For some time it had been felt that the emergency currency and other expedients were only tentative measures, and that in the revision of the Bank Act a satisfactory solution of the difficulty would be found. The central gold reserve furnishes a solution of the difficulty, and is a consistent amplification of the note-issue system, which has so completely met the requirements of the country during the last fifty years.
The central gold reserve is an ingenious plan whereby the banks are enabled to issue bills to an unlimited amount without departing from the well-established principles of an asset currency limited to the amount of paid-up capital. The notes issued under this plan possess all the desirable features of elasticity and convertibility in common with the ordinary issue. As a matter of fact, there is only one issue, and the central gold reserves come automatically into operation as soon as the circulation issued by a bank exceeds its authorized amount, and are immediately released by the retirement of the excess in the ordinary course of redemption.
The machinery is simple. Under the new law four trustees are appointed - three by the banks and one by the Minister of Finance - and the banks are empowered to deposit with these trustees as much of their gold as they like. This deposit is called the central gold reserves. The banks are then permitted to issue against the reserves their notes, dollar for dollar, as and when required.
Thus, as has already been said, a bank with $10,-000,000 paid-up capital, $5,000,000 reserve, and $15,-000,000 of gold and Dominion notes (which are really receipts for gold), would at all times be able to issue up to 810,000,000, and during the emergency period (September 1 to February 28) would be enabled to increase its circulation to $12,250,000. This bank would in all probability deposit with the central gold reserves, say, $5,000,000 in gold or Dominion notes. It would then be at liberty to allow its circulation to run up to $15,000,000 at any time, or to $17,250,000 during the emergency period, and it could issue a still larger amount of notes by making a further deposit with the central gold reserves.
Under previous acts, Canadian bank notes have proved themselves to be as good as gold; and the excess circulation protected by the central gold reserves will be equally as good, irrespective of amount. The system of issue and redemption thru the branches could not be improved upon. A note issue which has absolute security, rapid convertibility, and unlimited elasticity must surely come as near perfection as it is possible to reach.