Including call loans and securities the average reserve maintained by the Canadian banks lies between 35 per cent and 40 per cent of the total assets, of which about 10 per cent is in cash and Dominion notes, 10 per cent in amounts due from other banks, and the balance in securities and call loans. The banking conditions are so varied in the different sections of the country and in different institutions that it would be impossible to establish a fixed legal reserve which would suit all conditions and seasons. Past experiences have demonstrated that the question may be left safely with the individual banks themselves. The cash reserve of the Canadian banks compares favorably with the general average of the national banks of the United States.
The fixed legal reserve of the national banks of the United States has been compared to certain beds in a hospital which were always reserved for emergency, and on the occasion of a great disaster the superintendent refused to permit the beds to be used, assert1 Monetary Times, Toronto, Jan. 6, 1912.
ing that they were to be reserved for emergencies. To establish a legal reserve means that when a bank uses its reserve for what it is intended, it breaks the law and becomes subject to severe penalties. Altho there is no law or understanding on the subject in Canada it is generally conceded that the total quick assets of a bank should not be allowed to fall below 15 per cent, of which at least eight per cent shall be in cash and the balance in notes and checks of other banks, and in bank balances. In the statement under consideration it will be noticed that the quick assets amount to 18.28 per cent and liquid assets to 34.84 per cent, or nearly 40 per cent of the liabilities to the public.
With the establishment of the central gold reserves, certain new phases will arise in connection with the computation of the cash and other reserves. This feature has been very clearly explained in an article published in the Financial Times, Montreal, August 16, 1913, which reads as follows:
That the new system will necessitate a somewhat different method of computing the strength or weakness of a bank in point of reserves is evident. Or rather, while the method will remain the same, the standard will have to be adjusted. The gold deposited in the Central Reserve cannot, it is plain, be regarded as an available cash reserve, except to the extent to which there is no currency issued against it. Gold which is being employed as the basis of currency, under a law which requires the holding of a full dollar in specie for every dollar of the corresponding notes, is not an asset at all; but neither, on the other hand, are the notes of liability. The issue of notes against deposited gold, therefore, decreases the amount of cash assets, but does not increase the amount of liabilities. But the process of issuing additional currency implies the receipt by the bank of something with which that currency is purchased by the person who takes it out. So far as concerns the special additional currency taken out in the autumn and returned before spring - which is the only class of circulation to which the Gold Reserve clauses will at present apply, since the ordinary issue power of the banks up to the limit of their capital, without gold deposit will for a good many years suffice to look after the all-the-year-round requirements of the nation - practically all of it is taken from the banks in exchange for grain receipts, drafts on grain shipments, and similar high-grade, short-term, readily negotiable securities. These securities have in themselves a certain value as reserve. They are not to be indiscriminately ranked with the ordinary commercial loan which forms the bulk of the all-the-year-round business of the banks, for they are based upon a commodity which is at all times salable, and they possess a negotiable value far in excess of that of ordinary commercial paper. In addition to this, they will be steadily disposed of by the banks in the international money market, in proportion to the speed with which the crop moves to seaboard; and if money is tight and reserves low it is in the power of the banks to exert much pressure to get the crops moved rapidly - as they doubtless will do this season. So that while there will be an apparent reduction in the reserve strength of many if not all the banks when grain payments commence, it will be much more apparent than real; and the gold which is taken from the banks' control to form a basis for the extra currency can in case of need be replaced without any great difficulty or sacrifice.