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REPRINTED FROM THE ''Morning Chronicle'' and ''British Colonist: HALIFAX, N. S. : A. & W. MACKINLAY. 1869. /i A > fc -f LETTERS ON BANKING AND CURRENCY. LETTER I. The Banking system of the several Provinces forming the Dominion is likely to come up for review during the ensuing session of Parliament. As a preparatory measure, the Dominion Government, through a Committee of the House of Commons, issued during last session a series of questions on the subject, having reference principally to the note circulation, to be answered by the cashiers of the several banks and other persons conversant with the subject. The peculiar character uf these questions shows a very decided leaning on the part of the Government in favor of the adoption of a note circulation based on Government securi- ties, or one issued altogether by the Government, involving, of course, the withdrawal of the notes at present issued by the banks in all the Provinces. The Government of the late Province of Canada, sorely pressed for want of money, and as an easy means of borrowing, com- menced the issue of its own notes through the medium of the Bank of Montreal. The Dominion Government adopted the same system, and extended it to the Lower Provinces. The charters of the Canadian Banks expire soon, and it is supposed that the policy of the Government is to withdraw the privilege of issuing notes when they are renewed. Considerable alarm has in consequence been felt in Ontario and Quebec, and the attention of the public and members of the Legislature has been drawn to the subject by discussions in the newspapers. Although the effect of such a policy, if carried out, will be quite as disastrous in Nova Scotia as in the Upper Provinces, the subject has not received the attention its importance demands. 4 l.r.TTF.RS ON Some time since Senator Wilmot, moved by the financial dif- ficulties lately experienced in New Brunswick, published his answers to the questions reiorred to, in advance of their submis- sion to the Committee of the Mouse of Commons. Altliouerh there is not the remotest probability of his main views being adopted, there is a possibility of the end which he desires being arrived at in an indirect manner by the success of the policy of the Government. Mr. Wilmot advocates a radical change in the currency of the Dominion, by substituting for the bank note cir- culation a Government irredeemable paper currency, h^very sane and thoughtful man in the United States admits and deplores the evils connected with such a currency there, and one of the great- est problems they are trying to solve is how to return to specie payments, — yet Mr. Wilmot recommends its adoption in the Dominion. In his opinion the gold sovereign or dollar should not have any fixed relations to its paper representative — the five or one dollar note, but should be an article of merchandize, now at one rate of premium, and now at another, ever varying in relation to the paper currency according to the supply and demand. He attributes all the financial crises under the sun at one time to the fixed price of gold, which, he says, causes " wealth to accumulate in the hands of the few and untold misery to the masses ;" and at another to the selling of goods on credit, "creating debt unneces- sarily." The foreign trade and exchanges, too, come in for a laige share of blame, as proving injurious to the country. Two things Mr. Wilmot appears to dislike — a fixed price of gold and the foreign exchanges ; apparently his idea is to raise an impassa- ble barrier between the Dominion and the outer world, to prevent exportation and importation, or all foreign trade, and to issue Government paper money, inconvertible into gold, based on nothing, and of ever-varying nominal value, to stimulate internal trade. He would drive gold with its fixed price, and notes pay- able in gold on demand, out of circulation, and substitute paper of no value, and then he expects the millenium, when the poor would become rich and the rich somewhat poorer. This seems to be his grand cure for the financial evils under which New Bruns- wick has been groaning for some time past ; and it is a strange remedy, totally inapplicable to the disease. It has not, according to him, been bad banking, but a deficiency of currency that has caused the distress there experienced. Most persons imagine that the Banks which failed in New Brunswick and Canada did so because they made imprudent -** m BANKING AND CURRENCY. s advances to parties who declined to repay the amount advanced. Ihit Senator Wihuot takes a different view of the matter. More currency, which would not require to be repaid, would work like maeric. But he does not shew how a bank which invests half its capital in a railway, is to be prevented from becoming embar- rassed, nor how a bank can remain solvent when two-thirds of its capital is lost. This is the real difficulty It would seem that no amount of currency could prevent disaster in these cases, and had Mr. Wilmot shewn how it could, then would he be a benefactor to his country. Failing in this, it is difficult to discover the value of his publication in relation to the peculiar state of affairs in New Brunswick. Still it may be of service by provoking discussion, and awakening the public mind of the Lower Provinces to the considerat.on of a question of the utmost importance to the future welfare of the Dominion. Preoccupied as the people of this Pro- vince arc at present with exciting questions, the time is not pro- pitious for calm thought about it. But as the Dominion Parlia- ment will meet in April, and the future of our Banking system will then be decided, and believing that the foreshadowed policy of the Government is one which, if adopted, will be productive of much injury to our mercantile and industrial interests, I take the liberty of calling attention to the subject, and hope that others better qualified will also raise their voices, that a sound public opinion may be formed for the strengthening of the opposition to the proposed changes already in existence in the other Provinces, and which, I trust, may yet lead the Government to reconsider their policy, and induce them to let well alone. LETTER II. Question 2.— State your views on the IJanking system obtaining in the late Pro- vince of Canada, as well as in the Provinces of Nova Scotia and New Brunswick respectively ; and whether, in your opinion, it has been conducive to the development of the material interests of the country > MR. WILMOT's reply. Answer. — The Banking system prevailing in the late Province of Canada and in New Brunswick has been similar. In Nova Scotia, as in England, banks are re- stricted from issuing notes of a smaller denomination than five pounds (^20). The circulation below that consists of Provincial notes to the extent of about two dollars per head of the population. That this circulation has nut been injurious to the banks is proved by the fact that no bank has ever failed, nor any lower dividend been declared than at the rate of six per cent.,— usually much more ; while in the other LEITF.KS ON' Pruvinccs disnslroiis failures liavc rHcabinniilly 'k( inud, cniisinf; loss (o t/ic .slock- li'ildLi-s ami noteliolilers, and iiiconvcnicinc to tlic pulilic at l.iinc. Ddul.tlos tlic exibting l!anking system has l)cen CDiidiaivc to Hie drvclopiiKnt (it llie iiiatfiial resources of the country, ])ut heing too much dciicndcnt upon credit and tiie state of tile forei},'n trade, has, wlien the foviinn exchanges Irave hecu adverse, inttiisilicd ilie periodical revidsions in Ijusincss wliich have l)otn ^^o disaslvous u> individuals, and of great inconvenience to tiie trading coinniiniity. *****♦#»## As the foreign trade of the Dominion l)cars I)iit a small propoition to the value of the domrsiic trade, and as the hank note civcnlalion depends so much ujjon the state of the foreign trade, (for an iniiiorlatinu of a few nullidiis, beyond the value of the expiiris, causes such a demand u],on the hanks for l)ills of exchange, and in their absence for s[)ecie, that they n)iist necessarily contract their discounts, restrict their note circulation, and. make money scarce, reducing values ro, 20, or ;,o per cent.), I am of opiiu(;n that the present Hanking system does not afford tiie facilities necessarv for the incist henelicial development of the industrial resources of the Dominion. It will l)c seen from the above extract that Mr. Wilmot, while admittin.o- that the i)re.seiit Jkiiiking system has been of some service in advancing the material interests of the Provinces, gives it as his opinion that it does not " alford the facilities necessary for the most beneficial development " of their industrial resources. His reasons are that the system is too much dependent upon credit and the state of the foreign trade ; that when the foreign exchanges are adverse, it intensifies the periodical revulsions in business which take place ; that the banks foster the foreign trade, wiiilc they do not grant the necessary Hicilities for the domestic, and do not ciiculate a sufficient amount of notes. Now, with all due deference to Mr. Wilmot's authority, we think he has here coiifoundetl two things which are quite distinct, namely: the mode in which banks conduct their oi)erations, and the Banking system. The system may be perfect, and yet very imperfectlv administered. As a matter of fact, it was under the same BanKing system that the Commercial Bank failed and the Bank of New Brunswick fiourished, and still flourishes, in oflr sister Province. The banks in Nova Scotia have also prospered under the system, which is the same in all the Provinces. It is similar to that which has been so successful in Scotland, although even there banks have failed. The banks are all banks of deposit, discount, and circulation. But the trade of the several Provinces is somewhat different, and consequently the securities on which banks lend are also different. And it is here that the causes of their failure must be sought for, and not in their note circu- lation. Mr. Wilmot would lead the public to believe that, because the banks in Nova Scotia are not allowed to issue notes of a lower HANKING AND CURHKNCY. f tlcnfimination than >'.2o, tlicy li;ive been fj.vempt from failure, while some banks in the other Provinces liave unfortunately ^^onc to the wall because they were permitted to issue small notes. Now, there is no connection whatever between the failure of banks and the value of the notes they issue. The banks which failed did so partly because they made loans on securities which deteriorated in value, antl on which they could not realize, and jjartly because their debtors could not repay the loans made to them. Jiut this Would have hai)pened if these banks had not issued any notes. It Mr. W'ilmot would only tell us how banks may sink their lunds in advances to railways, and on real estate, and by means of bad debts, until two-thirds or three-ft)urths of their capital is lost, and yet remain solvent, he would do good service ; but when he tells us that (iisastrous failures have occurred in the other rrovinces, where small notes have been issued, and that none have happened in Nova Scotia, where the banks are not allowed to issue them, and thus insinuates and suggests that these issues have some- thing to do with the failures, he simply writes nonsense. As well might he say that in some occult way the rate of interest has been the cause of failure ; for in Nova Scotia, where no bank has ever failed, the rate of interest was constant, until recently ; whereas, in Canada, where some failures have taken place, it was regulated by the supply of loanable funds and the demand for them. Mr. Wilmot seems to think that banks can augment their issues and loans to any extent, but in this he is quite mistaken, lianks do not, and cannot, regulate the quantity of notes in circu- lation. Notes are used mainly to facilitate the exchange of com- modities, and it is the number of transactions in which they are required that regulates the quantity in circulation. As these transactions are numerous or few, so is the circulation large or small, and thus it is that in some countries there is a regular ebb and flow in the amount of notes afloat. In Canada, for instance, when the crops have to be moved to market, a much larger quan- tity of notes is required than at other times ; so also in Scotland during harvest. After the crops have reached a market, and har- vest is over, the notes are returned to the banks. It is not the banks, however, which thus regulate the issues, but the parties who purchase the notes to facilitate these operations. Beyond the quantity necessary to effect those exchanges of property in which notes are employed, it is absolutely impossible for banks to increase their issue when redeemable in specie on demand. To 8 LKrTI'.RS r)\ this extent banks will issue them, for it is their interest to have as larj^Q an amount in eirculation as possible. When they have been in existence for some time they can very well estimate this quan- tity, and will re^^ulatc their loans accord in,^Hy. There is a current opinion that banks may lend to an indefinite amount, and that when they refuse to make loans by the issue of their notes it is from caprice, as Mr. WMmot says, or for some other equally unworthy reason. It mi<;ht b(.' thou<;ht self-evident that banks can only lend what they have, and nothinjjf more. Their resources consist of their capital and what they are enabled to borrow by deposits and their notes in circulation. The first of th^se — their capital — they can loan alto<;ether ; but the latter — what they have borrowed — can only be loaned to that extent which will leave a sufficient reserve to meet probable demands. When this has been done, all that banks can afterwards do in the way of discounts is to make their daily or weekly receipts and loans balance each other. When the notes in circulation are, from any cause, returned for payment, the available resources of the banks are reduced to that extent, and they must curtail their discounts. This, however, is what Mr. Wilniot cannot perceive. He imagines that banks wilfully intensify the evils resulting from a revulsion in trade, or an adverse foreign exchange, by capri- ciously reducing their discounts ; whereas they cannot help them- selves if they would remain solvent. They suffer with the trading community, and v\hatever injuriously alTects the latter is felt by the banks in diminished resources. l"he same results would fol- low from like causes, although the banks did not issue notes. In this case, wl^en the foreign exchanges are adverse — that is, when the imports exceed the exports of commodities — the balance must be paid for in coin, or in that which is equivalent to coin — bills of exchange. The amounts at credit of the mercantile community in the banks would be withdrawn, either to purchase bills of exchange, or in gold for exportation, whereby the available resources for discount would be dimhiished. They must then, as their loans mature, decline to ma^:e as large advances as before. When the deposits are diminished, the advances to merchants must be curtailed. Again, if the notes in circulation were issued by the Govern- ment, and were payable in gold on demand, they would be brought in for coin to be exported, or to purchase bills of exchange. The amount in circulation would thus be reduced by an adverse foreign exchange, and whatever evils might exist would be inten- 1;.\\KI\(. AM) ClKKl.'.s'LY. 9 I sificd by ri sc.n\'ity of money even uikKt a system of riovcrnincnt ni)!i! issiK's. Neither the (invei'iinieiU, however, nor the banks are th'e a'j;enls in rrstvictinj; the I'ii-cnhilion ; tliis is done by the lioMers of iiolvs, wlio relinMi tlieni (ny i);iyinenl. Of course, if tiio nolrs uert" not redet'inafile in !-|)eeie on deniand, as Mr. Wihiiot , then it wiU he found that there are more notes in cir- culation than are required for the diminished number of transac- tions in which they are employed, and they will be rcLurned to the banks. This would again diminish their available means for discount, and must reduce their loans. The same result would follow if the notes in circulation were a Government one, redeem- able in specie. Not being required, they would be sent in for redemption, and fewer of them would be kept afloat. For this result neither the banks nor the Government would be to blame. It is a natural consequence of the state of the domestic trade. And here again Mr. Wilmot's reason for governmental interfer- ence is fallacious. But if the circulation were furnished by the Government, we w^ould be liable to a very serious evil. For if the notes sent in for redemption were of considerable amount, Gov- ernment might not be able, or might: be afraid of their ability, to redceiTj them, and an Order in Council could be easily issued, and would be, suspending specie payments. Then would revulsions JO LKiTEKS O.V 111 trade be intensified, and property sacrificed. Froiri tlicsc evils hitherto the bank note circulation has kept us, and this is one of the strouijjest reasons why the Government should not be allowed to tamper with the currency. i « LKTTKR III. In my last letter I endeavored to show tl>nt banks cannot aug- ment or diminish the notes in circulation at will, and that they are not responsible for the e.\-[>ansians and contractions which take place, I will now attempt briefly to exhibit what the present JJankins system has done for these Provinces, in assistin-,^ their material 'development, and thus furnish a strong argument against unnecessary Government interference. In any country where there are no banks, there are many per- sons who have surplus huuh not required in their business, and others who have accumulated savings which they retain in their own possession. At the same time there are many who are with- out adequate means to carry on their business profitably, antl who are unable to obtain them because they are unacquainted with those who might be able or willing to supi)ly them. So long as this continues ''t is imix)ssible for the country to prosper. But when a bank is organized v/ith sufficient capital to give depositors assurance of its stability, it draws together into one centre the larger part of the surplus funds and savings of the district in which it is situated, and makes them available for loans to indus- trious persons whose business has been retarded for want of capi- tal. Additional resources are also derived from the notes cir- culated. Thus banks become the medium by which the funds possessed by persons unable or unwilling to use them are trans- terrcd to those who desire to employ them in mercantile, mechani- cal and agricultural operations, and, in consequence, are very powerful instruments in advancing the national prosperity. Espe- cially is this the case in a new country, where the want of capital is more felt than in older ones, where it has accumulated. By reference to the Year iiook of Canada for the present year, it will be found that on the 31st July last the total capital of the chartered banks in the Dominion was $31,735,095 ; the loans made to them by the public in deposits and circulation.s,' $42,755,- 595 ; and the amount loaned by them to the mercantile comma- n.WKINr, AM) CURREXCY, II nity in discounts, S52. 737,51;. As the notes under discount mature at least every three months, and new notes are then dis- counted, it follows that the accommc. .".ation granted by the banks yearly, by means ot' discounts alone, cannot be less than $210,- 000,000. Of this lari^e sum, $26,500,000, or rather more than one-eighth, is i'urnished through the lending power which the banks obtain by means of their noie circulation. But this does not exhibit the entire assistance given by the banks. IMany of them advance money on cash ere lits and on bills of lading, while all ot them ])urchase large amounts of exchange. When we con- sider the imi)etus thus given to trade and commerce, it will at once bj seen that those who purchase stock in banks, and those who deposit money with them, are, as surely as those engaged in industrial pursuits, promoting the material in.provement of the Provinces ; and some idea may be formed of the importance of the present Banking system, including its note circulation. The farmer, the miller, the lumberer, the mechanic, the mer- chant,— all have felt this beneficial influence. The domestic trade, no less than the foreign, has been stimulated into activity. There is a stage in the history of every young country when the foreign trade is of vital importance, its condition guaging and controlling that of the purely domestic. It is the source of most of the wealth which is first accumulated. As it flourishes, it calls into being and activity domestic industries. The great assistants and stimulants ot all these are the banks. They may not have given as mucii assistance as was necessary. There have been occasions undoubtedly when the demand upon them has been greater than they were able to supply. But Mr. Wilmot's plan of increasing their elTficiency, by diminishing their resources, is assuredly a very " Irish " one. He proposes to compel them to withdraw their circulation, and imagines that thus their power to give assistance would be increased. The very statement of his plan shews its absurdity, and were it not that it chimes in with the views of the Government, although on very different grounds, it would be unworthy of notice. He and the Government, however, seek the same end— the substitution of a note circulation issued by the Government, or one based on Government securities, for the present one. One-eighth part of the loans made by the banks, as already stated, is derived from their note circulation, and the Dominion Government aims at absorbing this amount in a loan to itself, and thus withdrawing it from the available working capital of the banks. 12 L];rTi;us f)X Now, it bchnvcs those who wish to alter the present cr'ndition of thini^s, to give very satisfactor}' reasons for so doiiip;. j\ sys- tem whieh produces rcstiUs such as have been e.xpcriencecl should not be rudely tampered with. It has been the growth of time, and has become interwoven with all the various material interests of the country. Any check, such as the withdrawal of the note circulation, must inevitably have a very injurious el'leet. What- ever losses may have resulted from the failure of one or two banks has been amply compensated for in the general beneiit resulting from their operations. In Caiiada there lias only been one bank failure of importance for many years. There was a stoppage of another last year, but within a very lew weeks its notes were at par, and have since been paid in lull. The tailurc of the Commercial Bank in New Brunswick will not cause any loss to the holders of its notes who continue to hold them,, as it is estimated that its assets will be sufficient, not only to pay all its debts, but to realize something for the shareholders as well. In Nova Scotia there has never been a bank failure, and conse- quently note holders have always obtained pa) ment of bank notes on demand. This is more than can be said for the Government notes issued in Nova Scotia. It has often been difficult to obtain specie for them, as they are not all redeemable in specie, and hoUleis have sometimes found trouble in paying their debts with them. It should also be borne in mi;vl, in discussing this subject, that durino: the various crises and revulsions in trade wh.ich ha\c occurred of late years, and when the banks in the United States suspended specie payments, the banks in the Provinces continued to meet all demands promptly in specie. They have thus proved their stability in the past, and the inference naturally is, that in the future, if Government does not interfere to cripple them, they will continue to maintain the same high position. ) I LETTER IV. QuF.STlox 3. — Do vou favor tlic system of a direct issue of ('.ovcrnnient notes as a circulating medium for Canada, or that of having circuhuimi 1)ased on (loveinmcnL securities, but issued to the public otherwise than dirL'ctly I'v the Government ? — State what plan or system would in your opinion be best adapted to the wants and interests of the Dominion, and give the outlines of the [il.an you would recommend. State particularly what percentage of specie, under any svstem, ought to be retained for purposes of redemption ; and, if any, wh.it in proportion to dejiosits ? It will be observed that in the above question one of two alter- natives is proposed for adoption by the Government for the cur- li ■V i t BANKING AND CUKRKNCY. 1 3 rency of the Dominion, leaving out of view a third which might be continued. The first two arc "a direct issue of Government notes," or the " having circulation based on Government securi- ties, but issued to the public otherwise than directly by the Gov- ernment/' The third, which has been overlooked, is that of the present circulation issued by the banks. ' ji ' In considering the question. By whom should the circulating medium of the country be furnished ? it ought not to be treated as a mere abstract one, as if the Government had now to deter- mine for the first time on the circulation of the Dominion. Much injury may result if the present circumstances of the country are not taken into account. There is already a circulating medium provided with which the public arc familiar, adapted to the wants of trade, and which has already done good service. It is issued by the banks, and is based on specie, into which it has always been convertible on demand. It has thus maintained the same value, and passed current as freely as gold. There have been panics and runs upon the banks, but specie payments have never been suspended. From the endeavor seemingly about to be made to change the currency, it n.'jht be supposed that much loss has been sustained from the one now in use ; but I venture to affirm that there have been fewer losses to the holders of bank notes in these Colonies than in any other country which possesses a similar bank note circulation, or one based on Government secu- rities. In this Colony, certainly, there has never been any loss, and there appears therefore to be no necessity for a change. The security for ultimate payment is found in the capital and assets of the banks, together with the double liability of the stockholders, and it must be a very rare case indeed when these are insufficient to prevent loss. Still, to prevent even the possibility of loss to holders of hank notes, and to ensure speedy payment when a bank has failed, there could be no difficulty in making the circula- tion a first lien on the assets, to be paid whenever sufficient funds are realized. If the Government is honestly desirous of securing note holders from loss by bank failures, and has no ulterior design in depriving the banks of their circulation, this plan would completely serve its purpose. And there is this advantage in it over any other — that it could be accomplished without disturbing existing arrangements or cramping business, as must be the case when the loanable capital of the bank is diminished. In the development of new countries the want of sufficient capital is severely felt, and any plan which would tend to diminish 4 J H LETTERS ON what there is should be carcfi)lly examined before beinj,^ adopted. The outcry in Nova Scotia, and I presume in the other Colonies as well, whenever trade is active, is that there is a deficiency of capital. The banks arc j^enerally accused of unworthy motives when they decline to make advances under these circumstances, although they may be reducing their reserves to the lowest jioint compatible with prudence, to give all the assistance possible. But if the Government, by its interference, were to diminish their power, the comtnunity would very speedily discover the difference in greater stringency and in an increased rate of dis- count. Borrowing, says Mr. Gladstone, is the vice of Kuropean Gov- ernments, and it has extended to the American continent. We see it in its worst features in the United States, where th2 National Banking system is a gigantic u'jode of borrowing. The Government of the Dominion is not free from the vice, and seems desirous of indulging in it still more freely. Whatever desire there may be to give security to holders of notes, it is nevertheless the fact that when Governments issue notes, it is not for the encouragement of trade by making loans to those engaged in industrial pursuits, but as a means of borrowing by paying their debts with "promises to pay." And the necessity for this course generally grows, and the issues of notes not being regu- lated by the requirements of trade, but by the wants of the Gov- ernment, are increased until the country blessed with the system is landed in all the evils of a suspension of specie payments. This has been the invariable result wherever Governments have assumed the control of the entire circulation. Now I question the wisdom or the advisability of the Govern- ment of a comparatively undeveloped country, where capital is scarce, borrowing from its own people the funds required for pub- lic works, or for the payment of salaries and other debts. Pru- dent Governments can generally obtain loans abroad for all they gradually require, and by this means they introduce more capital instead of absorbing a portion of what is already insufficient. If the Dominion Government were to issue the entire circulating medium, it would bori'ow from the public, to pay its debt.s, that which the banks now borrow and circulate through the various channels of trade. Or, if it were to compel the banks to lodge Government bonds as security for their note issues, this would be to make them loan to the Government a large amount now avail- able for mercantile purposes. In other words, by the adoption of r.ANKIXG AND CURRENCY. 15 <. t * ▼ cither of the proposed alternatives, the loanable capital of the banks — which is confessedly not in excess of the wants of com- merce — would be largely diminished. To prevent this, it has been sui;,L;esled, in anotiier of the questions of the committee, that the jiresent capital stock of tne banks might be increased, but it does not follow that their loanable funds would thereby be augmented. For the money lying idle and available for the pur- chase of bank stock is, for the most part, it not altogether, depo- sited with the banks. Any simultaneous addition to the capital slock of all of them would be derived from their deposits, so that they would not be placed in any better position. There can be no doubt, then, that the loanable capital would be permanently diminished by the withdrawal of the bank note circulation. Let us now consider what would be the effect in Nova Scotia of the adoption of either of the alternatives apparently favored by the Government. The first one suggested is the issue of notes directly by the Government, instead of by the banks. The total circulation of the chartered banks on the 31st July last, as given in the Year Book, was $822,748, to which has to be added that of the two private banks and the Bank of British North America. This would bring it up to at least $1,000,000, If we assume that the banks hold 20 per cent, of this amount in specie (such being the proportion of specie to deposits and circulation), there remains $800,000 derived from the circulation employed in the encourage- ment of trade. Were the sujiposed policy of the Government carried into effect, and the circulation of the banks withdrawn, it would necessitate the curtailment of the discounts to the extent of $800,000, or one-fourth of the entire amount — that is, an amount equal to the united capital of the Union Bank and the People's Bank. In regard to our two country banks — the one in Yarmouth and the other in Windsor — the proportion would be still greater. The circulation of the Bank of Yarmouth on the 31st July was $154,820, and its discounts $289,511. The circula- tion of the Commercial liank of Windsor was $63,000, and its discounts $190,613. From these figures it is evident that the former would require to reduce its discounts by more than one- half, and the latter by about one-third. It requires no prophet to fortell the effect likely to be produced on the trade and commerce of Nova Scotia by this arrangement. The result of the second alternative, if adopted — that of a cir- culation based on Government securities, according to the Na- i6 LETTERS OX tional Banking system of the United States, which is referred to in several of the questions of the Committee — would be even more injurious than that of the first. Under the National Banking system of the United States, the banks arc required to lodge with Government, in (jovernment securities, one-third of their paid-up capital ; and as security for the ultimate payment of their note issues, they must deposit Government bonds to an amount equal to their circulation, and one-ninth more. Now the paid-up capital of the chartered banks in Nova Scotia on the 31st July last was $1,554,380, and if there is added for the other three banks $400,000 (a low estimate), it gives $1,954,380 as the total paid-up capital. Of this amount one-third, or $651,460, would be deposited with the Government to begin with. Then, as the circulation is $1,000,000, to which, if we add one-ninth, there would be $f,i 1 1,1 1 1 deposited in addition as security, making in all $1,762,571 to be deposited with the Government, or more than half the entire amount under discount of the chartered banks. To purchase these bonds it would be necessary for the banks to call in their loans to the same extent. Thus the accommodation given to the mercantile community would be reduced one-half. Could anything more disastrous to the interests of Nova Scotia be devised than such a scheme as this .'' The banks would not suffer, it is true, because they would receive interest on the bonds and also on the circulation, but the business of the Province would be entirely prostrated. If at times it is difficult for the banks with their circulation to supply the wants of trade, it would be utterly impossible for them to do it when deprived of the means derived from their notes in circu- lation. The conclusion of the whole matter, so far as I can see it, is that " the plan or system best adapted to the wants and interests of the Dominion " is the one now in existence, which has been of immense service in the development of these Colonies ; and that the Government cannot do anything better than to let it alone. LETTER V. " I think that the effect of the State having the complete control of the circulating medium in its own hands would be most mischievous." — Sir Robert Peel. It has been recognized by eminent writers on Economical Science that if a Government takes the note circulation into its i I5ANK1NG AND CURKENCY. 17 own hands, it should conform itself solely to the " iron principle'* of an exchange of notes for gold and gold for notes ; and that there should always be in its possession an amount of gold equal to the notes in circulation. On this principle, the only sound one for a Government to adopt, there could not be any doubt of the imme- diate or ultimate redcemability of the notes, and note holders would be perfectly secured from loss. This, however, does not appear to be in accordance with the policy of the Dominion Government. Judging by the tenor of the various questions, the design is to substitute a Government note circulation with only a partial reserve in specie for the present bank note circulation with a like reserve. And the conviction is forced upon us that it is not for the purpose of thoroughly securing the convertibility of the currency, but in order to borrow, that the Government desires to interfere with the present system. This being the case, the policy is a most dangerous one. There would not be the same security for the immediate nor for the ultimate redemption in specie of Government notes as there is for bank notes. The money borrowed by Government by the issue of its notes would be expended on various Government works, in payment of salaries, and in other ways, and would be gone beyond recovery. In the event of a panic or a large demand for gold for exportation, all that the Government would have to meet its notes would be the specie reserve. There would not be, as with banks, the daily maturing of loans, nor any other reserve, such as money invested at call, or in the hands of agents abroad, by means of which gold comes in, or could be immediately obtained, to meet any extraor- dinary demand. The only way in which the Government could obtain the gold would be by effecting a loan. But at such a time this would be next to impossible, and Government would be com- pelled to suspend specie payments. Besides, as Government would thus be relieved from the necessity of paying its debts in anything but " promises to pay," which are not intended to be paid — and this is a much easier process than paying them in coin — there is a constant temptation to bring about this result, dimi- nishing any desire there might be to maintain the convertibility of the note. Even if there were no distrust or panic, nor any extraordinary demand for gold, there is still danger in another direction. It is not difficult to imagine a time when there are as many notes issued as can be kept in circulation, when the Government is in want of money and there is difficulty in raising a loan by the sale of bonds. 5 i8 LF.ri'KKS ON Under these circumstances there would be a stronj:^ temptation to supply the deficiency by simply issuing an order m Council sus- l)endinj; specie payments. When it is possible to borrow money at the expense of paj)er and printin<; merely, it is too much to expect a necessitous Government, having the control of the cur- rency, not to do so. For a bank to suspend specie payments is ruin, but for a Government to do it is to obtain increased facilities for raising money. There is every inducement for banks to pay their notes in gold on demand, no matter what the cost may be, but with Governments it is just the reverse. The latter gain by that which would be destruction to the banks. Nothing but the fact that its notes were not payable in specie enabled the Govern- ment of the United States to borrow so largely by their issue. There thus appears to be a far greater risk run by the holder'; of Government notes when the reserve is only a partial one, than by those who are in possession of bank notes. For, as was remarked in a previous letter, suspension with all its accompanying evils, such as the depreciation of the value of all kinds of property through the inflation of the currency, has been the invariable result, sooner or later, in every country where the Government has usurped the control of the note circulation. , There are other evils besides that of a suspension of specie pay- ments, although it is the worst ; evils of a political nature, which may result from the Government taking the circulation into its own hands, which I shall only glance at. It would then possess a power which might at any moment be exerted for jxirty and other illegitimate purposes. Whether justly or not the Govern- ment also would be continually liable to attack for the manner in which it might use its power of issuing notes. And if the power of issue were conferred on any one bank of discount, which would thus become the national bank, the evil would only be intensified. On this point Mr. McCulloch says that "a national bank for transact- ing ordinary banking business would be neither more nor less than a national nuisance that would very soon have to be abated. And no Government would choose to encounter the obloquy of being connected with such an establishment." Whether correctly or not it has already been asserted that the power conferred on the present Government bank of the Dominion has been used in a manner disadvantageous to the interests of the banks and the community at large, thus corroborating so far Mr. McCulloch's opinion. What may then be expected if the power for evil is in- creased by the destruction of the bank circulation and the substi- BANKING AND CURRENCY. 19 tution of that of the Government, and the whole confided to a sin<llod to invest u largo portion of 'iiuir capital in gov- ernment securities c<' variable value, nnd which would not bo available when rcqiiirpd for the redi'mption of the notes. Thoy also knew that whatevor legislation might injuri- ously aHWst tho morcuntilo community must react upon tho banks, To this extent tlic bankers were selfish in their opposition. But it did not aiiso from any fonr as regards their profits, as might bo supposed, for theso would bo nearly, if not quite, as much under tho Government sohome as they are at present, whilu some thought that if thry had morcly consulted their own interests they would have welcomed tho proposed change. Tho question in reality is one which mainly nlFucts tho merchant, tho trader, tho mechan- ic, tho manufacturor, tho lumberman, nnd the fiirmcr, as it would bo impossible for the banks under tho proposed system to grant to them anything like tho samo nccoininodatiou as they at present receive. Tho object of this letter is to dmw attention again to tho subject, and to sliow what tho result would have been in Nova Scotia had tho Resolutions of Mr. Rose passed, and what thoro is in store for us should the Government hereafter succeed in forcing their policy through pai'liament. The plan of tho Government, as explained by Mr. Rose, and embodied in his Resolutions, was to compel tho banks to purchase govern- ment bonds to an amount equal to their circu- lation, and to maintain besides a resorvo of gold equal to twenty pei cent, of their circula- tion. Tho meaning of this is, that for every one hundred dollars of notes afloat the banks must originally possess one hundred and twen- ty dollai-s in gold, of which one hundred dol- lars were to be loaned to the government and twenty doUara held in their safe to meet any demand for specio payment. It will be seen at once that this was in reality, whatever it may havo been in intention, n grand scheme for obtaining possession of a large amount of gold by a forced loan from the banks. The lat- ter were also required to hold in gold, or legal tender notes, a further reserve equal to one- sovcuth of their call deposits. This wus the entire reserve which Mr. Rose supposed to be necessary for safe banking; an opinion oppo- sed to the views of most practical bankers. To shew that his scheme would not be very detrimental to tho commercial interests of the country, it was necessary for him to put the reserve at the very lowest point; which he ac- cordingly did. And even with this very small «'(l to 1 gOT- 1111(1 mIdo iijiiri inuat It the But tlieii- would tho issont, lorely havu SI irwvrvo, liu wnn ubligcil to conluM timt IiIm uchnino woiiM witlidmw nt lenxt ^5,700,000 t'roin tho uvuiliiblii bunking fuitdn uf tlui Domi- nion, Tho I'rjllowinK culciihition will show tho ct- (t'Cl on tlic Imnkinjj I'undH of Novii Heoliii. I Imvc tiiki'ii liu! n^uM.'H U.S ({Ivcn in tho ictnrnM ol tlin chuilRt'cd liunkM on tliii 31.slJul>' liist, wliicli in lh<) latcHl di.to to wliith I hiivo accfsti, and hiiv(! udddd onotoiii th lor th« two privnli' lliiiiki* and tlm U:»nk ojBiitiHli North Anicii- cu. At tliu' ditto tho toUd ciiciilution was ,1^1,028,000, wliic:li, according to tho (lovern- iiionl jiropoHrtl, wiistobo witlwh-awn, nnd otlior noloH biiHi'd on (jivvvrnnient socnvitifm Hulwti- tutcd. 'I'lio liunks wore n-tjuirwl to hand over (otho (iovorninL'nt .#1,028,000 in gold for thfir boHds. They were hImo to k(!cp a rcHcrvo of 20 p. 0. In gold, and a furtlier ruHcrve ol one- seventh of their rail deposits. Tho total uniount of specie thns reciniwd would Imve been l)> 1, 358,000, to meet which tho Banks bold #703,000 in gold and Governmont Umils, tlie dilVerence amounting to ;9i655,000 they could only obtui.i -y permanently reducing thiir discountH to ' 'm extent. This, bo it re- membered, is according to Mr. Kose's own molhod cf calcululion, and yet is equivalent to wiping out the capital of the Union Bunk and half that of the People's Bank. But tho calcu- lations of M r. Rose are defective In two par- ticulure. lie haa not made provision for any reserve for deposits on interest, nor has ho made any for tho resor\'o of notes which Banks must always hold in their tills, or which may bo pttssing between tho head olllces and branches, and which nro not in circulation. He has taken tho amount of notes in tho hands of the public alone us it stood on a particular day, or on tho average, but there may be, and are, many days when it is considerably liigher than on the day on which the returns arc niudo up, A much larger amount tlian is made to appear in his calculations nmst be in. vested in Government securities, and thus withdrawn from uvailablo banking funds. Add- ing to the igl655,000 required to be withdiiiwn from discounts, according to Mr. Rose's mode of calculation, oue-sevenlli say of the deposits on interest, or #225,000, and the very moderate allowance of one-seventh of the actual circula- tion for u reserve in the till or $.147,000, and wo have at the very lowest estimate consist- ent with necessity and prudence, $1,022,000, permanently withdrawn from the loanable banking funds in Nova Scotia, or more than tho united cajjital of the Bank of Nova Scotia and the Union Bank, The following recapitu- lation will probably vhow the ix'itult more olonrly : — Total oiroulatlon tu ho uovurud by Oov- orninuiit Ixindji {1 ,0.>4,0U0 Reaerve uf ^U |t, c. tu be niam'uined lu gi)ld ■io:,,iMO Reiorvo ,onu, dupuaitit on Interest ',f,.'U,i)0(> Reflurvo uf nutuH In till, viz., l-7th of 1 1 ,O^S,OUU actual oiroulatlon I47,U<)U SBOirhH; the total amount to bo with- drawn Item (llAeuuuts to be |I,02,>,UU0 No scheme more injurious to tho material interests of this Province could well bo ron- ceived than this with which we arn still threat- ened. To conciliate the banks, if possible, and to prevent the damaging effects from being im- mediately felt, it was proposed to spreiul the operati