Volume 2 - ElectricCanadian.com

THE CHARTER 5practice must have prevented the banks established under theAct from attaining large proportions. This result was facilitatedby the smallness of the minimum amount of capitalrequired, and has led to the impression that only small bankswere contemplated under the Act. There were, however, inits provisions, no restrictions looking to this end, but theplan was undoubtedly the antithesis of the branch bankingwhich is the fundamental principle underlying the Canadianbanking of to-day. Mr. Merritt aimed at the ultimateelimination of the chartered banks, but in this he did notsucceed, with the result that in the "fifties" and until well oninto the "sixties" Canada enjoyed a dual banking system,consisting on the one hand of chartered banks with branchesand extensive capital, and on the other of free banks ofpurely local importance and limited capital.Of the new institutions that grew out of Mr. Merritt'splan, only one, the Molsons Bank, has survived, and it lateradopted the system now prevalent. The principal reasonwhich led to the adoption of the free banking system by theUnited States did not apply to Canada. In the neighbouringrepublic, bank charters had been used as political plums; thetriumphant party in a given election had often rewarded itshenchmen by such grants, with small provision for the protectionof the public. Thereby an intolerable situation hadarisen, for which the free banking system seemed the onlyeffective remedy. Mr. Merritt and his supporters couldpresent no such arguments in favour of destroying Canadianbank charters, and as it turned out, the free banks establishedin this country were unable to maintain themselves alongsidethe chartered institutions because of the greater economy ofthe system under which the latter worked. The free bankswere obliged to invest the whole amount of their authorizednote issue in securities bearing a moderate rate of interest,and it was not possible to keep the whole note issue in circulationat all times. In addition, as these securities were notavailable except in the event of failure, the banks had to main-