The call loans carried by certain of the larger banks in New York and London subject them to a great deal of undeserved criticism, 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 reserve for, if these call loans were not maintained, the Canadian borrower would be no better off than now. The banks would have no alternative but to carry the amount in 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 the government statement and ascertain the net amount of Canadian money which is invested in call loans outside of Canada, they would doubtless be surprised at the results.
Take for instance the foreign loans in the government statement for the month ended June 30, 1913:
Balance due by banks in the United Kingdom........
Balances due by foreign banks
Call loans elsewhere than in
Current loans elsewhere than in Canada..............
Due depositors elsewhere than in Canada.........
Due banks in United Kingdom ..................
Due foreign banks........
Net amount supplied by Canada ...........
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 Canadian 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 the banks, leaving only $52,000,000 as the actual amount supplied by Canadian banks toward a very important part of their reserve. This is only 3.42 per cent of the total assets, an insignificant amount compared 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 6 1/2 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 safety 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 markets 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 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 Monetary 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 business 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........
Current loans outside Canada....
Deposits and balances due outside
Net amount employed outside
The panic in the United States may be said to have commenced in October, 1907, and at November 30, later, the position of the Canadian banks as regards their outside accounts had changed to the following:
Call loans outside Canada
Current loans outside Canada
Deposits and balances due outside
Net balance owing by Canadian banks outside Canada
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 employed outside Canada, the balance was actually the other way to the extent of $2,841,000, a condition of affairs which continued several months into 1908.
In the payment of its debts due abroad or in selling exchange 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 sending 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 financial 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, therefore, 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 subject of praise by critics of Canadian banks and not of dispraise.1