CHAPTER XVI.

THE CANADIAN BANKING SYSTEM.

Its Origin and Growth-Foundation of the Bank of Montreal-The Union of the Canadian Provinces and the Dominion-Banking Reforms in 1870, 1880, and 1890-The Effect upon the Security of Note Issues and the Small Losses by Failure-Recent Suspensions-The Reforms of 1900 and 1908.

TH

HE Canadian banking laws now in force represent an almost steady growth from comparatively crude conditions to a perfected scientific system. Founded originally upon Scotch models, the Canadian banks enjoyed at first the freedom from even the police supervision of the government which naturally arose from the fact that they framed their own charters. Canadian banking was not exempt from the risks and difficulties of the other institutions of a new and growing country, and defects in the security of the note issues and the protection of deposits were gradually remedied as they were disclosed by experience. The development of the Canadian system, however, has been natural and symmetrical and most of the changes in the law have had the approval of the leading bankers. Attempts have been several times made to substitute a government currency or a specially secured circulation for the elastic medium provided by the banks, but these attempts have not been sufficiently successful to destroy the essential advantages of the Canadian banking system. They have resulted in putting a considerable volume of government paper alongside the bank-note currency and in requiring a certain percentage of this paper to be held by the banks in

their cash reserves, but they have not supplanted the banknote currency and are not likely to be permitted to, unless the necessities of the government in time of war should become paramount to the commercial interests of the country. The history of Canada is that of several separate provinces before the union in 1841. The movement for better banking facilities began independently, but almost simultaneously in each province early in the present century. The scarcity of specie or of any other circulating medium in Lower Canada was partially supplied by the "Army bills" issued by the government during the war with the United States and it was not until 1817 that a banking company was formed.' Previous attempts to found a bank had been addressed to the local legislature of Lower Canada, but on June 23, 1817, a meeting was held at Montreal at which an association was formed with a capital stock of £250,000. An office was opened in August under the title of the Bank of Montreal, without waiting for legal authority, and what afterwards became the strongest institution of the Dominion was thus established. The bank was simply a private partnership, with unlimited liability of the shareholders, and continued so until the passage of a charter by the legislature on March 17, 1821, which was approved by the royal government and proclaimed on July 22, 1822.

Charters for the Quebec Bank and the Bank of Canada, situated at Montreal, were passed at the same session of the legislature and their approval by royal authority was proclaimed on November 30, 1822. The Quebec Bank had been organized in a similar manner to the Bank of Montreal on July 9, 1818, with a capital of £75,000, and the Bank of Canada had been organized on August 25, 1818, with a capital of £200,000. The charter of the Bank of Montreal, whose provisions were followed in the charters of the other two banks, gave the institution corporate powers until June

I The Army bills outstanding at the close of the war in March, 1815, were £1,249,996, but they were receivable for public dues and convertible into government bills of exchange on London, and were reduced by May, 1816, to £200,000.

1, 1831, and provided for the choice of thirteen directors, who must be British subjects and holders of at least four shares each. The principle of limited liability was applied to the shareholders, without any obligation beyond the amount of their subscription to the stock, but the directors were to be liable to the stockholders as well as to the holders of bank-notes in case the debts of the corporation should exceed treble the amount of the capital stock actually paid in, exclusive of the deposits. The bank was prohibited from lending on land or mortgage, but might take such property for debt contracted in the course of its legitimate dealings.

The fact that the acts passed by the provincial legislature for the incorporation of these banks were based upon the articles of agreement drawn by the incorporators made the restrictions trifling which were imposed upon the banks. There was no limit upon the volume of note issues except the general liability of the directors for the aggregate indebtedness. There was no prohibition upon loans upon the stock of the bank or upon loans to directors. The fact, however, that each bank was established by a special law afforded some measure of protection against indiscriminate private banking and there was a disposition from the outset to adhere closely to Scotch methods.' An indication of this is given by the prompt establishment of branches by the Bank of Montreal at Quebec and by both the Bank of Montreal and the Bank of Canada at Kingston in the upper province. The banks received the notes of their competitors and exchanged them and settled the balances in specie as often as once a week, according to the Scotch system. The Bank of Montreal employed an agent in New York for the negotiation of sterling exchange and all the Canadian banks. of importance eventually had an agent or correspondent in the American metropolis.

1 Mr. R. M. Breckenridge, in his admirable work, The Canadian Banking System, published by the American Economic Association, from which many of these facts regarding early Canadian banking are taken, states that among 140 odd charter members of the Bank of Montreal there were at least 90 Scotch names.

The importance of freedom of note issues in developing banking in a new country is indicated by the early returns of the Canadian banks, in spite of the considerable deposits which they were able to obtain. The total deposits of the three banks of the lower province in 1824 were £135,426, while the circulation was £167,498; the deposits in 1825 were £151,637 and the notes in circulation £177,454; the deposits in 1826 were £176,475 and the notes £193,548. The debts due to the banks, which may be assumed to represent chiefly the discounts, were £529,363 in 1824, £585,265 in 1825, and £594,515 in 1826. The debts due the Montreal Bank in the latter year were 371,334; Quebec Bank, £111,523; and Bank of Canada, £111,658. The banks secured the renewal of their charters in 1830 and 1831, until June 1, 1837. The legislation of this time cut off possible note issues by private bankers, by prohibiting notes payable to bearer except when issued by banks incorporated by law in Lower Canada. The total amount of notes in circulation for less than $5 was limited to one-fifth the capital stock of the Bank of Montreal and notes for less than five shillings were prohibited. Similar limitations were imposed upon the Quebec Bank and the power was reserved to the legislature to prohibit or limit entirely the circulation of notes under $5.

The Bank of Canada found its business falling off in 1825 and after gradually reducing its capital stock went into liquidation in 1831, upon the lapse of the charter. The bank did not fail or suspend payments, but adopted a policy of paying uncurrent and underweight coin, which led the Bank of Montreal to refuse its checks and notes and caused the rapid reduction of deposits until it became unprofitable to continue business. A charter was granted to the City Bank of Montreal in 1831, upon the representation of leading merchants that the capital of the existing bank was "altogether inadequate to the circulation of the valuable articles of import and export which its geographic position naturally brings to it," and that the most effectual preventive of the evil of monopoly "is the admission of reasonable

competition, with its counteracting influence." Another Montreal bank began business in 1835 under the title of the Banque du Peuple (Bank of the People). The principal partners were Messrs. Viger, De Witt, and Co., who were fully liable for the debts of the bank, while shares were issued to persons having no share in the management and liable only for the amount of their stock, according to the French system of partnership en commandite.

The movement for a bank in Upper Canada, now constituting the Province of Ontario, assumed definite shape a trifle earlier than in Lower Canada, but the first charter passed by the provincial legislature did not receive the royal assent within the period provided by the charter to give it validity, so that it became necessary to pass a new charter in 1819. The royal government again delayed action, but the Bank of Upper Canada, situated at Kingston, was finally authorized by proclamation of the royal assent on April 21, 1821, more than a year before such assent was granted for the banks of Lower Canada. The capital of the bank was originally fixed at £200,000, but this was reduced in 1823 to £100,000. The general provisions of the charter were similar to those of the banks of Lower Canada, but notes under five shillings were forbidden from the outset and the charter was to remain in force until June 1, 1848. The government subscribed for 2,000 shares of the capital at a par value of £25,000. A practical monopoly of note issues was conferred upon the bank in 1823 by an act prohibiting banks from carrying on business in the province, which did not redeem their notes in specie within its limits. The development of Upper Canada was somewhat more rapid after the establishment of the bank than before, from a combination of causes, and the capital stock actually paid in increased from 10,640 in 1823 to the full limit of £100,000 in 1830. The debts due by the bank increased from £107,598 on December 15, 1826, to £260,557 on January 1, 1831, and the notes in circulation increased during the same interval from £87,339 to £187,039. The bank encountered only the rivalry of an institution purporting to be the Bank of Upper Canada under