The bank circulation fund should not lie confused with the central reserve fund. The redemption fund is held by the minister of finance and it draws three per cent interest. It is maintained out of contribu tions by the banks and must always equal five per cent of their average monthly circulation. It is especially set apart for the payment of notes of banks that fail. If the fund becomes impaired, the banks must con tribute annually to its recoupment a sum not exceed ing one per cent of their average circulation for the preceding year.
To secure redemption, the law requires that the banks shall make such arrangements as are necessary to insure the circulation of all notes issued at par in every part of the country. To this end, each bank is required to establish redemption agencies in at least one city of each province.
The Canadian law does not require the banks to keep a minimum reserve. The question is one which has been widely discussed in Canada, but the weight of the argument seems to be on the side of those who think that a reserve requirement does more injury than benefit to the community. A reserve which can not be used is of no avail in emergencies. As a matter of fact business prudence has led Canadian banks to maintain adequate reserves, and they have been able to lend funds in the United States when our own banks have been paralyzed.
7. Dominion the exception of bank notes, the only other kind of paper circulation in Canada is Dominion notes or "legal tenders," as they are often called. These are issued by the Dominion government. Against the first $30,000,000 of Do minion notes a reserve of 25 per cent is held in gold and securities, the amount of gold not to be under, 15 per cent. All above $30,000,000 are backed by a gold reserve of 100 per cent. The gold reserve against the total issue usually amounts to from 80 to 85 per cent.
Dominion notes are issued in the following denomi nations: fractional, $1, $2, $4, $5, $50, $100, $500, $1,000, $5,000. The notes above $2 circulate very little among the people. They are used principally by banks for clearing and reserve purposes. While the banks are not required to hold any specific reserve, there is a requirement that 40 per cent of whatever reserves they choose to hold in Canada must consist of Dominion notes. Over 70 per cent of the Do minion notes is in large denominations and circu lates only among banks. On the other hand over 75
per cent of the paper currency in circulation among the people consists of bank notes.
The advantage of having the general circulation consist largely of bank notes is readily apparent. Bank notes are elastic. Dominion notes are not. The more the total circulation is made up of the elastic element, the nearer will it approach perfect elasticity. The Dominion notes in circulation are for the most part in small denominations where elasticity is relatively unimportant.
Dominion notes closely resemble the United States gold certificates, except that they are issued in small denominations. Their resemblance to the Bank of England note is even closer.
8. Branch advantages of branch banking are: 1. Large capital behind each institution. No matter how small the branch, the customers share in the security which a large capital offers.
2. Unity of policy on the part of the leading banks during a stringency, in contrast to the playing at cross purposes which distinguished the action of the national banks in the central reserve cities of the United States against the smaller banks in the panic of 1893. In 1907, if the country banks had been branches of the large city banks, they would not have withdrawn funds from those hanks when they were so badly needed, and the crisis would not have been so severe.
3. Power to equip every branch with ample reserves for maintaining commercial credit by means of note issues. In Canada it is impossible for the business needs of any com munity, no matter how remote, to outstrip its banking facili ties, as so often occurs with us. The resources of the branch bank are extended quickly and indefinitely. More over, when the need for additional facilities has passed, the business of the branch can contract accordingly without loss to any one.
4. Uniformity of interest rates thruout the whole country. Rates do not vary more than one or two per cent' between the large cities in the East and the newer towns and rapidly ex panding cities of the West. In the absence of competition, the necessity of depending upon small local banks for ac commodation requires the business men of western towns in the United States to pay monopoly rates for the use of capital.