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Since 1954, Canada’s banks have been employing in a new way those funds which they are prepared to invest for only very short periods. In addition to purchasing Treasury Bills on their own behalf, they have been lending spare cash to investment dealers which the latter in turn use to buy Treasury Bills. (The dealers are continuously purchasing these Bills on behalf of clients or for their own portfolios, and therefore very frequently need bank loans to pay for these purchases.) These bank loans to dealers are made on a “day-to-day” basis; the bank has the right to demand  repayment of the loan at any time. Once the bank demands repayment, the dealer must repay the loan within a matter of hours. To the banker these “day-to-day” loans are even more liquid than Treasury Bills; they can be converted into cash more speedily, and they involve no risk whatsoever of capital loss. Whereas even a 91 day Treasury Bill may have fallen slightly in value when a banker wishes to sell it to raise cash, a “day-to-day” borrower must repay exactly what he has borrowed. The rate of interest received on such loans is of course always lower than the rate currently earned on Treasury Bills, but the banks are willing to accept the lower interest in order to gain the higher liquidity.

These Bills are in effect very short term bonds. The federal government, which needs cash at all times to meet its daily expenses, offers Treasury bills for sale each week (currently about $100 million weekly). These are offered for sale on a tender basis. Anyone can bid for them, indicating in his bid the quantity he wishes to buy and the price he is prepared to pay. The price paid by a successful tenderer determines the interest he receives, since this will consist of the difference between that price, and the face value of the Bill which he will receive upon its maturity date.

The banks are the chief bidders at the weekly auctions of Treasury Bills; the short maturity of the Bills renders them an excellent investment for any bank which has cash to spare but does not wish to commit that cash for a lengthy period. Furthermore, if a bank buys Bills regularly, it will regularly receive cash, for Bills which mature. If a bank buys $1 million worth of 91 day (13 week) Treasury Bills every week, Then each week it will receive $1 million from the federal government in redemption of the Bills which it had bought  13 weeks before. If ever the bank wished to increase its cash in any week, it could simply refrain from buying any new Bills that week; its cash would automatically rise by $1 million, through the redemption by the government of Bills which currently became due for repayment.

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