The effect of the branch system and the freedom of note issues is to keep interest rates steady and fairly uniform throughout the entire country. Practically all the chartered banks are national institutions having branches everywhere. The small, remote community therefore enjoys the same security and substantially the same banking facilities as the large city. The rate of interest in the small towns of the Northwest is only 1 or 2 per cent higher than in the eastern cities on the same kind of loan, the difference being due to the risk and expense involved in doing business in remote districts. Moreover, under this system branches can be maintained and operated with perfect security in localities where the business would not justify the establishment of a bank with independent capital. The home bank can establish branches in villages of 500 inhabitants or less, giving them all the facilities they need without the investment of additional capital.
Under the Bank Act the Canadian banks have very generous powers, permitting them to "engage in and carry on all such business generally as appertains to the business of banking." Certain provisions of the act relating to loans "make it possible for a Canadian banker to become, as it were, a silent partner in an industry and at the same time to possess a first lien on all its liquid assets ... If a bank lends money to a wholesaler or to a manufacturer it practically becomes owner of all the goods in his establishment. Yet the borrower is in no wise embarrassed, for he has the same right to buy and sell that he would have if he were under no obligation to the bank. If any time, however, he adopts a policy of which the bank disapproves, or if the course of his business indicates that something is wrong, his bank may take immediate possession of his stock of goods."1
The relation between the Canadian bank and its customer is made as intimate and helpful as possible. In practice the business man deals exclusively with one bank, or in the case of the largest concerns with two banks which work in harmony. The bank expects to be kept informed regarding the customer's financial affairs and business operations, and in turn it expects to extend to him all the credit he needs consistent with his business and with general commercial conditions. The customer would not think of attempting to raise funds elsewhere without the consent of his bank. There is very little commercial paper in the Canadian money market and the note broker is almost unknown. Drafts are but little used in domestic business, credit taking the form of book accounts and promissory notes.
1 Johnson: Canadian Banking System, p. 41.
The Canadian law makes it possible for the banks to supply adequate funds for the movement of the grain crops with ample security to themselves. When a dealer buys grain he assigns it to his bank; when it is delivered to a railroad the bill of lading becomes the property of the bank; when it is stored in an elevator the bank receives the warehouse receipt; and when shipment is made to the seaboard or to Europe the bank gets possession of the shipper's draft on the consignee, the bill of lading and other documents. Thus, throughout the entire process of marketing the bank practically has title to the agricultural products upon which it has made advances. In the agricultural districts the branch banks supply farmers with working capital for the purchase of implements, seed, stock, etc., on their own personal credit. They do not make a practice of lending on farm mortgages, but lend outright on the farmer's note, strengthened sometimes by a neighbor's indorsement.1 Some of the larger banks loan considerable sums on call especially in the New York market. They figure these loans as part of their reserve. Financial banking is not very highly developed in Canada as yet, but whatever dealing there is in securities is controlled mainly by the chartered banks. A bank cannot make a loan on the pledge of its own stock or upon real estate. It may acquire title to real estate, but cannot hold it for more than seven years, except that which is needed for the conduct of business. Loans to directors or officers must be reported each month to the Government. Dividends in excess of 8 per cent must not be paid until the "rest" or surplus equals 30 per cent of the capital.
1 Johnson: Canadian Banking System, p. 48.
The trust companies in Canada do a strictly fiduciary business. The chartered banks and their branches all have savings departments and pay 3 per cent on deposits. There is, however, no sharp distinction drawn between demand and savings deposits. In practice both are payable on demand, both go into the general fund of the bank, and savings funds are as likely to be loaned to merchants and manufacturers as are funds which represent demand deposits. While wage-earners and other classes are given every encouragement to open savings accounts, a considerable proportion of the time deposits of the banks are made by business men, who, finding periodically that they have a larger bank balance than they need, arrange for the transfer of the surplus to a savings account or for the payment of interest on it. The government savings institutions pay interest at 3 per cent, but they require several days' notice of withdrawal.