This section of the book is from the "Canadian Banking Practice" book, by John T. P. Knight.
Question 33.— The Bank of X has a small capital and its circulation limit is frequently reached. The notes of another bank not represented in the district are paid out by it, and as a result the other banks in the neighbourhood Receive large amounts of these bills and are obliged to pay express charges to the nearest point of redemption.
Is not this a violation of the spirit of the Bank Act and also in some sense unfair to the public, who accept these bills in good faith, and find that they cannot exchange them for legal tender or gold? Why should not other banks in the district refuse to receive such bills except at a discount ?
Answer.—We think that the wrong to the public may be left out of consideration, as they take the bills voluntarily in payment of debts due them, for which they have the right to exact payment in legal tender money.
The question as to the duty of the issuing bank in such a case as this, is, however, open to discussion. We think that they might very well undertake to redeem for the time being all notes of the kind they are circulating, and it would seem clear that this could usually be done without loss. If, however, the matter could not he amicably arranged in this way, we would think it open to serious objection for the other banks to refuse to accept the bills from their customers. The adoption of such a course, even under the stress of unfair conditions such as those mentioned, would be bound to disturb the public confidence in bank notes, a confidence that has been largely increased by the arrangements brought into effect at the last revision of the Bank Act. At the present time any person, in any part of Canada, who receives a bill issued by a Canadian bank, knows that he has something that he can use without question, and at its face value, whenever he wishes to pay a debt with it or deposit it in his bank, and it would be a serious matter to disturb this condition.
Bank Notes—Fraudulent Issue of, to a Friendly Depositor by a Bank on the Eve of Failure.
Question 34-—Would it not be possible for the officers of a bank on the eve of failure, without breaking the law, to pay a friendly depositor the amount of his balance in notes of the bank on the understanding that he was not to use them until the danger had either passed or else the bank suspended, and that until the notes were presented for payment interest would be allowed as though the amount were still on deposit?
Answer.—The clauses of the Act respecting the note issue seem to cover quite fully the case you mention, although it is always possible for a fraud to be committed under them which might not be discovered. Section 51 authorizes the issue and re-issue of notes "for circulation." This would invalidate an issue made under such conditions as those you quote, as the notes would clearly not be issued for circulation, and they would probably be held, under section 53, not to give a preferential claim. We think, however, that the claim would be held to come directly under clause 52, as such a transaction would be really hypothecation of the notes of the bank by one of its officers to secure a debt, notwithstanding the form in which it was placed, and the fact that the party receiving them held them and brought them back for redemption after the failure of the bank, would be apt to lead the Court to take that view. We should think also that it would be most unlikely that a bank manager would lend himself to such a transaction, as he would thereby render himself liable to the penalties set out in section 97.