In contrast with that of the United States, the characteristic features of the commercial banking systems of Europe are the central bank performing important functions for all other financial institutions and for the government; a relatively small number of large institutions with many branches mediating between the central bank and the people; and the use of commercial and bank bills instead of promissory notes as the chief instruments of loans and discounts.
The central banks differ considerably in organization and business methods, but perform essentially the same functions; that is, they act as financial agents for their respective governments; discount high-grade commercial and bankers' bills for other banks and usually for private persons; administer the cash reservesof the entire country; and furnish the greater part and, in some cases, the entire supply of bank notes.
The other large banks do most of the business with the public, the central bank's relations being chiefly with them and with the government. They conduct checking accounts with merchants, manufacturers, farmers, and others; receive and invest savings deposits, and deal in certain classes of investment securities; conduct the domestic and foreign exchanges; discount various kinds of commercial and banking bills, frequently those not available for discount at the central bank; and make advances on personal and other kinds of security. Their main offices are located either in the central money market of the country or in important financial centers, and their branches are extended to all places in which banking facilities are supposed to be needed. As a rule, they are less restricted by legislative provisions than are the national and state banks and trust companies of the United States, and are less carefully supervised and inspected by public officers.
Commercial and bankers' bills are widely used as credit instruments between buyers and sellers and between bankers and their customers. A common method of procedure, whena sale is made on time, is the drawing of a bill for the amount due, by the seller upon the buyer, payable at the end of the credit period agreed upon, and accepted by the buyer, and the discount of the bill by the seller's bank. In foreign and in some branches of domestic trade, the banker's bill is used on account of its more general acceptability as an object of discount, such bills usually being discountable by the central bank and by banks far distant from the place in which the bill originated.
In case a buyer desires to furnish his creditors with bills of this kind, he arranges with his banker for a line of "acceptance" credit, which permits people who sell goods to him to draw bills upon his banker instead of himself, the banker agreeing to accept the bill and guaranteeing its payment at maturity. The seller will usually have no difficulty in discounting such a bill at his own bank, no matter how far removed it may be from the home of the buyer, the character of the accepting bank being known throughout the financial world. "Acceptance lines" are usually granted only on condition that the customer agrees to supply the bank with the funds necessary for meeting the accepted bills as they fall due, and to pay a fee for the accommodation. Ample securitythat these obligations will be met is usually demanded.
In the English system, the central bank is the Bank of England, with the possible exception of a few private banks, the oldest financial institution in the country. It is privately owned and privately governed. Its board of directors, chosen by the stockholders, consists of twenty-four persons, a portion of whom are practically life members, being regularly reelected when their terms of office expire. The others usually serve alternate years only, vacancies being filled by promising young men selected from the business houses of London. The oldest director is regularly elected to the office of governor of the Bank, and the next oldest to that of deputy governor, both serving two years, the deputy governor regularly succeeding to the office of governor, and the ex-governors forming the life members of the board and constituting a kind of advisory council to the governor, and known as the Board of Treasury.
The head office of the Bank of England is in London, and there are eleven branches, two in London and nine in the provinces. By a law passed in 1844, the Bank was divided into twodepartments, called respectively the banking and the issue departments, the latter having exclusive charge of the issue of notes, and the former of all other branches of the bank's business.
This same law prescribed the conditions under which notes could be issued. It provided that the Bank of England might issue £14,500,000 of notes in exchange for securities, and any amount in addition in exchange for an equal amount of coin or bullion. Additions to the amount issued in exchange for securities might be made by order of the government to the extent of two-thirds the amount of issues relinquished by the other issuing banks, all such banks in existence at the time the act was passed being permitted to retain, without increasing, their existing issues. Most of these other issues having been abandoned since 1844, the Bank of England is now permitted to issue in exchange for securities £18,450,000. The securities against which these issues are made were transferred to the issue department by the banking department, and consist of the debt owed by the government to the bank and of other government or governmentally guaranteed securities. The issue department freely issues additional notes in exchange for an equal amount of gold coin or bullion, and on demand redeemsnotes in gold coin. Since the amount of notes all the time outstanding greatly exceeds £18,450,000, the business of the issue department is confined to the exchange of notes for gold coin and bullion and the redemption of notes in gold.
The banking department receives and disburses the funds of the government, manages the public debt, and serves as the government's agent in most of its other financial operations; receives on deposit from other financial institutions the money which comes into their possession, and supplies them with such money funds as they need from day to day in payment of checks drawn against their balances; discounts bills of exchange with a minimum maturity of four, and in exceptional cases six, months; and to a limited extent makes advances on and invests in high-grade public and other securities. Besides the English government and financial institutions, it has other customers, but it is to be presumed that these are of a special character, since the conditions under which it does business with private persons are in most cases more onerous than those prescribed by other banks, and consequently not attractive to the ordinary business man.
The so-called English Joint-Stock Banks areclassified into three groups, known as metropolitan, metropolitan and provincial, and provincial banks. The metropolitan banks have their head offices in London, and do not, as a rule, extend their branches beyond the suburbs of the metropolis. The metropolitan and provincial banks have their head offices in London and branches scattered throughout the provinces, as well as in various parts of the city and suburbs, and the provincial banks have their head offices in the larger provincial cities, and each one confines its branches usually to the town and country districts tributary to the city in which its head office is situated. Often the provincial banks establish branches in London.
For banking purposes, these banks are the chief reliance of the agriculture, industry, and commerce of the country, but competing with and supplementing them are the bill brokers and discount houses, the private banks, and the foreign and colonial banks. The bill brokers and discount houses make a business of dealing in foreign and domestic bills of exchange. They buy in the first instance a large percentage of the bills brought to market, keep some of them until maturity, and sell the remainder to the other banks, usually indorsing them first. A large part of the capital employed in their business is obtained by loans made from the other banks, subject to call and secured by the bills they purchase deposited as collateral.
The private banks are the remnant left of the oldest group in the country. There were private banks in London centuries before the Bank of England was incorporated, and previous to 1826 the Bank of England was their only competitor. Since 1844 their number has steadily diminished. Those which remain have, as a rule, built up a special constituency, to the special interests of which they cater. Among them are strong institutions, but as a class their importance in the system is not great, and is waning.
The foreign and colonial banks are branches of important institutions in foreign countries and the English colonies which have a considerable volume of business to transact in London. They serve as intermediaries between their respective countries and the English money market, and on account of the enormous volume of foreign commerce which is financed in London, their number is large, and the rôle they play on that market is important.
In the operation of this machinery, the most noteworthy features are the reserve system, and the administration of the discount rate of the Bank of England. There is no law on theEnglish statute books prescribing the amount of cash which banking or other financial institutions shall keep in their vaults. The custom of these institutions regarding that matter is to keep on hand relatively small sums and to rely upon the Bank of England or some other London banking house for the replenishment of their supply as needed. For this purpose, London and many provincial banks keep balances with the Bank of England, and other banks maintain balances with other London institutions. These balances may be obtained by the deposit of coin or Bank of England notes or by rediscounts. Another widely used resource is the calling of loans made to bill brokers or discount houses. Such loans or a considerable volume of bills of the kind discounted by the Bank of England, or both, are regularly carried by London banks and counted as a part of their reserves.
On account of these practices, surplus cash not needed in the conduct of the current business of the country speedily finds its way into the vaults of the Bank of England, and additional supplies, when needed, come from this source. The administration of the cash reserves of the country thus becomes one of the important duties of the Bank of England, in theperformance of which variation of the rate charged on discounts is the most important device.
Many years' experience has enabled the Bank to determine with a considerable degree of accuracy the volume of the demands for cash likely to be made upon it from day to day, and consequently the amount that it should keep on hand in the vaults. Whenever this amount approaches the minimum regarded as consistent with safety, the directors raise the rate of discount, and when the amount on hand becomes excessive, they lower it. The efficiency of this procedure in increasing the reserves in the one case and in decreasing them in the other is due to certain conditions and practices which deserve attention at this point.
Long-established custom has made the rate of interest paid on deposits in London and other parts of England vary with the discount rate of the Bank, and on this account the market rate of discount also varies in the same manner. The Bank of England is thus ordinarily able to regulate the market for commercial paper. Since paper payable in London is a favorite form of investment for continental bankers, by raising its rate of discount and with it the market rate above the level of the rates of some or all ofthe continental centers, the Bank of England is able to induce these bankers to send money to London for investment and thereby to increase her reserves, and by lowering its rate below the level of the rates in these continental centers, she is able to induce them to sell some of the paper they already hold, and thus to furnish a market for her surplus funds and diminish her reserves.
On account of the readiness with which the international gold movement responds to variations in the discount rate of the Bank of England, the need for an elastic system of bank note issues is not felt in England to the same extent as in other countries. It is this fact, doubtless, which explains the retention to the present day of the essentially inelastic bank note system created by the act of 1844.
In France, the Bank of France is the central institution. It is the oldest of the important French banks of the present day, having been established in 1800 by Napoleon the First. Its capital, amounting at the present time to 182,500,000 francs, or approximately $36,500,000, is supplied by about 30,000 privatestockholders, about 10,000 of whom own only one share each.
The two hundred largest stockholders appoint a General Council, consisting of fifteen regents and three censors. Five regents and all the censors must be chosen from the commercial and industrial classes, and three of the remaining ten regents must be selected from thetresoriers payeurs généreaux, an important group of representatives of the public treasury scattered throughout the country. The General Council as well as the stockholders' assembly is presided over by a governor, who, together with two sub-governors, is appointed by the President of the Republic upon the nomination of the Minister of Finance. The governor is the chief executive officer of the bank and the final source of authority in most matters of vital importance. He is responsible to the government rather than to the stockholders, and is subject to removal only by the power which appointed him.
The Bank of France has about two hundred branches and sub-branches located in Paris and all the important cities and towns in the Republic, also over three hundred so-called agencies located in smaller places and transacting only a limited line of business. Each branch has amanager appointed in substantially the same manner as the governor, and the sub-branches and agencies are administered through the branches. Through this network of offices, every part of the country is brought into direct and easy access to the Bank.
The Bank of France is the only institution in the country privileged to issue circulating notes. The maximum allowed it is regulated by law and is increased from time to time. At present it amounts to 5,800,000,000 francs, or approximately $1,160,000,000. The bank is obliged to redeem these notes on demand in gold coin or silver five-franc pieces, but it is free to determine how much cash it shall keep on hand for that purpose, and when and under what conditions it shall issue them.
Its discount operations are limited by law to bills maturing in not more than three months, and bearing the signatures of at least three solvent persons, or two signatures and secured in addition by specified forms of collateral. It is also permitted to make loans or advances, as they are called, on securities of the French government maturing at fixed dates, gold and silver bullion, and the money of foreign countries, and obligations of the French railroads, French cities, and departments, the CréditFoncier, and the Société Algerienne. It is also obliged to loan 180,000,000 francs ($36,000,000) to the government without interest.
One of the chief branches of the business of the Bank of France is the service of the public treasury and the performance of other financial duties imposed upon it by the government. It serves as the depository and disbursing agent for the government, and performs important functions connected with the public debt, the mints, the savings institutions, and publicly administered trusts of various kinds. It is also the depository for the banking reserves of the country. In France, as in England, it is not the custom of banking and other financial institutions to hoard money in their vaults, but to depend upon the Bank of France for supplies as needed. To this end they keep funds on deposit there, and regularly rediscount the paper of their customers when balances need to be replenished.
Through its network of branches and agencies spread over the entire country, the Bank of France is able economically and expeditiously to conduct the intermunicipal exchanges of the country. It participates in local clearings through membership in the clearing houses, at which balances are paid by checks drawn againstcredits on its books maintained for that purpose by all members, and it conducts so-called transfer accounts with other banks and financial institutions against which drafts can be drawn payable at any place where one of its offices is located. Such drafts constitute the chief means through which transfers of funds are made between different places.
The business of the Bank of France with private persons is limited by the requirement that all paper discounted must have three signatures, or two signatures and collateral security, and that advances can only be made on the security of the forms of collateral indicated above. Most business men find it either inconvenient or impossible to comply with these conditions, and consequently transact most of their business with other banking institutions. The third signature on paper discounted by the Bank is, therefore, usually supplied by these institutions, which thus act as an intermediary between the Bank and the commercial world.
Next to the Bank of France, the most important banking institutions of the country are the Crédit Foncier, the Crédit Lyonnais, the Comptoir d'Escompte de Paris, the Société Générale, and the Crédit Industrielle et Commercial. The Crédit Foncier is principally engaged in extending credit based on real estate security, but it also discounts large amounts of commercial paper. Its organization is modeled after that of the Bank of France, and, like that institution, it is controlled by the state. Since it is primarily an investment bank, a description of its principal operations will be deferred to the next chapter.
The four other banks mentioned are a product of the commercial life of modern France, all having been established since the revolution of 1848. They are all heavily capitalized, the smallest, the Crédit Industrielle et Commercial, having a capital of 100,000,000 francs ($20,000,000), and the largest, the Société Générale, having a capital of 400,000,000 francs ($80,000,000), and all extend their business by means of branches. The Crédit Lyonnais and the Comptoir d'Escompte have branches in France itself, the French colonies, and a number of foreign countries; the Société Générale, throughout France, in London, and San Sebastian, Spain; and the Crédit Industrielle et Commercial, in Paris and its suburbs. Taken together, these four institutions supply the French people in Paris and the Provinces with banking facilities for both their domestic and their foreign business. While in some ofthe larger provincial cities local banks with branches in surrounding towns and sometimes in Paris are to be found, branches of one or more of these four institutions are the chief reliance in nearly all places.
These institutions cater to all the financial needs of their constituents. They supply their needs for cash and for exchange; conduct checking accounts for them, although these are not used in France to the same extent as in the United States; discount their commercial paper and make loans to them on personal and other security; and receive on deposit their savings and provide them with investments. In performing these functions they make extensive use of the Bank of France and of the stock exchanges of the country. With the former they conduct checking and transfer accounts and rediscount their customers' bills, by these means procuring the coin, bank notes, and exchange needed; and from the latter they obtain the investment securities required for the satisfaction of both their own and their customers' needs.
Gold and silver coin and the notes of the Bank of France constitute the hand-to-hand money of the country. The latter form the elastic element, and their operation approximatesperfection. When demand for money increases for any reason, more commercial bills are presented for discount to the banks, which, after indorsement, exchange them at the Bank of France for the notes with which they supply their customers' needs. The note issues of the Bank thus expand in direct and immediate response to the needs of the country for more currency. When such needs have passed, the discounted bills, in exchange for which these notes were issued, mature and are paid in greater volume than new bills are created and presented for discount, and notes, or a corresponding amount of coin, accumulate in the vaults of the Bank. The notes are cancelled and destroyed and the coin is kept in store until it again passes into circulation through exchange for notes still outstanding, or for discounted bills.
On account of the elasticity of its note issues, and the extent to which they are used in the commerce of the country, the Bank of France has occasion to change its rate of discount less frequently than any other bank in Europe. The result is that the country enjoys the advantage of steady and low rates, since in France, as in England, the discount rate of the central bank controls the market rate, and the ease and inexpensiveness with which the notes are issued make low rates possible.
The Imperial Bank, with head offices in Berlin, and about one hundred branches and more than four hundred sub-branches scattered throughout the country, plays essentially the same rôle in the German banking system that the Bank of England and the Bank of France play in the English and French systems, respectively. It was established in 1875 by an act which also profoundly affected the entire banking system of the country, and its development has been aided and directed by several acts passed subsequently.
Its capital, supplied by the general public, amounts at the present time to 180,000,000 marks ($45,000,000), and it is governed by three boards, known respectively as the Curatorium, the Direktorium, and the Central Ausschuss.
The Curatorium is composed of five members, of which body the Chancellor of the Empire is ex-officio chairman. A second member is appointed by the Emperor, and for that position he has always selected the PrussianMinister of Finance, and the three remaining members are appointed by the Bundesrath. It meets quarterly and reviews all the operations of the bank. It, or rather, the Chancellor, its chairman, has supreme power, which, however, he has never exercised except on one occasion, when he ordered the bank not to accept Russian securities as collateral for loans, an order since revoked.
The administration of the bank's affairs is chiefly in the hands of the Direktorium, consisting of a president, vice president, and seven other persons, all of whom are appointed by the Emperor for life, from a list of candidates recommended to him by the Bundesrath. This board selects the staff of bank officers and clerks, and superintends the daily conduct of the bank's business.
The Central Ausschuss is a committee of fifteen persons elected by and representing the stockholders. It holds monthly meetings; has the right to demand complete information concerning the bank's operations, to discuss all matters freely, and to tender advice and counsel; but it has no power to control except regarding two matters: it can set a limit to the amount of securities the bank can purchase, and can veto any proposed transactions withthe Imperial Government or with the governments of any of the states.
Like the other central banks described above, it receives on deposit and disburses the funds of the Imperial Government; administers the coin reserves of the country; conducts the domestic exchanges, and serves as a bankers' bank. It is free to do business with the general public, but the legal and other limitations under which it must operate give the other banking institutions of the country the advantage in competition for this kind of business.
It shares the right of note issue with four other banks, which, out of thirty-two that retained that privilege at the time the Imperial banking system was established, alone retain it at the present time. The issues of these four institutions, however, are relatively small in volume, and the Imperial Government has the right to deprive them of it January 1, 1921, or any tenth year thereafter, on condition of giving one year's notice of its intention so to do. The issues of the Imperial Bank are subject to the following regulations: they must be covered by cash and discounted bills maturing in not more than three months, and signed by at least two solvent persons, the proportion of cash being not less than one-third of the total.If the total amount issued exceeds the Bank's holdings of gold bullion, specie, and government notes by more than 750,000,000 marks at the end of March, June, September, and December, and 555,000,000 marks at other times, a tax of five per cent per annum is levied on the excess.
The law confers upon the Bank the following powers:
a. To buy and sell gold and silver coin and bullion.b. To discount, buy and sell bills of exchange whose maturity shall be three months at the longest, and for which usually three, and in no case less than two, accredited vouchers shall stand good; furthermore, to discount, buy and sell bonds of the Empire or of any German state, or domestic municipal corporations, provided such bonds mature within three months at the longest and conform to the new standards of value.c. To grant interest-bearing loans for terms no longer than three months, upon movable security (lombard, or deposit loan business), such as: gold and silver, coined or uncoined; interest-bearing or non-transferable bonds maturing within a maximum term of three months, whether of the Empire, a German state, or of domestic municipal corporations; interest-bearing non-transferable bonds on which the interest is guaranteed by the Empire or by any one of the German states; capital stock and stock priority shares, fully paid up, of Germanrailway companies in actual operation; mortgage bonds of the provincial, municipal, or other land credit institutions of Germany that are subject to state control, including shares of German mortgage banks to an amount never exceeding three-fourths of their market value; interest-bearing non-transferable bonds of foreign states, and foreign railway priority bonds, covered by state security, in amounts not exceeding 50 per cent of their market value; bills of exchange of recognized soundness, after deducting at least 5 per cent of their market value; and pledges of native merchandise, in amounts within two-thirds of their value.d. To negotiate collections for the account of individuals, institutions, and governing boards; and upon security, as before mentioned, to furnish payments, and make orders or conveyances on the branch banks or on correspondents.e. Upon prior security, to buy on behalf of outside parties, effects of all kinds, including the precious metals; and after delivery to sell the same.f. To receive money for circulation or on deposit, with or without interest, the sum of interest-bearing deposits not to exceed that of the capital stock and reserve fund.g. To accept the custody or other management of objects of value.
a. To buy and sell gold and silver coin and bullion.
b. To discount, buy and sell bills of exchange whose maturity shall be three months at the longest, and for which usually three, and in no case less than two, accredited vouchers shall stand good; furthermore, to discount, buy and sell bonds of the Empire or of any German state, or domestic municipal corporations, provided such bonds mature within three months at the longest and conform to the new standards of value.
c. To grant interest-bearing loans for terms no longer than three months, upon movable security (lombard, or deposit loan business), such as: gold and silver, coined or uncoined; interest-bearing or non-transferable bonds maturing within a maximum term of three months, whether of the Empire, a German state, or of domestic municipal corporations; interest-bearing non-transferable bonds on which the interest is guaranteed by the Empire or by any one of the German states; capital stock and stock priority shares, fully paid up, of Germanrailway companies in actual operation; mortgage bonds of the provincial, municipal, or other land credit institutions of Germany that are subject to state control, including shares of German mortgage banks to an amount never exceeding three-fourths of their market value; interest-bearing non-transferable bonds of foreign states, and foreign railway priority bonds, covered by state security, in amounts not exceeding 50 per cent of their market value; bills of exchange of recognized soundness, after deducting at least 5 per cent of their market value; and pledges of native merchandise, in amounts within two-thirds of their value.
d. To negotiate collections for the account of individuals, institutions, and governing boards; and upon security, as before mentioned, to furnish payments, and make orders or conveyances on the branch banks or on correspondents.
e. Upon prior security, to buy on behalf of outside parties, effects of all kinds, including the precious metals; and after delivery to sell the same.
f. To receive money for circulation or on deposit, with or without interest, the sum of interest-bearing deposits not to exceed that of the capital stock and reserve fund.
g. To accept the custody or other management of objects of value.
Besides the Imperial Bank there are in Germany eight very large and powerful banking institutions and a considerable number of smaller and less powerful ones. The eightgreat ones have each its head office in Berlin, and connections, through branches, agencies, and controlled institutions, in other parts of the Empire, the German colonies, and foreign countries. Together they control about eighty per cent of the entire banking capital of the Empire. In reality they are federations of banking institutions, many of which were once independent, and some of which were promoted and established in the interests of the group.
While these eight institutions are primarily engaged in commercial banking, they are also promoters on a large scale of German industry and commerce, both at home and abroad. Through interlocking directorates, stock ownership, and in other ways, they are closely allied with the leading industrial and transportation interests of the Empire, and they have been and are leaders in the promotion of these interests in other parts of the world, notably in the Orient, South America, and Africa. They are, therefore, leaders on the stock as well as the discount markets of the country, and are widely influential in investment as well as commercial banking affairs.
These, as well as the other commercial banks, consisting for the most part of local institutions and those catering to special interests, usethe Imperial Bank for rediscounts, for transfers of funds between different parts of the country, and as a depository for surplus funds. They do not normally keep on hand more cash than is needed for till purposes. Being in easy reach of an office of the Imperial Bank, supplies can be obtained at any time by checks drawn against credit balances or through rediscounts of commercial bills. Special accounts are carried for transfer purposes and are used even in the transfer of funds between different offices of the same institution.
On account of its right to issue notes against commercial securities, the Imperial Bank has the power to meet the demands made upon it and to supply the country with an elastic medium of exchange. The levy of a tax upon the excess of the issues above a prescribed maximum prevents perfect elasticity, unless this maximum be kept above the highest point which the circulation would normally reach, since the actual levy of the tax forces the rate of discount to such a point as to seriously restrict commercial operations. However, since the line between commercial and investment banking is not drawn by the great Berlin banks with the care that is desirable, and since they have been able at times, especially on account oftheir foreign connections, to embarrass the Imperial Bank in its efforts to maintain adequate specie reserves, such a tax is probably a desirable safeguard against over-expansion of credit.
In important respects the Canadian banking system differs from those of the European countries which have been described and from that of the United States. It consists of a varying number of relatively large institutions, each with several offices administered from a common center, but without a central bank. For some time the total number has decreased, since 1900 from thirty-six to twenty-seven, in spite of the fact that the Canadian law, like that of the United States, provides for the formation of new banks at any time, on compliance with certain prescribed conditions, including a subscribed capital of at least $500,000 and a paid-up capital of at least $250,000. The number of branches, however, has increased rapidly, much more rapidly than the population.
The most noteworthy legal provisions pertaining to the banking business in Canada concern note issues and loans and discounts. Regarding the establishment of branches, theamount, and, with one exception, the composition of the reserves, and many other matters carefully regulated by law in the United States, Canadian bankers are left free to follow their own judgment. Neither is there public examination of banks in Canada. Reports must be regularly made to the Minister of Finance, and he may call for special reports whenever he desires so to do; but neither he nor any other public officer has the right to examine a bank's books or to quiz its officers or directors. In contrast with banking legislation in the United States, another peculiar feature of Canadian law is the incorporation of the Canadian Bankers' Association, an organization resembling in essentials the American Bankers' Association, and the assignment to it of important functions connected with the issue of notes and the winding up of the affairs of failed banks.
Regarding note issues, the chief provisions of the Canadian law are as follows: Each bank is permitted at any time to issue circulating notes to the amount of its capital stock, and between October 1 and January 1 an additional amount, equal to fifteen per cent of its combined capital and surplus, may be issued on payment of a tax to be assessed by the Governor in Council, not to exceed five per cent per annum.The notes are a first lien on all the assets of the bank that issued them, and must be redeemed on demand at the head office and at such other places as are designated by a committee of public officials known as the Treasury Board. As such redemption centers, this board has named Toronto, Montreal, Halifax, Winnipeg, Victoria, St. John, and Charlottetown. Each bank must also deposit with the Minister of Finance a sum of money equal to five per cent of its average circulation. The aggregate of the amounts thus deposited by all the banks is known as the "circulation redemption fund," and may be used in the redemption of the notes of a failed bank. In case the fund is so used, and the liquidated assets of the bank prove to be inadequate for its complete replenishment, a tax sufficient to meet the deficit is levied on the solvent banks in proportion to their circulation.
Regarding loans and discounts, the law aims rather to protect than to restrict the operations of the banks. They may "deal in, discount, and lend money, and make advances upon the security of, and may take as collateral security for any loans, ... bills of exchange, promissory notes, and other negotiable securities, or the stocks, bonds, debentures, and obligations of municipal and other corporations, whethersecured by mortgage or otherwise, or Dominion, provincial, British, foreign, and other public securities." The only important restriction placed upon their loaning activities is the prohibition of making advances on the security of landed or other immovable property.
In making loans to wholesale dealers and shippers of produce, the law safeguards the banks by allowing them to take a blanket lien on the goods dealt in by the borrower. This lien applies not only to the goods in possession at the date of making the loan, but to any others which may be substituted for them or manufactured out of them. This lien is prior to that of any other unpaid vendor, except one acquired before the bank's lien was established.
The chief officers of a Canadian bank are the general manager, the chief accountant, the superintendent of branches, the inspector, and the secretary, all connected with the head office, and the managers of the branches.
The general manager is the chief executive and the chief in authority. While he is subject to the board of directors, on account of his wide experience and knowledge his judgment is usually followed. The other officers are appointed by him with the approval of the board, but, almost without exception, from persons who have served the bank in subordinate capacities. The general manager himself is nearly always a man who has passed through the hierarchy of positions from the bottom up, and is therefore thoroughly familiar with every detail of the bank's business and history. The inspector has charge of the examination of the branches, and this work is so carefully and thoroughly done that examination by public officials is not considered necessary, or regarded as desirable by most Canadian bankers. Regarding this matter, however, there are differences of opinion, and changes in the near future are not improbable. The managers of the branches are in strict subordination to the authority of the general manager, though they are necessarily allowed a large amount of discretionary authority in matters pertaining to the branch over which they preside. Unless prevented by distance, they are in daily communication with the head office or with one of its representatives.
In the operation of the Canadian system, noteworthy features are the methods of controlling credits, of managing the issues and the reserves, and of securing unity or at least harmony of action. It is the usual practice in Canada for a business man to do all his bankingwith one institution. This practice is rendered possible because most of the banks are large enough to take proper care of almost any business establishment in the Dominion, and because experience has demonstrated its wisdom.
The banks compete vigorously for new business but do not attempt to attract one anothers' customers. Indeed a customer who desires to change his banking connections is looked upon with suspicion and is subjected to a very careful examination by the bank that is asked to take him on, including a careful discussion of all the aspects of the matter with the bank he desires to leave. The result of this practice is that a man's banker is thoroughly familiar with his affairs, especially his credit relations, and at the same time feels under obligations to render him such support and guidance as he deserves. On account of this practice, also, commercial paper brokerage does not flourish in Canada.
The notes of the Canadian banks constitute practically all of the hand-to-hand money of the country in denominations above two dollars. The one and two dollar denominations are supplied by Dominion notes—all but $30,000,000 of which are represented by gold coin orbullion—and the lower denominations by subsidiary silver supplied by the government.
Each bank pays out its notes freely to supply the cash demands of its customers, and receives from them on deposit, without hesitation or depreciation, the notes of other banks as well as its own. The former, however, are either sent in for redemption as soon as received or used in making payments to the banks which issued them. Thus notes are cleared as readily as checks and the volume in circulation expands and contracts in automatic response to business needs. The fact that these notes are neither legal tender nor guaranteed by the government does not interfere with their circulation—daily clearings, the first lien on assets, and the redemption fund amply protecting holders against the possibility of loss—but does prevent their being hoarded as reserves or for any other purpose and thus contributes towards their elasticity.
The connection now established by law between the maximum volume of bank note issues and the capitalization of the banks renders necessary the increase of the latter in correspondence with the expansion of commerce in order to prevent a contraction of credit. Present law, however, does not provide forsuch an increase. It is left to the voluntary action of the banks, which seem inclined to increase surplus funds rather than capital. The permission granted in 1908 to extend issues beyond the amount of capital during the crop moving season, on payment of a tax, is a makeshift and not a solution of the difficulty, since a tax on issues is a means of forcing contraction of credit and not of adjusting issues to legitimate needs.
Since Canadian banks are able to meet the greater part of the public demand for hand-to-hand money by means of their own notes, they do not need to carry in their vaults large amounts of gold and silver coin and Dominion notes. They keep on hand only so much as experience indicates they are likely to be called upon to supply to their customers, plus a reasonable margin for safety and for the payment of clearing house balances. The greater part of their reserves consists of balances in banks outside of Canada, especially in the United States and England, call loans in New York City, and easily salable securities. In case of an emergency of any kind these resources may be transformed into gold or their customers supplied with foreign exchange, which is often as much or even more needed.Gold can at any time be exchanged for Dominion notes if that is the currency wanted.
The lack of a central bank and of a rediscount market is to a degree compensated by unity of action among the banks. This is the result not so much of law as of conditions, among which the most important are: the fact that the six largest banks do fifty per cent of the business and that one of these, the Bank of Montreal, holds most of the deposits of the government and is generally spoken of as the government bank; the fact that the general managers are experts, in first-hand touch through their branches with business conditions in Canada and other parts of the world, and in possession of the same data concerning these conditions, and through the same kind of acquired skill and similar experiences likely to draw the same or at least similar conclusions from this data; common interests in the prosperity of the country and in the prevention of speculative excesses and mutual interdependence in the successful conduct of their everyday business as well as in times of emergency and stress: and the Bankers' Association, which through its journal gives authoritative expression to the best banking opinion and actually acts for the banks inmany matters of common interest. To what extent this community of action takes the form of rediscounts for each other in ordinary times it is impossible for an outsider to say, but that it is operative in times of stress is indicated by the manner in which the failures of the Bank of Ontario in 1906 and the Sovereign Bank in 1908 were handled.
In both of these cases the public was protected against loss and panic was averted by the cooperative action of the other banks in assuming the obligations of these institutions to the public, and in winding up their affairs in such a manner as to occasion little disturbance.
While Canadian banks are free to carry on investment as well as commercial banking operations, their published reports indicate that they take care to avoid confusion of the two, or the infringement of one upon the other. Their holdings of investment securities are kept well within the limits set by their aggregate capital, surplus, and savings funds, and their method of handling commercial business, based as it is on accurate knowledge of their customer's operations and upon the lien upon produce heretofore described, prevents their acceptance, through ignorance, of investment securities under commercial disguise.
In the economy of nations the encouragement and promotion of saving and the accumulation, distribution, and investment of capital are as essential as the conduct of exchanges, but the performance of these functions has not been segregated and institutionalized to the same extent as has commercial banking. Vast amounts of capital are invested directly by the people to whom it belongs without the aid of middlemen and large amounts are also invested through brokers of one kind and another who can hardly be classed as bankers. The most important types of institutions which have been developed in connection with these functions are savings banks, trust companies, bond houses and investment companies, land banks, and stock exchanges.
Saving is an individual matter for which the essential conditions are the development of theinstinct to make provision against uncertainties of future income and to better the material condition of one's self and family, and a surplus of income above necessary daily expenditures. In order to secure the realization of these conditions to as great an extent as possible, many agencies cooperate in all modern nations, among them savings institutions. Included among these are various forms of provident associations, sometimes independently organized and sometimes connected with other organizations, insurance associations of many kinds, building and loan societies, and savings banks.
The need for savings institutions varies greatly among the different nations and among different classes of people in the same nation. Among people of great wealth the surplus of income above expenditures is so great that large savings can hardly be avoided, and among all the well-to-do classes the margin from which savings are possible is sufficiently large and the desire to save sufficiently great to insure large accumulations of capital. Among these classes there is little or no need for institutions designed primarily for the development of the saving instinct. What they need are institutions for the safe keeping, accumulation, andinvestment of the savings which they are constantly making. The principal work of savings institutions, therefore, pertains to the classes of people who are not well-to-do and who need encouragement and help in their efforts to improve their material condition, if they are so inclined, and stimulus to make such efforts, if they are not so inclined.
The means available to savings institutions for the accomplishment of these ends are the urging of the importance of saving upon the attention of people who do not adequately appreciate it, the placing at their easy disposal of facilities for making savings when they have the ability and inclination to save, and the application of pressure of various kinds to compel or induce saving.
In the application of these means the methods employed by the various groups of institutions mentioned differ widely and they are efficient in different degrees, partly because they have other objects in view besides the promotion of saving and partly because they deal with different classes of people. Savings banks constitute the only group to which the term bank can properly be applied and consequently the only one to which attention will here be given.
In a book entitled,Savings and Savings Institutions, written by Professor Hamilton of Syracuse University, the following definition is given:[A]