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Banking Principles and Practice E. L. Stewart Patterson BANKING PRINCIPLES AND PRACTICE BY E. L. STEWART PATTERSON SUPERINTENDENT OF EASTERN TOWNSHIP BRANCHES, CANADIAN BANK OF COMMERCE MODERN BUSINESS: VOLUME 16 A SERIES OF TEXTS PREPARED AS PART OF THE MODERN BUSINESS COURSE AND SERVICE OF THE ALEXANDER HAMILTON INSTITUTE 1917 Copyright © 2009 Dodo Press and its licensors. All Rights Reserved. CONTENTS PREFACE PART I.. BANKING PRINCIPLES. CHAPTER I. HISTORICAL SKETCH CHAPTER II. KINDS OF BANKS CHAPTER III. THE BANK ACT CHAPTER IV. THE BANK ACT (CONTINUED) CHAPTER V. NOTE ISSUES AND THE BRANCH SYSTEM. CHAPTER VI. ANALYSIS OF A BANK STATEMENT. PART II BANKING PRACTICE. CHAPTER I. HEAD OFFICE CHAPTER II. HEAD OFFICE RECORDS CHAPTER III. THE BRANCH STAFF CHAPTER IV. BRANCH BOOKS AND RECORDS. CHAPTER V. DEPOSIT BUSINESS CHAPTER VI. LOANING A BANK’S MONEY CHAPTER VII. CLASSIFICATION OF LOANS. CHAPTER VIII. ADVANCES ON WAREHOUSE RECEIPTS AND ASSIGNMENTS. CHAPTER IX. INTERNAL INSPECTION CHAPTER X. BANK COST ACCOUNTING. PREFACE It would be impossible within the narrow confines of one volume to deal exhaustively with so extensive a subject as that of Canadian banking practice, but it is hoped that the parts of this subject dealt with herein will be found to be treated with due regard to their relative importance, and that no really essential information has been overlooked. As far as possible, all matters coming within the scope of the Bills of Exchange Act have been purposely omitted, because an intimate knowledge of the act itself is essential to every business man and banker. Altho Canadian banks may differ in bookkeeping and methods, the general principles and aims of their systems are the same, and the reader should have no difficulty in understanding the forms and methods explained in the Text, and in interpreting them by his own experience. Too specific explanations have been avoided as far as possible, lest the principles involved should be buried under a mass of detail. The present edition of the Text has been revised and brought down to the end of 1916; the bank and other financial statements presented reflect conditions existing prior to the commencement of European hostilities, inasmuch as these statements represent the ordinary position of the banks. More recent statemerits reflect the abnormal conditions induced by the war, and are therefore but of temporary interest. E. L. Stewart Patterson. Sherbrooke, Que. Banking Principles and Practice PART I.. BANKING PRINCIPLES. CHAPTER I. HISTORICAL SKETCH 1. Introduction In an intelligent study of the Canadian banking system particular stress should be laid on the fact that the system has been evolved, not made; that it has grown up with the country, suffered with it, prospered with it and, since the Confederation, been the backbone of commerce and agriculture. The careful decennial revisions of the banking laws have kept the system continually in touch with the requirements of Canada’s constantly altering conditions. In fact, in no other country does the history of bank-ing support so forcibly the contention of Horace White in his “Money and Banking”: The principles of banking are the outgrowth of experiment. They must be learned from the history of banking and particularly from the laws that have been enacted from time to time. These laws are the crystallization of ideas dominant at given periods. The history of banking in Canada may be roughly divided into four periods: New France.....................1608-1763 British Occupancy ...............1763-1817 Provincial Banking...............1817-1867 National Banking System.........1867 2. New France During this period (1608-1763)-Canada had its first, and it is to be hoped its last, experience in “fiat” money. In lieu of a better circulating medium, beaver and other furs, wheat and tobacco were 1 Banking Principles and Practice accepted in trade, and tho at first the issue of government obligations in the shape of “or-donnances” and card money were a welcome relief, the scandalous abuse of this privilege quickly brought it into disrepute, for no matter in what form, or under what conditions these obligations were issued, they all traveled the same road to ultimate depreciation. The country found itself at the time of the capitulation, in 1760, loaded with a tremendous debt of over 80,000,000 livres outstanding, of which some 34, -000,000 livres were in ordonnances, 7,000,000 in card money and treasury bonds and the balance in other forms of obligation. This formed one of the most difficult problems that confronted the British government and, notwithstanding the impoverished condition of France, the British insisted upon a definite basis of settlement. Accordingly, a convention was signed in 1766 under which bills of exchange and kindred obligations were to be redeemed by the French government at 50 per cent of their face value, and ordonnances and other forms of debt at 25 per cent. Owing to circumstances which need not be entered into here, the unfortunate holders eventually received only a moiety of this settlement. The history of this period presents an instructive lesson on the evils of money issued on credit only, even tho the credit is that of a government. There is no doubt that Alexander Hamilton had the sad experience of New France before him when he made his severe stricture on government issues based on credit. In his report on banking in 1790, he said: The emitting of paper money by the authority of the government is wisely prohibited to the individual states by the national constitution, and the spirit of this prohibition ought not to be disregarded by the government of the United States. Tho paper emissions under a general authority might have some advantages not applicable and be free from some disadvantages which are applicable to the like emissions by the states separately, yet they are of a nature so liable to abuse, and it may even be affirmed so certain 2