- The Empire Club of Canada Addresses (Toronto, Canada), 14 Dec 1905, p. 86-96
- Stewart, D.M., Speaker
- Media Type
- Item Type
- Some general comments about the banking business. A duty owed to the public to disseminate accurate information regarding this subject, as it is one upon which the commercial, agricultural and industrial prosperity of the Dominion is vitally dependent. The detriment to any country and demoralization to its people if there exists a feeling of uneasiness or distrust in its public institutions. The importance of banks and other financial institutions, their methods and management should be so conducted, and at the same time be so understood, as to inspire and maintain the fullest measure of public confidence. A comparison of the Canadian banking system with that of the United States: some of the main points of difference. The discussion proceeds under the following headings: Capitalization; Branch System; Paper Currency; Rest Estate Investment; Cash Reserves; Revision of Bank Act. Some conclusions, including the speaker's claim that "the United States system would not be suitable for Canada, and that even with whatever imperfections may now exist, our present banking and currency system is the very best that could be devised for the legitimate requirements of our great agricultural, manufacturing and commercial interests, and for the proper development of the enormous latent resources of this great Dominion."
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- 14 Dec 1905
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- THE BANKING SYSTEMS OF CANADA AND THE UNITED STATES.
Address by Mr. D. M. Stewart, General Manager of the Sovereign Bank of Canada, before the Empire Club of Canada, on Thursday, December 14th, 1905.
Mr. Chairman and Gentlemen,--
This is the first time I have had the privilege of addressing the members of the Empire Club, and I beg to thank you very sincerely for your invitation. I can assure you that I regard it as a great honour to appear before you, but 7 also feel that it is a great responsibility. Recognizing this responsibility, and assuming that at these periodical gatherings you have no time to bother with theories and abstractions, I intend to confine myself to facts-plain incontrovertible facts-or to statements based on actual experiences.
Whenever I am asked to speak on Banking, especially Canadian banking, I always do so if possible, as I believe bankers are the proper people to talk about banking. It is a hard, practical business, about which armchair theorists can impart but little knowledge that would be of value in every-day life. I think it is a duty we owe to the public to disseminate accurate information regarding this subject,- as it is one upon which the commercial, agricultural and industrial prosperity of the Dominion is vitally dependent. I believe in publicity, and an intelligent people such as we have in Canada cannot be too well informed about the laws which regulate and control their public institutions. When these laws are properly enforced and understood, the people may be relied upon to support them. A feeling of uneasiness or distrust in its public institutions must be detrimental to any country and demoralizing to its people, so that it is of the highest importance that our banks and other financial institutions, their methods and management, should be so conducted, and at the same time be so understood, as to inspire and maintain the fullest measure of public confidence.
We are sometimes enabled to form a better idea and to appreciate more fully the value of our own laws and institutions when we compare them with those of another country, and it was probably this fact that led to my being asked to compare our Banking system with that of the United States. Two or three weeks ago I spoke on this matter at Ottawa, and as the discussion of such a topic seemed more or less appropriate at the present time, it was suggested that I address the Empire Club on the same subject. I must tell you frankly, however, that in the brief space of fifteen or twenty minutes, it is quite impossible for me to give you anything like a detailed comparison, and the best I can do is to bring to your notice a few of the main points of difference in the two systems.1. CAPITALIZATION.
There are two kinds of chartered banks in the United States, namely, those operating under State laws and those incorporated under the National Banking Act. Both may issue notes and conduct a general banking business, but as there is a heavy tax (10%) on the circulation of State banks, these institutions are practically prohibited from issuing notes, and our comparison will, therefore, not include them. We have no " State," or Provincial, banks in Canada, all being operated under Dominion Act, the Provinces having relinquished their rights to legislate for banking and currency to the Federal Government at the time of Confederation (1867).
In the United States a National Bank may commence business on a capital as low as $25,000, the amount being regulated by the population of the place of establishment. One-half of this amount must be paid up in cash, but the Government is satisfied with a sworn statement of the Directors that this requirement has been complied with, and the only positive proof of bona fade capital it exacts is the.deposit of United States Government bonds whose par value equals only one-fourth of the bank's paid-up stock-or, $6,250. In Canada the minimum paidup capital required is ten times the amount necessary in the United States, namely, $250,000, and this must be deposited in gold with the Dominion Government before the Bank can issue a note or do business of any kind. Most of this sum is returned later, its main purpose being to prove that the capital, to that extent, has been actually paid up. The incorporators must at the same time lodge with the Government a list of bona fide subscriptions for stock in the Bank to the extent of not less-than $500,000, and as subscribers are liable for double the par value of their subscriptions, the Canadian people have a guarantee of at least $1,000,000--if which they know $250,000 had been paid in gold-before the institution can open its doors for business. The Canadian system of incorporation, almost of necessity, creates a larger number of shareholders, and the wider the distribution of a bank's stock the better for the public. The minimum number of Directors is five, but there is no limit placed on the number of shareholders a bank may have.
In the United States one man frequently controls the entire capital, which is not difficult when the amount is so small as $25,000. The system of regulating a bank's capital by the population is responsible for the creation of hundreds of weak and badly managed institutions all over the United States. After a country storekeeper has accumulated $20,000 or $30,000 his ambition is to be the President of a bank and he starts one with his own capital, giving some of his family or friends enough shares to qualify as Directors and comply with the Act: Thus, with $25,000 he can start a National Bank, with all the legal powers and functions of a great New York or Chicago institution. He takes deposits, does a general banking business and sails gayly along until soiree customer fails, or a burglar cracks- his safe, or the confidential clerk disappears with a few thousand dollars. Of course, these are exigencies to which the best managed banks in the world are exposed, but the country storekeeper, who has had no technical training and knows nothing about the scientific distribution of his assets, does not know how to meet them and his bank is forced out of business, to the discomfiture of the poor man himself and the sorrow of the little community which confided in him.
Even in the largest banks in the United States the number of shareholders is comparatively small. The leading banks in the American financial centres are, in my opinion, very ably managed and generally successful, but their officers are trained bankers who owe nothing to the National Banking system. An indifferent system will not prevent good management; neither will the most perfect system save a bank from destruction through bad management. There are 33 chartered banks in Canada, and these are owned by some 25,000 shareholders who afford the public a total security of over $169,000,000 in the form of " double liability " alone. When you hear someone railing against our banks as a huge monoply " just remind him that they are controlled by 25,000 partners--mostly good Canadian voters--but many of whom unfortunately are widows and orphans whose bank stock forms their chief or only source of income. American banks in the smaller towns are so susceptible to local conditions that a trade depression of comparatively small area will often bring them into difficulties. In Canada no purely local depression, however severe, could seriously affect any of our chartered banks. So much for the difference in point of capital and numerical strength.II. BRANCH SYSTEM.
There is another great difference in the conduct of banks in the two countries. The National Banks of the United States' are not allowed to open branches, and it ,is for the purpose of providing banking facilities in the smaller towns that charters are granted on the low capitalization already mentioned. We, therefore, find thousands of small banks scattered throughout the country, each one a head office and branch combined, and catering to the purely local wants of the community in which it is established. If the community is rich, the bank will have more loanable capital than it can safely invest, and the temptation to embark in doubtful enterprises is very great; this has caused the downfall of many a National Bank. If the community is poor, the available funds of the bank cannot be large, and the progress of its customers is hampered by its inability to accord them proper financial aid. In such cases the rate of interest is unusually high, but this does not attract outside banking capital because there is no common connection between the bank with more money than it knows what to do with, and the one whose funds are fully invested.
The advantage of a branch bank to a small community is apparent when you consider that it is identical with, and has all the strength, backing and responsibility of its parent institution in the great financial centre, and that before ever this parent bank could open its doors it had a minimum paid up capital of $250,000 and a shareholders' liability of $1,000,000. Contrast this with the minimum paid-up capital of an United States National Bank of $12,500 and a shareholders' liability of only $50,000.
In Canada the community in need of money for its legitimate requirements has no difficulty in obtaining it -at a reasonable rate of interest-from the wealthier community which has a surplus, as the branch system creates a bond of union between the two. This system brings even the most remote constituency in the far North-West into close touch with the great financial centres of the East. It so regulates matters that an abundance of crops does not create a plethora of money in one place, nor a commercial depression cause financial disaster at another. The parent bank being in touch with every corner of the Dominion, is able to assist a suffering community with one hand, while investing and protecting the resources of a more fortunate community with the other.
One of the most important results of the branch bank system is the equalization of interest rates throughout the country. The borrower in Vancouver; where there are twelve branch banks and not a single head office, pays no more for the use of money than the same class of borrower, 2,000 or 3,000 miles distant, in Montreal, Toronto or Halifax, where the head offices of the Vancouver banks are situated. This is in strange contrast to the actual conditions prevalent in the United States, where there is a constant difference, varying from 2% to 6%, between the normal interest rates in the Eastern centres and those prevailing in the Pacific and Southern States.
Another advantage to a small community in having the branch of a large bank instead of a small individual bank lies in the fact that a branch manager is generally a trained banker, accustomed to consider local transactions solely on their merits. He is not usually swayed by family influence or local prejudice; his own personal advancement is in exact proportion to the success of his branch; he is a salaried official, not the owner of the whole institution. He is under no obligation or necessity to invest all of the depositors' capital in his own immediate locality, and he only makes loans of any size upon the authority of his General Manager and Directors who are capable of impartial judgment, if the Manager is not. In this way, unscrupulous or visionary individuals are often prevented from embarking in schemes that would eventually involve themselves, the bank, and the community ministered to, in financial loss.
This system of connecting the outlying points with the great centres; this ability to gather up the wealth of the older portions of the country and distribute it amongst the newer sections; this method of giving to a rural municipality the benefit of the most mature thought, trained intelligence and impartial judgment on financial matters, form some of the most important factors in the development of any country along safe lines.III. PAPER CURRENCY.
Another important feature of the Branch system is its usefulness in the distribution of our paper currency. Chartered banks may issue note circulation in Canada, as in the United States, to the extent of their paid-up capital and no more-the law in this particular being the same in both countries. The currency question is most interesting, and I am sorry to be unable to go into more details, as in the limited time I must necessarily omit a great many points that ought to be dwelt on in a logical discussion of the subject. Putting it briefly, however, there are two absolute essentials to every good paper currency, namely safety and elasticity.
The circulation of the American National Banks is secured by deposit, with the Comptroller of the Currency, of United States Government bonds whose par value must equal the amount of the note issue. The United States Government would, therefore, have to become bankrupt before the note circulation could become worthless, so that there can be no doubt that the National Bank note circulation possesses the first essential-safety. The Canadian bank note circulation is equally safe, though secured in a different way. Every bank has to deposit and maintain with the Minister of Finance a sum in gold equal to five percent of its outstanding circulation, and the fund thus created, though contributed to by all chartered banks, is available for redemption of the circulation of any one bank. In this way the banks are responsible for the circulation of one another. But this Redemption Fund is only a small portion of the security. The note circulation is also a first or prior lien on the entire assets of the banks.
These assets, including shareholders' "double liability," amounted on 31st October, 1905, to $896,540,065, as security for $76,880,440 of circulation. There has not been a bank failure since 1867 in which the assets were not sufficient to meet the note circulation, even in the case of a notoriously bad failure in which, among other crimes, the concern was guilty of overissuing circulation. Nothing short of the bankruptcy of the entire Dominion could imperil the bank note circulation of Canada, and I think we may, therefore; consider it quite as secure as that of the United States.
As regards the other essential, " elasticity," our paper currency possesses this to a much greater degree than that of our neighbours, and this is generally admitted by American bankers. One reason for this is that the Canadian banks are obliged to withdraw from their loanable capital gold to the extent of only 5% of their circulation for deposit with the Government--and even on this they receive interest at the rate of 3% per annum. This fact alone provides a great incentive to our banks to get their notes into circulation, and when the crops have to be moved, instead of taking cash out of their ordinary business (in other words, calling in loans) they issue notes, thereby increasing the volume of money in circulation proportionately to the demand for it. The result is that year after year there is a steady flow of paper money every Fall towards the great grainproducing sections of the country, the channels which conduct it being the branch banks. All this takes place with the greatest regularity whether the crops are abundant or meagre, and without any excitement or financial trouble, and, what is very important, without the slightest fluctuation in the interest rate.
In the United States the harvesting of a large crop is almost invariably accompanied by high rates for money at the financial centres, where the greatest steadiness should prevail. The hundreds of small Western and Southern banks which finance the grain and cotton crops withdraw their balances from the New York and Chicago banks, which, instead of shipping their own promissory notes and adding to the volume of money in circulation send notes that are the equivalent of gold, as they have dollar for dollar in United States gold bonds deposited against them. To produce the extra currency for crop requirements their only recourse, therefore, is to call in money already in circulation, with the result that the rate of interest advances sometimes to abnormal figures. Already this Fall we have seen the interest rate in New York as high as 28%, and I have personally collected interest at the rate of 120% per annum on the. highest class of gilt-edged loans, when ,I was Loan clerk in the New York Agency of one of our largest Canadian banks. The United States National Banks have practically no incentive to issue notes. A tax of 312% is charged on circulation secured by the Government consols, and 1% on circulation secured by other classes of Government bonds. The deposit of these bonds to the full amount of the note issue is a hindrance to the extension of the circulation, which the people of Canada would not tolerate for one moment, and the United States Comptroller of the Currency is trying to overcome it at the present time.IV. REAL ESTATE INVESTMENT.
The law in both Canada and the United States is the same as regards lending money on mortgages and speculating in real estate. Both are absolutely prohibited, banks being only allowed to take a mortgage as security for a past due debt and to confine their real estate investments to the actual land and buildings required for bank premises. This is a wholesome and perfectly proper restriction, which removes from our banks at least the temptation to buy building lots and town sites, or to lend money to their clients on such unrealizable securities
In Canada many companies exist for the specific purpose of making loans or mortgages and assisting people to buy farms, build homes, etc., and these concerns have been an important factor in the general development of the country. If, however, you will pardon a slight digression which, I think, is not inappropriate, I may say that some of these companies have departed from their original purpose, and in view of past (may I say present) experiences I believe it to be in the public interest that certain restrictions should be placed upon all concerns that take deposits and do a banking business which is outside of their regular line. You are all aware of the losses our farmers and others have sustained through the failure of Private Bankers and Loan Companies whose funds were tied up in real estate, buildings and other fixed assets. Such concerns are quite legitimate and useful in their own sphere, but they only court disaster when they endeavour to do a banking business as well. Taking deposits, which represent the savings of the people, often hardly earned, is a serious responsibility, which any concern should be very slow to assume, and I believe that to the absence of some such Government restriction as I have mentioned, or the failure to voluntarily adopt it for themselves, is due much of the trouble that has in the past overtaken some otherwise estimable institutions.
It is for the purpose of safeguarding the depositors' money that the Parliaments of Canada and the United 'States require the Chartered Banks to avoid real estate and kindred investments, which cannot be readily converted into cash. This is such an eminently sound principle, that, conversely, all companies authorized to make loans on real estate, buildings, etc., should be either prohibited from taking deposits or be required by law to maintain a certain percentage of their assets in actual cash as a reserve for the security of depositors, more especially when they accept deposits which are withdrawable by cheque and payable on demand or short notice.V. CASH RESERVES.
Another important point of difference between the two systems is the treatment of the Banks' cash reserve. In the United States the law requires a certain fixed percentage to be maintained against deposits. In New York City and other "reserve centres" this is 25%, elsewhere 15%. Mr. B. E. Walker, one of our ablest exponents of banking, has likened the fixed cash reserves of the Arperican banks to a Field Marshal's reserve forces kept in concealment during a fierce and prolonged battle which could have been promptly terminated, victoriously, by bringing them, into action. A reserve of soldiers or of money is worse than useless if it cannot be availed of when wanted. Occasions have frequently arisen in the United States when that country was in urgent need of currency for its legitimate requirements while millions of money were lying concealed in the vaults of "reserve" banks and not one dollar of which could be put into circulation.
In Canada all banks keep a reserve in gold or legal tenders in addition to their deposit with the Government, but the amount is not fixed by law, this being left to the prudence of the bankers. Our own experience, as well as that of the United States, has shown the wisdom of this policy, and the comparative freedom allowed the Canadian banks in the conduct of their regular business has gone far towards the establishment of our banking and currency system on the sound and efficient basis on which you find it today.VI. REVISION OF BANK ACT.
In the United States the charter of a National Bank is good for twenty years from the date of establishment, and consequently the charters expire at various times. In Canada all Bank charters are made to expire simultaneously at the end of every ten years, regardless of the date of incorporation of any particular institution, the decade period being calculated from 1870. The expiry 'of the charters always affords an occasion for the Dominion Parliament to revise the legislation which controls the Banking system. This decennial revision is taken advantage of to correct any defects that may have been discovered in the application of the law to practical business operations. Of course, amendments may be, and are made, at any time, but this periodical revision has nevertheless resulted in giving to the people of Canada a singularly perfect Bank Act.
In conclusion, I need scarcely say that in comparing the Banking system of Canada with that of the United States, I have not been actuated by any unkindly feeling towards the latter country. I am too great an admirer of it for that. I do not claim that the Canadian system would be better for our American friends, or that it has ever reached a point where it could not be altered without advantage to our own country. But I do claim that the United States system would not be suitable for Canada, and that even with whatever imperfections may now exist, our present banking and currency system is the very best that could be devised for the legitimate requirements of our great agricultural, manufacturing and commercial interests, and for the proper development of the enormous latent resources of this great Dominion.