THE LIBRARY OF THE UNIVERSITY OF CALIFORNIA LOS ANGELES Rte.U.S.fWT. OFFICE Modern Business A SERIES OF TEXTS PREPARED AS PART OF THE MODERN BUSINESS COURSE AND SERVICE OF THE ALEXANDER HAMILTON INSTITUTE ALEXANDER HAMILTON INSTITUTE NEW YORK Modern Business Editor-in-Chief JOSEPH FRENCH JOHNSON Dean, New York University School of Commerce, Accounts and Finance Associate Editors: PETER P. WAHLSTAD, ROLAND P. FALKNER Titles Authors Business and the Man Joseph French Johnson Economics of Business \ Joseph French Johnson { Frank L. McVey Organization and Control Charles "W.Gersten berg Factory and Office Administration . . Lee Galloway Marketing Methods • Ralph Starr Butler Advertising Principles Herbert F. De Bower Salesmanship and Sales Management . . John G. Jones Credit and the Credit Man Peter P. Wahlstad Accounting Principles Thomas W. Mitchell Cost Finding Dexter S. Kimball Corporation Finance William H. Walker Business Correspondence Harrison McJohnston Advertising Campaigns Mac Martin Inland Traffic Simon J. McLean Foreign Trade and Shipping Erich W. Zimmermann Banking Principles AND Practice . . . E.L.Stewart Patterson Domestic AND Foreign Exchange . . . E.L. Stewart Patterson Insurance and Real Estate j w r'^^'^"'"''^^ ( Walter Lmdner Merchandising John B, Swinney The Exchanges and Speculation .... Albert W. Atwood Accounting Practice and Auditing . . . John T. Madden Financial and Business Statements . . , Leo Greendlinger Investment Edward D. Jones Commercial Law ........ Walter S. Johnson BANKING PRINCIPLES AND PRACTICE BY E. L. STEWART PATTERSON Superintendent of Eastern Township Branches, Canadian Bank of Commerce MODERN BUSINESS . VOLUME 16 ALEXANDER HAMILTON INSTITUTE NEW YORK COPTRIGHT, 1911, 12, 13, 16, 17, BY ALEXANDER HAMILTON INSTITUTE COPYRIGHT IN GREAT BRITAIN, 1914, 17, BY ALEXANDER HAMILTON INSTITUTE The title and contents of thia volume, as well aa the business growing out of It, are further protected by laws re- lating to trade marks and unfair trade. All right reserved, including transla- tion into Scandinavian. Registered trade mark, Reg. V. S. Pal. Off., Marca Registrada, M. de F. Made in V. S. A. HI, 21 ci ?n PREFACE It would be impossible within the narrow confines of one volume to deal exhaustively with so extensive a subject as that of Canadian banking practice, but it is hoped that the parts of this subject dealt with herein will be found to be treated with due regard to their relative importance, and that no really essential information has been overlooked. As far as possible, all matters coming within the scope of the Bills of Exchange Act have been purposely omitted, because an intimate knowledge of the act itself is essential to every business man and banker. Altho Canadian banks may differ in bookkeep- ing and methods, the general principles and aims of their systems are the same, and the reader should have no difficulty in understanding the forms and methods explained in the Text, and in interpreting them by his own experience. Too specific explanations have been avoided as far as possible, lest the principles involved should be buried under a mass of detail. The present edition of the Text has been revised and brought down to the end of 1916; the bank and other financial statements presented reflect conditions ex- isting prior to the commencement of European hos- tilities, inasmuch as these statements represent the ordinary position of the banks. More recent state- 930817 vi PREFACE ments reflect the abnormal conditions induced by the war, and are therefore but of temporary interest. E. L. Stewart Patterson. Slierbrooke, Que. TABLE OF CONTENTS PART I— BANKING PRINCIPLES CHAPTER I HISTORICAL SKETCH SECTION PAGE 1. Introduction ^ . . . . 3 2. New France 4 3. British Occupancy (1763-1*817) 5 4. Army Bills 6 5. Provincial Banking (1817-1867) 6 6. National Banking System 8 7. First Bank Act 187i 9 CHAPTER II KINDS OF BANKS 1. Commercial Banks 12 2. Savings Banks 13 3. Trust and Loan Companies 14 CHAPTER III THE BANK ACT 1. The Bank Act of 1913 17 2. Changes in the Bank Act . . . . - . . . 18 3. Shareholders' Audit 18 4. Abstract of the Bank Act 20 5. Title and Interpretations (Sections 1-2) ... 21 vii viii BANKING PRINCIPLES SECTIOX PAGE 6. Application of the Bank Act (Sections 3-7) . . 21 7. Incorporation of Banks (Sections 8-12) . . .22 8. Organization of Banks (Sections 13-17) ... 22 9. Refusal of Certificate 23 10. By-Laws (Section 18) 24 11. Board of Directors (Sections 19-28) .... 24. 12. General Powers of Directors (Sections 29-30) . 25 13. Regulations as to Shares and Shareholders (Sec- tions 31-32) 25 14. Increase or Decrease of Capital Stock (Sections 33-35) 25 15. Shares and Calls (Sections 36-42) .... 26 16. Transfer and Transmission of Shares (Sections 43-53) 26 17. Annual and Special Statements (Sections 54-55). 27 18. Shareholders' Audit (Section 56, all new) ... 28 19. Special Report to the Minister of Finance (Sec- tion 56a, new) 29 20. Dividends (Sections 57-59) 30 21. Cash Reserve (Section 60) 30 22. General Note Issue and Circulation of Notes (Sec- tion 61) 30 23. Additional Issue for IMoving Crops (Section 61, Sub-sec. 15-20) 31 24. Central Gold Reserve Issue (Section 61, Sub-sec. 3-13) 31 25. Note Issue in British Colonies (Section 62) . . 32 26. Pledge of Notes Prohibited (Section 63) . . . 32 27. Bank Circulation Redemption Fund (Sections 64-69) 32 28. Redemption at Par (Sections 70-71) .... 34 29. Paj-ments in Dominion Notes (Section 72) . .34 30. Signing of Bills, etc. (Sections 73-74) ... 35 31. Counterfeit Notes (Section 75) 35 CONTENTS ix CHAPTER IV THE BANK ACT (Continued) SECTION PAGE 1. Business and Powers of a Bank (Sections 76-83) 36 2. Warehouse Receipts as Collateral Security (Sec- tions 84-90) 37 3. Rates of Interest and Exchange (Sections 91-94) 39 4. Deposits (Sections 95-98) . . . .• . . .39 5. Purchase of the Assets of a Bank (Sections 99- 111) 40 6. Returns to Government (Sections 112-114) . . 41 7. Payments to the Minister of Finance upon Disso- lution of a Bank (Sections 115-116) . . 44 8. Canadian Bankers' Association (Sections 117—124 44 9. Insolvency (Section 125) 45 10. Suspension (Sections 126-131) 45 11. Penalties (Sections 131a-158) 45 12. Amendments to Bank Act During 1913-1916 . 46 13. Bills of Exchange Act 47 CHAPTER V NOTE ISSUES AND THE BRANCH SYSTEM 1. Monetary S^'stem 50 2. Dominion Notes 52 3. Bank Note Issue 5'3 4. Security to Note Holder 55 5. Elasticity 56 6. Seasonal Fluctuations 57 7. Annual Changes 58 8. Monthly Changes 62 9. Emergency Currency 64 10. Central Gold Reserves 65 11. Lost and Destroyed Notes 67 12. Branch System 68 X BANKING PRINCIPLES SECTION PAGE 13. Branch System and Circulation 70 14. Branch System and the Borrower 72 15. Estabhshing a Line of Credit 75 16. Branches and Panics 78 17. General Review 81 18. Canadian Banking System Under War Conditions 83 CHAPTER VI ANALYSIS OF A BANK STATEMENT 1. Bank Statements . 89 2. Deposits Payable After Notice 92 3. Demand Deposits 9-i 4*. Deposits Elsewhere 96 5. Due Banks in Canada 96 6. Due to Banks in Foreign Countries .... 96 7. Dominion and Provincial Governments ... 96 8. Circulation 98 9. Capital and Reserve 99 10. Specie and Dominion Notes 99 11. Notes and Checks of Other Banks 100 12. Deposits with Other Banks 101 13. Securities 101 14. Call Loans in Canada 101 15. Call Loans Elsewhere 103 16. Reserves 108 17. Current Loans 110 18. Overdue Debts 113 19. Real Estate 114 20. Bank Premises 114 21. Profit and Loss Statement of a Bank . . . .114 22. Interest on Deposits 118 23. Profits of the "Percentage Bank" 120 24. Bank Premises 121 CONTENTS xi SECTION PAGE 25. Reserve Fund 121 26. Gross Profits 122 PART II— BANKING PRACTICE CHAPTER I HEAD OFFICE 1. Directors 12T 2. General Manager 129 3. Superintendent of Branches ISCT 4. Chief Inspector 132 5. Secretary 133 6. Chief Accountant 133 CHAPTER II HEAD OFFICE RECORDS 1. Head* Office Bookkeeping 135 2. The General Ledger 135 3. Correspondents' Ledgers 136 4. Statistical Books 13T 5. Branch Clearings 137 6. Stock Books, etc 138 7. Circulation Records ......... 139 8. Returns to Head Office 14-1 9. Branch Clearings Statement (Daily) ... . . 141 10. Financial Statement 141 11. Discount Report 142 12. Cash Item Account 142 13. Balance Sheet 142 14. Overdue Bills 143 15. Monthly Liability Return 143 16. Sundry Returns 143 xii BANKING PRINCIPLES SECTION PAGE 17. Weekly Report on Business 143 18. Records of Routine Work 145 CHAPTER III THE BRANCH STAFF 1. Manager 147 2. Daily Work 148 3. Accountant 149 4. Teller 150 5. Ledger-Keeper 151 «. Collection Clerk 152 7. Discount Clerk 153 8. The Junior 153 CHAPTER IV BRANCH BOOKS AND RECORDS 1. Bank Accounting 155 2. Books of a Branch 156 3. Loose-Leaf Accounting 159 4. Cash Book 160 5. Writing Up the Cash Book . . . . r. .162 6. Supplementary Cash Book 162 7. Discount Register 164 8. Discount Blotter 166 9. Discount Diar}' 167 10. Trade Bills Remitted Diary 169 11. Drafts Register 169 12. Check Lists 171 13. Cash Items 173 14. Remittance Book 175 15. Branch Clearing Statement ...... 177 16. "At Credit" Advices 179 17. Head Office Entries 181 CONTENTS xiii SECTION PAGE 18. Business with Other Banks . . . . , . . 183 19. Teller's Records 183 20. General Ledger 184 21. Current Deposit Ledger 187 22. Savings Bank Ledger . .^ 189 23. Liability Ledger 190 24. Collection Register 192 25. Collateral Register 194 26. General Statement Books 194 27. Balance Book 196 28. Overdraft Register 196 29. Discrepancies Book 196 CHAPTER V DEPOSIT BUSINESS 1. New Accounts 198 2. Opening Accounts < . 198 3. Particulars to Be Recorded in Ledger .... 199 4. Partnership Accounts 200 5. Conversion of Partnership into Joint Stock Com- pany 201 6. Joint Accounts 201 7. Accounts with Married Women 201 8. Waiver and Authority to Charge Back . . . 203 9. The Ledger 205 10. Deposit Slips 206 11. Money Received After Hours 207 12. Customers' Pass-Books 207 13. Customers' Certification of Accounts .... 208 14. Guarding Against Fraud 209 15. Certification of Checks . 210 16. Cashing Checks 211 17. Savings Bank Department 213 xiv BANKING PRINCIPLES SECTIOX PAGE 18. Duplicate Pass-Books 214 19. Machine Statements 214 CHAPTER VI LOANING A BANK'S MONEY 1. Experience the Only Teacher 218 2. Causes of Failure in Business 220 3. Statement of Affairs 223 4. Science of Credit 227 5. Form of Statement 228 6. Cash 229 7. Merchandise 234 8. Bills and Accounts Receivable 236 9. IMachinery and Fixtures 236 10. Current Liabilities 238 11. Mortgages and Other Factors 239 12. Sundry Information ' . 240 13. Preparing the Application 242 14. The Application 243 15. Guarantees 246 16. Customers' Wills 247 17. Power of Attorney 249 CHAPTER VH CLASSIFICATION OF LOANS 1. Call Loans 254 2. Loans to Joint Stock Companies 256 3. Loans to Municipalities 260 4. Loans to Professional Men 262 5. Loans to Farmers 263 6. Loans to Retail Merchants 265 7. Loans to Manufacturers and Merchants . . . 266 CONTENTS XV SECTION PAGE 8. Collateral Notes 268 9. Accommodation Paper 272 10. Overdrafts 2T^ CHAPTER VIII ADVANCES ON WAREHOUSE RECEIPTS AND ASSIGNMENTS 1. Sections 86 and 88 276 2. Section 88 278 3. Promise 279 4. Assignment 281 5. Declaration 286 6. The Note 289 7. Making Advances 292 8. Warehouse Receipts . 295 9. Substitution 297 10. "Current Season" 301 11. Default 302 12. General Remarks 303 CHAPTER IX INTERNAL INSPECTION 1. Branch Inspection 306 2. The Audit 307 3. Cash and Securities 308 4. Ledgers, etc 309 5. Sundries > 310 6. Inspection Liability Return 311 CHAPTER X BANK COST ACCOUNTING 1. Need of a Cost System 315 2. Principles of Cost Accounting 317 xvi BANKING PRINCIPLES f SECTION PAGE 3. Small Checking Accounts 319 4. Branch Expenses 323 5. Inland Exchange 325 6. Cost Data 331 7. An Account Anal>'zed 333 8. Method of Analysis 335 9. Exchange Received on Items Deposited and Col- lected 337 10. Checks Paid at Par at Other Branches . . . 339^ 11. General Remarks . 839 PART I BANKING PRINCIPLES XVI— 2 BANKING PRINCIPLES CHAPTER I HISTORICAL SKETCH 1. Introduction. — In an intelligent study of the Canadian banking system particular stress should be laid on the fact that the system has been evolved, not made ; that it has grown up with the country, suffered with it, prospered with it and, since the Confedera- tion, been the backbone of commerce and agriculture. The careful decennial revisions of the banking laws have kept the system continually in touch with the re- quirements of Canada's constantly altering conditions. In fact, in no other country does the history of bank- ing support so forcibly the contention of Horace White in his "INIoney and Banking" : The principles of banking are the outgrowth of experi- ment. They must be learned from the history of banking and particularly from the laws that have been enacted from time to time. These laws are the crystallization of ideas dominant at given periods. The history of banking in Canada may be roughly divided into four periods : 3 4 BANKING PRINCIPLES New France 1608-1763 British Occupancy 1763-1817 Provincial Banking 1817-1867 National Banking System 1867- 2. New France. — During this period (1608-1763> Canada had its first, and it is to be hoped its last, ex- perience in "fiat" money. In lieu of a better circu- lating medium, beaver and other furs, wheat and tobacco were accepted in trade, and tho at first the issue of government obligations in the shape of "or- donnances" and card monev were a welcome relief, the scandalous abuse of this privilege quickly brought it into disrepute, for no matter in what form, or under what conditions these obligations were issued, they all traveled the same road to ultimate depreciation. The country found itself at the time of the capitu- ■ lation, in 1760, 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 monev and treasury bonds and the balance in other forms of obligation. This formed one of the most difficult problems that confronted the British govern- ment and, notwithstanding the impoverished condi- tion of France, the British insisted upon a definite basis of settlement. Accordingly, a convention was signed in 1766 under which bills of exchange and kindred obligations were to be redeemed by the French government at 50 per cent of their face value, and ordonnances and other forms of debt at 25 per HISTORICAL SKETCH 5 cent. Owing to circumstances which need not be entered into here, the unfortunate holders eventually received only a moiety of this settlement. The history of this period presents an instructive lesson on the evils of money issued on credit only, even tho the credit is that of a government. There is no doubt that Alexander Hamilton had the sad ex- perience of New France before him when he made his severe stricture on government issues based on credit. In his report on banking in 1790, he said: The emitting of paper money by the authority of the government is wisely prohibited to the individual states by the national constitution, and the spirit of this prohibition ought not to be disregarded by the government of the United States. Tho paper emissions under a general authority might have some advantages not applicable and be free from some disadvantages which are applicable to the like emissions by the states separately, yet they are of a nature so liable to abuse, and it may even be affirmed so certain of being abused, that the wisdom of the government will be shown in never trusting itself with the use of so seducing and dangerous an expedient. a. British occupancy (1763-1817).— The British government found the countiy practically without any currency, and immediately took steps to place the finances of the colony on a stable foundation by establishing an equitable and permanent standard of value for the various coins which now became current in Canada. The government imported and paid out large quantities of Spanish milled dollars at 4s. 6d. per dollar or $4.44% per pound sterhng, the old par 6 BANKING PRINCIPLES of exchange. These were used for the payment of the army and the purchase of pubhc supphes. In 1791 representative government was established and during the next few years several unsuccessful attempts were made to obtain charters for banks of issue. 4. Army hills. — In 1812, during the war with the United States, the British government, finding itself hampered by a serious lack of currency, met the dif- ficulty by the passage of the Army Bill Act. Under this act the Army Bill office was established and em- powered to issue bills of various denominations. These bills were readily absorbed by the people, who were quick to realize the advantage of a system of financing so carefully thought out with a view to prompt and satisfactory redemption, and with that quality of elasticity which later became such a prom- inent feature in the bank note circulation of Canada. 5. Provincial hmihing (1817-1867). — The contrac- tion of the Army Bills circulation naturally caused great inconveniences to the public ; the principal busi- ness centers, jNIontreal and Quebec, being the greatest sufferers. The bills filled a long-felt want and in ^lay, 1817, to supply their place, the ^lontreal Bank, now known as the Bank of Montreal, was founded, followed by the establishment of other banks under charter from the various provinces. Between 1817 and 1825 two banks were established in Lower Can- ada (Quebec), and one each in Upper Canada (On- tario), New Brunswick and Nova Scotia. There HISTORICAL SKETCH 7 was no attempt at uniformity in the conditions of the various charters, but Httle attention having been paid in those days to the theory of banking. As a rule, the charters were based upon the articles of agree- ment as drawn 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 compli- cated by independent ventures into the field of bank- ing legislation by the Parliament itself, such as the "Free Banking Act" and the "Provincial Note Act." Fortunately, the British government was fully awake to the dangers of promiscuous banking, and even at the risk of having interference in these matters mis- construed, persisted in demanding that all legisla- tion bearing on note issues, banking and the like, should receive the royal assent before going into effect. The young colony at first resented this restriction, but soon learned to appreciate the guidance of riper and more experienced judgment, and undoubtedly this wise action on the part of the Colonial Office saved Canada from being the exploiting ground of many unsound and dangerous banking theories. As it was, many vicissitudes were experienced, and in 1837, during the rebellion, a temporary suspension of specie payments occurred under permission of an order in council. The necessity for this, however, can hardly be considered a reflection on the banks, as it was due principally to similar tho more serious 8 BANKING PRINCIPLES conditions which obtained at that time in the United States, Canada then as now being intimately con- cerned 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 surprisingly creditable, and much of their exi^erience and foresightedness is embodied in the present Bank Act. In fact, from 1829 to 1866, not one bank failed. True, trying times 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 redemption of their obligations in specie. 6. National hanking system: — In July, 1867, the British North America Act was passed by the Im- perial Parliament, under which the provinces of Can- ada were confederated into the Dominion of Canada. The framers of the Act, with creditable foresight, real- ized that the banks, like the railroads, in order to dis- charge most effectively their natural functions, must be national rather than provincial in character, and to this end vested in the parliament of the new Do- minion the exclusive authority to legislate on all matters pertaining to banks and banking, currency and coinage, negotiable instruments and kindred matters. With the passing of the Act the existing banks came automatically under the new jurisdiction. Tentative legislation between 1867 and 1870 extended HISTORICAL SKETCH 9 the powers of the banks previously incorporated by the provinces to the whole Dominion and unified the laws as far as practicable. 7. First bank 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 concur- rent with decennial 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 the regular revisions, changes have been infrequent, and have been made only to meet some contingency due to the rapid expansion of Canada, or to correct some omission or ambiguity overlooked in the previous revision. The last revision should have been made in 1910, but owing to causes which it is not necessary to detail here, the charters of the banks were extended to 1913. The delay, however, was accompanied by little or no inconvenience to those concerned; the charters of the various banks were extended until the new act was finally passed. Changes that were imminently neces- sary 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 re- vision should be most carefully and presciently con- 10 BANKING PRINCIPLES sidered. During 1913, the banking system of Can- ada was freely discussed, both in the pubhc press and in special committees appointed for the purpose. It is notable that the revisions are made neither by theorists nor tainted with political expediency. The ablest men in the country, regardless of their politics, are consulted and give evidence before the parlia- mentary committee. Lawyers, merchants, farmers, bankers and others equally well qualified contribute their criticism and advice towards the advancement of the best interests of the country. The measures are then fully debated, and when finally passed, are ac- ceptable to all interested. This brief account of banking in Canada is given, not as a history, which would be without the scope of this volume, but in order to assist the reader in realiz- ing that the growth of the banking system of Canada has been one of evolution rather than of expediency or hasty legislation, and that the machinery provided for the systematic and regular revision of the Bank Act is invaluable in meeting the tremendous expansion and constantly changing requirements of Canadian com- merce and agriculture. This chapter, read in con- junction Math the chapter on the Bank Act, and the explanation of the branch system and note circulation, should demonstrate clearly how far the functions per- formed by the banks in Canada respond to the require- ments of a new country, as defined so lucidly by Sir Edmund Walker: HISTORICAL SKETCH 11 What is necessary in a 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 financial 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 small- est 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, and that the supply of currency should be adequate, there should be a similar relation be- tween the requirements of trade and the cause which forces notes back for redemption. REVIEW Upon what fact should we lay particular stress in studying Canada's banking history? What were the first steps taken by the British Government to place the finances of the colony on a stable foundation? What is the duration of a bank's charter? Why is this desir- able? According to Sir Edmund Walker what should a banking sys- tem do to meet the requirements of a rapidly growing country ? CHAPTER II KINDS OF BANKS 1. Commercial banks. — In the Bank Act of Can- ada, 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 institution. Economists have defined the functions of a bank in many different ways, but all arrive at the same gen- eral conclusions. Horace White, in his "IVIoney and Banking," thus defines a bank : An institution where deposits of money are received and paid, where credit is manufactured and extended to bor- rowers, and where the exchange of property is facihtated. Having first acquired the confidence of the community, the bank extends its credit by purchasing interest-bearing se- curities, mainly business men's notes, pa3'able at a fixed time and giving the sellers the right to draw checks upon itself payable at sight. The amounts thus authorized to be drawn are termed deposits, the bank being liable for them in the same way as for actual mone}- deposited. . . • Bank notes are the bank's promises to pay money to the bearer on de- mand. 12 KINDS OF BANKS 13 All these functions are discharged by the Canadian banks, but their economic value is greatly enhanced by the system of branches, which enables the banks to gather and distribute money over the whole area of the country, thus utilizing, as far as possible, the sup- ply of loanable capital to meet the demand. In other words, thru the branch system, money is constantly working to find its own level. The Canadian banks are, therefore, essentially of a national rather than of a local character. 2. Savings banks. — The main function of a savings bank is to encourage thrift in a community by accept- ing, for deposit, money in small amounts and allowing interest 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 practically only two savings banks in the country, namely: the City and District Savings Bank, INIon- treal, and La Caisse d'Economie, Quebec. These are well-known institutions and are highly successful in encouraging thrift especially 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- posits at every post office, and the other called the 14 BANKING PRINCIPLES Government Savings Bank, which is under the control of the Finance Department. The latter receives de- posits at comparatively few points, principally in the larger towns in the maritime provinces, and its busi- ness is gradually being merged with that of the Postal Savings Bank. The money received from these sav- ings banks is regarded by the government as a loan, which practically replaces money that could be bor- rowed outside of Canada. The rate of interest in both banks is 3 per cent. Each entry costs about 12 cents or .62 per cent of the average deposit, making a total of 3.62 per cent.^ It is easily seen that if an adequate reserve were maintained it would bring the cost of these deposits to over 41/0 per cent. The gov- ernment, however, avoids the expense and responsi- bility of maintaining an adequate reserve by a clause in the Bank Act which makes it compulsory for the banks to honor government checks without charge wherever presented, and all withdrawals from the sav- ings banks are in this form. 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 placed on the amount which may be deposited. 3. Trust and loan companies. — Of late years a con- siderable number of these companies have been organ- 1 Hearing before House Committee on Post Office Savings Bank 1909, page 70. KINDS OF BANKS 15 ized in Canada under provincial or Dominion char- ters, and as it is an open question whether their con- trol is vested in the Federal or in the provincial au- thorities, some companies, to make sure of their position, have obtained charters from both sources. Trust and loan companies are supposed to enter into the field of banking only in so far as it is neces- sary to transact their especial business. There is a tendency, however, recently developed, to enter into competition with the banks in various ways, espe- cially in canvassing for demand deposits. This is a dangerous practice for trust companies to indulge in, for demand deposits require special provision in the shape of cash reserve, and a study of the annual state- ment of the average trust or loan company will show how little this responsibility is realized or provided for. Like the government, each company evidently thinks it can rely on the banks in case of trouble, over- looking entirely the fact that at such times the banks themselves are making every effort to protect their own reserves, and would hardly be willing to advance money to a corporation which has all its assets locked up in real estate and other fixed securities. One of the basic principles of credit is that the cur- rency of the assets should not exceed the currency of the liabilities, and any departure from this principle is bound to prove disastrous eventually. The assets of trust and loan companies in Canada are invariably based entirely on real estate and other non-liquid se- curities, and their deposits, if any, should be composed 16 BANKING PRINCIPLES of the long time funds of the communitj^ — those which are not regularly employed in the quick turnover of commercial life. To accept demand deposits, and then loan on real estate the funds thus obtained, is to invite disaster. The question is a serious one for the country, and likely to prove more serious later on, unless steps are taken to bring all these companies under government control with uniform charters. To be consistent, the same sound considerations which led the framers of the Bank Act to prohibit banks from loaning on real estate should work inversely, and should withhold from companies loaning on real estate the right to receive demand deposits. As am- ple funds are obtainable both in Canada and Europe from the sale of debentures and bonds secured by real estate, a company well managed and reputable has no need to plunge into the dangerous ebb and flow of transient money. REVIEW Frame a brief yet complete definition of a bank. What feature of the Canadian banking system enables the banks to perform their functions so efficiently ? What provisions are there for savings deposits in Canada? What valuable service do trust and loan companies perform for the country? CHAPTER III THE BANK ACT 1. The Bank Act of 1913. — The present Bank Act/ which came into force on July 1, 1913, consists of one hundred and sixty sections or clauses. Its leading features may be briefly summarized as fol- lows : 1. Interpretation and application Sections 1-7 2. Incorporation of new banks " 8-17 3. Purchase of the assets of a bank " 99-111 4. Insolvency and winding up, etc " 115-131 5. Offences and penalties " 131a-160 6. Internal regulations as regards direc- tors, shares, annual statements, audits, etc " 18-60 7. Returns to government " 112—114 8. Note issues " 61-75 9. 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 only of occasional application. The last four, however, deal with mat- ters of everyday banking and call for careful study. The last division, "Business and powers of a bank," 1 Copies of the Bank Act or Bills of Exchange Act may be obtained by remitting twenty cents for each copy to the King's Printer, Ottawa. XVI— 3 17 18 BANKING PRINCIPLES wherein are defined the business relations of banks with the public, is therefore of particular interest to branch officers. The other three headings deal with matters more or less pertaining to, or under the direct control of the head office. 2. Changes in the Bank Act, — Two very unportant additions were made in the present act, namely: the sections providing for a shareholders' audit, and the creation of central gold reserves in connection with the issue of extra circulation when required. Au- thority was given to loan money to farmers on the security of threshed grain, and a number of minor changes were made, mostly of a routine or explana- tory character, such as the opening up of registiy offices in the different provinces, the printing of Sec- tion 125 on stock books, documents and the like, and the establishment of several new headings in the monthly and annual statements. The central gold reserves will be dealt with in the chapter on note issues. 3. Shareholders' audit. — A provision for the exter- nal supervision of banks is an entirely new feature of the Bank Act. No objection was advanced by any one as to the desirability or usefulness of the external audit itself, but the problem was how to effect an audit without evoking the aid of too cumbersome or too burdensome a mechanism and how to avoid plac- ing too great a burden of responsibility on those as- suming the work, without first ascertaining how far the physical limitations of any such examination, due THE BANK ACT 19 to the branch system, would affect the value of its con- clusions. Three forms of external supervision were given consideration, namely: examination by the Do- minion government, by the Canadian Bankers' As- sociation, and by competent accountants. The idea of government supervision was advocated by those who were admirers of the system of national bank examinations obtaining in the United States. It is obvious, however, that even if these examinations were effective in the United States (which is very much open to question), the plan itself would not be feasible in Canada on account of the branch system. Furthermore, there is no doubt that the goverimient 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 palpable injustice to those banks which have, by years of sound banking, established themselves firmly in the confidence 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 super- vision would be the fact that the appointments of examiners would run the risk of being occasionally based on political expediency rather than on expert knowledge and fitness for the positions. The Cana- dian government was well advised in not allowing it-^ 20 BANKING PRINCIPLES self to be burdened with a new and unknown respon- sibility. 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 associated banks of the solvency of the indi- vidual banks. Furthermore, no matter how impar- tially such a supervision was exercised by the Asso- ciation, it would always be open to misconstruction, and any bank whose affairs called for criticism, would not be likely to neglect an opportunity of appealing to the public sympathy with a cry of persecution. The system finally adopted promises to overcome the above objections and to be a satisfactory solution of the question. The act provides for the appoint- ment 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 approved by the JNIin- ister of Finance. These auditors check the cash and verify the securities of the head office and such branches as thev may deem necessary to visit, and report to the shareholders annually upon the affairs of the bank. 4f. Abstract of the Bank Act. — A knowledge of the Bank Act 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 be consulted, of course, when the exact wording is de- sired. THE BANK ACT 21 5. Title and interpretations (Sections 1-2). — The Act may be cited as the bank act. The intention of the Act in its use of certain words and expressions is clearly defined. 6. Application of the Bank Act (Sections 3-7). — The provisions of the Act apply to the following banks : Chief Office Name of Bank of Bank The Bank of Montreal Montreal The Bank of Nova Scotia Halifax The Bank of Toronto Toronto The Molsons Bank Montreal La Banque Nationale Quebec The Merchants Bank of Canada Montreal La Banque Provinciale du Canada Montreal The Union Bank of Canada Winnipeg The Canadian Bank of Commerce Toronto The Royal Bank of Canada Montreal The Dominion Bank Toronto The Bank of Hamilton Hamilton The Standard Bank of Canada Toronto La Banque d'Hochelaga Montreal The Bank of Ottawa Ottawa The Imperial Bank of Canada Toronto The Home Bank of Canada Toronto The Northern Crown Bank Winnipeg The Sterling Bank of Canada Toronto The Weyburn Security Bank Weyburn The 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 royal charter. ^2 BANKING PRINCIPLES 7. Incorporation of hanks (Sections 8-12). — The conditions under wliich a new bank may be organized and the procedure necessary are clearly set forth. The first step is to obtain an Act of Incorporation by means of an application signed by at least five re- sponsible men, known as provisional directors, who are able to satisfy the Parliamentary Committee on Banking and Commerce that their project is a gen- uine one, that they are fully aware of the responsi- bility of their undertaking, and that they have the ability and backing necessary to carry out the or^ani- zation of a bank successfully. If the committee re- ports favorably, letters of incorporation are granted, and, after ten days' public notice, the provisional di- rectors may advertise for public subscriptions and cause stock books to be opened. No bank, however, can be incorporated with a capital of less than $500,- 000, divided into shares of the par value of $100 each. 8. Organization of batiks (Sections 13-17). — If within a year the sum of not less than $500,000 of the capital stock of the bank has been bona fide sub- scribed, and not less than $250,000 paid in and de- posited with the JNIinister of Finance, the provisional directors may, by public notice published for at least four weeks, call a meeting of the subscribers for the purpose of organizing the bank. At this meeting the subscribers shall elect five or more qualified directors to replace the provisional directors, determine the date of the annual meeting, etc. A certificate of the THE BANK ACT 23 Treasury Board ^ permitting the bank to commence business may now be applied for, but, before issuing such a certificate, the Treasuiy Board must be sat- isfied : 1. That the payments and subscriptions ai'e all genuine 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 regularly elected ; 4. That the expenses of incorporation and organi- zation are reasonable; 5. That all other requirements have beeij complied with. If everything is found satisfactory a certificate will then be granted and the deposit of $250,000 returned, less a reduction of $5,000 as the initial payment on account of the Bank Circulation Redemption Fund (see Section 64). Then, and not until then, is the new bank able to issue notes, open branches and begin the general business of banking. 9. Refusal of certificate.— If, however, the certifi- cate of the Treasury Board is not obtained within one year from the date of the passing of the Act of In- 1 The Treasury Board exercises important functions under the act, and is frequently referred to. The ]Minister of Finance and Receiver-General is the chairman of -the board, which consists of four other ministers be- longing to the King's Privy Council for Canada, nominated from time to time by the Governor-in-Council. The Treasury Board acts as a com- mittee of the Privy Council on all matters referring to finance and pub- lic accounts, and has power to call for any information it may require from corporations and persons, etc., who are bound by law to furnish the same to the government. 24 BANKING PRINCIPLES corporation, all the rights and privileges granted thereunder cease, and provision is made for the equi- table liquidation of any bank so unsuccessful. The severe penalties attached to any infraction of the reg- ulations covering the incorporation and organization of banks are set out in Sections 131 and 132. 10. By-laxos (Section 18). — The shareholders may pass by-laws regarding the following matters: the date of the annual general meeting at which share- holders elect directors; regulations (subject to -limi- tations mentioned in Act) as to proxies; the number, quorimi, qualifications, remuneration, etc., of direc- tors ; limits of loans or discounts to directors or to anv one person, firm or corporation; authority to con- tribute to guarantee and pension funds, etc. A copy of all the by-laws of a bank must be sent to each shareholder at the end of each fifth year, beginning December 31, 1913. 11. Board of directors (Sections 19-28). — The stock, property, affairs and concerns of the bank are managed by a board of directors who are to be elected annually and shall be eligible for re-election, subject, however, to the following provisions : Each director shall hold stock of the bank as absolute and sole owner in his individual right, on which not less than from $3,000 to $5,000 has been paid up, the amount vary- ing according to the paid-up capital of the bank. This amount, however, xnsiy be increased by by-law. The majority of the directors must be British sub- jects living in Canada. THE BANK ACT 25 The method by which directors shall be elected is provided for, also the manner in which directors shall elect the president, vice-president and fill vacancies on the board. 12. General powers of directors (Sections 29-30). — 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 establishment of guarantee and pension funds for the staff. The directors are required to obtain satisfactory security from all officers and clerks for the faithful performance of their duties. 13. 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. 14. Increase or decrease of capital stock (Sections 33-35 ) . — The capital stock of the bank may be in- creased 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 share- 26 BANKING PRINCIPLES holders pro rata, on such terms as are fixed by the directors, with certain limitations as to the price, the amount and the frequency of the calls for payment thereof. Provision is made for the reduction of the capital stock of the bank if such action should become neces- sary. 15. Shares and calls (Sections 36-42). — Shares of the capital stock of a bank shall be personal property. The manner of subscribing for shares 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 thirt^^ days, and in amounts not exceeding 10 per cent of each share subscribed. There must be printed on each page of the stock book upon which subscriptions for new stock are re- corded, and "on every document constitutinar or au- thorizing such subscriptions, on a part of the page and document, respectively, which may be readily seen by the person recording the subscription, or by the person signing the document, a copy of Section 125," which provides for the double liability of the shareholders. 16. 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 satisfied the bank as to any liability that may be due to it. « THE BANK ACT 27 The bank may open and maintain in any province in Canada in which it has one or more branches a share registry office, at which the shares of the share- holders resident in that province shall be registered. A list of all transfers of shares registered each day at the respective places where transfers are authorized shall be made up each day, and kept for the inspection of the shareholders. The procedure in connection with the sale and transmission of shares under special conditions, such as writ of execution, 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 holding stock as executor, trustee, guardian, etc., is not personally liable unless the trust is not dis- closed. 17. Annual and special statements (Sections 54- 55) } — At every annual general meeting the outgoing directors must submit a full statement of the affairs of the bank. 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 man- ager or other officers of the bank next in authority, and on behalf of the board by the president or vice- president or any other two directors. Copies of these 1 See Figure 2 for prescribed form for monthly statements. 28 BANKING PRINCIPLES statements must be sent to each shareholder of the bank and to the Finance Minister. The directors must also submit to the shareholders such further statements of the affairs of the bank as the shareholders may require by by-law regularly passed. 18. Shareholders' audit (Section 56, all new). — Shareholders of a bank shall, at each annual general meeting, appoint and fix the remuneration of an audi- tor or auditors, chosen from a panel of not less than forty selected by the general managers of the banks and approved by the ISIinister of Finance. Full provision is made for filling the vacancy caused by the death of an auditor or the failure of the shareholders to appoint an auditor. Written notice of the inten- tion to nominate any auditor other than a retiring auditor must be given at least twenty-one days before the annual meeting; the bank must cause a copy of such notice to be delivered to the retiring auditor, and particulars of the nomination must be forwarded to each shareholder at least fourteen davs before 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 require from the directors and offi- cers such information and explanation as may be nec- essary for the performance of his duties. An auditor is not required to visit any branch for the purpose of examining the books, cash, securities and records, but he may do so if he considers it ad- THE BANK ACT 29 visable. 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. The auditors shall make a report to the share- holders : (a) On the accounts examined by them; (b) On the checking of the cash and securities; (c) On the statement of the affairs of the bank submitted at the meeting; The report must also state: (a) Whether or not they have obtained all the in- formation and explanation they have required; (b) Whether, in their opinion, the transactions of the bank which have come under their notice have been within the powers of the bank; (c) Whether the cash and securities agreed with the books of the bank ; and (d) Whether, in their opinion, the statement re- ferred to in the report is properly drawn up so as to exhibit a true and correct view of the state of the bank's affairs, according to the best of their informa- tion and the explanations given to them, and as sho^vn by the books of the bank. This report must accompany the statement sub- mitted to the shareholders at the annual general meet- ing. 19. Special report to the Minister of Finance (Sec- 30 BANKING PRINCIPLES tion 56a, new) . — The Minister may require any duly appointed auditor, or any auditor whom he may se- lect, to examine and inquire specially into the affairs and business of a bank, and the auditor so selected shall, at the conclusion of his examination, report fully to the Minister the results thereof. 20. Dividends (Sections 57-59). — These sections deal with dividends and the method of their payment. The directors are permitted to declare quarterly or half-yearly dividends, but no dividend or bonus shall be declared which will impair the paid-up capital of the bank, or which exceeds a rate of eight per cent, unless, after paying the same and providing for all bad and doubtful debts, the bank has a rest or re- serve fund equal to at least 30 per cent of its paid-up capital. Previous to the payment of any dividend or bonus the directors must give public notice for at least four weeks prior to the date fixed for payment. 21. Cash reserve (Section 60). — The bank must hold in Dominion of Canada notes not less than 40 per cent of the cash reserves which it has in Canada. Arrangements for issuing Dominion notes in ex- change for gold, and for redeeming them, are made at the branch offices of the Department of Finance, namely: Toronto, ]Montreal, Halifax, St. John, Winnipeg, Victoria, Charlottetown, Regina and Calgary. 22. General note issue and circulation of notes (Section 61 ) . — A bank may issue and reissue its notes THE BANK ACT 31 payable to bearer on demand and intended for circu- lation to the amount of its unimpaired paid-up capital. No such note, however, shall be for a sum less than five dollars or for any sum which is not a multiple of five dollars. 23. Additional issue for moving crops (Section 61, sub-sec. 15-20). — During the usual season of moving crops — that is to say, from and including the first day of September in any year to the last day of February next ensuing — a bank is allowed to issue additional notes to an amount not exceeding 15 per cent of its combined unimpaired paid-up capital and rest or re- serve fund, as stated in the monthly return to the gov- ernment for the month immediately preceding that in which the additional amount is issued. While such excess notes are in circulation the banks must pay to the Minister of Finance interest on the excess at a rate not exceeding 5 per cent per annum, the interest to be calculated on the amount of notes in circulation for each day during the month, as shown in a return to be sent monthly to the Minister. This feature was added to the Bank Act in 1908 in the form of an amendment to the Act of 1901. 24. Central gold reserve issue ( Section 61, sub-sec. 3-13). — In addition to this special provision for emer- gency circulation during the crop-moving period, the new act provides for an increase of circulation at any time against the deposit of current gold or Dominion notes, in what is termed the central gold reserves. These central gold reserves are under the control 32 BANKING PRINCIPLES of four trustees, three appointed by the Canadian Bankers' Association, and one by the Minister of Finance. It is the duty of the trustees to receive gold coin and Dominion notes that any bank may de- sire to deposit with them, and the bank may then issue extra circulation up to, but not exceeding, the amount of such deposit. When any part of the amount deposited in the central gold reserves is not required for the purpose of issuing notes, the surplus may be returned to the bank by the trustees upon formal application. The central gold reserves are subject to frequent inspection and audit by the De- partment of Finance. 25. Note issue in British colonies (Section 62). — Provision is made for issuing notes in pounds sterling or in dollars at agencies of a bank in any British col- ony or possession other than Canada. The denomi- nations of such notes are limited to one pound sterling or any multiples of that sum, or five dollars or multi- ples thereof, and the amount issued in this way must be treated as a part of the general circulation of the bank. 26. Pledge of notes prohibited (Section 63). — A bank shall not pledge, assign or hypothecate its own notes, and no loan thereon shall be recoverable from the bank or its assets. 27. Bank Circulation Bedemption Fund (Sections 64-69) . — Each bank must maintain with the Minister of Finance a deposit equal to at least five per cent of the average amount of its notes in circulation during THE BANK ACT 33 the year. These deposits are known as the Bank Circulation Redemption Fund, and are held only for the purpose of redeeming the notes of any banks which fail to redeem their own issues in specie or Dominion notes. For all notes so redeemed the fund has the same rights against the estate of the failed bank as any other holder. Interest at three per cent is al- lowed by the Government on the fund. The amount at credit of the banks in this fund is to be adjusted on the first of July of each year, in such a way as to make the amount at credit of each bank equal to five per cent of its average note circulation during the pre- ceding twelve months. In calculating the average circulation the average amount at the credit of the bank in the central gold reserves is to be deducted. If a bank suspends payment of its notes, interest ac- crues thereon at five per cent per annum ^ until the day named for their redemption, of which public no- tice is given by the liquidator, after which interest on the notes outstanding ceases. If, after the expiration of two months from the date of suspension, the liquidator has not funds to redeem the notes, the Min- ister of Finance may redeem them out of the Circula- tion Fund. If payment made from the fund exceeds the contributions of the failed bank, the other banks must recoup the fund pro rata for the amount of the excess, recoveries from the liquidation of the failed 1 The provisions contained in Sections 64-69 were added to the Bank Act of 1890, at the suggestion of the banks themselves. The rate was changed from six per cent to five per cent in the revision of 1900. XVI— 4 34 BANKING PRINCIPLES bank being, of coui'se, distributed in like proportion. For this purpose, however, no bank shall be required to pay in any one year more than one per cent of the average amount of its notes in circulation. In the vi^inding-up of a bank, if satisfactory ar- rangements are made for the redemption of the out- standing notes, with interest, the Treasury Board may return the amount to the credit of the bank or such part as may seem expedient. The Treasury Board will make all necessary rules and regulations as to the management of the Circula- tion Fund. The Minister of Finance may take legal action, if necessary, to enforce payment of any sum due by a bank to the fund. 28. Redemption at par (Sections 70-71). — Banks are obliged to make arrangements to ensure the circu- lation at par of their notes in any and every part of Canada, and must maintain offices or redemption agencies for the payment of notes at Toronto, Mon- treal, Halifax, St. John, Winnipeg, Victoria, Char- lottetown, Regina and Calgary, and at such other places as are from time to time designated by the Treasury Bioard. Altho the notes of a bank are al- most invariably payable only at its head office, they must be accepted at par at any of the branches, agen- cies or offices of the bank. 29. Pay merits in Dominion notes (Section 72). — In making a payment a bank must, if required, pay in Dominion notes (legal tender) in denominations of THE BANK ACT 35 $1, $2 and $5, not, however, exceeding $100 in any one payment. No payment in Dominion notes or notes of the bank shall be made in unclean or torn bills, and the Treasury Board has the right to make regulations regarding the disinfection and sterilization of bank and Dominion notes by the banks. 30. Signing of hills, etc. (Sections 73-74). — Bills or notes issued by a bank are binding on a bank, tho not sealed with the corporate seal of the bank. The directors may deputize an officer of the bank to sign notes intended for circulation. If both the signatures on a bank note are impressed by machinery, at least one name, together with a dis- tinguishing device and number, must be impressed or engraved, under authority of the bank, after the notes have been received from the engraver or printer. 31. Counterfeit notes (Section 75). — Officers re- ceiving public moneys and bank officers must stamp or write on fraudulent bank notes or Dominion notes such words as "Counterfeit," "Altered," or "Worth- less," as the case may be. If, however, a bill is wrongly stamped it must be redeemed at its face value by the officer at fault. REVIEW What are the leading features of the Bank Act of 1913? Give the argument for and against an audit of the banks by the Dominion Government. State the procedure in incorporating a new bank. What information should be contained in the auditor's report? What provision is made for note issue in British colonies? Are banks obliged to keep their notes circulating at par? CHAPTER IV THE BANK ACT (Continued) 1. Business and jmwers of a hank (Sections TO- SS). — The first section, 76, is of sufficient importance to give in full. It states that a bank may : (a) Open branches, agencies and offices; (b) Engage in and carry on business as a dealer in gold and silver coin and bullion ; (c) Deal in, discount and lend money and make advances upon the security of, and take as collateral security for any loan made by it, bills of exchange, promissory notes and other negotiable securities, or the stock, bonds, debentures and obligations of municipal and other corporations, whether secured by mortgage or otherwise, of Dominion, Provincial, British, foreign, and other public securities ; and (d) Engage in, and carry on, such business generally as appertains to the business of banking. Except as authorized by this act, the bank shall not, either directly or indirectly: (a) Deal in the buying or selling or bartering of goods, wares and merchandise, or engage or be engaged in any trade or business whatsoever ; (b) Purchase, or deal in, or lend money, or make advances upon the security or pledge of any share of its own capital stock, or of the capital stock of any bank ; or (c) Lend money or make advances upon the security, mort- gage or hypothecation of any lands, tenements or immovable property, or of any ships or other vessels, or upon the se- curity of any goods, wares and merchandise. 36 THE BANK ACT 37 The bank shall have a privileged lien on shares of its own stock or on dividends for any debt or liability of a shareholder. In case of default, provision is made for the sale and transfer of such shares within twelve months after the maturity of the debt and after due notice to the debt'or. Provision is made for the sale of collateral security held by the bank in case of default in the payment of the relative debt. A bank may hold real property for its own use and occupation, and may sell the same and acquire other property in its stead for the same purpose. A bank may take a mortgage on real estate or per- sonal property by way of additional security for a debt already contracted. A bank may acquire title to real propertj^ on which it has a lien as security by purchasing the equity of re- demption or by foreclosure. No bank, however, is allowed to hold property except for its own use and occupation longer than twelve years. 2. Warehouse receipts as collateral security (Sec- tions 84-90). — A bank may lend money upon the se- curity of standing timber and on the rights held by persons to cut or remove such timber. A bank is empowered to lend moiey to a receiver or liquidator appointed under the Winding-up Act, and to take security in connection therewith. Power is given to advance money for building ships and to take such security thereon as is permissible for individuals under the laws of the respective provinces. 38 BANKING PRINCIPLES Power is given to advance money on warehouse re- ceipts and bills of lading. The provisions embodied in what is known as "Sec- tion 88" have proved an important factor in the in- dustrial and agricultural development of Canada. The clause permitting loans to farmers under this section appears for the first time in the Act of 1913. The main text of Section 88 is as follows : The bank may lend money to any wholesale purchaser, or shipper of, or dealer in, products of agriculture, the forest, quarry and mine, or the sea, lakes and rivers, or to any wholesale purchaser or shipper of or dealer in live stock or dead stock or the products thereof, upon the security of such products, or of such live stock or dead stock or the products thereof. The bank may lend money to a farmer upon the se- curity of his threshed grain grown upon the farm. The bank may lend money to any person engaged in business as a wholesale manufacturer of any goods, wares and merchandise, upon the security of the goods, wares and merchandise manufactured by him, or procured for such man- ufacture. All advances secured under Sections 86-88 have priority to the claim of an unpaid vendor unless he had a lien, of which the bank was aware, on the goods. The material or goods on which a bank has a lien by warehouse receipt or pledge, under Section 88, may be converted by manufacture without the bank losing its lien thereon. In the case of the non-payment of a debt thus secured, the goods may be sold under cer- tain specified conditions. A bank cannot acquire or hold any warehouse re- THE BANK ACT 39 ceipt, bill of lading or pledge of goods to secure any debt unless such debt is negotiated at the time of the acquisition of the security by the bank, or upon the written promise or agreement that such warehouse re- ceipt, bill of lading or security would be given to the bank. Such liability, however, may be renewed from time to time without affecting the condition of the se- curity. A bank may also exchange warehouse re- ceipts for bills of lading, or vice versa, without affect- ing this security. 3. Rates of interest and exchange (Sections 91- 94) . — A bank may stipulate for, or exact such rate of interest or discount as may be agreed upon, and may receive in advance any such rate, but no higher rate than seven per cent shall be recoverable by the bank. A bank may allow any rate of interest whatever upon deposits. The liability of the bank to repay money deposited with it is not affected by any statute of limitations or any law relating to prescription. A branch bank, when discounting bills payable at another branch, vaay take commission, in addition to interest, to an amount not to exceed Vs of one per cent; minimum, 15 cents. In discounting bills drawn on places where a bank has no branches this rate may be increased to ^ of one per cent; minimum, 25 cents. 4. Deposits (Sections 95-98). — A bank may re- ceive deposits from any person, whether qualified by law to contract or not, and may repay the same to such person unless the money is lawfully claimed by 40 BANKING PRINCIPLES another. Where this conflicts with the law of a prov- ince regarding minors, married women and other per- sons not competent to enter a contract, the total amount received from such person shall not exceed $500. A bank is not bound to see to the execution of any- trust in relation to deposits. Provision is made facilitating the transmission of deposits not exceeding $500 in case of the death of the depositor. Official checks of the Dominion of Canada shall be cashed at par at the branches of every bank in Canada. 5. Purchase of the assets of a bank (Sections 99- 111). — These sections provide for the amalgamation of banks and set forth the necessary procedure. How- ever, before a bank can enter into any agreement to sell the whole or any portion of its assets to another bank, it is necessary to obtain the consent of the Min- ister of Finance in writing. The agreement to sell and pm'chase must then be submitted to the share- holders of the selling bank either at its annual general meeting or at a special general meeting called for that purpose, a copy of the agreement having been mailed to each of the shareholders at least four weeks previous to the date of the meeting. To carry a resolution approving of the agreement the votes of shareholders representing not less than two-thirds of the amount of the subscribed capital stock of the bank are necessary. The agreement may then be executed under the seals of the banks, and ap- 4,1, CHARTERED BANKS' STATEMENT TO THE DOMINION GOVERNMENT — JULY, 1913 NAWE OF BANK Bank of Montreal Quebec Bank Bank o( Nova Scotia Bank of British North America. . Bank of Toronto. Molsona Bank Banquo Nationals Merchants Bank of Caimda Bauque Provincial^' du Canada. . Union Bank of Canada Caoadiiin Bank of Comincrcc . . liuyal Bank of Canada Dominion Bank Bank of Hamilton Standard Bank of Canada. . Banquo d'HochelagB Bank of Ottawa Imperial Bank of Canada.. Kovcrcign Bank of Canada, . Metropolitan Bank Homo Bank of Canada Northern Crown Bank •Sicrling Bank of Canada.. Bank of Vancouver. Wcybuio Security Bank. . 25.000,000 5.000,000 10.000.000 4.800.(100 10,04)0.000 5.000,000 s.ww.ooo 10.(KK),000 2.000,000 s.ooo.ooo l',1,(KJU.O00 25,01X1.000 10.000,000 3.000,(100 5.000,000 4,000.000 5,000.000 10,000,000 3,000.000 2,(KI0.1KK) 2,000.000 0,000,000 3,000.000 2,000,000 CAPITAL STOCK -16,C00,03O 2,720,400 6,000,000 2,000.000 6,784.700 1,000,000 5,000,000 1 5.000 .l.(>.-3 4,795,409 22,691.529 26.777,441 26,678,917 13,306.806 38.655,150 6,396,029 28.430.303 87.385.741 71.823,768 14.871,512 29.878,046 34.180,887 7,067.058 4.056.971 816.566 DepoBita elsewhere than in Canada * 27.548.498 11.181,404 2.451,123 1.096.633 225.733 97.333 455,245 16.572,397 25,820,690 Loans from other banks in Canada secured, including bills rv discounted Deposits made by and balances other banks in Canada 1.430,608 250,000 109,343 18.026 74,780 91,751 3.634 864,304 1,645 324.970 778.987 605,805 194,935 1,207 769,062 banks and banking correapond- 42.219 355,359 52.574 12,122 233,799 1,630 393.703 1.262.969 1,216,666 1,131,686 6,183,990 228,418 75,220 245.620 682,071 Due to banks and bankine correspond- entfl else- where than in Canada or the U. K- 815.298 8.761 516.181 416.736 115,043 186.309 32.245 642.289 107.902 79.720 3,385.861 2.111.023 756.tKI5 128.055 164.065 2.575.617 4.182 60.240 1.732.207 712.319 79,053 48,9.50 3.104.977 1,143,536 766.283 130,613 162,978 42.382 178,170 193.862 labilities not Deluded livSoiDS J.256.455 709 387.694 297.577 169,938 , 22,789 1.841 41.557 187,095.329 17,021,240 61.393,109 54,359,018 40.509.873 41.023.240 20.615.091 66.148,317 10,095.220 66,135.:i83 220,140.683 151,021.206 64.369.042 37.708.&11 37.926,346 24.900.001 43.967,813 63,513,116 3J88,Jlfl 10,205.807 10.975,801 15,202,534 7,458,886 2,130,859 Aggregate amount of and firms of which ihey are pnnncra 1,109,000 508.129 517,579 93,425 82.771 610,264 692.814 526.799 137.500 401.027 436,052 428,695 Bold and subsidiary coin held during the mouth 8,981,000 373,787 4,048,0M 976.527 858.737 561.220 156.290 2,118,492 54.025 899.307 fi,876.000 6.005,184 1.624.806 723.304 574,405 S-ILSl? 1.030,533 1,676,560 Average amount of Dominion Notes hi- Id during tho month 12,231,440 735,921 5,475,445 3.187,102 3.670.137 3.083,348 1,038,226 4,983.410 158.854 4.614.256 11.511,000 13.146,920 6,346,616 1,940.4,V} 1.953,420 1,623,114 2,774,523 10,257,216 circulation lit any time durina tho 283,286 5-1.605 20,400 907,994 526.887 213.600 15.610.458 2,600.305 6.563,607 4.560,703 4.8ftS.8(H) 3.882.827 1.965,840 0.660,800 070,208 6.016,634 13,827.000 10.010,177 5.328,000 2,868.105 2.400.583 3.302.017 3.St0.500 0,839,407 2,225,400 1,091,506 606,700 ^O 100,866,666 118.190.966 110,620,153 356,685,100 621.347,388 1.275,297,267 10. 106.3 1 1 ^ ASSETS ASSETS J / NAME OF BANK Current Gold and Sub- aidiar>- Coin Dominion Nolci lis in ill 1 l a Notca of other banks Cheques other banks ir as Deposits made with and bal. ,?om other banks Canada Due from banks and p on dents in the Uriiicd Due from bks and banking corres- pondents else- where than in Canada and U K Domin'n Govern- ment and vincial Govem- ties Can, municipal securi- tiea, and Brit., foreign and Colonial public se- curities Otlier than Canada Railway and other bonds, deben- tures and stocks Call and short loans in Canada 00 stocks, deben- tures and bonds (not ex- ceeding 30 days) Call and short loans else- where Canada (not ex- eeeding 30 days) Other current loans and discounts Canada Other current loans and disc'junts elee- whcro than Cailada H It ss Loans Pro- vinoinl Govern- ments Loins to Qties twns, otiAI'ttes ind adiool dijtricts Ovcr- dobts Bank Liabili- Real MorU premiBcs ti'-s o( Other Total other ihiui bank ises on real "wld by tho bank more turners not ineludoH under tho tor<)- Cads T«tnl A SBC IS Canada Else- whoro Total In Canada Else- wbero U.aa cost, less amounts (if any) written off under letters of credit nsiHT contra 1 ? Bank of Montreal guetec Bank Bank ol Nova Scotia Bank of British North America 9 7,651,003 376,838 2,086,802 804.354 863,070 562.496 155.315 1.389.407 69,634 780.4.54 5.322.663 1.896.787 1.644.008 730,859 578.052 306.521 1,033.143 1,686,527 i 3,070,257 ■ 2.09 1.592 164.180 S 10,722,220 375,838 4,178,484 968,5-10 863,079 662,496 163,765 2,139.497 69.634 U66.1S8 7,504,231 6.834.000 1.645,382 739.859 678,662 306.621 1,033,143 1,686,527 S 10.474.201 731.788 6.562.288 2,998,084 3,870,617 3,643,901 I,5:H.536 5.123.174 308.244 4.612,515 10.303,601 11,863.778 5,518.614 3,321.191 2,106.214 1 ,978,281 2.>1K3,079 10.819,402 S 4,2i6 13 288 61 12,302 175 $ 10.474.291 731.788 S,566.504 3,098,097 3.870,647 3.643,904 1.634.824 5.123.174 308.244 1,612.570 10.315,901 11.803.963 6,518.614 3,321.191 3,106.214 1,078.281 a«83,079 10,819.462 s 7(10.000 121.000 244.793 1.436.748 228.000 200,000 100,000 325,000 62,000 240,000 7.38,500 578.000 260.000 150.000 130,000 123.300 185.657 320.350 27.320 51.500 80.600 114.663 53.747 37.155 13.003 s 1.913.121 146.234 754.995 311.272 36S.4I8 349.892 428.195 746.397 208.907 708.030 1.475,274 2.571,739 546.90.5 319.0.30 235.320 199.065 411,120 023.835 ' VoV.776 141.040 los.ai."; 136.030 36.410 6.310 S 4,435.027 916.644 2,635.599 1.121.894 2,439.349 1.987.056 820,271 3.516,009 495,243 2.572.285 5.961.220 5,276.542 2.268,153 1.490„'i4S 1.878,809 1,650.471 1.722,889 4,243,980 32V.375 404.090 1.118.179 392,855 135.412 16,239 s i':j8,6oo S 298,246 26.433 8.101 22.429 67.256 2.948 609.001 136.401 2.881 11,973 t 1.397.917 i.ios.ooo 95,420 S 5.348,416 310.000 1.663.671 1.041,356 1.152,081 1.293.204 410,371 532,311 55.190 801.818 4.439.203 2.187.807 1,267,726 177,430 924,215 70.727 509,409 2,096.501 ■ lobUio 71,472 $ 520,125 49,750 682,643 llV,472 437,000 S 540,591 252.446 1.136,074 1.537.351 11.977 697,865 873,754 618,899 1.103.023 445.119 2,495,725 2.646.3.56 579.623 2.913.139 1.214.778 1.628,949 2.029.595 1.166.470 ■29V.373 34.818 125.246 281,135 i 11.826.479 1.939,076 3.288,386 211.066 960.483 1.644.343 1.035.526 4.350.221 1.921.887 2.705.621 17,392.175 13,645,438 6.007.753 609,245 768,025 204.500 825.302 803.549 1.000.000 1.089.444 293.582 610.805 446.366 103.568 14,406 S 2.217.589 4.157.578 2.523,890 1.793.664 6.957,455 2,950,952 4.008.838 1.712,574 3,761,777 9,982.188 8,453.850 5.066.801 1.333,298 2.995,226 472.489 758.522 4.604.480 ■ 938.874 1.843.044 6-(3.140 1.050.021) 275,000 46.481,588 i 113.788.072 12,251,957 38,608.604 27.609.874 40.747,219 29,930,726 14.518.929 40.757.358 5,220.778 44,795.429 151,814.657 88,327.585 48,000.276 29.134.136 29.781,632 20.841.120 35.157.201 40,242,388 8.251,223 8.054,124 13,117.275 .■5,211.641 1,783,963 882,269 S 8.425.825 $ 301,214 is 6,494.440 308.669 723.781 4,»8.247 3,381,317 982,139 H2,569 1,815,716 J48.597 3.730.229 4.166.619 3,316.602 727,383 1,536.117 S 75.325 105.019 184.017 447.028 151,574 290.310 24.963 173.001 72.017 170,594 024.079 417,762 182.878 118,924 118,349 286,824 97.886 85.565 ■ '17.635 67.004 114.041 10.385 76.372 19,607 S 1.622 48.250 12,349 ■ 177.002 73.134 20.3.S0 11.321 208.377 207,K05 4.000 186.883 21.000 43.210 82.9?. 98.220 44.088 1.028 1.800 t 79,907 20.775 806 V4'.532 85,267 16.099 38.090 83.088 419.177 050.359 81.210 1,983 35.635 .19.465 456.784 V.466 6.931 97.669 16.000 % 4.000.000 1.201,007 1.608.618 1,566.319 2.578.220 1.260.000 664.403 2,927.033 51.664 1.283.217 5,30-1.742 6,908.345 2,946.453 2,016,962 1,051,113 816.510 1.0M.703 2.003.027 '378.678 090.445 350.215 311.691 67.720 118.600 2,575.617 4,182 60,2-10 1.732.207 712.319 79,053 6.544 106.042 1,176.813 148.636 33,426 3.639.792 231.608.300 21.200,778 78.680.048 04,322.311 68,600,561 60,400.636 24,316.605 80.022.015 12.401.845 76.368.646 250,576,288 177.12l,9.')2 77,483,470 4.^5. 116.234 44.289.774 32.231.035 53.052.164 70.720.703 4,601.661 12.763,229 13.060,274 18,532.993 9.025.678 3,076,011 1,366.104 1 2 3 4 6,523.915 8.564.393 5,115.038 3,580.291 156,439 1.142 3 4 6 641,881 '239,121 15.6B2 102,706 143.740 4.491 76.745 ) 7 Banque Nationale Merchants Bonk of Canada. . . I'nion Bank of Canada Canadian Bonk of Commerce Royal Bank of Canada Dominion Bank Bank of Hamilton Standard Bank of Canada Banque d'Hochflaga Bank o( Ottawa Imperial Bank of Canada 8,450 750,000 I3V.426 7 e 27;920 691.917 191,447 359.183 130.258 559,829 620.707 2.594.160 1.185.112 431.302 301.253 598,110 899.974 1,299.327 557,268 ■45.163 2.982,973 9 10 n 385,734 2.181,568 4,937,909 474 5.903.770 10.025,189 8.092.725 91.676 G79.798 10.921 ..538 14.019.957 86.616 149 214.857 100.724 48.960 3.104.977 1.143.536 766.283 130,613 162.078 42.382 178,170 193.862 ' ■8'2.853 10 11 13 260.163 14.068 143.471 1.000 43.496 3,574,231 ■ ■ 3.130 76,403 61,720 58,305 30.609 IS 14 9.500 276,131 196.127 338.729 339.497 064,791 ■ 158.414 101,038 102.252 10.000 124,124 91,873 381 ■4,499.33H '64,643 99.915 i,2*o'.i76 1,513,168 2.148.4.52 3.813.173 3.274,706 ■ ■'68.658 242.863 898.780 156.200 83,133 3S,456 10 17 18 10 16 17 IS 19 16.5,390 9S.222 288.842 67.518 21.660 13,656 165,390 98,222 697,326 863,050 697.320 863.0.50 673.703 613.0-14 220.646 73.170 21 Home Bank of Canada Northern Crown Bank Sterling Bank of Canada Bank of Vancouver 22 7,135 ' 3.438 22 23 24 57.51SJ 613,(144 224;873 62,905 39.883 24 25 WByburn Saourily Baok 12.056 73.176 2S _ Total 28.582,779 13,590.170 42.172.949 00,994,635 17.055 91,011.691 6,616.333 12.908.203 17,819.915 138.100 3.588.651 9.201.28C 34.892.762 10.958.221 22.-^84.905 73.697.295 67,991.255 S9.2fl6,235JS58,429.069 12.960.513 2.111.836 13,121.384 I,291.20sll,,-J40.l00 2.471,176 l0.896,6I6|Il.I34.246j 0.012.8Z4 - o T. c. bovule Deputy MinUier of Finarux ^ THE BANK ACT 41 plication made to the Governor-in-Council, thru the Minister, for approval thereof. The approval of the Governor-in-Council is not given, however, until the Minister is satisfied that all the requirements of the act have been complied with and the necessary publicity given by the insertion of notices in the Gazette and certain newspapers. The approval by the Governor-in-Council of the agree- ment will then be evidenced by a certified copy of the Order-in-Council approving thereof. The notes of the selling bank, of course, cannot be reissued, but must be called in, redeemed and cancelled as quickly as possible. 6. Returns to government (Sections 112-114). — Banks must send a statement in a specified form^ at the end of each month to the Minister of Finance. The statement must be 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 re- turns from any bank at any time. A bank at the end of each calendar year shall trans- mit to the Minister: (a) Detailed returns of all unpaid dividends, bills of ex- change, drafts and certified checks outstanding for more than five years and of all balances in respect of which no transac- tions have taken place or upon which no interest has been paid during the five years prior to the date of such return ; (b) A list of shareholders with their addresses and the number of shares held by each. 1 See combined statements of all banks, Figure 2. RETURN OF THE TOTAL LIABILITIES CANADIAN BANKS AS REPORTED Pekckntage to Total Assets Liabilities to Public Capital authorized Capital subscribed Capital paid up Amount of rest or reserve fund Rate per cent of last dividend declared, per cent. LIABILITIES 1 Notes in circulation 2 Balance due to Dominion Government after deducting advances for credits, pay-lists, etc 3 Balances due to Provincial Governments 4 Deposits by the public, payable on de- mand in Canada 5 Deposits by the public, payable after notice or on a fixed day, in Canada . 6 Deposits elsewhere than in Canada .... 7 Loans from other banks in Canada, se- cured, including bills rediscounted. . 8 Deposits made by and balances due to other banks in Canada 9 Due to banks and banking correspond- ents in the United Kingdom 10 Due to banks and banking correspond- ents elsewhere than in Canada and the United Kingdom 11 Bills payable 12 Acceptances under letters of credit. . . . 13 Liabilities not included under foregoing heads Aggregate amount of loans to directors, and firms of which they are partners . Average amount of current gold and subsidiary 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 P190,866,666 118,190,966 116,520,153 108,959,833 ,143,411 6,760,046 34,075,596 356,585,196 621,347,388 86,600,194 6,002,957 14,228,085 9.713.020 21,169.142 11,134,246 8,537,905 $1,275,297,267 $10,105,316 37,107,557 91,656,478 108,178,424 12.56 7.78 7.67 7.17 6.52 .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 8.54 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 is We declare that the foregoing return is made tip from the bonks of the -Ban^"- clearly the financial position of the Bank, and ire further declare that_^the Bank has ion notes less than forty per cent of the cash reserves which it has m Canada this day of 19. . . . Figure 3 42 Form Prescribed for AND ASSETS OF ALL THE TO THE GOVERNMENT On the Thirty-first Day of July, 1913 Peecentage to ASSETS Total Assets Liabilities to Public 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Current gold and subsidiary coin : In Canada, $28,582,779. Elsewhere, $13,590,170 Dominion notes : In Canada, $90,994,635. Elsewhere, $1 7,055 Deposit with the Minister of Finance for the security of note circulation Deposit in central gold reserves Notes of other banks Checks on other banks Loans to other banks in Canada, secured, including bills rediscounted 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 government securities Canadian municipal securities, and Brit- ish, foreign and colonial public securi- ties other than Canadian Railway and other bonds, debentures, and stocks Call and short (not exceeding thirty days) loans in Canada on stocks, de- bentures and bonds Call and short (not exceeding thirty days) loans elsewhere than in Canada Other current loans and discounts in Canada Other current loans and discounts else- where 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 as per contra Other assets not included under the fore- going heads $42,172,949 91,011,691 6,616,333 'i2,'9'08,263 47,819,945 138,100 3,588,651 9,201,286 24,892,762 10,958,221 22,584,905 73,697,295 67,991,255 89,266,235 858,429,069 42,960,513 ' 2,111,836 43,121,384 4,291,208 1,340,100 2,471,176 40,896,616 11,134,246 9,912,824 2.77 5.99 .44 " .85 3.15 .24 .61 1.64 .72 1.49 4.85 4.48 5.87 56.49 2.83 " ' .14 2.84 .28 .09 .16 2.69 .73 .65 100.00 3.31 7.14 .52 i.oi 3.75 .28 .72 1.95 .86 1.77 5.78 5.33 7.00 67.32 3.37 ' '.ie 3.38 .34 .10 .19 3.21 .87 .79 119.15 correct according to the books of the bank. Chief Accountant, and that to the best of our knowledge and belief it is correct, and shows tridij and never, at any time during the period to ivhich the said return relates, held in Domin- Individual Statement Figure 2 — continued 43 President. General Manager. 44 BANKING PRINCIPLES 7. Payments to the Minister of Finance upon dis- solution of a hank (Sections 115-116). — The liqui- dator of a bank must, after three years, pay to the Minister of Finance all amounts due to shareholders or depositors remaining unclaimed, together with all interest due. The government will hold the money in trust for the owners and, in case of interest-bearing deposits, will continue to allow for six years' interest at the rate of three per cent per annum. Liquidators of banks are also required to pay to the Minister of Finance within three years an amount equal to the excess of the outstanding notes in circu- lation over the amount at the credit of the bank in the Circulation Fund, the same to be held by the govern- ment for the purpose of redeeming such notes. 8. Canadian Bankers' Association (Section 117- 124). — In the event of the suspension of a bank the Canadian Bankers' Association is intrusted 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. v The association may make by-laws, rules, and reoju- lations respecting: (a) All matters relating to the appointment or removal of a curator, and his powers and duties ; (b) The supervision of the making of the 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. THE BANK ACT 45 No such by-law, rule or regulation, however, shall be in force until approved by the Treasury Board. 9. 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 deficiency 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. 10. Suspension (Sections 126-131). — The non- payment in specie or Dominion notes of any of its lia- bilities, as they accrue for ninety days consecutively, constitutes a bank insolvent and suspends the working of its charter. The charter shall remain in force a length of time sufficient only to enable the directors to make and enforce the calls on the shareholders deemed necessary to pay all the liabilities 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 government, and the third charge the payment of the money due to the Provin- cial government. 11. Penalties (Sections 131A-158). — The remain- ing sections deal entirely with offenses against the act and the penalties incurred. The majority of the pen- 46 BANKING PRINCIPLES allies are applicable to banks and bank officers, but the following 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 cir- culate as money or to be used as a substitute for money ; For mutilating or defacing bank notes or Dominion notes ; For making false statements in connection with ware- house receipts or bills of lading, or for wilfully disposing of or withholding from the bank goods covered, by security under Section 88, an indictable offense; For using the word "Bank," "Savings Bank," "Banking Company" or an}^ equivalent term without being authorized to do so by the act, nor can any words in a foreign language with a similar import be used. 12. Amendments to Bank Act during 1913-1916. — At the outbreak of the war in August, 1914, the Do- minion Government extended the emergency currency privilege thruout the whole year, instead of limiting it to the usual period from September first to February twenty-eighth. It also authorized the chartered banks to make pajments in bank notes instead of in gold or in Dominion notes, until further official' an- nouncement. Neither of these amendments were availed of to any appreciable extent. An amendment to section 88 of the Bank Act was made in March, 1915, permitting the banks to lend money to farmers for the purchase of seed gi*ain upon the security of the grain and the subsequent crop. This privilege was availed of to a very limited extent as the banks were content in most cases to rely upon THE BANK ACT 47 the general credit of the borrower, as they had in the past. In INIay, 1916, another amendment to Section 88 of the Bank Act was passed, permitting banks to loan money to a farmer or to any person engaged in stock raising upon the secm'ity of live stock. In provinces where chattel mortgages are legal the security of the live stock must be taken in the form of a chattel mort- gage duly registered. In any province in which there are no statutes or ordinances in force relating to bills of sale or chattel mortgages, security may be taken by way of an assignment, but a memorandum of such se- curity must be published in the Official Gazette of the Province within thirty days after the date of the as- signment. These onerous requirements defeated the object of the amendment and little advantage was taken of it. The borrower naturally objected to the publicity incurred and the banks on their part w^ere unwilhng to undertake the responsibility and work en- tailed bv such a transaction. 13. Bills of Ecvchange Act. — The whole business of banking is so intimately concerned with negotiable in- struments and the laws governing their existence and validity that a fair knowledge of the general principles of the Bills of Exchange Act is essential even to the youngest bank clerk, and such knowledge is best ob- tained by a study of the act itself. For this reason little or no attempt has been made in this book to ex- plain the nature of the various classes of negotiable instruments. Copies of the act are easily obtainable — 48 BANKING PRINCIPLES if annotated, so much the better, and every student of banking should make a systematic study of the act until it is thoroly mastered. Concise notes should be taken under the different heads, and sufficient space left for comments or illustrations gathered from ac- tual experience or from legal decisions. This rough classification gives an idea of the scope of the act: Sections 1-16 Interpretation and general provisions of the act. 17 -16 If. Bills of Exchange. 17-34 Form of bill and interpretation. 35—39 Acceptance and interpretation. 40—41 Delivery and oral evidence. 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. 165-175 Checks {Crossed checks). 176—187 Promissory notes. Schedule. The Bills of Exchange Act, like the Bank Act, is a Dominion statute and is largely based on and fol- lows, almost word for word, the English Bills of Ex- change Act.^ 1 Copies of the Bills of Exchange Act can be obtained by forwarding twenty cents to the King's Printer, Ottawa. THE BANK ACT 49 REVIEW What are the powers and limitations of a Canadian bank? W^hat are the regulations governing deposits ? What information must a bank submit to the Minister of Fi- nance each year? Under what conditions is a bank declared insolvent? XVI— 5 CHAPTER V NOTE ISSUES AND THE BRANCH SYSTEM 1. Monetary system. — The monetary system of Canada consists of gold, paper cmTency, 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 in the United States and the British sovereign (worth $4.86%) are legal tender for any amount, and still form the bulk of the gold re- serves of the government and of the banks, as it is only of recent years that Canada has had a distinct- ive gold coinage of its own. Gold coin is seldom seen in circulation and its use is practically confined to re- serve i^urposes and international exchange operations. Silver is used for the subsidiary coins of the denomi- nations from five to fifty cents and copper for the cents. With these exceptions, paper currency is prac- tically the only form of money used in Canada. It consists of two kinds, Dominion 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 under the following conditions : the Minister of Finance shall always hold for the se- 50 NOTE ISSUES 51 ciirity and redemption of Dominion notes up to and including $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 guaranteed by the government of the United Kingdom. The amount held in gold, how- ever, shall never be less than 15 per cent of the notes so issued and outstanding. As security for the redemp- tion 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 cir- culation $116,363,538 Less amount protected by 25% of gold ! 30,000,000 $7,500,000 Excess over $30,000,000 pro- tected by full amount of gold ..' 86,363,538 86,363,538 Total gold held account Do- minion 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 three of four per cent, being subsidiary silver), making a total of $138,381,985 of gold held 52 BANKING PRINCIPLES by the banks and the government or, allowing for the silver, about $133,000,000. This amount will repre- sent the total gold holdings of Canada, as there is practically none in circulation 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, $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 j)layed in the upbuilding of the country. Valuable as the note issue privilege is to the banks it has proved even more valuable to the countr}^ since to the banks, as well as the railways, maj^ be ascribed the credit for the phe- nomenal development of Canada during the past twenty years. 2. 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 various provincial capitals. They may be issued in any denomination, but the one and two dollar bills are practically the only denomination in active circula- tion, the larger bills being used principally by the banks for clearing and reserve purposes. 1 From this should be deducted about $11,000,000 representing the amount of bills in process of clearino; between the banks, and held in the tills of the several banks as "bills of other banks." NOTE ISSUES 53 The government statement of June 30, 1913, shows the following amounts outstanding: Provincial and fractional $769,426 $1 12,750,790 $2 9,340,820 $4 109,717 $5 5,854,985 $50 15,200 $100 6,600 $500 2,880,000 $1,000 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 It will be noted that $80,089,000 is given as "legal tender between banks"; this amount consists of special notes that are payable only to chartered banks in Canada and used by them as before stated. From the figures given above it will be seen that $36,274,538 is available for i^ublic use, but the banks' statements to the government at the same date shows that the holdings of Dominion notes by the banks amounted to $94,544,199, 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. 3. Bank note issue. — Bv the Bank Act, Canadian 54, BANKING PRINCIPLES banks are empowered to issue notes of $5 and multi- ples 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, Hahfax, St. John, Charlottetown, Montreal, Toronto, Winnipeg, Regina, Calgary and Victoria. Every bank accepts the bills of every other bank at par and forwards them to the nearest branch or re- demption 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 advantages of the system, and makes the cir- culation perfect and free from stagnation. The circu- lation thus varies in velocity and volume as the activity and requirements of the country demand, revealing to the experienced banker the conditions of trade and finance thruout the country. It is important to remember in considering the note issue that, in the tills of its own bank, a note has absolutely no value except as so much stationery. This enables 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 over the counter. This is a very valuable feature, as it not only allows a bank to keep a good supply of till money on hand NOTE ISSUES 55 without loss, but it enables a small branch to meet an usually large demand for cash either in the way of repaying a heavy deposit or of making a large loan. 4. 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 five per cent per annum from the date of suspension until re- deemed either by the liquidator or by the government, and each bank is obliged to keep a deposit with the government for this purpose equal to five per cent of its average circulation. This is called the Bank Cir- culation Redemption Fund, and should it ever happen that the assets of a failed bank are insufficient to re- deem 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 themselves. The note holder is amply protected, first, by the total assets of the bank ; second, by the double liability of the shareholders; and third, by the entire redemp- tion fund. The amount of circulation outstanding at the end of June, 1913, was, in round numbers, $106,- 000,000 for the whole of Canada, and to meet this the banks could show total assets of $1,521,000,000 (in- cluding five per cent redemption fund, $7,500,000), and double habihty $116,000,000, or nearly $78 assets for every five-dollar note issued. Then also penalties for over-issue are extremely heavy. It may be noted that only three banks have a cir- 56 BANKING PRINCIPLES culation that much exceeds the total redemption fund. The question may perhaps be raised, why should all this care be taken to protect the note holder against the principal creditor of the bank, the depositor, but it must be recognized that there is an essential differ- ence between a note holder and a depositor, the former being an involuntary creditor and the latter a volun- tary one. The depositor becomes a creditor of his own free will and for his own 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 merchandise and should be fully pro- tected. A note issue, to fulfill its best and most use- ful function, must be absolutely and without question as good as gold. One of the strongest elements of security, however, is the fact that the notes are sub- jected to daily redemption. A Canadian bank is pro- hibited by law from pledging or assigning its own notes, consequently the only way it is able to put them into circulation 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. 5. Elasticity. — The most admirable feature of the note issue is its quality of elasticity. In every coun- try, more especially every new country where the ag- NOTE ISSUES 57 ricultural interests naturally predominate, the alterna- tions of the seasons and the succession of the various agricultural and lumbering products, have an import- ant influence on the currency requirements of the na- tion. In Canada the machinery of the circulation sys- tem is such that it expands and contracts automat- ically according to the wants of the country. It will expand to pay for the making of butter and cheese, the moving of the crops, and for lumbering operations, but when it has performed these duties it will contract silently and without disturbing the money market or any of the banks' numerous functions. Dunbar, in his "Economic Essays," thus defines elasticity in cuiTcncy: It means responsiveness to present increase or diminution of demand — the power of adaptation to the needs of the month, the week, or the day, whether rising or falling. . . . Elasticity implies the operation of counter forces, in a cur- rency as well as in a steel spring. That a currency may be responsive to demand, it is necessary that the forces tending respectively to expand or to restrict, should be forces at work in the daily business of the bank, where it is brought into contact with the community by the stream of loans, de- posits and payments. 6. Seasonal fluctuations. — The study and analysis of the monthly circulation returns afford much inter- esting and useful information. The monthly and an- nual fluctuations show, year by year and season bj^ season, every change and pulsation in the financial life of the nation, increasing annually in volume by an av- erage of late years of about $8,000,000, while each 58 BANKING PRINCIPLES month, tho sharing in the general annual increase, shows a rise or fall corresponding with the same months of previous years. The tables in Figiu*e 3 are compiled from the government returns and illus- trate that fact very forcibly. It must not be over- looked that the figures given do not show either the maximum or the minimvmi amount of circulation dur- ing the respective months, but simply the point at which the issue stood at the end of each month. The maximum amount of circulation during the month is given in the government statement, but the figiu'cs at the end of the month are generally considered as the most satisfactory figures to deal with. 7. Annual changes. — Figui-e 3 shows the amount of notes in circulation at the end of each month from January, 1901, to January, 1913, inclusive; and the average 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 1902 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? m — 92 — 97 1910 82 73 — 99 — 100 1911 90 77 — 112 — 108 1912 100 88 — 120 Dec. 115 NOTE ISSUES 59 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 tendenc^^ 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 circula- tion can be traced to seasonal or temporary reasons, which do not, as a rule, affect the year as a whole, and can generally be ascribed to purely Canadian causes ; but the check in the annual increase and the de- crease in the volume of the circulation tell a different and more serious tale, generally that of unwise specu- lation 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 consequent depression in business during the following years seriously affected the circulation, and the following year, 1909, shows a curtailment of all ex- pansion and enterprise thruout the coimtry. A simi- lar condition will be found to follow all such panics. A reference to the years 1892, 1893, and 1894 shows the average circulation for these years as $32,000,000, $34,000,000, and $31,000,000 respectively, the latter figures showing the reaction from the panic of 1893. A study of the monthly fluctuations shows that from 1868 to 1891 the lowest point in the circulation. 60 BANKING PRINCIPLES was generally reached about the middle of the year in- stead of in January, which is now the lowest month. About 1889 evidences of a change began to ap- pear, until by 1895 the readjustment was completed, and January became 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 his- tory of the Dominion, and this was no less an occasion than the opening up of the gi-eat 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 pub- lic, but in 1907 the banks began to realize that the moving of the crops and the opening up of the North- west was beginning to test tlie efficiency and volume of the available circulation. A number of the banks increased their capital. For tlie requirements of the average circulation this would have sufficed amply, but it was impossible to increase capital at a suf- ficiently rapid rate to cover the "soaring peak" of the October and November demand for currency. In 1908 an amendment to the Bank Act was passed per- mitting banks to issue emergency currency during the crop-moving months, based on a percentage of their combined capital and reserve. This, tho useful, proved of only temporary and limited advantage. Another expedient was tried by the govermnent in CIRCULATION OF CANADIAN BANKS "Y^Jiame.tn linnojis.aa repotted in the Governmeat Statemenf at the ^nd of Each Month. 1901-1913 Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Capital 1901 45 46 48 47 46 49 49 51 56 58 58 54 67 1902 49 50 52 51 51 54 52 55 61 66 65 61 73 1903 55 56 58 56 57 59 58 60 64 71 67 63 79 190i 57 58 60 59 58 60 60 60 64 72 69 65 80 1905 58 59 59 60 58 62 61 62 70 77 73 70 85 1906 61 62 66 67 64 69 68 70 77 84 81 78 95 .1907 6S 71 76 73 71 76 73 77 79 84 84 78 96 1908 67 69 69 67 68 68 67 70 76 83 80 73 96 1909 66 67 69 67 69 70 71 72 79 90 86 81 97 •1910 73 75 78 79 77 80 81 81 87 96 90 88 100 1911 ti 80 82 84 82 89 89 91 97 106 102 102 108 .1912 88 89 96 95 94 103 96 102 104 111 116 110 115 1913 95 97 102 98 103 106 99 106 111 118 119 — 118 DlHerence la Millions over Previous Month. 1901-1913 Decrease shown thus:- 2 (minus two) Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. 1901 1 2 — 1 —1 3 2 5 2 — 4 ,1902 — 5 1 2 — 1 3 — 2 3 6 5 — 1 — 4 1903 — 5 1 2 — 2 1 2 — 1 2 4 7 — 4 — 4 '1904 - 6 1 2 -1 -1 2 4 8 — 3 — 3 1905 M 1 1 —2 4 — 1 1 8 7 —4 —3 1906 — 9 1 4 1 —3 5 -1 2 7 7 — 3 — 3 1907 — 10 3 5 — 3 —2 5 -3 4 2 5 — 6 1908 -11 2 — 2 1 1 3 6 7 — 3 1909 1 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 6 9 — 4 1912 -14 1 7 — 1 —1 8 -6 6 2 7 5 — 6 1913 —15 2 5 — 4 5 3 -7 7 5 7 1 . Figure 3 61 62 BANKING PRINCIPLES permitting banks to deposit gold with the Receiver- General and obtain Dominion notes in exchange. This was not taken advantage of to any great extent, as it was found to be not only slow and clumsy in oper- ation, but lacked the essential feature of elasticity. As might be surmised, during the past few years the banks have frequently found themselves uncomfort- ably near the limit of their circulation, and at these times they do not present the notes of other banks for redemption in the usual way, but retain them for their own use over the counter. For instance, in June, 1912, the banks evidently held each other's notes until the June demand was satisfied, and in consequence the July redemption was abnormally large. In studying the circulation returns for the years 1908 to 1912 these peculiar conditions, and the expedients re- sorted to for supplying the extra circulation required, must be taken into account. 8. Monthly changes. — Figure 3 shows the differ- ence month by month, six months of redemption and six months of issue. The months arrange themselves naturalty into three groups, as follows : Monihs of Issue Months of Redemption Februaiy. April. JNIarch. May. June. July. August. November (4th week). NOTE ISSUES 63 Months of Issue Months of Redemption September. December. October. January. November (3 weeks). The circulation year commences with the month of February, which shows a shght output varying in amount, and due principally to the requirements of the lumbering industry. March again calls for an in- creased issue, as in this month the lumbering camps are paid off, and only sufficient men for the drives are re- tained. In April and ]May most of the March circu- lation is redeemed, as the lumbermen return from the woods 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 verv considerable rise in circulation ; then navigation opens, the large lumber drives are com- pleted and the men paid off. Payments for dairy products increase in amount and general activity pre- vails thruout the country. July is a redemption month, and generally shows a considerable falling off; factories are closed down for repairs and stock taking, and the steady circulation of factory pay-day asserts itself by its absence. In addition to this the summer exodus to the seaside and to Europe begins with the consequent purchase of traveling fmids. August is the first of the three great months of issue. But- ter, cheese, and hay, with vegetables and all manner of fruit for cannery and table use, call largely for cur- 64. BANKING PRINCIPLES rency, and with increased momentum join forces with the cereals in September and October mitil the highest point of the circulation is reached, usually in the third week of November. Toward the end of November the steady return of the circulation begins and con- tinues all thru December and January. It is, of course, impossible to detail all the influences which affect circulation, but the above covers the more important points. A late winter or spring, for instance, will, of course, affect the figures for the spring months slightly, and those for the fall may be influenced by the lateness of the crops or by the holding of their produce by the farmers 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, tho delayed, take place as usual. 9. Emergency currency. — The provision for a spe- cial issue during the crop-moving period, tho limited in operation, was found sufficiently useful to be incor- porated in the Act of 1913. It provides that during the crop-moving period, from the first of September to the end of February, banks are at liberty to increase their note circulation to the extent of 1 5 per cent of the combined total of their paid-up capital and reserves. A bank, for instance, with a paid-up capital of $10,- 000,000 and a reserve of $5,000,000 would, of course, at all times be able to issue notes up to $10,000,000, but during the period from September 1 to February 28 it can make a further issue of 15 per cent of NOTE ISSUES 65 $15,000,000, namely, $2,250,000, excess, or a total of $12,250,000. As this excess issue is subject to a gov- ernment tax of five per cent, its use entails a loss to the bank, and consequently it is used only when abso- lutely necessary. In August, 1914, this privilege was extended thru- out the whole year, during the continuation of the war. 10. Central gold reserves. — For some time it had been felt that the emergency currency and other ex- pedients were only tentative measures, and that in the revision of the Bank Act a satisfactory solution of the difficulty would be found. The central gold reserve furnishes a solution of the difficultv, and is a consistent amplification of the note-issue system, which has so completely met the requirements of the country dur- ing the last fifty years. The central gold resen^e 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 possess all the desirable features of elasticity and convertibility in common with the ord- inary issue. As a matter of fact, there is only one is- sue, and the central gold reserves come automatically into operation as soon as the circulation issued by a bank exceeds its authorized amount, and are inmiedi- ately released by the retirement of the excess in the ordinary course of redemption. The machinery is simple. Under the new law four XVI— G 66 BANKING PRINCIPLES trustees are appointed — three by the banks and one by the Minister of Finance — and the banks are empow- ered to deposit with these trustees as much of their gold as thej^ like. This deposit is called the central gold reserves. The banks are then permitted to is- sue against the reserves their notes, dollar for dollar, as and when required. Thus, as has already been said, a bank with $10,- 000,000 paid-up capital, $5,000,000 reserve, and $15,- 000,000 of gold and Dominion notes (which are really receipts for gold), would at all times be able to issue up to $10,000,000, and during the emergency period ( September 1 to February 28) would be enabled to in- crease its circulation to $12,250,000. This bank would in all probability deposit with the central gold reserves, say, $5,000,000 in gold or Dominion notes. It would then be at liberty to allow its circulation to run up to $15,000,000 at any time, or to $17,250,000 during the emergency period, and it could issue a still larger amount of notes by making a further deposit with the central gold reserves. Under previous acts, Canadian bank notes have proved tliemselves to be as good as gold; and the ex- cess circulation protected by the central gold reserves will be equally as good, irrespective of amount. The system of issue and redemption thru the branches could not be improved upon. A note issue which has absolute security, rapid convertibility, and unlimited elasticity must surely come as near perfection as it is possible to reach. NOTE ISSUES 67 11. Lost and destroyed notes. — There is a very ex- aggerated idea in the mind of the pubHc as to the amount of notes that are lost or destroyed, and never presented to the banks for redemption. So far as the banks themselves are concerned, the amount is immaterial ; they cannot profit by it in any way, except in so far as the notes form part of their general outstanding circulation. In case of the fail- ure of a bank, the liquidator, at the end of three years, pays to the government an amount sufficient to re- deem all outstanding notes; in this way the govern- ment eventually gets the benefit of any notes not pre- sented for redemption. Very few people can give instances within their per- sonal knowledge of notes destroyed bej^ond recovery, either by fire or other agencies. When such accidents do occur the banks always stand prepared to consider a refund of the amount lost, provided satisfactory affi- davits and bonds are submitted. No bank is able to give any figures as to the amount of destroyed notes represented in its circulation; notes issued forty or fifty years ago are still being presented for payment. A study of the course of redemption of the Sover- eign Bank circulation is interesting. This bank failed at the beginning of 1908 with an outstanding circula- tion of $1,988,585; at the end of six years (January 1, 1914) there remained $23,520 unredeemed or only 1.18 per cent of the amount outstanding on January 1, 1908. On January 1, 1917, this amount had been 68 BANKING PRINCIPLES further reduced to $15,270 or .61 per cent. During 1916 redemption averaged over $100 monthly. The outstanding balance consists entirely of fives and tens, all larger denominations having been re- deemed. 12'. Branch system. — Practically every country in the world except the United States has recognized the utility, if not the absolute necessity, of the branch sys- tem of banking in handling commodities as liquid as money or credit. A bank system without branches is on a par with a city without waterworks or a country without a railroad so far as an equable distribution of credit is concerned. In October, 1916, there were in Canada twenty-two banks, with head offices situated principally in Mont- real and Toronto, controlling 3,296 branches of which 3,190 are situated in Canada, twenty-five in Newfoundland and eighty-one elsewhere, chiefly in the West Indies. Some of these banks have over three hundred branches scattered thruout the Do- minion, receiving money in Vancouver today and lending it in Halifax to-morrow, or the reverse; and ceaselessly working to remove money from where it is least needed to where it is most needed. With a branch system money always finds its own level. A merchant in the West pays no more for his banking accommodation than his confrere of equal standing in the East. The immense territory covered by Canada alone makes branch banking an absolute necessity for the economic and efficient distribution of loanable cap- NOTE ISSUES 69 ital and banking facilities. Any other method would be cumbersome and wasteful. Under the Bank Act banks are permitted to "open branches, agencies, and offices." No restriction is placed by the govermiient on the number or situation of the branches to be opened bj^ any bank, and to this absence of red tape may be ascribed in great measure the successful working of the system in Canada. As a practical illustration of the work accomplished by the branches in distributing wealth, let us take two towns — it is immaterial whether they are ten miles or three thousand miles apart. A is a comparatively wealthy town, with a population composed in gTeat part of retired merchants and farmers, with practi- cally no industries and with little or no enterprise. Its deposits are large with no demand or outlet for money in the town. B, on the other hand, is a busy little manufacturing town with all its money invested in its constantly increasing industries, and the branch here receives but meager deposits to meet the heaw demands for advances. Now this is where the branch system steps in and enables the B branch to use the surplus funds of A, thus supplying the legitimate re- quirements of B's customers, to the profit of the bank and the benefit of the town. When it is remembered that this principle is working every day in hundreds of branches thruout Canada in towns and villages ten, one hundred or one thousand miles apart, and yet just as intimately interdependent of each other as in the above instance, the benefit and economy of the 70 BANKING PRINCIPLES branch system will be realized. From this it will be seen that no matter how small the deposits are in a branch, its loanable funds are limited only by the available resources of the bank of which it forms an integral part. A branch till is like the widow's cruse of oil; it can never be emptied nor yet, on the other hand, can it be made to overflow. A consideration of the great area over which the branches of Canada are spread and the variety of in- terests to which they minister, impresses one Avith the fact that Canadian banks are not local in character, and that their interest and their activity are not bounded by the confines of any one town or province, or even by the Dominion itself. 13. Branch system and circulation, — The branch system and the note issues are the two principal fac- tors which have enabled the banks to assist so ma- terially in the expansion and upbuilding of Canada. They are so closely connected and interdependent that it is necessary to consider them together. With- out branches the circulation would lack in a great measure the elasticit>^ of issue and redemption which is its most useful and characteristic feature. With- out the circulation privilege it would be impossible for the banks to open branches in new and sparsely popu- lated districts. It is well known that the average branch is run at a loss for the first three or four years, and bearing this in mind a consideration of the large number of branches opened yearly by the banks, must lead to NOTE ISSUES 71 the conclusion that many banks are devoting at least the whole of their profits on circulation to the opening of branches and the development of new districts. An average of three or four new branches opened yearly might easily absorb the profit on $1,000,000 circulation, especially in the West, where the initial and the operating expenses are high. With the exception of Scotland, where branch banking has been brought to a gi'cat degree of per- fection, Canada shows a larger number of branches in proportion to population than any other country in the world, as the following figures will show: At End of 1912 Scotland one bank to every 2,106 people Canada one bank to every 2,847 people United Kingdom. . .one bank to every 5,116 people England one bank to every 5,422 people United States .... one bank to every 3,407 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 eveiy 2,354 people. Cincinnati, in the United 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 show only 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 con- cerned. Without asset currency, however, such ex- pansion would have been impossible. 72 BANKING PRINCIPLES 14. Branch system and the borrower, — The eco- nomical and equable distribution of loanable funds made possible by the branch system has already been referred to. The control of these funds and the abil- ity to direct them to different parts of the country, according to the demands of trade and agriculture, has enabled the banks to accomplish astonishing re- sults 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 bor- rower and borrower. A little consideration 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, altho these two gentlemen may be quite unconscious of the relation and have probably never even heard of each other. There is practically little or no fluctuation in the total amount of commercial loans, only a steady in- crease due to the gi'owth of the country, the demand for the loanable capital at the disposal of the banks generally being in excess of the supply. In the gov- ernment statement of July, 1913, commercial loans were reported 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 ti'ue they restrict unwise expansion in times of financial stress, and are always foresighted in preparing the country for troublesome NOTE ISSUES 73 times, but this action is of inestimable benefit to the country. Even under the serious conditions which prevailed in 1893, 1907, and 1913, regular customers were not restricted in the use of their authorized lines of credit or reasonable renewals thereof. The banks did refuse to make advances for projects outside or- dinary business requirements, such, for instance, as an unusually heavy purchase of raw material, not for the immediate needs of the business, but simply available at a bargain. New 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 assistance. 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 in- stance, current loans increased by over $11,000,000 between January 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 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 Canadian customers were asked to pay no more than the usual rate of six or seven per cent.* The slow and apparently placid increase of the loans, as shown by the monthly statements, is decep- tive, for beneath the surface lies a seething mass of 1 See call loans in New York, page 103. 74. BANKING PRINCIPLES activity, inexti-icably interwoven. The continued ex- istence of each kind of advance depends in great measiu'e on the constant mobihty of every other. Re- payments of advances made by one class of industry are received in time to be loaned to an entirely differ- ent business, possibly at the other end of the countiy, and so on. If lumber becomes unsalable from over- production or other causes, the advances made for lumbering operations would not be liquidated in sea- son, and the banks might find it difficult to satisfy the requirements of other industi'ies, which generally make use of these funds as they are returned. This will indicate how necessarj^ 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 merchan- dise 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 de- pendent on the frequency of this "turn over," and the keen interest which bankers take in preventing over- production in any line is thus justified. The average customer gauges his output from local or provincial experience, the banker from a national and interna- tional standpoint. A concrete example may be of value in illustrating the circulation of credit attained thru the branch sys- tem. Take, for instance, a western farmer who bor- rows money from a bank in the beginning of the year in order to pay for seed and labor, and about the same NOTE ISSUES 75 time becomes indebted to the local store for supplies and the like. When he harvests his crop, in the or- dinary course, he sells it to a grain buyer, who pays him by a check 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 liquidates his indebtedness to his bank or to the manufacturer; the latter in turn pays his bank and buys more raw material. This is an instance of only one class of loan, but it will give some idea of the fluidity and interchangeability of credit which is possible thru the branch system. It might further be pointed out that the aggregate liqui- dation of loans by the farmers and correlative debtors enables the banks to finance the crops by making ad- vances against warehouse receipts, etc., which are ul- timately liquidated by drafts with bills of lading at- tached. This financial operation provides the basis for foreign exchange with which to pay for the raw material and other imports of the manufacturer and wholesaler. It is impossible fully to appreciate the far-reaching effect of even this simple payment of a farmer's debt. The discharge in any part of Can- ada of a debt of no matter what nature or size, is likely to be equally dynamic in its influence on the huge tho sensitive volume of loans. 15. Establishing a line of credit. — There are cer- tain conditions covering the relation of Canadian 76 BANKING PRINCIPLES banks with their borrowers which are invariably ob- served. One is, that no man can be a borrower from more than one bank, and it is only in the case of a very large account that this rule is broken, and then only by mutual agi'eement between the banks inter- ested. 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 sup- port of that bank at all times. The bank is also thoroly in touch with his position and prospects, and is often able to give valuable advice. Another con- dition a Canadian bank insists on is, that a full state- ment 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 Avhat is called a line of credit, based on his estimated requirements, which is generally for a period of one year, during which time the customer is able to use as much or as little of the authorized credit as his business requires; providing, however, that he does not exceed the limit. A cus- tomer of a Canadian bank of opood standing has there- fore very little to worry about during the currency of his line of credit. He is not called upon to pay in- terest on more money than he is actually using, and he is, moreover, assured of the support of the bank in the operation of his legitimate business, no matter what the financial conditions may be. The position of a bank customer in the United NOTE ISSUES 77 States is very different and not always so comforta- ble. National banks are restricted by 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 comitry. This practice is not to the advantage of the borrower; he is dependent on note brokers to dispose of his paper to various pur- chasers thruout the United States, to whom he is personally unknown. The paper must be met at ma- turitjT- without fail. True, provision could be made by selling more paper, but if money is at all scarce even this resource is not available and, in consequence, solvent firms are often forced to the wall. The po- sition is an unfortunate one for the borrower, not only because his finances are always in a state of un- certainty, but because the practice has a tendency to encourage over-borrowing in times of easy money, with consequent over-expansion. This evil is un- likely to happen to a man who has only one bank to deal with, as no trained banker would allow a cus- tomer to obtain more money from the bank than his business conditions warranted. A 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 manufacturer and wholesale merchant to the makinfi- of one class of paper, their own single name notes, and consequently comparatively few settlements witli their customers are affected by means of notes or drafts, the amounts due being carried in open account 78 BANKING PRINCIPLES 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 thru 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 securitj^ for the purpose of cre- ating or purchasing 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 and, when discounted by a reputable firm, form the highest class of security a bank can have. The discounting of trade paper is of benefit both to the bank and to the borrower. The latter changes a direct loan into an indirect or contingent liability, and is assured of the effective 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 been disposed of to responsi- ble merchants; furthermore, its position is strength- ened b}^ a second name and a definite date of pay- ment. 16. Branches and panics. — It is apparent that the branch system not only gathers up money thruout the country, but distributes and varies the risk of the NOTE ISSUES 79 bank's investinents. It does more than this, it dis- tributes 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, tho quite capable of wrecking an individual bank, would not seriously affect the standing 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 the run by its ability to pay out its own notes; these would be taken readily by the depositors and, as a rule, assist- ance from the 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. Frequently, in such cases, the majority of the de- posits are returned to the bank if it is willing to take them. Depositors who can be stampeded in this manner by a chance word or rumor are not desirable, and the refusal to reopen a few of these accounts has a very salutary effect on a community. So unrea- sonable are panics of this nature that people have been known to withdraw money from a small city branch and deposit it in the main office of the same bank further down the street, but occupying a more pretentious building. Such panics as these are dis- agreeable, but do not seriously affect a bank as a whole, and fortunately thej'^ seldom happen. Even a serious loss by way of a bad loan would not affect the security of a branch depositor; no matter how small the branch, the depositor shares in the gen- 80 BANKING PRINCIPLES eral security of the assets of the whole bank. The failure of a large customer might easily force a purely local bank to close its doors, but under the branch system the loss would be spread over the earnings of the whole system. Altho the keenest competition exists among the banks in obtaining business at their various branches, and little or no intercourse occurs between the gen- eral managers in ordinarj^ times, they are, as trained bankers, naturally in accord in interpreting the first signs of trouble on the financial horizon, and either in their several annual addresses or thini the press warn the public to retrench and prepare for the storm. All the annual reports of the banks issued at the end of 1906 and beginning of 1907 contained, in the ad- dresses of the several general managers, serious warn- ings of troublesome times ahead, which unliappily materialized in October, 1907. Banks made them- selves veiy unpopular in the early part of 1907 by their insistence on retrenchment in all lines of busi- ness activity, but their wisdom was fully justified by the result — Canada rode thru the storm inconven- ienced but unscathed. Should a sudden emergency ever arise a few hours would suffice to bring the general managers of the twenty-five banks to Montreal or Toronto. Their united counsel and experience would go far to ward off the anticipated trouble. In a few hours, if nec- essary, every branch in Canada from Dawson City to Halifax would act in unison. With a system ca- NOTE ISSUES 81 pable of such control a general crisis or panic would be almost impossible. Consider, too, the personnel of the general mana- gers, who are men trained from their youth up in their profession, as only the branch system can train. In their early years, moving from branch to branch thru- out Canada, they became thoroly versed in local cus- toms and environments, and in many cases they gained experience in foreign branches in England, the United States, and elsewhere. As accountants and managers of large city branches they obtained a broad knowledge of national trade and finance until, as general managers, they are found not only direct- ing the administration of their mmierous branches, but also digesting and interpreting the reports of conditions received from the branches, scattered thru- out the length and breadth of Canada. There are few things connected with the life of Canada that a banker can afford to leave unstudied. The weekly reports or news letters received from the branch man- agers deal with ever\^ variety of subject, from the price of staples to the death of a leading citizen. As a result, the bankers know more of the general condi- tions of Canada as a whole than anyone else. It has been said that the files of one of the larger banks contain more valuable and accurate information than can 'be found in any newspaper office. 17. General review. — A study of the Canadian banking system along the above lines will demon- strate clearly why it has been accorded such a high XVI— 7 82 BANKIxNG PRINCIPLES place among the banking systems of the world, not only on account of the equable distribution of loan- able funds thru the branch system, but also on account of the absolute safety of the note issue and its elastic- ity in meeting every need of national life and com- merce. The uniform reciprocal payment of each other's notes at par by the banks all over the Domin- ion, followed by prompt redemption, renders forced and unhealthy inflation an impossibility, while the automatic expansion of the circulation whenever re- quired or called for by the exigencies of commerce and agriculture renders it peculiarly adapted to the needs of a young and growing country like Canada. Dr. Joseph French Johnson sums up the main ad- vantages of the Canadian system of branch banking as follows: 1. Large capital behind each institution. No matter how small the branch the customers share in the security which a large capital offers. 2. Unit}' of policy on the part of the leading banks dur- ing a stringency, in contrast to the playing at cross pur- poses which, in the panic of 1893, distinguished the action of the national banks in the central reserve cities of the United States against the smaller country banks. In 1907, if the country banks had been branches of the large city banks, they would not have withdrawn funds from those banks when they were so badly needed, and the crisis would not have been so severe. 3. Power to equip every branch with ample reserves for maintaining commercial credit by means of note issues. It is impossible in Canada for the business needs of any com- munity, no matter how remote, to outstrip the banking facili- ties, as is often the case with us. The resources of the NOTE ISSUES 83 branch bank are quickly and indefinitely extended. More- over, when the need for additional facilities has passed, the business of the bank can contract accordingly without loss to anyone. 4. Uniformity of interest rates thruout the whole coun- try which do not vary more than one or two per cent be- tween the large cities in the east and the newer towns and rapidly expa:nding cities of the west. In the absence of com- petition the necessity of depending upon small local banks for accommodation requires the business men of western towns in the United States to pay monopoly rates for the use of capital. 5. Expert supervision by the central office prevents bad banking. The boards of directors of the large banks are responsible for all the branches and they are therefore forced to put into practice a method of examination and super- vision which is much more effective than government exam- ination in the United States. 6. Branches can be maintained in localities where the profit of the business would not justify the establishment of a separate bank with independent capital. The city banks can establish branches without any investment in additional capital. Branches can be established where the business is so small as to justify simply the employment of a few clerks in a rented office. 18. Canadian hanking system under war condi- tions. — Since the outbreak of the war in August, 1914, the branch system of banking combined with an asset currency gave another proof of its value for the equable and economic distribution of loanable funds thruout a vast area, under adverse conditions, and with the least possible disturbance of business or dis- placement of reserves. Elasticity and adaptability to new conditions have always been among the chief characteristics of the Ca- 84 BANKING PRINCIPLES nadian banking system and these qualifications could be subjected to no more severe test than when Can- ada, as a belligerent nation found herself confronted b}^ the complicated and innimierable problems raised by war conditions. The majority of these problems at the outset of the war were of a financial and fidu- ciary nature and the government naturally looked to the banks for assistance and advice. The latter were equal to the occasion and exhibited a reserve of power and a capacity for overcoming these new and trying conditions, from their ordinary resources, with little or no recourse to the remedial measures passed by the government. Altho no moratorium was declared in Canada, the Dominion Government, more as a matter of prepar- edness than of necessity, made bank notes equivalent to gold or legal tender, extended the emergency cur- rency privilege thru the whole year (instead of the usual period, September first to February twenty- eighth) and made provision whereby the banks could borrow from the government against the deposit of approved securities or commercial paper. As stated above, however, the banks did not find it necessary to use any of these privileges, whose real value rested in their moral effect, in the assurance to the public and to the banks that a provision had been made, so far as lay in the power of government, to enable business to go on as usual. It was fortunate for Canada, that for some time prior to the war, the banks had been advising re- NOTE ISSUES 85 trenchment in expenditure and discouraging any ten- dency on the part of their customers to overexpand or overproduce. The outbreak of war, therefore, found bank loans in process of satisfactory reduction and no untoward pressure on the part of the banks was necessary to continue the healthy liquidation then in process, the public being more than ever aware of the necessity for reduction in loans and retrencliment generally. Commercial loans in Canada decreased $156,000,000 between June 30, 1914, and October 31, 1916. For the year preceding the war, Canada had ad- verse international trade balances of nearly $300,- 000,000. To-day this has changed to a favorable balance which will, for the year 1916, reach at least $500,000,000 and probably more. The total foreign trade has nearly doubled during the same period, the estimate for 1916 being in the neighborhood of $2,- 000,000,000. Much of the increase in the exports may be ascribed to shipments of munitions and other war materials, the output of manufactured goods in the country having increased more than 50 per cent over 1913. A very large proportion is also due to the in- creased quantity and value of the natural products of the country exported. With a favorable trade balance of one-half bil- lion dollars, Canada is easily able to absorb the in- visible interest balance estimated by Sir Thomas White, the Minister of Finance (February, 1916) at $187,000,000 annually, of which $150,000,000 is due 86 BANKING PRINCIPLES Great Britain and the balance to the United States. Within the last tv/o years, not only has Canada practically ceased to depend upon foreign loans, but she is to-day financing her own heavy war expendi- tures and in addition, placing large sums at the dis- posal of the mother country for use on this side of the Atlantic. Economj^ efficiency and increased i:)roduction brought about a remarkable change in the foreign trade balances and also in the banking situation. With busy factories, steady increase in bank deposits and favorable trade balances, Canada is now in a posi- tion not only to render valuable aid to the Allies in the prosecution of the war, but is also able to con- sider the remedial measures necessary to offset the economic reaction that is expected when peace is finally declared. The following statement shows the position of the banks as a w^hole for the month ending October 31, 1916: Millions Per cent of of net Liabilities: Dollars liabilities Deposits 1,549 98 Circulation 145 9 Bills payable 5 Sundry liabilities 7 1 1,706 108 Less : Notes and checks of other banks, etc 97 Central Gold Reserve, etc 38 135 8 1,571 100 Capital paid up NOTE ISSUES 113 Millions of Dollars 245 87 Per cent of net liabilities i-ided profits . . 132 16 1,816 485 360 913 50 8 116 31 23 59 nortgages .... 3 1,816 116 Assets: Cash reserve . Liquid reserve Loans Real estate aiK Other assets . The principal increase is found in the deposits which have increased nearly $400,000,000 since June, 1914, while commercial loans in Canada decreased $156,000,000 during the same period. The increase in savings, or time deposits, is most gratifymg, and would be more so if it were entirely the result of thrift on the part of the small depositors ; part of it, however, represents the cash surplus of manufac- turers and large corporations whose prosperity has converted them from bank borrowers to bank deposi- tors. The credits granted to date by the Canadian banks to the British Government for expenditure in con- nection with munitions amount to $120,000,000, and in January, 1917, they agreed to advance an additional $25,000,000 for the same purpose. During Novem- ber, arrangements were also completed with a number 88 BANKING PRINCIPLES of the Canadian banks by representatives of the Brit- ish Government for a six months' credit of $20,000,000 for the purchase of wheat in Canada, making a total of $165,000,000. It will be apparent from a study of the statement that the chief present problem of the Canadian banks is not so much the obtaining of new deposits as the remunerative and short time employment of those they already have with a view to being in a strong posi- tion when the war comes to an end, to assist in the process of adjustment from war to peace conditions — a matter that is engaging the serious attention of all thinking men in Canada. REVIEW Describe the various forms of currency used in Canada. What currency is legal tender? What is meant by elasticity in currency? How does the Canadian system of note issue provide for this ? What situation proved the excellence of the Canadian banking system ? How ? Why does the brancli bank system work particularly well in Canada? CHAPTER VI ANALYSIS OF A BANK STATEMENT 1. Bank statements. — The Bank Act requires the banks to furnish the government with monthly state- ments of their assets and HabiHties, and in addition to these, an annual statement to the shareholders. The latter differs only slightly in detail from the monthly statements, and is submitted to the shareholders at the annual general meeting, accompanied by the profit- and-loss statement and the report of the auditors. The annual reports of the several banks appear at various dates during the year, principally during the winter months. The monthly and annual state- ments are published in the various financial and other papers and are subjected to the closest sci*utiny and analysis both by the press and the banks themselves. The totals of the combined monthly statements of the banks as pubhshed by the government are of par- ticular interest, as the figiu-es generally afford a verj'^ fair barometer of the financial condition of the coun- try. To the average man a bank statement has no more than a passing interest. Even if he goes so far as to compare the statement of one bank with another, the bare figures tell him very little more than that one 'S9 90 BANKING PRINCIPLES < < < -. o o tij H ^ :^ < w CO ^ w < < 5^ CJ ci K /^ •—4 K K H CI a> o •* lo w oc t- 1 -! OO' 1- 1 1 r1 Cl O in Oq OS Ol »-*; Ci 00 00 OOP rH "cj ■ 'r-i 00 t> 06 T)< CO ' cj d 1 -^ 2 o rt tH CO C O w IH O C_( 73 ;-- •■ -.^ coo~. t- tOrt ^ coo , 1 u o ^* .-< t-_ ;d in-* IH 1-1 oc oi w pi muj T- — 1 N cT-i to^- . • il^ : : : © . . a -.a '-*j . . a -ts • a n . • ■ 'r- M :l . CO SfacQj : : ■ '^ o c r - ■ "5 i ■ s a ■ •; c 2 « !0-^ 02 . e3 • •*^ Qent etc. rid B •S .© -s .a ■ « *■ • CO 3cie and Dominioi '0 per cent Circuli tes and Checks on e from Canadian e from British Ba c from Foreign B Total Quick Asset a 5 « ID < n Governi: a] Bonds, Stocks a; 11 Loans in Ca 11 Loans elsewl Total Liquid A c state othe raises . . es on Real cn .56 s u minio inicij); ilway rrent erdue al Ef Pre irtgag the nk P S..C O 3 3 3 3 cs 53 C3 a > <» s =s M^^QQQ a^oi 00 00« S P5 00 moocD tH a> o t- i-H CO «3C0 m to S 3 K .^ .«:> -M LO d ' 'r-i 00 »H d 00 00 ■H COO 1-4 gHS OOf O: f crt-Oi u o<; 1-. ococ cc CI 1) -^ i-i d ci '-6 Olo IMIO 1< Tt rH in O CI CO o in t--* t-in N cq 3 rt w it; d d ' 'i-I d CO CO £3 O^^ o iH 1.H 1-1 9h^-e.C Ln n o o (OrJfCO |S32 ^1 c^ IN 05 tHc-eo i-i CO OS d »>in c-iin ■ > a 3 ce Canada. ingdom . lountries § ° d .* . U .a; sO .c* 73 11 ter N ban i inada nited ireign .a ;>5 J .ss .^i^oa.S.a • 3 < 5 a. «5 Bank duo P ments . Depos . Payab 1 elsewh Banks Banks Banks ;^ 2 r£ 2 (£S C 03 ^ cs ^ S j: a--- 000 s •=s;s-s oc .i) a> « a a s 1 ca a 2;fO iQOC 5C 5Q !- /C: H 5 13 a cs a a: a o a IS a 8 -* .= OS S 5h a ta a o ■d > tl O c3 .£> P< c« 2§ BANK STATEMENTS 91 bank has larger deposits or loans than the other, but as to the standing or earning power of the banks in question, he can form but a faint idea until he has compared them on a common percentage basis, say, to total assets. A full understanding of a statement of a bank forms a very good introduction to the actual practice of the business; and in order to present the leading features in the most comprehensive form the statement^ on page 90 (Figure 4) has been pre- pared. This is based on the annual statements of several banks, with the amounts under the various headings reduced to a percentage to total assets. For comparison, a percentage to total liabilities to the public is also given. The several headings will be con- sidered briefly in detail, and should be studied with special reference as to their relation, the one with the other. The percentages will be referred to as dollars in discussing them. A bank statement is primarily intended to show the distribution of the assets of a bank and to whom they ultimately belong, the public or the shareholders. The bank occupies a dual relation to the public; it is, on the one hand, a borrower of credit and, on the other, a lender. The prime qualification for success- ful banking is so to command the public confidence that the public will deposit its money freely and con- tinuously. The habilities of a bank to the public are 1 This statement should also be compared with the percentage of the combined monthly statements of all the Canadian banks as reported to the government for the month of July, 1913, Figure 3. 92 BANKING PRINCIPLES therefore of the most vital importance to its existence and will be considered first. 2. Dejwsits payable after notice. — A reference to the statement will show that nearly 60 per cent of the liabilities to the pubhc consist of interest-bearing de- posits or, as they are sometimes called, time deposits or savings bank deposits. They form the largest indi- vidual item in the statement with the exception of cur- rent loans. Time deposits are so called because they are deposits made in the savings bank department of a bank and under the rules of the department are sub- ject to a withdrawal notice of ten or fifteen days. Practically, they are payable on demand, as no bank now makes a practice of exacting the required notice, altho the majority still retain a clause to that effect in their pass books. All these deposits bear interest at the rate of three per cent compounded semi-an- nually. The chief difficulty a bank experiences in this kind of deposit lies in the fact that a certain class of the public is inclined to look upon a savings bank account as a convenience as well as an investment; the two are not compatible. A time deposit requires a small re- serve and a minimum of bookkeeping and a three per cent rate leaves a margin of profit to the bank, but to give three per cent on an account subject to frequent checking is another matter and would be likely to re- sult in an expense to the bank rather than a profit. In fact, of late years many of the savings bank de- BANK STATEMENTS 93 posits, thru competition, have been allowed to develop into ordinary checking accounts. Theory as well as experience in Canada has shoAvn that no bank can afford to pay a higher rate than three per cent without seriously affecting its position. In fact an increase of even one-half or one per cent would change the present net profits of the majority of the banks into a loss,^ Deposits bought too dearh^ must be fully employed because interest and dividends must be earned in some way. Competition prevents a bank from lending money to legitimate enterprises at a higher rate than the market rate; consequently a bank pajnng a high rate for its deposits is forced to invest its money in risky undertakings, or else to main- tain inadequate reserves, both very dangerous and un- desirable expedients. Fortunately, the bulk of the savings bank deposi- tors are quite content to use their savings bank ac- counts for the purpose intended — a depositing place for their surplus money. Each person who keeps a bank account does so for his own convenience, but the result is an enormous control of credit placed at the disposal of the industries of the country thru the agency of the banks and their branches. In fact with- out these deposits banks could render but little assist- ance to the trade and commerce of the countiy. The steadiness of these 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 1 See Section 2-2, also Chapter on Bank Cost Accounting. 94 BANKING PRINCIPLES times, they are constantly increasing, is the basis of the commercial credit system of Canada. 3. Demand deposits. — Demand deposits represent amounts due to individuals and firms payable on de- mand. No interest is paid on these accomits except in special cases where a large dormant balance is kept which could otherwise be transferred to the savings bank department. The average current accounts are frequently run at a loss, and were it not for the col- lateral profits accruing from the connection in the shape of exchange, discount and the like, the burden of operating them would be serious. The average cost of carrying a small account has been variously estimated at from $15 to $2o per annum, to cover this expense a full balance of at least $300 is neces- saiy. In order to prevent the abuse of the checking privilege some of the banks make a nominal charge for carrying 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 re- serve of the average bank is so large that even a small increase in the interest rate or in the expense of op- erating the deposits will materially affect the earnings on capital, imless, as has already been pointed out, the question of maintaining adequate reserves is neg- lected. In a lecture on "Interdependence of Trade and Banking" George H. Pownall, an English banker, in referring to the question of banking profits, savs : BANK STATEMENTS 95 Fanking would not be possible if its present lines were seriously changed. We have to bear in mind that the busi- ness of banking, like every other kind of business of long standing, has evolved itself by daily-accumulating expe- rience. I believe that depositors cannot expect a greater return than they now obtain, unless there were some general change in the supply of, and the demand for, loanable capi- tal. Bankers do not take in deposit money as an invest- ment 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 per- centage of cash to their total liabilities they need to keep in their tills, what percentage of cash they shall keep un- employed to insure the public confidence in the stability of their institution, and what percentage of their liabilities to the public shall be represented by first-class securities, and first-class securities so written down in price that nothing but an extraordinary 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 unemployed is to lessen earning power; to hold first-class securities is to obtain less than the average rate of return on money employed in loans, and to write them down to a safe level is a form of insurance that expert opinion demands of a banker. It is not only from within that these matters have to be looked at, it is also from without. There is a large class of the public perfectly able to reckon up the safety or inse- curity indicated by the broad lines of a bank balance-sheet, and, in the long run, the strongest institutions get the de- posits. Paradoxical as it may seem, a banker's balance- sheet must exhibit an ability to pay any proportion of the banker's liabilities likely to be called for by nervous people in times of stress, not merely because the call for repayment needs to be faced, but also because to exhibit strength is to disincline people to make the demand. 96 BANKING PRINCIPLES 4. Deposits elsewhere. — These amount to $6.90 * and represent deposits by individuals and firms made in branches outside of Canada. Part of these de- posits in all probability 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 question will be fully considered in con- nection with call loans. 5. Due banks in Canada. — Owing to the fact that practically 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. 6. Due to hanks in foreign countries. — Under this heading are included all amounts due to foreign cor- respondents and represent balances which are main- tained by banks of Great Britain, United States, Eu- rope and elsewhere which have business relations with Canada. 7. Dominion and provincial governments. — The branches of the banks act as depositaries of the Domin- ion and provincial governments, and transfer funds 1 Read thus: "$6.90 out of every $100 due the public." BANK STATEMENTS 97 received at their various branches to Ottawa or to the several provincial capitals. All customs, internal revenue and Post Office receipts, including the de- posits of the Postal Savings Bank, are deposited by the federal officers in the local branches of the various banks thruout Canada, and are transmitted by them to Ottawa for the credit of the government. Gov- ernment checks of every description, including those issued on account of withdrawals from the Postal Sav- ings Bank, are, by the Bank Act, payable without charge at any branch of any bank in Canada. Altho the collection and disbursement of the na- tional revenues involve a great deal of work, it is done willingly by the banks, not only in a way, as a return for the note issue privilege, but also as an appreciation of the practical and economical manner in w^hich the government handles its revenues and funds. So effi- ciently is this done thru the banks that no disturb- ance is ever made in business or financial circles by the movement of government moneys, notwithstanding their very large aggregate. All revenues received are left with the banks for commercial use until ultimately disbursed 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 countiy until w^anted. The net balance due to the government may be mo- bile, and at times comparatively small, but the princi- ple is sound and works well in every respect. It would be almost impossible to devise a scheme for the XVI— 8 98 BANKING PRINCIPLES collection and disbursement of government revenues that would work more smoothly or efficiently. Canada in her scientific administration of govern- ment funds differs from almost every other country. The balances of the provincial governments consist principally of deposits in connection with the Inland Revenue Department and judiciary accoimts. The balances due the Dominion and provincial govern- ments are privileged claims on the assets of a bank and rank above those of other depositors. 8. Circulation. — The nature of this liability has been fully explained in Chapter V. It will be no- ticed that the amount given in the statement is less than the paid-up capital. No bank, especially one wdth numerous branches, would feel safe in increasing its circulation over this margin except during the pe- riod of emergency currency. During that period, nameh% September first to February twenty-eighth, the circulation could be increased to $9.19. In addition to the protection offered to the note- holder by the general five 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 practically 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 profitable to the banks. The emer- gency currency bearing interest at five per cent will be BANK STATEMENTS 99 availed of at a decided loss, while the central gold re- serve will result in a small loss. 9. Capital and reserve. — The total liability to the public is equal to $88.31 of the total assets, and the bal- ance, $11.69, belongs to the proprietors or share- holders. The latter consists of capital, $6.33, and re- serve and undivided profits, $5.36. A reference to the profit-and-loss sheet on page 120 shows that the dividends declared were equal to 10 per cent of the capital, or 5.47 per cent on the capital and reserve. The net profit earned on capital and reserve is 10.50 per cent or, as it is generally published, 19.30 per cent on the paid-up capital. The method of basing earnings on the percentages to paid-up capital is a misleading one, and should be abandoned by the banks and financial papers or used only in conjunction with the percentage on capital and resei've. To base earn- ings on capital not only 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 par value of their shares. 10. Specie and Dominion notes. — Under this head- ing are included not only the gold and large legal tender held by the bank for its cash reserve and clear- ing house settlements, but it includes 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 Bank Act to a cash 100 BANKING PRINCIPLES resen^e is in connection with the requirement that at least 40 per cent of the cash reserve must consist of Dominion notes. It is left entirely to the judgment of the individual banks themselves to fix their own cash reserves, and tho experience so far has fully borne out the wisdom of non-interference in this connection on the part of the government. Considering that practically all the till money is in the form of a bank's own notes, the average cash reserve maintained by the banks of about 10 per cent to 12 per cent has proved fully adequate at all times. Some banks maintain a higher and some a slightly lower rate than the above according to their circumstances or requirements, the ratio varying with the same bank at different times. The daily redemption of notes and checks thru the clearinofs all over Canada acts as a constant check to any tendency on the part of a bank to lower its re- serve below a certain limit. 11. Notes and checks of other hanks. — This amount represents notes and checks of other banks in process of clearing. These have been deposited by customers during the day, and in the ordinary course are pre- sented and redeemed thru the "clearing" the following morning. As the customer is given credit the same day and the bank does not receive returns until the following day, this amount represents a loss of one day's interest to the banks and forms a very consider- able item in the course of a year. The average amount outstanding under this heading for all the banks in 1912 was nearly $70,000,000, representing a BANK STATEIMENTS 101 steady loan to the public for that amount without in- terest. The average note circulation for 1912 was $100,000,000 ; this item offset it 70 per cent. In addi- tion to this the amount of checks in transit between the branches of the different banks themselves would run considerably over $100,000,000. 12. Deposits with other banks. — These amounts represent the balances maintained in the United States, Great Britain and elsewhere in connection with exchange operations, and make also a very useful way of carrying a certain proportion of the bank's re- serve. These balances combined with specie. Do- minion notes and the notes and checks of other banks form $18.28 of the bank's total assets, are generally known as quick assets. With the exception of a few of the bank accounts, on which a low rate of interest is sometimes obtained, the quick assets do not earn interest. 13. Securities. — The securities held amount to $7.59 of the total assets and consist of municipal bonds and other first-class investments. The banks are not re- stricted in their choice of this class of security, and may purchase not only government, provincial and municipal bonds, but also the bonds of domestic and foreign railways and industrial corporations. Banks look upon these securities as a kind of secondary- re- serve, and include them with call loans among their liquid assets. 14. Call loans in Canada. — Call loans in Canada represent advances made to brokers and other cus- 102 BANKING PRINCIPLES tomers, principally the former, on the security of first- class stocks and bonds, with an average margin of some twenty points below the market value of the stock and, if loaned conservatively and watched care- fully, form a safe and remunerative asset. Call loans in Canada are not call loans in the strict acceptance of the word. The securities given as col- lateral have, as a rule, only a hmited market princi- pally confined to Canada. Comparatively few of them are listed on the stock exchanges of New York and London, and they consequently cannot be looked upon as a means of increasing the cash reserve of the country in case of emergency. An individual bank, in ordinar}^ times, can, of course, reduce its call loans in Canada at any time for its own purpose, the brokers simply borrowing from another bank to meet the call, but in a general emergency a prompt response to a call by a considerable number of banks could not be relied upon. Under these circumstances the rate of interest charged on these loans is considerably higher than that obtaining on strictly call loans in New York and Lon- don, and is only slightly lower than the rate charged on commercial loans, seldom falling below five per cent. In times of financial stringency the rate on call loans is generally higher than the commercial rate, -which remains practically unchanged. The Canadian custom of requiring a man to con- fine his borrowing to one bank — the one-bank policy as it is called — does not apply to brokers who from the BANK STATEMENTS 103 nature of their business borrow where they can, the loans depending entirely on the securities pledged, rather than on the financial standing of the borrower. A broker is therefore a customer of one bank but a borrower from many. These latter naturally look after their own commercial customers first, and the broker, not being a regular customer, is of only sec- ondary consideration, and he is loaned any surplus money of the bank after the requirements of the com- mercial and other customers have been met. Banks are frequently accused of encouraging specu- lation on the stock market at the expense of their com- mercial customers, but this is certainly far from the case, as will be vouchsafed for by any broker. 15. Call loans elsewhere. — The call loans carried by certain of the larger banks in New York and Lon- don subject them to a great deal of undeserved criti- cism, as it is a common belief on the part of the public and the average newspaper man that the Canadian banks lend money in New York because of the higher rates obtainable there. Such criticism betrays a total ignorance of the nature of the Canadian bank re- serve 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 gold 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 104. BANKING PRINCIPLES the government statement and ascertain the net amount of Canadian money which is invested in call loans outside of Canada, they would doubtless be siu-- prised at the results. Take for instance the foreign loans in the govern- ment statement for the month ended June 30, 1913: Assets: Balance due by banks in the United Kingdom $15,941,257 Balances due by foreign banks 33,165,595 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 Due banks in United King- dom 11,755,653 Due foreign banks 7,656,846 $123,702,281 Net amount suppHed by Canada 51,662,772 $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 the return which shows that over $123,000,000 of this amount represents outside capital on deposit in BANK STATEMENTS 105 the banks, leaving only $52,000,000 as the actual amount supphed by Canadian banks toward a very im- portant part of their reserve. This is only 3.42 per cent of the total assets, an insignificant amount com- pared with 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 below five per cent, while the call loan rate in New York seldom rises above three per cent, and the rates on call and short loans in London are usually lower than those which prevail in New York. The average rate for call loans in Canada during June, 1913, was G^/o 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, which made the net rate received by the Canadian banks less than two per cent. At this rate it would certainly be to the advantage of the banks to confine themselves entirely to Canadian call loans or even place money on deposit with one another at three per cent. The banks, however, fully realize that safetj^ must be considered before profit, and that the investment in outside call loans provides the best form of reserve, next to the actual gold in their vaults. New York is one of the international money mar- kets of the world to which funds flow freely from abroad. Gold can be obtained there at any time. The Canadian banks have on numerous occasions 106 BANKING PRINCIPLES tested their ability to liquidate loans in New York and bring them to Canada in the shape of gold. New York is within half a day's journey from Montreal or Toronto, and to all intents and purposes is just as convenient as if the gold were kept in Montreal or Toronto. Sir Edmund Walker, in an interesting article in the Mo7ietary Times on this subject, concludes with the following example of the actual working of this form of reserve during the panic of 1907: That the banks draw freely upon their funds out of Canada to meet the requirements of their Canadian busi- ness was very conclusively demonstrated at the time of the last United States panic. According to the Government Bank Statement of September 30, preceding, the position as regards the outside accounts of the banks was as follows : Call loans outside Canada $63,158,601 Current loans outside Canada .... 25,794,092 $88,952,693 Deposits and balances due outside Canada 76,178,950 Net amount employed outside Canada ' $12,773,743 The panic in the United States may be said to have com- menced in October, 1907, and at November 30, later, the position of the Canadian banks as regards their outside ac- counts had changed to the following: Call loans outside Canada $41,198,293 Current loans outside Canada 23,576,315 $64,774,608 BANK STATEMENTS 107 Deposits and balances due outside Canada 67,616,113 Net balance oziing hy Canadian banks outside 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 clamor against the banks, who were accused of lending in New York, moneys gathered from their Canadian customers and needed in Canada. But it will be seen from the above figures that during a period when call money commanded very high rates in New York, the Canadian banks in less than two months reduced their call loans outside of Canada by $22,000,000 and that by the end of November, instead of having Canadian funds em- ployed outside Canada, the balance was actuallj' the other way to the extent of $2,84?1,000, a condition of affairs which continued several months into 1908. In the payment of its debts due abroad or in selling ex- change against commodities shipped by Canada, New York is the market where all such transactions must 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 following clear to any intelligent person : 1. That the banks lend money in New York at a much lower average rate than loans produce in Canada ; 2. That the high rates of interest so often referred to occur only at rare occasions coincident with panic, and do not materially affect the average rate earned ; and that at the time of such high rates the Canadian banks are almost always withdrawing money from New York instead of send- ing it there. 3. It is the power to withdraw money at such times which enables the Canadian bankers to support their customers, and it is largely because of this power that, altho the finan- 108 BANKING PRINCIPLES cial history of the United States is marked with frequent panics, no financial panic has taken place in Canada in recent times. 4. The object of the loans in the United States, there- fore, is not to enlarge the profits of the Canadian banks but to enable them to do justice to their customers in time of stress. Such loans are an evidence of caution and wisdom in the interest of Canada and the policy should be the sub- ject of praise by critics of Canadian banks and not of dis- praise.^ 16. Reserves. — Including call loans and securities the average reserve maintained by the Canadian banks lies 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 insti- tutions that it would be impossible to establish a fixed legal reserve which would suit all conditions and sea- sons. Past experiences have demonstrated that the question may be left safely with the individual banks themselves. The cash reserve of the Canadian banks compares favorably with the general average of the national banks of the United States. The fixed legal reserve of the 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 gi-eat disaster the superin- tendent refused to permit the beds to be used, assert- 1 Monetary Times, Toronto, Jan. 6, 1912. BANK STATEMENTS 109 ing that they were to be reserved for emergencies. To establish a legal reserve means that when a bank uses its reserve for what it is intended, it breaks the law and becomes subject to severe penalties. Altho there is no law or understanding on the subject in Canada it is generally conceded that the total quick assets of a bank should not be allowed to fall below 15 per cent, of which at least eight per cent shall be in cash and the balance in notes and checks of other banks, and in bank balances. In the statement under consideration it will be noticed that the quick assets amount to 18.28 per cent and liquid assets to 34.84 per cent, or nearh^ 40 per cent of the liabilities to the public. With the establishment of the centi-al gold reserves, certain new phases will arise in connection with the computation of the cash and other reserves. This feature has been very clearly explained in an article published in the Financial Times, Montreal, August 16, 1913, which reads as follows: That the new system will necessitate a somewhat different method of computing the strength or weakness of a bank in point of reserves is evident. Or rather, while the method will remain the same, the standard will have to be adjusted. The gold deposited in the Central Reserve cannot, it is plain, be regarded as an available cash reserve, except to the extent to which there is no currency issued against it. Gold which is being employed as the basis of currency, under a law which requires the holding of a full dollar in specie for every dollar of the corresponding notes, is not an asset at all ; but neither, on the other hand, are the notes of liability. The issue of notes against deposited gold, therefore, de- 110 BANKING PRINCIPLES creases the amount of cash assets, but does not increase the amount of liabilities. But the process of issuing additional currency implies the receipt by the bank of something with which that currency is purchased by the person who takes it out. So far as concerns the 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 man}^ years suffice to look after the all-the-year-round requirements of the nation — practically all of it is taken from the banks in exchange for grain re- ceipts, drafts on grain shipments, and similar high-grade, short-term, readily negotiable securities. These securities have in themselves a certain value as reserve. They are not to be indiscriminately ranked with the ordinary commercial loan which forms the bulk of the all-the-year-round business of the banks, for they are based upon a commodity which is at all times salable, and they possess a negotiable value far in excess of that of ordinary commercial paper. In ad- dition to this, they Avill be steadily disposed of by the banks in the international money market, in proportion to the speed with which the crop moves to seaboard ; and if money is tight and reserves low it is in the power of the banks to exert much pressure to get the crops moved rapidly — as they doubtless will do this season. So that while there will be an apparent reduction in the reserve strength of many if not all the banks when grain payments commence, it will be much more apparent than real ; and the gold which is taken from the banks' control to form a basis for the extra cur- rency can in case of need be replaced without any great difficulty or sacrifice. 17. Current loans. — Current loans form the larg- est individual item in the statement, and consequently represent the bulk of a bank's investment. This is an asset which requires the most careful and unremitting BANK STATEMENTS 111 attention on the part of the branch manager and the head office. Current loans can be broadly divided into advances to customers and bills and notes maturing. The lat- ter are the more desirable because they are principally composed of trade bills, with a currency of from sixty to ninety daj^s, 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 refuse 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 matui'uig were paid in full.^ Advances to customers, however, cannot be relied on to any such extent. They may be divided into four classes: (a) Advances made to customers on the security of produce and other merchandise; (b) Advances made to customers on stocks, bonds, notes and other collaterals; (c) Advances made to customers on notes other than trade bills; and 1 An interesting calculation may be made in any office by rebating in- terest 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 be re- bated supposing all the notes were paid on the day selected. Taking this total rebate, ascertain for how many days it would pay interest on the total amount of immatured time items. The number of days repre- sents the average currency of the bill file. The actual results in one branch varied between 41 and 45 days' currency. 112 BANKING PRINCIPLES (d) Advances made to customers on single name paper. The first two call for very little comment, and, if well margined, form a desirable asset. The third class, altho secured by two or more names, is not so desirable from a banker's point of view, as it may com- prise a certain amount of accommodation paper. Ad- vances to customers by means of single name notes are less objectionable, providing the customer's state- ment shows a sufficient margin of quick assets to war- rant the loan, and that there is a definite understand- ing between the bank and the customer as to the des- tination of the loan, and when and how the advance is to be paid. Occasionallj^ this latter class of advance is made bv means of overdraft. This, however, is a practice that should not be encouraged as it is ob- jectionable for many reasons which will be given later. ^ It is the two latter classes of notes which give the most anxiety and trouble to the banker. Unless great care is taken, the bank is apt to become a part- ner, as it were, in more or less undesirable undertak- ings. It is here we find the dead loans, safe enough no doubt so far as ultimate payment is concerned, but still not banking transactions. Advances are made to business firms and others that are in their way more or less permanent, sometimes consciously so, sometimes made so by force of cir- cumstances. How can payment of such loans be ob- 1 See Section 10, Chapter VII. BANK STATEMENTS ITS tained within a reasonable time? Or in case of fail- ure what can the bank do with the wornout works or the old-fashioned mill? It finds itself a partner, fre- quently principal partner, 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 rea- sonable proportion to its deposits. Leroy-Boileau, in his "Traite d'Economie Poli- tique," says: Banks obtain their resources generally from the most mobile part of a country's capital — from funds scarcely constituted, destined for an investment whose character has not been determined or for consumption slightly postponed. In view of this origin of the larger part of banking re- sources, it follows that the capital lent by banks ought always to remain in the condition of circulating capital, easily convertible into money, and should not be trans- formed into fixed and inconvertible capital. Banks are in- stituted to make capital circulate, not to lock it up, 18. Overdue debts. — These call for very little com- ment; the gi'eater portion consists of notes which are overdue owing to temporary delays in settlement. Farmers are notorious delinquents in this respect. They have, however, a good excuse, particularly in the West, owing to the distances they generally live from the bank. 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 pa- per to frequent the overdue file. A portion of the XVI— 9 114 BANKING PRINCirLES overdue consists of doubtful debts for which full pro- vision has been made. 19. Real estate. — The law is very strict as to banks holding real estate other than that required for their own premises, nor can they lend on mortgages. They may, however, take a mortgage as additional security for a debt already incurred, and in case of foreclosure they are allowed to bid in the property, but cannot hold it over a certain length of time. Real estate other than bank premises, in the statement, repre- sents lands which have been acquired in this manner and bought in by the bank in its effort to improve the position of a doubtful or a bad debt. Banks nat- urally try to get rid of j^roperty thus acquired as quickly as possible and, in making sales, frequently sell.for part cash and accept security for the balance in the shape of a mortgage. These are shown in the statement as "mortgages on real estate sold." 20. Bank premises. — The Bank Act permits banks to own real estate and erect buildings for the purposes of 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 purposes. The question is not a serious one and should be left to the banks themselves. 2\. Profit and loss statement of a hank. — A study of the profit and loss statement of the various Cana- dian banks for the past years shows very conclusively that, notwithstanding the large increase in the amount of deposits and the volume of business transacted. BANK STATEMENTS 115 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 1.26 per cent. Banks, in com- mon with all other business concerns, have had to pay out more in salaries, rents and other expenses, yet it is seldom realized that banking charges to the public have not been increased. On the contrarj% they have by force of competition and other causes been considerably reduced. The table on page 117 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 the earnings of Canadian banks are by no means commensurate 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 reserve ratio is required, it will he found by dividing this percentage into 100; thus, the deposits of bank No. 1 are six times its capital and reserve. The second column gives the proportion of the total assets represented by interest deposits, and shows what a very important part the interest-bearing de- posits take in the existence of a bank and how easily a slight increase in interest would materially affect the net profits. The third column gives the net profits earned on the total assets of the banks. Considering the large amount of the turnover during tlie year, and the dou- 116 BANKING PRINCIPLES ble liability of the shareholders, these figures consti- tute a very small return for the amount of work done and the risk taken. Column No. 5 shows the percentage of net profit to capital, and is the method usually adopted by banks and financial papers in commenting upon the profit and loss sheet of a bank. As it shows the interest on only a part of the liability to the shareholder this per- centage affords no useful information, unless used in conjunction with the figures given in column No. 6. This gives the percentage of net profits to capital and reserve and shows the true net earnings on the pro- prietor's capital before any dividends have been de- clared or amounts written off. Column No. 7 gives the percentage of net earnings before any dividends have been declared or amounts written off. These last two columns will show where the market value exceeds the book value or vice versa. Column No. 8 gives the actual dividends paid. It will be noted that many of the banks prefer to give their shareholders an increased return on their invest- ment in the shape of a bonus, rather than an increase in the dividend rate. It is evident from this that banks are unwilling to make a permanent increase in their dividends in case they might not be able to main- tain it, owing to the very narrow margin of profit on \vhich they have to work. Column No. 9 sliows the yield on the market price of the stock on the basis of the figures given in column 10. O ^ ©J m ■*, 1ft CO r- 00 05 O Js? r-l s 1^ 11 §§ SI 18 OO go Cd - 1 'O .§? eg fS8 S?3 SfS 1 lO lO U5 irf U5 115 >rf «o >o to P 00 id c4 >-; d CO d « N p^ s .-1 »-( I-* i-i. »-» rH f-t i-i v> Si z J4 0) y Sg 2 3 S. gS §2 < " !; ^ 2 50 CO 00 p 05 05 oo" 00* t^ <» CO a £ " »— 4 z < o < o o <-• r-: d 1—4 3 2 CO d o o z bJ t- 1 ss ss 00 s ^ §g Q. us o o o 'is ss s"s ss 0) o H U. o 5 5 « "3 oc. Q. ^ "3 g c. as -C^ ed S5^ ^s. S5 • • SgJ ^.n K Ci^ g 2 a UJ -On" z u> o — s — CO II g§l 3g S3 g 2 ?i?S (0 < H ^ -< -H 1-1 rH »-H I— * ,~4 1^ •-' rH z < O u e^ a S 1 1 "S Q 2 O §s gs S?o ^ ^ SS 8 fl §s gs §s s^ g§ P4 O o _ T-l ail Q S3 8S ^1 00 o •-I 9* n -f "5 to t- 00 OS Q ^ r-t s ^ the general mana- ger and inspector. In the larger banks, however, the loans can only be comprehensively dealt with by a process of sifting and elimination, according to size and importance. All loans, irrespective of amount, are subject to constant supervision both in returns of the branch and by regular inspections. In the grant- ing of these loans, however, conditions vary accord- ing to amount. Every branch manager is accorded a limit up to which he may lend without direct refer- ence to the head office, the amount varying with the size and importance of the branch. For all amounts over this limit, the application, with full particulars and statements, must be sent to the superintendent of the district and a copy of the correspondence to the head office. The district superintendent in his turn has a limit to the amount he can authorize. If a pro- spective loan is larger than he can deal with, he writes to the head office, recommending the application or otherwise, the head office already being in possession of the particulars. At the head office the application is dealt with by the superintendent in the usual way, and either authorized forthwith by the general mana- ger or referred to the board. 132 BANKING PRACTICE 4. Chief inspector. — As has been indicated, in some banks this office is combined with that of the su- perintendent, the work being so intimately connected. The chief inspector gives special attention to the auditing and inspection of the branches and sees that every branch is inspected at irregular inter\^als at least once a year. As a rule he personally conducts the inspection of the larger branches and supervises and directs the other inspectors in their examination of the rest of the branches. An inspection consists of two kinds of examinations, namely, verification and valuation. The first is called the audit or routine inspection, and consists of auditing and balancing the books of a branch and ascertaining the existence of all the assets called for by the books. Attention is also given to the general routine work of the office with a view to ascertaining if insti-uctions from the head office are faithfully observed. This is the first stage of the inspection, and is made by routine in- spectors or officers. The second stage, or inspection proper, is made by a senior inspector and consists of a thoro analysis and valuation of the loans and other assets of the branch. This is not necessarily made at the same time as the audit, but the inspector visits the branch as soon as possible afterward and discusses every ac- count exhaustively with the manager. On his return to the head office he embodies his criticisms in the official correspondence with the branch. The chief inspector generally has in his charge all HEAD OFFICE 133 matters pertaining to bookkeeping methods, disposi- tion of the junior staff, stationery forms, bank premi- ses, furniture, etc. Of course he can delegate any of these to the care of one of the inspectors. 5. Secretary. — One of the most useful officers in the head office is an efficient secretary with initia- tive, tact and a good memory. The secretary forms the connecting link between the different depart- ments, and thru his hands passes all the correspond- ence received or despatched by the head office. He is therefore in touch with any question that may be under discussion with any of the branches, and if possessed of a good memory is frequently able to refer the general manager or inspectors to similar in- stances that have occurred in the past at other branches. The secretary generally has charge of the bank advertising, and deals with all minor matters that do not fall within the province of the other de- partments. The general diary of the bank is kept by the sec- retary, who sees that all the returns called for by tlie Bank Act are promptly dispatched, dividends and meetings duly advertised, and any court or legal busi- ness looked after by the officer appointed to appear. 6. Chief accountant. — This officer, tho seldom heard of by the public, fills a most important place in the bank, as he is required by the Bank Act to join with the president and general manager in certifying to the correctness of the returns made to the govern- ment. It is his duty to combine the branch balance 134 BANKING PRACTICE sheets so as to show the position of the bank as a whole, and submit a true copy to the directors every week, to the government every month and to the shareholders every year. The stock ledger and trans- fer book are under his charge, as are also all special accounts such as the pension and guarantee funds of the bank. It will be gathered from the above that not only is the general manager himself thoroly in touch with the affairs of the bank, but he has also a highly effici- ent staff about him, all able to make helpful sug- gestions and if necessary to take the initiative in any matter. Each has his own well-defined duties, yet is able to assume any other work if called upon, and all are imbued with one common aim, the well-being of the bank. REVIEW \'\liat are the principal duties of a bank director ? What are the duties of the superintendent of branches? How does he regulate loans made at the branches? In what respects is the secretary one of the most useful officers of the head office? What are the duties of the chief accountant? CHAPTER II HEAD OFFICE RECORDS 1. Head office hookheeping. — A distinction must be made between the head office and the main office of a bank. By head office is always meant the executive office of the bank, while the main office, tho generally in the same building, is simply a branch office. Not- withstanding its size and importance, its relations to head office are exactly the same as the most distant branch so far as routine matters and operations are concerned. Its business, like that of other branches, is with the public. The head office, on the other hand, transacts no actual business with the public, and its bookkeeping consists principally of combining and analyzing the statements sent in from the various branches. Practically all this work is done in the cliief accountant's department. The machinery, however, is suprisingly simple considering the work it accomplishes. The immediate books of the head office consist of a general ledger, a cash book, a correspondents' ledger with controlling account in the general ledger, and the stock transfer books. 2. General ledger. — The head office general ledger contains accounts for all the assets and liabilities of the bank which are not included in the branch 135 136 BANKING PRACTICE statements : such as capital, surplus, undivided profits, head office investments, general expense account and the like. At the end of each month every branch sends in an exact balance sheet of its general ledger. These .statements are all summarized in specially ruled books or sheets under the various headings of the accounts, and, when combined with the balance sheet of the head office general ledger, give the complete state- ment of the bank's business required by the Bank Act. Attention is called to the fact that after allowing for the amount due to or from the head office itself, the combined debit and credit balances of all branch clearing accounts (Pages 177-179) will exactly offset each other with the exception of the items in transit. These outstanding items are analyzed and allotted to their several destinations or accounts, and there is consequently no branch clearings account balance shown in either the government report or the annual rei)orts. J}. Correspondents' ledgers. — Every bank finds it necessary, for exchange and other purposes, to carry accounts with correspondents in Great Britain, the United States and other parts of the world. For simplicity and directness of accounting some of these accounts are frequently carried at the head office, and the various debits and credits from the branches are passed thru the branch clearings account as later ex- plained (Section 18, Chapter IV). As the entries HEAD OFFICE RECORDS 137 reach the head office they are posted direct from tlie slips to the several bank accounts in a special ledger. Statements of the accounts are received from the vari- ous correspondents weekly, and in many cases daily, and the accounts are kept in constant adjustment — any item outstanding an undue length of time being- made the subject of immediate inquir)^ 4. Statistical books. — Apart from the sharehold- ers' ledger and the stock transfer books which, for convenience to the public, are generally kept in the main office, all the books used in the head office are principally of a statistical or analytical nature. The profit and loss returns from the different branches are all carefully analyzed in relation to the amount of business done and the capital employed. Daily circulation returns are compiled, and a close watch kept on the movement of the bank's liquid assets. Special funds, in connection with guarantees, pen- sions and the like, are also administered from this department. 5. Branch clearings. — The checking of the branch clearings statements received from the branches is also in charge of the chief accountant. The method is very simple. An ordinary filing clip is kept for each branch ; when a statement is received, the entries are ticked off as far as possible against the entries on other branch statements, and it is then filed on its clip to await delayed corresponding entries. As the entries on each sheet are completely marked off, a diagonal line is drawn across the statement, and whenever a 138 BANKING PRACTICE balance is sti-uck by the department these dead sheets are filed away in bundles. Some banks arrange the clips in alphabetical order, but the best way is to arrange them first by provinces, as naturally the ma- jority of the entries are between branches in the same province. The checking is also more concentrated under the latter system. 6. Stock books, etc. — In the shareholders' or stock ledger an account is kept with each shareholder in which are recorded all shares bought and sold. The amounts entered in the account represent the par value of the shares, and the sum of all the balances in this ledger will equal the amount of the paid-up capital of the bank. The shares of a bank are transferable only on the books of the bank; these are known as "Transfer Books." Each page of the ti-ansfer book is in the form of a legal document by which one person agrees to transfer a certain number of shares standing in his name to another person who agrees to accept the shares. The transfer must be executed by both parties in person or by a properly executed power of attorney appointing some one to act for them. The entries in the stock ledger are made direct from the transfer book. The other books used in the stock department are a "Register of Stock Certificates Issued" and a "Divi- dend Register." The stock certificates issued are not transferable and need not be presented when a trans- fer is made. HEAD OFFICE RECORDS 139 Dividends are usually paid quarterly by check to sliareholders of record on certain dates, and the divi- dend register is simply a record of the payees and amounts of checks issued. A bank may keep transfer registers in other prov- inces than that in which the head office is situated. The books consist of a stock ledger ( a duplicate being kept at the head office), in which is kept the accounts of shareholders residing within the province, a trans- fer book and a register of stock certificates issued. The head office is advised regularly of all transfers made, and altho certificates are issued at the branch office, all dividend checks are issued at the head office. 7. Circulation records. — An important duty of the chief accountant is to watch the circulation closely and see that an overissue does not occur. Reports are received daily from the larger branches as to the amount of notes on hand, and weekly from the smaller branches, and from these the exact position of the note issue is determined. Altho a bank, under ordinary circumstances, can issue notes only to the amount of its paid-up capital, the invariable practice is to carry a large supply of circulation in the tills of the branches thruout the country so as to be ready to meet, without delay, the requirements for circulation at any point. A bank, for instance, with a paid-up capital of $3,000,000 would probably have at least $5,000,000 at the credit of bank note account in the head office general ledger. 140 BANKING PRACTICE Part of this amount would be represented by notes on hand in the head office, part by notes in the brancli tills, and the balance would represent the amount of circulation outstanding. At credit bank note account. . . . Less: Unsig-ned notes Soiled and mutilated notes awaiting destruction Notes held in the tills of the branches $500,000 400,000 1,400,000 $5,000,000 $2,300,000 2,300,000 Total amount of outstanding cir- culation in the hands of tlie public $2,700,000 This leaves a margin of $300,000 unissued, the difference between authorized and actual circula- tion. Changes in bank note account are infrequent and occur only when notes received from the engraver are credited, or when a debit entry is made of the amount of mutilated bills destroyed by the directors. Soiled and mutilated notes are counted and burned by the directors whenever a sufficient quantity has accumulated. A special furnace is used for this pur- pose, and as soon as the bills are counted they are placed in the furnace by the directors, where they are rapidly consumed. A statement showing the amount and denomination of the notes destroyed is then HEAD OFFICE RECORDS 141 signed by the directors to be attached to the monthly circulation return. In the note circulation register, a complete record of the various issues is kept, as well as of all the de- nominations of the notes themselves. 8. Returns to head office. — Every branch sends to the head office a number of statements and returns. These statements go under different names in the various banks tho ihej vary but little in their in- tention and in the information conveyed. It is most important that all returns should be carefully pre- pared and legibly written by the branch. An error in any one of them is serious; it involves the head office in a great deal of unnecessary work in locating the difference and, obviously, is a serious reflection on the ability of the officers whose signatures attest the correctness of the figures. The principal state- ments are as follows: 9. Branch clearings statement (daily). — The branch clearing statement is forwarded to the head office as soon as the cash book for the previous business (lay has been checked. It is signed by the cash-book clerk and checked in every particular by the account- ant, who also signs in attestation of its correctness. 10. Financial statement. — This is forwarded daily ])y the larger, and weekly by the smaller branches. It is practically a balance sheet of the branch gen- eral ledger, either in exact figures or approximately in even thousands. It is important that this state- ment should be despatched promptly, as the data are 142 BANKING PRACTICE necessary to the chief accountant in arriving at the amount of circulation outstanding and the general movements of the bank's assets and liabilities. A complete balance sheet is rendered on the last day of the month. 11. Discount report. — In some banks this is sent in daily, and in some weekly. If sent in daily, it gen- erally takes the form of a carbon copy of the discount register, with the manager's comments or explana- tions of the different transactions. If a weekly statement, only transactions above a certain amount are reported. The limit varies with the importance of the branch. All overdrafts, no matter how small, are reported with explanations. All liabilitj-^ ac- counts in the branch which are out of order in any way, either by the expiration of the credit or for other reasons, are listed in each repoi-t until they have been adjusted to conform to head office require- ments. 12. Cash item account. — This return is made u]) at least once a month and gives the outstanding sight drafts and other cash items with the date of origin and domicile. A special report should be given on any item which appears to be too long outstanding, thus anticipating inquiries from the head office. 13. Balance sheet. — This is made up to the close of business on the last day of the month, and mailed to the head office not later than the following business day. It is an exact statement of the general ledger of the branch, and is used by the head office in com- HEAD OFFICE RECORDS 143 piling the general statement of the bank, or monthly return to the government, as it is generally called. 14. Overdue bills. — This statement is required at least once a month, and gives a list of all overdue loans and discounts. It should be the ambition of every manager to keep this Hst down to a low point, if not entirely to eliminate it. Any name which ap- pears frequently in this hst should be avoided; it shows a lack of business honor, or something worse. 15. Monthly liability return. — This return gives a list of all the liability accounts on the books of the branch over a certain amount with all necessary par- ticulars regarding security, etc. Some banks require the monthly liability return to contain the name of, and amount, no matter how small, due by every obligant. 16. Sundry returns. — Statements of the expense account of each branch, accompanied by the relative vouchers, are sent every month to the head office. The closing of the books at the end of the bank's fiscal year calls for a number of returns for statistical and other purposes, such as the profit and loss state- ment, the report on bank premises, the bad and doubt- ful debts return, and the like. In addition to these, special reports on various subjects may be called for from time to time by the head office. 17. Weekly report on business. — In discussing the Canadian banking system, frequent reference is made to the very full knowledge possessed by the general managers as to the condition and requirements of 144 BANKING PRACTICE the country as a whole. This information is acquired thru two separate channels: the weekly financial statement and the weekly report on business. The weekly financial statement from the different branches shows the fluctuation of the circulation, loans, de- posits, etc., thruout the countiy, and forms an ex- cellent financial barometer of business conditions. The information in these statements is supplemented by weekly or fortnightly letters from the branch man- agers which, as a rule, cover the ground most thoroly, and give a variety of interesting and useful facts. Among other things with which the letter deals may be mentioned the following: (a) Particulars as to prices and movements of staple commodities such as grain, flour, cattle, dairy produce, lum- ber, etc. ; (b) Acreage, condition and prospects of crops, etc.; (c) Farm sales and other real estate transactions: (d) The conditions of trade locally, scarcity or othcr- vrise of money, general financial and commercial news ; (e) Business failures or indications of beginnings of un- soundness in local firms, whether customers or not ; (f) Local rates for money, domestic and foreign ex- change, etc. It is easil}^ seen that no press association or mer- cantile agency could possibly give the intimate in- formation as to the country's condition thus afforded the general managers thru the branches. By means of information thus regularly afforded, Canadian banks are able to see the coming financial clouds six HEAD OFFICE RECORDS 145 months or even a year before they appear on the com- mercial horizon, and thus not only to take the neces- sary steps to prepare themselves for trouble, but also, in the annual reports of the bank, to warn their cus- tomers and the public generally of the approaching' storm. 18. Records of routine work. — At the end of each month there is forwarded to the head office a certifi- cate signed by the manager and accountant, which certifies to the following: That all the general statements and work of the office have been completed and verified for the month ; That all the overdrafts shown in the deposit ledger dur- ing the month were authorized by the manager ; That the liabilities of customers as shown in the liability ledger are correct; That all interest computations in the discount and ledger departments have been independently verified by a second and competent officer; That all insurance held is in force ; That the time-lock is running correctly and the combina- tion locks are in satisfactory condition : That the cash items account was drawn off, and that all outstanding items are satisfactory ; That the current deposit ledger, savings bank, and lia- bility ledger balances were drawn off and found to be cor- rect ; That the notes, bills, and collaterals were inventoried and balanced ; That the collection register has been regularly checked, and that there were no unsatisfactory outstanding items ; That goods pledged or warehoused have been examined and found correct ; That the draft account has been balanced. XVI — 11 146 BANKING PRACTICE The dates on which these several balances were arrived at are given, as well as the initials of the offi- cer who made the check. It is essential that a complete record of daily routine work, etc., should be maintained, and some banks require 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 the head office it is advisable to keep a systematic record in the office. REVIEW What accounts are kept at the head office of a bank? Who keeps the circulation records of the bank? Who makes up the branch clearing statement? How often is it sent to the head office? Thru what channels does the general manager get complete in- formation about the branches ? How is the routine work reported to the head office? CHAPTER III THE BRANCH STAFF 1. Manager. — ^The directors are obliged to rely on the general manager to a great extent for the com- petent 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 success 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 attract and accumulate de- posits by giving a satisfactory and effcient service to customers and the public at large. There is no diffi- culty 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 denied, nor the fact that loans frequently create deposits; but banking essen- tials should be considered in their proper sequence; first, deposits, then loans. No bank would open a branch simply to make loans; deposits or other col- lateral advantages must be present or in prospect. 147 148 BANKING PRACTICE That the loans at a branch may exceed the deposits does not alter the principle. To attract deposits, personality, efficient service and 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 transactions the manager exercises his own dis- cretion, within certain limits established by the head office for each branch or manager. Loans exceeding this amount must first be submitted to the general manager for authorization. The requisites of a good loan will be dealt with in another chapter. The manager has many other duties and responsi- bilities besides obtaining deposits and making loans. He is expected to give constant and vigilant super- vision to every part of the business of his office, and to the general deportment of his staff. The fact that he is permitted by the head office to delegate a certain portion of this work to the accountant or other senior officer does not relieve him of the responsibility for anything that goes wrong. Except at the small offices the manager is not ex- pected to do any of the routine work of entering or posting, but he has a good deal of work to do in connection with the checking of the day's work. 2. 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 THE BRANCH STAFF 149 two hours of the day, but the manager's punctuality insures a like quality in the staff. All checking in the office should be accomplished before ten o'clock in the morning. The manager is then 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 accountant should be constantly on the alert to see that every customer receives prompt attention. During the day the manager's time is fully occupied with preparing applications for credit, general corre- spondence and interviews with customers. Much of the manager's time is frequently wasted by customers, and offenders in this respect should be tactfully broken of the habit. Every minute of the manager's time costs money to the bank — a fact frequently over- looked by both the customer and the manager himself. The staff of a Canadian bank are designated gener- ally as officers, irrespective of rank. 3. Accountant. — The position of accountant is a responsible one. As lieutenant or deputy of the manager he is frequently called upon to assume charge of the office whenever it may be necessary for the manager to be absent, to which end he should be thoroly acquainted with the discounts and general business of the office. A gi'eat part of an account- ant's duties consists in relieving the manager of the work (but not the responsibility) of looking after the routine and general supervision of the office. 150 BANKING PRACTICE 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 atten- tion is given to the public, devotes such direction and teaching to his subordinates as they may require, and insures that all work is punctually performed, and none permitted to fall into arrears. The accountant is generally expected to check all statements and returns, to see that nothing has been omitted, and to sign or initial them in attestation of their correctness, prior to handing them to the mana- ger for completion. The accountant jointly with the manager has con- trol of the treasury cash and other valuables of the branch. He is also responsible for the safe-keeping of all engraved forms, such as drafts, money orders, and the like. 4. Teller. — A great deal of responsibility is at- tached 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 account 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, how- ever, the work is performed by two or more tellers, THE BRANCH STAFF 151 and a distinct 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 indorsed 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 customer's pass book. The only book kept by the teller is the blotter in which all debits and credits passing thru his hands are entered. It has various columns, in which the entries are so distributed that the totals can be used by the different departments in proving the day's work. At the close of the day's business the cash is balanced and the details of the various denominations are entered in the space provided for the purpose in the teller's balance book. 5. Ledger-keeper. — A good ledger-keeper should be accurate, quick and a good writer. Accuracy is the most important qualification, as errors in posting or in extending the balance of an account might re- sult in a loss to the bank. A ledger-keeper should be thoroly familiar with the signatures of the bank's customers, and be con- stantly on the alert to detect forgeries and other ir- regularities. When opening a new account care should be taken to record in the ledger all the necessary particulars. In the case of accounts with partnerships, societies, 152 BANKING PRACTICE corporations, etc., both the manager and ledger- keeper should see that the necessary authorization and other documents are lodged with the bank. Particular care must be taken, when "marking" or accepting checks, to see that they are not written in such a way that they can subsequently be changed to a larger amount. If there is any space left on either side of the written amount, it should be filled in with a heavy stroke of the pen. 0. CoUection clerk. — The collection department is considered one of the most important in connec- tion with the business of the bank, and the clerk in charge of this work must be careful and methodical in his work, and constantly on the alert, to see that all the details in connection with each item passing thru his hands are promptly and carefully looked after. At most branches of the bank the larger part of the items received for collection come thru the mails from other branches and correspondents, and the majority of these are drafts on local merchants which require to be presented for acceptance. The instructions which accompany these items must be noted and care- fully followed. Items which are to be protested for non-acceptance or non-payment require special at- tention, as the bank could be held responsible for any loss if the instructions are not carried out to the letter. As the bank should not hold a collection unac- cepted more than two days if the drawee resides in THE BRANCH STAFF 153 town, or over five days if he resides out of town, it is necessary to obtain the acce2)tance without delay or return the item with or without protest, as the case may be. It is, of course, to the interest of the bank as well as of the drawer to get all items accepted if possible. Drafts with documents attached, such as bills of lading, also re([uire special attention, and the instructions regarding each must be carefully ob- served. The work in connection with drafts issued on other branches or correspondents in payment for collec- tions, as well as with drafts and money orders sold to customers, is generally performed by the collec- tion clerk. 7. Discount clerk. — It is the duty of the discount clerk to look after the work in connection with all notes and bills discounted. Each note and bill should first be initialed by the manager, and then passed by the latter direct to the discount clerk, who should see that each item is in proper form as re- gards terms, date, indorsement, and the like, before entering it in the discount register. The interest is then reckoned and the proceeds credited to the cus- tomer's account thru the discount blotter. In the case of a "petty loan" a voucher is issued on which the proceeds may be drawn in cash. All interest computations should be checked by a second officer to insure correctness. Exchange on bills payable at outside points must also be deducted. 8. The junior. — The duties of the junior, as the 154 BANKING PRACTICE beginner is called, vary according to the size of the office. At a small country branch he will have charge of the collections, cash book, supplementary casli book, outgoing mail, besides various other duties which in a large office are performed by the messen- ger or porter. In a large office where there are sev- eral tellers, ledger-keepers, etc., his duties may con- sist of only one line of work. He may be one among several in charge of the supplementary cash books, and do nothing else all day than entering up deposits and checks; or he may do similar entry work in vari- ous other departments. REVIEW Describe the duties of the branch bank manager. What are the duties of the teller? Of the ledger keeper? For what work is the discount clerk responsible? What experience does the j unior in a small branch receive ? CHAPTER IV BRANCH BOOKS AND RECORDS 1. Bank accounting. — The tendency of modern accounting is to adapt the books to a business, rather than the business to the books, and this practice is particularly noticeable in bank bookkeeping. Sys- tems and devices may differ among banks, and even between branches of the same bank, but the basic principles are the same. Once a clear understanding of bank bookkeeping in general is obtained, there will be found little or no difficulty in mastering any of the methods or systems in use by Canadian banks. To grasp thoroly all the underlying principles of bank accounting, it is necessary to bear in mind that practically everything handled by a bank, in the or- dinary course of its business, is either money itself, or a written claim or right to money. Consequently the cash book in a bank is the principal book, and thru its pages must pass a record of eveiy transaction made by the bank, either in detail or as a total from a supplemenary book. Thus the cash book gives a bird's-eye view each day of all the work of the bank. Some banks still use, in addition to the cash book, a 155 156 BANKING PRACTICE modified form of the old-fashioned journal, but it is preferable to make the cash book the only posting medium of the general ledger. It would be quite possible for a newly-opened branch to conduct its business for the first six months or so with the aid of a cash book and a ledger, which would serve for all accounts. A collection register would, however, soon be necessary. As the business grew it would be found convenient to have a special ledger for individual accounts, witli the control or key account carried in the original led- ger, and to have the checks and deposits entered in a supplementary cash book, with only the totals entered in the general cash book. Similarly, it would be found necessary in time to open up a discount regis- ter and a liabilitj^ ledger to look after the increased number of loans. As the volume of business increases, the deposit ledger is capable of being indefinitely subdivided, either alphabetically or numerically. Generally, tlie ordinary deposit ledger is divided alphabetically and the savings bank ledger numerically. From the above it will be noticed that bank book- keeping, altho based primarily on the cash book and ledger, is susceptible of indefinite expansion in any direction to meet increased volume of business or other local exigencies. 2. Books of a branch. — The books in use at even a moderately sized office generally include those given in the following list: BRANCH RECORDS 157 Books of Original Entry Cash Book. Figure 6. Cash Book, supplementary. 7. Discount Register. 8. Discount Blotter. 9. Discount Diary, local bills. 10-11. Discount Diary, remitted bills. 12-13. Draft Register. 14^15. Checks Remitted Register. 16. Sight Item Register. 17. Remittance Book ("Red" book). 18. Branch Clearings Statement. Teller's Books Teller's Blotter. Figure 21. Teller's Cash Statement. Money Parcels Received. Money Parcels Despatched. Books of Summary General Ledger. Figure 23. Deposit Ledger. 24. Savings Deposit Ledger. 25. Liability Ledger. 26. Blue Books (Trade Paper). Fiduciary Books Figure 27. Collection Register. Collection Diary. 28. Collateral Register. Statistical Books, etc. General Statement Book. Financial Statement Book. Letters Received Register. Postage or Letters Despatched Book. Past Due Bill Register. Warehouse Receipt or Produce Book. Pro Forma Stationery Book. 158 BANKING PRACTICE Register of Powers of Attorney. Register of Waivers, Etc. Overdraft Register. Expense Book. Discrepancy Book. Treasury Book. This list ma}' appear formidable but it is intention- ally comprehensive. A small branch would require only half this number; the fewer books used in an office the better. New books or sub-divisions of books should be introduced only when the work on the original book becomes congested. A ledger, for instance, should be subdivided only when the posting and references become too heavy for one clerk to do, and when, in consequence, the work of the office is delayed. jNIethod, simplicity and concentration are the foundations of an efficiently managed office. Books should be uniform in size as far as possible ; thickness and weight should be avoided. Two or three standard sizes should be established and com- plied with. Uniformity in size and position of post holes is particularly advantageous in the loose-leaf system, as the binders are then not only interchange- able, but one binder can be used for several different forms. Attention should be paid to the ruling, with a view to uniformity. One inch and a quarter is ample w^idth for the average money column, with a hair line dividing the thousands — allow five-sixteenths of an inch for the cents and, say, seven-sixteenths for the thousands. One-half to three-quarters of an inch is BRANCH RECORDS 159 sufficient for discount, exchange, date columns, etc. As regards the width between the horizontal lines, one-quarter of an inch is a good average. In books where the entries are extended across a number of columns, every fifth horizontal line should be of a color different from the regular ruling, to serve as a guide line. Books or forms intended for use with an adding machine, if ruled, should be spaced accord- ing to the mechanical spacing of the machines used. In the sample forms given in this chapter no at- tempt is made to preserve the correct proportion of the various columns; to do so would occupy too much space. These forms have no particular claim to merit except that they have been in satisfactory use for years in different banks. They are general rather than specific, and will, it is hoped, be suggestive as well as directly useful. 3. Loose-leaf accounting. — The vast increase in the number and volume of commercial transactions dur- ing the past twenty years has made the use of loose- leaf ledgers and other books a practical necessity in modern accounting. In Canadian banks, particu- larly, the system has been in successful operation for many years. The principal objection urged against loose-leaf ledgers — the question of their validity in a court of law — appears to have died a natural death. The courts rule so plainly and the logic is so clear, that it is the original entry that counts and not the assembly of entries in the ledger, that it is now gen- erally conceded that the loose-leaf ledger is just as 160 BANKING PRACTICE acceptable as evidence in a court as a bound ledger. In fact, with the precautions observed by the banks in their use of loose-leaf books, the evidence mioht be considered even more competent. The following rules are generally observed: 1. The keys of all loose-leaf ledgers and transfer binders are kept in the custody of the manager or of the accountant or other officer specially authorized, by whom blank sheets are inserted as required, and the used sheets removed and filed in the transfer binder. 2. After removing the sheets, the officer who has custody of the key must place a paper seal bearing his signature in the sealing device on the front of the ledger, and, when open- ing the book again, must satisfy himself that his last seal has not been tampered with. 3. A separate sheet must be used for each account, and each sheet must be signed in the upper right-hand corner b}' the manager or accountant when the first entry is made. The officer who signs the sheet must see that the account is properly indexed. 4. A few blank sheets may be locked in the current ledger for emergency use, but all others must be kept under lock in the custody of the officer who holds the key of the ledger. Bound books have not prevented manipulation and fraud, and the above precautions combined with the comprehensive checking system of a bank should practically eliminate the danger of fraudulent substi- tution of pages. If a man is determined to be dis- honest there are easier and less evident methods of defrauding than by switching ledger leaves. 4. Cash book. — This book contains a record of all the vouchers and entries representing the transac- tions of each day. Theoretically, the particulars of BRANCH RECORDS 161 every item in the cash book should be entered in de- tail, but owing to the wide extension of banking fa- cilities 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 totals are carried into the general cash book. The majority of entries, es- pecially in a large office, are therefore 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 under- stood by any one at any time — ten years after, if nec- essarv. In the larger offices, tlie 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 advisable to have the clerks entering up the vari- ous supplementary books, give a similar memoran- dum of their totals. This limits the responsibilitj'' and adds to the efficiency of the staff. Debit and credit entries for cash book, other than the totals referred to above, are represented by vouch- ers giving the necessary particulars, signed by the manager, accountant or other authorized officer, and it should be an imperative rule that any slip, which does not contain sufficient particulars or which lacks the necessary signature, should be refused by the cash- book clerk and referred back to the teller for comple- XVI— 13 162 BANKING PRACTICE tion. In order to facilitate the sorting and check- ing of these vouchers, distinctive colored paper or printing should be used; for instance, yellow, debit slips and white, credit slips. It should constantly be borne in mind that as the cash book and its supplementary books are recognized in a court of law as the books of original entry, faulty or meager particulars might cause serious trouble. Verbal explanation, even if available, would not be admitted. Examine a bank cash book of twenty or thirty years ago: there could be no better object lesson of what a cash book should be. Coj^per-plate writing and ample particulars are characteristic. 5. Writing up the cash book. — Many labor-saving and ingenious rulings are to be found among the books of banks, and improvements are constantly be- ing devised and adopted. The most essential book however, the cash book, remains practically un- changed, and is simply an ordinary commercial cash book with two or three money columns, a space for date and particulars, and with no printed headings. The columnar cash book is not adapted to bank work and it has never found favor. 6. Stipplementary cash book. — In this book are entered all the deposit slips, checks, and other vouch- ers pertaining to the ordinary deposit and savings bank ledgers. The ruling is simple, requiring no printed headings, and consists of columns for folio, names of customers and amount of vouchers — two sets of columns to a page. Two pages will easily contain BRANCH RECORDS 163 a day's entries for a small branch, the first or left- hand column being used for deposits and the remain- ing three for checks, the latter being much more nu- merous. The savings deposits and checks, being com- paratively few in number, are entered at the end of the day under their own headings at the foot of the ordinary checks and deposits respectively, tho 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, a special "supplementary" is devoted to each division including the savings bank ledger. It is not neces- sary to open up an account in the' general ledger for each division of the dej^osit ledgers. If the savings ledger contains a large number of accounts, 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 special form of supplementary casli book should be used witli a money colmnn for eacli block of accounts. In the case of a current account which has an un- usual number of checks at a certain period of the month or year — for instance, payroll or dividend checks — it is permissible to detail a day's checks once, either in the supplementary cash book or ledger, and enter the total only with a reference in the other book. In the larger offices of some of the banks, where the volume of checks is unusually heavy, a loose-leaf form 164 BANKING PRACTICE of supplementary cash book is used in connection with the adding machine, the names being typewrit- ten in afterward. Where this form is adopted, care should be taken to see that the sheets are consecu- tively numbered and filed, and that each sheet is signed by the two checking officers. 7. Biscount registe7\ — 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 and numbered consecutively. Two or more lines can be used where a note has nmnerous obligants, or when the description of the security is lengthy. A form in common use is shown in Figure 7. The head- ings are self-explanatoiy with the exception perhaps of the last two — loans and trade bills. Loans comprise all the advances made to a borrower on his own name and consist principally of the fol- lowing classes: (a) Advances made on the name of the borrower alone ; ( b ) Advances secured by one or more indorsers ; (c) Advances secured by produce, stocks and bonds, notes and other collateral securities. Trade bills represent settlements for actual goods sold, and are only offered by the party who has dis- posed of the goods. They may consist of either drafts or notes. The last, or remark column, is used to denote the domicil of a trade bill when it is payable at an outside o o m I tn < o >■ cr < Z UJ Hi _l Q. 0. CO <0 J J m ui Q < tr o •« < g « . 2 < fe o ii. o aJ t- co CD hi 105 a a « IB c o o u a « Si o M W Discount and Interest Rate per cent. Date of Note 1 - E-l Endorser or Security u u. q a 3 PS 166 BANKING PRACTICE point. It is also used for any special memorandum regarding renewals, and the like. Some banks have an additional column for proceeds in their discount register. As already stated, all notes and bills are entered and numbered consecutively. The loans and local trade bills are then entered in the diary and taken over, checked and initialed by the manager daily, or at least twice a week. The other trade bills are entered in the trade-bills-remitted diary and initialed by the mailing officer. 8. Discount blotter. — This book is a valuable ad- junct to the discount register and an excellent form is shown in Figure 8. In this book are entered the net total proceeds of the discounts to be credited to the various customers, also the amount of interest and ex- change collected. If more than one deposit ledger is used, a column is provided for each ledger. These entries are made from the discount deposit slips or lists which are then passed on to the ledger-keeper who posts the net proceeds to the credit of the various customers in the ledger, marking the abbreviation "disct" opposite each entry. In the case of casual or transient notes discounted for customers who have no deposit accounts, a special form of receipt is used which, when signed by the ob- ligant, is cashed by the teller and charged to an ac- count called "petty discounts" in the deposit ledger. The offsetting credits are entered in detail in the last column of the blotter, extended at the end of the day BRANCH RECORDS 167 into the ledger column and posted in one amount to the account. When the day's work is balanced, the interest, ex- change, and ledger colmxins will agree with the total of the loans and trade bills in the discount register. The total for the deposit ledger is included in the total of the supplementary cash book for the day, and the balancing entries are passed thru the general cash book. The entries in the blotter are called off with the deposit ledger daily. 9. Discount diary. — Figure 9 shows a useful form of diary for loans and local trade bills maturing, a page or part of a page being given to each day of the year. As each day's bills mature the notes are taken over and initialed by the teller, a line being drawn across the money columns, and the loans and trade bills for the day totaled. At the end of the day the unpaid items are extended into the past due column for debit to past due bills account, and the entries passed thru the teller's blotter, whose "Notes paid" column should balance with the total of the credits to loans and trade bills. Any notes paid before maturity are marked off the diary on the day due, entered below the dividing- line of the day's notes and added to the total. Simi- larly any past due bills should be marked off and en- tered in the column provided, all entries below the line in this column being considered credits. The column for interest can be used for a record of 5 3^ ►J 5) a a u M O m Discount and Interest H Z O o o Account Credited X 168 ■*d 0) « « h a a M 3 A -] H !?; m m & Cci >- « H u as Q Q o> w H T3 H 5?^ s (4 ;n a ^ O 3 ^ b (-4 a r(1 a J ^ i-l ss « U 00 3 u a< 6 S5 1 BRANCH RECORDS 169 any interest collected which is not entered in the reg- ister, such as interest on past dues, demand notes, etc. The diary sheet of the day will afford, therefore, a complete record of all payments made to the discount department. 10. Trade hills remitted diary. — Only in the very large offices is it necessary to have a separate book for this diary. In the ordinary branch, the ruling given in Figure 10 appears at the foot of the discount diary. At the end of each day the total is credited to trade bills remitted and debited to cash items account, there to await the relative remittances, credits, etc., when the items are duly marked off as either paid or re- turned. Considerable space is wasted in connection with this daily diary, and a weekly diary, as shown in Figure 11, has been used to advantage. Four sheets to the month are used, covering 1st to 8th, 9th to 15th, 16th to 23d, and 24th to the end of the month, and are filed in their chronological order in the discount diary, a different colored paper being used to distinguish them. The bills are entered in consecutive order ac- cording to maturity on these weekly sheets. On the second day of each week, say on August 2, for the week of August 1 to 8, the total for the week is cred- ited to trade bills and debited to cash items account, and the sheet handed to the cashbook man to be marked off as the items are accounted for. 11. Drafts register. — The first form given in Fig- ure 12 is for drafts drawn on foreign correspondents. a B m 0) S o « H Q u H H M Pi Q H O O CO OS :^ n •o s « o Jit a « •a <» a 3 O Q o S3 o a o u -0 o o m CD 1 O o is m UJ D < 170 a a 3 o a gg ■** a 03 1 a Krf ■* m C3 8 Cm II a o a d CM o 3 •*■ 1^ bl o a s o 5 Smith, T. Roy, H. 5 a b3 B BRANCH RECORDS 171 These generally have to be covered by remittances or credits to another branch or correspondent. Great care should be taken to see that the draft is prop- erly made out, signed, advised and remitted for cor- rectly. Figure 13 is the register for drafts drawn on other branches. The total for the day is credited to an ac- count in the general ledger called di'aft account. After payment the draft is returned by the drawee branch at debit, is marked off with the dating stamp, listed with other paid drafts in the right-hand column, and at the end of the day this total is debited to the draft account. The items unmarked at any time will be outstanding, and their total will balance with the draft account in the general ledger. 12. Chech lists. — All 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 ac- count and the list forwarded direct. The receiving branch gives credit on the branch clearings statement inmiediately 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 invariably 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 type- a UJ D CO (0 o Ul CO < a >- q: Q z CO o z < iz 2 UJ § z UJ m s Credit Foreign Exchange a O b o . a SI to • 14 d a a Co £ o sterling or Foreign Currency be 3 S s 1 a a o k e c o d S 5 H a C5 c 5 o w PS H w CE •o c .2 go o E < a a 6 ■0 p* S a Q 01 es s a »-i Q , UJ o a ,!>) -) •4^ o 4> CO CO tn ti J3 ' CO o UJ I o s (D h a S z ,UJ i^ S o UJ _l 1- X H o UI C CO o Q s z y. < 9 p fit * tr *4 < o oc H n ► I & o z < or o a ca ffl Q ;3 o d rt L, « d ?; V IS a s o <; B pa a a S O 'A O s n 172 BRANCH RECORDS 173 writer or adding machine, the carbon copies being filed in a binder for reference. Figure 14 is a com- mon form. In the smaller branches the lists are in bound form, generally two large and four small lists to a page, Figure 15. At the end of the day all lists for other branches are debited in the branch clearings state- ment, 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 similarly, with the exception that they are deb- ited to the head office in the branch clearings state- ment. Originally, check lists were debited to cash items account 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. 13. Cash items. — All 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" ac- count. These debits may consist of the following: (a) Demand and sight drafts received from cus- tomers as cash, the currency of which is not likel}- to exceed one week; (b) Coupons and other items requiring special ad- vice or attention; CREDIT Form 61 D THE CANADIAN BANK OF COMMERCE SHERBROOKE, CUE. All Items marked X and those under $10 no protest Wire Non-Payment of items S500 or over unless otherwise stated. Date- -To Maker Payer I^ndorser Amount Figure 14. Check List WHEN CRED1TIN0THE8EITEMS GIVE DATE C.U.List THE CANADIAN BANK OF COMMERCE 191 WE ErfCUOSE rOR CREDIT OR REMITTANCE ITEMS AS LISTED BELOW | Figure 15. Check List 174 BRANCH RECORDS 175 (c) Remitted discounts as debited each day from the diary. These include bills held by correspond- ents as well as by branches. This account should be drawn off weekly and bal- anced with the general ledger. Any item outstand- ing an undue length of time should be promptly in- quired about or "fated" — to use an office term. WHEN CREOITINQ OR REMITTING FOR _j ~ \^ THESE ITEMS DESCRIBE BY THE NO. ►^^ V. \^ THE CANADIAN BANK OF COMMERCE \^ 1*11 ^ WE ENCLOSE FOR CBEOIT OR REMITTANCE ITEMS AS LISTED BELOW^ Manager FiGUBE 16. Cash or Short Date Draft Account Figure 16 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. 14. Remittance book. — This book was originally used simply to record the remittances from other S 9 ^ S a 9 o n fee a u « o » a o o m UJ o z < H S UJ GC o « 2 u u 3 O u PS p J3 ■o T1 a 2 •3 « o ^ XI 1. a 66 u a g CD «5 & ■a a a tn 176 BRANCH RECORDS 177 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 con- nection with the mail work. All credits for cash items account should be entered here and, if possible, all the entries for branch clearings account, in order to form a check on the completed statement. The ruling and headings vary in different banks, but a good form is shown in Figure 17. The bulk of the entries for this book arrive in the morning mail. Returned cash items are also entered in this book, being credited in the cash items column and debited in the sundry column to the indorsers, only the totals being handed to the teller. This book is most useful in sorting out and block- ing the work. 15. Branch clearing statement. — In a branch sys- tem there must, of necessity, arise each day numerous entries between the branches themselves, and between the branches and the head office. Direct accounts be- tween branches are out of the question, and separate accounts with the head office are cumbersome, especial- ly when the branches are at all numerous. The most satisfactory method in use is what is known as the branch clearing system. This is a simple and ingenious system which makes the head office the clearing house for all inter-branch transactions. The medium is a statement called the branch clearing statement which is sent to the head office daily by each branch, and on XVI— 13 Account No, -191- BRANCH CLEARINGS ACCOUNT DR. CR. Date of List Branch Amount. Date Branch Amount "At Credit" advices received Clieck. lists sent Head Office (debits to) Total. Balance - Check lists received "At Credit" advices sent Head Office (credits to) Total. Balance- I have compared the above en- tries with the relative At Credit slips, checked the summations, and have compared the balances shown with the figures of the General Ledger. 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. A ccoiintant Extreme care must be taken to avoid errors of any kind in this Return Figure 18 178 BRANCH RECORDS 179 which are entered all transactions with the other branches and with the head office. (See Figure 18.) So far as possible, the entries passing thru branch clearings account consist of totals only. No particu- lars are necessaiy except the name or number of the branch credited or debited. Check lists originate as debits and are responded to b}'- credits. "At credit" advice slips originate as cred- its and are responded to by debits. Head office en- tries, both debit and credit, originate at the branches. All entries for the statement should be systematic- ally arranged both as to classification and the order of the branches. At the end of the day the branch clear- ings statement is added and the totals, debit and credit entered in the cash book. The statement is then balanced with the general ledger by the addition of the dav's balance, carefully checked, and forwarded to the head office the following day. No change is permissible in the entries. They must be credited or debited to the statement exactly as received. Er- rors in check lists or advices must be corrected by the creation of separate entries. 16. ''At credit" advices. — With the exception of check lists, no branch debits another branch in this statement without first receiving an advice on an "At credit" slip. (See Figure 19.) All 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 statement against the name of the branch interested, o c u H U O > Q < O UJ cc o I- < •a o u o c 3 O o o <) CO o o Cl to '"t* a w iS a « 6 •q to - o P 9o ^' (U 13 ^ 9o * a 12; a, b 03 o ii §2 3 .9 <1 o S C m 1.2 CL, O O O OS o a; CO C H) C S CS ^ S !^C 4, C 3—^ > n "^ ^ s >< 5 3 =- - b4 CO O C ' 4! CS O o j: 5,« — <" 'S CO 3 O .S-2 CO ^H ' 3 ^S O 4i 1) C 13 'O C +J •'" cc cS ^ D 53 E S S to "^ to CO ^- I • I- ^ cS >- W ecS 03 S c bs xf> iJ O ID A 2 i \l § -^ i3 03 m li ^ 05 S o S. h V u a a u CO a •1^ a n a 0-S ki o 1 3 ■3 a 3 1 a o o IZi CO ■< H CO UJ en a 3 S o H Z Hi tlJ o ii u. u. o ~ o t4 12 X O II 3 3 o «3 a o a 1 • Q. to ■Si S to 3 to o m a a 1^ CD cs M o 5 y rt y ^ a o 2 a 2 o ja GO n o 09 o e3 6 3 O 1 a 52; o H O o n ^ » V ^ « tj ■a « I '^ « 5" 5 3 1 D a # < "? "^ 1 B. ' 1 • u » O 5 o wc 3 Q J c^ 2 15 3 q S5 A , a 3 o a rt o O .;^ G» H U c P o o •3 fc. :i to a o o. a * 182 BRANCH RECORDS 183 and loss entries, expense checks and other head office matters are all entered here. 18. Business with other banks. — Transactions be- tween Canadian banks are generally effected thru the daily clearing, and very seldom thru 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 with correspondents, however, are more con- veniently carried at the head office; all debits and credits originating with the branches being advised thru 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 concentration at the head office sim- plify the bookkeeping, but, as the balances with cor- respondents frequently form an important part of a bank's resei-ve, it enables the head office to control the balances accordingly. 19. Tellefs records. — The teller's cash book or blot- ter consists of a skeleton ruling with no printed head- ings, these being written in daily by the teller accord- ing 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 shoidd arrange his entries, debit, and credit to conform with the general system of the office. Checks should be sorted out and entered according to 184 BANKING PRACTICE the divisions of the ledger, thus balancing with the various supplementaries. 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. 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 21 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. If the advice comes in first it should be at once entered in this book, and the parcel inquired for if necessary. Money parcels dispatclied are also entered in a book. Great care is necessary in handling money parcels. Both sent and received parcels should be counted by two men in each other's presence and, in the case of the former, it is necessary to have the parcel in the uninterrupted custody of two men from the time it is counted and sealed until it is delivered to the express company or post office. The relativ^e advices and acknowledgments should be carefully watched and any delay immediately in- quired into. 20. General ledger. — The general ledger, next to the cash book, is the most important book in a branch ; in fact it is equally important, tho in a different sense. The cash book is the book of original entry, and con- 1 m < o u. o a a: o o UJ IT O z < o o OQ UJ o z < _l < OQ tp oc UJ t>> 0) o u ,M OS a M a a 3 C3 'A o OQ -4^ a •a cQ tn 3 m a .« o ^ o ® "» s S § o M K X H X o a m o J3 rH ^ <« us H « « K a Hi a "O 3 5 o a o l-H fl (3 a Ot o 3 o "A a ■d o •3 a 1 2 •rt a 3 s o Ph •3-2 ? " > o 09 1 i3 a ■n « %. s ^j o a a >> rt 6c a 73 o -a r> nog u o o es fi. S-«n 5a a a S 2S s ta "H >• a 1- a c8 fq now a -a 03 rt o t- HlH a 5 185 •a S ? 1 ■T3 Co a b a C3 ►t A , ^« t> a M o W 13 ^ 4) ■o bn o a 5 a ■S ti u o a S3 186 BANKING PRACTICE tains a chronological record of all the 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, summarize the amount due to or from individuals respectively. The general ledger is posted every day from the cash book, and contains all accounts necessarj^ to show the position of a branch with regard to the business done under the various classifications called for by the government statement. As a matter of fact, however, the accounts kept in the average branch ledger are not very numerous and con- sist broadly of: Assets — cash, loans; Liabilities — liabihties 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. The latter is the adjusting account of the branch with the bank as a whole, and varies approxi- mately with the difference between its loans and de- posits, as every branch either supplies funds to the head office or the reverse. Loans are generally carried under two headings, loans and trade-bills, tho in a large city office they are frequently sub-divided into half a dozen accounts. This is merely a matter of convenience, however. In the same way the liabilities are divided into ordinary and interest-bearing deposits, etc. The form most BRANCH RECORDS 187 generally used is similar in ruling to the current de- posit ledger ( Figure 22 ) , with wider money columns and more space for particulars. 21. 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 dispatch on the part of the clerk in charge, as errors can easily be made, involving the bank in seri- ous loss. The deposit ledger is invariably a loose- leaf book and ruled as shown in Figure 22. This form is invariabl}^ used by all the banks. The so- called Boston ledger has been tried several times, but was not found practicable in Canada, owing perhaps to the method of marking or accepting checks by a direct debit to the account. The accounts are ar- ranged alphabetically, and are therefore self -index- ing, but an index is usually kept on the tagged sheet dividing the alphabet. In small offices there is usually only one current ledger used, A-Z. As work increases and becomes too much for one ledger-keeper, a second ledger can 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-leaf there is no accumula- tion of dead leaves, but the general regulations re- garding loose-leaf ledgers given in Section 3 of this chapter should be observed closely. The posting is invariably made direct from the o a a o u u " si o a S & C t^ u 43 o O -4A 3 o P 2 3 <2 1 o u a 03 D •4J 2 04 1 a s o u u •«1 fl 43 O. 3 u O H s o M Q 'A M s & O 43 o f; B 188 a S a n ■a a Q a ss H H-1 •a W3 CO H C3 O4 4> 43 BRANCH RECORDS 189 original deposit slips and vouchers, and called back or checked from the supplementary cash book. The balances should be kept constantly extended, and checked from time to time bv the additions of the debit and credit columns. 22. Savings bank ledger. — This book is invariably in loose-leaf form, ruled as in Figure 23, in size gen- erally about 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 to take care of the bank's deposits. The accounts, tho very numerous, are small in the number of trans- actions, and a leaf is used for each account. The signature of the depositor is generally taken on the ledger sheet for convenience of reference, as well as on a signature card. The rules given in Section 3, Chapter IV, should be carefully followed. The manager must control the sheets and sign all that are inserted in the ledger. The bank pass-books, which are simply 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 arranged sometimes alphabeticallj'' 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 190 BANKING PRACTICE ledgers are balanced in blocks of one or two ledgers each, and in this way errors are easily located. 23. 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 liabihty ledger never shows an account in credit and the deposit ledger should never show an account at debit. There 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 how much of each kind of paper a customer has under discount, the names of security against each note, and the total amount of ad- vances. A simple form is given in Figure 24. This pro- vides progressive 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 liabil- ity to the bank. Frequently, however, a customer is an obligant either as maker or indorser on a note discounted for another customer, and it is important for the bank to know how much of such indirect lia- bility is outstanding. This class of paper can be in- dicated 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 indorsers can be re- a o a 3 q a o O •a o N o S3 a ca ■v» P 5 o t, 3 -a 4) O "3 in a to d 6 o o a 13 P3 5 J3 o o S 3 "3 « . a !zi J3 o 6 When Discounted 191 o o o a o ® o c a U a a 3 o g < 7i o o M Gt s: •a M a 3 o 3 Q o o 191 192 BANKING PRACTICE corded against each account in red ink without affect- ing the ledger balance. Where accounts involve the discounting of a large amount of trade paper, small loose-leaf books are used, known as "Blue Books" (see Figure 25), one for each account, and by this means track is kept of the total amount due from each borrower's customers. When a blue book is used, the totals only, debit or credit, are entered in the liabilitj^ ledger, no details being required. The resulting balance in the ac- count, 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, pro- vided all the paper represents goods sold and deliv- ered to responsible purchasers. The total amount on any one name, however, is vitally important, and should not be allowed without special consideration to exceed five per cent of the total amount of trade bills. 24. Collection registe7\ — The form shown in Fig- ure 26 is an economical ruling, as it only occupies one page and gives all required particulars. If neces- sary, two lines can be used for an item which requires a fuller description than ordinaiy. The entry of the name of the maker or drawee is unnecessary, for, in the case of a note or accepted draft, it is entered at once in the collection diary, where space is provided for the maker's name. If it is a draft for acceptance, the drawee's name is entered in the messenger's book, and in due course the draft is either returned re- fused to the correspondent or entered in the diary. a U a a a 5 o Q ^ Q d d o 1 a S p p '3 Day of Month In- struct- tion d "o H 3 PS ;?; o H o u 1 ■a •" 5 o a o « s§ CS o a ^ ;z; t. o -w a o a < u p % «» s 3 o o >J < BS m g e < d- -TS o ^ • s £> o fe. tn tH o -d fl «»-« W o -tJ a 3 o c 33 a a o ? CM ^ a o o , 2 _9 « d d^ n o o ±i J3 o O > o J3 <:> O ^ - XVI— 14 193 194 BANKING PRACTICE In the case of customers who have a large number of collections, separate forms are frequently provided, on which the customer lists the items himself in dupli- cate and the bank files the list in a binder as its regis- ter and diary, adopting the customer's nimiber as its own. An initial letter or prefix number can be used to distinguish one account from another. (Figure 28.) Collection diaries are very similar in form to those used for bills for discount, and need no special de- scription. 25. Collateral register. — The collateral register is generally a loose-leaf book with an alphabetical in- dex, ruled as in Figure 27. A page is given to each account, and the balance should always show the amount of notes held as collateral. The collection diary is used to diarize collateral notes, the entries be- ing made in red ink to distinguish them from ordi- nary collections. Where a large number of collater- als are received from customers thev can be listed on separate sheets and the totals only entered in the reg- ister ( Figure 28 ) . 26. General statement hooks. — In connection with the monthly return to the government each branch forwards to its head office a complete financial state- ment of its affairs at the close of business on the last day of the month. This is obtained from the general ledger, and a copy of the statement is made on a book called the general statement book. The general led- ger is also balanced weekly, say, on the 8th, 15th and g -< . "3 s^ o ■S.2 o CC 01 "i r S rt * o S 9 ^^ «^ a o ^< «S «3 « --- o =s ^< $ p< ^ o fl .«£ •r .ii aj P< ►J <-. r M " S * £ 9 t4 o M (J) n:? is.ii r2 s 'i '^ "— ' m ^ C€ r-^ -S S tH » O r' O cC ^ ta >> r3 « 0) •*■§ to^ % - 1^ fl fl " o 2.9 S 2 .2 ~ « Cp 43 OJ a L^ H O) O - °^ « 2 S~ ^ m.a ^ £ §•.-2 .t^ O ^ M J5 i** r1 /.I T^ ^-s * i* 3 v.« 0) o ^ o o u (1) . O) Ol fl!M 13 CS Ol o a ! 1 5 a 3 O a "3 01 «- a o n Banking Town a £ ■a ««1 Li O >> d I X 195 196 BANKING PRACTICE 23rd of each month, and a statement sent to the head office either in exact form or in even thousands, the latter method being sufficiently close for all general purposes. 27. Balance book. — The balance book is used to record the trial balances and adjustments of the dif- ferent accounts in the office. The balances should be taken off on loose leaves and filed 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 accounts, list of loan and trade bills, cash items account, etc. 28. Overdraft register. — It is very important that the manager should be fully informed of the amount and nature of the overdrawn accounts in his office. This register should be written up each morning and placed on the manager's desk so that he may have before him a daily indicator of the status of accounts to serve as a guide in extending further business. 29. Discrepancies book. — Canadian banks are very strict in their rules regarding the correction of errors in the books, any erasures being absolutely forbid- den. Errors discovered immediately by a clerk should be neatly cancelled in ink and the correct fig- ures entered above. All other corrections must be made by a reversing entry thru the cash book; full particulars must be entered in the discrepancy book and compared and initialed by the manager or ac- countant. * BRANCH RECORDS 197 REVIEW What is the principal book in bank accounting ? Why ? What books are added as the bank grows? Make a list of the books used in a fairly large branch and in- dicate the importance of the record kept in each. What is the legal value of accounts kept in loose leaf form? How are remittances for collections made to other banks ? Why are all correspondents' accounts not kept at a branch ? CHAPTER V DEPOSIT BUSINESS 1. New accounts. — As a rule, no new account is opened in a bank except under the authority of the manager or accountant, expressed by initials on the deposit slip. In other words, the privilege of a check- ing account should be extended only to persons who are known to be of good character and reputation, and therefore no account should be opened with a stranger until he has been satisfactorily identified. To do otherwise is to leave an opening for fraud. Ledger-keepers are usually held equally responsible with the tellers for any deviation from the regula- tions laid down in connection with the opening of new accounts, especially with strangers. 2. Opening accounts. — Wlien an account is opened a specimen signature of the depositor duly witnessed should be obtained and placed on file — the card sys- tem is the best — for ready reference. In the case of a firm or company a specimen signature of each part- ner, or of the properly constituted signing officers, re- spectively, should be taken. If a power of attorney is filed, a specimen of the attorney's signature as such should be placed on file. Every customer opening an account in the current 198 DEPOSIT BUSINESS 199 account ledger should be provided with a pass-book and a book of checks. This does not apply, how- ever, to out-of-town customers, copies of whose ac- counts are sent monthlv usuallv. Care should be taken in handing out check books and other supphes to customers. The nature and importance of an account should govern the size of the pass-book and the check book supplied. 3. Particulars to he recorded in ledger. — The full name, designation or occupation, and address of each customer is written at the head of every page of the account in the ledger. If the customer is a farmer, his lot, concession, and township as well as his post office address should be recorded. A concise descrip- tion of the personal appearance or other mark of identification of all customers who cannot write their names should be noted in the ledger or on the signa- ture card. Special care should be taken to record correctly the names of signing officers of benevolent and friendly societies, lodgj-es and other bodies of this kind, their powers and other useful information. In the case of a firm, the names of the partners and, where there is a special partnership, the date of its expiry should be recorded in the ledger; if a trust estate, the names of the trustees and in the case of corporations, etc., the names of the officials author- ized 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 200 BANKING PRACTICE should state the date when the power is granted, the names of the persons authorized to sign, the extent of the power and the hmitations placed upon its use, if any. Special sheets are usually supplied for re- cording such information in order to obviate the ne- cessity of carrying forward the particulars from page to page ; these are inserted at the front of the account. 4. Partnership accounts. — The law does not recog- nize co-partnerships of professional men, i.e., in con- tradistinction to traders ; therefore, the individual sig- nature of each member is requisite to paper of all kinds. Otherwise, if an account is opened in the name of a firm of solicitors, architects or other non- trading partnerships, a written agreement should be taken (Figure 29), signed by each of its members, whereby they undertake to be jointly and severally NON-TRADIXG PARTXERSHIP SIGNATURE BY ANY MEMBER TO BIND 191.... To THE MaXAGER THE BANK We, the undersigned, composing the firm of do hereby acknowledge and agree that we are and will be jointly liable and responsible to the Baxk for all transac- tions 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 signature had been affixed by each of us respectively under our own hands. FlGLKE x?9 DEPOSIT BUSINESS 201 liable for every transaction, by check, note or draft, signed, made or indorsed, entered into with the bank by any individual member of the co-partnership in the firm name, or by any person they may designate to transact business with the bank on their behalf. In the latter case a differently worded form is used. 5. Conversion of partnership into joint stock co7n- pany. — 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. Also, it should never be overlooked that a partnership dif- fers from a corporation in that the latter is absolutely restricted by the terms of its charter, and its officer:^ by the authority conferred upon them by the by-laws. The same reasoning necessarily applies to new cus- tomers who are already joint stock companies. 6. 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 in eveiy instance to the effect that the bank is authorized to pay checks on the account signed by either or both. (See Figure 30.) 7. Accounts with married women. — In the Prov- ince of Quebec, on account of the restrictions imposed by the law of that province on married women, it is essential that the fullest particulars should be ob- tained at the time the deposit is taken. When a mar- 202 BANKING PRACTICE 191. To THE MaxaGER THE BANK Dear Sir: You have a deposit account standing in the name of " or either of them." We authorize you to pay and charge against said account all sums evi- denced by checks on your branch or other vouchers signed by or either of them, and we confirm the verbal instructions to this effect already given to you, and all acts done by you in pursuance thereof. Yours truly. Figure 30 JOINT ACCOUNT ried woma'n makes a deposit, the name of her hus- band, with the post office address of each ( in the event of their not hving together) , should be given. Any other information necessary to identify or locate the depositor should be noted. 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 Baxk ; to deposit or indorse for deposit to the credit of such account, money, checks, drafts or other negotiable instruments; to receive deposit receipts and surrender the same; to draw checks upon the said account and to withdraw 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. 191 Figure 31 DEPOSIT BUSINESS 203 When opening such an account it is advisable in every instance to obtain the husband's authorization to withdraw money (Figure 31), as without this she would be restricted to withdraw an amount not ex- ceeding $500 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 indorse a note, or bind herself in any way for the benefit of her husband. Therefore notes signed or indorsed 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 Supreme Court, confirmed by the Privy Council, it was decided that a married woman's guarantee or indorsement for her husband is void unless she signs independently (Stuart versus Bank of Montreal). Therefore in these latter provinces if it is found expedient or necessary to have a wife join in a guar- antee or indorsement on her husband's behalf, care must be taken to see that 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 declaration from the latter that she has been so advised. 8. Waiver and authority to charge hack. — An au- thority (see Figure 32) to charge back returned bills, notes, etc., should be taken from every customer whose account is an active one. In every case of 204 BANKING PRACTICE The Manager THE BANK Dear Sir: In consideration of your lending money to the undersigned or dis- counting for or taking on deposit or for collection or otherwise from the undersigned bills of exchange, promissory notes, checks or other securities payable at points at which there is no branch of a char- tered bank of Canada, you are hereby authorized to forward the same for collection to any National Bank, State Bank, private banker or private firm, and the undersigned hereby undertakes to keep you 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 exchange, promissory notes, checks or other securities so forwarded or for any sum or suras collected on account thereof. The undersigned hereby waives every presentment, notice of dis- honor and protest of all bills of exchange, promissory notes and checks now or hereafter drawn, made or indorsed by the undersigned, and now or hereafter deposited with or delivered to you for collec- tion or discount or as security or otherwise. The undersigned, to avoid expense, requests you not to protest such bills of exchange, promissory notes and checks, and agrees not to hold you or your agents liable for not presenting or protesting or giving notice of dishonor of the same and to become and remain as fully liable to you upon and for said bills of exchange, promissory notes and checks as if its presentment, protest and notice hereby waived were duly made and given. The undersigned hereby authorizes you to debit the account of the undersigned with you with the amount of any bill of exchange, prom- issory note or check payable at your office and which may be now or hereafter drawn, made or accepted by the undersigned, and with the amount of any bill of exchange, promissory note or check which having been previously credited to the said account is returned to the Bank impaid, and with all such charges and expenses as the Bank shall have properly incurred in connection therewith, and the undersigned agrees to repay to the Bank the amount so debited to the account of the imdersigned. The above shall hind the successors and assigns of the undersigned. Dated at the day of 19.... Figure 32. Wai\t:r of Protest charging a customer's account with a returned or dis- honored bill, note or check, the ledger-keeper should immediately notify the customer by mail of the debit. A special form of advice is usually used for this pur- pose, which is written in duplicate, the original being DEPOSIT BUSINESS 205 mailed to the customer and a carbon copy used as a voucher to be charged to the account. Dishonored bills, acceptances and the like charged to an account should not be given up until the cus- tomer's check has been received therefor or the ac- count verified and the usual receipt for checks and vouchers received. If there are not sufficient funds in an account to retire such items they should be held in the overdue file until provided for. 9. The ledger. — It is the rule in most banks that no entries shall be made in any ledger by any officer other than the accredited ledger-keeper. All entries are made from: (a) Checks, acceptances, di'afts, 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 carefully followed both as regards the current account ledgers and savings bank ledgers.^ The ledger- keeper should watch out carefully for customers hav- ing the same or similar names, as there is always the danger of a mistake occurring between the two ac- counts. In such case it is advisable to put a warning notation on the account, as well as in the index, so as to attract the attention of any one looking up the ac- count. All indexing should be carefully checked. 1 See Section 3, Chapter IV. 206 BANKING PRACTICE 10. Deposit slips. — The usual form of deposit slip is shown in Figures 33 and 34. The deposit slip after being checked, stamped and initialed by the teller should be handed by him direct to the ledger-keeper. The latter should see that each slip has been initialed and stamped by the teller; he should then post the credit in the ledger and enter the amount in the cus- tomer's pass-book, initiahng 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 accord- ing to the ledger. No blank lines should be left be- T\ HE CANADIAN BANK THE CANADIAN BANK. OF COMMERCE QF COMMERCE CREDIT SAVINGS BANK DEPARTMENT Account No. For Credit of BY Oocnpatirxn DEPQaiTED nr 191 _191 X 1 = X .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 = X HOO = $ X. 100 = Rilvpr $ rhppWR $ FlGURl : 33 FiGUl IE 34. DEPOSIT BUSINESS 207 tween the entries, or between the entries and addi- tions of the debit and credit columns. The teller should not, when he has received a de- posit, retui'n the deposit slip to the customer, that he may hand it to the ledger-keeper for entiy or for any other reason. To do so would, obviously, be danger- ous. 11. Money received after hours. — Frequently money is received by the teller too late in the after- noon 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 customer's deposit, entered in the ledger at once. This practice is followed in order that no deposit may remain overnight um'ecorded and entirely in the hands of one officer. 12! 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 balance book. Pass-books are collected from customers at the end 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 dav of the month, when the entire staff, with the exception of the teller, assists with the work in order that tlie pass-books may be ready for the customers the following morning. Altho the teller takes no part in writing up and bal- ancing customers' pass-books, he may assist in com- 208 BANKING PRACTICE paring the checks with the entries in the books after they are balanced. The manager or accountant, pro- vided the latter does not also act as teller or ledger- keeper, afterward compares the balances in the pass- books with the corresponding balances in the ledger, attesting the comparison by placing his initials oppo- site the balance in the ledger, and against the balance carried forward in the pass-book. 13. Customers' certification of accounts. — Each balanced pass-book when delivered to a customer should be accompanied by a certificate (Figure 35), stating the amount of the balance and the number of checks returned. 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 cer- tificate at the bank counter; otherwise the certificate should be signed and returned to the bank before the checks are surrendered. THE BANK 191.... The undersigned hereby agrees with the Baxk that at the close of business on the day of the balance of the accounts and dealings between the undersigned and the Bank is the sum of .Dollars in favor of thc- .„„ undersigned. And in consideration of the account of the undersigned as a cus- tomer of the Bank being not now closed, and subject to the correc- tion of clerical errors (if any), the Bank is hereby released from all claims by the undersigned in connection with the charges or credits in said accounts and dealings up to said day. The undersigned hereby acknowledges receipt of the checks charged in said accounts. N.B. — This receipt must be signed by the Customer or his Attorney. Figure 35 Pass Book Certificate DEPOSIT BUSINESS 209 In the case of out-of-town customers, receipts ( Fig- ure 36) should be obtained before the checks are sur- rendered. It may be necessary to make exceptions in special cases, when vouchers should be carefulUy 191.... RECEIVED from The Bank Insert the num- pass-book and checks in '^ words — not ^^^ vouchers for amounts charged to my/our account figures in the books of the said Bank during the month of last. Figure 36 compared with the pass-book or copy of the custom- er'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 dispatched. In eveiy case in which checks are sent out before the receipt is obtained they should be sent by registered mail. After being signed the certificates should be checked with the led- ger by the manager or accountant, who should place his initials and the number of the vouchers opposite each balance in the ledger. As this certificate is equivalent to an adjustment of the account between the bank and its customer, it is very important that as few balances as possible re- main uncertified. 14. Guarding against fraud. — Fraud has been per- petrated upon employers by confidential clerks mak- ing false entries in a bank pass-book, or by keeping a spurious pass-book for the eye of their employers. It is fully within the range of an observant officer's XVI— 15 SIO BANKING PRACTICE power for the safeguarding of the bank and the pro- tection of its chents to detect embezzlement attempted by such methods. If an account, operated under a power of attorney, or by one particular employee, is frequently overdi'awn, or if anything of a question- able nature occurs in the working of the account, the circumstances should be discreetly brought to the no- tice of the principal by the manager. As the teller comes more into contact with the pub- lic than any other officer he has exceptional oppor- tunities for observing things which may be of great use to the manager. He should train himself to ob- serve every circimistance connected with each trans- action, and especially with any unusual occurrence. Any attempt at "kiting" by means of checks should be reported at once to the manager, who will deal with it as he may consider advisable. This applies also to accommodation checks, indeed, to anything unusual or irregular. 15. Certification of checks. — Checks are accepted by the ledger-keeper only after they have been charged to the account on which they are drawn. Checks should not be marked "good" by the man- ager or any other officer unless previously debited to the proper account, or be crossed "Negotiable at par" thru another branch until accepted. No check should be charged to an account unless there are funds at credit to meet it, without the au- thorization of the manager signified by his initials on the check. A check which has been altered or erased DEPOSIT BUSINESS 211 in any vital part should be refused. Any blank space in the amount should be distinctly filled in or the cus- tomer's attention called to it. In accepting a check which has been carelessly filled in the ledger-keeper should write across the face of the check the amount for which he has accepted it, so that it cannot be "raised" or changed to a larger amount. In the case of a check for which there are funds being returned for some informality in the indorse- ment, it should be "accepted" before being sent back for correction. Xo overdraft should be allowed without the per- mission of the manager expressed in writing at the head of the account or by his initials on the checks. 16. Cashing checks. — Tellers are generally forbid- den to cash or receive on deposit unaccepted checks on any bank, or any drafts or other items unless they have been initialed by the manager. In special cases, where the manager deems it necessary, he may give the tellers written authorization to accept from cer- tain customers checks, drafts and items to a specified limit. This is only done, however, when the un- doubted responsibility of the customers justifies this action. The possibility of being victimized by confidential clerks or other employes 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 sus- 212 BANKING PRACTICE picion. A check drawn payable to the customer of another bank should, in the ordinary course of busi- ness, be presented thru 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 cir- cular letters of credit are also all liable to forgery and alteration; payments made on the latter, especially to strangers, should be limited to a reasonable amount for traveling requirements. If they call for a large amount great care should be exercised. Checks payable to corporations or wholesale firms should not be paid over the counter of the bank to an employe without express authority of the company or firm. Checks should not be cashed for strangers until they have been satisfactorily identified; even then, there is not, as a rule, much profit to a bank in the transaction. No identification is safe or satisfactory^ excepting the attendance at the bank of a well-known and re- sponsible person, who indorses the check or other in- strument in the presence of an officer of the bank. Any other ostensible identification or indorsement may be fraudulent. A person who forges the sig- nature to a check, or raises the amount of a draft, or steals any negotiable instrument, might be pre- sumed also to forge a letter of identification or an DEPOSIT BUSINESS 213 indorsement, to serve the purpose of identification. The safest course is always to give the bank the ben- efit of the doubt. A written identification which purports to be that of a hotel-keeper or hotel clerk is especially open to suspicion. Every check for a large sum should be particu- larly scrutinized, and the attention of the manager called to it. Customers or others who are unable to write and who sign by mark on checks or other docmnents, should be identified to the satisfaction of the teller, but in no case should the teller witness the mark, which should be attested by an independent witness, not an officer of the bank. 17. Savings bank deparUnent. — The rules to be ob- served with respect to the current account ledger are applicable to the savings bank ledger, with the fol- lowing exceptions: The manager should take charge of and keep under lock and key all blank 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 numbers when checking the ledger entries with the supplementary cash book. Should it be neces- sary to issue a new book in continuation of an old ac- count the ledger-keeper should then and there draw the manager's or accountant's attention thereto. By this method it is intended that the manager should 214 BANKING PRACTICE personally know that no deposit is received for a new account without a corresponding 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 depositor's identity, and the man- ager should initial the check, making note of any par- ticulars, especially the name and address of any out- side party called in for identification. When a savings bank account is closed the pass- book should be returned and written uj) in full with a heavy line ruled across the page under the last en- try, and filed away by the ledger-keeper in a box provided for the purpose. 18. Duplicate j^^^^s-books. — Where the identifica- tion of the depositor is without question, and the man- ager is fully satisfied that the pass-book has been lost, the balance of the account should be withdrawn by check and a new account opened with a book under a new number. A memorandum, giving the circum- stances of the case, should be made on the old account in the ledger. 19. Machine staternents. — Nearly all the large city branches of Canadian banks have adopted the prac- tice of rendering machine statements of the custom- ers' accounts in preference to using pass-books for the purpose. The statement system eliminates the dreaded "pass-book night" at the end of the month, reheves the congestion at the ledger wicket, enables DEPOSIT BUSINESS 215 the accountant or statement clerk to maintain a con- stant 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 state- ment of his account at regular intervals, monthly or weekly as desired. With the pass-book system a mis- take might run for several weeks or months thru the failure of the depositor to bring in his pass-book to be balanced. Wliere a regular statement is sent an error is sure to be detected on receipt. The adoption of the statement sj^stem involves no extra expense in the long run, as the improved serv- ice to the customers soon justifies the initial expense of the statement machine and the salary of a state- ment clerk. The machine usually used is the Burroughs Adding Subtracting Statement machine and the method of operation is very simple. After the checks and de- posits passing thru the current ledger have been checked to the supplementary cash book the first thing in the morning, they are canceled and handed to the statement clerk, who lists them on the various statements. Figure 37 with the perforated balance slip to the left is the form in general use. The op- erator first records on the machine the last balance shown on the statement and, after making all the pre- vious 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 statement clerk with a memorandum for each accepted check 216 BANKING PRACTICE outstanding, which is replaced by the check itself as soon as it comes in. The statements are filed in in- genious trays so divided that the balance slips of the day's operative accounts project from the general PLEASE EXAMINE AT ONCE AND REPORT ANY DIFFEfiENCE IN THE STATEMENT DIRECT TO THE ACCOUNTANT Itoms Paid .IN ACCOUNT WITH THE CANADIAN BANK OF COMMERCE KtNDlY NOTIFY THE BANK OF ANY CHANGE OF ADDRESS DAT! DEPOSITS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 S4 25 26 27 BALANCE BROUGHT FORWARD Balance Credit INDEX TO abbreviations: D DiscouDta Credited L List of Checks Debited C Collections Credited 1 Interest R Returned Items _VOU'C,HtRS RETURNED Figure 37 file of statements. Thus the active and inactive ac- counts for the day are separated without disturbing the alphabetical or numerical arrangement. It is therefore a simple matter to make a comparison of DEPOSIT BUSINESS 217 the statement files with the relative ledger balance if desired. Where the employment of a special state- ment 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 only 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. Pass-books will, of course, continue to be used for certain accounts, but the envelop system can be used to advantage for small accounts. An envelop spe- cially ruled with a progressive balance is kept entered up from the ledger or vouchers, the checks being en- closed as entered. With the exception of perhaps a few entries, the statement is always ready to be handed to the customer as opportunity offers. This method, combined with the statement system, is of great assistance in relieving the vaults of an accumu- lation of checks and vouchers. REVIEW What precautions are taken upon opening an account? Who approves the opening of a new account? What provisions are made in the case of professional partner- ships? Of joint stock companies? To what extent can the bank guard against fraud ? How is interest on savings accounts computed ? What is the value of the monthlv statement system? CHAPTER VI LOANING A BANK'S MONEY 1. Experience the only teacher. — David Hanim's definition of banking, "Loaning your money and get- tin' 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 reduce 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 abilitj^ 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 neces- sary qualifications. True, there are certain funda- mental principles to observe in analyzing any account, but, outside of these, no two accounts can be judged exactly alike; conditions are too varied. Certain qualifications are essential to a manager in loaning money. He must be a man of pleasing ad- dress, able to meet with and draw out from men the information 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 218 LOANING MONEY 219 to read between the lines of a statement, or detect a discrepancy. He should have a good memory, sup- plemented by a record of all essential information ob- tained verbally from a customer. As a rule, it is bad policy to take notes during a conversation, as it is likely to restrain a customer from giving information freely. Credit has been defined as "A question of ability to pay coupled with an intention to pay." Both ability and intention must be assured in order that the loan may be considered a safe proposition; the latter of these requisites is one that must be settled on the basis of past experience, habits of life, character and the like. If a man has always paid his debts and is not living beyond his means his intention to pay would be practically assured. The ability to pay, however, is another matter and much more difficult to deter- mine. There are, therefore, certain facts that a manager must know in order to determine whether or not tlie bank will be willing to extend credit to a borrower : (1) Antecedent and character of a borrower (2) Nature of the business (3) Organization (4) Competition (5) Business methods (6) Outside opinion (7) Net worth. In addition to this general information the manager should know what kind of transaction every piece of 220 BANKING PRACTICE paper discounted by him represents, and should make a practice of putting the following questions to him- self: 1. For what purpose is the bank's money to be used? 2. Is the loan safe: would I lend my own money on the security offered? 3. Is it a transaction that the bank should undertake to, or which can legally or morally become a party? 4. Will the money be used for the purpose for which it is borrowed? 5. Will the paper be met at maturity, and from what source? 6. Would the indorser 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 satis- factorily, and are corroborated by an analysis of the borrower's statement, the manager is in a position to discount the paper if within his discretionary limits, or otherwise to recommend the loan to the head office for authorization. A simple rule is never to 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 by being trans- ferred to another bank. 2. Causes of failure in business. — A study of the LOANING MONEY 221 principal causes of business failures may be useful in demonstrating the relative importance of the various factors 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 de- ficiencies in the traders themselves, rather than be- cause of happenings beyond their immediate con- trol. 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 individuals themselves. These causes are as follows in the order of their importance : 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 11. Speculation (outside of regular business) B. — Not due to faults of those failing: 3. Specific conditions (disaster, prolonged sickness, etc.) 8. Competition 9. Failure of others (of apparently solvent debtors). In 1912, 30.3 per cent of the nimiber of failures and 80 per cent of the liabilities were due to the shortcom- ings of those who failed. Bradstreet's gives the fol- lowing interesting table : 222 BANKING PRACTICE PERCENTAGES OF NUMBER OF FAILURES AND LIABILI- TIES IN THE UNITED STAES AND CANADA IN 1911 AND 1913 CLASSIFIED AS TO CAUSES United States, Per^Ceat- Canada, Pex Cent Failures Due to Number Liabilities 'Number Liabilities 1912 1911 1912 1911 1912 1911 1912 1911 liaek of capital 20.7 30.2 16.5 10.3 4.6 2.0 2.0 1.9 1.3 .7 .8 31.4 27.0 16.9 10.6 4.1 ,2.2 5.0 2.9 1.3 .9 .7 33.5 2G.8 13.8 8.8 3.0 1.0 2.6 '1.3 4.9 .9 3.4 28.3 23.5 20.7 8.9 2.2 1.3 2.2 4.8 4.2 1.2 2.7 50.3 16.3 12.8 6.7 5.1 '4.3 1.3 1.0 .9 '.8 .5 49.3 16.1 14.6 8.1 2.9 4.1 .9 1.1 1.1 .9 .9 45.8 22.8 8.8 10.3 3.5 3.1 ^1.7 .6 2.5 .5 .4 478 IncomDetence :i8.9i Specific conditions 101, Fraud '9 9! Inexperience '15' Kcs^e.c.t 251 TTnwise credits 1.0 OoniDetition ,6' 1.4 \ Failures of others F.xtravapance 32 Speculation 3 I- These percentages afford much interesting and in- structive information and point definitely to the more serious ills of commercial life. It is at once apparent that the most dangerous fac- tor in Canadian business life is the lack of capital, which is responsible for over 50 per cent of the busi- ness failures. The lack of liquid capital is one of the most serious difficulties a bank manager has to con- tend 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 os- tensibly for the creation of liquid assets may be im- properly diverted into building, real estate or other fixed assets. Lack of capital, altho the apparent LOANING MONEY 223 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 living 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 per cent in liabilities. These particular causes assert themselves in various ways: injudicious buying, lack of organi- zation and other unwise business transactions. It must be borne in mind that a man may be most suc- cessful in operating a small business, but may prove 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 com- ment. It is not only necessary to keep these causes of failures constantly in mind, but it is advisable also to watch carefully that the presence of these causes in an account of the least importance does not assume larger proportions or induce even more serious con- ditions. 3. Statement of affairs. — Reference has already been made to the necessity for obtaining a knowledge of a borrower's net worth. This information is ar- rived at by an analysis of the business statement which is required from all customers seeking credit from a bank. 224. BANKING PRACTICE Altlio the practice of requiring statements from borrowing 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 expansion of the country and the opening up of branches in new territories ; another is the grad- ual elimination of the personal element in modern business life, due to the incorporation of old-estab- hshed 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 de- mand for efficiency and thoroness in all branches of business life. The granting of commercial credits, as the keystone of the whole structure, has been raised almost to the dignity of a profession. The excellent work accomplished by the various credit men's asso- ciations in the United States ^ has naturally extended its influence to Canada, and practically every business house of any importance has its own credit depart- ment doing invaluable work.^ iMuch credit is due to the late Mr. James G. Cannon, President of the Fourth National Bank of New York, to whose unremitting efforts in arousing public interest in this question may be ascribed the present high standard of credit requirements in the commercial world. Mr. Cannon is the author of many interesting and exhaustive articles and addresses on the subject of commercial credit, and he was instrumental in having the banks and credit associations thruout the United States adopt a uniform statement blank. 2 The Canadian Credit Men's Association, altho only started in LOANING MONEY 225 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 fm'ther, that a statement of affairs is often an expression of opin- ion rather than a statement of facts. In the course of one of his addresses on "Bank Credits," Mr. Cannon, in an interesting and instruc- tive way, remarked 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 af- fairs. This has now become an accepted custom in the re- lation between 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 oftentimes 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 fre- quently 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 atten- tion of the borrower, if reckless methods have been indulged in or any dishonesty 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 exists. Frank and open statements, Winnipeg in 1910, has extended its organization thruout Canada and has already accomplished much excellent work. XVI— 16 526 BANKING PRACTICE bearing upon their face the evidence of a true condition of affairs, are the greatest factors in establishing credit. Nothing will more firmly cement the union between borrower and banker than such a statement, and nothing will be of more value to a banker and of less harm to an honest, enter- prising borrower. Hidden facts are revealed by analysis, and skill in reading between the lines is an important part of a manager's training. By this means, weaknesses may frequently be discovered and proper steps taken to avert trouble before acute difficulty arises. A large number of statements will show on their face such evidence of weakness as to require no further investigation. This information, of course, is valuable to bankers, and they will at once decline to extend these applicants any ac- commodation; whereas, if, on the other hand they were only in possession of indefinite data, they might be disposed to extend a line of credit. Many old firms, because they have been in the habit of conducting their business without revealing their financial affairs to any one, feel a natural reluctance to making a statement of their condition ; but we should bear in mind the fact that great and deplorable mistakes have been made by banks in granting large lines of credit to old houses sim- ply because they had an unblemished record and were sup- posed to be entitled to liberal consideration. Notes, bills, drafts, checks, book credits, or any form of obligation resulting from a credit transaction, come into existence, not antecedent to, but as a consequence of, a transfer of goods involving futurity. Paper is purely fic- titious and illegitimate which is not the outcome of an opera- tion in goods ; and we are enabled to test whether loans are legitimate or not according as we know whether the dis- counts 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. The manager as a rule trusts too much to his customer — if the latter wants money, presumably he is an ordinarily prudent man, and knows what to do with it ; he must know LOANING MONEY 227 his own business better than his banker, and it would be presumptuous in the latter to undertake to guide him. While this may be true of the well-trained and experienced merchant, it is very wide of the truth with hundreds of traders and small manufacturers all over the country. There are really very few men anywhere who can be trusted to handle prudently and safely unstinted loans of money. The proverb "Give him rope enough and he will hang him- self" fitly illustrates the tendency of the average trader to get into difficulty when he is too freely provided with money. With careful and prudent banking, however, much of the mischief would be prevented. Inflation is seldom developed to a very great extent without accommodation loans, and these would be very sparingly indulged in if not altogether avoided. Credits would be carefully scanned and risks divided ; and so the skilful banker, by simply following safe rules in his own business — rejecting here and encouraging there — can- not help saving his customers as well as himself from much trouble and loss. But in order to do this well he must be a man who thoroly knows his business ; of strong self-reliance, a man who arrives at his opinions and judgments from ob- served facts, not from hearsay, and who is not to be fright- ened into altering his course to suit importunate and perhaps influential borrowers. 4. Science of credit. — The following analj^sis of the principles and rules which govern a credit man in his work were suggested by Mr. Cannon : PRINCIPLES : 1. To reduce losses 2. To eliminate disproportionate risks 3. To conserve worthy interests 4. To war on dishonesty and incompetence. MECHANISM : 1. The statement of condition, including: Assets and liabilities 228 BANKING PRACTICE Annual business or turnover Net result of business Bad debts Commercial expenses Character and antecedents Special trade conditions. 2. The analysis and study of the above. GUIDING RULES : 1. Quick assets only are a basis for loans 2. Fixed assets only considered as giving an unknown support to the quick assets 3. The debt limit of the borrower has been exceeded when his liabilities exceed 50 per cent of his quick assets (the so-called 50 per cent credit rule) 4. It should always be borne in mind that there is a cardinal difference between banking credit and other kinds of commercial credit ; you can afford to run much less risk in banking than in commerce and therefore you must take much greater precautions. 5. Form of statement. — Altho for many reasons it is preferable to have a statement rendered on one of the standard forms supplied by a bank, the main object is to obtain information, and frequently a statement made up by a customer along his own lines may disclose weakness which a more formal state- ment might not reveal. Figure 38 is a comprehen- sive form combining both a statement and an appli- cation, and is adapted to the statements of j^rivate individuals, firms and corporations. It will be noted that each partner of a firm is required to sign the statement and application. The statement generally submitted to a bank is the annual statement of the customer's affairs. This LOANING MONEY 229 should be made at the end of his fiscal year, when his merchandise and raw material accounts are at their lowest, and his bank loans cleaned up. In any business there should be at least one period in the year when the direct indebtedness to the bank is fully paid up. This is of vital importance both to the bank and the customer. Under normal condi- tions inability to clean up bank loans annually points to a lack of working capital, which may be due either to the gradual change of quick assets into fixed as- sets, or to injudicious buying or selling. To allow this condition to become chronic is fatal; it should be remembered that 50 per cent of the failures in Can- ada are due to lack of capital. A brief comment on the information called for by the statement shown in Figure 38 will be instructive. It must first be noted that what are called "quick as- sets" consist of cash, receivables and merchandise, while "current liabilities" include practically all in- debtedness except mortgages. The ratio of liabili- ties to quick assets is usually the first test of the statement. The two totals are therefore in line with each other for purposes of quick comparison. Ex- cept in certain businesses such as lumber, grain or other staples, the liabilities should not exceed 50 per cent of the quick assets, and as a rule the former should not exceed the cash and receivables, thus leav- ing the amount of merchandise on hand to represent working capital. 6. Cash. — The cash on hand should always be a T3 ,•* % o a o a o ;=: a> -3 a o a a « d o a> a G o B ■*J ^ o to p. u , 1 0) a Tl d d O) td X a o C3 d d 03 w P ^ 5a a II C3 O -3 d 0) J3 o d o d «> U a 03 S M d 3 z, g o 2 ^ o o CO "^ O u HI o ^dS d § ^ O Di a •d o 2 2 o :d 5j3 rt tf> ,» .a ' ■*^ 3 O Of C5 « o o o a C3 3 O o SI n fc m d O V H OS d 03 CO a CaD ■e o us 0) X) 5 Oi 3 a o s Q pq «« -al 230 a 2 3 u I I a> OS d el 51 a o CO H M O •n bi nl fe rl £ gl s b 5 B d -1 a m O DJ (0 III < U (T li. O 03 EC < O H- ir < Q. g '3 11 II o "3 > 1 > •a •< 3 B o CO ( <1 d a * o o ^^ - o, " > J '^ i-^ ^ =s a— ' ■ fa O W Oi J a u in .22 o ffl Oj »- "^ Pi ^"-^ - P.-- !;< IH 03 Hi a a~ ooo o CI :/2 O o a C3 "cS /2 t3 •-. ^ 3a *^ S' -Sag Qj -p- o sli 9 ^ a ""ia >- ®.^«i-i a ■w a ° 2 H o CO a S'" 231 a fl ij pq > I— I o CO h- 1 « Q CO o o o .p.4 a o > . a •i^ . Cj a • O ■n • bO Q • a ,o ''u o ' t~* • d :a a o • ^*-4 tH . o • 4.S &3 «»• o a < (U o ^ o o a, ■■a o — I. ce u a> -^ M O ij ^ zj aS? 5?? fi'-s Ol ; cS a oi 2§ aaS (h tog " O) I, 1) 13 « >. C3 = a.a CS B I-' m Hi 01 a 03 a to . ® a a to C3 •.a ■a /-v w o CD CO o a a a S o CO (S o o i 9 A &, o o a SI o X u o at tn O O H 33 a D m « •0 w 3 « "C « vt ^ v> a H 3 a o I 2. I o a 3 o u •3 V o o o o o 3 P. o a 3 •3 o o a «4 Cq fl « Cm 233 -3 o id o >. ■4J "C a 3 o o -i-* "5 d u) a O 3 a u o O •3 O •o o a a o •a 'A 03 Iz; o u s o o tn h Cd a a Ml " 5 -§ g a 1 f ^ I 234 BANKING PRACTICE comparatively small amount. If large, the reason should be inqmred into, as this means either careless- ness in financing or that some worthless note or bon is carried as cash. Practically all the cash on hand should be carried in the bank, and the balance main- tained should be commensurate with the amount of work which the account 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 liabihty side of the statement, the amount should agree, otherwise the deposit ledger balance will be the larger; if the re- verse, the reason should be inquired into. 7. Merchandise. — Stock on hand or merchandise calls for most careful consideration and analysis. Old and unsalable stock accmnulates rapidly, espe- cially under poor management, and even if the stock is reasonably new, its amount, if out of proportion to the total sales, may be a burden to the business and prove a source of weakness. It is important to know if the figures are the result of actual inventory at cost price, and also on what basis old or unsalable goods have been included. In revaluing the mer- chandise for credit purposes due consideration must be given to the nature of the business. A deduction of 10 per cent is generally sufficient for staples such as groceries, provisions, iron and leather, while on goods partaking of the nature of luxuries, or depend- ing for their sale on changing fashions or seasons, there should be a much heavier discount. It is always LOANING MONEY 235 advisable to look over the stock as occasion offers. Another good plan is to keep a record of the result of local liquidation sales of goods and receivables; no better object lesson can be found as to the reali- zable 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 15 per cent of the cost. Finished goods, if ready for shipment, should be worth actual manufacturing cost, but unfinished goods should only be considered to the extent of the goods actually in process of manu- facture, as established by the ratio between the dailv and total annual output. Any balance over this amount should be inquired into, as under this heading are often inventoried parts of articles whose manu- facture has been discontinued. The amount of merchandise in a business should form a reasonable proportion of the annual turnover. Conditions vary in different trades and localities, and it is impossible to establish any standard. Roughly speaking, however, the turnover of a business should be two and one-half to three times the working capital. Ample insurance is necessary in any business. Whether a bank is interested or not, every customer should be advised of the wisdom of keeping fully in- sured. If the insurance is assigned to the bank the schedule should be compared with the annual state- 236 BANKING PRACTICE ment, and all the conditions of the policy carefully examined. 8. Bills and accounts receivable. — Bills receivable in the statement of a Canadian merchant are generally few in nmnber, as practically all his trade paper is discomited, or else left with the bank for collection. With the facilities offered by the banks there is scarcely any object in holding paper in the office. Under these circumstances a large amount of bills receivable, in excess of collection held by the bank, should be looked into, as it probably means an ac- cumulation of past due or worthless paper or else some special transactions which should be disclosed. Accounts receivable should be inquired into, espe- cially as to the method of allowing for bad and doubt- ful debts. A distinction is made in the statement between receivables for goods sold and receivables from other sources. Loans to officers, relatives and friends, and other irregular transactions are fre- quently found in the latter. Receivables should bear a reasonable ratio to the turnover and goods on hand. This ratio, of course, would vary in different trades according to the terms of sale. A business selling on ninety days' time would naturally show a higher proportion of receiv- ables than a business selling at thirty days. 9. Machinery and fixtures. — Real estate, machin- ery 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 practi- LOANING MONEY 237 cally 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 machinery are constantly being 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 located for the business, and the rent paid should be in proportion to the business done. Much de- pends, 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 quick turnover for cash. The same rent, however, might ruin a more profitable business with a slower turn- over. 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 busi- ness can stand on a reasonable rental basis, the valu- ation is either excessive, or the business should be moved elsewhere and the property sold. The owner must acknowledge either overvaluation or poor busi- ness judgment, if he continues to do business at a more expensive stand than his business warrants. The value of the real estate as security is the price for which it can be sold at a forced sale. If the holder of a mortgage has to foreclose, the property, altho 238 BANKING PRACTICE seemingly desirable and well situated, depreciates enormously, a result which is intensified if the mort- gage is to a bank. Experience shows that a large sum is consumed for overdue interest, legal expenses, commissions and the like; this should be taken into account in estimating the real value of such an asset as a means of paying off indebtedness. 10. Current liabilities. — Current liabilities gener- ally consist of amounts due the bank and the whole- sale trade for goods purchased. If due to any other creditors the circumstances should be explained. As already stated, amounts due to the bank should be cleaned up at least once each year either by cash or trade paper discounted. The observance of a borrower's daily transactions and a critical scrutiny of his liability" account from time to time, and one year with another, should reveal whether he is progressing or otherwise. A comparison of the indirect and other liability of the customer on the books of the bank with the amounts shown in his statement will sometimes dis- close an omission in the latter. In one instance, a branch held for collection from other banks more than double the amount of the bills given in a state- ment. Needless to say the account was not enter- tained. Where amounts are due to other than trade credi- tors, such as members of the firm, relatives and em- ployes, it is a disturbing featin-e, as such loans are liable to be given first consideration in case of trouble. LOANING MONEY 239 Should the account be at all weak in other respects, postjDonements of claim to the bank should be ob- tained from such creditors. 11. Mortgages and other factors. — Mortgages should invariably be shown as a liability, and the relative real estate as an asset. The equity alone should never be considered. The position of a mort- gage in regard to taxes, interest and insurance will frequently warrant examination. It is very important 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 province of Que- bec, the amount of the marriage contract is material information, as the latter ranks prior to an unsecured liability. The information called for by the reverse side of the statement figure A"o. 38 (pages 232, 233) is self-explanatory, and is pertinent to the consideration of an application. Every borrowing customer should provide, in his will, power to his executors to continue his business after his death until it can be profitably liquidated. If a firm, the partnership agreement should contain a similar provision; otherwise the business must be liquidated without the expenditure of further moneys. In many cases this would entail heavy loss MO BANKING PRACTICE and, if the bank were interested, the safety of its loans would be endangered. Where a firm or corporation operates branch offices great care should be taken to see that no cross draw- ing or sales are allowed to swell the assets. Many losses have been made thru the careless scrutiny of branch operations, especially where a branch carries a deposit account at a local bank. Check kiting is one of the first symptoms of the disease ; others quickly follow. 12. Su7idry information. — No statement can be an- alyzed by rule of thumb. The points brought out in this chapter are by way of suggestion only. To many accounts, of course, they would not all be ap- plicable. No unfavorable fact, however, is too unim- portant to be overlooked and a competent manager is constantly adding to his knowledge and developing his power of drawing inferences and making deduc- tions. At the risk of repetition the following ques- tions are given and may be found helpful in reahzing the varieties of causes which contribute to the forma- tion of a borrower's credit standing. Are the borrower's antecedents and character good? Are his personal drawings from the business large? Has he ever failed or had a suspicious fire? Is he well liked and respected in the community? Does he kite notes or checks? Is he in good health? His age? Is he what is known as a "rebater," a man who makes un- fair claims for goods in the hope of getting rebates or other concessions ? LOANING MONEY gil Can reliance be placed on his statements? What are his personal habits? How does he spend his evenings? Has he technical ability' in his business? Are his books properly kept? Does he extend credit too freely or without discrimination ? Does he cut prices ? Is he careful and discriminating in the purchase of his stock or does he carry an unnecessarily heavy stock? Is he inclined, to dabble in outside ventures such as real estate or stocks? Does the business depend on conditions that may not be permanent ? Does he allow his machinery to become out of date and in- efficient ? Does he study the particular wants of his trade with a view to meeting public demands? Are his accounts receivable and bills receivable all genuine collectible accounts or are they padded with slow or worth- less 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? 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 en- gagements, 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? XVI— 17 242 BANKING PRACTICE 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? 18. Preparing 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 be- lated "yes." The latter implies indecision. The least indication of weakness in the statement should not be overlooked. The margin of profit in bank- ing is too small to allow unnecessary risk to be taken, and the bank should always be given the benefit of the doubt. A reference book or card index should be kept on the manager's desk, and any credit information about customers and others, whether borrowers or not, should be s^^stematically jotted down. In 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 account. It is advisable, whether the account falls within the manager's discretionary limits or not, to do this. When 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 essential. Therefore, as soon as the manager decides LOANING MONEY 243 that a loan of this nature is desirable, he prepares the statements required by the head office and forwards them with his letter. Figm-e 39 gives an exact copy of a customer's statement with space at the foot for a revaluation of the assets by the manager. Fig- ure 40 provides for a detailed analysis and compari- son of the last two statements on file, and also gives a comparison of the statements for the past five or six years. 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 re- ferred to. 14. The apjjlication. — The most severe test of a manager's ability and soundness of judgment is found in the writing of a letter of application. The rea- sons 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 further information or missing particulars. A separate letter should, of course, be written for each account, and the 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) The amount of credit applied for; (b) The purpose for which the advances are to be used; (c) When the advance will be required; (d) When and from what source payment is ex- pected. Give full Name or Names j of Partners, Age, Buaiaess.f and Residence. ' STATEMENT OF THE AFFAIRS . Branch OF -as at_ -19- Item No. Assets Per cent deducted In Mgr's valuations Liabilities Sales for past year_ Losses " S- S- Insurance on Liquid Assets S_ " on Fixed Assets S_ Real Estate Searched MANAGER'S ABSTRACT OF ABOVE. WITH HIS VALUATION OF ASSETS Liquid ^Vssets: Cash, Bills Receivable and Accounts Merchandise held for Sale Miscellaneous movable property. Fixed Assets: Floating Liabilities: To Bank Accounts Payable- Bills Payable. To Sundry Parties- Mortgage Debts: Surplus- Liability as Endorser or auar antor not included above, namely on: — Trade Paper in Customer's Account $ On other Accounts at Bi^anch S On other Accounts else- whci'e Figure 39 244 Name of customer. COMPARISON BETWEEN ACCOMPANYING STATEMENT AND LAST PREVIOUS STATEMENT 4 As per Last previous Statement Dated Ifl As per Present Statement Dated 13 Increase Decrease Liquid Assets: Cnih Rills RpCfivahlP and Accniintfl _ ' '^Alerchandi*'^ h^\<\ for Sale Total TiiTI''' Aaauta Net Net IFixed Assets: Mortgages and otlier Investments OiiattPlK and oth'^r nornmnt Assets PromiSfP and Stfltinnnry Plnnt other Rfal F«tatP, nnonpiimliered otlier Real Estate, encumbered Total FiTted Assets Net Net Total Assets 1 Deer ease Incr ease > Floating Liabilities: To Rank A,i-coiints Priyqhlp Rills Pnynhle To Sundry Partie* Total Floating T.iahilltiPs Net Net ATnrt crn o-p Dphts ! Total Mortg^cre Df>ht<5 Net Net X"tl' T.inhiMtios Surplus: 1 Increase — Decrease in Liquid Assets Increase— Decrease in Floating Liabilities, Increase— Decrease in Liquid Surplus Increase— Decrease in Fixed Assets ^Increase— Decrease in Mortgage Debts Increase— Decrease in Total Surplus 19 19 19 19 19 19 . Liquid Assets T'loating Liabili- tips T,iqnid Surplus Fixed Assets "TVTortfjnge Debts Fixed S'lrplns Tot.Tl Surplus ■■» FlGUHE 40 245 246 BANKING PRACTICE Sometimes preliminary letters may have been written giving information on some of these points, but the final letter should nevertheless contain full particulars, and reference to previous letters or state- ments should not be made merely to save the trouble of repeating information, except in special and in- volved cases. It is much more economical in time and labor for a branch manager to set forth the case 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 sequence, each subject being discussed in a separate clause, and all to be said on a particular subject brought together in one place as far as pos- sible. 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 reported, and if the application is for a line of trade paper a list of the trade bills under discount with his previous bank should accompany the letter. If these simple requirements are carefully com- plied with, the head office will be in a position to accord a prompt authorization or otherwise of the application. 15. Guarantees. — Guarantee bonds are a danger- ous form of security, liable to be voided by what may LOANING MONEY 247 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 41. In cases where a guarantor is also a creditor of the borrower it is generally the custom to obtain a postponement of the former's claim in favor of the bank. It must be borne in mind that a bond of guarantee would become ineffective in all such cases, even if the business of a firm or individual were converted into a stock company, or if the ownership of a business changed, altho the same business style should be con- tinued. 16. Customers' wills. — Under ordinary circum- stances and speaking generally, the business in which a man is engaged at the time of his death must be liquidated by his executors, or, if he is a member of a firm, by the surviving partners, without the expen- diture of further moneys. In many cases, this would entail heavy loss. For this reason, it is very desirable that every bor- rowing customer should be influenced to provide in his will that his executors be empowered to continue his business after his death until it can be profitably liquidated. Deeds of partnership should also make similar provisions. The borrowing powers of executors, if they have any, are determined by the will of the testator. Upon the decease of a borrower the conditions of the will should be ascertained, and unless authority is specially GUARANTEE BOND AND POSTPONEMENT OF CLAIM To THE Manager BANK In Consideration of The Canadian Bank of Commerce agreeing to deal with herein referred to as "the customer," in the way of its business as a Bank, the undersigned hereby jointly and severally guarantee payment to the Bank of the liabilities which the customer has incurred or is under or may occur or be under to the Bank, whether arising from dealings between the Bank and the customer, or from other deal- ings by which the Bank may become in any manner whatever a creditor of the customer; (the liability of the undersigned here- under being limited to the sum of dollars with interest from the date of demand for payment of the same). And the undersigned agrees that the Bank may grant extensions, take and give up securities, accept compositions, grant releases and discharges, and otherwise deal with the customer and with other par- ties and securities as the Bank may see fit, and may apply all moneys received from the customer or others, or from securities, upon such part of the customer's indebtedness as it may think best, without prejudice to or in any way limiting or lessening the liability of the undersigned under this guarantee. And' this guarantee shall apply to and secure any ultimate balance due to the Bank, but the Bank 'shall not be bound to exhaust its re- course against the customer or other parties or the securities it may hold before being entitled to payment from the undersigned of the amount hereby guaranteed. And that this shall be a continuing guarantee, and shall cover all the liabilities which the customer may incur or come under until the undersigned, or the executors and administrators of the undersigned, shall have given the Banlc notice in writing to make no further ad- vances on the security of this guarantee. And it is Agreed that this guarantee shall be good notwithstanding any change or changes in the name of the customer, or any change or changes in the membership of the customer's firm by death or by retirement of one or more of the partners, or by the introduction of one or more other partners. Any debts or claims against the customer now held, or which may, chiring the continuance of this guarantee, be held by the undersigned or any of them are for the further security of the Bank, and as be- tween the undersigned and the Bank are hereby postponed to the debts and claims against the customer now held or which during such continuance maj' be held by the Bank, and until the Bank has re- ceived payment in full of its said debts and claims any such debts and claims of the undersigned or any of them shall be collected, enforced or proved subject to and for the purpose of this agree- ment, and any moneys received by the undersigned or any of them in respect thereof shall be received as trustee for the Bank and shall be paid over to the Bank on account of its said debts and claims. The Guarantee and Agreement on the part of the undersigned herein contained shall extend to and enure to the benefit of the assigns of the Bank. Given Under Seal at this day of A. D. 191.... Witness: Figure 41 248 LOANING MONEY 249 given thereunder the executors cannot legally borrow or renew any note which may be running. 17. Power of attorney. — The original of any power of attorney should be permanently lodged with the bank, unless it has been filed in a city or county registry office, in which case a certified copy under the hand and official seal of the registrar may be accepted. A notarial copy of a power of attorney which remains in the hands of an attorney cannot be acted upon. As a rule, however, the powers of attor- ney are executed on forms provided by the bank ( Figures 42 and 43 ) . A power of attorney must not be 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 attor- ney. Where an instrument is executed before a notary public in the province of Quebec and the original left on record in his office, a copy certified by the same notarj^ may be accepted. A notary in the province of Quebec is a public officer and authorized to act as a depositary for such documents. Bear in mind always that the authority confeiTcd by a power of attorney is closely circumscribed to the acts which it specifies by the most strict reading. Unless specially authorized an attorney for a cus- tomer cannot hypothecate collateral to the bank. An overdraft created by check signed by an attor- ney is not binding u2:)on the principal unless the power of attorney granted by him expressly specifies that POWER OF ATTORNEY LI MIXED FORM WITH POWER TO OVERDRAW Kxow ALL Men by these Presents that Fill in here the name, busi- ness and ad- dress of the Attorney. Fill in here the name, busi- ness and ad- dress of the Customer. of. The words in italics may be ruled out if the Attorney is not to have power to overdraw. lias been made, con.stituted and appointed, and is by these presents made, constituted and appointed the true and lawful .Vttorney of the undersigned of. for and in the name of the undersigned to indorse all or any Bills of Exchange, Orders, .Drafts and Checks for deposit witii the Baxk, to draw and sign all Checks, Orders and Drafts for payment of money on the said Bank, and to overdraw the ac- count of the undersigned with the same if he shall think fit; to arrange, settle and balance all books and accounts, and to sign the Bank's form of settle- ment of balances and release; and generally for and in the name of the undersigned, to transact with the said Bank any business that may be necessary in the premises; and all that the said Attorney shall do by virtue hereof is hereby ratified and confirmed. The said Bank may continue to deal with the said Attorney under tliis power until notice of the revo- cation hereof has been given in writing to the Man- ager or Acting Manager of the Branch of the said Bank at which the account of the undersigned is kept, and imtil such notice in writing has been given, the acts of the said Attorney hereunder with tlie said Bank shall be binding on the undersigned. Ix WITNESS WHEREOF tiicsc prcscuts have been exe- cuted by the undersigned at the day of One Thousand Nine Hundred and Witness Figure 42 250 POWER OF ATTORXEY FULL FORM Know All Mex by these Presents that Fill in here the name, busi- ness and ad- dress of the Attorney. Fill in here the name, busi- ness and ad- dress of the Customer. of. has been made, constituted and appointed, and is by these presents made, constituted and appointed the true and lawful Attorney of the undersigned of. for and in the name of the undersigned to draic, ac- cept, sign, make, indorse, negotiate and dispose of all or any Bills of Exchange, Promissory Notes, Checks, and Orders for the payment of money; to pay and receive all moneys and to give acquittances for the same; to discount or deposit with or transfer to the Baxk any negotiable paper. Stocks, Bonds and other securities; to draw and sign all Checks, Orders and Drafts for payment of money on the said Bank, and to overdraw the account of the undersigned with the same if he shall think fit; to arrange, settle and balance all books and accounts, and to sign the Bank's form of settlement of bal- ances 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 Attornejr shall do by virtue hereof is hereby ratified and confirmed. The said Bank may continue to deal with the said Attorney under this jiower until notice of the revoca- tion hereof has been given in writing to the Manager or Acting Manager of the Branch of the said Bank at which the account of the undersigned is kept, and until such notice in writing has been given, tlie acts of the said Attorney hereunder with the said Bank shall be binding on the undersigned. In witness whereof these presents have been exe- cuted by the undersigned at the day of One Thousand Nine Hundred and Witness Figure 43 251 252 BANKING PRACTICE it confers power to overdraw, for which the principal undertakes to be responsible. When a power of attorney is revoked the revoca- tion may be acknowledged, but under no circum- stances should a power of attorney once lodged with a bank be surrendered. A power of attorney is terminable by the following- causes : (a) Revocation by the principal (b) Renunciation by the attorney (c) Dissolution of a partnership (d) Loss of civil rights or civil capacity (as inter- diction ) (e) Death of the principal (f ) Bankruptcy of the principal. Care should be taken to procure properly certified copies of the by-laws or resolutions authorizing offi- cials to sign for incorporated companies, municipali- ties and other similar bodies. These should be en- tered in the register in the same manner as the powers of attorney. The properly authorized signing officers of a muni- cipal corporation whose checks are a correct charge against a credit balance may not create a debt, which an overdraft would be, unless authorized by by-law to do so. However temporary an advance to a cor- poration may be, a by-law or resolution authorizing it must be passed and a certified copy of it should invariably be lodged with the bank. Such resolution should state the source from which payment is to be LOANING MONEY 253 made, such as taxes, for example, and should also provide for renewals, if necessary. REVIEW What should be the basis of credit extension by a bank ? Why is a statement of affairs of the borrowing concern neces- sary in extending credit? What principles and rules should govern the credit man? W^hat are quick assets? Fixed assets? Current liabilities? To what extent may current liabilities indicate a man's worth as a credit risk ? What is the value of a guarantee bond? Why should a bank retain the original of any power of attor- ney ? CHAPTER VII CLASSIFICATION OF LOANS 1. 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 I, and it is only neces- sary 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 market, and with a margin of about 20 per cent and 10 per cent, respectively. Two margin tests should be applied: first, a 20 per cent margin of security above the amount of the loan ; second, ten points per share less than the market value of the stock. The first test insures an ample margin on high-priced stock, and the second discrimi- nates against low non-dividend paying stock. For instance, 20 per cent on stock selling at $30 per share would mean a margin of $6 per share as against $10, or 33/4 per cent, called for by the second rule. Figure 44 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. The 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 254 191.... The undersigned hereby acknowledge to have received from THE BANK Dollars, as an advance, which sum will bear interest from this date at the rate of per cent per annum, as well after as before maturity, and is repayable , And the undersigned having cause to be transferred to the Bank, or to one or more of the officers thereof in trust, the following security, namely : (i)®©® \i/ ee-e&se^ to be held as collateral security for the payment of the said advance and interest, the Bank is hereby authorized to sell and convey the said security, or part thereof from time to time, whenever the Bank shall think proper, upon default in the payment of the said advance, and to apply the pro- ceeds thereof towards its reimbursement, without preju- dice to its claims upon the undersigned for any deficiency. Should the said security depreciate in value before the maturity of said advance, the Bank is hereby authorized to sell and convey the same, or part therof, from time to time, without waiting the day of payment. It is also hereby agreed that should the Bank at any time determine upon a sale and convevance of the said securitj', or part thereof, from time to time, for either of the reasons above stated, such sale and conveyance may be made without notice to the undersigned, all and every for- malitj- prescribed l)y law or otherwise in relation to such sale and conveyance Iieing hereby waived. And it is further agreed that should the Bank allow the undersigned to substitute for the above other collateral security such substituted security shall be held by the Bank, subject to the same terms and conditions, and with power and authority to dispose of and apply the same in the same manner as the Bank could have done with the original se- curity. 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 indebted- ness or liability, present or future, of the undersigned to the Bank. In case any security or substituted security transferred to, or lodged with, the Bank is in the form of a certificate for shares of stock, with a blank transfer and power of at- torney in blank to transfer the shares of stock on the books of the Company endorsed thereon or attached thereto, the Bank is hereby authorized, through any of its officers or employees, to fill in all blanks in such transfers and powers of attorney with such names and in such manner as may be thought best by the Bank, and to seal and deliver the same after such blanks have been filled in. Witness the hand and seal of the undersigned. CO Figure 44. Form for Hypotiiecatixg Coi.i.A'reRAi, 2.55 256 BANKING PRACTICE indorsement guaranteed by a broker whose signa- ture the bank knows, and should be assigned in blank and witnessed. These requirements not only insure the genuineness of the stock, but also that claims for dividends are made on responsible brokers by the holders of the stock. To make a transfer every time a certificate changes hands would, of course, be im- possible. Bonds should be scrutinized to see that they are payable to bearer, and all bonds, debentures, certificates of stock and similar certificates pledged as collateral for advances, or lodged for safe keeping, should be kept in the treasury under the joint custody of the manager and accountant. All securities, as soon as received, should be recorded in the securities register by the number of the certificate or bond, the name of the company, the number of shares, the par value of the shares and the name of the broker to whom the certificate is assigned. It should be the in- variable practice of every bank to record the above particulars of any stock passing thru its hands, whether received as security or simply passing thru the bank's books attached to a draft. In case of the loss of the script such information has often proved invaluable. 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 wavs: CLASSIFICATION OF LOANS 25T 1. By special act of either the Parliament of Can- ada or the provincial legislatures ; 2. By 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 Manitoba; 3. By memorandum of association in the provinces of Nova Scotia, Saskatchewan, Alberta and British Columbia. As the powers conferred on companies under these several methods of incorporation vary, banks, as a rule, issue instructions to their branches in the dif- ferent provinces regarding loans to joint stock com- panies; special forms for by-laws, etc., are also sup- plied. When considering loans to companies incorporated by special acts, it is, of course, necessary to refer to the companies' 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 com- pany? XVI— 18 258 BANKING PRACTICE This information can be obtained from the charter and records of the company and from the statute under which the company is incorporated. These Resoi.ltion passed by iJie Board of Directors of the at a meeting duly calif d, held at the office of the Coinpany in on the day of , 191 On motion it was resolved that be and hereby is authorized on behalf of the Company to draw, accept, sign, make and agree to \rc\y all or any Bills of Exchange, Promissory Notes, Checks and Orders for the payment of money; also to authorize any Manager or other officer of the bank to accept all or any Drafts or Bills of Exchange on behalf of the Com- pany ; also to sign checks upon and to borrow money from the BANK on behalf of the Company, either by overdraw- ing the account of the Company with the said Bank or otherwise. Also that be and hereby is authorized on behalf of the Company to assign and transfer to the Bank all or any Stocks, Bonds, Warehouse Receipts, Bills of Lad- ing, and other securities, and to give the Bank security under Section 88 of the Bank Act, and to sign a written promise or promises binding the Company to give any such securities as aforesaid. Also that or any one of them, be and lierebj' is, authorized on behalf of the Company to negotiate with, deposit with, or transfer to the said Bank (but for credit of the Company's account only) all or any Bills of Exchange, Promissory Notes, Checks or Orders for the payment of money and other negotiable paper, and for the said purpose to indorse the same or aiw of them on behalf of the Company; also to arrange, settle, bal- ance and certify all books and accounts between the Company and the Bank, and to receive all paid checks and vouchers, and to sign the Bank's form of settlement of balances and release. CERTIFIED a true copy of the Resolution passed as above set forth and recorded in the Minute Book of the proceedlnys of the Board of Directors of said Company. Dated the day of , 191 PRESIDENT SECRETARY The President and Secretary' will sign as above; the other officers as follows : Vice-President Figure 4.5 CLASSIFICATION OF LOANS 259 questions being satisfactorily answered, it is custom- ary for the directors of the company to pass a reso- lution outlining the powers of the signing officers, and specifying who they are to be. A certified copy of this is generally supplied to the bank on a form similar to that in Figure 45. Where a by-law of the shareholders is necessary to confer borrowing powers on the directors, a certified copy of the by-law is sujoplied to the bank on a form similar to that in Figure 46, supplemented by the directors' resolution above referred to. It may be seen from the above that care should be exercised by a bank, not only in opening an account with a company, but also in any subsequent transac- tions. It is well to remember that a corporation has no personal liability, that no director or officer of a company is identified with the business of the com- pany 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 exti'eme caution. If the men who are managing the com- pany have not sufficient confidence in their own man- agement to guarantee the loan, why should the bank take the risk? 260 BANKING PRACTICE BY-LAW of the Be it Enacted 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 pledge 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 Bank Act or otherwise are hereby ratified and confirmed. In witness whereof the corporate seal of the Company has been hereto affixed, and this By-law duly countersigned the day of 191. . . . r L. S. president At a general meeting of the shareholders of the above-named Com- pany 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 sanctioned 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 SECRETARV FlGURE 4:6 3. Loans to miinlcipaUties. — The conditions gov- erning loans to municipalities, school districts and other public bodies differ in the various provinces and also in the case of cities incorporated under spe- cial charter. As the laws are frequently changing no general procedure can be formulated. The head office of each bank generally issues specific instruc- CLASSIFICATION OF LOANS 261 tions 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- borrowing up to a certain percentage of their annual assessment. These borrowings must usually be re- tired by the taxes as they are paid in. The loans are, and should be, short in term. When, however, one year's borrowings overlap another the advances should be kept distinct. Such loans, when supported by authentic copies of the resolution of the council, may be considered legitimate banking undertakings. Frequently a municipality is authorized by a by- law, voted on by its ratepayers, to borrow money for some specific purpose, such as water works, drains and the like. It is advances of this description which form one of the objectionable features of municipal accounts. As a rule, municipalities postpone any definite arrangement as to the disposition of the bonds until the construction, for which the issue is autho- rized, has been completed. In the meantime, they look to their banks for advances from time to time until the work is fully accomplished. This feature in itself is not objectionable if the municipality takes immediate steps to dispose of its bonds on the com- pletion of the work. Unfortunately, this is seldom 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 262 BANKING PRACTICE own ability in judging market conditions. The re- sult is that the time in their opinion is rarely oppor- tune 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 alternatives. 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. 4. 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 understanding as to final payment. The money may be locked up in some undesirable venture, and tho sure of ultimate payment the bank is confronted with the alternative 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 except in very exceptional cases. If a man cannot live on his salary he cannot hope to pay off an indebt- edness in addition. The loan is either intended to discharge another indebtedness or to purchase some- thing which cannot be paid for out of future salary. Credit is a good servant and a bad master, and many CLASSIFICATION OF LOANS 263 men in these days of competition, both social and otherwise, are induced to "keep up" with their neigh- bors, to purchase automobiles, and generally to 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 pronounced. 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 people who have suffered misfortune, and to whom every consideration should be shown, but it does refer to people entirely dejiendent upon moderate salaries, received with a regularity which renders credit un- necessary. 5. Lomis to fanners. — Under certain conditions of farming, more especialty in the West, credit for a farmer is more or less a necessity, and loans to respon- sible farmers is a desirable and legitimate business for a bank. In the East, where mixed farming pre- vails, 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 thruout the year from tlie sale of farm produce to the neighboring towns. Loans when made to him are generally for some specific purpose — such as the purchase of cattle for fattening — in other words for the creation of an immediately liquid asset. In the West, however, where only grain-growing prevails, a farmer has practically only one crop a 264 BANKING PRACTICE year, and it is necessary for hini to have credit while he is preparing for the crop, 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, the farmer 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 purchase nor produce anything. Credit to a farmer, no matter what his moral or financial standing, is relative and should not exceed a year's supplies at any time. The loan should be cleaned up regularly after harvest, unless arrange- ments were made bv 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, for some farmers are too ambitious and try to farm too much land. The tenure of the land, the amount of mortgage, and other indebtedness, espe- cially for machinery, are all important features in considering advances to this class. As a rule, tlie farmer should not need to borrow from the bank until seed-time to pay for seed, labor and the like. If his crop is successful, he should be clear of his indebtedness before the end of the year, and have a good surplus to pay on his mortgage or to place in the bank. A clause in Section 88 of the Bank Act of 1913 permits a bank to lend money to a farmer "on the security of his threshed gi-ain gi'own upon the farm." The addition of tliis clause was due to the fact that CLASSIFICATION OF LOANS 26d the grain grown by a farmer in the West was ex- pected to clean up his indebtedness at harvest time or shortly afterward. This condition worked a hard-* ship on the farmer, who sometimes had to throw his crop on the market regardless of prices, instead of having an opportunity to await normal conditions. The volume of sales, moreover, at this time depresses prices and adds to the confusion and congestion on the railways. The farmer is now in a position to offer the security of a staple article, and can borrow enough on his crop to pay off his indebtedness. It is still early to give any opinion on the result of the new law but, speaking generall}^ it possibly will not make very much difference to the responsible farmer, as he was able to borrow monev on his own note in any case. As to the farmer of less favorable stand- ing, it is questionable whether a security entirely under his control will improve his chance of credit. 6. Loans to retail merchants. — As a general rule, retail merchants are not entitled to unsecured ad- vances on their own name. A storekeeper who takes considerable credit from the wholesale trade should be able to obtain all his 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, 266 BANKING PRACTICE 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 seven per cent or even less. The mere transfer of an obligation from the mercan- tile creditor to a bank does not diminish by one-half the monetary risk of the accommodation; it is illogi- cal 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 because it frequently leads to lax methods of collecting. 7. Loans to manufacturers and merchants — Xatu- rally the bulk of the loans of a commercial bank con- sists of advances to manufacturers and wholesale mer- chants. Both classes are considered highly desirable customers. They are at times heavj^ borrowers from banks, and a consideration of their relative merits in that connection is of interest. Mr. George Hague, in his "Banking and Commerce/' has expressed him- self so clearly on the subject that he is well worth quoting : There is this fundamental difference between the whole- sale merchant and the manufacturer ; 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 wholesale houses in England. But a CLASSIFICATION OF LOANS 267 manufacturer can do nothing of the kind. From the time that he begins operations he has to provide for a cash ex- penditure which never ceases until goods are ready for sale. In nearly every branch of manufacture he must pay cash for his raw material and his fuel. And the moment he be- gins the manufacturing process, his pay-roll of wages con- fronts him week hy 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 special lines of manufacture where wages are a most important item of cost, the necessity of meeting the large sums required is the most harassing of all financial pressures. It presses, indeed, more heavily than the necessity of meeting accept- ances and promissory notes, for the payees of these can be approached for renewal, at a pinch, while a request to a body of workmen to defer payment of wages is utterlj^ im- possible. And as payment is imperative, the manufacturer will naturally, in such circumstances, have recourse to his banker. Hence, it is more difficult to finance for a manufacturing establishment than for the business of a wholesale merchant. The latter, having the power to bu}- goods at all times on credit, has no reasonable ground for asking regular ad- vances from his 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, Avhich are absolutely imperative, are the customs duties and freight on imported goods. It is just as impossible to ask credit here as it would be for the payment of wages. But no wholesale merchant could reasonablj^ think of commenc- ing business without capital, and the very lowest minimum necessary would be an amount sufficient to pay the duties on the stock requisite to commence 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 read}' to offer for the cashing of customers' bills, a merchant may, from a •financial point of view, be said to be able to sell for cash. 268 BANKING PRACTICE Thus, by the time the payments for his stock becom.e due, the proceeds of his sales ought to be sufficient to meet them. From all which the rule may be deduced that loans to a wholesale merchant (as distinguished from the discount of trade bills) should be considered as irregular in the nature of things, and only to be granted in exceptional circum- stances. But the whole system of loans to wholesale merchants is exceptional, and requires exceptional treatment at the hands of a banker. The character of that treatment may be indicated as follows : First, no regular line of credit should be arranged for in respect of loans ; that is, no amount which a customer can always have at his command. Second, advances should be temporary, each being applied for on its own merits, with the explanation of circumstances. Third, they should only be allowed at certain seasons, and never last more than two or three months at the most. Fourth, renewals should not be granted. Indications of continuance should be care- fully watched and promptly dealt with. If advances be- come chronic, security should be insisted upon. Fifth, it is always desirable, too, that when such advances are granted to a firm, the indorsement or guaranty of each individual in it should be obtained; for individual partners may have separate estates which the indorsement would bind. If the business is carried on by a joint-stock company, the guar- anty of some of the principal stockholders would be desir- able. 8. Collateral notes. — There are several reasons why it is preferable sometimes to make advances against notes as collateral instead of discounting them. The borrower may need, perhaps, only part of the face value of the notes, and that only for a short time. The quality of the paper may not warrant an advance CLASSIFICATION OF LOANS 269 of more than a certain percentage, or the notes may be of a longer currency than three or four months, beyond which time a bank is loath to make an ad- vance. Its assets must be kept liquid and not locked up in long time loans. The merits of a note tendered as collateral should be gauged with no less care than if offered for dis- count; a large nominal margin may be delusive and by no means an adequate security. Such notes should be scrutinized as critically as discounted bills, and re- jected if defective in any vital part. If notes offered by agricultural implement dealers and others are en- cumbered with conditions which render them non- transferable, they should be refused. Lien notes, or notes secured by lien on implements, machinery and other movable equipment, sold, should only be taken for collection, as it must be borne in mind that the maker has the right of set-off for any legitimate claim against the vendor, and third parties must always be prepared for something of this kind. The bank in making advances of anj^ nature has the right to expect the note taken to be free from any irregularity, 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 objec- tionable, 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 270 BANKING PRACTICE borrower (Figure 47 or 28). The form Figure 47 can also be used to pledge stocks and other securities, permissible under the Bank Act. The attorney for a customer cannot hypothecate collateral notes unless specially empowered to do so. All collateral hypothe- cations should be consecutively numbered as received from the customers, and filed in proper order in the vault. The full margin of good collateral stipulated as the basis for any credit must always be maintained. A liberal margin will generally be found to be insuffi- cient in case of trouble. The margin agreed upon in all cases should be calculated on the amount of collat- eral offered, and not based on the amount of the advance. For instance, on a margin of 25 per cent, advance $75 on each $100 worth of collateral depos- ited. Do not base the margin on 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 ad- vances against trade paper deposited as collateral, it will be necessary 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 25), and an account opened up for each obligant. In all cases of advances against this class of security it is necessary to see that drafts and notes which are returned unaccepted or unpaid are settled for, eventu- ^ a d e ^ a 3 o S ^Q •Si b. Zj d ;s W 'o (^ 1, ^ o &. o -o 5 9J <:j o ^ >, ^ •2 •2 03 S.2 <3^ a « " 3 ■^'fel »j 4) . • M -i.:) 00 g§5 o » to *? suS O s - ? 5 n fl 2 ^ = o ^ ^( ^ fl -*J W eg ^ "2fl4i!jf "5^ a •- 0) « s ~ pq ^ E^' S w ; o o! » ' o-S fl fl ■" 0.2 -^ •^ -1 o a! "^ fl ^ a> fl ? . =3 i. J3 .5?-^ t? C fl o t- -fl ^ ■*^ :_! "t; (^1 -^ M fl »,-< _ O M.'2 P ^ S ? J; fl rt w -^ „ 2 g "3 to §^fl^2 " fl ? - o fl"^ fl<» 5"^ -• uafl-.„2^fl S^Ss'^^gflfl I- -e =s s — =« i>.fl _ fl . t> ^?fl aj c3 w C5 S C 03 I « fl S m dj' ifl >.•; fl.Tj S -^ 5^^ fl s' 3 fl.^ o ,. S3 S3 o S "> B i fl O bc.i:^ >.fl"='2«fl'' AM =^ -a M o g 2-S 5 . o»joi^s:4)fl ■. O ,0 o ' fl'.fl St: ;.^§|^K=--2fl : fl fl » o fl.ti '^ jfl .^ a '3 a: X 2 fl"-5§ a Si's s'v:: fl >.Si^2 ° fl 2 "^ 0) I- 05 a o s 5 t, « 6 ®5 .K fl a t< bJD o 4> • ^ J- cfl 2 C fl ci r-4 O C3 , O CO ,-) c3^ — ■ 5-^ 03 — - =" n 2 flfl: c o o Cj'o £ 3 t- ^ 271 fl E s'= . c fl > o 1 ^ - fl' o fl — i"0 o . — .i: o! I-Ifll •Y fl "-^ .2-S.2 •-*-• fl pq « fl-^ ■ '^ <- c 1^2--- « K '^ P O CO O g H - O 6 — rS X — - O) s £ fl c ") >- o— ' ot: fl fl.2 C .s -^ c <4-t fcT 2 t-' fl fl ?^ fl o 0) (U •fl -fl 2 C5.3 O— ♦- 272 BANKING PRACTICE ally, by the maker or drawee. The wholesale sur- rendering of these returned items to the pledger in exchange for fresh collateral drafts should not be per- mitted. 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. 9. Accommodation imper. — Accommodation paper is most dangerous 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 accommoda- tion taint wherever it may exist, however dexterously covered up, and in keeping clear of it and of the other dangerous complications and contingencies insepara- ble from it. Accommodation paper disguised as trade bills should be looked for and regarded with the same dis- crimination applied in separating spurious coin from genuine. Such paper should be detected if a man- ager is observant of the working of his accounts. The most ordinary kinds of accommodation paper, according to an old rule book, are the following: (a) Paper floated b}^ the borrower with the names of his friends for the general purposes of his business, say, a drygoods, grocery or hardware business, or a manufacturing business of any kind. (b) Paper floated by the parties to it for the pur- pose of going into some speculation outside of their legitimate business. They are induced to buy or build a ship, a saw mill or factory of some kind, a CLASSIFICATION OF LOANS 273 farm, a mine, timber lands, or a score of other enter- prises. These two classes of accommodation must be avoided at all hazards. (c) Renewals of notes that were legitimate enough in the first instance. If the goods they originally represented are still unsold by the promissor, the paper may still, in a sense, be held to be legitimate, altho, even in that case, the renewal is a most un- healthy sign, being proof of over-production and over- trading. But in the case of most renewals they have lost all connection with the goods they originally rep- resented, the proceeds of which should have gone to wipe the notes out of existence at maturity. The pro- ceeds of goods have been used for something else, and the notes remain, representing nothing. This is accommodation of the worst kind. There is no more significant indication to a banker who has eyes open than renewed paper. In the most favorable light you can take it shows miscalculation. But in most cases it means something much worse — the beginning of the end. If accommodation paper is taken at all you should be absolutely certain of the genuineness of the signa- tures. The danger from forgery is not the least of the dangers attending the handling of this objection- able kind of paper. The way is left open for that kind of fraud when indorsed notes are discounted for the promissors, but this is prohibited in most banks. Never overlook the consideration that if you take XVI— 19 274 BANKING PRACTICE an accommodation endorsement you see perhaps less than one-half of the paper afloat bearing the same names. The obligant calls for a quid pro quo, the accommodation becomes reciprocal and, likely enough, develops into a network of cross indorse- ments. 10. Overdrafts. — The strong objection which all banks have to making advances by way of overdrafts is based on sound principles, which are not generally understood fully or appreciated. The principal rea- sons why this form of advance is not desirable are as follows : (a) That it does not fix the customer's liability as indisputably as a note does ; (b) That it leaves the date of repayment uncer- tain 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 clerical work, and it is important that the average free balance in such accounts should be sufficient to afford the bank a proper remuneration. Accounts in which the bal- ance is frequently reduced to zero or converted into an overdraft are not of any direct value to a bank. It is further to be borne in mind that accounts which from time to time are overdrawn are a further ex- pense, thru the waste of the time of the managers and ledger-keepers, whenever proper authorization has to be obtained for payment of a check creating or in- CLASSIFICATION OF LOANS 275 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 manager may decide whether the money will be lent or not; otherwise an attempt is made to borrow the bank's money without its consent. The practice of issuing a check without having any account is a criminal offense, and many business men are in favor of placing a check for which there are not sufficient funds in the same category. In some towns the banks make a practice of adding 10 or 15 cents to each check returned dishonored from the clearing house before charging it to the indorser's account. This charge has been found to have a deterrent effect on the practice, and has therefore met with the ap- proval of the merchants. An overdraft in a savings account is, of course, ab- surd and under no circumstances should be allowed. REVIEW What margin tests sliould be applied to the security for call loans? Why is it sometimes preferable to make advances against notes as collateral rather than to discount them? What is the maximum term of credit to a farmer ? Why ? What are the ordinary kinds of accommodation paper? Why is an advance in the form of an overdraft undesirable? CHAPTER VIII ADVANCES ON WAREHOUSE RECEIPTS AND ASSIGNMENTS 1. Sections 86 and 88. — Before studying the spe- cial conditions governing a bank's advances on the security of merchandise, etc., it is necessary to grasp thoroly the difference between security afforded by warehouse receipts under Section 86 and the security^ on a loan given under Section 88 of the Bank Act. The main difference is one of the possession of the goods, namely, constructive and actual possession of the security, respectively. Advances on a warehouse receipt or bill of lading can be made to any person, and the continued exist- ence of the security depends upon the reliability of an independent party, the warehouseman or carrier, pro- duction and surrender of the warehouse receipt being necessary to obtain the goods. Loans of this kind are reasonably safe, and the conditions governing them are very simple. In the case of advances made under Section 88, however, the conditions are much more complicated, as advances under this section can only be made to manufacturers and wholesalers dealing in certain classes of goods, the continued existence of the se- 276 ADVANCES ON ASSIGNMENTS 277 curity depending entirely upon the probity and the abihty of the pledger, who retains possession and con- trol of the goods himself. Consequently, a bank never lends money under Section 88 unless it is abso- lutely certain of the honesty and experience of the customer. Even then, loans of this class are not very desirable, owing to the technical detail and work in- volved in their operation. There is always a latent risk. Men who have had no previous experience in 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 indorsements or other security in addition, until thej'- have shown by actual experience that their operations are successful. Sections 86-90, which give the bank special privi- leges to take such security, are based on the principle that the security must be taken and bear the same date as the advances, for which it is taken, thus insur- ing that the assets of the borrower will be increased concurrently, and therefore the act will not in any way operate to the injustice of any creditor. Conse- quently, if there is any discrepancy between the date of the advances and the date of the taking of the se- curity, the legality of the latter is voided unless, prior to the advance, the bank holds a written promise that the security would be given. It must always be borne in mind that banks alone are permitted to take this kind of security. For that reason, it is necessary when making advances to fol- low strictly the letter as well as the spirit of the law. S78 BANKING PRACTICE Otherwise 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 con- trary to established business customs. The fact, how- ever, that there have been so few lawsuits arising out of such transactions groes to show that the svstem works well in practice, and that no interests have suf- fered, notwithstanding the enormous volume of busi- ness transacted. The conditions governing the classes of loans under Section 88 are varied and more or less technical, and the following brief description is intended only as a general, rather than a specific, exi^lanation of some of the more important featm-es. 2. Section 88. — Under this section banks are per- mitted to make advances: To any wliolcsale purchaser or shipper of or dealer in products of agriculture, the forest, quarry and mine, or the sea, lakes and rivers, or to any Avholesale purchaser or ship- per of or dealer in live stock or dead stock or the products thereof upon the security of the same. To a farmer upon the security of his threshed grain grown upon the farm. To an}' wholesale mamifacfurer of goods upon the se- curity of the goods actually manufactured b}' him or pro- cured for such manufacture (a bank may not, however, lend to a manufacturer upon the security of any goods pro- cured by him to be sold in substantially the same condition in which they were received). No definition of the term "wholesale" manufacturer, purchaser, shipper or dealer is given in the Act — in fact, it would not be possible to define the term — but no difficulty, probably, will arise in the ma- jority of cases, as the dividing line is generally well defined. ADVANCES ON ASSIGNMENTS 279 A correct appreciation of the intention and legal effect of the forms used in this connection will be help- ful. Only one form, the assignment or pledge ( Schedule C ) , is given in the Bank Act. All forms, however, are based on a correct interpretation of the act, and vary but slightly in the different banks. Among the more important forms may be mentioned : 1. The pledge or assignment of goods (Figure 48) 2. The promise to give security (Figure 49) 3. The contract w^ith the customer respecting sales, insurance of goods, etc. (Figure .50) 4. The declaration by the customer as to the quality and value of the produce assigned and also a statement as to wages and other privileged claims (Figure 51) 5. The note (Figures 52 and 53). To be used with all advances made under Sections 86-90. 3. Promise. — When advances are made to facili- tate operations extending over a season or for a certain period of time, as, for instance, in a lumber or grain business, it is obvious that the bulk of the secur- ity will be brought into existence in great part by the use of the bank's money. A general written promise to give security (Figure 49) must, therefore, be ob- tained before any advance is made, and pledges or assigmuents of goods should be obtained as often as any i^roperty constituting the security can be de- scribed or located. In addition to "the promise" a bank generally obtains an undertaking from the cus- tomer (Figure 50) regarding the insurance of the 280 BANKING PRACTICE goods in question, and an agi-eement as to the sale of the goods in case of default in payment, etc. Fur- thermore, each note form refers to the general prom- ise and supplements it (Figure 52). Casual loans are made on another form of note (Figure 53), the promise being original and therefore calling for par- ticulars of goods and location. It must always be borne in mind that the "prom- ise" is not in itself security ; it is simph^ a contract to give security, and can only be enforced as a contract : in other words, it is an equitable assignment, in con- tradistinction to the pledge which is a legal assign- ment or transfer of property actually existing. The * 'promise" confers upon the bank no legal title to the property mentioned in it, and until a legal transfer in form of a pledge is made, the borrower, if dishonest, may sell, mortgage or otherwise deal with the goods intended to be the bank's security. The penal pro- visions of the Bank Act are not applicable to equita- ble assignments. It is important, therefore, to obtain a legal assignment as soon and as often as there are goods capable of being transferred. Under a "prom- ise" the bank is not entitled to priority' over unpaid vendors, unsecured creditors, or, in fact, to any greater rights than the customer himself. It is important to remember that when a promise to give security does not exist, a bank cannot, except imder the substitution clause of Section 88, claim any right to, or security upon, any other goods than those pledged at the time of the advance, and even ADVANCES ON ASSIGNMENTS 281 these must be specially described so as to be distin- guished from others. Care should be taken to have the written promise include each class of product on which it is at all likely that the bank may be asked to lend during the sea- son, and all places where the customer is likely to store or warehouse goods. If a customer desires to obtain advances upon goods of a different nature from those covered by the original promise, or if the goods, whether of the same nature or not, are stored in places not mentioned in the original promise, then a fresh promise should be taken for the amount of advances required under the new conditions, and a separate account should be opened, thru which must pass the proceeds of all ad- vances made in accordance with the terms of the sec- ond promise. Under such circumstances, the pro- ceeds of the advances made under one promise must on no consideration be used to repay advances made under the other. 4. Assig7iment. — The assignment or pledge is in the exact form prescribed by the Bank Act or of like effect (Figure 48), and is a legal transfer to the bank of the title of the customer to the goods de- scribed in it. A legal acquisition of valid pledges, warehouse receipts or bills of lading confers on the bank priority of claim over an unpaid vendor. To obtain title it is necessary that the pledge should be contemporaneous with the advance, or pursuant to a written promise to give security made either prior to Security under Sec. 88 fok One or more Projisssory Notes In consideration of advances of dollars made by The Canadian Bank of Commerce to the undersigned, for wliich the said Bank holds the following bills or notes made by the undersigned : Notes dated 191 due 191 $ Here describe fully C the bills or notes -l so taken. [, Rule out the classes of products, etc., not covered by this assignment. tlie products of agriculture, the forest, quarry and mine the products of the sea, lakes and rivers the live siock or dead stock, or the products thereof the goods, wares and merchandise the grain mentioned below axe/is hereby assigned to the said Bank as security for the pay- ment of the said bills or notes, or renewals thereof or substitutions therefor and interest thereon. The security is given under the provisions of Section 88 of the Bank Act, and is subject to the provisions of the said Act. The said Rule out the classes of prodiicts, etc., not covered Ijy this assignment. products of agriculture, the forest, quarry and mine products of the sen, lakes and rivers live stock or dead stock, or the products thereof goods, wares and merchandise grain are/is now owned )>y the undersigned and are 'is now in the possession of. and are/is free from any mortgage, lien, or charge thereon (except previous assignments to the Bank ) and are in Describe fully the f place or places I where the goods "1 are. I ^ ituated and are the following . Insert as full de- scription as pos- sible of goods as- signed, e.g., logs, lumber, wheat, etc., and specify the products on hand. Dated at .the. .dav of 191. N.B. — If necessary, for want of space, the bills or notes or the description of the goods may be set out in schelule to be annexed, in which case insert in the appropriate spaces the words "those mentioned in the schedule hereto." J Figure 48. Assigxmext 282 ADVANCES ON ASSIGNMENTS 283 or at the time the advance is made. When assign- ments are given in connection with a general or con- tinuous promise to give security, it is advisable to include all goods covered by previous assigmiients given under that promise, by describing all the i3rop- erty then in existence and in the customer's possession. In filling out an assignment all the notes represent- ing the total advances to date should be clearly de- tailed in the blank provided, and the goods and the places where stored should be described as definitely as possible. The advance from the bank should be described as it actually is and not in general terms such as "all ad- vances" used in the written promise. Assignments must be given as security for a specific loan in money, or for a specified promissory note or notes. The best description is one which takes in all goods in a particular place, such as the following: "all the logs, lumber, lath and shingles which are now in the following place (s), namely. . . ." This description, if the place or places are properly described, would leave no doubt as to what goods are assigned. It would transfer the goods to the bank subject to what- ever claim it might already have under previous as- signments and, in addition, all goods covered by the description that had been added since the date of the last previous assigmnent. The words "except pre- vious assignments to the bank" should always be left in the form when there are previous assignments. Failing this general description, the security, to be 284 BANKING PRACTICE good, must contain such a definite description b}^ 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 where the property is stored is as necessaiy as a description of the goods themselves, and indeed, is an essential part thereof. The ponds, yards, etc., where logs and lumber are stored, the warehouses about a mill containing flour or grain and, in fact, all the places in which the goods to be assigned are situated, must be described in such a way that there can be no doubt which particular places 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 elevators would 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 broad enough to include these also. It is to be noted that the act authorizes a bank to take assignments of goods whether in the possession of the owner or not. The pledge (Figm-e 48) has been framed to meet customary cases, but it may be altered to suit the circumstances when goods are in possession of another person, as, for instance, at a railway station where the agent cannot grant a ware- house receipt. Promise to Give Warehouse Receipts or Seccritt uxder Section 88 191.... to the manager THE BANK Dear Sir: The bank is hereby requested by the undersigned to grant and continue during the current season a revolving line of credit for ray/our business of $ , and to make advances to the undersigned there- under either by waj'^ of overdraft or in the form of discounting bills and/or notes of or for the undersigned on the security of all the (hereinafter referred to as "goods") which are now owned or which may be owned by the undersigned from time to time while any advances made under this credit remain unpaid, and which are now or mav hereafter be in situated And the undersigned promise and agree to give the said Bank from time to time security for the said advances by way of assign- ments under Section 88 of the Bank Act, covering all the said goods or part thereof, and/or bills of lading and/or warehouse receipts for goods of the above kinds or some of them; and you or the Act- ing Manager for the time being are hereby appointed tlie Attorney of the undersigned, to give from time to time to the Bank tlie security above mentioned and to sign the same on behalf of the undersigned. The Bank may from time to time take from the undersigned bills and/or notes representing the advances in whole or part. Such bills and/or notes shall not extinguish or pay the indebtedness created by such advances but shall represent the same only. This undertaking is to apply to all advances made to the under- signed under the said line of credit, the intention being that all said goods which the undersigned may from time to time have in said place (s) shall from time to time be assigned to the Bank under Section 88, as security for all advances, and that all bills of lading or warehouse receipts covering goods of the above kinds which the undersigned may receive from time to time shall be given to the Bank as such security. Yours truly, Figure 49 285 286 BANKING PRACTICE The goods and their location must, of course, be similarly described in both the written promise and the assignment. Contract with Customers Respecting Warehouse Receipts, etc. IN CONSIDERATION of the advances being made to the under- signed upon the security of warehouse receipts or bills of lading, or upon security under Section 88 of the Banlv Act, the undersigned consent and agree with the Bank as follows: 1. To keep the property covered by the warehouse receipts, bills of lading, or security given from time to time, insured against fire to the extent of the advances made thereon, or to the full insurable value thereof in case such advances exceed the insurable value, and to assign the policies to the Bank (or have the loss, if any, made payable to it). Should the undersigned neglect to keep up such insurance, the Bank may insure and hold the property as security for the premiums paid 'and interest thereon, which premiums and interest the undersigned will pay on demand. 2. Any sale of the property covered by any such warehouse re- ceipt, bill of lading, or security under such "Section 88, given or which may be given to the Bank by the undersigned, may be by private sale, if the Bank thinks fit,— no advertisement or public notice of sale or intention to sell need be given, — and if three days' notice of general intention to sell be given by registered letter mailed in the Post Office and addressed to the undersigned at the address last known to the Bank, such notice shall be sufficient, and the property may be sold en bloc or in smaller quantities either by public auction or private sale or partly by each mode, at any time after the expiration of such period without further notice. This is to be a continuing consent and agreement, and is to apply to all warehouse receipts, bills of lading and securities (and the property covered thereby) given, and which may be given, to the Bank bV the undersigned. Dated at the day of , 191 Figure 50 An assignment of goods is continuous and follows the relative goods thru all processes of manufacture until the bank's security is converted into the finished article. o. Declaration. — Every borrower under this sec- tion should be required to furnish a statement at ADVANCES ON ASSIGNMENTS 287 least monthly, even if estimated, showing what stock he is holding at that date under assignment to the bank. This declaration (Figm^eol) 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 place of those origin- ally 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 conclu- sively 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 wage-earners under an amendment incidental to the 1913 revision of the act. Even if the customer is not in a position to give periodically the informa- tion regarding quantities and values of the products, etc., assigned, the statement should nevertheless be taken with respect to wages, salaries and the like. When an exact inventory is taken, or a sufficiently de- tailed declaration made, it would be advisable, in most cases to utilize it as a basis of an assignment. It is customarj'^ to make an examination of the se- curity 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 sur- 288 BANKING PRACTICE veillance, so much depends on the integrity of the pledger that a bank should not consider making ad- vances in this form unless the applicant is a person of unquestioned integi-ity, with a previous record which leaves no doubt on the subject. 191... TO THE MANAGER THE BANK The tmdersigned submits the following true statement of products, stock, merchandise, grain, etc., and values thereof as at , assigned to The Bank under Section 88 of the Bank Act by the undersigned as security for advances made by the said Bank to the undersigned. The said products, stock, merchandise, grain, etc., are free from any mort- gage, lien or charge thereon, except previous assignments' to the Bank. The wages, salaries or other remuneration owing by the undersigned to persons employed do not now exceed $ , of which not exceeding $ are in arrears. The under- signed hereby agrees with The Bank that should this statement be found incorrect, then you or the Acting Manager for the time being may declare to be due and payable all moneys owing by the undersigned to the Bank and all bills and notes held by the Bank in respect thereof, and on such declaration being made, the said moneys and bills and notes sliall thereupon become and be due and payable. (Statement follows showing quantities, values, insurance, etc.) Figure 51 Declaration In making advances under promise to give security it is a general principle that the money the bank ad- vances should go directly into the creation of the goods intended to be pledged. No portion should be diverted to any other purpose. This is an important matter and should be checked constantly, even if it is necessary to make a special visit in the early stages ADVANCES ON ASSIGNMENTS 289 of the operations. The time to do it is at the begin- ning of operations before the money can be diverted into fixed assets or plant. In the case of a large company the fact that the fmids have been placed in actual production is often an intricate question to decide, being shown bj^ the concuiTence of several lines of evidence, the scale, in- ventory sheets, state of the books, etc. It is there- fore 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 artisans are paid within a reasonable time and that no privileged liens for wages are demandable, in fact, that no preferential claim exists on the stock. Full insurance in a bank's favor in satisfactory companies should always be held upon goods and the policies re- tained in the bank's jjossession. Insurance held upon goods under assignment must not be regarded as effective securitj^ should fire occur, for if the goods were not there to be destroyed, the in- surance company would not paj^ The loss has to be proved. It must not be assumed that the existence of a policy of insurance is any evidence of the exist- ence of the merchandise which it is supposed to cover. 6. The note. — Altho an ordinary promissory note form can be used in conjunction with either the prom- ise or the assignment, it has been found more con- venient in practice to adopt a special form of note XVI— 20 H ft O o H g < Q H a as H U i g O H m o H O o O M P4 c uT : 'g'Si? ^S 1 § . 1 4-' >- c: : %.>Ar^^%^ : t' 2 2. 3 4; c this 1 ar by of the the u e sam ? ^ J3 ^ O . fc, «i- *3 c 2 O ecurity f plication, : Manage torney o so sign 4 TS K 4J « fl, 5i ii a :5 .^ =» £ <: 1 5. advance , dated said Bar tlie said eof, and ted the tioned ai J. for an e Bank ive the led in art ther appoin ve men a; « ^ C u o -^ C o D • £ of Comm rsigned t ■ promise oods" mc the same ^, is her security ^^^■^^ uB^ ^"'*''"'"*"^ c c w o ii ■*-' o c an Ba the u ed her on the ding f time b Bank ower t •e also c anadi n of Tsign t, up f La the ^ the borr n hei cr O .2 -- i ° ^ •<=' dj ti) o « i "^ - «2 § ^ o 3 >^ s S g - "s H ^ o = S S ■■£= 1^ T* JZ -^ he « o r* -^ W •« « 3 -• +j re o c ^ a • : < ote is given :erms of the .191...., and on 88 of the ise Receipts i le acting Mai ive from time he undersigne ^ ^ r S ^ 5o -^ C/2 S O -M O Ss ^^¥1^ =« 0) 'C 'c 5 B,^ o ^ s o 3 S ^ 7 "eS * • W « > • SB- c; ^ »4 =2 0> a: o 290 • O >s> sT »v, , ^ 2 ->; ••"-«£ 1 « ; S • c 2; 5 S i 1^ I "o : '« ^ .191 lo p : c • 5 •fS- give ulers ■^w <^ o =^. '• to o ;s "T* ■to *^ •v , 1 ^ o ; 5S to ^ ^ o B S ^ •.A ^ -*• 'C: '« -« 1^ ^ '. ^ '~H S to ^ ^ r^ ? -o « • **"- ".2; to to s ^ ; »i '■* "^^ H.A « c •^ > ! 40 IS s B to • i s' to o s ^ -, ■ -« ^^ to ?; ^ '■^-'*-— ' <4 s: JI ^ o •* ■♦». s. c "* : cq .js : to ■** B to *■- - .2 s y^-o £ . o^ r* o c ^ s to •^ -« 2 1 i ^ «j g CO o "C •^-j ^ S "« -o « Si - to a, to S "^ s S e s> -0 ; a- e H •e* o -^^ s o ^ s •< ■a 5 : ereby i menti 0; 'Si o S s : -5 5 ^■^ oq ^.i *-5 ^0 55i B • «0 »i •si o ; r^ e « ; ^ h ^ TS o .~ ; f5 to s K s CO 00 ^ 5 •~ ^ CJ S .a, to for the ink the ^ «> -C) : to ft^ •«■ s : to o Manag to the «« "♦^ S : to *s IS o ^ B t) « S U ^ to Jto i «* « 5i ' »-^ •= S EC 2 - "S ch are the Act e to ti e^ * 1 S « V Si 291 292 BANKING PRACTICE (Figure 52 or 53), with a promise to give securitj^ appended thereto. Both the 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 preferably be drawn on demand, as then the original note will remain current in the pos- session of the bank until the loan is retired. When taken on demand, the note is made to read with inter- terest, which is collected monthv. If advances are made on time notes, they will have to be renewed, and the old notes and all other documents retained, to show the continuity of the transaction. The file will show, therefore, the current note and, attached there- to, 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 52, is used. 7. Making advances. — Before making advances the manager should be able to answer the following ques- tions : 1. Is the customer a wholesale dealer, manufac- turer or farmer within the meaning of the act? 2. Are the goods of such a character that they can be held as security under the act ? 3. Does the character and standing of the appli- cant for the loan, entitle him to consideration? 4. Has he had sufficient experience to insure a suc- cessful outcome of the transaction? ADVANCES ON ASSIGNMENTS 293 5. If there is an advance on the warehouse receipt, is the warehouseman unquestionably rehable? 6. Has the borrower sufficient means to supplement the margin on the goods in case of depreciation? 7. Are there any unpaid vendors or has the bor- rower large outside liabilities which might lead to trouble or litigation? 8. Will the insurance requirements of the bank be complied 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 ad- vances are to be made should be examined by the man- ager 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 con- tinued during a season's operations, the general prom- ise 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 assigmnent and the contract in regard to insurance. 294. BANKING PRACTICE A reasonable margin should be maintained at all times, depending upon the class of security. If the margin will permit and further advances are subse- (juently necessary, for instance, in order to saw logs, for the purchase of which the original advance was made, or for additional expenditure in manufactur- ing, it is permissible to make additional advances and take additional assignments. These should, of course, recapitulate all the security in the original assignment, including additional goods, if any. But under no circumstances must the original pledge be renewed, the goods being carried out to their final realization on each pledge given. All that is here said as to taking assignments ap- plies equally to warehouse receipts, provided these cover property which is clearly a portion of that de- scribed in the promise. There could be no doubt on that point if the promise is to give security by assign- ment of all the grain, etc., now held or hereafter held by the customer, or by warehouse receipts covering the same or any part thereof, as the printed form pro- vides. It may be well to mention that the taking of the subsequent warehouse receipts or assignments re- ferred to above is not a siihstitntion. The customer has promised that he will from time to time give secur- ity on all his goods for all his advances. The subse- quent assignments, therefore, are not substituted for previous security, but are given in addition and in ful- filment of his promise to give security on the particu- lar goods covered thereby. ADVANCES ON ASSIGNMENTS 295 It should be distinctly understood that the proceeds of all loans under Sections 86-90 must be used bv the borrower for current expenditure in connection with his business, and no portion of them must be applied, either directly or indirectly, in settlement of any pro- vious existing loan to the bank. Altho not essential, it is found more convenient in most cases to have two accounts; first, the customer's current account, from which his regular disbursements can be made and to which proceeds of the advances under this section would be credited; second, a col- lateral account, 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 should be noted that an overdraft should not be permitted in the current account of a customer borrowing under Section 88. 8. Warehouse receipts. — The bank may acquire and hold warehouse receipts and bills of lading as col- lateral security for the payment of any debt incurred in its favor, but it is necessarv that the warehouse re- ceipt be acquired at the time the advance is made or pursuant to a wi'itten promise to give security made prior to the time the advance is made. Loans may be made by the bank to any person upon any goods, wares or merchandise covered by warehouse receipts or bills of lading. In lending on the security of ware- house receipts or bills of lading, it is not necessary that H Oh O o • • c f- ^ •*-• O 'C (u S +3 C3 "S *t-< £ ° cS ^ >» n3 .S ."S cc C s- C rt S cs u o o a s t! . +3 S c3 • .» % « S > > : "« 4- ^' =3 1— ' 1 4) c ^ •4^ cn ^ "S -S 5 «; * S^i £ c ^ tj ^ • ?i. CS CS ^ a ►** ^ pa =* o _ -fl % o ■s ce '^ .il iJ ■s : o o £ C 3 '. -S S 00 o •^ "2 • "« s •- .E ^ a; ^ 5 — c« C s s -« ^ • t t ^ 6.575 cents Remittance sent to Montreal, 2 days , Exchange charged on check by correspond- ent at Carleton Place 10 cents Total cost 18.575 cents If 25 cents was collected on this item, the bank would have earned a profit of six cents; which is little enough. Had this been a sight item, the bank would have lost three cents or more. Of course, amounts below the hundred on which a minimum is charged help to improve the average profit. A small table (Figure 57) showing the approxi- mate time and interest cost to various parts of the country, to and from a branch, will greatly assist in these calculations. The figures above are based on the supposition that only the larger items received in the morning mail are cleared the same day ; the smaller ones being cleared the following day. It is, therefore, very important for branches to remember the neces- sity of using the mail services intelligently with a view to saving interest; in other words, if a large item is cashed during the day, to see that it gets out AVERAGE TIME OCCUPIED IN CLEARING BETWEEN BRANCHES HH w H m 2 c 03 CO C3 (J "^ Oh ;s5 C? O ^ M < <; W ;z;m Nova Scotia 2 2 3 1 2 2 3 3 4 4 6 6 6 6 6 6 7 7 o Prince Edw. Isl o New Brunswick 2 2 1 3 3 6 6 6 7 2 Quebec 3 3 2 2 2 5 6 6 7 2 Ontario 3 5 6 3 6 7 3 5 6 2 4 6 2 4 5 4 2 3 5 3 3 5 3 4 6 5 5 H Manitoba 6 Saskatchewan 6 Alberta 6 7 6 5 5 3 3 2 3 6 British Columbia 7 7 7 7 6 5 5 4 3 7 1 day's interest at 6% ^ l/G-t, approximately. Therefore, the cost of interest (say) between points in Ontario and Manitoba is 4/64 = 1/16, if sent to a correspondent the item would be 8 days outstanding, or 8/64 = y, of 1% for interest, as it would take the same time to clear the return remittance. INTEREST ON $1,000 Days 2% ^Vz% 6% Decimal Values of 64ths l/32nds 1 .0548 .1233 .1644 .15625 1 . . • * 2 .1096 .2466 .3288 .3125 2 1/32 3 .1644 .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 .6027 1.3562 1.8082 1.71875 11 .... 12 .6575 1.4795 1.9726 1.87500 12 3/16 13 .7123 1.6027 2.1370 2.03125 13 .... 14 .7671 1.7260 2.3014 2.18750 14 .... 15 .8219 1.8493 2.4658 2.34375 15 1/4 Figure 57 330 BANK COST ACCOUNTING 331 by the first mail even if a special letter is necessary. Tho in the above examples we have not included any chai-ge for the transmission of funds on the indi- vidual item, this expense must eventually be met in some form or other in the adjustment of balances between branches, either by remittance of legal tender or bank notes, etc. Express charges run from 30 cents to three or four dollars per one thousand dollars. The above facts establish conclusively that the cash- ing of checks at par at the branches is a constant source of loss to a bank and that outstanding items in the coui'se of collection or in transit from a more seri- ous and unavoidable expense for which a bank should be compensated. 6. 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 arrived at in various ways but, generally speaking, it averages between four and four and a half per cent. Two cents per check is considered a low cost per item. Mr. F. W. Thomas of Toledo, an expert in banking cost accounting, places the cost of an ordinary check at two and a half cents while he computes a savings bank check at six and a half cents. INIr. Bordwell of San Francisco, figures that a clearing house check costs 1.22 cents and an out of town item 2.7 cents for bookkeeping only. A customer's check costs 3.13 cents, or 2.87 cents if the customer supplies his own check form. A Chicago bank makes its cal- 332 BANKING PRACTICE dilations at 1.516 cents per check, but this figure does not include anything for overhead charges, for man- agement, check blanks and other incidental expenses. It is simply for clerical work, rent, light and heat. The other figures are over all. The English banks not only charge the customer for postage, check books and the hke, but expect a reasonable balance to be maintained ; generally a min- imum of about £100 in the city or £50 in a country branch. In arriving at the actual cost per item, it is neces- sary to include, in addition to the cost of clerical work, the cost of the supei-vision of the manager and ac- countant, the apportionment of the rent, stationery, light, heat, and vault and safe accommodation; also an apportionment of head office expenses. This in- volves extra work, but once a basis for per item cost is established in an office, it will serve for the con- sideration of all accounts for the year. Even if the bank considers onlv the salaries of the men actuallv 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 by a customer, or even by the manager himself, that a check form on safety paper costs $2.50 per thousand or one-fourth cent each. For the average branch in Eastern Canada a per item cost of 2 cents per check is accurate enough for general purposes, or to put it another way, a steady average balance of between 50 and 60 cents BANK COST ACCOUNTING 333 per check issued should be maintained. An ac- count, for instance, which issues one thousand checks per annum should maintain a balance thruout the year of between $500 and $600 to cover the out-of-pocket expenses of the bank in operating the account. 7. An account analyzed. — In order to illustrate some of the more elementary features of cost account- ing, 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, average amount of checks cashed at par at other branches $600, number of checks issued seven thousand. GROSS EARNINGS Interest on the average balance at 4^2%? $7,000 r. . . $315 Exchange received on items deposited or col- lected 325 $640 $640 LESS VALUE OF WORK DONE Interest value of items in transit average $5,300 at 5% $265 Interest on checks crossed at par and paid by branches, average outstanding, $600 at 5% 30 Collection charged paid to other banks 78 Office charges on 7,000 debits to the account at 2 cents each 140 Total cost $513 $513 This leaves a net profit to the bank of $127. 334. BANKING PRACTICE 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 by other branches. This leaves the real balance practically $1,100 instead of $7,000. It is well to remember that the bank must base its hold- ings of cash reserves on the larger or book balance, which will reduce still more the net balance of $1,100. The rate of interest, four and a half per cent, is based on a net earning power of five per cent less ten per cent for cash reserve. The "exchange received" is self-explanatory, but attention is drawn to the fact that the schedule of exchange charges is evidently insufficient. In mak- ing the rate, full allowance was not made for the length of time the items would be outstanding. The total cost for collection, 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 serious loss. The most satisfactory way of obtaining the average amount of items in transit is to multiply each item by the number of days it was outstanding, and divide the total amount bv the number of davs under considera- tion. This will give the average daily amount out- standing. In the accounts of customers who have the privilege of crossing checks payable at par at another branch, particular attention should be paid to the date such checks are cashed at the other branch, and the interest BANK COST ACCOUNTING 335 during the time taken in transit, made an expense against the account. The correct treatment is shown in the above statement. This is necessary because 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 be granted only to accounts which keep a credit balance commensurate with the work done, in addition to having ample funds to cover outstanding checks. Altho the account shows a profit, it is not a normal one, as there is a serious weakness shown in the rates of exchange charged. A slight drop in the deposit balance would turn the profit into a loss. An ex- amination of the cash items deposited will show on what points the rate of exchange is inadequate, and an adjustment should be made accordingly. Condi- tions in a customer's business are constantly chang- ing. The nature of the items deposited varies accordingly. An exchange rate that is satisfactory one year might not be so the next. 8. MetJiod of analysis. — The work of analyzing an ordinary account is not veiy onerous, especially if systematically followed out. The course of the de- posit balances is the main information required. Wholesale and other accounts depositing a large num- 336 BANKING PRACTICE ber of cash items involve more work, especially if the data for the whole year is required. Usually, however, the transactions for a month are sufficient for all general purposes. The amount earned on an account depends princi- pally on the value of the credit balances maintained. For purposes of analysis the minimum weekly credit balance is the one which should be considered. Anv money on deposit less than a week has no loanable value to a bank so far as an individual account is con- cerned. It 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 purposes of comparison, however, the average monthly balance should be considered in the general sizing up of the account. If the account shows debit balances during the period, the exact number of days overdi*awn and the amount at credit should be shown. Debit balances do not enter into the value of a deposit account. The net discount or interest earned thereon is considered as part of the profits accruing from the general loanable funds of the bank, and cannot, therefore, be regarded as a benefit derived ^ from any individual account. Furthermore, in the J analysis, credit is accorded the account for any loan- l able funds supplied. The average debit balance, however, is of value for BANK COST ACCOUNTING 337 purposes of comparison, and can be easily ascertained on the basis of the interest debited to the account dur- ing the period. If interest is allowed on the credit balance or any part of it the amount of interest credited should 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. 9. Exchange received on items deposited and col- lected. — Gross earnings are derived from the value of the credit balance and from the exchange received on items deposited and collected. Profits on special transactions, such as letters of credit, foreign ex- change, circulation and the like should be shown separately. In an ordinary deposit account there are compara- tively few items deposited drawn on out-of-town points, and the rates received for these are generally remunerative. However, in the case of wholesale merchants and other distributors who deposit a large number of cash items, the rate of exchange charged is generally low and frequently unremunerative, unless the destination and interest cost of the items has been taken into consideration in making the rate. Therefore the first data to examine in this connec- tion is the schedule of rates under which the account is operated. To the practised eye the weak points in the arrangement, if any, will at once become appa- rent. It would, of course, be impossible to consider each XVI— 23 338 BANKING PRACTICE item iiidividiially. The best method is to divide Can- ada into provinces or sections. The figures given for each province, etc., should be multiphed by the average number of days which items remitted to each section are outstanding. The result 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 period will give the average amount outstand- ing. It is a simple matter for any branch to make a schedule showing the average time between the de- posit of an item and the receipt of the relative clear- ing returns from various points in the country. A statement should be made of checks drawn on banks in the same city, the returns for which are 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 the end of the day. In other words, the bank would be lend- ing $45,000 overnight without interest. If this occurs daily, as it does to a great extent, it is a serious burden on the bank. 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 checks have been actually cleared at Mont- real or Toronto, or on whatever central point the draft is drawn. The gi'oss amount of exchange received, less the BANK COST ACCOUNTING 339 correspondent'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 dis- counts. Interest is not an expense in comiection with exchange on collections, but in arriving at the net exchange on discounts the time occupied in 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. 10. Checks paid at par at other branches. — Refer- ence has already been made to the loss sometimes en- tailed in granting this j^rivilege. In the case of checks cashed at par bj^ another branch, the ledger- keeper should make, in the ledger account opposite the entry of the check, a memorandum showing the date of encashment. The check becomes a charge against the account as soon as it is paid by the other branch. The analysis of some accounts in regard to items in transit and checks paid at par will frequently afford surprising results in the dissolving of apparently sub- stantial balances. 11. General remarks. — The question of cost ac- counting for banks offers a large field for study and investigation, and it is impossible in a volume of this nature to deal exhaustively with the subject. How- ever, the broad fundamentals have been touched upon in the hope that the information and suggestions given will be sufficient to arouse the interest of the reader 340 BANKING PRACTICE and induce him to make a further study of what is an intensely interesting subject. Every manager should make himself thoroly acquainted with the costs and expenses at his own branch and with the opera- tion of every account, in order that he may find out whether the time spent by himself and the staff in operating each account is compensated for by the balance at credit, or other collateral advantages. The analysis itself is purely mechanical. The real test is to decide whether an adjustment of the rates should be discussed with the customer, or whether the collateral advantages of the account outweigh any unsatisfactory feature disclosed by the analysis. Business men as a rule are not unreasonable when an issue is put squarely before them. Few would refuse to make some adjustment of an account if they were shown that it was working a palpable injustice to the bank. The tactful manager could take advantage of a favorable opportunity to suggest to a customer slight changes which would place the account on a more satisfactory basis. Various methods are avail- able; the balance might be increased, the exchange rate adjusted or, in the case of a small checking account, a flat rate of fifty cents or one dollar per month could be made. It is preferable to submit the account to a rigid analysis and thus allow leeway for the consideration of collateral benefits, rather than to make a less ex- haustive analysis and run the risk of overlooking some unfavorable feature. After an analysis is completed. BANK COST ACCOUNTING 341 consider carefully all the advantages of the connec- tion. The customer's side of the question should also be impartially considered ; he may have cause for com- plaint, and analysis is invaluable in either case. When the results of an investigation indicate unsatis- factory conditions it is generally advisable, unless the unfavorable feature is very outstanding, to defer any action until the fact has been confirmed by a subse- quent anal3"sis. REVIEW If you were determining whether or not an account Avas profit- able to a bank what factors would you consider? Of the eight classes of accounts enumerated which are desirable, which are neutral and which are undesirable ? Why is it a bad plan to check against saving accounts ? What elements of expense are incurred in making an exchange charge to a customer ? Give an illustration. Analyze an account so as to show gi'oss earnings and the ex- pense of keeping the account. What changes would you suggest if an account had proved unprofitable .'' INDEX Accommodation Paper, Objections to, 112; Disguising. 272; Kinds, 272-73; Forgery, 273 Account, Analysis of a Bank, Illustration, 333-35; Exchange charges, 334; Crossing checks, 334; Profit, 335; Method, 335- 36; Credit and debit balances, 336-37; Exchange received, 337; Gross earnings, 337; Rate sched- ules, 337; Checks in same city, 338; Branches, 339; Net ex- change and interest, 339; Obtain- ing a more satisfactory basis, 340; Rate adjustments, 340; Ad- vantages considered, 341 Accountant of Branches, 149-50 Accounting, Bank, Books, 155 et seq.; Loose-leaf, 1.59- 60 See Banks, Head Office Accounts, Bank, Small, 94; Opening, 198; Signa- tures, 199; Pass book, 199, 207- 9; Ledger, 199-200, 205; Part- nership, 200-1 ; Joint stock com- panies, 201; Joint, 200; Married women, 201; Quebec, 201-3; Charging back, 203-5 ; Indexing, 205; Loose-leaf, 205; Deposit slip, 206-7; Money received after hours, 207; Fraud, 209- 10; Certification, 210-11 ;Checks, 210; "Kiting," 210; Overdrafts, 211; Savings bank ledger, 213- 14; Machine statements, 214-15; Envelope system, 215; Inspec- tion, 312; Analyzing, 317-19; Profits, 317; Unprofitable, 318; Small checking, 319-21; Saving bank, 322 Army Bill Act, 6-7 Assets, Bank, Quick, 109; Current loans. 111 et seq.; Call loans, 254 Assignment, Form, 282; Advances on, 283; De- scription of goods, 283-84 Assignments, Advances on. To whom made, 276-78 ; Bank Act, 277; Forms, 279; Written prom- 343 Assignments — continued ise, 279-80, 285; Security, 280; Legal assignments, 281-86; Dec- laration, 286-89; Use of money obtained, 288; Note, the, 289- 92; Questions, 292-93; Examina- tion of property, 293; Margin, 294; "Current season," 301-2; Default, 302-3 See Warehouse Receipts, Advances on, Attorney, Power of. How issued, 249; in Quebec, 249; Overdrafts, 249-50; Typical, 250-51; Termination, 252; Mu- nicipal authorities, 253 Audit, The, Officer, 307; Use, 307; Cash and securities, 308-9; Ledgers, 308; Statements, 310; Sundries, 310- 11 Auditors, Bank, Appointment, 28; Duties. 28-29; Reports, 28-29 See Shareholders' Audit Bank, A, Definition, 12 ; White. Horace, 12 Bank Accounts, See Accounts, Bank Bank Act of 1913, Copies, 17; Leading features, 17; Changes, 18; Shareholders' au- dit, 18-19, 28-29; Reserves, gold, 18, 31-32; Abstract, 20-21; Banks under, 21; Incorporation, 22; Organization. 22-23: Cer- tificates, 23-24; Treasury Board, 23, 34-35, 45; Dividends, 30; Reserve, cash, 30—31; Note is- sues, 31; Redemption fund, 33; Suspension of payment, 33; Wind- ing-up, 34; Powers of a bank, 36-37; Loans, 37-39; Interest and exchanges, 39; Amalgama- tion, 40-41; Statements, 41 et seq; Dissolution, 44; Suspen- sion, 44—45; Canadian Bankers' Association, 45; Penalties, 45— 46; Amendment, 46-47; War, European, 46-47; Regulation for 344. INDEX Bank Act — continued note issue, 53-54; Emergency currency, 64; Branches, 69; Du- ties of executives, 129 et seq. ; Advances on assignments and warehouse receipts, 276-294; De- fault. 302-3 See Note Issues Banking, David Harum, 218; Making loans, 218 et seq. Bank Cost Accounting, See Cost Ac- counting, Bank Banking System, History of Canadian Evolution, 3 ; White, Horace, 3; Four periods, 4; New France, 4-5; British occupancy, 5— 6; Army bill, 7; Provincial banking, 6-7 ; Bank of Montreal, 7 ; Independent ven- tures, 7; Regulation by Britain, 7 ; National system, 8-9 ; British North America Act, 8 ; Dominion General Bank Act, 9 ; Walker, Sir Edmund, 10-11 Bankers' Magazine, 323 Banks, Canadian, Bank Act, 12 ; Functions, 12 ; Com- mercial, 12-13; Branches, 13; National character, 13; Savings, 13—14; Trust and loan comi)a- nies, 14—16; Supervision. 19— 20; Incorporation and organiza- tion, 22-23; Capital stock. 23, 25-27; Directors, 23-25; Treas- ury Board, 23; By-laws, 24; Cer- tificates, 24; Subscriptions to stock, 26; Transfer, 26-27; An- nual statements, 27-28, 41-42; Collateral, 37; Holdings, 37; Loans, 37; Machine receipts, 37- 38; Interest and exchange, 39: Deposits, 40; Amalgamation, 41; Dissolution, 44 ; Suspension, 44— 45 ; European war, 46—47 ; Bills of Exchange Act, 47-48; Gold holdings in 1913, 51-52; Out- standing circulation, 55; Protec- tion of noteholders, 55—56; In panic, 78—81; Competition, 80; Advantages, Johnson, Joseph French, 82-83 ; European war, 83-88; Profits, 94-96; One man, one bank, 102; Quick assets, 109; Real estate and premises, 114, 121; Liabilities, 123; Di- rectors, 127; Executives, 127: President, 127; General man- ager. 128-30; Head office. 129- 30; Branch superintendents, 1 SC- SI; Inspection, 132-33; Secre- Banks, Canadian — continued tary, 133; Chief accountant, 134; Records, 135 et seq.; Reli- ance on branch managers, 147- 48; Accounting, 155-56; Safe- guarding loans 245 et seq. See European War, Statement, An- alysis of Bank Bills and Accounts Receivable, in Borrowers' statements, 2.'i6 Bills of Exchange Act, 47-49, 269 "Blue Books," 192 Bookkeeping in Branches, See Branches, Records of Borrower, the. Branch system and, 73; Establish- ing credit, 75-78 ; Facts to know about, 219 et seq.; Obtaining net worth, 223; Importance of state- ment, 226-29; Credit standing, et seq. Bradstreet's Journal, 221-23 Branch Banking, Economic Value, 13 Branch Managers, Reliance on, 147; Duties and re- sponsibilities, 147-48 ; Daily work. 147-48 Branch System, the, Utility, 66; Bank Act, 69; Illus- tration, 69-70; Circulation, 70- 72; Interdependence, 70; Open- ing new, 70—71; Number, 71; Scotland and England, 71 ; Bor- rowers, 72 et seq.; Distribution loanable funds, 72; Line of credit, 75-76; Customers, 76; Panics, 78-81; Depositors, 79- 80; Competition, 80; Unison, 80-81; Personnel, 81; European war, 83-88; Inspection, 306-7; Expenses and economies, 323—25; Exchange costs, 325-33 Branches, Records of. Clearing statements, 137-38, 141, 177-79; Returns to head office, 141 ; Financial statements, 141- 42; C^sh book, 155-56, 160-65; Books, 156-59; Loose-leaf, 159- 60, 163; Discount register, 164: Blotter, 166; Loans, 164; Trade bills diary, 169; Draft register, 170-71; Check lists. 171-73: Cash items, 173-75; Remittance books, 175-77; Head office, 181- 83; Teller's records, 183-84; Ledgers, 184 et seq.; Deposits, 187; Savings banks, 189; Liabil- ity ledgers, 190-92; "Blue- books," 192; Collection register, 192-94; Collateral, 194; State- ment to government, 194-95; INDEX S4.5 Branches — continued Balance book, 196; Discrepancies, 196: Overdrafts, 196 Branches, Staff of, Superintendent, 130; Inspector, 131-33; Managers, 147-49; At- tracting deposits, 148; Account- ant, 149-50; Teller, 150-51; Ledger-keeper, 151-52; Collection clerk, 152; Discount clerk, 153; Junior, 153-54 British Colonies, Note Issue in, 32 British North America Act, 8 British Regulation of Canadian Bank- ing, 6-8 Business Conditions, Monthly Report on, 143-45 Business Failures, Reasons, 221-22; Lack of capital, 222; Incompetence, 223 Call Loans, In Bank statement, 101-08; Defini- tion, 101-02; Interest, 102; Se- curity, 102, 255; In New York and London, 103-04; Walker, Sir Edmund, 106-08; Bank asset, 254; Margin, 254; Form, 255; Records, 256 Canadian Bankers' Association, 20, 44-45 Cannon, James G., 224, 225-28 Capital, Lack of business, 222 Capital Stock, Organization, 22-23; Increase or decrease, 25-26; Treasury Board, 25 ; Calls, 26 ; Personal property, 26; Subscriptions, 26; Transfer, 26-27; Trusts, 27 Casn Book, Principal record, 155; Contents, 160-61 ; Debit and credit entries, 161-62; "Writing-up. 162; Sup- plementary, 163 Certification of Checks, 210-11 Certification of Customers' Books, 208-09 Checks, Of other banks, 100; Bank state- ment, 101; Accommodation, 210; Certification, 210-11; "Kiting," 210; Cashing, 211; Overdrpits, 211; Forged or raised, 211; Iden- tification, 211; Customer unable to write, 213; Cost, 330-31; Crossing, 334 Circulation, Records, 139-40 See Note Issues Circulation Redemption Funds, 33, 55 Clearing Statement, 177-83 Collateral, Register, 194 See Security Collections, Clerk, 152-53; Register, 192-94 Commercial Banks, 12-13 Competition, Excessive, 316 Corporations, 256-59 Cost Accounting, Bank, Necessity for, 315; In United States, 315; Excessive competi- tion, 316; New class of business, 316; Principles, 317; Profits, 317; Analyzing accounts, 318 et seq.; Unprofitable, 318-22; Sav- ings bank, 322 ; Branches ex- penses and economies, 323-24; Elementary features, 333; Analy- sis of an account, 334 et seq.: In- land exchange, 325—31; Cashing checks, 330-33; Costs, 331-33 Credit, Principles, 15; Trust and loan com- panies, 15-16; Establishing, 75- 78; War, 87-88; Definition, 219; Facts to know about borrower, 219 et seq.; Business failures, 221-23; Borrowers' statement. 225-27; Cannon, James G., 227- 28; Rules, 227-28; Professional men, 262; Farmers, 264; Retail merchants, 265-66; Wholesalers and manufacturers, 265; Good col- lateral, 269-71 ; Accommodation paper, 273; Renewal notes, 273; Overdrafts, 274 Credit Men's Association, 224 Credit Money, New France, 5 ; Hamilton, Alexan- der, 5 Crop Movements, Currency for, 60 Currency, Emergency See Emergency Currency Current Loans, Advances to customers, 111—12: Classes, 111; Accommodation, 112; Leroy-Beaulieu, 113 "Current Season" Loans, 301 et seq. Customers, Position in Canada and I'nited States. 76-77; Credit, 77-78; Advances to, 111—12; In inspec- tion, 312-14 Declaration, the, Importance, 287; Prior rights, 287; Security, 287 Demand Deposits, 94-96 Depositor, Security of, 79; Reserve fund, 121- 23 346 INDEX Deposits, Regulation, 39-40; Bank statement, 92; Time, 92; Difficulties, 92-93; Interest rate, 93, 118-19; Saving banks, 93; Demand, 94-96; Abuse of checking privilege, 94; Small accounts, 94; Pownall, G. H., 95; Outside of Canada, 96; With foreign banks, 101 ; At- tracting, 147-48 ; Supplementary cash book, 162-63; Ledger, 163, 199-200; Branches, ledgers, 187- 88; Responsibility for, 193; Open- ing, 199; Signatures, 199; Slip, 206-07 See Accounts, Bank Directors, Appointment, 22 ; Provisions for, 24; General powers, 25; Annual statements, 27-28; Supervision by, 127; Qualifications, 128; Loans, 129 Discount Clerk, 153 Dividends, Method of payment, 30 Dominion Notes Act, 50 Dominion Notes, "Legal tender," 50; Act, 50-51; Amount, 51; Gold reserve, 51-52; Redemption, 51; Bank statement, 99-100 Dunbar, "Economic Essays," 57 Elasticity of the Note Issue, Value, 56-57; Dunbar, 57; Sea- sonal fluctuations, 57 Emergency Currency, European war, 46 ; Crop move- ments, 60, 64 Errors in Bookkeeping, 196 European War, Canadian banks and, 40; Elasticity of issue, 83-88; No moratorium, 84; Preceding year, 85; Loans, 85; Trade balance, 85-86; White, Sir Thomas, 85-86; Banks in 1916, 86—87; Increased deposits, 87; Credit to Britain, 88 Exchange, Inland, Source of expense, 325; Outstand- ing items, 326; Between branches, 327 et seq.; Costs and profits, 327; Time and interest cost, 329-31; Cost data, 331-33 Failures, Business See Business Failures Farmers, Bank loans, 74-75, 263 ; Creation of liquid assets, 263; Limit on loans, 264; Security, 265 Financial Times, 109 France, New, Period of banking, 4-5; Settlement by, 4-5; Credit money, 5; Ham- ilton, Alexander, 5 Frauds, Guarding against, 209-10 "Free Banking Act," 7 Gold, In little use, 50; Amount in banks in 1913, 51 Gold, Reserves of. Creation, 18; Central. 31-32, 65- 67, 109: Trustees, 32; Dominion notes, 51-52; In bank statement, 99-100 Government, the. Supervision, 19-20; Funds, 96-98; Financial statements to, 194 Guarantee Bonds as Security, 246-47 Hague, George, 266-67 Hamilton, Alexander, 5 Harum, David, 218 Head Office, the, Executives, 130 et seq.; Bookkeep- ing, 135 et seq.; Ledgers, 135- 37; Statistical books, 137; Stock transfer books, 137; Branch clear- ing statements, 137-38, 141; Shareholders' ledger, 138; Circu- lation, 139-40; Dividends, 139; Unissued notes, 139-40; Returns by branches, 141; Financial state- ments, 141-42; Discounts, 142; Balance sheet, 143; Business re- ports, 143-45; Overdue bids, 143: Routine, 145-46; Branch entries. 181-83; Loans submitted to, 242- 46 Hypothecation of Collateral Notes, 270-72 Identification, 212-13 Incorporation, Joint Stock Companies, 256-57 Inland Exchange, See Exchange, In- land Inspection of Banks, 132-33 Inspection, Internal, Branches, 306-07; Two kinds, 306; Training of inspector, 307; Audit, 308-11; Liability return, 311 Inspector, Chief, 132-33 Insurance, Necessity for Customer, 235-36 INDEX 34)7 Interest, Rate of, Time deposit, 93; Call loans, 103, 105; On deposits, 118-19 "Kiting" Checks, 210 Johnson, Joseph French, 82-83 Joint Stock Companies, Definition, 256; Loans to, 256 et seq. ; Incorporation, 257; Open- ing account, 257; Obtaining in- formation concerning, 257; Offi- cers, 257 ; Guarantee by directors, 259-60 Ledger-Keeper, 151-52, 198, 210 Ledgers, Bank, Head office, 135-36; Branches, 155- 56, 184-87; Deposits, 163; Sav- ings bank, 189, 213-14; General liability, 190; Entries, 199, 205; Audit, 309 Leroy-Boileau, 113 Liabilities, Bank, In statement, 98-99; 123; Ledger, 190-92; Inspection, 311-12 Loans, Bank, Provisions for, 37-39; Security, 37- 38, 246 et seq.; Warehouse re- ceipts, 37-39; Interest rates, 39; Branches, 72; Fluctuation, 72; In- crease in, 73 ; Regular customers, 73; Foundation for, 74; Out- break of European war, 85; Call, 101-08; Current, 110-13; Super- vision by directors, 128-29 ; Branch managers and, 131; Classes of, 164; Reducing loss, 218; Poor and good, 219; Qualifi- cations of borrower, 219; Rules, 220, 227-28; Business failures, 221-23; Bradstreets, 222-23; Net worth of borrower, 223—24; Can- non, James G., 224n, 225-28; Canadian Credit Men's Associa- tion, 224n; Borrowers' state- ments, 225-27; Credit standing of borrower, 240—42; Submission to head office, 242; Guarantee bonds, 246; Customers' wills, 247; Safeguarding bank, 247-48; Power of attorney, 249 et seq.; Municipal authorities, 252-53 ; On assignments, 276 et seq.; On warehouse receipts, 295 et seq. ; "Current season," 301 See Assignments, Warehouse Re- ceipts, etc. Loans, Classification of. Call loans, 101-08, 254-56; Joint stock companies, 255—60; Munici- palities, 260-62; Professional men, 262; Farmers, 263-65; Re- tail merchants, 265; Manufac- turers and wholesalers, 266-C8; Hague, George, 266-68; Notes as collateral. 268-69; Bills of Ex- change Act, 269; Security, 269: Hypothecation of notes, 270 ; Rules for accommodation paper, 272-73; Renewed paper, 273; Ob- jections to overdrafts, 274 Loose-leaf Accounting, 159-60, 163, 187, 205 Lumbering Industry, and Note Issues, 63 Machines, Keeping statements by, 214-15 Managers, Must study, 81; Ability in making good loans, 218-19; Decision. 242; Application for loan, 243- 45; Audit, 310; Must know costs, 346 Manufacturers and Wholesalers, Bulk of bank loans to, 266-68; Hague, George, 266-67 Married Women, Bank accounts of, 201; In Quebec, 201, 203; Husband's authoriza- tion, 202; Indorsements, 203 Merchandise, Security for loans, 74; Analysis of, 234-36; Insurance, 235 Minister of Finance, Report to, 29; Emergency circula- tion, 31-32; Deposits with, 32- 33; Suspension of payment, 33; Monthly and annual statement to, 41—44; Dissolution of banks, 44 Monetary System, Canadian, Elements, 50; Dominion notes, 50- 53 Montreal, Bank of, 6 Mortgages, Liability in Borrowers' Statements, 239 Municipalities, Loans to, 252, 260-62 New France, See France, New New York, Call loans, 104; Canadian money in, 104—05; International money mar- ket, 105 Note, the. Required for advances, 280- 92 Noteholder, Protection of the, 55-56 348 INDEX Note Issues, Bank Act, 30-31; Crop moving, 31, 60; Interest, 31; Emergency, 31, 64; In British colonies, 32; Pledge prohibited, 32; Deposit with Minister of Finance, 32-33 ; Redemption fund, 33 ; Suspension of payment, 33-35; Counterfeit, 35; Signing, 35; Amount in circu- lation, 1913, 52; Value, 52; Daily redemption, 54, 56; Circulation Redemption Fund, 55; Failed banks, 55; Elasticity, 56 et seq.; Dunbar, 57; Changes in circula- tion, 58 et seq.; Monthly fluctua- tions, 59—60 ; Lumber industry, 63; Central gold reserve, 65-66; Advantages, 66; Lost or de- stroyed, 67; Branches, 68 et seq.; Panics, 78—80; Reciprocal pay- ments, 82 ; Johnson, Joseph French, 82-83; European war, 84; Bank statement, 98; Carried in tills, 139-40 See Branch System Notes, Dominion, See Dominion Notes Overdraft, Register, 196; Allowing, 211, 249; Objections, 274; Savings account, 275 Panics, Canadian banks in time of, 78-81; 1907, 80, 106; Walker, Sir Ed- mund, 106-08 Partnership, Accounts, 200-01 ; Non-trading, 200; Joint stock companies and, 201 Pass Book, Customers', Provisions for, 199 ; Teller does not make entries, 207; Writing up, 207; Customers' certification, 208-09; Duplicate, 214; Machine statements, 214—15 "Percentage Bank," 120-21 Postal Savings Bank, 13 Pownall, George, H., 95 Professional Men, Loans to, 262 Profit and Loss Statement, 114-15 Profits, Bank, Net, 116 et seq.; "Percentage bank," 120-21; Gross, 122; Earlier, 316; Accounts, 317 Provincial Banking, See Banking, His- tory of Canadian "Provincial Note Act," 7 Quebec, Province of. Married women, 201—03 ; Stuart v. Quebec — continued Bank of Montreal, 203; Power of attorney, 249 Real Estate and Fixtures, As security, 74; Holdings by banks, 114; Borrowers' statement, 237- 38 Records, Bank, Head office, 135 et seq.; Branches, 155 et seq. Redemption of Notes, Circulation Fund, 33 : At par, 34 ; Dominion notes in payment, 34— 35; Daily, 54, 56 Reserves, Ca.sh, 30; Central gold, 65-67, 109; Trustees, 66; In United States and Canada, 108; Fund, 121- 23 See Gold Reserve Retail Merchants, Loans to, 266 Savings Banks, Functions, 13; Government and. 13- 14; Postal, 13; Interest rates. 14; Deposits, 93; Ledger, 189, 213-14; Duplicate pass books, 214; Small accounts, 322; Check- ing against, 322 Seasonal Fluctuations, 57-58 Security, for Loans, Real estate, 74 ; in Bank statement, 101; Call loans, 102, 254-50; Guarantee bonds dangerous, 246- 47; Customers' wills, 247-48; Guarantee by corporation direct- ors, 259-60; Farmers' loans, 26-5; Collateral notes, 268—69; Accom- modation paper, 272—73 See Assignments, Advances on. Warehouse Receipts, Advances on Shareholders, Regulations for, 25; Vote, 25; Double liability, 45 : Supervision, 4.5-46; Ledgers, 138-39 Shareholders' Audit, New features of Bank Act, IS; Methods, 19; Supervision by gov- ernment, 19—20; Provisions in Bank Act, 28-29; Duties of audit- ors, 29 ; Reports to Minister of Finance, 29 Statement, Analysis of a Bank, Bank Act, 89; Typical, 90; Under- standing, 91; Assets and liabil- ities, 91; Intention, 91; Impor- tance, 92; Time deposits, 92-93; Savings banks, 93 ; Demand de- posits, 94-96: Pownall, G. H., 95; Due to banks, 96; Government INDEX 349 statement, Bank — continued funds, 96-98; Circulation, 98; Capital and reserve, 99 ; Specie and Dominion notes, 99—100; Notes and checks of other banks, 100—01; Deposits with foreign banks, 101; Securities, 101; Call Loans, 102-08; Reserves, 108-10; Quick assets, 109; Financial Times, 109-10; Current loans, 110—13; Advances to customers, 111-12; Overdue debts, 113-14; Real estate, 114, 121; Profit and loss, 114-15; Net profits, 116- 17; Interest on deposits, 118-19; "Percentage bank," 120-21; Re- serve Fund, 121—23; Gross profits, 122; Liabilities, 123 Statements, Borrowers' Importance, 225 et seq. ; Form, 228- 29; Cash on hand, 229; Typical, 230-32; Merchandise, 234-35; Raw materials, 235; Bills and ac- counts receivable, 236; Real es- tate, machinery, and fixtures, 236— 38; Current liabilities, 238-39; Compared with books of bank, 239; Life insurance, etc., 239: Mortgages, 239; Sales to branch houses, 240; Regular, 242 Statements, Financial, to government, 194 Stuart V. Bank of Montreal, 203 Substitution of Goods as Security, 297-300 Suspension of Banks, 44—45 Suspension of Payment of Notes, Interest, 33; Redemption Fund, 33 Teller, the. Duties and responsibilities, 150-51; Records, 183-84; Customers' pass books, 207-09; Powers of ob- servation, 210; Cashing checks, 211; Overdrafts, 211 Time Deposits, 92-93 Trade Paper, Discounting, 78 Treasury Board, Bank Act of 1913, 23; Functions, 23n; Capital Stock, 25; Winding- up a bank, 34; Note payment, 35; Supervision, 45—46 Trust and Loan Companies, In banking field, 15; Dangers of. 15; Demand deposits, 15-16; Credit principles, 16 United States, Loans in, 76-77; Panic of 1907, 80, 106; Legal reserves, 108; Cost accounting, 315 Walker, Sir Edmund, 10-11, 106-08 Warehouse Receipts, Advances on, as collateral, 37—39 ; Rules, 294; To whom made, 295; Definition, 297; Substitution, 297- 300 War of 1812, Canadian banking, 6; Army Bill Act, 6 White, Horace, 3, 12 White, Sir Thomas, 85-86 Wholesalers, See Manufacturers and Wholesalers Wills, Safeguarding the bank in cus- tomers', 247 UNIVERSITY OF CALIFORNIA LIBRARY Los Angeles This book is DUE on the last date stamped below. HG Patterson - 2702 P27b Banking princi- ples and practice UC SOUTHERN REGIONAL LIBRARY FACILITY ii|i|i !Mi!|ii|!| iii'iiriii|iiiiiii AA 000 552 645 4 HG 2702 P27b