The economical and equable distribution of loanable funds made possible by the branch system has already been referred to. The control of these funds and the ability to direct them to different parts of the country, according to the demands of trade and agriculture, has enabled the banks to accomplish astonishing results with the means at their disposal. The banks, as a whole, form a vast clearing house not only between the depositor and the borrower, but also between borrower and borrower. A little 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 increase due to the growth of the country, the demand for the loanable capital at the disposal of the banks generally being in excess of the supply. In the government 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 true they restrict unwise expansion in times of financial stress, and are always foresighted in preparing the country for troublesome 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 ordinary 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 instance, 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.1
1 See call loans in New York, page 103.
The slow and apparently placid increase of the loans, as shown by the monthly statements, is deceptive, for beneath the surface lies a seething mass of
activity, inextricably interwoven. The continued existence of each kind of advance depends in great measure on the constant mobility of every other. Repayments of advances made by one class of industry are received in time to be loaned to an entirely different business, possibly at the other end of the country, and so on. If lumber becomes unsalable from overproduction or other causes, the advances made for lumbering operations would not be liquidated in season, and the banks might find it difficult to satisfy the requirements of other industries, which generally make use of these funds as they are returned.
This will indicate how necessary it is for the banks . to observe at all times one of the most important rules of sound banking, namely, that every loan made by a bank should rest on a foundation of salable merchandise or collectible debts. It is for this reason that loans on real estate have no place on the books of a commercial bank, whose profit and existence are dependent on the frequency of this "turn over," and the keen interest which bankers take in preventing overproduction in any line is thus justified. The average customer gauges his output from local or provincial experience, the banker from a national and international standpoint.
A concrete example may be of value in illustrating the circulation of credit attained thru the branch system. Take, for instance, a western farmer who borrows money from a bank in the beginning of the year in order to pay for seed and labor, and about the same time becomes indebted to the local store for supplies and the like. When he harvests his crop, in the ordinary 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 liquidation of loans by the farmers and correlative debtors enables the banks to finance the crops by making advances against warehouse receipts, etc., which are ultimately liquidated by drafts with bills of lading attached. This financial operation provides the basis for foreign 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 Canada 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.