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BRANCH BANKING IN CAN1HA

Material prepared for the information of the
Federal Reserve System "by the
Federal Reserve Committee on
Branch, Group, and Chain Banking

Members of the Committee

E. A. Goldenweiser, Director, Division of Research and Statistics,
Federal Reserve Board, Chairman
Ira Clerk, Deputy Governor, Federal Reserve Bank of San Francisco
M. J. Fleming, Deputy Governor, Federal Reserve Bank of Cleveland
L. E. Rounds, Deputy Governor, Federal Reserve Bank of Hew York
E. L. Smead, Chief, Division of Bank Operations, Federal Reserve
Board

J. H. Riddle, Executive Secretary and Director of Research

The Committee was appointed February 2o, 1930. ^7 the
Federal Reserve Board




". . .to assemble and digest information on
"branch banking as practiced in the United States,
group and chain hanking systems as developed in
the United States and elsewhere, the unit hanking
system of the country, and the effect of oimership
of bank stocks hy investment trusts and holding
corporations."

LETTER OP TRANSMITTAL

To the Federal Reserve Board:
The Committee on Branch, Group, and Chain Banking transmits herewith a study of "branch banking in Canada, its organization, safety record, and services to the public.




Respectfully,

E. A- Goldenweiser
Chairman

COPTMTS
Page

Chapter I, .

Chapter II

The Canadian Banking System
Origin of Canada's Banking System
Commercial Banks
Growth
Legal Basis
Structure and Organization
Branch Operation and Supervision
Personnel
Other Types of Financial Institutions
Currency System

1
P.
4
4
6
11
14
17
19
22

Safety Record of Canadian Banks
Bank Failures in Canada
Forced Amalgamations
Factors Relating to Safety
Banking Structure
Management
Function
Reserves
External Supervision
Existing Safeguards against Failure

26
29
33
34
34
35
36
40
42
45

Chapter III The Test of the Post-war Agricultural Crises
Agricultural Expansion and Bank Credit
Deflation and "Frozen" Loans
Diversification
A Local Canadian Bank

50
51
64
66
67

Chapter IV

73
73
75
76
81
82
87

Chapter V




Adequacy of Service
Availability of Banking Facilities
Branch Banking and the Frontier
Credit in the Agricultural Provinces
The Term of Farmers' Loans
Interest Rates
The Local Manager
Branch Banking in the Economic Development
of Canada
Banking Concentration in Canada
Tendencies Towards Concentration
Is Effective Competition Maintained?
Customers' Rates
One-Dank Rule
Credit Control
Establishment of Branches
Dividend Policies
The Question of Monopoly

90
93
93
97
98
100
100
101
105
106




OONTMTS ( C o n t ' d )
Pago
The Cost of Branch Banking
Operating Expenses
Excessive Hfumber of Branches
Gross and Net Earnings
The Cost of Branch Banking to the Economic
Community

119

Summary

122

Statistical Tahles

126

Canadian Bank Act

129

Bibliography

ISO

109
110
116
118

CHAPTER I

THE CAMDIAI . BAMBINO SYSTEM

A study of the "banking system of Canada is particularly pertinent
at this time, since the commercial "banking requirements of Canada and the
United States are essentially similar in nature.
of volume or magnitude rather than of kind.

The differences are those

Moreover, the Western or Prairie

Provinces of Canada and our Western Grain States have "been struggling with
the same agricultural problems. In "banking structure, however, a striking
contrast exists between the two countries.

The Canadian system is composed

of a few great "banks, which are made up of an aggregate of a large number of
branches, while in the United States there are thousands of independent banks,
the great majority of which are small institutions, operating single banking
offices in small communities. Moreover, the banks of Canada operate under a
single banking code, while those of the United States transact their business
under forty-nine separate jurisdictions.
In this preliminary chapter an attempt is made to sketch in broad
lines the essential elements of the financial institutions of Canada, with
special reference to the commercial banking structure.

The analysis will

then be confined to the two vitally important and interrelated questions
which arise in the consideration of any banking system;—namely, its safety
and stability and its capacity to supply to the economic community adequate
service at reasonable cost.




- 2-

Origin of Panada's Banking System
A distinctive feature of the Canadian banking system has "been its
steady, orderly growth. Whereas banking in the United States has been subjected to several revolutionary changes in the course of its hi story (establishment and abolition of the First and the Second Banks of the United
States, the passage of the National Bank Act, establishment of the Federal
reserve system, etc.), Canada has had more than a century of unbroken continuity in her financial structure.

!Ehe early banks, of which the Bank of

Montreal, founded in 1817 and still in existence, was the first and the most
important, were chartered by the various Provinces of Canada while still
separate colonies of Great Britian, under laws generally similar in content
and simple in operation. When the two Provinces of Upper and Lower Canada
(now Ontario and Quebec) were united in 1841 to form the colony of Canada,
the banks in existence continued their operations with little change. Ehirty
years later, after confederation, which established the present Dominion of
Canada, a general law known as the Bank Act was oassed, which for the most
part merely confirmed and codified the banking statutes already in force in
the various Provinces.

Since that time revisions of the Bank Act have been

made at ten year intervals, but the alterations have not resulted in any
essential change in the organization of the banking system.
Canadian banks from the beginning have been comparatively large
institutions, and they have been allowed to establish branches as a matter
of course. In the Bank Act of 1871 a requirement was incorporated to the
effect that no charter could be issued to a bank with less than $500,000 of
subscribed capital, and this provision has remained in force ever since.
On two occasions, in connection with the passage of the Bank Act in 1871







-

3-

CHART I

GROWTH OF CANADIAN BANKIN6 SYSTEM
n01=100 PERCENT

Assets and number of branches of Canadian chartered banks
and the population of Canada each year from 1901 to 1931,
in percentages of the 1901 figures

- U -

and again during the discussions preceding the revision of 1923, serious attempts were made to change the law so as to permit and even compel the
adoption of the type of small scale unit hanking common in the United States.
The controversy over this question has in fact persisted in desultory fashion
almost from the beginning of Canadian "banking; "but all specific proposals to
change the fundamentals of the existing system have "been overwhelmingly
defeated.

Commercial Banks
Growth. - A comprehensive view of the growth of the commercial
"banking system in relation to the population, since confederation, may " e
b
obtained from Chart 1 and Table 1.




Table 1 - Growth of the Canadian Banking System

Year

186?
1868
1869
1870
1871
1872
1873
1874
1875
1876
1877
1878
1879
1880
1881
1882
1883
1884

Population(l)

Branches in
Canada of
chartered
banks(2)
(December 31)

Total assets of
chartered banks(3)
(average of
monthly returns)
(000 omitted)
$

123
3,689,257

4,324,810

78,295
79,861
86,284
103,197
125,274
148,862
166,057
187,921
186,255
183,500
181,019
175,450
173,548
184,276
200,614
227,427
228,085
219,999

- 5 Table 1 - Growth of the Canadian Banking System (Continued)




Year

1885
1886
1887
1388
1889
1890
1891
1392
1893
1894
1895
1896
1397
1898
1899
1900
1901
1902
1903
1904
1905
1906
1907
1908
1909
1910
1911
1912
1913
1914
1915
1916
1917
1918
1919
1920
1921
1922
1923
1924
1925

Population^)

Branches in
Canada of
chartered
banks(2)
(December 31)

Total assets of
chartered banks(3)
(average of
monthly returns)
(000 omitted)
$

4,833,239

5,371,315

7,206,643

8,787,949

402
426
468
479
502
513
530
533
555
622
663
708
750
904
1,049
1,145
1,454
1,745
1,386
1,927
2,164
2,367
2,554
2^813
2,962
3,049
3,159
3,160
3,015
3,439
4,337
4,676
4,659
4,451
4,227
4,040
3,840

219,147
228,062
230,393
243,504
253,790
254,546
269,307
291,635
302,697
307,520
316,537
320,938
341,164
370,584
412,505
459,715
531,829
585,761
641,543
695,418
767,490
878,512
945,686
941,291
1,067,008
1,211,452
1,303,131
1,470,065
1,530,094
1,555,676
1,596,425
1,839,287
2,111,560
2,432,331
2,754,568
3,064,134
2,841,782
2,638,776
2,643,774
2,701,427
2,789,619

- 6 -

Table 1 - Growth of the Canadian Banking System (Continued)

Year

1926
1927
1928
1929
1930
1931

Population^)

10,374,196

Branches in
Canada of
chartered
banks'^'
(December 31)
3,770
3,870
3,966
4,069
4,083
3,970

Total assets of
chartered banks
(3)
(average of
monthly returns)
(000 omitted)
$2,864,019
3,029,681
3,323,163
3,528,468
3,237,074
3,066,018

t 1 ' The Canada Year Book, 1932, p. 91.
(2)
Includes subagencies. Figures for 1368-1915 from
compilation of B. H. Beckhart, in Willis and Beckhart, Foreign Banking Systems, p. 362, based in
part on History of Banking in Canada (National
Monetary Commission), p. 310, by Breckenridge,
and on data supplied by Canadian Bankers' Association; figures for 1916-1926 from The Canada
Year Book, various years, and from Canadian Bankers'
Association; figures for 1927-1931 from The Canada
Year Book. 1932, p. 776.
(3) Figures from The Canada Year Book, 1932, p. 769.
Legal Basis. - The legal basis of the present commercial banking
system is the Bank Act of 1871 and the subsequent revisions and amendments
The full text of the act as amended is published in the appendix.

It is a

comprehensive code of Dominion laws covering all important phases of the
organization and operation of banking institutions. While no attempt is
made here to summarize all the provisions of the act, a few are commented
upon briefly and others are referred to at appropriate points in later
chapters.
Under the Bank Act, no institution can use the word "bank" or
any other word or words of similar import in its corporate name except it

(4)

Canada Laws, Statutes, etc.. Chapter 12; An Act Respecting Banks and
Banking, E. S., 1927 - Short Title: The Bank Act. 1923.




- 7be chartered " y a special act of the Canadian Parliament (Sections 4 and 166).
b
Preparatory to starting such an institution a private "bill is introduced in
the House of Commons and usually the Minister of Finance is called upon to
make recommendations as to the granting of a charter.

If he approves, the

hill is likely to be passed and the charter granted.

Before a new hank can

open its doors for "business $250,000 of the subscribed capital must he paid
up in cash (legal tender of gold or Dominion notes) and temporarily deposited
with or to the credit of the Minister of Finance (Sections 13 and 14). This
must he done within one year of the granting of the charter, unless a longer
delay is later authorized " y parliamentary action. As in the case of national
b
hanks in the United States, the shareholders are subject to double liability
up to the par value of their holdings.
Each director of a bank must be the bona fide owner of stock on whicl
at least three thousand dollars has been paid up if the paid-up capital of the
bank is $1,000,000 or less.

Four thousand dollars of each director's stock

must be paid up when the capital of the bank is over $1,000,000 but does not
exceed $3,000,000, and five thousand when the capital exceeds $3,000,000*
Ihe Canadian banks do not issue transferable share certificates but
this does not prevent bank stocks from being freely bought and sold.

A

Canadian bank is prohibited from purchasing, dealing in, or lending money
upon the security not only of its own shares but of the shares of any other
bank (Section 75).

Moreover, since transferable certificates are not issued,

Canadian bank shares are not desirable collateral for loans. Banks are given
a lien on their own stock for indebtedness of shareholders (Section 76).
Another restriction of potential importance in preventing manipulation of bank




- sstock is that no "bank can sell any of its own original or new shares for more
than their "book value—that is, at a premium greater than "the percentage
which the rest or reserve fund of the bank then bears to the paid-up capital
stock thereof.'^1)
Each hank is authorized to issue notes up to the aggregate value
of its unimpaired paid-up capital and the amount of gold and Dominion notes
it has on deposit in the central gold reserves (which may " e augmented by
b
borrowing from the Dominion Treasury as explained below); and in addition,
during the six months of September to February inclusive—the usual crop
moving season—up to 15 per cent of its combined unimpaired paid-up capital and rest or reserve fund (Section 61).
Any bank may open as many branches as it likes, anywhere in Canada;
and there is no restriction in the Canadian law as to foreign branches (Section
75).
Canadian banks are not authorized to conduct a fiduciary business.
No bank may lend money upon real estate as security (Section 75),
although mortgages may be taken as additional security for debts previously
contracted (Section 79).

If real estate acquired by the bank, other than that

required for its o 7 use, is not disposed of within the statutory period
\n
allowed, it may be forfeited to the Government (Section 82).
There is no limit to the amount a bank can lend to a single borrower, except that (l) no loan of over $1,000 can be made to any officer
or enroloye of the bank without the approval of the directors, and none of
over $10,000 in any case; and (2) no loan in excess of 10 per cent of the

t 1 ' Ihe Bank Act, 1923. Section 33. The term "rest or reserve fund" in bank
accounting in Canada corresponds to "surplus" in the United States.




- 9-

"bank's paid-up capital can be made to a director or to a company or corporation of which the president, general manager, or a director of the
bank is a partner or a shareholder, except with the approval of two-thirds
of the directors present at a regular meeting of the board, or a meeting
specially called for the purpose (Section 75).
Under the somewhat celebrated provisions of Sections 88 and 89
of the Bank Act, Canadian banks making loans to certain classes of borrowers
may take liens on certain products, goods, wares, and merchandise which give
them the same rights as holders of warehouse receipts even though such products,
goods, wares, and merchandise remain in the possession of the borrowers and
are subjected to manufacturing processes, except that certain priorities are
preserved for wages of the borrowers' employes*

Loans for which such se*

curity may be taken include, among others, loans to wholesale purchasers and
shippers of, or dealers in, products of agriculture, the forest, quarry, mine,
sea, lake, or river; loans to dealers in live stock or dead stock or the
products thereof; loans to farmers on the security of their threshed grain
grown upon their farms; loans to persons engaged in stock raising upon the
security of their live stock; and loans to wholesale manufacturers on the
security of the goods, wares, and merchandise manufacturered by them or
procured for such manufacture.

Since 1923, notice of intention to borrow

under Section 88 must be registered in the office of the Assistant Heceiver
General of the Ministry of Finance in the Province in which the principal
place of business of the borrower is located, so that prospective creditors
may have the protection of being able to learn of prior commitments and
possible liens.




- 10 -

Canadian "banks can buy and hold for their own account any kind
of securities (except "hank stocks).

As a matter of practice, however, " y
b

well established tradition they confine their activities more strictly to
commercial "banking than do the "banks of many other countries. Some of the
large institutions occasionally engage in the underwriting of high-grade
"bond issues, and most of them have bond departments to supply their customers
with a selected list of securities; but no bank has an affiliated securities
company in Canada, nor do the banks there perform the wide variety of financial services which are commonly rendered by banks and trust companies in the
United States.
There is no provision in the law as to reserves against deposits,
except that at least 40 per cent of the cash reserves held in Canada shall
be in Dominion notes (Section 60).
The act requires monthly and annual statements of condition to
be submitted to the Minister of Finance and prescribes in detail the items
to be included in these statements.

The minister may also require special

returns at any time (Sections 112, 113, 114). There is a specific prohibition against the classification of certain types of loans as "current loans"
in any statement or balance sheet prepared and issued by the bank (Section
113, subsection 5).

Separate monthly returns must be made showing the assets

and liabilities of each controlled corporation and the value of the bank's
interest in the corporation.

The act also requires the directors to submit

to each annual shareholders' meeting a statement of the affairs of the bank
and prescribes in detail the items to be included.

In this statement non-

current loans must be shown separately, and investments must be shown at
not exceeding their market value (Section 53).




- 11 -

Structure and Organization. - There are at present only ten chartered tanks in Canada, including a subsidiary of Barclay1s Bank, Ltd., of
England, which also is incorporated under Canadian "banking law.

The names

of these institutions, together with their capital funds, total assets, and
number of "branches in Canada as of December 31, 1931, are as follows:

Table 2 - Canadian Chartered Banks, December 31, 1931 (1)

Name of bank

Rest or
Total
reserve
assets
fund(2)
(000 omitted)

500

500

761,157
262,732
120,792
52,796
592,513
782,584
132,875
150,206
136,917
5.101

$144,500

Bank of Montreal
Bank of Nova Scotia
Bank of Toronto
Banque Provinciale du Canada
Canadian Bank of Commerce
Royal Bank of Canada
Dominion Bank
Banque Canadienne Nationale
Imperil Bank of Canada
Barclays Bank (Canada)
Total

Capi tal
paid

$ 36,000 $ 38,000
24,000
12,000
9,000
6,000
1,500
4,000
30,000
30,000
35,000
35,000
7,000
9,000
7,000
7,000
7,000
8,000

$

$162,000

$2,997,673

Number of
branches
in
Canada(3)

624
307
191
331
758
805
137
591
226
2
3,972

(1) Returns of the Chartered Banks. Figures include assets of foreign
branches. Number of branches from Houston1s Bank Directory of Canada.
January, 1932. The total number of branches shown is 2 more than the
figure in The Canada Year Book, given in Table 1 above.
(2) The term "rest or reserve fund" in bank accounting in Canada corresponds
to "surplus" in the United States. "Undivided profits" are not reported
in Returns of the Chartered Banks.
(3) Including over 600 subagencies, which are usually open for "business no
more than two or three days a week. Most of these are operated in the
Province of Quebec by the Banque Provinciale du Canada and the Banque
Canadienne Nationale.

These institutions are organized into the Canadian Bankers' Association, which since the Bank Act revision in 1901 has be?n given a definite
legal status and authority to perform certain functions in the general ad-




- 12 -

ministration of the "banking system.

In case a bank suspends payments the

association is authorized to appoint a curator to supervise its affairs until
it resumes "business or until a liquidator is appointed to wind up its "business.

The functions of the association are set forth in Section 124 of the

Bank Act as follows:
"124. The Association may, at any meeting thereof, with the
approval of two-thirds in number of the "banks represented at such
meeting, if the "banks so approving have at least two-thirds in par
value of the paid-up capital of the "banks so represented, make "bylaws, rules and regulations respecting
(a) all matters relating to the appointment or removal
of the curator, and his powers and duties;
( b the supervision of the making of the notes of the
")
"banks which are intended for circulation, and the
delivery thereof to the "banks;
(c) the inspection of the disposition made " y the "banks
b
of such notes;
(d) the destruction of notes of the hanks;
(e) the custody and management of the central gold
reserves and the carrying out of the provisions of
this Act relating to such reserves; and
(f) the imposition of penalties for the "breach or nonobservance of any "by-law, rule or regulation made by
virtue of this section.
2. No such by-law, rule or regulation, and no amendment or
repeal thereof, shall be of any force or effect until approved by
the Treasury Board.
3. The Association shall have all powers necessary to carry
out, or to enforce the carrying out, of any by-law, rule or regulation, or any amendment thereof, so approved by the Treasury Board,
1923, c. 32, s. 124."
Both through the association, and directly, the banks are intimately
related to and supervised by the Ministry of Finance.

There is no central

bank; the growing requirements for central banking service have been met to
some extent in recent years by the Ministry of Finance, through the making
of advances to the banks against certain classes of securities. As compared
with the facilities existing in New York or London, there is no highly de»
veloped




money market in Canada, and loans designated there as "call" are in

- 13 -

reality short-term advances not strictly payable on demand.
The Canadian "banking system is composed of "banks of "branches rather
than "banks with "branches. Each aggregation of "branches is a closely coordinated unit managed " y the head office, which is an administrative office and
b
does not deal directly with the public. All "business with the public is done
" y the "branches, each of which is conducted largely as a separate institution
b
and keeps its own complete set of accounts.

Each "branch, however, has an

account with the head office, " y means of which transfers of funds from one
b
"branch to another can " e accomplished, usually with little more than a "bookb
keeping operation.

The larger institutions have "branches throughout the

inhabited portions of Canada; in fact, even the smallest (exclusive of Barclays) spreads its operations over a considerable part of the territory of
the Dominion.

In addition, some of them have branches abroad, the Royal

Bank leading in numbers with over 100 foreign offices and agencies.
As in other countries, the ownership of a Canadian bank, together
with the ultimate power of its administration^ rests with the shareholders,
who for all ordinary transactions delegate their authority to the board of
directors.

Usually the president of the institution acts as chairman of the

board of directors.

The principal executive officer of the bank is the gen-

eral manager, with functions and powers corresponding approximately to those
of the president of a bank in the United States. In the larger institutions
his duties and responsibilities are shared by one or more assistant general
managers.

The usual main departments of the head office are those of the

superintendent of branches, the chief inspector, and the chief accountant.
In general terms it may be said that the higher officers subordinate to the




- 1 U -

general manager rank about equally with the vice presidents of a "bank in
the United States.
Often there are two or more superintendents of "branches, each with
the title of assistant general manager, who are in charge of regional groups
of "branches. Sometimes the assistant general managers are not stationed in
the same city as the head office, the Bank of Montreal, for example, having
one in London (ingland), one in Toronto, and another in Winnipeg.

In addition

to these, the larger "banks have district superintendents in each of the
Provinces of Canada and in some cases in foreign countries, with authority
delegated either from the head office directly or through resident assistant
general managers.

Their offices are in effect extensions of the head office.,

The chief inspector and his corps of assistants are charged with
the audit and examination of all the "branches of the hank.

Each "branch is

inspected at irregular intervals at least once a year, the inspection consisting first of a routine audit and then of a thorough examination of the
assets and of all other activities of the local office.

The latter part of

the inspection is often carried out " y a different and senior inspector,
b
who may time his visit to take place a few days after the routine audit.
The inspection department ^orks in the closest possible collaboration vdth
the superintendent or superintendents of "branches and with the chief accountant. All the various executive and supervisory departments, whether
located in the same city or not, are parts of the head office organization,
their work "being coordinated and directed " y the general manager.
b
Branch Operation and Supervision. - Branch managers throughout the
system function much as do the presidents (or cashiers in the case of some of
the smaller institutions) of independent "banks in the United States, except




- 15 -

that they are under the supervision of the head office organization, either
directly or through the intermediary of a district superintendent, for their
more important lending operations.

In all matters -pertaining to loans, the

district superintendent's office, in the case of the larger hanks, is in
effect the local manager's head office. Each local manager is allowed a
certain discretionary limit as to the size of loan he can make without special
instructions from higher authority.

This varies among the hanks and i?ith

different managers, according to the size or importance of the "branch and the
proven ability and experience of the manager.

The maximum in the smallest

"branches is usually about $500, whereas in the large city offices the manager
is often permitted to lend up to ten or fifteen or even twenty-five thousand
dollars on his own responsibility.
Generally the district superintendent is empowered to authorize
loans " y the branches under his supervision up to twenty or twenty-five
b
thousand dollars.

For larger operations authorization must be obtained from

the general manager.

The assistant general managers have about the same

discretionary limits as the district superintendents.

The general manager

himself sometimes authorizes loans up to $100,000, although such transactions
may require the consent of the board of directors, who generally meet once
a week. All along the line there is of necessity a considerable degree of
elasticity in the application of lending limits, particularly under active
business conditions.
At each step of the process of making or authorizing a loan there
is, in addition to the discretionary limit, what is known as a reporting




- 16 -

limit.

Thus a local manager with authority to lend up to $1,000 may " e reb

quired to report immediately to the district superintendent the full particulars of all loans between $500 and $1,000.

The district superintendent, in

turn, with lending powers -oerhaps up to $25,000, must report to head office
on all loans "between, say, ten and twenty-five thousand dollars. To complete
the chain of responsibility, the assistant general managers and the general
manager must report to the "board of directors full particulars on all loans
above, say, $25,000.
For each local branch, or in each district, an effort is made by
the general management to set the lending limit high enough to cover nearly
all applications for loans. For the exceptional cases, when possible, borrowers requiring advances above the discretionary limit make application for
a line of credit in advance of their needs to extend over a period of one
year. When this is granted the local manager, or the district superintendent
as the case may be, can make or authorize loans from time to time without
consultation with higher authority.
For every loan, from the smallest advances made by local managers
to the largest authorized by head office, a complete financial statement of
the borrower is drawn vp and carefully analyzed.

This statement is designed

primarily to disclose the current position of the borrower and M s prospects
of being able to repay the loan when due, although, of course, consideration
is also given to fixed assets, and the "net worth" of the borrower. In
finally granting the credit special importance is attached to the debt record
of the borrower.
Besides the careful consideration given the loan at the time it is
made, and the various reports made to the district superintendent and the




- 17 -

head office, every advance recorded in the liability ledger, no matter how
small, is rigorously scrutinized by the "bank's examiners at least once a
year at the time of the annual inspection.
Liabilities of the "branches consist almost entirely of deposits.
Something like two-thirds of the aggregate amount of individual deposits for
the whole of the Canadian "banking system ia in savings accounts, upon which
a uniform rate of 3 per cent of interest is paid.

Such accounts are handled

" y means of passbooks as in the United States, and although legally the banks
b
have the right to require notice before they are withdrawn, actually they are
paid on demand.

There is no legal requirement for the segregation of savings

deposits, which in practice are merely kept in separate ledgers.
An elaborate system of daily, weekly, and monthly returns and reports, from the branch managers to the head office, or to the district superintendents and from the latter to the head office, makes it possible to keep
track of and coordinate all the transactions of the bank.

The subject matter

of the reports includes not only the activities of the various branches themselves but also as much information as possible of a general economic nature,
so as to provide the head office with accurate information regarding business
conditions throughout the territory served by the institution.
Every banking service available in the largest cities is also at
the disposal of the customers of the smallest branch. Moreover, branches
draw upon the entire resources of the institution for making loans, in so far
as these are considered safe and in accordance with sound banking practice.
Personnel. - Most of the employes are taken into the Canadian banks
at ages varying from sixteen to nineteen, the average being perhaps seventeen




-Ig-

or eighteen.

The young clerks, or "juniors,"^' as they are called, are

usually high school graduates; only occasionally is there a college or
university man among them, the Canadian hanks following in this respect the
ancient traditions of apprenticeship brought over from England and Scotland.
Upon entering the service of the hank the "junior" is pledged to secrecy, and
to all intents and purposes is sworn in as an officer of the institution.
Usually he enters the organization with the expectation of making "banking his
life work. Promotions to the higher executive positions are almost invariably
made from the ranks, and each employe is expected to understand that his
advancement will depend upon his own ability and energy,
Kie juniors usually begin work as all around handy men in the
smaller branches, although they are often assigned for varying periods to more
specific tasks in the larger offices. During the first few years they are
shifted about from one kind of work to another, and from one branch to another,
in order that their latent capacities may be discovered and developed.

Fre-

quently, also, they are given a turn in the head office. After having shown
sufficient ability and judgment as second in command of a branch, the employe
may be promoted to a branch managership—unless he should happen to show
special capacity and a liking for some sort of administrative work in the
head office.

If he is ambitious and gives evidence of greater ability than

is required for his duties in a given position, he is likely to continue to
he shifted every few years from one branch or department to another. On the
other hand, if it is believed by his superiors that managing a branch of a
given size, or performing the tasks of a given position in the head office,

^ ' This discription does not supply to stenographers and machine operators,
or to messengers, doormen, etc.




- 19 -

is about the upper limit of his capacity, he is likely to settle down and
remain in the same place for many years, perhaps until retirement. Considerable effort is made to see that each employe has an opportunity to develop his fullest capacities.

Each inspection of a "branch includes a report

on the personnel, a part of which is the inspectors opinion regarding the
potential abilities of each employe. Since each "branch is usually examined
from year to year " y different inspectors, there will " e in the head office
b
b
the impressions and recommendations of several different observers, which
serves to eliminate the possible effect of recommendations based on personal
bias.
As far as natural ability makes it possible, each member of the
personnel is expected to become familiar with and competent to perform the
various duties connected with the operation of the bank.

Those who demon*

strate exceptional ability, therefore, become v/ell equipped by experience
to assume larger responsibilities as branch managers or in other excjcutive
capacities.

The remainder of the personnel are trained in such tasks as

they are called upon to perform.

Other Types of Financial Institutions
Brief mention should be made of the other types of institutions
which make up the financial organization of the Dominion. Apart from the
insurance companies, the principal ones are the loan companies, trust cons*
panies, savings banks, investment "banking houses, investment trusts, and
Dominion and provincial institutions for agricultural credit.
Canadian loan companies are incorporated under either Dominion or
provincial laws and procure their funds partly from deposits but mainly from




- 20 -

the issue of debentures.

The principal function of the loan companies is the

making of loans on real estate, hut they also invest in securities and make
loans collateraled hy securities.

They are not, however, permitted to dis-

count commercial paper or engage in ordinary commercial 'banking. Tne " o k value
bo
of the assets of all loan companies in Canada in 1930 was reported as
$205,962,000, and their liabilities to the public as $137,056,000.^
Canadian trust companies, which also operate under either Dominion
or provincial laws, are in some instances closely related to the commercial
banks and to loan companies through interlocking directorates.

They are

essentially trust companies and confine their activities mainly to trust and
agency business, although they accept deposits to a limited extent, Canada
has no counterpart of the trust companies in the United States which carry
on a combined fiduciary and commercial banking business. Since the trust companies have practically the same privileges as the loan companies, and in
addition have trust powers which the loan companies do not possess, there
has been a noticeable tendency for loan companies to convert to trust companies.
Many of the trust companies accept money in trust for investment
and some of them act virtually as savings depositories, even accepting deposits subject to check. Others restrict themselves to the issue of
guaranteed investment certificates as evidence of the deposit of money for
investment. All these deposits, of whatever nature, are guaranteed by the
company and are listed in the balance sheet as "guaranteed funds."
The largest trust companies accepting deposits are incorporated
by the Provinces.

In 1930 the guaranteed funds of all provincially incor-

The Canada Year Book. 1932, p. 787.




- 21 -

porated trust companies in Canada amounted to $137,573,000, as compared
with $26,409,000 for those incorporated under Dominion law.(1) Total
assets were reported as $2,080,913,000 for the provincial companies and
$246,644,000 for the Dominion companies, thus making a total for Canada
of $2,327,557,000.(2)

These were made up of:

company funds, $86,129,000;

guaranteed funds, $163,982,000; estates, trusts, and agency funds, $2,077,446,000.(3)
Savings "banks are operated by the Dominion Post Office Department
and by certain provincial governments. In addition there are two important
privately owned institutions, the Montreal City and District Savings Bank
and la Caisse d'Economie de Notre Dame De Quebec, "both operating under
Dominion charters authorized by the Quebec Savings Bank Act.

The former

had on December 31, 1931, paid-up capital of $2,000,000 and total assets
of over $60,000,000; the latter had paid-up capital of $1,000,00Q and total
assets of over $16,000,000. Inasmuch as the commercial banks accept savings
deposits, the strictly savings institutions play a comparatively minor role
in Canada.

The combined deposits of all such institutions at the end of 1931

amounted to about $150,000,000 as compared with aggregate savings deposits
of over $1,300-,000,000 in the commercial banks.
A large number of investment banking houses and brokerage firms
are in operation, although the bulk of the underwriting is done ''ay a few
of the larger concerns, which sometimes act in combination with the banks

^
»lcL.
(2) Ibid.
(3) Ibid.




- 22 -

or other financial houses in Canada or the United States.

Their business

is not essentially different from that of similar firms in the United States.
Hie same observation applies, moreover, to the investment trusts, which
have come into existence only in recent years.
There are certain publicly owned institutions for supplying agricultural credit, one of which is the Canadian Farm Loan Board.

This was

created by legislation passed in 1927 and had outstanding at the end of 1931
long-term farm loans of about $7,500,000. Other similar organizations are
conducted by some provincial governments, and in Quebec there are a number
of cooperative credit societies. The main sources of long-term agricultural
credit, however, are the trust companies, loan companies, life insurance
companies, and private individuals, as was the case in the United States before the passage of the Federal Farm Loan Act.

Currency System
Canada's monetary unit is the dollar, having the same gold content
as the United States dollar.

Currency consists of gold and subsidiary coin

and Dominion notes, which are legal tender, and the notes of the chartered
banks.

The latter are not legal tender, although accepted without question

in all parts of Canada. Under the Dominion Notes Act of 1914 the Government
is authorized to issue $50,000,000 of Dominion notes against a gold reserve
of not less than 25 per cent.

The act of 1915 authorizes a further issue

of $26,000,000 without any gold reserve requirement, of which $16,000,000
must be secured by certain specified Canadian railway securities guaranteed
by the Dominion Government. Dominion notes in excess of $76,000,000 may be
issued only against dollar for dollar gold reserves or, under the Finance Act




- 23 -

as amended in 1923,^' against approved securities pledged by the "banks.
Dominion notes are used for general circulation only in denominations of $5 and under, the larger denominations "being employed mainly for
interbank transactions and reserves. The bulk of the money in circulation
consists of the notes of the chartered banks in denominations of $5 and
multiples thereof.

The total circulating media of all kinds in the hands

of the public since 1916 has varied from an average of $21.86 per capita in
that year to $34.33 in 1920. In 1931 the average per capita was $20.36.(2)
From earliest days the chartered banks have had the privilege of
issuing notes up to the full value of their paid-up capital stock.

The notes

are a first charge against assets. As an added measure of security, in effect since 1391^ each bank is required to keep on deposit with the Minister
of Finance an amount of cash equal to 5 per cent of its average circulation,
subject to annual adjustment, to constitute a guarantee fund for the payment
of all notes of any suspended bank with interest "until the date set for their
redemption by the liquidator.

If depleted for this purpose, the fund must be

replenished by the remaining banks in proportion to their circulation, each
bank contributing not more than one per cent per year of its average circulation.

There has been no delay or loss to the noteholders of a suspended

bank since 1881.
So long as the banks' own notes made up a large proportion of their
funds available for loans, the note issue privilege represented one of their
chief sources of income. Although now relatively less important, it is still

See discussion below.
2

' ' The Canada Year Book. 1932, p. 764.




-2k-

considered valuable, owing to the fact that a "bank's notes are not a liability
until actually paid out over the counter. Because of this feature, small
branches, amply supplied with currency, may be opened with very little cash
(gold or Dominion notes).
Prior to 1900 the total of notes in circulation was usually well
below the paid-\ip capital of the banks, and consequently a sufficient degree
of elasticity of the currency was assured.

Thereafter the rapid economic

expansion of the country caused circulation to approach the total of paidup capital, with the result that difficulty was sometimes encountered in
meeting seasonal requirements, particularly in connection with crop movements.

To remedy this situation, the Bank Act was amended in 1908 to permit,

for a period covering the crop moving season of each year, the issue of additional notes up to 15 per cent of the combined paid-up capital and rest
or reserve fund of each of the banks.

Then in the 1913 revision of the act,

provision was made for the establishment of central gold reserves, to be administered by trustees appointed by the Canadian Bankers' Association and
the Minister of Finance, and the banks were authorized to issue additional
notes up to the amount of gold or Dominion notes deposited therein.
To add still further elasticity, a law was passed in 1914, known
as the Finance Act, providing that the banks could borrow Dominion notes
from the Minister of Finance against Government bonds and certain other approved securities, including commercial paper of not more than six months'
maturity.

Originally this law was to be in force only during emergencies.

In 1923, however, it was amended to permit the Minister of Finance to issue




- 25 -

Dominion notes and lend them to the "banks against approved securities and
commercial paper at any time, and without any prescribed limit as to the
amount,

' so that " y depositing them in the central gold reserves the hanks
b

could in effect issue their own notes to take care of any requirement for
additional currency.

nnance Act, H. S., 1927, pp. 1717-1720.




CHAPTER I I
SAFETY BECOKD OF CAMAPIM BflKKS

In the period 1901 to 193^ inclusive there were seven suspensions
of chartered banks in Canada, with t o t a l reported resources of $23,^+2,361.^ '
During the same period of thirty-one years in the United States there were
10,190 State and national hank suspensions, with t o t a l reported resources of
over $6,500,000,000.
This comparison, however, should "be r e l a t e d to the size of the
banking systems.

Two s e t s of figures will perhaps serve as the best stand-

ard obtainable for t h i s purpose:—(1) the r a t i o of t o t a l reported a s s e t s of
suspended banks to the average yearly t o t a l banking a s s e t s of each country,
and (2) the r a t i o of the t o t a l number of banking offices closed as a r e s u l t
of suspensions to the average number in existence.
been made in Table 3 below for three periods:

These comparisons have

1901 to 1920, 1921 to 1931,

and 1901 to 1931.
For the period 1901 to 1920 the a s s e t s of suspended banks in Canada
amounted to about one-half of one per cent of the average yearly banking
a s s e t s of the country.

The corresponding figure for State and national banks

i n the United States for the same period was about seven times as l a r g e , or
3.6 per cent.

For the eleven year period 1921-1931 the a s s e t s of suspended

banks in Canada were again equal to about one-half of one per cent of the
average yearly banking a s s e t s of the country, while the corresponding figure
in the United States was about twenty times as high, or 10.7 per cent.
(1) From data furnished by the Inspector General of Banks in Canada.




- 26 -

- 27 -

Table 3 - Bank Suspensions in Canada and the United States
United States(2)
(national and
State hanks)

Canada(1)
(chartered
banks)

1901-1920
Average yearly t o t a l hanking a s s e t s
Total reported a s s e t s of suspended hanks
Percentage suspended
Average yearly t o t a l hanking offices
T o t a l closed as r e s u l t of suspensions
Percentage suspended

$1,396,163,000
7,593.961
0.5$

$21,521,950,000

2,428
50

21,228
1,274
6.0^

767,577,000
3.6$

2.1J&

19 21-19 TL
i $2,969,4-57,000
Average yearly t o t a l hanking a s s e t s
Total reported a s s e t s of suspended hanks
15,S4S,4OO
Percentage suspended
o.5'/»
Average yearly t o t a l hanking offices
Total closed as r e s u l t of suspensions
Percentage suspended

$54,183,455,000
5,773.299,000
10.75&

4,086
68
i.75f»

28,975
9,390
32.4£

1901-1931
Average yearly t o t a l hanking a s s e t s
Total reported a s s e t s of suspended hanks
Percentage suspended
Average yearly t o t a l hanking offices
Total closed as r e s u l t of suspensions
Percentage suspended

$1,954,421,000
23,442,361
1.256

$33,150,226,000
6,540,876,000
19.7$

3,016
118

23,976
10,664
44.5^

3.9^

(1) Average yearly t o t a l hanking a s s e t s in Canada are computed from data in
The Canada Year Book, 1932» P. 769. Total reported a s s e t s of suspended
hanks and the number of banking offices closed as r e s u l t of suspensions
in Canada are from data furnished by the Inspector General of Banks in
Canada. For sources of data on the average yearly t o t a l banking offices
in Canada see Table 1, pp. 4-6.
(2) Data for the United States have been compiled by the Federal Reserve
Committee on Branch, Group, and Chain Banking from reports of the
Comptroller of tne Currency and State banking departments. The number
of branches closed in the United States during 1901-1920 i s not a v a i l able, but the omission does not seriously affect the percentages.
Assets of State banks suspending from 1901 to 1920 are estimated from
data contained in the annual reports of the Comptroller of the Currency.




- 28 -

The above data relate to "banks which have suspended payments to
depositors because of financial difficulties. They do not take into account banking difficulties which are met in other ways, such as emergency
consolidations or assessments and contributions from stockholders to prevent closing.

There have been some amalgamations in Canada and many in

the United States in order to prevent the failure of institutions in difficulties, but it is not possible to enumerate these with sufficient accuracy to make a reliable comparison between the two countries. Some banks,
especially in the United States, have been saved by different measures,
such as reorganization with new capital, the cooperation of public officials
and sound banks, or by injecting new funds into them by their directors
and stockholders. Millions of dollars have been poured into weak banks
by this process during the past eleven years, but reliable figures as to
the total amount involved are not available.
It is not possible to compute the total loss or damage to a
community as a result of a bank suspension. Even in those cases where
the bank reopens or where the depositors are ultimately paid in full the
shaking of confidence and the general demoralizing effects are serious.
It is possible, however, to make a rough comparison of losses to depositors
in the two countries. This comparison must be based largely on estimates,
since the liquidation of many suspended banks in the United States is incomplete. On the basis of the best estimates available, the results for
the eleven years 1921-1931 are as shown in Table U.




- 29 -

Table H - Estimated Losses to Depositors of Suspended Banks in Canada
and the United States, 1921-1931 Inclusive
Canada
(chartered
banks)
Average yearly t o t a l deposits'*)
Total estimated losses to d e p o s i t o r s ^ )
Percentage loss

United States
(national and
State banks)

$1,897,519,000

$39»^50,500,ooo
1,386,000,000

6,Hoo,ooo
0.3^

3.5lc>

(1) Includes for Canada only individual demand and time deposits; for the
United States, demand deposits, time deposits (including Postal Savings), certified and cashiers' che/dcs, cash letters of. credit,
and travelers checks outstanding. Canadian figures are from The
Canada Year Book. 1932, p. 768. United States figures are computed
from the annual reports of the Comptroller of the Currency, 1921-193L
(2) Total estimated losses to depositors in Canada are from data furnished
by the Inspector General of Banks in Canada, Losses to depositors in
the United States are estimates by the Federal Reserve Committee on
Branch, Group, and Ghain Banking based on data supplied by the Comptroller of the Currency and State banking departments. The estimates
were made on the basis of the experience of those suspended banks that
had been reopened, taken over, or completely liquidated at the time
the data were compiled. The ratio of losses to total deposits as
shown by these banks was applied to the deposits of all banks suspending during the eleven year period.
Bank Failures in CanadaO)
Of the 7 Canadian banks which have suspended payment since the
beginning of the present century, 6 were relatively small, while the seventh
and last was a comparatively large institution, its suspension causing considerable losses and widespread indignation.
The Bank of Yarmouth, a local institution without branches,
founded in 1859, suspended payment on March 6, 1905. Its reported assets
were $723,660, and liabilities to the public were $388,660. All depositors
were eventually paid in full.




See appendix, p. 133, for list of Canadian bank insolvencies since
1867.

- 30 -

The Banque de S t . Jean, founded in 1873 a nd having five "branches
a t the time of suspension, closed i t s doors on April 28, 1908.

Assets were

reported as $326,118, and l i a b i l i t i e s to the public amounted to $560,7S1.
Losses to depositors have been estimated a t $237iOOO.
The Banque de St. Byacinthe, founded in 1873» went into liquidat i o n on January 2k, 1908.

I t had 6 branches, reported a s s e t s of $1,576»*&3«

and l i a b i l i t i e s to the public of $1,172,630.

All depositors were paid in

full.
St. Stephen's Bank, founded about I836, closed i t s doors on
March 10, 1910.

I t was a local bank with no branches, having a t the time

of suspension reported a s s e t s of $818,271 and l i a b i l i t i e s to the public of
$5*+9 »830.

Shortly a f t e r i t s suspension some of the d i r e c t o r s advanced suf-

f i c i e n t funds to pay off a l l c r e d i t o r s , and the bank's a s s e t s were sold to
the Bank of B r i t i s h North America.

Thus there were no losses except to the

shareholders.
The Farmers' Bank, comprising 27 branches a t the time of suspens i o n , closed i t s doors on December 19 > 1910, a f t e r only four years of operation.

At the time of suspension i t s paid-up c a p i t a l amounted to $567>579

and there was no s u r p l u s .

L i a b i l i t i e s to the public were $1,997>0Hl and

a s s e t s were reported to be $2,6l6,683» although these turned out to be composed largely of bad debts.
Prom the very beginning, the operations of the farmers' Bank appear to have been f r a u d u l e n t . ' 1 )

The organizers, as provisional d i r e c t o r s ,

took personal notes for the bank's shares, then pledged them as c o l l a t e r a l
against loans from a t r u s t company and an insurance company, and used the
proceeds to make the temporary deposit with the Minister of Finance which
'*'

See




Proceedings of Royal Commission on Farmers' Bank, pp. U56-U90.

- nwas required before the institution could obtain a certificate authorizing
it to commence business. After the certificate was issued, this temporary
deposit was returned to the bank and the loan from the trust company, as
had been arranged when the loan was made, was repaid.

Shortly after open-

ing, it began to incur heavy losses from poorly secured loans. The general
manager was accused of having looted the institution, and some smaller defalcations were said to have occurred in the branches. According to press
reports the general manager was convicted of forgery, theft, and perjury
in connection with the bank's returns to the Minister of Finance and was
sentenced to six years in prison.(!) The main cause of the failure was
clearly shown to be mismanagement and dishonesty in the head office. (2)
Losses to depositors have been estimated at $1,31^»000.'3)
On December lk,

191^> the Bank of Vancouver, which had been char-

tered less than seven years previously, was obliged to close its doors.
Operating locally in southern British Columbia, it had 10 branches. Its
paid-up capital amounted to only $y+5,188 and there was no surplus. Assets
were reported as $1,532»7S6, and liabilities to the public amounted to
$912,137.

Losses to depositors have been estimated at about $550,000.^ '

Failure seems to have occurred chiefly because there had been no economic
justification for the bank's opening in the first place, and because of the
poor loans it made in its desperate attempts to retain its customers and obtain new business. (5)

U ) Monetary Times, January 21, 1911, p. 315 and April b, 1911, pp. ll&i-lfe
See Proceedings of Royal Commission on rarirer^1 Ban!-:, pp. Mj6-^90.
(3) From a tabulation furnished by the Inspector General of Banks in Canada.
Liquidation incomplete at the end of 193^» Figures for estimated losses
furnished by the Inspector General of Banks.
w ) For a discussion of this bank's affairs, see monetary Times, Dec. 18, I91U,




- 32 -

The last failure which has occurred in Canada wae the Home Bank
of Canada on August 17, 1923. This institution closed its doors under circumstances even more disturbing to public confidence than those of the
Farmers' Bank in 1910. At the time of suspension it had 68 "branches and
reported paid-in capital of $1,960,591, surplus of $550,000, and liabilities
to the public of $18,356,373. Assets were reported as $15,8^8,^00.^ '
The history of the Home Bank of Canada goes back to 185*+. when
the original institution was founded as the Toronto Savings Bank. After
the passage of the Bank Act in 1871. forbidding the use of the word "bank"
in the title of institutions not chartered by the Dominion Parliament, it
became the Home Savings and Loan Company. Although finally obtaining a
charter under the Bank Act in 1903, it did not commence business as the
Home Bank of Canada until 1905.
When the institution started as a chartered bank, its condition
was apparently sound, but beginning with 1909 it included unpaid interest
on certain loans, real estate write-ups, and other questionable items in
reported earnings, and continued to pay dividends while the bank was actually operating at a loss.
(2)
In addition, it made very large loans to
certain of its customers. Its heaviest losses occurred between 1916 and
1923, amounting for this period to at least $7»500,000. Practically all
the doubtful loans were made through the head office or with the approval
of the head office. Many of them were made without the knowledge of the
^ ' Figures furnished by Inspector General of Banks in Canada, and are as
of date of suspension, August 17, 1923; whereas figures in The .Canada Year
Book are as of June 30, 1923.

(2)
Statements in t n i s paragraph are based on "The Story of the Home Bank,"
Monetary Times, December lU, 1923, and the Beport of the Royal Commission
on Home Bank, 192U, pp. 258-288 and 507-515.




- 33 directors.

In later years the bank resorted to trading in securities to

bolster its profits. Testimony at the hearings of a Royal Commission in
192U indicated that it had actually been insolvent for from eight to ten
years before its suspension.
Losses to depositors have been estimated at $6,400,000, after a
donation of about $3>*+25»000 by the Dominion Government for the benefit of
creditors with claims of less than $500, as well as those with claims of
over $500 if found to be in special need.'1'

Primary responsibility for

failure was shown to be that of the general management at the head office.
(2)
Forced Amalgamations (3)
Besides the suspensions noted above, two Canadian banks, the Ontario Bank and the Sovereign Bank of Canada, have disappeared since 1900
through liquidation with open doors, and 30 through mergers, several of
which were forced amalagamations to prevent suspension. Among the latter
in recent years were the Merchants' Bank and the Banque Nationale. The
Merchants' Bank made application to the Minister of Finance in 1921 for
permission to sell its assets to the Bank of Montreal. Authorization was
given and the institution was taken over in 1922, but without loss or delay to depositors. The Banque Rationale was a French Canadian institution,
operating mainly in the Province of Quebec. By 192H it was insolvent, but
the provincial government of Quebec intervened and induced the Banque
d'Hochelaga to take it over.

The Province assigned its own forty year

5 per cent bonds in the amount of $15,000,000 to the Banque d'Hochelaga in
(1) Information furnished by the Inspector General of Banks in Canada.
Liquidation incomplete at the end of 1931(2) See Report of Royal Commission on Home Bank, 192H, pp. 491-522 and 539551» testimony of Mr. George Edwards, special auditor appointed by
Minister of Finance.
(3) For a complete list of bank absorptions since IS67 see appendix, p. I3U.
( + Information furnished by for. C. S. Tompkins, Inspector General of Banks.
*)




-3*-

full ownership, the latter agreeing in return to pay to the Province of
Quebec $125,000 a year for forty years to liquidate, the principal amount of
the bonds, but only out of net profits and after 10 per cent dividends to
shareholders. The Banque d'Hochelaga then changed its name to Banque Canadienne Rationale.
Other forced amalgamations have occurred, although very little information is available as to the exact conditions and circumstances. In
view of the above cases, however, it is evident that mergers to prevent suspension constitute a recognized procedure.
notwithstanding the suspensions and forced amalgamations which
have occurred, it is evident from the tabulations at the beginning of this
cnapter that, in comparison with the unit banking system of the United
States, the Canadian branch system has in recent years provided a higher
degree of safety to its depositors.

Factors delating to Safety
Banking Structure. - Made up of branches spread over an expanse
of territory in which tne economic activities are varied, the Canadian banks
have obtained considerable diversification in their assets. This, coupled
with the fact that taey are institutions of large resources, has enabled them
to provide a degree of safety usually not obtainable for a small independent
unit bank operating in a single community.

Wjen unforeseen difficulties have

arisen in the collection of loans made in one community, or to one division
of economic activity, tiie other loans and investments of the bank have usually
been of such a character as to preserve the institution as a v/hole from danger
of insolvency.




Tnese two factors, large resources and wide diversification

- 35 -

of loans, may be described as the elementary structural features making for
safety in the Canadian banking system.
Certain administrative advantages are claimed " y Canadian bankers,
b
moreover, in connection with the branch system.

They say that a large branch

organization possesses superior facilities for investigating not only the
soundness of current investments but also the broader trends of economic
development calculated to affect general policies. Owing to the close supervision and control exercised over the branches, the degree of safety of the
organization as a whole is measured largely by the integrity, the ability,
and the judgment of the general management of the institution.
Management. - The degree of safety to depositors of any banking system depends very largely upon the quality of its management.

Consequently

the actual safety record of the Canadian banks reflects in some measure the
quality of their management. A banking system which has developed gradually
over a long period of years without revolutionary changes, as in Canada,
nas been able to build up time-tested and well established traditions of
sound banking practice. By the very nature of their structure and their
methods of personnel administration, the Canadian banks have for generations
played an important role as training schools for bankers.
Under the laws of the Dominion, Canadian banks must be at least
ten times as large in terms of paid-up capital stock as the minimum for
national banks in the United States, and modern economic tendencies have
resulted in institutions a great deal larger than the legal minimum.




-36-

Function. - The kind of business in which the Canadian
banks engage is determined partly " y law, as in the case of the prob
hibition of loans secured by real estate, but in greater measure by
the judgment exercised by the management.

It is a noteworthy fact

that the commercial banks do not operate security affiliates in
Canada and do not engage in general investment banking activities.
It is commonly asserted in authoritative circles in Canada, moreover,
that the banks are conducted as strictly commercial institutions,
avoiding not only real estate loans but all loans the proceeds of
which are intended for capital investment. As pointed out in tne preceding chapter, a large proportion of their total deposit liabilities
are time or "savings" deposits; but in practice these are paid on
demand and loaned out or invested exactly as if they were demand deposits. Practically all loans are made, originally at least, as
short-term advances, and most investments are eligible as collateral
for advances by the Dominion Treasury under the Finance Act.
Some indication may be had of the distribution of their
resources from the accompanying condensed statement C Table 5) of
assets and liabilities in 1931 and at five year intervals since
1915.




- 37 -

Table 5 - Assets and L i a b i l i t i e s of All Canadian Chartered B a n k s ' 1 '
(yearly averages of monthly r e t u r n s ; in tlwusands of dollars)
1915

1920

1925

1930

1931

255,687

^35,380

366,739

353,485

312,836

72,763

85,465

73,606

106,772

106,528

15.082

113.826

63.496

46.722

32,869

Total quick a s s e t s

3^3,532

634,671

503,841

506,979

452.233

Other licjuid a s s e t s
4. Call and short (not exceeding t h i r t y days) loans
on s e c u r i t i e s in Canada
and elsewhere
5. Dominion, p r o v i n c i a l , and
Canadian municipal s e c u r i t i e s ; other public securit i e s ; railway and other
securities

19L592

319,054

345,548

414,431

278,760

118.389

379,215

565.506

471,638

674.357

Total other liquid a s s e t s

309,981

698.269

911,054

886.069

953.117

ASSETS
Quick a s s e t s
1. Cash items: Specie, Dominion notes, notes of and
checks on other hanks,
foreign currencies
2. Balances due from other
banks in Canada and e l s e where
3» Deposits in c e n t r a l gold
reserves and with Dominion
Government for security of
note c i r c u l a t i o n

Otner a s s e t s
6. Current loans and discounts
in Canada and elsewhere
7. Non-current loans
S. Bank premises
9. Other r e a l e s t a t e and mortgages on r e a l e s t a t e sold
10. L i a b i l i t i e s of customers
under l e t t e r s of c r e d i t
11. Other a s s e t s not itemized
Total other a s s e t s
Total a s s e t s




867,950 l , 6 l l , 4 4 o 1,205,589 1,642,516 1,476,026
6,747
4,952
7,651
10,879
9,303
hi ,10k
58,112
73,086
79,112
77,465
5.6U5

7,46o

13,085

12,496

12,734

9,835
5.031

46,055
3.175

62,54l
9,544

90,356
13.542

67,897
15.597

942.912 1.731.194 1.374,724 1.844.026 1.660.669
1 , 5 9 6 , ^ 5 3,064,134 2,789,619 3,237,074 3,066.019

- 38-

Table 5 - Assets and L i a b i l i t i e s of All Canadian Chartered Banks' 1 )

(Continued)

(yearly averages of monthly r e t u r n s ; in thousands of d o l l a r s )
1915

1925

1930

1931

105,137

228,800

165,235

159,3^1

i4i,969

358, 444

LIABILITIES
L i a b i l i t i e s to the p u b l i c
1. Notes i n c i r c u l a t i o n
D e p o s i t s and due t o b a n k s :
2 . By the p u b l i c , payable on
demand i n Canada
3 . By the p u b l i c , payable
a f t e r n o t i c e i n Canada
4 . Elsewhere than i n Canada
5 . Made by and b a l a n c e s due
to o t h e r banks i n Canada
and elsewhere
6. Balances due t o Dominion
and p r o v i n c i a l Governments

1920

653.S63

53L181

622,895

578,604

690,904 1,239,308 1,269,543 1,427,570 1.437,977
110,672
362,104
335,164
390,403
332,903
30,720

59,269

52,820

90,447

79,954

38,320

209,744

58,334

75,743

73,351

T o t a l deposits and due to barks 1,229,120 2,497,348 2,273,982 2,607,058 2.502,789
7 . B i l l s payable and advances
u n d e r t h e Finance A c t ( 2 )
8 . L e t t e r s of c r e d i t o u t standing
9 . Other l i a b i l i t i e s

6J10

Total l i a b i l i t i e s to
shareholders
Total

liabilities^)

27,707

46,496

23,975

9,826
2,836

46,055
3,710

62.541
3,367

90,356
6,279

67,897
4,924

& 353,629 2,784,069 2,532,832 2,909.530 2,741,554

Total liabilities to the public
L i a b i l i t i e s to s h a r e h o l d e r s
10. C a p i t a l p a i d up
1 1 . Best o r r e s e r v e fund

8,156

*

1

113,983
113,020

123,617
128,757

118,831
123,109

l44,56l
160,639

144,675
162,075

227,003

252,374

241,940

305,200

306,750

1,580,632 3,036,4U3 2,774,772 3.214,730 3 , 0 4 8 , 3 0 4

(1) Data fromffhe Canada Year Book, 1918, pp. 524,525; 1924, pp. 797,793; 1927-1928,
PP. S68,S69; 1932, P P . 770,771.
(2) "Advances under the Finance Act" were not reported s e p a r a t e l y in 1915 and 1920,
and in those years are included among "other l i a b i l i t i e s . "
(3) The Re turns of the Chartered Banks are not in the form of balanced statements.
The excess of a s s e t s over l i a b i l i t i e s as shown in the r e t u r n s i s u s u a l l y r e ported as undivided p r o f i t s in the balance sheets presenter) in the annual r e p o r t s of the banks.




- 39 -

The composition of items 5 and 6 of the assets listed in this
statement is the most important factor in determining the character of the
hanks1 business. The investments described in item 5 are reported in the
monthly returns in three classifications:

(l) "Dominion government and

provincial government securities"; (2) "Canadian municipal securities,
and British, foreign and colonial public securities other than Canadian";
and (3) "Eailway and other bonds, debentures and stocks." Securities of
the first classification are eligible as collateral for loans from the
Dominion Treasury.

These averaged about 32 per cent of total investments

in 1920, 63 per cent in 1925, 67 per cent in 1930, and were reported as
about 69 per cent on December yi,

1931*

Some of the securities in the sec-

ond classification, namely, the Canadian municipals, securities of the British and colonial Governments, and United States Government bonds, are also
eligible as collateral for loans from the Treasury, but the amounts held
by the banks are not reported separately. Although none of the securities
in the third classification are eligible, it is evident that in recent years
a very large proportion of the total of the banks' investments have been in
effect quickly convertible into cash.
The largest single classification of the banks' assets, of course,
is current loans and discounts, as shown in item 6.
cerning these may be stated with certainty.

Only a few facts con-

In the first place, all those

wnich meet approximately the requirements for eligibility for rediscount
in the United States by the Federal reserve banks

are also eligible as col-

lateral for advances from the Dominion Treasury under the Finance Act. In
the second place, current loans and discounts contain no loans made in the
first instance against the security of real estate, although some real




- 10 +

estate mortgages have "been acquired as additional security on loans already
made. The actual amounts of these are not made public.
Current loans and discounts in other respects may perhaps he assumed to have encountered from time to time the vicissitudes common among
commercial hanks everywhere.

It is known with certainty, and the fact will

he dealt with at some length in a later chapter, that following the agricultural deflation of 1920-1921 many of the loans of the western branches
of the Canadian hanks were in a condition described as "frozen"; but in
general they were made in the first instance as current loans, and not as
capital investments.
Eeserves. - Canada, in contrast with the United States, has no
legal requirements for reserves against deposits other than that ko per cent
of whatever cash reserve is held in Canada shall be in the form of Dominion
notes.

Primary or cash reserves consist of gold and subsidiary coin, Dominion

notes, and United States and other foreign currencies. Additional reserves
are of two types, those maintained abroad and those in Canada. Those maintained abroad are made up of call and short loans (not exceeding 30 days)
elsewhere than in Canada—principally in New York—and balances due from
banks elsewhere than in Canada. The domestic secondary reserve consists of
call and short loans (not exceeding 30 days) on securities in Canada and
securities held, a large proportion of which are eligible as collateral
for advances from the Government,
The following table shows the reserves of each class in percentages
of demand liabilities and time deposits at the end of selected years since
1910.




- 4i -

Table 6 - Reserves of the Chartered Banks in percentages of Demand
Liabilities and Time Deposits(l)

December
31

Primaryreserve
Cash—gold, subs i d i a r y coin,
Dominion n o t e s ,
and United
States and
other foreign
currencies

1910
1915
1920
1925
1930
1931

11.3*
15.6
10.9
11.1
9.2
8.7

1

•

•

'

Secondary reserve
Abroad
In Canada
Call and short
loans elsewhere "Call and short
than in Canada loans in Canada
and Government
and balances
and other mardue from banks
ketable securielsewhere than
ties
in Canada
13.3*
17.6
13.3

l4.4
9.3
8.0

16.6J&
15.1
19. 8
29.7
32.0
3H.3

Total

29.9$
32.7

S:i

41.3
42.3

Total
reserves

4l.2#
48.3
44.0
55.2
50.5
51.0

(1) Compiled from Beturns of the Chartered Banks. Figures for years prior
to 1923 are not strictly comparable with later figures because the item
of "United States and otaer foreign currencies" was not segregated from
"notes of other banks." Demand liabilities are taken to include: notes
in circulation (less notes held by other banks and deposits in the central gold reserves), demand deposits, time deposits, balances due to the
Dominion and provincial Governments, deposits in branches elsewhere than
in Canada, and balances due to banks elsewhere than in Canada (less
checks on otner banks). Time deposits, accounting for about half the
demand liabilities upon which the above percentages are based, while not
legally payable on demand, are included because in practice they are
paid on demand.
Another feature of the organization of the Canadian banks, which
should be noted in connection with their general reserve policy, is the ratio
of their reported capital funds (paid-up capital plus rest or reserve fund)
to total liabilities. During tne past twenty or thirty years this ratio has
been greatly reduced. By 1928 the average for all banks was less than 8 per
cent and in the three largest banks it was less than 7 per cent, as compared
with an average in 1900 of well over 20 per cent for all banks. Since 1928,
however, capital and surplus have been increased, so that the average ratio




- H2 -

at the end of 1930 was aligiitly over 9 per cent and slightly over 10 per cent
at the end of 1931, althougn the increase in 1931 resulted solely from a decline in liabilities. As of December 31, 1931. the highest ratio of capital
funds to total liabilities among the different banks (exclusive of Barclays,
which was about 20 per cent) was nearly lk per cent and the lowest 9 per cent.
It is a matter of common knowledge, however, that most of the banks have in
addition to their reported rest or reserve fund, varying amounts of hidden
reserves. These hidden reserves are included in an account or accounts set
up in the head office general ledger and may be said to be represented by
the excess of general assets over their statement value. I o data are availT
able as to the amounts of hidden reserves possessed by any individual bank
or by the banking system as a whole, but tnose of certain institutions are
generally believed to be substantial.
External Supervision. - All the chartered banks of Canada are required to send monthly returns to the Ministry of Finance. These are made
out in considerable detail and their accuracy is attested by the signatures
of the general manager, the president, or a director acting as president, and
the chief accountant. At the various revisions of the Bank Act since 1S71,
requirements for additional data have been incorporated in the law, in an
effort to have the returns reveal more fully the true condition of the banks.
Thus, among other things, they are required to report:

(1) not only cash

(gold and subsidiary coin and Dominion notes) on hand at the end of the
month, but the average holdings during the month; (2) the greatest amount
of their own notes in circulation during the month; (3) ' h aggregate amount
te
of loans to directors and to firms of which directors are partners, as well
as loans for which they are guarantors, and (U) the amount of "non-current




-1*3-

loans." Under the latter classification, according to subsections 5 and
6 of Section 113 of the Bank Act, the monthly returns must include separately
a report of "any loan in respect of which:
"(a) the "borrower has not for a period of two years preceding the date of such return, statement or "balance sheet paid
the interest thereon at the rate agreed, in cash, unassisted " y
b
the hank;
"(b) the bank has taken possession of the property or any
part of the property covered by any security given by the borrower with the intention of realizing thereon, or has realized
or taken any step or proceeding for the purpose of realizing
upon any security given by the borrower;
"(c) the bank has commenced an action at law to recover
from the borrower the amount of the loan or any part thereof;
"(d) the borrower has made an abandonment of his estate
for the benefit of his creditors or any of them; or
"(e) there is other cause, sufficient in the opinion of
the manager of the branch of the bank where such loan is domiciled, or in the opinion of any director or officer of the bank
who prepares, signs, approves or concurs in such return, statement or balance sheet, for deeming such loan not to be a current loan.
"6. Any loan falling within the last preceding subsection
may be included amongst current loans if the directors declare
that after due inquiry they have approved such loan as a current loan."
The Canadian law since 1923 provides that any officer, director,
or trustee of a bank who knowlingly prepares, signs, or approves any bank
report containing any false or deceptive statement shall be guilty of an
indictable offense punishable by iaprisonment for a term not exceeding
five years. Furthermore, any officer, director, or trustee who negligently
signs or approves any such report may be punished by imprisonment for a
term not exceeding three years.'1)

(!) Section 163 of the Bank Act, 1921.




~ U!+ -

In addition to the monthly returns, the Minister of Finance is empowered under the law to require from any "bank a special report and audit
whenever he sees fit. This provision, however, has "been considered of doubtful efficacy, since the action

authorized by it, "being unusual and exception-

al, would " e likely to become publicly known and might cause injury to a
b
financially sound institution.
For over forty years after the passage of the Bank Act of 1871
there was no external supervision of the chartered banks other than that
which the Minister of Finance could legally exercise on the basis of the information contained in the regular monthly returns and such special reports
or audits as he might require.

If the reports indicated that the law was

being violated he could proceed against the bank, or if it was insolvent he
could order it closed and liquidated. But he had no means of determining
whether the returns were accurate, nor could he enforce any restraining
measures in case an institution was engaging in unsound banking practices, so
long as it appeared to be solvent and innocent of violating the letter of the
law.
At the revision of the Bank Act in 1913 a provision was incorporated to require at least once a year an independent audit of each bank in
behalf of the shareholders. This was the first measure of active supervision of the chartered banks from outside their own management ever passed
in Canada. From time to time something of the kind had been advocated in
the Canadian Parliament, but with only one exception the banks had consistently opposed all such measures. The exception was the Bank of Nova Scotia,
whose general manager (retired 1910), the late Mr. H. C. McLeod, had for
many years urged the necessity, both in the public interest and in that of




_ 15 +

the banking system itself, of external supervision. After the failure of
the Farmers' Bank in 1910, when the circumstances of its administration "became known, some of the opposition to external supervision disappeared, and
the shareholders1 audit was provided for. This, however, did not turn out
to he very effective in practice.

It was carried out simply as a technical

audit, and the law was not sufficiently specific to ensure that even this
would he done by well qualified accountants. The difficulties of the Merchants' Bank, which necessitated its being taken over in 1922 by the Bank
of Montreal, crystallized public opinion, and in the Bank Act revision of
1923 a provision was inserted requiring a more complete examination of
every bank by two chartered accountants, chosen by the shareholders from
a list approved by the Ministry of Finance.
Before a real test could be made of the adequacy of the revised
shareholders' audit, the Home Bank failed in August, 1923, hy reason of alleged maladministration and fraud at the head office. This precipitated a
demand on the part of public opinion for external supervision by the Government, and in 1924 the Bank Act was amended to provide for the appointment
(by the Governor in Council on the recommendation of the Minister of Finance)
of an inspector general of banks. This official is required to make an examination of each institution at least once a year, "for the purpose of
satisfying himself that the provisions of this Act having reference to the
safety of the creditors and shareholders of each such bank are being duly
observed and that the bank is in a sound financial condition.
Existing Safeguards Against Failure. - As pointed out above, there
have been no bank suspensions in Canada since 1923. Moreover, it is claimed

(1) Ibid., Section




%.

-U6-

by Canadian "bankers and others that in all probability no suspensions will
ever again " e allowed to occur. The validity of such assertions will depend,
b
first upon the integrity and ability of bank management, second upon the
adequacy of the existing measures for external

supervision to disclose

promptly to the public authorities any condition which might impair the solvency of a particular bank, and finally upon the readiness and ability of the
Government and the other banks to take preventive action.
As to the integrity and ability of the management, it is clear that
the critical point is the administration of the head office. The essential
purpose of external supervision is therefore to make certain that such
qualities as incompetence and dishonesty on the part of the general management are detected in time to permit the taking of remedial measures.
The annual shareholders' audit which has been carried out since
1923 consists of an examination of the head office and several of the principal branches.^' The two auditors, who must not be members of the same
firm and one of whom must be replaced by another auditor after every two
years of service, are required to sign jointly a certificate to the effect
that they have examined the bank and are convinced that the annual report
of the directors to the shareholders shows its true

condition.

In addition

they must report to the general manager and to the directors upon each loan
in excess of 1 per cent of the capitals2) of the institution which appears
to be inadequately secured, and in general upon any transaction or condition
deemed by them unsatisfactory. A copy of all reports made by the auditors to
the general manager or the directors of a bank must be transmitted at the
same time to the Minister of Finance.

Moreover, the minister may in his

U h b l d . , Section 55.
^2'In the course of their examination the shareholders' auditors actually
satisfy themselves as to the quality of all loans in excess of a much
more moderate amount.




-U7-

discretion order the scope of the audit to be enlarged or extended. No attempt is made to examine all the branches of one bank simultaneously, but
the auditors have access to the reports of the banks' own internal inspections and of all their transactions as reported by the branches. The branches
do not carry accounts with each other, all interbranch transactions being
carried out through the head office. This is calculated to make it difficult
to conceal irregularities by shifting assets among the branches and altering
the records in the head offices, especially because of the considerable numbe:.
of people who would have to be involved in the conspiracy.
The Inspector General of Banks makes an examination at least once
a year of the head office of each bank, where he has access to the returns
and reports from all the branches, as wall as the reports of the bank's internal inspections. He has full authority under the law. however, to examine
any or all of the branches of any bank, if such procec\x:ce is considered
necessary or desirable. Particular attention is directed by the inspector
general to the quality of all loans in excess of 1 per cent of the bank's
paid-up capital, although the position of accounts under this limit is often
ascertained.

The examination also axtends to investments in securities and

to real estate, mortgages, and other assets of importance. The inspector
general is authorized to call upon the directors, officers, and auditors of
a bank for such information and explanations as he may require. Thus far
he has made all examinations personally,- having no staff of assistant examiners. Because of the elaborate system of internal inspections carried
out by the banks themselves and because of the shareholders' audit described
above, it has not been considered necessary to provide for the type of detailed examinations commonly made of banks in the United States. The




- kz inspector general is expected to keep closely enough in touch with the more
important transactions of the hanks to enahle him to detect the sort of mismanagement or fraud in the head office which nas been responsible for the
insolvencies and suspensions of the past. According to the testimony of well
qualified hank auditors and accountants, notably that of Mr. George Edwards,- '
any such practices as those causing the failure of the Home Bank would have
been disclosed to a competent banker by a brief examination of the head office. Further opinion to the same effect is contained in the testimony of
Mr. C. E. Meill, general manager of the Royal Bank of Canada, before the
Select Standing Committee on Banking and Commerce, in 192^, as follows:(2)
". • • I believe this, that any competent and experienced man can go into the
head office of any bank in Canada, and within a very short time, if he has
access to the figures, to the returns, and to the correspondence and auditors
of the bank, and also if qualified and is able to querfcion the different officers of the bank, I believe that within a very short time that officer can
determine absolutely whether that bank is solvent or not."
It is thus the theory of external supervision of banking in Canada
that the Minister of Finance will be forewarned of any condition of insecurity
in a bank's affairs in time to enable him to deal with the situation. There
is nothing in the Canadian banking law authorizing the Minister of Finance
to compel other banks to take over a weak institution, but in practice ne
seems to have considerable moral authority.

In the course of investigations

of the failure of theHotna Bank, Sir Thomas White, minister of Finance from
1911 until 1919. declared that if he had known the true condition of the

V1) Proceedings of the Select Standing Committee on Banking and Commerce,
192U, pp. 19, 2U, 26, 31, and U9.
(2) Ibid., p. 286.




-H9-

i n s t i t u t i o n he would have forced the other banks to take i t over.

Replying

to a question as to h i s authority he s t a t e d , "• . . the fact i s , when the
Minister t e l l s hanks to do things they do them, they c a n ' t afford not t o . " ' 1 '

(1) Hearings of Eoyal Commissions on Home Bank, p. 3&5c




CHAPTER III

THE TEST OF JJE POSTWAR AG-RI CULTURAL CRISES

It has been frequently asserted that an important cause of the
large number of bank suspensions occurring in the United States since 1920
was the sudden and drastic post-war decline in the value of farm land and
farm products, and the subsequent depression in agricultural values. 3!his
question will be the subject of consideration in another section of the
Committee's report.

It will be of interest here, however, to examine some-

what more fully than in the preceding chapter the contrast presented in the
matter of safety to depositors by the branch banking system of Canada, where
the course of inflation and subsequent deflation in agriculture has been
much the same as in the United States,
Both countries made strenuous efforts during the World War to increase their output of basic commodities, particularly of agricultural products.

There was a period of exceptional prosperity.

This was especially

true in the great grain growing areas of the Northwest in the United States
and the Prairie Provinces of Canada. In both countries a large part of the
increased agricultural activity was made possible by the expansion of bank
credit. The result was that with the advent of readjustment and deflation
in 1920, the banking systems of both countries began to be subjected to
tests of extreme severity, which have continued in varying degree to the
present time.




- 50-

- 51 -

Agricultural Expansion and Bank Credit
Available data regarding developments in the western agricultural
regions of Canada lack comprehensiveness in some respects, "but sufficient
information of a general nature has been obtained to show that developments
there during and after the war were of much the same character as in the
Northwestern States of this country. According to available information,
including the verbal statements of well known Canadians, the essential facts
of the rise of the farming industry in Western Canada may be summarized as
follows:
During a period of some ten or twelve years preceding the outbreak of the war there was a great influx into Canada of farmers from various
parts of the world to take up the free land available in Manitoba, Saskatchewan, and Alberta under the so-called "homestead" provisions of the law. As
farms were brought under cultivation and titles acquired by the homesteaders,
improvements, such as new buildings, machinery, and equipment, were added,
by means of long-term credit obtained from insurance companies, trust companies, loan companies, private individuals, and other agencies, through
mortgaging the land. The result was that a large percentage of the farms
were encumbered with mortgage indebtedness. After the war commenced,
and the increased demand for foodstuffs resulted in higher prices, many
farmers began to pay off their mortgages. But with the continued rise
in prices, and the continued demand for agricultural products, they soon
began to buy more land, sometimes from their neighbors, sometimes from the
Government, greatly increasing their mortgage indebtedness to pay for their




- 52 -

purchases.

In spite of the remaining free, though less desirable, acreage

available to homesteaders, land prices rose considerably.

The result was

that by the time deflation set in most of the farms operating in the Prairie
Provinces, which had increased considerably in acreage per unit, were more
heavily mortgaged than in 191^. A large part of the added indebtedness consisted of purchase money mortgages held by former owners of the land. Owing
to several crop failures and to world-wide agricultural conditions, there had
been little if any reduction in farm mortgage indebtedness by the beginning
of 1930.
Daring the period of high prices for agricultural products current
loans were readily obtained from the chartered banks and easily paid off,
despite the considerable carrying charges for invested capital. When deflation set in the farmers found themselves faced with exceedingly difficult
conditions and the banks with large amounts of slow or "frozenn paper in
their Prairie Province branches—a state of affairs which had not been completely remedied when the world-wide economic depression began in 1929*
Preliminary to an examination of the available statistical and
other evidence showing the similarity of agricultural developments in the
Prairie Provinces and the Northwestern States, one aspect of the above
account of conditions in Canada calls for special comment. This is the
matter of mortgage indebtedness.

Data are not available for accurate com-

parisons of such indebtedness in the two regions under consideration, but
it should be noted that the mortgages encumbering the farms in the Prairie
Provinces, particularly the purchase money mortgages, have not generally
been held by the banks.

Canadian banks, as pointed out in preceding chap-

ters, are forbidden by law to make loans secured by real estate, and mort-




- 53 -

gages can " e taken only as additional security for loans already made.
b
Tables 7 and S and Charts 2 and 3 show the fluctuations from year
to year in the values of land and field crops in the Prairie Provinces of
Canada and in four Northwestern States.

Table 7 - Indexes of Estimated Value of Farm Heal Estate per Acre in
Prairie Provinces and Four Northwestern States(l)
1915 » 100




Year
1915
1916
1917
1918
1919
1920
1921
1922
1923
192^
1925
1926
1927
1928
1929
1930

Prairie
Provinces
of Canada

h Northwestern

100
100
109
116
125

100
104
112
121
132
156
1U5
130
119
111
105
101
95
9^
93
91

13k

120
109
99
100
103
104
103
107

103
89

States of the
United States

(1) The Northwestern States include
Minnesota, North and South Dakota,
and Montana.
Sources: Prairie Provinces, The Canada
Year Book, 1931. P« 260; Northwestern
States, U. S. Dept. of Agriculture,
Circular No. 209, December, 1931: The
Farm Real Estate Situation, 1950-51.
pp. 8, 9* The published figures give
indexes for each State and each Province. In combining these indexes in the
above table they were weighted according
to the land area of the States and Provinces included.




54 -

CHART Z

ESTIMATED VALUE PER ACRE OF FARM REAL ESTATE
1915 °MOO

Estimated value per acre of farm real estate in the three
Canadian Prairie Provinces of Manitoba, Saskatchewan and
Alberta and in the four States of Minnesota, Forth Dakota,
South Dakota and Montana each year from 1915 to 1930, in
percentages of the 1915 figures

- 55 -

Table 8 - Indexes of Estimated Value of Principal Field Crops in
Prairie Provinces and Four Northwestern States (1)
1912-191* * 100

Year
1912
1913
I91U
1915
1916
1917
1918
1919
1920
1921
1922
1923
192U
1925
1926
1927
192S
1929
1930
1931

Prairie
Provinces
of Canada

4 Northwestern
States of the
United States

93
96
111
ISO
207
265

99
96
105
13S
142
219
288
225
141
95
145
13*
220
179
119
186
165
157
103
53

237

272
244

ikz

196
190
213

2kt

249
281
273
201
107

(l) The Northwestern States include Minnesota, North and South Dakota, and
Montana.
Sources: Prairie Provinces, The_ Canada Year
Book, 1916-1917, p. 196; 19~20, p. 214;
1926, p. 206; 1930, p. 210; 1931, p. 220.
Northwestern States, figures compiled on
comparable basis by the U. S. Department
of Agriculture, Bureau of Agricultural
Economics.

Commercial bank credit was widely extended to agriculture in the
Prairie Provinces in the period from 1915 to 1920, but exact figures to
measure the expansion are not available, since the Canadian banks do not
report their loans by geographic subdivisions.

It is possible, however, to

arrive at a general idea of the extent of credit operations by the use of
the reports of particular institutions. During the war and until the end







- 56 -

CHART 3

VALUE OF PRINCIPAL FIELD CROPS

Value of the principal field crops in the three Canadian
Prairie Provinces of Manitoba, Saskatchewan and Alberta
and in the four StateG of Minnesota, North Dakota, South
Dakota and Montana each year from 1912 to 1931, in percentages of the average for 1912-1914

- 57 -

of August, 1925, two "banks were operated mainly or exclusively in the three
Prairie Provinces. These were the Union Bank of Canada, (1) with its head
office in Winnipeg, and the Weyburn Security Bank, (2) W ith head office in
Weyburn and operating only in southern Saskatchewan.

The combined current

loans and discounts to the public (3) of these two institutions and the number
and location of their branches, together with the total current loans and
discounts to the public in Canada of all the banks, as of the end of June
of each year, are shown in Table 9 ancL Chart 4.
Table 9 - Branches and Current Loans of Canadian Chartered Banks

June
30

100
101
103
109
134
132
128
123
116
113
107

206
20S
212
224
277
272
263
25I+
23S
233
220

1915
1916
1917
191S
1919
1920
1921
1922
1923
1924
1925
1926
1927
1928
1929
1930
1931
7^^

All chartered banks
in Canada
Total current
loans

Union Bank and Weyburn Security Bank
Combined current
Combined branches
loans
(4) 1
In Prairie
Per
Provinces
Else- Total
Amount
Per
cent
where
Numof 1915
cent
ber
of 1915

1

1

125
113
110
121
128
l4l
133
132
125
121
115

1

$44,211,000
43,750,000
^8,736,000
54,46s,000
69,202,000
88,456,000
71,362,000
66,139,000.
60,372,000
58,577,000

331
321
322
31+5

405

ta3

396
386
363
354
335

1

100

$

759,93^,000

99

1

71+7,1+71,000

110
123
157
200
161
150
137
132
121

53,4oo,ooo

i

Per
cent
of 1915

Amount

839,356,000
897,226,000
1,01+3,713,000
1,365,151,000
1,256,61+3,000
1,117,81+5,000
1,065,855,000
986,366,000
895,592,000
931,549,000
1,027,187,000
1,184,924,000
1,319,840,000
1,306,665,000
1,127,038,000
J

100
98
110
118
137
180
165
147
140
130
118
123
135
156
174
172
148

_J

( + Branches of Union Bank of Canada as of December 31; branches of Weyburn
*/
Security Bank as of June 30.
(1) Merged with Royal Bank of Canada on August 31, 1925.
(2) Merged with Imperial Bank of Canada on May 1, 1931. Loans of Weyburn
Security Bank amounted to only 2 to 3 Ve? c e n t of combined total.
(3) Reported in Returns of the Chartered Banks as "Other current loans and
discounts in Canada." Does not include loans to Dominion and provincial
Governments.






- 58 -

CHART4

CURRENT LOANS AND DISCOUNTS OF CANADIAN BANKS
1915=100

Current loans and discounts of two Canadian chartered banks
operating mainly in the Prairie Provinces and of all chartered
banks in Canada each year from 1915 to 1931, in percentages
of the 1915 figures

_ 59 The current loans and discounts to the public of the two institutions operating mainly in the Prairie Provinces increased up to 1920 somewhat
more rapidly than those of all banks in Canada. At the same time the loans
and discounts of the two institutions increased faster than the number of
their Prairie Province branches. The other banks were represented by numerous branches in the Prairie Provinces^1' and they were all in keen competitior
for business.
The expansion in the number of branches prior to 1920 in the Prairie
Provinces as compared with the rest of Canada is shown in Table 10 and Chart 5
-

Table 10 - Number of Branches of the Chartered Banks of Canada
December 31
1915
1916
1917
191S
1919
1920
1921
1922
1923
192^
1925
1926
1927
192S
1929
1930
1931

In Prairie Provinces(2) In remainder of Canada(2)
,, ,
Per cent
Per cent
Number
N m b e r
of 1915
of 1915

863
860
911
1,067
1,311
1.36*
1,27*
1,18*
1,072
1,000

933
920
9*3
979
1,009

990
89U

100
100
106
12U
152

15s
ikB

137
12k

116
108
107
109
113
117
115
10*1

2,296
2,33S
2,395
2,373
3,026
3,312
3,3S5
3,267
3,155

3,o*o
2,907
2,850
2,927
2,987
3,060
3,093
3,076

( 2 ) From The Canada Year Book of various years.
are included.

100
102
10U
103
132
lkk

1*7
1*2
137
132
127
12U
127
130
133
135
13*
Subagencies

It will be observed that up to 1920 the total number of branches
increased faster in the Prairie Provinces than in the remainder of Canada.
Comparing now the chart of the increase in banking offices with that of
(l) All the Canadian banks were represented by branches in the Prairie Provinces during the period under consideration, except two institutions
known as French banks, Banque Rationale and Banque Provinciale du Canada,
the branches of which are confined mainly to the Province of Quebec.







- 6n -

CHART 5

NUMBER OF BRANCHES OF THE CHARTERED BANKS
1915 = 100

Number of branches of the chartered bank* of Oanada in tha
three Prairie Provinces and in the remainder of Canada «aoh
year from 1915 to 1931, inperoentage& of the 1918 figurai

- 61 the increase in loans and discounts, it appears that throughout Canada up to
the middle of 1920 the volume of loans increased faster than the number of
"branches of the banks. If this was also true in the Prairie Provinces for
all the hanks, as it was for the two whose operations were centered there, it
is another indication that the credit granted to agriculture in the years preceding the depression of 1920-1921 was somewhat greater in proportion to the
total volume outstanding than the advances to other lines of economic activity
Accurate comparisons can not he made between the expansion of commercial bank credit to agriculture in the Northwestern States and in the
Prairie Provinces of Canada. A general indication, however, may be obtained
from Table 11 and Chart 6 which show for each year from 1915 t o 1931 the number and the loans and discounts of State and national banks in four Northwestern States.




Table 11 - Number of Active State and National Banks in
Four Northwestern States(l) and Their
Loans and Discounts
June
30
1915
1916
1917
191S
1919
1920
1921
1922
1923
1924
1925
1926
1927
1928
1929
1930
1931

Loans and discounts
Amount
Per cent
(000 omitted)
of 1915
$

619,061
735,541
872,403

922,736
1,065,801
1,313,984
1,201,865

1,156,953
1,168,237
993,925
952,912

100
119
141
159
172
212
194
187
189
161
154
1%
130
129
130
120
110

Number
of
banks
2,853
3,001
3,181

3,322
3,384

3,521
3,437
3,369
2,897
2,783
2,576
2,337
2,224
2,091
1,93?
1,71s

Per cent
of 1915
100
105
112
116
119
124
122
121
118
102
98
90
82
78

885,092
804,083
801,171
73
805,861
68
742,300
60
681,800
(1) The Northwestern States include Ivlinnesota, North
and South Dakota, and Montana.
Sources: Reports of the Comptroller of the Currency
and reports of State banking departments.




- 62 -

CHART e

BANKS IN FOUR NORTHWESTERN STATES
1915-100

Number of national and State banks and t h e i r loans and d i s counts in the four S t a t e s , Minnesota, North Dakota, South
Dakota, and Montana each year from 1915 to 1931, in percentages of the 1915 figures

- S3-

Comparing this chart with the one showing loans and discounts of
the two Canadian banks operating mainly in the Prairie Provinces, it will
he observed that the increase up to 1920 in the four Northwestern States was
only slightly greater. After 1920, on the other hand, the loans outstanding
in the Prairie Provinces appear to have decreased much faster than in the
Northwestern States. Prom 1920 to 1926 the reduction in the number of banking offices, although not as great as the contraction in loans, was more
rapid in the Prairie Provinces than in the Northwestern States. After 1926
the number of offices in the Prairie Provinces increased slightly until the
end of 1929> but declined again in 193^ and 1931*

I n the four States the

decrease since 1920 has been continuous. The number of banking offices in
operation at the end of 1931 represents a decline from the 1920 maximum of
3 + per cent in the Prairie Provinces and 51 per cent in the Northwestern
^
States.
These variations in the number of banking of.'ices serving two
regions so similar in economic conditions illustrate one of the fundamental
differences between the banking systems concerned.

Both areas were apparent-

ly equipped with more banking offices than were needed.

In the Prairie Prov-

inces a substantial reduction was accomplished without any suspension of payments to depositors (except for the IS Prairie Province branches and 3 subagencies of the Home Bank, which suspended in 1923), the accounts of the
closed offices being merely transferred to neighboring branches of the same
or other banks.

In the four States, on the other hand, the reduction was

brought about largely by bank suspensions. Morsever, the suspensions have
continued irrespective of the needs of t e , c i a i unities concorned for banking
h . ori
service.




~ 6k ~

Banking facilities in the Prairie Provinces were admittedly overexpanded in the three years from 1917 to 1920. Even as late as 1923s after
a considerable reduction had taken place, the president of the Canadian
Bankers' Association testified "before a committee of the House of Commons
that " . . . out of the 1,219 "banks operating in Western Canada klj

are

operating under an actual loss, an operating loss."^'
Branches in Canada were closed or kept open on the basis of future
prospects and the general policies of the banks; losses on loans, as distinguished from operating losses, were not the determining factor.

Losses on

loans in the Prairie Provinces are known to have been substantial, although
no figures have been made public; no doubt, also, the amounts involved varied
widely among the branches.

Deflation and "Frozen" Loans
After 1920 a large proportion of the loans to agriculture in the
northwestern States had to be renewed and extended for several years. That
the same practice had to be resorted to on a large scale in the Prairie Provinces is evidenced by the testimony of witnesses heard in the course of
various investigations of agricultural credit conditions subsequently made.
At the instance of the provincial government of Alberta in 1922, Professor
D. A. McG-ibbon made an extensive study and report on conditions in the Province.

In the course of public hearings on July 17 of that year the branch

manager of the Union Bank at Foremost, Alberta, testified in part as
follows:(2)

(1) Proceedings of the Select Standing Committee on Banking and Commerce,
1923, p. 311.
(2) D. A. McG-ibbon, Report of the Commissioner on Banking and Credit with
Respect to the Industry of Agriculture in the Province of Alberta.
1922, p. 5.




- 65 r-

"Q.

What has "been the average length of time that a note
has actually run - could you say anything about that?

"A. At the present time I should judge the average of our
notes that have run in our office, probably would be
four years."
Referring to various allegations of curtailment of credit in
Alberta, Professor McG-ibbon -writes in part as follows: (1)
"With a view to forming an opinion in respect to the belief
that the banks had not been sufficiently generous to western
farmers since the fall in prices I have aggregated figures supplied to me by the individual banks covering current loans running for over one year, in 1916 and in 1921 for the branches of
the chartered banks in the province of Alberta. In 19l6, current
loans running for over one year totaled in round numbers seventeen million dollars. In 1921, this total had increased to over
fifty-two and a half million dollars. The significance of these
figures lies in the fact that they represent fairly accurately
the amount of carry-over from one year to another. The banks
were carrying over at the close of 1921 over three times as large
a sum as they were in 19l6
Speaking generally, I do not
consider the farmers in this province have a legitimate grievance
against the banks with respect to the degree they have been carried during the depression and drought of the last few years."
At the hearings in 1923 of the Select Standing Committee on Banking and Commerce of the House of Commons, a number of bankers gave evidence
bearing on the extension of credit to western agriculture. Among these was
Sir Frederick Williams-Taylor, general manager of the Bank of Montreal and
at that time president of the Canadian Bankers' Association, whose testimony
was in part as follows:(2)
"Q. And would you say that his (Professor McG-ibbon1 s) report
indicated that every legitimate credit requirement of the
province of Alberta had been met by the banks, or do you
disagree with his report?
"A. Well it is quite possible that there may be a branch of
a bank with a manager who has not extended to some farmer

(1) Ibid., pp. 25, 26.
(2)
Proceedings of the Select Standing Committee on Banking and Commerce,
1923, PP. 310 and 3*+^




- 66 -

or other, the full facilities. That is quite possible,
"but I do say this—with some hesitation—that I could a
tale unfold about the bank loans in .Alberta which would
show by the losses incurred by the banks, that they have
not merely extended facilities, but they have over extended facilities.
n

Q.

Is the Bank of Montreal at the present moment carrying
substantial amounts-—I do not want the figures mentioned—
of agricultural loans, and that their first maturity was
more than six months ago?

"A.

I am sorry to say we have loans, Mr, Chairman, that have
been running for one, two, three, four and five years, in
districts where the crops have been a failure, and where
we are still carrying the farmer in the hope that he will
eventually pull through with a good urop.

"Q. And those would run into quite substantial amounts?
"A. They would run I should say into millions, in our own case,
and I am perfectly sure that I am correct in stating that
every bank is in exactly the same position."
Before the same committee Sir Edmund Walker, president of the
Canadian Bank of Commerce, declared: (1)
" . . . You must remember that the overwhelming bulk of our
business is loaned for one year and paid off in the year, so
that you see the bottom. Almost the whole Western business
has not that quality at the present time; it is almost all
more or less frozen and dragging."

Diversification
The foregoing account of developments in the Prairie Provinces of
Canada gives some indication of the extent to which the banks operating there
expanded their loans to agriculture from 1915 to 1920. One of the principal
reasons why they could do this with less dire consequences than the unit banks
suffered in the United States, was the high degree of diversification for
their loans and investments obtained through their large resources and their




- 67"branches in other parts of the Dominion.

Difficult as was the situation

in the West, the hanking structure as a whole was ahle to withstand it.
The problems of small institutions under such conditions are well
illustrated in the experience of the Weyburn Security Bank. This was a comparatively small institution (although operating as a "branch system) doing
"business only in Saskatchewan, which was taken over in the spring of 1931
" y the Imperial Bank of Canada.
b

Because of the fact that the conditions

under which this "bank carried on its operations are similar to those prevailing for "banks operating in the agricultural regions of our own Northwest, it will he of advantage to examine its history in some detail.
A Local Canadian Bank. - The origins of the Weyburn Security Bank
go "back to 1902, when certain real estate dealers from the United States
started, as a partnership, a small private "bank and trading concern in southern Saskatchewan, known as the Weyburn Security Company.

In 1907 the direc-

tion of the enterprise was taken over by Mr. H. 0. Powell, who was later to
become general manager of the chartered bank. Mr. Powell had operated banks
in the agricultural districts of the United States for many years and had encouraged mixed farming in Wisconsin, Minnesota, and South Dakota. At Weyburn,
in a region where almost the only cash crop was grain, he urged the farmers of
the surrounding community to raise dairy cattle, hogs, and chickens, to grow
more green vegetables and the like, lending them money with which to get
started.
Both the Weyburn Security Company and the community prospered, and
in 1910 it was decided by the partners of the enterprise to apply to the
Dominion Government for a regular bank charter for the banking part of the
business.

The charter was granted, and in 1 9 H the Weyburn Security Bank,

with nine branches, was opened for business. Its subscribed capital was




- 6S $602,000, of which $301,300 was paid up. Prom June 3, 1911, until May 1, 1931,
when it was formally taken over "by the Imperial Bank of Canada, the institution was operated in all essential respects in the same manner as the other
chartered hanks of Canada, except that its deposit and loan "business was confined to a comparatively small area in the Province of Saskatchewan.
Table 12 - Weyburn Security Bank
Condensed Statements as of the End of the Year^/

ASSETS

(amounts in thousands of dollars )
1911 1 1915 i1916 1921

1926

1929

1930

Cash, notes, cheques on
and balances due from
other "banks

244 1.034 1^07

819 1,809 1,234

781

Dominion and provincial
Government and other
securities

28 1,209

294 1,265 1,228

69

Loans and discounts

693

897 1,149 2,121 2,554 2,895 2,100

Other assets

131

719

Total^ 2 )

264

350 1,032

797

7S1

1,068 2,17S 4,530 3,584 6,660 6,154 3,731

LIABILITIES
Capital paid u p
Rest or reserve fund

316

421

525

525

525

525

130

301

175

225

225

250

225

306

406

433

839

Notes in circulation

236

Deposits

50k 1,377 3,572 2,354 5,003 4,153 2,584

Other liabilities
Total(2)

29

6s

47

35

7*?4

18

1,070 2,17s 4,642 3,584 6,627 6,095 3,667

Dividend rate
Branches in operation (June 3 0 )

1+9

315

5%

5$

1$

5i

i4 1 19 ; 24
I

26

30

30

5$

9

(1) Figures condensed from Be turns of the Chartered Banks,.
(2) Canadian "bank returns are not made out in the form of true balance sheets.




- 69 -

At the time of amalgamation it was operating 30 "branches, the most distant
"being about 190 miles from the head office, although most of them were in
the towns and villages within forty or fifty miles of Weyburn.

The accom-

panying condensed statement (Table 12) of its affairs as of the end of
various years indicates the progress of the institution.
The following extracts from circular letter sent by the general
manager to his branch managers during the period of inflation and deflation
following the war indicate the precautions taken by the Weyburn Security
Bank during that period.
September 5» 1918
"We must not think too much of profits this year but keep
the Safety First idea in mind, and the only way to play the
safe game is to get our money while the farmer has some to pay
us. Speculation of every kind must be discouraged, and if a
man has no money to invest, he should not be encouraged to
borrow money for investment. The happy man, when the war is
over, will be the man who owns what property he has free of
encumbrance and on account of this is. in an independent condition. No matter what happens a man without debts and with
a reasonable amount of property which is productive will be
independent of after war conditions, to a large extent. The
farmer who has a half section paid for andstock and implements
enough to work it can always make a living, but the man with
a section or two heavily encumbered making a large property
statement out of equities, later on may be covered with judgments so deep that he will never get out. You are doing your
customer a favor to insist on his getting out of debt and keeping out of debt until after the re-adjustment."
January 16, 1919
"The slump in the price of hogs came quicker than we
anticipated and undoubtedly a good many buyers have lost a
lot of money on shipments made within the last few days.
"There is another line which is going to be hit soon and
that is the automobile business. Some companies are already
making cuts in prices, and one company is refunding a certain
amount of last year's purchase price on account of the fact
that the price was raised too high last year. . . .




- 70 -

"We are taking the stand that we will not finance anyautomobile business unless we know that it is going to be
handled along safe lines. We have decided not to advance
money to dealers to handle cars on time, and we wish all
automobile lines referred to Head Office before any promises
are made as to what the Bank will do."
October 2, 1919
"There is another thing to be taken into consideration
and that is - that the past year has been a year in which the
public as a rule have been inclined to over-expand, as a reaction from the curtailment of business which went on during
the War. People felt that the War was over, and so there was
no more necessity for holding business in check. The country
is in the same position as a man \vho has been sick and in the
hospital - the doctor's bills and hospital bills, together with
some of the medicine, all have to be paid for now, and while
the necessity for curtailment is not quite so apparent, still
it is just as real and business must be kept within bounds.
"There is bound to be a re-action later on when the institution which is not on more than simply good sound basis
will have hard sledding. The only way to do is to prepare before the pinch comes. This we intend to do. By taking care
of only the necessary business we will grow, stand well in the
community, and be in a position to take advantage of profits
later on, when some other institutions may be calling in loans
and driving business away. We have seen several such instances
in the past twelve years, and each time our Institution has
been in shape to take advantage of the good business offered
and take a further step forward due to conditions."
December 2, 1919
"The present is not the time to reach out for more investments but the time to protect what you have. Get into
shape so that no matter what happens you can hold what you
already have. Do not try to make any money. There are times
to make money and there are times to save what you have.
Generally the hardest job of all is to save what you have made."
October 27, 1921
"For years before the War, experience taught Bankers
that 10$ of a conservative valuation of a man's assets was
all that he could expect to repay out of a fair crop. If
you ?all analyze your borrowing accounts you will find that
some of them are double or more than double this percentage
of the customer's net worth. This means that we have slow




- 71 -

accounts to deal with in such cases and it will be impossible
for us to extend much added assistance to a customer in this
position. From three to six hundred dollars a year is about
what the ordinary half or three-quarter section farmer is able
to save for debt paying or other purposes in one year, with
prices ruling as they did before the War and it will take good
management to do this."
"I have written you fully in this way so that you will
know what to figure on when you send in an application for
credit. We have no intention of making donations through
credits if we can avoid it. We probably already have donated
quite a little hoping that something would turn up which would
help the customer out and let him pay us back, but we cannot
afford to do much of this class of work. . . . "
January 3, 1923.
"This good crop has made a wonderful change in the cash
balances of the Bank as a direct result of improvement in the
financial conditions of some of our customers, but there is a
lot of work to be done yet before we have the people with the
heavy loads up the hill."
The bank was able to come through the first post-war agricultural
depression in good condition, although its losses had been considerable.
Prom I92U until 1929 its operations were moderately profitable—until the
disastrous fall in agricultural incomes beginning in the latter year. The
management, meanwhile, was taking every possible precaution to meet the
difficult period ahead.

During the year I93O the bank had an aggregate of

approximately 4,000 borrowing accounts in its 30 branches, the average loan
being about $600.
And yet the Weyburn Security Bank's management, directors, and
shareholders, before the end of 193^* ^©1* impelled to sell the institution
to a larger bank, with an aggregation of branches spread widely over the
territory of the Dominion, because of doubt of profitable continuance in
operation as an independent institution.

The Minister of Finance gave his

preliminary approval and a contract of amalgamation with the Imperial Bank
of Canada was signed on January 20, 1931.




- 72 ~

The Weyburn Security Bank in 1930 was confronted with, a situation
too difficult to he coped with by a hank of its nature and size. The institution was unable to spread its risks widely enough to ensure profitable
continuance in operation as an independent bank during the period of stress
which began in the autumn of 1929-

Its loans were preponderantly farmers'

risks, a large portion of which became practically frozen under the agricultural conditions prevailing.




CHAPTER IV

ADEQUACY OF SERVICE

The question of the adequacy of "banking service relates to
the requirements of "both depositors and borrowers. From the depositors'
viewpoint, adequacy, aside from the px*oximity of banking offices, relates principally to the question of safety, which has been dealt with
in previous chapters. This chapter, therefore, is concerned largely
with the adequacy of banking services in Canada to the borrowing community.

Availability of Banking; Facilities
From an examination of the number and location of banking offices it appears that the various sections of the country are supplied
with the technical equipment for adequate service. Table 13 gives the
number of banking offices in the different Provinces at the end of the
year 1931* tiie population of each Province, and the population per banking office.

Similar figures are given for the United States as a whole

and for representative States.




- 73-

- 74-

Table 13 - Banking Offices and Population in Canada
and the United States
Number of
banking offices
Dec. M, 1 9 t t U )
Canada
Prince Edward Island
Nova Scotia
New Brunswick
Quebec
Ontario
Manitoba
Saskatchewan
Alberta
British Columbia
Yukon
Northwest Territory
United States
Massachusetts
New York
California
Wisconsin
Minnesota
North Dakota
South Dakota
Montana

3.970

28
13S
101
1,176
1,400

222
394
278
229

4

-

22,501
3I+5
1,52^

1,191
87 S

892
246
263
157

PopulationC 2 )

10,374,196
88,038
512,846
408,219

2,874,255
.3,431,683
700,139
921.785
731,605
694,263
4,230
7,133
122,775,046
4,249,6l4
12,588,066
5,677,251
2,939,006
2,563,953
680,845
692,849
537,606

Population
per banking office
2,613
3,144
3,716
4,042
2,444
2,451
3,154
2,340
2,632
3,032
1,058
-

5,457
12,318
8,260
4,767
3,3^7
2,874
2,768
2,634
3,424

' •• Number of banking offices in Canada from The Canada Year Book,
*'
1932, p. 776; in United States, from Federal Eeserve Board,
Division of Bank Operations. United States figures include
only national and State chartered banks and trust companies
and branches thereof.
(2) Population of Canada and the Provinces from the census of 1931»
The Canada Year Book, 1932, p. 91« United States figures are
from the census of 1930*
Not only is the population per banking office in Canada smaller
than in the United States, but with the approval of the head office each
branch is able to make a loan, if necessary or desirable, as large as the
most important branch of the entire bank; whereas the small unit banks of
the United States are narrowly limited in this respect.




- 75 -

Branch Banking and the Frontier. - In the development of the
great areas in the West of Canada, the banks have supplied service from
the earliest stages of community growth.

It lias "been the common practice

to open branches along with the establishment of railway communications,
and sometimes even in advance.

Indeed the competition of the different

hanks in opening branches has been severely criticized as excessive, tending to increase the cost of banking service.

Sometimes as a matter of

prestige, but more often in an attempt to establish offices in time to
enjoy the advantages of future growth, the banks have opened branches in
new communities long before the business available was sufficient to pay
expenses.

In 1913 the president of the Canadian Bank of Commerce, which

has had for many years a large number of brandies in the western agricultural districts, stated that usually the newly opened offices operated at
a loss for about three years, and that "It takes six or seven years at
least before we have made enough money to cover the losses made in the
first three years. . J'^1)

While this statement was meant to apply to

conditions before the war, a number of Canadian bankers have declared that
it still holds good. At all events, it appears that competition among the
banks has resulted in banking facilities being extended to every new community which might be expected to have any appreciable need for it—to say
nothing of the duplication of branches in the cities and towns far beyond
the reasonable requirements of the population.
An interesting commentary on the manner in which the branch banking system has cooperated in the opening up of Canada's great Western areas
—

•—

1

••*'—|lw

-

••••

-

i."

^ ' See testimony of Sir Edmund Walker, Proceedings of the Committee on
Banking and Commerce, 1913» P» ^85.




- 7D -

is contained in the following extract from a letter of Professor J.
Courtland Elliott of the University of Saskatchewan* (1)
"In considering the relation of the chartered hanks to the
economic development of the Dominion, I feel it is essential
that their influence he judged in terms of the tasks imposed
upon them in a country undergoing rapid expansion. Within the
limits of the existing legislation and in conformity with established banking practices * they have had to face the problems
of assuring safety to their note holders and depositors on the
one hand, to supply adequate funds to legitimate borrowers on
the other, and attractive earnings to the shareholders on 'any
other hand that way be left.'
"If you will picture the westward surge of population in
the early years of this century into the wheatlands of this
west, into the mining areas of northern Ontario and the Klondylce, you will realize the financial requirements imposed upon
the banks. The map of the north was rolled back and it was
essential that the banks be in the vanguard. To me this is
a thrilling and romantic part of Canadian banking and if you
were to travel through the pioneer settlements out here you
would realize, I am sure, how grateful we Canadians should
be for the initiative of Canadian bankers. They may have been
over-prudent in certain of their activities, but, subject to
my possible bias of judgment, it seems to me that the advantages of our system have outweighed the disadvantages, and I
feel that the structure of the banking system was well adapted
to the pioneering processes of economic development. The device of branch banking could diversify the risks, render reserves more efficient, and enable unprofitable operation in
new territory."

Credit in the Agricultural Provinces
It is commonly asserted by Canadian bankers that the supply of
bank credit extended to those areas in Canada which are in tue process of
economic development and expansion is considerably greater than to similar
communities in a country served by independent unit banks. In the usual
course of opening up new territories, loans of the branches at the beginning are said to be largely in excess of deposits. After the pioneer

(1) Letter to B. H. Beckhart, quoted in Willis and Beckhart, Foreign Banking Systems, 1929, footnote, pp. kS], 4gg,




- 77 -

period has passed, wealth begins to accumulate, and gradually the deposits
of the communities approach the volume of the loans. Testifying before
the Select Standing Committee on Banking and Commerce of the House of
Commons in 1923, Sir John Aird, general manager of the Canadian Bank of
Commerce, declared in reply to a question regarding western branches of
his bank.:

"In the last revision, ten years ago I happened to be going

through the mill then. The proportion of loans was about three to one
of deposits, the proportion of loans today to deposits is about two to one.
That indicates the West is growing richer and I think in anotner ten years
they will balance very well if we have good crops."
Complaints have nevertheless been frequently made that Western
Canada has not been adequately supplied with credit. As early as 1913>
in reply to such allegations, Sir Edmund s/alker, president of the Canadian
Bank of Commerce, testified as follows:^'

"At a hundred and twenty-two

branches of the Canadian Bank of Commerce, in the middle or prairie provinces,
we have farmers' deposits amounting to $2,869,926, a^d we have loans to
farmers amounting to $13,035,73^.

• • • five times as much as we receive

in the way of deposits from farmers at those western branches."
Various other statements have been made by bankers from time to
time concerning loans and deposits in the West. These have referred only
to the branches of certain banks and have not completely answered the
charges made with respect to the banks' general credit policy in the great
agricultural regions.

In the spring of 1931» however, the president of the

Canadian Bankers' Association, speaking in behalf of all the banks, gave

*•1' Proceedings of the Select Standing Committee on Banking and Commerce,
1923, P. 360.
{*' Proceedings pf the Committee on Banking and Commerce, 19131 P» ^Sk,




-78-

out a comprehensive official statement (April 17, 193^) which reads in
part as follows:




"As regards alleged withholding of credit, it is regrettable
that the names of these would-be borrowers have been withheld,
because there are no means open to the banks to ascertain to
what extent the allegations have a solid foundation and conse-.
quently no remedial action can be taken if there has been an
error in judgment on the part of any local manager. Instead of
visiting complaints with reprisal a& appears to be feared, the
banks will always welcome communications which would enable them
to rectify any such error or to explain fully the reasons for
their action in not entertaining credit applications.
"The banks desire to state that there has been no general
withholding of credit and that they are to-day, as in the past,
considering demands from their Western farmer clients and granting advances which appear justified—that is, advances which do
not place the principal of loans in jeopardy, upon T/hich there is
a fair prospect of receiving interest and which may be repaid
within a reasonable time. Banks do not in the usual course compile statistics regarding particular classes of business outside
of the requirements of bank returns to the Government. But one
bank, very strongly represented by branches in each of the Prairie
Provinces has, for its own information, during the past two years
carefully ascertained in all its branches in this area the volume
of loans to farmers. At the end of December, 1930, the loans of
this bank to farmers exceeded the loans to farmers at the same
date in 1929 by l6^J&. If a like detailed examination were made
in the branches of all the banks, the combined result would probably not differ materially from the foregoing. And this, too,
notwithstanding the fact that the prices of commodities and the
value of real estate show a substantial shrinkage.
"The full amount of all deposits originating in the Prairie
Provinces is not equal to the loans made to the banks' customers
in those provinces, and in addition there are large amounts represented by cash assets, municipal and other local securities and
bank premises, all necessary and incidental to the carrying on of
the business of the banks in the area0
"Some of the criticism of the banks is based on a misconception of their functions. Many critics appear to believe that
these financial institutions should enter into a form of partnership
with their borrowers, acting as 'silent partners' and providing funds
at low rates of interest and for indefinite periods. The banks
are debarred from performing this function by the very nature of
1
*r business which consists in the loaning of deposits, entrusted
' j their care, payable on demand. Moreover the Bank Act, under
"

- 73 -

which they operate, specifically limits the lending powers of the
hanks with the very plain objective of preventing them from locking up their funds. There are very definite limits "beyond which
no hanker, conscious of his responsibilities to his depositors
and shareholders, should venture. It cannot he repeated too
often or he too strongly emphasized that the deposits in the
hands of the banks are not public funds. They belong to hundreds
of thousands of depositors throughout the Dominion. And they are
not the savings of wealthy people alone. The savings deposits in
the banks which form the bulk of the loanable funds are the savings of that portion of the general public who put by a part of
their earnings against a time of need and select the banks as
the safest and most convenient depository; in other words, they
are the funds of the friends and neighbors of the people who do
most of the borrowing. These depositors are entitled to assurance that their savings will be so cared for that they will be
available when wanted."

"No other institutions are more vitally or sympathetically
interested in the progress of agriculture in the Prairie Provinces than are the chartered banks of Canada. As evidence of
this practical goodwill the Canadian banks have all promptly
agreed to contribute to the share capital of the Dominion Agricultural Credit Company, Limited, now being organized on the
initiative of Mr. E. W. Beatty, Chairman and President of the
Canadian Pacific Kailway Company. The Canadian banks believe
that, even if diversified farming cannot be developed with an
equal measure of success in all sections of the Prairie Provinces, it should be of great assistance to thousands of farmers
by at least contributing directly to the maintenance of their
own households. The welfare of the banks is dependent upon the
welfare of their customers, and it will in the future, as in the
past, be the earnest desir,-e of the banks to serve this great
farming community with such credit facilities as can be afforded
in accordance with sound banking principles."
The above statement does much to clarify the controversy over
the plentifulness of credit extended to agriculture and the movement of
funds from small communities to large centers. Loans to farmers by one
large bank are declared to have been l6^ per cent greater at the end of
1930 than at the end of 1929> .and the association assumes that the combined result of all the banks would not differ materially from this. It




- SO -

should be remembered in this connection, however, that generally farmers
are expected to pay off most of their loans "before the end of each year.
Doubtless they were as a class in a better position to do this in 1929
than in 1930?

s0

that the amounts outstanding at the end of the latter

year do not necessarily mean that they had received more ample credit accommodation in 1930 than in 1929* but perhaps only that before the end of
1930 they were obliged to demand a longer time allowance for the repayment
of a greater part of their loans. Even so, however, the increased amounts
outstanding at the end of 1930 could only mean either that more credit had
been extended, or that a larger proportion of the loans to farmers were
being carried beyond the repayment period usually considered permissible
in strict commercial banking practice.
The Bankers' Association asserts that the aggregate loans and discounts of the banks to customers in the Prairie Provinces are greater than
the aggregate deposits originating in those Provinces. Presumably this is
meant to describe a condition prevailing from year to year.

It would seem

by implication, moreover, to be in harmony with various statements of bankers
as to the manner in which the financial requirements of the expanding and
developing regions of the West have been met.
for the whole of Canada, current loans and discounts to the public
by all banks have varied since 1920 from 50 to 70 per cent of the total deposits of the public. During the five years 1927-1931 they averaged 57 per
cent.

If loans and discounts in the Prairie Provinces are actually greater

than the deposits originating there, those Provinces receive much more
credit in relation to their deposits than the rest of Canada.




-gi-

lt is of interest in this connection to note the situation of
the State and national banks in Minnesot'3 "Torth and South Dakota, and
Montana, just across the "border from the ti-airie Provinces of Canada. On
the basis of reports of the Comptroller of the Currency the aggregate loans
and discounts in these four States averaged less than two-thirds of deposits
during the five years 1927-1531*
While the Prairie Provinces of Canada and the four Northwestern
States referred to are predominantly agricultural, there are differences
in population, in the stages of development, in the savings of the people,
in the supply of capital funds, etc., which make it impossible to draw
definite conclusions as to the adequacy of credit granted in the two regions.
The information made public does, however,

indicate the extent to which

the more highly developed Eastern sections of Canada supply the credit
facilities for the less developed agricultural regions of Western Canada.
The evidence tends to snow that the commercial banking resources of that
country are distributed for lending and investment, in so far as safety
will permit, where credit is .most needed.
The Term of Farmers' Loans. - A common source of difficulty in
the operation of commercial banks in agricultural communities, not only
in Canada but also in the United States, is the length of time for which
farmers usually require bank credit.

In Canada the banks generally ad-

here, at least technically, to strict commercial banking practice, making
loans to farmers of three or four months' maturity, even though it is known
in advance 'that the notes will have to be renewed at least once, if not
still further extended.

Professor McGibbon, whose investigations in the

Province of Alberta in 1922 were referred to in the preceding chapter, has




- 82 -

commented on this practice as follows:'1'
"At many points in the province objection was taken to the
period for which a farmer may obtaiu a loan. It was shown that
the usual period a bank will grant a loan to a farmer is three
or four months, whereas the farmer's operations commonly extend
from six to eight months. He requires a loan granted in April
that will mature in October, November or December. He can only
obtain one to mature in July or August. The farmer's complaint
is that the banker knows when he makes the loan in April to run
until July or August that it cannot be paid at its due date.
Yet bankers require the farmers to meet those conditions. When
the note is renewed interest is compounded and interest charged
upon the discount. Other conditions may be imposed. What the
farmer wants is a loan made on the basis of a straight note for
the whole period of his crop operations, that is, to the date
when he will be in a position to settle up„ . . .
"There is practical unanimity of opinion among the bank
superintendents examined that the chief reason the bank insists, in most cases, in loaning only for three or four months'
periods is in the opportunity it gives the banker to review the
farmer's condition and to require additional security if it is
thought necessary,,
" . . . when the farmer at renewal is called upon to give
security he is at a disadvantage, he already owes the money and
cannot withdraw or curtail the season's operations."

Interest Bates
There are no usury laws in Canada. The Bank Act provides, however, that the maximum interest rate which can be collected by legal procedure, where none is stipulated, is 7 P e ^ cent per annum. The common practice in making loans, as in many localities in the United States, is to
discount the borrower's note, thus imposing a slightly greater charge than
the nominal rate. (2)

^ ' D. A. McGibbon, op., c i t . . , pp. 22-2U.
\2) The borrower, receiving l e s s than the p r i n c i p a l amount of h i s loan,
pays i n t e r e s t in advance on t h i s p r i n c i p a l amount for the f u l l term
of h i s n o t e . Thus a borrower discounting a note for $1,000 a t 7 per
cent per annum for 3 months would a c t u a l l y receive but $9S2.50. His
i n t e r e s t payment of $17.50 would amount to 7*12 per cent per annum on
the amount received.




- 83-

Interest rates among the various Provinces of Canada tend to be
more nearly uniform than in the different regions of the United States, aLthough in general the rates in the agricultural West df both countries are
higher than in the industrial East.'1'

Canadian rates remain approximately

uniform from year to year, without relation to money rates in financial
centers or the rate charged " y the Dominion Treasury on advances to the
b
hanks*

Interest paid on deposits is at a uniform rate throughout the

country and the rates charged on loans by different banks in any given region are generally the same. The result is that competition among the different institutions must consist essentially of services offered.

Inasmuch

as all the banks are equipped to render a wide variety of banking services,
effective competition must be confined mainly to the credit accommodation
extended.

In other words, apart from the business obtained through personal

relationships of the local managers, competition can exist only in the quality
of loans made and the amount of credit extended and promised.

This state of

affairs, to be sure, is not essentially different from that which exists in a
community of the United States outside the larger cities, where there is
more than one unit bank, since interest rates are generally uniform among
different banks. Thus in both countries the competitive incentives are
in the last analysis approximately the same,
Tor many years, both before and since the war, rates to borrowers
in the large cities and industrial centers of Eastern Canada have usually
varied from 6 to 7 per cent per annum, depending upon the size and credit

v 1 ) Except as otherwise noted, general observations regarding interest rates
are besed on verbal staternents of a number of Canadian bankers, checked
and verified one against another.




-

Zk-

standing of the customer; whereas in the agricultural West of Canada outside the larger centers they have been generally, although not always, in
excess of 7 per cent, the prevailing rate for the great majority of farmer
"borrowers "being 8 per cent. At the hearings of the Select Standing Committee
on Banking and Commerce of the House of Commons in 1923» certain members
from western constituencies cited instances of charges of 10 per cent or
higher. (1) The allegation that such rates had "been collected, in isolated
cases and for special reasons, was not denied " y any "banker; " u "before the
b
bt
same committee on the same day Sir John Aird, general manager of the Canadian
Bank of Commerce, testified in reply to the demand of a member to know
whether "the Western farmer is up against eight, ten and twelve per cent
(o)

for a year," as follows:s '
"He is not. Let me correct you; the Western farmer is
not up against nine and ten per cent. The percentage of money
that is loaned out at that rate is an infinitesimal' fraction.
We have lots of money in the tVest; in Manitoba for the giltedged farmer at 6, 7» 7 - and 8 per cent, and the prevailing
§
rate for 95 per cent of the loans in our banks is 8 per cent
n
• . .

As in the matter of the plentifulness of credit supplied, the
criticism of Canadian banks on the score of interest charges emanates
mainly from the agricultural West. In reply to complaints during the depression beginning in 1929, the Canadian Bankers' Association issued a
statement (April 17, 1931) reading in part as follows:
"As regards the rates of interest, a great deal of misconception is apt to result from vague statements. Throughout the
Prairie Provinces,76^ of the loans by the banks bear a rate of
7$ or under,(3) and 20$ of the loans from ~fp to 8$. In order
to appreciate the conditions under which the banks are operating
(1) Proceedings of the Select Standing Committee on Banking and Commerce,
1923, PP. 333 and 361.
(2) IMd., p. 361.
(3) This lower average rate is no doubt due to the large proportion of
Prairie Province loans to the wheat pools at 6 per cent.




-35-

in the Prairie Provinces, it is necessary to consider that
farmers' "borrowings represent numerous small amounts, and it
it well known that the handling of a large number of small
items in all lines of business is more costly than handling
large units. There are many points in Western Canada where
the volume of "business available is insufficient to pay expenses under present conditions and it would seem inevitable
that a lowering of rates must result in a curtailment of "banking service and facilities in such localities.
"In the United States, interest rates of the Federal
Reserve banks are not the same throughout the country. The
interest rate charged to customers in recent months in Helena,
the capital of Montana, the State adjacent to Alberta, by
members of the Federal Reserve System, on the security of
prime commercial paper and even on loans secured by warehouse
receipts, has been 8$. Recent enquiries in Montana, where
conditions are comparable to those in the Southern part of
Alberta, reveal the fact that in the best banks farmers pay
Zft to 10^ and that the bulk of the loans for $500 and under
is made at the latter rate."
The substance of the first paragraph of the above statement of
the Canadian Bankers' Association is borne out in a general way by the
data made available to the Federal Reserve Committee on Branch, Group, and
Chain Banking by five different Canadian banks for 20 of their small Prairie
Province branches. The average discount rate to all borrowers from those
branches in 1930> as computed from the loans and discounts outstanding and
the gross earnings from interest on loans and discounts, was about 7»3 P e r
cent.^ ' This figure is somewhat lower than the 8 per cent commonly reported to be the prevailing rate to farmer borrowers in the West and is
doubtless due to lower rates for other types of loans, such as those to
school districts, municipalities, etc.

Inasmuch as the brancnes in question

are all small offices, and rates on loans to large borrowers in the principal towns of the Prairie Provinces are generally lower than in rural communities, the average for all Prairie Province loans would naturally be

\1) Only one bank reported quarterly averages of loans and discounts outstanding while the others reported merely the amounts outstanding at
the end of the business year.




- 36 -

somewhat lower. A very considerable percentage of the total loans in the
Prairie Provinces in 1931» f° r example, was to the wheat pools, at the rate
of 6 per cent per annum.'•*•'
Precise data are- not available for a general comparison of interest charges of the Canadian branch banking system as a whole with the
rates of the unit system of the United States. From the meager information at hand, it appears that lending rates are generally lower in the
agricultural West of Canada than in some of our Western States. As for
the industrial East of both countries, interest charges are known to be
somewhat more variable in the United States, and appear to be on the whole
somewhat lower. The common rate for small borrowers in most Northeastern
States remains uniform at 6 per cent, as compared with 7 per cent in Eastern
Canada. In some instances, however, the difference may be counterbalanced
by the fact that Canadian banks do not generally require their borrowers
to leave a compensating balance on deposit, as do many banks in the United
States, particularly in the larger centers.
The general manager of the Canadian Bank of Commerce in his recent
annual statement to the stockholders of that institution referred to interest
(2)

rates in the Western Provinces as follows:N '
"The rates of interest charged in our Western provinces
have met with frequent criticism. In answer, I point to the
fact that the profit on our loans to fanners in the West is
now, and has been in many former years, insufficient to meet
the costs of the service we have provided, and the losses on
loans which, because of extreme weather hazards, lack of diversified agriculture and constantly changing market conditions, are much higher than in the East."

\ 1) Verbal statements of wheat pool secretaries, confirmed by supervisors of
western branches of various banks.
(2) American Banker, January 13, 1933• P. 2.




" 27 -

The local Manager
Since all the business of the Canadian tanks is done in the first
instance at the "branches, discussion of the quality of service rendered by
the branch system centers mainly about the local manager. The principal
elements of criticism may be epitomized in the allegation that he tends to
become a highly trained automaton, a rule-of-thumb banker, with dictatorial
power to refuse credit accommodation and very little authority to grant it.
A further criticism is that managers are too frequently shifted from one
branch to another, often leaving a community before, or soon after, becoming
personally familiar with its banking needs.
It is true that the more competent managers are generally shifted
from the smaller branches to the larger ones as the more important positions
become available.

If they are possessed of exceptional ability, they will

look forward to early promotion, which may result in taking them away from
branches before they acquire a genuine understanding of the needs and
economic possibilities of their communities. On the other hand, if they are
of limited ability, they may remain indefinitely; but in neither case is the
smaller community likely to be provided directly with service by bankers
possessed of long experience and endowed with exceptional capacity.
Branch managers are nevertheless

under the spur of their district

superintendents, who expect them to obtain at least the bank's share of business in the community.

If the inclination of the manager is that of over-

conservatism, he is likely to find himself ultimately in a branch where
there is little demand for progressiveness.

If, however, he is inclined

to extend credits unwisely, the rein of the superintendent is likely to
be tightened.




- gg -

If a prospective "borrower applies for a loan above the maximum
wiiich the local manager can extend on his own responsibility, the manager
may take the matter under advisement with his superiors, or he may refuse
the accommodation outright, thus putting' an end to the proposed transaction;

In the former case he must submit the application with his reasons

for its approval to the head office. Only a relatively small proportion
of the loans applied for at a given "branch, however, are above the discretionary limit of the local manager, The few that must be authorized
by higher authority are usually referred, not directly to Montreal or
Toronto, but to a district superintendent located in the principal city
or town, of the Province,,
The small borrower starting in business may have to submit to a
more searching inquiry into the probability of success of his venture than
he does when he applies to an independent banker, who presumably may be
more familiar with the character of the applicant.

Commenting on this

phase of branch operation, one Canadian banker made the observation that
the prospective beginner of a new enterprise is likely to have the choice
of applying to the branches of several banks in or near his community, which
are in keen competition for desirable new accounts.

If he fails to obtain

accommodation from any local manager, the banker continued, there is nothing
to prevent him from applying directly to one or all of the district superintendents in his Province, where he would be at once in contact with banking ability of presumably much wider scope. If he is not possessed of
enough initiative and tenacity of purpose to do this, the banker remarked,
he would not be likely to start a new enterprise of very much value, either
to himself or to his community.




- 83 -

Apart from promotions or demotions, local managers are changed
from time to time by some of the "banks as a matter of policy.

One general

manager has declared that on principle his "bank endeavors to shift its
branch managers every two or three years. However, each branch is required
to keep written records of the credit information relevant to each customer,
and in addition, when the manager is moved away, the other members of the
staff usually remain.

In other words, the replacement of a local manager

does not completely interrupt personal relations between the branch and its
customers. Another object sometimes present in shifting managers is to
bring the loans of a branch under the review of a new manager. The theory
is that a manager who has not been responsible for making undesirable loans
is more likely to pursue a strong policy of readjustment than the manager
who has made those loans.
A number of the banks have furnished statements of the length of
time the managers in charge of their branches in various regions in the
spring of 1931 bad occupied the position.

One institution, which appears

to be in this respect typical of the larger banks, reports as follows for
56 of its branches in one of the Prairie P?^ovinces:




Tenure of Office of Branch Managers
in Western Canada
Under 1 y e a r
From 1 t o 2 y e a r s
» 2 » 3
»

9
9
11

1 ij.
1

1
1

5

1 4
1

1 5
1

1
1

1

I!

5

II g

II

3

n

g

1 j
1

1
1

3

1
1
1
1

7
g

1 g
1
1110

ti
1
1

1
1
+

1
1

-1

Over 10 y e a r s

10

- 90 As a rule the local managers in the older Eastern Provinces remain in their position soraewnat longer than those in the west. Of twentyseven branches of one hank whicn were chosen at random in Ontario, Quebec,
Nova Scotia, and New Brunswick, the tenure of office of the managers was
reported as follows:

Tenure of Office of Branch Managers
in Eastern Canada
Under 1 y e a r
From 1 to 2 y e a r s
ir

2

«
it

3
k.
5

"
n

ii

3
ll

«

5

" 6

"

II

6
y

it
i.

u
it

II

n

II

y
1 0

Over 10 y e a r s

II

1
1

3
3
2
4
J-

5
7

Canadian banking authorities point out that there is something to
be said on both sides of the question of periodical changes of local management. They generally admit that a banker permanently located in a given
community is likely, other things being equal, to give greater weight to
personal considerations and local sentiment in the granting of credit than
would a branch bank manager in temporary residence . On the other hand, they
point out that sound banking must in the nature of things be conducted on
strictly business principles, independently of personal relationships and
local sentiment.

The Canadian branch system, they assert, tends to ensure

banking along sound lines, while at tne same time the desire of the local
manager to make a good showing with the profit and loss account of his
branch is likely to cause him to extend credit as liberally as safety will
permit.




Branch Banking in the Economic Development of Canada
Various commentators have attempted from time to time to assign

r 91 responsibility to the Canadian branch banking system, either for the rapid
economic growth of Canada, or for the economic backwardness of the Dominion
in comparison with the United States.

It is commonly asserted by defenders

of the unit banking system, for example, that Canada lags far behind the
United States in economic expansion because of lack of aid and encouragement
to new enterprises on the part of branch managers.'•I' The fact is that
Canada—with a climate on the whole less temperate than that of the State of
Maine, and with navigation closed at her principal ports from 1'ovember to
May—has had in the past thirty years a substantial economic growth.

So, of

course, has the United States. The following figures will serve to illustrate
the development of both countries:
Table l4 - Selected Data Showing Economic Development of Canada and the United States
Canada(2)
Per cent
increase

Uni.ted S t a t e s (3)
Per cent
1900
1928
increase

1901
Population
Commercial banking
a s s e t s i n thousands
of d o l l a r s
Gross v a l u e of manuf a c t u r e s , per c a p i t a
Gross v a l u e of a g r i cultural production,
per capita.
Foreign trade (imports
plus e x p o r t s ) , per
capita
Steam r a i l r o a d p e r
1,000 i n h a b i t a n t s ,
miles
Surfaced r o a d s p e r
1,000 i n h a b i t a n t s ,
miles
R e g i s t r a t i o n of motor
v e h i c l e s p e r 1,000
inhabitants
E l e c t r i c i t y generated
i n P . U. p l a n t s ,
k.w.h. per c a p i t a

1929

5.371,300

9,796,800

82

76,303,000 119.79S.000

57

$53i»S29 $3,528,468

563

$8,319,079 $61,392,160

638

$90 M

$4i5

361

$152(5)

$531(6)

250

$68

$166

144

$63(5)

$142(7)

125

$69

$268

238

$19

$81

326

3.3s

4.23

25

2.55

2.08

18 (decrease)

(8)

7.36

(8)

5.23

(8)

122

(*)

205

_
(«)
1.833
(2) Figures compiled from The Canada Year Eooks of various years,
(3) Figures compiled from Statistical Abstracts of the U. £ . of
!
various years.
( 0 Year 1900.
*

(g)

735

(ij) year 1899
(6) Year 1927.
(J,) Year 1§26.
(S) Data for early
period not
available.

(1) E.g.. M. P. Beebe, president, Bank of Ipswich, South Dakota,
American Bankers Association Journal, October, 1929, p. 35S.




M

- 92 -

It is possible to argue that each country has progressed either
because of, or in spite of, its banking system. But there are ample reasons
to believe that the development of "both has been due mainly to other causes.
The most important of these causes is the natural wealth of the vast territories of the two countries, in conjunction with the industry, the energy,
and the initiative of their respective populations.




CHAPTER V

BANKING CONCENTRATION IN CANADA

One of the most persistent controversies concerning the Canadian
banking system is whether it constitutes a monopoly or "money trust."
Perhaps the difficulty lies in the vagueness of the terms used.

No attempt

will he made here to state conclusions, but only to set forth the facts and
tendencies of banking concentration in Canada, to examine the effectiveness
of the competition existing among banks, and finally to present certain
representative opinions as to whether or not a banking monopoly does in
fact exist.

Tendencies Towards Concentration
At the beginning of the present century there were thirty-six
chartered banks in Canada, with total resources amounting to about
$460,000,000.

The largest had resources of about $93,000,000 and the

smallest, less than $600,000. The resources of the ten largest amounted
to approximately $330,000,000 or over 70 per cent of the total banking
assets of the country. At the end of 1931> exclusive of Barclays Bank
(Canada) with resources of about $5,000,000, there were only nine banks,
with total assets of approximately $3,000,000,000. Each of the two largest
had resources of over $750,000,000 and the smallest, about $53,000,000.
Total assets of the four largest amounted to about $2,400,000,000 or 80
per cent of the total for the country.

The largest bank had about 26 per

cent of the total banking resources of the country.




-93 -

-9*Of the thirty-six banks existing in 1900, four have disappeared
through failure, one through liquidation with open doors, and twenty-two
through amalgamation with other hanks. Since 1900 thirteen new ones have
been started.

Of these, all except Barclays Bank (Canada), which was

organized in 1929* have disappeared—three through failure, one through
liquidation with open doors, and eight through amalgamation. Altogether
since 1900 thirty-nine hanks in Canada have gone out of business, seven
through failure, two through liquidation with open doors, and thirty through
amalgamation,
A list of the banks in operation on December 31» 1931* showing
their resources and growth by absorption of the assets of disappearing institutions, is given in Table 15.
Table 15 - Growth of Chartered Banks by Mergers^-*-)
Bank

Date of
charter

Resources
July 31, 1900

Bank of Montreal
Bank of Hova Scotia
Bank of Toronto
Banque Provinciale du Canada
Canadian Bank of Commerce
Royal Bank of Canada
Dominion Bank
Banque Canadienne Nationale
Imperial Bank of Canada
Barclays Bank (Canada)

1S17
183 2
1856
1900
1867
1869
1871
I860
1875
1929

$93,158,000
20,561,000
19,^92,000
2,160,000
47,546,000
18,337,000
21,381,000
9,670,000
20,279,000

Resources
Dec. 31, 1931

Resources
absorbed
since 1900

$761,157,000 $352,459,000
90,792,000
262,732,000
120,792,000
52,796,000
592,513,000 223,814,000
782,584,000 255,617,000
132,875,000
49,871,000
150,206,000
136,918,000
3,938,000
5,101,000

(1) Sources: Returns of the Chartered Banks; and Willis and Beckhart, Foreign
Banking Systems, p. 330«
It will be observed that with the exception of Barclay Bank (Canada) and
the Banque Provinciale du Canada, chartered in 1929 and 1900, respectively, every
chartered bank operating in Canada at the end of 1931 had been in existence




- 95 -

since 1875 o r longer. Two have changed their names—the Merchants' Bank of
Halifax to the Royal Bank of Canada in 3901, and the Banque d'Hochelaga to
Banque Canadienne Rationale in 192^.
The mergers have occurred at the average rate of nearly one a
year, the last one having taken place on May 1, 1931*

Thus, gradually all

the smaller hanks and many larger ones have ceased to exist, leaving the
commercial hanking structure of Canada in the hands of a few comparatively
large institutions.
Under the Bank Act, (1) the approval of the Governor in Council,
based on the consent of the Minister of Finance and the recommendation of
the Treasury Board, is necessary before any bank amalgamation can take
place, and in theory at least, these agencies of the Government must be
convinced that a merger is actually in the public interest before it is
approved.

It is possible since about 1910 to discern some indications of

a general policy, somewhat liberally applied, to the effect that mergers
shall be permitted only to prevent danger of insolvency.

Several banks

have been taken over, however, while still unquestionably solvent, although it has been claimed that their general condition and prospects were
such as to cause doubt that profitable operations could be continued.

In

other cases the fact that the institution had ceased to grow, or that its
earnings had decreased substantially, has been deemed sufficient to justify
its being taken over. As a consequence of these incentives to amalgamation,
most of the mergers of the past 15 or 20 years have been arranged at the
request of the disappearing institution, rather than upon the initiative of
the absorbing bank.

(1) The Bonk Act, 1923, Sees. 99-111.




- 96 -

A more clearly defined policy of the Government has "been evidenced
in recent years in the matter of maintaining a sort of rough- equilibrium in
the hanking organization, particularly with respect to the distribution of
"branches. (1) Generally, the mergers permitted have tended to extend the
geographical field of the purchasing bankss operations, rather than to have
it acquire offices in regions where it is already strongly represented, so
that competition among the "branches of different hanks is maintained. No
mergers have taken place of any considerable proportion of the whole number
of branches of all the banks operating in a given region, and in very few
cases has the total number of branches been decreased.

It should be pointed

out, however, that with the present banking organization of the country it
will be exceedingly difficult in the future to effect any merger which will
not run counter to this policy.
According to law, the principal specific requirement for receiving
a charter to start a new bank is the raising of $500,000 of subscribed capital, of which $250,000 must be paid up in cash before the institution can
commence business.

In practice, recommendations regarding the application

for a charter are made to the Parliament by the Minister of Finance, who
usually consults with the Canadian Bankers' Association before coming to a
decision. Since 1910 seven new charters have been granted, but only three^2)
banks have been opened.

The others did not raise the required capital within

the period of one year granted for this purpose.

In most cases the time was

extended for another year, but even with this allowance the capital was not

(1) C. A. Curtis, The Canadian Banking System. 1910-1925. pp. l62, 163. A
doctoral thesis on file in the University of Chicago Library.
(2) Ibid., pp. 151-153.




- 97 -

raised.'*'

It has often "been charged that the influence of the "bankers and

their association has "been used to prevei^ the opening of new institutions.
The "bankers on the other hand claim that they have recommended charters even
when doubtful that the new institution could survive.

Cases are cited to

prove their point, of the unused charters, as well as of the "banks which
have "been opened and later disappeared through failure or were obliged to
merge with stronger institutions.

Is Effective Competition Maintained?
That the existing Canadian "banks are in fact separate and distinct
institutions, not controlled " y common share ownership or interlocking direcb
torates, is evidenced " y the following extracts from a letter from the Inb
spector General of Banks dated January 26, 1932.




"With regard to the general question of monopolistic
possibilities through share ownership, I have no hesitation
in expressing the emphatic opinion that no situation of this
kind exists. The shares of the chartered "banks generally
have a wide distribution and I know of no holder or group
of holders in a position to exercise control in the manner
suggested. Incidentally, it might also be mentioned that
the director of any one bank does not in practice act as
the director of another bank. The by-laws of some of the
banks specifically prevent such a possibility.
". . . In the very nature of things, trust companies hold
from time to time blocks of shares as executors of estates,
but in addition to such holdings accounts are sometimes carried 'in trust' without the trust being specified, or are
designated by a number or some other distinguishing mark.
Personally I am satisfied that trust companies are never
shareholders in their own right to any substantial extent;
in fact I think it is often the case that they are not the
actual owners of any bank shares whatever."
As an official of the Ministry of Finance, the Inspector G-eneral

_ gg -

of Banks has access to the annual reports containing the names and the
amounts held " y all shareholders of the vj^..'ks.
b
Although the "banks are clearly not under ccmtLon ownership or control, it will be of interest to examine the evidence of effective competition among them.
Customers' Rates. - As pointed out in preceding chapters, all
Canadian hanks pay the same rate of interest on time deposits, a custom
admitted " y hankers to he the result of agreement. (1/
b

Interest rates to

borrowers are usually the same for all banks in a given region, but the
Canadian Bankers1 Association has specifically denied the existence of any
general agreement in the matter.

Before the Select Standing Committee on

Banking and Commerce of the House of Commons, the vice-president of the
association testified as follows:^'
"Q.
"A.

What about the rates to be charged to borrowers?
I think that in one or two instances there have
been rates agreed on for certain classes of business, but on the whole there is no agreement.
"Q. Municipalities?
"A. Yes, municipalities. There is a certain class of
business on which we agree on fair rates, but on
the whole there is no agreement of any great importance. "
It is a matter of common knowledge that rates to similar classes
of borrowers are approximately the same among the different independent
unit banks of a given community in the United States. The actual charges
are in the long run no doubt determined partly by local competition.

(1) See, for example, testimony in I92U of Mr. C. E. Heill, at that time
general manager of the Royal Bank of Canada and vice-president of the
Canadian Bankers' Association, Proceedings of the Select Standing Committee on Banking and Commerce, 192^, p. 287.
(2) Ibid., p. 287.




- 99 Apart from the general uniformity of interest rates in each of
the various sections of the country, it is a fact that such rates tend to
remain constant in Canada, not only from month to month " u from year to
bt
year. At first glance this might seem to result from "banking concentration.

It should he remembered, however, that in England, where concentra-

tion has "been oarried as far as in Canada, interest rates on customers'
loans fluctuate quite as widely as in the United States.
Even in the United States, however, notwithstanding the large
number of "banks, the existence of a central "banking system, and the facilities of a money market, fluctuations in customers* rates are confined mainly
to large financial centers, particularly in the North and East. Moreover,
they are much smaller than is commonly supposed. According to a study " y
b
Riefler,'1' of the research staff of the Federal Reserve Board, during the
five years 1923 to 1927 the fluctuations of the open market commercial rate
in New York City were from slightly over 3 per cent to nearly 5i per cent;
that is, changes during the period amounted to about 80 per cent of the
lowest rate. Fluctuations in rates charged customers " y member "banks of
b
the Federal reserve system in the leading cities in different geographical
regions during the same period, on the "basis of notes rediscounted, were as
follows: (2) New York City, from H.09 per cent to 5*39 per cent, or a variation of about 32 per cent from the lowest rate; other Northern and Eastern
cities,

(3) from U.76 per

cent to 5.6k per cent, or a variation of about IS

per cent; Southern and Western cities,W from 5.^7 per cent to 6.02 per cent,

(1) Winfield W. Riefler, Money Rates and Money Markets in the United States.
1930, pp. 72-76 and 233-235.
(2) Ibid. Figures include commercial loans and loans on securities, but not
real estate loans.
(3) I"bid., p. 73- Includes the leading cities in the Boston, New York,
Philadelphia, Cleveland, and Chicago Federal reserve districts.
(k) Ibid. Includes leading cities of all other Federal reserve districts.




- 100 -

or a variation of about 10 per cent. The rates mentioned above were those
prevailing in the 36 cities in which are located either Federal reserve hanks
or branches of Federal reserve banks. They do not, therefore, indicate the
rates charged by the thousands of small banks in towns and villages throughout the country, where interest on ordinary commercial loans tends to remain
about the same from year to year.
One-bank Rule. - A feature of banking operation in Canada which is
in common practice is the one-bank rule. By long tradition each customer is
required to confine his borrowing operations to one bank, and the different
institutions are said to cooperate in enforcing the rule. The only deviations
are in cases of very large borrowing accounts of great firms or corporations,
concerning which full information regarding every transaction is exchanged
among all lending banks. Obviously the one-bank rule is of considerable
advantage to the banker in keeping track of the financial standing of his
customers, and since generally each bank has plenty of resources to supply
all the credit any individual customer may justifiably require, it is doubtful whether any borrower is handicapped by being required to deal with only
one institution at a given time.
Credit Control. - So far as can be ascertained, no definite attempt
has been made by the Canadian banks collectively to control the total credit
supply.

In other words, no concerned effort appears to have been made to

bring about the sort of regulation attempted in other countries by central
banks through raising or lowering rediscount rates and through open market
operations.

In fact the Canadian Bankers' Association has specifically denied

that such efforts are made. The following testimony of the vice-president in




~ 101 -

1924 is of interest in this connection:v1)
"Q.

"A.

"Q.
"A.
"Q.

"A.

I think I gathered from the evidence given last year,
that the "banks had on one or t r important occasions
vo
decided on the restrictions of loans, "bringing about
a certain measure of deflation? Am I correct?
The "banks in Canada, so far as I know, have never
agreed as a body to restrict loans. The restriction
of loans comes through the head office to each "bank.
For instance, if the directors of a "bank, en the advice of the general manager and executive officers
decide that it is a good time to curtail loans, they
do it themselves without any reference to any other
"bank or without consulting them.
There has not "been any concerted action?
Absolutely none.
If a particular "bank or two or three of the leading
banks believe from a study of the general conditions
that loans ought to be curtailed, that would have a
very marked effect throughout the entire country.
It would make it a little difficult for the borrowers,
but I do not think that the banks ever pressed borrowers unduly."
It is clear, however, that, because of the small number of banks

in Canada, general credit control could in fact be exercised much more
easily and effectively than in the United States, and it is possible that
as a result of informal discussions a more or less common credit policy
is sometimes followed. Moreover, the Minister of Finance, in time of emergency, undoubtedly has brought about a common policy in some respects.
Establishment of Branches. - One way in which effective competition
may be said with certainty to exist among the Canadian banks is in the establishment of branches. As the number of banks has diminished the number of
banking offices has increased, as will be evident from a glance at Chart 1
in Chapter I.




In all parts of the Dominion, except the sparsely settled areas

Proceedings of the Select Standing; Committee on Banking and Commerce,
1924, p. 287.

- 102 -

of the far North, the larger hanks are represented by numerous tranches.
There is hardly a town or village in Canada of any importance in size which
is not served hy two or more "banks, while practically all settled communities and rural districts are within reach of the offices of more than one
institution hy automobile or other means of transportation.

Table 16 indi-

cates the distribution by Provinces of the branches of the various banks
as of June 30, I93I.
A further illustration of the wide distribution of the branches
of different banks is provided by the information contained in Table 17.
This has been compiled from a bank directory of Canada as of the end of
Februaryt 1931* by choosing at random 27 cities and towns in which are operated more than two banking offices. For convenience the population of each
place is included.
Each of the larger banks appears to be determined to have representation and to do its share of the business in every settled community.
Indeed this phase of competition, as will be made clear in the next chapter,
seems to have been in the past considerably keener than was profitable for
either the banks or the public. During the war, in fact, the Minister of
Finance for a while called a halt to the opening of new branches to avoid
wasteful competition, but after the armistice the race was resumed.




Table l6 - Branches of Canadian Chartered Banks " y Provinces(l)
b
June 30, 1931

Name of hank

-\ Total Outside
Prince
New
SasNova
Qae- On- ManiBritish
Grand
Edward
Brunskatche- Alberta
Yukon
in
of
Scotia
bec tario toba
Columbia
Island
wick
wan
Canada Canada total

Bank of Montreal

1

l4

14

133

2U7

40

62

72

57

2

642

17

659

Bank of Nova Scotia

9

4l

3S

24

144

8

25

12

7

0

308

41

349

Bank of Toronto

0

0

0

16

108

14

35

14

10

0

197

0

197

Banque Provineiale
du Canada

5

0

19

284

26

0

0

0

0

0

33*

0

33^

Canadian Bank of
Commerce

7

21

7

93

337

53

100

75

73

2

768

15

783

Royal Bank of Canada

6

62

22

91

288

76

132

80

64

0

821

104

925

Dominion Bank

0

0

1

8

105

12

4

6

4

0

140

2

142

Banque Canadienne
Nationale

0

0

0

532

28

16

9

8

0

0

593

1

594

Imperial Bank of
Canada

0

0

0

4

124

8

57

25

15

0

233

0

233

_o

0

0

1

1

0

0

0

0

_0

2

0

2

28

138

101

1,186 1,408

227

424

292

230

4

4,038

180

4,218

Barclays Bank (Canada)
Total

1

(1) From Houston's Quarterly Bank Directory. July, 1931* Figures include subagencies.




- 104 table 17 - Banking Offices and Population of Selected Canadian
Towns and Cities
City or town
Alexandria, Ont.
Amherst, 1J. S.
Assiniboia, Sask.
Brampton, Ont.
Calgary, Alberta
Chill iwack, B. C.
Edvuonton, Alberta
Estevan, Sask.
Fernio, B. C.
G-ravelbourg, Sask.
Figh River, Alberta
Lethbridge, Alberta
London, Ont.
Melville, Sask.
Nanaimo, B. C.
Portage l a P r a i r i e , Man.
Red Deer, Alberta
Regina, Sask.
S t . Thomas, Ont.
Saskatoon, Sask.
S t e t t l e r , Alberta
Swift Current, Sask.
The Pas, Man.
Vancouver, B. C.
Weyburn, Sask.
Winnipeg, Man.
Yorkton, Sask.

Population(l)
2,006

7,450
1,454
5,532
83,761
2,46l
79,197
2,936
2,732
1,137
1,459
13,^29
7l,i48
3,S9l
6,7^5
6,597
2,344
53,209
15,430
43,291
1,219
5,296
4,030
246,593
5,002
218,735
5,027

Number
of banking
offices(2)

Number
of banks
represented

3
4
3
4
22
3
18
3
3
3
3
6
19
3
3
4
4
14
9
11
3
4
5
80
4

3
4
3
4
7
3
S
3
3
3
3
4
7
3
3
4
4
7
5
6

6

l

I

5
7
4
8
4

(IF Population figures from the census of 1931, The Canada Year
Book. 1932, pp. 103-108.
(2) Prom Houston's Monthly Bank Directory. March, 1931. In some
of the cities, such as Vancouver, Winnepeg, Calgary, and Regina,
the larger banks are usually represented also by supervisory
offices which do no banking business directly with the public.
It is not always possible to determine from the directory
whether these are included or not; consequently some of the
larger cities in this list may be credited with two or three
more banking offices than are actually operating there as branch
banks.
Pertinent testimony on the basis of long experience in both Canada
and the United States as to the degree of competition actually existing was
given in 1923 by Mr. H. 0* Powell, general manager of the Weyburn Security
Bank. Before the Select Standing Committee on Banking and Commerce of the




- 105 -

House of Commons, in answer to a question he declared:^' "The competition
is very teeen. The fact is that the competition in Canada "between "banks is
far keener than it is in the United States." In the course of in/t-stigations
in Canada for the preparation of this report, questions regarding competition
were asked of a number of economists and business men who have had opportunities for considerable observation and experience. Without exception they all
declared that there was intense rivalry for business among the different banks
several observed that competition seemed to become keener as the number of
chartered banks diminished.
Dividend Policies
One of the principal results to be feared from an unrestrained
monopoly is that its owners will profit unduly from their privileged position. Prom this point of view it may be said with certainty that the shareholders of the Canadian banks have not received in recent years unusually
high returns on their investment as compared with those of the member banks
of the Federal reserve system. Dividends declared by eight of the tenv2)
existing chartered banks in the ten year period 1920-1929 averaged 6 1 5 per
.+
cent(3) of their capital funds (paid-up capital plus rest or reserve fund).
The corresponding average for the member banks of the Federal reserve system
was 6.21 per cent.

In a comparison made in a later chapter for the three

years 1927-1929 net earnings of Canadian banks on their reported invested
(1) Proceedings of the Select Standing Committee on Banking and Commerce.
1923, p. klk.
(2) Hot included are: Banque Canadienne Rationale, for which complete data
are not available, and Barclays Bank (Canada), chartered in 1929. The
former declared dividends during the five years 1925-1929 averaging
5.O5 per cent of its capital funds.
(3) Computed from reports published in Monetary Times. January 9» 1931.
pp. 5 i and 5S-6O.
*
( + Computed from tabulations in Annual Reports of the Federal Reserve Board.
*)
1925, P. 169, and 1930, pp. 135, 136.




- io6 -

capital are shown to have been substantially higher than those of the member
banks of the Federal reserve system, but the Canadian banks did not increase
their regular dividend rates during this period of exceptional prosperity.
They have long been accustomed to follow a conservative dividend policy.
During the period of prosperity prior to 1929 the shares of the Canadian banks
did not rise to the same inflated price levels as the shares of many banks
in the United States.

The Question of Monopoly
In 1922 Professor B. H. Beckhart, of Columbia University, undertook to obtain the opinions of well qualified and impartial observers regarding the existence of a banking monopoly in Canada. With this end in
view he wrote to a group of Canadian economists, and received six replies,
as follows: (1)
I.

"The criticism that the Canadian banks constitute a banking monopoly is well founded. They all pay the same rate of
interest on deposits and charge the same rate on loans. The
loaning provisions are virtually identical. Moreover, if a
new bank were seeking incorporation, The Canadian Bankers'
Association reports upon the fitness of the incorporators to
undertake the work of a bank and if their report to the Minister of Finance is not favorable the charter will be refused.
Is not this monopoly?"

II.

"We hear a lot in certain quarters about a 'money trust.'
I do not deny the possibility of such a development but with
the keenest competition between the chartered banks, it seems
to me there is no practical danger of it."

III.

"I think that this criticism (that the Canadian Banks do
constitute a monopoly) is well founded. Through The Canadian
Bankers' Association the Canadian Banks are, in many respects,
one bank. In a great many respects uniformity is insisted
upon and a bank that protests had better look out. It is almost inconceivable that any capitalists would seek a charter
for a new bank and yet on the face of it there is nothing to
prevent them."

v 1 ) Willis and Beckhart, Foreign Banking Systems. pp. U76, ^77.







- 107 -

"There is no monopoly. Any group of reasonable men—and
no others should " e considered, can obtain a charter on prob
viding $250,000 in cash, and meeting the provisions of the
Bank Act. I have only to refer to the unhappy experience of
the defunct Farmers Bank to make it clear that the stringent
scrutiny of any application of a group of men for a charter
is justified. On the other hand, among the "banks themselves
there is the keenest kind of competition, except in the item
of interest paid on time deposits—which is determined by
agreement at 3$» But when the Trust Companies provide checking accounts on which h$> is paid, so that there is no great
hardship here; although some may say that such an agreement
among the banks themselves to pay no more than 3$ on time deposits may savour of monopoly."
"I do not believe that there is a banking monopoly in
Canada. Of course there is considerable concentration of banking power. We have only 17 banks at the present time (1922);
five of these have 75$ a^^ seven S5$ of the total banking assets
of the country. It is true also that under our Bank Act The
Canadian Bankers' Association exercises important powers, that
there is very close touch between the leading Canadian bankers,
and that there is a common bankers' opinion in this country.
It is true also that the rate paid on deposits is the same and
that all through there are very slight differences in charges
for services made by the banks. The competition shows itself
in a competition of service, however. As already hinted, the
spreading branches might be regarded as an instance of excessive competition.
"fe have a free banking system and any new bank may be
started in this country at any time, provided that the minimum
capital can be raised, and that the backers of the project can
satisfy the Committee of the House in regard to their honesty,
competency and financial backing. It is true, however, that
the most recent project for a Canadian bank, the Great West
Bank, has fallen through. I think, myself, that the personality of the promoters had a good deal to do with this. One might
also admit that a new bank would find it somewhat difficult to
develop new business, especially in the first few years of its
existence because the service rendered by the other banks is,
on the whole, efficient."
"There is some foundation, I think, for the criticism that
the Canadian banks constitute a banking monopoly, but it is a
monopoly of the loosest sort, involving at most, I think, certain
bank agreements as to practices. Between the local branch managers there is a very keen competition. There is also very keen
competition with regard to the locating of branches."

- 108 -

As is evident from these opinions, the answer to the monopoly
question depends largely upon definitions. The "banking resources of Canada
are concentrated in a small number of institutions and, unquestionably, more
of the obvious external features of a "banking monopoly exist there than in
the United States.

Concerted action "between the Canadian "banks could doubt-

less " e readily undertaken, unless prevented " y public authorities.
b
b
On the other hand, it might be noted that the unit banks in many
sections of the United States engage in uniform practices. Many of them are
bound together in clearing house associations which enforce a high degree of
uniformity.

There is little evidence that the agreements as to practices are

any more numerous among the Canadian banks, or affect a larger proportion of
their activities, than in the case of the clearing house banks in the United
States.
If by monopoly is meant the abolition of competition between banking institutions, then clearly it does not exist in Canada, since keen competition continues to prevail between the branches of the different institutions as well as in the location of new branches.




CHAPTER VI

THE COST OF B3MCH BAMKINQ

Very little factual data have 1 6 1 available heretofore " y which
361
b
to compare the earnings and expenses of "branch operating tanks in Canada
with those of independent unit tanks in the United States. For the purposes
of this investigation, however, some of the Canadian hanks have furnished
sufficient information to make possible a rough comparison.
It should be borne in mind, however, that on account of differences
in banking practice and in the scale of commercial operations in the two
countries, it is difficult to secure strictly comparable data. Gross earnings
of the banks in the United States, for example, include, in the case of many
institutions, the receipts from trust business, whereas such business is not
engaged in by the Canadian banks. Moreover, there are various services performed by the banks of both countries, such as carrying small accounts, making
out income tax returns for customers, and the like, for which charges may or
may not be made; but it would be impossible to compare the actual value to
the two economic communities of such free services as may be rendered.

The

larger Canadian banks, moreover, do an extensive business in foreign countries
while only a few of the great banks in the United States operate abroad an a
comparable scale. Finally it has not been possible to compare the accounting
methods of the Canadian banks, tither as among themselves or with those of
the banks in the United States. Consequently the various ratios of earnings




- 109 -

- 110 -

and expenses may not have "been computed on exactly the same basis.
The differences, however, are not likely to " e so great as to
b
vitiate entirely the general conclusions indicated.

For convenience attention

will " e devoted first to the expenses of operating the banking system; second,
b
to gross and net earnings; and finally, to the cost of the system to the
economic community as a whole.

Operating Expenses
Operating expenses of hanks may he conveniently expressed as percentages of loans and investments, which for practical purposes may he considered roughly equivalent to their total earning assets. From information
furnished by a number of Canadian banks(l) for the three years 1927-1929,
accounting for about one-third of the total banking resources of the country
and spread widely over the territory of the Dominion, a comparison may be
made with the member banks of the Federal reserve system.

The figures for

both the Canadian banks and the member banks of the Federal reserve system as
shown in Table 18 are averages weighted on the basis of the actual amounts
of loans and investments of each group outstanding at the end of the years
in question.




Certain banks were unwilling to give this information, as a matter of
principle. The others consented to give it only on condition that if
included in averages for publication, no statement should be made
which could be used to identify the particular institutions «ef*rc«d
to. Hence the very general description in the text; but it is believed
that the figures thus compiled do represent a fair average of the earnings and expenses of Canadian banks.

- Ill -

Table 18 - Expenses per $100 of Loans and Investments
Average for Three Years 1927-1929(1)
Other
Total
expenses,
including expenses
net losses

Salaries
and
wages

Interest
on
deposits

Eepresentative Canadian tanks

$1.78

$2.23

$1.38

$5.39

All member "banks of the
Federal reserve system(2)

1.28

2.15

1.77

5.20

^ x ' Averages weighted by size of loans and investments of the banks;
i.e., the ratios were computed " y aggregating the various items
b
concerned for all the "banks tneluded in the tabulation for each
country.
\2) Computed from data published in the Seventeenth Annual Report of
the Federal Heserve Board. 1930, pp. 135, 136.




Another comparison, on a slightly different basis, between
the same group of Canadian banks and various size groups of national
banks in different geographical divisions of the United States is
made in Table 19. for the Canadian institutions the figures are
still the weighted averages described above, but for the national
banks ratios for each bank were computed and then these were averaged
for the banks in each size group, thus giving equal importance to
each bank in the group. It is believed, however, that the differences
in methods of computing the averages do not distort the comparison.

- 112 -

Table 19 - Expenses per $100 of Loans and Investments
Average for Three Years 1927-1929
Other
expenses,
including
net l o s s e s

Salaries
and
wages

Interest
on
deposits

$1.78

$2.23

$1.38

$5.39

United States
Small(3)
Medium size (4)
Large(5)

1.94
1.30
1.19

1.94
2.23
2.13

2.65
1.80
1.72

6.53
5.33
5.04

Hew England and Middle
Atlantic States(6)
Small
Medium s i z e
Large

1.43
1.09
1.06

1.90
2.39
2.19

1.73
1.46
1.52

5.06
4.94
4,77

Representative Canadian b a n k s ' 1 '

Total
expenses

National b a n k s : ^ 2 '

Mid-continent S t a t e s ^ ? '
Small
Medium size
Large

2.20
1.95
3.12
7.27
1.57
2.04
2.30
5.91
Not a s u f f i c i e n t number to permit a
f a i r average

i

i

I

(1) Averages weighted " y size of loans and investments of the banks.
b
(2) Figures compiled " y Federal Reserve Committee on Branch, Group, and
b
Chain Banking; not weighted " y size of loans and investments of the
b
"banks.
(3) Banks having between $250,000 and $500,000 of loans and investments.
(4) Banks having "between $2,000,000 and $5,000,000 of loans and investments.
(5)

Banks having $10,000,000 or more of loans and investments.
(6) Maine, New Hampshire, Vermont, Massachusetts, Rhode Island, Connecticut,
New York, New Jersey, Delaware, Pennsylvania, Maryland, and the District
of Columbia.
(?) Louisiana, Texas, Arkansas, Oklahoma, Minnesota, North Dakota, South
Dakota, Iowa, Nebraska, Missouri, and Kansas.

It will be observed from Table 18 that the total operating expense
per $100 of loans and investments of the Canadian banks appears to be slightly




- 113 -

higher than that of the members of the Federal reserve system. Allowing for
possible discrepancies arising from the basis of comparison, however, the
small difference shown in the table is probably not greater than the margin
of error. On the other hand, when the various items making up the totals
are compared, the differences are seen to be substantial.

Salaries and

wages and interest on deposits appear to be higher in Canada, while "other
expenses, including net losses" are lOT/er.
The higher outlay for salaries and wages in Canada results in part,
no doubt, from the larger number of banking offices in proportion to the bank
deposits of the country.

The average total deposits of the 3,970 banking

offices in Canada on December 31, 1931, amounted to about $475,000'!' as compared with an average of about $2,000,000 for the 22,501 offices in the
United States on the same date.
It will be noted, however, that the comparison of operating costs
is between a group representative of all banks in Canada and only the members of the Federal reserve system, which include very few of the thousands
of small State banks whose operating costs run comparatively high. Clerical
work in a large office can be concentrated and to a large extent done with
the aid of mechanical devices, so that one teller or bookkeeper can do three
or four times as much as he would be called upon to do in a small branch. A
comparison illustrating this point was made several years ago by Mr. E. L.
Stewart Patterson, on the basis of figures obtained "from one of the leading
American banks where for the past ten years the average number of men per
million dollars deposited has held steadily at about four and six-tenths,

W




The Canada Year Book. 1932, pp. 776-779.

- 114 -

whereas Canadian "banks average twelve or thirteen men per million dollars
of deposit."(1)
The aggregate amount of interest paid on deposits in Canada, notwithstanding the uniform rate of 3 per cent on time deposits, is higher than
in the United States mainly "because a considerably larger proportion of the
total deposits in Canadian banks is time or "savings" deposits. The figures
as of the end of 1929 are shown in Table 20.

Table 20 - Deposits in Banks of Canada and the United States
December 31, 1929

Time deposits

Total deposits

Ratio of
time deposits
to total
(per cent)

(2)
All Canadian hanks^)

$2,163,720,000

$1,434,405,000

66

All member "banks of
the Federal reserve
system(4)

32,095,063,000

13,233,481,000

41

Deposits of other "banks and of United States and Dominion and provincial
Governments, as well as deposits in foreign "branches of Canadian "banks,
are excluded.
Returns of the Chartered Banks.
Seventeenth Annual Report of the Federal Reserve Board. 1930, p. 91.

To find a ready explanation of the lower outlays in Canada for
"other expenses, including net losses"

is more difficult. Data for net

losses of the Canadian "banks are not available for a sufficient number of




E. L. Stewart Patterson, formerly superintendent of eastern township
branches, Canadian Bank of Commerce, Banking Principles and Practice,
edition of 1929, p. 337—textbook of Alexander Hamilton Institute. It
is probable that the difference is not now so great as before the war
when Mr. Patterson wrote the first edition of his book.

- 115 -

institutions to be included separately in the foregoing tables, "but there
is some evidence that they are substantially lower than in the United States.
For certain Canadian institutions from which figures have "been obtained for
the three years 1927-1929, average net losses per $100 of loans and investments amounted to $0,11, while the corresponding figure for all the member
banks of the Federal reserve system was $0.54. Probably the Canadian system
as a whole saves money on general administration and overhead charges through
centralized control of the banks, although the added cost of the large number
of banking offices in the country may offset the gains.
Among the different size groups of national banks shown in Table 19,
the "large" banks in the United States as a whole appear to operate at a
somewhat lower cost than the Canadian institutions. For the medium size banks,
however, the costs are nearly the same, and for the small banks the costs are
considerably higher than for the Canadian institutions, the difference being
especially marked in the case of the small banks in the great agricultural
areas of the United States.
The difference between the large national banks and the Canadian
banks are accounted for chiefly by the difference in cost of salaries and
wages, which seems to be around 50 per cent higher in Canada than for the
large national banks of the United States.

In view of the greater number of

employes per million dollars of deposits in Canada it might be expected
that the difference would be even greater than the tabulated figures indicate.
Bat salaries of personnel in Canada, especially in the numerous branches
in small towns and villages, are considerably lower than in the large cities
of the United States; and while many of the largest banks in the United States




, 116 -

also operate as branch organizations, their "branches for the most part are
limited to their home cities.
If a comparison could be made, however, "between the operating costs
of the entire "banking systems of Canada and the United States, a number of
other factors would have to be taken into consideration.

It must be borne

in mind, in connection with the first of the foregoing tabulations, that the
figures for the United States are averages which include the operating costs
of the largest banks in the country, but leave out of account more than
15,000 State banks which during the period 1927-1929 were not members of the
Federal reserve system.

The great majority of the latter are very small in-

stitutions, and many of them are located in the Southern, Southwestern,
Middle-western, and Northwestern States. Judging from the operating costs
of the small national banks in those States, it may be assumed that the
average operating costs of the nonmember banks are considerably higher than
the average for the member banks. If, therefore, the nonmember banks could
be included in an average of operating costs for all banks in the United
States, the resulting figure should be higher than the average shown in the
tabulation for representative Canadian banks.
Excessive Number of Branches. - As suggested above, there seems
to be one feature of Canadian branch banking which makes for needlessly high
operating costs. It is the unrestrained competition practiced by the banks
in the establishment of branches, which has resulted in so many banking
offices in Canada that their average deposits in 1930 were but litte more
than one-fourth the average in the United States. The most striking manifestation of this competition is in the cities, although the towns and




- 117 -

villages often have more 'banking offices than they would seem to he able to
support economically on the hasis of the "business actually transacted.

In

the city of Montreal, for example, with a population of about 1,000.000,
there were about 230 branches of the various banks in 1931. There were only
about 660 commercial banking offices in New York City, which has a population
more than seven times as great as Montreal.

Toronto, a city of about 700,000

inhabitants, had about 300 banking offices, more than four times as many in
proportion to its population as New York, nearly eight times as many as
Chicago, three and a half times as many as Cleveland, nearly three times as
many as Buffalo, two and a half times as many as San Francisco, and twice
as many as Los Angeles.
A list has already been presented (see Table 17 in Chapter V) of
other cities and towns chosen at random throughout the Dominion, showing the
population and the number of banking offices, as well as the number of banks
represented.

This illustrates both the competition among the banks and the

wide distribution of their offices in small communities.
The practice in the matter of establishing new branches in the
cities, as explained by an official of one of the largest Canadian banks, is
about as follows:

The managers in branches neighboring on a given region

decide that the bank should have an office in such and such a block, and so
report to the head office. Whereupon an investigator is sent to look the
situation over on the ground.

If he reports favorably, a branch is estab-

lished on an experimental basis, usually in premises rented on a short lease.
The new office, with a staff of at least two men, operates for two or three
years.




If by the end of the trial period it has obtained as much as $150,000

- X1S -

of deposits, it is put on a permanent "basis.
That competition in the number of offices is excessive and costly,
the general managers of the Canadian 'banks are well aware. Bat the;T declare
that no single institution can afford to refrain from opening a "branch wherever the smallest profit can eventually " e made, since some other 'bank would
b
" e sure to do so.^D
b

jt is also felt in some quarters that any concerted

attempt on the part of the banks to limit the number of "branches in a given
city or community would " e likely to meet with public criticism on the score
b
of monopolistic practices.

Gross and Net Earnings
Based on the data for the representative Canadian institutions referred to at the "beginning of this chapter, Table 21 is a comparison between
the gross and net earnings of banks in Canada and the United States.

Table 21 - Earnings and Expenses and Invested Capital t>er $100 of Loans
and Investments, Average for Three Years 1927- 1929(2)
Gross
earnings

Operating
costs, including
net losses

Net
profits^)

Representative Canadian
banks

$6.85

$5.39

$1.46

All member banks of
the Federal reserve
system(5)

6.65

5.20

1.46

Reported
invested
capi tal

Net profits
on reported
invested capital
(per cent)

$10.9l(4)

13.39

16.61

8.79

Averages weighted by size of loans and investments of the banks.
^ ' Net profits available for dividends.
(4) From Returns of the Chartered Banks as of the end of each year.
^ ' Computed from data given in the Seventeenth Annual Re-port of the Federal
Reserve Board, 1930, pp. 135, 136.

V-U ^ good many branches in the West, as shown in a preceding chapter, have
been kept open for considerable periods at an actual operating loss.




- 119 -

From these figures it would appear that the average earnings and
expenses of Canadian banks ~>er $100 of loans and investments are remarkably
similar to those of the "banks in the United States which are members of the
Federal reserve system.

As in the case of operating costs, gross earnings

of the Canadian institutions appear to be slightly higher, but if a comparison could be made -sith the entire unit banking system of the United
States, including all the small nonmember institutions, there can be little
doubt that the gross earnings of the latter, like their operating costs, would
prove to be higher.
Canadian net earnings'^-' on the amount of invested capital reported
in the Returns of the Chartered Banks (capital plus rest or reserve fund) are
substantially higher than for the member banks of the Federal reserve system,
as a result of the fact that the Canadian banks reported a lower ratio of
invested capital to total loans and investments.

If hidden reserves should be

added to the reported amount of invested capital, it would affect the rate of
net earnings of both Canadian and American banks. No data are available,
hor/ever, to show the extent of hidden reserves in either country.

The Cost of Branch Banking to the
Economic Community
Turning now from a consideration Of the operating costs and profits
of the Canadian banks—that is, of branch banking from the point of view of
the shareholders—an attempt will be made to examine the various elements of




The figures for net earnings of Canadian banks here tabulated cannot be
compared even approximately with any published statements ''ay individual
banks, for the reason that the amounts of earnings carried in times of
exertional prosperity to hidden reserves are not reported in such
-published statements.

- 120 -

the outlay made " y the economic community for the maintenance of the system.
b
The chief item of cost is the interest rates charged to "borrowing customers,
discussed at length in an earlier chapter.

The charges other than interest

on loans consist of exchange charges on checks, charges for checking accounts
when the deposit is "below a certain minimum, rent on safe deposit "boxes,
commissions on purchase or sale of securities, foreign exchange, etc., etc.
The net cost of any "banking system to the economic community it
serves (apart from the shareholders and employes of the "banks considered as
such) may " e expressed in a very rough approximation as the interest and
b
other charges paid to the "banks—i.e., their gross earnings—minus the interest received on deposits.(l) When the community as a whole is considered
the important question relates to the actual out-of-pocket expense of all the
customers of the "banks collectively for the maintenance of the system. As
in the case of operating costs, this may " e conveniently expressed in perb
centages of loans and investments. Using the figures for the representative
Canadian "banks previously referred to, a three year comparison with "banks
in the United States is shown in Table 22.
Table 22 - Net Cost of Banking Service per $100 of Loans and Investments
Average for Three Years 1927-1929(2)
Gross
earnings
( p a i d "by
communi t y )
R e p r e s e n t a t i v e Canadian
"banks
Member "banks of t h e Fodcral
r e s e r v e system(3)

Interest paid
on d e p o s i t s
( r e c e i v e d "by
community)

$6.85

$2.23

$4.62

6.56

2.15

4.51

Uet c o s t to
communi t y

(2)
Averages weighted by size of loans and investments of the "banks.
(3) Computed from data given in the Seventeenth Annual Report of the
federal Reserve Board. 1930, pp. 135, 136.
(1) Such items as local and national taxes represent additional refunds " y
b
the "banks to the economic community; as do also, in a sense, the salaries
and wages paid to the operating personnel.




- 121 -

Altogether the figures tabulated above are sufficient to give only
a very general impression.

They would seem to afford some reason to believe

that the maintenance of the Canadian "banking system is slightly mora costly
to its customers than that of the member "banks of the Federal reserve system
as a whole. As in the analysis of operating costs, however, the comparison
leaves out of. account more than 15,000 State banks in the United States^
nearly all of them very small institutions, which during the period 1927-1S29
were not members of the Federal reserve systeme

The average gross earnings

of these nonmember banks per $100 of loans and investments, like their
operating costs, are certainly higher than the average for the member banks.
Furthermore, losses resulting from suspensions, which are not included in
the above figures, have been substantial in the United States whereas Canada
had no bank suspensions in the period 1927-1929.

Consequently, the indica-

tions from the available information are that the unit banking system of
the United States costs the economic community as a whole as much per unit
of banking accommodation as the branch banking system of Canada. This
appears to be true in spite of the wasteful competition in opening excessive
branches in Canada,




CHAPTER VII

SUMMARY

The Canadian "banking system, composed of 10 "banks with about 4,000
"branches and operating under charters granted only " y the Dominion Government,
b
has provided a notable degree of safety for its depositors.

Since 1923 there

have "been no suspensions of Canadian "banks. In the eleven year period 19211931, during which nearly 9,000 State and national banks suspended in the
United States, only one institution suspended in Canada, the Home Bank of
Canada which failed on August 17, 1923, with 68 branches.
The ratio of total assets of suspended banks to average total
yearly assets of active banks during the same period was less than onetwentieth as great in Canada as in the United States. Even during the
years 1901 to 1920 inclusive, before the present large number of suspensions in the United States began, the ratio of the assets of suspended banks
to the average yearly assets of active banks was about seven times as great
in the United States as in Canada,
Post-war agricultural conditions have proved a severe test for
Canadian banks. The story of rising agricultural prices, rising land values,
expansion of credit, and the overdevelopment of banking facilities prior to
1920 was much the same in the Prairie Provinces of Canada as in the Northwestern States across the border.

The number of branches in the three

Prairie Provinces increased over 50 per cent from 1916 to 1920. After 1920
both sections likewise experienced declining prices, declining land values,
frozen bank loans, and profitless banking offices. In 1923 the president
of the Canadian Bankers' Association testified before a committee of the




- 122 -

- 123 -

House of Commons that " . . . out of the 1,219 banks operating in Western
Canada 419 are operating under an actual loss, an operating loss."
result of these conditions many branches were discontinued.

As a

From 1920 to

1926 nearly one-third of the "branches in the Prairie Provinces were closed,
hut the losses incurred were absorbed by the banks, that is by the proprietors
or stockholders.

Except for the branches and subagencies of the Home Bank,

the reduction in the number of branches was accomplished without suspension
of payments to depositors.

The accounts of the closed offices were trans-

ferred to neighboring branches of the same or other banks.
The structure of the Canadian banking system is an important
factor in its record of safety.

The large size of the banks has made possi-

ble; (a) a wide diversification of assets; (b) large reserve funds for the
absorption of special and regional losses; (c) adequate facilities for formulating and pursuing effective credit and investment policies; (d) ample resources for providing managerial ability; and (e) wide facilities for training the personnel in the traditional principles and practices of commercial
banking.

In Canada the facilities of large institutions have been made avail-

able to the smaller communities through the development of branch banking.
A further factor in connection with the safety record is the degree
of adherence to commercial banking principles and the tendency to resist the
practice of using deposits to supply capital funds.

This is due in some

measure to legal restrictions but in large part to management.
Safety to depositors does not appear to have been attained at the
cost of adequate service to the community.

Facilities for banking service

are provided for all the settled regions of Canada, often in frontier towns




» l?)\ m

and other communities too small to support independent banking institutions.
IThere are more than tv:/ice as many "banking offices in Canada as in the United
States in proportion to the population, and nearly four times as many in
proportion to the commercial "banking resources of the country. While loans
are generally made on business principles rather than on a personal "basis, no
evidence has "been obtained that either communities or individuals have suffered from the withholding of credit warranted on the basis of sound banking
practice. Banking funds in Canada have a high degree of mobility through the
network of branches, and are readily shifted to communities where they are
most needed.

The evidence available shows that the loans of the branches in

the great agricultural areas of the Dominion exceed their deposits, whereas
for the country as a whole deposits exceed loans.

This indicates that the

newer regions of the country are financed in part through the loan of the
surplus funds accumulated in the older and more thickly settled regions.
While the banking resources of the country have been gradually concentrated in a few large institutions, there is no evidence that competition
between these institutions has been diminished.

On the contrary competition

is keen, both in the establishment of branches and in the development of
business.

In fact competition in the establishment of branches has resulted

in what many observers have described as an overbanked condition.

Towns of

under 2,000 inhabitants all over the Dominion frequently are served by the
branches of as many as three banks. Many villages of less than 1,000 have
two or more banking offices. In the cities the multiplication of banking
offices is equally apparent.
The costliness of competition in the number of banking offices is
recognized by the general managers of the Canadian banks. There appears




n 125 ~

to be a conviction, however, that if one institution refrains from opening
a "branch wherever a profit can eventually " e made some other "bank would " e
b
b
sure to do so. At the same time it is "believed " y "bank officials tLat a
b
concerted attempt on the part of the banks to limit the number of branches
in a given city or community would be likely to meet v;ith public criticism
as a monopolistic practice.
In view of the differences in banking practice in Canada and the
United States and the difficulties of securing comprehensive data on earnings
and expenses of banks, it is not possible to dra'v definite conelusions as to
the relative costs of the two banking systems.

The evidence available, how-

ever, does not indicate that the total cost per unit of business is higher
for the Canadian system than for the American system, although the former
maintains a much larger number of banking offices and personnel in proportion
to the volume of business than the latter. On the contrary, the average gross
earnings and the average operating costs (including net losses) of Canadian
banks, in percentage of loans and investments, appear to be nearly the same
as the averages for all member banks of the Federal reserve system.

Taking

into consideration the thousands of small high-cost nonmember banks in this
country, there is reason to believe that the cost to tho economic community
of the unit banking system of the United States per unit of banking accommodation is at least as large as the cost of the branch banking system of Canada.
In addition, the public in the United States has had to bear a much larger
cost resulting from "bank failures.







- 126 -

JEPffiDIX A
S t a t i s t i c a l Tables

Canadian Bank Insolvencies since 1867
(Taken from The Canada Year Book, 1932, pp. 779, 780)

Name

Date
of
Suspension

Paid-up
Capital
$

Commercial Bank of N.B.
Bank of Acadia(l)
Metropolitan Bank
Mechanics1 Bank
Bank of Liverpool
Consolidated Bank of Canada
Stadacona Bank
Bank of Prince Ed. Island
Exchange Bank of Canada
Maritime Bank of Dom. of Canada
Pictou Bank
Bank of London in Canada
Central Bank of Canada
Federal Bank
Commercial Bank of Manitoba
Banque du Peuple
Banque Ville-Marie
Bank of Yarmouth
Ontario Bank(3)
Sovereign Bank of Canada(3)
Banque de St. Jean
Banque de St. Hyacinthe
St. Stephen's Bank
Farmers' Bank
Bank of Vancouver
Home Bank of Canada

1868
600,000
April,
1873
100,006
Oct.,
1876
800,170
May,
1879
194,794
Oct.,
1879
370,5^
Aug.,
1879 2,080,920
July,
1879
991,890
Nov. 28, 1881 120,000
Sept.,
1883
500,000
Mar.,
1887
321,900
Sept.,
1887
200,000
Aug.,
1887
241,101
Nov.,
1887
500,000
Jan.,
1888 1,250,000
June 30, 1893 552,650
July 15, 1895 1,200,000
July 25, 1899 1+79,620
Mar.
6, 1905
300,000
Oct. 13, 1906 1,500,000
Jan. 18, 1908 3,000,000
April 28, 1908
316,386
Jan. 24, 1908 331,235
Mar. 10, 1910 200,000
Dec. iq, 1910
567,579
Dec. 14, 19lU 445,188
Aug. 17, 1923 1,960,591

Reserve
Fund
$
_
_
—
—
—

1+5,000
300,000
60,000
-

50,000
45,000
150,000
50,000
600,000
10,000
35,000
700,000
—

10,000
75,000
55,000
—
—

550,000

Paid t o —
DeposNoteitors
holders
p.c.
p.c.
$
$
100
671,420
100
1,222,454
_
—
106,914
213,3*+6
100
100
779,225
293,379
547,238
57*
721,155
5J J/2
136,480
100'
9b 6/17
207,877
3,077,202
1,794,249
100
100
341,500
100
100
1,355,675
59 1/2
1,108,000
953,241+
59*
2,868,884
100
663/8
3,779,^93
1,409,482
100
102/3
1,825,993
74,364
100
100
277,017
1,031,280
100
100
1,310,675
2,631,378
100
99 2/3
3,231,518
100
100
4,869,113
3,W9,%9
100
1,341,251 1,951,151 100
7,761,209 9,533,537 100
75 lA
1,766,841
100
17 1/2
2,267,516
388,660
723,660
100
100
100
15,272,271 15,920,307 100
16,174,408 19,218,746
100
100
5bO,781
326,118
100
30 1/5
1,576,443
100
100
1,172,63C
549,830
818,271
100
100
2,6l6,683
100
Nil
1,997,041
1,532,786
100
(2)
912,137
(2)
19,678,7% 27, ^ 709 100
Liabilities

Assets

(1) This hank was cnly in existence for 3 months and 26 days. Some of i t s notes were redeemed on i t s r e opening for a few days. The Dominion Government received 25 cents o n t l l e d o l l a r on several thousand
d o l l a r s worth of the notes which i t h e l d .
(2) Liquidation incomplete.
(3) These hanks never suspended payment. Their branches were taken over "by other hanks which assumed a l l
l i a b i l i t i e s t o d e p o s i t o r s . Some years l a t e r , for technical purposes, these hanks were put i n t o insolvency.




CO
—J

- 128 -

Bank Absorptions in Canada since
(Taken from The_ Canada Year Book, 1932, p. 780)
Purchasing Bank
Bank of Montreal

Canadian Bank of Commerce

Bank of Nova Scotia

Royal Bank of Canada

Imperial Bank of Canada
Banque d'Hochelaga(3)
Bank of Sew Brunswick
Merchants' Bank of Canada
Union Bank of Halifax
Northern Crown Bank
Union Bank of Canada
Home Bank of Canada
Standard Bank of Canada

Bank Absorbed

Date(2)

Exchange Bank, Yarmouth, N. S.
People's Bank of Halifax, N. S.
Ontario Bank
People's Bank of Hew Brunswick
Bank of British North America
Merchants' Bank of Canada
Molsons' Bank
Gore Bank
Bank of British Columbia
Halifax Banking Co.
Merchants' Bank of P. E. I.
Eastern Townships' Bank
Bank of Hamilton
Standard Bank of Canada
Union Bank of P. E. I.
Bank of New Brunswick
The Metropolitan Bank
The Bank of Ottawa
Union Bank of Halifax
Traders' Bank of Canada
Quebec Bank
Northern Crown Bank
Union Bank of Canada
Niagara District Bank
The Weyburn Security Bank
Banque Nationale

Aug.
June
Oct.
April
Oct.
Mar.
Jan.
May
Dec.
May
May
Feb.
Dec.
Nov.
Oct.
Feb.
Nov.
April
Nov.
Sept.
Jan.
July
Aug.
June
May
April

13, 1903
27, 1905
13, 1906
15, 1907
12, 1913
20, 1922
20, 1925
19, 1870
31, 1900
30, 1903
31, 1906
29, 1912
31, 1923
3, 192S
1,1883
15, 1913
Ik, 19lU
30, 1919
1, 1910
3, 1912
2, 1917
2, 1918
31, 1925
21, 1875
1, 1931
30, 1924

Summerside Bank
Merchants' Bank
Commercial Bank of Canada
Commercial Bank of Windsor
The Northern Bank
Crown Bank of Canada
United Empire Bank
La Banque Internationale du Canada
Western Bank of Canada
Sterling Bank of Canada

Sept.
Feb.
June
Oct.
July
July
Mar.
April
Feb.
Dec.

12, 1901
22, 1868
1, 1868
31, 1902
2, 1908
2, 1908
31, 1911
15, 1913
13, 1909
31, 192U

(l) The tjurchasing banks named in the latter part of the table are no longer in
business.
(2) Dates given since 1900 are those of the Orders in Council authorizing the
absorptions.
(3) The Banque d'Hochelaga after absorbing the Bank Nationale adopted the name
Banque Canadienne Nationale.







- 129 -

APPMDIX B
Canadian Bank Act to "be i n s e r t e d here

- 130 -

BIBLIOGRAPHY

Bank Directory of Canada and Newfoundland.
Houston's Standard Publications.

Monthly and quarterly.

Toronto:

BECKHART, B. H.
The Banking System of Canada.
(Reprinted from Foreign
Banking Systems. Pp. 239-495.) New York; Henry Holt & Co. 1929.

BRECKINRIDGE, R. M.
History of Banking in Canada.
Vol. IX, Publications
of National Monetary Commission: Part I, Pp. 310. Washington:
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CURTIS, C. A.
The Canadian Banking System. 1910-1925. Doctoral thesis
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ECKARDT, H. M. P.
Manual of Canadian Banking.
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FISK, HARVEY E. ^ie Dominion . f Canada.
o
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Pp. 208.

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Published by

New York; Bankers

JOHNSON, JOSEPH FRENCH.
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MC GIBBON, D. A.
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The Best System of Banking.
printed. 1925.

MITCHELL, W. A.

Rural Credits.

An Inquiry.

Scientific Agriculture.

Privately

September 27, 1923.

How 11 Chartered Banks Serve Our Neighbor Dominion.
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Vol. XLII, No. 7.
July, 1925.

Monetary Times, various issues.




Published weekly at Toronto.

The

- 131-

MORMAN, JAMES 3.
Farm Credits in t i United States and Canada.
le
Hew York: The Macmillan Co. 1924.

Pp. 406.

PATTERSON, E. L. STEWART. Banking Principles and Practice.
Revised edition.
Pp. 359. New York: Alexander Hamilton Institution. 1929.

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Money Rates and Money Markets in the United States.
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ROSS, VICTOR.
A History of the Canadian Bank of Commerce.
595.
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TORY, H. M.
Report on Agricultural Credit.
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Pp. 90.

2 vols: Pp. 516,

Ottawa: King's

Supplementary Report on Agricultural Credit.
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Canadian Banking.
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Pp. 35.

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Toronto; Canadian Bank

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Canada.
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Dominion Bureau of Statistics.
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The Canada Year Book,

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Royal Commission on Farmers' Bank.
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Proceedings.

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- 132 -

___
Royal Commission on Home Bank.
Ottawa: King's Printer. 1924;

Hearings.

Canada Laws, Statutes, etc.
Bank Act of 1922 and Amendments.
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Finance Act.

State Banking Departments.

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18 vols.

Chapter 12,

Ottawa;

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U. S. Comptroller of the Currency.
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Washington: Government


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102