Readings in Money and Banking / Selected and Adapted

by Chester Arthur Phillips

In the recent revision of the act the public was most deeply concerned with the problem of securing an adequate system of bank inspection. The immediate reason for this was the disastrous failure of the Farmers' Bank. This institution had gambled away its resources on the Keeley mine; and had, in its failure, brought many farmers as well as others to the verge of ruin. For several years previous, however, there had been an insistent demand for some sort of external bank inspection....

The banks as a whole have been opposed to any change in the method of inspection. The reason they advance is that the keynote of the organization of Canadian banks has always been the centralization of responsibility; and they do not think it wise to divide that responsibility with any outside authority....

As far as the public is concerned it has no means of judging of the soundness of a bank except by examining the monthly returns which are required by law from each bank. These returns are fairly comprehensive, and have been made more so by the revision of the act this year. The Minister of Finance may call for supplementary information from any bank, whenever, in his judgment, such data are required to afford a fuller knowledge of a bank's affairs. Of course, these returns can be taken only for what they are worth. In the case of several failed banks the returns were made with every degree of falsification, because no independent checking of the figures was possible.

Nevertheless, in obedience to the strong demand for some sort of independent bank examination, provision was made in the recent revision of the act for a shareholders' audit of each bank's affairs. The auditors are to be chosen by the shareholders from a list of forty names selected by the whole body of the general managers of the banks. The list must be submitted to the Minister of Finance for his approval. If one-third of the shareholders of a bank are dissatisfied with the auditor appointed by the majority, they may appeal to the Minister for the appointment of another auditor.

The auditors must submit a statement of their findings to the shareholders at the annual meeting, or on any other occasion the necessity may require. In addition the Minister of Finance may require a special return to be made to him, the cost of the service rendered being paid for by the Government.

Canadians would be wise not to expect too much from this system of external examination. After all, it can do no more than verify a bank's statements and books.... In every large undertaking, the soundness of the transaction must depend, as before, upon the judgment of the general manager and the board of directors.

The establishment of central gold reserves is the most important feature added to Canada's banking system by the legislation of 1913.... Under the new act each bank may issue any amount of notes that it may desire, provided that it deposits with a board of trustees, at Montreal, gold or Dominion notes to the full amount of the notes issued. These notes are to be identical in form with the ordinary notes of the bank. The gold or Dominion notes deposited with the trustees shall be returned to the bank whenever the notes which the bank has outstanding do not amount to the paid-up capital of the bank together with the amount of legal-tender money deposited with the trustees. In other words, the banks can still issue their notes up to the full amount of their paid-up capital, and an additional amount from September 1 to the end of the following February, which may equal 15 per cent. of a bank's combined capital and surplus. It is only for notes issued in excess of these amounts that legal-tender money must be deposited with the trustees at Montreal. It should be observed, however, that the banks pay a tax of 4 per cent. on the extra issue during the crop-moving period, whereas there is no tax upon gold-reserve notes. And as Canadian banks are not required to keep a legal reserve against their demand liabilities, there is no reason why the idle gold in their reserves should not be sent to Montreal to form the basis of new note issues, especially when it is considered that the gold may be recalled at once when no longer needed to cover notes.

The ability to issue notes to any amount required, on a gold basis, will greatly strengthen the position of the banks.

The third important new feature in the revision of the act is the power given to the banks to make loans to farmers on grain which is stored on the farm and still in the farmer's possession.... The permission granted them to loan money to farmers on stored grain in the latter's possession is an attempt to extend to the farmers aid similar to that hitherto granted to manufacturers and wholesalers alone. It should not be thought, however, that the banks have not always granted loans liberally to farmers....

The possibility of making advances to the farmers on their grain is expected to be of especial benefit to the West.... It is hoped that, under the new legislation, the farmer will be able to hold his grain for higher prices; and in the meantime secure accommodation from the banks to meet his obligations. Many bankers, however, refuse to see any remedy for the situation in the new legislation. They maintain that it will involve too much risk to extend loans on grain over which the farmer continues to assert control. Only the operation of time will enable us to estimate the value of this feature of the act.