This does not include the securities of subsidiary companies or of allied industries, the continued con trol of which is important to the integrity or success of the business. Such securities, it is true, may be quite salable or easily pledged to secure additional loans, but should not, in the writer's opinion, be classed as quick assets for the purpose of determining the safe extent of trade or bank credit. Securities of this type are really a part of the capital investment. Trade credit and bank loans can properly be asked to finance current operations only, in the ordinary course of production and distribution. In determining the ratio of current assets to current liabilities, only those assets should be included as current which are being continuously converted into cash by the transaction of current business. On this basis, it is usually safe to carry current liabilities equal to 75 or 80 per cent of the quick assets.
Trade credit is not obtained on advantageous terms when the concern, by so doing, acquires a reputation for slow pay or loses the benefit of cash discounts much larger than the prevailing discount on bank loans. If the proper relation is maintained between liabilities and quick assets, neither slow pay nor loss of big dis counts results. Credit is often injudiciously extended on mere amount of assets, whereas only cash will pay the obligation. Therefore, only quick assets are good cover for current liabilities. Lack of appreciation of this simple fact has caused the unnecessary failure of many business corpqrations and banks.
11. Bank loans.—What has been said about trade credit applies largely to bank loans. Both are for the purpose of financing current operations, and this is really the true purpose of a commercial bank.
The more important functions of commereial banks are, or should be, to receive deposits and discount trade notes and acceptances, both of which arise essen tially out of commercial transactions. These instru ments are two-name paper, and usually self-liqui dating; that is, backed by the actual existence of salable merchandise on its way to the ultimate con sumer.
Most bank advances in the United States, however, have not been of this kind, since the borrower has financed his customers on open account, in turn sell ing his own note direct to the bank, bearing on its face no evidence of the use to which the funds were put. Added security is often given to such notes by the sig nature of an indorser or the pledge of collateral.
It has been customary in the United States to make such bank loans on the general standing and reputa tion of the borrower, altho frequent losses have grad ually led to the introduction of statements to enable the banker to judge the credit risk more intelligently, Under our present system of bank loans in the United States, any successful manufacturer may go to the bank and borrow funds to gamble on the stock market, play the horse races, live extravagantly, or send his boy to college. None of these are proper
commercial loans, and perhaps none of them, not even the last, is productive. But the bank and its de positors do not know what the borrowed funds are being used for. This could not happen if customers' notes and trade acceptances were discounted. These instruments would evidence the nature of the transac tions out of which they arose.
Every bank should insist upon, and every borrower should willingly furnish, especially under the Ameri can system of accommodation loans, a complete, de tailed and sworn annual statement, upon which the borrower's credit for the ensuing year may be judged. This practice is being gradually introduced in the United States.
12. Growth of Canadian rapid in crease in the number of industrial and other corpora tions in Canada in recent years has materially ex tended the relations of Canadian banks and corpora tions. In a recent year, 4,651 new companies with a total authorized capitalization of $1,245,000,000 se cured Dominion or provincial government charters. By the postal census of manufactures, taken in 1916 for the previous year, it was shown that capital of $1,138,000,000 was employed in manufacturing, being an increase of 134 per cent over the capital employed in 1905. These figures indicate to some extent the heavy bank financing involved.
13. Financing new Edmund Wal ker in testifying before the Banking and Commerce Committee of Ottawa in 1913, was asked whether it were good banking to advance money on securities of new enterprises pending the sale of bonds, and replied that not only was it proper to do so but that industries could not be established unless this prac tice were followed.
Complaints are sometimes made in the Dominion that funds belonging to communities are drawn to monetary centers and there used as loans to under writers, promoters and others. But many of the large factories or industries could not have built up unless the facilities of financing the underwriting operations had been available.