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Les diagrammes suivants illustrent la methode. 1 2 3 4 5 6 MICROCOPY RESOLUTION TEST CHART (ANSI and ISO TEST CHART No 2l 1.0 I.I 1.25 1^ 140 2.5 2.2 2.0 1.8 A -APPLIED IM/1GE 165 J East Main Street Rochester, Ne» York 14609 USA (716) 482 - 0300 - Phone (716) 288 - 5983 - Fa« I \ Modern Business CANADIAN EDITION A SERIES OF EIGHTEEN TEXTS, ESPECIALLY PREPARED FOR THE ALEXANDER HAMILTON INSTITUTE COURSE IN ACCOUNTS, FINANCE AND MANAGEMENT EDITED BY JOSEPH FRENCH JOHNSON DIAK, WW TORK fNIVEIlSlTT WH<«>I. "F COMMEHt-B, *t« Ol'NTS *ND rtNANCE NKW YonR CITV Title Author APPLIED ECONOMICS James Mavor ORGANIZATION AND MANAGEMENT Lee Galloway SELLING R S. Bi TLER CREDITS Lee Galloway TRAFFIC S. J. McLean ADVERTISING Lee Galloway BUSINESS CORRESPONDENCE . . G. B. Hotjhkiss ^.,»,^,»,,. „T,,,.r,„,„. f Leo Greexdlinoer ACCOUNTING PRACIKE . . ■ 1 ^ ,,-. Wr.oht ^„.^,,-.x. r-.x- ,»./^T- [William H. Louqh CORPORATION FINANCE. . . ■ Ured W. F.eld ..^.-^,. .x.rN T> i v-T'ix'/-i /Earl Dean Howard M0NE\ AND BANKING . . . • { ^y. w. Swanson BANKING PRACTICE E. L. Stewart Patterson ^^x,^T/-,». T^iT.,. .v-r^f /Franklin Escher FOREIGN EXCHANGE i E. L. Stewart Patterson f Thomas Conway INVESTMENT AND SPECULATION J Albert Atwood I Fred W. Field Tvm-RANCF (Edward R. Hardy INSURANCE I Pj^^jj ^y ^^^^^ _^., ^„^.__ /Walter Lindner REAL ESTATE t E. W. Wright AUDITING Seymour Walton COST ACCOUNTS Stephen W. Gilman COMMERCIAL LAW Walter S. Johnson Banking Practice and Foreign Exchange PART I: BANKING PRINCIPLES PART II : BANKING PRACTICE BY E. L. STEWART PATTERSON ACTING INSPECTOR, TIIK fANAOIAN BANK OF COMMERCE; FORMERLY ASSISTANT e eonsideved representative. While the writer is alone responsihle for all views and .statements, he is under ohligations to the following gentlemen for valuahle assistance: to Mr. IL M. 1*. Kekardt for reading the manuseript of part one and making many valuahle suggestions; to Mr. H. O. K. Asman, and finally to Mr. K. C. Grundy for his helpful reading of most of the proofs. The writing has been done at odd times and to a cer- tain extent under unfavorable circumstances, and may perhaps lack the symmetry and completeness which might have been attained by more continuous and lei- surely work. It is hoped, however, that notwithstand- ing its acknowledged or latent defects, it will prove to be of considerable assistance in the study of a subject the literature of which is at present very limited. E. L. Stewart Pattehson. 104 Admiral Road, Toronto. TABLE OF CONTENTS PART I: BANKING PRINCIPLES CHAPTER I HISTORICAL SKETCH ■■onoN rAoa 1. Introduction 1 S. New Frnnce 2 8. British Oc-cupancy 8 4. Army Bills S 5. Provincial Bnnkinf^ 4 6. National Bunking System 6 7. First Bank Act 1871 . . 6 CHAPTER II KINI>S OF BANKS 8. Commercial Banks 9 9. Savings Banks 11 10. Trust and Loan Companies IS CHAPTER III THE BANK ACT 11. Bank Act of 1913 15 12. Changes in the Bank Act 1^ 13. Shareholders' Audit Iti 14. Abstract of the Bank Act 18 1.5. Title and Interpretations (Sec. l—<; 18 16. Application of the Bank Act (Se(. 3—7) 18 17. Incorporation of Banks (Sec 8—1 i; 19 18. Organization of Banks (Sec. l;{—17j 20 vii Vlll CON'l'ENTS lECTION JAOB ly. Refusnl of Lificate 21 20. By-L vs f Section 18) 21 21. Board of Directors (Sections 19-28) 21 22. General Powers of Directors (Sections 29-30) ... 22 23. Regulations as to Shares and Shareholders (Sw. 31—32). 22 24. Increase or Decrease of CapHal Stock (Sections 33-35). 22 25. Shares and Calls (Sections 36-42) 23 26 Transfer and Transmission of Shares (Sections 43-")3) . 23 27. Annual nnd Special Statements (Sec. 54—33) .... 24 28. Shareholders' Audit (Sec 56) 26 29. Special Report to the Minister of Finance 27 30. Dividends (Sections 57- "9 > 27 31. Cash Reserve (Section 60) ... 28 32. General Note Issue and Circulation of Notes (Section 6l) 28 S3. Additional Issue for Moving Crops (Section 6l, Sub-Sec. 15-20) 28 34. Central Gold Reserve Issr- (Section 6l, Sub-Sec. 3-13) 29 35. Note Issue in British Colonies (Section 62) .... 29 36. Pledge of Notes Prohibited (Section 63) 30 37. Bank Circulation Redemption Fund (Sections 64-69 • • 30 38. Redemption at Par (Secti ns 70-71) 31 39. Payment in Dominion Notes (Section 72) .... 31 40. Signing of Bills (Sections 73-74) 32 41. Counterfeit Notes (Section 75) 32 CHAPTER IV THE BANK ACT (Continued) 42. Business and Powers of a Bank (Sections 76-83) ... S3 43. Warehouse Receipts as Collateral Security (Sections 84- 90) 34 44. Rates of Interest and Exchange (Sections 91-94) . 37 45. Deposits (Sections 95-98) 37 46. Purchase of Assets of a Bank (Sections 99-111) ... 38 47. Returns to Government (Sections 112-114) .... 39 48. Payments to Minister of Finance upon Dissolution of 3 Bank 39 49. Canadian Bankers' Association (Sections 117-124) . . 40 50. Insolvency (Section 125) 41 CONTENTS IX ■BCnON '*°'^ 51. Suspension (Sections 126-,1S1) 42 52. Penalties (Sections 131a-158) 43 58. Changes in the Statements 44 CHAPTER V NOTE ISSUES AND BRANCH SYSTEM 54. Monetary System 47 55. Dominion Notes 49 . 56. Bank Note Issue 50 57. Security to Noteholder 51 58. Elasticity 52 59. Seasonal Fluctuations 53 60. Annual Changes 54 61. Monthly Changes 57 62. Emergency Currency 59 63. Central Gold Reserves 6l 64. Lost and Destroyed Notes 63 65. Branch System 6* 66. Branch System and Circulation 66 67. Branch System and the Borrower 68 68. Establishing a Line of Credit 71 69. Branches and Panics 74 70. General Review 76 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. CHAPTER VI ANALYSIS OF A BANK STATEMENT Bank Statements 80 Deposits Payable After Notice 81 Demand Deposits 83 Deposits Elsewhere 85 Due Banks in Canada 85 Due to Banks in Foreign Countries 85 Dominion and Provincial Governments 86 Circulation 87 Capital and Reserve 87 Specie and Dominion Notes 88 Notes and Checks of Other Banks 89 X COXTFA'TS »i:rTiON PaOI 8i.'. Deposits with Other Banks 89 8a. Securities yo 8k Call Loans in Canada 90 85. Call Loans Elsewhere 91 86*. Reserves 95 87. Current Loans 93 88. Overdue Debts 100 89. Real Estate 101 90. Bank Premises 102 91. Profit and Loss Statement of a Bank 103 92. Interest on Deposits IO6 9S. Profits of the Percentage Bank 108 94. Bank Premises 108 95. Reserve Fund 109 96. Gross Profits 110 PART II: BANKING PRACTICE CHAPTER I HEAD OFFICE 97. Directors 113 98. General Manager 115 99. Superintendent of Branches . .118 100. Chief Inspector 119 101. Secretary 120 102. Chief Accountant 121 CHAPTER II HEAD OFFICE RECORDS 103. Head Office Bookkeeping 122 104. General Ledger 122 105. Correspondents' Ledgers 123 106. Statistical Books 124 107. Branch Clearings • 124 108. Stocks Books, etc 124 109. Circulation Records 127 fON'TENTS XI SECTION »AOK 110. Returns to Head Office 129 111. Branch Clearings Statement (Daily) 129 112. Financial Statement 130 113. Discount Report 130 114. Cash Item Account 130 115. Balance Sheet 130 116. Overdue Bills 131 117. Monthly Liability Return 131 118. Sundry Returns 131 119. Weekly Report on Business 131 120. Records of Routine Work 133 CHAPTER III THE BRANCH STAFF 121. Manager 135 122. Daily Work 136 123. Accountant 138 124. Teller 140 125. Ledger-keeper 141 126. Collection Clerk 142 127. Discount Clerk 143 128. Junior 144 CHAPTER IV BANK BOOKS AND RECORDS 129. Bank Accounting 146 130. Books of a Branch 147 131. Loose Leaf Accounting 150 132. Adding Machines 151 133. Cash Book 152 134. Writing Up Cash Book 153 135. Sherbrooke Cash Book 155 136. Supplementary Cash Book 155 137- Discount Register 157 138. Discount Blotter 159 139. Discount Diary 162 140. Trade Bills Remitted Diary l62 xu CONTENTS HKCTION 141. 142. 143. 144. 145. 146. 147. 148.* 149. 150. 151. 152. 153. 154. 155. 156. 157. 158. 159. 160. 161. 162. 163. 164. 165. 166. P*OE Drafts Register 16* Check Lists 166 Cash Items ^68 Remittance Book ^69 Branch Clearing Statement 170 At Credit Advices . 174 Head Office Entries 176 Business with Other Banks 176 Teller's Records . . 178 General Ledger 181 Cash Book Ledger 183 Current Deposit Ledger 189 Savings Bank Ledger 191 Liability Ledger 192 Collection Register 195 Collateral Register 195 Letters Received Register 197 General Statement Books 197 Past Due Bills Register 198 Produce Book 198 Balance Book 198 Overdraft Register 198 Discrepancies Book 200 Proforma Stationery Book 200 Treasury Cash 200 Special Registers 200 167. 168. 169. 170. 171. 172. 173. 174. 175. CHAPTER V DEPOSIT BUSINESS New Accounts 205 Opening Accounts 205 Particulars to Be Recorded in Ledger 207 Partnership Accounts 207 Conversion of Partnership Into Joint Stock Company . 208 Joint Accounts 208 Accounts with Married Women . 208 Waiver and Authority to Charge Back 210 Ledger 216 CONTENTS • t* xiu ■BCTION 176. 177. 178. 179. 180. 181. 182. 183. 184. 185. 186. rAOB Deposit Slips 217 Money Received After Hours • • .217 Customers' Pass Books 217 Customers' Certification of Accounts 219 Guarding Against Fraud 222 Certification of Checks 223 Cashing Checks 224 Method of Filing Checks and Deposit Slips . . . .225 Savings Bank Department 225 Duplicate Pass-books 226 Interest on Savings Bank Accounts 227 CHAPTER VI LOANING A BANKS MONEY 187. Experience the Only Teacher 228 188. Causes of Failure in Business 230 189. Statement of Affairs 233 190. Science of Credit 237 191. Form of Statement 238 192. Cash 239 193. Merchandise 239 194. Bills and Accounts Receivable 245 195. Machinery and Fixtures 246 196. Current Liabilities 247 197. Mortgages and Other Factors 247 198. Sundry Information 248 199. Preparing the Application 250 200. The Application 254 201. 202. 203. 204. 205. CHAPTER VII CLASSIFICATION OF LOANS Call Loans 259 Loans to Joint Stock Companies 261 Loans to Municipalities 265 Loans to Professional Men 266 Loans to Farmers 267 XIV CONTENTS 8ECTI0N PAflC '206. Loans to Retail Mcrcliants '2(5!) '207. Loans to Manufacturers and Merchants 270 208. Collateral Notes 27:5 209. Accommodation Paper 276 210. Overdrafts 278 211. Doubtful Paper 280 • CHAPTER VIII ADVANCES OX WARKHOl'SK RKCKIPTS AXD ASSIGXMF.XTS 212. Sections 86 and 88 283 213. Section 88 285 214.. The Promise 286 215. The Assignment 287 216. The Declaration 293 217. The Note 296 218. Making Advances 296 219. Warehouse Receipts 302 220. Substitution 302 221. The "Current Season" 308 222. Default 309 223. General Remarks 310 22*. Interpretation of Terms 311 CHAPTER IX BAXK COST ACCOrXTIVG 225. Need of Cost System 31i 226. Principles of Cost Accounting 316 227. Small Checking Accounts 318 228. Branch Expenses 322 229. Inland Exchange '.i'il 230. Cost Data 329 231. An Account Analyzed 331 232. Method of Analysis 333 233. Exchange Received on Items Deposited and Collected . 336 234. Checks Paid at Par at Other Branches 340 235. General Remarks 343 CONTENTS XV CHAPTER X INTLRNAL INSPECTION •acnoN PAO» "■236. Branch Inspection 345 237. The Audit 346 238. Cash and Securities 347 239. The Ledgers, etc 348 240. Sundries 349 241. Inspection Liability Return . 351 242. Rules and Regulations 353 243. StafiF Reports 854 CHAPTER XI LABOR-SAVING METHODS 244. Efficiency Methods 358 245. Departments in a Bank 360 246. Batch Method 363 247. Special Deposit Slips 366 248. Numerical Transit System 368 249. Transit Numbers in Canada 372 250. Machine Statements 375 CHAPTER XII MISCELLANEOUS 251. Collections 380 252. Reports on Customers 382 253. Expense Account 383 254. Fire Insurance 384 255. Telegrams, etc 387 256. Clearing Houses 388 357. Gnar.intees 389 258. Power of Attorney 391 259. Monev Parcels 395 XVI (ON'IKNTS BECTION 'JfiO. iJti'2. '263. 26t. y65. '266. 267. 268. Ipaoc \'aiilts and Sates 3f)(J Lost C'lirrks and Drafts 398 Custonirrs' Wills 399 Secrecy 400 Education 401 Canadian Bankers' Association 40 ^ Foreign Branelies 40(J Correspondence .410 Bills of Excliangc Act 412 PART III: FOREIGN EXCHANGE CHAPTER I .MF.CHAM.SM OF THK KXCHAXGK MARKET- 269. Inland Exchange 41,-, 270. Inland Exchange in United States 41 7 271. New York Funds 418 272. Foreign Exchange 421 273. The Mint Par 422 274. Gold Points 426 275. How Exchange is Quoted 428 276. Underlying Principles 43O 277. Commercial Long Bills 433 278. Bills of Exchange That Involve More or Less Risk . . 436 279- Clean (omrncrcial Bills 437 280. Drafts Drawn Against Securities 438 281. Bankers' Long Bills 438 282. Long Bills from Loaning Foreign Money 439 283. Finance Bills 442 284. Limitations to Finance Paper Issue 444 CHAPTER II HOW MONEY IS MADE IX FOREIGN EXCHANGE 285. The Sale of Demand Exchange 446 286. Merchant Seller's Credit 446 287. Banker's London Balance 448 CONTENTS XVII •EmoN rhom 288. Interest on Cable Transfers 4*8 289. Against Remittances of Sixty and Ninety Day Bills . . 449 290. A Typical Example 450 291. Opportunity for Profit 451 292. Loaning Foreign Money on Joint Account 451 293. Nincty-dny Bill Operation 451 294. Loaning on Credit 452 295. Risk of Exchange 453 296. Commissions on Loans 454 297. Profits Made from the Purchase of Exchange .... 454 298. Time Money Rates on Call Money Basis 455 299. Dealing in Futures 456 300. Arbitraging in Exchange 458 SOI. Arbitraging Illustrated 458 302. Arbitraging Operations 459 CHAPTER III FOREIGV EXCHANGE AND IMPORTS 303. Commercial Credits. — The Financing of Experts and Imports 46s 304. Commercial Credit Finance Illustrated 467 305. Part London Plays 468 306. Value of Imp.icit Trust 469 307. Banker's Only Security 470 308. Benefits to Importer 475 309. Benefits to Eyporter. 476 310. Banker's Commission 477 311. An Aid to Business 480 312. Growth of Commercial Credit and Facilities .... 480 CHAPTER IV FOREIGN EXCHANGE AND THE INTERNATIONAL SECURITY MARKET 313. The Three Classes of International Security Dealings . 482 314. Replacement of Maturing Investments 483 315. International Speculations 484 • •• XVlll CONTENTS HCCTinN MOB :ll(). I ntrrnntional Arbitraging 486 .'JIT. Vnlur of Early News 487 818. Arbitragr Profits 488 319- Market Influences 489 320. Strong £ffect on Exchange Rates 490 CHAPTER V THE MOVEMENT OF GOLD S21. Production of Gold 491 322. Distribution of Gold 492 .S2.S. Small Merchandise Exports 498 an. Low Money and Remitting of Balances 494 325. High Money Rates 494 326. International Trading in Securitiec 495 327. Methods of Moving Gold 496 328. Indirect Methods of Moving Gold 497 329- Profits on Shipments 498 CHAPTER VI FOREIGN EXCHANGE OPER.VTIONS IN CONNECTION WITH EXPORT TRADE .'?.'?0. Foreign Exchange and Exports 300 33\. Financing Exports by Means of Dollar Credits . . 501 332. How the Exporter Gets His Money 303 333. The Question of Commission 304 334. Drafts Direct on the Importer 304 335. Improvement in Facilities 303 336. Export Letters of Credit 306 337. How the Credit Works 307 338. A Concrete Example 508 339. Why the Credit is Issued on London 309 340. The Question of Interest 310 341. Where the Advance is Actually Made 511 CONTENTS xa CHAPTER VII STERLING EXCHANGE •tcnnH ,^„ S42. Great Britain 312 343. Making a Rate 315 344. Interest 313 345. General Notes on Sterling Exehangc 318 846. Foreign Exchange Bookkeeping 321 S47. Drafts Drawn 323 848. Bills of Exchange Purchased 323 CHAPTER VIII 349. 350. 351. 352. 353. 354, 355. 356. 857. CONTINKNTAL EXCHANGE Latin Union Countries 527 *''«ncc 528 The I'ranc Quotation 329 Time Bills 33j Germany . ^.^c Holland . . e^o Scandinavian Liiion and Austria-Hungury .... 534 Asiatic Exchange gjjj Sundry Exchanges 337 CHAPTER IX FOREIGN REMITTANCES 358. Non-Commercial Exchange 53g 359. Principles Underlying the Issuance of Drafts . . .539 .'^60. Advices ^ , , 541 361. Specimen Forms and Signatures 343 362. Cost of Drafts to Purchasers ! ! 54.8 363. Drafts versus Travelers' Checks 544 364. Travelers' Checks . . . 345 365. Payment of Checks 343 xs CON'ILMS HcTinn rAOE .'l()(i. Pnynirnt to Hnldrrii StA :il)7. Ilrdnnption of ( hrckti 5(7 .'UiM. Letter of Indirntion ,'»IN •Mj. I.o<.t Trnvelrru' Chcek.i .5:. I .'»T(). Letters of Credit .').Vi .'«7I. I'liymrnl to the Holder .I.". .' ;«7'.'. Cireiilnr Notes T,".; 7.'J.'}. I'oreign Money Orders 5(il .174. Pnyment of Orders 361 S75. Mail Remittances 363 »*«■ 549 3*7 .I.Vi !i:,7 AH I 56 1 569 FART I: BANKING PRINCIPLES CHAPTER I HISTORICAL SKETCH 1. Introduction. ~li\ an intelligent study of the Cana- dian hanking system particular stress should he laid on the fact that the system has heen evolved, not made; that it has grown up with the country, suffered with it, pros- pered with it and, since the Confederation, been the hackhone of commerce and agriculture. The careful decennial revisions of the hanking laws have kept the system continually in touch with the re(|uirements of Canada's constantly altering conditions. In fact, in nt other country does the history of hanking support st forcibly the contention of Horace White in his "Money and Banking": The principles of bunking arc the outgrowth of experiment. They must bo learned from the history of banking and particu- larly from the laws that have been enacted from time to time. These laws arc the crystallization of ideas dominant at given periods. The history of banking in Canada may be roughly di- vided into four periods: 1608-1763 New France. 1763-1817 British Occupancy. 1817-1867 Provincial Banking. 1867-1913 National Banking System. C— VIII— 1 1 0 loaded with a tremendous debt of over 80,000,000 livres outstanding, of which some 34,000,000 livres were in ordonnances, 7,000,000 in card money and treasury bonds, and the balance in other forms of obli- gation. This formed one of the most difficult problems that confronted the British goAcrnment, and, notwith- standing the impoverished condition of France, they in- sisted upon a definite basis of settlement. Accordingly, a convention was signed in 1706 under which bills of exchange and kindred obHgu*:ions were to be redeemed by the Freneli government at 50 per cent of their face value, and ordonnances and other forms of debt at 25 per cent. Owing to circumstances which need not be entered into hece, the unfortunate holders eventually received only a moiety of even this settlement. The history of this ])eriod presents an instructive les- son on the evils of money issued on credit only, even though the creilit is that of a government. There is no doubt that yVlexander Hamilton had the sad experi- ence of New France before him when he made his severe stricture on government issues based on credit. In his report on banking in 1700, he said: IIISTOUICAI. SKETCH 3 TliL' iiuit tiller of paper money by the authority of the gov- cnimcnt is wisely prohibited to the 'tMlividual states by the national co.istitiitioM, and the spirit of this prohibition ought not to be disregarded by the government of the United States. Though paj)er emissions under a general authority might have some advantages not applicable and be free from some disad- vantages which arc applicable to the like emissions by the states separately, yet they are of a nature so liable to abuse, anA4>i per pound sterling, the old par of exchange. These were used for the payment of the army and the l)urchase of public supplies. In 1791 representative government Mas established and during the next few years several unsuccessful attempts were made to obtain charters for banks of issue. 4. Arm// hills.— In 1812, during the war with the T'nited States, the government, finding itself hampered by a sei-ious lack of currency, met the difficulty by the passage of the Army Bill Act. Under this act the Army Bill office was established and empowered to issue bills of various denominations. These bills were readily ab- sorbed by the people, who were quick to realize the ad- vantage of a system of financing so carefully thought 1 HANKING riUN( IPLKS out with a \ iew to prompt and satislactory redemption, and with that quality of ehisticity which later hecame such a j)roniinent feature in the hank note circulation of Canada. 5. Provincial hauliu^ ( Isir-JStrrj.—The contrac- tion of the Army Bills circulation naturally caused great inconveniences to the public; the principal business cen- ters, Montreal and Quebec, being the greatest sufferers. The bills filled a long-felt want, and in May, 1817, to supply their place, the ^lontreal Bank, now known as the Bank of Montreal, was founded, followed by the es- tablishment of other banks under charter from the vari- ous i)rovinces. Between 1817 and 182.' two banks were established in Lower Canada ( Quebec ^, and one each in Upper Canada ( Ontario) , New Bru >wick, and Nova Scotia. There was no attempt at uniformity in the con- ditions of the various charters, but little attention hav- ing been paid in those days to the theory of banking. As a rule the charters were based upon the articles of agreement as dra*\n up by the incorporators, and, as might be expected under such circumstances, many of the clauses were dictated by selfishness or originated in a total misconception of the functions of a bank. This unsatisfactory situation was further complicated by independent ventures into the field of banking legis- lation by the Parliament itself, such as tl^ "Free Bank- ing Act" and the "Provincial Note Act." Fortunately, the British government was fully awake to the dangers of promiscu'jus banking, and even at the risk of having their interference in these matters misconstrued, per- sisted in demanding that all legislation bearing on note issues, banking, and the like, should receive the royal assent before going into eftect. The young colony at first resented this restriction, but sooq learned to appre- mS'lOllK AL SKl/ITH 5 ciatc the jruidancv of riper and more experienced judg- ment, and undoubtedly this wise action on the part of the Colonial Office saved Canada from being the exploit- ing ground of many unsound and dangerous banking theories. j\.s it was, manj' vicissitudes were experienced, and in 1837, during the rebellion, a temporary suspen- sion of specie payments occurred under permission of an order in counc.x. The necessity for this, however, can hardly be considered a reflection on the banks, as it Mas due principallj'^ to similar though more serious con- ditions which obtained at that time in the United States, Canada then as now being intimately concerned in the financial welfare of its neighbor to the South. Considering the physical and other disabilities under which these early banks labored, their record is sur- prisingly creditable, and much of their experience and foresightedness is embodied in the present Bank Act. In fact, from 1829 to 1866, not one bank failed. True, trying *imes and heavy losses were met time and again, but with the exception of the authorized suspension in 1837, which was very reluctantly taken advantage of, the banks not only remained solvent, but maintained the re- demption of their obligations in specie. Such satisfac- tory results, however, cannot be ascribed to the quality of the then banking laws, so much as to the common sense and judgment of the Canadian people themselves. , The majority of the banks were under the control, if not the actual manageznent, of Scotchmen, who had a keen appreciation of the merits of the banking system of their native land, and lost no opportunity of perpetuating and extending "for the farmer and merchant the lienefits and stimulus of a system the worth of which Scotland's prosperity could abimdantly prove." These men with their keen and analytical minds no doubt profited by 6 nANKINc; IMllM IFLKS the study of the past history of hanking in Canada, and followed closely the developments of hanking in Canada and the United States. To such men the sound prin- ciples of hanking and finance advocated by Alexander Hamilton nuist have ai)pealed with great force, though he was a century in advance of his times. 6. National banking- s/j.stem (hsar-lOlS). — In July 18G7, the British North America Act was passed by the Imperial Parliament, under which the i)rovinccs of Can- ada were confederated into the Dominion of Canada. The framers of the act, with creditable foresight, realized that the banks, like the railroads, in order to discharge most effectively their natural functions, must be national in character rather than provincial, and to this end vested in the parliament of the new Dominion the exclusive authority to legislate on n\\ matters pertaining to banks and banking, currency ?.(ul coinage, negotiable instru- ments and kindred matters. ^Vith the passing of the act the existing banks came automatically under the new jurisdiction. Tentative legislation between 1867 and 1870 extended the powers of the banks previously incorporated by the provinces to the whole Dominion and unified the laws as far as practicable. 7. First hank act 1871.— The first general bank act of the Dominion was passed in 1871. By this act the duration of a bank's charter was practically limited to ten years, and as the charters of the banks expired they . were renewed until the following revision of the act. The renewals of the charters were thus made concurrent with deceimial revisions of the act in 1880, 1890, 1900, and so on. Various amendments were made during the first few years, but since then, except at tiie regular revisions, changes have been infrequent, and have l>een made only to meet some contingency due to the rapid expansion of HISTORICAL SKETCH Canada, or to correct some omission or ambiguity over- looked in the previous revision. The last revision should have been made in 1910, but owing to causes whitli it is not necessarj' to detail here, the charters of the banks were extended to 191.3. The delay, however, was accompanied by little or no incon- venience to those concerned; the charters of the various banks were extended until the new act was finally passed. Changes that were imminently necessary were looked after by special amendments to the act of 1900. In many ways the delay was not without its advan- tages. The tremendous expansion in the financial and commercial life of Canada demanded that the revision should be most carefully and presciently considered. During 1913 the banking system of Canada was freely discussed, both in the public press and in special commit- tees appointed for the purpose. The result of these de- liberations will be dealt with in a chapter on the Bank Act. It is notable that the revisions are ne'"."ier made by theorists nor tainted with political expediency. The ablest men in the country, regardless of their politics, are consulted and give evidence before the parliamentary committee. Lawyers, merchants, farmers, bankers and others equally well qualified contribute their criticism and advice towards the advancement of the best inter- ests of the country. The measures are then fully debated and when finally passed are acceptable to all interested. This brief account of banking in Canada is given, not as a history, which would be without the scojje of this volume, but in order to assist tlie reader in realizing that the growth of the banking system of Canada has been one of evolution rather than of expediency or hasty leg- islation, and that the machinery provided for the sys- 8 BANKING IMUNCIPLKS tciiiatic and regular revision of the Bank Act is invalii- al)k' ill meeting tlif tivnjcii(l(Mi.sex|)ansi()ii and constantly changing requirements of Canadian commerce and ag- riculture. Tliis chapter road in conjunction with the chapter on the Bank Act, and the explanation of the hranch system and note circulation, should demonstrate clearly Iioav far the functions performed hy the banks in Canada respond to the requirements of a new country, as defined so lucidly by Sir Edmund ^Valker: What is necessary in ii banking system in order that it may answer the requirements of a rapidly growing country and yet be safe and profitable? 1. It should afford the greatest possible measure of safety to the depositor. 2. It should supply the legitimate wants of the borrower, not merely under ordinary circumstances, but in times of finan- cial stress, at least without that curtailment which leads to abnormal rates of interest and to failures. 3. It should possess the machinery necessary to distribute money over the whole area of the country, so that the smallest possible inequalities in the rate of interest will result. 4. It should create a currency free from doubt as to value, readily convertible in specie, and answering in volume to the requirements of trade. There should be as complete a relation as possible between the currency requirements of trade and the cause which issues paper money, and, as it is quite as necessary that no over-issue should be possible, as that the supply of currency should be adequate, there should be a similar relation between the require- ments of trade and the cause which forces notes back for re- demption. CHAPTER II KIxNDS OF BANKS 8. Commercial haiiks.—In the Bank Act of Canada no attempt is made to define the functions of a bank in general terms; the act merely states that "a bank means any bank to which this act applies." A bank in Canada therefore means one of the chartered banks, as the law prohibits the use of the word "bank" by any other insti- tution. The State of Xew York, however, is more venture- some in this direction and gives the following excellent definition of a bank in its banking statutes: The term bank means any monied corporation authorized by law to issue bills, notes or other evidences of debt for circulation us money, or to receive deposits of money and commercial paper and to make loans thereon, and to discount bills, notes or other commercial paper, and to buy and sell gold and silver bullion or foreign coins or bills of exchange. Economists have defined the functions of a bank in many different ways, but all arrive at the same general conclusions. Charles F. Dunbar, in his "Theory and History of Banking," gives the following definition of a bank: A bank miy be described, in general terms, as an establish- ment which makes to individuals such advances of money or other means of payment as may be required ami safely made, and CO which individuals entrust m ney or the means of pay- 'A 10 BANKING PUIVdPLKS nu'iit, wlini nt)t riiinircil liv lliriii for iinc. In nlluT wonis, llie husiruvss of ;i hank is said to Ik- Io liiiil or discount, uiid to hold deposits. Witli tlieso two fiinctions is often combined n third, tliiit of issuing hunk notes or the Imnk's ow/i promises to piiy, for use in general circulation as a sul)stituto for money. Horace White, in his "^loney and Banking," thus tle- fincs a bank: An institution wliore deposits of money are received and paid, where credit is manufactured and extencJed to borrowers, and where the excluin^e of property is facilitated. Having first acquired the confidence of the community, the bank extends its credit by purchasin<5 interest-bearing securities, mainly busi- ness men's notes, payable at a fixed time and giving the sellers the right to draw checks upon itself payable at sight. The amounts thus authorized to l)e drawn are termed deposits, the bank being liable for them in the same way as for actual money deposited. . . . Bank notes are the bank's promises to pay money to the bearer on demand. Gilbart says: A banker is a dealer in capital, or, more properly, a dealer in money. He is an intennediary between the borrower and the lender. By this means he draws into active operations those small sums of money which were previously unproductive in the hands of private individuals, and at the same time fur- nishes accommodation to those who have need of additional capital to carry on their business. E. S. Meade, in his text book on "Economics of Busi- ness," states that: A bank is an institution engaged in the safekeeping of money and other valuables, in transmitting funds from one place to anothci", in making loans and in buving promises to pay money in exchange cither for money or for its own promise to pay money. These are important functions of a bank, although a banker performs nu.ny other services to the community. KINDS or HANKS 11 ^\I1 thcso fuiK'tioiis arc (liscliargoosit money in small amounts, and allowing inter- est thereon. Upon deposits of this class, no matter how small the amount, the chartered banks of Canada pay interest and they operate as part of each branch what is called a Savings Bank Department. Consequently the need of special institutions for this purpose has hardly been felt in Canada. Outside the government savings bank there are prac- tically only two savings banks in the country, namely: the City and District Savings Bank, INIontreal, and La Caisse d'Economie, Quebec. These are well-known in- stitutions and are highly successful in encoiu'aging thrift principally among the Canadians of French origin. The Dominion government supports two savings banks, one the Postal Savings Bank, which is op- erated by the Post Office Department, and accepts de- ])osits at every post office, and the other called The Government Savings Bank, which is under the control ot ihe Finance Department. The latter receives depos- its at comparatively few points, principally in the larger towns in the maritime provinces, and its business is gradually being merged with that of the Postal Savings Bank. The money received from these savings banks is H nANKIN(; PIUNCirLFS rcgunied hy the govtiiinKiit as a loan wliicli [narHcally leplucrs inoii.y that coiihl he hoirowtd at a louir cost outside of Canada. The rate of interest in hotli hanks is 3 per cent. Eaeh entry costs ahout 12 cents or A\'* per cent of the avera«:e deposit, making a total of 3.G2 i)cr cent.' It is easily seen that if an adecjnate re- serve were maintained it would hring the cost of these deposits to over i\ per cent. The government, however, avoids the ex|)ense and responsihility of maintaining an adccpiate reserve hy a clause in the IJank Act which makes it compulsory foi the hanks to honor government checks without charge wherever jH-esented, and all with- drawals from the savings hanks are in this form. For- tunately, the hurden on the hanks is not at present a serious one as the government savings hanks control only ahout 5 per cent of the total dei)osits of the country, the chartered hanks holding 90 per cent, the special sav- ings hanks 3 per cent, and the trust and loan companies the balance, ^^'ere the deposits heavier the question would be a serious one, not only for the banks but for the country, for the former, on account of the burden of maintaining adequate reserves for the government, and for the latter on account of the increased expense of these deposits over and above the low rate of interest at which the government can borrow in Great Britain. Theoretically these savings banks are intended for the benefit of the poorer and more ignorant classes of the community. It is not intended that the well-to-do should avail themselves of the privileges they offer, and to this end there is a limit i)lace(l on the amount which nuiy be deposited. 10. Trust and loan com panics. — Of late years a con- siderable number of these companies have been organized * Hearing before House rommittce on Post Office Savings Bank IflOfl. pape 70. KINDS or HANKS IS ill Caiiiulu nmlcr provincial or Dominion diarters, and as it is an o|)tii «|iitstion wlictlicr llicir control is vested ill tlic federal «»r in tlie provincial authorities, some com- panies, to make sure of their position, have ohtained charters from both sources. Trust and loan companies are supposed to enter into the field of banking only in so far as it is necessary to transact their especial business. There is a tendency, however, recently develoi)ed. to enter into competition with the banks in various ways, especially in canvassing for demand nO, debentures payable in Canada r.l.H:iO,GJ.;}, and debentures payable elsewhere as .$67,708,2.59, an increase in the latter of over $10,000,000 for the year. From these figures it will be seen that the greater part of liabilities to the public con- sists of debentures issued to foreign purchasers, and that these corporations perform an invaluable service to t!ie country in obtaining foreign capital. The principal as- sets of these companies consist of: Mortgages $157,979,495 Municipal debentures, etc 5,687,823 Stocks and bonds 27,292,174 ^K CHAPTER HI THE BANK ACT 11. The Bauk Act of /,'>/.;.- Tiie present Bank Act,* wliich came into force on July 1. 19i;j. consists of one hundred and sixty sections or clauses. Its leading fea- tures may he hriefly summarized as follows: 1. Intorpretation and application Sections 1-7 ?.'. Incorporation of new banks « 8_|.y !}. rurcliasc of the assets of a bank " 99-111 \. Insolvency and windinpr up, eti " 113-131 5. Offences and penalties « 131a-160 6. Ii.tcrnal regulations as regards directors, shares, annual statements, audits, etc. " 18-60 7. Returns to government '« 112-lH S. Note issues <* fil— 7*5 '.) Business and powers of a bank " 76-98 It will be noted that the first five divisions deal with special conditions, such as the establishment of new banks, amalgamations, etc., and are of only occasional applica- tion. The last fom-, however, deal with matters of cvery- (hiy banking and call for careful study. The last divi- sion, "Business and powers of a bank," wherein arc de- fined the business relations of banks with the public, is therefore, of particular interest to branch officers. The 'Copies of the Bank Act or Bills of ExchariRe Act may be obtained by remit- I ing twenty cents for each c> .^ to the King's Printer, Ottawa. 15 ,6 IIANKINO IM11NCH'1.1'.S o,l,c,- tince headings deal -"unatters more or^e^s per- tainiiiK to oi- .aider the .liiect control ol Head Oftice. i- C7,„,«r» in the Bank .Jc(.-T«o very important Jwions ,vae n.ade in the l---',-'> --']•, '^ tions providing for a shareholders »";)'«_; »f'^,^^^„\ tion o( central gold reserves hi connection with the issue , extra circnlafion «he„ re.,uired. Authority was g.v» t„ loan money to farmers on the security of thres u , a^, and a number of minor changes were made mo Hy ^ a routhie or explanatory .haraeter, such as the op^,. i, g up of registry offices in the different provinces, the riiZg of lection 1« on stock books and documents, ind the'likc. and the establisbmcnt of -eral new h f - iiiffs in the monthlv and annua! statements. The central gold "Lves will-be dealt with in the chapter on note "T Sl,arcM,lcn- andit.-A provision for the external sunervision of banks is an entirely new feature of the Bank Act. Xo objection was advanced by anyone as fotetesirability 'or usefubiess of *- external audit itself, but the problem was how to effect an audit with- out evoking the aid of too cumbersome or too burden- some machinery, and how to avoid placmg too great a burden of responsibility on those assuming the work, without first ascertaining how far the physical limita- tions of any such examination, due to the branch system would affect the value of its conclusions. Three forms of external supervision were given consideration, namely: examination by the Dominion government.^ by the Canadian Bankers' Association, and by competent accountants. , . , ., The idea of government supervision was advocated bv those who were admlicrs of the system of nationa hank e nations obtaining in the United States. It THE BANK ACT 17 is obvious, liowever, that even if these exammations were effective in the United States (which is very mucli open to question), tlie plan itself would not be feasible in Canada on account of the branch system. Further- more, there is no doubt that the government inspection of a bank is taken by the public in a way as a guarantee of solvency. In the United States such a belief is of only local effect whereas in Canada it would be national in Its influence, would practically put all banks on the same footing in the public eye, and would work a pal- pable injustice to those banks Mhich have, by years of sound banking, established themselves firmly in the con- fidence of the public. With such supervision, therefore, would go a great deal of responsibility for a bank failure, and this re- sponsibility the government was naturally reluctant to assume. Another objection to government supervision would be the fact that the appointments of examiners would run the risk of being occasionally based on politi- cal expediency, rather than on expert knowledge and fitness for the positions. The information so far made pubhc as to the failure of the First-Second National iiank of Pittsburg is a serious and almost unanswerable reflection on the present system of examination, and must undermine the public confidence in the efficacy of government supervision in the United States The Canadian government was well advised in not allowing itsdf to be burdened with a new and unknown responsi- The Canadian Bankers' Association was also averse to assuming the responsibility of inspection, as such action would be considered tantamount to a guarantee by the cssomted banks of the solvency of the individual banks. Furthermore, no matter how impartially such a super- 18 nANKIN(; rUlXCIPLES vision was exercised by the Association, it would always l)e oi)en to misconstruction, and any hank, whose affairs called for criticism, would not he likely to neglect an oijportumty of appealing to the public sympathy with a cry ot j.'cisecution. The system finally ad()]>tcd i)romiscs to overcome the above objections and to be a satisfactory sohition of the (luestion. The act provides for the appointment of auditors by the shareholders of each bank from a panel of forty or more, selected by the general managers of all the banks, and aj)] roved by the Minister of Finance. These auditors check the cash and verify the securities of the head office and such branches as they may deem necessary to visit, and report to the shareholders annu- ally upon the affairs of the bank. 14. Abstract of the Hank Act.— A knowledge of the Bank ^Vct is most necessary in the study of both the theory and the practice of Canadian banking, and in a volume of this nature a brief synopsis of the act will be found useful. The full text of the act should of course be consulted when the exact wording is desired. 1.5. Title and interpretations (SectivOjis 1-2). The act may be cited as the ijax k act. The intention of the act in Its use of certain words and expressions is clearly defined. 10. Application of the Bank Act (Sections 3-7).— The provisions of the act apply to the following banks: V r ij ; I '/lief Office Ihe Bank of Nova Scotia Halifax The Bank of Toronto Toronto The ^folsons Bank ..;.;: Montreal l>a Banque Natinn;t!<> Quehec- The Merdianfs Bjink of ("nii.i.lM Ar„„4-_i llli: JJAMv ACT 19 Lii Baiiquo I'rovincijilc da Canada ■Vronlreal ,'!!|»^ I'liioti Bank of Canada Winnipeg 1 lie I anadian JJank of ConiiiKTco Toronto Tlio Royal Bank ol" Canada Montreal The Dominion ]{ank Toronto Tlie Bank of Hamilton .,,,.•; Hamilton I he Standard Bank of Canada Toronto ha Biuujne d Jlochelaga Montreal he Bank of Ottawa. Ottawa Ihe ImiKTial Bank of Canada Toronto The Sovereif,'!! Bank Toronto The Metropolitan Bank Toronto 'riie Home Bank of Canada. • Toronto The Northern Crown Bank Winnipeg The Sterling Bank of Canada ' Toronto The Bank of Vaneouxer Vaneouver 1 tie Ueylnirn Seenrity ]Jank Weyburn Bank of British North America London, Eng. The act extends these charters from July 1, 1913, to July 1, 1923, and makes special provision for the Bank of British North America, which still operates under its original roval charter. 17. Iiicorpordiion of b ks (Sections 8-12). —The conditions under which a new hank may be organized and the procedure necessary are clearly set forth. The first step is to obtain an Ac* )f Incorporation by means of an application signed by at least five responsible men known as pro\isionaI directors, who are able to satisfy the Parliamentary Conmiittee on Banking and Com*- tnerce that their i)roject is a genuine one, that they are fully aware of the responsibility of their undertaking, and that they have the ability and backing necessary to carry out the organization of a bank successfully. If the committee rei)orts favoi-aI)ly, letters of incoi^ora- tion are granted, and, after ten days' public notice, the provisional directors may advertise for public subscrip- tions, and cause stock books to be opened. Xo bank, however, can be incorporated with a capital less than •'t<500,000, divided into shares of .$100 each. 20 HANKIN(i rUIN( II'I.F-S 18. Organhaliun of hanks (Sections 13-17). — If within a year the sum of not less than $500,000 of the capital stock of the bank has beer bona fide subscribed, and not less t1i;in $250,000 paid in and deposited with the jMinister Finance, the provisional directors may, by public notice published for at least four weeks, call a meeting of the subscribers for the purpose of organiz- ing the bank. At this meeting the subscril)ers shall elect five or more (qualified directors to replace the pro- visional directors, determine the date of the annual meeting, etc. ^V certificate of the Treasury Board ^ per- mitting the bank to commence business may now be applied for, but, before issuing such a certificate, the Treasury Board must be satisfied: 1. That the payments and subscriptions are all gen- uine and in form. 2. That the deposit of $250,000 with the :Minister of Finance has been made, and is still in his hands: 3. That the directors are qualified and have been reg- ularly elected. 4. That the expenses of incoriioration and organiza- tion are reasonable. 5. That all other requirements have been complied with. If everything is found satisfactory a certificate will then be granted and the deposit of $250,000 returned, less a deduction of $5,000 as the initial payment on ac- count of the Bank Circulation Redemption Fund (see Section 04f) . Then, and not until then, is the new bank ' The Trrasur>' BiKird pxcrrises important functions unC> HANKIN(i 1MUN( IPLKS The majority of the directors must be liritish sub- jects living in Canada. The method by which directors shall be elected is pro- vided for, also the manner in which directors shall elect the president, vice-president, and fill vacancies on the board. 22. General poxcers of directors (Sections 20-30). — The directors may make by-laws for the regulation of all matters in connection with the business of the bank, the duties and conduct of the employees, and the estab- lishment of guarantee and pension funds for the staff. The directors are required to obtain satisfactory se- curity from all officers and clerks for the faithful per- formance of their duties. 23. Regulations as to shares and shareholders (Sec- tions 31-32). — A special general meeting may be called at any time for any purpose by four or more of the directors, or by at least twenty-five of the shareholders who own not less than one-tenth of the paid-up capital stock of the bank. Votes of the shareholders at any meeting must be by ballot, and each shareholder has one vote for each share owned. Shareholders may vote by proxy, but no shareholder who is also an employee of the bank is allowed to vote. 24. Increase or decrease of capital stock (Sections 33-35) .—The capital stock of the bank may be increased at any time by a by-law passed at a general meeting of the shareholders, subject, however, to the approval of the Treasury Board. New shares issued must be allotted to the sharehold- ers pro rata on such terms as are fixed by the directors, with certain limitations as to price and the amount and frequency of the culls for payment thereof. THE BAXK ACT 2.'J Provision is made for the reduction of the capital stock of the bank if sucli action should become neces- sary. 25. Shares and calls (Sections 36-42). — Shares of the capital stock of a bank shall be personal property. The manner of subscribing for sliares and making calls thereon is provided for. Calls shall be made at the option of the directors, but such calls shall be payable at intervals of not less than thirty days, and in amounts not exceeding 10 i)er cent of each share subscribed. There must be printed on each page of the stock book upon which subscriptions for new stock are recorded, and "on every document constituting or authorizing such subscriptions, on a part of the page and document, re- spectively, which may be readily seen ])y the person recording the subscription, or by the person signing the document, a copy of Section 125," which provides fcr the double liability of the shareholders. 26. Transfer and transmission of shares (Sections 43-53). — No transfer is valid unless the stock has been accepted in writing by the person to whom the transfer is made, and the person transferring the stock has satis- fied the bank as to any liability that may be due it. The bank may oj)en and maintain in any province in t' mada in which it has one or more branches a share registry office, at which the shares of the shareholders resident in that province shall be registered. A list of all transfers of shares registered each day at the respec- tive places where transfers are authorized shall be made up each day and kept for the inspection of the share- holders. The procedure in connection with the sale and trans- mission of shares under special conditions, such as writ 24 HANKING rUINCIPLKS of exe( .itioii, marriage of female shareholders, lunacy, bankruptcy, death, and the like, is set forth. A bank is not bound to see to the execution of any trust, whether expressed, implied or constructive, to which any share of its stock is subject. A person hold- ing stock as executor, trustee, guardian, etc., is not per- sonally liable uidess the tr ist is not disclosed. 27. Annual and special statements (Sections 54-55).* — At every ainmal general meeting the outgoing direc- tors must submit a full statement of the affairs of the bank. The statement must include and show the fol- lowing particulars: ASSETS (a) Current coin licld l)y the bank. (b) Dominion notes held. (c) Notes of other banks. ((I) Checks on other banks, (r) Bahinces duo by other banks in Canada. (f) Balances due by banks and banking correspond- ents elsewhere than in Canada. (^) DoininJon and provincial pfovernnient securities, not exceeding market value. (h) Canadian municipal se- curities, and British, for- eign and colonial public securities other than Can- adian. (i) Railway and other bonds, debentures and stocks, not exceeding market value. (j) Call and short (not ex- ceeding thirty days) loans in Canada on bonds, debentures and stocks. (k) Call and short (not ex- ceeding thirty days) loans elsewhere tlmn in Canada. (1) Other current loans and discounts in Canada (less rebate of interest). (m) Other current loans and discounts elsewhere than in Canada (less rebate of interest). 'See figure 2 for presfribpcl form for monthly statements. THE BANK ACT 2A (ii) Liabilities of customers under letters of credit as per contra, (o) Real estate other than bank premises, (p) Overdue debts, estimated loss provided for. (q) Bank premises, at not more than cost, less amounts (if any) written off. (r) Deposit with the Minister for the purposes of the Circulation Fund, (s) Deposit in the central gold reserves, (t) Other assets not included in the foregoing. LIABILITIES (a) Capital stock paid in. (b) Rest or reserve fund. (c) Dividends declared and unpaid. (d) Balance of profits. (o) Notes of the bank in cir- culation. (f) Deposits not bearing in- terest. (g) Deposits bearing inter- est, including interest ac- crued to date of state- ment. (h) Balances due to other banks in Canada. (i) Balances due to banks and banking correspond- ents in the United King- dom and foreign coun- tries. (j) Bills payable. (k) Acceptances under let- ters of credit. (1) Liabilities not included in the foregoing. Any other particulars which, in the opinion of the directors, are necessary to a full and clear statement of the affairs of the bank, should also be given. A statement of the profit and loss account for the financial year next preceding the date of the annual general meeting must accompany the statement. These statements must be signed by the general manager or other officer of the bank next ii. authority, and on be- half of the board by the president or vice-president or any other two directors. Copies of these statements ii(J 1J.\NKIN(; rUIN{ IPLKS *>ast be sent to eaeh .slmieliolcler of tlie bunk and to the Finance Minister. Tlie directors must also submit to the shareholders such further stattineiits of the affairs of the bank as the shareholders may re(iuire by by-law regularly passed. 28. SharchoUh't's' aiidit (Section .')(», all new). — Shareholdeis of a bank shall at each annual general meeting appoint and fix the remuneration of an auditor or auditors chosen from a panel of not less than forty selected by the general managers of the banks and ap- proved by the Minister of Finance. Full provision is made for filling the vacancy caused by the death of an auditor or tlie failure of the shareholders to appoint an auditor. Written notice of the intention to nominate any auditor other tluui a retiring auditor nuist be given at least twenty-one days before the annual meeting; the bank must cause a copy of such notice to be deliv- ered to the retirijig auditor, and particulars of the nomi- nation must be forwai-ded to each shareholder at least fourteen days l)efore the meeting. Every auditor of a bank shall have right of access to the books, cash, securities, and records of the bank, and is entitled to recjuire from the directors and oflRcers such informatioj) and exjjlanation as mav be necessarv for the performance of his duties. An auditor is not re(|uired to visit any branch for the purpose of examining the books, cash, securities, and records, but he may do so if he considers it advisable. It is sufficient for the purposes of the audit if he has access to the returns, statements, and the like, which are sent to the head office in the ordinary way. He must at least once during the year check the cash, securities, etc., at the chief office of the bank and at those branches at which he may consider it advisable. Tin: HANK A(T •27 The auditors shall iiiakc a ivport to the share- holders: (a) On the accounts examined l)y them; (h) On the checkin^j; of the cash and securities ; (e) On the statenuiit of the afl'airs of the hank siih- mitted at the meetinr; and the report must state: (a) Whether or not they liave ohtaincd all the in- formation and explanation they have re- (juired; (h) >Vhether, iii their opinion, the transactions of the hank which have come under their notice have heen v>ithin the powers of the hank; (c) Whether the cash and securities agreed with the hooks of the l)ank; anlik ..I |..r..llll>. M,,l«nli» llalik I^|II<)IH' \lltl<'II!tt»' M.Ti lialil- ll;ilik .'I i'l li |lillli|ui' rn.MTiiliili' '111 <:iiiM.li I rii'iii Hank ■■( <'.iii:iil:i « uimihan Haul- .■! < '..inn iiir l!i.>al Hank .il (aiiaila MiiMiinii.ii Hank I'ank .il llaTiiili..n Siaiiilaral Hank ..I Cariaila Han.iuf .I'll.i.liilaK.i, Hank ..I I Miavia lrji|~ mil Hank iil t'anaila- S.iMTi iitn Hank of Canaila Ml lr.i|"liian Hank 1 1.. in. Hank ..f (anaila \,.rilirrn Cmnn Hank :-l. riniir Hank ..l ( anaila r.ank ..I Xan.i.imr. . W.'Vliiirn Siurit\ Hank \i II /"I (•■ipil ,1 ?i(il.-»*rii . «l Ca- Hal lanl I ,. l>.-,,tllNl,ll(»l I IC.IIIO.'IHI ■huhi.ihn) j J.TJn, I'Hi lll.KIII.IHMl j n.lXl.lKKI i.>i'>i>.i;iii'. In.l.tl<).IH!!t .'..I a II 1,1 HI) I I '..IIIIII.IIINI I |il.1HNI,IKHI ; ...imii.iKiii I S.INDI.IIIIII ' jri.lKMI.IIIMI .."..mil 1.1 mil i ! III.IKNI.mNI ii.iimi.iHiii .'i.iimi.iiiiii '. l.imii.iHHi ;,.iKm.iH.o lll.lHMI.IHHI :i., II HI.! II III :;,inii.iiiit( 'j.miii.iHiii i;.iiiiii,iiiKi a.imii.iid'i ;.>,iiiiii.iNiii Amount t.f ri ..I i.t r.-iN-r\<< luiitt l.Sliti.lit.l» ,-,iMHl IMMI I.INHI.INm ...INKI.INH) ii.;M,7(«> l.iKNi.m^i .'i.lNNt.lHHI i;..l«III.ISKI ll.'iriii.iiiNi .•i.ii."..">.". :i.iiiil.'.iiiii :l,'i."i.>.7ii,i 7.IIII.I.IKIII H.imii.iiiKi l.tmii.iiiKi L'.iHHi.iimi ■J.MW.H"' I L'-M.l.l«l I.17I.7IIII I'.ilj.jmi lii.miii.iiili) ^•7111 131 .'./ivl.l.vi I.M>l'>.lil'>li .'..IHII.IIIMI (.iimi.iiiMi ^.'.miii.lKMt li.'M.TlMl I.IMHI.IIIIil .'i.lNDI.IItlll l.'i.llll.l.lHHI |l,.'.li,!i:in :)/ill.:tiiii (i 'i.'L>.:i.ss ll.iNIO.IMIII I.IMMI.IHNI l,!i:i'.i,:i:iii ■J.7sti,2Hl l,l:i:t,:H!> MH,2I.'> :ilii.liKi lll,(KIII,(ll> l.J.-i(i.tii.' lo.wM.nl' ;j.!i'ji),iii« tl.lDKI.III" 4,7(ui,iii ' (i,473.a:i-' :|,.'>IKMII'' :i,:«i2,.'il ' M.INIII.III I 4,4ll,:« ' 7.(Mi(Mlli' l,2.Vl.llli' Ik-i0,li(«' :«ii),iiiii> 4(l,()ll<' (k'l.iiii" in II II II III 1.' I.' iMi,siii,,iii,r, I iiM'.HM"'i« I liri.:.ai,l.'>:« Hw,«.W,>t:i ; in rirrlllalli.fl ii.iHM.aj>* .'•,;!7.">.i'aii 4,1111,4:1:1 4,tlH,lll2 ,l,,'i(l7,iW.i i,!t:ii.iij"i .•i.H;tl,l71 lt.!4,l7H 4.lHlll.t7l i:j,it;ii..'i;i.'i Iii,:i2n,ii.«i 4.7.vi,v«» j,.v..'i.:i! II ;Miiii,4ti:. :i, 1(111. in.'i 0,.mH,f,i7 2ii,:;i:i 'tll.i:-.' .,tu:.,H2.-i ; ,ii.-.:t,.2H ;,iilii,."iii.'i .■|Vi,7".' 11)1,11711 Hal ilia. 1.1 l>..ni. (;.iv ali.r ili'.liniiMf iitl\ aliit-< fi.r «n' ItN, |.Ii>-IWlH, I'll' •.■,tiH4,i«'.'> j :i7,l''.'i 4.W,i):..' 1 4.'i,.'iri ,V'l,.'Mill .'i:i,.>'.ii 2:t,i'i» i :i.vi.''i.'2 ai.iwi i HI. MIS l,siii,:iis jlii,.'ii'. .•).".,n.is i I I.I 1 1 i!t;i.7l^i :w,:it!i L'll.'-i7:t Itiilnni'ia ■ IlK' t 1 l'r<.\ inrinl (iuViTII- iiii'liU |>i |u.>tl> I y ihi' iiiil.lii . |ia\ al It' i.n ifi-innnil III ('uliltt)il l>.'|M~i|i» 1; till' |>tr In |.il>ti! r.ii.."ij7 ■2i:i,ini-. ll.M'.ino : 7ll,ii.'i i iii.K.'.i ; i 1.-iii.lr.7 ' •.'M'.117J 1 Htl'.L'lil I rt.'.iiM.jri ' I.l7l.:.ii'i i>,i72,;iii i liis,:iL'> l,L'7(l,lll.M ;».!i-.':l ' I27,.M7 :r.l,:.7:i 1 .llNil.O.Mi ik-i,74 1 l(l,!«12 l,:i:il.7:il l.Vi.Hia li2,l>1Hl 41>.."i(«>..H>Ml ! :l.,"i.n,:i7l I :iH.iw.VHi»t ] i;i.:iJL'.'.il"i I it.iii,7(i:i 1 '.i,li2(i,:(ii:l ; M.JIHt.lOI I l7.7.Vt,l22 i l,71.-i.!tV. I I7,iiis.:i7:i 7'.M7J,a7'.l I :il,ini,2ic' j l(l,M7l>,:W7 I lt,(IIH,7l» io,:i:iN,iK;t 4,7ii7,l2fi Ii,|."i7.:!s7 JO .'idO.XIII 2.!»:i7,r.l 2.ii'Vt,7sl 4.iilii.!»H 2,i|.Vt.7l!t iir..i,.srM :tss..V4i) lMt,l4;i.4ri 6,7lll),(14ll j ;H,(I7.1..VI(1 .■|.-.H,.V<.'.,HMi 02l..147.:i ii;i,iviii,ii) lll,II.VI.li.'> l,7lt.VIIV Ti.miM •Jii.777,41 •.'n,n7H,'ii i:i,:iiHl.Mii ;tN.ii.Vi.l.- ii,:MMi,iu 2N,i:Mi.:iii >«7.:w.-i,7i 7l,»2:i,7ti :i'i.u-..!ij •.•».;«iH.:i? 2:i,i2i,*i: 1(,H7I,.'.I 2!'.><7h.ih :tl,li4ii.i*> .■■..Vix,!!: 11,(1 1 :i,7'. 7,iMi7,(i: t.ii.'id'i' >l(i,.">i :i4:i,(i! .\-si:is f urr.nt ('...lil ami Sul.- .-iiliarv ( "ill r)o:iiiniiiii N'lil^'.^ I t,; \ \Mr 111 11 WK In i;i-.- ( 'anaila uii.'n T..lal III !-;is- Caiiaila »liirr I Hank ..( Mi.ntnal ■J (^1. .■■■ Hank :i Hank III \ii\.i Sii.lia I I Hank "f Hrili-li Ni.rlli Slmri. a .-. I Hank i.f 'l'..ri> I, Mi,l«.n-< H.ink i 7 i I'aniiu'' N'ali'.nal.' 1 s M, rii.anls Hank ..IC'an'i.la ' tl I Han. tui' rrovini-ialr lilt ('anaila; 1(1 Inion Rank ..f r'ana.la j II Caiia'lian Hank .if ( "..ninifrr ■ . 1.. lii.yal Hank iif ('an.iili |:{ Mi'iiiiiii.in Hank II Hank '.( If;iiliill .•|(12,l!»l iii;i.7i'.-"i 7.".ll,illl(i- 2,l;i'.l,l'.l7 ,-.y,ii:H 7H().i.vtl :if*."),7:H .■..:i22.i'.(i:i, 2.1XI.'">(i.S l,s!lti,7s7 4,937 ,9(»n I,Ci-I4,!MIh' 7:i!l.s.'i!l r)7.s,(M2j :«Mi,."i2i l.(i:t:),|i:t l,(iMi,.-i27 i(i.-i,:t<»ti ns,222 2v>i,S42 .■i7,:ils 2l,.-)(i!l 474 I,I(i(i,1SS 7,.->(M.2il (),s;n,(ii»(i l,iit.',,:ts 7:i'.(,s.v.i ■i7.s,(l.12 :!iMl..-i21 I,ii:U,li:f l,(iK(l,."i27 I(l,474,2 lii,: 4,211 Toil 10,474 JIM 7:tl 7v> 2,99*- 1 HI' :t,s7(i,iil7 :t,i>|:i.'KH *I 2 5 if 7tMI,(NNI 121,(1(1(1 244,791) l,4:t(),74N 22X,()(I(I 2(19,11(1(1 = J i. & 1,MIS24 KMUXKI .•■,12:; 17t :i2.-i,(KI() ;t0^.2l4 .■>2,ll(l(l 12,(mCi: I(r.,:»90 9S.222 2'!H»,17(I42,172,949 ri97,:t2(i 8t>.t,0.->(l S73,70:t (ii;!.(l44 22(),(H.') 73,I7(i (il !,tii-' 17:. i2,:.7(i 1.1,91)l .:«.9.-.:t .'i,: n,(il4 :t,: 'l.lOl 2,1 i(i,214 1. 9 S.2XI 2„s 4,079 l(l,Ki!),462 ()97,32fl .S(a,050 K7:t,703 (il3,044 220,r>4.'V 7:j,I70 lHI,9«»,(i:t,->! 17,().Vi; 91,iip.(l9: 210,000 7:!M,.MI() .•l7S,l¥KI 2li(l,ll(NI l.VI.OtX) KIO.UUO 123,300 IS.-),^^ :)2ti,3,V) 27,32<) .■)I..tO(I S9,l'i(KI 114,(>4,(HI.-i 311,272 3(W,41S :M9,S92 42H,l9.-i 74(i.:l97 2(IS,9(I7 I>riH>Mit> 3 -.5 Chi'iiui'rt t?Si atiil t'til. on x""? 99 1, 12 1. (Ml I 2,4:t9.:VHij i2s,ii;Ki 1.9H7,(>.'i(i N20.'.'7I 3„M(i,ll(19 49.a,2l:V 70S,l):«) 2,.">72.2H.-.i, l.l7.-i.274| .■.,9(il.2-'(i 2,.Wl,7:t9 .".,27(i.."v42 I l.:i97,9 CI 29S,2tC. l,l(I.S,IMi(l 9.-i,42(l (iVl.sM 2iM:i:i K,l(ll 22,129 .■i4(1.9llH 3l9.ii:iii 23.">,32(l !99.(IC..". 411,129 (i23,s:j.- 104,77C. III.IMC 2.2(i'S. !.'.:< 1.49ii.-"il'« 1,h7S,S09, l,(.,-)n.47l 1 722.HMI 4,243,9S(i 321.:l' 401,0911 |Ci.-.,3« i:."i: i:t.-i,il2 (i7,2.">(i 2.94N (IIKMKII i:<(i,40l 2,H.SI 11,973 27(i,l:tl 19(1,12; :t:!s.729 :U9.I97 1.14,791 J)il froi likrt I l.aiik corn poiidi t'W whr than Cam and r I. -1.4,4 It l()l,li:tH 102.2.'i2 10.000 121,124], 91.S731 27,9-20 .VI 1.9 17 I9l.l47i .3.-i9,lS3 l:«),2.-iS! .■kSl 4,r.i9.3:is .-►l,(i43 99,91.-i .■.,31.1' 311 l,(m: 1,(V41 l,l.-.; 1.2'.i: 411 .vi; 80 4.43 2,1S l,2(j 17 92 7 .VI 2,0(1 It 1 l2.!HI.S,2(i3J47,M9,94.-) 13S,100 :«,.->!«.lk">l 9,2()l,2!«i TO THE DOMINION GOVERNMENT -JULY, 1913 iIm' |mi tl' , |ill>ttMr tidfr iiiitifi* iir nri n tn.il llllV 111 ( 'uimilu ii;i,ivio,iiii |ll,II.VI.Ii.VI l.7H.-i,IIHI •.'■J.IKH .AW •.•Ii,777.4ll •.'ii,i>7x,'i|7 i:(.:)iN),Nim :m,i'i.-i:>,i.'iIi ti.:ni*i,ii;fl( »,i::i.t24,i)a:i I4.M71..M3 a'.i.H7H,(»4« :h,ihii.»i'*7 .-•,.vm,KM) n,lll3,7tM 7,(Mi7,(l'iH 4.ci.'>ll,'>71 Mil," (Mi .'HII.IMI I.IAHII.ITIFH Ih.ll III Citiiti'hi I ••'7.. MS, urn 11. Mil. MM 2.l.'>l.l;.':t U7..i;t;t 4.Vi.JI.> 111 .•.7.',.«i7 l...iili» frtilii .iittir liiiiik^ III (':il|j|ilil wiiri tl. lilt IlKllhlt I ill< rt- I tli^i'iiuni*'*! fl2l,M7,;«>t>l I »0,«llll,l'.M |h-|HH<|ll« inuili- lt> lllltl t ullllH'l'" llll.' I.I nll.ir lilllk* III ( uliHtla l,l.ll>..Mts J.-iii.mi'i liMi.:i|:i iN.O'.Mk 74,7MI 9I.7.M .■i.ii:vt MVI.iHII l.i^l.'i :u(.i>7ii 77h.!Is7 :>!).•>, wi."! UM.t»:t-'i 1.2117 7tH),(MU 4:(7 144,2211 ;ti.t,77i) 2.tl2H 7..-.i:i l<)U,42;i tl.l)(l2.".i.'«7 Dim- t" liiiiik.^ iiiiil I riiikifK i'urri'M|M)iM|. I'fllM III till- I lllli'il Kiiicitiini 42.211) avi.a.Mi fl2,.-.7l 12.122 2:«,7l1I l,2l)l,IWM l.ni.iiHO (l.lXi.tMUt 22H.41H 7.">.22<) 21.-.,i»2W III I unk» iiriil t iihkiiiii ('iirri'i»tM>ii21'.»7>« li(.i)l:l 4lrt,7:«i .•..tM.V7(t7 1 1. vim;) 1N)I,:«H) i . :(2.2i.'i IW2,2»(t II 17, til 12 7U.72II .l,:iN.^.Miil 2.111,112:1 Ii7,;i<.i'«-Vi i(V4,:m.'i n..vu.»wi l,:i2l.:li»i 77.-..7»4 2,.V 7.-..IH7 4.IW IIII.2III 7.I..VM 1.7:12,2117 712.:iMi 7!t,l».">:t 1I..M I IINI.1112 4N.0,'KI :i.ll>4,lt77 i.ii:«,.vm 7iut,2N:t roi.ni:! in2,ii7N 42.:iM2 17H,I7<1 H2,K.VI :t,4:M l.mll Mlt-* ll< ( \wl .1..1 iirtt ,r (nn-( •mt ht'ii '!• T..i»l l.iiii'iliii*-* 2'J'i.niii 1'|..IT.' :l.2.Vi,IV, rmi :IH7.".IM ! I '."'T 'i77 i lll'i'ils 2.'.7vi , 7,1177 l.l!t2 2s."i,.vi:i til.iM2 :i.7il2,illU 12 H,S»«l 1.K4I 41..m7 l(>7.IHt.'l..'t21i 17,1)21,211) lll,.'i:>:i,l:ili .V4.:l,VVill» iri,.'iiili.>i7.1 ll.i>2:(.2iu 2II..M.'>,lilil IM>.lls,:il7 lll.iHI.'i.22l» ii)i.nv:tM 22ii.llO.)>s:i l.-|l.lt2l.2Ml IV4.:UH),IM2 ;i7.71t'<..V»l ;i7,(t2ti.:H.'. 3I,IN>I,I>II 4:i.iHi7.Hi:) i):i,.'ii;i,iiit :t.7HN.:Hi lli.2it,'i.Ml7j lll,ll7.'),NUl| 1.V2II2..VH 7. l.'lH.Hfll 2,l:)l>,H.'>U (t74,>t.V« ■tiMmtii t4 lltHII** III iliri't iiirN mill iiriiiM III kIii.Ii I 1m V II rt' liari iirra l.llltt.lXI ,1l7,.^7o IW.I2."> H2.7.'l ,Mit,22.> .V>4.11'.l 7:t,:t7.-i li.M.2:i2 4(,:i7H Mt,li>>H 0.477 AVMMI- aniimni nl rtirn-lil tfolil nllil ■III Mhlitiry ■mil Im I<1 • Itinritf ih,' liiDlilh K.imi.ivm :l7:i,7-'' 4,oi».....« »7ll,'V27 M.-.N.7:17 .Vil.22i> IVI.21" 2,111. 1112 .•MI2.-1 >«Ht,:iii7 ."..,^7li.l»l I ,1,ti(l.1.lHl l.ii2I.H:Mt 72:t.:f.il fi74.4».% ■III.hK 1.0.III,.VI2 l,i)7n,,Vio tl)ll,2.Mi H.'i,!!:!.^ 2h:I.2h.-i 2'> 12,24(1 ,S\rntr miinllllt •>} |>tiMilll|i*fl \..f'. Im'IiI iliiriiiK lh«- liiolilh |. ClrrMnrt aiiioufit III litrtcM III rirrllliktiiill ai niiv iiiM>- iliirihii lln- iiitiiilh I2,2:tl,44.i:i7 :i.l)KI.:tli:i,iio I.Vi,H.M 4.«14.2Vi ll..'ill.i.1.I2II 1.1^2:1.1 It 2..74..u:t llt,2.-|7,2Ul .Vi7.tH.'. 744,»2:» (107 .imi .'i20.»».'«7 2i:i.,VNi •).'>, 1 12 t.'t.tllH I.Vt 2.iMIO..I>i.'> .•■..■i.Vt,ili27,i>iil 10,11111,177 .'■..".2M,iail) 2. ■>.%», in.'i 2,IH0,.V>:i 7 H I I II 12 i:t 14 u :i,:io2.tii7 I I'V :i,Hlit„'no li' n.H:»H,'.(»7 11 2«',:4»-"> tmi.' 21 22 2:1 21 2.^ ll,22«,OH.-. i tl,7i:i,02l) 21,imi,H2 ii,i:h,24ii 8,.-i:i7.(io.") |l,27.'.,2!t7,2 70.727 ,VW,4iHl 2,00(),.'>0i ino.iio 71,47: m,'2fll 22t.s7:t tl2,9l)."ij ,19.ss:t! (VM7()7l 44.'i,ll(l 2.7n,Vf.2l -1.7.^.1,777 ,-..'.»03,77 .Vi7,.'iW l,10U,47O 4,'..1'.I3 (1.007,7,"i:t liOI),24.'> 7t))«,02."i 204,.')00 H2."i,;)02 HO;),.^!! .'4,«92,7ti2 29i,:i7:i .14,HIS I2.">.24( 2sl,i:i.-. I .-i.fHMi.HOI i,:»;i:«,29H 2,99.'>.22(i 472.4S9 7.W..">: 4,.V)4,4Ss I4,4(l.'> 114:1.140 I.(ri0,02i 275,0110 10,9.W.l'2l 22,.'MM,90.'>i73,WI7,29.'i FlUlKE 1 (I7,9,i 91,0711 4S,n(l0.27(i 29,i;h,i:mi 29,7S1,«32 2(),*41.120 :t:i.l.-i7,204 40,242,.38« K,2.->1,223 «,(..«, 124 i:i.l 17,27.^ ,-..2 II, Ml 1,7h:I.9(13 882.2(19 89,2(Mi,23.'> (179,798 .(i-.M..1:|8 ,iil'.i,9.-|7 8(),I>4I> 149 3.7:1^.229 179„'.94 214,8.17 4,l(ii...'>l» (124.079 100,724 ;i,31il.(i(12| 417.7112 727.383 182.8781 L.Wii.lU 118.924 l,,-ii:(.l(18 U8,:M9l S.->8,429.(Hl942.9ai),.'>l3 1,240.17(1 7,13.-> 2,1IH.4.'>2 3,8l:i.l73 :i,27l.7(H (i>.0.W 24.'.H(i:i 39^,781) 1.-.I.200 8:i.i:i3 3.'..4.'i« 4,INI0 l.S(l,8.S3 2I,0(MI 286,824 97,HH,') 8."i,.'i(i.'> 17,o:i.i 57,9(« II4.(MI I0,:i8.'> 70,372 19,097 '1^ .•),998.:t4;. 48.9."iO 3,I(M.977 l,l4:l,.Vt(l 9,'ifi.:t.W 81,210 1,983 43 219 ;i.'i,ii:i.'> 82.9J'l .")9.4(l.-> 9S,220 4.">(i,7N4 44.088 I ,(>28 1.800} 2,94.-..4.i:i 7(1(1.28;) 2.01(1.9(12 l:«),(il3 l,0.-il,U3 102.978 1,4IMI 0.931 97,«!i9 l,'i,(K)0| 8IO,.-.IO l,(l(V4,7()3 2,093,027 37S..-,7S (11t9,44.' 42.382 178,170 193.802 82.8.'i:i 2.111.836 4.3.121 .3M 1,291,208,1,340,11)0 2,471,170 3,W.24,i ;ill.C.91 .■>7.729l I I8,ll0(l| 3.438 aim.i.i:) 14,U(i8 143,471 1.000 43.49.'> .3..174.23I 3,i:«) 70.403 .'■>1,729 .'.(i..)!).". :)0.0I)9 7.'..;)6H..'>40, 2.".O„'>70.288; 177,121,9.12 77.48.3.471) 4.'-.,ii.'.,2:h 44,2K9,774 :t2.2il.o;)."i .-):),o.'2.l(H' 79,720,7931 4.(K)I..".1| 12,70:),22't 13,0.19,274 18,.i:V2.993 9.02.1.'178 3,07(1.011 |.;)6.1,l()4 14 1.1 in 17 18 19 21) 21 22 23 21 2.1 40,80«,010ll 1,134,24(1} 9.9!2.824l I,.1l9..117,013j T. C. BOVILLE Deputy Minuter of Finance n 8 m V( th th ex nil foj or c&\ be ho\ qui nee tlie TIIK BANK AC" ut t will then be w.Jer-in-Council the Governor-in-C'ouncil of the ugrt evidenced by a certified copy of the approving thereof. The notes of the siclling bank, of course, cannot be reissued, but must be called in, redeemed and cancelled as (piickly as possible. 47. Jictunis to Government (Sections 112-114). — Hunks must send to the Minister of Finance a statement at the end of each month in a si)ecified form.' The statement must i e signed by the chief accountant and by the president and general manager, or persons duly authorized to act in their stead. The Minister of Finance may call for special returns from any bank at any time. A bank at the end of each calen ir year shall trans- mit to the Minister: (a) Dctttilcd returns of all unpaid dividends, bills of ex- changL", drafts and certified checks outstanding for more than five years and of all balances in respect of which no transactions have taken place or upon which no interest has been paid during the five years prior to the date of sucli return. (b) A list of sharohohlers with their addresses and the number of shares held by each. 48. Payments to the Minister of Finance upon dis- solution of a bank (Sections 115-116).— The liquidator of a bank must, after three years, pay to the Minister of Finance all amounts due to shareholders or depos- itors remaining imclaimed, together with all interest due. The government will hold the money in tnist for the owners and, in the case of interest-bearing depos- its, will continue to allow for six years' interest at the rate of 3 per cent per annum. 'See combined statementM of all banks, 6gure 8. RETURN OF THE TOTAL LIABILITIES CANADIAN BANKS AS REPORTED Capital authorized Capital sub.si'ril' . Capital paid u, Amount of rest or reserve fund Rate yer cent of last Jiridend declared per cent. $190,860,606 118,190,960 110,5*0,153 108,959,833 Percentaob to Total I.iabilitiea Assets' to Public 14.50 7.78 7.07 7.17 1 e 10 11 u IS LIABILITIES Notes in circulation Balance due to Dominion Government after deducting advances for credits, pay-lists, etc Balances due to Provincial (lovernnients. . Deposits by the public, payable on demand in (Canada Deposits by the public, payable after notice or on a fixed day, in Canada Deposits elsewhere than in Canada Loans from other banks in C^anada, secured, including bills redi.scounted Deposits made by and balances due to other banks in Canada Due to banks and banking correspondents in the United Kingdom Due to banks and banking correspondents elsewhere than in Canada and the United Kingdom Bills payable Acceptances under letters of credit Liabilities not included under foregoing beads $99,143,411 0,700,040 34,075,590 350,585,190 6*1,347,388 80,000,194 Aggregate amount of loans to directors, and firms of which they are partners Average amount of current gold and sub- sidiary coin held during the month .... Average amount of Dominion notes held during the month Greatest amount of notes in circulation at any time during the month 0,002,957 14,228,085 9,713.020 21,109,142 11,134,246 8,537,905 $1,275,297,207 $10,105,316 37,107,557 91,050,478 108,178,424 0.52 .44 2.24 23.47 40.89 5.70 .39 .94 .64 1.39 .73 .56 83.93 .66 2.44 6.03 7.12 14.97 9.27 9.14 8.64 7.77 .53 2 67 27.96 48.73 6.79 .47 1.12 .76 1.66 .87 .67 100.00 .79 2.91 7.19 8.48 / declare that the above return has been prepared under my directions and i» correct We declare that the foregoing return is made up from the bookn of the Bonk, and that eial position of the hank; and we further derlare that the Hank han never, at any time per teiil uf the ranh reaerree uhich it ha* in Canada. this day of. 19. AND ASSETS OF ALL THE TO THE GOVERNMENT On the Thirty-first Day cfjvly, 191.1 ASSETS 10 11 12 13 14 15 IG 17 18 19 SO 21 ii 23 24 25 2G Current golil and subsidiary coin: In Canada, $28,582,77tf/ Elsewhere, $13,590,170 Dominion notes: In (Canada, $90,994,035. Elsewhere, 17,055 Deposit with the Minister of Finance for| the security of note circulation Deposit in ci-ntral gold reserves Xotes of other banks Checks on other banks Loans to other banks in Canada, secured, including bills rediscounled Deposits made with and balances due from other banks in Canada Due from banks and banking correspond ents in the United Kingdom Due from banks and banking correspond ents, elsewhere than in Canada and the United Kingdom Dominion government and provincial gov- ernment securities Canadian municipal securities, and British, foreign and colonial public securities other than Canadian Railway and other bonds, debentures, and stocks Call and short (not exceeding thirty days) loans in Canada on stocl^, debentures and bonds Call and short (not exceeding thirty days) loans elsewhere than in Canada Other current loans and discounts in Canada )ther current loans and discounts elsewhere than in Canada Loans to the Government of Canada Loans to provincial governments Loans to cities, towns, municipalities and school districts Overdue debts Real estate other than bank premises Mortgages on real estate sold by the bank. . Bank premises, at not more than cost, less amounts (if any) written off Liabilities of customers under letters of credit us per contra Other assets not included under the fore- going heads according to the books of the bank. Percentaoii to Total I Liabilities Assets to Public $42,172,949 2.77 91,011.091 0,610,333 12,908,203 47,819,945 138,100 3,588,051 9,201.280 24,892.762 10.958,221 22,584.905 73.697.295 67.99 ,255 89,266,235 858,429.069 42.960.513 2.111.836 43.121,384 4,291,208 1.340.100 2.471,178 40.896,616 U. 134.240 0.912,824 5.99 .44 .85 3.15 .24 . •*! 1.64 .72 1.49 4.85 4.48 5.87 56.49 2.83 .14 2.84 .28 .09 .16 .73 .65 3. SI 7.14 .52 1.01 8.75 .28 .72 1.95 .86 1.77 5.78 5.SS 7.00 67. S2 8.87 .16 3.38 .34 .10 .19 S.21 .87 .79 $1,519,517.013 100.00 119.15 Chief Accountant to the best of our knowledge and belief it is correct, and shows truly and clearly thefinan- during the period to which the said return relates, held in Dominion notes less than forty President. General Manager. dual BtataiMBt 41 42 BANKING PRINCIPLES Liquidators of banks are also required to pay within tliree years to the Minister of Finance an amount equal to the excess of the outstanding notes in circulation over the amount at the credit of the bank in the Circulation Fund, the same to be held by the government for the purpose of redeeming such notes. 49. Canadian Bankers' Association (Sections 117- 124). — In the event of the suspension of a bank the Canadian Bankers' Associatior is entrusted with the appointment of a curator who continues to supervise the affairs of the bank until it resumes business or until a liquidator has been appointed to wind it up. The association may make by-laws, rules, and regula- tions respecting: (a) All matters relating to the appointment or removal of a curator, and his powers ami duties; (b) The supervision of the makin^^ of tlie notes of the banks which are intended for circulation, the delivery thereof to the banks, the disposition made of them, and their final destruction; (c) The custody and management of the central gold reserves and the carrying out of the provisions of this act relating to such reserves. No such by-law, rule or regulation, however, shall be in force until approved by the Treasury Board. 50. Insolvency (Section 125).— In the event of the property and assets of a bank being insufficient to pay its liabilities, each shareholder shall be liable for the de- ficiency to an amount equal to the par value of the shares held by him, in addition to any amount not paid up on such shares. 51. Suspension (Sections 126-131).— The non-pay- ment in specie or Dominion notes of any of its liabil- ities, as they accrue for ninety days consecutively, con- THE BANK ACT 43 stitutes a bank insolvent and suspends the working of its charter. The charter shall remain in force only a sufficient length of time to enable the directors to make and enforce the calls on the shareholders deemed neces- sary to pay all the liabihties and to wind up the business of the bank. The total amount of such calls is limited by Section 125. Shareholders of a bank who have sold or transferred their stock are not relieved from the double liability until the expiration of sixty days. In case of insolvency the payments of notes then in circulation shall be the first charge on the assets of the bank, the second charge being the payment of money due to the Dominion i>t vernment, and the third charge tlie payment of the money due to the Provincial govern- ment. .52. Penalties (Sections 131A-158).— The remaining sections deal entirely with offences against the act and the penalties incurred. The majority of the penalties are applicable to banks and bank officers, but the follow- ing five may be incurred by the public: For selling or transferring shares contrary to the require- ments of the act. For issuing or drawing any instruments intended to circulate us money or to be used us a substitute for money. For mutilating or defacing bank notes or Dominion notes. For making false statements in connection with warehouse rtceipts or bills of lading, or for wilfully disposing of or with- holding from the bank goods covered by security under Section H8, an indictable offence. For using the word "Bank," "Savings Bank," "Banking Company" or any equivalent term without being authorized to do so by the act, nor can any words in a foreign language i w ith a similar import be used. I ! i i I i \\ 44 BANKING rUlNC'TPLKS The principal penalties incurred by the banks or their officers are connected with the following offences: For comiuencing business without a certificate froia the Trciisurv Boiuti. For hoUling less than 40 per cent of the cash reserve in Dominion notes. For allowing the note issue of the bank to exceed the amount authorized by the act. For pledging the notes of a bank or issuing the same fraudu- lently or during suspension. Both f bank officers and the person accepting such notes comnnt a . mdictable offence. For issuing an aiumal statement unsigned or without the auditors' report. For acquiring a warehouse receipt or bill of lading to secure payment of any debt or liability unless such debt is contracted ut"tl-.e time of the acquisition of tlie security or upon a written promise or agreement to give such security. For non-compliance with the requirements of Section 89 regarding the sale of goods covered by warehoiso receipts, etc. For not selling shares subject t a privilege lien within twelve months after relative debt has become payable. For buying or selling goods or engaging in any business not authorized under tlie act. For payment of any debt or liability of a bank during sus- pension of specie payment. For neglect or delay, over the stipulated time, in forwarding the various returns re,,uired by the act to the Minister of Finance. For making false returns, an indictable offence. For giving undue preference to any creditor of a bank, also an indictable offence. 53. Changes in the statements.— The Act of 1913 made several changes in the headings of the monthly and annual statements submitted by the banks, of which the following may be noted: thp: bank act 45 A distinction is made between the gold and Domin- ion notes held in Canada and the amount held else- where. They are now stated separately. Notes and checks of other banks are also stated sepa- rately. IJy this chantje the amount of notes of other hanks held in the tills of the several banks can be ar- rived at, and the exact circulation in the hands of the public ascertained. These figures have always been furnished to the Canadian Bankers' Association in con- ficction with the circulation returns, but were not avail- able to the public, luiless asked for. The former heading "Bank Premises" now reads "Bank Premises at not more than cost, less amount (if any) written off." The foregoing changes are self-explanatory and call for no particular comment. There are, however, sev- eral new headings, which afford interesting information. "Deix)sits in the Central Gold Reserve" is one of the important headings. The nature of this asset is fully explained on page 01. The information called for under "Loans to Cities, Towns, jMunicipalities, and School Districts" will al- ways l)e of interest as showing the amount of temporary assistance the banks are rendering to municipalities and other public corporations. These advances are made partly for current expenses in anticipation of taxes, but mostly in connection with proposed bond issues, where the by-laws authorizing them have already been passed. The amount of bank loans to municipalities should prove a gofxl index of the future trend of the market for mun, ipal bonds, and no doubt the brokers as well as the municipalities themselves will be able to use this in- formation to advantage in their respective positions of Iniver and seller. BANKING PRINClPLtlS li ! I "Acceptances under Letters of Credit" on the liabil- ity side is offset on the asset side by "Liabilities of Cus- tomers under Letters of Credit as per Contra." This is simply a Ixwkkeeping entry and shows the contingent liability on letters of credit. There is, however, prac- tically no risk to the bank, for, though it is directly liable to its correspondents for the amount, these acceptances are drawn against bills of lading, and the obligation is further protected by the financial standing and credit of the customer himself. "Bills Payable" is one of the most important of the new headings. Under the former act no provision was made for this feature of the banks' foreign business, and the few banks who had liabilities of this nature in- cluded them either under "Other Liabilities" or in the "Amounts due Foreign Agents and Correspondents." Practically only those banks which have a large busi- ness with Great Britain and Europe have any items coming under this classification. Bills payable are not defined by the Bank Act, but the intention is that the term should include all drafts, other than demand and sight drafts, drawn upon and accepted by agents and correspondents in Great Britain and Europe. These bills originate in the regular conduct of a for- eign exchange business and are based upon several vari- eties of transactions. Some of them are thirty or sixty day bills sold to customers, who prefer this method of remittance to that of purchasing demand drafts or cable transfers. Others may originate from the placing of for- eign loans in Canada, while others may arise from a de- sire to anticipate a change in the rate of exchange. A full description of both these liabilities will be found in the chapters on foreign exchange. CHAPTER V NOTE ISSUES AND THE BRANCH SYSTEM 'yi. Monetary s if stem. — The monetary system of Canada' consists of ^old, paper currency, and silver and copper subsidiary coins; the latter, however, not being legal tender for amounts over $10 and 25 cents respectively. The unit is a dollar of 23.22 grains of pure gold. Gold coins of the United States and the British sovereign (worth $4.86^) are legal tender for any amount, and still form the bulk of the gold reserves of the government and of the banks, as it is only of re- cent years that Canada has had a distinctive gold coin- age of its own. Gold coin is seldom seen in circulation and its use is practically confined to reserve purposes and international exchange operations. Silver is used for the subsidiary coins of the denominations from 5 to 50 cents and copper for the cents. With these excep- tions, paper currency is practically the only form of money used in Canada. It consists of two kinds, Do- minion notes and bank notes. Dominion notes, or "legal tender," as they are often called, are issued by the Dominion government under the authority of the "Dominion Note Act," which per- mits an unlimited issue on the following conditions: the ^linister of Finance shall always hold for the security and redemption of Dominion notes up to and including • See text on "Money and Banking," Volume VII. 47 48 BANKING PRINCIPLKS $30,000,000, issued and outstanding at any one time, an amount equal to not less than 25 per cent of the amount of such notes in gold, or in gold and securities of Canada, the principal and interest of which are guar- anteed by the government of the United Kingdom. The amount held in gold, however, shall never he less than 15 per cent of the notes so issued and outstand- ing. As security for the redemption of Dominion notes issued in excess of $30,000,000, the Minister must hold an amount in gold equal to such excess. The total amount of gold and specie held by the government on June 30, 1913, was $100,437,593, of which $93,863,538 was held in connection with the outstanding amount of Dominion notes on that date, as follows: Gold held Total amount of outstanding circula- tion $116,363,538 Less amount protected by 25% of gold. 30,000,000 $7,500,000 Excess over $30,000,000 protected by full amount of gold $86,363,538 86,363,538 Total gold held account Dominion notes $93,863,538 The total amount of gold held by the banks at the same date was $37,944,392 (a small proportion of this, perhaps 3 or 4 per cent, being subsidiary silver) , mak- ing a total of $138,381,985 of gold held by the banks and the government, or, allo^ving for the silver, say $133,000,000. This amount w aj represent the total gold holdings of Canada, as there is practically none in circu- lation among the public. If any British or American gold is paid out by tourists or others, it is immediately exchanged or deposited at a bank. The total amount of circulating notes in the hands of. the public on June 30, 1913, was, in round figures, NOTE ISSUES AND THE BRANCH SYSTEM 49 $127,500,000, of which $105,700,000' (or over 82 per cent) was in the form of bills issued by the chartered banks, the balance, $21,800,000, being in the form of Dominion notes. These figures will give an idea of the important part the bank circulation has played in the upbuilding of the country. Valuable as the note issue privilege is to the banks it has proved even more valu- able to the country, for to the banks, equally with the railways, may be ascribed the credit for the phenomenal development of Canada during the past twenty years. 55. Dominion notes. — Dominion notes are legal ten- der for any amount, and may be redeemed at the offices of the Assistant Receivers General situated in the vari- ous provincial capitals. They may be issued in any denomination, but the one and two dollar bills are prac- tically the only denomination in active circulation, the larger bills being used principally by the banks for clearing and reserve purposes. The government statement of June 30, 1913. shows the following amounts outstanding: Provincial and fractional $769,426 JJ 12,750,790 J? 9,340,820 n 109,717 J^ 5,854.985 .fJX 15,200 J^ 2.880,000 *1'""" 5,319,000 $36,274,538 $500 Legal tender between banks. . . 365.000 $1,000 Legal tender between banks. . . 2.029,000 $5,000 Legal tender between banks. . . 77,695,000 80.089,000 $116,363,538 nf Kill^^'" '^'■'' '^*'"}*^ ^ detlucted about $11,000,000 representing the amount C— VIII— 4 50 BANKIN(i IMUNCirLES -' \ It will be noted that $8(M)80.0()0 arc given as "legal tender between banks"; this amount consists of sixjcial notes tbat are payable only to chartered banks in Canada and used by them as before stated. From the figures given alwve it will be seen that {p86,- 274,538 are available for publi' use, but the banks' statements to the government at the same date shows that the holdings of Dominion notes by the banks amounted to $04,544,199, or $14,455,199 in excess of the special bank legals, which leaves the amount ac- tually in the hands of the public at that date as $21,- 819,339. 56. Bank note issue.— By the Bank Act, Canadian banks are empowered to issue notes of $5 and multiples thereof up to the amount of their unimpaired paid-up capital against the general security of their total assets on which the notes form a first lien. All the banks are required to insure the circulation of their notes at par in every part of Canada. This is effected by requiring each bank to provide known redemption agents in the cities of chief commercial importance, namely, Halifax, St. John, Charlottetown, Montreal, Toronto, Winni- peg, Regina, Calgary, and Victoria. Every bank ac- cepts the bills of every other bank at par and forwards them to the nearest branch or redemption agent of the bank of issue; hence, every day all over Canada the banks undergo a severe test of their ability to redeem their circulation, no matter how freely it is offered for redemption. This is one of the strongest advan- tages of the system, and makes the circulation perfect and free from' stagnation. The circulation thus varies in velocity and voUunc as the activity and requirements of the country demand, revealing to the experienced NOTK ISSUES AND TIIK BUAN{ II SYSTKM 51 hanker tlic conditions of trade and finanee throughout the country. It is important to renieml)er in considering tlic note issue that, in the tills of its own bank, a note has abso- lutely no value except as so much stationery. This en- al)lt.> the banks to carry a good supply of bills at each branch, as they do not become a liability of the bank until they are paid out over the counter. This is a very valuable feature, as it not ojdy allows a bank to keep a good supply of till money on hand without loss, 'Mit it enables a small branch to meet an unusually large iitmand for cash either in the way of repaying a heavy deposit or of making a large loan. 57. Security to note holder.— To prevent the charg- ing of discount on notes in case of suspension, notes of failed banks bear interest at the rate of 5 per cent per annum from the date of suspension until redeemed either by the liquidator or by the government, and each bank is obliged to keep a deposit with the government equal to 5 per cent of its average circulation. This is called the Bank Circulation Redemption Fund, and should it ever happen that the assets of a failed bank are insuf- ficient to redeem the notes outstanding at the time of failure, the entire fund is liable for the deficiency and the other banks have to bear the loss pro rata. This fund was established in 1890 at the suggestion of the banks I themselves. The note holder is amply protected, first, by the total assets of the bank; second, by the double liability of the Ishareholders; and third, by the entire redemption fund. iThe amount of circulation outstanding at the end of Vune, 1913, was, in round numbers, $106,000,000 for the [\vhole of Canada, and to meet this the banks could show total assets of $1,521,000,000 (including 5 per cent re- 52 BANKING P1UN{ IPI.KS ilcmption fund, $7,.5(MM)(K)), and double liability $llrt.- ()()(),0(M), or nearly $78 assets for every Hve-doHar note issued. Tbe penalties for over issue are extremely heavv. It may l)e noted that only three banks have a circu- lation that much exceeds the total redemption fund. The question may perhaps he raised, why should all this care be taken to protect the note holder as against the princip;.! creditor of the bank, the depositor, but it must be recoft-nizcd t' it there is an essential difference Iwtween a note holder and a depositor, the former being an involuntary creditor and Ihe latter a voluntary one. The dejwsitor becomes a creditor of his own free will and for his oAvn benefit, and exercises his own choice in the selection of a bank. The holder of a note, however, receives it in good faith in payment for labor or mer- chandise and should be fully protected. A note issue, to fulfil its best and most useful function, must be absolutely and without questioji as gotKl as gold. One of the strongest elements of security, however, is the fact that the notes are subjected to daily redemption. A Canadian bank is prohibited by law from pledging or assigning its own notes, consequently the only way it is able to put them into ciradation is to pay them out over the counter. It would be fatal for a bank to issue notes except with due regard to its ability to redeem them. It is seldom in the interest of any bank to hold or pay out the notes of other banks; as soon as a bill has done its work in the hands of the public and has been paid into another bank it is promptly presented for payment. 58. Elasticity. — The most admirable feature of the note issue is its quality of elasticity. In every country, more especially every new country where the agricul- a tural interests naturally predominate, the alternations NOTE ISS.es and THE BRANTH SYSTEM «3 "f the. «..„«„,, and ,|„. ,„„^.^,i„„ „r ,1,^ ,.„^i, ™ltur«l «„. Iu,„lH.r,„K I.r.»l..cl». I,ave an i„.,,„rt.„t in- ma, a the machinery „f the eirculation system i, auch lu. ,t expands .„,| contracts aut„n.atica ly accor^h'^ . the wants of the country. It will expan.l to pa/fof the nmk,n« of bntter and cheese, the moving' oMhe rops, and or hm,berin« operations, but when it iZ |.e fomie. these d,.tie, it will contract silently and with .Jt;:"in :.':.!;:''""'''"'' ^'^''•" '""^ '''"^^ «'- It ,.K.a„, rc,p„„,ivc„c., to present i„crca,o or di„,i„„,io„ I. .-k. or .1,0 ,l„y, »,,o„,er ri,i„g or falling. . . . eZmIv ■--• .-. ;. ^r/r. :hXrt::c:s: :: vpun,! or to restrict, should be forces at work T ^r ^ • .V .y stream of loans, deposits and payments. f late years of about $8,000,000, while e'oh moX hough sarins in the general annual increa sWs .' """. ."ais. The tables m Figure .t are compiled from "'hij. It nmst not be overlooked that the figurX i i in hi 54 BANKING PRINCIPLES given do not show either the maxinmm or the minimum amount of circulation during the respective months, but simply the point at which the issue stood at the end of each month. The maximum amount of circulati >i) dur- ing the month is given in the government staten. but the figures at the end of the month are genera i; con- sidered as the nv 3t satisfactory figures to deal wilh. 60. Annual changes,— Vxyrure 3 shows the amount of notes in circulation at the end of each month from Jan- uary, 1901, to January, 1913, inclusive, and the aver- age circulation in millions for each year of the twelve years is as follows: Circulation Paid-up Average Minimum Maximum Capital 1901 50 45 Jan. 60 Nov. 67 lona 56 49 — 68 Oct. 73 1903 . ; . . . 60 55 - 71 " 79 1904 62 57 — 74 Nov. 80 1905 ..... 64 58 — 79 — 85 1906 71 61 — 86 Oct. 95 1907 76 68 — 69 Nov. 96 1908! 71 67 - 86 - 96 1909 74 66 — 92 — 97 1910 82 73 — 99 — 100 iSll 90 77 - 112 - 108 191g; 100 88— 120 Dec. 115 An examination of the average circulation shows a more or less steady annual increase from $50,000,000 in 1901 to $100,000,000 in 1912, and there is only one break in the upward tendency. In 1907 the average had reached $76,000,000, but in 1908 dropped to $71,- 000,000, a loss of $5,000,000, which was not fully cov- ered even in 1909 with its banner crops, the average for that year being $74,000,000. Any departure from the normal in the monthly course of the circulation can be traced to seasonal or temporary reasons, which do not, as a rule, affect the year as a whole, and CIRCULATION OP CANADIAN BANKS Volume in Milliont tu reported in the Government Statement a( the End of Each Month 1901-191S Jan. Feb. Mar. Apl. May June July Aug. Sept. Oct. Nov. Dec. CapiUl 1»U1 45 46 48 47 46 49 49 51 56 58 58 54 67 \90i 49 50 52 51 51 54 52 55 01 00 65 61 73 1903 55 56 58 56 57 59 58 00 04 71 67 OS 79 19U4 57 58 60 59 58 60 60 00 04 72 69 05 80 1905 58 59 59 60 58 62 01 02 70 77 73 70 85 1900 61 W 06 67 04 69 08 70 77 84 81 78 95 1907 08 71 76 73 71 76 73 77 79 84 84 78 96 1908 07 69 09 67 08 68 07 70 70 83 80 73 96 1909 66 67 09 67 09 70 71 72 79 90 86 81 97 1910 73 75 78 79 77 80 81 81 87 06 90 88 100 1911 77 80 82 84 82 89 80 91 97 106 102 102 108 mi 88 89 96 95 94 102 90 102 104 111 116 110 115 191.'i 95 97 102 98 103 ino 99 106 111 118 119 " 118 Difference in Millions over Previou* Month, 1901-1913 Decrease shown thus: —2 {Minus two) Jan. 1 Feb. Mar. Apl. May June July Aug. Sept. Oct. Nov. Dec. 1901 1 2 -1 -1 3 2 5 2 -4 liMW - 5 1 2 -1 3 -2 3 6 5 -1 -4 I9u:i - 5 1 2 -2 1 2 -1 2 4 7 -4 -4 1!M)4 - 6 1 2 -1 -1 2 4 8 -3 -3 1903 - 7 1 1 -2 4 -1 1 8 7 -4 -3 mm - 9 1 4 1 -3 5 -1 2 7 7 -3 -3 \\m -10 3 5 -3 -2 5 -3 4 2 5 -6 t!N)H -11 2 -2 1 1 3 6 7 -3 -7 1!H)0 - 7 1 2 -2 2 1 1 1 7 11 -4 -5 1910 - 8 2 3 1 -2 3 1 6 9 -6 -2 1911 -11 3 2 2 -2 7 2 9 -4 1912 -14 1 7 -1 -1 8 -6 6 2 7 5 -0 ]9l.i -15 2 5 -4 5 3 -7 7 5 7 1 FlUURE 3 6J 56 BANKING PRINCTPT.es can generally In? ascribed to purely Canadian causes; but tlie check in the annual increase and the decrease in the volume of the circulation tell a different and more serious tale, generally that of unwise speculation and its inevitable finale. At all events, the reason is international and not national in character and, as a rule, arises out of the financial ills of our neighbor. The panic of 1907 in the United States and the conse- quent depression in business during the following years seriously affected the circulation, and the following year, 1909, shows a curtailment of all expansion and enterprise throughout the country. A similar condition will be found to follow all such panics. A reference to the years 1892, 1893, and 1894 shows the average circula- tion for these years as $32,000,000, $34,000,000, and $31,000,000 respectively, the latter figures showhig the reaction from the panic of 1893. A study of the monthly fluctuations shows that from 18C8 to 1891 the lowest point in the circulation was gen- erally reached about the middle of the year instead of in January, which is now the lowest month. About 1889 evidences of a change commenced to appear, until by 1895 the readjustment was completed, and January l)e- came the largest redemption month, the circulation then reached its lowest point, and it has held that position ever since. Such a radical change must mark an epoch- making event in the history of the Dominion, and this was no less an event than the opening up of the great Northwest and the entering of Canada into the arena of the world's wheat growers. Previous to 1906 the circulation returns in the gov- ernment statement formed a very reliable barometer of the outstanding circulation in the hands of the public, but in 1907 the banks began to realize that the moving NOTE ISSUES AND THE BRANCH SYSTEM 57 '»f the crops and the opening np of the Northwest was coinniencing to test the efficiency and volume of the avuiltthle circulation. A nunil)er of the banks increased their capital. For the recpiirements of the average cir- culation this would have amply sufficed, hut it was im- possible to increase capital at a sufficiently rapid rate to reach the "soaring peak" of the October and November demand for currency. In 1908 an amendment to the IJank Act was passed i>ermitting banks to issue emer- gency currency diu-ing the crop-moving months, based on d percentage of their combined capital and reserve. This, though useful, proved of only temporary and lim- ited advantage. Another expedient was tried by the jrovernment in permitting banks to deposit gold with the Receiver General and obtain Dominion notes in ex- change. This was not taken advantage of to any great extent, as it was found to be not oidy slow and chunsy in operation, but lacked the essential feature of elas- ticity. As might be surmised, during the past few years tlie banks have frecjuently found themselves uncomfor- tably near the limit of their circulation, and at these times they do not present the notes of other banks for redenjption in the usual way, but retain them for their own use over the counter. For instance, in June, 1912, the hanks evidently held each other's notes until the June demand was satisfied, and in consequence the July re- demption was abnormally large. In studying the cir- ( idatior returns for the years 1908 to 1912 these pecu- liar conditions, and these expedients for supplying the extra circulation required, must be taken into account, (n. Monthhj chatigeft. — Figure 3 shows the difference month by month, six months of redemption and six months of issue. The months arrange themselves natu- ra!l\ into three groups, as follows: 58 BANKING PRINCIPLES Months of Issue February. March. Months of Redemption April. Mav. June. July. August. September. October. November (3 weeks), November (4th week). December. January. The circulation year commences with the month of February, which Lhows a slight output varying m amount,* and due principally to the recpiirements of the hunbering industry. March again calls for an mcreased issue, as in this month the lumbering camps are paid off, and only sufficient men for the drives are retauied. In April and .May most of the March circulation is re- deemed, as the* lumbermen return from the wcmkIs and pay their family bills for the winter at the village stores, or 'otherwise spend their winter's pay. June, especially during the last three or four years, has shown a very con- siderable rise in circulation; then navigation opens, the large lund)er drives are completed and the men paid off. Payments for dairy products increase in amount and general activity prevails throughout the countr>\ July is a redemption m«)nth, and generally shows a consider- able falling off; factories are closed down for repairs and stock taking, and t'.ie steady circulation of factory ])ay-day asserts itself by its absence. In addition to this the summer exodus to the seaside and to Europe conunences with the conse(iuent purchase of traveling funds. August is the first of the three great months of issi'- Butter, cheese, and hay, with vegetables and all manner of fruit for cannery and table use, call largely NOTE ISSUES AND THE BRANCH SYSTEM 59 for currency, unci with i.u-rcased momentum J"'"f«^;f with the cereals in Septemln-r and October unt. the hiifhest point of the circulation is reached, usuaUy in the third week of xXovember. Toward the end ot No- vember the steady return of the circulation conmiences a„.l continues all through December and January. It is of course, impossible to detail all tlie influences which att'ect circulation, but the above covers the more important points. A late winter or spring, for instance, wdl, of course urtect the figures for the spring months slightly, and th..se for the fall may be influencetl by the lateness ot the crops or by the holding of their produce by the iurm- trs in the hope of better prices, but these changes are all adjusted within six months, the year's average is not affected, and the fluctuations, though delayed, take place as usual. . . u • i C2. Emergency currency.— The provision for a special issue during the crop-moving peri(Kl, though limited in ,peration, was found sufficiently useful to be incorpo- () rated in the Act of 1913. It provides that during the crop-moving period, from the first of Septeml)er to the end of February, banks are at liberty to increase their note circulation to the extent of 15 per cent of the com- bined total rf their paid-up capital and resenes. A bank, for instance, with a paid-up capital of !i^lO,000,- ()(){) and a ics,>rve of $5,000,000 would, of course, at all times be able to issue notes up to $10,000,000, but dur- ing the i)eriod from September 1 to February 28 it can make a further issue of 15 per crnt of $15,000,- 000, namely, $2,250,000 excess, or a total of »(Sl2,250,- 000 As this excess issue is subject to a government tax ..f 5 per cent, its use entails a loss to the bank, and it is cc.use(|uently only usetl when absolutely necessary. 60 BANKING PRINCIPLES ir Tile extent to which hunks employ emergency cur- rency is rather difficult to determine, as tlie monthly re- turn to the government does not give the necessary data. The special statement of the amount of circulation out- standing on each day of the month sent hy the banks to the government is not published ; it is only used as the basis for figuring the interest on the excess issue. More- over, it must be remembered that it is necessary to con- sider each individual bank by itself to obtain exact fig- ures; when the banks are considered as a whole, much of the excess issue of the banks, availing themselves of this privilege, is offset by the margin of circulation still available to those banks which are below the limit of their paid-up capital. A reference to the statement given on page 54 will show that in 1911 the maximum circulation was reached some time in November, and exceeded the total paid-up capital of the banks by $4,- 000,000. In 1012, the maximum circulation was reached in December, and exceeded the paid-up capital by $5,000,000. A reference to the maximum circulation column in the government statement of Octol)er, 1912, shows that some time during that month fifteen of the twenty-seven banks exceeded their limit by a total of $3,448,000, though the maximum figure of each bank was probably reached on different dates. At the end of October the total circulati«)n was apparently more than $4,000,000 below the total paid-up capital* of the banks, yet ten banks were using emergency currency to the extent of $1,870,000. Similarly in the Xovemljer statement of 1912 twenty banks exceeded their limit by a total of nearly $9,000,000, while the circulation of the remaining six banks, exclusive of the Sovereign,' came 'TV SoveiviKn Bank still appears in the government statement willi a ,u.!,t fl.? .1^ . • "'"""". f. '■"'"'"' "^••"'"'•l'' fof j «3. <^V«/ra/^oWr^*m'^«._For some time it had been Kit that the emergency currency and other expedients were only tentative measures, and that in the revision of the Bank Act a satisfactory solution of the difficulty would be found. In this expectation the banks have not been disappointed. The central gold reserve furnishes a solution of the difficulty, and is a consistent amplifica- tion of the note-issue system, which has so completely met the requirements of the country during the last fifty years. ^ The central gold reserve is an ingenious plan, whereby the banks are enabled to issue bills to an unlimited amount without departing from the well-established principles of an asset currency limited to the amount of paid-up capital. The notes issued under this plan pos- sess all the desirable features of elasticity and con- vertibility in common with the ordinary issue. As a matter of fact, there is only (me issue, and the cen- tral gold reserA-es come automatically into operation as s(K)n as the circulation issued by a bank exceeds Its authorized amount, and are immediately released by the retirement of the excess in the ordinary course of redemption. The machinery is simple. Under the new law four trustees are appointed— three by the banks and one bv the Minister of Finance— and the banks are empowered t(| deposit with these trustees as much of their gold as they hke. This deposit is called the central gold reserves. Ihe banks are then permitted to issue against the re- 62 BANKIN(} PHIXCIPLES I! serves their notes, dollar for dollar, as and when re- quired. Thus, as has alreae<-eml>er. 1000 58,540 $45,483 $3,700 Ju'U', 1010 48,010 l)eeem»)or, 1010 4<,i;J5 16,405 1,367 June. 1011 37.815 Dec-emlKT. 1011 34,170 7,065 664 June. low 30.1JM) DjH-einlKT, 1014 47,865 6,305 545 April. 1013 46,005 545 May. 1013 4(».685 310 June. 1013 46.345 340 Deeember, 1013 43,540 4,345 471 After six years, there remained $23,520 inirefleemed, or only 1.18 ])er cent of the amount outstanding on January 1, 1908. As the notes, however, continue to he presented for redemption at the rate of over three hundred dollars monthly, there is likely to he a consider- able reduction made in this amount during the next few years. It is quite possible that fifty years hence Sov- ereign Bank bills will still be occasionally presented. According to the report of the Comptroller of the Currency at Washington for 1912, some of the failed national banks show very low jiercentages of outstand- ing notes to original circulation, for instance, 15/100 j)er cent, 17/100 per cent, and 22/100 per cent. The fractional currency of the United States, issued prior to the Civil War, is still being presented for redemption in surprisingly large amounts. From the above it is evi- dent that the actual nimiber of notes which will never be presented for redemption becomes almost negligible in the course of time. 65. Branch system. — Practically everj'^ country in the world except the United States has recognized the utiUty, No'l'i; i.ssri;s and rm: huantii sysjkm Ho if not the ul).s«»]iitc mrtssily. of the hranch system of Imrikin^ in Imiulliii^ eoninio«lities as li(|iii(I as money or iitdit. A hank system without hranehes is on a par with a city without waterworks or a country without a rail- lojul so far as an ea-K«. -Now this is where ,he hraneh svsten, steps , a "I enables the H brand, to nse the sni-plns funds ^. thus snpply.ng the lejritin.ate re,,nirements of B' the town, n hen ,t ,s ren.enibere.1 that this prineinle , work,„g every day in hundre.Is of branches fh oZ. out Canada ,n towns and villages ten, one hundred or one thousand n.iles apart, and yet just as intinmteKi," erdependent of eaeh other as in the above instan«,' the Frt 't^:' H";;",'^' '"' '"ir"' '•"'™' -» "^ ^■ I'rom this ,t «,ll be seen that no matter how small the "iilj by the a^adable resources of the bank of which it io ms an n.tesral part. A branch till is like the «id «w s cruse of oil ; it can never be en.ptied nor ve on the other hand, can it be made to overflow branches of Canada are spread and the variety of in- tfV: ;,'"^'',"»>- '"i-'-^ter, impresses one with he Ik f /•""'""''" ^""'^'^ "<= ""' l"eal in character tt Dor-ori^let;'-^- ""' '""•" "' p™™- " -" "y teran^tre^r^r'r^'f '■-^'^''™''' '^- ;W,iehhaveenab,edrb:Lt:rstrrrir-: rrc:erriSe;:„rtt^t'''^^^^^^^ Hcuja lack m a ^reat measure the elasticity .NOTi: ISSIKS AND THK BHANCtll SYSlk.M 67 "( ivstie ami mien.ption wl.ich is its most useful and .•h-.ctenst,c feature. Without the ciroulatio,, ,„"' cj,.c. ,t would V impossible for the banks to op«, Inanches „, ,.„• and sparsely populated districts "^ loss fo> the hrst three or four years, and hearimr i- .n „„„d a consideration of th; large numtr "^ ''ranches opened yearly by the banks, must lea^to the >Mcl„s,on that n,any banks are devoting at C Z 'l">le of then- profits on circulation to the opening of l"a..cl,es an, the ,levelop„,ent of new distr ets ^A„ average o three or four new branches open d yeariy »..Sl.t easdy absorb the profit on ,$I,ooo,ooS circu a«™ especally „, the ^\-est, where the initial and tteoi^at ' ing expenses are high. operat- During the year ended July 31, 1918, 21, branches «ere opened, distributed as follows: ""-an^es Pwrim-n Branches in Branches in Increase, frmmce Existence Existence '""^""'w (J,.,.|«^.., '-JJ? U13 4S N'ivaSTOlia. ,..,.: J,,' ??| 82 Nfw liriiiiswick. 74 'I™ 3 decrease ['riiici-Kdivard Island. 14 \\ S:;''" ■»? ^ V""^ S'-' '-'■^"- 'f ^* g ''otal in Canada.. 2,718 ~7^ \'«f„„nclland.. . ,o ^'^f^ '^05 ^ 66 4 2.793 3,004 211 ^Vith the exception of Scotland, where branch bank- 'n^ has been brou^.ht to a fine de^^ree of p^ffeS. 'H H ■/■ M r^t OS HANKINCi ruiN( iri.KS Canada sliows a larger number of brandies in propor- tion to popuhition tban any otlier country in the world, as the following figures will show: .1/ Kitd of i'.hj Scotland i»«»' '>'»»»^ t*' ^'^'^'»>' '^'^**^' people (^anada «>»"" bank to overy 'i,Si't jwop e United Kingdom one bank to every 5,110 peop e Fnuland «»t' bank to every 5,4.^2-i people United States one bank to ever>' :J,407 people As regards cities, Bristol, England, for example, has one bank for every 5,674 people, while Toronto, a city of similar size, has one bank for every 2.354 people. Cin- cinnati in the Ignited States has one bank to every 9,120 people. Taking Canadian cities as a whole there is one bank to every 3,100 people, while the United States can only show one bank for 9,700. It will be seen from this that Canadian banks have given a good account of their stewardship so far as supplying banking facilities to the country is concerned. Without asset currency, however, such expansion would have been impossible. r>7. Branch Hifsiem and the homncer. — The econom- ical and equable distribution of loanable funds made possible by the branch system has already been referred to. The control of these funds and the ability to direct them to diflferent parts of the country according to the demands of trade and agriculture have enabled the banks to accomplish astonishing results with the means at their disposal. The banks as a whole form a vast clearing house not only between the depositor and the borrower, but also between borrower and borrower. A little con- sideration shows that the latter is an important factor in the financial life of a country so extensive as Canada. The banks are continually lending to Peter to pay Paul, although these two gentlemen may be quite unconscious NOTE ISST'ES AM) THE HUANCH SYSTEM G!) of the relation and have probably never even heartl of each other. There is practically little or no fluctuation in the total amount of commercial loans, only a steady increase due to the growth of the country, the demand for the loan- able capital at the disposal of the banks generally being ill excess of the supply. In the government statement of July, 1913, commercial loans were re})orted at a trifle under $902,000,000, as against $899,000,000 in the preceding month and $852,000,000 in July, 1912, yet in the face of this constant increase, banks are accused of restricting their loans unduly. It is true they re- strict unwise expansion in times of financial stress, and are always foresighted in preparing the country for troublesome times, but this action is of inestimable bene- fit to the country. Even under the serious conditions which prevailed in 1893, 1907, and 1913, regulai- custom- ers were not restricted in the use of their authorized lines of credit or reasonable renewals thereof. The banks (lid refuse to make advances for projects outside ordinary business requirements, such, for instance, as an unusually iieavy purchase of raw material, not for the immediate needs of the business, but simply available at a bargain. Xew accounts at such a time are not encouraged, and all ventures other than those devoted to the creation and distribution of products are consistently refused assist- ance. A study of the bank returns for the period referred to will show how the banks use every means to meet the needs of their regular customers. In 1893, for instance, current loans increased by over $11,000,000 between Jan- uary and June with an increase of barely $1,000,000 in deposits. The banks felt that they were under a moral obligation to take care of their customers to the (0 HANKlNd rUINClI'I.KS ii| 1 I extent of their current lines of credit, and provided these funds by reducing their foreign balances just at the time when they could have been used at a profit, yet the Ca- nadian customers were asked to pay no more than the usual rate of (J or 7 per cent.' The slow and apparently placid increase of the loans, as shown by the monthly statements, is deceptive, for beneath the surface lies a seething mass of activity, in- extricably interwoven. The continued existence of each kind of advance depends in great measure on the con- stant mobility of every other. Repayments of advances made by one class of industry are received in time to be loaned to an entirely different business, possibly at the other end of the country, and so on. If lumber becomes unsalable from overproduction or other causes, the ad- vances made for lumbering operations would not be liqui- dated in season, and the banks might find it difficult to satisfy the requirements of other industries, which gen- erally make use of these funds as they are returned. This will indicate how necessary it is for the banks to observe at all times one of the most important rules of sound banking, namely, that every loan made by a bank should rest on a foundation of salable merchandise or collectible debts. It is for this reason that loans on real estate have no place on the books of a commercial bank, whose profit and existence are depernlent on the fre- quency of this "turn over," and the keen interest which bankers take in preventing overjn'oduction in any line is thus justified. The average customer gauges his out- put from local or provincial ex])erience. the banker from a national and international standj)oiiit. A concrete example may be of value in illustrating the circulation of credit attained through the branch sys- ' Sec call loans in New York, jkikp 91. NOTE ISSrKS AND TIIK nUANCH SYSTEM 71 km. Take, for inslaiicr, a wtstcni farmer who borrows money from a hank in the hegimiing of the year in order to pay for seed and Uihor, and ahout tiie same time be- comes indebted to the local store for supplies and the like. When he harvests his crop, in the ordinary eourse, he sells it to a grain buyer, who pays him by a cheuk or order on the bank. This money is used by the farmer to discharge his debt to the bank and to the store; the balance, if he is a thrifty man, he deposits. The storekeeper remits his receipts from such payments to the wholesale houses in the East, and the wholesaler licpiidates his indebted- ness to his bank or to the manufacturer, and the latter in turn pays his bank and buys more raw material. This is an instance of oidy one class of loan, but it will give some idea of the fluidity and interchangeability of credit which is possible through the branch system. It might further be pointed out that the aggregate liquidation of loans by the farmers and correlative debtors enables the banks to finance the crops by making advances against warehouse receipts, etc., which are ultimately liquidated by drafts with bills of lading attached. This financial operation provides the basis for foreign ex- change with which to j^ay for the raw material and other imports of the manufacturer and wholesaler. It is im- possible fully to appreciate the far-reaching effect of even this simple payment of a farmer's debt. The dis- charge in any part of Canada of a debt of no matter what nature or size, is likely to be equally dynamic in its influence on the huge though sensitive volume of loans. (58. Estahlisltin^ a line of credit.— There are certain conditions covering the relation of Canadian banks with their borrowers which are invariably observed. One is. that no man can be a ])orrower from more than one :| I 72 HANKINC; l'UIN( IPLKS bank, and it is only in llic case oi' a very large account lliat this nilf is hroUcn, and tlicn only by mutual agree- ment between the banks interested. The advantage of this "one bank" policy is obvious. The customer benefits from the fact that in being loyal to one bank he can rely upon the supi)(>rt of that bank at all times. The bank is also thoroughly in touch with his position and pros- pects, and is often able to give valuable advice. An- other condition a Canadian bank insists on is, that a full statement of a customer's affairs should be submitted to it each year, and that as far as possible loans should be cleaned up at least once a year. On the fulfilment of these conditions the bank on its part grants a customer what is called a line of credit, based on his estimated reciuirements, which is generally for a period of one year, during which time the customer is able to use as nuich or as little of the authorized credit as his business requires ; providing, however, that he does not exceed the limit. A customer of a Canadian bank of good standing has therefore very little to worry about during the currency of his line of credit. He is not called upon to pay interest on more money than he is actually using, and he is, moreover, assured of the sup- port of the bank in the oj)eration of his legitimate busi- ness, no matter what the financial conditions may be. The position of a bank customer in the United States is very different and not always so comfortable. Na- tional banks are restricted bv law in the amount of loans they may make to any one firm or corporation, and large concerns are forced to seek loans all over the coun- try. This practice is not to the advantage of the bor- rower; he is dependent on note brokers to dispose of his paper to various purchasers throughout the United States, to whom he is personally unknown. The paper NUTi: ISSIKS AM) Till-: BUANCII SVSTK.M 7:5 must l»c met al inaturily without fail. True, piovisiou could be made by selling more paper, but il" money is at all scaree even this resource is not available, and hi con- sc(iuenee, solvent firms are often forced to the wall. The position is an unfortunate one for the borrower, not oiilv because his linances are always in a state of uncer- tainty, but because the practice has a tendency to en- courage over-borrowing in times of easy money, with consecpient over-expansion. This evil is unlikely to hap- pen to a man who has only one bank to deal with, as no trained banker would allow a customer to obtain more money from the bank than his business conditions warranted. -cV brake is just as necessary in business life for averting disaster, as it is in the mechanical world. This method of financing naturally restricts the manu- facturer and wholesale merchant to the making of one class of paper, their own single name notes, and conse- ([uently comparatively few settlements with their cus- tomers are effected by means of notes or drafts, the amounts due being carried in open account until the customer remits according to the terms of the sale. In Canada, however, open accounts are the excep- tion, and practically every sale of goods is subject to settlement by draft or note. These notes and drafts are known as trade bills and are discounted freely by a bank and collected through its various branches, the proceeds being applied in reduction of the customer's loans. The Canadian borrower has therefore two methods of borrowing, loans and trade paper. Loans are made with or without security for the purpose of creating or ])urchasing goods. The goods when made or acquired are exchanged for cash, notes, or the right to draw on the purchaser; the two latter are known as trade bills 74 HANKlNCi rui\( iri.KS l! If and, whtn tiiscounttd by a rii>ulahU' liiiii, l»)rin ti»c lugh- cst class of scciirily a hank nm have. The (liscountin^r of trade paper is of heiicfit both to tlie bank and to the borrowi-r. The latter changes a direct loan into an indirect or contingent liability, and is as- snred of the ett'ective and prompt collection of the debt. The bank receives tangible evidence that its loan has been devoted to the production of goods, and that the goods have l)een disposed of to responsible merchants; furthermore, its position is strengthened by a second name and a definite date of payment. (59. Bram-hcH atid punics.— It is apparent that the branch system not oidy gathers up money throughout the country, but distributes and varies the risk of the bank's investments. It does more than this, it distrib- utes the risk of the deposits which, at times, is a very real risk. A run on a solvent bank is always more or less local in character, and though quite capable of wreck- ing an iiniividual bank would not serious affect the stand- ing of a branch banking system. Not only would the head office be able to send ample funds to pay off every deposit if necessary, but the branch itself would be in a position to allay tlie run by its ability to pay out its own notes; these would be readily taken by the depositors and, as a rule, assistance from head office would not be required. Nothing will stop a run of this kind quicker than an apparent willingness and ability to meet all demands. Freciuently, in such cases, the majority of the deposits are returned to the bank if it is willing to take them. Depositors wh(J can be stampeded in this man- ner by a chance word or rumor are not desirable, and the refusal to reojjcn a few of these accoimts has a very salutary effect on a community. So unreasonable arc panics of this nature that pco])le have been known to NOTE issrr.s and Tin: miANcii svstk.m 75 \\illi. ANALYSIS OF A BANK STATEMENT 83 Fortunately, the bulk of the savings bank depositors arc (juite content to use their savings bank accounts for the purpose intended — a depositing place for their sur- plus money. Each person who keeps a bank account does so for his own convenience, but the result is an ( nornious control of credit placed at the disposal of the industries of the country through the agency of the hanks and their branches, ^n fact without these de- ])()sits banks could render \at little assistance to the trade and commerce of the country. The steadiness of tlit'se deposits, the fact that by the law of average they can be relied upon to remain fairly constant in amount and that, except in very stringent times, they are con- stantly increasing, is the basis of the commercial credit system of Canada. 73. Demand deposits. — Demand deposits repre- sent amounts due to individuals and firms payable on demand. Xo interest is paid on these accounts except in special cases where a large dormant balance is kept which could otherwise be transferred to the savings l»ank department. The average current account is frequently run at a loss, and were it not for the collateral profits accruing from the connection in the sliape of exchange, discount, and the like, the burden of oi)erating them would be serious. The average (ost of carrving a small account has been variouslv t'^tiniated at from $15 to $25 per annum. This (|ncstion will be gone into more fully in a later chapter. In order to prevent the abuse of the checking privi- lege some of the banks make a nominal charge for car- rying small checking accounts, but it is a question even then if the bank comes out ahead. The ratio of total deposits to the capital and reserve 84 1JANK1N(; PUINCirLKS I t1 of the average bank is so large tlmt even a small increase in the interest rate or in the expense of operating the deposits will materially affect the earnings on capital, unless, as has already been pointed out, the question of maintaining adeijuate reserves is neglected. In a lec- ture on "Interdependence of Trade and Banking" CJeorge II. Pownall, an English banker, in referring to the question of banking profits, says: Banking would not be possible if its present lines were seri- ously cbiinged. We liiivc to bear in mind tbat the business of bankinft-, like every other kind of business of long standing, has evolved itself by daily-accumulating experience. I be- lieve that depositors cantiot expect a greater return than tliey now obtain, unless there were some general change in the sup- ply of, and the demand for, loanable capital. Bankers do not take in deposit money as an investment for the depositor. The money comes in at the will of its owner, without notice, and is withdrawn without notice. That consideration governs the employment by bankers of their deposit money. They have individually to judge from the circumstances of their particular business what percentage of cash to their total liabilities they need to keep in their tills, what percentage of cash they shall keep unemployed to ensure the public con- fidence in the stability of their institution, and what percentage of their liabilities to tlie public shall be represented by first- class securities, and first-class securities so written down in price that nothing but an e\tr ordinai-y public catastrophe shall reduce their selling price below the figures at which they appear on the balance-sheet, and so produce an apparent deficiency in the assets of the bank. To keep money uiiem- ployed is to lessen earning power; to hold first-class securities is to obtain less than the average rate of return on money employed in lo.ans. and to write them down to a safe level is a form of insurance that expert opinion demands of a banker. Tt is not only from within that these matters have to be ANALYSIS OF A BANK STATEMENT 85 lookfd at, it is also from without. Tlitn- is a larj^^c ilass of (lie public perfectly able to reckon up the safety or otherwise indicated by the broad lines of u bank balance-sheet, and, in the long run, the strongest institutions oet the deposits. Paradoxical as it may seem, a banker's balance-sheet must 1 \liibit an ability to pay any proportion of the banker'ii lia- liilities likely to be called for l)y nervous people in times of >tress, not merely because the call for repayment needs to l)e faced, but also because to exhibit strength is to disincline people to make the demand. 74. Deposits elsctclicrc. — These amount to $6.90 ^ and represent deposits by individuals and firms made ill branches outside of Canada. Part of these deposits in all probabiHty bear interest. Combining them with the deposits maintained by foreign banks gives a total of nearly $9 representing funds supplied by depositors outside of Canada. An examination of the asset side of the statement shows that the greater part of this amount is invested as a quick asset in call loans outside of Canada and on deposit with foreign banks. This <|iiestion will be fully considered in connection with call loans. 7.J. Due banks in Canada. — Owing to the fact that |)raotically every Canadian bank is represented by branches in the redemption centers and other large towns, there is no necessity for it to maintain balances with other banks for the protection of its interests at those points, and any balances which may be due be- tween banks in Canada are merely as matters of con- venience in connection with collection arrangements. 70. Due to banks in foreign countries. — Under this iK'ading are included all amounts due *^o foreign cor- lespondents and represent balances which are main- ' Rpiid thus: "$6.90 out of every StlOO due the public." 8(! RANKIXC; riU\( IPLKS r iii 'i. i. laiiied by hanks ul' (ircat Britain, I'liitcd States, Eu- rope and elsewhere which have business relations with Canada. 77. Doiiiiiiioii and provincial governments. — The branches ol" the banks act as depositaries ol* the nonun- ion and provincial governments, and transfer funds re- ceived at their various branches to Ottawa or to the sev- eral provincial capitals. ^Ml customs, internal revenue, and Post Otfice receipts, including the deposits of the Posta! Savings Bank, are deposited by the federal offi- cers in the local branches of the various banks through- out Canada, and are transmitted bv them to Ottawa for the credit of the government. Government checks of every description, including those issued on account of withdrawals from the Postal Savings Bank, are by the Bank Act payable without charge at any branch of any bank in Canada. Although the collection and disbursement of the na- tional revenues involve a great deal of work, it is done v, illinglv bv the l)anks, not onlv in a wav, as a return for the note issue privilege, but also as an appreciation of the practical and economical manner in which the government handles its revenues and funds. So effi- ciently is this done through the banks that no disturb- ance is ever made in business or financial circles by the movement of govermiient moneys, notwithstanding their very large aggregate. All revenues received are left wi*h the banks for commercial use until ultimately dis- bursed by the government. There is no wasteful piling up of gold in government vaults; every cent is allowed to do its share in the economic development of the coun- try until Avanted. The net balance due to the government may be mo- bile, and at times comparatively small, but the principle ANALYSIS OF A BANK STATKMENT 87 is sound and works well in every resi)eet. It would be almost impossible to devise a selieme for the collection and disbursement of government revenues that would work more smoothly or efficiently. Canada in her scientific administration of government funds differs from almost every other country. The balances of the provincial governments consist principally of deposits in connection with the Inland Revenue bepartment and judiciary accounts. The bal- ances due the Dominion and provincial governments are j)rivileged claims on the assets of a bank and rank ahead of the other depositors. 78. Circulation.— The nature of this liability has been fully explained in Chapter V. It will be noticed that the amount given in the statement is less than the paid- up capital. No bank, es[)ecially one with numerous branches, would feel safe in increasing its circulation over this margin except during the period of emergency currency. During that period, namely, September 1 to February 28, the circulation could be increased to $1).10. In addition to the protection offered the note-holder by the general 5 per cent redemption fund of all the banks, the statement shows that the circulation of $6.54 is protected by the total assets of the bank and the double liability of the shareholder, $120.39, or practi- cally over $91 for every $5 in circulation. Both the emergency currency and the central gold reserves will under certain conditions prove of great advantage both to the public and the banks, but neither will be profit- able to the banks. The emergency currency bearing interest at .5 per cent will be availed of at a decided loss, while the central gold reserve will result in a small loss. ss n.WKiMj i'ui\( ii»m:s I lb ] U 70. Capital and nxvnr. Tlie lotal liability in the public is eciiml to $88.ai of the total assets and the bal- ance, $11.09, belongs to the proiJi-ietors or shareholders. The latter consists of capital, ^(\.li',i, and reserve and un- divided profits, ^rj.lH'}. A reference to the profit and loss sheet (Section \)ll) shows that the dividends declared were ecpial to 10 per cent of the capital, or .3.47 per cent on the ca])ital and reserve. The net profit earned on capital and reserve is 1()..5() per cent, or, as it is generally pub- lished, 1 {).»() per cent on the paid-up cai)ital. The method of l)asing earnings on the percentages to paid-up capital is a misleading one, and should be abandoned by the banks and financial ])apers or used only in conjunction with the percentage on cajjital and reserve. To base earn- ings on caj)ital not oidy gives an erroneous idea to the public of the earning powers of banks, but does not form a fair method of comparison. In case of the insolvency of a bank the shareholders are liable to be called upon for an amount equal to the j)ar value of their shares. 80. Specie and Dominion notes. — Under this head- ing are included not oidy the gold and large legal tender held by the bank for its cash reserve and clearing house settlements, but it ii hides also the till and change money at the various branches. The latter, however, forms a very small proportion of the whole. The only reference made by the liank Act to a cash reserve is in connection with the recpiirement that' at least 40 per cent of the cash reserve nujst consist or Do- minion notes. It is left entirely to the judgment of the individual banks themselves to fix their own cash re- serves, and the experience so far has fully borne out the "wisdom of non-interference in this connection on the part of the government. Considering that practically ANALYSIS Ol' A HANK STATKAIKNT SI) all the till money is in the I'orin of u liank's own notes, the uveruge cash reserve niuintuined by the bunks of altout 10 per cent to 12 per cent has proved fully ade- ({iiate at all times. Some hanks maintain a higher and some a slightly lower rate than tlie above according to their circumstances or re. Call loans clscicJnre. — The call loans carried by (rrtain of the Inrgcr banks in Xew York and London sihjoct them to a great deal of undeserved criticism, as it is a common l)elief on the part of the pu])lic and the average newspaper man that the Canadian banks lend money in Xew York because of the higher rates ob" lir- j'.ble there. Such criticism betrays a total ignorance of 92 BAXKINC; PRINCIPLES the nature of the Canadian bank reserve for, if these call loans were not maintained, the Canadian borrower would be no better off than now. The banks would have no alternative but to carry the amount in jrold in their own vaults. This would not only mean a loss of earning power to the banks, but would also cripple them in the foreign exchange and other facilities which they now offer the public. If these critics would take the trouble to examine the government statement and ascertain the net amount of Canadian money, which is invested in call loans out- side of Canada, they would be doubtless surprised at the results. Take for instance the foreign loans in the government statement for the month ended June 30, lorS: Assets: Balance due by banks in the United Kingdom. $15,941,257 IJa ances due by foreign hanks JW,165.595 Call loans elsewhere than in Canada. 89,363,520 Current loans elsewhere than in Canada 36,894,681 $175,365,053 Liabilities. Due depositors elsewhere than in Canada. $104,289,782 Jnie banks m I nited Kingdom 11,755,653 Due foreign banks 7,656,846 -^ $123,302,281 Act amount supplied by Canada 52,062,772 — $175,365,053 The critic would point out that Canadian banks had over $175,000,000 of their assets in foreign loans and bank-balances, and that this .should be loaned to Cana- dian borrowers. They .seldom look at the other side of AN^.LYSIS OF A BANK STATEMENT 93 the return which sh )\vs that over $123,000,000 of this amount represents outside capital on deposit in the banks, leaving only $52,000,000 as the actual amount supplied hy Canadian hanks toward a very important part of their reserve. This is only 3.42 per cei.t of the total assets, an insignificant amount compared witi: the real benefits which it creates. As regards earning a higher rate of interest in the foreign call markets, the argument is fallacious. The rate for call loans in Canada is seldom helow 5 per cent, while the call loan rate in New York seldom rises above li per cent, and the rates on call and short loans in Lon- don are usually lower than those which prevail in New Vork. The average rate for call loans in Canada dur- ing June, 1913, was 6i per cent, and the average call loan rate in New York during the same period was 2.35 per cent, from which must be deducted the heavy state tax on loans of foreign corporations in New York, whkh made the net rate received by the Canadian banks less than 2 per cent. At this rate it would certainly l)e to the advantage of the banks to confine themselves en- tirely to Canadian call loans or even place money on deposit with each other at 3 per cent. The banks, how- ever, fully realize that safety must be considered before profit, and that the investment in outside call loans pro- vides the best form of reserve, next to the actual gold in their vaidts. New York is one of the interriational money markets of the ^\()rld to which funds flow freely from abroad. Gold can be obtained there at any time. The Canadian banks have on numei-ous occasions tested their ability to licpiidate loans in New York and bring them to Canada In the shape of gold. New York is within half a day's journev from Montreal or Toronto, and to all intents 94 MANKINCi PUIN( IIM.KS and puriK)st's is just as t'onvcnieiit as it* the gold were kejit in Montreal or Toronto. Sir Kdniund Walker, in an interesting artiele in the Monctarij Times on tliis siibjeet, eonclndcs with I lie following example of the aetual working of this form of reserve during the panie of 1907: Tlwif Hie l);iiik.s dr.iu fncly upon Huir fuiitls out of ('hiiiuI.-i to iiKot the rc(|uiriiiuiits of their ('jiiiiunjin l)usiiK'ss w;is vcrv conclusively diiiionstrfited at the time of the hist I'nited States panic. A''conhn<>; to the Goveninient Bank Statement of September 30, precedinj^, the position as rej^ards tlie outside accounts of the banks was as foUows : Call loans oulsidi of Canada $63,158,601 Current loans outside Canada '25,704,092 $88,952,69.'? Deposits and balances due outside Canada . . 76,178,950 Net amount emi)loyed outside Canada. . . $12,773,743 Tlie panic in tlie I'nited States may be said to have com- menced in October, 1907, and at November 30, later, the position of the Cana(h'an banks as regards their outside ac- counts bad dianged to tin- following: Call loans outside Canada $41,198.29;{ Current loans outside Canada 23„576,315 $64,774,608 Deposits and balances due t)utside ( "anada . . 67.616,113 Net balance oirinif hi/ Canadian banks out- side Canada $2,841,505 The tight money conditions which existed in Canada at the end of 1907 and the early part of 1908, led in all parts of the country to a chunor against the banks, who were accused of lending in \ew York moneys gathered from tlieir Canadian customers and needed in Canada. Rut it will be seen fi,)!>! the ANALYSIS OF A BANK STATEMENT 95 al)ove figures tlmt (luring a period wlien cull money commanded vi'iy high rates in New York, tlie Canadian hanks in less than two months reduced their call loans outside of Canada by S^>!i,0()(),()()0 and that by the end of November, instead of hav- iiijr Canadian funds employed outside Canada, the balance was iutually the other way to the extent of .^a.Si 1,000, a condi- tion of affairs which continued several months into 1908. In the payment of its debts «lue abroad or in selling cx- (•lian"-e against commodities shipped by Canada, New Y'ork is the market where all such transactions nmst be settled, and therefore ready money to be available in the operations of a Canadian Bank is, in the majority of cases, needed in New York. A careful examination of the evidence must make the follow- ing clear to any intelligc person : 1. That the banks lend money in New Y'ork at a much lower average rate than loans produce in Canada. 1. That the high rates of interest so often referred to oc- (iir onlv at rare occasions coincident with panic, and do not II! erially affect the average rate earned; and that at the time of such high rates the Canadian banks are almost always with- ( hawing money from New Y'ork instead of sending it there. a. It is the power to withdraw money at such times which (iiables the Canadian bankers to support their customers, and it is largely because of this power that altliough the financial hi>tory of the I'nited States is marked with frequent panics, no financial panic has takeii place in Canada In recent times. 4. The object of the loans in the ITnited States, therefore, is not to enlarge the profits of the Canadian banks but to en- able tliem to do justice to their customer-, in time of stress. Such loans arc an evidence of caution and wisdom in the in- terest of Canada and the policy sliould be tlie subject of praise hy critics of Canadian banks and not of dispraise.^ 86. Reserves. — Including call loans and securities the a\erage reserve maintained l>y the Canadian banks lies ' Mniictarfi riwc', Toriiiilo, .Tan. (!, li)J2. 90 BANKING rillNCIPLES s; I ii between 35 per cent and 40 per cent of the total assets, of which about 10 per cent is in cash and Dominion notes, 10 per cent in amounts due from other banks, and the balance in securities and call loans. The banking conditions are so varied in the different sections of the country and in different institutions that it would he impossible to establish a fixed legal reserve which would suit all conditions and seasons. Tast experience has demonstrated that the question may safely be left with the individual banks themselves. The ca.h reserve of the Canadian banks compares favorably with the gen- eral average of the national banks of tlie United States. The fixed legal reserve of tlie national banks of the United States has been compared to certain beds in a hospital which were always reserved for emergency, and on the occasion of a great disaster the superintendent refused to permit the beds to be used, claiming that they were to be reserved for emergencies. To establish a legal reserve means that Avhen a bank uses its reserve for what it is intended, it breaks the law and becomes subject to severe penalties. Although there is no law or understanding on the subject in Canada it is gener- ally conceded that the total quick assets of a bank should not be allowed to fall below 15 per cent, of which at least 8 per cent sliall be in ca.sh and the })alance in notes and checks of other banks, and in bank balances. In the statement under consideration it will })e noticed that the quick assets amount to 18.28 per cent and liquid assets to 34.84 per cent, or nearly 40 per cent of the liabilities to the public. With the establishment of the central gold reserves, certain new phases will arise in connection with the com- putation of the cash and other reserves. This feature has been very clearly explained in an article published ANALYSIS OF A BANK STATEMENT 91 ill the Financial Times, Montreal, August IG, 1013, which reads as follows: That the new system will iietissitiitc a sonicwhiit diflVrcnt imthod of computing tlie strengtii or weakness of a bank in ])()int of reserves is evident. Or rather, wliile tlio method will ivinain the same, the standard will have to he adjusted. The oold deposited in the Central Reserve cainiot, it is plain, be icfrarded as an available casli reserve, except to the extent to which there ?s no currency issued against it. Gold which is being employed as the basis of currency, under a law which ivquires the holding of a full dollar in specie for every dollai of the corresponding notes, is not an asset at all ; but neitlier, on the other hand, are the notes a liability. The issue of notes ji;fHinst deposited gold, tlierefore, decreases the amount of cash assets, but does not increase the amount of liabilities. But the proce of issuing additional currency implies the receipt liy the bai.k of something with which that currency is pur- chased by the person who takes it out. So far as concerns tlio special additional currency taken out in the autumn and returned before spring — which is the only class of circulation to which the Gold Reserve clauses will at present apply, since the ordinary issue power of the banks up to the limit of their capital, without gold deposit will for a good many years suffice to look after the all-thc-year-roinid requirements of the nation — practically all of it is taken from the banks in exchange for grain receipts, drafts on grain shipments, and similar high- grade, short-term, readily negotiable securities, Tliese secu- rities have in themselves a certain value as reserve. They arc not to be discriminatcly ranked with the ordinary commercial loan wliich forms the bulk of the all-thc-ycar-round business of the banks, for they arc based upon a commodity which is at all times salable, and they possess a ncgotial)le value far in excess of that of ordinary commercial paper. In addition to this they will be steadily disposed of by the banks in the international money market, in proportion to the speed v\Ith which the crop moves to seaboai'd; and if money is tight and C— VTII— 7 08 BANKING I'UlNCU'LliS f I I ,* rcsencs low it is in tlie power of the banks to exert muclj pros- sure to get the crops moved rapidly — as they doubtless will do this season. So tiiat while there will be an apparent re- duction in tlio reserve strength of many if not all the banks when grain ])aynunts ronnncnco, it will be nnu-h more apparent than real; and the gold which is taken from the banks' control to form a basis for the extra currency can in case of need ho replaced without any great difficulty or sacrifice. 87. Current loans. — Current loans form the largest individual item in the statement, and consequently rep- resent the bulk of a bank's investment. This is an asset which requires the most careful and unremitting atten- tion on the part of the branch manager and the head office. Current loans can Ix; broadly divided into advances to customers and bills and notes maturing. The latter are the more desirable because they are principally com- l)osed of trade bills, Avith a currency of from sixty to ni/iety days, and as a rule can be relied upon to be retired at maturity. A good portfolio of bills is no mean factor as a part of the reserve. Canadian banks as a rule re- fuse to take longer term paper than that of three or four months currency; in fact the average currency of a good bill file should not exceed six weeks, which would mean a steady flow of money coming in every day, even if only 50 per cent of the items maturing were paid in full.i Advances to customers, however, cannot be relied on ' An interesting calculation may be made in any office hy rebating interest on the daily total of the maturing notes and bills in the diary. The total thus arrived at will show the amount that would have to lie rebated supposipc all the notes were paid on the day .selected. Taking this total rebate, ascertain for how iriiiny J;iys it would pay interest on the total amount of unmatured linit Items. The number of days represents the average currency of the bill file. The actual results in one b-anch varied between 41 and 45 days currencv. ANALYSIS or A BANK STATEMKNT 99 to any such extent. They may be divided into four classes : (a) ^Vdvaiices made to customers on the security (>r pnuhu'c and other merchandise; 1 1)) Advances made to customers on stocks, bonds, imtis and otlier coUaterals; (c) Advances made to customers on notes other than trade bills; and (d) Advances made to customers on single nanie paper. Tlie tirst two call for very little comment and, if well margined, form a desirable asset. The third class, .iltbough secured by two or more names, is not so de- sirable from a banker's point of view, as it may comprise a certain amount of accommodation paper. Advances to customers by means of single name notes are less ob- jectionable providing the customer's statement shows a sufficient margin of quick assets to warrant the loan, and that there is a definite understanding between the liank and the customer as to the destination of the loan, arid when and how the advance is to be paid. Occa- sionally this latter class of advance is made by means of overdraft. This, however, is a practice that should not be encouraged as it is objectionable for many rea- sons which well be given later.^ It is the two latter classes of notes which give the most anxiety and trouble to the banker. Unless great cave is taken, the bank is a])t to become a partner, as it were, in more or less undesirable undertakings. It is here we find the dead loans, safe enough no doubt so *';'r as ultimate payment is concerned, but still not bank- ing transactions. 'Sco section 210. \ 100 BANKIMJ PHINC iri.KS f ;| Wi iVdvanccs are made to business firnif and others that arc in tlicir way more or less permanent, sometimes con- sciously so, sometimes made so by force of circumstances. How can payment of such loans be obtained within a reasonable time? Or in case of failure what can the bank do with the wornout works or the old-fashioned mill ? It finds itself a partner, frequently principal part- ner in the business. It is therefore most necessary for a bank to avoid advances of this nature. It should endeavor to keep its loans in as liquid a condition as possible, and in reason- able proportion to its deposits. Leroy-Boileau, in his "Traite d'Economie Politique," says : Bunks obtiiin their resources jrenerally from the most mobile part of a country's capital — from funds scarcely constituted, destined for an investment whose character has not been de- termined or for consumption sli»rhtly postponed. In view of tin's origin of the hirgcr part of banking resources, it follows that the capital lent by banks ought always to remain in the condition of circulating capital, easily convertible into mcmey, and should not be transformed into fixed and inconvertible capital. Banks are instituted to make eapital circulate, not to lock it up. 88. Overdue debts.— These call for very little com- ment; the greater portion consists of notes which are overdue owing to temporary delays in settlement. Farmers are notorious delinquents in this respe"*^. They have, however, a good excuse owing to the distances they generally live from the bank, in the West particularly. There is not the same excuse, however, for ordinary business paper being overdue, and the same leniency is not extended to a business man, whose credit is seriously affected if he allows his paper to frequent the overdue ANALYSIS OF A RANK STATKAIKNT KM lilc. A poilioii oj' khv ovtnliic coiisi^jls of doubtful dehts lor wliidi I'uil imnisioii iuis htrn niiidi". 89. Jhal CHtatc. — The law is very strict as to banks Iioldiii^- real estate other than that re(iuired for their (»\\ii premises, nor can they lend on mortgages. They may, however, take a mortgage as additional security for a debt already incurred, arid in case of foreclosure they are allowed to bid in the property, but cannot hold it Dver a certain length of time. Real estate other than hank i)remises, in the statement, represents lands which have been acquired in this manner and bought in by the bank in its effort to improve the position of a doubt- ful or a bad debt. Hanks naturally try to get rid of l)r()perty thus accpiired as (piickly as possible and, in making sales, frequently sell for part cash and tucept security for the balance in the shape of a mortgage. Tiiese are shown in the statement as "mortgages on real estate solr their business. It has always been a question as to whether banks have the right to erect a building and rent any part not required for banking purjioses. The ([ucstion is not a serious one and should be left to the hanks themselves. If a business man should erect a building on an expensive corner in a city simply for his own office, his action would be characterized as extrava- gant for devoting expensive land to a one-fioor building when, by building higher, he could have rented sufficient offices to help pay the cost of carrying the investment. Furthermore, a bank, in building, must consider the fu- ture, and there are many Instances in Canada where a building that was erected for a banking office with upper floors for renting is now wholly occupied bv the bank itself. 10!^ HANKINd IM{I\( N'LKS H f Another mutter of conniicnt in coniitrtioi, uitli Imnk pmnises js the .substantial and hannie huihhnas wliieh are generally erected for hanking ortiees, even in a small town. There are several reasons why a hank should huild a substantial oftiee: /ir,sl. that in opening a branch at any point, It expects to be represe.ited there i)er,nanentlv'; this alone should warrant the erection of a substantial building; second, it is a well-known fact in banking that a substantial and fine-appearing building is the one which attracts the business of a certain class of the pub- lie, the impression of permanency and solidity being un- consciously extended to the standing and security of the bank Itself; third, the banks are in a measure foVced by I)ubhc opinion, when building, to i,ut up an office that will be a credit to the town, for until a bank owns its own premises and becomes a taxpayer it is fretiuently reminded of the fact by its customer's and others. It is a principle of sound banking that bank premises no matter how valuable for their especial purpose, must be written down in the course of time to a figure con- siderably l,elow cost and approximating as nearly as possible the amount they might be expected to reilize at a forced sale. For this reason all well-managed banks make an annual appropriation from their profits for the reduction of their bank premises account, and the ma- jority of banks now have their premises written down to a conservative valuation. In the case of some of the older bi.nks tlie values are particularly conservati^■e, for not only have the proi)er- ties been written down from the cost price of many years ago, but no attention is paid to the great increase in their values of late years, in common with all other Cana- dian city property. This feature, however, may be eon- ANALYSIS OF A BANK STATKMKNT 103 sidt'ifd as offset l)y the excessive prices Imiiks have had to paj' lor any property purehased recently. Some of the larger hanks with numerous branches, instead of increasing their hank premises account pre- fer to arrange with some trust or loan company to erect a proportion of the buildings for them on a rental basis which will eventually leave the property clear to the hank. in. Profit and loss statement of a bank. — A study of the profit and loss statement of the various Canadian hanks for the past years shows very conclusively that, notwithstanding the large increase in the amount of de- posits and volume of business transacted, the profits have not kept pace with the continuous increase in operating expenses, and the average net earnings on assets during the last decade has dropped from 1.50 per cent to 1.20 per cent. Banks in common with all other business con- cerns have had to pay out more in salaries, rents, and other expenses, and yet it is seldom realized that bank- ing charges to the public have not been increased. On tlie contrary, they have by force of competition and other eauses been considerably reduced. The table on page 10.5 shows the percentage of net earnings, etc., of ten of the Canadian banks for the year 1912. It affords several interesting comparisons and demonstrates that tile earnings of Canadian banks are by no means com- mensurate with the risk and work. Column No. 1 will assist in giving the reader some idea of the proportion of capital and reserve to total deposits, or, if the reverse ratio is required, it will be found by dividing this percentage into 100; thus, the deposits of bank Xo. 1 are six times its capital and re- serve. The second column gives the proportion of the total 104 HANKINT, nilNdPI.ES assets rtprc'Miilnl l.y iiiltivsl .K|M)sil.s. niul .shows whut a very importaiil pari the intiicsl-hcariiig ilqH>sits take in the existence of u hank and how easily a slight increase in interest would materially affect the net profits. 'J'he third column gives the net profits earned on the total assets of the hanks. CNuisidering the large amount of the turnover during the year, and the douhle liahil- ity of the shareholders, these figures constitute a very small return for the amount of work done and risk taken. Column No. 5 shows tlie i)crccntage of net profit to capital, and is the method usually adopted hy hanks and financial papers in commenting ujwn the profit and loss sheet of a hank. As it shows the interest on only a part of the liahility to the shareholder this percentage affords no useful information, unless used in conjunction with the figures given in column Xo. 6. This gives the per- centage of net profits to capital and reserve and shows the true net earnings on the proprietor's capital before any dividends have been declared, or amounts written off. Column Xo. 7 gives the percentage of net earnings. These two lust columns will show where the market value exeee• S u H y. U 1 Market PrkT-of Stork 33 S3 J! 82 S8 10 X X 2 a a X X r>x 52 82 52 ;s 8? 1- 1- i»2 xe r-h- t-t- 'a ss ss X gs s;s j2g 2g •* a 22 » r- •f Assets after allowing 6% on Capital' s% 'ss S9 S3 ss « II 33; 3;s; 82 g2 1 «l Percentage of Interest Deposits to toUl Assets g§5 §S 55 = S52 «.-5 V s.-s 2 SS 2 g§ §2 F* and Re to tt Depo 1-50 rj — •0 «♦ 1- X s;: i 1- 9« « ^ •0 w t- X OS© 5 105 100 BANKINT, PRIXCIPLKS I ,1 m. on the Wasis ol' llie figures given in of the stoek column 10. 92. Interest on deposits:— Vrom time to time it is advanced in the public press and elsewhere that the hanks should pay a higher rate on their deposits than 3 per cent, especially in view of the fact that they are getting G per cent and 7 per cent for their money. Though nearly the whole of a bank's gross revenue is derived from interest on its loans, the net profit is nec- essarily governed by tlie difference between the deposit and loaning rates Avhich, in Canada as in all other coun- + !ies, bear a fixed ratio to each other, firmly established '> ' oth theory and experience. Any attempt to deviate iiOiji this fundamental rule of correlation, either by raising the deposit rate, or unduly lowering the loaning rate, can lead to but one end, as many banks have found to their cost. The average difference between the de- posit and loaning rate of Canadian banks is 3 per cent, and any increase in the former must be accompanied by a corresponding increase in the latter. That this is no arbitrary ruling can be conclusively proved by examining the profit and loss statement of any bank on a basis of giving a fair return to the share- holder for his investment, it being first conceded that every business should pay interest upon the capital actu- ally invested in it at a rate determined by the risk or responsibility incurred in the business. This is a prac- tice that no business man will question, and there is no reason why the banking business should be excepted from its application. No man is willing to invest his money in an active business which involves responsibility and the meeting of keen competition, unless he thinks there is the prob- ability of more than an ordinary return in interest. t. ?*f . ANALYSIS OF A RANK STATEMFAT 107 Hanking' l)nsiiie,ss is certainly not Jnr riotii siicii c'oinjK'- titioii, risks, and responsibilities, and unless a hank ean make a reasonable i)rofit ui)on its i)roprietors' invest- iiRiit, the shareholders niioht as well put the bank into li(|uidation and invest their capital elsewhere where it ■m\\ be free from risks of this nrture. I i making such ail apportionment from banking pre Its for capital in- Msted, C i)er cent should be conside -d a very reason- able rate to accord to shareiiolders ic the use of their money, and after deducting that amount from the net profits of the bank the remainder represents the com- IRMsation for banking services and the like. Tlie appli- cation of this principle to the annual profit and loss siucts of the banks given on page 10.5 demonstrates \ciy graphically how impossible it would be for any of these banks to pay a higher rate than 3 per cent nil their deposits without increasing their loaning rate accordingly. Column 4. in the table on page 105 shows the amount of j)rofit remaining, after deducting 6 per cent on the capital and reserve of the different banks. A compari- son of these figures with those given in tJie second column ^vilI show that only one bank, the fourth, would have Mitlicient profit left to increase the rate on its interest deposits one per cent; the remaining banks would show a serious deficit. That Xo. 4 bank could increase Its deposit rate to 4 per cent is due to several reasons, ;'il more or less temporary. In the first place, the net I'n.lits for 1012 happen to l)e unusually large; secondly, ;itio of cai>ital to total deposits is small (C^ohmm No.' 1 1 : and, lastly, the interest-liearing deposits are only slightly over 50 per cent of the total assets (Column N ' ' -i ) . Similarly, only two of these banks could afford ^o increase their rate on deposits to 3i per cent but 108 BANKING PHIXCIPLES would have practically notliiiieen pointed out that the greater portion cf a hank's ,,rofits is derived from the difference hetwecn the interest on its deposits and Its loans. The gross profit therefore can he found roughly hy a study of the interest-hearing assets of a bank, and it may be safely assumed that even in the best of years a hank can seldom make more than hetAveen 5 and 6 per cent gross on its total assets; that is, inelu- '':Y['J'''^'^''^^ «"d «11 other profits. In the statement of the Percentage Bank" the interest earned on the vari- ous assets may be roughly estimated, as follows: ^^yt'^*^ $7.3})atli 34 v^all Loans 8 97 >' j,- Currcnt Loans nr a systematic study of costs with a view to reducing expenses and eliminating accounts or transactions which have hitherto been a source of loss. Hank cost account- ing will be dealt with in a separate chapter. 1 il PART II: BANKING PRACTICE CIIAPTEP I HEAD OFFICE 97. The directors. — The nominal executives of a l)ank are the president and hoard of directors, M'ho are responsible not only to the shareholders but to the gov- ernment for the true and faithful administration of the Imiik's affairs. In practice, however, the actual work of administration has to be entrusted to the general manager and his staff. The work of the directors is rather of an advisory and supervisory nature. That this supervision, however, should not be of a perfunc- tory character is demanded in no uncertain terms, both l)y the Bank Act and by public opinion. The president, as chairman of the board of directors, occupies the most prominent position in the bank, cs pccially in the eyes of the public, and should always be a man who can command public attention and respect. Ill virtue of his position the president is obliged to devote more of his time to the affairs of the bank than ills brother directors; upon him devolves the checking and signing of the bank returns and other official doc- uments. Daily, in conjunction with the general man- ager, he must review the position and general policy of the bank. c— VIII-8 ll.T 114 BANKING PHACTICE ii I li f-; Of recent years the j)iil)lic has demanded "direetors who direct." No man should, therefore, accept a po- sition on the board of a hank unless he is prepared not only to attend the meetings regularly, but also to take sufficient time to become accjuainted with banking in general and the affairs of his own bank in particular. In other respects a director should Ikj a man of outstand- ing (lualifications, especially as regards character and influence in the community; he should also be a man of large business affairs and a g(K)d judge of men. The principal duty of the directors at ordinary board meetings is to discuss with the general manager and authorize all credits and loans which exceed a certain amount. This amount or limit is set by the directors themselves, as it would be physically impossible for the board to deal Mith all the loans made by a bank. The majority of these can safely be left to the judgment of the general manager, leaving the large and important accounts for the careful consideration of the board. There are, of course, some losses in small loans. But the supervision of the directors would not avert them, and the average is never high enough to l)e serious. It is the larger loans which call for the constant and care- ful attention of the directors. Experience shows that bank failures arise invariably from losses made by the failure of a small number of large accounts, and never from any trouble caused by the small accounts. The limit varies from $1,000, in a small bank, to $5,000 or $10,000 in a large bank. In setting the amount, the directors are guided by their opinion of and confidence in the general manager and his staff, as well as by the volume of applications calling for consideration. Board meetings are held once a week and a financial statement of the affairs of the bank as well as a report HEAD OFFICE 115 Inn all ini])()rtmit transactions that have taken place since Itln' last meeting is i)hice(l before them. In some banks |;i list of the smaller loans authorized by the general liiiaiiager (luring the week is submitted, and initialed by I the directors after reading. The duties and responsi- •ilities of the ^)resident and directors are outlined in the I Hank Act. !>«. The general matiager.— The general manager oc- Iciinics the most important position in the bank. To attain that rank a man must not only be a professional banker by training and instinct, but must possess other outstanding qualifications. His duties are numerous and the responsibility heavy. To assist the general man- ager in his work of supervision and control, there is a I head office staff of highly trained men. If the bank is |Iaron of the government of a joint-stock bank, so far as officers r.ro concerned. The work only .-alses when a bank has arrived \k the stage of development Mhero thi bank has many branches, |''i'l- with a manager at the head of it. To snpervise all these IIU HANKING PRACTICE i9 Kubonliiiute tnunagers, to give tiieiii directions from time to time, iiixl to nmko till their operations Imrnionixc with the work- ings of the bank as a whole under the directors, is the duty of the general manager. The title implies not merely that In has heads of departments under him — for the manager of a I single office has — but that he has managers under him, each of whom has the control and responsibility of his own office. The position of general manager is somewhat analogous tnl that of an admiral of a fleet, which fleet consists of a number | of ships, each being under the command of a captain who i. supreme in his own sphere. The first and second officers inl such a ship will take their directions from the captain, while he in turn is subject to the order of the admiral. The admiral! himself is subject, as to matters of general policy, to the gov- ernment. It is the admiral, however, who is looked to to insure I success m the operations of the fleet. If these operations are] successful the honor is his ; if unsuccessful, the disgrace of fail- ure appertains to him. The analogy between this and the functions of a general I manager is very close. He is a servant of a board of direetonj who are entrusted by law with functions of government. Bull for actual and effectual carrying out of these functions thevj are largely dependent upon the general manager. He givcsj them advice both as to matters of general policy and as to tkl details of operations. This advice they may take or refuse atl their pleasure. They may modify it, suggest changes, or, ifl they think well, reject it. This they have the power to do.| But to reject entirely the advice of a professional banker inl any matter of importance, involves responsibility, and direc-l tors will scarcely take such a step unless for very good reasons! This, certainly, should only occur rarely in practice, for to bcl often rejecting the advice of a general manager would be il sure indication for the necessity of a change. His position with regard to the managers under h>m is onel of undisputed authoritj'. It is to him they look for dirccliosT as to the course of the business of the branch. And his order they must obey. Otherwise there would be danger of serioul IIEAU OFFICE 117 ml .Imf to lliu blink us u wliolc. For briiiuh iiiuimgiTs to liiiity tlicy tun uppoul to tlic bourd uguiust a gtncrttl nmim- g.i's directions would speedily bring ubout n dislocation of tik' wliole business. Kucli branch niunuger, however, is su- I piviiie in his own sphere. To him his officers look for direc- tii)ii>, and his orders tliey must obey. 'riitre muy, of course, urisc cxtruordinftry circumstances in «lii(li this order of things is set usidc, but the foregoing must be taken us ordinury practice. To understand properly the responsibilities of a general I iiiaim^rer it is needful that the powers and functions of each hiiaiich of the bank should be understood. Every individual l)raiich carries the full powers and responsibilities of the bank witliin itself. To the general public and to the body of customers, the "branch" is the bank. For every dollar of niomy deposited in the branch the whole bank is responsible. For every engagement to lend money or to transmit money the bahk is responsible. This Is tlie strength of the branch system so far as the public is concerned. Hut there is a reverse side. For every failure in these re- spects the whole bank is responsible. If at a certain branch, even the least, there were a failure to perform any of the en- ffincments it had entered into, the whole bank would be dis- < Toditcd. It is under these circumstances— and they press upon liiiii constantly— tliat a general manager exercises the functions "f Ills office. These functions may be summed up in one sen- I ten re. It is his business to sec that every branch during every I ".\v is properly equipped and managed ; that it has a sufficient •iii'l Immediately available supply of money of every kind for j tlie wants of customers and the public ; that the money lent at Ibe branch is lent safely and according to directions; that the '"lis discounted are good bills ; that the securities taken for loans are according to law; that delinquent customers are Niirply looked after; that proper men are appointed to the various departments; that the accounts are properly kept; tliat proper statements of the business are forwarded to be 118 nANKlNC; rUAtTICE .1 i ■ 1; 111 iiiiti iMfoie the «lint lor» unti to In n poitid t(> the j;ovcrniiunt, uiul fiiiullv. llml the tush on hiiiiB Six Months Endisq AS PER Statement Resdebed Head Okfk e (Form S. A.R. 9) :— 1 . Average Deposits ott Demand (mclud- ing Draft Acit. and Profit) $ Average Deposits After Notice $ Average Loans (including Short Date Drafts. Overdrawn a/ca. Overdue Notes. Real HsUte other than Bank Premises, Mortgages on Real Es- tate sold and Other As.sets) : — Productive *$ Unproductive 9 Tot^d Deposits and Loans Average Short Date Drafts (included in No. 3) V.MOUNT OF E. T. Bank Notk-s Circulated. Comi'uted as Follows :■ Balance on hand six months ago $ Add total ret-eived from Branches and Banks (other than local) $ • Deduct total sent to Branches and Banks (other than local). $ Deduct Balance oil 'i\ud $ * I'uoFiT AND Loss Statement.— Discount and Interc.t Received (le.ss rebates) ^ Inland and Foreign Exchange ^ . Add or deduct adjustment of Profit with Head Office Deduct Interest Paid Depositors $ Deduct Salaries ($ ) and Charges ($ ) ^•■ Net Profit... $ Pekc-entages:— ■ 1. Per cent, of Discount and Interest to average 1 re- ductive Loans, aliove stated ■ • • 2. Per cent, of Discount and Interest to average Pro- ductive I. ! The dates on which these several balances were arrived at are given, as well as the initials of the oflf'. .10 made the check. It is essential that a complete record of daily routine work, etc., should be maintained, and some banks re- quire monthly reports from their branches giving the initials of the officers who fulfill the various duties each day. Even if this report is not required by head office it is advisable to keep a systematic record in the office. Figure 8 is comprehensive for this purpose. h^ CHAPTER III THE BRANCH STAFF 121. The manager.— The directors are obliged to rely oil the general manager to a great extent for the compe- tent administration of the bank's affairs, and he, in his turn, has to look to the branch managers and their staff for an efficient and loyal discharge of duties, for on the staff, more than on any other factor, depends the suc- cess of the bank. The making of loans is a corollary of having the money to loan, and consequently the most important work of a manager is to attrac tid accumulate deposits by giving a satisfactory and efficient service to customers aiid the public at large. There is no difficulty about making loans; the difficulty is to know when to refuse to make them. The head office can always assist in the decision, but the manager has only the general standing of the bank and his own efforts to rely on for obtaining deposits. The value of a good loaning branch is not de- nied, nor the fact that loans frequently create deposits; but banking essentials should be considered in their proper sequence; first, deposits, then loans. No bank would open a branch simply to make loans; deposits or other collateral advantages must be present or in pros- l)ect. That the loans at a branch may exceed the de- posits does not alter the principle. To attract deposits, personality, efficient service and 135 136 BANKING PRACTICE a knowledge of human nature are necessary, but the loaning of money, in addition, calls for a high degree of tact, ability, and technical training. In small transac- tions the manager exercises his own discretion, within certain limits established by the head office for each branch or manager. I^oans exceeding this amount must first be submitted to the general manager for author- ization. The requisites of a good loan will be dealt with in another chapter. The manager has many other duties and responsibili- ties than obtaining deposits and making loans. He is expected to give constant and vigilant supervision to every part of the business of his office, and to the gen- eral deportment of his staff. The fact that he is per- mitted by the head office to delegate a certain portion of this work to the accountant or other senior officer does not relieve bin of the responsibility for anytliing that goes wrong. Except at the small offices the manager is not ex- pected to do any of the routine work of entering or post- ing, but he has a good deal of work to do in connection with the checking of the day's work. 122. The daily work. — A manager will find it of great advantage to himself and his staff to reach the office a little before nine. Not only can more work be done between nine and ten o'clock than in any other two hours of the day, but the manager's punctuality ensures a like quality in the staff. The first work of the day is to distribute the mail, after numbering and entering all letters containing enclos- ures in the letters received register. The earlier this is done, the sooner the staff can start the day's work. The next duty is the checking of the previous day's v;ork. The manager either individually or in conjunction with RECORD AND DIARY OF ROUTINE WORK FOR MO ^':^:::^jrjT!Z^^:^^>^'^^ Dat K< ix Initials or OrricEiw Checsino Lbdoem. Cahh Boc Suppl BRANTII R MONTH OF .191 In offirc, wh.^ therr an. more than one '-^{''".{'ll^P^.^.'In'^'f "" may awist in rhorkinit lA-ilm-n othir than t neir o »n. Cash Bookk and Voucherh CASH Suppl':' VouchorM - i.\ - Z HavinRs Savinus Ciwh Iniliiila of ( irti<«r who Chiik. il Ti'IUt's Cash Supiil'y 1 Vourhcrs -r KiMik Ut I 2nd 3rd | Uji TfUer T.II.T Trll.-r T.-II.t Initial!* of T.II.T i 1 DiffiriMiii' iivrr in I y^^^,. j ,„.i^ Wound and Safi- CUwd hlai k, »liort mi nil < Tinii' Amount Initial* Two Offlorr. | W(X'j|;K Number of hours Wound FuaRE S THE BRANCH STAFF 137 the accountant compares carefully all the entries in the Mirious cash books with their respective vouchers, pay- ing due regard to the regularity of the latter, both as to si '••natures, endorsements, etc. lie also compares all credit entries with the various registers and other books of original entry. The letters containing enclosures are then carefully compared with the relative entries in the hooks to see that every item received on the previous day lias been properly accounted for and entered. Finally, the extensions and additions are checked, and the man- ager attests the correctness of the work by placing his initials in the cash book, opposite the balance to be car- ried forward. After comparison, all checks, drafts, and other vouchers must be effectually cancelled, so as to ])reclude their being used a second time. While em- l)loyed in the above work the manager sees that the check- ing of the general ledger, savings bank and current account ledgers is properly carried on by the officers to \\hom such work is assigned, and that all entries in the cash books, discount blotter, etc., are carefully compared ^^ ith the ledgers mentioned. All checking in the office should be accomplished before ten o'clock in the morning. The manager is now prepared to receive and inter- view customers, and his desk should be so placed that he can see all who enter the office. Both the manager and the accoiintant should be constantly on the alert to see that every customer receives prompt attention. This is particularly important in dealing with strangers — if they are desirable, the attention creates a favorable im- l)ression ; if they are not desirable, the experienced judg- ment of the manager will at once recognize the fact and a jiossible risk will be averted. During the day the manager's time is fully occupied with preparing applications for credit, general corre- 138 BANKING PRACTICE Vm spo!ideiice, and interviews with customers. Much of the manager's time is frequently wasted by customers, and oflFenders in this respect should be tactfully broken of the habit. Every miimte of the manager's time costs money to the bank— a fact frequently overlooked by both the customer and the manager himself. During the day the manager will be called upon to sign drafts, head office returns, and other documents. This work should not be done in a perfunctory manner, but with a full realization of the responsibility which the signature entails. All correspondence of the office is under the immedi- ate supervision of the manager, and all letters should be signed by him. At the close of the day the manager examines the teller's cash and sees it placed in the teller's chest and locked in the safe, at the same time checking the time- lock and certifying to the examination by placing his initials against the balance after comparing it with the cash book. All local bills and notes, whether under discount or held for collection, are kept in the manager's charge. These are taken over by him and initialed for in the re- spective registers at least twice each w eek, and delivered to the teller each morning as tney mature. In the smaller offices the work of the accountant is done by the man- ager. The position of branch manager corresponds to that of a cashier in a national bank in the United States, and the accountant to that of assistant cashier. The staff of a Canadian bank are designated generally as officers irrespective of rank. 123. The accountant. — The position of accountant is a responsible one. As lieutenant or deputy of the man- THE BRANCH STAFF 130 ajrer he is frequently called upon to assume charge of the office whenever it may be necessary for the man- ager to be absent, to which end he should be thoroughly acquainted with the discounts and general business of the office. A great part of an accountant's duties con- sists in relieving the manager of the work (but not the responsibility) of looking after the routine and general supervision of the office. With the concurrence of the manager he apportions the work among the staff, clearly defining the duties of each officer, sees that prompt and becoming attention is given to the public, devotes such direction and teaching to his subordinates as they may require, and ensures that all work is punctually performed, and none permitted to fall into arrears. j ^ u The position of accountant offers an unlimited field, not only for the acquirement of the qualifications of a successful manager, but also for the development of ad- ministrative ability in the arrangement of the work of the office, and the management of the staff. A capable accountant means a contented staff and efficiency in the work; no one is overworked, yet no man has an idle moment. The capable accountant sees that the entries in the teller's books are so arranged that each depart- ment has a total to balance to at the end of the day, and any error e^.. thus be easily located. If the work is heavy it is balanced in batches during the day, and the work of balancing at the end of the day is thus re- duced to a minimum. A spirit of emulation rapidly evinces itself in the staff, night work is seldom neces- sary, and everyone takes a pride in keeping the work uj) to date. (See Chapter XI.) To obtain these results may take a little time and pa- tience on the part of the accountant, but when it is once 140 BANKING PRACTICE ■| * accomplished he will have all the more time to devote to his other duties. The accountant is generally expected to check all statements and returns, to see that nothing has been omit- ted, and to sign or : ;itial them in attestation of their cor- rectness, prior to handing tliem to the manager for com- pletion. The accountant jointly with the manager has control of the treasury cash and other valuables of the branch. He is also responsible for the safe-keeping of all en- graved forms, such as drafts, money orders, and the like. 124. The teller.— A great deal of responsibility is attached to the position of the officer who has charge of the cash, and known as teller. His principal duties are the receiving of deposits and the payment of checks. This work requires great care in order to avoid a loss to himself or to the bank. In most banks the tellers are required to make good all shortages in the cash. When cash is over, however, the amount is credited to an ac- count in the deposit ledger called "cash over account." In a small office the duties of paying and receiving teller are fulfilled by one man ; in larger offices, however, the work is performed by two or more tellers, and a dis- tinct division is made between the work of receiving and paying. The teller must scrutinize closely all checks and cash items which are included in the deposit in order to see that they are properly endorsed and in form as to dates, amounts, etc. The total is then entered in the teller's blotter, and the slip is handed to the ledger-keeper who posts the deposit in the ledger and enters it in the cus- tomer's pass book. (See Chapter V.) The only book kept by the teller is the blotter in which all debits and credits passing through his hands THE BBANCH STAFF 141 ,vc entered. It has various columns, in which *!« «"™» ,./r.listrib„ted that the totals can be nsed by the d.f- ^t lepartments in proving the d.y^ work A he r„f the days business the cash is balanced and t e Wails of the various d-..ominations are entered in the ',,!.« provided for the purpose in the teller's balance '""a teller should cultivate a pleasing manner in deaUng „itl> the public, as he is in a tetter position than an> , l,er member of the staff, with the po^.ble excep ,on , «,e manager, to attract business to the bank. A «jriy. ,lisobliging teller is a bad advertisement for any bank Vl^ ledger-keeper.-^ good lef provided wliere llie volume of items warrants it, but 7* 152 BANKING PRACTICE it? I ■•■ i : t i tli I n I V ' II 1 otherwise the books should be entered up and added in the ordinary way. This rule should be strictly en- forced. 133. The cash hook. — This ImjoIc contains a record of all the voucliers and entries representing the transac- tions of each day. Theoretically, the particulars of every item in the cash book should be entered in detail, but owing to the wide extension of banking facilities and the constantly increasing volume of checks and other entries, it has been found necessary to use supplementary books for recording particulars of any class of items whose volume is sufficient to warrant a separate book — only the day's total being carried into the general cash book. The majority of entries, especially in a large office, are there- fore in the form of totals, and very few detailed entries have to be made; but all entries, when made, should be definite as to source and sufficiently self-explanatory to be understood by anyone at any time — ten years after if necessary. In the larger offices, the officers in charge of the dif- ferent departments after balancing their books hand to the cash-book clerk the totals in the form of a signed memorandum, and even in the smaller offices it is advis- able to have the clerks entering up the various supple- mentary books give a similar memorandum of their to- tals. This limits the responsibility and adds to the effi- ciency of the staff. There is a tendency in many offices to throw the whole burden of balancing on the shoulders of the cash-book clerk. This is palpably unfair, as much of his time is taken up in looking for the errors of others. Every clerk should be made responsible for the correctness of liis own figures, and should not leave the office without the per- mission of the accountant until the cash book is balanced. BRANCH BOOKS AND RECORDS 1A8 In u well-systematized office where the "block" or hatih" method' is used, this works little or no hardship on anyone, and certainly adds to the efficiency and ac- (iiraiy of the staff. In some offices over thirty per cent 111" the time is occupied in looking for errors. Debit and credit entries for the cash book, other than tilt' totals referred to above, are represented by vouchers giving necessary particulars, signed by the manager, aiiountant, or other authorized officer, and it should be an imperative rule that any slip, which does not contain surtieient particulars or which lacks the necessary signa- ture, should be refused by the cash-book clerk and lelerred back to the teller for completion. In order to laeilitate the sorting and checking of these vouchers, distinctive colored paper or printing should be used; for instance, yellow debit slips and white credit slips. 1 1 should be constantly borne in mind that as the cash l)()()k and its supplementary books are recognized in a court of law as the books of original entry, faulty or meagre particulars might cause serious trouble. Ver- bal explanation, even if available, would not be admitted. Kxaniine a bank cash book of twenty or thirty years ago: tJK re could be no better object lesson of what a cash book sliduld be. Copper-plate writing and ample particulars are eharacteristic. r.n. Writing up the cash boofc.— Many labor-saving and ingenious rulings are to be found among the books of hanks, and improvements are constantly being devised and adopted. The most essential book, however, the cash Ixiok. remains practically unchanged, and is simply an ordinary commercial cash book with two or tliree money coliinins, a space for date and particulars, and with no l)rinte(l headings. The columnar cash book is not 'Sw Chapter XI. _ _ 7/ 154 BANKING PRACTICE 1 adapted tu bank work, and it has never found favor, The form in general use, even in large offices, is shown! in Figure 0. As a rule it is found convenient to sort out the differ- ent vouchers into debits and credits, and arrange andj enter them in the order that the accounts appear in tlit general ledger, the credit vouchers being entered on the | left or debit side of the cash book, and debit vouchers on the right or credit side, the headings of the various ac- counts on each side being in line with each other. The headings are generally raised during the day, spaced according to probable requirements, and the| vouchers entered as they accumulate, leaving the totals of the supplementary books as the final entries. Where there is only one amount for the heading it is entered | in the outer or right-hand column, and where there are several amounts they are entered in the left or inner col- innn and the total subsequently extended into the outer. It will be found advantageous to strike a balance before extending the sub-totals, that is. by adding up the four cohunns in pencil as, in case of error or omission, no extension will have to be altered. The practice of writing up the cash book and guessing at the required space before all the entries are on hand, naturally creates many blank spaces, and is a departure from the rules of formal bookkeeping which requires that every line should be written on in seijuence. Another in- formality found in large offices is the use of different cash books on alternate days. This destroys the chronological sequence of the entries. There is probably no serious ob- jection to either custom, but the advantage gained is more apparent than real, and the practice can be easily avoided by a slight adjustment of method. The alter- nate cash book-is unnecessary except in very large offices; BRANCH BOOKS AND RECORDS 150 (.Iherwise it means that the cash book is overloaded with accounts and entries which should be dealt with through supplementary books. 135. Sherbrooke cash book. — A good form of cash book is shown in Figure 10. The headings require to be writ- ten only once, the credit entries with particulars being entered on the left and the debit entries on the right. Three fine hair lines divide the particular column, the center line serving as a division between the debit and the credit vouchers, while the outer lines can be used as writing guides, thus adding to the uniformity and com- pactness of the entries. The procedure of entering and balancing is the same as in Figure 9. 136. Supplementary cash book. — In this book are en- tered all the deposit slips, checks, and other vouchers |)crtaining to the ordinary deposit and savings bank ledgers. A page of the form in general use is shown in Figure 11. The ruling is simple, requiring no printed headings, and consists of columns for folio, names of customers and amount of vouchers — two sets of col- umns to a page. Two pages will easily contain a day's entries for a small branch, the first or left-ha!id column being used for deposits and the remaining three for checks, the latter being much more numerous. The sav- ings deposits and checks, l)eing comparatively few in number, are entered at the end of the day under their own headings at the foot of the ordinary checks and de- posits respectively, though in some small branches they are entered in the general cash book. In offices where it is found necessary to split up the deposit ledger into two or more alphabetical divisions, Ji special "supplementary" is devoted to each division including the savings bank ledger. It is not necessary to open up an account in the general ledger for each di- MICROCOPY R"<:oiUTION TEST CHART (ANSI and ISO TEST CHART No 2| 2.8 I.I 1^ 2.5 2.2 2.0 1.8 ^ APPLIED IIVMGE '653 Cast Map" Street Rochester. Ne« fork 14609 USA ;7I6) 482 -OJOO-r>,one (?t6) 288- 5989 -Fax ?a 8 ^ Cfl Z k u • Particulars 1^ £ 156 BRANCH BOOKS AND RECORDS 157 vision of the deposit ledgers. The total from the sev- eral divisions should be combined in the detailed column of the gcioral cash book and only the total extended and posted in the general ledger to ordinary deposits. The individual ledger-keepers can easily keep a controlling balance in the back of their own ledgers, and the com- bined balances, so obtained, will agree with the amount in the general ledger at any time. Some banks, how- ever, prefer to keep a separate account in the general ledger for each division of the deposit ledgers. If the savings ledger contains a large number of ac- counts, it will be found of great advantage to split it up into several sections or blocks of accounts, as this greatly facilitates the location of errors when balancing. A spe- cial form of supplementary cash book should be used with a money column for each block of accounts. In the cas( of a current account which has an unusual number of checks at a certain period of the month or year — for instance, pay roll or dividend checks — it is per- missible to detail a day's checks once, either in the supple- mentary cash book or ledger, and enter the total only in the other book with a reference. In the larger offices of some of the banks, where the volume of checks is unusually heavy, a loose-leaf form of supplementary cash book is used in connection with the adding machine, the names being typewritten in after- wards. Where this form is adopted, care should be taken to see that the sheets are consecutively numbered and filed, and that each sheet is signed by the two checking officers. 137. Discount register. — In this book, as its name im- plies, are entered all the notes and bills discounted by a branch. The book is ruled so as to provide space for a full description of every item, and the notes are entered £3 J T u \4 u en i ^ ^ »4 •t. X 1 7' ' sS > T 1 £a .3- £ i-J2 = 11 IS n 165 iPI^Vt 160 BANKING PRACTICE siK)iisible for the correctness of the entries and the due advice of the drafts. Two or more columns can be used in this i-egister if necessary. Settlement checks, for in- stance, or money orders, could be given a special column, if desired. 142. Check lists.— AW debits between branches, in- cluding checks, drafts and money orders paid, and the like, are listed on a special form called a check list, and debited in one total to branch clearings account and the list forwarded direct. The receiving branch gives credit on the branch clearings statement immediately on receipt. Even if an item has to be returned or there is an error in the addition of a list, the amount as shown must be credited exactly, and the difference adjusted on "At Credit" advice or a return check list, as the case may be. Check lists are of different forms and sizes, but are in- variably in duplicate, the carbon copy being retained as a record. In the larger branches the lists are on loose sheets of one, two, or three lists each, for use with the typewriter or adding machine, the carbon copies being filed in a binder for reference. Figure 19 is a common form. Many banks follow the American custom of omitting the column for the maker's name. This makes a more compact form, and as many check signatures are unread- able not much is lost to the record. In case of loss in transit the maker's name can be obtained from the cus- tomer. In the smaller branches the lists are in bound form, generally two large and four small lists to a page, Figure 20. At the end of the day all lists for other branche.«f are debited in the branch clearings statement, and only in case of loss or delay in transit will the copies be referred to. Check lists sent to correspondents are entered and filed (UEDIT THE CANADIAN BANK All itFUiN nurknl X and Ihii.tr under Wire Nun-l'nymcnt of iteiiM $AUO or Uttle To Furni 01 D OF COMMERCE Qti:. $10 no nrotrat. over unlewt utberwUe aUted. . 1 1 Maker - ■ ■ — ■ \ Patch i Emm>rbcr Amoi-nt 1 FlOURE 19 CHECK LIST WHEX rREDITINO THESE ITEMS OIVE DATE 0. K. b»T THE CANADIAN BANK OP COMMERCE 191 WE EMCLOBE FOR CREDIT OR REMITTANCE ITEMS AS USTED BEU>W: t Figure 20 CHECK LIST 167 168 BANKING PRACTICE similarly, with the exception that they are d^'.ited to the head office in the branch clearings statement. 143. Cash items.— AW debits originating at a branch against other branches, with the exception of check lists, are debited to an account in the general ledger called "cash items" account or "short date draft" account. These debits may consist of the following: (a) Demand and sight drafts received from cus- tomers as cash, the currency of which is not likely to exceed one week ; (b) Coupons and other items requiring special ad- vice or attention ; (c) Remitted discounts as debited each day from the diary. These include bills held by corre- spondents as well as by branches. This account should be drawn off weekly and balanced -vith the general ledger. Any item outstanding an un- due length of time should be promptly inquired about or "fated," to use an office term. Figure 21 is a common form, combining a record and a letter, bound six or eight to a page, a carbon copy being retained as the record. In writing the entries, care should be taken to record full instructions as to protest, and the like. The items entered for the day can either be totaled on the carbon copy leaf or a machine list made and pasted in the book, only the total being entered in the cash book. The maturing discounts are of course not entered in this book except as part of the machine list referred to. The items as paid are marked off, and as each page is completed, the right-hand top comer can be torn off at the ruled line. In this way long out- standing items are easily watched. A rubber date stamp BRANCH BOOKS AND RECORDS 169 should be used to mark off the items as either "paid" or "returned." Originally, check lists were debited to cash items ac- count until due advice of payment was received on "At credit" advice. The best practice now is to debit the lists direct to branch clearings account. No item is more promptly responded to than a check list, and much time and postage are saved by the elimination of the advice. WHEN CREDITING OR REHITTINa FOR Q f^ THESE ITEMS DESCRIBE BY THE NO. O.V/. THE CANADIAN BANK OP COMMERCE 191. . WE ENCLOSE FOP CREDIT OR REMITTANCE ITEMS AS USTED BELOW: 1 Manager Figure 21 CASH ITEM OR SHORT DATE DRAFT ACCOUNT 144. Remittance book. — This book was originally used simply to record the remittances from other banks and the distribution of the proceeds; but it gradually developed into a general sorting-out book for the cash book, and is particularly useful in connection with the mail work. All credits for cash items account should be 170 ACCOUNT No .191.. BRANCH CLEARINGS ACCOUNT DR. CB. Date u( List Branch "At Credit" advices received Check lists sent HeadOflBce (debiU to) Total... Balance. Amount Date Branch Check lisU received "At Credit" advices sent Head Office (credits to) Total. . . Balance. Amount The balance to be carried forward from this account should be written on a LOWER line than that on which the balance from the previous day is given. I have compared the above entries with the relative At Credit slips, checked the summations, and have compared the balances shown with the figures of the General Ledger. .Aeeouniant Extreme care must be taken to avoid errors of any kind in this Return Figure 23 171 172 BANKING PRACTICE !■' P entered here and, if possible, all the entries for branch clearings account, in order to form a check on the com. pleted statement. The ruling and headings vary in dif- feient banks, but a good form is shown in Figure 22. The bulk of the entries for tliis book arrive in the morning mail. All remittances from correspondents are first entered ^ in the sundry debit column, and the credits distributed to the cash items and ledger columns, etc. The credit advice slips from the branches are then entered in the same way, and a balance struck for the morning maU the credits equalling the debit columns. The totals can then be handed to a teller for entry in his book. A ma- chine list can be pinned to the remittance checks if drawn on the same place, and only the total entered on the check list, the particulars already having been recorded. Returned cash items are also entered in this book, being credited in the cash items column and debited in the sundry column to the endorsers, only the totals being handed to the teller. This book is most useful in sorting out and blocking the work. ° At the end of the day the credit to cash items should mclude everything, and can be entered directlv into the cash book. The debits and credits for check lists can be entered as totals at the foot of their respective columns (branch clearings), as well as any other entries from the tellers for branch clearings not already included. Ihe totals thus arrived at can be entered in pencil in the cash book. If the latter balances, the branch clearing statement can then be written up and balanced, thu« reducing the risk of errors to a minimum. 143. Branch clearing statement—In a branch system there must of necessity arise each day numerous entries BRANCH B(K)KS AND RECORDS 173 between the branches themselves, and between the branches and head office. Direct accounts between branches are out of the question, separate accounts with head office cumbersome, especially when the branches are at all numerous. The most satisfactory method in use is what is known as the branch clearings system. This is a simple and ingenious system which makes the head office the clearing nouse for all inter-branch transac- tions. The medium is a statement called the branch clearings statement which is sent to the head office daily by each branch, and on which are entered all transac- tions with the other branches and with the head office. (See Figure 23.) So far as possible, the entries passing through branch clearings account consist of totals only. No particulars are necessary exCept the name of the branch credited or debited. Check lists originate as debits and are responded to by credits. "At credit" advice slips originate as credits and are responded to by debits. Head office entries, both debit and credit, originate at the branches. All entries for the statement should be systematically arranged both as to classification and the order of the branches. At the end of the day the branch clearings statement is added and the totals, debit, and credit en- tered in the cash book. The statement is then balanced with the general ledger by the addition of the morning balance, carefully checked, and forwarded to head office the following day. No change is permissible in the en- tries. They must be credited or debited to the statement exactly as received. Errors in check lists or advices must be corrected by the creation of a separate entry. It is imperative that absolute accuracy be assured at all times, and all statements must be carefully checked 174 BAxVKING PRACTICE ■ill I i ■'? both as to entries and summations. The slightest error may necessitate a tremendous amount of work in the head office in locating the difference. Perfunctory checkmg ,s therefore inexcusable and should be severely penalized. A delay of a day in forwarding the state'- ment allows time for checking, and has the further con- hrmation of a balanced cash book. 146. At credit adiices.-With the exception of check lis s, no branch debits another branch in this statement without first receiving an advice on an "At credit" slip (See Figure 24.) ^' AH other items collected by one branch for another during a day are entered on an "At credit" slip, the total of which IS credited on the branch clearings state- ment against the name of the branch interested, and the advice IS then mailed direct to the latter, a carbon copy being retamed for record. Immediately on receipt of the advice the total amount is debited in branch clearings agamst the name of the advising branch, and the items credited to their several destinations. The credit entry is thus offset and ticked off in due course at head office. Some offices will, of course, require the use of a much larger advice slip than the form shown. Two columns will be noticed in the advice. The first column IS used for debits already created at the credited branch, which await the relative credits in ''Cash items account." The second column is used to advise all other credits such as collections, deposits, collaterals, trade biUs paid out ot date, and other similar items. Cash items consist principally of sight items and ma- tured trade bills, and these, on the receipt of the advice, are marked off as paid, and the first column of the ad- vice credited to the account as a total. am lu 3 a O fc.'S 1 "S f S o o 9i S> a 3- a-2. ? s ee. S U Ml Si 5 IS-O S-S 1 175 176 BANKING PRACTICE 147. Head office entries,— Head office entries, both debit and credit, originate with the branches in everj- case. The entries can be made either in red ink at the foot of the branch clearings statement, or else entered on a special form in detail, and only the totals entered into the statement. Figure 25 is comprehensive and allows for an analysis of the contents of all money par- cels debited. All debits and credits on correspondents originating at the branches, are passed through head office account. Lists of dividend warrants, profit and loss entries, expense checks and other head office matters are all entered here. In case of a general credit to head office being required from all the branches, say, for pension or guarantee fund, it is better for head office to make out the debits to the different branches and obtain credit in one amount through the main branch, which will distribute these debits to the various branches in its check lists. This method not only obviates any mistakes by the branches in making a credit, but very much simplifies head office bookkeeping. 148. Business with other banks. — Transactions be- tween Canadian banks are generally effected through the daily clearing, and very seldom through the medium of an account. Foreign correspondents generally carry a deposit account at one of the large offices to which any collections made for them by any of the branches are credited or drafts drawn debited. :Most accounts tcith correspondents, however, are more conveniently carried at the head office; all debits and credits originating with the branches being advised through the branch clearings account. Daily statements from the correspondents give the responding entries, and the accounts are kept in constant adjustment. Not only does this concentra- mWW*' C o ■< a 1 ^ 1 < n b << U e 1 1^, u o >*. D y. gen S Q pa <5 O a u I n u 'X! e B -5 Ten .a a I •c a H I en ■| C-VIII— 12 177 178 BANKING PRACTICE f!- •I ^1 tion in head office simplify the bookkeeping, but, as the balances with correspondents frequently form an im- liortant part of a bank's reserve, it enables the head office to control the balances accordingly. 149. Teller's records.~The teller's cash book or blot- ter is shown in Figure 26. It consists of a skeleton ruling with no printed headings, these being written in daily by the teller according to his requirements. Were the headings printed it would require a specially printed book for each class of teller, and even then it might not be suitably spaced for local requirements. A teller should arrange his entries, debit, and credit to conform with the general system of the office. Checks should be sorted out and entered according to the divi- sions of the ledger, thus balancing with the various sup- plementaries. If the checks are very numerous, separate sheets, suitably ruled, can be used; these can be entered on an adding machine or by an assistant. In large branches where cash items and checks on out- side points are numerous, the form given in Figure 27 can be used with advantage. Each item shows its ex- change, and the totals only are entered on the blotter. At the end of the day the sheets from the various tellers are combinet" by the cash item clerk for balancing pur- poses, errors thus being easily located. A teller's book is in reality a skeleton cash book, and the entries should be so arranged that the books of the various departments should balance with the combined entries of the tellers. Figure 28 is used at the end of the day as a balance book and record of cash in hand ; it is self-explanatory. All parcels of money received are acknowledged, and entered in a special book. ( See Fig. 29. ) If the advice comes in first it should be at once entered in this book, !r^ I r. X 'A Hi s ■I tS H ^ Difi M 4 I I I Si I I 5 S 179 S: BRANCH BOOKS AND RECORDS 181 and the parcel inquired for if necessary. Money parcels parcels. Hoth sent and received parcels should be counted by two mtii in each other's presence and, in the case of tlie loiiner, it is necessary to have the parcel in the uninter- iiil)te(l custody of two men from the time it is counted and sealed until it is delivered to the express company or post office. The relative advices and acknowledgments should be carefully watched and any delay immediately inquired into. 130. General ledger.— The general ledger, next to the cash book, is the most important book in a branch; ir. fact it is equally important, though in a different sense.' The cash book is the book of ^ '-inal entry, and contains a clironological record of all tl . transactions of a branch. The general ledger contains the summary or analysis of these transactions under the various headings, while its subsidiary books, the deposit and liability ledgers, sum- marize the amount due to or from individuals re- spectively The general ledger is posted every day troni the cash book, and contains all accounts necessary to show the position of a branch, with regard to the busi- ness done under the various classifications called for by the government statement. As a matter of fact, how- ever, the accounts kept in the average branch ledger are not very numerous and consist broadly of: Assets — cash, loans; Liabilities — liabilities to the public; Office Accounts— profit and loss, branch clear- ings, etc. The profit and loss and branch clearings, accounts are internal accounts, and may be either debit or credit. (d U u 1 s3 1 1 When Received a s o From Whom Received d 2 2-T3 s « s £8,; II fc,=a< ja B Sd s^-S ..Big M en U ■s >> 3 ea o JS c^ s s 1 189 BRANCH BOOKS AND RECORDS 183 The latter is the adjusting account of the branch with the bank as a whole, and varies approximately with the difference between its loans and deposits, as every branch either supplies funds to the head office or the reverse. Loans are generally carried under two headings, loans and trade bills, though in a large city office ♦:hey are fre- (juently sub-divided into half a dozen accounts. This is merely a matter of convenience, however. In the same May the liabilities are divided into ordinar) and interest- bearing deposits, etc. The form most generally used is given in Figure 31. It is advisable to have fifty or more pages in a book ruled with single columns instead of double. The former ruling affords a very wide particu- lar column for accounts calling for full details, or the space can be ruled by hand for a special analysis of an account. In some offices a form of the Boston ledger commonly found in the United States (Figure 32) is used with advantage, and also an adaptation as de- scribed in the next section. 15 V Cash book ledger. — A combined form of cash book and general ledger is shown in Figure 33. This form permits the whole of the cash book entries for one day to be entered on a page and, at the same time, dis- I)enses with the necessity of posting the general ledger, as the relative cash book totals have only to be added to or deducted from the general ledger balances of tlie previous day and extended into the next ledger columns. The first two columns on the page shown in Figure 33 represent the debit and credit balances, respectively, of tile general ledger at the close of business on the previ- ous day. The next column gives the printed names of all tbe accounts in the ledger. To the right are the debit and credit columns of the cash book in which are entered a St n a ou u 3 ■•£ P4 00 6 ill II I 184 I < s; o H CD o 185 :: ' -1 f ^ Sherhrooke, Que., 190 GENERAL LEDGER Ur Balances Cb. Balances Cash Book, Bank Premisea Bank Furniture Real Estate (other than Bank premises) Mortgages on Real Estate 6. 7. 8. 9. 10. Cash in Treasury " " hands of Tellers Call on Loans on Stocks and Bonds Nqtes Discounted Current 11. Bills 12. Produce Loans 13. Notes and Bills Overdue Jl ou " ^' " P"* Due 15. Short Date Draft Account 16. 17. 18. Canadian Bonk of Commerce 19. National Park Bank, N. Y. National Exchange Bank, Boston First National Bank, Portland N. Y. State National Bank, Albany 26. First National Bank, N. Y. 28. Com Exchange Bank, N. Y. 29. Drafts Issued on London 30. Bank of Montreal, Quebec CASH BOOK Credits Debits 31. Cash Items 32. Head Office 33. Branch Clearings 34. Remittance Account •So. 3C. Discount and Interest 37. Inland Exchange 38. Foreign Exchange 39. Expense Account 40. Salaries 41. Deposits on Demand 42. 43. Deposits after Notice 44. 45. Draft Account 46. Dominion Government 47. " " 48. 49. Provincial Government 50. 51. 52. 53. 54. ,55. 186 Supply Draft FlOUBE Si BANK Sherbrooke, Que., 190 DETAILED ENTRIES MEMORANDA Credith Debits lat Teller 2nd " 3rd •• 4th " Dnfu - *^ DiMounti Inland Remittaneei Excbanob r DlSCOUN T AND Interest DOMINIO N Government — Corn Ex CHANQE Bank National Exchahob Bank N. Y, State National Bank t - Cash Statement 1st Teller 2nd •• 3rd •' 4th *• Total Cam Book Leikibk. 187 FiQCRk: 33 (continued) 188 BANKING PRACTICE i i ; the totals from the supplementary hooks and the sub- totals of the various accounts detailed in the halance of the rulings. \Vhen the cash hook is halanced the ledger is posted and ready for extension. The ruling of the rest of the page is similar in form to that shown in Figure 10, hut with single columns in- stead of douhle (dehit, particulars, credit). These sul)- columns are used for detailed entries, and there is space for the equivalent of one or more pages of Figure 10. When the accounts in the suh-colunms have daily en- tries the headings can he printed. There are comparatively few headings to write in this form of cash hook, as they are all i)rinted, and the writ- ing up need not he started until late in the afternoon. The totals from the books can he entered direct into the main columns, and the vouchers and sundry matters detailed under their respective headings in the sub-col- umns. ^Vhen the entries are complete all the columns should be added in pencil, a balance struck, and, if cor- rect, the various detailed accounts extended. The totals are entered in the main columns, debit and credit, re- spectively, the final addition of these columns completing the work of the day. The extension of the ledger balances calls for no ex- planation. In order to facilitate the carrying of an ex- tension over a page, a sharp rule is used in the printing, which makes a fine incision in the paper to the right of the ledger columns, and enables them to be neatly folded back on the previous page. The advantages of this form of cash book may be briefly stated as follows: 1. It presents at a glance the whole of a day's work on one page, which facilitates checking and renders the supervision of the manager more comprehensive. BRANCH I!()OKS AND RECORDS 189 'p 'r 2. It economizes labor and enables the services of the cash book clerk to be utilized in other directions, and also, owing to the printed headings, minimizes the danger of omissions, even by a new clerk. 3. By eliminating the ledger posting it saves, dally, twenty to thirty minutes, or more, of a senior offi- cer's time. i. It is capable of expansion or contraction (horizontal or vertical), to meet the requirements of any office, although a book 19 inches by IH inches in size should be ample for the entries of a very large office. The general ledger is balanced daily ; the fluctuations in the balances can be closely watched and the rea- sons promptly located. Those Avho prefer to continue the ledger as a sep- arate book can dispense with the two ledger balance colunms, and still have a compact and labor-saving cash book. 1.52. Current deposit ledger. — The ordinary or cur- rent deposit ledger is a very active and important book in a bank, and one which calls for both accuracy and (l('sj)atch on the part of the clerk in charge, as errors can easily be made, involving the bank in serious loss. The deposit ledger is invariably a loose-leaf book and ruled as shown in Figure 3-i. This form is invariably used I)y all the banks. The so-called Boston ledger has been tried several times, but was not found practicable in C aiiada, owing perhaps to the method of marking or aeeepting checks by a direct debit to the account. The aeeounts are arranged alphabetically, and are therefore self -indexing, but an index is usually kept on the tagged slieet dividing the alphabet. In small offices there is usually only one current ledger «fi HllANCH BOOKS AND RECORDS 101 used: A-Z. As work increases and becomes too much for one ledger-keeper, a second ledger can be opened divided A-K and L-Z. For three ledgers the divisions generally run A-G: H-O: and P-Z, and for four the divisions are A-C: D-K: L-R: and S-Z. As the ledger is loose-leafed there is no accumula- tion of dead leaves, but the general regulations regarding loose-leaf ledgers given in Section 181 should be closely- observed. There are in every ledger a number of casual and petty accounts, transactions in which are infrequent. The best disposition to make of this class of account is to carry them in the front of each alphabetical division di- rectly behind the index page and to give each account one column on the page. As the accounts are closed off new accounts can be opened immediately under the closed accounts. In this way no space is wasted, and the only balance in each column is the last. Some banks pre- fer to carry their petty and inactive accounts in a small or petty ledger, the two ledgers, of course, being com- bined for balancing purposes. This is of advantage, es- l)eeially if there are a large number of these accounts. The posting is invariably made direct from the orig- inal deposit slips and vouchers, and called back or checked from the supplementary cash book. The bal- ances should be kept constantly extended, and checked from time to time by the additions of the debit and credit columns. 153. Savings bank ledger. — This book is invariably in loose-leaf form, ruled as in Figure 35, in size generally aJMiut 8" X 11". In a small branch one ledger suffices as a rule, but in the larger offices half a dozen or more are required. The accounts, though very numerous, are small in amount, and a leaf is used for each account. : I 10^ BANKING PRACTICE m The signature of the depositor is generally taken o^i the ledger sheet for eonvenience of referenec, as well as on a signature card. The rules given in Section 131 should be carefully foj- lowed. The manager must control the sheets and sign all that are inserted in the ledger. The blank pass- books, which are simi)ly small copies of the ledger sheet, must also be kept in the custody of the manager, and given out in, say, dozen lots, to be accounted for as used. It is advisable that no name shall appear on the pass- book; just the account number. The accounts are nrranged sometimes alphabetically and sometimes numerically. Both methods have their adherents. In either case they are indexed on the tagged divisions or, in some cases, in a separate book. Where the accounts are very numerous the ledgers are balanced in blocks of one or two ledgers each, and in this way errors are easily located. A starting point is taken at some balancing period, say, for three ledgers, and a memorandum taken at the back of each ledger of its balitnce. A supplementary cash book, with three credit and three debit columns, is used, and the vouchers sorted and entered accordingly. The total difference between the first columns at any time added or deducted, as the case may be, from the balance at the back of the first ledger, should give the balance of the first ledger to date, and so with the second and third ledgers. Finally, the combined balances of the three ledgers equal the con- trolling balance in the general ledger. 154. Liahility ledger. — This book bears the same re- lation to a bank's advances as the deposit ledger does to the deposits. The latter shows how much the bank owes each customer, and the former how much each customer owes the bank. The liability ledger never shows an ac- MUAMII H(H)KS AM) UKCOUDS VXi ((Hint ill cri'dit •md the (k'[>osil ledger should never show all aceoiiiit at debit. 'riiere are many different kinds of liability ledgers in use. some very elaborate. The simpler forms are the more practical, the main object being to see at a glance liow much of each kind of paper a customer has under (lisiount, the names of security against each note, and till- total amount of the advances. A simple form is given in Figure 86. This provides j)r()gressive balances for loans and trade bills, and space for particulars of securities, other names, etc. The total of the loan and trade bills at any time shows the amount of the customer's total direct liability to the bank. Fre- quently, however, a customer is an obligant either as maker or endorser on a note discounted for another cus- tomer, and it is important for the bank to know how much of such indirect liability is outstanding. This class of paper can be indicated by an entry in red ink, but is omitted of course from the balance, as it has been posted once to the account of the customer discounting it. In this way a note with half a dozen endorsers can be re- corded against each account in red ink without affecting the ledger balance. AN'here accounts involve the discounting of a large amount of trade paper, small loose-leaf books are used, known as "Blue Books" (see Figure 87), one for each account, and by this means track is kept of the total amount due by each borrower's customers. When a blue book is used, the totals only, debit or credit, are entered in the ledger, no details being required. The resulting balance in the account, however, should agree with the total of the balances in the blue book. The total amount of trade bills in an account is not of great importance, provided all the paper represents goods sold and deliv- C_VIII_13 m -52 I = i J < - Q 1 ^ j ^3 3 ' ■ ^ a :^ u W ^ d H l>^ -_ 2 1 ^ « < k ^^ J - k a 3 k 2 ^ u ^ a a JS «i* 6 f_, »'. u u Q z /^ a e V s . r^ PS 194 miANCH BOOKS AM) HIXORDS 105 vin\ \n resfmiisible purchasers. The total amount on any niu mmie, however, is vitally im|)f»rtant, and should not Im allowed without special consideration to exceed 3 |K I- cent of the total amount of trad* bills. !.>.>. Collection register.— The form shown in Figure ;W is nn eeonomieul ruling, as it oidy occupies one page and gives .11 required particulars. If necessary two lines can he used for an item which requires a fuller de- scription than ordinary. The entry of the name of the tiijikcr or drawee is unnecessary, for, in the case of a note nr accepted draft, it is entered at once in the collection n tix nimiber can be used to distinguish one account 1 11)111 another. (Figure 78.) Collection diaries are very similar in form to those used lor bills for discount, and need no special descrip- tion. 1)0. Collateral register. — The collateral register is «(!ieially a loose-leaf book with an alphabetical index, nilcd as in Figure 39. A page is given to each account, nid the balance should always show the amount of notes lield as collateral. The collection diary is used to diarize niilateral notes, the entries being made in red ink to dis- tintTuish them from ordinary collections. Where a large number of collaterals are received from customers thev i f-f! i ^ ^ f ■ i V. O fa Q a & a •S-2 0.2 X •= i X 3 3 s a ■g _> I! B! Day of Month In- struc- tion a 3 o S B C I S I .1 196 BRANCH IWK)KS AND RECORDS 19: can be listed on separate slieets and the totals only en- tered in the register. ( Figure 78. ) 1.57. Letters received register. — Ail letters received I»y a branch containing check lists or other cash enclo- int'S should be numbered and entered in detail in a rei(ister ruled as in Figure 40. i^ill other letters contain- ing; enclosures, other than ca h, should also be numbered, but need only be entered in ulk in the register: for in- stance, Nos. 642 to 664. This is done by the manager or accountant immediately on the opening of the mail and before it is distributed and initialed by the various (lt'])artments. The numbered letters are used the next morning by the checking officer to see that every enclo- sure has been properly dealt with. I f a special column is given to branch check lists, the total only need be given the teller to balance the lists w ith. and the branch statements can be entered up from tilt registfir at the end of the day. The letters despatched register is useful as a record of liostage expenditure. Some banks enter the address and l>ostage of every letter, but the same purpose is attained with less work by entering only the special letters in de- tail and bulking the routine correspondence according to postage, so many letters at two cents, etc. Before taking the mail to the post office the letters should be counted and checked, as to postage, by another officer, who will initial the book to that effect. No special ruling is required; an ordinary pass-book will serve the pur- pose. 158, General statement books. — In cornection with the monthly return to the government each branch for- wards to its head office a complete financial statement of its affairs at the close of business on the last day of the month. This is obtained from the general ledger, and a 198 RANKINC; I'KACI'Ki-: 1 t copy of the .statement is made on a book ealled the gener- al statement book. The general ledger is also balanced weekly, say, on the 8th, 15th and 23rd of each month, and a statement sent to the head office either in exact form or in even thousands, the latter method being suffi- ciently close for all general purposes. 159. Past due hills register.— 'Mhe past due bills regis- ter is a book suitably ruled for recording past due bills. In the average branch, however, there is hardly a'ly necessity for a separate book, and full particulars should be kept in the general ledger. Some banks divide their past due bills into tivo classes, past due bills represent- ing those items whose settlement is temporarily de- layed, and overdue bills, being those items which for one cause or another are likely to remain overdue for oome time. IGO. Produce hook.— The produce book or warehouse receipt register is used to keep track of all loans made against grain and other produce under Section 88 of the Bank Act. It is nded with aiiiple space for particulars, and provides progessive balance colunms for quantity and value of the securities and the amount of the ad- vances. A column is also given for insurance. 161. Palance hook,— The balance book is used to record the trial balances and adjustments of the different accounts in the office. The balances should be taken off on loose leaves and tiled in a binder, either continuously in chronological order, or consecutively under tagged divisions, one for each class of balance. The divisions would be made for the various ledger balances, draft ac- count, list of loan and trade bills, cash items account, etc. 162. Overdraft register.— li is very important that the manager should be fully informed of the amount and nature of the overdrawn accounts in his office. Figure t -3 -3 'f. > O -,^ » Si u < \ 1 V. 1 a. < 3 ■< -< 3 •< •< *>* S 1 •< V s s y. i 199 aoo BANKINCJ PUACTICi: :*! 4 1 is used for this purpose. This re^nster sh«)iihl he writ- ten up eaeh morning and phiced on tlie manager's drsk. Utti. Discrcpancicff book: — Canadian banks are y strict in their rules reganhng the correction of errors iii the l)()()ks, any erasures heing ahsohitely forhi(hlen. Errors discovered immeihately l)y a clerk should be neatly cancelled in ink and the correct figures entered above. All other corrections must l)e made by a revers- ing entry through the cash book; full particulars must l)e entered in the discrepancy book (see Figure 42) and comjjared and initialed by the manager or accountant. 104. Pro forma .stationcri/ book.— Th\s book, if prop- erly arranged and systematically kept up to date, is one of the most useful books in an office. It should contain specimen forms of all the authorized stationery used by the bank. Pro forma samples of all routine and legal forms should Ije given, so that in making out a head office return or filling out a guarantee form the best arrange- ment and wording can be found by reference to the sta- tionery book. This book, therefore, not only gives the staff the benefit of being able to see all the forms in use in the bank, but also enables them to study the proper methods of filling them in. 165. Trcasiiri/ cash.— The surplus cash of the branch is kept in a separate compartment of the safe, called the treasury, and under the joint control of the manager and teller. The deposits and withdrawals are kept track of in the treasury book, ruled as in Figure 43, which is self- explanatory. 166. Special registers.— It is only in a very large branch that there is a sufficient number of special entries to warrant a separate book or register for each class of document, and in the ordinary branch it will be found of advantage to have a loose-leaf book with tagged divi- a / X a J o s 72 r. y. < H OS p !; ^ Ui . . e — III 201 fr T R E A S L It V IN •HI oi r Kiirwanl IfalaiHM' Maluiur llalaii.i' Halanco Haluiir<> Hulancr Balani'c iiulancr lialaiii'c Balanic Halitnrc Baluni'i' Balance Bnlanre Balanc<' Bala lire BalaiiK Balaiiri BalaiMM n Vnri H ii( i Ml UisK Forward $10 S20 f.'iO $1(HI Tola I (■ B <.tC I.KIiAl, Bank Other 202 Figure 43 ItOOK 1* P K 1- I K GnM KritHli Gold American Silver Copper 203 Total IN' or OUT Teller's Initials , Total Treasury Initials FlGlRK 43 (conlimicil) ■ m- 1! 3 i ,■• 204 BANKING PHACTICi: sions. Sheets, blank with the cxeeplion of a date aii.l munher column, should l)e used with this book, and ruled by the aceuiuitant aceording to requirements. The following headings or di^isions for the several puri)oses are suggested, the first eolinnns being the num- ber and date received, which are common to all rulings: Poiter of Attorney: ^erurilien Lodged ax Collateral: Constifuent Partii'uliirs tif Sfciirity or Debl Attorney Particulars, etr. Amount of Debt Set' u red Amount of ( 'ollaterul Depositor and Part iculars Eacrom: in Brief (taking several lines if necessary) Resdutionn of Incorporated Co.' a, Municipalitiea, etc. Securitiea Depoaited for Sc^e-keeping From Whom Rec'd N'ame of Company Address Record of Payment Surrender Xame of Officer. etc. Description of Package Lodged Date of Surrender Total Market \aluf of Collatefal Receipt, etc. Particulars of Resolution Customer's Receipt ' i .11^ CHAPTER V DEPOSIT BUSINESS l<>7. New accounts. — As a rule no new account is opined in a hank except under the authority of the man- aycr or accountant, expressed by initials on the deposit sli|). In other words, the privilege of a checking account should be extended only to persons who are known to be (if o()(h1 character and reputation, and therefore no ac- count should be opened with a stranger until he has been satisfactorily identified. To do otherwise is to leave an (ipciniig for fraud. Ledger-keepers are usually held Kjiiaily responsible with the tellers for any deviation from the regulations laid down in connection with the 01)111 ing of new accounts, especially with strangers. KiS. Openins; nccounts. — When an account is opened a s|)ecimen signature of the depositor duly witnessed siionld be obtained and placed on file for ready refer- HKc: the card system is the best. In the case of a firm 01 company a specimen signature of each partner, or of the properly constituted signing officers, respectively, siiould be taken. If a power of attorney is filed, a speci- imn of the attorney's signature as such should be placed o!i tile. Every customer opening an accoimt in the current ac- count ledger should be provided with a pass-book and a liook of checks. This does not apply, however, to out- of-town customers, copies of whose accounts are usually Hilt monthly on current account sheets (Figure 44). «05 e06 DEPOSIT BUSINESS f^l Cure siiould l)e taken in handing out eheck books and other supplies to customers. The nature and importance ot an account should govern the size of the pass-book and the check book supplied. KJO. Particulam to be recorded in ledg'. — The full name, designation or occupation, and address of each customer is written at the head of every page of the ac- count in the ledger. If the customer is a farmer, his lot, (oriccssion and township as well as his post office address should be recorded. A concise description of the per- sonal appearance or other mark of identification of all ciistoiiiers who cannot write their names should be noted in file ledger or on the signature card. Special care shoui(i be taken to record correctly the names of signing officers, powers and the like of benevolent and friendly societies, lodges and other bodies of this kind. In the case of a firm, the names of the partners, and, where there is a special partnership, the date of its ex- pii. should l)e recorded in the ledger; if a trust estate, the names of the trustees and in the case of corpora- tions, etc., the names of the officials authorized to sign checks. In the case of powers of attorney or of by-laws au- thorizing officers of incorporated companies to sign for such companies lodged with the bank, the record should state the date when the power is granted, the names of the persons authorized to sign, the extent of the power and the limitations placed upon its use, if any. Special sheets are usually supplied for recording such informa- tion in order to obviate the necessity of carrying forward tlie particulars from page to page; these are inserted on the front of the account. 170. Partnership accounts. — The law does not recog- nize co-partnerships of professional men, i. e., in contra- 2U8 BANKING I'HACJ'Ki: lll!i .listmctioii to traders; tlicrdorc. the individual si^na- tiirc of each member is rc(iuisite to paper of all kinds. Otherwise, if an account is opened in the name of a firm of solicitors, architects, or other non-trading partner- ships, a written agreement shouM be taken (Figure 45) signed by each of its members, wherebv they undertake to be jointly and severaljy liable for every transaction, by check, note or draft, signed, made or endorsed, en- tered mto with the bank I)y any individual member of the co-partnership in the firm name, or by any person thev may designate to transact business with the bank on their behalf. In the latter case a differently worded form is used. 171. Conversion of partncrti/np into joint stock corn- pan?/.— The conversion of a partnership into a joint stock company entails upon a manager the immediate necessity of obtaining from them and placing on file a copy of the company's by-laws, so that all transactions may be made to conform to legal requirements; and it should never be overlooked that a partnership differs from a corporation in that the latter is absolutely re- stricted by the terms of its charter, and its ofl^cers by the authority conferred upon them by the by-laws. The same reasoning necessarily applies to new customers who are already joint stock companies. 172. Joint accounts.— Where a deposit is made to the credit of two parties jointly, the form which should be used IS as follows: "John Smith and Jane Smith, or either of them," and a declaration signed by both should be taken m every instance to the effect that the bank is authorized to pay checks on the account signed by either or both. ( See Figure 47. ) 178. Accounts rvitk married women.— In the Province of Quebec, on account of the restrictions imposed by the N()\-TRA DI .\< J I'A HTN KIIMII I P SIONATIKE BY ANV UICMUCR TO BlVn 191 To THE Manaueii THE BANK We, the undersigned, composing the fipm of do hereby acknowledge and agree that we are and wUl be jointly liable and responsible to the B\nk for all transactions entered into, or to be entered into, with the said Bank in the name of our said firm by any individual member of the same, and that the signature of the name of our firm by any member of the same to any note, bill, draft, check, receipt or other document shall be as binding on us as if such M^nature had been affixed by each of us respectively under our own hands. t -VIII— 14 Figure 45 209 210 BANKING rUACTICE law of that province on married women, it is essential that tlie fullest particulars should be obtained at the time the deposit is taken. When a married woman makes a deposit, the name of her husband, with the post office address of each (in the event of their not living to- gether) , should be given. Any other information neces- sary to identify or locate the depositor should be noted. When opeiu'ng such an account it is advisable in every Instance to obtain the husband's authorization to with- draw money (Figure 46), as without this she would be restricted to withdraw an amount not exceeding $300 in all. A separate authorization on each withdrawal would be satisfactory, but this is not always convenient. In the Province of Quebec no married woman can enter into a contract, sign or endorse a note, or bind her- self in any way for the benefit of her husband. There- fore notes signed or endorsed by married women should be refused. The law in this respect, however, is not so strict in the other provinces, but recently, by a judgment of the Su- preme Court, confirmed by the Privy Council, it was decided that a married woman's guarantee or endorse- ment for her husband is void unless she signs indepen- dently (Stuart versus Bank of Montreal). Therefore in these latter provinces if it is found ex- pedient or necessary to have a wife join in a guarantee or endorsement on her husband's behalf, care must be taken to see tiat she has had the advice of her friends, of whom her husband is not to be one, and of a lawyer other than her husband's legal adviser, with a declara- tion from the latter that slie has been so advised. 174. Waiver and authority to charge hack. — An au- thority (see Figure 48) to charge back returned bills, notes, etc., should be taken from every customer HUSBAND'S AUTHORIZATION TO OPEN BANK ACCOUNT For use in Quebec To THE Manager of THE BANK I hereby authorize my wife to open an account in her own name with the Bank; to deposit or endorse for deposit to the credit of such account, money, checks, drafts or other nego- tiable instruments; to receive deposit receipts and surrender the same; to draw cheques upon the said account and to with- draw therefrom the whole or any part of any money standing to her credit in such account, all upon such terms and conditions as may be agreed upon between my said wife and the said Bank; and generally subject to terms of Art. 181, C. C, to perform all acts of administration with regard to said account. And I hereby agree to hold the said Bank harmless in respect of all transactions between my said wife and the said Bank done or entered into in pursuance of the foregoing authorization. .I?>1 FlGlTRE 46 511 i 9 191.. To THE Manager THE BANK Dear Sir: You have a deposit account stauiing in the name of" or either of them." We authorize you to pay and charge against said account all sums evidenced by checks on your branch or other vouchers signed by or either of them, and we confirm the V( bal instructions to this effect already given to you, and all acts done by you in pursuance thereof. Yours truly. Figure 47 JOINT ArrorXT ^U The Manager THE BANK Dear Sir: In consideration of your lending money to the undersigned or discounting for ..r taking on deposit or for collection or otherwise from the undersigned bills ..f .xchange. promissory notes, checks or other securities payable at points at wln.h there is no branch of a chartered bank of Canada, you are hereby author- izi(i to forward the same for collection to any National Bank. State Bank private banker or private firm, and the undersigned hereby undertakes to keep yuu fully indemnified against any loss arising from the default or failure of any such bank, private banker or private firm to account to you for the said bills of cxdiange. promissor>- notes, checks or ether securities so forwarded or for any sum or sums collected on account thereof. The undersigned hereby waives every presentment, notice of dishonor and protest of all bills of exchange, promissory notes and checks now or here- after drawn, made or endorsed by the unders gned, and now or hereafter de- posited with or delivered to you for collection or discount or as security or utl„Twisc. The undersigned, to avc J expense, requests you not to protest siuli bills of exchange, promissory notes and checks, and agrees not to hold yoM or your agents liabe for not presenting or protesting or giving notice of dMonor of the same and to become and remain as fully liable to you upon and for said bills of exchange, promissory notes and chciks as if its present- ment, protest and notice hereby waived were duly made and given. The undersigned herebj authorizes you to debit the account of the under- Mpned with you with the amount of any bill of exchange, promissory note or ' l'<' k payable at your offir. and which may be no^v or hereafter drawn, made I or m repte,! by the undeis.gned, and with the amount of any bill of exchange proiiussory note or check which having been previously credited to the said "",'."" n' T*"u"^ ^^ "'•' ^'"''' "^P"'''' ""•* "^'^^ *" "«'•'' '••"'^K^^ "nd expenses .1^ !..■ Hank shall have property incurred in connection therewith, and the >m. . TM^ni^l agrees to repay to the Bank the amount so debited to the account ol the undersigned. The above shall bind the successors and assigns of the undersigned. I> lied at. the day of 19. FlGCRE 48 WAIVER OF PROTEST 213 m u -g to ■<«" o o !^14 H "'6 irr 216 ,ii II HANKING PHACTICE wliosf account is an active one. In every case of cliaiv. mg a customer's account with a returned or dishonored bill note or check, the ledger-keeper should immediatelv noti f y the customer by mail of the dehit. A special form '»( advicc IS usually used for this jjurpose, which is writ- ten m du])licatc, the original being mailed to the cus- tomer and a carbon copy used as a voucher to be charged to the account (Figures 49 and 50) . Dishonored bills, acceptances and the like charged to an account should not be given uj) until the customer's check has been received therefor or the account verified and the usual receipt for checks and vouchers received If there are not sufficient funds in an account to re- tu-e such items they should be held in the overdue file until provided for. 175. The ledger.— 1\ is the rule in most banks that no entries shall be made in any ledger bv any officer other than the accredited ledger-keeper. aIi entries are made from : (a) Checks, acceptances, drafts, notes, etc., of cus- tomers. (b) Deposit slips initialed by the teller. (c) Debit slips for items charged up, etc., initialed by the manager or accountant. The rules regarding loose-leaf ledgers should be care- fully followed both as regards the current account ledg- ers and savings bank ledgers.^ The ledger-keeper should watch out carefully for customers having the same or similar names, as there is alwavs the danger of a mis- take occurring between the two accounts. In such case It is advisable to ])ut a warning notation on the account, as uell as in the index, so as to attract the attention of 'See Section 131. DEPOSIT BUSINESS 217 ..ny one looking up the account. All indexing should be carefully checked. 17G. Deiiosit slips.— The usual form of deposit slip is shown in Figures 51 and 79. The deposit slip after be- iiiK checked, stamped and initialed by the teller should be lianded by him direct to the ledger-keeper. The latter slioiild see that each slip has been initialed and stamped !)>• the teller; he should then post the credit in the ledger iiiid enter the amount in the customer's pass-book, initial- ing the entry. At the same time he should enter in the pass-book all checks which have been charged to the account since the book was last presented and insert the correct balance according to the ledger. No blank lines shoiihl be left between the entries, or between the entries and additions of the debit and credit columns. The teller should not, when he has received a deposit, return the deposit slip to the customer, that he may hand it to the ledger-keeper for entrj- or for any other reason. To do so would, obviously, be dangerous. 177. 3lone?/ received after hoiirs.—Frequentlv money is received by the teller too late in the afternoon to be entered on the books on that day. In that case it is the usual rule to require the teller to enter it in his blotter for the following day and hand the deposit slip, after initialing, to the accountant, who will have it, if a cus- tomer's deposit, entered in the ledger at once. This piactice is followed in order that no deposit may remain overnight unrecorded and entirely in the hands of one nificer. 178. Customers' pass-hooks.— The teller should not make any entry in the pass-books of customers, or in any of the books of the bank other than his blotter and itahuice book. Pass-books are collected from customers at the end « ''i;, 1. i m THE CANADIAN BANK THE CANADIAN BANK OF COMMERCE OF COMMERCE CREDIT SAVINGS BANK DEPART Account No MEr For Credit of DEPOSITED BY Occupation Address OF 191 191 X 1 1 X 1 - 1 X 2 = X 2 = X 4 = X 4 = X 5 = X 5 = X 10 = X 10 = X 20 = X 20 = X 50 = X 50 = < 100 = X 100 = Silver $ Checks $: $ FlGlHE 51. DEPOSIT SLIPS 218 DKPosrr nrsiNKSs ^>ij) of each month in order to be written up and balanced on the last day of the month. The work is usually done on the evening of the last day of the month, when the entire ^tatt^ with the exception of the teller, assist with the work ill order that the pass-books nmy be ready for the cus- tdiiieis the following morning. Although the teller takes no part in writing up and balancing customers' pass- books, he may assist in comparing the checks with the entries in the books after they are balanced. The man- a^ar or accountant, provided the latter does not also act as teller or ledger-keei)er, afterward compares the bal- ances in tlie pass-books with the corresponding balances in the ledger, attesting the comparison by placing his initials opposite the balance in the ledger, and against the balance carried forward in the pasy *»«ok. (See Section 250.) 179. Customers' certification of accounts. — Each bal- anced pass-book when delivered to a customer should be accompanied by a certificate (Figure 52), stating the amount of the balance and the number of checks re- turned. The checks may be returned at the same time if the customer or his attorney is prepared to compare these with the pass-book and sign the certificate at the bank counter; otherwise the certificate should be signed and returned to the bank l)efore the checks are sur- rendered. In the case of out-of-town customers, receipts (Figure Vi) should be obtained before the checks are surrendered. It may be necessary to make exceptions in special cases, when vouchers should be carefully compared with the pass-book or copy of the customer's account by a second officer before being mailed, so that in event of a loss in transit or of a dispute with a customer, the bank may be able to prove that the vouchers were despatched. In •n ^2^20 e 00 'iii BANKING PHACTICE every ease in which checks are sent out l>efore the re- ceipt is obtained they should Iw sent by registered mull. iVI'ter being signed the certificates should be checked with the ledger by the manager or accountant, who should j)lace his initials and the number of the vouchers op- l>osite each balance in the ledger. If the accountant acts as teller or ledger-keeper this duty should l)e performed by the manager oidy. The certificates should be filed away in monthly pack- ages in such order as to be easily accessible when re- quired. As this certificate is equivalent to an adjustment of the account between the bank and its customer, it is Aery important that as few balances as possible remain uncertified. 180. Guarding against fraud.— Fraud has been per- petrated upon employers by confidential clerks making false entries in a bank pass-book, or by keeping a spu- rious pass-book for the eye of their employers. It is fully within the range of an observant officer's power to de- tect embezzlement attempted by such methods for the safeguarding of the bank and the protection of its clients. If an account, operated under a power of attorney, or by one particular employee, is frequently overdrawn, or if there occurs anything of a questionable nature in the working of the account, the circumstances should be dis- creetly brought to the notice of the principal by the mana^^er. As the teller comes more into contact with the public than any other oflficer he has exceptional opportunities for obser\'ing things which may be of great use to the manager. He should train himself to observe every cir- cumstance connected with each transaction, and espe- cially with any unusual occurrence. Any attempt at "kiting" by means of checks should be reported to the DEPOSIT BUSINESS as manager at once, who will deal with it as he may con- sider advisable. This applies also to accommodation checks, and, indeed, anything unusual or irregidar. ISI. Certification of checks. — Checks are accepted by tla- Ie(l^er-keej)er only after they have l)een charged to the account on which they are drawn. Checks should not lit marked "good" by the manager or any other officer iiiilt ss previously debited to the proper account, or be iiossed "Negotiable at par" through another branch until accepted. Xo check should be charged to an account unless there are funds at credit to meet it, without the authorization of the manager signified by his initials on the check. A check which has been altered or erased in any vital part should be refused. Any blank space in the amount should be distinctly filled in or the customer's attention called to it. In accepting a check which has been care- lessly filled in the ledger-keeper should write across the i'ace of the check the amount for which he has accepted it. so that it cannot be "raised" or changed to a larger amount. Ill the case of a check, for which there are funds, being returned for some informality in the endorsement, it should be "accepted" before being sent back for correc- tion. The acceptance stamp should be closely guarded by the ledger-keeper during the day and invariably locked lip in the vault at night. \() overdraft should be allowed without the permission •if tlic manager expressed in writing at the head of the account or by his initials on the checks. Xo check should be refused for lack of funds until the balance shown in the ledger has been proved by the addition of the debit and credit columns. ^zu BANKING I'HACTICE inv ill; mi ;: t Attention is directed to the serious danorer which is in- volved in initialing checks which creo " ; .erdraft, and then handing them back to the customer instead of to the ledger-keeper for certification. 182. Cashing checks.— Tellers are generally forbidden to cash or receive on deposit unaccepted checks on any bank, or any drafts or other items unless they have betli initialed by the manager. In special cases, where the manager deems it necessary, he may give the tellers written authorization to accept from certain customers checks, drafts and items to a specified limit. This is only done, however, when the undoubted responsibility of the customers justifies this action. The possibility of being victimized by confidential clerks or other employees of the bank's customers by means of forged or raised checks should always be borne in mind. A check for an appreciably larger sum than is customary, for which cash is demanded in payment, is in itself significant and should excite suspicion. A checii drawn payable to the customer of another bank should, in the ordinary course of business, be presented through the other bank, and such a check, even if payable to bearer, presented over the counter for cash should carry suspicion on its face and suggest inquiry. It should always be borne in mind by the teller that accepted checks, bank drafts, express orders and circular letters of credit are also all liable to forgery and altera- tion ; payments made on the latter, especially to stran- gers, should be limited to a reasonable amount for travel- ing requirements. If they call for a large amount great care should be exercised. Checks payable to corporations or wholesale firms should not lye paid over the counter to an employee with- 1 to the bank by the company or firm. sane DEPOSIT BUSINESS 2!2J Checks should not be cashed for strangers until they have l)een satisfactorily identified; even then, there is not, as a rule, much profit to a bank in the transaction. Xo identification is ?afe or satisfactory excepting the attendance at the bank of a well-known and responsible l)erson, who endorses the check or other instrument in the presence of an officer of the bank. Any other osten- sible identification or endorsement may be fraudulent. A person who forges the signature to a check, or raises the amount of a draft, or steals any negotiable instru- ment, might be presumed also to forge a letter of iden- tification or an endorsement, to serve the purpose of identification. The safest course is always to give the bank the benefit of the doubt. A written identification which purports to be that of an hotel-keeper or hotel clerk is especially open to suspicion. Every check for a i. xge sum should be particularly scrutinized, and the attention of tli^ manager called to it. Customers or others who are unable to write and who sijfn by mark on checks or other documents, should be identified to the satisfaction of the teller, but in no case should the teller witness the mark, which should be at- tested by an independent witness, not an officer of the bank. 183. Method of filing checks and deposit slips. — Checks and deposit slips should be filed away by the led^rer-keeper daily. The checks of each customer should be filed separately in the order in which they are entered, for ready comparison with the ledger or pass-book. The deposit slips should be filed in alphabetical order each day and in chronological sequence. ISJ'. Savings bank department. — The rules to be ob- served with respect to the current account ledger are C-VI 11—14 ^ I ■ 1 2£6 BANKING PRACTICE I I applicable to the savings bank ledger, with the follow- ing exceptions: The manager should take charge of and keep under lock and key ali h^ank savings bank pass-books, and issue them to the ledger-keeper in unnumbered lots of one or two dozen, as he may think best, keeping a record thereof and verifying them according to the new num- bers when checking the ledger entries with the supple- mentary cash book. Should it be necessarj' to issue a new book in continuation of an old account the ledger- keeper should then and there draw the manager's or accoimtant's attention thereto. By this method it is in- tended that the manager should personally know that no deposit is received for a new account without a cor- responding credit to the ledger. The savings bank pass-book should be presented when withdrawals are desired so that the entry can be made in the book itself. Whenever it is necessary to make an exception to this rule there should be no question as to the dejwsitor's identity, and the manager should initial the check, making note of any particulars, especially the name and address of any outside party called in for iden- tification. When a savings bank account is closed the pass-book should be returned and written up in full with a heavy line ruled across the page under the last entry, and filed away by the ledger-keeper in a box provided for the purpose. All pass-books so retained should be sorted in numerical order so that they may be readily accessible. Should a customer reopen an account, however, it should be under a new number and book; the old book should never be "eissued. 185. Duplicate pass-hookft. — Where the identification of the depositor is without question, and the manager is DEPOSIT BUSINESS 227 fully satisfied that the pass-book has been lost, the bal- ance of the account should be withdrawn by check and a new account opened with a book under a new number. A incniorandum should be made on the old account in the ledpfcr, giving the circumstances of the case. 18(1. Interest on savings bank accounts. — Interest on accounts in the savings bank department is credited to the accounts every six months. The interest should be coniputed by the ledger-keeper and checked by a senior officer before adding the amount to the balance. The debit slip to discount and interest should be initialed by both officers. Savings bank accounts which become unduly active are not worth 3 per cent interest and should be trans- ferred to the ordinary deposit ledger, but only by au- thorization of the manager. As a general rule, two or thiee cheeks per month should be the limit, though com- |)etition may render inadvisable a too strict interpreta- tion of this rule. fl CHAPTER VI LOANING A BANK'S MONEY 187. Experience the only teacher. — David Hariim's definition of banking, "Loaning your money and gettin' it back," presents the gist of this chapter in a few words. A bank must naturally expect to make some losses in its business, but discrimination in making loans will re- duce these losses to a minimum. The avoidance of losses is seldom a matter of good fortune, but rather of good judgment, and the time to avoid a bad debt is when the paper is offered for discount. The ability to recognize the difference between a good loan and a poor one cannot be acquired from books or even from personal teaching; it can only be gained from experience supplemented by other necessary qualifica- tions. True, there are certain fundamental principles to observe in analyzing any account, but, outside of these, no two accounts can be judged exactly alike; con- ditions are too varied. Certain qualifications are essential to a manager in loaning money. He must be a man of pleasing address, able to meet with and draw out from men the informa- tion he desires, and above all must be able to say no without giving undue offense. He should have a fair knowledge of accounting, so as to be able to read be- tween the lines of a statement, or detect a discrepancy. He should have a good memory, supplemented by a record of all essential information obtained verbally from a customer. As a rule, it is bad policy to take notes 228 LOANING A BANK'S MONEY 239 (luring a conversation, as it is likely to restrain a cus- toiiar I'roni ifiving information freely. Credit has been defined as "A question of ability to pay coupled with an intention to pay." Both ability and iiitdition must be assured in order that the loan may be considered a safe proposition; the latter of these requi- sites is one that must be settled on the basis of past ex- || v-iice, habits of life, character, and the like. If a man liiis always paid his debts and is not living beyond his means, his intention to pay would be practically assured. i'lic ability to pay, however, is another matter and much iiKirc difficult to determine. Tlicre are therefore certain facts that a manager must know in order to determine whether or not the bank will ill- willing to extend credit to a borrower: (1) ^Intecedent and character of a borrower. ( 2 ) Nature of the business. (3) Organization. (4) Competition. { 5 ) Business methods. ((>) Outside opinion. (7) Net worth. 1(1 addition to this general information the manager should know what kind of transaction every piece of l)ai)cr discounted by him represents, and should make a practice of putting the following questions to himself: 1 . For what purpose is the bank's money to be used ? '2. Is the loan safe: would I len my own money on the security offered? *). Is it a transaction that the bank should undertake or can legally or morally become a party to? i. Will the money be used for the purpose it is osten- sibly borrowed for? 230 BANKING PRACTICE 5. Will the paper be met at maturity, and from what source ? 6. Would the endorser be able to pay the amount, if called upon to do so, without seriously impairing his means? To sum up, is the transaction a good banking prop- osition? If all these questions can be answered satisfac- torily, and are corroborated by an analysis of the bor- rower's statement, the manager is in a position to dis- count the paper if within his discretionary limits, or otherwise to recommend the loan to tlie head office for authorization. A simple rule is: never give out the bank's money without having rational or common sense reasons for knowing that it can be repaid within a reasonable time. It is the first principle of banking science that money must not be locked up in land, buildings, mines or similar non-banking ventures, or so loaned that it can only be paid out of future profits or by being transferred to another bank. 188. Causes of failure in business. — A study of the principal causes of business failures may be useful in demonstrating the relative importance of the various fac- tors of weakness. The accumulated experience of many years has been shown by Bradstreet's to prove that a large number of failures occur because of deficiencies in the traders themselves, rather than because of happen- ings beyond their immediate control. In Bradstreet's Journal for January 25, 1912, eight leading causes were grouped under the first heading, while only three were given as existing apart from the individual them- selves. These causes are as follows in the order of their importance: LOANING A BANK'S MONEY 231 A.— Due to faults of those failing: 1. Lack of capital. 2. Incompetence (irrespective of other causes). 4. Fraudulent disposition of property. 5. Inexperience (without other incompetence). 6. Neglect of business (due to doubtful habits) . 7. Unwise granting of credits. 10. Personal extravagance. 1 1 . Speculation ( outside of regular business ) . B.— .Yof due to faults of those failing: 3. Specific conditions (disaster, prolonged sick- ness, etc. ) . 8. Competition. 9. Failure of others (of apparently solvent debt- ors). In 1912, 30.3 per cent of the number and 80 per cent of the liabilities were due to the shortcomings of those who failed. Bradstreet's gives the following interesting table: PERCENTAGES OF DUMBER OF FAILURES AND LIABILITIES IN THE UNITED SFATES AND CANADA IN 1911 AND 1912 C.A88IFIED AS TO CxCSEa United States, Per Cent Canada, Per Cent Failures Due to Number Liabilities Number Liabilities 1912 1 1911 1912 1911 1912 1911 1912 i 1911 l.;i(k of capital Iiudiiipetence Spteitic condition.s. Fraud 20 7 314 :jo 2 27 10 5 10 9 10 3 . 10 4 4 1 20 22 2.0 2.0 1.9 , 2.9 13 1.3 .7 .9 .8 .7 33 5 20 8 13 8 8 8 3 10 2 6 13 4 » .9 3.4 28.3 23 5 20.7 8.9 2 2 13 2 2 4.8 4 2 12 2.7 50.3 16.3 12.8 6.7 5.1 4 3 13 10 .9 .8 .5 49.3 16 1 14 6 8 1 2.9 4.1 .9 11 11 .9 .9 45.8 22 8 8.8 10 3 3 5 3.1 1.7 .6 2 5 .5 .4 47 8 18 9 10 1 9.9 1.5 2.5 I mvise credits CcmiiK'tition Failures of others Extravagance Speculation 10 .6 1.4 3.2 31 232 RANKING PRACTICE These i)eiccj«tages afford imicli interesting and in- structive information and point deHnitely to the more serious ills of commercial life. It is at once apparent that the most dangerous factor in Canadian business life is the lack of capital, which is responsible for over 50 per cent of the business failures. The lack of liquid capital is one of the most serious diffi- culties a bank manager has to contend with, and he must ever be on the alert for its appearance. It is a condition which may arise at any time. For instance, a loan made to a customer ostensibly for the creation of liquid assets may be improperly diverted into building, real estate or other fixed assets. Lack of capital, although the ap- parent cause of these failures, is not necessarily the primary condition, but may arise or be aggravated by any of the other causes: injudicious buying, for instance, extravagance in li\ ing, or speculation, may all result in this condition, without showing as an apparent factor in the failure. Incompetence shows the next largest percentage in Canada, and combined with inexperience gives a total of 21.4 per cent in number and 26.3 p^r cent in liabilities. These particular causes assert themselves in various Mays: injudicious buying, lack of organization, and other unw'se business transactions. It musi be borne in mind that a man may be most successful in operat- ing a small business, but may j)rove quite unfit to handle a larger one, on account of lack of business education. The other causes are self-evident reasons for non- success in business and call for no particular comment. It is not only r cessary to keep these causes of failures constantly in mind, but it is advisable also to watch care- fully that the presence in an account of the least im- LOANING A BANK'S MONEY 23S jM)rtaiice does not itself assume larger proportions, or induce even more serious conditions. 181). Statement of affairs. — Reference has already l)een made to the necessity for obtaining a knowledge of a borrower's net worth. This information is arrived at by an analysis of the business statement, which is re- quired from all customers seeking credit from a bank. Although the practice of requiring statements from borro^Ning customers is by no means an innovation on the part of banks, it is only of late years that it has been found advisable to make the rendering of a statement an invariable condition of lending a bank's money. This necessity is due to several causes; one is the rapid ex- l)ansion of the country and the opening up of branches in new territories; another is the gradual elimination of the personal element in modern business life, due to the incorporation of old-established firms into joint stock companies, a shareholder in which has only the amount of his investment in the company at stake, and not his whole fortune and the honor of the family name. The principal reason, however, is no doubt a response to the constant demand for efficiency and thoroughness in all hranches of business life, and the granting of commercial credits, as the keystone of the whole structure, has been raised almost to the dignity of a profession. The ex- cellent work accomplished by the various credit men's associations in the United States ^ has naturally extended its influence to Canada, and practically every business ' Much credit is due to Mr. James G. Cannon, President of the 'ourth National Bank of New York, to whose unremitting efforts in arousing public interest in this qul'^ti()[| iiHiy be ascribed the present high standard of credit requirements in the comHitni:'.! wiirld. Mr. (^mnon is the author of many intorpsting and exhaustive articles and addresses on the subject of commercial credit, and he was instrumental in liuving the banks and credit aiisoeiations throughout the United States adopt i uiiif(jrm statement blank. Il 234 BANKING PRACTICE fe house of any importjuice has its own credit department doing invaluable work.' In analyzing a statement it is well to bear in mind the old saying that "A man tells his hopes to his banker and his fears to his lawyer," and further, that a statement of affairs is often an expression of opinion rather than a statement of facts. In the course of one of his addresses on "Bank Credits," Mr. Cannon, in an interesting and instructive way, remarks on the necessity of an analyzed statement in loaning money : The cornerstone of credit may be said to be the requiring from borrowers of statements of the condition of their affairs. This has now become an accepted custom in the relation be- twicn banks and borrowers on commercial paper. It has come to be recognized that the practice is of value to both the bank and the borrower, and this may be considered the reason for its success. Furthermore, the making of statements often- times renders concerns themselves aware of their weaknesses in their methods of operation, financial practices and results of business. The banker, having a substantial interest in the success of the customer, may frequently give wholesome advice or timely warning from his wide experience in commercial affairs and his foresight in monetary matters. A statement, however, which is not submitted to analysis is a menace. Because, first, if errors have been made, if lack of judgment on the part of the management of the concern has been shown which is not brought to the attention of the bor- rower, if reckless methods have been indulged in or any dis- honesty has been practised, the very fact that a statement has been received and accepted by a banker either lulls into a sense of security the careless or heedless borrower, confirms the reckless financial habit or establishes the dishonesty, if such " The Canadian Credit Men's Asscciation, although only sUrted in Winnipeg in 1910. has extended its organization throughout Canada and has already accaoi- plishi'd much excellent work. LOANING A BANK'S MONEY 885 lAi'ts. Frank uiui open Ntntenients, lionring upon their fare the tvulence of a true condition of afTuirs, are the greatest fai tors in establishing credit. Nothing will more firmly cement thf union bitwoen borrower and banker than such a statement, iiK* nothing will be of more value to a banker and of less harm to tin honest, enterprising borrower. Hidden facts are re- vt:ili(l by analysis, and skill in reading between the lines is an Important part of a manager's training. By this means, weak- iitNxs may freijuently be discovered and proper steps taken to a\crt trouble before acute difficult \ irises. A large number of statements will show on their face such cviik-nce of weakness as to require no further investigation. Tills information, of course, is valuable to bankers, and they will at once decline to extend these applicants any accommoda- tion; whereas, if, on the other hand they were only in possession of Indefinite data, they might be disposed to extend a line of cndit. Many old firms, because they have been in the habit of con- ilinting their business without revealing their financial affairs to any one, feel a natural reluctance to making a statement of thtir condition; but we should bear in mind the fact that great and deplorable mistakes have been made by banks in granting l.irtfc lines of credit to old houses simply because they had an uiiliit nilshcd record and were supposed to be entitled to liberal consideration. Notis, bills, drafts, checks, book credits, or any form of ohlifrjition resulting from a credit transaction, come into exist- ence, not antecedent to, but as a consequence of, a transfer of floods involving futurity. Paper is purely fictitious and ille- gitimate which is not the outcome of an operation in goods; aiui \vc are enabled to test whether loans are legitimate or not according as we know whether the discounts are granted or not for actual transfers of salable goods. This test gives us the means of drawing the line between sound and unsound banking-. Tlie manager as a rule trusts too much to his customer— 'f the latter wants money, presumably he is an ordinarily pru- dint man, and knows what to do with it ; he must know liis own -, 236 BANKING PRACTICE I , : li u hi business better than his banker, un H: M:|fti. y 238 HANKING rUACTICE V^\. Form of st(,tcmcut,—A\\.ho\xf^h for many rea- sons it is prcfcnihlf to have a statement rendered on one of the standard I'orms sni)i)ned hy a hank, the main ohjeet is to ohtain information, and frecpiently a statc- nient made up l)y a customer along his own lities may (hselose weakness whieh a more formal statemen' might not reveal. Fi^nnv .34 is a comprehensive form eomhiii- inn- both a statement and an application, and is adapted to the statements of private individuals, firms and cor- porations. It will he noted that each partner of p. firm is mpiircd to sign the statement and ai)plieation. The statement generally submitted to a bank is the amnial statement of the customer's affairs. This should he made at the end of his fiscal year, when his merchan- dise and raw material accounts are at their lowest, and his bank loans cleaned up. In any husiness there should be at least one period in the year when the direct uulebtedness to the hank is fully l)aid up. This is of vital importance both to the bank and the customer. Tiider nornml co?iditions inability to clean up liank loans annually points to a lack of working capital, which may be due either to the gradual change of (piick assets into fixed assets, or to injudi- cious buying or selling. To allow this condition to be- come chronic is fatal ; it should be remembered that Sn per cent of the failures in Canada are due to Jack of capital. A brief comment on the information called for hy the statf-mcnt shown in Figure ,54 wiil be instructive". It must first lie noted that what are called "quick assets" consist of cash, receiva!)les and merchandise, while "cur- rent liabilities" include practically all indebtedness ex- cept mortgages. The ratio of liabilities to quick assets is usually the first test of the statement. The two totals LOANING A BANK'S MONEY 239 are therefore in line with each other for purposes of (|uick comparison. Except in certain businesses such as lumber, grain, or otb staples, tlie liabilities should not exceed 50 i)er cent i lie quick assets, and as a rule the former should not exceed the cash and receivables, tiiiis leaving the amount of merchandise on hand to rep- resent working capital. 192. Cash. — The cash on hand should always be of comparatively small amount. If large, the reason should he iiKjuired into, as this means either carelessness in tiiiaiicing or that some worthless note or hon is carried as cash. Practically all the cash on hand should be car- ried in the bank, and the balance maintained should be commensurate with the amount of work which the ac- coimt involves to the bank. Comparison should be made with the bank ledger on the same date, and if outstanding checks have been allowed for by an entry on the liability side of the state- ment, the amount should agree, otherwise the deposit led^rer balance will be the larger; if the reverse, the rea- son should be inquired into. lO.'J. Merchandise. — Stock on hand or merchandise calls for most careful consideration and analysis. Old and unsalable stock accumulates rapidly, especially under poor management, and even if the stock is reasonably lieu, its amount, if out of proportion to the total sales, may l)e a burden to the business and prove a source of weakness. It is important to know if the figures are the rcsidt of actual inventory at cost price, and also on what hasis old or unsalable goods have been included. In re\aluing the merchandise for credit purposes due con- sideration must be given to the nature of the business. A di(hiction of 10 per cent is generally sufficient for staples such as groceries, provisions, iron, and leather. ! a I 1 1 i u ^ ii ^ ^ J I S 5 i 2 II 2 i i ■11 - £ ■g S i s - III 1 c i ^ > 1 1-5 ft ^1 1 j Actual Value 4 1 1 1 E 5. 1 ( -vni_i6 a si X a 01 C' s M U 2 111'- " ■- i« t- . S i-P u •»«••» g «* S - ■5 X i ' 'lie S o it :i^ ilPfl ^ £i; ;j -7^ 5- c - S » k c n ^ e? ?^ -' ■5" i 4j s a ig-s Ml .2 £32 E ^8 1- -a ti 3 << t 1 1 1 ' 1 :«• ' I ^ 1 : t i : z i» 99 > ! 1 : k « r 1 i f t: b t 1 J = i! e s 1 ill i 1 c £: 1 '*' '*' 1 1 1 ^ mm I "8 U u g S42 8 u 65 - -r f- 1 1 y. a o te 3 I I \ <2 P 1= - - •- 1 a 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 j 1 1 ! I 1 1 9 1 i 1 1 e H •< '■J 1 1 i : 1 1 1 1 1 1 ! ! 1 1 1 1 1 1 1 ! ! 1 j 1 1 1 1 1 2 «i "3 M a 1 a a: 1 I 1 1 I 1 1 1 1 i i 1 1 1 1 1 i 1 i 1 i 1 1 1 i 1 1 1 i 1 1 1 i 1 1 1 1 i i 1 i I s i I I I I i 1 i ■I- 244 BANKINCi I'HACTICE si H s f- Wk uhile on goods partaking of the nature of luxuries, or depending for their sale on changing fashions or sea- sons, there should he a much heavier discount. It is always advisahle to look over the stock as occasion offers. Another good plan is to keep a record of the result of local Jiquidation sales of goods and receivahles; no bet- ter ohject lesson can be found as to the realizable values of different kinds of merchandise. In a manufacturing business it is necessary to know the several values of raw materials, finished goods and goods in process of manufacture. Raw material if not too much broken in bulk is worth within 10 or 1.5 per cent of the cost. Finished goods, if ready for ship- ment, should be worth actual manufacturing cost, but unfinished goods should only be considered to the extent of the goods actually in process of manufacture, as es- tablished by the ratio between the daily and total an- nual output. Any balance over this amount should In- inquired into, as under this heading are often inventoried parts of articles whose manufacture has been discontin- ued. For instance, se\ cral years ago a carriage factory prepared for a large output of a special make of sleighs. The winter that year was mild, and oidv a few were sold. and the following year there was practically no demand for this particular style of sleigh, and the few manufac- tured ones left were disposed of with difficulty. The company had very foolishly prepared a large number of parts in anticipation of heavy sales, and these were carried at cost price in the inventory as unfinished goods for a number of years. The company was finally liqui- dated ; the wooden parts were used for firewood and the hardware scrapped. The amount of merchandise in a business should form a reasonable proportion of the amiual turnover. Con- LOANINC, A HANK'S MONEY S45 (litinns vary in different trades and localities, and it is iiii|)()s.sil)le to establish any standard. Roughly s{)eak- iiij,'. however, the turnover of a business should be two ;iii(l one-half to three times the working capital. Flour and Iced business, for instance, owing to the small prof- its derived, would probably have to show a turnover of four or five times the working capital in order to be prolitable. Ample insurance is necessary in any business. Whether a bank is interested or not, everv customer should be advised of the wisdom of keeping fully in- sured. 1 f the insurance is assigned to the bank the sched- ule should be comi)ared with the annual statement, and all the conditions of the policy carefully examined. VM. Bills ami accounts receivable. — Bills receivable ill llie statement of a Canadian merchant are generally tin in number, as i)ractically all his trade paper is dis- tniirited, or else left with the bank for collection. With tlu facilities offered by the banks there is scarcely any oltjcet in holding paper in the office. Under these cir- • imistanccs a large amount of bills receivable, in excess ot eollections held by the bank, should be l(M)ked into, as it probably means an accumulation of past due or worth- less paper, or else some special transactions which should lie disclosed. Accounts receivable should be inquired into, espe- cially as to the metluwl of allowing for bad and doubtful (k'lits. A distinction is made in the statement between ree(i\al)les for goods sold and receivables from other soiirees. Ix)ans to officers, relatives, and friends, and otlui- irregular transactions are frequently found in the latter. H( ccivublcs should bear a reasonable ratio to the turn- over and goods on hand. This ratio, of course, would 246 BANKING rUACTICE 1 1' m i. vary in diflFerent trades according? to the terms of sale. A business selling on ninety days' time would naturally show a higher proportion of receivables than a business selling at thirty days. lOo. Machincrji and fixtures. — Real estate, machinery and fixtures are known as fixed assets and should only be considered as offering an unknown support to quick assets. In fact, real estate should be practically ignored unless a direct and steady revenue is derived therefrom. In other words, real estate should be looked upon only as something to fall back upon in case of need and never considered as a basis for a bank loan. In a manufacturing business both buildings and ma- chinery are constantly beifig converted into goods, and proper allowance for depreciation should be made each year out of profits. If the premises are rented they should be suitably lo- cated for the business, and the rent paid should be in pro- portion to the business done. Much depends, however, on the nature of the business itself. A drug or tobacco business could afford to pay a large rental for a corner store because of the (juick turnover for cash. The same rent, however, might ruin a more profitable business with a slower turnover. Where the premises are owned outright the rental test should be applied on a basis of interest and taxes. If the valuation of the owner is higher than the business can stand on a reasonable rental basis, the valuation is either excessive, or the business should be moved else- where and the property sold. The owner must acknowl- edge either overvaluation or poor business judgment, if he continues to do business at a more expensive stanJ than his business warrants. The value of the real estate as security is the price for LOANING A BANK'S MONFA' 247 .nich it can be sold at a forml sale. If tlK. holder c.f a n.<..t«age has to foreclose, the property, although seem- ZJ desirable and well situated, depreciates enor- Islv, a result which is intensified if the mortgage is to a bank. Kxi)erience sbows that a large sum is con- Sinned for overdue interest, legal exi)enses, commissions, a,ul the like, and this should be taken into account in estinmting the real value of such an asset as a means of Daviuu ott' indebtedness. vm Current UahUitics.^Cmveut habiht.es generally ..,„Msi of amounts due the bank and the wliolesa e trade ,o,. ^roods purchased. If due to any other creditors the oircumstanc^s should be explained. As already stated a„u,imts ects, postponements of elaim to the bank should be obtainetl from such cred- '^"I'^T. Mortgages ami other factors. - Mortgages 3»8 BANKING PRACTICE ri f'- .should l)e invariably shown us a liability, and the rela* tive real estate as an asset. The eijiiity alone should never be considered. The position of a mortgage in re- gard to taxes, interest, and insurance will frequently warrant examination. It is very imiNirtant that all contingent liabilities should be given, such as trade paper discounted and paper indorsed or guaranteed. Such obligations if not disclosed and allowed for will always be a source of menace. It is useful to know the amount and disposition of life insurance in force, and, in the jirovince of Quebec, the amount of the marriage contract is material informa- tion, as the latter ranks prior to an imsecured liability. The information called for by the reverse side of the statement figure No. 54- is self-explanatory, and is per- tinent to the consideration of an application. Every borrowing customer should ])rovide, in his will, power to his executors to contimie his business after his death until it can be profitably li<|uidated. If a firm, the ])artnership agreement should contain a similar provi- sion; otherwise the business must l)e liquidated without the expenditure of further moneys. In many cases this wouhl entai! heavy loss and, if the bank were interested, the safety of its loans woidd be endangered. Where a firm or corporation operates branch offices great care should be taken to see that no cross drawing or sales are allowed to swell the assets. Many losses have been made through the careless scrutiny of branch op- erations, especially where a branch carries a deposit ac- count at a local bank. Check kiting is one of the first symptoms of the disease: others quickly follow. 108. Sundrif information. — No statement can be an- alyzed by rule of thumb. The points brought out in LOANING A BANK'S MONEY 249 this chapter are by way of suggestion only. To many acromits of course tliey would not all be applicable. No unfavorable foct, however, is t(X) unimportant to be over- looktti and a competent manager is constantly adding to his kiHiwledge and developing his power of drawing in- ferences and making deductions. At the risk of repeti- tion the following questions are given and may be found helpful in realizing the varieties of causes which con- tribute to the formation of a borrower's credit standing. Are the borrower's antecedents and character good? An- Ills personal drawings from the business lorge? Has lie ever failed or had a suspicious fire? I> lie well liked ond respected in the community? Dots he kite notes or checks? Is ho in good health? His age? Is he what is known as a "rehater," a man who makes unfair flfiiiiis for goods in the hope of getting rebates or other con- ct»i()iis? Can reliance be placed on his statements? What are his personal hobith? How does he spend his evenings? Has he technical ability in his business? Arc his books properly kept? Docs he extend credit too freely or without discrimination? Docs he cut prices? Is lie careful and discriminating in the purchase of his stock or (Iocs he carry an unnecessarily heavy stock? Is lie inclined to dabble in outside ventures such as real estate or stocks? Docs the business depend on conditions that may not be per- manent? Docs he allow his machinery to become out of date and in- tfficii Ilf ? Docs he study the particular wants of his trade with a view to meeting public demands? MICROCOPY RESOLUTION TEST CHART (ANS and ISO TEST CHART No 2| 1.0 I.I 1.25 1^ 1^ IB 1^ IIIIM III ^"^ 1^ h4£ 11^ 1.4 1.8 ^ /APPLIED IIVMGE Ir ^^ 165 J Et:l Moin StrMi rrjS Rochester. New York '♦609 USA ^S (716) 482 - 0300 - Phone ^S (716) 288 - 5989 - Fa» ///: 250 BANKING PRACTICE Are his accounts receivable and bills receivable all genuine collectible accounts or are they padded with slow or worthless paper? Does he take advantage of all trade discounts? Are his sales out of proportion to his capital? Is his position improving year by year? Has he any large contingent liability? Are all his liabilities given in the statement? Are his profit and expense accounts in proportion to his sales ? Does he buy his raw material before he is reasonably sure of the amount of his sales r Is he over-ambitious and anxious to extend his plant out of all proportion to his working capital? Does he turn his capital quickly, or as many times as his competitors in the same line of business? Does he always plan ahead in regard to his financial engage- ments, and know where the money is to come from? Has he made provision for continuing his business in case of death? Does he advertise wisely? Is the line of goods he manufactures or sells one which is easily affected by changing fashions or seasons? How do his annual sales compare with his stock on hand and bills payable and receivable accounts? On what basis is the inventory taken and by whom? Are his books audited by a chartered accountant? 199. Preimring the application.— The consideration of a customer's statement along the lines suggested in the previous sections should assist a manager in promptly deciding whether he will grant a loan or not. A prompt "no" is often preferable to a belated "yes." The latter implies indecision. The least indication of weakness in the statement should not be overlooked. The margin of prorit in banking is too small to allow unnecessary risk LOANING A BANK'S MONEY 251 t,. hv taken, and the bank should always be given the l)t.iHtit of the doubt. A itl'erence book or ca' J index should be kept on the iiiaiiaj^er's desk, and any credit information about cus- tumti" and others, whether borrowers or not, should l)e systematically jotted down. Special cards or sheets are generally used for obtaining farmers' statements, Figure 5.5, and these are filed in alphabetical order for easy reference. ill the case of larger firms submitting regular state- ments, it is necessary to keep a careful record year by year of the changes in the statements and course of the aceount. It is advisable, whether the account falls within the manager's discretionary limits or not, to do this. Figure 56 is a useful form for recording this infor- mation and is self -explanat Dry. The condition of the liability account under each heading can be posted from the ledger or from the monthly liability return. Head ottiee authorizations or instructions are entered in red ink when received. Space is provided for the analyses of six statements and for records of the course of the account for sixty months. A clip placed over the name (if the month indicates the expiration of a credit. The size of the card is 113 by 9i inches, and can be filed conveniently in any vertical file. The blank columns K. F. G. can be used to record advances under Section 88, overdrafts, letters of credit, and the like. Should an account call for special attention at any time all the facts of the case can be recorded on a follower which is a differently colored card ruled with horizontal lines only. This statement card can also be used with advantage hy a Iiead office for keeping a record of the course of the s * 6 H 3 <* 4 a o 1 1 a 1 p. c Due Sundry Parties ■J. 1 p.- •A _ . - I «• s •< w * The description of the parcels of land, with the amount owine aRaiii'^t each parcel, should appear in the Branch records. • 1 c c 1 c E Ei. !: c i: e J # d 1 a e i £••2 as fc C'^ s > o ■: b as ^ b Si- eS 1^ — 2 £ ( 252 S-3 - /. a •aa C< MS Of. -fc r=: < s .11 HO " r i 5 £ 5 i I ! 253 254 BAN KIN (i rU ACTU'E larger accounts, by posting from the monthly liability return of the various branches. AV^hen a loan is outside the manager's discretionary limits it must be submitted to the head office accom- panied by a definite recommendation. The latter is es- sential. Therefore, as soon as the manager decides that a loan of this nature is desirable, he prepares the state- ments recjuired by the head office and forwards them with his letter. Figiu'e 57 gives an exact copy of a cus- tomer's statement with space for a revaluation of the assets by the manager at the foot. Figure 58 provides for a detailed analysis and comparison of the last two statements on file, and also gives a comparison of the statements for the past five or six years. In Figure 59 the course of the liability account is given for the past year with sundry other information. The course of the deposit account should also be referred to. 200. Jlie application. — The most severe test of a manager's ability and soundness of judgment is found in the writing of a letter of application. The reasons for recommending the loan should be concisely stated and no pertinent fact omitted. In other words, the head office should never have occasion to write back for fur- ther information or missing particulars. A separate letter should, of course, be written for each account, and tlie condition of the liability and security at the moment of writing should be set forth at the head. The letter should further give a concise statement of: (a) Tlie amount of credit a])plied for; (b) The purpose for which the advances are to he used ; (c) When the advance will be required; (d) When and from what source payment is ex- pected. r,i> r full Nrnne or Xbitim 1 ■ ['irtmr:'. Age, BueincM, ' ,;,,) l!r-ii|crii-c. BitANrn I STATEMENT OF THE AFFAIRS OF Asset* Sales for past year $ Losses " * Insurance on Liquid Assets.* on Fixed Assets. $ Real F.stnte Searched M\NAOERS ABSTRACT OF ABOVE. WITH HIS VALUATION OF ASSETS iI.KjriD .\»»ET«: I f;ish, Bills Receivable ! and .\ccounts '. Mfrihandisc held for 1 .-^alc Mivrollaneoiis movable pror>orty KixKU .XssETs; Flo.*tino Lubiutiks: To Bank Accounts Payable Rills Payable ToSundrj- Parties Morto.\<;e Pebts: Srrplii'* ... I.iiibilil .• lis 1',ndr>r?rr or (luar- antor not included above namel>" on;-- Trade Paper in CiLstonier'' .Vccount On other Account' at Branch * On other Account* elH HANKING I'HACTKi: M' S»niicliiucs i)relimiMary letters may have been writ- ten K'^'"K' information on some ol' these points, hut the final letter should nevertheless contain full particulars, and reference to i)revious letters or statements should not he made tnerely to save the trouhle of repeating in- formation, except in siK-'cial and involved cases. It is much more economical in time and labor for a branch manager to set forth the ease fully, rather than to put the head office to the trouble and delay of looking up references. The reasons leading to the recommendation and any criticism of the account should be carefully and sys- tematically assembled and the information set out in due order and se(iuence, each subject being discussed in a separate claiise, and all to be said on a particular sub- ject brought together in one place as far as possible. This can only be accomplished, as a rule, by the letter being first drafted and carefully corrected before it is written. If the application is from a new customer the cause of the change in his bank account should be re- ])orted, and if the a])plication is for a line of trade paper a list of the trade bills undeu discount with liis previous bank should accompany the letter. If these simple recjuirements are carefully complied with, the head office will be in a position to accord a prompt authorization or otherwise of the application. CHAPTEH VII CLASSIFICATION OF LOANS •iOl. Call loans. — The subject of call loans in Canada or elsewhere as an asset of the bank has already been dealt with in Chapter VI, Part 1, and it is only necessary to describe briefly the methods of making such advances in Canada. These loans are generally made to brokers on satisfactory stocks and bonds listed in the local mar- ket, and with a margin of about 20 per cent and 10 per cent, respectively. Two margin tests should be applied: first, a 20 jier cent margin of security above the amount of the loan; seeoiid, ten points per share less than the market value of the stock. The first test insures an ample margin on hi<'h-priced stock, and the second discriminates against low non-dividend paying stock. For instance, 20 per cent on stock selling at $30 per share would mean a mar- flin of $() per share as against $10, or 33i per cent, called lor by the second rule. Figure 60 is the form in general use, and combines in one the hypothecation and the agreement of sale in case of default in keeping up the necessary margin. Tile discount clerk should see that every certificate of stock pledged is good delivery; that is, the certificate must be in the name of a responsible broker or the en- dorsement guaranteed by a broker whose signature the bank knows, and should be assigned in blank and wit- 259 1«1 Thfl unHrrsignrJ hrrrby urkDowliilgp to have rercivtd Item THE BANK UollnrK, B» iin !nlvnnri', whirb tttni will be»r kt tbo rstr Intcrpst from llii" Irnn.-ferrcd to th« Bank, or to one or more o( iho officers tl»n..( in Iriint, Ihr Mlowiog i»rurity. umtly: •»«»«•«• « il II H to hr hi'ld II* cnllatcriil «riirily f..r Ihr paymont i)( tlir nuid advance ud intcriwt, tlio Buak is hrnhy luitlixriii'd to pcII and roiivry the said security, or purl thtrt'of from tinif to tiino, whenever the Hank Hhall think proper, upon default in the payment of tlie »uid advance, and to apply the proceed* tliereol toward* its reimbursement , without prejudice to its clu-nii upon the undw- signed for any deficiency. Should the naid »ecurity depreciate in value before the maturity of Mid advance, tho Bank is hereby authoriicd to wll and convey the name, or part thereof, from time to time, without waiting the day of payment. It ia also hereby agreed that should the Hank at any time determine upoB a sale and convc>anoc of the said .-crtirity, or part thereof, from time to time, for cither of the reasons above stated, such sale and conveyance may be mid« without notice to the undirsigm-.l, all and every formality prescribed by law or otherwise in relation to such sale and conveyance b<'ing hereby waived. And it is further agrceil that should the Bank allow the undersigned to substitute for tho above other collateral security, such substituted security i shall be held by the Bank, subject to the same terms and conditions, and with j power and authority to dispose of and apply the same in the same manner la \ the Bank could have done with the original security. And it is understood and agreed that the Bank is at liberty to retain and | use the above mentioned security (or substituted security) as collateral for any other indebtedness or liability, present or future, of the tmdersigned to the Bank. In case any security or substituted secuiicy tran.»ferred to or lodged with the Bank is in the form of a certificate for shares of stock, with a blank transfer and power of attorney in blank to transfer the shares of stock on the books of the Company endorsed thereon or attached thereto, the Bank is hereby author- iicd, through any of it.^ officers or employee.-, to fill in all blanks in such transfm and powers of attorney with such names and in such manner as may be thought best by the Bank, and to sea! and dcUvcr the same after such blanks have been filled in. Witness the hand ami seal of the undersigned. Figure tiO. FORM FOR HYPOTHECATING COLLATERAL 260 (i.ASSII'K ATIUN OF LOANS 201 iitsM*!. These miiiiirimiits iml only insure the jteiiii- imiKss of Ihc sttK'k, hut also that ehiiiiis I'or dividends arc made "ii responsible brokers by the hohlers of the stock. To make a transfer every time a eertifieate (lian^es hands would, of eoiirse, be impossible. Bonds sliDiild i)e serutini/,ed to see that they are payable to iKiircr, and all bonds, debentures, eertifieates of stock, and similar eertifieates pledged as collati'ral for advances (ir l(»(ln;c'd for safekeeping should be kept in the treasury under the joint custody of the manager and accountant. All security as soon as received should be recorded in the snuiities register by the number of the certificate or 1h)ii(1, the name of the company, the number of shares, the |)ar value of the shares, and the name of the broker to whom the certificate is assigned. It should be the in- variable ])ractice of every bank to record the above par- ticulars of any stock passing through its hands, whether nccived as security or simply passing through the bank's liooks attached to a draft. In case of the loss of the scrip such information has often proved invaluable. '2i)'2. Loans to joint stock companies. — A joint stock company has been defined as an association of indi- viduals possessing corporate powers, enabling them to transact business as a single individual. Such companies may obtain incorporation in Canada in several ways. 1. By special act of either the Parliament of Canada or the provincial legislatures. 2. Ity letters patent issued under the general Com- panies Acts of the Dominion of Canada or of the provinces of New Brunswick, Prince Edward Island, Quebec, Ontario or INIanitoba. 3. I?y memorandum of association in the provinces of Nova Scotia, Saskatchewan, Alberta and British Columbia. 20^2 BANKING PRACTICE Iff. "It As llie powers conrcnvd <)i» fompanics under these several metliods of iiieorporation vary, banks, as a rule, issue instructions to their branches in the different provinces regarding loans to joint stock companies; spe- cial forms for by-laws, etc., are also supplied. When considering loans to companies incorporated hy special acts, it is, of course, necessary to refer to the com- panies' charters in each instance. In opening an account with a joint stock company, it is, therefore, necessary to ascertain the following: 1. Has the company power to borrow? 2. Have the directors authority to exercise that power without a by-law of the shareholders? 3. Is there a specified limit to the amount which can be borrowed and has that limit been reached? 4. Have the directors power to secure the payment of moneys borrowed by giving security under Sec- tions 86-90 of the Bank Act or by mortgage or other charge on all or any part of the assets of the company? This information can be obtained from the charter and records of the company and from the statute under which the company is incorporated. These questions being satisfactorily answered, it is customary for the directors of the company to pass a resolution outlining the powers of the signing officers, and specifying who they are to be. A certified copy of this is generally sup- plied to the bank on a form similar to that on page 263. Where a by-law of the shareholders is necessary to confer borrowing powers on the directors, a certified copy of the by-law is supplied to the bank on a form similar to tha^^ on page 264, supplemented by the direc- tors' resolution above referred to. REsoLfTioN passed by the Board of Directors of the illaL held at the office of the Comimuu in on the ^f"y"S at a meeting duly , 19t On motion it was resolved that . .. ; , ., . ,„ a^?d hereby authorized on behalf of the Cc)n,pany to dn V accept, sign, make and a«ree to pay a 1 or any U.lls of San^ Promissory Notes, Checks and Orders for the pay- ^ef money; also to authorize any Manager or other officer n till mu y . ^ ^^^ ^^ ^p^^p^ ,jjl jjp jj„y Drafts riwis of Exchange on behalf of the Company; also to sign .hecks upon and to borrow money from thk - 3VVK on behalf of the Company, either by overdrawmg the account of the Company with the said Bank or otherwise. ^}^ ^^^* i^reby authorized on behalf of tl^ to si'"n and tranlr to the Bank all or any Stocks. Bonds, \\are- mte Receipts, Bills of Lading, and other securities and to give r imk Srity under Section 88 of the Bank Act, and to sign 1 wrulen promise or promises binding the Company to give any such securities as p' -esaid. or.;):Imie';rf\hem:beami:::. hereby authorized rV)mpany to negotiate with, deposit with, or transfer to the said ,k Cfor credit of the Company's account only) all or any s of Exchange, Iromissory Notes, Checks or Orders for the pavnient of money and other negotiable P^P«'-';"»^J^:i K^ purpose to endorse the same or any of t^em on l)ehalf o Coinnany also to arrange, settle, balance and certify all books Lui Jccountrretween the'company and the Ba"k-d to receive all paid checks and vouchers, and to sign the Bank s form ol settlement of balances and release. CERTIFIED a true copy of the Resolution passed <^f foveset forth and recorded in the Minute Book of the proceedings of the Board of Directors of said Company. ,„, Dated the '''"' "^ ' ''^ day of U- L. S. PRESIDENT SECRETARY The President and Secretary will sign as above; the other officers as f illows: ... „ ., „, \ ice-IresidcM if 263 BY-LAW of the Be it Exacted as a By-law of the Company as follows: The Directors may borrow money on the credit of the Company from time to time and in such amounts as they may think proper, and may hypothecate, mortgage or i)ledge the personal property of the Company to secure any sum or sums borrowed for the purposes thereof. The borrowings of money from time to time heretofore under the authority of the Directors from the BANK and the giving of securities therefor under Section 88 of the Bunk Act or otherwise, are hereby ratified and confirmed. In witness whereof the corporate seal of the Company has been hereto affixed, an^I this By -law dulv countersigned the day of 191 L. 8. > PRESIDENT il: At a general meeting of the shareholders of the above-named Company duly called for considering the foregoing By-law, which was passed by the Directors on the day of 191 , and held on the day of 191 , the same was duly sanc- tioned and confirmed by a vote of not less than two-thirds in value of the (1) subscribed stock represented ■ at such meeting. (2) shareholders present in person or by proxy CHAIRMAN OF THE MEETING SECRETARY 264 CLASSIFICATION OF LOANS 265 ll may be sctri I'roin the above tliat care should be ex- ercised by a bank, not only in opening an account with a company, but also in any subsequent transactions. It is well to remember that a corjjoration has no personal lia- bility, that no director or officer of a company is identi- Hcd with the business of the company as closely as he would be if it were his own undertaking, and that failure of a company can affect a director or shareholder only to the extent of the amount of his shares. In view of this limited liability it is customary among banks, when a company is a frequent applicant for loans, to require the personal guarantee of the directors. The logic of this is sound, and the refusal on the part of the directors to comply with this condition should be considered with extreme caution. If the men who are managing the com- pany have not sufficient confidence in their own manage- nicu't to guarantee the loan, why should the bank take the risk? •20.3. Loans to municipalities— The conditions govern- ing loans to municipalities, school districts and other pirhlic bodies differ in the various provinces and also in the cases of cities incorporated under special charter. As the laws are frequently changing no general procedure can be formulated. The head office of each bank gener- ally issues specific instructions and forms regarding these loans to their branches in the several provinces. Generally speaking, municipalities, on resolution of their councillors, are authorized to anticipate taxes by horrowing up to a certain percentage of their annual assessment. These borrowings must usually be retired hv the taxes as they are paid in. The loans are, and sh( aid be, short in term. When, however, one year's horrowings overlap another the advances should be kept distinct. S\ich loans, when supported by authentic copies 266 BANKING PRACTICE of the resolution of the oouiieil, may be eonsidered legiti- mate banking undertakings. Frequently a munieipality is authorized by a by-law, voted on by its ratej)ayers, to borrow money for some specific puri)ose, such as water works, drains and the like. It is advances of this description which form one of the objectionable features of nmnicipal accounts. As a rule, municipalities postpone any definite arrangement as to the disposition of the bonds until the construction, for which the issue is authorized, has been completed. In the meantime, they look to their banks for advances from time to time until the w'ork is fully accomplished. This feature in itself is not objectionable if the munici- pality takes immediate steps to dispose of its bonds on the completion of the work. Unfortunately, this is sel- dom the case. Financial committees sometimes number among their members one or more amateur financiers, who not only have exalted ideas of the market value of the bonds in question, but also overestimate their own ability in judging market conditions. The result is that the time in their opinion is rr.rely opportune for making a sale of the bonds, and the bank is confronted with the necessity of continuing to carry an unsatisfactory loan or enforcing a sale of the bonds, both undesirable alter- natives. The proper method to follow in making such advances is to see that, at the inception of the loan, a definite arrangement is made as to the disposition of the bonds irrespective of market or other conditions. 204. Loans to professional men. — Loans to profes- sional or salaried men cannot be considered desirable from a banking point of view, or from any point of view for that matter. Even where the applicant is possessed of private means, a loan of this nature is more or less objectionable according to its object and the under- CLASSIFICATION OF LOANS 267 slaiidiiiK' as lo final payment. Tlic money may l)c locked „|, in some undesirable venture, and though sure of ulti- mate payment the bank is confronted with the alterna- tive of carrying a dead loan or, by enforcing payment, making an enemy of a desirable citizen. Loans to men who depend entirely on their salaries and professional earnings should not be considered ex- cept in very exceptional cases. If a i-ian cannot live on his salary he cannot hope to pay oL an indebtedness ill addition. The loan is either intended to discharge another indebtedness or to purchase something which cannot be paid for out of future salary. Credit is a good servant and a bad master, and many men in these days of competition, both social and otherwise, are induced to "keep up" with their neighbors, purchase automobiles, and generally live in a style beyond their means. Retail merchants frequently offer this class of paper for discount, and the objection to this is even more pro- nounced. If a man cannot pay for the necessities of life for his family there is not much likelihood of his being able to pay off a debt. These remarks are not intended to apply to worthy l)e()ple who have suffered misfortune, and to whom every consideration should be shown, but it does refer to people entirely dependent upon moderate salaries, received with a regularity which renders credit unnecessary. 20.). Loans to fanners.— Under certain conditions of fanning, more especially in the West, credit for a fanner is more or less a necessity, and loans to respon- sible farmers is a desirable and legitimate business for a f)ank. In the East, where mixed farming prevails, the farmer is not only in easy circumstances, with perhaps a savings bank account or money loaned out on mortgage, but he has a more or less certain income throughout the 2F# 268 nANKING I'UACTICK I \\ in year from the sale of raiiii in-odiicc- to llic iiLi^iilxniiii; towns. Loans when made to him are «»enerally lor soini; specific purpose — such as the [)urchase of cattle for fat- tening — in other words for the creation of an immediate- ly li(iuid asset. In the West, however, where grain-growing only pre- vails, a farmer has practically only one crop a year. and it is necessary for him to have credit while he is preparing for the croj), as he has to wait until the fall before receiving any return for his year's work. Seed must be bought, labor paid for, and while the crop is growing he must live. Few farmers can cultivate their farms without some credit either from a bank or store, and if no credit were extended they could neither pur- chase nor produce anything. Credit to a farmer, no matter what his moral or finan- cial standing, is relative and should not exceed a year's supplies at any time. The loan should be cleaned up regularly after harvest, unless arrangements were made by way of advances under Section 88 of the Bank Act. The size of the farm and the amount of land under crop should also be carefully considered; some farmers are too ambitious and try to farm too much land. The teimre of the land, the amount of mortgage, and other in- debtedness, especially for machinery, are all important features in considering advances to I lis class. As a rule, the farmer should not recpiire to borrow from the bank until seed-time to })ay for seeds, labor, and the like. If his crop is successful, he should be clear of his indebted- ness before the end of the year, and have a good surplus to pay on his mortgage or place in the bank. A clause in Section 88 of the Bank Act of 1913 per- mits a bank to lend money to a farmer "on the security of his threshed grain grown upon the farm." The ad- CLASSIFICATION OF LOANS 209 (litioii of Ihis clause was due to the fact that the grain (nowii by a farmer in the ^Vest was expected to clean lip liis indebtedness at harvest time or shortly after- ward. This condition worked a hardship on the farmer, \\\\n sometimes had to throw his crop on the market re- irardkss of prices, instead of having an opportunity to await normal conditions. The volume of sales, more- i)\tr. at this time depresses prices and adds to the con- tusion and congestion on the railways. The farmer is now ill a position to offer the security of a staple article, and tan borrow enough on his crop to pay off his in- debtedness. It is still early to give any opinion on the result of the new law but, speaking generally, it will ])ossil)ly not make very much difference to the responsi- ble farmer, as he was able to borrow money on his own note in any case. As to the farmer of less favorable standing, it is questionable whether a security entirely under his control will improve his chance of credit. •iO(i. Loans to retail merchants. — As a general rule, retail merchants are not entitled to unsecured advances on their own name. A storekeeper who takes consid- erable credit from the wholesale trade should be able to obtain all liis credit from that source. If his position is not such as to enable him to do this, a bank should not intervene unless he is able to put up good trade bills or other security. A bank has only the bare interest in the loan, while the wholesale merchant has a margin of •20 or 30 per cent profit to fall back on in case of loss. If the loan is sought for the purpose of paying cash for goods purchased, it should be borne in mind that the usual discount granted by the seller for cash is 12 per cent per annum or more, that being in effect his estimate of the degree of risk, while for precisely the same risk the bank is asked to be satisfied with 7 per 270 BANKING PKACTKK I' cent or even less. The mere transfer of an obligation from the mercantile creditor to a bank does not dimin- ish by one-half the monetary risk of the accommodation; it is illogical and irrational to assume such risks for an ordinary banking rate of discount. Loans to retailers are dangerous both to the bank and to the borrower; to the bank on account of the risk, and to the borrower l)ecause it frequently leads to lax meth- ods of collecting. 207. Loans to manufacturers and merchants. — Nat- urally the bulk of the loans of a commercial bank consists of advances to manufacturers and wholesale merchants. Both classes are considered highly desirable custom- ers. They are at times heavy borrowers from banks, and a consideration of their relative merits in that connec- tion is of interest. :Mr. Geo. Hague, in his "Banking and Commerce," has expressed himself so clearly on the subject that he is well worth quoting: There is this fundamental difFerence between the wholesale merchant and the manufacturer; that the merchant, if his credit is good enough, can put the whole of his stock upon his shelves without the expenditure of a single dollar except for freight and duties. Good credit will enable him to obtain all he wants from manufacturers on this side of the Atlantic, or from whole- sale houses in England. But a manufacturer can do nothing of the kind. From the time that he begins operations he has to provide for a cash expenditure which never ceases until goods are ready for sale. In nearly every branch of manu- facture he rust pay cash for his raw material and his fuel. And the moment he begins the manufacturing process, his pay- roll of wages confronts him week by week, and must be met. There can be no possibility of asking credit here ; not for a single week could wages be left unpaid. In the case of the special lines of manufacture lately under review, where wages are a most important item of cost, the necessity of meeting C'LASSU'KATION Ol' LOANS 271 the liirge sums required is the most harussinj; of all financial prc>Mne.s. It presses indeed more heavily than the necessity of imL'ting acceptances and promissory notes, for the payees of tlit'se can be approached for renewal at a pinch, while a rc- quiNt to a body of workmen to defer payment of wages is utterly impossible. And as payment is imperative, the manufacturer will iiuturally, in such circumstances, have recourse to his l);iiikt'r. Hi iKc, it is more difficult to finance for a manufacturing es- tiihlisliincnt than for the business of a wholesale merchant. The liittir, having the power to buy goods at all times on credit. Ills no reasonable ground for asking regular advances from lii> banker. His dealings should be confined, as a rule, to the discount of bills given by his customers. The only payments a wholesale merchant has to make, which aio iibsolutely imperative, arc the customs duties and freight on imported goods. It is just as impossible to ask credit here u> it would be for the payment of wages. But no wholesale iiKTcliiint could reasonably think of commencing business with- out capital, and the very lowest minimum necessary would be ail iijiount sufficient to pay the duties on the stock requisite to coiiinicnce business, and thereafter on his average stock. Once he has his goods in warehouse, he can begin to sell, and with such facilities as bankers are now ready to offer for the liishing of customers' bills, a merchant may, from a financial point of view, be said to be able to sell for cash. Thus, by the time the payments for his stock become due, the proceeds of his sales ought to be sufficient to meet them. This elementary financial theory of a wholesale business be- comes modified by circumstances as time progresses, and no prudent man would be satisfied with being so wholly dependent on his credit with other houses as to have nothing left over after payment of duties. He will, of course, aim at having far more capital than that. But even on such a modicum of capital as is indicated, it is clear that no necessity should arise for loans from a banker. From all which the rule may be deduced that loans to a whole- 272 BANKING PUACTKE ■■■i^ m^ sale mcrclmnt (as distinguished from the discount of trade bills) should he considered as irregular in the nature of things, and only to he granted in exceptiotial circumstances. When, therefore, a hanker is ap{»lied to by a wholesale mer- chant for a loan in addition to a discount of customers' bills, he is put upon in<|iiiry as to why such a loan is required. The reason connnonly given is that goods are arriving in quantity in the Custom House and that the duties must be paid. But this, in itself, is not a good reason. For, as has been observed, the capital of such a house should be sufficient to provide for this requirement. The payment of customs dues can never take a merchant unawares. The necessity for it must have been seen long beforehand, and ample opportunity given for making provision. An application for a loan may, therefore, indicate that purchases have been too heavy; or that sales are not being vigorously pushed, or that an unsuitable stock has been laid in, or that the customers of the house cannot be de- ponded on for payments. Any of these will cause the finances of a wholesale house to drag heavily, and they are all of such a character as to make a banker pause. The head of a house may naturally be unwilling to acknowledge that any of these suppositions are correct, and some are very unwilling to talk to a banker on the subject. Yet the application for a loan gives him the right to make inquiry; for experience shows that such things, if allowed to go or. uncorrected, may be the begin- ning of a course which will end in Insolvency. There is this further reason for a banker's caution in this matter, that a dealer in imported or manufactured goods can- not give a banker security upon them. A miller, a tanner, a pork packer, can pledge his product as security for advances under the warehousing clauses of the Banking Act. But a wholesale merchant cannot do this under the Act. And there is reason for this distinction in the nature of things; for a wholesale merchant's stock has almost invariably been bought on credit. The goods on his shelves are probably not yet paid for. It would, therefore, be contrary to every principle of equity tc allow a merchant to pledge his goods for advances CLASSIFICATIUN OF LOANS S7S «liilt' »lie clHiiiis of the crcditurs wore unsatisfied. Tliia being tlif tfisc, it has become a practice for such loans to be applied for witliout security, and not infret, MO regular line of credit shouhl be arranged for in It^[»(■(•t of loans; that is, no amount which a customer can ilwavs have at his connnand. Second, advances should be tniiporiiry ; each being applied for on its own merits, with the ixpl.iiiiition of circumstances. Third, they should only be al- lowed at certain seasons, and never last more than two or three iiioiitlis at the most. Fourth, renewals should not be granted. Iiuhcations of continuance should be carefully watched and promptly dealt with. If advances become chronic, security should be insisted upon. Fifth, it is always desirable, too, that when such advances are granted to a firm, the endorsement or fiUfuantce of each individual in it should be obtained; for in- HANKING rUACTRi: i: a imiik is loath to make an advance. It.s assets must be kepi li({iii(l atul not locked up in lon^ time loans. Tile merits of a note tendered as collateral should be gauged with no less care than if offered for discount; a large nominal margin may he delusive and hy no means an ade(|uate security. Such notes should he scrutinized as critically as cliscounted hills, and rejected if defective in any vital part. If notes offered hy agricultural im- l)lcmcnt dealers and others are encumhered with condi- tions which render them non-transferahic they should k refused. Lien notes, or notes secured hy lien on imple- ments, machinery, and other movahle equipment, sold, should only he taken for collections, as it must be borne in mind that the maker has the right of set-off for any legitimate claim against the vendor, and thiru parties must always Ik- prei)ared for something of this kind. The bank in making advances of any nature has the right to exi)ect the note taken to be free from any irreg- ularity, and in accord with the requirements of the Bills of Exchange Act. It is not sufficient that a bank could probably overcome any irregularity by proving its case; even successful litigation is objectionable, and invariably means considerable worry and some loss in costs and time. All notes taken as collateral security should be hy- pothecated to the bank on a form duly signed by the bor- rower ( Figure 61 or 78) . The form Figure 61 can also be used to pledge stocks and other securities, permissible under the Bank Act. The attorney for a customer cannot liypothecate collateral Tiotes unless specially empowered to do so. All collateral hypothecations should be con- secutively numbered as received from the customers, and filed in proper order in the vault. The full margin of good collateral stipulated as the / 3 E .J 5 a- = c c = 0-5 C'B c, ♦-at aX.O « -.-S ! fe 3 J.f .5 a «n : s e'5 e £ x »• _ t- o •" a" E ' .i-o =.5 " g s >. - a 4, 1 c o-t: g'^TJi-SoaS I' c ■ - a « 5 : 2 2^ £ £ ■ *)ja n o e ^ . £ B 4£ I lEs Soj-S" J' a-w * a I f ^ a •* te ® o I' *^ »j 4) «» a f?b i° -si is-ca' o « ".a -a " S S E a 8 sil-S cao •saeSsi iS»3'l»-o!J :zi 27j- ES.SI 27G IJANKINCJ J'UACnCK H.I basis for any credit must always be maintained. A liberal margin will generally be found to be insufficient in case of trouble. The margin agreed upon in all cases sliould be calculated on the amount of collateral offered, and not based on the amount of the advance. For in- stance, on a margin of 25 per cent, advance $75 on each $100 worth of collateral (lei)osite(l. Do not base the mar- gin (Ml 25 per cent of the advance, which in the above would only give $93.75 collateral for every $75 advanced. Overdue paper should not be accepted as collateral. In the case of wholesale accounts obtaining advances against trade paper deposited as collateral, it will be nec- essary to follow the account as closely as if the paper were discounted. For this purpose the blue book used in the discount department should be used (see Figure 37), and an account oi)ene(l iij) for each obligant. In all cases of advances against this class of security it is necessary to see that drafts and notes which are re- turned unaccepted or unpaid are settled for eventually by the maker or drawee. The wholesale surrendering of these returned items to the pledger in exchange for fresh collateral drafts should not be permitted. Under no circumstances should unaccepted drafts which are lodged as collateral be held without presentation at the request of the pledger or for any other reason. 209. Accommodation paper. — Accommodation paper is most dajigerous when, as is generally the case, it is carefully concealed. A proof of a banker's sagacity will be best seen in his detection of the accommodation taint « herever it may exist, however dexterously covered up. and in keeping clear of it and of the other dangerous complications and contingencies inseparable from it. Accommodation paper disguised as trade bills should be looked for and regarded with the same discrimination CLASSIFICATION OF LOANS 277 a[)i)lial in separating spurious coin from genuine. Such jjaper should be detected if a manager is observant of the working of liis accounts. Tlie most ordinary kinds of accommodation paper are these according to an ohl rule book: (a) Paper floated by the borrower with the names of his friends for the general purposes of his busi- mss, say, h dry goods, grocery or hardware busi- ness, or a manufacturing business of any kind. (h) Paper floated by the parties to it for the purpose of going into some si)eculation outside of their legitimate business. They are induced to buy or build a ship, a sawmill or factory of some kind, a farm, a mine, timber lands, or a score of other enterprises. These two classes of accommodation must be avoided at all Jiazards. (e) Kenewals of notes that were legitimate enough in the first instance If the goods they originally represented are still unsold by the promissor, the I)aper may still, in a sense, be held to be legiti- mate, although even in that case the renewal is a most unhealthy sign, being proof of over-produc- tion and over-trading. But in the case of most renewals they have lost all connection with the goods they originally represented, the proceeds of which should have gone to wipe the notes out of existence at maturity. The proceeds of goods have been used for something else, and the notes remain, representing nothing. This is accommo- dation of the worst kind. There is no more significant indication to a banker ^vll() has c>es open than renewed paper. In the most iiTS BANKING PHACTICK U llF^ favorable view you can take it shows iniscaleulalion. Hut in most cases it means somethin^r much worse — gen- erally it means the beginning of the end. If accommodation ])ai)er is taken at all you should be absolutely certain of the genuineness of the signatures. The danger from forgery is not the least of the dangers attendhig the handling of this objectionable kind of paper. The way is left open for that kind of fraud when endorsed notes are discounted for the i)romissors, but this is prohibited in most banks. Never overlook the consideration that if you take an accommodation endorsement you see perhaps less than one-half of the paper afloat bearing the sam • names. The obligant calls for a quid pro quo, the accommoda- tion becomes reciprocal, and likely enough develops into a network of cross endorsements. 210. Overdrafts. — The strong objection which all banks have to making advances by way of overdrafts is based on sound principles, which are not generally fully understood or appreciated. The principal reasons why this form of advance is not desirable are as follows: (a) That it does not fix the customer's liability as in- disputably as a note does. (b) That it leaves the date of repayment uncertain and thereby tends to encourage laxity on the part of the borrower. (c) That the maintenance of an active account in the current account ledger involves an actual out-of- pocket cost in the matter of stationery and cleri- cal work, and it is important that the average free balance in such accounts should be sufficient to afford the bank a }>roper remuneration. Ac- counts in which the balance is frequently reduced to zero or converted into an overdraft are not of CLASSIFICATION OF LOANS 279 any direct value to a bank. It is farther to be borne in mind that accounts which from time to time are overdrawn are a further expense through the waste of the time of tlie«managers and ledger- keepers whenever proper authorization has to be obtained for payment of a check creating or in- creasing an overdraft, as all such checks have to be referred to the manager. (d) No customer has the right to issue an order upon a bank to pay money which he has not at his credit. The least he can say is that he wishes to borrow so much, for such a time, so that the man- ager may decide whether 1 le money will be lent or not ; otherwise an atteiiipt is made to borrow the bank'smoney without its consent. The practice of issuing a check without having any account is a criminal offense, and many business men are ill finor of placing a check for which there are not suffi- cient fi'.nds in the same category. In some towns the l)anks make a practice of adding 10 or 15 cents to each check returned dishonored from the clearing before charging it to the endorser's account. This charge has heen tV.und to have a deterrent effect on the practice, and has therefore met with the approval of the merchants. An overdraft in a savings account is, of course, absurd and under no circumstances should be allowed. As a matter of interest it may be noted that nearly every state banking statute in the United States has a clause making overdrafts an offense. Lawrence O. Murray, late Comptroller of the Currency, among other strictures on the practice, says as follows: Wliilc the National Bank Act itself is silent on the subject ;>f I IV, n I rafts, very fortunately the question has been before the I i ' fe I a 280 BANKING PRACTICE 4* SiipriniL- Court of the Uiiitid States, aiid that court says that the grantin- can be made to ani/ person, and the continued exist- ence of the security depends upon the reliability of an iiulepeiulcnt party, the warehouseman or carrier, produc- tion and surrender of the warehouse receipt being neces- sary to obtain the goods. Loans of this kind are reason- al)ly safe, and the conditions governing them are very sJnij)le. In the case of advances made under Section 88, 1 low ever, the conditions are much more complicated, as aiKances under this section can only be made to manu- facturers, and wholesalers dealing in certain classes of K'xxls, the continued existence of the security depend- mfj entirely upon the probity and the ability of the pledfier, who retains possession and control of the goods 283 = 111 284 nANKIN(; I'HACTKE tn liiinscir. C'oi.saiuently, u Imnk never lends money under Section 88 unless it is absolutely eertain of the honestv and experience of the eustonur. Even theti, loans of this class are not very desirable, owin^r t„ the technical detail and work involved in their .)|)eration. There is always a latent risk. JNIen who have had no previous expericm 111 this kind of business, no matter how competent in other lines, are not good credit risks for this kind of loan. They should furnish good endorsements or other security in addition, until they have shown by actual exijeriemt that their operations are successful. Sections 8r,-00, which give the bank special privileges to take such security, are based on the i)rinciple that the security nujst l)e taken and bear the same date as the ad- vances, for which it is taken, thus ensuring that the assets of the borrower will be increased concurrently, and there- fore the act ^^ ill not in any way operate to the injustice of any creditor. Conseciuently, if there is any discrep- ancy between the date of the advances and the date of the taking of the security, the legality of the latter is voided unless, prior to the advance, the bank holds a writ- ten promise that the security woukl be given. It must always be borne in mind that banks alone are permitted to take this kind of security. For that rea- son, it is necessary when making advances to follow strictly the letter as well as the si)irit of the law. Other- wise the courts, if called upon to adjudicate, would no doubt render judgment against a bank. The whole of this system is more or less a novelty in business practice, and in some respects may act contrary to established business customs. The fact, however, that there have )>een so few lawsuits arising out of such transactions goes to show that the system works well in practice, and that no interests ha\e suffered, notwithstanding the enormous KECEIPTS AND ASSIGNMENTS iho vdliimc of business transacted. The conditions govern- iii^r the classes of h)ans under Section 88 are varied and more or less technical, and the following brief descrip- tion is intended only as a general, rather than a specific, cxi)lariation of some of the more important features. •Jl.'}. Section 86'. — Under this section banks are per- mitted to make advances: To iii\y icholcnale purchaser or ,shii>pcr of or dealer in prod- ikIn of a(»■■ • J"* l"l • • Il.r.' ilcvrilw (iilly thi' jiill* or Dotcs Ml taken . Itiilr nut the rli ..( prixliirtif, etc , mil rnvrred hy lliii BMitnmrnt. the prodiirta i f nBrirultiirc, tlir forrnl, .iimrry nnd miB« t.ie priKluriHl.ii t» thereof •' - ■oud», w«rpi tt'id mrrrhiindi«! ■le irsin mentioned below are, i» hereby awi«ned iiloik, or the products thereof. goodit, wares and mcrchandis*! grain »rr if. now owned by the uodenigned and are, is now in the posacssion of and are is (rMfrom "any mortgage. Uen. or charge thereon (eiccpt previoui aaaignmenta to the Bank) and are in Dcrribc fully the phici- or places nhiTC the goods arc situated.. snd are the following.. ! Inipri a« full dc- j iinption aspossi- I hie of Roods a»- I signed, c. g.. logs, lumber. wheat, j fir., and specify I hi' products OQ h:iad. Dated at.. ..the day of.. .191. N, B.— If necesaary, for want of space, the bills or notes or the description of the goods may be set out in schedule to be annexed, in which case insert in the appropriate spares the words "those mentioned in the schedule hereto." FlorBE 62 ASSIGNMENT 289 C— VIII— 19 '290 RANKINCi rilACTKE i. alwaj's be Icl't in the form when there are previous as- signments. Faihng this jieneral deserijjtion, the security, to be good, must eotitain such a definite description by marks, location or otherwise as will enable the bank to identify the goods without question, even if there are other goods of the same kind in the same place not assigned to the bank. A clear and definite description of the place or places Av here the property is stored is as necessary as a descrip- tion of the goods themselves, and, indeed, i. an essential part thereof. The ])()nds, yards, etc., where logs and lumber are stored, the warehouses about a mill contain- ing flour or grain, and, in fact, all the places in which the goods to be assigned are situated, must be descrilied in such a way that there can be no doubt which particular l)laces are meant, and so that if there are other places of a similar kind belonging to the customer they can be clearly distinguished. Such a description as "my mill" or "my elevator" if the customer owned two mills or two ele\ators woidd not be good. If the customer is likely to use any other than the usual storage places the phrase in the written promise and assignment should be made wide enough to include these also. It is to be noted that the act authorizes a bank to take assignments of goods Avhethcr in the possession of the ov ner or not. The pledge (Figure (>2) has been framed to meet customary cases, but it may be altered to suit the circumstances when goods are in possession of another j)erson, as, for instance, at a railway station where the agent cannot grant a warehouse receipt. Tile goods and their location must, of course, be simi- larly described in both the written promise and the assignment. u^i Tromise to Give Wahehduse Receipts ob Sectjritt under Section 88 191 TU TUE MANAOEB THE BANK Dkmi Sir! Tlie bank is hereby requested by tlie undersii^ •! to grant and continue during the current season a revolving line ot redit for m\, our business of iji , and to make advances to th iindorsign<'d th'-eundcr eith furnish a statement at least monthly, even if estimated, showing what stock he is holding at that date under assignment to the bank. This declaration (Figure 65) is of importance, because if a manufacturer, the pledger may have changed the status of the goods from raw material to manufactured articles ; or, if a dealer, he may have substituted other goods in the l)]ace of those originally pledged. The intention of the declaration is to show periodically just what the bank's security is at stated intervals. It also keeps in the borrower's mind his responsibility to a bank, and would show conclusively to a court that a bank was following these goods, according to the spirit of the act. The form also contains a statement as to the amount of wages or other privileged liens on the goods. Particular attention is directed to the prior rights of wa^fe-earners under an amendment incidental to the 1913 revision of the act. Even if the customer is not in a posi- tion to give periodically the information regarding quan- tities and values of the products, etc., assigned, the state- ment should nevertheless be taken with respect to wages, salaries, and the like. When an exact inventory is taken, or a sufficiently detailed declaration made, it would be advisable in most cases to utilize it as a basis of an assign- ment. It is customary to make an examination of the security pledged at irregular intervals, and a manager should at all times keep himself informed as to the fact that the security is fully sufficient to protect the advances. At the same time, even with the best surveillance, so much t4 < W a X *- 3 -a H :: &. r ■r c ^ -S _ I 1 "2 » i ^ -J .t: B 'S is M f » = ii 5 5. SC i, i" '•S = c -= E H J ^ e. 5 - ^ c S ■5 =8 3 a C M 5 J — ^ ^ ^ C Sj . -a s! S !? ■3 :- a -js to ■= -a. H "S »; a ? r ^ = a & a t* s = ~ I i c. ^ •a ^ "^ e K 3 -3 to = J: »: 5 — ^ -K J ■c c ~ 5 - » :3 ~ .5 1 •!< w C/j •9 -« 394 RECEIPTS AND ASSIGNMENTS 295 (Icpciids on the intcj'rity ol' the pledger that a hank should not consider making advances in this form unless the applicant is . person of umpiestioned integrity, with a previous record which leaves no douht on the suhject, III making advances under promise to give security it is n general principle that the money the hank advances sliould go directly into the creation of the goods intended to he pledged. No portion should be diverted to any other purpose. This is an important matter and should he checked constantly, even if it is necessary to make a si)c(ial visit in the early stages of the operations. The time to do it is at the beginning of operations before the money can be diverted into fixed assets or plants. In the case of a large company the fact that the funds have been placed in actual production is often an intri- cate question to decide, being shown by the concurrence of several lines of evidence, the scale, inventory sheets, state of the books, etc. It is therefore advisable that there should be an understanding that these are open to the bank if it sees fit to send an auditor at any time. Care should be taken to see that all workmen and arti- zaiis are paid within a reasonable time and that no privi- lejred liens for wages are demandable: in fact, that no preferential claim exists on the stock. Full insurance in a hank's favor in satisfactory companies should always he held upon goods and the policies retained in the bank's possession. (See Section 251.) Insurance held upon goods under assignment must not be regarded as effective security should fire occur, for if the goods were not there to be destroyed, the in- surance company would not pay. The loss has to be proved. It must not be assumed that the existence of a ])oli('y of insurance is any evidence of the existence of the merchandise which it is supposed to cover. / / 296 BANKING PRACTICE ii »?-. ■ 217. The note- AJtlioii^li an ordinary promissory note form can be used in coiijuMctioii with either the promise or the assignment, it has been found more con- venient in practice to adopt a special form of note (Fig- in*e OC or 07) , with a promise to give security apjjended thereto. Both tiie note and the promise require to be signed. This form should be used in connection with all advances under Sections 86-88-90. The note should pref- erably be drawn on demand, as then the original note will remain current in the possession of the bank until the loan is retired. When taken on demand, the note is made to read with interest, which is collected monthly. If ad- vances are made on time notes, Ihey will have to be renewed, and the old notes and all other documents re- tained, to show the continuity of the transaction. The file will therefore show the current note and, attached thereto, any renewed notes, the promise (if any), the pledge and the insurance policies. Where an account is operated under a general promise it is not necessary to repeat the descriptions, and a note similar to Figure 66 is used. 218. Making advances. — Before making advances the manager should be able to answer the following ques- tions: 1. Is the customer a wholesale dealer, manufacturer or farmer within the meaning of the act? 2. Are the goods of a character which can be held as security under the act ? 3. Does the character and standing of the applicant for the loan entitle him to consideration? 4. Has he had sufficient experience to ensure a suc- cessful outcome of the transaction? 5. If an advance on the warehouse receipt, is the ware- houseman unquestionably reliable? 1 2 5 I t' "S ^ "S j- -9 * S V s 8.:S & g - • I - "i - a i S -" '2 ■2 4/ . :a-s a ^ ^ ^^a 1 5 "S ja eg «« o ■^ T^ a ■■- - S o a B ^ £2 •s &>• u :S^ •si •« 5? Jo ^ v ■a *i "^ 'I sl (S i' i & "? ^ I "2 'a IS » a 1 1 1 :! 2 ••5 •a 3 1 ^ ^ a ^ '9 a e S ^ ^ s '^ a >< 00 en .5 a> » CL V 5-s ■s a :S ^ 807 298 BANKING PRACTICE 6. Has the Imrrowcr surticieiit. means to su;)plement the margin on the goods in case of depreciation! 7. Are there any unpaid vendors or has the borrower hirge outside liabilities which might lead to troii- hie or litigation? Even if the title is perfect, the bank may be called upon to protect its possession, which means costs and trouble, if nothing worse. 8. Will the insurance requirement of the bank be com- plied with? 9. If a farmer, is there a definite understanding as to the eventual sale of the grain? 10. Is the procedure under which the account is to be conducted perfectly clear to the customer and the bank staff? If these questions can be satisfactorily answered the manager is in a position to recommend the credit. Whenever possible the property upon which adA'ances are to be made should be examined by the manager with a view to ascertaining where and what it is, and he should subsequently be able to identify it if necessary. The goods must be particularly described both in the promise and the assignment, and there must be no mistake as to where they are stored. As already noted, if the advances are to be continued during a season's operations, the general promise and other forms should be taken in addition to the note. If the advance is of a casual nature it will be necessary to take only the note, the assignment and the contract in re- gard to insurance. A reasonable margin should be maintained at all times, depending upon the class of security. If the mar- gin will permit and further advances are subsequently necessary, for instance, in order to saw logs, for the pur- I I I ■? 1 :s ^ ^ .5> i- •2 I. ^ 1 5 .5 3 ■2 ^ 1 •2 ■ ^ 299 300 BANKING PRACTIC'K I Si chase of which the original advance was made, f>r for additional expenditure in nianui'aeturing, it is permissi- ble to make additional advances and take additional assignments. These should, of course, recapitulate all the security in the original assignment, including addi- tional goods, if any. But under no circumstances must the original pledge he renewed, the goods being carried out to their final realization on each j)ledgc given. All that is here said as to taking assignments applies equally to warehouse receipts, provided these cover prop- erty which is clearly a portion of that described in the promise. There could be no doubt on that point if the promise is to give security by assigimient of all the grain, etc., now held or hereafter held bv the customer, or bv warehause receipts covering the same or any part there- of, as the printed form provides. It may be well to men- tion that the taking of the subsequent warehouse re- ceipts or assignments referred to above is not a sub- stitution. The customer has promised that he will from time to time give security on all his goods for all his ad- vances. The subsequent assignments, therefore, are not substituted for previous security, but are given in addi- tion and in fulfilment of his promise to give security on tbf* particular goods covered thereby. It should be distinctly understood that the proceeds of all loans under Sections 86-90 must be used by the borrower for current expenditure in connection with his business, and no portion of it must be a])plied, either directly or indirectly, in settlement of any previous existing loan to the bank. Although not essential, it is found more convenient in most cases to have two accounts; first, the customer's current account, from which his regular dirburscments can be made and to which proceeds of the advances under & & 1 J 3 1 ■2 J 301 >> ja ■2 J I 303 BANKING PRACTICE I'm this section would be credited; second, a collateral ac- count, into which all the proceeds derived from the goods pledged should be credited and from thence applied on the loan. By this method of carrying collaterals the same rate of interest may be credited as is charged on the loan on which it is finally applied. It sh.iuld be noted that an overdraft shoidd not be permitted in the cur- rent account of a customer borrowing under Section 88. 219. Warchoimc rccciptx.—Tht: bank may acquire and hold warehouse receipts and bills of lading as collateral security for the payment of any debt incurred in its favor, but it is necessary that the warehouse receipt he acquired at the time the advance is made or pursuant to a written promise to give security made prior to the time the advance is made. Loans may be made by the bank to atit/ person upon «//// goods, wares or merchandise covered by warehouse receipts or bills of lading. In lend- ing on the security of warehouse receipts or bills of lad- ing it is not necessary that a customer should be a manu- facturer or wholesale shipper or dealer, as in the case of advances m^.de under Section 88. A definition of a warehouse receipt is giver in Section 2 (p. 312) of the Bank Act. In making advances on warehouse receipts an ordinary note form, or, preferably, the special form ( Figure 67) can be used. Although the delivery of a warehouse receipt constitutes a legal trans- fer, it is generally considered advisable to take an ordi- nary pledge or to use a special form (Figure 69). Im- mediately an advance is made on a warehouse receipt the warehouseman should be notified in duplicate on a form similar to Figure 70. One of these he signs and re- turns to the bank. 220. Substitution. — Section 88 of the Bank Act au- thorizes a bank to allow pledged goods taken from a HtrtiTiiEc-ATinN or Warehouhb RRrciiTti and/or Bills or Lading WARKIiOLSE RECEIPTS and/or BILLS OF LADING ACQUIRED BY THE BANK u CollmtenI Security W/R or B/L Issuctl DcKription of Good* The »i)ove-mentioned Warehouse Receipts and/or Bills of lading are to he lit'ld by the Bank as security for the payment of the indebtedness of the undir^ifmpd. as follows: Note dated 191 , due 101 , |. nr retiPwaUa) thereof or gubstitution(s) therefor, and interest thereon. The goods covered by the above-mentioned securities may be realized by the Bank in such manner as may deem to it advisable, and without notice to the undersigned, in the event of any default iu payment of !hc said indebted- ne^8. The proceeds may be held in li u of what is rcalize( tion 88 of the Bank Act hereby, until this provision is with- drawn, allows to HMiiove from time to time in the ordinary course of business, for llu" purpose of delivering? the same \h jjurchascrs thereof, the products, jjoods, wares and merchandise, live stock or dead slo( k or the products thereof, or any portion or jwrtions thereof, (.11 the security of which the Bank has lent or may lend him/them money inidcr the provisions of said Section, and to substitute respectively therefor other products, goods, wares and mer- chandise, live stock or dead stock or the products thereof, respectively of substantially the same character. For The Bank MANAGER TiiK uNDEnsiGNED, in consideration of ttic foregoing permission, hereby ,n;r.i. . with The Banlcnot to remove any of the said pri«luils, gooiis, wares and merchandise, live stoeli or dead stock or the products tlnroof, in rosiH-ct of which the siiid permission is given otherwise than in accord- aiuf thtrewith, and within a reasonable time from any such removal (what >hall be a r( iisonalile time in each and any case to t>e determined by the Manager f.irlhttimol)eir,B«f The Bank at — , wIkisc (l.cision shall be final) to substitute respectively for the products, goods, wan- and merchandise, live stock or dead stock or the products thereof so rcnioviMl other gcHxls, wares and merchandise, live stock or dead stock or the priKJucls thereof respectively of su'istantially the same character as and of not los vahic than those so removed, and in ease of breach of this agreement the iinl.r-iciird agree . . that the said Manager may during the continuance of such lina. li (Iciare to be due and payal)le all moneys owing by the undersigned to 111.' Hank and all bills and notes held by the Hank in respect thereof, and on Ml. Ii ilcdaration In-ing made the siiid moneys and bi Is and notes shall there. uiHin Income and be due and payable. I FiaijRE 71 SIBSTITUTIOX .\GREEMFA'T 307 .'J08 BANKING PRACTICE li- the bank would have a right to hold them under the last assignment. Si)eaking generally, it may be said that the benefit of this clause will be most felt when security has been taken upon any stock of grain, minerals, logs, live stock, etc., at a time when the quantity of stock is at the highest point. Tlic removal, with the bank's consent, of a por- tion of the goods, and the substitution of other goods of the same character, would leave the assignments applica- ble to all the remaining stock. It will l)e observed that under this clause the right to substituted goods will not depend on an assignment be- ing taken after the substituted goods are required, but on having an assignment covering the original goods for which the new goods have been substituted. This is an added reason for keeping all the assignments until the whole of the advances to a customer are cleaned up for the season. 221. The "current season." — There is no special limit to the time during which the bank can hold security on goods properly assigned to it. For example, an assign- ment from a grain customer, dated August, would be effective in the following year provided the actual grain which was on hand in August was s^'ll on hand. The question of the season is one which involves some difficulty in the case of accounts of tanners and other manufacturers, whose business goes on unbroken from year to year, so that it is hard to say where their season begins or ends. But there can be no risk in making the promise apjdy to the recognized tenii for bank credits— that is, one year following the date of the promise only. In the case of advances which are not retired in M within the year it is advisable to act on the theory that a general ])romise would not be api)licable to advatices RECEIPTS AND ASSIGNMENTS 300 made Jiflcr the expiration of llic particular season of the customer's business to which it refers. The general promise, however, undertakes to give security by way of assignment from time to time "while any advances made iiiuler this credit remain unpaid," and under this clause !i hank would be entitled to continue taking assignments tor loans carried over the end of the season until such time us they are entirely cleaned up. Renewals of notes representing advances carried over the end of a season should not be merged with notes representing new advances, and the former should be liquidated first. It is not necessary, however, to take separate as- sionments for the renewals, if any, of advances carried over. \Miile assignments of new goods may be taken for ad- vanees carried over the end of the season, and while the same form of assignment may be used for new and old advances, the proceeds of advances on a new season's account should not be used to liquidate any portion of the advances carried over from the previous season. This ie(iuirement can best be observed by opening new ac- counts in both the liability and deposit ledgers for the new season's business, and keeping the old season's busi- ness entirely separate. When the old liability account is fully liquidated the old deposit account may, of course, be closed. Tt should be borne in mind that the object aimed at in conducting separate accounts is to make sure that not a single dollar of the indebtedness which existed before the IK \v promise was taken is jjaid out of the proceeds of the advances charged to the new liability account. 222. Default. — rrovision is made in the Bank Act (sub-section 3 of Section 88) for the sale of goods, in case the l)ank finds it necessary to realize on its security, 310 BANKING PRACTICE 1 'J- ■i owing to the iioii-paynieiit of the deht. A distinction is made between i)roduets of the forest and other gocids. For the former the law requires that thirty days' notice should be given the pledger; if it concerns other goods, only ten days' notice of the time and place of sale is re- quired. In both cases, however, the sale must be by pub- lic auction and after due advertising in at least two local papers. In the Province of Quebec one of the pajjcrs must be in French. If, however, tlie consent in writing of the pledger had been obtained the above procedure is unnecessaiy, and the sale can l)e proceeded with at con- venience. (Figure 64.) There are four penalties in the Bank Act which refer particularly to Sections 86-90. These are set forth in Sections 141-2-3-4. A bank is subject to a fine if it takes security for a pre-existing debt, or fails to comply with the requirements of the act in connection with the sale of goods in case of the default of the borrower. It is an indictable offense for any person to make a false state- ment in any warehouse receipt or pledge, or alienate any part of the bank's security under such pledge. The two latter clauses should be printed on the warehouse receipt or otherwise brought to the attention of those interested. 223. General remarks. — The whole question of mak- ing advances under Sections 86-90 demands careful study of the act, as well as of the definite instructions issued by every head office on the subject. Losses are generally made by banks in connection with loans under this section, due to carelessness in the details of taking the security. In some cases banks have lost their rights to the security. Security taken under this section gives a bank preference over other creditors because the bank created its own security by advancing the money, and in the event of the failure of a customer this preference is RECEIPTS AND ASSUIN.MENTS 311 almost invariably attacked. 11' any tiaws exist in the security a bank has practically no defense. Where this class of security is taken, therefore, it is essential that the niocedure be strictly in accordance with the legal re- quirements, if the security is to be at all relied on. The most important thing to remember is that the security under this section cannot be taken to secure any pre-existing debt, and to obtain title it is necessary that the pledge should be contemporaneous with the advance, or i)ursuant to a written promise to give security made either prior to or at the time the advance is made. When a manager has had little or no experience in this class of loan, it is advisable that in making application for the credit he should outline the necessary procedure as he understands it, referring to the forms he intends to use in this connection. Head office, in reply, will cor- rect or confirm his conclusions. Assurance is thus made (louhlv sure. . Asalready mentioned, the above brief explanation ot this important class of loan is not intended for direct application, but rather as a general commentary on the specific instructions, which are included in the rule books of cverv bank. It is lioped, however, that this chapter will i)rove helpful to any who have not had sufficient op- portunity to grasp the spirit which actuates the law. 224. interpretation of terms.— Vor convenience of reference, the clauses of Section 2 of the Bank Act gov- erning the interpretation of terms and phrases used in Sections 8G-90, inclusive, are given below: (0 ''BUI of lading'' includes all receipts for goods, wares or UKrclmndise, accompanied by an undertaking to transport the same from the place where they were received to some other place, by any mode of carriage, whatever, whether h.v land or water, or partly by hind and partly by water; ' i U 312 BANKING PRACTICE (f) ^"Furnivr'"' inchulcs the owner, occupier, landlord und ten- ant of u furni; (g) "Goods, wares and merchandise'^ includes, in addition to the things usually understood thereby, products of agri- culture, products of the forest, products of the quarry and mine, products of the sea, lakes and rivers, petroleum and crude oil, and other articles of commerce; (h) "Grain" means wheat, oats, barley, rye and flax; (i) "Manufacturer" includes manufacturers of logs, timber or lumber, maltsters, distillers, brewers, refiners and pro- ducers of petroleum, tanners, curers, packers, canncrs of meat, pork, fish, fruit or vegetables, and any person who produces by hand, art, process or mechanical means any goods, wares or nii .chandise; (1) "Products of agriculture" in addition to the direct pnx'- ucts of the soil such as hay, grain, roots, vegetables, fruits and other crops, includes milk, cream, butter, cheese, honey, poultry (dead), and eggs, hides, skins and wool, and dried, canned and preser\'ed vegetables and fruits; (m) "Products of * * * * the forest" includes bark, logs, spars, railway tics, poles and other timber, shingles, laths, deals, boards, staves and other lumber, and the skins and furs of wild animals ; (n) "Products of * * * * the sea, lakes and rivers** includes, in addition to fish of all kinds, whether fresh, frozen, salted, dried, canned, preserved in oil or otherwise preserved, whales and seals, their oil, skins and bone, oysters, lobsters and other crustaceans, fresh and canned or otherwise pre- served ; (p) "Warehouse receipt — " (i) Means any receipt given by any person for any goods, wares or merchandise in his actual, visible and con- tinued possession as bailee thereof in good faith and not as of his own property, and (ii) Includes receipts, given by any person who is the owner or keeper of a harbor, cove, pond, wharf, yard, RECEIPTS AND ASSIGNMENTS 313 wurehousc, shed, storehouse or otlicr place for the storage of goods, wares or merchandise, for gooils, wares and merchandise delivered to him as bailee, and actually in the place or in one or more of the places owned or kept by him, whether such person is en- gaged in other business or not, and (iii) Includes also receipts given by any person in charge of logs or timber in transit from timber limits or other lands to the place of destination of such logs or timber. -i^^^^^wi " CHAPTER IX BANK COST ACCOUNTING ill #h 225. Need of a coat system. — Practically every bank in the United States of any importance has installed a system of cost accounting an<' made a careful study of the principles involved. In Canada, however, very little attention has been given the subject by the banks, although in almost every other line of commercial indus- try cost accounting is given thorough consideration, and in fact has become an absolute necessity under modern business conditions. The necessity of a cost system to a bank is really greater than in any other business, owing to the narrow margin of profits on the gross amount handled in bank- ing, and the number and variety of services rendered by the banks to their customers and the public without re- muneration. In the stress of competition most banks overlook the fact that every transaction made for a customer, no mat- ter how simple, bears a basic cost to the bank. They have allowed tlie public to encroach gradually on their legitimate exchange and other profits. They are not only rendering a great many services for nothing, but frequently at a loss to themselves. The public has been quick to grasp this weakness of the banks, and has natu- rally pressed its advantage to the utmost. 3U BANK COST At't'Ol'NTING 315 I'lilil the beginning of the present centmy the profits obtained from the banking business were large enougli so tlmt tlie loss from a few unprofitable accounts had no appitriahle effect on a bank's net earnings. Competi- tion, however, has brought conditions to a state such as has existed for some time in other lines of business, so that it has become more and more necessary that all the business ha?\dled by a bank should show a certain anioniit of profit, or at all events not be transacted at a loss. The development of a new class of business, that of small and unremunerative checking accounts, the vast increase in the volume of checks, the tendency to carry active checking accounts in the savings bank department and the constantly increasing cost of operating, have made the analysis of the profit or loss on individual ac- counts an absolute necessity. The only remedy for ex- cessive or unintelligent competition between Canadian banks lies in an accurate knowledge of costs. No or- dinary argument will appeal to a branch manager suf- ficiently to restrain him from offering extra inducements to customers, as long as he honestly believes that he is securing such business at a j)roiit. But few managers would persist in offering the goods or the services of the hank for less than cost after they know what the latter was. The modern banker would severely censure a cus- tomer who was ignorant of the manufacturing costs of his goods, or who was unable, in discussing an unsatis- factory profit and loss sheet, to state whether his whole business was unprofitable, or whether there were certain lines he was manufacturing at a loss, which should be either discontinued or the weak point in their manufac- turiufT or selling remedied. Yet the banker himself is 310 bankim; I'HACTici: hJ [II ■ li' '- luint'iilaMy iicglctiriil cil' infonuulioii of this w>rt c-oii- ceriiing his own business. It should prove a humiliating retlcction that the Imnks, the most indispensable business units in the eouutrv. art oiKTating with an almost utter disregard to receiving adeipiate profit from individual eustomers, and are evi- dently content to trust to luek that the business as a whole will carry the burden. It is true that the hanks, notwithstanding this handicap, pay dividends. But these dividends are not at all conmiensurate with otiitr lines of business requiring less ability and involving much less risk. With expenses constantly on the increase, and with returns for banking services steadily diminishing, tlie banks have been forced to study seriously the reduction of expenses, both by the introduction of efficient and labor-saving methods in the work, and by systematic study of costs, with a view of adjustment or eliminating any accounts or transactions Mhich have hitherto been done at a loss. 226. Principles of cost accomitinfr,—'rhere are a great many factors entering into what constitutes a profitable account to a bank. The amount of credit bal- ance maintained is not the principal factor to be con- sidered, but the i)er item cost of the entries. In other words, an account with a balance of only $200, with a few entries, can easily Ire more i)rofitable to a bank than one with a balance of $1,000 or more, but with a large number of cheeks, deposits, and outstanding items. In analyzing accounts the following questions should be answered; (a) Is the account producing a profit? (b) Is the account handled at a loss? (c) If the latter, exactly what increase of balance or BANK lOST ACCOUNTING 817 other change of conditions governing the account will vkxutii.' the loss to a proHtf Though ai» accoiuit nmy he „ptralc(l at an uiiparent loss it frwiuently htti>i)ens that there are collateral advantages which warrant a continu- ation of the arrangement. ((I) If the account is protitahle, is the hank justly tiititU'd to a larger profit than now ohtained^ (i) Is the depositor entitled t() any additional con- irssionsf In considering these points the following are axio- niatii". (a) That in order for a deposit account to l)e protit- ahle the halance must he a credit halancc. (I)) Any account is profitahle if the income from it exceeds the exiHjnse of keeping it. (c) That in determining whether or not an account is proHtahle the amount of credit hahuice maintained is not necessarily the principal factor to ht considered, and that in determining the value of an account the amount of the halance is of secondary consideration as compared with the per item cost. (d) That in reviewing an account the minimum wecklv credit halance is the one that determines the loan- ing value of the halance. Care should he taken to dis- ciimii.ate hetween the value of an average balance and a steady halance; the former, if a violently fluctuating nc- coiint, is valueless. (c) Discounts on loans and trade bills, as well as interest on debit balances, should not be taken into con- sideration in this coiujection, as the net discount or inter- est earned Is regarded as a part of the profit accruing from the general loanable funds of the bank, and can- not therefore be regarded as a benefit derived from an 318 HANKING PRACTICE m ir .■ individual account, which receives due credit for the amount of halance maintained on deposit. (f) In considering unprofitable accoui. ..ic point should always be looked into, especially in the case of accounts in newly established branches, and that is wlicther the actual loss to the bank in carrying tiie ac- count is less than the amount of fixed charges which sucii account is carrying. (g) General conditions of policy must govern a bank in the consideration of cost figures, and the introduction of a cost system does not imply the elimination of this element, but it does mean, however, that in deciding upon a concession in any individual case, the bank will have an exact knowledge of the costs and earnings of the ac- count, and will know exactly what it is granting and the actual cost thereof. (h) It is important to bear in mind that an appa- rently large balance is not necessarily remunerative, as it may be partly, wholly, if not more than offset by items in transit or process of clearing, so that without an ac- curate analysis, a customer's balance as it appears on the ledger may be a very deceptive measure of the value of the account. 227. Small checking accounts. — The steady increase in the number of small current accounts is becoming a serious problem in banking, owing to the difficulty and expense of operating them. There are several classes of small accounts, some of them desirable, others neutral, and many inidesirable. A consideration of the origin and intention of these small accounts is of interest. Roughly speaking, they may be divided into eight classes: the last class, No. 8, liowever, is the one to which particular reference is made, owing to the per item cost with no compensating bahujce to support fixed charges. BANK COST ACCOUNTING 319 1 A balance created by the payment of notes or other itetns collected by the bank for a customer. These ac- counts are generally closed by one withdrawal. •> Proceeds of discounts credited. These accounts are" generally inactive and the balance left comparatively small, a few dollars as a rule. :3. Money left for safe-keeping and generally with- drawn in one amount. 4 Funds deposited from time to time to meet certam payments inactive, and generally withdrawn in one amount. 5. Balances of subsidiary business accounts of large customers, such as coupon and dividend accounts, pay check accounts, etc., the checks for which would other- wise go through the general account; therefore a mat- ter of bookkeeping convenience to the customer, and as a rule a convenience to the bank. Include in analysis of jreneral account. (). Private checking accour, of partners, managers, and other officers of a company, and occasionally their wives. These accounts are generally carried wilhngly bv the banks as a matter of courtesy. Such accounts freciuently have good balances in the savings department. 7. Seasonal accounts. The balances of these accounts during the greater part of the year are generally small, with practically no entries, and represent the balance left over after a season's operation in a certain class of business, such as agriculture or lumbering; for instance, jirain buvers, cheese factories, etc. These as a rule mam- tain satisfactory balances during the height of theu: ac- tivitv. 8.' Small checking accounts with a maximum of en- tries and minimum of balance. Tiie bank, for this last class of account, practically 320 BANKING PRACTICE ,!l ( [ M II m ■^■i acts as bookkeeper and saves the depositor in some instances $5 or more per month in that connection. Ex- perience has shown that these accounts are more fruit- ful of trouble and risk to the bank than any other ac- counts, and once a mislal ^ is made the loss is seldom recovered. Forgeries, raised checks, and other forms of criminal financing are frequent. "Eternal vigilance is the price of safety." Beyond the personal equation of the customer and his good opinion, whatever that is worth, there is little or no value in these accounts. The balances are small and of such a fluctuating nature that practically 100 per cent cash reserve has to be carried to meet their requirements. Furthermore, as the d^ posit" would probably show that about 90 per cent of the amounts consist of checks and bills redeemable at other banks in the city, there is in many cases a real overdraft in the account, pending the clearing of these items. The entries on these accounts, credit and debit, cost at least 3 cents apiece. Accounts of this character take up a great deal more of the time of the manager and staff than practically any of the desirable accounts. As a rule checks are issued before the deposit is brought in, and frequently it is necessary to call up the customer by telephone in order to protect his checks from protest. It must be remembered, however, that in many small branches a number of these unprofitable accounts can be carried under certain conditions without any actual money loss to a bank. The reason for this is obvious. A small branch, especially if newly established, has cer- tain fixed charges to maintain irrespective of the business done. For several years after opening, it has men and machinery to spare to handle this class of account with- out any additional expense. It is only when the business BANK COST ACCOUNTING 321 lias increased and more men and office accommodation are rt(iuired that these accounts become burdensome. This explains why some banks advertise for and encour- age small accounts. They enable the manager to become aniuainted with his neighbors, and frequently a small account may later turn out desirable or bring desirable connections. The same arguments do not, however, apply tc a small savings bank account. Such an account is not intended to be checked against, and should have practically no expense except the cost of opening, calculating the inter- est, and holding the reserve. The tendency to check against savings bank accounts is to be deplored for many reasons. The banks have no machinery for handling these checks. The cost amounts to abort 6 cents per entry, as practically every signature has to be looked up with each presentation, the pass-book called for, etc.; moreover, this abuse of the savings bank account is an open door for forgeries and other frauds. The increasing activity in the savings bank business is constantly adding to the expenses of that department, o^ving to the number of checks that are now bemg issued on the various accounts, and the practical elimination of anv notice, or deduction of interest in lieu thereof. No balik can afford to pay a higher rate than 3 per cent under present conditions. In fact, a study of the state- ments of the various banks in Canada graphically dem- onstrates this fact. , It will be conceded that 6 per cent on the shareholders capital and reserve is not an exorbitant rate to allow, and after deducting this from the net profits of the in- dividual banks in 1912 only three would have been able to pav 4 per cent on savings bank accounts without com- pletcly wiping out their profit and loss account, and C— VIII— 31 323 BANKING PRACTICE leaving a lieavy deficit. These three banks are those whose savings bank deposits are relatively small com- pared to their capital, being in the ratio of only about three to one. Out of the same banks only seven, in ad- dition to the above three, could afford to pay 31 per cent. Of these seven, a few are able to pay because of the small ratio of their deposits to their capital, but in the majority of cases they are banks who have a large amount of ordinary deposits and other free balances. Even these banks would have remaining a balance of profit totally inadequate to meet their usual appropria- tions for depreciation and other contingencies, and cer- tainly nothing to set aside for reserve. 228. Branch expenses. — A service whieli the Cana- dian banks render the country, and which is usually but poorly appreciated, is the branch service. It speaks well for their progressiveness iu this connection when the number of branches is compared with those of Great Britain or elsewhere. According to the Bankers' Mag- azine, during a recent five-year period, Canadian branches were increased 50 per cent while in Great Brit- ain the increase was only 15 per cent. Furthermore, these statistics show tliat Great Britain has one bank for every 5,116 inhabitants, while Canada has one for every 2,847 people. Thus, according to population, the bank offices in Canada are nearly double those of Great Britain, and it must be remembered that the Canadian banks open branches under a great deal heavier expense and more inconvenience than their English confreres, and a branch is more likely to remain an expensive bur- den in Canada for a longer period than a similar branch in the old country. There are few villages in England which cannot show a fair proportion of affluent residents either living in the village or occupying the neighbor- BANK COST ACCOUNTING 323 ID? ,„. country houses, whereas in Canada a new branch aciierally means more loans than deposits to start with. Were it not for the circulation privileges the expense would be a serious deterrent to the practice of opening „|) branches, especially in newly settled localities. It has been advanced that there is a great economy in tlie l)ianch system in the fact that there is only one execu- ti\e for a large number of branches as compared with the indivi al executives required for the American national oanks. This economy, great though it is, is partly offset by the increased cost of operating branches, owing more particularly to the non-concentra- tiou of the clerical work. In other words, a teller or lidger-keeper, for instance, in a big office can easily put tlnouense involved. True, this one feature may be considered but a small part of a bank's business. It is usually looked upon as one not worth BANK COST ACCOUNTING 325 ,„„si.kri..}A-. Yet, in acting as a clearing house in this conncrtion, the hanks of Canada reiuler an uiestimable service to the country, at a cost of millions of dollars an- ""'riie average amount of outstanding items held over „i.,l,t for the daily local clearings of the Canadian banks is over $70,000,000, and offsets nearly three-fourths ot the average circulation of the banks. At 6 per cent in- terest it represents over $4,000,000 annually. In addi- tion to local clearings there is a much larger amount of items in transit between branches and correspondents, some of which business is transacted at a loss. \ customer of a Toronto bank, for instance, meets a „„te l.v depositing a check drawn on another bank in rnn.Mto; interest stops when the note is charged up to ],is account. But his bank does not receive returns for the check through the clearing until the following day, u loss of one dav's interest. If the check had been drawn „n a hank in ]\Iontreal it would be two, or in some cases three, (lavs (where Sunday intervenes) before the branch at Montreal receives clearing returns for the item. Even if the check were onlv for $100 the loss at 6 per cent would amount to over 31 cents. Roughly speaking, a (hivs interest at 6 per cent is equivalent to a little over one sixtv-fourth of 1 per cent. It is important to bear in mind that a check or sight draft outstanding seven (lays has exhausted the ecpiivalent of one-eighth of 1 per cent in interest alone. In making an exchange charge to a customer there are three elements of expense to be considered and ad- justed to meet the special conditions of the customer s Inisiness, namely : 1. Postage and the actual cost of stationery, clerical work, etc. 326 BANKING PRACTICE * if Iff If' I it i m 2. Interest for the time outstanding.* 3. (a) If a branch: the cost of the ultimate transfer of funds between branches, (b) If a correspondent: the actual charge. 4. Profit to bank. commission The first three clauses — expenses — are incurred in connection with every transaction, whether with a branch or correspondent or whether put through at par or not, and it is advisable for every branch to test out its exchange charges on the above basis, and see if the bank is being fully remunerated for its services. As an example, we shall work out the details of handling a check between two such important centers as IHontreal and Toronto. Take a check for $100 cashed in Toronto: Office and postage charges 2 cents Interest for time outstanding (2 days) at 6% . 3 . 288 cents Total cost 5.288 cents In other words, a check for $100 between the two branches costs approximately 5i cents. It may, of course, be advanced that a bank is not out any interest when the check is between two customers of the bank at different branches. This is true where the account of the drawer is in funds at the time the check is cashed. But, theoretically, the transaction must be dealt with as it concerns each customer and each branch. Xo merchant would sell an article at a loss to one cus- tomer simply because he expected to make a sale to an- other customer at a profit. ' The time element in clause 2 i.s frequently overlooked, with the consequent absorption of the profit into expense. BANK COST ACCOUNTING 327 Tliere is a tendency on the part of some customers to expect, almost as a right, all sorts of par privileges and concessions from their banks, presuming on the fact that the i)aiik would be sorry to lose a good account. Ihis is a peculiar trait in men who are otherwise honorable and tree from petty motives. If a bank manager, ui buying goods from one of these same customers, tried regularly to beat down the price, or expected to get all small wares for nothing because they did not cost much, what would the merchant say? The foregoing figures would apply to a check remitted any other branch, with the change in the time only. Should the item be sight instead of a check the mterest pel U)d would be increased to seven days, or 7-64, ap- proximately 11 cents. A collection sent to a correspondent, however, has to stand a double charge in the interest. Take a check for, say, $100 sent from Toronto to Carleton Place, the cost would be as follows: Office charges and postage ••■•••,<* **"*' Interest for time outstanding Carleton riace and return, 2 days, at 6%. . . . ^6.575 cents Remittance sent to Montreal, 2 days. . .. . ) Exchange charged on check by correspond- ent at Carleton Place ^0 ^"^ Total cost 18.575cents If 25 cents was collected on this item, the bank gets a p.o\. New Hri'n.twick. Qiiflni- Ontario ManitolM Saskatchewan . Albfrta BritLshrulunibia N.S. U 5 V, (I 7 V K I. N. B. :l < I i ;! .1 1 c .) 1 (i 4 7 i)w. (hit. Man. Susk. AlUi. H.< 7 .'} t a 4 U U (! 7 :j :« U (i (i 7 < ^ 5 li U 7 4 '.' 4 ,'. .> (! 4 1 ^ .'1 a •> « .) :j :i 4 J ,j .) :j :< 4 a 7 (i 5 J 4 :< X V 1 day's intprcst at fl'^ = 1/Ct, approximately. Tlien'fopi', the ii.sl of inten-st (sjiy) Iwtween points in Ont.irio and ManltnU is 4/(54 = 1/10, if sent to a corn-sponth-nt the item would be 8 days outstanding. or 8/ft4 = y^ of 1% for interest, as it would lake the same lime to clear the return remittance. Interest on $1,000 Days 2% -^yrc O'o Decimal \'ulue.s ol 64th.s l/32n(l.s 1 .0548 . 1233 .1644 . 15625 1 2 .1096 .2466 .3288 .3125 2 1 32 3 . 1(544 .3699 .4932 .46875 3 4 .2192 .4932 .6575 .625 4 1/16 5 .2740 .6164 .8219 .78125 5 6 .3288 .7397 .9863 .93750 6 3/32 7 . 3836 .8630 1 . 1507 1.09375 7 1 10 8 .4384 .9863 1.3151 1.250 8 1/8 9 .4932 1.1086 1.4795 1.40625 9 10 .5479 1.2329 1.6438 1.5625 10 5/32 11 .0027 1.3562 1.8082 1.71875 11 n .6575 1.4795 1.9726 1.87500 12 3/16 13 .7123 1.6027 2.1370 2.03125 13 U . 7071 1.7260 2.3014 2.18750 14 15 .8219 1.8493 2.4658 2.34375 15 r4 Figure 72 328 BANK COST ACCOUNTING 329 o tions The figures alwve are based on the supposition that only the larger items reeeived in the morning mail are cleared the same day, the smaller ones being cleared tl,e following day. It is, therefore, very important for branches to remember the necessity of using the mail services intelligently with a view to saving interest; m „tlKT word-, if a large item is cashed during the day. to st'c that it gets out by the first mail, even if a special letter is necessary. Though we have not included any charge for the transmission of funds on tl»e indi^ idual i^em, in the above examples, this expense must eventually l)e met m some i„nn or other in the adjustment of balances between branches, either bv remittance pf legal tender or bank notes, etc. Express charges run from 30 cents to ^3 or M per one thousand dollars. The above facts establish conclusively that the cashmg of checks at par at the branches is a constant source of loss to a bank, and that outstanding items in course of collection or in transit form a more serious and un- avoidable expense for which a bank should be compen- 230. Cost data.— The loanable value of the balance maintained must be determined by each individual bank for itself according to its net earnings. It can be ar- rived at in various ways, but, roughly speaking, it aver- ages between 4 per cent and 4 J per cent. Two cents per check is considered a low cost per item. F. W. Thomas, of Toledo, an expert in banking cost accounting, places the cost of an ordinary check at 2. J cents while a savings bank check he figures costs 6i cents. ISIr. Bordwell, of San Francisco, figures that a clearing house check costs .0122 cents and an out of town item .027 cents for bookkeeping only. A custom- 330 BANKINCi PRACTICE 1-1 er's check costs .0313 cents, or .0287 cents if the custonter supplies his own check form. A Chicago hank inakes its calculations at .01516 cents per check, hut this figure does not include anything for overhead charges, for man- agement, clieck blanks, etc. It is simply for clerical work, rent, light and heat. The other figures are over all. Sir George H. Murray, one time Secretary of the Post Office in Great Britain, stated in 1902 that it cost at least Gd for every transaction in the Post Office Sav- ings Bank, and 7d per transaction in the Trustees Sav- ings Bank. It is to be noted that the Od is |)er transaction and covers both checks and deposits. If limited to checks would probably be Is or more per entry. The English banks not only charge the customer for postage, check books, and the like, but expect a reason- able balance to be maintained generally a minimum of about £100 in the city or £50 in a country branch. In arriving at the actual cost per item, it is necessar}' to include, in addition to the cost of the clerical work, the cost of the supervision of the manager and accountant, the apportionment of the rent, stationery, light, heat, and vault and safe accommodation ; also an apportionment of head office expenses. This involves extra work, but once a basis is established in an office for per item cost, it would serve for the consideration of all accounts for the year. Even if the bank considers only the salaries of the men actually engaged in handling checks and deposits— namely, the teller and ledger-keeper — the cost per check, just under this one expense, will be found surprising. It is seldom realized bv a customer, or even bv the manager himself, that a check form on safety paper costs $2.50 per thousand or i cent apiece. HANK COST A((m'NTiyG BiU For the average braiuh in caskTii Canada a per itfiu i„sl of '1 cents per cheek is accurate cnouKh for gen- tiul purposes, or to put it another way. a steady average ludunee of between 50 cents to GO cents per check issued slidiild he maintained. An account, for instance, which issiHS one thousand checks per annum should maintain a balance throughout the year of hetween $.>00 a!»d $000 to c.vir the out-of-pocket expenses of the bank in operat- ing the account. •_>;n. An account nnalifzcd.— In order to illustrate some of the more elementary features of cost accounting the following brief analysis will be useful. The account shows an average weekly credit balance of $7,000 for the year, average amount of items in transit $5,300, aver- ajTf amount of checks cashed at par at other branches )i$«;()0, number of checks issued seven thousand : Gross Earnings Interest on the average balunfe nt 4^%. 7'^ ^VJi Kxchange received on items deposited or collected Jiio $640 $040 Less Value of Work Done Interest value of items in transit average $5,300 ^l 5^ . . • $»«5 Interest on checks crossed at par and paid by hrunches, average outstanding, $600 at 5%. 30 ( ollection charged paid to other banks 78 Othce charges on 7.000 debits to the account at 2 ct-nts each 2_. Total cost *^^3 ^'*^^ which leaves a net profit to the bank of $127. Even with the large balance of $7,000 it will be noticed that there is constantly outstanding $5,900, consisting of $5,300 of items in transit, and $600 of checks paid at par :j:32 BANKING PRACTICE Iti ■41 I w h\ other branches. This leaves the real hahinee prac tieally $1,100 instead of $7,000. It is well to remember that the bank nuist base its holdings of cash reserves on the larger or bo«>k balance, which will reduce the net bal- ance of $1,100 still lower. The rate of interest, 4i per cent, is based on a net earn- ing j)ower of 5 per cent less 10 per cent for cash reserve. The "exchange received" is self-explanatory, hut at- tention is drawn to the fact that the schedule of exchange charges is evidently insufficient. In making the rate, full allowance was not made for the length of time the items would be outstanding. The total cost for collecting these items, interest, and commissions, was $343, or $18 more than the exchange collected, and were it not for the free balance of $7,000 the account would be operated at a seri- ous loss. The most satisfactory way of obtaining the average amount of items in transit is to m'iltii)ly each item by the number of days it was outstanding, and divide the total amount by the number of days under consideration. This will give the average daily amount outstanding. In the accounts of customers who have the privilege of crossing checks payable at par at another branch, par- ticular attention should be paid to the date such checks are cashed at the other branch, and the interest during the time taken in transit made an expense against the account, as shown in the above statement. This is neces- sary, as the amount of such checks in transit not only affects the amount of the credit balance, but, in addition, some customers do not arrange to provide funds for their checks until they are about due at the bank. In many cases they do not even provide the funds then, until their attention is called to the matter. Par privileges should not be accorded to accounts of this nature. They should BANK COST ACCOUNTING 333 l,c ^.laiitcd only to accounts which keep a credit balance con.intnsurate with the work done, in addition to having ample funds to cover outstanc'ing checks. Although the account sho^ • profit, it is not a normal „„c. as there is a serious wea ss shown in the rates of excliange charged. A slight ur(.p in the deposit balance would turn the profit into a loss. An examination of the cash items deposited will show on what points the rate of cxduuige is inadequate, and an adjustment should be made accordingly. Conditions in a customer's business are constantly changing, and the nature of the items de- posited varies accordingly. An exchange rate that is sat- isfactory one year might not be so the next. ■_'.•{•.'. Method of anal ifsis.— The work of analyzing an ordinary account is not very onerous, especially if sys- tematically followed out, the course of the deposit bal- aiues being the main information required. Wholesale and other accounts depositing a large luimber of cash items involve more work, especially if the data for the whole vear is required. Usually, however, the transac- tions fi)r a month are sufficient for all general purposes. An analysis sheet which provides a space for all nec- essary information is given in Figure 73, and a brief ref- erence to some of the important headings will be of inter- est. The information called for by this form is of course very much more full than it would be necessary to con- sider in analyzing an average account, but the form is in- tended to be used for any account, no matter how large. The amount earned on an account dei)ends principally on the value of the credit balances maintained, and for puriM)ses of analysis the minimum weekly credit bal- ance is the one which shoidd be considered. Any money on deposit less than a week has no loanable value to a bank so far as an individual account is concerned. It S; u H *, u I < -I" fe K (. ce Ik* >»■ 91 a < ,0 O « :fi ' >. s .SJS it l5~ c c s c s S i S & - I .1 1111 (SO. c£ ?34 3 ^ ^ I < -• N « •» KJ (9 1 I 5=5 I I 5 TS ^ 111 i i I - ? f ' g I s •:; a 5 5 " -3 -3 " fc. w I- "r? n r - s a « I > ' ^ ■= JS X ^ w •!< •'-'-'-err i i 11 « = c t V c V ^ %^ ^ e e « ess - c c o -<; - - 335 :u{6 BANKING PRACTRE : 4 11. . • H>! I may be contended that under the law of averages, and considering the accounts as a whole, the average weekly or even daily balance is of value, but in an analysis no account should depend for strength in any particular on another account. For j)urposes of comparison, however, the average monthly balance should be considered in the general sizing up of the account. If the account shows debit balances dm'ing the i)erio(l, the exact number of days overdrawn and the amount at credit should be shown. Debit !)alances do not enter into the value of a deposit account, as the net discount or interest earned thereon is considered as part of the profits accruing from the gen- eral loanable funds of the bank, and cannot, therefore, be regarded as a benefit derived from any individual ac- count. Furthermore, in the analysis, credit is accorded the account for any loanable funds supplied. The average debit balance, however, is of value for pur|)oses of comparison, and can be easily ascertained on the basis of the interest debited to the account during the peri(Hl. If interest is allowed on the credit balance, or any part of it, the amount of interest credited shouhl be taken into account as part of the expenses. Care should be taken to see that the interest credited covers the whole period under analysis. '2lili. rjAclianfic received on items deposited and col- lecied. — Gross earnings are derived from the value of the credit balance and from the exchange received on items deposited and collected. Profits on special trans- actions, such as letters of credit, foreign exchange, circu- lation, etc.. should be shown separately. In an ordinary de[>osit account there are compara- tively few items deposited drawn on out-of-town points, BANK COST ACCOUNTING 337 and the rates received for these are generally remunera- tive. In the case of wholesale merchants and other dis- tributors, however, who deposit a large number of cash items, the rate of exchange charged is generally low, and trt(iueiitly unremunerative, unless the destination and in- terest cost of the items has been taken into consideration in making the rate. The first data to examine, therefore, in this connection is the schedule of rates under which the account is op- erated, and to the practiced eye the weak points in the arrangement, if any, will at once become apparent. A useful form for affording this information is given in the ii|)l)cr half (C) of Figure 74, the analysis of the actual items deposited being made in the lower half (D) . It woidd, of course, l)e impossible to consider each item iiuhvidually, and the best method is to divide Canada into provinces or sections, as shown in this form. The information given in (D) represents the total of cash items (lei)osited during the period reviewed, and shows the distribution of the business transacted, as well as the amount of exchange collected and paid. The totals given for each province, etc., should be mul- tii)lied by the average number of days items remitted to eaeh section are outstanding ( Figure 72) , and the amount extended into the last column. The total of this column will represent the amount of items in transit outstanding on the basis of one day, and when divided by the number of days in the i)eriod will give the average amount out- standing for the year. It is a simple matter for any l)raiieh to make a schedule showing the average time be- tween the deposit of an item and the receipt of the rela- tive clearing returns from various points in the country. The heading "Local" in form (D) refers to checks (Irauri on banks in the same city, the returns for which < Vlll-!i2 8 C. e SfiiKnn.F. OF Ratks ON ('a«m Ium-. Ff . ft) 1 (ash Bnin(-lir< Itkmm Skjiit Dhaith TkADK IllLU* 1 Olhtr TiMnl.s Branc-hrii OIlur Points Brunfhr< I'ljinl. 1 I^al.. . . 4 MHrilinir and (jiu'Imi' ~ ()nl;iririiritini<" and (iuclw' Ontario <«-nlral Wi-.st I'acitir Const New York ( \-.ii I iKM i Cur.niTKD WiiK.N Dkphsitkh Kxrhaiif^ CollfHtifl Paid Anionnt (Omit Cent--) Aiwly." Total. . . OTHER POINTS Maritime and Quebec Ontario Central West Paeifu- Const I'niled SluteM TdTA h - c a N«>Tr III roiinectioii with thi- iil»u.\ iiii-iit (the pmroifls of wliirh an- nfltTwurdrt rrniitli-rf t" .voii (nr i-rrd't o< th«>^ cuuut; abuuld be (luUnguuhed frum those deponited with you for iiuiiiediate credit. Figure 74 lias ( OIXKCTIOXS ^\D CoLLATEHAUi Branthcs Other Points Drafts Sold Par or Other Special Privileges. Etc. Arc thrso ratrs rharoed in frery insianc*? . In the work rntailcd above the average? .pplication (or credit, prcferabb' the month in which the account is most active.) Sight Items Chedited When Deposited Returned N.. Exchani;e Amount (Omit CenU) .Vnalysis No. Amount Collected Paid -•-- ■ ^ --- _^__ ! 1 1 ' ' i ' 1 : 1 1 SS9 340 BANKING PRArriCE arc not received until after clearing the following day. An account could easily deposit $50,000 of local checks and have only $5,000 to $10,000 balance at tlie end of the day. In other words, the bank would be lending $45,000 overnight without interest. If this occurs daily as it does to a great extent, it is a serious burden on the bank. Figure 75 gives an excellent form for analyzing the distribution of cash items, the reverse giving columns for the local, Quebec, Ontario and maritime provinces. Some banks prefer to sort the items out according to the number of days they may be outstanding, in which case a form similar to Figure 76 can be used. In allowing for the time an item is outstanding it must be borne in mind that the loss of interest does not cease until the actual clearing returns are in the hands of the bank. Items sent to correspondents, therefore, are not finally disposed of until the relative settlement chaks have been actually cleared at Montreal or Toronto, or whatever central point the draft is drawn on. The gross amount of exchange received, less the cor- respondent's commission and interest value of the time in transit, will show the net profit or loss on exchange. An account should also receive credit for the net exchange received from collections and discounts. Interest is not an expense in connection with exchange on collections, but in arriving at the net exchange on discounts the time occupied in the remitting or returning the items should be taken into account. The basis of rebate, if any, in connection with cash items or discounts should be looked into carefully, as this is a fruitful source of loss. 234. Checks paid at par at other branches. — Refer- ence has already been made to the loss sometimes entailed z £. / = 1 f z 1 e • 1 12 \ i 1 2 > 1 1 1 1 A n 6 V. i 1 7^ 1 "s •< • i 1 '■ 1 w 1 e 1 >• ■1^ i 3 Y. i 7 s < • 1 c 1 1, Si «4 :5 1 i ■r. 1 6 « a 1 • 1 I 1 z 'li 6 i j WKST Other Poisth s 's < • 1 M 1 a. 1 i F 1 u a "s •< • ■ ! ; 1 = 1 ^ j 1 S 941 X H y. 9 s 2 C O < < ? 1 'I O y. i a u M I £ S ! 5 7 e •2 i2 I S I " a Sl!i ii i j J :5 55 I 1! il II e ^1 II << IJ I L hi CO ££ BANK (OST AC'COl'NTING 84S ,„ jrrantin^ this privilege. In the case of checks cashed at par hv another hranch a mcnioraiulum should he iiuide l,v tlif it'ilKer-keeper in the ledger o|)|M)sitt the clieck, >|i()«inK the date of encashment. The check lieconies a (liariff against the acc«)nnt directly it is paient hy himself and the staff in (.|)eiating each account is compensated for by the balance at credit, or other collateral advantages. Tile analysis itself is purely mechanical, and the real test is to decide whether an adjustment of the rates should he discussed with the customer, or whether the (olhiteral advantages of the account outweigh any unsat- isfactory feature discl«)sed by the analysis. Business iiitii, as a rule, are not um-easonable when an issue is put s(|narely l)ef.)re them. Few would refuse to make some adjustment of an account, if they were shown that it was working a palpable injustice to the hank. The tact- ful manager could take advantage of a favorable oppor- tunity to suggest to a customer slight changes, which MICROCOPY RESOLUTION TEST CHART I ANSI ond ISO TEST CHART No 2l A APPLIED IM/^GE Ir ^K '653 Lost Ma^n Streel 5*^ Roc^este^, New York 14609 USA '■SB (716) 482 - 0300 - Phone ^S ("6) 288 - 5989 - F<3« 344 BANKING PRACTICE w m would plaee the account on a more satisfactory basis Various methods are available; the balance might be in^ creased, the exchange rate adjusted or, in the case of a small checking account, a flat rate of 50 cents or $1 per month could be made. It is preferable to submit the account to a rigid analy sis and thus allow leeway for the consideration of col- lateral benefits, rather than to make a less exhaustive analysis and run the risk of overlooking some unfavor- able feature. After an analysis is completed, consider carefully all the advantages of the connection. The cus- tomer's side of the question should also be impartially considered; he may have cause for complaint and anal- ysis is invaluable in either case. Where an analysis is unsatisfactory it is generally advisable, unless the'unfa- vorable feature is very outstanding, to defer any action until the fact has been confirmed by the next analysis. CHAPTER X INTERNAL INSPFXTION 236. Branch inspection. — At irregular intervals and at least once a year every branch is visited by an inspector and his assistant from head office, and a thorough audit of the books and assets of the office made. An inspection consists of two kinds of examinations, naniclv, verification and valuation. The first is called the audit or routine inspection, and consists of an audit of all the books, and a verification of the physical exist- ence of the assets of the branch, as well as the correctness of tlie liabilities. All routine matters are carefully checked to see if head office instructions are being con- furnied with. Tlie first part of the inspection is made by a routine inspector, or, as he is sometimes called, audit officer, who either accompanies or precedes the senior inspector, with one or more assistants, according to the size of the hranch. The second phase or inspection proper is made by a senior inspector, and consists of a thorough analysis and valuation of the loans and other assets of the branch. The senior inspector's particular duty is to discuss with the manager the inspection liability return with a view to obtaining a valuation, as correct as possible, of the loans and securities held by the branch. To be a good inspector requires special training and 345 346 BANKING PRACTICE qualifications. In the first place, a thorough knowledge of all conditions of branch work is essential, and this training can be acquired only through actual experience in branch positions, from that of manager downward. The inspector follows the audit officer as soon as the inspection report on liabilities is completed, though in the case of small branches, which have but few large loans, the liabilities can be discussed by the routine inspector or by correspondence, and a visit from an inspector is there- fore not necessary. 237. The audit. — Although the work involved by an audit is too specific to be dealt with fully .n this chap- ter a brief consideration of its methods and require- ments will he of value in emphasizing some of the essen- tial features of Canadian practice. Practically all banks are similar in their method of auditing, though with some the examination may be more exhaustive and searching. The following procedure may be considered as fulfilling the requirements of an average audit: The audit ofl^icer and his staff of assistants time their arrival in a town so as to reach the office at the close of the day's business, and thus interfere as httle as possible with the service to the public. Their arrival, of course, is unheralded. Immediately on entering the office con- trol of the safe is obtained and the following taken into custod v : Treasury and teller's cash, etc. Bill cases containing discounts, collateral notes, col- lections, etc. Cash books, vouchers for the day, including letters received. Current account, general and saving ledgers. Collection register. INTERNAL INSPECTION 347 2.18. Caah and securities. — The auditor then proceeds to: Count in detail the teller's cash and the treasury cash. Take charge of deposits made up for the clearing house and see that they are credited by other hanks the following day without deductions, or if deductions are made, ascertain their nature. Obtain verifications of balances due to or by other banks. Ascertain from the teller's cash statement book whether the cash has been examined in detail at irregular intervals at least twice a month. See that a satisfactory explanation is entered in the teller's cash statement book opposite each impor- tant cash over and cash short item. Check list of collateral securities with the securities themselves and with the register. Examine all life and fire insurance policies and see that they are properly assigned to the bank and otherwise in form. See that all securities are properly hypothecated and otherwise in order. Check list of securities held for safe-keeping with the documents or packages themselves. Send hsts of all negotiable securities held as col- lateral or for safe-keeping for verification by owners. A'erify existence of loans, trade bills, and past due hills, initialing for each item in the diary or past due bills register. Make a summation of the totals in the bill diarV and compare with balances in the general ledger. 348 BANKIXC; PHACTlCi: ii i.:^.lti Ihe bill diary should be kept in the custody of the inspec ting officers from the time they begin to check the bills until the totals have been veri- fied. Examine bills. Take a memorandum of all items not correctly drawn in every respect, and Imnd them to the manager or accountant to be put in order as soon as possible. Verify the existence of local collections and col- lateral bills held, checking off each item with its relative entry in the collection diary. See that all collections outstanding in the collection register are properly accounted for. Examine collections and collateral bills, ascertain- mg regularity of acceptance and correctness of due dates. Mail to branches and correspondents for verifica- tion, lists of trade bills remitted, collateral bills i-enn'tted and items outstanding in cash item ac- count. 239. The ledgers, etc.— Call off the day's checks and deposits and othe- vouchers with cash book, and compare cash book entries with current account and savings ledgers. Take a rough list of current account balances and outstanding checks, and afterward instruct ledger-keei)er to balance ledger in the usual way in his balance book. Take off balance from savings ledgers, listing bal- ances on inspection return. When the current account ledger has been bal- anced, call off balances, initialing the balances in the ledger and comparing them with list previ- ously prepared. INTERNAL INSPECTION 349 theck general ledger balance sheet, initialing bal- ances in the general ledger. Kxamine each ledger heading in the current ac- count uiul savings ledgers and see if all particu- lars reciuired have been entered, also if rules re- garding loose-leaf sheets have been observed. Check all entries for authorities, powers of attor- ney, etc., with list of authorities held. Sec that proper entries have been made in deposit receipt account in the general ledger for all re- ceipts issued and paid since last insi>ection. Examine endorsements on receipts paid since last inspection, and see that they are tied up and sealed with the inspector's private seal. Kxamine powers of attorney, resolutions and documents respecting signing officers. Check date of last certification of each ledger bal- ance. See that certificates are properly tilled in and signed. 240. Sundries. — Compare inspection liability sheets prepared by the staff with liability ledger. Examine entries in cash item register since date of last inspection, noting any items outstanding an undue length of time. Ascertain if any items have been put through as cash items which should have been shown on dis- count return as trade bills remitted. See that the following books and records, etc., are properly kept: Manager's diary. Discrepancy book. ^50 HANKINCi PKACTKi: Record of lost drafts, stopped checks, etc. Overdrafts register. Circular book. Overdue debt register. Postage account. Record of examination of bank premises. Character card file. Receipt for duplicate keys, etc. Rates book. Record of mercantile agency reports received. The following lists and statements are prepared bv the staff and handed to the manager or accountant, and when checked and completed by them given to the inspector: Adjustments. Assignments of goods. Balance sheet, general ledger. Bank premises, safes and vaults. By-laws, minutes, etc., list of. Comparative statement of condition of branch. Current account balances. Deposit receipts outstanding. Drafts issued accounts. Insurance policies held — fire. Insurance policies held— life. Letters of credit outstanding. Letters of guarantee. Liabilities of customers. Partnership agreement. Past due bills, list of. Powers of attorney, list of. Reports on officers. Securities, collateral. INTKRNAL INSPECTION 351 Securities, safe-keeping. Sterling exchange purchased and current. Trade bills remitted, summary of. Verifications, current accoiuits. Verifications, letters of credit. A'erifications, trade and collateral bills remitted. Warehouse receipts, loans on. Waivers. •Jll. Inspection liabilitif return. — This return shows every liability in detail whether overdue or not. The iiaiiits of all obligants should he in strict alphabetical order, and the totals of the loans and trade bills in each account should be shown in the proper column opposite the names of the customers. All securities should be shown in detail with the manager's estimate of values. The following information should appear in the report on each important account : Names and ages of individuals or partners. Head office authorization and expiry date of credit. Total fire insurance carried both on liquid and fixed assets, and the amount, if any, assigned to the bank. Discussion of customers' position and balance sheet giving copy of the latest statement of affairs and notes as to the changes of importance therein, in- dicating progress or the reverse. Remarks regarding customers' wills or deeds of partnership, having reference to the way in which the bank would be affected by the death of the customer. Ill reporting on farmers' and other casual loans, the original date of the transaction must l)e given. 35:2 BANKING PIIACTICE if any portion of the advance has l)een running for more than twelve months. The ol)ject of the loan, time of repaynient, and source from which tlie money is to come, should also l)e stated. The purpose for which a loan has been granted and the source of repayment should be stated— also the prol)able course of the advance, unless pay- ment is assured at maturity. In connection with all important accounts the fol- lowing points should be fully discussed with the man- ager by the inspector, and the significant features made the subject of correspondence: Personal : floral character, habits, and business ability. Past record. State of health. liife insurance carried. General : Is financial progress satisfactory? Fluctuations in liability and reason for anv sub- stantial increase — highest and lowest points of advance monthly for past year. Promptness in meeting obligations. Obligations in connection with interests outside the business, if anv. Titles to, and liens or mortgages on property, in- formation, researches, etc. Value of collateral held. Value of the account or the connection. Any special features or influences which are likely to benefit or be detrimental to the customer or the business. INTEUNAL INSPECTION 353 If a wholesale house: Distrihution and classification of risks in credits to customers, also any recent or anticipated josses. Financial responsihility of largest customers. I'l'icentuge of hills returned unaccepted or unpaid. Alttr fully discussing with the manager all the out- staiidiiiK features in the different accounts the in- spirtor is in a position to offer a reasonahly close valu- ation i)f all the accounts, which he does according to the following ratings: 1. First-class business. 2. Accoiuits regarded as desirable, but which do not liquidate satisfactorily. 3. liusiness desirable because of the connection or local conditions, but not on its merits otherwise. 4. I'lidesirable but probably collectible. .). Locked up but eventually collectible. <». Marginal loss probable. 7. Bad. ( A ) Secured by mortgage, etc. (B) Interest l)eing set aside as a contingent fund. (C) Not producing interest. On his return to the head office, the inspector takes ux^ witli tile branch and records by correspondence any ob- jectionable features in the accounts, which he thinks re- quires adjustment or comment. 242. Rules and regulations. — Every Canadian bank lias its own book of rules and instructions, supplemented from time to time by means of circulars. Every offi- cer is expected to make himself thoroughly familiar with these rules, and no one is excused from neglect of C— VI 11—33 iloi n.\NKiN(; iMiAcncK duty oil the pica of i^^iiorancc or misapprehension. Tlie instructions arc intended to effect uniformity of prac tice in the branches, and to assist the staff in the efficient discharge of their (hities. A l)lind eomphance with the rules under all circumstances is not expected or advisa- hlc, and though they should be closely followed, discre- tion is ix-'miissible under certain conditions. All rules, hoNvever, covering the custody of the cash and securities. and the checking and other internal routine, should under no circumstances be modified or departed from without express permission. If a rule be found imprac- ticable, owing to local or other conditions, the facts shotdd be placed l)efore the general manager who will authorize such modification as may be necessary for a specified time only, at the expiration of which the ap- plication must again be renewed if the conditions r^ main unchanged. At each inspection a list of printed questions based on the rules and regulations is filled in by the auditor. The questions are so framed that they can nearly all be answered by a negative or affirmative. A list of these questions w ith the approved answers is given in the ap- pendix. A perusal will not only give the reader an idea of the comprehensive nature of these books, but also afford a useful insight into routine matters. In addition to rules dealing with routine matters, these books generally contain a great deal of useful and necessary information on legal and other points, and when studied in conjunction ^^ ith the Bank Act and Bills of Exchange Act give a most serviceable knowledge of banking law and requirements. 243. Staff reports.— At least once a year the man- agers are called upon to make a full report on each indi- vidual member of their staff, and this is supplemented INTKUNAI, INSPHCTION 353 !)V a s|)ccial report made by the inspector. Practically similar forms are used in both instances. Figure 77 is c-iiinprchensive. The rating used is as follows: Al Highest rating. 1 First-class. •J Above average. a Average. 4 Helow average. 3 Low. Unsatisfactory. a B a CO s b ■«: as OS o < H 111! o ■ o^^X o a 3 g S ■/I e 5 « eta til iiilBl s' 2 o 5? = ill £25 3o6 1^ iii ^1 Is o 5 "t! © ■u-o ^ .5=3 C T C kl -9 b a e-3 a o ^ 1-9 •° ° S ACQ «> a C-^ SJ= 357 CHAPTER XI LABOR-SAVING METHODS 244. Efficiency methods.— The first object of an ac- countant in taking charge of an office should be to see that the work of tlie staff is so arranged that loss of time and motion is reduced to a minimum. No matter how excellent the staff" may be, they are severely handicapped in results unless the work of an office is well system- atized. Some accountants have a genius for organiza- tion, others can only acquire the knowledge by experi- ence and careful study. The steady increase in the volume of entries passing through a city office has necessitated the study by banks of scientific office organization, and the adoption of a number of labor-saving machines. The staff should be encouraged to work together as a unit. There is just as much room for good "team work" in an office as there is in a football field. The good work accomplished by such men as Taylor, Em- erson, and others in teaching the principles of "efficient and scientific management," though directed particu- larly to shop management, is applicable to any class of business, including banking.* These men are able to go into a factory, watch the operatives at work, make a study of their motions and methods, and from this ob- ' An ahlo treatise showing liow lluvse principles may be applied in the offit-e will be found in "The American Office— Its Organization, Management ani Records." by J. William Schulze. 358 LABOR SAMN(i METHODS 359 sci\ati()ii show where waste movement and loss of time otriirs. Out' of the most elementary examples of the work ac- i.,iii!|)lisliL(l by efficiency experts is in the manner in \vlii(li the method of bricklaying was improved. The ordinary ])roce(hire in bricklaying is for the workman to stiKij), take a brick from a mixed pile at his feet, and cm y it to the wall. If the workman weighs two hundred |)(Miii(ls. and can lay, say, one thousand bricks a day, he would he lifting his own weight about four feet each time hv took up a brick. An efficiency expert, after watching ;. hiickhiyer at work, devised a little table or platform, a(ljiistiil)ie to any height, which holds the bricks proper silk- II |) in a neat pile at the workman's side. Lost mo- tion and waste of energy is almost eliminated by this sim- l)k' (k'\ ice, as stooping and sorting are unnecessary. The man is able to lav three times as many bricks as under the old method, and would noAv use five motions where for- ii.oily eighteen were necessary. The connection between banking and bricklaying may not be apparent at first, but the lesson should be. Kvcry class of work in an office- is susceptible of im- l)i()venient by the elimination of waste movements and (lii|)licate liandling. It is a simple lesson of what can l)e accomplished by a little thought, and should be con- stantly home in mind in offije organization. Many important efficiency methods used by banks may he mentioned, the batch system of handling clear- ings, etc., the machine statement in place of the pass- liook, t!ie use of perforated deposit slips, and the numer- ical system for branches and customers. l)iiI)lication of entries should be avoided as much as possihle. and where possible, carbon copies should he made. Customers who deposit long lists of collections -x^ A 360 BANKING PRACTICE iffl^l II 1 it ' k should be asked to use a special form in listing them, a co])y of which could be filed by the bank as a record, the bank adopting the customer's immber as its own. Ad- vice of payment or intjuiries can thus be made by num- ber instead of by name, and this is a great convenience in practice. The number on the item is so placed that the bank collection stamp can be used over it. Long lists of collaterals, trade i)aper, etc., can be handled ad- vantageously in this manner, though in the latter the number would necessarily l)e different. Only the totals from the lists would be entered in the bill register. Fig- ure 78 shows a form which can be adapted to any of the above purposes. The addition of columns for banking towns, etc., dispenses with the necessity of a diary. One entry, therefore, by the customer pro- vides him with a record, and the bank with a register and diary. 245. Departments in a /^flw/v-.~Although the wickets of even the small branches bear the legends "Discount Department," "Savings Bank Department," etc., the designations exist simply as a convenient name rather than as a condition. Even in large city offices the plan of dividing the work of the office into departments with responsible heads is not followed out to any great extent. This is, no doubt, due to the centralization of control and responsibility in the manager and accountant and the final review and control by head office. A departmental system developed as fully as it is in the United States would add to the expense, without relieving the manager of ultimate responsibility. In the United States the large city banks divide the Avork of the office into dif- ferent executive departments each in charge of a vice- president, assistant cashier or other senior officer. These men as a rule are specialists, highly trained in the par- •ia = =-.2 :^i a - «£5 - — ^ >i :: = w d ^%% •* i i fci t, * d y ^ = a = 111 c =•» S ■ — * 22 ♦* I 361 3G2 BANKING PRACTICE ticiilar work of their departments. Under branch organ- ization, specialization in any line of banking, except foreign exchange, is best administered from head office. from whence the expert knowledge would be available for the whole system. In the routine or internal administration of an office, however, the division of the work for balancing and other purposes can be worked out to advantage irrespective of the size of the office, and the teller's entries should be so arranged that the different divisions or "departments" can balance independently of each other. The following main divisions are the ones generally adopted : 1. Deposits. 2. Discounts. 3. Checks and cash items. 4. Collections. 5. Branch clearings. Debit and credit columns are provided in the teller's blotter for these headings with an additional column for sundries. Each department can thus prove its work at the end of the day, or at any time during the day for that matter, and the cash book clerk in balancing, would have to check only the teller's totals and the details of the sundry column, in a search for a difference. A bright junior would be quite capable of taking charge of any one of these bookkeeping divisions. This idea is, of course, <"isceptible of extension to suit the particular needs of any office no matter how large, the underlying principle being to segregate the work into classes suf- ficiently distinct from each other and thus eliminate any chance of confusion of items. The adoption of the system outlined above does not necessarily mean that each member of the staff should confine his attention and work entirely to one depart- LAnOR-SAVING METHODS 363 ,„eiit: on the contrary, he should employ his slack time (liiiino- the day in assisting with the work in other de- nartiiietits. Local conditions, such as the arrival of the mails, will govern the accountant in the adjustment of the work of the office in this connection. In large city (iHicts it will sometimes be found an advantage to give (inc man the ])osition of say, chief clerk, whose particular duty would be to organize and dovetail the work of the otlice in such a way that it is evenly distributed. •2W. Hatch method. — The batch or block method is the I)t'st system of avoiding loss of time in an office, and pioiiiptly locating differences. It can be easily adai)ted to till- woik of any office though its use is most evident ill the larger offices. The daily work of the average liraiicli can be roughly divided into three or four divi- sions or blocks of entries. The first is received in the iiioming mail, the second through the morning clearing, and tilt' other two through the morning and afternoon eotiiiter work and sundry mail matters. The idea is to handle these batches separately so that they may be bal- anced separately, the totals only being passed through the teller's book. If the office is large this work should lie ])laced in charge of a mail or check teller and the en- tries i)assed through his blotter. It is necessary that the cohinm headings in all the tellers' books should be uiiit'orni, and the entries so arranged that any depart- ment of the bank can balance its day's work by com- parison with the totals for that department obtained from the various tellers. As soon as the morning mail has been entered in the letteis received register, the check lists from the liraiK'hes and correspondents are called off and the items scrutinized. They are then sorted out into different classes and listed by an adding machine on specially 304 BANKIN(; ritACTKK I It ruled forms or butch sheets, with a column for each class. The combined totals of these cohimns slioultl agree with the total amount shown by the letters re- ceived register and the batch is thus balanced. If not. the error can be easily located. The totals are then passed through the teller's b{K)k, and the items are dis- tributed to the various departments and follow their usual course. The entries generally consist of the following: Cr. Brunch ("U'arinps Correspondents Dr. Ordinary Checks Savuigs (Checks ('hecks on branches (rec'd from corre- spondents) ('hecks on city banks (for clearing) Sundries If the ledger is a divide^ one, a column should be given to each division in the batch sheet, and the checks sorted accordingly, A-K, etc. If any of the items have to be returned, for any rea- son, these totals are not affected, as the item is dehitetl back through the usual channels. The morning clearing from local banks which is gen- erally received about 10.30 a.m. is dealt with in tlie same way, except that the cash delivery from the clear- ing is first initialed for and taken over by one of tiie tellers. I^arge lists are generally balanced separately, but the lists from the smaller banks can be dealt with in batches of three or four, the total finally agreeing with the total amount of the clearing. The entries would consist of the following: Cr. Clearings Received Exchange on Branch Checks Dr. Ordinary Checks Checks on Branches Savings Checks Drafts and Sundries LAUOlt SAVING MKTIIODS 365 Hiaiicli checks, with exchange dethictions, are thrown ,„it jiikI entered at the foot of the proper column at face valiif. \vith the amount of exchange shown at the side „!' cadi entry, the total of the latter heing credited to ixcliaii^e. As rapidly as each batch is balanced the items arc passed over to their resi)ective departments and t iittrcd up in the usual way, and on completion the Mil)|)liintntary cash book, outward check lists, etc., can |)c exactly balanced. This procedure can be followed in tlic same way with all other entries. With the exception of a few items received by mail diiiii.^' the day, the remainder of the day's entries con- sists almost entirely of items received by tlie teller over till' counter and passed through his books in the usual way. No further batch balancing is necessary except for some unusual inflow of work which calls for special Imiidliiig. As all entries intended for the cash book are ])asscd through the tellers' blotters, the total of any class of entries can be checked up as often as necessary dur- iim the (lav. For instance, the totals of the supple- mtntary cash book can be compared several times dur- iii».— Another time saver in an t)ffice, where there are customers depositing a large num. her of checks and other cash items during the day, is the u' .? of a perforated deposit slip as in Figure 79. AH checks are listed on the left-hand side of the perfora- tion; the total only is extended on the right-hand side and included with the cash to make the total deposit. The teller receiving a deposit on this form will count the number of items and check off the amount on tlie main deposit sli]), tear off the check slip and pass it over with the items to an assistant or check teller outside the box, who will check the addition arid make the necessan' scrutiny of the endorsements. The assistaht will then distribute the items to the various departments after making the necessary entries in his blotter. The re- ceiving teller will enter the total of the main deposit slip (cash and check) on the credit side of his blotter and debit the check teller with the amount of the checks handed him. Where the customers deposit a large number of cash items it is advisable to have them deposited entirely sep- arate from the cash, and with a separate list for local and out-of-town items. Under the ordinary method fully 50 per cent of the teller's time is taken up in ticking off and checking cash items deposited, the cash handled being a compara- tively small i)ercentage of the total deposits. As a mat- ter of fact an actual test made showed that over 9i per cent of the deposits consists of checks and other cash items, while the remaining 6 per cent is composed of bank notes and silver. Counter space is valuable, and the increased efficiency of a teller in handling customers n.itr S\MK or I)i,p[Hciiiiin : PAY TO THE ORDER OI Any Bank, Banker or Trust Co. All Prior Endorsement! Guaranteed JULY 1. 1911 NATIONAL CITY BANK 1 -8 New York, N. Y. 1 -8 A. *% ^'ANAGH, Cashier Second: Tiy printing the number assigned to your bank on III! checks drawn on your bank and on certificates of deposit and cashiers' checks. The number to be printed immediately following the name of the bank as shown in the following speci- iiif n : OHiOAeO, ILL 1B1. e>l|r 9\tBt •National Sank of Cl^iraQO 2-1 ntr TO THE ORDER OF OOLLARR (_VIII_24 370 BANKING PRACTICE Third: By printing tlic number assignrd your bank and also the number assigned your correspondents on allyour drafts drawn on your correspondents, and also on drafts drawn "pay- able if desired" on your correspondents. The numbers to be printed immediately following the name of the bank, as shown in the following specimen : The First National Ba:nk 18-3 KA^SSAS CITY, MO., No. Pay to the obder of ft DOLLABS TO CONTINENTAL ft COMMERCIAL NATIONAL BANK 2-3 CHICAGOJ CAtmi Fourth: By drawing drafts in payment for remittance to the order of banks and not to the order of bank officers. The process of gjetting all banks and trust companies to number their checks and other documents is neces- sarily slow, as the supply oi ordinary stationery must first be exhausted. The extent, however, to which the banks have adopted the system may be realized by ex- amining any list of American checks. The introduction of transit numbers has revolution- ized the work of the American banks, as practically ail their remittance lists are now made out on the addiiii? machine, numbers alone being used in recording the particulars, with a saving of from .50 to 75 per cent over the old method. The Burroughs Adding Ma- chine Company make a special machine with a split keyboard for this purpose, which records endorser, LABOR-SAVING METHODS 371 l)avcc, amount, and instructions with one insertion of tiif letter or list. A few special keys are provided which print the initial letters of such instructions as "no pro- test."' "bills of lading attached," "telegraph non-pay- iiitiit." etc. An examjile may be seen from the follow- "utf endorsement: Drawn on K 11(11 )rsod by: Amount: $1,670.50 Xo protest recorded numerically thus : '■i-'^ 1-8 $1,679.50 Transit No. ConliiR-nlal & Conmcrcial National Bank, Chicago 2-3 National City Bank of New York . . 1-8 N.P. As a further adaptation of the numerical principle many l)aiiks liave already adopted the plan of number- ing all customers, more especially those who deposit many f)ut-of-town items, the number appearing on the I'lulorscnient stamp of the customer and noted in re- cording the item. In case of checks paid by the paying tdlcr to customers, and others whose transactions are tiu) inf're(iut'nt to warrant the use of a stamp, it would, of course, be impracticable to give them numbers. It is customary to handle such transactions by having the teller register the name of the endorser on his blotter. The teller's number is then stamped on the check to indieate the teller who has received the item. By this means it can be easily traced. Numbers given by a bank to its local customers in no way conflict with the other niiinl)ers. as they have no prefix. In order to avoid confusion, the first ten numbers can I'c (le'.oted to the use of the tellers and other depart- ments of the office, and the customers numbered from eleven on. The method of numbering customers opens 'ip a large field in the sorting and recording of office 372 BANKING PRACTICE i work, in addition to its usefulness in the transit depart- ment. 249. Transit numbers in Canada. — At the Annual Meeting of the Canadian Bankers' Association in 1898 the writer advocated the adoption of a uniform numer- ical system for branches, but no steps were taken to put this into force. The success of the system in the United States, however, has demonstrated conclusively the ad- vantages of using numbers. The following method has been suggested for Canada ; it has already been adopted by several banks and it is hoped that it will eventually become general: First: A prefix number for each bank, taken from the governmen' r.tatement, where the banks are ar- ranged by seniority of charter. This order would therefore remain unchanged during a bank's exist- ence, which cannot be claimed for any other basis of arrangement — alphabetical, size of capital, etc. Second: An affix number for each bi:-nch, the ar- rangement of which is a matter for the individual banks to decide. It is recommended, however, that a common number be used by all the banks to repre- sent the larger clearing centers. These larger cities may be numbered from 1-50 ac- cording to their population — thus, INIontreal 1, Toronto 2, Winnipeg 3, etc. By this method every bank in these cities would have a uniform number; the bank of Mon- treal in INIontreal, Toronto and Winnipeg would be des- ignated by 1-1, 1-2, 1-3; The Canadian Bank of Com- merce in the same cities by 12-1, 12-2, 12-3 and so on If a bank did not have a branch in one of these cities the rmmber would be a blank as far as it was concerned, until such time as a branch was opened. Outside the LABOR-SAVING ^lETHODS S73 advajitages of uniformity this plan apportions the sinaller numbers to the branches on which the most items are drawn. PREFIX N'UMBERS OF BANKS ') Bank of British North America 15 Hank of Hamilton 1 IJaiik of Montreal 4 Bank of Nova Scotia 18 Bank of Ottawa 6 Bank of Toronto '26 Bank of Vancouver 17 Banque de Hochelaga 8 Banque Natiouale (La) 10 Bruque Provinciale du Canada (La) 1-2 Ca adian Bank of Commerce (The) 14 Dominion Bi.nk (The) 23 Home Bank of Canada (The) 19 Imperial Bank of Canada 9 MerchantsBankofCanada 22 Metropolitan Bank (The) 7 Molsons Bank (The) 24 Northern Crown Bank 3 Quebec Bank (The) 13 Royal Bank of Canada 16 Standard Bank of Canada 25 Sterling Bank of Canada 11 Union Bank of Canada 27 Weyburn Security Bank N;)TK —These prefix numbers were taken from the Government Bank State- ment of May, I91i. AFFIX XUMBERS OF BRAXCHES Clearing Cities, Etc., Population of 10,000 and Over 1 Montreal 21 Glace Bay 2 Toronto 22 Fort William ;> Winnipeg 23 Sherbrooke 4 N'aiicouver 24 Berlin a Ottawa 25 Guelph (> Hamilton 26 Three Rivers 7 Quebec 27 St. Thomas 8 liOndon 28 Brandon 9 Halifax 29 Moose Jaw 10 ('algary 30 New Westminster 11 St. John, N. B. 31 Stratford l'-2 Victoria 32 Owen Sound l;5 Reg'uia 33 St. Catharines 14 Edmonton 34 Saskatoon 15 Brantford 35 Moncton 1() Kingston 36 Port Arthur 17 Peterboro 37 Charlottetown 18 Windsor, Ont. 38 Lachine 1}> Sydney 39 Chatham ^20 Hull 374 BANKING PRACTICE 40 Gait 41 Sault Ste. Marie 42 Saniiu 43 Belleville 44 St. Hyacinthe 45 Valleyfield 46 Broekville 47 \V(K)d.stock 48 Niagara Falls 49 Sorel N..TE-It .s .nt..„d.',J that the smaller numbers. 1-4!). will be crnimon toaH banks, as m tins way no large city will use more than two figures. The n-muinder of the branches can be arranged according to the in.lividual requiremeuU of ih banks adoptmg this system. The remaining branches of each bank can be num- bered according to convenience. The banks which have already adopted the sys.em use a geographical divi- sion of the country, corresponding to the districts of their various superintendents, thus: East 100—299 Maritime provinces and Quebec 300—399 Ontario. 400—499 Spare numbers. West 500-699 CenlralWest (Manitoba, Alberta and Saskatchewan ) . 700 — 899 Spare numbers. 900—999 British Columbia. In apportioning the branches to these different dis- tricts the alphabetical arrangement is retained, and numbers left blank for the addition of new branches in alphabetical order. It will be noted that numerical sort- ing arranges items automaticallv into East and West, and into the various districts in alphabetical order The usefulness of the numerical system to a Canadian bank IS much greater than it is to an American bank. Ihe constantly increasing numl)er of branches in many of the banks has made the old method of abbre- viation for branches dangerous as far as accurate designation is concerned. A systematic and generally recognized method of numbering should be welcome, es- LABOR-SAVING METHODS 375 ptcially in view of the fact that the numbers will appear oil all cliec'ks, drafts, letterheads, rubber stamps, etc.— in fact, every place where the name of a branch is printed. Oil branch clearing and other statements, in the mailing (Itpaitiiient, in filing, and for many other purposes, such :i system is economical, labor-saving, and efficient. The arrangement of branches into districts is found most useful in ticking off the branch clearings state- ment, as the majority of the entries for a branch is with hraneiies in the same district, and when arranged nu- 'iKiiealiy they all come together. Under the straight al|)lial)etieal arrangement the responding entries are scattered throughout the sheet instead of being together. '.'.)(). Machine statements. — Nearly all the large city branches of Canadian banks have adopted the practice of rendering machine statements of the customers' ac- counts in ])reference to using pass-books for the pur- pose. The statement system eliminates the dreaded ■pass-book night" at the end of the month, relieve^ the conj^estion of the ledger wicket, enables the accountant or statement clerk to maintain a constant check on the accuracy of the ledger balances, and, above all, lessens the chance of fraud and error by insuring the receipt by each customer of a statement of his account at regular intervals, monthly or weekly as desired. With the pass- l)0()l< system a mistake might run for several weeks or months through the failure of the depositor to bring in bis pass-book to be balanced. Where a regular state- ment is sent an error is sure to be detected on receipt. The adoption of the statement system involves no cxtia expense in the long rini, as the improved service to tlie (iistomers soon justifies the initial expense of the statement machine, and the salary of a statement clerk. The machine usually used is the Burroughs Adding 376 BANKING PRACTICE if Subtracting Statement machine which compiles the fol lowing in one operation: (a) Lists the checks on the sheet and carries then into the subtracting mechanism. (b) Lists deposits made and carries them into th( adding mechanism. (c) Lists balance of previous day and carries i| into adding mechanism. (d) Strikes the difference between credits and debits. (e) If balance is an overdraft strikes letters "OD" alongside the balance paid. The operations may be made in any order desired bv a particular bank. The carriage is automatic and controls not only its own movement across the sheet, but also the adding and subtracting mechanism. Overdrafts are automat- ically deducted, and cannot be printed without being marked "OD." The method of operation is very simple. After the checks and deposits passing through the current ledger have been checked to the supplementary cash book the first thing in the morning, they are cancelled and handed to the statement clerk, who lists them on the various statements. Figure 80 with the perforated balance slip to the left is the form in general use. The operacor first records on the machine the last balance shown on the statement and, after making all the previous day's entries, debits, and credits, extends the balance to date. As It is necessary to have slips for each entry the ledger- keeper furnishes the statemem clerk with a memoran- dum for each accepted check or-tstanding, which is re- placed by the check itself as soon as it comes in. The Pleaw r.iuii.iiie at uDce and Hepurt soy Diflerance in the SUUment Direct to the Accountant .Vni'CHEBS Retubnco _is Account with. THE BANK WiNsiPEO, Canada. Month of Kiiiill> N"ti(> Your I.eUger Keeper of Change of Address. Cbick^' ■ Checks Forward li Forward Checks Total Date Total Balance Forward From Total Debits Deposits Outstanding Checks Balance Dr.-Cr. As At... Date 1 2 3 4 5 U 7 8 9 10 n 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 Balance FiocrRE 80 377 378 BANKING PRACTICE statements are filed in ingenious trays so divided that the balance slii>s of the day's operative accounts projett from the general file of statements. Thus the active and inactive accounts for the day are separated without dis- turhing the alphabetical or numerical arrangement. It is therefore a simple matter to make a comparison of the statement files with the relative ledger balance if desired. AVhere the employment of a special statement clerk is not warranted, statements can be made up at regular intervals instead of daily, but the work should be so arranged that the entries for oidy one day should be necessary at the end of the month. The pass-book is still used in connection with state- ment accounts, but simply as a receipt for deposits to the customer. A special form is generally used with provision for deposit entries only. In view of the regu- larity of the statements and the constant lessening chances of errors, some banks have ventured to depart from the universal rule of not permitting the teller to enter or initial deposits in a pass-book, and allow him to do so in the case of customers who receive machine state- ments. The time gainejl for both the customer and the bank more than offsets the slight risk of fraud by the teller in this connection. The customer can make liis deposit and have it entered in his pass-book without the necessity for wasting his time at the ledger-keeper's wicket. The ledger-keeper also benefits and has more time to attend to acceptances and other duties. If nec- essary, the customer can present his book for compar- ison with the ledger at irregular intervals during the month. Pass-books will, of course, continue to be used for certain accounts, but the envelope system can be used to advantage for small accounts. Aii envelope specially LABOR-SAVING METHODS 379 ruled with a progressive balance is kept entered up from tin ItdMtr or vouchers, the checks being enclosed as en- ttiid. With the exception of j)erhaps a few entries, the I stiittrmnt is always ready to be handed to the customer I !is opportunity offers. This method, combined with the stattmcnt system, is of great assistance in relieving the vaults of an accumulation of checks and vouchers.^ ' For furlluT details the reader is referred to Mr. H. M. Jefferson's excellent s|«ri.il nport cm "Depositors' Monthly Statement System," and the special tulKilH (111 this suhjett published by i'le Burroughs Adding Machine Company. CHAPTER XII fi 111 n I 1 i\ MISCELLAXEOCS Too much attention cannot be given to the work i connection with the collection department; beyond th responsibility entailed, the exactness and promptness o the service governs, in great measure, the opinion o corresi)on(lents and other banks. 251. Collcctions.~ln the case of a draft with bill o ladnig attached, where delay is anticipated, the sendinj bank should be communicated with immediately for per mission to hold for arrival of goods, etc., and a copy o the letter kept (Figure 81), unless written instniction to that effect are contained in the letter enclosing th. draft; even then advice should be sent if acceptance ii delayed more than three days. Prompt remittance should be made for all items am special care taken to follow all instructions carefully Unless otherwise instructed, all items requiring accep tance, if refused, should be returned not later than tlu tlnrd day after they are received unless subject to pro test, when they must be returned as soon as the notarv can make the protest (the same day if possible). Foi mstance, such items are generally received in the morn- uig mail and should be immediately entered in the col- lection register and presented that day to the drawees, if they reside in the town. If the drawees are not pre- pared to accept immediately, a draft can be held for two days longer; but. if not then accepted (on the third day) 380 THE BANK 101 TlIK M-VNACiKR I)k\h Sm: I'lcasc nolo that acceptance of I has Im'cii rrfused by the drawees for one of the following reasons We >hall lioUl drafts unless otherwise instructed by you ft-iY" Reasons for holding crossed X I'art y writing GwkIs not as ordered N(i iiiv<)i(|.s not arriwd Out of town until ('■(Hitls nut checked Claims credit for goods returned i i or *A> we arc not in a position to inform ourselves as to arrival or non-arrival of ^'iioils, and have to dc|Mopular , million, nor should u hank continue to accord the same cndit t(i a |R'rs(»n wlio years hefore may have heen wor- thy of it, hut is so no longer (although prohahly hvin^ ill tin- sitmi' style and havinj? the same reputation for wtiiltli). Ohservanee of actual transactions and appre- ' lion III' their significance arc safe guides; popular (i|)iiiinn is not. H( ports are frcijuently requested hy correspondents, and the utmost care should l)e exercised in giving out iiildiinatioii regarding the standing of customers and ntliiis. An unduly favorahle expression of helief might iiMilt in the hank l)eing mulcted for damages, and an ad- Mi'sc It port might hring suit from the person concerned (III till' plea that his credit had heen injured. Rej)orts frivcn out on the standing of parties should invariahly he iKiidid "Confidential and without prejudice to this bank or to the writer." Xo statement or document of anv kind, other than pass-books, where the initials only will he used, should l)e issiifd to the public without being signed by the man- ajrvror other officer who is jiutlvMT/ed U> act in his stead. 'ly.i. Expense account. — A dollar saved in an econ- omy is of far more value than a dollar made on a trans- action: the former is in perpetuity, while the latter op- porlnnity may not occrr again. Salaries, rent and other major items of ex[)ense are autliorizfd by the head office, and it is in the minor ex- penses, such as stationery, etc., that economy can be ef- feekd. The handling of the stationery affords oppor- tunity for the exercise of good judgment in controlling Maste. Important economies in the expenses under this head, in the aggregate amounting to a large sum, ma^ 384 BANKING PRACTICE i 1 i if ti ;.! u often be effected. Efforts in this direction should be unremitting, but should not, of course, be stretched to tlie point of penuriousness. JNIuch waste is caused by carelessness in filling out forms both by the customers and by the staff. A check or draft form costs j cent, and yet how main- are wasted. Some of the special forms supplied by a bank cost still more. Blotting paper, ink, pencils and the like are all subject to unintentional waste. To avoid waste of stationery, it is important that the supply should be under the direct clij.-ge of the accountant anil should be systematically arranged and kept under a look and key, in a cabinet reserved exclusively for the pur- pose. He or his assistant should personally hand out only such quantities as are actually required. The in- discriminate issue of checks and other forms to customers of the bank entail a serious loss upon the bank. Due regard to economy should be observed in dealing with applications for stationery made by any customer. A source of much waste is to allow an unnecessary accumu- lation of stationery in the drawers of the various desks. Telegrams, lawyers' fees, traveling expenses and simi- lar expenses iocurred in connection with the bank's cus- tomers should be charged to them, and such recoveries should always be received at the moment; later they might be called in question and lead to annoyance. Long-distance telephone tolls should be carefully scrutinized to see that all possible refunds have l)een made, and that no charge is incurred on the part of the bank where a letter will answer the purpose equally as well. 254. Fire insurance.— Bven though a bank is not im- mediately concerned with the question, it is customary to impress upon all customers the wisdom of keeping their ill ^iw« MISCELLANEOUS 385 ,„.oj)crty well insured. It is a common practi( 3 to assign fiie jiisiiranee to a bank to cover direct advances, and it is vtiv necessary that a manager or accountant should he al)ie to judge whetiicr the policy afl'ords the security of its face value or not. Tiic two most important points to he considered are: tlie riiiancial standing of t!ie company itself and its legal position in the province. Is it licensed to do business^ If not, the policy si, )uld he refused, for in case of loss there would he ditHc lly in eollci ting a claim. Even if licensed, the strengti: of the company should he fully considered. If these two points are satisfactorily an- swered, the policy itself should be examined and the fol- lowing points kept in view: The property insured should be correctly described, a.ul in the case of merchandise antl other movable prop- erty, the place or placts where it is stored correctly stated. The interest of the policyholder in the property — as owner, trustee, bailee, etc. — should be expressed. If this interest is subject to a mortgage or other lien the fact should he stated. If i)roperty is insured in more than one company the consent of each to the concurrent insurance in the other c()nii)any or companies should appear on the policy, un- less this requirement is expressly waived therein, by the following clause: "Further concurrent insurance, if re- quired, permitted icithout notice." The effect of an existing co-insurance clause should be carefully considered. The distribution of insurance in policies covering more than one item — for example, buildings, machinery and stock- should be carefully scrutinized. An excess on one item and a deficiency on another might lead to a heavy loss in case of fire. (■-VIlI_.>o ;j«G iJA\Ki\(; ruACTici: li it If if AVatch for "red ink" clauses and .s})ecial condition which nii^ht weaken the vahie of the j)olicy. The polici shouhl invariably read ; "Loss, if any, i)ayahle to ' and never "Loss, if any, i)ayal)le to as its iiiteres may a|)|)ear." A contract of insurance, that is, the policy itself, wouk he invalidated by its assignment without the consent o the company, or by its assignment with or without tli consent of the company to a party not having an "in surable interest" in the property insured. A mortgag or lien on the i)roperty constitutes an insurable interesl The assignment of the possible loss, however, is not ai assignment of the insurance contract, and does not affec the policy; but the consent of the company should b obtained in every case. Any irregularity in respect to the above-mentione jjoints might vitiate the insurance. Should a bank hold insurance in the quality of mori gagee and afterwards become owner of the property th l)olicies should be at once altered to correspond with th changed conditions. The eighty per n nt co-insurance clause is not alway fully understood. The eighty ])er cent co-insuranc clause does not affect the settlement of a loss when th property insured is totally destroyed, or when it is iii sured for eighty per cent or over of its actual cash valu( ^Vhen a property insured for less than 80 per cento its actual cash value is oidy partially destroyed, th amount recovered under a ])olicy containing this claus bears the same ratio to the loss as the amounts of insui ance carried bears to the amount required to be carriec namely, 80 per cent of its actual cash value, e. g.: iVctual cash value $10,000 Insurance carried, fiO""; 6.000 MISCKI.LANKOIJS 387 liiMiraiice reiiiiired by clause, 80^ ,' .... 8,000 Loss 5,000 liiM-'aiifc payable under policy 3,750 li.OOO or ' I of loss. 8,000 111 other words, the company insured the property for so.ooo and the insured carried one-fourth or $2,000 of the risk iiiniself. The dates of expn-y of all policies held by the bank should he entered in the manager's diary and the entries checked by a second officer. Care should be taken to see that insurance is never allowed to lapse, and that renewal receipts or new policies are obtained by the bank before the expiry of the existing insurance. •i.5.}. Telegrams, etc. — Every bank has its own tele- with legal tender. In places where there is no clearing house the banks deliver the parcels to each other and obtain a receipt by entry in a pass-book. After two banks have deposited with each other, the differences between the two deposits is the balance due one or the other, and is settled by a draft on the nearest large center. Sometimes, when the differences are not large, a settlement draft is only given at the end of the week, or when the balance reaches a certain stipulated amount, say. one to two thousand. 2J7. Guarantees. — Guarantee bonds are a dangerous form of security, liable to be voided by what may appear to be a most trivial incident not affecting in any way the equities of the situation. A special form used by banks is given in Figure 82. In cases where a guarantor is also a creditor of the bor- rower it is frequently advisable to obtain a postponement of the former's claim in favor of the bank. It must not he stated to persons who contemplate be- coming guarantors that "it is a mere matter of form," "They will probably never be called upon to pay any- thing," or the like. It has been held in the past by the courts that such representations released the sureties from liability. Never make settlements with obligants UCAHANTHK BOND ANI, HO«TPONKMBNT OF CLAIM To Thk Manaoeh BANK agweingtodetJwith In Consideration of The Canadian Bank of Commerce herein referred to nx "tlie riwi,m...t- ■■ ;.. .1 , ; signed hereby Jointly an Lv r k"' J ' "'"' "' "" ''""""^ " » »«■'''. *>>• uad.r- the customer ha.s incur red r i under "?' '"""""." '" "" """'' °' ""-' ""bilitie. Xh from dealing. Uaween tl.o bI itV : uir^^ Bank „.„y beoon.e in any manner V^l^'rTZZ of't'L . '''"*""•' '^ ""''" '^ the undersigned hereunder bein^ lin.ited to the su,^ '" '""'"""^ '""' "^"ility of wUh mtereH from the date of den.and for payment of the same) """"' customer and with other part e! and ieu U s l"Tt "'"' """'*''* •^'='" "'"" '^^ all moneys received from the customer or .T ,r ' '"'"' "" ^*' ""'' """y »PP'> customer's indebtedness as it mav th!nk b^ "7, , "" "7"'"'' "P°" '"'''' P"" <>' 'h or lessening the .ability of the u.S^' :::^:l!:'^-^ - - «■»■ -y .in>iti^ but tf Brk-^st: brLrd'-.^rurrr ""'"'"'- ''^'-- ^- - ">« '^'^^^ parties or the securities it nmrhold before bl^LTZT "'""''' "" '^"^"""" <" "'^^ of the amount hereby guaranteed " '^ '° '"'^■'"^°' '""" "><= undersigned the .rr ma? ^'r t cVm^e unirtfir r^'-^'^-e:! '-". «"' ''" '^'^^^ ^^^^ i..trators of the undersigned slmll haveM It T u"""'' "' ""^ "'""'o" ""d "dmin- advances on the sc-cu'ty oflS'i^JX^^^ changeTirth: tZlZ ItVustr ra^ttn^ -od notwithstanding any change „. customer's firm by death or by reUrement o on.' " ''"1"T" '" '^^ ""^'"be'^Wp of the duction of one or more other partner! "'°"'" °' """ ""'"""• °' ''^ '»'« i"'^-- uance°of t's^Zrant? be'S byM^r," °°\''"' °^ "'>'^'' '"''^- '»-"« '"o -«- security of the Bank, and as t Ueen the " „ .""''"i " ^l "' '^"^ "" '"' »'"' '-^^' to the debts and claims a,Zn.tZouTj''Tt'''''^ '^' ^""^ "" ^""^^ P'-'PO-"' may be held by the BaZand u^td he Barh ' "'■ "'/' '"""« '"'•* -"»'"-« debt, and claims anv such debt, and clLm, f ^^ "T""'^ '"''''"'"'' '" '"" «>' ''' "^-i colleeted.enforced or proved ,ubecUo and ftt *»"" '""^"""""^ - any of them shall be received by the undersigned or anTofthi'''''^'"r'*'"'''''^''''"'^"*-''"''»''>''"''"^>» Given Under Seal at thi. day of.. Witness: FiauRB 82 390 MISCELLANEOUS 891 willioiil llif consent of the sureties; this would prohuhly irlcaM' the f?uaraiitors from liahihty. It ri'(|iiires to be borne in mind and guarded -af^ainst tliat a bond of guarantee would become ineffective if the Inisiii.'ss of a firm or individual were converted into u stock company, or if the ownership of a business changed, altliou'ih the same business style should be continued. 2.)8. Poiccr of at tome//. — The original of any power of attorneys should be permanently lodged with the bank, uiiltss it has been filed in a city or county registry office, in wliich case a certified copy under the hand and official seal of the registrar may be accepted. A notarial eo[)y (if a i)()\ver of attorney which remains in the hands of an attorney cannot be acted upon. As a rule, however, the powers of attorney are executed on forms provided by the i)aiik (Figures 83 and 84). A power of attorney must not he witnessed by the party in whose favor it is drawn and, as a general rule, should be delivered to the bank by the grantor and not by the attorney. Where an instrument is executed before a notary j)ubhc in the Province of Quebec and the original left on record in his office, a copy certified by the same notary may he accepted. A notary in the Province of Quebec is a j)ul)lic officer and authorized to act as a depositary for sucli documents. Bear in mind always that the authority conferred by a power of attorney is closely circumscribed to the acts wliieli it specifies by the most strict reading. Unless specially authorized an attorney for a customer cannot liyj)()tlieeate collateral to the bank. An overdraft created by check signed by an at- torney is not binding upon the ])rineipal unless the power of attorney granted by him expressly specifies that it confers power to overdraw, for which the principal ft; n P<)WKI( OF ATTOHNET H LI. t)UM Know All Men by tiiumi; I'KEsKNTa that Fill in here till' imiiif, busi- iiea!< u II (t |„|. il r <• a M o( tin- Attoriwy, of prosonts mu.l.. con.litut...l and appointed the true and law J Attorney of the undersiimed !)>■ th«- Jill in hrre ■ the name, bini- n,. rmke, endorse,, ,cyonatc and dispose o/ull or any BilU of Exohan« Promissory Notes. Chcvks. and Orders for the payment!! num.^. to pay and rcveive all moneys and to give acquittance, for the .same; to discount or shall tlnnk fit; to arrange, settle and Ulance all lKK,k, and accounts, and to sign the Bank's form of settlement of balanees and release; and generally for and in the name of the undersigned to transact with the said Bank any business he may think fit; and all that the said Attorney shall do by vi^ hereof is hereby ratified and confirmed. The said Bank may continue to deal with the said Attorney under this power until notice of the revocation hereof has beei Branch of the said Bank at which the account of the undersigned « kept, and until such notice in writing has been given, the acts of the said Attorney hereunder with the said Bank shall be binding on the undersigned. In Witv».ss wiiEHEOK these prc-sents have been executed by the undersigned at.. the ,^y ijj One Thoii.s,Hnd Nine Hundred and Wit .NK.S.S FlClRE 8.'{ 3U2 POWKII OF ATTORSET I.IM1TKD KOKM WITH I-OWKIl TO OVF.RDKAW Know all Men by these Presents* that i fill in »'•"• III.- nrnv,.!)""!- f II ri (1 ttil- ,1 r !■ ■' ^ <e recore passed and a (rrtified copy of it should invariably l)e lodged with the liank. Such resolution should state the source I'loni wliitli paynjcnt is to be made, such as taxes, for txaiiiple, and should also provide for renewals, if neces- sary. •«'.)'.>. Moncji parcels.— The regidations regarding the imipt and despatcb of money parcels are very strict in Caiailian hanks. All parcels, M'hether sent by mail or express, must be (oiintcd by two officers in the presence of each other, iiiaile into compact packages, and sealed so that the seals will not be broken in transmission; the intention being that in case of loss or dispute the two officers may be able ti) s'vcar jjositively that the money was counted and Staled in each other's presence, kept in joint custody and delivered by them to the post office or express tonipany without having once been out of their joint I)f)ssession. T!u' clearing house rides of the different cities call for t(|iially effective checking by two men, both for parcels reteived and delivered through the clearing house. Two clerks properly authorized are required to co- ()j)cr.'ite in receiving registered mail from the post office (or to deliver or receive clearance from the local banks) . l){)th of whom invariably examine and count the number of ji.u'kages. examine the seals of all parcels and letters I'oceived before giving a receipt. Registered letters in- ward shoidd be entered in the register book according 396 BANKINT, PHACnCE lo lilt' local post aiVnT niiinlHr at IIk- |ii»sl otYnv, iiiid H,, iHiiiihcr ol* Ictttrs and |m»'kaKr.s tvilifii.l l„ |,y t|,c |„,si master before they are handed to the iimnager. Outjroing registered letters should also l)e in diarj^, of two olfieers anil receipts obtained at the i)ost ortia- ii the presence of each other and the book returned to tlu manager or accountant. The register book should nevei be left at the ])ost office. All incoiiiin^r parcels, letters containing cash and otlui important packages are retained in joint custody unti; they have been opened and counted by the teller in tlit presence of another officer. In opening parcels the seals should never l)e broken, but the \vrai)per cut around same so that the intact sealing may be used as evidence of tlit amount originally enclosed in parcel. 260. Vaults ami safes. — The rules governing the cus- tody of a bank's securities as represented by the control of the vaults and safes are very strict, the intention king that under no circumstances should a strictly divided cus- tody be departed from. This custody must be so regu- lated that the co-operacion of two officers shall at all times be necessary to afford access to either the vault or safe. Xo officer should communicate his combination or surrender his key to another unless such transfer be ren- dered necessary by his absence or removal, and then in such manner only as shall not impair the absolute divi- sion of custody above prescribed. A safe is not opened except in the presence of the officers res])onsible for the contents. The treasury com- partment should never be ()i)ened, remain open or be closed unless all the officers holding combinations or keys giving access to it are present. Two senior officers at a branch generally have custody of one of the locks on the outer door of the safe and one Mis( i;ij,am:viiHk ii|> the tiiiK'-l(K'k in the morn- iii^r ;is snnii iis tlic salV or vault jloor to which it is al- tiuliid is opened. Tlie lock is set tor the full time, whicli iiiiisf rlapse until the morning of the next husiness day, anil Im r<»re leaving the office in the aftern(Km the man- ager c'liceks the numl)er of hours the movement has still VAULT DOOR Tlmo when lorknl. InitialH of Offlccra (hriminK iiff riim- 1 iiiBtiorui ami rolling time-lock.'' P.M. SAFE DOOR UmR P.M. Lower P.M. TIME LOCK HOURS TO RUN WHEN OOOR LOCKED to rim, puts up tlie lever and sees that the door is then closed, ir the manager is obliged to be away from the office at locking-up time he must specifically depute this duty to some officer other than the accoimtant. It is the intention of this rule to provide that two officers shall be jointly responsible for the proper operation of the time- lock, and it is the duty of each one to see that the other does not have it in his power, by failing to wind up the mov-ment for the full time, by omitting to raise the lever, or by any other means, to render it ])ossible to open the door before the proper time. The closing time, ;5f)8 I .a BANKING I'UACTKi: etc-., is noted and initialed ])y the two officers either in , special book or on the teller's hook. A rubber stamo U sometimes used for uniformity of record. ^ 261. Lost chcchx and drafts.— Koikes of lost drafts and checks should be recorded in the Stop Payment Register as soon as received. In the smaller offices a pass-book can be used for this purpose. All such no tices must be read and initialed by the proper officers No duplicate draft should be issued unless reason^ able proof is furnished that the original has been lost or destroyed, and a satisfactory bond of indemnity for double amount be obtained. Notices stopping payment should be sent to the drawee. Care should be taken I see that the duplicate corresponds in every particular as to date, number, and other details, with the original and that "Duplicate" is vyritten plainly across the face ot same in red ink. When drafts payable to a chartered bank or repu- table insurance or loan company are lost, and dupli- cates applied for, a bond of indemnity as a rule is not asked for. When an accepted check is lost a stop payment notice m writing is taken from the customer on a form similar to the following: STOP PAYMENT NOTICE THl^ MANAGER .191. BANK Please Stop payment of check No .dated '^* ' ir riiks and principles are running. He begins to see where lii> (li'p.irrmcnt affects others, and where they affect his. And as liis mind becomes familiar with these laws, his knowledge hro.uicns ; he becomes inventive. He sees improvements that c'iin l)e made, economies that can be effected, difficulties in inter- (Iipartmontal relations that can be smoothed away. Each time !u sti^ffcsts an econoni}', an improvement, a decrease of friction, his handling of his department is better, and his oxen growth and coiipdcnce are increased by the knowledge of his own in- craiscd power. When a man starts gathering information in addition to that needed in his own work, and when, through having devoted time to getting that extra knowledge, he finds that he has in- creased his efficiency, it is the old story over again of the lion tasting blood. Once he has tasted it, he always wants it. And so, a man builds up the habit of learning rules and principles ahead of what he just needs to do. When a man gets absorbed in finding new ways for developing himself and his work, busi- ness has acquired the excitement of the gaming table or the race track. It ceases to be monotonous and is alive with interest. The man who is gathering information and training his mind for i)ifrircr tilings, can see himself grow bigger than his work, flhtre once it was bigger than he. Every man who uses his mind, if he Hants to get maximum efficiency, must cease to rely on his own opinion on guesswork, on his own, pitifully small ex- perience. There is only one way to handle men, and that is to help them. And you cannot help them if you do not know more than they do. Of course, some men think that handling men is a .// /*»//■ Wi «A\KIN(; rUA(TI("K Not by trick that can l)o learned over night, but it is not so. King, h)ng way. 265. Canadian Bankers' Association.—Thh Asso ciation was originally a voluntary organization, formec in 1892, presumably for the common benefit of the banks and their officers. The association consisted ol members and associates, the former being the chartered banks themselves, and the latter bank officers of all banks. With the incorporation of the association in 1900, the associates, notwithstanding their legal status in the association, were gradually relegated to the position of mere subscribers to the Journal and ceased to attend the annual meeting. In the Bank Act of 1890, the banks, at their own suggestion, were practically made joint guarantors of each other's notes, and the logical conclusion of this principle was to give the banks a measure of joint con- trol over the issue, circulation, withdrawal and destruc- tion of bank notes. The justice of this was recognized by Parliament in the revision of the act in 1900, and the association was given the status of a public corpo- ration, by a special act. The original purposes of the association were contiiuied, with additional duties im- posed in connection with supervising the note issues, establishing clearing houses, and so on, as set forth in Sections 117-124 of the Bank Act. The association still consists of members and asso- ciates, the members being the chartered banks, who vote and act in all matters relating to the association, through their chief executive officers, and the associates, con- sisting of the individual officers of the various banks. The latter, as mentioned above, have practically been eliminated from the affairs of the association. Tii meet- MISCELLANEOT^S 405 iri-;s of tlif association, tlic members are represented, as a rule. l»y their respective general managers; between nitrtings the interests of the association are watched, and its affairs managed by an executive council, con- sisting of the president, vice-president and fourteen of tilt' chief executive officers of the members. SooM after its incorporation, the association pre- pared by-laws for carrying out the provisions of the IJank Act, and these were approved by the Treasury Hoard, and came into effect in April, 1901. These by- laws embodied rules for the establishment of clearing houses and regulations for the appointment and duties of curators of failed banks. In the matter of supervising the bank note circula- tion, the association prescribed a form of monthly re- turn of circulation which is sent in by all the banks at the end of each month, accompanied by a certificate of tlie amount of notes withdrawn from circulation and burned. The latter must be signed by the chief officer and by at least three of the directors of the bank con- cerned. These monthly returns are combined into a statement and a printed copy sent to each bank. In addition to these monthly returns, an annual in- sj)eetion is made by the association of the circulation ac- count of every bank, and the executive council may, at any time, by resolution, cause a special inspection to be made. The Canadian Bankers' Association is frequently re- ferred to as a "trust." This is far from being the case, as apparently the requirements of the Bank Act are the only factors that have kept the association in existence. F\e!i practical and neccssaiy co-operation in matters of common interest or against fraud, and burglary, is not attempted. The annual meeting of the association is 406 BANKING PHACTICE more or less of a i)erfunctoiy character. Il,e associa tion has little or nothing in common witli the practiw work accomplished l,y the American Bankers' Associa tion, which numbers many C^anadian banks amonir it inen.bers. The present tendency, however, is in the di rection of a renewed interest in the original purpose of the association. This spirit will, no doubt, mak, itselt telt within the next few years. Mr. R. M. Breckenridge, in his "History of Bank ing m Canada," included in the reports of the Xationa .Monetary Commission, refers to the inactivity of th( association in the following words: Apart from the supervision of circulation accounts and the more exact detennination of th. procedure in case of suspension, the Canadian Bankers' Association does not appear to have nmde mucl, effort to develop the functions acquired, or to exten.l the held of activity oi)ened n.p by the legislation of 1900. The re- port of proceedings of the annual meeting, which has previously been published in the Journal of the Association and the news- papers of the day with a degree of fullness which made it prac- tically complete, was condensed in 1903 to the baldest sketch. Reports of later meetings were omitted from the Journal alto- gother. The project of competitive papers, discussions, lectures an.l examinations seems for some years at any rate to have been abandoned. Already in 1903, a Committee appointed for the purpose of enquiry reported that they "had failed in arous- ing sufficient interest to warrant proceeding for the present with the formation of an institute." 26G. Foreign branches.~The Bank Act permits Ca- nadian banks to open branches outside of Canada and several of the banks have established branches or agen- cies m London, New York and other points in the United States, Newfoundland, West Indies and IVIex- ico. A study of the list of branches outside of Canada MISCELLANEOUS 407 will show that the policy which governs Canadian banks in opening branches at foreign or colonial points is due Idiiiiiuily to the exigencies of their own or their custom- iis' business, rather than to any desire to compete for local business (in some places, notably New York, for- ti<>n banks are proliibited by custom, if not by law, from eii^niging in a general banking business ) . For instance, tlie maritime provinces. Nova Scotia and New Bruns- wick, do a very large trade with the West Indies, and it is. therefore, not surprising to find that the only banks which have established branches there are the Bank of Xova Scotia and the Royal Bank of Canada (formerly the Merchants Bank of Halifax), two banks closely identified with the maritime provinces. The Bank of Xova Scotia has a branch in Boston also, another point with a very large volume of trade with eastern Canada. Xo doubt, as trade in the West Indies and Canada in- creases imder the new tariff agreement, other banks w ill find it necessary to open branches at various points. On the Pacific Coast, The Canadian Bank of Com- merce has branches in the principal United States ports, all of which do a large business with Vancouver. The oi)ening of branches in Newfoundland was hast- ened by the disastrous failure of the local banks in 1894 and anticipated perhaps l)y a few years the commercial demand for representation at that ])oint. In the case of branches in I^ondon and New York, the reasons for their establishment are based on wider issues, for although the special or sectional reasons ^iven above are important factors in the establish- ment of branches at these points, they are of minor importance compared to the maintenance of adequate reserves outside of Canada, a responsibility which an un- viitten law has gradually imposed on the larger Ca- 408 BANKING PRACTICE fiadian Imnks. The facilities afronled at these cente for international exchange operations form an impoi tant corollary to these preniises. The value and avail, hihty of balance and call loans in London and New Yor hin e already been fully explained in Section 85. Ne^ ^ ork funds or call loans can be converted into gold an delivered either in Montreal or Toronto within twent\ four hours, and London balances are equally available through the sale of cable transfers in New York. Although London does not encourage the establish ment of foreign banks, it, on the other hand, doe nothing to 1 strict the movement. This broad-niinde( policy, though it may perhaps affect the individual inter csts of s(,me of the British banks, is of immense advan tage to London and the country in general, and there fore indirectly to the banks themselves. This freedoir in banking is a leading factor in making London the clearing house of the world, and insures its pre-emi- nence as a financial center. The policy of New York in connection with foreign banks is just the reverse to that of London, and is ap- parently based on the local and narrow point of view. New York would have the most to gain by an open- door policy of banking, and yet it is the most stringent m Its restrictions against foreign banks, and were it not for the fact that New Y^ork is the foreign exchange center of the continent, it is probable that few foreign banks would be represented there. As it is, foreign banks do not have regular branches in New York but are represented by agents, generally the two senior men of the staff. This is due to the advisability of oper- ating as far as possible along the lines of a private bank, rather than as a foreign corporation. It will be seen from the above that as Canadian com- MISCELLANEOUS 400 nitrtr t'xpnruJs it will be followed by tlie establishment of hraiK-lies of Canadian banks at many other points outside of Canada. Foreign branches form an excel- lent ji(l\ trtisenient for Canada, and serve as a very nse- I'lil cliamiel for trade inquiries and general information. lU'low is a list showing the foreign branches of the Caiiu(liui) banks: Bank of Montreal: Newfoundland (8). London (2). New York. Chicago. Spokane. Mexico City. The Canadian Bank of Commerce: Newfoundland. London. New York. Portland, Oregon. San Francisco. Seattle. INIexico City. Bank of Nova Scotia: Newfoundland (9). Boston, Massachusetts. Chicago, Illinois. New York. West Indies (7). Merchants Bank of Canada: New York. 410 BANKING PRACTICE II 11 ;i 11 SI Roi/al Hank of Canada: Newfoundland (2). London. New York. West Indifs (a«). Dominion Bank: London. Union Bank of Canada: London. Bank of British North America: London. New Vork. San Francisco, p • Banqiic Nationale: 267. Correspondence. — The correspondence of branch may be roughly divided into three classes, hea office, routine and general. Head office correspondem consists of letters on matters pertaining to loans (som times known as discount communications) and lette dealing with the general affairs of the branch and i management (known as routine letters). The statioi ery generally used for head office correspondence is i memorandum form, the upper left-hand heading givir the superscription and date, the subject matter and siil heading, if any, being on the right-hand side, and i every case a separate form for each customer or subje is used. In the case of letters dealing with loans, it is custon ary to give the name of the customer, the present pos tion of the account, the date and amount of the la head office authorization, if any. The balance of tl letter is then written along the lines suggested in Se MlS^'KLI.ANKOra 411 lion iMMK Tliesi' (liscmiit ('ornimiiiicatioii.s to lii-ad otYiic urt' mimljtrcd consf<*ntivt'Iy as written, hut art' tiled ;il|>liiil)(tically, either in hinders or vertical tiles. The litMil oflu't' also nunihers its replies ami in(|niries to the Itniiicii on discount matters, and lK)th are thus assured that IK) important correspondence has heen delayed or lost ill the mails. The general or routine corres|M)ndenee with head of- ticr is also conducte«l on numl)ered memorandum forms (liff'(iin<^ slightly in size or color from the discount com- iniiiiie.'itions. A standard list of headings covering all the routine matters likely to he the suhject of corre- s|»()n(leiiee with head offici , such as "Statf," "Station- try." "Furnishings," etc., is used, under which appro- priate suh-headings can he raised. Ihese letters are filed under suhjects, and alphabetically under sub-head- injjs. at hoth offices. The numbers on an inquiry and its re|)ly do not nece**sarily correspond, head office in- quiry No. 142 "Stationery" may be answered by the branch under No. 186 ""Stationerv'." Routine correspondence generally consists of stereo- typed forms enclosing check lists, collections, etc., both despatched and received. Such letters received from other branches, and correspontlents containing collec- tions, etc., seldom have to be referred to, as full particu- lars of their contents are recorded in the books, and the payment or return of the items enclosed practically ends any necessity for reference after three or four months. so that the manner of filing these forms is not so im- portant as of ordinary letters. The most practical way is to file them altogether by months, arranged in order of date of despatch or receipt. I^etters received from cus- tomers containing deposits and the like may also be considered as routine matter and kept altogether on sim- PS ! 412 BANKING PRACTICE ilar files, llontine lettr-s ,ar(l are generally writ ten on a form similar to Figure 21, a carbon copy beini retained in a book or binder. ' General correspondence may I)e said to consist o special letters to the branches, correspondents and other which do not fall under the above classifications. The) are written on letter size paper and filed in a vertica file with the relative replies and memoranda. 268. Bills of Ejochange Act— The whole business ol banking is so intimately concerned with negotiable in stmments and the laws governing their existence and val idity that a fair knowledge of the general principles ol the Bills of Exchange Act is essential even to the young, est bank clerk, and such knowledge is best obtained by a study of the act itself.' For this reason little or no at- tempt has been made in this book to explain the nature of the various classes of negotiable instniments. Copies of the act are easily obtainable; if annotated, so much the better, and every student of banking should make a sys- tematic study of the act until it is thoroughly masterd. Concise notes should be taken under the different heads and sufficient space left for comments or illustrations gathered from actual experience or from legal decisions. The following rough classification will give an idea of the scope of act and at the same time form a basis for stiuh' : Sections l-ie Interpretation and general provisions of the act. J 7-704 Bills of CiVclinnge. 17-.1* Form of bill and interpretation. 85-39 Acceptance and interpretation. 40-41 Delivery and oral evidence. 'See Volume XII, "Commercial Law." MISCELLANEOUS 413 42-46 Computation of time, non-juridical days and days of grace. 47-52 Capacity and authority of parties. 53-59 Consideration. 60-74 Negotiation of bills. 75-84 Presentment for acceptance. 85-94 Presentment for payment. 95-126 Dishonor and protest. 127-138 Liabilities of parties. 139-146 Discharge of bill. 147-164 Miscellaneous. lO/i-175 Chech's (Crossed checks). 176-187 Promissory notes. Schedule. The Bills of Exchange Act, like the Bank Act, is a Dominion "tatute and is based largely on, and follows almost woi a for word, the English Bills of Exchange Act.^ ' ("opics of the Bill of Exchange can be obtained by forwarding twenty cents to the King's Printer, Ottawa. m li \i Ir \l \'^»i^ ^- PART III: FOREIGN EXCHANGE CHAPTER I MECHANISM OF THE EXCHANGE MARKET •>()'.). Inland exchange.— ¥.xchange ma/ be defined as the payment of obligations in one place by the trans- fer of a credit from another. Its operations are based on the principle of the cancellation of indebtedness, thus discharging obligations without the actual forward- iiiff of money. Exchange may be divided into inland exchange and foreijrii exchange, but the same principles cover both; Ilic latter, however, is the more complicated. Inland or (lomestic exchange represents the transfer of funds be- tween points in the same country, generally through the niechum of bank drafts and checks. When drafts are ,hawn against individuals to whom merchandise has been sold they are called commercial or trade bills. For- eign exchange represents the transfer of funds between two countries. In other words, inland exchange oper- ates as a clearing house between diflferent sections of a count ly, whereas foreign exchange operates as a clear- ing house between nations. Inhuul exchange is calculated only in one kind of money: no conversion is necessary and the difference between the amount remitted and the amount paid for 415 416 I'OHKIGN KXCIIANGE I hi a draft is in tlie form of discount or premium on the amount. Excliange is said to he "in favor of Toronto." for instance, and "against :Montreal" when the neces- sity for remittances from Montreal to Toronto exceeds the necessity for remittances from Toronto to Montreal, in which case a (h-aft on JNIontreal coidd l)e iiurcliased at a discount in Toronto, while Toronto funds would he at a premium in Montreal. It must he Ik)?- • in mind that this condition applies to large operati. .s In;- tween hanks and not to counter transactions for which ordinary banking commission is charged, no matter how the actual exchange stands between the two points. The maximum discount or premium rate between JSIontreal and Toronto on large transfers of funds between banks, never exceeds fifteen cents per thousand dollars. Other- wise it would be cheaper for a bank to remit large Do- minion notes (negotiable only between chartered banks) by registered mail, insured. In Canada the rate for inland exchange between tlie banks, or charged to customers, is generally very much below the cost of shipping the actual money. This is principally due to the fluid nature of money and credit in Canada, owing to che branch banking system. Com- petition is also an important factor in maintaining low rates of inland exchange. A bank, through its branches and circulation, is gen- erally able to supply the bulk of its own domestic ex- change reijuirements, and it is only in the case of special transactions of large amounts that outside purchases or sales are made. Consecjuently there is little or no ma- terial available for the study of domestic arbitrage. Another feature which tends to simplify domestic ex- change in Canada is the fact that the principal cities are practically in a direct line with each other east and west. Mi:i HAMSM OF THE KXCIIANdE MARKl'/r 417 L'TO. Inland exchange in the United Statea.— In the rnitcil States, with its widely scattered centers, the i-ainifications of inland exchange are far more exten- sive than in Canada, and the study of the course of ex- change hetween the large cities and New York is most interesting. Reference to the "Statistics of the United States 18G7-1009" (Document 570), published by the National :Monctary Commission, shows that in New Orleans, for instance, New York funds are almost in- variaMy at a discount, owing, no doubt, to the large shi])nients of cotton from that section. New York funds in St. Louis are also more frequently at a discount than at a i)reniium. In Chicago, New York funds in .Tanu- ary, May, June and December on the average have been at a premium; the balance of the year they have been (renerally at a discount. In San Francisco, New York funds up to 1910 were generally at a premium. In 1911, however, the rate cnninienced to take a downward tendency, which it has maintained on the average ever since. The average premium for the period of 1911-12 was only one third of the average premium for 1909-11. The reasons for this change may be due to the fact that the Pacific Coast is getting more and more self-centered, and conse(iuently less dependent on the East for financial and other assist- ance. This feature will probably become more empha- sized with the opening of the Panama Canal and the holding of the exhibition at San Francisco. The combination will forn- an exploitation of the Pa- cific Coast interests \Much will be far reaching in its effects. At the end of November, 1913, New York exchange hi the various centers was quoted as follows per thou- sand dollars: C-VIII— 27 a > i 418 lOHEIGN KXClIANXii: Boston par. Chicago 5 cents premium. (express rate ,)() cents per thousand) St. I.ouis l.'i cents (hscount. (express rate (50 cents per thousand) St. Pail! 15 cents premium. San Francisco l() cents premium. (express rate $l.i)() per thousand) 271. Netc York fiuuh.— The vohuiie of business transacted between Canada and New York is verv large, and tliere is consequently an active market throughout Canada in New ^'ork funds. Nearly every large bank has found it necessary to establish an agency in New York and in some of the other large centers in the I "nited States. Until 1912 New York funds in Canada were gener- ally at a discount, averaging between A and A of 1 per cent, and this in face of the fact that the so-called "bal- ance of trade" was always against Canada. In other words, imports from the I ^nited States greatly exceeded Canadian exi)orts to the United States by some $250.- 000,000 a year, and yet the exchange was generally in favor of Canada.^ This abnormal condition was due principally to the steady flow of British and foreign capi- tal into Canada during the period referred to, the rela- tive exchange operations l)eing effected through New York. With the diminution of the volume of these in- \estmcnts and the constantly increasing remittances to , . Canadian Canadian Year CTiiIinfj Imports from Kxports to Excess of Junf •'"• I'nifed States United States Imports 1908 «il,218,00O 113,5«0.000 107,698.000 9 191..i80,000 »2,60.1.000 98.977.000 1" '?;?7.fi93.0(.K) 113.14.5.000 104,.')IS,000 11 29.'{,40i.0«)O 1 19,«03,000 174,197,000 K .1I<1 ill (lolliir therefore 1 dollar 1 pound 28.22 ^rs. •.•:iJ'.'X2i)yiL' M3(j«no 23i!2" ~^ 4* — i..'n» M rFu -r o a h. ao f.2 gi kJ OS S t-»5 * >3 o5.HS:»55^ 4^ iiG FOREIGN EXCHANGE i Country AiiNlria-lliiii^rury I^iliii I'liidii.. <'••» n iiilii ami I nilid States l>**ninurk (lermany. Holland Japan Mfxifo Ru.s.sia Great Britain Namf of I nit krone franc •lollar krone ri'ichsmark gulden yen pe.io ruble pound (iross ^yl•iKht Cii rains 5 «77« 4 »7«17 C. 91415 0.145K8 lo.;no54 H. 80024 1«.8C(«;{ 13.)J7JS4 123.27447 Pure Gold Grains of 4.70498 4.4803(i 23.22 22274 5.5 ,34 9.33348 11.57422, 11.37421 1 1 94820 113.00100 Dollar Kquiva- lent .20202 . 19295 .20799 .23821 .40195 .49845 .49845 .51456 4.86056 or 4.80% SterJinf Kquivg. lent 'npenr<« 1U<1 » 516 49,816 13 2U 11 75 19 8« 24 57 24 57 25.37 The table on page 427 gives an interesting comparison of the units a the principal countries in terms of each other s units, based on mint par values 274. Gold points.-Go\A points or specie points, as they are sometimes called, are the rates of exchange pro- duced by buj.ng gold in one country and selling i^ in another. When sterling exchange is selling in New \ ork higher than it would cost to buy gold and ship it to London the remitter naturally takes the cheaper method and sends gohl; and Mhen, on the other hand, exchange IS so freelj' offered in New York that the rate registers abnormally low, a seller may find it cheaper to brina Ins J^ondon balance over in gold. This mint par, or theoretical par, remains invariable m gold standard countries. If the exporting or import- ■ng of g„ld could be effected without expense or loss of interest, the mint par and gold points between anv two countries would be practically identical, but heavV ex- penses are involved in a gold shipment, for freight, in- surance, cooperage, cartage, abrasion, interest and other charges. These deducted from the mint par will give « 518 y. IBM «*■ X. o y. •1} r» a X % 9 »« o rt do o 1- (- ^ t- *^ 3 (1; O 5 1- s § ?? 3 OJ 11 z> =" s •o = r • - ; "" 11 <- 1- ■a 1 i 1- 3 % % ^^ 2 "> « o 3 ^^ ^^ © o ^^ ^^ 13 ^ fe :! X g « 1 £ "J « X H r>M •1 •M •s S * X 1- •r 9) 1- *>! X f>^ " ^ X « o O ^^ »-4 o ^t F*M 1 • >. la r. C i5 ^ 1- 1 i IS 3 3 "* o I-H *M FN ^* p^ •M { .| J §§ s "5 in S X g 1« 5^ 2 ® -»• ««) 1- X s§ -J ' 1 •= ^ cs © « «- »0 o a *"« -i O © ^M © © © o 1 -3 * ^ ^ •-M i^ Ian II B '!1 X ss 3 i i 2 «»• »• © s ^ FH d d d ,^ M ^^ 1 . ii.'j « •1 ^^ M CT Franot and I'nion Latin ^4 0< »« « FN FN ■»» 1 C « ■? Is « X •g •f! •v !g a IS 2 X s ^ ^ 154 FN §; i V ■F ' PH F^ «» FN p^ «« U 11^ "5 M •^ s 2^ ^ O 3 % 5 s •E3 ^« ^3 2 % «s s i S 3 U'-n •^^ - « "O -3 J.2 « IM § :2 '1 S $; (M 5 Engl r^* si a 3 o M d "fi "" F^ FN FN FN M II II It II II H II H II II 1 1 — "^ •4 1 s 1 S •a i e 2 J3 a > 1 B .s -0 e FN S -5 .^ I e e »« •< 1 1^ 4«7 I ^^^ FOHKIGX KXCHANGK the import gold point and added t.» the nunt par will give the export gohl point. The charges on a shipment of gold to London „r I ar.s vary w.th each shipper, anl/s. Progression in the case of tills (|ii()tation is by sixteenths— 9.>, 9.5 1/16, 951/8, for (\anij)le. In order to bring these quotations closer tlurt- may be added or subtracted slight percentages, as, tor instance, 9.3 l/s + 1/16%, or 9o\\ - l/lQ'/r. In turning marks into dollars at one of these rates, it is to hf noted that the percentage mentioned is to be added or snbtraeted from the dollar-proceeds after conversion at the regular rate has been made; thus in figuring, say, I.OOO marks at 95y^ + 1/16, first convert the 1,000 marks at 9.5l^, adding to this dollar-product one-six- t((.iith of one per cnt. of itself. The quotation of marks at so-and-so-many cents for oicli mark rather than at so-and-so-many cents for each toKf marks would seem to be far more reasonable, but tile custom has come down from times immemorial and allows no sign of changing. Drafts on Paris, unlike d'-afts on Berlin or London, arc (juoted at so-and-so-much of the foreign currency tor each American dollar. Thus a quotation of 5.lii% iiKaris that 5.18% francs can be bought for one dollar. A moment's thought will show that the higher the fig- ures in the rate, the lower the rate actually is. Drafts -n Paris are cheaper, for instance, when 5.1834 francs 430 FOREIGN EXCHANGE can be bonght for a dollar tba„ wlien only 5.181/, franc can be bought. Progression is by five-eighths of a eeT time (a centime is a hundredth of a franc) per dolZi thus 5.18% U8.y„ .,.19%, etc. As ..iikZ^^Z- tafons arc brought closer together by the use o p '. centages. Thus a seller of drafts on Paris wanting to charge a customer a little more than, say, 5.18l//bu? not wanting to charge as much as the nexfreg^dato o tation (.5.171/1.) might fix a price of 5.181^-7/ Tha would mean that for each .5.181/, francs in the draft, one do lar would be charged; in addition to "h ch there would be a charge of 1/16 of one per cent. 2,0. Lnderhiing principles.-Vnderlylng the whole business of foreign exchange is the system by which h creditor draws a draft upon the debtor-bv which or sold 100 bales of cot on to a spinner in Liverpool, draws a draft upon the Liverpool firm for £1,000. That is the origin of practically all foreign exchange business- some one IS owed money and in order to get it draws upon the man who owes it to him. The draft he draws IS called a bill of exchange. How this simple operation develops into a transaction in foreign exchange is best shown by using a concrete example. Take the case of the cotto/merclfai^ who h sold his 100 bales and drawn his draft for £1,000 on Liverpool. Such a draft, in pounds sterling, is in itself of no use to him. Before he can make use 5 it he must manage to convert it into American money-find sonie- Tntrf '"' '* '1 ^'^'^ ^"" ^^^'^^ ^'- ^*- Such a man IS the foreign exchange banker. He keeps an ac- r"co«o^"'"^ ' "f " ^^"'"^^ *° ^"^ '^' ^»r«ft from the cotton man m order to send it over there and have MKCIIANISM 01' TIN-: i;\( II.\N(;i.: MAKKKT 4:51 it placed to the credit of his account. Hie price of a IM)und sterhng to-day is $4..8(i," he says. "J can pay yon $4,8(50 for your draft on Liverpool for ^1,000.'' The cotton merchant accepts, takes his check, and is out of it. lie lias sold his cotton, .rot his money, and is midy for a new transaction. Ihit why was the hanker willin^r to buy that draft for 11.000, and why does he keep an account in pounds stdlin/r over in Liverpool? Simply because customers uli.) have i)aynients of one kind or another to make on tJR other side are continually comin^r to him to buy (halls in pounds, and he wants to be in a position to sell them what they want. When he takes that £1,000 (halt off the hands of the cotton merchant and sends it over to be deposited to his credit in Liverpool, he ktioNvs very well that he can always draw his own draft for £1,000 and sell it for dollars at whatever happens to k' the current rate of exchange. If he paid $4,800 for the £1,000 draft he Imught, and sells his own 11,000 draft for, say, $4,870, he has clearly made $10 on the transaction. And that is what the foreign ex- ehan^re banker is in business for— to buy drafts, deposit them abroad for his credit, and tlien sefl liis own drafts a^rainst the balance at a higher rate of exchange. Needless to say, the illustration given is elementar>'; hankers do not make money exactly as stated— the oper- ation described is the very simplest and would not result in hankers making much money. At the same time it IS the principle underlying the whole business, the prin- ciple on which a clear understanding of th. foreign ex- chai.^re business as it is carried on absolutely depemls. Everything is built up around it. Every move the for- ei^'n exchange banker makes depends upon his being s s §> I _c ?i C o a o u •a o 6 -« a £ t ^ c o c el 3 3 432 MKCIIAMSM OF TllK KXCIIANCii: MAUKIIT 4.*j:{ ;il»lo lo buy bills drawn by creditors on debtors, and on liis bein^' able readily to sell bills drawn against balances lie is carrying aliroad. It is customary for bankers vvbo are doing a regular l(.rii<,'ii excbange business to carry a balance with their r(.r(i;,ni correspondent (they often have several in each h\H •§ I a: M O t<3 M O s u c I I* I I I I < i t 5 5 1 -a I 'mi I t« 1 'f a i5 ^ ««M ^ c I >t e '/} s ■E o B ^^ « 1 3 fcS 3 4:5 1 ^ Ml ( IIAMSM OK rilK KX( IFAMJE MAUKKT 4:U 111 alt uiidtr discount. In the cusc of a driift marked rddciiiiK'nts for aceeptanee," therefore, the party abroad Ivliicli lias iKMight the ^«M)ds can ^et them out of the ship »s s(M)ij as it — or the bank which represents it — has **ac- rt ptid" the draft. Where the bill of huling is deliver- Inhli oidy on "payment" tiie consi^rnee has to pay the Idralt diss a rebate for the unexpired time it has to Iriiri) before be can get bobl of the bill of lading to get Itlic ^r,„„ls (iff the ship. "Acceptance bills" are, therefore, hliscoiiiitahlr; "payment" bills, rebatable at the current Irate for loans. The rate for short loans in London |iisiially riding lower than the discount rate, bills for jpayiiitnt drawn against perishable goods which mu«t be paid Milder rebate as soon as the goods arrive, command a better rate of exchange than even the l)est bills where (loeiiments are to lye handed over to the consignee on aeeeptanee. Differently expressed, the idea is that a lii/;Iier rate of exchange is commanded by a grain. "pay- nient" bill than by a cotton "acceptance" bill, because in the discounting process in London less pounds sterling ' will be taken off the face of the grain bill than off the [cotton bill. Documentary exchange drawn by reliable parties is I a fairly safe kind of exchange in which to deal, the buyer kiiiy: pi-otected by the bill of lading which is endorsed ov( r to him. As long as the buyer of the exchange or liis a^reiit abroad retain the bill of lading, they are per- fettly safe; it is in the case of acceptance bills, therefore, where the documents pass out of possession as soon as the drawee accepts tlie draft, that the element of risk comes in. For which reason the greatest care is exer- cised not only as to the maker of the bill, but as to the drawee as well, documents never being surrendered to the latter iiidess bis standing is absolutely satisfactory. 4.'tU FOIIKIC.N i:X( IIANC.R 27H. Jiilh of cvchan^c thai inv(tlvc more or less rink.- C'oiictriiiii^ tilt" risk incurred in the ptireliusc of djici iiKiitary exelmn^a-. A, \V. Mur^nitt' in his book "lutci lintionul Exehun^e" writes us follows: JiilU of cxihaufiC that ma// he purchttncd aafehj.—BW a«l l)v (lonimints cnvirin^ ht/ipli-, nnn-|M'risliu}) imrdmndisc tlial niii lu rnulilv ivmiM in tlic niarkit wIuti- nii HiKiiwI, in the event of foreeW sale, l»y reason nf iion-Heecptaiu «r non-pavment hy the rator cars and vessels of modern ty|)e, and warehoused in cold-storage ])]ants upon the arrival at destina- tion, if not inunediately taken up by drawees. liiUs invoh'ing marc or lens risk. — Bills accompaniefl hy doc- uments representing shipments of perishable merchandise, such OS butter, cheese, fresh fruits, etc., that are liable to deteriora- tion in quality, or to absolute loss, during transit. \!r.( iiAMsM OF Tin: kxciiamu: maukkt m Mill-, uitli ilnriiiiiciil.s NliuHiii^ coliatinil Mruri t>' of I ivf nil- ,li(»iM •> or oflicr livi> iiiiiinalH.iu' frs«i itiitin|( the fx|)t>ii!«i> uf liolp iiid f.i.l iliii iii^r tniiisit for thf iiiiiiiitcnHiicc of lift-, an a ri-fumil ,.l' Ml. Ii iiniux««l hill Hoiilil iltprtciatf tlu- valiu- of tlii' hvv ,1 tv by du.v, to thf txUnt of such i;x|Kn>w; iiu-urrcd. urit>', In ail.lition to the liiihility of drawers and endorsers, if any, piirdiiiscrs of documentary hills are secured by the financial rt- >|.(. nihility of the acceptors on ami after acceptance until actual |i.iMiiiiif li()uld he (juite ample in the majority of cases. Further, th.M l.ilU possess another element of protection against a possible I..- in this, that they are supplemented by documents covering >.il.il»lf imrchandise with title continuing in the purchaser of the l)ili>. uiiMI payment at maturity, or retirement prior to maturity, of tilt respective hills of exchange. •-'7!». Clean commercial 6i7/*.— Bills drawn by com- mcnial lioiises in one countn' on honses in other coun- tries, at anywhere from thirty days' to six months' sight and miaoeonipanied by documents. Of all classes of exchange this is about the most risky in wh'wh to deal, for which reason bills of this class can l)e bad at lower rates than almost any other kind. The haukn- buying a bill of this kind has absolutely no secur- ity ( xcept the standing of the firms concerned. The actual shipments, payment for which is represented by thi" drafts, may have l)een made months before, or they MICROCOPY RESOLUTION TEST CHART (ANSI and ISO TEST CHART No 2) 1.0 I.I 1.25 if 1^ 1.4 2.5 2.2 2£ 1.8 ^ APPLIED IIVMGE inc :^. 1653 tasl Mam Street 5".^ Roctiestef. New Yo-k 14609 USA -^ (716) 482 - "MP - Ptione ^S ("6) 288 - 5989 - Fa« 438 FOREIGN EXCI lAXGK I I 1 : may not have been made at all— about that the baiikei buying the bills knows nothing. When he buys cleai conmiercial bills he does so absolutely on the standing ol the drawer and the drawee. A good many foreign ex- change bankers make it a point never to buv this class of bill at all. 280. Drafts drazcn against securities. — Out of inter- national trading in securities there originates an enor- mous volume of foreign exchange business. A banker in Xew York, for instance, sells a block of bonds to a firm in London and draws upon the firm in London for the purchase price converted into pounds sterling at the prevailing rate. To this draft are attached the securi- ties, the whole being then sold in the open market. Ex- change of this class is, of course, about the safest to buy that there is. The buyer of the draft gets the bonds as collateral and does not give them up until the draft is paid on the other side. Sales of stocks as well as of bonds furnish a large amount of security-bills. "Buy for us 100 shares of Union Pacific preferred and draw on us for the amount due," comes a cable from a house in London to a house in Xew York. The order is executed, the stock bought, and a draft for the amount expended drawn upon the house abroad which sent over the order. Here again the stock itself is attached to the exchange, insuring for it a quick sale in the exchange market. A form of bill to the purchase of which there attaches less risk could hardly be imagined. 281. Bankers' long bills.— Drafts drawn at sixty and ninety days' sight by bankers here upon bankers abroad are coming to take an increasingly important part in international exchange operations. Such bills of ex- \ AIIXHANISM OF THE EXCIIANGK .^lAKKET 4.J!) clian^'e may be divided into three classes: (a) long bills arising from the regular conduct of foreign exchange business; (b) long bills originating from the operation of loaning foreign ii^oney in this market; (c) long bills sold without security for the purpose of raising money —so-called "finance-bills." \\' ith regard to the first class of bills, it need only he said that «very banker doing a regular foreign exchange business is continually called upon to fur- nish customers with bills of exchange drawn at sixty and ninety days' sight. Take, for example, the case of a merchant here who owes a merchant abroad £1,000, due in two months, but who has the money, on hand and wants to pay off the debt. He might buy a demand bill of exchange and get the * mer- chant abroad to give him a rebate for the period of pre- payment; but a far better way would be to go to his hanker, get from him a sirty-day bill of exchange and send that. This is only one of a thousand different sources from which may spring a demand for bankers' long bills. Any banker at all actively engaged in the business must at any time be prepared to furnish cus- tomers with exchange of this kind-. 282. Long bills from loaning foreign money. — The second class of bankers' bills originates from loaning op- erations. To appreciate fully the nature and standing of these bills, it is necessary to understand the mechanism of the loaning of foreign money in this market. Take, for instance, the case of a house in London which decides to lend money out here. Its American correspondent is notified, and the question having been settled as to \s hether the loaning house wants to take the risk of ex- change and accept a fixed rate of interest on the money, wm 440 lOKKKi.N i:xtiiAN(;i: or whellR'r the loaning Iionsc would rather accept a com- mission and leave the risk of exchange to the borrower, the operation goes forward about as follows: Suppose the London house to have chosen that the loan shall ))ear, say, 4 per cent interest, the risk of ex- change to be taken by itself, the lender. The first step is the drawing by the American house of an amount of ninety-day exchange exactly equivalent to. the amount of American currency to be loaned out. Thus, if the loan is to be for $100,000, and the rate realizable for ninety- day exchange is 48.5, the American house draws a draft on the lender in London for £20,G1 8. This draft it sells in the open market, realizing thereon exactly $100,000 which, upon deposit of satisfactory collateral, it turns over to the firm here to whom the loan has been made. The latter will then have the use of the $100,000 for ninety days, at the end of which time it must pay it back, plus 4 prr cent interest, to the American correspondent of the English lender. So far as the actual borrower of the $100,000 knows, the loan is a regular loan of American currency— he has no way of knowing that the money he is receiving is a product of bills of foreign exchange, or, indeed, that there is any question of foreign exchange involved. He lias borrowed $100,000, and at the end of ninety days he will have to pay it back with 4 per cent interest. Beyond that his concern in the matter does not extend. But with the two banking houses who have lent the money the case is different. With them it is very much of a question of foreign exchange rates. They began the operation bv selhng £20,018 of ninety-day sight bills, and at the end of ninety days those bills will come back and have to be paid. What rate has to be paid in order to secure de- mand bills with which to meet the maturity of the "nine- MI.( IIAMSM OF THE EXCHxVNGE MARKET 441 tics" ori^niuilly sold will !iave a good deal to do with what tlicv will make on the transaction. If, during the life of till' loan, exchange rates have gone down, they will be a ilk' to buy in the necessary demand exchange at a low pi'iie and make good profit on the transaction. But if rates in the meantime have risen, a price may have to be paid for the necessary exchange which will wipe out all profit on the transaction. Not infrequently it happens that enough of a rise in exchange takes place to cause the whole operation to show an actual loss to the lender. In the other kind of a foreign 'oan where the lending banker does not care to take the risk of exchange, he le.Kls out bills of exchange instead of dollar proceeds of bills of exchange, and charges a commission instead of a fixed rate of interest. The borrower, in this case, in- stead of receiving a check for $100,000, would receive a ninety-day bill for £20,000. This he would immediately sell for dollars, but when th^ time for repayment came alojig three months later, he would have to pay back, not dollars but a demand draft for £20,000 plus the com- mission (usually % per cent on ninety-day loans). In this case it is evident that it is the borrower who takes all the risk of exchange, the cost of the loan to him depend- ing upon what he has to pay for the £20,000 demand which he must return at the end of ninety days. The banker, of course, makes only the commission, but that is fixed— he knows exactly what his profit is going to be. Because of the speculative element which attaches to loans of foreign money in this market, they are a favorite form of operation with many houses. Take, for in- stance, the case of a borrower of money who figures out that the exchange market is bound to decline within a few months. By getting some foreign banker to lend money to him on the basis of his, the borrower, taking / 44> FOREIGN EXCHANGE i i I i f I the risk of exchange, he can practically get himsel short of the exchange market, and if he Ys right in h forecast he can get the use of the money for nothini or even make a profit out of the deal. Similarly wit the hanker. Frequently it happens that foreign mone IS pressed on the market here on the idea that exchang rates are about to go down and that the lender of th money, by assuming the risk of exchange himself, cai make a big return on the money put out. 283. Finance biUs.—These are the other great clas of bankers' long bills in the exchange market. Con cernmg the exact meaning of "tinance-biU" it is sur prising what a difference of opinion exists even amon^ well-informed writers on exchange; but concerning th( present meaning of the term as it is used in the exchange market m Xew York, there is no chance for any differ ence of opinion. Among practical exchange men a finance-bill means just one thing— an unsecured long bill of exchange drawn by a banker in one country on a banker in another and sold for the purpose of raising money. Sometimes the drawer carries a balance with the drawee, sometimes not; usually not, the drawee "ac- cepting" the long bill drawn upon him for a fixed com- mission. Xeedless to say, the house abroad has to have a high opinion of the house here, or has to be in prettj- close connection with it, before it will agree to accept its unsecured drawings to any extent. This is the finance-bill as it is— not widely different from accommodation paper among international bank- ers. The house of Jones and Company in New York, which enjoys good standing and has close connections with Smith and Company in London, wants to raise additional money for some purpose. A credit is ar- ranged with Smith and Company in London and the Mi:( NANISM OF THE EXCHANGE MARKET 14.i New York house draws upon them in sterling for the amount required. The bills are then sold and Jones and Coinpany finds itself in possession of the money it needs. I'oi- ninety days it has the use of that money, at the end of which time the bills it drew in the first place will he coming due and demand drafts will have to he sent across to meet the maturity. Usually the arrange- ment calls for the nrivilege of renewal, which works out as follows: Sui)pose at the end of ninety days, Jones and Com- pany in New York find it inconvenient to put up money with which to buy demand exchange in "cover" of the bills they drew ninety days previously. Yet those bills are maturing and have to be met. So, in order to raise the money with which to buy the necessary demand exchange, Jones and Company sell a fresh lot of ninety-day bills. Just here there is an important point to be noted. To take a concrete case, suppose tluit Jones and Company of New York originally drew £10,000 of ninetj'-day sight bills and that the exchange market did not materially change between the time the bills were drawn and the time when it became necessary to "cover." Say that when the "nineties" were sold Jones and Company realized $48,700 for them, demand exchange standing at 487. The finance-bills fall due and have to be covered, but Jones ara Company decide to renew them by drawing more nineties. From the sale of £10,000 nineties at 484 they would not realize within $300 of enough to buy the necessary demand at 487. That difference represents the interest on the transaction. Usually, when connections are close, in- stead of drawing for exactly £10,000, the second time, Jones and Company of New York w^ould draw for enough more, say £10,060, so that there would be no 4U FOREKiN EX(HAN(JK real balarice to pay. Such a process iiiav be contiimc.l indefinitely— is being continued indefinitely, in fact bv many banking houses in New York who have come to regard the money to be raised bv the sale of these finance-})ills as part of their regular working capital. 284. I^imitatinns to finance paper issue— Where is ih limit to the practice? Only in the credit of the houses concerned, in the willingness of the exchange market here to absorb offerings of their long paper and the will- ingness of the London bankers to discount it when it is sent abroad. Otherwise there is no check upon the amount of finance-paper that a house might put out JNo mark distinguishes it from any other kind of long bill; the banker who buys it cannot tell whether he is buying a bill of exchange secured by railroad first mortgage bonds or whether it is a finance-bill put out with nothing back of it to "raise the wind." There is no way for him to tell. His protection and his only protection is in the character of the drawer and the acceptor and in his knowledge of how much of the paper there may be knocking around in the open market Finance-bills have at times played a very important part in our financial history, the last time being in 1906 and 1907. That episode was thus recently described by John Gardin, vice-president of the National City Bank. New York. Finance bills were Issued in this country up to the spring of 1907 m enormous quantities. It was estimated that in the fall of the year when these bills generally are paid off, there was running all the way from $250,000,000 to .$300,000,000 m finance biUs. The merchants, particularly here in the East have credits in the financial institutions abroad and sell these b.lls here and get thoir money. The brokers in Wall Street in- stead of negotiating time money here, negotiate sterling loans. Mi;( iiAMSM OF Till-: i:xaiAN(iK MARKET ilJ 'I'li(M' loans arc generally put out in the spring of the year wlicn (Acli.iii^fo is high, due to the cnonnous amount of imports that li.ivf to he paid for. They are generally issued so as to hring tli( ir maturity in the fall when the exports of staples from thir; (diintry prevail and exchange rates are very low. The result is that where a man issues a bill originally when exchange is high and ndconis it when the exchange is low, together with the con> iiii»I«)n he has to pay and the discount he has to allow, he finds as a general rule lie pays a very low rate of interest; in some (JIMS, 1 to 1 ' \ per cent. Ill 1906, before the San Francisco disaster, we had quite a large ^rold importation and a great howl was raised in England by the financial writers to the effect that the enormous gold importa- tions were facilitated by the credits granted for these long bills, l)v lianks over there permitting their names to be used. There was quite a crusade against them. Any bank in London mak- in<^ a practice of loaning money in this country by means of these acceptances was looked down upon. In 1907 most of these crtdits were canceled. I don't believe $25,000,000 or $30,- ()(;(),()00 were owing to Europe in July and August on the strength of these credits. The result was that when the export season started in, due to the hard time we were having, and ex- j)i)rts assumed undue proportions, there was no offset in the way of the redemption of these credits. In consequence, Europe had to give up its gold. CIIAPTKR II HOU' MONEY IS MADE IX FOREIGN EXCHANGE 285. The mlc of demand carhanffc-Voreiau t clmn^re ,.a„.sacti<,ns, nowadays, are of considerable sco and eijdless variety, hut all are based fundamentally , five different kinds of operation. ^ Selling demand exchange and cables against r m.tta..ces of den.and exchange is the elementaVprin pie of e business. Suppose an exporter here to ha, hipped $5,000 worth of merchandise and to have dr^ us draf on the foreign buyer for £l,000. He tab this draft to his banker and sells it at the current r of exchange, say 485. The latter sends the bill t his correspondent abroad for credit of his accounl drawmg at the same time his own check for £l 00( against the deposit rnd endeavoring to sell it at a highei rate than 485 Outside the expense of conducting th' business, anythmg over 485 that he can get for his drafi ;s clear proht. The two transactions cross off. It cost mm Jj?4,850 to buy the commercial draft in the first {P4.8b0. He may not have been out of the use of his money for five minutes, and as to his balance on the other side, the deposit of £l,000 and the draft on the balance for £1,000 arrive by the same mail steamer. 280., ^Merchant seller's credit-^ aturaWy, the credit of a merchant selling a commercial draft enters very largely into the transaction-determines, in fact, what rate the banker is willing to pay him for his bill of ex- 446 now MONKV IS AIADi: 447 clum.i'c. Here, evidently, is a elianee for taking risks and making profits. Jt not inf're<|uently happens that a liaiikt r eonies to helieve that some exporter who is not .ft iR-rally eonsidered strong finaneially is really all right, and he hiiys his paper continually, though always at a I)i^r reduction from the market for prime bills. Two ants |)er pound sterling is not infrecpiently the profit MM purchases of exchange of this kind. It is a form (.(' husiness which a gfxxl many hankers refuse to touch at Jill, hut on the other hand there are foreign exchange houses with Mell-equipped credit organizations who go in largely for just such transactions, and as long as they can avoid the purchase of bad paper they make very large profits. The business, too, can be done with a varynig degree of risk, one banker being often in a j)nsiti()n to sell his own demand draft at a little better rate than he is offered the demand draft of some other hariker. In that case the profit is apt to be small but so is the risk, and an easy chance is afforded to make from one-tenth to one-quarter cent per pound sterling on tlie amount turned over. Tlie other form of activity along this line is the sell- ing of "cables" against remittances of demand drafts. A cable transfer works as follows: A in Xew York has a credit balance in London; B, also in Xew York, conies to him and says, "I want you to wire your cor- respondent in London to hand over so-and-so-much in pounds to my correspondent over there. I'll pay you the c(iuivalent on this end." The rate is fixed and A wires to the London bank which holds his money to make the transfer to B's bank, the whole operation being closed inside of twenty-four hours. In point of time we are five hoiirs behind London so that unless the trans- ff us lOIIKKiN KXdiANdi: I'cr is uircci early in tl.c „,„r„i„^ it will uu\y lake n|a, the tollou iii^ (Jay. ' 287. BmkcrH London halamc~ln order to k^ ab to sen eahle transfers, the hanker, clearly, nmst can «n adequate h„|„nee in London and must* he constant rq,len.slnnK .t with deposits of exchange. Son.etin when his halanee has run down and he fin3 .1 draft and later receives the nicdiiim >vitli which to pay it. The American broker (h-UAvs tiic loan-bills, puts out tlie money as agreed, and gets it back in time to remit the necessary demand exchange to the banker abroad who has done the "accepting." Xeither party, then, has liad to put up a cent of capital. Credit only has entered into the transaction, and anything that has been made out of it is clear profit. Sometimes the operation is tiansacted with the foreign banker taking all the risk and all the profit except the commission he allows to his American representative. Sometimes the operation is transacted on joint account. In that case the risk and the profits are equally divided. Such an arrangement works rather to the advantage of the foreign banker, assuring him as it does of the utmost tare in the han- dhng of the money. As for the commission, in order to get the business properly taken care of on this end, he lias in any case to pay some American banker very neaily half of what he can make out of the transaction. 29.5. Risk of e.rchange.— Bearing further upon this question of commission, it is to be noted that" it makes a great deal of diiference whether the money is loaned out under an arrangement by which the banker takes the risk of exchange, or whether the borrower takes that risk— as fully explained in par- a^naph 178. In the case where the banker takes the risk of exchange he receives just so and so much fioni the borrower, 3, 4, 5 per cent as the case may be, and out of that has to come the difference between what he was able to realize from the sale of the ninety-day loan bills and what he has to pay for the "cover" ninety days later. Even if the exchange market has stood still in the meantime this difference in the two exchange rates is bound to be quite an item, and it reduces what t 4.54 FOREIGN EXniAXGK he makes on the whole business to a pretty small „e crntage But then the faet must not be lost si J c hat he has never had to put up any capital at all an that any^hmg he makes is elear profit. In case th oan has been made on the other basis, with the borrowe taking the risk of exchan^re, the borrower pays th banker a fixed rate of eommission-usuallv three eighths of 1 per cent on ninety-day business. Th banker makes that clear, for the borrower to whom h has lent, say, £10,000 of ninety-day bills, is obligate, to return to him i:iO,000 of demand exchange at th. end of ninety days. If the borrower can buy in thi^ cover cheaply, by so much is the cost of th; loan t( him reduced. As for the banker, it makes no differ ence to him what the exchange market may do; he get« his three-eighths per cent commission (eqiial to 4 times 'h per cent = ihU per cent per year) and is out of the transaction. 296. Commissions on loans.~l.arge profits are at times made in loaning foreign money in the two ways described. The interest rate may seem small but the amounts involved in operations of this kind are enor- mous and even a small commission may mean a verv large profit-in one month (October, 1902) one of the trust companies doing a foreign excliange business in ^ew \ork cleared nearly $25,000 from commissions on sterling loans, excellent collateral being deposited and the borrower in every case taking the risk of ex- change. Examination of the books of some of the big banking houses making a specialty of lending out for- eign money here would probably show profits far in excess of the amount made by this trust company. 297. Profits made from the purchase of exchange- HOW MONEY IS MADE 4.>o liiiyin^ foreign exchange for investment is still aii- otlicr source of profit to the foreign department. It sometimes happens, for instance, that for one reason or aiiotlier discounts rise in Europe, driving down the rate of exchange for sixtj' and ninetj-- day bills. When this takes place, if money is easy here, bankers are likely to buy large amounts of long exchange, not for the pur- pose of having it discounted and placed to their credit as usual, but for the purpose c^ actually holding it to maturity. 298. Time money rates on call money basis. — The purpose of such an operation is to take advantage of a depressed market for long bills. Suppose that on account of one of Europe's not infrequent war-scares or for any other reason, discount in London makes a sharp advance, correspondingly depressing the rate of exchange for "sixties" and "nineties." A banker who buys the latter with the purpose of holding rather than of discounting is pretty sure to be making a good rate of interest on the money he has laid out. As the bill nears maturity it breaks away from the influence of the hjt^h discount rate, becoming eventuallj^ demand ex- change. In the meantime, if discount has gone down, the rate at which the banker can resell his bill has gone up. For there is always a market — always the closest kind of a quotation on exchange of whatever usance. After the bill has run forty-five days, and has fifteen (lays left to run, the banker, if he wishes, can instantly (hspose of it. And just here is one of the most attract- ive j)oints about this business of investing in exchange — the buyer gets time money rates on a call money basis. The price he pays for the bill is governed by the time rate and that is what he gets if he holds the bill to if I! 4.';(] FOREIGN EXriTAXGE exchange, and he f'm ' i. *" ^° ''' *" ■■«'" purchase;. P™et'c<.lly certain to find a re, "The Element! of F^ i^^' E^h^t '•r^'' '" ''" "^ of cxcllg. I,r ;ri,^^ '" ™"""-" '"■• "-0 future doliv. broad classes of Wilimul,. T' 1 . ^'""'' ""^ »' ''«*' *' -KIT,:,: r:r-::r -^^ '' — of the draft. That meanTli IJ I, ' T^l °"' "?">"""' amounted to £50,000 tt" 000 „ , u * '"'"'' °' '^'"^'>«"« able balance on I ,e „ |tr sTr ""*'" ""' ^"""^ »" »~' rived there-not unti l,e . " ^""^ "*''" """ " l>»d a^ were drawn ehoseTo ™ T "^ °"7'""" "" "P"^"-'" ^t rate, in the .nea^t Z L^Md T'" "•"""" ^'^ -^''""«« mitling banker n,^h, aT M f 7 r.f- ""■'■"'"«• »"'' "■= ' find himself „iu, „ balaL :|,"1;' '""''^ ?' '"'^""ve da,-., checks onlj, „t very 1„! ™L ' ' °" "'' "" "''^ ^'' "^ draft, for future deliverv ""'""S''/''" his own demand ««,000„fc„„.erei„,"; yJjP^ ,"/ t '"^ ""' °'" when the process would ^ ,' ""'•''' '° ''" ""^'"j the bill, »1„,d, „ vlrt ir "° '"■'"'*''"''• ""^ '"'"''- """J-i^ %•, HOW MONEY IS MADE 4.5 i« safe, for instance, for tlic bunker to sell futures as follows: t;r>,000 deliverable in fifteen days; £10,000 deliverable in thirty days, tlO.OOO deliverable in from forty-five to sixty days. Such drafts on being presented could in all probability be taken care of out of the pre-payinents on the commercial bills. By figuring with judgment, foreign exchange bankers are often able to make substantial profits on operations of this kind. An exchange broker comes in and offers a banker here ft lot of good "payment" commercial bills. The banker finds that he can sell his own draft for delivery at about the time the commercial drafts are apt to be paid under rebate, at a price wliieh means a good net profit. The operation ties up capital, it is true, but is practically without risk. Not infrequently good conmiercial "payment" bills can be bought at such a price and bankers' futures sold against them at such a price that there is a substantial profit to be made. The other operation is the sale of bankers' futures, not agamst remittances of actual commercial exchange but against exporters' futures. Exporters of merchandise frequently quote pr.ces to customers abroad for shipment to be made in some following month, to establish which fixed price the exporter has to fix a rate of exchange definitely with some banker. "I am gouig to ship so-and-so so many tubs of lard next May," says the exporter to the banker, "the drafts against them will amount to so-and-so-much. What rate will you pay me for them-delivery next May?" The banker knows he can sell his own draft for May delivery at, say, 4.87. He bids the exporter 4.86M. for his lard bills, and gets the contract. Without any risk and without tying up a dollar of capital the banker has made one-half cent per pound sterling on the whole amount of ti.e shipment. In May, the lard bills will come in to him, and he will pay for them at a rate of 4.86 >!., turning around and de- livering his own draft against 4.87. Selling futures against futures is not the easiest form of for- eign exchange business to put through, but when a house has a large number of commercial exporters among its clients there are generally to be found among them some who want to sell 7 \ . ! tJ8 FOi;Eir.\ EXCHANGE their cxchanfTO for future delivery. As to the buyer of tl banker's "future," such a buyer iiii^^ht be, for instunee, aiioth banker who had sold finance-bills and wanted to limit the cost i "covering" them. The foregoing examples of dealing in futures arc mere! examples of how futures may figure in every-day exclmnj transactions. Like operations in exchange arbitrage, thei is no limit to the number of kinds of business in whic "futures" may figure. They are a much abused institutioi but are a vital factor in modern methods of transacting foreig exchange business. 800. Arhitr aging in exchange.— T\\h is another im portant part of the activity of the foreign departmenl Arbitrating may best be described as the purchasin| of exchange on one country through another country Conditions often arise, for instance, which make it cos less dollars to send a given number of francs to Pari by buying them in London, with a sterling bill, than t( buy them here in New York. Even very slight ad vantages gained in this way may amount to considerabh profit on a large volume of transactions. 801 . ^ rhitraging illustrated.— To illustrate with a con Crete case: Suppose a banker in New York sells a 25,- 250 franc draft on Paris, at the rate of 5.17I/2 (5 francs, 17M.' centimes to the dollar). That means that he realizes from its sale $4,879.23. Making up his mind to cover through London, he finds that the check-rate on London is 4.84, which means that he can buy a £l,OOC draft on London for $4,840. Cabling to London, he finds that the rate there on Paris is 25.25 (£l = fcs, 25.25) B.ne that £1,000 will therefore exactly buy the francs, 25,250, he needs. lie goes ahead, therefore, and pays out $4,840 for the £1,000 draft on London, sends it to London with instructions to his correspond- ent to buy with it francs 25,250, and directs that these HOW MONEY IS MADE 4a!) fniiics l»f stilt to Paris to the credit of his account. On tilt other side the transaction just matches off — he drew I'raiics 2.5,250 on Paris and he has deposited there ex- actly the same amount. But on this end lie is ahead. He took in }j54., 879.28 originally and has spent only s-t,840. 'M)-2. Arbit raging operations.— This is of course only the .sirnj)lest form of arbitrage but it is typical of transac- tions being continually made. A recent article in the \nc York Financier says: III coiuliicting such operations it is essential that tlie banker >liall he advised, through tiie cable, of tlie varying conditions of the markets ahroad. In such markets as Paris and London, hIrio the exchange transactions are always large, rates often fluctuate sharply and conditions change frequently. Conse- qiRiitly, though the situation may be favorahle one day it may siuldcnly hecome adverse, necessitating some modification of the nutliod of arbitraging. Moreover it frequently happens that at'tir a successful negotiation has been effected by a banker as the result of private information, his competitors may be ad- viseil of the favorable conditions prevailing and they also may draw In a similar manner. Hence each operator seeks to obtain for himself alone all possible information regarding changes wliidi are likely to affect his business. Sometimes a banker may fiiui, upon calculation, that it will be profitable to conduct arbi- trating of exchange between three or more points ; in such cases the conditions at each of the points must first be ascertained and calculations have to be made with the utmost care. Occa- sionally in drawing bills the banker, in order to take advantage of abitraging operations, will transfer credits, through the cable, from an adverse center to a point favorable for his pur- pose. Indeed there are very many ways by which arbitraging f-'in be profitably conducted by bankers lia\ ing the requisite fa- cilities and the necessary skill for such operations. It will be observed that operations in arbitraging of exchange require the 100 FOREIGN EXCHAXGK Hcrviccs of men of the larficst cxpcrionco, and hence tljc hiisinci- can be conjlucttd to advantage only in the most tliorou^jhl equipped offices. The exchange student who enjojH opportuni ties for practice in Mich offices and has the determination t( qualify liiniself fo.- this branch of exchange work by ocquirinj a knowledge of all of its intricate details will have no difficult^ after such qualification in securing advancement. The field foi operations in arbitraging of exchange is continually and rapidlj broadening, and there will probably always be a deniand for tlu services of men capable of taking positions as managers of ex change houses or departments. APPUCATION FOR COMMERCIAL CREDFP New York,. ^••••««*MtM GtARANTY TrU»T CoHPANT OF NeW VoRK, Drar Sin. PUoM iaaue for our aeeount a Doeumtntarg Credit in favor of for £.. draftaat.. igainst. .*oat of ihipment of.. iTom. In force untU first day of.. Insurance effected in.. Kindly advise the Credit by „*""" Mail. Yours truly. 4S1 APPLICATION FOR CIRCl LAR LETTER OF CR1.DIT Xew York, Cmmnty Trwtt Compnny 0/ Xrw York. 28 Xasitau Street, (Mutual Li/e Building). I>car Sir$: Pkasc issue your Circular Letter 0/ CrtdU £ /or of.. or. l«MMMMMa,.„M, to nad in faro and to remain in loree for ^.^n,. 1 j . , . ' '"^ moniha from daU of issue. At foot we affix specimen signatures. Yours truly, ••••••••••••••MMMMMMMHMVVM *** — > — ■••■■■■ M W 4aa CHAPTER III. FOREIGN EXCHANGE AND IMPORTS m:i. Commercial credits.— The financing of ex porta nml imports.— During the past ten years there has unnvu up a system of interrelation between the imiK)rt houses and the bankers which is entirely different from anything that has ever been seen before. Due, prob- al)Iy, to our territorial expansion and the great gain in our foreign commerce, there has been an enormous in- crease in the amount of banking capital used in mer- catitile business and a corresponding cementing of the ties between the merchant and the banker. Twenty years ago the financing of imports i d ex- |K)rts at any given commercial center was concentrated in the hands of two or three bankers who understood the business and made a specialty of it. To-day there is hardly a leading banking house which does not engage in foreign exchange business and hardly a foreign ex- change manager who is not doing some sort of a com- mercial letter of credit business. At a point like Xcw ^'ork, for instance, there has been a complete change within ten years in the personnel of the banking frater- nity M-hich is backing the operations of the import and export houses. The private banker has given way en- tirely to the institution. Even the trust companies are engaging in this business on a large scale. Commercial credit business has come to play so im- portant a part in the operation of the up-to-date bank, and is so little understood even by many of those well 463 Credit No (Copy) £ Sterling GUARANTY TRUST COMPANY OF NEW YORK Xew York, , I I ( I .191. To the Gdaranty Trdst Company of New York, 33 Lombard Street, LOXDOX. Gentkmen: At the request and for account of ur hereby authorize or any other parties whose drafts you may be directed by written order, or hy u-i. to accept under this credit, to value on you at for any sum or sums not exceeding in all Pounds Sterling (say £ Sterling) to be used as may direct for invoice cost of to be purchased for account of and to be shipped to a port in the United States The Bills mu^t be dravm in prior to the first day of and advice thereof given to you in original and duplicate, such advice to be accom- pnnird by Bill of Ijiding filled up to order of the Guaranty Trust Company of -Vcu' York (with copy of invoice) for the property shipped at above. All the Bills of Lading issued, except one sent to us by the vessel carrying the cargo, and one retained by the captain of the said vessel, are to be forwarded direct to yon. Copy of invoice, properly ceHified by the U. S. Consul to be for- warded to us by the vessel, also advice of each Bill drawn. And we hereby agree with the drawers, endorsers, and bona fide holders of Bills drawn under and in compliance with this credit, that the same shall be duly honored on presentation at your office in London. We are. Gentlemen, Your obedient .servants. Guaranty Trust Company of New York, by Manager. N. B. Bills drawn under this credit must be marked Drawn under Guaranty Trust Company of New York Letter of Credit No dated for£ Insurance in order at 491 .191... Xew York,. 191... Tnthe GUARANTY TRUST COMPANY OF NEW YORK (irntlcmen: Hating^ rccHved from you the Leltrr of CredU of which a true copyuonthe nihrr side, ^^hcreby agree to it. terms, and in conmdcration thereof Jj^^ agree with you to provide in New York, tu^lve day. preinous to the Maturity of the Bills riran-n in virtue thereof, mfflcicnt funds in cash, or in BUls on Lo,uion, satis- me us , to meet Inrlory to you, at not cscrrding sixty days' sight, and endorsed by '" '"•'""^"' "/""' "'""' ■-■''' prrcent. commission and interest as hereinafter pror-ided, and ^ undertake to insure at ^^ expense, for your benefit, n,mnst risk of Fire or Sea, all property purchased or shvpped pursuant to said Later of Credit, in Companies satisfactory to you. „.^ agree that the title to all property which shall be purchased or shipped under t>>e said credU, the bills of lading thereof, th. polices of insurance thereon and tl'c rrhole of the proceeds thereof, shaU be and remain in you until the payment of ,he bais referred to and of all sums that may be due or thai may become due on «">/ bills or otherwise, and until the payment of any and all oth^r indebtedness and liability now existing or now or hereafter created or incurred by ^ to you "n any and all other transactions vow or hereafter had with you, withluthority t'> take possession of the same and to dispose th^eof at your discretion for your nunbursement as aforesaid, at public or private sale, .mlhaut demand or notice. o'ld to charge aU expenses, including commission for sale and guarantee. Should the market value of .^id merchandise in New York, either before a ollrr Us arrival, fall so that the net proceeds thereof (all expenses, freight, duties. rlc, being deducted) would be insufficient to cover your advances there again* -i'h commission and interest. ^ further agree to give you on demand any further -purity you may require, and in default thereof you shall be entitled to sell said '•"rrhandi^ forthwith, or to seU "to arrive,- irrespective of the maturity of the acceptances under this CredU, ^ being held responsible to you for any deficit ""''' u. ^nd and obluje Jl^y^^^ to pay you in cash on demand. It is understood that in all payments made by -/ to you n. the United States, C-MII-.T) ^ ilir Pound Strrlitifj fhnll br rnlnilatrd at tlw. current rate of rrc'innqr for linnkcrt mih in All/' York on London, rxixting at the time of urttlrmrnt, and that tnterr-.t shall hr charged at the rate of five per cnil. per annum, or at the current Bank of England rale in London if ahoir five ;x r cent. Should anticipate the jxiifmrnt of an;/ jtorlinn of the. amount payable, interest is to be allowed at a rate one per cent, under the current Bank of England rate. In ca.<f the credit have been fully satisfied and subject in every respect to the conditions of this agreement. It is further understood and agreed in the event of any suspe.vnon, or failure, or assignment for the benefit of creditors on "'^ part, or of the nonpayment at maturity of any acceptance madeby^, or of the nonfulfillment of any obliqa- Hon under said cndit or under any other credit issued by the Guaranty Trwi Company of X7 informed in most other departments of banking, that it is well worth while to pause and look carefully into the rnncii)les on which the business is grounded. A (i( scription of all the various forms in which it is being M.. iked would require a volume in itself; but there is one main operation around which the system is built, a clear understanding of which will make it easily possible to grasp the more complicated forms of the business. im. Commercial credit finance illustrated.— Take the commercial credit business as it applies to the im- |)oit of merchandise, say, from the Far East to New York. Suppose a Xew York house to have bought a hundred cases of bristles in China, How can the trans- action be financed and the paym- it effected? On clos- ing the contracts for the bristles by cable, the first thing the importer would do would be to go to his banker and uet him to issue a commercial letter of credit to fit the terms of the contract. Such a letter of credit would he addressc:' to some bank in London and would au- thorize that bank to "accept" the four months' sight •lial't of the sellers of the bristles in China, up to a ceitain amount and under certain conditions. These conditions, having to do with the attaching to the drafts of the bills of lading, insurance certificates, etc., are all set forth in the credit. The banker in London having been duly advised of the credit on him that has been issued, the letter of credit itself would be sent out to the seller of the goods in C hina. The latter would then go ahead with the ship- nient. First, the bristles would be insured and a certificate to that effect received from the insurance com- pany. Next they would be put aboard ship and a cer- tificate to that effect (bill of lading) received from the steamship company. Having these documents in his 4ns FORKKiN 1,X('IIAN(;K possession the seller of the hristles would next draw a hill of exchange, in pounds, on the London hank men- tioned in the credit, the draft heing at four months' sight or six months' sight, as set forth in the credit. To this draft he would pin the bill of lading and the insurance certificate, and then, taking the letter of credit with him, he would go to the local bank to sell the draft, get his money, and thus close the whole transaction so far as he is concerned. 305. Part London plays. — Just at this point should be mentioned the reason wh)^ London was brought intj the transaction at all— why, in fact, the seller of the goods did not draw direct upon the buyer in Xew York. The explanation is simply this: in the first place, be- cause a draft drawn on some small New York mer- cantile house would not be readily negotiable out in China; in the second place, because a draft in dollars drawn on a banker in Xew York, no matter how good its standing, would be but little better by reason of there being no market in the United States in which such drafts can be discounted. Having drawn his sterling draft for the full value of the merchandise, the seller of the goods takes the draft to hi bank, shows the letter of credit which gives him the authority to draw, and turns it into local money. The bank is glad enough to take the draft. Exchange on London is always in demand and most of the local banks' business consists in buying bills of exchange just of this kind. So the shipper of the merchandise takes his money, and is finished with the transaction. At this point in the operation the merchandise has been sent oif on a slow steamer to Xew Y'^rk and the hill of lading and the four months' sight draft on Lon- don, representing the value of the goods, is in the hands FOREIGN COMMERCE 40;) "■•■ liie local bank. The latter now loses no time in send- m^ off this draft (pinned to it is the hill of lading) to Louilon, m order that the draft mav be "accepted" by IIk" hank on which it is drawn. For the sake of clearness suppose the draft to be •Iniwn on the London City and .Alidland Bank. A month passes, and one day the draft is presented for 'acceptance." Detachin|r from the draft the bill of lading and the insurance certificate, the cashier of the I^ondon City and Midland Bank writes across the face of the draft, "Accepted, Payable June 23." He gives the draft back to the man who brought it in. He keeps the hill of lading and the insurance certificate. June '2'M .s four months off. The accepted bill of exchange may be discounted and rediscounted a dozen times be- tween now and thtn but the cashier of the London City and Midland Bank has no interest in what happens to i.e hill or where it goes. All he knows is that in exactly lonr months that bill of exchange will fall due, and conin.g out of somewhere, will be presented at his wicket i or payment. m\. Value of implicit //-M^f.-Meantime the slow f "eighter ,s steadily carrying the goods toward New ^ ork. and as it is impossible for anyone to get them <".t of the ship without the bill of lading, the cashier "' the London City and Midland Bank loses no time in sending the bill of lading to his banking correspondent n. Aew York who originally issued the credit. From tins time on the London banker is unprotected. He has i;nt his name on a bill which obligates him to pay it in l-'-r months; and relying solely on the good faiih and s..l^ency of h,s New York correspondent has sent the sl'.pp.ng documents to him. In a business which in- vnlves such an operation as this it may be readily imag- / / 470 FOREIGN KXCIIANT.K iiied liow intimate the relations must be between tli bank that issues the eredits in New York and the baiil in London on which tliey are issued. No bank in Lon don wouUl ever a^ree to "accept" bills unless it ha: the most implicit trust in its New York corresponden and was sin*e that before the four months were up anc the bill came due the necessary remittance would arriv< from New York. Before going on with the transaction and seeing hov the goods arrive in New York and are finally deliv ered into the hands of the buyer, it is worth while tc note what the usual relations are between the issuer ol a commercial credit and the bank in Europe on whicli the credit is drawn. Very often it happens that a New York bank issues credits on its own branch in London, as for instance the Guaranty Trust Company of New York on its London office. Then again a great deal of the business is transacted on joint account both as to risk and commission realized — in which case the rela- tionship has to be very close. Lastly, credits are issued strictly for a consideration — that is to say, the banking house of John Jones and Company in London being satisfied that the banking house of John Smith and Company in New York is all right, agrees, for a stipu- lated commission, to "accept" drafts drawn under John Smith and Company's credits up to a certain amount. Any good bank in the L^nited States can easily make such arrangements. 307. Banker's only security. — Going back now to the typical transaction whose course we have been follow- ing, let us assume that the bristles have arrived in New York and that the bill of lading has been received by the New York banker who issued the credit, together with advice from his London correspondent of the TRUST RECEIPT. t (rOB DEUVERT TO PCRCBABER.) RECEIVED from the Gcara.vty Thvst Co. op New York the following goods and nimhundi..-. Ih.ir i.ro,,..rly. specified in the Bill of lading per ^ j^^^ marked and numbered as fuUowv: 1 a 1 same. in trust In trust to deliver the same to who have purchased the same for payable in and to obtain from the purchaser the proceeds of the sale of the In consideration of the delivery of said goods to | . "^ f I ; ^ "^ J as above, | .^^ | agree to deliver them immediately to the said purchasers and to collect th,- proceeds of sale, and immediately deliver such procecls to the Guaranty Trc st V,k of New York in whatever form collected, to be applie.l by them against the acceptances of the Guaranty Trust Co. of New York on i . ""^ °^ \ i" account, under the I, our my terms of Letter of Credit No issued for ^ I account, our J r mine and to the payment of any other indebtednesi Guaranty Trust Co. oi \ Mo the >Ew York City. N. Y 471 I, ours #7 I s ■i { } York. It is ,in.loMt. Ihoy hIuII not Ik>.s<, Mpplio.l unlil p:.i.|, hut with lilK-rty meanwh to lb- (luAHx.vrYTiusrCo. ofNkw VoKK lo m-U ..r .Iwioiint. and so app ■et pnicccds. Tho (U.MtvNTY Ti.is,T (\>. OK \nv York may at any time oanrel tl, trust, and they may tako i>...s.sos,si„„ „f sai.l g,H,ds until the .same have \m delirered to sai.i pnnhas,.rs an.l th.- pr»<(v.l.s .,f sale rireived fmm ther and th..r..after ,.f su.h p..,,....!-.. wherever the 8aid g.HMJs ami proceeds ,m then Ik.' found, and in (lie event ..f any .sus|R.n.ion or faih.re or a««igmnei my forthel)enefit of ereditoi-son t)ur I)art or of the non-fu!fdIment of an under sai.l credit, or any other credit issued l)y the Cuaraxt obligation or of tlie non-payment at maturity of any aceeptance made b f me TrustCo.okXkw VoHKon j '"^ I account, or of any indebtedness o , , I our J f my 1 our j '""'^ '" "'*"'"■ *'" •^'^''K''*'°n-^' a'-ceptances. indebtedness, an, liabilities whatsoever shall thereupon (with or without notice) mature am become due and payable. Dated. .101 26990 472 TRUST UEfEIPT. KF(T-IVEI) from the Guaranty Tmrni Co. of Nkw Yohk the foUowin* f,u,,U HI..I menhandwe. their property, Hpeiifted in the BUI of LadiniT? ^ '^ Dated luaiked and numbered u followa: anrl, in consideration thereof, ( we J HEREBY AOREE TO HOLD SAID OOOD8 IN TKf HT for them, and as their pro^rty. with lif)erty to sell the .same for their :..-< by fire. Dated, New York City, jgj (Signed) £ Stg. 47.3 I Jij { i i i 5 1 TRU3T RECETFT. (DocvMENTB roK Warbhoo«ino.) RECEIVED from ilu- GtAKAsir Thuar Co. or New York BUI Lading pt-r ilated for the following good* and luercbuidiate, their property, marked and bered tu followa: nu imported under the terms of Utter of Credit No , issued by the for i j account, the sai.l Hill of Lading to be used bv I «"•■ ' ^ us fort! sole purpose of entering the al)ove described property at the United State Custom House at the Port of ^^^ ^ storing the same in the name, an.l as the property, of the said the Guaii.4nt Trust Co. of New Yokk. and subject only to their order, J . hereb agreeing to so store the said property an.l to hand the storage receipt forth same to t^he .said the Guahanty Tkist Co. ok Xkw York, when obtained. I We^ I ""^^ '^'""*^*^ ^° '""'^ ""*"'^ '*'*''* P^Perty against fire, the losi if any. payable to said the C.uauaxty Tkl-st Co. of New York, and to ham to them the policies of insurance thereon. Dated 191 (Signed).. 474 FOREIGX COMMERCE 475 ariiount of the draft drawn and its maturity. The next stij) is to put the bristles into tlie iniijorter's jjossession Hut by doin^ so, the banker is doin^ nothing less than liaiuling over the only security he has. How can he let \\\v irnj)orter have the bristles and still remain protected liiruself? He cannot, unless the "trust receipt" he receives when lie ^rives up the bill of lading to the importer can be called protection. The "trust receipt" is simply a paper sio^ued by the importer stating that he has received the inerchundise and that he will sell the same and apply the proceeds toward paying off the four months' sight draft before or at maturity. Most trust receipts spec- ify that the merchandise is to be kept separate, ear- marked as it were, and that the proceeds are to be kept strictly distinct from the firm's other assets and handed over to the banker as the bristles are sold. Having the actual merchandise in his hands, the im- porter is now in a position to sell it and begin to make pre-payments to the banker who issued him the credit. As these are received by the banker he sends them to the London bank which holds them against the maturity of the bill it accepted. Presumably, before the four months are up, the bristles will all have been sold and enough money out of the proceeds remitted to London to cover the whole amount of the maturing draft. AN'liat is left constitutes the importer's profit. 308. Benefits to importer. — It has been worth while to set down the whole practical course of one of these typi- cal commercial credit operations in order that there may be no confusion in dealing with the theoretical side — tlie reason why the various parties go into such transac- tions and the benefits each gets out of it. Take first the importer. It is all a matter of credit with him; if ltd FOREKJN r:X( IIAN'GE i he can get a bniiker to ^ive him a coimiicrclal lettci credit, lie eaii hrin^ in any <|uantitv .)l' inereliaml have anywhere up to four months to sell it in. and ne have to put up a doUar of his own money. All it c< him is a commission on the amount of the drafts dra^ The regular commission is one-(iuarter i)er cent each thirty days of the life of the draft drawn. Th if the drafts are drawn at sixty days' si^ht, the merclu pays a conmiission of two times one-ijuarter per ce which equals one-half jier cent. I f the draft runs fc n *nths, or 120 days, the commission would be fc times one-quarter per cent, which ecjuals one per cei This is the regular conunission. As may J)e imaKim it is changed in all sorts of ways as a matter of indivi ual negotiation. On coffee credits there are sevei hanks in Xew York now doing the business at thre eighths per cent for ninety days' sight drafts— whi^ is exactly one-half the regular commission. So keen the competition that there is one large bank which doing six months' business at only one-half per cer Such business is ruinous, a commission of that kind beiri no fair compensation for the risk taken. 309. Benefits to exporter.— ^o much for what the in porter gets out of the transaction. How about the e? porter in China? As has been shown, he has been abl to make a sale on a four months' credit, and to get h money without a day's delay and put himself in shaj] for the next transaction. Of course, when he took hi four months' sight sterling draft to his banker to sel he did not get as high a rate of exchange as if he hai had a sight draft to sell, the difference representing th discount. But that was allowed for in the piice Ik originally quoted for the goods. What counts witl I'OUKKiN (O.M.MKHCE 477 liiiii is that he hus iiiudc the suit', Ims received his money, .'iiiii is ready for the next transaction. .'HO. liaukir'n com mimon.— As for tlie two bankers, one in New York and one in London, their part in tlu transaction has In-en influenced sininlv bv the desire to make a commission. Both of them took a certain risk, to k' sure, Init crechts of this kirxl are never issued ixirpt to entirely trustworthy, parties. And as a mat- te r of fact neither banker has had to put up any real iiioiity. The one in New York has had to stand respon- sihlc for the importer to whom he issued the credit, and the one in London has had to obligate himself by "ac- (•c|»tin^" the drafts— putting his name on commercial paper— but no one has had to advance any actual money. 'I'lif real money that the shipper in China received was based entirely on the credit of the banks concerned in the operation. I'or which reason it appears that as long as a bank here can get a bank in London to "accept" drafts drawn mider the American bank's letters of credit, there is ahnost no limit to the volume of business it can do. Aid en a siiiall rate of commission will return big profits. There are a number of banks and bankers doing business in Xew York for whom their foreign cor- lespondents regularly keep running acceptances amount- in.; to $5,000,000. A fair average net profit to the bank issuing the credit would l)e called 14 per cent, turned over four times a year, so that a bank with $5,000,000 of aeeeptances constantly running abroad would stand to make, say, $50,000 a year in commissions without hav- ing put up a dollar of capital. A l)ook might be written on the various forms of commercial credit business being transacted but it would M O W CQ s. r I H. O 5 S .-2 s *<* s I f*0 I •2 ■a c g f J u "2 'i 5 5 ^ -^ ■2 S. * I s. s 5 ft- h 1 I ■aig iCq esoj ipuibSb painsui ^nnj 3q n^qs spnBti i 1 ifui 478 1 3 I 2 ^ I- ft 8 O •Is I" S: •« 1 I o i s I •9 at ajnjM spoog pres aqx •aig Aq PBOj ^saicSt: pairsn; Xjinj aq jjuqs spuBq r jno } ui anq* epooS ptBS aqj, a. 1 - i^ < c » C S. w ••2:2 « IS, ^^ 05 .cs e 'Z ^ i 1 1 13 s " *" .S - 4i 3 5 •3 3 O § s 2 •■2 8 1^ « o a je V -a J ^- ■£ « ^ ■8 fe K "S "a. *> C a 3 ^11 1 g Si c c 5 3> I S. ;n ^ s §■§ £•■35 3 ,^0 ft, o-t; OS o fa o z •< o a, Ik- S < 5 O M a; O u K H a a < < 3 41 « o o "9 '«n '>; pn: .'"(»; liHo '"ipilDljJJ ■pimbasqns puv'ifM^ msx fo Kuvdutoj jsruj^ finitutmQ ay; oj pajojgjj . 03j»i{) pvd Hud jlo 'awos ayf fo p)J)uoi> jem jo ji3i{}3yin 0/ pijdifn Moqu .' (., T/rfrfo puo 3nutiuo3 //n?/.v fujiiiaijfw puv )dt»OM stiff [o suu3} m{j^ 479 4sn FOREIGX EXCHAXGE [I i be only a more detailed description of operations whos( tlieory is tlie same as the one I have attempted to out line. \\'hether the merchandise in question is bristle; and comes from China, or whether it is coffee and come; from Brazil, makes little difference so far as the bank ing end of the transaction is concerned. Nor does il make any difference if the article happens to be sili< or dry ^oods imported from France, or if tlie credil directs that the drafts shall be drawn in francs on some bank in Paris instead of pounds on some bank in Lon- don. All these are ramifications of the same thing. They all come back to the one central idea that the banker turns over not his money but his credit to the importer, enabling the importer to do safely a very much larger amount of business than he could do on his own limited capital. 311. An aid to business. — Through the utilization of commercial letters of credit, indeed, more than one small firm has remarkably built up its business. The writer happens personally to know of the case of a small im- porting firm, which, as the result of the commercial credits extended to it by a big trust company, became a strong concern within the space of only a very few years. Had the men at the head of this firm not been able to convince the bankers of their ability and integ- rity, they would never have been able to obtain the credits and must have been content with much slower progress. But, on the other hand, had there been no such system existent, no amount of abihty could have built up the business in >.o short a time. 312. Grozcth of commercial credit and facilities.— Owing to the large' number of bankers now engaged in commercial credit business and the fact that even the big banks are willing to open little credits of £100 FOREIGN COMMERCE 481 to £200, the use of these facilities by importers has hecoint' very general. It is a common thing for a bank to ^rra:it an importer with resources of $100,000 a letter ,,i credit for £20,000, thus enabling him to double his business. And it is to this that the ^reat increase in our foreign trade during the past ten years is undoubt- edly due. Where importing is made so easy there will be plenty of people who want to engage in it. \V'^hat influence does this mass of credit exert on tiie stability of the commercial structure? Is there any ground for the mistrust of the old-line importer wiio thinks that the merchant should use his own cap- ital and not the banker's? Very Httle — that was shown beyond doubt by the panic of 1907 and the bad times wjiich followed. Failures among importers occurred but they were comparatively few — certainly nothing like what was feared. Bankers lost some money on commercial credits during that time but the amount was not very great. The merchandise imported by any but the strongest houses is usually all sold before tiie letter of credit is even applied for; and so, as long as the importer is honest, the banker takes little risk of not getting his money. The commercial credit business as it has developed (luring the past few years has, in fact, become an in- tegral part of our banking system and is growing more and more important all the time. It is a development, indeed, which is a long step toward the bringing about of those ideal relations between the banker and the bus- iness man which tend to use the accumulated savings of the country, not for speculation but for carrying on the country's legitimate business. C— VIII— 31 CHAPTER IV, FOREIGN EXCHANGE AND THE INTERNATIONAL SE CURITY MARKET 313. The three classes of international security deal ings.— Out of Europe's interest in American enterpris and constantly growing investment in American se curities arises an immense volume of international secu rity dealings. Estimates, as nearly reliable as cai be made, place the amount of foreign-held Americar securities at five billion dollars. The maintenance aloiK of such an investment makes necessary dealings whicl run up into the hundreds of millions each year, afford ing, as well, an opportunity for speculative and arbi- trating operations between the markets, the vast exteni of which it is impossible even to estimate. Security dealings between our own and the foreign markets resolve themselves, broadly speaking, into three classes. First, there is the business arising from re- placement of maturing investments and the distribu- tion to foreign buyers of new issues. Second, there are the great operations which accompany speculations of an international nature; cases, for instance, where foreign operators or banking houses, working on joint account with parties here, carry large lines of stocks or bonds. Third, there is a great volume of dealings arising from the never-ceasing efforts to "arbitrage" between various markets — to buy something in one city and at the same moment turn around and sell it in some other city at a higher price. 482 INTERNATIONAL SECURITY .AIARKET 483 :Ui. Replacement of maturing investments.— Taking the first class of dealings, it readily appears how great .1 volume of trading originates jolely from the replace- ments of r aring honds. Of the five billion dollars of America. , held abroad a considerable part consists of stocks, but it is safe to sa, V ;: rf. leasL two-thirds of tlie total is made up of bonds. Furthermore, the ^ntat bulk of this foreign money went into our Amer- ican bonds a number of years ago at the time when the development of the West and the construction of its raihvays was being so largely carried on with foreign cai)ital. Each year a larger proportion of these bonds is coming due, and where renewals are not made, the way is opened for investment in something else. American banking houses closely in touch with their foreign correspondents know just about what securities their friends and clients on the other side hold. The most careful watch is kept upon the maturity of these investments, and offerings and suggestions are usually ^^overned by what the house here knows of its cor- respondents' liability to buy. A foreign holder, for in- stance, of Atchison serial debentures which run off in large amount during the next few years, is apt to have ^reat quantities of various Atchison issues offered him (luring the time that his old Atchison bonds are ma- turing. He has shown preference for that kind of a I'ond, dealers here reason, and so that is the kind of a I'oiul he is apt to want in substitution. Knowledge of what investments are held by big cap- italists abroad is, of course, an extremely valuable asset of the bond dealer here and is very hard to obtain. There are many cases where the foreign and domestic tirnis are so close to each other that the foreign firm Mmply sends lists of what it holds and what its clients 48-* FOREIGN EXCHANGE ;s 1 1 I i i! i! ii own, but more often the banker here gets his informi tion from the coupons which are regularly sent him f( collection. That is, of course, an infallible indicatio of what Ixinds are being held for fixed investment an is a clew which the shrewd dealer here never fails 1 follow up and use for all it is worth. The amount of new American securities annuall sent abroad is very large. JMore and more, as tli financial relationship of our own and the foreign mai kets has been strengthened and developed have hanV ers here come to rely upon the participation of Ihei foreign friends in any syndicates which they go intf It has always been the case that when blocks of firsi class bonds were underwritten by powerful interna tional houses here, a good part of the underwritin, was for bankers on the other side. Now, however, i has come about that issues brought out even by rela tively unimpoitant financial interests are being con tinually offered and placed on the other side in local ities where American bonds not so long ago would no have had any market whatever. 315. International speculations. — Turning to the sec ond class of international trading — speculative opera tions by foreign interests in our market — it appear that dealings of this kind at times foot up to an enormou total. There are, of course, countless forms in whicl operations of this kind are conducted, but they an pretty much all based upon the principle which th( following example illustrates. An operator or bank ing house abroad has come to a cable agreement witl its American representative that a certain stock car be profitably bought. The amount which is to be car ried (joint account, usually) is fixed upon and the American firm goes ahead and buys the stock. Bui inti:r.\ati()n\al sfxuhitv mahkkt ^H^ Irislcad of imyin^'- for the stock out of its own capital ()!• hoirowiii^r the money from a hunk, the American house is apt to raise the money by drawing sixty to uiiRty-day bills of exchange in pounds, marks, or tV.iiics, as the case may be, upon its foreign partner 111 the transaction. These "long" bills it sells in the t M'hange market, using the dollar proceeds to pay for the stocks which have been bought. i\s the case then stands, the stocks have been bought and are beijig carried with money on which no interest is being paid. At the same time it must always be ruTiembered that the American house has drawn and thi' foreign house has "accepted" ninety-day bills of ( xchange, and that in just three months the holders <>r the bills will come to the firm on which they are drawn and demand payment. By that time the Amer- ican iirni must have sent money across with which to imrt the maturing bills. lint suppose that the parties in the transaction have not hi.d the chance or have not seen fit to sell their stock before the bills of exchange come due in Europe. Where, then, is the American firm going to raise the money to send abroad to its correspondents? By "re- newing" as they call it— selling more long bills and using the proceeds to send across to retire the first set of long bills. Suppose that in the first place £lO,- 000 of ninety-day bills had been drawn and fell due Xovember 30. Then, if the stock had not been sold, on Xovember 30 the American house would draw£lO,- 000 more of ninety-day bills and use the dollar proceeds to buy demand exchange to send to its foreign cor- respondent. The dollar proceeds of £10,000, "nine- ties," would, of course, not be enough to buy £10,000 of demand exchange the same day. The demand ex- 480 FOREir.X EXCHANT.E chancre would he ai)t to cost from three to four cci a pound stcrliii|r ,n„,.e tliau could be realized ou the n( set of "nineties," this difference representing the i terest on the money. As has been remarked, intemational si)eculative o erations in stocks are of an infinite variety and invol all kinds of complicated forei^rn exchan^re transactior Very often the stocks or bonds are not bou^dit on joii account and instead of being "carried" here, are drav against, and at once shipped to the other side. Som times, even in joint account transactions, it is four better to ship the stocks to a foreign market and borro on them there. Operations of this sort, however, ai more apt to come under the first class mentionei AVhere stock is bought for a turn the whole transactic is likely to be along the line of the example which lu been given. 31 (J. Internatimial arhitragin^r.— Coming now to tli third class of international security dealings, it aj pears that out of the maintaining of the parity o the various stock and bond markets arises a farg volume of dealings. With cable facilities develope as they are now, it is evident that it is impossible fc stocks in which there is any broad market to be sellin, very far apart on two different exchanges. Exper arbitrageurs are at hand in every market constantl; receiving cable reports from other markets in whici they work, and their operations continually tend t bring together prices and keep them on a parity. Without becoming involved in the intricate detail of arbitraging between stock exchanges, it may mereh be said that on account of the difference in time th( only part of our session in Xew York during which th( Loudon market is open is between 10 and 11 o'clock ir art; TNTERNATIOXAL SECURITY MARKET 487 ifMinin^r. During that time the same active stocks being traded in on both exchanges at the same time. And during that hour there are a number of houses with direct connections at each end of the cable who are watching their chance to shave out a difference of any- thing from an eighth of a point to a point. 317. Value of ean y nezcs.—If the arbitrageurs are so keen, why is thene ever any difference in the parity, or a chance for any one to make money? Simply because the same influences affect the two markets differently and news often reaches one market before the other. Foreign political disturbances, for instance, are more likely to start selling movements among foreign spec- ulative holders of American stocks than among specu- lators here. ^Vhen a movement like that begins it will be easily seen where the arbitrageur's chance comes in. Stock is being pressed on the foreign market. Realiz- ing that fact, he gets the best bid here and deducting the fraction he is willing to make, cables the bid to the other market. If he has sized up the movement right, the chances are that his bid will buy the stock and that he will be able to make the difference. Strictly speaking, both ends of an arbitrage trans- action are closed at the same time and no risk is taken. In actual practice, however, it continually h ppens that the chance to do a good stroke of business presents itself conditional to the arbitrageur's being willing to l)uy or sell in one market and wait a few minutes before closing the other end. This is particularly so in the less active stocks. Frequently it happens that shares of this kind are offered in a foreign market at such a concession i'rom the last price here that the operator can be prac- tically sure that if he takes the stock offered, the next bid here will enable him to get out at a .^ood profit. In 4SS FORFJGN EXriTAyCE i ■ i I! ^1 i ' \wm 1 ■P^^^Wm I f m ^ f ^BUk s "IB|»1 3 wS^ 1 ^^JSm i| i K '^« \ V> '.iM i i^^mi 11 i T^ iW^ 1 ' 1 / ' .}'^B i ! ^B 4.1 .1 - L^!«: ' !■ B ^''B !;|: Hi (Icalm^rs of this kind there is naturally an element risk and in had markets eonsiderahlc losses sonietiii have to he taken. Success in that kind of arbitra l)resupposes great skill and shrewdness on the part the operator. .•n8. Arbitrage /jro/?/#.— Straight arbitrage betwe two stock exchanges is a more or less exact operatic much more so than the great amount of arbitragii in bonds which is going on all the time. More diffici to put through, these deals are far more profitable th the shaving off of fractions in stocks. And realizii how big the outside market for American bonds London has become, many prominent houses have mi whose sole business it is to keep in touch with the mark for international securities in Xew York and Londc and to put through trades between the two markets. In theory the idea is the same as when bonds con into the Philadelphia market and a Philadelphia hou offers them by wire in New York, half a point or point higher. In actual practice, however, the case very different, for the number of private wires inl most of our big cities is such that there is not muc chance for profit. But between Xew York and Loi don there are comparatively few competitors in the fiel and cabling is too expensive a luxury to be indulge in freely. Where the Xew York house has the right Londo connections this arbitrage business in bonds is exceed ingly profitable. Even on fairly active bonds it is nc at all unusual to make over a point net, while on bond in which there is not a continually quoted market ther is the opportunity to take much more. The elemen of risk, too, can be completely eliminated if the opera tor wishes, for firm bids and offers for cable reply are t( INTERNATIONAL SECURITY MARKET 4H9 '«" had in both markets. ^Vhat is uhsohitely esscntiul, of course, in business of this kind, is to hiive a man in charge of it who knows not only the market here but t'xuctly where the right bids and offers are to be found (HI the other side. ;no. Market influences.— These are the three great classes of international security trading. Concerning their effect upon exchange rates it is apparent that as the speculative stock operations described are usually of a temporary nature, and as arbitrage transactions in stocks and bonds are evened up the same day, the first class of dealings is the only one which can exert any permanent influence on foreign exchange and the inter- national money market. There are times, in fact, when the foreign exchange market is governed exclusively by international investment sales or purchases of se- curities. The trade balance, heavy exports of commodi- ties, and such factors, seem to be completely ignored. What seems to be all-important is the fact that a selling movement is under way. Stocks are being sold and exchange to pay for them must be had. So the price of exchange goes up. Such a rise in exchange is by no means necessarily due to stocks or bonds actually sold. Very frequently it is predicated upon what foreign exchange managers and dealers think of the chances of a continuation of the selling movement. Europe may sell 50,000 shares of investment stock here to-day and exchange will have to be found to pay for it. But what really regulates the price of that exchange is what the dealers think of the probability of the selling movement's going on. If they think that Europe's sales of to-day will be followed by continuing sales to-morrow and next week, tliey figure that exchange will have to be bought all 4!>0 FOHr.K.N Kxrif.wr.F, I I nloii^', nnd they will Ik- loath t(» draw on thtir huhinct It not inl'reqiu'ntly hapiuiis that hankers have ^«m rouiui halant'cs ahioad drawing hut very nuMlerate i terest, but that it is inipossihle to buy drafts from the except at contiinially advancing rates. They %u exchange as rising, and simply dechnc to draw. 320. Strong effect on ectchange ra/f*.— Movemen of this kind sometimes go on for weeks and months, ai interrupted, and are resumed. It is wljen stocks an bonds a "e being bought by us on the foreign markets i quantity that foreign exchange is consistently strong and when we are seUing on a large scale that it is coi sistently weak. Other influences can be at work, bii an actual movement in securities, either way, will al'way give the exchange market its real trend. And it is fo that reason, more and more as the financial relationshi] between our own and the foreign markets is being de veloped, that the exchange market is coming to h looked upon as far and away the best tangible indica tion of what the international movement of securitie; actually is. CHAPTER V. TIIF MOVKMK.NT OF GOLD .'J-Jl. Production of ^oW.— riulerlyiii^ the whole (|ii(stion of gold nioveint'iits — the passage from one market to another of great quantities of sjKjeie — is the faet that of the gold now annually produced, a •food deal more than half originates in countries which liave no great need for a circulating medium, and must lie distributed to the hanking centers of the countries wliieh have and which produce no gold themselves. The production of gold in 1912 was $471,000,000, of which $218,000,000 originated in Africa and ahout $.)(),000,000 in Australasia. Practically all of this new irohl has, in the first place, to make what might be eailed a primary movement from the mines to some eefiter from which it can be redistributed. London is that center; has been from time immemorial. Imports of viigin gold into London l)etween the j'ears 1905 and in08 inclusive amounted to $700,000,000. Of this amount London retained but $67,000,000. The re- mainder was all distributed to other countries — $205,- 000,000 to France, $170,000,000 to the United States, and the balance scattered among other countries. It is important to note the conditions under which this distribution of gold takes place. The gold market in I.ondon is held every Monday morning. On that day there is a public auction of the new gold which has arrived during tlic- past week. The brokers repre- senting the various foreign banks and the local banks as 491 499 FOREIGN EXCHAXGE if well, come prepared to hid for tlu new gold according the exchange on various points allows them. The Bai of England is re(iuired hy law to buy all the gc offered it at the rate of 77 shillings, 9 pence per oun (that is to say, gold of the fineness of British so creigns, .910-2-3) . Above this amount the brokers ci bid according to the urgency of the demand on the pa of the principals Mhom they represent. Gold very fr quently sells veiy much above 77 shillings, 9 pence- during the panic of 1907, in fact, the rate went up as fi as 78 shillings, 2 pence per ounce. 322. Distribution of gold.— But after the gold hi been taken in London and sent to various foreig centers it does not follow that the distribution is con plete. Financial conditions obtaining at those poini may make it possible for the time being for representj tives of bankers at those points to go into the Londo market and get gold by bidding for it, but later thes conditions may so change as to necessitate a furthe readjustment. Frankfort, for instance, may be in position to obtain a good part of the gold arriving dui ing some week in London, but in a very short time i may come about that Paris may be able to draw mos of that gold from Frankfort. And so there is a cohtin uous movement set up, after the first radiating of thi gold from London, which might well be called a sec ondary distribution. When exchange is high gold goei out and when exchange is low gold comes in. It ma\ seem almost too elementary to mention this, but for a clear understanding of the various influences whid govern gold movements it is indispensable that tlie idea should be firmly established how the movement takes place along the lines of exchange rates. When ex- change on a point is high it indicates primarily a scarcity THE MOMvMFA r OF CxOLD 403 of ( xclian^c and a ^reat demand. Consequently when t!if (h'inand conies to exceed tlie supply some other me- dium of exchange must be found ana gold goes out. C'()n\crse]y with regard to imports, when exchange on any point is exceedingly low, as for instance when it is i>ossihle to buy a pound sterling in New York at Si.84 or $4.83, gold naturally tends to come in. When a pound can be obtained at so low a rate it is possible to go into the foreign markets and pay a premium for (H rORKIGX F.XCUASCE ^e someone to lake this 08 F()REK;.v KXCHAXCK 4J JNeu 1 „rk hanker pi-<% »is'.t draft in pounds tS tl e I on.lo„ hanking correspon.Ient of the hanker h vho issues the eredit. The hills of lading at „| documents, ,t is provided, are to be turned orer to banker who issues the credit so that the, mav be f warded by hin, to his correspondent in B.^os Air ;° ro r"" "; '^™"-""" "f «-• ".oney" is eV forth aTt^''^' '"."'"' ''''"^'^- This money, IS set to. th, as it is collected, is to l>e remitted not h», to -New York hut to the hanker in L„„™wh„m cport credit gives the ship,.r here a right "„ draw oft:^l:Z "' '^T' f "'" P"-^'"- "-at rt'ea .1 aws Xad t ■'"* '"' '""'' °" ^"'^""- 'he bank. t^rmethod Th " • ^^r "" '"'"' '"^™""'8^^ ' knl^ tf f •'"'"''P''' °"^ '^ "'"»• however wei salable at aT mT "i'"^' '^' "" '«'"''"•» "■•''»' -" b salable at a slightly better rate of exchange than hi o iits' trr """ '"^ ^''" '^'''^ " '^-' "-"' oi aoiiars trom the same amount of pounds. Anothei saved the trili::? stpSraTot:^-—^^^^^^^ rate possible for the hills he wants to sell. The blnkc does all that for him, not infrequentlv taking the M for Ins own account. *" sCment of J h " ''^ " "'"'^^*^ ^^"""Ple- The Shipment of machinery in question, we will ^av is worth ten thousand dollars. The exporter gets his letter^f FORKKiX KXrilAM.E OPERATIONS 509 credit aiul draws a ninety-day draft on London for, say 1,800 pounds, that being ninety per cent, of the value of the shipment. This draft he sells in the New York for- ei^rii exchange market (the letter of credit being his aiitiiorization) and receives dollars therefor. That •rives liim his money and practically puts him out of the transaction. The documents he turns over to his banker, who sends them along to Buenos Aires. At the end of forty-five days, we will say, the South American banker has eollected the whole ten tliousand dollars. He then proceeds to remit this money to London, in sterling drafts. Before the ninety-day draft originally drawn matures, therefore, there will have been received in Lon- don sufficient funds to take care of it, and neither" the accepting banker nor the banker who originally issued the credit will have had to put up any actual money. Tiie amount received from Buenos Aires, indeed, will be considerably more than the amount of the draft drawn originally. This surplus, after deduction of charges, is remitted back to New York and then turned o\ er by the New York banker to the party to whom he issued the letter of credit. .•{.30. Why the credit is issued on London. — In con- nection Avith the above, several important considerations present themselves. In the first place, why is London l)rought into the transaction at all?— why cannot the operation be worked direct between New York and IJnenos Aires? Answer to that is to be found in the fact that banking relations between ourselves and South America are not suflSciently close to maintain a foreign excliange market in which remittances and drawings can he advantageously made. National banks here not l)cing allowed under our present laws to accept time- arket London » Parfs 1 thf t"^ "' r"''^'' P"'"*' ^-^h .•^-.to,oa„;p,trcc;:i^^ con^lrSn':rnri;::^:UeT''-'"^^^^^^ n.net,..day bills bv the expLr; ' F:r StTof tJ' usance he irets of nn..i.e^ • , ararts ot tha than if thSXf" we;e d^™ r^r^'''^^^''''''^ remittances are made from bZ /•''''*• "^"^ * -and. the,, must ^rlirtZlfZZ^'T' rrct'e;rr^-'-^^^^^^^^^ rtifferenee represent 'rt • " ' *' ""'• '''« action be- floes not ave some to draw irst-cJass larket in . such as ker here FOREIGN EXCHANGE OPEUATIOXS 511 .311. niiere the advance is actually made.— A third •lucstioii often asked in connection with export letters (.f credit is as to who does actually put up the money winch the exporter receives at the time the shipment is niadc. The answer is that the money comes from the k'reat discount market in London, which absorbs the I lo.i^r draft drawn under the credit by the exporter. Di- rectly he has drawn this draft he sells it in the exchange market for dollars. The d ft is then sent to London and discounted— that is to say, an amount of money equal to the face value of the draft, less only the amount of the discount, is credited to the account of the New \'ork banker who bought it. It is from the great dis- count market in London, in other words, that the money actually comes. m '4i iff •f{ f) ill CHAPTER VII STERLING EXCHANGE 342. Great Bnto«._Tl,e monetary unit of G JlntaM. ,s H,c .,oveiei«n or pound sterling equal t dnllings One shilling equals 12 pence and Ine ' equals 4 farthings. The mint value of the pound Zm. ' ""'' "" ■"'"* ™''"= °f ">« dollar." In actual practice, conversions are generally m w,th the a,d of exchange tables, but eviy o^™t" exchange ,s, of course, able to make the neceTrv s™» 'Z'"",,'™"" 1" """''"« -"versions nTJe To convert English money into dollars, multiplv 1 amount by the rate of exchange: thus ^440 a S4« = 440X 4.8525=.$2135.I0. When ttellg am™ c'on ams shillings and pence, reduce them toVeS™ of the pound before multiplying.' To convert A ^DfcimaU of a pound: '^^^^i^'^''^^ST.^^Lrrm^%if^' ^',\^--^- Multiply £1 = 1. ^ *• ^ "^ "***<"» »' thw is apparent: l.s = .05 of a pound. l«l=004I6(lofapoundor.004i. by f :te,r:„'c"™S if-..^ ;rr st.:: ^'~';r"* •" >" Lxampio: i»cnc, and two if over thuty-two. Reduce £1.5.8, 7d to pound.s and decimal: .0.>X8. . '5. .00»^X7.... *<> . .W9J 5n S'l'KKLING EXCHANGE lars 513 into sterlin^r. divide the amount in dollars and ants by the rate of exchange. How many pounds in ,5213.5.10 at $4.8525 = 'i'* 'o = £440 J.e calcu ations in both cases are simple arithmetic, .nul need not be worked out in detail here. The calcu- lations frequently permit of cancellations which mate- rially shorten the work. Tlie large majority of the foreign exchange transac t.ons m New York are with London, and it is to be carefully borne in mind that althougl, the rates (,f ex- change between the two countries are goverr.ed by the market cond.t.ons of both countries, it is a significant act that practically all exchange transactions emanate from th.s side, and the rates of exchange are therefore fixed m ^ ew York. The exporter here prefers to sell h s bdl and obtam ready money and a speedy turnover of capital rather than to await a remittance from Eng- The importer here who has bought goods abroad wouh rather remit for them to the foreign exporter th!n an bargain for as low a rate as possible, while in the lat- er lie would have to pay the rate fixed by a bill broker in I^ndon who has not the same interest in the transac- t'on. It might be thought that the London exporter and importer would object to letting the merchants here have their own way. On the contrary, it appears troX^Xr ^"^' '-' ' '-- ^ --"'^ --- «^ 343. Making a mf^.-Practically all exchange busi- ness m sterhng is transacted by cable and by demand an sixty-day bills, and quotations are geneLll fur' n shed accordingly. Occasionally, however, it is neces- sarj to make a quotation on some special dating, such I— VIII— 33 ° ^14 ifP II I'OUKIGN KXCIIANGK i as thirty or ninety days, and it will therefore be us. to show how this is done. The demand rate is the base from which the dec tion for interest, stamps, etc., is made. The follow will show the difference of time between the differ bills und the stamps reipn'red: Three days' sight (3 d/s) , one penny stamp, six dt interest on demand rate. All bills drawn for over three days' sight incui stamp duty of is per £100 or A of 1 per cent, wh must always he taken into consideration in figuri value of time bills. Fifteen days' sight, eighteen days interest off dema rate, and stamps; thirty days' sight, thirty-three days demand rate, and stamps. Sixty days' sight, sixty-three days interest off ( mand rate; this is also called the usance or customs time on bills drawn between the New York and Lond market; a seventy days' date bill is often used as ; equivalent. In all exchange transactions the rate of interest always governed by the rate obtaining in the count where the bill is domiciled, so that on bills drawn ( Great Britain the Bank of England rate and Lond. market rates are used in these calculations; the Bai of England rate also governs the ^ ite of interest pa by the London joint stock banks on deposits, that beir generally Ih per cent below the Bank of England rat This fact is mentioned because one often sees bills, wil documents attached, going forward with instructions \ accept payment "under a rebate of } per cent above ral of interest allowed on deposits by joint stock banks," the bank rate was 4 })er cent the deposit rate would t 2i per cent and the rebate rate 3 per cent. As pointe SIKHI.IMi i;X(IIAN(JH 4,4 ",'" '" '["'■'f""' \^"' ^'"■•k Roverns ti.e sterling e.- :' I-";"'. ""» ^Mt-ent. and both Canadian an,l An.er. "" '7"""'^'^ "^' ■'"»«< on the Xc.w York ,,uotati„, ,n, ««,! „r dec-re„,cHi .,y t|,e pre„,iun, or dLnnZ N " ^ ork fund, and other l.K-al c.nlinKcncics. Quota ,ons for sterling a,-e Kenerally quoted by ad- .m.«_of five cents per £100, thus 4.8ni, 4.81lLnd Si«l.t drafts one penny stamp, no days of grace. ( able transfers require no stan.p; the difference V "-«, cahe and demand rate varies from one-sNtLth l.>"..e-e,ghth above the rate for banker's demand" r.;,.rese„ ,„g the interest on the time between the ^™ pi n d X ft 71" "'"' "" ^^^^'P' "' London of He' 1 "I. The time would vary from six to ten days ac omling to steamer sailings. " are published by .ome Tf ihe fe^™^ ™k '" ™l b.v others, it is just as well tX at "nS p^de^n" luhte'tr'r '■? ™"™"'™^- " '' euSarv to «c„la e the .nterest on the basis of £100 = $483 ' the *.la„on resolving itself into one of simprliter! Sixty-three days at .t per oent on $485 = Mx3x« _ ?2.5M.3 per £100. i«ox3M — This of course, can also be figured out on the ordi- ly interest tables. With demand rate at 486.4«! ma - "ueted (.24 cents r>fr£wT=maM """"' '" rtW l'OHi:iGN KX(IIAN(JK For those who have not a convenient tahle for caleulations the following httle tahle. represent!.! interest on $485 at 1 per cent for the respective nu of (lays, IS useful. Ry means of this a small desk can he made out at the current discount rate in (hm hy simply multii)lv;„g l,y the rate per cent tahle at 3 per cent is appended as an example: Days days £100 at 1;? XlOOatS;^ 3 10 18 30 33 45 03 03 123 Wit Stam .64 .96 1.33 1.55 2.031 2.75J 3.941 5.14i .039,803 .120 .132,876 .399 .239,178 .718 .398,028 1.196 .438,498 1.315 .597,941 1.793 .837,118 2.511 1.235,746 3.707 1.634,374 4.903 In the above the calculations are carried out fan than necessary. The mills may be neglected and a ( added. By combining, the interest for almost any ni her of days may be found : for instance, three days' si (six days) at 3 per cent = 2x.i20 =- .240. Always member to add stamps afterwards. Great Britain and Canada are the only two count of importance that figure interest on the awkward bj of365days.» l! in.^« " 1 '''• ^"'' "' '''"" '"'""^^^ .alrulations. except that if par o'VsC "' "' mT" "T^'Y''''- theoretically and practically, the 1 par of 4.8C3 would have been the best rate, theoretically becau«, it o«n. « multip^ of 73 which form, an awkward factor of 365 in «lculatmg inter«K il O" « ha,„ of iMl wc get the following rule: Multiply the nu„ of days by the rate per cent and divide by 73. f J' wc nuu It' feu- tlicse 'ser)tin|^ tlie ive number I desk table ite in Lon- r cent. A e: With Stamps .641 .060 1.838 1.557 2.036 2.753 8.949 5.145 ut farther md a cent any num- lays' sight dways re- countries mtd basis sterling was it that it ua ally, the legal 96 it occupiM luse 4.86} is ig interest by ' the number 517 A IVu c.xa«.,,le.s ilh.stratin^r the n.elho.40 ^^ «3days interest at .04«'.. 4.OO ^ta"'l> * .24 481.07 Vahie of 60.day hills 7^ the nearest commercial quotation to 4.8107. If Xew York funds in Canada were at 1/32 r^^^Vit'^r "7 -te would he .$481.07 plu! •« J — .154.8122 or 108{ plus 1/32- Find the cahle rate from the demand rate 4 8540 ■'.terest at .041 for ei^rht days. * Thus: «., days at 3% on 48e.6flf. worked by thi, rule, give. Tin. k of eoun.. .„„ than the inte«.t'Lkoned o„ W.85 by -1 of it«.f. Interest on 486.66 :=« ,, ** ,„, . . Approximate interest on W . 85 =. 2 5116 rh.s .s conect to the oue-tenth part of one per mill. Proof. de.luct the-i_thpart-«22« 10.000 '^ $2.5113 $2.5113 Actual interest - a £. ..«sis. sumps wZj ro^24:;u • " ''•' '''^''' •"' »-" '-'"'^"^ «^t, ,.,.r £100. ' ' ^' *"" """^ ^^' "--Pec-t.vHy. for £10.000 or 08. 15. 23 and 31 .118 ii i f!. I Driii.iriil i;j|r » »1"nV iiitcifst at .Oil. .50 " '-•"Ho/./tv^T, ;"';'?""•;■••■;■■■■ '"■'^ '"'"k "ill, ii, I , "l,„ ""'""'""I «rr«n«e.„ei,t of drawn out of Great Britain ^"^ ' The days of grace are three. iJr hi.: If:: zi'i-,- ^''"•' <" ^«'" <^™ after. """^ ''"'"'"J- "e I.ai.1 the , are^lflXTe:r^''^'^'"-^''>-«<»-'FH« 4tt::;^:j:;'r;^:;;f,:--o„thatthi. Interest is ealeulated by takin" ,? '"*' '"°"'''- d«ys and the year at .%o davf *" '" ''"'' ""■»•>*' a» the «rst^::Er, ft tr'"' ^'^'^ "">"'' * counted. '""^' currency to he redi ™te'f?l~r:::t^t:>'''r•'^"'''■«'< to the element of risk ^ „' . ! """'''"* '"'"^- ""'"l Of rate O^r^^t^i:^^^ --"'« ^'■•- '™"" "" '•'"««»'• l-n»» outride London .„ STKRLING KXCIIANGE sm gtiicrally worth oiie-quarttr cent per ikhhkI less tlian London bills on account of collection charges, etc. Hills drawn on British colonies hearing the clause "uith exchange and all stamp . Foreign exchange hookkeepinfr. — AWhoxi^h practically every branch of a Canadian bank can issue •halts on London and European correspondents, only the larger and more central branches carry foreign ac- ' Tl,.. nason for this is simple; 283 is n multiple of is crcdilud lo foreign ex- 'I'lu' actual value of the London balance at any time is lasily ascertained by converting the sterling amount of till' account at the market rate, and the rofit of the sterling business to date. In hiaiK'hes where long ppper is bought and sold, the vari- ous outstanding unmatured items must, of course, be i(|iiatcd on a dt.nand basis and the result figured at the iiiaiket rate as above. In addition to the special ruling ill tlie general ledger two or three specially ruled books are recjuired: 1. A check register for checks and sight items. This contains columns for the necessary ])articulars and sj)ecial columns for rates sterling and dollar amounts. 2. A register of documentary and time bills pur- chased, the ruling lieing similar to that shown in Figure 8(), the headings of which are self-explan- atory. .'{. A register of bills of exchange sold, both time and demand. Time and demand bills should he en- tered separately. A form similar to Figure 17 is satisfactory. Tliese books are sometimes in the form of bound regis- ters, but many banks are using loose leaf forms entirely, letniiiing the duplicate and sending the original to the correspondent with the item, or as the advice, in case of drafts. In branches where much foreign business is transacted tJK re are gejierally three accounts in the general ledger lii :i c c STKHLINC, KXCHAMJE 5'i5 k(|)t within lliu L«)iKh)i» bruiicli or corre.spoiuleiit, iiaiiii'ly: Cash account Bills of exchange |)urclmsc(l Hills of exchange sold A |)r()fit and loss account called "foreign exchange jiicMiiiit" is also kept. ;U7. Drafts f/zYmr/.— Demand drafts drawn, after be- iiifT t iitircd in the drafts register, are credited in total to tlif London cash account through the cash l)(K)k. If the drafts are drawn payable at any longer term than sight tluv are credited in the same way to bills of exchange Mild. The totals of the cash book in each instance are paiml" at Oi. The difference, debit or credit, is car- ried into foreign exchange account and the sterling and c'lirrciK'y amounts posted into the general ledger. I .'U8. liUh of cjcchansrc purchased. — Demand items iiridtr this class are debited each day to the cash account; tiiiK' hills of exchange to bills of exchange purchased. Tiiey are registered separately for convenience of advice; also lor the purpose of marking off in the adjustment. Totals are "parred" as above and carried into tlie cash lMM)k. Demand bills of exchange purchased are, of idiirsc, not diarized except in so far as keeping track of the steamer arrivals is concerned. This is an esti- mate of the probable balance of the cash account in l.«n(l(»n based on the steamer arrivals. All time bills nr ;|iari/ed, the date of their presentation being closely istiiiiated. The arrival of the steamers and the ajurse of till- hills after arrival in London is so regular, that tlio date of maturity is seldom in error. ^^ II these bills are rebated, or discounted in the maik( t on account of the remitting branch, the fact is A^iCi I'OUKIGN EX(HAN(;i': imiiic'diiilc'ly advised by London, and a rash Iniok en is made crediting l)ills of exeliange purehased and del ing Lon«'on cash aeount, tlnis offsetting the credit wli London makes when the hill was discounted or rebat The item is also marked off the diary. Bills purcha are also recorded against the customer in his liahil ledger account hut are not marked off there until hill is actually paid. Statements are sent from the Li don correspondent every week and, as soon as possi following its receipt, a complete adjustment of the th accounts is made, the outstanding items represent! amounts in transit. Any items outstanding an undi long time are, of course, investigated. In order to si time the acceptance or non-payment of items is invf ably advised by cable. C'lIAPTKH VJIl CONTINENTAL EXCIIANCiE im. Latin Ionian cnNtitrics.—h\ France. Belgium iiikI Su it/eiland and all French dependencies, the franc, "liicl. is the monetary unit, is equal to 100 centimes! T!i( unit in (ireece, the drachinn, is equal to 100 kpta. Tlio unit in Italy, the lira, h vi\\m\ to 100 centeffirni. The value of the franc, drachma and lira is 19.3 cents '»r .).1H! francs to the dollar. The- Latin Union was formed for the adoption of a timlorin monetary- system comprising France, Helgium, Suit/trland. (Jreece and Italy. TIr" free circ.dation of gcid and silver coins issued l>y llu countries named was ratified at a convention held at Paris in November, 1893, so that the gold and silver ("HIS issued hy each of the above-named countries were |iTai.tnl free and urdimited circulation at their face value 111 tlu- .ountries forming the Latin Tnion. Tlie Italian silver coins of less than five lira, however, were excluded from this arrangement, as were also cop- I'lr (cms and paper money. Tli, following ..ountries have a decimal coinage, prac- I" 'Ily Kjinxalent in face value to tho.sc r.)rming the 1-atiii riiion: Hiilnaria: hva or Icxc ecjual to 100 stotiuhi. Hnimiania: hi ecpial to 100 hatii. I'inlaiul : murk equal to 100 pcnni. 527 o^M FOIlEIGxN EXCHANGE 1 1 'ii Servia: dhiar ecjual to 100 poras. Spain: pcttcla ecjiial to 100 ceutimes. Consequently a study of French exchange opera will practically cnihrace all these countries. 350. /'Vrtwtr.— France is not only the principal r l)er of the Latin Union, hut the one with the gre amount of exchange transactions with Canada, change rates are quoted in Xew York and Canac terms of hoth currencies, the mint par value being It cents or 19.3 cents, as it is commonly reckoned, dividing 19.3 cents into $1 we obtain the value of a lar in francs 5.18134, which is quoted as 5.18J.* The cent quotation, however, is only used in minoi change operations and for drafts drawn on small tc in France, all the large transactions in Paris being ducted on the franc quotation per dollar. Conversion in the former is simple. For exam find the cost of a draft for 672 francs (a .198 cents franc: 072 X .193 = $129.70. How many francs can be purchased with $800 .192 cents per franc? 800 ~ 192 = francs 4166.66 It will be noted that all the other exchanges que on the Xew York market are on a basis of dollars i cents per foreign unit, consequently the higher the c quotation the less francs received for any given sum, i the dearer the exchange, thus $800 Oi 192 ---^ francs 4166.66 Oi 193-^ 4145.08 This form of quotation is seldom seen in the papers, a is used principally in bank and express counter quo ' The exact value of the dollar found by d iding the weight of pure gold ( Umrd in the franc with the pure gold conta' J in the dollar is fcs. 5.18M Section 351). 5.18J^ and .193 are the two par values used commerciaUy. CONTiNKN'l'AL KX('IIAN(;i: MO ti..ns. In the franc (|u«)tation per dollar the effect of ati a.lvance is the reverse; a rising rate means eheai>er cxcliMMH^e. In making rates for Canada from New York (|U()tations care should he taken to make the necessary allouanee for the exchange rate k-tween Montreal and ^(^v York. In ajnverting the franc quotation, dis- cniiiits should he added and premiums deducted. .T)!. The franc qiiolation.—'Vhis method of quotation is \cry confusing at first, owing to its l)eing the reverse of the usual exchange (juotations— foreign units for dol- lar, instead of dollar value for foreign unit. The first lesson to he learned is that the higher the quotation the lower the exchange; in other words, the higher the quo- tation the more francs received for a dollar. For in- stance, $1,000 at 5.18i would purchase francs 3181- .2.3, while this number of francs at 5.22 would only cost Vrimc (juotations advance by 5 centimes; thus, 5.1 8i, .'>.1H/, .5.19-', 5.20, etc. It will he noted that as there' arc five francs to the dollar, therefore •' centimes ad- vance on five francs is i centime advance on one franc. I'or all ordinary transactions this difference of i* of a centime is sufficient, but in large transaetbrts, necessitat- in^r dose quotations, the shading is effected by increasing or decreasing the quotation by sixty-fourths • these frac- tions are quoted plus or minus, although most frequently ■"■'ins, and always apply to the dollar amount. The toll..u n.g table shows the value of the dollar at 5.18i to .5. IS; with the various fractional shadings: Cents .193,003 .193,033 .193,063 .193,094 ipers, and Cents er quota- a.lSi .193,003 pure gold coo- 5.\Hl-ij .192,973 i. 5.I8M(m -^■r .192,943 lercially. :i <-\ 111—34 .192,918 5.181 4- TrV -t. 3 ii Uf ^•*» lOltKiGN 1:XC1IANG1': (Vnls Q -A .lJ)2.H.5;i ^^«^ ,j,; "V •l'»^'«^3 +nV .10; .^».1HJ .102,771 5.m .i». 5.1H,' -,', .lj)2.7K) 5.18i'+..V .19: It will hf stcn that these Iractioiuil deductions U(hlitn)ns are made on the dollar priee. Find eost of: (1) r>.()00 fes. 0, .3.18' (2) .3(M)(M) I'es. 0, 5.IH.' -^.V (;i) ,30.000 fes. r^r, .5.18:+ A ( 1 ) 0.000 : .3.18i =.^65 02 (2) .50,000 fes. -= $9,650.20 less «^4^ of 11^ I 55 ."iO.OOO fes. r,/ .5.18i-,;V $9,048.65 (3) .50.000 fes _ $9,650.20 add T;\ of l-r 4 50 50.000 fes. r?7 5.1HJ+A .$9,654.70 Find the nund)er of francs that can be purchased $1,000 at the same rates. (1) $1,000 ru .5.l8i -- .5.18125 x 1,000 -= fes 5181 (2) $1,000 (a 5.18i - ,V .-fes 5181 add ^V "f 1 '/ of $1 ,000 1 6 cents .... fes. $1,000 0, 5.l8i-A =.- fes ^ (3) $1.000rr,5.18i + A fes.' 5181 marks. '^'if ^/^J"^ M^'^ ''' o^i^'""": the fraetion increases the price per mark, sequontly $1,000 will purchase less marks at the fractional rateT if thTfnic had been minus it would be added to the mark value. *h I ^' k'*"'*^?'" ^"t '^^'^ ""^^^^ ^* ""y '■**^ ™" ''«• ^ounJ mentally by multipl the rate by .OS. Interest for 30 days at 4| = 4? X 08 = 3.-5 crnts 4' .Oj = total deduction 40 cents. CONTINENTAL HXCHANGE 53S "■'."," '',";.'-■ ''"-''»>' 'l""t»ti"» when dcimnd diecks arc !lj. and discount rate in Berlin 43 pep cent? Demand checks If.95.i25 l-iss interest fio days at 43 fin Stanii) duties (,, .74 $94,385 or 94} Bills d.,e on a Snnday or holiday are due the day n ■ T"' ""^ '''""P ""'' '^'"^•^^^ on Germany » ..nld bear the following words written after the name t^'ZZ''""' "^"^ ^''"^ ^"'^ '"-^ ^-" our The Imperial Reiehsbank of Germany has branches I" every important town i„ Germany/and transfer ."-ney from one branch to another free of charge for S ■M. /fo/W.-Quotations on Holland are given in llar ' Sterling Cts. £ 8. d i2A 1 4 UO.O 19.3 96.5 4 m ■SB. 6 I lO.i 10 9.3 95; (8.9 iii.O i4.U 6.6 . ^n^'^ 9.3 0.6 1 l^ 2.4 I 4 6.5 1 6H 0.0 2 ni 6.6 4 9.3 9« 6.5 I io« ' for uliich it has made no draft arranjB^ements, a sttrliiig draft on the bank's London, England, branch or correspondent is usually sold, sterling drafts on Lon- don king more easily negotiated than those drawn in other currencies, owing to the fact that the great ma- jority of banks throughout the world have correspond- ents or accounts in that city, and the exchange rates for sterling are steadier and more widely quoted than those for other currencies. To guard against loss in the case of countries in Africa, Asia or South America where silver units exist or the exchange value of the currency is subject to large fluctuations, drafts are usually drawn in sterling on the London branch or correspondent of the issuing bank and crossed "Payable at the drawees' buying rate for si^'ht bills on London," or with a phrase similar in mean- in^'. The correspondent on whom such drafts are drawn pays them in local currency at a rate of exchange which includes his commission and other charges, and after- wards forwards them to London for redemption at the face amount of sterling. 3(50. Advices.— A letter of advice (Figure 88), au- thenticating the draft and usually containing the fol- lowing particulars, is sent to the branch or correspond- ent on whom the draft is drawn: (a) (h) U') (d) (e) Xumber of the draft. Amount of the draft. Date of issue of draft. Name of payee. Name of bank at which drafts will be presented l)y bearer if other than correspondent drawn on. (If the draft is to be readvised to bank at which i m No '^^^ BANK HEAD orrifE, TORONTO, OXT. Dear Sirs: This is to advise that the above branch of this Ban to-day drawn on the undermentioned drafts, to which please give due li reunbursuig yourselves in accordance with our arrangemc DATE NUMBEH IN WHOSE FAVOR AMOl (All unused lines should be scored through) Yours truly, NOTE. — This fonn is to ho Mscd for advicos to ForciKn Correspondents only. MANAGER ACCOUNTANT LETTER OF AUVK E (DRAFTS) FlGORE 88 54i2 lORKIGX KKMf'lTANCKS 543 it will be presented, a note to this effect is added to the advice.) (f) Particulars of the mode of reimbursement (cover draft enclosed, debit amount to account, etc.). Should the draft be payable by a third party (see above) for account of the correspondent on whom it is drawn, this third [)arty is also advised either by the issu- ing' hank direct or by its correspondent on receipt of ad- \ioc from the issuing bank. The relative advices should be despatched as soon as possible after the sale of the drafts in order that pay- ment may not be refused through the correspondent's l)eing unable (in the absence of advice ^ to authenticate the drafts. 361 . Specimen forms and signatures. — Each bank fur- nishes the correspondents on whom it has arranged to issue drafts with specimens of the special draft form and of the special advice form (if any) it will use, together with specimen signatures of the officers who are authorized to sign drafts and advices on its behalf. If possible, a specimen signature of the payee is also forwarded with the advice of a draft, so that any pos- sible difficulty in establishing the bona fides of the payee and draft may be avoided. 362. Cost of drafts to purchasers.— The amount to be charged by the issuing bank to the purchaser of a de- mand draft is ascertained bv adding together the under- noted amounts: (a) fb) (c) (d) Face amount of the draft. (If drawn in a foreign curren y the amount is converted into local cur- rency at the rate of exchange for the day.) Commission of the issuing bank. Commission (if any) of the paying bank. Cost of postage on advices. 5U FOREIGN EXCHANGE II II i it ( 1 303. Drafts versus travelers' checks.— Some misi derstanding regarding th spective functions of tn elers' checks and d afts has apparently arisen (ev among those actively engaged in banking), and the f lowing observations may therefore here be made so 1 as they concern travelers: In the Latter case one draft for tlio whole sum involved is u ally issued in favor of the traveler who cannot obtain the whole any part of the amount withe ut considerable trouble and pense until he arrives at the point of payment, and even then must be identified. After the draft is eventually negotiated \ proceeds must either be deposited in a bank or carried at so risk in the form of currency, the traveler having no means replacing the amount in the event of robbery or loss. Travelers' checks, however, are issued in various denomir tions as desired, are negotiable everywhere .. their face value banks, steamship companies, department stores and hotels, t traveler thus being equipped at every stage of his journey wi the means of making payments, either l.n-irc or small, up the total amount of the checks he holds. Further, the spec method adopted for the identification of the proper holder the checks prevents payment being made to unauthorized pc sons, while the amount of stolen or lost checks is refund on the execution of a satisfactory bond of indemnity in fav of the issuing bank, provided the purchaser carried out tl instructions on the checks and relative letter of indication. It will thus be seen that drafts are intended for the simp rcnittance of money from place to place, whereas traveler checks furnish the bearer with a secure means of prompt! providing himself at any point with funds to meet the expcns incidental to traveling. In view of the undoubted advantages in their pai ticular sphere which travelers' checks possess over draft! their greater cost, the wi^Iespread nature of the initis FOREIGN REMITTANCES 545 arrangements and the fact that the exchange charged by correspondents on the checks is met by the issuing bank, the slightly higher commission charge which is made by banks for travelers' checks is fully justified. 364. Travelers' checks. — Travelers' checks enable a traveler to provide himself with funds without delay at any point of his journey in a convenient yet inexpensive manner. They are issued in denominations of even amounts ($10, $20, $50, $100 and $200: £5, £10, £20, etc.), with the exact equivalent in the moneys of the principal foreign countries stated on the face of each ciieck. (See Figure 89.) They may be cashed practi- cally anywhere, are self-identifying and easily negoti- ated, and are therefore one of the safest and best forms in wliich to carry money when traveling. They are issued by all first-class banks at a small premium. iiOry. Payment of checks. — The issuing bank usually holds the paying agents of their travelers' checks free from responsibility in cashing such checks, provided: (a) The holder s'gns them in the presence of the pay- ing agent. (b) The signature of the holder and that of the coun- tersigning oflBcer agree with the signatures con- tained in the relative letter of indication. (c) The numbers of the checks are entered on the letter of indication. (d) The checks are negotiated within the period speci- fied (usually twelve months from date of issue) . (e) The other general terms of the circular of instruc- tions are duly complied with.* 366. Payment to holders. — In countries specified on the face of the check the face amount of local currency ' This circular of iastructions is generally printed in the principal commercial languages for the benefit of paj'ing agents. C— VIII— 35 o- o THIS cur.rK SHOWS rni exact amount or movet which WILL HE PAID IX OOLI> OR ITS EQI'IVALENT IN THE COrNTHIfH SPEriALLV ntsKiNATED HEIIEON WITIIOfT DEDUCTION l)R DISCOUNT EXCEPT IN COUNTHIES REQUIKING A STAMP n m I > 3 O 5 3 ' k O > '-• 2 H » I o r> O 3 31 B n ■£ % a R e B B s o ^1 |2.gi M 2 ." -.? 3 =■?.; i = " 2 5 3 w o 93 ^ 9 o - y. B o S2.-S ?3 o € 5 ?! m 3 ^.r. *< ? I^f = 33 £5 - = 1 3 Trr .' N=.-^ — fi-^f r ^ B S I 3 'JD w " 5 3 r ? ri .— 832 *=?:' 8=?! •ir ^ 1 » M " — I SiT a 5fT 1 At current. rates 02 31 n r n n n 50 > 0) X > M o -< a r-. .'2 B S w > o Z > > z > •«) z 2 o- o- 546 FOREUiN REMITTANCES 547 is i)ai Ul 0) u 6 < V5 I' u H H PssS-SS-S^-g-wglSS? i-? IH^^ ?i *!S g U-Sij ^ £i5.J'£x.-3Z=~ *- 3 6* _- U* 4* ^ a; W_Sa ■£§ Xi. I » S^Is ,? il 8 I.I S eu a ^ 8 6 S £ s |a a moq 3a t u U - ^ i 2 U .2 3 £2J an:'.- s^ 0. to No. B of the deiiominatioo of $50. to No. C of the (lenomination of $100. , ■ . to No. n of the denominatioD of $200. '" your u.sub1 courteaiea. FOR THE inclua inrlua iuduKi inclusi iiK'luai BAI srov.tTUBi; of {ThiK aiunaturi muitt offree tciih ] couHtersiunature un the checks) are purchased.) LETTER OP INDICATION AfVOMPAXYIXG TRAVELERS' CHF riauHE 90 .191 To OCR CORREHPON'DE.NTS: Gentlemen, .M the bearer of thi., letter, whose ^i^nature i. to be found below, ha, been ,uppU« wuh our Circular Letter of Credit No ^^j ^^ ,„„„^„j to your usual courtesies. FOR THE ..BANS SlaNATUBI O* LETTER OF INDICATION ACCOMPANYING LETTER OP CREDI riGCRE S2 650 FOREIGN REMITTANCES 5.31 RS' CHECKS the officer who issues the checks, and the second in the j)re.seiice of the paying agent, who compares the two signutiires to establish their identity. This system, how- ever, readily lends itself to forgery should the checks be lost or stolen, as the presenter of the checks has a copy of the necessarj'' signature before him while signing the ciiecks or tlie signature may be lightly traced in pencil in tiie space provided before presentation and covered with ink in the presence of the paying agent. During 1913 the Federation Universelle des Soci- ctcs (V Hoteliers (with which the principal hotels of the ^v()rld are associated) addressed a circular letter to the various issuers of travelers' checks stating that in view of the risk involved, ])ayment by the leading hotels of travelers' checks of this form would thereafter be more or less uncertain, and suggested that the banks adopt the safer method whereby the specimen signatures of the ])urcliaser and coimtersigning officer are given in a sepa- rate letter of indication. 3G9. Lost travelers' checks. — The same care should be taken of travelers' checks as of money, and due pre- cautions taken to avoid risk of loss. Should this occur, however, the holder is advised to communicate imme- diately by telegraph with one of the redemption agencies of the issuing bank or the branch at which the checks were obtained, so that the presenter of such checks may be traced without delay. The issuing bank will usually refund to the owner tl'.e face value of lost or destroyed checks, or will issue a new supply in their stead, upon receipt of sufficient evidence of loss or destruction thereof and the execu- tion of a satisfactory bond of indemnity, provided the holder immediately notifies the bank by telegraph of the loss as mentioned above. 552 FOREIGN EXCHANGE : •■ 1 ravelers' checks are useful for those carryinir paratively small sums of monev, as they can be m ated at hotels, department stores, etc.. where it i possible to secure funds under letters of credit th.)se who require to provide themselves with larce s say. $1,000 or over, will find a lett r of credit convenient. A gcK,d plan for many travelers is to < both. 370. Letters of credit.~The principal banks ol world issue letters of credit designed specially fo, use of travelers. They are accompanied by a [ of indication (see Figure 92), and are of two ki namely: (a) Domestic, drawn in local currency for use in country where they are issued (Figures 94 94A), and, (b) Foreign, usually drawn in sterling (Figures The holder of one of these credits may draw any « he desires, up to the amount of the credit, through i respondents at all the principal i)laces visited by b ness men and tourists throughout the world, 'a of paying agents is supplied to each purchaser. 371. Payment to the holder.— The holder draw draft on the central correspondent of the issuing h designated in the letter of credit for the amount money he requires and i)resents it to one of the pay agents designated in the list of paying agents. '^ paying agent then compares the signature on the dr with that given in the relative letter of indication a authenticates the signature of the officers appearing the letter of credit by means of the specimens he I on file. If the signatures are in order he makes pj So Circular Letter o*' Credit ISSUED BY Stg. THE BANK. 19 To the Bankers named in our Letter of Indication. This letter will be presented to you by in whose favor we have opened a credit of .* Sterling to be availed of by demand drafts on The Bank, London. iihich we request that you mil negotiate at the current rate of the day, less your usual charges. The drafts should bear the following clause: — "Drawn under Credit No "; they should be drawn trithin one year from the date hereof, and the date and amount of each draft cashed are to be entered in the space provided on the back of this letter. M provided with a copy of our Letter of Indication, whereon signature may be found. For The Bank. CIRCULAR (STERLING) LETTER OF CREDIT Figure 93 553 SFKCrFICATION OF Payments Madk Under thih Letteh ok Credit Date When Paid Paid by Amount in Words Araoi in Figu CIRCULAR (STERLING LETTER OF CREDIT (Back) Figure 93a 554 Cjhcli^k Lkttku ok Creuit Vo IHHUKD BY $ THE «AXK. 191 To the Agenh and Correspondents of The Bank. This letter will be presented to you by M 'in whose furor we hare opened a credit of Dollars lo be availed of by demand drafts on The Agents The Bank, Sew York, which we request that you will negotiate at the current rate of the day less your usual charges. The drafts should bear the followiny lause: "Drawn under Credit So ": they should be drawn within one year from the date hereof; and the date and amount of each draft cashed are to be entered in the space provided on the bark of this letter. We beg to refer you to our separate letter of introduction for a specimen of M signature. For The Bank, CIRCULAR (DOLLAR) LETTER OF CREDIT (Front) FiGUBE 94 555 Ill SI*K( IFU'ATION or Payments Madk Lnukk th.« Lkttek ok Ck»: Dute CIRCULAR (DOLLAR) LETTER OP CREDIT (Back; Figure 94a 556 re )Ili: I Ci N HEM ITT ANCES 5A7 iiurit and critrrs tlic particulars of the draft on the back „t'tlii'Ulli'«*<>f iTcdit. Ill lurordaiu'e with tlie usual banking custom the pay- iiijr iiMitit deducts his commission at the time payment is iiiiido to the holder of the letter of credit, but should 111!' I( tfir of credit request him to make payments with- iHit (Inluction, his cominission is added to the amount of till- dralt when forwarding it for redemption to the hraiich or correspondent of the issuing bank named ill llie letter of credit. If the letter of credit is not (liaun in local currency the paying agent makes pay- imiit at a rate of exchange which includes his commis- sion. The hanker who pays the draft exhausting the letter dl' credit forwards it to the central agent together with tlic (haft for redemption. Adv!" 1 or restricted letters of credit are similar in tonii to ircular letters of credit, except that they are a(l\ isod direct to the correspondents to whom they will 1)0 presented for payment, and specimen signatures of the holder are forwarded to these correspondents, so tliat a letter of indication is unnecessary. Letters of credit are available for the period speci- fied thereon only (generally twelve months or less), and paying agents should always take care to see that this period has not expired when a letter of credit is pre- sented to them for negotiation. ii7'2. Circular notes. — Circular not^s (usually written in French) are similar in form, payment and redemp- tion to travelers' checks. They are issued for fixed even amounts of a given currency (generally sterling £lO, £20, etc.), and are payable at that amount without deduction in countries which use that currency. In eountries Mhere th( local currency differs from that r™ V !i S- as — 1 ! 5 ^1 S 1 ' ' »»i S; ^ i: N 1 : s I . if i 1^ s 2 J. -^ i i : •- ■ ' a Gs 1 ^ * ^ . 2 r 1 2? a. 1 if 3 5 5-^ S as »i £ '5 •& a 2 = o 5 -^ ~ =5 ^ 1 1 :J a a § "** o ^o i I O J^ \- t ^ ^ ; 'S g ^ 1 i.i § *u^KH < ; t 2^ fSfl c; ■ S K ■ ;' .M ^-^ N^ e :' £ » . 1; .M u ; ' 2 55 ■ § sg 1 "2 :| f ^ ;g ■r •^ :s 30 : H S5 5- at a : •^ » "J ■ o as itX' ^- s \ WR t- -§ ^Hl 3 < s fl 1 1 'n/M -s ;&^ ^ -> ^ ^ -C .tf) i 558 9 U) s% !/! 8 £ H B4 09 ;5 o>5 U1 U en u 5^ "8 u CD S >^ 2 ») u a n* £ W £ Sr H 2 o < '^ S D a ,. M e * «a a> -« -s OS to f4 559 'HI CO o »>. 9- 1.= c ■J! ^ ^ a f- o o =^ Oi s A. I ^ a ^ )^ s S «J .s. •ii .a o Q > H s: 2 I ^5 a, " o < En ^ s o 5 : -S a o c o Si = ~ S fc. I ^^ .5":^ .2* < s o e ,0 '■S eg e 8 < o B O o cs •< X •<.« 05 u b t^ V »: •w p— 1 J^ u s H ■a 3 X e B :j "3 rf 2 fi H "0 560 FOREIGN REMITTANCES 561 designated on the circular notes, the equivalent of the amount is paid at the current rate of exchange. The amounts of local currencies to be paid to the holder are not specified on the face of the note, and this consti- tutes the ciiief difference between circular notes and travelers' checks (see Figures 95 A and DoB). S7:i. Foreign money orders.— There k no cheaper, safer or more convenient means of remitting small sums of money to any part of the world than that of foreign money orders { Figure 96) . They are usually drawn in sterling, the maximum amount of any one order being limited to (say) £25. For amounts in excess of this sum it is cheaper and more convenient to purchase a draft. 374. Payment of orders. — Foreign money orders are not usually advised to the paying agents, but the issuing bank, as a rule, holds the paying agents of their foreign money orders free from responsibility in cashing them, provided : (a) The money orders are drawn on the proper form. (b) The amount of any one money order does not ex- ceed the limit fixed by the issuing bank. (c) The signatures of the officers on the money order agree with the specimen signatures of authorized signing officers on file. (d) The money order is presented for payment within (say) 12 months of the date of issue. (After the expiration of this period the money r-rders are pay- able only at the head oflice of the issuing bank.) ' Patmevt to Holders: (a) In Great Britain and Ireland the face amount of sterling is paid to the holder without deduction ex- cept for revenue stamps. ' Spedmen forms and signatures are. of courM-, supplied to the paying agents when the arrangement for the encashment of foreign money orders is made. (— VIIl— 36 n ji ii I- jty *-B J* t- FOREIGN REMITTANCES (b) 563 (b) In countries otiier than rs.«af u * • the equivalent of I T . ^'*'*^'" ^"^ ^^-eland resign ro;4x-'^'''°'''^''°"^^'''"'^ Hkdkmptiox: 'i^r™"' "' ^'""""" -'"^ '"^ co^^sbn ated Foreign money orders paid in countries other than f.reat Britain and Ireland are redeemed hV*?, London Kngland, braneh or cor espTdent /f h! -«u,ng bank at the face amount of sterhng! ;™es. -ts ,,,, • j^rrtintttirrnt"; pn> a cer a.n sum to a specified person in that raun -n„,i::ion(c ";;;::„,' r «'^ ^-p-ndenfs TUr. V "sualjy the same as for drafts ^ '""""I sterling) i, established so ^h«tfU ].' """"'" *"'^<'' ^f*-- '« th" 'I- nt intervals „,., be „Sed "'""" "' '"™'^'''"« """*»»'«- "^ fre- No Date Received from 101. So. THE CANADIi^ (Rcgidcncc) For remittance to u Received from (Bank) For payment to (Name of Payer) (Town) (Province) (Country) Foreign Currency. . Trannlation of paragraph in foreign languages appearing on "Xotine for Payee." "If the above amount is not received within 10 days, send this slip with your exact address to the (Correspondent in foreign country) Special Xote— It is important that the name of the foreign correspondent be inserted on the "Notice for Payee" in the space following the instructions in the relative foreign languagt. gfor a ^tobc remitted to . Sfori (Air ' payment to (Christian N (Street and Town TH O • u '^ 0^ ■*fi ^ < ^ U ; a ^ a 3 O a 4 4) jS -d I •a 1- OS 2'" "S3 •I* H .2 a § o I 'i I §• > u 1 1 y 5 a < ea a N •5 c: gs e a' V. QJ It is important that the name of space following the instructions in 564 RECEIPT F( (R*Wi|H ADIAN B (Name of (Amount in (Foreiu " (Nam, 'hriatian Name) and Town) THE a •9 S K a >• b It i-3 Li name of the ctions in the Fig ;eipt for " 'i X 3 for HiiuitlorJ ANK OF COMMERCE BRANCH ^ 1»1 5 Hiiuitter) H (urreucy) X curiiuij ) of ituiik) Dollun (Suruame) ^ (Province and Country) NADIAX BANK OF COMMERCi: AfC'ountant. u - 3 e tt .S ^ u o s -.■i_ t — o tea - - -- c ., s ~ : V. ■■ c -S ~' "" X I e e -ir i^ -^5 C r 5, .- J2 2 5 f 1* : -J •< si =" . < Si.: o =- K N ? ■ >^ t (Lett«T of Advice for Correspondent) No The Canadian Bank or Coumercb Branch 191 (jentlemen Please pay to (N'anif of I'uyeej Clown) (I'rovince) the sum uf (Foreign Currency) from (Name of Keiiiitit'i ) C Town) (Address of Heniittirj (Provinir ) A iDver draft for in favor of yourselves is enclosed here- with. f'Tc ii-n correspondent be inserted in the r(l;illv^> foreij,'n langiiugc. IKK 97 MAIL REMITTANCE 665 ... Manager Accountant 3UU !S FOHEIG.V EXCHANGE with two I ips , ': srr '!'"'""•■''' ^y »- ficiary. which uSuJjtT'^'"" '""'' ".unicate with the mutr '*■■" ""f '^«<'i".v) to tinned thereon I n ' '"'''■"?''"''"" if the sum uttv!,. (j,ee figure 97.) '■ reaches its ^y Ju's bank he has paid thereof in to the bene- y) to com- e sum men- ourse of a APPENDIX ENDORSEMENTS AS ADOPTED BY THE CANADIAN BANKERS' ASSOCIATION ENDORSEMENTS Conventions axd rules of the Canadian bankers' associa- tion KESPECTING ENDOHSKMENTS, ADOPTED BY THE COUN- CII, OK THE CANADIAN BANKERS' ASSOCIATION ON THE «0TH KEBRIAKY, 1908, UNDER AUTHORITY OF A RESOLUTION I'ASSED AT THE ANNUAL MEETING OF THE ASSOCIATION, 6TH OCTOBER, 1897. 1. Mode ok Endorsement. An endorsement may be either written or stamped, in whole or in part. 'i. Regular Endorsements. A regular endorsement within tlic meaning of the^e Conventions and Rules must be neither re- strictive nor conditional, and must be so placed and worded as to show clearly that an endorsement is intended. If purporting to be the endorsement of the person or firm to whom the item is payable (whether originally or by endorse- imrit), the names must correspond, subject, however, to Sec- tion 32, sub-sec. 2, of the Bills of Exchange Act, which is as follows : "Where, in a bill payable to order, the payee or en- "dorsee is wrongly designated, or his name is misspelt, he "may endorse the bill as therein described, adding his "proper signature ; or he may endorse by his own proper "signature." 567 MRl 1 i : 508 APPEXDIX been „„,|,„nVd ,„ .,„„ '^,; "" '«' ' "'■"^ "'«"'' Bro™ Company l°2,', ; '" ' ■•"> '"■■ PP) Tl,e a mtrictivc c„,lor,c,„i.„t .1,;^ • '"•'"■■™'"™<. othe, 'orcgo-v .i.fi.u„„„ : ; :';„;':'; '" "'•™''''''"^' "■' placed or .or.ld „, ."':'«'' "^"''"'""'".t. or .|„VI, restnctMc en,oor:dfr;:rt„:j::L'' «■"! Rui.s, .i„,„,„ "Z\^\ "'"""'"« -f "-«" fonventi, »i-i.. .he ,„o„,o„ L:;:t :o!,:r,™;; *° "■''- '-^ '■"»-'• Z""" f P0»" only ,0 oro,lit „f . . r or deposit in i , "Deposited in ... : j,.' ?",'' *° ^''^^'t °^ "Credit ; account of hank." • • • . 5. Form and Effect of GrAR.xTEF A dorsements shall be in the followino- f «^"'^'-«"tee of e, "Pn-or endorsements .u^rd t^" "^r'^" '"l ^ "' "y- • . (name of bank). APPENDIX 509 It nwiy be written or .tampecl, but Hhall be signed in writing l»y Hii authorized officer of the bank giving it. By virtue of such guarantee and of these Conventions and Rules the bank giving same shall return to the paying bank the amount of the item bearing the guarantee, if, owing to the nature of any endorsement, or to its being forgev,th or presents for payment to another bank (whether through the Clearing House or otherwise) a bill, note or (heck, the item so deposited or presented shall bear the stmnped open endorsement of the depositing or presenting bank. Such stamp shall contain the name of the bank its branch or agency, and the date, and shall for all purposes be the en.lorsement of the depositing or presenting bank; and, except as heremafter specified, no further or other endorse- ment shall be required, whether the item be specially payable to the bank or otherwise, or be payable at the chief office or elsewhere. 7. Restrictivelv Endorsed Items. If a bill, note or check bearing a restrictive endorsement be so deposited or pre- sented, the depositing or presenting bank shall, ip,o facto, and by virtue of these Conventions and Rules, be deemed to have j,'..aranteed such endorsement in accordance with Section 5 boreof, and shall be liable to the paying bank to the same ex- tent as ,f such guarantee had been actually placed upon the .tern, but payment may, notwithstanding, be refused until the rejit fiction be removed. 8. lRREGri.ARi.Y ENDORSED Items. If a bill, note or check beanng an irregular endorsement as above defined be so de- posited or presented the depositing or presenting bank shall endorse thereon the guarantee referred to in Section 5 hereof but payment may, notwithstanding, be refused until the irreir- ularity be removed. 9. Letters of Credit. Deposit Receipts, etc. When a ettcr of credit, deposit recei^it, or other hew lot negotiable, 570 APPFA'DIX and to ulHd. , .0 provision, of the Billn of Kx..,.„„«e Ac, n the fol ow„.^ fonn. or to the like effect, j.all be wr .unped thereon. .i«ned in .ritin^ b, a'n «uth i.ed •f the presenting or depositing bank. viz. : u, ," ■'■"'•' '"''^"'"'fi"' «ff«.n.t all claim, under by an\- person." 2« b.".. no „bjco.,„„ .„, ^. „„.,|,. ,„ „ f P prm,d«l for be g.vc, yet ,„ vie. of .l,e ro,po,„ibilitT a .epo,, „,g p„,^„,,„^ ^^__^|^ ,^ eonnee „„ ,::•:;;"' ""' ■""'"'"'" * ■"- ■•" -»"« o ei, Jla^e all endorsements on itonw ,J,.nn«;*„ i objeetion. ^ ^'""' '•^^'^'^""^ *° ^' --"^ned wiU 11. Amexdmext Adopted 20th Febhiary IQOfl T =;r;t;.r,r:?-;i';i-r £~ »gc Art ilo not »nd indcin.nfv l>c written or liortzed .»fflc»r named bank claim* here- is understood f or present- tive endorse- rantee above ibilitjr which i?ction there- tie efforts to H'nted by it public gen- »nd uniform ' made with- liall not b ed with the 0. In case Jrwlse, sent House, the ns guaran- on, and i/ nplied. gl'ESTIONS 0\ RULES AND REGULVTIONS FOR BANK ROUTINE No QUK8TIO.N ANSWER SECTION 1. General Is every officer provided with a copy of the Rules and Regulations? Is the work of each day always finished on I hut day? Does every member of the staft report for Mio have access to them? When taking over the notes on the day of diaries? tijscount and collection \ Y Y( U Ac Ac No Y- Yes Yes Mgi Mgr Dail Mgr's cus Mgr Yes FOR BANK ROITIXE 573 No. QUESTION I I ANSWER Is prompt enquiry made for all hills re- milted for w'lich returns have not been received in good time? Are all debits to Charges Account, Ex- change and Commission Account, Interest Account, Teller's Overs Account and all Iivp(>r.sonal Accounts, also all correcting en ries, initialed by the Manager, or, in hi a!)sen(c, by the Accountant? Ar ' the signed receipts for checks com- pared by the INIanagerf or Accountant with the balances in the ledger, and are his initials placed opposite each balance as a proof that this has been done? t DcIiU- "or Accf." if Accountant acts as Teller or F>fr. Are the balances of all current deposit ac- counts confirmed monthly as far as possi- ble and the checks surrendered? Does the Manager control by lock and key and paper seal the entry and removal of sheets for all Loose Leaf Deposit Ledgers in use? * Does the Accountant read the Manager's correspondence with Head Office? * This question applies only to branches where there is a regular appointwl accountant. Does the Accoimtant examine all State- ments and Returns before they are placed before the Manager? Are all blank draft forms locked in the safe at night? SECTION III. The Teller Is the door of the Teller's box secured by a spring lock under his sole control? Is the Branch Seal kept under lock and key when not in use? Does the Teller ever make any entries in the Pass Books of customers or in the Deposit Ledgers? Yes Yes Yes Yes Yes Yes Yes Y es Yes Yes No M I 1 !^- If m 674 Rl LES AM) RKGI LATIONS urn Rule No. QIESTIOX Does the Toller over hold in liis Cash checks cashed Tor any officer of the hank? Are unpaid notes or checks, or other such items, ever held as part of the Teller's Cash over night? Does the Teller mark in the Discount Diary day by day how each note is taken up, whether by the endorser, by the prom- issor, or dishonored? Are all money parcels and deposits re- ceived by mail or expres; , credited and acknowledpfed on day of receipt? Are the public encouraged as much as pos- sible to make out their own deposit slips, requisitions for drafts, etc.? Are deposit slips made out by officers of the bank signed or initialed by the customers? Is a deposit slip ever returned to a cus- tomer instead of being passed direct to the ledger-keeper? Is money ever received for deposit, or in payment of notes, or for anv other purpose, by any officer other than' the Teller? Are all entries posted in the ledger before being made in the customers' pass books? When money is received by the Teller too late to be pa.ssed through the books that day, IS the amount entered by him in his blotter for the following day, the voucher initialed and handed to the Accountant? If the above is a customer's deposit, is it entered at once in the ledger by the *Ac- countant? ♦ At branches where the Teller also aets as Aceountant, for 'Accoiintanl " substitute "Manager." Is the Teller's "Paid" stamp impressed on all debit, vouchers and branch drafts at time of payment? Is the system adopted in recording in the Teller's Cash Book the amoimt of the bank's notes paid out each day such as to ensure accuracy.' FOR BANK ROITINE «75 No. QUESTION Air Iho instructions in regard to mutilated notes properly observed? Does the Teller ever purposely tear or dis- figure, or further mutilate, any bank or I dominion note? Is the Register of Parcels Despatched and K(>('eived checked by the Manager or Ac- countant with the advices? Are notes of other banks remitted for re- demption to the nearest clearing center as soon us they reach an amount of $1,000.00? Arc money parcels counted and sealed by two officers in the presence of each other? Are parcels for deposit with other banks always sent out properly sealed? Arc deposits for other banks and money parcels for the Express or Post Office taken out by two officers? Is the Teller one of the two officers to tj. . part in the sealing and despatch of mont^ parcels? If so, is the joint continuous custody required by this rule observed? Are the requirements of the Insurance Companies covering money parcels com- plied with in every particular? Are parcels of money and registered letters opened in the presence of two officers? Is the Treasury Cash under the joint con- trol of the Manager and Accountant, and is it examined at least once a month? Are the securities deposited for safe-keep- ing, or as collateral, kept in the Treasury? Are these securities always entered in the Securities Register? Arc receipts taken in the Securities Reg- ister for securities surrendered? Are all returned items from other banks presented to the Manager o** Accountant, and are the debit slips therefor signed by one of these officers? ANSWER Yes No Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes ff ■! II f I i s .Me Riil. No. RULES AND RECrXATIOXS QIESTION SECTION IV. Deposit Business Are accounts ever ope. . ,„ the Current Account Ledger without the uuthoritv of fne JNIanager? ;Vo f ^^/^^"•''^^d particulars entered at the head of every deposit account? Are Trust Accounts with Trusts specified clinunated as far as possible? Is a declaration on the special form 8 ob- tauied for every joint account? Is every account in the ledgers properly imle^ed, even though consisting^f^ne Are dishonored notes, checks or bills ever charged to a customer's account when there are not sufficient funds? Are the checks or debit slips for with- .tlSTaily' """""' ^""""' ^'"^"^'^^ nightF '"'"''^'P'^"''*^ ^^^'"P J«^'I^^d up at Are checks ever surrendered before the receipt is signed by the customer or his attorney? Are customers ever delayed in receiving I back their pass books? ^ Is a husband's authorization held for every account in the name of a married $500?" ^""'"^ * ''^'''""'^ ^° ^"^^^^ «f * F..r branches in the Province of Quebec only. Is interest on Savings Accounts computed on imnimum monthly balances ? Are Savmgs Bank Pass Books alwavs sur- Are Pass Books of closed Savings Accounts Yes R)R BANK ROITIM; CilKSTIOV Are instructions repirding lost Savings I'uss Jiuuks observed? SECTION V. Collections Is every bill received for collection regis- tered on the day of receipt? Are collections presented for acceptance on the day they are received? Is every bill initialed for in the Register by the Manager or other senior officer, and its entry in the Diary checked? Are collections held unaccepted more than 48 hours without instructions lo hold, or advice to the branch or ccnespondent from whom they were received? Is a copy of this advice kept? Are reasons for returning unjiccepted col- lections always stated on the back? Are bills received for collection ever held overdue for the convenience of customers without authority from the remitters? Are receipts taken for collections returned to customers? Are all blank money order forms, except the supply in the hands of the Teller, kept in the Treasury; also all Travelers' Checks, Letters of Credit and Deposit Receipt Forms? Are all other draft forms kept in a locked cupboard under the control of the Man- ager or Accountant? Are depositors' signature cards in order? SECTION VI. Correspondence Are stamped signatures of officers ever used? j Are all bills remitted initialed for by I proper officers? C— VIII— 37 ANSWER Yes Yes Yes Y es No Yes Yes No Yes Yes Yes Yes No Yes mS Riilo No. in m:s a\i> i{i;(iri,.Mi(».\s QI KSTIOX Are all Cimilars rojul jitul initijilrd l)v every nu'inlu'r of the sliill'? Arr any comimmic alioiis mado l)v Post ( ani otluT than those allowed Uy Iho rule? SIX-nON VII. iiKvn Okkh ^: liKTvum Arc particulars of oacli sliipmont by in- sured mail entered on the form provided on file (1(11/ of .shiptuentY Are pai.l drafts, adviees of eredit, ete., eheeked off daily, ininiediatelv on receipt and bt^orc bein^ entered in the C^ash Book> Are all deposits and transfers between offices advised l,y si)ecial letter signed by the Manager und Accountant in addition to the regular "At Oedit" advice' Is the junount stated both in words and figures in these letters? In acknowledging telegrams is the copy of u code message ever enclosed in the same envelope with the translation? Are all code messages received and des- patched confirmed by first mail? Is the telephone ever used to transfer money, or order or advise parcels' Are all expenditures for telephonic or tele- graphic messages or otherwise, in connec- tion with the customers or emplovees col- lected from such customers or emplovees? Is any advertising expense incurred except that which IS authorized by Head Oflice? Are the different books and accounts t>alanced periodically as instructed in the rules? JVhat officer posts the General Ledger? Does the Teller ever write the Cash Book? Does the Manager keep keys to loose leaf deposit lerlgers m his possession, and super- vise the entry and removal of sheets? Are loose leaf de])osil ledgers sealed? FOR BANK KOI TIN K 57!) NV. QIKSTIOX Is I lie hank ever loft in charge of one officer during' business lionrs? Are tlie Imnk premises carefully examined oil Sundays and holidays? Ar(^ the office and cellars examined every night by the watchman, or some officer of the bank? Is the safe door kept closed and locked (luring the day? Are the combinations of outer door of safe and of Treasury Compartment in the divided custody of two senior officers, each holding one lock? Does the same officer liold combinations or keys of both outside and inside vault doors? Is the setting of Uie time lock properly f)erformed ? Is the setting checked by the Manager and does the responsibility for its operation rest always with two officers? Is the vault door kept closed during the day? Is the custody of combinations so arranged that it is necessary to have the co-operation of two officers in order to obtain access to the vault or safe? Are combinations always reset when trans- ferred from one officer to another, even for a short time? Is the stationery n refully assorted and kept under lock and key in the custody of the Manager or Accountant? Are all Powers of Attorney numbered and entered in the Register? lias any Power of Attorney, on being re- voked, passed out of the Bank's possession? Are Suits-at-Law ever entered in the Bank's name for the convenience of cus- tomers or others? Have Non-Trading Partnership Agree- ments been obtained from every firm of Architects, Solicitors, Accountants, In- ANSWKR No Yes Yes Yes Yes No Yes Yes Yes Yes Yes Yes Yes No No I. tiflT'' 4 11 ..■;»i Itnlr No. in l,i;s A.\M KKCI I.ATIONS QIKSTION snrai.co \^r(.„fs, oi,.., |,.,vi„^r (li.s(.„„„t tran.su<-li,)...s willi H,,. Hank--- Are any Loiters „f (J.mruiitcc l.ol.l ..li.er than those <„, the Bank's regular f»rni> Is eyor^v assignment of fire insurance assented to ,y the Company issuig the offiSr'''" "'^'"^^"'•^ "f ^n autuorized Is the distribution of insurance, if coverinc more than one item, carefully scrutinized? Are the dates of expiry of all policies en- ered m the .ALmager's Diary and checked by a second officer? Are any policies held with assignment to the Bank as its interest may appear"? Is the effect of the 80% co-insurance clause always borne in mind? Is a written acknowledgment held from the insurance company of every assign- ment to the Bank of a life insurance policy? Is the age of the assured admitted on eyery policy assigned? *^ Is the due date of eyery premium entered m the Manager s Diary and checked by a second officer? "^ Is care taken to preserve the identity of J every debt against which mortgages, ware- house receipts, customers' notes, etc., have been pledged as collateral, by retaining the original notes and all renewals? Are the rates of commission on checks and drafts, and the rates of interest on notes discounted marked by the Manager in cipher? ** Is a general waiver or protest held from all customers who require indirect advances of any kind? Are Rating Cards filled out for every borrower whose total liability direct and indirect reaches $ — -, and are copies of these cards sent to Head Office? FOR nwK nolTIXE Ml Kill' gi KSTION Doi's the Manager initial all paper dis- coiinted? Are the addresses of all <>I)Iij;ants on notes discounted writ ten under the names? Are notices of notes discounted maturing sent reguhirly, and how long in advance of jnaturity? Are notices sometimes sent to indirect ol)ligants, particularly when the amount is large, or the signature not well known? Are hills payal)le at points where- there are private hanks hut no chartered bank for- wardetl for acceptance and return, and held until ten days before maturity and then forwarded for collection? Are any notes or bills discounted for less than a minimum charge of fifty cents? Are the maturities of notes discounted, their formal correctness and the calcula- tions of interest and exchange checked daily by a senior officer? Are all notes under discount checked off with the Diary once a njonth, the Diary having been previously balanced? Do Liability Statements include all Over- drafts, Short Date Drafts, etc.; in fact all obligations to the Bank of whatever nature they may be? Are demand notes ever discounted without the authority of the General Manager? Are all stocks held as security for loans properly hypothecated on the Bank's Form? Is borrowing by way of overdraft dis- couraged as much as possible? Is interest on overdrawn accounts charged monthly? Is interest on demand notes collected monthly? Is the interest on demand notes ever added to the principal? A.NSWKU Yes Yes Yes 10 days Yes Yes No Yes Yes Yes No Yes Yes Yes Yes No H ;s ,i,,i Hull- No. ~J'l^ AND HKta LATIOXS WrKSTION "Um" •'?""'"' ""^'''* '•""'"'" the words .nonlmn,.,!? ^' ' *'•' '"**' ''^''"^ I« the iMj,.r«..st ^..hn, .li.v, loans ..ollect..; illt;. Is parf.Vular (arc taken t., ^ruard against Sf^ul W «»f '."'y debtor throngh he ^tutnte of Lmutations, an.l to make ti ndv reference to Head Offic-e of any debt " uS are almnt to prescribe? ^ -nonl^^'"""!""",'.'^^'^'''^*^''- '"^'«n«''l once a -nonth l,y cheeking it with the coHatera notes on hand or remitted? *^""'^t<^'''i' Cnufr ''""•^t^"''^^' n"t<'« entered in the dm I ;"" ^'f ^ ""*'^"'- t'>^''> respect ve due dates, and are all overdue t;A,Ll\ entered i„ the Past Due'cfcl^'lT R^ Have all advances of $ or over been uutljonzed by the General Manager e ciit ete'rel "'? 'M '''''y «"thorized XreLX '"' ^''^ ^Y-'^nager's Diary? Are each season's credits in lumber and Is a record kept of all trade bills disconnterl remitted collaterals, and casl ttis "vS have l,een returned unaccepted with the reason for refusal? « **it" me Are there any accounts such as rent taxes etc., due and unpaid? ' ^' Tv'nl'r??''"?^ ^''"^ letters satisfactory? Is care taken to see that the year is entered with the date for the first entr' of each year and at the head of each ne^ pLeP '' Is the existence and value of goo,ls aSn'ed to the Bank under Section 88 and of Xj' Bv wl. .f ffi ' ""^ ^'''''^ P"^^ '' '"""th? uAdrand ^ " ''''' '^'''' examinations uiuut and IS a proper record kcjit? Ye Ut Ye FOR HANK ROITrNF, .^8.1 Klllr I gi i;sTio\ Arc till' pHMTi'ds from sjiltvs (»f ^oods |)I«m1^'('(I to llic Hatik (l('|>o.sil(>t| to a col- lulml uccoiiiit aihl from tliciicc applicii uii llir (l<-l)(? Wli(» vcrifirs the mptitatioii of Iiilcrrst on (Irposils? Who verifi<'s tlu' computation of interest ill llie (li.scouiit (IcpurliiU'iit? Arc ull (it'iicral Munagcr's rircular.s filed in the Circuhir Book? Where are the Code Books kept? Whenever money is phiced in the Treas- ury or withdrawn therefrom, are two .senior ofKeer.s alway.s present, and is the amount entered in the Treasury Book and initialed by both officers? Are postage stamps properly supervised and placed in the vault at night? Is the Manager keeping an up-to-date record of customers' standing, etc., and in what form? Are commissions received on cliecks, etc., verified by the INIanager and comi)are(l with the credit slip? Is the Teller provided with a list of the principal customers, indicating the limit within which uncertified checks on other banks, or items payable out of town, may be accepted from each? Is a record kept of the numbers of blank draft forms received? Are draft forms ever signed in blank? Are notes signed in blank ever accepted? Are any endorsed demand notes taken? Is every signature to a l)ill by mark wit- nessed by an independent witness? Is there a sufficiency of firearms; are they kept within easy reach during the ilay, taken to the sleeping rooms at night, A NSW i: II Yes Ac L. Acct. Yes Vault Yes Yes Yes Yes Y es Yes No No No Yes s i fl It III.- s». Jll I.KS AM) HK(;( LVTIOVS Wl KSTIo.N ruTfcJ wah. properly c-urc-d for „ ml fe o<«».s.o„HlIy Jo see that tl.ry are «,S Hiivv any CMrpJions lo Ihr RuKs arul Hr«,,laho„s l„.,.n a„ll,ori/o,l l.y / ( .„ oral Manager for this branch? W «o. Kin. particulars with rule numbers. ..hl^«;;!r i;;::::/';::.':::" "•""'"^'^ ""''^^^'^ '" -«'- STAMI* nri'IKS ON FORKIGN DRAFTS rill Ntiiiiip (IiitioH of the VHiiiMiH tountriis an- so involved ami \.irv to nucIi ail i-xtciit that it in only possihle to give htiv a »vii.i|)>i.s of lliose wiiich olitain in (iri-at Britain, Fnintf aiit.iiii|)s may be ealcuhited on a hasis of half of one per mill »)!• :_,'j of 1 per cent, GRKAT BRITAIN AND IRKLAND (lucks: Rills of Exchange payable on demand or up to three days' sight Id irrespective of amount. VrnmUxorjf Notes: 1 shilling per £100 or fraction thereof. All other bills of exchange: Not exceeding X5 Exceeding W and not exceeding £10 Id M a M M 10 50 75 100 S5 3 50 6 75 9 100 Is - 200 2s - for .very additional flOO or fraction thereof Is Rills ill foreign money are staiiiju-d at the rate at which they lie llr"()tiali'd. /: III /it Rill l<=>a, of Ireland, dmft 1 s issued by the Rank of England or by tl ic s or iiiclcrs drawn bv aiiv itatiKi-r in Ih i;il(i I Kiiigilom upon any other banker in the T^iitcd Kiiigd I |i iv.il.lc fit bearer or to order, and only used for flir piir) om lose 585 I *^ APPENDIX ••f M-UllMg any .uTminf hotum, s,ul, IkimUts, letters of and Inlls drawn l.y gcvornnKnt depailinent... Tlje duty on a bill of exchange drawn or expressed payal. o out of the Unitecl Kingdon, where actually paid « '»rs,.,| or n. any manner n.-gotiated in the United Ki„ shall where the amount for which the hill is drawn exceed he reduced so as to he, when the an.ount exceeds fSO an. not exceed flOO, Gd. When the an.ount exceeds £100, tlu •s 6d for every £100 or any fractional pa'rt of £100. V\hen bdls are drawn in sets, one of the sets requires stanjped Adhesive stamps n,ay be used for bills drawn al but for bills drawn in the country embossed stamps must be FRANCE (Including Algeria and Senegal) Checks drawn "A vue" {the date of ■which must be written in words) if payable in the town where they are drawn -n «, -^ — Fes. 0.10 Otherwise — " 0.20 Bills of exchange not exceeding fcs. 100 — " 0.05 For every additional fcs. 100 or fraction — « 0.05 Bills passing through France by endorse- ment only — Not exceeding fcs. 2,000 _ «« q gQ From fcs. 2,000 to fcs. 4,000 . __ «< j For every additional fcs. 2,000 or frac- '•°" - « 0.50 GERMANY Checks: n II f 1 M. (} JJills ot exchange not exceeding ]VT. 200 M Q Exceeding l\r. 200 and not exceeding 400 — fl ;; " *«« " " " 600 _ 1 " ««« " " " 800 - ^ ,,,."««" " " " 1,000- Each additional 1, ()()() ,„• part thereof APPENDIX 587 Iters of credit pressed to b« Lv paid or en- fed Kingdom, I excveds £.150, fSO and does 100, tlie duty 00. equirc's to be rawn abroad, must be used. I'l. avoid tbr sliinip tax diocks 011 Germany .should bear the loilowiii^ words written after name of tlie drawee bank "Pay ji^rjiiiist tliis check from our credit balan.-e." 0.10 0.20 0.05 0.05 0.50 1. 0.50 M. 0.10 M. 0.10 0.20 O.30 O.40 M M .388 APPRXDrX. rfirn the history of the "old n^r »f . '''"''* ^^^""n Broflv stated tl,o P,. ° ' '°"' '" 1'"'^' 8"™. and card ,„„,„^ „f t ," pt! , ;"'' '™''"""' """I"-"'' countries for ,1, cim.Y.tlnJ T "''''■'• *■"'"« -' ■>< -nl found it ncooss.:: tZp 'rt ,"""■ """ ""«'''* «"- -I. billed dollar, for tl,o p !" ,, ,1^ *"'""""" "^ ">' ^p. ""•I »ork.,, „.,,;,,, ,^,, : „-^"^ J" "/ "'- """.v. puMie .upp, ■>' ^*-*H per p„u-:r M- ;' t t- "\t- '•"■ '- "-" ".lopted the par value of tlu Iu„ "/ T-"^ """■ "'^■'' -' <■«. eolonies. Tl,l,rra,, ,, f I IT''^ T""'"'" "' "" '^">" Pnr of ,.Ml,„„ge," and H„. ,„. .' '" " '■'' '" ''■'""' "«■ ""I '-n, of „per;„,,,„,. .,;•;;,;:;;:-,,•.;;-;;;;.-.. «^ -, AITKNUIX 589 '"ff Stcilillff ,,^ ,rin,ic..ii> l)v iii.)st auHioriliVs. Ac.-oidin^r f„ one author, (Iw S|.,Mii>h dollar contaiiitd at thai period, 38.5 grains of pure mIvct. while }.'0 Vlu^rUsh .shillin^rs eoiitained 1718.709 grains |Mllt'. 'I'liiis the value of the Spanish dollar would be "in^^M = 4.480106s. = 4s. 5{'^^. anil the value of the sovereign ^^p^ - $4.46417. Ill nOii the act establishing the United States mint Mas |..is.nl. and we now find the legal weight of the silver dollar -n.ii as JJTl.yS grains of pure silver, while the weight of the Kii^iisli shilling remained unchansred. The sterling equivalent of this new dollar is ^Tfim = 4-3201S. = 4s. 3/gVd. .111(1 the value of the sovereign in terms of that dollar ^gff = $4.6295. In 1H!}7 the United States altered the ratio between gold and Sliver from 15.1 :1 to 15.988: 1. This undervaluation of silver practieally made gold the standard of value and, from this time <»., we have to deal with the relative value of the pure gold c.ntamed in the sovereign and in the gold dollar respectively. 1 !..• gold dollar co.itains 23 »2 grains of pure gold, and the sovniign 113.001605. The gold dollar has, as its sterling equivalent, mMS = 49.3161d. = 4s. l/^,d. ■iiul the sovereign, expressed in terms of the gold dollar, is n^ocmns ^ $4.86656. This is now the "mint par" between North America and (Jr. at Britain, or an advance of 9.497679 (approximately 9\ p« r cent on the old legal par of exchange of 4.444f By an act of Parliament, $4.86ii per pound sterling, or 9^ per cent premium on the old par, was made the legal par of exchange tor Canada. The United States continued to quote sterling bjr premium on the old par of exchange until 1873, when it was 590 APPENDIX sensibly abolished. Owing to tbo light weight of the so\ at that time (lia.149 grains) the actual premium stood al 9 per cent. Method of conrcrsionn.—T\w advance is reckoned as sf per cent on ,$4,444, the old value of the pound. There per cent premium amounts to .355, which added to 4. $4.80 per pound, and so on. Find the value of a draft for £100 at 9^ per cent premi Old par of exchange $4.4444 To which add 91^ of itself 4055 or $485 for the £100 draft. What is the premium when £1 = Deduct old par of exchange. . . 4.8500 $4.8666 4.4444 Advance over old par. . . which works out 4.444: 100 A222 .4222 : 9i^. This method may be simplified into the following rules (1) To convert from a premium quotation to currency the decimal point one place to the left and divide 1 The currency equivalent of 109J by this rule would out as follows: 10.91 ^2i=^X|- 4.85. (2) To convert from a currency to a premium quot move the decimal point one place to the right anc tiplyby2]. Thus: 48.6?, X 2] = 109i or 9^ per cent premium on the old " These two rules are based on the fact that at the old par of excha dollar was worth nme English sixpences, of which there are forty in the therefore — 40 10 £l=— or — 9 2Ji , 9 iH £l=— or — 40 10 APPENDIX 591 Now, as Canadian quotations between banks advance by sixty- fourtlis, it will often happen that, in converting from a currency to fi preiiiium quotation by the above method, some difficulty will be found in expressing the decimal to the nearest sixty- fourth. Tsually a table has to be referred to, unless the onirator knows all the fractions by heart. To avoid either evil use the following simple rule : Learn the eighths by heart: the knowledge is always useful. J-.125 I— .250 §-.375 J— .500 t— .625 5— .750 I— .876 Deduct the nearest eighth from the decimal and divide the rcniiiiiider by sixteen. This will give the number of sixty- fourths to be added to the deduction. Thus for the rate $4.8298 «e have by the rule 48.298 X 2^ — 108.670 nearest eighth f — .625 .045 sixteen will go into 45 almost three times: therefore 4.8298 = 105-;: + -,\. Another method. — It must always be borne in mind that all fractions of the Canadian quotations arc a fractional percentage im the old par of exchange and not on the present value of the pound sterling, the latter being about 10 per cent more. The difference between 109 and 109| is .5555 cents per £100, while one-eighth of 1 per cent on $485 is .606 cents: a difference of 51 cents per £100. An advance of a sixty-fourth in the Ca- nadian quotation makes a difference of $6.94 per £10,000, or ap- proximately $7.00. From this fact a short and useful conver- sion rule can be made. Neglect 4.80 as common to all quotations and equivalent to 108 per rent, divide the remaining three figures in the quotation l)v 7 : neglect the remainder, if any, and add one to the result. This will give the number of sixty-fourths over 8 per cent. 5iH APPENDIX Thus to convert 4.8715, divide 715 by seven and add o gives ^103 as the number of sixty-fourths to be added i or Igi = IfV + ^\; therefore the equivalent for 4? TOO t 4- 3 * **^ 'I'his rule is accurate to the nearest sixty-fourth up chiding 4.8875 = 9[f + ^V- Afler that, it will b. necessary to increase the remedy for degree of error sixty-fourths. This rule will, of course, work conversel C unadian to currency quotations, by multiplying the nui sixty-fourths in excess of 8 per cent by 7, and, for ren error, deducting 1 per cent from the result: To find the equivalent of 9j\ + ^V by this rule, 9-^ -, 8 -f- ^J, and 77 X 7 = 539, 1 per cent of which, nai being deducted, leaves 534, and the equivalent rate is 4.8 A third method.— As already pointed out, the quo on sterling exchange have reached a point where exchange have to be supplemented by calculations, as no table go thcr than an advance of one-sixteenth of 1 per cent ; to di with this partial use of tables and to simplify the calcul the following method will be found useful in calculating o amounts at close fractional quotations. The method consists simply of assuming a base or key n to correspond with 108 per cent (1728), increasing tl number by one unit for every sixteenth advance over the cent premium, thus : 8% premium is represented by JgV¥ 8t7% " Oi% (8% + II) 10% (8% + ff) « « « (( 1760 and so on, each advance of a sixteenth in the quotation in^ mg the key number by one ; this form is the numerator of a tion, of which 360 is the denominator or diviser common \ For example, a purchase of £10,000 (q) 9| would be w out as follows : '■^W^' = W/ X 10,000 = ^-^^M = $48,500. APPENDIX 593 Conversely, a purchase of $10,000 (ft' 9i would be worked out h.v rcversinpr the fraction : ■jY'i's ^ 10,000 =-=£ii,06l.n. 1 ^f . 'I'lic iisefuhiess of this rule will he more apparent when sixtv- foiirtlis and finer shadings are dealt with, which arc added to the key number as fractions or decimals of a sixteenth, thus : 9^ + fiV = 17461 or 174(50.25 9k + s'r = 17461 or 1746.50 9* + B'V = 1746^ or 1746.75 9i + ik = 1746J or 1746.125 \Vc will take, for example, the purchase by a bank of £10,000 @ 9fV + ITT = 1747.25 = 174725.00 10,000 @ 9j\ + ^T = 1747.50 = 174750.00 360 = 6 X 60)349475.00 Value of £20,000 @ above rates, 6)582458.333 $97076.388 Conipare this with the ordinary method of working the same example with or without tables. Remember that 360 is the divisor common to all. London quotations. — The English quotations for North Amer- ican exchange were generally quoted in pence for dollars, ad- vancing by thirty-seconds of a penny, and the reduction to an cqnivalcnt American rate per pound sterling had to be done In- tables or by a very tedious calculation. Lately, however, it lias become more and more the practice to use the American method of quoting dollars and cents per pound sterling, which, of course, makes comparison a simple matter. The old method, liowcvcr, is frequently found in newspapers and books on ex- change. As there are no tables in use on this side which give the e(|nivalent, the following may be adopted as a quick mental inetliod of converting the American equivalent to the terms of the other to the nearest thirtv-second of a penny. It should (—VIII— 38 594 AITKXDIX !!i be rcineinlKivd that us tlu« (iollur valiR. „f ti.e jiound i till- iHi.ce value i)f tlu- dollar naturally decreases and vi( Thus : $5.(MM)0 per I' = 48(1. jKjr dollar 4.})!.% 4.8000 " 50 ■mi To reduc-o the American rate to the Kn^Hi.sh quotat dollar: take 4.80 as equal to .50,1. and deduct from qu, divide the remainder hy 30; the whole number thus o represents the number of thirty-seconds of a penny to ducted from 50 pence, to ^ive the ecpiivalent. Find the equivalent of .$*.9l,% per t. $4.91.'J6 = 48000 + ' l^^ = 50d. - :].T = 48^ pen. $4.80(56 = 48000 + -Ml = 50d. - P = 49^ ^„, $4,842.5 = 48000 + ^ = 50d. - ff = 49tV penc This rule will hold good to $4.9199 or 48 |f pence that the degree of error beomes appreciable. However, rate is much higher than the gold point, we need go no f, the Canadian equivalent being lOf^. BIBLIOGRAPHY BANKING PRACTICE "Manual of Canadian Banking": H. M. P. Eckart. "(anudian Banking Practice" : John Knight. Compiled from the .Journal of the Canadian Bankers* Association. "Questions on Banking Practice" : Compiled from the Journal of the Institute of Bankers, London, England. "The Country Banker" : George Rae. "History, Principles and Practice of Banking": J. W. Gil- bart. "Money, Exchange and Banking" : H. T. Easton. "Accounting and Banking" : Alfred Nixon and J. H. Stagg. "Banking and Commerce" : George Hague. "Modem Bank": Amos K. Fiske. MISCELLANEOUS "Credit": William A. Prendergast. "Disputed Handwriting" : Jerome B. Lavay. "Pitman's Business Man's Guide" : J. A. Slater, B.A., LL.D. "The Annual Financial Review" (Canadian) : Compiled by W. R. Houston. "Essay Mathematics": Sir Oliver Lodge, F.R.S. "Tables for Repayment of Loans": J. A. Archer. "Inwood's Tables," including logarithms. "Five Figure Logarithms and Other Tables": Alexander M'AuIay, M.A. "Accountancy of Investment": Charles Ezra Sprague. "The American Office": J. W. Schulze. TRUST COMPANIES, ETC. "Trust Companies : Their Organization, Growth and Manage- ment" : Clay Herrick. 505 596 JJIJJLKKilUPIIY "The Modern Trust Conipaii^r": F. B. Kirkbride an Stcrrctt, C.P.A. "Modern Industrialism": Frank L. McVej. "Trust Finance": Edward S. Meade, Ph.D. "Work of Wall Street": Sereno S. Pratt. "Clearing Houses, Their History, Methods and Adn tion" : James G. Cannon. BANKING LAW Then Bank Act, 1913.' Bills of Exchange Act.'. Department of Finance and Treasury Board Act.* Cu-rency Act' Dominion Notes Act.' "Banking and Bills of Exchange" : J. D. Falconbridge LL.B. "Bills, Notes and Cheques" : J. J. MacLaren, K.C., D. "Banks and Banking": J. J. MacLaren, K.C., D.C.I "Shareholders and Directors' Manual": J. D. Warde. "The Civil Code of Lower Canada: Handbook of Comn Law": William Patterson. "Pitman's Legal Terms, Phrases and Abbreviations": E A. Cope. Pratt's "Digest of Laws relating to National Banks." Grant on "Banking" (Canadian edition). "The Law of Banking" : Hebcr Hart, LL.D. "The Law of Banking": Sir John R. Paget, Bart., F "Digest of Canadian Mercantile Laws" : W. H. Anger, MONEY AND BANKING "Money and Currency" : Joseph French Johnson. "Money and Banking" : Horace White. "The Theory and History of Banking": Charles F. Du "History of Modern Banks of Issuo": Charles A. Conar 'Can be obtained from Kind's Printer, Ottawa. BIBLIOGRAPHY 597 "Principles of Money and Banking" : Charles A. Conant. ••KItimiits of Banking": Henry Dunning MacLeod. "Uiiiiking" (2 volumes) : Henry Dunning MacLeod. "Loiiilfiinl Street" : Walter Bagehot. "'I'liirtv Years of American Finance": Alexander Dana Noyei. ".Moni'tury and Banking Systems" : Maurice L. Muhleman. 'i'litiils (ind Their Uses": Frederick A. Cleveland, Ph.D. "Kinuncial Crises and Periods of Industrial and Commercial Depression": Theodore E. Burton. "Canadian Banking System" (1817-1890): R. M. Brecken- "TIk' History of Banking in Canada": R. M. Breckenridge. "Till' Canadian Banking System": Joseph French Johnson. "A Rational Banking System": H. M. P. Eckart. "rrescnt-day Banking": Francis E. Steel. FOREIGN EXCHANGE "A. B. C. of the Foreign Exchanges" : Geo. Clare. "Money Market Primer": Geo. Clare. "Foreign Exchange Text Book": H. K. Brooks. "Foreign Exchange Tahles": H. K. Brooks. "Sterling Exchange Tahles": E. Buchan. "International Exchange": A. W. Margraff. "Tate's Modern Cambist": H. T. Easton. "Foreign Exchange": Hon. Yiscount Goschen. "Klcments of Foreign Exchange": Franklin Escher. "Arbitrage": 11. Deutsche. "Arbitrage": E. Kaufmann (French). "Arbitrage and Parites": O. Haupl (French). QUIZ QUKSTIONS I'ART I: HANKINC; PRINCIPLES CHAPTER I 1. Into what periotls may the history of banking in Canada be divided? Upon what fact should we lay par- ticular stress in studying Canada's banking histo , ? 2. \Vhat kind of money did Canada have during the New France period ? How were the "ordonnances" and card money redeemed? 3. What were the first steps taken by the British Government to place the finances of the colony on a stable foundation? 4. What was the attitude toward Army Bills when they were first issued { '). Discuss the progress of Canadian banking during tlu- ])eriod from 1817-1867. Why was there little uni- formity in the charters of the banks established in Up^jer and Lower Canada during the period? What part did the Colonial Office play in this perio. If so reqin*red must a bank make payment in Do- minion notes? To what extent? 40. What regulations govern the signing of bills? 41. How are fraudident notes treated? G0!2 QUIZ QUESTIONS CHAPTER IV 42. What are the powers and limitations of a dian bank? 43. What are the provisions of Section 88 of the 44. State the stipulations applying to rates of in and exchange. 45. What are the regulations governing deposil 46. What is the procedure when there is an an mation of banks? 47. What information must a bank submit t M mister of Finance each year? 48. How are the unclaimed funds of a bank \ care of after dissolution? 49. Describe the procedure when a bank susi payment. * 50 If the assets of a bank are insufficient to pa liabilities how is the difference made up? 51. Under what conditions is a bank declarec solvent? 52. What are the principal penalties which ma incurred by the public under the Act? By the ban) their officers? 53. What are the principal changes and additior the headings of the monthly and annual staten:ents n by the Act? CHAPTER V 54 Describe the various forms of currency usee Canada. What curency is legal tender? What i visions are made for the redemption of Dominion no 55. Where may Dominion notes be redeemed ? W was the amount of these outstanding June 80, 19 ^^ hat amount was in the hands of the public? QUIZ QUESTIONS 603 .50. From the banker's standpoint what is the valu- able feature of permitting bank note issues? 57. How is the holder of bank notes secured? Why is it |)r()per that note holders should have prior rights oil the bank's assets as against the depositor? .)8. \Miat is meant by elasticity in currency? How does the Canadian sysvem of note issue provide for this? .50. In what months is the circulation of notes heaviest? OO. What expedients have been tried to keep the amount of notes in circulation equal to the demand? (51. Which are the months of note issue? Of note redemption? What are the reasc;ii> for this grouping? 62. Explain the provision for emergency currency. What restricts its issue? To what extent have the banks used this privilege? 63. How do the central gold reserves provide for additional note issue? 64.. To what extent are notes lost or destroyed? ()5. Under the "branch bank system money always finds its own level." Explain. Why does this system work particularly well in Canada? ()6. Discuss the two principal factors which have en- abled the banks to assist materially in the expansion and upbuilding of Canada. Compare the various nations as to the number of banks per thousand population. 67. Explain how the branch system helps to avert panics and prevent bank failures. (>8. How are the banks continually lending to Peter to pay Paul? Discuss the various aspects of this stiuation. 69. Compare the methods of which the Canadian busi- ness man can avail himself in borrowing money with those which the American business man uses. 70. What features of the Canadian banking system have enabled it to perform its functions so successfully? 604 I QUIZ QUESTIONS I CHAPTER VI balk n)?*^'''/'''.'""'^^'"''^ "'""*''^>' statements of bank of particular interest? What is a bank staten intended to show primarily? 72. \\1,y is it risky for both the bank and the pu to allow savmgsd^^^^^^ to be used as cheekin/a Z 73 Why ,s ,t unprofitable to allow interes on 75. Why is it unnecessary for a bank to maint large balances with other banks? 76. What is included under the heading "due to bar in foreign countries"? ^ 77. How does the heading "due to Dominion a Provmcial governments" arise? a. to th': ;:;;b;^r^ ^'"-^^"^^^ «^ p^"«*«'^^^ ^^ «. ban centage to paid-up capital a misleading one ? «0. How IS the cash reserve regulated? HI. How do the banks make a steady loan to tl J)ublic without interest? * 82. ^Vhat form of assets do the deposits with othc banks represent? 83. Are securities listed among the quick assets? loans' in thfT"'' "'" ''" ^"'"^ '" ^^^^^^^ ""* ^^^ loans in the strict acceptance of the word? Jd tirjr'r"" ^?T ^'""^'^^^^ *^'«" •" Canada . ^ood thing for Canada? On June 30, IO13, what wa- the net amount of (^ana()K griz QiKSTioNS I low (Iocs this (Icpartiuent record the receipt of lei notes, (h'afts, etc.? 1'27. ^VlIat is the work of the discount clerk? 128. What are the junior's duties? Upon what his promotion depend? CIIArTKR IV 129. Why is the cash book the principal book in accounting? As the bank grows what books are ad 130. Name the books in use at a fairly large brj In introducing new books what principles shoul observed ? 131. W^hat is the legal value of accounts kept in I leaf form ? What rules are observed in the use of I leaf books? 132. To what extent should the use of the ad machine be restricted? 183. How is the accuracy of the figures in the book insured? 134. How is the cash book written uj)? 133. W^hat is the Sherbrooke cash book? 136. What figures are entered in the supplemer cash book? 137. Of what classes do lo.xns principally consist' what book are they entered? 138. AVhat is tlie discoimt blotter? ISO. The discount diary? 140. The trade bills remitted diary? 141. How are drafts drawn on foreign correspon( covered? How are remittances for collections ma( other banks? What is the drafts register? 142. On what forms are debits between brai listed? QT'IZ QI'ESTIONS 60» t of letters, rk? I what does tok ill bank are added? •ge branch. should be pt in loose- se of loose- the adding in the cash plementary :onsist? In •espondents ns made to 143. What is the "cash items" account? ]U. How are entries made in the remittance book? U.>. \\'hy is the branch clearing statement necessary? UC. What are "at credit advices"? U7. Head office entries? 148. Why are all correspondents' accounts not kept at a l)raiich ? 149. Enumerate and explain the teller's records. 1.50. Of what importance is the general ledger? What accounts are kept in it? 1.51. What are the advantages of the cash book ledger? 1.52. What is the current deposit ledger? How are the petty accounts in this ledger disposed of? 1.5.3. How is the savings bank ledger kept? When there are several such ledgers how are they balanced? 1.54. To what other book does the liability ledger correspond? What information is recorded in the lia- bility ledger? What are "Blue Books"? 1.5.5. Describe the collection register. How are entries made in it? 1.50. AVhat is the purpose of the collateral register? 1.57. How does the branch keep track of letters re- ceived? Of letters sent? 158. What is the general statement book? 1.59. How are past due bills recorded? IfiO. AVhat is the purpose of the produce book? Ifil. The balance book? Ifi2. Overdraft register? Ifi3. How are errors in the accounts corrected? 164. What is the proforma stationery book? lfi.5. How is the treasury cash accoimt kept? Are special registers often necessary? Under ircumstances? what C-VIII— 89 lilO QLIZ QUESTIONS CHAPTER V 167. Who approves the opening of a new acco 168. What precautions are taken upon oneni account ? 169. What particulars are recorded in the ledirei the opening of a new account ? 170. A\'hat s]i€vial provisions are made in the c professional partnerships? Why? 171. Joint stock companies? 172. Joint accounts? What is a joint account 173. Enumerate the special regulations govern married woman's account. 174. What is the procedure in the case of a di orcd bill, acceptance, and the like? 175. Who is authorized to make entries in the le. i-rom what sources are entries made? 176. Describe the procedure when a deposit is r 177. How IS money received after hours taken car 1/8. In what books does the teller make enl liow are the customers' pass books balanced? 179. How are customers' accounts certified? frau'd? '^^ ''*''* ''^*'"* ''" '^' ^'""^ ^"^ ««' 181. Discuss the certification of checks. 182. What precaution should be taken before c Jngacheck? 183. How are checks and deposit slips filed? W 184. What rules apply to the current account led. 18o. I nder what circumstances are duplicate i books issued ? 186. How is interest on savings accounts compul QriZ QUESTIONS 611 CHAPTER VI 187. \Miat facts slumld a manager know to determine Hlittlitr or not he should extend credit? What ques- tions should he ask himself about each loan? Give a simple rule to folloAv. IHH. \Vhat are the principal causes of failure accord- ing t(. Bradstrcet? What is the most important cause? Discuss the relative importance of these causes. 189. Why has the practice of requiring statements fron. borrowing cu.stomers grown? Discuss James G. Cannon's opinion of credit. 190. Analyze the principles and rules which govern the bank credit man. 191. What are quick assets? Current liabilities? 192. What may a large amount of cash on hand indicate? 193. Indicate the precautions necessary in estimating the value of merchandise and raw materials. 194. How would you analyze the bills and accounts receivable ? 10.5. What are fixed assets? How may rent be used as a means of determining business ability? What should be taken into account in estimating the value of rml estate as security? 196. To what extent may current liabilities indicate n man's worth as a credit risk? What precaution should ■i l»ank take in case of liabilities to relatives, firm mem- bers or employes? 197. What other factors m addition to those men- tioned should be considered in determining the desira- niiity of making a loan? 613 V IZ gilKSTlONS 108. U'hat «ei.er«| (,„e«ti«n.s noul.I v«u ask in deciding upon a Umni 1 no Why slHH.Id unnecessary risks. „„ „,atl sma I. be avoided? How mav a manage klen ::;tr'"' t.. infor„.tion*he need^'a^o^h 200. What points should the nianairer ob« writing the letter of application ? ^ CIIAPTKK VII 201 Describe the procedure in making call t WhT ^t -^'""^^ ''^ «»^P'-^ *«^»^e sec -0.. What IS the attitude towards loans to t sional or salaried men? Why? ^ 203. Discuss loans to farmers. V\^hat feature , ^:mllvr "^^^^ *'-^ ^"- -e desl^^ desirable?'" ^^''^* ""^"*'""^ «- ^"^ *« -I 205. Discuss the desirability and necessity nf m, loans to manufacturers and wholesale m"!^^^ " conditions should govern loans to whoJlej ^ch against notes as collateral rather than to discount t ^^ hat precautions should be obsened ? about overdrafts? ' '^"P""""" <^™'-' sp^Mo^rj?"."''' "" """""«" »f"W^ himself in spect to doubtful paper? Con«;r]*»r fk^ of this paper. Consider the various cla QITIZ QUESTIONS 613 CHAPTER VIII •JK). Distinguish between tlie security afforded under Stcfioris m and 88 of the Bank Act. 211. Disniss Section 88 in detail. •-'I J. To wliat extent is "the promise" security? •2V.I What is an assignment ? How shouhl it be made L'U. What is a declaration? Why is it important? •Jl.). Describe the form of note used in loans made under Sections 86-88-90. I'K). \Vhat (juestions should the manager be able to answer l)efore making advances? iil7. ^^'hat conditions govern loans made on ware- lioiisc receipts? I'lH. Discuss the practice of substitution in this con- nection. -Ml). How are "current seasons" determined? •Ji'O. How does the bank gets its money if a loan made under Sections 8G-90 is unpaid? '2'2^. Why are losses frequent in loans of this char- acter? What is the most important thing to remember in making such loans? 2J2. Under the interpretation of the Act define "bill of lading," "farmer," "goods, wares, and merchandise," "Krain," "manufacturer," "products of agriculture," "warehouse receipt." CHAPTER IX 223. Why is an accurate cost system necessary in a l)ank? 224.. W^hat poiht should be kept in mind when deter- mining the profit or loss involved in a deposit account? 014 QUIZ gi r.sTioNS 225. Divide small checking accounts into eight cIj Discuss them from the banker's viewpoint. Woi he profitable for the average bank to pay more \\ per cent interest on savings deposits? Explain. 226. What is a simple way of keeping tab on th penses of a bank? How many men are requirec million dollars of deposits in Canada? In the U Explain the difference. 227. About how much interest is lost annual Canada on outstanding items held over night fo daily local clearings? What elements of expense si be considered in making an exchange charge to a tomer? Explain. Work out the cost of handli hundred dollar check between Toronto and Montr 228. How is the loanable value of an account c mined ? What charges should be included in arrivi the cost per item? 229. Analyze an account so as to show its gross ings and the expense of keeping it. 230. Upon what does the amount earned on a count principally depend? Do debit balances entei the value of a deposit account? Why? 231. How is the net profit or loss on an excJ figured? How can the data be conveniently arra so as to determine the profit or loss? 232. What is meant by a check paid at par? 233. What changes might be suggested if on ani an account proves unprofitable? CHAPTER X 234. How often and when is a branch inspected what does an inspection consist? Explain. 235. What is the first step of the audit officer in mencing an audit? QUIZ QUESTIONS 615 230. How are the securities and cash checked? 237. How are the ledgers checked? What are the steps; • Hiis procedure? 23= -low are the sundries checked? 231 V^hat does the inspection liability return show? Accordif g to what ratings does the inspector value all the uceoiints? 240. Discuss the rules and regulations of a branch. 241. What are staff reports? icer m com- CHAPTER XI 242. Are efficiency methods applicable to bank work? What important efficiency methods are now being used in banks? Where do you think efficiency methods may he profitably employed in a bank? 243. What is the batch method? How does it work nut in practice? What are its advantages? 244. How are large numbers of checks handled when received in one deposit? 245. Explain the numerical transit system in the U. S. 240. What method has been suggested for Canada? 247. Describe the monthly statement system. What is the method of its operation? CHAPTER XII 248. How should collections be handled? 249. Can mercantile reports be relied on entirely? How may they be supplemented? 2J0. How can the expense account be kept down? 251. What points in an insurance policy should l)e considered when it is assigned to a bank to cover direct advances? Explain the 80 per cent co-insurance clause. 252. How are telegrams transmitted? 616 QUIZ QUESTIONS 253. How are clearing settlements made? \\ items are cleared in a Canadian Clearing House? 254. >Vhy are guarantee bonds a dangerous forn security ? 255. What precautions should be taken in regan a power of attorney? How may a power of attor be terminated ? 256. What regulations govern the despatch and ceipt of money parcels in Canadian banks? 257. What rules govern the custody of the bai securities in the vaults and safes? 258. How are lost checks and drafts recorded? 259. What interest has the bank in a depositor's m 260. Why should strict secrecy be observed in c nection with all transactions between a bank and customers ? 261. How may a young man prepare himself to a banker? PART III: FOREIGX EXCHANGE CHAPTER I 269. Define exchange. Distinguish between fore and inland exchange. Which is more complicat ^^'hy are the charges for inland exchange particula low in Canada? 270. Discuss inland exchange in the United Stal 271. lentil 1912 New York funds were generally a discount despite the fact that the "balance of tra( was adverse to Canadp. Why? Why has Canada pra( cally no exchange market of its own? QUIZ Ql'ESTIONS 617 J? What )use? IS form of regard to f attorney ;h and re- :he bank's led? iter's will? id in con- Is and its self to be GE n foreign iplicated? Tticularly 'd States, lerally at of trade" ia practi- 27'i. How does the necessity for foreign exchange arise ( 273. What is mint par? 274. What are gold points? 27.3. Of what importance is the fixed par of exchange? 270. A cotton merchant in the United States has sold 100 hales of cotton to a spinner in liiverpool. Kng. Explain how the payment is effected. 277. What is the difference between "discountable" and "rebatable" commercial long bills? 278. In a general way, which is the safer, a commer- cial bill drawn against cotton, or a commercial bill drawn against meat? Why? 271). Why are "clean" bills a risky kind of exchange ill which to deal? 280. Assimie that bonds have been sold by a banker in Xew York to a banker in liOndon. lixplain how they will be paid for. 281. What are the three main classes of "bankers' long l)ills"? 282. W^hy do international loaning operations bring \un^ bills of exchange into existence? 283. How do "finance bills" differ from bills orig- inating as a result of foreign loaning operations? 284. What are the main limitations to the issuing of tinance bills? CHAPTER II 285. Explain the operation of a banker's selling de- mand exchange against a remittance of demand ex- change. 280. Does the credit of the drawer of a commercial bill f^lS QlIZ ylKSTIONS have much of an effect on the rate of exchange at \ it can he sold^ •J87. Why most hankers who make a practice of ing "cahles" keep good balances abroad. 288. What fixes the difference in the rate of excli between "cables" and "demand." 289-290. Explain the operation of a banker's st demand bills against remittances of long bills. \ long bills are remitted, when does the balance al become available ? 291. Whv are different bills of the same kind counted abroad at varying rates? 292-93. Explain how foreign money is loaned i American market. 294. How is it that foreign money can be loane here without any actual cash being sent over? 29.>. \>'hat is meant by the "risk of exchange" or eign loans? 29(). Show why profits made out of this kind of ness are large. 297. What is meant by investing money in excht 298. Show the principal Ijenefit of investing ii in exchange. 299. In the above operation, long bills remitted al are not discounted. Why not? 300. WHiat is the reason for "arbitraging" ii change? 301. W^ithout giving exact figures, explain an trage operation in foreign exchange. 302. Why is great skill required for operatic this kind? Ql'IZ ylESTIONS (ilU CIIAPTEU HI 303. U'hy is commercial credit business growing in ;{()4. What is the primary purpose of a commercial 3(1."). How does the shipper of the merchandise get his iiiotiry ? 30(1. What part does the credit of the importer play? 307. Explain the general purpose of a "trust receipt." 3()H. What is the great advantage of a conmiercial mdit to at) importer of merchandise? 3(M>. AVhat is its advantage to the shipper of the i>'()(»(ls? 310. 1(1 a commercial credit transaction the banker puts ii)) IK) actual money, and yet the shipper of the mer- iliaiulisc receives his money at once. Where does it come flOIll? 311. What are export credits? 31'J. AVhat influence does the issue of commercial cred- its I'xert on the stability of the commercial structure? CHAPTER IV 313. \\\\sl\ are the main divisions of dealings in ex- diaii^e originating from international security trading? 3U. Explain how the replacing of maturing invest- ineiits held abroad gives rise to foreign exchange trans- actions. 31.), Show the usual method of financing international siKciiIation in securities. 31(1. Define "arbitrage" as applied to securities. 317. Why is there ever any difference in the price of til' same security in two different markets? 6^20 QUIZ QUESTIONS 318. What constitutes u fair profit in stock arbi In bond arbitrage^ 819. Why do operations of this sort at tin strongly influence the exchange market? 320. Why is the exchange market so gotul ai cator of tlie trend of international security dej CHAPTER V 321. Why is there a "i)riniary" movement of 322. What is the secondary distribution? 323. Why do small exports result in high ext rates? 324. Point out the influence of low money ra foreign exchange. 325. How do high money rates afi'ect the ext market ? 326. Show how international buying and selling ments of securities afl'ect the exchange market. 327. What is a "direct" movement of gold? 328. An indirect movement? 329. Why is the business of shipping gold c trated in the hands of a few bankers? CHAPTER VI 330. Why is it desirable for an exporter of me dise to know something about foreign exchange 331. How may an exporter of goods to (iermai his payment in dollars, instead of in marks? 332. How long does it take for the exporter his money? Qi'iz giiES'noNs 621 iVitl IIoAv are banking commissions on foreign ex- t'liaii^fc transactions determined? :VM. What is the advantage of drawing a draft direct oil the foreign purchaser of goods? ;j.'J.). \N'hy is it becoming more common practice to draw (h-afts? :i'M}. What are "export letters of credit"? .'WT. Wliat are the advantages of this method of paymi'iit if ;{.'{«. Show by an example how this method works. .'WD. Why are payments for trade between this coun- try and South America bandied through London? ;J4(). Why do ninetv-dav bills sell at a lower rate than sijjlit bills of exchange? .'141. Where is the market for long-period bills of exchange? CHAPTER VII '.U'l. Reduce £1481 to dollars when the rate of ex- fliaii^rc is $4.8525. 'M'i. How is a rate of exchange made on ninety day paper' .'J44. How is interest figured in foreign exchange transactions? .'U.). Xanie the general regulations governing sterling (MJian^c. State a simple rule for converting sterling to dollars at par rate. .'U«>. How are the book entries made for foreign ex- rlian^e transactions? •'U7. How are demand drafts entered? •UH. How are bills of exchange purchased entered on the books? 622 Ql'IZ gi'ESTIONS CHAPTER VIII 349. Discuss the currency of the Latin Union tries. 850. Find the cost of a draft for 672 francs at I'ents per franc. 351. How does the franc quotation differ fron usual exchange quotations? 852. How are quotations for time bills draw France derived ? 858. What is tlie cost in dollars for 1,000 marl 9514? 354. What are the regulations governing exch with Holland? 355. What is the common unit in the Scandina Union? In Austria? 856. What are the principal difficulties of the nese exchange situation? ^Vhat is the mint par v of the yen? 857. Give the rule for converting dollars into fon currency at the mint par value. CHAPTER IX 358. What is non-commercial exchange? How d it arise? 359. What are the principles underlying the issua of drafts? 360. What is an advice? Why is it used? 361. What precautions are taken to avoid difficult} establishing the bona fides of drafts? 862. How is the cost of drafts ascertained? QI'IZ QUESTIONS 623 3<5.3. Distinguish between drafts and travelers' checks. im. What are the principal features of travelers' tliccks? .{*».>. How are travelers' checks paid ? ;}«»♦». What deductions are made if any? '.m. How are travelers' checks redeemed? IW». What is the letter of indication? ;IH9. How can the holder protect himself if travelers' cheeks are lost? 370. What is a letter of credit? 371. How are payments made to the holder of a letter (if eredit? 372. What are circular notes? 373. What is a foreign money order? 374. How are foreign money orders paid? 375. What are mail remittances? Why are they nec- essary? B issuance INDEX Arrf (»»»ncp hilla, 434. .\rrniiitiin96. At credit advices, 174-175. Attorney, powers ot, 207, 391-394. Audit, the, 346. Auditors, duties of, 26. Austrla-Hungary,Canadlan exchange with, iM. Averages and percentages, statement of, 125. B Bailee receipts, 478-479. Balance Book, 198. Sheet, in head office, 131-132 Bank Accounting, 147. Assets, purchase of, 38. Cost accounting, 314-344. Credits, Cannon on, 234-236. Department in a, 360. Dissolution of a, 39. Expenses in a, 383. Head office ot a, 113-121. 685 MICROCOPY ttfcSOlUTION TEST CHART (ANSI ond ISO TEST CHART No 2) 1.0 I.I 1.25 ^ 1^ IIII2.0 1.4 1.8 1.6 ^ APPLIED IIVMGE Inc ^^ 1653 Ec Mam Street ~«S Rochester. Ne» York 14609 USA ^S (■"6) '*82 - OJOO - Phone 5= (716) 288 - 5989 -Fax 626 INDFX Bank — (Conlinufd) Iii.s])cction, questions on, 571-581-. Loaning the funds of a, :2i8-ij8. Premises, 101-103. Profits, 8+, Returns to government by. 39. Statement, analysis of a, 80-111. Statements, isJi. Stock, regulation of, ■22-22. Act of 1871, 6, 15-46. Last revision of, 7. Circulation Redemption Fund, ^0, 51. Kxaminations in the United States, 17. Xofc issue, limit of, .50. Of British North America, branch- es of, 410. Of Montreal, branches of, 409. Of Nova Scotia, branches of, 409. Banks As partners in a business, 99-100. Board of Directors in, ;21. Branch, in Canada, 22-2. Branch system of, 47-79. Business and powers of, 33. By-laws of, 2\. Canadian, essentially national, 11. Cash reserves, 28. Deposits, 37. Dividends, 27. High position of, in Canada, 76. Incorporation of, 19. Internal inspection of, 345-357. Kinds of, in Canada, 9-14. Labor-saving methods in, 358-379. List of, under Bank Act, 18-19. Loans and securities of, 34-36. Misdemeanors of, 44. Note issue of, u'8-31. Organization of, 20. Rules and regulations of, 353. Shareholders in, 22. Special reports of, 27. Tables of circulation, 55. Their treatment of customers in Canada and the United States, 72-73. "Banks and Banking," quo from, 1. "Banking and Commerce," quo from, 270-273. Banker's commission on foreif change, 477. I^ondon balance, 448. Long bills, 438. Banking, History of, in Ci divided into four periods. Practice, 113-413. Principles, 1-111. System, national, 6. Banque National, branch of, 41 Batch method of handling worl 365. Benefits To exporter, in foreign exc 476. To importer, in foreign exc 475. Berlin, drafts on. 429. Bill of lading, definition of, 31 Bills and securities, hypothecat 275. Bills Of exchange involving risk, Of Exchange Act, 412. Of lading, 303. Payable, how listed, 46. Purchased, record of, 525. Receivable, 245. Register, 523. Sold for finance purposes, 4 The security back of, 469-4'i Board meetings, 114. Bonds, issue of, by Municip 266. Books needed for branch oLici 149. Bookkeeping Head office, 122. Of foreign exchange, 521. Bordwell, Mr., on the cost of < 329. Borrower, the. 68. And the branch bank, 68. Questions to be asked of, 24! INDEX 627 Borrow rr — (ConHniierl) Ht(Hiired to give statements, ;;33. Ability to dihtiiiguish, i-2H. Horrowcr's statements, form of, :»38- -'t3. ' Dnrrowing, two methods, in Canada, rn. Br.idstreet, summary of failures by, .'30--';{l. Briiiicli Imnks, 74. And panics, 74. Hooks and records, 147O0t. Clc.irings, how recorded, KH. Clciring statement, 1;J9-130, 171- I7t. I'.xprnses of, 3-23. Foreign. 40tt. Insjiection of, 3t5. Statistics of, 67. Branch staff, the, 1.36-U6. Branch system of hanks, 47-79. llllity of the. 64-b(i. B (ckcnridge. R. M., on the Cana- handled, 31 Commercial Banks, 9. Bills, clean, 437. Commercial credit Application for, 461. Finance illustrated, 467. Growth of, 480. The financing of exports. Commercial Letters, many kinds of, 5t Long bills, 433. Terms, table of, 4.j. Commission on foreign loan; The question of, 504. Continental exchange, 527-53 Contingent liabilities, 248. Contract with customers, 2!] Conversions and fluctuations Correspondence, three classe! Correspondents' accounts, 52 Correspondents' ledgers, 123. Cost accounting, bank, 314-3 Principles of, 316. Cost Data on checks, 329. Of drafts to purchasers, 54 System, need of a, 314. Counterfeit notes, 32. Country bank.s, loans by, 28: Credit, 229. A definition of, 229. Establishing, 71. Finance, commercial, illu 467. Letter of, how used, 467. Letters of, for travelers, 55; Loaning on, in exchange, 4j Man, rules which should gov 237. Merchant seller's, 446. The science of, 937. Credits, commercial — The fir of exports, 463. INDEX 629 And bank issues, 57. Ami issue of notes, JS. MDving of, i~. I'lirri'iuy, 59. I'.uKTfteucy, 59. il.iiniltoii oil, 3. Currt'iit I)<|iosit ledfrer. 189-191, l.ialiilities, J 17. Loans, 98. Season, in advanees, 308. Ciistouiers, 319, C'trtificution of accounts of, 219. Contract with, 292. How recorded, 207, Out-of-town, -M9. Pass-books of, 217. Iteports on, 382. Wills of, 399. D Daily routine of the branch office, 137-139. I)t nicrs, advances to, 285. Dealing in futures, 456. D(l)ts, overdue, 100. Declaration of goods, on advances, 293-295. Default on assignment, 309. Demand exchange, sale of, 446. Denominations of notes, 49. Departments in a bank, 300. Deposit business, the, 205-227. Deposit slips, 217. Methods of filing, 225. Special, 366. Deposits, 37. Hank, 37. My the government, 86. Demand, 83. I'lsewlicrc, 85. Interest on, 106. Payable after notice, 81. With other banks. 89. Depreciation On bank buildings, 102, 108. On bills of exchange, 437. Description of goods, in assignment, 288. Directors of banks, 21-22. Duties of the, 113-115. Discount Blotter, 160-162.. Clerk, duties of, 144. Diary. 163. Register, for branch office, 158. Report in head office, 131. Discrepancies book, 200. Dissolution of a bank, 39. Distribution of gold, 491-493. Dividend register, 127. Dividends of banks, 27. Documentary and time bills register, 523. Documentary exchange, value of, 435. Dollar credits, 501 et. seq. Dominion Bank, branch of, 410. Doubtful paper, 280. Drafts, 281. Discounting, 281. Drawn against securities, 439. Drawn by bankers, 438. Drawn on the importer, 504. Principles underlying the issuance of, 539. Register of, 165-166, 525. Sold against remittances, 449. Specimen, 540. \'ersus travelers' checks, 544. Due to banks, items in statement, 85. Dunbar, Charles F., defines a bank, 9. On elasticity of currency, 53. Duplication of entries, how avoided, 359. Duplicate pass-books, 226. "Economics of Business," quotation from. 10. Education of employees, 401-403. Efficiency methods in banks, 358. Elasticity of notes, 52. <»;{o INDEX "l-;irnir„ts „f FoniKi. Kxchange, 'In," quoted, 4,i(;. J>nj)loyee.s, educdtion of. 401-tOU. Kiulorsements, rules reN|)eitinK. Ml- oTO. Knglish money, its equivalent in Ca- nadiun. jlJ. Exchange, jll. Advance money on, jll. And imports, 463-481. Arbitraging in, 4jH. Asiatif, 534. Between France and Canada, how reckoned, 5iS-331. Bills of, involving risk, 430. Charge on, 3:^5. Continental, 5^7-537. Documentary, 4;«. Foreign, 415-566. Foreign, and the international se- curity market, 48^-490. Foreign, influences affecting. 49{. How it is quoted, 4:^8. Inland, 3^4, 415. Interest on, how figured, 515. Market, mechanism of the, 415-445. Xon-commercial, 538. Purchase of, 454. Quotations between Canada and' the United States, 587-59i. Rate of, 37, 419, 489. 513. Received, in accounts, 336. Risk of, 453. Sterling, 51:?-526. Sterling, features of, 518-531. Underlying principles of, 430. Executor, power of, 248. Expense account, items in, 383. Expenses of branch banks, 3J2. Export letters of credit, 506. Export trade, in connection with for- eign exchange, 500-511. Exporter, the, 476. Benefits to. in foreign exchange, How he obtains remittances, 503. Exports And imports, the financii Financing, |)y „H.a„s 67. Farmer's statement of affaii Fiat money, experiment in. Finance bills, 44:3-445. Financial statement in hea 131. Financing exports by means lar credits, 501 et seq. Fish products defined, 312. Fluctuation in loans, 69. Foreign Branches, 406-410. Coins, values of, 527-537. Drafts, stamp duties on, 58, Loans, commission on, 454. Foreign Exchange, 415-566. And imports, 463-481. And the international s market, 482-490. Banker's conmnssion on, 47' Bookkeeping, 521. Definition of, 421. How money is made in, 446 Influences affecting, 493-495, Operations in connection wi port trade, 500-511. Foreign money Loaned by long bills, 439-44S On joint account, 451. Orders, 561-5G3. Remittance, 538-566. Tables of, 535-536. A'alues of, based on mint pai Forest, products of the, deflnec Form of statement by borrower 243. INDEX 631 France, » B financing of, uu C'unadian exchange with, 538-531. "H-ans of dollar Eurly financial agreement with .seq. Canada, 2. uence of, upon ex- Stamp duties in, 586. Fraud, guarding against, 232. i, 418. i ret- Baniiing .Act, I. 1 Futures, dealing in, 456. causes of, 330, 'f, MJ. G 207. of affairs, Sji. Uardin, John, on finance bills, 444. nent in, 2. General ledger 15. 111 branch office, 181. t in head office, Of the head office. 133. Uetierul manager, duties of, 115-117. •y means of dol- (ieiieral statement books, 197. et seq. Clerinany ■d, 313. Canadian exchange with, 533-533. , 69. Stanip duties in, 586. Gilbart, quoted on banking. It). Gold. 497. 27-537. Cost of buying and shipping, 497. es on, S85-58U. -Methods of moving, 496-498. on, 454. Profits on shipments of, 498. 15-566. Iteserves, 29, 48, 61, 96. 81. The production of 491. tional security The movement of, 491-499. Gold or specie points, in exchange. n on, 477. 436-428. Gold, standard, almost universal, 433. Goods. e in, 446-460. Assignment of, 287-393. . 493-495. Declaration of, on advances, 393- ection with ex- 395. 1. Subslitution of, 303-308. Wares and merchandise defined. !, 439-442. 313. >I. tlovernment Funds, handling of. by banks, 86. Savings bank, 11. ('•rain, definition of, 313. Great Britain, stamp duties in, 585. Gross profits how determined, 110. (irowth of commercial credit, 480. Guarantee bonds, 389-390. open H Hague, George On loans to Manufacturers, 270- 37.3. On the duties of the general man- ager, 115. Hamilton, .Alexander, report on Banking, 3. Head office, the, 113-121. Entries, 176. Records 133-135. High money rates, influence of, upon exchange, 494. Historical sketch of banking in Can- ada, 1-8. Holland, Canadian exchange with, 533. Husband's authorization to bank account, 311. 1 lypothecation, 375. Of bills and securities, 275. Of collateral, 360. Of notes, 374. Of warehouse receipts, 303. Identification of check-holders, 225. Importer, the, 475. Benefits to, in foreign exchange, 475. Drafts direct on, 504. Imports -And exports, the financing of, 46S. Foreign exchange and, 463-481. From United States, 418. Incompetence, a cause of failure, 232. Incorporation of banks, 19. Inexperience, a cause of failure, 232. Influence of banks upon business, 75. Inland exchange, 324. In Canada, 415. In the United States, 417. Insolvency, rule governing, 42. Inspection Internal, of banks, 345-357. Liability return, 351. Of banks, questions on, 571-581. 632 INDEX Inspector, bank, duties of. 344. Insurance, 245. Ample, should |je carried, 245. Items of, 384-387. On goods under assignment, 295. Interest, 448. On cable transfers, 448. On call loans, 93. On deposits, rate of. should be steady, lOtf. On exchange, how figured. 515. On long-time foreign exchange, 510. On savings accounts, 237. On time deposits, 82. Rate of, during financial stress, 70. Hate of, in government banks. 12. Rates of, on loans, 37. Tables, 328, 516-518. Internal inspection of banks, 345-357. International arbitraging, 486. "International Exchange," quotation from, 436. International Security dealings, three classes of, 482. Security market, the, 482-490. Speculations, 484. Trading in securities, influence of, upon exchange, 495. Interpretation of terms in assign- ments. 31 1-313. Investments, knowledge of, a neces- sity, 483. Issuance of drafts, principles under- lying the, 539. Japanese money, equivalents of, 537. Joint account, loaning foreign money on, 451. Joint accounts, 208. Joint stork companies, 208. Stock comjianies, loans to. 2C1-265. Junior, duties of the, 145. Labor-saving methods, 348 Lawson, W. H., on "Bankir ada," 77. Ledger-keeper, in the brai 142. Ledger, rules for keeping, ; Ledgers, audit of, 318. Leroy-Hoileau, quoted on b: Letter of advice, how drawi Letter of indication, for checks, 548. Letters of credit, 480. As an aid to business, 48 Export, 506-509. For travelers, 552-557. How listed, 46. How used, 467. S])ecimen. 464. Letters received register, IS Liability Ledger. 192-194. Record, 253. Return, inspection, 35L Liabilities Contingent. 248. Current. 247. Lien notes, 274. Limitations to finance pap« 444. Liquidation of advances, 309. Loan companies, 12-14. Loaning .\ bank's money, 228-258. Foreign money on joint « 451. On credit, 452. Loans, 35. Bank. 35. Call. 90-92. 259. Classification of, 259-282. Conuuission on, 454. Current, 98. Distinguished from overdraf Foreign. 92. Reasons for granting, 254. To fanners, 267. INDEX 033 IPC paper issue, I oaM>— ( Con tinutd) Tu juiiit stock companies, 36l-26i. I'o inunufacturers and merchants, ■270. I'o municipalities, -266. To professional men, 366. To retail merchants, -269. Vuiunir of, 69. I.undon Uanltrr's balance in, 418. Branch bunks in, 407. Drafts on, 428. Letters of credit on, 468. Quotations for American exchange, 592-593. The center of gold distribution, 491. Why credit is issued on, 509. J.ong bills, various kinds of, 438-442. i.oose-leaf accounting, 151. Losses on loans due to ca ; dessness, :{I0. Lost and destroyed notes, 63. Loxt checks and drafts, 398. Lost travelers* checks, 551. Low money, as a factor in exchange, 494. M .Machine statements of accounts, 375. .Machinery and fixtures, in a state- ment, 240. .Mail remittances, 563-566. -Manager, branch, duties of the, 136- 139. .Manager, qualifications of, for loans, 228. Manufacturer, definition of, 312. .Manufacturers, loans to, 270-273. .Manufacturing business, statement of, 244. .Margin maintained on advances, 298. Margraff, A. W., on bills of exchange, 436. Market, exchange, mechanism of the, 415-445. Market influences on exchange rates, 489. Maturing investments, replacement of, 483. Meade. E. S., on banking, 10. Merchandise Analysis of, 239. Exports, influence of. upon ex- change, 493. Merchant seller's credit, 446. Merchants Loans to, 270-27.3, Bank of Canada, branches of, 409. Mint pur, in exchange, 422. Misdemeanors of banks, 44. Monetary system of Canada, 47. Monetary values, 423-426, 527-537. "Money and Banking." quotation from, 10. Money How made in foreign exchange, 446-460. Information necessary in lending, 229. Parcels, 395. Rates, time, 455. Received after banking hours, 217. Orders, foreign, 561-563. Monthly liability return, in head ofBce, 132. Monthly variations in circulation, 58. Montreal Rate of exchange with New York, 419. Bank of, founding of, 4. Mortgages, in statements, 247-248. Movement of gold, the, 491-499. Municipalities, loans to, 265. Murray, Sir George H., on banking costs, 330. Murray, Lawrence O., on overdrafts, 279. N National banking system, 6. Ket profit, how determined, 108. New accounts Opening of, 142. Safeguards in opening, 205. New France, banking history in, 3. 634 INDEX I New York A center of exchange, 413. An international money market, 93. Branch banks in, 4U7. Call loans in, 91. Funds in Canada, 418. Varying rates of exchange with, 417. "New York Financier" quoted on ar- bitraging, lAtf. Non-commercial exchange, i38. .Note issues and the branch system, 47-79. Note issues in the British Colonics, ■29. Notes Amount of, in 1913, 48-49. And checks of other banks, 89. Circular, 557-5til. Circulation of, ^28. Collateral, 373. Counterfeit, 32. Dominion, 49. Elasticity of, 52. Hypothecating, 274. Lost and destroyed, 63. Outstanding in the United States, 64. Payment of, 31. Pledge of, 30. Renewals of, 377. Seasonal fluctuations of, 53-54. Used for assignment, 296. Notice to warehouseman, 304-305. Numerical transit system, 368. O Opening accounts, how done, 205. Operating expenses a source of loss, 315. Organization of banks, 20. Overdraft register, 198. Overdrafts. Guarding against, 223. Not the right class of loans, 278. Overdue bills, in head office, 132. Panics, effect of, upon brui 74. Pu|)er, safeguarding of, 23 Paris, drafts on, 429. Par payment of checks, 3t Partners, signatures of, 39^ Partnership accounts, 207. Partnership, conversion of. Partnership, non-trading, fi Pass-book Certificate, 220. Heceipt, 221. Savings bank, 226. Use of, 217, 378. Pass-books, duplicate, 226. Past due bills register, 198. Payment, stopping, 398. Penalties for default, 310. Penalties for violating the I 43. Percentage Bank of Cana< ment of the, 79. Percentages of failures, 231 Postal Savings Bunk, 11. Power of attorney, 391-395. Pownall, George H., quoted profits, 84. President, position of, in b Principles of cost accountin Produce book, 198. Production of gold, the, 491 Professional men, loans to, 2 Profit and loss statement, 10 Profits Gradual decrease in net, 1 In arbitraging, 488. In banks, Pownall on, H4. Made from the purchasi change, 454-455. Pro forma stationery book, 9 Promise to give receipts not ity, 286, 291. Promissory note, forms of. Protest, waiver of, 213. Provincial banking, 4. INDEX 635 pon branch banki, if Canada, sUt^ I rouNcial Note Act, 4. I'uiictuulity, drsirubility uf, 137. (,>ui'l)tr, tint hunk in, 4. (^ti> >ti()ii ul' cuinmiii.tion, thr, 504. t^ui'^liunt wliic-ti should btr u!>k«d of a Ijorrower, -'49--'50. (^uiik ussfls. J'M, R Hiitf of rxchungc, how made, 513. Kaw iiiatrriuls, in u ittutenient, Hi. Kfal estate \-< an asset, 2i6. As stciirity for loans, 101. KcaMms for grunting u loun, i'3t. Kcitipfs and assignments, udvunoes 1)11, .'8U-313. Kicords Of routine work, 134. Of tlie head office, 123-135. Itrilcriiption At pur, of notes, 31. I'lmd for liank paper, 30. Of travelers' checks, 547. Itrfusal of certificate to banks, 21. Urinittunce Hook, 170-172. i'orei|rn, 538-560. ilciiiittances Hy mail, 563-566. Of sixty-day bills, drafts sold against, 449. Id newals of advances, 309. Kenewuls of notes, 277. liftital of property, 346. Heplacement of maturing invest- ments, 48.3. Heports on customers, 382. Kfserve fund, the, a margin of safety, 109. Hescrves, percentage of, to assets, »5-96. Kestricted letters of credit. 557. Retail merchants, loans to, 2G9. Upturns to government, by bank, 39. Heturns to head office, 139. Hisk taken on foreign exchange, 477. Koutine work, butch method of han- dling, :i63-:ui5. Hoyal Bunk of Canada, branches of, 410. Itules and regulations of banks, 353. Kules of credit, 237. ex- Safes and vaults, 396. Sale of demand exchange, 440. Savings accounts Interest on, 227. Small, 321. Savings bank department, 925. Savings bank ledger, 191-192. .Savings hanks, function of, 11. S<-undinavian Union, Canadian chunge with, 534. Schedule of rates on cash items, 338 Science of credit, the, 237. Seasonal fluctuations of notes, 53-54 Secrecy in transctions, 400. .Secretary, duties of the, 120. Securities. Analysis of, 90. Drafts drawn against, 438. Hypothecation of, 275. Of trust companies, 13. Security Back of bills of exchange, 469-470. Dealings, international, three class- es of, 482. Different kinds of, 34. Distinguished from a promise, 286. Margin of, 259. Market, the international, 482-490. To note holder, 51. Selling futures against futures, 456- 457. Shareholder's audit, 16, 26. .Shareholders in bunks, 22. .Shares And calls of bank stock, 23. Transfer of, in hanks, 23. Shippers, advances to, 285. Sight drafts, exchange on. 438. G.')6 INDEX Signatures Of customPDt. i07. Of partners 'Ml. Signing of l)iiu |,v |,„nk,, 31, Silver stunUurd. where niuintained. ii'X Siimlj urc'otint!) Cost of. ,n j. Increase of, :n8. Sovereign U,.i,|<. fallurr of. OS. Spanish mill dollars, A. Special Deposit slips, ;Wo-. Hegisters, in branch office, JOO-MH Specie and notes, analysis of. HH Specimen forms and signatures for i'orrespondei.ts, 54;J. Siwciilations. international, tHl. Staff reports, 3j»-:WT. Stamp .luties on foreign drafts. .WJ. M(}, Statement by borrower, form of. j-.m- statement of affairs, required of bor- rowers. i>33. Statements. Annual and s))ecial, 24, Changes in. 44. Made on machines. 375. Of borrowers, why necessary. 335 Statistical books at the head olBce, 1*4. Sterling exchange. 513-526. Features of, 518-531. Stock booVs How used. 134. Certifu-ates. register of. 127. Ledger, form of, I3(i. Stop payment notice. 3<)8. Substitution agreement, 307. Substitution of goods, 303-308 Suminary of the Bank Act of 1913, Sundries, audit of. 3|0. Sundry returns, in bend office 13^ Su,)erintendent of branches,' duVies of. 118. Susj)ensioii, rule governing, 42, Telegrams, how handled, 'l>ller. tlie. in the branch ( 'I'eller's records, I7H-18I. •riK-ory anks for stwk, I Transfer of funds. .334, 447 Tra"si« numbers in Canada, 'rra\ elers" checks, 544-553. Treasury cash, in branch offl Trust and loan companies, 1 Trust receipts, 471-475. U Union Bank of Canada, br 410. Value of early news in arbi 487. Values Of coins of various countri 430. Of foreign coins. 537-537. Of foreign money based par. 437. Vaults and safes, 39C, w Wage-earners, rights of, 293. Waiver and authority to charg items, 210. Waiver of protest, 213. nada, branch of, f countries, 433- IXDEX 6d'i Walltrr, Sir F.ciinund On liHiikiiii:, H. Oil i'hII Iiihiis, 01. WHrilioiiM-iiiiin, noticF to, '.VH-'Mj. Warrlioiisc rwript.s And ii^igiiincnts, udviinccs on, >:i-;n:i. |)i liiiltion of. 'M-J. loiiiis of, :«l|. IImm ii.Ncd, 30.», IlypnttMTiitinn of, 303. Weekly report on l)UNlneft!i, In head offliT, i;u-i:h. White, llorHce Defliirt* n linnk. 10. (jiioteil in ".Money and Ranking," Wliolesiile nierclinnts advances to, .'8.). Women, married, accounts with, iOM.