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UBC Theses and Dissertations

Central banking in Canada Creighton, James Hugh 1933

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CENTRAL BANKING  IN  CANADA  by J a m e s Hugh. C r e i g h t o n  A Thesis  submitted MASTER in  f o r the Degree  OF A R T S  the Department of  Economics  The  and P o l i t i c a l  University  of B r i t i s h  April,  1933  Science  Columbia  COITE. I T S  Chapter  I.  Introduction.  Page  1.  Page  10,  Page  17,  Page  49,  Page  57  The g r o w t h o f c e n t r a l b a n k s — a d v o c a t e s of a c e n t r a l bank f o r Canada—opponents o f the idea. Chapter  2.  The G e n e r a l F u n c t i o n s Bank.  of a  Central  (a) As a bankers' bank. (b) A s a g o v e r n m e n t ' s bank. (c) As a " p e o p l e ' s " b a n k . Chap t e r 3.  The C o n t r o l o f Money and and t h e C e n t r a l Bank. (a)  (b)  Chapter  4.  Credit  Object 1. 2. Possibi 1.  ives— Exchange c o n t r o l . Price level control. l i t i e s of c o n t r o l — Evidence f o r and against exchange control. 2. E v i d e n c e f o r a n d against price level control.  Monetary Control t o 1914. ' .  i n Canada  Previous  T y p e s o f money u s e d — f i r s t b a n k s — Act of 1 8 7 1 — g o l d s t a n d a r d — Dominion n o t e s — t h e banking system—panic of 1907—the cropmoving p r o v i s i o n — w a r - t i m e emergency measures. Chapter  5.  The F i n a n c e A c t a s a a C e n t r a l Bank.  Substitute f o r  (Contents  cont'd.)  Evidence i n f a v o r o f the A c t as an a d e q u a t e s u b s t i t u t e — t h e history of the A c t — t h e s i g n i f i c a n c e of i t s p a s s i n g — t h e A c t as a b a n k e r s ' b a n k - — a s a g o v e r n ment's b a n k — a s a " p e o p l e ' s " bank. C h a p t e r 6.  Arguments f o r and a g a i n s t a C e n t r a l Bank f o r C a n a d a .  Page 1 3 3 .  l o n e c e s s i t y of d i s t u r b i n g p r e s e n t efficient system—there already i s c r e d i t c o n t r o l i n Csnada--doubt as t o e f f i c a c y o f c e n t r a l banks generally—danger of the p o l i t i c a l f a c t o r - - d i f f i c u l t y of securing e f f i c i e n t management—lack of a money m a r k e t i n C a n a d a — a c e n t r a l bank c o u l d n o t i n c r e a s e c r e d i t i n C a n a d a — c o s t w o u l d be b u r d e n s o m e — capitalization—reserves—profits— competition with the chartered b a n k s — t h e note i s s u e — w h a t a c e n t r a l bank m i g h t a c c o m p l i s h . Chap t e r 7. Bibliography  Summary and C o n c l u s i o n s .  Page 181. Page 201  1.  Chapter  I.  Introduction. •  Referring anarchy"  i n the course  committee Ottawa  to the world's  delegation  summer,  state  of h i s statement  of the Imperial  last  present  Economic  the Hon. U.  of the Union  of  before the monetary  Conference  C. H a v e n g a ,  of South  "economic  Africa,  held  at  leader  of the  said:  " B u t we l a c k t h e g e a r - l e v e r w h i c h w i l l l i n k u p the machinery of p r o d u c t i o n t h r o u g h u n i v e r s a l j o i n t s to the d i f f e r e n t i a l o f consumption which w i l l .set i n m o t i o n t h e w h e e l s o f p r o g r e s s i " l If,  i n Canada,  resulted  from  fundamental are  s t i l l  people control good  in  forces  are trying o f money  only  which  at least  to f i n d and  brought  efforts,  about  In doing  Britain  level  this  the world  number  they of  have  i f a l lthe  "gear-lever"  i n 1931 d e s c r i b e d  throughout  and  our present  an i n c r e a s i n g  the required  credit.  palliatives  f o r the " M a c M i l l a n Committee"  i n Great  the p r i c e  elsewhere,  our "anti-depression"  operating,  company,  experts  as  trouble of i n the  are i n  financial  the d r a s t i c  fall  as  "....a monetary phenomenon which has o c c u r r e d as the r e s u l t o f the monetary system f a i l i n g to solve s u c c e s s f u l l y a problem of unprecedented  1.  Report of the Imperial 1933, p . 127.  Economic  Conference,  Ottawa,  2.  " d i f f i c u l t y and c o m p l e x i t y s e t i tby a conjunct i o n of h i g h l y i n t r a c t a b l e non-monetary phenomena . With the  the c o n t r o l  question of central  been  witnessing a strong  Canada an  and a n e q u a l l y  advocates  opportune are  from  granted  last  banking. demand  forceful  i s closely  H e n c e we for a  denial  of the c e n t r a l  their  point  f o rp e r i o d s  extended  i n 1923.  t h e Bank A c t would  its  reasons,  entire another  however,  banking  have  central  linked  recently bank i n  o f t h e need  the proposed  on  February  extend that  was a r o u s e d  year  will  1934.  general  find  f o r such  taken  that  a thorough  place  i n 1933. inquiry  i n anticipation  Stating  before  t h e outcome  permission to  1, 1 9 3 4 .  of a revision  Interest  this  year  now b e f o c u s e d  on t h e p a r l i a m e n t a r y s e s s i o n o f  Past  have  revisions  interest.  Owing  not usually  to the f a c t ,  as  the government  f o r and r e c e i v e d July  revision  into the  t o await  conference,  charters until  charters  a decennial  was d e s i r a b l e  i twished  economic  bank  most  The c h a r t e r s were  then,  system  the time  Canadian  have  15, 1933, asked  the e x i s t i n g  of view.  Formally,  and that  world  bank  of t e n years.  and monetary  revision,  of  of  systems  institution. The  of  of monetary  aroused  however,  very  that the  2.  R e p o r t o f t h e Committee on F i n a n c e and I n d u s t r y , London, June, 1931. (The M a c M i l l a n R e p o r t . ) p . 9 3 .  3.  H o u s e o f Commons Debates; F e b . 1 5 , 1 9 3 3 , p . 2 2 7 5 . S e e a l s o H o u s e o f Commons D e b a t e s , M a r c h 2 1 . 1 9 3 3 p. 3444. • '  3.  present widely  depression and  revision unusual with  i n t e r e s t on proximity  in  back  post-war  tions  be  part  the  to  date  such  the as  met  since  the  war  in  number  and  in  of  the  the  coming  This  the  a  more  the  public,  have  immediate  States,  Bank.  when  was  to  i s no  the  together  Bank  central  present banking  the  Act, bank  the  central  tendency  of  International  one  effect  Central  of  the  of  the  resolu-  that  Bank  of  Britain,  advanced  France,  A u s t r a l i a and c e n t r a l banks  scope.  In  advised  and  i n the  1920,  The  in Issue  one  192£ the  Elkin.  the  have  should  central  greatly  the  and  the  South  Conference  Banks,  of  p.  a  of  both  organization African  the  League  c e n t r a l bank  2.  Japan,  banks,  increased  saw  establishment  Central  had  coun-  Germany,  1980  Bank  Genoa  commercial  Italy,  others  year  Czecho-Slovak National  Kisch  be  interest.  r e v i s i o n of  in Brussels,  many  Great  but  4.  before,  general  would  to  4  war  united  Nations  of  support In  there  the  of  the  t h o s e who  find  i t passed  where  Before  Reserve  of  period.  established."  tries,  ever  the  Conference  which  countries  than  widespread  beyond  bank p r o t a g o n i s t s  Financial  studied  subjects  Canada.  Looking  the  economic  arousing  of  encouragement  created  caused  deeply  i s already  the  gives  more  has  by  4.  each  of  "that to  the  such  the  newly-created central  governments  located." creation  The of  Dawes P l a n Central the  many  banks  were  territory  and  Russia,  that and  interesting, to  be  of  the  Bank  Following Minister  most  of  i n New  of  Finance  to  the  South  recent,  and  in central In  surveyed  o f New  the  relationship  as  the  Reichsbank. i n some  of  American  but  the  states.  Canadians  of out  Austria  p l a n has  banking  A  since  the  most  circles,  however,  S i r O t t o H e m e ye r  banking  Hon.  Zealand,  German  of  c o u n t r i e s hewed  1930  the  the  Out  empires  to  were  seen  Russia,  the  the  for India,  h i s recommendations, of  of  of  Zealand.  England  in close  in Soviet  belonged  planned  recommended  institutions.  in certain  few  and  f o l l o w e d have  banking  development  found  have  instituted  The  stand  reorganization  in a  b a n k was  dropped.  is  that  had  Europe,  countries i n which they  central the  of  should  the  countries,  of  reserve  of  years  came  Balkan  been  banks  states  J.  system  G.  there.  Coates,  says:  "The G o v e r n m e n t i s g o i n g a h e a d w i t h a p l a n t o e s t a b l i s h a f e d e r a l r e s e r v e b a n k i n New Zealand. Our i d e a i s t h a t t h e r e s h o u l d be an E m p i r e c h a i n o f c e n t r a l b a n k s , a n d New Zealand i s going to supply her l i n k . " 6  The pictured,  extent  of  however,  5.  Willis  6.  The  and  the  growth  from  the  Beckhart.  Financial  Post,  of  central  following  banks  table  F o r e i g n Banking Toronto,  Dec.  17,  may  best  be  adapted  from  a  Systems,  p.  10.  1932.  5.  list  given  Beekhart.^ ment  i n "Foreign It will  of Kisch  be  and E l k i n  Banking seen  Systems",  that  that,  this  "The  by W i l l i s  bears  lack  and  out the s t a t e -  of a  Central  Bank  Q is  now  exceptional 1656 1694 1800 1809 1814 1816 1817 1818 1821 1828 1829 1835 1842 1859 1875 1880 1882 1883 1885 1896 1898 1905 #1912 #1914  -  1920 1920 1922 1922 1922 1922 1924 1924 1924 1925 1927 #1933  -  7.  Willis  8.  Kisch  i n advanced  Bank o f Sweden Bank o f E n g l a n d Bank o f F r a n c e Bank o f F i n l a n d N e t h e r l a n d s Bank Bank o f Norway A u s t r i a n N a t i o n a l Bank N a t i o n a l Bank o f Denmark Bank o f P o r t u g a l Bank o f Java Bank o f S p a i n N a t i o n a l Bank o f B e l g i u m N a t i o n a l Bank o f Greece Bank o f I t a l y German R e i c h s b a n k N a t i o n a l Bank o f Roumania Bank o f Japan N a t i o n a l Bank o f S e r b i a N a t i o n a l Bank o f B u l g a r i a Bank o f Uruguay N a t i o n a l Bank o f E g y p t Swiss N a t i o n a l Bank Commonwealth Bank o f A u s t r a l i a The F e d e r a l Reserve System o f the U n i t e d States C z e e h o - S l o v a k N a t i o n a l Bank S o u t h A f r i c a n R e s e r v e Bank Bank o f L a t v i a Bank o f L i t h u a n i a R e s e r v e Bank o f P e r u S t a t e Bank o f R u s s i a Bank o f D a n z i g Bank o f P o l a n d N a t i o n a l Bank o f Hungary C e n t r a l Bank o f C h i l e Bank o f E s t h o n i a B a n k o f New Z e a l a n d  and B e c k h a r t . and E l k i n .  . # Additions  countries."  by  Foreign  Central  writer.  Banking  Banks,  p.  Systems, 11.  p.  10.  6.  It  i s not without  however, banks have  that  goes been  on.  government  able  Minister  other  from  members  policy.  In  resisting here. held  Canadian  Mr. Sir Mr. Mr. Mr. Mr. Mr. Mr. Mr.  b a n k e r s o f New  found  the  a  central  and  opposition,  greater  Zealand,  against  for  central instance,  the d e c l a r e d  bank  there,  policy  and  the  t h e Hon.  Downie  the  owing  disagreement with  cabinet  of the  ministry too, the  the p a s t  that few  to  on  banking  banks  months  ten Canadian chartered  of a t t i t u d e  f o r Canada  has  At  Stewart,  and  bank  annual  be  b e e n made  very  has the  a unit  in  organized  m e e t i n g s have  banks  and  these  meetings a  towards the p r o p o s a l  of  monetary  a p p e a r t o be  a central  Bankers' Association.  J . A.  reputable  of Finance,  the proposal  declaration bank  to  and  t o w a r d s more  i n protest  Canada,  During by  The  united  the  resigned  the march  powerful  by  been  the  for a  public central  by:  McLeod  President of Canadian Bankers' A s s o c i a t i o n Charles Gordon P r e s i d e n t of t h e Bank of M o n t r e a l M. W. W i l s o n G e n e r a l Manager, R o y a l Bank o f Canada S. H. L o g a n G e n e r a l M a n a g e r , C a n a d i a n B a n k o f Commerce J . A. McLeod G e n e r a l Manager, Bank of Nova Scotia A. E . P h i p p s G e n e r a l Manager, I m p e r i a l Bank o f Canada H. B. H e n w o o d G e n e r a l Manager, Bank of T o r o n t o C. A . B o g e r t G e n e r a l M a n a g e r , The D o m i n i o n Bank C. A . R o y G e n e r a l Manager, The P r o v i n c i a l Bank o f Canada  7.  Mr.  Beaudry  Leman  General It the  will  above  list  expression bank  by  bankers  of  the  stern  that  opinion  above  were  exception against  and  strong  on  the  grounds  that  present  banking  system  be  efficacy danger  of  from  Canada, w h i c h a  the  political debtor  could  central  bank  could  exists;  that  the  ease  have  i n the  way  we of  "There  not  not  cost  of  i s no  practical  the  Bank  need  purposes  of  any  be Act  a  such  the to  of sugges-  such  to  a  disturb  efficiency, doubt  that  no  as  there  in a  to  would  country  money  like  market, a  more  than  already  credit  burdensome; a l l that  that  c e n t r a l bank  in  for  any in  the  Gordon, instance,  Canada.  already  in  i s needed  S i r Charles says,  agency  clear,  that  Montreal,  an  ten  adequately;  machinery. of  to  i s grave  has  the  i s one  dangerous  and  this  personal  object  f a c t o r ; that  function  Finance  i s not  generally;  country  would  both,  i t s proven  there  create  central banking  President  that  c e n t r a l banks  is a  c e n t r a l bank  with  own  in  definite  of  Whether  expressed  be  no  their  They  i t would  was  meeting  opposition  c e n t r a l bank.  stability;  annual  or  represented  There  Borden.  attitude  bank  the  the  the  a  and  at  Hationale  bank n o t  (Canada).  opinions,  of  security,  only  expressing  tion  the  Canadian  Canadienne  S i r Robert  "official"  warning  the  given  president,  or  witnout  noted  Banque  is Barclay's  listed  opinions, but  be  Manager,  For a l l  e x i s t s under  the  8.  "Finance  A c t , which  formed  i t s purpose."  of  the Royal  Bank  f o r eighteen 9  M r . M.  o f Canada,  years  W.  has admirably p e r -  Wilson,  expresses  General  himself  Manager  as f o l l o w s :  "I have f r e q u e n t l y s a i d , and s t i l l b e l i e v e , t h a t the b a n k i n g s y s t e m o f Canada a d e q u a t e l y serves the needs o f t h i s c o u n t r y I confess a reluctance to t i n k e r with our f i n a n c i a l machinery i n a time l i k e t h i s . " 1 0 The A.  P r e s i d e n t o f the Canadian Bankers' McLeod,  says  A s s o c i a t i o n , Mr. J .  i n part:  "I have, perhaps, s a i d e n o u g h t o make i t c l e a r that the p r o j e c t e d establishment of a c e n t r a l b a n k i n C a n a d a r a i s e s some e x c e e d i n g l y d i f f i c u l t problems, and i s n o t w i t h o u t elements o f d a n g e r . I t i s n o t my i n t e n t i o n ( n o r w o u l d y o u w i s h me t o do s o ) t o t a k e a p o s i t i o n o n t h i s g r e a t q u e s t i o n a t t h e moment. N e v e r t h e l e s s , because t h e p r o j e c t i s surrounded w i t h such d i f f i c u l t i e s , you w i l l a g r e e w i t h me t h a t t h e t i m e h a s come w h e n , i n n o c o n t r o v e r s i a l s p i r i t , t h e b a n k e r s s h o u l d make t h e i r v i e w s known t o t h e p u b l i c . " 1 1 Thus both in and  we  sides  Canada must  expressions  of t h e argument have  come  command  numerable  from  of opinion  respect that  I f we  Daily  magazines,  Province,  supporting  to central  have  great  add t o these  w r i t t e n by newspaper  to popular  The Vancouver  with  sources  attention.  articles  contributors  9.  see t h a t  editors,  weight the  i n -  and b y  to the " f i n a n c i a l  Vancouver,  banking  page",  B . C . , D e c . 5,  193E. 10.  The V a n c o u v e r  Sun, Vancouver  B.C.,  J a n . 12, 1 9 3 3 .  11.  Mr. J . A. McLeod, P r e s i d e n t i a l a d d r e s s t o meeting of Canadian Bankers' A s s o c i a t i o n , Nov. 10, 1932 -- p r i v a t e copy.  annual Toronto^  9.  etc., to  we  weigh  assuredly and  nave  consider."  need  to  "read  not  to believe  but  10.  Chapter  The  It a  i s essential,  central  bank  impartially, what  such  are.  so-called  There  banks  of England  national  banks  independent  such  Bank  of A u s t r a l i a . or f u l l y  i n a broad  w i t h the  countries, banks.  States, f o rinstance,  have  no more  truly  say, " N a t i o n a l B i s c u i t s " , Company". i n that  o f these  they  o f the g o v e r n m e n t ,  sense  that  they  o f Sweden, Whether  g e n e r a l way,  have  such  a  owned as the  Others are are true Board  state  of the  a n d t h e Common-  independent  state-controlled,  or  On t h e o t h e r  are privately  as the F e d e r a l Reserve  wealth  may,  confused  and t h e German R e i c h s b a n k .  States, the Riksbank  bank  that  Some  United  government  i t s chief functions  of various  are n a t i o n a l  i n the a d d i t i o n a l  organizations,  conception of  n o t be  Manufacturing  banks  and considered"  way a s o r d i n a r y p r i v a t e  than,  influence.  completely  i t must  "national"  " N a t i o n a l Waste a l lcentral  an informed  i n the United  significance  nation-wide  Bank  place  Bank:.  i f the question of  "weighed  i s and what  "national"  t h e name  national  have  i n t h e same  a r e many  bearing  and  should  that  i s t o be  an i n s t i t u t i o n  functioning  hand  we  of a Central  therefore,  i n Canada  I n the f i r s t  many  the  General Functions  £.  however,  be r e g a r d e d  of the a  central  as  playing  11  three  main  r6les--a  a'^eople's" The from a  an  amount bank  as a  other and It  Though  business rule  banks.  other  Just  deposit  their  does n o t  ordinary  concentration  credit  mercial  banks  may  cheques  i f the  by  settle  upon  of cash  i f t h e y were  central over  bank  acting their  their  as  clearing  reserve  balances  bank  store-  needed  by  the  efficient  immobilized  able  in  house  The  f o r the  com-  agency.  balances  is  to  system.  service  house  public. the  central  i s t o be  a clearing  banks  centralization  the b a n k i n g  performs a great  the  central  f o r more  Such  with  of the commercial  i n one  makes  o f banks.  central  corporations  of reserves  hence  than  control  also  reserves  volume  and  reserves  necessary  bank  banks  total  o f a number  central  cash  the  are to  so t h e  o f the  certain  the g e n e r a l  banks  bank,  essentially  the commercial  than  as t h o s e  bank  a  competition  their  with  system  exercise  into  rather  banks  do  the p u b l i c ,  funds  banking  hands  with  banks  and  whole  also  bank,  central  i t i s  individuals  the  the  central  a  as p r i v a t e  reduces  of these  is that  customers are  houses  house  use  some  enter  Its chief  the depository This  bank  directly  financial  i s to the  banks.  a government's  which distinguishes  commercial  bank.  people.  is  feature  ordinary  of  bank,  bank.  chief  bankers'  bankers'  by  i n the central  These  drawing bank.  12.  This one as  largely bank  eliminates  to another  many p r i v a t e  the  central  too,  may  against may  Another  loans  cash  bonds, his  When  he may,  o r good  commercial  paper  loanable  rediscounted  i s largely  A acting  system leading  "MacMillan 193L:  securities. i s that  individual  gets  short  o f exchange,  take  f o r a cash  of  of  to p o s s e s s these  loan.  to  In the  overloaded  with  and has reached i t s  t o the c e n t r a l  bank  Finally,  f o r the solvency  function  of a central bank.  of t h e government's  government  bank  and have  the  central  o f t h e whole  of the country.  as the government's  pository  banks  bank  f o r currency.  responsible  Loans,  t o commercial  bank becomes  go  just  central  or securities, i t may  banks.  enough  from  so does  a s an o r d i n a r y  i s fortunate  commercial  capacity,  paper  banking  The  bank  bank a s c o l l a t e r a l s e c u r i t y when a  bank  t o member  of a  or b i l l s  Again,  on s a t i s f a c t o r y  a private  i f he  notes  same way,  its  function  cash  t o the p u b l i c ,  just  to individuals  rediscounting. ready  currency  collateral,  fundamental  protection.  notes  by t h e c e n t r a l  deposited  of transferring  police  issue  issue  b e made  issue  under  banks  bank  the cost  Usually  funds  i s one o f i t s c h i e f  Committee"  of B r i t i s h  bank  today  i s that  i t i s t h e de-  and o f i t s g o l d customers.  financial  of  reserves.  The  experts  said i n  13  " I n p r a c t i c e the t a s k s w h i c h have been imposed u p o n t h e c e n t r a l b a n k make i t i m p e r a t i v e t h a t i t s h o u l d h o l d the a c c o u n t of the government, f o r the f i n a n c i a l o p e r a t i o n s of the government a r e conducted on a s c a l e so g r e a t a s s e r i o u s l y t o d e r a n g e t h e money m a r k e t u n l e s s s p e c i a l m e a s u r e s a r e t a k e n to c o u n t e r a c t t h e i n c o n v e n i e n c e s w h i c h r e s u l t from the i n f l o w of revenue or the temporary e a s i n e s s w h i c h r e s u l t s f r o m i n t e r e s t and d i v i d e n d payments. T h i s t a s k ought to d e v o l v e upon the c e n t r a l bank i n v i r t u e o f i t s g e n e r a l f u n c t i o n a s g u a r d i a n o f t h e money m a r k e t , a n d d o e s i n f a c t d e v o l v e u p o n i t when i t c a r r i e s t h e G o v e r n m e n t account." 1 2  The  central  bank  also  ment,  receiving  times  of  as  intermediary  an  temporary  Department be  ready  payments  of  to  large  which  Speaking  and  to  Beckhart  of  and  smooth the and  payments,  agent  short  i n many  of  term  At  banks  loans  or  Commonwealth Bank  in  the  i t must  international--  "transfer  would  govern-  acting  between  a l l times  national the  the  o t h e r ways  relationship  involve  private the  fiscal  business.  seriously few  the  advancing  shortage,  w h i c h may  arrange.  funds,  Finance  make  transactions  Willis  tax  becomes  be of  problem"--  prepared  to  Australia,  say:  "....some r e f e r e n c e s h o u l d be made t o t h e war services i t rendered. More t h a n a n y t h i n g e l s e t h e s e s e r v i c e s have g i v e n the i n s t i t u t i o n i t s p r e s e n t a u t h o r i t y and h i g h p l a c e i n the mechanism of A u s t r a l i a banking the a r r a n g e m e n t s i t made f o r t h e r a i s i n g o f w a r loans i n A u s t r a l i a , a country hitherto quite unacquainted w i t h the f l o t a t i o n of large security issues."^  18.  R e p o r t of the London, June,  13.  Willis  and  Committee on F i n a n c e and I n d u s t r y , 1931. (The M a c M i l l a n R e p o r t ) , p . 16.  Beckhart.  F o r e i g n Banking  Systems,  p.  87  14.  Similarly, United  States  consider which  that  brought  1914.  Then  instead at  various  when  and a f t e r  i t was  an e x c e e d i n g l y  the F e d e r a l  again,  t h e war,  Reserve  informed  happy  system  may  where  often  the duty  into  persons  existence i n bank  the  knowledge  is required.  of i s s u i n g  the l e g a l  as p r e v i o u s l y mentioned,  o f the  circumstance  represent  the e x p e r t  c o n d i t i o n of the country  government  operations  r e p r e s e n t a t i v e s of the c e n t r a l  conferences  the country,  In  financial  during  i t assumes  ment's  t h e huge  o f the government,  financial  of  remembering  country of the  Then, t o o ,  tender  i t performs  notes a  service.  addition bank,  to being  however,  regarded  b y many  as a  not  just  a privilege,  and  serious  out  that  a bankers'  the c e n t r a l "people's"  many  people  and a  bank  i s coming  bank.  I t s vast  b u t i s bound  responsibilities.  bank  up w i t h  Willis  heavy  governt o be power i s burdens  and Beckhart  point  are of the o p i n i o n :  " . . . . t h a t a c e n t r a l b a n k s h o u l d be a t h a n d a s a mechanism f o r c o n t r o l l i n g and d i r e c t i n g movements o f p r i c e s , f o r f o r c i n g o t h e r ( n o n c e n t r a l ) banks t o a c c e p t the o r d e r s o f t h e g o v e r n m e n t , and t o c o o p e r a t e w i t h i t i n c a r r y i n g out i t s p r o j e c t s , and f o r c o n t r o l l i n g t h e money m a r k e t s i t u a t i o n o n b e h a l f o f government o p e r a t i o n s . I t h a s t h u s come about that the advocacy of c e n t r a l banking and t h e e f f o r t t o e n l a r g e i t s b r e a d t h and p o w e r s h a s t a k e n s h a p e a s a " s o c i a l " movem e n t . "14  14.  Willis  and B e c k h a r t .  Foreign  Banking  Systems,  p. 11.  15.  With  this  "social"  central  bank m a i n t a i n  a  function  prime  be v e s t e d  cising  i t s powers rather  profit  that  in a  than  of this  and t h a t  i n the i n t e r e s t s having  that  of a  function  institution  of the p e o p l e  i t operated  i n mind  advocates  o f money a n d c r e d i t i s  state-controlled  f o r the shareholders  something  i n mind,  control  o f government,  should  whole  function  exer-  as a  i n the p u r s u i t  of a p r i v a t e  of  institution.  the "MacMillan  With  Committee"  remarks: " I t f o l l o w s t h a t the f u n c t i o n s o f a c e n t r a l bank and t h e o b l i g a t i o n s r e s t i n g u p o n i t a r e o f a very s p e c i a l character, c a l l i n g f o r s k i l l , experience and judgment o f a k i n d d i f f e r e n t f r o m t h o s e w h i c h must be p o s s e s s e d b y c o m m e r c i a l bankers. No b a n k e r c a n n e g l e c t t h e r u l e s o f p r u d e n c e and o f s a f e t y , b u t the o b j e c t o f a c o m m e r c i a l b a n k e r i s t o make a p r o f i t . The s i t u a t i o n o f t h e C e n t r a l Bank i s s u c h t h a t i t must o f t e n u n d e r t a k e o p e r a t i o n s w h i c h a r e n o t only n o t p r o f i t a b l e , but r e s u l t i n losses-.. I t s aim must be the s a f e t y o f t h e f i n a n c i a l system and t h e e c o n o m i c w e l f a r e of the country."15 Of  similar  opinion  is a  Canadian  W.  Plumptre,  lecturer  i n money  of  Toronto.  A  of a r t i c l e s  Financial bank  f o r Canada  Canadian  15.  Post  series late  and p r i c e s  by him appeared  of foreign  Expressing  Mr. A.  himself  F.  at the University  i n 1932 on t h e p r o b l e m  i n the l i g h t  conditions.  authority,  of a  i n The  central  experience i n favor  and o f of  such  R e p o r t o f t h e Committee on F i n a n c e and Industry, London, June, 1931. (The M a c M i l l a n R e p o r t . ) p . 16  16.  a to  bank be  f o r C a n a d a he derived  suggested central  from  above.  bank,  functions  would  sixth  object  so  he  the  he  are  indicates make  defines  the as  basis  function  enumerating  a l l of which  really  on  i t s "social" After  above,  which  does  gain  the  i n the  i n the  i t i s the  worth  the  benefits sense  s i x objects  included that  of  of  a  outline  sixth  cost.  of  object This  follows:  "To e n s u r e t h a t c r e d i t a n d n o t e i s s u e w e r e c o n t r o l l e d , n o t f o r p r i v a t e p r o f i t but i n t h e public interest."16  16.  Plumptre,  A.  F.  W.  A  Central  Bank f o r C a n a d a ,  p.  21.  17.  Chapter  The  Control  o f Money  the  If, central seem  then, banking  this  3.  and C r e d i t and  Central  "social"  generally  Bank.  function  as the M a c M i l l a n  to i n d i c a t e , a n d i f i n C a n a d a ,  the  all-important  Mr.  Plumptre  should here,  be  thoroughly  f o r instance,  function whole  feature  declares,  may  question  paragraphs briefly  relative  analyzed. a s t o how  to a central necessary  Nothing this  Committee  h a s y e t been  supposedly  controversial.  an attempt w i l l  the p o s s i b i l i t i e s  b e made,  In  succeeding to  "management" q u e s t i o n ,  the  of knowledge  thus  gained  b e made  t h e s i t u a t i o n i n Canada,  then  present, If  relative control  telligently objectives we  think  into  t o t h e same  o f money  i n Canada of such  o f two m a i n  the f i r s t  purposes,  a  detailed  and i n  examination past  and  problem.  and c r e d i t  c o n t r o l be  explore  o f money a n d c r e d i t  and the s o - c a l l e d  will  said  Yet the  generally light  as  desirable  therefore,  of c o n t r o l  bank,  that i t  out by a c e n t r a l bank.  i s highly  would  i n particular, i t i s  i t i s highly  be c a r r i e d  i s as i m p o r t a n t i n  i s t o be  necessity  clearly  exercised i n -  i s that the  defined.  (a) t h e c o n t r o l  In  general  of f o r e i g n  18.  exchange  r a t e s and  (b) t h e c o n t r o l  of the general  price  level. For  the sake  litating we  international  usually  times,  of course,  Zealand  certain export  a country  recently New  of a g r i c u l t u r a l  hand,  this  i fa rise  be s m a l l  and  Canada  painful  Importers debts  per  i n the price  during  the p a s t  experience  and  with  with  continuous  had t o pay a premium cent,  of f o r e i g n  on A m e r i c a n  should  these  between  this  had very  who have  been  real  exchange. have had been  ten per cent,  but have  ends  prices  con-  i n exchange r a t e s .  of from  dollars,  exports.  money.  have  funds,  the  that de-  i n home  a disparity  or other  with  Both  i f the r i s e  we  achieve  of the depression  an u n c o n t r o l l e d  changes  to  these  Zealand.  year  as when  prices  exporters, as w e l l as those  to pay i n American  fronted have  w i t h i n New  enough t o l e a v e  and the r i s e In  encourage  At  policy,  such  and she hoped  d e p r e c i a t i o n , the burdens  be a t t a i n e d i n a m e a s u r e  of  concerned  i n internal  might  exchange.  i t sexchange  products,  be r e d i s t r i b u t e d  rise  disparity,  i s vitally  would  should  foreign  as a matter  o f h e r c u r r e n c y would  the o t h e r  accompany  may,  manipulated  Zealand  of faci-  transactions i n general,  stable  c r e a t e an exchange  ends.  preciation On  financial  desire reasonably  deliberately New  o f commerce and f o r the p u r p o s e  They  to twenty  able  to  19.  obtain to  E n g l i s h pounds  twenty p e r cent.  not  enjoyed  at a discount  of from  Canadian importers  rate  the United  have  not had the advantages of a p a r exchange w i t h  i s g e n e r a l l y admitted  made a t t h e I m p e r i a l summer  were  change  handicaps.  certainty that  largely  great been  Worst  maintaining  of a l l ,  'gold'  could  be done.  preciated  strictly  Others  the " s t e r l i n g  should  have  tied have  price  standard  bloc".  o u r money fixed  indexes.  In other  a  Still  others  neither to gold  standard Since  i n 1926 h e r o f f i c i a l  thus  that  should  assert nor to  returned  monetary  policy  this  and  o f o u r own b a s e d  Canada  of  have de-  of s t e r l i n g we  have  been our  and those  should  words  authority  should  have  of course,  to t h e l e v e l  been  i s room f o r  standard,  t h a t we  by ex-  to have  policy  our c u r r e n c y  maintain  i t there.  joined  modity  between  our currency  should  to the gold  last  the un-  There  i t should  countries—assuming,  stabilized  was  seems  at a l l .  that  sterling.  arrangements  two m o n t h s  as t o what  believe  exporters  a t Ottawa  perhaps,  The t r o u b l e  any p o l i c y  a parity  other  within  and  central,responsible, directing  Many  t o adhere  the trade  Conference  invalidated  or pursuing  adopted.  that  Economic  difference of opinion  policy  have  now  of the r a t e s .  t h e r e was no  planning  but  and o u r m a n u f a c t u r e r s  have  at par  with  It  cent,  and debtors  the advantages o f an exchange States,  t e n per  should have  that  we  sterling, o n com-  to the g o l d has been t h e  20.  first by  above—that  adherence to the gold  was be  one o u t l i n e d  the wisest  policy,  standard.  and  f o r a central  i s , therefore,  successful  other words,  while  that  bank)  r a n i n the opposite  instability  i n our exchange.  the control  upon it  o f money  a monetary  i s , as  A c t (our  unlimited  inflation,  opposed  gold  will  to t h e  standard.  In  o u r p o l i c y r a n i n one d i r e c t i o n o u r  "machinery"  in  point  principle,  of the orthodox  h e r exchange  or n o t t h i s  the Finance  permits  i n i t s very  functioning  Whether  the unfortunate  shown i n a l a t e r s e c t i o n ,  substitute  of s t a b i l i z i n g  direction, with  Our f i r s t  and c r e d i t ,  p o l i c y and then  resultant  objective,  should  be  to  then, determine  " s t i c k " to. i t a n d s e e  that  i s c a r r i e d out. So m u c h  Price  control,  justices against  on t h e o t h e r  between loss  regularity booms  f o r the objectives  debtors  through  and d e p r e s s i o n s ;  a t the expense  phenomena;  avoiding  generally,  etc.  prices  are high that  of another  guarding  through  the  between  o f income  from  monetary  disturbance  are not necessarily  I t i s the change  the suffering  savings  increasing  the extremes  and  control.  at preventing i n -  one c l a s s  social friction  prices.  exchange  depreciation;  lessening  Low p r i c e s  causes  aims  and c r e d i t o r s ;  preventing  increasing  Neither  hand,  currency  o f employment;  of foreign  attending  harmful.  i n the level business  of  depressions and  loss  price of  and  peaks  Having control to  see  Let  and  common  i f their then,  foreign  consider  has  generally  stability  strictly  to  coinage  the  smoothing  the  objectives  i t will  gain  objective  history.  next and  possibilities  and  of  of  of  there  between  gold  in  of  be  of  out  monetary  necessary  i f so,  how.  control  of  "management".  was  defined  tender;  of  the  number  of  money  import  gold,  World  was  by  was  free to  and  in or  untrammelled. There  of units  was of  no  a  gold  (unlimited)  money  back  export,  as  ensure  exchange  and  standard  this  a l l paper  gold  to  most  statute  were used of  way  War  the  fineness;  there  of gold  "automatic". The  was  specified  of  the  best  adhere  system whereby  freedom  form  and  movement as  a  the  i s to  Before  convertibility  the  arts;  regarded  of  legal  free  a  value  that  exchange  standard.  reserves  par;  industrial  foreign  of  gold  gold; and  considered  maintained  at  national  in  made f u l l  restricted  was  the  is possible,  been  gold  account  weight  u n i t was  gold  the  countries  of  fixed  be  The  price  be  interest,  i n e q u a l i t y of  groups.  would  our  might  attainment  maintain  unit  of  is  exchange.  It  'gold'  then,  valleys  s t a t e d what  there  economic  i n Canada,  i n the  us,  because  between v a r i o u s  control  the  booms,  and  uninto  forth  the the  inter-  This  system  political  purchasing  power  22.  depended  upon  the productiveness  extent  t o which  change  r a t e s were kept  fact  that  points,  i f they  gold  national  gold  was u s e d  above,  or s e l l i n g  foreign  system  that had been  i n force  below,  I t was  o f Canada f o r t h e s i x t y  1914,  and a g a i n  from  under  the Finance  ;  standard.  Whether  Canada  then,  here.  What  system  used,  Since  interests  gold  weight  the Great  having coinage  a more  of Canada  years  the best  operations  of t h e g o l d system f o r n o t be  i s simply  that  such  d i d Canadian  or  preceding  will  T h u s we  a  argued  was t h e  and most  unit  the gold  orthodox  gold  i s usually  the gold  other  speak  standard  of gold  The monetary u n i t  standard  but t h i s  with  of g o l d  however,  standards. such  of gold, unit  "automatic"  now,  a way  War,  changes.  having  domestic  this  operate.  bullion  country  u s now  and i n such  u n d e r g o n e many or  o r n o t t h a t was  inter-  instead of  u s o f f t h e edge  or would be t h e b e s t  exchange r a t e s  of the  1916 t o t h e e n d o f 1928 when  A c t pushed  Ex-  the specie  i n the province  i n ,the D o m i n i o n  arts.  to effect  o f payments  exchange.  and t h e  by r e a s o n  or imported  of balances  buying  stable  or f e l l  be e x p o r t e d  adjustment  mines  i n the i n d u s t r i a l  moderately  rose  would  of the gold  exchange of a  i s s t i l l  defined as a  i s derived  by l i n k i n g  unit  o f some  standard.  other  has  fixed the  country  Hence u n l i m i t e d  prohibited, convertibility  of  currency  into  gold  i s abandoned,  stricted,  et cetera.  payments,  the monetary  central  bank  tariffs, ments  policies,  quotas,  nature  MacMillan  gold  arbitrarily  fixed  duties,  trade  can be  saying,  said  rates,  and a l lt h e other  standard.  debt  people,  exchange  have r a d i c a l l y  of the g o l d  i sre-  r e p a r a t i o n s and war h a b i t s of a  Committee  standard  again,  of g o l d  and b a n k i n g  dumping  to international  "automatic" the  Then,  export  impedi-  modified the  T h e r e f o r e we  "The s e n s e  t o be a u t o m a t i c  find  i n which the i s thus  very  1 7 limited." that  Hence  x  under  t h e same  the g o l d  management, cise  standard  at which  of d i s c r e t i o n  ment"."-^ B r . Gustav and of  exchange  rates  our t r o u b l e  i t should and  have  past,  therefore,  we  then,  and must  taken  taken,  and  remain  i n a word,  b e e n managed  Whatever  17.  be  i s due t o t h e f a c t  exchange  i tf o r granted  Cassel not only maintains  managed.19  What,  t o be  judgment,  badly  foreign  taxes  t h e r e has been,  but the action  moment  sphere  committee  cannot  may now  have  but that  that been  they  the prei n the  with  are the p o s s i b i l i t i e s  t h e case  Ibid.  19.  The C r i s i s  i n the World's Monetary  i n the of  system.  o f management  System,  deal  been  R e p o r t o f t h e Committee on F i n a n c e and I n d u s t r y , June, 1931. (The M a c M i l l a n Report.) p. 2 1 .  18.  money  a great  have  "automatic"  "manage-  that  look f o r s t a b i l i t y  i n any s o - c a l l e d  be,  or London,  Chapter  I.  24.  control  of  exchange?  The  MacMillan  Committee  speaks  of:  "Certain technical devices for directly influenc i n g the f o r e i g n exchanges, namely, s a l e s or p u r c h a s e s of f o r e i g n "balances ( i . e . s o - c a l l e d "gold-exchange" methods), d e a l i n g s i n f o r e i g n exchange, and s m a l l v a r i a t i o n s i n the Bank's buying price f o r gold."20 Early  i n the  determined and  the  heavy were  course  to  sold,  the  heavy  the  rate  led  to  i n New so  Then  the  British  ties  i n England  the when  sterling  Britain the  was  going  British  Fund"  to be  20•  lacking  f e l l  kept  by  as  by  to  until  after  o f f the  gold  United  the  the  name  between  the  pound  degree  of  Then lowered  from States.  American  large  loan i n  pound  at  an  the  success  R e p o r t of t h e C o m m i t t e e on F i n a n c e L o n d o n , J u n e . 1931, (The M a c M i l l a n S e c . 356, (4).  securithe  $4.76.  More  There  recently a  result  i n September, "Exchange  suggests, and  York.  States  as  a  securities  United  York  sterling  months  shipped  war.  i n New  established  the  be  i n the  standard  as  the  i n New  purchasing  "peg"  rapidly  to  rate  Government  between  few  foreign  could not  dropped  used,  first  as  the  further  British  exchange  negotiating a  able  Government  fluctuations is  Gold  the  the  exchange  Government, and  of  i n England,  York.  S t a t e s , was  pound  rate  of goods from  sterling  War  During  a high  imports  Great  the  dollar.  f o r funds  England,  United  the  stabilize  American  demand  of  1931,  Equalization  to moderate dollar.  of  the  Information  or f a i l u r e  of  the  and Industry, Report), p. 152,  25.  plan,  but a Canadian  predicts  banker,  the f a i l u r e  of an  cost  upwards  that  the fluctuations  fund  will  is  change Dr.  will  this  Cassel,  Affairs,  s p e a k i n g to t h e Royal  struction",  i n September,  this  have  banker  means  mitigated,  or the  not say.  judgment  to control to note  t o be named,  will  he does  stage to pass  It i s interesting  London,  which  been  or both,  or otherwise, of attempts rates.  not wish  Yi/hether  n o t have  n o t show a p r o f i t , at  does  "experiment  of $150,000,000".  not our purpose  wisdom,  who  It  upon t h e  foreign  ex-  here, however,  Institute  of  that  International  1932, on "Monetary  Recon-  said:  " l o r t h e s e r e a s o n s I v e r y much d o u b t t h e w i s d o m of any endeavour t o c o n t r o l f o r e i g n exchange. Y o u must a l w a y s remember t h a t t o c o n t r o l f o r e i g n exchange i s to c o n t r o l t h e r e l a t i o n between t h e v a l u e o f y o u r own c u r r e n c y a n d t h e v a l u e o f some other currency. Y o u may b e t h e m a s t e r o f y o u r own c u r r e n c y , b u t y o u c a n n o t b e t h e m a s t e r o f the o t h e r c u r r e n c y . " - ^ l On money  t h e o t h e r hand  and p r i c e s  writings  Mr. A . F . W.  Plumptre,  at Toronto University,  i n support  of a c e n t r a l  bank  lecturer  on  i n h i s recent  f o r Canada  says:  " T h e r e f o r e , a proposed Canadian c e n t r a l bank s h o u l d be t h o u g h t of n o t s o much a s a bank o f note i s s u e and F i n a n c e A c t r e d i s c o u n t , b u t g r a t h e r a s a bank o f exchange r a t e c o n t r o l . " ?  21.  Cassel, Dr. Gustav. 1932, p . 6 6 5 .  22.  Plumptre,  A . F . W.  International  A  Central  Affairs,  September,  Bank f o r Canada,  p. 20.  26.  It  can scarcely  be s a i d  on e v i d e n c e d i s c e r n i b l e  C a n a d a h a s made u p h e r o f f i c i a l of  control  or l a i s s e z - f a i r e  Generally  she has been  existence  of such  government the  advisability  The  idea  her  own e x c h a n g e  was  rates  and thus  Canadian  money.  proposal  was u n w i s e ,  This  t o ease  with  prevent  bankers  a foreign  the l a t t e r  from  evidently  consider market.  t h e r e b y be e n a b l e d  but another  of the  to  exchange  other countries  The meeting  even  rates.  i n 1931, however, t h e  o f Cana.dian  Canada might  merits  t o exchange  unconscious  Late  of organizing  that  on t h e r e l a t i v e  respect  blissfully  a meeting  New Y o r k  was  with  a problem.  called  mind  that  t o make  independent  of  depreciating  decided that the  p l a n was d e c i d e d  t h e p r e s s u r e on t h e exchange  upon.  rate  by p r e -  24 venting  the export  attempt  was made  securities abroad  of Canadian  t o persuade  funds were  control  of the exchange  retained  of half-hearted  towards  control  Canadian  To a c e r t a i n  foreign  weeks  Canadians  and not to r e c a l l  by purchase.  capital.  seem  effort.  unofficial  not t o buy securities  extent,  i n Canada.  was g i v e n  An  foreign from  therefore,  This  attempt at  up, however,  after  At present o f f i c i a l  t o be l i m i t e d  to exhortations  a few efforts  on t h e  23.  The M a i l and E m p i r e , T o r o n t o , December 16, 1 9 3 1 — q u o t e d b y C. A . C u r t i s , i n " T h e C a n a d i a n Monetary Situation".  24.  The M a i l and Empire, T o r o n t o , December q u o t e d a g a i n b y C. A . C u r t i s .  22, 1 9 3 1 —  27.  virtues that  of  confidence  the minds tinue for  to  left  " s o u n d " money w i t h  i n our  credit  foreigners an  and  attribute  pride,  imagination.  In  the  past  the  banks  exchange 1914  such  but  there  rates  with  the  banks  authoritative b a n k s was  has  object  to-day  the  to  1914  with  of  each  the  of  the  the  grounds  policy  of  Finance  hands  interest  four  over Act  the their  responsibility  Department  the  of  exercised  of  Finance,  or  discount  exchange.  Neither  control.  of  the  con-  exercise control  of  of r e g u l a t i n g  will  in  conveniently  been  they  the  such  mind,  i n the  that  hope  instilled  faith  being  passage  Since  practise  and  to  entirely  apparent  thereby  have  manipulation  spokesman  asked  faith  the  rested  b e e n no  the  and  the  Canadian  evidence  respect.  control has  i s no  "be  government  were  i n this  such  the  matters  powers for  or  Until  there  the  i t seems n o t  rates.  but  will  fortitude  of  soundness,  the  banks,  do  or  to  either  in  of be  such  our  "proud"  of  Recently our  an  largest  question:  "Does y o u r bank, a l o n g w i t h o t h e r b a n k s , v a r y i n t e r e s t or d i s c o u n t r a t e s w i t h the p u r p o s e of r e g u l a t i n g f o r e i g n exchange?" With "No".  one  slight  One  m o d i f i c a t i o n the  a n s w e r went  on  to  show  r e g u l a t i o n would  be  Canadian  g e n e r a l l y seem  bankers  fruitless  a n s w e r was  and to  that  such  possibly see  an  unqualified,  an  attempt  harmful.  great  at  Indeed  difficulties  28.  and In  little the  a  of  Financial  pearing of  hope  a  Post  number  central  of  bank,  Banker",  and  Canadian  Bankers'  cally,  is  success  who  of  S 5  in  attempts  Toronto  articles in by  one  claims  who  to  to  exchange  recently  have  opposition  signs  express  Association.  devoted  at  to  himself, the  One  views  whole  discouragement  of  control.  "been  the  suggestion  "A  Canadian  of  the  article,  the  ap-  idea  practi-  of  exchange  control. Some o f foreign the or  the  central  should  be  considered.  of  a  protective  perpetuate  a  condition  levels.  control  In  protects  familiar  objections  industries  reduce  foreign  because  t h e y may  specialization, of  exchange  are  demand  materials.  volume  to  be  to  the  is  by  the  reducing at  and  the  unit  a  cost  probably  be  force  Toronto,  total of  to  exports  7,  and  effective  payment  in  and  securing  reduces  The resist  1933.  the  restrictions  transacting  increased.  January  international exchange  of  trade  create  most  the  disadvantage  in  to  in  The  means  the  frequently  open  protection. because  placed  has  that  i t is  handicapped  of  likely  extent  industries,  reduction  Post,  It  It  dis-equilibrium  tariff  r e s t r i c t i o n s to  Financial  of  The  trade w i l l  bank c o n t r o l  tariff.  addition, certain  export  £5.  of  exchanges  effect  price  raw  effects  a  smaller  use  of  imports  29  may  exert  injure  the  If the  a  a  gold  depressing very  country  country  has  standard,  consider  that  i n f l u e n c e on that  an  and  domestic  currency  at  the  domestic  currency  will  be  value  by  scribed case,  To  overvalues  the  foreign  effect  buyers,  prevail. England  the  be  local  currency,  i s to  raise  the  are to  thus  the  the  gold  economic  policy  had  to conform.  which  she  placed  disadvantage employment  in  were  Discount  rates as  upon her  international thereby  striction.  I t does  eluded  o b t a i n i n g funds.  from  strength  are  the  fact  very  the  cause  the  so,  maintain mean  that  artificially exports rate  is usually  t h a t would  will pre-  the  instance,  i n 1925, to  she  bank  currency  to  otherwise after used  policy,  artificially  trade.  the  and  high  put  her  Depression  and  less  is fairer  than  anyone  be  Those  greatest are  that  an  likely  at  a  un-  intensified.  rate regulation not  The  may  as  of commodities  For  a guide  to  exchange as  prices  standard  of  at If  prices  impeded.  movement  valuation  exchange  to  is  This  the  the  Exports  duty  gold.  that  such  agency w i l l  legislation.  and  restrictions.  maintained  extent  relative  returned  control  with  prices  standard,  fundamental  par  restrictive  discouraged.  the  international  the  high  imposes  i t s monetary  i t s first  commodity  to  arbitrarily  whose n e e d  assured  urgent  exchange  of  demand  and  reex-  economic  accommodation i s excluded  by by  30.  the  higher  arbitrary the  rate  judgment  strongest,  often  interest  If  there  world's  operation, stock  chasing not  of i n f l u e n t i a l an  effective  exchange  rather  had  an agreed  gold  likely  estimate  t o be  Hence policies  Canada  i n terms  and  the  of g o l d ,  her p r i c e  of the  leading policy  as  of gold  exchange  h e r economic  level 'gold'  were  known, pur-  conditions  policies  States  by  countries.  to m a i n t a i n  country—the  to cause progressive  i f the  i s determined  fluctuates with  of the United  and  these  'gold'  co-  present  i t s commodity But  leading  c o n t r o l s her  and  monetary  of the  than  control i s  the  annually  t o keep  the v a l u e  of  purposes,  added  greatly.  exist.  the  i n t e r n a t i o n a l bank, i f  varying  such  weakest,  to  individuals.  power f r o m  conform,  i s subject  nationalism,  as  then,  been  mercantilism,  so used  If,  prices  Besides,  be  monetary  stable  The  a v a i l a b l e f o r monetary  could  the  The  survive.  existed  i f we  o f new  then gold  control  c e n t r a l banks w e r e w o r k i n g i n i n t e l l i g e n t  of g o l d  amount  do  may  Exchange  of i n d i v i d u a l s .  tinctured with  selfish  the  exacted.  her  have  the  United  of  to  gold States.  i n recent  depression  money  years  has  commodity  prices. V/hatever of  foreign  nothing  has  the merits  exchange been  may  or demerits be,  attempted  the f a c t i n that  of attempts i s that  connection  at  control  practically in  Canada.  31.  S h o u l d a c t i v e r e g u l a t i o n he c o n s i d e r e d should  be g i v e n t o t h e p o s s i b i l i t i e s  a r b i t r a g e , forward a regular policy imports  buying,  i n t h e f u t u r e , study-  i n the f o l l o w i n g * ^ -  the b a l a n c i n g o f the budget as  i n normal t i m e s , a normal balance  between  and e x p o r t s , d i s c o u n t r a t e r e g u l a t i o n , c e n t r a l  f o r e i g n b a l a n c e s , f o r e i g n l o a n s when n e c e s s a r y ,  bank  and r e g u l a -  t i o n o f t h e q u a n t i t y o f home c u r r e n c y and o f t h e d o m e s t i c price  level. H a v i n g now c o n s i d e r e d some o f t h e p o s s i b i l i t i e s and  methods o f f o r e i g n exchange c o n t r o l l e t us n e x t p r i c e r e g u l a t i o n i n t h e same way. subject that i s extremely T h e o r y o f Money we f i n d c r e d i t and p r i c e s . things remaining and  H e r e a g a i n we h a v e a  controversial.  expressed  consider  In the Quantity  t h e r e l a t i o n b e t w e e n money,  Stated simply this  theory i s t h a t , other  t h e same, t h e p u r c h a s i n g  power o f money  credit varies inversely with the quantity i n c i r c u l a t i o n .  I t i s now a c k n o w l e d g e d b y i t s s u p p o r t e r s t h a t many stances enter i n — s u c h as business psychology, w h i c h money i s p u t , r a p i d i t y  of c i r c u l a t i o n ,  of c o m m o d i t i e s , e t c e t e r a — t o d i s t o r t expressed  i n this  a s L i o n e l D. E d i e  E-'6»  theory.  circum-  the use t o  the quantity  the r e l a t i o n s h i p  A t l e a s t i t i s t r u e , however,  says:  l a r g e l y b a s e d o n t h e s u g g e s t i o n s o f L i o n e l D. i n "Money, Bank C r e d i t a n d P r i c e s " , p. 5 6 .  Edie  32.  " T h a t an i n c r e a s e of t h e q u a n t i t y of money r a i s e s p r i c e s , and a d i m i n u t i o n l o w e r s them, i s the most elementary p r o p o s i t i o n i n t h e t h e o r y of c u r r e n c y , a n d w i t h o u t i t we s h o u l d h a v e n o k e y t o a n y of the others."27 This between the  the  causes  prices the  the  gold  factor  has  gold that  is a  and  as  theory  standard are  the  It  should  The  monetary  have  has  most  i s of  be  tending  affect  i n the  ratio  Those  important  great  given  to  prices.  general  between  fortunes  relation  the  Among  level  of  supply  of  adhere  to  to  the  supply  of  gold.  Gold  significance  by  reason  of i t s  demand  importance,  the  the  the  c o u n t r i e s which  their  achieved  upon  international  to  tied  bearing  f u t u r e demand f o r a n d  a money b a s i s  use.  and  for gold.  standard  scarcity.  important  fluctuation  demand  of  an  quantity  for  then, of  i t is for  that  gold  unknown  monetary  consideration  available  for  purposes. go  According Kitchin  i n 1931,  necessary level  other  be  rate  hand  the the  he  27.  Edie,  28.  Kitchin,  from  of  calculations net  to maintain  would  world's  to  annual  stability  3.1  per  estimated  Lionel  D.  Joseph.  of  the to  d i d not  that  Money, The  increase  cent,  development  made by  for  Bank  the  Mr.  Joseph  of monetary  commodity  3.4 slow  per  twenty  Credit  price  cent,  down.  On  years  and  I n t e r n a t i o n a l Cold  gold  i f  the  the following  Prices,  p.  Problem,  188. p.  68.  33.  1930  the  probable  Assuming, monetary more  then, gold  lixely  net  t h a t .the  i s not  to  increase  economies  i n the  structure  of  use  credit  of can  be  1  l/2  per  cent.  e x i s t i n g a v a i l a b l e supply  great,  decrease  would  and  that  future  than  increase,  only  gold  as  a  basis  prevent  a  steady  for  of  production  is  drastic the  f a l l  super-  in  commodity  prices. It  will  bearing saving in  on has  the  credit  many  ments.  29.  On  of  to  M.  1925, the  cause in  other  standard total  Charles  area  of  the  i n the hand  banx  gold  policies,  together  growth  with  the  The  of  cheques of  so  war requirefour  years to  Perhaps  gold,  however,  payment  of  war  nationalist  absence  International  coins  contributed  The  of  i n t e r n a t i o n a l co-operation,  Charles.  the  standard. use  of  the  reserve  countries  gold  return  9  the  the  use  the  factors  tremendous  of  Rist? during  new  the  A  following  inefficient  and  of  decrease  i t s mal-distribution.  reparations,  Rist,  the  twenty  of  the  some  years.  increase  world's  found  of  vast  the  greatest  economic  the  to  greatly  around  and  owing  gold  the  degree  and  examine  i n recent  the  extension  debts  gold  to  to  the  be  of  place  According  centering  to  use  then,  generally.  countries  increased  well,  taxen  circulation  and  is  be  of  brought  Gold  any  great  about  Problem,  p.  195.  34  movements was  that  their  of the  Britain,  that  impediments listic it  place,  the  are be  have  return  above  addition as  the  saving  Gold  war  debts  a  of  the  the  Germany and  begin  with;  in central  and  Great  owing  standard  i f there  bank of  to  i n the  is  which  the  off to  have  i s , at  p r i c e s , many for  decrease  funds  nationa-  m a l - d i s t r i b u t i o n of  were f o r c e d  countries  a  reparations;  goods  drastic f a l l  gold  i t ; and  to  the  possible  generally  i s no  with  than  the  of  price the  level  gold  be . m a i n t a i n e d abandoned same  those  present  gold;  i t  time,  to  causes  situation,  will  removed.  suggested great  the  to  increase  and  responsible  In  gold  countries  i f those  be  result  f a r more  supply,  as  net  international transfers  of  i n commodity as  The  acquired  gold  such  f r e e movement  many  to  of an  huge  policies;  to  public  gold;  I f , then,  stability  cited  new  the  and  future;  to  world's  surprising that  standard. in  to  scale.  France  nations,  payments  economic  i s not  took  of  by  the  and  supply  requirements;  necessitated  unprecedented  little.  limited  production  reserve  of  other  too  a  an  States  share  had  Given  on  United  proper  consequence  in  gold  longer  that  economies  i n the could  understood necessary  in  the  use  of  above d i s c u s s i o n , be the as  made true  i f bankers function  backing  for  gold  already  there  remains  and of  notes.  the  gold  to-day.  Furthermore  35  it not to  i s n o t now get gold give  f o rnotes,  f o r notes,  desirable. of  i n reality  as such.  Yet c i t i z e n s  a n d b a n k e r s who  s t i l l  On t h i s  two eminent  used  imagine  point  economists.  i tw i l l  that  have  gold  be w e l l  S i rC e c i l  who c a n  not the  gold  backing i s t o hear  Blackett  the  views  says:  "The i d e a t h a t you keep g o l d f o r t h e purpose of making t h e i n t e r n a l c u r r e n c y of any country, or any Western country at any r a t e , c o n v e r t i b l e , i s one w h i c h o u g h t t o be e x p l o d e d r i g h t n w a y . I t w o u l d b e a t r e m e n d o u s g a i n i f we c o u l d g e t p e o p l e t o u n d e r s t a n d t h a t j u s t t h a t amount o f c u r r e n c y i s r e q u i r e d i n a c o u n t r y w h i c h i s enough t o keep p r i c e s s t a b l e . . . . . . a n d t h e amount o f g o l d t h a t i s r e q u i r e d ought n o t t o have a n y d i r e c t r e l a t i o n t o t h e amount o f c u r r e n c y that -is o u t . "The amount o f g o l d t h a t a c e n t r a l b a n k r e q u i r e s , i f we c o u l d p e r s u a d e p u b l i c o p i n i o n t o s e e t h e t r u t h , i s t h e amount t h a t w i l l make i t p e r f e c t l y s a f e f o r m e e t i n g an e x t e r n a l b a l a n c e o f payments a g a i n s t i t a t a n y g i v e n moment. T h a t o u g h t t o be the s o l e p u r p o s e i n a p e a c e f u l w o r l d f o r w h i c h a gold reserve i s k e p t — t o meet a n e x t e r n a l b a l a n c e of payments t h a t i s a g a i n s t t h a t country."30 Mr.  J . M.  Keynes  says:  "...» t h e g o l d w h i c h a c e n t r a l bank h o l d s ought t o h a v e no p a r t i c u l a r r e l a t i o n t o i t s n o t e issue t h e r i g h t c r i t e r i o n f o r t h e amount o f t h e g o l d r e s e r v e i s t h e amount o f t h e s u d d e n d e m a n d s t h a t a c o u n t r y may b e s u b j e c t t o i n t e r n a t i o n a l l y before i t c a n t a k e other measures o f regulation "31 It of  30.  gold  should  Blackett, P.  31.  i s vitally  important,  be u n d e r s t o o d .  S i rC e c i l .  then,  that  the proper  I t s misuse  had been a  The I n t e r n a t i o n a l  Gold  function leading  Problem.  179.  Keynes,  J . M.  The I n t e r n a t i o n a l  Gold  Problem,  p.  186.  36.  cause  of  the  intelligent operation, dictate  management,  gold's wise  degree  of  stability going  both  control.  of  witnesses proponents  to  cases a  makes  very  Economist  noted of  i t may  of  no  central  to  to  Bank  In  which  One  control Benjamin of  not  the  a  time  as  there of  evi-  such  that  are as  control  the  of  fact  there  bank p r i c e  Chase N a t i o n a l  by  system  Dr.  could  reasonable  advocate  regulation.  banker,  a  examine  the  popular, present  world  co-  commodities.  means  the  doubt,  our  the  of  Y/ith  prices.  well  of  prices.  degree  maintain  the  be  and  price  American  the  other  could  reforms  greater  made a g a i n s t  of  explore  opponent  i n defence of  banksof  in international  Owing p a r t l y ,  depression  i n commodity  reasonable  central  policy  on  the  a  i n terms  p r i c e s i s attempted  dence  by  value  fall  and  the  monetary  Before  of  drastic  however,  short,  of  recent  the  many  are strongest  i s that M.  City  made  Anderson, of  New  32 York. the  In h i s  bank  Goldsborough  serve  authorities  average  of  fashioned  bulletin  Bill to  commodity  o f May  because raise  doctrine" relative  1932'  i t directed  and  prices.  16,  stabilize After  to  , he  the the  attacked  Federal general  d e s c r i b i n g "the  central  bank  Re-  policy  oldhe  says:  32.  T h e C h a s e E c o n o m i c B u l l e t i n , May 16, 1932. The Goldsb o r o u g h B i l l and the Government S e c u r i t y P u r c h a s e s o f the F e d e r a l Reserve Banks.  37.  "VYhereas t h e new t h e o r y a s k s c e n t r a l b a n k s t o s t a b i l i z e the commodities market, I m a i n t a i n t h a t they have a g r e a t t a s k i n s t e a d y i n g t h e money m a r k e t . " 3 3 Then respect  he goes  on to ask what  t o commodity  prices,  central  and  banks  c a n do  with  answers:  " F i r s t t h e y can i n f l u e n c e commodity p r i c e s o n l y t h r o u g h t h e i r i n f l u e n c e on t h e money a n d c a p i t a l markets. S e c o n d , c e n t r a l bank p o l i c y i s o n l y one o f many f a c t o r s g o v e r n i n g money r a t e s a n d g o v e r n i n g t h e v o l u m e o f money a n d c a p i t a l a v a i l a b l e i n t h e money and c a p i t a l m a r k e t s . "There a r e f i v e main s o u r c e s o f c a p i t a l : (1) Consumers' t h r i f t , (2) The t u r n i n g back o f b u s i n e s s p r o f i t s , t o i n d u s t r y and t r a d e , (3) T a x a t i o n , when t h e p r o c e e d s o f t h e t a x e s a r e u s e d f o r c a p i t a l p u r p o s e s and v e r y especially the p u r p o s e of r e d u c i n g p u b l i c d e b t , (4) D i r e c t c a p i t a l i z a t i o n , a s when a f a r m e r spends h i s s p a r e t i m e i n b u i l d i n g b a r n s and f e n c e s , o r p u t t i n g i n s u b - s o i l d r a i n a g e , o r when a f a r m e r a l l o w s h i s h e r d s and f l o c k s t o g r o w i n s t e a d o f s e l l i n g o f f t h e a n n u a l i n c r e a s e , ( 5 ) New B a n k C r e d i t , t h e p r o d u c t of bank e x p a n s i o n , based on e x c e s s b a n k r e s e r v e s , w h i c h may g r o w o u t o f ( a ) i n f l o w i n g g o l d , or (b) i n c r e a s e d c e n t r a l bank credit. I t i s the abuse of t h i s s o u r c e of c a p i t a l which i s r e s p o n s i b l e f o r our p r e s e n t financial problems."34 Continuing bank p o l i c y and  h i s argument  i s with  respect  he  a s k s v/hat  t o money  t h e power  of  and t h e c a p i t a l  answers: " F i r s t , i t s d i r e c t i n f l u e n c e i s o n l y on t h e money m a r k e t . I t can i n f l u e n c e the c a p i t a l market only i n d i r e c t l y as i t f i r s t a f f e c t s t h e money m a r k e t . Second, i n i t s i n f l u e n c e on t h e money m a r k e t i t c a n a f f e c t o n l y t h e s u p p l y  33.  The C h a s e  Economic  Bulletin,  May  16, 1 9 3 2 , p .  4  34.  The Chase  Economic  Bulletin,  May  16, 1932, p . 5  central  market,  "side. Demand i t c a n n o t c o n t r o l . T a k i n g money m a r k e t and c a p i t a l m a r k e t t o g e t h e r , i t c a n a f f e c t t h e s u p p l y s i d e o f o n l y one o f t h e m a i n s o u r c e s o f c a p i t a l , o u r n u m b e r ( 5 ) a b o v e . . . "35 Then he  follows  up h i s a r g u m e n t  with:  " I f i t i s unreasonable t o ask a c e n t r a l bank t o f i x money r a t e s a n d i n t e r e s t r a t e s , f a r m o r e u n r e a s o n a b l e i s i t t o a s k a c e n t r a l bank: t o f i x the l e v e l o f commodity p r i c e s . Central bank p o l i c y i s o n l y one f a c t o r i n t h e m o n e y a n d c a p i t a l m a r k e t s , and t h e s t a t e o f t h e money and c a p i t a l m a r k e t s i s o n l y o n e o f many f a c t o r s a f f e c t i n g commodity p r i c e s . I n n o way, e x c e p t t h r o u g h t h e r e g u l a t i o n o f t h e money a n d c a p i t a l markets, c a n the c e n t r a l banks i n f l u e n c e comm o d i t y p r i c e s , and t h i s i n f l u e n c e i s a n i n f l u e n c e a t second or t h i r d remove and o f indeterminate degree."36 The whole in  same w r i t e r  Quantity  approval  Canadian  Theory  then goes o f Money  upon Dr. Anderson's  banker,  who  does  o n t o t r y t o show t h a t i s fallacious.37 argument,  not wish  a  the  Commenting  prominent  t o b e named,  says:  "With r e g a r d t o the r e g u l a t i o n o f commodity p r i c e s , and w i t h o u t going i n t o the m a t t e r a t l e n g t h , we t h i n k i t s u f f i c i e n t t o p o i n t o u t t h a t t h e Q u a n t i t y T h e o r y o f Money i n i t s s i m p l e r f o r m s h a s l o n g b e e n d i s c r e d i t e d among most modern e c o n o m i s t s o f r e p u t e . " With of  respect  control  t o t h e u s e o f t h e bank  t h e same b a n k e r  quoted  rate  Viscount  as a method  Snowden a s  follows: "The e f f e c t o f t h e Bank R a t e exaggerated. I have s t u d i e d  35.  The Chase  Economic  36.  Ibid.,  p.  8.  37.  Ibid.,  p.  9.  on i n d u s t r y i s much the r e l a t i o n of the  B u l l e t i n , May  16, 193S, p . 6  39.  "Bank R a t e t o t h e volume o f i n d u s t r i a l output and employment o v e r a number o f y e a r s and i t i s d i f f i c u l t to f i n d any connection."38 In  Canada  position  to  our  bankers  anything  i n the  the  monetary  agency.  the  views  the  Canadian  1938,  issue  of  a December,  seem  "A  to  be  almost  nature  of  price  Canadian  Banker",  Bankers'  of the  a unit control  who  Post  op-  through  represents  Association,  Financial  in  writing  of  in  Toronto,  says: "We have been s u r f e i t e d i n the p a s t few months w i t h many p o s i t i v e a s s u r a n c e s t h a t c r e d i t c o n t r o l by a C a n a d i a n c e n t r a l bank w i l l s o l v e our most s e r i o u s economic d i f f i c u l t i e s . A much m o r e b a l a n c e d v i e w was r e c e n t l y e x p r e s s e d t o t h e e f f e c t t h a t c r e d i t c o n t r o l i s b y no means easy to e x e r c i s e i n c o u n t r i e s such as Canada where the t o t a l t r a d e i s so v i t a l l y affected by t h e v o l u m e and v a l u e o f t h e e x p o r t s o f one o r two c o m m o d i t i e s and w h e r e t h e s e c o m m o d i t i e s may v a r y s o g r e a t l y i n p r i c e a n d i n t h e q u a n t i t y produced, t h a t i f h a r v e s t s a r e g o c d a.nd prices h i g h a t t e m p t s to c o n t r a c t a r e not l i k e l y to be s u c c e s s f u l i n c h e e k i n g a boom, n o r i f s h o r t h a r v e s t s a n d low p r i c e s p r e v a i l i s i t p r o b a b l e t h a t " e f f o r t s t o pump m o n e y i n t o circulation" w i l l be v e r y e f f e c t i v e . " 3 9 In held and  recent  their General  topics  weeks  annual  meetings.  Managers have  of current  opposition  practically  to  38.  Viscount  39.  Financial  At  these  pronounced  interest.  They  inflation  as  Snowden.  London  Post,  a l l the  a  December  means  are of  meetings their  views  raising  1932.  banks  the  unanimous  Spectator, 17,  Canadian  Presidents  upon in  the  October  have  many  their price  8,  1932  level.  For  Charles  Gordon^,  annual  instance, stern  meeting  Mr.  1/7. G.  opposition  P r e s i d e n t of  i n Montreal Gooderham,  on  the  was  Bank  December  P r e s i d e n t of  v o i c e d by  Sir  of M o n t r e a l , 5,  1932.  the  Bank  of  at  the  Toronto,  says: " T h e o r e t i c a l l y , a r e s t r i c t e d and temporary measure of c u r r e n c y i n f l a t i o n i s t e m p t i n g , but one d o s e a l m o s t i n v a r i a b l y c a l l s f o r a n o t h e r , a n d who i s t o s a y where the l i n e s h o u l d be drawn? In any e v e n t i n f l a t i o n i s n o t t h e r e m e d y f o r d e p r e s s e d p r i c e s . "41 Mr. Canada, not  M.  W.  admits  s a y how  Wilson, the  General  need  i t could  be  of  Manager  price  brought  of the  adjustment  Royal  to-day,  Bank but  of does  about:  "On p r e v i o u s o c c a s i o n s we h a v e s t r e s s e d t h e importance of r e s t o r i n g the world price s t r u c t u r e to a p p r o x i m a t e l y 1924-28 l e v e l s . The v i t a l n e c e s s i t y f o r i n c r e a s i n g p r i c e s i s now commonly r e c o g n i z e d , b u t t h e d i f f i c u l t y of c o u n t e r i n g d e f l a t i o n i n c r e a s e s as the d e p r e s s i o n continues."42 In tion,  1928,  giving  mittee  at  the  evidence  Ottawa  "The  President of  Banker  before  the  the  Canadian  Banking  Bankers'  and  Commerce  AssociaCom-  said: is primarily  and  mainly  concerned  a b o u t t h e s a f e t y of h i s a d v a n c e s He i s n o t t h i n k i n g about the volume o f c r e d i t i n t h e c o u n t r y nor the e f f e c t w h i c h the g r a n t i n g o r withholding of c r e d i t i n the p a r t i c u l a r  46*  Vancouver D a i l y 1932.  41.  The  42.  Financial  Ibid.  P r o v i n c e , Vancouver,  Post,  Toronto,  January  B.  21,  C ,  December  1933.  5,  41.  " i n s t a n c e w i l l have upon the p r i c e commodities i n the c o u n t r y . " 4 3 A of  short  our  t i m e ago  largest  Canadian  "Does y o u r with other attempt to The At  responsible banks  was  of  official asked  the  of  each  of  four  question:  b a n k i n a n y way, i n co-operation b a n k s and the Department o f F i n a n c e , i n f l u e n c e commodity p r i c e s ? "  unanimous the  a  level  a n s w e r was,  same t i m e  "No".  they were  asked:  "In your estimation c o u l d commodity p r i c e s and f o r e i g n e x c h a n g e be r e g u l a t e d to a worthw h i l e d e g r e e by c o - o p e r a t i o n o f t h e b a n k s f o r t h a t d e f i n i t e p u r p o s e o r b y some a g e n c y of the government?" With On  one  the  evidence  that  the  with  respect  faith  exception  banks  of  to  in positive We  shall  now  of  In  his  prize  printed  in  the  May,  Canada,  Mr.  J.  essay 1932,  Clark,  "No".  cited  pursue  money  action  the  was,  been  to-day  volume  state  answer  has  monetary  level.  F.  that  Canada  the  the  no  and  for  case f o r  above  i t  conscious  credit  the  is  and  control  control  of  clear policy  have of  the  no  prices. price  entitled, "Price Stabilization", letter  of  a student  the of  Royal  McGill  Bank  of  University,  says: " S i r J o s i a h Stamp h a s s t i g m a t i z e d the i n s t a b i l i t y of the v a l u e o f the monetary u n i t as the g r e a t e s t e v i l of our t i m e . The recent c a t a s t r o p h i c f a l l i n p r i c e s has s h a k e n the v e r y f o u n d a t i o n s of our s o c i a l , p o l i t i c a l , and  43.  P r o c e e d i n g s of on B a n k i n g and  the.Committee o f Commerce, 1928.  the  House  of  Commons  42  "economic s t r u c t u r e . I t i s a b s o l u t e l y imperat i v e , i f modern c i v i l i z a t i o n i s t o endure, t o s o l v e the problem of p r e v e n t i n g d r a s t i c elianges i n the p r i c e l e v e l . " 4 4 After  relating  achievements through  of  control  some  central  of  the  bank  o f money  and  difficulties  efforts credit  to  and  control  the  some of  the  prices  same w r i t e r  says:  "But t h e e s s e n c e of t h e p r o b l e m of c r e d i t c o n t r o l , a n d so i n d i r e c t l y o f t h e c o n t r o l o f b u s i n e s s a c t i v i t y and p r i c e s by a C e n t r a l Bank, i s t o t a k e a c t i o n i n t i m e "45 In Canada,  the  there  Reginald which  they  either In a  basis  of  managers  ,  that  on  can or  their of  our  Ibid.  46.  Ibid.,  47.  Ibid.  of  policy.  March,  L e t t e r o f the  quotations  of  the  i f people  are  their  o f f the  can  o p p o s i t i o n to  of the  1932.  Royal  Hon.  England,  letter.  stated  said  to  in  of  the  term  fluc-  purchasing  that  be  on  general  of  appears  Canada,  the  practically  control  exception  Bank  Mr.  exchange  p r e s i d e n t s and  be  of  47  attempted  interesting  Right  constant  been  the  Bank  Bank,  the  risk  standard.  utterances  An  to  i t has  Royal  f r i g h t e n e d by  currency  gold  paragraph  of  not  and a re w i l l i n g keep  from  Midland  the w r i t e r  Canadian banks  Monthly Letter May, 1932.  45.  Chairman  recent  in their  by m o n e t a r y  Monthly  extensive  approval  previous  unanimous  44.  4 6  currency",  tuations, power  the  claims  "managed  1932,  appear  McKenna  have  McKenna  March,  prices to  Montreal,  43.  exist  among  Marvin,  our  Economist  1931,  issue  great  length,  of and  prices. ^  one  of  Carl  The  of  with  Reserve He  best this  Snyder,  trend He  at  o f the Royal  and  4  the  bank  comments banker, these  i n the  Bank  shows  price  o f an such  level.  He  that,  York,  says  prices  relation  i n part  the  In the  June,  recent  relative past  Mr.  be  ten  years,  i n the  trade  findings  findings.  49.  R o y a l Bank  economistdepicted  :  Ibid.  of Canada Monthly  Letter,  and  the  " T h i s r e l a t i o n s h i p between v o l u m e of p r o d u c t i o n a n d t r a d e a n d v o l u m e o f c r e d i t i s one o f t h e most i m p o r t a n t d i s c o v e r i e s w h i c h h a s e v e r been made b y t h e s t a t i s t i c i a n . It implies that there i s a mathematical r e l a t i o n s h i p between v o l u m e o f p r o d u c t i o n and c r e d i t on the one h a n d , a n d t h e p r i c e l e v e l on t h e o t h e r The a c c u r a c y w i t h which the l i n e showing the theor e t i c a l p r i c e l e v e l corresponds to the a c t u a l price level i s , i n i t s e l f , a remarkable v e r i f i c a t i o n o f t h e q u a n t i t y t h e o r y o f money."49  48.  Mr.  the  credit  to n o t e  Canadian  of  calculated.  Snyder's  of  findings credit  from which may  at  to  the g u i d a n c e  It is interesting  Marvin, upon  Donald  discusses  the  the data  trained  of Dr.  laboratories  under  and  close  he  f o r the  illustrating  academically  as Dr.  charts.  the  York  statistical  credit,  Canada.  approval,  gathering  charts  of  person  letter  o f New  out  i n Hew  been  reproduces f o u r  the g e n e r a l  Bank  equipped  ha.s  one  evident  points  production,  fourth  however,  of h i s bank's monthly  the Federal  world,  bankers,  June,  1931.  by  44.  Then  i n c o n c l u s i o n he  says:  " C a n i t be t h a t h a d t h e g r o w t h o f c r e d i t p a r a l l e l e d the i n c r e a s e i n volume of p r o d u c t i o n and t r a d e t h e r e w o u l d h a v e b e e n no s u b s t a n t i a l changes i n the g e n e r a l p r i c e l e v e l , no m a j o r b u s i n e s s c y c l e s , no booms, no severe depressions? This i s indeed a s t a r t l i n g concept, a f f o r d i n g hope that the s o c i a l i n j u s t i c e s i n h e r e n t i n a l l major changes i n the g e n e r a l p r i c e l e v e l might be a v o i d e d by proper c o n t r o l of c r e d i t . This i s surely a counsel of p e r f e c t i o n n o t f u l l y a t t a i n a b l e i n human a f f a i r s , b u t i t i s c l e a r l y w i t h i n t h e p o w e r of t h e g r e a t centra.l banks, through a p p r o p r i a t e interest r a t e s and open m a r k e t p o l i c i e s , t o c o n t r o l w i t h i n reasonable l i m i t s t o o r a p i d i n c r e a s e i n the volume of c r e d i t and a l s o to p r e v e n t c o n t r a c t i o n of the normal growth of c r e d i t , w h i c h i s the b a s i s o f the p r e s e n t w o r l d tragedy."50 It  would  argument credit  already  and  Committee, on  the  seem a p p r o p r i a t e given  prices, widely  subject  one  i n support of the  recognized  to-day.  here  In  of  to  add  the  perhaps  their  the weight  c o n t r o l of  conclusions as  to  of  the  r e p o r t we  the  of  money,  MacMillan  ablest  authority  find:  " I t w i l l be s u f f i c i e n t f o r o u r p u r p o s e , i n p u t t i n g f o r w a r d our r e c o m m e n d a t i o n s i n P a r t I I o f the r e p o r t , to h o l d t h a t i t s h o u l d be our o b j e c t to i n c r e a s e the power t o e x e r c i s e d e l i b e r a t e c o n t r o l over the p r i c e level; t h a t there is nothing inherently impracticable i n t h i s ; t h a t w i t h t h e g r a d u a l g r o w t h o f knowl e d g e and e x p e r i e n c e , and p a r t i c u l a r l y with the f u r t h e r development o f s u i t a b l e machinery f o r r e g u l a r i n t e r n a t i o n a l c o - o p e r a t i o n , the. p o s s i b i l i t i e s of s u c h d e l i b e r a t e c o n t r o l s h o u l d s t e a d i l y i n c r e a s e ; a n d t h a t we s h o u l d forward t h e s e ends t o t h e b e s t of our powers by being r e a d y to a t t e m p t t h e t a s k and t o g a i n experience by p r a c t i s e . " 5 1  50.  Royal  Bank  of  Canada Monthly  Letter,  June,  1931.  51.  R e p o r t o f t h e C o m m i t t e e on F i n a n c e and I n d u s t r y , J u n e , 1931. (The M a c M i l l a n R e p o r t . ) p. 94.  London,  45.  Having  dealt with  considerable the  purpose  applied  to  practical  of  and  the  T h i s we  Both  (2)  timber,  produce not  the  produced  have a  high  (7)  have  (9)  conduct  and  (10)  find  their  at  home  (5)  standard  of  their  h a v e no  b i l l  this  bank has  experiment  followed  Britain  been  since  i n her  September,  1931.  Of  currencies  none  offers  and  in  light  Canada  gold  raw  of  i n many  standard  ores (4)  (3)  import  mineral  oils  rigid,  high  rather  i n terms  of  of  foreign  foods (6) wages trade  currency,  markets.  central  bank,  conducting end  departure  an  the  a  in actual  i n the  supplies  and  Sweden  a l l the  theory  and  coal  give  have v a r i a b l e balance  money a  to  with  control  experience  off  food  largely  has  such  Sweden a n d  are  at  of theory,  of  the  recent  import  or  of  paper,  own  (8)  trade  of v i e w  advisable  between  living  taxation  price control  appropriate  pulp,  of  monetary  52.  i n the  bulk  heavy  and  seem  more  wood  of  possibilities  countries—(1)  Sweden, however, bank,  point  illustration  similarity  respects. export  the  the  i t i s the  great  question  i t would  recent  , and  very  from  showing  Canada,  operation. Sweden  length  the  so  from  countries  instance  of  the  Sveriges  something many the  of  other  gold  a  countries  standard  operating monetary  Riks-  in  managed  policy  more  M o s t o f t h e d a t a o n S w e d e n was t a k e n f r o m a n article i n the M i d l a n d Bank M o n t h l y Review, O c t o b e r - N o v e m b e r , 1932.  46.  closely than  adapted  Sweden.  to  Because  world's  monetary  of gold  payments,  a  local  impossible  sterling. of  the  to  and  the  first  confidence  therefore  purchasing  it  was  place  to  any  i n the  arrest  long-standing  the  to  production  prices  of  These  and  different  statements  were  statements  wholesale  the  collect  power  policy to  of  impediment downward  extensive  turnover goods  as  and  to  stabilization  objects  in  view.  i n t e r e s t s of  public  Secondly,  already  inelastic  trend.  costs,  I t was  to  considered  statistical  material  showing  well  movement  of  as  the  services.  foreign  different  two  industry,  covering  contained  in relation  in prices.  of  felt  krona.  i n the  rise  suspension  Sweden  attempt  the  the  d e c l a r a t i o n of  Britain,  decided  desired  obtained  prices at  Great  of  defined  of  Britain's  lack  i n t e r e s t s of  against  necessary  Great a  clearly  uncertainty  definite  marked  struggling the  of  more  a u t h o r i t i e s had  i t was  avoid  desired  by  any  or  general  after  policy  Sweden's m o n e t a r y In  the  because  pursue  I t was  internal  of  situation  p o s i t i v e monetary  it  conditions  the  Weekly  entire price  quotations,  stages,  tabulated  and  system.  Swedish  Swedish  retail  prices. Guided pursued there  by  the  i t s policy  i s no  information  thus  of  price  internal  money m a r k e t  i n Sweden,  obtained,  the  Riksbank  stabilization. and  since  the  Since  central  47.  bank has  little  owing  the  to  reserves the  of  fact the  quantity  operating rates,  and  rates.  control  on  money.  the  of  bank d e p o s i t s  part  i t cannot  bank  a direct  upon  a writer  only a  of  of  the  act  cash  through  It i s confined, therefore,  exerting  bank:' s p o l i c y  volume  banks,  allocation  Commenting  the  i t holds  commerical  of  to  that  over  the  assets through  influence  apparent  i n the  to  over  success  Midland  interest  exchange  of  the  Bank M o n t l y  Riks-  Review  says: " I t can be s a i d , h o w e v e r , t h a t up t o d a t e t h e i n t e r n a l p u r c h a s i n g power o f t h e k r o n a has b e e n k e p t s t a b l e , p a r t l y by d e l i b e r a t e a c t i o n of the c e n t r a l bank, n o t w i t h s t a n d i n g g r a v e d i s t u r b a n c e s and d i s e q u i l i b r i a , industrial, t r a d i n g a n d f i n a n c i a l , b o t h w i t h i n Sweden a n d • without."53 At  first,  Sweden's p r i m e it the  was  internal  consideration.  price  At  i  a  level  stabilization  later  stage,  found  possible  to a c h i e v e approximate  sterling  exchange  i n conjunction with  price  noted  was  however,  stability  stability  of  of  the  level. In  a  previous paragraph  between  observe  many  Sweden a n d  Canada.  some d i f f e r e n c e s  between  difference finance.  53.  then,  Ibid  i s to For  the  be  seen  past  points Here the  i n their  two  decades  of  similarity  i t might  two  be  well  countries.  positions  in  Sweden h a s  were to  One  international been  a  48.  c a p i t a l - e x p o r t i n g country,  though only on a s m a l l s c a l e .  Another i s that Sweden has  s e t an o u t s t a n d i n g example of  r e s t r a i n t w i t h regard i n exchange. low,  and  Her  transactions comparatively  quota system has been s e d u l o u s l y  Only mild and  temporary r e s t r i c t i o n s have been  p l a c e d upon p u r c h a s e s and Hence i t may  trade and  t a r i f f r a t e s have been kept  the import  avoided.  to the import  s a l e s of f o r e i g n c u r r e n c i e s .  be s a i d that few  c o u n t r i e s have  freedom of movement f o r goods and  preserved  capital, i n so high a degree  as Sweden. As Canadians c o n s i d e r i n g the a d v i s a b i l i t y of o r g a n i z i n g a central.bank  f o r Canada we must weigh and  consider  the  case f o r and a g a i n s t the p o s s i b i l i t i e s of c o n t r o l of money and  credit  i n a " s o c i a l " sense.  Balancing  the  evidence  a v a i l a b l e , i t seems f a i r to conclude that i n g e n e r a l , a t l e a s t , c o n t r o l of money and  credit  i s p o s s i b l e , that  p r i c e s can be r e g u l a t e d to a very p r o f i t a b l e degree, tha.t v e r y extensive s o c i a l advantages can be r e a l i z e d such c o n t r o l .  and by  49  Chapter  Monetary  In  and  C o n t r o l i n Canada  the light  gulation  management  tary  o f what  of foreign  generally,  we  4.  we  have  exchange,  o f monetary shall  now  Previous  seen  control  questions  examine  t o 1914.  with  respect  to r e -  of the p r i c e  level,  i n the social  the Canadian  interest  pre-war  mone-  system. 54 During  the early  C a n a d a was m a i n l y sol,  t h e money  and t h e l i v r e .  monetary  French  court  for  t h e payment  regime  t h e money  of F r a n c e ,  used  the i n t r o d u c t i o n  had f a i l e d of i t s  t o send  soldiers  of card  out a supply  and o f f i c i a l s  o f money  before  on t h e S t . Lawrence  River,  De M e u l l e s ,  obtained  of p l a y i n g cards,  in  quarters,  amounts. dence  money  merchants  redeemed  54.  The o n l y  as  and s e a l e d  backing  i n the promise  "real" the  and marked  quantity  arrived  of this  them paper  of the Intendant i n the s p r i n g .  and other  people  so t h e  great  money.  "freeze-up"  a  i n  the denier, the  I n 1685 C a n a d a made h e r f i r s t  experiment,  The  French  Intendant, c u t them  for different money was  t o redeem  confi-  i t when  I t was a c c e p t e d  o f Quebec  a n d was  by  duly  promised.  T h e m a t e r i a l u s e d h e r e was l a r g e l y o b t a i n e d f r o m , Romance o f C a n a d a ' s Money", by P a u l Montgomery.  "The  50.  Many and the next mention in  the  form  military  and  were  c e n t u r y and them  opening  varied  here. of Army  a  half,  but  of  Bills  to f i n a n c e  was  The  used  years  1817  first  Canadian  the Quebec  Bank,  respectively.  i t s own  however,  that  structure Canada  printed the  was  In  basis  laid.  adopted  maintained  real  the  without  1871  In gold  for  year  until  pre-war  this  money  the Bank, banks  1853,  monetary  the province  s t a n d a r d and  the passing  saw  of these  not  our  until  1818  Each  to  Canadian  the Montreal  I t was  that  breach  1812-14 p a p e r  and  banks,  notes.  during  i t i s not necessary  our  issued  used  D u r i n g the war  operations. of  t h e k i n d s o f money  of  standard  was  1914.  of the  Uniform  Currency Act  gave  56 the  Canadian  Canadian as  gold  dollar  system  dollar  legal  and  tender,  Canadians Dominion  T h u s we based  little  notes  on  to use  C.A.  56.  Beckhart,  B.H.  gold  paper  notes  of  standard.  The  Canadian  The  Banking  The  same q u a n t i t y  of pure  the pre-war  the g o l d  Curtis,  the  Canadian  that  sanction.  gold.  s o v e r e i g n s ( a t $4.86  o r o f the  see  55.  grains  British  preferred  legal  contained  the American—23.22  gold  was  monetary  coin  was  American  /g)  were  struck,  i n the  the  chartered  Monetary System  form  money  It consisted  gold  The  money  Canadian  of  of  as  of  banks. system two  Situation, of Canada,  p.  314.  p.  291.  divisions,  however,  (1)  hank  issue.  Of  ment  issue.  After  Mint  i n Ottawa  Royal gold of  c o i n s were  fifty,  and  these the  cents  tender,  there  are  the  there  are  no  serve  as  never  presented the  i n 1908  Our  notes  of  of  less  than  in  $5  as  cash  These  were  the  currency.  the  Canadian consists  pieces,  limited money.  groups.  First  denomination.  small Dominion  Since notes  These were t h e r e f o r e i n any  large  numbers.  in circulation  there  of  silver  two  the  govern-  currency  i n standard into  such notes  $10  which are  $5  (2)  branch  five-cent  divided  under  a  and  be  Secondly  5 8  of  $5  a l l of  f o r redemption  $5,000 u s e d notes  and  and  c o n s i d e r the  may  hand-to-hand  amount  issue  fractional  redeemable  bank notes  $24,586,000.  a few  or coppers,  but not  first  establishment  struck.  Dominion notes  1914  v/e s h a l l  twenty-five, ten,  bronze  legal  the government  are  reserves for  in circulation  large  the  averaged  notes  commercial  i n 1914  In  to the  of  $50—  banks. value  of  59 $89,596,000. to for  handle  than g o l d ,  reserves.  57.  Beckhart,  58.  The  59.  The  so  find  these  they use  No  specified  B.  H.  Canada Year  Ibid.  banks  them  notes  more  convenient  more  than  the  reserves are  The  Banking  Book,  1931,  System p.  885.  required  of  of  Canada,  latter banks  p.  292.  52.  by  law,  be  Dominion  mainly for  but  of  such  notes.  f o r the  reserves,  Previous ability Curtis  to of  reserves Since  the  settlement they  1914, the  are  as  of  Treasury  to  keep,  40  l a r g e Dominion clearing  often  however,  they  was  redeem  cent,  notes  are  for  must used  house balances,  presented  there  per  and  redemption.  never  any  i t s notes.  doubt As  Mr.  of  the  0.  A.  says:  " I t s d u t i e s were p r a c t i c a l l y a u t o m a t i c — t h e exchange of g o l d f o r n o t e s , and n o t e s f o r g o l d . " 6 0 It to  should  1914  the  frequently that of  a  the  all  gold  degree  be  no a  60.  i n excess by  of  only this  the  be  principle  sum  was  backed should  had  "automatic"  from  1868  law  were  always  before  partly  T h u s we  period  r e q u i r e d by  i n 1914,  fixed  of Finance  the  backing  general  gold.  I t was  second  division  considered.  of  need  during  an  by be  passing  gold,  but  covered  orthodox  system  not  the  was  form  of  so-called.  called  upon  for  any  "management".  central bank  the  ($50,000,000  Department  of  that  of gold  yet  Act)  for dollar  The now  altered,  Finance  the  here  proportions  standard.  Hence  said  s e t maximum  issued  dollar  be  bank  in fact  branches  Curtis,  C.  This  A.  (not  The  of  our  was or  the  p r e - w a r money bank  theory.  a bank w i t h  Canadian  system  system.  Each  of  the  branches),  Monetary  There  will was  banks  was  spread a l l  Situation,  p.  316.  53.  over  the  what  as  policy, acted  country. a  central  provided  as  counting  office,  hank f o r  the  them w i t h  away f r o m  facilities  emergency.  As  reserves  gold-covered this  head  i t had  for  the  funds,  head  were not the  i t is  and As  to a  office,  adequate,  some-  It directed  their  a  certain  branch  system,  i n a d d i t i o n to  i t s own  total  Dominion  notes  only  abroad,  outside  or  withdraw  or  sell  i t s securities.  serious  of  rediscounting f a c i l i t i e s  in  gold  Canada.  there  for  To  do  loans  was  the  get  and  i t s call  Thus  an  i t could  of  of  be  redis-  especially  banking'  extent  might  however,  f r o m .abroad,  a  acted  whole  to b o r r o w  lack  true,  branches.  a r e d i s c o u n t i n g agency.  3,000 m i l e s  cash  The  a  banks  as  whole. The  seriousness  however,  on  Bank n o t e s and  account were  because  banks. notes  to  of  this the  elastic  they  the  banks  f u l l  By  about  expansion  of  the  note  limit  to  the  failure  This  was  States.  the  year  There  was  1907,  of no  were  they  the  and  of  of  their  had bank  panic  felt the  at  first,  note  issue.  were c r e d i t convenient to  issue  unimpaired  i t was  evident  practically capital  financial  such  of  permitted  however,  issue  not  elasticity  because  amount  capital.  due  l a c k was  were p r o f i t a b l e  Chartered up  of  panic  to  for  the  their  own  paid-up that  reached  its  increase.  i n the  i n Canada,  issues,  but  United the  banks  54.  took  every  tomers,  precaution.  withdrew  securities,  and  Nevertheless and  call  They gave w a r n i n g s t o loans  contracted  a serious  the government  f r o m New their  shortage  met  cent,  on  certain  Thus for  notes,  lack  which  of  a  to  contract  to  their  of sufficient  of  t h e b a n k n o t e s we  extended  permits  15  per cent,  of t h e i r  so  issued  It of  61.  evident, the  1  borrow  at 4  per  of the bank n o t e s inadequate.  the  out  government  of t h i s  Because  been  forced  had  evident  come  inadequacy  i s known a s t h e c r o p - m o v i n g 1908.  the banks  This to  Dominion  provision,  increase  to F e b r u a r y  paid-up c a p i t a l to a  had  had  their  inclusive,  and  up  surplus.  tax not  further  to  Notes  to exceed  5  annum.  i s interesting  emergency  of  September  are subject per  might  was  possible.  o f f> 1 0 , 0 0 0 , 0 0 0  the banks  and  have what  from  cent,  currency  Growing  circulation,  per  sold  suspending  issue  p r o v e n t o be  i n t h e amendment i n 1912,  London,  as much a s  by  elasticity  operations  assistance.  provision  of the  cus-  securities.  time been  their  and  of currency  the banks  t h e much-vaunted  the f i r s t  loans  the s i t u a t i o n  Dominion Notes Act to permit additional  York  their  (1907)  to note,  the banks  Minutes of Proceedings,  by  then,  that;—(1)  in a  t h e m s e l v e s had  been  Evidence,  e t c . , 1913,  p.  time  551  55.  unequal their  to  the  assistance,  seasonal  need  supplement The  next  banking  the  whole  the  war  gold  Council  (2)  had  own  history  of  was  our  created  the  banks  passed,  herald  by  nervous later  of Dominion  d e p o s i t e d i n the  to  H.  Beckhart  the  end  system.  cope w i t h  collateral  to  recurrent,  currency  inadequacy  emergency  advances  B.  the  To  which  come  a wholly normal,  "emergency"  banking an  had  to  resources.  of to  permitting  this  government  t o meet  ordinary  of meeting.  was  the  required  facilities  from  and  demonstration  i n 1914  incapable  and  they  their  war  of  situation  of  The  which the  of  en  in  outbreak  of  banks  notes  the to  Order-in-  Finance  the  were  withdrawals  d e p o s i t o r s an  became  pre-  era  the  heavy  the  banks  Finance Department.  Act, against  Referring  says:  "The s i t u a t i o n e x i s t i n g t h e r e r e v e a l e d a weakn e s s i n the C a n a d i a n bank n o t e i n t h a t i t seemed u n a b l e t o e x p a n d to meet a war demand for currency. Were t h e r e a c e n t r a l r e d i s c o u n t i n g bank, o p e r a t i n g a l o n g l i n e s o f t h e Bank o f F r a n c e o r the F e d e r a l R e s e r v e Banks, w h i c h w e r e empowered t o c o i n c o m m e r c i a l paper i n t o bank n o t e s , t h i s s i t u a t i o n c o u l d have b e e n m e t . "62 Previous the  utter  to  lack  than  those  62.  Beckhart,  the of  passing  regular  H.  The  Order-in-Council in  rediscounting  provided f o r the  B.  of the  branches  Banking  by  System  facilities, the  of  head  1914  other  offices,  Canada,  p.  294.  made  the  cash  reserves.  watch the to  banks  on  the  call pay  Thus  on  the  function Any  necessary  the  banks.  or  the C.  control  of  and  of  working  Curtis  of  of  the  that  gold the  as  a  Ho  matter to  close  As as  any  gold  standard  by  the  so  automatic. rested  was  through  standard  in the  was  standard  control  either  able  stated before, i t s  with  exercised—  generally, control  was  be  what  i t s doors.  f a r as  standard  gold  to  constant  c a u t i o u s l y , and  secure.  the  respect  a l l times  concerned,  credit  prices—it  regulating A.  was  management  money  at  position  to  keep  position.  had  standard  respect  with  i n s o l v e n c y and  Insofar, then,  of  automatic  admit  of F i n a n c e  with  their  bank  their  gold  t h e r e f o r e , to  of  each  or  guarded  Department  had,  liquidity  demand  kept  control  They  f o r cash,  they  doing  absolutely self-dependent  of  the  exchange,  somewhat  itself,  or  through  banks.  Or,  as  Mr.  puts i t :  "The r e s p o n s i b i l i t y f o r c r e d i t c o n t r o l r e s t e d w i t h the c o m m e r c i a l bajiks of Canada and was b o u n d u p w i t h t h e i r own s o l v e n c y . "63 As Finance of  the  closing  63.  we  shall  Act  removed  banks an  see  and  era  Curtis,  C.  later, this  placed  of  A.  our  however,  responsibility i t upon  banking  The  the  the  passage from  the  government,  of  the  shoulders thus  history.  Canadian  Monetary  Situation,  p.  317.  Chapter  The  Finance  A c t as a  a  It opposing have  bank  spokesmen  hymn  Bank  thesis  that  Bank  of Canadian  of o u r banks  A c t a De Recent  constitute  Act as a  S i rCharles  and  bank f o r Canada  adequate.  f o r the Finance Hear  bankers  of the Finance  is entirely  o f some  bank.  Substitute f o r  of a c e n t r a l  i n the form  of praise  central  Central  the creation  already  central of  i s the main  5.  Gordon  64  a  others that  we  Facto utterances  veritable  substitute  f o r a  , President  o f the  of Montreal: "There i s ho need o f a c e n t r a l bank i n Canada", Sir Charles declared. "For a l l p r a c t i c a l purposes such an agency a l r e a d y e x i s t e d under t h e Finance A c t , which f o r eighteen years had admirably performed i t s purpose." Mr.  of  Frank  Canada,  A. R o l f e  6  5  , President  of the Imperial  Bank  said:  "The p r o p o s a l t o e s t a b l i s h a c e n t r a l b a n k i n C a n a d a i s one f o r w h i c h i t i s d i f f i c u l t t o s e e the n e c e s s i t y . I t would not p r o v i d e a d d i t i o n a l c r e d i t beyond what i s a l r e a d y a c c o r d e d by our Canadian Banking Systems, w i t h the a s s i s t a n c e of the present Finance A c t . " Mr.  A. E . P h i p p s  64.  Vancouver  65.  Saturday  66.  Ibid.  Daily Night,  6 6  ,  General  Manager  o f t h e same  P r o v i n c e , D e c . 5, 1 9 3 2 . D e c . 3, 1 9 3 2 .  bank  58.  is  quoted  Finance  as  saying  Corporation  in reference of  the  to  United  the  Reconstruction  States:  I f you can imagine the U n i t e d States with a Finance Act instead of a Federal Res e r v e S y s t e m , t h e r e w o u l d h a v e b e e n no c a u s e for t h e e n a c t m e n t of s p e c i a l l a w s , and in f a c t t h e r e n e e d n e v e r h a v e b e e n any money panic." 67 Mr. Toronto,  H.  B.  Henwood  i s quoted  as  , General  Manager  of  the  Bank  of  saying:  . . . . , we a r e w e l l s a t i s f i e d w i t h t h e present s i m p l e a n d e f f e c t i v e m a c h i n e r y b y w h i c h we are a b l e t o b o r r o w u n d e r the F i n a n c e A c t f o r our n e e d s d u r i n g the peak p e r i o d s of b u s i n e s s , by p u t t i n g up a m p l e s e c u r i t y w i t h o u r g o v e r n m e n t . " 68 M r . S. H. L o g a n , G e n e r a l Manager of the C a n a d i a n r r  Bank  of  Commerce,  observes:  "...., but I submit t h a t e v e r y f u n c t i o n o f c e n t r a l b a n k i n g e s s e n t i a l f o r Canada i s a l r e a d y being f u l f i l l e d t h r o u g h the o p e r a t i o n of our e x i s t i n g banks w i t h the a u x i l i a r y s e r v i c e of the F i n a n c e A c t , " Another to  be  named,  on  the  same  well has  k n o w n C a n a d i a n b a n k e r , who been k i n d  theme.  It  is  enough to i n part  "Having r e g a r d t o Canada's the F i n a n c e A c t a f f o r d s an for a C e n t r a l Bank. The f a count which i t o f f e r s are,  Post,  Jan.  as  express  does his  not  opinion  follows:  economic p o s i t i o n effective substitute cilities of r e d i s a s y o u may know, a s  67.  The  Financial  21,  68.  The  Vancouver D a i l y Province,  1933. Jan.  10,  1933.  wish  59.  " w i d e a s t h o s e p r o v i d e d by a n y c e n t r a l h a n k a n d l e s s encumbered w i t h l e g a l i s t i c restrictions than most. T h i s i s p a r t i c u l a r l y e v i d e n t by c o m p a r i s o n w i t h the F e d e r a l R e s e r v e A c t of t h e U n i t e d S t a t e s f o r example I t i s obvious t h a t t h e r e c a n be no r e s t r i c t i o n of c r e d i t f o r l e g i t i m a t e purposes so long as Canadian banks h a v e t h i s f a c i l i t y a t t h e i r d i s p o s a l , and t h i s c o n t r a d i c t s the p r i n c i p a l argument o f t h o s e now a d v o c a t i n g a. C e n t r a l B a n k f o r t h i s c o u n t r y . " In  1923  pertinent  to  Professor Swanson^ the  central  bank  gave  testimony  as  follows  question:  ".... I don't t h i n k i t i s r e q u i r e d i n Canada. O u r b a n k s h a v e t h e r e s o u r c e s r i g h t now. It is n o t t h e e a s e t h a t we h a v e n o t t h e m o n e y . No F e d e r a l R e s e r v e scheme s u p e r i m p o s e d on our banks c o u l d i n c r e a s e the c r e d i t to a m u c h g r e a t e r degree than the banks can i n c r e a s e t h e i r c r e d i t r i g h t now " Professor says  of  the  Beckhart ^,  i n h i s book  7  Finance  Act,  after  making  on  our  a number  banking of  system,  criticisms:  ".... A t the p r e s e n t time, i t i s p r o b a b l y a l l t h a t C a n a d a n e e d s b y way of a c e n t r a l bank. I f used by the banks, not c o n t i n u o u s l y , but s i m p l y as a means o f f i n a n c i n g s e a s o n a l r e quirements, i t s i n t r o d u c t i o n w i l l probably be beneficial." In  view  hart  so  expressed  boom  of  1928-29  interesting  of  the  fact  that  themselves  and  the  P r o f e s s o r s Swanson and before  present  to know w h e t h e r  or  our  e x p e r i e n c e v.'itn  d e p r e s s i o n , i t would not  t h e y would, v o i c e  same  opinion in  69.  Proceedings of the Select Standing and Commerce, 1923, p . 784.  70.  Beckhart,  Beckthe  be the  1933.  B.  H.  The  Banking  System  Committee  of  on  Canada,  Banking  p.  400.  60.  Sufficient  e v i d e n c e h a s now been g i v e n t o i n d i c a t e  t h e g e n e r a l a t t i t u d e o f t h o s e who o p p o s e t h e i n s t i t u t i o n of  a c e n t r a l b a n k on t h e s c o r e t h a t t h e F i n a n c e A c t i s  an adequate s u b s t i t u t e .  This evidence  necessity f o r a c l o s e examination q u e s t i o n of t h e c e n t r a l In  later  e s t a b l i s h e s the  of t h e A c t i f t h e  bank i s t o be u n d e r s t o o d  s e c t i o n s answering  arguments w i l l  adequately.  be g i v e n t o t h e  above s t a t e m e n t s and a c l o s e e x a m i n a t i o n v a i l  b e made  t h e o p e r a t i o n s o f t h e A c t t o make i t p o s s i b l e  to a r r i v e  at  conclusions.  Before doing t h i s ,  however, i t w i l l be  necessary to enquire into the h i s t o r y The  into  o f the A c t .  circumstances surrounding the passing of t h e  F i n a n c e A c t a r e d e s c r i b e d a u t h e n t i c a l l y by t h e M i n i s t e r o f Finance  o f t h e w a r p e r i o d i n "The S t o r y o f C a n a d a ' s War 71  Finance".  He p i c t u r e d  the s t a t e  w o r l d a t t h e end o f J u l y f o l l o w i n g ultimatum to Serbia by.Austria.  of excitement the delivery  ofthe of the  The s t o c k e x c h a n g e s o f  all  t h e l e a d i n g f i n a n c i a l c e n t r e s had c l o s e d .  and  apprehension  Uneasiness  l e d c r e d i t o r s t o seek g o l d , and t h i s  g r e a t demand f o r g o l d d i s l o c a t e d t h e i n t e r n a t i o n a l e x changes. to  71.  E v e n t u a l l y t h i s panicky gold psychology  C a n a d a and s o o n c r e a t e d a s e r i o u s s i t u a t i o n .  W h i t e , S i r Thomas.  spread Heavy  The S t o r y o f C a n a d a ' s War F i n a n c e .  withdrawals parts were 3  a  of  of gold  the  country,  feared.  The  delegation their  Ottawa  obtain  No  machinery  ready of  cash  their  pre-war was  could  in  reserves  of  There  cash.  No  or  the  their  had  no  seemed  faced  to  the  emergency.  situation. meet 4  the  The  demands  above,  chartered  the  bank  and  i f i t  i t must  close  i t s  adequate  be  August  solvency,  to  to  for  meet  bank t o  probable  a  not  cash  existed  must  meet  each  inadequate  on  went  i n Chapter  i t for  central  Assistance  to  i t s own  banks  Association,  such  that  the  that  V/ilkie,  of  various  go  the the  to  from  insolvency  war-time  for  provide  obtained  banks  and  addi-  for  such  the  govern-  closing  doors.  Hence was  for  legislation  banks  R.  care  such  totally was  D.  explained  s y s t e m was  were  Bankers'  in  on  grave  banks would  demands u p o n  emergency.  ment  As  so  place runs  assistance  take the  Reserves which  peace-time  Mr.  responsible  meet  situation.  an  of  serious  Canadian  to  took  became  government  creditors.  not  tional  the  banks  more  President,  banking  doors.  and  existed  completely  the  situation  from  including to  from  issued  threatened  on  the  same d a y ,  providing  protection  insolvency.  thus  permitting  with  their  own  the notes  August  3,  for  I t made b a n k  banks  to  instead  meet of  an  the  Order-in-Council banks against  notes  their  having  legal  tender,  depositors' to  pay  out  their  demands  gold  or  62.  Dominion their  notes.  own  bank  unimpaired Dominion Gold it  But  n o t e s was  paid-up  To  provided  that  to  February  inclusive,  addition  the  the  banks,  at  with  the  them  Dominion  Department  Central  Governor-General, of  what  had  taken  was  gold,  to  and  been  ture.  increase the  maintained In Council  was  through  passed.  used  Gold be  issue  not e s  possible'  hitherto to  the whole  deposited  so  to  by  supply  or might  and  year.  notes  This extra  Reserves  immediately, to  and  stability  reassured,  the whole  of  be  used  as  of  course  signed  a very  by  full  papers.  The  i n order  to  make  and  (August one  the  necessary  currency  This  Central  Dominion  directly  given  week  and.  a  base  issued.  being  ensure  the f o l l o w i n g was  be  d o n e was  public  to  their  September  through  of F i n a n c e .  i t was  e x p l a i n e d as  The  from  Order-in-Council being  as  i n general to  i n the  circulation,  issued  was  of  the g o l d  deposit  season  be  could  above  on  q u a n t i t y of •  amount  against securities  i n the  the  the  The  i n c r e a s e of bank  Government  ba.nk n o t e s  to  emergency  might  might  Upon  had  crop-moving  "legals"  deposited on w h i c h  the  enough.  together with  an  interest,  not  limited  they  make  confined  In  the  was  capital  notes which  Reserves.  was  this  i t more  of 10)  the a  supplemented  account action conserve  flexible,  the f i n a n c i a l confidence  the  struc-  was  war.  second the  Order-infirst  by  63.  suspending Thus  the redemption  the gold  standard  turned  o u t , was  above,  public  confidence  by  these At  later  emergency  the g o l d  adequate reserves  situation  and  to  thereby  the  A c t makes  was  and, as i t  1926.  As s t a t e d  r e s t o r e d by t h e  The e f f e c t  o f t h e two currency  o f the met  session of Parliament cope w i t h  t h e war  O r d e r s - i n - C o u n c i l were  Act  abandoned,  had a l r e a d y been 3.  i n specie.  to the  country.  very  effectively  measures.  the special  mentioned  notes  restored until  to s u p p l y  t h e emergency  i n August  stances  was  to p r o t e c t  Altogether  legally  of August  Orders-in-Council and  was  not t o be  Order-in-Council  public  of Dominion  ratified.  surrounding  embodied  reading  i t s genesis.  little  the above-  i n the  Finance  of certain  i n view There  a  o f the  parts of circum-  c a n be no  con-  troverting  the fact  t h e A c t was  passed  t o save  banks  from  i n s o l v e n c y , as abundantly  proved  by the  ments  o f no  less  in  a previous  of  the f u l l  the  that  situation,  The w o r d i n g  interesting  called  an a u t h o r i t y than  paragraph.  title  Hence  i s worth  Then  again,  to  save  t h e banks  so  f a r as even  i n view that  to a b a n d o n  the all-inclusive Act to  cited  nature  conserve  I n t e r e s t s o f Canada".  of the f a c t  made  state-  S i r Thomas W h i t e ,  noting—"An  Commercial and F i n a n c i a l  the  that  i t was  the d e s i r e  t h e Government w i l l i n g  the gold  standard,  t o go  the f o l l o w i n g  64.  words  of the Act are intriguing: "In c a s e o f war, i n v a s i o n , r i o t o r i n s u r r e c t i o n , r e a l or apprehended, and i n case of any r e a l or apprehended f i n a n c i a l c r i s i s , the Governor i n C o u n c i l may, b y p r o c l a m a t i o n p u b l i s h e d i n t h e Canada G a z e t t e "72 (It  then goes  on t o s a y what  may  b e done  under  these conditions.) While to  a preamble  say the least  purpose It least  i t lacks  might  t e r m s may  frankness  of the provisions  have  as a  been  desirable,  statement  of the  of t h eA c t .  be m e n t i o n e d  well-informed  Finance  i n such  here  i n passing that  o f t h o s e who  A c t as a s u b s t i t u t e  uphold  some  of the  the adequacy  o f the  f o r a central  b a n k make  two  assertions: (1)  That  the above  insurrection", the  premises  (This  i n defence  i s usually  A n d a t t h e same  time—that  need  i s surely  i n t h e way  absurd  the Finance  of a central  Otherwise  we  72.  we  must  The F i n a n c e  have  a  "riot"  Act, Part  to produce  I , 4.  that  Act i s  bank. these  must  two  conclude  that: (1)  by  inflation.)  to t r y to m a i n t a i n  a t t h e same t i m e .  stated  a g a i n s t t h e argument  of u n c o n t r o l l e d  we  or  h o l d s , r e g a r d l e s s of  the A c t permits  all It  people  c l a u s e r e "war, r i o t  etc.s t i l l  1923 r e v i s i o n .  such  (2)  quoted  our  central  65.  bank, (2)  need  i n the form  only  i n times argument  much  central In  and should  the Finance  t h e preamble they  that  is a  appears  are as  i t i s true,  i s met w i t h be  but n e v e r -  on t h e  subject  combatted.  Act is a  r e c a p i t u l a t i o n of the  I t s most  quoted  important  above  pro-  i n Section  4,  Part  follows:  described  i n the preamble the  authorized:  t o make a d v a n c e s Dominion  notes  deposited (b)  thing"  trivial,  thinking  the conditions  Government was (a)  faery  Orders-in-Gouncil.  Summarized, Under  i s rather  banking,  follow  of a c e n t r a l bank  of emergency.  confused  t h e main  earlier  visions I.  a l l we  of an " u n s u b s t a n t i a l  theless  Wo  that  sort  The  of  and  with  to t h e banks  upon  t h e banks  as  tender  legal  the pledge  the Minister  to allow  by t h e i s s u e  of s e c u r i t i e s  of Finance.  to pay out t h e i r  instead  of  of gold  own  notes  or Dominion  notes. (c)  to extend issue  (d)  t h e "crop-moving"  of excess  t o suspend  circulation  the redemption  provision over  the whole  i n gold  notes. (e)  to proclaim  a moratorium  on  forthe  debts.  year.  of Dominion  66.  The  other  elucidate tions  further  f o r their In  will  view  be w e l l  going  sections  on. (a)  importance  t o summarize  c e r t a i n f a c t s about  be remembered  introduced  prevent  regula-  i t was  i t before  that: emergency  of t h e banks  i n force  measure  and t o  throughout  of a n " a p p r e h e n d e d  this  Acti t  avoid  panic.  continued  i t allowed  of the Finance  i n 1914 a s an  insolvency  financial  and  merely  a n d l a y down  of t h e v i t a l  because (c)  provisions  part  operation.  i t was  a (b)  the above  I t should  to  of the a c t i n large  the war-time  i n turn  financial  inflation  formed  the base  the war crisis".  of t h e f o r "an  currency, inflated  73 super-structure (d)  i t was  used  says,"....  on It Finance  a s a means  i s of v i t a l  of  a s a war  has  been  The  p r o v i s i o n f o r making  73.  Beckhart,  74.  Ibid.  as a sort  B. H.  t h e war,  or, as  of s e c u r i n g  'manufactured  importance  passed  continued  credit."  to f i n a n c e  the basis  A c t was  of  to note  men  that  supplies 7  measure  of Dominion System  power."  although  of rediscounting  The Banking  and  purchasing  1  emergency  advances  Beckhart  the  only, i t  machinery. notes  of Canada,  t o the p. 400.  banks  upon  t h e deposit  Finance—the war-time  i n f l a t i o n — h a s been  Canadian monetary  the  Finance  of  measure  o f 1 9 1 4 w a s made  too few people. by s t i l l  significant  quoted  word  part  permitted  This  was d o n e b y permanent  complete c o n t r o l Board,  permanent  The r e a l  that  authority of Dominion  over  the rate  the  i n 1923 i s known b y  significance of the fact i s  fewer persons.  I t i s well  o f t h e 1923 A c t , S e c t i o n  5,  then  f o r word:  T r e a s u r y b i l l s , bonds, d e b e n t u r e s o r stocks of t h e D o m i n i o n of Canada, G r e a t B r i t a i n , a n y p r o v i n c e o f Canada, and o f a n y B r i t i s h possession;  (b)  Public United  by  s e c u r i t i e s o f t h e Government States;  writer  that  should  (a)  Italics  way  emergency  75 "At M Y TIME when t h e r e i s no p r o c l a m a t i o n i n f o r c e under the a u t h o r i t y of paragraph (a) o f s e c t i o n f o u r o f t h i s A c t , t h e M i n i s t e r may make a d v a n c e s t o t h e c h a r t e r e d banks and t o t h e s a v i n g s banks t o w h i c h t h e Quebec S a v i n g s Bank A c t a p p l i e s b y t h e i s s u e of Dominion n o t e s upon t h e p l e d g e o f t h e s e c u r i t i e s h e r e i n a f t e r mentioned:  75.  of  passing  and i n a general  The f a c t  of  unlimited  feature  t o make a d v a n c e s  t h e A c t of 1914.  appreciated the  of F i n a n c e  i n t e r e s t t o the T r e a s u r y  elaborated  all  system.  s t o the banks, gave  the Department  made a. p e r m a n e n t  A c t o f 1923, w h i c h gave  t h e Department  note  with  temporary p r o v i s i o n which  the  to  of c o l l a t e r a l  of the  be  (e)  Canadian municipal  (d)  P r o m i s s o r y n o t e s a n d b i l l s of exchange secured, by d o c u m e n t a r y t i t l e t o wheat, o a t s , r y e , b a r l e y , c o r n , b u c k w h e a t , f l a x o r o t h e r commodity ;  (e)  Promissory notes a n d b i l l s of exchange i s s u e d or drawn f o r a g r i c u l t u r a l , i n d u s t r i a l , o r c o m m e r c i a l p u r p o s e s and w h i c h have b e e n u s e d for such purposes. 1 9 2 3 , c . 4 8 , s . 2."  It force the  will  under  section  the  5 above  banks  may  i n force  the case  that  the a u t h o r i t y  A c t advances  clamation  in  be n o t e d  securities;  when  of paragraph  b e made,  advances  quoted.  t h e r e _is a p r o c l a m a t i o n i n  and when  may  Hence  (a) of s e c t i o n  4 of  there  pro-  b e made  by a u t h o r i t y  at a l ltimes,  of emergencies, such advances  by t h e M i n i s t e r  o f Finance.  i s not a  may  of  and n o t  just  b e made  The R t . Hon.  to  Arthur  76 Meighen  , ex-Prime  appreciation making  Minister  of the s i g n i f i c a n c e  advances  t o the banks  Educational  Association  spoke  words:  these  of Canada,  exhibited  of t h i s  when,  before  a  keen  provision f o r the Bankers'  a t T o r o n t o , on J a n u a r y 21, 1931, he  "....Under t h e F i n a n c e A c t of l a t e r y e a r s , our g o v e r n m e n t was a u t h o r i z e d t o a d v a n c e t o b a n k s a g a i n s t s p e c i a l l y named c l a s s e s o f c o l l a t e r a l , g o v e r n m e n t n o t e s b y way o f t e m p o r a r y l o a n s , a n d n o p r o v i s i o n was made f o r a g o l d r e s e r v e a g a i n s t t h e s e n o t e s . . . . As t o t h e money a d v a n c e d u n d e r the Finance Act i t i s indefinite, consequently  76.  Quoted from a popular pamphlet C a n a d a , Why W o t ? " p . 6.  entitled,  "Bank o f  " l o a n s o f u n s t a t e d a m o u n t s , WITHOUT L I M I T , depending w h o l l y upon t h e d i s c r e t i o n of t h e F i n a n c e D e p a r t m e n t , c a n b e m a d e WITHOUT A GOLD R E S E R V E . " 7 8 Nowhere h a s t h e w r i t e r change wrought as  clearly  found  i n our monetary  interpreted  t h e importance of t h e  system by the Finance A c t  as i n the writings  of Professor  C.  79 A.  Curtis  .  Summing up t h e p r e - w a r m o n e t a r y  situation i n  Canada he s a y s : "The Government's d u t i e s w e r e a u t o m a t i c and f i x e d and t h e Government i t s e l f might a l m o s t be d e s c r i b e d a s a n o n l o o k e r a t t h e c r e d i t system. The b a n k i n g system, on t h e o t h e r hand, was i n t i m a t e l y i n v o l v e d i n m a i n t a i n i n g t h e g o l d standard. And I have assumed t h a t t h e maint e n a n c e o f t h e g o l d s t a n d a r d i m p l i e s a modicum of c r e d i t c o n t r o l a t l e a s t . Thus t h e r e s ponsibility f o r credit control rested with the c o m m e r c i a l banks o f C a n a d a a n d was bound up w i t h t h e i r own s o l v e n c y . " T h i s w h o l e s y s t e m was c o m p l e t e l y t r a n s formed by t h e changes consequent on t h e outb r e a k o f war i n 1914." (He g o e s on t o r e c i t e the p r o v i s i o n s of the F i n a n c e A c t . ) Again  he  says:  " P r e v i o u s l y t h e c o n t r o l o f bank c r e d i t rested s o l e l y w i t h t h e b a n k s t h e m s e l v e s , b u t now i t was t r a n s f e r r e d t o t h e a g e n c y w h i c h h a d t h e power to a d d t o t h e r e s e r v e o f t h e banks, t h a t i s t h e Department of Finance. The A c t which made t h i s f u n d a m e n t a l c h a n g e i n t h e C a n a d i a n monetary s t r u c t u r e r e c e i v e d l e s s c o n s i d e r a t i o n t h a n a n y o t h e r m a j o r c h a n g e e v e r made i n Canadian monetary l e g i s l a t i o n I t i sto be d o u b t e d i f t h e g o v e r n m e n t o r t h e p u b l i c ever adequately r e a l i z e d the s i g n i f i c a n c e of t h e Act."80  77.  Italics  by w r i t e r .  78.  Italics  by  79. 80.  The C a n a d i a n Forum, M a r c h , 1932, p . 2 0 7 . The J o u r n a l o f P o l i t i c a l Economy, J u n e , 1932, p . 3 1 9 .  writer.  70.  In l a t e r  sections of t h i s  chapter i tw i l l  he shown t h a t  t h e D e p a r t m e n t o f F i n a n c e h a s n o t b e e n c o n s c i o u s o f t h e new r e s p o n s i b i l i t y p l a c e d , u p o n i t by t h e F i n a n c e A c t , t h a t t h e banks have d e f i n i t e l y  shed  the r e s p o n s i b i l i t y f o r monetary  c o n t r o l w h i c h was t h e i r s b e f o r e t h e A c t was p a s s e d , t h e r e f o r e Canada's m o n e t a r y s y s t e m accepts the r e s p o n s i b i l i t y  and t h a t  i s one i n w h i c h no one  f o r credit  control.  I n a d d i t i o n t o making permanent t h e arrangement f o r making advances t o t h e banks,  t h e F i n a n c e A c t o f 1923  provided: (1) t h a t bank n o t e s s h o u l d c o n t i n u e t o b e l e g a l for  tender  t h r e e y e a r s more;  (2) t h a t f o r t h r e e y e a r s l o n g e r D o m i n i o n n o t e s  would  n o t be r e d e e m a b l e i n g o l d ; (3) t h a t f o r t h e same t h r e e y e a r s t h e e x p o r t o f g o l d w o u l d be p r o h i b i t e d  except by s p e c i a l  license;  (4) t h a t t h e a b o v e p r o v i s i o n s w o u l d l a p s e u n l e s s specifically  extended  a t t h e end o f t h e t h r e e  years. As  i t t u r n e d out they were n o t extended,  so Canada  a u t o m a t i c a l l y r e s u m e d t h e g o l d s t a n d a r d on d u l y 1 s t , 1 9 2 6 . Having noted  the evidence t o the e f f e c t  Finance A c t i s regarded  that the  by many a s a n a d e q u a t e  substitute  f o r a c e n t r a l b a n k , and h a v i n g t r a c e d t h e h i s t o r y  of t h e  A e t , we s h a l l now examine i t i n o p e r a t i o n t o s e e w h e r e i n  it  does or does n o t f u l f i l  the r e q u i r e m e n t s of a c e n t r a l ,  "bank. To what- e x t e n t 2,  i s i tlike  when t h e g e n e r a l  a bankers' bank?  I n Chapter  f u n c t i o n s of a c e n t r a l bank a s a  b a n k e r s ' bank w e r e b e i n g d i s c u s s e d ,  i t was s t a t e d  that  s u c h a bank h a d a s i t s c u s t o m e r s t h e c o m m e r c i a l , b a n k s , i t made l o a n s  that  t o t h e b a n k s , t h a t i t s u p p l i e d them w i t h  emergency c u r r e n c y  and a c t e d a s a r e d i s c o u n t i n g a g e n c y f o r  them, t h a t i t u s u a l l y i s s u e d n o t e s and s o m e t i m e s h a d a monopoly of t h e n o t e i s s u e , t h a t h o u s e f o r them, t h a t reserves for  i t acted  i t was t h e d e p o s i t o r y  o f t h e b a n k s , and f i n a l l y ,  the solvency  as a c l e a r i n g o f t h e cash  t h a t i t was  of t h e whole banking  responsible  system.  T h e r e i s no d o u b t o f t h e t e n c o m m e r c i a l b a n k s t h e customers of t h e F i n a n c e A c t . the s o l e customers.  not  considered  the  issuance  by p a s s i n g  Not only t h a t , they a r e  Even the Federal  borrow f r o m i t s " c e n t r a l bank".  being  Government c a n n o t  The n a t i o n ' s  credit i s  t o be " s o u n d " o r " h e a l t h y " a s b a c k i n g f o r  o f currency  through  until  i t has been " d i s i n f e c t e d "  t h e h a n d s of t h e b a n k s and u n t i l  been t e s t e d i n t h e f i r e  of p r o f i t - m a k i n g .  i t has  Thus t h e  " c e n t r a l bank" may n o t l o a n d i r e c t l y t o i t s c r e a t o r , t h e n a t i o n , on t h e l a t t e r ' s  own c r e d i t .  bank may t a k e some o f t h e n a t i o n ' s  On t h e o t h e r  hand a  c r e d i t ( i n the form of  ?2.  a  victory  and  bond,  Receiver  ceiver  deposit dollar  paying  these  five  per  quantity  of  and  them  loan  the  charging funds  other city  to  from  services of  bank",  to  cent,  for  Ottawa of  an  Department  of  city  of  that  the  For  Vancouver and  Finance  then as  of  borrow  perform  a  secure  deposited  collateral  3-§- p e r  at  6 per  f o r  the  through may  service  as  those  or  a  at  from  pointed  bonds  and  cent, cent.,  transferring  i n s t a n c e , i f the city  as  the  middleman.  transaction be  notes  cent,  m a i l , and and  Victoria),  borrowed.  per  way  directly  i t should  sometimes  4  may  cost  broker"  borrow  so  Vancouver  the  or  John,  t u r n around  say,  t e l e g r a p h or  not  banks  money  in this  St.  (bond)  b a n k may  A c t ) ; i t must  overlooked. accepted  by  "honest  may  the  they  that  notes  Re-  Dominion  credit  of Montreal  2-g- p e r  to  loan  Bank  tender  i t at,  city  In  Montreal  to  Finance  Assistant  Calgary,  the  the  needy  i n order  be  on  the  (the Finance  "middlemen"  Regina,  cent,  an  of  Chariottetown,  deposited  back  the  "middleman"  easily  the  Dominion  Vancouver  fairness  (or to  Halifax,  i s i n need,  these  the Minister  receive legal  3-g- p e r  Or  to  Ottawa  at  same n o t e s  cent.  say?)  Winnipeg,  on  Government  loan  thus  at  i t t h e r e , and f o r dollar  the  we  Office  Toronto,  security, If  General  General  Montreal,  shall  be  "central  the "sound".  out  that  that Bank  The  might of  security  for  bonds w i t h  security  as  f o r an  a the  advance  under  the Finance  default.  On  securities two  the  i t would  o t h e r hand,  other  risks.  Act,  than  Hence  the  part  cases  i s to compensate  often  than not,  city's  of  the  the  way.  i t may  the  of  gold  dollar its  Central as  backing  Reserves, on w h i c h  for dollar.  own  notes,  advertising additional the  Gold  cost.  Government  or  i t has  deposit issue  to  that  therefrom w i l l  Then  i t may  the  Vancouver's  loan  city  of  Vancouver  i t would, a s s u m e  charged  in  not  reloan  secured  so  the  instead  bank  notes  to  prestige  more t h a n  above  obtained  something  i t s own  More  i n the  there  i t s own  the  such  assumed.  them  the bank  i t considers  resulting  of  Dominion notes  to  It costs  but  bonds,  bank w i l l  that  the  own  interest  themselves,  to  risk  bank f o r r i s k s  however, t h e  take  the  i f i t accepted from  Dominion notes Instead,  bear  print and  repay  the  bank n o t e s  Vancouver  as  to  suggested  a.bove. Ho  more  t h a n what  was  stated  Aet  i s needed  bankers' tomers,  bank that  them w i t h defence supposed  i n our to  to  just  discussion show  to t h e  that extent  i t makes  emergency  of  has  be f o u n d  above and  the  history  this  Act  does  that  as  The a  and  as  are  that  that  bank,  what Finance  a  i t s cusi t  ma.in b u l w a r k  bankers'  claim  of the  serve  t h e banks  them,  currency.  i n the  said  of  l o a n s to  the Finance Act  been  supplies  of  the  however,  i t serves as  an  is  74.  adequate made  rediscounting  this  claim  sufficient Logan, at  i n recent  to i n d i c a t e  General  t h e bank's  1933,  agency.  spoke  months.  their  Manager  Most  of our bankers  One s t a t e m e n t w i l l  general  view.  of t h e Canadian  annual meeting  nave  M r . S.  Bank  i n Toronto,  be  H.  o f Commerce  on January  10,  as follows:  " I t may b e n o t e d t h a t t h e A c t p r o v i d e s f o r f r e e r r e d i s c o u n t i n g than i s permitted i n the United S t a t e s , a c o u n t r y w i t h t h e l a r g e s t c e n t r a l bank in the world."81 It quite  i s quite  true  that  r e a d i l y by t h e banks  advances through  may  be a.nd a r e  the operation  obtained  of the  82 Act. the  For instance, banks  December  according  to the Minister 31, 1932, every  t o the monthly  of Finance,  we  that  one bank h a d a d v a n c e s  $25,000,000,  that  t h e bank w i t h  As  listed  made  a l l o f them  i n a previous  eligible  variety—from  Dominion  missory  and b i l l s  notes  that  on  such  t o t h e a.mount o f  the smallest  together  section  by l a w f o r  find  of  one o f t h e t e n b a n k s h a d a d v a n c e s  outstanding,  $84,000, and t h a t  returns  h a d $56,988,000.  the s e c u r i t i e s or paper  advances  treasury  amount h a d  bills  of exchange.  show  quite  and bonds Very  81.  The V a n c o u v e r D a i l y  Province,  82.  The F i n a n c i a l P o s t ,  F e b . 11, 1933.  to pro-  little  J a n . 10, 1933  a  trade  75.  paper  i s so used,  deposited Minute classes amount Bills  a r e bonds. o f May  8 3  and Bonds,  counting loans  does are  really  liable,  these are that the  83.  rediscounted  hand,  securities  redeemed  bank  when  remain  on t h e l o a n  the Department maximum  When they  B. H.  process  "rediscount"  or t r a d e  them  paper  and t h e p u r t i l l  maturity.  rediscounted  them  i n favor  o f t h e new  a r e made  the property maturity  on  remains  holder.  securities,  o f t h e borrower and  date.  The v e r y  r e q u i r e s margin,  the advances  The B a n k i n g  seen  " l o a n " and  but t h e word  or hold  be  of making  h a s them  of Finance  by  redis-  that  p e r i o d f o rwhich  Beckhart,  secured  i tcan r e a d i l y  are negotiated  loans  Treasury  c e r e a l s and f e e d .  securities  them a g a i n  i thas endorsed  the other  on Dominion  The words  i n the Act,  at a l l .  the f i r s t  i n value the  on a s s i g n m e n t s  an o r d i n a r y  collateral.  may n e g o t i a t e  Although  the different  "rediscounting" i s not r e a l l y  are used  n o t appear  exceed  nothing,  s t a t e d above  but just  on d e p o s i t e d  chaser  On  has been  at all,  from  Board  by which  should  grain, flour,  so-called  "advances"  deposited  range  the securities  to a Treasury  t o 25 p e r c e n t ,  covering  this  cases  30, 1923, t h e m a r g i n s  o f t h e loans  From what  I n most  According  of s e c u r i t i e s  documents  that  however.  System  facts  and t h a t  a r e made  of Canada,  i s one  p. 391.  76.  year, Act  are  are  i n themselves  not  clearly  proof  rediscounting.  when he  that  In  the  fact  operations  one  banker  84  of  the  puts  i t  says:  we a r e w e l l s a t i s f i e d w i t h t h e p r e s e n t s i m p l e a n d e f f e c t i v e m a c h i n e r y b y w h i c h we are a b l e t o b o r r o w 8 5 u n d e r t h e F i n a n c e A c t f o r our n e e d s d u r i n g t h e peak p e r i o d s of b u s i n e s s , by p u t t i n g up ample s e c u r i t y w i t h o u r G o v e r n m e n t . " Central the  real  That is  sense  there  shown  loans  banks, and  is a  on  the  make  other  loans  distinction  i n the  fact  i s usually  on  than  rates the  t r a n s a c t i o n s r e d i s c o u n t i n g by  the  commercial The  as  we  of  the  issue  Finance  Act  have a l r e a d y note bank  i s much (as a  seen,  issue,  but  more  in  collateral.  two  transactions The  rate  rate.  central  Of  on  the  bank f o r  important.  bank") does  i t does not banks  rediscount  differ.  the  "central  s i n c e the  issue  possess  themselves  may  a  notes  monopoly and  do  notes.  It  cannot  be  said  bank  by  acting  as  a  They  provide  does,  the  the  discount  two  banks  both  deposited  between  that the  higher  hand,  their  however,  clearing own  provide  84.  H e n w o o d , H. as r e p o r t e d p . 5.  85.  U n d e r l i n i n g by  that  the  house  clearing them  Act  with  serves for  house legal  the  as  a  central  commercial  facilities. tender  notes  The  banks. Act  which  G., G e n e r a l Manager o f t h e Bank o f T o r o n t o , i n the F i n a n c i a l P o s t of J a n . £1, 1933,  writer.  they  use  as  a medium  of  exchange  in settling  clearing  house  balances. Unlike pository own  a  of  the  reserves.  Dominion they  have  the  that  they  constitutes  are  Gold  place  like  a  Act  does  The  fewness  evitably  such  Beckhart  of a  8ft  the the  C e n t r a l Gold their  own,  in location  the  Department  reserves by  each  they are would real on  solvency  of  not  be  are  used  the of  and  the  of  but  and  ad-  Finance. in  t e n b a n k s and  the  economically  were  concentrated  bank.  other  hand,  the whole  Government  their  than  reserves,  as  i f they  central  hold  decentralized  the  de-  Reserves  distinct  bank,  of  of  the  of g o l d  are  c h a r t e r e d banks  kind  quantity  cash  in a  bankers'  ensure  to  as  They  of t h e i r  cash  they  i s not  part  i n part  as  Act  banks.  a greater  from  Reserves,  of t h e  for notes  Reserves  held  Finance  i n the  a  personnel  efficiently one  have  backing  therefore, the  Central  As  as  the  reserves  deposited  used  ministrative  in  cash  C e n t r a l Gold  Since,  bank  1  I f they  notes  difference  and  bankers  (10)  the  Finance  banking  system.  leads  guarantee  of  almost  in-  banking.  says:  "The C a n a d i a n G o v e r n m e n t c o u l d n o t a l l o w a n y of t h e l a r g e r banks to f a i l , f o r s u c h would be most d i s a s t r o u s to the e n t i r e economic s t r u c t u r e of the country. The Government v/ould h a v e t o  86.  Beckhart,  B.  H.  The  Banking  System  of  Canada,  p.  328.  78.  -"lend support i fsuch an i n s t i t u t i o n were app r o a c h i n g i n s o l v e n c y , a s i n d e e d i t was c a l l e d u p o n t o d o on one o c c a s i o n "before t h e w a r . " As the  have a l r e a d y  Government  passing is  we  solvency  the  would  whole  banking  go  system,  that  Reserve that  this Banks  System  system  In  numbers  11  a n d 13, b u t i n o t h e r  Later  i t i s true  o n , w h e n we  "people's"  control  over  o f twelve  i s only  ways  there  shall  i n the past the chartered  see that at least, banks  supporters with  They  regional  Board.  Then  Reserve  Federal they  Banks. between  difference.  the Finance  Act as a  the administrators exercised  or over  say  Reserve  the difference i s a vast  the  point  the Federal  the Federal  come t o c o n s i d e r  b a n k , we  A c t have,  there  system  States.  bank.  Act i s a  of i t s  banking  of  as a  of a central  some  Act corresponds with  and our t e n banks w i t h  Act serves  the Finance  bank,  Reserve  In the sense,  f o r t h e solvency  o f the United  consists  by  i n 19£3, t h i s A c t  the rftle that  broke out  of t h e banks  occurring.  our whole  and a F e d e r a l  our F i n a n c e  Board  the  plays  War  threatened, bank i n -  the Finance  further the idea  so f a r a s t o compare  out  from  a  responsibility  bank and i n p a r t  Reserve  permanent  which  s u b s t i t u t e f o r a bankers'  Federal  t h e Great  of i n s o l v e n c y  Made  be prevented  i t assumes  Carrying good  Act.  t h e medium t h r o u g h  that  bankers'  the danger  the Finance  to-day  then,  met  s e e n , when,  money  no  of  conscious  and  credit.  79.  The  Federal  direct and  and  does  head the  Reserve very  branches,  while  the  little point not  real  pursue a  o f f i c e of  and  t o do  a  bank.  t h o s e who  oppose  Canada.  is  I f each  i n effect  say that be  hands  of  further s t i l l  office,  discounts f o r  acts  the u n i t  as a  banks. i t may  Though be  however,  i s one  o f the  creation  of a  central  thing  banks,  But  bank  In f a c t ,  discount  central  banks.  should  for  centralization  of as  Though  one has  more  thousands  head  office.  i n one control  chartered been  said  of miles Hence  real of  bank  bank,  then  control  from  the d i s c o u n t i n g  i n comparing  our  in  that  bank w o u l d  b r a n c h may  t e n head  ten  of a l l  concentrated  central  logical  opposite  the r a m i f i c a t i o n s  a  by  we  thing,  the  i s concentrated  before,  the  bank f o r  i s a good  be  is  made  i t i s hardly  the  to  bank  points  of course, that  i t has  Canadian  central  The  bank,  interesting  strongest  office i s a  one  central  ten i n s t i t u t i o n s i t i s l o g i c a l to argue  better.  branches  i t i s said,  I t does,  "unit"  Banks,  our banks,  better.  or  Reserve control.  I f i t i s a good  branch,  exercise  o f monetary  o f f i c e of a  head  does  Federal  t h e head  the  because  the  hand,  policy  ten central  s t i l l  true.  our  this  other  over  t h e argument,  out h e r e t h a t  and  would  of  the  i n o t h e r ways  with  branches,  to  definite  each  on  control  branches are  itself  have  Board,  three  agency  s t i l l be  of a l l the  i n the be  the  of  offices  head or the  80.  with we  the  must  former ten  twelve remember  are  Board.  As  ordinate  central  the  bank  have  seen,  head  argument office  8  under  Finance  is a  Act  a  that  States  not  our Reserve  co-  Bankers'  ordinary  the  Federal  does  Canadian  the  United  realize  ,  put  plus  forth  the  in  Associa-  functions  support  Finance  security  Act  of  have  i n Canada  since  Confederation,  1900,  and  while  i n the  figures ^ 8  United  i n the  last  been  that  States three  the  of  a  only  the  i n Ca.n8.da.  twenty-six that  last  failures  years,  adequacy  a, b a n k e r s '  deposits  there  since  of  as  that  been nine  four  the  the  regional while  should  unified  perform  comparative  realize  failures '''  8 8  not  there  not  we  are  of  bank.  When we  1923  True  i t does  i s the  only  are  Banks  latter  too,  banks"  we  Another of  Reserve  the  Then,  them.  but  that  not.  "central  tion,  Federal  as  bank  there  have  occurred have  in  reached  many a s  sixty-  90 six  ha.ving  agree  that  security the  failed  our  for  banking  88.  The  89  Home  have  given  deposits.  system  Beckhart,  one  banks  our  87.  during  B.  of  H.  In  w e e k , we us  a  are  high  inclined  degree  of  f u r t h e r condemnation  the  United  The  Banking  States  System  i t may  of  be  to  of  stated  Canada,  p.  480.  Bank.  and 9 0 . S a t u r d a y l i g h t , T o r o n t o , A r t i c l e on t h e G l a s s S t e a g a l l B i l l b y J o h n M c L e a n , a b o u t M a r c h 1, 1932.  81.  that  i n 19E9  December,  there  i n a l l 25,110  there  were  only  6,064 i n t h r e e  years,  most  o f them  doors  insolvency.  does of  1932,  were  owing  to  our banks  were  branches and  failures. the  have  Nor  voluntary  Nevertheless branch tuted tary of  winding  bank  o f an  the f a i l u r e s  banks  power) were made up  non-members  o f s t a t e banks  hand,  i n view  of  91.  a  bank  and of  60  States  the n a t i o n ' s  and  trust  in rural  simply  little constiinvolun-  Sixty per  cent,  o f banks  under  of the commercial commercial banking  Reserve  companies,  that  is  an  as  bank.  have  been  t h e minimum  i s $500,000,  them  meant  there  d i s t r i c t s . ^  that  these  solvent  were  per cent,  system  many b r a n c h e s  They  bank.  of  one  not class  where  o f the F e d e r a l  of the f a c t  i n Canada  do  in  their  Since  c l o s i n g s would  insolvent unit  per cent,  institutions  we  States,  i n the United  small  1929.  f o r each would have  capitalization,  ( n o t 60  great  of branches of a  each of these  failure  since  A  true f a i l u r e s .  up  closed  condemnation of  banks  i n the United  closing  $25,000  they  while  a decrease  having  another.  closed  not unit  were  banking, a  been  19,046,  But  not n e c e s s a r i l y defend  banks,  System,  preponderantly  On  the  other  capitalization  each chartered  bank  The i n f o r m a t i o n g i v e n above r e l a t i v e t o A m e r i c a n bank f a i l u r e s was t a k e n f r o m a n a r t i c l e on " U n i t e d States B a n k s " b y F r a n c i s H. S i s s o n , P r e s i d e n t o f A m e r i c a n B a n k e r s ' A s s o c i a t i o n , i n t h e Review of R e v i e w s and V / o r l d V/ork f o r D e c , 1932.  has  a  g r e a t many  Finance ten  Act  banks  recall  "The the  said  words  to  be t h e  of  be  well  be  of the  the  facilities  a disgrace for  ca.lamitous would  one  i t be  of  the  of  that,  our to  Beckhart *' again: 9  to n o t e  great security  banking  1932,  So  that  Canadian Government c o u l d l a r g e r banks t o f a i l  will  meeting  and  i t would  fail.  It  Canadian  10,  exist,  to  the  branches,  system.  Canadian  the P r e s i d e n t  the of  stress  9 3  a l l o w any  laid  at  the  last  Association  of  u p o n v/hat i s  d e p o s i t s under  Speaking Bankers'  not "  on  our annual November  said:  "They ( t h e C a n a d i a n b a n k s a r e t o be r e g a r d e d , f i r s t and f o r e m o s t , a s g u a r d i a n s of t h e p e o p l e ' s money. In the t o t a l o f our b a n k i n g a s s e t s t h e shareholders' e q u i t y forms a v e r y s m a l l proportion. M o s t o f t h e v a s t sum f o r w h i c h t h e b a n k s are r e s p o n s i b l e has been l e f t i n t h e i r safek e e p i n g by t h e p e o p l e o f C a n a d a . . "To t h e p e o p l e t h e y d i s c h a r g e two p r i m a r y r e s p o n s i b l e duties; f i r s t l y , that of p r o v i d i n g c u r r e n c y f o r the d a i l y conduct of b u s i n e s s , as a n d when r e q u i r e d , and i n a d e q u a t e a m o u n t s ; and secondly, that of holding i n safe custody the b a l a n c e s e n t r u s t e d t o them by t e n m i l l i o n p e o p l e in Canada. "It i s unnecessary to state that both of.these f u n c t i o n s have been performed w i t h complete smoothness and c e r t a i n t y throughout the depression. "....The s a f e t y o f d e p o s i t s has n e v e r been i n any d o u b t , n o r has t h e r e b e e n a moment's h e s i t a t i o n i n the m e e t i n g of a l l l a w f u l demands."  92.  Beckhart,  93.  M c l e o d , «T. A . Address to the Annual General Meeting the C a n a d i a n B a n k e r s ' A s s o c i a t i o n , Nov. 10, 1932.  94.  B.  H.  - P a r e n t h e s i s by  The  the  Banking  writer.  System  o f Canada,  p.  328. of  83.  In  a  previous  last  three  have  been  or  the  bank  months held.  general  being  but  respect  their  was  to to  Bankers'  annual In  manager  not  laud the  to  every  spoke One  mentioned  that  of  a l l the  almost  case  against of  the a  of as  the  so  none  of  idea  the banks  president  of  methods used  a  central  almost  c e n t r a l bank would  deposits. quoted  in  e i t h e r the  e x i s t i n g system,  safety  fully,  meetings  show t h a t  the  Association  point  i t was  nearly  instituted.  invariably bad,  chapter  particularly  The  above, the  President  however,  others  need  be  with of  the  covers be  quoted  in  neither  here. It  would  criticism  nor  be w e l l  approval,  claimant  against  does  give  not  matter on  of  these  the  give  the  question to  95.  him  assets;  depositors' On  the a  of  viewpoint of  the  a  here,  status of  a  lien  notes  claims  perhaps,  of  the  failed  on  bank.  these  the  the  Dominion  the  24,  as  The  assets.  constitute  of  depositor  P r o v i n c i a l Governments,  claims,  December  the  assets  the  the  state  prior  priority,  second;  to  a  law  In  first  the lien  Government, the  third;  the  fourth.  1932,  "A  Canadian  Banker",  of  Canadian  chartered  central  bank f o r  Canada,  banks  writing on  says with  to  the reference  deposits:  Beckhart,  B.  H.  The  Banking  System  of  Canada,  p.  403.  84.  "long experience has indicated that i fapproxim a t e l y 10 p e r c e n t , o f t h e a m o u n t o f t h e d e p o s i t s i s h e l d i n cash or i n b a l a n c e due by o t h e r b a n k s , 10 p e r c e n t , i n c a l l l o a n s (Hew Y o r k ) a n d 25 p e r c e n t , i n s e c u r i t i e s , t h e * requirements of s a f e t y a r e s u f f i c i e n t l y met." b  The holding amount past  and of  t h e banks  have  made  a practice  demand  only  10 p e r c e n t ,  of deposits has u s u a l l y  without from  become  been  that  i n reserve against  sulting to  fact  very let  been  from  depression,  interested  recently have  criticism  i n banking  pointing  acknowledged  the public.  however,  criticizing  extreme  been  this  have  of the  i nthe  Conditions r e caused  affairs,  more  a n d many  "pyramiding"  out that  of  of  i tconstitutes  people have  credit, a  method  inflation.  us quote  one p o p u l a r  writer  as an  illustration:  "Are t h e Banks Gambling With T h e i r D e p o s i t o r s ' Money? T o t a l amount o f c a s h a d m i t t e d b y t h e banks t o be on d e p o s i t w i t h them o n A p r i l 30, 1931 $2,049,002,583.00 T o t a l amount o f c a s h i n t h e f o r m o f l e g a l tender throughout t h e e n t i r e Dominion out o f which t o pay these deposits $ 214,814,046.00  Balance cash  n o t covered  by l e g a l  tender i n $1,834,188,537.00  How c o u l d t h e y p a y t h e i r d e p o s i t o r s e v e n 1 1 p e r c e n t , o f w h a t t h e y s h o w t h e y owe t h e m . . . . ? Can t h i s be considered a safe and c o n s e r v a t i v e p o l i c y to pursue  96.  The F i n a n c i a l  Post,  D e c . 2 4 , 1 9 3 2 , p . 15  " i n our banking system; s h o u l d be a p p r o a c h i n g a And least,  now  we  come  consideration  Finance  Act  bankers'  bank—the  fails  to  The  vital  factor,  exhibit  bank,  sonnel.  a  by no  means  t o t h e argument  satisfactory  than  i n any  i s to  key  be f o u n d  about  the  that  substitute  o t h e r way,  t h e symptoms  the r e a l  Speaking  but  question of administration.  more  Act  last,  relative  constitutes  administration,  central  to the  p a r t i c u l a r l y i f we period of panic?"97  of a  for a  In i t s  the  Finance  central  to the s u c c e s s  bank. of  a  i n i t sadministrative  monetary  control  the  lionel  D.  perEdie  says: " I t s s u c c e s s depends upon the d i s c r i m i n a t i o n and judgment o f c e n t r a l bank o f f i c i a l s i n a n a l y z i n g complex s i t u a t i o n s of f i n a n c e and trade."98 And  again:  " F i n a n c i a l statesmanship of a high the c a r d i n a l requirement."99 In  o t h e r words,  as  Bagehot  once  "Good b a n k i n g i s made by g o o d by good l a w s . " Or,  as  economists  one  of  o u r most  order i s  said:  bankers  and  e n l i g h t e n e d Canadian  says:  97.  Bank  o f Canada,  98.  Money,  Bank  99.  Ibid.,  p.  Why  Credit,  483.  Not? and  not  p.  7.  Prices,  p.  475.  bank  86.  "The d e g r e e o f s u c c e s s t h e y w i l l a c h i e v e w i l l depend upon t h e i r s k i l l i n i n t e r p r e t i n g the v a r i o u s c r i t e r i a , and t h e p r o m p t i t u d e with which they e x e r c i s e the expedients a t t h e i r command."100 It tion of  i s above  of a  central  unquestioned  tion  who  will  situations before  is  be a b l e  and  should  spot  i s  appointed  Board.  Their well  able  by t h e  Board  " "  qualifica-  and  to "apply  financial  the  brakes"  A c t i s i n t h e hands  i s presided  With  1  enjoyed  and t r u s t w o r t h y have  f o r the position  or an  to  t h a t such  men been  of head  i f ever,  economist expect  economic  experts  over  Minister of  these Privy  two  by  Finance  officials  C o u n c i l who a r e  Governor-General-in-Council.  has u s u a l l y  rarely  of  reached.  of H i s Majesty's  qualifications  However,  i n t h e hands  The D e p u t y 1 0  the administra-  and p r o f e s s i o n a l  This  ex-offieio.  members  Canada very  that  administration of the Finance  Secretary, five  be  f a r enough  M i n i s t e r of F i n a n c e .  are  then,  to interpret  see ahead  the Treasury  the  bank  intelligence  the danger  The of  a l l important,  fortune  as M i n i s t e r s of such  Hence  ministers should give  o f t h e Royal  been  Bank  having  Finance.  of t h e Department  banker.  of  as t o f i t them  h a s one o f them  experienced  Letter  t h e good  a  very  of Finance. professional  i t i s t o o much expert  of Canada,  direction  100.  Monthly  May,  101.  P r o c e e d i n g s o f t h e S e l e c t S t a n d i n g Committee on B a n k i n g a n d Commerce, 1924, p p . 344 a n d 3 4 7 .  1932.  87.  to  the  administration of  The heads They to  five  of various are  able,  matters  the  Privy  change  departments  i n personnel  central  banks,-the  by  the  loan, be  expert  when  the  requested view  admittedly things  for four of  advice,  of  the  financial,  to  of  within  Unlike  the  be  advice  on  the  quality  Bankers' Referring  Trustees. The  other  " I n 19E4 Company,  the the the  of of  One three  Association, with to  an  "central  Trustees  Trustees  Besides,  thought they  body  subj ect  to  the  Cabinet  and  and  with  a d m i n i s t r a t o r s of  i n the banks  Board  case as  Central  head  "expert  i t i s somewhat our  or  of  are  most not  the valuation  collateral  for  Gold  Reserves  of a  central  a  may  advice.  almost  the  Finance.  by  As  heavy d u t i e s .  time  Treasury  t h a t the  to  these  the  the  their  go  of  of  of  fact  Act.  shifts  Ministers.  other  little  political  deposited  lend  devote  except  Trustees  should  a  Cabinet  have  Finance  members  to  administrators have  with  governments.  securities  In  the  M i n i s t e r form  of  of  to  Act.  are  they  t h e r e f o r e , to  changes  aided  Finance  Councillors  relative  Finance  the  of  amusing  bank" the  experts" to  C e n t r a l Gold  the  appointed  approval  Beckhart  T r u s t e e s were the Bank o f M o n t r e a l ,  of  by  the  Aet)  There  the  by  the  Reserves  paper.  i s appointed  in a l l  that  (the Finance  commercial  are  find  bank  the  are  Minister Canadian  Minister.  says; Royal Trust the Canadian  88.  "Bank It  o f Commerce  i s stated  trustees,  t o be t h e custom  o r h i s bank,  consideration, that  and the R o y a l  he  i s interested  elsewhere would  obtained  from  Trustees  of  Privy  Gold  Reserves  i n impartiality  see that  the Minister  Councillors are not trained  thought  or a t t e n t i o n  probably  of the Deputy  responsibilities in  charge  indicated them to  devolving  nature  the Banking a week".  B . H.  upon  that,  duties  ''does n o t  and the f i v e of central  to give  the suggesof the  them a s a T r e a s u r y i s probably  of t h e remarks he said  Board accurately  o f one o f they  "try  104  102.  Beckhart,  103.  Watson,  104.  P r o c e e d i n g s o f the S e l e c t S t a n d i n g Committee B a n k i n g a n d C o m m e r c e , 1 9 2 4 , p. 3 9 2 .  Donald,  much  of the Finance A c t .  conception  Committee when  that  disinterestedness."  questioning  Their  than  Trustees  f o r the duties  administration  by t h e c a s u a l  onee  little  the  of Finance  other  Minister.  of the Act's  before  meet  with  advice  o f t h e Bankers'  and  to a d m i n i s t r a t i o n  accept  however,  says,  3  under  i t i s the banks  to s u s p i c i o n  are a body  and a r e t o o busy w i t h  tions  open  Watson^  banking  They  Since  a r e members  Donald  the ultimate  T h u s we  who  A s Mr.  the Central  possess  be l e s s  one o f t h e  i n the s e c u r i t i e s  i n the transactions,  obtained  l u < ! i  t h a t when  i s not consulted.  are i n t e r e s t e d  Association.  Bank.. "  The B a n k i n g Essay  System  o f Canada,  on "The F i n a n c e A c t " . on  p. 3 8 5 .  89.  The usually  Deputy regarded  generally natural  in  civil  should  o f government i s  department, servant.  leave  In f a c t  administrator  one such  andi s ,  Iti s  details  I t i s t h e r e f o r e the Deputy  i s the r e a l  practice.  of that  a permanent  the M i n i s t e r  to him. who  department  as the expert  speaxing,  that  stration Finance  Minister of a  of  admini-  Minister of  of the Finance A c t  Deputy  said  he  was  105 "supposed very  t o be t h e a d v i s e r " .  efficient  criticism  and f a i t h f u l  o f them a s such,  have n o t , i n t h e past banking  experts  criticism there  been  at l e a s t ,  imposed  rightly  The  have  belong  be s a i d some  There  are i n fact  stration  105.  no  Ibid.,  Act.  a civil  service  p . 388  central Rather, by  any  which  institution.  training i n  i n banking.  of t h e Currency  statutory requirements  they  department  specialized  of t h e o p e r a t i o n s  of any o f f i c i a l  of the Act.  as  the system  to a  been  I t i s no  against  experience  of the details  qualifications  fitted  the Finance  of the Comptroller  after  been  have  to s a y that  had n e i t h e r an academic  economics nor p r a c t i c a l may  upon  Deputies  servants.  therefore,  be d i r e c t e d  duties which Deputies  civil  to administer  should  have  Most  The who  same looks  o f theA c t . as to t h e  r e s p o n s i b l e f o r the  admini-  90.  In  a  later  section,  "people's"  bank,  i t will  tion  e x e r t s no  sense. it  Suffice  has  the  control  not  been  interest  regulating  i t to  when be  f o r the  commodity  monetary  here  the policy  rate  Act w i l l  shown f u l l y  over say  the  purpose  prices,  or  that  judged  the  matters  that,  of the  be  i n the  as  a  administra-  i n the  social  past  at  administrators  to  of  credit,  controlling  foreign  exchange.  least, vary  Just  or one  106 or  two  excerpts  Committee w i l l fact  that  control  be  could  be  the  given here  the Deputy  "Question:  has  not  Proceedings  of  i n p a s s i n g as even  been  the  Banking  evidence  conscious  the such  exerted. C a n y o u t e l l me w h e t h e r o r n o t t h e i n t e r e s t r a t e m i g h t be u s e d a s a means o f a s s i s t i n g i n t h e p r o c e s s of d e f l a t i o n , or a s a weapon w h i c h might be used a g a i n s t inflation? I do  Question:  Do y o u r e c o g n i z e t h e i n t e r e s t rate, t h a t i s , the r a i s i n g and l o w e r i n g of the i n t e r e s t r a t e , as an effect i v e i n s t r u m e n t , n o t. p er h a p s t h o r o u g h , but an e f f e c t i v e instrument, t o c a u s e d e f l a t i o n o r t o assist inflation?  Answer:  I do  Minister  of  that  Answer:  It  106.  from  is interesting of Finance  not  not to  quite  think note  f o r more  get  that.  so." that  than  t h e r e was  two  years.  no The  Deputy late  The P r o c e e d i n g s o f t h e S e l e c t S t a n d i n g C o m m i t t e e B a n k i n g a n d Commerce, 1924, p . 393.  Mr.  on  91.  J.  C.  died  S a u n d e r s , who on  until  April  1,  anomalous  was he  no was  of  Now  a  civil  doubt not  a  that  the  situation  assistant,  His  1932.  assumption  administrator  become  1930.  November,  previous  had  very  the  Finance  i s evidenced  During  the  greater  part  o f f the  that be  "central  was  tacitly  this the  was fall  panic  a  two  of of  of  and  a  at  unprecedented  the  the  the  United  to  from  time  work  fact  States,  Ottawa,  and  discount—a  our  that was  expert  he  did  finally able  than  then, did  made.  to  usual.  when not  civil  have our  Canadian  on  fact,  who  at  an  And  debts,  financial  Economic  dollar  would-  task.  moratorium a  even  servant  f o r the  standard,  Finance  Canada  control,  a  to  not  Affairs.  by  in  That  External  Imperial  period,  an  Deputy,  of  Hoover  the  the  of  unsuite'd  gold  of  The  Minister  therefore  the  years.  the  years,  be  the  half  M i n i s t e r was  Minister  and  saw  a  the work then  administered  that  Britain  i n the  the  s o - c a l l e d "automatic"  acknowledged period  by  and  appointment  half  standard  b a n k " was  of  Conference  that  M i n i s t e r and  gold  semblance  the  two  an  as  share  was  existed  there  sufficiently  unlikely  of  Act,  then  real  qualified  greater  period  i s the  position).  any  a  Deputy M i n i s t e r  ( f o r another  assume  For  our  man  capable  D e p u t y when  Prime  in  did  new  also  correct  v,/ho  become  was  appointed  servant,  considered  very  were  not  1920,  these  Act  is also  was  in  during  the  It  successor i f we  administer the  Deputy M i n i s t e r  u n p a r a l l e l e d , i n t h e number financial As  interesting official.  the  above,  structure a new  Deputy  o f what to n o t e  He  has a l r e a d y  i s D r . V/. . C.  experience  Finance  Act the administrator to d i r e c t Clark  time,  central  v/as a d v i s e r  in  Ottav/a  i n 1932.  At almost  being  appointed  Deputy,  of " r e f l a t i o n "  in  newly  in  new  issued  bank d e p o s i t s ,  advances  to  that  of  a $350,000,000  if  the outlet,  for  i t , because  and  financial of t h e  seemingly  well  taking  by a d e q u a t e  that her  the  becomes  bank  possibility  c r e d i t , when  collateral,  first  $35,000,000  received  created  he  $35,000,000  created  f o r t h e Government  o f bank  Conference  moment  o f some  This  I t also  representatives  Economic  C a n a d a was  t h e $35,000,000  joining  considerable  the exact  notes).  extension  backed  Before  policy.  (to the extent  amount.  be  new  i n the h i s t o r y  the Imperial  Dominion  1932.  of the Depart-  to t h e Canadian  at  finally  i tw i l l  i s an expert  bank  monetary matters  taste  he had  then,  on  was  was  i n November,  recently  i n the business  For the f i r s t  Dr.  Minister  University.  -world.  qualified  world.  been s a i d  Clark,  o f Queen's U n i v e r s i t y  "practical"  shook t h e  the q u a l i f i c a t i o n s of t h i s  of Economies o f Queen's staff  o f the  to the Department o f F i n a n c e  the l i g h t  ment  economic  stated  appointed In  and  of c r i s e s that  and  i s found  an a d d i t i o n to  the of  cash  reserves  o f t h e banks,  permitting their  ten  times It  their  deposits  cash  t o grow u p  to  a  practice  approximately  reserves.  i s not the purpose of the f a c t  of t h i s  but  i n view  has  so f r e q u e n t l y e x p r e s s e d  that  thesis  the present himself  " s o u n d " money,  one i s i n c l i n e d  Deputy  and convinced  advised  a n d b a n k s make  to speculate, Prime  as b e i n g  to conclude  him t h a t  Minister  i n favor of  that  t h e new  a measure  of  infla-  in? tion  was  Premier in  necessary. was  also  our d o l l a r  wheat". remains  influenced  was  damming  Y/hatever that  The F i n a n c i a l  m o n e t a r y management. initiation  already under an  experienced  the regime  attempt  and  107.  monetary  be  the export  flow  of  The F i n a n c i a l  we  conscious of Dr. Clark and  us r e a s o n  Deputy  fact  history  m a n a g e m e n t w h i c h we  have  to a n t i c i p a t e  Minister  our monetary  of  Finance  and b a n k i n g  control  of the department g e n e r a l l y .  of interest  Clark's views.  i n Canada's  the  Canadian  the interesting  i n seemingly  would g i v e  to r e g u l a r i z e  will  "the r i s e  qualifications  o f t h e new  the operations It  Dr.  into  The  that  that  time  an e x p e r i m e n t  thinks  by the f a c t  the influence,  f o r the f i r s t  have witnessed  the  up  Post  then  to learn  something  There  has been  something  Post,  Toronto,  Nov.  26,  of  of t h e nature  1932  94.  of  a controversy  the  gold  Great and  standard.  Britain  up  to t h e present  Deputy  o r n o t Canada  The P r i m e M i n i s t e r  abandoned  " s o u n d " money. new  as t o whether  gold  that  declares  Canada  is still  declared would  on  when  n o t do so,  h i s i n t e n t i o n to adhere t o  Of o u r p o s i t i o n w i t h  respect  t o gold  the  says:  " . . . . P r o h i b i t i o n of g o l d export i s tantamount to s u s p e n s i o n of the g o l d s t a n d a r d , though t h e n i c e t i e s of formal l o g i c would also r e q u i r e t h e s u b s t i t u t i o n o f a DE JURE f o r a DE-FACTO prohibition of the conversion of Dominion notes into gold f o r domestic as w e l l as export purposes."108 In  t h e same a r t i c l e  he  says:  " S e p t . E l , 1931, m a r k e d t h e end o f an e p o c h i n the f i n a n c i a l h i s t o r y o f t h e w o r l d . " 1 0 9 ( I t w i l l be remembered t h a t t h i s was d u r i n g the p e r i o d when Canada h a d no D e p u t y M i n i s t e r o f P i n a n c e — n o one d i r e c t i n g our' " c e n t r a l banking" machinery.) Again  he  states:  "We w o u l d b e i n a s o u n d e r p o s i t i o n , h o w e v e r , i f we h a d c e n t r a l b a n k i n g m a c h i n e r y p r o p e r l y equipped and d e f i n i t e l y r e s p o n s i b l e f o r the c o n t r o l o f c r e d i t i n an e m e r g e n c y o f t h i s charac t e r i n s t e a d of the anomalous c o n d i t i o n o f d i v i s i o n o f r e s p o n s i b i l i t y between t h e banks and t h e g o v e r n m e n t a n d l a c k o f s p e c i a l e q u i p m e n t o r t r a d i t i o n s i n t h e D e p a r t m e n t of F i n a n c e . " 1 1 0  108.  "The F l i g h t f r o m t h e Gold S t a n d a r d " , Q u a r t e r l y , Autumn, 1931, p . 760.  109.  Ibid.  110.  I b i d . , p. 761.  Queen's...  Are our In  then,  Finance fact  ment a  we,  the  bank.  i s to  Deputy  should and  the  vast  instance, new  have  i f he  central  of  a  deliberate  of  a  that  large able  of  such  the  around  traditions exist  to  Finance  Act  great  asset  are  a  the  Bank  extent  due  management  in building  epoch  up  of  to  convince  machinery, new  no  up  traditions constitutes  prestige  is  banking  "traditions" built  Traditions  succeeds  beginning  such  theory  bank.  The  have  Certainly  lack  against  centra.1  the  Act?  to  argu-  is in to  effect  a  England,  central  for  its traditions.  the of  Government  our  monetary  1932,  will  financial  If  that  we  system,  t r a d i t i o n s around  November,  i n the  an  yet.  our  mark  history  of  condition  of  the  Canada. Dr. sion  of  Clark  speaks  of  "the  r e s p o n s i b i l i t y between  ment".  Certainly  central  banking machinery  the  phrase  sider  the  Finance  in  effect a  that  constitute  administration (1)  The or  (2)  The  Act  and  central  divided  amont  central  decentralized Finance  banks  Act  of  illustrates  " d i v i s i o n of  b a n k s ,—10 a  the  administration  economises  of  anomalous  banking have  the  are  system the  to  con-  together  powers  following:  banks  central  govern-  so-called  I f we  b a n k we the  our  the  admirably  labor". our  and  divi-  working  independently-  bank.  —administered  by  the  Treasury  96.  Board—grants (3)  (4)  The  Trustees  as  to  the  values  which  loans  are  sought.  The  The  as  Central  Board  experts  of  legal  Central  tender  Gold  Gold  the  commercial  -  Reserves  -  and  three  by  the  Bankers'  Association  for  the  gold  and  Dominion  notes  The  of  the  Minister  visor  of  the  amount of  the  for  of  Canadian  as  supervisor  over  on  the  by  Minister  of  -  of  four Finance  responsible  deposited  by  bank n o t e s  paid-up  Redemption  the in  capital.  capacity  Bankers' A s s o c i a t i o n  as  super-  Fund.  in  its  capacity  -  (a)  clearing  (b)  the  printing  the  banks  the  appointment  (c)  issue  in his  Circulation  The  the  their  Finance  for  administered  one  backing  Treasury  notes).  trustees,  as  by  — i n  paper  responsible  (Dominion  appointed  Reserves  advising  of  Governor-in-Council  excess  (7)  the  banks.  capacity  banks  (6)  of  to  their  issue (5)  loans  houses. and  and  supervision  of  distributing  their of the  of  notes  destruction. a  curator  affairs  of  to  assume  suspended  banks. (8)  The  Postal  Savings  Banks  -  state  institutions.  to  97.  (9)  The I n s p e c t o r inspection, chartered  When  not  surprised  central the  at least  Canadian  —makes  one a y e a r ,  this  medley  of  of powers  of our " c e n t r a l banking" that  banks,  o f Banks  each  Kisch  and E l k i n ^ ^ " ,  of "the s e r i o u s  system",  under  the following  Divided responsibility.  (2)  Lack  of  (3)  Gold  standard  share the he i s  authorities  speak  (1)  that  machinery  should  Following  external  bank.  one s u r v e y s  administration  General  on  draw-backs  to  heads:  leadership.  i s their  n o t an automatic comment  system.  i n part:  "Whether t h e r e i s a g o l d s t a n d a r d or not the c o n t r o l o f the c r e d i t and t h e monetary system i n v o l v e s t h e s o l u t i o n o f many d i f f i c u l t problems o f p o l i c y and d e t a i l e d a d m i n i s t r a t i o n . B u t i f t h e r e a r e many i s s u i n g a u t h o r i t i e s t h e r e c a n n o t be one c o n t r o l l i n g f o r c e t o d i r e c t t h e monetary p o l i c y o f t h e country, a n d t h i s i s b o u n d to be a s o u r c e o f w e a k n e s s , e s p e c i a l l y a t a t i m e o f s e r i o u s c r i s i s , when a well-devised and c o h e r e n t p l a n o f a c t i o n vigorously applied i s essential."112 While  on the s u b j e c t  consideration relationship This  111. 112.  to the p o l i t i c a l between  i s a subject  Kisch Ibid.  of administration  f a c t o r , and the  the "central  on w h i c h  and E l k i n .  there  Central  we m u s t  bank" i s room  Banks,  give  general  and t h e Government. f o r much  p . 6.  honest  difference  o f opinion.  of  t h e c e n t r a l bank  to  their  might  the entry  banking  machinery  keeping  politics  on  that  is  of the utmost  be  kept  clear  controversy",  the  should degree  should  state  Kisch  control  bank  of  Sweden  in  between  varieties  like and  and  that  believe  insist  two t y p e s  degrees  that  Kisch  and E l k i n .  that  Bank  Bank  should  Iti s  r i s e to  independent  o f Germany  i t should  are almost  Banks,  bank of  and t h e  be a  real  the Riksbank  of Australia.  of independence  and  the central  of Norway,  there  Central  opinion  the c e n t r a l  Then  a s many  as there  banks.  113.  matters  politics  gives  that  and completely  the Norges  of  independent".  the Reichsbank  Others  of  matters  of p a r t y  or quasi  the Commonwealth  these  out o f such  monetary  of independence  like  bank  t h e monetary and  i t i s desirable  b e p r i v a t e l y owned  voice  i n e f f e c t say that i t  that  Some  give  central  i s no d i f f e r e n c e 113  the exigencies  be "independent  of a  opponents  The d e s i r a b i l i t y  and E l k i n  and that  of England.  into  sense)  there  importance  "from  i n Canada,  the creation  of p o l i t i c s  of opinion.  government Bank  lest  that  and k i n d  difference  generally,  ( i nthe e v i l  so s e l f - e v i d e n t  point.  i n p a r t i c u l a r , and  o f our c o u n t r y .  is  bank  idea  apprehension  mark  Bankers  p. 27.  are central  99  What it  be  a  state  bank  the  a  the  "People's that  other of  as  partisan  party  real  work  responsible  the  of  dependent  the  may  conceive  the  Finance The  the  act  the  so  so  incontrovertibly  considerable the  The  voices  the  virtues  being  institution  of  the the  and  state  amusement  of  be  Deputy  five  their  state  of a  bankers Finance  that  of  real  compose Act.  i t s head  i n the  light,  thick  by  of the  and  is  Councillors  of  Deputy,  the of  In  office  is  addition,  i f  then  are  one  o u r " c e n t r a l bank",  owned.  our  the  the  Finance  "central  should  Act  bank"  give rise  i s  to  o p p o s i t i o n shown  central a  is  Privy  term  party.  be  completely  i s appointed  "banic"  i n view  governed  t o whom f a l l s  administration of  political a  could  "owned",  i s completely  that  completely  of  the  leading party  exception  and  with  It will  At  If  completely  Russia,  Board.  Act The  the  fortunes  an  Act,  The the  Government,  of  fact  bank?  i s administered  anyone  Minister.  is  towards  as  world, of  generally a  A l l , with  upon  central  Finances".  Treasury  administering  the  a  bank  Act  controversy.  p a r t y men.  members  of  Finance  body--the  to  as  i n the  state  Commissary  completely  of  Act  bank  the  M i n i s t e r of Finance,  immersed  are  any  exception  political  Finance  banlc i t i s i n d i s p u t a b l y a m o r e  than  remembered by  of the  central  possible by  now  bank f o r  symphony 'Yet  Canada.  in praise  they  utter  of a  d i r e warning  a g a i n s t the  danger o f p o l i t i c a l i n t e r f e r e n c e  s h o u l d a c e n t r a l bank be c r e a t e d . banking  If political  i s dangerous, then the Finance Act  dangerous instrument. v i r t u e s a s we  are not n e c e s s a r i l y e v i l .  s t a t e ownership and  o p p o s i t e s and  " c l e a v e t o t h e one  and d e s p i s e t h e  be  logical. other".  i n p r e v i o u s p a r a g r a p h s t h e r e a r e many f a u l t s One  any control  O p p o n e n t s of a c e n t r a l  c a n n o t h o l d t o two  bank  They must As  indicated  t o be  found  of these i s that i t s a d m i n i s t r a -  t i o n i s l e f t t o o open t o t h e d a n g e r o f t h e p o l i t i c a l Yet  the w r i t e r has  political  searched  i n v a i n f o r any  i n t e r f e r e n c e ( i n the e v i l  w i t h t h e a d m i n i s t r a t i o n of t h e A c t passed  i n 1914  have been.  to the p r e s e n t .  Y e t , although not  factor.  suggestion  from the time  Mistakes  t h e r e no  i t was doubt  properly qualified for servants at  have not a l l o w e d the e v i l  t o show i t s e l f  of p o l i t i c s  this  least to  the s l i g h t e s t degree i n the a d m i n i s t r a t i o n of the A c t . A. F. V/. P l u m p t r e  says:  " . . . . p o l i t i c a l i n t e r f e r e n c e w i t h the c r e d i t money s y s t e m i s n o t a p r o b l e m i n C a n a d a a t present."114  114.  A C e n t r a l Bank f o r C a n a d a , p.  of  sense) i n c o n n e c t i o n  s p e c i a l w o r k , o u r M i n i s t e r s and. c i v i l  Mr.  of  i s a most  I f the F i n a n c e A c t has as m  are t o l d , then  i n the F i n a n c e A c t .  control  3.  and  As  101.  That i s n o t to say, however, that the dangers  of the  p o l i t i c a l f a c t o r should n o t be guarded a g a i n s t .  Here i n  p a s s i n g i t may be suggested, however, that i f under unguarded,  "wide open" c o n d i t i o n s the p o l i t i c a l  not appeared,  e v i l has  s u p p o r t e r s of a s t a t e owned c e n t r a l bank  may be encouraged  to b e l i e v e that in" a Canadian  central  bank w i t h proper safeguards t h e r e need n o t n e c e s s a r i l y be any great danger from the p o l i t i c a l a n g l e . A v e r y important o b j e c t i o n that may be o f f e r e d a g a i n s t the Finance A c t as a bankers' bank i s that i t operates on the i n i t i a t i v e  of the banks only.  V/hen t h e banks d e s i r e  advances they may a p p l y f o r them under t h e p r o v i s i o n s o f the A c t , and presumably,  i f t h e s e c u r i t i e s which they  o f f e r a r e a c c e p t a b l e , the Department of Finance has no o p t i o n but to make t h e advances sought.  On the other hand  our " c e n t r a l bank" has not the power to f o r c e i t s "member" banks to accept advances when i t wishes  to i n i t i a t e an  "easy money" p o l i c y w i t h the i d e a o f encouraging No doubt  investment.  t h i s e x p l a i n s why the banks p r e f e r the Finance Act  to a r e a l c e n t r a l bank. And no?/ we may summarize the arguments f o r and a g a i n s t the Finance A c t as a bankers' bank: I t i s l i k e a bankers' bank i n that -  10S.  (1)  I t makes p r o v i s i o n f o r in  this  bears  general  some  It provides  (3)  In  a  way  that  do  of  for  branches.  the  a  be  chartered  Its customers are  (5)  It  the  (if in a  the  Department  of Finance  the  "central  bank"),  monopoly  of  the  It might  be  said  solvency  of  the  but  note to  banks,  making  central  said  the  have  for  banks  do  banks. ten  the  "member  head  rediscounting  banks.  b r o a d way as  advances' i t  bank.  for to  and  you  being  does not  a  think  part  of  of  possess  a.  issue. be  whole  Government  the  commercial  issues notes  it'the  of  rediscounting,  (4)  (6)  to  currency  i t may  offices the  to  emergency  loose  banks"  operation  semblance  (2)  loans  responsible banking  comes t o  for  the  system,  for  rescue  of  the  through the  banks. It (1)  is unlike It  i s not  the (2)  It  bankers' the  bank  in  that  depository  of  the  cash  reserves  of.  banks. is therefore  serves (3)  a  by  I t does not bank  unable  to  economize  the  cash  re-  concentration. act  as  settlements.  a  clearing  house  for  inter-  103.  (4)  I t has not a monopoly o f t h e n o t e (though not a l l c e n t r a l  (5)  have).  I t does n o t r e d i s c o u n t f o r t h e banks i n t h e real  s e n s e ; i t m e r e l y makes l o a n s  deposited (6)  banks  issue  t o them on  securities.  I t s administration i s f a u l t y . i n that (a) t h e o f f i c i a l w i t h f i n a l r e s p o n s i b i l i t y i s the M i n i s t e r of Finance  who  has n e i t h e r  the time n o r the Q u a l i f i c a t i o n s  f o r these  . duties. (b) t h e o f f i c i a l s  who  do t h e r e a l w o r k a r e  civil  s e r v a n t s who h a v e i n t h e p a s t a t  least  been incompetent f o r t h i s  special  work. (e) t h e T r e a s u r y is  Board n o m i n a l l y  responsible  e n t i r e l y u n f i t f o r the work.  (d) t h e r e  i s d i v i s i o n of t h e r e s p o n s i b i l i t y .  (e) t h e r e  i s l a c k of l e a d e r s h i p .  ( f ) i t i s open t o t h e d a n g e r s o f t h e p o l i t i c a l factor. (g) a s i d e f r o m  the personnel  l a c k of c e n t r a l  there  i s a complete  b a n k i n g m a c h i n e r y and  equip-  ment. (h) i t o p e r a t e s  a t t h e o p t i o n of t h e b a n k s o n l y .  In  Chapter  2  the f u n c t i o n s  headings—(1)  discussed, under t h r e e a  g o v e r n m e n t ' s bank,  Finance a  ment's  bank.  We  (3) a been  shall  a bankers'  customers holds  there  is a real  of that  central  i s the government.  the account  of the government;  reserves.  In f a c t  t h e b a n k make  the tasks  funds.  the  Government  Canadian  "central  loans  As  was  T h e y may bank"  Act}  and  tion  to t h e Government,  of t h e  The  i n a  previous  advances  the  section  authority 115 $50,000,000 a g a i n s t  An  it,  a  no  as  secure  and without such  a c t o f 1914  to i s s u e  notes  and  including  which a gold  Chapter  any  accommoda-  D o m i n i o n Government  G e o r g e V,  but  to t h e Govern-  b a n k s may  limit,  Act gives  however.  o f Canada,5  imposes  of being  the  Statutes  nation's  hold  advances through  amounts, w i t h o u t  whatever.  central  i t i s the  i t should  t h e means w h e r e b y  reserve  The  chief  the banks are i t s only  i t d o e s n o t make  It provides of u n s t a t e d  that  shown  receive  gold  115.  of  govern-  of the  has not the p r i v i l e g e  of t h e F i n a n c e  customers.  ment.  light  which the government  i t imperative  government's  "customer"  one  bank  o f the government's funds  a  (2)  The  i t as a  bank  depository  on  i n the  consider  were  bank,  " p e o p l e ' s " bank.  considered  now  bank  bank.  Where  bank  and  A c t has a l r e a d y  bankers'  of a c e n t r a l  4.  gives up  to  reserve  of  25 p e r c e n t , h a s t o b e m a i n t a i n e d . mitted  t h e Government  without to  be  any r e s e r v e of g o l d .  backed  Railway  issued  be  by C a n a d i a n  securities,  notes  Of  that  Dominion  secured  dollar  notes  i n the Finance Aet  issue  of notes  f o r i t s own  restricted  as  $16,000,000 Grand  banks,  on t h e o t h e r hand, t h e Government  as  advised  three In  by g o l d .  Trustees  backed  by  Ibid.  118.  Ibid.  Parlia-  of the  is limited  purposes  to t h e extent  through  i n the  by a c t o f  the Bankers'  In the issue  were  pro-  only  of the Treasury  must  be  of notes  Board,  Reserves, Association. the Government o f 25 p e r  backed  cent,  dollar  f o r the  con-  t h e F i n a n c e A c t , no  gold  S t a t u t e s o f C a n a d a , 5 G e o r g e 7,  117.  as  see' t h a t  o f the Gold  $76,000,000  o f t h e banks,  except  f o r the convenience  f o r i t s own  and a l l over  dollar  venience 116.  of notes  h a v e $50,000,000  gold,  for  the four  o f whom a r e a p p o i n t e d  the i s s u e  must by  by  same a c t  the Government i s v e r y  I n the i s s u e  members  notes  The  T h u s we  ment.  the judgment o f i n e x p e r t  Pacific  uncovered 118  to the quantity,  by  were  o f $76,000,000  by g o l d ,  purposes  of notes  Trunk  purposes.  o f 1914.  per-  t o $2 6 , 0 0 0 , 0 0 0 ^ 117  were  i n excess  for dollar  vided  definitely  and  a n d $10,000,000  a c t o f 1915  up  these  Northern  f o r g e n e r a l governmental  required to  to issue  An  Chapter  4.  106.  backing  i s required at a l l .  Hence serve to  we  see that  the F i n a n c e  as a government's  the Government  tomer.  I t would  be  absurd,  be  the d e p o s i t o r y of  banks  are the f i s c a l  financial  them.  Where  that  there  times  of  the  Finance  has  been  central  Act f o r the  said bank  b e f o r e , where experts  and  Certainly  the Finance  at had  When  Ottawa no  i n the  central  financial Minister  economic  the  there  bank  experts  or m o n e t a r y of Finance  a t the time.  term  c a n be  a  handle  in  acts as  an  and  business.  performed  such  by  Again, banks,  as the  at  service for  Conference  the Canadian  We  on  loans  the country  no  to c a l l  matters.  The  of v a r i o u s k i n d s .  I m p e r i a l Economic 1932  central  are central  Act performs  of  Most  o f Canada.  conferences  summer  an " a c t "  of Finance  often represent  financial  Canada.  Government  that  could  i n general  of course,  cus-  i t receives tax  short  t h e Department  functions,  banks  not  loans  a  are conducted  bank  and  as  governments.  private  advances  shortage,  between  of these  Government.  of their  n o t many  f o r the government,  None  the  i s a central  temporary  Government  of governments  funds  intermediary  the  does  of making  too, to suggest  agents  operations  so g r e a t  i n the sense  or of having  could  scale  bank  Act certainly  upon  held  Government  f o r advice  even had The  was  no  on  Deputy  Government  called  107.  upon  a Queen's U n i v e r s i t y  advice. as  Dr. Clark  previously  should  very  Finance and of  was  later  stated.  greatly  improve  he c a n n o t  appointed  the administration  of the  proper hope  central  to give  bank.  When  summing  up t h e a r g u m e n t  Finance  A c t as a bankers'  b a n k we  support  o f each  may,  by  with  saying  function  now  Chapter money  of  we  a  lives  bank.  a "social"  government—that  interest  rather  institution In  In this  i s a matter  experts  that  many  however,  the  points i n  sum u p  the argu-  a government's does  exercising  than  being  light  a  bank  i t perform the  o f the Finance Act central  function. o f many  importance i n  be a prime  i n t h e hands  their  powers  i n the hands  f o r the pursuit  3 the theory  the c o n t r o l o f  of such v i t a l  be  bank i s  As s t a t e d i n  that  i t should  i t should  organized  Chapter  the. a d v a n t a g e s  bank.  of a people  interested  found  single respect  i t i s the opinion  and c r e d i t  facilities  f o r and a g a i n s t  come t o a c o n s i d e r a t i o n  as having 2,  bank  Canada  t o the Act being  i n no  a "people's"  regarded  the  that  of such  And as  reference  We  Minister, expert  central  ment  Deputy  f o r such  of this  a real  side.  Dr. Clark,  The appointment  A c t , but without  equipment  professor,  of  i n the  of a  disgeneral  private  of p r i v a t e  o f monetary  function  gain.  control i n  general outlined  was  studied.  under  The o b j e c t i v e s  the heading's—(a)  change,  (b) c o n t r o l  against  the possibilities  As  a result (1)  of t h e p r i c e  that  control  of f o r e i g n  level.  Evidence  control  conclusions  Balancing the evidence o f money  control  control  o f such  the following  of this  was  were  were ex-  f o r and  examined.  arrived a t :  available  i t would  seem  and c r e d i t  i s quite  possible. (2)  (3)  That  the v a r i a t i o n s  kept  within  That  a very worth-while  the (4)  price  That  reasonable  level  c a n be  times  degree  at  exchange  of c o n t r o l  exercised,  c a n be a t t a i n e d  have  never  attempted  Canada,  money  i n normal  and have  unaware  monetary at least,  price  control been  of i t s p o s s i b i l i t y .  banks  policy  at times,  officials  with  have  pursued  respect  no c o n s c i o u s ,  t o t h e volume  and c r e d i t , and a r e s k e p t i c a l  attempts the  seriously  Canadian  positive  o f both  least. governmental  That  over  and  of c o n t r o l  the r e s p o n s i b l e  entirely  c a n be  or  That  in  (6)  limits,  a reasonable measure  exchange and p r i c e s  (5)  i n foreign  at deliberate level.  control  of  o f any  of exchange and  In  Chapter  4  control  i n Canada  were  the  to (1)  A  1914.  given  Resulting  to  monetary  conclusions  gold  standard  v/as  maintained  up  date.  Government's  monetary  system  exchange  of  The  1907  year  resulting of  duties with were  gold  insufficient  tance  to  orthodox  that  a t t e n t i o n was  that:  fairly  The  (3)  previous  effect  to (2)  particular  the  practically,  f o r notes,  brought  the  elasticity  i n the  and  of  the  with  the  automatic—the for  evidence  to  gold. of  bank n o t e  coming  the  to  notes  first  Government  banks  respect  issue,  the  assis-  "crop-moving"  pro-  vision. (4)  Previous  The altered  entirely  passing  of  Finance  whole  Previous  reserves  loans  from  that  Finance the  reserves,  by  abroad,  facilities  The  a l l responsibility  rested  their  no  1914  control  the  system.  to  the  s t r u c t u r e of to  1914  the  borrowing or  by  banks their  provided could  the  to  the  abroad,  however,  could by  only  increase  withdrawing  securities.  facilities, quickly  expand  completely  monetary  increasing their  and  credit  banks.  Canadian  banks  these  easily  ability  Act,  selling  i n Canada f o r  Act  with  for  credit  call  There  reserves.  however.  increase v/as  were  also  Now  their greatly  110.  increased. the  fact  This  that  ability  Canada  was  has  of  the change wrought  be  over-emphasized.  a l lthe greater  so few  by  banks.  the Finance  A s Mr.  C.  A.  The  Act  by  reason  significance  can thus  Curtis  of  scarcely  says:  " P r e v i o u s l y , the c o n t r o l o f bank c r e d i t r e s t e d s o l e l y w i t h the banks t h e m s e l v e s , but n o t i t was t r a n s f e r r e d t o t h e a g e n c y w h i c h h a d t h e power t o a d d t o t h e r e s e r v e s of t h e b a n k s , t h a t i s the Department o f Finance."119 Certainly of  1914  true not  and  i t would  that  1923,  nor the  public  significance  of t h i s  Act.  the Department  of Finance  r e s p o n s i b i l i t y , which Act  seem  was  ever We  has  i t tacitly  the  fully  may  now  governments  realized  ask whether  been m e e t i n g  assumed  the  when  the  the  or  new  Finance  passed.  The social  neither  best-known  method  sense i s that  In  support  be  quoted:  of this  of monetary  of manipulating  statement  control  the d i s c o u n t  the M a c M i l l a n  "Thus v a r i a t i o n s i n t h e r a t e a p p e a r t o be t h e a p p r o p r i a t e b r i n g about harmony."120  i n the rate.  Committee  may  of i n t e r e s t charged instrument to  " T h e r e c a n be no d o u b t , i n o u r j u d g m e n t , t h a t 'bank r a t e p o l i c y * i s a n a b s o l u t e n e c e s s i t y f o r  119.  The  Journal  of P o l i t i c a l  Economy,  June,  1932,  p.  319.  120.  The R e p o r t o f t h e C o m m i t t e e on F i n a n c e and I n d u s t r y . (The MacMillan Report) London, June, 1931, p . 15.  111.  " t h e sound management of a m o n e t a r y s y s t e m , a n d t h a t i t i s a most d e l i c a t e and b e a u t i f u l i n s t r u ment f o r t h e p u r p o s e . " 1 2 1 122 A of  summary  the  of  operation  of  manipulation  of  As  out,  he  points  the  lowered  to  prevent  the  An  of  and  this  of  and  so  public  the  discount  borrowing menting of  the  the  should  attained, directed As  to  of bid  be  however, by  stated  able  to  the  in a  judge  121.  Ibid.  122.  Money,  the  the  payment  to  of  previous the  paragraph,  various  Bank C r e d i t  criteria  and  and  P r i c e s , p.  of in  aug-  the  ability  raising i s to  must of  of be  be experts.  experts ahead  474.  and  thus  The  see  means  of  success  these and  business the  sustaining  judgment  re-  volume  business,  If  during  reduction  the  bank p o l i c y  d i s c r i m i n a t i o n and  of  A  to  should  traders  goods.  signal.  central  of  stimulate  so  booms  curtail  of goods.  and  control. raised  rate  a wave  ability  prices  a danger the  be  how  excessively  should  of receding  up  should  during  Edie  explain  effect  discount  prices aim  a wave  means  public  rate  the  to  falling  borrowing  rate would  during  made  restriction  up  L i o n e l D.  excessively during  in  curtail  to b i d  the  rising  Mr.  rate will  rate  prices from  expansion,  the  be  discount  advance  volume  payment  discount  r a t e may  the  prices from  strict  the  the  prevent  depressions.  d e s c r i p t i o n by  must so  be  that  they  may b e a b l e  danger  the  has been  duced  was  used  i n connection  A c t . ' When  t o be m a n i p u l a t e d anything  required do  serve  reaching the  said  Banks  interest  the operation of  to indicate  to control this  credit  o r whether  merely  of the United  States,  that  the rates  i t would  Nor  i n 1923.  provide  bank r e - d i s c o u n t i n g l i k e  intro-  or prices.  by t h e M i n i s t e r  t h e A c t would  by t h e banks,  central  nothing  about  whether  with  or  t h e A c t o f 1914 was b e i n g  the M i n i s t e r said  When a s k e d  way  before  l e t u s s e e how t h e " d i s c o u n t " r a t e ,  Finance  were  the brakes"  spot.  Now rate,  to "apply  loans  i n a  when  broader  the Federal  Re-  t h e M i n i s t e r i n 1923  said: "There i s no doubt t h i s measure s e r v e s t o some e x t e n t t h e same p u r p o s e a s t h e n a t i o n a l r e s e r v e system of the U n i t e d S t a t e s . But as we a r e n o t l i k e l y a t t h i s s e s s i o n t o a d o p t t h e n a t i o n a l r e s e r v e s y s t e m g e n e r a l l y , we might have t h i s b i l l as a p i e c e ofi t , possibly."123 It the  i s quite evident  M i n i s t e r t o do r e a l  credit  control.  central Nor  123.  At best  that  t h e A c t was n o t i n t e n d e d  rediscounting involving the Act i s only  conscious  "a piece  of a  bank". i s there  Debates  anything  o f t h e House  i n the Act i t s e l f  o f Commons,  to  by  suggest  1923, p . 4405.  113.  " t h a t t h e r a t e s c h a r g e d by t h e T r e a s u r y Board s h o u l d be a l t e r e d w i t h a v i e w a f f e c t i n g t h e b u s i n e s s s i t u a t i o n , of p r e v e n t i n g i n f l a t i o n o r def l a t i o n , o r i r o n i n g out c y c l i c a l sweeps i n b u s i n e s s , o f p r e v e n t i n g or c h e c k i n g s p e c u l a t i o n , or of p e r f o r m i n g the f u n c t i o n s e x p e c t e d ' o f the r a t e of d i s c o u n t of a c e n t r a l bank."124 Evidence-*shows  that  he,  administration the  of  2 5  the of  r a t e s f o r the  the  Deputy M i n i s t e r  official the  Act,  purpose  chiefly  Finance  concerned  knew n o t h i n g of  of  of  controlling  with  in  1924  the  "management"  of  credit:  "Question.  You t h i n k t h a t the i n t e r e s t r a t e would h a v e no r e l a t i o n t o t h a t m a t t e r a t a l l ?  Answer.  I  Question.  And c o n s e q u e n t l y i t w o u l d be w h o l l y u n n e c e s s a r y to have e i t h e r an i n c r e a s e or decrease i n the i n t e r e s t r a t e f o r t h a t purpose under the p r o v i s i o n s of t h e War F i n a n c e A c t ?  Answer.  We h a v e n e v e r l o o k e d a t i t i n t h a t nor considered i t i n that way.  Question.  Then i t w o u l d be f a i r t o say t h a t a s an instrument f o r the purpose I h a v e ment i o n e d , the T r e a s u r y Board does not c o n s i d e r i t , and h a s n e v e r c o n s i d e r e d it?  Answer.  Not i n t h a t l i g h t , no. I t has a l w a y s been c o n s i d e r e d as m e e t i n g the n e e d s of t h e banks i n t h e i r commercial busin e s s , and work o u t s i d e i n t h e b u s i n e s s world."  124.  Beckhart,  B.  125.  Proceedings 3 a n k i n g and  H.  do  not  The  think  Banking  so.  System  of  Canada,  of t h e S e l e c t S t a n d i n g Committee Commerce, 1924, p . 343.  on  way,  p.  392.  114.  Then a  again,  chartered  changes  in  From cent,  1914  1,  per  cent.,  was  4  the  rate  per  against was  3  1931,  per 19,  126.  from  the  was  cent.  3/4  per  cent.  the  general  Treasury  and  cent,  26,  from t i l l  cent. 5  per  From was  4§- p e r  when  1931,  to  that  date  date  Notes  the  cent.,  general  these  was  1927,  the rate  f i g u r e s were  ad-  cent.  From  was  4f-  the June  until  rate 8,  1928,  September  advances  authorized to  except 3  per  on  rate  for  1928,  the  5  date  1,  1932,  was  until  the  2,  what  rate  1,  when  May  see  the  date  rate  now  3-g- p e r  except  September  Notes  the  cent.,  of  rate  was  that  view.to  1914.  1927,  latter  a  any  purpose  the  December  From  Treasury  rate  1917,  1,  and  us  the  November  cent.,  the  since  Bills  until  rate  for  Edwards,  that  made w i t h  Treasury  date  George  stated  1924,  20,  that  per  Mr.  Let  1,  from  October  cent.,  until  the  or  b e e n made  October  Imperial  per  against From  from  3/4  not  conditions.  November  3  4  deflation,  until  1924,  1924,  were  have  was  1928,  or  in  definitely  rates  that  against  November  1,  the  very  charged  economic  except  vances  rates  inflation  stabilizing changes  testifying  accountant,  i n the  checking  in  3/4 rate  rate  October on per was  remained  26,  advances cent. 3 at  per 3|-  obtained—November  1932.  P r o c e e d i n g s of the S e l e c t S t a n d i n g Committee a n d C o m m e r c e , 1924, p p . 4 6 , 349 a n d 375.  on  Banking  115.  Ho w o n d e r be  humorous),  For  the  calmly  and  from  1914 t o November  at 5 per cent.  banking.  rates--a  changes  made  period  i n a l l phases  No w o n d e r , ' t h e n ,  that  (without about  And t h i s  o f the world  rediscount  sweeping  i n 1928  i s a steadiness  c e n t r a l banks their  said  "there  t e n years,  kept  in  a witness  intending  to 127 here".  the r a t e  1, 1 9 2 4 , t h e r a t e was  a period  i n v/hich  many a n d d r a s t i c of almost  changes  unparalleled  of business,  Beckhart  was  finance,  and  says:  "The l a c k o f c h a n g e d u r i n g t h i s p e r i o d when i n t e r e s t r a t e s t h r o u g h t h e w o r l d s o a r e d s k y w a r d , .when t h e d i s c o u n t r a t e a t t h e F e d e r a l R e s e r v e B a n k o f New Y o r k r u l e d a t 7 p e r c e n t , f o r n e a r l y a y e a r , i s .. s u f f i c i e n t evidence i n i t s e l f that the Treasury Board d i d n o t look upon t h e r a t e as a c e n t r a l bank w o u l d upon i t s r a t e of d i s c o u n t . T h a t t h i s was n o t t h e c a s e was a n e r r o r i n a d m i n i s t r a t i o n . The r a t e s h o u l d h a v e f l u c t u a t e d w i t h e c o n o m i c and f i n a n c i a l condi tions."128 In  this  inflation rapidly  followed  until  Advances  interest  i n C a n a d a we by d r a s t i c  experienced  deflation.  rapid  Prices  and  fell  p r e c i p i t o u s l y i n 1921.  the Act rose  from  $12,767,500  i n 1920.  remained  then Deputy  1 2 9  Yet i n spite  unchanged  Minister  127.  Ibid.,  128.  Beckhart,  129.  I b i d . , p. 397.  i n 1914 t o  of a l l t h i s t h e  at 5 per cent.  of Finance  high  rose  1920 and t h e n  under  $123,689,025  the  period  According  t h e r a t e was  to  lowered i n  1928, p . 384. B. H.  The B a n k i n g  System  of Canada,  p. 392.  1927  to  lower  1928,  at to  per  its  3/4  i n lew  borrow  4f  3  per York  cent,  and  i t was  home r a t h e r October  cent.  26,  Yet  rate four  than  the  Bank  and  of  the  the  desired  i n New  1931,  the  times  because  money  that  York.  general England  rates  the  banks  From rate  were should  September  stood  i n 1929  still  alone  Federal  Reserve  England  abandoned  1, at  changed  Bank c h a n g e d  i t s  131 rate  three  standard changed of  the  to  5  on  times.  Riksbank  per  Since  September  three  of  cent.,  Sweden's in  times.  In  later  from  1931.  By  it  4  lowered It except  to  cent.,  3J- p e r  would  per  time  cent,  at  been  the  discount  (at  of  place  time then  June  a  i n the  September  first  the  standard),  beginning  and  r a t e has  been r a i s e d  gold  taken  then,  f o r the  that  general  money r a t e s , h a s  been  b e e n made b y  Treasury  the  same  gold  1,  rate from  4  of down t o  6,  fourth  rate,  bringing  1932,  i t  was  cent.  seem,  perhaps  8  the  Canada's  has  the  r e d u c t i o n had per  the  to  successive down t o  1931,  Sweden  departure  October,  21,  the  the  no  very  position  cause  of  Board.  the  Proceedings of S e l e c t S t a n d i n g and Commerce, 1928, p. 53.  131.  The  Monetary  132.  The  Financial  Post,  Annual Dec.  of  the  few  for 31,  New  the  Committee  1930, 1932.  reasoning,  changes  Seemingly  130.  Times  definite  p.  York that  Board  on  38.  have  has  Banking  117.  not  yet discovered  ful  instrument"  credit  has never  and  credit  discount In  been  i n the  made e f f e c t i v e .  It  must  t o be  they  are reached  the  that  i n order  are doing  i n mind.  beauti-  control  the  Finance  to c o n t r o l  of the  bank  inflation  money  interest  this  or  gone  bankers, and  discount  rate  As  should  on  easily  won  to warn  tries  credit.  by p u b l i c  before  be r e g a r d e d  hand,  are  boom  f o r the Hence  fraternity  to  secure  I t may  go  further  conservatism  statements  t h e mere r a i s i n g by  be  whole  generally.  o f c a u t i o n and  public  may  of a  profits  the banking and  before  of the  the other  of the people  said  bank  dangers  i n the m i d d l e  in restricting  conferences.  i s to suasion.  the c e n t r a l  the i n t e r e s t  f a r enough  of the general  rate  p r e v e n t i v e measures  t r y to engender a n a t t i t u d e the part  of  bank  requires  i s moral  anticipate  with  profits  rate  devices  and  that  commences  co-operation  the c e n t r a l  i f the o f f i c i a l  to s a c r i f i c e  has  control  experts  Commercial  i n making  central  personal  past  by means  of these  o f the f u t u r e welfare  their  on  One  to see ahead  not disposed  that  and  able  They  interested  the  or t o  say that  of the d i s c o u n t  devices  be r e m e m b e r e d  have  sake  may  i n the  at monetary  supplementary  be  people  sense  of g o l d  and  rate.  that manipulation  taken.  we  administered social  i s "a d e l i c a t e  flows  Certainly  i t s attempt  various  are  the r a t e  to r e s t r i c t  conditions.  Act  finds  that  the people  a s a,  and of  118.  clanger upon  signal.  It generally  both bankers  a n d b u s i n e s s men  phere  of h e s i t a t i o n  rate,  on t h e o t h e r hand,  effect.  I t would  has a p s y c h o l o g i c a l  and retrenchment. s h o u l d have  be f o o l i s h  Act  as a c e n t r a l  If,  however,- we w e r e  Board",  and t h e t e n c h a r t e r e d be able  suasion  a department  is  generally  of  United  Government.  of England While  f o r good,  our banks might  monetary  moral  view  policy  there  that  "Federal  Reserve Banks",  i n the nature of  there  u n d e r s t a n d i n g between t h e be added  influenced  influences  also  be t h e r e b y  Reserve  Bank  of t h e  fortunately are  influenced  with  that  by t h e p o l i c i e s  i s the p o s s i b i l i t y  conflicting  as a  and i n war time  and the F e d e r a l these  suasion.  The A c t i s a d m i n i s t e r e d  I t might  are undoubtedly  States.  generally  a t times.  and c l o s e  the F i n a n c e  are the "Reserve  something  o f t h e Government, common  banks  t h e Bank  time  a  and the  Canadian  to discover  being used  by  banks  that  the Finance A c t i s merely-the banks  atmos-  the opposite  used  the broad  bank  moral  just  bank h a s i n t h e p a s t t o take  an  The l o w e r i n g o f t h e  to suggest  central  we m i g h t  and c r e a t e s  effect  that  by a  the interests  a t some  foreign o f o u r own  people. Another  supplementary  rate  more e f f e c t i v e  When  the rate  device  i s found  i sraised,  f o r making  i n open-market  the central  the discount transactions.  b a n k may  sell  some o f  119.  its  commercial  he  drawn  up  the market  paper  out of the market,  commercial  easy  On t h e o t h e r  paper  inject  money,  business.  lower  bank  into  we  have  already  seen  performed  through  of loans  carries  the  c r e a t i o n of a central  bank no  could  such  bank  If  should  should  be  to  t r a n s a c t i o n s . As  and c r e d i t  more t h a n t h e  a s we  shall  put forth  i n Canada  against  i s that  because  see i n  such  a  there i s  i n which  a  central  operate.  central  generally  buy  the Finance A c t  bank f o r Canada  money  business  s e c t i o n s the transactions  In fact,  t h i n g a s a money m a r k e t  could  that  one o f t h e a r g u m e n t s  not control  of  encouragement  t h e A c t amount t o n o t h i n g  next  will  to tighten .  b a n k may  The r e s u l t  on open-market  i n previous  the  money  i n t h e open market and  i t .  to the banks.  chapter,  tend  the central  I t c a n s c a r c e l y be s a i d  a central  making  hand  r a t e s , and g r e a t e r  as  vail  way  f u r t h e r expansion  and s e c u r i t i e s  new f u n d s  In this  and this  and d i s c o u r a g e  transactions.  thereby  or securities.  bank  admitted  be h e l d  control  that  by i t .  i s t o be e f f e c t i v e ,  the reserves  i t  i s  of the commercial  As t h e M a c M i l l a n  Committee  has  banks said:  "....once t h e commercial banks o f a c o u n t r y h o l d t h e i r r e s e r v e s i n t h e shape o f d e p o s i t s a t t h e c e n t r a l bank, t h e p o s s i b i l i t y of c o n t r o l by t h e c e n t r a l bank arises."133  133.  The R e p o r t of. t h e Committee on F i n a n c e and I n d u s t r y . (The M a c M i l l a n R e p o r t . ) L o n d o n , J u n e , 1931, p . 16.  120  When we bank, the  were  dealing  i t was  shown  reserves  this  means  of  to  of  money m i g h t profits,  the  that  case  country  of  a  try  note  on  the  management  is  a  paragraph,  previous  has  no  lacks  We control Act  in  of an  already  See p.  the  now  the  the  exchange. earlier  In  part  inflation  Beckhart, 400.  that 1  3  4  .  B.  to  depository the  Act  control  to  of  of  has  that  not its  of  the  be  the  in  of  paper  desire  When  need  as  a  for  the  (in a  effective  been  stated  central  Canada.  for  to  inadequate  already  Act  possess  i t s issue  standard).  has  issue  of  the  should  issue  expand  would  gold  As  in  bank  Hence i t  control.  the  this  This  bank  influence  i t was  H.  bankers'  make p o s s i b l e  Finance  dealing with  of  of  Freedom  standard  note  means  the  Hence  central  Finance  consider  been noted  war-time  134.  of  another,  shall  the  even' g r e a t e r .  monopoly this,  that  the  gold  a  exercise.  of g o l d  on  as  not  measure  issue.  reserve  was  Act  banks.  i s s u i n g body  country  i s not  to  under  each  the  Act  i t i n any  control  easily,  lead  this  Finance  considered  of  the  the  chartered  might  measure  monopoly  extent  our  is usually  greatest a  that  assist  administrators It  with  the  present this  Act  inflation  The  Act  Banking  with respect history  chapter that was  i t  the  has  permitted  part  System  of  of  to  of  the  the  Canada,  121.  cause at  of the d i s t u r b e d  that  time.  generally, The  Since  however,  A c t was  explained, were  permitted  1926  Canada  may  now  relation As  under  from  the Dominion  Act  and  fact, As  having  an  such  Dominion  required  at a l l .  issued  part  legally  be  under  in  They  total  redeemable  i n gold  the Finance  notes  of the notes that  to  (with that  no were  them  the percentage  Notes in  demand.  on a g o l d standard.  on  of gold  standard Should  large  reserve),  issued  out  issue.  upon  Act a very gold  go  become,  Dominion  the  gold,  the Dominion  backing.  of the  real  through  so d i l u t e d  YiTe  under  to d i s t i n g u i s h  that  might  in  particularly  notes  danger  reserves  others  Then  these  i s here  gold  and  any  there  of Dominion  already  o f the Act,  issued  to be  quantity  as  to have  Y e t when  i s nothing  gold  notes  desirable  secure  further.  standard.  management  i f i t i s considered  banks  period  more.  to the g o l d  Hence  the  conditions  exchanges.  notes  a very  war  when,  years  conditions,  there  exchange  permanent,  gold  definite  are  1923,  f o r three  standard  by  that  and  inseparable they  on  the operation  them  circulation  until  returned  foreign  affected  w e r e made  of t h e A c t a r e not  into  our  not dwell  features  previously,  behind  of  was  i n force  the f o r e i g n  noted  reserves  need  officially  to  authority  we  to c o n t i n u e  consider  therefore,  exchange  continued certain  condition  then  a gold  the  basis  backing  122.  to  the total  In  fact,  caused a  body  a s we  Canada  danger  of notes  shall  see l a t e r ,  to s l i p  from  on t h e g o l d  the  1914 A c t f o r m a k i n g  was  being  danger see. both on  p a p e r money.  did  not r e a l i z e  standard, of  to  the gold  form her  after  o f f the gold From  present of and  any other  which  we  slightly.  Canada  on  of  collateral  the framers  Canada went  period.  while  of t h e A c t ,  when  Canada  was  o f t h e 1923 A c t  back  different  to  on t h e g o l d of the o p e r a t i o n s  from  what  they  were  As h a s p r e v i o u s l y been policy  was  to adhere  h e r monetary machinery  A c t was g o i n g  the opposite  i n the  way—pushing  standard.  our point  the p r i c e  other  gained  1926 t h e G o v e r n m e n t ' s  of the Finance  Such  i s not difficult  i n the operation  be v i t a l l y  standard  what  i n 19£9.  to the banks  a s she d i d i n 1926, the e f f e c t s  money  was  When t h e p r o v i s i o n  t h e w a r , was  t h a t when  the paper  stated,  standard  The r e a s o n  Apparently  the A c t would  during  "dilution"  by t h e A c t o f 1923 a p p a r e n t l y t h e  experience  and a f t e r  infinitesimal.  1914 t o 1926 b e c a u s e  advances  was n o t r e a l i z e d .  before  this  standard.  made p e r m a n e n t  The whole  become a l m o s t  o f fthe gold  did not exist  was n o t t h e n  would  of view  i n Canada  i n o u r money  country  may  c o u n t r i e s were  Otherwise  at which  be bought  rates r e -  the currency  or sold.  on t h e g o l d  had t o pay f o r t h e i r  exchange  standard  While  Canada  the prices  currencies varied  i f , say, the cost  unit  only  of the United  very States  123.  dollar from  above  Canada  tions the  rose  to t h e United  would  be  purchase  settled  or s a l e  exchange  rates  (between  Canada  the  rise  be s h i p p e d orthodox  abnormal gold  standard  movement  i n gold  f o r any a n d ' a l l  was  implied  also  of gold  From 1926 rates  States  funds  no  gold  135.  began  was  o n demand  permit  returned  exported,  C u r t i s , C. A .  without  on t h e  a  stated  currency.  It  the export  to the gold  steadily within  to r i s e ,  considerably  when  correct  C a n a d a was  of h e r paper  ) gold  and  restriction.  Canada  pretty  135  Thus  to  when  points are  parity  tends  When  t h e end o f 1928, h o w e v e r ,  remained  from  of gold  she would  without  the gold  t h e end o f 1928 C a n a d i a n - U n i t e d  remained  Towards  that  the time  until  points  "automatically",  to give  of by  the gold  of balances.  situations.  she promised  instead words,  States  works  sum  import  beyond  gold  obliga-  In other  o f one p e r cent,  this  versa,  of gold  of exchange. or f a l l  of shipping  or v i c e  by t r a n s f e r  standard  exchange  the cost  States,  i n settlement  gold  interference,  below  and the United  / 5/32  approximately will  or f e l l  above  States  the gold  t h e premium  and f r o m  then  the gold  export  however.  Monetary  in  exchange  points. on  until  United 1930 i t  point.  Our D e p a r t m e n t  The C a n a d i a n  standard  Almost  of Finance  Situation,  p.320.  124.  had  practically  gold.  Hence g o l d  According Canada  to  had  As rose  suspended  that  began  to  freely  definition  of  the  standard,  abandoned  i n 1914  t e n d e n c y was  increase  As  again.  American  funds  securities  under  notes  v/ere  for  redemption  the  United have  from  1/3  of  the  be fact  per  such  136.  notes  of  gold cent,  remembered that while  the Dominion Notes under  Computed t i o n and  premium,  1928  our  notes  on  which  Act  in turn  paying  this to  to  had  process  i n 1926  the  to  this  is rigidly Act  1/6  result  issue  the F i n a n c e  was  notes 29  of  were  and  deposited Act.  These  of  United  Finance  shipping  premium w h i c h  bought  Dominion  that  the  they  they  Camdian  Department  i f they  of  rapidly"in  when  the  do  ratio  1927  Act  1920.  presenting  had  effect  a  then,  in  Finance  in gold,  to  at  export.  Finance  $123,689,025  rose  in  1929.  the  avoid  average  will  then  in  the  until  for  p r o v i s i o n s of  to  The  It  the  to  under  of Dominion  States  change.  57  standard  downward  were  s e c u r i n g loans  would  gold  that  They  banks were  they  notes  obtained  in effect  the  Dominion  he  $12,767,500  After  of  not  p r e v i o u s l y stated, advances  from  1929.  our  could  redemption  to  they  States  ex-  s o o n 'seen.  The  outstanding  dropped  per was  cent,  possible  Dominion  limited,  in  notes  the  because under  issue  i s u n l i m i t e d and  1929.  of  requires  f r o m t h e m o n t h l y r e t u r n s made o n "CirculaS p e c i e " as p u b l i s h e d i n the Canada G a z e t t e .  no  gold  backing.  becoming its  depleted  notes  gold. Act  i n gold  H e n c e we  forced  central  a  to  interest trators  of  October  26,  was  on  the  attempt  to  Act  bank a t  that  such  those  rate,  was  From  Treasury  the  act  to  be  as a  off  once  process.  poor  such by  4-§- p e r  of  the  the  gold  would.  137.  The  to  the  rate  therefore standard  the  rate  in  exchanges  for a  the  central  time. or  not  Canadian  or f o r  the  banks  Finance  investment  during  Act  to  i n stocks  1928  use  on  i s hard  137 2.,  the  adminis-  Certainly  substitute  of  as  cent.,  Act  foreign  rate  1928,  when  determine. Part  an  use  the 1,  raising  The  they  No  Notes,  administrators  even  1929.  i t s discount  was  of  Finance  described  made  of  export  the  September  rate  forced  the  in  reserves.  general  without  to  as  reserves  redemption  of  standard  have used  Act.  being  money u n d e r  York  operations  gold  against  proved  Whether  New  the  discount  halt  allowed  Finance  the  i t s gold  country  an  thus  that  The  i t s operations  in  prohibit  the  cent.  the  borrowed  to  in  Finance  by  were  effect  advances  3f; p e r  watched  and  bank w o u l d  1931,  i t s gold  suspend  off  or  saw  to  protect  rate,  Government forced  circumstances  ordinary weapon  the  i t was  see  Canada  Under  except  As  Section  Finance  Act,  14,  of  Part  the  2,  Act  Sec.  says:  5.  and call to  1929 loans  "No a d v a n c e s s h a l l b e made a g a i n s t t h e p l e d g e o f p r o m i s s o r y n o t e s o r b i l l s of exchange i s s u e d or d r a w n f o r t h e p u r p o s e o f c a r r y i n g on t r a d i n g i n s t o c k s , bonds, or o t h e r s e c u r i t i e s and t h e M i n i s t e r may d i r e c t t h e t r u s t e e s t o make e n q u i r y and r e p o r t as to whether any n o t e s or b i l l s o f f e r e d i n p l e d g e f a l l w i t h i n the p r o h i b i tion of this section." On to  first  provide  appearance  an  adequate  mind,  however,  under  the  the  clause  safeguard.  transactions  not  necessarily  character  of  the  s e c u r i t i e s or  big  enough  one  i s again  upon  to  house  are  as  the  i n number,  Camdian  to  of  the  the  fact  wisdom of  whom t h r e e  as  Act  have  possible,  making  any  been  fact  state  of  in advance . with as  the  In  addition,  woodpile  experts  called  proposed Reserves,  appointed  case,  is  an  seem  in  Cold  abused  the  to  the  bankers  In  borne  deposited  the  Central  would  connection  hole  that  are  be  nigger.  of  the  any  a  Act  rise  paper  celebrated  of  the  have  least  Association.  of  above  i s at  Trustees  Bankers'  provisions  suggested  the  reminded  advise  advances four  to  there  the  giving  do  Hence  of  I t must  Act  collateral.  the  that  this  by  whether  in  the  that,  as  or  the not  ways Mr.  138 W.  H.  not be  Budden  only  in  says, theory  expecting  138.  Budden,  too  W.  "this but  much  H.  affairs  in practice...." of  any  banker  "Finance",  p.  to  is  dangerous  I t would resist  7—private  seem  borrowing  copy.  to  127.  under  the Finance  could  be  rate  as  put 20  out  per  Act on  at  4§- p e r  call  cent.  loans  To  as  the  most p r e c a r i o u s .  However, more  than  date  i t almost  (March the  Z\  the  2,  of  Britain's  generally of  our  excess  balance does  not  exchange  of  trade  balance  1930,  but  From  i n 1932  $82,000,000 ments  of  139.  Data  imports.  It i s true of  $91,000,000  a growing we  and  had a  credit  $61,000,000.  1 3 9  obtained from  we  the  balance  the  our  on  that  drop Great 21,  we  had  year  an the  to  "unfavorable"  and  $103,000,000  fall  i n our  adverse credit  in  total balance  balance  of  a l l international  dollar  Financial  in  explanation  latter  i n our  of  payments  1928  an  such  writing  sudden  adequate  merchandise  Yet  of  September  to  a  never  After  followed  on  had  a drastic  high  control  t r a d e amounted  i n 1929  decrease  a net  date The  1921 In  of  that  with  At  money  e x i s t e n c e of  international  situation.  balance  a t as  1951.  abroad  an  when  e x c h a n g e was  standard  offer  over  time  renders  cent.  dollar  gold  seem  accompanied find  per  trade and  "favorable"  $152,000,000.  t r a d e we  the  cent.  to  of exports  so-called  until  Canadian  the  September,  per  i t i s 19.76  from  least  on N e w ' Y o r k  25  a  York  suggested  cent, u n t i l  the  fall  The  premium  reached  1933)  value  1931.  per  above  at  i n New  the  possibilities exchanges  those  say  cent,  is s t i l l  Post,  Feb.  at  18,  paya  1933.  128.  big  discount i n the Undoubtedly  in  foreign  the  gold  demand cease  shock  given to  the  standard  almost  Then led  to  a  The  fact  generally  i n September  (particularly  of  the  again  foreign this  been  general  examination  of  having  to the  present,  England's  1931,  so  state of  weakened  could  Bond  not  ceased. effect heavy held added  on  Many  issues  could  refinanced,  This  cessation  our  i n the  exchange  greatly  to  on A m e r i c a n  Canadian  be  t o maJce o n  burden.  funds  securities  have  to the  to  of  debt  even  our  Then  practically short-term loans  an of  abroad  unfavorable c o u r s e v/e  Canadian  burden  gold  nervous.  borrowing had  from  probably a l l  more  were  condition.  standard  of  had  securities  the unfavorable The  confidence  financial  floated,  Canadian  situation.  of  gold  funded  borrowing  S t a t e s and  this  foreign  securities  condition  markets  not  and of  payments  United  our  foreign  be  interest  premium  above,  of  the  make p r o s p e c t i v e i n v e s t o r s  closed.  extent  lack  Canada's  played with  the  of  tended  stated  caused  from  completely closed  and  As  f a l l  before, probably,  reserves, to  the  of a l l n a t i o n s  borrowings.  closer our  faith  f o r Canadian  llever  world  the  by  1,  American)  altogether,  first-class  1929  States.  investments  money m a r k e t s even  United  exchange the  high  was  evidenced  i n another  way.  held  i n Canada  are  in  payable  129.  either  Canadian  option. sent  Many  them  payment  demand  owners  States  addition, back  for United  depressed  our of  standard Canada  caused  and  this  the  payment funds.  to  at  there  Undoubtedly,  was  of  a f f e c t e d Canada's  Canada  advantage to  of a  the  net  the  f a l l  payments  additional further  general  from  United  the  States  exchange  of  payer's  these  in turn  too,  Britain's  repatriation  the  amount  holder's in  added  exchange w h i c h  after  the  held  get  This  full  Canada  States  dollar.  funds  securities  i f the  to  insecurity  States  such  i n United  brought  feeling  of  York for  In  not  United  t o New  burden. was  or  gold,  funds  situation  in  un-  favorably. Had its  own  the  financial  necessary  to  been  led  have  seen,  to  standard, and  Canadian  as  during and  on  the  banks  we  1929 the  t i l l latter  p r o h i b i t e d , except  admittedly  o f f the  to  this  140.  the  the  felt  very  likely  not  standard.  As  gold  October, date under  standard  Government's r e s e r v e  solely  -it not  were d e f i n i t e l y  officially  gold  had  concerned  i t would  i t did with  1929  after  o f f " . .Then  been  o b l i g a t i o n s and  assist play  Government  gold  we  license,  position  But was  have we  gold  were  export  again.  i t  o f f the  1931,  with  "on  was  and just  we  were previous  sound.  140  The m a t e r i a l h e r e u s e d i s a s u m m a r y o f Mr. C. A . Curtis' treatment o f t h e q u e s t i o n i n h i s a r t i c l e on "The C a n a d i a n M o n e t a r y S i t u a t i o n " i n t h e J u n e , 1932, issue of t h e J o u r n a l o f P o l i t i c a l Economy.  130.  Dominion notes  o u t s t a n d i n g amounted  which  $ 2 8 , 0 0 0 , 0 0 0 was  i n the hands  banks  had  of t h e r e s t  Gold  $12,000,000  R e s e r v e s and  Government of  had  $110,000,000  $67,000,000  Dominion notes.  It i s altogether  reduced  to  endanger  enough fore, own  had  the  i t need  reserves.  But  in  1914  with  to  rely  on t h i s  terms  of  Finance for of  monetary  time.  banks  price  the  gold It a  The  come  marked  to an  that  had  could not,  of i t s assistance  per  the  cent,  banks  There-  with i t s  about i t s of the  banks  become a c c u s t o m e d by  the passing of  the  of the  responsibility  to the a d m i n i s t r a t o r s  supported  the banks  not permit  any  was  up  to  of the  t h e r e f o r e , abandon  t o them  the  great  solely  to the rescue  the banks  and  position.  itself  words,  Central  form of  extent  gold  the t r a n s f e r  Government  It could  l a w 40  i n the  had  The  i n the  assistance provided  In other  from  By  unlikely  They  of  possession,  been w o r r i e d  Act.  I t admittedly  to f a i l .  The  not have  i t had  control  the Act.  this  is  i n 1914  be  concerned  Government  Act.  on d e p o s i t  Government's  the Finance  that Act  the  reserves  Government  position,  gold  their  of the p u b l i c .  i n specie.  o f t h e b a n k s must  have  $150,000,000  i n their  the r e s e r v e s  could  to  them  the abandonment  now. of  standard. would  appear  s e r i o u s weakness  to  be  beyond  question,  then,  i n our C a n a d i a n monetary  that  system.  there It  131.  may  be t h a t  there  overhauling vital It  no  o f t h e ?/hole  defect,  n o t only  force  however,  does  working  out that  Canada  necessary  than  the  banks,  found  under  that it  The w r i t e r  found  gold  i f some  the Finance  substitute with  as a bankers'  customers. bank  the reserve  respect  Act to  to i t s  i t i s like  loans f o r  On t h e o t h e r  and  that  from  function  does not c o n s t i t u t e  i t s administration  the point  o f view  has been  of t h e banks,  real  that  that  rediscounting,  hopelessly  of c e n t r a l banking.  hand  inadequate i n  does n o t a c t a s a c l e a r i n g house f o r t h e banks, loaning  a  and has t h e  i t is. v e r y funds  will  fora central  i t provides  currency,  standard  control  examined  i n that  emergency  other  conditions.  i n some r e s p e c t s  particularly  of danger  standard  the evidence  that  supplies  hand  an adequate  i t does n o t h o l d  its  has  but would  source  of i n t e l l i g e n t  we h a v e  weighing  that  direction.  be a c o n s t a n t  degree  commercial banks a s i t s only we  i s a positive  On t h e o t h e r  chapter  bank,  a  Act w i l l  i f i tconstitutes  bankers'  i t at times  i s t o be m a i n t a i n e d i n  a greater  we  i n the Finance A c t .  standard  be  operation  really  i f such  adopted,  After  i s t o be f o u n d  The  standard,  is  bank.  desirable.  general  the gold  its stability.  see  t o make a  to uphold  to  this  defects  structure  not control,  the Finance  In  minor  i n the o p p o s i t e  inclination  point  a r e enough  As a  inefficient bankers'  132.  bank,  then, i t i s only  viously ment's  seen  that  bank.  Now  i n no we  "people's"  bank  only  to p r o v i d e  fails  is a  monetary  structure.  stitution  which  no  service  direct  control  over  policy,  which  does  the  which  in  provides  social being of  a number  central  no  chapter real  of t h i n g s ,  i t serve  control  we  may  Government,  have a  which  monetary  a  but  i n our  which  an i n -  performs  exercises  p u r s u e s no  exchange  a modicum  as  whatever,  a possibility at  pre-  govern-  observe that  banics, w h i c h  most  as  instability  of  no  credit  price  control,  of c o n t r o l  i s responsible  but  We  bank, f o r i t n o t  rediscounting,  attempt  even  which  bank".  i t i s even w o r s e  s o u r c e of  o f f i t s adopted  bank.  that  social  commercial  not  a  a government's  f o r the  makes no  s e n s e , and driven  add  i s u n c o n s c i o u s ©f  control, short  this  of  sense does  any  dangerous  concluding  "piece  may  than as  actually  In  a  which  i n the  f o r i t s country standard,  certainly  may  i t i s not  be a  one  Chapter A r g u m e n t s f o r and  against  Bank: f o r Since reached  the  the  question  Central  C a n a d a.  of a c e n t r a l h a n k f o r Canada  show f i r s t ,  service.  The  institution  a r g u m e n t most f r e q u e n t l y p u t  o f a c e n t r a l hank.  the head o f f i c e s  of the  way  forth i n  opposi  h a v e a l l t h a t we  need  A n o t h e r argument i s t h a t  chartered  d i s c o u n t i n g f a c i l i t i e s f o r the a r g u m e n t s we  i n the  that could render e f f e c t i v e  t i o n i s t h a t i n t h e F i n a n c e A c t we t h e way  has  that i t i s unnecessary,  t h e n t h a t t h e r e w o u l d he many d i f f i c u l t i e s  o f c r e a t i n g an  in  a  stage of s e r i o u s c o n s i d e r a t i o n i t s opponents  have been t r y i n g to and  6.  banks p r o v i d e  branches.  adequate  With these  have a l r e a d y d e a l t a t l e n g t h i n the  two  previous  chapter. When the  argument i s a d v a n c e d t h a t a c e n t r a l b a n k i s  r e q u i r e d f o r t h e p u r p o s e of c o n t r o l l i n g c r e d i t , c l a i m t h a t the  chartered  opponents  banks t h e m s e l v e s p r a c t i s e c r e d i t  c o n t r o l t o an a d e q u a t e d e g r e e .  I t i s t r u e that they  do  h a v e c e r t a i n more or l e s s m e c h a n i c a l r u l e s t o g u i d e them. For  i n s t a n c e , they f e e l  about equal  t o 10  constrained  per cent,  t o keep cash  of t h e i r l i a b i l i t i e s .  holdings Then  154.  again  they  a r e i n c l i n e d t o have a "balance  sheet  concept".  They w a t c h one a n o t h e r ' s s t a t e m e n t s t o s e e w h e t h e r ov/n p o s i t i o n i s r e l a t i v e l y f a v o r a b l e doubt t o a c o n s i d e r a b l e  extent  or not.  times,  This  i s particularly  broader sense o f c r e d i t  In addition, i t  banks, a t l e a s t , have, a t c e r t a i n  a common u n d e r s t a n d i n g  policy.  They a r e no  i n f l u e n c e d b y t h e Bank o f  E n g l a n d and t h e F e d e r a l R e s e r v e B a n k s . i s true t h a t the Larger  w i t h t h e G o v e r n m e n t on c r e d i t t r u e i n time of war.  i s d o n e by t h e c h a r t e r e d  suggestion  I n the  c o n t r o l as a s o c i a l f u n c t i o n ,  h o w e v e r , a s s e e n i n C h a p t e r s 3 and 5, p r a c t i c a l l y  One o f t h e f i r s t  their  nothing  banks i n C a n a d a .  r e a c t i o n s of Canadian bankers to t h e  t h a t we s h o u l d h a v e a c e n t r a l b a n k i s to  anxiety l e s t the present  express  b a n k i n g s y s t e m be d i s t u r b e d .  l o o k upon t h i s system a s t r i e d , p r o v e n , and e f f i c i e n t . t h e n s h o u l d we t i n k e r w i t h i t ? innovation?  Mr. C. A. B o g e r t ,  M a n a g e r o f t h e D o m i n i o n Bank,  They Why  Why e n d a n g e r i t w i t h a n Vice P r e s i d e n t and  General  says:  " T h r o u g h o u t t h i s d e p r e s s i o n , t h e C a n a d i a n bankings y s t e m h a s f u n c t i o n e d s o q u i e t l y and e f f i c i e n t l y as t o w i n p r a i s e f r o m many o t h e r c o u n t r i e s , a n d c o m p e t e n t o b s e r v e r s i n t h e U n i t e d S t a t e s do n o t h e s i t a t e t o p r o n o u n c e i t much s u p e r i o r t o t h e i r ov/n. "141  141.  The D a i l y P r o v i n c e , p.  3.  V a n c o u v e r , B. C ,  J a n . 31, 1933,  135.  Mr.  J . A. M c l e o d ,  Association,  President  of the Canadian  Bankers'  says:  " I h a v e , p e r h a p s , ' s a i d e n o u g h t o make i t c l e a r that the p r o j e c t e d establishment' of a c e n t r a l b a n k i n C a n a d a r a i s e s some e x c e e d i n g l y d i f f i c u l t problems, and i s not without elements o f danger."142 "A  Canadian  Canadian  Banker"",  chartered  banks,  writing  to give, the v i e w - p o i n t o f  expresses himself  i n part  as  follows: "....I believe that the establishment of a cent r a l bank i n Canada i s u n n e c e s s a r y a n d t h a t i t s o r g a n i z a t i o n and o p e r a t i o n i n t h e manner o u t l i n e d i n Mr. P l u m p t r e ' s a r t i c l e s w i l l involve a d r a s t i c and d a n g e r o u s c h a n g e i n C a n a d a ' s b a n k i n g s t r u c t u r e w h i c h may v i t a l l y a f f e c t t h e i n t e r e s t s a n d w e l l - b e i n g o f e v e r y C a n a d i a n . , ."143 Bo  doubt  victions haps  of t h e g r e a t  natural  projected view,  seem  that  change  appears  question  the above  i s given  bank need  privileges  majority  they  i n a system  from  their  con-  I t i s perany point  of  N e v e r t h e l e s s , when t h e free  from  reason f o r t h e i r  not interfere  nor lead  with anxiety  which,  consideration valid  of our bankers.  should view  t o be e x c e l l e n t .  t o be l i t t l e  central  quotations express the sincere  with  to uncontrolled  bias,  there  opposition.  their  would A  ordinary  inflation,  which  they  142.  M c L e o d , J". A . Address to the Annual General Meeting of t h e C a n a d i a n B a n k e r s ' A s s o c i a t i o n , T o r o n t o , N o v . 1 0 , 193'2, p . 1 3 .  143.  The F i n a n c i a l  P o s t , D e c . 10, 1 9 3 2 .  136.  fear.  In fact  bankers them  to solve  many  only in-so-far  abuses. be  a genuine  of t h e i r  up  bank would  problems  as i t would  The s i t u a t i o n  summed  central  and would  be n e c e s s a r y  of our Canadian  i n the words  assist  of Kisch  limit  to prevent  bankers  and  the  might  best  Elkin:  " I n some i n s t a n c e s w h e n t h e C e n t r a l B a n k i s superimposed on an e x i s t i n g b a n k i n g s y s t e m the commercial banks which have m a i n t a i n e d t h e m s e l v e s p r e v i o u s l y w i t h o u t i t may perhaps n o t f u l l y a p p r e c i a t e i t s advantages and, j e a l o u s o f t h e i r p o s i t i o n , may q u e s t i o n t h e expediency of the innovation."144 Our of  Canadian  the efficacy  place  they  monetary to  bankers  a r e f o r t h e most  of c e n t r a l  have  little  control  banks  faith  generally.  i n the general  i n the social  sense.  shy a t the s u g g e s t i o n of c o n t r o l  and  of the p r i c e  were p r e s e n t e d  i n Chapter  3, h o w e v e r ,  labored  further  Mien banks  we  to date,  144.  Kisch  so  that will  exchange question phase  of the  n o t be  here.  however,  ground  instance,  first  theory of  on t h i s  efficacy  look a t the mistakes  considerable for  bank  In the  of f o r e i g n  The a r g u m e n t s  question of central  skeptical  They a r e i n c l i n e d  level.  broader  part  i t must  and f a i l u r e s  be admitted  f o r our bankers'  t o t h e Bank  and E l k i n .  Central  that  doubts.  of E n g l a n d ,  Banks,  of  t h e most  p . 117  central  there i s  They  point,  famous  137.  central  bank  b a n k was 1931  It  powerless  in  think  i n the  that  that  i s not  poration  owned  one  Governor. indicates of  the  tors  that  the  city". nation  An  illustration  pursued,  in  not  any  frozen  true of  be  no  directorate's  may  be  From whatever remains  policy  assets  this  of  and  the in a  that  not  perfect.  private  be  one  the  part  that  the  direc-  to  the  in  motive the  financial  one the  the  crisis.  best  policy the by  "the  and  city" the  events  i t may  of  i s the  influenced  and  p o l i c y of  government  appear  otherwise,  i n t e r e s t s of  seen  country  best  much  always  usually  on  i s the  too  who  Deputy  policy  of what  or  corThese  as  i t would  idea  what  not  of  directors  doubt  consciously  are  a  nation  obligations  the  does  Bank's  can  to  crisis  and  Nevertheless,  a whole  fact  the the  often  great  i t s shareholders.  to  is really  this  means  is really  that  moral  Whether  of  It  duty  There  motive.  as  i s by  Governor  their  1931. the  any  Unfortunately  the  of  England  as  a l l too  of  crisis  writer  number  nation  seem  C e r t a i n l y the  bank.  sense  city".  financial  twenty-four  i s quite  the  that  of  It  the  the  us  board  their  often  for  directors  and  a  of  place  remind  c o n t r o l l e d by  elect  profit  very  "the  "the  of  directorate.  policy for  and  a high  often  above  Bank  and  prevent  government  shareholders choose  to  country.  the a  world,  of  same. the  have  been  "the  city",  day,  resulted  I t was  not  necessarily wages the  in  the  should  be  reduced,  standard  of  living  standard  should  in  that  order  the  fire.  the  Bank  and  the  Banx  the  another a  been f o r m u l a t e d  interests, One  personnel  not  a l l that  doubtedly  of  there  last  the to  are  The  should  and  and  might of  be  "the  these  be  that  by  d i r e c t o r a t e having  be,  many  uninfluenced  not  likely  seems t o  management  of  in spite  be  the of  s p l e n d i d and  Governor,  Mr.  bank,  by  have proof  Bank the able  gold next  from led  by  government  things.  government's  a  the  pulled  one  that  the  city",  of  that  cut,  despised  downfall do  generally  real  alone  i t might  directorate. saying  the  day  policy  things would  illustration  dole  lowered,  one  consciousness,  these  the  be  people  chestnut  forced  been  the  the  should  financial  England,  social  that  city's"  c r e a t i o n of  lightened  of  glorified  "the  Yet of  be  of England  policy  as  interests  Had  the  had  i t s  an  en-  special  happened. enough  of  fact men  M o n t a g u Norman,  that  England that on  i s  un-  i t s  is  quoted  autumn:  "The d i f f i c u l t i e s o f t h e p r e s e n t e c o n o m i c s i t u a t i o n a r e so v a s t and so u n l i m i t e d t h a t I a p p r o a c h the s u b j e c t not o n l y i n i g n o r a n c e but i n h u m i l i t y . I t i s t o o m u c h f o r me I h o p e we may a l l s e e t h e a p p r o a c h of l i g h t a t the end of t h e t u n n e l . Some p e o p l e h a v e b e e n a b l e t o p o i n t o u t t h a t l i g h t to us. I m y s e l f see i t somewhat i n d i s t i n c t l y b u t I a d m i t t h a t f o r t h e moment t h e w a y i s not clear."145  145.  The  Financial  Post,  Oct.  29,  1932.  139.  The  frankness  of t h i s  utterance  mended.  For humility there  however,  there  the  of England.  Bank  candour, had  t o some  tunnel"  system  was  cope w i t h  we  could  may  i n f l u e n c e was  been  period. the  panic The  with  utterance,  again  Reserve  of  be f o r h i s more  respected and  given  a t the end of  deficient  Each  exerted  i t s credit  as a brake  The weakness  Before  the  banking  control of the  o f banks were u n a b l e t o As a matter  of  i n the d i r e c t i o n existed.  bank f o l l o w e d  time when  of t h e  the American  in social  The thousands  often  System  find- imperfections.  the i n s t a b i l i t y that  used  ignorance,  resigned  "see the l i g h t  to the F e d e r a l  was u s u a l l y t o e x p a n d  have  b e e n much  i n f l a t i o n and s p e c u l a t i o n .  at a  For  com-  indistinctly.  structure.  banks  to be  i n the governorship  A c t o f 1913 was p a s s e d ,  impossible.  other  need.  a s he must  have  frank  particularly  aggravating was  now  Reserve  monetary  their  o n e who  States  Federal  Respected  this  less  Turning united  be no p l a c e  the Governor would  he, f o l l o w i n g  place the  should  i s great  i s indeed  United  i t s own  concerted  of t h e system  was  action  with  restriction  on the i n f l a t i o n  of  policy,  i n competition  of a  fact  which the  should boom  seen c l e a r l y i n  o f 1907. United  twelve  States  now  r e g i o n a l banks  has a Federal headed  Reserve  by a F e d e r a l  System  Reserve  14.0.  Board.  The  Reserve  developments market  place  closely  operations  prising  that  the  they  established  as  years,  1916,  to  carry  out  have not Reserve  a  shall  very of  ideas  The  of  of  Federal  expected  vary  It  i s perhaps  During  say,  i t was  policy.  States  Reserve  Board's  and  In  young, the  open  surthe  first  having  first  been  few  not  strong  enough  The  period  of  i n the  Board's of  business  not  this.  1913.  Secretary  Reserve  discount  is very  United  the  their  System  we  the  to f o l l o w  always done  ambitious  the  subordination  mistaken  to  r e c e n t l y as  participation the  and  are  accordingly.  Federal  t i l l  Banks  the  war  witnessed  policies  Treasury.  policy  has  the  to  the  146  never  been  3 4-7 very  definitely  acknowledged policy,  but  defined. The  Strong  stated.  the only  What  one  index  Bill,  and  level  f o r commodities Board  Reserve  and  level  Banks  B.  H.  Board  as  one  among many. or  indexes  v/hich w o u l d  Board  Both  the  price  The  Banks  officially to  discount  "Stability" are  used  was  disowned  Banking  has  i n not have  "promoting  in general",  The  guide  definitely to  i n 19S7  has  a  System  been  clear.  committed stable  opposed any  not  by  the  price them.  responsibility  146.  Beckhart,  of  Canada, p.  147.  The i n f o r m a t i o n h e r e g i v e n i s l a r g e l y a summary o f t h e v i e w s o f L i o n e l D. E d i e i n " M o n e y , B a n k C r e d i t P r i c e s " , pp. 491-92.  485.  and  141  for  the  drastic  started boom  decline  i n 1925.  caused  In  great  of  1929  commodity the  concern  on  growth the  prices which of  part  the  of  had  speculative  both  the  Federal  148 Reserve  Bank  o f New  the  could  not  two  taken, the  the  former  latter  agree  Early  i n the found  to  too  of  the  Reconstruction  of  the  Glass-Steagall B i l l .  in arresting  in  to  discount  direct  action  be  rates, and  co-operation naturally about  rigid,  Finance  inaugurated  Unfortunately  measures  the  depression  was  ful  be  upon of  System  operations  to  raise  bring  present  Board.  remedial  to  lack  efforts  the  upon  to r e l y  Consequent their  and  wishing  desiring  warnings. weakened  York  stability. the  hence  Federal the  Corporation The  1932  policy  seems  bank f a i l u r e s  and  to  organization  and  of  Reserve  the  open  have  market  been  in reversing  passing  success-  the  hoarding  14-9 movement however, The to  be  for and  the  worst  that  a  the  time. real  feature  The  bank of  personnel  success  crisis the  are  was  came  Federal  only  on  temporary,  March  Reserve  apparently  4,  1933.  System  unable  to  seems  decide  148.  B o p p , K a r l R. Two N o t e s o n t h e F e d e r a l R e s e r v e System. The J o u r n a l o f P o l i t i c a l Economy, J u n e , 1932, p. 388.  149.  See  Chase Economic  Bulletin  of  May  16,  1932,  p.  18.  142.  readily they  upon  have  policy  the  not  i s .  policy  to he  made d e f i n i t e  The  cause  of  carried  out  declarations  this  condition  and  consequently  as-to  what  of a f f a i r s  their can 150  perhaps Its  he  found  structure  complicated nature renders  consistent up  many  on  policy.  eight of  i n the  long-run policy.  agencies having There  members.  Then  each F e d e r a l  There  is also  made u p  of  is first there  Reserve  one  from  These  governors' i n t u r n  individuals therefore power.  to  the this  the  are  the  the  policy  result the  of  fact  States  commercial  or  Reserve of  Council  several  open  12  of the 1 5  members  at  more  in  hanks.  least  140  Policy  balance  25,110 ^  are  market  development. or  of  directors.  There  are  sets  influence  regional  an  a  directors  of  district.  there  Act  Board  i n a l l 108  i n 1929  banks  obtain  indirect  compromise that  to  System. .  Reserve  boards  constitute  In a l l , then,  i n the United  c e n t , of  Federal  of  concerned with  often  Add  operation per  governors  conference.  the  Reserve  the  policy  direct  Advisory  addition 12  12  each  Reserve  Federal  Bank h a v i n g  the F e d e r a l  the  i t difficult  The  either  of  of  hanks than  were non-members  is  in  60 made  150.  S e e B o p p , K a r l R. Two N o t e s o n t h e F e d e r a l R e s e r v e System. The J o u r n a l o f P o l i t i c a l Economy, J u n e , 1932, p . 379.  151.  Sisson, Reviews  F r a n c i s H. and W o r l d ' s  U n i t e d S t a t e s Banks. Work, D e c , 1932.  Review  of  143.  up of s t a t e banks and  t r u s t companies, preponderantly  small  i n s t i t u t i o n s , and you  see the d i f f i c u l t y of e n f o r c i n g a  u n i f i e d banking p o l i c y . n e v e r t h e l e s s the F e d e r a l Reserve System i n i t s b r i e f e x i s t e n c e has a l r e a d y been of u n t o l d b e n e f i t to the c o u n t r y — i n the f i n a n c i n g of the Great War,  i n making  p o s s i b l e at l e a s t some degree of concerted a c t i o n , and h e l p i n g to meet the present  critical financial  N e i t h e r time, space, nor examination  i n t o the g e n e r a l  the v a r i o u s c e n t r a l banks. s a i d of two  in  situation.  purpose permits a f u r t h e r e f f i c a c y , or lack of i t , of  In the l i g h t  of what has been  of these banks, however, i t i s not a l t o g e t h e r  s u r p r i s i n g that the P r e s i d e n t o f the Canadian Bankers' A s s o c i a t i o n should  say:  "May I say, with regard to c e n t r a l banks, that there has been a g r e a t d e a l of misapprehension as to what they can do: t h a t even today there e x i s t s a g r e a t d e a l of misapprehension as to what they have been able to do elsewhere." When " C h r i s t i a n " met  "Atheist", i n P i l g r i m ' s Progress,  trudging along w i t h h i s back to the C e l e s t i a l C i t y , f o l l o w i n g c o n v e r s a t i o n i s supposed to have taken  the  place:  "Where are you going?" asked A t h e i s t , l a u g h i n g at C h r i s t i a n . "To the C e l e s t i a l C i t y " , r e p l i e d C h r i s t i a n , h i s f a c e a l l aglow with heavenly l i g h t . "You  fool.'" s a i d A t h e i s t , l a u g h i n g as he  trudged  X44.  on i n t o t h e d a r k n e s s . " I ' v e been h u n t i n g f o r t h a t p l a c e f o r t w e n t y y e a r s and h a v e s e e n n o t h i n g of i t y e t . P l a i n l y i t does n o t e x i s t . " H e a v e n was b e h i n d h i m . The  b a n k e r s o f Canada c a n s e e no " h e a v e n " i n a c e n t r a l  bank f o r o u r c o u n t r y . But  Their  backs a r e turned  even i f c e n t r a l banks i n e x i s t e n c e  against i t .  elsewhere have not  been a l l t h a t t h e y m i g h t have been, even i f t h e c r e a t i o n o f a c e n t r a l bank i n Canada w o u l d n o t i m m e d i a t e l y us  into a financial  or monetary heaven, i t would  b e a c o n s o l a t i o n t o know t h a t we w e r e w a l k i n g direction.  usher at l e a s t  i n the right  A t t h e same t i m e i f we a r e t o h a v e a c e n t r a l  bank i n Canada i t w i l l  be v i t a l l y  i m p o r t a n t t o remember  t h a t t h e mere e r e c t i n g o f a c e n t r a l bank o f "some k i n d " w o u l d be f u t i l e a n d a w a s t e o f t i m e a n d money.  We do n o t  w a n t t o copy a n y p a r t i c u l a r c e n t r a l bank i n e x i s t e n c e . We s h o u l d one  h a v e one t h a t w o u l d f i t o u r p a r t i c u l a r n e e d s and  that w i l l  banks.  be f r e e f r o m t h e f a u l t s  We s h o u l d  a d o p t t h e v i e w t h a t no s i n g l e c e n t r a l  bank y e t i n e x i s t e n c e  i s q u i t e good e n o u g h f o r u s .  Another o b j e c t i o n that proposal  of the present c e n t r a l  our b a n k e r s r a i s e a g a i n s t t h e  o f a c e n t r a l bank f o r Canada i s t h a t  f a c t o r may t h e r e b y come t o h a v e a n e v i l banking system.  I n the previous  the p o l i t i c a l  i n f l u e n c e upon t h e  chapter t h i s point  d e a l t w i t h r a t h e r f u l l y and n e e d n o t be c o n s i d e r e d  was at  145.  length  here.  I t w i l l he  Finance Act yet  " w i d e o p e n " to p o s s i b l e  t h e r e was  no  e v i d e n c e o f any  Speaking r e c e n t l y that the  r e c a l l e d that  i n favor  s u c h a b a n k w o u l d be Hon.  V i n c e n t Massey  "The n e e d i s and i f t h e r e the d e l i c a t e of p o l i t i c a l  form of  M a s s e y one  he  "A  can  may  bank w o u l d a t the  the  political  Finance that  s e c u r e e f f i c i e n t management f o r  In f a c t ,  that  scarcely  be  i t w o u l d be the  t h e r e Y/ould  be  no  observe  that  a  least leave  our  f a c t o r than i t for a  central  difficult  projected  central  the  to bank.  however.  very breath i n which  difficulty  unintentionally i n securing  the  In recommending a permanent economic  a d v i s o r y committee i n s t e a d  of a c e n t r a l h a n k , he  part:  The  influence,  taken s e r i o u s l y ,  Canadian Banker", w i t h  needed e x p e r t s .  denying  Act.  i s s t r e n u o u s l y o p p o s i n g a c e n t r a l hank,  implies  152.  bank and  existing substitute  i s contended a l s o  This objection  regard.  said:  central  at p r e s e n t w i t h the  It  in this  influence,  t o t a k e t h e b a n k s out o f p o l i t i c s , i s one a g e n c y w h i c h w o u l d keep, a l l m e c h a n i s m o f f i n a n c i a l p o l i c y out d e b a t e i t i s a c e n t r a l bank."152  constituted  bank i n t h e  evil  the  s u b j e c t to p o l i t i c a l  b a n k i n g s y s t e m l e s s open t o is  found  political  of a c e n t r a l  I n a g r e e m e n t w i t h Mr. properly  we  F i n a n c i a l P o s t , Feb.  4,  1933.  says  in  " T h i s c o m m i t t e e s h o u l d be composed of t h e most i n t e l l i g e n t , e x p e r i e n c e d a n d p r a c t i c a l men i t i s possible to secure. C o n s i d e r a t i o n might be g i v e n to o b t a i n i n g as c h a i r m a n an o u t s t a n d i n g B r i t i s h e c o n o m i s t who w o u l d b r i n g t o t h e d e l i b e r a t i o n s of the committee a broad intern a t i o n a l p o i n t of view."153 This  i s indeed  administering often  or  central sounding "A  too  i s the  Banker"  is a  could  danger,  "practical". men  and  the  forest  function Hence with  for a  to the  be  to  be  so  well too  mere  banking  that  study—an  field  o f money  and  or  153.  The F i n a n c i a l Banker".  on  they  be  should  policy  been  person as  i s an  final  article  a  "A  see  position person  with  knowledge  expert  by  business  social  result  i n some u n i v e r s i t y .  word  paramount.  whose a  with  experienced. the  key  formation  gained who  i n the  a  high  cannot  i n Canada to h a v e  a  eminent  the  economist  Post,  that  of  central  too  over-emphasis  training—a  banking  our  Consideration of  bank  has  and  agreement  intelligent  of  too  personnel bank  In  admit  "practical"  bank  central  of  interested  may  A  experts  I t cannot the  enough.  seem a d v i s a b l e  academic  and  not  trees.  professional money  factor.  however,  central  i t would respect  be.  It is possible f o r so-called  bankers  of  one  should  of what  stressed that  are  not  description  banx  vital  constitution  experts  There  central  s t r o n g l y be  banx  Canadian  bank  a  a good  of in  disthe.  Then, i f  Canadian  147.  necessary, Canada A not  surely  could more  the very  supply  able  us w i t h  some  serious contention  function effectively  a money m a r k e t . Association  bankers  o f t h e management  i s that  i n Canada  The P r e s i d e n t  that-we have  a central  because  i n .  personnel.  bank  could  of our l a c k of  o f the Canadian  Bankers'  says:  " I t may b e q u e s t i o n e d w h e t h e r i n a n y c o u n t r y t h a t i s a d e b t o r c o u n t r y the c e n t r a l bank can p o s s e s s -power. F o r a c e n t r a l bank t h a t does p o s s e s s power, t o b r i n g i t si n f l u e n c e t o bear w i t h o u t s h o c k t o t h e f i n a n c i a l and b u s i n e s s structure,it s h o u l d be f u n c t i o n i n g i n a s e n s i t i v e m o n e y market and, i f p o s s i b l e , a market which c r e a t e s b i l l s o f e x c h a n g e i n i t s own c u r r e n c y . Where these c o n d i t i o n s a r e n o t f u l f i l l e d a c e n t r a l bank i s a p t t o resemble an i m p r e s s i v e f a c a d e .with a s m a l l and r a t h e r f l i m s y b u i l d i n g behind it."154 As Act  was  rate  The or  o f money  bank  i s the primary  and c r e d i t .  One  i s found  central  bank u s e s  this  "easy",  discount  thereby  will  taken  or cheap.  rate will be s o l d  chapter,  a s a' " p e o p l e ' s "  effective  securities  154.  appraised  device  dear,  the  being  i n the previous  of the c e n t r a l  control this  outlined  market  the discount  of making operations.  money  "tight",  i s too plentiful,  and commercial  i n t h e open m a r k e t .  out of the market,  Finance  device f o r the  of making  I f money  be r a i s e d  bank,  the  o f t h e means  i n open  method  when  and t h i s  paper  or  Money i s  tends  to tighten  M c l e o d , J. A . Address to the Annual General Meeting of t h e C a n a d i a n B a n k e r s ' A s s o c i a t i o n , T o r o n t o , Nov. 10, 1 9 3 2 .  148.  the  market.  liberal  The commercial  a supply  customers.  with  enthusiasm  other  hand,  new  deposits  forfurther  i f money  securities  "deposits". or  notes,  to their  they  may  this  make new way^the  increased But market  it  bills  drawn  with  the date i n terms  i n Canadian  the central I t may  their  like  money.  Very  new  new  with notes  banks reserves customers.  country  out*  may  be  such  Business  them,  such  Few Y o r k  and  i tusually  often,  or American  do  no  Neither as i s London. retains  t o o , such dollars  open  men  b u t we h a v e  of exchange.  discounts a b i l l ,  of s t e r l i n g  these  i n which  bankers,  centres  will  transactions.  market  i n bills  On t h e  the s e l l e r s  to t h e i r  open m a r k e t  be c a r r i e d  dampen  bank  The commercial  loans  be  do so b y  transfer  of the whole  of m a t u r i t y .  they w i l l  of credit.  f o r dealing with  i n financial  one o f our banks  until  than  bank  f o r dealing  the machinery  be found  are  banks.  credit  transactions could  h a v e we  then  and p r o f i t a b l e  bank  adequate market  When  own  may  as  loans to  which w i l l  r e s e r v e s , and on t h e s e  by c e n t r a l  their  bank  by c r e d i t i n g  Canada, h a s n o s e n s i t i v e  discount  to  or simply  The s e l l e r s  r e c e i v e added  market.  have  t o make new  expansion  i s too scarce,  i n t h e open  thus  In  which  not then  the high discount rate  their  issuing  with  I f t h e y go t o t h e c e n t r a l  confronted  buy  of funds  banks w i l l  bills  rather  149.  It  is,usually  central media term  bank  last  the  totals  a  and few In  must  means  was  not  the  of  be  this  drawback  the  the  of  commercial  to  short-  supply  extent  of  of  extent  $35,000,000  paper,  individual  any  and  constant, a l -  to  the  for  investment  paper  l a r g e nor  should  control  are  not  be  while  items  i n any  a  lack  device  of  a  of a this  central money  are one  or  bank  in  The  discount  for  such  control.  effective  than  anything  else.  fraternity  and  public,  when a  central in  the  banking  bank a n n o u n c e s  checking  unsound  a  market  undoubtedly  over-emphasized  possible.  on  greater  of  Nevertheless  effect  either. rate  Moral  Other  itself  suasion The  on  change  developments  psycho-  the of  is  general  policy,  than  any  device. In  market, the  sum,  of  Canada  possibilities  minimized.  o f t e n more  other  supply  be,  centres.  primary  be  supply  concentrated  logical  may  In  neither  immense  should  commercial  augmented  for an  obstacle  the  also  to  are  plentiful  short-term  is usually  As  up  a  treasury b i l l s .  supply  then,  not  potent  of  c o n s i d e r i n g the  Canada,  is  bills  autumn.  small in  form  Government  though  it  operations,  i n the  treasury  d e s i r a b l e that' t h e r e  Sweden yet  Sveriges  there  i s no  that country Riksbank.  -short-term  has  a very  money m a r k e t  effective  Sweden f o l l o w e d  Great  nor  bill  central  bank,  Britain  in  150.  going o f f the g o l d standard  i n 1931.  Since  that time the  c e n t r a l bank h a s been f o l l o w i n g a p o l i c y o f r e g u l a t i n g t h e internal price exchanges. to  date  l e v e l and more o r l e s s i g n o r i n g t h e f o r e i g n  T h i s p o l i c y has been r e m a r k a b l y  i n stabilizing  the k r o n a .  successful  t h e i n t e r n a l p u r c h a s i n g power o f  As i n t h e c a s e  o f C a n a d a , Sweden's f o r e i g n  t r a d e i s t r a n s a c t e d i n t e r m s o f f o r e i g n c u r r e n c y , and a s s t a t e d a b o v e s h e h a s no money o r b i l l  market.  Her  central  bank o p e r a t i o n s a r e t h e r e f o r e l a r g e l y c o n f i n e d t o d i s c o u n t and  e x c h a n g e r a t e m a n i p u l a t i o n s u p p l e m e n t e d by m o r a l  s u a s i o n , j u s t a s w o u l d l a r g e l y be t h e c a s e w i t h a  central  bank i n C a n a d a . In  New  Zealand  a l s o we f i n d  t h e r e i s no money or  m a r k e t , y e t t h e M i n i s t e r o f F i n a n c e , Mr. C o a t e s , announced o f f i c i a l l y  t h a t t h e Government  bill  has  i s going to  156 e s t a b l i s h a c e n t r a l r e s e r v e bank t h e r e . F i n a l l y , we may a s k t o what e x t e n t o u r l a c k o f a money m a r k e t , o r b i l l s  o f e x c h a n g e , or s h o r t - t e r m  p a p e r and t r e a s u r y b i l l s ,  e t c . , s h o u l d be r e g a r d e d  commercial as a  r e s u l t o f h a v i n g no c e n t r a l b a n k , r a t h e r t h a n a s a g o o d c a u s e f o r n o t c r e a t i n g one.  I s i t n o t t o be e x p e c t e d  155.  See F i n a n c i a l P o s t , D e c . 3 1 , 1 9 3 2 .  156.  See F i n a n c i a l P o s t , D e c . 17, 1 9 3 2 .  also  151.  that  our  foreign transactions w i l l  o r of A m e r i c a n d o l l a r s , d o l l a r s , as At  l o n g a s we  a l l e v e n t s ' we  instead h a v e no  should  of  he  i n t e r m s of  c e n t r a l hank  not  permit the  money m a r k e t a l o n e t o d i s c o u r a g e t h e hank, f o r as K i s c h and  Elkin  i n terms of  sterling,  Canadian  facilities? l a c k of  a  i d e a of a c e n t r a l  say:  "....the r i s k of p r e m a t u r i t y i n the c r e a t i o n of a c e n t r a l h a n k i n g system should not n e c e s s a r i l y he r e g a r d e d as a d e c i s i v e f a c t o r , h e c a u s e t h e r e i s no i n f l u e n c e s o p o t e n t i n the way o f d e v e l o p i n g t h e c r e d i t s y s t e m on s o u n d and p r o g r e s s i v e l i n e s as a w e l l - f o u n d e d C e n t r a l Bank."157 Canadian hankers are v e r y t h a t t h e y do  not  criticism  meet t h e n e e d s o f t h e p u b l i c i n  m a t t e r of c r e d i t . in recent  s e n s i t i v e to t h e  Practically  e v e r y one  months s p o k e n a g a i n s t  the  the  o f them who  proposed c e n t r a l hank,  seems t o h a v e assumed t h a t t h e u p p e r m o s t t h o u g h t i n m i n d s of t h e a d v o c a t e s of  s u c h a bank i s t h a t  greatly increase  One  quently  put  increase c r e d i t .  Canadian Banker"  For  the  i t would  o f t h e a r g u m e n t s most  f o r t h by t h e m , t h e r e f o r e ,  bank w o u l d n o t "A  credit.  has  fre-  i s that a  central  i n s t a n c e we  find  saying:  "The e s t a b l i s h m e n t of a c e n t r a l h a n k c a n n o t , t h e r e f o r e , i n c r e a s e by one d o l l a r t h e s u p p l y o f c o m m e r c i a l c r e d i t now a v a i l a b l e i n t h i s country."158  157.  K i s c h and  Elkin.  Central  158.  The F i n a n c i a l P o s t . Banker".  Banks,  p.  F i n a l A r t i c l e by  12. "A  Canadian  152.  In  s i m i l a r v e i n Mr.  M.  W.  W i l s o n , V i c e - P r e s i d e n t and  G e n e r a l Manager o f t h e R o y a l Bank, s a y s : "Too o f t e n , I f e a r , i t i s t h o u g h t t h a t a c e n t r a l . bank w o u l d f u r n i s h i n c r e a s e d c r e d i t f a c i l i t i e s t o f a r m e r s and o t h e r s . T h i s i s n o t t h e e a s e . A t no t i m e d u r i n g t h e p r e s e n t d e p r e s s i o n h a s i t been n e c e s s a r y t o w i t h h o l d bank c r e d i t f o r a g r i c u l t u r a l or c o m m e r c i a l p u r p o s e s when p r o p e r s e c u r i t y was o f f e r e d . " 1 5 9 We  might c o n s i d e r b r i e f l y  of  credits.  or  not  the q u e s t i o n of  W h e t h e r t h e r e i s any r e a l f o u n d a t i o n f o r i t  the f a c t remains  t h a t the  c r i t i c i s m o f our  most commonly v o i c e d i s t h a t t h e y a r e n o t enough i n t h e m a t t e r k e e p s up an a l m o s t facilities.  of c r e d i t .  The  Some o f t h e p e o p l e  They f e e l  accommodating  West i n p a r t i c u l a r  than the  t h a t w i t h the b r a n c h  c e n t r e s of t h e E a s t , s u c h  it  t h e West t h a n i t w o u l d be  Ibid.,  financial  I t i s no  1933  doubt  to i n t e r e s t t h e o f f i c i a l  However, i f t h e West had u n i t  Jan..21,  and  of t h e E a s t i n a l o a n  i s d o u b t f u l i f c r e d i t w o u l d be a n y  159.  system  as M o n t r e a l and T o r o n t o ,  to i n t e r e s t a bank o f f i c i a l  a l o c a l u n i t bank.  present  banking  t h a t t h e West i s d i s c r i m i n a t e d a g a i n s t .  in  credit  there think that u n i t  money i s c o n c e n t r a t e d t o o much i n t h e l a r g e  harder  banks  continual c r y against inadequate  banks would s e r v e l o c a l needs b e t t e r banks.  availability  "cheaper".  of  banks The  West  153.  i s a n area, o f e x c e s s o f l o a n s  o v e r d e p o s i t s , and c r e d i t  w o u l d h a v e t o come f r o m t h e " s u r p l u s f u n d " u n i t banks such an a r e a as the M a r i t i m e  areas.  Provinces,  With however,  w i t h an e x c e s s o f d e p o s i t s , m i g h t e x p e c t t o o b t a i n l a r g e r amounts o f c r e d i t a t l o w e r The  rates.  c r i t i c i s m o f t h e moment, h o w e v e r , i s t h a t t h e  chartered  banks, b e i n g p r i v a t e i n s t i t u t i o n s  and' r i g h t l y  concerned.primarily  quite n a t u r a l l y  w i t h p r o f i t - m a k i n g and  t h e i r own s a f e t y , g i v e c r e d i t a l l t o o f r e e l y times  and r e s t r i c t  l i k e the present.  i t too r i g i d l y  i n times  i n prosperous  of  depression  The i d e a o f t h e c e n t r a l b a n k a d v o c a t e ,  on t h e o t h e r h a n d , i s t h a t s u c h a bank w o u l d be more f a r seeing but  i n i t s p o l i c y , w o u l d n o t be c o n c e r n e d w i t h  r a t h e r w i t h the general  w o u l d tend  to r e s t r i c t  w e l l - b e i n g of t h e n a t i o n , and  credit  accommodating i n d e p r e s s i o n  i n boom t i m e s a n d be more  periods.  A good s a m p l e o f t h e t y p e f o u n d i n an e d i t o r i a l  profits  entitled  o f c r i t i c i s m h e a r d i s t o be "Money a n d C r e d i t " i n a n  i s s u e of the Vancouver D a i l y P r o v i n c e  of March  3,.1932.Quoted  i n p a r t we h a v e : "The c r e d i t s i t u a t i o n h a s become a s e r i o u s one i n the Dominion. T h e r e i s no l a c k o f w e a l t h i n the c o u n t r y , but a v e r y s e r i o u s l a c k of t h e means o f d e v e l o p i n g t h a t w e a l t h . " C o n f i d e n c e and no money] The two d o n ' t go together. W h i l e t h e men o f money w h i s p e r o f their confidence, t h e i r actions i n denying  154.  " c r e d i t t o c o n s t r u c t i o n and i n d u s t r y and i n r u s h i n g to o v e r - s u b s c r i b e government i s s u e s a t 6 and 6 f p e r c e n t , f a i r l y s h o u t t h e opposite. Where i s t h e money t o meet t h e s e 6 and 6-g- p e r c e n t , i s s u e s to come f r o m ? It c a n o n l y come, u l t i m a t e l y , f r o m i n d u s t r y . And i n d u s t r y i s b e i n g t h r o t t l e d f o r l a c k o f credit. Undoubtedly the system needs i n vestigating. " I n the as  same e d i t o r i a l Mr.  Reginald  McKenna i s q u o t e d  saying: "The amount o f money i n e x i s t e n c e v a r i e s o n l y w i t h t h e a c t i o n of t h e h a n k s i n i n c r e a s i n g or . diminishing deposits. We know how t h i s i s effected. E v e r y hank l o a n c r e a t e s a d e p o s i t , and e v e r y r e p a y m e n t o f a bank l o a n d e s t r o y s one." Bankers maintain  of d e p o s i t o r s . whole  truth.  This  that  to borrowers the  of c o u r s e I s t r u e , b u t  They a r e r e a l l y  t h a n " m e r c h a n t s of money". favorable  they loan  t h e y make a p r a c t i c e o f l o a n i n g  t e n t i m e s t h e amount o f p o s i t v / i t h them.  to  This p r a c t i c e gives  Plumptre  the rather  conditions  b i r t h t o the  on  de-  currently  haven't'got".  says:  "The f a l l a c y t h a t b a n k e r s as a b o d y r e c e i v e and r e - l o a n t h e ' s a v i n g s ' of t h e p u b l i c d i e s h a r d ; and t h a t n o t . o n l y among t h e b a n k e r s . But i t i s a fallacy."160  160.  P l u m p t r e , A. F. Bank. p. 132.  W.  The  Point.of  as  customers  t h e money a c t u a l l y p l a c e d  p o p u l a r s t a t e m e n t t h a t b a n k s " l o a n what t h e y As Mr.  i t i s not  "merchants of c r e d i t "  When t h e y r e g a r d  savings  7 i e w of a  Central  The is  amount of r e a l money i n C a n a d a a t a n y  e x t r e m e l y s m a l l compared w i t h  bank d e p o s i t s . e n t r i e s , and can  "money" i n t h e  These d e p o s i t s a r e n o t h i n g  s u r e l y i t i s reasonable  exercise considerable  to  i f t h e y d e s i r e , and  i f the  s u r e l y a c e n t r a l bank c o u l d . then,  f o r "A  could not  one  form  of  more t h a n b o o k that the  bankers can  chartered  It is utterly  Canadian Banker" to say  i n c r e a s e by  time  bankers  c o n t r o l over these e n t r i e s .  Hence i t i s l o g i c a l t o assume t h a t o u r credit  say  given  dollar  the  increase  bank c a n  do  this,  unreasonable,  t h a t a c e n t r a l bank supply  of  commercial  quotation given  above f r o m  credit. I t w i l l be n o t e d f r o m t h e Mr.- M.  W.  Wilson  of t h e  t i o n of bankers that there  i s no  maintain  R o y a l Bank, t h a t  even t o d a y i n t h e m i d s t o f  l a c k of c r e d i t f o r  that decreased loans  admit t h a t a s t r i n g e n c y  a r e a r e s u l t of t h e  t h e r e a p p e a r s t o be no credit  i n 19E9,  They lack  have c o n t r i b u t e d  b o r r o w e r s . ' To  the  to  them  r e l a t i o n between t h e abundance  f o r i n s t a n c e , and  of  They a r e u n w i l l i n g t o  o f c r e d i t may  ' u n s o u n d n e s s ' of p r o s p e c t i v e  conten-  depression  'sound' b o r r o w e r s .  borrowers w i t h adequate s e c u r i t y .  the  i t i s the  'soundness'  of  of  borrowers at that time.  I t i s hard t o u n d e r s t a n d , however,  t h e i r p e r s i s t e n c e i n the  theory  and  a b u n d a n t c r e d i t are n o t  that r e s t r i c t e d  credit  even c o n t r i b u t a r y c a u s e s  of  156.  the  'solvency' As Mr.  and  'insolvency', r e s p e c t i v e l y , of  Plumptre very a p t l y  borrowers.  says:  "The m a i n d i f f e r e n c e ( b e t w e e n a c e n t r a l bank and a p r i v a t e b a n k ) i s r e a l l y e x t r a o r d i n a r i l y e l u s i v e — f o r i t i s a d i f f e r e n c e i n point of view."161 The  p o i n t of v i e w of our  that p r o f i t s should  chartered  banks p r i m a r i l y i s  be made f o r t h e i r s h a r e h o l d e r s  and  t h e b a n k i n g i n s t i t u t i o n s must n a t u r a l l y be g u a r d e d insolvency.  So f a r a s  i s consistent with  o b j e c t i v e c r e d i t a c c o m m o d a t i o n and be g i v e n and  to  the p u b l i c .  reasonable The  T h i s , of c o u r s e ,  services i s the  of v i e w f o r the banks t o  I t would not Profits  t h e y w o u l d be  be  against  primary may  natural  take.  p o i n t , o f v i e w of a c e n t r a l b a n k w o u l d be  different. profits.  point  general  this  very  concerned p r i m a r i l y w i t h  i t m i g h t , and  l i k e l y w o u l d , make,  of s e c o n d a r y c o n s i d e r a t i o n .  but  Transactions  m i g h t o f t e n be u n d e r t a k e n d e l i b e r a t e l y a t a l o s s i n to serve  a greater  purpose.  or of a banking system a l o n e , p e o p l e , w o u l d be  the  Another obstacle  161.  that  Hot but  the  order  s e c u r i t y of a bank,  the  ' s e c u r i t y ' of a  whole  objective. i n t h e way  P l u m p t r e , A. F. W. Bank. p. 152.  The  of t h e  Point  c r e a t i o n of  o f View of a  a  Central  157.  c e n t r a l bank f o r C a n a d a , s a y i t s o p p o n e n t s , of  costs.  serious  This i s a question which  consideration.  opponents.  i s the matter  o f c o u r s e demands  L e t us hear f i r s t  from  banker  Mr. A. E. P h i p p s , G e n e r a l M a n a g e r o f t h e Im-  p e r i a l Bank o f C a n a d a , s a y s : A c e n t r a l b a n k c a n n o t be e s t a b l i s h e d w i t h o u t heavy e x p e n s e s — n o doubt i t s sponsors w i l l say o t h e r w i s e , b u t once i t i s l a u n c h e d e x p e n s e s w i l l be h a r d t o c o n t r o l . " 1 6 2 rr  Mr. Toronto,  H. B. Henwood, G e n e r a l M a n a g e r o f t h e Bank o f says:  " . . . . I am s a t i s f i e d t h a t i f t h i s a d d i t i o n a l f r i l l t o our p r e s e n t b a n k i n g system were added, i t w o u l d mean a h e a v y i n c r e a s e i n e x p e n s e w i t h l i t t l e o r no o f f s e t t i n g b e n e f i t s t o t h e b a n k i n g f a c i l i t i e s of the country...."163 The b a n k e r s , their  i n fact,  seem t o be p r e t t y u n a n i m o u s i n  support of the g e n e r a l statement t h a t t h e c o s t s of  a c e n t r a l bank w o u l d into details,  be t o o g r e a t . .  b u t Mr. P h i p p s  N o t many o f them go  says:  " I t i s not d i f f i c u l t to v i s u a l i z e the a g i t a t i o n f o r an i m p o s i n g head o f f i c e , e x p e n s i v e branch o f f i c e s f o r every p r o v i n c e , h i g h l y paid M a n a g e r s a n d s t a f f a t t h e Head O f f i c e and t h e B r a n c h e s w i t h no b e n e f i t s t o t h e c o u n t r y , . . . " 1 6 4 It  i s o f c o u r s e o b v i o u s t h a t t h e r e would  162.  S a t u r d a y N i g h t , D e c . 3, 1 9 3 2 , p . 2 7 .  163.  The F i n a n c i a l P o s t , J a n . 2 1 , 1 9 3 3 , p . 5  164.  S a t u r d a y N i g h t , D e c . 3, 1 9 3 2 , p . 2 7 .  be a n  initial  158.  o r g a n i z i n g c o s t , but t h i s w o u l d n o t be a r e c u r r i n g N o r n e e d i t be  t h e s p e c t r e t h a t Mr.  i s t o be f e a r e d t h a t Mr.  item.  Phipps imagines.  Phipps envisions a c e n t r a l  e d i f i c e a s i m p o s i n g a s , s a y , t h e m a i n b r a n c h o f one c h a r t e r e d banks i n the c i t y of these i n the c i t y high—the tallest i t s appointments two  i s thirty-eight  of the One  storeys  i n the B r i t i s h E m p i r e — a n d a l l  are i n keeping w i t h i t s h e i g h t .  o r t h r e e b l o c k s away t h e same bank h a s a n o t h e r  b u i l d i n g a t l e a s t about  bank  of M o n t r e a l or T o r o n t o .  of Toronto  building  It  h a l f as l a r g e .  Only branch  But i t would  be  e n t i r e l y u n n e c e s s a r y f o r a c e n t r a l b a n k t o be h o u s e d  in  such a p a l a t i a l b u i l d i n g . profits  enough t o i n v e s t  I t w o u l d n o t a i m t o make i n real estate  t o s u c h an e x t e n t .  B e s i d e s , i n m o s t o f our l a r g e c i t i e ; s t h e G o v e r n m e n t s p e n d s a g r e a t d e a l on r e n t a l s f o r o f f i c e s p a c e .  Should  the  c e n t r a l bank, o r a b r a n c h o f f i c e , h a v e s p a c e t o s p a r e , i t c o u l d be u s e d f o r Government o f f i c e s . particularly well  i f the c e n t r a l  T h i s would  work  bank w e r e e n t i r e l y  state-  owned. A matter of g r e a t e r importance would costs.  Mr.  be t h e o p e r a t i n g  Phipps says:  "A c e n t r a l bank once e s t a b l i s h e d i s e s t a b l i s h e d f o r a l l t i m e , a n d t h e e x p e n s e g o e s on f o r e v e r . " 1 6 5  165.  S a t u r d a y N i g h t , Dec.  3, 1932,  p.  27.  159.  If  i t i s e s t a b l i s h e d f o r a l l time,  the i n i t i a l doubtedly do n o t His  then presumably  o r g a n i z i n g cost i s paid for a l l time.  operating  c o s t s w o u l d go  t h e c o s t s o f Mr.  Phipps'  on  indefinitely.  b a n k "go  on  Six current  But  forever"?  s t a t e m e n t o b v i o u s l y i s m e a n i n g l e s s a s an  a g a i n s t a. c e n t r a l  Un-  argument  bank.  of t h e U n i t e d  R e s e r v e banks had A 166 e x p e n s e s o f l e s s t h a n $2,000,000 i n 1929. In  t h e same y e a r  States Federal  t h e s m a l l e s t one,  t h e R e s e r v e Bank i n 167  Minneapolis,  k e p t i t s c u r r e n t e x p e n s e s undier $ 1 , 0 0 0 , 0 0 0 .  I t w o u l d seem f a i r  t o assume t h a t t h e  C a n a d i a n c e n t r a l b a n k w o u l d be the U n i t e d  166.  than those  a  costs-in  States.  Then t h e r e i s the q u e s t i o n bank.  lower  c o s t s of  of c a p i t a l f o r t h e  central  "A C a n a d i a n B a n k e r " s a y s : " T h e r e a r e s o u n d p o l i t i c a l r e a s o n s why t h e i n s t i t u t i o n s h o u l d n o t be g o v e r n m e n t - o w n e d and s i n c e i t i s t o be a "bank f o r b a n k e r s " t h e c h a r t e r e d b a n k s w o u l d p r o b a b l y be c a l l e d u p o n to s u b s c r i b e f o r the g r e a t e r p a r t , i f not a l l , the c a p i t a l s t o c k . " 1 6 8  See C u r t i s , C.A., P o l i t i c a l Science  167.  Ibid.  168.  The  i n P r o c e e d i n g s of t h e A s s o c i a t i o n , 1930, p.  Financial Post,  Jan.  28,  1933.  Canadian 111.  160.  T h i s b a n k e r i s t a k i n g a good d e a l f o r g r a n t e d .  The  Finance Act which bankers laud as a p e r f e c t s u b s t i t u t e a c e n t r a l b a n k i s , a s we  saw  previously, entirely  ment-owned", y e t t h e b a n k e r s e e s no r e a s o n s " f o r o b j e c t i n g to i t . central  bank w e r e s e t up  of the  capital.  e v e r , why He why  can,  political  I t m i g h t be  that i f a  i n Canada, t h e b a n k s h e r e , a s  The w r i t e r  i t should  owned.  more t h a n a mere b a n k e r s ' b a n k , and  The  central  bank.  cribed i n previous chapters.  how-  state-owned.  several very v i t a l  reasons  bank s h o u l d  I t s h o u l d be  above a l l a " p e o p l e ' s "  tion completely  t o s u b s c r i b e some o r a l l  be c o m p l e t e l y  o t h e r hand, see be so  in  can s e e no v a l i d r e a s o n ,  t h e bank s h o u l d n o t  on t h e  "govern-  "sound  t h e u n i t e d S t a t e s , w o u l d be a s k e d  be  a government's  bank i n the manner d e s -  As a g o v e r n m e n t - o w n e d  i n d e p e n d e n t of t h e  institu-  other banks i t would  i n a p o s i t i o n t o a c t a s t h e g u a r d i a n of p u b l i c w e l f a r e a g r e a t e r d e g r e e than chartered banks. f a c t o r has  has in  The w r i t e r  b e e n met  "bogey" r a i s e d  i f partly  been suggested  f e e l s t h a t the  The  be to  the  political a  of v e s t e d i n t e r e s t s w h e n e v e r i t  that the s t a t e should operate  the i n t e r e s t s o f the people  largely lost  o r e n t i r e l y owned by  w i t h so r e p e a t e d l y i n h i s t o r y a s  i n defence  for  a service  g e n e r a l l y , t h a t i t has  i t s effect.  A t l a n t a R e s e r v e Bank h a s  a c a p i t a l i z a t i o n of  about  161.  169 $5,000,000.  170 $138,000,000  A t t h e b e g i n n i n g o f 1930 i t h a d  of F e d e r a l R e s e r v e N o t e s i n c i r c u l a t i o n .  The C e n t r a l R e s e r v e 171  Bank o f S o u t h A f r i c a .has a c a p i t a l the  of $5,000,000.  F e d e r a l R e s e r v e Banks of the U n i t e d S t a t e s have c a p i t a l  o f $6,000,000  or l e s s .  The t e n c h a r t e r e d b a n k s  $144,500,000.  of  The a v e r a g e number o f b r a n c h e s o f a l l t h e s e  b a n k s f o r t h e y e a r 1931 was 3,506.  branches has a paid-up c a p i t a l  One bank w i t h  of $ 4 , 0 0 0 , 0 0 0 .  b a n k s w i t h a c o m b i n e d c a p i t a l o f $27,000,000 636 b r a n c h e s .  o f Canada  1 7 2  on December 3 1 , 1932, h a d a t o t a l p a i d - u p c a p i t a l  ten  S i x of  Three other have  together  I t w o u l d seem r e a s o n a b l e t o s u g g e s t ,  t h a t the c a p i t a l  141  then,  o f t h e p r o p o s e d c e n t r a l bank f o r Canada  n e e d n o t e x c e e d $10,000,000  a t most.  W i t h t h e e s t a b l i s h m e n t o f a c e n t r a l bank t h e C e n t r a l G o l d R e s e r v e s w o u l d no l o n g e r be r e q u i r e d . s t a t e - o w n e d bank w e r e c r e a t e d ,  I f an  entirely  the Government's s u p p l y o f  g o l d c o u l d be u s e d a s c a p i t a l and r e s e r v e s and w o u l d be more t h a n a d e q u a t e a s s u c h . by t h e M i n i s t e r  of F i n a n c e - 1  On O c t o b e r 3 1 , 1932, g o l d 7 3  held  was a s f o l l o w s :  169-171  C u r t i s , C. A. P r o c e e d i n g s o f t h e C a n a d i a n P o l i t i c a l S c i e n c e A s s o c i a t i o n , 1930, p . 1 1 1 .  172.  The a b o v e i n f o r m a t i o n on c a p i t a l o f C a n a d i a n B a n k s was o b t a i n e d f r o m t h e F i n a n c i a l P o s t o f J a n . 2 8 , 1 9 3 3 , w h i l e i n f o r m a t i o n a s t o t h e i r b r a n c h e s was t a k e n f r o m " C a n a d a , 1 9 3 3 " , p . 156.  173.  S t a t e m e n t f r o m the D e p a r t m e n t o f F i n a n c e o f Nov. 1932, and p u b l i s h e d i n t h e C a n a d a G a z e t t e .  10,  162.  Against  S a v i n g s Bank  Against Dominion  deposits  |  Notes  2,312,316.06 70,301,955.69  In excess of S t a t u t o r y r e q u i r e m e n t s  874,231.33  73,488,503.08  Mr. A. E. P h i p p s q u i r e d t o b u i l d up  174  wonders where the d e p o s i t s r e -  t h e c e n t r a l b a n k w o u l d be  T h i s w o u l d n o t seem t o be a v e r y g r e a t  obtained.  difficulty.  The  G o v e r n m e n t ' s a c c o u n t w o u l d n a t u r a l l y be t r a n s f e r r e d f r o m t h e c h a r t e r e d banks  t o t h e c e n t r a l bank.  B a n k e r " g i v e s f i g u r e s t o s h o w t h a t i n 1931 balance c a r r i e d $49,000,000.  1 7 5  "A  the average  by t h e D o m i n i o n w i t h t h e b a n k s  was  Monthly r e t u r n s to the M i n i s t e r of  F i n a n c e show u n d e r t h e h e a d i n g , " B a l a n c e Due G o v e r n m e n t " , t h e sum Such f u n d s would  Canadian  to  Dominion  o f $53,107,707 a s a t December 3 1 ,  1932.  seem t o be ample a s d e p o s i t s f o r t h e  c e n t r a l bank t o s t a r t w i t h . "A C a n a d i a n B a n k e r "  1 7 6  a l s o says that w i t h t h e  p e a r a n c e o f t h e c e n t r a l bank t h e D o m i n i o n  Government w o u l d "  174.  See A d d r e s s o f Mr. P h i p p s i n " S a t u r d a y N i g h t " , 3, 1932, p. 2 7 .  175.  The F i n a n c i a l P o s t ,  176.  Ibid.  J a n . 28,  1933.  ap-  Dec.  163.  l o s e the i n t e r e s t p a i d by the c h a r t e r e d under the F i n a n c e A c t . by  b a n k s on  loans  The a v e r a g e a n n u a l r e v e n u e  t h e Government from t h i s  y e a r s h a s been 1 1 , 2 5 0 , 0 0 0 .  source during This  received  t h e past  five  i s o f course quite  but  what t h e Government w o u l d l o s e d i r e c t l y  the  c e n t r a l bank w o u l d g a i n b e c a u s e t h e c e n t r a l bank  would  replace  the Finance A c t .  i n this  I f t h e bank were  true, way  entirely  s t a t e - o w n e d t h e Government w o u l d p r e s u m a b l y r e c e i v e t h e equivalent  sum t h r o u g h i t i n t h e f o r m o f p r o f i t s ,  t h a t t h e b a n k i s n o t t o b e o p e r a t e d on a basis.  In f a c t ,  assuming  service-cost  e v e n i f the c e n t r a l bank w e r e  entirely  p r i v a t e l y owned, i t w o u l d b e r e a s o n a b l e t o assume w o u l d t u r n o v e r t o the Government t h e e q u i v a l e n t net  profit  on w h a t i s now  b a n k v^ere r u n p u r e l y banks, business,  I f the  on a s e r v i c e b a s i s , t h e n t h e c h a r t e r e d  and t h e g e n e r a l  public would  f a c t that  the o p e r a t i o n s  are p r o f i t a b l e tends t o prove that I t i s true  benefit  t o pay  t o t h e Government t o make up f o r i t s i n i t i a l  be p r o f i t a b l e .  of t h e  the Dominion note i s s u e .  a c c o r d i n g l y , and w o u l d be t h e b e t t e r a b l e  The v e r y  that i t  taxes  loss.  of the Finance A c t  t h e c e n t r a l bank w o u l d  t h a t the expenses of a d m i n i s t e r i n g 177  the F i n a n c e A c t a r e s l i g h t ,  177.  much l e s s , no d o u b t ,  House o f Commons D e b a t e s ( C a n . , 1 9 2 3 , V o l . 5, p. 4408).  than  w o u l d be t h e c a s e w i t h t h e c e n t r a l  bank.  On t h e o t h e r h a n d  r e d i s c o u n t s w o u l d n o t be t h e o n l y s o u r c e of r e v e n u e f o r t h e central  bank.  The maximum g r o s s e a r n i n g s o c c u r r e d i n 1920-21, amounting the  under  t o $3,568,000.  minimum y e a r l y e a r n i n g s s i n c e 1917  a n d amounted t o $ 3 1 3 , 0 0 0 .  the Finance Act We  appeared  find  that  i n 1925-26  The y e a r 1929-30 b r o u g h t  e a r n i n g s o f $ 2 , 2 3 5 , 0 0 0 , and t h e a v e r a g e a n n u a l e a r n i n g s f r o m 1914 it will  t o 1930 w e r e a p p r o x i m a t e l y $ 1 , 3 0 0 , 0 0 0 .  be s e e n t h a t t h e c e n t r a l bank w o u l d  From  have an  this  ex-  ceedingly l u c r a t i v e business to s t a r t with.  With the  added f a c i l i t i e s w h i c h i t w o u l d  rediscounting  would  be i n c r e a s e d and w o u l d  provide true  n o t be c o n f i n e d  government bonds, as a t p r e s e n t under  largely to  the Finance A c t , but  would extend to commercial paper g e n e r a l l y .  T h i s would  of  c o u r s e s w e l l t h e income o f t h e c e n t r a l bank f a r b e y o n d that of the present Finance Act. C e n t r a l b a n k i n g i n any c a s e i s g e n e r a l l y The p r e s t i g e o f a p r o p e r l y r u n c e n t r a l from f i n a n c i a l  178.  losses.  profitable.  bank r a r e l y  suffers  A l a r g e amount o f a b s o l u t e l y  safe  F i g u r e s which f o l l o w were l a r g e l y o b t a i n e d f r o m C. A. C u r t i s , P r o c e e d i n g s o f t h e C a n a d i a n P o l i t i c a l S c i e n c e A s s o c i a t i o n , 1930, p. 1 1 3 .  165.  "business i s b r o u g h t t o i t b y i t s c u s t o m e r s . not  usually paid  on t h e o t h e r  on d e p o s i t s w h i c h i t h o l d s .  hand, except f o r  are u s u a l l y very  Interest i s  productive.  cash h o l d i n g s  Its  assets,  and r e a l  Additional profits  estate,  could  be  made b y t h e c e n t r a l banx t a l c i n g o v e r t h e m o n o p o l y o f t h e n o t e i s s u e a n d by e n t e r i n g i n t o mercial but  competition  with  t h e com-'  banks i n t h e r e a l m of b u s i n e s s and f i n a n c e  these p o i n t s w i l l  be d e a l t w i t h  i n later  generally,  paragraphs.  I t c a n s c a r c e l y be t o o o f t e n r e p e a t e d , h o w e v e r , profit-making  should  be o f o n l y v e r y  secondary concern t o  t h e c e n t r a l b a n k . • I f t h e bank i s e n t i r e l y , owned p r i v a t e l y , i t i s d e s i r a b l e t h a t  should  be  But i t i s o f supreme i m p o r t a n c e t h a t t h e e a r n i n g  of d i v i d e n d s For  or i n part,  payment o f a r e a s o n -  a b l e r a t e o f i n t e r e s t t o the s h a r e h o l d e r s ensured.  that  should  n o t be made t h e p r i m e  consideration.  t h i s a d d i t i o n a l reason i t would appear that a s t a t e -  owned i n s t i t u t i o n w o u l d be b e s t , f o r t h e n t h e r e w o u l d be l e s s t e n d e n c y t o become c o n c e r n e d o v e r p r o f i t s . and  As K i s c h  E l k i n say: "The a c t i v i t i e s o f a C e n t r a l Bank h a v e s u c h f a r - r e a c h i n g e f f e c t s on t h e e c o n o m i c w e l f a r e o f t h e w h o l e n a t i o n t h a t no i n d u c e m e n t must be a l l o w e d t o d i v e r t t h e Bank f r o m t h e p u r s u i t of t h e p u b l i c i n t e r e s t w i t h t h e o b j e c t o f earning increased profits."179  179.  Kisch.and E l k i n .  C e n t r a l Banks,  p. 50.  166'.  With P r o f e s s o r L I o f f i t t ' h o w e v e r , we c a n s a y t h a t yield  a profit  L O U  of Wesley  College,  "a c e n t r a l bank w o u l d  to the t r e a s u r y " , and, whether  ment w e r e p a r t o r w h o l e  Winnipeg,  undoubtedly t h e Govern-  owner o f t h e i n s t i t u t i o n , i t s  p r o f i t s f r o m t h e bank w o u l d  be a most welcome a d d i t i o n t o  revenue. Our C a n a d i a n b a n k e r s a r e n a t u r a l l y r a t h e r a p p r e h e n s i v e of  the possibility  of c o m p e t i t i o n from the p r o j e c t e d  bank i n t h e o r d i n a r y f i e l d the  view of t h e w r i t e r  tion.  of commercial  banking.'  central  It i s  t h a t t h e r e s h o u l d b e no s u c h c o m p e t i -  T h e r e a r e many a n d s u b s t a n t i a l r e a s o n s why i t m i g h t  be d e s i r a b l e t o n a t i o n a l i z e t h e b a n k i n g s y s t e m c o m p l e t e l y . In t h a t ease, however, t h e r e would because  b a n k i n g would  be no c o m p e t i t i o n ,  be a Government m o n o p o l y .  I f , however,  o u r p r e s e n t c o m m e r c i a l b a n k s a r e t o be a l l o w e d t o c o n t i n u e after  t h e c r e a t i o n o f a c e n t r a l bank v e r y much a s b e f o r e ,  i t would  seem t o be b e t t e r  that the c e n t r a l  s t a y out of t h e c o m m e r c i a l f i e l d .  A central  be s e t up t o d o i t s own p a r t i c u l a r j o b . s p e c i a l m i s s i o n to perform. in  the performance  I t would  bank s h o u l d bank s h o u l d  I t has a v e r y  be v e r y a p t t o f a i l  of i t s t r u e f u n c t i o n s i f i t attempted  as w e l l t o p e r f o r m t h e f u n c t i o n s of c o m p e t i t i v e  180.  See F i n a n c i a l P o s t , F e b . 14, 193S.  commercial  167.  banking. A further subject g r o w i n g out  of the  o f c o n c e r n to C a n a d i a n h a n k e r s ,  proposal  found i n the note i s s u e . would u l t i m a t e l y I f not the note i s s u e .  "A  of a c e n t r a l hank, i s to  They f e a r t h a t o r i g i n a l l y he  t h e c e n t r a l hank  given  Canadian Banker"  he  a monopoly  of  says:  " I h a v e l i t t l e d o u b t t h a t , w e r e a c e n t r a l bank f o r m e d , i t w o u l d i n due c o u r s e be g i v e n a m o n o p o l y of t h e n o t e i s s u e , e v e n w e r e t h i s m o n o p o l y d e n i e d to i t a t t h e t i m e o f i t s o r g a n i z a t i o n . "181 In h i s r a t h e r s u p e r f i c i a l treatment of the note question Mr..  A.  i n h i s w r i t i n g s on  F.  W.  Plumptre  "A  Central  issue  Bank f o r C a n a d a "  says:  "But t h e r e , seems no r e a s o n why, a t t h e same t i m e , t h e c h a r t e r e d h a n k s s h o u l d n o t he a l l o w e d to continue to i s s u e notes under s t r i c t r e g u l a t i o n s s i m i l a r i f not i d e n t i c a l to t h o s e a l r e a d y l a i d down i n t h e Bank £ct."182 It  i s quite  might not  t r u e t h a t c o n t i n u a n c e of t h e n o t e  prevent the  i n s t i t u t i o n , but B a n k e r " has  i t seems t o t h e  faced  f r a n k l y t h a n Mr.  c e n t r a l hank f r o m b e i n g  the  realities  Plumptre.  To  c e n t r a l banking.  181.  F i n a n c i a l Post,  Jan.  182.  P l u m p t r e , A.  YT.  F.  28,  Canadian  s i t u a t i o n more  deny t h e  c e n t r a l hank a  m o n o p o l y of t h e n o t e i s s u e w o u l d mean t h a t we playing with  a useful  w r i t e r t h a t "A of t h e  w o u l d be  I t i s w ell that the r  1933,  issue  p.  but  issue  11.  A C e n t r a l Bank f o r C a n a d a ,  p.  3.  168.  s h o u l c l . b e met h o n e s t l y ,  cold-bloodedly,  without any attempt t o p l a c a t e bank, by p r e t e n d i n g  without  compromise,  t h o s e who o p p o s e a c e n t r a l  that they would not l o s e the note  issue  privilege. Mr.  C. A. C u r t i s showed a k e e n a p p r e c i a t i o n  note issue problem i n h i s address given  of the  to t h e Canadian  183 Political  S c i e n c e A s s o c i a t i o n i n 1930.  mated t h e l o s s e s t h a t t h e c h a r t e r e d  T h e r e he  esti-  banks might s u f f e r i n  the c a n c e l l i n g of t h e i r note issue p r i v i l e g e ,  and t h e n  stated: The c o n c l u s i o n w o u l d a p p e a r t o b e t h a t w h i l e t h e b a n k s m i g h t l o s e s l i g h t l y by h a v i n g t h e i r note issue p r i v i l e g e cancelled, the l o s s w o u l d n o t be a s g r e a t as i s o r d i n a r i l y . b e l i e v e d . " ,r  It  i s n o t easy to estimate  a c c u r a t e l y what t h e l o s s  o f n o t e i s s u e w o u l d mean t o t h e c h a r t e r e d a number o f q u e s t i o n s  banks.  were a d d r e s s e d t o t h e o f f i c i a l s o f  the head o f f i c e s of s e v e r a l o f our Canadian banks. these questions  Recently  Among  was t h e f o l l o w i n g :  "Do b a n k s t o - d a y depend v e r y much u p o n t h e i r r i g h t of note i s s u e as a p r o f i t - m a k i n g branch of t h e i r b u s i n e s s ? " One o f f i c i a l a n s w e r e d t h a t our  183.  " i t w o u l d be c o n t r a r y t o  p o l i c y to give you information  along  Proceedings of Canadian P o l i t i c a l 1930, p . 1 1 5 .  the lines  asked  Science Association,  i n your questionnaire".  The  officials  o f two  of t h e h a n k s  were k i n d  enough t o a n s w e r t h e a h o v e q u e s t i o n .  t h e s e was  good e n o u g h t o g i v e p e r m i s s i o n t o q u o t e w h a t he  said.  F o l l o w i n g i s h i s complete  One  of  answer:  "Ho, The p r o f i t on n o t e c i r c u l a t i o n i s l a r g e l y e a t e n up. f i r s t hy t h e Government c i r c u l a t i o n t a x (1$>}184, n d t h e n hy t h e e x p e n s e o f p r o v i d i n g f a c i l i t i e s f o r d a i l y redemption, the i n t e r e s t c o s t of m a i n t a i n i n g revenues a g a i n s t p o s s i b l e adverse b a l a n c e s i n the d a i l y c l e a r i n g s , s h i p p i n g n o t e s from p o i n t to p o i n t , the p r i n t i n g o f new and d e s t r u c t i o n of o l d n o t e s , a n d t h e employment o f s t a f f w h o s e d u t i e s a r e e x c l u s i v e l y or l a r g e l y i n c o n n e c t i o n w i t h the n o t e i s s u e and i t s h a n d l i n g . "The n o t e i s s u e s , h o w e v e r , r e p r e s e n t a f o r m o f p u b l i c i t y and w o u l d he c o n t i n u e d even a t a l o s s f o r reasons of p r e s t i g e . A consideration w h i c h h a s a l w a y s b e e n i m p o r t a n t i n Canada i s t h a t o u r n o t e s y s t e m e n a b l e s b r a n c h e s t o be e s t a b l i s h e d i n p i o n e e r d i s t r i c t s , and t o be m a i n t a i n e d i n many l o c a l i t i e s , o n l y o r m a i n l y b e c a u s e of t h e f a c t t h a t s u c h b r a n c h e s c a n h o l d the cash r e s e r v e s n e c e s s a r y f o r t h e i r b u s i n e s s i n the f o r m o f t h e b a n k ' s own n o t e s , w h i c h i n v o l v e no i n t e r e s t l o s s . S h o u l d i t become n e c e s s a r y f o r b r a n c h e s t o c a r r y t h e i r workingc a s h r e s e r v e s i n any o t h e r f o r m of c u r r e n c y , the r e s u l t a n t b u r d e n o f i n t e r e s t l o s s w o u l d make t h e o p e r a t i o n of many e x i s t i n g b r a n c h e s too u n p r o f i t a b l e t o p e r m i t c o n t i n u a n c e o f banking s e r v i c e . " a  The m a t t e r o f t i l l the  money i s no d o u b t  important.  above quoted hanker s a y s , i t i s d e s i r a b l e t h a t  the  r e s e r v e s o f n o t e s n e e d e d f o r b u s i n e s s p u r p o s e s by t h e branches s h o u l d not e n t a i l a heavy  184.  P a r e n t h e s i s by t h e w r i t e r  cost.  I t might  he  As  170.  pointed  o u t , however, t h a t the e x i s t e n c e o f a c e n t r a l  wo\ild e n a b l e  the branches to do w i t h l e s s  under t h e present  system.  would have a g e n c i e s  till  money  Presumably the c e n t r a l  bank than  bank  e i t h e r i n each of t h e p r o v i n c e s o r i n  each o f s e v e r a l g e o g r a p h i c a l a r e a s .  Every branch  of the  c h a r t e r e d b a n k s w o u l d be w i t h i n a f e w h o u r s o f t h e s u p p l y o f r e s e r v e bank c u r r e n c y .  Then a g a i n , s i n c e t h i s  currency  w o u l d n o t be t h e c o m m e r c i a l b a n k ' s own c u r r e n c y , i t w o u l d not have t o worry about t h e redemption w o u l d be t h e c o n c e r n  of t h e c e n t r a l  of i t .  Redemption  bank.  To a v o i d d i s c o u n t f o r g e o g r a p h i c a l  reasons,  bank a t p r e s e n t must p r o v i d e f o r t h e r e d e m p t i o n  each of i t s  185 notes  i n specified  c e n t r e s throughout  n o t e s a r e redeemed d a i l y .  Canada.  Each bank keeps a l l t h e n o t e s  o f o t h e r b a n k s and p a y s o u t i t s own n o t e s . bank's notes a r e p r e s e n t e d the  day.  notes  The  f o r redemption  The o t h e r a t t h e end o f  This p r a c t i c e i n c r e a s e s the q u a n t i t y of the  r e q u i r e d by t h e branches.  With  a central  bank  this  e x t r a q u a n t i t y would n o t be r e q u i r e d . S i r Edmund W a l k e r ^ ^ note  i s s u e must be c h a r g e d  185.  W a l k e r , S i r Edmund.  186.  I b i d . , p. 2 6 .  n  a  s  p o i n t e d out t h a t a g a i n s t t h e  t h e e n t i r e cost of m a i n t a i n i n g Canadian Banking,  p. 23.  171.  the C e n t r a l Gold Reserve fund. interest  i s charged  notes.  by t h e Government  S i r Edmund e s t i m a t e d  of t h e notes  In a d d i t i o n 5 per cent. on a l l e m e r g e n c y  i n 1922  t h a t 71 p e r c e n t .  i n c i r c u l a t i o n r e t u r n e d a p r o f i t a n d 29 p e r  cent, a l o s s . Another q u e s t i o n addressed  to the bankers a t t h e  same t i m e a s t h e one q u o t e d a b o v e was a s f o l l o w s : " A p p r o x i m a t e l y what p e r c e n t , o f p r o f i t bank make on n o t e s i s s u e d ? " O n l y one a n s w e r e d t h i s q u e s t i o n .  can a  H i s answer i n f u l l  was as f o l l o w s : "The d e t e r m i n i n g f a c t o r h e r e i s t h e i n t e r e s t v a l u e t o t h e bank o f i t s c i r c u l a t i o n , w h i c h i s s i m i l a r t o t h e i n t e r e s t v a l u e o r e a r n i n g power o f t h e f u n d s i t r e c e i v e s on d e p o s i t , a n d h e n c e i s c o n t i n u a l l y v a r y i n g . Some o f t h e c o s t f a c t o r s h a v e been i n d i c a t e d a b o v e . We c o u l d not g i v e any s t r i c t e s t i m a t e of t h e n e t p r o f i t , b u t , t a k i n g i n t o c o n s i d e r a t i o n t h e low l e v e l s o f i n t e r e s t r a t e s now p r e v a i l i n g , ' we s h o u l d n o t be s u r p r i s e d i f a c a r e f u l a n a l y s i s showed t h a t t h e r e was a n e t l o s s on c i r c u l a t i o n a t t h e present time. To t h e b e s t o f o u r k n o w l e d g e no e s t i m a t e s t h a t h a v e been made i n t h e p a s t h a v e i n d i c a t e d a n e t p r o f i t on c i r c u l a t i o n a b o v e  3#.  ff  I n 1923 S i r Edmund W a l k e r e s t i m a t e d t h e n e t p r o f i t s from the note  i s s u e t o be b e t w e e n 1 p e r c e n t , and 1-g-  188 per cent.  On December 3 1 , 1 9 3 3 , t h e t e n c h a r t e r e d  187.  W a l k e r , S i r Edmund.  Canadian Banking,  188.  P r o c e e d i n g s o f C o m m i t t e e on B a n k i n g 1923, p . 5 2 8 .  p. 2 6 .  a n d Commerce,  172.  b a n k s h a d more t h a n $127,000,000 w o r t h o f n o t e s tion.  i n circula-  To t h e l a y mind one t o t h r e e p e r c e n t , on t h a t  amount s h o u l d n o t be d e s p i s e d . of t h e w r i t e r  Moreover, i t i s the view  that i n estimating, the p r o f i t  on t h e n o t e  i s s u e n e i t h e r t h e a b o v e q u o t e d b a n k e r n o r S i r Edmund W a l k e r gave adequate w e i g h t notes  to t h e p o s s i b i l i t i e s of p r o f i t s  issued as a r e s u l t  Finance Act.  of t h e f a c i l i t i e s  on  p r o v i d e d by t h e  U n d e r t h e p r o v i s i o n s o f t h a t A c t a b a n k may  t a k e , f o r i n s t a n c e , a D o m i n i o n V i c t o r y Bond o f $100 i n value, deposit i t with the M i n i s t e r of Finance, receive i n r e t u r n a $100 D o m i n i o n n o t e ,  deposit the note  C e n t r a l G o l d R e s e r v e s a n d on i t a s b a c k i n g its  own bank n o t e s f o r $ 1 0 0 .  At the present  i n the  i s s u e one o f time  t h e bank  w o u l d h a v e t o p a y 3§- p e r c e n t , t o t h e Government on t h e $100  Dominion note.  I f i t should  t h e n l o a n i t s own bank  n o t e f o r $100 t o a c u s t o m e r a t 7 p e r c e n t , i t w o u l d be making a very  considerable p r o f i t .  At the present  time  b a n k s a r e c h a r g i n g m u n i c i p a l i t i e s a s h i g h a.' r a t e a s 6 p e r c e n t , on a d v a n c e s .  I f t h e money s o l o a n e d w e r e  f r o m t h e Government u n d e r  the F i n a n c e  obtained  A c t a t 3-§- p e r c e n t ,  t h e t r a n s a c t i o n w o u l d be a most l u c r a t i v e one. All  t h r e e b a n k e r s q u o t e d a b o v e , t h e n , S i r Edmund  W a l k e r , "A C a n a d i a n B a n k e r " w r i t i n g i n t h e F i n a n c i a l and  the banker  ( n o t t o be named) who a n s w e r e d t h e t w o  Post,  questions  quoted above, m i n i m i z e the  b a n k s on t h e i r n o t e i s s u e . banks s h o u l d  not  that i t w i l l  deprive  On  hand t h e r e  the  other  object  some l o s s ' i n t h e should  not  be  way  It  i s true  i s no  doubt  of p u b l i c i t y  that  on  issue  only a very  the  the  score  the n o t e  that  and  then  issue.  they would s u f f e r But  this  a s a c r i f i c e f o r the b e n e f i t s  that  i n a few is still  t h a n t h e R e i c h s b a n k may  is  to a c e n t r a l b a n k on  prestige.  cases where there more t h a n one  I n Germany, f o r i n s t a n c e ,  permissible  right,  the  from a c e n t r a l bank.  c e n t r a l banks there authority.  I f they are  them of p r o f i t s  too great  w o u l d be d e r i v e d  p r o f i t s g a i n e d by  still  i s only  note i s s u i n g  f o u r banks  issue notes.  194  are  other  Their  total  m i l l i o n marks, however,  small proportion  T h e r e f o r e t h e c e n t r a l bank h a s  of the  t o t a l note  contro}. over the  and  issue.  issue  of  189 p a p e r money. In the U n i t e d n o t e s , but bility  States  t h e s e are  f o r the  very  an  inelastic.  e x p a n s i o n and  r e s t s predominantly with As  t h e N a t i o n a l Banks s t i l l  illustration  K i s c h and  Elkin.  190.  Ibid.,p.  77.  responsi-  c o n t r a c t i o n of the  the F e d e r a l  of t h i s f a c t we  189.  Hence t h e  issue  currency 190 Reserve Banks.  may  C e n t r a l Banks,  note that i n  p.  79  the  174.  present  financial  crisis  in" t h e U n i t e d  States  R e s e r v e Bank n o t e s t h a t a r e "being i s s u e d a s currency. of h a v i n g  I n f a c t the d i s a d v a n t a g e more t h a n one  i t i s Federal  emergency  i n the U n i t e d  States  i s s u i n g body i s more a p p a r e n t  than  real. H e r e we  might quote K i s c h a n d - E l k i n ! - w i t h 1 9  " W i t h m u l t i p l e banks of i s s u e t h e r e single d i r e c t i n g impulse."  can  be  profit: no  "Ho c e n t r a l b a n k i n g s y s t e m c a n r e a l l y be t h e c o n t r o l l i n g f o r c e i t s h o u l d be i f i t s p o l i c y c a n be s t u l t i f i e d b y u n c o r r e l a t e d a c t i o n on t h e p a r t o f n u m e r o u s c o m m e r c i a l banks of i s s u e . " U n d o u b t e d l y the g r e a t e s t a u t h o r i t y t h a t c o u l d q u o t e d on t h i s q u e s t i o n i s the M a c M i l l a n their  r e p o r t we  find  this  Committee.  same M a c M i l l a n  four r i g h t s  1  ° that are  p.  In  statement:  " S i n c e f r e e d o m o f i s s u e of p a p e r money may e a s i l y , u n d e r t h e s t i m u l u s of t h e d e s i r e t o make p r o f i t s , l e a d e a c h i s s u e r t o e x p a n d u n t i l t h e t o t a l amount i n c i r c u l a t i o n i s i n c o n s i s t e n t w i t h t h e r e t e n t i o n of a s u f f i c i e n t r e s e r v e of g o l d , i t i s c l e a r t h a t t h e C e n t r a l Bank s h o u l d p o s s e s s a m o n o p o l y o f n o t e i s s u e , and t h i s i s i n d e e d t h e a l m o s t u n i v e r s a l p r a c t i c e of t h e m o d e r n w o r l d . " 1 9 2 The  be  Committee says t h a t t h e r e  ••  are  e s s e n t i a l to a c e n t r a l b a n k — ( 1 )  191.  Ibid.,  76.  192.  The R e p o r t of t h e C o m m i t t e e on F i n a n c e a n d I n d u s t r y . (The M a c M i l l a n R e p o r t . ) L o n d o n , J u n e , 1931, p. 15.  193  I b i d . , p.  16.  175.  the r i g h t  of n o t e i s s u e  of c o m m e r c i a l banks and  (4) t h e r i g h t  (2) t h e r i g h t t o h o l d t h e r e s e r v e s  (3) t h e r i g h t  t o buy and s e l l  securities,  to- d i s c o u n t .  I n c a s e s we n o t e d , w h e r e a u t h o r i t i e s ,  o r banks  other  t h a n t h e c e n t r a l b a n k , h a v e t h e r i g h t o f n o t e i s s u e we that the "independent" i s s u e , a d d i t i o n a l i s s u e , was  to t h e c e n t r a l  s m a l l i n comparison w i t h the t o t a l note  I n Canada t h a t  i s n o t the' c a s e u n d e r  The. number o f D o m i n i o n  the present  notes a c t u a l l y  bank  issue.  system,  in circulation is  e x t r e m e l y s m a l l i n p r o p o r t i o n t o the t o t a l n o t e Hence t h e r e c a n be ho p r e d o m i n a n t  saw  central  circulation.  controlling  authority. In view of t h i s f a c t ,  t h e n , and  i n the f a c e of t h e  o p i n i o n s e x p r e s s e d by t h e o u t s t a n d i n g a u t h o r i t i e s  above  quoted, i t i s s c a r c e l y c o n c e i v a b l e that r e t e n t i o n by c h a r t e r e d banks  of the note issue p r i v i l e g e ,  after  c r e a t i o n o f a c e n t r a l bank i n C a n a d a , c o u l d be  a n s w e r i n g o b j e c t i o n s and  In the p r o c e s s o f  i n previous chapters,  i n f a v o r o f s u c h a bank h a v e b e e n a d v a n c e d . t o t h e s e , however,-we m i g h t h e r e p o i n t t h a t might  almost  and a n s w e r i n g t h e o b j e c t i o n s t o t h e  c r e a t i o n of a c e n t r a l b a n k i n Canada.  advantages  the  justified.  So f a r i n t h i s c h a p t e r we h a v e b e e n c o n c e r n e d entirely with stating  the  be e x p e c t e d .  arguments  In addition  out some f u r t h e r  176.  In Chapter  5 we n o t e d t h e p r o f u s i o n  bodies concerned w i t h the c h a r t e r e d  banks,  our financial  structure.  There  were  the Finance A c t administrators, the  T r u s t e e s of t h e C e n t r a l Gold R e s e r v e s advisers,  of a d m i n i s t r a t i v e  the C e n t r a l Gold Reserves  i n their  cape, c i t y a s  administration, the  C i r c u l a t i o n R e d e m p t i o n Fund s u p e r v i s i o n ,  t h e Canadian  Bankers' A s s o c i a t i o n , t h e I n s p e c t o r G e n e r a l o f Banks, and the P o s t a l Savings Banks.  A c e n t r a l bank c o u l d c o - o r d i n a t e  most o f t h e s e a n d t a k e o v e r t h e i r d u t i e s . over t h e banking d u t i e s  I t would  take  of the M i n i s t e r of Finance, the  Deputy M i n i s t e r and t h e Treasury Board as a w h o l e — i n s h o r t , t h e w o r k t h a t now comes u n d e r the F i n a n c e A c t .  I t would  own management w o u l d  not r e q u i r e a d v i s e r s , as i t s  consist of experts.  R e s e r v e s , most o f t h e d u t i e s  of c u r a t o r  handled  Association  banks,  etc.), the  operations,  publication  d a t a , and i n s p e c t i o n o f b a n k s w o u l d  or r e p l a c e d  by t h e c e n t r a l  Much h a s a l r e a d y  Gold  note p r i n t i n g , t h e  f o r suspended  Dominion note i s s u e , r e d i s c o u n t i n g of f i n a n c i a l  The C e n t r a l  of t h e B a n k e r s '  ( s u p e r v i s i o n over c l e a r i n g houses, appointment  the administration of  a l l be  bank.  b e e n made o f t h e i m p o r t a n c e  of t h e  s o c i a l f u n c t i o n o f a c e n t r a l bank i n c o n t r o l l i n g t h e m o n e t a r y a n d b a n k i n g s t r u c t u r e i n t h e common good. problem  of current  i n t e r e s t i n Canada might  be c i t e d  A here  177.  as a c a s e i n p o i n t . present depression has  Owing t o t h e l e n g t h t o w h i c h the. h a s gone t h e "burden o f d e b t and i n t e r e s t  been g r e a t l y i n t e n s i f i e d .  W h i l e commodity p r i c e s and  t h e wages o f l a b o r h a v e gone down, t h e "wages o f money" has  not decreased i n proportion.  mitted  I t i s very g e n e r a l l y ad-  that i n t e r e s t r a t e s should  mental a u t h o r i t i e s b e l i e v e that  be l o w e r e d .  the rates  l o w e r e d they have not as y e t p r o c l a i m e d bringing  about the d e s i r e d  should  be  any p l a n f o r  result.  I n E n g l a n d , on t h e o t h e r  hand, r a t e s have been  g e n e r a l l y , and t h e Government was s u c c e s s f u l a large part  I f govern-  of. i t s d e b t a t a v e r y  lowered  i n refunding  much l o w e r r a t e .  This  was b r o u g h t a b o u t b y d e l i b e r a t e l y p l a n n e d f i n a n c i a l p o l i c y . First per  t h e Bank o f E n g l a n d l o w e r e d t h e d i s c o u n t  c e n t , and k e p t i t low.  rate to 2  Then t h e Government  imposed  an  embargo on t h e i s s u e of new s e c u r i t i e s ' , a n d t h i s p r o h i b i t i o n was m a i n t a i n e d u n t i l j u s t r e c e n t l y . banks, under t h e l e a d e r s h i p the  In a d d i t i o n the  of t h e Bank o f E n g l a n d , r e d u c e d  i n t e r e s t r a t e on d e p o s i t s  to \ per cent.  As a r e s u l t  o f t h e s e m e a s u r e s t a k e n b y t h e G o v e r n m e n t and t h e Bank of' England i n c l o s e co-operation, g r e a t l y r e d u c e d , and  t h e demand f o r f u n d s  the r e d u c e d demand c a u s e d a  i n the " p r i c e " , or the i n t e r e s t .  was  reduction  Thus t h e i n t e l l i g e n t l y  planned, d e l i b e r a t e , " c e n t r a l banking" p o l i c y of England  178.  f o r c e d a s i t u a t i o n w h e r e t h e i n v e s t o r was w i l l i n g lower r a t e of i n t e r e s t  on h i s money.  a d d i t i o n , many o f t h e Government on s h o r t n o t i c e .  to take  a  Fortunately, i n  s e c u r i t i e s were  Hence when t h e Government  callable  gave t h e h o l d e r s  t h e c h o i c e of r e n e w i n g t h e i r h o l d i n g s a t a r e d u c e d r a t e o f i n t e r e s t o r o f t u r n i n g them i n f o r r e d e m p t i o n t h e y  were  g l a d t o e x c h a n g e them f o r bonds b e a r i n g a l o w e r r a t e o f interest. I n C a n a d a , i f we h a d a c e n t r a l bank managed b y a n i n t e l l i g e n t b q a r d o f m o n e t a r y and f ' i n a n c i a l e x p e r t s in  c o - o p e r a t i o n w i t h ( o r p e r h a p s i n s p i r i n g ) an  working  enlightened  Government p o l i c y , some s u c h r e s u l t m i g h t h a v e b e e n achieved, our  u n f o r t u n a t e l y , however, the g r e a t m a j o r i t y o f  Government bonds, a r e o f l o n g t e r m i s s u e and n o t r e -  d e e m a b l e a t t h e c h o i c e of t h e G o v e r n m e n t .  This f a c t  emphasizes f u r t h e r t h e g r e a t need o f a c e n t r a l equivalent. the past  but  bank o r i t s  I f we h a d h a d a w i s e . c e n t r a l bank b o a r d i n  i t w o u l d h a v e b e e n one of i t s d u t i e s to a d v i s e  a g a i n s t t h e i s s u e of u n c a l l a b l e s e c u r i t i e s . Indeed there t h e r e may  i s a faint  flicker  of a s u g g e s t i o n  r e c e n t l y have been a c o n s c i o u s  i n o p e r a t i o n i n Canada. be a f l i c k e r ,  Or i s t h e r e ?  but t h e p o s s i b i l i t y  Much h a s b e e n h e a r d a t l a r g e , a n d  that  monetary p o l i c y  I t m i g h t n o t even  i s at least  intriguing.  something has been  said  179.  h e r e a l r e a d y , o f t h e $35,000,000 a d v a n c e t o t h e b a n k s l a s t November u n d e r t h e p r o v i s i o n s o f t h e F i n a n c e I t has been s u g g e s t e d  t h a t t h i s t r a n s a c t i o n may  was  t h e a d v a n c e was effect  Act.  have been  c a r r i e d o u t on t h e a d v i c e of t h e p r e s e n t D e p u t y o f F i n a n c e who  Minister  a p p o i n t e d j u s t a b o u t ' t h e same t i m e t h a t  made.  And- now  we  hear r u m o r s  1 9  ^ to  the  t h a t t h e i n t e r e s t r a t e on s a v i n g s d e p o s i t s may  lowered.  of  I t i s suggested  t h a t the banks,  h a v i n g no  be  need  f o r t h e $35,000,000 w e r e f o r c e d t o e m p l o y the.se e x t r a f u n d s i n a d d i n g t o t h e i r a l r e a d y huge i n v e s t m e n t ment s e c u r i t i e s .  ( I n D e c e m b e r , 1932,  $562,000,000 w o r t h . a b l e t o e a r n o n l y &|securities*  1 9 5  )  But  a t h a v i n g t o pay  t o 4§- p e r c e n t , on p r i m e  are  Government  be g r e a t l y  relieved  cent,  on  Then i f t h e i n t e r e s t on s a v i n g s d e p o s i t s  w e r e l o w e r e d , f u n d s now  i d l e m i g h t be i n d u c e d  p r o f i t a b l e employment i n h i g h g r a d e g r a d e b o n d s , and f i n a l l y  t o do  that they  l e s s than the present 3 per  savings deposits.  enterprises.  they h e l d o r e r .  t h e banks f i n d  Hence they w o u l d perhaps  i n Govern-  to s e e k  bonds, then i n second  i n more s p e c u l a t i v e  business  T h i s w o u l d make i t e a s i e r f o r t h e  Government  t h e g r e a t amount o f f i n a n c i n g t h a t w i l l s h o r t l y  necessary.  194.  F i n a n c i a l P o s t , Feb.  195.  I b i d . , Feb.  11, 1933,  18, p.  1 9 3 3 . , p. 12.  more  16.  be  180.  I f one w e r e t o v e n t u r e f u r t h e r  i n the s u b j u n c t i v e mood  he m i g h t e v e n s e e a r e l a t i o n b e t w e e n p o s s i b l e r e v i v a l and t h e now if the  the " f l i c k e r "  famous $35,000,000  transaction.  Even  s h o u l d p r o v e t o have been a myth, however,  suggestion at least w i l l  tend t o i n d i c a t e something of  "what m i g h t h a v e b e e n " u n d e r i n t e l l i g e n t leadership.  business  central  banking  181.  Chap t e r 7. Summary a n d C o n c l u s i o n s . A careful  e x a m i n a t i o n o f^ t h e m o n e t a r y ana  banking  s t r u c t u r e o f Canada l e a v e s t h e s e t h r e e f a c t s f i r m l y p r e s s e d upon t h e m i n d — f i r s t l y been a r e l a t i v e l y  that i n t h e past there has  e f f i c i e n t system,  secondly that the  e v e n t s of 1907, 1914 and 1923 m a r k e d s t a g e s i n a p e r i o d , and t h i r d l y  i n t e l l i g e n t l y planned  s h o u l d be d e c i d e d u p o n , h a v e b e e n In the e x i s t i n g disorder  s t r u c t u r e somewhat l e s s c h a o t i c  reached.  o f a m o n e t a r y and  and i n c o m p e t e n t  banking  than t h e  I t s r e l a t i v e s t a b i l i t y and e f f i c i e n c y h a v e b e e n  due t o a number o f f a c t o r s , system;  policy  of a w o r l d o f f i n a n c i a l  Canada h a s b e e n p o s s e s s e d  average.  transition  t h a t t h e c r o s s - r o a d s where i t i s  e s s e n t i a l that a d e l i b e r a t e ,  anarchy  im-  such as t h e branch  t h e s m a l l number o f l a r g e b a n k s ;  banking  a considerable  degree o f c o - o p e r a t i o n , u n i t y , and s o l i d a r i t y f o s t e r e d the Canadian elasticity  by  Bankers' A s s o c i a t i o n ; and t h e c o m p a r a t i v e  of t h e  system.  This e l a s t i c i t y ,  due  i n p a r t t o t h e la. c k o f f o r m a l  reserve requirements, the comparative c o n c e n t r a t i o n of r e s e r v e s i n a few l a r g e banks,  and t h e d e g r e e o f g e n e r a l  u n i t y o f t h e s y s t e m , was more p a r t i c u l a r l y note issue p r o v i s i o n s . elastic  because  capital.  e f f e c t e d by t h e  The ba.nic n o t e s w e r e  originally  they were a s s e t i s s u e s based  on p a i d - u p  Paid-up c a p i t a l d i d not i n c r e a s e , however, a s  r a p i d l y as d i d the need f o r n o t e s . bank n o t e s h a v i n g r e a c h e d t h e l i m i t s elasticity  H e n c e , a s we h a v e of t h e i r  original  i n 1 9 0 7 , t h e Government came t o t h e r e s c u e o f t h e  b a n k s w i t h a n emergency p r o v i s i o n f o r e x t r a D o m i n i o n and  the crop-moving  i n 1908.  seen,  p r o v i s i o n f o r bank notes.was  notes,  inaugurated  But v e r y s h o r t l y , w i t h t h e g e n e r a l i n c r e a s e i n  b u s i n e s s t h r o u g h o u t C a n a d a , t h e banks f o u n d t h e m s e l v e s i n t h e p o s i t i o n where t h e y w e r e u s i n g e v e n t h i s emergency n o t e issue privilege It  to the l i m i t .  i s n o t t o be w o n d e r e d a t , t h e n , t h a t t h e f i r s t  s e r i o u s shock s h o u l d v i t a l l y a f f e c t  our b a n k i n g  structure.  T h i s s h o c k came w i t h t h e outbreak: o f t h e G r e a t War i n 1 9 1 4 . The r e s u l t w a s , a s r e l a t e d Finance Act.  The a d v e n t  foundly significant  i n C h a p t e r 6, t h e p a s s i n g o f t h e  o f t h i s A c t m a r k e d t h e most p r o -  c h a n g e i n our b a n k i n g and m o n e t a r y  s t r u c t u r e s i n c e t h e p a s s i n g o f t h e Bank A c t o f 1 8 7 1 . a war-time  emergency e x p e d i e n t t h e A c t no d o u b t  u s e f u l purpose  even t h o u g h  instrument of the i n f l a t i o n under  abnormal  i t may b e c r i t i c i z e d of that p e r i o d .  As  served a as t h e  Tested only  c o n d i t i o n s a n d i n a p a p e r money p e r i o d , t h e  183.  m a i n p r o v i s i o n s o f t h i s A c t w e r e made p e r m a n e n t i n 1 9 2 3 . Operating  i n normal times, under g o l d  standard  conditions,  t h i s A c t , b y p e r m i t t i n g our. m o n e t a r y a n d c r e d i t get  out of c o n t r o l , r e s u l t e d i n Canada's d e f e c t i o n f r o m  the g o l d s t a n d a r d Previous for  system t o  and t h e d e p r e c i a t i o n of our d o l l a r .  to the passing  the solvency  of t h e A c t t h e r e s p o n s i b i l i t y  o f t h e b a n k i n g s y s t e m and f o r the s o c i a l  c o n t r o l o f money a n d c r e d i t r e s t e d e n t i r e l y w i t h t h e b a n k s themselves. ponsibility  The p a s s i n g  of the A c t t r a n s f e r r e d t h i s  t o t h e Department of F i n a n c e .  res-  Unfortunately  t h e Government was n o t a w a r e o f i t s new r e s p o n s i b i l i t y . C a s t o f f by i t s f o r m e r o w n e r s , u n c l a i m e d by i t s new m a s t e r s , our monetary s h i p has d r i f t e d world  finance.  a i m l e s s l y i n t h e c u r r e n t s of  I t i s high time,  then,  that consideration  s h o u l d be g i v e n t o d i r e c t i n g i t i n t o t h e c o u r s e  most s u i t e d  to our n a t i o n a l w e l f a r e . Canada h a s d e p a r t e d  from the gold  o p i n i o n of t h e w r i t e r t h a t i s w e l l . ever, parted are  standard.  In the  We do n o t seem, how-  t o h a v e gone o f f t h e g o l d m e n t a l i t y .  Having de-  f r o m ; g o l d o n l y i n a h a l t i n g , h a l f - h e a r t e d way, we  still  t h i n k i n g i n terms o f g o l d .  are hazarding  L i k e L o t ' s w i f e we  our p o s i t i o n by t h e backward l o o k .  off the gold standard  was m e r e l y a n e g a t i v e  now make a p o s i t i v e move.  The g r e a t e s t c a r e  act.  Going We must  should  be  184.  taken that  t h i s p o s i t i v e move s h o u l d be t h e w i s e s t one  possible.  B u t t h e n e e d f o r c o u r a g e i s no l e s s  need f o r c a u t i o n .  I t i s e s s e n t i a l that  a  than the  deliberate,  d e f i n i t e p o l i c y be i n t e l l i g e n t l y p l a n n e d a n d b o l d l y d e clared. forced was  I f we a l l o w o u r s e l v e s t o d r i f t into a certain action,  forced  action,  of c o n f i d e n c e .  we must f o r c e  declaration  of i t s e l f  International be  ideal assistance  our a c t i o n  of i t s e l f  Y/e must n o t be f o r c e d  action" into 0  our system.  A. b o l d  consideration  confidence.  concerted action for us.  c o u l d come f r o m a d e c l a r a t i o n  i n monetary p o l i c y  American monetary  b e e n s u c h a s t o make h e r c u r r e n c y t h e l e a s t  all  i n p u r c h a s i n g p o w e r , a n d i t seems l i k e l y t h a t to f l u c t u a t e  follow  policy  stable of 'gold'  i n p u r c h a s i n g power  whether d e f l a t i o n continues or a p o l i c y adopted.  help  o f the a d o p t i o n of a p o s i t i v e  has  continue  would  Perhaps the next g r e a t e s t  m o n e t a r y p o l i c y by G r e a t B r i t a i n .  currencies w i l l  into  a.dopting a p o l i c y  o f c a l m and i n t e l l i g e n t  beget  that  planned w i l l  t h a t we a r e d e l i b e r a t e l y  which i s the r e s u l t will  the very f a c t  and n o t d e l i b e r a t e l y  generate a lack  u n t i l we a r e  of i n f l a t i o n i s  H e n c e i t w o u l d seem u n w i s e f o r Canada, t o t r y t o  the course of t h e American d o l l a r .  hand i f G r e a t B r i t a i n w e r e t o make a b o l d  On t h e o t h e r declaration  of  p o s i t i v e p o l i c y , i f she w e r e t o a d o p t a d e f i n i t e and  i f she r e s o l v e d  t o manage t h a t  standard  standard,  d e l i b e r a t e l y and  i n t e l l i g e n t l y , m e m b e r s h i p • i n t h e s t e r l i n g b l o c w o u l d be o f great  b e n e f i t t o Canada.  sterling  The i n t e r n a l p u r c h a s i n g  is'already relatively  stable.  power o f  A d e c l a r a t i o n of  p o s i t i v e p o l i c y would have.a f u r t h e r s t a b i l i z i n g e f f e c t . The and,  majority  of t h e n a t i o n s  under the l e a d e r s h i p  stable sterling bloc.  a r e now o f f .the  gold  standard,  of Great B r i t a i n , would f o r m a  By j o i n i n g s u c h a g r o u p Canada w o u l d  be g r e a t l y h e l p e d . But  G r e a t B r i t a i n and t h e o t h e r  these things.  nations  International co-operation  immediate hope.  Y e t Canada h a s t a k e n no  a c t i o n o f h e r own.  h o l d s out l i t t l e constructive  She c a n n o t a f f o r d l o n g e r  t h a t a c t i o n on t h e p a r t  of o t h e r s  h a v e n o t done  merely to await  w h i c h d o e s n o t come.  N e g l e c t b y t h o s e who h a v e t h e g r e a t e s t  responsibility  not  r e l i e v e Canada o f t h e s h a r e o f r e s p o n s i b i l i t y  her  own. The  e n t i r e process of abandoning the gold  does  that i s  standard  and  of w a t c h i n g our d o l l a r f l u c t u a t e i n terms o f f o r e i g n currencies  h a s p r o b a b l y c a u s e d u s t o t h i n k t o o much o f t h e  e x c h a n g e s i d e o f o u r money p r o b l e m . exporting nation,  T r u e , Canada i s a  and a s s u c h , i n n o r m a l t i m e s ,  great  she should  186.  probably  be more c o n c e r n e d  most n a t i o n s .  about e x c h a n g e c o n t r o l  However, t h e p r e s e n t  d e p r e s s i o n has  gone s o f a r , f o r e i g n e x c h a n g e as a w h o l e i s so and  f o r e i g n t r a d e has d e c r e a s e d  o f emergency e x i s t s , and  order.  we  should concern  At the present  o f our d o l l a r and of our  so g r e a t l y  duty  time, t h e n ,  we  g i v e our f i r s t  i t would appear  that  a t t e n t i o n t o management  U n d o u b t e d l y we  i f present  have a  w h i c h we  very  owe  c o n d i t i o n s are allowed to  continue,  s h a l l n o t much l o n g e r be a b l e t o meet our f o r e i g n o b l i -  g a t i o n s r e g a r d l e s s o f what the We  that a s t a t e  o u r s e l v e s l e s s w i t h the e x t e r n a l v a l u e  internal price level.  But  unstable,  i s to s e t her house .  g r e a t p r o b l e m i n t h e r e p a y m e n t of d e b t s abroad.  already  i n t h a t s t a t e o f emergency i t  w o u l d seem t h a t C a n a d a ' s f i r s t in  than  e x c h a n g e r a t e s may  be.  s h o u l d t h e r e f o r e b o l d l y t a k e the r e s p o n s i b i l i t y  claring  t h a t we  a r e g o i n g to r a i s e the  l e v e l to a determined so d e t e r m i n e d  and  our money and  credit  But who c a r r y i n g out both  will  level,  s a y t h a t o f 19S6.  d e c l a r e d we to that  do t h i s ?  such a p o l i c y ?  t h e Government and  internal  should r e s o l u t e l y  of  de-  price Having administer  end. Where i s t h e m a c h i n e r y f o r I n t h e p a s t , a s we  have  seen,  the c h a r t e r e d banks have disowned  responsibility for social control  of money and  TTone o f t h e r e q u i r e d m a c h i n e r y e x i s t s .  credit.  What, t h e n , c a n  be  187.  done t o remedy our As we that way  situation?  h a v e s e e n i n C h a p t e r 5,  the F i n a n c e Act  provides  o f a c e n t r a l hank.  roundly  On  condemned t h e A c t  a r e a l c e n t r a l hank.  a l l that  the and  Canadian hankers  other  i s necessary i n  hand c r i t i c s  have p o i n t e d  I t i s not  claim  unnatural,  to  the  have  the need f o r  therefore,  that  a c o m p r o m i s e , i n t h e f o r m o f amendments to t h e F i n a n c e should  he p r o p o s e d hy  that could  he  some a s  the remedy.  The  a measure of g o l d  l i m i t e d and  p r o v i s i o n made f o r  specified limit.  minimum p e r c e n t a g e o f g o l d r e s e r v e s  for  Or,  a definite  the  total  n o t e i s s u e m i g h t he  s e t and  consistent with  s a f e t y o f t h a t minimum.  gold  against  h a c k i n g as a d d i t i o n a l s e c u r i t y f o r  amounts e x c e e d i n g t h e  Ho  amounts  advanced under the F i n a n c e Act  s e c u r i t i e s a l o n e m i g h t he  the  in a situation like  Canada i n 1929.  But  Canada may  that which existed  these proposals  are  b a s e d on  never r e t u r n to that standard.  of course that other  extent  safeguard  a s s u m p t i o n t h a t Canada w i l l go b a c k t o t h e g o l d and  Dominion  a d v a n c e s made o n l y t o an  d o u b t t h e s e amendments w o u l d t e n d t o  standard  amendments c o u l d  be  t o remove £he  Admittedly  the Act  dangers inherent  could  be  the standard,  It is  devised  so  as  changed  i n i t u n d e r any  the  in  true a  s a f e g u a r d i f t h e A c t w e r e o p e r a t e d u n d e r p a p e r money conditions..  Act,  as  and a l l  180.  c o n d i t i o n s , but even i n a h a r m l e s s f o r m i t would n o t be a c e n t r a l bank.  G o v e r n m e n t s and c i v i l  s e r v a n t s , as such,  w o u l d ha.ve n e i t h e r t h e t i m e , t h e i n c l i n a t i o n , nor t h e q u a l i f i c a t i o n s On t h e o t h e r h a n d ,  the machinery,  t o o p e r a t e t h e A c t as a c e n t r a l  i fproperly q u a l i f i e d  administrators  and t h e n e c e s s a r y c e n t r a l b a n k i n g e q u i p m e n t p r o v i d e d t o make t h e A c t e f f e c t i v e , reasonable to take the f i n a l  bank.  have t o be  i t w o u l d be more  step of c r e a t i n g a g e n u i n e  c e n t r a l bank. A more v a l u a b l e p r o p o s a l i s t h a t made by "A C a n a d i a n Banker" w r i t i n g  to g i v e t h e point  c h a r t e r e d banks 196  on t h e q u e s t i o n o f a c e n t r a l b a n k f o r  Canada.  Instead o f a c e n t r a l  o f view of Canadian  bank he a d v o c a t e s t h e  s e t t i n g up o f a p e r m a n e n t e c o n o m i c  advisory  committee,,  " T h i s c o m m i t t e e " , he s a y s , " s h o u l d be composed o f t h e most intelligent,  e x p e r i e n c e d and p r a c t i c a l men i t i s p o s s i b l e  197 to secure."  He w o u l d go o u t s i d e o f C a n a d a , t o G r e a t  Britain—presumably anywhere—to  get a s u i t a b l e  S u m m a r i z e d a r e h i s m a i n i d e a s a s t o what s u c h a  personnel. committee  w o u l d .do: 1. 196. 197.  C o n c e n t r a t e i t s e f f o r t s upon f i n d i n g t h e b e s t  Financial P o s t — f i n a l Ibid.  a r t i c l e b y "A C a n a d i a n  Banker".  XC  way  t h r o u g h t h e maze of t r o u b l e s i n w h i c h  */  o  we  are entangled. 2.  E x a m i n e and p a s s judgment d i s p a s s i o n a t e l j r u p o n v a r i o u s p l a n s a d v o c a t e d , and e x p e r i m e n t s b e i n g tried  3-  elsewhere.  A d v i s e t h e Government r e m a n i p u l a t i o n of t h e r a t e of i n t e r e s t  4.  Hake p o s s i b l e a n i n t e l l i g e n t rate  5.  attempt at  exchange  stabilization.  Make f o r g e n e r a l s t a b i l i t y b y c r e a t i n g a n lightened public  6.  on l o a n s u n d e r t h e F i n a n c e A c t .  Represent  en-  opinion.  Canada a t i n t e r n a t i o n a l e c o n o m i c  con-  f e r e n c e s o r a c t a s a d v i s e r s to o f f i c i a l d e l e g a t e s to such c o n f e r e n c e s . With the g r e a t e r p a r t of t h i s p r o p o s a l the w r i t e r i s i n h e a r t y agreement.  The g e n e r a l n a t u r e o f t h e p e r s o n n e l  which "Canadian Banker" proposes f o r h i s committee w h a t - i s r e q u i r e d f o r a c e n t r a l bank? he w o u l d  a s s i g n t o the committee,  would h e a r t i l y approve.  i s just  Of s u c h d u t i e s  as f a r as t h e y go,  Moreover,  a, c o m m i t t e e . o f  as one  this  c h a r a c t e r c o u l d p e r f o r m t h o s e d u t i e s a d m i r a b l y and t o t h e very g r e a t advantage  of Canada.  To c r e a t e  such a  w o u l d be t o t a k e a b i g s t e p i n t h e r i g h t d i r e c t i o n .  committee It  190.  w o u l d mean a v a s t The  improvement over trie  committee would  s i d e monetary and w o u l d h a v e no but  ment c o u l d i s t o be we  be a v e r i t a b l e p h y s i c i a n f o r  banking system, y e t as  s u r g i c a l instruments.  i t could not  operate.  the  The  that  public i s that  a public service.  To  writer this  evitable ultimate  our  Nevertheless,  i f  situation,  l e t us  banks s h o u l d  that  i s the  course.  To  as t h o s e t h a t a r e  t h i s i s the  t h r o u g h the that  the  centuries  state should  be  operated  the c o n t r o l  l o g i c a l and the  as of  almost the i n -  t h r e a d - b a r e and c a n n o t be  e v e r y t i m e i t has remove f r o m v e s t e d  discredited  operated  p r i v a t e l y owned one  i n t e r e s t - any  occurrences during  be n a t i o n a l i z e d .  owned and  s t o c k a r g u m e n t t h a t has  form i n the s o c i a l  should  be  with  a s t a t e monopoly.  argument t h a t s t a t e i n s t i t u t i o n s efficiently  emergency i t  C o m m e r c i a l b a n k i n g and  c r e d i t w o u l d be  the  Govern-  i s c u r r e n t l y t h e most p o p u l a r  T h i s means t h a t a l l b a n k s s h o u l d  money a n d  the  one.  proposal  the general  The  i n an  c a n n o t h a v e a c o m p l e t e remedy f o r o u r  have a p a r t i a l  prescribe  B e f o r e t e n b a n k s and  patient would d i e .  our  a physician i t  It could  be p r e v a i l e d u p o n t o a c t  feared  e x i s t i n g system.  as  ms.y  reply  b e e n u s e d down been p r o p o s e d i n t e r e s t s and  per-  additional function.  the c o u r s e of the  present  depression  s u f f i c i e n t to g i v e t h i s argument i t s f i n a l  quietus.  T h r o u g h i t s own i n c o m p e t e n c e i n d i v i d u a l e n t e r p r i s e  has f a i l e d .  P r i v a t e "business f a i l e d  first.  Then,  throwing  the r e s p o n s i b i l i t y f o r i t s employees a s a n e x t r a burden upon governments, and r u n n i n g t o governments f o r s u c c o r and a d o l e f o r i t s e l f , p r i v a t e b u s i n e s s h a s b e e n g r a d u a l l y d r a g g i n g t h e s e g o v e r n m e n t s down t o b a n k r u p t c y  after i t .  M o r e o v e r , t h e r e i s a " w o r I d i z i n g " , s o c i a l i z i n g movement a f o o t t h a t i s g a i n i n g i m p e t u s w i t h t h e m a r c h o f t i m e . To t h e - w r i t e r g e n e r a l s t a t e ov/nership a n d s o c i a l i z a t i o n of  i n d u s t r i e s and s e r v i c e s i s m e r e l y  banking i s not l i k e l y change.  o f time, and  to experience  T h e r e f o r e , i f we do n o t n a t i o n a l i z e o u r  b a n k i n g s y s t e m now, merely  t o be the l a s t  a matter  this Canadian  i t w i l l l i k e l y mean t h a t we s h a l l  be p o s t p o n i n g t h e  event.  I t w o u l d be e n t i r e l y f e a s i b l e f o r t h e C a n a d i a n  Govern-  ment t o t a k e o v e r a l l t h e banks a n d n o t do anyone a n i n justice.  The t o t a l p a i d - u p  capital  198  of the t e n  c h a r t e r e d b a n k s amounts t o $144,500,000 a n d t h e  total  199 reserves  amount t o  Eon  dividends-one  198-200  tfl62,000,000.  Of t h e l a s t  paid  was a t t h e r a t e o f 7 p e r c e n t . , one a t  F i n a n c i a l P o s t , Feb.  11, 1933.  14 p e r c e n t . , end b a s e d on p a i d - u p  e i g h t a t 10 p e r capital.  cent.  This rate i s  ."A C a n a d i a n B a n k e r " s t a t e s t h a t  on t h e b a s i s o f c o m b i n e d c a p i t a l and bank s h a r e h o l d e r s r e c e i v e d i n 1932  reserves  Canadian  a return slightly  less  201 t h a n 5± p e r c e n t .  I f t h e Government i s s u e d b o n d s t o  t h e s h a r e h o l d e r s t o t h e amount o f t h e c o m b i n e d c a p i t a l and  r e s e r v e s , and  guaranteed,  on them, the s h a r e h o l d e r s unfairness, particularly would be  relieved  shares are for  could not i n view-of  of the "double  subject.  t h e Government i n m e e t i n g t h e  H u n d r e d s of bank o f f i c e s facing  one a n o t h e r  could  the f a c t  that  cent,  of  any  they  t o which bank  t h e r e 'he a n y  difficulty  guarantee.  be c l o s e d a s  expensive,  N e i t h e r w o u l d i t be n e c e s s a r y  j u s t l y complain  interest  across the street  p l a c e s under the p r e s e n t  say, even 6 per  liability"  N e i t h e r should  pa.id-up  needless,  a s t h e y do  i n s o many  c o m p e t i t i v e system.  i n f u t u r e to  erect  the  p a l a t i a l b u i l d i n g s t h a t i t i s the custom of the banks t o build  i n c o m p e t i t i o n w i t h one  another.  With these  and  o t h e r s a v i n g s , w i t h p r a c t i c a l l y t h e same e f f i c i e n t  staff  o f e m p l o y e e s , and  the  banks it  to pay  w i t h the d e m o n s t r a t e d a b i l i t y  handsome d i v i d e n d s i n t h e s e t i m e s  s h o u l d n o t be d i f f i c u l t f o r a c e n t r a l i z e d ,  s y s t e m t o pay  201.  Ibid.,  the i n t e r e s t  J a n . 28,  1933.  guaranteed.  of  of d e p r e s s i o n , unified  193.  The  writer  l a b o r s under  no d e l u s i o n as t o t h e  diffi-  c u l t y of b r i n g i n g a b o u t t h e c o m p l e t e n a t i o n a l i z a t i o n the  banking system immediately.  Quite n a t u r a l l y  bankers would  strenuously r e s i s t  it  be t h e o l d e r p e o p l e and  a l s o would  the  such a p r o p o s a l .  have l i t t l e  generally.  be, t h e r e f o r e , that the s p i r i t  y o u t h , w h i c h a l o n e would  reform which w i l l  come w i t h  herent I n the apparent s e n i l i t y g o v e r n m e n t and Of a l l  lifting  have to await the of t h e  l a c k of r e s o l u t i o n i n t h a t now  g u i d e s the hands  finance.  and b a n k i n g s y s t e m t h e one most g e n e r a l l y  a c c e p t a b l e i s the the f i r s t  terested  may  of  t h e p r o p o s a l s r e l a t i n g t o t h e r e g e n e r a t i o n of'  our m o n e t a r y  In  enterprise  the n a t u r a l removal  p r o c r a s t i n a t i o n , I n d e c i s i o n , and  of  i n public  a p p e a r t o be c a p a b l e o f  us out o f our p r e s e n t d e s p o n d e n c y ,  Against  conservative-  m i n d e d p e r s o n s who I t may  faith  t h e more  of  suggested c r e a t i o n  p l a c e , as we  of a central  have seen, informed, d i s i n -  opinion supports the e f f i c a c y  tion properly constituted.  bank.  o f s u c h an  Secondly, n e i t h e r a  institu-  privately  owned n o r a s t a t e owned c e n t r a l b a n k n e e d a n t a g o n i z e t h e p r o t a g o n i s t s of i n d i v i d u a l e n t e r p r i s e because l i k e l y be e x p e c t e d t o c o m p e t e ' w i t h in  the c h a r t e r e d  the commercial banking b u s i n e s s .  be i n t h e "money b u s i n e s s " r a t h e r  i t would  Its interest  banks would  than i n t h e b a n k i n g  not  194.  b u s i n e s s , and i f n a t i o n a l i z a t i o n  of the whole  banking  s y s t e m were l a t e r d e t e r m i n e d upon, t h e o r g a n i z a t i o n n e c e s s a r y f o r the complete i n t e g r a t i o n of the f i n a n c i a l s t r u c t u r e w o u l d be i n r e a d i n e s s i n t h e f o r m o f t h e c e n t r a l bank. I t w o u l d be most a central  i n e p t of us, however, to o r g a n i z e  bank j u s t b e c a u s e i t m i g h t r e p r e s e n t a. c o n v e n i e n t  c o m p r o m i s e b e t w e e n more c o n t e n t i o u s p r o p o s a l s . h a v e a c e n t r a l bank.  She must i n s t i t u t e  b a s i s of compromise, however. it  Canada must  such a b a n k on no  She must c r e a t e i t b e c a u s e  c o u l d be o f t r e m e n d o u s b e n e f i t t o h e r p e o p l e .  a summary o f w h a t 1.  our proposed c e n t r a l  bank c o u l d  Here i s do:  A c t as the d e p o s i t o r y of the cash r e s e r v e s of the commercial banks.  £.  P e r f o r m the d u t i e s o f a c l e a r i n g house agency.  3.  Do  4.  Assume t h e d u t i e s p e r f o r m e d a t p r e s e n t by t h e  rediscounting.  T r u s t e e s of the C e n t r a l Gold 5.  Reserves.  Take o v e r t h e s u p e r v i s i o n o f t h e C i r c u l a t i o n Redemption Fund.  6.  C a r r y o u t t h e work  7.  Assume r e s p o n s i b i l i t y f o r t h e s o l v e n c y o f t h e whole b a n k i n g  8.  o f bank  inspection.  structure.  R e l i e v e t h e D e p a r t m e n t o f F i n a n c e o f the d u t y  195.  of a d m i n i s t r a t i o n of the Finance A c t . 9.  Encourage t h e growth in  o f money a n d b i l l  markets  Canada.  10.  A c t a s t h e d e p o s i t o r y o f Government f u n d s .  11.  A c t as the f i s c a l  12.  Represent  13.  Assume t h e m o n o p o l y o f t h e n o t e  14.  A c t i n the c a p a c i t y of expert f i n a n c i a l a d v i s e r  agent  of t h e Government.  t h e Government a t f i n a n c i a l  to G o v e r n m e n t s — f e d e r a l ,  conferences.  issue.  provincial,  c i p a l — s u c h as i n t h e m a t t e r  and m u n i -  of foreign  borrowing. 15.  Determine  16.  Exercise control  17.  E x e r c i s e c o n t r o l over t h e p r i c e  18.  Publish financial  19.  G u a r d t h e money a n d b a n k i n g s y s t e m dangers  a l lcurrency and credit over, f o r e i g n  exchange. level.  data.  of t h e p o l i t i c a l ' f a c t o r  t i o n s of p r i v a t e s e l f 20.  E x e r c i s e complete  problems.  from the  and t h e m a n i p u l a -  interests.  c o n t r o l o v e r money a n d c r e d i t  i n the general interest rather  than i n the  i n t e r e s t of p r o f i t . A few of these d u t i e s deserve s p e c i a l emphasis. i s a w i d e l y r e c o g n i z e d f a c t , and i t has been herein, that  It  repeated  one o f t h e l e a d i n g f u n c t i o n s o f a  central  196.  bank i s t h a t  of r e d i s c o u n t i n g .  There  i s a great  t h a t t h i s f u n c t i o n m i g h t be o v e r - e m p h a s i z e d * c e n t r a l b a n k must be a b a n k o f r e d i s c o u n t , be more t h a n t h a t . of r e d i s c o u n t  and  more w o u l d  t o t h e i n e p t i t u d e of i t s p o l i t i c a l  b u t i t must  i n the l i s t  trolling  money and  c r e d i t f o r the g e n e r a l The  be a b a n k  progenitor.  l a s t item  t h e most i m p o r t a n t .  Canadian  be a l a s t i n g monument  The  far  Our  A c e n t r a l bank t h a t w o u l d little  danger  of d u t i e s — t h a t  of c o n -  welfare—is  by  i n f l u e n c e of the w o r k i n g s  of  money a n d c r e d i t on t h e l i v e s o f t h e p e o p l e t o - d a y i s so profound that  i t s d i r e c t i o n and c o n t r o l s h o u l d  the prime f u n c t i o n s a d i r e c t one.  of g o v e r n m e n t — t h o u g h  I n Canada, we  function to institutions private profit.  I t should  this  as a  would  vital  f o r the pursuit  be r e m o v e d f r o m such  t i o n s and i n t r u s t e d t o a c e n t r a l b a n k w h o s e experts  of  not n e c e s s a r i l y  have d e l e g a t e d  organized  be one  of  institu-  monetary  e x e r c i s e i t i n the i n t e r e s t of the p e o p l e  whole. I f t h e p r o p o s e d c e n t r a l bank i s t o be t h e  institution  o f s e r v i c e t h a t i t o u g h t t o be, i t must be p r o p e r l y s t i t u t e d and empowered. NATIONAL c e n t r a l bank.  I n the f i r s t p l a c e  i t must be a  I t i s not the purpose  paragraph t o r e p e a t t h e arguments  f o r and  con-  of  against  this public  o w n e r s h i p o f t h e c e n t r a l bank, b u t t o r e i t e r a t e t h e f a c t  197.  t h a t t h e p r o p o s e d bank s h o u l d  be " n a t i o n a l " i n t h e  sense  that i t w i l l  To make i t o t h e r w i s e  would  be,  be s t a t e owned.  i n the o p i n i o n of the  w r i t e r , but  to play with  q u e s t i o n — t o a t t a c k the problem i n a s u p e r f i c i a l The  q u e s t i o n of t h e d e t a i l s  t h e c e n t r a l bank must be be t o o o f t e n r e p e a t e d  left  i t would  t o e x p e r t s , but  that the type  t r a i n i n g — a man matters  has  of t h e p e r s o n n e l As  stated i n  been g a i n e d a s a r e s u l t  banking  of d i s i n t e r e s t e d  i n some u n i v e r s i t y .  of d i r e c t o r s should  s t a n d i n g man  of p r a c t i c a l b a n k i n g  t i o n s h o u l d be g i v e n t o t h e  experience.  Association, etc.  t h e members of t h e b o a r d at  least,  should office.  and  s h o u l d be a p p o i n t e d  be a s s u r e d  him  outConsidera-  q u e s t i o n as t o w h e t h e r o r  such as A g r i c u l t u r e ,  the Canadian Bankers'  study—  With  be a t lea.st one  c e r t a i n s p e c i a l i n t e r e s t s m i g h t be r e p r e s e n t e d on t h e b o a r d ,  banking  i s , s a y , an e x p e r t i n t h e  on t h e b o a r d  rSles  Chapter  position  whose .knowledge o f m o n e t a r y a n d  o f money and  of  w i t h p r o f e s s i o n a l academic  a p r o f e s s i o n a l e c o n o m i s t who field  of  i t cannot  appear a d v i s a b l e to have i n t h e key  d e t e r m i n i n g p o l i c y , a man  way.  of t h e c o n s t i t u t i o n  its administration is all-important. 6,  the  the  dominating  by t h e  of r e l a t i v e l y  i n minor  Commerce, The  not  Labor,  majority  of  officials,  Government.  Each  l o n g and .secure t e n u r e  of  198.  E v e n u n d e r s t a t e o w n e r s h i p a n d w i t h an a b l e p e r s o n n e l , however, t h e c e n t r a l the p r o p e r powers.  bank c o u l d n o t a t t a i n r e s u l t s w i t h o u t I t s h o u l d be g r a n t e d t h e m o n o p o l y o f  the note i s s u e , c o n t r o l banks, and t h e r i g h t should  o f t h e r e s e r v e s of t h e c o m m e r c i a l  t o do r e d i s c o u n t i n g .  be empowered t o buy a n d s e l l  open m a r k e t  In addition i t  s e c u r i t i e s i n the  when n e c e s s a r y , a n d t o d e a l i n p r e c i o u s m e t a l s  and f o r e i g n e x c h a n g e .  I n s h o r t , i t must be g i v e n e v e r y  power n e c e s s a r y t o e n s u r e c o m p l e t e m a s t e r y e n t i r e money and c r e d i t  o f the country's  system.  W h i l e i t i s no c r i t i c i s m o f a c e n t r a l  banking  to p o i n t out that i n c o u n t r i e s where c e n t r a l e s t a b l i s h e d bank f a i l u r e s , crises s t i l l  system  banks a r e  and f i n a n c i a l a n d b u s i n e s s  o c c u r , y e t t o o much may e a . s i l y be e x p e c t e d  o f a c e n t r a l bank.  As K i s c h and E l k i n s a y :  "Advocacy of a c e n t r a l b a n k i n g system r e s t s n o t on t h e v i e w t h a t i t i s a p a n a c e a o r a s u b s t i t u t e f o r p r u d e n t b a n k i n g , b u t on t h e v i e w t h a t i t a f f o r d s t h e b e s t b a s i s f o r a sound b a n k i n g a n d b u s i n e s s economy and t h e s u r e s t s a f e g u a r d f o r the s t a b i l i t y of the currency."202 A c e n t r a l bank w o u l d n o t be a c u r e - a l l a n d e n d - a l l for  our t r o u b l e s , b u t i t would  be o f v e r y r e a l  value.  would  a t l e a s t mean t h e c o n t r o l o f money and c r e d i t  202.  K i s c h and E l k i n .  C e n t r a l Banks,  p . 112.  It  i n the  199  i n t e r e s t of t h e p e o p l e interest  of p r i v a t e p r o f i t .  of a w o r l d  economic u n i t .  f l u e n c e s the c e n t r a l own  as a w h o l e r a t h e r than i n the A d m i t t e d l y , we  are but a p a r t  Owing t o t h e w o r l d - w i d e i n -  bank c o u l d n o t g u a r a n t e e  economic w e l f a r e .  N e v e r t h e l e s s , by  even  establishing  an i n s t i t u t i o n t o a c t i n c o - o p e r a t i o n w i t h o t h e r b a n k s and  an  e f f e c t i v e world  n a t i o n a l S e t t l e m e n t s may c o n t r i b u t i n g our s h a r e in  bank (which  central  t h e Bank o f  Inter-  towards ending  the present  anarchy  international finance.  p a s s i n g of the F i n a n c e  f r o m t h e o l d t o a new the  such  b e c o m e ) , we w o u l d a t l e a s t be •  Our m o n e t a r y a n d b a n k i n g The  our  foundations  system i s i n a s t a t e of  Act  commenced t h e  financial  o f t h e new  era.  transition  To make c e r t a i n  order should  w o u l d seem a d v i s a b l e t h a t we  flux.  that  be w i s e l y l a i d i t  should have a  "MacMillan  Committee" to i n v e s t i g a t e e v e r y phase of our monetary and  banking  problem.  the p e r s o n n e l  of t h e c o m m i t t e e .  e x p e r t s i n money and financiers, The any  Here a g a i n the v i t a l p o i n t would Professional  banking—would  " b i g b u s i n e s s " men  and  time f o r a c t i o n i s upon us.  l o n g e r content w i t h the  economists—  be r e q u i r e d , n o t  merely  bankers. A r e we  i d e a l of an  s o c i a l good i s n o t h i n g more t h a n  be  going  to  order i n which  the inadvertent  and  be  200.  p r e c a r i o u s b y - p r o d u c t of an i n g l o r i o u s c o m p e t i t i o n f o r private gain?  I n t h e w i s e w o r d s on t h e p a s s i n g h o u r s , t h a  S i r C h r i s t o p h e r Wren w r o t e u n d e r h i s s u n d i a l i n A i l S o u l s C o l l e g e , we w o u l d  say:  "Pereunt et I m p u t a n t u r " — t h e y  away and a r e c o u n t e d a g a i n s t u s *  pa.ss  201,  BIBLIOGRAPHY.  General References: B e c k h a r t , B. H., The B a n k i n g S y s t e m o f C a n a d a . H e n r y H o l t a n d Co., IT. Y., 1 9 2 9 . ; Cassel,  Gustav., Post-War Monetary  Columbia U n i v e r s i t y P r e s s , Cassel,  Stabilization.  IT. Y., 1928.  C-ustav., The C r i s i s i n t h e W o r l d ' s Monetary  System.  Oxford U n i v e r s i t y Press,  T o r o n t o , 1932.  D o u g l a s , C. H., S o c i a l C r e d i t . The C r e d i t - R e s e a r c h L i b r a r y , L o n d o n , W.C.I, 1929. Edie,  L i o n e l D.,  Money, Bank C r e d i t  and P r i c e s .  H a r p e r s , IT. Y., 1 9 2 8 . H o l d s w o r t h , J o h n T., Money a n d B a n k i n g . D. Apple t o n a n d Co., IT. Y., 1 9 2 8 . Kemmerer, E d w i n W.,  The ABC o f t h e F e d e r a l Reserve  Princeton  System.  University Press,  K e y n e s , J . M., A T r e a t i s e  Princeton,  1929.  on Money.  M a c M i l l a n a n d Co. L t d . , L o n d o n , 1 9 3 0 . Kisch,  C. H. and E l k i n ,  W. A., C e n t r a l  Banks.  M a c M i l l a n and Co. L t d . , L o n d o n , 1 9 3 0 .  202.  P l u m p t r e , A. F. W.,  A C e n t r a l Bank f o r C a n a d a .  R e p r i n t e d from the F i n a n c i a l 1932. Salter,  S i r Arthur,  The Walker,  Post,  Toronto,  Recovery.  C e n t u r y Co., IT. Y., 1 9 3 2 . S i r Edmund, C a n a d i a n  Banking.  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