Prior to the consolidation of the various provinces into the Dominion of Canada, in 1867, a number of the largest banks issued circulating notes under permission of their respective provincial governments, but after the consolidation, only banks authorized by the general government were permitted to issue notes. The present banking system of Canada somewhat resembles that of Scotland, and possesses some excellent features, among which is its system of "asset currency" with its very desirable quality of perfect elasticity. In 1870 a law was passed requiring all banks of issue in the dominion to have a paid up capital of at least $250,000, and restricting the note issue of each bank to the amount of its paid up capital. In 1891 the banking act was amended and the capital stock limit of issuing banks was raised to $500,000, of which one-half must be paid over at the time of organizing the bank, to the minister of finance, to be held by him until the organization is complete and all details of the law have been complied with. He then pays back to the bank the amount so deposited, less five per cent of the capital, which is retained as a guaranty fund, to be used in the redemption of notes in case of the failure of the bank.

A Canadian bank may issue notes to the full amount of its capital stock, and no reserve is required to be kept on hand as a security for their redemption, the only provision of this kind being the fund in the hands of the treasurer, composed of the five per cent required to be deposited by each bank of issue at its formation. Thus the notes of every bank are credit obligations based upon almost wholly the general assets of the bank, but the law makes them a first lien upon such assets, liabilities to the dominion government being a second lien, and liabilities to the provincial government a third lien. In addition to this very excellent precaution, the law imposes a double liability upon the stockholder, making each liable for double the amount of stock which he holds.*

No inspectors or examiners are employed by the government, but monthly reports are made to the government showing the condition of the bank's assets, circulation, etc., and severe penalties - fine and imprisonment - are prescribed for failure to comply with the law or the making of false returns. The banks may also demand of each other statements as to their condition at any time, and thus the most careful scrutiny is exercised by each bank upon all of the others as well as by the government. Since each bank in the regular course of business has occasion to take over its counter the notes of other banks, the care exercised against taking notes that are not good is a wholesome restraint upon every bank, and under the system every banker is watching the solvency of every other. This supervision is far more thorough and effective than that of government inspection, since bankers are not only more capable of scrutinizing such institutions, but it is vital to their interest to do this in the most thorough manner.

*Two banks, La Bank du Peuple and the Bank of British North America, exist under ancient charters which do not permit of the double liability requirement as to stockholder, and for this reason they are only allowed to issue notes to the amount of 75 per cent of their capital.

No Reserve

Inspection

An essential feature of the Canadian system is the fact that the bank notes are not a legal tender, for were they possessed of this quality, other banks would be compelled to accept them, irrespective of the solvency of the issuing bank. They would circulate then not upon their merits but upon the legal tender quality underlying them. Without the legal tender quality to float the circulating notes, each bank takes them upon the soundness of the bank issuing them, and upon the slightest indication of weakness on the part of the issuing bank its notes are thrown out and it is discredited. Thus any bank may be summarily and severely punished the moment it allows itself to get into an unsound or weak condition.

The banks of the three financial centers of the dominion, viz., Montreal, Quebec and Toronto, act as clearing houses for all the banks of the dominion. Notes of any discredited bank are immediately sent to them for redemption, and should a bank suspend, liquidators are at once appointed to convert the assets and redeem the circulating notes. In case the assets are insufficient for this purpose the extra liability of the stockholders is resorted to, and should this not prove sufficient, then the five per cent fund in the hands of the treasurer is forthcoming for the purpose. Should this fund become exhausted, the solvent banks are assessed to make up the difference. As a matter of fact, however, the liquidators are always able to redeem the notes out of the assets, but in order that all solvent banks may accept the notes of an insolvent bank without loss, the law provides that such notes shall bear interest at the rate of six per cent from the date of the suspension of the bank until they are redeemed. Thus the notes of even a suspended bank never fall below par. After the lapse of sixty days, if the liquidators do not pay, then the treasurer pays them out of the redemption fund.

The banks are compelled to keep their notes at par, and in order to do this they must provide redemption agents at various points throughout the dominion. Were it not for Notes at Par this provision, notes of a Montreal bank would be at a discount when circulating in a distant province like Manitoba, for the reason that time and effort would be required to present the note at the proper place for redemption. The elasticity of the circulating medium is one of the features most prized in the Canadian banking system. This quality of being capable of expansion and contraction according to the requirements of trade is possessed by the note circulation of Canada to a greater extent than that of any other in the world. When business activity demands a large circulating medium the banks issue their notes to meet the demand, not exceeding, of course, the amount of their paid up capital, and when less money is needed these notes drift back into the banks in the form of deposits or in liquidation of discounts and are thus practically retired, being locked up in the vaults. They are not then idle capital since they have cost nothing, except the expense of printing them. The volume of the circulating medium of Canada often varies as much as 15 per cent. in the course of the year. As a matter of fact the volume of notes outstanding is usually not much above 75 per cent. of the paid up capital of the banks, thus the currency has an expansibility in case of emergency amounting to nearly one-fourth its usual volume, provided, of course, the assets of the bank are sound in quality. As a result of this, rates of interest in Canada are comparatively uniform, and a "tight" money market is unknown.*