MARKET PRICE MUST BE PAID FOR MONEY, JUST AS FOR ANY OTHER COMMODITY WE DESIRE
BUSINESS & INVESTMENTS
A. B. BARKER
Manager Toronto Clearing House
Note.—In the April 1 issue. J. H. Haslam discussed banking conditions in Canada from the view-point of the farmer—and more specifically of the western farmer. In this article the service rendered the community by banks is treated in simple, logical and informative fashion by an undoubted authority.—EDITOR.
THE open season for banks is now here. The decennial revision of the Act takes place this year, when the governing rules under which the banks operate will be settled for the next decade. It is to be hoped that the discussion will be full, so that the reasons for the final decision, whatever that may be, will be clearly understood by all. A bank is the servant, not the mistress, of trade and the system under which it operates must conform to the trading customs of the country if it is to perform properly the duties for which it was organized. These customs are changing from time to time as conditions alter, and banking methods and laws must be modified accordingly.
The fathers of Confederation, to whose foresight we owe the decennial revision, builded better than they knew. Thanks to this provision, the revision comes up at stated intervals in the usual course and, after discussion, is settled for a tenyear period with the least possible disturbance. No vested interest has been created, as would have been the case had the charters been perpetual. Much of the criticism of the banks and their policies comes from a misunderstanding of the functions of a bank, and its place in the business mechanism of the country.
A bank is often described as a manufacturer of credit, and a dealer in money, and in popular opinion the manufacturer of credit is synonymous with the creator of credit. Now a bank does manufacture credit, but not in the sense of creating it. All it does is to buy the raw material in the shape of deposits, and turn it into the finished article, which it sells to its clients, the business men of the country—all classes of business men, including farmers, It gives this credit a currency which it would not otherwise have, and makes it available in convenient amounts, and on specified terms suitable to the operation of the business of these customers. Primarily it does not deal in money; it merely uses money as does every other business man, as a measure of value and a medium of exchange to facilitate its transactions with those with whom it trades. A bank is best described as a trader in credit, buying this commodity from its depositors and selling it to its customers.
Governed by Business Rules
AS WITH other traders, the terms on which it sells must be governed by the terms on which it buys, for the reason that in order to keep in business it must be ready to carry out the agreements under which it purchased the commodity in which it deals. It buys at wholesale and sells at retail and the retail price must be decided by the wholesale price and the cost of operation, just as in every other business. There is this difference in a bank, however, that in every other trading business the trader may, without any serious loss of credit, ask a creditor to extend a note, if for any reason his sales have fallen below expectations, or his collections have been slower than usual. The reason is that the ordinary trader buys from the few and sells to the many.
With the bank it is the other way around: it buys from the many and sells to the few, and therefore is precluded from asking for renewals of its obligations to the public. It must pay as agreed, or acknowledge bankruptcy. There is no middle course. When a bank sells credit, therefore, discounts a note or makes a loan, it is essential that the transaction be one which does not involve the tying up of the funds in long-winded deals. The terms on which a bank buys credit and takes deposits are that it will account for them to the depositor on demand. If all wanted their money at once it is obvious that no bank could continue* in business, but experience has shown that only a certain percentage will be required from day to day, and by holding in actual cash, i.e., legáis and specie, sufficient to provide for this, and also a turn in reserve either in cash, or in readily realizable assets, sufficient to take care of any sudden unforeseen call, the balance may be used in supplying the business requirements of the bank’s customers. From this it follows that the funds supplied in this way by the banks are intended to supplement the working capital of the bank’s customer, and* not to go into capital expenditure such as land, plant, and machinery. The funds for these must come from the borrower’s own resources, or be obtained from funds available for long term investments.
Difficulties of Comparison
COMPARISON is often made between the Canadian and other systems of banking, but our difficulty in this is that the same terms are used in different countries to mean quite different things, and unless this is allowed for, the conclusions will be wide of the mark. It may be assumed that the. object in each system is the same, the distribution of available credit to the best advantage, but the varying conditions obtaining in different countries have altered the form of the machinery. No system has ever been evolved by calm discussions, it had always been the result of a crisis; designed to meet a particular set of conditions, and this fact would be responsible for the form. As time went on and conditions changed the system would be altered to meet the new conditions, but ordinarily the main features would still remain. This tendency is the rule in all other kinds of business operations. No plant is ever scrapped entirely unless under exceptional circumstances, if the owners are continuing in business.
Both the American and Canadian systems illustrate this. Before the Civil War in the United States all the banks operated under state charters, wîiich permitted branches and the issuing of notes as currency. These notes were based on the assets of the issuing banks just as are the Canadian bank notes at present. During the panics of 1837, 1847 and 1857 many of these state banks failed, and the noteholders as well as depositors were heavy losers. One result was a general suspicion of bank notes, and these were
accepted only where the issuing bank was known. The newspapers of the time are full of accounts of the inconvenience of this. Notes issued by Boston banks were not accepted in New York and vice versa.
The country had not recovered when the Civil War broke out. The Federal Government had to find a circulating medium which would be accepted at par anywhere in the country, and it also needed a steady market for its bonds floated to secure funds to equip and maintain its armies. The National Banking Act was the result. By providing for a bank currency secured by bonds of the United States both of these requirements were met, the banks had to buy the bonds to lodge as security for their note issues, and the notes so secured were readily accepted by the people. This gave the note absolute^, security so long as the Government endured, and the measure contributed in no small degree to the final success of the federal arms in the struggle.
Security vs. Elasticity
THIS security was at the expense of the elasticity of the currency, and later on when conditions changed the rigidity was frequently the cause of serious inconvenience to the business and trading community. Most of us can remember the currency famines which our neighbors used to have every year or so, chiefly in the fall, when funds were needed to move the crops. It was to correct this weakness in their monetary system in that country that led eventually to the establishment of the Federal Reserve banks, which are permitted to issue notes based on gold and trade paper. This provides a method by which the issues of these Federal reserve notes expand and contract according to the demands of business, as do the notes issued by Canadian banks. , '
Canada’s early banking problems took a different form, and the solution was therefore different. At the time of the British occupation of Canada there was no money in the country. The French authorities to supply the want of a circulating medium had previously issued a paper currency in the shape of card money and “ordonnances,” and at first these were welcomed as a convenience. There was, however, no provision for their redemption, and the authorities, finding how easy it was to finance in this way, abused the privilege shamefully. The natural result followed, as we have seen it in recent times in Austria, Germany and Russia. It fell to a discount, and finally would not be accepted by the people in exchange for goods or services. This had a disastrous effect on the French arms, as supplies of grain and fodder could with difficulty be had from the farmers, and in consequence food and supplies for the troops were scarce. As men will not fight unless they are fed, Montcalm had great difficulty in holding his men together.
The British, on the other hand, although their own home currency was in a most unsatisfactory state, arranged for supplies of Spanish dollars, then used so widely in trade in the American colonies, and used these to buy supplies. They were thus able to purchase freely supplies from the farmers, who preferred to sell to the invaders who did pay in coin, rather than to thèir own people who could pay only in depreciated paper. The British won, not so much because of the skill of their general and the bravery of their troops, as because of the criminal dishonesty of the French civil authorities, through the issue of this irredeemable paper currency. When the country wás ceded there were outstanding some 80,000,000 livres of this worthless paper, equal at par to nearly $126,000,000.
Our First Bank
HPHE circulating currency of the new colony, until after the war with the United States in 1812, consisted of these Spanish dollars referred to, American silver, and army bills on London, issued by the British forces in payment of supplies. When peace was declared the troops were withdrawn, and the issue of these bills ceased. As a result the shortage of a circulating medium was a serious inconvenience and led in 1817 to the establishment of the Bank of Montreal.
The main object of a bank at that time was considered to be the issuing of notes for use as currency. On account of the unhappy experience of the people with the government issues under the old re-
gime, and recent difficulties of the new American republic with its continental issues, government notes were out of the question; the people would have viewed them with suspicion from the start. They preferred the notes of a private organization, which had to redeem its notes on demand or confess bankruptcy, rather than those of a government which might under stress of circumstances over-issue, and in this way send them to a discount. People will die for their country, but they will not accept its promises to pay at their face value unless they believe that these will be redeemed promptly on demand.
United States banks were organized about this time on theories similar to those in Canada, and had it not been for the financial upheaval due to the Civil War the chances are that the American and Canadian systems would' have been more alike to-day. As has been pointed out, the American system was completely altered to meet the conditions of this struggle. Canada has not had to face such a crisis, and therefore there has been no need for any alteration in its system. It does the work for which it was designed, and does it well, and the same thing may be said about the American system, though they cannot be compared in detail, owing to their differences in operation.
Criticism of banks, however, in regard to their lending policy to farmers, is not confined to Canada. It is prevalent in England, and is particularly vigorous in the western states of our neighbor t.o the South, where the banks are accused' as they are here, of discriminating against farm loans by refusing to make advances either to the extent asked for, or for the length of time necessary. The answers to these charges are almost identical in the different countries: that funds obtained from deposits payable on demand are not intended to be used for long-winded advances; that as the banks are required to repay to their depositors on demand, the funds must be invested in more liquid form. From this it would appear that the cause of complaint is not in the system, and relief must be sought for in other directions^
Savings banks in the Eastern States do not take deposits payable on demand, nor do they make loans for either commercial or farming operations, so that they cannot be compared with the chartered banks here, or with the commercial banks in the United States. They are more like the Loan Companies in Canada. These now take deposits, and permit the issuing of cheques against them, but for the funds from which they make their loans on land and house property, these companies depend on their long-term deposits, and before the war obtained these largely in Great Britain through the sale of their debentures. This source is not now available owing to the adverse rate of exchange, and this no doubt is largely responsible for the shortage of funds available for mortgage loans in the West, as well as in Eastern Canada. Owing to the extensive purchases of land in the West on agreements of sale, the need of accommodation to meet maturing payments is urgenti. Banks cannot be expected to make loans for any such purpose, and in self-defence have been forced to take steps to see that the funds advanced by them for farm operations, the growing and marketing of grain, and the fattening and selling of cattle, are repaid when that particular operation is over, and not used to meet payments due and pressing on land or machinery.
Keeping Its Money Busy
THE reason for this is easily seen. In order to make a profit, without which it cannot continue in business, a bank must keep its funds employed. A bank, however, is organized to serve the whole community, not a part, and as its resources are limited strictly by its deposits, it is essential that each class of borrower shall clean up its bank advances at the close of its season, in order that the next class of business shall receive in its turn the accommodation it has the right to expect. If for any reason one class of borrower does not repay at the close of its season as expected, the next in turn must go short. It is not a question of whether the bank is willing to lend, but that the funds are not available, and cannot be made so by the issue of additional notes by either bank or government. Bank notes or government notes are not money
but merely promises to pay money, and circulate as money only because the public have confidence that they will be redeemed by the issuer on demand. The moment the amount of such notes issued exceeds the ability of the issues to redeem on demand they fall invalueand it requires inore of these than before to purchase a given quantity of goods.
With regard to rates it will be found that on the whole the Canadian West has been able to obtain accommodation on terms as low as, or lower than, similarlysituated localities in the western states.
The published rates may not show this, but the method of handling makes the actual rate paid in the United States considerably higher than the published rates. A customer in' Canada arranges for an advance from a Canadian bank. The whole amount of the agreed-on loan may be drawn by him. Under the American practice, however, one of the conditions upon which a loan is granted by a bank is, that the borrower shall maintain during the currency of the loan a free balance at credit of his account in the bank equal to an agreed on percentage of the amount loaned. In many cases this is as tiigh as twenty per bent., which means that the borrower is able to use only eighty per cent, of the loan for which he is paying interest. A rate of eight per cent, in Canada would therefore equal a rate of six and a half per cent, in the United States.
As to the merits of the small local bank compared to the branch of one of the chartered banks, the arguments in favor of the former may be dismissed as purely sentimental. The best proof of this is that no attempt is ever made to establish one of these local institutions. There is no law to prevent a group of local men organizing to do a banking business in any section of Canada, with practically all the powers of a small American National Bank except the right to use the name of Bank. They could take deposits and pay cheques against them, and lend money on any class of security, mortgages, or chattel mortgages, as well as on any security on which a chartered bank may make advances. They could not, of course, issue notes as currency, but then many American National Banks do not issue notes, as in order to do this the National Bank must first purchase United States bonds to án amount roughly five per cent, more than the notes to be issued, and. lodge these bonds with the Treasury of the United States. The smaller National Banks can use their funds to greater advantage, and many forego the right to issue notes.
What Are Bank Profits?
THE agitation for small banks therefore appears to be based on the belief that these institutions could issue notes on the same terms as the chartered banks. This would be a big step backward, and would tend to destroy the confidence of the public in our present note issues.
There is a widespread, but mistaken, belief that the banks make enormous profits from these issues. True they do make a profit, otherwise there would be no incentive but when all the circumstances are taken into consideration it will be found that the banks give full service in return for the privilege. These issues are no longer free. Banks are permitted to issue up to the amount of their paid-up capital, and on this issue there is a yearly tax of one per cent. On any authorized issue in excess of this, there is a tax of five per cent, per annum, unless the bank deposits with the government gold or legal tender notes equal to such excess. On the notes issued in excess of the amount of paid-up capital there is obviously no profit, and the government regulations were intended to insure this, so that there would be no incentive on the part of the bank to over issue.
As already stated, these notes are not money, but promises to pay money, and pass as money only because of the public confidence that they will be redeemed on demand. They are in fact a loan to the bank by the public, and the loanable resources of the bank are increased to the extent that the notes remain outstanding. The funds available to the banks from this source will depend on the turnover, and this is exceedingly active. According to the government statement of iDecember 20, 1922, the total circulation outstanding was $176,000,000. The deposit in the gold reserve was $61,000,000 leaving $115,000,000 on which the hank would make its
profit after deducting the tax of one per cent, and the cost of handling. The notes held by other banks at the same date was $43,000,000, and as these would be presented for redemption within a day or two, and must be paid for in legal tenders, the amount remaining is reduced to $72,000,000.
As against this it may be pointed out that the cheques on other banks received on deposit, and upon which depositors are permitted to draw at once, amounted to $116,000,000. These cheques will not be actually settled for until the following day, although the public have received value for them, and without charge if they are drawn on banks in the same town and this may be considered a fair offset for the circulation privilege. This custom does not obtain in other countries. IntheUnited States, according to the Federal Reserve Regulations, cheques deposited are not considered part of the bank’s cash reserve until a certain specified period, based on the time necessary for the bank to realize on them, and there is a general custom then of requiring each depositor to maintain at his credit a free balance based on the activity of his account.
In Great Britain a depositor either maintains a free balance, according to agreement, or a charge is made based on the items passing through the account. In both of these countries the published rates of interest are lower than in Canada, but the service is paid for in other ways. It all comes down to the same thing in the end, that the market price must be paid for anything we want-whether it be credit or goods.
ANSWERS To FINANCIAL QUERIES
Question—Kindly let me know whether you would advise buying shares of the Vipond Consolidated Mines and the Davidson Mining Company as good speculations with a chance of returns at the present market value.— H. B., Three Rivers, Que.
Answer—The words used in the latter part of your enquiry, “good speculations with a fair chance of return at the present market value” is. as good a statement of the position of the two issues as can be given. Both have capital and mining plants, while the property of each has been sufficiently developed to show that further work may result in mines of importance. The big trouble with these two propositions is that many of the original shareholders tired while waiting for them to develop.’ Efforts .to this end seem to be fairly under way now.
Question—I am holding some shares of the Night Hawk Peninsular and will be pleased if you will give me some information concerning them and when they will be listed on the exchange.—Subscriber, TFoodbridge, Ont.
Answer—The property of the Night Hawk Peninsular is capitalized at $5.000,-
000 of which $4,000,000 has been issued. The company controls about 1,600 acres, including the original Night Hawk staking, which was one of the first in the Porcupine district. The directors have spent $300,000 on development work and foundations are now being laid for a mill which, we understand, will be completed shortly. Application has been made to list the stock on the Standard Mining Exchange, but no date for its appearance on the board can be given at present.
Question—About seventeen years ago
1 purchased some Canadian Marconi Wireless Shares, but so far have had no dividends. The shares cost $5 each. I understand that there was some re-organization several years ago at which time part of the capital was written off; Please give me some information regarding the shares and the value.—Subscriber, Fort W.illiam. Ontario.
Answer—At the Annual and Special General Meeting of the shareholders of the Marconi Wireless and Telegraph Company of Canada, that was held in September, 1919, by-law number 26 was ratified, confirmed and enacted, whereby the capital of the company was reduced from $5,000,000 to $3,750,000. by reducing the par value of the outstanding shares from $5 to $2.50 each, and authorizing the issue of an additional 500.000 shares at the par value of $2.50 each. Up to the present time directors had been
unable to allocate funds for dividend purposes, therefore no dividends had been declared or paid. The present price of the stock is around $2.00, and it is generally considered by brokers that this is the value of the shares.
Question—Please give me your opinion of Durant Motor Stock as an investment for a person of moderate means.—A. M. C., Toronto.
Answer—Durant Motors of Canada, Ltd., has made a very notable record in production since it started its Canadian plant at Leaside. It has now extended the plant in order to take care of the assembling and turning out of the new Durant “Star” model. The company’s cars have been very popular and it is claimed that just as fast as the production can be increased there is a market for everything that can be turned out.
The Durant Company, of course, is still largely in a state of development, as it is of necessity related to some extent to the parent concern in the United States. What you have to decide for yourself is whether you think there is enough margin in the stock to allow for the risk that you have to take in a new industry. The company has been expanding very rapidly and it will be some time of course before it will be in a position to pay dividends.
Question—Do you expect Spanish River preferred to show an appreciation in price, and a return towards normal, this autumn? Subscriber, Bridgetown, Nova Scotia. •
Answer—Conditions in the pulp and paper industry have shown a steady improvement during the past twelve months and while it is generally considered that the outlook for the larger concerns is bright, it is contended that the return to normal conditions will be slow.
ANSWERS To INSURANCE QUERIES
Question—I have taken out a policy with the Mutual Life Assurance Company. I have paid my first annual payment, and would like to know if the company is a safe one. Is the company authorized by the government to carry on business in Ontario? —Policyholder, L amilton, Ont.
Answer—The Mutual Life Assurance Company has just completed its thirteenth year. The annual statement for the past year is not yet available, but we understand that business during the period has been very satisfactory, and in keeping with the business of all the leading insurance companies in Canada. The company is operating in Ontario under a provincial charter. It also has licenses to carry on business in the other provinces throughout Canada. The company is capably managed.
Question—Please tell me how long the Western Empire Assurance Company has been in business. Is it a reliable company? I have paid two yearly_ premiums, and want to know whether it is safe for me to continue or to let the policies lapse.—School Teacher, Brandon, Man.
Answer—The company took out a Province of Mantoba License in 1911 and commenced business in January, 1912. A few months later licenses were taken out in order to carry on business in the other provinces. The company has a large business connection throughout Western Canada, and judging from the latest financial report it has made very good progress.
The company is capably managed. We strongly advise you to continue your payments, which may be considered a good investment.
J Subscribers to MACLEAN’S MAGAZINE desirina advice in regard to Canadian industrial investments. or life insurance problems. will be answered freely (if a stamped, addressed envelope is enclosed), by addressing Financial Editor of MACLEAN'S MAGAZINE.
If you are asking in regard to insurance, please give full details of your own financial and family position, so that definite and individual suggestions can be given.