The Circulation

What a bank gains from its note circulation has already been referred to. The conditions relating thereto cannot, however, be fully understood by the reader unless he has a knowledge of the "Bank Circulation Redemption Fund." Prior to 1890 there were some instances of bank failures in which the note holders did not get 100 cents on the dollar for their claims. And in practically every case of a banking suspension note holders were obliged to wait an indefinite time before getting full satisfaction - this notwithstanding the fact that the notes represented a preferred claim on the assets of the banks suspending payment. As a natural result of the delay in the redemption of the notes the announcement of suspension was followed in nearly every case by the bank's notes going to a discount.

Generally, in framing banking legislation it is recognized as a principle that note holders are entitled to more consideration than depositors, this for the reason that the note holder is an involuntary creditor. A man engaged in any business could hardly refuse to accept payments from his customers when tendered in the notes of any going bank. When he does accept them he becomes a creditor of the bank issuing the notes. He had hardly a choice about so becoming. But depositors are in different case; they may, in many cases, choose or select the banks with which they will deposit.

Therefore, it happened, prior to the renewal of the bank charters in 1890, that the Government intimated to the banks that they would have to do something to protect noteholders from the inconvenience and loss they suffered almost invariably when a bank closed its doors. The Bank Circulation Redemption Fund is a result of the negotiations that ensued. The stipulations gov-erning the fund are found in Sections 64 to 69 of the Bank Act.

The Bank Act of 1890 provided that within two years from the 1st July, 1890, every bank then in operation should deposit with the Minister of Finance and Receiver-General a sum equal to 5 per cent. of its average note circulation for the twelve months immediately preceding the going into force of the Act. And afterwards, on the 1st July in every year, it should adjust the amount of its balance so paid in to correspond with any change that may have occurred in its average circulation during the twelve months immediately preceding. This money, paid in to the Treasury, was to constitute an asset of the banks paying in. They are allowed 3 per cent. interest per annum on the monies in the hands of the Receiver-General. The total of the balances paid in by all the banks constitutes the Redemption Fund. Though it remains the property of the respective banks contributing to it, the fund is liable for the following purpose: If any bank suspends payment in specie or Dominion notes of its liabilities as they accrue the Minister of Finance and Receiver-General may, if the liquidator, receiver, or assignee fails to make arrangements for the payment of its notes within two months from the date of suspension, make arrangement for their payment, and all interest thereon, out of the fund.

All notes thus redeemed by the Minister of Finance are held by him as the property of the banks contributing to the fund. They are a first charge on the assets of the failed bank, and, on being collected the proceeds are to be re-credited to the Redemption Fund. When the Fund is depleted through redemption of the notes of a failed bank, the banks may be called upon to replenish it, but not at a greater rate than 1 per cent. per year on their average circulation.