SCOTCH AND CANADIAN BANKING.

SCOTCH SYSTEM; BRANCH BANKS; CANADIAN SYSTEM;
ASSET BANKING; ELASTICITY.

Banking in Scotland is conducted upon a system resembling
in many respects the English, and yet differing from it in
several important particulars. There are ten banks of issue, each
of which has many of the privileges of the Bank of England,
but without the monopoly which the latter possesses in England
and Wales. These ten banks are strictly private institutions,
but are allowed to issue notes after the method of the Bank of
organization England. The act of 1845 regulating the banking
of the Banking system of Scotland, fixed the volume of authorized
note issues of all the banks at 3,087,209, which,
however, has since been reduced by the suspension of two banks
to 2,676,350. All note issues above this amount must be fully
covered by coin, one-fifth of which may be silver. The circula-
tion on June 30, 1900, amounted to 7,903,000, and in addition
to this, Bank of England notes circulate extensively in Scotland.
A large portion of the circulating bank notes of Scotland are in
denominations of less than 5, while the Bank of England notes
are all of 5 or upwards.

May and November in Scotland are the seasons for making
the regular semi-annual settlements. Interest on mortgages is
then collected, and annuities are received. The country folk
draw the interest on their bank deposits, and there
Elasticity is a general liquidation throughout the country re-
quiring an additional volume of currency. The
banks are then pressed to enlarge their circulation, and in order
to do this they must in some cases bring specie from the
Bank of England, the great storehouse of cash for the United
Kingdom. After the drain is over the circulation falls to its
normal volume and the boxes of gold are returned to London,
without, in many instances, having been opened. The elasticity
of the currency would be much greater were it not limited by
the requirement of the coin deposit, but safety in Scotland, as in
England, is preferred to elasticity, and the quality of safety is
so great that the people prefer bank notes to gold.

A novel feature of the Scotch system is the cash credit
accounts, by which a customer whose account is secured by the
guarantee of two friends, is supplied with funds from time to
time as he needs it to the agreed limit. The system practically
amounts to the granting of permission to firms or individuals

to overdraw their bank accounts to a certain ex-
Accounits 11 tent. The design is to furnish a working capital

to tradesmen and farmers, especially those who
are possessed of good character but with little means. The custom-
er is only charged interest from day to day on the amount which
he actually draws under his cash credit and his deposits go to re-
duce the amount of such interest. The difference between this
arrangement and the usual way of covering the loan with a note
is that the daily deposits of the customer reduce the interest
charge and the bank has control of all sums not in active use.

Scotland has eleven banks and these have 1,077 branches.
Nowhere else is the system of branch banking so extensively
carried on, a feature scarcely known in the United States.
Scotland has one bank or branch bank to every 4,000 of popula-
tion against one to about every 10,000 in England, and one
national bank to nearly every 20,000 people in the United

States. With a population of only a little over
Branch Banks 4,000,000 Scotland has bank deposits of 103,674,-
000, or nearly 26 per capita. This speaks well
for the thrift of the people and may be attributed in a large part
to the diffusion of branch banks into every corner of the public
domain. In the early history of banking in Scotland a low interest rate
was paid by the banks on current deposit ac-
counts. This no doubt stimulated habits of saving and thrift
among the people and taught them to use the banks as de-
positories for their funds. Gradually the interest was reduced
and finally abolished on all but savings accounts, with little or
no diminution of the number and size of the depositors' accounts.
Governed by a head bank, the expense of conducting the branches
is comparatively small, amounting on an average to not more
than 1J per cent, on the deposits, and thus with the economy
of resources afforded by the system, the eleven institutions
produce earnings which enable them to pay dividends of 8 to 15
per cent, per annum.

THE CANADIAN SYSTEM.

Prior to the consolidation of the various provinces into the
Dominion of Canada, in 1867, a number of the largest Bank of Canada
issued circulating notes under permission of their respective
provincial governments, but after the consolidation, only banks
authorized by the general government were permitted to issue
notes. The present banking system of Canada somewhat resem-
bles that of Scotland, and possesses some excellent features,
among which is its system of "asset currency" with its very
desirable quality of perfect elasticity. In 1870 a law was passed
requiring all banks of issue in the dominion to have a paid up
capital of at least $250,000, and restricting the note issue of
each bank to the amount of its paid up capital. In 1891 the
banking act was amended and the capital stock limit of issuing
banks was raised to $500,000, of which one-half must be paid
over at the time of organizing the bank, to the minister of
finance, to be held by him until the organization is complete and
all details of the law have been complied with. He then pays
back to the bank of Canada the amount so deposited, less five per cent, of
the capital, which is retained as a guaranty fund, to be used
in the redemption of notes in case of the failure of the bank.

A Canadian bank may issue notes to the full amount of its
capital stock, and no reserve is required to be kept on hand as a
security for their redemption, the only provision
NO Reserve of this kind being the fund in the hands of the
treasurer, composed of the five per cent, required
to be deposited by each bank of issue at its forma-
tion. Thus the notes of every bank of Canada are credit obliga-
tions based upon almost wholly the general assets of the bank,
but the law makes them a first lien upon such assets, liabilities to
the dominion government being a second lien, and liabilities to
the provincial government a third lien. In addition to this
very excellent precaution, the law imposes a double liability upon
the stockholder, making each liable for double the amount of
stock which he holds.*

No inspectors or examiners are employed by the government,
but monthly reports are made to the government showing the
condition of the bank's assets, circulation, etc., and severe pen-
alties fine and imprisonment are prescribed for failure to
comply with the law or the making of false returns,
inspection The banks may also demand of each other state-
ments as to their condition at any time, and thus
the most careful scrutiny is exercised by each bank upon all of
the others as well as by the government. Since each bank in the
regular course of business has occasion to take over its counter
the notes of other banks, the care exercised against taking notes
that are not good is a wholesome restraint upon every bank,
and under the system every banker is watching the solvency of
every other. This supervision is far more thorough and effective
than that of government inspection, since bankers are not only
more capable of scrutinizing such institutions, but it is vital
to their interest to do this in the most thorough manner.
*Two banks, La Bank du Peuple and the Bank of British North America,
exist under ancient charters which do not permit of the double liability
requirement as to stockholder, and for this reason they are only allowed to
issue notes to the amount of 75 per cent, of their capital.
An essential feature of the Canadian system is the fact that
the bank notes are not a legal tender, for were they possessed
of this quality, other hanks would be compelled to accept them,
irrespective of the solvency of the issuing bank. They would
circulate then not upon their merits but upon the
legal tender quality underlying them. Without
the legal tender quality to float the circulating
notes, each bank takes them upon the soundness of the bank
issuing them, and upon the slightest indication of weakness on
the part of the issuing bank its notes are thrown out and it is
discredited. Thus any bank may be summarily and severely
punished the moment it allows itself to get into an unsound or
weak condition.

The banks of the three financial centers of the dominion,
viz., Montreal, Quebec and Toronto, act as clearing houses for
all the banks of the dominion. Notes of any discredited bank are
immediately sent to them for redemption, and should a bank
suspend, liquidators aro at once appointed to convert the assets
and redeem the circulating notes. In case the assets are insuffi-
cient for this purpose the extra liability of the stockholders is
resorted to, and should this not prove sufficient, then the five
per cent, fund in the hands of the treasurer is forthcoming for
the purpose. Should this fund become exhausted,
Liquidation the solvent banks are assessed to make up the
difference. As a matter of fact, however, the
liquidators -are always able to redeem the notes out of the assets,
but in order that all solvent banks may accept the notes of an
insolvent bank without loss, the law provides that such notes shall
bear interest at the rate of six per cent, from the date of the sus-
pension of the bank until they are redeemed. Thus the notes
of even a suspended bank never fall below par. After the lapse
of sixty days, if the liquidators do not pay, then the treasurer
pays them out of the redemption fund.

The banks are compelled to keep their notes at par, and in
order to do this they must provide redemption agents at various
points throughout the dominion. Were it not for
Notes at Par this provision, notes of a Bank of Montreal would be

at a discount when circulating in a distant prov-
ince like Manitoba, for the reason that time and effort would
be required to present the note at the proper place for redemption.
The elasticity of the circulating medium is one of the features
most prized in the banking system. This quality
of being capable of expansion and contraction according to the
requirements of trade is possessed by the note circulation of
Canada to a greater extent than that of any other in the world.
When business activity demands a large circulating medium
banks issue their notes to meet the demand, not exceeding,
of course, the amount of their paid up capital, and when less

money is needed these notes drift back into the
toe currency banks in the form of deposits or in liquidation of

discounts and are thus practically retired, being
locked up in the vaults. They are not then idle capital since they
have cost nothing, except the expense of printing them. The
volume of the circulating medium of Canada often varies as
much as 15 per cent, in the course of the year. As a matter of
fact the volume of notes outstanding is usually not much above
75 per cent, of the paid up capital of the banks, thus the cur-
rency has an expansibility in case of emergency amounting to
nearly one-fourth its usual volume, provided, of course, the
assets of the bank are sound in quality. As a result of this,
rates of interest in Canada are comparatively uniform, and a
"tight" money market is unknown.*

With the currency based upon the general assets of the
bank having a priority of lien over all other liabilities, being

*True elasticity in bank note circulation implies automatic adjustment of
the volume to the needs of business. Heretofore the Canadian system
has worked perfectly because the banks have been able at all times to
supply all that has been needed without exceeding the maximum limit,
and that limit was so well beyond the need of the country that the banks
under the surveillance of not only the government hut, hetter
still, the entire banking fraternity, and safeguarded by the
double liability of stockholders, it is believed that the note
circulation of Canada is absolutely safe, and possesses advantages
over any other system.

The system of branch banks which prevails in Canada is not
only an advantage to the banks, but a decided convenience to
the people. Nearly every bank of any considerable size in the
dominion has a number of branches scattered throughout the
provinces, there being in all about 650 branches. Weekly re-
ports are made to the head bank, and thus the manager is kept
fully posted as to the business transacted by the branches. By
this system sparsely settled portions of the dominion are pro-
vided with banking facilities through a branch
Branch Banks bank, where the business in that particular sec-
tion would not be sufficient to support an inde-
pendent bank. The branch may be conducted in a small and
inexpensive manner suited to the needs of the community, while
it furnishes the benefits of the financial strength and solidity
of the parent institution. Then again, through its various
branches a Bank of Canada is able to loan out its funds advantageously
where money is most needed. In one province there may be an
abundance of money seeking investment, with large deposits in
the banks, while in another where the work of development of
natural resources is going on, there may be a demand for
money, and small deposits in the banks. Now by transferring the
surplus funds from the one province to the other both are
accommodated, and this can be done easily and readily through
the agency of the branch bank system. Not only is the public
accommodated, but by this means the banks are able to earn
have seldom been able to push their notes out so as to raise the total
beyond 75 per cent, of the maximum. Of late, however, the rapid develop-
ment of the country without proportionate increase in its banking capital
has changed this and their issues now approximate very nearly to the
lawful maximum at all seasons.
larger dividends, in consequence of using their assets to the
best advantage. Under this system the farmer in the Northwest
is able to borrow money almost as cheaply as a resident of
Quebec.

Mr. B. E. Walker, President of the Canadian Bankers' Asso-
ciation, in explaining the advantages of the branch system,
said: "In Canada, with its banks with forty and fifty branches,
we see the deposits of the saving communities applied directly to
the country's new enterprises in a manner nearly perfect. The
Bank of Montreal borrows money from depositors at Halifax
and many points in the maritime provinces where savings largely
exceed the new enterprises, and it lends money in Vancouver or
in the Northwest, where the new enterprises far exceed the
people's earnings." As water "seeks its level" so money will
to a certain extent flow where the greatest demand for it exists
and the highest rates of interest are paid, but by means of the
system of branch banks this ebbing and flowing of the financial
tide is greatly facilitated.

A third advantage growing out of this mobility of the finan-
cial system is that a financial stringency in any part of the
Dominion can be instantly relieved by transferring funds from
any other part, thus averting what might, under other circum-
stances, become a panic or commercial crisis.

In the United States under our law there can be no branch
banks in our national banking system because every national
bank must have a capital of at least $25,000, and when a strin-
gency arises in any part of the country, the banks both there
and elsewhere usually look out for their own welfare, and money
does not flow to the point where it is needed, as under the
branch bank system.

While the law does not specifically require the banks to
carry a reserve, in order to protect their notes, nearly all of the
Canadian banks maintain a reserve as a means of demonstrating
their strength and as a practical necessity in the conduct of their
business.
The Canadian government issues a paper currency called
"Dominion Notes" which is a legal tender and redeemable in
gold on demand. These notes are issued in denominations of
25c, $1, $2, $4, $50, $100, $500 and $1,000, and together with
a small proportion of silver, furnish the circulating medium

for small transactions, the bank notes not being
Notes 0100 issued in denominations below $5, and above that

amount only in multiples of five. In making pay-
ments every bank is compelled, if required, to pay small Domin-
ion notes to an amount not exceeding $100. Thus the notes
readily circulate, keeping the bank note circulating at par with
it, and the whole upon a gold basis. There is no limit upon the
issue of notes by the government, but for all over $20,000,000 an
equal amount of gold must be held by the minister of finance.
Below that amount the government reserve consists of gold
and Dominion bonds.