates in Dominion Securi- ties. On the contrary, I would like to see the people interested in them. •' The price which they now command proves that they are in favor, and, if they were ofl"ered conveniently, I have liUle doubt they would voluntarily be subscribed for in considerable amounts. What I do object to is the proposed enforced loan to the Government through the Banks ; in fact, changing the Banks from in-stitutions intended to lend money to the commercial and industrial classes of the community into lucre Incorporated Associations of public creditors. 1 do trust, for the sake of the country, that this never may be accomplished. The only other feature in your proposed scheme, which 1 shall notice in this letter, is that which I consider its greatest defect, the entire absence of elasticity. All who are familiar with the trade of Ontario know that the circulation expands and contracts during cer- tain moiiths of the year, with as much rcf^ul.irity as the tides ebb and flow ; expanding after harvest, for purchasing the products of the soil and moving them to market ; contracting after that has been accom- plished ; expanding again in spring under the accumulation of agricul- tural products and timber purchiised and manufactured during the winter, and again contracting at midsummer. The amount of expan- sion is variable, ranging from three millions to over six millions, and is governed by the harvests and prices. When high prices range concur- rently with a bountiful harvest, as in 1865, the expansion is very great. Tn that year, within a period of three months, between July and October, the circulatioq almost doubled, rising from a little over eight millions in July, to upwards of fourteen and a quarter cer- and soil millions in October. Who can estimatu what would have been the con.soqueuces to Ontario, if wo then had had a " cast- iron " system such as la propo.-^i'd, iuatcud ol" one that allowed an ex- pansion of upwards of i$(),00(>,UOO lo meet the rtquiremt nts of the country ? What would have been the effect upon Lhe value of her pro- ducts that year? What diflerence would it have made iu the price of every bush( 1 of wheat to our fanners ? H ow many of them wo\ild not have had mortgages upon their farms now, which were then paid off ? Who can tell the difference it would have made to the manufacturers of the Province: and in short, to the great producing interests of the country, and to the multifarious industrioB, comnu^rcial, manufactur- ing and mechanical, dependent upon them ? .1/ And what took place in 1865 is only an example of what takes place every year, differing only in degree. . ;• The only remedy you suggested for the inexpansiveness of the (lov- ernment measure, was that the banks might reserve in their vaults the mcan.s to supply the increased wants of the country in moving the crops to market. But is it reasonable to expect banks, any more than individuals, to keep funds idle during nine months of the year, just to oblige thuir friends for the other three months, when they could readily employ them profitably for the whole year ? I hiive endeavoured to point out to you the un,;uitableness of the Government measure to the requirements of Ontsirio. Ifer opposition, it its understood, caused the m^-asure to be withdrawn. Kad it been dropped altogether instead of postponed, I slioidd not have troubled you with this letter. 1 hope the Administration will be persuaded that the longer it is considered, the moi-e fully it is discussed, and the bettt^r it is understood, the less likely is Ontario to become reconciled to it. T therefore entreat the CJovernraent to abandon all intention of re-introducing it next session, and to amend judiciously the charters of the banks, and extend them for a number of years, so that the public mind may be set at rest upon the (jucstion, leaving men free to prosecute enterprises, which, in an unsettled condition of the currency, they would shrink from entering upon. The Dominion Note Act should, of course, be repealed. Tliere never was a time when the interests of the country re((uired a firmer confidence iu the future of our finances aud credit. New and important enterprises are being projected, not confined to Ontario, but extending even to our newly acquired North- 4 ' I 1^— .16 West Territory. And in Ontario, enterprises involving large amounts of capital are not only projected, but actually in progress. I may men tion the two railways, penetrating from this City to the North- Kast and North- West, the latter opening up the great productive peninsula of this province, the graaary of Ontario, as Ontario is the granary of the Dominion. These organizations have been completed, and capital subscribed in the form of bonuses and share Capital to the amount of $2,000,000, of which $900,000 have been subscribed by this City, in her corporate capacity, and by her citizens. The roads are to be con- structed entirely with municipal and private capital, without Govern- ment aid of any kind, all bearing striking and gratifying testimony to the enterprise and liberality of the people, and constituting additional reasons why their means should not be curtailed nor their energies para- lysed by a currency scheme unsuited to their wants. I have said nothing about the Maritime Provinces, but, as they came under the proposed system, they also would necessarily have to pay the amount of their circulation into the Treasury of the Dominion in gold. I have the honor to be. Sir, Your very obedient Servant D. L. MACPHERSON. K'M t • ^iV I- i, ■> .^~..J „„