Combined Banks Guarantee Note Circulation

In addition to this certainty of redemption within two months of the date of suspension provided by the Act, it also provides that the notes of a failed bank shall bear interest at 5 per cent. from the date of suspension till the liquidator advertises his readiness to redeem them. The two stipulations together effectively prevent the notes of a failed bank going to a discount. In every case of bank failure since 1890 the notes of the failed banks have passed from hand to hand in equal credit with the notes of going banks. It should be said also that in no case has it been necessary for the Minister of Finance to use the fund for their redemption.

The assets of the failed banks have been sufficient to effect redemption of the notes within the two months allowed, except in the case of the Farmers Bank of Canada. In that case the going banks redeemed all Farmers Bank notes as presented by the public, and held them pending the completion of arrangements for payment by the liquidator. Thus it is seen that the combined or associated banks, in effect, guarantee the note circulation of each one of their number. The benefit derived by the individual banks is somewhat unequal. It goes chiefly to the small and weak institutions.

Bankers' Association Has Right Of Inspection

As the associated banks have thus been made liable by Act of Parliament for the note issues of the individual institutions, it was seemly and proper that they should have some powers of supervision of the individual issues. That also Parliament has provided. The powers are given to the Canadian Bankers' Association, which is an incorporated body made up of accredited representatives of all the banks. The Bankers' Association directs its efforts towards ensuring that each one of the banks complies with the law in regard to note issues. Each bank has long had the right to issue its own notes up to the amount of its paid-up capital. The banks' powers of circulation were enlarged by amendments made to the Bank Act in 1908 and 1912. By these each bank is allowed to circulate during the crop-moving time-between 31st August and 1st March in every year - in addition to its ordinary uncovered circulation, which is not to exceed paid-up capital, an amount equal to 15 per cent. of its combined capital and rest: the extra issue is subject to interest or tax at a rate not to exceed 5 per cent. per annum.*

*As the stockholders of the Bank of British North America are not subject to the double liability, the ordinary uncovered issues of that bank are limited to 75 per cent. of its paid capital. The bank may, however, issue up to its paid capital on depositing in the Central Gold Reserves Dominion Government securities, or current gold coin or Dominion notes, equal to 25 per cent. of its paid capital; it may issue further, in excess of capital, by depositing gold or Dominion notes equal to the excess; and in the crop-moving season the bank is authorized to issue in excess of capital up to 10 per cent. of capital and rest combined, without specific security.