FARMERS FEEL BANK ACT REVISION SHOULD ENSURE CHEAPER MONEY FOR THEM
BUSINESS & INVESTMENTS
J . H. HASLAM
(Member of Royal Grain Inquiry Commission)
Note.—This article is especially timely as the question of the revision of the Bank Act is before the House of Commons during the present session. Mr. Haslam has been asked by the committee on revision of the Bank Act to go to Ottawa to give evidence, particularly in regard to western conditions and views.
Mr. Haslam presents a very definite-sided viewpoint. The other side of the question—the bankers’—will be given in these columns next issue, by a well-known authority, A. B. Barker, manager of the Toronto Clearing HOUSE.-EDITOR.
IN VIEW of the fact that the bank act is to be revised at the present session of the federal parliament, it is well to discuss the whole question of banking and credit, apart from marketing. It may be laid down as a general principle that banks do not create wealth. Yet they perform a very necessary economic function; much therefore depends on how this is done. The savings of the people are mainly responsible for providing the lifeblood of commerce, agriculture and industry. If a banking system gathers the savings of the people in the most efficient and economical way; if it provides capital foi the needs of commerce, industry, agriculture and all the manifold activities of the people of the nation at a reasonable cost for the service rendered; and if it does this with absolute safety to the owners of the money it is a good system; and it is only good as it does this with the maximum of efficiency.
Canada is about the only country, except Great Britain, that has not a system of land banks under the authority of its highest authority. Savings bank exist together with the commercial banks in most countries and perform a function, different to, but just as necessary as, that of the commercial banks. They provide the money necessary to build homes, to put roads, sewers and other facilities in the cities and towns, finance railroads and, in conjunction with the insurance companies, do nearly everything that is done, to finance the permanent needs of the people of the nation.
Deposits in savings banks command a much higher rate of interest than those loaned to commercial banks. In fact the charge by savings banks is rarely more than one per cent, for the service they give the owners of the money. All the rest of the earnings besides this goes to the depositors in the way of dividends, Many of the mutual savings banks in New York, Boston, Cleveland, Minneapolis and elsewhere have built up huge surpluses out of this one per cent. Last year the rate paid by the large savings banks of the United States averaged nearly five per cent. Some of these banks are enormously wealthy and have been in existence since before the revolutionary war. It will readily be seen that five per cent, is a very much more attractive rate than the three that the Canadian banks pay, and attracts more savings than would the latter rate.
On the other hand, the National banks in the United States do not pay as high a rate as the savings banks and do not therefore attract as many deposits. In many eases the large United States banks do not pay interest at all, except to the banks that use them as repositories for their reserves.
Various Interests Involved
THERE are three interests involved in the work of the banks—those who loan them money, those who borrow from them, and the general public which may or may not use the banks, but whose wel-
fare is much influenced by their policy. In a period of free loaning by the banks, business is usually good, and all the activities of the nation are much accelerated.
It will therefore be seen that it is very essential that the general policy of the banks should be awise one, not guided by undue optimism at one time, or by exaggerated and undue pessimism at another. This is where the interest of the general public comes in. Nearly all other countries have national banks, in which the interest of the general public is considered as well as the interest of the banks, when general financial policy is fixed.
There is no doubt that a great many farmers, as well as others, are suffering from the policy of the banks, which a few years ago encouraged them to go into debt unnecessarily, and loaned them money, that, as things have turned-out, they could not use to advantage, and which has brought them to the verge of ruin. It may be said that it is all very well to be wise after the event—but there you are. It all proves the need of a great and wise public body in which both the banks, and the interests of the general public shall be represented when banking policy is determined.
In the last few years it can scarcely be said that a farmer, or anyone else in good credit, could complain of the attitude of the banks towards his needs, so far as the amount of money he could borrow was concerned. The amount of interest charged, in view of the interest paid by the banks, was much too high and more than the borrower could afford to pay; there the chief trouble lies. No farmer can afford to pay eight per cent, for money. His competitors have to pay no such high rate for the use of money, or rather such a large profit to the banks who handle it, for the owner of the money does not get the benefit of the high rate.
In Winona, Minnesota, the rate paid to the public by the National banks is three per cent., and the rate charged for the money is five per cent, and never more than six. The savings banks in that town pay four and a half per cent, and loan the money at five and a half and six to the home builder and farmer on mortgage. As high as seven per cent, is paid in some parts of that state to depositors and the rate to borrowers is ten per cent. The rate charged by the banks is determined by the figure at which the bank has borrowed the money.
In Canada no such conditions exist. The same rate is paid on the money borrowed by banks in districts where they charge ten per cent, as in others where the rate to the borrower is five per cent. The banks, on the other hand, claim that banks in small and new places do not pay, as it is. But the fact remains. The western farmer is a great producer of food in ordinary years but on, account of high rates of interest, and in many cases high prices occasioned thereby, he is sometimes unable to pay promptly; his credit
is therefore often bad. The bank made that an excuse to charge him a' higher rate of interest. High interest to the borrower, and low interest to the lender, is the trouble with our Canadian banks in Western Canada. No fault can be found with the Canadian banks so far as their soundness is concerned. They have stood up well during the stressful times we have had lately. It surely would have filled our cup of bitterness to the full had it been otherwise.
Position of Canada’s Banks
The condition of the Canadian banks at the end of 1922 was as follows:
Borrowed from the public in
savings deposits .........$1,167,609,065
Borrowed from the public in
demand deposits .-........ 544,446.720
Loaned to the public for commercial and other purposes of a temporary na-
„ ture................... 1,105,630,178
Cash in vaults ............ 278,000,000
Loaned abroad, call and
short loans ......... 204,500,000
Loaned on bonds and government securities and such securities as savings
banks use ............ 475,000,000
Deposited in central gold
The total assets of the comI bined banks are ......... 2,690,434,823
be seen that, of the total assets of the banks, only forty-four per cent, is loaned for the commercial and productive purposes of the nation.
Why should such large sums of the savings of a young and comparatively poor country be loaned abroad? Why is it necessary for the banks to keep such a large amount of their assets, in what is called liquid form; that is, cash and easily marketable securities? In 1913 it was thirty-one per cent, and now it is about forty-five per cent. What has arisen to make this necessary since the war? The country is starving for money and could use it very well at a higher rate than this money is paying the banks.
And now we get to the question of a National Bank of rediscount and issue such as other countries have. It must be remembered that our banks absorb the savings that in other countries are used for home-building, etc. They keep a large amount of it tied up_ in their vaults and loaned abroad to enrich and sweeten the economic life of other countries.
The banks claim this is necessary to preserve their safety beyond a doubt. The Weyburn Security Bank has more than a million dollars loaned to Eastern Canadian banks. This money is gathered in small amounts in villages, and towns in Southern Saskatchewan.
What Could A National Bank Do?
"MOW the question arises how would a 1 ^ National bank change this? It would revolutionize Canadian Banking as the Federal Reserve banks have revolutionized the banking customs of the United States. In the first place, the cash reserves would be largely carried in the National Bank. There would be no necessity for carrying anyreserves in the United States or elsewhere. There would be no
need to carry such huge amounts of bonds, and other quick assets; for the banks would have the National bank behind them and they could rediscount their good paper in time of stress if such a time_ should come. They could use the public’s money up to the limit, with much more safety than at present, and keep their funds much more readily employed. If they still used savings deposits they could use them as savings are usually employed, and pay a higher rate of interest for them, and attract more savings. People of ^rnall means do like to have their money m a bank, rather than in securities no matter how good. It would not be necessary for the Weyburn Security Bank, for instance, to keep a million dollars of the money of the people of the country in vhich they do business, loaned in Montreal or Toronto or elsewhere. The people, t is true, might want some of their deposits later on, but the bank could rediscount some of their paper with short maturity to take care of any such contingency.
'What It Has Done Elsewhere
[ TNTIL a few years ago the farmeis in ^ the Western States paid on their nortgages the same high rates that the armers in Western Canada are paying
nowThe Federal Farm Loan Bank now provides the farmer cheaper money for his permanent purposes than any merchant or manufacturer can procure for his permanent needs. The securities issued by the Farm Loan Board are tax exempt, and are the most popular of any security used for any purpose except those issued by the Government or the municipalities. They are now selling at a •price that nets the purchaser very little more than four per cent. So that an investor who has an income of $100,000 and has to pay fifty per cent, income tax would prefer them to an prdinary bond that pays six or seven per cent. There is a lot of complaint about this policy from the Secretary of the Treasury who has to raise the revenues for the nation as it dries up a great reservoir of taxable proprety, and enables much wealth to escape taxation. The sentiment of the farmers is so strongly in favour of the Farm Loan Board and its tax-exempt securities that it is extremely unlikely that a change could be made. Nearly a billion dollars has been loaned to the farmers by these banks and the old loaning agencies are retiring from the field.
The law also allows for the creation of Joint Stock Land Banks, in which a company can issue tax-exempt securities under the auspices of the Federal Farm Loan Board. Many of the large companies doing a loaning business are coming ito the scheme, although their securities are not so popular as those of the Federal Farm Loan Banks, and they usually sell at a price that gives a return of about onehalf per cent, higher than the more popular security. The rate to the farmer is about five per cent., with one per cent, additional which pays off the debt in thirty three years. The Joint Stock Land Banks charge about one half per cent, more.
Various schemes are now before Congress to provide money for the farmer at the same low rate for his temporary needs as well. These will likely eventuate in some workable plan during the next Congress. The farmers, with their quick aggregate wealth, will have to mobilize their credit before they can borrow as cheaply as can the savings banks, on the Continent of Europe. This is certain: the functioning of the Farm Loan Banksand the prospect of the other scheme has restored agriculture to much of its former prosperity and every industry to normal activity and given employment to nearly everyone. The reform of banking in Canada, if such there is to be, and if it is to be of any material benefit to agriculture, must contemplate cheaper money for farmers. Each type of banking should fit into and articulate with the other. There has been serious mortality in Canada among the farm Loan Banks, or Mortgage Companies and Trust Companies as we call them. Surely Parliament is not going to ignore this condition; and particularly as the mortgage companies are now soliciting deposits. It may be all right for those that are old and strong but those that are new and to be established need regulation.
The Question of Branch Banking
THIS brings up, too, the much-discussed questionof branch banking. There are two sides to this question as to every other. There is no doubt that the presence of an active and prosperous bank in a community, that is owned by the people of that community and receives its support therefrom, adds much to the prosperity of that place. The banker is usually a businessman of long experience and much wisdom, and he has a very strong steadying influence on the bor-rower. He is usually at the head and front of every movement for the betterment of the community. He helps to promote industries and to finance them after they get on their feet. He is ready when they have merit to tide them over their troubles The best “proof of the pudding is the eating’’ and the wonderful come-back that agriculture and industry have had in the United States, under a system of branch banks, is the answer.
On the other hand, it is hard to see how any small bank in western Canada could have stood up under the fearful strain of the last two years. It is idle to suggest small independent banks under our present system; yet the Weyburn Security Bank has stood up. As an illustration of the way the branch banking system works out, let us take the case of two cities and
institute a comparison. Calgary has no local banks. Nearly every business of importance in that town is owned outside of the city, except the large packing plant. On the other hand Spokane has very large, prosperous banks owned by the citizens. Practically every business activity in the city is owned by its own people. Consequently it attracts to its citizenship the best of the ability in the territory tributary to it. Its banks not only finance the needs of its own citizens but also the temporary needs of the region of which it is the commercial capital. As the profits of the business conducted in the city go to its own citizens there is consequently very much more money available for all purposes. Surely it is not hard to determine which is the better policy for the building up of a city.
Is not the same condition of affairs as exists in Calgary, true also of Winnipeg?
As the Maritime Provinces lost their banks they also lost control of their industries. It may be laid down as a general rule that the control of industry and commerce resides where large banking interests are domiciled. Why should Winnipeg not own its own business and industries, to the same extent that St. Paul, Minneapolis, Duluth or Fargo do? What proportion of the great profits of the grain business apart from salaries, comes to the citizens of Winnipeg? What part have they in the immensely profitable milling business of Western Canada? One cannot help but think that there is very close connection between the conditions that exist, whatever they may be, and the banking of Canada.
Now, whatever the answers to all these questions may be, and they are all controversial, it must be given in such a way that will help the deplorable economic conditions that exist in Western Canada to-day.
Perhaps no like number of farmers in the world produce so much food as the farmers of Western Canada; and yet there is decay in the economic structure. Farmers are disheartened; business is languishing; capital to the borrower is too expen. sive.
Sir Joseph Flavelle, in an address made in Toronto a short time ago, made a statement, as reported in the Eastern Canadian papers, that there were two hundred million dollars of savings deposits in the banks of the three Western Provinces. And in addition to this, there were one hundred and fifty millions of demand deposits, which, in view of all the circumstances, is a remarkable showing. Especially so, when it is remembered that a very large share of the profits of both business and industry, including insurance, goes elsewhere. A statement was also made that there were seventy-five million dollars loaned to the farmers of Western Canada by the banks. This, surely, must be a mistake, in view of the statements made from time to time by the banks which indicate a very different state of affairs.
But, whatever the facts, the farmers must have cheaper money, both for their permanent and temporary needs. Grain is grown at a very high cost in Western Canada, much more so than in any country with which we compete. And if, on top of this high cost, the huge amount of capital required has to pay abnormally high rates which one cannot help but think are unjustified by the situation, the condition is impossible and demands immediate and drastic treatment. There appears to be only one answer to it all and that is, the farmers should borrow the money direct without the intermediary of a middle man.
THE rural credit scheme of Manitoba is certainly a move in the right direction. The condition outlined in the report on the activity of these institutions is deplorable, if true. But are the mistakes made, if such there are, greater than those made by the banks during the same period? If so, it is only a question of degree. President Harding, in a message to Congress some time ago, made the statement that farmers were only prospering, at the present time, where they co-operated both for production, marketing and finance. This statement is undoubtedly true and it suggests the answer to our economic ills. A comparatively small number of farmers in Western Canada who produced, as is stated more than six hundred million dollars worth of wealth last year, must have
just as great credit, if mobilized as the banks and merchants doing business in Western Canada. But the problem is to mobilize it and make it available. The problem may be difficult, but it must be tackled with soberness and earnestness, and that is a task for Parliament. It is not only a question for Western Canada but for Eastern Canada. Their farmers have their trouble as well as we. These problems cannot be solved by the wanton destruction of long-established institutions, but the very few men who have charge of these institutions should give the matter careful thought and survey the_situation. They dictate the financial policy of the nation, as things are. They should consider whether their institutions, at present functioning, in the light of what is being done in some other countries are best adapted to the productive needs of the nation.
There can be but one answer to this question.