On banks and banking in Canada: a study of the bank returns with reference to proposed changes in the Bank Act. Treatise.

promise to pay' which he classes among his liabilities as ' Deposits.'The result is the exchange of one credit payable in the future for another payable on demand.This ' promise to pay ' or credit, or deposit, when put into negotiable form so as to pass by delivery without endorsement, is called bank Circulation.It requires no argument to show, for it is apparent in the mere assertion, that Circulation being one form of credit, and bankDeposits another, the demand for the negotiable form, Circulation, will increase pro rata with the amount in the form of Deposits Bank credits put into the shape of checks and drafts constitute the great bulk of the circulating medium of the country, but the minor operations of trade must necessarily be done with money or bank credits in the form of money (Circulation), and these miaor operations keep pro rata pace with the larger transactions.So that to the extent that Deposits in banks increase, to the same extent is there a corresponding demand for Circulation."*While a bank may have aCirculation in due proportion to its Deposits, and only adequateto the currency needs of its customers, the amount may yet far exceed what is allowed by the Bank Act.If the Deposits in the Cana- dian banks were as large in proportion to the Capital as are the Deposits in the English and Australian banks (to be referred to later), a limitation of the amount of bankCirculationto the amount of paid-up Capital would be altogether inadequate to the currency needs of the country, in default of gold and silver coin : as Deposits grow with the development of the resources of the country, Circulation will grow pari passu.And from this it would appear that Capital alone may not be the proper standard to regu- late Circulation by ; it might be better, as it would be according to a truer principle, that the legal limit of Circulation should bear a certain proportion also to the amount of Deposits.Under equally good management and in like circumstances, all banks show a pretty uniform proportion of Deposits to Capital, and the Circulation being naturally in pro rata proportion to Deposits, it follows ultimately that Circulation also bears a regular proportion to Capital ; and so an objection to the present preferential lien of note- holders, that in case of failure it may absorb an altogether undue proportion of the assets, is obviated.An indispensable condition should be that adequate Reserves be kept against Circulation as well as Deposits.That would lend support to both, and on such a basis a bank might safely hold any reasonable amount of Deposits with a corresponding Circulation, while restraint would be put on inflation generally, and especially would inflation of Circulation by the discount of bills in order to increase the Deposit account be prevented.With legitimate business methods, the resources of a bank in specie and marketable securities ought to keep pace with the growth of Deposits, and * The bank bills maintained in Circulation in Canada are mainly in the hands of (i) Farmers and lum- bermen, and dealers in agricultural and other natural products; (2) Employers of labor on manufactures, and industrial employers generally ; (3) Shopkeepers ; and (4) The well-to-do classes.All these except the last two clashes get the bank bills directly or indirectly from the banks, generally by way of advances or discounts, sometimes as drafts on actual deposits ; the well-to-do classes get them as drafts on similar deposits, or if in business, also by way of discounts ; city shopkeepers, who hold a very large sum in the aggregate (this in the main is the Circulation created by manufacturers and importers), get them from workpeople and from the well-to-do classes ; country shopkeepers get them from farmers.It is the aggregate of these sums, kept floating at an average amount by the activities of business, operating through the Deposit account of the banks, that constitutes the bank Circulation.The Deposit account consists of fixed deposits, the proceeds and balances of proceeds of discounts, and current deposits.All these constitute the fund from which the banks make advances to the public for use in the domestic trade of the country ; and these advances, with the drafts of the owners of actual deposits, are paid (1) In cheques to pav mercantile indebtedness ; (2) In bank bills and change (Dominion notes and silver), to pay- labor in factories, shops, and for industrial disbursements generally ; for purchases of agricultural and other natural products ; and for pocket money.Bank bills are really change for, and convenient because divisible substitutes for, cheques, just as the smaller Dominion notes and silver is change for bank bills.Manifestly the volume of Circulation depends altogether on the activity of the Deposit account, through which the fund of fixed deposits is made fluent, with the other deposits, chiefly by the granting of loans as advances and discounts.therefore of Circulation.And as the credit that attracts Deposits is usually better founded than that which floats currency, the Circulation, while hearing a due proportion to the Deposits, would generally correspond in some measure to the standing of the bank of issue ; and fluctuating with the Deposits as the public gained or lost confidence in the institution, the amount at risk by noteholders would in normal circumstances be automatic- ally adjusted to the degree of credit enjoyed by the bank.The purpose of Mr. Flannagan's paper is to show that the financial stringency in the States is due, not exclusively or even principally to an excessive Treasury surplus, as is generally supposed, but in a greater measure to a contraction of bank Circulation -the commercial interest of the country being forced under the National bank system to base its medium of exchange, not on the necessities of trade, but on the amount of the de- creasing National Debt.And the theory as to the close connexion between Deposits and Circulation appears to be confirmed by a comparison of the figures of the Canadian bank Deposits and Circulation, which since Confederation have shown-save in the years of financial inflation and disturbance, 1871-74 -a tolerably uniform proportion the one to the other, as may be seen by the following table, prepared from the Government Returns as given in The Statistical Abstract and Record, 1886 : Percentage of Circulation to Deposits.

Fetched live from OpenAlex and de-inverted. Abstracts are not stored in this database: the inverted indexes are 8.6 GB of the frame’s 9.3 GB of text, and the host has 13 GB free.