LIBRARY 
 
 OF THK 
 
 University of California. 
 
 Class 
 
Banking and Commerce 
 
 A PRACTICAL TREATISE FOR BANKERS AND MEN OF 
 BUSINESS. TOGETHER WITH THE AUTHORS 
 EXPERIENCES OF BANKING LIFE IN 
 ENGLAND AND CANADA DUR- 
 ING FIFTY YEARS 
 
 By GEORGE HAGUE 
 
 Formerly General Manager of The Merchants Bank of Canada 
 
 Experien t ia docet 
 
 NEW YORK 
 
 THE BANKERS PUBLISHING COMPANY 
 
fi£K£fiAL 
 
 Copyright, 1908 
 
 G 
 
 nfc 
 
 Y^ 
 
 -2- 
 
INTRODUCTION. 
 
 THE following work is the reflection of a banking and commercial 
 experience extending over more than forty years of active life in 
 England and Canada, together with the observations gained in the 
 supervision of the New York business of one of the larger Canadian 
 Banks established in that centre. 
 
 This treatise, it will be observed, relates not simply to banking, like the 
 practical work of Mr. Gilbart, or the scientific treatise of a political 
 economist like McLeod, but covers also the field of commercial and manu- 
 facturing operations as w-ell, and discusses the causes of success, or fail- 
 ure, in each of them. 
 
 The author has taken particular pains to open up the relation of 
 Banking to Commerce, as a handmaid and tributary to it, and this, as 
 distinguished from other modes of employing and investing money; and 
 has endeavored to show the danger of confounding the functions of a 
 banker with those of a capitalist, or a Loan Comj^any, whose sphere is 
 found in the lending of money on mortgage, or the undertaking of loans 
 for long periods to governments or corporations. 
 
 It \vas long ago observed that a large part of the art of banking con- 
 sisted in knowing the difference between a bill of exchange and a mort- 
 gage. 
 
 Simple as this may sound, it opens up a whole world of interesting 
 study; and to become thoroughly master of it, in its practical application, 
 has baffled the ability of many a man otherwise eminent in the sphere of 
 finance. And the failure to carry out this distinction in practice has 
 involved man}' an institution of these times in financial overthrow. All 
 this Avill be considered in the course of the work now submitted, and as 
 the author has largely drawn from his own experience and observation, 
 he thinks it may be well to say a few words about them. 
 
 Commencing his banking career in one of the joint-stock banks of 
 the north of England, having its centre in a large manufacturing town, 
 with branches in the agricultural district around, the author became famil- 
 iar with representatives of nearly every class of the producing community 
 of England. 
 
 This bank, in which he served for nearly eleven years, was founded by 
 men of remarkable intelligence and ability, who had studied the principles 
 on whicli banking should be conducted, and carried them into effect so 
 judiciously, that the bank has had an uninterrupted career of prosperity 
 since its foundation, and is still well known as one of the best-managed 
 banks in England. 
 
 In course of time, and after some years' experience in a large business 
 
iv INTRODUCTION. 
 
 office, he entered the service of one of tlie chartered banks of Canada, 
 and there, first as Branch ]\Ianager and then as Cashier (a term equiv- 
 knt, in Canada, to general manager), he was brought into contact with 
 the agriculturists, merchants and manufacturers of the Dominion, all 
 which prepared him for the larger sphere to which, in the providence of 
 God, he was afterwards called, viz., to the general managership of one 
 of the larger banks of Canada whose business extends over nearly every 
 district of the countrj', from the Atlantic to the Pacific. These larger 
 banks all have offices in New York, and, in connection with the New York 
 Agency, the author became familiar with the various classes of business 
 carried on by foreign banks in that city. 
 
 Note Circulation. 
 
 While engaged in the first of these spheres of work in Canada, the 
 Government of the day, under the guidance of its Finance Minister, en- 
 deavored to change the basis of the note circulation. The change pro- 
 posed was in furtherance of a certain theory of note issues, which he had 
 adopted. The plan proposed would have met the pressing necessities of 
 the Government at the time, but it would seriously have crippled the power 
 of the banks to carry on the business of the agricultural districts of the 
 country. As it was in one of these that the business of the bank he 
 was then connected with was mainly done, he made strenuous efforts, 
 along with others similarly situated, to induce the Government to modify 
 its scheme, in so far as to permit the banks, under regulations, to continue 
 to circulate their own notes. These measures compelled a closi" study of 
 the M'hole question of note circulation, and the author was drawn into 
 taking a prominent part in the discussions that arose respecting it. His 
 opinions gradually took the shape of doubt as to the desirability of any 
 Government issuing notes for circulation; all such notes, in every coun- 
 try of the world where they were issued, even in the United States, be- 
 ing at that time at a heavy discount. The Canadian Government, how- 
 ever, was too strong to permit of its hands being tied in the matter, and 
 a system of Government issues was established, under very strict regula- 
 tions as to redemption, which has continued to work side by side with the 
 banking issues of the country ever since. 
 
 After some 3'ears, an attempt was made by the Government to 
 assimilate the circulation of Canada to that of the United States. The 
 bankers doing business in the agricultural districts saw, however, that 
 such a system would be inimical to their interests and those of their cus- 
 tomers, and in fact to the interests of the country generally. They there- 
 fore united in an informal association, of which the author became secre- 
 tary, to oppose the measure. The discussions that arose, and which were 
 taken up by Boards of Trade throughout the country, were continued 
 through several sessions of Parliament, but ultimately, under the auspices 
 of another Finance Minister, a compromise was effected, and a measure 
 
INTRODUCTION. v 
 
 ado{)ted whicli in its main features has continued to be the banking law 
 of Canada to this day.* 
 
 Bankruptcy. 
 
 The manner in which debtors that arc insolvent, or supposed to be so, 
 can settle with their creditors, is a matter of vital importance to bankers, 
 inasmuch as a large part of their assets consists of the personal obliga- 
 tions of persons engaged in business, some of whom from time to time 
 may find themselves unable to discharge those obligations. At one period 
 of the author's experience in Canada, the Bankruptcy Law was of such 
 a nature, and so administered, as to form a positive temptation to traders 
 in temporary embarrassment. 
 
 The times that were passing over the country were such as to make 
 trading difficult, and as one insolvency almost invariably gives rise to 
 others, the number and amount of yearly insolvencies rose to amounts 
 far beyond the average. It is vain to expect that at any time, even the 
 most prosperous, trading can be conducted without insolvencies at all, 
 but there is a law of average in this matter as in others, and the fluctua- 
 tions of insolvencies reflect very fairly the conditions of trade at any par- 
 ticular period. At the period spoken of insolvencies were so numerous 
 as to become a constant source of anxiety to all the banks of the country, 
 and the evil was being constantly aggravated by the development of a 
 class of insolvency agents who made it their business to assist insolvents 
 to obtain settlements under the Act; and many of whom became, almost 
 in spite of themselves, promoters of insolvency. The Bankruptcy Act of 
 Canada, at that time, was looked upon by most bankers as really cal- 
 culated to promote insolvency rather than otherwise. In these circum- 
 stances both bankers and all the large traders who gave credit to customers 
 were quite willing to allow the act to expire, by efflux of time, and rather 
 to endure the evils of having no bankruptcy law at all, than face the pos- 
 
 » During these discussions several proposals were made by the banks to the 
 Government with a view to further securing their note issues. Of these the most 
 important was that all such issues should form a preferential charge upon the 
 whole assets of the issuing bank, including the double liability of stockholders. 
 This they contended was just and equitable, inasmuch as noteholders are in- 
 voluntary creditors. 
 
 The other proposal was that a Redemption Fund should be created by pro 
 rata contributions from the banks, which fund, if impaired, should be made up 
 by further contributions. Some bankers considered this fund to be unnecessary, 
 as the privileged lien, in their opinion, would be amply sufBcient. They were 
 willing, however, to fall in with the idea of a redemption fund, as it would make 
 assurance doubly sure. Both these proposals were adopted by Parliament. Ex- 
 perience, however, has demonstrated that the privileged lien was sufficient; for 
 although there have been several bad failures since the fund was created, arising 
 from fraud or serious mismanagement, the assets have never failed to redeem 
 the notes with sufficient promptitude to prevent necessity for calling upon the 
 fund. It therefore remains intact to this day. 
 
 It only remains to be stated that the whole business of issuing, redeeming 
 and destroying notes in Canada has been placed under the supervision of the 
 Bankers' Association, which was created a Corporation for the purpose. 
 
vi INTRODUCTION. 
 
 sibility of a rrcnrrcnce of the evils that had so sorely troubled them 
 for years back. 
 
 But after a time a new crop of evils sprung up, and grew to such a 
 height and extent that wholesale traders and bankers became urgent in 
 their demands for the passing of a new law. Men failed and gave pref- 
 erences to relations and favored creditors to such an amount as to work 
 Hagrant injustice to the rest of their creditors, and the law afforded no 
 redress. 
 
 Men went on trading after they were insolvent and frittered away 
 their whole estate, while their creditors were powerless to stop them. 
 They could thus go on buying goods while there was no prospect of pay- 
 ing for them, and in other ways committing grievous trade wrongs, of 
 which the ordinary law took no cognizance. 
 
 The Bankers' Association, under these circumstances, had full dis- 
 cussions of the whole matter, and considered what the provisions of an 
 equitable law of bankruptcy should be. There was little difference of 
 opinion upon the subject, and they arrived at conclusions which were in 
 due time communicated to the Government of the day. The ideas em- 
 bodied in these conclusions will be found largely reflected in the chapter 
 on Bankruptcy. 
 
 It will be observed that this work has been chiefly written from a 
 Canadian standpoint. This was inevitable, seeing that the author 
 drew so largely from his own experience and observation, as any author 
 must do whose work is of a practical character. Thus Mr, Gilbart's able 
 v.ork is written from the standpoint of I>ondon, and reflects largely 
 a London banker's ideas on the subject. That excellent little treatise 
 called "The Country Banker" gives the views of a banker from 
 the country districts of England. The author, however, though writing in 
 Canada and from that standpoint, has endeavored to avoid a narrow and 
 partial view of both banking and commerce, and has founded his remarks 
 on the broad principles which are common to both of them everywhere. He 
 therefore confidently hopes that the work may be found a useful hand- 
 book to bankers and merchants in every part of the country to which it 
 may find its way. 
 
 After a life of business activity protracted beyond the usual course of 
 human affairs, he now, in retirement, is able to look back quietly upon 
 the activities and conflicts of former j'cars, and can sympathize with a 
 new generation who arc fighting their way, with varied success, through 
 the same conditions and circumstances. He has written this work largely 
 for their guidance; and not for theirs only, but for the guidance of their 
 customers; for he lias stood on both sides of the counter in his time. He 
 has felt more than once at the end of a bank year, but especially when a 
 General Manager, as if he had just concluded a voyage round the world, 
 and was thankful to have brought his vessel once more safe into port. 
 
INTRODUCTION. vii 
 
 In these voyages (to pursue the simile) he had the opportunity of noting 
 the shoals and quicksands that lay in the way, and of noting also the 
 indications of the weather, so as to look out for coming storms and learn 
 when it was necessary to take in sail, and when he might spread his sail 
 to the breeze with safety. He thus, in course of time, accumulated a 
 body of signs and indications of which he frequently availed himself. 
 All this he has endeavored to embody in a readable form in this trea- 
 tise, which he now sends forth, with the hope that it may serve for the 
 guidance of men who are pursuing a course in which many difficulties 
 and dangers have to be encountered, but which may be safely followed 
 if men are only willing to learn by the experience of others, and to give 
 close attention, hour by hour, as the mariner does to his compass, to the 
 aspect of things around them. It is a course, in truth, in which many 
 have been shipwrecked, but the shipwreck has generally arisen from inat- 
 tention, from conceit, from unwillingness to take advice, and learn by the 
 experience of those who have gone before them. Geo. Hagce. 
 
 Montreal, March, IQOS. 
 
CONTENTS 
 
 CHAPTER I. Page 
 
 ELEMENTARY PRINCIPLES OF BANKING 1 ^ 
 
 CHAPTER II. 
 
 THE ELEMENTARY PRINCIPLES OF COMMERCE IN CONNEC- < 
 
 TION WITH BANKING 8 
 
 CHAPTER III. 
 
 FURTHER PRINCIPLES OF BANKING AND DEVELOPMENT OF 
 
 PRIVATE BANKING IN ENGLAND 1^ 
 
 CHAPTER IV. 
 JOINT STOCK BANKING IN GENERAL IT 
 
 CHAPTER V. 
 THE INTERNAL ECONOMY OF A JOINT STOCK BANK 22 
 
 CHAPTER ri. 
 DIRECTORS OF AN INCORPORATED BANK 28 
 
 CHAPTER VII. 
 
 OFFICERS OF AN INCORPORATED BANK HAVING BRANCHES 
 
 —THE GENERAL MANAGER 38 
 
 CHAPTER VIII. 
 
 THE SUCCESSFUL MERCHANT 48 "^ 
 
 CHAPTER IX. 
 THE SUCCESSFUL MERCHANT (Continued) 55 
 
 CHAPTER X. 
 MANUFACTURING 65 
 
 CHAPTER XI. 
 
 THE SUCCESSFUL MANUFACTURER 70 
 
 CHAPTER XII. 
 
 ELEMENTS OF SUCCESSFUL BANKING '» ^ 
 
 CHAPTER XIII. 
 THE BANKER'S INFORMATION AND OTHER ELEMENTS OF 
 
 SUCCESS 83 
 
 CHAPTER XIV. 
 LOANS 9» 
 
X CONTEXTS. 
 
 CHAPTER XV. Page 
 
 LOANS TO DEALERS I\ GRAIN AND OTHER AGRICULTURAL 
 PRODUCE 104 
 
 CHAPTER XVI. 
 LOANS JiO MANUFACTURERS AND IMPORTERS 113 
 
 CHAPTER XVII. 
 LOANS TO RAILWAYS AND RAILWAY CONTRACTORS 128 
 
 CHAPTER XVIII. 
 
 LOANS AND ADVANCES TO GOVERNMENTS AND MUNICIPAL 
 CORPORATIONS 136 
 
 CHAPTER XIX. 
 LOANS ON STOCKS AND BONDS 144 
 
 CHAPTER XX. 
 THE DISCOUNTING OF TRADE BILLS 147 
 
 CHAPTER XXI. 
 FOREIGN BILLS 157 
 
 CHAPTER XXII. 
 OVERDRAFTS IN CANADA AND CASH CREDITS IN SCOTLAND 171 
 
 CHAPTER XXIII. 
 BANK RESERVES 178 
 
 CHAPTER XXIV. 
 BANK INVESTMENTS AS RESERVES 187 
 
 CHAPTER XXV. 
 SECURITY AND SECURITIES IN GENERAL 101 
 
 CHAPTER XXVI. 
 SECURITY AND SECURITIES IN GENERAL (Continued) -.'04 
 
 CHAPTER A' AT//. 
 BANKING AND COMMERCIAL LOSSES 213 
 
 CHAPTER XXVIII. 
 BANKINC AM) COMMERCIAL LOSSP:S (Continued) 221 
 
 CHAPTER XXIX. 
 
 LOSSES IN CONNECTION WITH TIN'. I.AH'ORTING IHADE AND 
 
 OTHER LINES OF BUSINESS 22S 
 
CONTEXTS. xi 
 
 CHAPTER XXX. Page 
 FRAUDS, FORGERIES AM) DEFALCATIONS 239 
 
 CHAPTER XXXI. 
 A BANKRUPTCY LAW 251 
 
 CHAPTER XXXI 1. 
 
 INSURANCE IN ITS RELATION TO BANKING 264 
 
 CHA P TE R XXXIII. 
 
 THE NATIONAL BANKS OF THE UNITED STATES AND AMERI- 
 CAN BANKING 269 
 
 CHAPTER XXXIV. 
 VARIOUS THEORIES OF NOTE CIRCULATION 278 
 
 CHAPTER XXX v. 
 BANKING ACT OF CANADA 290 
 
 CHAPTER XXXVI. 
 
 MNANCIAL PANICS AND REVULSIONS IN ENGLAND AND THE 
 
 I'NITED STATES 30-2 
 
 THE AUTHOR'S EXPERIENCES IN FIFTY YEARS OF BANKING 
 LIFE IN ENGLAND AND CANADA,. 
 
 CHAPTER I. 
 
 EXPERIENCES OF BANKING LIFE IN ENGLAND 315 
 
 CHAPTER II. 
 
 J^IY EXPERIENCES OF BANKING IN CANADA 327 
 
 CHAPTER III. 
 MY EXPERIENCES AS A BRANCH MANAGER 336 
 
 CHAPTER IV. 
 
 I .Vl^LlilENCES IN HEAD OFFICE MANAGEMENT IN TORONTO.. 342 
 
 CHAPTER V. 
 
 NEGOTIATIONS WITH THE GOVERNMENT RESPECTING CIRCU- 
 LATION 353 
 
 CHAPTER VI. 
 
 MY EXPERIENCE AS GENERAL MANAGER IN MONTREAL 
 INCLUDING REFERENCES TO BUSINESS IN NEW YORK, 
 CHICAGO. .AHLAVAUKEE AND TO THE BARING CRISIS 367 
 
A Practical Treatise on Banking 
 and Commerce. 
 
 CHAPTER I. 
 ELEMENTARY PRINCIPLES OF BANKING. 
 
 A Banker's Service to the Community — Development of Modern 
 Banking — Employment of a Bank's Funds — Relations Between 
 the Banker and the Merchant. 
 
 EVERY man who expects to derive his subsistence from a community 
 will find himself under obligation to render service thereto. This 
 is a universal law of civilized life, in default of obedience to which 
 another law will come into operation, viz., that if a man will not work, 
 neither shall he eat.^ 
 
 A Banker's Service to the Community. 
 
 Service to a community is of various kinds, depending generally upon 
 the inclination of the individual. Some men devote themselves to produc- 
 tion in one or other of its manifold forms: a class of service that comes 
 first in order of time in every community, but survives in the most ad- 
 vanced stage of development. Others devote themselves to selling what 
 others produce. Others to the work of transportation by land or water. 
 These are all departments of what is generally known as business. They 
 are all forms of that labor which brings profit, and are all to be found in 
 those rudimentary stages of a community with which the people of 
 Canada and the United States are familiar. Long before there is any 
 requirement for the services of a person whose business it is to take care 
 of money, and to deal in it, there has been some progress made in the 
 clearing or preparation of land: in making roads, in building houses, and 
 al'^o in the carrying on, in a rudimentary form, of farming, store-keeping, 
 f ng, and other handicrafts. In addition to tliis, there generally arises 
 
 1 '^" might be supposed that the class of wealthy men, and men of leisure, 
 who t-:-^-ually arise in a more advanced stage of society would be an exception 
 u-'l-^r all circumstances to the above remark. But, as a matter of fact, there 
 o.. -. but few members of this class who do not devote more or less time to gra- 
 tuitous service for the community they live in. In England, they serve as un- 
 paid Magistrates, Members of Parliament, and Guardians of the poor, as well as 
 in numerous forms of benevolent activity. On this Continent, the larger part of 
 such men devote time to church and benevolent work, sitting on numerous 
 boards and committees, undertaking treasurerships, and various other unpaid but 
 useful offices. In fact, if the services of our leisure class were to be estimated on 
 a commercial basis, it would amount to a sum that would startle the most cap- 
 tious objectors. 
 1 
 
2 BANKING AND COMMERCE. 
 
 the class of professional men who make or administer law, eure diseases, 
 or care for the spiritual interests of the people. 
 
 For the first few years, a very small supply of actual money suffices 
 an infant comnnmity in the conduct of its business. Barter in various 
 forms is the ordinary' medium of exchange. So many yards of cotton 
 for so many bushels of wheat; so much of nets or ammunition for so 
 many fish or skins. This and such-like modes of making exchanges serve 
 all the practical purposes of life, and at this stage of development all 
 wealth, roughly speaking, consists of land, houses, or goods. 
 
 But as time goes on. Money in the shape of notes or coin finds its 
 way to the community; and one man after another who prospers in his 
 affairs comes to have more or less of it. 
 
 When, from such simple rudiments as a blacksmith's smithy, a store, 
 a grist and carding mill, and a tavern, at some crossroads of the olden 
 time, or a railway station of the present, there has grown up an aggrega- 
 tion of such concerns, some of them in a well-developed form; and when, 
 all round about, the forest or prairie has been converted into productive 
 farms, sufficient money will generally have been accumulated to give rise 
 to the question. Who is to take care of it? The answer to this question 
 opens up another class of service ; that, namely, rendered by a person who 
 has for generations been known as A BANKER. This being understood, 
 let us enquire under what conditions any man is likely to imdertake that 
 service, and how lie is to be remunerated for it.^ 
 
 Development of Modern Banking. 
 
 Putting aside, at present, considerations as to the origin of corpora- 
 tions like the Bank of England and the Bank of Scotland, it will be inter- 
 esting to note how the simple function of taking care of the spare money 
 of a man's neighbors, gradually assumed, one after another, the compli- 
 cated forms of modern banking. 
 
 The first "banker" (if he may be so called at this stage) is usually one 
 of those prosperous men of business who are to be found in every com- 
 munity, and Avhose store, warehouse, or factory is known to everybody in 
 it. All his surroundings suggest that he is a man of means. He is also 
 a man of reputation. He has liad money dealings with his neighbors, and 
 all respect and trust him. Ele has money of his own, and has a strong 
 box or chest in which to place it, as everybody knows. What more nat- 
 ural, then, than that he shall be asked to take care of the money of his 
 neighbors, as well as his own.^ 
 
 Some of the more cautious ones will, indeed, never trust their money 
 out of their o\vn possession. Some do not want it to be known that they 
 have money at all. The secretive instinct prevails everywhere, and is to 
 be found even in these days of higlily developed banking. The failure of 
 a banking corporation or of a private banker, even now, invariably drives 
 some people back to the rudimentary stage of taking care of their own 
 monev. In this, however, tliey encounter another danger, viz.. that their 
 
ELEMENTARY PRINCIPLES OF BANKING. S 
 
 money maj' be stolen. The majority of the people, however, in our infant 
 communities, are willing to trust their money to the care of a wealthy 
 neighbor. In most cases, they will expect it to be as much at their com- 
 mand as if it was locked up in a cupboard of their own. In some cases, 
 however, they may consent to give notice of withdrawal. 
 
 Thus, at the very outset, we are confronted with two of the principles 
 that have always governed banking operations, and which have as much 
 force to-day as they ever had. The greatest banking corporations in the 
 world are not exempt from enquiring as to money deposited with them, is 
 
 it to be WITHDIIAWN AT CALL, Or is it TO BE SUBJECT TO NOTICE.'* 
 
 The first arrangement is at the root of nearly all the multifarious 
 forms in which banking is carried on, for, as will be subsequently shown, 
 it involves the obligation (1) of constant attendance; (2) of keeping a 
 sufficient stock of money on hand; and (3) having a counter, apparatus, 
 and officers for the transaction of business. Most important of all, whilst 
 it necessitates the keeping of a certain stock of money on hand, it governs 
 the manner in which all the rest may he employed. 
 
 The person who undertakes the safe-keeping of money and its return 
 when called for will soon ascertain that the commodity he has undertaken 
 to safeguard is dift'erent in kind from all other commodities. It is repre- 
 sentative of property rather than property itself; and the obligations he 
 enters into with regard to it are different not only in degree, but in kind, 
 from those which persons enter into with regard to other property. If, 
 for example, a farmer undertakes to take care of a neighbor's horse, he 
 must return that very animal when called upon. If a wharfinger under- 
 takes the care of a merchant's iron, flour, or cotton, he delivers back the 
 very goods he receives. 
 
 But the care of money is governed by different considerations. No 
 man who delivers money to a banker for safe-keeping wants back the 
 very notes or coins that he deposited. What he wants is, not the identical 
 pieces of gold or paper, but the value of them in current money, or in 
 some other form that ma}^ suit his convenience; for example, in a draft 
 or bill of exchange.' 
 
 The relation therefore between the depositing customer and his banker 
 is not that of owner and bailee, but of creditor and debtor. This be- 
 ing so, the banker is not bound to take care of his creditor's money as a 
 wharfinger takes care of his customer's goods. But he is bound — and this 
 
 2 It was indeed once stated to me by a person acquainted with the facts, 
 that on the occasion of the first meeting of the directors of a newly organized 
 bank in an American city, the President, addressing his colleagues, observed 
 that persons would no doubt shortly make their appearance to deposit money, 
 and as it was essential that each customer's money should be on hand when 
 wanted, it was desirable to provide a large wallet divided into compartments. 
 In which each person's separate deposit could be placed, duly labeled. In that 
 case, he observed, the bank would never be called on for money without being 
 able to respond at once. 
 
 The good man's care for the safety of the customer's money was commend- 
 able, but he did not tell his colleagues how the bank was to make profits under 
 such an arrangement. 
 
4 RANKING AND COMMERCE. 
 
 is the first simple contract of banking — to repay the amount deposited, 
 or such part of it as may be required, at the time agreed upon, whether 
 on demand or after notice. 
 
 In the meantime, a banker has the power, and the law gives him the 
 right, to deal with the money as if it were his own; that is, he has the 
 power to use the money at his pleasure for the purpose of making a profit 
 out of it. The obligation, however, to pay a depositor's money on de- 
 mand, at the very moment it is asked, is of the most stringent nature. 
 Universal custom insists on a rigid enforcement of it. A merchant may 
 ask for time from his creditors; a banker never. If he is reduced to this 
 position he must close his doors. ^ 
 
 Common prudence therefore dictates to one who is undertaking the 
 responsibilities of a banker for the first time, that he shall, at the outset, 
 keep a considerable part of the money lodged with him in his own pos- 
 session. 
 
 As time elapses, and the conditions of the supply and demand for 
 money gradually assume a more settled form, such a banker will come to 
 understand what portion of his funds he must keep on hand, and what 
 portion he can otherwise employ. 
 
 The Emplovment of a Bank's Funds. 
 
 But the question at once arises, in what form it may be otherwise em- 
 ployed, consistently Avith the peculiar requirements of his business? 
 Money may be employed in various ways to make profit, and the mode of 
 employment will be largely influenced by the consideration whether it is 
 a man's own, or whether he is taking care of it for another. Some modes 
 for the employment of money have been demonstrated by experience 
 to be suitable for a banker; others have been equally proved by experi- 
 ence to be highly unsuitable. 
 
 (1) For example, a man who has money at his command may buy 
 productive property A^-ith it, and so obtain a reasonable return in rent. 
 A banker, however, would soon discover this to be a very dangerous busi- 
 ness. He might be compelled to close his doors and wind up his business 
 although in possession of immense amounts of valuable property. 
 
 (2) He can lend money on mortgage of property, and draw the inter- 
 est. This is just as unsuitable for a banker as the other; for wherever 
 
 3 There have been, however, some curious exceptions to this. There was 
 formerly a little bank in Prince Edward's Island, which made no scruple of 
 telling depositors at times that they had run out of money, but would have some 
 next week — just as a storekeeper would tell a customer that he was out of a 
 particular pattern of print. There was, however, some excuse for this in the fact 
 that the Island is sometimes cut off in winter from the outside world for a fort- 
 night together. This bank has long disappeared. But it is rather odd that so 
 recently as at the Louisville bankers' convention, a Cashier of a National bank in 
 Georgia, with a cajiital of $25,000. should bo boasting of the arrangements under 
 which business was done in his part of the State. Our customers, he said, are 
 never discomposed when wo run out of money. They are always good natured 
 with us. and willing to wait while wo get some! 
 
ELEMENTARY PRINCIPLES OP BANKING. 5 
 
 mortgages exist, they run almost invariably for long periods of time. 
 Even if subject to gradual repayment, the periods are of slow recurrence. 
 
 (3) When a community is sufficiently developed to give rise to them, 
 money can be invested in stocks or bonds. It is open to a banker to do 
 this, to a reasonable extent, as will be hereafter discussed under the head 
 of investments, provided the stocks involve no liability and that both 
 stocks and bonds are such as can be readily realized. 
 
 (4) He can engage in commercial or manufacturing business. This is 
 wholly improper for a banker under modern conditions, and the banking 
 law of Canada very wisely prohibits it. 
 
 The above are all legitimate channels of investment for a capitalist, 
 as such. 
 
 But a banker's business is governed by other considerations. It is of 
 the very essence of a banker's business to incur liabilities. The larger a 
 banker's liabilities are — paradoxical as it may sound — the more he has of 
 the elements of a flourishing business. For while a wealthy mercantile 
 house will pride itself on having no liabilities at all, the pride of a banker 
 is in the extent to which his liabilities exceed his capital ; or, in plain terms, 
 in the amount of his deposits and note issues. His creditors may be 
 numbered by thousands, and the total amount he owes them may, in the 
 aggregate, be ten times the amount of his capital or more. He, there- 
 fore, as a simple matter of prudence, will at all times so shape his busi- 
 ness as to be able to fulfil his daily obligations.^ 
 
 But how does he accomplish this.^ In every community, where busi- 
 ness has become developed, there will invariably be found, in addition to 
 those who have more money than they need, another class of persons, who 
 have less than they want. Merchants, manufacturers, miners and trans- 
 mitters of commodities, no matter in how simple a form their business is 
 carried on, need, as a rule, more money than they have of their own. And 
 if there is, in that community, a person who has spare money under 
 his control, he will certainly be interviewed by one or more of this class 
 with proposals for the use of a portion of that money. Thus we arrive at 
 the first rapprochement between Banking and Commerce. 
 
 That bankers should listen to overtures from this class of the com- 
 munity is natural ; and this for several reasons. Their business, in the 
 very nature of things, is in a constant condition of flux. It is active at 
 one period, and dull at another; largely arising from the changing seasons 
 of the year, and therefore inevitable, and such as can be calculated on. 
 The world's commerce is conditioned by the laws which govern its prod- 
 ucts. These products come largely (but not wholly) in the shape of 
 yearly harvests; some of food, some of materials for clothing, some of 
 appliances for shelter, some of materials for producing warmth or power. 
 
 4 In the statements that joint stock banks in England arc bound to place 
 before the public, the term for "deposits" is, "Debts due on simple contract." 
 This legal term puzzles those who have been accustomed to the term deposits. 
 But the phrase is strictly accurate. 
 
6 BANKING AND COMMERCE. 
 
 Stocks of great ninsnitude must be held at one period, to be succeeded by 
 a largely diminislied volume as the consumption of the world progresses. 
 These world-harvests, therefore, require at one time large amounts of 
 money for the purpose of purchasing, storing and preparing them for 
 use; conversely, an immense volume of money is set free when purchas- 
 ing is succeeded by realization. All goods, whether material products 
 or manufactured articles, are ultimately converted into money or book 
 entries or paper representing money. As stocks of goods increase, the 
 stocks of money (using that word in a broad sense) diminish, and as 
 stocks of goods decrease, those of money increase.*^ 
 
 Relations BetweeiJi the Banker and the Merchant. 
 
 This being the case, it can easily be seen that the banker and the mer- 
 chant have a natural relation to each other. The one deals with a fluctuat- 
 ing supply of money, the other with a fluctuating quantity of goods. 
 The banker must perforce employ his money in fluctuating transactions. 
 The merchant desires fluctuating supplies of money to meet his require- 
 ments. There is therefore perfect correspondence between them. ^JThe 
 business of both is, to consider how these fluctuations are likely to operate 
 in the spheres of their business^ 
 
 /The merchant, naturally, moves first. The natural order is for the 
 borrower to approach the lender.- (Cases, indeed, sometimes arise, in the 
 stress of conipetition, in which the order is reversed, but the results are 
 usually injurious to both.) (.The merchant approaches the banker, stating 
 that the time has come for him to buy the productions of the district^ the 
 lumberer, that he is about to send his gangs into the woods ; the fisherman, 
 that his fleet is ready to begin operations; the manufacturer, that the 
 year's suppl}'^ of wool, grain, iron or raw cotton is arriving. There are 
 as numerous varieties of such applications as there are of commercial 
 avocations; but in every one of them there is a statement of a want fi^ '^^^'^'^\ 
 it-^Ty^waiA. oi-moneij. That want is exactly the counterpart of a want on « 
 the part of the banker. He has money for which he wants profitable 
 employment. Thus both are brought within the operation of that— all- 
 embra<HftgUaw of supply and demand, which governs the world's transac- 
 tions in commerce and finance/as surely as the laws of gravitation govern 
 the material universe. The want being opened up, and the application 
 made, it is for the banker to determine, having understood for what 
 length of time advances are wanted, what securiti/ is off'ered, and what is 
 the position of the person proposing to borrow, whether he can (1) make 
 the advance, (2) open the credit, or (3) discount the paper. These are 
 
 B This is the natural law, but it is affected by numbers of counteracting: cir- 
 cumstances, the cross-currents of trade and of finance, so to speak. The operation 
 therefore of this natural law is not always easy to trace. But it is a law not- 
 withstanding. And, as a part of this law, all stocks of goods bear interest— a 
 fact often lost sight of. 
 
ELEMENTARY PRINCIPLES OF BANKING. 7 
 
 the three fundamental forms of the dealing of a banker with the business 
 community. 
 
 All developments of business may at times afford outlets for the money 
 a banker desires to employ. They are legitimate spheres for utilizing his 
 funds, always on the supposition, never to be forgotten, that such loans 
 shall be temporary, repayable at a fixed time which can be depended 
 upon, that they shall be allowable by law, and within the legal borrowing 
 powers of the corporation, if the borrower is such. And it is not too much 
 to say that it depends upon the banker's answers whether the wheels of 
 the machinery of commerce in his district are to begin to revolve for 
 another season or not. Naturally, his desire is that they shall; for upon 
 this a thousand other things depend, in which no one is more interested 
 than the banker himself. 
 
 There is this, however, further to be said, that a great banking cor- 
 poration may at times, and in certain circumstances, employ a portion of 
 its resources both safely and profitably in other spheres than commerce. 
 They may assist the financial operations of the Government, or make ad- 
 vances to municipalities, or assist in developing enterprises not strictly 
 commercial, yet which have a close relation to commerce — such as rail- 
 ways, steamboat lines, gas and electric corporations, etc. All this will be 
 fully treated of in succeeding chapters. 
 
CHAPTER II. 
 
 THE ELEMENTARY PRINCIPLES OF COMMERCE IN CON- 
 NECTION WITH BANKING. 
 
 Beginnings of Commerce in North America — Development of the 
 Export and Import Trade — Co-operation of the Banker in the 
 Carrying on of Trade. 
 
 IT has been shown in a former chapter how naturally the business of a 
 banker is connected with that of a merchant. Therein are roughly 
 sketched the elementary features of a banker's business, as custodian 
 of the money of the community in which he lives, and the source whence 
 the temporary wants of the commercial portion of that community may 
 be supplied. 
 
 As this is a treatise, not soleh' respecting banking, but banking and 
 commerce, it is reasonable to consider also the elementary principles of 
 commercial business, including in that term not merely those who buy 
 goods and sell them, but those who in various ways produce the goods 
 required to be sold. 
 
 Beginnings of Commerce in North America. 
 
 Going back, as some persons now living can do, to the earliest devel- 
 opments of commerce, in certain parts of this continent, the time can be 
 recalled when its sole production was in the shape of the skins of fur-clad 
 animals. Before the time of farms and mills and crops and mines, was 
 the time when the trapper, or hunter, penetrated to remote depths in the 
 forest, or to unknown wastes of the prairie, capturing the animals, whose 
 fur was so highly prized by the civilized world, and bringing the skins 
 for sale to a central depot. There still flourishes, on both sides of the 
 Atlantic, the great Trading Corporation, which has carried on this traffic, 
 without interruption, for more than two centuries, over half a continent, 
 whose centres of trade, generally called "forts," have, in some instances, 
 developed into important towns and cities of the present day. In these 
 forts, the Hudson Bay Company received the furs from the Indian tribes 
 around them, and gave suitable goods in exchange, on such equitable 
 terms that the Great Company came to be looked upon as the embodiment 
 of all that was just and honorable, as well as rich and powerful. This 
 reputation, first acquired many generations ago, the Hudson Bay Com- 
 pany and its agents have never lost. 
 
 There were similar operations in the older parts of French Canada, 
 New England and New York, and also in the remote regions of the Ear 
 West of the United States. 
 
 These were the first beginnings of commerce in North America, and a 
 6 
 
ELEMENTARY PRINCIPLES OF COM^NIERCE. 9 
 
 legitimate dovelopmeiit it was; naimly, the gathering together from re- 
 mote regions of -what was useful to mankind, and bringing back in ex- 
 change such products of other parts of the world as were suitable to the 
 wants of its inhabitants. 
 
 Development of the Export and Import Trade. 
 
 But the simple trade of early days on this Northern Continent has 
 now developed, under modern forms of division of labor, into various great 
 lines of export and import trade. Instead of furs as the sole product for 
 export, we now have cotton, grain and flour, cattle and cheese, pork and fish, 
 timber, iron, and gold, as well as many varieties of manufactured articles. 
 And instead of simple imports of beads and ammunition, we have laid the 
 whole world under tribute for the supply of our wants, and built ware- 
 houses and stores in our cities filled with every possible requirement of 
 modern comfort and luxury. For the great Creator of the world has so 
 ordered that the diff'erent parts of the earth shall have productions com- 
 plementary to each other. The East produces what the West needs, and 
 the West supplies the wants of the East. The South produces one set 
 of commodities, the North another, the interchange of which is of mutual 
 advantage. A perfect exemplification of this may be found, though on a 
 small scale, m the simplest store of any Canadian town or village. In 
 such a place are gathered for sale the products of almost every country 
 under the sun. China has contributed tea, Java sugar, the West Indies 
 coffee and fruits. On its shelves are to be found spices from the Eastern 
 Archipelago, and currants from the Mediterranean. There are woolen 
 goods made from raw materials supplied by flocks of sheep in Australia, 
 cotton goods from the produce of plantations in the Southern States of 
 America. The factories of Great Britain, France and Germany have 
 contributed their quota, as well as those of the United States and Canada. 
 There is, in truth, scarcely a country or climate in the world which has 
 not taken part in furnishing the shelves of even a simple Canadian vil- 
 lage store. 
 
 A remarkable thing, truly; and it is worth considering how this has 
 come to be. Evidently, it cannot have come to pass without a combination 
 of mercantile operations on the part of numbers of individuals, many of 
 whom had no idea what the final result would be, and also j ust as compli- 
 cated a machinery for the supply of money during the process. 
 
 Let a typical example be taken. How, for example, has that chest of 
 tea come to find its way to a place so remote from that of its growth } The 
 cultivator of tea-plants in the interior of China cannot have any idea of 
 the persons who are to consume his produce. But these small parcels of 
 tea, when once produced by the cultivator, become almost immediately 
 subject to the operations of Commerce. The country trader of an inte- 
 rior province makes his appearance, and purchases the products of a few 
 plantations around him. His knowledge, however, is limited, and so is 
 the extent of his operations. He passes the tea on to a trader of larger 
 
10 BANKING AND COMMERCE. 
 
 capacity in a commercial centre. Even he has little comprehension of 
 the distances the chests will have to traverse before reaching their final 
 destination; and little indeed can these traders comprehend how many 
 agencies, both of commerce and banking, have to be combined before the 
 products of those plantations can make their appearance on the other 
 side of the world; to be sold, and finally consumed, by people of whom 
 the Chinese tea-grower and merchant have no more idea than they have 
 of the inhabitants of the moon. 
 
 The Chinese tea-planter never writes a letter to the Canadian store- 
 keeper, advising him that he is growing a number of choice tea-plants, 
 and asking whether he will buy the leaves when ready. But, if he did, 
 and the storekeeper listened to his proposal (let us imagine this for a 
 moment), some questions would arise, one of which would be. How is the 
 tea to be delivered.^ and another. How is it to be paid for? 
 
 The producer and possible customer are thousands of miles apart; 
 separated by vast stretches of sea and land, how, then, can they trade 
 together? A very pertinent question; and it would pass the wit of any 
 of the declaimers against middle-men to answer it, except in one way. 
 They must he brought together by middle-men; to speak in language be- 
 coming the subject, by the merchant,^ who will conduct his operations ac- 
 cordingly. He will inevitably follow also the law of "buying in the 
 cheapest market, and selling in the dearest," for he could do no business 
 if he did not. This law is as beneficent as it is inevitable; inasmuch as 
 goods are cheap wherever they are redundant; and dear where they are 
 scarce. At every stage of these complicated processes, the banker finds 
 
 6 For the sake of argument, let us suppose that some tea-planter determines to 
 dispense with intermediaries and to go, in person, to the consumer of his products. 
 To enable him to do this, he will probably borrow money from one of the numerous 
 bankers who abound in the interior of China. The project would certainly find 
 favor with those who imagine the merchant to be the natural enemy of the pro- 
 ducer, and who sometimes initiate arrangements with a view to dispensing with 
 him altogether, by which — to say truth— they generally lose money. In pursuance 
 of this Idea, the planter will proceed with his tea to the nearest river, or canal- 
 down which he voyages, week after week, to a seaport — with his tea. He then 
 crosses the ocean, lands on this continent, pays customs duties, and travels thou- 
 sands of miles, arriving at last in a commercial city of Canada or the United 
 States. Thence he proceeds to find his customer, and dispose of his product. 
 
 But is it not evident that the expenses of such a journey as this would more 
 than swallow up the whole value of his tea, and probably leave him stranded in a 
 foreign city, unable to return home? For the few chests of tea, which he had been 
 able to produce, would have had to bear the whole expenses of his journey. 
 
 This may seem an absurd illustration, but it represents what would be inevi- 
 table, in case the theory of dispensing with "middle-men" were fully carried out. 
 
 If the Ignorant prejudice against intermediaries were to prevail generally, al- 
 most every farmer on this continent would have to undertake some such a journey 
 every year. 
 
 The first Journey of the kind would undeceive him, and compel him to ac- 
 knowledge that the merchant is as necessary a factor in business as the pro- 
 ducer. For It has been demonstrated by experience, that even if a number of 
 farmers pool their products, and appoint an agent to sell for them, his remunera- 
 tion, on the average, will be as much as the profits of a merchant, and their risk 
 far greater. 
 
ELEMENTARY PRINCIPLES OF COMMERCE. 11 
 
 lijs place, and renders assistance. Almost from the time when the seed 
 is sown, the mine opened, the trees felled, the fishing fleet sails, and all 
 througli the journeys taken, either by raw materials or finished products, 
 to their destination, the aid of the hanker is required and rendered. 
 
 Co-OrEPATION OF THE BaNKER IN THE CARRYING ON OF TrADE. 
 
 Throughout the whole processes of trade, the banker co-operates by 
 supplying money to those who carry it on and also by transporting money, 
 from place to place, as needed. 
 
 The bankers who take part in the work are of various grades. Some 
 of them, indeed, take only a small part: passing it on to others of a larger 
 calibre and with wider connections. The largest class bankers not only 
 supply money at first hand to the men who purchase the products of the 
 planter and the farmers, but they also open credits for the lumberer and 
 the foreign merchant, give cash for the bills drawn by the exporter on 
 foreign correspondents, lend money to the importer to pay customs duties 
 and finally assist in the distribution of finished products, by discounting 
 the notes given to him by his customers. 
 
 What are the methods and principles under which all this is done; 
 which of them are sound, which of them conduce to success, and which 
 lead to failure or disaster, will lie fully opened up in subsequent papers. 
 
CHAPTER III. 
 
 FURTHER PRINCIPLES OF BANKING, AND DEVELOPMENT 
 OF PRIVATE BANKING IN ENGLAND. 
 
 Origin and Meaning or the Word "Bank" — The Delegation of a 
 Banker's Powers — DevelopiMent of Private Banking in England 
 — Considerations Governing Private Banking. 
 
 A BANKER who has opened an office for business will not have pro- 
 ceeded far before perceiving that his occupation is a far more ex- 
 acting one than that of a capitalist or money-lender. The obliga- 
 tion to pay variable sums of money on demand involves another obligation, 
 viz., that he, or some one acting for him, shall always be on the spot to 
 answer the demand made. If the banker, before entering upon the busi- 
 ness of banking, properly so called, has been in the habit of lending 
 money, and has become known as a money-lender, he will have had appli- 
 cations in abundance, but he would be under no obligation to be on the 
 spot to answer them. He could intermit his business to pursue other 
 engagements, yet no one would have ground of complaint against him. 
 Herein is precisely the point of difference between a money-lender and a 
 banker — a difference that is frequently not w-ell understood, and the fail- 
 ure to understand Avhich has led to confusion both in thinking and irr 
 writing. 
 
 Origin and Meaning of the Word "Bank." 
 
 It is of the essence of a banker's business that he shall be in a posi- 
 tion, at all times, to pay money on demand to those who have the right to 
 demand it. This necessity is the reason why a banker finds it necessary 
 to have what is universally known as a counter; an elevated table, in fact,^ 
 of proper height for convenience of counting. If we pursue the idea we 
 shall arrive at the genesis of the word bank in English, or banco in Italian,, 
 as applied to money matters.^ 
 
 But there is a further idea connected with this word. The word in^ 
 common usage is invariably connected with the idea of protection — pro- 
 tection, for example, against floods, as are the levees of the Mississippi, 
 or against the tides, as in Holland and Nova Scotia. And the idea of 
 protection is strictly applicable to a banker's counting-table or counter,. 
 
 7 The word bank in its original meaning, as is well known, indicates nothing 
 but a raised platform, generally of earth, behind or before which persons can stand. 
 The word thus came to be applied to the elevated table, or platfoim, behind which 
 the banker, or his substitute, stood to receive or pay money. This elevated table 
 is the real "bank," and the person who stands behind it is a banker or his rep- 
 resentative. 
 
 12 
 
FURTHER PRINCIPLES OF BANKING. 13 
 
 -so made, ex necessita, as to protect the banker himself. For the purpose 
 of mere counting, a table in llie middle of a room would answer. But a 
 banker must have a store of money beside him, and finding it necessary 
 to protect that store, needs to arrange his counting-table so he can stand 
 behind it, and do business in security. Indeed, it is customary on this 
 side of the Atlantic, as every customer of a bank knows, to protect the 
 counter itself by screens. 
 
 In conducting the business of banking, it is necessary to fix certain 
 hours when demands for money can legally be made. As to these hours, 
 a private banker can fix them for himself; in which case his customers, 
 or the public, being duly notified, will be debarred from making legal 
 demands at any other time. This is part of his contract with them. But 
 usually, as the business of banking is developed, the hours of business 
 become settled by custom, to which all conform for the sake of conveni- 
 ence. If the bank is a corporation its hours of business are usually stated 
 in its by-laws, and advertised, especially in country districts, where per- 
 sons have to travel far at times to reach the banker at all. The only way 
 in wliieli. as a rule, the law intervenes, is to declare what days shall be 
 considered as IwUdoys on which no demand can be made at all. 
 
 The Delegation of a Banker's Powers. 
 
 The necessity of being always present to answer demands soon im- 
 poses on the banker a serious question, viz., to whom can he delegate the 
 power to answer demands in his absence.'' For absent, at times, he must 
 be. Even if he can trust a clerk to answer the demands of depositors 
 from hour to hour, the safe custody of his stock of money or securities 
 is a matter of the first consequence, demanding the attention of more 
 than one person. But even the function of lending money cannot be 
 intermitted by a banker, as it can by a mere money-lender. With his 
 open door and open counter, he must be prepared either in person or by 
 <deputy to answer the demands of borrowers as well as of depositors. 
 The commercial customers of a })ank have obligations of their own to 
 meet day by day, and in these days dejiend upon arrangements with their 
 bankers to enable them to meet these requirements. It is therefore neces- 
 sary for a banker to have some person in his office whom he can trust to 
 exercise this function of lending money in liis absence. But what posi- 
 tion is such a person to occupy? 
 
 This question, in former years, was repeatedly asked by the bankers 
 of England, and it was generally and finally answered the same way. 
 When such a ])erson was found, and he was generally some clerk or officer 
 of their own, whose qualities of shrewdness and sound judgment had 
 been observed in course of business, he was at first entrusted with power 
 of attorney and placed in the position of managing clerk. 
 
 But it would soon occur to a shrewd banker, that such an officer might 
 build up an interest and connection of his own, which interest, so long as 
 there was no closer connection between them than employer and employed, 
 
14 BANKING AND COMMERCE. 
 
 might in time become something distinct from liis own. It might, in fact^ 
 be used to his disadvantage and loss. This would naturally lead to the 
 consideration whether it was not desirable to bind such a capable officer 
 to himself by taking him into partnership. By this means all thoughts 
 of rivalry, or separate interest, would be banished, and such a close iden- 
 tity be established that tlie banker and his confidential officer would no 
 longer be two persons, but, for all banking purposes, only one. 
 
 Development of Private Banking in England. 
 
 Through this process of what may be called banking evolution, nearly 
 all the great banking firms of England have passed. The clever and 
 shrewd accountant has been promoted to the management of the office^ 
 taken into partnership, accumulated wealth, and has finally become the 
 head and principal of the concern which he once served. And his name, 
 once jitterly unknown, is now in a prominent place in the firm's title, and 
 figures in banking and commercial directories so prominently as to be 
 known all over England. 
 
 It is thus, probably, that the banking firms of England came to have 
 such long titles as many of them had until modern developments set in. 
 Thus, for example, it Avas with Barclay, Bevan, Triton, Trells & Co., Glyn 
 Mills, Halifax & Co., Williams, Deacon, Labouchere & Co., Smith, Payne 
 & Smiths, and other firms of like character. And so great a weight did 
 the more prominent of these names carry, that they have been generally 
 retained in the corporate name of the joint-stock company into which they 
 have been merged.** 
 
 But in the. serious step of taking in a partner, either a merchant or a 
 banker will have regard to many circumstances. Perfect honesty and 
 reliability are the primary considerations; after that come business knowl- 
 edge, prudence and industr}^, and a due measure of caution and enter- 
 prise. Along with all these a merchant who consults his own comfort 
 will take care to have a man of reasonably good temper and common 
 sense about him. A quarrelsome, cross-grained man, one who cannot give 
 and take, a man so conceited that he cannot fancy any other person knows 
 anything, no matter how clever he may be, should be left to plow his 
 own furrow, but never entrusted with a partnership. 
 
 In a business like banking, where the interests of so many persons 
 depend on a successful continuance of the business, it is of the first im- 
 portance to provide for the future. The business of a bank carried on by 
 
 8 Most of this has as close an application to commercial partnerships as to 
 partnership in banking. It Is well known that many of the men who are now 
 heads of great commercial firms commenced their career in the "house" as clerks. 
 While doing their own special work faithfully, they displayed ability for some- 
 thing beyond it — ability not only for keeping books, but for suggesting improve- 
 ments; capacity not only as salesmen, but shrewdness in discriminating between 
 customers; ability not only to handle goods, but capacity for understanding what 
 goods would suit the customers. They displayed, in fact, that quality that Is so 
 difficult to define, but so well understood, viz., business ability. 
 
FURTHER PRINCIPLES OF BANKING. 15 
 
 private individuals might, in the absence of such arrangements, be brought 
 to an entire stop by the death or withdrawal of a single partner. Such 
 a stoppage, in certain cases, might throw the business of' a whole district 
 into confusion. Tliese contingencies in former days were necessarily pro- 
 vided for by arrangements between the partners themselves, and tlie best 
 legal skill in England was drawn upon to prepare deeds that would ensure 
 a continuance of business. That this has been successfully done is sho^Vll 
 by the recoid of banking firms that have had an unbroken career for 
 upwards of two centuries, and are in vigorous life at this day. In such 
 arrangements none are so much interested as junior partners, for they, 
 obviously, have most to fear from an interruption of the business. 
 
 Private banking on this continent has never occupied the high position 
 it attained in England. The reason for the extraordinary development 
 of banking by private firms in England was the jealously-guarded monop- 
 oly of the Bank of England. In the United States, however, and in Can- 
 ada, as in Scotland, the development of banking by joint-stock compa- 
 nies has always been unrestricted by monopoly; and even the very ap- 
 pearance of it, in the case of the United States Bank, was ruthlessly 
 stamped out by a Democratic President. 
 
 But though the banking business of towns and cities on this continent 
 has been almost wholly conducted by joint-stock companies, a consider- 
 able sphere has existed (at any rate, until late years) for the operations 
 of private banking in the thriving villages and smaller towns of the 
 country. 
 
 The humorous story of David Harura, which, as is well known, was 
 written by a bank officer, probably gives a fair picture of the kind of 
 persons that many of them were, and the kind of business they did, in the 
 village communities of the United States. 
 
 Private banking at one time had obtained a considerable development 
 in Canada, and that for a good reason in the circumstances of the coun- 
 try, largely agricultural as the Provinces of Canada are, the towns and 
 cities generally at considerable distances from each other, and between 
 thena having grown up villages of fair population, in which are to be 
 found some of the features of town life. Such villages did not at one time 
 afford sufficient business to make it profitable for joint-stock banks to be 
 established in them, for their methods and machinery are costlj', and it is 
 contrary to law for them to undertake any other business. But where a 
 joint-stock bank would scarcely pay expenses, a private banker might 
 make a respectable living; for in addition to banking he could undertake, 
 for example, to effect insurances, both fire and life. He could assist in 
 drawing up the simpler kinds of legal instruments, and do the same busi- 
 ness as is done by professional accountants. This state of thing, how- 
 ever, is gradually passing away. By the development of the country, 
 many former villages are becoming towns, and are affording sufficient 
 business to enable one or more branches of joint-stock banks to be estab- 
 lished in them. Even in this case, however, a private banking firm may 
 
16 BANKING AND COMMERCE. 
 
 maintain its position, if its partners are known to have undoubted means, 
 and have so conducted the business as to gain and keep the confidence 
 of tlie community. 
 
 CoXSIDERATIONS GOVERNING PrIVATE BaNKING. 
 
 Before entering on the hirger class of questions that appertain to 
 joint-stock banking, it may be well to note briefly the considerations that 
 should govern a private banker in the conduct of his business: 
 
 (1) He should certainly not carry on any mercantile business, for in 
 so doing he might be in competition with his own customers. 
 
 (2) He should undoubtedlj' be possessed of a sufficient amount of 
 
 CAPITAL. 
 
 Every private banker, in the nature of things, should have a fund out 
 of which he can meet the losses which are incidental to the lending of 
 money. For if he cannot meet them out of his capital, he must draw 
 upon the money of his depositors for the purpose, to their loss. 
 
 It must be remembered that the customers of a private banker are 
 almost invariably persons of small means, who have deposited money 
 with him which they cannot afford to lose. A village community, as a 
 rule, is not distressed or embarrassed by the failure of one of its store- 
 keepers; but it may be very seriously distressed, and the distress will 
 probably extend to the farming community round about, if a private 
 banker cannot repay the sums deposited with him. 
 
 There is, however, this to be said, that a private banker can take 
 securities for his loans that are prohibited to a chartered bank and so 
 keep himself safe. 
 
 (3) A private banker must beware of getting his money "locked up," 
 and will need to calculate carefully the length of time which borrowers 
 require so as to be sure of having sufficient money in his office, or at com- 
 mand, to meet daih' demands. And in taking fixed deposits, the notice 
 should be sufficiently long to enable him to make arrangements to meet a 
 large demand without embarrassment. He will, of course, have it under- 
 stood in taking deposits of more than an average amount that the notice 
 will be required, as a matter of business. 
 
 (4) To insure all this, he must keep sufficient reserves. 
 
 There are private bankers in Canada who have continuously fulfilled 
 these conditions, and maintained a prosperous business. 
 
 On the other hand, there have been a certain number of failures 
 amongst this class, which failures have been almost invariably traceable 
 to want of sufficient capital to begin with, coupled with a disposition to 
 take risks which a cljartercd bank would avoid. 
 
CHAPTER ir. 
 
 JOINT-STOCK BANKING IN GENERAL. 
 
 Canadian Joint-Stock Banks — The Bank of England — Organiza- 
 tion OF Banks in the United States. 
 
 THE early bankers who co-operated in the movements of commerce, in 
 Europe, apart from the great institutions which were avowedly 
 created to assist the Government, were largely, as has been seen, 
 private individuals or firms, lint since the extraordinary opening up of 
 countries in modern times and the vast development of commerce in con- 
 sequence, the tendenc}' has increasingly been for banking to be carried 
 on by incorporated companies. 
 
 Banking, therefore, in all its important spheres, is thus carried on; 
 and it has been evident that the principal motive for giving powers to 
 banks in a corporate form is tliat they might efficiently co-operate in the 
 promotion of commerce. 
 
 A joint-stock bank with its headquarters in China and its agencies 
 in England, the United States, and Japan, takes an influential part in 
 the movements of the Eastern trade of those countries. Similarly, an 
 Indian bank having its headquarters in London covers the whole of our 
 Indian Empire with its operations and takes part in the movements, both 
 outward and inward, of the commerce of Australia and New Zealand. 
 These are simple facts. 
 
 Canadian Joint-Stock Banks. 
 
 The principal banking corporation of Canada covers the whole Do- 
 minion from the Atlantic to the Pacific with its branches, and there is 
 scarcely an operation of manufacture or conunerce therein which that 
 institution does not assist in developing. But the commerce of Canada 
 has an intimate connection with England and the United States. This 
 bank therefore has offices in London, New York and Chicago, and assists 
 in carrying on the larger operations of trade in all these cities. 
 
 The same may be said of other Canadian banks whose operations 
 cover an immense extent of territory in the United States as well as in 
 Canada, from New Orleans to the Yukon, and enable them to co-operate 
 in the movements of commerce from its smallest beginnings in the opera- 
 tions of a country trader, to those vast developments by wliich the pro- 
 ductions of whole countries are massed for shipment in great ports and 
 sent across the ocean to the remotest parts of the world. It is evident, 
 however, that banks covering so wide a field must of necessity have a 
 corporate form. No private firm, however wealthy, could possibly carry 
 2 17 
 
18 RANKING AND COMMERCE. 
 
 on business in so many diversified forms, in such diverse conditions, and 
 covering such vast spheres of operation as are covered by some modern 
 banks. Incorporation therefore was a necessity. 
 
 Thk Bank of England. 
 
 It has been already pointed out that the continuity of a banking firm 
 is a most essential feature of the business. So many interests depend 
 upon it, that all modern countries have sought by legislation to provide 
 that, so far as possible, they shall not be subject to the changes of time 
 and chance. In Scotland the greater part of the business of banking has 
 been carried on for two hundred 3'ears by corporations organized directly 
 or indirectly by acts of Parliament. And banking would doubtless have 
 had the same development in England, but for the fact that up to a cer- 
 tain period the Bank of England was by long tradition extremely jeal- 
 ous of banking being carried on by corporations. That great corpora- 
 tion, while willing to tolerate what it could not prevent, viz., the forma- 
 tion of private banking partnerships, would never tolerate the formation 
 of bankmg corporations created by act of Parliament. 
 
 The idea of the Bank of England was that all other banks in England 
 should be tributaries to itself, revolving round it as lesser lights revolve 
 around the sun. They should keep an account with it, deposit with it all 
 their spare funds, keep their cash reserves in its hands, and in case of 
 need rely upon it for assistance by rediscounting or by secured advances. 
 
 The Bank of England was thus to be the Banker's Bank; and any 
 coming into touch on its part with the commerce and trade of the coun- 
 try was to be througli the medium of other bankers. There was no ex- 
 press law to this effect, but the unwritten custom gradually grew up, and 
 so potent was its force that in time it became fixed and universal. Even 
 aff.er the force of public opinion became potent enough (as it did after 
 the crash amongst the {private banking interest in 1825) to break down the 
 opposition of the Bank to the establishment of banking corporations, the 
 force of this tradition prevailed. To this day the Bank of England is 
 largely the banker's bank. All the banks in the country keep an account 
 with some bank in London, or with the Bank of England direct, and all 
 London banks keep an account with the Bank of England, and commit 
 to its keeping their reserves of cash. Such great banks as the National 
 Provincial Bank of England, with its 200 branches and 50,000,000 ster- 
 ling of deposits ; or the London and County, with its deposits of 4 1,000,- 
 000 sterling, not to mention other great corporations in London, Man- 
 chester, Liverpool and other centres, besides every bank in Scotland and 
 Ireland, all acknowledge the supremacy of the great central institution 
 by keeping accounts with it, and lodging with it their spare funds. 
 
 It might be thouglit tliat M'hcn power was given by Parliament to es- 
 tablish banking corporations, the Legislature would endeavor to have 
 them modelled upon tlie pattern of the Bank of England. That great 
 corporation had demonstrated the wisdom of its constitution by a re- 
 
JOINT-STOCK BANKINC. IN GENERAL. 19 
 
 markablo course of what was, on the wliolo, good management. During 
 all the vicissitudes of English history from the Revolution of I688 to the 
 time then present, it had maintained its ])osition, and rendered ines- 
 timable service to the State. But the Bank of England was not taken 
 as a model ; and that for good reasons. The Bank had one distinguish- 
 ing power which marked it off from all other banking concerns in the 
 kingdom. It had tlie ]K)wer of issuing notes which were created legal 
 TENDER b}' law. 
 
 There was at that time nothing to prevent private bankers from issu- 
 ing notes to any extent they pleased. They were not empowered to do 
 it by law; neither did the law pit^vent them, the only condition imposed by 
 law was that no note-issuing bank should carry on business within sixty 
 miles of London. But none of their notes were legal tender, consequent- 
 ly their circulation was almost wholly confined to the district in which 
 they were issued. But the notes of the Bank of England being legal 
 tender, circulated, and were intended to circulate, all over England, and 
 were a legal tender everywhere except at the Bank itself.'' But they were 
 never legal tender in Scotland. 
 
 There was another reason why the charter of the Bank of England 
 could not be followed in framing laws for other joint-stock banks. It was 
 a part of its original constitution, and that feature of it has subsisted 
 ever since, that the whole of its capital should be loaned to the Govern- 
 ment. It was founded to assist the Government in the difficult days of 
 the Revolution of lt)88, and it has retained this essential feature to this 
 day. Although its capital has been increased more than tenfold since its 
 foundation, there has never been a time, down to the present hour, when 
 the whole of it failed to be loaned to the Government of the day. And 
 further, it has always been understood that the Government has had the 
 first claim to any resources that the Bank might possess. This has never 
 been embodied in legislation, but it is one of those traditions that have 
 been so long in operation as to have acquired the force of law.'" 
 
 9 It must not be supposed, however, that the Government of England was 
 responsible for the notes. It is a common mistake to suppose that it was. The 
 Government of England never issued circulating notes as the Government of Can- 
 ada and the Government of the United States have done. The Government of 
 England, though it did interfere occasionally in times of pressure to assist the 
 Bank, was careful to guard itself from being responsible for the notes. All that 
 it ever did was to relax some one or other of the restrictions under which notes 
 were issued. But no noteholder or other creditor of the Bank was ever allowed 
 to imagine that he could go to the Treasury and make a legal demand there. 
 
 10 The same principle of the whole of the capital of the bank being lent to 
 the Government lies at the foundation of the National banking system of the 
 United States. This system, like that of the Bank of England, took its rise from 
 the necessities of the Government. Its founder had primarily in view not the 
 establishment of sound banks, or of a secure circulation, but the obtaining of 
 money to carry on the war. And it fully answered its purpose. Almost the whole 
 banking capital of the country was loaned to the Government in the shape of the 
 holding of Government securities. And not only was the operation in the early 
 days of the war highly profitable ,to the banks, but a currency was secured whose 
 safety has never been questioned. But in the change of times and circumstances 
 very grave defects have been developed in this system which will be noticed later 
 
20 BANKING AND COMMERCE. 
 
 The charter of the Bank of England, which charter is simply an act 
 of Parliament embodying its constitution, has therefore never been adopt- 
 ed as a model for other banks in England. In fact, the joint-stock banks 
 of England have never been governed by the provisions of a general act 
 as have the banks of Canada and the United States. Apart from the 
 necessity of making a declaration as to the amount of their proposed 
 capital, the names of their original directors and stockholders and most 
 particularly the name of the officer in whose name the corporation can 
 sue and be sued, they are at liberty to carry on their business in any way 
 that stockholders and directors may deem advisable. The one important 
 restriction to which they are subject is in the amount of their circulation. 
 
 Since the passing of the celebrated Banking Act of Sir Robert Peel in 
 1844, every bank in England, whether private or joint-stock, has been 
 obliged to restrict its issue within the amount of its average issue for the 
 three years previous to 1844. This amount has been registered, and ap- 
 pears in every published statement of the note issues of English banks. 
 The banks of Scotland made a strenuous resistance to the restriction be- 
 ing applied to them; and succeeded so far as this, that they were allowed 
 to exceed this limit on condition that they should hold gold for the excess 
 — an academic rule, devised by legislators of little banking experience. 
 But the liberty they obtained to pass beyond the average of circulation 
 of half a century ago has proved to be most profitable to the banks and 
 advantageous to the country. 
 
 Organization of Banks in thk United States. 
 
 The organization of banks in the United States has passed through 
 various stages, and is complicated by the fact that it has been dealt with 
 by both State and Federal legislation^ To attempt even a brief summary 
 of the steps by which the banking laws of the United States have reached 
 their present development would be beyond the scope of this work. Suf- 
 fice to say that after an attempt made many years ago to establish a 
 Bank of the United States on somewhat similar principles to that of the 
 Bank of England, which project failed for political reasons, numerous 
 charters were granted by the separate States. Many of these, especially in 
 the Eastern cities, were well considered, and framed with much financial 
 wisdom. But it was far otherwise in some of the States of the West. In 
 these newer communities, many charters were granted by their several 
 States in a manner that set common sense at defiance, 'lumbers of banks 
 were established with powers to issue notes, imder the foolish idea that 
 by this means money Could be made plentiful, and the development and 
 prosperity of the district insured. No proper provisions were made for 
 the redemption of these notes; it thus came about tliat masses of cur- 
 rency were set afloat which, speedily went to a discount; whilst much of it 
 ultimately became almost as valueless as the Continental currency of the 
 Revolution. This "wild-cat" currency (as it was named") was a source 
 of untold trouble to merchants and travelers, from the fact that the notes 
 
A- 
 
 JOINT-STOCte I BANKING IN GENERAL. 21 
 
 oIl nearly every Western bank had a different value, which value could 
 only be ascertained from publications issued for the purpose. These 
 bank-note reporters were a necessary part of the furniture of every busi- 
 ness office, and were even necessary to householders, lawyers and minis- 
 ters; for none of them could tell what was the real value of the bank 
 bills that were circulated, without consulting one of these records. ' But a 
 step Avas at length taken that put a final stop to all such bank issues. A 
 great exigency had arisen under which the interests of the separate 
 States had to give way. It was during the first years of the great Civil 
 War that Mr. Chase, the very able Secretary of the Treasur}', conceived 
 the idea of establishing, not one great bank of issue like the Bank of 
 England, but numhers of banks whose whole capital should be lent to 
 the Government; and who should have the right of issuing notes for the 
 amount of their loan which would be held as security therefor (less a 
 percentage reserved). These notes, then, would be indubitably safe, and 
 could be received without question, from one extremity of the country to 
 the other. But they were never made legal tender. The system was no 
 sooner launched than it proved successful. It appealed to patriotic feel- 
 ing. Large numbers of banks, formerly organized under State laws, 
 adopted the National system. And under it an immense number of new 
 banks were organized. The old issues of State banks, under the opera- 
 tion of this system and disabilities imposed by it, speedily disappeared, 
 and the notes of the national banks became universally prevalent. 
 
 Along with all this, a system of Government issues was devised which 
 were made legal tender. But as they were not payable in gold, which 
 continued at a premium all through the war, they commanded no more 
 favor than the notes of the national banks. For these were exchangeable 
 for Government notes at any time, besides which they were, if anything, 
 safer. The notes of the Government rested on the credit of the Govern- 
 ment alone, while those of the banks were not only secured by Government 
 bonds, but were a charge upon the assets of the several banks. 
 
 It is not necessary to enter further on the subject of the Government 
 issues. Our concern is with banking, and with the laws of the United 
 States on the subject. 
 
 It must not be imagined that when the National banking system began 
 to prevail so extensively it drove the old State banks out of existence. By 
 no means. The State banks could, under their respective laws, carry on 
 all the operations of banking except the issue of notes. Now, for banks 
 in large cities, the power to issue their own currency, restricted as it was 
 to a lesser amount than their paid-up capital, and accompanied by the 
 obligation to hold Government bonds, was of less and less value as the 
 bonds yielded a lessening rate of interest, until finally it became of scarce- 
 ly any value at all. It was, and it is, of some value to banks in smaller 
 centres. But banks in the large cities, and especially in New York, could 
 dispense with it without inconvenience, and work under State charters, on 
 Iheir own credit alone. 
 
CHAPTER V. 
 
 THE INTERNAL ECONOMY OF A JOINT STOCK BANK. 
 
 The Two ]\Jain Departments — The Teller — His Qualifications — 
 The Ledger Keeper — Discount and Loan Department — The Ac- 
 countant — The Branch Manager. 
 
 IN every banking office, be it large or small, the work will be divided 
 into two main departments — the handling of money and the keeping 
 of accounts; each of these, in a large office, having various subdi- 
 visions. Above and beyond these is the department of management, 
 whether of a single office, or the whole bank. Let us consider each of 
 these in order. 
 
 The Teller. 
 
 The first persons with whom a banker has to do when he opens an 
 office are those who bring money to deposit. It is for the purpose of 
 receiving them, that he must have a counter. This counter, as has been 
 shown, is the original bank, behind which the banker or his officers stand 
 and on which money is placed to be counted. Hence its name. A person 
 who stands at this counter ready to receive or pay money is called in Eng- 
 land a cashier, meaning a person who handles cash. In Scotland, the 
 United States, and Canada, this officer is called a teller, or a person who 
 tells or cou7its out tlie money he handles. In a small branch the manager 
 himself often performs this office; but when the business is enlarged, the 
 work must be delegated to another. The amount passing through the 
 hands of such an officer in the course of a day is very large, and he is re- 
 sponsible for it to the last penny, or the last cent. Such a man must 
 have a good head for figures, quickness of fingers, be able to count rap- 
 idly all sorts of money, and also to make rapid calculations. A slow 
 man, no matter how correctly he may do his work, will never answer for 
 this post. He will only waste the time of customers, and irritate them. A 
 good teller must have a quick eye, so as to be able to tell a bad coin or 
 a forged note or draft, the moment he sees it. An expert teller will come 
 to have a sort of instinct about such things, and be able to detect a bad 
 coin or a bad bill, or raised draft, by instant eyesight. Besides this, he 
 must be able to keep cool on busy days, and learn not to be flurried when 
 many are waiting about the counter, or are unreasonable in their require- 
 ments, as some people arc at times.* ^ If he does get flurried, he will be 
 
 11 In some English banks a practice prevails of providing an ante-room and 
 
 only admitting into the banking office as many persons at a time as there are 
 
 tellers to wait upon them. Thus there is never a crowd aVwut the counter, and 
 
 the teller has only one person to attend to at a time. To carry out this practice. 
 
 22 
 
THE I>:Tf:RNAL ECONOMY OF A JOINT STOCK BANK. 23 
 
 sure to lose money. He should liave a large development of civility; if 
 it be not natural to him, he should cultivate it. 
 
 A good teller, besides being quick and cool, will also be observant; 
 and being so, may notice many things in his intercourse with customers 
 and the public which are worth communicating to the manager. In a 
 large bank a division is customarily made between the duties of those 
 who receive money and those who pay it out. In both of these, however, 
 the observant mind, the quick eye, and the skilful fingers are equally 
 necessary. 
 
 In the banks of the United States, the senior teller has the responsi- 
 bility of certifying checks to be good — a difficult function to perform, as 
 may be supposed, seeing that the teller does not keep the accounts him- 
 self, and must trust largely to his memory. This officer in an American 
 bank is entrusted with a certain discretion in the matter of certification. 
 He is always a man of experience, and his position is next to that of 
 Manager or Cashier. 
 
 The Ledger Keeper. 
 
 In the natural order of things, the next person with whom a bank 
 customer has to do, is the person who keeps the ledger containing the 
 customers' accounts. The connection between him and the teller is neces- 
 sarily close, and it is important that the money paid in or taken out by a 
 customer should be speedily entered, so that on a busy day of many 
 transactions the account may be accurately stated at any hour. Otherwise, 
 there is danger of a check being refused when there are funds to meet it, 
 or of a check being paid after all the funds have been drawn out. The 
 ledger keeper, like the teller, must be both accurate and quick; but above 
 all things accurate, as a mistake in the keeping of a customer's account 
 may lead to an actual loss of uioney, or to the closing of the account itself. 
 And like a teller he must have a quick eye to observe, for upon him rests 
 the responsibility of discovering forgeries. To this officer in a Canadian 
 bank all checks are presented to be "marked good" before being paid. 
 But there is a difference in this matter between the custom prevailing in 
 the United States and in Canada. The ledger keeper in Canada before 
 he marks a check good, debits the customer's accojint with it. There is 
 thus a scientific precision about the process. In an American bank, the 
 check is simply certified to be good without the customer's account being 
 debited with it, a practice which seems to open the door to serious abuse. 
 This custom is analogous to that prevailing in many English banks. It 
 is not good in theory, but it seems to work well in practice. 
 
 however, different arrangements are required from those in a Canadian bank, 
 where customers have direct access to a ledger keeper or a discount or collection 
 clerk. On the whole, the Canadian arrangement Is preferable, though it requires 
 much more coolness on the part of a teller than the other. An English cashier 
 or Scotch teller almost invariably stands at an open countar. On this side the 
 Atlantic, he is protected by a railing. 
 
-2t BANKING AND COMMERCE. 
 
 The ledger keeper, like the teller, if observant, may notice many 
 things in the working of accounts that are worth communicating to the 
 manager, especially symptoms of exchanging checks, or borrowing sur- 
 reptitiously from another bank. He can also form an opinion as to 
 whether a customer is easy financially or otherwise. 
 
 The DisrouNT and Loan Department. 
 
 In this important ofFce a clerk has many opportunities of displaying 
 more than ordinary intelligence if he is possessed of it. To a discount 
 clerk is committed the responsibility of seeing that the bills he handles 
 are in proper legal shape. The manager considers whether or not the 
 names on the bills are satisfactory, and if they ought to be discounted. 
 But the discount clerk examines every bill to see that there has been no 
 material alteration in it, that it is not dated on Sunday, that the signature 
 and endorsement are in proper order, that it is complete, and not defec- 
 tive. He will also notice any peculiarity in the signature or endorsement 
 which would lead to a suspicion of fraud. A good discount clerk will 
 notice how the account of a customer is working, whether favorably or 
 otherwise, also whether renewals are frequent, and certain lines of paper 
 tend to become chronic. 
 
 In the case of loans he will be expected to scrutinize the security, and 
 to see that such documents as warehouse receipts, bills of lading, policies 
 of insurance, etc., are in proper order. Loans on bonds and stocks, where 
 the business is large, are generally under charge of a special clerk. His 
 duties will be very similar to those of a discount clerk. Here again an 
 observant clerk will notice much, in the actual handling of the business, 
 which would be of interest to a manager to know. 
 
 The duties of a collection clerh are of much the same character as a 
 discount clerk, and call for no special remark. The same may be said 
 of the exchange clerk. He deals with foreign bills as a discount clerk 
 does with inland ones. And while a manager determines whether the 
 bills are to be bought or not, and fixes the rate, the exchange clerk will 
 see whether they are drawn in accordance with law, and whether the doc- 
 uments of security are in proper form. 
 
 The Accountant. 
 
 The highest officer in the ordinary working of a bank, and coming 
 immediately next to the manager, is the accountant. He keeps himself, 
 or causes to be kept, the important book called the general ledger in 
 which the leading departments of the office are summarized. It is by an 
 accurate keeping of this book that the manager is made acquainted with 
 the amount of the deposits, discounts, and cash, day by day, together with 
 balances due from one or to other banks or agencies. It is by information 
 gathered from this book that he guides his course, very much as a navi- 
 gator guides his ship. Summaries of the principal accounts are also laid 
 
THE INTERNAL ECONOMY OF A JOINT STOCK BANK. 25 
 
 before the meetings of the Board and form the foundation of statements 
 to be made to the Government. As a matter of mere bookkeeping this 
 ledger is not difficult to keep. But to keep it accurately is of the highest 
 possible importance, for it is a check upon and a key to all the other 
 books of the bank. There is another book of high importance which 
 should be kept by the accountant, or his assistant, viz., what is generally 
 known os the liability ledger. In this book an account is opened with 
 every discounting or borrowing customer, which account is debited with 
 every bill discounted, and credited with every bill paid. The account 
 shows whether a customer is keeping within the line allotted to him by the 
 Board, and also, what is of the highest importance, how much of each 
 man's name (or each stock in case of stock loans) every customer has 
 under discount. This book should be kept rather by the accountant than 
 by the discount clerk. Its contents should be so familiar to the manager, 
 by examanation or by summaries, that he may be said practically to know 
 it off by heart. The accountant should always be a man who has passed 
 through the grades and understands the work of every other clerk in 
 the bank. He has a supervisory control of the other clerks, and is respon- 
 sible for the discipline of the office. He is able to instruct clerks in their 
 duties, and to advise them in case of difficulty. He naturally takes the 
 manager's place in case of absence and is looked upon as eligible for pro- 
 motion to a managership, should he display managing qualities when 
 placed temporarily in charge. 
 
 But here must be inserted an important proviso. It is not every good 
 bank officer who is fit to be a manager. A man may be a first-rate teller, 
 or even a llrst-class accountant, and vet not have the qualities that would 
 make him a successful manager. What these qualities are will appear 
 later on; meanwhile, the foregoing will give a general idea of the leading 
 divisions of work in a banking office. But they are susceptible of varia- 
 tions according to circumstances, and there must be many subdivisions, 
 as the office increases in size. In the smaller branches, of which many 
 exist in Great Britain and the Colonies, the whole of the above duties Avill 
 be performed by two, three, or four men, of whom the manager is one. 
 But as a branch, or individual bank as in the United States, increases in 
 size, it is necessary to arrange matters so that the manager shall have less 
 and less time occupied with the routine work of the office, so as to con- 
 centrate his attention upon its discounts and loans and keeping a proper 
 supply of money. Far better to have an extra clerk employed, at a cost 
 of a few hundred dollars a year, than to allow the manager's attention 
 to be divided from matters by which the bank may lose thousands or tens 
 of thousands. 
 
 One final remark. The various books and departments will be ar- 
 ranged so as to check each other. Especially should the bookkeeping de- 
 partment be a check upon the officers who handle money or its repre- 
 sentatives. 
 
 The foregoing sketch is applicable solely to the single office of a 
 
26 BANKING AND COMMERCE. 
 
 bank. The general manager's department, or, as it is sometimes called, 
 the Head Office, calls for a different set of men altogether. 
 
 The Branch Manager. 
 
 The manager, as Mr. Gilbart well observes, in his practical treatise, 
 is a banker and not a hank clerk; and there is somewhat of the same dif- 
 ference between the tAvo as there is between a lawyer's clerk and a lawyer. 
 
 The manager should be a man who understands the principles of the 
 business, and especially the principles on which loaning and discounting 
 should be conducted. He must have the aptitudes of a man of business; 
 must have more or less of "savoir-faire;" must know how to talk to dif- 
 ferent classes of people ; in fact, he should understand human nature. It 
 is he to whom customers apply for loans, and to him they explain their 
 position, their means, and their difficulties. He must understand enough 
 of business to judge whether their a]iplications are reasonable or not; 
 whether the amount is proportioned to the extent of the business ; whether 
 the security is good ; whether the time is reasonable. And as his business 
 proceeds, he must be able to judge whether a discount account is working 
 properly; whether the class of bills offered is satisfactory; above all, he 
 must have a keen eye to observe any signs o^ coming trouble, and courage 
 to take measures accordingly. Yet he must be discreet, and not hasty in 
 forming conclusions; otherwise, he may do serious mischief. An import- 
 ant part of a manager's care is to see that the supply of money for his 
 office is sufficient, so that he may meet the daily demands of customers 
 and of other bankers through the clearing-house or in course of exchange. 
 If he is manager of a branch, he has a head office to fall back upon for 
 supplies, and a general manager for orders or advice. But the daily duty 
 presses upon him of seeing that his office is properly equipped for meet- 
 ing demands. For this reason he will notice day by day the balances at 
 his credit in other banks or agencies. 
 
 A manager will pay special attention to how his clerks per- 
 form their duties, and "keep them up to the mark" in that respect; en- 
 couraging or reproving as circumstances arise, or if necessary changing 
 their positions, or recommending change. He will of course be often in 
 communication with the accountant in regard to these matters, and will 
 see that the accountant himself performs his duties properly.^ - 
 
 A good manager will look after the past-due bills of his customers, and 
 take them specially under his own charge. 
 
 This remark applies very particularly if any of his customers become 
 insolvent. It will be his special care to see that the most is made of the 
 estate, and that the rights of the bank are properly guarded in the mat- 
 
 12 The manager will of course understand the work of every man in the office, 
 and should be able to do It If necessary. It will add immensely to his influence 
 In the office if he Is able to go to a clerk and say. "You are not doing this work 
 properly. See now, this is the way to do it." suiting the action to the word. 
 Clerks in such an ofl;ice will be sure to be alert, and will talk among themselves, 
 "The manager knows all about It: it is no use making foolish excuses to him." 
 
THE INTERNAL ECONOMY OF A JOINT STOCK BANK. 27 
 
 ter of ranking npon it. If the bank of wliich he is manager has no 
 branches, other duties will devolve upon him : such, for example, as relate 
 to his intercourse with the directors, and also to general administration. 
 These, however, are fully treated in the chapter relating to the depart- 
 ment of the General IManager.^' 
 
 13 In a bank situated in the United States, nearly the whole of the foregoing 
 will apply as a description of the work to be done and the men that have to do it. 
 But the person entitled "Branch Manager" in the above would, in an American 
 bank, be called Cashier, or possibly President. The only change needed, in that 
 case, in the description of his duties, would be that Instead of having a General 
 Manager and Head Office to refer to, he has a Board of Directors on the spot. 
 
CHAPTER VI. 
 DIRECTORS OF AN INCORPORATED BANK. 
 
 Directors — General Qualifications — Duties — The President — 
 Committees of Directors — Local Directors. 
 
 THE general framework of a joint-stock bank in Canada and in the 
 United States, and in some resjDects also, but in a lesser degree, in 
 Great Britain, is defined by acts of Parliament or of Congress. 
 
 In Canada and the United States the law regulates the minimum of 
 capital, the rights and functions of stockholders, and their voting power. 
 It ordains that such banks must be governed by a Board of Directors; 
 it regulates also the minimum amount of stock they must hold, and the 
 minimum number of which the board shall be composed. The law gives 
 these directors the power of appointing and dismissing officers, but it does 
 not prescribe anything as to the duties and responsibilities of such officers. 
 
 The Banking Law of Canada also limits the amount of circulating^ 
 bills, and regulates the security under which they are issued. But it im- 
 poses no limits on deposits, or discounts, or investments, or reserves. The 
 principal difference between the banking law of Canada and that of Eng- 
 land is in the restrictions that the former lays upon the manner in which 
 banking loans shall be made, namely, forbidding absolutely any loans upon 
 real estate, and in the imposition of elaborate rules and regulations, with 
 penalties, with respect to loans on merchandise, all which are absolutely 
 foreign to English and Scotch ideas of banking. But on these points^ 
 the law of the United States agrees Avith that of Canada. 
 
 Directors. 
 
 All these and some other minor points being prescribed by law, it will 
 be well to consider how such laws are, or should be, worked out in prac- 
 tice, in order best to secure the object for which a bank is established. 
 
 Proceeding upon this idea, it is evident that the first matter of con- 
 sideration will be the composition of the board of directors. LTpon this 
 will largely depend not only the well-being and prosperity of the bank, 
 but the very continuity of its existence. The government of the bank is 
 placed in their hands by law, and they are lield responsible for it by 
 ))ublic opinion. And rightly so. 
 
 What manner of man therefore sliould a director be individually.* 
 And what sort of selection should be made with regard to the men who 
 have to act collectively.-^ These are pertinent questions, and an endeavor 
 will be made to answer them. 
 
 When the legislature ordained that joint-stock bank? and trading 
 
DIRKCrORS OF AN INCORPORATED BANK. 2.9 
 
 ■companies should be governrd hy directors, the intention was doubtless 
 that these should have somewhat of the i)lace of partners in a private 
 firm. This was the theory, no doubt. But consideration will show 
 that it cannot be strictly carried out. For the partners in a private firm, 
 whether of bankers or traders, are men who have the sole ownership of 
 the business, and are responsible to its creditors to the full extent of 
 their fortune. They are, too, generally men who have a practical 
 acquaintance with the business, most of them having been brought up to it, 
 and gone through the grades necessary to a familiarity with its details. 
 The heads of the trading houses of every country are generally men 
 •of this sort, and know how to make, buy, sell, and handle the goods of 
 their line of business. As to banking it is well known that the partners 
 in the great private banks of England have generally had a practical 
 training in the office, many of them having entered early and gone through 
 the grades of each department exactly as if they were to be subordinates 
 all their lives. 
 
 But it is impossible that conditions like these should be found in a 
 number of men selected for the board of a joint-stock bank, or of a manu- 
 facturing company. They have not, and cannot have, the technical 
 knowledge that partners would have. Hence they must rely much more 
 upon the skilled and trained officers in their employ, upon whose shoulders 
 rest the daily care and administration of the concern. In the sphere of 
 banking such a class of officers has long existed, the necessity for them 
 having arisen many generations ago in Scotland and the United States, 
 and partially so in England. In manufacturing and trading corporations 
 such matters can only be said to be in a condition of slow development. 
 Meantime the question will arise as to what can be reasonably looked 
 for from a body of gentlemen who are placed by law in the position of 
 directors, but who have not practical knowledge of the business to be di- 
 rected ? 
 
 To answer this, let us first take the case of a Joint-stock Bank. 
 
 When a gentleman takes his seat for the first time at the board of a 
 "bank, and iiartieularly one with branches in various parts of the country, 
 he will probably have jjlaced before him reports as to its general condi- 
 tion, the amount of its deposits, its discounts, and its circulation ; also the 
 amount of cash on hand and balances in banking centres. He will not, 
 at first, probably understand much about the bearing of these statements, 
 or matters submitted or referred to the board, but will learn later on. 
 By and by, however, there will almost certainly arise matters of which 
 he has some special knowledge. An account may be offered at one of 
 the branches by a party in his own line of business. He then may be 
 able to say to his fellow directors, "I know that firm. They are fairly 
 well off now, but the head of the firm is somewhat tricky. He failed 
 some j^ears ago, when he was in business alone, and his creditors (I 
 was one) generally thought he look advantage of them. You had 
 tetter be careful what you do with this application." Or, it may be, 
 
so BANKING AND COMMERCE. 
 
 he can say the exact opposite of all this; viz., "That firm has not over- 
 much capital, and they have not been long in business. But they are 
 capable and honest: they are the kind of people that get on. Depend 
 upon it, they won't borrow what they cannot pay. You may safely give 
 them credit, though perhaps, not quite all they ask." Or the board m«y 
 be discussing the case of a customer who is embarrassed, the question 
 being whether the bank shall support him or allow him to fail. Here 
 a director who is in wholesale trade, and has customers of his own, may 
 give valuable advice, based on his own experience; or, it may be, valuable 
 information as to the antecedents of the person concerned. 
 
 As time goes on, the new director will acquire a knowledge of the 
 leading customers of the bank, and their lines of discount, or their loans 
 and the security held therefor. The knowledge that such a director 
 acquires bv moving about in the commercial world, will be of great 
 assistance in enabling him to form a judgment with regard to many of 
 these accounts, and specially if the question arises of an application 
 for a temporary advance without security. In such a case, the informa- 
 tion possessed by a single member of the board may be of invaluable 
 assistance to the whole, in arriving at a safe conclusion. 
 
 In time a director may acquire sufficient knowledge of the theory of 
 banking to form an opinion as to the general course of its business; 
 namely, as to whether it is extending its discounts too widely or not; 
 whether its loans are properly distributed; whether the reserves of the 
 bank are sufficient and in proper shape, and other questions of general 
 policy, which can only be properly considered by a man of experience. 
 
 In the case of a director of a manufacturing company — let us say, 
 of a large saw-milling establishment- -a director who is not a practical 
 lumberman may form an idea as to the financial position and banking 
 arrangements of the company, and whether they are doing too much 
 or too little business for their capital. In time he may be able to judge 
 whether the cutting of timber is proceeding economically, and whether 
 the outcome of logs is sufficient for the money expended on a certain 
 camp; whether the drive is well managed, whether the mill itself is pro- 
 ducing all it ought to do, and of the right proportion of qualities. If 
 a responsible foreman or manager is to be engaged, he may have special 
 knowledge of applicants, and so on. The same principles will apply to 
 the management of every kind of manufacturing enterprise, whether it 
 be a cotton factory, an iron foundry, a sugar refinery, or any other of 
 the diversified industries of the country. In all these, as well as in the 
 sphere of banking, a body of men of business experience and general 
 intelligence may render aid of a highly valuable character, even though 
 they have no knowledge of the technique of the business. 
 
 General Qualifications of a Bank Director. 
 Proceeding to the general characteristics that should be sought for in 
 the director of a bank, it may be said that: 
 
DIRECTORS OF AN INCORPORATED BANK. 31 
 
 (1) A bank director should be. in the first place, a jiian of means. 
 The law itself prescribes this, to a certain extent, for it orders that the 
 director must hold a certain amouirt of stock, the amount being propor- 
 tioned to the capital of the bank. But the prescribed amount is small 
 compared with the responsibility of the office, and it might, with ad- 
 vantage, be largely increased, and doubled or trebled in the case of an 
 ordinary director, and quadrupled in the case of a president. But even 
 then a man would be thought poorly qualified to direct the affairs of a 
 bank whose means did not extend beyond such a minimum as that. The 
 amount of wealth implied in the term "man of means" should be such as 
 gives a man importance and standing in the community, and causes him to 
 be looked up to by the people generally as a man of capital and sub- 
 stance.^* 
 
 It would be well, as a rule, in selecting men of wealth for directors to 
 give preference to such as have been the architects of their own fortune. 
 There are exceptions to this, of course; but it will be found, as a rule, that 
 such men know the value of money better, how it is gained, and how it is 
 lost, what is safe and what is not. A man who has made a success of his 
 own business is likely to be able to direct other affairs successfully. 
 
 (2) A bank director should be a man of character, respected in the 
 commimity he has lived in, with good antecedents and connections, a man 
 of whom it could be said "that his word is his bond." He should have a 
 character, too, for good judgment, prudence and common sense; such, for 
 example, as would be made a trustee of an estate, or executor under a will. 
 If he is a director in one or more trading corporations or in an insurance 
 company, it will be all the better, as evidencing that other men think well 
 of him and can work with him in positions of responsibilitj'. 
 
 (3) A bank director should be, as a rule, a man of influence; that is, 
 he should be able to influence others, and therefore to influence business 
 to the bank. There are in every commercial centre men of both means and 
 character, who are so wrapped up in their own concerns as scarcely ever 
 to mingle with their fellows; commercial recluses in fact, who know a 
 mere nothing of commercial affairs in general. Such men, as a rule, would 
 make very indifferent bank directors. AVhat is wanted in a bank director, 
 amongst other things, is the power of influencing business, and the ca- 
 pacity for bringing good accounts to the bank. 
 
 (4) It is desirable that there shall be, on a bank board, men who rep- 
 resent and have connections in the leading lines of business in the country. 
 The applications for loans from a bank come from men of different 
 trades and occupations, and it is obviously useful to have, at least, one 
 
 14 In using these words it sliould be remembered, that wealth and substance 
 are relative terms. A man is looked upon as wealthy in a village, who would 
 by no means be considered such in a town or city. Similarly, the wealthy man 
 of the large town or small city would be accounted nothing of in London or New 
 York. When, therefore, it is laid down, that a bank director should be a man of 
 means, the measure of his wealth must be estimated according to the rule of the 
 place where the headquarters of the bank are situated. 
 
32 BANKING AND COMMERCE. 
 
 person on the board who has special knowledge of the trade carried on 
 by the applicant. Such a one can give valuable hints to his fellow direct- 
 ors or a manager with regard to accounts of people in that line of busi- 
 ness: always under the condition, however, that they shall not be rivals 
 of his own. In that case, his judgment Mould be apt to be warped. 
 
 (5) A bank director should be a man who can work in harmony with 
 others. A cross-grained and self-opinionated man, a man who considers 
 that all wisdom is centred in himself, and cannot bear contradiction, a 
 man who is unable to "give and take" but must have his own way in every- 
 thing, and at all times, is not suitable for a bank director. At the same 
 time no man sitting at a bank board should be content to be a mere dum- 
 my, unable to give an opinion or to maintain it, giving way at the least 
 sign of dissent, agreeing with everything and having no mind of his own 
 about anything. A board composed of men of that kind could not direct 
 anything. 
 
 (6) A bank director should be a man who can give sufficient time to 
 the affairs of the bank to make himself acquainted with them generally, 
 who can attend board meetings with sufficient regularity as to make his 
 influence felt. 
 
 (7) A bank director, lastly, should be a good judge of the capacity 
 of men, for a most important part of his duties is to make aiDpointment'' 
 to the higher offices. 
 
 A Bank Director's Duties. 
 
 Such being the qualifications of a bank director, it remains to be con- 
 sidered what may be counted as his duties, and how they should be dis- 
 charged; in fact, what a director should do, and what he should not do. 
 
 (1) It is clearly the duty of the directors to see that the officers of 
 the bank, especially those of the higher grades, be men of proper capac- 
 ity; also, to see that they are properly remunerated according to the gen- 
 eral standard in such matters, and that proper provision is made for them 
 in case of retirement in advancing years. 
 
 (2) It is above all the duty and province of the directors to see that 
 the loans, discounts, and investments of the bank are made with due cau- 
 tion and on proper security. No attention to other departments of the 
 business can atone for inattention to this. For in this lies the key to 
 success or failure. It is the one thing to which all others are secondary. 
 The directors, therefore, will see that all important transactions of that 
 kind shall be submitted to them for consideration, saving only such small 
 matters as may safely be left to the officers. They will also require 
 statements to be laid before them at every meeting of all important 
 transactions that have transpired in the interval. And to such statements 
 they will give such attention as will enable them to have a clear appre- 
 hension of the business the bank is doing. 
 
 It has not seldom happened in the case of the failure of a bank that 
 there were on its board of directors men of conspicuous ability in their 
 
DIRECTORS OF AN INCORPORATED BANK. 33 
 
 own line of l)usinrss; and the question was generally asked, how was it 
 that such men could allow the bank to drift into such a position? They 
 would never have dreamed of allowing their own business to become so 
 involved ; how was it they allowed it in the case of a bank at whose board 
 they legularly took their place? It is no proper answer to such criticism 
 to plead that they were not informed of tlie transactions by which losses 
 had been sustained ; still less that they had not time to examine state- 
 ments put before them; least of all that they trusted all such matters to 
 the manager. There are undoubtedly numbers of matters that must be 
 trusted to the manager; and it cannot be pretended that a board of di- 
 rectors shall be acquainted M'ith the multitudinous small transactions that 
 make up so much of tlie total business of the bank. But experience shows 
 that as a rule it is not in the smaller transactions of a bank that losses 
 arise of sufficient amount in the aggregate to cause a bank to fail. It is 
 invariably the case that the failure or embarrassment of a bank arises 
 from the failure or embarrassment of a comparatively small number of 
 its largest customers. Tlie* bank may have live thousand small customers 
 whose transactions no board of directors can take effective cognizance of. 
 But although there will be an average of losses from such transactions, 
 the average will never be high enough to cause serious difficulty. But the 
 same bank may have on its books twenty or thirty, or, in the case of 
 a very large institution, with widespread connections, forty or fifty ac- 
 counts of considerable magnitude. It is within such a narrow circle as 
 this that the storms of the banking world strike. 
 
 Now, it is plainly within the power of any board of directors to keep 
 an efficient oversight over such a small number of customers as this. 
 Amongst the circle of large customers, there will be, to a certainty, a 
 proportion that practically do not require watching at all; firms of un- 
 doubted strength and capital, whose accounts are so conducted as to give 
 evidence of their soundness. But there will almost certainly be a propor- 
 tion to which directors should give close attention; make close enquiries 
 of the manager, and be ready to check any signs of irregularity, or what 
 might lead to danger. It is with regard to this smaller circle that the 
 directors should distinctly not leave everything to the manager. For if 
 they do, they can, very fairly be held up to reprobation, if matters go 
 wrong. 
 
 With regard to these, the directors should require constant and full 
 information. Long and voluminous lists of comparatively small transac- 
 tions it would be impossible for them to keep track of, unless they were 
 prepared to spend the whole of their time at the bank. But any body of 
 directors who take their duties and responsibilities seriously can keep 
 track of this small number of accounts within the time that directors n ay 
 reasonably be expected to give to the business. Not that they need never 
 extend their observations beyond this circle. A director may well, at 
 times, extend his observations over transactions of a second and third 
 order of magnitude and particularly those with regard to which he has 
 3 
 
34. BANKING AND COMMERCE. 
 
 special knowlcdfrc. And beside this duty of indindual directors it is 
 desirable for the whole board, at times, to examine the whole business 
 done at a certain branch, and if needful to give directions respecting it. 
 By following this method the whole business of the bank can be brought 
 under review at least once a year. But let it be repeated, the circle of im- 
 portant accounts should be before the directors, not once a year, nor even 
 once a month, but constantly. For when a large firm or trading company 
 begins to go wrong, it is apt to go Avrong at a constantly accelerating 
 pace. And its course may be something like that of runaway horses — 
 rapidly getting beyond control and rusliing on to destruction. In one 
 short month all this may develop, and if directors intermit their atten- 
 tion to large accounts, even for this period, they may awake to find that 
 one of them has gone wrong to such an extent that an enormous loss is 
 staring them in the face. It was one large account, rapidly developing 
 mischief, that ruined the Royal Bank of Liverpool. Four large accounts 
 brought the City of Glasgow Bank to the ground. Yet the hundreds, 
 indeed it may be said, the thousands, of its sntaller accounts, even of this 
 bank, were on as good a footing as those of the rest of the Scotch banks. 
 In this case, too, the course of deterioration was very rapid. The same 
 may be said of the Western Bank of Scotland. And, referring to Cana- 
 dian banks, one of the largest of them, the Commercial Bank of Canada, 
 was ruined by one account, another by some six or seven, others by two 
 or three. 
 
 It would be a desirable point of administration for the directors of 
 every bank to require to be laid on the table, at every meeting, a state- 
 ment of all advances amounting to a certain sum and upwards, at all 
 points; the amount of the minimum to be proportioned to the magnitude 
 of the whole business. This should not be in too much detail, but in such 
 a shape that it could be readily taken in and understood at a single sitting. 
 If details are wanted in the case of any account, they could be called for 
 and furnished by the general manager at the next sitting. 
 
 It is needless to add that if the bank has large investments, such as 
 considerable holdings of debentures and bonds, these should be examined 
 and criticised by directors also. They generally consist of considerable 
 sums of any one security, and may be looked over without a great expendi- 
 ture of time.^^ 
 
 15 These observations are founded upon the theory that the board of directors 
 should consist of men who are not only men of character and influence, but men 
 who understand the business of the country, and also have a substantial interest 
 in the bank. It is a fact within the author's knowledge, that in a certain great 
 banking corporation that failed the directors collectively held no more stock than 
 would have been considered much too small for any one of them to hold individ- 
 ually. This was before the present Banking Act was passed. Yet the capital of 
 this bank placed it in the front rank of the banking corporations of the country. 
 These directors, too. consisted almost wholly of men who had no practical ac- 
 quaintance with business. 
 
 In another case of the failure of a great bank in the same part of the country, 
 the directors were largely retired gentlemen or politicians. On one occasion when 
 an Important business account was under discussion by the board, one of its 
 
DIRECTORS OF AN INCORPORATED BANK. 35 
 
 The President. 
 
 In considering the qualifications and duties of directors, one of the 
 most important questions is as to tlic position of the president or chair- 
 man of the board. With regard to tliis important matter wide differences 
 prevail in banking practice. In England and Scotland, the presiding 
 officer is, as a rule, called not President but Chairman of the Board. He 
 gives, as a rule, not much more time to the bank than the other directors, 
 but is supposed as chairman to represent the bank more perfectly before 
 the public and also to give more special study to its affairs. But he does 
 not sign statements; and in the reports of annual meetings his name, as 
 a rule, has no more prominence than that of other directors. 
 
 In other cases, however, the chairman (or president) gives more ac- 
 tive and personal attention to the bank than his confreres; giving more 
 or less of daily attendance; being ready, therefore, for any consultation!) 
 Avith the manager or for conferences with important customers. The 
 chairman, if he continues in office, year after year, as he may do, and 
 giving a large part of his time to the affairs of the bank, may become 
 almost a practical banker himself, and able to exercise an intelligent and 
 capable supervision over every department of its business. This, how- 
 ever, presupposes that he shall be not only in daily attendance, but give 
 as much time and attention to the bank as if he were senior partner in a 
 firm. When a great private banking or commercial firm has assumed the 
 form of a joint-stock company, it is natural that the late principal part- 
 ner shall become 7iot only the chairman of the board, but exercise the 
 functions above described. In this case, the manager or general man- 
 ager will have less importance than in the case of a company that has 
 been "joint-stock" from its foundation. 
 
 In the United States an entirely different order of things has gradu- 
 ally come to prevail, though it does not prevail universally even yet. But 
 in a large majority of banks the president is a salaried officer of the insti- 
 tution, performing the same duties as the manager or general manager 
 of an English or Canadian bank. He is not a merchant or man of busi- 
 ness, having a position in the community irrespective of his position in 
 the bank, like the Chairman of an English board. He is a professional 
 banker, and has generally passed through the grades and risen from the 
 ranks, having been promoted, from one position to another, as other 
 officers have been. 
 
 There are both advantages and disadvantages in this method. The 
 
 members, a retired admiral of the British Navy, after the matter had been dis- 
 cussed for some time exclaimed, "Well, I can't express an opinion. I know how 
 to sail a ship, but I'll be hanged if I know anything of such matters as this." 
 One of the directors of this bank, almost the only commercial man amongst them, 
 confined his attention to such small advances as his own business led him into 
 connection with. These came to be referred to, at board meetings, as Mr. M.'s 
 proteges. Needless to say, that the bank suffered no appreciable loss by this class 
 of business, whilst it was overwhelmed by the losses arising out of political and 
 other loans of great magnitude. 
 
36 BANKING AND COMMERCE. 
 
 advantages arc tliat such a ]ircsidcnt carries more weight and authority in 
 the bank's daily administration, by reason of his being a director. The 
 disadvantage is, that he does not move about in the commercial community 
 and acquire information as a commercial chairman of the board would do. 
 Tliis is a serious practical drawback. It is a disadvantage also to the 
 man himself, that though a salaried officer, and his livelihood being de- 
 pendent upon his continuance in office, he is subject to an annual election. 
 There is this further to be said, that it is much more difficult for the rest 
 of the board, in case of need, to criticise imfavorably the actions of one of 
 their own number, than if he were simply an officer and not a director. 
 And there is more danger, under such an arrangement, of matters being 
 left wholly to the president and of his being allowed to administer the 
 a.Tairs of the bank without efficient check. 
 
 But some American bank presidents are men who correspond to the 
 English chairman of a board and who have large interests outside the 
 bank. 
 
 In Canada, the position of president is somewhat midway between the 
 English and the American position. He is always styled president, and 
 not chairman. And he signs statements and documents, especially the 
 annual report to the stockholders. But he is in no respect a salaried 
 officer, but a man moving about in the community, and having interests 
 of a business character or otherwise, apart altogether from the bank. He 
 is always a man of position, and generally a man of wealth. Sometimes 
 he has been the founder of the bank, and is the largest stockholder in 
 it; naturally therefore being chosen president year after year. In this 
 case he will have a somewhat dominating influence, overshadowing the 
 other directors, and exercising more influence in the management than 
 all the rest put together. This influence, moreover, is immensely increased 
 by the fact that under the Canadian law votes at the annual meeting 
 (when directors are elected) can be by proxy, and that it is an almost 
 universal custom for such proxies to be given to the president. He thus 
 carries the election of the directors in his hand. These are well aware 
 of it, and the fact cannot but aff'ect their course of action. For the 
 power that proxies give is no mere nominal one in practice. It has more 
 than once happened in Canadian banking that some director, having given 
 umbrage to the president, has found himself rejected on the day of the 
 annual meeting, much to his surprise and annoyance, solely by the presi- 
 dent's proxies. Such a president is apt, at times, to assume functions 
 that properly pertain to a general manager; a condition of things that is 
 generally detrimental to the bank's interest. 
 
 There have been, however, presidents in Canada who corresponded 
 much more closely to the American officer of that name. But these have 
 invariably been men of exceptional ability and experience, who have been 
 general managers, and were given the title and ]iosition of president as a 
 matter of honor, without the smallest difference l>eing made in their duties 
 or remuneration. 
 
DIEECTOPS OF AN INCORPORATED BANK. 31 
 
 Committees of Directors. 
 
 In some banks, especially those of great majjnitude and widespread 
 interests, it is customary for one or more committees of the board to be 
 formed, each committee having a supervision over certain branches or of 
 certain departments of the business. It cannot be considered a desir- 
 able plan, as it tends to divide the interests of directors and prevent their 
 having an intelligent comprehension of the whole. It can never be for- 
 gotten that every director is responsible to the stockholders for every part 
 of the bank's administration, and that it would be no proper answer for a 
 director in case of hcav}' loss or disaster to say that it did not occur in 
 his dep;irtment. On the other hand, a small committee consisting of — 
 let us say — the president, the vice-president, and another member of the 
 board, may sometimes be formed into a committee of reference. This 
 plan, however, will only work when the members of such a committee 
 agree to give, and do actually give, more time to the business than the 
 rest of the board. But all such arrangements for committees are apt 
 to work disadvantageously because of their tendency to shift responsi- 
 bility from the general manager and to prevent his exercising the full 
 measure of his capacity in his office. Every benefit that could reasonably 
 be expected from such a committee would be attained by frequent meet- 
 ings of the board, say, twice a week, and by making it the interest of 
 directors to attend. A daily meeting, which has been practiced in some 
 cases, is apt to degenerate into an occasion for talking politics or gossip. 
 
 Local Directors. 
 These are authorized by the Banking Act, but the law gives no power 
 of management, and places no responsibility upon such directors, though 
 they may be of great service in distant branches, provided they arc men 
 who can influence business, or give useful information to the manager. 
 The best local director to be found will sometimes be the solicitor of the 
 bank, provided he has no other interests. 
 
CHAPTER VIL 
 
 OFFICERS OF AN INCORPORATED BANK HAVING 
 BRANCHES— THE GENERAL MANAGER. 
 
 The General Manager— The Inspector — Chief Accountant — Sec- 
 retary. 
 
 THE office of general manager is the last stage in the evolution of the 
 government of a joint-stock bank, so far as officers are concerned. 
 The work only arises when a bank has arrived at the stage of de- 
 velopment where the bank has many branches, each with a manager at the 
 head of it. To supervise all these subordinate managers, to give them direc- 
 tions from time to time, and to make all their operations harmonize with 
 the workings of the bank as a whole under the directors, is the duty of the 
 general manager. The title implies not merely that he has heads of de- 
 partments under him — for that the manager of a single office has — but 
 that he has managers under him, each of whom has the control and re- 
 sponsibility of his own office. The position of general manager is some- 
 what analogous to that of an admiral of a fleet, which fleet consists of a 
 number of ships, each being under the command of a captain who is 
 supreme in liis own sphere. The first and second officers in such a ship 
 will take their directions from the captain, while he in turn is subject to 
 the order of the admiral. The admiral himself is subject, as to matters 
 of general policy, to the Government. It is the admiral, however, who is 
 looked to to insure success in the operations of the fleet. If these opera- 
 tions are successful the honor is his; if unsuccessful, the disgrace of fail- 
 ure appertains to him. The analogy between this and the functions of a 
 general manager is very close. He is a servant of a board of directors 
 who are entrusted by law with functions of government. But for actual 
 and effectual carrying out of these functions they are largely dependent 
 upon the general manager. He gives them advice both as to matters of 
 general policy and as to the details of operations. This advice they may 
 take or refuse at their pleasure. They may modify it, suggest changes. 
 or, if they think well, reject it. This they have the power to do. But to 
 reject entirely the advice of a professional banker in any matter of im- 
 portance, involves responsibility, and directors will scarcely take such a 
 step unless for very good reasons. This, certainly, should only occur 
 rarely in practice, for to be often rejecting the advice of a general man- 
 ager would be a sure indication for the necessity of a change. His posi- 
 tion with regard to the managers under him is one of undisputed author- 
 ity. It is to him they look for direction as to the course of the business 
 of the brancli. .\nd his orders thev must obey. Otherwise there would 
 
OFFICERS OF AN INCORPORATED BANK. r,<j 
 
 be danger of serious miscliief to the bank as a whole. For branch man- 
 agers to fancy they can appeal to the board against a general manager's 
 directions would speedily bring about a dislocation of the whole business. 
 Each branch manager. l)owever, is supreme in his own sphere. To him 
 his officers look for directions, and his orders tliey must obey. 
 
 There may, of course, arise extraordinary circumstances in which this 
 order of things is set aside, but the foregoing must be taken as ordinary 
 practice. 
 
 To understand properly the responsibilities of a general manager it is 
 needful that the powers and functions of each branch of the bank should 
 be understood. Every individual branch carries the full powers and re- 
 sponsibilities of the bank within itself. To the general public and to 
 the bodv of customers, the "branch" is the hank. For every dollar of 
 money deposited in the branch the whole bank is responsible. For every 
 engagement to lend money or to transmit money the bank is responsible. 
 Tliis is the strength of the branch system so far as the public is con- 
 cerned. But there is a reverse side. For every failure in these respects 
 the whole bank is responsible. If at a certain branch, even the least, 
 there were a failure to perform any of the engagements it had entered 
 into, the whole bank would be discredited. It is under these circum- 
 stances — and they press upon him constantly — that a general manager 
 exercises the functions of his office. These functions may be summed up 
 in one sentence. It is his business to see that every branch during every 
 day is properly equipped and managed; that it has a sufficient and im- 
 mediately available supply of money of every kind for the wants of cus- 
 tomers and the public; that the money lent at the branch is lent safely 
 and according to directions ; that the bills discounted are good bills ; that 
 the securities taken for loans are according to law; that delinquent cus- 
 tomers are sharply looked after; that proper men are appointed to the 
 various departments; that the accounts are properly kept; that ])roper 
 statements of the business arc forwarded to be laid before the directors 
 and to be reported to the Government, and, finally, that the cash on hand 
 always corresponds with the amount shown in the books. 
 
 This is a large line of responsibilities, but they, every one, fall upon a 
 general manager day by day. It is to enable him to fulfil them that he 
 requires a staff of officers whose duties are of an entirely different de- 
 scription from any that have been named hitherto. The work of a general 
 manager is thus: 
 
 1. A work of supervision. 
 
 2. A work of audit. 
 
 3. A work of control. 
 
 To enable him to perform these functions he has in liis department : 
 
 An assistant general manager. 
 
 An inspector and officers under him. 
 
 A chief accountant and officers under him. 
 
 A secretary with officers under him. 
 
40 BANKING AND COMMERCE. 
 
 In addition to these will be an officer in charge of the stock registers 
 and dividends. The most important officer in the department is 
 
 The Inspector. 
 
 This officer is usually a man of considerable banking experience, and 
 he has generally been a branch manager. He visits the branches and 
 makes a perfect audit of the accounts and examination of the cash and 
 securities. The time of the inspector's visits is confidentially arranged 
 with the general manager, so that his arrival may not be anticipated and 
 prepared for. For if it were, the object of the visit would be frustrated. 
 
 In former days, when practical banking was not so well understood, 
 and no officer was set apart to the work of inspection, it was customary 
 for the president to make a tour of the branches, taking an accountant 
 with him to assist in the details of the inspection. But so little was 
 thought of the importance of secrecy in these visits that it was generally 
 known throughout the branches that the president was on his annual tour 
 and might shortly be expected. It was even sometimes mentioned as an 
 item in the daily papers. Of course, in that condition of things prepara- 
 tion was made for his visit. It is known to the writer that on an occa- 
 sion of this kind the manager in a large city branch was actually advised 
 that the vice-president of the bank would be visiting the city shortly and 
 would take the opportunity of examining his branch. At that very time 
 great irregularities were occurring in the management, improper loans to 
 a large amount being carried on by overdrafts, and false statements sent 
 week by week to the head office to conceal them. The manager, being 
 apprised of the approaching visit, took the pains to transfer all the cur- 
 rent accounts to a new ledger and managed, by borrowing checks and 
 concocting fraudulent entries, to make the irregular accounts appear cor- 
 rect. The visit took place, the books were balanced, the accounts were 
 examined, and all was reported in order. Shortly afterwards, circum- 
 stances transpired which rendered further concealment impossible. The 
 manager came to the head office of the bank and made a confession to the 
 directors, though he did not confess all. A trained officer was at once 
 sent down to make examination. The whole machinery of fraud was 
 then brought to light, and the manager's trick exposed of a new ledger 
 being opened long before the old one was filled up, and bogus checks 
 credited to the fraudulent account. This case is referred to in a subse- 
 quent chapter on frauds, but it is noticed here to show the folly of the 
 old inspecting system. 
 
 The importance of the audit and examination by an inspector will be 
 evident when it is considered that it is by reports and statements from the 
 branches that the whole bank is governed. It is only by summarizing 
 these statements that a general manager can know, for example, whether 
 the law with regard to circulation is being complied with, or whether the 
 bank as a whole is holding adequate reserves of cash and available funds. 
 It is by statements from branches that the head office can judge whether 
 
OFFICERS OF AN INCORPORATED BANK. 41 
 
 they are doing sound business and following tlie lines laid down for the 
 government of managers. Yet he can not know that the statements are 
 correct except hij actual examination on the spot. AVhether there actually 
 is so much cash at a certain branch as is represented, whether the bills 
 discounted are secured as they are reported to be, whether the loans are 
 really endorsed or guaranteed by the parties whose names are entered in 
 the lists, these and many other important matters can only be proved by 
 actual examination. An inspection, therefore, is of vital importance. No 
 general manager and no board can be on sure ground with regard to the 
 business of any branch until an inspection has been made. But to be of 
 value the inspection must be thorough. An inspection carelessly made is 
 more dangerous than none at all, for it lulls into a false security. 
 
 A case once came under the writer's notice of a weak manager, having 
 allowed some of the securities for an important account to lapse, and 
 being afraid to confess, went on reporting advances to be covered as 
 before. The supposed endorsers were good beyond doubt and, according 
 to the statements rendered, the account was working satisfactorily. But 
 when the office was examined the inspector failed to notice that the names 
 of the supposed endorsers were not on the paper. They had in fact with- 
 drawn their names, having a Avell-founded suspicion that the party was 
 not doing well. This, however, the'inspector failed to notice. The head 
 office being lulled into a false security, the account went on as accounts 
 usually do. The advances increased considerably, but the business was 
 reported as enlarging and the customer as prospering, and the endorse- 
 ments made the account perfectly safe — apparently. 
 
 But a subsequent examination of the office revealed the fraud. Twice 
 before, the inspecting officer had failed to notice it, but he discovered the 
 real position at last. The bank, instead of advances well secured, had 
 no security at all; the customer's affairs were in a bad condition; he had 
 been going from bad to worse ever since the endorsements were with- 
 drawn, and was utterly bankrupt. Now, had the false statements of the 
 manager been discovered at the first examination, the account would have 
 been stopi)cd before much mischief had been done; the customer would 
 have failed, but the bank would have made but a small loss. As it was, 
 the loss finally sustained was sufficient to wipe out all the profits of the 
 branch for years. 
 
 The inspector's business is therefore one of verification. Examina- 
 tions must be made down to the minutest detail. In counting bimdles of 
 notes, for example, an inspector must not make a cursory handling of 
 each bundle, but must handle every note. He must not excuse himself 
 from this minute examination by thinking, "Oh, it is impossible that such 
 a manager or such a teller as this can be wrong." The very reason of his 
 office, and the work he has to do, is to prove that they are not. If man- 
 agers and tellers had never done wrong, and never could be guilty of 
 irregularities and frauds, there would be no need for inspections at all. 
 In law ever}' man is considered innocent until he is proved guilty. The 
 
 w(VERS'T'.i' 
 
42 BANKING AND COMMERCE. 
 
 inspector M-ho does his work thoroughly will proceed on the assumption 
 that everything is wrong until he has proved it to be right. He will be 
 specially careful in examining cash to guard against a mode of manipula- 
 tions by which a parcel can be handed him twice over. This has been 
 done to the writer's knowledge and a shortage covered up thereby. In 
 examining the checks on hand he will be careful to notice any indication 
 that they have been borrowed. This, too, has been done and inspections 
 passed successfully when large shortages existed at that very time.*^ 
 
 It is important in making examinations to notice any slight irregulari- 
 ties and probe them to the bottom, for a very trifling irregularity may be 
 a key to the discovery of numbers of others extending back, perhaps, for 
 months and even years. For example, the books of a certain branch on 
 being examined by an inspector were found to be irregularly balanced. 
 This was a key to irregularities that had been going on almost from the 
 day the branch was opened. It is within the writer's knowledge that 
 these books required to be checked over again from the very opening of 
 the branch and much of them absolutely rewritten. The final result of 
 this was that after the irregularities had been rectified, the manager, who 
 was of course dismissed, had to make good a defalcation of between seven 
 and eight thousand dollars. In this case, if the inspection had been loose 
 and inefficient the irregularities would certainly have gone on for many 
 months longer, and the deficit have grown to much larger proportions. 
 It should be noted that the reports and statements made to head office 
 from this branch were always in order. No amount of attention there 
 
 16 A sad revelation of fraud of this sort transpired in a branch office of an 
 important bank many years ago. The senior teller was a man highly respected 
 In the community. He had long held his position, which was an unusually good 
 one. It was, in fact, more like that of an assistant manager than a teller. He 
 occupied a beautiful place in the outskirts of the city, and his pretty pony carriage 
 was well known to the habitues of the streets. But one day a rumor got about 
 that there was something wrong with his cash, that he had been suspended; then, 
 soon after, that he had been dismissed. It proved to be too true. His face was 
 seen no more in the bank and his pony carriage disappeared from the streets; his 
 effects were sold and he left the city never to return. The truth gradually leaked 
 out. A considerable shortage was discovered in his cash. Whether it was ever 
 made good the author is unaware, but it is an undoubted fact that the shortage 
 had been going on for a considerable time, and that the office had been inspected 
 more than once whilst it existed. It then became known to bankers in the city 
 that the teller had observed most carefully the movements of the inspecting officer 
 and had succeeded more than once in ascertaining very nearly when a visit might 
 be e.xpected. In preparation for this he had on each occasion borrowed checks 
 from his friends in the mercantile community, of whom he had many, "vi-hich 
 checks were counted in amongst his cash when examined. It so passed muster. 
 The checks were of course never presented. This, however, can not often be re- 
 peated. The resource finally failed him and discovery followed. 
 
 Upon this case a remark or two may be made. The manager should certainly 
 have noticed the style In which his officer was living. His salary would not have 
 allowed him to occupy such a cottage with grounds and to keep a pony carriage. 
 This tendency to overspending should therefore have been checked at the outset. 
 In which case all the subsequent sad developments might have been prevented. 
 It should be said in addition that it is almost certain that there was some loose- 
 ness in the style in which the Inspections were carred on, otherwise the shortage 
 would have been discovered at an earlier stage. 
 
OiriCERS OF AN INCORPORATED BANK. 4.'? 
 
 could have resulted iu the discovery. But discovery immediately resulted 
 upon an inspection on the spot. Yet there was no anterior reason why 
 there should be more suspicion of this branch than of any other, for the 
 manager, though not a practical banker, was a man of high standing in 
 the connnunity, and was able from his own resources to make good the 
 deficiency. 
 
 This audit and examination is a sufficiently onerous business in itself 
 to occupy all the attention that any man can give to it. In the examina- 
 tion of the teller's department all his care and vigilance will be needed to 
 ensure that the cash, including checks and cash items, is exactly as has 
 been represented. It has been known that a teller by clever sleight-of- 
 hand succeeded in i)assing off" a bundle of notes twice when his cash was 
 being taken over by a successor. The examination of the discounting de- 
 partment is a far more difficult and laborious matter, for here he should 
 Kot confine himself to the mere checking of the amount of each bill and 
 noting whether the total agrees with the books, but ascertain whether 
 every bill is in legal form, properly drawn and endorsed, proper author- 
 ity being held for such as are signed by officers of corporations ; and also 
 that proper vouchers have been received for all the bills remitted for col- 
 lection. It is also his business, as has been shown, to see that the securi- 
 ties for loans are really as has been represented to head office. 
 
 But when an inspector goes beyond this business of verification and 
 expresses opinions upon the soundness and goodness of the names or the 
 safety or otherwise of the discounts of the office, he is going beyond his 
 province. For in this case he is conveying not information but simply 
 opinions, for the formation of which he has only had slender opportuni- 
 ties. An inspector visits a branch only at long intervals, and can not pos- 
 sibly have the materials for forming a judgment as to the goodness and 
 soundness of the borrowing customers themselves. It is his business to 
 see that the various securities are there, or that, if sent away, there are 
 proper vouchers for them, and also, what should never be overlooked, that 
 tJiey are exactly as they have been represented to head office. But when 
 he not only certifies of the existence of bills and securities, but makes re- 
 ports upon their soundness or value, he raises two questions: one, as to 
 where he gets his information, and the other as to the soundness of his 
 judgment. As to information, in almost every case he will get it from the 
 manager. His report, therefore, will be a mere echo of the manager's 
 opinion, and consequently of no value whatever as a check. As to sound- 
 ness of judgment, that is a quality not always possessed by an inspector. 
 It has been known that an inspector who was a keen and vigilant examin- 
 ing officer was lamentably deficient in judgment as to the standing of 
 merchants. To suggest to head office that the advances to a certain cus- 
 tomer were not on a good foundation because they fluctuated so much, or 
 that, in considering the position of a certain firm, if certain assets were 
 left out they could not be considered solvent, was not calculated to en 
 bance the value of an inspector's opinion. Yet both instances have oc- 
 
44 BANKING AND COMMERCE. 
 
 curred in banking i)ractice. There can be no doubt, therefore, that for a 
 general manager to get into a habit of relying on the opinions and judg- 
 ment of an inspector as to the soundness of the advances at branches, is 
 dangerous. The value of an inspector's work is when he reports what he 
 has seen, and communicates to a general manager what the latter cannot 
 otherwise know; such, for example, as that such and such an account is a 
 very inactive one, or that in another case the deposit account of such a 
 customer showed him to be constantly short of money. 
 
 It is generally placed upon the inspector to report upon the officers 
 of the branch. But here again he should only report as to what, comes 
 under his own observation. He can see how an officer does his work dur- 
 ing an inspection, and how the books in his charge have been kept; also 
 whether he makes out statements quickly, and, in the case of a teller, 
 whether he is accurate and courteous in attending to customers. But to 
 express an opinion as to the general value of an officer, and whether he 
 is worthy of promotion or otherwise, is to go beyond his province, for in 
 the course of a few da^'s he cannot have sufficient opportunities of obser- 
 vation to enable him to form an opinion that could safely be acted upon. 
 
 Above all things the error must be avoided of allowing an inspector 
 to give orders and directions to managers. That is the business of the 
 general manager alone. If an inspector is allowed to do this, there will 
 be the proverbial danger of having "two masters" whom it is impossible 
 to serve. It is only when the office of inspector is held by an assistant 
 general manager, as it sometimes is, that orders and directions can prop- 
 erly be given by him. But in that case the orders are given invariably by 
 the officer as assistant general manager, not as inspector. 
 
 In the case of an inspector the old saying applies, Quis custos ens- 
 todies? Who is to inspect the inspector? Who is to see whether he is 
 attentive, efficient and reliable.^ It may be thought that the directors are 
 the persons to do this. But the work can only be properly performed by 
 a professional banker, and the proper officer to examine the inspector's 
 work is the general manager. 
 
 Directors sometimes conceive that an inspector should be independent 
 of the general manager, and that his reports should be a check upon his 
 superior officer. And it has been known that an inspector has endeav- 
 ored to work himself into that position. But it would be dangerous, in- 
 deed, for directors to listen to such overtures, for, if carried out, such a 
 course would introduce an element of anarchy and confusion into the 
 business. There would soon come to be two governing officers — two heads 
 — each having independent authority, but the one more in the confidence 
 of the directors tlian the other. There would inevitably be friction in 
 that case, conflicting i(1eas of management would be introduced, contradict- 
 ory directions could not fail to be given to managers of branches. These 
 officers would soon discover the real state of things, and ascertain whose 
 directioiis they were to follow. This would naturally be tlic officer who 
 was in the confidence of the board. 
 
OFFICERS OF AN INCORPORATED BANK. 45 
 
 To put the case in concrete form: The general manager would, for 
 example, give directions that such and such an account was to be handled 
 carefulh^, and on no account to exceed the limit fixed. The inspector, 
 however, might say at his next visit that the account was a very satisfac- 
 tory one to the board, and that close restriction was not desirable. The 
 branch manager, therefore, being placed between two fires, would lose 
 all sense of responsibility to head office, and as he could not please both 
 his superiors he -would try to please the customer. The general manager, 
 under such a state of things, will come to be a mere "figurehead," having 
 no more controlling power than a secretary. 
 
 This is not a fanciful sketcli of what might be, but a description of 
 what has actually occurred; anarchy and misrule prevailing in the estab- 
 lishment, and losses gradually developing which ultimately almost brought 
 the bank to a stop. Yet the board of directors was one of the ablest bod- 
 ies of men ever brought together to administer the affairs of the bank. 
 
 It will thus be seen that a clear understanding of the inspector's real 
 functions and duties is of essential importance to a joint-stock bank. His 
 proper functions are important enough and difficult enough to perform 
 without intruding into the office of the general management.^" 
 
 The Chief Accountant. 
 
 The chief accountant's position is of such importance that he is re- 
 quired to join with the president and general manager in certifying the 
 correctness of the returns made to the Government. He receives the bal- 
 ance-sheets of all the branches, examines them, compares them, checks 
 the items, and finally summarizes them in one general statement of the 
 cash, the deposits, the loans and discounts, and all the other items re- 
 quired by the Bank Act. It is by these statements that the board and 
 general manager, as advising them, are guided in the bank's general ad- 
 ministration, and as it is simply impossible for a general manager, still 
 less a president, to verify the voluminous details from which the state- 
 ment is made up, they must, perforce, and in tlie nature of things, depend 
 on the chief accountant for the accuracy of what they certify. The check 
 upon this is the inspection. For the inspector examines the head office 
 department, as well as every other branch of the bank's operations. 
 
 17 As there are exceptions to every rule, it is, of course, conceivable that an 
 inspector on visiting a branch may discover cases of glaring violation of rules, 
 disobedience to orders, or even positive fraud. What, it may be asked, is he to do 
 in such circumstances as these? It is his duty at once to communicate to his head 
 office in cipher, by telegraph, or by telephone, if he can, and asli for instructions. 
 Meanwhile, he may reasonably take upon himself to act in the case, stopping, it 
 may be, some improper discount about to be put through, or even going the length 
 in an extreme case of taking charge of the office himself, pending instructions. 
 But he would in any such case take such a course under responsibility and incur 
 the danger of severe reprimand to himself in case lie made a mistake of judgment 
 
4f) BANKING AND COMMERCE. 
 
 The Secretary. 
 
 In the general manager's department few officers render more useful 
 service than an active and vigilant secretary. Tliis officer should be much 
 above the rank of a clerk, although his faculty may not be in the sphere 
 of management. Indeed, it has happened that a secretary high in the 
 conridcnce of the board and highly efficient as a secretary may prove a 
 lamentable failure on being entrusted with the responsibility of manage- 
 ment. 
 
 It is his business to keep all the records of the general manager's 
 department (including the voluminous statements and returns made there- 
 to by branch managers), after they have been examined and action taken 
 thereon. An efficient secretary will not only keep such records, but re- 
 member their general contents, and be able to answer the general man- 
 ager's questions about them without loss of timie. All the correspondence 
 of the general manager with managers of branches will pass through his 
 hands, and here again will be found the importance of an accurate mem- 
 ory so developed that he can answer readily such questions as are con- 
 stantly arising in dealing with the business of branches. "Was not such 
 and such a manager advised about this matter some time ago?" the gen- 
 eral manager will say to himself on reading a branch manager's letters, 
 and may thereupon dictate a letter of strong disapproval of the man- 
 ager's conduct in the matter. But reference to a secretary might correct 
 the impression that was leading to the remonstrance, and show that this 
 particular matter had never been corresponded about at all. Or the error 
 may be in the other direction. "Did we not order such and such a man- 
 ager to discontinue taking bills with the name of such a one?" the gen- 
 eral manager will say to his secretary, and yet here he is passing such 
 bills through his books still. "Certainly," the secretary may reply, and 
 proceed to turn up at once the copy of the letter he well remembers to 
 have been sent. On this a letter of remonstrance will be written of a 
 character that no branch manager would dare to disregard. For want 
 of a watchful secretary, a general manager may even himself give con- 
 flicting orders after intervals of time, his judgment at one period not 
 being exactly the same as at another period owing to a difference of 
 environment. A general manager may, under the influence of some de- 
 pressing news, take a pessimistic view of matters in general, and begin 
 to dictate a letter to the manager of a branch expressing severe blame for 
 permitting a certain account to assume the position it was reported to be 
 in. Here a watchful secretary may interpose an observation like this: "I 
 think that matter was the subject of correspondence some months ago; 
 will you allow me to refer to it?" He does so and finds that the manager 
 at that time reporting upon the account asked permission to continue cer- 
 tain advances for a time, giving reasons therefor, which request was al- 
 lowed. "The time has not yet expired," the secretary might say, on which 
 the general manager would hold his hand, and instruct the secretary to 
 
OFFICERS OF AN INCORPORATED BANK. 47 
 
 be watchful of the time, and see that the paper referred to was then 
 retired. 
 
 Thus the general manager is in the position of managing partner of 
 a large establishment who thoroughly understands his business but has 
 trained men about him, eaeh with strictly defined lines of duty, all of 
 whom must be in his confidence, all obeying his orders, yet with liberty 
 to make suggestions, all acting together like a complicated machine, wheel 
 within wheel, all moved by one central power, and all converging to the 
 one uniform end, namely, the good of the whole body of the proprietors 
 of the institution. 
 
CHAPTER nil. 
 
 THE SUCCESSFUL MERCHANT. 
 
 Conditions and Causes of Success — Importance of Careful Buying 
 — The Office — The Warehouse — Training in Business — Ele- 
 ments of a Good Salesman- -Knowledge of Goods — Knowledge 
 OF Men. 
 
 BEFORE a banker can do a successful business, there must be suc- 
 cessful merchants, manufacturers, or farmers, in the community- 
 It is for this reason that the consideration of their business comes 
 at this stage. 
 
 Some years ago there was published in England a very readable book 
 entitled "The Successful Merchant," in which was described the career 
 of a Bristol trader who was not only a successful man himself, but the 
 founder of successful firms that bear his name to this day. The success 
 of this merchant, it is evident, was not due to speculative ventures by 
 which some men seek to acquire a fortune rapidly, but to perfect knowl- 
 edge of his own line of business, combined with industry, shrewdness and 
 rectitude. It becomes evident, too, that this is the reason why the busi- 
 ness he founded has continued to flourish in the hands of his successors. 
 
 It is essential to the success of a banker that the mercantile customers 
 with whom he deals shall be on the whole successful men; otherwise they 
 will cause him loss and embarrassment, even though he holds what is 
 called "security." For security in many instances fails to secure. 
 
 It is equally essential to a merchant that his customers shall be also 
 successful. If they are not, their failure will result in even a larger pro- 
 portion of loss, seeing that generally the merchant gives credit without 
 security at all. 
 
 The losses of both banker and merchant may be, and, indeed, not sel- 
 dom have been, serious enough to bring both into embarrassment, in fact, 
 they continually act and react on each other. The study of the causes of 
 success and failure is therefore one that practically comes home to both. 
 
 Conditions and Causes of Success. 
 Let us first consider the conditions and causes of success. When a 
 person enters upon any line of commercial business, as distinct from mere 
 speculation,'^ he will find that the first element of success is knowledge of 
 goods: that is, what goods are, where they are to be bought to advantage, 
 what is the right time to buy them and how to place them to advantage. 
 
 IS The difference between the merchant and the speculator Is that the mer- 
 chant handles the goods he deals In, and therefore requires to be a judge of their 
 quality and suitability; while the speculator rarely handles the merchandise in 
 which he speculates, and could not tell good cotton or grain from bad. His busi- 
 ness is simply to watch the markets, and to buy or sell on change. For his opera- 
 tions he needs neither a warehouse nor stoclc. 
 
 4B 
 
THE SUCCESSFUL MERCHANT. 49 
 
 As he progresses he will discover that the second element of success is 
 knowledge of men; that is, whom to employ, what to give them to do, to 
 whom to give credit and whom to avoid. The first is to be acquired only 
 in the warehouse, the second can be learned best in the office or "on the 
 road." When, with these two, is combined a reasonable capital, together 
 with common sense, enterprise and integrity, success may be said to be 
 not problematical but reasonabh' certain. 
 
 A young man who enters a mercantile warehouse, will be employed 
 for some time in learning how to handle the goods dealt in; how to sort 
 and arrange them for sale, how to receive and dispatch them with expedi- 
 tion, and generally to become so familiar with the stock as to know where 
 any particular article is to be found and how much of it there is in the 
 warehouse. While doing this, the head of the business will have oppor- 
 tunities of judging the young man's capacity, intelligence and character; 
 also M'hether he is more likeh^ to be useful in the warehouse or in the 
 office. A young man whose mind is in the business will desire to find out 
 not only how much goods sell for, but how much they cost; also where 
 goods are bought, and from whom. If the goods he handles are not 
 bought strictly from manufacturers, then he will find out who did manu- 
 facture them, and where. An intelligent warehouse clerk will try to 
 gather information from young men not in the same house, and will, at 
 times, be able to communicate to his principals something to their advan- 
 tage. 
 
 There are, of course, other elements of success in a junior, such as 
 civility, readiness to assist, quickness to obey orders, punctuality in at- 
 tendance. A good junior will also avoid what mars the usefulness of 
 many a clever employee, viz., an impatience of work, and eagerness to 
 rush away at the earliest moment when work appears to be finished. 
 
 Supposing that a young employee has proved himself capable so far, 
 the next step will be to trust him with the responsibility of selling. Here 
 his knowledge of goods comes into play. For many of the customers of 
 a wholesale house have only a vague idea of what they want, and expect 
 to be told what goods are in the market ; to be shown them and have their 
 merits pointed out by one who knows and can describe them accurately. 
 
 If, for example, the warehouse is that of a dry goods merchant, the 
 salesman will have some knowledge of the person he is speaking to, where 
 he comes from, and what is the nature of his business. It would be ab- 
 surd to show the store-keeper of a backwoods village the goods suitable 
 for a leading town or city store. The seller 7nust know both his goods 
 and his men. If the young clerk performs the duty of a seller satisfac- 
 torily, in the warehouse, he has taken another step towards ultimate suc- 
 cess.^® 
 
 19 It is sometimes supposed tliat to be able to sell goods successfully, an 
 employee must not be too scrupulous; must, in fact, be willing to tell lies about 
 them. But quite apart from the immorality of this, experience demonstrates that 
 to deceive customers is not to the seller's advantage. The deceived buyer will 
 avoid the warehouse in which he has been deceived. Even if he does not go so 
 
50 BANKING AND COMMERCE. 
 
 It inaj^ not be possible in a large establishment for every salesman to 
 ascertain what is the net cost of the goods he is handling, and to a ma- 
 jority of those engaged in selling, a principal would scarcely think it pru- 
 dent to give such information. But as a salesman grows in experience 
 he will be sure to exercise himself in this direction. And it is desirable 
 he should; for in the case of salesmen and travelers of experience, they 
 may sometimes be allowed discretion in the selling price of goods. It 
 would obviously be of advantage to a salesman, in using this liberty, to 
 know what tilings cost, so as to ensure that no mistake was made in re- 
 ducing the price unreasonably. 
 
 A successful salesman or traveler will exercise a good deal of tact in 
 dealing with the peculiarities of customers, and a large amount of pa- 
 tience and perseverance also. Experience shows that a stubborn "no" 
 may be changed into a complacent "yes" by quiet and intelligent per- 
 sistence. Above all things he will be civil; ready to anticipate a cus- 
 tomer's wishes, ready also with suggestions as to what would be satisfac- 
 tory in case the party does not see the article he wants. But it is a mis- 
 take for a salesman to push off undesirable goods on a customer by brag 
 and volubility. The customer who has been overreached in this way will 
 avoid the place in future. 
 
 In the life of George Moore, of the great house of Groucock and Co., 
 of London, who used to be called "The Napoleon of the Road" because of 
 his wonderful quickness and energy, there is an excellent story of his suc- 
 cess M-ith a retail storekeeper who, after repeated refusals such as would 
 have damped the energy of most men, was at last induced to make a pur- 
 chase of some insignificant article and thereby open an account. The 
 door once opened, the young traveler took care it should be kept open; 
 with the result that the casual buyer became a valuable customer of the 
 house. The responsibility of a traveler is, of course, much more than that 
 of a salesman in the warehouse. He needs much more tact, more knowl- 
 edge of human nature, more patience, more perseverance. And, it needs 
 to be added, he will need to be more watchful of liis own conduct. Living 
 in hotels, he will be in tlie way of temptation that does not meet those 
 whose duties are at home. 
 
 far as this, he will certainly make a complaint. If he has been deceived by an 
 employee, he will complain to the principal, and the employee will suffer. If he 
 has been deceived by the principal himself, he will probably be more outspoken. 
 In either case he will want redress. 
 
 It was said of the late A. T. Stewart, whose retail store used to be one of 
 the wonders of New York, that one element of his success was this, "He always 
 turned the rotten side of the melon up"; a very homely phrase, but highly ex- 
 pressive, as Indicating that, if there were anything defective about his goods, he 
 never concealed it. It thus came about that people had implicit confidence in 
 Stewarts goods and consequently flocked to his store to buy them. There are 
 manufacturing firms in England that have built up a reputation by the invariable 
 rule of never stamping their name on an Inferior article. They have found the 
 advantage of this In the fact that the name came to have a distinct mercantile 
 value; such, for example, as that of Rodgers of Sheffield, for fine cutlery. 
 
THE SUCCESSFUL MERCHANT. 51 
 
 Tmpoptaxce of Careful Buying. 
 
 Pursuing the future successful mercliaut tlirough his course of prepa- 
 ration, and supposing him to have achieved success as a salesman and a 
 traveler, the next question will be, whether he can be trusted with the 
 responsible function of huijing. 
 
 It is a maxim of trade that "goods well bought are half sold." Though 
 the most difficult functions of a buj^er are exercised in lines of business 
 where taste and fashion come into play, yet his skill, if he has it, will 
 find ample scope even in dealing with raw materials and great staples. 
 Judgment and special knowledge are required even to buy grain, cheese, 
 timber or iron to advantage. 
 
 Passing, however, by these for the present, let us look at the charac- 
 teristics of a successful buyer of dry goods and fancy goods. Here an 
 essential difference must be noted. While the buyer of grain or any other 
 like commodity may make mistakes, it is certain that the goods he buys 
 can be sold at some price. But the buyer of dry goods can never be sure 
 that what he buys (unless it be simple staples) can ever be sold at all. 
 The buyer then Avill naturally be one who has had experience as a sales- 
 man or traveler, and has learned by experience what the taste and fancy 
 of customers are likely to be when new goods are offered them. There 
 is a difference in this respect, between the customers of one house and 
 another, between the people of one city and another, and between one 
 period and another. A class of goods can be safely imported by a mer- 
 chant in New York that it would be unwise to bring into a smaller city. 
 As to the difference between one time and another it is a fact that in the 
 inflation that prevailed in the early days of Manitoba, there were goods 
 to be found in the Hudson Bay Company's store at Winnipeg of so costly 
 a character that no merchant in ^lontrcal and scarcely even in New York, 
 would have dared to import them. Such goods could be sold in ^^'innipeg 
 at that time. Two years afterwards a heavy reaction set in, and no such 
 articles have been seen there since. -° 
 
 The buyer then will consider the customers of the house, as to their 
 taste and capacity, as well as the time. An intelligent buyer after some 
 experience develops a sort of intuitive apprehension of goods. He could 
 
 20 During this inflation a rough looliing fellow entered a crockery store in 
 Winnipeg and asked to be shown a dinner set. The proprietor, wondering some- 
 what what such a man w^anted with a dinner set, reached down one of a common 
 character. The man, however, said at once, "That won't do." Other sets were 
 then shown him of a better kind, but none of them suited him. They were not 
 good enough. The man then said, "I've had a big stroke of luck; made $50,000 
 out of a piece of property, and 1 want to give my wife something really tip- top; 
 something extra, you know." The storekeeper then brought out a set he had 
 specially imported for customers of the nouvcau rkhc order; a set of such rarity 
 and beauty that it would have graced the table of an English nobleman. The man 
 said, "That will do;" and it was bought and paid for on the spot. The merchant 
 showed his knowledge of the time by ordering a single set like this. But a year 
 or two afterwards, no such goods, or goods of a quality even many grades lower, 
 were ever seen on his shelves. 
 
52 BANKING AND COMMERCE. 
 
 not explain it if lie tried, but it exists, and it will lead him to say of some 
 new patterns, "Our house could never sell them," and of others, "These 
 will suit us exactly." Judging thus intuitively he judges promptly; and 
 in a majority of cases he will be right. 
 
 A buyer's judgment, however, is not only exercised as to what goods 
 to buv, but how much. This, sometimes, is a more difficult matter to de- 
 termine than the other, for if he buys too much, even of an article that 
 takes the fancy of customers, the extra quantity will be carried past the 
 time when the fancy of customers favors it. On the other hand, if he 
 buys too little, a feeling of vexation is generated in the warehouse at op- 
 portunities of profit being missed. The latter error, however, is the safer 
 of the two. If the goods are evidently going off well a repeat order can 
 be cabled. 
 
 Buying too much is a fcible of some otherwise capable men, and some- 
 times a cause even of financial embarrassment. The amount to be bought 
 is a matter for the principal to judge of. He will look over his stock, 
 consider his average sales, and give his buyer instructions accordingly. 
 But cases may arise in which an experienced buyer may take the risk of 
 varying from instructions. He may learn things about the market when 
 abroad that make it desirable rather to hold off than to buy. Or, what 
 he learns may lead him to buy more heavily than was arranged. This, 
 however, he will do at his own peril. A young buyer entering this difficult 
 field will do well to err on the side of caution rather than otherwise. Bet- 
 ter for him to cable for instructions and pay the cost himself, than to 
 make such large purchases as, to the writer's knowledge, have not only 
 caused loss to his principals, but deranged the whole market. 
 
 There are fields of mercantile enterprise in which the functions both 
 of buyer and seller would appear to be far more easy than the foregoing, 
 seeing that prices are quoted day by day, and that all a man has to do, 
 apparently, is to follow the market. A plausible theory, but utterly fal- 
 lacious. For in all staple articles, such as grain, cheese, wool or timber, 
 there is a remarkable range of qtiality. The grades, certainly, are indi- 
 cated by market quotations. But even in such apparently simple mat- 
 ters as grain and flour, there are shades of difference that none but ex- 
 perts can appreciate. 
 
 Yet it is often in a correct appreciation of these that the profit or loss 
 of a given line of operations consists. The same remark applies to im- 
 ported articles in other trades, such as groceries, fruit, wines, raw sugar ; 
 not to speak of hardware, iron and steel, in all of which there is room for 
 the finest exercise of judgment on the part of the buyer as to the quality 
 of goods. It may indeed be laid down as an absolute rule with regard to 
 every variety of staple goods, that none but a man of experience can safe- 
 ly venture on the operation of buying. If he does, he will infallibly "burn 
 his fingers," and if he continues, he will ruin himself. 
 
i:-*-' — 1 - THE SUCCESSFUL MERCHANT. 53 
 
 The Office. 
 
 Passing now from the warehouse to tlie office, let us consider what is 
 done therein as bearing on tl)e conduct of a successful business. Here are 
 kept the records which show whether the business is or is not on a proper 
 foundation, and whether it is being conducted profitably from time to 
 time. It is in tlic office that the merchant ascertains whether credit is be- 
 ing given judiciously, who and what the customers of the firm are; wheth- 
 er prompt in payment or otherwise; whether profits are being made, and 
 what are the drawbacks in the shape of losses. 
 
 The important matter of Insurance will here come before him, also the 
 financial management of the house. Above all, it is here he will ascertain 
 whether he is keeping on a right footing with his banker. That all these 
 are vital elements in the success of a business, every merchant knows; 
 indeed, the trend of experience shows that business failures are more fre- 
 quently traceable to defective management in the office than in the ware- 
 house. For one merchant who fails by reason of not understanding his 
 goods, ten fail because of injudicious crediting, too easy collecting, neg- 
 lect of insurance, an incorrect style of stock taking, too small capital, too 
 heavy drawings of partners, too heavy borrowing, and general lack of 
 economy. All these are matters for the office. It is not so essential for 
 the principal to have passed through the grades of o^ce work, as that he 
 should have had a thorough training in handling goods. But every prin- 
 cipal should have had so much experience as to understand office records, 
 and to see Avhether office work is properly done, and if the statements 
 rendered to him from time to time can be depended upon. 
 
 In large mercantile firms a judicious combination of talent is desir- 
 able, so that while one partner shall be particularly conversant with goods, 
 another shall be familiar with finance and office work; each giving, as a 
 rule, imdivided attention to his own department, yet being able at times 
 to take an oversight of the other in case of need. But where there is only 
 one partner, and one who has a thorough familiarity with goods, it is de- 
 sirable that he should have at the head of his office, not a mere bookkeeper, 
 however efficient, but a reliable man to Avhom he can entrust the manage- 
 ment of the finances and accounts of the house. To a man of this sort he 
 will pay such a liberal salary as will make him as much attached to the 
 business as if he were a partner. Such a person will save his salary many 
 times over by attention to credits, prompt collecting, sufficient insurance, 
 attention to economic details, keeping stock within due bounds; and last, 
 but not least, keeping the borrowings and discounts of the house within 
 such limits that their cost will not be a drain on the business. 
 
 The foregoing may be called the elementary foundations of success in 
 business as now carried on. They may not all have been necessary in the 
 earlier days of the country. Many a man then succeeded who conducted 
 his business by rule of thumb. But competition is now too keen and its 
 methods too developed to permit any man to succeed who is not equipped 
 at all points. 
 
54 BANKING AND COMMERCE. 
 
 But this is not all that is necessary to success. 
 
 There liave been men who could sell and buy goods, and know how to 
 keep accounts, too, who have entirely failed in the attempt to carry on 
 business for tliemselves. 
 
 It was said tliat at one time a considerable number of the salesmen in 
 the employ of Mr. A. T. Stewart, of New York (who has been already re- 
 ferred to) were men who had failed in business. They were expert sales- 
 men ; and perhaps some of them expert buyers, but were deficient in other 
 qualities essential to success. They could serve an employer and be de- 
 pended upon to follow instructions. But experience had })roved that they 
 could not succeed when they had no guidance but their own judgment. 
 
 What, then, are the other and final conditions of business success, 
 permanent success, let us say, in addition to the technical knowledge 
 and skill before referred to? The consideration of these is of sufficient 
 importance to form tlie subject of further treatment. 
 
CHAPTER IX. 
 THE SUCCESSFUL MERCHANT— Continued. 
 
 Creoit and Capitai, — Business Location — Extending Credit— Econ- 
 omy IN Business Expenditures — Insurance — Interest and Dis- 
 count — Advertising — Personal Drawings — Progressiveness and 
 Courtesy — Carefxti, Accounting. 
 
 PERSONS of little experience in the world may think it strange that 
 a man whose character and capacity have been such as were 
 sketched in the preceding paper should not succeed in business. 
 Experience, however, shows that they do so fail. But that we may under- 
 stand what is meant by success or failure let us remember that conimercdal 
 business in this treatise is considered in relation to banking. Following 
 this clue, it must be answered that the successful merchant is simply and 
 essentially one who is able, from the beginning to the end, to meet his en- 
 gagements; to perform every obligation he has entered upon, and to close 
 his business career without being in debt to any man. He may and ought 
 to aim at more, but considering the number of persons who fail in this 
 primary condition, this must be looked on with no little satisfaction. But 
 if the idea of success is to be carried no further than this, the mercantile 
 world will generally pronoimce it to be inadequate. Every man on enter- 
 ing business aspires after something beyond this, otherAvise he might as 
 McU have remained an employee. What he generally aspires after is, at 
 least, a competency — a sufficiency over and above his liabilities to support 
 him when old age has deprived him of his powers. 
 
 Credit and Capital. 
 
 No man could conduct his business with comfort if he were always 
 on what may be called "the ragged edge" of this world's affairs, being 
 barely able to pay his debts and nothing more. A captain may at times 
 have to sail close to the wind, but if he made a practice of so doing he 
 would undoubtedly lose his ship. There must be a margin if there is to 
 be any satisfaction in business ; and this margin in the case of a merchant 
 is his Capital. Of this a few words require to be said. And the first 
 thing is that tlie capital, so called, must be a man's own. There is hardly a 
 more dangerous delusion than for a merchant to talk of "borrowed 
 capital," and no more dangerous practice than to enter in his balance 
 sheet as "capital" money that does not belong to him. Borrowed money 
 is not "capital," it is a liability. No matter though the loan has been 
 arranged for a long term, though there may be an apparent certainty 
 of the loan being renewed when due, or what is more dangerous, that 
 
56 BANKING AND COMMERCE. 
 
 no period of payment has been fixed at all — money borrowed, no matter 
 from whom or under what circumstances, is not "capital." 
 
 Traders sometimes think it does no harm to reckon as capital an 
 amount of money which is certain to remain in the business for a con- 
 siderable period. But it does this harm, that a merchant, if he so 
 considers it, will incur risks, buy goods, and give credit to a larger 
 amount than he would do, if he rigidly thought of this supposed capital 
 as a debt of which payment would some day be demanded.-' 
 
 Capital, then, is what a merchant owns himself, on which no other 
 person has a claim, the surplus over all liabilities, no matter to whom. 
 
 To ensure success in business, capital must be sufficient; an elementary 
 truth, indeed, but capable of a great variety of applications. For 
 example, it may be taken as a well established truth, that other things 
 being equal, the larger the business the larger the capital needed. But 
 the proviso, other things being equal, must be carefully noted. The 
 slower the course of the business, the more the capital required to conduct 
 it. The country store doing business where payments are only made 
 once a year, requires more capital than a town store that sells a good 
 deal for cash, and gives no credit for longer than a month. And the 
 cash store, that gives no credit to anybody, requires pari passu least of 
 all. The business of a saw miller or the maker of timber is one that 
 calls for an unusually large capital in proportion to the annual production ; 
 for expenditures go on continuously for a whole year before the article 
 is ready for market. At the other end of the scale, we find a grain 
 merchant where the article is botight and sold on the spot for cash. This 
 consideration, of course, determines the percentage of profit called for. 
 
 It is argued by some theorists that credit answers every purpose of 
 capital. It answers some purposes of capital, for a time, beyond doubt. 
 But such theorists are apt to forget that crenit vmst always he paid for, 
 no matter in what shape it is taken, whether in goods or in money. And 
 experience shows that what is paid for credit in the shape of interest 
 sometimes absorbs all that remains of profit, after expenses and losses 
 have been provided for. Young men, for example, who buy out the 
 assets of an established firm, paying a small amount down and giving 
 notes for the balance, may find that interest absorbs their profit year by 
 year, and renders progress impossible. The same thing is likely to 
 h-ippen when a young man is set up in business by a wholesale house, 
 he having nothing worth the name in the shape of capital. The house 
 fells him a stock of goods, and keeps him supplied with what he needs. 
 He is compelled to buy from them, for if he buys elsewhere, they can 
 bring his business to a stand. Under these circumstances, he invariably 
 pays a high price for everything he orders, which high price really rep- 
 
 21 A very common form of the delusion spoken of is apt to arise when a part- 
 nership is dissolved, and the retiring partner leaves his money to those who 
 remain. The remaining partners are then under constant temptation to consider 
 the capital of the house to be as much as before, and to carry on business accord- 
 ingly. From this delusion they sometimes receive a rude awakening. 
 
THE SUCCESSFUL MERCHANT. 57 
 
 resents tlic interest on his indebtedness, together witl) compensation for 
 the risk run by the supplying house. If a man determines to break the 
 chain and get free, bending his energies to effect it by a steady course 
 of economy and industry, he may possibly make progress, and in time 
 acquire a competency. But if not, he will almost certainly toil on 
 through life, and be as poor at the end as he was at the beginning. But 
 in a majority of cases he will fail during the process, and if the support- 
 ing house fails, he will fail, too. 
 
 As to the approximate amount of capital required for safety, it may 
 be roughly estimated as follows: For a storekeeper, or a merchant whose 
 business is moderately brisk, about one-fifth or sixth of his annual sales; 
 in a slower style of business, about one-third or fourth. A manufacturer 
 of any kind should have at least as much capital as his factory or mill 
 with its plant, water power or machinery have cost together with the 
 price of the land. In the case of a saw miller, the value of his limits 
 or timbered lands must be added. A merchant in agricultural products, 
 during the season of navigation, may do a large business on a smaller 
 capital than a merchant in any otlier line of business: for the movement 
 is so quick that he may be able repeatedly to turn over his whole capital in 
 a week. To do this, however, he must act on the principle of steadily 
 selling as fast as he buys. 
 
 But, when navigation is closed in river and canal, a produce merchant 
 inay find at times that he cannot profitably move his product at all. He 
 should therefore have as much capital, at least, as will enable him to 
 meet not only the fluctuations of the market, but unfavorable conditions 
 of trade. 
 
 Paradoxical as it maA' sound, it is undoubtedh' true that, on entering 
 upon business it is not desirable for a firm to have too much capital. If 
 they have, they will be apt to indulge in an easy-going style of conduct- 
 ing business, crediting too much, not collecting sharply, carrying too 
 much stock, all of which are bad habits and may lay the foundation of 
 future embarrassment. 
 
 If a father is setting up his son in business, the wisest course to 
 pursue is to give him such an amount of capital onh' as will necessitate 
 his being both industrious and careful. Better he should learn the value 
 of money by being occasionally short of it. Better he should learn to 
 be economical in personal and business expenses by its being rendered 
 impossible for him to be otherwise. The law of necessity is a wholesome 
 one, though many a man has fretted by reason of its pressure. Experi- 
 ence, in the majority of cases and in due time, will convince him that it is 
 salutary. 
 
 Value of a Goon Business Location. 
 
 An important element of success in mercantile business is a good 
 stand in a proper locality; and. in the case of such a business as dry- 
 gcods, a well arranged, well lighted, and convenient warehouse or store. 
 
58 BANKING AND COMMERCE. 
 
 But, even in the same locality and in the same street there are 
 differences in the eligibility of a stand. The chance of obtaining a choice 
 corner has not seldom been the making of a business. On the other hand, 
 1he energy and skill of an able man may be neutralized by a badly 
 lighted store, or one placed on the wrong side of the street. 
 
 With regard to the building in which he is to carry on business, a 
 young merchant will beware of entering upon a warehouse too large for 
 his means. If he makes this mistake, he is in danger of either attempting 
 too large a style of business for his capital, and being continually ham- 
 pered for money, or of paying out too much of his profits for rent and 
 taxes. 
 
 The Extension of CnEmr. 
 
 But now, on the supposition that a merchant who knows his business, 
 has secured a warehouse in a good position, that he has a proper amount 
 of capital, that with the judgment of a good buyer he has laid in a 
 seasonable stock of goods, he will immediately be confronted with the 
 difficult question of giving credit. In all lines of wholesale business, this 
 may be said to be the question of questions. It is even so to some 
 extent with a retailer, especially in a country store. 
 
 The giving of credit in a country where the average of failures is 
 so high at times as it is in Canada is so difficult a function to exercise, 
 that, in a large establishment, it is well for one partner to devote his 
 M'hole attention to it. 
 
 In this matter, a few general rules and principles may be indicated 
 as the result of experience, some of which are applicable to the whole- 
 sale merchant and some to the retail storekeeper. It may be said, also, 
 by the way, that most of them apply to a Banker also. 
 
 With regard to the former, the importance of correct information 
 cannot be too much emphasized. Get information, and he always on the 
 lookout for more; that should be the rule. Day by day, it should be the 
 merchant's business to keep his information up to date. The things 
 he knew about his customer a year ago may utterly mislead him now. 
 Solvent a year ago and doing well, a man may now be losing ground 
 and even unable to pay his debts. But while the present condition is 
 important, the past has also to be considered. A man's antecedents are 
 an important element in considering whether he is deserving of con- 
 tinued credit or not. Information requires sifting, for there are false 
 reports as well as true. The working of a customer's account will tell 
 him much. Conversation with the customer himself will elicit what could 
 not otherwise be learned. The traveler who waits upon him will bring 
 information also.'^ 
 
 It is always desirable for a mercantile house to have a maximum 
 sum beyond which they will trust nobody. This maximum will be care- 
 fully considered in relation to the capital of the house itself, and so 
 
 22 All this will be more fully considered further on. 
 
THE SUCCESSFUL MERCHANT. 59 
 
 regulated that the failure of no five or six persons could bring the firm 
 into embarrassment. But the bulk of the accounts carried by a firm will 
 be far smaller than tliis. That good old trade maxim, "Divide your 
 risks," can never safely be forgotten. A tendency to be watched is for 
 Ihe large customers of a firm to drift into a habit of leaning upon the 
 liouse. Such accounts have a general tendency to go on increasing, and 
 their very size makes it difficult to t])row them off. It is always known in 
 the trade that such and such customers are "supply houses" of this firm 
 or tliat, and the fact of the parties desiring to open an account else- 
 where raises a suspicion that the supporting firm desires to get rid of 
 Ihem. Hence they cannot be got rid of at all; the only alternative being, 
 either to bring them to a stop and face a loss, or carry them on with a 
 c-onstant endeavor at reduction, whicli is generally futile. 
 
 In the ordinary run of accounts the amount of credit will vary with 
 the means and standing of the customer, a theory which is unquestionably 
 true, but which requires a firm liand and watchful oversight to carry 
 out. For some customers, when kept strictly within bounds by one house, 
 -tvill endeavor to run up an account with another. A dangerous amount 
 of credit may arise when dealings-are with a number of houses; each one 
 imagining its own line to be judicious, while the whole, collectively, are 
 unreasonable in a high degree. The remedy is to keep well informed, 
 and to require periodical statements from customers, in addition to which 
 the partner at the head of the credit department will find it useful to 
 have statements rendered him by his clerks in comparative form, showing 
 the progress of aceimnts from month to month, or year to year, indicating 
 the amount of a customer's purchases during these comparative periods. 
 From this it could readily be seen whether the account was sufficiently 
 active for the indebtedness. 
 
 The head of the credit department of a house will also do well to 
 note any hints he may receive from his banker. The banker often knows 
 what the merchant does not. He deals with other houses in the same 
 trade, and has branches in other cities. He may therefore be able to say 
 to a wholesale merchant: "You are aware, I suppose, that such a 
 customer of yours is running an account with a house in another city?" 
 The banker need not violate confidence by going into details. "A word 
 to the wise is sufficient." But if a hint is not sufficient, a banker may 
 sometimes render an essential service by throwing out the paper of that 
 customer. 
 
 The real test as to whether a merchant is crediting judiciously is the 
 average percentasre of his losses to his sales. Some percentage every 
 merchant may expect. But in ordinary times this percentage should be 
 so moderate as to make no serious impairment of profits. Even in times 
 of depression, when insolvencies are double or treble the average, the 
 losses ought never to be so much as to impair the stability of the house, 
 though they make serious inroads into its profits. 
 
 The foregoing observations have reference wholly to dealers in 
 
60 BANKING AND COMMERCE. 
 
 imported or nianufacturcd goods. Tlie dealing in exports, liowevcr, is 
 governed by other eonsidcrations. It mny be laid down as a general rule 
 that the exporter of Canadian products, partly from the nature of the 
 products themselves, and partly from other circumstances, should usually 
 give no credit at all. For how can he keep himself informed of the 
 changing position of merchants in a foreign country.^ A partner may 
 die or retire, yet the conservative habits of English houses will lead to 
 the name being retained, while the capital may have been withdrawn- 
 Even the ratings of firms in reference books may be kept as before, 
 nlthough a vital change has taken place in their composition and capital. 
 
 The true position for the Canadian exporter to take is, that if the 
 buyer abroad wants credit, he should get it in his own country; an idea 
 which is undoubtedly reasonable, and has led to the habit, now general in 
 many lines of export trade, of attacliing bills of lading to bills of 
 exchange, and requiring the bill to be paid before the security is given, 
 up. All this will be fully considered later.- ^ 
 
 With regard to the credit given by retailers, a distinction must be 
 made between those in the city and the country. 
 
 The accounts of respectable families in cities are seldom a source of 
 loss, though some householders do occasionally run up tradesmen's accounts 
 to an unreasonable extent. Such accounts, however, seldom give rise to 
 discountable bills; and if such are presented to a banker he will generally 
 do well to decline them. 
 
 But the credit given by country storekeepers to farmers rests on 
 different grounds. The farmer has property which can be seen, both real 
 and personal, and though often slow, is generally sure. The danger with 
 farmers' accounts is not so much of ultimate loss, as of their degenerating 
 into what bankers call "lockups." A storekeeper with his books full of 
 such accounts is apt to become as slow as the farmer himself. His 
 interest account therefore becomes heavy and tends to eat up his profits. 
 He is made also to feel in times of pressure that his account is unde- 
 sirable. In dealing with farmers, storekeepers need to be careful to 
 consider whether their customer is owner or tenant; and if owner, 
 whether his land is free of encumbrance or not. The utmost limit of 
 credit to a farmer should be the amount of one season's supplies. When 
 an account gets beyond this, it should be stopped. Xo consideration of 
 ease in getting bank discount should prevail to alter this rule. 
 
 23 It is to be said, however, that the houses in Great Britain witli wlioni our 
 timber exporters deal are almost invariably of a high class, both in wealth and 
 credit, merchants of long standing and unblemished antecedents, who have never 
 failed to meet obligations in the worst of times. Yet it is singular how cautiously 
 English Vjankors speak when asked an opinion of even these. Circumstances prove 
 that there is a good leason. A timber merchant in England who had maintained 
 a high iiosition through a long course of years became embarrassed and stopped 
 payment, with heavy loss to his creditors. To the astonishment of them all. his 
 bankers included, it was found that he had engaged in reckless speculation in an 
 article that had nothing to do with his trade, which speculation going wrong, had 
 resulted In such heavy loss as to ruin him. This affair was the occasion of con- 
 siderable loss to Canadian firms who had dealt with him continuously for years. 
 
THE SUCCESSFUL MERCHANT. 6l 
 
 Economy in Business Expenditures. 
 
 This is another condition of success. By this is not meant mere 
 saving and cheese-paring. Economy primarily means management, as 
 the derivation of the word implies to begin with; careful calculation of 
 what charges can be afforded according to the size of the business. The 
 primary charge in a mercantile business is the rent of the warehouse. To 
 rent too large a store is a serious mistake. But it is poor economy to rent 
 one too small: or that is situated on a back street, or is badly lighted, or 
 badly laid out for business. Saving of this kind will be far more than 
 offset by loss of customers.-' 
 
 The salaries of clerks, salesmen and travelers is another item of 
 even more importance than the other. Here again it is poor economy to 
 employ an inferior class of men. Such are apt to injure the business 
 by inefficiency. More men, too, are required to do a certain amount of 
 business when they are below a proper standard. Three competent men 
 will do as much work as four of an inferior class, and while they cost 
 no more in the aggregate, they help to build up the business by wise 
 attention to the wants of customers. A merchant will do well to have 
 young men about him who are undergoing training in the methods of the 
 business. This tends to economy, but must not be carried too fai, as no 
 warehouse or office can be carried on well when there are too many 
 juniors in it. 
 
 Closely connected M'ith this matter of employees and making the 
 most of their capacity, is that of the treatment of the seniors. Some of 
 these, although they grow in years, and can be more and more trusted, 
 do not develop business capacity. Men of this kind have their value; as 
 they save the principal much anxiety, and need no supervision. They can 
 also be useful in the training of juniors. They gradually therefore grow 
 up to the position of old servants of the house, who have a comfortable 
 salary and are contented with it, on whom reliance can be placed and 
 who never aspire to anything beyond. It is always good economy to treat 
 such servants well. 
 
 But there are others who develop a capacity for business. Such as 
 these not only work, but think. They suggest improvements and economies. 
 They calculate how much things cost, and sometimes find out where they 
 can be bought clieaper. Such employees as these should be noted and 
 encouraged, and sometimes taken in as partners. 
 
 It is thus that the traditions of a house are preserved from generation 
 to generation, the firm going on doing service to the community and 
 
 24 It need scarcely be pointed out that the rent of a store is a charge upon 
 •the business, even when the premises are owned by the firm. And in an adjust- 
 ment of accounts, or stock-taking, rent should be charged as part of the annual 
 expense of business exactly as if it were paid to an outside person. Where the 
 business belongs to one person, and he owns the warehouse or store, he is deluding 
 himself as to the expense of the business if he omits to charge it with rent, and 
 ihe is of course deceived as to the percentage of increase to charge on his goods. 
 
62 BANKING AND COMMERCE. 
 
 securing wealth for its niouibcrs, inaiiy cxanijiles of wliidi may be secrr 
 on both sides the Atlantic, but especially in Great Britain. == 
 
 Insurance. 
 Another item of expenditure, and one in which serious mistakes are 
 made, is that of insurance. This will be fully treated of hereafter. It 
 may, however, be noted in this connection that insurance is as reasonable 
 a charge as rent and taxes, and if business, as carried on, will not bear 
 the expense of insurance, there is something wrong with the business. 
 
 Interest and Discount. 
 
 Another item of expense which, in some cases, is the most serious: 
 of all, is interest and discount. Few firms are in condition to conduct 
 their business without bank loans or discounts at all. But there is a 
 reasonable use of bank credit, and an imprudent use. "When a wholesale 
 merchant's line of discounted paper averages more than one-fourth of 
 his annual sales, it is generally a sign that his credit to customers is too 
 long, or that he does not collect sharply, or that he is too easy in renew- 
 ing. But when, in addition to discounted paper, he borrows directly and 
 regularly from his banker, he has reason to revise the whole methods of 
 his business. Bank credit to some men is a dangerous luxury. Such 
 loans may serve a useful purpose, provided they never amount to more 
 than one-fifth of the average line of discounted paper and that they 
 never extend beyond one or two months. But when such loans are 
 required constantly, and exceed the amount above named, it is, as a rule,. 
 a sure sign that the credit department of the house is loosely managed, 
 or that it is carrying too much stock. 
 
 When times of difficulty set in,' and the general average of failures 
 rises, the pressure will show itself in a tendency to require more of this 
 kind of bank credit. But this state of things is best met, not by taking- 
 more credit, but by curtailing the business. As to the interest account 
 of a merchant in agricultural products, it will not amount to more than 
 one-third or one-half of one per cent, on the total sales, if the business 
 is as active as an exporter's should be. But should such products be held 
 month after month, in our long winters, interest and charges will almost 
 certainly swallow up the profit, even of an ordinary rising market. 
 
 25 A mistake has sometimes been made by the head of a commercial liouse 
 who has one or more sons growing up, whom he naturally desires to succeed hinr 
 in business. While they are growing up one or more of his employees are devel- 
 oping a capacity for management; yet he hesitates to take them into partnership, 
 fearing they may displace members of his own family. The result often is, that 
 these employees leave the house, enter jnto business for themselves, and be- 
 come serious rivals. If the sons prove to have managing capacity, the firm may 
 not ultimately be damaged. But if not, the chances are that a business founded 
 and maintained by the father may disappear under the Incainicity of the sons. 
 It Js, therefore, wise to keep managing capacity in the firm, even if. under such 
 a regime, sons have to become little more than sleeping partners. The prevailing 
 tendency to convert firms Into joint-stock companies affords, however, an easy 
 method of dealing with this state of things. 
 
THE SUCCESSFUL MERCHANT. 63 
 
 Advertising. 
 
 There are otlicr items of expense, sucli as advertising, whicli every 
 merchant must think out for himself, for no general rules can be laid 
 down, except this, that advertising should be in a proper medium, that 
 it should be arranged so as to attract attention, and that it should be 
 changed from time to time so as not to become monotonous. In the nature 
 of things some kinds of business depend more on advertising than others. 
 Those who deal in articles that are constantly changing must bring their 
 novelties before the public; on the other hand, those who deal in staple 
 goods with a limited range of customers, and where the price is a matter 
 of market quotations, such as grain, etc., never need to advertise at all. 
 
 But in the general matter of charges and expenses, when they have 
 been arranged so as to comport with the size of the business, the thing 
 to be kept constantly in view is to get good value for the expenditure, 
 whether of rent, salaries, insurance, advertising, or what not. 
 
 Personal Drawings. 
 
 It goes without saying that personal drawings from the firm and 
 personal expenditures should be on an economical scale also. This is a 
 matter requiring careful adjustment where there are two or more part- 
 ners, and careful consideration where there is only one proprietor. The 
 amount to be drawn is usually set forth in the deed of partnership and 
 should obviously be on a scale that will allow a considerable margin 
 between drawings and profits. But in case the amount is for any reason 
 exceeded by one or more partners, the amount of the excess should be 
 by no means entered as among the ojien accounts due to the firm. This 
 is a most delusive practice and has not seldom been the means of deceiv- 
 ing a firm's bankers. Right and proper it is between partners to keep 
 accounts to show how the members of the firm stand to each other ; but 
 for a firm to enter amongst its available assets sums that are due by one 
 member to the rest, and to render an account to a creditor in that shape, 
 is a proceeding that borders upon fraud. This practice is particularly 
 dangerous when a partner, by arrangement with the other member of the 
 firm, is allowed to draw out a considerable sum, possibly to build him- 
 self a house, or enter on a speculation. The real capital of the firm may 
 be largely depleted in this way without its being apparent in their state- 
 ments. 
 
 Pkogressiveness anu Courtesy. 
 
 In these days of increasing competition where business is apt to 
 assume the form of a contest and only the fittest survive, it is essential 
 that the principals of a firm shall be constantly on the watch to note new 
 developments, new markets, new methods, new economies, new styles of 
 goods, new methods of transportation. All the world is rapidly becoming 
 one country, and the successful merchant will keep an eye upon whatever 
 is going on that bears upon his business. 
 
64 BANKING AND COMMERCE. 
 
 In dealing witli his customers a merchant will observe the maxim, 
 "Civility costs nothing, but is worth a good deal." Many a merchant 
 spoils his trade by a deficiency in this respect. He is impatient, and if 
 his customers don't like the goods he is showing them, he will not take 
 the trouble to show them something else. True, a merchant sometimes 
 knows what will suit a customer better than does the customer liimself. 
 But it is bad policy to say so, or to show that he thinks so. A dry 
 goods merchant should make a practice of systematically clearing out 
 all goods that are passe, or becoming so. That was another of Mr. 
 Stewart's cardinal rules. He made a point of having nothing but salable 
 goods on his shelves. But there is a great temptation to hang on to stock 
 that has once been bought, and some men constantly do it, hoping against 
 hope that it will be sold in ordinary course. It is an unpleasant thing 
 to sell goods at a loss, but it is often true economy in the end. The 
 process of weeding will, of course, be carried on by the principal, so as 
 to ensure that good plants may not be piilled up with the weeds. 
 
 Value of CAhEFUi, Accounting. 
 
 The final element of business success is the keeping of accurate 
 accounts, and the systematic balancing of them once a year at least. It 
 has been said of many a merchant, but perhaps more frequently of a 
 manufacturer, that he does not know what his goods cost, and therefore 
 he is deluding himself during the whole time that he is selling them. 
 The only efficient check upon this is the careful taking of stock, and 
 periodically balancing of books. In stock taking, when goods on hand 
 are written down to what the merchant could buy them at for cash, 
 or what he would be willing to give for them; when all accounts are put 
 at their collectible value, and written olf if they have none; and when 
 due allowance has been made for depreciation in fixed property, a mer- 
 chant M'ill sometimes be astonished to find that he has not made half the 
 profit he had anticipated, or perhaps none at all. This being so, he will 
 naturally endeavor to ascertain where the leak is, overhauling every 
 department of his business for the purpose. He will, after this, buy 
 more carefully, sell more closely, economize expenditures, collect more 
 jiharply, and borrow less money — thus laying a foundation for a satis- 
 factory result in future. 
 
 It may be objected to this that many a man has prospered and made 
 a competency in Canada who conducted his business by "rule of thumb" 
 and never made out a balance-sheet in his life. There have been cases, 
 no doubt, where great natural shrewdness and ability in buying and sell- 
 ing have brought out such results. But these were exceptions, even in 
 the early days of the country. But now that population has increased 
 and competition increased with it, the "rule of thumb" must perforce 
 give way to the keeping of accurate accounts. 
 
CHAPTER X. 
 MANUFACTURING. 
 
 Early Developments of Manufacturing — Suitable Locations — 
 Bonuses — The Successful Manufacturer — Capital Required — 
 Proper Machinery — What Goods to Make and to Whom They 
 Are to Be Sold — Consignments — Selling Agents — Sales to 
 Wholesale Merchants — Insurance. 
 
 THE subject of Manufacturing, apart from the petty developments of 
 a primitive condition, at once opens up this fundamental question, 
 what natural capacity or suitableness exists in any given country, 
 or given tract of country, for the production of goods by manufacturing 
 processes? The answer to this question verges upon the problems that 
 gather round the controversy between free trade and protection. These 
 problems it is not within the scope of this work to consider; suffice it to 
 state, what is universally acknowledged, that the primary conditions of the 
 suitability of any country for manufacturing are two, the possession of 
 power, and the possession (or possibility of acquiring at a competitive 
 price) of raw material. There are secondary considerations, such as a 
 supply of suitable labor, and the proximity of markets, but the foregoing 
 are fundamental. 
 
 "SMiere these two are found together, manufacturing is most natural, 
 and if efficiently carried on, most profitable. Where only one of them is 
 found, the possibility of profitable manufacturing depends on the cost 
 of bringing the two into conjunction. Where neither of them is found, 
 profitable manufacturing is, generally speaking, hopeless. 
 
 Early Developments of Manufacturing. 
 
 The earlj- developments of manufacturing almost invariably arose 
 around water powers. Thus it was with nearly all the manufacturing 
 towns of England. The streams that flowed down from the central moor- 
 lands of the North gave rise to the falls and powers that were the origin 
 of the manufactures of Lancashire and Yorkshire. Thus it was also in 
 Scotland, in central P^ngland, in New England, and notably with the 
 powers arising from the great rivers of Canada, and of the United 
 States. 
 
 The development of coal mining introduced a new element into the 
 question, which element, in most cases, has become the dominant one. 
 Except in a few centres where water powers are found of prodigious 
 magnitude and continuity— such as Ottawa, INIinneapolis, and Kewatin, 
 the power of coal has not only become supplementary to the power of 
 5 
 
66 BANKING AND COMMERCE. 
 
 water, but has almost supplanted it. But even in localities where water 
 power has fallen almost into disuse, and great manufacturing cities 
 are fouiid at the present day, whose engines are almost wholly run by 
 the power of coal, it will generalh' be found that some water power 
 was the beginning of its development. Thus it was that several little 
 converging moorland streams in Yorkshire were the origin of the towu 
 of Sheffield, though the power derived from them is now infinitesimally 
 small. The little river Idle, which is humorously said to be tiie hardest 
 working stream in the world, flows down the western sides of these same 
 moorlands, and was the origin of many of the thriving communities of 
 Lancashire, Manchester included. Yet hard as the little stream works, 
 its total power and that of other streams like it is a very small factor in 
 the total production of the district. 
 
 Nature itself, that infallible mother of all forces, has indicated with 
 certainty where manufactures may profitably flourish. And it is one of 
 the most striking developments of these days that water power is asserting 
 itself again as a generator of Electricity. 
 
 Suitable Locations. 
 
 But though a given country, as a whole, may have the natural elements 
 of manufacturing success, it is not every locality that is suitable for 
 every kind of manufacture. Other elements have to be considered, and 
 particularly the important factors of labor, economical supply of raw 
 material, and the ease of reaching a consuming market. What particular 
 manufacture will suit a certain locality has Anally to be determined by 
 these. It has become plain that flour milling suits Minneapolis, saw 
 milling the Ottawa Valley, cotton manufactures New England, iron and 
 steel Pennsylvania. Cotton spinning flourishes in Lancashire, but an 
 attempt to introduce it into Yorkshire was a signal failure. Montreal 
 has remarkable facilities for a variety of manufactures, and a variety 
 of them are therefore found in that city and neighborhood. So, by a 
 natural process of development, each of the manufacturing towns of 
 Canada has come to be what it is; and the best has come to be made 
 both of our coal mines and the water powers of our smaller rivers, such 
 as the Trent, Otonabee, and Grand in Ontario, and the St. Francis 
 and the Chaudiere in Quebec. And what is true of Canada is true 
 of the United States on a much larger scale. In a forest covered country, 
 as most of Canada was originally, the most natural form of manufactur- 
 ing was sawing up the wood of the forest into lumber, or hewing it into 
 square timber. Both have been the source of great profit at one time, 
 both have caused great losses at another; the profit and loss having 
 been generally traceable to knowledge of the business or lack of it; but 
 sometimes to the chances and changes of winter and spring. But too 
 much or too little snow in the woods, or too much or too little water in the 
 river, may spoil the labor of a whole season. 
 
 But a person Avho has been successful as a maker of timber sometimes 
 
MANUFACTURING. 67 
 
 turns his attention to saw milling. He is then confronted with new 
 conditions of which he has had no experience, and ruinous losses have 
 followed the experiment. IMills were built where the best conditions did 
 not exist, and profit frittered awa}' in cost of hauling. 
 
 The difl'erence between a mill which can be worked properly and 
 one thai will entail constant loss may be only a difference in locality 
 of half a dozen miles. To locate a mill on one side of a stream or the 
 other, or on the eastern side of a hill instead of the west, may make the 
 diiFercnce to the owner of a fortune or ruin. 
 
 The same principle applies to another natural industry of Canada, 
 tJie flour mill; a business that has undergone a striking development 
 corresponding to the development of the country. The gristing mill of 
 former days, often buried in the woods, picturesque in appearance, 
 with the rudest description of equipment, has been necessarily replaced 
 by the substantial mill of these times, contiguous to a railway or naviga- 
 tion, equipped with modern machinery and perfect appliances for power 
 and transport. 
 
 At quite an early period there followed Avoolen mills, tanneries, and 
 pork factories; and, somewhat later on, breweries, distilleries, coal 
 mines, iron works, fish-curing establishments and implement manu- 
 factories, paper mills, etc., all of which are indigenous to the soil, and 
 work up the natural products of the country or its contiguous waters. 
 In all these, as in flour milling, there have been enormous developments 
 from the past to the present; and in all of them much money has been 
 both made and lost. 
 
 But there arc now in the country manufactures of a different descrip- 
 tion, which have yet attained a high degree of development and give 
 employment to a large number of artisans. These differ from the fore- 
 going, inasmuch as the raw material they work up is not a product of the 
 country. They owe their inception and, in part, their continuance, to 
 legislative conditions, for which reason it is considered by some that they 
 should never have been set on foot, and have no right to be continued. 
 (Many of them, however, have very fine water power.) These manufac- 
 tures, however, exist, and their development illustrates the importance of 
 locality as much as those before mentioned. Some mills have never been a 
 iuccess, and if they had been owned by private individuals the parties 
 would long ago have gone into bankruptcy. In other cases, after the 
 difficulties that attend all new enterprises had been overcome, success has 
 been constant and remarkable. All of them demonstrate the points 
 insisted upon, viz., that an ample supply of power, either of water or 
 coal, an easily available supply of raw material, good communications 
 both to and from the factory, and command of efficient labor, are the 
 foundations of success, without which the largest expenditures, the most 
 efficient machinery, and most economical management will be in vain. 
 
 There must, in the nature of things, at some time be a pioneer estab- 
 lishment in the case of every manufacture in every locality. It is not 
 
68 BANKING AND COMMERCE. 
 
 seldom the case that a large amount of money is lost while the experiment 
 is in progress, even if success be attained ultimately. Some of the well- 
 established manufactures of Canada were commenced by men who were 
 not discouraged by losses at the outset. They persevered, but not on 
 the same lines. They tried experiments, found out defects, introduced 
 new methods. Thus, sometimes very slowly at first, but surely, they dis- 
 covered the art of not only making goods but making money."'* 
 
 Bonuses. 
 
 Closely conected with the matter of locality is the practice, once so 
 common in Canada, of municipalities offering inducement to manu- 
 facturers to establish their business amongst them. This practice is 
 unknown in Great Britain, and it has been of doubtful advantage to this 
 country. For it is certain that unless a manufacturing business is estab 
 lished in a proper locality it cannot permanently succeed. 
 
 The great centres of manufacturing industry in Great Britain have 
 not become so by chance, or by means of municipal bonuses, but because 
 of their facilities. Why are they all found in the North, or in other 
 localities contiguous to hills .^ Jt is because of the water power originally 
 found there. In the early days of development, when a district is only 
 imperfectly known except to the people therein, these, knowing the 
 district to have advantages, may reasonably call attention to them, and 
 off'er inducements to a manuacturer to establish himself amongst them 
 rather than elsewhere. These inducements will off'set the risk of building 
 and bringing capital to a place hitherto unknown. Its success as a seat 
 of manufacture has to be j^roved, and it may take years to accomplish 
 it. Remission or reduction of taxes, or an actual bonus in money, may 
 therefore be off"ered without violating any economic principle. If the 
 place proves to have the advantages claimed and the parties receiving the 
 bonus have capital and capacity, the experiment will succeed, and other 
 enterprises follow. Then bonuses should cease. 
 
 But when the people of a town, simply out of a spirit of ambition, 
 or what is called enterprise, seek to draw manufactures to a place without 
 natural advantages, the effort is foredoomed to failure. Any manu- 
 facturer, looking round for a spot in which to commence operations, 
 will beware of being tempted by a bonus to an undesirable locality. 
 Better borrow the money at ten per cent., supposing it necessary to 
 borrow at all, and settle in a desirable locality, than get a supply of 
 
 26 It Is, as has been observed, foreign to the purpose of this treatise to dis- 
 cuss the economic questions connected with these latter lines of industry. But 
 it may be observed, and it deserves to be noted, that even such industries may 
 be consid(Med indigenous, at any rate to this extent, that the raw materials of 
 several of them are produced on this continent. If not in this country, and that 
 we have the means of economical production in our water power, and access to 
 coal mines; also in a supply of suitable labor and of economical distribution in 
 our great lines of railway and river transiiortation. And it is an undmibtod fact 
 that much of the water power which nature has given us would he wasted if 
 these enterprises ceased to exist. 
 
MANUFACTURING. o9 
 
 money for nothing in an undesirable one. And tlie people of a niuniei- 
 pality, under such circumstances, will learn by unpleasant experience that 
 their money has been wasted by reason of the forced enterprise never 
 taking root.-'^ 
 
 27 The writer remembers well an instance illustrating the importance of local- 
 ity that transpired in a certain town in England. The district is particularly well 
 adapted for iron manufactin-es, and they have flourislicd. there for generations. 
 But many years ago some capitalist conceived the idea of developing the cotton 
 industry there also. There were hundreds of cotton mills fifty miles off over a 
 range of moorlands, why could not the industry be domiciled in his own town? 
 The capitalist conceived there was no reason, and built and equipped a mill. But 
 it was found impossible, year after year, to make cotton goods at a profit; al- 
 though, not a hundred yards away, a great iron foundry and rolling mill, fed by 
 the same water power, were making large amounts of money for their proprietors. 
 The reason was that in the era before railways the range of hills aforesaid pre- 
 sented an insurmountable barrier. The cost of bringing raw material to the town 
 by carting it over the moorlands and carrying back many of the finished goods 
 over the same hills, swallowed up all the profits of the mill. After years of hope- 
 less struggle and heavy loss of capital, the factory was closed and dismantled. 
 1 well remember its broken windows, dilapidated flumes, and ruined dam, standing 
 out as an object lesson of misplaced enterprise. Canada, too, has some object 
 lessons of the same kind. But she has seen magnificent examples of success when 
 natural conditions have been duly observed, and business principles brought to 
 bear. 
 
CHAPTER XI. 
 THE SUCCESSFUL MANUFACTURER. 
 
 Capital Kequircd* — Proper ^Iaciiixery — Consignments — Selling 
 Agents — Sales to Wholesale Merchants — Insurance. 
 
 IT may at first sight seem unnecessary to make a distinction between 
 the successful merchant and the successful manufacturer. But the 
 points of difference are important enough to make it desirable. 
 
 Almost all that has been said respecting a successful merchant applies 
 also to a manufacturer; but all that applies to a manufacturer does not 
 apph' to a merchant. In using the word "manufacturer," it should be 
 understood that, in this chapter, a flour miller, a tanner, sugar refiner, 
 saw miller, pork packer, and hewers of squared timber are included. 
 They all produce goods by a manufacturing process, though they are 
 not generally called "manufacturers." 
 
 To be a successful manufacturer implies at the outset that the goods 
 produced are such that, speaking generally, there will be some certain 
 demand for them. There are goods which are subject to the changes 
 of fancy and fashion : it is then of primary importance for a manu- 
 facturer to watch tliese changes and regulate production accordingly. 
 There are others for which the demand is certain. 
 
 But though a man may be sure of selling the goods he produces, 
 it by no means follows that he can always sell them at a profit. A 
 manufacturer may have an imperfect equipment, or insufficient knowledge, 
 or inadequate capital, in which case, so strenuous is modern competition, 
 that to make profit is out of the question. 
 
 Capital Required. 
 
 With regard to capital, it is obvious that more is required for a 
 manufacturer than for a merchant. A merchant buys the very goods 
 he sells; and can generally buy them on credit; the only immediate cash 
 outla}' on them being for freight and duties. He can generally lease 
 the warehouse in which he does business. But a manufacturer can rarely 
 rent liis mill or factory; in fact, it is almost a necessity for him to own it. 
 
 The minimimi capital on which a manufacturer can carry on business 
 with ease, is that expended on land, buildings, plant and machinery. 
 But it is certainly desirable for a manufacturer to have some capital 
 beyond this, otherwise he may find himself seriously embarrassed, in 
 a time of monetary pressure. It is only prudent therefore for him to 
 allow his profits to accumulate until lie can look circumstances squarely 
 in the face no matter what financial changes may transpire. 
 70 
 
THE SUCCESSFUL JNIAXUFACTURER. 71 
 
 Proper JNIaciiinery. 
 
 But, though being in possession of adequate capital, it may be safely 
 said that a manufacturer cannot be successful unless he, or a manager 
 under him, has a faculty for machinery, and can tell, as by instinct, 
 whether any particular machinery is serviceable and workable. This 
 faculty, if he has it, will enable him to make economical repairs and re- 
 placements, or introduce improvements, perhaps peculiar to himself. For 
 it is a necessity for every factory to adopt current improvements when 
 their merit has been demonstrated.-^ 
 
 Here it is that tlie faculty for machinery will have its scope. It 
 will enable a manufacturer to judge whether the new thing is a good 
 thing, and whether improvements, so called, will really improve; or 
 whether he cannot, by some alteration, make his own machinery answer the 
 same purpose. The proprietor of a large flouring mill, not in Canada, 
 once lost a large sum of money by hastily adopting a new method recently 
 patented. The mill was at a standstill for some time while the altera- 
 tions were being made, and its customers were obliged to trade elsewhere. 
 But when the mill started again, although a great flourish of trumpets 
 had been made about the new process, it was found to make no better 
 flour than the old and no cheaper, and in the end it was abandoned 
 altogether. 
 
 What Goods to ISIake, and to WhOiM They Are to Be Sold. 
 
 The question, however, now arises to which all that has been referred 
 to is preparatory, viz., what goods are to be manufactured, and to tvhom 
 and how are they to be sold? It is not necessary in a treatise like this 
 to enter upon the specialties of the many lines of manufacture estab- 
 lished in the country. The greater part of them are of staple products. 
 But there is this to be said, that it is highly conducive to success, even 
 in the manufacture of staples, for the manufacturer to make a special 
 article, and to brand it with his own name, so that it may have a name 
 in the market, familiar to his customers and the public. Unless he can 
 do this, he will rarely make profit. There is a general and noticeable 
 movement towards specializing manufactured goods, and labeling them 
 with a name which carries with it a guarantee of quality, even of such 
 articles as flour, pork, whiskey, etc. The reputation once established, 
 the demand is certain, and, in most cases, the profit is assured. 
 
 But in such lines pf manufactures as cottons, woolens, boots and 
 5hoes, rubber goods, etc., etc., many varieties are to be found. Some of 
 
 28 Not that every new idea in machinery is to be adopted as soon as it comes 
 out. A thing- is not necessarily good because it is new. The patent offices at 
 Washington and Ottawa contain hundreds of models of inventions, and of sup- 
 posed improvements, which turned out on trial to be unworkable. A manufacturer, 
 therefore, while keeping his eyes open to what is transpiring in the way of im- 
 provements, will be careful not to spend money on what may turn out to be mere 
 "fads," unless indeed he has capital enough to enable him to spend money in ex- 
 perimenting. 
 
72 BANKING AND COMMERCE. 
 
 these, too, are staple, hut others are of the kind where taste and fancy- 
 have sway; such as colored and fancj' cottons, woolens and silks. In 
 agricultural implements also a considerable clement of taste and fancy 
 has sway, and competition prevails as to the quality of various kinds of 
 machines. For the wise production of these classes of goods, the same 
 instinctive feeling of what will suit the market is required, that has been 
 referred to in the case of a merchant. 
 
 Consignments. 
 
 Passing, however, from the consideration of what is to be manu- 
 factured, to that of how the productions of the factory are to be sold; 
 a wide field is entered upon, which brings the manufacturer into close 
 contact with the banker. At the outset, questions arise as to whether 
 goods shall be sent on consignment, or whether they shall be made to 
 reach the merchant direct; whether the services of a selling agent shall 
 be secured, through whom the whole product shall be distributed to the 
 dealer, or whether dealings shall be with customers direct. 
 
 With regard to consignments, it has long come to be regarded as an 
 unprofitable method of doing business. Manufacturers of goods for 
 export have long seen it necessary to establish such connection abroad 
 that they can make sales, at definite prices and on definite terms of time 
 and delivery; and will not trade except for what are called ''firm offers." 
 
 Selling Agents. 
 Manufacturers of cotton and woolens have, however, found the con- 
 vonience of dealing through a selling agent who will guarantee sales; 
 or will accept himself against the goods that pass through his hands. 
 It saves a large amount of office work, and seems also to save a con- 
 siderable amount of risk in giving credit to a large number of traders 
 scattered over the country. But experience has proved that though 
 trouble and office work are saved, the risk remains. The selling agent 
 himself takes the risk of numerous accounts; and in difficult times he 
 may himself succumb. Hence it has come about that while the services 
 of a selling agent are retained, he is in some cases relieved from the 
 responsibility of accepting against goods, or guaranteeing accounts, a 
 difference in remuneration being made accordingly. The manufacturer 
 then deals directly with the customer so far as collecting is concerned, 
 and takes the risk of giving credit. This arrangement is looked upon 
 with much more favor by the banker, for obvious reasons. The practice 
 of selling goods through an agent is found convenient in the case of 
 factories located in country districts. The selling agent in such cases 
 performs the service of a well-informed partner. Being resident in a 
 mercantile centre, he can give the manufacturer advice as to changes of 
 fancy and taste; and prevent him running on undesirable goods. 
 
THE SUCCESSFUL MANUFACTURER. 73 
 
 Sales to Wholesale Merchants. 
 
 In most lines of manufacture, the natural course is to sell to the 
 wholesale merchant. In this case the manufacturer will have large 
 accounts in his books, especially in the timber trade, where it is a common 
 practice to sell the whole product of the year to one mercantile house. 
 This involves exceptional risk, and a prudent banker will be careful as 
 to discounting bills of the magnit-jde called for unless a lien is preserved 
 on the goods until payment. But throughout all these selling arrange- 
 ments, where paper is required to be taken, a prudent manufacturer will 
 always keep in touch with his banker, as to n^hom to credit, and to what 
 amount. 
 
 The last course open to a manufacturer is to sell to the retailer. 
 This is, or certainly was, a common practice in Great Britain, but it has 
 not taken root here, except indeed in the case of the departmental city- 
 stores, whose purchases are on the same scale as those of a wholesale 
 merchant, and are treated as such by a manufacturer. It is evidently 
 not desirable for the manufacturer to sell to the ordinary retailer, for in 
 that case he will endanger his trade with wholesale houses.^" 
 
 Insurance. 
 In the matter of insurance there is even a greater necessity for a care- 
 ful outlook; for the damage to the business of a manufacturer by fire is 
 usually far more serious than to a merchant. It is much more easy for a 
 merchant to obtain new premises and a new stock of goods than for a 
 manufacturer to replace his buildings and machinery. The fact that a 
 
 29 The method of disposing of staple export goods by consignment was for- 
 merly almost universal, but it has led to so many losses as to have been largely 
 abandoned. It was an easy way of doing business to forward goods to a consignee 
 as fast as they were made, and draw a percentage against them, that percentage 
 being supposed to leave a margin to be drawn for in future. The margin would, 
 in truth, be realized if the goods struck a favorable market; and many an exporter 
 has deceived himself by treating it as a tangible asset. But a sad undeceiving has' 
 often awaited him on the receipt of Account Sales. In many cases there was a 
 balance against him instead of to his credit, which balance he was called upon to 
 pay. The technical name for this is "reclamation," a word which has had an 
 ominous sound for many a shipper, and proved the beginning of a downfall. A 
 consignee when his own acceptances are coming due, and markets are adverse, 
 will .sometimes slaughter his correspondents' goods. An unscrupulous consignee, 
 indeed, in an advancing market has been known to take goods to his own account, 
 rendering a far less favorable return than he could afterwards have done, had 
 the goods been actually sold. There are, in fact, disadvantages every way in con- 
 signing. The manufacturer has not the advantage of that direct contact with the 
 buyer which is one of the most efficient checks upon his business. If he con- 
 signs he may not know for weeks that his goods are unsuitable or badly manufac- 
 tured; whereas, if he sells, the buyer will tell him at once. In the one case he 
 will go on making goods by which he ultimately loses money; whereas, in the 
 other he will at once change his methods, overhaul his machinery, or buy more 
 suitable raw material, and so work round to a profitable style of business. 
 
 It may be thought difficult to arrange sales with buyers across the sea, but 
 It is undoubtedly for every exporter's interest to open communication with buyers, 
 and to visit the centres of consumption abroad, and in these days of swift com- 
 munication it is becoming easy to do it. 
 
74 BANKING AND COMMERCE. 
 
 manufactory is usually well built, or that it has unusually good fire pro- 
 tection, should never induce a manufacturer to diminish insurance. He 
 gets the benefit of his good appliances in a lower rate. But to diminish 
 the amount is apt to prove a serious mistake. 
 
 Another factor in manufacturing success must finally be noticed. It 
 is that a manufacturer should be about his works early in the morning. 
 One of the most conspicuous instances of manufacturing success that 
 Canada has known, in which, from small beginnings, an enormous and 
 most profitable business had been built up, was characterized by this fea- 
 ture. One of the principals was always about the establishment as early 
 as any of the workmen, going from floor to floor, from room to room, 
 from department to department. Dusty and dirty he was as any workman 
 in the building, before breakfast. But a few hours later the same man 
 might be seen on 'Change, in the bank parlor, or in his own office, guiding 
 the finances of his large business, or attending to operations involving the 
 welfare of men in all parts of the country.'"' 
 
 With regard to other elements of success, all that has been said of the 
 merchant has an equal application to the manufacturer. 
 
 30 It Is amongst these large and diversified spheres of industry, some mer- 
 cantile, some manufacturing, that banks find their principal field of operations: 
 their mode of dealing with each will be fully opened up later on; meanwhile it 
 may be observed that it would be of extreme interest, though it may not be 
 possible, for a special Government return to be published, say once a year, show- 
 ing how much assistance the banks were rendering to the various lines of indus- 
 try in the country. 
 
CHAPTER XII. 
 
 ELEMENTS OF SUCCESSFUL BANKING. 
 
 Why a Banker Comes After a Merchant and Manufacturer — Pri- 
 mary Elements of Success — Capital — Its Minimum — How Dis- 
 posed OF — Location and Style of Office — Officers and Clerks 
 — The Machinery of the Office — Ultimate End and Summing 
 L^p OF What a Banker Should Be. 
 
 IX a treatise on banking and commerce it is perfectly in accordance with 
 the reason of things that the successful merchant and successful man- 
 ufacturer should be treated of before the successful banker. There 
 must be mercliants and manufacturers before there can be a remunerative 
 business for the banker ; and unless there are successful men in these call- 
 ings, a banker, though he may take care of the surplus money of the 
 community, -will find it dangerous to lend money amongst them. 
 
 He will be pressed to do this beyond doubt, and every kind of influ- 
 ence will be brought to bear upon him to induce him to comply. He will, 
 for example, be told that he must do his duty as a citizen. The town 
 supports him, and he ought to support the town. It is a matter of plain 
 obligation to help its industries along, for these, it will be said, are the 
 very foundation of his own business. So the people will say, and what 
 they say is sufficiently plausible to make a strong impression. But many 
 a banker has had to suft'er severely for listening to such representations. 
 In such circumstances, that is, when there are few desirable customers in 
 the locality, the banker will be ofi'ered high rates of discount. From 
 some of tlie applicants he knows that he could take, practically, what- 
 ever he pleased; and from the best of them, or those who seem so, he will 
 be offered rates such as he might think would enable him to provide a 
 safety fund. But on the supposition that the business of the town is in 
 such a state that there are as yet few or no successful men in it, high 
 rates of interest will be no protection. No safety fund can be built up 
 that is large enough to offset the losses which will inevitably ensue. The 
 successful merchant and the successful manufacturer therefore must come 
 in order of time before a banker can do a successful business.''^ 
 
 31 It may be said that such a state of things as has been Imagined thus far 
 is impossible. But experience refutes this opinion. A case is known to the 
 writer in which in the collapse in a certain town of a remarkable "boom" every 
 single storekeeper in it, except one, failed. The town itself became bankrupt and 
 could neither pay interest nor principal on its indebtedness. Its population de- 
 creased from 3,500 to 700, its main streets became grass-grown, and handsome 
 buildings became tenantless. Of the money lent by a branch bank in that town 
 more than thi-ee-fourths was lost. If the banker had been a private individual, 
 he would have gone down in the crash and been ruined beyond redemption. 
 
 This case was in Manitoba, but even in Ontario the writer can recall In- 
 
 75 
 
76 BANKING AND COMMERCE. 
 
 But now on the sui^position that in a certain locality sufficient savings- 
 have been accumulated to give business to a banker, and also that there 
 are a number of prosperous men of business in the locality; -what arc the 
 elements that make a banking enterprise successful ? 
 
 (1) Capital is certainly as much a necessity' for a banker as for a 
 merchant; for, speaking of him in this personal style, no man can ex- 
 pect a community to trust him with the care of their money unless he 
 has shown abilit}' to take care of his own. 
 
 (2) But how much capital ought a banker to have? What is reason- 
 able in the case.'' 
 
 Putting aside for the present the private banker, it may be noticed 
 that the legislatures both of Canada and the United States have dealt 
 with this question in their banking laM'S.'^- 
 
 In Canada, where the system of chartered banks issuing circulation is 
 firmly established, the Bank Act provides that no bank shall possess 
 a smaller paid-up capital than $250,000. This sum is certainly small 
 enough for a corporation which has the power to issue notes for circula- 
 tion — wliich notes are, in effect, guaranteed by the whole body of the 
 banks of the country. 
 
 In the United States, however, every banking office is owned by a sep- 
 arate corjDoration and some of them, owing to the absence of the branch 
 system, are permitted to be organized on a capital of only $25,000. 
 
 This must be conceded to be running near the danger point. It cer- 
 tainly imposes upon a bank of such small dimensions the duty of incur- 
 ring only the most moderate risks, and confining the business within 
 limits more like those of a storekeeper than a banker. 
 
 England has no legal requirement of minimum capital in banking; and 
 the tendency from the beginning has been for banks in England (as 
 distinguished from Scotland) to have a smaller capital in proportion to 
 the business done than is common in Canada; the Bank of P^ngland alone 
 excepted. 
 
 The reason for this is twofold : First, the branch system, until lately, 
 has never been developed in England to the extent that it has in Scotland 
 and in Canada. The banks of England, as a rule, do a much more 
 localized business than tliose of Scotland and Canada. Secondly, but a 
 more important and pertinent reason is, that business conditions in Great 
 Britain are so much more settled that banks may safely work on a smaller 
 relative capital than is nccesary in this country. 
 
 stances almost equalling it in disaster. During a period of heavy collapse the 
 losses suffered by banks in certain towns have amounted to a large percentage 
 of their assessed value. 
 
 32 There aie no laws, properly speaking, in Canada, on the subject of private 
 banking, though, as experience has shown, some regulations might have been 
 embodied in specific legislation with advantage. The only provisions affecting 
 this class of bankers are contained in two clauses of the General Banking Act, 
 viz., one to prohibit them from Issuing circulating notes; the other to prohibit 
 them from assuming a corporate name, such as that of the "Iroquois Banking 
 Company." These provisions are obviou.sly reasonable. 
 
ELEMENTS OF SUCCESSFUL BANKING. 77 
 
 Beyond the minimum required by the Banking Act the members of 
 each corporation in Canada decide for themselves wliat the capital shall 
 be. It depends largely on the sphere they intend to occupy, and how far 
 they mean to extend it. 
 
 A few Canadian banks have their headquarters in small towns, and 
 some have no branches. For these the mininnim of $250,000 is sufficient. 
 
 At the other end of the scale is an immense corporation like the Bank 
 OF Montreal, with its head office in a large commercial centre, branches 
 all over the Dominion, agencies in the United States and England, and 
 doing business not only with the mercantile community but with govern- 
 ments and great railways. 
 
 An institution like this can well emi)Ioy such a capital as $14,000,000 
 or more. 
 
 Between these limits are banks with capital ranging from $250,000 
 to $8,000,000. 
 
 Tracing now the business of a bank from its origin, the first considera- 
 tion will be in ?vhat form shall the capital be held before business is actu- 
 ally commenced.? Our Bank Act answers this question by requiring that 
 a joint-stock bank before commencing business under its provisions shall 
 have the whole amount of its capital in cash. To ensure this it is re- 
 quired that the cash shall be placed in the hands of the Government, and 
 that no business shall be done before an authorization is issued. 
 
 A bank before opening for business in Canada will need to arrange for 
 <'orrespondents in England and the United States. Much will depend 
 upon a proper choice and satisfactory arrangements in these matters. It 
 will also be prudent, as soon as possible, to invest some portion of the cap- 
 ital in realizable securities, and not hold the whole amount for discount- 
 ing. Such bonds would form part of the reserve against the liabilities 
 which the bank would begin to incur to depositors and noteholders, and 
 3'et bear a moderate interest. They are useful also to further needful 
 arrangements with English correspondents. Moreover, the holding of 
 such securities strengthens the position of the bank, and its credit with the 
 public. 
 
 TiiK Arrangements of the Office. 
 
 In the choice of an office, two questions arise, the first of which will 
 be its localiti/j a matter of as much importance to a bank as to a merchant. 
 It should, if possible, occupj'^ a corner, for the sake of light. It should be 
 in the wholesale quarter of the city, or if there be no such quarter, then 
 not far from other banks if there are others, not far from the post office; 
 near the market, or the exchange, or board of trade; and also, if pos- 
 sible, near to the retail shojis. 
 
 A building will naturally be rented at the outset, for it would be im- 
 prudent to devote capital to building at so earlj^ a stage, and one should 
 be sought that is substantially built, a good fire risk, with other good 
 
78 BANKING AND COMMERCE. 
 
 buildings about it. and with a loft}' main floor to give the bank a respect- 
 able appearance. 
 
 As to the internal economy of the office, convenience for doing business 
 should be the dominant consideration, and not show or ornament; too 
 much of -which displays bad taste, though the fittings should be solid and 
 as good as money can bu}'. 
 
 Light should be carefulh' studied in the internal arrangements, for 
 it is of the utmost importance both to those who handle money and those 
 who keep books. 
 
 A bad bill, or forged paper, may be discovered in a good light, where 
 it would be passed Avhen light is dim. A mistake also in bookkeeping 
 which would be readily apparent in a good light may easily be passed by 
 when light is insufficient. 
 
 The next important element is a judicious choice of officers, who 
 should be men who understand their business, and display civility and 
 attention to customers and the public. The subject of officers, the divi- 
 sion of their work, their duties and qualifications will be fully discussed 
 later. It will be sufficient to note here that upon a proper selection of 
 officers, a convenient arrangement of their work, and an efficient system 
 of check and supervision no little of the success of a banker depends, 
 especially in times of competition. Without going into detail as to what 
 constitutes the special qualification of each, let it be noted that there are 
 certain qualities which are essential to the success of any of them. 
 
 A bank officer should be of good character, honorable and trustworthy 
 in the instincts of his nature; in fact, he should be what is generally un- 
 derstood as a "gentleman" not in outward manners merely, but in charac- 
 ter. He should have a good natural aptitude for ariihmetic and have 
 been well trained therein. No matter how intelligent and well educated 
 a young man may be in other respects, a want of aptitude for arithmetic 
 will prove a fatal bar to progress. ^^ 
 
 A bank officer should write a good plain hand and make plain figures. 
 Many a mistake, costing the labor of scores of hours of officers to find 
 out, has been occasioned by carelessly-formed figures. He should have 
 a good general education. What is known as a good English education 
 may be said to be essential. Some drilling in mathematics, as distinct 
 from arithmetic, will be found highly useful as a young officer advances 
 in his profession. A university education is not necessary in the case of 
 a young banker; indeed, it is rather undesirable than otherwise, for to 
 acquire it a young man will be carried too far on in years before the 
 long course of training begins to fit him for the work that is to occupy 
 his life. 
 
 33 A foimcr General Manager and President of the Bank of Montreal was 
 well known to have an extraordinary faculty for arithmetical calculations. To 
 this he owed all his early advancement, and some of his later remarkable success. 
 He had, of course, other prominent qualities which would have made him a 
 notable man in any sphere. But it was his arithmetical faculty that laid the 
 foundation of his success as a banker. 
 
ELEMENTS OF SUCCESSFUL BANKING. 79 
 
 Bank officers, like other employees, require to cultivate habits of 
 civility and patience. All sorts of people are to be found at the counter 
 of a bank. Some of them are ignorant, who want much telling what to 
 do; some are impatient and unreasonable, who are nevertheless good cus- 
 tomers. A bank officer who is fretful and impatient will drive away both 
 classes of customers. He will need also to cultivate a habit of reticence. 
 It is a cardinal rule in all banks that clerks and officers must never talk 
 outside of what they see or hear inside. The whole business is confiden- 
 tial. A banker who is master of his business will, amongst other things, 
 sufficiently understand human nature to gather about him such men as are 
 here indicated. One by one, and during a considerable time, he will pur- 
 sue this end, selecting and training his officers until they are thoroughly 
 efficient. With such men about him, a banker can carry on his business 
 satisfactorily so far as its internal economy is concerned, and fulfil the 
 purpose for which the business was commenced. 
 
 Thus far with regard to a banker's staff and machinery. A banker, 
 however, may carry on every department of his routine business efficient- 
 ly, and yet fail in the essential object of doing well for himself. He may 
 fail so far as not only to lose part or the whole of his own capital, but a 
 part also, or even the whole, of the money deposited Avith him. These, 
 unfortunately, are not suppositions and possibilities only; they have be- 
 come in not a few instances very exasperating facts; causing distress in 
 thousands of households, and embarrassment to men in business. Suc- 
 cess, then, to the banker is primarily what it is to the merchant, viz., that 
 he should continue to fulfil his functions and meet his daily obligations to 
 the end, preserving his own capital intact, to saj^ the least, but adding to 
 it from time to time in prosperous seasons until he accumulates a re- 
 serve fund to provide for contingencies. For, as a merchant desires to 
 increase his capital until it amounts to a competence, so a banker, with 
 equal propriety, desires to accumulate such a surplus, after a reasonable 
 distribution of profits, as will amount to a reserve sufficient to render im- 
 pairment of his capital impossible. But to attain this he must be thor- 
 oughly au fait in the art of lending money and avoiding losses. A sum- 
 ming up of what the banker should be himself may be indicated as fol- 
 lows : 
 
 (1) A successful banker, like a successful merchant, must not only 
 understand the theory and practice of his business and the laws with 
 which it is carried on, but must, as a rule, have gone through such a pre- 
 paratory training in the office as will enable him to see that every part of 
 it is carried on with economy and efficiency. 
 
 (2) He must possess a sound judgment, and be able to discern be- 
 tween good loans and bad, desirable accounts and undesirable, and have 
 such a knowledge of human nature as will enable him to know whom to 
 trust and whom to avoid. 
 
 (S) He must possess, and keep himself possessed, of a good stock of 
 information, well-sifted, and kept up-to-date. 
 
80 BANKING AND COMMERCE. 
 
 (4) To enable him to make a right use of the qualities, he must 
 have a well-balanced character, viz., a due combination of caution and 
 enterprise, and neither of them in undue measure. Excess of caution 
 will prevent him from taking up accounts and transactions that are safe, 
 for to the over-cautious man risks loom up in unreasonable proportions. 
 
 On the other hand, if a banker has an excess of enterprise he will 
 take up accounts that are undesirable, enter upon lines of operation that 
 will result in lock-ups or losses; and so conduct his business with regard 
 to reserves as to endanger the bank's very existence. The over-cautious 
 banker may lose opportunities of business, but the interest of depositors 
 and stockholders will always be safe in his hands. The over-enterprising 
 banker will always have a tendency to enlarge his business beyond safe 
 bounds, and possibly place himself in the position of being compelled in 
 a time of pressure to ask assistance from his more prudent neighbors. 
 
 (5) The banker should have firmness and strength of character, com- 
 bined with good will and courtesy. 
 
 Of these the first are by far the more important. While a banker, in 
 his intercourse with men, is bound, like other men, to be courteous, he has 
 to beware of being what is generally known as "a good-natured man." 
 For a man whose predominant trait is good nature and benevolence runs 
 great risk of becoming the pre}- of schemers or enthusiasts. If he is a 
 banker on his own account, he will almost certainly ruin himself. If 
 he is an officer in charge of the general business of a corporation, he will 
 almost certainly bring it into embarrassment. 
 
 On the front page of the New York Bankers' Magazine there used 
 to appear the following motto: "Favor and benevolence are not attributes 
 of sound bankhig. Strict justice and the fulfillment of contracts are its 
 essential elements." This witness is true. 
 
 It is the commonest of truisms that a banker must be able to say no, 
 and stick to it; but, on the other hand, a banker who is alwaj-s saying no 
 will drive away good business. If a banker gets a reputation for being 
 crusty and sour-tempered, people who have desirable business to offer 
 vnW avoid him. Such a reputation will not drive away men of the iinde- 
 sirable sort; for, as a rule, they care nothing about the reception they get, 
 if they can only get the money. But men of standing and position, who 
 know that what they jDropose is reasonable, will not put up with surly 
 criticisms. 
 
 The old Latin motto, Suaviter in modo, fortiter in re, exactly ex- 
 presses the combination of temper needful to a banker. Courteous in 
 manner, he will give even a negative answer without giving offence; firm 
 in his position, he will maintain it in spite of all the importunities of cus- 
 tomers if what is asked is undesirable. 
 
 (6) A banker should have a shrewd judgment as to subordinates. 
 Men have various capacities; and to know how to put "the right man in 
 the right place" is all-im))ortant. Especially is this the case under a 
 banking system like that of Canada, where branches are put under charge 
 
ELEMENTS OF SUCCESSFUL BANKING. 81 
 
 of men who exercise almost all the powers given to tlic corporation. On 
 the exercise of a sound judgment in this respect, a large part of the suc- 
 cess of a joint-stock bank with branches depends. 
 
 Finally, it should be said, that a banker especially in the highest post, 
 needs to be a man of considerable "nerve." There alwaj's have occurred, 
 at times, and always will occur, crises, times of difficulty, emergencies that 
 could not be foreseen, and sometimes startling events that come like "a 
 bolt out of a clear sk}^" sufficient to try the nerves of the strongest man. 
 
 A great bank suspends payment: confidence in all banks is sha'ken, de- 
 positors and noteholders crowd round the counter all day long, and for 
 days together. In these circumstances a banker needs to keep his head 
 cool, and will not only avoid yielding to panic himself, but will be a cen- 
 tre of strength and confidence to others. 
 
 Two instances of this kind of courage and coolness may be given. 
 
 On the occasion of the failure of the Commercial Bank of Canada, 
 some thirty years ago, a panic seized upon the public of Toronto, and a 
 severe run set in on the banks having their head offices in Ontario. Their 
 counters wei*e crowded with an excited multitude for several days, and one 
 of the banks had to be supi)lied Avith gold by its strong neighbors. There 
 was excitement in ^Montreal, too, and on the third day a telegram was 
 received from a well-known public man there stating it as the opinion 
 of some prominent financiers that a general suspension of specie pay- 
 ments by the Western banks should take place. This advice was under 
 consideration by bank presidents and directors in Toronto, and some 
 were so alarmed that they recommended its acceptance. But the Cashier 
 of one of the banks, a young man, strenuously opposed such a humiliating 
 course, and declared that so far as his bank was concerned, his advice 
 would be to stand out to the last dollar. This counsel prevailed, and the 
 banks were saved from a step which would have damaged their credit be- 
 yond recall. Shortly afterwards, a step was taken by the Government 
 which stopped the i^anic. 
 
 The other case was that memorable action of the Governor of the 
 Bank of England on the occasion of the crisis which had overtaken the 
 great firm of Baring Brothers. This is referred to elsewhere, but may be 
 briefly noticed here. Had that house suspended, some eighty million 
 dollars of bills would have gone to protest, followed by an incalculable 
 number of failures in all parts of the world. The prospect of a world- 
 wide financial panic was sufficient to shake the strongest nerves. But the 
 Governor of the Bank was equal cO the occasion. He clearly perceived it 
 was a case for the co-operatirn of the whole banking interest of the 
 United Kingdom, and called on every bank of importance to join in tak- 
 ing the risk of paying this enormous amount of bills on the security of 
 the assets of the house. The call was responded to at once. The risk 
 was divided amongst the banks without difficulty; whereupon the Bank 
 of England made it known that arrangements were made to pay the bills, 
 and the whole financial woild in every quarter of the globe breathed a 
 sigh of relief. The courage and coolness of one man saved the situation. 
 
CHAPTER XIII. 
 
 THE BANKER'S INFORMATION AND OTHER ELEMENTS OF 
 SUCCESS. 
 
 Information Necessary to Successful Banking — Character and 
 Capacity of Borrowers — Failures in Business — Amount of Cap- 
 ital — Familiarity with Banking Laws — Dealing with Embar- 
 rassed Borrowers — Knowledge of Security Values — Credits — 
 Mercantile Agencies — Exchanging Information. 
 
 'T^HOUGH a banker lias proceeded so far as to have adequate capital, 
 A due authorization, suitable correspondents, and well-equipped office 
 and staff, he will find himself utterly unable to proceed in the way 
 of making profit, without an adequate stock of information. 
 
 If a young banker has passed through the grades of a banking office, 
 and acquired proficiency in counting money, keeping books and handling 
 securities, he may fancy he is well equipped for business, but this is only 
 one-half of a banker's business, and by far the easiest half. It is when 
 persons come with proposals for Loans, or for the Discount of business 
 bills, that the banker finds the necessity of another sort of stock than 
 money ; and another sort of capacity than handling it. 
 
 A person, for example, comes into the office, with a proposal for a 
 loan. The banker has funds, and he would be glad to employ them. But 
 he is at once confronted with the question, who and what is the person 
 proposing to borrow.? Who and what is his proposed endorser.? What is 
 the real value of the security he offers.? 
 
 The primitive banker, sketched in the beginning of this treatise, a 
 wealthy and successful man of business and long established in the com- 
 munity, knows everybody in it, and has already this valuable stock of 
 information at command. He can proceed safely enough in the business 
 of lending. But woe to the unfortunate banker who would attempt to 
 do a loaning business without information. 
 
 Information, then, being essential to successful banking, and to suc- 
 cessful trading, too (for banking and commerce in this respect are close- 
 ly connected), it is proposed, at this tii-ie, to enter more fully than here- 
 tofore into a consideration of the whole subject. 
 
 There are four general heads under which may be grouped all the 
 information a banker needs as to the persons who propose to negotiate 
 loans or discounts with him; viz. — 
 
 1st. Antecedents. 
 
 2d. Character. 
 
 3d. Means. 
 
 4th. Experience. 
 
 82 
 
THE BANKER'S INFORMATION. 83 
 
 Each of clic above heads of information lias pccnliaritics of its own, 
 and each of them ramifies into numerous particulars. 
 
 For example, with respect to character (for the above need not be 
 taken in their order), the most essential quality is obviously honesty and 
 uprightness; that is, that a man can be depended upon to perform his 
 promises, to speak the truth and attempt nothing unfair. 
 
 It is not generally appreciated as it should be, that all the dealings 
 of a banker in the way of lending money are based on promises; i. e., 
 the notes a merchant offers for discount, the acceptance of another mer- 
 chant to bills of exchange, the endorsements on which so many millions of 
 loans rest, even the contracts contained in debentures, are nothing but 
 promises in writing. They all depend for their value on the character 
 of the person promising. They are capable, indeed, of enforcement by 
 law, but they would lose all negotiable value unless they could be de- 
 pended upon without law. It is one of tjie marvels of modern banking 
 that so many millions of assets consist simply of pieces of paper on 
 which is written, either I promise to pati, or 1 will see that some other 
 person fulfils the promise he has made to pay. Even such securities, so 
 e.illed, as the bonds of governments, or other corporations, are nothing but 
 promises to pay certain moneys after a term of years, which promises 
 may be kept or broken a? circumstances develop. Such promises to the 
 amount of millions have been broken (the bonds go into default, as the 
 phrase is), and bondholders, on endeavoring to enforce performance by 
 law, have repeatedly found themselves baffled and disappointed. 
 
 Certainty of performance, therefore, is the foundation of all dealing 
 in promises; and it is only when a high degree of reliability is reached 
 amongst any circle of customers that a banker can carry on business with 
 success.''* 
 
 But reliability as to siairmciits is almost as important as reliability as 
 to promises ; inasnuieh as a banker's business is largely founded on the 
 representations made to him by his customers. There are degrees of re- 
 liability in men. One will make misrepresentations, deliberately, from 
 unscrupulousness, another from a sanguine temperament, and then from 
 simple carelessness. Some men will tell a banker what they know to be 
 false, though it is rare for men to go so far, unless in an extremity. 
 Others (or the same man at other times) will color representations, di- 
 minishing some things, and exaggerating others, making the favorable 
 points too prominent and keeping back those that are unfavorable; the 
 effect being that a false impression is produced, although no direct false- 
 hood has been spoken. Beyond all this lies the terrible region of fraud 
 and forgery, where a borrower brings promises to pay for discount, of 
 which the s\i)iiiosed jiromiser never existed, or, if he exists, that he never 
 saw. 
 
 34 It is generally known to bankers that the degree of reliability as to per- 
 formance of promises is very high in the course of banking business in England. 
 A protested bill is nothing but a broken promise, yet some banks doing a large 
 business in England have so seldom had bills protested, that they looked upon 
 such a case, when it did happen, to be ajmost as disgraceful as forgery. 
 
84 BANKING AND COMMERCE. 
 
 Wlicn a man has gone so far as this, lie lias jDut himself out of the 
 pale of bank dealings. His proper place is in the criminal dock. 
 
 Varying Degrees of Reliability and Capacity. 
 
 But apart from such a case as this — between the man of absolute hon- 
 est}' who can be relied upon to perform his promise, no matter what it 
 may cost him, and the men whose word cannot be relied upon at all, 
 there are many degrees of reliableness. Men there are who on all ordi- 
 nary occasions tell the truth, but whose moral courage fails them in an 
 emergency. There are others who have a character for making misstate- 
 ments to their neighbors, who never try to deceive their banker. The 
 banker learns by experience how to balance conflicting reports. He will 
 note whether statements may be made from personal prejudice, trade 
 rivalry, or political antagonism. Equally will he guard against being 
 misled by statements of a favorable nature that circumstances do not jus- 
 tify; for this is the more dangerous of the two. The one would lead to 
 loss of business, whereas the other would lead to a loss of money. And, 
 as Mr. Gilbart has well observed in his Treatise on Banking, when a 
 banker has a written report on a customer before him, he will note as 
 much what is omitted, as what is said. A man may be eminently honest 
 and truthful, yet it might be very undesirable to lend him money. There 
 are honest simpletons and truthful visionaries. 
 
 There are men who while scrupulously careful as to performiiio- prom- 
 ises, are ra.sli and sanguine in making them. 
 
 There are men who enter upon business operations who are fore- 
 doomed to failure from the outset. A banker, tliereforc, in the course 
 of his loaning operations, must direct his attention not only to honesty but 
 to capacity. 
 
 This quality, like honesty, has many degrees and varieties. It is a 
 composite quality, made up of various elements which are to be found in 
 various combinations in different individuals. 
 
 Some of these are essential, such as good judgment, and common 
 sense, together with a due combination of caution and courage; not an 
 over-developed cautiousness, for in this case he would be afraid to run 
 reasonable risks, nor an overweening courage, for in that case he will 
 venture into rash operations. Capacity such as Avill make a man a desir- 
 able borrower is a sum of desirable qualities well and reasonably com- 
 bined. For example, no man can be a desirable borrower from a bank 
 wlio is not able to put forth strenuous exertions in emergencies; for such 
 contingencies occur in every business; and if he cannot meet them he will 
 be overthrown. 
 
 If a man is given to pleasure, and spends too much time in the enjoy- 
 ments of the table, especially in drinking, he will prove to be a very un- 
 desirable customer for the banker. It need scarcely be said, except as 
 a passing allusion, that all vicious pleasures must be shunned by every 
 
an 
 sua 
 
 THE BANKER'S INFORMATION. 85 
 
 man who values liis business cliaractcr. Amongst these gambling and bet- 
 ting must be included. 
 
 A banker, then, has all the foregoing points to consider in their place 
 and order. How, for example, can it be safe to extend credit to a man 
 who is capable and economical, if he is not honest? Or, honest and 
 industrious, if he has no ability? Or, capable and economical, if he has 
 die disposition? Or, honest and capable, if he is a drinker or a sen- 
 list? A perfect character can never be looked for, but it is certainly- 
 necessary to take the foregoing points into account. 
 
 The antecedents of a man are generally more easy to ascertain than 
 his real character, especially when his life has been spent in the neigh- 
 borhood. When, however, a considerable part of a person's career has 
 been spent in a distant locality, it is sometimes difficult to arrive at the 
 truth. Enquiries as to antecedents obviously gather about several lead- 
 ing points. The first is, whether he has or has not been successful? Has 
 he ever failed? If he has failed, then under what circumstances? Was 
 it at a time of general depression, when the strongest firms could scarcely 
 hold their own, or was it when affairs in the commercial world were work- 
 ing smoothly? And what was the reason of his failure? Was it incom- 
 petency, idleness or extravagance? Did he over-trade or speculate, or 
 neglect to insure r Was he carrying on a business of which he knew noth- 
 ing? Was he foolish in crediting, and did he let every shiftless fellow 
 in the connininity take advantage of him ? Was he living in too fine a 
 house, making too great a show, perhaps building or buying property 
 when he ought to have ke]it the money in the business ? Prudent bankers 
 will endeavor to ascertain in addition whether he got a settlement, and 
 how he got it. Also what did his creditors think of it, especially what did 
 his banker think? Particularly, was there any suspicion of fraud about 
 his failure, or any attempt to take advantage of the easy provisions of 
 a Bankrupt Act and make money by declaring himself, or by collusion, 
 being declared, insolvent? 
 
 A banker might indeed save himself the labor involved in inquiries of 
 this kind, by making it a rule never to lend money to any man who has 
 failed under any circumstances. It would, perhaps, work to his disadvan- 
 tage at times, for a man who had learned lessons from experience may 
 be conducting a prudent and prosperous business. But it is certain that 
 one who has failed is apt to fail a second time. When times of difficulty 
 come, a person who has once failed, is strongly tempted to give up the 
 struggle even when really solvent. 
 
 A banker may also reasonably enquire whether the man has had fair 
 success in business, whether he "got on" as the phrase is. One who has 
 barely kept his head above water may sometimes prove an undesirable 
 borrower. But such a man may have had to struggle with unusual diffi- 
 culties, and yet have paid his way, and maintained an honorable reputa- 
 tion. Such men, although they do not accumulate money, are, sometimes, 
 the very "salt of the earth," and among the safest of a banker's customers. 
 
86 BANKING AND COxMMERCE. 
 
 Amol-xt of Means or Capital. 
 
 The third matter respecting which information will naturally be 
 sought is as to a proposed customer's means, or capital. Some men who 
 lend money would say that this is the only thing worth enquiring about. 
 Without going so far as this, common prudence suggests that a man's 
 capital is a matter of the first importance. Yet it is extremely difficult to 
 get accurate information about it. Men almost invariably consider them- 
 selves worth more than they really are, hence it is necessary to criticise 
 all statements of assets with a view to correcting over-valuations. But 
 there are men in business and desiring to be customers of banks, too, M'ho 
 never make out a balance-sheet at all, contenting themselves with mere 
 lists of accounts due to them, and now and then estimating the value of 
 their stock b}- guesswork. 
 
 If they own real property, they generally consider it worth its cost. 
 Of liabilities they rarely keep an accurate account, except possibly of 
 notes they have signed. Thus, judging both their assets and liabilities 
 by guesswork, they estimate their means by guesswork too ; guessing them- 
 selves to be worth one or more thousands of dollars, they claim credit 
 accordingly. 
 
 But a banker would be simple, indeed, who would be satisfied with 
 this. He Mill ask for what is generally called a "statement," which 
 statement, for obvious reasons, should be in writing. Yet a prudent 
 banker will rarely act upon a written statement without a conversation 
 with the party who has submitted it. Such conversation will often bring 
 out points that a bare statement leaves unrevealed, and will prove, if 
 carried out judiciously, of great value to the party concerned, as enabling 
 him to understand his real position. Moreover, in many cases, this will 
 afford a fair index to the borrower's habit of mind, and show how far he 
 is to be trusted in any future representations he may make.^^ 
 
 With regard to the Experience a proposed borrower has had in the 
 business he is carrying on, it is a comparatively simple matter to ascertain 
 it. If he has always carried on business in the same town or neighbor- 
 hood his experience will be a matter of notoriety. 
 
 If it has been gained in some distant place the information received 
 as to antecedents will cover the point. 
 
 But now supposing that the banker has acquired a sufficient stock of 
 information to justify him in commencing to deal with borrowers, he 
 must not imagine that he is exempt from the trouble of making future 
 enquiries. Changes are constantly taking place, and it is necessary for a 
 banker to keep his information abreast of the times. Last year's reports 
 are not a safe foundation for this year's business. 
 
 Premonitory symjitoms of coming trouble are of tlie first importance 
 
 35 There Is, however, a mode of giving information wliicli may be more valu- 
 able even than a written statement. When a merchant livos in a distant town 
 and his banl<cr casually calls upon him, the merchant may then take him Into 
 his office and open the private ledger containing his last stock-taking and state- 
 ment of profit and loss. It is impossible fur this to have been made up for the 
 occasion, and the very act of doing so will tend to inspire confidence. 
 
THE BANKER'S INFORMATION. 87 
 
 for a banker to consider. Especially such as come under his own obser- 
 vation. He will, however, take care that his observations are accurate 
 and his information to be relied on. He will constantly be coming into 
 contact with the better informed class of the community and have the 
 oi^portunity of separating the chafl" from the wheat. He will always be 
 on the look-out for information, even when transacting ordinary business, 
 but he will beware of encouraging his customers to gossip to him. 
 This is particularly the case needful in country towns where a banker has 
 farmers for customers. 
 
 In seeking information a banker will be careful not to waste his 
 customer's time bv asking too many questions. If he gets a reputation 
 for what is called "pumping," he will be avoided. The time of mercan- 
 tile customers is probably as valuable as his own, and while the informa- 
 tion he may receive will have a direct monetary value to him, it is no 
 benefit to him who imparts it. 
 
 In large cities there are generally to be found persons who have a 
 sort of faculty for acquiring information. They pick it up on 'Change, 
 or at the Club, or at Board of Trade meetings, or in traveling. They 
 have often a kind of instinct for discerning the quality of information 
 and know what is worth talking about and what is not. Acquaintance with 
 a man of this class is invaluable to a banker. 
 
 The knowledge to be acquired through Mercantile Agencies is dealt 
 with further on. 
 
 There are, however, other things that claim the attention of a banker 
 besides information as to the people with whom he is likely to do business. 
 The first of these is a knowledge of the laws under which he does busi- 
 ness. Later on in this work there is given a synopsis of the law relating 
 to joint-stock banking in Canada and the United States. As by far the 
 larger part of the banking of the country is carried on under this law 
 it will be assumed that a Canadian banker has become familiar with its 
 provisions, especially with those relating to his function as a money- 
 lender and the securities he can take therefor. He will learn from thence 
 what he has power to do, and what he is prohibited from doing, what are 
 his powers and limitations regarding real estate and fixed property, also 
 as to security in the shape of warehouse receipts, bills of lading, liens, 
 hypothecations, and other matters. Along with this he will learn what 
 the law allows in dealing with dej^ositors of various classes ; also what are 
 his obligations toward the Government itself. The provisions of the Bank 
 Act should be so familiar ihat it will become practically impossible for 
 him to incur any of the penalties provided for violating them. 
 
 Besides this special knowledge of the banking law, a banker will need 
 a general acquaintance with tlie law of bills of exchange, and promissory 
 notes; what constitutes their validity, and negotiability, also recourse upon 
 endorsers, policies of insurance, guarantees, mortgages on real estate, 
 chattel mortgages, how to proceed to enforcement, and other matters re- 
 lating to securities. A banker need not be a lawyer to have such knowl- 
 edge of these things as is necessary to conduct his daily business, and 
 
88 BANKING AND COMMERCE. 
 
 give instructions to his clerks. There will, however, arise at times ques- 
 tions regarding jjarticular points of procedure respecting which he would 
 do well to consult his lawyer. But, as he proceeds, a banker will grad- 
 ually become as familiar with what he has power to do and what he has 
 not as a merchant is with the tariff. 
 
 With regard to cash reserves and investments a banker should not 
 only understand wliat is the proper proportion to be observed, but be 
 possessed of sufficient skill and firmness to guide his discounting opera- 
 tions so as to maintain them. 
 
 An important qualification of a successful banker is the faculty of 
 dealing with customers who fall into embarrassment, and of realizing 
 securities to the best advantage, In spite of all a banker's caution he will 
 find himself compelled at times to deal with embarrassed customers (em- 
 barrassed through no fault of his), and compelled also, much as he may 
 dislike it, to devote time and skill to the working out of Insolvent Estates. 
 Times of difficulty recur periodically in the commercial M'orld, when in- 
 solvencies rise far beyond the usual average. It is in these difficult times 
 that a banker's judgment and skill are severely tried; not only in making 
 the best of securities, but in considering that most difficult question. Shall 
 he support his customer, and nurse him into a safe position, or shall he 
 refuse further advances and let matters take their course? Which of 
 these lines to take is generally a perplexing question to answer. Either 
 of them may lead to loss, if a mistake is made. The customer's business 
 may be too deeply embarrassed to permit of its recovery; in that case 
 additional advances will only lead to additional loss. On the other hand, 
 if it is not too far gone, a little timely help may tide a Avorthy and capable 
 man over temporar}^ difficulty and preser\e him as a good customer to a 
 future time. 
 
 To refuse help altogether, would lead to certain loss. There is thus 
 the alternative of certain loss on the one hand, of possible avoidance of 
 loss on the other, with the other alternative that the help may prove in- 
 sufficient, and the loss be increased. The only safe course to follow in 
 such cases is this: if the party is honest and has the capacity to succeed 
 if help is rendered — then care should be taken to ascertain, by the bank- 
 er's own examination, whether the party is really solvent; and, next, to 
 require such additional security as the law will allow, and as will not 
 prejudice the customer's position. If the debtor is thus kept on his feet, 
 it is not unreasonable to require that the banker should have some super- 
 vision over the business until such time as ciKoumstances prove to be un- 
 necessary. If such a step is taken, the banker will, of course, carry it 
 out prudently, and not give the customer reason to complain of inquisi- 
 torial prying, or of unreasonable interference with his business. 
 
 It is, at all events, certain tliat this course has been more than once 
 tried, and with tlie best results. 
 
 A banker will not have proceeded far in the way of his discounting 
 before he perceives the importance not only of information respecting 
 his immediate customers but of the persons with whom they deal. He 
 
THE BANKER'S INFORMATION. 89 
 
 will find it necessary also if he is doing business in a city to become ac- 
 quainted with the various classes of secitrUies that are offered for Loans, 
 or which it may be desirable to purchase for investment. It will be well 
 also that he should become acquainted, in some degree, with the staple 
 products, which, under our banking law can be transferred to him as 
 security, and Avith the prices current from time to time, and the condition 
 of the trade in general. 
 
 A banker should be sufiiciintly wtll informed to be able to advise an 
 importer, let us say, to moderate his purchases, giving reasons therefore 
 or an exporter whether to warehouse and hold for a time, or to engage all 
 freight possible and bring his goods to market. This by no means implies 
 that he shall acquire such technical knowledge as would enable him to 
 either buy or sell the commodities. No banker could pretend with any 
 reason to discuss the quality of a piece of cotton goods with a merchant, 
 or to criticise the workings of the gangs in a sawmill with the owner. 
 But he should know enough, let us say, of the trade of a wholesale mer- 
 chant to judge whether he was carrying a reasonable or unreasonable 
 amount of stock, as bearing on the amount of the credit such a merchant 
 might apply for. Similarh', with regard to a flour mill, a banker should 
 be well enough informed about the business to judge whether a jiroposed 
 credit would be reasonable. He should also have such a general knowledge 
 of the timber business in its financial aspects as would enable him to 
 judge whether the scale of his customer's operations was in proportion 
 to his capital, and whether his credit was being used economically. He 
 should know how much lumber a given expenditure ought to produce, and 
 be able to judge whether the business was well managed or otherwise by 
 the working of his customer's bank account. 
 
 And so with every leading line of business in which his customers are 
 engaged. It tends to establish good relations between the banker and the 
 merchant, w-hen a man of business finds his banker well enough informed 
 to be able to discuss the financial aspects of his business. From such a 
 banker a merchant will more readily take, not only pertinent hints and 
 ordinary advice, but those checks and refusals which at times are neces- 
 sary to sound banking. 
 
 It is not only, however, with regard to general lines of credit to the 
 customer himself, that the banker's information is important, but also 
 with regard to the credit that his customer gives to those who buy from 
 him. A banker should be sufficiently informed to be able to say to a 
 wholesale merchant who oft>rs bills for discount, "You give a large line 
 of credit to such a one. Probably you suppose you have his whole ac- 
 count. But I may tell you in confidence that you have not. He buys the 
 same kind of goods to my knowledge, from another house, and my judg- 
 ment is that both of you are giving him more credit than is desirable." 
 
 A merchant would be foolish indeed who did not take such a hint in 
 good part and profit by it. 
 
 The conversation may take the shape of a criticism of the standing of 
 a wholesale house. This house buvs ijoods from a manufacturer, who is 
 
90 BANKING AND COMMERCE. 
 
 wise enough to consult his banker about credits. It would suit the manu- 
 facturer to sell the merchant a larger line of goods, but he does not know 
 enough about him to take the risk. Here the banker may feel justified 
 in giving his manufacturing customer tlie benefit of confidential informa- 
 tion. In doing this he will consider well the kind of man to whom he is 
 speaking, and M'hat use he is likely to make of the opinion expressed. 
 
 Exporters are increasingly in the habit of attaching bills of lading 
 to the bills they draw. These are commonly directed to be held until the 
 bill of exchange is paid. But there are exceptions. It is in regard to 
 these that a banker's information might be all important. Some mer- 
 chants in Great Britain will not accept bills at all unless the bills of lad- 
 ing are given up; or they may require that bills shall be surrendered to a 
 certain amount, and in some lines of export business it is not customary 
 to attach bills of lading at all. In such cases the exporter has to rely 
 altogether on the standing of the foreign house; and a well-informed 
 banker can render his customer invaluable service. The banker may pos- 
 sibly express his opinion rather in acts than in words. He will not take 
 the bill except with documents attached ; or, if the documents are attached, 
 he will not consent to their being surrendered before payment. 
 
 A Canadian banker will therefore take means to keep his information 
 well up as to changes in foreign firms. 
 
 In the commercial centres of Great Britain the facilities for specula- 
 tion are so multiplied as to constitute a positive temptation. A shipowner 
 in Liverpool may be drawn into dabbling in cotton; a Glasgow grain 
 merchant may try his luck with iron. As to London the opportunities 
 for speculation are infinite, and embrace everything going on in the 
 business world. 
 
 It is therefore of high importance to an exporter and a banker who 
 deals with exporters to keep his information up to date.^" 
 
 Mercantile Agencies. 
 
 Mercantile agencies have been so remarkably developed during the 
 last thirty years that they are indispensable to all who give credit, either 
 in the shape of goods or money. The information they place at the ser- 
 vice of their clients goes much beyond mere books of reference, and em- 
 braces detailed reports covering all four of the points referred to in an 
 earlier part of this treatise. 
 
 Such reports, too, are often accompanied by balance-sheets, so that a 
 banker has furnished to him what are practically a number of business 
 histories condensed into a small compass and so methodically arranged as 
 to be accessible with the smallest trouble. '^^ 
 
 36 See the chapter on commercial bills drawn In sterling money. 
 
 37 The records hitherto published by one credit agency in Great Britain are of 
 exceptional value, being arranged on scientific principles, and enabling every 
 leading circumstance affecting credit to be taken In at a glance. It is well known 
 in banking circles that the conductors of this agency have been men of remarkable 
 Information and sound judgment. 
 
THE BANKER'S INFORMATION. 91 
 
 A banker, however, will find it jirudent to bring a critical judgment to 
 bear on such reports, for a mercantile agency makes mistakes, as well as 
 its clients. It can only report what is reported to it; and its reporters, 
 though generally well-informed men, do not, and cannot, know everything 
 that is occurring. 
 
 In examining these reports it is always im])ortant to note the differ- 
 ■ence between facts stated and opinions expressed. 
 
 With regard to the balance-slieets in such rei)orts, it should be re- 
 membered that they arc communicated by the party himself. A banker, 
 of course, will compare sucli balance-sheets with any that have been ren- 
 dered to him. 
 
 But these reports are not the only reports that mercantile agencies 
 publish. An important part of their business is to collect information of 
 the changes that occur, especially those of an unfavorable character. Thus 
 they furnish their suj^porters with lists of suits that are taken, and what 
 is more important, of chattel mortgages, bills of sale, judgments, execu- 
 tions, and insolvencies. Partnerships also come within their purview; 
 those formed or dissolved, together with information as to death of part- 
 ners, which, of course, ends the partnership. The lists containing such 
 information are long and the ta.sk of examining them laborious. But no 
 "banker who does an active business with the mercantile community can 
 afford to pass them by, or to look over them in a perfunctory manner. 
 An omission to notice some single unfavorable particular may cost a 
 banker or his customers thousands of dollars, especially if it relate to a 
 foreign firm. 
 
 Bankers at times ask information of one another. Formerly there 
 -was scarcely anv other source of information available, and much 
 correspondence was carried on between them on the subject. But 
 time has brought new developments. Bankers do not now corres]iond as 
 much as they once did respecting their customers, though they do 
 occasionally compare notes in confidence. There are considerations as to 
 such information that do not apply to any other mode of obtaining it. 
 For example, let us suppose that a banker desires of a confrere informa- 
 tion as to one of his customers. If the customer is in a good position and 
 doing well, there is little difficulty in answering. But if the contrary is 
 the case, what then.? The account of such a customer may be one that 
 the other banker is carefully "nursing," getting increased security when- 
 ever he can; hoping all may be well, yet being by no means sure. 
 
 Is he to damage his customer's credit by telling a confrere this? If 
 -he does, he may bring about a stoppage and ruin his customer. On the 
 other hand, if he conceals the real position and gives a favorable opinion, 
 he will violate the conlldence which ought always to exist between bankers. 
 The result usually is this: As bankers never care to give an un- 
 favorable opinion, while a favorable one may be unjust, and as the de- 
 clining to express an opinion would be construed unfavorably, they seldom 
 
92 BANKING AND COMMERCE. 
 
 or never ask one anotlier at all, that is^ as to their own respective custom- 
 ers. 
 
 A banker in Canada who buys a large amount of bills upon houses in 
 centres of British trade, will find it advantageous to visit such centres oc- 
 casionally, and compare notes on the spot, with his banking correspond- 
 ents. In so doing he will learn many things which would never be com- 
 municated to him in writing, and which no mercantile rating Avould give 
 him any idea of. There is this reason for taking such a course, that 
 English bankers never commit themselves in writing except to very 
 guarded statements. They are in the habit of stating that such and such 
 a firm is "considered to be worth," say, a hundred pounds, or it is "good 
 for engagements." 
 
 Such reports generally fail to meet the need of the enquirer. To say 
 that a firm in Britain is good for a few hundred pounds, when the banker 
 on this side knows that they are making purchases amounting to many 
 thousands, is obviously insufficient. And to say that such a one is "con- 
 sidered" to be "good for his engagements," if the statement is taken 
 literally, is simply to suggest that he has no capital at all. 
 
 If specific information is wanted, the better course is to ask specinc- 
 ally, giving exactly the point to be covered. When the question is put in 
 a vague and general form, "What is tlie standing of such a one?" it will 
 bring, as a rule, only a vague and general answer. 
 
 But if the querist puts such a question as this: "Would it be safe for 
 our customer here to ship such a firm two thousand pounds' worth of 
 merchandise without security?" he is likely to get a much more specific 
 answer, guarded though it may be. 
 
 The last remaining source of information arises in the daily inter- 
 course of a banker with his customers and the public. This has been re- 
 ferred to already, but it may be desirable to observe that a banker, even 
 while transacting routine business with customers, or mingliiig with his 
 fellow-s in the club or elsewhere, will note anything affecting his interests; 
 and by practice will acquire the art of doing this even when least appear- 
 ing to do it. A casual remark dropped in conversation across the table, 
 or a query addressed to him in a chance meeting with an acquaintance, 
 may give to a quick intellect a clue which, if followed up, will lead to 
 most important consequences. 
 
 Almost evei-y particular in this and the preceding chapter has an ap- 
 plication to Commerce as to Banking. The wholesale merchant with his 
 large circle of customers is under the same pressure to keep up informa- 
 tion as is the banker. Both mainly rely on the same sources of informa- 
 tion and their interests, as regards information, are identical. Th.cy 
 cover the same ground, and are subject to the same conditions. Both 
 are dispensers of credit, the one in money, the other in goods, and the 
 same general laws of credit are applicable to both bankers and merchants. 
 
CHAPTER XI r. 
 
 LOANS. 
 
 Difference Between Loans and Discounts — Loans to Various 
 Classes — To Farmers — To Grain Merchants — Warehouse Re- 
 ceipts of Various Kinds and the Law Relating Thereto. 
 
 WHEN a banker has acquired sufficient information as to persons 
 and securities to enable him to part witli money with reasonable 
 assurance of its return when promised, he may enter upon that 
 difficult field of operations which will prove either the making or the 
 marring of him, viz., tlie conducting of Loans and Discounts. It is obvi- 
 oush' in this department of a banker's business that the connection be- 
 tween Banking and Commerce is most clearlj^ shown, and most constantly 
 in operation. The public at large has to do with banking corporations 
 OS issuers of circulating notes and receivers of deposits, but in making 
 loans and discounting bills, banks have to do with the commercial classes 
 almost exclusively. It is well, however, at this stage, for the sake of 
 clearness to reiterate that the word "commerce" is used throughout this 
 work in a broad and comjjrehensive sense. Besides the merchant, prop- 
 erly so called, the whole class of manufacturers is included, inasmuch as 
 they require to sell what they produce and to buy their raw material. For 
 the same reason, the whole farming class is included; for the farmer 
 appears on the market both as a seller and a huycr. He sells his products, 
 and he buys his machinery and materials. 
 
 Banking is distinguished from money lending in that it requires an 
 active " ttirn-over ;" hence loans for periods of years are entirely foreign 
 to its scope, as, also, are loans of money which, even if made to a business 
 firm, cannot be repaid periodically out of its active operations. To loan 
 a manufacturer money to build or equij) a mill is a violation of prudent 
 banking, even though the security may be good. The whole operation of 
 loaning money on security of land, buildings, ships, or mines, belongs to 
 another category of business than banking. This has been so recognized 
 by the Legislature of Canada in granting charters to banking ci^rpora- 
 tions, that they are absolutely prohibited from lending money on immov- 
 able property. 
 
 This, therefore, being understood at the outset, let us enquire w^hat 
 line of loans are called for by the operations of Commerce.^ On what 
 ground, and with what documents of security, can a merchant or manu- 
 facturer properly approach a banker when he desires the use of the 
 bank's money? 
 
 93 
 
9i BANKING AND COMMERCE. 
 
 Distinction Between I-oaxs and Discounts. 
 
 This question opens up a variet}' of considerations, the first of which 
 is the distinction between loans and discounts. 
 
 Though both classes naturally arise in the dealings of bankers witli 
 corcmercial customers and both are exactly alike in that they draw money 
 from a bank, there are fundamental differences between them in their 
 origin, nature, and practical working. The main difference is this. 
 When a Merchant or Manufacturer has made a sale of goods and received 
 in return a written promise to pay for them at a definite time, he is in 
 possession of a valuable document, which he maj^ offer to a banker for 
 discount; that is, he will ask the banker to give him the amount promised 
 in the document, deducting the interest thereon. T)iis deduction of in- 
 terest beforehand is what the word "discount" means. The merchant, of 
 course, signs his name to the document, and this signature, in law, op- 
 erates as a guarantee of ])ayment, should the other partj' not fulfil his. 
 promise. ^^ 
 
 The banker, therefore, having a document founded on a sale of mer- 
 chandise (for value received, as the technical expression is), has a prima 
 facie assurance that merchandise of sufficient value to ensure payment has 
 passed from the seller to the buyer. This transaction between the banker 
 and his customer has a close analogy to the purchase and sale of a com- 
 modity ; the bill being the commodity, and the net proceeds of the discount 
 the price paid for it. And it has been contended by an able writer on 
 banking that this is the proper mode of viewing it ; that is, as a sale nilh 
 guarantee; and that the proper title of all such transactions in a banker's^ 
 books and elsewhere is not "Bills Discounted," but "Bills Purchased."" 
 This practice has been adopted by some bankers, and it has the advantage 
 of making a clear distinction between two classes of transactions, the 
 confounding of Avhich on this continent has worked very serious mischief. 
 
 A banking loan is a different matter in several respects. To begin 
 with, it is, as a rule, applied for at an earlier period. The customer has 
 no promise from a buyer to offer; in fact, in many cases, he has not any 
 salable goods in possession when he negotiates the loan. What he desires 
 is to borrow the money in order to produce the goods ; or, in some cases to 
 bring the goods to his warehouse. The transaction, to go to the root of it, 
 is borrowing money, instead of selling a document. It is important to 
 keep the distinction clear; but this is more diiHeult on this side of the 
 Atlantic than in Great Britain, owing to the prevailing ]n-actiee of having 
 borrowings represented by promissory notes, made in thi' same form as 
 those given for a purchase of goods. -^^ 
 
 38 This is the usu^l course of business. But there are cases, especially in 
 large financial centres, where a banker or bill-broker agrees to relieve the mer- 
 chant from being so called upon. In that case, the merchant when endorsing the 
 bill, adds the words "without recourse," meaning (and this is the legal effect of 
 the term), that he is not to be called on for payment in case the bill is dishonored. 
 The banker, of course, charges a higher rate for such a transaction. 
 
 3(1 The notes which represent borrowings are often treated by Canadian banks 
 
LOANS. 95 
 
 When a loan or standing credit is proposed to a banker, there arise 
 four piactical considerations: For liow much? For how long? For 
 what purpose wanted? On what security? The two first can be an- 
 swered in a few words, but with regard to the two last, long explanations 
 may be needed; and much consideration and consultation before an 
 answer can be given. Here the difference between a loan and a discounted 
 bill becomes very apparent; for when a trade bill is offered, three of the 
 foregoing questions are answered by the bill itself. For it tells for how 
 long, for how much, and on what security; and that without a word spoken 
 by the customer who offered it. But when he desires a loan, a customer 
 must explain himself on every one of these points, and be prepared to 
 answer questions as to the two last. 
 
 There are as many varieties of loans as there are of occupations in the 
 district where transactions arise, and each variety has its own special con- 
 ditions. All these may be summed up in the following classifications: 
 
 1. Loans connected with Agricultural pursuits, and with the dealing 
 in their products. 
 
 2. Loans connected with the products of Woods and Forests. 
 
 3. Loans connected with jNLinufacturing industries, as well as min- 
 ing, fishing, etc. 
 
 4. Loans arising out of the Importing trade; and the dealing in 
 manufactured articles. 
 
 All these are distinctly Commercial. 
 
 But there are also loans to various classes of corporations, such as 
 railways, power companies, municipalities and Governments; or, to capi- 
 talists other than merchants, or to private individuals. Before proceeding 
 to consider in detail the loans indicated, one general remark may be made 
 with regard to all, viz., that everi/ legiiimate loan from a hanker will rest 
 on a foundaiion of salable merchandise or collectible debts. Loans, 
 credits or advances that rest on fixed property, no matter how safe they 
 may ultimately be, are not such as a banker can properly make, or should 
 be asked for. 
 
 Even when security on real estate may lawfully be taken by a bank, 
 as is the case in England and Scotland, it is always understood that mer- 
 chandise must be possessed by the borrower to cover it. The property is 
 not considered as the foundation of the loan, as is the case with a mort- 
 
 In the same manner, and entered in the same books as trade bills discounted, 
 although the transactions they represent are radically different. The practice In 
 England and Scotland renders such confounding of loans and discounts impossible. 
 Loans or advances are made by means of what bankers here call "overdrafts;" 
 the balance of the current account of the customer being allowed to run on the 
 debit side for a specified term, up to a specific amount agreed upon. Such debit 
 balances are usually secured.* The security, however, is not given by the simple 
 endorsement of a promissory note, but by a formal guarantee duly signed, sealed 
 and delivered; or it may be by a mortgage of such property as the law allows to 
 be taken as a basis for bank advances. This mode of making advances is called 
 in Scotland the "Cash Credit" system. But the system of English banks is prac- 
 tically the same. Both agree in establishing a distinction between money lent^ 
 to a customer and trade bills discounted for him. 
 
96 BANKING AND COMMERCE. 
 
 gage company or capitalist, but as collateral. Tlie means of ordinary re- 
 payment are always considered, and this must consist of merchandise. 
 
 This being premised, various classes of banking loans will now be 
 brought under review, for the purpose of pointing out the conditions 
 whicli govern them respectively, and the proper mode of dealing with 
 them. 
 
 Loans Coxxected With Agricultural Pursuits. 
 
 First amongst these come loans or advances to the cultivator of the 
 soil, the farmer. Loans to farmers are the common staple of the business 
 of branches of banks in rural districts, and the accusation made against 
 chartered banks, that as a rule, they refuse to make such loans, is without 
 foundation. But a bank cannot l)e expected to lend money to every 
 farmer who applies for it. 
 
 If a farmer wishes, as he sometimes does, to borrow money to build a 
 new house, or to make a payment on his land, or to improve his barns and 
 stables, still less if he wants to buy more land, he cannot be surprised if 
 the banker refuses to lend, for none of these will furnish the means 
 within themselves of repayment. That could only be had by forcing the 
 guarantor, or by selling the borrower's property. Further, if the appli- 
 cant is known to be dilatory, or unsteady, or unreliable in his representa- 
 tions, he cannot expect a banker to part with his money in his favor, no 
 matter how good a guarantor he offers. The fact that a farmer's land is 
 heavily mortgaged, or that he does not own the property at all, are cir- 
 Ciunstances very unfavorable to borrowing, but if the farmer is a man of 
 respectable character whose promise can be relied upon, and can offer a 
 good guarantor, he may reasonably ask for a loan from a bank for the 
 following purposes: 
 
 1. He may require an advance for the purpose of buying seed, pre- 
 paring his land for a crop, meeting the expenses of gathering in and 
 harvesting, all having in view the resulting crop. 
 
 2. A farmer whose principal occupation is breeding horses, cattle or 
 sheep may reasonably ask, and the banker may reasonably lend, as much 
 money as will buy such stock as will, when fattened, be sold off the farm. 
 In this case as in the former the money loaned will furnish from within 
 itself the means of repayment. But, obviously, more care is needed for 
 this kind of business than the other. 
 
 3. In a dairy district a farmer whose principal product is butter or 
 cheese, or raw material for making them, will, as a rule, need to borrow 
 less than one who has to depend on his crops, for returns of dairy prod- 
 ucts are more rapid. But lie may reasonably ask an advance for such a 
 moderate amount as is required to buy fodder sit certain seasons, or as is 
 represented by the amount accumulating at his credit in the books of a 
 cheese factory. (Care, however, is needed here, for this money is some- 
 times not forthcoming.) 
 
 But in the last two cases a banker needs to watch that his money is 
 
LOANS. 97 
 
 not used to buy stock for the working of the farm; and that cannot be 
 sold witlioiit detriment. If he does, althougli the position is not so un- 
 pleasant as if his money were locked up in the land, he will still have a 
 dead loan or lock-up on his hands, and commonly require to obtain pay- 
 ment by an unpleasant amount of ])rcssure. In all dealings with farmers 
 the banker will need to take care that his money is not used to pay debts. 
 Almost every farmer has other creditors. Hence it is reasonable that a 
 farmer shall be asked to state his position, what he owes, when it is due, 
 and whence will come the funds to pay it. 
 
 In a country district a banker will naturally acquire such a knowledge 
 of a farmer's business as will enable him to judge whether he is borrow- 
 ing a reasonable amount, considering the size of his farm, or the extent 
 of his dairy operations. 
 
 Some bankers, whose whole experience has been with city business, 
 have a dislike to lending money to farmers, as a slow and unprofitable 
 style of business. But in the rural parts of Canada, and the United 
 States, as well as in England, 'dealing with farmers has generally been 
 found desirable and satisfactory. Loans to farmers rarely result in loss 
 if made with any degree of prudence, and often result in borrowers be- 
 coming stead V depositors. 
 
 Passing from the farmer himself to the man who deals in his products, 
 we are introduced to a class of loans of a more extensive character. In- 
 deed, the operations of the men who buy the products of the farmer are 
 so large as to have given rise to several well-marked lines of subdivision. 
 One class confine themselves to grain, others to cheese and htitter, others 
 to wool, others to cattle, others to hogs. 
 
 The country storekeeper, indeed, may buy from the farmers about him 
 more than one of this variety of products; but at the next move, there 
 will be found a differentiation. The larger grain merchants buy grain 
 and nothing else, the wool merchants wool, and so on with the rest. The 
 dealings of each of these classes with a banker are of a character in- 
 volving a different style of risks, and demanding a distinct line of treat- 
 ment. 
 
 The Grain Trade. 
 
 The most important of these is the grain trade. 
 
 This trade is one of large transactions, quick returns, considerable 
 risk, and small average profits ; with possibilities, however, of heavy gains 
 at one time, and heavy losses at another. It is a trade, too, in which large 
 speculative operations are constantly going on in great centres. It af- 
 fords fewer instances than any other of permanent prosperity, and more 
 instances than any other of men who after a lifetime of dealings aggre- 
 gating millions have ended their career in poverty. Yet no trade renders 
 more valuable service to the country. The movement of crops to market 
 sets all the wheels of commerce in motion. The men, therefore, who per- 
 form this service are entitled to honorable recognition in the community, 
 and to a considerate hearing from a banker when they apply for advances. 
 
P8 BANKING AND COMMERCE. 
 
 But in dealing with such applications the banker will need to exercise all 
 the faculties of judgment, caution and experience he possesses. The ac- 
 counts of grain merchants are among the most profitable and, in many 
 respects, the most indirectly advantageous that a bank possesses. They 
 ran be carried on Avith much facility in Canada, owing to the admirable 
 system of circulation the country enjoys. The turn-over is large, the re- 
 turns rapid, and the advances give rise to numerous bills of exchange, both 
 inland and foreign, yielding collateral profits. Yet a prudent banker will 
 never forget that the business is accompanied with unusual risks. When, 
 therefore, a grain merchant proposes to obtain advances, the first con- 
 sideration will be how much capital he has of his own, and in what shape 
 that capital exists. For the amount of such capital and the shape in 
 which it is held furnish an exact index to the amount he may reasonably 
 borrow. No man has the right to hold grain on borrowed money, without 
 having his own capital as a margin against loss to the lender. How much 
 per cent, this margin should be, will depend on the season and the state 
 of the trade; but, obviously, the higher the price, the higher per cent, 
 should be the margin. In such circumstances there is more room for a 
 fall, and more chance for a holder and even the bank itself to lose. 
 When, therefore, a banker knows with reasonable assurance what his pro- 
 posed customer's capital is, he can calculate how much it would be rea- 
 sonable to lend him. 
 
 But this is only the first step. It would be most unwise for a banker 
 to lend any man money to buy grain, unless the borrower had a good 
 knowledge of the trade. Yet this is often wanting. The grain trade is 
 the easiest of all trades for a man to venture upon. If he has a little 
 money he can open an office anywhere and announce himself a buyer of 
 wheat. If in the country, farmers will certainly come to him and sell for 
 cash. If in a city he can go on Change like any other man, or employ a 
 broker to do it, buying and selling to his heart's content, as long as he 
 has money to put up a margin. He needs no warehouse, no store, or 
 factory, or water power, or, in fact, anything whatever such as men need 
 in other lines of business. 
 
 This facility is the special danger of the business ; and experience 
 proves that when a man enters upon it in this style he will, before long, 
 be ruined. The temperament of the borrower is a matter to be considered. 
 The grain trade is a dangerous one to a man of sanguine temperament. A 
 man of this sort who has borrowed, let us say, $10,000, from a bank, may, 
 instead of buying that amount of wheat, be drawn into putting up the 
 money as a margin for his share in some deal or "corner." This has 
 happened, as will be seen in a subsequent chapter. The risk of $10,000 
 worth of wheat he could legitimately carry; but the risk of ten or twenty 
 times as much would plunge him far out of his depth. 
 
 Even if he avoids speculation, a sanguine man is apt to persist in hold- 
 ing for a rise when he ought to sell, and pay off his advances. To a 
 b'lnker's remonstances, such a man always has a plausible theory, which 
 
LOANS. 99 
 
 to him is a demonstration, why prices must inevitably advance. He 
 tnerefore holds on until a loss is incurred sufficient to ruin him. An ex- 
 ample of this is also given. 
 
 It may indeed be laid down as an axiom that none but a cautious man 
 is fit for the grain trade. He should also be a man of moderate ideas, 
 and willing to sell when a sound profit can be made. One of the few 
 survivors of the heavy grain dealers of former years, in this country, has 
 attributed his being able to stand while others were falling to the fact he 
 was always willing for some other person to take the last cent of profit. 
 
 Another important point, but one often lost sight of, is that a grain 
 merchant needs to have a certain line of customers; exactly as a dry goods 
 mcrcliant has. The man who buys grain in the market for all the world 
 in general, so to speak, without any idea who is going to buy from him, 
 is one of those whose mercantile course is generally short. Such buying 
 does not deserve the name of trade. It is simply speculation. All suc- 
 cessful grain merchants buy with a definite purpose in view. They have 
 a connection, at home or abroad. They know that certain varieties are 
 wanted by certain people, or in certain markets. Commonly, or frequent- 
 ly, they have orders from millers or distant merchants. Millers who are 
 perfectly good, but whose operations are not large enough to go into a 
 wide market themselves. These are legitimate customers. So are the 
 merchants of foreign cities like Liverpool, London, Glasgow or Antwerp, 
 who maintain a constant correspondence with Canada indicating their 
 particular wants, and not seldom making firm offers to buy. These are 
 all legitimate forms of outlet to a grain merchant on this side the Atlantic. 
 But the man who buys without any specific purpose, and sends his stock 
 to a foreign market on consignment, trusting to the mere chances of the 
 market, and having no idea who will be the real buyer of his stock, is 
 pursuing a road which sooner or later leads to ruin. Of this also a con- 
 spicuous example is given in a subsequent chapter. 
 
 Loans on Warehouse Receipts. 
 
 The amount of a reasonable credit to a grain merchant has already 
 been discussed. It remains now to consider the important question of 
 Security. 
 
 Except for such moderate amounts as may be advanced to the grain 
 dealer of a small village — generally the storekeeper — the time when per- 
 sonal guarantors or endorsers were commonly offered has long passed by. 
 The amounts are too large for such a form of security to be taken. But 
 as there was necessity for the trade to be carried on, and an almost uni- 
 versal necessity for bank advances to do it, special forms of legislation 
 were devised by which the grain itself could be pledged as security. The 
 ordinary chattel mortgage was seen to be ineffectual, as too slow in opera- 
 tion, and too formal in character for so quick-moving a trade. A special 
 style of pledge was therefore legalized, giving the same rights and pow- 
 ers as a mortgage, yet of so simple a character that men of business could 
 
100 
 
 BANKING AND COMMERCE. 
 
 use il without the intervention of a lawyer. This special style of pledge 
 was a warehouse receipt, and was so framed as to give the bank advanc- 
 ing upon it. in theory at least, the same power over the commodity as if 
 he had it locked up in a warehouse of his own, always supposing the 
 document to be genuine. 
 
 The idea of such security has been developed as circumstances arose 
 by amending and enlarging enactments, some of them anything but rea- 
 sonable, but in its original and natural form the document was an acknowl- 
 edgment bv the keeper of a warehouse that he had so many bushels of 
 grain in his possession, which he would deliver to the owner when called 
 for, or to his order. Such receipts were natural as between the owner 
 of grain and the owner of the warehouse, and were in use long before 
 there Avas any special legislation about them. The legislation was to en- 
 able the owner of grain to make a legal transfer to a bank, not of the 
 document merely, but of title to the grain itself, so that a banker would 
 become as much the OAvner of the grain as if he had bought it ; with, how- 
 ever, two important limitations. The banker was debarred from selling 
 the property without giving ample notice and could of course only sell 
 what would cover his advance. Both were most reasonable. But, on 
 the other hand, the banker's right to the grain, after making an advance 
 upon it, was made absolute as against the claim of any other creditor, even 
 of the party who had sold the grain, in case he had not been paid for it. 
 This provision was absolutely necessary to the safety of loans made on the 
 security of such property, and the whole trading community have acqui- 
 esced in them as being for their advantage. For they well know that the 
 more perfect the security, the more easy it is to obtain advances on it, and, 
 other things being equal, the more moderate the rate of interest. 
 
 The law contained another provision of a perfectly equitable nature, 
 viz., that the document could only carry such powers when it had been 
 lodged at the time the advance was made. It was seen to be unreasonable 
 that a man should be able to pledge grain to a banker as security for an 
 old debt, and that such banker should have a preference even over an 
 unpaid vendor.*'* The law intended that the loan secured by the pledge 
 should always be connected with the pledge itself. 
 
 But as time went on, and circumstances transpired, two amendments 
 were made. The most important of these was that a man might pledge 
 grain (and other specified agricultural ])roducts) when stored in his own 
 warehouse; and tliat this pledge, when properly transferred, should give a 
 banker the same rights as the receipt of a warehouse keeper would give. 
 This was to meet the case of grain buyers in towns and villages, where no 
 public warehouses exist, and M-hose purchases were therefore stored in 
 warehouses or sheds of their own. It had reference also to the dealers in 
 
 40 There is, however, nothing to prevent a borrower from giving a warehouse 
 receipt to a bank as security for an antecedent debt if he pleases. But in that 
 case the document will give the bank no right to hold the grain as against other 
 creditors. The banker can only take the receipt for what it Is worth. 
 
LOANS. 101 
 
 other agricultural products, such as cheese and pork, who, even in large 
 cities, almost universally store their goods in warehouses which they 
 either own or lease. The other amendment was intended to obviate the 
 difliculty experienced by dealers of small capital in comjilying with the 
 clause tliat a warehouse receipt to be elFeetual must be lodged at the time 
 of the advance. The dealer in this case must have bought and ware- 
 housed tlie grain before getting an advance upon it. But many dealers had 
 not capital enough to do this, or had their capital in other forms thaii 
 monev. They required money at the very outset, especially when deliv- 
 eries were active and heavy. l<\irmerly such men would get these pre- 
 liminary advances on the security of an endorser ; but as this became neces- 
 sarily difficult, the law was amended so as to allow a warehouse receipt to 
 be a valid security even if lodged after the advance was made. But only 
 with the proviso that the horrouer must, at the time of getting the ad- 
 vance, have given a written prornise to lodge the warehouse receipt in 
 question. The law thus carried out its original intention to make a dis- 
 tinct connection between the advance and the security. 
 
 These amendments were all intended to facilitate borrowing by grain 
 dealers (and dealers in other products of the farm) by enlarging the 
 power to create warehouse receipts and use them as security. But bank- 
 ers have long ago found out that though the amendments enlarged the 
 powers of borrower and lender, they were far from enlarging the secur- 
 ity in the same proportion. 
 
 For the difl'erence in the security afforded by a receii^t given by a 
 warehouseman for property stored with him by another, and the pledge 
 of a man who has stored goods in his own warehouse is almost inconceiv- 
 able. In the one case, the banker has the written assurance of a per- 
 fectly independent party, that the grain exists, that he has got it for 
 safe keeping, and that he will not part with it except on the return of the 
 document. In the other ease, there is no independent person to give the 
 assurance. But this is the feature that gives its peculiar value to such 
 a documenl. Take this away and the banker has absolutely nothing but 
 the honor of the borrower to fall back upon, guarded of course by the 
 same penalties as are applicable to the man who holds the property of 
 another. 
 
 There is as much difi'creiiee, therefore, in jioint of real security be- 
 tween an independent warehouse receipt and a man's own pledge, as there 
 is between a man's own ])romissory note, and a good trade bill. Yet such 
 pledges have their value. If the grain exists, a pledge will hold it against 
 creditors ; though it is always in the owner's power to remove it. And as 
 to whether the pledged grain exists, there is the point that to write out 
 a pledge for grain that does not exist is so deliberate a fraud that it is 
 perhaps as rare as forgery. 
 
 The same lack of real security (though there is an appearance of it") 
 is found in the taking of a written promise to lodge a warehouse receipt. 
 The only value it has is, that, if when a warehouse receipt comes to bo 
 
102 BANKING AND COMMERCE. 
 
 pledged, that receipt will hold the grain although the advance was not 
 made simultaneously with its delivery. 
 
 ^Iemor.vxd\ ox Warehouse Receipts — Being Extracts From an 
 Address on Own Receipts and Pledges, to the Stockholders 
 
 OF THE MeP.CHANTs' BaNK OF CaNADA. 
 
 "As the productions of the country became more and more diversified, 
 it was important to grant facilities for enabling banks to lend money to 
 purchase them. 
 
 So from time to time, the scope of the act, i. e., The Warehouse Act, 
 was enlarged. And the intention of the Legislature in these successive 
 enlargements is clearly shown by the title of one of the acts. It was 
 called 'an act granting additional facilities in commercial transactions.' 
 a very proper title, too. 
 
 So when hogs became an important farm product, pork was included; 
 then hides and wool, then, as maltsters and distillers were large pur- 
 chasers of farm products, maltsters and distillers were included. Finally, 
 the matter was summed up in general terms of the products of agricul- 
 ture, the forest, the mine, the sea, lakes and rivers, together with live and 
 dead stock, in addition to which manufacturers were allowed to borrow on 
 pledge of goods of their own manufacture, or raw material therefor. 
 
 Down to the very last revision of the Warehousing Act, the great 
 object was kept in view of affording facilities for obtaining money on 
 goods, wares and merchandise: without which the true value of all our 
 products would never be obtained, and the wheels of commerce and indus- 
 try stand still. 
 
 The men who sat on the various Parliamentary committees on this 
 subject were nearly all men of business, who had a practical acquaint- 
 ance with the needs of the country. They knew the vital importance of 
 affording banking facilities to the dealers in the country's products, and 
 from time to time, as the act was reconsidered, they kept this object stead- 
 ily in view. Yet they showed their wisdom in the safeguards with which 
 they surrounded the business, and particularly witli regard to the right of 
 an unpaid vendor. And to show how equitably the matter is worked, 
 though transactions of this kind have amounted to millions every year, 
 and to hundreds of millions in all, the claims that have been made bv 
 unpaid vendors have amounted to an infinitesimal fraction. 
 
 But now a mode of looking at this class of business has arisen 
 (through decisions of judges) which will, if carried on, go largely to 
 defeat the object intended by the Legislature. This is founded on what 
 I must consider to be an extraordinary misconception. It has l)een as- 
 serted in various quarters that the general principle of legislation is that 
 banks shall not make advances on goods, wares and mercliandise, and 
 that the cases in which it can be done must be taken as exeej^tions to a 
 general rule. This idea is not only contrary to the fundamental rules 
 of all banking, but to the spirit and intention of all tjie foregoing legisla- 
 
LOANS. 10:5 
 
 tion. To legislate that banks shall not make advances on goods, wares 
 and merchandise as a general rule, -would be equivalent to a legislation 
 that a saw miller shall not manufacture lumber as a rule, or that a dry 
 goods merchant shall not, as a rule, sell cotton, or that a farmer, as a 
 rule, shall not grow wheat. 
 
 The very essence of the business of a banker is to advance on goods, 
 wares and merchandise, either in the shape of discounting bills repre- 
 senting goods sold, or making loans to enable goods to be purchased or 
 held. And the whole object of the Warehouse Receipt legislation is to 
 enable such advances to be got at the cheapest rate by basing them on 
 actual merchandise. The restrictive clause of the Act is, that advances 
 on goods shall not be made except as provided by the Act. But the Act 
 itself opens the door to a wide enough range of transactions, and the 
 limitation plainly means that banks shall not lend on goods as a pawn- 
 broker does, or keep warehouses to store them in as the Bank of Germany 
 does, and also that a storekeeper or a dry goods merchant who buys goods 
 on credit shall not have the power of pledging them for bank advances. 
 It is true that the Act gives the lender of the money, when he advances on 
 goods, a right to them, even over an unpaid vendor — a very strong pro- 
 vision, and showing how strong was the desire of Parliament to facilitate 
 loans on merchandise. But it is safeguarded by restricting the opera- 
 tion of the Act to cases in which, as a rule, there is no unpaid vendor. 
 Any other limitation, I venture to think, should always be interpreted 
 reasonably and liberally, and with due regard to the great object intended 
 to be accomplished by the Legislature, and to the vast importance of such 
 advances to the country at large in its increasing development. 
 
 An Act of Parliament, as we know, may be variously interpreted; in 
 fact, it is impossible to frame clauses that are not susceptible of divers 
 interpretations. Lf such interpretations are of a nature to hamper and 
 embarrass banks in assisting merchants to handle the products of the 
 country, they cannot be for the good of the community, but very much to 
 its detriment." 
 
CHAPTER XV. 
 
 LOANS TO DEALERS IN GRAIN AND OTHER AGRICULTURAL 
 PRODUCE.— Continued. 
 
 Difference in Warehouse Receipts — Cheese and Butter — Advances 
 FOR Dealing in Cattle — Pork — Hides — Wool and Hay. 
 
 "I3 URSUIXG the subject of independent warehouse receipts, it may 
 -i- be noted that they are by no means all equal in quality. If given 
 
 by a private individual, a banker needs to make enquiry as to his 
 reliability before advancing money on his receipts, for sometimes the 
 relations between a warehouseman or wharfinger and the borrower of 
 money are closer than is desirable. Without any intention to defraud, a 
 warehouseman has sometimes been induced to give a receipt for goods 
 before he has obtained them, trusting to his customer sending them on. 
 There is a particular temptation to do this in these days of exceptionally 
 heavy deliveries, which are common in the grain trade. Such cases are, 
 of course, rare, and every warehouse knows it to be a dangerous business. 
 
 The receipts of a railway corporation or a city warehousing company 
 are the most reliable a banker can have. This is especially the case when 
 a banker is making advances in the grain centres of the United States. In 
 Chicago and Minneapolis the system by which warehouse receipts are 
 registered and checked renders them exceptionally valuable as a security. 
 Error or fraud are practically impossible in connection with them.^^ 
 
 When a borrower can present documents of this kind, insurance in all 
 cases being effected in favor of the bank, advances may be safely made to 
 a far greater extent than when they are secured by guarantee or by a 
 dealer's own pledge. In all such cases a margin is required and given,^ 
 and if the margin is well looked after, loss is practically impossible, so 
 long as the grain is in the warehouse. 
 
 There is, however, a danger which arises out of the necessity for 
 parting with the receipt when the time comes for grain to be delivered. It 
 is practically impossible for the ordinary dealer to pay for the grain 
 before it is delivered, yet witliout possession of the receipt the warehouse 
 company will not allow it to be moved. The bank cannot attend to this 
 matter of shipment; none but the owner can do it, but to do it he must 
 
 41 But Canadian bankers who have, during some years, advanced money to 
 grain merchants in Duluth and Minneapolis have learned by experience how 
 much difference in quality there is between receipts technically known as termi- 
 nals; that is, those given by the great warehouses at the terminal of a railroad, 
 and those given by small country elevators situated along the line. The former 
 have invariably proved satisfactory. The grain never failed of delivery. But the 
 latter were not seldom the occasion of long correspondence, disputes, lawsuits, 
 and injunctions— which lasted for months before final settlement was reached. 
 104 
 
LOANS TO DEALERS IN GRAIN. 105 
 
 have the warehouse receipt in his possession. The necessity of the case 
 has given rise to the standing? custom in such cases of delivering the 
 document to the borrower, he giving the banker a formal pledge by which 
 the shipper is constituted a bailee of the property for the purjjose of sliip- 
 ment or sale^ and under which he undertakes to account for the proceeds 
 if sold, or to bring back a bill of excliange if shipped. A breach of this 
 engagement renders the party liable to prosecution for fraud. In an 
 active shipping season the amount of grain in transit in this shape, owned 
 by a single firm at a particular time, is often very large, involving large 
 sums of money for which the banker during a short time has no security 
 but the borrower's pledges. 
 
 The amount of these in Chicago during any grain season runs up into 
 millions, yet it is a fact that failures to meet the engagement of a bailee 
 have scarcely ever been known, even in such a vortex of speculation as 
 Chicago. The experience of other grain centres has not been materially 
 different. Yet it is natural for bankers who have large grain accounts, 
 involving the necessity of temporarily parting with security, to feel 
 anxiety when many sales are being effected at the same time, and large 
 amounts are afloat on the mere honor of borrowers. These are times that 
 press strenuously on a banker's attention the importance of having honor- 
 able men as borrowers, even if at the outset all transactions rest on 
 undoubted security. 
 
 When the borrower brings a Bill of lading, or Railway receipt, for 
 the goods he is shipping, he almost invariably draws a draft against them. 
 The bill of lading being attached to the draft, gives to the banker dis- 
 counting it the same rights and powers over the property that the ware- 
 house receipt does. And practically most of the risk of the transaction 
 is then at an end, except in certain cases that arise in foreign ports. 
 These matters, however, are dealt with under the head of foreign bills. 
 
 Owing to the closing up of navigation, on the lakes and canals of 
 Canada and the Northern States, it is sometimes necessary to hold grain 
 for many months in warehouse. To send it by rail would be altogether 
 too costly. It would destroy tlie profit of the dealer, unless there had 
 been a large advance in the price. Tliese long periods of holding grain 
 are not without anxiety to bankers wlio have made advances on it, for the 
 holder may be at the mercy of the market for a long period, during which 
 neither he, nor any other person, can move the grain. In former days 
 great losses have resulted to merchants from this circumstance, and not a 
 few have been ruined altogetlier with considerable loss to their bankers. 
 Now, however, the system of dealing in "futures" and "options" has be- 
 come so perfected that it is possible for a holder of grain, who is com- 
 pelled to carry it for a considerable season, to guard himself from loss. 
 And thus the very speculation in grain, which, under one aspect, is in a 
 high degree baneful, becomes in another aspect the means of guarding an 
 ordinary trader from risk. Of course, such contracts for future delivery 
 are liable to fail in execution, in case misfortune overtakes one of the 
 
J 06 BANKING AND COMMERCE. 
 
 contracting parties, or, in case he becomes involved in the vast operations 
 of one of those speculative "corners" that loom up now and then in the 
 trade. But the risk of this is small compared with the risk of long win- 
 ter holding. 
 
 On the whole, and to sum up the matter in a few words, the banker, in 
 carrying on the account of a grain merchant, M'ill need first to be thor- 
 oughly satisfied as to the honorable character of his customer. A failure 
 here is sure to end in trouble sooner or later. But equally necessary it 
 is for the dealer to be a prudent and cautious man; for the grain trade 
 is — of all others — the most dangerous to a man of sanguine temperament. 
 With customers of honor and prudence, whose capital is proportional to 
 the amount of business they do, and who understand the trade, both as to 
 the article itself and the markets for buying and selling, a banker may do 
 business from season to season with no greater liability to loss than 
 would be found in t]»e average of occupations. But he certainly does 
 need to be on the watch for any symptoms of a speculative spirit in his 
 customer, and especially of his taking money lent to him for the purchase 
 of grain, and using it as a margin for speculative operations. 
 
 The Tr.\de Bills drawn by grain dealers on correspondents are dealt 
 with in subsequent pages. 
 
 It is now necessary for other branches of the trade in farm products 
 to be brought under review, and the first to be taken up will be: 
 
 The Cheese and Butter Trade. 
 
 This, as is well known, has attained verj^ large dimensions in Canada 
 during the last quarter of a century, and the accounts of merchants in it 
 are amongst the largest of those carried on by Canadian bankers. Yet 
 the trade in cheese and butter is a wholly different one from the trade in 
 grain. It is not so easy to enter upon; it demands far more special 
 knowledge of the article, and also more intimate acquaintance Avith the 
 markets and merchants of foreign countries. There is no speculative 
 centre like Chicago, for this trade, and comparatively little of that buying 
 and selling in -which tlie article is never handled at all. And though the 
 prices fluctuate, they seldom fluctuate from anything but natural causes, 
 such as the abundance or scarcity of grass and fodder, or the conditions 
 of the markets of Great Britain. The trade is not in many hands; and 
 most of those who carry it on are men of knowledge, experience and good 
 connections abroad, !^^oreover, the small dealers in country places are 
 seldom merchants on their own account, but act as agents for large dealers 
 in cities. The transactions of banks through their country branches, with 
 this class of men, are numerous, and involve little risk, owing to the fact 
 that they are almost always in the shape of drafts from city dealers duly 
 autliorizcd. A large part of the cheese and butter exported from Canada 
 is purchased at first hand from farmers, creameries and cheese factories 
 by this useful class of men. But their dealings with a banker, though 
 numerous, and large in the aggregate, are matters which jiractically in- 
 volve no risk. The real risk begins with advances to the cheese merchant 
 
T.OANS TO DEALERS IN GRAIN. 107 
 
 of a city. These advances, as in the case of grain, and other analogous 
 trades, are almost invariably arranged beforehand for a whole season. In 
 considering them a banker has to give unusual weight to the character of 
 the borrower for honesty and reliability, seeing that it has come about, 
 bv force of circumstances, that cheese and butter are almost invariably 
 stored in warehouses belonging to, or leased by, the merchant. — 
 
 The ordinary warehouse, or elevator, has not the appliances necessary 
 in this climate for the safe-keeping of cheese and butter, as they are spe- 
 cially liable to deterioration under changes of temperature; from all 
 which it follows that much more of the security tendered in this trade is 
 in the shape of a merchant's own receipts. When, therefore, an applica- 
 tion is made for advances to carry on a season's trade in these articles, 
 the banker needs, above all things, to be sure of the men he is dealing 
 with. If the applicants be a firm, with one or more partners, the character 
 of every partner is a matter for weighty consideration. If during the 
 •currency of advances an additional partner is taken in, that also should be 
 a matter for consideration, lest an unsound element be allowed to creep 
 in, and damage the stability of the firm.-*- 
 
 The matter of knowledge and experience in the trade no banker will 
 lose sight of in considering an application; but the men who propose to 
 •obtain advances from a bank to buy cheese and butter are seldom deficient 
 in this respect, either as to the article or the markets. But a banker will 
 require to be particularly well satisfied as to the applicant's capital; for 
 it may be taken as a rule, in this line of business, that the capital, in pro- 
 portion to the advances asked, should be large. The fluctuations in prices 
 are sometimes rapid and very considerable.^' The article is required at 
 times to be held in large quantities and for long periods, at the risk of the 
 market, and there are not many facilities for rapid selling in a falling 
 market, whereby men may escape loss. There are, too, more dangers 
 from the fluctuations of the seasons, and the suitableness, or otherwise, 
 of the article to the market it is bound for. 
 
 All these considerations naturally lead up, not only to the require- 
 ment of a large capital in the borrower, but that his capital should be in 
 some available shape, in case of a bad season, unfavorable markets and 
 loss to the buyers. 
 
 rz Bankers are often taught, by severe experience, how dangerous are the 
 risks involved in the change of the personnel of firms. A father may build up, 
 by years of prudence and honesty, a lucrative and prosperous business: sons 
 grow up who, being taken into partnership, may destroy the work of a lifetime 
 by a few years of incapacity and, possibly, dishonesty. Yet the name of the firm 
 may be the same as before, and the traditions of honorable dealing will survive, 
 although the foundation for it has disappeared. 
 
 43 These fluctuations are apt to appear less than they are, owing to the quo- 
 tations for cheese and butter, even in the wholesale trade, being at so much per 
 pound. The rise or fall of a cent per pound sounds like a very small affair, yet it 
 may amount to as much as ten to fifteen per cent., according to the price of the 
 article. Thus, if a merchant is carrying a heavy winter's stock (and such stocks 
 are sometimes carried of a value of two or three hundred thousand dollars), this 
 seemingly trifling change of a cent per pound may make a difference of twenty 
 or thirty thousand dollars in its value. The changes in values in this trade are, 
 in truth, heavier than in the grain trade, and need more constant watching. 
 
108 BANKING AND COMMERCE. 
 
 This trade is one jjiving rise to large amounts of exports, especially 
 to Great Britain. The consmnption of cheese is much larger in the agri- 
 cultural districts of l,oth England and Scotland than in Canada or the 
 United States. 
 
 The cheese trade in Great Britain is in many respects as diff'eront 
 from the grain trade as it is on this side the Atlantic. It is not so rapid, 
 so changeable or so speculative. The article, moreover, is itself a finished 
 product, not requiring a manufacturing process to make it available. It 
 is, therefore, commonly held longer in stock, and as it cannot be held in 
 ordinary warehouses, it comes about that merchants in Great Britain must 
 more commonly ask for bills of lading to be given up on acceptance, in 
 order to remove the stock to their own warehouses. To this, of course, the 
 banker must consent if it is to be done at all; but bankers on this side 
 are usually ready to meet the views of their customers in this matter, as 
 the persons in the trade on both sides the Atlantic are, as a rule, men of 
 capital and standing, and the bill will have two presumably good names 
 on it, even M'heri the bill of lading has been given up. So great is the 
 confidence between one merchant and another in this trade, that it has not 
 been luicommon for parties in England to accept bills drawn against 
 goods tvarehoused on this .side. Experience, however, has proved this 
 practice to be exposed to peculiar risks, which may render it dangerous for 
 the foreign merchant, and unsatisfactory for the Canadian banker. 
 
 The Cattle Trade. 
 
 Passing from the trade in dairy products to the trade in the animals 
 themselves, we enter upon another set of considerations altogether. 
 
 Advances for the purpose of dealing in cattle or feeding them com- 
 monly begin with loans to small dealers in country districts who gather 
 together small lots and sell them to large dealers or distillers. These ad- 
 vances are usually of moderate amount, and such short time that they can 
 be reasonably secured by an endorsement or guarantee. Such small deal- 
 ers, indeed, are sometimes ambitious to become exporters, but bankers are 
 usually chary of encouraging such operations. Small dealers, as a rule, 
 have neither the knowledge of foreign markets, nor the experience, nor the 
 capital necessary lo do this successfully. Their proper business is to 
 pass on the animals to men of greater weight. 
 
 Of these some of the most prominent are Distillers. The advances to 
 distillers for the purpose of feeding cattle, in some cases, arc on a large 
 scale, and continued for a considerable time. They are commonly se- 
 cured by the pledge of the distilhr, which pledges are of a much safer 
 character than any others Iiindlcd by bankers; the reason being that the 
 animals, having once entered the distillery, are never removed until finally 
 ship))ed aM'.Mv. An inspection of them, moreover, is perfectly easy. 
 
 When I he process of fattening is completed, and the time has arrived 
 for shipping, they are generally sent in a live state across the Atlantic. 
 Tlic trade of sl)ip})ing live cattle across the Atlantic is a develo}):nent 
 
LOx\NS TO DEALERS IN GRAIN. 109 
 
 of recent years; and until it was better understood and more perfect ship- 
 ping facilities were devised for it, it was attended with heavy casualties 
 and losses. This trade is not one of those that are easy to enter upon. 
 None but men who are familiar with cattle ever think of meddling: with 
 it. It has been proved to require not only large ca])ital and thorough 
 knowledge of animals,- but first-rate arrangements for handling cattle in 
 Great Britain. Naturally, it is a far more difficult business to handle 
 live animals than grain, cheese, or pork. They are exposed to far more 
 casualties both from cold and heat. The risks of land transport are con- 
 siderable, but the risk of ocean transport is immensely greater. But per- 
 haps the greatest risk of all is in the hot days of summer before steamers 
 are well out at sea. The risks of this trade are considerably augmented 
 by the fact that tlie cattle cannot be held in an English port, or sent into 
 the interior. They must be sold and slaughtered at once, be the market 
 bad or good, the price high or low. It is evidently a trade therefore for 
 men of large means, and for no others. 
 
 With regard to security for the loans of bankers, the pledge of the 
 dealer in the case of live animals herded or yarded is of the weakest 
 quality, theoretically, for it is obviously more easy to take cattle away 
 than to move any other commodity. The case is entirely different with the 
 distiller, for the cattle in his byres are a part of the very machinery of 
 his business. He could not take them away while feeding without suf- 
 fering heavy damage. But the cattle dealer can make away with his 
 property witliout tlie slightest difficulty if he chooses. The animals can 
 walk oft" by themselves, and need neither trunks, wagons nor carts to 
 transjjort them. 
 
 Yet this cattle trade is one of the most important that Canada has; 
 and with the development of the Nortliwest, with its great stretches of 
 ranches, is becoming increasingly so. And in the hands of men with ade- 
 quate capital and knowledge, it may be conducted as safely as any other 
 branch of export business. But woe to the men, or firms, that plunge into it 
 without these requisites, or to the unfortunate banker who is beguiled into 
 lending them money. And one consideration will be found by bankers 
 to be fundamental, never to make advances or buy bills against cattle 
 shipped in winter. 
 
 Pork and Provision Trade. 
 
 In this trade the animal itself is never exported. But Canada carries 
 on a very large business in its products, and some of them, namely, ham 
 and bacon, are figuring heavily in our list of exports. The trade is dif- 
 ferent from that in grain or cheese in this respect, that the portions of the 
 slaughtered animals undergo a change before being sold. This can hardly 
 be called a manufneluring process, being merely salting and curing, for 
 which reason it is not dealt with under the head of loans to manufactur- 
 ers. Yet the packing of pork (for the operation goes by this name) is a 
 large and important industry, carried on in costly establishments, fuU of a 
 valuable plant, requiring large capital to carry them on. 
 
 At the very outset the question arises, when considering loans for this 
 
no BANKING AND COMMERCE, 
 
 business, at what point bank advances may be reasonably asked for, and 
 the answer must, of course, be given, as in analogous cases, that the fac- 
 tory should be completed and paid for, before a banker is approached. 
 This circumstance will be in itself a guarantee of the borrower possess- 
 ing considerable capital. But to be a satisfactory customer to a bank he 
 certainly ought to have more than this; viz., as much more as would 
 enable liim to provide against the losses of an unfavorable season without 
 mortgaging his property. 
 
 In this trade security oft'ered to a banker is almost invariably a pledge 
 of the newly-slaughtered animal; the law allowing the pledge to subsist 
 during the process of converting it into pork, ham, or bacon, and attach- 
 ing to the finished product. 
 
 Again must be emphasized the importance of a continuously good 
 record to every member of a borrowing firm, both at the time, and as it 
 may be subsequently changed by the entrance of other partners. It is 
 far more difficult for a banker to judge of the value of his security in this 
 business than in any of the foregoing. And there are hindrances in the 
 trade itself. 
 
 Pork packing is a different trade from the curing of hams and bacon. 
 Barrelled pork is essentially for the home market, being the staple food 
 of hmiber camps. In centres like Chicago, barrelled pork is often spec- 
 ulated in; ''corners" are made in it, and the fluctuations in its price are 
 heavy. There is the same reason as in the grain trade for a banker to 
 beware of his advances being used to put up a margin. No advances 
 in this business can be considered safe unless to men of solid 
 temperament and judgment, whose capital is large in proportion to their 
 business — and who understand well both the article, the process, and the 
 markets. 
 
 The export of hams and bacon to Great Britain has now attained large 
 dimensions, and is subject to the same conditions as pertain to other 
 branches of the export trade. It requires good connections on the other 
 side of the Atlantic; it should be conducted on the principle of purchase 
 and sale, and not of consigning; for it cannot be too often repeated that 
 consigning is the road to ruin in this, as in every other branch of the 
 export business. 
 
 As in other branches of production, the maker of hams and bacon will 
 find it highly conducive to profit to establish a nanie for his article, as 
 Armour & Co. of Chicago have done. 
 
 The special danger to bankers, in this line of business, is that the 
 packer's building and plant may not be kept abreast of modern improve- 
 ments; also that changes in the firm may deteriorate it, new members 
 not having the same ability as the old, competent and able fathers being 
 succeed by incompetent sons. (The latter, however, is not peculiar to the 
 pork trade.) 
 
 Hides and Wool. 
 
 The last branch of agricultural products to be noted is the trade 
 in hides and wool, these generally going together. This trade, like the 
 
LOANS TO DEALERS IN GRAIN. Ill 
 
 foregoing, has its peculiarities, and special sources of risk and danger. 
 Hides and wool are articles that only experts can deal in, for no out- 
 sider can possibly tell the value of a given quantity of either of them. 
 There are in this trade, as in the others, small dealers and large — the 
 men who gather up small lots in the country, and the men who have 
 large wholesale dealings in the city. And, as in other branches of trade, 
 the small dealer is sometimes too ambitious for his means and experience, 
 and too desirous to enter upon operations that he has neither the capital 
 nor the ability to carry on. 
 
 Bankers cannot do a greater service to a man of this class than to 
 refuse to lend him sums of money large enough for wholesale operations; 
 for it is, in truth, often learned at a bitter cost, that many a man in trade 
 has been ruined by having too free a use of money, loaned him by a com- 
 pliant banker. 
 
 The trade in hides and wool provides raw material for two important 
 lines of manufacture; viz., woolen mills and tanneries. In both of these 
 much of the raw material is produced in foreign countries, and the large 
 merchants in wool and hides become importers from Australia and South 
 Africa. To carry on these operations the banker is asked to issue to his 
 customer letters of credit authorizing their correspondents to draw upon 
 a bank in London, for the value of the wool or hides shipped, attaching 
 bills of lading and policies of insurance thereto. The issuing of such 
 letters of credit is a special branch of a banker's business both in Canada 
 and in the United States and is treated of subsequently. Its special ad- 
 vantages and risks are, there completely opened up; meanwhile, it is 
 sufficient to say, that no small dealer should ever be encouraged to enter 
 upon this line of operations. For the losses of a single unfavorable sea- 
 son might sweep aAvay all he had. 
 
 Merchants in hides and wool, in large cities, applying for advances, 
 generally offer, as in other cases, warehouse receipts as security. And 
 here again they will desire that the goods shall be stored in their own 
 warehouses, for the reason that goods require to be handled during the 
 progress of warehousing. This may be conceived of as an element of risk, 
 and so it is. Bat it may be taken as a general rule, that unless a banker 
 can trust his customer so far, he ought not to advance him anything at 
 all on his own pledge. 
 
 As the articles dealt in by men in this trade are the raw material of 
 manufacturers, they come imder that general law, applicable to all such 
 cases, that raw materials should not be sold on credit. Every manufac- 
 turer should have capital (or, at any rate, credit) enough to enable him 
 to pay cash for his raw material. And this is almost universally the case. 
 Canadian dealers export large quantities of home-grown wool to manu- 
 facturers in the United States. They also sell to such manufacturers con- 
 siderable quantities of wools imported from abroad under letters of credit. 
 These are entered in American ports. But it is a dangerous experiment 
 to give time to manufacturers, on such goods. Though they may be re- 
 
1]2 BANKING AND COMMERCE. 
 
 ported in high credit and possessed of large capital, the very fact of their 
 asking credit should be tlie reason for refusing it. 
 
 Hay. 
 
 The growing of hay, in some districts of Canada, forms an important 
 part of a farmer's operations. But the hay crop, though of very great 
 value, seldom calls for bank advances to any extent. Farmers use much 
 of it themselves. ' A good part of the rest is handled by small dealers 
 scattered through the country districts. The article is too bulky to be 
 gathered into warehouses; but considerable quantities are sent over the 
 border, into the United States. Banking transactions arising from these 
 are almost universally in the shape of sight drafts, with bill of lading 
 attached. Occasionally, however, when the hay crop is a bad one in Eng- 
 land, owing either to rain or drought, a deiiiand sets in from that quarter 
 to Canadian dealers. In such circumstances, a large and active trade has 
 been done. It is a trade that involves unusual trouble in handling, and 
 merchants in large centres do not care to meddle with it. But exporting, 
 as lias been said already, is a business by itself; and country dealers, in 
 venturing upon the export of hay, have sometimes brought infinite trouble 
 upon themselves, their correspondents in Great Britain, and also upon 
 London bankers. Although the difference in price paid to the Canadian 
 farmer and the price as quoted in England is unusually great, and seems 
 to give opportunities for large profits, tlie multiplied cost of freight by 
 land and water, added to the cost of warehousing, wharfage, demurrage 
 and commissions in England, generally swallows up this difference. Some- 
 times, as a matter of fact, they do much more, and involve the Canadian 
 shipper, and sometimes his banker, in heavy losses. 
 
 It has been known that in an active season enormous quantities of 
 baled hay have been lying about on the wharves and docks of England 
 for weeks together. The risk of this, in that climate, may be imagined. 
 It has also happened that canal boats loaded with Canadian hay have 
 been held under demurrage for many consecutive weeks, at enormous 
 cost, owing to the refusal of purchasers to receive the goods and accept 
 bills drawn against them. In that case it has happened that scores of 
 bills have lain unaccepted in the London banks, to whom they were sent 
 for collection; and that the hay, when brought to forced sale, did not 
 realize a half, or even a quarter, of what was drawn against it. 
 
 It may be concluded, therefore, that no Canadian banker will in future 
 make advances to any country dealer for the purpose of buying hay for 
 export. And if bills drawn against hay shipped across the Atlantic are 
 offered him, he will prefer to make a moderate advance, and send them 
 on for collection. 
 
 Of all the various descriptions of advances referred to in this chap- 
 ter, there is one thing to be said that admits of no exception; viz., that 
 they should be paid off at the end of every season. On no account should 
 onei season's advances ever run into another. 
 
CHAPTER XVI. 
 LOANS TO MANUFACTURERS AND IMPORTERS. 
 
 Loans to Manufacturers of Timber, and Saw ^Millers — Loans to 
 Flour Millers — Loans to Cotton and Woolen Manufacturers 
 AND Wholesale Importers. 
 
 Although the operation of cutting down the forests of Canada 
 -l\. and turning the fallen trees into timber by hewing, or into lumber 
 by sawing, is not generally called manufacturing, it will now be 
 treated as such, inasmuch as both are carried on with plant, machinery 
 and tools — the last especially. The operations of the timber and lumber 
 men of Canada have been very diiferent from those of the settlers who 
 cleared the forest for the purpose of creating farms. For in the latter 
 case the trees were absolutely destroyed; in the former, they were pre- 
 served as the raw material of manufacturing operations. No lines of 
 business have called for such heavy advances from banks, and none have 
 given rise to such large amounts of inland and foreign bills of exchange 
 as those now to be considered. 
 
 These two divisions of manufacture are so distinct from one another 
 that thev require separate treatment; the only point in which they coin- 
 cide being that both require large tracts of timbered land, sometimes ex- 
 tending over thousands of square miles, from which to draw the raw mate- 
 rial for their operations. 
 
 The first in order that will be taken up is the manufacture of square 
 timber. In this trade, as in some previously mentioned, there are found in 
 co-operation two classes of men, the one consisting of small jobbers, and 
 the other of large operators. The first generally confine their labors to a 
 small piece of forest territory, employing a few hewers and choppers on 
 their own account; having in view the delivery of the product to some 
 great firm at a central point, and working in subordination to it. These 
 jobbers are often half farmers and half woodsmen; farming in the sum- 
 mer, and working in the woods in the winter; good judges of trees by 
 long experience, and generally men of intelligence and reliability, not 
 having, as a rule, much capital of their own, but being generally safe bor- 
 rowers. Advances to these men are of moderate amount; for no banker 
 would listen to an application from a jobber for such an amount as would 
 enable him to send the product to a distant market, and compete with the 
 larger men of the trade. 
 
 Such jobbers carry on work during the Avinter; delivering their prod- 
 uct and getting paid for it in the spring. Then they pay off advances. 
 
 Sometimes, however, the banking operation is different. The large 
 operator may have a suffeient capital to supply these men with money as 
 
114 BANKING AND COMMERCE. 
 
 the -work goes on. and also to supply them with the provisions needed in 
 their cnnips in the woods. Or he may have credit enough with the bank 
 to enable him to borrow money for the purpose. 
 
 In this case he will enable the jobber to obtain money from the bank 
 by becoming guarantor for his advances. These advances are of course 
 paid by the large operator when the lots of timber made by the jobber are 
 delivered. But a large operator, in addition to the supplies of timber that 
 these jobbers may procure for him, will generally employ numbers of men, 
 scattered over a wide extent of territory, to chop, hew, and haul the trees 
 on his own account. The operations by which these scattered lots of 
 timber are floated doAvn subsidiary streams into a main river like the 
 Ottawa, and then down the St. Lawrence into the coves of Quebec, the 
 great emporium of the trade, are well known in Canada. It must, how- 
 ever, be evident that a large amount of money requires to be disbursed be- 
 fore the timber can finally be placed on board ship, and foreign bills of 
 exchange drawn against it. This money for the most part, from the very 
 beginning, has been obtained by advances from banks. 
 
 An unusually large capital is required to carry on these operations, for 
 the timber growing on these tracts of territory must be owned by the mer- 
 chant before a tree can be cut down. The land on which the timber 
 grows is rarely valuable for settlement. And the timber merchant does 
 not care for the freehold of the land at all. What he wants is the trees 
 that are growing upon it. 
 
 A system has therefore grown up by which the right of cutting trees 
 over defined lines of territory is sold to operators under the name of 
 limits. These "limits" are simply licenses to cut, renewable on payment 
 of ground rent year by year. Yet so well established has the system of 
 renewal become that they are highl}' valuable property, and constitute 
 in many cases a large part of the capital of many wealthy firms. 
 
 Before applying to a banker for advances for a season's operations, 
 it is usual for firms to own their limits absolutelj', and to have paid for 
 improvements on them, such as dams, slides and water-ways. 
 
 The operations of a woodsman require to be carried on for nearly 
 twelve months before the timber is ready for market. Advances to such 
 firms are therefore necessarily as long, and once entered upon they cannot 
 be stopped. To stop advances when the whole floating assets of a timber 
 firm are in the shape of half-hewn trees lying scattered over hundreds of 
 miles of territory, would be disastrous on both sides. Bankers, therefore, 
 are in the habit of considering the situation well before consenting to 
 allow such advances to begin. And tliis consideration embraces not only 
 the points common to all lines of business, such as capital, experience, 
 and reliability, together with tlie security off'ered, but whether the bank 
 can afford to carrv such large loans for so long a period at all. 
 
 But when a banker is satisfied that he can afl^ord to make advances for 
 so long a period, he will consider whether the amount desired is reason- 
 able in proportion to his customer's capital, and the extent of the year's 
 
LOANS TO MANUFACTURERS AND IMPORTERS. 115 
 
 operations. Every timber maker lays out his plans a year beforehand, to 
 get out, as it is called, a certain quantity. Upon this is based the number 
 of men and horses sent into the woods, and the supplies of food and fod- 
 der provided. The number of sleighs, wagons, canoes and other requisites 
 needs to be carefully calculated ; in fact, the winter's operations of a 
 timber-maker in the woods arc of the nature of an expedition. For once 
 dispersed amongst their cam])s in the forest, there they must remain until 
 the spring. 
 
 The timber-maker will inform liis banker what he intends to do; and 
 the banker will doubtless have learned enough to estimate how much 
 money will be required to carry him through. It may be taken for grant- 
 ed tliat the borrower understands the trade, for no man could carry it on 
 for a month unless he did. 
 
 Character and reliability will be considered as usual. But in the 
 matter of capital wide differences will be found. Some of the wealthiest 
 firms that Canada has known have been able to carry on the operations 
 of a whole season involving immense disbursements without borrowing 
 at all. 
 
 But at the otlicr end of the scale are men of capacity and character 
 who have barely ca})ital enough to own their limits. This, however, is a 
 minimum requirement. To make advances to a timber-maker while some- 
 one else has a claim on his limits is a very rash proceeding, and has led, 
 during bad seasons, to heavy bank losses. A banker, under all circum- 
 stances, will aim to be the first claimant; never the second. 
 
 Limits can be 'assigned to a bank as security, as they are not real 
 estate. They generally are so assigned. And very good security they 
 generally prove, if valued with reasonable care. 
 
 Risks to Bu Taken into Account. 
 
 But in addition to limits, tlie pieces of timber themselves can be as- 
 signed, and sjDCcial legislation has been devised for the purpose. They 
 are always stamped with a registered mark, and occasionally a bank will 
 have them marked on its own account. It is, however, almost unheard of 
 that a bank should lose its hold upon the timber, or fail to receive the pro- 
 ceeds when sold. The risks lie in another direction, viz., that the pieces 
 shall stick fast in subordinate streams, or be carried away by floods on the 
 larger ones, both involving the danger that many of them will never be 
 recovered, or that the expense of recovering them will destroy the chance 
 of profit. There is also the risk of a fall in the British market during 
 the long ])eriod of work in the woods and of driving to Quebec. A drop 
 in the ])rice has been known of so serious a character as not only to 
 destroy the chance of profit, but the possibility of realizing ain'thing near 
 even the cost of the article. Hence it is that bankers require to be satis- 
 fied beforehand of the ability of their customer to bear such reverses. 
 
 In this branch of trade there is usually a distinct line of demarcation 
 between the producer and the exporting merchant. The producer rarely 
 
116 BANKING AND COMMERCE. 
 
 exports his product ; in fact, wlien lie does so. the result is not always 
 satisfactory. And the banker has something to say to this also; he has 
 carried the risks of the producer's operations for twelve months, and it is 
 time that they should end. For undoubtedly a new line of risks begins 
 when timber is shipped across the ocean. To whatever market destined, 
 whether to Great Britain, or to the Continent of Europe, or any other 
 market, the trade assumes an entirely new aspect when once the timber 
 is placed on board ship for transport across the sea. Before that is done, 
 the man who has produced it and carried it through all risks of navigation 
 to a seaport has a right to be paid for it, and thus have the means of 
 recouping his banker. 
 
 With respect to bills arising out of the export of timber a practice 
 has grown up which is peculiar to this trade. Every timber house in 
 Canada has usually some corresponding house in Great Britain on whom 
 it draws Sometimes these houses are merchants of large capital in the 
 seaports of Great Britain. Sometimes they are branches of the Canadian 
 house, sometimes they are London bankers. To these correspondents 
 the bills of lading are remitted; but the bills of exchange are drawn 
 without reference to them. When such bills were accepted by a different 
 corresponding house, they could stand on the merits of both drawer and 
 drawee. But when the corresponding house was a branch of the other, 
 the bills stood upon the merit of the drawer alone. In this case, it was 
 for the banker to have thorough and up-to-date information of what the 
 two branches of the house were doing. Casualties in this line of business, 
 however, have not beer frequent. Only seldom in a quarter of a century 
 has there occurred a failure on this side the Atlantic, and rarely indeed on 
 the other, unless the English merchant had engaged in speculations for- 
 eign to his business. 
 
 .Saw Milling. 
 
 Though the operations of the timber merchant and saw miller both 
 commence by hewing down tlie trees of the forest, there is a marked dif- 
 ference in subsequent developments. The squaring of trees in the woods 
 is a simple process, after which they only require transportation to mar- 
 ket. But lumber and deals, in addition, need for their production an 
 elaborate manufacturing process, carried on in expensive mills, filled with 
 costly ])lant and machinery. 
 
 But larger and finer trees are required for timber than for the others. 
 There is a difference also in several respects between the manufacture of 
 deals and lumber, the principal being that they ai'e intended for different 
 markets. 
 
 Deals are wholly exjiorted to Europe, while lumber is manufactured 
 for the Canadian and L'nited States market. Deals are much finer and 
 more costly articles tlian lumber, requiring finer logs for the raw material 
 and a more valuable kind of trees. Deals, moreover, are cut in pieces of 
 three inches in tliickuess. wliile the standard thickness of lumber is one 
 
LOANS TO MANUFACTURERS AND IMPORTERS. 117 
 
 inch. Thus it conies about that on a given range of forest territory, tlm 
 selection is made of the finest trees for timber, of trees of the second 
 quality for deals, and of tlie third for sawed lumber. 
 
 But of all these three there are many varieties, involving great differ- 
 ences in value. Only a practised expert can judge rightly of such dif- 
 ferences, and it is largely in the knowledge of what will be the best use 
 to make of certain trees, so as to get the best possible value out of them, 
 that a successful carrying on of the business of a lumberman depends. 
 
 With regard to the mill itself, where the operation of manufacturing 
 is carried on, great and irretrievable mistakes have at times been made, 
 occasioning ruin to the operator and loss to his banker. 
 
 A mill may be built in the wrong place, as respects water power, con- 
 venience of receiving logs, or shipping lumber, or it may be built in too 
 expensive a fashion for the work it has to do, or it may be fitted up with 
 inferior plant and machinery. Hence the importance of a saAV miller hav- 
 ing a practical knowledge of machinery and also the faculty of using it 
 profitably, as has already been shown. From all these considerations it 
 will be evident that more capital is required in the saw milling business 
 than in that of the making of timber; practically just so much more as 
 is required to build and equip the mill and the adjoining storage grounds. 
 In nearly all other respects the conditions are the same. 
 
 Mills Should Not Be Encumbered. 
 
 Now, when a banker comes to deal with the account of a saw miller 
 it is obvious that tlie first condition is that the fixed property shall have 
 been paid for, both the mill, and the timber limits. But if an exception 
 may be made in either case, it should certainly not be in favor of the 
 mill. A lumberer whose saw mill is not free from incumbrance is not in 
 a position to ask advances from a bank. Limits are, as a rule, much 
 more salable than saw mills; and, moreover, a bank can take security on 
 them at any time. 
 
 But now, supposing this preliminary to be as it should be, the saw 
 miller desiring advances will state the quantity of lumber he is proposing 
 to manufacture for the season. If the trade is brisk, demand strong, and 
 profit good, he may determine to run his mill to its utmost capacity, and 
 work it night and day. If the trade is dull and demand slack, he will no 
 doubt be wise enough to run his machinery moderately. The banker (or 
 his board of directors) will doubtless know sufficient of the conditions of 
 the trade to judge which of the two courses is more prudent, and regulate 
 advances accordingly. 
 
 The security taken will probably be the same as in the timber trade; 
 namely, a transfer of the limits and a pledge of the logs and their 
 product. 
 
 In this trade, unlike that in timber, the banker requires to look nar- 
 rowly after insurance. In the square timber trade no insurance is ever 
 required, for the article is never out of the water. But saw mills and lum- 
 
118 BANKING AND COMMERCE. 
 
 ber are terribly inflammable articles, and in a large concern insurance to 
 the amount of lumdreds of thousands may be necessary to safety. 
 
 All advances to lumberers and timber-makers should be made gradu- 
 ally, as the season advances, and as more and more money requires to be 
 spent on the article to bring it. to a salable condition. If they are asked 
 for otherwise, there is reasonable suspicion that they may be used to pay 
 antecedent debts. 
 
 When the lumberman's stock is in a finished condition, a distinction 
 arises between its two varieties, viz., lumber and deals. The saw miller 
 sells his deals for export to Europe. They go, therefore, to an Atlantic 
 seaport, and, as a rule, they are purchased by a merchant of the port. It 
 has been customary for such merchants to give their acceptances in pay- 
 ment to the manufacturer; but, considering the very large sums such ac- 
 ceptances amount to, it has been common for a lien on the property to be 
 held by the seller or his banker until the acceptances were paid. 
 
 The manufacturer of sawed lumber, as distinguished from deals, has 
 always found his principal market in the United States. It is here per- 
 haps more than in any other product that the interdependence of the two 
 countries has been manifest. Canada in proportion to her population has 
 always had far more forest area than the adjacent States; hence it came 
 about naturally that the lumber mercliants of the latter, from an early 
 period, looked to Canada as a market of supply. In many cases they 
 formed permanent connections with the saw millers of the North, making 
 arrangements, not seldom, to buy the whole product of certain mills at a 
 schedule of prices agreed upon. Bankers therefore who kept the accounts 
 of saw millers, would have the acceptances of such houses offered for dis- 
 count and naturally became interested in their means and standing. For 
 the discount had to rest on the credit of the parties to the paper, inas- 
 much as it was impossible for a Canadian banker to maintain a lien upon 
 an article like lumber after it had passed beyond the borders of his own 
 country. 
 
 The lumber trade of the Northern States, with a few striking excep- 
 tions (one of them hereafter noticed), has for a long period been in the 
 hands of firms of tried chamcter and sufficient means, not to speak of 
 others of large wealth. This class of discounts has been subject to few 
 casualties and has always been looked on with favor. One reason for this 
 is that there is no speculative element in the trade, though it is subject 
 to cycles of good and bad years, generally about five. The changes, how- 
 ever, either in the way of improvement or deterioration, proceed slowly, 
 and there is ample time for operators to prepare for changes, either by 
 curtailment of business or enlargement, as circumstances call for it. 
 
 The bad years in the trade are generally extremely trying, involving 
 not only the doing of business without profit, but the carrying it on at a 
 loss for years together. 
 
 Yet the business has wonderful recuperative powers. At the end of a 
 cycle of bad years it sometimes appears to be so prostrate as to be incapa- 
 
LOANS TO MANUFACTURERS AND IMPORTERS. 119 
 
 ble of revival. Not onh^ the lumber itself, but all tliat goes to ])roduce it, 
 seems to have lost its value. ISIills and limits, but especially the latter, 
 become such a drug in the market as to become practically worthless. Such 
 times as these try the faith and courage of a banker sorely. But if he is 
 unwise enough to bring a customer's account to a close at such a time, and 
 sell his property at a price which results in a heavy bad debt, he is not 
 unlikely to hear later on that the same property had been resold at a price 
 which would have enabled his customer to pay liis debts in full with the 
 addition of several years of interest. 
 
 Few bankers in Canada but have known cases of tliis kind, and some 
 have seen such extraordinary cases as the realizing, after a lapse of 
 years, for one-tenth part of a certain area of timbered lands a greater 
 price than the whole was once in danger of being sacrificed for in a time 
 of depression. 
 
 There is one feature of this trade in which it differs from almost 
 every other in Canada, viz., that many Americans have crossed the border 
 at various times and established mills on their own account. Not a few of 
 such have become permanent citizens of the country, transferring to it 
 not only capital, but themselves and all their interests. Some of the 
 largest of the lumber firms now in Canada are of this description; hav- 
 ing acquired limits, built mills, and amassed wealth; becoming, it scarce 
 needs be said, most valuable citizens and satisfactory customers to the 
 banks. Natural it was for houses of this description to keep up close 
 connections with lumber merchants in American cities; using them as 
 agents or consignees. Such American houses would, not seldom, accept for 
 the Canadian house in advance of shipment. In that case the banker 
 would be advised of the fact, and use his judgment as to discounting the 
 bills. If he did, he would take care that his own advances should be paid 
 ofl' before they matured, or that the proceeds of the bills should be used 
 to take them up. 
 
 The position which has resulted during recent years in the lumber 
 trade from the strife of parties in politics in the United States and in Can- 
 ada, has had the result of inducing not a few firms in the lumber regions 
 of the States to acquire properties in Canada, and carry on their operations 
 here. As the forests of the Northern States become more and more de- 
 pleted, this step is likely to become more frequent. All that has been ob- 
 served with regard to the migration in the earlier years in the trade applies 
 in the fullest measure to this. 
 
 The only other variety of banking transactions connected with this 
 trade is in the case of American houses of such Avealth and capital that 
 they can carry on the large operations connected with a Canadian branch 
 of their business, without requiring bank advances at all. 
 
 In this case all that a Canadian banker will be required to do is to 
 give cash for authorized short date drafts upon the parent firm. But 
 here an observation requires to be made. In cases of this kind it has 
 sometimes occurred that a change of policy, or a change of times, brought 
 
120 BANKING AND COMMERCE. 
 
 about a clifFerent style of dealing with Canadian banks, and that the cash- 
 ing of sight drafts drifted into the making of permanent advances. An 
 occurrence like this is fully opened up later on. 
 
 On the whole the accounts of persons in this trade, while in many 
 respects the most advantageous that a banker can carry on, are, at the 
 same time, such as to require more technical knowledge and more good 
 judgment, more foresight, and, in difficult times, more courage and pa- 
 tience, than any other class of business that may be submitted to him. 
 
 Advances to Flovr Millers. 
 
 Tliis branch of manufacture differs from almost every other in the 
 fact that the raw material is of a highly speculative character. 
 
 The Produce Exchanges of Chicago, New York, and Montreal, on this 
 side of the Atlantic ; and of London, Liverpool, and Glasgow on the other 
 (not to speak of Continental cities), are all the scene of transactions in 
 grain to enormous amounts by persons who never either see or handle 
 the commodity, whose operations have a constant bearing upon prices. 
 
 This has already been fully considered under the heading of "Ad- 
 vances to Men in the Grain Trade." What we are now concerned with 
 are the operations of the men who turn the grain into flour, oatmeal, or 
 other manufactured products. 
 
 Of these there were formerly a large number scattered over the grain- 
 producing countries of both Canada and the United States, utilizing the 
 numerous water powers to be found therein. Their little establishments 
 in some cases would grow with the growth of the town or district, until 
 they became of sufficient importance, not only to supply the country 
 around them, but some distributing centre, whence it might be shipped 
 across the Atlantic. In the early days of this trade the miller almost 
 invariably sent his product for sale on consignment; drawing against it 
 for a portion of its value, with the usual result, at length, of embarrass- 
 ment on both sides. As matters progressed, consignments gradually gave 
 place to purchase and sale; and this was carried out, not only with ship- 
 ments to centres in Canada, but also to exports across the ocean. As time 
 progressed and population increased, the mills situated along the line of 
 water powers were enlarged in capacity, and steam called into aid, until, 
 in some centres, large establishments were to be found, whose brand 
 became well known, not only in every part of this country, but also in 
 the centres of population in Europe. 
 
 In dealing with the men carrying on this business the banker will re- 
 quire the same fundamental conditions as to full ownership of property, 
 capacity, experience, and prudence which have been referred to already. 
 But as every trade has its special requirements and dangers, the banker, 
 in making advances to a flour miller, will take care to limit them to such 
 an amount that his funds cannot be used for speculative holdings. 
 
 If the miller carries on his trade steadily, and sells as fast as he 
 
LOANS TO MANUFACTURERS AND IMPORTERS. 121 
 
 produces, advances will never need to be more, as a rule, than will buy- 
 about a month's supply of grain. 
 
 There is no branch of manufacture which is so simple in character, 
 which takes so little time, and which adds so little to the cost of the arti- 
 cle as millina;. A flour miller is not like a lumberman whose article takes 
 twelve months to produce, nor a tanner or pork packer whose process 
 requires weeks or months to complete, nor a cheese-maker whose product, 
 when made, requires time to ripen. The product of a flour miller can 
 always be sold. The world needs and buys it every day, so that the 
 process of manufacturing could go on, if circumstances required it, with- 
 out any accumulation of stock whatever. 
 
 Some time, however, may reasonably be allowed for contingencies, 
 both for obtaining a supply of grain, and of manufacturing, barrtlling, 
 sacking, and transporting to market. 
 
 If the advances exceed the amount required to purchase a month's sup- 
 ply of raw material, the banker will need to be satisfied that the condition 
 of the market, the difficulty of transport, the blocking of supplies, or 
 other causes, may account for the excess. 
 
 In a miller's account, as well as a grain merchant's, any indication of 
 speculating on margin will need to be carefully watched and checked at 
 the ver}' outset. 
 
 The banker will also be careful that his advances are not expended in 
 additions and improvements to the mill; or in the purchase of an addi- 
 tional one, should some tempting offer be made. A man who desires to 
 stand well with his banker will never be tempted to such a misuse of funds 
 advanced to him. 
 
 This trade, unlike that of timber and lumber, does not move in cycles 
 of alternate prosperity and depression. It has its changes, nevertheless, 
 but they are of a rnore transient character. The market is ebbing and 
 flowing continually ; and there is a necessity for the miller, like the grain 
 dealer, to keep a daily and hourly watch upon it. 
 
 It scarcely needs to be added that every miller will act wisely in en- 
 deavoring to make specialties, which will practically sell themselves at 
 better prices than an article which has no name, however it may be pushed. 
 To do this, he will, of course, be rigidly careful in selecting his grain, 
 have his machinery up-to-date, and work his process at every step to the 
 desired end. And men of small capital in this business, perhaps more 
 than any other, need to beware of launching into operations larger than 
 their capacity or capital justify. It is so easy to do it; easier in this trade 
 than any other that can be named. But in no trade is there more reason 
 for the observance of the old adage, 
 
 "Vessels large may venture more. 
 
 But little boats should keep near shore." 
 
 The principles laid down so far will equally apply to such manufac- 
 turers as tanners, distillers, sugar refiners, and others of a like character, 
 
122 BANKING AND COMMERCE. 
 
 where larger capital in buildings and plant is necessary, but where there 
 is not a large proportionate employment of labor. 
 
 In all these there is required to ensure success a well chosen site, mod- 
 ern buildings and plant, adequate capital, thorough knowledge of mar- 
 kets, and if possible a special article with a well-known name and mark. 
 And the banker who is applied to for advances (or for foreign credits 
 under which he may be requested to surrender documents) will look care- 
 full v into all these points, so as to judge whether advances asked are of 
 reasonable amount, and also whether, from the "working of the account," 
 if he has had it before, the business appears to have been carried on pros- 
 perously or not. This Avill stand him in special stead in times of de- 
 pression, when it seems impossible to make profits in any line of business, 
 and when that most difficult alternative is presented, bet^veen making fur- 
 ther advances and keeping a concern alive, or stopping advances alto- 
 gether, with a certainty of bringing it to an end. In the former case, 
 there is risk of increasing what may be a possible loss, tempered with an 
 expectation of assisting a worthy customer over a difficult time, and 
 avoiding a loss altogether. In the latter case there will be an absolute 
 certainty of loss, with the wearing vexation of handling an insolvent 
 estate, realizing stocks of merchandise (perhaps shipping them to distant 
 markets, and waiting anxiously for returns), selling, or attempting to sell, 
 mills, factories, lands, or ships; processes which every banker of experi- 
 ence has learned to dread as not only vexing to the last degree, but as 
 almost invariably disappointing. 
 
 In such circumstances nothing enables a banker to come to a sound 
 decision better than a knowledge, not only of the customer himself (which 
 is the first element), but a general knowledge of the business he is 
 carrying on. 
 
 Cotton and Woolen Mills, Etc. 
 
 There are, however, manufacturers of an entirely different description 
 to the foregoing. In fact, these are seldom spoken of as manufacturers 
 at all. 
 
 But we now have in Canada large developments of manufacturing in- 
 terests, such as were formerly confined to England and the older countries 
 of Europe, and which crossed the Atlantic, and became established in New 
 England and other parts of the United States at an earlier period than in 
 Canada. These last have been largely, but not wholly, the gro^vth of a 
 protective policy. 
 
 It is not the intention of this work to discuss the debated question of 
 Free Trade vs. Protection. The fact is simply noted that there are now 
 established in Canada, as developed by what is known as the "National 
 Policv," cotton factories, woolen mills, iron-works, and many other manu- 
 facturing industries, with respect to all of which one particular point of 
 difference from the former ones is noticeable, viz., the large amount of 
 mechanical labor that is required to carry them on. To produce the same 
 
finnuf 
 
 T.OAXS TO MAXUI ACTURERS AND IMPORTERS. 123 
 
 ml output of goods iu a cotton factory that would be turned out of a 
 flour mill, for example, ten or even twenty times the number of artisans 
 would be required. And the outlay for wages would be large, in a corre- 
 sponding degree. Some of this class of manufactures are more indigenous 
 to the soil tiian others; for example, woolen mills more than cotton mills; 
 inasmuch as part of the raw material of a woolen mill is a product of 
 the country. Woolen mills were therefore known in Canada long before 
 cotton mills were heard of. Such mills, however, were of a very simple 
 type, and corresponded largely to the grist mills of primitive days. These 
 woolen mills, however, have now developed, in many cases, into large 
 establi-shments in which goods are produced of a quality rivaling those 
 of the old world. The same process of development has been seen in 
 manufactures of iron, steel and agricultural implements. The blacksmith 
 shops have grown with the growth of the locality. A ]:>rimitive village 
 has become a busy town or city, and the blacksmith of former days has 
 expanded into a manufacturer of all kinds of goods in iron and steel, 
 including machines for producing other things. Similarly the wagon 
 maker and mechanic of a former generation is now the head of a vast 
 establishment employing thousands of hands, and manufacturing agri- 
 cultural machines, not only for the Canadian farmer, but for export to 
 distant colonies of the Empire and other countries. The little cabinet 
 maker's shop has grown into a vast furniture factory able to produce 
 goods that can be exported to advantage to the mother country. 
 
 This process of development is constantly widening, and embracing 
 other articles, otlier lines, and still wider areas of production. 
 
 All this must come under the cognizance of the banker ; and the enter- 
 prising men who have developed these industries will certainly seek to be 
 his customers, and need his facilities, not only to give cash for the bills 
 of their customers, but in the way of direct loans. 
 
 With respect to these lines of manufacture, as has been observed re- 
 specting others, the first and fundamental requirement of a sound busi- 
 ness concern is, that if the customer owns the property it shall not be 
 encumbered; and, second, that whatever advances are obtained shall be 
 represented by merchandise which has been paid foi:, or collectible debts. 
 In entering on the business of dealing with manufacturers, the banker 
 will soon ascertain that there are great differences between the skill and 
 capacity of one manufacturer and another. Even when business is gen- 
 erally prosperous, one man may succeed and another fail. Of several men 
 who are carrying on cotton mills, one may have a sounder judgment 
 of raw cotton than another, as well as of the best time and place for 
 purchasing the quantity needed from time to time, and of the best mode 
 of utili;dng machinery. A whole season's productions may be damaged 
 by errors in this respect. Men in the charge of woolen mills may also pro- 
 duce goods of a pattern that will not sell, or they may acquire a name 
 for a badly made goods owing to poor machinery. 
 
 An agricultural implement maker may experiment upon new styles of 
 
124 BANKING AND COMMERCE. 
 
 machines; which styles may he unsuccessful^ and have, practically, to be 
 given away. It is not, therefore, enough that a banker's advances should 
 rest on merchandise as a matter of theory; for if they are employed to 
 purchase poor raw material, or to produce merchandise that nobody wants, 
 his reliance on merchandise may prove a delusion. Such things seldom 
 happen to an extent which makes banking advances absolutely unsafe. 
 But they have transpired in the experience of bankers, both here and 
 abroad, and they manifest themselves in the inability of the borrower to 
 repay, or reduce advances as agreed upon. And they often result in the 
 batiker having to take security upon property for the unpaid portion 
 of the debt. 
 
 And here it is that one of the dangers of incautious banking arises. 
 If a borrower has been able to obtain advances from a bank, while his 
 property is mortgaged, the banker will have no recourse but to take a 
 second mortgage as security. Now, second mortgages, of all forms of 
 security, are the most undesirable and delusive; for in a majority of 
 cases the banker will find that his customer has already obtained on the 
 property such an amount as makes it impossible for anything additional 
 to be got out of it. 
 
 But the greatest danger in carrying a manufacturer's account is that 
 the funds loaned for the purpose of producing merchandise may be di- 
 verted in the direction of fixed property. A manufacturing establishment 
 is subject to constant requirements for repairs, improvements, or addi- 
 tions, either to the building, the machinery or the power. Circumstances 
 often transpire that seem to call for xmusual outlay; some accident to 
 machinery; some bursting of a dam; some fire not wholly covered by 
 insurance; all of which call for expenditure that cannot be met out of 
 profits. Or the manufacturer may be of a quick, inventive capacity; fond 
 of trying experiments calling for new machines or additions to build- 
 ings. 
 
 In all these cases such expenditures should be met out of a reserve 
 fund invested in a realizable form, or out of additional capital, or an 
 issue of bonds. But in some cases they become a drain upon banking 
 advances, and cause suoh advances to assume the shape of a "lock up." 
 In this manner many of the losses in the manufacturing districts both of 
 England and Canada occurred. Indeed, to such an extent has this been 
 the case at times, that a manufacturing concern has drifted from bad to 
 worse, until bank advances were represented by nothing but buildings 
 and machinery, which when realized left a debt behind, on which the 
 banker might receive a dividend of five cents on the dollar. These are 
 not fancies, but facts.''* 
 
 44 In one of the largest manufacturing districts of England a bank has long 
 carried on business ■which had almost the whole of its resources employed in man- 
 ufacturing accounts. Two principles have been rigidly observed in the manage- 
 ment of this bank from the beginning, viz., that advances shall never exceed 
 more than one-tenth of the annual output of the concern; and that all such ad- 
 vances shall be paid off once a year. (This, of course, does not refer to the dis- 
 count of trade bills.) This bank has had a career of singular prosperity amongst 
 
LOANS TO MANUFACTURERS AND IMPORTERS. 125 
 
 Loans to Wholesaie ^Merchants. 
 
 There is this fundamental difference between the wholesale merchant 
 and the manufacturer; that the merchant, if his credit is good enough, 
 can put the whole of his stock upon his shelves without the expenditure of 
 a single dollar except for freight and duties. Good credit will enable 
 liim to obtain all he wants from manufacturers on this side of the Atlantic, 
 or from wholesale houses in England. But a manufacturer can do noth- 
 ing of the kind. From the time that he begins operations he has to pro- 
 vide for a cash expenditure which never ceases until goods are ready for 
 sale. In nearly every branch of manufacture he must pay cash for his 
 raw material and his fuel. And the moment he begins the manufactur- 
 ing process, his pay-roll of wages confronts him week by week, and must 
 be met. There can be no possibility of asking credit here; not for a 
 single week could wages be left unpaid. In the case of the special lines 
 of manufacture lately under review, where wages are a most important 
 item of cost, the necessity of meeting the large sums required is the most 
 harassing of all financial pressures. It presses indeed more heavily than 
 the necessity of ineeting acceptances and promissory notes, for the payees 
 of these can be approached for renewal at a pinch, while a request to a 
 body of workmen to defer payment of wages is utterly impossible. And 
 as payment is imperative, the manufacturer will naturally, in such cir- 
 cumstances, have recourse to his banker. 
 
 Hence, it is more difficult to finance for a manufacturing establishment 
 than for the business of a wholesale merchant. The latter, having the 
 power to buy goods at all times on credit, has no reasonable ground for 
 asking regular advances from his banker. His dealings should be con- 
 fined, as a rule, to the discount of bills given by his customers. 
 
 The only payments a wholesale merchant has to make, which are abso- 
 lutely imperative, are the customs duties and freight on imported goods. 
 It is just as impossible to ask credit here as it would be for the payment 
 ■of wages. But no wholesale merchant could reasonably think of com- 
 mencing business without capital, and the verj"- lowest minimum necessary 
 would be an amount sufficient to pay the duties on the stock requisite to 
 couunence business, and thereafter on his average stock. 
 
 Once he has his goods in warehouse, he can begin to sell, and with 
 such facilities as bankers are now ready to offer for the cashing of cus- 
 tomers' bills, a merchant may, from a financial point of view, be said to be 
 
 all the fluctuations of the trade of the district, and its losses have been a mere 
 fraction of such as have been suffered by even well managed Canadian banks. 
 
 It would be difficult to apply both of these rules to such lines of manufacture 
 as saw milling and tanning, owing to the great length • of the manufacturing 
 process. But the last of them is an absolutely necessary requirement in every 
 case. And the first, which Implies that there should be a certain proportion, be- 
 tween the amount of advances and the annual output, is important as indicating 
 what is desirable in all manufacturing advances, the proportion varying, of course, 
 with the condition of the business. 
 
12(3 BANKING AND COMMERCE. 
 
 able to sell for cash. Thus, by the time tlie iiayments for his stock be- 
 come due, the proceeds of his sales ought to be sufficient to meet them. 
 
 This elementary financial theory of a wholesale business becomes 
 modified by circumstances as time progresses, and no prudent man would 
 be satisfied with being so wholly dependent on his credit with other houses 
 as to have nothing left over after payment of duties. 
 
 He will, of course, aim at having far more capital than that. But 
 even on such a modicum of capital as is indicated, it is clear that no ne- 
 cessity should arise for loans from a banker. From all which the rule may 
 be deduced that loans to a wholesale merchant (as distinguished from the 
 discount of trade bills) should be considered as irregular in the nature 
 of things, and only to be granted in exceptional circumstances. 
 
 When therefore a banker is applied to by a wholesale merchant for 
 a loan in addition to a discount of customer's bills, he is put upon inquiry 
 as to why such a loan is required. The reason commonly given is that 
 goods are arriving in quantity in the Custom House and that the duties 
 must be paid. But this, in itself, is not a good reason. For, as has been 
 observed, the capital of such a house should be sufficient to provide for 
 this requirement. The payment of customs dues can never take a mer- 
 chant unawares. The necessity for it must have been seen long before- 
 hand, and ample opportunity given for making provision. An applica- 
 tion for a loan may therefore indicate that purchases have been too heavy; 
 or that sales arc not being vigorously pushed, or that an unsuitable stock 
 has been laid in, or that the customers of the house cannot be depended 
 on for payments. Any of these will cause the finances of a wholesale 
 house to drag heavily, and they are all of such a character as to make a 
 banker pause. The head of a house may naturally be unwilling to 
 acknowledge that any of these suppositions are correct, and some are very 
 unwilling to talk to a banker on the subject. Yet the application for a 
 loan gives him the right to make inquiry; for experience shows that such 
 things, if allowed to go on uncorrected, may be the beginning of a course 
 which will end in insolvency. 
 
 There is this further reason for a banker's caution in this matter, that 
 a dealer in imported or manufactured goods cannot give a banker secur- 
 ity upon them. A miller, a tanner, a pork packer, can pledge his 
 product as security for advances under the warehousing clauses of the 
 Banking Act. But a wholesale merchant cannot do this under the Act. 
 And there is reason for this distinction in the nature of things; for a 
 ■wholesale merchant's stock has almost invariably been bought on credit. 
 The goods on his shelves are jirobably not yet paid for. It would there- 
 fore be contrary to every principle of equity to allow a merchant to 
 pledge his goods for advances while the claims of the creditors were 
 unsatisfied. This being the case, it has become a practice for sucli loans 
 to be applied for without security, and not infrequently for tliem to be 
 granttd in that shape. This certainly is a deviation from sound banking 
 
LOANS TO MANUFACTURERS AND IMPORTERS. 127 
 
 practice. But the whole system of loans to wholesale merchants is excep- 
 tional;, and requires exceptional treatment at the hands of a banker. 
 The character of that treatment may be indicated as follows : 
 First, no regular line of credit should be arranged for in respect of 
 loans; that is, no amount which a customer can always have at his com- 
 mand. Second, advances should be temporary; each being applied for on 
 its own merits, with the explanation of circumstances. Third, they should 
 only be allowed at certain seasons, and never last more than two or three 
 months at the most. Fourth, renewals should not be granted. Indica- 
 tions of continuance should be carefully watched and promptly dealt 
 with. If advances become chronic, security should be insisted upon. 
 Fifth, it is always desirable, too, that when such advances are granted to 
 a firm, the endorsement or guarantee of each individual in its should be 
 obtained; for individual partners may have separate estates which the 
 endorsement would bind. If the business is carried on by a joint-stock 
 company, the guarantee of some of the principal stockholders would be 
 desirable. 
 
 By the observance of such rules as these, and with constant exercise 
 of vigilance, loans of this character may be granted without unreasonable 
 risk.^^ 
 
 45 In the early days of joint-stock banking in England and Scotland, when the 
 business was not so well understood as at present, numbers of accounts in the 
 manufacturing districts of England had drifted into the condition of being largely 
 represented by fixed property. Half the cotton mills of Lancashire, the woolen 
 mills of Yorkshire, and the iron foundries of the "black district" were mortgaged 
 to the banks of that period, some of which were ruined by the heavy losses that 
 ensued. These severe lessons have had their fruit in the improved style in which 
 bank advances are made in these times to the mutual advantage of both the banks 
 and their customers. The same condition of things prevailed in certain quarters 
 at one time in Canada, and with the same result of either embarrassment or abso- 
 lute ruin. 
 
 In a certain district of Canada where flour milling was a leading industry. It 
 was well known at one time that nearly every mill it contained had fallen into 
 the hands of the leading bank of the district by foreclosure of mortgage. This 
 was the result of the style of business adopted by one who was known as a most 
 enterprising and pushing manager, whose lavish dealing with the funds entrusted 
 to him by his head office had not only ruined the customers who dealt with him 
 but brought about heavy losses to the bank. 
 
 The disposal of these properties and the operations connected therewith, 
 formed a principal part of the occupation of the officer who succeeded the en- 
 terprising manager. If the bank referred to had been an independent one, like 
 the banks in small towns in the United States, it would have been ruined beyond 
 redemption; but, fortunately it was only a branch of a larger institution which 
 could afford to lose large sums with no more consequences than temporary em- 
 barrassment. 
 
CHAPTER Xril. 
 LOANS TO RAILWAYS AND RAILWAY CONTRACTORS. 
 
 Railways Under Construction — Peculiar Dangers — Railways in 
 Operation — Contractors — Delays in Payment — Engineer's 
 Certificates — Lock-Ups — Contracts for Railway Companies — 
 Contracts for Public Works of Government. 
 
 THE development of railways in modern times is one of the most 
 striking factors in our industrial progress. Though they do not 
 produce or create anything, the}' bring producer and consumer 
 more nearly together, and lessen the cost of raw material to the pro- 
 ducer and of finished products to the consumer, so much as to have given 
 an enormous stimulus both to manufacturing and trade. This has been 
 the case even in the older countries of Europe, whose every acre was 
 cultivated long ago, and whose means of transportation were in a well 
 developed condition long before railways were heard of. But whatever 
 stimulus might be given to production and trade by railroads in older 
 countries, it has been immeasurably exceeded by the effect which their 
 construction has produced upon the undeveloped or partially developed 
 regions of North America. Whether in the United States or in Canada, 
 the eff"ect of the extension of railways into undeveloped tracts of country 
 has been such that it may almost be said that the railway has created the 
 country. For, so far as the interior of the continent is concerned, when 
 we consider the enormous distances to which the product of the soil had 
 to be carried to reach a market, it will be seen there was an insuperable 
 bar to profitable cultivation, and that great regions now populated and 
 prosperous must have remained in their original state of wildness, but for 
 better means of transit. But the railway which penetrates these regions 
 enables their products to be brought profitably to market, and so opens 
 up a path to settlement and the industrial development that follows. Thus 
 it lias been in all the Western States of the American Republic, and thus 
 it lias been in Canada in a most remarkable degree. 
 
 But at an early stage in these developments the intervention of the 
 banker has been needed. The financing of nearly every railroad during 
 the period of its construction has been attended with not a few financial 
 difficulties; the only exception being the railroads avowedly undertaken 
 as Government works. Of this we have had one conspicuous example in 
 Canada in the case of the Intercolonial. 
 
 Railway corporations have two modes of raising money; viz., by the 
 subscription of stock, and by the issue of bonds; the latter being partly 
 of the nature of mortgages, and partly of long-dated promissory notes. 
 Subscriptions on account of stock are invariably, in these times, paid in 
 
 128 
 
RAILWAY LOANS. 12.9 
 
 to a banker; and this is the point at which the bank and the railway first 
 come into contact. The banker opens an account with the company; 
 receives money on its account; pays out that money as construction pro- 
 ceeds, often at widely distant points through tlie medium of its branches. 
 The bank also, through the medium of bills of exchange, brings out 
 moneys paid in by subscribers abroad, and places them to the credit of 
 the company in Canada. All the foregoing are simple and natural bank- 
 ing transactions, and although the amounts involved are sometimes enor- 
 mous, amounting to tens of millions in the course of a single half-year, 
 they are not such as to give occasion for thought or anxiety on the part 
 of the banker. So long as the sums drawn out are no more than the 
 sums paid in, the transactions are part of the mere routine of banking. 
 This is the elementary theory of banking in connection with railroads 
 during construction. 
 
 But, as a matter of fact, it often hapjiens that the financial opera- 
 tions connected with the building of a railwa}'^ do not run as smoothly 
 as this. The incoming of money does not always keep pace with the ex- 
 citing demands of its outgoing. These demands are imperative, consist- 
 ing as they largely do of wages of laborers and artisans. It has already 
 been shown how necessary it is to meet demands of this nature at the 
 time the}^ are due. It happens, therefore, at times, that emergencies 
 arise which lead to an application to the banker for advances. The 
 banker is naturally the person applied to, as the company is having large 
 monetary transactions with him; and the application can be represented 
 as simply the honoring, for a short period, the checks of the company, 
 until subscriptions are paid in, or bonds are sold. It has thus come 
 about that many a banker has been induced to consent to advances, which, 
 though represented, with perfect sincerity, as "temporary," were found 
 to have an unpleasant element of permanency about them in practice. 
 The new subscriptions or the proceeds of new bonds could not in some 
 cases be applied to the advance, inasmuch as the money was required to 
 meet other and more imperative demands. The temporary overdraft, 
 therefore, went on, with varying amount, but undischarged, even for 
 years, until some turn of events after completion enabled funds to be 
 set aside to meet the banker's claim. 
 
 These, however, are not the only contingencies that meet the banker, 
 when, as is generally the case on this side the Atlantic, the money is 
 raised in one country and expended in another. The officials of a road 
 under construction are subjected to constant pressure to find funds for 
 vast jDay-rolls regularly recurring, sometimes running up to millions; 
 and on the banker demurring to increasing an overdraft, would suggest 
 that he might cash bills of exchange drawn by them on headquarters. 
 They might not, it is true, have explicit authority for so doing. But 
 they would trust to the exigencies of the case being recognized and the 
 bills honored. Such things have been known, however, as of these bills 
 
1.30 BAXKIXG AND COMMERCE. 
 
 being refused acceptance or recognition, and of the banker being com- 
 pelled, to his intense disgust, to write them off, as losses. 
 
 A case has also happened where a railway, pushing works of con- 
 struction ahead, for a road of which it has obtained control, but which 
 is still carried on under its old name, has made arrangements with a 
 bank for supplies of money from month to month to be repaid periodi- 
 cally by drafts on the headquarters of the company. For a. time the 
 arrangement works smoothh^, and advances are paid off periodically. 
 But, as time goes on, money is not paid in the one country as fast as it 
 is needed in the other. The bankers, therefore, are asked for the peri- 
 odical payment to be deferred. Meanwhile, outlays proceed, advances 
 go on increasing, until at last the bank is itself embarrassed by the huge 
 amount to which the account has grown. Further advances are therefore 
 stopped, and payment demanded of those existing. Then, to the disgust 
 and alarm of the bank, the point is raised as to which corporation has 
 had tlie advances. Is it the corporation that has obtained control of 
 and absorbed the other, or the corporation which has been absorbed, 
 but which is practically a mere name ? The first repudiates responsi- 
 bility. Litigation ensues, and is continued for years. Meantime the 
 bank is embarrassed by the enormous amount of its funds locked up, 
 and suffers in credit through the facts becoming known. The case is 
 finally settled by an arrangement for a special issue of bonds, the whole 
 of which are handed to the bank. But of these bonds neither interest 
 nor principal is ever paid, and the bonds themselves are finally can- 
 celled by legislative arrangements, which give the bank about one-tenth 
 of its advances, the remainder being a total loss. Largely as a conse- 
 quence of this, the bank ultimately suspends payment and finally passes 
 out of existence. 
 
 Advances to a railway during construction are therefore critical af- 
 fairs, and require much judgment and caution, and also much firmness, 
 on the banker's part, in dealing with the "account. Such advances, if 
 once allowed, are almost certain to increase. And as the disbursements,, 
 during construction of even a small railway, are very heavy, the pres- 
 sure for advances may soon raise them to large amounts. The only 
 safe rule for a banker with an account of this kind is to be firm at the 
 outset, and not to allow the thin end of the wedge to be inserted without 
 outside security. 
 
 It is a delusion to suppose that a railway corporation must in the 
 nature of things be good to repay advances. A banker, until he has 
 learned the contrary by experience, finds it difficult to believe that a 
 corporation, with a paid-up capital of millions, can fail to pay its debts. 
 But reflection would teach him that when the whole of the capital afore- 
 said has been expended in works, from which it can never be extracted 
 again, it is impossible that capital can furnish the means of repaying 
 what he has lent. Still more is this the case when such a company 
 
RAILWAY LOANS. 131 
 
 stretches its borrowing capacity in tlic shape of bonds to the utmost 
 extent to which the market will take them, which bonds are sometimes 
 constituted by law a first mortgage on all the property of the company. 
 The banker therefore finds himself in a difficult position if he attempts 
 recovery by law; he indeed finds this impossible. 
 
 It may be taken therefore as an axiom in banking, that advances to 
 raihvays in construction should never be undertaken without security 
 beyond that of the railway itself. Even if bonds are offered as security 
 they should be received with caution, for the proper mode of raising 
 money on the bonds of a railway company is to place them on the 
 market. That is an infallible test of their value. The market price is 
 simply a consensus of the opinions of the financial world. 
 
 Many instances have been known, of a finished railway barely pay- 
 ing working expenses, and our own Intercolonial railway is a conspicu- 
 ous instance of this. The bonds of such a road are, of course, valuer 
 less, so long as this state of things continues. They may have a 
 speculative value, in view of future developments. But improvement 
 may never be realized. 
 
 Advancing on the strength of future stock subscriptions may prove 
 as delusive a foundation for a loan as anything that has been referred 
 to. Experience has proved that when the outlook has become distinctly 
 unfavorable subscribers will not only neglect to pay their calls, but 
 will resist legal process by every device known to the law. 
 
 Advances to railways in actual operation, however, rest on a differ- 
 ent footing. When a road with an established traffic desires a temporary 
 loan for the purpose of laying in supplies, let us say, of fuel at the 
 approach of winter, such a loan may be regarded as legitimate and safe. 
 For the repayment of such a loan would practically be a disbursement 
 for working expenses, and would take precedence of any claim con- 
 nected with its bonds or stocks. But then a banker must exercise a dis- 
 criminative judgment in regard to advances like this: for there have 
 been instances of railroads getting into such low water that no depend- 
 ence could be placed upon them for any sort of payment. This, how- 
 ever, cannot fail to be known to the bankers of such a company, and 
 they would be wanting in judgment to a singular degree if they did 
 not treat such a railway as they would an impecunious mercantile bor- 
 rower. 
 
 A railway corporation, in fact, comes to have what may be called a 
 commercial standing, exactly as a merchant does. It is not common for 
 mercantile agencies to enter railways in their books, and give them 
 grades of credit; but, if they did, they would find it necessary to use 
 as many symbols as they do in case of merchants. Some would have 
 the highest grade of credit that any marks could indicate, while others 
 would be found at the other end of the scale. But as there are no books 
 of reference indicating the standing of railways, and any reference to 
 
132 BANKING AND COMMERCE. 
 
 their supposed capital is utterly delusive, a banker must himself take 
 means to find out what is necessary, only taking care that he does not 
 find it out by costly experience. 
 
 Railway Contractors. 
 Closely connected with the foregoing are advances which banks are 
 often called to make, during construction, to railway contractors. 
 Through the hands of this class of the community very large sums pass 
 during the course of construction, and the expenditures of a single 
 month, at times, run up into millions of dollars. The usual course is 
 for payments for work to be made on the certificate of an engineer or 
 inspector, at periodical times, named in the contract, and usually once 
 a month. This process seems very simple and not likely to lead to finan- 
 cial difficulties. But experience teaches otherwise, as will now be shown. 
 Any person or firm engaging, or contracting, as the phrase is, to do a 
 certain piece of work, will require, before he begins it, a considerable 
 stock of material and plant. He must have horses, barrows, shovels, 
 wagons, and a variety of other tools and plant of more or less value, 
 according to the extent of his contract. In some cases the whole of the 
 contractor's capital will be invested in his plant. If he opens a bank 
 account, and it is almost a necessity that he should, he will inform the 
 banker of the amount of money he has so invested, and will, naturally, 
 open to him the amount of the contract, the mode and time of payment 
 for his work, and so on. In fact, he will explain his position, so that, 
 in case he requires advances, the banker may understand what to do. 
 In a majority of cases, a contractor will want advances before he has 
 got on far with his work, for the pay-rolls of his men will come due, 
 and must be met, before his receipts from the company come in. For 
 there is always an interval, during which his work is being measured, 
 his account passed, and payment received in the treasurer's office. This 
 interval may be days or it may be weeks, but his little army of workmen 
 cannot wait for weeks, or even for days; they must be paid, or they 
 will not go on with the work. Now, some contractors have available cap- 
 ital enough to enable them to pay their wages in the interval; that is, 
 they have, in addition to the capital they have expended on the plant, 
 or material, sufficient, at least, to meet a month's pay-roll of their men. 
 Men of such capital as this seldom require advances at an early stage 
 of a contract, thougli they may do so later on.'*^' But the majority of 
 contractors have not so much capital as this, and arc in the habit of 
 applying to a banker for advances, tlie ground for such application be- 
 
 46 The author well remembers an aconmit oponod witli the bank in which his 
 early days were passed, by the contractors for ilie works of the Manchester & 
 ShefHold Railway. They deposited a single sum of £80,000. iMige as this was, 
 it was all absorbed as the work v/ent on, and they had to apply to the bank for 
 advances. 
 
RAILWAY LOANS. 1^3 
 
 ing that so much work has been done or will be done at the end of the 
 month, when the account will be presented, certified and paid. And as 
 payment is supposed to be sure, the borrower will represent that ad- 
 vances must be safe. In many cases, the contractors will give to the 
 bank a written order on the treasurer of the company, directing him to 
 pay the account to the bank when certified. This might seem to make 
 the advance ])crfectly safe, especially if the treasurer undertakes to 
 comply with the order. But a treasurer will almost certainly avoid bind- 
 ing himself to pay a specified sum of money at a specified time. He 
 will generally simply acknowledge the receipt of the letter, or if he 
 goes further, he will say that it has been placed on file, probably calling 
 the banker's attention to the fact that his duty is only to pay whatever 
 sum may be certified by the engineer of the company to be due. And 
 here we touch the vital point of the w^hole matter, for, as many bankers 
 have found to their cost, nothing is more common, in railway work, 
 than for disputes to arise betw^een the contractor and the engineer, and 
 for such disputes to remain unsettled for a length of time. In the in- 
 terval, possibly, payments may be made on account, but not nearly 
 enough to cover the banker's advance. Meantime, another month's work 
 has been going on, and pi*essure is put upon the banker for further ad- 
 vances, which he may yield to, under expectation of a speedy adjust- 
 ment of differences. This the contractor will give strong assurances of. 
 The banker therefore is in a difficult position. If he refuses to advance 
 further, his customer cannot meet his payments. The work must there- 
 fore stop, his contract will be annulled, and any drawback in the hands 
 of the company forfeited. This will almost certainly result in a loss 
 to the bank; for such a contractor's capital will only be represented by 
 plant and material, w^hich will depreciate to a mere nothing if sold, 
 though it may have cost a very large sum of money. On the other hand, 
 if he goes on, he may continue to have a profitable account and come 
 out safely in the end. Perhaps he may stipulate for an extra charge in 
 consideration of the extra risk; but whether he comes out well or not 
 will largely depend upon whether the contract is a good one, and what 
 the amount afl'ected by the dispute is. It may be $5,000; it may be 
 $50,000; it may be even $500,000; but a contract is rarely finished with- 
 out a dispute of some kind, as to the quality or quantitj^ of the work; 
 whether a certain amount of material removed was not rock instead of 
 earth, whether the foundations of a bridge are properly laid, or what 
 not. Sometimes engineers are to blame for these disputes ; sometimes 
 contractors. But in any dealings between a banker and a contractor such 
 possible contingencies must be taken into account. Some of the most 
 exasperating "lock-ups" that have been known in the history of banking 
 have arisen in this manner. Such disputes often lead to lawsuits; and 
 even though an award may be made in the contractor's favor, a delay 
 of years may transpire, during which interest has been accumulating and 
 
131 BANKING AND COMMERCE. 
 
 costs mounting up, while the amount of the judgment may be far less 
 than the debt due to the bank. 
 
 If the contractor has otlier resources than the capital, in his plant 
 and gives the bank security on them, all may be well in the end ; if not, 
 the result may be that the "lock-up," or a considerable portion of it, 
 may become a bad debt. 
 
 No banker, therefore, will consider himself safe .by the mere fact 
 that he has security, so called, in the shape of an order on a railway 
 company to pay him what they owe the contractor, if the order be in 
 general terms and unaccepted. ^^ 
 
 But all advances to contractors are not such simple matters as the 
 foregoing. Not seldom a contractor will approach a banker before work 
 has begun with a proposal for a credit of a round amount, liaving no 
 relation to any specific sum as earned, or to be earned, in any particular 
 month. And the banker, knowing him to be a man of good standing, 
 and to be the owner of real property in the neighborhood; knowing also 
 that he understands his business, and that his account may yield large 
 and profitable transactions, may grant such a credit. Yet a portion of 
 the money advanced may be used to purchase that miscellaneous collec- 
 tion of articles known as a contractor's plant, which costs so much, and 
 is ultimately worth so little. Or there may be, for some reason, unusual 
 delay in passing the accounts, or accidents may transpire from water, 
 fire, or dynamite; or there may be miscalculation as to the nature of 
 obstacles to be overcome, especially in deep cuttings, high embank- 
 ments, or bridge building. Or the contractor may have miscalculated 
 the cost of numerous materials he requires to use; in fact, the casualties 
 are almost innumerable, and what position the contractor may be in by 
 the time he gets to the end of his work, a mere lottery. It may be a 
 fortune; it may be bankruptcy. 
 
 All that is said in regard to contractors for railways applies even in 
 a stronger degree for contractors in government works. And for this 
 reason, that whatever delays may be experienced in the passing of a 
 contractor's account by a railway company, they are sure to be more 
 protracted in a government department. 
 
 The habit of delay, the cumbrous circumlocutory system which in- 
 heres in all government offices, which it is vain to remonstrate against, 
 is certain to bring about greater delays in this case than in the other. 
 And in case of dispute, the engineer or inspecting ofiicer of a govern- 
 ment department is apt to be more exacting, and more firmly set in his 
 opinions, tlian the officer of a railway corporation. And in case the dis- 
 
 47 It lias not soldom been the case in difTicult times tliat a contractor could 
 not gret his certificate paid, even when there was no dispute about it. owing to 
 the company being unable to float bonds, or to get calls paid, or to make ef- 
 ficient banking arrangements. Numerous cases of this kind have arisen where 
 the works were on this side the Atlantic wh'lst the money had to be raised 
 on the other. 
 
RAILWAY LOANS. ' 135 
 
 pute leads to law proceedings, tlie machinery requisite to carry on such 
 proceedings leads to delays which are interminable. Many an unfortu- 
 nate suitor has been driven to distraction, or to bankruptcy', by such 
 suits; yet there is generally, on the part of the officers that defend 
 them, a sort of consciousness that they are doing well in protecting the 
 public at large against unjust claims, on the part of individuals; a most 
 formidable obstacle to settlement. 
 
 There is this, however, to be noted, as a set-off against all disadvan- 
 tages of doing work for a government, that payment, at any rate in 
 countries like Canada, Great Britain, and the United States, is certain 
 in the end. 
 
 But the same cannot be said of all governments, as has been seen. 
 
CHAPTER XVIII. 
 
 LOANS AND ADVANCES TO GOVERNMENTS AND MUNICI- 
 PAL CORPORATIONS. 
 
 England — The United States — France — Insolvent Governments 
 OF Europe — The Separate States of the Union — Separate 
 Provinces of Canada — Municipal Corporation Loans. 
 
 THE dealings of bankers with governments have peculiarities of their 
 own, and at times are so important that the whole foundation of a 
 banking corporation has rested upon them. This was the case with 
 the Bank of England, the very purpose of whose establishment over two 
 centuries ago was to aid the finances of the Government of the day. 
 
 By the terms of its constitution its whole capital of one million ster- 
 ling was loaned to the Government of the time, and this primal condition 
 has been observed down to the present day through all the changes and 
 vicissitudes of the last two centuries. Although the capital of the bank 
 has been increased from time to time until it now amounts to fourteen 
 millions sterling, there never was a time when the whole of it was not lent 
 to the Government. The debt is represented by those Government securi- 
 ties which regularly appear in its published balance-sheet, and with which, 
 so far as the amount of its capital is concerned, it cannot part without a 
 forfeiture of its charter. 
 
 In consideration of this, the whole business of the Government of Eng- 
 land — using that word in its broadest sense — has alwa^'S been done with 
 this one bank. 
 
 The Bank of England, however, is not a Government institution, as 
 is often supposed. It is distinctly a banking corporation with its own 
 body of stockholders who elect its own board, appoint its own officers, 
 receive dividends out of profits, and hold annual meetings exactly as do 
 other banks. In all these respects the Bank of England is on the same 
 footing as an ordinary joint-stock bank. The only difference is that in 
 consideration of its relation to the Government it has powers of circulation 
 of a peculiar kind, as opened up in another chapter. 
 
 But notwithstanding that the Bank of England is not a Government 
 institution, the fact that the whole financial business of the Government 
 passes through its hands, has always been held to constitute a claim on the 
 part of the Government for financial assistance should it ever be needed; 
 and that in preference to the commercial community. If the commercial 
 community were urgent for discounts at the same time as a Chancellor 
 of the Exchequer was urgent for advances, there can be no question which 
 of them would have the preference. Yet the instinct of self-preservation 
 136 
 
LOANS AND ADVANCES TO GOVERNMENTS. 137 
 
 is as strong with the Governor and Company of the Bank of England as 
 it is with the directors of any other corporation, and that would undoubt- 
 edly prevail in case the demands of the Government were likely to endan- 
 ger its existence. This, of course, has been well understood by every 
 Chancellor of the Exchequer from the beginning, and no demand would 
 be made upon the bank that would be likely to bring it into danger. The 
 bank is altogether too valuable an adjunct for any Government to allow 
 its usefulness to be imperilled ; besides, there are other ways in which the 
 Government could borrow to meet pressing emergencies, such as the issu- 
 ing of Exchequer bills and so forth. Yet undoubtedly it has happened 
 at times that the directors of the bank must have felt their position with 
 the Government to be burdensome, notwithstanding the privilege of having 
 its notes made legal tender. A natural longing for freedom to use their 
 immense capital in a way that might seem agreeable to their own judg- 
 ment as directors of other corporations could do, would, at times, almost 
 of necessitj' arise, and if it did so arise, would be pardoned. 
 
 The principle of lending the whole capital of a bank to the Govern- 
 ment prevails also in the United States, as has been set forth in another 
 chapter.' Most of the National banks lend their whole capital to the 
 Federal Government, and receive in acknowledgment bonds for the amount. 
 The banks are authorized to issue circulating notes on the security of 
 these bonds and every possible safeguard has been devised in order to 
 render these notes secure. The Government retains the custody of the 
 bonds, thus insuring that the bank cannot dispose of them. The Govern- 
 ment also furnishes the notes to the bank, thus insuring that the proper 
 amount and no more shall be put into circulation. These notes, though 
 absolutely secured by the Government, were never made a legal tender, 
 the reason probably being that the Government itself became an issuer 
 of legal-tender circulating notes, and is so to this day. 
 
 The Bank of France has a more intimate connection with the Govern- 
 ment of the day, whatever its character might be, than the Bank of Eng- 
 land. The Government is always represented influentially on its board, 
 so that the obligation to meet its necessities bears upon it with even a 
 stronger pressure than in the Bank of England. Still, the Bank of 
 France is not a department of the Government, and its advances must be 
 regulated in the last instance by the all-prevailing law of self-preserva- 
 tion. 
 
 It might be supposed that advances to governments must, in the nature 
 of things, be safe. But experience teaches some bitter lessons in this 
 respect. All governments are not like the Government of England. There 
 have been times, revolutionary times of course, when the obligations 
 even of the Government of France became utterly valueless, and its 
 promissory notes so depreciated that a thousand francs of them would 
 hardh" buy a loaf of bread. Yet these were secured by assignments of 
 Government lands, and hence bore the name of assignats. A similar state 
 of things prevailed in revolutionary times on this Continent when what 
 
138 BANKINXt and CO^rMERCE. 
 
 was known as Continental money of the revolting colonies became as much 
 depreciated as the assignats of France. 
 
 Of this state of things we have seen a repetition in recent times with 
 regard to notes issued by the revolting Southern States. These became, 
 every one of them, absolutely worthless. It is well known in the higher 
 circles of finance in Europe that the Government of Spain has more than 
 once compromised with its creditors, exactly as a merchant does when he 
 cannot pay his debts. What is more, that Government has even com- 
 promised on its compromise. 
 
 At this very time the Government of Turkey is under heavy default 
 on its obligations, and if it were a railway company, we should say it was 
 in the hands of a receiver. A certain portion of its finances are adminis- 
 tered by representatives of its bondholders, comprising French and Eng- 
 lish capitalists, each of whom, in terms of a year about, receives certain 
 allocated revenues, and after appropriating a certain sum for the interest 
 on bonds, pays over the balance to the Turkish Government, if there 
 be any. 
 
 A government is unlike any other debtor in this respect, that if de- 
 fault is made, there is no mode of compelling payment except by going 
 to war. In all ordinary cases of debt the remedy is to appeal to the 
 judgment of the court, which judgment will be enforced against the 
 debtor by the Government. But when a Government itself is the debtor, 
 there is no higher authority to appeal to, unless in these times the interna- 
 tional tribunal of The Hague may be considered such. But how could 
 that tribunal enforce its decisions.^ Nothing but the terrible arbitrament 
 of war will meet the case. Now, private persons, no matter how rich and 
 powerful, cannot levy war. Their case must, therefore, if it is to be 
 enforced at all, be taken up by their own Government, which if payment 
 is refused, can declare war, seize custom-houses and ships, and bring the 
 whole machinery of the defaulting Government to a stand. This was the 
 raison d'etre of the measures taken against the Republic of Venezeula by 
 Germany and England in 1902. 
 
 Bankers therefore who keep accounts with governments and make 
 advances to them have always this risk to reckon with. They cannot com- 
 pel payment. Even if a government endeavors to satisfy the bank by an 
 issue of bonds, there are difficulties and disadvantages even in this simple 
 process. If the Government is a constitutional one, bonds cannot be 
 issued without authority of Parliament; and such an issue may become a 
 matter of fierce contention between opposing parties, may be delayed 
 indefinitely, or refused altogether. Or if the government has succeeded 
 in obtaining authority to negotiate a loan, it may have already exhausted 
 its credit, in which case it cannot press more bonds upon the market 
 without a heavy sacrifice. Canada itself before Confederation, consist- 
 ing only of Upper and Lower Canada (corresponding to the present 
 Provinces of Ontario and Quebec) had sunk so low in credit that its 
 London agents were unable to place further loans upon the market ex- 
 
LOANS AND ADVANCES TO GOVERNMENTS. 139 
 
 ■cept at a heavy sacrifice. These agents being under heavy advances 
 themselves, at one time absohitely refused to increase these advances, and 
 wrote letters, as may be seen in the Blue Books of the time, to the Finance 
 Minister of Canada couched in terms exactly similar to those employed by 
 a banker to a debtor whose bills were overdue. It was natural, therefore, 
 under these circumstances that the bankers of the Government in Canada 
 should be called on for advances to a constantly increasing amount, which 
 advances becoming, at length, really embarrassing, led to consultations 
 and conferences which finally ended in the proposal for a Government 
 issue of circulating notes. The present legal-tender note issue of the 
 Government of Canada had its origin in this way. 
 
 Since this great settlement the credit of the Government of Canada 
 has steadily improved, and its bond issues are almost on as high a level 
 as those of England. Its relations with its bankers have therefore never 
 since ceased to be satisfactory; and at times when other Canadian banks 
 have been called on to co-operate in placing loans on the London market, 
 they have gladly consented to do so. It is to be noted, however, that the 
 Government of Canada, through all the periods of strain and stress of 
 commercial and financial depression has never failed to meet the interest 
 on its bonds to the day. 
 
 There are, however, other forms of Government advances than those 
 referred to; namely, those of the separate States of the American Union, 
 or of the separate Provinces of the Dominion of Canada. Each of these 
 has its own financial system. It levies taxes within certain limits, collects 
 and disburses revemie, and places bonds upon the market exactly in the 
 same manner as an independent State does. Each is a separate financial 
 entity, and has a character and credit of its own. 
 
 The Provinces of Canada differ widely in their financial position; but 
 all have maintained a reputation for meeting interest on their bonds with 
 as much regularity as the Dominion Government itself. Nevertheless, 
 there would be a wide dif!'erence of judgment in the case of an application 
 for loans as between one Province and another. This matter is well 
 imderstood by financiers. 
 
 As to the mode in which pressure could be brought to bear in case of 
 difficulty or embarrassment, an appeal in Canada would undoubtedly be 
 made to the Dominion Government, which Government possesses powers 
 in the way of compulsion in the fact of its granting subsidies to the 
 different Provinces. The case may never arise when the question of with- 
 holding a portion of these subsidies to meet the claims of creditors may 
 become a practical one. Nevertheless, it is conceivable that under circum- 
 stances, say, of exceptional extravagance in expenditure on the part of a 
 particular Province and consequent default, the claims of the creditors 
 may be carried before the higher power and demand made that pressure 
 'be put upon the defaulting Province. 
 
 In this respect the Canadian Provinces differ from the States of 
 
140 BANKING AND COMMERCE. 
 
 America. The latter receive no subventions from the Federal Govern- 
 ment, and their finances are on an entirely independent basis. 
 
 It may be laid down as a general principle that the advances of a bank 
 to a Government need to be regulated by the same fundamental rules as 
 those to a municipality or a business corporation. A prudent banker 
 dealing with a Government will keep advances down to such a level that 
 they can be repaid out of the j'ear's revenue. These advances should 
 always be represented by and rest upon this asset within sight; with the 
 exception, of course, of advances in anticipation of the floating of a duly 
 authorized loan; in which case the sole matter for consideration will be 
 whether it is likely to be successfully placed upon the market. 
 
 But in the case of a Government undertaking great works of con- 
 struction, such as Canada has more than once undertaken, to its embar- 
 rassment, a banker will be careful lest his advances do not eventuate in 
 a "lock-up" which is embarrassing to himself. 
 
 LoAXs TO Municipal Corporations. 
 
 This is a branch of banking advances in which grievous mistakes 
 have, ^t times, been made, and respecting which it is desirable to act 
 according to fixed rules suggested by experience. 
 
 It will be found on consideration that the same general rules and con- 
 siderations apply here that need to be observed in other lines of banking 
 advances. In the business of a corporation, as in that of a manufacturer, 
 there are expenditures on permanent works, and expenditures which may 
 be termed "current and annual." 
 
 It is evident that the first class of expenditures should be represented 
 by bonds spread over a term of years, and that only expenditures of a tem- 
 porary character, resting upon collectible revenue, should be represented 
 by loans from banks. With these two leading principles kept well in mind 
 a bank may steer its way safely through this class of business. 
 
 There are enterprising corporations as there are enterprising manu- 
 facturers, and the readiest way of obtaining money for schemes of im- 
 provement and extension is to apply to the bank where the account is kept. 
 
 Now, there are expenditures regularly going on in every municipality 
 to provide for which an annual levy of taxes is made. It is obvious there- 
 fore that a bank may reasonably make advances to the amount of such 
 levy, pending the collection of taxes, of course, with a fair allowance for 
 such as are not collected or collectible. 
 
 But expenditures for permanent improvements can rarely be provided 
 for out of the annual levy. The money required should therefore not be 
 borrowed from a bank, unless indeed, bonds, duly authorized, are about 
 to be put on the market, and a loan is desired in anticipation. In that 
 case the banker's business will be to see that the bonds are such as are 
 likely to find favor in the market. 
 
 But even during the currency of a year, a banker may need to be 
 careful about the amount he advances. An era of extravagance will some- 
 
LOANS AND ADVANCES TO GOVERNMENTS. Ml 
 
 times set in with a municipality under the regime of an enterprising mayor 
 •or council, exactly as it may with an individual. In that case there will 
 be strong pressure put upon a corporation banker to extend his advances 
 beyond due bounds. He will then need to remember that there are charges 
 upon the income of the municipality which take precedence of his advances. 
 Wages of employees, for example, and interest on bonds; these cannot 
 be left in abeyance. For it has been the just pride of Canadian munici- 
 palities (with one or two exceptions after the collapse in the Northwest) 
 that they never made a default in their bonds, either of interest or prin- 
 cipal. 
 
 In carrying on the account of a corporation a banker will need to 
 keep the foregoing in view. He will also be careful not to allow one 
 year's advances to be carried over into another. Each year should stand 
 on its own foundation. 
 
 This is the regular and normal working of advances to corporations. 
 But both in times of prosperity and adversity there are apt to arise circum- 
 stances which militate against it. In times of expansion and prosperity 
 when a close watch is not kept over the finances by corporation officials, 
 expenditures of a fixed character sometimes get so mixed with those that 
 are temporary that the moneys advanced for the one may become locked 
 up in the other. This is especially the case when advances are made in 
 the form of an overdrawn current account. Nothing is more easy than for 
 a treasurer or finance committee to issue cheeks ad libitum, the result of 
 which is that the banker finds himself at the close of a corporation year 
 with a heavy undischarged debt. 
 
 This, of course, may not give a banker the same anxiety as if the debt 
 were against a mercantile firm. A corporation cannot go out of business 
 as a merchant can; and the cases of corporations being absolutely unable 
 to pay their debts have been extremely rare. Usually the worst conse- 
 quence of abnormal advances is that a certain amount of money is locked 
 up. Now, though a "lock ujd" is not the same as a bad debt in its ultimate 
 consequences, it may, if large enough, be a cause of real embarrassment. 
 It may, however, be thought that a banker's advances can always be pre- 
 vented from becoming embarrassing by a corporation issuing bonds, or in 
 a last resort, exercising the power of taxation. There are, however, serious 
 limitations to both of these plans. Corporations cannot issue bonds except 
 within the limits of their charter or the general law. If attempts are made 
 to extend such powers, the ratepayers are very apt to initiate opposition. 
 With regard to taxation the same objection would apply in even stronger 
 form. Nothing provokes more determined opposition than undue increase 
 of taxation. 
 
 The only mode left under such circumstances is a considerable re- 
 trenchment of expenditure; but that, too, is a very difficult process, as 
 anyone connected with municipal matters knows well. 
 
 A banker therefore who has incautiously allowed his advances to drift 
 into this position may have the mortification of finding it impossible to 
 
142 BANKING AND COMMERCE. 
 
 collect for years tlie amount due, and of being under the necessity of 
 curtailing advances to mercantile customers. All that has been observed 
 with regard to this matter is founded on actual experience. 
 
 The total amount which a municipal corporation may prudently bor- 
 row, that is in a permanent form, is a question on which different opinions 
 may be and have been entertained. It generally resolves itself into a 
 question of so much per capita of population. But here distinctions must 
 be made. For some municipalities are so much wealthier than others, as 
 a whole, that an amount per capita that would be a serious burden to one 
 would rest lightly upon another. But the limit of safety will be found, 
 as a rule, to lie between sixty and eighty dollars per capita: the former, 
 let us say, in the case of a municipality having a considerable population 
 of artisans, and the latter where a much larger percentage consists of the 
 well-to-do class; such, for example, as towns resorted to for the purposes 
 of health or recreation, or which are agreeable places of residence for 
 persons of competence. Suburban towns within reach of a great city 
 can bear a higher rate of debt per capita than many others; but there 
 have been on this Continent (but not in Canada) some striking instances 
 of extravagance in such places under the regime of an enterprising 
 mayor or council, when new streets, squares and boulevards were made in 
 advance of population, burdening the existing inhabitants to such an 
 extent that the taxes became intolerable, and compelled many of them to 
 leave the place altogether. Thus the expenditure defeated its object. 
 Population, instead of being attracted, was driven away, so that those 
 who had property in the place and could not leave were compelled to 
 allow the bonds of the corporation to go into default. Under such a cloud 
 as this an attractive municipality might lie for years, its bonds becoming 
 for a time almost worthless imtil some forced arrangement was made with 
 creditors that lightened the burden of taxation, and enabled the natural 
 advantages of the locality to assert themselves and bring in population. 
 
 Such a state of things as this would scarcely arise until the municipal 
 debt had increased to more than a hundred dollars per capita. 
 
 Sometimes, in a large and prosperous city, under the regime of an 
 enterprising board of aldermen, great works of improvement would be 
 planned and carried out year after year that added nothing to the 
 revenue of the city, while they added immensely to the burden of taxation. 
 Such expenditures might at length become so serious as to arouse organ- 
 ized resistance on the part of the property-holders, and appeals to the 
 Legislature to limit the borrowing power of the municipality. Under 
 circumstances such as these, if a bank went on making advances on open 
 account, there might be danger of such advances being declared to be 
 beyond the limit of the law, and considerable difficulty might arise as to 
 liquidation. 
 
 The above observations as to the limit within which the debt of a muni- 
 cipality should be kept are of course irrespective of expenditures of a 
 remunerative character. If a municipality borrows for the purpose of 
 
LOANS AND ADVANCES TO GOVERNMENTS. 143 
 
 acquiring water-works, or other revenue-producing property, it may safely 
 exceed the limit laid down herein, always on the supposition that the 
 price paid for the same be such that the revenue will meet the interest 
 and provide a sinking fund in addition. 
 
 But experience shows that a municipality has always a tendency to 
 manage such works less economically than a private company would; 
 hence there is a constant danger that revenue may be insufficient, and 
 ordinary taxation resorted to for meeting the deficiency. 
 
 The banker of a corporation needs, therefore, under all circumstances 
 to keep a close eye upon its financial management. And he may render 
 essential service to the citizens by imposing, when needed, stringent 
 checks upon borrowing.^** 
 
 48 Nothing in this chapter need prevent advances to a corporation pending the 
 sale of a duly authorized issue of bonds, on the strict agreement that such ad- 
 vances shall be liquidated out of the proceeds of the bonds. A banker in such 
 cas-es may act as intermediary in the matter and have the bonds in his own pos- 
 session until a sale is effected. In all such cases it is desirable that a separate 
 account be opened, so as to prevent these extraordinary advances from becoming 
 mixed with those that are of an ordlnar>- character. 
 
CHAPTER XIX. 
 
 LOANS ON STOCKS AND BONDS. 
 
 Growth of This Branch of Leading — Call Loans — Loans on 
 Time. 
 
 THIS branch of banking loans has come into great prominence of late 
 years on both sides of the Atlantic, owing to the increasing difficul- 
 ty of obtaining satisfactory commercial loans and discounts. The 
 immense increase in the deposits entrusted to Canadian banks has more than 
 kept pace with the increase of satisfactory commercial business; hence, with 
 many banks, the larger ones especially, it has become a regular branch 
 of business to make advances on the security of bonds and stocks ; not that, 
 as a rule, they have deliberately passed by commercial business in order 
 to enter upon this branch. No bank has a right to do this, for the very 
 object for which banks are chartered is to promote trade and commerce. 
 It is only when this requirement is fulfilled that banks can fairly enter 
 upon this other field of enterprise. To put it in one word: it is only the 
 banker's spare funds that can be properly so emjjloyed. The amount of 
 such spare funds varies with the course of business and the season of the 
 year; but, generally speaking, there is always sufficient to engage some 
 measure of a banker's attention, and to make it important that he should 
 master the principles on which loans should be carried on. 
 
 There are two very important differences in this class of business, 
 usually expressed by the term, "loans at call," or "loans on time." There 
 is- also a distinction between "loans on bonds" and "loans on stocks." 
 
 Loans on Call. 
 
 By far the larger part of these are secured by stocks, of which there 
 is in Canada a comparatively small range to choose from. Loans on 
 bank stocks have been prohibited; for, when permitted, they gave rise 
 to dangerous speculation. There remains, therefore, only the stocks of 
 railways, shipping companies, and industrial enterprises. A banker in 
 dealing with these will do well to make it a rule to lend on no stock that 
 is not listed and regularly quoted. He will require as a minimum a 
 margin of ten per cent., but the higher the price the larger percentage 
 of margin he will exact. In fact, when a stock is obviously inflated, he 
 will do well to fix a definite limit to his advances, no matter how high the 
 stock may be quoted. This is a cardinal rule, and it will be found very 
 dangerous to depart from it. He will be careful to have a substantial 
 borrower, and avoid dealing with impecunious speculators, no matter 
 how good the security may seem to be. And he will keep his eye upon 
 
 Hi 
 
LOANS ON STOCKS AND BONDS. 145 
 
 the fluctuations of the market, and take means to keep well informed of 
 the doings, speculations, and schemes of the principal operators. He 
 will do well to observe certain rules or traditions, the result of experience, 
 which, when applied, will rule out wrong classes of securities altogethei. 
 The greater part of call loans will be to stock brokers. Loans to them 
 are prima facie safer than to principals, for the reason that they them- 
 selves have a principal behind them on whom they can call if needful. A 
 banker dealing with brokers is, therefore, almost in a position of having 
 a double security, besides the stock itself. A banker will take care to 
 have his risks well distributed, not only amongst persons, but amongst 
 stocks. He will take care not to have too much loaned on any one 
 stock, otherwise he may find to his annoyance that he has been a party 
 to some scheme for inflating a stock beyond a reasonable value. He may 
 then be caught in a reaction, and find that he has locked up his money, 
 instead of having it at his disposal on a day's notice. In a limited market 
 like that of Canada, a banker will need to be careful not to have too 
 much money out upon it. Experience has proved that this market cannot 
 stand any very heavy strain of calls for money, especially on stocks 
 that have a local value only. 
 
 Some stocks there are on which money can always be obtained in New 
 York or London. These, of course, can bear a much heavier strain of 
 call than the rest. But if advances rest on stocks that are not known in 
 New York or London, the calling in of loans may sometimes result as 
 "the calling of spirits from the vasty deep" by the Welsh bard was said 
 to do. 
 
 But much of the money lent on call by Canadian banks is through 
 offices in New York. There the field is immensely greater. There is a 
 much greater variety of quoted stocks, the changes in which are known 
 far more rapidly than is the case in Canada. There are large numbers of 
 brokers of solid means and standing, who are well able to stand the 
 changes and even shocks of the market, as has been repeatedly proved. 
 The tone of honor amongst this class is high. If calls for money are 
 made, it is a point of honor to respond at once; and if the call is for 
 more margin, it is at once lodged. No complaint is ever made either of 
 the suddenness or the amount of any call; or even of the sale of stock in 
 case the call is not responded to — a rare event, however. 
 
 The great objection to the New York market is the rapid changes 
 in the rate for money, and the fact that the rate may be as low as two to 
 three per cent, for months together. Then, in a remarkably short time, 
 the market may assume such a condition that rates of ten, fifteen, or 
 even twent}'- per cent, per annum are paid without grumbling. This state 
 of the market, however, rarely lasts more than a few days, or a few weeks 
 at most; and, during its continuance, a vast amount of clearing out of 
 weak speculators usually takes place. 
 
 The New York market, as is well known, is occasionally visited by 
 
 10 
 
 OF THE 
 
 UNIVERSIXX 
 
116 BANKING AND COMMERCE. 
 
 spasms and cataclysms. Memories of "Black Fridays" still linger about 
 Wall Street (as indeed they do about Lombard Street), but these spasms 
 are not so common now as formerly. They depend partly upon the 
 money market itself. A continued period of very tight money will result 
 in sharp spasmodic movements in which a fall of twenty to thirty per cent 
 (or even more in some cases) will take place along the whole line of 
 stocks in a single day. Yet so solid is the underlying stratum that it 
 has been known again and again that banks having large sums out "at 
 call" have found themselves at the end of a most convulsive day in just 
 as good a position as at the beginning. Their calls for margin or for 
 payment had, in every case, been responded to, and not a single failure 
 occurred amongst the circle of their customers. 
 
 Loans on Time. 
 
 The principal point of difference between call and time loans is that 
 the latter are more nearly analogous to the ordinary loaning operations 
 of the bank, and are not a mere employment of funds that may be wanted 
 at any time, and must be at command on a day's notice. 
 
 A banker who is purposing to make loans on time will consider 
 whether the prospective state of his finances warrants this mode of em- 
 ploying his funds. He will also scrutinize the security more carefully 
 and avoid such stocks as have a tendency to considerable fluctuations 
 during a given course of months. It has happened to a lender of money 
 on time, that circumstances transpired making it most desirable, and in- 
 deed necessary for safety, to call in the loan. But being precluded 
 from doing this, he was compelled to allow it to run on and so to submit 
 to a loss. Loans on time are often advantageous to a banker with whom 
 money is plentiful, %vhen the rate he can command is good. He is saved 
 from the trouble attendant on the constant changes involved in dealing 
 with call loans, and will sometimes have the satisfaction of having his 
 funds out at a higher rate than call loans are bringing. Of course, his 
 experience may be the contrary. 
 
 There is one fundamental rule which experience has suggested in 
 dealing with loans on stocks, viz., that it is never desirable to lend direct 
 to the promoter of a company or to the man who owns and controls the 
 majority of the stock in it. 
 
CHAPTER XX, 
 THE DISCOUNTING OF TRADE BILLS. 
 
 Definition of Thade Bills — Discounting with More Than Onb 
 Bank — Bills upon Branches of the Same House — Bills of 
 Selling Agents — Bills of Wholesalers on Retailers — Bills 
 of Manufacturers on Merchants. 
 
 TRADE bills ordinarily (though there are other classes) are repre- 
 sentatives of sales, and arise at the point where a bargain for 
 purchase of a commodity has been consummated, and the property 
 ia it has passed to the purchaser, who has given a written promise to 
 pay for if. That promise to pay, in accordance with universal modern 
 practice, is written on a brief document called variously a Jiote or a bill. 
 
 Sometimes the promise is in the form of an acceptance of an order 
 or direction to pay. It is then called a bill. But when it is a simple 
 promise to pay, it is called a note, or more definitely, a promissory note. 
 
 These distinctions, however, are principally matters of form. The 
 essence of all such documents, when legitimate and regular, is that 
 certain goods have been bought, and that the purchaser has given written 
 engagement to pay for them. 
 
 Now, when such documents arc what they purport to be, and are 
 given for value received (these words being of the essence of the bona 
 fides of the document though not of its legality), the business of a banker 
 in dealing with one of them is comparatively simple. He has, in the 
 first place, to be satisfied that the signature of the maker or acceptor 
 of the document is genuine. If the maker or acceptor is an officer of a 
 company, he is bound to enquire whether he has authority to bind his 
 employers by his signature. Being satisfied on the point, he will next 
 scrutinize the document to see whether it is drawn out in accordance with 
 the law. For the law in respect of these simple looking documents is 
 more precise and more elaborate than it is with regard to almost any 
 other documents involving a contract. 
 
 Byles on Bills of Exchange is a well known handbook. Yet, though 
 containing hundreds of pages, it is so far from exhausting the subject 
 that hundreds of cases have been argued and decided since it was written, 
 the record of which would occupy many volumes more. The subject 
 appears to be unfathomable, for new cases are constantly arising involv- 
 ing new considerations, based on new sets of facts, and demanding, if 
 not new laws, new a})plications of those already existing. 
 
 The more abstruse points connected with notes and bills are matters 
 for the consideration of a lawyer alone, and a banker, if he is wise, will 
 
 147 
 
14S BAXKING AND COMMERCE. 
 
 let his solicitor deal with them. But there are certain general principles 
 which every banker ought to have, so to speak, "at his fingers' ends," 
 viz., that the document shall not have been altered in any essential point; 
 that is, as to amount, or date, or time, or the person to whom it is payable, 
 or the person who promises to pay; also that it promises to pay a specif c 
 amount at a specified time, and without any conditions; also that it is 
 properly endorsed. All these are of the essence of the document. It is 
 not a bill that can be sued on by a banker if there is a failure in one of 
 these respects, although the seller of the goods would always have the 
 right to recover on his contract. 
 
 But a bill may be made in perfect accordance with the law, and the 
 person who brings it to the bank may have a perfect right to transfer it, 
 and yet it may not be a desirable document for him to discount. The 
 person promising may not be what is generally called "good" for its 
 amount; which brings up once more a commercial question whether the 
 seller of the goods was wise in selling him so large an amount on credit 
 as he has done. 
 
 It is a banker's business to keep informed as to the whole series of 
 bills made by any one promissor standing in his books, to keep the total 
 in mind, and to consider not the single document presented to him at 
 any one time, but the amount of the whole of the bills made by this one 
 person or firm that may be afloat. And this brings up another point of 
 vital importance, viz., whether the bank's customer keejis more than one 
 bank account. For in that case the banker will need to keep himself 
 informed of the amount of bills made by the same party that are domi- 
 ciled in another institution. Want of consideration on this point will 
 result in constant misconception. 
 
 Let us suppose, for argument's sake, that the amount of the bills of 
 a certain promissor in his own office is $2,000. That figure will be before 
 him whenever a reference is made to the bills of the party. He will 
 recall the information he has on record respecting him, and applying 
 that information to this specific amount will exercise his judgment ac- 
 cordingly. 
 
 But if the merchant who offers the paper has another discount 
 account, he will, in all probability, oiFer the paper of the same customer 
 in that quarter also. 
 
 Thus the very basis of a banker's judgment will be a misconception. 
 For he is thinking of a credit of $2,000 ; whereas, he ought to be thinking 
 of some larger sum, viz., $3,000, or $5,000, or even more; and may awake 
 to the true condition of things only when he is prevented from applying 
 a remedy. For his own customer, i. e., the wholesale merchant, may fail, 
 and his failure be due to the fact of his having given too much credit. 
 Then, for the first time, the banker realizes the true position. The 
 retailer who was considered perfectly good for $2,000 is found quite 
 unable to pay $5,000 or $10,000, and the merchant who has been con- 
 
THE DISCOUNTING OF TRADE BILLS. 119 
 
 sidered prudent in crediting the retailer $2,000 is discovered to have been 
 rash and imprudent in trusting him double or treble the amount. 
 
 The question therefore of what is called in banking phrase "a divided 
 account" is of the first importance in connection with the discount of cus- 
 tomers' bills. It is even of more importance in connection with loans of 
 money. 
 
 In a banking system like that of Canada, where branches are estab- 
 lished at many points, a banker has also to consider whether his cus- 
 tomer is carrying on business in more than one centre, and keeping a 
 discount account at some other branch of his own, or some other bank. 
 This, of course, is a matter for the consideration of those who from the 
 head office of the bank have supervision over what is going on at the 
 branches. But in general it may be said that it is not desirable for a 
 customer to have a discount account at more than one branch, though 
 he may, of course, keep another deposit account. And it is very unde- 
 sirable, as a rule, for a customer who carries on business in two places to 
 have bills discounted for him drawn upon his own firm in another centre 
 of business. It is common, in these days, for large houses to establish 
 branches or agencies in other cities; and it appears as natural at times 
 for the central establishment to draw bills upon the branch representing 
 goods shipped to it as for it 4:o draw bills upon the purchasers of goods. 
 But consideration will show that there is an essential difference between 
 the two cases. In the one there is an actual transfer of property to an 
 independent party, whose obligation to pay is a distinct contract; while 
 in the other, the goods are only transferred from one warehouse to 
 another, the obligation of the keepers of the second warehouse adding no 
 strength whatever to the bill. The paper thus created differs in no wise 
 from that which might arise if a firm had two warehouses in different 
 streets of a city, and one warehouse drew bills upon the other. 
 
 All such paper will be classed by an intelligent banker not amongst 
 his trade bills, but as loans without security. Such loans may be good 
 or otherwise according to circumstances, but the documents are not trade 
 bills. 
 
 But now, supposing the bill to be genuine, as bearing the real or 
 duly authorized signature of the parties to it, and that it be properly 
 drawn in accordance with law, the banker, bearing in mind the total ' 
 amount that he is asked to discount of the same person, will have before 
 him the fundamental question, whether the maker of the bills can be 
 relied on to pay them. To the settlement of this question a banker wiU 
 bring all the information at his command from outside sources, aided by 
 his own experience of the same name in the course of an account, or in 
 that of other persons. It not infrequently happens that a purchaser of 
 commodities may deal with several houses in the same trade, all of whom 
 keep accounts in the one bank, either at the head office or at some of the 
 branches. The banker has thus a somewhat wide range of experience 
 
1-0 BANKING AND COMMERCE. 
 
 and information at his command. A large Scotch bank may have a 
 mercantile account in Glasgow, and discount thereat the bills of traders 
 in dift'ercnt towns of the interior. But some of these traders may buy 
 goods also in London, and their bills may be offered at the London office 
 of the same bank. Thus, from two sources the bank can form a judgment 
 as to the quality of the bills. The same principle will apply to cities in 
 Canada, for it is common there also for retail traders to make purchases 
 in more than one centre of wholesale trade. Thus, their bills may come 
 under the review of a banker in any one of the centres where the head 
 offices of banks are situated. 
 
 The same custom of buying from wholesale houses in other cities 
 doubtless prevails in the United States. But American bankers have not 
 the same facilities for discovery that the bankers of Canada have. 
 
 Almost every large wholesale firm has a circle of customers who, for 
 various reasons, deal almost exclusively with it. The bills given by this 
 class of customers will swell up to a much larger total than those of the 
 average trader, and the attention of the banker will very naturally be 
 given to them with corresponding care. For experience shows that the 
 line of credit given by a wholesale merchant to a retailer of this class is 
 very apt to be abused. 
 
 The retailer gradually acquires the habit not only of buying his goods 
 from the merchant, but of leaning upon him financially, looking to him 
 for help in emergencies, expecting help when he has not the wherewithal 
 to meet his bills; in fact, practically making the merchant his banker. 
 In such cases it is not uncommon for a merchant to hold security, which 
 security may, or may not, be strictly applicable to the paper held by the 
 bank. Such security may be for an open account, or a balance due over 
 and above the notes given for goods, in which case the banker would 
 derive no benefit from it in case of failure. 
 
 When the amount of a retail customer's paper swells up beyond the 
 average, it will always be wnse for a banker to ascertain what is his 
 total indebtedness to the merchant; and, supposing he has given security, 
 what is the nature of it, and the terms on which it has been given. And 
 if an account begins to show unfavorable features, it may be desirable 
 to have the security transferred. 
 
 It is in connection with customers* paper of this kind that the danger 
 of a divided account becomes manifest. For, in that case, it is certain 
 that the bills of the customers who owe the largest amounts will be 
 divided between two or more banks. The result is that an excessive 
 credit is apt to be concealed or overlooked. The banker, having before 
 him a statement of the account of a certain customer, may not notice 
 what he would consider an excessive amount under one name. And 
 though he may have been informed that there is another bank account, 
 he does not always recollect at the moment that the amount he has before 
 him is not the true total. But if the whole of the paper of the retailer 
 
THE DISCOUNTING OF TRADE BILLS. 151 
 
 were in his own hand, he would at once be struck with the amount as 
 excessive, and take measures accordingly. He would almost certainly 
 have refused to discount so large an amount of paper at all, and thus 
 have rendered his customer essential service. Or if inadvertently so 
 large an amount had been allowed to creep in, he would require reduction 
 or security, putting the customer on his guard by such action, and 
 indicating to him that the account of his debtor was becoming dangerous. 
 When a wholesale firm has failed, the failure has often been brought 
 about by excessive credit given to a small number of customers whose 
 paper has been distributed between two or three banks. 
 
 Remarkable instances of this kind have been known in the experience 
 of Canadian banks. The failure of a wholesale firm has revealed more 
 than once an amount of credit as having been given to certain retailers 
 that was simply appalling, and which could never have happened if 
 all the bills had been domiciled with one banker. The same danger arises 
 in the United States when bills are sold to bill brokers in New York, 
 as well as discounted at a merchant's own bank. 
 
 The discounting, then, of customers' bills by a banker is not so simple 
 a matter as might be supposed. 
 
 The note, say, of John Thompson to McGregor & Co. for $500 
 may seem to be a good bill, and the risk of discounting it a mere nothing. 
 But if the banker has already discounted Thompson's paper to the same 
 firm for $5,000, the question whether he shall take $500 more is a 
 different affair. If the banker has also in his bill-case, Thompson's 
 paper to Williamson & Co., the affair is more complicated still. If in 
 addition, McGregor & Co. keep an account with another bank, and have 
 under discount there more of Thompson's paper, amount not known, the 
 question of the $500 note has an aspect that a casual glance does not 
 begin to reveal. Still further, if in addition to all the notes, the banker 
 is aware that McGregor & Co., and probably Williamson & Co. as well, 
 have an open account against Thompson, the considerations with regard 
 to that one note may well be of such a character as to make him take a 
 long time to deliberate about it. 
 
 Yet this is a fair si^ecimen of the manner in which much of the 
 discounting of customers' paper has to be conducted. In every case, the 
 consideration has to be of the total amount of the same name in the 
 banker's possession, then of the position of the maker, then that of the 
 iiierchant himself, then of the total amount of the latter's whole discount 
 line; and also, if he is known to have more than one account, the amount 
 and character of the liability under that. 
 
 It might be thought that if such complicated considerations present 
 themselves with regard to every note offered, the time necessary to com- 
 prehend them would prevent any discounting being done at all. But a 
 banker who understands his business and gives close attention to it, 
 acquires a sort of instinct, which, aided by accurate information periodi- 
 
152 EAXKIXG AND COMMERCE. 
 
 oally placed before him, enables him to deal with such matters promptly 
 and without wasting either the customer's time or his own. 
 
 But such a habit of close attention is absolutely necessary to efficiency, 
 and not less is the habit of constantly consulting his records and of 
 srranging the summaries of his customers' discounts so that he may be 
 able at a glance to see how each of them stands, and how much paper of 
 each retailer is generally offered by mercantile customers. 
 
 The foregoing observations largely refer to the notes generally 
 offered by importing merchants. But when such merchants have estab- 
 lished a character for prudence and attention to business, and are known 
 to have sufficient capital, it is common for the banker to "pass" such 
 paper as is offered without special scrutiny of the names at the time. 
 Indeed, it may fairly be said that a merchant has never established him- 
 self on a proper footing with his banker until the bills he offers can be 
 passed at once. This, however, can only be the case where a bank has 
 the whole account. 
 
 But for all that, the paper will come under periodical review, and a 
 judgment will be passed upon the names which compose it, in those sum- 
 marized statements which are presented to the banker by his officers, 
 which statements are almost of as much importance to him as the compass 
 is to the captain of a ship. 
 
 There are other classes of trade bills than these, such, namely, as 
 arise in connection with manufacturing industries and require to be 
 judged by different rules. The relation between a manufacturer and 
 the purchaser of his goods is often of an entirely different character 
 from that of a wholesale merchant and the retailer. 
 
 In transactions between a wholesale merchant and a retailer the 
 former is generally the more important person. But when the manufac- 
 turer sells to the wholesale merchant, it is not infrequently the case that 
 the purchaser has a far larger capital than the seller. 
 
 Included in the category of manufacturers is the large class of owners 
 or operators of flouring mills and saw mills; though, as has been ob- 
 served, they are sometimes not thought of as manufacturers at all. 
 
 Many of these mills are small concerns, yet they occupy a most useful 
 place in the industrial development of the country. Such as these will 
 have as purchasers the large merchants of central cities, whose reputed 
 wealth and standing give them a position much beyond the persons from 
 whom they buy. 
 
 The bills of houses of this kind are generally esteemed by bankers 
 as of a choice character; for they are, as a rule, short, and as a rule, 
 paid at maturity. If a wliolesale merchant were to desire a renewal of 
 any of his obligations, his credit would be impaired at once. 
 
 The bills drawn by a saw miller in Canada u]j()ii lumber houses in the 
 United States are often of a high quality, yet a banker will need to kee}) 
 
THE DISCOUNTING OF TRADE BILLS. 153 
 
 himself advised from time to time, and especially from season to season, 
 of the operations of such houses. 
 
 The bills of woolen and cotton mills upon dry goods and clothing 
 houses are of the same class as the last. They, as a rule, are promptly 
 paid, for the reason just assigned. In fact, their regular payment is 
 sometimes the reason why a banker is deceived by them. The wholesale 
 merchant must pay his obligations promptly or stop payment altogether. 
 Thus, when such a house does stop payment, it is usually without any 
 premonitory symptoms, such as the asking for renewals, or letting an 
 acceptance occasionally be dishonored. 
 
 Bills Drawn Against Consignments of Goods. 
 
 There is, however, a class of bills, which, though having the appear- 
 ance of customers' paper, and being generally classed as such, does in 
 reality take its rise from different circumstances altogether. 
 
 The ordinary trade bill represents a purchase of goods. But in some 
 cases, as has been shown in an earlier chapter, a selling agent is em- 
 ployed in large cities who receives goods as a purchaser would do, and 
 accepts bills against them in favor of his manufacturing correspondent. 
 These bills naturally run up to large amounts; in fact, to the whole sum 
 which the bills of a number of purchasers would have done had sales been 
 made direct to them. The arrangement saves the manufacturer much 
 labor, for instead of drawing on a multitude of traders, he only draws 
 upon a single agency house. 
 
 But it is obvious that the risk is heavy, for in case of misfortune to 
 the agent, the manufacturer becomes a creditor of a bankrupt estate to 
 such an amount that he may be landed in bankruptcy himself. These 
 bills, however, are of an exceptional class, for the property in the goods 
 against which they are drawn has not passed to the drawee. 
 
 The bills drawn by a flour miller or pork packer upon a consignee 
 against goods sent for sale are a variety of the same class. If drawn 
 against merchandise, a banker would look on them with considerable 
 favor, objectionable as the practice of consigning is, so far as the owner 
 is concerned. But it is not uncommon for such relations to be established 
 between consignor and consignee that the latter will sometimes accept 
 bills before goods are shipped, and for this, in time, to degenerate into a 
 practice of drawing without reference to merchandise at all. When 
 matters have arrived at this shape, it may be assumed that both jiarties 
 are pretty far on the way to insolvency. Yet the consignor's banker may 
 not find it out until both parties fail, and the true character of the paper 
 is revealed. 
 
 The only safe mode of dealing with bills drawn against staples like 
 flour, grain, pork, or similar articles is to require a bill of lading to be 
 attached to them. This, in fact, has now generally come to be the case; 
 the only question being whether the goods shall be to "order" generally. 
 
154 BANKING AND COMMERCE. 
 
 or to the bank's order, or to the order of the purchaser or consignee. 
 In the latter case the bill of lading gives no practical security, except 
 to insure that the bill is drawn against merchandise. In the two former, 
 the purchaser cannot get the goods without the bill of lading, and it is 
 for the banker to say whether he will give it up on acceptance or retain 
 it until payment. The last is the usual course. But the drawee may 
 refuse to accept, in which case the bank has the goods as security. What 
 he shall do with them is generally a matter of arrangement with the 
 drawer. 
 
 Accommodation Bills. 
 
 There is, however, a class of bills which have generally been known 
 by the appellation of "accommodation," but which, as will be shown, 
 ought properly to be designated by a severer epithet. 
 
 For such bills, as a rule, are the expression of a written falsehood. 
 It is not essential to the legality of a bill to append the words for value 
 received, for which reason the words are not found in every bill that is 
 drawn. But it was once universal, and it is almost universal now. The 
 practice is founded on the reason of things ; viz., that the promise to pay, 
 or the acceptance of an order to pay, should be a warrant to any man who 
 is asked to give cash for the document, that a genuine transaction is at 
 the bottom of it. That the maker owes the money, that he has received 
 value, raises a strong presumption that he will pay the bill. This is the 
 natural order of things, and it is this that gives a value to the bill it 
 would not otherwise possess. For unless the maker becomes bankrupt, 
 it is certain he will endeavor to pay the bill. But if he does not owe the 
 money, he may do all that is possible to avoid payment. Thus the words 
 "for value received," though not essential to the legality of the bill, are 
 important as bearing on its genuineness. 
 
 It consequently follows that these words, if used on a bill which is 
 not founded on a debt owing by the party that made or accepted it, are 
 a written falsehood. The document therefore is a fraud. Even if the 
 words are not there, when the bill has the form and outward character 
 of a bill representing a business transaction, when there is no such basis 
 for it, the bill, if passed at all, will be passed on false pretences. 
 
 In banking practice there are found to be various descriptions of 
 notes of this kind, which differ considerably from one another. 
 
 A merchant, for example, when sales are slow, and bills are scarce, 
 and having payments impending which he must meet or lose credit, will 
 sometimes ask one of his customers to make a note or accept a bill for 
 a larger amount than he owes. In this case the merchant will probably 
 promise to send goods at a future day to cover the extra amount. The 
 bill will, in such a case, be partly genuine and partly fraudulent. But 
 the words for value received, should they be written on the bill, will be 
 wholly false. 
 
 Such bills as these are pcrliaps more dangerous than those which 
 
THE DISCOUNTING OF TRADE BILLS. 155 
 
 liave no business foundation at all. It is almost impossible for a 
 banker to detect the fraudulent element, seeing that the bill is made by a 
 trader known to have dealings with the house. It would be difficult for 
 a merchant to obtain such a bill from a man who owed him nothing at 
 all; and if he did, a banker would more easily find it out. If such a 
 practice therefore is entered on, it is generally with a customer who has 
 regular dealings with the house, and is in the constant habit of giving 
 them bills in settlement. The practice, however, is a very dangerous one 
 for the merchant himself. The single instance affords so ready a mode 
 of obtaining money that there is a constant temptation to continue it. 
 Like other evil habits, this is apt to grow by indulgence, it may therefore 
 come to pass that there is a constant (but fluctuating) element of fraud 
 in the whole line of this merchant's discount. If indeed the merchant 
 informed his banker of the real state of the case; if he advised him, 
 let us say, that of the bills he offered for discount a certain amount, 
 twenty per cent., thirty per cent., or otherwise, did not represent business 
 transactions, he would be relieved from the charge of fraud. But we can 
 scarcely conceive of the merchant having the coolness to do it; and if he 
 did, of the banker being simple enough to go on discounting the bills. 
 The banker's proper reply would be this: if you have need of more 
 money than could be provided by genuine bills, let me know the amount 
 you want and whether you can give me security for it; and if security, 
 what security; or whether you want me to make a temporary advance 
 without security at all. We should then understand one another, and all 
 would be fair on both sides. But for me to go on discounting so-called 
 <?onmiercial bills that have a taint of fraud in them would be to become a 
 party to the fraud myself. 
 
 There arc, however, bills of this character which have the element 
 of fraud outright. Bills have been offered to banks and have been dis- 
 counted to considerable amounts which rested on no business transac- 
 tion whatever. Commercial firms in great business centers having high 
 credit and standing have been found capable of concocting and carrying 
 forward for years schemes of deliberate deception with their bankers, 
 like the following. They would arrange with a number of small traders 
 in various parts of the country to accept bills drawn upon them, although 
 no business transactions whatever had passed between them. A con- 
 sideration was given in such cases; and the bills were always carefully 
 seen to at maturity by the negotiating house. It was by a perfect net- 
 work of arrangements of this kind that the great wholesale firm of 
 Macdonald & Co., of Glasgow, managed to deceive the Western Bank 
 of Scotland, and to keep themselves afloat long after they were insol- 
 vent. The amount involved in the deception Avas enormous (some £408,- 
 000), and wIrmi the bubble burst, as it could not fail to do, it had much 
 to do with the stoppage and ruin of the bank itself. 
 
 It may be said without a carping style of criticism that the officers 
 
156 BANKING AND COMMERCE. 
 
 of the bank miglit surely have diseovered what was going on before the 
 situation became dangerous. 
 
 Another instance of the same kind was in the case of a great house 
 in the Leather trade, who with headquarters in London, had established 
 a network of branches and correspondents by means of which an 
 enormous amount of bills was kept afloat far beyond the actual business 
 transacted. When the firm failed it was found that no less than twenty- 
 nine of these "drawing posts" had been made use of, and that the 
 fraudulent bills amounted to no less than £620,000! In this case a cer- 
 tain amount of real business was done with some of the corresponding 
 houses, giving color to the bills offered for discount. It is evident, how- 
 ever, that in this case, a vigilant stj^le of doing business would have dis- 
 covered the fraudulent character of the operations carried on. So far, 
 however, was this from being the case that the London bank where the 
 account was kept carried on the discounting operations of the firm in 
 such a reckless manner as to raise the imputation that the manager was 
 a particeps criminis in the affair. He was on such terms of intimacy 
 with the partners of the house that a sort of slang-falk was current be- 
 tiveen them, according to which a small batch of bills was called a tea- 
 spoon, a larger batch a dessertspoon, and a batch of considerable amount 
 a tablespoon. In the examination before the bankruptcy court, it was 
 revealed that the manager of the bank had been in the habit of send- 
 ing over to the firm, asking whether they had any bills to discount, thus 
 grossly violating all natural order, and letters from him were produced 
 in court such as the following: 
 
 My dear M.: 
 We are flush this morning. Send me over a tablespoon. 
 
 Yours, . _ ,, 
 
 A. B., Manager. 
 
 If ever in the dealings of banker and customer there was a do^vnright 
 incentive to extravagance and fraud it was offered in this instance. 
 
 It cannot be wondered that the bank itself had only a short career. 
 It was regularly organized, and had the ambitious title of The Bank of 
 London. But it ran only a short career and was wound up in disgrace, 
 with a heavy loss to the stockholders. 
 
CHAPTER XXI. 
 
 FOREIGN BILLS. 
 
 Bills With Documents — Other Classes of Bills — Drawing of 
 Fraudulent Bills — Bills Drawn Against Future Shipments — 
 Sterling Bills of Banks and Finance Houses — The Baring 
 Crisis Recalled. 
 
 THE bills drawn upon Great Britain or other countries against goods 
 sliipped there are in a different class, so far as bookkeeping is 
 concerned, from the foregoing, being drawn payable in sterling or 
 other foreign currency, and necessitating a different style of treatment 
 in a banker's books. But they are essentially the same in effect as bills 
 drawn upon some commercial centre in the country. They represent, 
 cr should represent, either purchases of goods, or goods sent on consign- 
 ment. They are subject to the same risks of non-acceptance or non-pay- 
 ment, saving only the fact that there are attached to a large proportion 
 of commercial bills of exchange what are called documents, viz., bills of 
 lading and policies of insurance, which are transferred to the bank, and 
 ivhich are held as security until the bill is paid. 
 
 It was at one time a sort of superstition amongst bank officials that a 
 bill drawn in sterling, payable in pounds, shillings, and pence, was, by 
 that fact a safer document than a bill drawn in dollars and cents. There 
 was some ground for this opinion in the fact that it was not so easy for 
 accommodation pajDcr to be manufactured i^ayable in sterling money as it 
 was when the note was made by persons in the same town. At one time, 
 M'hen the Canadian law imposed heavy penalties on the dishonor and 
 return of a sterling bill, it would have been a serious business for any 
 one to concoct accommodation paper payable in London. These penalties 
 have been largely done away with. Yet it is still much more difficult to 
 float accommodation foreign bills than inland. It has, however, been 
 done. 
 
 There are several distinct classes of bills drawn payable in sterling 
 cr other foreign money, viz., commercial bills, banker's bills, bills drawn 
 by finance houses or other corporations upon their agents, and bills drawn 
 by governments. It is of the first of these that the present chapter will 
 treat. 
 
 Commercial bills, properly so-called, payable in sterling or other 
 foreign money, arc drawn by the seller or consignor of exported goods on 
 the purchaser or consignee on the other side of the Atlantic. Of these 
 there are several varieties, and the risk to the banker dealing with them 
 varies greatly. 
 
 157 
 
158 BANKING AND COMMERCE. 
 
 Bills with Documents. 
 
 It has become customary of late years in several of the larger branches 
 of the export trade for the exporter to secure himself from loss by attach- 
 ing bills of lading and policies of insurance to his bills. These documents 
 are so drawn that the goods shipped cannot pass into the possession of 
 the purchaser until he has paid the bill (if he has accepted it). If he 
 fails to pay, or refuses to accept it, the banker who has bought the bill, 
 in addition to his claim against the drawer, acquires property in the 
 goods, and can sell them as the law may allow, placing the proceeds tO' 
 account of the bill. The drawer is then liable for the deficiency, if any. 
 
 It might be supposed that this proceeding would make a banker so- 
 safe that the purchasing of such bills w^ould become almost a mechanical 
 operation, requiring neither knowledge nor good judgment. But experi- 
 ence dissipates this delusion. Every banker who has had to do with bills 
 of this class is aware that the same considerations arise with regard to 
 them that are needful with inland bills. To begin with, he has to consider 
 the character of the shipper, both as to honesty and capacity. As to 
 honesty; for the bills of lading may not be genuine. Instances have been 
 known of forged bills of lading being attached to sterling bills, and heavy 
 losses suffered by the bank purchasing them. 
 
 But supposing the bills of lading to be genuine, they may be very 
 insufficient securit}'^ for the bill to which they are attached. For the 
 shipper may have only an imperfect knowledge of the merchandise he is- 
 shipping, and sends across the Atlantic goods which no prudent merchant 
 will accept against. Or the shipper maj^ be of that sanguine tempera- 
 ment whicli invariably leads him to think his goods worth more than they 
 are, in which case his bill is drawn for too large an amount. In both 
 these cases the bill is liable to be refused acceptance, and the banker 
 may find himself with the goods upon his hands which the English mer- 
 chant, on the spot, considers not worth as much as the bill. Then ensues 
 one of the most unpleasant of all a Canadian or American banker's ex- 
 periences, viz., the bringing to sale, in a distant market, of goods which 
 are stamped as undesirable by the very fact of their being in the hands, 
 not of a merchant, but of a bank. The goods must be warelioused and 
 insured. Charges begin to accimiulate, A broker must be employed. 
 The goods are offered for sale, but naturally purchasers are shy. Offers 
 are made which are, perhaps, forty per cent, less than the amount of the 
 bill. If the offers are accepted, a loss more or less is certain. If they 
 are not, the banker takes the risk of the market. A rise will bring him 
 out; a fall will increase the loss unless the drawer can make it good. 
 The holding of goods becomes therefore a speculation; meanwhile one 
 thing is certain — that charges are increasing. 
 
 But the banker has another party to deal with in these cases, viz., 
 the shipper of the goods, who is his own customer. 
 
FOREIGN BILLS. 159 
 
 It is not an unknown experience tliat he intervenes respecting the sale, 
 refusing to consent to the goods being disposed of at a lower price than 
 will meet the bill. Always sanguine that the market will turn in his favor, 
 he constantly objects to sale at such a figure. If this does not turn out 
 to be the case, and the banker exercises his legal power and sells the 
 goods at a sacrifice, the drawer will be apt to contend that his goods 
 have been slaughtered, and resist a claim for the deficiency. Thus, even 
 with documentary bills, as they are called, a banker may have, and many 
 a banker has had, not only much harassing anxiety and labor, but much 
 ultimate loss. For, in some cases, the overdrawing arises from impending 
 embarrassment; and then non-acceptance of the bills is a prelude to 
 failure. 
 
 From all this it follows that the character and standing of the drawers 
 of documentary bills should be as carefully considered as if no docu- 
 ments were attached. 
 
 This is particularly the case when, as sometimes happens, the drawer 
 desires the documents to be given up on acceptance. If this be consented 
 to (and both the shipper of the goods and the banker must consent), 
 the bill will rest entirely on the credit of the parties to it. There is, 
 however, this difference between such a bill and one which never had 
 documents attached to it at all, viz., that whereas the latter may have 
 been merely affirmed by the drawer to represent a shipment, the docu- 
 ments attached to the former, if genuine, afford absolute proof of it. 
 
 The bills to which documents are attached are chiefly those in the 
 grain trade, the cotton trade, and the trade in dairy and other food prod- 
 ucts. 
 
 Bills without documents offered by persons in these branches of busi- 
 ness should be drawn against balances that have accrued, and the banker 
 should be satisfied of this before buying them. 
 
 Other Classes of Bills. 
 
 But large numbers of commercial bills are drawn by firms in other 
 branches of business, which being, as a rule, unaccompanied by docu- 
 ments, must be cashed on the credit of the drawer alone. At the time 
 such a bill is cashed it is a bill with only one name, and the banker has 
 to take the risk of its being accepted. 
 
 Bills in the timber trade, the leather trade, and bills drawn against 
 manufactured goods are usually of this class. 
 
 The name of the firm on whom such a bill is drawn matters not in the 
 least at the outset; for any man can, if he pleases, draw a sterling bill 
 on any other man for any amount. John Smith, let us say, is carrying on 
 a small business in a lumber centre in Canada. He can, if he chooses to 
 commit a fraud, and to expose himself to the consequences, draw a bill 
 for ten thousand pounds upon the wealthiest timber merchant in England. 
 And he can offer it to a bank manager, telling him that it is drawn in 
 
160 BANKING AND COMMERCE. 
 
 course of business, and will be accepted on presentation. The banker 
 knows that the liouse on whom the bill is drawn is abundantly good for 
 ten thousand pounds, or ten times as much, and can scarcely help being 
 influenced by the sight of such a powerful name, though it may be that 
 the drawer has no more right to use it than he would have to draw on the 
 Bank of England for a million. 
 
 The banker has therefore to consider, when a sterling bill is offered, 
 unaccompanied by documents, whether his customer is likely to have 
 dealings for such an amount with the English house; whether he has 
 ever known of transactions between them, whether the course of his busi- 
 ness lies that way; and, in fact, whether he ever had the right to draw 
 a sterling bill upon anybody. By such reflection and queries he will easily 
 be able to satisfy himself whether the transaction is genuine and the bill 
 likely to be accepted. But such things have been known as for a banker, 
 possibly a young beginner in the responsibilities of management, being 
 persuaded to give cash for a fraudulent foreign bill, in which case he 
 will have a rude shock of awakening on learning that the bill has not 
 been accepted, and never will be.*'' 
 
 The example in the accompanying note is adduced to show the neces- 
 sity of only buying "free" bills when written authority to draw is shown, 
 or in the case of commercial bills from houses whose relations with the 
 drawee are .such that no bill is likely to be refused acceptance. And 
 such houses there are, firms that have drawn millions of pounds sterling 
 of bills in the course of their business of which not one has ever failed 
 of being honored. 
 
 The Drawing of Fraudulent Bills. 
 
 Yet the history of Canadian banking has furnished singular instances 
 of fraudulent bills being negotiated by houses of apparently good 
 standing. 
 
 Some years ago a house in the timber trade in a certain part of 
 Canada, which had conducted its business soundly for a long course of 
 years and had established itself in good credit, became embarrassed, and 
 to keep itself afloat set on foot a system of drawing free bills from 
 \arious centres where it professed to do business. The house opened 
 
 49 A case is known to the writer wlieio a ncw-comor to Canada, moving In 
 the Ijest circles, who had made arrangements to enter into partnership with a 
 manufacturing house, Induced a banlter to cash a sterling bill for about four 
 thousand pounds, alleging that this amount was coming to him from his father's 
 estate, and that the legal firm on whom he drew had authorized the bill. But 
 they refused to accept it, alleging that the estate was in no position at the time 
 to meet such a demand upon it. The banker indignantly demanded payment 
 from the party who had sold it, but he was entirely unable to refund. The 
 proceeds had gone into the business, and he could not get them out. 
 
 This was not a case of obtaining money under false pretences, for he hon- 
 estly believed he had the right to draw. But more than two years elapsed be- 
 fore the estate was able to pay the money, and during the whole of this time 
 the banker had to return this protested hill in his statements to hp;\d office. 
 
FOREIGN BILLS. l6l 
 
 offices at several additional points in Canada, Montreal being one; also 
 in Boston and New York. These were all in correspondence with an 
 agency or branch house in Great Britain. Different names were adopted 
 for these firms in order to carry on the deception, but the original names, 
 both in Canada and England, were of firms of weight and standing, and 
 a considerable amount of actual business was done. 
 
 The machinery once started, and credit established, the leading spirit 
 of the concern, a man of experience and great plausibility, found no 
 difficulty in obtaining cash for the bills he drew. Some of these were 
 bona fide, and were paid in the ordinary course out of sales of timber — 
 a circumstance which added to the danger. Thus, credit was kept up. 
 But the actual trade of the concern resulted in continuous loss. The 
 losses, however, were easily met by the proceeds of new bills, some of 
 them negotiated in Montreal, some in Boston, some in New York; such 
 proceeds being cabled over to London and api)licd in payment of matur- 
 ing bills or deficiencies in sales. 
 
 Upon a small foundation of actual business was raised a huge super- 
 structure of fictitious drawings, which were so cleverly managed that 
 various bankers and finance houses both in Canada and the States were 
 deceived. This clever operator would sell a genuine bill at one time and 
 a fictitious bill at another; a fictitious bill to one bank and a genuine bill 
 to another, transferring the proceeds of a bill sold in Montreal to Boston 
 and buying a cable transfer therewith, reversing the process the following 
 week, or changing Boston for New York. 
 
 These were all free bills, drawn under different names, and on 
 apparently different houses in London. Yet the whole circle was in 
 reality but one concern, the afl'air being wholly in the hands of one man. 
 Many subordinates co-operated with him, both on this side of the Atlantic 
 and on the other, most of whom were entirely ignorant of the real char- 
 acter of the operations they were helping to carry out. 
 
 The bubble, of course, burst in time. The leading schemer took care 
 to be out of the way when the bills came back, but sundry banks and 
 bankers shortly found themselves possessed of large claims on a bankrupt 
 estate of which the assets were undiscoverable. 
 
 One device of those who aim to get sufficient credit to enable them to 
 sell free bills is to commence a bona fide business under some high sound- 
 ing name, such as Cameron, Boi^anquet, McGregor & Co., the very name 
 suggesting wealth and capital. After a few months of genuine business, 
 during which drawings are promptly paid, their bills become sufficiently 
 known on the market to enable them to offer them in various banks. 
 
 Probabh', as thej^ proceed, they may adopt a cunning method of sup- 
 porting their credit, by refusing to take any but the highest price for 
 their bills, and withdrawing them from the offer, thus creating the 
 impression that they have abundant means at command. Thus the bills 
 11 
 
162 BANKING AND COMMERCE. 
 
 acquire a character and are readily purchased, the regular operation of 
 the house lending color to their genuineness. 
 
 The time comes at length for a great coup. Simultaneously a number 
 of bills are drawn, offered to all the banks who will take them, and sold. 
 Then, on some morning later on, the community is startled to find the 
 office closed and the partners fled the country. Some banks shortly after 
 have numerous batches of worthless protested bills in their possession. 
 
 This, or something like it, has actually occurred in Canada, and it 
 is always liable to occur when the free bills of a commercial house can be 
 easily negotiated with banks who are ready to buy them in entire ignor- 
 ance of the total amount afloat. It is a good rule, in such cases, for a 
 bank to determine that it will take all or none; and, if all, then for un- 
 doubted reasons; the only exception being when the drawers are of 
 known wealth and whose business is of such a magnitude as to justify 
 the domiciling of their free bills with various banks. 
 
 Releasixg Documents ox Acceptance. 
 
 When the question of giving up documents on acceptance is raised, a 
 banker will be careful to have the permission of his own customer on this 
 side before consenting to it. And this permission must be a written one, 
 for nothing would be more likely to create difficulty in case a bill was 
 dishonored than a failure to establish consent. 
 
 To give up documents without consent would, of course, release the 
 drawer from liability. 
 
 In some cases a drawee will request documents to be given up in 
 exchange for a banker's or broker's guarantee. The guarantee of a bank, 
 as banks are now in Great Britain, is about as good security as can be 
 conceived. 
 
 But of brokers there are numerous varieties, from wealthy firms of 
 unlimited credit, to the smaller class who are hardly good for a thousand 
 pounds. In the case of these, a banker on this side, and his customer 
 with him, are generally guided by the judgment of their banking cor- 
 respondents on the other. And it is to be said that they exercise the 
 discretion committed to them with remarkable prudence. Cases have 
 not been infrequent where a bank in one or other of the great ports of 
 Great Britain has exercised this discretion in multitudes of cases during 
 manv successive years, and to the amount of many millions sterling, 
 without once making a mistake. 
 
 Bills Drawn Against Future Shipments. 
 
 There is another class of bills which, though not drawn against 
 shipments actually made, are sometimes classed as "commercial," inas- 
 much as they are drawn against goods that are to be shipped. In the 
 complicated arrangements between merchants of different countries, it 
 is sometimes the case that a house in London or Liverpool will agree to 
 
FOREIGN BILLS. l63 
 
 accept bills for a drawer in consideration of goods to be shipped here- 
 after. 
 
 Such arrangements, of course, argue a very high degree of con- 
 fidence, which confidence may be well placed or misplaced. This, how- 
 ever, is not altogether the concern of the banker on this side, whose 
 business is simply to be satisfied that such an arrangement exists, so 
 that he may be sure that the bills he buys will be accepted. Sometimes 
 this is secured by an engagement in writing, either special or general, 
 that is, either to accept all bills that may be drawn, or to accept bills 
 for a certain amount and during a certain time. 
 
 It is, however, not uncommon for an exporting merchant on this side 
 to be so well established as to capital and reputation that his bills can 
 be negotiated without any engagement to accept being required. In that 
 case, however, a banker on this side requires to keep himself particularly 
 well informed as to the condition of both houses concerned. For changes 
 in these times are rapid. Partners die, and capital is drawn out. New 
 partners are introduced who change the whole style of the business; it 
 may be for the better; but possibly for the worse. And a strong house, 
 in these times of huge operations and speculation, may lose their whole 
 capital in a year. It is thus incumbent on a banker who buys such bills to 
 be satisfied in the first place that the former relations between the parties 
 still exist, and then that the house on the other side is as good as ever. 
 
 The only other class of commercial bill to be noticed is that where a 
 commercial house has offices on both sides of the Atlantic. A manufac- 
 turing firm in Canada may have an agency in England, and a resident 
 partner in some large centre. The name of the firm will probably be 
 changed in that case; the Brown, Jones and Robinson, of New York, 
 becoming the Jones, Brown & Co., of Liverpool. But the responsibility 
 i^ the same. 
 
 The banker in all such cases has constantly to bear in mind that his 
 bill is a one-name bill and nothing more. In fact, such bills have a strong 
 tendency to degenerate into accommodation bills based on nothing. 
 
 Sterling Bills of Banks and Finance Houses. 
 
 This is a class of bills well known in all exporting centres, and it 
 forms the great medium of remittance by importers on this side the 
 Atlantic. 
 
 It is one of the most noticeable developments of the financial opera- 
 tions of modern times, that foreign bills of exchange are dealt in exactly 
 as a merchant deals in goods. And just as the merchant is a necessary 
 factor between the buyer and seller of goods, so is the bank or finance 
 house between those who draw bills against commodities exported and 
 those who desire to pay for commodities imported. 
 
 When a merchant ships a quantity of grain, cotton or any other 
 staple across the ocean, he has the power to draw a bill of exchange 
 
1(51 BANKING AND COMMERCE. 
 
 against it. In a primitive condition of tilings and if the comnuinity in 
 which he lives is a small one, his neighbor who has bought goods abroad 
 and desires to pay for them, might approach him and say, "If you will 
 draw a bill for a thousand pounds against that cotton you shipped, I 
 will give you the cash for it. For I want to send that amount to Eng- 
 land." Thus, by direct dealings between the exporter and importer the 
 wants of each might be satisfied. But this mode of operation would not 
 differ much from dealings by barter, in the case of merchandise. For 
 the exporter would always find it difficult to find persons who wanted 
 the exact amount of the bills he had to draw against his cotton, v/hile the 
 importer might find that the exporter could not draw for as much money 
 as he required to send; or at the time he wanted to remit, for anything 
 at all. 
 
 There thus arose the necessity for an intermediate, a person with com- 
 mand of money, who >vould buy the exporter's bills at any time, without 
 reference to the amount, and would be ready to sell his own bill to the 
 importer, to whatever amount would satisfy his requirements. 
 
 Before this could be done the intermediate would require the services 
 of a corresponding house abroad ; and particularly in London. This 
 house miglit be a banking house of the old school, — like the Glyns, — or 
 a financial house like the Barings used to be; and the arrangement would 
 be, that the intermediate, on this side, would remit to them the bills 
 he had bought from the exporter and draw upon them the bills he would 
 sell to the importer. These the London house, or bank, would agree to 
 accept, on terms arranged. This, stated in its simplest form, is the 
 foundation of the great masses of bills that are constantly being drawn by 
 bankers and finance houses on this side, on bankers and finance houses 
 on the other. 
 
 It will be perceived that the foundation of this business in its elemen- 
 tal form is the expout of goods, in which term, as will be seen later on, 
 more than merchandise is included, the bills drawn against which are 
 sold to a bank on this side, the payment of which bills affords the means 
 of payment of the bills drawn by the banker against it. Thus, all these 
 bankers' or financial bills rest, if legitimate, upon the foundation of 
 salable merchandise or securities, exactly as all legitimate bankers' loans 
 and trade bills do. 
 
 The export of articles, therefore, gives rise to two classes of bills: 
 first, the bill drawn by merchant upon merchant, and then the bills drawn 
 by banker upon banker. This has the appearance, at first sight, of that 
 objectionable operation, the drawing of sets of accommodation bills; 
 the first set drawn against goods and having a mercantile foundation, the 
 other drawn against nothing. The sale of the cotton will provide the 
 means of paying the first, but out of what fund is the second to be paid } 
 How can the sale of so many bales of cotton of a certain value ))ay more 
 than one of the bills drawn against it for that amount.^ 
 
FOREIGN BILLS. l65 
 
 A consideration of tlic facts will^ liowcvcr, show tliat lliis supposition 
 would be erroneous. 
 
 Wliat takes place is really this: a merchant in New York sends over 
 to a Liverpool rfierchant a quantity of cotton, worth, let us say, a thousand 
 pounds. Against this cotton he draws a bill for a thousand pounds. This 
 bill is simply an order to the Liverpool merchant to pay a thousand 
 pounds lo the person who will present that bill. But what becomes of 
 the bill.^ In the ordinary course of business a banker in New York buys 
 it, pays the exporter a thousand pounds for it (less exchange) and ob- 
 tains the right to collect the same amount in Liverpool. Having that 
 document, giving him the right to receive a thousand pounds in Liverpool, 
 he sends it over to his correspondent in London, directing him to collect 
 the money and place it to his credit. When the Liverpool merchant pays 
 the bill and gets it from the London banker, that banker will have a 
 thousand pounds of the New York banker's money in his possession. 
 How is the latter to get it? He can, if he pleases, write a letter order- 
 ing it to be sent over in gold packed up in a box; w^hich indeed is some- 
 times done. But a much simpler process than that is available, and a 
 much more useful one, for it subserves the needs of the other side of 
 commercial operations. The importer has his wants as well as the ex- 
 porter; viz., to send money over to Europe to pay for goods. But in 
 modern financial arrangements there is no need for him to send a box of 
 gold. He can go to the banker Avho bought the exporter's bill and get an 
 order for his London correspondent (who is collecting a thousand pounds 
 for him) to pay that sum to the importer's correspondent. This order is 
 that second bill of exchange just referred to, which the importer remits 
 and with which he satisfies his obligation. (This second bill, let it be 
 noted, is drawn not against the cotton, but against the money lodged in 
 tlie London bank.) Thus, the whole operation is complete, and all 
 accounts settled without the transmission of gold at all. The New York 
 exporter gets the money for his cotton from the New York banker. That 
 banker is recouped by selling his bill to the importer. The London 
 banker, as the final intermediary, receives the money from the Liverpool 
 merchant and tlicnwitli pays the bill, which his New York correspondent 
 has drawn u})on him. Thus, although two bills have been drawn, they 
 have not been drawn by the same person upon the same drawee, but by 
 different parties upon a different correspondent and to effect a different 
 purpose. 
 
 And the proof that the second bill is not an accommodation one is 
 that both of them have been paid without the borrowing of money in 
 London. If the second bill had been drawn against nothing, there would 
 have been notliing wherewith to pay it. But, as we have seen, the London 
 banker had the money in hand. At the close of these transactions none of 
 the parties owed the other anything; whereas, if the London banker had 
 
166 BANKING AND COMMERCE. 
 
 paid an accommodation bill for a thousand pounds, the New York banker 
 who drew it would have owed him the amount. 
 
 It is, however, to be borne in mind that merchandise is not the only 
 exportable article that can be sent for sale to a financial centre and drawn 
 against. In these days of highly developed financial business, when gov- 
 ernment and other loans are negotiated through financial houses in 
 London or Paris, the debentures representing them are sent forward, and 
 drawn against exactly as if they were so many bales of cotton or barrels 
 or flour. The bills are sold by the borrowing government to bankers or 
 capitalists in a financial centre, who forward them, along with the bonds, 
 to their London correspondents. These bills are accepted by a London 
 financial house, who pay them out of the sale of the bonds. In this 
 manner, loans to the extent of hundreds of millions are carried out, 
 without any movement of gold, exactly as is the case with mercantile 
 transactions. 
 
 In like manner, when a great railway corporation has need to borrow 
 money in Europe on its bonds, they are sent across and drawn against 
 as if they were merchandise. The acceptors of the bills in London 
 or Paris take the risk of floating the bonds and accepting against them. 
 
 The Baring Crisis Recalled. 
 
 But as these bonds have been treated exactly as if they were merchan- 
 dise, it has happened that embarrassments have arisen in connection with 
 them, just as embarrassments arise in consignments of staple goods, A 
 catastrophe on an immense scale, in connection with acceptance against 
 bonds was only averted some years ago by the courageous and far-sight- 
 ed action of the Governor of the Bank of England. The case was that of 
 the great house of Barings; it occurred in the last decade of the nine- 
 teenth century, and created a sensation all over the financial world. It was 
 indeed so extraordinary as to be deserving of permanent record. The 
 house of Baring Brothers had been known for a century as negotiators 
 of government loans for states and countries in every continent on the 
 globe. Their character for prudence and judgment was so high that for 
 generation after generation any bond on which they placed their im- 
 primatur was accepted by investors and found ready sale. Time, how- 
 ever, passed on. Old partners passed away; new men and new methods 
 were introduced, corresponding to new developments in modern times. 
 The name of the great house was of course retained, for it was a 
 synonym of wealth, almost equal to the name of Rothschild. Yet, not- 
 withstanding all the changes in the personnel of the firm, the commercial 
 world in general considered the House of Baring to be as good as ever, 
 and bought its bills as readily as they would those of the Bank of Eng- 
 land. 
 
 But about the time spoken of it became known in the inner financial 
 circles of London that the Barings had negotiated loans to an enormous 
 
FOREIGN BILLS. l67 
 
 amount which they found difficulty in placing. This was especially the 
 case with loans lo the Argentine Government. The debenture market in 
 fact had become overstocked with them; yet the Barings had accepted 
 against the whole, and the bills were constantly falling due. These 
 acceptances were met for some time out of other resources of the firm. 
 They were able also to borrow large sums of money on the bonds. All 
 this was whispered about among the higher magnates of Lombard Street, 
 and the whispering gradually spread even to circles on this .side the 
 Atlantic. Such a thing as hesitating to buy the bills of Baring had never 
 been heard of in New York, but such a hesitancy did undoubtedly prevail 
 for some time. 
 
 At length a very extraordinary event happened, the like of which 
 had never been known in the financial world. A few of the heads of 
 the leading banks of London were invited one day to meet the Governor 
 of the Bank of England, and confer with him on a matter of importance. 
 What this matter was they could not divine; but on entering the bank 
 parlor, they were informed of this very extraordinary state of facts, 
 namely, that the Barings were under acceptance of bills, mostly drawn 
 against Argentine bonds, to the amount of sixteen million 'pounds; that the 
 bills were coming due at the rate of about a million pounds a week; that 
 the Bank of England had already made large advances on the bonds; 
 that it was quite impossible for the Bank to carry the whole burden; 
 that if assistance were not rendered, the Barings would have to suspend 
 and millions of pounds of bills go to protest! A tremendous piece of 
 intelligence this ; for these bankers knew that if such an event did happen 
 there would be one of the severest panics ever known in the financial 
 world, and that not in England only, but in the United States and every 
 great monetary centre of Europe. 
 
 On the bankers enquiring what the Bank of England had to propose, 
 they received this answer: the Governor informed them that, after con- 
 sultation with his colleagues, they had concluded that other banks might 
 fairly be asked to share in the burden of meeting the acceptances, inas- 
 much as they were all interested in preventing a panic, and many of them 
 were themselves holders of the Baring bills. 
 
 After much consideration, and consultation with others, it was finally 
 concluded by London bankers, including the representatives of the Scotch 
 banks, to acquiesce in the division of the burden. It was also suggested, 
 that some of the leading banks of the interior, such as those of Liverpool, 
 Manchester, and other cities, might fairly be asked to join in the move- 
 ment. This idea was acquiesced in, and correspondence opened with the 
 leading provincial banks. These also agreed to the principle. The only 
 thing now remaining was to arrange the amount of the advance which 
 each bank was to make upon the bonds, and to such an extent did a 
 spirit of mutual respect and confidence prevail amongst these magnates of 
 haul finance, that a distribution was made without difficulty. 
 
168 BANKING AND COMMERCE. 
 
 The Bank of England undertook by far the largest share of the 
 burden. Then the London banks, including the agencies of Scotch and 
 Irish banks, followed with their respective shares, and finally the great 
 banks of ^Manchester, Liverpool, and other prominent centres. The Bank 
 of England undertook to see after the retirement of the whole of the 
 acceptances, and the other banks paid in their quota to the Bank of 
 England to enable the Bank to do it. When these arrangements had 
 been completed, every banker in the United Kingdom breathed a sigh of 
 relief, seeing that the shadow of an impending panic which had overhung 
 the financial world was dispersed, and that business could go on as usual. 
 And not only they, but bankers in great centres of North and South 
 America, India, China, and Australia — not to speak of the Continent of 
 Europe — also felt easier when the dreaded possibility of the Baring bills 
 being returned upon them, protested, for tens and hundreds of thousands 
 of pounds, had passed away. 
 
 As for the great house itself, it went into liquidation. A considerable 
 surplus of assets remained to the partners, after the liabilities were all 
 discharged, but the prestige of the name of Baring was permanently 
 impaired. The partnership was dissolved, and a new company formed, of 
 large capital, which is doing the same kind of business, but which, we 
 may be very sure, will never overload itself with unmarketable securities. 
 
 It has been stated that the bills drawn by banks on their foreign 
 correspondents have their foundation in exports. This is true, in a large 
 majority of cases. It is, however, not uncommon for banks and capital- 
 ists in London to open a credit for banks or finance houses abroad, which 
 credit is availed of by the drawing of bills. To this extent the foreign 
 bills sold in the financial centres of this continent are not founded upon 
 merchandise. They are, however, a mere fraction of the whole. And, 
 it may be added, such drawings are invariably covered afterwards by 
 mercantile bills. 
 
 Yet another class of bills may be briefly noticed, viz., such as are 
 drawn by banks or capitalists upon their own offices in London or Paris. 
 These bills afford a mode of raising capital which may be profitably em- 
 ployed on this side of the Atlantic. The bills, however, are of the one- 
 name class, and no matter how high the credit that the one name com- 
 mands (and it runs up into very many millions in some cases"'") the money 
 market of London will at times discriminate between such bills and those 
 drawn upon a London bank. 
 
 There is another description of foreign business which has attained 
 a large development in these times, viz., the issuing of Credits by banks 
 on this side of the Atlantic to importers of staple goods. The working of 
 
 50 It is, however, known to old bankers that in the groat revulsion of 1S57 
 one of the greatest of the capitalist houiscs was obliged to apply for assistance 
 to the Bank of England. The Bank loaned the firm a million sterling, and en- 
 trusted the selection of the securities to a well-known officer of the Bank of 
 Montreal in New York. 
 
FOREIGN BILLS. 169 
 
 this system illustrates in a striking degree the co-operation of banking 
 and commerce. Let us put the matter in a concrete form, that it may be 
 better understood. A woolen manufacturer in the United States or 
 Canada requires certain wools which can be had most conveniently in 
 Australia. How is he to get them.'' It would not be reasonable for a wool 
 exporter in Australia to send his goods to Boston or Montreal on credit, 
 or for an importer to disburse cash to bu}' a bill to send to Australia, 
 which bill might be for an amount much less or much more than the value 
 of the wool his correspondent would buy. What he does is this: A 
 banker in Boston or Montreal will give him a letter, on an engraved 
 form, authorizing any correspondent of his in Australia to draw on a 
 bank in London or Paris for any amount he needs up to a certain sum, 
 the bill to have attached to it an invoice for wool, a bill of lading for the 
 same, and a policy of insurance. With this document in hand, the 
 Australian wool exporter can ship wool to America and obtain cash for 
 it at once from a bank in Melbourne or Sydney by drawing in conformity 
 with the credit. The bill with its documents is presented and accepted 
 in London, the bill of lading, invoice and insurance being passed on to 
 Boston or Montreal, with advice of the amount drawn against them. 
 The banker on this side of the Atlantic then advises his customer that he 
 holds the documents for the wool, that so many pounds sterling have been 
 drawn against it, which amount is at his debit, for which he is called on 
 to settle by furnishing, on the terms of the credit, a banker's bill on 
 London. Thus, the first disbursement of the wool merchant in New Eng- 
 land or Canada is coincident with the arrival of the goods or the document 
 representing them. And a clean settlement of the whole transaction has 
 been made. For the credit has been used to the exact amount needed, 
 and the balance is cancelled. "^^ 
 
 Letters of credit for the use of travelers are on a different footing 
 altogether. There is no merchandise in the case, and the use of the credit 
 is simply to transmit money by bills of exchange in the ordinary way, 
 without risk. 
 
 One final remark with regard to foreign bills needs to be made. 
 
 The development of messages across the ocean by cable has given rise 
 to numbers of monetary transactions between different countries in which 
 bills are dispensed with altogether. A New York banker can order his 
 London correspondent to pay money to an applicant by cable message, 
 
 51 It is a point of very important consideration with a banker who has Issued 
 a commercial credit which becomes practically an advance on goods In transit 
 secured by a bill of lading, whether, and on what terms, he should give up the 
 bill of lading on the arrival of the goods, and before payment by the customer. 
 If the banker does, he is then under advance without security. The only excep- 
 tion to this is when the customer receives a bill of lading for the purpose of 
 customs entry and warehousing, bringing back a warehouse receipt within a 
 day or two. In this case the banker does not lose his hold on the goods unless 
 there Is actual fraud. But when goods are allowed to be placed In the custom- 
 er's warehouse the banker will generally lose his security. 
 
170 BANKING AND COMMERCE. 
 
 just as easily as he could by drawing a bill. The importer referred to in 
 the former part of this chapter can obtain a cable transfer, as it is 
 called, just as formerly he would buy a bill of exchange. By means of 
 this he could pay a London merchant, with no more loss of time than 
 would be required to pay a bill to a neighbor across the street. 
 
 These transactions, however, require different arrangements in Lon- 
 don. For M'hen a bill is drawn at sixty days after sight, the London 
 banker who accepts it has sixty days before payment in money is required. 
 But a cable transfer requires payment of money on the spot. Now, as 
 no London banker has an infinite supply of money at command, lie has to 
 watch the daily calls upon him for cash with as much care as a banker 
 does on this side the Atlantic. For this reason, the banker on this side 
 will be careful when selling "cables" to keep within the limits prescribed 
 for his drawing on London for cash. 
 
CHAPTER XXII. 
 
 OVERDRAFTS IN CANADA AND CASH CREDITS IN SCOT- 
 LAND. 
 
 Dangehs IX OvERnRAFTs — Caxadi\n Practice — Unsecured Advances 
 — Advantages and Disadvantages of the Scotch System. 
 
 THERE is perhaps no more important matter to which the attention 
 of directors and general managers of banks should be directed 
 than overdrafts. For some of the most dangerous departures 
 from sound banking principles that have transpired in Canada have 
 occurred in connection witli thcni. For this reason it has been dtsirable 
 to devote a chapter to a careful consideration of the subject. 
 
 The question of overdrafts is entirely a different one in England and 
 Scotland from what it is in Canada and the United States; and for 
 this reason: In Scotland, advances to customers, as distinguished from 
 the discounting of trade bills, are made by allowing the current account 
 of the party to be in debt. The extent to which this shall be the case 
 is fixed by the board of directors; and for this amount, security, as a 
 rule, is held. This system of advancing by secured debit balances, is 
 the well-known cash credit system of Scotland, the same system, how- 
 ever, being common all over the north of England, at least. This system 
 consists simply in fixing the amount to which the debit balance of a 
 customer shall be allowed to run. And in Scotland, and in many parts 
 of England too, it is only when this authorized amount is exceeded that 
 the account is said to be overdrawn. The excess only, in that case, is 
 called an overdraft. If a merchant obtains a credit of a thousand 
 pounds, from a Scotch or English bank, the amount is notified to the 
 manager, whose business it is to keep the current account debit within 
 that sum. Occasions, however, do arise when the merchant may draw 
 a check which oversteps the limit. Sometimes this may be from inad- 
 vertence, sometimes from monetary pressure. If the manager takes the 
 responsibilit}' of allowing the check to be paid, the account is then 
 overdrawn by so much, and the customer will be requested to put it in 
 order. Or a customer (and this is the proper course) may interview tht 
 manager, explain that some expected remittance has not come to hand, 
 and ask to be allowed to overdraw his account, let us say, for a week 
 or two, to the extent of a hundred pounds. The manager may, or may 
 not consent. If he consents, the debit balance will be a hundred pounds 
 more than it ought to be. Under this system of business all the debit 
 balances of current accounts are constantly under the view of the man- 
 ager of a branch; and if a prudent man, he will take care that they are 
 all in order, and as authorized. For he is held responsible for any over- 
 drawing. If he finds that a teller or cashier has paid the checks of 
 
 171 
 
172 BANKING AND COMMERCE. 
 
 a customer to an amount beyond the sum authorized, he will call him 
 sharply to account, and insist upon his getting the overdrawn amount 
 paid in. 
 
 Similarly, the debit balances of customers at all points are constantly 
 under review at headquarters; and for this good reason, that the loans 
 or advances of the bank are all to be found there. Overdrafts, therefore, 
 cannot fail to be noticed. If the returns from a certain branch show that 
 certain accounts are overdrawn, the manager will be called to account, 
 asked for explanations, possibly sharply reproved, and may even be 
 suspended from his functions, unless he can show that he was authorized 
 to allow them by correspondence. But this is not all. It is perfectly 
 easy for a board of directors to examine such statements of debit bal- 
 ances, and as all credits in this shape have been authorized by them, it 
 is easy for them to see whether any accounts are overdrawn. If any 
 of them are, they will no doubt ask the reason why. And if a general 
 manager (or officer acting as such) cannot give good reasons, he is liable 
 to displeasure in his turn. 
 
 Thus the whole sj'stem of the bank works harmoniously. Everything^ 
 is clearly apparent. All advances are regularly reported, considered, 
 and dealt with by the branch manager, and the general manager, up to 
 tjie final authority, the board itself.^- 
 
 OVERDRAFTS IN CaN.\DIAN BaNKS. 
 
 But overdrafts in a Canadian bank are on a different footing from 
 the outset. The rule is that current accounts are all expected to be 
 in credit. A general manager, therefore, does not look for advances in 
 lists of deposit balances. Such lists are generalh' sent at much longer 
 intervals than the statements of loans and discounts, and this for an 
 obvious reason. Whilst it is of the first importance for a manager to 
 keep an eye on the total amount of deposits, so as to keep proper re- 
 serves, it is of only secondary importance whose particular money it is 
 that is deposited with him. Mr. Thomas Johnson, let us say, keeps a 
 current account with one of the branches of the bank. It matters little 
 whether the balance at his credit is $500 or $5,000. And what he puts 
 in and draws out week by week is not a matter of particular interest 
 to the management.^" 
 
 But if Mr. Johnson owes the bank money, the amount he owes is >\ 
 matter of the first consequence. If he owes $5,000 he may be abundantly 
 good for it. The board may have authorized that amount; security for 
 that sum may be held. But let us suppose, and such things have really 
 
 52 This is, of course, the system in theory. Whether it is properly worked out in 
 practice will depend on the care and attention the directors bestow on the business 
 of the bank. The best system may be badly administered, and produce poor results. 
 But there can be no doubt that the system of advances prevailing: in Scotland and 
 the north of England is a much safer one to work, and that under it the direc- 
 tors find it much easier to keep track of advances made at various points. 
 
 5.3 If Ml-. Johnson has discounts or advances, it is, of-courso, dosiinblo to keep 
 an eye upon the working of his current balances as bearing on the profitableness 
 of his account, or otherwise. But what is now being discussed is its safety. 
 
OVERDRAFTS IN CANADA. 173 
 
 happened, that whilst $.>,000 is the sum which Mr. Johnson has been 
 iiuthorized to borrow, a weak manager has been prevailed on to advance 
 him double or treble that amount. This is a state of things to create 
 serious concern. For the general management may be well aware that 
 the latter sums were not only entirely unauthorized, but beyond his 
 ability to pay. Underneath, then, what may be a single line of a state- 
 ment, there may loom up the horrid figures of a bad debt. It is apparent 
 tlien that statefncnts of loans and advances are of vastly more import- 
 ance than statements of credit balances, and that they should be sent 
 much more frequently, and in such a form that they 'will be naturally 
 looked for, readily comprehended by directors, and attract the attention 
 they deserve. 
 
 Yet persons on this side the Atlantic may draw checks which turn a 
 current account to a debit; and here, as in England, a manager may 
 think the amount desired to be perfectly good, and take the responsi- 
 bility of allowing it. He must take the responsibility; and, at times, a 
 very serious responsibility it is. For even perfectly good customers are 
 not all considerate, neither are they all attentive. A responsible firm, 
 considering themselves to be perfectly good, may at times take liberties 
 with their account, and overdraw to a considerable amount. The mana- 
 ger has now to consider whether he shall refuse the check, and thereby 
 offend and alienate a firm whose account is valuable, or whether he shall 
 pay the check and so make an unsecured advance without authority, to 
 a firm whose position may possibly turn out not to be so good as he 
 supposes. 
 
 But now, supposing the check has been paid and the advance made, 
 is a manager to allow it to appear as a simple item in a list of deposit 
 balances, every one of which is presumed to be a credit, and therefore 
 returnable only at considerable intervals to head office.'' Such a course 
 is obviously dangerous; all which leads up to this conclusion, that any 
 overdrafts in the deposit ledger, if such there be, should be reported 
 in the same statement which contains the loans of the branch. 
 
 It should be the business of a general manager to see that this is 
 done. But the directors may very properly take the matter up also; 
 first seeing to it that statements of overdrafts are regularly laid before 
 them, and then taking care to examine them, conferring with the gen- 
 eral manager, and giving through him such directions as may be needful. 
 The board will of course not care to have lists of trifling sums brought 
 to their attention ; they would do well therefore to fix a minimum below 
 which no report need to be made to them. The general manager will, 
 however, take cognizance of them all. 
 
 Dangkrs of Making Unsecured Advances. 
 
 The making of advances by allowing debit balances of a current 
 account, when it is not provided for as part of an established system 
 like that of Scotland, has been proved to be dangerous. The advances 
 
174 BANKING AND COMMERCE. 
 
 that brought ruin to tlic Commercial Bank in the early years of banking 
 in Canada could ne^er have assumed the disastrous shape they did if 
 they had been made in the customary manner, viz., by promissory notes. 
 For it was not simply that advances were allowed to grow to enormous 
 dimensions, but the fact that the bank was unable to prove that the debt 
 was contracted by the corporation that was supposed to owe it. There 
 were two corporations in the case, very intimately connected, but legally 
 distinct. One of them was sound and solvent, the other practically 
 insolvent. The same officers, however, governed both. The loans were 
 negotiated by these officers. The bank supposed they were advancing 
 money to the sound and solvent company, to be used by it in furthering 
 the business of the weak and crippled one of which they had control. 
 But the solvent company, when called upon to pay, declared that they 
 never borrowed the money at all; that their officers, being also officers 
 of the weaker company, borrowed the money on its behalf. Whai issue 
 was joined in court, the bank was utterly unable to prove that the solvent 
 company was its debtor, and on books and pass-books being produced it 
 was found that both in the ledger and in the pass-books, the headings 
 had repeatedly been in the name of the weaker company. Thus issues 
 of hundreds of thousands of dollars hung upon the entries of subordinate 
 officers. The case was decided against the bank, which decision was the 
 beginning of its downfall. 
 
 Now, had the advances been made by promissory notes, which notes 
 must in the nature of things have been drawn in a clear and unmistaka- 
 ble manner, the officers must have signed them, either in the name of 
 the one company or the other. The liability, in that case, could never 
 have been disputed, and the bank would have been saved a protracted 
 and costly lawsuit, with an enormous loss at the end of it, which loss 
 proved its ruin. 
 
 This instance may be said to prove that the Canadian system is 
 better than the Scotch. But the advances of the Commercial Bank were 
 not made on the Scotch system at all. They were made on a deplorably 
 bad imitation of it, in which its most essential feature was lost sight of. 
 Under the Scotch system, the amount of the credit is strictly defined, and 
 a bond of security taken, duly signed, sealed, and delivered, for the 
 whole amount. If these advances had been made on the Scotch system, 
 the solvent company would have been required, at the outset, to give a 
 bond of guarantee, which bond would have been drawn by the legal 
 advisers of the bank, making the solvent company liable beyond doubt. 
 Then further, that guarantee would have fixed the amount to be ad- 
 vanced, an invaluable safeguard against advances being allowed to run 
 on indefinitely as they did. As it was, the advances were allowed to run 
 to nearly ten times the amount verbally agreed upon at the outset. They 
 were made, in fact, neither on the Scotch system nor tlie Canadian.''* 
 
 54 In another instance known to the writer, one of the heaviest bad debts over 
 made by a Canadian bank arose through advances to a certain firm being allowed 
 to be carried on In the shape of continual overdrawlnga of a very active current 
 
 account. 
 
THE SCOTCH SYSTEM. 175 
 
 It is at this time of day vain to think of making a fundamental 
 change in the mode of making bank advances in Canada, or the United 
 States, but it is certainly worth while to consider the points in which 
 the Scotch system has the advantage. In speaking of Scotland, let it be 
 understood that a considerable part of England is included too, and 
 specially that wherein the writer's English experience was gained. 
 
 Advantages and Disadvantages of the Scotch System. 
 The advantages of the Scotch system are the following: 
 
 (1) Advances can never be confounded with trade bills. Every 
 banker knows, and every merchant knows, too, that there are funda- 
 mental differences between these two: first, in the risk; next, in the 
 availability; and, last and most important of all, in the amount of atten- 
 tion they require. The risk of trade bills (provided only they are bona 
 fide and genuine) is immensely less than the risk of loans. Their avail- 
 ability to bring in money when due is immensely greater. And as to 
 the amount of attention that loans require, it would be to speak within 
 bounds to say, that they require as a rule ten times as much as trade 
 bills. To this, there may, of course be exceptions. In all bank state- 
 ments, therefore, it is of vital importance to keep advances and trade 
 bills separate. This is most effectually done under the Scotch svstem, 
 for loans are entered in an altogether different set of books from those 
 which contain trade bills, and they are reported to head office on differ- 
 ent statements. But in Canadian practice they are apt to be confounded, 
 for the reason that both are made by promissory notes exactly similar in 
 form, both are entered, commonly, in the same register and ledgers, and 
 both are included in statements under the one generic term, liabilities. 
 They are apt, in fact, to get so inextricably mixed in a badly-managed 
 office that it has taken weeks of the time of a superior officer to disen- 
 tangle the accounts in which they are entered, and to fix the primary and 
 secondary liability on the proper parties. 
 
 (2) The second advantage of the Scotch system is that all advances 
 are initiated in the first place and authorized by the board of directors. 
 No matter in what branch advances are made, authorization must come 
 from headquarters. This has so long been the established custom all 
 over Scotland that every person understands it and conforms to it, both 
 branch managers and customers alike. 
 
 It is quite true that in Canada all advances on credits of importance 
 and those which are to be spread over a whole season, are, as a rule, 
 applied for to the board, and not entered on until sanctioned by them. 
 But it is also a part of the Canadian system that discounts of promissory 
 notes, known to be loans, are constantly made in a majority of offices, 
 that have never been submitted to the board at all. The first that a 
 general manager knows of them is when they come before him in a list 
 of bills discounted. 
 
 (3) The third advantage of the Scotch system is that all such ad- 
 
176 BANKING AND COM^rERCE. 
 
 varices are accompanied by, not mere endorsements, but by bonds of 
 guarantee, drawn up in legal form, and duly signed, sealed, and de- 
 livered. This has prevailed in Scotland for generations, and it is now 
 an ingrained habit of the whole people, rooted bj"- long continuance, that 
 when they want to borrow money from a bank, they give security for it 
 by a bond. There is the further advantage in giving security by legal 
 documents, that the guarantors cannot but feel the legal responsibility 
 that attaches to them, when instead of merely writing their names across 
 the back of a promissory note, often in a very perfunctory way, think- 
 ing little about it (and it is undeniable that they do), they sign and seal 
 a legal document in the presence of one or more witnesses. The im- 
 portance of having endorsers alive to their responsibilities has been en- 
 larged on already. Every banker is well aware of it. There is under 
 this system the further important advantage to the banker himself, that 
 such a document of guarantee can scarcely ever be forged. A branch 
 manager can never be certain that the endorsement on a promissory note 
 i5 genuine, unless the endorser comes in person and signs in his presence. 
 He has been authorized to lend John Smith up to $5,000 on the endorse- 
 ment of Thomas Malcolm. When, then, the customer brings promissory 
 notes, apparently endorsed by Thomas Malcolm, the manager is apt to 
 be satisfied. Yet Malcolm may never have signed at all. What is, per- 
 haps, more dangerous still, although ^Malcolm may have signed the 
 original note, he may not have signed the renewal of it. But a bond 
 of guarantee is not only signed, generally by more than one person, but 
 witnessed in the office of the bank. This renders forgery practically im- 
 possible.^^ 
 
 There are undoubtedly some disadvantages in the practical working 
 of the system. One of these is that in case of an account becoming un- 
 satisfactory, it is more difficult to deal with than if it was expressed by 
 one or more promissory notes, coming due on definite days. If renewal 
 is desired, as it almost certainly will be in such a case, the opportunity 
 arises of insisting upon payment or reduction. It is generally stipulated 
 that a cash credit shall be paid up at least once a year, but until the 
 time for retirement comes, the tacit understanding is that advances shall 
 be continued without criticism, unless often overdrawn. But when a 
 promissory note comes due the opportunity for criticism arises naturally, 
 and must be met. 
 
 Another point of disadvantage is that if a customer is called upon 
 to pay the balance against him, and the amount is disputed, it is some- 
 times difficult to establish it. If a single voucher is missing, it cannot be 
 done. The writer has a vivid recollection of a case of this kind occurring 
 when he was a young clerk, and of the weary time he had, day after 
 day, in the intervals of business, and after bank hours, in laborious 
 
 55 A rule has been sometimes adopted by n bank that every endorser on a loan 
 note must sign his name In the presence of the manager. But It has been found 
 very difficult to carry It out In practice. 
 
THE SCOTCH SYSTEM. 177 
 
 searching for documents that had been fiJcd away months and even years 
 before. Payment on his bond was being demanded from a guarantor, 
 but it was necessary, of course, to establisli tlie amount of the debt before 
 a definite sum could be demanded of him. 
 
 These, however, are trifling drawbacks, compared with the great ad- 
 «rantages attending the system; and the writer has had practical experi- 
 ence of the working of both. 
 
 We have in Canada, in various spheres of action, improved upon the 
 methods of other countries, by adopting all their good points, and leav- 
 ing out or modifying what seemed to be defective. And, in this matter, 
 we could undoubtedly accomplish it. For example, the promissory notes 
 representing advances should be kept in entirely different registers, and 
 posted into entirely different liability ledgers from those relating to trade 
 bills. Advances should be entered in different statements, when accounts 
 are placed before the board. Overdrafts should be forbidden until se- 
 curity is held, but when allowed, under exceptional circumstances, an 
 accurate account should be taken of them and entered along with other 
 advances to the same party if any exist. 
 
 It might be well to consider whether the Scotch system of security by 
 guarantee in the case of established credits might not be substituted for 
 the prevalent practice of security by endorsement.'^^'' 
 
 It must not be imagined from the foregoing that the trade bills offered 
 to a banker, either in England or Canada, require no examination or 
 supervision. A striking instance given under the head of forgeries — which 
 occurred in Scotland — will prove that they do so. But the examination 
 and criticism of these is conducted on entirely different principles from 
 those required in judging advances, and it is far less laborious. 
 
 56 In fact, the law of bills of exchange an<l promissory notes might well be re- 
 vised so as to place the practice of endorsement by way of guarantee on an en- 
 tirely different footing from the endorsement of the owner of a bill. It might be 
 enacted that an endorsement as guarantee should always be so expressed; as, 
 for example, in the following form, or something to the same purport: "For 
 valid consideration I hereby guarantee payment of the within promissory note 
 
 at maturity. As witness my hand and seal, at this day of 190.." 
 
 This understanding should be witnessed in the office of the bank. It used to 
 be held by some English judges that a promissory note was not a negotiable in- 
 strument. They doubtless were thinking of a promissory note given to represent 
 money borrowed, and not of a note given in settlement of a mercantile account. 
 
CHAPTER XXIII. 
 
 BANK RESERVES. 
 
 Rationale of Cash Reserves — How Much — Of What Character — 
 Canadian Legal Tender — Proportion to be Kept by Banks — 
 Other Forms of Reserves — Bank Balances — Call Loans — Con- 
 ditions AS TO Both. 
 
 IT has been pointed out that the first idea of one who has commenced 
 the business of taking care of other people's money, and has engaged 
 
 to repay it on demand, will be to keep the whole of it in his safe; 
 and a humorous example of this feeling has been given in the address of 
 the president of a newly-organized bank in the United States. There 
 would, indeed, be some justification for this course; for how, such a 
 banker might say, can I possibly tell irhen these people will want their 
 money, or how much they will want, if they need any at all. Until, then, 
 he had arrived by experience at what may be called a law of average, 
 as to the demands of his customers (as a whole) from time to time, he 
 would, if prudent, keep the larger part of the money deposited with him 
 within reach. But as time went on such a banker would arrive at this 
 general average, and after providing for this, and also for unforeseen 
 emergencies, would feel himself safe in using the balance of his deposi- 
 tor's funds in transactions yielding interest. 
 
 Through such a process as this the whole business of banking has 
 passed, until in the evolution of events general rules and priniciples have 
 been arrived at; applicable, some to one condition of things and some to 
 another. For conditions differ in different countries and also at differ- 
 ent times. It is universally conceded, for example, that in the case of 
 the Bank of England a larger percentage of actual money reserve is 
 needful than is the case with an ordinary bank; and for this reason, that 
 the Bank of England is the depository of the spare money of all the 
 banks in the Kingdom. In the balance-sheets of all London banks will 
 be found the significant item, cash on hand, and in the Bank of Englarid. 
 They all keep large amounts of money in the great central institution, 
 not that they get any interest for it, for they do not, but for the sake of 
 convenience, and partly, also, for safety. 
 
 But these London banks are themselves custodians of the spare funds 
 of the banks of the interior, all of whom keep accounts with a London 
 bank, and usually have large amounts of their reserve money lodged with 
 them. It thus has come about, by a gradual evolutionary process, that 
 much of the reserve money of the whole Kingdom is in the shape of bal- 
 ances due by the Bank of England; a fact which at once suggests that 
 
 178 
 
BANK RESERVES. 179 
 
 the great national institution should keep a far larger proportion of such 
 balances in actual gold in its vaults than would be necessary if its de- 
 positors were wholly mercantile. 
 
 But at this point another consideration arises, viz., of what should 
 this actual money consist.^ The answer to this question involves another, 
 viz., what is considered to be actual money ; that is, what are all persons 
 bound to receive as such according to the law of England or of any other 
 country.^ Within the Bank of England itself the only money which it 
 can tender in response to a demand is gold coin. This is the only 
 LEGAL TENDER for the Bank. But the law of England has provided that 
 the notes of the Bank of England are themselves legal tender every- 
 where except at the counter of the Bank itself. These notes are simply 
 the promises of the corporation to pay a given number of pounds on de- 
 mand; but it would obviously be absurd for the Bank to be able, legally, 
 to pay its own promises with its own promises. This would make them 
 irredeemable, in which case they would infallibly go to a discount. The 
 Bank must perforce pay in gold, if payment is demanded. Gold, of 
 course, is legal tender if any other bank or person chooses to tender it. 
 Silver coins are recognized as legal tender also, but only to the extent of 
 two pounds — an amount evidently fixed as the sum an individual can 
 carry about with him, or wherewith a laborer's wages can be paid, or small 
 change made. It is, however, entirely unsuitable for the larger purposes 
 of trade and commerce. 
 
 Gold, therefore, is the final legal money of England (but Bank of 
 England notes are not legal tender in Scotland), and as the Bank of 
 England is the only place where no other money will answer lawful de- 
 mands, this Bank is the great reservoir of gold for the country. Every 
 other bank in the Kingdom can keep its available reserve in Bank of 
 England notes, and with them discharge all lawful obligations. But as 
 no bank notes in England are less than five pounds, a large amount of 
 gold coin must necessarily be kept for the requirements of business. 
 
 It has come, therefore, to be universally understood that the percent- 
 age of the reserve of the Bank shall be on a far higher scale than is con- 
 sidered necessary for an ordinary institution. It generally ranges from 
 forty to fifty per cent, of the Bank's liabilities, and is watched by the 
 whole financial world with as much care, and sometimes with as much 
 anxiety, as the weather is by a farmer or a navigator. 
 
 For ordinary banks it has come to be recognized, as the result of wide 
 experience, that a cash reserve of about twenty-five per cent, of liabilities 
 is sufficient for ordinary purposes; with the proviso, however, that a sort 
 of secondary reserve shall be held for emergencies in the shape of in- 
 vestments. The latter is fully of treated later on. The proportion of 
 twenty-five per cent, has been adopted in the banking law of the United 
 States as the standard to which all the national banks located in "central 
 reserve cities" and "reserve cities" must conform. That amount of avail- 
 able reserve they are bound to keep. But the banks of Canada, though 
 
180 BANKING AND COMMERCE. 
 
 fully recognizing this percentage as a reasonable one, have always de- 
 clined to have it made compulsory, for reasons set forth in other chapters. 
 
 Character of the Reserve. 
 
 Assuming, then, that this amount may be reasonable for a bank to 
 keep, the question may fairly be raised as to the precise shape in which 
 such a reserve should be held. This brings us to the question of what is 
 legal-tender money in Canada.^ 
 
 It is to the credit of Canadian financiers and bankers that they have 
 always maintained that gold is the only proper basis for a monetary 
 system, refusing to be drawn away by the plausible arguments, at one 
 time so general in the United States, in favor of a double standard. And 
 whatever may have been the case in the early days of settlement, it is 
 crtain that for more than sixty years past the single standard of gold as 
 legal tender has been resolutely maintained. The only time when specie 
 payments were ever suspended in any of the British Provinces was when 
 tlie country was in a state of civil war. This was in 1837. 
 
 But about forty years ago — or immediately after Confederation — a 
 strenuous attempt was made to introduce a Government currency which 
 would operate somewhat as that of the Bank of England does in Eng- 
 land. These Government notes were to be legal tender, except at the 
 Government Treasury. There they were to be redeemable, on demand, 
 in gold. Under this measure it was intended to abolish bank-note cir- 
 culation altogether. The majority of the banks, however, strenuously 
 resisted this; and after a controversy extending over several sessions of 
 Parliament, a compromise was finally agreed to, by the terms of which 
 the banks retained the right to issue notes to the extent of their capital. 
 An act was passed authorizing the issue of Government notes, but only 
 of small denominations, for general circulation ; and also of notes of large 
 denominations for use between banks in settlement of claims against each 
 other. Both alike were to be redeemable in gold. The final basis, there- 
 fore, in the country was still to be gold. 
 
 In connection with this an important clause was introduced into the 
 Banking Act, which ensured that the banks, at all times, should hold 
 large amounts of these Government notes. The clause was this, that 
 whatever amount each bank might hold from time to time, as a cash re- 
 serve, at least forty per cent, thereof should consist of Government notes. 
 Being then under obligation to hold such large amounts, it became a mat- 
 ter of vital importance to the banks that this currency should never fail 
 to be redeemable in gold on demand. When, therefore, the Dominion 
 Note Act was passed, the bankers of the day, in conference with the 
 Government, pressed strenuously for a broad foundation of actual gold, 
 to be always available in the Treasury, and that Government bonds, duly 
 authorized by Parliament, should be held for the balance. These ideas 
 were acquiesced in by the Government, and on this foundation the legal- 
 tender notes of Canada have ever since rested. It is important to note 
 
BANK RESERVES. 181 
 
 that there has never been an occasion in which the Treasury failed to 
 respond instantly to any demand for gold made upon it.''^ 
 
 Thus, then, we arrive at the mode in which the banks of Canada deal 
 with their cash reserve. All their instincts as bankers and all the tradi- 
 tions that influence them, would lead them to keep their cash reserves 
 wholly in gold coin, and to make their clearing-house settlements in that 
 medium. This they actually did until the Dominion Note Act was passed. 
 But as the law of their organization binds them to keep at least forty 
 per cent, in Government notes, and this under heavy penalties, they do, 
 as a matter of fact, keep more. How much more is left to their own 
 discretion and convenience. Notes of large denominations are, of course, 
 much more convenient to handle than the bags of gold they were formerly 
 accustomed to carry about. And being well convinced that these notes 
 are perfectly safe, long experience having proved that gold can be had 
 for them whenever Avanted, the banks have settled down into a general 
 practice of keeping much larger amounts of such notes than they are 
 bound to do. 
 
 There arc, however, two drawbacks. It is much easier to steal and 
 to hide such notes than it is to steal gold. Gold is so heavy that it is 
 practically impossible for a thief to carry it away. A theft of bags of 
 gold has never occurred in the experience of banks of Canada, although 
 it has been knoAvn that bars of specie have been stolen in transmission 
 across the Atlantic and the Continent. The second drawback arises from 
 the fact that all engraved notes can be imitated and forged ; a very prac- 
 tical danger, as experience has proved. In view of both these possibili- 
 ties, the Government, after consultation with the officers of banks, have 
 adopted special precautions in the matter, making it almost impossible 
 for the large notes to be used in any way except between banks, and thus 
 practically useless to a thief or embezzler. As to the smaller ones, as 
 none can be issued above four dollars, it is not worth while to attempt to 
 counterfeit them. 
 
 The banks, it will be observed, under this system are under no obliga- 
 tion to keep gold at all. Every demand made upon them can be satis- 
 fied with legal-tender notes. But as a matter of fact all the banks do 
 keep a portion of their cash in gold, as may be seen by the returns made 
 to the Government. There has never been an issue of these returns in 
 which any bank reported that it carried no gold. Now, for this course 
 there have been several reasons. The first is that they are sometimes 
 asked for gold by customers who are travelling, or who have a use for 
 
 57 The liasis, it will be percoivcd. is analogous to that of the Bank of England. 
 That Bank is popularly supposed to hold actual coin against every note passing 
 over the counter of Its issue department. But this is a fallacy. The Bank Is au- 
 thorized to issue notes against the large amount of Government bonds which rep- 
 resent Its own capital. Thus, Bank of England notes, like those of the Gov- 
 ernment of Canada, rest partly upon a strictly-defined amount of Government 
 bonds, and partly upon gold. It should be noted further, that the Dominion Note 
 Act strictly limits the amount of notes that may be Issued against Government 
 securities, and ordains that for any excess beyond this amount dollar for dollar 
 shall be held in actual gold coin. 
 
182 RANKING AND COMMERCE. 
 
 gold, at times, in the transaction of business. These demands, however, 
 are always very slight. Another reason for keeping gold is that in cer- 
 tain conditions of exchange with Great Britain and also with the United 
 States it is the most profitable medium of remittance. This, however, 
 does not, as a rule call for what mav be called large amounts, that is, in 
 proportion to the total reserves of the bank. 
 
 A 'third is, that long and traditional habits with Canadian bankers 
 have led them to value gold as the final foundation of all their transac- 
 tions, and to keep as much of it as they can with convenience and under 
 compliance with the law. It may be truthfully said, that in spite of the 
 great convenience of legal-tender notes in practice, there is not a Cana- 
 dian banker but would feel more satisfaction in carrying gold in his 
 vaults to represent the whole of the cash reserve. Another reason (rather 
 a remote one in practice) why the banks keep a certain supply of gold is, 
 that on the rare occasions that a "run" takes place on any of them, nothing 
 will satisfy demands as effectually as gold. Indeed, it has been known 
 more than once, in the experience of both sides of the Atlantic, that the 
 mere piling up of gold on the counter in sight of all and sundry who 
 came, has been sufficient to stop a "run" altogether. Fifty thousand dol- 
 lars is the merest fraction of the reserve of most of our banks, but fifty 
 tliousand dollars in gold coins, piled up on the counter in front of a pay- 
 ing teller will generally satisfy all but the most nervous applicants. 
 When the people see so much gold they are ashamed to ask for it. 
 
 But now, granting that the cash reserves of the bank must, of neces- 
 sity, consist partly of legal-tender notes, and assuming that twenty-five 
 per cent, of liabilities may be considered a normal amount, why should 
 not a bank keep the whole of this percentage in Government notes and 
 gold.'' That none of the Canadian banks do this is known to all who 
 examine their statements to the Government. On the other hand it is 
 equally well known that the sum total of what the banks call their avail- 
 able reserves is, as a rule, far beyond the twenty-five per cent., and is 
 more frequently as much as fifty per cent. 
 
 A critic, however, may say, that as the liabilities of the bank are all 
 payable in legal tender or gold, why not keep this twenty-five per cent, 
 at any rate in this solid shape? Demands are daily made on the banks 
 by other banks, and it is certain such demands cannot be satisfied by ten- 
 der of balances due from banks abroad or by call loans. "N^Hiy then not 
 keep in the vault the kind of material which can be used on the spot? 
 This is a very reasonable question, to which every banker is bound to 
 give reasonable consideration, with a view to satisfying not only himself 
 but the banking community and the public generally. For, in any 
 country, none are so much interested as bankers in the stability of banks 
 as a wliole. But this is more particularly the case in Canada, where, 
 under the operation of the "redemption fund," all the banks are practi- 
 cally guarantors of each other's notes. No persons watch the returns of 
 U»e reserves of the banks with so much care as bankers do. But with tar 
 
BANK RESERVES. 183 
 
 more care do prudent bankers watch the fluctuations in their own re- 
 serves. The amount and the percentage of his available resources is a 
 matter of daily consideration and examination by every banker. And 
 just as the amount of the reserves is so considered, so is their character. 
 If any banker had concluded, as the fruit of reasoning and experience, 
 that it was necessary to keep the whole percentage of his reserves in gold 
 and Government notes, he would undoubtedly do it. But practical ex- 
 perience — and that extended over a long period and through varied cir- 
 cumstances — has convinced most bankers that the requirements of safety 
 can be fully met by kee])ing considerable sums deposited, at credit with 
 banking agents, in one or more great financial centres. Thus it is, as 
 has been observed, that English country bankers keep so much of their 
 cash in the hands of their London agents, while these agents, in their 
 turn, keep a large part of their cash in the vaults of the Bank of Eng- 
 land. The same principle obtains in the requirements of the United 
 States banking law, which, rigid as they are, as to the total amount, allow 
 considerable portions of such reserves to be deposited with banks in large 
 centres. 
 
 Now, in considering the application of this general principle to Cana- 
 dian banks, let it be noticed that the requirements of their business call 
 for them all to have accounts with bankers in at least two financial cen- 
 tres — New York and London ; and in some cases with Boston also. With- 
 out such arrangements they could not meet the requirements of their cus- 
 tomers, nor make the collections required in the course of business. The 
 trade between Canada and the United States is, as we all know, of im- 
 mense magnitude; but it is not so well understood that this immense trade 
 is all represented by banking transactions of equal magnitude. Now, 
 New York is the financial centre of the American Continent, and all these 
 transactions finally centre there. Money flows to New York and flows 
 out from New York in large sums (only a small part, however, in actual 
 coin), according as the exigencies of commerce arise. Canada is in- 
 cluded within the area of these operations, and the Canadian banks, in 
 furtherance of them, must of necessity keep large supplies of money in 
 New York at immediate call. These balances with banks in New York 
 as a financial centre correspond with the balances kept by provincial and 
 Scotch banks in London. And experience has demonstrated that the 
 money a Canadian banker has with his banking agent in New York is 
 almost as available as if he had locked it up in his safe. He can make 
 it available in the intercourse of banks by drafts, for which he can obtain 
 legal tenders on the sjiot, if he needs them. It has thus come about that 
 bankers in Canada have come to regard cash to their credit in a New 
 York bank as a part of their cash reserves. 
 
 Utilization of Spare Funds. 
 There are, however, other considerations connected with this matter. 
 Whilst the first instinct of every banker is to keep himself safe, under all 
 
184 BANKING AND COMMERCE. 
 
 circumstances, it is equally his instinct to endeavor to make as much profit 
 as he can out of the funds at his daily command. This has long led to 
 the consideration whether spare funds cannot be so employed as to yield 
 some interest, and yet be absolutely safe and at command when wanted. 
 It is obviously only in great financial centres, where vast masses of money 
 are constantly to be found, that such operations could be devised; accord- 
 ingly, it is only in London and New York where they are developed to 
 any large extent. They are found indeed, but only to a limited degree, in 
 smaller financial centres. Now, in London, for one or two generations 
 back, the balance-sheet of every bank has contained amongst its assets this 
 significant item, loans at call, the significance being that this item was 
 invariably included as a part of the cash reserve of the bank and not 
 amongst its loans or investments. Cash on hand, in Bank of England, or 
 at call; this form, slightly varied as it may be, but the same in substance, 
 has appeared in every London bank statement for fifty years. And the 
 fact that it has so continued and is in full force to this day, is proof that 
 it has worked satisfactorily. 
 
 The same conditions that have prevailed in London have also arisen, 
 and had influence in New York. Money can be loaned there with a large 
 margin of security and with an assurance of being returned on demand, 
 to a class of borrowers of high standing. It has been so for a sufficiently 
 long term of years to enable the system to be tested. And as it has 
 yielded similar satisfactory results, the banks have steadily followed the 
 course purused in London and placed money out on call, repayable on 
 demand, with a large margin of security, taking for it whatever rate may 
 be current at the time. And long experience, in every variety of circum- 
 stances, even in sharp crises, has proved to bankers that they can do this 
 with assurance of receiving it when wanted. The bankers of Canada 
 well know the importance of having their ordinary reserves at absolute 
 command; and if at any time any events had transpired which cast a 
 shade of uncertainty over this fundamental requirement, it would have 
 been discontinued beyond doubt. ■^'' 
 
 Much that has been observed with regard to placing spare money 
 and keeping part of a banker's cash reserves in New York applies equally 
 to London. The whole trade between Canada and Great Britain gives 
 rise to banking transactions in the shape of sterling bills of exchange or 
 transfers of money by cable. Indeed, if the amount of such bills passing 
 
 58 There are, however, call loans put out In smaller centres of finance than New 
 York or London. In fact, wherever there Is a stock exchanse, of sufficient magni- 
 tude to give rise to large daily transactions, there is the opportunity of placing 
 out money strictly at call, on ".he security of stocks and bonds. But bankers are 
 well aware of the difference between such small centres and those of continental 
 or world-wide magnitude like New York or London. This difference i.s not so 
 much in the safevy of the loans as in the certainty of repayment of large amounts 
 Immediately on call. It has consequently been the practice, especially by the 
 larger banks, to place a limit on the amount of money they loan at call in smaller 
 centrfs. re.sfrving the larger operations for New York or London. But as to safety^ 
 there Is r« much of this in the j-maller centres as the larger. 
 
BANK RESERVES. 185 
 
 through the hands of the bankers that have to do with them could be as- 
 certained, it would be found to afford a very fair idea of the trade be- 
 tween Canada and the mother country. All these transactions finally 
 centre in London. It is a matter of necessity, therefore, with all Cana- 
 dian banks to keep an account with a bank in London, and to have money 
 at command there. With the majority of the banks, balances with their 
 bankers comprise the whole of the arrangements they have in that centre. 
 But several of the larger ones have an office of their own in London and 
 can, if desirable, place money on call there as they do in New York. '' 
 
 Thus balances and items are created, which appear in bank state- 
 ments either as balances due from banks in Great Britain, or call loans 
 put out on that market. 
 
 We thus arrive at the three modes in which a banker's cash reserve 
 may be held: First, in gold or legal-tender notes, in his own possession; 
 second, cash balances due on demand from other banks, generally in New 
 York and London, but sometimes in smaller centres; third, cash, payable 
 on demand — or it may be at one or two days' notice — loaned to stock 
 brokers with stocks or bonds as security, and a margin. 
 
 It is the last two items that give rise to criticism, and the criticism 
 is, either that the banker from whom money is due may become embar- 
 rassed and fail to respond at once, or that the parties who have borrowed 
 money on call may also fail to respond and compel the banker to realize 
 his loan by selling securities. This, of course, would cause delay, and 
 thus make such transactions undesirable as cash reserves. To all which 
 it is sufficient to reply that time and experience test all things. When 
 brought to this test, both these modes of placing money have been demon- 
 strated to be successful. As to balances due from banks in large centres, 
 there has hardly been known an instance, amongst the countless multi- 
 tude of transactions in which any New York bank failed to respond to 
 demands. Not that no bank has ever failed in New York, for some sec- 
 ond-rate concerns have stopped payment. But none of the large corpo- 
 rations, with whom the Canadian banks are in the habit of keeping ac- 
 counts, have ever failed to respond to demand. It is needless to say that 
 the same observation applies also to London. But it may be a matter of 
 surprise to those not acquainted with the subject to learn that there has 
 scarcely ever been an instance, amongst the countless transactions in call 
 loans, when a delay, even for a day, has occurred in responding, and that 
 an actual loss of such money has scarcely ever been heard of. Thus, 
 time and experience have both proved that, for all practical purposes, 
 
 59" It is well known, also, that London barks are quite willing, and have been so 
 for a long period, to allow Canadian banks a standing credit, that may be availed 
 of or drawn for according to terms agreed upon. This credit cannot be looked, 
 upon as part of a bank's cash reserve, as a balance at credit would be. but It may 
 be considered as a secondary line of defence against emergencies, somewhat In 
 the same manner as we have shown Investments to be in the next chapter. For 
 money can be obtained against such a credit, by a Canadian banker at any time. 
 within twenty-four hours. 
 
186 BANKING AND COMMERCE. 
 
 moneys due by bankers in financial centres, and cash placed out on call, 
 are both available at any time witliin twenty- four hours. ^° 
 
 There are, of course, occasions during which the signs of threatened 
 disturbance in financial matters have become so serious that bankers have 
 thought it prudent to draw in balances due them by other banks, and to 
 call in the money they placed out at call. Such a time, for example, was 
 to be found when what was known as the "silver agitation" rose to such 
 a height in the United States as to become the main factor in a Presiden- 
 tial contest. Canadian bankers well knew the dangers involved in this 
 question, and were convinced that gold would rise to a premium if the 
 views of certain parties prevailed. Tliey had previously taken the pre- 
 caution to have all their contracts for loans at call made payable in gold; 
 but in addition to this it was thought desirable by some to draw away 
 money altogether from the scene of possible disturbance, leaving only 
 such balances as were absolutely necessary for the conduct of business. 
 
 This matter is of interest to merchants as well as bankers. For they 
 should undoubtedly so manage their affairs as to have a reserve of cash 
 — in hand, or in bank, or bills undiscounted, or a reserve of credit un- 
 drawn upon with their banker. If not, they may be compelled to stop 
 payment, even though solvent. 
 
 60 It may seem strange that a banker can reckon upon money at his credit in 
 London being as much at his command as if he had it deposited in a bank in New 
 York. But to such perfection have exchange operations between these financial 
 centres been brought that bills of exchange, either at sight or time, can at once be 
 negotiated and the amount placed to credit, with as little loss of time as it would 
 take for a merchant to draw a check on his own bank in the same city. And 
 If an exacting critic should object that this is not a sufflcient reliance in such an 
 Important matter as cash reserves, Inasmuch as financial disturbances would im- 
 pede its operation, the reply must be that experience >loes not justify this con- 
 tention. There has never been a time in the heaviest crisis in which money could 
 not be transferred from London to New York or Montreal by means of bills of 
 exchange, or cable transfers. The only difference between the transferring of 
 money in a crisis and in an ordinary time is in the rate of exchange. 
 
CHAPTER XXI r. 
 BANK INVESTMENTS AS RESERVES. . 
 
 Reserves Against Emergencies — Should Be Negotiable and Avail- 
 able — Reserves of a London Bank — Comments Thereon. 
 
 CLOSELY connected with the keeping of adequate reserves of cash 
 for daily needs is that of maintaining what may be called a second 
 line of safety and defence in the shape of Investments. These 
 investments must, in the nature of things, if they are to answer the pur- 
 pose, consist of securities that can at all times be easily realized. This 
 primary condition arises out of the necessities of a banker's business, and 
 at once dift'crentiatcs his investments from those of a private individual. 
 Such an individual has no large body of persons about him to whom he is 
 indebted, whose funds have been lodged with him in trust, some of whom 
 are making demands upon him every day in the regular course of busi- 
 ness, and all of whom are resting upon the honor and wisdom of their 
 banker to answer not only ordinary demands, but extraordinary ones. 
 This is the first principle that dominates every movement that a banker 
 makes, and in nothing is it so operative as in the selection of securities 
 for investment. 
 
 In fact, the word "investment," as used in reference to a banker's 
 business, has a radically different meaning from that which appertains to 
 it in ordinary use. When a private individual thinks of making an 
 investment, the primary condition lie thinks of is permanence. If he is 
 likely to want the money he has at his command, he keeps it in the bank. 
 But when the need is for steady interest and security of principal, he 
 takes it out of bank and buys something that can rest undisturbed, per- 
 haps for years. He can purchase real estate, or take an interest in a 
 well-established business, or lend money on mortgage for long terms. 
 If he becomes a stockholder in a bank or other company, he thinks not of 
 the realizableness of the security, but of the permanence of the corpora- 
 tion. And he acts with regard to investing in bonds on the same rule. 
 
 But with a banker this idea of permanence is out of place. His in- 
 vestments, so called, are really a part of his fund to meet liabilities. But 
 not his ordinary and daily recurring liabilities, but such as are extraor- 
 dinary, which arise under special circumstances and at intervals of time, 
 such, for example, as when a bad harvest causes scarcity of money and a 
 heavier demand for it both from depositors and mercantile customers, or 
 when a season of bad trade supervenes and continues year after year with 
 the same result. 
 
 If a banker's whole spare resources are employed in discounting bills 
 and making business loans, he will find when such a time supervenes, and 
 a drain of deposits or contraction of circulation sets in, that hte cannot 
 reduce his discounts without embarrassing his customers. In fact, at such 
 
 187 
 
188 BANKING AND COMMERCE. 
 
 a time the majority of his commercial customers could not respond at all 
 to his demands for reduction. Instead of that they will want more 
 money from him. Thus, instead of his being a tower of strength to the 
 circle who do business with him, he may become weak himself. 
 
 The Investments of an English Bank. 
 
 Experienced bankers in old financial centres like those of Great Brit- 
 ain have, therefore, long found the necessity of placing out a certain 
 percentage of their resources in securities which can be realized without 
 disturbance. In all the statements of English and Scotch banks, but of 
 the London ones especially, we find the item of securities owned by the 
 bank figuring prominently. These securities, let it be observed, are the 
 actual property of the bank and must not be confounded with call loans. 
 
 Take, for example, the following, which may be looked upon as a 
 typical instance, inasmuch as the bank in question combines within itself 
 almost every description of bank business as carried on throughout Eng- 
 land. With its head office in London, where the firm of Barclay Bevan 
 & Co. was for generations known as one of the most conservative (and 
 jet most prosperous) of the great banks of the metropolis, it is now a 
 joint stock corporation (under the name of Barclay & Co., Limited), in 
 perfect touch with the commercial interests of the whole country, its cus- 
 tomers representing every class and interest. 
 
 The paid-up capital of the bank is $12,100,000 (the figures are given 
 in dollars that they may be the more easily followed). The capital, of 
 course, can never be demanded, and though sometimes considered as a 
 liability for bookkeeping purposes, it is a great error to include it along 
 with such liabilities as can be demanded. 
 
 But when we look at the item of deposits, that is, of moneys that 
 can be actually called for, we are struck at once with the enormous 
 amount. Deposits amount to $165,318,000. The reserve to meet 
 this immense total consists, in the first instance, of cash in hand, or in 
 the Bank of England, or out on call or short notice, $4-4,235,225. 
 
 This is what we have described as the ordinary reserve, kept against 
 ordinary demands. But the bank has a provision for extraordinary de- 
 mands also, in the shape of investments to the amount of $i3,6l'2,735, 
 being nearly the same amount as the ordinary reserve. 
 
 These investments are summarized as follows in the balance sheet of 
 the bank: 
 
 1. British Government securities and Bank of 
 
 England stock $18,613,000 
 
 2. Metropolitan and British corporation. stocks 
 
 and bonds 3,928,000 
 
 3. Indian and Colonial Government securities, 
 
 including guaranteed railways 7,550,000 
 
 4. British railway debentures and guaranteed 
 
 and preference stocks 5,592,000 
 
 5. Other securities 7,928,000 
 
r.AXK INVESTMENTS AS RESERVES. 189 
 
 It will be apparent at once that tliese fulfil the essential requirements 
 of" availability. They can be realized on as may be required within a short 
 time, and so enable the bank to meet extraordinary demands without dis- 
 turbance to those mercantile customers who depend upon it for supplies. 
 
 In looking over this summary of investments it is interesting to no- 
 tice one or two points as to their classification. Thus, for example, 
 while the leading position is given to Consols and other British Govern- 
 ment securities, it is curious to note that Bank of England stoch is 
 grouped with them, thus placing the Bank of England, in point of sta- 
 bility and credit, on a par with the British Government itself. This, 
 of course, reflects the opinion and judgment of the directors of only 
 one of the many banks of London; but that judgment, let us remem" 
 ber, is the result of several generations of knowledge and experience; 
 and is a striking tribute to the unique position occupied bj- the Bank of 
 England amongst the financial institutions of the world. For there is 
 really nothing like it, unless perhaps the Bank of France may be in- 
 cluded in the same category. The stability of that great Bank, amidst 
 the constant political upheavals of the country, is one of the most re- 
 markable phenomena of modern times. 
 
 Reverting to the classification of the Barclay Company's investments, 
 it is again interesting to note that Corporation storks and bonds are 
 placed before Indian and Colonial Government securities. 
 
 The corporation bonds referred to are probably those of British 
 municipalities — cities and towns chiefly — and it is interesting to see 
 how high a place they hold. 
 
 But the stocks must be those of manufacturing or trading companies, 
 of which there is an immense variety quoted on the Eondon Stock Ex- 
 change, and of all possible degrees of stability. It is interesting to 
 note that there are stocks of this description which are considered to be 
 at least equal, as a banking investment, to the bonds of our own Govern- 
 rrent. 
 
 We, however, on this side of the Atlantic might classify the securi- 
 ties diff'erently. For even with regard to the bonds of municipalities, 
 it is a question if the element of municipal trading now so prominent 
 ■will not introduce a very considerable amount of uncertainty as to the 
 financial position of such corporations. 
 
 As to stocks of trading corporations, called on this side of the Atlan- 
 tic Industrials, they surely cannot be compared for stability with the ob- 
 ligations of the great colonies and dependencies of the Empire. Their 
 debentures are worth nearly as much as consols, and might well be 
 placed immediately after them. 
 
 The next two classifications are natural enough. British railway 
 bonds, with their guaranteed and preference stocks, are a class by them- 
 selves; and their stability has long been proved. It is noticeable that 
 ordinary stocks are not included. They are all either guaranteed or 
 
190 BAXKIXG AND CO^IMEKCE. 
 
 preference, though even witli these the question may arise, guaranteed 
 by whom? 
 
 The final item of nearly $8,000,000 of "other securities" is one in 
 whicli there may be endless scope for variations in value according to 
 exigencies of the times, and the judgment of trained experts may find 
 constant opportunities for exercise in considering them. 
 
 Investments of Canadian Banks. 
 
 It M'ill also be interesting to compare this classification of invest- 
 ments with that of the Government statements of Canadian banks. This 
 classification reflects generally, though not absolutely, the consensus of 
 both the Finance Department of the Government and the Council of the 
 Bankers' Association. It is divided into three heads, as follows: 
 
 1. Dominion and Provincial Government Securities. 
 
 2. Canadian Municipal Securities, and British, Foreign, 
 
 or Colonial Securities other than Canadian. 
 
 3. Railway and other bonds, debentures and stocks. 
 
 This classification is not materially different from that of the Lon- 
 don bank. The first item is the same, with the exception of the omission' 
 of bank stock. We have nothing analagous to the Bank of England in 
 Canada. 
 
 The second and third items correspond to the second, third and fourth 
 ill the London statement; but they are less specific and more compre- 
 hensive. 
 
 In considering the Canadian classification it will be evident that 
 other considerations than relative stability of value have governed it. 
 Dominion and Provincial Government securities naturalW come first, 
 but there is a very wide difference between the value of the two. 
 
 The second item includes under one heading classes of investments 
 that are as different from one another in stability and value as can be 
 conceived. In the same column are included all sorts of Canadian mu- 
 nicipal securities (town, city and country alike, in all the various prov- 
 inces), and British public securities, which last item, of course, includes 
 consols. Then, in the third, there is no distinction made between railway 
 bonds and stocks, though it is evident that for purposes of bank. invest- 
 ment these two are widely different in character. Railway stocks are 
 subject to sucli fluctuations and manipulations as to put a majority of 
 them rather into the category of speculative holdings than solid invest- 
 ments that should be clioscn by a bank. (It will be noticed that in the 
 London classification all the stocks arc either guaranteed or preference.) 
 
 The Canadian bank statement miglit be amended with advantage in 
 many particulars, and in none more than in the columns showing their 
 investments. Thus, if the object of the differentiation of the assets be 
 to show how much of a bank's funds is employed in discounting and 
 bow much in investments, one column for each would be sufficient. This 
 
BANK INVESTMENTS AS RESERVES. 191 
 
 distinction is one of the highest importance; for the total amount of the 
 discounts and advances would show the total amount of service the bank 
 is rendering to the commercial community of the country, and to that 
 extent fulfilling the purposes of its charter; whilst the total amount of 
 the investments would show what provision the rules of the bank thought 
 necessary for extraordinary emergencies; that is, to secure its own pro- 
 tection. 
 
 It is evident that there should be a reasonable pro))ortion betvveeen 
 these two. For, on the one hand, if an excessive spirit of caution were 
 to prevail, the wliole of the funds of the bank, over and above its reserve 
 of cash and availables, might be invested in Government securities, and 
 so save the authorities of the bank from all the anxiety arising from 
 dealing with the commercial community. But the public, that granted 
 the charter through its representatives, would certainly complain that this 
 style of management was not fulfilling the object of the bank's exist- 
 ence, and might require its charter to be surrendered, and with good 
 reason. 
 
 On the other hand, if it appeared that the bank had no investments 
 at all, it would be apparent either that the managers were making inade- 
 quate provision for emergencies, or that their ordinary cash resources 
 were maintained at an imusually high figure. In that case the stock- 
 holders might complain that the bank was not earning sufficient profit. 
 
 General Character of a Bank's Investments. 
 
 As to the character of the investments of a bank, unless the whole is 
 to consist of Government securities, it is evident that the experienced 
 judgment of a manager or board of directors would find ample scope 
 in the selection. Even in municipal securities there is considerable dif- 
 ference in stability and value; although it may be stated, to the honor 
 of Canadian municipal bodies, that none of them in the older provinces 
 ever made default in the payment of either principal or interest. But 
 this cannot be said of the municipalities of the Northwest. Some of 
 them, in the excitement of the great "boom" of an early daV, entered 
 into engagements which, after the boom collapsed, they were entirely 
 unable to fulfill. The result was a compromise with their creditors — a 
 state of things however that may never be repeated. 
 
 But in the matter of railway securities, there is infinite scope for the 
 exercise of judgment, and still more in those of enterprises such as 
 shipping and manufacturing companies. It is to be supposed that no 
 prudent banker will choose the stoch of such companies as a subject for 
 investment. The fluctuations are far too serious for such a field to be 
 ventured upon, amounting as they do (experience shows it) to as much 
 as fifty per cent, and upwards. Of the stocks of railway and other in- 
 dustrial corporations, Canada offers only a slender selection; and they 
 would scarcely be thought of for investment by a banker. Prudence 
 would suggest that he should confine himself to the bonds. 
 
192 BANKING AND COMMERCE. 
 
 The bonds of railways of the whole continent offer a very large field 
 of selection, and so do those of industrial and semi-public undertakings. 
 These last are continually increasing, and are presented by their pro- 
 moters and agents in every variety of attraction. This is especially the 
 case with the more speculative varieties, and above all with those relat- 
 ing to gold mining. But these should be considered as out of the realm 
 of a banker. 
 
 There remain to be considered the bonds of railways and of well- 
 established undertakings of a commercial or semi-commercial character. 
 
 With respect to these, a banker must needs exercise a far more criti- 
 cal judgment than a private individual. That a man may do what he 
 likes with his own is proverbial, and true enough within limitations. 
 But no man may do what he likes with money he holds in trust. In in- 
 vesting such money he will do well to act on the established rule that 
 high interest denotes poor security. Yet a banker can scarcely avoid 
 feeling the attraction of high interest. He is investing for the sake of 
 the interest; that is certain. And when a choice of investments is before 
 him, as it continually will be, the higher figure will inevitably attract 
 attention. A difference of one per cent, in the return on a considerable 
 amount of bonds will make a perceptible difference in his profit and loss 
 statement. 
 
 There are always two impulses in such cases — that of enterprise 
 and that of caution, the former saying, take the risk and get the higher 
 return; the other, be careful, for in seeking higher interest you may lose 
 some of the principal. It need not be said that the latter is the voice 
 to be listened to. 
 
 But mere caution will not be sufficient in the case. A banker, in 
 considering investments, will take means to acquire information; he will 
 make comparisons; he will look into antecedents and range of fluctua- 
 tions; he will, perhaps above all, consider the personnel of the parties 
 in control. If his information as to the last is unfavorable, he will do 
 well to take the benefit of the doubt. For bonds, as well as stocks, 
 though no-t to the same extent, may be subject to the operations of the 
 giants of finance, whereby innocent "lambs" are fleeced. Above all. 
 ivith regard to bonds, he will choose out those that are first preference. 
 
 A banker will certainly observe another rule of investment, viz., to 
 divide his risks. And in so doing he will divide not only amongst cor- 
 porations, but amongst classes. So much of ordinary railways, so much 
 of street railways, so much of light and power companies, so much of 
 navigation companies, so much of iron, cotton, wool, flour, and so on; 
 this will be the rule, as well as so much under this control, and so much 
 under that. He will thus ensure a general average of safety, for it is 
 scarcely possible that the same cause, at the same time, can affect them 
 all. 
 
 A banker will revise his investments from time to time as he does his 
 discounts, and pass judgment upon them in detail. In so doing, he can 
 
RAXK INVEST.MENTS AS RESERVES. 193 
 
 scarcely fail at times to discern symptoms of weakness in certain direc- 
 tions leading to desirableness of change. For it is in this, as it is in all 
 other spheres of action, that constant vigilance is the price of safety. 
 
 But one settled principle should never be departed from, viz., that 
 stocks sliould he lent upon, but not owned. When a bank buys stock it 
 makes itself a sort of partner in the enterprise — certainly an improper 
 position; while in buying bonds it is occupying its proper sphere as a 
 lender of money. 
 
 It may be thought that the foregoing observations have no bearing 
 on the conduct of a commercial or manufacturing business. But in truth 
 every merchant and manufacturer will find it to his interest to accumulate 
 what corresponds to the rest or reserve fund of a bank. This indeed 
 some of them do. But this surplus over ordinary capital is often invested 
 in the business, and not available when wanted for emergencies. A re- 
 serve fund that is represented by buildings and machinery is no reserve 
 fund at all.«i 
 
 61 One of the most prosperous of the many prosperous manufacturing concerns 
 of Canada was managed, financially, on the principle, first of accumulating suffi- 
 cient cash reserves to enable them to hold their bills receivable without dis- 
 counting, and. after that, of Investing surplus profits in Government securities 
 and other negotiable bonds. 
 
 The business of this concern called at times for very heavy outlays that could 
 not be foreseen, a state of things that might have been embarrassing but for their 
 possession of this large reserve of bonds. When the emergency arose they would 
 take their bonds to a bank and obtain advances on them at a much lower rate 
 than that at which they could discount bills on their own credit, or on warehouse 
 receipt. To this it may be replied that a commercial or manufacturing concern in 
 good credit can always obtain advances from its bankers; and that it is rather a 
 diversion of funds from profitable uses to invest in securities that yield a low 
 rate of interest. But it is not true that a respectable concern can obtain advances 
 from its bankers at all times. Bankers are themselves, at times, short of money, 
 and are constrained to refuse even their soundest customers. The advantage, then, 
 to a commercial house of having a reserve of negotiable oonds is that if an emer- 
 gency arises, they can apply to any bank doing business In their district, or even 
 beyond it; or, in the last resort, they can put their bonds on the market. But It 
 Is evident that a firm in this position can at times take advantage of favorable 
 changes in the price of commodities, and buy for cash at a time when others 
 are precluded from doing it. They can thus realize an exceptional profit, besides 
 being in so strong a position that they can present a square front to all the 
 winds that blow, no matter how stormy. 
 
CHAPTER XXV. 
 SECURITY AND SECURITIES IN GENERAL. 
 
 Security and Securities Theoretically Considered, with Practical 
 Applications — Of Security in General: Its Limitations — Per- 
 sonal Security — Endorsements — Guarantees — Security Taken 
 on Goods. 
 
 SOME of the observations in this and the preceding chapters will have 
 been found in other portions of this work where modes of doing 
 business are referred to. (See chapters on Loans.) They are 
 repeated here because of their intrinsic importance and because the ques- 
 tion with which this chapter is concerned is specifically that of security 
 and the various considerations connected with it. 
 
 In one of the striking scenes of "Hamlet," the great dramatist makes 
 the Prince of Denmark say to Horatio while they are standing in the 
 churchyard talking together: "Is not parchment made of sheep skins .^" 
 To which his friend replies: "Ay, and of calf skins, too, my lord." 
 Hamlet rejoins: "They are sheep and calves too that seek out assurance 
 in that." A biting sarcasm, and one that has proved only too true in the 
 experience of many an unfortunate money lender, who relied for what 
 Shakespeare calls "assurance," but what we generally name security, 
 upon the mere possession of parchment deeds; forgetting that the real 
 assurance is not in the parchment, but in the property, whatever it may 
 be, that the parchment purports to hold. "Purports" is a very impor- 
 tant word in this connection, for deeds do not always fulfil the purpose 
 which the holder supposes they do. A deed may be improperly drawn; 
 it may be signed by a party who has no right in law to convey. If he 
 signs in an official capacity, let us say as curator, trustee or what not, 
 the instrument creating his authority may be a faulty one.®- The con- 
 veyance of itself may be one that is against common or statute law; 
 as, for example, certain conveyances are prohibited by the Banking Act; 
 or the whole document may be a forgery, signers and witnesses alike. 
 But even if the parchment itself is strictly regular in terms and the con- 
 veyance authorized by law, it may still fall short of being what it pur- 
 ports to be ; i. e., security. For, if it is a title to land, the land may have 
 fallen out of cultivation, with buildings dilapidated, fences thrown do>vn 
 or destroyed, and a plentiful crop of weeds and new underbrush, which 
 
 62 An instance of this is afforded by something that took place in one of the 
 midland counties of England, where a bank took over as collateral security the 
 deeds of a property valued at £80,000. Trouble arose. It was necessary to pro- 
 ceed upon the deeds; when, to the disgust of the bank, they were pronounced by 
 a high-class conveyancer utterly worthless to convey a negotiable title. Yet 
 they had been examined by the bank's own solicitor and pronounced perfect. 
 
SECURITY AND SECURITIES IN GENERAL. 195 
 
 will take years to brinj; back into a proper condition. Nay, the land 
 represented by the parchment may be in the condition kno\vn as drowned 
 land, being continuously overflowed by water and useless for any pur- 
 pose whatever. All these cases have been actually known in Canadian 
 experience. 
 
 The instrument may not purport to convey land at all, but chattels, 
 personal effects or merchandise, in which case another element of uncer- 
 tainty enters in. For whereas land cannot be moved, and therefore is 
 called real estate, chattels and merchandise can. So then, whilst the 
 parchment or other document of security lies safe in the money-lender's 
 strong box, the thing which is supposed to make him secure may have 
 been made away with. True it is, that the law provides a certain safe- 
 guard in the shape of stringent penalties against such removal, making 
 it almost equivalent to theft. But, while it is comparatively easy to se- 
 cure conviction and punishment for actual theft, it has been proved to be 
 difficult to obtain conviction in the case of chattels that have been removed 
 improperly. Hence this is a real danger, which can never be lost sight 
 of by any man that holds chattels as security. 
 
 Benevolent Loans. 
 
 The general question of security is one that has so vital a connection 
 with the banker's business that it is desirable to lay down with perfect 
 clearness all that appertains to it. It is a well understood and univers- 
 al principle that when a man allows another to have the use of his money 
 he shall give some form of assurance that it will be returned at the time 
 agreed upon. The only exception is in the case of private loans made 
 from motives of benevolence — a very important distinction — and one that 
 throws some light on passages in ancient books on the subject, the Script- 
 ures for example. Benevolent loans are quite commonly unsecured; 
 moreover, they are generally without interest, a fact that at once removes 
 them from the category of banking loans. When a man lends a sum of 
 money to tide a friend over a difficulty, or to help a poor widow to pre- 
 vent her goods from being seized, the character and the motive of the 
 transaction are wholly different from loans undertaken by bankers. Even 
 if the principal is not repaid when promised, the lender is seldom vexed. 
 He did not lend the money as a matter of business, and will find his sat- 
 isfaction not in the receipt of interest, but in doing good."^ 
 
 Personal Guarantee. 
 
 By far the most common of all forms of banking security is that of 
 personal guarantee. That there should be two names, at least, to every 
 bill, is a banking axiom, and, in the case of trade bills, it is a matter of 
 
 63 A careful perusal of those passages of the Old Testament in which usury 
 Is forbidden will show that many of them refer to loans of this class, viz., to 
 money lent to needy brethren. In other cases the prohibition is against exces- 
 sive and burdensome interest. But the teaching of Jesus Christ clearly recog- 
 nizes the reasonableness of interest being required when the transaction is purely 
 a matter of business. (See Mathew XXV. ?7.) 
 
106 BANKING AND COMMERCE. 
 
 course; for such bills arise from a transaction between two parties, both 
 of whose names are on the document. Hence every trade bill would be 
 classified as a secured transaction.'^' 
 
 But a banker will not, as a rule, deal with trade bills long before 
 finding out tliat security, so called, does not necessarily make secure. In 
 estimating the value of trade bills it is customary to use the phrase, are 
 the makers or promisers good for the amount — a phrase which primarily 
 means, have they money or available resources enough to pay the bill. 
 This is the commercial sense of the word good; but the primary meaning 
 of the word, as every one knows, is a moral one. It has to do with char- 
 acter, not money. The question therefore is one of morality also, and 
 involves the consideration not only whether the maker is able, but 
 wliether he is willing. In looking at a certain name a banker therefore 
 considers not alone the resources of tlie party, but his cliaractcr also, and 
 from this forms his conclusion, whether payment of that particular bill 
 may be relied upon. But this is not all. A trade bill is never brought 
 to the banker by the maker; and in this there is an essential difference 
 between a trade bill and an endorsed loan bill. In the latter case the 
 maker invariably brings it. But the trade bill is brought by the endorser; 
 the man who sold the goods. 
 
 These points have been brought to the reader's attention in other 
 chapters and need not be enlarged upon here, further than to say that 
 the banker in discounting a trade bill looks, primarily, for his security to 
 his own customer, the man who brings it to him. And in so doing he has 
 an assurance, with regard to the other name, that of the maker or ac- 
 ceptor of the bill, for before he got the bill at all the seller of the goods 
 must have exercised his judgment and concluded that the buyer was able 
 to pay for them. The banker, therefore, with regard to such bills, exer- 
 cises a double mental operation and considers, first, whether the maker 
 can and will pay the bill, and also whether his customer can and 
 will in case the maker does not. So important has this last con- 
 sideration become, that in nearly all well governed banks the rule pre- 
 vails to continue discoimting for no man who has not proved himself able 
 and willing to take up such bills at once, in case they are dishonored. 
 A customer who fails to do this is speedily made aware that his account is 
 undesirable. 
 
 But the question of security by endorsement arises most frequently 
 
 gT There is indeed a mode of dealing with trade bills, in large financial cen- 
 tres, known as "buying and discounting bills without recourse," that is, where 
 the banker relinquishes the right to call upon the seller of the bill, and under- 
 takes to rely, solely, on the maker. The seller of such a bill. In endorsing, adds 
 the words "without recourse," meaning without recourse to him. The bill then 
 becomes a one name bill, and naturally a higher price is demanded for cashing 
 It. Some merchants systematically conduct their discounting business on this 
 principle, and are willing to pay much heavier charges for discount in consider- 
 ation of being relieved of responsibility for their customers' bills. There are 
 bill-broking firms and companies who cultivate this class of business, making a 
 specialty of it, and taking means to acquire the wide range of information neces- 
 sary to do it safely. 
 
SECUIUTY AND SECURITIP:S IN GENERAL. 197 
 
 with regard to just sucli advances of money by a banker to a customer. 
 
 A man in business, needing supplies of money for his operations, will 
 frequently prevail upon some neighbor, relative or friend to become his 
 surety; or, to speak in common phrase, to endorse his paper. Such an 
 endorsement is of an entirely different character from that of the owner 
 of a note or bill, who passes his title on to a succeeding holder for value 
 bv endorsing it. The endorsement now referred to is of the nature of a 
 surety or guarantee. 
 
 With regard to the value to be attached to such endorsements much 
 confusion of thought exists. A banker who lends ten thousand dollars 
 on the endorsement of another man, reputed to be worth twenty thou- 
 sand, might seem to be undertaking a very safe operation; but experience 
 teaches that he might be leaning upon a broken reed. The endorser 
 might be surety for other persons also, and the aggregate amount of 
 these obligations might be far beyond his means of meeting them. Such 
 cases have arisen and have opened the eyes, more than once, of confiding 
 bankers, and shown that before lending money on the strength of a cer- 
 tain endorser inquiries should have been made whether he was not in- 
 volved in the success or failure of half a dozen commercial enterprises 
 over which he could exercise no effective control. But, besides this, there 
 is another very important consideration. An endorser becoming surety 
 for ten thousand dollars, might be utterly unable to pay as much, even 
 if he had a real surplus of twenty thousand, without winding up his own 
 business. This surplus might consist in land, buildings and machinery, 
 on which the very existence of his own business depended. And it might 
 be, and probably would be. impossible for him to diminish his own capital 
 by the sum necessary to pay the amount he endorsed, without ruining his 
 own credit. In this instance the banker would almost certainly be con- 
 fronted, in case of need, wuth a proposal from the endorser to release 
 him, on payment of only a portion of what he had endorsed. If he re- 
 fused, and demanded what was due, he might find himself the plaintiff 
 in a vexatious lawsuit, and only obtain judgment after long delay, by 
 which time the affairs of the endorser might be put into such a shape that 
 to collect the debt would be impossible. 
 
 The banker, in considering an endorsement, will do well to remem- 
 ber that what he wants from the endorser is assurance of repayment at 
 the time promised,— time being of the essence of the value of the secu- 
 rity. He must therefore consider whether the endorser is in such a posi- 
 tion that he could pay the amount when called upon without embarrass- 
 ment. Many a man is in a position at all times to meet his own 
 engagements who Avould be seriously embarrassed to pay the debts of 
 another person. It is sometimes said by a borrower, to a proposed en- 
 dorser, that it is a mere matter of form; that he, the borrower, will be 
 sure to pay the note at maturity. And not a few endorsers have been 
 incautious enough to believe it, finding out to their cost that to guarantee 
 another man's debt is no mere matter of form, but a very solid reality. 
 
IPS BANKIN'G AND COMMERCE. 
 
 Various Classes of Endorsers. 
 
 There arc various classes of endorsers, as there are of borrowers. 
 There are endorsers wlio treat the matter so lightly that they will en- 
 dorse for any amount, and never think of keeping a record of their re- 
 sponsibilities. These are a class for a banker to avoid. On the other 
 hand, there are endorsers who are keenly alive to the responsibility they 
 undertake, who consider carefully, and insist on knowing accurately the 
 position of the borrower before undertaking that he shall pay a certain 
 amount of money on a certain day. A prudent endorser will take means 
 to have an efficient oversight of the borrower's business so long as the 
 obligation endures; considering, very properly, that his guarantee gives 
 him a right to this position. An endorser of this kind is esteemed, and 
 very properly so, a more valuable one than another of much larger means 
 who would neglect such precaiitions, especially if he has had more expe- 
 rience in business than the borrower and is able to give him valuable 
 hints as to his business. Thus a father's endorsement for a son just 
 commencing business is of a particularly valuable kind, or that of the 
 senior partner of a firm, who, after retiring, consents to guarantee a cer- 
 tain amount of their liabilities. 
 
 There is another class of endorsers that used to be much more com- 
 mon than at present; namely, the professional endorser, who is known 
 in the community as such, and endorses or guarantees for a commission. 
 Such men, generally, have some capital at command, but the value of 
 their endorsement largely depends on the prudence with which they carry 
 on their business. A prudent endorser of this class will always scruti- 
 nize carefully the position and character of the borrower. He will make 
 accurate record of his guarantees, as if they were his own promissory 
 notes. And he will take care never to allow his name to remain in de- 
 fault. The endorsement of such a man, so long as he is commercially 
 "good," will come to have a peculiar value in a banker's eyes, as being 
 almost equivalent to a certificate that the borrower is both able and will- 
 ing to pay his debts. This class of man, however, is rapidly disap- 
 pearing. 
 
 There is another class of endorsements to be considered; namely, that 
 of more persons than one on the same note. A loan will sometimes be 
 proposed to a banker, generally in connection with some public enter- 
 prise, in which the notes are to be endorsed by four or five individuals. 
 This class of endorsements, however, often proves very unsatisfactory, 
 for although each of the endorsers is responsible for the whole amount 
 of the note, it rarely happens that any one of them is willing to pay the 
 whole amount. He will come to a banker and offer to pay his share and 
 request a discharge, which, of course, the banker will not grant. Con- 
 sultations then follow between the parties as to how the obligation is to 
 be met, in M'hich one will offer to do this, and another that, but seldom 
 coming to an agreement satisfactory to the banker. Not infrequently 
 
SECURITY AND SECUKITIKS IN GENERAL. 199 
 
 they quarrel among themselves, each one of them declaring that he will 
 fight to the last in resisting payment. The banker then finds himself 
 involved in half a dozen lawsuits, and it will go hard if some clever law- 
 yer, employed by one of the parties, does not find a loophole for evasion, 
 or delay, owing to some peculiarities in the case, possibly suggested by 
 false swearing or confused testimony. We know how a clever counsel 
 can confuse a witness so much as to get him to admit almost anything, 
 and a banker in the witness-box is just as liable as other people to be 
 wheedled or bullied into admissions of a damaging nature, such as may 
 be almost fatal to his case. 
 
 There is another consideration with regard to these multiple endorse- 
 ments ; namely, that by law each endorser on a bill has recourse upon the 
 preceding one, this being founded upon the practice of jjassing notes 
 from one man of business to another for a valuable consideration, as used 
 to be common in the business world. In this case it is perfectly equitable 
 for the last endorser to call upon the preceding one to pay him, and so 
 on, until the maker or acceptor is reached. This law prevails even in 
 such cases as have been referred to, although the circumstances are en- 
 tirely different. There is no method under our law of bills of exchange 
 by which a number of men can endorse a note, one after another, so as to 
 be jointly and severally liable, and avoid recourse upon previous names. 
 It is therefore better that the persons proposing to become security 
 should become joint and several promisors, or joint and several guaran- 
 tors on a separate instrument. 
 
 Differences Between Endorsement and Guarantee. 
 
 This leads to the question of the difference between an endorsement 
 and a document of guarantee ; respecting which it is well to note some 
 points for consideration. 
 
 The first point is that endorsements require to be on each separate 
 note, and that when there are several endorsers for the same debtor on 
 separate notes, and difficulties arise in the circumstances of the maker, 
 each endorser can claim the right out of any security realized to have' 
 his notes paid in the order in which they become due. This operates, in 
 some cases, very much to the creditor's disadvantage. Moreover, if the 
 time for a loan is long, as it requires to be in some lines of business, 
 notes require to be renewed, failing which, they lie under protest in the 
 banker's hands. Now, the endorser may not be at hand; he may be, in 
 these times of travel, at a considerable distance; or he may, in some 
 cases, refuse to endorse a renewal, and insist on the banker forcing pay- 
 ment. If the banker refuses, as being contrary to agreement, the en- 
 dorser may pay the note himself, and sue the maker, to the great damage 
 of his credit, and with a danger of bringing about a stoppage of his busi- 
 ness. 
 
 A guarantee, however, obviates all these difficulties. But such a 
 
200 BANKING AND COMMERCE. 
 
 document requires to he drawn with exceeding care — so as to avoid bring- 
 ing the banker himself under obligations upon which a defense might be 
 hung in case of suit. There is scarcely any instrument capable of giving 
 rise to so many conflicting points as a loosely drawn guarantee. For 
 this reason the banker will bring to his aid the best legal talent available 
 to prepare a proper form of instrument applicable to general uses. This 
 guarantee should provide for renewals, changes of security, additional 
 advances, partial payments and other contingencies, and in most cases 
 should bind the guarantor to pay a specific sum whenever called upon. 
 
 But a guarantee may be taken for a running account, and made to 
 cover the balance due on such an account, whenever it may be struck. In 
 some cases, indeed, where an account is a complicated one, and consists 
 partly of trade bills and partly of securities of various classes, a guaran- 
 tee may be taken for the final balance remaining after other securities 
 are exhausted. This word exhausted, however, in a legal document, re- 
 quires to be very carefully defined. But one thing a banker needs to be 
 particularly careful about, viz., not to introduce special conditions, of 
 his own motion, into a form of guarantee which has been prepared by 
 his solicitor. He will alwaj's find it prudent to let his solicitor insert the 
 special conditions also. 
 
 Of the two forms of personal security, therefore, an endorsement is 
 the most simple and the least open to misconstruction, and affords the 
 least opening for a vexatious defense in case of a suit. And when the 
 note guaranteed is a single transaction, and not a part of a general ar- 
 rangement for advances, it is the most advisable form of personal secu- 
 rity that can be taken. 
 
 But there is this to be said, that a guarantee is alwaj'S witnessed, and 
 is generally signed in the office of the bank, or the bank's attorney; while 
 it not infrequenth^ happens that the maker of an endorsed note brings it 
 to the bank for discount, and expects it to be passed without further cere- 
 mony. But a prudent banker will invariably require the endorser to be 
 present when he affixes his signature, especially when the amount is large. 
 For an endorsement may be forged; or, even if the original signature is 
 genuine, the renewal may be forged. An endorsement of a loan bill, in 
 fact, as it is a document of guarantee, should be treated with as much 
 care and ceremon}^ as if it were a deed to be signed, sealed, and delivered 
 by the party to it. 
 
 Loans Secured by Merchandise. 
 
 It is a fundamental axiom in banking that all discount loans for com- 
 mercial firms should rest on, or be represented by, salable goods, on 
 which no other person has a claim. Exceptions there are, as have been 
 noted, but the exceptions are few. It is here that banking differs from 
 mere money-lending; its loans should be founded, not simply on valuable 
 property or even valuable goods, but on goods that are salable, that have 
 
SECUETTY AND SECURITIES IN GENERAL. 201 
 
 a market value, that are dealt in between man and man, and between 
 country and country. In other words, banking is the hanrmaid of 
 coMMEncE. But although these things are so, it is not all banking dis- 
 counts or loans that constitute a claim on any particular goods. It can- 
 not be said, for example, that a trade bill is represented by such and such 
 lots of dry goods, groceries or hardware in the store of the person who 
 has made the bill. They are not earmarked and set aside for that pur- 
 pose. There are, however, banking loans that do rest on goods that are 
 specifically designated and set aside for the purpose. 
 
 The security for this class of loans has now to be considered. 
 The simplest and most natural form of lending money on the secu- 
 rity of goods is that of the pawnbroker, so called — a very misleading 
 name — for his real business is to lend money on goods that are left in 
 his possession. It is a most simple business, requiring scarcely any 
 C'ipacity to carry it on, except a fair judgment as to what goods will sell 
 for. The pawnbroker does not rely on any legal documents to secure 
 him and he cares nothing about the standing of his customer. He has 
 the goods themselves, and it is his own lookout if he does not take proper 
 care of them. The pawnbroker's loans are, however, not commercial. 
 No man, in a centre like Chicago or Liverpool, would deposit a thousand 
 barrels of flour with a pawnbroker and get an advance on ihem. Such 
 loans are part of the operations of commerce, and would be applied for 
 to a banker. 
 
 Now, as a pawnbroker keeps a shop or a warehouse in which to store 
 the goods he has lent money upon, it would naturally be supposed to ap- 
 pertain to a banker's business to have a warehouse, wharf or yard, with 
 conveniences for the storage of various classes of goods owned by his 
 customers. This would strike anyone as the most reasonable, natural, 
 not to say safe, mode of transacting business. "Bring me your goods," 
 the banker might say, "and I will lend you money upon them." In some 
 parts of the world this is actually the mode on which banking loans on 
 goods are made. The bank owns as a part of its machinery (so to speak) 
 a commodious warehouse, yard or wharf, in which it requires all goods 
 to be deposited on which advances are made. These are, of course, in 
 charge of its own officers, and the bank attends to insurance at the charge 
 of the borrower; charging him also, directly or indirectly, with the 
 storage.'""'^ 
 
 That this tends in a remarkable degree to the safety of such loans 
 goes without saying. The only danger to the banker in that case is that 
 he may overestimate the value of the goods, or forget to take into account 
 the chance of decline. 
 
 This mode of procedure, however rational it may seem, has never 
 been adopted by bankers generally. The bankers of Great Britain, gen- 
 es The Imperial Bank of Germany conducts its business on this principle, and 
 Is the owner of many warehouses in different parts of the Empire, in which are 
 Btored all eroods that are advanced upor. 
 
202 BANKIXG AND COMMERCE. 
 
 en^lly speaking, know nothing ofit:^^" ncitlier do those of the Ignited 
 States or Canada. They keep no storehouses or yards in which to place 
 goods they have loaned upon ; though doubtless many of them have wished 
 they had done so when they have been deceived by documents purporting 
 to represent goods. All the loans in their books stated to be on goods 
 rest in fact upon nothing but pieces of paper; or rather let us say, on 
 what is written on pieces of paper. Just as an American Treasury cer- 
 tificate for five thousand dollars represents that amount of actual coin 
 in its vaults, so are these pieces of paper presumed to represent so many 
 tons of iron, bags of wool, barrels of flour, or bushels of wheat. And, 
 to say the truth, there are such documents which carry almost as much 
 assurance with regard to goods as the gold certificates of the American 
 Treasury do with regard to money. "When the officers of a well-known 
 warehousing or dock company issue a certificate that they have received 
 a thousand barrels of flour from John Smith or a thousand bales of cot- 
 ton from MacGregor & Co., and that they will deliver the same on pro- 
 duction of the certificate duly endorsed, a banker will feel almost as much 
 assurance in advancing on such a document as if he had the goods in his 
 own possession."^ 
 
 This is more especially the case if such documents are registered, as 
 they are in Chicago and other grain warehousing centres of the United 
 States. The truth is that the value of the document is in the responsi- 
 bility of the party issuing it. This is a principle that is often forgotten, 
 and it is here repeated, that it may be better remembered. The value of 
 the document is in the responsibility of the party issuing it. There are 
 various grades of such documents as there are various grades of bills and 
 promissory notes, the question always being, in the first place, will the 
 issuer of such a receipt sign the document unless he has the goods in 
 
 66 It has. however, sometimes happened that in conservative Great Britain, ex- 
 ceptional measures are taken with regard to property advanced upon. A bank 
 In the "Black Country" was at one time in the habit of advancing on pig iron 
 stored in a certain borrower's own yard, or in the yard of the blast furnace where 
 it was produced. This customer having once removed this iron so advanced 
 upon, the bank adopted the plan of leasing a small area in some furnace yard, 
 fencing it in. placing it under lock and key, and requiring iron advanced on to be 
 deposited there. This plan proved effectual. 
 
 67 There are, however, cases at times which shake a banker's confidence in 
 this theory. 
 
 The writer once had to do with a draft secured by a bill of lading for goods 
 signed by the shipping officer of a railway station on the company's regular form. 
 But such goods were never delivered at the destination indicated. And investi- 
 gation brought out the fact that such goods were never received at the station. 
 The bank contended that the railway company was liable for the acts of its own 
 oflficer done In the regular course of business. This was denied, the company 
 claiming that they were only liable for goods they had actually received. And 
 this contention was upheld, though it really did not touch the pomt. The point 
 was, a wrong having been done by an employee of the company in the ordinary 
 course of his duty, who is to suffer for the wrong— the company that employed 
 him, or a perfectly Innocent party? 
 
 The decision Is calculated to undermine the confidence entertained in bills 
 of lading as security. 
 
SECURITY AND SECURITIES IX GENERAL. 203 
 
 ■possession? And, secondly, will he take due care of them and not let 
 them go except to the right party? And, if he fails to do either of these 
 things, is he of sufiicient responsibility to make Jiis ciigagcmeiit good?'^^ 
 
 In Canada and the United States the issuing and advancing of these 
 documents is carefully regulated by law; the object being to facilitate 
 bank advances on the great staple productions of the country and so to 
 assist in that great annual movement upon which all internal commerce 
 depends. 
 
 This law of warehouse receipts, let it be borne in mind, traverses the 
 law of chattel mortgage in two respects. The ordinary law is that a 
 bank cannot make a new advance on the security of chattels; and also, if 
 a chattel mortgage is given to secure an existing debt, it must be entered 
 in a public registry within a certain nimaber of days. But the warehouse 
 receipt law enables new advances to be made on goods, and gives the 
 lender a valid title to them against all comers, subject to certain restric- 
 tions. It also dispenses with the necessity of registration, though it is 
 often contended that it would be better in all cases if registration were 
 required. Under this law bankers can advance on documents in the same 
 manner that they discount bills, looking to the names of the parties and 
 considering also the genuineness of the document itself. 
 
 68 There is this difference, between a banker advancing on goods in his 
 •own possession and advancing on a warehouse receipt, that the document may be 
 forged. The certificate of registration may be forged also, and the banker may 
 be deluding himself by an imagined security of goods, while such goods have no 
 existence whatever, or may have been pledged to another party on a genuine 
 document. 
 
CHAPTER XXV I. 
 SECURITY AND SECURITIES— Continued. 
 
 Security by an Owner's Warehouse Receipt — ^Bailee Receipts — 
 Bills of Lading — Security on Real Property. 
 
 IN the last chapter was considered the security afforded for advances 
 on goods by means of a formal document acknowledging receipt 
 of them and undertaking to deliver them when called for, on sur- 
 render of the document. The legislation respecting these documents, 
 and the title they conveyed, was also adverted to. In all these two 
 persons were concerned — the person who deposited the goods and the 
 person who undertook to take care of them, the latter being a warehouse- 
 keeper, or wharfinger, by occupation. But in process of time, and what 
 may be called the evolution of business, it came about that another class 
 of receipts or certificates wei-e proposed as security. The borrower, in 
 small towns especially, often having a store, warehouse or yard of his 
 own, the question was asked, why should he not be the warehouseman of 
 his own goods, and give his own certificate of possession, borrowing 
 upon that? These receipts were warehouse receipts undoubtedly, and 
 the fraudulent issuing of them, or making away with the goods, would 
 be equally an offence against the law. It thus came about that bankers 
 ill places where no professional warehouse-keepers were to be found 
 became willing to advance monej' on this kind of document. 
 
 The law for some time, however, did not recognize them as convey- 
 ing title in the same manner as the former documents did. But in time 
 especial clauses were added to the Banking Act legalizing this class of 
 receipts, but defining very strictly the kind of goods for which such 
 certificates could be given. Strict provision was also made that the 
 document should be handed to the banker at the time an advance was 
 made, or that the banker should hold a written engagement from his 
 customer to lodge such a document with him. In every other respect the 
 provisions relating to the older classes of receipts were made applicable 
 to these receipts. 
 
 It is evident, that these restrictions have in view the prevention of 
 what might prove to be a great abuse, viz., that a dealer in imported or 
 manufactured goods — such as dr}' goods, groceries, etc., should h.ive it 
 in his power, while such goods are still unpaid for, and without remov- 
 ing them from his shelves, to pledge them for advances, thus making it 
 easy to deceive or defraud his creditors. These creditors, under such 
 circumstances, would find that the stock in trade on which they relied 
 for pa3'ment had been so pledged as to give a bank a title to it, thus creat- 
 ing a preference of a very inequitable kind. The Act therefore, very 
 
SECURITY AND SECURITIES IX GENERAL. 205 
 
 properly limited the class of goods that could be pledged by the owner's 
 simple certificate to such articles of merchandise as are invariably 
 bought for cash, viz., all kinds of agricultural and natural productions. 
 There could tlien be no conflict of claim between one class of creditors 
 and another. 
 
 These documents being thus legalized, gradually came to liave, in 
 the minds of inexperienced bankers, the same weight and consideration 
 that attaclied to the certificates of a professional wareliouseman. And 
 in the consideration of the various classes of loans and discounts in 
 their books tliey would describe these as "secured" and place them in 
 the same category as advances secured by goods stored in a public ware- 
 house or wharf. 
 
 But little consideration is required to show that there is a fundamental 
 difference between them. The warehouse receipt, or dock warrant, 
 properly so called, is the receipt of a person who has no interest in the 
 goods except to take care of them, and deliver them in good order when 
 called upon. This is his business. For this service he receives due re- 
 muneration, and his whole reputation and standing are involved in per- 
 forming the duty well. He is practically, so far as the banker is con- 
 cerned, in the position of a guarantor holding specific goods with which 
 to meet his obligation. There is no inducement to him to give a certifi- 
 cate unless he has the goods; and every possible inducement to refuse 
 to give them up except to the banker who holds his pledge. 
 
 These safeguards, however, are wholly wanting when a man bor- 
 rows money on his own pledge. There is nothing, except a borrower's 
 honor, to prevent his writing out a certificate before he has the goods 
 in possession, or for a larger quantit}' than he actually has in store, or 
 for goods of a higher brand tlian he has in stock. Even if a banker 
 takes the precaution to have the goods examined, it is next to impossible 
 for him to arrive at an accurate statement, either as to quantity or 
 value. Then, as to the other point of safe custody and delivery, it is 
 impossible to prevent the owner, when in possession, from taking the 
 goods into the stock which is being manufactured, and selling and de- 
 livering the goods produced. Nay, it is not uncommon for a banker to 
 give his consent to this, either in general terms or specifically, either 
 verbally or in writing, so that an understanding is established, or sup- 
 posed by the borrower to be established, such as can be pleaded in 
 court against a charge of wrong-doing. From all which it is evident 
 that the pledges of the owner of goods are not to be looked on in the 
 light of an actual security. It does not make secure in the manner 
 that intervention of a third party does. It amounts, in reality, only to 
 an additional promise on the borrower's part. Having already written 
 a promise to repay a certain sum of money on a certain day, he adds 
 to it a promise to deliver certain goods on a certain day. It is only a 
 promise added to a promise, both by the same person, and not an en- 
 gagement by another person. 
 
sot) BANKING AND COMMERCE. 
 
 There is, however, this to be said, that while the pledge of a prom- 
 isor is weak in not making sure that the goods pledged are actually 
 where they are represented to be, it is a strong security when the goods 
 are actually there, and the borrower becomes unable to pay his debts. 
 Thev cannot be seized in judgment; and they do not pass to an assignee 
 in case of insolvency. Tlie law holds them strictly for the banker, until 
 the debt secured by them is paid. But he must be able to prove, in case 
 of dispute, that the debt attaches specifically to those goods. Neither 
 a proper warehouse receipt nor a borrower's own pledge can attach 
 generally to a debt due to a banker. A specific sum of money that can 
 be so identified must be lent on certain specific goods that can be identi- 
 fied; otherwise the security will not hold. 
 
 There is, however, this safeguard; that a pledge of this character, 
 if not bona tide, is subject to the same criminal penalties that attach to 
 a document issued by a third party. If a man gives a banker a pledge 
 on goods that do not exist, or are not what he represents them to be, 
 he exposes himself to a criminal prosecution. And if, after giving a 
 pledge on goods that actually exist, he removes the goods without the 
 banker's consent or without accounting for them, he is equally guilty. 
 Such is the law; and, to a certain extent, it is efficacious. But when a 
 trader in exportable goods becomes pressed, as he sometimes may be 
 unknown to his banker, the temptation is very great to raise money by 
 the easy process of writing out a pledge. And a man, without any in- 
 tention of ultimately defrauding, will avail himself of this relief, trust- 
 ing that he may be able to redeem the pledge in course of business. 
 Experience, moreover, has proved that is not easy to obtain conviction 
 when prosecution is resorted to. Juries are unwilling to convict when a 
 plea is entered that there was an undersianding (that dangerous word) 
 with the banker that goods might be removed in case they were needed 
 for the borrower's business — as in the case of a miller who has pledged 
 wheat in his own store and needs it to fill an order for flour. 
 
 The sum of the whole matter is this, that individual pledges have a 
 real value with men of probity and honor, and also, that with men 
 whose sense of honor is not high, the fear of punishment will ordinarily 
 restrain them from issuing false pledges, or removing goods; but that 
 this fear is not sufficient "to restrain such men when heavily pressed for 
 money. Further, that in either case, if the goods actually exist, and the 
 security has been properly taken, the pledge will hold the goods for 
 the banker in case of judgment or insolvency. 
 
 But no banker of experience will consider a debt absolutely secured 
 by reason of liis holdinir the borrower's pledge.'^" 
 
 MA oomnion mistake -with regard to the security of these documents hns 
 arisen when thev have been taken from manufacturers, whose stock of raw ma- 
 terials Is constantly being converted Into manufactured goods. The raw mate- 
 rial In the vard or warehouse today, la found next week In the factory, being 
 replaced by other raw material of the same description, but not that upon which 
 
 the money was lent. 
 
 It Is sometimes supposed that a personal pledge can be given for a general 
 
SECURITY AND SECURITIES IN GENERAL. 207 
 
 Bailee Receipts. 
 
 In the case of all goods and merchandise pledged to a banker, the 
 time comes when they must be removed; and, in modern business, the 
 removal Avill be either to a ship or to a railroad. Now, during the 
 process of removal it is injpossiblc that the security before mention, d 
 will hold the goods. They must be released from the warehouseman's 
 custody, and until they are loaded on board ship or placed in custody 
 of a railway company, a hiatus necessarily arises in which there is no 
 security to the banker at all, except what is generally known as a 
 "bailee receipt." This is a document somewhat similar to the pledge 
 which has been discussed, and is given by the owner of the goods during 
 the time they are in transit. In this document the owner acknowledges 
 to have received certain specified goods for shipment by rail or steamer, 
 as may be; constituting himself a bailee for the same, and engaging to 
 deliver them as directed. A breach of this engagement is a criminal 
 offence. Upon the lodgment of such a bailment with the banker, the 
 custom is to surrender the warehouse receipt, to be exchanged, after rea- 
 sonable delay, for a steamship bill of lading — or a railway receipt. 
 When a banker gets either of these, his anxiety is generally at an end, 
 always supposing that the goods are worth what he has advanced and 
 that the document is genuine. 
 
 Bills of Lading and Railway Receipts. 
 
 When the process previously described has issued in the shipment 
 of goods by steamer, the captain or agent signs that important docu- 
 ment called a Bill of Lading, making the ship and its owners respon- 
 sible for safe carriage, and delivery of the goods. This document 
 insures that the goods are on their way to a definite destination. The 
 owner of the goods, who has had them in his own charge, for a time, 
 now draws upon a purchaser or consignee and attaches the bill of lading 
 to the draft together Avith a document of insurance; the law giving the 
 banker the same position now with regard to the goods that he pre- 
 viously had as the holder of a warehouse receipt. The goods on that 
 ship are his, until the draft is paid, and the security to the banker on 
 the transaction is as complete as a mortgage on real estate is to a 
 
 stock, let us say, of iron in the yard, or wool in the warehouse, such as may 
 be, at any time, found there. But this kind of pledge will not stand the test 
 of a lawsuit or an assignment, unless it can be shown that the stock has not 
 been changed since the pledge was given. The law does, however, provide that 
 when wheat is changed into flour, logs into lumber, hides into leather, or dressed 
 hogs into pork, the pledge shall attach to the manufactured article, if the sam<' 
 can be identified, which is sometimes a difl^cult business. But bankers hav 
 learned to take care, in lending money upon pledges of this kind, that the 'bor- 
 rower shall have no other creditors. There is, too, a method of lending upon 
 raw material, which is prevalent in the lumber trade, namely, that the logs 
 are branded with a certain mark, by which they are identified as the goods that 
 have been advanced upon. 
 
208 BANKING AND COMMERCE. 
 
 money-lender. The one point a banker now has to think about is 
 whether the goods are worth the amount drawn against them. This 
 consideration, however, is dealt with in the chapter on trade bills, or 
 bills drawn in sterling money. 
 
 Having thus considered the various points arising out of security 
 by endorsement or guarantee, and also by security of goods, either in 
 situ or transitu, it is in order to consider other forms of security met 
 with in banking. 
 
 Of these some are met with in the active prosecution of business, 
 while some come to a banker when additional security is demanded. The 
 last will be treated of first. 
 
 In ordinary loans the customer offers security at the inception. In 
 real estate it is the banker that demands it. 
 
 Securities Resting on Real Estate. 
 
 The banking law of Canada differs from that of Great Britain, in 
 that it prohibits loans on real estate security. A banking transaction 
 cannot be initiated by a mortgage on real property. Former disastrous 
 experience led to this prohibition, and more recent experiences in Aus- 
 tralia, of a much more distressing character, have shown the wisdom 
 of adhering to it. One, at least, of the greater banks of Canada, after 
 a long career of usefulness to the infant community, was finally forced 
 to succumb owing to the fact of its resources having been engulfed, so to 
 speak, by real estate transactions. In the days when this bank was 
 doing its most active business, the loan and mortgage companies, row 
 so common, were almost unknown. Only one company, an English 
 one — "The Trust and Eoan Company of Canada" — existed. It was im- 
 possible, however, for this one company to meet the needs of the vast 
 stretch of country — then known as Upper Canada — and now called 
 Ontario. It came naturally about, therefore, that as loans were re- 
 quired for clearing land, improving property, and building stores, nu'lls 
 and factories, recourse was had to the banks of the time; and to this 
 one bank in particular. The true principles of sound banking were 
 little understood in these early days. If a man was posses.sed of a 
 piece of land, large or small, encumbered or unencumbered, he was con- 
 sidered to be an eligible customer. Many of the loans made were paid 
 off in the course of events, but large numbers were not, and remained 
 on the bank's books year after year. It thus came about that the mass 
 of undigested and indigestible securities in the shape of promissory 
 notes of real estate owners, many of whom were domiciled in the back 
 woods of those days, went on constantly increasing, until the bank 
 could carry them no longer, and fell buried, so to speak, undfr -heir 
 ruins."" 
 
 70 It seems hard to realize, and might be deemed Incredible to one not famil- 
 iar with the early history of the country, that the author was well acquainted 
 with a resident of Toronto who rememl)ere(l the time when the whoile stretch 
 
SECURITY AND SECURITIES IX GENERAL. 20[) 
 
 Yet, securities on real estate have their use to a banker who knows 
 how to use them, and have saved many an account from degrnerating 
 into a bad debt. For although real property is a bad foundation for a 
 banking loan, when it is the only foundation, it is a strong s':p]iort to 
 a mercantile account whose main security is of a commercial character. 
 It enables a banker to nurse a customer through bad times with con- 
 fidence when otherwise he would be obliged to allow him to succumb. 
 This is so well understood in England that a lien upon a customer's 
 property is considered one of a banker's strongest safeguards, and as 
 the law allows a lien to be created by the simple deposit of title deeds 
 with a memorandum describing the purpose, such a hold upon a custom- 
 er's real property is very common. In Canada, however, no such custom 
 exists. A banker's lien cannot be established without a regular mort- 
 gage, duly registered, and this must be after the inception of a loan, 
 not at the time. 
 
 The term Real Estate, though definite enough in law, is so indefinite 
 in fact that some bankers have almost prohibited the use of it in corre- 
 spondence with their branches. When the manager of a country branch, 
 for example, writing of a somewhat doubtful account, informs the board 
 that it is secured by "real estate," he will certainly be asked for more 
 definite information; and very properly, for real estate is of so varied 
 a character that unless specific information is given, the word conveys 
 no practical meaning, so far as actual security is concerned. 
 
 It is desirable then to consider real estate from a banking point of 
 view, and to point out what property is desirable and valuable in that 
 connection, and what is undesirable or worthless. 
 
 Real property in Canada may be classed under the following heads: 
 
 (1) Farms. 
 
 (2) Land capable of being made into farms. 
 
 (3) Stores or dwellings in towns, cities or villages. 
 
 (4) Vacant lots in towns, cities or villages. 
 
 (5) Factories, saw mills, tanneries, etc. 
 
 (6) Timbered lands, when owned as a freehold and used for lum- 
 bering. 
 
 (7) Mines. 
 
 Any one or more of these descriptions of real property may be 
 offered to a banker as security for an existing debt, and it is certainly 
 the business of a well-informed banker to make himself sufficiently ac- 
 quainted with them all to be able to judge what value to attach to the 
 
 of country between that city and T^ake Hnrnn was almost unbroken forest. Only 
 three settlers had penetrated into its vast solitudes, fighting their way through 
 bush and swamp and slowly making clearings, in a region entirely destitute of 
 roads, bridges or dwellings;— then given up to bears, wolves, and Indians, but 
 now full of prosperous towns and cities. 
 
 It was some time after this that the Bank of Upper Canada was established; 
 but its early days were passed when forests covered most of Ontario and the 
 towns and cities of the present day were mere hamlets. 
 14 
 
210 BANKING AND COMMERCE. 
 
 security or if it has any practical value, present or prospective. An 
 intelligent manager of a branch will certainly make himself acquainted 
 with the conditions and value of farm and town property, in his dis- 
 trict. And a general manager or president will always be adding to 
 his stock of information with regard to property in those parts of the 
 country where the business of the bank is carried on. 
 
 When a banker is offered security on real property the first point to 
 consider is what will be expected of him if he concludes to take it. In 
 some cases a debt may be in such a doubtful position that a banker 
 would take any security he could get (any security being better than 
 none) not scrutinizing it very carefully except to obtain assurance that 
 the taking of it involves no responsibility. But real estate is sometimes 
 offered by a debtor who is in a comparatively good position, it being 
 perfectly understood, though it is not formally expressed, that the 
 banker in consideration of the security will be less exacting and more 
 indulgent in his treatment of the account. And this he may be in various 
 ways. 
 
 When security is taken under these circumstances, a banker will 
 naturally, to begin with, arrive at an understanding of what value the 
 property is as security; where situated, of what character, whether the 
 debtor has a clear title to it, and whether it is clear of encumbrance. 
 These last are both legal points, and upon them both only the bank's 
 solicitor can give accurate information. 
 
 If the title is clouded, a banker will do wisely to refrain from taking 
 security until it is cleared ; otherwise, he may find himself made a party 
 to a troublesome lawsuit. But if the property is desirable in itself, he 
 will do well to insist on steps being taken to have the title cleared. This 
 preliminary' being arranged, the banker will next have to consider the 
 question of encumbrance. If there is no encumbrance at all, the case 
 will be simple. Whatever value there is in the property will accrue to 
 the banker's benefit. But if there is an encumbrance, a banker's judg- 
 ment and experience require to be called into play in dealing with it. 
 
 No sane man would ever lend money, as a matter of business, on en- 
 cumbered property; or, at any rate, if he thought well to lend at all, he 
 would lend enough to pay off the first mortgage. But it may be well 
 worth a banker's while to get security for an existing debt on an en- 
 cumbered property. Everything depends on the amount of the enium- 
 brance. If that amount is not more than one-quarter the assumed, or 
 assessed value of the property^ the probability is that a second mortgage 
 would yield him something. But if the encumbrance amounts to half 
 the value of the property, tlic security of a second mortgage is problem- 
 atical. The valuation may be too high; it generally is; or the interest 
 of the first mortgage may have accumulated and rank as an addition 
 to it. It has happened, in a banker's experience, that the unpaid interest 
 has swallowed up all reversionary interest in a valuable property, mak- 
 ing the second mortgage worth nothing. 
 
SECURITY AND SKCUIUTIKS IN GENKUAL. 21 1 
 
 There arc other considerations also. Before anything can be re- 
 covered from a second mortgage a banker will find it necessary to pay 
 off the first. He thus adds more to an already existing debt. Yet, wlitii 
 property comes to be sold, the fact that a bank holds it has a depreciat- 
 ing tendency, as all experience proves. A banker, therefore, may have 
 the mortification of finding that a property, when he has the wliole 
 benefit of it, will not yield him as much as he paid for the first mort- 
 gage; making it apparent that he would have been in a better position 
 if he had never taken a second security at all. A banker, too, has to 
 consider also that while he must disburse cash in paying off a first mort- 
 gage, it is almost an impossiblity to sell without accepting a mortgage 
 for a large part of the pxirchase money. He thus finds that to the 
 original debt, which was more or less of a lock-up, he has added another, 
 which being in the shape of a mortgage, is practically, a lock-up also. 
 
 The question of encumbrances deserves especial care when the prop- 
 erty is connected with a manufacturing business. If the business is un- 
 successful, the property will depreciate by an amount that would seem 
 incredible to an}' but one who has had experience. 
 
 It has sometimes happened to a banker to have the mortification of 
 finding that, when he has paid off an encumbrance of only one-quarter 
 of the estimated value of manufacturing propcrt}', the sale has not 
 realized even half of this paltry sum. 
 
 The best form of real estate security, generally speaking, is that on 
 shops and offices in one of the main streets of a commercial city. The 
 very worst, as a rule, is a mill, a factory, or a tannery. A banker \n\\. 
 find it prudent, as a rule, though he may take such a security, never so 
 to rely upon it as to be more indulgent either as to time, rate, or amount 
 than he would be had he no such security at all. And this more par- 
 ticularly if the property is encumbered, no matter how small the en- 
 cumbrance may seem. 
 
 The securities that bankers may take in the active prosecution of 
 their business are so fully opened up in the chapters on Loans that it 
 is needless to refer to them again. The only additional remark needed 
 is to state that a merchant, sometimes, instead of discounting a certain 
 amount of trade bills will obtain an advance, pledging the bills as secur- 
 ity. This may be a more economical process in case he only requires the 
 loan for a shorter time than the bills, on an average, have to run. 
 
CHAPTER XXVII. 
 
 BANKING AND COMMERCIAL LOSSES. 
 
 Various Sources of Loss — Particular Instances Cited — City of 
 Glasgow Bank Collapse. 
 
 THESE are coupled together in this treatise for the reason thai 
 there is generally a very close connection between them. 
 
 A bank cannot lose money by a commercial customer until that 
 customer, except in the cases of deliberate fraud, has lost all his capital, 
 and is unable to pay his debts. It is also not seldom the case that a mer- 
 chant fails by reason of the losses he, in his turn, sustains by his 
 customers. 
 
 He may indeed, especially in some branches of trade, fail because 
 of a heavy fall in the price of some commodity he deals in. This is a 
 contingency that every wise merchant will take special means to pro- 
 vide against. 
 
 Thtn there are the losses that a merchant may suffer by speculation. 
 
 These are not legitimate losses. They ought not to occur at all. 
 But they do occur in sufficient numbers to make it necessary for a banker 
 to take them into account. 
 
 Both banking and commercial losses are much influenced by the 
 condition of the trade of the district in which operations are carried on. 
 also by times of prosperity or depression, either in a particular district 
 or in the whole country. 
 
 It is, for example, will known that failures are much more common 
 in new countries than in old; and in the newer parts, let us say, of the 
 United States and Canada than in the older. 
 
 They are also more common, other things being equal, amongst men 
 in new industries than in well established ones. 
 
 Of all these things a banker must of necessity take more account 
 than a merchant, for the latter in doing business in a new community, if 
 he incurs greater risks, can generally make greater profits. But a 
 bc':nker is rarely able to do this; hence the importance to him of care in 
 having loans adecpiately secured ; also of scrutinizing business bills so 
 as to guard against mere accommodation paper being taken under that 
 guise. With such precautions as every banker ought, in the reason of 
 things, to take, it should be tlie rule, that even if his customers fail, the 
 security should ])e capable of such realization as will save him from loss. 
 
 Passing, liowever, from general observations to particulars, it is 
 necessary to take note of both commercial and banking losses as matters 
 of fact; togetlier with the reasons for failure in one case and loss in the 
 other. 
 
BANKING AND COMMERCIAL LOSSES. 213 
 
 Pauticular Instaxcrs oi- Losses. 
 
 The most effective wny of doing this, and it will add point to all 
 observations on the subject, will be to cite particular instances of losses. 
 Most of these have come under the author's own observation, and have 
 made an indelible impression on his memory. The rest were well kno%vn 
 at the time to the commercial and banking world. Names, dates, and 
 places will, of course, not always be given, for it would not be proper 
 to do it; but the cases cited may be relied upon as narratives of actual 
 events; every one of them conveying some practical lesson for future 
 guidance. 
 
 More than fifty years ago no goods in a certain line of English man- 
 ufacture were of higher finish or more beautiful design than those made 
 in the great establishment of B. & Co., in Yorkshire. The firm had a 
 warehouse in London, and a large part of the goods they produced were 
 sent there, and sold to wealthy residents of the capital, or distributed 
 throughout the Kingdom from that centre. The leading noblemen of Eng- 
 land were their customers; and on one occasion they manufactured a 
 magnificent set of goods for the King. 
 
 The members of the firm lived in expensive style, and took the lead 
 in the fashionable society of the neighborhood. But to the bankers of 
 the district, they came, in course of time, to be kno^vn as continually 
 short of money. 
 
 They were, however, the kind of people sometimes called "clever 
 financiers," and having several banking towns within easy distance, they 
 managed for a considerable time to get cash for checks, by drawing 
 sometimes on one bank and sometimes on another, varying the operation 
 by drafts upon their house in London; that house repeating the opera- 
 tion conversely. 
 
 But as time went on these I<ondon drafts occasionally Avent to pro- 
 test. Bankers in the neighborhood got more and more shy, and at 
 length refused to cash their checks or bills at all. Finally, the firm came 
 to a stop, and went into bankruptcy. 
 
 When the accounts in bankruptcy were presented, the creditors were 
 astonished to find that a large landowner in the neighborhood, to whom 
 their works belonged, was a creditor for a sum representing the accumu- 
 lated rental of some twenty years, or about £20,000 and interest ! This 
 rent, his steward (with his own good-natured concurrence) had allowed 
 to run on year after year without pressing for payment, largely out of 
 consideration for the workmen employed in the establishment. 
 
 The estate paid practically notliing. The works were never re- 
 opened. The family disappeared from the district. Many local credi- 
 tors sufi'ered losses they could ill afford, but the bankers spoken of had 
 been wise enough to act upon indications of weakness; and, having 
 taken measures in time, lost practically nothing. 
 
 The cause of this collapse might be largely traced to the good nature 
 
214 BANKING AND COMMERCE. 
 
 of the landlord ; for it enconrasied the firm in a reckless style of doing 
 busiru'ss. 
 
 Of artistic tastes themselves, and fond of new designs, they were 
 continually bringing out rare and expensive styles of goods; concerned 
 only with keeping up their reputation, careless whether they were mak- 
 ing profits or not. They were in reality living upon their landlord dur- 
 ing all the years of the business; and he, of course, was the chief suf- 
 ferer by the failure. If he had done his duty to himself and his estate, 
 they would have been compelled to manage their business so as not only 
 to make beautiful goods, but to make profits (or retire) ; and might have 
 become a wealthy and jirosperous concern, as numbers of other manu- 
 facturers in that district had done and are doing at this day. But the 
 good nature of their landlord was their ruin. And it has to be added 
 that too easy a supply of money has paved the way to ruin of many 
 a man in Canada. 
 
 Some years after these events the commercial community of Liver- 
 pool was startled to learn that one of the leading banks of the city was 
 in difficulties, and had been compelled to apply to the Bank of England 
 for assistance. They were still more surprised to learn the cause of the 
 embarrassment, which proved to be Avholly owing to inordinate advances 
 to a single firm! This firm was in the habit of receiving consignments 
 of merchandise from foreign houses on a very extensive scale, and ac- 
 cepting bills against them. This was their business. They had carried 
 it on successfully for manj- years and had prospered. 
 
 At this time, however, the financial and mercantile position had be- 
 come clouded. Markets were dull. Goods were difficult to sell, and 
 steadily falling in value. Meanwhile the house went on accepting as 
 usual. But their acceptances were constantly maturing, and not being 
 willing to sacrifice the interests of distant consignees, instead of bringing 
 their goods to sale, they warehoused them, obtaining advances from the 
 bank to retire acceptances. 
 
 It so happened that at this time the manager of the bank, well 
 known as an able man in the community, was absent for a considerable 
 period from ill-health. He had gone abroad, and it was difficult to 
 communicate with him. The second officer and the directors had not the 
 nerve, and did not care to take the responsibility, of compelling the 
 goods advanced on to be sold, but went on making advances, hoping for 
 a turn of the tide which Mould save the house from ruin, and the bank 
 from loss. 
 
 Thus the advances, which were only some £50,000 at first, went on 
 increasing until they were; more than ten times as much, whilst the 
 warehouses of the port were becoming overstocked with merchandise 
 that was steadily going down in value. 
 
 The situation was bccoining terribly serious. To comi)el sales, or 
 refuse further advances, would inevitably ruin the firm, and result in 
 enornious loss to the bank, besides demoralizing the market and inflict- 
 
BANKING AND COMMERCIAL LOSSES. 215 
 
 ing loss on other customers. Under the circumstances the Acting Man- 
 ager and the Directors became utterly demoralized. So all drifted on 
 together, the advances of the bank mounting up week after week until 
 they reached the enormous sum of ,£750,000. 
 
 Then the crisis came. The resources of the bank were exhausted. 
 The Bank of England, Avhich had sometimes made advances to the bank 
 (as is often the case in England) in the ordinary course of business, 
 was made acquainted with the condition of affairs, but refused to in- 
 tervene. The bank perforce stopped payment. An enormous loss re- 
 sulted in the realization of the warehoused goods. The mercantile firm 
 went into bankruptcy; but scarcely anyone was interested in the firm 
 except the bank, which, by its culpable weakness and mismanagement. 
 Lad absorbed the whole affairs of the firm into its own hands. 
 
 The house disappeared from the seaport. And though the bank 
 resumed business in a reduced form, it never recovered its credit and 
 prestige and was finally wound up, its business being passed over to 
 another institution. The bank was the Royal Bank of Liverpool, and the 
 time 1817. 
 
 These disastrous consequences all ensued, first, from the folly of a 
 mercantile house accepting too heavily against merchandise, and allow- 
 ing it to accumulate instead of bringing it to sale; then, and onward con- 
 currently in the bank's making advances to an unreasonable amount 
 against the same merchandise, and failing in the courage required to 
 face the situation and compel sales; until finally all control was lost, 
 and the bank and mercantile firm together drifted into a position from 
 which there was no recovery. 
 
 The whole story is fraught with striking lessons to both merchants 
 and bankers. There was not, however, a suspicion of wrong-doing or 
 fraud by either party. All that could be alleged was a terrible deficiency 
 of good judgment and nerve. 
 
 City of Glasgow Bank Collapse. 
 
 This, however, could not be said of the frightful collapse of certain 
 mercantile firms and the City of Glasgow Bank which occurred some 
 years afterward. That collapse was a case of mercantile ambition grad- 
 ually developing operations spread over nearly all the markets of the 
 world, partly legititnate, but in the end grossly illegitimate; also of 
 banking ambition, aiming to carry larger accounts than any bank in the 
 country; both finally (nding in the most astounding financial frauds and 
 disasters of the nineteenth century. Of these operations at first there 
 was nothing worse to be said than that they were far too extended for 
 the capital of the firms interested, and far too extended for the bank 
 itself to encourage: by advances. After the operations of the firms be- 
 came manifestly unprofitable, the bank might have brought the whole 
 to a close with a loss of £50,000 or £100,000 at most. But this the 
 directors refused to face, and went on making advances, hoping for 
 
216 RANKING AND COMMERCE. 
 
 a turn in the tide which never came. Besides this, the accounts of the 
 firms (there were four in all) were highly profitable, owing to the mul- 
 tiplicity of exchange operations connected with them, and the immense 
 amount of interest they carried. So the advances went on increasing, 
 until tluy amounted to sums far beyond wliat had ever been heard 
 of in Scotch banking. 
 
 Had their operations, even then, been all based on merchandise, they 
 might possibly have been wound up with no worse result than the 
 bankruptc}^ of the firms, and the loss of part of the capital of the bank. 
 
 There were four firms interested in these operations, differing only 
 in name, for they were so interlaced as to be practically one concern. 
 And the time came at length when they launched into great operations 
 in real estate, and bought not merchandise only, but the land, buildings, 
 and plant by which the merchandise was produced, and this in many 
 countries, and to fabulous amounts. 
 
 By this time their operations had taken the shape kno^vn in com- 
 mercial circles as "plunging;" that is, buying heavily and selling as 
 heavily, entirely regardless of the condition and prospects of any mar- 
 ket in an}' part of the world. 
 
 The natural consequences ensued in the shape of losses to enormous 
 amounts. The bank, however, as in the former case, was under weak 
 management, and became so hopelessly entangled in the operations of 
 the firms that they had to "sink or swim" with their customers. 
 
 Then when the purchases of property by the firms necessitated ad- 
 vances of an unprecedented amount, which were inevitably of the nature 
 of a "lock-up," the bank fell into a terrible snare proposed by the 
 astute senior partner of one of the firms, and became parties to the 
 manufacture and negotiation of what were practically fraudulent bills. 
 Facilis descensus Averni. The doAvnward road is only too easy. Once 
 embarked in such lines of operation it became impossible to draw back, 
 and the authorities of the bank drifted helplessly on. Yet they were 
 well aware that the bank was "on the road to ruin," unless indeed by 
 some almost miraculous turn of affairs, and that in various parts of the 
 world, these properties could be sold for sufficient to retire the debts of 
 their customers and enable the fraudulent bills to be withdrawn. 
 
 But the fortunate turn of affairs never came. 
 
 The mass<s of bills that had been set afloat bearing the bank's name 
 were constantly falling due in London. To enable them to be met, other 
 bills were drawn purporting to be for difi'erent transactions of an origi- 
 nal character, but which were nothing more than fraudulent renewals. 
 
 The firms, as is the manner of men who have embarked on such 
 desperate enterprises, entered upon other engagements, purchased other 
 properties up and down the world, (for the whole world was the theatre 
 of their operations), n)ade contracts for other masses of merchandise, 
 all of which necessitated the floating of other masses of bills, the bank 
 being of necessity a party to the whole wretched business. 
 
BANKING AND COMMERCIAL LOSSES. 217 
 
 The volume of bills therefore went on constantly increasing; and 
 as these all finally had their domicile in London, the bankers and bill 
 brokers of the city, in spite of skillful devices kept in operation to 
 deceive them, began to be suspicious, and to confer with each other. 
 "There are too many of these City of Glasgow Bank bills floating 
 about," they said; and the general feeling was that the volume should 
 be curtailed. But none of the parties dreamed of the ajjpalling sum to 
 which the total amounted. 
 
 The Bank of England, the great joint stock banks, and the discount 
 houses then began to "discriminate against" the bills,, as the current 
 London phrase is. The signs of constant renewals became more and 
 more evident, and they refused to increase the "lines" they held. 
 
 But the plungers were men of resource; and by this time had become 
 utterly unscrupulous, both in what they said and what they did. False 
 statements were made in confidential interviews. Many of the opera- 
 tions were transferred to other financial centres. More and more in- 
 geniously contrived batches of bills were set afloat, the name or guaran- 
 tee of the bank being attached to all of them. And as it was known that 
 the bank was on the principle of "unlimited liability" with a circle of 
 stockholders whose wealth in the aggregate was immense, the money 
 markets of the world absorbed them. By such means the inevitable crisis 
 was deferred month after month. All this while the ordinary business 
 of the bank at its numerous branches went on as usual, and was eon- 
 ducted with the usual prudence of Scotch banking. 
 
 At length, however, the long-dreaded day arrived, and it came about 
 thus. 
 
 Some little time before the collapse, the older banks of Scotland had 
 been approached with a view to obtaining "temporary assistance," as 
 is customary in such eases. These banks, however, had for some time 
 entertained a suspicion that something wrong was transpiring, though 
 none of them had the remotest idea of its real character, and still less 
 of its enormous extent. 
 
 When, then, assistance was asked, they naturally (and as is custom- 
 ary) stipulated that an examination of the condition of the bank should 
 be made. 
 
 Before the examination had proceeded far, sufficient was revealed to 
 cause the older banks to refuse assistance. This was the end. The 
 Glasgow Bank stopped payment immediately. So did the circle of 
 dependent firms. And very shortly Scotland was convulsed by the 
 astounding revelations that were made of fraud and falsehood on a 
 scale never before dreamed of. Week by week enormous masses of 
 maturing bills were protested; and as the full extent of the aff'air began 
 to be revealed, London itself stood aghast at the masses of fraud that 
 its banks and bill-discounters had been supporting. For a time almost 
 everything emanating from Scotland was clouded with suspicion. 
 
 Strong and solvent firms, and banks that had not the remotest con- 
 
218 BANKING AND COMMERCE. 
 
 nection with the firms that had carried on these speculations, were sus- 
 pected. It appeared likely, indeed, that a general banking panic and 
 consequent "run" upon all the banks would spread over Scotland. 
 
 But the rest of the banks met the situation with a high degree of 
 wisdom and courage. They determined to act in concert, and announced 
 that they would pay the notes of the defunct bank. This stopped the 
 incipient panic. And as it came to be realized what an enormous finan- 
 cial strength resulted from the whole body of stockholders being liable 
 to the whole extent of their means, the public excitement gradually 
 subsided. 
 
 But the alarm of the unfortunate stockholders went on increasing; 
 and when the report of the committee of investigation was received, an- 
 nouncing that the whole of the capital and the reserve fund was lost, and 
 that the shareholders would have to pay in addition the unheard of sum 
 of ieoj'SOOjOOO sterling to the creditors of the bank, an unparalleled 
 sensation was created, not in Scotland only, but tliroughout the banking 
 world. 
 
 The report of the committee of investigation having made it clear 
 that there had been gross fraud and misrepresentation on the part of 
 the directors, and certain officials of the bank, the Directors, ^Manager, 
 and secretary were apprehended and brought to trial. The secretary, 
 however, was accepted as a witness, as his plea of acting under con- 
 straint, and by order of his superior officers, was allowed. 
 
 The trial lasted eleven days, and its revelations were another illus- 
 tration of the saying that "Truth is stranger than fiction." No romancer 
 or novelist in the wildest of his imaginations could ever have conceived 
 such a series of events as that trial brought forth. They filled the whole 
 banking and commercial world with excitement, and caused the expe- 
 rienced men of the London money market almost to hold up their hands 
 in horror at the operations to which they had unwittingly been parties. 
 
 The mercantile failures were on a scale of almost unprecedented 
 magnitude for that time; the liabilities of Jas. Morton & Co. being 
 £2,500,000, of Smith, Fleming & Co., £1,600,000, of Matthew Bu- 
 chanan & Co., £1,310,000, of James Wright & Co., £750,000, besides 
 others of smaller amounts. The total liabilities of the circle amounted 
 to nearly £6,500,0001 The assets were a mere nothing, and almost the 
 whole loss fell upon the bank and its unfortunate stockholders. 
 
 For them, indeed, the catastrophe brought about misfortunes that 
 till then were unparalleled. Suicides and madness ensued. Numbers 
 of respectable families were reduced to poverty, and to such an extent 
 did this prevail that a public subscription, which resulted in a very large 
 amount of money being raised, was set on foot for their relief. Thus 
 it came about that numbers of persons throughout Scotland, who would 
 but a short time before have abhorred the idea of receiving aid from 
 without, found themselves compelled by the pressure of poverty to accept 
 the benevolence of the public. 
 
BANKING AND COMMERCIAL LOSSES. 219 
 
 One very extraordinary contingency happened in connection with 
 the liquidation, wliich up to that time could not have Ixen conceived 
 possible. Tlic Caledonian Bank, a well-managed institution with head- 
 quarters in Inverness, had taken as security from one of its debtors 
 four shares of XlOO each in the Citj'^ of Glasgow Bank. The shares at 
 the time were well quoted, and considered good property. The name 
 of the Caledonian Bank was therefore on the Glasgow Bank's register 
 at the time of failure, and thus this bank was liable to the extent of its 
 whole capital for the Glasgow Bank's debts. It was therefore included 
 amongst the "wealthy stockholders" who were expected to contribute 
 large sums to make up the deficiencies of other stockholders who were 
 reduced to poverty. The knowledge of this produced great excitement 
 in the North of Scotland, especially amongst the bank's depositors and 
 shareholders. A "run" set in. The bank struggled bravely for a time, 
 but eventually was compelled to suspend payment. 
 
 Its doors remained closed for some months. Meanwhile a large 
 guarantee fund was raised, negotiations for settlement were entered upon 
 with the liquidators of the bank, and ultimately £11,000 was accepted 
 in discharge of the liability. It seems incredible that this immense sum 
 had to be paid as the result of taking the Glasgow Bank's shares to 
 secure a trifling debt of £400. But so it was. The bank resumed busi- 
 ness with the universal good-will o^ the people of Scotland, and of the 
 other banks, and has continued in a prosperous condition ever since. But 
 it had tlie misfortune to furnish this severe object-lesson of the danger 
 of taking unlimited bank shares as security. The danger is not so great 
 since the general adoption of the principle of limited liability; but even 
 noAv, the large amount of uncalled capital general in English banks 
 might be a cause of serious loss if a similar case arose. 
 
 An embarrassing question connected with the disaster was the lia- 
 bility of persons who were simply shareholders as trustees or executors. 
 The liquidators announced their intention to hold all these as liable in 
 their personal estates; a dem.and which spread consternation over a 
 wide circle. 
 
 Executors and trustees naturally contended that the liability attached 
 solely to the assets of the estates they administered; a severe liability 
 indeed in many cases, and inflicting untold misery upon widows and 
 children who were dependent on the provisions of wills made in their 
 behalf. But that there should exist, over and above this, a personal 
 liability of the trustee himself to the extent of his whole fortune, was 
 deemed incredible. It seemed utterly inequitable. Litigation therefore 
 ensued, and a test case being carried to the highest court in the realm, 
 the Judicial Committee of the Privy Council, that court decided that 
 the trustees were personally liable. The judgment was considered by 
 numbers of people, probably the majority, as contrary to reason and 
 equity, but the decision of the court conveyed by the Chancellor was 
 deemed a masterpiece of legal acumen and subtle reasoning. Needless 
 
220 BANKING AND COMMERCE. 
 
 to say, it broke with frightful severity upon numbers of persons who- 
 had never derived benefit from the stock. By such severe measures, how- 
 ever, the whole of the creditors of the bank were ultimately paid. 
 
 When things began to resume their ordinary course throughout Scot- 
 land, a profound impression took possession of the public mind, not in 
 Scotland only, but wherever the principle of unlimited liability prevailed, 
 viz., that the system was dangerous; and that some means must be de- 
 vised which would prevent such ruinous disasters again overtaking their 
 stockholders. \NTiat was required was some statutory limitation of lia- 
 bility at the outset, so that all purchasers and holders of stock would 
 have accurate knowledge of the worst that could happen to them, in case 
 of misfortune befalling the institution. 
 
 Legislation already existed in the Joint Stock Companies' Act by 
 which any compam'^ could limit its liability; and amendments were made 
 extending the operation of the act, so as to make it suitable to the cir- 
 cumstances of banks. 
 
 One condition of the legal adoption of the principle of limitation 
 was distasteful in the extreme, viz., that any bank or company desiring 
 the benefit of its provisions nuist add the word "limited" as an essential 
 part of its title. 
 
 Many banks were afraid of injury to their credit by the addition of 
 the obnoxious M^ord. In Scotland this requirement was felt to be par- 
 ticularly distasteful to the majority of the banks, inasmuch as the three 
 oldest institutions of the country, the Bank of Scotland, the Royal Bank 
 of Scotland, and the British Linen Company, all claimed that they were 
 on a limited basis already by their charters; and that there was no need 
 for them to add the word to their title. The rest of the Scotch banks 
 therefore, were particularly averse to the use of the word, as they con- 
 sidered it would place them in an inferior position beforie the public. 
 The leading London banks, however, gradually adopted the principle, 
 enlarging their subscribed capital so as to create a large margin of un- 
 called liability; and added the word "Limited" to their title. This, as- 
 experience has proved, did them no harm. Depositors and the public 
 were alike satisfied: and, gradually following their example, the joint- 
 stock banks of England and Ireland almost all adopted the principle. 
 
 The Scotch banks, who had at first stood out, at length overcame their 
 fears, and the same result followed. The whole joint-stock banking of 
 Great Britain and Ireland is now therefore conducted on the principle 
 of limited liability, with a large resene of uncalled capital. 
 
 And from the failure of the City of Glasgow Bank, as well as that 
 of the Western Bank of Scotland some years before, all bankers have 
 learned that ambilioyi, push, and what is called enterprise, are not ele- 
 ments of good banking. These two banks were distinguished by these 
 characteristics from the first, and not seldom twitted their neighbors 
 with their slow, old-fashioned methods. 
 
 Time, however, and events, justified them. 
 
CHAPTER XXJTII. 
 BANKING AND COMMERCIAL LOSSES— Continued. 
 
 A Corner ix Wheat — Another Disasthovs Grain Speculation — 
 Advances on WAUEiforsE Receipts- -Risks of the Grain Business. 
 
 IF experience has any value, few narratives can be more instructive 
 than the records of commercial and banking losses and disasters 
 now being presented. Tliey indeed form a sort of chart that indi- 
 cates the rocks and shoals besetting navigation in banking and com- 
 mercial seas. It is therefore of high importance that the record shall be 
 true; and the selection of instances such as to illustrate some danger to 
 be guarded against. The incidents related in these and succeeding chap- 
 ters fulfill both conditions. 
 
 Some years .igo, in a western city of this continent^ an able and in- 
 telligent merchant in the grain trade was carrying on business year after 
 year with safety and satisfaction. He was in good credit with hi^ 
 bankers, and well esteemed on " 'Change" for his probity and icliability. 
 He had, at times, his losses by falling markets, but he had also his gains; 
 and, taking one season with another, he made steady progress and quietly 
 accumulated capital. 
 
 His dealings with his banker h.ul always been marked by probity and 
 punctuality. He could be relied upon to fulfill his engagements, and 
 being well known to his bankers as a man of remarkable intelligence, his 
 account Mas detmed one of the most satisfactory in their connection. 
 
 His operations were legitimate, though of considerable magnitude, 
 and so high was he esteemed that his bankers had no hesitation, in an 
 active season, in making considerable advances, at times, on his simple 
 engagement to deposit equivalent bills of lading for grain in the course 
 of a few days, when the cargoes he was purchasing would be completed. 
 
 This was not tlic usual course of his account; for generally the ad- 
 vances he obtained were secured at the time. But these exceptional ad- 
 vances were considered to be needful when the movement of grain was 
 exceptionally heavy. For years no failure to meet his engagements had 
 occurred. But on one occasion, in the midst of an extremely active mar- 
 ket, an advance of this character was applied for of more than usual 
 magnitude. For the purpose, ostensibly, of filling contracts, the mer- 
 chant required to proceed to Chicago to purchase the required quantity. 
 Four or five days would have been sufficient for the purpose, and by that 
 time he was expected to return and deposit the bills of lading. 
 
 But he failed to appear at the expected time. After a further delay 
 of one or two days, his bankers became uneasy, especially on hearing that 
 a gigantic "corner in wheat" was in progress. 
 
 221 
 
222 BANKING AND COMMERCE. 
 
 He had, however, never been known to take part in anything of the 
 kind, and the uneasiness was not serious. 
 
 A few more days elapsed, when he again entered the bank. His 
 appearance at once excited attention. His face had a terribly haggard 
 expression, apparently from excitement and loss of sleep ; and a sad story 
 he had to tell. He had brought no bills of lading; he had lost the whole 
 of the money advanced to him and all his active capital in addition. In 
 a moment of weakness he had been induced to join in the huge "corner" 
 that was in progress, and to deposit the money that had been advanced 
 to him, as his share in the operation. For a day or two it seemed as if 
 he would more than double his money; but, as is generally the case, the 
 bubble burst just as the speculation was maturing. Every man engaged 
 in it was ruined, he himself included. 
 
 He made all the reparation in his power. He had no otlur creditor 
 than his bankers, and to them he gave a mortgage on all the property 
 he possessed, including a handsome residence. Shortly afterwards he 
 left the city. 
 
 The fact was, that lie was utterly ashamed to meet his confreres on 
 'Change after such a fiasco. And after realizing their security, the bank 
 made the heaviest loss it had known for years. 
 
 He went to Chicago. There he earned a precarious subsistence for 
 about a year, after which he suddenly disappeared. None of his friends 
 knew what had become of him; but a few days afterwards his body was 
 found floating about in New York Bay — a terrible end to a once most 
 promising and prosperous career. 
 
 Another Disastrous Speculation in Grain. 
 
 In another case in the same line of business, a failure took place from 
 a different cause. 
 
 In a certain commercial city of this continent a innn well on in A'cars 
 was often noticed at a certain period in the last century as haunting the 
 purlieus of 'Change, having a strangely shabby, broken-down appear- 
 ance. 
 
 He would occasionally ask his friends, and sometimes even his former 
 bankers, for a small loan, telling them, with an eager face and confident 
 air, that the market in some staple commodity was in such a condition 
 that an advance was certain. There was a handsome profit in sight. It 
 was a sure thing. The speculation was safe, and with a few hundred 
 dollars at risk, he had a certain prospect of making thousands. 
 
 Nobody doubted his truthfulness or honesty. But they would not 
 lend him any money. 
 
 The story of his fall from a higher position in the business world is 
 an instructive one. The circumstances passed under my own observation; 
 as did those just related. 
 
 In the year 18 — an extraordinary rise took place in a leading staple 
 of the Canadian grain trade. This person had been engaged many years 
 
BANKING AND COMMERCIAL LOSSES. 22S 
 
 in that special branch, and had met with fair success. He understood 
 the business, liad good connections, liad some capital, and always main- 
 tained an honorable record. 
 
 In this particular year he commenced buying the grain referred to 
 in the customar\ manner, and continued for some time shipping as well 
 as buying, taking but small risks, as was his usual method. As the price 
 was steadily advancing, he uniformly realized a profit out of his pur- 
 chases. Naturally, this developed a disposition to make larger pur- 
 chases, and also to hold, which at length he determined to do, warehous- 
 ing the grain in independent warehouses and obtaining advances thereon 
 from his bankers. He M'as advised by them from time to time to ship 
 and realize his profits, which were becoming considerable. But the mar- 
 ket went on rapidly rising. A heavy speculation set in. Buying orders 
 from abroad poured into the offices of dealers, and the price at length 
 reached a phenomenal figure, such as was never known for the article 
 either before or since. 
 
 Exciting scenes occurred daily on 'Change, and a perfect fever of 
 speculation prevailed. 
 
 His bankers now pressed more and more strongly that he should real- 
 ize and take advantage of what was the opportunity of a lifetime, by 
 realizing a profit which would nearly double his capital. 
 
 He was wise enough to adopt their suggestion, and on one wcll- 
 remembf red day, sold out his whole stock at an immense profit. 
 
 His bankers congratulated him that afternoon on the sale, for it not 
 only ensured repayment of their advances, but the prospect of a good 
 and safe business with him in the future from his largely increased capi- 
 tal. 
 
 The day on which he made the sale was a day of excitement far be- 
 yond anything ever known in the trade. The air was full of rumors, 
 dealers were buoyant bej'ond all reason, and the price went on advancing, 
 on this one day, by "leaps and bounds." The bank congratulated itself 
 that their customer at any rate had escaped from the vortex ; and when he 
 made his appearance next morning, supposed he would hand in checks 
 for his advances, with the large profit he had realized in addition. 
 
 Conceive, then, the disappointment and vexation, indeed the anger 
 of the bank, on learning that after selling out his stock, and realizing 
 practically a fortune, he had, in market phrase, "bought in again," and 
 was now holding as much of the grain as ever ! After getting safely out 
 of the vortex, he had been caught by the spirit of speculation then domi- 
 nating the market, and plunged in again. 
 
 The indignant remonstrances of his bankers produced no effect. He 
 was convinced that the market would rise still higher; that he would 
 make a still larger profit, and was deaf to all advice and warning. 
 
 It was, however, at that moment, more his affair than the bank's; for 
 its margin was very large, and the market would have to fall to what 
 seemed an impossible extent, before they could be affected. 
 
i?21 BANKING AND COMMERCE. 
 
 What followed may be briefly told. 
 
 FroDa that day the market began to decline. The decline went on 
 steadily. He persuaded himself, however, that there would soon be a 
 reaction, and that the price would go higher than ever. Nothing could 
 shake that conviction. 
 
 The decline proceeded as rapid)}- as the rise had done, but he could 
 not be persuaded to sell. 
 
 The bank could not reasonably exercise the "power to sell" contained 
 in their securities, so long as the margin continued so good. Therefore 
 week by week he was allowed to take his own course. But, as is often 
 the case under such circumstances, he became utterly demoralized bv the 
 rapid disappearance of his profits. He continued desperately to hope 
 against hope; until at last the bank, seeing that the margin was rapidly 
 disappearing, gave the usual notice, took jDOSsession of the grain, placed 
 it on the market, and realized. 
 
 The market fell steadily and rapidly during the process; and the 
 final result was that the net amount realized from the grain was actually 
 less than the advances on it. 
 
 The man was ruined beyond redemption. The bank's loss was con- 
 siderable, but for the merchant the event was fatal. 
 
 From that time he never held up his head. He became utterly unfit 
 for business, disappeared from the scene of his misfortune, and finally 
 subsided into a melancholy wreck, a terrible example of the folly of 
 eagerly grasping at the last dollar of profit, and so, according to the old 
 fable, by aiming at a shadow, losing the substance. 
 
 The grain trade, perhaps more than any other, requires a particularly 
 cool head, and what may be called a moderation of spirit, to enable suc- 
 cess to be achieved in it. In almost every considerable centre of this 
 branch of commerce are to be found such wrecks as the foregoing; and 
 it may be laid down almost as an axiom in this business that the man who 
 seeks to make large profits out of a single venture will inevitably be 
 overtaken at some time in his career with bankruptcy and ruin. 
 
 One of the most successful men who ever carried on this business in- 
 variably acted on the principle of never grasping at the last percentage 
 of profit in a given line of operations, and continued to the day when he 
 went out of the trade altogether, a prosperous and successful man. 
 
 Another example of commercial and banking loss in this exciting but 
 difficult trade differs from both the preceding. 
 
 At a certain point in the nineteenth century no name was more promi- 
 nently known, both on this side the Atlantic and in Europe, than that of 
 a large grain merchant in a certain much-frequented seaport. His op- 
 erations were legitimate, in one sense, namely, that, unlike speculators 
 on margin, he handled the actual grain, purchasing and shipping from 
 western centres of production to merchants and millers in Europe. His 
 operations, at times, were so large that he could furnish the whole cargo 
 
BAXKIXG AND COMMERCIAL LOSSES. 225 
 
 of several steamers at once. Many merchants and millers in Europe 
 looked to hira for supplies. Inland steamers were supplied by him with 
 a constant succession of cargoes during navigation. Cables and tele- 
 grams alike were pouring into his offices continually, and his bank ac- 
 count was one of phenomenal activity. His capital was supposed to be 
 large; but his operations altogether baffled the calculations of more mod- 
 erate men in the trade. They despaired of following out the results; but 
 amongst themselves had shrewd suspicions that, at some time or other, a 
 heavy collapse would ensue. And ensue it did. It came about in this 
 wise. 
 
 In the midst of a certain season, known to be one of heavy depression 
 in the trade, his bankers demanded a more exact statement of the stores 
 of grain he held, and the cargoes he had under way, as well as the state 
 of his account with European correspondents. 
 
 On this statement being examined, it became evident that he was 
 insolvent. 
 
 The advances from his bankers were nominally covered by securities, 
 but investigation showed that, in many cases, the so-called securities were 
 of an illusory character 
 
 Large quantities of grain, represented as being stored in a certain 
 mill, or in process of shipment, were not to be found. 
 
 Properties in the shape of mills, ships, etc., were found to be worth 
 a mere fraction of the values he had placed upon them. 
 
 When he had passed into insolvency, and a thorough investigation of 
 his affairs was made by a committee of creditors, it became evident that 
 his business for years had been nothing more than a continued course of 
 heavy "plunging." He had gone on recklessly making immense pur- 
 chases, and shipping a large series of cargoes across the Atlantic on 
 consignment, conducting his whole business as if it were a game of 
 chance. The only difference between his operations and those of a mere 
 speculator on margin was that he actually handled the grain. 
 
 Fortune sometimes favored him; for his books showed that at the 
 close of some seasons, he had a large surplus of capital. But more fre- 
 quently he closed the year in a state of insolvency. 
 
 How, then, it may be asked, did he keep himself afloat? 
 The answer is to be found in the condition of his affairs at the close, 
 viz., that there were in the hands of his banker documents representing 
 large quantities of grain that had passed out of existence, on which he 
 had obtained advances, l)iit which had been shipped without such advances 
 being retired, a state of things which every banker doing business in 
 seaport centres knows to be possible when numbers of cargoes are con- 
 stantly shipped. 
 
 The business was wound up. The estate paid scarcely any dividend 
 And as in the former cases, the great speculator disappeared from the 
 scene of his ambitious projects and never returned. 
 
226 BANKING AND COMMERCE. 
 
 Advances on Warehouse Receipts. 
 
 It may be said that the feature of Canadian law which makes it 
 legal for bankers to advance money on warehouse receipts given by a 
 person for his own property is responsible for such disasters as the fore- 
 going. 
 
 There can be no doubt that such receipts are of far less value as 
 security than those given by a warehouseman for goods placed in his 
 charge by another. But no banker is obliged to make advances on such 
 documents^ and it is doubtful whether in this case advances were made on 
 this kind of a warehouse receipt at the outset. 
 
 It is more than likely that the shortage, so to speak, arose in the 
 processes by which grain is transferred from railway to steamer, from 
 canal boats to warehouse, from inland steamers to ocean-going vessels, in 
 all which operations there are intervals of time during which merchandise 
 is in a state of transition, and actuallj' covered by neither one kind of 
 document nor another. The amount of grain in transition when opera- 
 tions are large, in an active shipping season, is of far greater magnitude 
 than any outsider would deem possible. 
 
 Risks of the Grain Business. 
 
 The commercial and banking losses mentioned in this chapter all arose 
 in connection with one line of business, viz., the export grain trade; and 
 all experience shows this business to be one of the most risky in which 
 any man can engage. Yet it is one of the most useful of all occupations, 
 for the supply of food to the people of whole nations depends upon it. 
 
 If such a thing could be conceived as that commercial men would be 
 so afraid of the risks of the trade that they would not engage in it, a 
 good part of the people of the world would starve. That, however, is 
 inconceivable. But it is a fact that the average rate of profit in the busi- 
 ness of providing the staple food of mankind is so small that nothing 
 but the closest calculation and most exact management, combined with 
 coolness of judgment, can carry a man successfully through its risks. 
 
 In looking over the results of hundreds of millions of operations 
 engaged in by exporters and dealers in breadstuff s throughout the world, 
 it is somewhat melancholy to notice how few of the men who have beer 
 engaged in the trade have derived any permanent benefit from it. Bene- 
 fit there has been to the great mass of consumers, but the result to the 
 men who have fed these millions has almost invariably been bankruptcy. 
 
 In examining dispassionately cases like the foregoing, and endeavor- 
 ing to draw some useful lessons therefrom, both for bankers and their 
 customers, it is impossible to avoid a conviction that some blame must 
 fall upon the banks concerned. 
 
 Let them be taken one by one. The bank in the first case advanced a 
 very large sum in actual money on the statement of a customer that he 
 was about to make large purchases in a distant grain centre. But with 
 such knowledge of business as bankers ought to possess, and the exercise 
 
BANKING AND COMMKIU lAL LOSSES. 227 
 
 of shrewd rcHection, they sl)ould have seen that it was not necessary for 
 a customer to go to that market with money actually in hand. There was 
 no need for the bank to hand their customer this money ; and the fact that 
 they were asked to do it should have rendered them suspicious. The 
 proper course for the merchant would have been to go to Chicago, to pur- 
 chase the required quantitj'^, to order it to be shipped; and for the seller 
 to draw upon him at short sight with bills of lading attached. The 
 bank could have advanced the money to take up the drafts with safety; 
 for they would have the bills of lading as security. This would have 
 demonstrated to the bank that their money was represented by grain; 
 but to ask for a large amount of money for the purpose of taking it to 
 Chicago should have suggested that an improper use might be made of 
 it. They should have known that it might be put up as a margin in a 
 speculation, or paid in as a share in a huge "corner;" which last proved 
 actually to be the case, to the ruin of the merchant and loss to the bank. 
 In the second case, where a bank's customer refused to sell grain on 
 a falling market, while there was still a heavy profit in the transaction, 
 it is evident that the power of sale should have been exercised earlier 
 than it was. 
 
 The case was one for prompt and decisive action, when the bank had 
 so foolish a customer to deal with. No considerations of regard for a 
 man's feelings, or fear of giving offence, should have been allowed to 
 prevail at such a time. Even a regard for the customer's own interest 
 might have led the bank to a firm course of action; for imdoubtedly a 
 customer's interest is, at times, best served by a refusal to lend money, 
 or by insisting upon payment at the proper time. 
 
 After all, what the bank was bound to consider was its own interest; 
 and if it had followed a course of action best suited to that, it would 
 have saved itself from loss, and its customer from ruin. 
 
 In the third case, the bank was to blame in making continuous ad- 
 vances to a customer whose operations repeatedly suggested the necessity 
 of a close inquiry as to his methods and position, which inquiry would 
 have demonstrated that his methods were unsound, and his operations 
 nothing but "plunging." In tliis case the bank should have insisted upon 
 tangible and -solid security to be furnished, so that its advances might 
 at all times be covered, in default of which it should have closed the 
 accoimt; and no consideration of the convenience of the customer, or the 
 indirect advantage to trade, or the profitableness of the apparently valu- 
 able account, should have prevented such action being taken. 
 
 The above criticism is all founded on the theory that a banker should 
 be sufficiently acquainted with the general course of the trade of his 
 customers to be able to judge whether they are carrying on business 
 judiciously or not. That this is a sound theory will hardly be disputed 
 by those competent to pass judgment. 
 
CHAPTER XXIX. 
 
 LOSSES IN CONNECTION WITH THE IMPORTING TRADE AND 
 OTHER LINES OF BUSINESS. 
 
 How A Bank Lost Through Taimtke of an Importing Hotse — 
 Benevolence Not an Attribute of Banking — A Remarkable 
 Failure — ^The Lumber and TiMTiER Trade. 
 
 IN the preceding chapter instances have been given of losses arising 
 out of one branch of our export trade, viz., that in grain. In the 
 present chapter the subject of losses in other lines of business will 
 be considered. 
 
 There is a radical difference between the modes of operation in these 
 lines of business and those in the grain trade. The latter deals with the 
 prime necessity of human life. Quotations of its value are made every 
 day in tlie commercial centres of the world. Its operations are carried 
 on and reviewed in the produce exchanges of commercial cities; the re- 
 sults are public property, and as the trade is in staples of absolute 
 necessity, transactions are large and the percentage of profit small. But 
 the importing trade of tliis continent deals with a multitude of articles 
 of which the values are never publicly quoted, and the dealing in which 
 requires special education and experience. 
 
 Moreover, the business of importing, and tlie wholesale dealing in 
 imported goods, can scarceh^ be entered upon without more or less capi- 
 tal and business knowledge. Its results, taken broadly and generally 
 have been much more satisfactory to those who have carried it on. 
 
 Yet it cannot be denied that in many instances, from various causes, 
 many a career that at one time looked promising has ended in disaster 
 and bankruptcy, entailing at times heavy losses both to banks and to 
 other traders. Let us take one or two examples of this on this continent. 
 
 In the earlier days of Canada a large house in the importing trade 
 had risen in a commercial centre from comparatively small beginnings 
 until its operations extended over a vast extent of territory and popula- 
 tion. Tlie firm had acquired high credit. It could buy at the best termi 
 in foreign markets, and its selection of goods was such as to attract 
 customers from all parts of the country. It thus gradually came to have 
 almost a monopoly of the business of many storekeepers in country 
 towns, who found the firm most accommodating in their mode of doing 
 business; giving credit liberally, being lenient in collecting, and always 
 ready to consider favorably proposals for renewing bills or extending 
 credit if satisfactory security was given. 
 
 Naturally, under these circumstances, the house came to have a num- 
 ber of customers who leaned u])on it for supplies and were of that profit- 
 
 228 
 
LOSSES JN OTIIKH TJNES OF BUSINESS. 2^29 
 
 able kind who never objected to prices. Their customers in many cases 
 gave security to the house on land and buildings, the land being often 
 uncleared lots in tlie forest, or the partially cleared farms of struggling 
 settlers. The properties in many cases had already been mortgaged for 
 loans or unpaid purchase money, but the house took the security for 
 what it was worth; generally under the impression, common in those 
 early days, that real property was sure to advance in value. The security 
 would thus become more tangible year by year. 
 
 Under this condition of things, the amounts owing by the circle of 
 dependents, for such they were, tended continually to increase; until in 
 many cases it became an absolute necessity to carry the account on, un- 
 less the customers were allowed to go on into insolvency. When men in 
 the retail trade arrive at this -stage, they cannot get credit elsewhere; 
 they must be carried on or stop. 
 
 The ordinary bank account of a firm in their line of business would 
 consist of the discounting of customers' bills given in payment of goods, 
 and purporting to be payable on an expressed day. 
 
 So long as these bills represented goods in the active course of buy- 
 ing and selling; representing, that is to say, a moving account, tluir pay- 
 ment with perhaps one renewal could be depended upon. With many of 
 the smaller customers of the house this continued to be the case. But 
 with regard to the class of customers before named (which was an in- 
 creasing one) their bills came to represent more and more mere dead stock 
 on the shelves, and were kept current by renewals. Especially was this 
 the case with that portion of their debt for which security had been given. 
 
 Thus, then, their banking accounts (for they ultimately had three) 
 would present this appearance: that, while it contained the paper of a 
 large number of persons for small amounts representing active business, 
 it also contained the bills of a certain number of persons for far larger 
 amounts, representing what are known as "supply accounts," on mere 
 dead stock. 
 
 It has been said that both the number of this class of accounts and 
 the sums due by each went on steadily increasing; for the method of the 
 house naturally led to their ordinary customers drifting into this undesira- 
 ble class. So long as the prosperous times lasted, while mo:uy was 
 plentiful, and the credit of the firm good, the account being large, active 
 and profitable, the several bankers of the firm allowed this state of things 
 to continue. But at length the usual turn in the tide took place. Bad 
 harvests made money tight. A great tide of revulsion set in, necessitat- 
 ing severe curtailment of discounts by banks. The firm was called upon 
 for considerable reductions by each of its -ba^ikers, while the creditors 
 of the house in Europe and elsewhere, being advised of the unfavorable 
 turn of affairs on this side of the Atlantic, also called for closer jiaymcnt 
 of invoices. The firm was thus pressed from two sides at once, and was 
 under the necessity of taking strenuous measures with its customers in 
 turn, insisting upon their accounts being reduced, or paid up. But reduc- 
 
230 BANKING AND COMMERCE. 
 
 tion in times of monetary pressure is almost impossible, as Mr. Gilbart 
 has shown in his admirable work on banking. The retailers endeavored 
 tci collect in turn from their customers, and a general condition of dis- 
 turbance ensued. Some asked extensions, offering such security as they 
 had. Others went into insolvency. The selling off their stocks by an 
 assignee tended to embarrass other firms, and thus things went on drift 
 ing from bad to worse. Before this had occurred, the banks had scruti 
 nized the bills given by the firm with unusual care, and realized that the 
 amount of paper given by certain customers was far beyond what was 
 legitimate."^ 
 
 Thus when the bankers of the firm, in the sharp stress of monetary 
 pressure, came to sit in judgment upon the bills current in the account, 
 they w-ere vexed beyond measure to find what large amounts of the paper 
 of certain storekeepers were afloat. Men whose whole sales in a year 
 were only some $50,000 had bills running for the whole of that sum o- 
 even more. 
 
 A scrutiny of the securities was quite as unsatisfactory. Numbers 
 of mortgages supposed to be on cultivated farms, with buildings and 
 orchards, were found to be on lands only partially cleared with nothing 
 but a shanty, or log barns on them, and the land itself not wholly paid 
 for. Under these circumstances the firm went into insolvency. As the 
 realization of the assets went on, the land often turned out to be barely 
 worth the first mortgage, making the bank's security worthless. Mort- 
 gages on property in villages or towns were in many cases equally de- 
 lusive. Vacant lots, valued at high prices under some "boom" influence, 
 wooden buildings, shops, dwellings or barns, when brought to sale after 
 foreclosure, realized, when charges were paid, but a mere fraction of the 
 nominal value of the mortgage. 
 
 Whilst these processes were advancing the revulsion in the commercial 
 sphere that had set in went on deepening year by year. Abundant har- 
 vests, sold at high prices, which had much to do with the development of 
 the boom, were succeeded by a succession of bad years. Hence a heavy 
 fall in the value of properties, and a continued series of commercial 
 failures both in the wholesale and retail trades. The terrible experiences 
 of the United States in 1857 were repeated all over Upper Canada. As 
 might naturally be expected nearly the whole of these dependent persons 
 failed when the supply house failed, and their estates yielded very mod 
 erate dividends. 
 
 This, of course, reacted upon the dividend paid by the great firn. 
 itself. Upon the various bankers of the firm finally fell the task ol 
 dealing with and winding up these complicated estates. This was a mat- 
 
 71 T.i't it not surprise the reader that this had not heen done before. Bankers, 
 like other mortals, are affected by changing circumstances. In prosperous times, 
 when business is swinging along with activity, a banker's judgment is apt to be 
 affected. An amount that would look dangerous when money is scarce, is passed 
 by almost without notice when money Is pl.-ntiful. And the course of an account 
 which In times of pressure is seen to be Illegitimate, in times of prosperity i« 
 apt to be passed by unnoticed. 
 
LOSSES IX OTHER LINES OF BUSINESS. 231 
 
 tcr of years, and the final result was heavy loss. As to the firm itself, 
 it passed out of existence. Its various members became scattered here 
 and there. Some of their old employees picked up the scattered debris 
 of the once widespread business, and met with various degrees of success ; 
 but the firm itself, once so prominent and powerful, has almost passed 
 out of the memory of the old inhabitants of the city where the name of 
 the firm once commanded such high respect. 
 
 The above is a typical instance of the kind of failures that occurred 
 in the early days of Canadian development, when the country was only 
 half cleared, the real value of land very unsettled, and few means exist- 
 ing of ascertaining the true position of retail merchants; and also when 
 the true principles on which credit should be given were as yet imper- 
 fectly understood. 
 
 It is true that even in this condition of things, some mercantile 
 houses managed to thread their way by dint of more than ordinary saga- 
 city and prudence, combined with courage in stopping when things looked 
 dangerous. Such men, in various instances, accumulated a competency 
 or fortune, which, with the business they founded, has survived to this 
 day. But the above history is only too true a record of an opposite 
 kind, of which Canada in its early days furnished many unfortunate 
 examples. 
 
 Of an entirely different description in most of its particulars, though 
 like it in its general features, was a failure that occurred in a later period 
 of deep depression in one of the commercial centres of this continent. 
 The head of the house was a man who had been well trained to business, 
 and thoroughly understood it in all its departments. A man of activity 
 and energy also, of an enterprising disposition, he had built up a larg-.' 
 business from small beginnings, until he stood in the front rank of the 
 houses in his own line of trade. His capital, apparently, had been 
 steadily growing until it amounted, as was supposed, to a very large sum. 
 And so he supposed himself. He was a man of philanthropic tempera- 
 ment, loved to help men on in life, especially young men; and had sel 
 up in business a number of such in various parts of the country, whu, 
 of course bought goods from his firm exclusively. As has been sho^vn 
 in another part of this treatise, this mode of doing business has, for a 
 time, great attractions on both sides. To the merchant it gives an outlet 
 to his goods at all times with the least trouble and expense, and at a 
 better than average profit. To the retailer it affords an unfailing source 
 of supply of goods for his shelves, and almost certain help when money 
 is scarce and times difficult. 
 
 Benevolf.xce Not an Attribute of Banking. 
 
 Benevolence is a fine attribute of character in the ordinary walks of 
 
 life; but a competent authority has declared it to be dangerous and out 
 
 of place when projected into the sphere of banking. It is equally so 
 
 in the sphere of commerce; for it renders it difficult for a merchant tt' 
 
232 BANKING AND COMMERCE. 
 
 resist importunities cither for more time, or more goods, and it prevents 
 him from employing those measures of enforcement which are at times 
 absolutely necessary to the safety of business. 
 
 Hardly ever was there a better exemplification of this than in the 
 case before us. The accounts of these men who had been so set up 
 went on smoothly when times were prosperous; the only disquieting 
 circumstances being that they tended to grow larger and larger. This 
 tendency should have been strenuously repressed, and the accounts kept 
 witliin proper bounds. 
 
 But unfortunately for this merchant, he was in such good credit, 
 that, as it was in the case just cited, he could discount bills freely in 
 three banks simultaneously. This facility of obtaining money blinded 
 him to the danger of such overgrown credits. And the fact that the 
 account was carried on in three places blinded the eyes of his bankers 
 too. None of them, in looking over the discounts under his name, seemed 
 to have realized the true position. Their own share of the bills of these 
 supph' concerns did not seem to be large enough to create uneasiness. 
 None of them, apparently, took account of the fact that the paper under 
 each name required to be multiplied by three. Had they done this, they 
 could not fail to have seen how dangerous the position was. Had there 
 been only one account M'ith a well managed bank, it would have been 
 impossible for such a state of things to have arisen. No single bank 
 would have discounted such an amount of the bills of these houses, or any 
 of them, as was discovered to have been distributed amongst the three 
 The tendency to overgrown credits would have been checked by refusal 
 to discount. But facility of discounting proved the merchant's ruin. 
 A time of depression at length set in. Trade became bad, money scarce, 
 collections difficult. Payments on the bills of these houses became less 
 and less, and pressure for renewals more and more. Even then the 
 house might have been saved bj' energetic treatment being applied to 
 these customers, and payments insisted upon before delivery of new 
 goods. But the head of the firm had not the heart to do this. He found 
 it impossible to resist importunity. Matters drifted on until the ac- 
 counts due by these parties and the paper discounted at the three banks 
 rose up to sums which, as owing by retailers, were simply appulling. 
 Had these customers owed him but five to ten thousand dollars, he might 
 have been able to take them in hand, and would not have been afraid 
 even of their stopping payment. But as it was, their accounts had run 
 up to sums of thirty, forty, and fifty thousand; and even in one case 
 to such an abnormal figure as one hundred and twenty thousand ! Their 
 aggregate indebtedness was far more than the whole capital of the 
 house. To stop them meant ruin. Matters therefore drifted on, always 
 with the same delusive hope of a turn in the tide which would render 
 quiet liquidation of some of these concerns possible. But depression 
 went on dee])ening, and banks as well as merchants felt the pressure of 
 it. They were comjielled to curtail their discounts. The three banks 
 
LOSSES IN OTHER LINES OF BUSINESS. 233 
 
 concerned all applied pressure, but there was no effectual response. 
 There could not be; and finally, the firm, overborne by the weight of 
 these masses of money due to them, that would take years to collect, 
 stopped payment, placed their affairs in the hands of an assignee, and 
 were compelled to compromise with the same creditors who had been 
 assured, only a year or two before, that the house had a capital of 
 hundreds of thousands of dollars. 
 
 In this case the primary cause of failure was in allowing a strong 
 instinct of benevolence to be carried into a sphere in which it had no 
 place. The secondary cause was the facility of obtaining discoimts. 
 
 There is this further to be said, that if the party had had to deal 
 with only one banker and could have shown himself solvent, effectual 
 help would have been rendered him when difficult times supervened. 
 But co-operation between three was impossible. 
 
 A Remarkable Failure. 
 
 We will now pass on to a failure in another line of business, and 
 distinguished by more remarkable features still. 
 
 In a certain town of Canada there lived in the last generation a man 
 of active habits, polished manners, and enterprising disposition, who 
 was a great favorite in the community. But his judgment was unequal 
 to his enterprise. He had failed to succeed in one or two positions en- 
 trusted to him (not mercantile) ; but he was one of that style of men who 
 are never daunted by adversity. 
 
 Soon after his last failure he conceived the idea of establishing a 
 new industry in the town, in furtherance of which a contiguous water- 
 power could be utilized. He borrowed all the money he could from a 
 member of his family, bought the necessary ground and water-power, 
 and made arrangements with a firm of contractors to erect the buildings, 
 These builders were men of considerable means, customers of one of 
 the local banks, and were in such high credit that paper bearing thei? 
 name could be readily discounted for considerable amounts. 
 
 The contract was signed, the buildings proceeded with, and month 
 by month the proprietor of the new concern gave his notes in payment 
 as the work proceeded, which notes the bank discounted. Such notes 
 had not a good banking foundation, as will be seen, but the local mana- 
 ger, a man of large experience and known to possess an intimate knowl- 
 edge of the peo})le of the district, reported the parties to be good beyond 
 question. The paper was therefore allowed to pass for a time at the 
 head office, with but little criticism. 
 
 As the buildings went on, the total amount of the notes increased; 
 a hope however being cherished that money to retire them could be 
 obtained by borrowing on the new buildings when finished. In this 
 hope all parties were doomed to disappointment. The projector, how- 
 ever, went on cheerily in his usual sanguine way, and the only parties 
 that felt uneasiness were the contractors and the bank manager. The 
 
231 BANKING AND COMMERCE. 
 
 liability of the contractors to the bank as endorsers had gradually in- 
 creased to an alarming sum, and the manager of the bank began to feat 
 for his own position, in case his advances did not turn out well. 
 
 It was, however, necessary to go on; for if stoppage had ensued, 
 all parties would have been left with that most undesirable of all assets, 
 an imfinished pile of buildings. As they stood, they had already cost 
 more than three times as much as it was supposed would be sufficient to 
 finish them. But many thousands of dollars were still required before 
 they could be ready for the plant, machinery and power. The buildings 
 however, were finished at last. But the projector's calculations as to 
 the cost of the plant were just as erroneous as they had been with regard 
 to the buildings. But plant and machinery must be procured and placed; 
 after which there might be a possibility of the advances being in some 
 way recouped. At all events the business might begin to earn money. 
 So advances went on, and an apparently finely-equipped establishment 
 stood on tlie ground. But no money could be borrowed on it until it 
 had proved itself capable of making profit for its owners. By this 
 time it became evident that the bank practically owned the concern 
 The advances were represented by notes that were far indeed beyond 
 tlie ability of the parties to pay, and the only hope of good results was 
 in the carrying on of the business. The unfortunate manager therefore 
 begged the head office to allow him to advance more money to buy stock, 
 and with a despairing sort of hoping against hope, this was consented 
 to. This stock was not only a stock of raw materials, but of animals 
 to consume the refuse. 
 
 ^Manufacturing then began, but the product was not satisfactory. 
 Considerable amounts of the goods were returned by purchasers, or 
 heavy reductions required from invoices. The promoter, who maintained 
 his cheerfulness, even' under these circumstances, now suggested that 
 certain alterations be made in the machinery, and managed to persuade 
 the bank to increase its advances for the purpose. 
 
 Thus matters went on for about a year. The concern never made 
 a doUar of profit. The burden of interest on the huge advances ground 
 the business slowly doM^n, and caused the advances to go slowly up. 
 Finally the bank authorities determined to bring the affair to a stop. 
 It was impossible to sell the establishment; for, notwithstanding the 
 money spent upon it, it had not been well planned and never could have 
 made money. The stock of raw material was worked up, the product 
 sold off, so were the animals, everything was realized on, and the place 
 finnlly dismantled, to remain to this day an object lesson to passers-by 
 of the folly of projecting a great enterprise without means, and of 
 lending huge sums of money without tangible security. 
 
 But when the sto])page transpired, a very singular circumstance came 
 to light. 
 
 Long before the final catastrophe the wrath of the bank authorities 
 had burst on the head of the unfortunate manager, and it was intimated 
 
LOSSES IN OTHER LINES OF BUSINESS. 235 
 
 that unless he could get the account secured he would lose his position. 
 Upon this he sought an interview with his friends, wlio comprised nearly 
 every man of position in tlie town, and his influence was so great that 
 many of them were persuaded to assume a share of the security for the 
 debt*. Some of them endorsed for $5,000; some for more (large sums in 
 that locality) and thus assumed obligations they could ill afford to meet. 
 But thev had to pay the whole amount, and some of them were im- 
 poverished for years thereby. 
 
 The loss to the bank was cons'iderably reduced by the severe measures 
 taken; but it was still enormous, considering the amount of business to 
 be done in tlie town. Indeed it was estimated that the profits of ten or 
 twelve good years of the branch would be swallowed up by it. 
 
 As for the parties themselves, the prime mover came out as he went 
 in, except tliat in addition to being worth nothing, a heavy and uncol- 
 lectible load of debt was registered against him. His relatives had lost 
 all they had lent him; and the endorsers lost all they had put their 
 names to. 
 
 He could not, of course, remain in a town where every second man 
 he met had lost money by him. He therefore took a situation in a dis- 
 tant town, and passed into obscurity. The contractors were hopelessly 
 ruined; a hard fate for men who had always maintained an unblem- 
 ished reputation, and who, previous to that aifair, had practically retired 
 with a competency. 
 
 The bank manager was well on in years at the time of tliis fiasco, 
 and only retained his position for a short time afterwards. He also left 
 the town, and never again held up his head in banking circles. 
 
 As to the bank, it was doing so well on the whole that even a loss 
 of this kind could be written off without attracting notice. 
 
 Failures and Losses in the Lumber and Timber Trades 
 
 ^Nlanv years ago it was common for the exporters of heavy timber 
 from Quebec to procure supplies of certain kinds of hard wood from 
 the forests of Michigan and Ohio. This business was one calling for 
 considerable bank advances spread over many months of time. It was 
 a highly remunerative one in good seasons, and no man had succeeded 
 better than a certain Ontario manufacturer who was well-known in 
 Quebec as a heavy producer of timber, and esteemed as a man of sterl 
 ing integrity. In a certain year, however, he concluded to vary his 
 operations, while still looking to Michigan for his supplies, to export 
 timber in a manufactured condition; that is in the shape of deals. He 
 was in high credit with his bankers and in the trade, and had no difficulty 
 in making contracts for large amounts with many of the sa\VTniU3 of 
 the State. In fact, the contracts were on a scale far beyond anytliiug 
 that had been attempted before; based on the idea of continued pros- 
 perity in the business and of large profits that awaited the conclusion of 
 
236 BAVKIXG AND COMMERCE. 
 
 the enterprise. But, as has been observed, the himber and timber busi- 
 ness is subject to recurring cycles of expansion and depression: the 
 depression at times being so severe as not only to render it impossible to 
 make profit, but impossible to avoid heavy loss, even with the closest 
 management. It was while these operations were in an early stage 
 that a period of heavy depression set in. Prices fell continuously month 
 after month; indeed, so severely did the revulsion press upon exporters 
 that cargo after cargo was at that time sent abroad from Quebec which 
 scarcely realized more than freight and charges, leaving the whole cost 
 of the article as a loss. Better would it have been in some cases, as a 
 merchant once told me, to have sunk the whole cargo in the St. Lawrence. 
 This had come to be the condition of the trade at the time now spoken 
 of. It was, however, impossible to stop operations when once begun. 
 Numerous gangs of men were out in the woods; the contracts covered 
 the operations of many mills ; deliveries were constantly going on rail- 
 way and ocean freights had been engaged both from Canadian and 
 American ports. Bank advances had also been arranged for. 
 
 But the full extent of the operations had not been disclosed. They 
 had only been spoken of in general terms. But as weeks passed on it 
 became evident that to carry these operations through a far larger amount 
 of money would be required than had been spoken of. It seemed a» 
 absolute necessity to make further advances on a very large scale, in 
 fact to an amount altogether unprecedented. There was not, on the part 
 of the bank, such a strict style of dealing with the account as its magni- 
 tude called for. In fact, the glamour of the customer's former sue 
 cesses somewhat blinded the bank's judgment. Matters, therefore, went 
 on. The advances mounted up to hundreds of thousands. The contracts 
 were finished and a prodigious accumulation of exportable merchandise 
 gathered together. It was then moved forward to tide water. Ocean ship- 
 ments began. Sales took place in Liverpool and other British ])orts. lint 
 the unwonted supply still further depressed the market; and finally the 
 affair was wound up, leaving the party, after all the merchandise had lucn 
 realized, indebted to the bank some hundreds of thousands of dollars. 
 
 ^lany other parties were involved, directly or indirectly, in these or 
 subsidiary operations, and the downfall of the firm brought many men to 
 ruin who had hitherto been regarded as men of substance. The catastrophe 
 was the heaviest that ever transpired in the trade; more than one bank 
 was involved in heavy loss; and the lessons are not likely to be forgotten 
 in this generation at least. 
 
 It may be reasonably asked, how it could come about that a trader 
 who had been uniformly successful in timber operations should have made 
 such a prodigious fiasco in a line of business so nearly related, even if a 
 time of depression had set in. To this the answer must primarily be 
 that the trader had entered upon operations that were immensely beyond 
 anything he had attempted before, and for which his capital was ab- 
 
LOSSES IX OTHER LINES OF BUSINESS. 237 
 
 surdly inadequate. But in addition to this, the operations Avere such as 
 he liad had no experitnce in. He was an expert in timber, but knew 
 nothing, practically, of deals. For, although the business of making 
 timber and manufacturing deals both originate in the forest, there is 
 an absolute difference in the modus operandi even from the very outlook; 
 as has been shown. The experience gained in one will not qualify a man 
 for dealing with the other. And Canada furnishes more than one in- 
 stance of the folly of attempting an interchange. 
 
 There is, however, something more to be said about this remarkable 
 case. After the great break-up, and when the methods of the firm were 
 brought fully to light, it was discovered that the expenditures had been 
 characterized by extraordinary recklessness. The close and careful 
 style of former successful days had been completely abandoned, and pur- 
 chases, contracts and disbursements were carried on from the office for 
 months together apparently on the principle that "money was no object." 
 The parties concerned, in fact, had completely lost their heads in the 
 magnitude and multiplicity of their operations, the result being, that the 
 stock which had been manufactured had cost them enormously more 
 than it should have done. 
 
 For this state of things, no little blame must be laid upon the firm's 
 bankers. They ought to have seen what was going on at an early stage, 
 and applied an eflectual check to it. But the large profits (apparently) 
 being realized from the account (and on paper they were simply im- 
 mense) completely blinded the judgment of the officials who had to do with 
 it. They therefore went on supplying the parties with money in a most 
 profuse style, and so continued until the great catastrophe supervened. 
 
 Another instance of the folly of a man passing from one department 
 of the timber trade to another of which he knows nothing, will now be 
 given. 
 
 In a certain timber district of this continent a person had grown up 
 amidst forest surroundings, who by shrewdness and close attention to his 
 business of manufacturing timber had succeeded in acquiring a con- 
 siderable c.-ipital. The business continued to be carried on by his suc- 
 cessors, but in time a change began to be perceptible to the bankers of 
 the firm, in the fact that advances were not periodically paid off as for- 
 merly. Inquiry elicited the fact that the firm, without informing their 
 bankers of the change, had ceased to be makers of heavy timber and 
 entered upon the business of saw milling. They had, in fact, expended 
 the whole of their capital and not a little of the bank's advances in the 
 erection and equipment of a sawmill in an adjoining district, and the 
 purchase of limits suitable for lumber operations. This was a line of 
 business of which they knew practically nothing. As was to be ex- 
 pected, they made mistakes both in the site, the building, and the equip- 
 ment of the mill. The business, naturally, did not prosper. The firm 
 steadily lost money. There are intricate points in the manufacture of 
 lumber of which the firm only knew theoretically. The times also were 
 
23S BANKING AND COISIMERCE. 
 
 not favorable. The enterprise was commenced in deception, for they 
 had deceived the local manager of the bank as to the purpose for which 
 advances were required, and, after struggling along for a year or two. 
 they came to a stop. The business was closed. The mill and limits were 
 disposed of. All the property of the partners was realized, after which 
 there remained a heavy debt to the bank which had to be written off 
 as a loss. The mill has long ago been dismantled and abandoned, and 
 all that remains is the memory of a once honorable and prosperous firm, 
 who, in an evil day, were tempted to abandon the pursuit to which they 
 had been brought up, and enter upon operations of which they knew 
 nothing. 
 
CHAPTER XXX. 
 FRAUDS, FORGERIES AND DEFALCATIONS. 
 
 Frauds Perpetrated from the Inside of the Bank — Specific 
 Insiances Narrated — Danger fro.m Forgery. 
 
 CONSIDERING the enormous amounts of money and negotiable re- 
 presentatives of money in the shape of checks, drafts, etc.. that 
 pass tlirough the hands of bank officer^, it is remarkable how 
 little irregularity, on an average, occurs in connection therewith. 
 Through the hands of various officers of a single one of the larger banks 
 in Canada there nnist pass, at least, many thousands of millions of dol- 
 lars every year; yet, year after year will sometimes pass, not only with- 
 out the slightest defalcation, but without even a serious mistake, every 
 dollar being accurately entered and duly accounted for. Yet, although 
 this may be the case in an average of instances, there have arisen at 
 times, in the sphere of banking, very remarkable developments of fraud, 
 not only from without, but from within. Such instances are worthy of 
 a permanent chronicle in a work like the present, for they will warn bank 
 officers themselves of the devious ways in which they may be tempted to 
 walk; it will warn, also, those who have the direction of them, in what 
 quarter dangers may be lurking. 
 
 Frauds and forgeries in connection with banking obviously divide 
 themselves into two classes: those from without, and those from within. 
 The last will be taken first. 
 
 Frauds Perpetrated From the Inside of the Bank. 
 Many years ago, in a condition of things now almost forgotten, the 
 manager of a certain bank in a large business centre stood so high in the 
 estimation of his superiors that he would undoubtedly, had the vacancy 
 occurred, have been promoted to the highest office in the bank. He had 
 risen rapidly to the position he occupied; and he filled it with such in- 
 telligence and judgment that there was every prospect of his becoming 
 a man of note in the banking world generally. But during the period 
 of his management a tide of heavy speculation in a certain article set in, 
 taking its rise from the terribly disturbed condition of the neighboring 
 States at the time. The article speculated in was subject to heavy fluctua- 
 tions, according to the course of the war, and many fortunes were won 
 and lost in great centres of business at the time. A number of Southern 
 refugees had taken up their residence in the city where this manager was 
 located, and gradually became the centre of constant speculative opera- 
 tions. Brokers were employed by this circle, who made heavy commis- 
 sions on the sales and purchases carried on. These brokers kept large 
 and active bank accounts. 
 
210 BAXKIXG AXD COMMERCE. 
 
 In an evil hour for this manager, he made the acquaintance of some 
 of the members of this circle of refugees and became cognizant of the 
 operations they were carrying on, said to be largely based on private 
 sources of information at their command. Acquaintance ripened to 
 friendship and friendship speedily led to sympathy with the ideas that 
 were the foundation of their speculations. They were all based upon the 
 final success of their cause. 
 
 If it was an evil hour for the manager when he first made their 
 acquaintance, it was a far worse calamity for him when he was induced 
 to take a hand in their speculations. His operations increased little by 
 little. At the outset it was only his own money that he risked. But as 
 events developed, the speculative fever grew stronger, and larger 
 amounts of money continued to be required to carry them on. Then it 
 was that he brought the funds of the bank into play, concealing it from 
 the authorities by ingenious frauds. It would have been impossible to 
 pass these transactions through his own account without instant discovery. 
 He therefore arranged with a firm of brokers, customers of the bank, 
 that the entries should all pass through their account. The advances 
 themselves, however, could not be reported at all; they must be concealed. 
 The statements of this broker's account that were sent to Head OfEce 
 were systematically falsified. Large advances were concealed by fraud- 
 ulent crediting of manufactured checks. Thus, supplies of money were 
 kept up and the authorities of the bank, for a time, kept in ignorance. 
 All this time, hoping against hope, this speculative circle were looking 
 for some decisive change in the course of events that would ensure victory 
 to their cause. The manager lived in the same atmosphere of hope, and 
 longed for a turn in the tide which would enable those illegitimate ad- 
 vances to be paid off. The rest of the business under his charge was 
 being conducted with his wonted skill and judgment. But the hoped-for 
 turn of events never came; on the contrary, matters became worse and 
 worse. The prospects of the great cause on which so many had staked 
 their all became darker and darker, until finally, a decisive event happen- 
 ed, which ruined that cause forever. The game was now up. All hope 
 of repaying advances was gone, detection was certain, and the wretched 
 manager sought an interview with the directors of the bank, making a 
 partial confession. In consideration of his high character and general 
 success- the board at first were inclined to deal leniently with him, as 
 the element of fraud was not confessed at all. But as investigation re- 
 vealed the machinery by which fraud had been long carried on, there was 
 no alternative but to dismiss him from the service and to call upon his 
 sureties to make good the loss. 
 
 He remained in the city for some time after these events, but never 
 again held up his head. And though comparatively young in years, he 
 died a few months afterwards, a broken-hearted man. 
 
 Defalcations amongst bank officers, in most cases, take the form of 
 appropriations b}' those who Iiave the actual command of money, such 
 as tellers. At times, however, there occur cases of defalcation on the 
 
FRAUDS, FORGERIES AND DEFALCATIONS. 211 
 
 part of those who do not handle casli, the fraud being carried on by 
 means of one or more confederates. It sometimes happens that the idea 
 of such frauds originates in the brain of fraudulent schemers outside the 
 bank. Tliese become tempters to wrong-doing, and if they can find a 
 bank clerk willing to be a party to their schemes, he may, even if in a 
 subordinate position, enable them to carry on fraudulent operations to 
 a very large amount. 
 
 The most remarkable of such cases in modern times is undoubtedly 
 that which transpired in the year 19OO, within the office of the Bank of 
 Liverpool, England. The details of this singular affair became known 
 at the trial of the parties concerned, and seldom has a more extraordi- 
 nary story been published. It is another case of truth being "stranger 
 than fiction;" but it illustrates what is found to be the general feature in 
 all these transactions, namely, that the bank clerk or officer concerned 
 has made acquaintances or friends amongst a class with whom he has 
 no right to mingle. The case is rare indeed that a bank officer may be 
 drawn into connection (through frequenting saloons and kindred places) 
 with actual thieves and burglars. Usually, however, it is with a class 
 who being at the outset nothing worse than speculators, are drawn into 
 fraudulent transactions. In the case now to be referred to, the associates 
 who brought about the T,ivcrpool bank clerk's downfall were men of the 
 "turf." 
 
 It is well known and "pity 'tis, 'tis true" that the habit of gambling 
 and betting on the turf has largely increased in England during the last 
 decade of years. Men of all classes have been drawn, more or less, into 
 the vortex. Some of them, after having been "scorched," have had the 
 good sense to withdraw with no great loss. In other cases men have gone 
 on plunging deeper and deeper, until ruin and disgrace closed the scene. 
 A career of betting is dangerous for any man; but of all men it is the 
 most dangerous for a bank officer. In the Liverpool case the beginnings 
 were doubtless small, and the gang of sharpers, who made this bank clerk 
 their tool, probably hardly imagined what possibilities of mischief were 
 within their reach, when they inveigled him into their toils. And the young 
 man himself, at the outset, never dreamed of the daring schemes of fraud 
 that were to be carried on by his instrumentality. He began betting 
 with such small sums as he could risk of his own. But the time came 
 when his small resources were insufficient, and the temptation was pre- 
 sented to him to abstract funds from the bank. From the moment he 
 yielded to this he was in the power of his confederates. The whole truth 
 of the relations between them has never transpired, but the probability is 
 that the modits operandi by which the money was secured was the result 
 of cogitations between all parties concerned. The men into whose power 
 the miserable youth fell were evidently familiar with banking operations, 
 and it is not improbable that the suggestion of the forging of customers' 
 checks came from them. Forgeries having begun, it was essential that 
 schemes should be devised by which it might seem that the proceeds of 
 the checks were drawn out legitimately. Machinery, therefore, was set 
 
242 BAXKINXt AXD COMMERCE. 
 
 on foot of a complicated character, and by means of it abstractions went 
 on until they amounted to a sum which startled the banking world. Dis- 
 covery, of course, was eventually made. The clerk fled. So did his fel- 
 low conspirators. The ramifications of their villainies were gradually 
 brought to light. Most of the parties were brought to justice, tried and 
 sentenced. The bank recovered a large part of the money out of which 
 it had been defrauded and charged the balance from its special reserve 
 fund. 
 
 But the most singular part of this story is, that the young man him- 
 self seems to have derived no benefit whatever from the gigantic frauds. 
 He kept his position in the bank, went on quietly doing his work, ap- 
 parently spending no more than young men of his class were accustomed 
 to. Nor does he seem to have been allowed by the gang who had the 
 mastery of him to have funds placed to his credit in a distant bank. The 
 men who were his masters could easily have made him rich, but that wa.: 
 far from their thoughts. To enrich themselves at his expense, and build 
 up their fortunes on his ruin, was the one object they steadily kept in 
 view. He was their slave, and as a slave, they treated him. 
 
 One of the parties to the fraud was never discovered. Some evidence 
 was given at the trial, leading to the supposition of his having taken pas- 
 sage in a steamer from France to England, and as he never landed it was 
 surmised that he ended his career by suicide. If so. Justice was balked 
 of her prey, for crimes such as these men committed could hardly be 
 deemed sufficiently punished even by penal servitude for life. 
 
 In neither of the foregoing cases did the frauds result in any benefit 
 to the bank officer who committed them. A case is now to be related in 
 which gain was the object and in which measures were so cunningly con- 
 trived that success for a short time was attained. 
 
 In a certain bank office, in one of the smaller towns of Canada, a 
 manager many years ago was performing his duties, on the whole, in such 
 a manner as to give satisfaction. He made mistakes, at times, as other 
 men do, in like positions and was sometimes reprimanded by his superior 
 officers on account thereof. But he stood well on the whole, and would 
 doubtless, in time, have been promoted to a higher position. 
 
 The ordinary course of the business of his office was quiet and un- 
 eventful ; but on a certain daj', in the midst of a winter season, a rather 
 singular event occured. As is the case in all bank offices, the keys of the 
 safe and its inner compartments are divided between the manager and 
 one or two other officers, the presence of all being necessary before the 
 safe and its compartments can be opened. On the day referred to, the 
 manager told the accountant that it would be needful for him and the 
 "teller" to come to the bank rather late in the evening, as a person with 
 whom he had had some correspondence had business to transact and would 
 arrive by a late train and must leave by an early train in the morning. 
 This man, as the event proved, was a confederate in a contemplated 
 scheme to defraud the bank. Yet he was a well-known merchant in e 
 
FRAUDS, rORGERlKS AND DEFALCATIONS. 213 
 
 certain line of business of which there was a good deal in the neighbor- 
 hood. 
 
 Under the pretence of a large transaction Avith this man, in which the 
 officers said there appeared to be some haggling about the rate of ex- 
 change, the manager had the safe opened, and a considerable sum of 
 money paid over to him. The confederate left the town the next morn 
 ing. The manager, leaving the accountant, as customary, in temporary 
 charge of the branch, went to Toronto the next evening, stating that he 
 was going to look after a past due bill and would return the following 
 day. He did not return, however, but remitted the amount of the bill ; 
 immediately after which a telegraphic message from a distant city re- 
 vealed that the pretended business transaction was a fraud. On receipt 
 of this, the first thought of the accountant was, that the manager had 
 been victimized; for that he, the manager himself, could be a party to the 
 fraud was almost unthinkable. However, the authorities of the bank, who 
 had been conuuunicated with, soon became convinced that a collusive 
 fraud had been perpetrated, and that the whole proceedings had been 
 part of a prearranged plot to deceive the bank. The appearance of the 
 stranger at the time, the haggling about commissions, the journey of the 
 manager after a delinquent debtor, and his remitting the amount of the 
 past-due bill the following day, all were seen to be cunning contrivances 
 by which suspicion was lulled sufficiently long to enable the manager and 
 his confederate to place themselves as far beyond discovery as possible. 
 The most enei-getic measures were taken immediately. The most skillful 
 of the man_y law officers connected with the bank were set to work. 
 Pinkerton's Detective Agency was employed, and hundreds of telegraphic 
 messages were sent to all parts of the United States; for thither, of 
 course, the fugitives would be sure to proceed. The first trace of the 
 delinquents appeared in the shape of a parcel of the notes of the bank 
 sent for redt)ni)tion from a city in the State of New York to a western 
 branch of the bank. These, on examination, were found to be a portion 
 of the stolen money. This was the first clue, and with the assistance of 
 the detectives, lawyers, and officers of the bank, it was so well followed 
 up that the fugitives were both discovered in their remote hiding-places 
 and the larger part of the spoil recovered. 
 
 The story of their pursuit is a singular one. The first person to be 
 communicated with was the private banker in New York State who had 
 forwarded the notes. In answer to enquiries, he said that two men had 
 come into his office some days before, and deposited a large amount of 
 money in Canadian bank bills, stating that they were in the cattle trade 
 and had come over to buy cattle in the state of New York; a likely 
 enough story. Tlien, that they had drawn out the money the day after in 
 American bills, to make payments, as they said, for the cattle they had 
 bought. The two men were evidently the bank manager and his con- 
 federate. Detectives followed up the clue and ascertained that the two 
 men had proceeded to the station of the New York Central Railroad, 
 where one had bought a ticket for New York and the other for Chicago 
 
244 BA\KI\G AND COMMERCE. 
 
 The manager had gone to New York, as was supposed he would, and 
 strange as it may appear, he spent a day or two quietly visiting his sister 
 at the very time detectives were scouring the city in search of him. But 
 the search being continued, the detectives found traces of a man resem- 
 bling the manager as having left New York en route for the South. One 
 of the higher officers of the bank, who was well acquainted with the man- 
 ager and his handwriting, was instantly despatched to accompany a de- 
 tective in pursuit. The first certain trace was found in a southern hotel, 
 on examining the register of which a name was found to have been en- 
 tered two days before in the manager's handwriting; under another name, 
 of course. They were now on the track of the fugitive. Travelling 
 swiftly they followed up traces from city to city, by means of his hand- 
 writing. Passing on from South Carolina, they traversed the states of 
 Georgia, Florida, Alabama, Louisiana, Mississippi, Texas and Arkansas. 
 All the traces were followed up with the keenness of a sleuth-hound, but 
 the fugitive was always a day ahead of his pursuers. He did not know 
 exactly what was being done, but he was very sure that he was being 
 closely pursued. This conviction led him to betake himself., it last, to 
 the most remote and least frequented parts of the immense regions he was 
 traversing. The same cunning he had manifested in devising the plot 
 enabled him, after a day or two of flight, to devise measures by which his 
 pursuers would be completely baffled. And baffled, at length, they were. 
 When they reached the farthest portions of Arkansas and were on the 
 border of the Indian Territory, they lost the clue completely, to their 
 great vexation. The fugitive had evidently escaped for the time. The 
 pursuers returned and the bank resigned itself to the possibility of a con- 
 siderable loss. 
 
 This, however, was not to be. A few months transpired and nothing 
 was heard of the missing man, until one day the solicitor of the bank in 
 New York received a letter from him dated from an obscure little town, 
 in one of the far Western states, stating that he still had nearly half the 
 stolen money in his possession, that he felt himself to be like a hunted 
 hare that would certainly be run down some day, that life had become 
 perfectly intolerable to him; that he could neither rest by day, nor sleep 
 by night; and finally, offering to make all the restitution in his power. 
 The bank left the matter in the hands of their solicitor in New York, 
 ajid the greater part of the money in the fugitive's possession was re- 
 covered. It was evident, at the time the restoration of the money was 
 brought about, that the man was utterly broken both in body and mind; 
 and he died a short time afterwards. 
 
 Meanwhile, energetic steps had been taken to follow the clue afforded 
 by the ticket to Chicago to track t)i^ confederate. He had come to 
 Chicago, that was proved. But whither he had gone was the difficult 
 thing to trace, as there were dozens of directions, each leading to far dis- 
 tant ])laces. in which lie might liave sought shelter. ]?ut the fact of his 
 having been in the lumber trade led the Pinkertons to suspect that he 
 might possibly have betaken himself to the distant forest regions border- 
 
FRAUDS, FORGERIES AND DEFALCATIONS. 215 
 
 ing on Lake Superior, where lumbering operations were then being car- 
 ried on. It was winter and there would be numbers of lumbering camps 
 in the woods. In some of these camps tidings might possibly be heard of 
 him. Pursuing this idea, detectives were sent in search. The localities 
 were very remote, the area covered by the camps was hundreds of square 
 miles in extent, and covered by dense forest. The chance seemed very 
 remote; but detectives seem almost able to work miracles in the way of 
 investigation, and at length, in one of these camps, in a very remote re- 
 gion, they heard that a stranger had lately made his appearance, appar- 
 ently a Canadian and a lumberer, who had come professedly to look after 
 timber lands. The detectives were now convinced that their man was in 
 sight. Soon afterwards they found him and telegraphed to the lawyer 
 of the bank who had the matter in charge. He came up and found that 
 the confederate had the larger part of the stolen money upon him, and 
 so managed matters that most of it was given up. 
 
 Further iNbTANCEs of Fraud and Forgery. 
 
 Although the instances of defalcations and forgery are repeated 
 one after another in these chapters, it is not intended to convey the im- 
 pression that such crimes against commercial honor are common events. 
 This is so far from being the case that of the millions of money that 
 pass through the hands ot bank officers in the course of their business, 
 not one in a million probably is abstracted or improperly dealt with. Of 
 the millions of dollars of commercial bills draAvn during any given year, 
 it is safe to say that not one in a million is forged. A striking instance of 
 the absence of defalcation and the prevalance of commercial honor dur- 
 ing a long course of years is furnished in the history of the Bank of 
 New York. This bank has put on record that during the first forty 
 years of its existence no bonds of suretyship were taken from its officers, 
 and that during the whole cf that period not a single defalcation occurred. 
 Times and circumstances have changed materially since the period re- 
 ferred to, and all banks and corporations now find it prudent to take 
 such bonds. Yet, even now, frauds and forgeries are rare events. But 
 when they do occur they are not seldom of so striking a character as to 
 furnish object lessons to banks and every description of corporations. 
 
 At a certain period in the history of the New England States, few 
 bank officers were more prominent and respected than the cashier of a 
 certain bank in one of their principal cities. He was known all over his 
 own state and highly esteemed as a man of honor and ability. He took 
 a prominent part in the affairs of the city in which the bank was situ- 
 ated. And if, at any time, a discussion had arisen as to the possibilities 
 of fraud in the banks of New England, his would have been the last 
 name thought of. But one day there began to be rumored about the 
 city, to the astonishment of the community, that there was something 
 wrong with the account of the Cashier of the bank. 
 
 At first nobody credited tlie rumor, unless it might be a few cynics 
 of the class that have a "had opinion of everybody in general." But as 
 
246 BAXKI-N'G AND COMMERCE. 
 
 the days went on the rumor gatliered strength and took a more definite 
 shape. A defalcation had certainly been discovered. The amount, as is 
 invariably the case, was exaggerated by rumor; but at length the arrest 
 and prosecution of the cashier placed the matter beyond doubt. The 
 event gave a shock to the banking and commercial community of the 
 whole state, and even beyond its borders. Numbers of people felt aS 
 if the very foundations were giving away, when such a man as he wa.<» 
 supposed to be could be guilty of crime. If such men as he could not 
 be trusto'd. who was worthy of confidence.^ Many hoped that after all 
 he niiglit be able to clear himself. The hope, however, proved fallacious. 
 The arrest was followed by trial; the evidence could not be controverted, 
 and he was found guilty b}' the jury, regretfully enough. A long course 
 of honorable dealing could only be pleaded in mitigation of sentence. 
 This was doubtless taken into consideration by the judge, but the 
 sentence imposed was severe, namely, imprisonment for ten years in the 
 State pi'nitcntiary. 
 
 When the cause of this sad downfall was inquired into, it was found 
 that stock speculating had been carried on by the cashier for some time 
 back, and that the funds of the bank had been used for the purpose. 
 These speculations were sometimes very profitable; at other times not. 
 But at length a period of steady losses set in; calls for margins could 
 not be responded to, and the defalcations could no longer be covered up. 
 Then came the inevitable discovery. 
 
 But there was something behind the stock speculation. The promi- 
 nence of this cashier, in the community and the state, had gradually led 
 him into a style of liA'ing that was far beyond his income. It was 
 doubtless for the purpose of adding to his income, so as to enable him 
 to keep up this style, that stock speculation was first resorted to. That 
 step once taken, the path diverged further and further from safety and 
 honor, and ended in the catastrophe that has been narrated. In this case 
 the directors of the bank can hardly be absolved from blame. The style 
 in which the cashier lived was perfectly apparent. The very house he 
 lived in gave evidence of it, and they could not fail to know that such a 
 style could not be supported by the salary he was receiving. It was, 
 doubtless, their duty to interfere, before wrong-doing had been develop- 
 ed. Had they done so. they would have saved the bank from loss and 
 their cashier from ruin and disgrace. 
 
 The Danger From Forgery. 
 Of all the dangers that arise in the conduct of bank business, forgery 
 is perha])S the most difficult to guard against. The danger especially 
 arises from the fact that it is often committed by persons of good stand- 
 ing, who by a course of honorable dealing have established themselves 
 in the confidence of the community. There are, in every large commer 
 cial centre men in business whose reputation is so bad that they could 
 not pass a forged bill if they tried. It is the men of good reputation 
 and antecedents who astonish the world at times by falling into the pit 
 
FRAUDS, FORGERIES AND' DEFAECATIOXS. 217 
 
 of dishonor, and offering forged bills and documents to a bank. Of this 
 a few instances will be given. 
 
 At a certain period, in the histor}- of one of the great staple trades 
 
 of the Continent, no firm stood higher than that of & Co. The 
 
 head of the house belonged to one of the best families in the country, 
 and the name itself Mas a synonym for all that was honorable and 
 respectable. They carried on business in more than one centre of trade, 
 and were known as amongst the largest exporters of the commodity they 
 dealt in. They were bona-fide merchants, who actually handled the 
 goods they exported; not mere schemers, who lived by speculation and 
 engineered "corners" in the trade. This firm, like other firms, had its 
 good and bad years. But if any one had made a guess as to the possi- 
 bility of any house on 'Change doing anything dislionorable, this firm 
 would have been ruled out of the supposition at once. 
 
 One day, in the midst of a busy season, the head of this house pre- 
 sented shipping documents to a bank with whom they dealt; that is, bills 
 of lading and policies of insurance, for a large amount of merchandise 
 to be shipped. An advance was made npon them with the usual margin. 
 A da}' or two afterwards the city was startled by the news that this firm 
 had stopped payment. The news did not particularly disturb the bank, 
 for their advance was apparently well covered by securities. The only 
 irregular feature was that the bills of exchange, which should naturally 
 have been drawn against the merchandise shipped, had not been brought 
 in as customary. The bank had bills of lading however. This would 
 keep them safe. The idea of the bills of lading brought in by such a 
 firm being forged was inconceivable. But this proved to be the case. 
 The whole of the documents were forgeries, bills of lading and policies 
 of insurance together, skillfully contrived by the head of the firm, in 
 order to present a perfectly genuine appearance. He Avas the guilty 
 party, and was arrested at once. Trial, of course, followed. The facts 
 were indisputable, and the only plea put in was insanity — a plea that 
 might well carry some weight in such extraordinary circumstances. For, 
 though such a firm might possibly fail, the failure would not have been 
 an extraordinary matter in that trade, in a time of falling markets. And 
 such a failure would carry no stain of personal dishonor compared with 
 that which would arise from the commission of a crime. It might well 
 be called an act of moral insanity for a man to perpetrate such a deed 
 on the eve of insolvency; for its effect was merely that some one or more 
 of his creditors would be paid in full, while another creditor would be 
 created to an equal amount. It was not moral insanity, however, that 
 was pleaded; but actual insanity: such insanity as would make the party 
 irresponsible for his actions, and justify his incarceration in a lunatic 
 asylum. The plea carried weight to this extent, that the judge who 
 tried the case ordered that the prisoner be committed to the state lunatic 
 asylum, for the purpose of testing whether he were insane or not. 
 
 Meanwhile the affairs of the firm were placed in the hands of an 
 assignee, and the usual course in such cases was followed. Scarcely 
 
248 BANKTXG AND COMMERCE. 
 
 enough, however, was realized to pay the costs of liquidation, aiiJ tht 
 bank concerned lost the whole amount of its advance. The head of the 
 firm remained in the asylum for a time, and was then relegated to the 
 custody of the officers of the law, no definite decision having been 
 reached. Strong influences were brought to bear, and the court finally 
 allowed the prisoner his liberty, under an engagement of reappearance. 
 As time went on, the case and its circumstances and all concerned in it 
 were forgotten, in tlie rush of new events. The affair sank into oblivion^ 
 and has so remained to this day so far as the public are concerned The 
 directors and officers of the bank, however, are not very likely to forget 
 it. The case is one of the most singular developments of human nature, 
 and human folly, that ever arose in banking annals. 
 
 The only comment that can be made upon the action of the bank in 
 the case is that they should have noticed that the application was for a 
 loan on bills of lading, instead of for the negotiation of a bill or bills 
 of exchange, with the bills of lading attached. Enquiry might have 
 been made why the usual course was not followed. Any departure from 
 the ordinary course of things may naturally, at any time, give rise to 
 enquiry. In fact, it should always do so, as such a departure is, at times, 
 an indication of a more grave irregularity than a mere matter of form. 
 In this case it is, at least, possible that enquiry might have revealed 
 something that would have put the banker on his guard. Some hesita- 
 tion in manner might have been apparent, some awkwardness in ex- 
 plaining the reason why bills were not offered, some contradiction in 
 statement, that might have led to a request for time to consider the 
 matter, which consideration might have led to further enquiry, which 
 would have exposed the contemplated fraud. And though it is easy ta 
 be "wise after the event," there can be no doubt that a considerable part 
 of the most valuable experience that a banker possesses is a record or 
 recollection of just such occurrences as are noticed in these chapters. 
 
 Of a very different description is the case now about to be presented. 
 
 In a certain district of the northern part of this continent, few men 
 had a higher reputation some years ago than the treasurer of certain 
 country municipalities, who united to put their financial affairs into his 
 keeping. His account was with one of the banks of the district, and for 
 some time had been carried on satisfactorily. These municipalities were 
 in the habit of borrowing sums in anticipation of taxes to be collected, 
 which loans were upon certified resolutions of the municipalities But 
 one day a rumor spread abroad that this gentleman had disappeared; 
 then, following upon this that he had large amounts of the funds of the 
 municipalities in his possession. Enquiry, of course, followed. It was 
 then discovered that some of the documents on which the treasurer had 
 obtained money were forgeries, the result, of course, being that the 
 municipalities were not responsible. Detectives were set to work, and 
 the manager of the bank was authorized to follow the fugitive, accom- 
 panied by a local constable who knew him. Traces were found here and 
 there, at points further and further south, and it became evident at 
 
FRAUDS, FORGERIES AND DEFALCATIONS. 249 
 
 length that he was on his way to Mexico. He crossed the Rio Grande 
 and thqn supposed he was perfectly safe, there being no extradition 
 treaty between Mexico and Great Britain. However, the manager who 
 .was a man of energy and determination, decided to continue the piirsuit, 
 and confront the forger, if he coukl find him. He followed him to the 
 City of Mexico, obtained the aid of the British Ambassador, found the 
 man, and at lengtli succeeded in having him taken to Vera Cruz and put 
 on board a British steamer bound for the West Indies. He was now in 
 safe custody. The manager and the constable kept their prisoner in 
 charge and had him transferred to a West Indian steamer sailing to 
 Liverpool. From thence the parties proceeded back again across the 
 Atlantic, landed on British ground, thence proceeding half way across 
 the continent until they arrived at the city where the fraud had been 
 committed. Thus, after a journey of nearly twenty-thousand miles, the 
 criminal was brought back, much to the astonishment of the community 
 where he had lived, and especially of the people of the country munici- 
 palities, whose names he had fraudulently used. He was tried, con- 
 victed and sentenced to a long term of imprisonment in the penitentiary. 
 The energetic action of the bank in following this man over such enor- 
 mous distances produced such an impression upon that community that 
 though some fifteen years have elapsed since those occurrences, no serious 
 case of forgery has since transpired in the city. 
 
 In this case, it does not seem that any want of care could be imputed 
 to the bank, in their dealings with this man. But as it is not the only 
 instance, either in Canada or the United States, where treasurers of 
 municipalities, and even of churches and missionary societies, have com- 
 mitted fraud in their dealings with banks, it does seem desirable, and 
 necessary, for bankers to take special care in regard to such accoimts, 
 and to insist upon such checks, by continuous audit, or otherwise, as 
 would put efficient obstacles in the way of wrong-doing, on the part of 
 treasurers. 
 
 The next case cited is of a totally different character from any of 
 the preceding. 
 
 One of the most remarkable cases of forgery that have transpired 
 within the last quarter of a century was that of a prominent merchant in 
 a large seaport of Great Britain, where an extensive trade was carried 
 on in the raw material of the manufactures of the district. He was a 
 man of great energy and ability, not a native of the place, but one of 
 that large class of foreigners who have established themselves in the 
 centres of trade of these times. His business was that of an importer, 
 and that on a large scale. His customers were the manufacturers of the 
 district. They settled their accounts by acceptances or promissory 
 notes. The "paper" was of that class which bankers always consider 
 with high favor; and very naturally, being founded, when genuine, upon 
 bona-fide transactions, and both names to every bill being generally of 
 a high class. Suddenly, however, an event happened — for such events 
 always happen suddenly— which was the beginning of a revelation that 
 
250 BANKING AND COMMERCE. 
 
 astonished the bank and the whole district. One of the bills was re- 
 turned protested for non-payment; the bank at which it was payable 
 having no advice, and no funds. The discounting bank naturally thought 
 that some clerical irregularity had transpired, some letter had been mis- 
 posted, some remittance gone astraj-, and notified the acceptors at once, 
 expecting a check in payment by return mail. Instead of this came the 
 alarming announcement that the drawees had never accepted such a bill 
 at all. Recourse was instantly made to the merchant, who had, in the 
 ordinary way, been notified of the dishonor of the bill. But his place 
 of business was closed that morning, and he himself, had left the city. 
 Then gradually came a full revelation of the whole, extent of the v/rong- 
 doing. Bill after bill came back under protest, one house after another 
 wrote in the same terms as the first, namely, that they had never signed 
 such bills. It was like a succession of thunder-claps to the bank, for 
 nearly all the bills were of large amount, running into thousands of 
 pounds. Finally, the whole extent of the fraud was realized, the loss 
 being serious enough to require to be charged to the surplus fund of the 
 bank. The fund, however, was well able to sustain it, and the bank 
 went on with its business as usual. 
 
 In this case, the general impression among bankers and merchants in 
 the district was, that no blame could be attached to the bank; or that 
 any imputation of laches, or negligence, could lie against the managers. 
 The frauds had been carried on with extraordinary ingenuity; the forger 
 even had printed or engraved copies made of the forms used by the 
 drawees of bills, for correspondence, promissory notes, and acceptance 
 of bills, when acceptance was made by a stamp. And the forger having 
 a good reputation, established trade, and good connections both at home 
 and abroad, there was everything in the circumstances to inspire confi- 
 dence. But, as has been observed, it is generally only in circumstances 
 like this that forgeries of any extent can be carried out at all. 
 
 There is this, however, finally, to be said, that in most cases of fraud 
 and forgery, there arise little circumstances, which if noticed at the 
 time, might be followed up, and lead to increased watchfulness as to 
 other circumstances, which course in some cases would lead to a dis- 
 covery in the early stages of wrong-doing, and prevent loss later on. 
 For in all cases of fraud the tendency is to grow worse and worse, the 
 amount becoming larger and larger until discovery puts a stop to the 
 whole affair. 
 
 The sum of the whole matter is this, as respects employes: whenever 
 a bank officer or confidential employe of a mercantile house is known, 
 or suspected with good cause, to be living beyond his means, or to be 
 gambling, or indulging in betting, or keeping company with gambling 
 or betting men, or speculating in stocks — the sooner the matter is taken 
 iu hand the better. For delays in such matters are always dangerous. 
 
CHAPTER XXXI. 
 A BANKRUPTCY LAW. 
 
 Bankers Interested ix the Slbject — Oricixal Lau' Arose from 
 
 SUFI'ERINGS OF IMPRISONED DeBTORS CONTINUED FOR VaRIOUS 
 
 Reasons, Though Imprisonment Abolished — EffecI- of Discharg?: 
 Clause — Great Abuses Developed — Ax Last Abolished. 
 
 IT sliould be stated at the outset that the insolvency of banks is dealt 
 with in special clauses of the Canadian Banking xVct. 
 
 In spite of the caution with which their business is conducted, 
 and the securities they take, bankers and merchants sometimes find them- 
 selves confronted with that ugly spectre, the bankruptcy of their cus- 
 tomers. This is especially the case in those difficult times, which, as all 
 experience shows, are sure to recur when the commercial pendulum swings 
 from prosperity to adversity. The insolvency of an important customer 
 in a large centre may bring a number of other insolvencies in its train, 
 so that a banker who has discounted a considerable amount of bills for 
 a wholesale merchant who has failed may find himself, by that one 
 failure, a creditor of a dozen or more bankrupt estates in addition. 
 
 The subject is one with which all bankers of long experience become 
 unpleasantly familiar; dealing, as they do, with all sorts and conditions 
 of debtors in all sorts of times. They can speak, therefore, with some 
 measure of authority on the subject. For this reason, whenever Parlia- 
 ment has taken the matter seriously in hand, and an important bankruptcy 
 law has been submitted to it, bankers, as well as merchants, hav-^ been 
 invited to state their views to the special committee in charge of the 
 subject. 
 
 There arc many causes for insolvenev; some of them involving more 
 or less of culpability on the part of the insolvent. Such, for esample, 
 as entering on business without experience or sufficient capital ; careless 
 ness in carrying on business; neglecting to insure; neglecting to keep 
 books; foolishness in giving credit; idleness; neglect of business for 
 politics or pleasure; extravagance; speculation in outside matters, becom- 
 ing guarantee for others, and so on. 
 
 Nine out of ten of the insolvencies that occur are traceable to one or 
 the other of the above causes ; and clearly put upon a creditor the respon- 
 sibility of enquiry as to the cause, whenever an insolvent debtor seeks to 
 be released without paying his debts in full. 
 
 If a trader becomes unable to meet his obligations there is nothing 
 in either law or custom to prevent him approaching one or more of his 
 creditors, and asking them either for simple delay, for a formal exten- 
 sion, or for a release on terms submitted. No law is needed to enable 
 
2j2 banking and COMMERCE. 
 
 the application to be made and dealt with. The matter is purely one 
 for private negotiations; with this condition, however, that no engage- 
 ment with one creditor will bind any other. Nor will an agreement of 
 a majority of creditors, in meeting assembled, bind any of the rest, 
 unless under the provisions of an Act of Parliament. And here we touch 
 the fringe of that complicated and difficult subject of a Bankruptcy Law, 
 which has so often baffled the wisdom of legislatures to settle on equitable 
 terms. 
 
 It is well known that Canada as a whole, after having experienced 
 the working of more than one general Insolvency Law during a course 
 of years, finally allowed the last of them to lapse, and has never enacted 
 another. But as there are some undoubted disadvantages in this lack 
 of a general law, it is desirable, in a work like this, to consider the 
 general principles on which such a law should rest, in case it occupies^ 
 the attention of Parliament again; and Avhile doing so, to consider how 
 far certain laws of the several provinces fulfill the requirements of the 
 case. 
 
 In order to deal with this matter it will be needful to "begin at the 
 beginning," and consider the relations of debtor and creditor as they are 
 affected by the ordinary operation of law. 
 
 Remedies Against Debtors. 
 
 When a debtor neglects or refuses to satisfy his creditor, the latter 
 can invoke the power of the law to compel him to fulfill his contract. 
 Every debt is the result of a contract. It is prima facie the province of 
 law to enforce the fulfillment of contracts; hence a creditor can call 
 his debtor before a court, state his claim, prove it by evidence if he can, 
 and ask for judgment. The debtor can also plead; but unless he can 
 prove that the claim is unjust, either as to time, or amount, or in some 
 other way, judgment will be given against him. It is needful to note 
 that the powers of a court extend simply to the determination of the 
 amount due, the time when due, and to the enforcing of payment. An 
 ordinary court can neither grant time, nor abatement, nor release. 
 
 Following upon judgment, is the seizure of the debtor's property by 
 an officer of law, its sale, and the payment over of proceeds to the 
 creditor. If the proceeds are sufficient and the debt paid, there is an 
 end of the matter. The law has fulfilled its object, and the creditor is 
 satisfied. But if the officer of law cannot find any property of the debtoi, 
 or if such property does not realize enough to pay the debt, what then? 
 
 As the law now generally exists, and has done for some time past, 
 it can do nothing more. 
 
 But under the old administration of law not only could the debtor's 
 property be seized, hut his person. The operation of law was. until a 
 recent period, exactly as it was 1.800 years ago, as described in a graphic 
 passage in the Sermon on the Mount. Counsel is there given to a debto> 
 as follows, Agree with thine adversary quickly, whilst thou art in the 
 nay with him; lest at any time the adversary deliver thee to the Judge. 
 
A BANKRUPTCY LAW. aSS 
 
 .and the Jud^e deliver thee to the officer, and thou be cast into prison. 
 Verily, I say unto thee thou shall by no means come out thence until thov 
 hast paid the utmost farthing. This has a wonderfully modern sound, 
 for it exactly describes what would have taken place in England nearly 
 up to the middle of the nineteenth century. The debtor could be put in 
 '.prison, not, as in criminal matters, for a week, a month, or a year, but 
 until the debt was paid. 
 
 The difference between tlic criminal law and that respecting debtors 
 was remarkable enough. The criminal, at the expiration of his term, 
 was a free man and discharged of all 'obligation. His imprisonment 
 constituted a sort of claim to discharge; but with the debtor, imprison- 
 ment operated in no degree towards his discharge. Unless the creditor 
 consented, in prison he must remain for the whole of his natural life. 
 Numerous cases of this kind did actually occur. The term "rot in prison" 
 has become incorporated into our language, and expresses exactly what 
 occurred in many cases under the ordinary law. 
 
 English literature tells only too truly the stories of suffering endured 
 by insolvent debtors in London prisons; for one singular feature of this 
 matter is, that while the Government was obliged to support thieves and 
 burglars while in prison, no support whatever was provided for the 
 imprisoned debtor. 
 
 Origin of Insolvency Laws. 
 
 It was under these circumstances that the first movement for an insol- 
 vency law began. The object was primarily the release of imprisoned 
 debtors; and the title of early acts of Parliament on the subject wa? 
 "An act for the relief of insolvent debtors; the relief being, not to 
 provide them with necessary food and comfort, but to give them a dis- 
 charge from prison and from their debts. 
 
 Such a law, of course, would only be needed to compel unwilling 
 creditors to be satisfied with what the ordinary course of law had failed 
 to give them. Thus, in its very inception, an insolvency act contradicts 
 and traverses the ordinary operation of law. The law is to give effect 
 to contracts, but the effect of an insolvency law is to break them. 
 
 But the cases of hardship, and even of cruelty, were so undeniable 
 that the force of public opinion became strong enough at length to insist 
 upon a way of legal relief being opened. 
 
 It was in these circumstances that the first act for the Relief of 
 Insolvent Debtors was passed. That act provided for the constitution of 
 a special court, whose functions were to be the exact opposite of an 
 ordinary one. The ordinary court was for the administration of justice: 
 this was for the administration of mercy. And to it the unfortunate and 
 impecunious (but presumably honest) debtor was allowed to appeal and 
 plead for his release from prison. His creditors, as a matter of course, 
 were allowed to appear also, and to show cause to the contrary, if they 
 were able. 
 
 If the creditor could prove that his debtor was keeping back money 
 
254 BANKING AND COMMERCE. 
 
 or effects, or tliat there was an element of fraud in his conduct, or that 
 his statements had been characterized by lying or deceit, the court had 
 little mercy to sliow him. It was not for such as he tliat the court was 
 created. On the other hand, if the debtor could prove that he had donr 
 what he could, or that he had no friends upoi; whom he could call for 
 relief, that there was no fraud or misrepresentation in his dealings, and 
 particularly tliat he was suffering in body and mind by continued impris- 
 onment, the court would, in many cases, open the prison doors and allow 
 him to go out free. 
 
 But if any of the jolly felloAvs of the "Jingle" or "Smangle" sort 
 had the impudence to apply to the court, they would be laughed out of 
 it and sent back to confinement. In prison they deserved to be; and in 
 prison they must remain. 
 
 Such was the general idea embodied in the first insolvency leg'slation. 
 It was for the administration of mercy. 
 
 It was a matter of course that a class of attorneys would devote 
 themselves to cases of this kind, and be kno^vn as men who could get 
 debtors out by passing them through "the court." The M'ays of this 
 class and the incidents arising out of their profession are accurately and 
 humorously dealt with in the pages of many of our novelists. In course 
 of time a class of houses of temporary detention arose, called "sponging- 
 houses," M'here a debtor under arrest was allowed to remain, under strict 
 confinement for a few days, to give him opportunity of effecting a com- 
 promise with his detaining creditor, or calling upon his friends to help 
 him with money. 
 
 It cannot be too emphatically noted that the whole raison d'etre of 
 the law for the discharge of debtors against the will of their creditors, 
 was this very power of imprisonment. But for that it is very doubtful 
 if such a laM- would ever have been enacted. 
 
 Thus, when imprisonment for debt was abolished, it might naturally 
 be supposed that insolvency laws would be abolished with it. 
 
 But in the complicated circumstances under which credit is given in 
 modern trading and banking, it was still deemed desirable to retain some 
 other mode of settling affairs between debtor and creditor than the 
 ordinary process of law afforded. The dominant idea of this, however, 
 had reference to a class of evils that scarcely existed in former days. 
 
 For example, it was sometimes the case that a debtor who had many 
 creditors would treat some of them unfairly; giving a preference to 
 one or more when he knew himself to be insolvent, or paying one in 
 full, and leaving the rest to scramble for the balance of his estate The 
 ordinary machinery of law might itself be abused to this end; for on 
 becoming embarrassed, and several creditors suing a debtor, he cou^^ 
 defend one action, and allow judgment to be entered for another. For 
 this the law afforded no redress. 
 
 In other cases, a trader, knowing himself to be unable to pay his 
 debts in full, might go on trading at a loss, wasting more and more of 
 his estate (or perhaps secreting money), until it was wasted entirely 
 
A BANKRUPTCY LAW. 255 
 
 away; leaving nothing for his creditors to realize upon. Here, again, 
 the law aiForded no means of redress. All that any creditor coald do 
 was to refuse to sell the party more goods, and to sue for balance due. 
 
 But the process of ordinary suits affords so many opportunities of 
 delay, that a whole estate might be wasted during the progress of one 
 of them. 
 
 On the other hand, a creditor might under some circumstances obtain 
 what is known as a "snap" judgment against a debtor, who would be 
 compelled to submit to the sale of his goods at a sacrifice by one creditor, 
 leaving him indebted to many more, while the means of payment had 
 been taken away. 
 
 For these and for other reasons, there arose a desire on the part 
 of creditors for the enactment of a law which would prevent these evils, 
 and ensure, first, an equitable division of an insolvent estate; second, 
 the power of stopping an insolvent debtor from wasting his estate: third, 
 the prevention of unjust preferences; fourth, the punishment of fraud- 
 ulent debtors. 
 
 These were the primary objects thought of when the subject of insol- 
 vency legislation was broached as applied to debtors who were person- 
 ally free. But though no act could now properly be styled "An Pct for 
 the relief of Insolvent Debtors;" that is, by releasing them from prison, 
 no sooner was insolvency legislation broached, mainly in the interest of 
 creditors, than pleas began to be put in on behalf of the debtor. There 
 were, it was alleged, other forms of relief that were needful. 
 
 Thus, it was urged, why should a man not be relieved from the burden 
 of his debts when he had become unable to pay them and surrendered 
 his assets? What equity was there in taking forcible possession of a 
 trader's effects and dividing them amongst his creditors, unless he were 
 discharged from his debts? And why should a man be forcibly pre- 
 vented from carrying on his business, when the ordinary courts had not 
 been appealed to for redress? 
 
 These and other pleas for the debtor were put forth for considera- 
 tion whenever it was proposed to protect the creditor by a bankruptcy 
 law. Indeed, it was held by some that an insolvency law was no insol- 
 vency law at all if it did not provide on some terms for an insolvent's 
 discharge. They argued that the very groundwork of such legislation 
 was to relieve the insolvent, not to assist the creditor. The creditor is 
 sufficiently protected, it was argued, by his power to get judgment and 
 seize his debtor's goods; why, then, consider him alone in the matter? 
 To which the obvious reply was, that former acts for the relief of the 
 insolvent debtor had relation to different circumstances. It was to prevent 
 cruelty and oppression, and had always been preceded by the obtaining 
 an ordinary judgment at law, and the declaration that the debtor had no 
 seizable goods. But to discharge a debtor against the will of his creditors, 
 or any of them, and while he was perfectly at liberty, personally, was 
 contrary to the first principles of justice. Even to enable his property to 
 be seized and divided amongst his creditors was no valid gromid for 
 
256 BANKING AND COMMERCE. 
 
 claiming a discharge ; for his property, if he was insolvent, really belonged 
 to his creditors in any case. 
 
 It was further argued, that the reasonable course for a debtor to 
 pursue when he could not pay his debts, was to approach his creditors 
 singly, or call a meeting of them, and offer to pay what he could, and 
 ask for a discharge. They would be acquainted with his affairs and 
 with himself, from having done business with him, and might be trusted 
 to act reasonably according to circumstances. And the necessity for 
 obtaining the consent of each of his creditors would be an effectual check 
 upon that scheming to effect an unjust settlement which was so great a 
 temptation when discharge could be granted without that consent. 
 
 Principles of Insolvency Legislation. 
 
 Such were the arguments, pro and con, that arose at the outset of any 
 proposal for insolvency legislation. 
 
 Yet there was much on which all parties were agreed. Thus, all were 
 agreed that a law should be passed to prevent or nullify preferences; 
 and all were agreed to what necessarily followed, viz., that if a person 
 were really insolvent and his effects were divided amongst his creditors, 
 they should be divided pro rata. 
 
 But there was division of opinion as to the advisability of stopping 
 a person who was carrying on his business when a suspicion arose that 
 he was wasting his estate; also as to whether the law should undertake 
 to discharge a debtor at all if any of his creditors objected. If the 
 principle of a discharge Avere agreed to, there was great diversity of 
 opinion as to its terms, one class of legislators leaning towards the debtor, 
 and desiring his "relief;" the other contending for the claims of the 
 creditor, and that strict justice should be the object aimed at. 
 
 Another point of division was as to creditors holding security. The 
 questions as to this were found to be numerous and of an intricate char- 
 acter; secured creditors naturally pressing their claims for what they 
 considered to be equitable, against the views of others who were disin- 
 clined to give secured creditors any consideration. 
 
 The most difficult question under this head arose in connection with 
 bankers who were claiming on the estate of a wholesale merchant, for 
 whom they had discounted the bills of numerous customers. So long as 
 the merchant was solvent, the bank had no correspondence with his cus- 
 tomers. But the moment he went into insolvency it became necessary to 
 deal directly with the parties to this discounted paper. There might be 
 fifty of them; there might be one or two hundred; and those living in 
 all parts of the Dominion or elsewhere. As a rule, many of them would 
 be dependent upon tlie principal house, and some of these would go into 
 insolvency also. Then the bank would find itself a creditor ot many 
 subsidiary insolvent estates; while a certain proportion of the rest would 
 be embarrassed by the demand of payments at maturity, and request 
 time, possibly also offering security by way of second mortg;^ge or 
 
A BANKRUPTCY LAW. 257 
 
 endorsement. With such an extraordinary mass of complications arising 
 out of the failure of a single wholesale house, the winding up of its 
 affairs would sometimes occupy years; and what would be the banker's 
 final claim upon the bankrupt estate of his customer, it would be impos- 
 sible to say. Under the common law bankers had a right to claim upon 
 every single bankrupt estate for the full amount of its discounted paper, 
 and to collect from it all that was possible, claiming upon one estate 
 after another, until the entire mass of paper was paid in full. And if 
 it was claimed that in all equity a bank should value its securities and 
 claim for the balance, the bank could point out that wliile it was compara- 
 tively easy to value a single mortgage or even a single endorsement, it 
 would be practically impossible to value security consisting of claims 
 upon numbers of other people, some of them already insolvent, and some 
 who might possibly become so. 
 
 The whole subject of insolvency bristles with difficulties; but not- 
 withstanding this, more than one strong Government in Canada, and also 
 in England and the United States, has taken up the subject and carried 
 through bankruptcy bills. But the last of such bills in Canada came 
 to an end about fifteen years ago, and although strenuous endeavors 
 have been made to carry others through Parliament, no Government has 
 had the courage to take the matter up and carry a bill through as a 
 Government measure. 
 
 For this inactivity various reasons have been assigned. The most im- 
 portant of these was the undoubted fact that in actual operation the 
 former bill came to be looked on, practically, as a bill for the promotiGn 
 of insolvency. A class of men was developed in connection with it, as 
 under other insolvent acts, who made a special business of assisting em- 
 barrassed debtors to obtain a discharge. That there is a legitimate field 
 for accountants and commercial lawyers in connection with insolvent 
 estates, there can be no manner of doubt, whether under an insolvent law 
 or without it. But under the last act abuses crept in, and it came to be 
 generallv known, that by such and such intervention, debtors could obtain 
 a discharge, with the least trouble, the least expense, in the shortest time, 
 and without interruption to their business. Above all, the prospect was 
 held out that after a discharge was obtained the debtor would have a 
 substantial capital left, and be enabled to carry on his business in com- 
 fort and security. In the opinion of many observers, the root of the mis • 
 chief was in the fact that a discharge could be obtained under the act if 
 a debtor's estate yielded only fifty cents in the dollar. The operation of 
 this clause, it was said, was to fix a standard. The law of the land under 
 it recognized that fifty cents in the dollar was a reasonable amouiit for a 
 debtor to pay. If he offered that, he might be recognized as an honor- 
 able man. I if a creditor was not satisfied, and demurred or opposed a dis- 
 charge, the law could override his opinion, and compel acquiescence, un- 
 less, indeed, actual fraud was proved. 
 
 An anomalous condition indeed for the law to create; and it is well 
 to note how it came about; also how it came to be so generally abused. 
 
258 BANKING AND COMMERCE. 
 
 When this discharge clause was under consideration by a parliairentary 
 committee, and it was contended tliat fifty cents was too little, the reply 
 was, that there were so many expenses connected with insolvency, and so 
 serious a depreciation when goods and property were sold by an assignee, 
 that fifty cents in the dollar was a fair residuum, and proved the failure 
 to be honest. The argument was plausible, and the fifty cents clause was 
 adopted. But it was also provided that if the debtor, after surrerdering 
 his estate (which he could do without stopping his business) succeeded in 
 inducing a certain portion of his creditors in number and amount *o con- 
 sent to a compromise and accept fifty cents, a discharge could be obtained 
 in spite of the opposition of the rest. 
 
 Abuses Arising Under the Law. 
 
 Here it was that the root of the ensuing mischief lay. For the idea 
 speedily began to prevail that there was no dishonor or discredit to a man 
 who had failed, if he had only paid fifty cents in the dollar. And this 
 was specialh^ the case when difficult times supervened, and bad debts rose 
 above the average. Under these circumstances many traders who were in 
 temporary straits, but were perfectly solvent, began to see an easy way 
 out of their difriculties, not by making an assignment and allowing their 
 stock to be sold and their accounts collected by an assignee, but bv the 
 much easier and economical process of offering a composition of fifty 
 cents or more, under the act. Thus, a large expense would be sa\ed, and 
 the business could go on in the meantime. The assignee or accountant 
 would receive his commission, and act as the insolvent's friend in per- 
 suading the requisite number and amount of creditors to consent. 
 
 It was not difficult in ordinary cases for this to be secured, for the 
 alternative was that a large additional expense would be incurred, much 
 time lost, and goods slaughtered, with the doubt whether some portion 
 of the estate could not be concealed, and as a final result a smaller divi- 
 dend than fifty cents declared. 
 
 The result generally was, that the insolvent who had got his stock 
 into his hands by paying fifty cents in the dollar for it, was able to 
 undersell his neighbors who had hitherto paid their debts in f.ill. A 
 further result then followed, vi/., that some of his neighbors, whose trade 
 was interfered with, began to think of passing through the same process 
 themselves. This they not seldom did, for money was to be made by it; 
 moreover, less and less discredit came to be attached to it, until in time 
 the idea of discredit h'ad almost passed away. 
 
 Thus, the virus of mischief spread until the trading community was 
 honeycombed with it; and a wholesale merchant could never be sure 
 which of his customers would approach him next with an offer of com- 
 promise. 
 
 What an opportunity this condition of things afforded to the debtor 
 whose sense of honor was not of the strongest, it is needless to point out. 
 Suffice to say, that between the weak-kneed debtor who was temporarily 
 embarrassed, but could and would have paid his debts but for induce- 
 
A BANKRUPTCY LAW. 259 
 
 ments to compromise, and the fraudulent debtor who laid himself out 
 deliberately to feign embarrassment and plunder his creditors, the mer- 
 cantile community became so disgusted -with the operation of the act that 
 a universal sense of relief was felt Avhen it was abolished. 
 
 Difficulties in Framing a Bankhuptcy Law. 
 
 It has been slated that it is extremely difficult to frame an equitable 
 and serviceable bankruptcy law. The difficulties may be stated as follows : 
 
 First, to avoid making bankruptcy so easy as to tempt unscrupulous 
 men to embrace it who are able to pay their debts. For this reason it is 
 that the discharge clause is the one which, more than all the rest, requires 
 consideration. 
 
 Second, to avoid making the administration of a bankrupt estate so 
 expensive as to damage both the debtor and his creditors. 
 
 Third, to deal with the question of the security given to a creditor 
 previous to bankruptcy so as to avoid doing injustice on the one hand bo 
 the general body of creditors, or on the other to the secured creditor him- 
 self. In this case the difficult question is whether the consideration given 
 for the security was equitable and reasonable. 
 
 Fourth, the mode of adjusting tlie ranking of creditors holding secur- 
 ity requires special care and some technical knowledge. 
 
 Fifth, it is found difficult in practice to frame a bankruptcy law which 
 has not the effect of creating a class of persons whose interest is to 
 promote insolvency, and suggest it. 
 
 Sixth, it is also difficult to frame penalty clauses which will not bear 
 too severely on those who have done wrong through carelessness or inad- 
 vertence, and not severely enough upon traders who have knowingly and 
 deliberately been guilty of actual fraud. 
 
 The great objects to be obtained by a bankruptcy law have been 
 treated in the foregoing pages, but may be briefly summarized in this, viz.: 
 
 (1) To prevent preferences being given to one or more creditors at the 
 expense of the rest. 
 
 (2) To prevent debtors wasting or making away with their estate 
 when getting into difficulties, and apparently becoming unable to pay their 
 debts. Here a distinction should be made between being unable to meet 
 engagements as they become due, and inability to pay debts in full at 
 all. It was a great error in some former proposed bankruptcy acts in 
 Canada to declare that a man was insolvent if he could not pay his debts 
 as they became due. 
 
 (3) To insure equitable and economical distribution of bankrupts' 
 estates; and 
 
 (4) To enable discharge of competent and worthy debtors to be had 
 on such terms as will not on the one hand encourage idleness, extrava- 
 gance, and bad business conduct on the part of the debtor; and, on the 
 other hand, will prevent harshness and cruelty on the part of one, or a 
 small number of creditors. A discharge clause should be so framed also 
 
260 BANKING AND COMMERCE. 
 
 as not to make it an object for a trader to fail and make money out of 
 his failure. 
 
 If a bankruptcy law is ever submitted to a Legislature in Canada, its 
 members will, of course, consider the former laws on the subject, their 
 excellencies and defects, and why they were suffered to come to an end; 
 and also the bankruptcy laws of other commercial countries, and partic- 
 ularly of Great Britain and the United States, ascertaining whether such 
 have worked satisfactorily, and are accomplishing the end aimed at. 
 
 It would be well also to consider whether a bankrupt law of limited 
 scope might not be desirable; such, for example, as one that would pre- 
 vent preferences, punish fraud, stop waste, make equitable distribution, 
 but not give a discliarge; leaving that for settlement between the debtoi 
 and his creditors. 
 
 It might be worthy of consideration also whether a bankruptcy law 
 might not be passed with a limitation of time, an idea that has com- 
 mended itself to various legislators. 
 
 Summary of the American Bankruptcy Law. 
 
 This law is a general one for the whole Union. It is comprehensive, 
 and fairly covers all the points to be considered. It is precise in regard 
 to matters which were not clearly dealt with in former Canadian laws. 
 It emphasizes in some of its clauses the important distinction between 
 voluntary and involuntary bankruptcy. 
 
 But the distinction is not sufficiently preserved throughout the act, as 
 will be apparent to any one who carefully reads it. 
 
 Amongst the numerous provisions of this act, the following are the 
 most noticeable: 
 
 (1) The ordinary courts are given jurisdiction in cases of bank- 
 ruptcy, and no special court for dealing with them is created by the act. 
 
 (2) The words bankrupt and bankruptcy are used throughout, and 
 not insolvent and insolvency. There are good reasons for this. 
 
 (3) Farmers and wage-earners cannot be made involuntary bank- 
 rupts; though ihcv may be embraced within the provisions of the law, if 
 they are willing so to be. 
 
 (4) A bankrupt may offer a composition only after a meeting of 
 creditors, or examination in open court. 
 
 (5) A discharge may be agreed to, if accepted by a simple majority 
 of his creditors, both in number and amount. No maximum is named of 
 either as necessary; and no minimum of the amount to be paid or realized. 
 But no discliarge can be confirmed unless the amount of the composition 
 and all preferred claims and charges shall have been actually paid in. 
 This is an important point, and differs from what has hitherto prevailed 
 in Canada. 
 
 (6) The judge is required to confirm a discharge, if satisfied, (1) 
 that it is for the best interest of tlie creditors; (2) that no fraud lias been 
 committed, or duty owing to them neglected; (3) that the offer and its 
 
A BANKRUPTCY LAW. 2(il 
 
 acceptance have been made in good failh, and not procured by improper 
 means. 
 
 (7) But a composition may be set aside upon application of interested 
 parties within si.\ months, if it can be made apparent that fraud was used 
 in the procuring of it, and tliat certain knowledge has come to the peti- 
 tioners after the confirmation of the discharge. 
 
 (8) If a person who has been proceeded against in bankruptcy denies 
 that he is insolvent, he is entitled to have a trial by jury as to whether 
 he is so or not. This is a provision we have never had in Canadian law. 
 Its wisdom is questionable, considering how trials by jury in civil cases 
 often work. 
 
 (9) The question of preferences and securities is fully and equitably 
 dealt with. 
 
 Amongst other clauses relating thereto are the following: 
 
 (a) The claims of creditors who have received preferences shall not 
 be allowed unless such creditors shall surrender their preferences. 
 
 (6) If a creditor has received preference within four months of 
 bankruptcy, and had reason to believe that it was intended as a prefer- 
 ence, it shall be voidable, and the amount may be recovered. But if a 
 creditor has been preferred, and afterwards in good faith gives the 
 debtor further credit, this new credit may be set off against the amount 
 recoverable. 
 
 (r) Secured creditors can only claim after deducting wliat the court 
 may consider the value of their security. 
 
 Clauses follow as to the mode in which the value of such security is 
 to be determined. 
 
 (10) The administration of estates is to be by officials of two classes; 
 namely, trustees and referees. 
 
 These correspond somewhat to the liquidators and inspectors under 
 former Canadian acts; but they apear to constitute in both cases an 
 official class who give security to the court before entering upon their 
 duties. These duties are minutely set forth in the act. But there is *i 
 singular want of preciseness in the directions horv an estate is to be 
 realized. 
 
 The general underlying principle seems to be that the trustees shall 
 have the actual handling of the property constituting the estate; while 
 the referees are an advisory and directing body, for the purpose of being 
 a check upon the actions of trustees. It is made the duty of the referee 
 to declare dividends, and to deliver the dividend sheets to trustees; also 
 to examine all the schedules of the property of bankrupts together with 
 lists of creditors. 
 
 (11) The compensation to the various classes of officers is precisely 
 defined. Economy is evidently aimed at. 
 
 (12) The first dividend is to be declared within thirty days if the net 
 money on hand amounts to five per cent, of the allowed claims. Subse- 
 auent dividends shall be declared upon like terms, and as often as the 
 
262 BANKING AND COMMERCE. 
 
 amount shall equal ien per cent. But they may be declared oftener, and 
 in smalkr proportions, if the judge shall so order. 
 
 (13) Offences are very carefully set out, and apply to the officials 
 and collusive creditors as well as to bankrupts themselves. 
 
 Altogether the act is one which evidences much care and thought in 
 its compilation, and is -well worthy of study if the government of Canada 
 at any time should attempt to pass a general law upon the subject. 
 
 Its principal defect, and a very serious one it is, lies in the facilities 
 it affords for a debtor obtaining an easy discharge. 
 
 When such a discharge can be granted on the consent of a bare ma- 
 jority in number and amount of creditors, and without any limitation as 
 to the amount of the composition or dividends declared, the door is open 
 to serious abuse, especially as it is provided that a discharge may be con- 
 firmed by the fiat of a single judge. 
 
 The act is also somewhat defective in not maintaining throughout all 
 its clauses the necessary distinction of procedure and administration in 
 the case of voluntary and involuntary bankrupts. 
 
 This act is stated by men of experience to work well on the whole, 
 though it is not economical in its operation. 
 
 The following general suggestions on the subject are the result of 
 experience and may be found worthy of consideration. 
 
 (1) If legislation is attempted, it will be well to consider from tvhom 
 the pressure for it originates; what class in the community is calling for 
 it; what class is suffering by reason of the want of it. Is it the debtor 
 class; or is it the creditor class.'' And what has each of them to say on 
 the subject.'' A settlement of such questions will determine much of the 
 general character of the bill. 
 
 Besides this, it should be considered, as preparation proceeds, what 
 dangers may arise from any unwise and incautious provisions of the act; 
 and what were the reasons for former legislation having been abrogated? 
 
 (2) The general framework of a Bankrupt Law might be on the 
 following lines: 
 
 I. — The words should be bankrupt and hanhruptcy, and not insolvent 
 and insolvency. 
 
 II. — A clear distinction should be made throughout between the pro- 
 ceedings in the case of voluntary assignments and compositions by honest 
 debtors; and the forcible measures necessary in dealing with a debtor 
 who is wasting his estate, giving preferences, secreting his effects, or 
 committing frauds, singly or in collusion. 
 
 III. — The procedure throughout should always keep in view one or 
 other of the objects aimed at; that is, either to afford facilities for a 
 competent and honest debtor to continue in business after dealing equit- 
 ably with his creditors; in which case he might retain practical possession 
 of his estate, or that the law should aim at forcibly depriving a dishonest 
 and incompetent person of his estate; realizing it economically, distrib- 
 uting it equitably, and closing nut the business altogether. 
 
 IV. — Administration in bankruptcy should be by the ordinary courts; 
 
A BANKRUPTCY LAW. 263 
 
 but provision to be made for special sittings at definite times for dealing 
 with such cases. 
 
 V. — A class of ofiicials to deal with bankruptcy cases should not be 
 created by law. 
 
 VI. — Liquidators, in all cases, should give satisfactory security. Their 
 remuneration should be strictly defined, and power given to the court to 
 deal with collusive or unreasonable charges. 
 
 VIL — If a composition contains preference clauses, it should, ipso 
 facto, be thrown out, and the attempt dealt with as a species of fraud. 
 
 VIII. — Securities should be accurately defined; and procedure with 
 respect to them set out with clearness and precision, yet without harass- 
 ing unreasonably those who have an equitable claim to them. On the 
 other hand, it should compel surrender of such as have been acquired 
 improperly. 
 
 IX. — Discharge should in no case be granted unless concurred in by 
 at least a majority of three-fourths in number and amount of creditors, 
 and a "net result of seventy-five per cent, to the creditors has been 
 realized. 
 
 X. — Penalties to be precise, applicable to definite acts of wrong- 
 doing, and severe enough to be deterrent. 
 
 In considering the question of discharge, too much weight should not 
 be given to the plea that if a man cannot get a release from his debts, 
 the community will lose the benefit of such services as he might render 
 to it as a trader. For the very fact of the debtor's failure proves that 
 hitherto he has not rendered the service to the community that is desir- 
 able. And experience proves that the best service that many men can 
 render is as employes of others, and not as traders on their own account. 
 There is no object, therefore, to be gained by granting a discharge that 
 may be disapproved by a number of creditors in order that the debtor 
 may be able to contract new obligations. 
 
 XI. — The full amount of the composition should be paid in or secured 
 before discharge; or, as an alternative, the business of the bankrupt 
 should be carried on under a controlling inspection, until the amount ia 
 fully realized. 
 
 An act framed in accordance with these suggestions would be found 
 serviceable alike to the reasonable creditor and the honest debtor, and 
 would be free from the drawbacks and disadvantages which led to the 
 repeal of former laws on the subject. 
 
I 
 
 CHAPTER XXXII. 
 
 INSURANCE IN ITS RELATION TO BANKING. 
 
 ExTENi OF IiN'srHAXCK — CoiT — "FjRc-PnooK" Strcctures Not Exempt 
 FROM Daxger — Life Ixscrance. 
 
 THE intimate connection between banking and insurance may be 
 understood when it is considered that the mercantile loans and 
 discounts of a bank should invariably rest on mercantile property 
 or movables ; that is to say, on goods that may be destroyed by fire, which 
 destruction may render the payment of the loan or bills difficult or impos- 
 sible. Hence it is of the first consequence to a banker to see that the prop- 
 erty to which he looks for the payment of his loans is insured in sound and 
 reliable companies. Even in the case of discounted bills for wholesale 
 houses, it is perfectly reasonable for the banker to ask of his customer, 
 are the makers of these bills insured.^ If their stock was burned could 
 they pay these notes .^ Do you, in fact, for your own protection, see to 
 it that the goods transferred from your warehouse to his store are insured 
 after they get there? It is to be presumed that they are insured so 
 long as they remain on your premises; are they equally safe from loss 
 by fire when transferred to his ? These are not impertinent questions, for 
 they concern the very essence of the well-doing of both parties. A 
 fire, to an uninsured trader, may mean bankruptcy to him, and a bad 
 debt to his creditors. These are elementary principles which are ob- 
 served, to a certain extent, by the majority of men in business. But it 
 is always a pertinent inquiry whether property is insured to the extent 
 it ought to be, or whether the person concerned is, or is not, one of the 
 minority who take the risk of leaving their consumable property almost 
 wholly uncovered. 
 
 Extent of Insurance. 
 
 Let us consider these points in detail. First, to what extent ought 
 goods to be insured? To this there maj' be more than one answer, for 
 obviously all goods in transit b}'^ sea or lake should be insured for their 
 full value at place of destination. This is, indeed, a universal rule. The 
 bills of exchange bought or discounted by bankers, to which are attached 
 bills of lading, have also attached to them policies or letters of insurance 
 covering the whole amount of the bill. And a purchaser of such a bill 
 would be negligent indeed if he passed such a bill for discount with no 
 insurance policy attached. But goods in warehouse, store or factory are 
 treated on different principles. Seeing that insurance costs money, the 
 owner of a stock will consider what the probabilities are in case a fire 
 breaks out, and whether it is necessary to have it insured for its fulT 
 
 264 
 
INSURANCE IN ITS RELATION TO BANKING. -265 
 
 value. To this question men will give answer according to their tem- 
 perament. The cautious man will insure for all he can get placed on 
 the goods, the sanguine and overconfident man will carry as much of 
 the risk as he dare himself, or as much as his creditors will let him. But 
 there is one general principle applicable to cases of this kind, viz., that 
 no man has a right to leave uninsured any goods on which he owes money. 
 Property which is absolutely his own and on which no claim of any 
 creditor is based, a man may leave uninsured, if he so pleases. It is his 
 own affair, and no one has the right to call him to account, unless it 
 may be his wife or children, if he has them; for, indeed, he has no more 
 right to injure them than he has his creditors. 
 
 With regard to the great staples of merchandise stored in ware- 
 houses, such as grain, flour, raw cotton, wool, etc., the custom is uni- 
 versal to insure up to the full value, if so much insurance can be placed. 
 And this is reasonable. For, in a large majority of cases, such stocks 
 have been advanced on by banks. In the case of merchandise such as 
 lumber, piled up in yards and wharves, or hides, wool, leather and other 
 staple commodities in warehouse, difference of temperament will lead to 
 different lines of action. It is in regard to these that rates of insur- 
 ance are apt to be high, varj'ing according to locality and the com- 
 bustible character of the goods. And being high, men are constantly 
 tempted to save in insurance as much as they can. The only absolute 
 rule that can be laid down is the one just enunciated, viz., that insurance 
 should be placed to the full amount of any debt against the property, 
 either direct or indirect. This is the very lowest that justice demands. 
 A merchant or manufacturer, however, is bound also, in considering how 
 much his insurance should be, to think of the preservation of his own 
 standing, and the continuity of his business. This consideration would 
 lead him, even in cases where no debt rests upon the goods, to insure 
 for such an amount as would replace them in case of fire; and even, if 
 possible, to such an amount as would compensate for the loss of time and 
 business which a fire would occasion. This applies particularly to manu- 
 facturing establishments and mills. In all cases it is undoubtedly bet- 
 ter to err on the safe side and to consider any additional amount paid 
 for insurance (if it is reckoned to be additional) as well laid out in 
 ensuring that quietude of mind which is an important element of suc- 
 cess in business. 
 
 The Cost of Insurance. 
 
 There are, however, in every communitj^, persons who grudge the 
 cost of insurance, considering it as so much loss, and prefer to take the 
 risk of fire rather than pay it. That this is a "penny-wise-and-pound- 
 foolish" policy such persons often find out. But some men still lean to 
 such a course; and especially so where the occupation is hazardous and 
 the risk great. "The premium is enormous," such a person will say; 
 "my business cannot afford it." But in so saying they forget that insur- 
 ance, whatever the rate may be, is as legitimate a charge on business as 
 
266 BANKING AND COMMERCE. 
 
 rent and taxes. If the business will not bear the cost of insurance as 
 well as these, there is something wrong with the management. If a 
 man has been selling his goods at a certain price, without taking the cost 
 of insurance into account, he has been selling tliem too low. 
 
 But, in reality, the high rate of insurance is a sort of signal hung 
 out to warn men of the necessity of taking unusual precautions. An 
 unusually high rate may be a reminder to a mill o^vner that his mill is 
 not properly built, or that its internal arrangements with regard to 
 heating or power are not well contrived, or that he is in danger from 
 his neighbors and needs to take extra precautions on that score. It 
 will warn him to look after his engine-i'oom, or his power-house, or the 
 manner in which his goods are stored, or whether he has proper arrange- 
 ments for carrying about combustibles; or about smoking, or the use of 
 matches. Still more will the high rate remind him of the necessity of 
 appliances for an early extinguishment of fire should one break out. A 
 high rate, that is, a comparatively high rate, will always arise from a 
 consideration of these sources of danger, and should lead, not to the 
 refusal to insure, but to the taking of all possible precautions, and keep- 
 ing them constantly in operation. 
 
 A man who neglects to insure because the rate is high would be 
 like a ship owner whose business is to sail across the Atlantic, not build- 
 ing his ship strong enough because it would be so costly; or a banker 
 who contented himself with a mere fireproof safe because a steel-clad 
 burglar-jjroof one would be too expensive. The real truth of the matter 
 is that the higher the rate of insurance the more need there is to insure. 
 
 In speaking of a high rate, it is not the writer's intention to refer to 
 the rates current over a whole city as compared with other cities. These 
 may be high or otherwise, but they affect all kinds of properties and all 
 sorts of risks in the same proportion. The high rate on which the fore- 
 going reasoning is based is the rate which is high in proportion to build- 
 ings or stocks in other lines of trade, or even to buildings or stocks in 
 the same trade where insufficient fire appliances, or defects of construc- 
 tion or proximity to other sources of danger, have to be taken into 
 account. 
 
 But even when rates are high over a whole city as compared with 
 other cities, the very fact is a danger-signal to all who carry on busi- 
 ness in it, and should naturally lead to extra precaution and watchful- 
 ness. The same remark applies to certain districts in business centres 
 where risky trades are carried on, and where a fire may extend over the 
 whole area of the district before it can be put out. 
 
 "Fire-Proof" Structures Not Exempt from Danger. 
 
 It is sometimes pleaded by persons who neglect insurance that their 
 premises are so well-built that they cannot lake fire; or that they are so 
 isolated that no fire of their neighbors can reach them, or that they take 
 such i)recautions that no fire could possibly make headway. Experience, 
 
INSURANCE IN ITS RELATION TO BANKING. 267 
 
 liowevcr, proves how little reliance can be placed on such reasoning. 
 Fireproof buildings have been burnt down. Iron will not burn, but it 
 -will get red hot and set fire to wood in proximity. Steel will warp and 
 twist under heat and drag down floors. As to isolation, a great fire will 
 cause flames to shoot out to a distance that might be deemed incredible 
 by tliose who have not had experience. 
 
 Considerations of extra precaution or isolation, or of a superior style 
 of building, may be fairly taken into account by one who is considering 
 hoiv much insurance he will place. But they should never prevail to 
 such an extent as to lead a man to neglect insurance altogether. And 
 no matter how free from danger a man may consider his property to be, 
 he is bound to insure so as to cover any indebtedness against it, or 
 against its contents. The first, indeed, will be certainly taken care of 
 by a mortgagee if there is any encumbrance against it. The latter 
 indebtedness will be to a merchant or a banker, who may not be as exact- 
 ing as a mortgagee, but whose interests the debtor is as much bound 
 io protect. 
 
 Thus far our observations have related generally to stocks of goods, 
 these being the ))rimary consideration for a banker or a merchant. Real 
 property is no proper basis for a banker's loans, and he should have 
 nothing to do with it, unless it comes into his hands as security for a 
 standing debt. Then, he will, of course, look after the insurance as a 
 matter of primary necessity. 
 
 But a banker, though he does not directly lend money upon the 
 buildings owned by customers, has nevertheless a strong interest in their 
 preservation; for it is a banker's interest that his customer's capital 
 should not be impaired, and that his business should go on without inter- 
 ruption. If his customer's warehouse be destroyed, it is a pertinent 
 ■question to inquire whether the insurance will cover the loss, not only on 
 the contents of the building, but on the building itself. For a person 
 may have a substantial capital, say in ground or water power, and yet, 
 if his insurance does not enable him to rebuild, he would find it diflicult to 
 raise money to do it. In that case, he may have to curtail his business to 
 an unprofitable extent, or to wind it up altogether. These are the risks of 
 the man who does not insure, or who insures for an amount that Is 
 insufficient for contingencies. 
 
 There are, indeed, certain classes of property that are indestructible 
 by fire. When a saw miller or timber merchant has got his logs into 
 the water, there is no need to insure them, so long as they are floating 
 down the stream or confined in a boom or cove. They are so safe there 
 that even an incendiary could not set them on fire. But the moment a log 
 is transferred to the mill and sawn into lumber it becomes combustible. 
 Similarly, stocks of fish, so long as they are in the boat, are practically 
 incombustible. But the moment they are placed in a "cannery" or fish 
 warehouse they call for insurance. It is, however, on such debatable 
 ground, as it may be called, that negligence or a disposition to tak** 
 
268 BANKING AND COMMERCE. 
 
 undue risks may prevail, and a disastrous fire expose the folly of all 
 parties concerned. 
 
 Though it is not strictly within the province of a banker to consider 
 other kinds of risk, yet, as loans are sometimes made (as an exception) 
 to bodies other than mercantile, it may be noted in conclusion that all the 
 foregoing principles apply, with full force, to them. No body of col- 
 lege governors, or directors of benevolent institutions, hospitals, asylums, 
 or officers of churches, has a right to allow the property of the institution 
 to be jeopardized by neglect of insurance. The obligation is of neces- 
 sity even stronger than in the case of a private individual. He may, if 
 he will, jeopardize his own property, within certain limitations, as before 
 stated. But boards of governors are trustees and guardians of the prop- 
 erty of others. Such property has been created by public funds or bene- 
 factions; trustees are bound, therefore, by every obligation of honor, to 
 see that the property entrusted to them is not only preserved from the 
 davger of fire by ordinary precautions, but from loss, should fire unfor- 
 tunately break out. With regard to institutions, such as colleges, where 
 young people are boarded from time to time, it is obviously the duty of the 
 authorities to insure, not only the building and furniture, but also the 
 wearing apparel and other private property of the students and scholars. 
 It is unreasonable that parents should take the risk of this, and be 
 exposed to the charges incident to the refitting of pupils, whose clothing 
 and books have been destroyed by fire. It is also incumbent upon college 
 authorities, where pupils are boarded, to see, not only that their prem- 
 ises are insured to a sufficient amount, but also that proper precautions 
 are taken against the danger from fire itself. Proper means of exit and 
 preventives against fire spreading are their bounden duty to provide. The 
 necessity of all proper precautions being taken has been demonstrated 
 of late (1903) in a marked degree by the fires which have taken place — 
 the one at the great public school of Eton, England, the other at Ridley 
 College, Ontario, Canada. 
 
 Like Insurance. 
 Of this style of insurance, all that needs to be said is that a banker, 
 if he advances at all, will never advance more than the surrender value 
 of a polic}'; and if he takes a policy as security, will never consider the 
 security to be more than such surrender value amounts to. 
 
( IIAPTKU XXXIII. 
 
 THE NATIONAL BANKS OF THE UNITED STATES, AND 
 AMERICAN BANKING. 
 
 Absence of Branches- -Lack of Note Redemptions — Law of Fixed 
 Reserves — ExajMinations — Stockholders' Meetings in Canada 
 AND the United States — Officers of American Banks — Certifi- 
 cation OF Checks. 
 
 THE National Bank Act of the United States provides a safe and 
 uniform currency for the whole country, as has been shown. But 
 tliat currency is subject to one considerable drawback, as being a 
 fixed quantity, and being incapable of corresponding with the movements 
 of commerce. It wants what is known as elasticity. 
 
 All experience shows that agricultural conmiunities are subject to great 
 variations in the amount of currency required at different seasons. If 
 then the volume of currency cannot be enlarged as that of Canada can, 
 during the harvest season, and that of Scotland also (on condition of 
 gold being held to cover it), there is apt to arise a period of monetary 
 pressure whenever the crops require to be moved to market. The cir- 
 culation required at the harvest season can only be obtained by drawing 
 on the centres where it has accumulated during the interval. But in these 
 centres such funds are invariably loaned or employed in temporary dis- 
 counting. All such loans must be called in when the harvest demand sets 
 in, causing a necessity for other arrangements, or a stringency more or 
 less developed, and a rise in the rate for money to abnormal figures. In- 
 deed, such a scarcity of currency has been known to prevail in the United 
 States for a period of years, aggravating commercial depression and 
 producing widespread disaster. The scarcity of currency in some agri- 
 cultural districts at such times has resulted in practically putting them 
 back to the primitive condition of barter."" 
 
 Absence of Branches. 
 
 Apart from the system of currency, with its excellencies and defects, 
 the American banking system has several points of difference both from 
 banking in Canada, and from the practice of England and Scotland. 
 The most striking of these differences is that every banking office is a 
 
 72 It is on record in reply to enquiries instituted by the Cliamber of Com- 
 merce of New Yorlv. about the year 1894, that over a large part of Western 
 Virginia, at that time, money had so completely disappeared that a person in 
 possession of a $50 bill, being desirous of changing it, drove more than forty 
 miles round about his village without being able to find as much money as 
 fifty dollars anywhere. At this very time, across the border in Canada, simi- 
 lar districts were abundantly supplied with currency. 
 
 269 
 
270 BANKING AND COMMERCE. 
 
 separate corporation, with its own capital, stockholders, and directors. 
 Branches are unknown. The system of branches never prevailed in the 
 United States to any extent, and they have now entirely disappeared. 
 The law allows joint-stock banks with as small a capital as $25,000, and 
 though it may seem an anomaly to constitute a complete corporation, with 
 the machinery of a separate bank for such a miniature concern, neverthe- 
 less numbers of such banks have been called into existence, and have ren- 
 dered the same kind of service to the small towns of the United States 
 as is done by the branches of banks in Canada. 
 
 But the service is not so efficient. For the branches of banks in 
 Canada are managed by men who have been trained in banking principles 
 and practices in the large institutions of the country. They are, for that 
 reason, well qualified to judge of the transactions that come before them, 
 and to discriminate against undesirable and insecure advances; in ad- 
 dition to M'hich they have the advantage of constant advice from head- 
 quarters. They are also free from local prejudices and predilections, 
 and are likel}^ to judge of transactions on their merits. This, however, 
 is not the sole advantage. A branch of a large institution carries Avith 
 it the strength and safety of the parent corporation. It is therefore a 
 safe place for deposits, in addition to which the whole resources of the 
 corporation are available in case some enterprise in the locality should 
 require larger advances than could be furnished by a local institution. 
 Of the merits of the branch system in general, mention will be made more 
 at large in the chapter on Canadian banking. The above, however, will 
 suffice to suggest that the system of a separate corporation for each bank 
 is not so advantageous for small communities. 
 
 Note R 
 
 EDE.MPTIOXS. 
 
 Another peculiarity of the American system is that there is no re- 
 demption of notes. This has come about most naturally from the cir- 
 cumstances under which they are issued, for all are secured by deposit 
 of Government bonds of the same quality, all therefore are nearly equal 
 in credit and value. Hence they are all treated by the banks as money 
 of a common stock. !Many of the banks have issued all they have the 
 power to issue. Redemption therefore answers no particular object and 
 is never carried out. 
 
 Law of Fixed Reserves — Examinations. 
 
 But the two most striking features of American banking, next to its 
 secured but inelastic circulation, are the requirements b}' law of a fixed 
 minimum of reserve of cash or its equivalent, to be kept on hand, and 
 next the system of bank examination by Government officials. With re- 
 gard to the former it must be said that while it has a great attraction for 
 those whose knowledge of banking is only theoretical, its benefits are il- 
 lusory in practice. The system indeed has two fundamental drawbacks. 
 It is calculated to aggravate banking difficulties in time of embarrass- 
 
AMERICAN BANKING. 271 
 
 ment. and when there is a scarcity of money, the very necessity of the 
 case leads to its provisions being violated. In all sound banking the 
 keeping of adequate reserves of available funds is deemed a matter of 
 vital importance, it being of the essence of a banker's business to be able 
 to meet, at once, under all circumstances, every demand made upon him, 
 To every prudent banker, therefore, the amount of cash reserves he has 
 on hand is a matter of daily attention; and the watching of its ebb and 
 flow, and the replenishing of his resources when the demands of business 
 cause them to run down, a never-ceasing occupation. But a small con- 
 sideration will show that it is a matter of imperative necessity, not only 
 that he shall have an ample stock of lawful money by him, but that he 
 shall have command of the tvhole of that store at all times. If, out of 
 this store of legal-tender money, there is a certain amount he cannot 
 touch, it is evident that for purposes of meeting demands upon him this 
 particular amount might as well be non-existent. It is as if on some par- 
 ticular day he had locked up a large amount of reserve money in his 
 safe and handed the key to the Government. No matter how much money 
 he might have there, he might be compelled to stop payment and be 
 ruined, because he could not meet demands out of the remainder. 
 
 This is exactly the position in which the American system places every 
 bank. It ordains that a certain percentage of the liabilities of the bank 
 must be kept in cash, or in the equivalent of cash. This legal percentage 
 is undoubtedly a reasonable amount; such, in fact, as prudent bankers 
 •M'ould seek to have on hand in the ordinary course of business. But it is 
 evident that, when the law orders a banker to keep this amount of money 
 by him, that amount is withdrawn from his use for meeting demands 
 upon him. No matter what demands are made upon him in the course of 
 a day's business, he cannot, if he obeys the law, touch that portion of his 
 cash reserves to meet them. It is as if, in military matters, the law or- 
 dained that every general must keep twenty per cent, of his army in re- 
 serve, and forbade him to use that part of his force when a battle is 
 going on. 
 
 But no General, if the exigencies of an engagement were imminent, 
 could help bringing his reserves into play to prevent defeat. Self-preser- 
 vation is the first law of nature. No statute law can override it. The 
 position of a banker under a law of tliis description is of a similar char- 
 acter. In the demands of his customers he has a daily battle with cir- 
 cumstances. These demands must be met with money on the spot, or he 
 is defeated and disgraced as a banker. 
 
 Thus, then it has come to pass, under the pressure of circumstances, 
 in times of monetary scarcity, that American bankers have found them- 
 selves face to face with the problem, shall they use their monetary re- 
 serve to fulfill the contracts made with their customers, or shall they 
 comply strictly with the law and refuse to pay their customers the money 
 demanded. It is evident that when in this position the banker is in the 
 presence of two conflicting laws. On the one hand is the law which 
 
272 BANKING x\ND COMMErXE. 
 
 obliges him to fulfill the contract made with customers, on the other is the 
 statutory requirement that forbids him to touch his store of money when 
 it has run down to a certain sum. Placed thus between two contradictory 
 requirements, it does not need much penetration to see what a banker's 
 choice will be. The law of self-preservation, combined with the funda- 
 mental law of the inviolability of contracts, will lead him to pay the de- 
 mands of the customers, though by so doing he violates the provisions of 
 the statute law of banking. 
 
 This forecast of what would be likely to be done has been demon- 
 strated to be correct by evperience. Again and again have American 
 banks kept on fulfilling their contracts with depositors, although the 
 store of money required by law has gone below the limit. In such a pub- 
 lic manner has this been done that it has been regularly published in 
 financial journals. When these papers are publishing the condition, say, 
 of the banks of New York city, they are in the habit of giving the fig- 
 ures of the monetary reserve as being jip to legal requirements, or above 
 them, or below them. Now, in the latter case they publish the fact that 
 the banks have violated the law. This has repeatedly been done during 
 the last thirty years, yet neither the Government, nor the public, nor 
 banks in dealing with one another, have taken the least notice of it, ex- 
 cept as an indication that money is scarce. It is for these reasons that 
 Canadian bankers have invariably resisted any attempt to incorporate 
 such a provision in the banking law of the Dominion, although, under 
 pressure from doctrinaires and theorists, the Government has sometimes 
 endeavored to effect it when the renewal of charters was under considera- 
 tion. 
 
 Closely allied with the requirement of a minimum money reserve, is 
 that of a system of Bank Examination. This system probably had for 
 its foundation not so much the determination whether a bank's business 
 was being conducted safely, as whether it was complying with the law in 
 the matter of reserves. This necessitates an inspection somewhat of the 
 same character as is given to the branches of banks in Canada, viz., a 
 verification of the liabilities and assets of the office, not merely by a 
 balancing of books, but by an actual counting of money and examination 
 of bills and documents. The examination of an American bank, however, 
 especially in large cities, is now carried beyond this, and embraces pass- 
 ing judgment upon the loans and discounts of the office. And when the 
 examiner is a man of capacity, and has learned by practice how to bring 
 his experience to bear upon current transactions, his visit is often found 
 to be highly beneficial. But experience has proved that the examination 
 is in some cases of a perfunctory nature, doing neither good nor harm. 
 There have been instances in which, only a short time after an examiner's 
 verification, a bank has been found to be utterly bankrupt. Further, 
 when the examiner was a strong-headed, opinionated man, whose knowl- 
 edge of business was in inverse proportion to his conceit, his visit would 
 
AMERICAN BANKING. 273 
 
 be productive of harm. For he would find fault with transactions that 
 were sound, and pass by others that were dangerous. 
 
 The examinations of the banks in the large cities, in New York espec- 
 ially, are well and carefully done, as a rule. Though the post is a politi- 
 cal one, and therefore liable to changes, the Government, as a rule, takes 
 care that men of intelligence and experience are appointed. An intelli- 
 gent examiner will give the banker the benefit of his judgment as to the 
 soundness of his discounts, and sometimes a hint that the paper of sucli 
 and such a house was to be found in other banks, thus jiutting a president 
 or cashier on his guard. The examiner's duty also embraces the overdue 
 loans and bills of the office, with the securities held therefor; and it is 
 his business to see that proper provision is made for such as are doubtful, 
 and that such as are bad are written off. Securities in the shape of 
 mortgages, properties, and claims, also bonds, stocks and guarantees are 
 examined with a view to ascertain whether they stand at a proper amount 
 in the bank's books. And when the examination is completed, a report is 
 made to the Comptroller of the Currency in Washington, who passes the 
 wliole under review, and sometimes corresponds with the banks on points 
 that seem to require it. 
 
 This examination of the American banks is another of the points 
 sometimes put forward by theorists as desirable to be applied to Canada. 
 But this is in evident ignorance of the difference in circumstances. To 
 examine properly a single large office of a Canadian bank, doing a large 
 business, is a laborious matter, occupying the time of several officials for 
 three or four weeks, and entailing in addition a large amount of supple- 
 mental office work to bring all the threads to a point. But when a bank 
 has branches, as nearly every Canadian bank has, the examination of any 
 one of its offices is not an examination of the bank, for the bank exists 
 with all its powers of creating liabilities and investing in assets, in ten, 
 twenty, or even a hundred places at once; all of Avhich must be examined 
 on the very same day, if the truth of its published statement is to be veri- 
 fied. For example, the first column in the monthly statement made by 
 Canadian banks to the Government gives the amount of their note cir- 
 culation. This amount is ascertained by deducting the total of its own 
 notes held by a bank on a given day from the total that has been signed 
 and entered in its books. But those notes are held in forty, fifty or more 
 separate offices, and the amount varies every day. They must be counted 
 simultaneously therefore at the close of the same day, in every one of the 
 offices. To do this so as to make a complete check would require the em- 
 ployment of a hundred men at least. But this would be only the begin- 
 ning. The whole of the rest of the cash would require to be counted on 
 the same day, and on the same day also the vast volume of bills dis- 
 counted wculd require to be examined at every one of the offices. The 
 deposit ledger must also be simultaneously balanced, the general ledger 
 also, the bills for collection verified, the accounts with other banks at 
 home and abroad checked over, and an enormous mass of verifying cor- 
 18 
 
274 BAXKIXG AND COMMERCE, 
 
 respondcnce entered upon, the results of which would require to be waited 
 for before the examination could be said to be complete. To carry out 
 all this efficiently in the case of any one of the large banks two himdred 
 men at least would be required. Yet the examination even then would 
 only have embraced one bank. Now, considering the number of banks 
 in the Dominion, and the number of their branches, some of them in the 
 United States, the West Indies and Great Britain, it is not too much to 
 say that to do the work effectually would require the creation of an 
 enormous Government department with at least a thousand trained of- 
 ficers. To do che work in any other way would be delusive and mis- 
 chievous, Th' above statement should demonstrate the impossibility of 
 the project. 
 
 Stockholders Meetings in Canada and the United States, 
 
 Another feature of American banking and one in which it differs in 
 a marked degree from that of Great Britain and Canada is, that its bank- 
 ing corporations, apart from the returns they make to the Government, 
 scarcely ever come before the general public. The annual meeting of 
 the stockholders of one of the larger banks in Great Britain or Canada 
 is an event of interest to the whole community. Reporters are generally 
 present, remarks and comments are made by the president, and often by 
 the chief executive officer, in which there is sometimes a review not only 
 of the business of the bank, but of the financial and commercial position 
 of the country. This is specially the case in Canada, Questions are 
 asked by stockholders as to points in the annual statement, or as to profits 
 or losses, and it is common both in Great Britain and Canada for stock- 
 holders to make remarks and criticisms. And when legislation is being 
 brought forward on the subject, either in the Provincial or Dominion 
 legislatures, the opinions of bankers are generally asked for and great 
 weight attached to their answers. 
 
 But as a rule nothing of the kind is known in the United States, Un- 
 less something extraordinary is taking place, the newspapers take no 
 notice of the annual meetings of banks, and as to admitting reporters, 
 they would as soon be allowed to attend the weekly meetings of the board 
 of directors. The banks are looked upon almost as private partnerships, 
 so far as their individual action is concerned; the only notice taken of 
 them is in their associated capacity, when their public statements are 
 noted and commented upon purely in their bearing on the money market. 
 As to their action as bearing on trade or commerce it is rarely thought of. 
 Nor is it as bearing upon legislation. 
 
 The Annual Meetings of the Bankers' Associations, both of the sepa- 
 rate States, and of the country as a wliole. are the only occasions on which 
 the larger questions are discussed which are common to all banks and 
 which relate to banking as a profession. There, however, they are dis- 
 cussed with marked ability. The purely local character even of the larg- 
 
AMERICAN BANKING. '275 
 
 est American banks is doubtless the reason for all this, which, it should 
 be borne in mind, has not arisen from legislation, but has been simply a 
 growth of custom. ' 
 
 Officers of Ameuican Banks. 
 
 There are certain particulars in which the internal economy of Ameri- 
 can banks is different from that prevailing in Great Britain and Canada. 
 The most important of these is in the position occupied bj'^ the president. 
 The president of an American bank is, as a matter of course, a member 
 of the board of directors, and subject like the rest to an annual election. 
 And he is, by the very nature of his office, the chairman of the board. 
 But in addition to this, he, in many cases, is the manager and chief ex- 
 ecutive officer of the corporation, and as such gives daily attendance, re- 
 ceives customers, arranges loans, discounts bills, opens or closes ac- 
 counts, and appoints and supervises the staff of the bank. He has had 
 almost invariably a training in the business of banking from the outset. 
 He is thus able to perform with intelligence all the fimctions of the 
 general manager of an English or Canadian bank. In the smaller banks 
 of the United States, the duties of even a Canadian branch manager ap- 
 pertain to him. There are undoubtedly some advantages in this system, 
 for the })resident being the chairman of the board of directors is able 
 with perfect knowledge and with the weight of authority to carry out 
 their policy in the bank's daily administration. 
 
 This ensures that there shall be no conflict between the chief executive 
 officer and the board, and that, in case of difference of opinion, the views 
 of directors shall prevail. It carries also the great advantage that in the 
 board itself there shall be one who is perfectly conversant with matters 
 from a banking point of view; a professional banker, in fact, whose in- 
 formation is varied, and his judgment sharpened by daily contact with 
 customers and the public. Reasons like these have prevailed when on sev- 
 eral occasions the general manager of a Canadian bank has been elected 
 to the office of president, continuing nevertheless to exercise the same 
 functions as before. 
 
 There are, however, disadvantages in the system. It is undoubtedly 
 desirable that the chairman of the board of directors and the principal 
 person amongst them, should be a man of wealth and importance in the 
 community, apart from his connection with the bank. This it is scarcely 
 likely that any officer of a bank could be. Moreover, it is certainly unde- 
 sirable that the principal executive officer of a bank should be subject to 
 an annual election, the continuity of the same person in such an office 
 being a matter of importance. The carrying out of this system of mak- 
 ing the president the chief executive officer involves also the making the 
 office of cashier a position of secondary importance. He therefore has 
 duties which though important are subordinate. His position in effect 
 
276 BANKING AND COMMERCE. 
 
 is analogous to that of assistant manager in an English or Canadian 
 bank."'^ 
 
 Certification of Checks. 
 
 Anotlier peculiarity of American banking, especially in the large 
 cities, is the function exercised by the paying teller of certifying checks 
 as "good." The exercise of this function by an officer who does not keep 
 the accounts of customers, and docs not charge such checks to account 
 when certifying them, is somewhat of an anomaly, and seems to open the 
 way to constant mistakes. For in a bank with a large number of accounts 
 it seems impossible for a teller to recollect with sufficient accuracy the 
 position of every account to make it safe for him to certify that checks 
 are good. Experience, however, seems to justify the practice, and it is 
 well known that the tellers of many English banks pay checks across 
 the counter without any certification at all. Some banks in the North of 
 England have adopted the practice of certification. But in their case 
 the certifying officer is the person who keeps the account in the ledger, 
 which is the more reasonable and safe practice. This is the case in 
 Canada, and it is carried out with accuracy and precision there by charg- 
 ing the account of a customer with every check that is certified. 
 
 Altogether the system of banking carried out in the States is evi- 
 dently adapted to the requirements of the country. The division into 
 national banks and state banks arises, naturally from the circumstances 
 under which the states of the Union came to be at once separate and 
 united. Both classes of banks are precisely the same in their internal 
 economy. The want of elasticity, however, is a great drawback to the 
 national currency, as has been observed, and efforts have been made at 
 various times to cure this defect, which could be accomplished by the 
 adoption of a system analogous to that of Canada. But the jealousy of 
 banking corporations entertained by large multitudes of the people, es- 
 pecially of the Western States, has hitherto prevented any legislation in 
 that direction; in fact, instead of turning their attention to such a prac- 
 tical matter as this, multitudes of the people have been misled into the 
 advocacy of such a will-o'-the-wisp as the establishment of silver on an 
 utterly impracticable and dishonest basis. This dangerous delusion has 
 only been dispelled by the setting in, of late years, of a tide of prosperity 
 over every part of the country and of every interest in it. 
 
 The interference by government in such a delicate matter of bank ad- 
 ministration as the monetary reserve, and also the system of bank exami- 
 nations under the supervision of a government bureau, are instances of 
 
 73 In the early days of Canadian banking, and tliere is a survival of this 
 system yet in some quarters, the chief executive officer of the bank, even when 
 it had many branches, was called "cashier," instead of manager or general 
 manager. But his functions were the same as those of the president of an 
 American bank, and not of its cashier. The title of "cashier" is also used of 
 the chief executive officer in some Scotch banks, as is the case also In the Bank 
 of England. It is well known also that the officers who are called "tellers" in 
 Scotland, are called "cashiers" in England. 
 
AMERICAN BANKING. 277 
 
 what is a remarkable feature in administration in the United States, viz., 
 the extent to which the powers of government are stretched. Such gov- 
 ernmental interference is entirely \inknown in the banks of England and 
 Scotland, and it would never be tolerated if attempted. The same remark 
 may also be applied to Canada. 
 
 One final word may be said as to the manner in which the Associated 
 banks of New York are accustomed to act together for mutual protection 
 in times of financial stress. Again and again, they have combined their 
 reserves, the strong protecting the weak, and this with so much wisdom 
 that no danger has been incurred, and no undesirable consequences have 
 followed. The Clearing-House of New York, which has supplied the 
 machinery for this united action, is beyond doubt one of the best, if not 
 the best, managed institutions of the kind in the world. 
 
CHAPTER XXXI r. 
 
 VARIOUS THEORIES OF NOTE CIRCULATION. 
 
 Government Note Issues — Government Bonds as Security for 
 Bank Notes — Issues of the Bank of England — Basis of Canada's 
 Bank Note Circ'tlation — How Elasticity is Secured. 
 
 AMONGST the various theories that have prevailed on this impor- 
 ±\. tant subject, the following have been the most important: 
 
 First. — That all promissory notes designed to pass as money 
 should be issued by the Government of the country in which they are in- 
 tended to circulate. 
 
 Second. — That all circulating notes shall be issued under Government 
 supervision, and be strictly secured by Government bonds. 
 
 Third. — That circulating notes may be issued by banks chartered by 
 subordinate legislatures, and secured by bonds issued under .authority of 
 those legislatures, or by bonds of railways, or municipalities. 
 
 Fourth. — That circulating notes shall be issued by a central banking 
 corporation having exclusive dealings with the Government, such notes 
 being secured in part by the bonds of the Government, the whole of the 
 remainder being secured by gold exclusively set apart in a department 
 for the purpose, and all would be legal tender. 
 
 Fifth. — That notes may be issued by banks without any restriction, 
 and subject only to the check imposed by daily redemption. 
 
 Si.rth. — That bank notes may be issued by banks duly registered as 
 such, having circulating powers to a certain amount fixed by law; and, in 
 some cases, to an amount over and above this sum, provided that gold is 
 held for the excess. 
 
 Seventh. — That banks duly organized under a general act, and sub- 
 ject to the provisions of such act, shall issue notes to the extent of theii* 
 paid-up capital; such notes being by law a first lieji upon all the assets 
 and resources of the bank, and further secured by deposits of money 
 with the Government as a special redemption fund. 
 
 All these systems have been tried in actual practice at one time or at 
 another time, in one country or another country. Some of them have 
 been found, after experience, utterly wanting, and no longer exist, such 
 as the Third and Fifth. Others of them exist at the present day and 
 furnish the circulating media of various countries in which they are es- 
 tablished. 
 
 It is proposed to consider these systems in their order. 
 
 Government Note Issues. 
 
 The first theory, namely, that the Government of the country should 
 be the only medium for the issue of circulating notes was thoroughly dis- 
 
 278 
 
VARIOUS THEORIES OF NOTE CIRCULATION. 279 
 
 cussed in Canada both by the press and* in Parliament about the year 
 1866, when, under the auspices of the Finance Minister of the day, it 
 was proposed to abolish the issue of notes by the banks and to substitute 
 for them the notes of the Government. 
 
 The banks of the country, with one exception, were opposed to the 
 Government assuming this function. Amongst other things, they stated 
 that it would be impossible to put an efficient check upon over-issues by 
 the Government, should pressing necessities arise, for with every Govern- 
 ment the law of self-preservation is paramount, and would override all 
 other considerations. 
 
 Second, that such issues, if continued, would inevitably depreciate the 
 value of the bills and unsettle every financial interest of the country. 
 
 At the very time when this theory was propounded in Canada, the 
 notes of the Government of the United States were at a heavy discount. 
 (It may be added that eleven years elapsed before they were worth par.) 
 It was pointed out that repeated experience had shown that there was no 
 limit to the dej^reciation of Government notes; that every Government 
 currency then circulating in the world was at a discount, Italy and Russia 
 being cited as examples; that such currencies in former days, though 
 issued by governments which had proved perfectly stable in other re- 
 spects, had fallen to such a discount as to be practically worthless. 
 
 Finally, the broad ground was taken that, though it was the un- 
 doubted function of the Government to stamp coin, and give authority 
 to issue notes, the function of redemption was one that peculiarly per- 
 tained to bankers; that nothing is more easy than to issue bills; nothing 
 more difficult than to maintain constant redemption of them. Moreover, 
 the issuing of circulating bills should be, and would be, if healthy, 
 closely connected with the daily operations of commerce, which is not in 
 the sphere of government but of banking. It was pointed out that a 
 government as a borrower of money is, in many respects, in the same 
 position as an individual, or an ordinary corporation; that there is no 
 charm about the organization called a government to make it safe under 
 all circumstances; that a government may fail to meet its obligations, 
 may compound with its creditors, and may actually compound on the 
 composition, as Spain has done. A government, it was said, may re- 
 pudiate its obligations altogether (as has been actually the case), and 
 may have its obligations protested by millions, and not make the slightest 
 effort to pay them. 
 
 Such were the reasons which had weight with the bankers and people 
 of Canada at the time named, and induced them to organize opposition 
 to the project of having all circulating bills issued by the Government of 
 the day. 
 
 It is true that subsequently in Canada an act of Parliament was 
 passed, authorizing the Government to issue one and two dollar bills for 
 circulation, and also bills of large denominations not for circulation, but 
 for the convenience of the banks in making settlements with each other; 
 
280 E-VXKIXG AND COMMERCE. 
 
 one provision of tlie act being that the banks should hold a certain per- 
 centage of their cash reserves in these notes. To this the}' submitted, 
 seeing that the act required the Government to hold a large percentage 
 of its issues in actual gold, and, in addition, to hold authorized debentures 
 for the balance. This system is precisely that of the Bank of England. 
 And to say truth, none of the dangers which were considered to be bound 
 up with issues of the Government have transpired so far. Respecting 
 this, however, two observations have to be made: first, that the system of 
 Government issues in Canada for circulation is only a very partial one; 
 and, secondly, that at times when large notes were presented for redemp- 
 tion by banks that needed gold for export, the bankers of the Government 
 were willing to assist in meeting the demand. The system, indeed has 
 never been very severely tried. 
 
 With regard to the United States, it is an undoubted fact that since 
 the Federal Government resumed payment in specie — and it was more 
 than twelve years after the war terminated that they did so — none of the 
 evils foreshadowed in Canada as a consequence of Government issues 
 have transpired. But it has to be said again, that the system of Govern- 
 ment issues since the war has never been severely tested, and also that 
 the Government, during the whole period, has been its own banker; al- 
 ways having stores of gold in possession, the product of over-sufficient 
 taxes. 
 
 Moreover, whatever evils might be developed by a system under 
 which the Government would be the sole issuer of circulating notes, such 
 would, even under pressure, be much lessened when supplemented by a 
 system of bank issues, as has been the case in the United States. 
 
 Had the agitation for a silver basis for Government issues been suc- 
 cessful (and this momentous question, at one time, wholly depended on 
 the uncertain issue of a Presidential election) it is certain that in such 
 an event gold would have gone to a considerable premium, and the notes 
 of the Government to a heavy discount. The trend of opinion, even in 
 the United States, is in the direction of gradually withdrawing Govern- 
 ment notes from actual circulation, and confining them to the issue of 
 such gold certificates as are in use now in the larger centres, exchange- 
 able for gold at the pleasure of the holder. But the idea of the whole 
 issues of a country being that of the Government loses favor when ex- 
 amined in the light of events; and for this reason especially, if none 
 others could be alleged, such issues cannot possibly correspond to 
 the movements and requirements of commerce. 
 
 Bank Notes Secured by Government Bonds. 
 
 The second theory is that which prevails in the United States under 
 the National Bank Act. Under this system all bank issues are secured 
 by Government bonds. They are absolutely restricted to a certain per- 
 centage of the capital of each issuing bank; the total amount cannot be 
 increased except by the establishment of new banks, there being no in- 
 
VARIOUS THEORIES OF NOTE CIRCULATION. 281 
 
 ducemcnt for existing banks to increase tlieir cajjital for tlie purpose of 
 increased circulation. 
 
 Under this system, while the notes are perfectly secure so long as 
 the bonds of the Government are good, they would depreciate if the bonds 
 depreciated. Moreover, this system, like that of Government notes, has 
 no correspondence with the inflowing and outflowing movements of com- 
 merce. The notes are never presented for redemption. They are far in 
 excess of ordinary requirements at one time, and far below such require- 
 ments at anotlier; the result being those heavy fluctuations in the rate of 
 interest which have always distinguished the New York money market, 
 and which bring about periodically severe financial crises. 
 
 The system, in its practical working, often leads to such a scarcity 
 of currency in rural districts that business is almost reduced to a condi- 
 tion of barter. ^Nloved by conditions such as these, strenuous endeavors 
 have been made in the United States to bring about such modifications of 
 the system as would ensure elasticity as well as security. 
 
 The third system prevailed in the United States before the establish- 
 ment of the national bank system; but its defects were so great, and 
 its abuses so constant, that it was abolished at the beginning of the 
 Civil War without any resistance, and has never since sought to be re- 
 habilitated. 
 
 Issues of the Bank of England. 
 
 The fourth is the system of the Bank of England. The notes 
 of the Bank of England are legal tenders everywhere in England ex- 
 cept at the counters of the Bank, where they are interchangeable for 
 gold. For many generations, and up to the passing of Sir Robert 
 Peel's Act, there was no statutory limit to the issue of the Bank of Eng- 
 land notes. But there was a constant and never-ceasing restriction upon 
 such issues by the necessity of redeeming them in gold. This restriction, 
 however, ceased to operate during the period of the French Revolution- 
 ary War. Specie payments were then suspended and. not resumed 
 until some years after the war had closed. 
 
 At that time, as might be expected, gold went to a premium, which 
 premium was disguised under the price per ounce of gold bullion; 
 wliicli was much higher when paid for in Bank of England notes than in 
 gold coin. Tlie discussions that took place in Parliament at this period 
 with regard to the Bank of England issues and the price of gold dis- 
 play a most remarkable want of apprehension of the real bearings of 
 the question on the part of eminent statesmen and members of Parliament. 
 Although for years it was patent that a certain number of pounds of Bank 
 of England notes would not buy nearly the same amount of commodities 
 as the same amount of money in gold coin, it was strenuously denied 
 by certain thinkers that the notes were at a discount. This might be 
 deemed incredible, if the fact were not so well established. The premium, 
 indeed, was never high; not more than fifteen or sixteen per cent., but 
 guineas, which were the standard gold coin at the time, were perfectly 
 
282 BANKING AND COMMERCE. 
 
 well known to be worth about that much beyond Bank of England 
 notes. '^ 
 
 But although si)ecie payments were suspended, the supply of gold 
 and silver in the country was jealously watched, and constant spasms 
 of uneasiness passed over it, when, under Mr. Pitt's policy, heavy drains 
 of specie took place for shipment to the Continent to subsidize the gov- 
 ernments fighting against Napoleon. 
 
 Tlic amount of discussion that took place on the subject of Bank of 
 England notes up to the time of the passing of Sir Robert Peel's Act 
 was simply enormous; but there scarcely appears during the whole of 
 it a proper appreciation of the undoubted fact that it was these abnormal 
 drains of gold tliat brought about the unusual condition that prevailed. 
 Gold was at a premium: that was a solid fact, deny it who would; but 
 no one seems to have imagined what was the true cause of it, namely, 
 that gold was in abnormal demand for ptirposes entirely unconnected 
 with the ordinary operations of trade or finance. It is perfectly evident 
 to us, who had the experience of gold rising to a premium during the 
 American Civil War, that if there had been no war with Napoleon, gold 
 would never have risen to a premium, and that Bank of England notes, 
 and all other paper money with them, would never have fallen to a dis- 
 count. 
 
 This was the truth, however, that had to be learned by experience ; for 
 when war ceased, and the movements of finance became natural, gold 
 gradually accumulated, and it became possible to resume payments in 
 specie. The convertibility of the note had once more become a patent 
 fact long before the passing of Sir Robert Peel's Act which was meant 
 to ensure it. 
 
 But after the great panic of 1825 (brought about by extravagant 
 speculations in foreign stocks, and the numerous failures of private banks 
 which ensued), an opinion began to prevail that all revulsions and panics 
 were attributable to the over-issue of notes by country banks and by the 
 Bank of England. That this idea was fallacious a long course of subse- 
 quent events demonstrated. But it took such deep root in the public 
 mind that at length, under Sir Robert Peel, legislation was carried 
 through Parliament with regard to it. 
 
 The object of Sir Robert Peel and the party that acted with him 
 was to abolish all issues throughout the Kingdom except the issues of the 
 Bank of England; and further that the issues of the Bank of England 
 should be absolutely upon a gold basis; so that for every five-pound 
 note issued by the Bank five sovereigns should be held to redeem it. The 
 theory was expressed in a sort of formula, that bank notes should fluctu- 
 ate exactly as gold would fluctuate in case there were no bank notes at all. 
 
 The framers of this theory and its upholders were not practical men, 
 
 74 Had the notes been Issued by the Government, It Is probable that they would 
 have fallen to the same extent as consols, viz., to about fifty per cent, discount. 
 Consols were at 52 In 1803, as may be seon by a recent issue of the London 
 "Times." 
 
VARIOUS THEORIES OF NOTE CIRCULATION. 283 
 
 and did not see that if tliis theory were thoroughly carried out it would 
 be far better not to have any bank notes at all. Why should any cor- 
 poration, or even any government, go to the expense of printing bank 
 notes and incur the risk of paying forged ones, if for every note issued 
 there must be a corresponding amount of gold in the till.'' In that case, 
 why not pay out the gold at once.^ Why not have a simjile gold currency, 
 and save the risk and expense of paper notes.'' 
 
 Under sueli a theory there is no possible object to be gained by is- 
 suing paper money; and it would be obviously more profitable not to 
 use it. It never seems to have dawned upon these theorists that the very 
 foundation and raison d'etre of paper money is to economize the use of 
 gold. 
 
 Against this reasoning it may be urged that the bankers who were in 
 favor of this currency measure were not mere theorists, but mostly Lon- 
 don bankers of large experience, who thoroughly understood the subject 
 they were treating of. This, however, is a mistake. London bankers 
 they were, certainly, and men of the largest experience truly in some 
 departments of banking. But it is a simple fact, that in the matter of 
 the issue and redemption of circulation, they had no experience what- 
 ever. London bankers had given up issuing their own notes for nearly 
 fiftj' years. Not one of them knew anything of the subject by his own 
 practical experience; for not one of them in his lifetime had ever 
 issued or redeemed a single note of his own. 
 
 In no department of finance is the maxim "experlentia docet" more 
 applicable than to that of circulation. Their answers, therefore, to the 
 voluminous series of questions put to them were all the speculations of 
 impractical theorists. 
 
 But even with these, when the idea was proposed to be applied to 
 the Bank of England, and to require that the Bank should hold gold for 
 every note it issued, an enormous, and what proved to be an insurmount- 
 able obstacle, loomed up. There was not enough gold in the country to 
 meet this requirement. If even an attempt had been made to put it in 
 operation, a tremendous disturbance of business and unparalled tight- 
 ness of money would have ensued. In order to get such an amount of 
 gold as that into the Bank of England, it would have been necessary to 
 appeal to foreign countries; for it certainly could not have been spared 
 in England. But it could not have been taken from foreign countries by 
 force, it could only be got by selling abnormal amounts of consols 
 abroad; or by making forced sales of British goods. 
 
 But even these resources would not have availed to a sufficient ex- 
 tent; for foreign governments would soon have put a stop to the drain of 
 gold when they saw what was going on. It was an absolute necessity, 
 therefore, for Sir Robert Peel to modify his theory to a large extent. 
 The idea of compelling the Bank to hold gold for every note it issued 
 was abandoned; and, as the Act finally passed, the governors were al- 
 lowed to issue notes against the debt owing to them by the Government. 
 
284 BANKING AND COMMERCE. 
 
 A considerable part of its issues, therefore, have never been represented 
 by gold at all; and the currency tlieory broke down from the very moment 
 it was attemj)ted to carry it into practice. 
 
 But -with regard to the remainder of its issues. Sir Robert thought 
 he could contrive a machine which would work automatical!}' and ensure 
 the convertibility of the rest of the notes into gold under all circum- 
 stances; for under its operation the circulation would flow out and in 
 exactly as if it were metallic. 
 
 This machine was the celebrated device of the separation of the is- 
 suing department of the Bank from the banking department. 
 
 All the notes of the Bank were to be issued by the issuing depart- 
 ment, and only in exchange for gold. Gold Avas, of course, to be given 
 for notes when demanded. The banking department could not get notes 
 to do business with exccjDt by handing gold to the issuing department. 
 Under this system it was concluded that there could be no possibility of 
 an overissue, and that for the future there would be no more financial 
 panics and revulsions. 
 
 But the Act went much further than to deal simply with the circula- 
 tion of the Bank of England. There were large numbers of banks in 
 England that regulai-ly issued circulating notes. Some of these were 
 private banks, some of them joint stock. It was intended by Sir Robert 
 Peel to abolish the circulation of all these banks; for they, like the Bank 
 of England, were blamed, though without reason, for overissuing, and 
 thus assisting to bring about panics. But these banks of the country 
 made such a strenuous resistance to the abolition of their notes that Sir 
 Robert was compelled to consent to a modification of his scheme. After 
 considerable discussion, which indicated on the part of Peel and his 
 Government a singular want of apprehension of the real bearings of the 
 subject (as contrasted with the views of practical men like the country 
 bankers), a basis of restriction was agreed upon. The average circu- 
 lation of the preceding three years was taken, which amount being duly 
 registered, was fixed as the limit beyond which the country banks were 
 not to extend their issues in future. Returns of the circulation of these 
 banks were hereafter to be published in the "Gazette," and so they have 
 been ever since, as well as in the London "Bankers' Magazine." It was 
 provided also that in case a bank discontinued business, its circulating 
 powers must lapse to the Bank of England. 
 
 The Scotch banks made even a more strenuous resistance than the 
 coimtry banks of England, and by their compactness and unity of action 
 were able to bring strong pressure to bear upon the Government. It was 
 finally agreed and embodied in law that the Scotch banks should continue 
 to circulate bills as before to the extent of the average of the three pre- 
 ceding years; but with this important proviso, that they might circulate 
 to any amount beyond that, provided they held gold to cover the extra 
 amount. On this basis the issues of the banks in Scotland have con- 
 tinued ever since. 
 
 I 
 
VARIOUS THEORIES OF NOTE CIRCULATION. 285 
 
 In Scotland, as in Canada, there is always an expansion of circula- 
 tion during several months of the year. At that time it has been the 
 custom of the Scotch banks to augment their stock of gold by the amount 
 calculated to be required. Boxes of gold are regularly sent down from 
 London to Scotland for the purpose : but it is a well known fact in bank- 
 ing circles that the boxes are, as a rule, never opened, and are returned 
 to London exactly aS they came when the period of expansion closes. 
 It should be remembered, moreover, that the circulation of notes is very 
 much larger in Scotland than in England owing to the fact that banks 
 issue one pound notes."" 
 
 All this legislation took place in the year 1841, or soon afterwards; 
 and upon this basis the circulation of notes in England and Scotland 
 has continued ever since. The notes of the Bank of England are issued 
 to the extent of its holding of Government bonds and of its gold in 
 possession. The English banks (those that circulate at all) issue up to 
 the amount established by law. The Scotch banks to this latter amount 
 with the addition of gold in hand to the excess. 
 
 But it is to be noted that the question of securing note issues seems 
 to have been considered quite subordinate in importance to that of pre- 
 venting what were thought to be overissues. As a matter of fact, the 
 only notes of the Bank of England that are absolutely secured are those 
 against which gold is held by the issue department. Government bonds 
 are liable to heavy depreciation whenever war supervenes. For notes 
 issued by English banks no special security is held at all. Note holders 
 and depositors stand on precisely the same footing in respect of their 
 ■claim upon the assets of the banks. 
 
 In the case of the Scotch banks tliere is even a more striking anomaly; 
 for while supplies of gold are sent up to Scotland as a basis for extended 
 issues, the gold is not constituted a special security for their extended 
 issues. It forms a part of the general assets of the bank, and the de- 
 positors have just the same claim to it as these very notes. 
 
 But in fact the Act all throughout as respects Scotland is most in- 
 consequent. To carry it to a logical conclusion, special issues of notes 
 ought to have been directed for the excess; each of them stamped with 
 the words "this note is secured by special deposit of gold." But the 
 bankers of Scotland, shrewd men as they are, would never have consented 
 to sucli discrimination affninst their ordinary issues.'^" 
 
 But the important question remains, viz., has that Act, or has it not, 
 fulfilled one great purpose of its enactment, namely, the placing of the 
 
 75 One of tho fnncies of the currency theorists had been that what they called 
 the overissue of the Bank of England had arisen from its power to issue one 
 pound notes. They were, therefore, abolished, very unwisely. One of the most 
 singular features of the long discussion that took place at that period was that 
 scarcely a single reference was made to the example of Scotland. 
 
 76 In making these observations it is not intended to cast the slightest doubt 
 upon the security of bank notes in Great Britain. The notes are abundantly se- 
 cure. But they are not secure by reason of the provisions of Sir Robert Peel's 
 Act. 
 
286 BAXKIXG A\D COMMERCE. 
 
 finances of country, as represented and controlled by banks, npon such 
 a basis as would cither prevent financial panics in the future, or, if they 
 should recur, ensure that they should be of very limited extent? 
 
 A general idea prevailed that it would; which idea was founded upon 
 a certain theory (which theory had the support of many eminent names) 
 viz., that all panics being due to overtrading and speculation (as was 
 universally acknowledged) and such overtrading and speculation being 
 largely fostered, and helped (as they supposed) by the overissues of 
 banks, if overissuing was stopped, overtrading and speculation must, per- 
 force, be prevented or confined within such narrow limits that panics and 
 revulsions would cease to trouble the land. 
 
 But alas for the vanity of human expectations ! Within three years 
 from the passing of the Act, a wave of panic swept over the country 
 once more. And strange to say, it was found that the effect of the Act 
 was to intensify the severity of the panic, and that the only recourse 
 available to prevent the stoppage of the Bank of England itself, and 
 with it a condition of universal bankruptcy, was to suspend the operation 
 of the Act! When the alternative became pressing, shall the Bank Act 
 be suspended, or shall the Bank of England itself suspend, theory gave 
 waj^ and common sense asserted itself. The Act was suspended by order 
 in Council, and the wave of panic began to subside immediately. 
 
 Within a few months a normal condition of finance prevailed. But 
 so inveterate is the force of tradition in English legislation that no 
 thought seems to have arisen of revising the provisions of the Act. It 
 came into force again; and again it was fondly hoped that peace and 
 security would prevail. But the hopes of the theorists were again and 
 again disappointed. After the lapse of ten years another period of over- 
 trading and speculation set in, not in England only; and again it was 
 evident that the Bank Act aggravated the pressure. The operation of 
 the Act was accordingly suspended again; an experience that was re- 
 peated once more about twelve years afterwards. 
 
 All this demonstrated the truth of what the opponents of the Act 
 contended, viz., that panics arise from other causes than overissues, that 
 overissues, so-called, do not originate or help them, and that restricting 
 issues will not prevent them ; and that Sir Robert Peel's Act was nothing 
 but a "fair weather" Act which would always have to be set aside when 
 a storm arose. The fact is undoubted that after the Act was passed the 
 course of commercial and financial affairs, and especially the waves of 
 inflation and speculation, the fortunes and misfortunes of commercial 
 houses and banks, proceeded exactly as they did before. 
 
 The Basis of Notk Circulation in Canada. 
 
 The seventh of the systems of circulation named above is that which 
 now prevails in Canada. It is the final result of the long process of 
 what may be called financial evolution. The distinguishing features of 
 this system are as follows: 
 
VARIOUS THEORIES OF NOTE CIRCULATION. 287 
 
 First. — That tlie riglit to issue notes for circulation shall be confined 
 to corporations that are registered under the provisions of the Banking 
 Act. 
 
 Secow^. — That no such bank shall issue notes until it has a minimum 
 of five hundred thousand capital subscribed, and of two hundred and fifty 
 thousand paid up. 
 
 Third. — That the amount of such issues shall be kept within the limit 
 of the paid up capital. 
 
 Fourth. — And that all such notes shall constitute, in case of failure 
 of the bank issuing them, a first lien upon all its assets, and upon the 
 double liability of the stockholders in addition. 
 
 For some years after its enactment, this important provision, which 
 is the keynote and distinguishing feature of the note circulation of Can- 
 ada, stood alone. 
 
 But to make assurance doubly sure, there was added to it after a time 
 a system of contribution by each bank of a certain sum, proportioned 
 to its circulation, to constitute a guarantee redemption fund, which fund 
 is deposited with, and is at the disposal of the Government, for the re- 
 demption of the notes of any insolvent bank, should the provision pre- 
 viously named prove insufficient. And should this fund, under any con- 
 junction of circumstances, prove also insufficient, provision is made for 
 futher contributions, until the redemption of every note is actually ac- 
 complished. The effect of this is very far-reaching; for it assures that 
 every possible asset of every bank in the country, including the doiible 
 liability of them all, is pledged for the redemption of the notes of any 
 single insolvent bank. The whole of the banks of Canada are therefore 
 pledged for one another in the matter of the ultimate redemption of their 
 circulating notes, affording a security for the issues much beyond any- 
 thing existing in the world. 
 
 It is, however, interesting to note that the provision by which notes 
 are made a first lien in case of a bank's failure has invariably proved 
 sufficient for the redemption of its whole issue. In no one instance has 
 it been necessary to fall back upon the redemption fund; even though, 
 as it has happened in more than one case during a number of years, the 
 issuing bank has been grossly mismanaged. Even when in a certain 
 bank, by means of fraud and concealment, a large issue was effected be- 
 yond the statutory requirement, the whole of them were redeemed out 
 of the assets of the bank itself. Thus the security by first lien has stood 
 the severest tests to which any system could be exposed. But with the 
 redemption fund behind it, the safety of Canadian bank note issues is 
 guarded beyond any possibility of failure. 
 
 How Elasticity Is Secured. 
 
 Yet with all this there has been ample provision made for the impor- 
 tant matter of elasticity. This feature of note issues is that which makes 
 them correspond with the movements of commerce from season to season, 
 and from year to year. 
 
288 BANKINXx AND COMMERCE. 
 
 Commerce begins at the point where production is finished. \VTien 
 the harvest of an agricultural country like Canada is ready for sale, the 
 merchant steps in with offers to purchase it. But experience has demon- 
 strated that purchases of agricultural produce can only be carried out 
 by the employment of current money. The movements of commerce in 
 towns and cities can be and are almost wholly effected by checks, bills, 
 and promissory notes. But for purchase of agricultural products from 
 the producer in country districts nothing will answer but current money; 
 coin for small change, and notes for larger transactions. When, there- 
 fore, the time of harvest comes round and purchases begin to be active, 
 an immense demand for notes sets in; an immense outflow of notes takes 
 place, which continues increasing until the larger part of the harvest 
 passes into the hands of the merchant. This great annual outflow of 
 money (the same that prevails also in the United States, in Scotland, 
 and the agricultural parts of England) necessitates that there shall be 
 powers of issue with the banks over and above the ordinary requirements. 
 This power of extra issue in Scotland is provided by the holding of 
 gold; not at all an economical process. It is provided in Canada by the 
 united capital of the banks being always kept at a point far higher than 
 that to which circulation ever rises at its highest level. Thus the power 
 of the banks to provide for the largest outflow of notes is economically 
 secured. 
 
 For a long period previous to the development of the great wheat- 
 growing regions of the Northwest the circulation of the Canadian banks, 
 as a whole, at its highest point year by year was far below their united 
 capital; that is, far below their circulating power. But in the year 1902 
 so vast was the harvest of the Northwest that this highest point ap- 
 proached so near to the united capital, before the reflex wave set in, that 
 the banks came to a general conclusion to increase their capital. Each 
 one acted for itself, on its own judgment in the matter, and according to 
 its special necessity, in order to provide for the expansion in future 
 years. Capital, therefore, has been increased and the great outflow fully 
 provided for. This will undoubtedly continue to be the case if necessity 
 arises again. 
 
 Thus, then, there is always a reserve of circulating power in the 
 country; for when the reflex wave sets in, notes return to the banks, and 
 there accumulate until a vast store lies ready in the safes of the banks 
 v/aiting for the great demand to set in for the movement of the crops 
 in the autumn. 
 
 Let it be noted that by this method the utmost economy of finance has 
 been secured; for the capital of the banks that has been paid up is avail- 
 able for commercial purposes as m-cII as the store of notes that are based 
 ujion it when wanted. The notes that lie in the bankers' safes ready for 
 the great outflow displace nothing. 
 
 Thus it is that the difficult problem of combining absolute safety with 
 perfect elacticity has been solved. As to the safetif, it has been shown to 
 
VARIOUS THEORIES OF NOTE CIRCULATIOX. 289 
 
 be of an even higher degree than that of the issues of the Bank of Eng- 
 land, or of the national banks of the United States; while its elasticity 
 has been proved by the long course of experience to be perfect in its 
 operation and that in a country -where the pursuits of agriculture and 
 forestry furnisli a very large proportion of its annual production."" 
 
 77 It should be noted that a small part of the circulating notes of Canada 
 (about ten per cent.) consists of the issue of the Government; and are of the 
 denomination of one, two and four dollars. All the notes of the banks are of 
 five dollars and upwards, corresponding in this respect exactly with the issues of 
 the Scotch banks. The large notes of the Government of Canada are never in 
 circulation at all. They are used solely by the banks between one anther to set- 
 tle balances due, and are expressly framed so as to have no value in the hands 
 of the public. 
 
 As a final remark with regard to this system of note issues, It should be 
 stated that a supervision of the whole system has been placed upon The Bank- 
 ers' Association, especially created a corporation for the purpose. This associa- 
 tion checks the unsigned notes received from the engravers by the several banks, 
 together with the amount signed and taken into account as money from time to 
 time; it checks the circulation account of each bank, and supervises their de-- 
 struction when finally written off. The association in this matter acts as an 
 agent for the Government, and ensures that the provisions of the law are com- 
 plied with. 
 
I 
 
 CHAPTER XXXV. 
 
 BANKING ACT OF CANADA. 
 
 Various Clausfs of the Act — Shakes axp Shaueiiolders — Directors 
 — Powers of Banks- --Deposits — Reserves — Statements — Insol- 
 vency — Penalties. 
 
 IT is desirable in a Avork like this that a statement of the leading fea- 
 tures of the Act under which chartered banks do business in Canada 
 
 should be made in such a form as to be understood by all classes of 
 the community. For all classes are interested in banks, whether they 
 desire it or not, inasmuch as the bulk of the notes circulating as money 
 are issued by them. Whether a man has money to deposit or not, whether 
 or not he needs money lo carry on his business, he must in the nature of 
 things, if he lives in Canada at all, sometimes have the notes of a Cana- 
 dian bank in his possession and carry them at his risk. But the provis- 
 ions of the Act are of interest to others besides Canadians, for it is uni- 
 versally admitted tc be of high excellence. 
 
 The power to establish banks that can issue notes for circulation 
 should reasonably be considered in relation to the general welfare of the 
 community. That should be well understood ; though, indeed, it is some- 
 times lost sight of. Banks do not receive powers for their own sake, but 
 for the advantage of the people. It is the representatives of the people 
 in Parliament that grant these powers; and when it is considered that no 
 professional banker has ever sat in Parliament, and only few, compara- 
 tively, of the class of bank directors or presidents, it becomes apparent 
 that bank legislation must have been considered in its relation to the 
 country at large, and not simply in its bearing upon the interests of a 
 particular class. 
 
 The Canadian Bank Act is the fruit of many years of discussion, 
 during which it has been repeatedly considered by committees of the 
 House of Commons and the Senate, who have had before them prominent 
 members of the mercantile community, as well as professional bankers 
 of experience. The Act itself is a consolidation of many separate acts 
 formerly enacted by Canadian legislatures, under which charters to carry 
 en the business of banking were conferred on certain corporations. The 
 provisions of these early charters were largely framed upon those pre- 
 vailing in the United States, with modifications suited to the circumstances 
 of Canada. 
 
 But soon after the Provinces of Canada were confederated, the gen- 
 eral subject of bank charters was taken up in Parliament with a view to 
 
J3AXKING ACT OF CANADA. 291 
 
 the cstablishimMit of a general Act for the whole Dominion. The ex- 
 isting charters were then thoroughly examined in committee and dis- 
 cussed clause by clause, the result 'being the passing of that one general 
 Act under which banking has been carried on by all incorporated banks 
 ever since 1871. At intervals of ten years (being the limit of the op- 
 eration of the Act) its provisions have again been the subject of ex- 
 haustive discussion, and various amendments have been incorporated there- 
 in, all designed for the better protection of the public. It is worthy of 
 note that the whole of these provisions for protection were suggested by 
 the banks themselves; and very naturally so, for the banks are, at all 
 times, by far the largest holders of each others' notes. They would there- 
 fore be the heaviest sufferers in case there were any failure of redemp- 
 tion. 
 
 VvRiocs Clauses of the Act. 
 
 The Canadian Bank Act, as it was finally passed through both Houses 
 of Parliament in 1901, consists of 104 clauses, the leading features of 
 which may be summarized as follows: 
 
 1st. — Clauses which concern the esiablishment of a bank; 
 
 2d. — Clauses relating to the stoch and stockholders; 
 
 Sd. — Clauses relating to directors, their powers, qualifications, and 
 responsibilities; 
 
 4th. — Clauses relating to the issue and redemption of notes for cir- 
 culation ; 
 
 5th. — Clauses with regard to the lending of money, discounting of 
 bills and investing in securities; also as to deposits and reserves; 
 
 6th. — Clauses relating to the statements to be made by the banks to 
 the Government; 
 
 7th. — Clauses relating to insolvency; 
 
 8th. — Clauses imposing penalties. 
 
 It is proposed in this chapter to give a brief synopsis of the Act under 
 these heads. 
 
 Of the Establishment and Incorporation of a Bank. 
 
 No bank can be established unless an Act of Parliament is obtained 
 for the purpose, setting forth: 
 
 (1) The proposed name; 
 
 (2) The capital to be subscribed; 
 
 (3) The locality of the head office; 
 
 (4) The names of provisional directors. 
 
 To such a bank all the provisions of the Bank Act must apply. 
 The subscribed capital must 7wt be less than $500,000 and tliere must 
 be $250,000 paid up before business can be commenced. 
 
 No business shall be entered upon until a Certificate has been given 
 
292 BANKIXG AND COMMERCE. 
 
 by the Treasury Board"- that the provisions of the Act have been com- 
 plied with, and this within one year of the passing of the Special Act of 
 Incorporation. 
 
 The large requirement as to capital M-as in view of the power of issu- 
 ing notes whicli the Act confers. 
 
 Clauses Relating to the Shares and Shareholders. 
 
 (1) Shares umst be uniformly of $100. 
 
 (2) At all meetings wliere voting takes place each share shall count 
 for one vote. 
 
 (3) Shareholders may vote by proxy. But no officer of the bank 
 can be nominated as proxy, and all proxies must be renewed every two 
 years. 
 
 (4) The names of shareholders must be registered in books kept for 
 the purpose by the bank. 
 
 No transfer or assignment of shares is valid unless and until entered 
 in such books. And the owner of the shares is the person whose name 
 is on the register. 
 
 (5) For any debt to the bank incurred by a shareholder the bank 
 shall have a lien on his shares. 
 
 (6) The shareholders shall meet annually and elect directors. 
 
 (7) They shall have power to pass by-laws touching the following 
 matters: The day of the annual meeting; the record of proxies; the num- 
 ber of directors, their qualifications, and the mode of filling vacancies; 
 the amount of discounts and loans that may be made to directors. 
 
 (8) Shareholders may authorize directors to establish guarantee 
 and pension funds. 
 
 In addition to the foregoing are clauses relating to the following mat- 
 ters: 
 
 (1) The payment of calls and penalty for neglect. 
 
 (2) The transfer of shares, under a writ of execution. 
 
 (3) The transfer of shares by will, or marriage, or bankruptcy. 
 
 (4) Lists of transfers to be exhibited in the bank. 
 
 (5) Persons holding shares as executors or trustees shall not be 
 personally liable. But the estate or funds they administer shall be liable, 
 provided always that such estate or trust shall have been expressly named. 
 In default of this the executor or trustee shall be liable personally. The 
 
 78 The Government Treasury Board exercises very Important functions in ttie 
 practical worl<ing of this Act. This Board was constituted by Act of the Domin- 
 ion Parliament, Sect. 9, Cap. 28, Revised Statutes of Canada, as amended by 50 
 I Victoria Cap. 13 and is. In substance as follows: 
 
 9. There shall be a Board to be called The Treasury Board consisting of the 
 Minister of Finance, and any five of the Ministers belonging to the Queen's Privy 
 Council for Canada, to be nominated from time to time by the Governor in Coun- 
 cil. 
 
 Sect. 10 Cap. Revised Statutes: The Minister of Finance shall be the Chair- 
 man of the Treasury Board, and the Deputy of the Minister of Finance shall be 
 the Secretary thereof, and through him the board shall communicate with any 
 public department, or officer, or other person. 
 
BANKING ACT OF CANADA. 293 
 
 bank shall not be bound to see to the execution of any trust to which 
 shares in its stock are subject. 
 
 In addition to the above jorovisions, the Bank Act contains the fol- 
 lowing relating to the capital as a whole: 
 
 (1) The capital may be increased or decreased by a by-law passed 
 by shareholders at the annual meeting, or at a meeting called for the 
 purpose, to any amount that may be determined, provided only that the 
 capital paid up sliall not be reduced beloAv $250,000. 
 
 (2) But no such addition or reduction shall take effect unless a 
 certificate approving thereof has been issued by the Treasury Board. 
 
 (3) Increased stock shall first be offered to the shareholders pro 
 rata at such a rate as ma}^ be fixed by the directors. But no rate shall 
 be fixed which will make the premium, if any, on such new stock, exceed 
 the percentage which the existing reserve fund bears to the existing cap- 
 ital of the bank. 
 
 Clauses Relating to Directors. 
 
 (1) Each director must hold stock paid up as follows, at least: 
 When the whole paid up capital is $1,000,000 or 
 
 less $3,000 
 
 From $1,000,000 to $3,000,000 4,000 
 
 Exceeding $3,000,000 5,000 
 
 (2) A majority of the directors must be natural born or naturalized 
 British subjects. 
 
 (3) The whole of the directors shall be elected annually. 
 
 (4) Vacancies during the bank year to be filled up according to 
 provisions of by-laws. 
 
 (5) The capital and all the affairs and concerns of the bank to be 
 managed by the directors. 
 
 (6) They shall have power to make by-laws as follows: 
 (a) As to the management of the business generally. 
 (&) As to the duties and conduct of officers. 
 
 (7) They may appoint such officers as they consider necessary, and 
 remunerate them as they think fit. But they must allow no officer to enter 
 on his duties until he has given satisfactory security. 
 
 (8) They shall submit to the shareholders at the annual meeting 
 a full statement of the affairs and condition of the bank and also such 
 special statement as may be called for in any by-law duly passed by the 
 shareholders either in annual meeting or at a meeting called for the 
 purpose. 
 
 (9) They shall declare dividends half-yearly or quarterly out of 
 the profits of the bank. But such dividends shall not be such as to 
 impair the paid-up capital. If any such dividend is declared the direct- 
 ors who concur therein shall be jointly and severally liable therefor. 
 
 (10) If any part of the capital is lost, the directors shall cause the 
 same to be made good bv the shareholders. 
 
5.04 BANKING AND COMMERCE. 
 
 (11) They shall not declare any dividend beyond eight per cent, 
 per annum unless the rest or reserve fund amounts to at least thirty 
 per cent, of the paid-up capital. 
 
 Clauses Relating to the Issue and Redemption of Notes for 
 Circulation. 
 
 (1) The bank may issue notes payable on demand to an amount 
 not exceeding its paid-up capital. 
 
 (2) No note shall be of lesser amount than five dollars — and notes 
 in excess shall be for some multiple of five dollars. 
 
 (3) All such notes shall constitute a preferential lien on all the 
 assets of the bank in the event of insolvency. 
 
 (4) The payment of such notes is further secured by a special 
 Redemption Fund, to which all banks shall contribute pro rata to the 
 amount of their average circulation year by year. The said fund to be 
 held by the Government under the name of "Bank Circulation Redemp- 
 tion Fund," and to be used for no other purpose than the redemption of 
 the notes of any insolvent bank. 
 
 On the amount contributed b}^ each bank, interest to be allowed by 
 the Government. The total amount to be contributed by each bank to 
 said fund shall be five per cent, on its average circulation. If pay- 
 ments are required to be made from the fund, they shall be made pro 
 rata from the amount of each existing bank. Banks to make good the 
 deficiency so caused, but only by payments not exceeding one per cent, 
 per annum. 
 
 (5) In case of insolvency the notes of a suspended bank shall 
 bear interest at the rate of five per cent, per annum, until notice has 
 been given by the Government of its readiness to redeem them. 
 
 (6) No bank shall pledge or hypothecate its notes for a loan, and 
 no Joan so made shall be recoverable from the assets of the bank. 
 
 If the total circulation at any time exceeds the capital of the bank, 
 the bank shall incur the following penalties, viz.: If the excess be not over 
 $1000 the penalty shall be the amount of the excess; if over $1000 and 
 not over $20,000, the penalty to be $1000; if over $20,000 and not over 
 $100,000, a penalty of $10,000; if the amount of the excess is o%'er 
 $100,000 and not over $200,000, a penalty of $50,000; and if the amount 
 cf such excess is over $-200.000, a penalty of $100,000.'" 
 
 79 Those pfT.alties, and the latter one especially, will strike any one who is 
 acquainted with the subject as being unreasona'bly laige, seeing that the banks 
 In Canada are Issuing bills for the carrying on of the business of the country; 
 that they are doing this day by day, at all their branches simultaneously; and 
 that in an active condition of business, a bank with numerous branches may pay 
 out to its customers the largest amount above named in a single day. These pen- 
 alties suggest that an impression must have prevailed in Parliament that it would 
 be detrimental to the public interest for a bank under any circumstance, and even 
 for a day, to issue bills beyond the authorized amount; the truth being that the 
 bills are so surrounded with safeguards that the public could not possibly suffer 
 loss even If such Issue were made. This has been demonstrated by experience. 
 
BANKING ACT OF CANADA. 295 
 
 At the revision of the bank charters which came into force in 1901 
 an additional safeguard was inn)oscd by placing the Avhole supervision 
 of the manufacture, distribution and issue of circulating notes of the 
 banks under the supervision of the Bankers' Association, upon whom 
 was also placed the responsibility of seeing that the destruction of can- 
 celled notes was carried out in a proj^er manner. 
 
 The Association had previously been constituted an incorporated body, 
 largely with a view to the exercise of these functions. The banks are 
 thereby, as a body, constituted guardians of their mutual interests; than 
 which nothing can be more reasonable, seeing that by the operation of 
 the bank note redemption fund they are made ultimately liable for each 
 others' issues. 
 
 Powers with Regard to the Lending of Money and Other Uses of 
 THE Funds of the Bank, Also with Regard 
 TO Deposits and Reserves. 
 
 (1) The bank may lend money on bills of exchange, bonds, stocks, 
 debentures and standing timber; may discount bills, and carry on such 
 business as generally appertains to banking. But it shall not lend money 
 on real estate or other immovable property, or ships. Yet it may take 
 and hold any of these as additional security for debts already con- 
 tracted. 
 
 (2) But it shall not hold real property more than seven years 
 without permission of the Treasury Board, and then only for five years 
 longer. 
 
 (3) The bank shall only lend money on merchandise when the same 
 is pledged to it at the time the loan is made, and then only on a ware- 
 house receipt, pledge, or bill of lading, which warehouse receipt or 
 pledge in certain specified cases may be given by the owners of the 
 goods. 
 
 It shall have the power to sell the goods after notice. Elaborate 
 provisions are contained in the Act respecting these powers to loan on 
 merchandise, all being designed to safeguard the rights of ordinary 
 creditors. 
 
 (4) There are also provisions respecting property which the banlc 
 may acquire, whether movable or immovable, also as to its power of 
 sale and realization. 
 
 (5) Any person making a false statement as to the goods pledged 
 by a warehouse receipt or bill of lading, or who removes any goods 
 pledged to a bank without its consent, or withholds them when demanded, 
 is liable to imprisonment for a term not exceeding two years. 
 
 (6) For all ad\ances made upon warehouse receipts or bills of lad- 
 ing the bank shall hold a preferential lien upon the goods prior to the 
 claim of a non-paid vendor, if such there be. And if such vendor have 
 a lien upon the goods at the time the advance was made, preference of 
 the bank will still hold good, unless it had knowledge of the prior lien. 
 
296 BANKING AND COMMERCE. 
 
 (7) The bank shall not be liable to penalty or forfeiture, for usury; 
 but it shall not be able to recover by action at law more than seven per 
 cent, per annum. 
 
 Deposits. 
 
 (8) The bank can receive deposits from any person and repay them 
 to the same perspn; subject, however, to any law of any of the provinces 
 of Canada imposing disability on certain classes of persons. Pro- 
 vided always that from such persons deposits may be received and re- 
 paid up to five hundred dollars. 
 
 The bank shall not be bound to see to the execution of any trust, 
 whether expressed or implied, to which any deposit may be subject, or 
 to the application of the money paid on such deposit. 
 
 If a deposit is made in the name of two persons the receipt of one 
 shall be a sufficient discharge; or, if in the name of more than two, the 
 receipt of the majority. 
 
 Money of a deceased depositor can only be drawn bj' production of a 
 notarial copy of will, or copy of probate or letters of administration by 
 a competent court. 
 
 Reserves. 
 
 The bank shall always hold, as part of its reserve*" of cash on hand, 
 not less than forty per cent, thereof in the legal-tender notes of the 
 Dominion; and the Finance Minister shall always deliver such notes in 
 exchange for specie at the offices where legal-tender notes are redeem- 
 able, which places, in 1901, were Montreal, Toronto, Halifax, Ottawa, St. 
 John, N. B., Winnipeg, Charlottetown and Victoria, B. C. 
 
 Clauses Relating to Statements to the Government. 
 
 These returns, which are sent monthly, and are summarized and 
 published in the "Canada Gazette," were formerly much simpler than 
 they were subsequentlj?^ made, and in their present form are so detailed 
 and elaborate that none but experts can properly appreciate them. 
 
 The points upon which information is desirable are of interest, partly 
 to the general public, partly to bank stockholders and investors, and 
 partly to other bankers and the Government. 
 
 The public are interested in knowing how the banks as a whole are 
 progressing, as to the total amount of their circulation, deposits 
 and discounts. All these are indices of the growth or otherwise of the 
 business and wealth of the coimtry at large. But the jiublic have little 
 or no interest in knoAving the amount of overdue bills, or what amount 
 of the banks' funds are invested in bonds and stocks^ or in what partic- 
 ular form its reserve of cash is maintained. 
 
 But bank stockholders and other banks are interested in knowing 
 what cash reserves or available resources the individual banks are keeping, 
 also what amount of its funds each bank employs from time to time in 
 
 80 But there is no provision as to the total amount of such reserve. 
 
BANKING ACT OF CANADA. 297 
 
 discounting bills and trade advances, and how much in stock exchange 
 loans and debentures, also how much real estate a bank has acquired and 
 whether any bank is borrowino; from another bank. 
 
 In fact, bankers and stockholders are all interested in seeing whether 
 any individual bank is stretching out its business beyond safe bounds, 
 and thereby jeopardizing its position. As for the Government, its main 
 concern is to see whether the bank's circulation is within the author- 
 ized limit, and whether in the cash reserve there is held the prescribed 
 proportion of legal-tender notes. 
 
 It is also of interest that it should be generally known what are the 
 total advances to directors, inasmuch as instances have occurred in bank- 
 \ng where the position has been seriously jeopardized by such advances 
 being allowed an undue amount. 
 
 The INIonthly Return, as now prescribed by law, is as follows: 
 
 Capital authorized $......... 
 
 Capital subscribed 
 
 Capital paid up 
 
 Amount of Rest 
 
 Rate per cent, of last dividend 
 
 Liabilities. 
 
 ( 1 ) Notes in circulation $ 
 
 (2) Balance due to Dominion Govt 
 
 (3) Balance due to Provincial Govts 
 
 (4) Deposits by the public in Canada pay- 
 
 able on demand 
 
 (5) Deposits in Canada payable after no- 
 
 tice 
 
 (6) Deposits not in Canada 
 
 (7) Loans and rediscounts from other banks 
 
 (8) Deposits by other banks in Canada, 
 
 including balances due 
 
 (9) Due to agencies of the bank, or to 
 
 other banks in the United Kingdom 
 
 (10) Due to agencies or banks elsewhere 
 
 (11) Other liabilities 
 
 Total liabilities 
 
 Assets. 
 
 ( 1 ) S])ecie $ 
 
 (2) Dominion notes 
 
 (3) Deposit tc secure circulation 
 
 (4) Notes and checks of other banks 
 
 (5) Loans to other banks secured, includ- 
 
 ing bills rediscounted 
 
298 BANKING AND COMMERCE. 
 
 (6) Due from other banks in Canada 
 
 (7) Due from agencies of the bank or other 
 
 banks in the United Kingdom 
 
 (8) Balances due from agencies of the bank, 
 
 or other banks or agencies elsewhere 
 than in Canada or the United King- 
 dom 
 
 (9) Dominion and Provincial Government 
 
 securities 
 
 (10) Canadian municipal securities and 
 
 British, foreign or colonial public se- 
 curities other than Canadian 
 
 (11) Railway and other bonds, debentures 
 
 and stocks 
 
 (12) Call and short loans on stocks and 
 
 bonds in Canada 
 
 (13) Call and short loans elsewhere than in 
 
 Canada 
 
 (14) Current loans in Canada 
 
 (15) Current loans elsewhere than in Canada. 
 
 (16) Loans to the Government of Canada. . . 
 
 (17) Loans to Provincial Governments 
 
 (18) Overdue debts 
 
 (19) Real estate, other than bank premises. . 
 
 (20) Mortgages on real estate sold by the 
 
 bank 
 
 (21) Bank premises 
 
 (22) Other assets, not already included 
 
 Total assets $ 
 
 Aggregate amount of loans to directors and 
 
 firms of which they are partners .... ^ 
 
 Average amount of specie held during the 
 month 
 
 Average amount of Dominion notes held dur- 
 ing the month 
 
 Greatest amount of notes in circulation at any 
 time during the month 
 
 This return, it will be seen, is in remarkable detail, and it affords to 
 bankers a certain amount of general information as to what their neigh- 
 bors are doing. This, of course, is of much interest to them. But it is 
 questionable whether much of the information might not be summarized 
 with advantage, so far as the Government and the public are concerned. 
 And it is certainly questionable whether the extraordinary detail of these 
 returns operates as a check upon illegitimate banking. Such a check 
 
RANKING ACT OF CANADA. 299 
 
 may have been intended, but experience does not bear out tlie supposi- 
 tion that these returns are effectual for that purpose. 
 
 Clax'ses Relating to Ixsolvexcy. 
 
 The closing of the doors of a bank and suspension of payment do 
 not ipso facto operate to place a bank in insolvency. 
 
 Suspension requires to be continued for ninety ciaj/s consecutively, 
 or for ninety in all, if at intervals during twelve months. 
 
 But suspension for t'hat period constitutes the bank insolvent and 
 operates as a forfeiture of its charter; which charter, however, is con- 
 tinued for the purpose of winding up the bank. 
 
 It is, however, provided that if any bank suspends payment, the 
 Bankers' Association shall api)oint a curator to supervise the affairs of the 
 bank; and it shall be his duty to make, in the first place, all needful 
 arrangements for the payment of the notes of the bank, and then for 
 protecting tlie rights and interests of the creditors generally. The 
 curator to hold office until a liquidator is appointed to wind up the bank, 
 or until it resumes business. 
 
 If, after sus})ension for ninety days, no proceedings are taken with 
 a view to the winding up of the bank by the appointment of a liquidator 
 or otherwise, the directors shall make calls upon the stockholders for 
 such sums as they may deem needed to pay all the liabilities of the 
 bank. Stockholders who have transferred their shares within sixty days 
 of the suspension of the bank shall be liable to pay the foregoing calls 
 as if they held them at the time of suspension. But they shall have 
 recourse against those by whom the shares are actually held at the time. 
 It is also provided that no statute of limitations or prescription shall 
 have any application to a bank. In all other respects the procedure in 
 the case of the insolvency of a bank is the same as that in the case of 
 an ordinary company or mercantile firm. 
 
 Penalties. 
 
 The act imposes sundry penalties for violation of its provisions :^^ 
 (1) For neglecting to pay calls when due, ten per cent.; or the 
 directors mav declare such shares to be forfeited. 
 
 81 The clause that imposes a penalty of $500 for each violation of the Act 
 comprised within sections from 64 to 7S inclusive, cannot but strike an observer 
 as singularly liable to abuse at the hands of an arbitrary administration. Those 
 sections are not only voluminous and complicated, covering a great number of 
 actions of a totally different character, but some of them are notoriously difficult 
 to interpret, and are open to different constructions as they apply to the numer- 
 ous and varied circumstances of daily banking business. Other penalties of the 
 Act are for single specific offenses respecting which there can be no dispute; 
 such, for example, as not holding a proper quantity of Dominion notes, or for an 
 over-issue of notes, or not sending in returns within the specified time. 
 
 All tliese are definite acts and easily provable. But what shall be said of a 
 clause that sweeps within a reiterated series of penalties a large number of 
 complicated provisions relating to advancing money in aid of the building of 
 ships, or acquiring, iiolding, and releasing warehouse receipts, pledges, and hy- 
 
300 BANKING AND COMMERCE. 
 
 (2) For liolding less than i'oTty per cent, of cash reserves in Do- 
 minion notes, five hundred dollars per day. 
 
 (3) For an over-issue of circulating notes. (These penalties have 
 already been referred to.) 
 
 (4) For violating any of the provisions of the Act relating to the 
 securities on which money can be lent, or to real property acquired, or 
 mortgages thereon, for each violation a penalty of five hundred dollars. 
 
 (5) For not sending monthly returns in proper time, fifty dollars 
 per day. 
 
 (6) For not sending any sj:)ecial returns required by the Minister 
 of Finance, five hundred dollars per day. 
 
 (7) For not sending list of shareholders annually at the time ap- 
 pointed, fifty dollars per day. 
 
 (8) For not sending list of unpaid dividends, unpaid balances and 
 unpaid drafts, fifty dollars per day. 
 
 The two clauses which follow impose penalties upon directors or 
 officers of the bank. 
 
 (9) For declaring any dividend which impairs the paid-up cap- 
 ital of the bank; all directors who knowingly concur therein shall be 
 jointly and severally liable therefor as a debt due to the bank. 
 
 (10) P^or giving a fraudulent or unfair preference to a creditor, 
 or for wilfully making any false return or statement of the affairs of 
 the bank, the parties who have prepared or signed such statement shall 
 be liable to imprisonment for a term not exceeding five j'cars, and shall 
 
 pothecs of variously described articles of merchandise, respeetingr the interpre- 
 tation of which lawyers and judges have held and are likely to continue to hold 
 different opinions. 
 
 It is to be noted that the actions hedged round by such extraordinary pro- 
 visos and penalties are such as must occur repeatedly in any single day's busi- 
 ness, when the movement of the crops is actually going on. Yet the penalty is 
 for each separate act, which, it has been contended, means the payment of each 
 check. The whole spirit of these clauses would imply that the lending of money 
 for the purchase of agricultural produce is a very suspicious business, fraught 
 with danger to the community, and to be jealously watched by the Government. 
 It may be said, and probably has been said, and will be again, that a banker can 
 easily keep himself safe by not lending money under these clauses; in fact, he need 
 not lend money to move the crops at all unless he pleases. This is easy to say; 
 but in so saying it is forgotten that the warehousing clauses of the Bank Act 
 were devised by Parliament for the very purpose of facilitating these operations 
 of commerce which, more than any otheis, promote the prosperity of the coun- 
 try; viz., the marketing, transporting, and exporting of its crops and produc- 
 tions. The "moving of the crops" as it is technically termed, including the 
 productions of the forest, sea, and mine, is universally recognized as the foun- 
 dation of all the other industries of Canada. 
 
 Now, if the clauses of the Bank Act that were expressly framed to enable 
 the banks to promote this are so hedged about by provisos and penalties, that 
 bankers cannot act upon them without great risk of being heavily fined, it is 
 obvious that both clauses and penalties need reconsideration. There is the more 
 reason for the latter in the fact that all the dubious clauses relate to the se- 
 curity for loans of money, a violation of which carries its own penalty in the 
 forfeiture of the security. 
 
 This forfeiture can be enforced by ordinary process of law, and renders ar" 
 special penally unnecessary. 
 
BAXKIXG ACT OF CANADA. SOI 
 
 be responsible for all damages sustained by any person in consequence 
 thereof. 
 
 The above penalties are all applicable to a bank in its corporate ca- 
 pacity, or to one or more of the officers. But the Act provides for penal- 
 ties applicable to offences by other persons, thus: 
 
 (1) For issuing any ])ill or note intended to circulate as money 
 four hundred dollars. 
 
 (2) For using the title of bank, or banking company (or the like 
 cor))ornte words), without authority from this Act^ a fine of one thou- 
 sand dollars, or imprisonment for a term of not over five years. 
 
 (3) For defacing any Dominion or Provincial note, a penalty not 
 exceeding twenty dollars. 
 
 Such it* the Banking Act of Canada, which, though not without de- 
 fects, is nevertheless by general admission an admirable compendium 
 of what is necessary and desirable for a banking corporation to be per- 
 mitted to do, or to be prohibited from doing. 
 
 The Act aims to include within one statute all necessary legislation 
 on the subject except that relating to promissory notes and bills of 
 exchange, which are dealt with in a sejiarate act. The banking legisla 
 tion of Canada is the final issue of much consideration from many quar- 
 ters and much discussion of opposing views and theories during a long 
 series of years. It is, in its main features, and in much of its detail, 
 especially adapted to the circumstances of Canada as a country of varied 
 productions, various lines of business and manufacture, and of a high 
 stage of industrial development. 
 
 But some of its clauses bear evidence of the prevalence of theoretical 
 views as opposed to those that are practical, and have doubtless been 
 insisted upon by parliamentary or governmental doctrinaires, in opposi- 
 tion to those who have practical knowledge. 
 
CHAPTER XXXJ'I. 
 
 FINANCIAL PANICS AND REVULSIONS IN ENGLAND AND 
 THE UNITED STATES. 
 
 Panic of 1825 in England — Revulsion of 1838-39 — Crisis of 1847 — 
 Financial Collapse of 1Sj7 — Panic of 1866 in England — Les- 
 sons to be Learned. 
 
 FEW events are at the same time more disturbing to read of and 
 yet more instructive than the narrative of the panics and re- 
 vulsions M'hich during the last century troubled the financial world. 
 They are worthy of cartful study for two reasons: On the one 
 hand to restrain the ardent and sanguine-tempered from proceeding far 
 in a course which will inevitably end in disaster; and on the other to 
 prevent the men who are pessimistically inclined from mistaking passing 
 clouds of trouble for such symptoms of disturbance as usher in a finan- 
 cial storm. Jt is by carefully noting these events of the past that a man 
 of financial, responsibility can steer a safe course in the present and avoid 
 cither rashness or pessimism. 
 
 In this chapter a brief summary will be given of several of the more 
 important of these reverses, consideration of which will well repay perusal 
 even now. For if we go back as far as the vear 18'25, we shall find our- 
 selves in a condition of things remarkably like what has prevailed in 
 later times; and the warning lessons of this panic will be found perti- 
 nent at the present day. 
 
 Drawing somewhat on the account given of the events preceding and 
 accompanying these panics by authorities like Gilbert and McLeod, and 
 to some extent from ray own knowledge, we will begin with a notable 
 panic in England. 
 
 The Panic of ISS.*) in England. 
 
 After several years of prosperity, clearly indicated by the amplitude 
 of the stock of bullion in the Bank of England, the Government de- 
 termined upon the reduction of the interest upon nearly a quarter of the 
 natioiial debt. This vast operation had a very considerable iuHuence in 
 curtailing the incomes of many ))crsons who could ill afford it. and pre- 
 pared them to look out for more profitable investments. Just at this 
 period the long contest between Spain and her South American Colonies 
 had now finally terminated in favor of the Colonies. The recognition 
 of the independence of the South American States and ^fcxico apparently 
 opened out a boundless field for the consumption of British manufactures, 
 and a spirit of speeuhition ra))idly rose, influenced by visions of countless 
 wealth io be extracted from gold and silver mines. Immense schemes 
 were formed for working these mines with British capital. 
 
 Besides this, the long struggle for independence had inspired the 
 
 302 
 
PANICS IN ENGLAND AND THE UNITED STATES. 303 
 
 British people with sympathy for the juvenile republics i)olitic'ally con- 
 sidered, and when they wanted to borrow money to support their credit, 
 British people were only too eager to lend it. It is alleged that in these 
 two ways <£ 150,000,000 of British cajiital was placed in Mexico and 
 South America, much of which was lost. The speculation in mines 
 speedily developed into a mania, and let it be noted that those were all 
 in a trans-Atlantic country, leading to immense exports, the greater 
 part of nhich were never paid for. In all these speculations only a 
 small installment, seldom exceeding five per cent., was j^aid at first, so 
 that a very moderate rise in the price of the shares produced a large profit 
 on the sum actually invested. All the gambling propensities of human 
 nature were therefore urged into action, and crowds of individuals of 
 every description hastened to venture some portion of their property (by 
 way of margin) in schemes of which scarcely anything was known except 
 the name. As a natural consequence the. prices of many other commodi- 
 ties doubled and tripled. 
 
 This is a most significant point, for it is a fact that there is never 
 so much buoyancy, and such mutual congratulation, as in the period be- 
 fore the bursting of financial storms. 
 
 The speculative fever was at its height in the first months of 18i25. 
 But the enormous absorption of capital that had taken place had made 
 money scarce and dear. And that ominous symptom, the steady decline 
 in the bullion in the Bank of England, had begun to be apparent. In 
 January, 1824, it amounted to .€14,200,000. In July to £11,800,000. 
 By January, 1825, it had fallen to £.9,500,000. Yet even the Bank of 
 England itself failed to read the signs of the times, and went on dis- 
 countins; as usual. It Avas not until the bullion was reduced to £6,500,000 
 that it took measures to stop the drain by curtailing its discounts. But it 
 was too late. That measure ought to have been taken six months earlier. 
 As it was, enormous commitments and engagements, made in the time 
 of inflation, had to be carried out. The drain, therefore, went on. In 
 July the bank had only £4,170,000 of bullion wherewith to meet all 
 the engagements to note-holders and depositors. This was reduced to 
 £3,150,000 in October and to £3,012,000 in November. Then the storm 
 burst. 
 
 Thfire can be no wonder that a panic prevailed, for the drain had 
 gone on until theri--* was actually less than £1,500,000 of specie left in 
 the Bank. A few days more, and the Bank itself must have suspended 
 paj'ments in specie. Gold would then have gone to a premium, as it had 
 done during the wars with Napoleon, and a universal dislocation of busi- 
 ness and general insolvency have ensued. 
 
 The one marked feature of this crisis was the large number of 
 Banling failures that it brought about. First came the stoppage of a 
 great bank in Ph'mouth. Then followed a greater collapse still, that 
 of Wentworth & Co. of Yorkshire. The London banking house of Pole 
 & Co. was also forced to succumb. The Bank of England had lent them 
 £300,000. but this was of no avail. Pole & Co. were agents of no less 
 than forty country banks, and their fall was the signal for a general run 
 upon the London banks, several more of which gave way, spreading uni- 
 
SOi BANKING AND COMMERCE. 
 
 versal consternation amongst the country bankers, sixty-three more of 
 ■which succumbed. Shortly after the cessation of the panic gold began 
 to flow in from abroad, and confidence to be restored. 
 
 The panic ceased -when it became evident that the Government 
 would stand by the Bank of England, and the Bank by the country. 
 
 But the events whicli had taken place had important consequences, 
 one of which was the rlopj^ng of all further issues of one-pound notes 
 by the Bank of England; and another the beginning of the agitation for 
 the abolition of its banking monopoly, and the establishment of Joint- 
 Stock Banks. The first measure was founded u))on a delusion, as might 
 have been seen had men cast their eyes towards Scotland. There had 
 been no panic and revulsion there, nor any circumstancs leading up to 
 it. Yet one-pound notes were the universal medium of issue, as they 
 have been ever since. And although there have been two failures of im- 
 mense magnitude amongst Scotch banks since then, in neither case was 
 the. Jisaster attributable to the note issues. In both cases, in the sphere 
 where one-pound notes are most in evidence as the medium of business, 
 that is, in the country branches, the business of both banks was in a 
 sound condition. 
 
 During the debate on this subject in Parliament, no less a person 
 than Sir Robert Peel expressed the opinion that if the Scotch system of 
 banking had prevailed in England in 179" and in recent years, no such 
 calamities would have happened as those they were discussing. He 
 seems, however, to have entirely forgotten this in subsequent years. 
 
 Panic of 1838-39. 
 
 The revulsion of 1838-39 may be passed by briefly, as it presented 
 features in no essential respect differing from those that preceded it, 
 and those which followed. It took its rise largely from the enormous 
 railwav developments of the period, leading into the passing of millions 
 of floating assets into a f.red form, ycilding no remuneration for many 
 years. It was preceded as usual by a steady and continuous drain of 
 gold. In December, 1838, the Bank held of bullion £9,790,000. In 
 May, 1839, this was reduced to £4 J 17,000; in July to .£2.980,000, and in 
 September to £2,400,000. Yet it can scarcely be credited that up to 
 ;May the Bank went on making advances as if matters were in a normal 
 condition. 
 
 This revulsion, however, I pass by. Those that succeeded are more 
 interesting to us, for two reasons: They all aff'ected both the United 
 States and Canada, and they are more near the events of our own times, 
 and tluTcforc carry more pregnant lessons. 
 
 The Crisis of 1817. 
 
 Though this crisis acted with great severity on the United States 
 and Canada its chief force was felt in England. So far as Canada was 
 ooncerned, it liad been preceded by the adoption of a trade policy in 
 England, which had, for a time, ruinous eftects on Canada. Sufiicient 
 opportunity for preparation had not been given. It was largely owing 
 
PANICS IN ENGLAND AND THE L'NITED STATES. 305 
 
 to this that the crisis of 1847 was so severely felt. Montreal was pros- 
 trate under the heavy blows inflicted on her prosperity. Banks made 
 heavy losses. The Bank of Montreal lost all its reserved fund. All 
 Canada M-as more or less affected, but it was in the commercial capital 
 that closed warehotisis and quiet wharves testified for years how severe 
 had been tlie blow. 
 
 The panic of 1 817 came about in England in this wise. During the 
 years 18ir;-l6, a perfect fever of Railway construction had been de- 
 veloped all over Great Britain, and the amount of money drawn for this 
 purpose from the floating funds of banks and the community gradually 
 mounted up to enormous sums. Railways were supposed to have within 
 themselves a certain guarantee of inexhaustible future wealth, and Parlia- 
 ment was besieged Avith applications for new schemes. Prices of shares 
 were continually on the rise, and for a time everything was on the 
 ascendant. Mercantile business became inflated, for everybody found 
 themselves rapidly getting rich. And many bankers were carried away 
 with the excitement and fostered it by free discounting. A high style of 
 living- was entered upon by many people, and establishments created; 
 a perfect type of which was found in the career of George Hudson, the 
 great railway promcter and operator of those times. A few years be- 
 fore he had been pursuing a quiet business as a draper in the city of 
 York, and living in a style corresponding to the position of a shopkeeper. 
 But in 18i6 we find him a railway magnate, occupying a splendid man- 
 sion overlooking Hyde Park in Eondon, and entertaining the nobility of 
 the land. All tliis was based upon the rise in railway shares and was 
 kept afloat by masses of bills incautiously discounted by bankers and 
 discount houses. All commercial transactions became infected with un- 
 soundness and an extraordinary number of persons became entangled in 
 obligations of which there was no prospect of their ever working free. 
 These were the conditions precedent to the great collapse; and I 
 know they are correctly described, for I was in England at the time 
 ind an ej^e- witness of them all. 
 
 The first sign of the break-up occurred in the grain trade. In the 
 month of August, 1817:, great houses in this line of business began to fail. 
 The first had liabilities of £:)00,000. Other firms followed; some failing 
 for £300,000, some for £400,000. One failure resulted in another, 
 and by the end of the third M-eek the failures amounted to £3,020,000. 
 The circle of disaster now widened and spread through all branches of 
 business, until the total amount within a few months reached the enor- 
 mous aum of £15,000,000, a sum fully equivalent to twice as much at 
 the piesent day. 
 
 So far with regard to merchants. Then came the turn of the 
 bill discounters and the banks. In was in September that the first 
 note was struck by the failure of a large firm of bill discounters in 
 London. Early in October the Royal Bank of Liverpool succumbed, 
 amidst tremendous excit(?ment. The failure of the Royal Bank was fol- 
 lowed by the stoppage of the North and South Wales Bank. (This Bank 
 resumed business, and is in high credit now.) The Liverpool Banking 
 Company and the Union Bank of Newcastle then followed. Heavy runs 
 20 
 
S06 BANKING AND COMMERCE. 
 
 also took place on other banks, leading to failures in Manchester and in 
 the West of England. 
 
 The Bank of England had rendered assistance during this period 
 of alarm, notwithstanding the fact that its supply of bullion was rapidly 
 being drained oft". But the time Avas coming when it was necessary for 
 the great Bank to look after itself. By the operation of the Act of 184'4, 
 a large part of the gold owned by the Bank was locked up in the issue 
 department, as security for its notes, and was utterly unavailable for the 
 claims of depositors and discounting customers. Ordinarily the Bank 
 had rbundant resources in bullion for all banking purposes, but, for more 
 than a year back its bullion had been steadily decreasing. By the end 
 of October it had been reduced to such an amount as to render it impos- 
 sible to go on with its business. Tlie bank could not even increase the 
 issue of its own notes; it could not obtain them without paying in gold 
 to the issue department, while for that department to issue them except 
 on gold paid in would have been to break the law. Yet something must 
 be done, or the Bank would stop payment. The Bank therefore had 
 no resource but to appeal to the Government, and at length the force 
 of circumstances compelled the Government to suspend the Act, and 
 allow notes to be issued (they were legal tender, let it be borne in mind) 
 without a covering of gold. 
 
 When the Government intervened, the panic passed away as had 
 that of 1825 for the same reason. Business gradually resumed its ordi- 
 nary course. But one of the most important consequences of the revul- 
 sion was to dissipate the idea that the act of 1841 could be relied on to 
 prevent panics. The whole banking interest of the country, with few 
 exceptions, had shared this delusive idea, and conducted their operations 
 as if, since the passing of the Act. nothing was to be feared from im- 
 prudent banking, so long as the Bank of England stood. Bankers in 
 England, even at that late date, had yet to learn that no legislative en- 
 actments can prevent continued violation of sound banking rules from 
 being followed by disaster. 
 
 But other revulsions were to happen before a right understanding 
 was arrived at, with regard to bank issues; and nothing is more re- 
 markable than the misconception that pervaded even the mercantile and 
 banking world of London with regard to this matter. 
 
 TiiK Reviti.sion of 1857. 
 
 The events of this terrible financial revulsion came very close home 
 to us on this side of the Atlantic, for, as some now living can remember, 
 it swept like a tornado over the United States, and passed as a deadly 
 blight all over the western portions of Canada. 
 
 Respecting England, there had been a heavy war ex)>cnditure in 
 the Crimea, and as is often the case, a development of extravagant living 
 attending it. A general spirit of buoyancy pervaded the community. 
 
 The Bank rate in August, 1856, was seven and eight per cent., a 
 very high rate for England. An enormous amount of accommodation 
 bills was set afloat in the community, and even the Governor of the Bank 
 of England observed not long before the panic that things were hopef'il 
 and satisfactory. Yet from June, 1855, to December the stock of bullion 
 
PANICS IN ENGI.AND AND THE UNITED STATES. 307 
 
 had gone down from £17,">00,000 to ,€10,300,000; and there were signs 
 of the times whicli sage financiers were carefull}^ noting from day to day, 
 and from Aveek to week. The bullion in the Bank was only of moderate 
 amount at best. During the period of extravagant living, there had been 
 heavy importations of Eastern luxuries as well as an immense increase in 
 ordinary importations from thence. These caused an abnormal accumula- 
 tipn of debt to that quarter, which could only be satisfied by shipments of 
 specie. Accordingly, a ^Million pounds sterling was taken from the re- 
 serve of the Bank for shipment to the East. This was the beginning of 
 the diminution in the Bank's stock of banking specie which went on until 
 it was nearly all exhausted. 
 
 The great centre and source of disturbance, however, was in the 
 United States. 
 
 After several good harvests and immense railroad development, 
 largely financed on money borrowed from abroad, but partly on dis- 
 counts at home, the usual era of extravagant expenditures set in. Follow- 
 ing on this came the bad harvest which prevailed over the United States 
 and Canada. The first note of distress, as I well remember, came from 
 Ohio. 
 
 On August 25th the Ohio Eife and Trust Company with deposits to 
 the amount of .ffi.OOG.OOO stopped payment. Tliis created a panic which 
 rapidly spread throughout the Union. Discount rose to eighteen and 
 twenty-four per cent. The extraordinary number of 150 banks in Penn- 
 sylvania, Maryland, Virginia and Rhode Island stopped payment. On 
 October l.'Uh a general run took place on the New York banks. Eighteen 
 immcuiately stopped; and soon afterwards, out of sixty-three, only one 
 maintained payment in specie. 
 
 A perfect avalanche of mercantile failures resulted from these stop- 
 pages and other causes and for months together several columns of the 
 New York papers were occupied by lists of firms that liad become bank- 
 rupt. Nothing like it had been known before; nothing like it has trans- 
 pired since. We used to read these lists in Canada with very serious 
 uneasiness, for at that time the old Reciprocity Treaty was in force, and 
 our exports of Lumber and Grain caused large masses of bills to be drawn 
 on United States firms. Whetlier these bills would be paid or not, was a 
 matter of daily anxiety to Canadian exporters and their bankers. 
 
 The depression continued for two or three years, during which there 
 was the severest weeding out of weak firms and weak banks that had ever 
 been known; accompanied also by an exercise of personal and domestic 
 economy so general as to produce a heavy diminution of imports, and a 
 restoration of sound methods of giving and taking credit. 
 
 Passing back to England, the course of affairs may be briefly sum- 
 marized f.s follows: 
 
 (1) The events in the United States first reacted upon Liverpool 
 and Glasgow, then, as ever since, very closely connected with American 
 firms. The Western Bank of Scotland failed; naturally enough, for it 
 had been scandalously mismanaged. The Borough Bank of Liverpool 
 also failed. 
 
 The City of Glasgow Bank suspended temporarily, but was able to 
 
808 BANKING A.ND COMMERCE. 
 
 resume; the most rem.-irkable tiling about which is that its Directors were 
 blind to this sharp lesson, and twenty years afterwards perpetrated the 
 most astounding series of follies and "frauds ever heard of in the history 
 of banking. 
 
 (9.) London was first disturbed by the tremendous depreciation in 
 American securities of all kinds, but ])articularly Railways. These had 
 l>een carrying on an extravagant style of management, for years; and 
 paying dividends, — practically. — out of ca])ital. Some eighty millions 
 sterling of American railroad stock was held in England, and the effect 
 of dej)reciation was far-reaching. 
 
 (3) Jn October failures began \o increase in the country. Alarm 
 spreid in all directions when it was announced that the great mercantile 
 house of Dennistoun and Co. of London had succumbed, followed a few 
 days ?ftcr by the failure (for the second time) of one of the largest dis- 
 counting houses of Londjn, Sanderson & Co. 
 
 All this time the bullion in the banking department of the Bank of 
 England was draining off, and it went down until on. November 12 the 
 amouTit of gold held by the banking department was only £'358,000. The 
 whole of the remainder was locked up in the issue department and held 
 for the notes. Yet, holding only this sum of less than £400.000 against 
 the mass of its deposits, the Bank was struggling on from hour to hour. 
 The London banks alone, at tliat date, had balances in the Bank of Eng- 
 land of more than five millions, and could have closed it up at once had 
 they pleased. Of course, it would liave been madness to do it. But they 
 themselves might l-.ave been compelled any day by the claims of their 
 country correspondents to draw out the whole of the gold in the vaults 
 of the Bank.*^" It is well known that this panic was stopped, by the 
 S'.'.spension of the Act of 1844; the second demonstration of the unwisdom 
 cf the idea that the Act would bring about a wiser course of financing and 
 l^revent panics altogether. 
 
 Turning now to Canada, we are confronted with a condition and 
 development of a higli degree of instructive interest. (The description 
 which follows is from my own knowledge.) During 185.") and 1856, the 
 country had enjoyed a period of remarkable development, in two ways: 
 the harvest of both years had been singularly abundant; and the price, 
 owing to the Crimean War, phenomenally high: wheat having been worth 
 from a dollar and a half to two dollars a bushel. The total value of each 
 of those harvests was equal to three or four average ones. The con- 
 sequence was a phenomenal expenditure u})on land, in the shape of new 
 clearings, buildings, barns and improvements. This was accompanied by 
 a heavy rise in the nominal value of lands, both cleared and wild. Nat- 
 urally following upon this, was an extraordinary impetus to the trade of 
 the towns, and a heavy rise in the value of town, city and village property. 
 
 Along with this^ came the immense expenditures connected with the 
 building of the C'rrand Trunk Railway. Never had such an outpouring of 
 money been known in t!ie quiet country towns and cities of Western Can- 
 
 82 One of the mnst noticoable things in the management of the BanVc of Eng- 
 land at that time Is an apparent obliviousness to the claims of depositors. If 
 any question arose, it was always this — Have you enough money to go on dis- 
 counting? never — Have you enough to pay demands of depositors? 
 
PANICS I\ ENGLAND AND Till: UNITED STATES. 309 
 
 ada; and never was tliere such extravagant expenditure and speculation. 
 Clianipngne flowed like water, and a style of dress and manners was 
 introduced that the country had never before known. 
 
 Land speculation gradually increased until it became rampant. It 
 took two distinct forms. The first related to vacant lots within towns 
 and cities, and their suburbs. The outskirts of every little town were 
 surveyed, to a considerable distance, and laid out into streets, and building 
 lots; all with the idea of an immense influx of population and business. 
 The village of one thousand was to become a town of ten thousand ; the 
 town of five thousand, a city of fifty thousand, — while Toronto, the seat 
 of Government, was to become a citj' rivalling New York. A similar 
 impetus was given to Farm property. As to property in wild lands, its 
 owners could set no limit to what they considered its value, — for at almost 
 every cross-roads in the country, often in the bush itself, surveys had been 
 made for a future town or citj'. In Toronto nightly sales were held of 
 lands where these future cities were to be located ; the auction room being 
 decorated with plans and pictures of future Town Halls, Banks, and 
 mercantile stores and offices. As to farms adjacent to cities, whose area 
 had been surveyed for streets and lots, the speculation in these was simply 
 fabulous. The farmer was tempted to sell the whole to some speculator 
 at a price that yielded him a little fortune. But the speculator on dividing 
 the farm, would get a thousand lots out of it, each of which, he was will- 
 ing to sell for a hundred dollars. These sales were made on credit spread 
 over ten years of time ; mortgages and promissory notes being given to 
 represent the debt. But the purchasers of the lots did not want them; 
 they sold them again; a fresh crop of mortgages and promissory notes 
 being the result at higher figures until, as an eye-witness has described it: 
 
 "The simple hundred acres has been so manipulated, such convey- 
 ances and promissory notes have clustered round it, that the very cost of 
 conveyancing has become more than the real value of the land. 
 
 "Carry this over a wide area, appl}' it to every town, city and village 
 in the Western Province of Canada; conceive, too, of all business infected 
 with the same inflation, of an enormous mass of dealing on credit in all 
 manner of extravagan.ces ; of people here and there fancying themselves 
 so rich as to make preparation for retiring to England and living on 
 their estates — and avc have a perfect picture of the Canada of 185.5, 1856 
 and part of 1857." 
 
 Tliis picture, let us say, would be just as true of considerable por- 
 tions of the Western States at the same period. 
 
 But h^t us pass oti and note the turn in the tide: 
 
 "The harvest of 1857 was a bad one. We had little to export, yet 
 cnorn\ous importations had to be paid for. Money became tight. Banks 
 grew suspicious. Lots ceased to be in demand, an unusual thing, and men 
 could hardly realize it. 'Men clung with tenacity to the idea that no matter 
 what miiiht transpire in mercantile circles, land must go on increasing in 
 value. But the logic of facts at length dispelled the delusion. 
 
 "There was a giadual bearing down through the latter end of 1857, 
 all of 1858;, 1859 -irid I860. During these years failures became more 
 and more numerous. Men that had fought against adversity bravely in 
 1857 and 1858 were compelled to succumb in 1859 or I860, after carry- 
 
310 NANKING AND CO^rMr:RCE. 
 
 ing for years a load of obligations. There were, indeed, instances where 
 failure ultimate!}' overtook men so late as 1S63 and 186i, the seeds of 
 which were sown in the revulsion of 1857."''^ 
 
 "If a man had been away from the country during the interval and 
 retur/ied. he could not fail to be struck with an extraordinary change. 
 Numerous shops are closed. Numbers of empty houses are to be seen. 
 Newspapers are full of notices of sales of lands for taxes. If he meets 
 a friend of former years, whom he knew as a successful speculator, and 
 begins to talk, as before, of lands and lots, he finds it to be a tabooed 
 subject. His old friend has gone through terrible exiDcriences. He has 
 sued and been sued; and has found that while liabilities are tangible 
 realities, assets in the shape of instalments on land purchases, were a 
 mockery and delusion. 
 
 "His mortgages, if he foreclosed, left him only the owner of thou- 
 sands of acres of bush and swamp ; unsaleable, yet liable to be taxed. He 
 had brought numbers of suits, but got practically nothing. But others 
 had sued him; and taken his house, his furniture, his bank stock, and all 
 he had in the world. Worse than this, he had involved his friends and 
 relatives in the same misfortune, and had alienated, or made enemies of 
 them all. They had endorsed his paper, had been sued in their turn, had 
 vainly endeavored to put off the evil day, but finally had to succumb to 
 the all-devouring fi fa of the sheriff, and the hammer of the auctioneer." 
 
 This graphic description of the revulsion of 1857, in Canada, and 
 the inflation that preceded it, has been quoted for the reason that both 
 are typical. What took place in Ontario took place in Ohio and Illinois.** 
 And what took place in 18.56 to I860, has been repeated more than once 
 in the developments of subsequent years. Every feature of 1857 to 1859. 
 was repeated in the great boom that swept over Manitoba, in 1881 and its 
 collapse ir-. subsequerl years; and on a more limited scale several times 
 since in some of our jirinv'ipal cities. The only difference between these 
 and ]8;"7, was that the area of disturbance was confined to one city or 
 district. 
 
 P.'iXIC OF 1866 IN EXGLAXD. 
 
 It might be supposed that after such severe experiences a whole 
 generation, at least, would pass before another such period could transpire. 
 Yet. far-sighted men, Avithin a year or two after were anticijiating that 
 
 83 It was during this time of reaction that the Bank of Upper Canada, whose 
 failure is referred to elsewhere, was forced to close its doors. The bank had 
 been more closely connected with the landed class of the community than any 
 other institution in the country, and a large portion of its discounts consisted 
 of their obligations, or the obligations of those connected with, or dependent 
 upon them. To some extent the same might be said of one or two small insti- 
 tutions with headquarters in Toronto, which disappeared about the same time. 
 
 84 The revulsion of 1857 swept with peculiar severity over Illinois and the 
 West, and a curious illustration of this occurred in Chicago. Numerous failures 
 there resulted in numbers of mercantile warehouses being left empty. The own- 
 ers of these were glad to have them occupied, even if no rent was paid. The 
 tenant of one of these called on the owner one day and told him he was going 
 to leave the store. "This is rather unreasonable." said the owner, "as I let 
 you have this good warehouse for nothing." "That is very true." replied the 
 tenant, "but I oaii get a much better one than yours for nothing!" 
 
PANICS JX P:NGLAND and the united states. 311 
 
 the horde of specub.t.ors who hover about financial centres would find 
 some means or other of bringing about another era of inflation. But it 
 was not until 1 863-6 1 that they found their opportunity. The law of 
 limited liability had just been passed (a highly beneficial law when used 
 properly), and under its operation immensely increased opportunities 
 arose for the floating of new companies. Up to March, 1861', two hun- 
 dred and sixty-three companies had been formed with a nominal capital 
 of seventy-eight millions sterling. In' connection with these, vast sums 
 in bills were set afloat and discounted by financial houses like Overend 
 & Co. Yet in June, 1 865, the rate of discount was only three per cent. 
 Then the great ojierations began which culminated in the panic of the 
 following year. The Finance and Discount Companies did an enormous 
 business in loans and bills, finding thus the means for the promotion 
 of credit enterprises by wliich fabulous sums of money were locked up, 
 and much of it lost. 
 
 Take the following sample of the ojjerations then indulged in: 
 The London Credit Company has a capital of a million and deposits of 
 two millions. With such means at command, it takes five thous/ind 
 shares in the Financial Association of Paris, (which Association has 
 operations going on in Egyj^t, Turkey, and Russia) ; it loans a large sum 
 to a company to build docks at INIarseilles ; undertakes the construction of 
 a railway on the Dar.ube, and finally has to take the railway itself in 
 payment: puts £200,000 into the building of a public hall in Milan; 
 undertakes works of drainage in Belgium; contracts for the improve- 
 ment of docks on the Thames; subscribes for 1,000 shares in the Bank 
 of China and Japan; and takes half a million of a loan to the Sultan of 
 Turkey. Another company of a similar kind goes more into Central and 
 South American securities, and has money invested in Honduras, Guate- 
 mala, Venezuela, Chili, and Brazil. Another fancies Shipping and 
 Steamship lines. And here it was that the great house of Overend, 
 Gurney & Co. met with the losses that ruined them. By forty years' 
 patient attention to business, a capital of many millions had been accu- 
 mulated by the house. They were Quakers of the very creme de la creme 
 of the financial world, and their credit was unlimited. Their business 
 was as large as that of all the banks of Canada put together. Yet in 
 two or three years^ under the enterprising management of younger mem- 
 bers of .the house, their immense fortune was dissipated in worthless 
 loans. ®^ There never was such a sensation as that which shook the 
 financial world on the announcement of the failure of Overend & Co., 
 JJmited. Their liabilities were over £10,000,000. The ramifications of 
 their business extended all over the world, and the day the failure was 
 made known will long be remembered in London as Black Friday. After 
 this, bank after bank, and company after company, came toppling down. 
 A tremendous drain took place on the bullion of the Bank of England, 
 and had it continued for two days longer the great establishment must 
 have closed its doors. Numbers of financial corporations, however, did 
 
 85 The same condition of things transpired twenty years afterwards with the 
 house of Baring. It had talten half a century to build the firm up. It only took 
 three years for the younger generation to pull it down. 
 
312 BAXKIXG AND COMMf:RCE. 
 
 suspend and were wonnd up. And again the famous Bank Act had to 
 be suspended to prevent the Bank of England from stopping payment. 
 Such are the principal panics and revulsions that have swept over 
 England, the United States and Canada, during the last century. 
 
 Lessons to Be Learned. 
 
 And noW; it may be asked, what is the moral of it all.^ What use 
 is it for the present generation to dwell upon the record of the follies 
 of the past, and their punishment? There are various reasons: but the 
 principal one is, that what has happened before is undoubtedly liable to 
 happen again. It is true that we have not had for thirt}' 3-ears past such 
 stupendous catastrophies over a wide area as those of 1825 or 18o7, but 
 we have had collapses, and reverses quite as severe in a more limited 
 sphere. The Blark Friday of Wall Street, when Jay Cooke & Co. 
 suspended, A'as quite as sharp a crisis as that which followed the sus- 
 pension of Overend & Co., in Lombard Street, and we have had sharp 
 lessons of the same kind since: confined, however, to a limited area. 
 There has been no general break-down of credit, affecting the whole 
 country, and characterized bv the failures of numerous banks and the 
 fall of numerous m.ercantile houses of the highest class, — yet the return 
 of such a convulsion as that of 1857 is quite within the bounds of possi- 
 bility. Therefore the old adage, "Forewarned is Forearmed," has a 
 pertinent application here. 
 
 But what is it to be "forewarned?" No banker can afford to be 
 nervous and disturbed at every change that clouds the financial horizon. 
 The true course is to learn from the events of the past and, with such a 
 chart of past disasters before him, as is contained in this chapter, every 
 banker (and every merchant, too) may ask himself the question: Is the 
 condi'.ion of things now prevailing like that which prevailed before the 
 great break-down of 1857, on this side of the Atlantic, or that of 1847 
 or 1825 on the other side? Is there a great and universal spirit of specu- 
 lation abroad, of a constantly increasing volume, all based on banking 
 credit? Is there a general prevalence of extravagant living (mostly 
 based on credit, too) so general as to lead to unusual imi^drtations of 
 luxuries from abroad? Is there any sign that vast masses of accommoda- 
 tion paper are being set afloat and discounted, unconnected with the 
 ordinary currents of business? Are the resources of the banks steadily 
 falling and continuously keeping below a safe position? These ques- 
 tions are the pertinen!; ones in the case; and, on the answer to them will 
 depend the action that every individual banker may take. 
 
 But it is fortunate that the action of individual bankers will not be 
 tlie determining factcr in the case. In this generation, there has been 
 a remarkable development of the ]irinciple of Association, and the action 
 of one bank upon another, both in the [Jnited States and Canada. The 
 Association of Banks in New York is a great conservative power; so is 
 that of the American Bankers' Association for the whole country; so 
 also is that of the Bankers' Association of Canada, Well-digested ideas 
 of the true methods of banking are much more prevalent than formerly. 
 
 But it must always be with bankers as a body to resist any extensive 
 development of inflation that may threaten to sweep over the country. 
 
PANICS IN ENGLAND AND THE UNITED STATES. 313 
 
 They hold the purse-strings. No matter how wild a spirit of specula- 
 tion may pervade the people, it cannot proceed far if bankers refuse to 
 lend money to foster it. 
 
 The whole fabric that comes crasliing down in times of revulsion is 
 based upon borrowed money. Here is where the banker's power has its 
 scope. There can be no borrowing unless the banker is willing to lend. 
 He holds the key of the position. The final issues are with him; and it 
 is not too much to say that it depends upon bankers alone whether there 
 are to be any more panics and revulsions. 
 
 Thus far, with regard to bankers, and the banking interest. But 
 turning to the great public mIio are apt to be carried away in these times 
 of exciteiLcnt, there can be no doubt that the events recorded in this 
 chapter are well worthy of consideration by them. They are full of 
 important considerations especially for a younger generation of business 
 rnen, and may all be summed up in one pregnant utterance of the wise 
 Solomon: "He that hasteih to be rick, shall not be innocent." It is the 
 hastening to be rich, especially by means of operations foreign to a man's 
 own business, that brings on the fever which deprives men of their senses, 
 and ends in revulsion and ruin. 
 
 And again referring to the philosophy of the wise man of Judea, 
 it is labor that brings the profit that lasts. To labor in any one of the 
 employments developed in these advancing times, so as to be of service 
 to the community, is the true vocation of man upon earth. Such labor 
 is always interesting; sufficiently exciting, and generally profitable. And 
 if wealth by this process is only built up slowly, it is universally the case 
 that there is satisfaction in the spending of it, and a good chance to 
 conserve it safely to the end, and bequeath it to those that come after. 
 
THE AUTHOR'S EXPERIENCES 
 IN FIFTY YEARS OF BANKING 
 LIFE IN ENGLAND AND CANADA 
 
With Sheffield BankiiiK Company. 1H40 to 1S51. With Bank of Toronto as 
 
 accountant and manancr. 1856 to 1«76. (ienoral ManaReT of 
 
 the Merchants Hank of Canada. 1X77 to I'XIi. 
 
CHAPTER I. 
 
 EXPERIENCES OF BANKING LIFE IN ENGLAND. 
 
 Introduction into Banking— Early ExrERiENCEs— Cash Credits- 
 Method OF Dealing with Trade Bills— Troublesome Accounts 
 
 Tkansfer to Head Office— Withdrawal from Banking for 
 
 a Time. 
 
 H 
 
 V^'ING when a boy shown considerable aptitude for arithmetical 
 calculations, it was decided that Banking should be my occupation 
 in life. I entered, therefore, a banking office in Yorkshire, England, 
 at the age of fifteen, being duly indentured by deed, in which I bound 
 myself to serve diligently and faithfully until I attained the age of 
 twenty-one. The bank into whose service I entered, at their Rotherham 
 Branch, was the Sheffield Banking Company, an institution which from 
 the beginning has had a continuance of able and successful management. 
 
 The chairman of the board was a gentleman of independent means, 
 much ffivcn to studies in political economy; well versed in the history and 
 principles of banking, who had himself written a treatise on "Value;" 
 a subject much discussed by political economists from Adam Smith 
 downwards. 
 
 Associated with him M\ns a board of directors composed of men of 
 high standing in the town, most of them in active business in the steel 
 or iron trades. The most prominent of these was a Quaker, a man of 
 considerable means, as will be seen later on, whose distinguished pres- 
 ence, courtly manners, and high intelligence impressed all who came in 
 contact with him. Another director was the head of the well-known firm 
 of Joseph Rodgers and Sons, the great cutlery manufacturers. 
 
 The bank was one of the earliest of the joint-stock banks established 
 after the monopoly of the Bank of England was broken. 
 
 The business of joint-stock banking in England was then in its in- 
 fancy. Not much could be learned from the experience of the Bank of 
 England, whose foundation and methods Mere unsuitable to be taken as 
 models by any ordinary institution. The directors of the newly-formed 
 banks in England had therefore to "feel their way" somewhat; for no 
 such body of trained managers existed as are to be found there at the 
 present day. Nearly all the banking of England, apart from the Bank 
 of England itself, was in the hands of private firms; but their methods 
 were not altogether suitable for a joint-stock bank. The partners in 
 these firms gave daily attendance at the bank, as if they were the heads 
 of a mercantile establishment; and in charge of the office was simply a 
 
 315 
 
316 BANKING AND COMMERCE. 
 
 head clerk, who sat with the rest of the employees. This latter feature, 
 in fact, survived after entirely difl'erent conditions were established; 
 and, in some instances, survives to this day. 
 
 But this head clerk had as a rule no managing powers such as ap- 
 pertain to the modern manager. One of the partners generally signed 
 the name of the firm to all drafts, bills, letters, and documents, and 
 transacted business just as a merchant would in his own counting-house. 
 
 But no board of directors could be expected to carry on the business 
 of a joint-stock bank in this fashion. There was necessity, therefore, 
 to appoint a Manager with signing powers, and also much of the dis- 
 cretion which a managing partner would exercise. And as the chief 
 banks of Scotland were joint-stock companies, and, unlike the Bank of 
 England, were transacting the counnercial business of the country, it 
 naturally came about that their methods were adopted by this new style 
 of banks in England, witli modirieations according to circumstances. 
 
 The joint-stock banks of England, therefore, having no trained body 
 of experts to draw upon, and no accumulated stores of experience for 
 their guidance, had each of them to carry on the business in the best way 
 they could. Their success or failure, therefore, largely depended upon 
 the personnel of the directors; and some of them made lamentable fail- 
 ures. Among the most prominent of these were the Bank of Manchester, 
 the Royal Bank of Liverpool, the Yorkshire District Bank and the West- 
 ern Bank of England; all large and important institutions in their own 
 locality, and all of whose failures were attributable to violations of rules 
 now universally established in banking, but which were then only be- 
 ginning to be evolved from the chaos of ideas on the subject. Others of 
 them, being in the hands of men ^v}lo had made a study of the principles 
 of banking, gradually established themselves in public confidence, grew 
 with the growth of the community and the development of its trade, and 
 are strong and prosperous institutions to this day. Of this latter class 
 the Sheffield Banking Company was one. But it is only right to say that 
 a large measure of this success has been due to the singularly able man- 
 agement of a man, who, entering the bank in a subordinate position, 
 rapidly rose to the highest place, which he retained until his death fifty 
 years afterwards. He became known in time all over England as one of 
 the prominent bankers of the day, and closed his career of exceptional 
 success only a few months before these pages Avere written. 
 
 Such was the bank into whieli I Mas introduced at its Rotherham 
 Branch, as a raw youth at the age of fifteen. This old Yorkshire town 
 was pjirtly manufacturing, and partly agricultural. With its suburbs it 
 had a pojmlalion of about ten thousand (now increased to fifty thousand) 
 and was the seat of iron and steel -works, rolling mills and foundries, all 
 of which in a former generation had belonged to one great firm, whose 
 business had been developed from tl.e smallest beginnings, its founder 
 
EXPERIENCES OF BANKING I. HE IN ENGLAND. r^iT 
 
 being .-i simple blacksmith. They became in time, bankers as well as 
 manufacturers, but their banking business was ultimately converted into 
 a joint-stock company in which form it still continues as one of the most 
 prosperous institutions in the North of F.ngland. 
 
 The heads of the great firm all accumulated fortunes, gradually 
 drew out of the business, and became country gentlemen or partners in 
 London banks, their foundries and rolling mills passing into the hands 
 of men, some of whom had been foremen in their shops, and others clerks 
 in their offices. These men, in their turn, rose to a higher position, and 
 for the most part became the heads of flourishing establishments. 
 
 The banking business of these concerns was divided between the two 
 banks of the town, of which ours was one; and during the eleven years 
 of my connection with the bank, not one of our manufacturing custom- 
 ers failed. 
 
 The town, however, had a fine farming district round about it, and 
 many wealthy landowners and prosperous farmers. One of the largest 
 cattle markets in the North of England was held in it weekly. It had 
 also a considerable corn and cheese trade, as well as flour mills, malt- 
 houses, and breweries. 
 
 The bank therefore had a miscellaneous range of accounts, and dur- 
 ing the period of my clerkship there, I came into contact with men of 
 various occupations, and laid the foundation of experiences which stood 
 me in good stead in subsequent years. For it was the custom in those 
 days for the heads of firms themselves to come in person and transact 
 their banking business, and if they wanted to talk to the manager, they 
 often carried on conversation at the counter. Thus I had the opportu- 
 nity of liearing a good deal which no clerk in Canada ever hears. Men 
 whose names and wares are well known to this day in the United States 
 and Canada regularlj^ came to the counter every Saturday (the great 
 business day of the week) brought their bills for discount, and carried 
 away bags of gold and silver in their own hands for the purpose of pay- 
 ing wages. ^ The bank was a sort of confidential institution in those days, 
 and they would never entrust their busitiess with it to clerks and mes- 
 sengers. 
 
 The manager had no private room. But if he required to have a con- 
 fidential talk with a customer, the board room or his own parlor was at 
 hand. Seldom, however, was there any use of this room (apart from 
 board days) unless when an account was working irregularly. Then the 
 manager would desire an interview with a customer for the purpose of 
 conversing with him. On the result of this conversation would depend 
 whether his checks were to be honored or not; in fact, it might be, 
 "whether he was to continue in business or not. (See note at the end of 
 this chaiiter.)- Flence the room came to be known as the "sweating- 
 room." When then on a busy Saturday it Mas intimated to some cus- 
 
 1 It must be remembered that no bank notes were Issued below five pounds. 
 
318 BANKING AND COMMERCE. 
 
 tomer at the counter that the manager "would like to see him in his 
 room," wc clerks knew very well what was awaiting him. 
 
 Advaxcks by Casii Credits. 
 
 The 7)iodus operandi of the business was largely founded on Scotch 
 methods. Every customer who desired regular advances applied for a 
 cash credit. This, if granted, was worked exactly as in Scotland by over- 
 draft on current account. With regard to these credits, three fixed rules 
 were observed. The first, that they should not exceed in amount one- 
 tenth of the annual turnover of the account. The second, that they should 
 be entirely cleared off at least once in each year. The third, that they 
 should be granted exclusively by the board, and on proper security. The 
 manager could grant no such credit on his own responsibility; though he 
 could discount trade bills. 
 
 His business w%is to see that the advances were kept within the 
 amount of the credit. He could certainly exercise a discretion as to 
 whether checks, which would overdraw it teiuporarily, were to be hon- 
 ored; but this he did on his own responsibility. But any customer whose 
 account was invariably up to the limit'and tending to rise beyond it, was 
 made to feel that his business was undesirable. 
 
 We charged a uniform rate of five per cent, on advances and dis- 
 counts, and a quarter of one per cent, in addition on the debit side of the 
 account. Divided accounts were unknown. Such a thing as obtaining a 
 cash credit at more than one bank was unheard of; and, if attempted, 
 A'ould have been met at once with a request to close the account. 
 
 Sometimes^ however, a casual discount, or the cashing of a check 
 would be offered by the customer of another bank at a distance, and 
 some of the troublesome transactions of the Rotherham Branch oc- 
 curred in this way. 
 
 There was a manufacturing village about four miles off. In this vil- 
 lage were situated the great works of a firm in the })orcelain trade. 
 Sometimes the astute heads of this concern beguiled our branch manager 
 into cashing a check on their London bankers, which check would some- 
 times be refused. And well do I remember being sent over to see these 
 people (living in great style) on one winter's morning before breakfast, 
 to endeavor to obtain pavment of a dishonored check, being expected to 
 be back by the time the bank opened. I did not get the money. And as 
 I had to walk there and back, it was a pretty severe experience. In the 
 same village a general store business was carried on by a very clever man 
 wlio had more ambition than capital; and had created quite a sensation 
 by purcliasing the fine residence and grounds of the Squire, and turning 
 the front of the liouse into a store. This step, however, proved his ruin. 
 His business expenses were now larger; so were those of his family; and 
 he was constantly short of money. He kept his account in the York- 
 shire District Bank, at Doncastcr; but he would occasionallv drive over 
 
EXPERIENCES OF BANKING LIFE IN ENGLAND. 319 
 
 to our town (whicli Avns much nearer) to get a check cashed. This the 
 manager sometimes did for him. The checks were generally paid ; let that 
 be said to his credit. But one day a rumor got abroad that he had failed. 
 This proved to be true; and the manner of it came to our ears a day or 
 two afterwards. His banking account was almost constantly overdrawn. 
 The head office at Leeds, after remonstrating repeatedly with the man- 
 ager at Doncaster, at length ordered him to put into effect a security 
 which they held for his advances. This security was in the shape of a 
 formidable instrument called, I think, a Cognovit, by which they were 
 empowered without notice, to take possession of his stock in trade and all 
 that he had. The manager, having received these peremptory orders, 
 with the Cognovit in his pocket, drove over to the village. On his way 
 he met the unfortunate storekeeper, who was driving over to Doncaster 
 to see him to beg for time to arrange his affairs. The manager, on meeting 
 his customei', merely nodded, and drove on. The storekeeper continued 
 his journey to Doncaster, saw another official of the bank, learned the 
 purport of the manager's journey, and drove hastily back to find himself 
 a ruined man, his store closed up, and an officer in possession. The 
 bankers in the neighborhood generally thought this was rather sharp 
 practice. I think we held a check for some twenty pounds (£20), but 
 the dividend was small, and we lost the greater part of it. 
 
 We had other casual business from people in the neighborhood; but 
 never from people in the town. All their dealings with us were in the 
 shape of credits, duly authorized by the board, and secured. But occa- 
 sionally a person in good credit who did not need regular advances, ■would 
 drop in, and ask for an advance of fifty pounds or so on a promissory 
 note. One of these was a landed proprietor in the neighborhood, a jolly 
 John Bull sort of a gentleman, whose borrowings have stuck to my mem- 
 ory because of his invariable habit of letting his bills be protested. But 
 he just as invariably took them up soon afterwards. He was one of those 
 oddities, so common in England, of whom Dickens's pages are full, and I 
 remember once, on the manager reminding him that his habit of letting 
 his bills go to protest must cost him a good deal of money, his replying: 
 "Oh, I do this on principle. I don't keep any particular account of my 
 bilh-. But when they are protested, I know I have to pay them." 
 
 Method op Dealing with Trade Bills. 
 
 The manner in which trade bills were dealt with was diametrically 
 opposite to that which prevails on this side of the Atlantic. Instead of 
 the bills being submitted to the manager or the board for examination, 
 some of which might be passed, and some thrown out, they were all 
 passed to the credit of the customer by the teller, just as if they were 
 checks or drafts on a bank. This might seem to us in Canada or the 
 United States a very risky mode of doing business; but it was, in fact, 
 nothing of the kind. And for this reason: all the bills paid in to a cus- 
 
320 BANKING AND COMMERCE. 
 
 tomer's credit were made payable in Eondon, and sent up to our bankers 
 for collection. Rarely, indeed, were any of these sent back protested; 
 for, if any customer's bills came back often, he was taken sharply to 
 task, or desired to close his account. 
 
 As to any applications for renewals of trade bills, they were never 
 heard of. If such an ajjplication had been made it would have dam- 
 aged the credit of the applicant beyond redemption. The truth was, that 
 the bank -would keep an account M'ith no man unless his bills were good 
 enough to pass without being first submitted to the manager. Not that 
 they Avere never scrutinized; for they were examined most carefully as to 
 their legality, the sufficiency of the stamps, the regularity of endorse- 
 ments, and so on. 
 
 Another fundamental point of difference was, that ordinaril}' no limit 
 was placed upon the amount of trade bills discounted for a customer. 
 One reason for this was, not only the uniformly high quality of the bills 
 themselves, but for the facility of rediscounting in the London money 
 market. Rediscounting is almost unknown on this side the Atlantic; but 
 it was, at that time, quite common for even the best banks of England 
 to send batches of bills to the great discount houses of London and have 
 the proceeds placed to credit with their own bankers. There was, there- 
 fore, no special reason to impose limits to the trade bills. But very care- 
 ful and exact limits were imposed on tlie loans. 
 
 The system worked well, and the high quality of the business done 
 may be gathered from the fact that the losses of the whole bank rarely 
 amounted to over five hundred pounds a year. I well remember the chief 
 manager once writing me, after I had come to Canada (for I correspond- 
 ed with him until his death), in a vein of low spirits over the bad times 
 they were passing through, and his expressing the fear that the losses 
 of the 3'ear would amount to a thousand pounds ! Yet the bank did the 
 leading business in one of the largest manufacturing districts of England. 
 
 The majority of the accounts in the branch where I served my ap- 
 prenticeship gave very little trouble. Trade was quiet but prosperous, 
 and a failure was a rarity. During the six years I passed in the branch 
 I do not tliink tliere were six failures in the whole circle of our custom- 
 ers. The population and wealth of the town have increased enormously 
 since then. Gas-lighted streets now extend over the suburban country- 
 lanes of my early days. But the characteristic of safe banking still 
 adheres to it. Only a few 3'ears ago, I was once again in the office 
 where my early years were passed, and the manager told me he had not 
 lost £100 a year for seven years back, and had never had a past-due bill 
 in his wallet for more than a week during the whole of that time. Yet 
 the branch had done a very large business, and must have had credits out 
 at all times of hundreds of thousands of pounds. 
 
EXPERIENCES OF BANKING LIFE IN ENGLAND. ;i21 
 
 Troublesome Accounts. 
 
 We had, however, during my time a few troublesome tilings to deal 
 ■with, and part of my recollections are of copying out some of those 
 formidable documents of security already mentioned; and also long lists 
 of the chattels of a customer, whose stock we had taken possession of 
 under one of them. Well do I remember the troubles of that old man as 
 he stood at the counter when "hard up" and begged the manager to allow 
 him to exceed his credit. But he had to fail at last, and we to realize 
 our security. It is interesting to relate how his sons, out of the wreck 
 of their father's business, built up one of the largest manufacturing 
 concerns in the district, and became prosperous and wealthy men, with 
 handsome villas in the breezy suburbs just mentioned. 
 
 ^^'e had during that six years two cases of forgery. One was of a 
 casual customer for whom we had discounted a few small bills, some 
 fifty or a hundred pounds in all. He belonged to the class of half-gen- 
 tleman, half-man of business, of whom we used to have many represen- 
 tatives in the early days of Canada, and some of w^hom I afterwards 
 had to deal with in one of the branches of the Bank of Toronto. 
 
 They were, as a rule, highly honorable men, but given to live beyond 
 their means. But forgery was about the last thing to suspect them of. 
 
 This man, however, who lived with a widowed mother, a lady of good 
 position, had fallen into the terrible temptation to forge bills; and well 
 do I remember the consternation of the family when it was discovered. 
 
 Another troublesome customer (I dwell on these because they were 
 typical cases, such as are known by bankers everywhere) was a large 
 timber merchant, with a good business, very loosely managed. He 
 allowed his customers far too much latitude; and gradually got his books 
 filled with what we would call a mass of "lock-ups." The consequence 
 was he was always short of money. I well remember one day (it was 
 pay day for his men) that he came to the bank as usual, begging for 
 money beyond his credit. On the manager positively refusing, he pulled 
 out of liis pocket a handsome gold watch, and begged for an advance on 
 that! Yet he lived in good style, and occupied one of the handsomest 
 villas in the neighborhood. This style of thing, of course, came to end 
 at last. The bank demanded payment of his account, and notified his 
 guarantors, who were wealthy relatives. They disputed the correctness 
 of our account, demanded proof; and well do I remember the long 
 search over stacks of vouchers, which had been filed away for years, in 
 order to prove the correctness of the final balance we required them to 
 pay. We established our case at length and got our money. He dis- 
 appeared from the scene, and his business was taken up by the manager 
 of his yard, a prudent and economical man, who built up a splendid con- 
 nection and fortune for himself out of it. 
 
 But the long search for these vouchers impressed me strongly with 
 21 
 
S22 BANKING AND COMMERCE. 
 
 one of the drawbacks to the system of advances by overdraft on current 
 account. 
 
 Such were some of my earl}-^ banking experiences, out of which grew 
 object lessons well remembered in after life when I came myself to 
 occupy the position of manager in that far-distant country of Canada 
 to which I had, at that time, as little prospect of going, as I had of being 
 transported to the moon. 
 
 Transfkr to Head Office. 
 
 A change came at length. I was transferred to the head office in 
 Sheffield, and bade adieu to the branch and its associations with little 
 regret; for I was to enter upon a scene of greater activity in an office 
 with an immensely larger number of accounts, where opportunities of 
 gathering experience would be much increased. Besides this, all the life 
 and bustle of a big manufacturing town would be before me every day. 
 In that office I spent the next five years, and came into direct contact 
 with the Chief Manager, of whom I have already spoken, together with 
 a number of men who were my superiors in ability and position. There 
 were three cashiers (or tellers) at the counter, and on busy days four. 
 We had about a thousand active business accounts in the ledgers as well 
 as a considerable number of fixed deposits. The business was active and 
 riourishing even then (though it has immensely increased since), and 
 altogether the change was, at first, decidedly agreeable. 
 
 My work, however, was much more monotonous. In the branch I had 
 to take a hand in everything, except waiting at the counter. In a small 
 way the whole experience of a banking office came before me; and, 
 althougli I did not actualh^ perform the duty of teller, 1 had plenty of 
 practice in assisting the manager to sort notes, count gold and silver, 
 arrange checks and drafts, conduct correspondence, and handle and 
 examine trade bills. The names on some of these I remember to this day. 
 
 But in the head office there was a thorough subdivision of work, and 
 each man did one thing only. I was little better than a junior in age, 
 but was put in charge of one of the current account ledgers, which post 
 I retained until I left the bank. 
 
 It was monotonous work, and at times I fretted over it a good deal. 
 But there was a most important education in handling these ledgers, for 
 they contained the whole of the cash advances of the customers of the 
 bank. Jt was there I learned the position of all the manufacturing 
 houses who did business with us. Many of the names were known all 
 over the world, and are to this day, in the United States and Canada as 
 well as elsewhere. Some of them were wealthy and strong beyond ques- 
 tion, and kept far within the line of credit allowed them. Most of the 
 others were in good position, doing a thriving business on adequate 
 capital. 
 
 But there were a few — a very few, considering the number of the 
 
P:XPERIEXCKS of banking life in ENGLAND. 3;23 
 
 wl)olc — who were evidently short of capital for the business they were 
 doing. These customers were always, financially speaking, "on the 
 ragged edge" of their credit, often wanting to overdraw, often asking 
 for unreasonable concessions, none of whose checks could be cashed 
 witliout reference. 
 
 No system of marking checks "good," was in vogue in the town; but 
 we ledger-keepers were expected to inform the manager when accounts 
 were overdrawn. Tliis, however, was too much like locking the door 
 after the horse was stolen to satisfy so clever a manager as we had; and 
 iifter a time he moved the ledger-keepers to the front of the office (we 
 had hitherto been far away from the counter), immediately behind the 
 cashiers, who were instructed to hand checks to us to be certified for 
 payment. Tliis we did generally from memory, and I think I could 
 without difficulty have made out from memory a fairly accurate state- 
 ment of the debit balances amongst the five luindred accounts in my 
 ledger. 
 
 During the time I was in the head office of the bank the terrible 
 panic of 1 847 transpired. The great features of this panic are treated 
 of in a separate chapter; but it is remarkable liow little it affected the 
 financial and commercial position of Sheffield. No great failure tran- 
 spired in the town, and the only measure of a restrictive character taken 
 by the bank was to Ihtiit the time of the trade bills discounted. Yet 
 London was convulsed with agitation. Great houses were failing every 
 day, as I well remember from the newspapers of the time, and the Bank 
 of England rate of discount rose to ten per cent, before the panic 
 abated. Our manager was one of the country bankers who had stren- 
 uously opposed Sir Robert Peel's currency legislation of 1844. as founded 
 on a mistaken theory. Many of the country bankers had ridiculed the 
 idea that such legislation would put an end to panics, and their con- 
 tention was justified by the event. 
 
 Another event of importance was the failure of the leading private 
 banking firm of the town. This, however, had no connection with the 
 panic. The i)artners had long been the leading people of the neighbor- 
 hood; the head of the firm being a ISIember of Parliament, and the bank, 
 at one time, had nearly all the business of the district. But it did busi- 
 ness in a generous, old-fashioned style, and got its books full of lock- 
 ups and uncoUectable debts. Its downfall was inevitable when times of 
 competition set in; yet the people of Sheffield had great confidence in it, 
 and its deposits and circulation were large. The failure produced im- 
 mense excitement. But there was no run on the other banks. What 
 dividend was paid I do not remember; but I do recollect that we got a 
 large accession of depositing customers and the accounts of public bodies, 
 and also a few desirable accounts of manufacturers and merchants. 
 
 The railway to Manchester was under construction at that time. It 
 was a mere railway from one town to another, as nearly all the railways 
 in England were in their origin. The great combinations which now 
 
324 BAXKIXG AND COMMERCE. 
 
 exist were then untliought of. This road from Sheffield to Manchester 
 is now a part of a great system stretching all the way across England. 
 But it was planned as a purely local road. It cost an enormous amount 
 of money, as it passed through a \ery hilly country. Hardly a mile of 
 it was on level ground. Its construction required an inordinate number 
 of bridges and embankments, and one of the longest tunnels in the world 
 was needed to enable the road to burrow its way through the great moor- 
 lands that separate Yorkshire from Lancashire. Numbers of people in 
 Sheffield had subscribed for the stock who could not afford to take money 
 out of their business for the purpose, and numbers of suits for calls were 
 the consequence, creating much local distress. 
 
 This produced the nearest approach to a real tightness of money that 
 transpired during the whole period of my clerkship. 
 
 Five years of my life thus passed. My work in the bank varied 
 little, yet I was daily becoming more expert in the work of an accountant, 
 and forming habits of thorouglmess and absolute accuracy, together with 
 the power of long and concentrated attention. And I was learning to 
 discriminate between desirable and undesirable customers, and to under- 
 stand how the profits of the bank were made, and how its losses were 
 avoided; all which stood me in good stead in my future career. I was 
 becoming, too, acquainted with the names and character of most of the 
 leading banks in the Northern and Midland counties of England, and 
 heard discussions on their modes of doing business. The great banking 
 firms of London were also constanth' before us, as well as the discount 
 houses and the Bank of England, with whose branch in Manchester we 
 used to correspond. And well do I remember the interest with which on 
 the occasion of a holiday vrsit to London, I strolled up Lombard Street, 
 and went into some of the larger, banks, such as Glyns, Barclays, and 
 Smith, Paj^ne and Smith's, watching with eagerness their crowded 
 counters and rushing business: little dreaming how familiar I should be 
 with Lombard Street at a future day, in a very different capacity. 
 
 Though tlie Sheffield manufacturers did a verj' large business with 
 the United States, I do not remember that we had correspondence with 
 any banks there. ]\Iost of the business was done through Liverpool 
 houses and particularly through the great firm of Brown, Shipley & Co., 
 so well known on this side the Atlantic. Of Canada I knew absolutely 
 nothing. 
 
 Temporary \A'rrHnRAWAL from Banking. 
 
 But at the end of five years circumstances arose wliich made an 
 increase of income absolutely needful; and as there was little prospect 
 of it in the bank, and my health, moreover, being impaired by close con- 
 finement, I sought and found a mercantile position in which I had not 
 only a considerable accession of income, but much employment in the 
 open air. 
 
 Thus, for a time I left banking altogether, having had before me 
 
EXPERIENCES OE BANKING LIFE IN ENGLAND. 325 
 
 the invaluable lesson of an institution conducted on sound and well-con- 
 sidered principles, which led it to a high plane of success; which did in 
 fact, furnish n)e in after days with a model towards which, when the 
 responsibilities of management were placed upon me, I strove to mould 
 the business with w^hich I had been entrusted in the far-off country 
 where my future lot was cast. 
 
 2 Referring to the Quaker gentleman named in an early part of this chap- 
 ter, a very interesting incident was related to me of him, not long ago, by the 
 distinguished chief manager of the bank already spoken of. The incident affords 
 a striking illustration, on the one hand, of rigid adherence to lines of duty laid 
 down, and on the other, of a coincident exercise of benevolence which was char- 
 acteristic of the man. 
 
 A certain firm in the town had risen from very small beginnings (the head 
 of it having once been a workingman) into a position of considerable prominence 
 in its own line of business. The founder of the firm had struggled in earlier 
 years to give his sons a good education; and they, in due time, were taken into 
 partnership. The eldest of these was a man of exceptional intelligence and vigor 
 of character. Under him the business gradually enlarged, their capital grew 
 also to some extent, but not so fast as the rapidly-extending requirements of the 
 business demanded. For they made very fine goods, and had a splendid connec- 
 tion. They, at length, took the important step of erecting immensely enlarged 
 works; and from that time onwards were continually cramped for money. In 
 fact, they were rather in the habit of neglecting the finances of the business and 
 concentrating their attention upon manufacturing. Their account was almost in- 
 variably overdrawn; and I have frequently seen this leading partner waiting at 
 the counter with trepidation to learn whether the checks he had drawn for wages 
 to his men could be paid. 
 
 The account was one, therefore, which, though large and profitable, consid- 
 erably tried the patience of the manager. 
 
 Matters went on in this way for some time, but at length they came to a 
 crisis. Wages in the town were invariably paid on Saturday afternoon; and to 
 pay them was an absolute necessity. On one particular Saturday, the account 
 having for some time been above the authorized limit, the head of the house 
 (for he had become such by this time) appeared at the counter as usual, and 
 presented a check which would swell still more largely the already overdrawn ac- 
 count. 
 
 The manager strongly remonstrated; but the party replied that he must have 
 the money; that he had no other means of getting it, he had no more trade bills 
 to offer, that his wages must be paid that afternoon, in default of which the 
 firm must close their works and be ruined. 
 
 Still, however, the manager was firm. But on being further appealed to, he 
 said, "Come with me to E. S." (the Quaker director already referred to) "and 
 we will see what he says about it." They went accordingly, and had a long inter- 
 view with him. What transpired was this, as the manager told me himself. The 
 director, speaking in the language used by "friends" at that time, said to the 
 customer, "Thou knowest. William, that the bank has given thee a very lib- 
 eral credit, and that the manager has been very indulgent with thee in allow- 
 ing it to be often overdrawn. But he did right to-day, in refusing to give thee 
 what thou wanted. There must be a stop put to this manner of conducting 
 thy account. I cannot, and will not take the responsibility of allowing the credit 
 to be exceeded further." 
 
 Notwithstanding the urgent entreaties o the customer, the director remained 
 firm, and there the interview ended. The manager and the customer then took 
 their departure, the latter terribly downcast; for nothing but ruin was staring 
 him in the face. 
 
 But just as they were turning into the street, the manager heard the direct- 
 or's voi'ce, calling out loudly to the customer, "William Thompson, come back, I 
 ■want to see thee." He accordingly turned back, and the manager waited for him. 
 In a few minutes he rejoined the manager, this time with a smiling face. "What 
 
326 BANKING AND COMMERCE. 
 
 did he say to thee?" said the manager, for he too was a Quaker. "He has lent me 
 a thousand pounds out of his own pocket," he replied. 
 
 This crisis in the affairs of the firm being got over, a better style of financial 
 management was introduced. They were never in difficulties again, and their 
 business went on prospering and developing until they became one of the largest 
 firms in the world in their own line of business, which they are to this day. The 
 head of the firm, the very man who used to stand supplicating at the bank for 
 money to pay his workmen's wages, died a few years ago leaving an estate of 
 over a million sterling, and this after making munificent gifts to the town in the 
 shape of a fine public park, a very large sum for local Improvements, and build- 
 ing a range of noble almshouses for poor widows. His mansion is one of the 
 finest residences in that part of Yorkshire, and in it he once entertained the 
 Prince of Wales. He died lamented by the whole community and has left a 
 name which will never be forgotten so long as the town lasts. But I need not 
 say his name was not William Thompson. 
 
CHAPTER II. 
 
 MY EXPERIENCES OF BANKING IN CANADA. 
 
 Preliminary — First Acqi/aintance With Canadian Banking — Em- 
 ployed EY THE Bank of Toronto — Straightening Out a Branch 
 — Reyulsion of 1857- 
 
 AFTER leaving the Sheffield Banking Company, I entered the em- 
 -^lIl ploy of a large flour miller as cashier and traveller. The pro- 
 prietor had formerly been a railway contractor, from which busi- 
 ness he had retired with a competency. But while carrying on his flour 
 mill, he entered the field of railway construction on this side of the 
 Atlantic; undertaking extensive operations in connection with his partners 
 in New Brunswick and Eower Canada. 
 
 I had charge of the financial department both of his milling business 
 and of the contracts; and was ultimateh' sent out to Montreal, in con- 
 nection with the latter. J now had the opportunity of seeing something 
 of the United States for the first time, and was astonished to see such 
 cities as New York, Boston, Albany, etc., of which, with the usual insular 
 ignorance of a young Englishman, I had formed such inadequate ideas. 
 In Slontreal I remained until his death by shipwreck brought the whole 
 business to a close. During this four years' experience I learned invalu- 
 able lessons, such as I could scarcely have learned in any banking office^ 
 no matter how extensive its business might be. 
 
 First Acquaintance With Canadian Banking. 
 
 It was M'hile conducting the financial affairs of this firm in Montreal 
 that I came into contact for the first lime with Canadian banking. But 
 the methods of a Canadian bank were wholly different from what I had 
 been accustomed to in England, especially in the matter of paying in 
 and drawing out money across the counter; and it was long before I 
 became accustomed to them. The English method, I thought, was much 
 more simple. 
 
 The mode of discounting trade bills was not essentially different, but 
 the method of granting credits was so absolutely dissimilar that during 
 the whole time I had to transact business from the outside of a bank 
 counter I never properly understood it. 
 
 I have discussed the difference elsewhere. 
 
 I learned also while doing business outside the counter, the modus 
 operandi of a style of banking of which I had had no experience before, 
 namely, the negotiation of sterling bills. The whole of the financial 
 arrangements of the firm depended upon this, and I became about as 
 
 327 
 
328 BANKING AND COMMERCE. 
 
 familiar with tlie business then as I was in after years as manager of a 
 bank. 
 
 The head of the firm, however, was lost on the steamship "Arctic." 
 His partners found it impossible to raise the capital for carrying on the 
 great contracts that had been entered on, the Crimean War being then 
 in full progress, and the money market of England clouded over with 
 apprehension. The construction of roads was, therefore, stopped, and 
 a large number of officers of various grades, of whom I was one, Avere 
 throAvn out of employment.' 
 
 I was, of course, by that time well known in ^Montreal. We had kept 
 our account, and a very large one it was, with the Bank of British 
 North America. As the financial manager of the firm, I had become 
 acquainted with men whose names afterwards became prominent in the 
 banking sphere, not only of Canada but of the United States. The 
 assistant manager was Mr. Charles F. Smithers, afterwards well known 
 as Agent of the Bank of Montreal in New York, and subsequently as 
 its General Manager. The chief accountant was Mr. E. H. King, who 
 Avas even then displaying those extraordinary talents for calculation 
 which afterwards distinguished him in the higher sphere of General 
 Manager. Little did I dream at that time how closely I should be asso- 
 ciated with these gentlemen in after life; and especially that it should 
 be my lot to take part, as manager of another bank, in a determined 
 opposition to Mr. King's policy of revolutionizing the currency system 
 of Canada, some twelve years afterwards. 
 
 When the affairs of the contracting firm were Avound up, and being 
 out of employment, my natxiral resource was to fall back upon my own 
 profession, and seek a position in a bank. IMy first application was to 
 Mr. Davidson, who had by this time become General Manager of the 
 Bank of Montreal, and had taken over with him Mr. Smithers and Mr. 
 King. He, however, gave me no encouragement. The bank was rather 
 restricting than extending its business in consequence of the monetary 
 cloud caused by the Russian War. I had obtained an introduction to the 
 President of the Commercial Bank in Kingston, a bank which then stood 
 almost on an equality with the Bank of Montreal in the value of its stock 
 and the business of some of its branches. Well do I remember calling 
 at the bank to present my letter. The bank occupied a splendid building, 
 and all its appointments were very fine. I was courteously received by 
 the President, a distinguished-looking gentleman of the old school; but 
 he gave me the reply, which I subsequently gave myself to dozens of ap- 
 plicants, that they had no vacancy at present, but would place my letter 
 on file and give it attention when circumstances called for it. Of this 
 
 3 In view of subsequent developments it is interesting: to notice what those 
 contracts were. Several of them were for lines that ultimately formed rmt of the 
 Canada Pacific or the Grand Trunk System, but. singular to say, the firm had en- 
 tered into a contract to construct a wagon road, and subsequently a railroad, 
 across the Isthmus of Tehuantepec In Mexico, starting from Vera Cruz, and had 
 sent fiiit a party of sui-veyors to lay out the line. 
 
MY EXPERIENCES OF BANKING IN CANADA. 329 
 
 bank I shall have something to say later on; meanwhile will observe, as 
 an illustration of the changes time brings on, that in that very room 
 M-here I had stood as an applicant for the position of clerk, I stood 
 twenty years afterwards as the General Manager of a bank that had 
 succeeded to its whole business. 
 
 E-MPLOVEn BY THE BaNK OF ToRONTO. 
 
 Meantime I had obtained employment of another character, and the 
 business I had in hand took me to Toronto. At that time there was only 
 one bank that had its headquarters there. I had no introduction to any 
 of its officials, and knew nothing of them; in fact, by this time I had 
 given up the idea of banking altogether. My re-entrance into it was 
 determined by one of those accidental circumstances which, apparently 
 of the most trifling character, sometimes determine a man's whole future 
 career. 
 
 Talking one day with a friend, he incidentally referred to a new 
 hank about to be established in the city, and asked whether it would not 
 be well for me to seek a position in it. He knew some of its promoters, 
 and oft'ered to give me a letter of introduction to one of them. I fell 
 in with the proposal. The letter was given. The party to whom it was 
 addressed, a respectable merchant in the flour trade, referred me to the 
 gentleman who was, he said, to take charge of the bank when it was 
 established. This gentleman was the second officer of the Bank of 
 Montreal in the city. I waited on him. He, however, gave me little 
 encouragement; said the affair was a mere project at present; that cer- 
 tainly a Charter had been got, and subscription books opened in various 
 places. But they were proceeding slowly; very little money was coming 
 in. and he rather doubted whether the project would ever take practical 
 shape. He said all this to me, of course, "in confidence"; for my letter 
 of introduction put me on a confidential footing; besides which I gave 
 him as references the names of first-rate people in Montreal whom he 
 knew. Moreover, he said in the usual way, that he would "bear it in 
 mind." I called again, with the same result, which confirmed me in the 
 idea of abandoning banking altogether. 
 
 A short time afterwards, however, having finished my business in 
 Toronto, I was preparing to leave the next morning, when it suddenly 
 occurred to me (little did I think that that accidental thought would in- 
 fluence my whole future life) that I might as well go to the Bank of 
 Montreal and see this gentleman again. To my surprise I found his 
 tone Avholly changed. He told me tliat matters had considerably pro- 
 gressed lately; that a provisional committee had been appointed, that 
 they had leased an office for business ; that he could offer me the position 
 of accountant, provisionally, and that I might proceed to the office and 
 open the first books at once. The salary offered was moderate enough, 
 as might be expected, far below what I had had in Montreal; but I ac- 
 cepted it as a beginning. A few days afterwards I entered the office 
 
330 BANKING AND COMMERCE. 
 
 in whicli the business of the Bank of Toronto was carried on during the 
 first eight years of its existence. And thus in very humble fashion did 
 I commence my banking life in Canada. 
 
 In the Bank of Toronto I continued twenty years, in the Merchants 
 Bank of Canada twenty-five years more, thus making with my eleven 
 years in the Sheffield Banking Company, a banking life of fifty-six years 
 before I finally retired. 
 
 It was on the twenty-third of March, 1856, that I opened the first 
 book of the bank by entering up the sums received to that date from 
 subscribers to the stock. The whole amount was only some twenty-five 
 thousand dollars. We could do no banking business until ore hundred 
 thousand dollars was paid in; and at the rate at which subscriptions were 
 being paid, it seemed as if a very long time must lapse before we could 
 commence banking. I was for several months alone in the office, con- 
 ducting, however, a large correspondence with subscribers or inquirers, 
 tlie former being mostly requests for instalments to be joaid up as speed- 
 ily as possible. Once or twice I visited localities where subscribers re- 
 sided, very much as a commercial traveller would do, for the purpose 
 of collecting instalments. One day when I was sitting alone in the office, 
 my good wife called for me. Looking round upon the quiet place with no 
 feigns of business visible, she said with true wifely anxiety, "I am afraid 
 this nill never be a bank!" And I more than once thought so myself. 
 
 When a young man in England, a play by one of Dickens's associates 
 was running its course, entitled "Time JVorks Wonders." There never 
 was a more perfect illustration of it than the career of this bank. For as 
 I revise these lines there lies on my table the statement of the bank for 
 the year 1908 which reads as follows: 
 
 Capital paid up $4,000,000 
 
 Rest (accumulated reserve fund) 4,500,000 
 
 Total assets 39,700,000 
 
 From this it appears that its deposits are $26,800,000 and its circu- 
 lation of notes nearly four millions more. 
 
 Who could dream that I, as accountant, was ever employed in that 
 very bank, slowly entering moneys paid in on Capital Account, which 
 £vmounted at that time (18o6) after months of labor, to no more than 
 thirty thousand dollars, and almost despairing that the sum would ever 
 reach one hundred thousand dollars. Time has certainly "worked won- 
 ders" in this case, and illustrated the truth that "Great oaks from little 
 acorns grow"; and also that men should never despise the days of small 
 things.* 
 
 4 But, after all, the growth of this bank is but a type of the growth of Can- 
 adian banking as a whole. One item of this growth can be taken as an illustra- 
 tion of the whole. At the time of which I am writing, the deposits of all the 
 banks unitedly. Savings Banks Included, in tlio whole country now called the Do- 
 minion of Canada, were not more than fifteen millions of dollars. The same 
 Item,— that Is. of deposits of banks of all kinds, together with those of loan com- 
 
MY EXPERTFAXES OF BAXKTXG TX CAXADA. 331 
 
 Subscriptions continued to come in slowly, but towards the middle 
 of summer, strenuous measures were taken ])y the Provisional Commit- 
 tee to work u}) the amount paid in to $100,000 so as to enable the bank 
 to commence business before the great crop movement of the fall season 
 began. Their efforts were successful. The required amount was ob- 
 tained, and the bank was in a position to ojx-n for business. 
 
 Previously to this, however, a very imjiortant step had been taken 
 bv the gentleman chosen as the future cashier. To understand the bear- 
 ing of this, however, it is necessary to go back a little. 
 
 The project of the bank originated with a few men in Toronto and 
 the neighborhood, all of whom were millers or in the grain trade, who 
 took the step because of the utter indisposition of the Bank of Upper 
 Canada to af!"ord facilities for moving the crops and i)urchasing grain. 
 The branches of the Montreal banks were not well affected to this line 
 of business either. They preferred the accounts of wholesale importers. 
 These millers were men of sufficient standing to secure a Charter and 
 start subscriptions. They determined, however, to keep the control of 
 the future bank in their own hands. A well-known and prominent miller 
 was to be President. It was, in fact, often popularly spoken of as the 
 "Millers' Bank." But when overtures were made to the officer of the 
 Bank of ^Montreal before mentioned, he demurred to this feature of the 
 business, and finally stipulated for two things: first, that the President 
 must be a man of independent means and out of business; and, second, 
 that half the remainder of the board should be men connected with gen- 
 eral mercantile business and not with the grain trade. 
 
 The suggestions created considerable commotion amongst the original 
 promoters, for it was evident that some of them, who were looking to be 
 directors, must be passed by. There was, however, no alternative. A 
 president was sought and found of the character described, and several 
 mercantile men cf good standing agreed to accept positions on the board 
 when it was constituted. So, then, when the required capital was paid in, 
 a. meeting^ of shareholders was held, a board and president were elected, 
 the cashier formally appointed, and the bank in July, 1856, opened its 
 Joors for business. 
 
 The bank being now ready for business something, must be said of the 
 men who had to carry it on, both at the head office and the branches. 
 
 The president, as has been said, was a gentleman of independent 
 
 panics (which did not tlien exist), amounts now. according to published returns, 
 to over six hundred millions! In fact, the deposits of the Bank of Toronto alone, 
 at the present date, amount to more than those of the whole of the banks of the 
 country put together when it commenced bu.siness. 
 
 5 At this meeting a very notable statement was made by an old resident of 
 Toronto, the Hon. Henry John Boulton, whose recollection went back to the 
 time of' the founding of the Bank of I'pper Canada. He said that the charter 
 ■of that bank provided that fifty thousand pounds currency ($200,000) must be 
 paid up before commencing business; that the amount had been subscribed, 
 the whole of what is now Ontario warmly supporting the project; but that, 
 when it came to THE PAYING IN OF MONEY it was impossible after the most 
 strenuous exertions EXTENDING OVER THE WHOLE OF UPPER CANADA 
 
332 BANKING AND COMMERCE. 
 
 means. He had been a bank director before — vice-president, I think, of 
 the Bank of Upper Canada — an exceedingly shrewd and capable man, 
 well esteemed in the community, of a cautious temperament; in fact, one 
 of the kind of men who are supposed to have "a bad opinion of every- 
 . body in general." But he was a courteous gentleman after all, and ren- 
 dered most valuable service to the bank. 
 
 The cashier was from the North of Scotland, and had many friends 
 and connections amongst the circle of Hudson Bay Company officers, 
 many of whom became stockholders through his influence. He was a 
 thorougidy trained banker, had gone through the grades in the Bank of 
 Montreal, and was jierfectly familiar with the methods of that bank, both 
 in office management, and in its dealings with customers. He was also 
 familiar with the mode in which its branches were governed. A man of 
 great natural ability, he would no doubt in time, had he remained in the 
 Bank of Montreal, and lived, have risen to the highest position. As it 
 was, it was his influence and that of the president, and the policy they 
 introduced, that enabled the bank to survive the storm which broke over 
 the country with such violence in the following year. 
 
 Had the original promoters been in charge of the bank at that time. 
 I am very sure it would have gone down in the general wreck that ensued 
 all over Upper Canada. 
 
 I must also say a word with regard to the men who were placed in 
 the branches. 
 
 The bank had been established on a principle which sounds rather 
 curious in these days. It being from the first intended to establish 
 branches, a subscription book was placed in the hands of some prom- 
 inent man in various tow-ns of Upper Canada, with the promise that if he 
 obtained a certain amount of stock, he should be appointed agent of the 
 bank. At that time it was quite customary in Canada (as it is now in 
 the country parts of Scotland) for the agent in charge of a branch bank 
 to carr}^ on a business of his own. 
 
 In several towns the requisite amount of stock had been secured; and 
 so it came about that all the branches were at first in charge of men Avho- 
 had no practical knowledge of banking. One was a prominent lawyer, 
 another the sheriff' of the district. Another agent was a country gentle- 
 man, and a fourth a prominent grain merchant. 
 
 to raise more than forty thousand pounds ($160,0€0) and tliat the balance had to 
 be borrowed from the military chest of the Government! 
 
 No general Banking Act existed at that time in Canada. Each bank was 
 constituted by a separate act of Parliament. But the general provisions of these 
 acts were alike, and were largely modeled upon the charter of the banks of the 
 State of New York. (These had owed their origin to the careful elaboration of 
 that most able of all American financiers, Alexander Hamilton.) Many of the 
 provisions of these separate acts are now incorporated in the present Banking 
 Act; but in one point there Is a fundamental difference; that, namely, which 
 provides for securing the circulation. At that time there was no security for 
 circulation at all, the only regulation about it being that it should not exceed 
 the paid-up capital, plus the gold and silver coin on hand. The last provision 
 was no security for the notes; for the note holders had no better claim to it 
 than the depositors. 
 
MV EXPERIENCES OF BANKING IN CANADA. 333 
 
 All these men were displaced as time vent on; and I niijiflit as well at 
 this point tell of the exjjerienee we had with them. The lawyer was a 
 most respectable man, and s])eedily gathered a good connection about 
 his branch. But in less than six weeks his returns — as we call the 
 statements sent by branches to the head office — contained so many mis- 
 takes that the cashier sent me up one afternoon to examine his books. 
 They were in a perfect tangle, and it took me all night, literally, to 
 straighten them out. It was about six o'clock in the morning before the 
 task was finished, and I had to leave at seven to return to town. The 
 agent, of course, was changed at cnee; but as lawyer, he continued to be 
 our confid( iitial adviser in the town, and rendered most valuable service 
 to the bank. 
 
 Our experience with the sheriff was of a somewhat similar char- 
 acter, but on a far more extended scale. He had gathered quite a good 
 business about the office, and his returns and statements were all in 
 order, so far as outward appearances went. But at the end of a year 
 it was deemed desirable to have the branch inspected. The work was 
 undertaken by the president, who took me with him as an accountant to 
 examine the books and cash, while he attended to the discounts and loans. 
 The cash appeared to be all right; but the books did not balance. I 
 spent the day in vainly endeavoring to find a place where a correct bal- 
 ance could he struck, but could find none. It was now evident that a con- 
 siderable amount of examination was before me, and the president re- 
 turned home. The iipshot of the affair was that it took me six weeks of 
 continuous labor, both in bank hours and long after, before the books 
 could be straightened out, some of them having practically to be re- 
 written from the beginning. Of course the agent was changed at once, 
 and the branch placed in charge of a young man recently arrived from 
 Scotland. He had a good bank training there, and was altogether one 
 of the cleverest men I ever met in the banking sphere. 
 
 In the branch of which the agent was a merchant it was found that 
 large advances were being made to his own firm, a state of things that 
 it was utterly impossible to continue. Business by that time had become 
 very cloudv and difficult everywhere; and it was thought on the whole 
 best to close this branch altogether. 
 
 Straightening Out a Branch. 
 
 The branch i^laccd under the charge of a country gentleman very 
 speedih' did a flourishing business; and as he had had some commercial 
 education, there was never anything wrong with his books or cash. He 
 was a man of popular manners, of the "Ilail fellow, ■vvell-met" style, 
 ready and willing to accommodate borrowers of all sorts and conditions, 
 and speedily did bv far the largest business of any of our branches. He 
 made large profits, and for a time it seemed as if we were to be con- 
 gratulated on having secured so active and enterprising a manager. 
 
 But after a vear or two, the fears of the cashier were aroused bv the 
 
334 BANKING AND COMMERCE. 
 
 extraordinary number of renewals that were passing througli the branch. 
 Correspondence followed, and finally the agent had to resign. I was 
 sent to succeed him, and again another task of straightening out fell to 
 my lot, not of hoohs this time, but of business. About this I say some- 
 thing in the next chapter. Meantime I dismiss the agent with the re- 
 mark that, in the process of straightening out, the whole of his profits 
 were absorbed by entries for losses. 
 
 The business of the head office wider the able luanagement of the 
 cashier rapidly developed. We had naturally a good connection amongst 
 men in the grain, flour and cattle trades ; and in addition a few accounts 
 of importing merchants. A share of one of the largest of these also 
 fell to our lot; and was very profitable. So passed the first year, at the 
 end of which we reported good ]n-ofits to the stockholders, and declared 
 a good dividend. 
 
 But at this meeting (July, 18570 another step was taken. There had 
 been a good deal of friction in the board between the old and new ele- 
 ments. And the latter, who had the balance of power, determined to 
 put an end to it by dropping out one or two of the original promoters. 
 The proposal created immense excitement, and I well remember what a 
 stormy meeting ensued. But the president was firm. It M-as really his 
 policy, and the uncongenial elements were replaced by others that had 
 very largely to do with the subsequent prosperity of the bank. 
 Revulsion of 1857. 
 
 Shortly after this the revulsion of 1857'' transpired in Canada, fall- 
 
 6 The revulsion of 1857 affected the United States more severely than it did 
 Canada, and prostrated business in Western cities particularly. The first stroke, 
 as is well known, came from Ohio in the failure of a Trust Company. Chicago 
 suffered as severely as Toronto, and the value of real estate was almost annihi- 
 lated. 
 
 It was while this period of depression was passing over us, that the cashier 
 called me into his room one day and made a rather remarkable announcement, 
 namely, that his father-in-law, Sir George Simpson, had been speaking to him 
 of a project to transfer the headquarters of the Hudson Bay Co.'s business from 
 Fort Gany (Winnipeg) to St. Paul, Minnesota. In connection with this, Sir 
 George's idea was, to establish a bank; and he had suggested that if the project 
 was carried out, he (the cashier) should take charge of it as manager. In that 
 case, the cashier added he would like me to accompany him there as account- 
 ant. 
 
 I well remember his saying to me in this conversation, that there was a 
 "small place, a few miles beyond St. Paul," called "The Falls of St. Anthony." 
 that tho bank would probably, after a time, open a branch there, and that he 
 would give me charge of it. This conversation was, of course, merely entered 
 upon to give me an opportunity of considering whether I would like to transport 
 my.solf and family to such a far-away region as Minnesota then was, in case the 
 project was carried out. However, it never was, owing to the death of Sir 
 George Simpson a short time afterwards. And I do not know that the Cashier 
 would have broken up all his connections in Canada and gone to St. Paul even 
 if it had: or whether I would have accompanied him myself. But I have often 
 since thought of THE SMAI>L PLACE CALLED THE FALLS OF ST. AN- 
 THONY, now the great city of Minneapoli.'?, and wondered what would have been 
 my future, had my lot been cast there. 
 
 With Minneapolis I became very familiar in after years when, as General 
 Manager of the Merchants Bank, I had to supervise extensive loans on warehouse 
 receipts we made from lime to time there. 
 
MY EXPERJENXES OF BANKING IN CANADA. .'iJ5 
 
 ing with terrible severity upon Ontario. The harvest was bad. Money 
 became tight. There was no panic; but a steady bearing down that 
 crushed men with the irresistible force of an iceberg upon an imprisoned 
 ship. The fullest force of the revulsion was felt in Toronto. Our cus- 
 tomers began to fail. To the president and cashier came the constantly 
 repeated and wearv task of interviewing customers in difficulties. To me 
 fell the laborious making out of long lists of protested bills, and writing 
 of letters requesting payment, or threatening suit. We had a portion of the 
 account of the largest Avholesale house in the country. They struggled 
 hard; but failed at last, and nearly all their paper went to protest. It 
 was years before this was all settled up; and this after endless interviews 
 and correspondence; taking security and giving time to some, using short, 
 sharp and decisive measures with others — a wearisome time indeed that 
 dragged on for years, during which the sickening business of making 
 more and more provision for bad and doubtful debts had to be gone 
 through periodically. Every year seemed worse than the last; and when 
 it was going to end, none of us could tell. Harvests were continually 
 bad in Ontario, and so long as that continued there was little hope. In 
 some of the streets of Toronto every other store seemed to be to let; 
 and for myself I almost despaired of what was to become of my growing 
 boys. 
 
 Montreal was not nearly so much aifected as Toronto. The Grand 
 Trunk Railway had brought about a great diversion of business in its 
 favor, formerly done in Toronto. And there had never been any of the 
 wild speculation in lands that had swept over Upper Canada like an 
 epidemic. But Toronto was struck with a tornado. A prominent Mont- 
 real merchant, well known to me, who did a large business with that 
 city, declared to a friend about that time (1858) that there were not 
 three solvent men left in the citj' — a gross exaggeration of course — but 
 well reflecting the views of one who was a creditor of too many insolvent 
 estates in the Western country. 
 
 During all this time the bank held bravely on. The ship w\as in 
 skilful hands, and they steered her wisely through the long period of 
 troubled waters. Many of our customers, too, held up bravely, and 
 there were some lines of business that were not much affected by the 
 hard times. We managed to make our dividend every year, but that was 
 all. All extra profits were swept remorselessly into the gulf of "Bad 
 and Doubtful Debts," which is the dread of all bankers in such times. 
 But the bank was never in the slightest trouble. Available resources 
 were always sufficient. And so w^e went on, meeting every day's emer- 
 gencies as they arose, hoping and waiting for better times. 
 
 They came at length in the shape of better harvests. But before that 
 time I had been transferred from the head office to the management of 
 the branch formerly described as under the charge of a country gen- 
 tleman. 
 
CHAPTER III. 
 
 MY EXPERIENCES AS A BRANCH MANAGER. 
 
 Origin of a Loan — A Kind-Hearted Sheriff — An Insolvent Trader 
 — Value of Second Mortgages — A Judgment-Proof Endorser 
 — Appointed Cashier of the Bank of Toronto. 
 
 THE town to which I was sent was one of the most beautifu]l> 
 situated in Western Canada. In this town and its neighborhood 
 many persons lived, of the class I have spoken of elsewhere ; half- 
 gentleman and half man-of-business. The former manager was intimate 
 \vith this class, and most of them did business with us. There was a very 
 "clannish" feeling amongst them. They visited a good deal together, and 
 endorsed freely for one another. The office was full of transactions of 
 this kind; and it seemed to me for a time as if everybody in the town 
 was on everybody's paper. To get to the bottom of such a maze of en- 
 tanglements seemed hopeless, but I plodded on, w^eek after week, and 
 month after month, like a man clearing a piece of "bush" or weeding a 
 choked-up garden. My chief anxiety was to avoid pulling up any good 
 plants along with the weeds, for there was much good business in the 
 office. The great difficulty was to find out who was really the responsible 
 party on much of this paper, and who would acknowledge his obligation 
 to pay it. In fact, it seemed to be a matter of surprise in the town that 
 Ihe bank should ever want payment at all. They thought we ought to 
 be satisfied with the interest, and even this was seldom paid in money. 
 
 Origin of a Loan. 
 
 Let the following be taken as a sample of many of the transactions 
 of the office. A note made by a storekeeper was in the circle of dis- 
 counts, and after renewing it once or twice, with small payments (all I 
 could get), I asked our customer what was the origin of it, as it did not 
 seem to be founded on business.^ "Oh, well," said he, "the origin of it 
 was this : times have been pretty hard for some time, as you know. One 
 day I was very hard up, and walked over to a neighbor, a storekeeper 
 like myself; 'John,' said I, 'wouldn't you like some money.?' 'Well,' 
 he said, 'a man can always do with money.' 'Well, then,' I said, 'you 
 make a note and I will endorse it,' or, 'I will make a note and you en- 
 dorse it.' He consented; and we both signed the note. I brought it to 
 tlie bank, got it discounted, and we divided the money between us. That 
 was tlie origin of the note, and we have been carrying it on ever since." 
 33G 
 
MY EXPERIENCES AS A BRANCH MANAGER. 337 
 
 Of such notes the bill case of the oflice was full. There must have 
 been scores, if not hundreds of them; and the task of interviewing the 
 l)&rties, corresponding with them, in many eases suing and getting judg- 
 ment against them, was wearisome beyond description. For many of the 
 parties to the notes defended the suits for time, and put us to heavy 
 expense for law costs. 
 
 A KiXD-HeARTEI) SllKRIFF. 
 
 A singular discount account was that carried on by the sheriff (not 
 the gentleman mentioned in the last chapter) a most respectable man, 
 and, though a sheriff, one of the kindest-hearted men I ever knew. In 
 the bad years succeeding 1857 he had had numerous judgments to en- 
 force against farmers in the district. Reluctant to sell out these parties, 
 he had, in man}^ cases, taken their notes, got them discounted at the bank, 
 and so made his returns to the Court, holding the judgment as his own 
 security. On taking charge of the branch, T found the sheriff's account 
 to be as large as a wholesale merchant's who had discounted the notes 
 of his customers. ^Vhat the sheriff' was doing with all these discounts, I 
 could not, at first, imagine, for I had never seen anything of the kind be- 
 fore, nor have I indeed since. However, I insisted upon a liquidation of 
 the account. Fortunately, the times had begun to improve; farmers once 
 more had good crops and were able to pay their indebtedness and release 
 the judgments hanging over them. The slieriff's discounts were there- 
 fore all closed out without loss. 
 
 An Insolvent Tradeh. 
 
 Far different, however, was our experience in another case. 
 
 A few miles from the town a manufacturing firm was carrying on 
 an extensive business. The members of the firm were of the class de- 
 scribed in the last chapter. But instead of half-gentleman and half- 
 man-of -business, they could better be described as three-parts-gentle- 
 man and one-part man-of-bu.siness. The principal partner was of such 
 aristocratic manners that he was often spoken of in the town as the 
 Duke. He had, however, some little knowledge of business. The other 
 partner was a younger man, a member of a good count}^ family in Eng- 
 land, who had come out to Canada, as many others had in that neighbor- 
 hood, largely to spend his time in fishing and shooting. He had no 
 knowledge of business whatever. 
 
 The firm kept their account in the branch, and had large advances. 
 They had also some trade bills, drawn against consignments; their 
 method of business being to ship off on consignment nearly evervthing 
 they mamifactured, drawing against it. as much as they were allowed to 
 do, and trust to Providence, that account sales would straighten matters 
 out. Meantime, they had a good-natured banker to deal with, who never 
 enquired particularly what advances were wanted for, or what they 
 rested on. Accordingly, they made up deficiencies by continually obtain- 
 
 22 
 
838 BANKING AND COMMERCE. 
 
 iiig further advances. But account sales seldom showed any balance 
 due; in fact, they were not seldom accompanied by a redrawing for 
 reclamation. The effect of this style of business may be imagined. It 
 was carried on year after year at a loss, the loss showing itself in a con- 
 stantly increasing advance account at the branch. 
 
 It must not be supposed that tlie head office did not notice what was 
 going on. Head office did, and v;rote repeated letters of remonstrance. 
 But the manager was one of the most plausible men that ever lived, and 
 succeeded more than once in quieting the apprehensions of headquarters 
 and persuading them to allow him to go on advancing. 
 
 But a crisis came at last. The advances at this branch as a whole at 
 length became serious enough to be a drain upon the resources of the 
 bank in such times as were raging over the country'. A stop had to be 
 put to them. I was sent down to make a thorough overhauling of the 
 business, and the manager sent in his resignation. 
 
 On examining the affairs of this firm, I became convinced they were 
 insolvent. But they strenuously denied it. alleging that proper valua- 
 tions would show that they could pay their debts, at any rate. The late 
 manager thought so too. On this assumption the firm submitted an elab- 
 orate scheme for the continuance of advances, their business to be under 
 a sort of supervision of the bank meanwhile. 
 
 I forwarded this to head office, but stated that I could not recommend 
 it. My comment on their proposal was that I could see no end to it — 
 Jio prospect of ever paying off advances by that process, or even of re- 
 ducing them. There was certainly a very heavy loss before us if they 
 stopped. But I was convinced that to let them go on would make matters 
 worse. It was not the sort of accoimt to be "nursed." The foundation 
 of any rational nursing process is confidence in the business ability of 
 the men; and of this I had none. They stopped therefore. We were 
 practically their only creditors, and made the best of their assets. But 
 the result was a loss sufficiently large to wipe out not only all the profits 
 we had made out of their account, but a large part of the profits made 
 out of all the rest of the business from the opening of the branch, a 
 never-to-be-forgotten lesson of the consequences of a good-natured and 
 so-called enterprising style of conducting bank business. 
 
 Amongst other advances at the branch I found some of considerable 
 amount, that liad been made on account of a local railway." Tliese were 
 
 7 In connection with this railway a remarkable circumstance suhseciuently 
 transpired. After I left the branch for Toronto, a cargro of rails for this' road 
 wa.s landed on the steamboat wharf. But the railwoy had no money to pay for 
 them, and there was no good-natured manager there then to advance them 
 money. The rails, therefore, lay on the wharf year after year, with charges ac- 
 cumulating. But when I assumed charge of the ^Merchants" Bank in Montreal. I 
 came across these very rails again. They were held as .security by the bank 
 under a letter of credit granted to a customer who had failed. The bank had 
 taken pos.session. The local railway company by that time h-ad entirely collapsed, 
 and there was no resource but to sell them through a broker to the highest 
 bidder; of cour.se, at a considerable loss. 
 
MY EXPERIENCES AS A BRANCH MANAGER. .'539 
 
 nil ill the sliape of notes bearinj; the names of various people in the 
 town. But as we had the same names in their own accounts, or in the 
 accounts of other persons; sometimes as promisors, sometimes as en- 
 dorsers, it was a matter of infinite difficulty to disentangle these 
 railway advances from those made to customers for their own business. 
 However, the task was accomplished at last, and a certain number of 
 persons agreed to raise the money to liquidate the account; which for- 
 tunately they were able to do. And this I must say, that they were all 
 "honorable men," not in Mark Antony's sense, but in reality. 
 
 Vamte of Second Mortgages. 
 
 While at this branch, I had some experiences which stood me in good 
 stead in after years. Let me relate some of them. One of these was an 
 object lesson as to Second Mortgages. A customer was carrying on a 
 saw-milling business. The account had worked unsatisfactorily, and we 
 had obtained a second mortgage on his property. I was assured that 
 there was a substantial value in it after providing for the first. The 
 advances were carried on for a time with some expectation that our 
 security would eventually bring us out. But the account continued un- 
 satisfactory; moreover, I had made up my mind that our customer was 
 not honest. To realize our security it was necessary to pay off the first 
 mortgage. This we did, adding thus to our advances. 
 
 But when we brought the property to sale, we could scarcely get a 
 bid at any price. It was withdrawn. Put up again, the highest bid 
 we got was less than the sum we had paid to free the property. By this 
 time I had become sick of the whole business of winding up the man's 
 estate, and concluded to let the saw-mill go. 
 
 It turned out that we would have been better off if we bad taken no 
 security at all. 
 
 A Judgment-Pkoof Endorser. 
 
 Another lesson. The man above named, I have said, was dishonest. 
 He committed some flagrant act of fraud for which we determined to 
 prosecute him. The case was as clear as daylight. His counsel, a very 
 clever local lawyer, knowing he had no chance if he dwelt on the merits 
 of the case, spent his strength in appealing to the jury to protect an un- 
 fortunate neighbor against the rapacity and tyranny of this big moneyed 
 corporation. When I heard all this, I felt sure how it would go. And 
 go it did against us. The jury found the man not guilty, and we liad the 
 pleasure of paying heavy costs. 
 
 One of this man's endorsers was a wealthy farmer in an adjoining 
 county. He was represented to be abundantly good for the amount he 
 endorsed; so I renewed the paper several times, giving attention to get- 
 ting the weaker notes in the account paid. At length, however, I 
 determined to bring this endorser "to book." Getting no answer to my 
 letters, I one day went over to his farm, a considerable distance off; 
 
340 BANKING AND COMMERCE. 
 
 found him, a man well on in years, sitting comfortably in the living 
 room of the farm-house, which was a very good one. The farm was one 
 of the sort that abounds in that part of Ontario, clean, clear, well fenced, 
 well culti\ated, worth a good deal of money. He received me very 
 coolly, and in answer to m}' query wlien lie was going to take u}) the note, 
 answered that he was not going to take it up at all. On my referring to 
 this fine farm of his, — he said it was not his at all. He had made it 
 over to his sons some time ago, together with all there was upon it, in 
 consideration of a maintenance for life. 
 
 This was a revelation, indeed. And on our solicitor making enquiry 
 at the Registry office of the county, he found it was true. ^Moreover, on 
 my asking whether such a conveyance could not be set aside, considering 
 bis endorsement; he gave the opinion that it could not, the consideration 
 being sufficient. Our security, therefore, turned out to be worth nothing. 
 This case made a deep impression on me in relation to the value to be 
 attached to endorsements in plain figures. 
 
 By the time that two years had elapsed, I had got the business into 
 a fairly satisfactory shape. T had been sent to get payment of a num- 
 ber of the discount accounts and had done it; making myself during 
 the process very impopular with a large section of the community. I had 
 tried to be reasonably courteous during the Avhole of this proceeding, 
 considering the work to be done, but at times my patience was rather 
 tried. On one occasion a money-lender whom we dealt with, on my re- 
 fusing to renew some paper for him, told me that we might collect it at 
 our leisure! "Very good," said I; "my leisure is twenty-four hours. If 
 you do not pay by this time to-morrow, you will have to look out." He 
 did pay up. for he knew very well he could not afford to be sued. 
 
 Appointed Cashier of the Bank of Toronio. 
 
 After clearing out the rubbish, there was a considerable residuum of 
 satisfactory business at the branch; and I settled down to make the best 
 of it, quite expecting to spend the rest of my days there. For of pro- 
 motion at that time there appeared little chance. The cashier was a 
 younger man than myself, with apparently a long life before him. The 
 manager of the Montreal Branch, (for we had by this time opened in 
 Montreal, and his position was a superior one to mine) was also a younger 
 man. To be transferred to any other branch than Montreal would be no 
 promotion at all. The way, therefore, seemed blocked. However, we 
 were reasonably comfortable at liomc; and I remember once making a 
 calculation, that in the quiet way in whicli we were living I could save 
 enough in tnenty years, at any rate, to "keep the wolf from the door" 
 for the remainder of my life. 
 
 But how little can we see the jirogress of events ! ^^'ithin three 
 months of my making this calculation a circumstance transpired which 
 influenced my whole future. Our much esteemed President died sud- 
 denly; resjjccted by all who had ever known him. It was then con- 
 
MY EXPERIENCES AS A BRANCH MANAGER. 3U 
 
 eluded to advance the cashier to the office of president; and one day, 
 (it was the day before Christmas, 18()-!-,) I learned to my astonishment 
 that I was appointed cashier. The new president desired me to come 
 up to Toronto and confer with him about business. I went up. He in- 
 formed me that he wished me to assume the position at once. I there- 
 fore handed over the business of the branch to my successor, who came 
 down for the purpose. And on leaving, in spite of the apparent unpopu- 
 larity I had incurred, a handsome presentation of ])late was made to me 
 by the customers, which is on my sideboard at this day. 
 
 Thus ended my experience as a Branch Manager, in the course of 
 which I learned lessons that were invaluable to me afterwards; mostly 
 lessons of what not to do; which I could not have learned in any way 
 except by fulfilling the task of steering the little vessel amongst such 
 iocks and quicksands as I met with in this part of my banking career. 
 
CHAPTER IF. 
 
 EXPERIENCES IN HEAD OFFICE MANAGEMENT IN 
 TORONTO. 
 
 Assumption of New Duties — Civil War in the United States — 
 Premium on Gold — Troubles of the Bank of Upper Canada — 
 Stoppage of the Commercial Bank — Organization of New 
 Banks — An Unfortunate Speculation — Retirement from 
 Banking. 
 
 M 
 
 y a2)poiiitment to the office of Cashier of the Bank of Toronto, 
 opened out apparently a far wider sphere of action than ever I 
 siip2)osed would fall to my lot. For I was now removed from a 
 branch in a small town^ with its small circle of interests and activities, 
 to the Head Office of a Bank in a large and important city, which had 
 by this time begun to recover from the depression spoken of in a former 
 chapter. Crops were abundant once more ; that was the root of the whole 
 business, as it largely is to-da3^ Storekeepers could buy freely from 
 wholesale houses; and these, in their turn, could do business with a rea- 
 f^onable prospect of getting their accounts paid. And the bank itself 
 by this time had passed safely through a process of purgation somewhat 
 similar, though less severe, than that described in the last chapter. Its 
 business, on the whole, was in a satisfactory position, and it Avas making 
 steady progress. P'or myself, it was an immense satisfaction to get back 
 to a sphere in which the higher descriptions of banking were carried on, 
 namely, the accounts of wholesale importers, large dealers in grain, 
 lumber and timber, together with those of millers, distillers, and ex- 
 porters generally. The Branch in Montreal was doing a large and 
 flourishing business, and as all the branches M'ere supervised and governed 
 from Toronto, I had the opportunity of becoming practically acquainted 
 with a much wider sphere of operations than I had known before. 
 
 It was some years, however, before I had the responsibility of active 
 management and control. The president, though he had acquired a 
 higher title, was still' performing the same duties, the consequence being 
 that my real position was rather that of assistant than of actual cashier.'' 
 
 The change was not agreeable at first, for I had had real manage- 
 ment and control when manager of the branch. However, all came round 
 in time; as the proverb says, "all things come to those that wait." 
 
 8 The Canadian cashier of those days was the GENERAL MANAGER of these: 
 the only difference probably being that when the chief executive officer was 
 called cashier, the president was expected to give more attention to the business 
 of the liank than he commonly does now. 
 ?,42 
 
HEAD OFFICE MANAGEMENT IN TORONTO. 3^3 
 
 Effects of the War ix the Uxited States — Pkemium ox Gold. 
 
 My narrative must now go back a little. 
 
 \^ilile branch manager I had once been unexpectedly summoned to 
 take the cashier's duties whilst he went over to Scotland for a holiday. 
 
 A few months before this, the war between the North and South had 
 broken out, and Gold had shown signs of going to a premium. This was 
 a serious matter for us; as we, like other Canadian bankers, could not 
 avoid keeping considerable balances of money in New York, which, of 
 course, formed part of our reserve cash. The premium on gold, there- 
 fore, whatever it was, would mean a loss of that amount, in case we 
 needed the money. The cashier, however, on going away was not much 
 disturbed about this. Like most other persons in Canada and the North, 
 lie supposed that the war would soon be over, and American currency 
 revert to its natural position. Gold might go to four or five per cent, 
 premium ; but that, he thought, would be the limit of it. And it could not 
 last long. 
 
 Amongst the directions he gave me for management in his absence, 
 one was that I must not disturb myself about this premium on gold, but 
 let the balance in New York go on accumulating, even if the premium 
 rose to ten per cent.'-' It was under these circumstances I took charge. 
 
 9 In view of the direction given me by the cashier not to be disturbed even 
 if gold rose to 110, it is interesting to note what really was its course. 
 
 In my banking diary, I kept a note of it, inasmuch as all the transactions 
 of our lumber customers, and of a large part of our grain customers, involved 
 the turning of American currency into gold. The price, therefore, was a matter 
 of daily interest; and so were the events that influenced It. A gold exchange 
 was opened in New York; operations in it soon became heavy, and not only op- 
 erations but speculations, as we had good reason afterwards to know, for one of 
 our officers became entangled in them. Every operation of the war was watched 
 with the keenest interest in Wall Street and speculated upon. When the North 
 suffered a reverse, gold went up; if things were going against the South, gold 
 went down; and so on, and so on, all through till the end. An attempt was made 
 by Congress in 1S64 to stop this speculation, and an act was passed making it 
 ILLEGAL, to deal in gold. This was on the 22d of June. The only effect of 
 this was to send gold up with a bound. Within ten days it advanced FIFTY 
 PER CENT. 
 
 Here are a few of the figures showing the price of gold after we decided U 
 realize half our currency balance. This was in July, 1S62, and gold was then at 
 116. In October it was 137, in March 172. After this there were heavy fluctua- 
 tions until the battle of Gettysburg, and the taking of Vicksburg by General 
 Grant on the same day, the fourth of July, 1863. This sent the price down to 
 126. But it rose again, until in October it was 158, at about which figure it con- 
 tinued with fluctuations, until the April following. It was then 170. In May, 
 1864, it rose to 193. in June to 200. Then, the act making it illegal to deal in 
 gold at all was passed. Within ten days afterwards, it was 280, and on the 11th 
 of July it touched the highest point during the war, namely 283. After that 
 there were heavy fluctuations. In September it was down to 190, in November up 
 to 257. But all this time General Grant was making his way through those ter- 
 rible battles of the Wilderness, in spite of the stubborn resistance of General 
 Lee, until it became apparent that he w^ould soon be able to plant his forces to 
 the south of Richmond. So in the month of January, 1865, gold dropped to 198, 
 and in March to 14S. Richmond was taken on the 3d of April— when the price 
 was 146. General Lee surrendered on the 8th, but this event had evidently been 
 
344 BANKING AND COMMERCE. 
 
 The premium crept up quietly and steadily week by week. On the 31st 
 of May gold was quoted at 104. On the 5jOth of June it was 109V2- By 
 the 31st of July it was 11 6. The president Avas with me all this time, 
 and we conferred a good deal about the matter. He, however, was of 
 the same opinion as the cashier; and thought we need not trouble our- 
 selves much about it. I was, however, seriously troubled myself, for as 
 time went on, it became necessary, as a matter of finance, that we should 
 avail ourselves somewliat of our balance in New York. But, to do this, 
 we must turn currency into gold, at a heavy loss. The price of gold 
 moreover was rising every week, and I could see no reason why it should 
 not go on rising indefinitely as long as the war lasted. 
 
 I therefore obtained jiermission from the Board to go down to New 
 York and investigate the matter on the spot. The problem was. wliether 
 there was any natural limit to this rise in gold, and consequent deprecia- 
 tion of our American funds. If the war went on, was not gold likely to 
 continue to rise, and our balance in New York to be worth less and less? 
 I concluded to consult two persons on the subject. One was naturally 
 the able and experienced cashier of the bank where we kept our account, 
 Mr. H. F. Vail, of the Bank of Commerce; the other was Mr. Charles 
 F. Smithers, who had then left the Bank of IVIontreal and was in busi- 
 ness for himself as a private banker. I well remember Mr. Vail's 
 answer. He said, "You want to know my idea as to the course of gold; 
 and whether the premium is likely to increase, and what it may increase 
 to if the war goes on? I might answer, 'Go and consult our janitor; 
 he can give you as good an opinion as I can.' But the fact is, speaking 
 seriously, I am as much in the dark as you are. As for us New York 
 bankers, you know we are going to stand by the Government; we have 
 subscribed amongst us fifty millions to help to carry on the Avar; and 
 vcrv sure I am that Ave Avill stand bv the Government till the end. All 
 
 discounted, for gold only fell to 145. A week after this, President Lincoln -was 
 assassinated, which sent gold up to 158. This was the highest point, with a mo- 
 mentary exception, that' gold touched after the war was over. But many long 
 years were to elapse before it touched par, and a quotation or two of its subse- 
 quent course may be interesting. 
 
 In 1866 it rose again to 155. In 1868 it ranged from 135 to 140. In September, 
 1869, the terrible "Black Friday" occurred, when, in one day. the transactions in 
 gold amounted to FOUR HUNDRED MILLIONS: THE PRICE OPENING AT 
 150. RISING AT NOON TO 165, when the Government telegraphed to .<=ell FOITR 
 MILLIONS, and the price dropped to 1.35 in five minutes. After this, year after 
 year, the price seldom varied more than seven per cent., dropping to 108^^ in 
 December, 1871, and rising to 115*4 in September, 1872. And thus it went on, 
 rising and falling, month by month, and year by year, until the end; heavy 
 speculations going on all the time as the course of political or national events 
 were adverse or otherwise. Thus even as late as 1875 the price went up to 117'^. 
 This, however, was the last spasm in the long and exciting course of a depreci- 
 ated currency. In the Spring of 1877, gold had fallen to 106. and thence it stead- 
 ily bore down until specie payments were once more resumed. 
 
 Thus ended one of the most extraordinary episodes in modern finance, dur- 
 ing the whole of which Canada remained firm on a gold basis. How these fluc- 
 tuations affected the bank into whose service I subsequently entered is told in 
 the next chapter. 
 
HEAD OFFICE MANAGEMENT IN TORONTO. 3^15 
 
 that is perfectly clear; but what the course of gold will be, no mortal 
 men can tell." While I was speaking with Mr. Vail, General Anderson, 
 who had so well defended Fort Sumter, came in, and Mr. Vail introduced 
 me to him. I appreciated this, for I had sympathized with the North 
 from the beginning. I next went over to Mr. Smithers. I could talk 
 freely with him, as he was a Canadian, and could look at the matter from 
 our point of view. My principal question to him was not so much what 
 he thought gold might rise to, but whether there was any limit to the 
 rise at all? We both knew very well, there was such a limit in the case 
 of sterling exchange ; that is, when dealt with on a gold basis. Was there 
 
 any such limit in the case of gold? 
 
 He said he could see no such limit. 
 
 I returned to Toronto, communicated what I had Iieard in New York, 
 and strongly recommended that we should convert a considerable part 
 of our balance into gold, for fear of worse happening. It would cost us 
 a good deal of money, but there was no sign of the war abating, but 
 every prospect of its going on for some time; and if the war went on, 
 it was certain that gold would continue to rise. I think one or two 
 members of the board considered me rather presumptuous in giving them 
 advice on the subject, for I was only a branch manager, of second rank, 
 in temporary charge there. The president, I think, agreed with me, and 
 after a thorough discussion it was determined to convert one-half of our 
 currency balance into gold, and leave the rest to the course of events. It 
 cost us a large amount of money, but at any rate, we had got a consider- 
 able sum safe "out of the fire" and available, if we wanted it. We placed 
 the gold to the credit of our Gold Account; for gold accounts had then 
 become common between Canadian banks and New York, and our deal- 
 ings thereafter with the Bank of Commerce were in this gold account. 
 The currency balance remaining, we held on to, until the resumption of 
 specie payments brought matters round many long years afterward. 
 But to resume: 
 
 My position at head office being a subordinate one, I continued dis- 
 charging this kind of duty for several years. The Bank of Toronto 
 was prospering, and no events worth recording transpired until the long 
 sickness and death of the cashier placed upon me a much larger share 
 of actual management than before. 
 
 His deatli indeed was a serious loss. He occupied by his marriage a 
 very high social position; he was a thoroughly trained banker, energetic 
 in character, rather sanguine in temperament; more ready to undertake 
 risks than I ever was, but with a most remarkable faculty of making the 
 best of doubtful and difficult accounts. I remember saying to the presi- 
 dent afterwards, that I could not pretend to such ability as the late 
 cashier had of getting out of trouble; all I could lay claim to, possibly, 
 was the faculty of not getting into it. When he had passed away, I felt 
 like a son who had lost a father; for though he was younger than I in 
 years, I always looked upon him as far beyond me in banking ability. 
 
346 BANKING AND COMMERCE. 
 
 To succeed him as president, the board elected the senior partner of 
 one of the -wealthiest firms in the country, a gentleman of years and large 
 business experience, with a remarkably solid j udgment of men and things. 
 The presidency has continued in his family with advantage ever since. 
 He had long been a director of the Bank of Upper Canada, 
 and used to tell curious stories of the way things were managed there.^" 
 (T one day said to the president, from what I knew otherwise, as 
 well as what he told me, that a safe rule for us to follow in guiding the 
 Bank of Toronto would be to find out what the Bank of Upper Canada 
 would do, and then to do exactly the opposite.) The vice-president was 
 the business partner of the president, and like him, though much younger 
 in years, was a man of singular ability, information and experience, thor- 
 oughly in touch with the business affairs of the time, especially with all 
 tlie branches of the grain and milling trades. These two gentlemen kept 
 close touch with the affairs of the bank, and along with another director, 
 a veri' wealthy capitalist, who used to drop in nearly every day, one of 
 the shrewdest men I ever knew, formed what might be called an "inner 
 circle" of the board. 
 
 With these gentlemen about me day by day. I spent the remaining 
 twelve years of my life as Cashier of the Bank of Toronto, in actual 
 management. 
 
 Troubles of the Bank of Upper Canada. 
 
 During these years several very notable events happened, by far the 
 most important of which was the long-continued contest to preserve bank 
 circulation. This matter, however, passed through so many phases that 
 I have thought it needful to devote the whole of the next chapter to it. 
 Of other important events, the first was the failure of the Bank of 
 Upper Canada. Of this bank I have already spoken. It had at one. 
 time, a very high reputation, and its credit was quite equal to that of the 
 Bank of Montreal. For many years the account of the Government was 
 kept with it. During several prosperous years preceding the Crimean 
 War, it had made very large profits. But banking was little understood 
 in Upper Canada at that time, and it made the egregious mistake of 
 dividing nearly the whole of its surplus amongst its stockholders. And 
 for years there had been accumulating in its books masses of loans, 
 which rested on nothing but real estate, much of it of wretchedly poor 
 qualitv. This gave rise to a perpetual series of renewals. Its internal 
 discipline was bad, and its government of branches notoriously weak. A 
 
 10 One of these Is worth recording:. The board of directors of that institu- 
 tion was largely composed of professional men who knew nothing practically about 
 business. One of the number had been an admiral in the British navy. A mat- 
 ter of weight and Importance coming before the board on one occasion, this 
 good gentleman, after It had been discussed for a time, bun-st out as follows: 
 "WKI.T.. GENTLEMEN. I KNOW HOW TO SAIL A SHIP. BUT I'LL BE 
 TTANGED IF I KNOW ANYTHING ABOUT SUCH MATTERS AS THESE!" 
 
HEAD OFFICE MANAGEMENT IX TORONTO. 31? 
 
 short time after I assumed charge in 'I'oroiito, on its sending an inspector 
 to a certain branch, tlie manager set him at defiance, refusing to receive 
 him, and locked the door of the safe against liim. After tlie revulsion 
 of ISJT the Government account was removed. This seriously aft"ected 
 the prestige of the bank, and injured its credit. It was known to be 
 heavily in debt to its agents in London; and they, at length insisted on a 
 change of management. But the bank was too far gone to be restored 
 to soundness by any change whatever ; so after a few years of struggle, it 
 closed its doors. The bankers of the country were not suri)rised at this: 
 in fact, they had been preparing for it for months back. But it created 
 a good deal of excitement amongst the people of Toronto, and the farm- 
 ers over a wide district of Upper Canada. Nearly everybody that had 
 notes at nil had some of this bank in their possession. There was no 
 fcecuritv for bank notes at that time, and a wave of distrust passed over 
 the community respecting the notes of all the banks in Upper Canada. 
 Of these the Bank of Toronto had become one of the most prominent, 
 and quite a heavy run by holders of small notes took place. 
 
 Our counter was thronged all day long, for several days, by people 
 presenting notes for redemption; mostly small notes. We met this in the 
 usual way by piling up gold on the counter, and detailing a special teller 
 to attend to the applicants. Many of these, when they saw the piles of 
 gold, went away satisfied: others presented their notes, and got quickly 
 paid. The disturbance abated in a day or two; no deposits were with- 
 drawn, and the whole amount of gold we paid out, was far less than 
 many of our customers could have drawn out by a single check. The 
 whole affair, indeed, with all its bustle and apparent excitement, was a 
 mere "tempest in a teapot." 
 
 The affairs of the defunct bank ]>roved to be in very bad shape. The 
 v/hole capital was lost, and in addition a good deal of loss was suffered 
 by depositors and noteholders. A certain jiortion of the last fell upon the 
 banks, and became the ground work of an agitation for the securing of the 
 currency, the consequences of which survive to this day.^^ 
 
 Stoppaof of the Commehciai. Baxk. 
 
 The next affair to which I will revert was the stoppage of the Com- 
 mercial Bank of Canada. This institution was in far better shape than 
 the foregoing; for on Ix^ng wound up it pnu\ its noteholders and de- 
 
 ll Let me relieve the reader's attention to these monetary details by an- 
 other story of the humors of the time, which was told me by our g-ood president 
 (i. e., of the Bank of Toronto), speaking from personal knowledge. 
 
 The cashier of the Bank of Upper Canada, before the change of manage- 
 ment, had been in office from its very foundation, and was well known all over 
 the country. He lived in great style, in a magnificent house, and drove to busi- 
 ness in a carriage and pair. But he was heavily in debt to the bank. He was 
 very crusty to outsiders; but "Hail fellow, well-met" to his familiars. One of 
 these, a well-known doctor in the city, said to him one day when his equipage 
 was at the bank door, "T0:M.— WHY DON'T YOU SELL. YOUR CARRIAGE 
 AND HORSES, AND P.\Y YOUR DEBTS? " 
 
318 BANKING AND COMMERCE. 
 
 positors in full, and returned one-third of the caiiital to its stockholders. 
 But it had unfortuiiately got itself entangled in heavy advances to the 
 Detroit and Milwaukee Railway Company, and after a verdict had been 
 given against it, at the end of a protracted and costly litigation, its 
 credit was so impaired that a drain of deposits set in, which at length 
 compelled it to close its doors. This event created immense excitement; 
 far exceeding that of the former occasion. It developed, indeed, into a 
 complete panic. For one or two days our counter in Toronto was be- 
 sieged as before, but by a more excitable crowd, and what was far more 
 sertous, a considerable drain of deposits set in. Any one of these would 
 take more out of the bank in a minute than the whole excited crowd of 
 noteholders would in an hour. While the panic prevailed, there was great 
 danger of one or two other banks closing their doors. We were in a 
 strong position ourselves, and determined to make common cause with 
 these weaker banks, as we knew they were sound. We therefore kept 
 supplying them with gold, as these exciting days passed on; ordering up 
 large supplies by special messenger from Montreal, night after night. 
 A large part of the gold we paid away went into the Bank of Montreal, 
 as did also, most of the money withdrawn from the other banks. The 
 Finance Minister in Ottawa was appealed to, but he refused to intervene; 
 after which a telegram arrived from some friends of the banking interest 
 in Montreal, advising the Toronto banks to suspend specie payments. A 
 consultation of bank directors was held in the midst of the excitement, to 
 consider this projjosal. I was not present at the consultation, l>eing only 
 a comparatively young banker, but when informed by the president of 
 what was going on, I protested and remonstrated in the strongest man- 
 ner against such a step; and declared that rather than do that, we ought 
 to pay out the last dollar of gold we had. The next day was Sunday, 
 which aiforded a breathing time; and on Monday morning, to our great 
 relief, we learned that the Premier, Sir John Maedonald, overriding the 
 advice of his Finance ISIinister, had determined to intervene, and ])ut a 
 stop to the panic. He gave orders that every Custom House and Post 
 Office in Ontario should be telegraphed to, directing them to take the 
 notes of all the banks whose doors were open. On this becoming known, 
 the panic ceased at once; and, politics apart, I have always considered 
 that the country owed a deep debt of gratitude to Sir John for his 
 conduct on that occasion. 
 
 This excitement over, matters bt^gan to jnirsuo their usual eoiirse. The 
 country was prosperous; and business on the whole, sound. The banks 
 to whom we Jiad loaned the gold, soon repaid it, and our business went 
 on as quietly as ever. As to the Conntureial Bank, after some excited 
 meetings of stockholders, projiosnls were made by two of the Montreal 
 banks ft)r the purchase of its whole assets. A sort of rivalry arose be- 
 tween the Bank of Montreal and the Merchants' Bank on this occasion. 
 One bid after anotlier was made, and finally the offer of the Merchants' 
 Bank was accepted. This offer was to assume all the liabilities of the 
 
HEAD OFFICE ^MANAGEMENT IN TORONTO. SM) 
 
 Commevcial Bank, and to pay the stockholders 33 1-3 per cent, of their 
 shares in the stock of the Merchants' Bank. It would liave been far bet- 
 ter for tlie stockholders of tlie Connnereial Bank to have taken the offer 
 of the Bank of ?^Iontreal ; and I believe it would have been better for the 
 Merchants' Bank to have had nothinp; to do with it. For subsequent in- 
 side experience led me to the conclusion that the Merchants' Bank lost a 
 j?ood deal of money by it. But the purchase enabled that bank, which 
 then had no branches at all, to establish itself with a business ready-made 
 to ts hand, in numbers of town.s and cities in Ontario; and laid the founda- 
 tion of tliat widely extended business with which I had to deal in sub- 
 sequent years.. The liquidation of the old assets of the Commercial Bank 
 caused a prodigious amount of labor to fall upon the officers of the Mer- 
 chants' Bank: and along with a considerable accession of good business 
 It also acquired a large amount that turned out doubtful and bad, partly 
 it may be said, by reason of the "hard times" that subsequently followed. 
 
 Organization of Nkw Banks. 
 
 During the period of my service in Toronto, and while gold was at 
 a premium, the General ^Manager of the Bank of Montreal, for reasons 
 of haute finance, determined on a policy of contraction of discounts 
 among all its Ontario offices. The bank transferred the money to New 
 York, and made large profits out of it. The pressure was severely felt 
 for a time, but it resulted in the offering to the Bank of Toronto of a 
 large amount of new business. Most of the accounts offered were ac- 
 cepted; and we thereby took our share in relieving the pressure upon the 
 commercial community. This policy had, however, very important con- 
 sequences, such as could scarcely have been foreseen. 
 
 The Barik of Montreal, in its Toronto office, was under the local 
 direction of a very prominent member of the mercantile community. 
 AVhen a policy of contraction was determined upon and continued, he con- 
 ceived the idea of obtaining a Charter for a new hank. He had no 
 difficulty in carrying out the idea, as he was influential in Parlia- 
 ment, as well as in banking. The charter was obtained, the stock sub- 
 scribed, an influential board of directors formed, and thus was launched 
 into being The Canadian Bank of Commerce. This bank in the course 
 (»f a few years became the largest bank in Ontario in respect to both 
 capital and business. It also absorbed after a time one of the older 
 banks in Ontario, the Gore Bank in Hamilton. During the last few 
 years it has still further enlarged its operations by taking over the Bank 
 of British Columbia with its branches on the Pacific coast from Victoria 
 to San Francisco, and also one of the banks of the Maritime Provinces 
 with its headquarters in Haliuix, and branches extending all over Nova 
 Scotia. It had not been long established when it opened an office in 
 London, England, and also in New York. The Eondon office ceased to 
 do business for some vears, but as the Bank of Britisli Columbia had its 
 
350 BAXKIXG AND COMMERCE. 
 
 headquarters in London, tJic Bank of Commerce assumed its business 
 there, a)id has ever since been represented in the Metropolis. 
 
 After some time it was rumored that the vice-president of the Bank 
 of Commerce was also about to apply to Parliament for a charter, and 
 establish another bank. He was also a man of wealth and position, and 
 easily obtained a charter, and subscriptions of a sufficient amount. A 
 body of influential men gathered around him, and thus was launched the 
 Dominion Bank, well known to be one of the most successful and pros- 
 perous of Canadian banking institutions. 
 
 Another director of the Bank of Commerce followed upon the same 
 path but in a somewhat different manner. There had long* existed in St. 
 Catherines, a prosperous town in the Niagara District of Ontario, a bank 
 called the Niagara District Bank. It had been on the whole well man- 
 aged. Its directors were influential men. It had branches in the western 
 peninsula of Ontario. Some conferences and consultations took place 
 between its directors and certain men of wealth in Toronto, which re- 
 sulted in the establishment of the Imperial Bank, with its headquarters 
 in that city. This bank absorbed the business and branches of the 
 Niagara District Bank; and the St. Catherines office, after being the head 
 office of the former bank, became a branch of the Imperial Bank. This 
 bank also has had a career of uninterrupted prosperity, and after pay- 
 ing continuously good dividends has accumulated, like the last, a rest 
 nearly equal to its capital. There thus sprang out of this policy of con- 
 traction on the part of the Bank of Montreal three of the most pros- 
 perous and flourishing of the banks of Canada. 
 
 A similar career of success, however, did not attend another institu- 
 tion established about the same time. The Federal Bank, after a check- 
 ered career, finally ceased to exist, but wound up its afl'airs without loss. 
 Most of its business was taken over by a new organization called the 
 Trader's Bank which has been doing a quiet business for many years. 
 Another of the banks which obtained charters at the time when charters 
 were so readily granted by Parliament, was originally named the St. 
 Lawrence Bank. It was not, however, well managed in the first instance, 
 and was nearly coming to a stop. It was then taken up by an able officer 
 of another bank; a man who had been well trained in banking; and under 
 another name, that of the Standard, it has had a prosperous career ever 
 since. 
 
 I was cashier of the Bank of Toronto, while all those changes were 
 going on, quietly pursuing my own business and maintaining friendly 
 relations with the managers and directors of these institutions. 
 
 Unfortunate Speculations of a Manager. 
 
 During the time that the war before referred to was going on, we had a 
 very unpleasant experience with one of our managers, who had unfortu- 
 
HEAD OFFICE MANAGEMENT IN TORONTO. 351 
 
 nately become connected with a number of Southern gentlemen, and liad 
 imbibed their views as to the course of gold. They were fully ])crsuaded 
 that gold would rise to a far higher figure than it had ever attained. He 
 was induced to join in a little speculation; and as is often the case, this 
 was the beginning of a troublous course which finally ended in his ruin. 
 Speculations went on increasing. A broker was concerned in them also. 
 Large advances came to be made, but they were so carried on as to be 
 concealed for a time. At length, however, the great events which brought 
 the war to a close took place. Gold rapidly fell. It soon became evident 
 that the game was nji. The concealment could be carried on no longer. 
 It fell to my lot to handle this unpleasant business, and I proceeded to 
 Montreal for the purpose. Investigation speedilv revealed the state of 
 matters. This was followed by the manager's resignation and with- 
 drawal from the service. I remained in Montreal some time to attend to 
 the winding up of the affair, taking actual charge of the branch, until a 
 new manager was appointed, becoming thereby very familiar with the 
 business of Montreal and acquiring m t xpcrience in exchange operations 
 such as was not to be had in Toronto. 
 
 Retiremext iROM Baxkixg. 
 
 After the agitation to preserve the circulation of the bank (sec next 
 chapter), T felt a great reaction setting in. And a conviction grew upon 
 me that I ought in the course of a few ^-ears to devote the rest of my 
 life to other than monetary pursuits. I had been active for years in the 
 work of the Church to which I belonged, and also in the work of the 
 Young Men's Christian Association, and looked forward to n time when 
 the burden of the bank could be laid down and my whole time given to 
 such work as this. It was many years before the opportunity came, but 
 it did come, or seemed to come, some years afterwards. In the year 1874^ 
 a period of depression set in over the financial world, and the full force 
 of it was felt in Canada. The lumber and timber interests were affected 
 most severely; and the depression in this line continued year after year, 
 as is common in a trade where business moves in cycles. Still the busi- 
 ness of the bank went on with a fair amount of prosperity. The average 
 of losses increased, but with the vigilance and co-operation of a good 
 staff of managers, v.e were able to prevent anything really serious de- 
 veloping. The times, however, were depressing, and the pressure on my 
 own mind was constantly increasing. At length about the middle of 1876 
 I conceived that I might honorably lay the burden down by the end of 
 the year. In fact, I began to feel that I was getting on in years, and 
 ought to relinquish the charge of the bank to a younger man. At that 
 time, so far as personal feeling goes, it seemed to me that I was older 
 than I was when T retired from the Merchants' Bank twenty-five 
 years afterwards. 
 
 The board allowed me to retire when they saw that my mind was 
 
S.'JS BANKING AND COMMERCE. 
 
 made up. though I believe they thought I would have done wisely to 
 stick to my own business. 
 
 But they presented me with a service of plate, on which some words 
 were engraved, which I have always esteemed tenfold more than the 
 silver itself, valuable though it was. 
 
 After speaking of the services I had rendered to the bank, during my 
 tenure of office, they went on to say that the presentation was made: 
 
 "To give them also the opporlunity of referring to the prominent and 
 active part he has taken in the legislation respecting Banking, and to 
 record their opinion that to him the Banks one several of their most 
 vahiahle privileges.'' 
 
 The last words are perhaps too flattering, inasmuch as others took a 
 very influential part in the work; but tliere was undoubtedly, at one time, 
 a crisis, as is related in the next chapter, when the action I took probably 
 saved the whole position. 
 
CHAPTER V. 
 
 NEGOTIATIONS WITH THE GOVERNMENT RESPECTING 
 CIRCULATION. 
 
 ClRCr.MSTAXCES OF THE CoUXXRV OPPOSITION TO GOVERNMENT PaPER 
 
 Money — Proposal to Secure Bank Notes by Government Bonds 
 — Specific Objections — New Law Respecting Circulation — 
 Great Safety of the Bank Notes. 
 
 THIS experience is related in rather full detail, as it concerns the 
 development of that Canadian system of circulation M'hich is 
 admitted to be one of the best in tlie world. It also traces the 
 origin of the present Canadian Banking Act. 
 
 Bj' far the most important events that transpired during the period 
 referred to in the last chapter were negotiations with the Government 
 respecting the circulation of the banks. 
 
 It has already been stated that a certain loss had fallen upon all the 
 holders of Bank of L'pper Canada notes, at the time of its failure. The 
 loss to any individual or firm was of no great importance, but it was 
 sufficient to create a desire for a better secured currency. The Finance 
 Minister of the day, Mr. Gait, afterwards Sir Alexander Gait and High 
 Commissioner of Canada to England, had long held, as a matter of 
 theory, that all circulating notes of any country should be issued by the 
 Government. This theory was held by a certain school of political 
 economists, of whom he was one, and the failure of the Upper Canada 
 Bank seemed to afford a favorable opportunity for putting the theory 
 into practice. He matured, therefore, an elaborate scheme for the sub- 
 stitution of Government notes for the circulating notes of the banks of 
 Canada. This was before the Confederation of the Provinces. 
 
 The Canada of that time consisted simply of the Provinces of Ontario 
 and Quebec, but then called Upper and Lower Canada. Mr. Gait's 
 scheme was approved by his colleagues, but before bringing in a bill 
 to give it effect, he consulted various members of the banking interest 
 uith regard to it. 
 
 Circumstances of the Country. 
 
 To enable the reader to understand the bearing of such a measure on 
 the finances of the Government, the circumstances of the country will 
 need to be considered. Canada, at that time (about 186;)) was still feel- 
 ing the effect of the terrible revulsion of 1857. I had always tliought 
 that it would take from eight to ten rears for the country to recover 
 
354- BANKING AND COMMERCE. 
 
 from it. During this period the finances of the Government were in a 
 really deplorable condition. The Finance Minister had to report deficits 
 year after year ad nauseam. The accoiuit of the Government with its 
 London agents was heavily overdrawn; and there can still be read in blue 
 books of the time letters from the Glyns and Barings, which are calcu- 
 lated to make patriotic ears tingle with shame. Our Government was 
 addressed by its London agents in exactly the same terms which a bank 
 employs to an impecunious trader when demanding payment of overdue 
 paper. Of course, they refused all further advances; they reported also 
 that it was practically impossible to place any more bonds of Canada 
 upon the market. Though they were six per cent, bonds, to attempt to 
 float more would send them to a heavy discount, a contingency which no 
 Finance ^linister would dare to face. Under these circumstances it was 
 not surprising that the account of the Government with its Canadian 
 bankers was overdrawn too. The recurring deficits of the finances were 
 the occasion of increased taxation, but it was impossible to load the 
 country more heavily in this way in its then condition. Continued deficits 
 v»-ere therefore largely reflected in the steadily increasing debt to the 
 Bank of jNIontreal. By the time the Finance Minister's scheme was 
 matured, this bank stood in the same position to the Government of 
 Canada that the Bank of England stood to the Government of England. 
 Its whole capital, or thereabouts, was lent to the Government; not a bad 
 position to be in, certain^, in one respect; and the authorities of the 
 bank by which, practically, must be understood Mr. King, the General 
 Manager, knew well how to make the most of it to their own advantage. 
 But the Government still needed more money; and matters had reached 
 a point when it was not convenient for the bank to increase its advances. 
 Such were the conditions prevailing at the time when the scheme was 
 submitted by which bank circulation would be abolished, and replaced 
 by the notes of the Government. 
 
 Opposition to Govkrnmext Papeu Money. 
 
 The Bank of Montreal gave in its adhesion at once, as might be 
 expected. The adoption of the scheme M'ould not necessitate any ma- 
 terial change in the course of its business, and the very able financier 
 M'ho was at its head, saw, in its working, large opportunities of increasing 
 the profits of the bank. But it was far otherwise with the rest of the 
 banks, and particularly with those carrying on the business of Upper 
 Canada. I gave careful study to tlie scheme as it Mould aff"ect the Bank 
 of Toronto, and became convinced that to adopt it would compel us to 
 make such a curtailment of our discounts, as would cause serious 
 disturbance and embarrassment to the whole circle of our customers. 
 And not only this ; it would seriously cripple our power of assisting in 
 that movement of the crops which M'as then, even more than now, the 
 foundation of so much of the business of Canada. The Bank of Toronto 
 
NEGOTIATIONS RESPECTING CIRCULATION. 3r,r> 
 
 had tlicn, I think, a larger share of the grain and lumber business of 
 Ontario, than any other bank; and I was filled with alarm at the con- 
 sequences of such an Act to us, if adopted by Parliament. Having be- 
 come thus convinced, I obtained permission from the board to go down 
 to Ottawa to confer w^ith the Finance Minister on the subject. Mr, 
 Gait received me very courteously, for he well knew the position of the 
 bank I represented. I carefully abstained from any discussion of the 
 merits of a Government currency, per sc; well knowing that in a matter 
 of that kind, I should be no match for a man of ^Ir. Gait's capacity. 
 He was, perhaps, the most brilliant of our many able Finance Ministers; 
 and almost the equal of Gladstone in the ability with which he discussed 
 hnancial questions in the House. I, therefore, confined myself purely 
 to. a statement of the eflect of this measure upon ourselves, and upon all 
 the banks who Avere doing the business of the agricultural and lumbering 
 interests of the country. I pointed out that the measure would also 
 necessitate a heavv curtailment of discounts to the mercantile community 
 of Upper Canada; that such curtailment would inevitably bring about 
 embarrassments and failures; that the country was only just recovering 
 from the sliock of the revulsion of 1S57 and could not bear any further 
 disturbance. I further said that quite apart from the immediate effect 
 of the measure, it would cripple for all time the power of the banks to 
 provide the means of moving the crops in the fall, and carrying lumbering 
 operations through the winter. 
 
 This was the general strain of my side of the conversations which 
 ensued. I found, however, that he was full of the idea of obtaining 
 more money for carrying on the business of the Government; and un- 
 doubtedly the measure he proposed would have effected that end, at 
 least. So I spent much time in the library of the House of Commons 
 endeavoring to think out some plan for relieving the Government with- 
 out damaging the banks. I was a young manager at that time, and 
 found it a very difficult task; in fact, it was beyond me. But one thing 
 I did understand, viz., the bearing of his scheme upon the business of the 
 country. That it would inflict incalculable damage, I was certain. It 
 was easy to reply that the Bank of Montreal was read}'- to fall in with 
 the scheme; but the position of the Bank of Montreal was as difl'erent 
 from our own as that of tlie Bank of England from the position of an 
 ordinary London bank. 
 
 The final point to which I directed our conversation was a strong 
 appeal io make the measure optional and not compulsory. 
 
 I have no doubt that other Western bankers brought influence to 
 bear on Mr. Gait (tliough I never met any of them in Ottawa), for 
 when the bill was brought before Parliament we found to our great sat- 
 isfaction, that this provision was expressly included. 
 
 The only bank that fell in with the measure was tlie Bank of 
 JNIontreal. Very favorable terms were offered, and its circulation was 
 relinquished. For several years, it issued Government notes exclusively. 
 
S5(i BANKING AND COMMERCE. 
 
 The bill provided for considerable reserves of gold to be kept against 
 these notes, and Commissioners were appointed, of vhom I was one, to 
 make periodical examinations of the gold on hand. The reserve in 
 Toronto was in the vaults of the Bank of Montreal; and, odd as it 
 seemed, another bank manager and myself visited the bank monthly, 
 entered the safe, overhauled and counted the gold exactly as one of their 
 own inspectors would have done. 
 
 The Western banks did not like these Government notes, though they 
 were legal tender. But Mr. King was determined that these banks should 
 carry a portion of the issue, and took characteristic measures to bring it 
 r.bout. The Bank of Toronto was strong enough to stand out for a time. 
 But, later on, J recommended that we should fall in, as we could do it 
 without detriment. And this we did. 
 
 Some time after the passing of the act it was rumored that the Com- 
 mercial Bank of Canada was about to fall in with its provisions and re- 
 linquish its circulation. I could not believe it. It would have been a 
 suicidal step for them to take. And as it was never taken, the rumor was 
 probably unfounded. 
 
 The Attempt to Ixtrodlce the National Bank SvsTEist of the 
 United States Into Canada. 
 
 Matters remained in this position for several years. Meantime Mr. 
 Gait had resigned and been succeeded by Mr. Rose of Montreal. Under 
 his auspices another attempt and of a far more determined character, 
 ivas made by the Government to change the basis of the circulation. At 
 that time the system of the United States was in universal favor, and so 
 far as the providing of a safe currency for the whole country was con- 
 cerned, it undoubtedly deserved it. But specie payments were still 
 suspended, and many inconveniences and drawbacks which have since 
 developed themselves were entirely unknown. It cannot be wondered at 
 therefore, that an idea began to prevail with the members of the Govern- 
 ment, that the system miglit be introduced with advantage into Canada. 
 It was based, as has been said, upon the holding of Government securi- 
 ties by every bank for the full amount of its circulation. Now the Gov- 
 ernment of Capada had already experienced great difficulty in the trou- 
 blous times just referred to, of floating more of its bonds in England. It 
 would therefore, be of great advantage if the whole bank circulation 
 were required to be based on Government securities; for in that case, 
 every existing bank would be compelled to make large purchases of 
 debentures; and every new bank organized in the country would fall 
 under the same rule. Immense sums of money (immense for those days, 
 though they would not be called such now) would thus flow into the 
 coffers of the Government, and relieve the Finance Minister from embar- 
 r.issment. The idea was extremely attractive; but like some other 
 theories, it omitted to take into account the most dominant factor of the 
 
NEGOTIATIONS RESPECTING CTRCUI.ATION. 357 
 
 position, viz., how to obtain the money to purdiasc such an enormous 
 amount of Government debentures as would be required. For it would 
 be absurd to supjiosc that the Government Mould furnish them on eri dit. 
 The bearing of this, however, was not well understood at first. 
 
 The bill to effect this object was prepared with great skill, and was 
 brought forward by the Finance Minister as a Government measure. 
 This rendered it all the more dangerous; for the Government, with Sir 
 John Maedonald at its head, had a large majority both in the House of 
 Commons and in the Senate. 
 
 It was incumbent upon me, as cashier of the Bank of Toronto, to 
 carefully study the measure,, which I did, and the conclusion I came to 
 was this, that whilst it would not affect our jjrofits to anything like the 
 degree which Mr. Gait's measure would have done, it would have pre- 
 cisely the same effect in compelling us to reduce our discounts to such 
 an extent as to cause very serious embarrassment to our customers. 
 Under its provisions, we would be compelled to buy Government securi- 
 ties (and that at an enhanced price, because of the new demand), not 
 simply for the whole amount of our capital, but for the whole amount 
 of our circulation at its highest point; and also in addition, for the 
 amount of the notes, with which we would carry on our daily business. 
 This was an alarming prospect indeed, as I pointed out to the directors; 
 for we would have to get the money from our customers. They fully 
 agreed that to compel our customers to pay up such an amount would 
 cause great distress and bring about numerous failures. In fact, it would 
 produce exactly the condition of which I had spoken to Mr. Gait. If it 
 was suggested that our customers could get accommodation at other 
 banks, the reply obviously was, that other banks would be in the same 
 position as ourselves, with one exception. I therefore, recommended the 
 members of the board to do their utmost to oppose the measure as in- 
 dividuals, and to bring every influence in their power to bear upon the 
 Government to induce them to abandon it. I did this, being well aware 
 that some of them were influential supporters of the Government. It 
 was a case, I said, for putting mere party considerations aside, and look- 
 ing at matters from a purely commercial and financial standpoint. 
 
 It soon api^eared that other banks were coming to the same con- 
 clusion, not only in Ontario, but in Quebec and the Maritime Provinces. 
 Correspondence and conversations only deepened tlie impression of the 
 disastrous consequences that the measure would entail, if forced upon us. 
 All the banks in Western Canada were a unit in this opinion, as well as 
 all the banks in the Maritime Provinces. Nearly all the banks with their 
 headquarters in the province of Quebec, had this opinion also. And as 
 Parliament was then sitting it was determined to hold a conference of 
 the banks that held these views, in Ottawa. 
 
 I attended this conference, practically at the risk of my life. I was 
 lying in bed, slowly recovering from an attack of malarial fever, when 
 the dav for the conference was approaching. An influential friend, a 
 
358 BANKING AND COMMERCE. 
 
 Senator and a strong supporter of the Go\ernment, who, however, shared 
 our views on this question, offered to provide a special car on the Grand 
 Trunk to take me down to Ottawa. I then determined to go, coiite qui 
 coute. My wife accompanied me as a nurse. On arriving at Ottawa, I 
 dragged myself up to the Committee room of the House of Commons, 
 wliere the meeting was to be held, and found a number of influential 
 gentlemen assembled, many of them Senators or Members of Parlia- 
 ment; all of them bank directors. 
 
 There were also a few managers present. The chair was taken by 
 the Hon. Mr. Eerrier of Montreal, a local director of the Bank of 
 British North America. But the meeting was very much at "sixes and 
 ievens." In was soon evident that very few of the gentlemen had given 
 much attention to the question; there was also a division amongst them 
 as to how far some of them would go in opposing what was distinctly a 
 Government measure. It Avas hard for a politician then, just as it is 
 now, to separate from his party; and the sentiment was strongly ex- 
 pressed by some, both then and subsequently, that though it might be a 
 bad measure, they could not see their way to oppose it in Parliament. 
 Some of the gentlemen, however, were Senators, and therefore, much 
 more independent than the Members of the lower House. Tlie upshot 
 of the meeting was, that it was desirable to form an association; the 
 object being to preserve the free circulation of the banks. Of this 
 association I was requested to act as secretary. The organization was 
 very informal ; no president was appointed, no funds subscribed, and no 
 rules adopted. The only thing that was thoroughly determined on was 
 to bring about, if j^ossible, a witlidrawal of the measure; for, of its 
 defeat, if it came to a real Parliamentary contest, we had but little hope. 
 But the strongest supporters of the Government were willing to use their 
 private influence for withdrawal. 
 
 Not a word of this was conm^.unieated to the press, and not a line of 
 our proceedings as an association ever appeared in the news of the day. 
 But some of us did endeavor, on our own responsibility, to influence pub- 
 lic opinion through the press, as will be seen. The banks of Nova Scotia 
 had deputed Mr. Peter Jack, cashier of the People's Bank, to represent 
 them in this matter. He \vas a well-educated banker, and liad studied 
 the question tlioroughly. And being a man of much intellectual force, 
 he carried great weight in tlie conferences we had on the subject. But 
 iiis especial forle was in interviewing iMembers of Parliament, a faculty 
 that I could lay little prttention to. I could, and did, write in the press, 
 and address meetings and conferences. But when it came to interviewing 
 ])rivate individuals, my tongue usu.illy failed me. The President of the 
 Bank of New Brunswick, afterwards raised to tlie Senate as the Hon, 
 .My. Lewin, a man of great influence in the city of St. John, N. B., M-as 
 also active in our cause, and rendered most valuable service. 
 
 We all liad our duties as managers or directors to attend to, and the 
 business of tlie banks was then just as engrossing as it is now. It was 
 
NFX;OTIATIONS RKSPKCTIXG CIRCULATION. 359 
 
 only snatches of time, so to speak, that practical hankers could give to 
 the agitation of this question. 
 
 Very little was said about it at our board meetings, and even when 
 absent in Ottawa, as I frequently was, I took care to keep firm hold 
 of the business of the bank by corres})ondence. Fortunately for us, the 
 Government also had other things to attend to, as well as this currency 
 measure. To Sir John Macdonald, it was practically a side-issue in the 
 great current of political events. There was no political principle in- 
 volved in it. as he knew very well. And when one and another of his 
 supporters took a <lifferent view from the Finance Minister, it did not 
 greatly trouble him. He had acted independently of his Finance Min- 
 ister once before, and we knew very well he would do so again, if circum- 
 stances called for it. He would not, therefore, let too much of the time 
 of Parliament be taken up with this measure. It was not therefore 
 pressed through as a great political measure would have been. We, 
 therefore, had breathing time, and ojjiiortunity of pursuing our object in 
 our own way. 
 
 Not that we were allowed to do this uninterruptedly. The able and 
 astute General Manager of the Bank of Montreal Avas then at the height 
 of his great fame. He was a perfect genius in finance, and was man- 
 aging the bank magnificently, making immense profits, paying large divi- 
 dends, adding heavy sums to the rest, and increasing the power and in- 
 fluence of the bank day by day. And an influential Imard of directors 
 was with him. 
 
 He had studied the measure as carefully as we had; indeed, there 
 was no doubt the Finance :Minister had consulted him in preparing it; 
 as was natural he should, the bank of Montreal being the bankers of the 
 Government. The measure, had it passed, would have had great ad- 
 advantages for the Bank of Montreal, both present and prospective. It 
 would have compelled niatiy merchants and men of business to apply 
 tor accommodation to the bank, and to transfer their accounts to it. In 
 fact, it would have gone further. The banks themselves would, in many 
 instances, have been put into such a position, that they could not carry 
 through their fall and winter business without rediscounting. And that 
 must be largely with the Bank of Montreal. This would have raised 
 the bank in many respects to the position occupied by the Bank of Eng- 
 land in England. 
 
 It cannot be wondered at then that Mr. King lent liis utmost influ- 
 ence to the side of the Government, and moved all the force at the com- 
 mand of the greatest bank in the country to enable the bill to be passed. 
 And as we were endeavoring to iuHuenee individual members of Parlia- 
 ment, so did he. 
 
 Very much could be said on this subject, especially that it would en- 
 sure an absolutely safe currency for the country. And if the necessary 
 contraction of discounts by the other hanks was referred to, it was easy 
 to say that merchants or their bankers might come to the Bank of 
 
S60 BANKING AND COMMERCE. 
 
 Montreal and get all the discount they wanted, if security were offered. 
 Some might rejoin that one bank could not carry all the business of the 
 country, when the reply would be to quote the example of England, and 
 Ihe Bank of England discounting for other banks. 
 
 To such an extent did this line of reasoning prevail that several of 
 our Western friends became quite cool, while the Bank of British America 
 concluded to join its influence to that of the Bank of Montreal. 
 
 It was an uphill fight, indeed, with such powerful influences arrayed 
 against us. But the rest of us determined, nevertheless, at that time to 
 persevere. Tlie bill was read a first time. Later on it was brought up 
 in the House again, and referred to a committee as usual. 
 
 It was either at this time, or before the measure was prepared at all, 
 that the Government framed a series of questions on the subject, ad- 
 dressing them to ihe bank presidents and cashiers of the country, as 
 well as to prominent members of the mercantile community. The ques- 
 tions referred specifically to the securing of bank notes by Government 
 s.'curities. Numerous rei^lies were received. They were all published 
 in a Parliamentary Blue Book, and form an interesting contribution to 
 the financial histor}' of the time. So far as the adoption of the system of 
 the American national banks was concerned, the answers reflected opin- 
 ions colored by the position of the parties concerned. My own answers 
 were to this eft'ect: 
 
 Specific Objections to the Proposed Change. 
 
 (1) That the proposed change in the circulating system was a revo- 
 lutionary one. 
 
 (2) That the whole system of our legislation was founded on 
 British precedents, under which all revolutionary changes Avere avoided, 
 and attention directed to the reform of acknowledged evils. 
 
 (3) That in such legislation care was always taken to bring about 
 the least possible disturbance to existing conditions. 
 
 (4) That no evils existed in Canada calling for such a radical 
 change; for any losses by bank circulation had been infinitesimally small 
 in comparison with the benefits it had conferred on the country. 
 
 (5) That the compelling of banks to hold Ciovernment securities to 
 cover the whole of their circulation would cause enormous disturbance to 
 business, bring about numerous failures, cripple the power of the banks 
 to facilitate the movement of the crops, and the utilizing of our forest 
 resources, and compel them to close up many of their branches, thereby 
 inflicting heavy damage to the small towns and farming districts. 
 
 (()) And finally, that changes might be introduced into our banking 
 charters of a conservative character which could be brought about without 
 disturbance, and would, while preserving the essential element of free 
 circulation, render the notes of tlie banks morer secure. 
 
 We had not then thought of the great safeguard of jnaking notes a 
 
NEGOTIATIONS RESPECTING CIRCULATION. 36f 
 
 lirst charge on assets, or of the fornintion of a rechinptioii fiiiid. Tliesc 
 were later developments. 
 
 The answers of the majority of practical bankers were to the same 
 eiFect as the foregoing, though the directors of some of the banks ex- 
 pressed themselves differently. And some merchants who had read 
 books on political economy aired fanciful theories on the subject. 
 
 I amplified my own ideas in a series of letters to the Toronto "Globe," 
 under the signature B. N. K. R., and also addressed a large meeting of 
 the Board of Trade in Toronto, pointing out that it was as much a mer- 
 chant's question as a banker's. Mr. Jack was equally busy in Nova 
 Scotia, and Mr. Lewin in New Brunswick, stirring up the business com- 
 munity to an appreciation of the evils to trade and commerce that must 
 ensue if the measure passed. The managers of all the banks in the City 
 of Quebec were active in the cause, especially Mr. Stevenson of the 
 Quebec Bank, and Mr. Vezina of La Banque Nationale. Some of the 
 bankers of ^Montreal were also with us, and rendered good service, but 
 were not so prominent in the contest as Western men. 
 
 We were particularly careful to avoid even the appearance of making 
 the matter a political one, for we knew well, in that case, there would not 
 have been the least chance of success. The leaders of the Liberal party, 
 which was then in a minority, were largely with us, as we well knew, and 
 this purely on financial and business grounds. We knew also from the be- 
 ginning that two of the most influential supporters of the Government, 
 both residing in Toronto, were with us. One Avas a Senator, the other in 
 the House of Commons. They held strong views on the subject, and ren- 
 dered invaluable service to our cause both in and out of Parliament. 
 They both had the ear of Sir John Macdonald, and did not fail to point 
 out to him the danger of alienating liis followers, especially from On- 
 tario and the other Lower Provinces. In fact, this was really the policy 
 we adopted; viz.: — to alienate one by one, on this question, so many of 
 Sir John's supporters that if he allowed the Finance Minister to force 
 the measure through the House, the Government would be in danger of a 
 defeat. 
 
 We had. however, continually new diflienltiis to contend with. The 
 Commercial Bank had failed, the effect of which was still further to 
 weaken confidence in bank notes. One or two Western banks were known 
 to be weak. The directors of others were afraid, for business reasons, to 
 do anything in opposition to the all-powerful Bank of Montreal, whose 
 branches were to be found in every important centre of business. At one 
 time, when we were having a conference in Ottawa, rumors of coming 
 financial trouble were so rife that the conference broke up and some of 
 its members went hastily home to look after their own interests. How- 
 ever, I knew that the Bank of Toronto was all right, and remained 
 Quietly in Ottawa. 
 
 But a feeling of uneasiness began to prevail among some of the 
 presidents of banks. Some of them were politicians; others had interests 
 
562 BANKING AND COMMERCE. 
 
 tliat appeared to them more important tlian anything that could be af- 
 fected by this measure. This uneasiness and doubt continued to increase 
 rather than otherwise, and it was finally decided to hold another general 
 conference on the subject. The place selected was Toronto. It was 
 largely attended by presidents and vice-presidents, but only a few cash- 
 iers were present. I doubt if Nova Scotia and New Brunswick were 
 represented. A long discussion ensued; the general trend of which was 
 that it was not desirable to continue the agitation. I was present as sec- 
 retary, but said very little. I never could sj^eak with much effect to in- 
 dividuals, or to a small number. The meeting finally came to the conclu- 
 sion to cease from agitating the matter, to accept the principle of the 
 Bill, and to rely on making amendments in detail. 
 
 This was, to me, a matter of great mortification, and I went home 
 vexed and depressed, for I well knew that to accept the principle of the 
 Bill was to yield everything. The next day, however, having recovered 
 my spirits, and feeling more than ever the momentous issues involved, 
 and that a definite crisis had arrived, I told the president, it never would 
 do to accept the conclusions of that conference. The passage of that bill 
 would do the Bank of Toronto more harm than any bank in the country. 
 We were doing by far the larger part of the grain and lumber business 
 of the Western country, and it was there Avhere the bill would strike. I 
 said, we must keep up the agitation, and that they really must allow me 
 to go down to Montreal at once, and see such bankers of that city and 
 Quebec as M'cre Avith us. I would also correspond with Mr. Jack, and ask 
 him to come up from Halifax and meet us, as well as the President of 
 the Bank of New Brunswick. They could be thoroughly depended upon. 
 The aim must be to rally our scattered forces, and Inspire with con- 
 fidence the doubtful and wavering. It was a bold step for a young man- 
 ager to take — to set myself in opposition to the conclusion of nearly all 
 the bank presidents of Ontario; but I knew, as a professional banker, the 
 nature of the issues involved better than any of these gentlemen; and 
 determined that the contest should not be given up without another 
 struggle. 
 
 I went down to Montreal and saw the men I had proposed to meet. 
 They were all of the same mind with myself; we must continue the con- 
 test to rlie end; it was useless to talk about compromising on the details 
 of the bill, as was suggested in Toronto. The sting of the bill lay iti its 
 principle, and that principle we would tight to the end. 
 
 Some members of the Government were disposed to ridicule our ef- 
 forts. "What is the good," said they, "of a parcel of small banks setting 
 themselves uj) in opposition to a strong Government like ours, and to 
 the two strongest banks in the country?" We were, however, not fright- 
 ened at such talk as this; for we knew well that when it comes to in- 
 fluencing votes in the House of Commons, a number of small banks acting 
 together can do more than any singh- b/uik. no matter how ])owerful. 
 Thus, then, we determined to persevere. 
 
NEGOTIATIONS RESPECTING CIRCULATION. S6i 
 
 The session of Pcarliament closed witliout niiylliiiij? heinj? done, and 
 we had another breathing space. 
 
 Before the next one opened, a very important change had taken 
 jilace. The Finance Minister, Sir John Rose, had resigned and gone to 
 England to fonnd the financial house of Morton, Rose & Co. Sir Francis 
 Hincks," a prominent Canadian politician of former days, had just ar- 
 rived in the country from Barbadoes, of which island he had been Gov- 
 ernor for some years. Some conferences between him and the Premier 
 resulted in his re-entering Parliament, and being offered the position of 
 Finance ^Minister, His advent to power raised our liopes considerably. 
 He w;\;s a Western man of a very practical turn of mind, had lived in 
 Toronto many years as a man of business, and thoroughly knew the 
 wants and requirements of the Western country. Of these, the late. 
 Finance Minister knew practically nothing. He was a lawyer in Mont- 
 real; and able man as he was, the horizon of his financial views was 
 largely bounded by INIontreal interests. But Ave instinctively felt that Sir 
 Francis would give practical consideration to our rejjresentations. And 
 so it proved. 
 
 Soon after he assumed office he determined to come up to Toronto to 
 consult the Western bankers and the supporters of the Government on 
 the subject. It so happened that I was on the platform of the Grand 
 Trunk Railway station when he arrived, being about to visit one of our 
 branches. Some political friends had come to meet him, one of whom 
 was that member of the House of Commons who had so warmly espoused 
 our cause. He introduced me to Sir Francis, and informed him that I 
 could give him full information respecting the controversy, as Western 
 bankers viewed it. We talked for some time, he manifesting great inter- 
 (:St, and evidently taking in the position as presented to him. He then 
 went into the city to see other bankers, some of them old political friends, 
 and with whom he had further conferences. He remained a day or two 
 in the West, and on leaving for Ottawa promised to give careful attention 
 to the representations M-e had made. 
 
 He had, of course, heard the other side from members of the Ciovern- 
 ment, and from the Bank of Montreal. But it was soon made evident 
 that he would think the matter out for himself, and take his own course, 
 no matter what names were quoted to influence him. I have no doubt 
 lifter leaving Toronto he also saw bankers from Quebec and the Maritime 
 Provinces. Some time now elapsed and the jjeriod was one of alternate 
 hopes and fears. But at last we were sununoned to meet him in Ottawa. 
 A full representation from the West, the East, and the Maritime Prov- 
 inces gathered in the capital, and to this conference Sir Francis an- 
 nounced the conclusions he had arrived at. These in substance were as 
 follows : 
 
364 BANKING AND COMMERCE. 
 
 New Law Rksi-kctixg Cip.cui..\tion. 
 
 (1) Tliat the banks should retain their circulation, with the exception 
 of the notes of one and two dollars. These to be issued by the Govern- 
 ment. 
 
 (2) The banks to be under no obliiiation to cover their circulation 
 by Government securities. But not to issue bej'ond their paid-up capital. 
 
 (3) An Act to be passed creating an issue of Government legal- 
 tender notes for the purpose of settlement between banks. The cash re- 
 serves of the banks at all times to consist partly of such notes; say, to 
 the extent of two-fifths of the whole, whatever such reserves might be 
 from time to time. For those legal-tender notes gold to be held by the 
 Government to an extent to be agreed upon. The balance to be covered 
 by Government securities held in the Treasury, of which ten pe*r cent, 
 would be guaranteed by the Imperial Government. Thus all ordinary 
 issues would be covered either by gold or Government securities. Beyond 
 this amount all Government notes to be secured by gold actually held. 
 
 Some other provisions for security were added, most of which had 
 been suggested by ourselves, but the foregoing were the fundamental 
 features of his scheme. 
 
 It will be perceived at once that this conceded practically all we had 
 contended for. The surrendering of one and two dollar notes amounted 
 to nothing. We were not sorry to get rid of them, for in the "runs" that 
 some of us had jiassed through, the bulk of the people that crowded 
 round our counters had presented only this class of notes. 
 
 The obligation to hold forty per cent, of our cash reserve in Govern- 
 ment notes, was somewhat distasteful, for we had always held our whole 
 cash res(;rve in gold; and some feared that its adoption might disturb the 
 solid basis on which our currency and financial system rested. But, after 
 all, the proposal could be adopted without practical inconvenience or 
 danger, for the notes themselves rested on gold and securities readily 
 convertible into gold. And the issues of the Government, apart from the 
 small notes, would not enter into circulation at all, being all of large 
 denominations. 
 
 It was an immense relief to us when the Finance Minister announced 
 these conclusions, and when we met to consider them there was not a dis- 
 sentient voice. Wc felt it to be reasonable that some concessions should 
 be made after the main issue had been agreed to, and all declared their 
 jcadiness to hold the large amount of Government notes proposed, if the 
 gold basis were made sufficiently strong. Sir Francis willingly agreed to 
 this, and great satisfaction was expressed at the haj)))y result of so long 
 and severe a contest. 
 
 It now only remained to embody these conclusions in legislation. And 
 here we come to the origin of "Tlie Canadian Banking Act." 
 
 With regard to the proposed issue of Government notes, it was com- 
 ])arative]y easy to frame an Act embracing the points agreed upon. This 
 
NEGOTIATIONS RESPECTING CIRCULATION. 36'; 
 
 Tvas done, and it exists to-day as the Dominion Note Act, having re- 
 mained substantially as at first, with the exception of the enlargement of 
 its provisions to meet the expansion of the business of the coantry. 
 
 But it was not so easy to deal with the charters of the banks, inas- 
 much as each of them at that time was in the shape of a separate act of 
 Parliament. In their main provisions most of the charters were alike. 
 But in several cases the constitution and privileges of the bank were on a 
 different basis from the rest. These acts had been passed at different 
 periods, and contained a number of minor provisions differing from one 
 another. It was felt, however, to be undesirable that the banking of 
 Canada should be continued under separate acts of Parliament, and that 
 an effort should be made to frame one general act, embodying the most 
 important provisions of them all, together with those that had recently 
 been agreed to by the Government. The best legal minds in Parliament 
 were then convened, in conjunction with the P'inance JSIinister, to frame 
 a general act. The Hon. Edward Blake took a prominent part in this, 
 and some of the new clauses were drawn by him. All who had been active 
 in the late controversy were invited to meet in Ottawa once more, and 
 give these gentlemen the benefit of their suggestions. The committee 
 had in addition the very valuable co-operation of the General Manager of 
 the Bank of Montreal; for now that the great points of difference had 
 been settled, the interests of all the banks were alike. Representatives of 
 banks from all parts of the country, therefore, sat in conference day by 
 day, discussing the clauses of the proposed act one by one; and none 
 rendered more valuable service than our late formidable antagonist, who 
 sat with us the whole time, and brought to bear u})on the matter all those 
 qualities of sound judgment and keen perception which distinguished 
 him. We sat in one of the committee rooms of the House, and discussed 
 the bill with a considerable sense of responsibility, being well aware not 
 only that our conclusions would affect the whole banking interests of the 
 country, but every other interest, commercial, manufacturing, and in- 
 dustrial, not to speak of the interests of the Government itself. 
 
 Many of the directors of the banks and several of their presidents 
 were Members of Parliament; some in the Senate, some in the House of 
 Connnons. Tiiese, of course, sat with us from time to time, so that, 
 though not formally constituted as such, m'c really were, in effect, a joint 
 committee of Parliament and of bankers. 
 
 I have always considered that this gave our Banking Act its peculiar 
 value, in that it expressed the matured judgment, sharpened by ex- 
 perience, of the foremost men in banking, commercial, and political life. 
 After all this preliminary work, in which members of both political par- 
 ties joined, it may be imagined that the bill passed through Parliament 
 with little criticism and no opposition. 
 
 It bears marks to this day of being an amalgam.iting act, with ex- 
 ceptions here and there, in minor features, but bringing every b .nk io 
 the couutrv under the same general law in regard to essentials. 
 
366 BANKING AND COMMERCE. 
 
 The duration of the act was for ten years, and it has been the sub- 
 ject of careful consideration and discussion at every decennial period 
 since 18?].. It has been amended and improved in important particulars 
 after passing, however, through the same process that it passed through 
 at first, viz.; long conferences between the Finance Minister, or his 
 Deputy, and bankers. 
 
 Safety of Baxk Notes Furtheh Assuueo. 
 
 By far the most important of these amendments >vas that which pro- 
 vides for bank notes to be a First Charge on all the assets of a bank, 
 and as subsidiary to that, the foundation of a Redemption Fund, the far- 
 reaching effect of which has been opened up elsewhere. Both these were 
 proposed by the bankers themselves; the first in response to a renewed 
 proposal to revive the act compelling a covering by Government secur- 
 ities. That, however, av3s not a serious effort, and the Minister readily 
 gave way to our proposed substitute of a first charge. 
 
 I have thus described in detail the various steps of the process by 
 which Canada came to possess a general Banking Act, which has proved 
 itself satisfactory in the highest degree in its practical working, and 
 under which a system of bank circulation has been established which 
 combines in an eminent degree the qualities of safety, elasticity and 
 adaptability to the varying requirements of commerce, and by the opera- 
 tion of which the financial affairs of the country have been preserved on 
 a more stable equilibrium than in any other part of this continent, and 
 perhaps of the world. 
 
CHAPTER VI. 
 
 MY EXPERIENCE AS GENERAL MANAGER IN MONTREAL, 
 
 INCLUDING REFERENCES TO BUSINESS IN NEW 
 
 YORK, CHICAGO, MILWAUKEE, AND TO 
 
 THE BARING CRISIS. 
 
 Enlarged Responsibilities — Shaueiiolders' Annual Meeting — Bank 
 Failures in Montreal — Oun Business in New York — Journey 
 TO THE South — Silver Agitation — Visits to Commercial Cen- 
 ters in England — The Baring Crisis — Chicago and Minneap- 
 olis — Visit to Manitoba — The Manitoba Boom — The Bankers' 
 Association — Renewal of Bank Charters and the Securing of 
 Circulation by a First Lien on Assets — Final Retirement from 
 Banking. 
 
 AFTER I left tlie Bank of Toronto, I still continncd to keep in 
 L touch with banking and financial movcnionts. It was agreed that 
 I should do so for about twelve months after my retirement, and 
 give the bank the benefit of any information at my command. Moreover, 
 I still continued to write for the press on financial subjects. This was in 
 January, 1877. 
 
 The times had now been bad for nrarly three years. They continued 
 to be bad. Business was difficult, and failures increasingly numerous. It 
 was known in banking circles that one of the leading banks of the 
 country, the Merchants' Bank of Canada, was meeting with severe 
 losses; and in such times as were then passing over us, it was with no 
 surprise that the public learned that an uneasy feeling was developing 
 amongst the stockholders and creditors of the bank. In these circum- 
 stances a movement was made by a number of stockholders looking to the 
 retirement of the president and general manager, which finally resulted 
 in the resignation of both. A new president and vice-president were at 
 once elected. But the office of general manager was vacant. 
 
 P^nlarged Responsibilities. 
 
 It was about the middle of February, only six weeks after I had, as 
 I thought, bade farewell to banking for life, that it was intimated to me, 
 by a banking friend, that the directors of the Merchants' Bank were 
 thinking of offering the position of general manager to me. I smiled, 
 and said the rumor was absurd. I had given up banking and was "out of 
 
36S BANKING AND COMMERCE. 
 
 the running." However, he persisted tliat lie liad the information from 
 a reliable source. This proved correct; for in the course of a day or 
 two, during which I had been able to think over the matter, a gentleman 
 from Montreal waited upon me to ask whether it would be possible for 
 me to take charge of the Merchants' Bank, in the present emergency, I 
 asked him at once whether he represented the directors. He assured me 
 that he did. He added that he was authorized to say that in the event 
 of my giving consent, everything in the way of support and assistance 
 from the board would be rendered me; that the late president was still 
 retained as director; that he could give me all necessary information 
 about the affairs of the bank. (This was the late Sir Hugh Allan, whom 
 I knew well. Of his high position I need not speak.) The late general 
 manager, he added, was still in charge, and would render every assist- 
 ance. 
 
 The responsibility of taking charge of a bank, under the circum- 
 stances, was a serious one, for two reasons. It had been attempted once 
 l>efore in the case of the Bank of Upper Canada, but the attempt had 
 entirely failed; yet the gentleman who undertook the task was of much 
 greater experience and much higher banking position than I could pre- 
 tend to; besides this, the times were very difficult; there had been 
 three years of depression, and it was feared there would be more, a fore- 
 cast which jjroved onl}- too true, for the succeeding years were worse 
 than those that had gone before. Insolvencies were increasing year by 
 year, and a settled gloom was prevailing in the commercial community, 
 so that, instead of the usual query on 'Change, and at the clubs, "How 
 is business.''" the question was, "Who is going to fail next.''" In the im- 
 porting trade, bad debts were swallowing up all the profits and more. 
 There was no profit in manufacturing, but very much the reverse. The 
 great lumber and timber interest was in one of the deepest sloughs of de- 
 pression into which it has ever been plunged. 
 
 Such was the condition of things when I was asked to assume charge 
 of the ^Merchants' Bank. I knew something of this, from my experience 
 in Toronto, but I did not knew all. If I had, it is doubtful whether I 
 would !iave had the courage to undertake the heavy task of rescuing the 
 bank from its difficulties and jjlacing it on a sound footing. There was, 
 however, one great dift'erence between the case of the Bank of Upper Can- 
 ada and this, viz. : in the composition of the board. The board of the 
 former bank I have characterized already. That of the Merchants' 
 Bank was a complete contrast to it in every respect, consisting as it did 
 of some of the wealthiest and most experienced business men of the com- 
 munity. Yet, able and important as they Avere, they were willing to give 
 me a perfectly free hand in the work of reorganization, and to co-operate 
 in any suggestions I made for improvement. 
 
 The two leading banks had ottered to render assistance, and very 
 politic it was in them so to do; for if the Merchants' Bank, with its 
 multifarious Inisiness and branches sjiread all over Canada, and its 
 
AS GENERAL MANACIF.R IN MONTH [•AL. 360 
 
 agencies in New York and London, had stopjicd payment, it is certain 
 that a condition of panic would have superseded, such as to shake the 
 credit of the country to its foundations. Their willingness to aid saved 
 Canada from this disaster. They agreed at once to advance the sum I 
 named as necessary; and a very large sum it was. But the security was 
 unquestionable. 
 
 The board and the managers co-operated heartily in the work of 
 reconstruction ; but the task jiroved far more difficult than I could have 
 anticipated. Not only were there masses of Canadian accounts to deal 
 with, of the same kind that 1 had had to deal witli before, but on a 
 more extended scale; there were in addition immense operations 
 being carried on in New York and London, of a different kind alto- 
 gether. 
 
 The former I cut short at once, se\ere as the loss was, and it was 
 well I did; for had the operations been let alone, the loss would have 
 doubled, ^^'ith regard to the latter, I accepted a favorable projiosal 
 made by the General Manager of the Bank of ^Montreal, whom I had 
 consulted on the subject. There was going on at this time, indeed, what 
 seemed like a certain amount of cargo being thrown overboard to save 
 the ship. But save the ship we did, and steered her at last out of the 
 stormy waters in a sound condition, atid well found in every respect, by 
 the blessing of God. And so she has continued ever since; and I don't 
 think what was thrown overboard was of any permanent value; indeed,. 
 I told the stockholders afterwards, that during this terrible period, 
 though we had to wade through and settle up masses of insolvencies, we 
 had not lost a single valuable account. But with me, it was night and 
 da}^ work for more than three years; and my banking hours, during this 
 period, might be said to have been from nine in the morning till eleven 
 at night. 
 
 Annual ^Meeting. 
 
 The time came at length for holding the annual meeting, and a very 
 important occasion it was. It was not without apprehension that we 
 bad looked forward to il. for it had begun to be rumored in the city that 
 an attempt would be made to hold some of the directors personally re- 
 sponsible for the losses. The meeting therefore needed to be very care- 
 fully handled. As the report of the directors was read, and it was 
 stated that a reduction of capital of more than two millions would be 
 necessary, a condition of suppressed excitement arose in the meeting. 
 I was aware that explanations would be asked from myself, and had 
 considered carefully what remarks to make. The directors, I was con- 
 vinced, were not so much to blame as was generally supjiosed. I there- 
 fore began by reminding the stockholders that tlie directors were very 
 heavy holders of the stock; that none were so interested in the welfare 
 of the bank as they were; that they would be the heaviest suflerers by 
 the reduction; that the times had been very difficult for several years; 
 
 24 
 
370 BANKING AND COMMERCE. 
 
 that all banks had surt'cred losses; that if the directors had made mis- 
 takes, they had acknowledged them, and agreed readily to my sugges- 
 tions for improvement; that the wise and practical course for them as 
 men of business was to make the best of the situation, just as men had 
 to do at times in conducting their own business. I told them that the 
 bank had a large amount of good business left, and six millions of cap- 
 ital, after reduction; that upon this new foundation a good future might 
 be developed; and that if the reduction of the capital were carried out, 
 there could be little doubt that steady dividends could be paid in future. 
 What the dividends would be would depend upon the general course of 
 affairs in the country, but that the bank had considerable earning capacity 
 tliere could be no doubt. 
 
 My object, as will be seen, was to jDour oil on the troubled waters, 
 and to turn the thoughts of malcontents into another channel from what 
 they had been dwelling upon. 
 
 The vice-president made some very pertinent remarks, much to the 
 same purpose. 
 
 It was no object of mine to cast blame on officials; but this I had to 
 do to some extent, but cautiously and guardedly. When I sat down one 
 or two of the stockholders asked questions, evidently prepared before- 
 hand, as to the responsibility of the directors, and what was to be done 
 in view of it. I had, however, no difficulty in answering them so as to 
 prevent that kind of remark being carried further. The late president, 
 with his usual sagacity, sat perfectly silent during the meeting, though 
 most of the criticism was directed against him. A few other questions 
 were asked, one of the most important being by Mr. Donald Smith of 
 the Hudson Baj'^ Company, now Lord Strathcona. This I was able to 
 answer to his satisfaction. The meeting finally ended in the adoption of 
 a reconnnendation to ask Parliamentary sanction to a reduction of twenty- 
 five per cent, on the capital. And the directors were unanimously re- 
 elected. 
 
 So ended this very important meeting. 
 
 The annual meeting settled things somewhat, and I soon afterwards 
 had the satisfaction of repaying to the banks all we had borrowed from 
 them, still, however, keeping good reserves. We were also realizing divi- 
 dends from insolvent estates, and the proceeds of properties we were 
 bringing to sale from month to month. And as one knotty' point after 
 another was settled, and one wave of difficulty after another was sur- 
 mounted, I became more and more hopeful of the ultimate issue. But 
 unexpected developments occasionally tried my patience almost beyond 
 endurance. 
 
 We still, however, had one more ordeal to jjass through, namely, to 
 get a bill through Parlia)nent authorizing tlie reduction of stock. 
 
 Application to Parliament. 
 
 The first year l>ad passed away. We were making a fair profit out 
 of our good business, but could distribute nothing until the capital was 
 
AS GENERAL >E\NA(iEH IN MONTH KAI.. 371 
 
 adjusted oil n now ba^is. But tlio times were iricnasiu^ly difficult. l)r- 
 pression became deeper and deejier, and by tbc time that Parliament 
 opened, and we had to make our a))plication, it became evident that the 
 reduction would need to be larger than the stockholders had voted for. 
 I was certain of this, owing to the number of new failures that had trans- 
 pired and tlie uusitisfaetory result of many insolvent estates. It was 
 therefore witli a luavy heart I proceeded once more to Ottawa and 
 traversed the familiar halls and corridors of former years. 
 
 The able and experienced Solicitor of the Bank, the Hon. John 
 Abbott, accompanied me; perhaps it might be put that I accomj)anied 
 him; for of course, as our Advocate, he would have the task of present- 
 ing the case to the Banking and Commerce Committee of Parliament. 
 He was a member of I'arliamcnt himself, and some years after became 
 Prime Minister. 
 
 The Finance MiniNter of that time had somewhat of a rei)utation for 
 impressing upon deputations that he knew their att'airs better than they 
 did themselves. In some cases this might be true. This disposition of 
 mind on his part, however, was of very great service in our interviews 
 with him. I Mas convinced, and had so informed the board and Mr. 
 Abbott, that unless we got the capital reduced by thirty-three per cent., 
 instead of twenty-five, it would be difficult to carry on business satis- 
 factorily. The difference would be some $700,000; and we needed it all, 
 if we were to start on our new career with any sort of a reserve fund. 
 But it was difficult to express this to the Parliamentary Committee, for 
 our mandate from the stockholders was to ask for a reduction of only 
 twenty-five. But to my surprise and great satisfaction the Finance 
 Minister himself began to suggest doubts whether a reduction of twenty- 
 five per cent, would be sufficient. This was exactly the line we wanted 
 him to take, though we did not give him to understand it in so many 
 words. He had formerly been a director of the Commercial Bank, whose 
 business we had purchased, and knew very well what the purchase of 
 that business had involved. And he was well aware of the depression of 
 business that prevailed in the country. The discussion was joined in by 
 another member of the Cabinet, a very influential Montreal gentleman, 
 M'ho said that he had also about made up his mind that a greater reduc- 
 tion than twenty-five per cent, would be necessary. In fact, he thought 
 it would be better to make the red\iction thirty-three i)er cent. This was 
 an immense relief. I doubt much whether we could have secured such a 
 reduction if we had pressed for it ourselves, but when the Finance Min- 
 ister announced this as a decision, it was accepted with a satisfaction I 
 did not care to show. On this basis then a bill was brought into Parlia- 
 ment. There was no opposition. The bill passed without difficulty, and 
 received the Royal assent. 
 
 Wlien this bill was passed I ft It that, at last, we had got down to a 
 solid basis. The credit of the bank was restored, we had a good circle of 
 \aluable customers and numerous paying branches. Our officers were 
 
372 BANKING AND COMMERCE. 
 
 coming to understand their duties under tlie new regime, our machinery 
 for dealing witli irsolvent estates was well organized, and although it 
 was more than three ye.TS before we were fairly "out of the woods," I 
 felt more and more confident that we could hold our own against any 
 storm that might rise, give satisfaction to our customers, pa}' respectable 
 dividends to our stockholders, and gradually accumulate a rest, which 
 vve hoped in time miglit amount to fifty })er cent, of the capital. 
 
 Bank Failurfs ix ISIontreal. 
 
 About the end of this long jieriod of depression signs of weakness 
 began to be exhibited by several small banks. These banks had no 
 branches, their business being entirely local. Their methods of manage- 
 ment had never inspired confidence. The manager of one of them was of 
 rather a boastful temperament, and amongst his friends was accustomed 
 to say that the banks of the city generally were old-fashioned in their 
 ways, and their modes of doing business not suitable to the times. We 
 rather smiled at all this, knowing well that banking M'as a business 
 founded on settled principles, demonstrated by long experience to be un- 
 susceptible of change from changing times. We quite expected that some 
 day or other this bank would get into difficulties, and apply for assist- 
 ance. And so it happened. The Merchants' Bank took part in con- 
 nection with some of the older banks in rendering them assistance, taking 
 such security as the bank was able to offer us. This, however, only put 
 off the evil day, and at length the bank stopped payment, and was wound 
 up. All these banks had corducted their business in a sanguine and reck- 
 less manner, in defiance of the precautions which experience has rendered 
 necessary to safety. Their failure, however, only intensified the gloom 
 which invaded financial and business circles, a gloom which had continued 
 (1879) for nearly seven years; and whispers began to be about respect- 
 ing the position of other banks. Slight symptoms of a run were mani- 
 fested in some quarters. I had fully anticipated this, and strengthened 
 our cash reserves, so that if a drain did set in we could meet it without 
 difficulty. However, notliing of the kind took place, nor was there any 
 serious demand made upon the otlier banks. Yet, I did feel the con- 
 linuous wearing anxiety of the unprecedented number of commercial 
 failures that were transpiring (more than four times as many as they 
 were a year or two afterwards), and longed for the time when the 
 clouds would break. ^- 
 
 12 How deep the depres.sion of this period was may be gathered from tlie 
 fact that Bank of Montreal stock had fillon from 2i'; in 1S72 to 125 in 1S79. 
 Bank of Commerce from 122 in 1877 to 95 in 1S79. Bank of Toronto from 176 in 
 1877 to 106 in 1879. The Canadian Pacific Railroad, now in such a magnificent 
 financial position, was then in such straits that after borrowing all it could 
 from its bankers it was obliged to pay for supplies by promissory notes, which 
 notes were hawked about the street, at a heivy discount. I never lost faith in 
 this enterprise, and discounted all its paper thai was offered. 
 
AS GENERAL .MANACiKK IX MONTREAL. 373 
 
 Our BrsiNEss ix Nkw Youk. 
 
 During tlie period of reorganization, and lut'orr we liad got the act 
 of Parliament to reduce the capital, it was useless to attempt to do much 
 business in New York. We !iad no spare money to lend on stocks, and 
 our commercial credits were not looked on with favor. Neither could we 
 draw further on our London office, which was about to be closed. 
 
 We therefore retired into a sort of obscurity for a time, and made 
 an arrangement with a private banking firm to occupy a part of their 
 spacious office, and to do a Sterling business, under their wing. We did 
 not expect to do more than pay expenses under this arrangement, but it 
 enabled us to keep our hold upon New York. It would keep our officers 
 in touch with the market, and in iiractice. We therefore gave up our own 
 office in Wall Street (saving a heavy bill of expense thereby), and 
 entered on. the new arrangement on a very economical scale. 
 
 This continued for a year. We did a quiet, safe business, having the 
 advantage of the excellent judgment of one of the partners of the firm 
 in the critical business of buying bills. We made no bad debts, and lost 
 nothing, somewhat of a contrast to our former Wall Street experience. 
 But on the other hand we viade nothing. 
 
 Our relations with the firm were always satisfactory; but at the end of 
 a year our managers thought we might make the experiment of opening 
 an office of our own. Our credit had gradually become re-established, 
 and we were beginning to have once more some disposable funds. 
 
 I therefore recommended opening. The board coincided. We rented 
 a very unpretentious office in Exchange Place, at a very moderate rent, 
 and commenced business on the new foundation. And as we had an un- 
 impaired capital of six millions, with the nucleus of a rest in addition, 
 we considered that we had a fair chance of success. 
 
 W'c soon found that we could sell our sterling bills at fair rates, 
 drawn as they were on a Scotch bank of undoubted strength. We pro- 
 ceeded very cautiously in the matter of issuing commercial credits, how- 
 ever, for the business has risks ])eculiar to itself. Before long we were 
 able to spare funds for loaning on stocks. Thus between the sterling 
 business and the interest on our stock loans, we did a fairly profitable 
 business in the first year. At the time of the boom in Winnipeg, as will 
 be seen later on, we had enormous deposits at that branch. It would 
 have been madness to employ them in discounting, and not ]irudent at that 
 time to place them out in stock loans in Canada. We therefore transferred 
 almost the whole amount to New York, and placed it out on call loans 
 there. Our New York business now assumed respectable proportions. 
 The brokers included us in their daily round of calls, and we took our 
 place once more amongst the Canadian banking institutions which have 
 played such a prominent part in Wall Street for the last generation. In 
 the second year we made very considerable profits. But a cloud was still 
 hanging over the commercial position. Stocks were heavily dejjressed. 
 
374 BANKING AND COMMERCE. 
 
 Much business in the United States was carried on without jjrofit. But 
 Wall Street was free from spasms, our customers were amongst the best 
 of the city brokers, and every one that knows New York knows what a 
 highly respectable class of men, as a rule, they are. (I stay my hand 
 jiere, for a moment, to say that of the hundreds of millions of money we 
 loaned to brokers in New York during the twenty-five years of my ad- 
 ministration, we never lost a dollar. We did lose, however, once, by 
 dealing with principals.) 
 
 As time went on, our managers came to have a more intimate acquaint- 
 ance with the range of stock and bond securities, and as one of them 
 had been brought up in New York, we came to feel more confidence at 
 headquarters in their judgment. We still, however, had to test by ex- 
 perience, what the effect of a shai-p break in stocks might be. It came at 
 length, and to ray great satisfaction we passed through it safely. Some 
 premonitory symptoms had appeared, and caused us uneasiness in ISIont- 
 jeal. On t)ic day when the heavy all-round break took place, we had 
 advices as the day Ment on; and at the close, I took the night train for 
 New York, to scan the position for myself. To my great satisfaction, 
 on entering our office early next morning, I found our managers per- 
 fectly comfortable and satisfied. The brokers had responded bravely to 
 our calls for margin. We never called for pai/ment in a single instance, 
 nor were we ever near the point of considering whether a stock should be 
 sold out. Matters quieted down in a day or two, and this experience gave 
 us great confidence in lending money on stocks in New York. 
 
 And this has been our experience on every occasion of a similar kind 
 since then. Our customers amongst the brokers have never failed us. 
 We have passed through several crises, when the whole market went down 
 an average of twenty-five per cent.; some stocks, of course, falling far 
 more. Yet, at the close of the day, our loans were as well margined as 
 before. 
 
 But on occasions, we have been approached by principals, with pro- 
 posals for time loans, and by one of these, Ave made a considerable loss. 
 The loan was desired by a man in good commercial standing, on a stock 
 quoted above par. The margin offered was ample, larger than usual, as 
 the loan was to be on time. But this lending on time to a principal 
 proved a great mistake. The party proved to be the promoter of the en- 
 terprise, and the largest owner of the stock. 
 
 It had formidable competitors, and the stock, while in our hands, 
 began to fall. We called for more margin, a)id for a time he responded. 
 The price still fell, and our call was repeated. But this time he failed to 
 rc&])ond. The stock went down until it reached so low a figure that the 
 promoter was ruined, the enterprise absorbed by its opponents, while 
 we made a considerable loss. This sharj) lesson taught us the im- 
 portance of confining our business to brokers, who always have a prin- 
 cipal beliind them, and who exercise their own judgment on a stock be- 
 fore presenting it to us. 
 
AS GENERAL MANAGER IN MONTRKAE. 375 
 
 With commercial credits our exptvience lias not been fortunate. We 
 have never done a large business in this line, hut the average of loss has 
 been high. The worst was the case of a credit grant«d to a cou])Ie of 
 young Englishmen of the half -gentleman class that I have referred to 
 in a former chapter. Their business was in exporting grain, ^^'hat they 
 did in this line was perfectly satisfactory. Bnt on one occasion they took 
 a fancy to dabble in the importation of steel rails, which they thought 
 were likely to advance heavily. A small clique of fellows of the same 
 class as themselves were in this venture. We gave them a credit to import 
 a thousand tons, a great mistake as it proved, for they were not in the 
 business; and the price instead of advancing, fell heavily. By this and 
 similar operations the firm was ruined. Some circumstances transpired 
 in our case which created a suspicion of fraud, and we prosecuted one 
 of the parties, but got no satisfaction. We did, however, get judgment 
 against each of them individually. The younger of the firm went home 
 to his father, a country gentleman in the West of England. We sent the 
 judgment to London for execution, but the young fellow was always kept 
 out of the way. Tlie next time I went to England I tliought well to go 
 down to see the father and endeavor to effect a compromise. But he 
 flatly refused to see me, and soon afterwards he sent his son out to In- 
 dia.. Many years afterwards we heard that he had returned, and that he 
 was about to be married. This, we saw, was our chance. We threatened 
 to put our judgment into execution. An ol^fer of compromise was made 
 at once, ^^'e refused to take it. The offer thereupon was doubled, and 
 after consultation with our agents in P^ngland, we concluded to settle on 
 these terms. And thus ended this disagreeable business. 
 
 Only on one or two occasions during a long course of heavy business 
 in New York have we suffered by actual fraud. We have bought millions 
 of pounds of sterling bills, every year, and made loans on stocks aggre- 
 gating as has been said, lumdreds of millions, but have never had a 
 forged bill of exchange on our hands, nor a fraudulent certificate of 
 stock. 
 
 But we were vietiini/id on one occasion by the prcsiiitalion of forged 
 bills of lading under cii'cumstances more remarkable than anything in 
 mj'^-long banking experience, or perhaps in the experience of New York 
 itself. It was a sad case, and one would willingly draw the veil of 
 silence over it. But as these reminiscences are written as lessons of in- 
 struction, I cannot pass it by. Moreover, the transactions were all made 
 public through the courts. 
 
 We had much business, both in Chicago and New York, with an ex- 
 porting firm of the highest standing, whose very name carried an assur- 
 ance of resisectability and honor. Eor many years nothing could be 
 more satisfactory. On one occasion, however, they departed from the 
 usual course and instead of offering bills of exchange with documents 
 Ihey presented the documents themselves, and desired a temporary loan 
 
376 BANKING AND COMMERCE. 
 
 upon them — the bills to be brought in subsequently. The transaction 
 seemed reasonable, although a little out of course, and the loan was made, 
 which was of considerable amount. One cr two days passed. The bills 
 were not brought in. The Produce Exchange was next startled to hear 
 that the firm liad failed. But infinitely N\orse than this was the discovery 
 that the documents were forgeries. It was incredible. Such a firm 
 might fail, but Forgery was unthinkable. It was, however, only too true. 
 Apprehension and trial followed. A plea of insanity was put in, but 
 nothing resulted. The estate barely paid the expense of the liquidation, 
 and the bank lost the whole amount of the loan. 
 
 It was a heavy blow. But we could hardly blame the managers under 
 such circumstances, and we bore the reverse with the philosophy which 
 all banks have to exercise at times, when some unforeseen trouble be- 
 falls them. 
 
 JoURXEY TO THE SoUTH. 
 
 Our o-eneral sterling business was, on the whole, most satisfactory, 
 and in connection with the most important branch of it, the purchase of 
 cotton bills from the South, we had not a single casualty, large as the 
 annual turn-over was. 
 
 It is a good rule for a banker to have personal acquaintance with 
 those he deals with, and in furtherance of this idea, I proposed to one of 
 our New York managers that we should take a journey down South to- 
 gether, and make tlie acquaintance of the firms whose bills we had bought 
 in the aggregate for so many millions. We therefore made the journey, 
 visiting Charleston, Savannah, Pensacola (to see a timber firm there 
 whose business was in charge of a young man who had been one of our 
 clerks). New Orleans and Memphis. At each place we called upon mer- 
 chants and bankers, discussing with them the prospects of trade and 
 movements of business and finance. It was one of the most interesting 
 journeys of my life. The bankers were thoroughly modern in ideas and 
 methods, and the merchants were men of more than average intelligence, 
 so!ne of them sent out from Liverpool to represent great cotton houses 
 of that cit}', and being in the habit of paying periodical visits to Eng- 
 land, France, and other cotton-consuming countries. And it surprised me 
 to learn what a large portion of the crop was sent to Continental coun- 
 tries. 
 
 Silver Agitation. 
 
 During the great Presidential Campaign of that time, under Bryan 
 as a candidate, -vve were in constant anxiety as the phases of the contest 
 unfolded themselves. All our loans, whether on call or on time, were 
 made payable in gold, but we were very certain that if the Bryan policy 
 prevailed; gold would go to a premium. There would be a natural limit 
 to this; depending on the ratio that was fixed. But the premium would 
 certainly be enougli to make it extremely difficult for brokers to fulfil 
 their contracts. It would therefore inevitably bring serious elements of 
 
AS GEXERAI. MANAGER IN MONTREAL. 377 
 
 difficulty and danger into a business wliieh liad ahvays been eminently 
 satisfactory. Foreseeing this we gradually eurtaib'd our loans, and by 
 the time of the election had reduced them to a very triHing amount. But 
 the good sense of the American people once more jirevaibd. 'I'hc crisis 
 was safely passed. Business resumed its ordinary course and we soon 
 put out money to as large an extent as usual. But there was a time 
 during this agitation when gold did become difficult to obtain, and we 
 once actually paid a premium for a considerable amount we desired to 
 tvansfer to Montreal.''" 
 
 Visits to Commercial Centres in Engt.vxd — The Baring Crisis. 
 
 In connection with our sterling business, both in New York and 
 Montreal^ I paid periodical visits to England, and spent much time in 
 the great centres acquiring information. This I could easily do, through 
 our banking correspondents in Eondon, Liverpool, Glasgow and Bristol, 
 from whom I received much of what may be called inside information, 
 that could never have been obtained otherwise. This we used for the 
 guidance of our sterling operations in New York and Montreal. As a 
 specimen of the kind of information given to me, I will mention several 
 instances, withholding names of course. They occurred many years ago. 
 In one of the above-named centres, a commercial firm had for years 
 maintained the highest standing, and was marked with the highest marks 
 in Reference Books. Bills upon this house it was generally considered 
 safe to take to any amount. But while in that city I was confidentially in- 
 formed that tho senior partner, to whom nearly all the capital belonged, 
 had retired from the firm about a year before. This was not generally 
 known. The name was retained; so was the rating in reference books, 
 and the business was going on as usual. But the strength of the firm was 
 so diminished that it was practically a different concern. I therefore ad- 
 vised New York office to have all bills upon that firm in future accom- 
 panied by documents. In the same city, with regard to another firm, and 
 in a different branch of business, I learned other particulars which I 
 deemed important enough to cable out at once. I always carried a 
 special cipher with mc in these visits abroad. The cable cost about five 
 dollars, but it was wortli t< m tliousand; for the firm failed shortly after- 
 wards. 
 
 The Baring Crisis. 
 
 All the world knows now of what was impending some years ago ovet 
 the great house of Bnri)i<r, and how under the lead of the Bank of Eng- 
 land the resources of all the banks in the country were skillfully com- 
 
 13 I had read a paper before the American Bankers Association at Chicago 
 some time previously, on this silver question, taking of course the view enter- 
 tained in New York and the East. 
 
 It was received with general favor, except by a gentleman who was not a 
 banker at all. 
 
378 BAXKINXt and COMMERCE. 
 
 Mned to prevent a catastrophe which would liave shaken credit to its 
 foundations all over the world. I was in London some months before 
 this intervention took place, and heard whispers, in the strictest con- 
 fidence, that the great house was getting into deep water. This was a 
 kind of thing that no man could talk about; but I gave instructions of a 
 secret and confidential character to New York to limit their purchases of 
 the bills to a moderate sum. This was our policy; and when the crisis 
 supervened it would not have mattered materiallj' even if an actual stop- 
 page had taken place. 
 
 Cjiicaco and Mixxeapolis. 
 
 About the year 1879 "vve opened an office in Chicago. Montreal and 
 Cliicago are closely connected in trade. One of our largest customers 
 did a heavy and legitimate business there, and some of our directors were 
 well acquainted with the mercantile people of the city. The vice- 
 president accompanied me to look over the ground, and together we in- 
 terviewed a number of men in the grain and provision trade. They gave 
 us considerable encouragement, and our report to the board was favor- 
 jible. We therefore opened, taking a very good office in a leading position 
 near LaSalle Street, and soon had plenty of applications for loans on 
 '.warehouse receipts as collateral. But our experience on the whole was 
 disappointing. We had hoped and expected to build up a good line of 
 deposits, and in time to have the accounts of interior banks. This ex- 
 pectation was not fulfilled. All the money we loaned had therefore to 
 be drawn from our resources in New York, and although we could gen- 
 erally calculate on a steadily higher rate of interest, we found at the end 
 of a year that the net result was little better than we could have real- 
 ized had we left our money there. We found, too, that though our loans 
 v.ere abundantly safe so long as grain remained in warehouse, we had to 
 take the risk of its removal, and surrender our security for several days 
 at a time, having nothing but our customers' pledge to replace it. We 
 had been assured that a default in this matter was almost unknown; that 
 not one instance in a thousand of defaults had taken place. This was so 
 far assuring. Still, we could not help feeling that possibly, at some time, 
 we might be that one. 
 
 We might, however, have remained in Chicago, Init that one of the 
 "corners" in grain that distinguish it, transpired while we were there. 
 Margins ra2)idly ran down, and we had considerable grain out on bailee 
 receipts. For three days we were in a state of uncertainty as to whether 
 our customers could stand the shock or not. By that time, however, 
 margins wen made good, and grain was shipped. Our customers were 
 standing, and going on with their business, but I had been, more or less, 
 "on the rack" during that time, and not feeling sure but that something 
 of the kind might ha])pen again, I concluded to recommend the board 
 that we should withdraw from the field, which we did some time after- 
 wards. We had one or two trifling losses, not worth troubling about, 
 
AS GENERAT. MANAGER TV MON TREAL. 379 
 
 and which were fully rrcoupfd hy tin- .iiliMiuud v.ilur of llii- lioard of 
 Trade seat held 1)\- our uiauaii-cr. 
 
 Our Chicago (experience,, however, was not tiirown away, as it enabled 
 us, with more intelligence and confidence, to carry those loans on grain 
 in Duluth and Minneapolis, which were so prominent a feature of our 
 business some years afterwards. The Alinneapolis loans, however, I may 
 say, were always guaranteed by a bank, and were done at a slightly lower 
 rate of interest on that account. The Duluth loans were made direct, 
 but und(>r the supervision of a former officer of a Canadian bank, whom 
 we could implicitly trust. While in Duluth on one occasion in connection 
 with our loans thci-c I made a thorough examination of the system under 
 which warehouse receipts for grain were granted and cancelled. A per- 
 fect system of registration was kept up, and irregularities rendered 
 almost impossible. I have often wished that some system of the same 
 kind was in force in ^lontreal. 
 
 All these loans were made on what are known as Terminal receipts. 
 Receipts of warehouses in the interior have ])r()ved troublesome, and I 
 have never encouraged them. 
 
 Visit to ]\rAXiTOB.\. 
 In the summer of the year 1878 I determined to pay a visit to Mani- 
 toba for the purpose of examining the business of our branch in Winni- 
 peg. There was no route to the Northwest at that time except via 
 Chicago and St. Paul. The first was comparatively familiar; but beyond 
 Chicago I had never travelled. I stayed over a day in St. Paul, as we 
 had some banking connections there. It was at that time a somewhat 
 sleepy-looking old place, and much unlike its active neighbor :Minneapolis. 
 St. Paul, however, was said to be much the more wealthy of the two. 
 
 Resuming my journey to Winnipeg, by a night train, I well remem- 
 ber opening my eyt s in the morning and seeing what appeared to be a 
 vast extent of ocean. I could not conceive at first what it was, for I 
 knew we were a long way from Lake Superior; but at last it dawned 
 upon me that this was the beginning of the great prairies of the North- 
 west. And so it was. I had seen the cultivated prairies west of Chicago, 
 but never had my eyes beheld such a vast ex])ansc of unoccupied ocean- 
 like green wilderness. We sped on our way through wliat was then an 
 almost wholly unsettled country, and late in the afternoon we reached 
 Winnipeg. 
 
 Winnipeg had then about six thousand inhabitants, and the business 
 of the branch was of about the same extent as that of an Ontario town 
 of the same size. No one who knows the splendid capital of the Canadian 
 Northwest now, with its handsome streets, magnificent imblic buildings, 
 banks (there are eleven of them), great warehouses, and beautiful boule- 
 vards of villa residences, can conceive what Winnipeg was at that time. 
 It was, in fact, little better than a straggling village. Its streets were 
 entirely unpaved. At the southern extremity stood the historic Eort 
 
380 BANKING AND COMMERCE. 
 
 Garry, the lieadqiiartcrs ot the Hudson Bay Company, and once the 
 scene of the stirring events of the Kiel rebellion. The Merchants' Bank 
 was the first established in the Northwest, and its supplies of money 
 were sent by long journeys over the vast stretches of prairies to the 
 infant city. We did nearly all its banking business for some years, and 
 indeed of" the whole Northwest. But it was a small affair at the best. 
 Save and except the forts of the Hudson Bay Company— little centres 
 of civilization amidst surrounding solitudes— there practically was 
 nothing in the interior. Now traversed by railways in all directions, it 
 was then utterly untrodden, except along the trails of the enterprising 
 voyageurs of the great Company. 
 
 ' While 1 was in Winnipeg, sitting in the manager's room, a travel- 
 stained messenger came in, bearing a package of letters. He had come 
 from a far-distant settlement in which a few -traders had gathered with 
 whom the bank did business. The manager asked him how long he had 
 been on the road. He replied, sixteen days. Noticing that the packet 
 vas damp, the manager ask the messenger what was the reason. He re- 
 plied that he could not always keep the packet out of the water when he 
 was fording the rivers. The place is now a prosperous town within 
 sixteen hours of Winnipeg. 
 
 We had some customers in a village about sixty miles away, called 
 Portage LaPrairie, at the extremity of settlement and civilization, and 
 being desirous to see the interior for myself, the manager made arrange- 
 ments for a journey there. The first fifteen miles was through scattered 
 settlements along the Assiniboine River. We then struck out, across the 
 uninhabited prairie, and in about an hour were fairly "out of sight of 
 land" so to speak. Not a single thing was in sight but the great ocean- 
 like expanse, all around us, and as we drove along, hour after hour, I 
 could not help thinking what would happen if we lost the trail, and we 
 found ourselves alone in a trackless wilderness. A small speck appeared 
 after a time upon the horizon. The speck enlarged until it became a 
 farm-house, standing alone, in the great expanse. We passed through 
 the farm-yard, and then struck out once more into the open prairies, 
 arriving, after passing a few farms, at Portage LaPrairie in the after- 
 noon. In the sixty miles, which we then traversed, there are now f.ve 
 stations of the Canadian Pacific Railway, and the last ten miles of our 
 journey now form part of one of the finest wheat-growing regions of 
 the continent. Portage LaPrairie. now such a prosperous and thriving 
 town, with three or four banks, and great mills and elevators, was then 
 a dirty little village,'^ the only "hotel"' being a miserable little tavern, 
 something like the Eagle Hoti'l in the story of "David Ilarum." 
 
 14 Yet it is curious how in sucli places, in the extreme frontiers of civiliza- 
 tion, are often to be found Englishmen, or Scotchmen, of high refinement and 
 good family connections. Our principal customer there was a grain merchant. 
 I found him a perfect gentleman, a nephew of the Bishop of Norwich. In his 
 warehouse was a stalwart young fellow busy amongst the grain. He was of the 
 Oiirn.y family, the great bankers of Norfolk and other parts of England. I 
 
AS GENERAL AfANAGER IX MONTREAL. 3Sl 
 
 Jityoiul Portairt' LaPrairic llicrc was al that tiiiif practically tiotliiiig. 
 In tlic regions beyond, wlicrc now there are such nunihers ol" towns, 
 bank offices, magnificent farms, cattle-ranclies, coal mines, and thousands 
 of miles of railway stretching on to, and through the Rocky Mountains, 
 and -where a hundred millions of busluls of grain were grown this year 
 (19O8), nothing was to be seen but herds of buffalo, Indians of numerous 
 tribes, and the forts of- the Great Company. Only thirty years have 
 elapsed since my visit, yet in that short time a new world has hccn 
 evolved from the wilderness. 
 
 The journey home was unattended by incident, but I could not fail 
 to have realized what enormous stretches of country are contained in 
 this Northwest, and formed some idea of its possibibtirs. when a con- 
 venient way to it was ojjened up. 
 
 The ]\L\nitora Boom. 
 
 Little, however, did I dream of the extraordinary developments that 
 were to come. It was only three or four years after this that the first 
 signs of the "Manitoba Boom" began to ajipcar. The Pacific Railway 
 was being pushed with extraordinary energy, and made it easy to traverse 
 regions till then inaccessible and practically unknown. But the more 
 Hie country was known, the more highly it was reported of. Yet the 
 land could then be bought for one or two dollars an acre. An idea, how- 
 ever, soon arose in older Canada tliat these lands must largely increase in 
 value. Reports of the condition of things were constantly sent to the 
 older provinces, and gradually a heavy speculative demand sj^rung up 
 from the East. Along with the stream of hona-pde settlers, which, how- 
 ever, was never a large one at that time, there came to the Province a 
 number of speculators in land, with money in hand, who began to make 
 })urchases, more or less extensive, here and there, as more and more of 
 the country was opened up. These early speculators all made money. 
 Rei)orts of their successes spread about. More and more men were led 
 to invest mone}', and before long the "land fever" began to work. As is 
 usual in such developments, men soon ceased to take a practical view of 
 j)ossibilities, and instead of this, "to dream dreams and see visions." 
 Men began to say that instead of two or three dollars an acre prairie land 
 was worth ten or tiventy, and as to town lots, nobody could imagine how 
 much they were worth. The ball gathered momentum rapidly. Swarms of 
 
 had an introduction to anotlier customer who lived at the hotel. He proved an 
 extraordinary fellow, one of those who have knocked about the world until 
 they are tired; who know everybody and have seen everything. We talked far 
 into the night— mostly about England. I mentioned that I was from Yorkshire. 
 He knew the county well. I spoke of the great Fitzwilliam family of the neigh- 
 borhood where I was born. Strange to say, he knew them, too, and told me a 
 curious story about a blacksmith who owned a little freehold near their es- 
 tates. A traveller calling one day to get his horse shod, enquired who owned 
 most of the land thereabout, on which the blacksmith replied, "OH, IT ALL BE- 
 LONGS TO ME AND LORD FITZWILTJ.VXr." 
 
382 BANKINO AND COMMERCE. 
 
 Eastern peo))lc went up to Winnipeg with money, deposited it in the bank, 
 and bought all they could lay their hands on, paying down money for 
 the first instalment and giving mortgages for the balance. The great 
 speculation was in town lots. At favorable points traders and store- 
 keepers began to settle, and numbers of places were marked out as the 
 towns of the future. Now, while there is a natural limit to the price to 
 which farming lots might rise, who could tell what might be the value 
 of lots, in the future town, or cit}'? In Winnipeg itself and round about, 
 and in little places of fifty or a hundred inhabitants, which people 
 imagined might grow to towns, or cities, a perfect furore of demand set 
 in for the possession of the lands round about, which were, by and by, 
 to be covered with streets, stores and dwellings. The experience of 
 Ontario in- 1856 was repeated in even a more extravagant form. Thou- 
 sands of people went on buying and borrowing with the utmost con- 
 fidence, making payments down wilh their ready money, and entangling 
 themselves with mortgage obligations, spread over long terms of years, 
 selling when they could to others, at continually enhanced prices on the 
 same long terms and never dreaming of the covenants on their mortgages 
 which were to drag tliem down to ruin. 
 
 ^Meanwhile the business of our Winnipeg Branch was growing to enor- 
 mous proportions. Deposits increased tenfold. The qmount of trans- 
 actions passing through the office was incredible. The counter was 
 thronged from morning to night by such crowds as are found at the 
 doors of an Opera House when some celebrated prima donna is perform- 
 ing. A stranger would have supposed that some heavy run was taking 
 place; but it was just the opposite. Most of these people wanted to de- 
 posit money, or to put in drafts for collection on distant points, trans- 
 ferring money to Winnipeg. The president and myself visited Manitoba 
 while this boom was at its height and saw all this with our own eyes. 
 
 During this inflation, as is always the case, a style of extravagant 
 living prevailed which set all reason at defiance. Nothing was too good 
 for people to eat, drink or wear. Champagne flowed like water. Plain 
 and comfortable churches, such as were suitable to a moderate-sized 
 town, were replaced by costl\^ erections, fit for Montreal or New York. 
 Houses were built of the best materials and style, of one of which it 
 was said that every brick (they were imported from an immense distance) 
 had cost a dollar. Yet the real business of the country was so small that 
 its exports of wheat scarcely amounted to a million bushels a year. I 
 remember answering to a querj-^ of a house in the grain trade in New 
 York with whom we did business, that there was not grain enough in the 
 whole of Manitoba at that time to make it worth their visiting it. 
 
 After two years, signs of reaction set in. Dreams and visions gave 
 place to practical realities. Men that had settled on farm lands realized 
 Die difl'erence between the cleared farms of Ontario and the prairie farms 
 of a province in the interior of the continent. Ideas of value began to 
 settle down. The twintv dollars an acre became ten; the ten i\\\\ the 
 
AS GENERAL MANAGER IN MONTREAL. 383 
 
 five two; and men that had sivcn mort;2:agcs at fifteen and twenty dollars 
 an acre found, when they could only sell to actual settlers, that five 
 dollars an acre was the utmost they could get for the best lands. Loan 
 companies that had lent money on security of prairie lands, town lots, 
 stores, churches, and warehouses, found that the security in hundreds of 
 cases would not realize half or a quarter of the loan. 
 
 As to the banks, nearly all their mercantile customers had become 
 entangled in land speculation, and were caught in the reaction. Their 
 trade bills were largely drawn on men who had speculated and failed. 
 Many of these bills represented goods of the extravagant style before 
 mentioned, which goods were never paid for by the purchasers. Some 
 bills were for more than the makers owed, and some were downright 
 forgeries. INIanufacturing enterprises, saw mills, foundries, fisheries and 
 such like collapsed. Thousands of speculators whose operations had 
 once made business to boom, left the province bankrupt. Failures mounted 
 up to terrible figures. The banks had their cases full of past-due bills. 
 In one town every single trader, with one exception, became insolvent. In 
 that town the losses of the Merchants' Bank amounted to seventy-five 
 per cent, of its whole discounts. Some ambitious churches now became 
 practically bankrupt, and made proposals of compounding with their 
 creditors. This revulsion, however, never became a panic. It was ex- 
 actly like that of 1857 in that it dragged along for years, bearing down 
 with an increasing heaviness as the j^ears passed on. Its effects were not 
 confined to ^Manitoba, but were felt in all parts of Canada. Three im- 
 2:)ortant customers of the bank who were utterly unconnected with Mani- 
 toba in the way of business, failed in after years owing to their specula- 
 tions in the time of this land boom. As to our customers in Manitoba 
 itself, only a few of them survived. We had made very heavy profits 
 during the time of the inflation, but with all our care, and the constant 
 directions given to our managers, they could not help their judgment 
 being biased as to the character of the transactions ofi'ered them. Masses 
 of landed property came into our hands, formerly belonging to our 
 customers, and held by them at inflated prices; also endless claims against 
 traders, customers of our customers, scattered over distant parts of the 
 immense interior. To deal with these I organized a separate depart- 
 ment of the office in Winnipeg, and it was only after many years that its 
 functions ceased. We Avrote off large sums for losses year after year, 
 but I fancy other banks (for by this time there were others in the 
 Province) had at least as severe an experience as ourselves proportionally, 
 and one of them (not now in existence) a far worse. For our profits 
 exceeded our losses coiisidc rably. 
 
 The Bankers' Association. 
 
 The general managers of the banks had met, as usual, in Ottawa in 
 1881 for the purpose of conferring with the Finance Minister, and on 
 the journey home the suggestion "vvas made, I think, by Mr. F. W. 
 
384. BANKING AND COMMERCE. 
 
 Thomas of tlie .Molsons Bank, that it would be desirable to form a per- 
 manent association for the furtherance of our mutual interests. The 
 idea Mas received with favor, and shortly afterwards we began to confer 
 as to the basis on which it should be formed. We found it a difficult sub- 
 ject. The first difficulty was to settle the question, who should be mem- 
 bers.^ After much discussion and corresijondence, it was finally agreed 
 that the membership should consist of the banks, as corporations, each 
 lo act by its principal Executive Officer, whether he were called presi- 
 dent, general manager, or cashier. On thi? basis, the government of the 
 Association was to rest. But it was provided that a class of associate 
 members should be formed, composed of all bank officers who desired 
 .to join and would pay a small subscription. This arrangement of the 
 membership has worked exceedingly well. Another question was as to 
 what powers the Association should exercise over its own members. Dis- 
 cussion had not proceeded far, however, on this head, when it became 
 clear to us all that of actual poM'er, the Association could exercise none at 
 oil. It Avas, liowever, felt that it would be reasonable, in the case of any 
 bank departing unduly from the rules of safe banking, that the matter 
 might be discussed in some confidential committee of the Association, 
 and a friendly intimation in the general interest conveyed to the bank 
 concerned. This was, however, a matter of extreme delicacy, and I am 
 not sure that it has ever been acted upon. 
 
 Of this Association I was elected the first President, the position 
 having been naturally offered to Mr. E. S. Clouston, General Manager of 
 the Bank of Montreal, who declined to accept it. Subsequently, however, 
 he accepted the position and has held it ever since. 
 
 IvENEWAL OF BaNK CHARTERS AND THE SECURING OF ClUCULATION BY A 
 
 First Lien on Assets, and Redemption Fund. 
 
 When the bank charters were up for renewTil in 1880-81 the Finance 
 Minister again brought forward the proposal that we should cover our 
 circulation by Government securities. There had been several bank fail- 
 ures not long before which gave weight to the proposal. As had been 
 the case before, the general managers of the banks had met in confer- 
 ence at Ottawa with a view to consider whether any changes in the Bank- 
 ing Act were desirable. The idea had been mooted by some of us that 
 the best possible security for the notes would be to make them a first 
 charge on all the assets of banks, including the double liability of stock- 
 holders. It was jierfectly reasonable that they should be so, inasmuch as 
 holders of notes Mere involuntar}' creditors. The proposal to cover by 
 Government securities met M'ith strenuous opjjosition, es])ecially from the 
 M'estern Banks, and in conference M'ith the I'inance Minister m'c argued 
 the matter at considerable length. Sir Leonard Tilley asked me to state 
 the case for the banks, M'hich I did, draM'ing on the experience of 1868- 
 1871. The Ciovernment finally did not press the matter, but adojited our 
 
xVS GENERAL MANAGER IN MONTREAL. 3S5 
 
 alternative proposal. Tliis liad a ver}' simple look on i)apcr, and only a 
 few lines in the Banking Act were required to make it law. But it had 
 a very far-reaching aspect, and has proved in practice sufficient to make 
 the notes safe, even when a bank has been scandalously or even fraud- 
 ulently mismanaged. At llu' next renewal of the charters, still further 
 safeguards were introduced in the shape of a Redemption Fund, which, 
 however, it has never been necessary to put into oi)eration, though there 
 is held by the Government a large sum available for the purpose, con- 
 tributed by the banks in a fixed ratio to their circulation. 
 
 The charters of the banks were again under review in 18.91 and the 
 Association acted with considerable eHeet in preventing what would have 
 been an undesirable addition to the Act. It is easy for doctrinaires to 
 frame theories: it is only practical men wjio can judge of their effect. 
 On this occasion, as once before, it was joroposed to introduce a promi- 
 nent feature of the American system, viz.: the compelling by law of a fixed 
 minimum of reserves to be held by the banks. Against this we were a 
 unit, for good reasons. We argued the case with the Finance Minister^ 
 but like most doctrinaires he was fixed in his opinion, and insisted on its 
 being made law. We then took the strong step of appealing to the whole 
 Cabinet. The Prime Minister (Sir John Macdonald) was again in power, 
 and a hearing was courteously conceded to us, a very rare favor. We 
 stated our case; some four or five speaking, the most prominent being the 
 General Manager of the Bank of Commerce, who had formerly been 
 manager in New York, and could speak from practical experience. At 
 the close of the interview the Premier desired us to put our views into 
 writing, which was done, and we heard shortly after that the clause had 
 been abandoned. 
 
 Thus for the second time. Sir John overruled his Finance Minister 
 in a matter that concerned the banks. It was on this occasion that the fur- 
 ther step was taken in the way of making bank circulation secure by the 
 formation of Redemption Fund under the auspices of the Government 
 to Avhich all the banks contribute. I always had the impression that the 
 making notes a first charge would render any further assurance un- 
 necessary; and events have so proved it. The fund, however, was formed, 
 and when its jorovisions came to be understood, it was found that under 
 them the Avhole of the banks were practically guarantors of each other's 
 notes. This was never intended by its promoters, but it is now the law, 
 and under it we may safely assert that the bank circulation of Canada is 
 far better secured than that of any circulation in the world. 
 
 Before the decennial period of 1901 was reached, some scandalous 
 revelations took place with regard to the overissue of notes by a bank 
 that had failed in Montreal. This circumstance gave rise to a good deal 
 of discussion, and to suggestions with regard to giving the Government 
 increased powers of supervision over the banks. Impracticable ideas 
 were again ventilated and discussed. At length it was determined that 
 as none were so much interested in the matter as the banks themselves 
 
386 BANKING AND COMMERCE. 
 
 (under the jJi'ovisions of tlic bank redemption fund), the whole regula- 
 tion of the issue and cancellation of notes should be committed to the 
 Bankers' Association, which had been already incorporated. The re- 
 sponsibility of seeing that the provisions of the law are carried out was 
 placed upon them, and they speedily organized machinery for the pur- 
 pose. This arrangement has worked well, and is as likely to be effective 
 as any sort of supervision by Government eould be, short of allowing no 
 notes to be signed that have not been printed in a Government depart- 
 ment and countersigned by Government oJficers. But to prevent delil>- 
 erate schemes of fraud, amounting almost to forgery, if any bank di^ 
 rectors should be mad enough to attempt it, is impossible. 
 
 The Association has done also very valuable work in the education 
 cf young bankers, and has published and is now carrying on a journal 
 which an English banker, well qualified to judge, once pronounced to be 
 more ably conducted than the Bankers' IMagazine of London. 
 
 Retirkment from Banking. 
 
 When the last year of my fourth engagement had transpired, I had 
 passed the boundary of three score years and ten. Yet, though still in 
 vigorous health, I was anxious that an arrangement should be made so 
 that the wide and diversified interests of the bank should not suffer by 
 any failure of bodily or mental vigor which woidd inevitably accompany 
 advancing years. The board acquiesced and generously furnished me 
 with a co-adjutor of experience, who took upon him a large part of the 
 burden of active management, until the time came at length for me 
 finally to part with the cares and conflicts of banking, and to retire with 
 an ample allowance into the comparative rest of private life. 
 
 I thus close these recollections, trusting that they, or some of them, 
 may prove to be in the nature of way-marks to guide, or beacons to warn, 
 for those who are still bearing the burden and heat of the day in the 
 banking sphere of this continent. 
 
 George Hague. 
 
 MoNTREAt, October, ]f)08. 
 
THIS BOOK IS DUE ON THE LAST DATE 
 
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