Each bank pays out its notes freely to supply the cash demands of its customers, and receives from them on deposit, without hesitation or depreciation, the notes of other banks as well as its own. The former, however, are either sent in for redemption as soon as received or used in making payments to the banks which issued them. Thus notes are cleared as readily as checks and the volume in circulation expands and contracts in automatic response to business needs. The fact that these notes are neither legal tender nor guaranteed by the government does not interfere with their circulation--daily clearings, the first lien on assets, and the redemption fund amply protecting holders against the possibility of loss--but does prevent their being hoarded as reserves or for any other purpose and thus contributes towards their elasticity. The connection now established by law between the maximum volume of bank note issues and the capitalization of the banks renders necessary the increase of the latter in correspondence with the expansion of commerce in order to prevent a contraction of credit. Present law, however, does not provide for such an increase. It is left to the voluntary action of the banks, which seem inclined to increase surplus funds rather than capital. The permission granted in 1908 to extend issues beyond the amount of capital during the crop moving season, on payment of a tax, is a makeshift and not a solution of the difficulty, since a tax on issues is a means of forcing contraction of credit and not of adjusting issues to legitimate needs. Since Canadian banks are able to meet the greater part of the public demand for hand-to-hand money by means of their own notes, they do not need to carry in their vaults large amounts of gold and silver coin and Dominion notes. They keep on hand only so much as experience indicates they are likely to be called upon to supply to their customers, plus a reasonable margin for safety and for the payment of clearing house balances. The greater part of their reserves consists of balances in banks outside of Canada, especially in the United States and England, call loans in New York City, and easily salable securities. In case of an emergency of any kind these resources may be transformed into gold or their customers supplied with foreign exchange, which is often as much or even more needed. Gold can at any time be exchanged for Dominion notes if that is the currency wanted.