time to possess a first lien on all its liquid assets. . . . If a bank lends money to a wholesaler or to a manufacturer it practically becomes owner of all the goods in his establishment. Yet the borrower is in no wise embarrassed, for he has the same right to buy and sell that he would have if he were under no obligations to the bank. If at any time, however, he adopts a policy of which the bank disapproves, or in the course of his business indicates that something is wrong, his bank may take immediate possession of his stock of goods.''1 The relation between the Canadian bank and its customer is made as intimate and helpful as possible. In practice the business man deals exclusively with one bank, or in the case of the largest concerns with two banks which work in harmony. The bank expects to be kept informed regarding the customer's financial affairs and business operations, and in turn it expects to extend to him all the credit he needs consistent with his business and with general commercial conditions. The customer would not think of attempting to raise funds elsewhere without the consent of his bank. There is very little commercial paper in the Canadian money market and the note broker is almost unknown. Drafts are largely used in domestic business, and credit also takes the form of book accounts and promissory notes. The Canadian law makes it possible for the banks to supply adequate funds for the movement of the grain crops with ample security to themselves. When a dealer buys grain he assigns it to his bank; when it is delivered to a railroad the bill of lading becomes the property of the bank; when it is stored in an elevator the bank receives the warehouse receipt; and when shipment is made to the seaboard or to Europe the bank gets possession of the shipper's draft on the consignee, the bill of lading and other documents. Thus, throughout the entire process of marketing the bank practically has title to the agricultural products upon which it has made advances. In the agricultural 1 Johnson: Canadian Banking System, p. 41. districts the branch banks supply farmers with working capital for the purchase of implements, seed, stock, etc., on their own personal credit. They do not make a practice of lending on farm mortgages, but lend outright on the farmer's note, strengthened sometimes by a neighbor's indorsement.1 Some of the larger banks loan considerable sums on call especially in the New York market. They figure these loans as part of their reserve. Financial banking is not very highly developed in Canada as yet, but whatever dealing there is in securities is controlled mainly by the chartered banks. A bank cannot make a loan on the pledge of its own stock or upon real estate. It may acquire title to real estate, but cannot hold it for more than seven years, except such as may be needed for the conduct of busiLoans to directors or officers must be reported each month to the Government. Dividends in excess of 8 per cent must not be paid until the "rest" or surplus equals 30 per cent of the capital. ness. The trust companies in Canada do a strictly fiduciary business. The chartered banks and their branches all have savings departments and pay 3 per cent on deposits. There is, however, no sharp distinction drawn between demand and savings deposits. In practice both are payable on demand, both go into the general fund of the bank, and savings funds are as likely to be loaned to merchants and manufacturers as are funds which represent demand deposits. While wage-earners and other classes are given every encouragement to open savings accounts, a considerable proportion of the time deposits of the banks are made by business men, who, finding periodically that they have a larger bank balance than they need, arrange for the transfer of the surplus to a savings account or for the payment of interest on it. The government savings institutions pay interest at 3 per cent, but they require several days' notice of withdrawal. 172. Supervision.-A weakness of the Canadian banking system has been the absence of outside inspection of the 1 Johnson: Canadian Banking System, p. 48. banks. The Minister of Finance may call for a report of condition of a bank at any time, and the Canadian Bankers' Association, of which all the chartered banks are members, has supervision over the circulation, but there has been no authority to investigate the operations and affairs of the banks. Each chartered bank has an "inspector" who makes periodically a thorough examination of all the branches of that bank, but there has been no outside authority to examine the head office itself. The bankers have contended that they are best qualified to examine themselves, but a feeling has been growing among the public that they should be subject to some kind of supervision. Consequently at the recent revision of the bank act, which went into effect July 1, 1913, provision was made for an annual audit by qualified auditors appointed by the stockholders from a panel selected by the general managers of the banks and approved by the Minister of Finance. These auditors are given the widest powers of access to the records and securities of the banks, and are required to make an annual report to the stockholders. The Minister of Finance may call upon the auditors or any other auditor whom he may select to make a special report at any time upon the affairs of any bank. Despite the fact that the Canadian system has a score of separate and independent banks, without any central or govermental control or supervision, it possesses a remarkable degree of unity and solidarity. Over one-half of the entire banking business of the country is done by six banks. The Bankers' Association binds the banks together on legislative matters affecting their mutual interests. The managers of the six largest banks, each having several score of branches, are ever watchful to discourage speculative excesses. Through information supplied by the branch managers there is practical unanimity of opinion and policy among bankers as to business conditions and the general outlook. The extent to which the larger banks are interested in the trade and industry of all parts of the Dominion through their branches makes it possible to secure unity and solidarity in a time of common peril. The system, though quite unlike any other noted in this chapter, is admirably adapted to the needs of the country which it serves. READING REFERENCES Conant: History of Modern Banks of Issue, Chs. II-XII, XVI. Fiske: The Modern Bank, Chs, XXXIII-XXXVII, XL. Phillips: Readings in Money and Banking, Chs. XXIXXVII. Publications of National Monetary Commission: Banking in Russia, Austria-Hungary, the Netherlands Breckenridge: History of Banking in Canada. Liesse: Evolution of Credit and Banks in France. Patron: The Bank of France in Relation to National Philippovich: History of the Bank of England. Riesser: The German Great Banks and their Concentration. The Reichsbank: 1876-1900. Withers and Palgrave: The English Banking System. Scott Money and Banking, Chs. XI-XIV. : White Money and Banking, Bk. III, Ch. XVI. CHAPTER XXI DEFECTS OF NATIONAL BANKING SYSTEM PRIOR TO THE ACT OF 1913 173. Defects of national banking system.-Reference has been made at various places in the foregoing pages to the defects of our banking system prior to the enactment of the Federal reserve law of 1913. In this chapter we shall try to summarize these defects and present a brief statement of the reforms which the Federal reserve system is expected to effect. The national banking system established in 1863, remodeled by the enactment of 1864, and patched up from time to time by sixty-odd amendments, remained substantially unchanged in scope and operation through a half century of growth and change in financial and commercial conditions. Designed to meet the fiscal necessities of war times, it proved inadequate to cope with modern commercial needs. It failed to supply commerce and industry with adequate credit facilities in normal times and in times of financial stress it broke down completely spreading disaster and ruin throughout the land. Indeed, prior to the corrective legislation of 1913, our banking system deserved the term, "panic breeder," so often applied to it. The fundamental defects of our banking system may be grouped under three general heads, concerning respectively the reserves, the note circulation, and the general banking organization. 174. Inelasticity of note issues. One of the principal defects of the banking system was the absolute rigidity of the currency. A national bank could issue notes only by |