COMMERCIAL BANKING IN OTHER COUNTRIES
In contrast with that of the United States, the characteristic
features of the commercial banking systems of Europe are the central
bank performing important functions for all other financial
institutions and for the government; a relatively small number of
large institutions with many branches mediating between the central
bank and the people; and the use of commercial and bank bills instead
of promissory notes as the chief instruments of loans and discounts.
_1. Common Features_
The central banks differ considerably in organization and business
methods, but perform essentially the same functions; that is, they act
as financial agents for their respective governments; discount
high-grade commercial and bankers' bills for other banks and usually
for private persons; administer the cash reserves of the entire
country; and furnish the greater part and, in some cases, the entire
supply of bank notes.
The other large banks do most of the business with the public, the
central bank's relations being chiefly with them and with the
government. They conduct checking accounts with merchants,
manufacturers, farmers, and others; receive and invest savings
deposits, and deal in certain classes of investment securities;
conduct the domestic and foreign exchanges; discount various kinds of
commercial and banking bills, frequently those not available for
discount at the central bank; and make advances on personal and other
kinds of security. Their main offices are located either in the
central money market of the country or in important financial centers,
and their branches are extended to all places in which banking
facilities are supposed to be needed. As a rule, they are less
restricted by legislative provisions than are the national and state
banks and trust companies of the United States, and are less carefully
supervised and inspected by public officers.
Commercial and bankers' bills are widely used as credit instruments
between buyers and sellers and between bankers and their customers. A
common method of procedure, when a sale is made on time, is the
drawing of a bill for the amount due, by the seller upon the buyer,
payable at the end of the credit period agreed upon, and accepted by
the buyer, and the discount of the bill by the seller's bank. In
foreign and in some branches of domestic trade, the banker's bill is
used on account of its more general acceptability as an object of
discount, such bills usually being discountable by the central bank
and by banks far distant from the place in which the bill originated.
In case a buyer desires to furnish his creditors with bills of this
kind, he arranges with his banker for a line of "acceptance" credit,
which permits people who sell goods to him to draw bills upon his
banker instead of himself, the banker agreeing to accept the bill and
guaranteeing its payment at maturity. The seller will usually have no
difficulty in discounting such a bill at his own bank, no matter how
far removed it may be from the home of the buyer, the character of the
accepting bank being known throughout the financial world. "Acceptance
lines" are usually granted only on condition that the customer agrees
to supply the bank with the funds necessary for meeting the accepted
bills as they fall due, and to pay a fee for the accommodation. Ample
security that these obligations will be met is usually demanded.
_2. The English System_
In the English system, the central bank is the Bank of England, with
the possible exception of a few private banks, the oldest financial
institution in the country. It is privately owned and privately
governed. Its board of directors, chosen by the stockholders, consists
of twenty-four persons, a portion of whom are practically life
members, being regularly reelected when their terms of office expire.
The others usually serve alternate years only, vacancies being filled
by promising young men selected from the business houses of London.
The oldest director is regularly elected to the office of governor of
the Bank, and the next oldest to that of deputy governor, both serving
two years, the deputy governor regularly succeeding to the office of
governor, and the ex-governors forming the life members of the board
and constituting a kind of advisory council to the governor, and known
as the Board of Treasury.
The head office of the Bank of England is in London, and there are
eleven branches, two in London and nine in the provinces. By a law
passed in 1844, the Bank was divided into two departments, called
respectively the banking and the issue departments, the latter having
exclusive charge of the issue of notes, and the former of all other
branches of the bank's business.
This same law prescribed the conditions under which notes could be
issued. It provided that the Bank of England might issue L14,500,000
of notes in exchange for securities, and any amount in addition in
exchange for an equal amount of coin or bullion. Additions to the
amount issued in exchange for securities might be made by order of the
government to the extent of two-thirds the amount of issues
relinquished by the other issuing banks, all such banks in existence
at the time the act was passed being permitted to retain, without
increasing, their existing issues. Most of these other issues having
been abandoned since 1844, the Bank of England is now permitted to
issue in exchange for securities L18,450,000. The securities against
which these issues are made were transferred to the issue department
by the banking department, and consist of the debt owed by the
government to the bank and of other government or governmentally
guaranteed securities. The issue department freely issues additional
notes in exchange for an equal amount of gold coin or bullion, and on
demand redeems notes in gold coin. Since the amount of notes all the
time outstanding greatly exceeds L18,450,000, the business of the
issue department is confined to the exchange of notes for gold coin
and bullion and the redemption of notes in gold.
The banking department receives and disburses the funds of the
government, manages the public debt, and serves as the government's
agent in most of its other financial operations; receives on deposit
from other financial institutions the money which comes into their
possession, and supplies them with such money funds as they need from
day to day in payment of checks drawn against their balances;
discounts bills of exchange with a minimum maturity of four, and in
exceptional cases six, months; and to a limited extent makes advances
on and invests in high-grade public and other securities. Besides the
English government and financial institutions, it has other customers,
but it is to be presumed that these are of a special character, since
the conditions under which it does business with private persons are
in most cases more onerous than those prescribed by other banks, and
consequently not attractive to the ordinary business man.
The so-called English Joint-Stock Banks are classified into three
groups, known as metropolitan, metropolitan and provincial, and
provincial banks. The metropolitan banks have their head offices in
London, and do not, as a rule, extend their branches beyond the
suburbs of the metropolis. The metropolitan and provincial banks have
their head offices in London and branches scattered throughout the
provinces, as well as in various parts of the city and suburbs, and
the provincial banks have their head offices in the larger provincial
cities, and each one confines its branches usually to the town and
country districts tributary to the city in which its head office is
situated. Often the provincial banks establish branches in London.
For banking purposes, these banks are the chief reliance of the
agriculture, industry, and commerce of the country, but competing with
and supplementing them are the bill brokers and discount houses, the
private banks, and the foreign and colonial banks. The bill brokers
and discount houses make a business of dealing in foreign and domestic
bills of exchange. They buy in the first instance a large percentage
of the bills brought to market, keep some of them until maturity, and
sell the remainder to the other banks, usually indorsing them first. A
large part of the capital employed in their business is obtained by
loans made from the other banks, subject to call and secured by the
bills they purchase deposited as collateral.
The private banks are the remnant left of the oldest group in the
country. There were private banks in London centuries before the Bank
of England was incorporated, and previous to 1826 the Bank of England
was their only competitor. Since 1844 their number has steadily
diminished. Those which remain have, as a rule, built up a special
constituency, to the special interests of which they cater. Among them
are strong institutions, but as a class their importance in the system
is not great, and is waning.
The foreign and colonial banks are branches of important institutions
in foreign countries and the English colonies which have a
considerable volume of business to transact in London. They serve as
intermediaries between their respective countries and the English
money market, and on account of the enormous volume of foreign
commerce which is financed in London, their number is large, and the
role they play on that market is important.
In the operation of this machinery, the most noteworthy features are
the reserve system, and the administration of the discount rate of the
Bank of England. There is no law on the English statute books
prescribing the amount of cash which banking or other financial
institutions shall keep in their vaults. The custom of these
institutions regarding that matter is to keep on hand relatively small
sums and to rely upon the Bank of England or some other London banking
house for the replenishment of their supply as needed. For this
purpose, London and many provincial banks keep balances with the Bank
of England, and other banks maintain balances with other London
institutions. These balances may be obtained by the deposit of coin or
Bank of England notes or by rediscounts. Another widely used resource
is the calling of loans made to bill brokers or discount houses. Such
loans or a considerable volume of bills of the kind discounted by the
Bank of England, or both, are regularly carried by London banks and
counted as a part of their reserves.
On account of these practices, surplus cash not needed in the conduct
of the current business of the country speedily finds its way into the
vaults of the Bank of England, and additional supplies, when needed,
come from this source. The administration of the cash reserves of the
country thus becomes one of the important duties of the Bank of
England, in the performance of which variation of the rate charged on
discounts is the most important device.
Many years' experience has enabled the Bank to determine with a
considerable degree of accuracy the volume of the demands for cash
likely to be made upon it from day to day, and consequently the amount
that it should keep on hand in the vaults. Whenever this amount
approaches the minimum regarded as consistent with safety, the
directors raise the rate of discount, and when the amount on hand
becomes excessive, they lower it. The efficiency of this procedure in
increasing the reserves in the one case and in decreasing them in the
other is due to certain conditions and practices which deserve
attention at this point.
Long-established custom has made the rate of interest paid on deposits
in London and other parts of England vary with the discount rate of
the Bank, and on this account the market rate of discount also varies
in the same manner. The Bank of England is thus ordinarily able to
regulate the market for commercial paper. Since paper payable in
London is a favorite form of investment for continental bankers, by
raising its rate of discount and with it the market rate above the
level of the rates of some or all of the continental centers, the
Bank of England is able to induce these bankers to send money to
London for investment and thereby to increase her reserves, and by
lowering its rate below the level of the rates in these continental
centers, she is able to induce them to sell some of the paper they
already hold, and thus to furnish a market for her surplus funds and
diminish her reserves.
On account of the readiness with which the international gold movement
responds to variations in the discount rate of the Bank of England,
the need for an elastic system of bank note issues is not felt in
England to the same extent as in other countries. It is this fact,
doubtless, which explains the retention to the present day of the
essentially inelastic bank note system created by the act of 1844.
_3. The French System_
In France, the Bank of France is the central institution. It is the
oldest of the important French banks of the present day, having been
established in 1800 by Napoleon the First. Its capital, amounting at
the present time to 182,500,000 francs, or approximately $36,500,000,
is supplied by about 30,000 private stockholders, about 10,000 of
whom own only one share each.
The two hundred largest stockholders appoint a General Council,
consisting of fifteen regents and three censors. Five regents and all
the censors must be chosen from the commercial and industrial classes,
and three of the remaining ten regents must be selected from the
_tresoriers payeurs genereaux_, an important group of representatives
of the public treasury scattered throughout the country. The General
Council as well as the stockholders' assembly is presided over by a
governor, who, together with two sub-governors, is appointed by the
President of the Republic upon the nomination of the Minister of
Finance. The governor is the chief executive officer of the bank and
the final source of authority in most matters of vital importance. He
is responsible to the government rather than to the stockholders, and
is subject to removal only by the power which appointed him.
The Bank of France has about two hundred branches and sub-branches
located in Paris and all the important cities and towns in the
Republic, also over three hundred so-called agencies located in
smaller places and transacting only a limited line of business. Each
branch has a manager appointed in substantially the same manner as
the governor, and the sub-branches and agencies are administered
through the branches. Through this network of offices, every part of
the country is brought into direct and easy access to the Bank.
The Bank of France is the only institution in the country privileged
to issue circulating notes. The maximum allowed it is regulated by law
and is increased from time to time. At present it amounts to
5,800,000,000 francs, or approximately $1,160,000,000. The bank is
obliged to redeem these notes on demand in gold coin or silver
five-franc pieces, but it is free to determine how much cash it shall
keep on hand for that purpose, and when and under what conditions it
shall issue them.
Its discount operations are limited by law to bills maturing in not
more than three months, and bearing the signatures of at least three
solvent persons, or two signatures and secured in addition by
specified forms of collateral. It is also permitted to make loans or
advances, as they are called, on securities of the French government
maturing at fixed dates, gold and silver bullion, and the money of
foreign countries, and obligations of the French railroads, French
cities, and departments, the Credit Foncier, and the Societe
Algerienne. It is also obliged to loan 180,000,000 francs
($36,000,000) to the government without interest.
One of the chief branches of the business of the Bank of France is the
service of the public treasury and the performance of other financial
duties imposed upon it by the government. It serves as the depository
and disbursing agent for the government, and performs important
functions connected with the public debt, the mints, the savings
institutions, and publicly administered trusts of various kinds. It is
also the depository for the banking reserves of the country. In
France, as in England, it is not the custom of banking and other
financial institutions to hoard money in their vaults, but to depend
upon the Bank of France for supplies as needed. To this end they keep
funds on deposit there, and regularly rediscount the paper of their
customers when balances need to be replenished.
Through its network of branches and agencies spread over the entire
country, the Bank of France is able economically and expeditiously to
conduct the intermunicipal exchanges of the country. It participates
in local clearings through membership in the clearing houses, at which
balances are paid by checks drawn against credits on its books
maintained for that purpose by all members, and it conducts so-called
transfer accounts with other banks and financial institutions against
which drafts can be drawn payable at any place where one of its
offices is located. Such drafts constitute the chief means through
which transfers of funds are made between different places.
The business of the Bank of France with private persons is limited by
the requirement that all paper discounted must have three signatures,
or two signatures and collateral security, and that advances can only
be made on the security of the forms of collateral indicated above.
Most business men find it either inconvenient or impossible to comply
with these conditions, and consequently transact most of their
business with other banking institutions. The third signature on paper
discounted by the Bank is, therefore, usually supplied by these
institutions, which thus act as an intermediary between the Bank and
the commercial world.
Next to the Bank of France, the most important banking institutions of
the country are the Credit Foncier, the Credit Lyonnais, the Comptoir
d'Escompte de Paris, the Societe Generale, and the Credit Industrielle
et Commercial. The Credit Foncier is principally engaged in extending
credit based on real estate security, but it also discounts large
amounts of commercial paper. Its organization is modeled after that of
the Bank of France, and, like that institution, it is controlled by
the state. Since it is primarily an investment bank, a description of
its principal operations will be deferred to the next chapter.
The four other banks mentioned are a product of the commercial life of
modern France, all having been established since the revolution of
1848. They are all heavily capitalized, the smallest, the Credit
Industrielle et Commercial, having a capital of 100,000,000 francs
($20,000,000), and the largest, the Societe Generale, having a capital
of 400,000,000 francs ($80,000,000), and all extend their business by
means of branches. The Credit Lyonnais and the Comptoir d'Escompte
have branches in France itself, the French colonies, and a number of
foreign countries; the Societe Generale, throughout France, in London,
and San Sebastian, Spain; and the Credit Industrielle et Commercial,
in Paris and its suburbs. Taken together, these four institutions
supply the French people in Paris and the Provinces with banking
facilities for both their domestic and their foreign business. While
in some of the larger provincial cities local banks with branches in
surrounding towns and sometimes in Paris are to be found, branches of
one or more of these four institutions are the chief reliance in
nearly all places.
These institutions cater to all the financial needs of their
constituents. They supply their needs for cash and for exchange;
conduct checking accounts for them, although these are not used in
France to the same extent as in the United States; discount their
commercial paper and make loans to them on personal and other
security; and receive on deposit their savings and provide them with
investments. In performing these functions they make extensive use of
the Bank of France and of the stock exchanges of the country. With the
former they conduct checking and transfer accounts and rediscount
their customers' bills, by these means procuring the coin, bank notes,
and exchange needed; and from the latter they obtain the investment
securities required for the satisfaction of both their own and their
customers' needs.
Gold and silver coin and the notes of the Bank of France constitute
the hand-to-hand money of the country. The latter form the elastic
element, and their operation approximates perfection. When demand for
money increases for any reason, more commercial bills are presented
for discount to the banks, which, after indorsement, exchange them at
the Bank of France for the notes with which they supply their
customers' needs. The note issues of the Bank thus expand in direct
and immediate response to the needs of the country for more currency.
When such needs have passed, the discounted bills, in exchange for
which these notes were issued, mature and are paid in greater volume
than new bills are created and presented for discount, and notes, or a
corresponding amount of coin, accumulate in the vaults of the Bank.
The notes are cancelled and destroyed and the coin is kept in store
until it again passes into circulation through exchange for notes
still outstanding, or for discounted bills.
On account of the elasticity of its note issues, and the extent to
which they are used in the commerce of the country, the Bank of France
has occasion to change its rate of discount less frequently than any
other bank in Europe. The result is that the country enjoys the
advantage of steady and low rates, since in France, as in England, the
discount rate of the central bank controls the market rate, and the
ease and inexpensiveness with which the notes are issued make low
rates possible.
_4. The German System_
The Imperial Bank, with head offices in Berlin, and about one hundred
branches and more than four hundred sub-branches scattered throughout
the country, plays essentially the same role in the German banking
system that the Bank of England and the Bank of France play in the
English and French systems, respectively. It was established in 1875
by an act which also profoundly affected the entire banking system of
the country, and its development has been aided and directed by
several acts passed subsequently.
Its capital, supplied by the general public, amounts at the present
time to 180,000,000 marks ($45,000,000), and it is governed by three
boards, known respectively as the Curatorium, the Direktorium, and the
Central Ausschuss.
The Curatorium is composed of five members, of which body the
Chancellor of the Empire is ex-officio chairman. A second member is
appointed by the Emperor, and for that position he has always selected
the Prussian Minister of Finance, and the three remaining members are
appointed by the Bundesrath. It meets quarterly and reviews all the
operations of the bank. It, or rather, the Chancellor, its chairman,
has supreme power, which, however, he has never exercised except on
one occasion, when he ordered the bank not to accept Russian
securities as collateral for loans, an order since revoked.
The administration of the bank's affairs is chiefly in the hands of
the Direktorium, consisting of a president, vice president, and seven
other persons, all of whom are appointed by the Emperor for life, from
a list of candidates recommended to him by the Bundesrath. This board
selects the staff of bank officers and clerks, and superintends the
daily conduct of the bank's business.
The Central Ausschuss is a committee of fifteen persons elected by and
representing the stockholders. It holds monthly meetings; has the
right to demand complete information concerning the bank's operations,
to discuss all matters freely, and to tender advice and counsel; but
it has no power to control except regarding two matters: it can set a
limit to the amount of securities the bank can purchase, and can veto
any proposed transactions with the Imperial Government or with the
governments of any of the states.
Like the other central banks described above, it receives on deposit
and disburses the funds of the Imperial Government; administers the
coin reserves of the country; conducts the domestic exchanges, and
serves as a bankers' bank. It is free to do business with the general
public, but the legal and other limitations under which it must
operate give the other banking institutions of the country the
advantage in competition for this kind of business.
It shares the right of note issue with four other banks, which, out of
thirty-two that retained that privilege at the time the Imperial
banking system was established, alone retain it at the present time.
The issues of these four institutions, however, are relatively small
in volume, and the Imperial Government has the right to deprive them
of it January 1, 1921, or any tenth year thereafter, on condition of
giving one year's notice of its intention so to do. The issues of the
Imperial Bank are subject to the following regulations: they must be
covered by cash and discounted bills maturing in not more than three
months, and signed by at least two solvent persons, the proportion of
cash being not less than one-third of the total. If the total amount
issued exceeds the Bank's holdings of gold bullion, specie, and
government notes by more than 750,000,000 marks at the end of March,
June, September, and December, and 555,000,000 marks at other times, a
tax of five per cent per annum is levied on the excess.
The law confers upon the Bank the following powers:
a. To buy and sell gold and silver coin and bullion.
b. To discount, buy and sell bills of exchange whose
maturity shall be three months at the longest, and for which
usually three, and in no case less than two, accredited
vouchers shall stand good; furthermore, to discount, buy and
sell bonds of the Empire or of any German state, or domestic
municipal corporations, provided such bonds mature within
three months at the longest and conform to the new standards
of value.
c. To grant interest-bearing loans for terms no longer than
three months, upon movable security (lombard, or deposit
loan business), such as: gold and silver, coined or
uncoined; interest-bearing or non-transferable bonds
maturing within a maximum term of three months, whether of
the Empire, a German state, or of domestic municipal
corporations; interest-bearing non-transferable bonds on
which the interest is guaranteed by the Empire or by any one
of the German states; capital stock and stock priority
shares, fully paid up, of German railway companies in
actual operation; mortgage bonds of the provincial,
municipal, or other land credit institutions of Germany that
are subject to state control, including shares of German
mortgage banks to an amount never exceeding three-fourths of
their market value; interest-bearing non-transferable bonds
of foreign states, and foreign railway priority bonds,
covered by state security, in amounts not exceeding 50 per
cent of their market value; bills of exchange of recognized
soundness, after deducting at least 5 per cent of their
market value; and pledges of native merchandise, in amounts
within two-thirds of their value.
d. To negotiate collections for the account of individuals,
institutions, and governing boards; and upon security, as
before mentioned, to furnish payments, and make orders or
conveyances on the branch banks or on correspondents.
e. Upon prior security, to buy on behalf of outside parties,
effects of all kinds, including the precious metals; and
after delivery to sell the same.
f. To receive money for circulation or on deposit, with or
without interest, the sum of interest-bearing deposits not
to exceed that of the capital stock and reserve fund.
g. To accept the custody or other management of objects of
value.
Besides the Imperial Bank there are in Germany eight very large and
powerful banking institutions and a considerable number of smaller and
less powerful ones. The eight great ones have each its head office in
Berlin, and connections, through branches, agencies, and controlled
institutions, in other parts of the Empire, the German colonies, and
foreign countries. Together they control about eighty per cent of the
entire banking capital of the Empire. In reality they are federations
of banking institutions, many of which were once independent, and some
of which were promoted and established in the interests of the group.
While these eight institutions are primarily engaged in commercial
banking, they are also promoters on a large scale of German industry
and commerce, both at home and abroad. Through interlocking
directorates, stock ownership, and in other ways, they are closely
allied with the leading industrial and transportation interests of the
Empire, and they have been and are leaders in the promotion of these
interests in other parts of the world, notably in the Orient, South
America, and Africa. They are, therefore, leaders on the stock as well
as the discount markets of the country, and are widely influential in
investment as well as commercial banking affairs.
These, as well as the other commercial banks, consisting for the most
part of local institutions and those catering to special interests,
use the Imperial Bank for rediscounts, for transfers of funds between
different parts of the country, and as a depository for surplus funds.
They do not normally keep on hand more cash than is needed for till
purposes. Being in easy reach of an office of the Imperial Bank,
supplies can be obtained at any time by checks drawn against credit
balances or through rediscounts of commercial bills. Special accounts
are carried for transfer purposes and are used even in the transfer of
funds between different offices of the same institution.
On account of its right to issue notes against commercial securities,
the Imperial Bank has the power to meet the demands made upon it and
to supply the country with an elastic medium of exchange. The levy of
a tax upon the excess of the issues above a prescribed maximum
prevents perfect elasticity, unless this maximum be kept above the
highest point which the circulation would normally reach, since the
actual levy of the tax forces the rate of discount to such a point as
to seriously restrict commercial operations. However, since the line
between commercial and investment banking is not drawn by the great
Berlin banks with the care that is desirable, and since they have been
able at times, especially on account of their foreign connections, to
embarrass the Imperial Bank in its efforts to maintain adequate specie
reserves, such a tax is probably a desirable safeguard against
over-expansion of credit.
_5. The Canadian System_
In important respects the Canadian banking system differs from those
of the European countries which have been described and from that of
the United States. It consists of a varying number of relatively large
institutions, each with several offices administered from a common
center, but without a central bank. For some time the total number has
decreased, since 1900 from thirty-six to twenty-seven, in spite of the
fact that the Canadian law, like that of the United States, provides
for the formation of new banks at any time, on compliance with certain
prescribed conditions, including a subscribed capital of at least
$500,000 and a paid-up capital of at least $250,000. The number of
branches, however, has increased rapidly, much more rapidly than the
population.
The most noteworthy legal provisions pertaining to the banking
business in Canada concern note issues and loans and discounts.
Regarding the establishment of branches, the amount, and, with one
exception, the composition of the reserves, and many other matters
carefully regulated by law in the United States, Canadian bankers are
left free to follow their own judgment. Neither is there public
examination of banks in Canada. Reports must be regularly made to the
Minister of Finance, and he may call for special reports whenever he
desires so to do; but neither he nor any other public officer has the
right to examine a bank's books or to quiz its officers or directors.
In contrast with banking legislation in the United States, another
peculiar feature of Canadian law is the incorporation of the Canadian
Bankers' Association, an organization resembling in essentials the
American Bankers' Association, and the assignment to it of important
functions connected with the issue of notes and the winding up of the
affairs of failed banks.
Regarding note issues, the chief provisions of the Canadian law are as
follows: Each bank is permitted at any time to issue circulating notes
to the amount of its capital stock, and between October 1 and January
1 an additional amount, equal to fifteen per cent of its combined
capital and surplus, may be issued on payment of a tax to be assessed
by the Governor in Council, not to exceed five per cent per annum.
The notes are a first lien on all the assets of the bank that issued
them, and must be redeemed on demand at the head office and at such
other places as are designated by a committee of public officials
known as the Treasury Board. As such redemption centers, this board
has named Toronto, Montreal, Halifax, Winnipeg, Victoria, St. John,
and Charlottetown. Each bank must also deposit with the Minister of
Finance a sum of money equal to five per cent of its average
circulation. The aggregate of the amounts thus deposited by all the
banks is known as the "circulation redemption fund," and may be used
in the redemption of the notes of a failed bank. In case the fund is
so used, and the liquidated assets of the bank prove to be inadequate
for its complete replenishment, a tax sufficient to meet the deficit
is levied on the solvent banks in proportion to their circulation.
Regarding loans and discounts, the law aims rather to protect than to
restrict the operations of the banks. They may "deal in, discount, and
lend money, and make advances upon the security of, and may take as
collateral security for any loans, ... bills of exchange, promissory
notes, and other negotiable securities, or the stocks, bonds,
debentures, and obligations of municipal and other corporations,
whether secured by mortgage or otherwise, or Dominion, provincial,
British, foreign, and other public securities." The only important
restriction placed upon their loaning activities is the prohibition of
making advances on the security of landed or other immovable property.
In making loans to wholesale dealers and shippers of produce, the law
safeguards the banks by allowing them to take a blanket lien on the
goods dealt in by the borrower. This lien applies not only to the
goods in possession at the date of making the loan, but to any others
which may be substituted for them or manufactured out of them. This
lien is prior to that of any other unpaid vendor, except one acquired
before the bank's lien was established.
The chief officers of a Canadian bank are the general manager, the
chief accountant, the superintendent of branches, the inspector, and
the secretary, all connected with the head office, and the managers of
the branches.
The general manager is the chief executive and the chief in authority.
While he is subject to the board of directors, on account of his wide
experience and knowledge his judgment is usually followed. The other
officers are appointed by him with the approval of the board, but,
almost without exception, from persons who have served the bank in
subordinate capacities. The general manager himself is nearly always a
man who has passed through the hierarchy of positions from the bottom
up, and is therefore thoroughly familiar with every detail of the
bank's business and history. The inspector has charge of the
examination of the branches, and this work is so carefully and
thoroughly done that examination by public officials is not considered
necessary, or regarded as desirable by most Canadian bankers.
Regarding this matter, however, there are differences of opinion, and
changes in the near future are not improbable. The managers of the
branches are in strict subordination to the authority of the general
manager, though they are necessarily allowed a large amount of
discretionary authority in matters pertaining to the branch over which
they preside. Unless prevented by distance, they are in daily
communication with the head office or with one of its representatives.
In the operation of the Canadian system, noteworthy features are the
methods of controlling credits, of managing the issues and the
reserves, and of securing unity or at least harmony of action. It is
the usual practice in Canada for a business man to do all his banking
with one institution. This practice is rendered possible because most
of the banks are large enough to take proper care of almost any
business establishment in the Dominion, and because experience has
demonstrated its wisdom.
The banks compete vigorously for new business but do not attempt to
attract one anothers' customers. Indeed a customer who desires to
change his banking connections is looked upon with suspicion and is
subjected to a very careful examination by the bank that is asked to
take him on, including a careful discussion of all the aspects of the
matter with the bank he desires to leave. The result of this practice
is that a man's banker is thoroughly familiar with his affairs,
especially his credit relations, and at the same time feels under
obligations to render him such support and guidance as he deserves. On
account of this practice, also, commercial paper brokerage does not
flourish in Canada.
The notes of the Canadian banks constitute practically all of the
hand-to-hand money of the country in denominations above two dollars.
The one and two dollar denominations are supplied by Dominion
notes--all but $30,000,000 of which are represented by gold coin or
bullion--and the lower denominations by subsidiary silver supplied by
the government.
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.
The lack of a central bank and of a rediscount market is to a degree
compensated by unity of action among the banks. This is the result not
so much of law as of conditions, among which the most important are:
the fact that the six largest banks do fifty per cent of the business
and that one of these, the Bank of Montreal, holds most of the
deposits of the government and is generally spoken of as the
government bank; the fact that the general managers are experts, in
first-hand touch through their branches with business conditions in
Canada and other parts of the world, and in possession of the same
data concerning these conditions, and through the same kind of
acquired skill and similar experiences likely to draw the same or at
least similar conclusions from this data; common interests in the
prosperity of the country and in the prevention of speculative
excesses and mutual interdependence in the successful conduct of their
everyday business as well as in times of emergency and stress: and the
Bankers' Association, which through its journal gives authoritative
expression to the best banking opinion and actually acts for the banks
in many matters of common interest. To what extent this community of
action takes the form of rediscounts for each other in ordinary times
it is impossible for an outsider to say, but that it is operative in
times of stress is indicated by the manner in which the failures of
the Bank of Ontario in 1906 and the Sovereign Bank in 1908 were
handled.
In both of these cases the public was protected against loss and panic
was averted by the cooperative action of the other banks in assuming
the obligations of these institutions to the public, and in winding up
their affairs in such a manner as to occasion little disturbance.
While Canadian banks are free to carry on investment as well as
commercial banking operations, their published reports indicate that
they take care to avoid confusion of the two, or the infringement of
one upon the other. Their holdings of investment securities are kept
well within the limits set by their aggregate capital, surplus, and
savings funds, and their method of handling commercial business, based
as it is on accurate knowledge of their customer's operations and upon
the lien upon produce heretofore described, prevents their acceptance,
through ignorance, of investment securities under commercial
disguise.