CHAPTER V.

LIABILITIES.

The liabilities of Canadian banks, like those of commercial banks in Great Britain and the United States, furnish a fairly correct index to the expansion of the country's credit. Since the Canadians, like other AngloSaxons, make free use of the check book in the settlement of both business and private accounts, any increase of bank loans and discounts is usually attended by a corresponding increase in deposits. When a Canadian business man discounts his note at his bank he almost invariably leaves the proceeds on deposit with the bank. As he makes his payments by check his own deposit account declines, but the bank accounts of his creditors increase, so that the net result of borrowing in Canada is an increase in the total of bank deposits. Consequently, in good times, when the banks are freely extending credit, the deposits grow, and in periods of dullness and liquidation they decline. A growth of deposits, therefore, is commonly accepted as an indication of business and industrial activity.

Bank notes constitute the second important liability. The amount of these in circulation, as will be shown later in this chapter, has little relation to general business conditions or to the amount of loans and discounts.

THREE KINDS OF DEPOSITS.

Deposits by the public are of three kinds-deposits payable on demand, deposits payable after notice (usu

ally ten to fifteen days), and deposits payable at a fixed date. The deposits payable after notice are commonly known as savings bank deposits, and are accepted in sums of $1 and upward, interest being allowed on minimum monthly balances. Many of the banks, if not all, permit a limited use of the check book by depositors in their savings departments. The deposits payable at a fixed date are technically known as "time deposits" and are represented by deposit certificates. In recent years the banks have paid 3 per cent per annum on both the "time" and the savings bank deposits. In the monthly bank statement these two classes of deposits are reported under the single head of "deposits by the public payable after notice or on a fixed day," and are commonly known as the "time deposits." On January 31, 1909, these deposits amounted to $443,170,532, but the returns do not show how much of this sum consisted of deposits in the savings department and how much of "time" deposits payable at a fixed date. As the two classes of deposits are quite different in character, one being much like a current account subject to check, the other being comparatively fixed or permanent, it would seem worth while to report them in separate columns.

In Canada the funds of savings bank depositors, who are usually people having no immediate use for their money, contribute directly toward the furtherance of trade and industry, whereas in the United States, where such depositors put their money into savings banks, it is quite commonly loaned out upon the security of real estate and corporation mortgages. The time deposits in Canada are almost double the demand deposits. For instance, in

October, 1909, the time deposits amounted to $481,000,000 while the demand deposits equaled only $251,000,000. It must not be inferred, however, that the whole of this $481,000,000 would have found its way into savings banks had Canada a banking system like that of the United States. This sum really represents funds which in the United States would be distributed among the commercial banks, the trust companies, and the savings banks. A considerable proportion of Canadian time deposits consists of money belonging to business men, and is quite as likely to be used in the furtherance of business enterprise as are any of the funds which stand to the credit of demand depositors. If a business man in Canada has temporarily a large balance in his bank and realizes that he will not need the money for several months, he will either arrange for its entry as a time or savings bank account, or for the payment of interest on his balance as a current account. Of course, the bankers do not encourage this practice, nor can it be indulged in by a depositor who is also a borrower. Depositors of the class who are paid a small rate of interest—usually 2 per cent—by national and state banks in the United States, usually have savings department accounts in Canada and get 3 per cent.

SAVINGS DEPOSITS ALWAYS PAID ON DEMAND.

On account of the fact that the time or savings bank deposits contain such a large proportion of money likely to be needed in business at any time, the banks regard both classes of deposit as being essentially the same form of liability. Practically all the deposit liabilities of a Canadian bank are payable on demand, although payment

on two-thirds of them at the present time can not legally be demanded until after notice. Custom has made it imperative that a Canadian bank shall pay any and all of its depositors on demand. For any bank to refuse to let a depositor have his money when he calls for it would be regarded by the public as an acknowledgment of weakness. Certainly no Canadian bank would take the risk of making the experiment.

Canadian bankers feel that 3 per cent is too high a rate of interest to pay depositors. This rate is a matter of tacit agreement among the banks and no single bank can afford to lower it, for such action would cause it a loss of business. On the other hand, if any bank, hoping to increase its deposits, should offer to pay 31⁄2 per cent or 4 per cent, its conduct would be looked upon with grave disapproval by its competitors. Some of the new banks in recent years have obtained business in this manner and have been severely criticised by the managers of the older institutions.

SAVINGS DEPOSITORS NOT PROPERLY REWARDED.

To an outsider it would seem that the savings bank depositor in Canada is not generously treated. In the United States he gets 4 per cent on his savings even in the large cities. In Canada, a country where real estate mortgages yield from 7 to 9 per cent and the bonds of new corporations are selling at prices giving the investor a higher return than he can get in the United States, it is certain that a real savings bank could well afford to pay depositors 4 per cent. It is doubtless true that 3 per cent is a higher rate of interest than most of the savings depositors in the

chartered banks have a right to expect. A large part of these deposits are not savings deposits at all. Nevertheless it is doubtful if the banks would be justified in a reduction of the rate.

The right solution of the problem seems to lie in another direction, namely, in the making of a sharper distinction between demand and savings deposits. The funds received from both classes of depositors should not be treated alike. The money of savings bank depositors should be invested in bonds and mortgages and then could be made to yield a net return of over 5 per cent. If the depositors were not allowed to check upon their accounts they would be a source of such little expense to a bank that it could easily afford to pay them interest at the rate of 4 per cent. At the present time the banks are paying 3 per cent interest on money which they are lending to commercial borrowers and for the care of which they are maintaining an expensive force of clerks. Depositors who have checking accounts might be allowed 2 per cent on large balances, but out-and-out savings depositors, people who make no use of the check book, are certainly entitled to a 4-per-cent rate in a country where investment capital is as fruitful as it is in Canada.

Strictly speaking, the savings departments of the Chartered Banks are not savings banks, for they do not pretend to devote their time funds to long-time investments. The amount of securities held by the banks is never equal to the amount of time deposits. For example, in October, 1909, the deposits payable at a fixed date or after notice amounted to $480,000,000, against $86,000,000 invested in securities. The banks in the use of funds at their dis