Large Use of Deposit Currency
It is sometimes assumed that a free and large use of bank notes tends to discourage the use of the check book and the growth of bank deposits. On the continent of Europe, for instance, where the notes of central banks supply all the currency the people need, the check book is comparatively little used. This fact is sometimes explained by the ease with which people can obtain bank notes for use in making all payments. Experience in Canada makes one doubt the validity of this explanation. The check book is almost as popular there as in the United States, and would probably be used still more than it is if the banks would adopt a policy as liberal as that in vogue in the United States. The Canadian banks not only charge exchange on checks and drafts payable in other localities, but even charge exchange on checks drawn on their own branches. The charge is a small one and probably has no great effect one way or the other, yet it certainly does not encourage the increase of deposits or the use of the check book. When a Canadian starts on a journey it is in a small way economical for him to fill his wallet with all the cash he expects to need. The notes of his bank will be taken at par everywhere throughout the country; his checks, even though he presents them at a branch of his bank, will be cashed only at a discount.
Notwithstanding this discrimination against the check, the deposits of Canadian banks have grown much more rapidly than the note circulation and the inference is that the volume of deposit currency has increased at the same rapid pace. Since 1900 the volume of notes has increased approximately 60 per cent., while the deposits by the public showed a gain of 155 per cent. These figures prove that business men in Canada appreciate the advantages of the check as a means of payment, and that the proportion of business transactions settled by it is steadily increasing.
Banks Silent Partners in Industry
A large part of the so-called commercial paper of Canadian banks is secured practically by title to goods in warehouses, factories, and wholesale stores. Such security is more saleable than stocks and bonds, and paper having such security back of it is therefore better banking paper than notes secured by stock-market collateral. So far as would seem possible the Canadian Bank Act makes merchandise of all kinds a sort of collateral security for bank advances. It assumes that if a bank advances capital for the conduct of a business it should have a claim upon all the assets of the business and upon all goods as they come and go in the course of trade. No matter how a merchant's stock may change in character, it all belongs to his bank in case he fails to take up his paper or meet his engagements. In the same way a manufacturer's stock of goods, the raw material and the finished products, no matter how they change from day to day and month to month, will become the property of his bank if he fails to pay his note. The law practically makes every bank a silent partner in many wholesale and manufacturing businesses and gives it many rights which no ordinary silent partner can acquire. It has the effect naturally of making bankers keep a close eye upon business conditions as well as upon the affairs of their individual borrowers. Canadian bankers are interested in the lumber market, in the prices of metals, in changes in the tariff, and in the acquisition of foreign markets for Canadian manufactures and products, even as the Wall Street banker is interested in the prices of stocks and bonds. He is in a sense the owner of merchandise of all kinds, and both trade and financial news has equal significance to him.
A Customer's Line of Credit
In Canada the banks are managed by men whose long experience in the business has taught them to avoid certain banking practices that are in vogue in other countries. Realizing how important is the relation between a bank and its customer, they believe that this relation should be made as intimate and helpful as possible. Among Canadian bankers, therefore, it is part of the law and gospel of banking that a bank is entitled to full knowledge of the financial condition and business operations and prospects of its customers. Hence a bank insists that its customers shall rely entirely upon itself, that they shall make a full statement of their affairs at least once a year, and that they shall begin each year with a clean slate.
As a result of this policy a business man in Canada deals exclusively with one bank. Once a year he arranges with his bank for a line of credit and learns exactly the amount of paper he will be able to discount. If he happens to need less than he anticipated, he will not exhaust the credit allowed by the bank and will pay interest, of course, only upon such portion of the bank's funds as he actually utilizes. If, on the other hand, his business is unexpectedly large, giving opportunity to make bigger profits and creating the need for more capital, he will find the bank ready to increase his line of credit, provided the manager is satisfied that business conditions and prospects warrant expansion. Under no circumstances, however, must the customer of a bank seek to raise funds elsewhere unless he first gets the consent of his bank. If he sells his notes in the open market, he must do it with the full knowledge of his bank or run the risk of being placed upon the "black list."
As one would naturally expect, there is very little commercial paper floating about in the Canadian money market. The bill broker is unknown. Wholesalers and manufacturers, unless shipping to foreign countries, do not draw upon their customers. If credit is granted, it takes the form of a book account or of a promissory note.
The promissory notes received by a manufacturer or wholesaler are deposited with his bank. The book accounts under ordinary conditions remain entirely at the disposal of the business, but in extraordinary cases, when the situation is not satisfactory, or if an additional credit at the bank is desired, an assignment of the book accounts to the bank may be required.