Seventeen Talks on the Banking Question / Between Uncle Sam and Mr. Farmer, Mr. Banker, Mr. Lawyer, Mr. Laboringman, Mr. Merchant, Mr. Manufacturer

by Charles N. Fowler

Mr. Lawyer: While all these splendid banking systems were snuffed out by the 10 per cent tax upon circulation, the sound principles upon which they were all founded are still most successfully exemplified by the Canadian Banking System which you will remember took its charter from the statutes of Massachusetts.

There are today 27 banks in Canada, with 2,000 branches. The general principle of the Canadian Banking System is identical with that of the Virginia, Kentucky, Louisiana, Indiana, Ohio, Iowa and Missouri banks. It is true there are some differences in matters of detail. The amount of notes that can be issued regularly is that of the capital of the bank. The notes are a first lien upon the assets of the bank, including a double liability of the stockholders; the bank notes are also secured by a guarantee fund of 5 per cent, which is contributed by the banks issuing the notes; there is a provision that the notes shall bear interest at the rate of 5 per cent until notification of redemption. No holder of a Canadian bank note has ever lost a cent since these provisions have been in force.

You remember that we have a chart which shows very graphically with what marvelous accuracy, year in and year out, month in and month out, day in and day out, the Canadian Bank note currency meets the actual requirements of trade; no more, no less, but always just adequate.

The precision with which the currency rises and falls with the demands of trade is the result of the daily redemption of all bank notes, concurrently with the checks and drafts, through the Clearing Houses, or over the counters of the banks, or at the points fixed by law for note redemption for the purpose of keeping the notes at par, all over Canada.

We want to keep this diagram here on file, because it speaks louder than words possibly can.

Mr. Banker: One striking characteristic of the Bank of the State of Indiana and the State Bank of Iowa was that the parent, or home institution, did no business at all, except for the branches, and examined and supervised them. Hugh McCulloch, the president of the Bank of the State of Indiana, said, "that the soundness of the bank was due to the frequent examinations."

Another feature to be found in both these systems, and so far as I know peculiar to them, was this: that all the branches were responsible for the failure of any one of them; but the branches did not share in each other's profits. The result of this law was to make every branch the watch dog of every other branch; there was only one instance in which the home, or parent institution, took charge of a branch in either state, and that was in 1860. The executive committee of the State Bank of Iowa having heard that one of the branches had made some unsafe investments, "promptly took charge of its affairs, and authorized a reorganization, calling upon other branches for such aid as was required, which was given so that the branch, with no delay, and without loss of a cent to its customers, or note holders, or suspension even of its legal business, was again put on a firm and solvent basis."

Undoubtedly this plan of supervision by the parent, or home institution, which did no business, was a wise precaution. Mark this, it is precisely the same principle put into operation that is now being followed by twenty of our Clearing Houses, and was then, and as I believe it will prove now, a practical guarantee of all the liabilities of all the banks that are subject to such examinations and supervision.

The most significant fact, and the one to be noted particularly, is that the parent, or home institution, like the Clearing House, only acted for the branches, precisely as the Clearing House acts for its members, and examined and supervised them. Economically this principle is absolutely sound. Historically, it is of essential importance because here history is repeating itself, after a lapse of fifty years, and in both instances this protective principle and practice has grown out of precisely the same conditions—the unsound and dangerous methods of certain members of the banking fraternity itself.

Mr. Merchant: Gentlemen, the astounding thing to me is that when this country had once learned and practiced so sound, complete and perfect a banking system, it should have lost it.