ness. Loans to directors or officers must be reported each month to the Government. Dividends in excess of 8 per cent must not be paid until the "rest" or surplus equals 30 per cent of the capital. The trust companies in Canada do a strictly fiduciary business. The chartered banks and their branches all have savings departments and pay 3 per cent on deposits. There is, however, no sharp distinction drawn between demand and savings deposits. In practice both are payable on demand, both go into the general fund of the bank, and savings funds are as likely to be loaned to merchants and manufacturers as are funds which represent demand deposits. While wage-earners and other classes are given every encouragement to open savings accounts, a considerable proportion of the time deposits of the banks are made by business men, who,, finding periodically that they have a larger bank balance than they need, arrange for the transfer of the surplus to a savings account or for the payment of interest on it. The government savings institutions pay interest at 3 per cent, but they require several days' notice of withdrawal. 172. Supervision.-A weakness of the Canadian banking system has been the absence of outside inspection of the banks. The Minister of Finance may call for a report of condition of a bank at any time, and the Canadian Bankers' Association, of which all the chartered banks are members, has supervision over the circulation, but there has been no authority to investigate the operations and affairs of the banks. Each chartered bank has an "inspector" who makes periodically a thorough examination of all the branches of that bank, but there has been no outside authority to examine the head office itself. The bankers have contended that they are best qualified to examine themselves, but a feeling has been growing among the public that they should be subject to some kind of supervision. Consequently at the recent revision of the bank act, which went into effect July 1, 1913, provision was made for an annual audit by qualified auditors appointed by the stockholders from a panel selected by the general managers of the banks and approved by the Minister of Finance. These auditors are given the widest powers of access to the records and securities of the banks, and are required to make an annual report to the stockholders. The Minister of Finance may call upon the auditors or any other auditor whom he may select to make a special report at any time upon the affairs of any bank. Despite the fact that the Canadian system has twentythree separate and independent banks, without any central or governmental control or supervision, it possesses a remarkable degree of unity and solidarity. Over one-half of the entire banking business of the country is done by six banks. The Bankers' Association binds the banks together on legislative matters affecting their mutual interests. The managers of the six largest banks, each having several score of branches, are ever watchful to discourage speculative excesses. Through information supplied by the branch managers there is practical unanimity of opinion and policy among bankers as to business conditions and the general outlook. The extent to which the larger banks are interested in the trade and industry of all parts of the Dominion through their branches makes it possible to secure unity and solidarity in a time of common peril. The system though quite unlike any other noted in this chapter is admirably adapted to the needs of the country which it serves. READING REFERENCES Conant: History of Modern Banks of Issue, Chs. II-XII, XVI. Fiske: The Modern Bank, Chs. XXXIII-XXXVII, XL. Howard and Johnson: Money and Banking, Chs. XXIX, XXX. Publications of National Monetary Commission: た Banking in Russia, Austria-Hungary, the Netherlands and Japan. Breckenridge: History of Banking in Canada. Conant: The Banking System of Mexico. Liesse: Evolution of Credit and Banks in France. Patron: The Bank of France in Relation to National and International Credit. Philippovich: History of the Bank of England. Riesser: The German Great Banks and their Concentration. The Reichsbank: 1876-1900. Withers and Palgrave: The English Banking System. Scott: Money and Banking, Chs. XI-XIV. White: Money and Banking, Bk. III, Ch. XVI. CHAPTER XXI DEFECTS OF NATIONAL BANKING SYSTEM 173. Defects of national banking system.-Reference has been made at various places in the foregoing pages to the defects of our banking system. In this chapter we shall try to summarize these defects and present a brief statement of the problem which the Federal reserve system is expected to solve. The national banking system established in 1863, remodeled by the enactment of 1864, and patched up from time to time by sixty-odd amendments, remained substantially unchanged in scope and operation through a half century of growth and change in financial and commercial conditions. Designed to meet the fiscal necessities of war times, it proved inadequate to cope with modern commercial needs. It failed to supply commerce and industry with adequate credit facilities in normal times and in times of financial stress it broke down completely spreading disaster and ruin throughout the land. Indeed, prior to the corrective legislation of 1913, our banking system deserved the term, "panic breeder," so often applied to it. The fundamental defects of our banking system may be grouped under three general heads, concerning respectively the reserves, the note circulation, and the general banking organization. 174. Inelasticity of note issues. One of the principal defects of the banking system was the absolute rigidity of the currency. A national bank could issue notes only by depositing government bonds with the Treasury. As bonds usually sold considerably above par a bank was disinclined to buy them since it had to pay out more money for the bonds than it was permitted to issue in currency. Instead of rising and falling with the needs of trade and commerce, as deposit currency does, the volume of national bank notes fluctuated with the price of government bonds. The price of these bonds, notably the two per cents which are held almost exclusively by the banks, is determined not by their general investment value, but by the profit possible to banks in using them as security for circulating notes. The people of the United States have become accustomed to bank notes secured by the deposit of government bonds. For fifty years this has furnished an absolutely safe bank note currency, and many people have come to believe that no other kind of bank note would be safe and acceptable. But in the past it has been the policy of the Government to pay off its bonded indebtedness and, doubtless, that policy will be continued. The reduction of the national debt will leave a constantly decreasing volume of bonds as a basis for the note issues of a steadily increasing number of banks. It is inconceivable that the United States would contract new debts or maintain old ones in order to provide a supply of bonds with which to secure bank notes. Even if sufficient amounts of bonds were available in the future, the plan of a circulation secured by bonds stands condemned as inelastic and unresponsive to business needs. The particular service rendered by bank note currency is substantially the same as that supplied by deposit currency. Both originate from private business operations of discount and deposit. The proportion of notes needed varies with the season, the business habits of the locality, and the rise and fall in the volume of goods exchanged. Though bank notes do far less work than deposit currency, it is essential that they shall be free, as deposit currency is free, to expand and contract with the changing needs of business. We have about 7,500 national banks issuing notes. In |