Since the outbreak of the war in August, 1914, the branch system of banking combined with an asset currency gave another proof of its value for the equable and economic distribution of loanable funds thruout a vast area, under adverse conditions, and with the least possible disturbance of business or displacement of reserves.

Elasticity and adaptability to new conditions have always been among the chief characteristics of the Canadian banking system and these qualifications could be subjected to no more severe test than when Canada, as a belligerent nation found herself confronted by the complicated and innumerable problems raised by war conditions. The majority of these problems at the outset of the war were of a financial and fiduciary nature and the government naturally looked to the banks for assistance and advice. The latter were equal to the occasion and exhibited a reserve of power and a capacity for overcoming these new and trying conditions, from their ordinary resources, with little or no recourse to the remedial measures passed by the government.

Altho no moratorium was declared in Canada, the Dominion Government, more as a matter of preparedness than of necessity, made bank notes equivalent to gold or legal tender, extended the emergency currency privilege thru the whole year (instead of the usual period, September first to February twenty-eighth) and made provision whereby the banks could borrow from the government against the deposit of approved securities or commercial paper. As stated above, however, the banks did not find it necessary to use any of these privileges, whose real value rested in their moral effect, in the assurance to the public and to the banks that a provision had been made, so far as lay in the power of government, to enable business to go on as usual.

It was fortunate for Canada, that for some time prior to the war, the banks had been advising retrenchment in expenditure and discouraging any tendency on the part of their customers to overexpand or overproduce. The outbreak of war, therefore, found bank loans in process of satisfactory reduction and no untoward pressure on the part of the banks was necessary to continue the healthy liquidation then in process, the public being more than ever aware of the necessity for reduction in loans and retrenchment generally. Commercial loans in Canada decreased $156,000,000 between June 30, 1914, and October 31, 1916.

For the year preceding the war, Canada had adverse international trade balances of nearly $300,-000,000. To-day this has changed to a favorable balance which will, for the year 1916, reach at least $500,000,000 and probably more. The total foreign trade has nearly doubled during the same period, the estimate for 1916 being in the neighborhood of $2,-000,000,000. Much of the increase in the exports may be ascribed to shipments of munitions and other war materials, the output of manufactured goods in the country having increased more than 50 per cent over 1913. A very large proportion is also due to the increased quantity and value of the natural products of the country exported.

With a favorable trade balance of one-half billion dollars, Canada is easily able to absorb the invisible interest balance estimated by Sir Thomas White, the Minister of Finance (February, 1916) at $187,000,000 annually, of which $150,000,000 is due

Great Britain and the balance to the United States.

Within the last two years, not only has Canada practically ceased to depend upon foreign loans, but she is to-day financing her own heavy war expenditures and in addition, placing large sums at the disposal of the mother country for use on this side of the Atlantic.

Economy, efficiency and increased production brought about a remarkable change in the foreign trade balances and also in the banking situation. With busy factories, steady increase in bank deposits and favorable trade balances, Canada is now in a position not only to render valuable aid to the Allies in the prosecution of the war, but is also able to consider the remedial measures necessary to offset the economic reaction that is expected when peace is finally declared.

The following statement shows the position of the banks as a whole for the month ending October 31, 1916:

Liabilities:

Millions of Dollars

Per cent of net liabilities

Deposits ..................

1,549

98

Circulation

145

9

Bills payable

5

Sundry liabilities

7

1

1,706

108

Less :

Notes and checks of other banks, etc.............

97

Central Gold Reserve, etc.....

38

135

8

1,571

100

Millions of Dollars

Per cent of net liabilities

Capital paid up........................

113

Reserve and undivided profits. .

132

245

16

1,816

116

Assets:

Cash reserve

485

31

Liquid reserve..............

360

23

Loans

913

59

Real estate and mortgages....

50

Other assets

8

3

1,816

116

The principal increase is found in the deposits which have increased nearly $400,000,000 since June, 1914, while commercial loans in Canada decreased $156,000,000 during the same period. The increase in savings, or time deposits, is most gratifying, and would be more so if it were entirely the result of thrift on the part of the small depositors; part of it, however, represents the cash surplus of manufacturers and large corporations whose prosperity has converted them from bank borrowers to bank depositors.

The credits granted to date by the Canadian banks to the British Government for expenditure in connection with munitions amount to $120,000,000, and in January, 1917, they agreed to advance an additional $25,000,000 for the same purpose. During November, arrangements were also completed with a number of the Canadian banks by representatives of the British Government for a six months' credit of $20,000,000 for the purchase of wheat in Canada, making a total of $165,000,000.

It will be apparent from a study of the statement that the chief present problem of the Canadian banks is not so much the obtaining of new deposits as the remunerative and short time employment of those they already have with a view to being in a strong position when the war comes to an end, to assist in the process of adjustment from war to peace conditions - a matter that is engaging the serious attention of all thinking men in Canada.

Review

Describe the various forms of currency used in Canada. What currency is legal tender?

What is meant by elasticity in currency? How does the Canadian system of note issue provide for this?

What situation proved the excellence of the Canadian banking system? How?

Why does the branch bank system work particularly well in Canada?