The Canadian banking system consists of 19 banking corporations, with 4,000 branch offices, including 124 branches outside of Canada. These 19 banks are empowered to issue notes at their main offices and through their branches. The banking system is characterized by a great freedom from legislative interference. The notes are secured by the general assets of the bank, and the noteholders are given a prior lien. Each bank is permitted to issue notes up to the amount of its unimpaired paid-up capital. There has been little practical reason for such limitation, for the circulation hardly ever exceeds 60 per cent of the paid-up capital; the limitation does, however, force the banks, as their volume of notes expands, to pay in more of their capitalization, and these contributions of the stockholders increase the security of the creditors. At times when the note circulation of a bank approaches its limit, say, 90 per cent of its capitalization, that bank tells its branches to cease giving out notes. When it reaches the limit, it uses the notes of other banks, paying them out over its counter, and to get such notes it borrows from banks which have not reached their limit.
A bank during crop-moving season (from March to August, inclusive) may issue notes in excess of paid-up capital to an amount equal to 15 per cent of its combined paid-up capital and surplus. This emergency issue is subject to a tax of 5 per cent or less per annum, the rate being fixed by the governor in council. These emergency notes are of the same quality, style, and denominations as the ordinary notes.
By an Act of 1913 provision was made for what are called "reserve" notes. Beyond the limits set forth above the bank may issue any amount of notes it desires, provided it deposits with the board of trustees at Montreal gold or Dominion notes to the full amount of notes issued in excess of the limits. These notes and the ordinary bank notes are identical in form, and on the issue thus covered by gold and Dominion notes there is no tax. The banks send their idle reserve gold to Montreal to cover such new notes, and this gold may be recalled when it is no longer needed for that purpose.
The smallest denomination of bank note is $5, and all the notes are multiples of $5. The Dominion notes are $1 and $2 notes issued by the government to an amount of $30,000,000, against which it keeps a 25 per cent gold reserve; any amount in excess of these $30,000,000 may be issued upon deposit of gold for the full amount. The Dominion notes are therefore somewhat like our greenbacks and gold certificates, but it is obvious that bank notes, because of their larger denominations, cannot displace the Dominion notes in circulation, nor vice versa; they are not competitive.
The law of Canada does not require any specific per cent reserve against the bank notes, but does require that at least 40 per cent of the reserve consist of Dominion notes. An opinion has grown up in Canada that a reserve of not less than 15 per cent of demand liabilities should be held in gold and Dominion notes, and if a bank falls below this percentage it is admonished by the Canadian Bankers' Association. By law bank notes are redeemable in specie, but banks in making ordinary payments are required to pay amounts up to $100 in Dominion notes if the payee requests it.
In order to effect uniformity and to prevent fraudulent issue, in 1900 the Canadian Bankers' Association was by law given power to regulate the making and issue of bank notes, to report to the government all overissues, to care for the destruction of worn and mutilated notes, and to take charge of suspended banks. Its main office, in charge of a Secretary, is at Ottawa. The worn and mutilated notes are sent to the Secretary and destroyed in the presence of witnesses, and new notes issued to replace them. The bank note printing companies report to the Secretary monthly the amounts of notes issued to the respective banks, and the Secretary compares these with similar statements from the banks as to notes received. The system is not so highly centralized as our national bank note issue is in the hands of the Comptroller of the Currency.
It remains to add that in Canada bank notes are not legal tender, nor are banks obliged to receive the notes of other banks.
A unique feature in the Canadian bank note system is the bank circulation redemption fund, or safety fund. Started in 1890, the fund was raised by contributions from the banks to an amount equal to 5 per cent of the average circulation of each contributing bank. The fund consists of gold and Dominion notes, lodged in the hands of the Minister of Finance, and bears interest at 3 per cent per annum. The sole object of the fund is to make payment of the notes of banks that have failed; the notes of such a bank are redeemed from the fund without regard to the amount which that bank may have paid into the fund. If the amount of redemptions plus interest on redeemed notes exceeds the sum it contributed, the other banks are required to make good the excess; the Minister of Finance assesses this excess upon the other banks, but the assessments in any year may not exceed 1 per cent of their circulation. All such assessments are reimbursed to the banks when they are recovered from the assets of the failed bank, on which assets the notes are a prior claim. The fund serves the purpose of a compulsory mutual insurance of bank note issues, in which the banks have an intense interest as to the right conduct of their sister banks.
The notes of failed banks bear interest at 5 per cent per annum from the date of suspension to the date announced for payment. Such notes are regarded, therefore, as 5 per cent investments to the date of redemption, and the notes of these banks may be actually more valuable than the notes of solvent banks. The holders have, at least, no difficulty in selling them at par to other banks, brokers, or persons having money for temporary investment. Instead of protractedly circulating at a depreciated value, the investment quality of these notes keeps them at par and withdraws them from circulation.
Every bank is required to redeem its notes at its head office and in such commercial centers as are designated by the Treasury Board. At present the redemption cities for all the banks in common are Toronto, Montreal, Halifax, Winnipeg, Victoria, St. John, and Charlotte town. The many redemption offices make it easy to redeem the notes, the distances are short, and there is no charge for exchange.
Banks issue notes freely, both at the home office and the branches, as loans and discounts are made; such loans and discounts are paid in bank notes or credited as deposits; when these loans are repaid later the means of payment are five in number, viz.:
1. Gold or Dominion notes - these increase the bank's reserve and decrease the total currency of the country.
2. Checks against the loaning bank - these leave the notes outstanding at the same amount, but reduce its deposit liabilities.
3. Checks Against Other Banks - These Are Cleared And Collected.
4. Bank notes of the loaning bank - these reduce its bank note liabilities and the total bank note currency of the country.
5. Bank notes of other banks - these are sent at once to the redemption offices or to the issuing bank for redemption, or if the head office or a branch of the issuing bank is in the same town as the loaning bank, the notes are enclosed along with the checks in the exchanges for the clearing house, for, although branches are not required to redeem notes of the parent bank, they are required to accept them at par in payment of all dues.
Every bank strives to put out into circulation its own notes, but at the same time to bring about the redemption of the notes of all other banks when tendered in payments or for deposit. The branches facilitate the bank note system by providing facilities for maintaining upplies of notes handy to borrowers. Though the bank notes acquire a national circulation, they do not stay out in circulation but are speedily returned for redemption. The result is an alm st perfect elasticity of note issue; the curve of the combined outstanding issues is highly symmetrical from year to year, the fluctuations ranging between 15 and 20 per cent, the maximum issue coming in October, the minimum in January. The spring revival calls out some extra notes, but the big issues start in August and decline in November.