¹ Altman, O., “Foreign Markets for Dollars, Sterling and Other Currencies,” International Monetary Fund Staff Papers, 8 (1960–1961), 313–52CrossRefGoogle Scholar; Altman, “Recent Developments in Foreign Markets for Dollars and Other Currencies,” ibid., 10 (1963), 48–93; Holmes, R. A. and Klopstock, R. H., “The Market for Dollar Deposits in Europe,” Federal Reserve Bank of New York, Monthly Review, 42 (11 1960), 197–202 Google Scholar; Congress of the United States, House of Representatives, Committee on Banking and Currency, Hearings, Higher Interest Rates on Time Deposits of Foreign Governments (87th Congress, Second Session, 1962).Google Scholar

² “Canadian Markets for U.S. Dollars,” International Monetary Fund Staff Papers, 9 (1962), 297–316 Google Scholar; reprinted in Congress of the United States, Joint Economic Committee, Factors Affecting the United States Balance of Payments: Compilation of Studies (87th Congress, Second Session, 1962), 527–40.Google Scholar All subsequent page references are to the latter volume.

³ Royal Commission on Banking and Finance, Report (Ottawa, 1964), 136–40.Google Scholar Some discussion of this aspect of the banking business is also to be found in Canadian Bankers' Association, Submission to the Royal Commission on Banking and Finance (Toronto, 1962), 101–6.Google Scholar For a more general treatment of some points see Galbraith, J. A., The Economics of Banking Operations: A Canadian Study (Montreal, 1963), 219–38.Google Scholar

⁴ Such classifications are inevitably somewhat arbitrary. The Porter Commission report suggests three categories. The first two, foreign exchange trading and foreign local banking, are identical with the first two noted in the text. The third, international wholesale banking, is a combination of the remaining three categories identified above. However, all three categories are clearly identifiable in the Porter Commission's discussion. Cf. Royal Commission on Banking and Finance, Report, 137–40.Google Scholar

⁵ Bank policies and practices in this regard are described in Turk, S., The Foreign Exchange Market in Canada, Working Paper for the Royal Commission on Banking and Finance (Ottawa, 1962).Google Scholar

I am also informed that the bulk of foreign currency “correspondent balances” are in fact “held” by the foreign agencies of the banks concerned. That is, foreign currency drafts (particularly large drafts) are drawn on (say) the New York agency, with the agency arranging settlement as required through appropriate operations in the New York money market.

⁶ At the end of 1962 Canadian chartered banks had approximately 5,320 banking offices in Canada, and 170 abroad. The figures include branches, sub-branches and agencies (including the offices of wholly owned subsidiaries in California and France), but exclude approximately 20 foreign field representative or “business development offices.” Of the 170 foreign offices, approximately 135 were branches of three banks in the Caribbean area and Latin America. In addition, and not included in any of the statistics used in this study, the Bank of Montreal had a 50 per cent interest in the Bank of London and Montreal which has its head office in Nassau and 28 branches throughout the Caribbean area and Latin America.

⁷ Our main interest is in the New York agencies. All but two of the smaller Canadian banks maintain agencies in New York. Until 1960 New York banking laws prohibited foreign banks from opening branches. Since the removal of this prohibition, however, none of the Canadian banks has elected to convert its agency into a formal branch which would then have to abide by the laws and conventions governing banking operations in New York. Cf. Brimmer, A. F., “Foreign Banking Institutions in the United States Money Market,” Review of Economics and Statistics, 44 (02 1962), 76–81.CrossRefGoogle Scholar

⁸ Breckenridge, R. M., The Canadian Banking System, 1817–1890 (Toronto, 1894), 30, 65–6.Google Scholar

⁹ For a list see Howard, C. S., “Canadian Banks in the United States,” Canadian Banker, 61 (Autumn, 1954), 94–100.Google Scholar

¹⁰ Breckenridge provides some early balance sheets which show very substantial balances due from foreign correspondents. Canadian Banking System, 31, 41, 62, 65.

¹¹ Thus an early study of Canadian banking notes: “In the eyes of a Canadian banker a call loan payable in New York City and secured by high class collateral is practically equivalent to cash on hand. … The call loans in Canada the bankers do not rely upon as in any way equivalent to or as a substitute for a cash reserve. Call loans in Canada are really not payable on demand. The securities put up as collateral cannot be quickly marketed without a sacrifice and bankers know very well that they cannot rely on such loans as a means for increasing their cash in an emergency.” Johnson, J. F., The Canadian Banking System (Washington, 1910), 73.Google Scholar See also, Eckhardt, H. M. P., “Modes of Carrying Cash Reserves,” Journal of the Canadian Bankers Association, 16 (01 1909), 98–105 Google Scholar; Breckenridge, , Canadian Banking System, 343–5.Google Scholar

This feature of Canadian banking played a central role in Viner's classic analysis of the balance of payments adjustment process in Canada in the period 1900–1913. Cf. Viner, J., Canada's Balance of International Indebtedness, 1900–1913 (Cambridge, Mass., 1924), 177–90.Google Scholar

¹² For example: “By about 1857 or a little later, the Bank of Montreal was larger than any American bank and probably the largest and most powerful transactor in the New York money market, where it maintained and employed immense sums.” Hammond, B., Banks and Politics in America (Princeton, 1957), 669–70.Google Scholar

¹³ Gibson, J. D., “The Trend of Bank Loans and Investments in Canada,” in Parkinson, J. F., ed., Canadian Investment and Foreign Exchange Problems (Toronto, 1940), 151 Google Scholar; Patterson, E. L. S., Canadian Banking (Toronto, 1932), 48–51 Google Scholar; Royal Commission on Banking and Currency in Canada, Report (Ottawa, 1933), 23–33.Google Scholar

¹⁴ MacIntosh, R. M., “Broadening the Money Market,” Canadian Banker, 61 (Autumn, 1954), 66.Google Scholar It is interesting to note that when the Bank of Canada was established it was argued by some that it was not necessary to create a domestic money market because the Bank could control cash reserves through operations in the foreign exchange market. Cf, Neufeld, E. P., Bank of Canada Operations and Policy (Toronto, 1958), 48.Google Scholar

¹⁵ The Royal Bank of Canada, 1869–1919 (Montreal, 1920), 15–16.Google Scholar

¹⁶ The Bank of Nova Scotia, 1832–1932 (Toronto, 1932), 71–3.Google Scholar

¹⁷ The Royal Bank of Canada, 19.

¹⁸ Trigge, A. St. L., A History of the Canadian Bank of Commerce, III, 1919–1930 (Toronto, 1934), 12–13.Google Scholar

¹⁹ Howard, , “Canadian Banks in the United States;” Bank of Nova Scotia, 70–1Google Scholar; The Centenary of the Bank of Montreal, 1817–1917 (Montreal, 1917), p. 44.Google Scholar

²⁰ Initially a representative travelled into the area from the New York office. When established in 1896 the branch was kept open only during the cotton moving season. The agency was closed in 1901 and its business was taken over by the Commercial National Bank, in which the Bank of Commerce had an interest. Ross, V., The History of the Canadian Bank of Commerce, II (Toronto, 1922), 125.Google Scholar

²¹ The San Francisco branch was taken over by the Canadian Bank of Commerce in 1901 and later it was incorporated as the Canadian Bank of Commerce (California). Cf. Ross, V., The History of the Canadian Bank of Commerce, I (Toronto, 1922), 298–350.Google Scholar

²² Howard, “Canadian Banks in the United States.”

²³ The data presented on Chart I are all in Canadian dollars. The figures on foreign currency deposit liabilities therefore reflect changes in the exchange rate as well as changes in the banks' holdings of foreign currency deposit liabilities. Data on foreign currency assets and liabilities for the period 1900 to 1929 have been compiled in Curtis, C. A., Statistical Contributions to Canadian Economic History, I (Toronto, 1931).Google Scholar

²⁴ See the Appendix.

²⁵ At this time call loans were classified on a location basis (i.e., “call and short loans outside Canada to brokers and investment dealers”). As noted in the Appendix this was changed to a currency basis in September 1957. However, there is no evidence that this formal change in classification in fact involved any change in the statistics. It would appear that virtually all foreign currency call loans were made at branches and agencies outside Canada.

²⁶ A change in classification in September 1957 (described in the Appendix) partly obscures the date of the start of the upsurge in this series. Foreign currency loans at Canadian branches, the category of assets which was reclassified, increased from $40 million to almost $100 million between September 1956 and September 1957. It seems probable that the sharp rise in foreign currency loans after September 1957 was a continuation of this rapid growth in foreign currency loans at Canadian branches.

²⁷ The data on foreign currency call loans by Canadian banks are in United States dollars. The portion of these loans which are in the New York market is unknown. Furthermore, a comprehensive and internally consistent set of data on the financing of New York security dealers is not available. The two sets of data plotted on Chart IV (money borrowed by members of the New York Stock Exchange against securities, and loans by New York City banks to brokers and dealers for purchasing or carrying securities) are both fragmentary and overlapping. The nature of these data and the problems involved in interpreting them are discussed in Treasury-Federal Reserve Study of the Government Securities Market, Part III (Washington, 1960), 29–31.Google Scholar On the role of agencies of foreign banks in the New York money market, see Brimmer, “Foreign Banking Institutions in the US Money Market”; Freeman, L., “The Financing of Government Securities Dealers,” Federal Reserve Bank of New York, Monthly Review, 46 (06, 1964), 115.Google Scholar

²⁸ In addition to deposits legally payable on demand, US banks accept both savings and time deposits. The former are “passbook” accounts, mainly of individuals. They are not chequable, can be subject to notice prior to withdrawal, but are in effect payable on demand. Time deposits are mainly corporate deposits. They are for a fixed term or are subject to specified notice prior to withdrawal, and the terms of the deposit are quite strictly enforced. The initial maturity (or minimum period of notice) may be for any period over 30 days. Payment of interest for shorter term deposits is prohibited, and such deposits are treated as demand deposits.

Inasmuch as US dollar deposits in Canadian banks are most directly competitive with time deposits, we are concerned only with rates paid on these deposits. In its Regulation Q the Board of Governors of the Federal Reserve System sets maximum interest rates which member banks can pay on time deposits. The Federal Deposit Insurance Corporation effectively generalizes these ceilings to non-member insured banks. The same ceilings thus apply to virtually all banks in the USA.

On January 1, 1957, the ceilings on deposits over six months were raised from 2½ to 3 per cent, and on deposits for 90 days to 6 months from 2 to 2½ per cent. The ceilings on shorter term deposits, 30 to 90 days, remained fixed at 1 per cent.

Cf. Regufotions of the Board of Governors of the Federal Reserve System, Regulation Q; Federal Deposit Insurance Corporation, Rules and Regulations of the Corporation, title 12, chap, III, part 239; “Maximum Interest Rates on Time Deposits,” Federal Reserve Bulletin, 42 (12 1956), 1312.Google Scholar

²⁹ One study provides data on original effective interest rates on large commercial bank call loans to brokers and dealers in the period January–July 1958. Treasury-Federal Reserve Study of the Government Securities Market, part II, 120. The second study provides data on maximum and minimum rates paid by brokers and dealers for call loans in December and through the balance of the year, in each year from 1948 to 1958. United States Congress, Joint Economic Committee, A Study of the Dealer Market for Federal Government Securities (86th Congress, Second Session, 1960), 88.Google Scholar

³⁰ According to the Joint Economic Committee study, the rate on collateral loans from New York banks seldom falls below the discount rate, but the rates on loans from banks outside New York are frequently lower than those charged by New York banks and occasionally lower than the discount rate. In general, as Altman notes, “… The Canadian banks have … shaded the rate charged by US banks by perhaps one-fourth per cent. … European banks generally charge even lower rates.” Altman notes that this rate spread is acceptable to all parties because call loans from Canadian and European banks (and presumably also from US banks outside New York) are less affected by established “customer relations” and hence more subject to call than similar loans from New York banks. Joint Economic Committee, Study of the Dealer Market, 87 Google Scholar; Altman, , “Canadian Markets for U.S. Dollars,” p. 535.Google Scholar

³¹ “Canadian Markets for U.S. Dollars,” 530–31. In this regard it should be noted that time deposits with Canadian banks tend to be more liquid than time deposits with United States banks. The terms of regulation Q make it difficult and expensive to close out a time deposit with an American bank prior to maturity. The Canadian banks, reportedly, have been willing to close out deposits prior to maturity with much less significant penalties.

³² Higher Interest Rates on Time Deposits of Foreign Governments, 131.

³³ Alternative evidence is provided by estimated interest rates on US dollar deposits with Canadian banks from August 1960 on, presented on Chart VI and discussed further below. In general, these data indicate a spread of 1 per cent over the Regulation Q ceiling in late 1960, falling to ½ per cent in mid-1961, and rising to 1 per cent or more with the general rise in interest rates in 1962 and 1963. Although they contradict Altman's assertion of a downward trend in the differential, these data support the assumption of a normal 1 per cent spread.

It is also interesting to note the relationship between the 90-day US dollar deposit rate of Canadian banks and the London Euro-dollar rate indicated in Chart VI. While the differential is far from stable in the period covered, fluctuations are confined within the narrow range of ½ per cent, with the Canadian rate averaging ¼ per cent less than the Euro-dollar rate. While this relationship holds true in the period August 1960–December 1963 the change in Canadian banks' participation in the Euro-dollar market in 1960 might imply that the two rates were closer together in the earlier period. In any case, the Eurodollar rate plotted on Chart IV provides a useful indicator of the rate paid by Canadian banks on US dollar time deposits. The figures for 1957 and 1958 (quarter ends) are from Altman, , “Foreign Markets for Dollars, Sterling and Other Currencies,” 326.Google Scholar The later data are from the Bank of England.

³⁴ “Canadian Markets for U.S. Dollars,” p. 535.

³⁵ “The Market for Dollar Deposits in Europe,” 197–202. The origins of the market are also discussed by Einzig, P. in “Dollar Deposits in London,” Banker, 110 (01 1960), 23–7Google Scholar; and in A Dynamic Theory of Forward Exchange (London, 1962), 116.Google Scholar On the advantages of Canadian banks see also Canadian Bankers' Association, Submission to the Royal Commission on Banking and Finance, 103.Google Scholar

³⁶ Altman, “Canadian Markets for US Dollars,” 535.Google Scholar

³⁷ The acceleration in the growth of foreign currencies loans other than call loans which occurred in 1961 probably mainly reflects an expansion of commercial lending in foreign currencies both in Canada and the United States. In part, however, it may also be a manifestation of the shift in the participation of Canadian banks in the Euro-dollar network, and particularly an expansion of US dollar lending in Europe and the swapping of Euro-dollars into sterling for loans to local authorities and finance companies in the United Kingdom.

³⁸ These quotations are obtained from one chartered bank, and are for deposits of average magnitude. I have checked the quotations against those provided on a confidential basis to the Royal Commission on Banking and Finance by another major bank and have satisfied myself that the Gairdner figures are representative. Inevitably discrepancies exist between the two series, but the conformance between them is striking. I wish to express my thanks to Mr. W. Keyser of Gairdner and Company for making these data available and for exploring their meaning with me.

³⁹ The finance paper and hedged United States finance paper rates are also from the Gairdner Money Market Letter.

⁴⁰ Royal Commission on Banking and Finance, Report, 138.Google Scholar

⁴¹ MacIntosh, , “Broadening the Money Market,” 63–73 Google Scholar; Wilson, J. A. G., “The Canadian Money Market Experiment,” del Lavoro, Banca Nazionale Quarterly Review (03 1958), 19–55.Google Scholar

⁴² Banks are required by law to maintain “adequate reserves” on foreign currency liabilities, but this phrase has not been publicly defined. Cf. Royal Commission on Banking and Finance, Report, 138.Google Scholar

⁴³ See also the discussion below, pp. 349–50. Altman also draws our attention to the possibility that part of the increase in foreign currency deposits in 1961 and 1962 may nave reflected speculation against the Canadian dollar. It would be highly interesting to have a breakdown of deposits by country of residence of depositors. This would provide a clue to such speculative activities. Altman, , “Canadian Markets for US Dollars,” 532.Google Scholar

⁴⁴ The foreign exchange rates used in these calculations are also from Gairdner and Company's Money Market Letter. They are Bank quotations of their spot selling rate and forward buying rate. The calculations thus take account of the spread between buying and selling rates. All calculations are on the basis of a 365-day year.

As in the case of the swapped deposit rates themselves, the US dollar deposit rates derived by this method were compared with quotations provided to the Royal Commission on Banking and Finance by one of the major banks. The conformance of the two series was sufficiently close to justify using the rates calculated from the Gairdner data.

⁴⁵ Cf. Higher Interest Rates on Time Deposits of Foreign Governments, 131.

⁴⁶ “Canadian Markets for US Dollars,” 530–1, 534.

⁴⁷ The behaviour of the associated London Euro-dollar rate during the 1958 recession would lend support to this hypothesis.

⁴⁸ The data were seasonally adjusted by the Census II method. While the seasonal pattern changes somewhat over the period it shows peaks in the Spring (April-May) and Fall (October-November). The latter is related to fiscal year end window-dressing.

The reclassification of foreign currency loans effective September 30, 1957, necessitated further adjustments to the early years of the net foreign asset position. The Bank of Canada has adjusted the data back to September 30, 1956. For the period January 1955–September 30, 1956, the reported net foreign asset position was augmented by 0.117 of the foreign loans reported at month end. This is the ratio of loans reclassified ($40 million) to total foreign currency loans ($342 million) on September 30, 1956.

No adjustment was attempted for the valuation change of January 31, 1957, as no benchmark has been provided.

⁴⁹ The denominator of the liquid asset ratio is total assets less foreign currency assets, an approximation to total Canadian dollar assets. It includes an unknown (but small) amount of foreign currency securities issued by Canadian firms and governments. The numerator of the ratio is the sum of Bank of Canada notes and deposits (i.e., cash reserves), treasury bills, government securities, day-to-day loans, and call and short loans to security dealers. It should be noted that holdings of all government securities regardless of maturity have been included. While data on holdings two years and under to final maturity are provided for month-ends, such data are not available on a Wednesday basis. Moreover, reported holdings in this category are subject to wide variations as a result of periodic reclassification of large blocks of securities from “over two years” to “two years and under” simply through passage of time. A ratio which includes the two years and under category presents a distorted picture of variations in the banks' liquid asset position. On the other hand, shortterm government securities play such an important role in the reserve adjustment process that they cannot be omitted from any such ratio. Inclusion of all government securities is the only reasonable alternative. Such holdings are heavily weighted with shorter-term issues in any case.

⁵⁰ The agreement is to maintain at a minimum holdings of cash, treasury bills, and day-to-day loans equal to 15 per cent of Canadian dollar deposit liabilities on a daily average basis. This liquid asset ratio includes the legally required cash reserves of 8 per cent of Canadian dollar deposits on a daily average basis. The agreement was urged on the banks in late 1955, but first came into effect in June 1956. In order to maintain rough consistency in the data an equivalent deduction has been made from Canadian liquid assets for the period January 1955–June 1956. It should be noted also that the required liquid asset reserves are computed on a daily average basis whereas the figures used for total Canadian liquid assets and net foreign assets are averages of Wednesday figures. Unlike the data on Chart VII, the net foreign asset figures used in these calculations are not adjusted for seasonal variation.

⁵¹ Cf. Meade, J., The Theory of International Economic Policy, I, The Balance of Payments (London, 1951), 11.Google Scholar

⁵² Cf. Rhomberg, R., “Canada's Foreign Exchange Market: A Quarterly Model,” International Monetary Fund, Staff Papers, 8 (04 1960), 439–56CrossRefGoogle Scholar; Wonnacott, P., The Canadian Dollar, 1948–1958 (Toronto, 1960), 35–59 Google Scholar; Shearer, R., Monetary Policy and the Current Account of the Balance of International Payments, Working Paper for the Royal Commission on Banking and Finance (Ottawa, 1964).Google Scholar

⁵³ If the purchaser of the swapped deposits is holding a temporarily idle Canadian dollar bank deposit then the bank must dispose of money market instruments to purchase the required US dollars (unless it has excess Canadian cash); if not, then the purchaser of swapped deposits will either be disposing of Canadian money market instruments or borrowing Canadian funds short-term.

⁵⁴ Cf. Shearer, , Monetary Policy and the Current Account, 9–30, 181–4.Google Scholar

⁵⁵ Canada's Balance of International Indebtedness.

⁵⁶ Report of the Superintendent of Banks, State of New York, 1961 (Albany, 1962), 314, 316, 319, 334, 337.Google Scholar

⁵⁷ Bank of Canada, Statistical Summary, Supplement, 1962, 18–19, 15 and 16.Google Scholar

⁵⁸ Canada Gazette, Supplement, Nov. 2, 1957; Bank of Canada, Statistical Summary, 1962, 18–19, n. 15.Google Scholar