In the Bank Act of Canada, no attempt is made to define the functions of a bank in general terms; the Act merely states that "a bank means any bank to which this act applies." A bank in Canada therefore means one of the chartered banks, as the law prohibits the use of the word "bank" by any other institution.
Economists have defined the functions of a bank in many different ways, but all arrive at the same general conclusions.
Horace White, in his "Money and Banking," thus defines a bank:
An institution where deposits of money are received and paid, where credit is manufactured and extended to borrowers, and where the exchange of property is facilitated. Having first acquired the confidence of the community, the bank extends its credit by purchasing interest-bearing securities, mainly business men's notes, payable at a fixed time and giving the sellers the right to draw checks upon itself payable at sight. The amounts thus authorized to be drawn are termed deposits, the bank being liable for them in the same way as for actual money deposited. . . . Bank notes are the bank's promises to pay money to the bearer on demand.
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 supply 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.
The main function of a savings bank is to encourage thrift in a community by accepting, 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, Montreal, 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 operated by the Post Office Department and accepts deposits at every post office, and the other called the
Government Savings Bank, which is under the control of the Finance Department. The latter receives deposits at comparatively few points, principally in the larger towns in the maritime provinces, and its business is gradually being merged with that of the Postal Savings Bank. The money received from these savings banks is regarded by the government as a loan, which practically replaces money that could be borrowed 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.1 It is easily seen that if an adequate reserve were maintained it would bring the cost of these deposits to over 4 1/2 per cent. The government, however, avoids the expense and responsibility 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 savings 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.
Of late years a considerable number of these companies have been organ1 Hearing before House Committee on Post Office Savings Bank 1909, page 70.
ized in Canada under provincial or Dominion charters, and as it is an open question whether their control is vested in the Federal or in the provincial authorities, 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 necessary to transact their especial business. There is a tendency, however, recently developed, to enter into competition with the banks in various ways, especially 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 statement 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, overlooking 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 currency 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 securities, and their deposits, if any, should be composed of the long time funds of the community - 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 ample 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.
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?