UBC Theses and Dissertations

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UBC Theses and Dissertations

Central banking in Canada 1933

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CENTRAL BANKING IN CANADA by James Hugh. C r e i g h t o n A T h e s i s s u b m i t t e d f o r t h e D e g r e e MASTER OF ARTS i n t h e D e p a r t m e n t o f E c o n o m i c s and P o l i t i c a l S c i e n c e The U n i v e r s i t y of B r i t i s h C o l u m b i a A p r i l , 1933 C O I T E . I T S C h a p t e r I . I n t r o d u c t i o n . Page 1. 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 C a n a d a — o p p o n e n t s o f t h e i d e a . C h a p t e r 2. The G e n e r a l F u n c t i o n s o f a C e n t r a l Bank. Page 10, (a) As a b a n k e r s ' bank. (b) As 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 of Money and C r e d i t and t h e C e n t r a l Bank. Page 17, (a) O b j e c t i v e s — 1. Ex c h a n g e c o n t r o l . 2. P r i c e l e v e l c o n t r o l . (b) P o s s i b i l i t i e s o f c o n t r o l — 1. E v i d e n c e f o r and a g a i n s t e xchange c o n t r o l . 2. E v i d e n c e f o r a n d a g a i n s t p r i c e l e v e l c o n t r o l . C h a p t e r 4. M o n e t a r y C o n t r o l i n Canada P r e v i o u s Page 49, t o 1914. ' . T y p e s of money u s e d — f i r s t b a n k s — A c t of 1 8 7 1 — g o l d s t a n d a r d — D o m i n i o n n o t e s — t h e b a n k i n g s y s t e m — p a n i c o f 1 9 0 7 — t h e c r o p - m o ving p r o v i s i o n — w a r - t i m e emergency m e a s u r e s . C h a p t e r 5. The F i n a n c e A c t a s a S u b s t i t u t e f o r a C e n t r a l Bank. Page 57 ( C o n t e n t s cont'd.) E v i d e n c e i n f a v o r o f the A c t as an adequate s u b s t i t u t e — t h e h i s t o r y o f t h e 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 ba n k e r s ' bank-—as a govern- ment's b a n k — a s a " p e o p l e ' s " bank. Chapter 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 Canada. Page 133. 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 e f f i c i e n t s y s t e m — t h e r e a l r e a d y 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 of c e n t r a l banks g e n e r a l l y — d a n g e r o f t h e 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 o f s e c u r i n g e f f i c i e n t m a n agement—lack o f a money market i n C a n a d a — a c e n t r a l bank c o u l d not 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 would be burdensome— c a p i t a l i z a t i o n — r e s e r v e s — p r o f i t s — c o m p e t i t i o n w i t h t h e c h a r t e r e d b a n k s — t h e n o t e i s s u e — w h a t a c e n t r a l bank might a c c o m p l i s h . Chap t e r 7. Summary and C o n c l u s i o n s . Page 181. B i b l i o g r a p h y Page 201 1. C h a p t e r I . I n t r o d u c t i o n . • R e f e r r i n g t o t h e w o r l d ' s p r e s e n t s t a t e o f "economic a n a r c h y " i n t h e c o u r s e of h i s s t a t e m e n t b e f o r e t h e m o n e t a r y committee o f t h e I m p e r i a l E c o n o m i c C o n f e r e n c e h e l d a t Ottawa l a s t summer, the Hon. U. C. Havenga, l e a d e r o f t h e d e l e g a t i o n o f t h e U n i o n o f S o u t h A f r i c a , s a i d : "But 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 up the m a c h i n e r y o f 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 t o the d i f f e r e n t i a l o f c o n s u m p t i o n w h i c h 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 I f , i n Canada, as e l s e w h e r e , o n l y p a l l i a t i v e s have r e s u l t e d f r o m o u r " a n t i - d e p r e s s i o n " e f f o r t s , and i f a l l t h e f u n d a m e n t a l f o r c e s w h i c h b r o u g h t a b o u t o u r p r e s e n t t r o u b l e a r e s t i l l o p e r a t i n g , a t l e a s t an i n c r e a s i n g number o f p e o p l e a r e t r y i n g to f i n d t h e r e q u i r e d " g e a r - l e v e r " i n t h e c o n t r o l o f money and c r e d i t . I n d o i n g t h i s t h e y a r e i n good company, f o r t h e " M a c M i l l a n Committee" o f f i n a n c i a l e x p e r t s i n G r e a t B r i t a i n i n 1931 d e s c r i b e d t h e d r a s t i c f a l l i n t h e p r i c e l e v e l t h r o u g h o u t t h e w o r l d a s " . . . . a m o n e t a r y phenomenon w h i c h has o c c u r r e d as the r e s u l t o f the m o n e t a r y s y s t e m f a i l i n g t o s o l v e s u c c e s s f u l l y a p r o b l e m o f u n p r e c e d e n t e d 1. R e p o r t o f t h e I m p e r i a l E c o n o m i c C o n f e r e n c e , Ottawa, 1933, p . 127. 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 t b y a c o n j u n c - t i o n of h i g h l y i n t r a c t a b l e n o n - m o n e t a r y pheno- mena . W i t h the c o n t r o l of m o n e t a r y s y s t e m s i s c l o s e l y l i n k e d the q u e s t i o n o f c e n t r a l b a n k i n g . Hence we have r e c e n t l y b e e n w i t n e s s i n g a s t r o n g demand f o r a c e n t r a l bank i n Canada and a n e q u a l l y f o r c e f u l d e n i a l o f t h e ne e d f o r s u c h an i n s t i t u t i o n . T he a d v o c a t e s o f the c e n t r a l bank f i n d t h e t i m e most o p p o r t u n e f r o m t h e i r p o i n t o f v i e w . C a n a d i a n bank c h a r t e r s a r e g r a n t e d f o r p e r i o d s o f t e n y e a r s . The c h a r t e r s were l a s t e x t e n d e d i n 1923. F o r m a l l y , t h e n , a d e c e n n i a l r e v i s i o n o f t h e Bank A c t would have t a k e n p l a c e i n 1933. S t a t i n g a s i t s r e a s o n s , however, t h a t a t h o r o u g h i n q u i r y i n t o t h e e n t i r e b a n k i n g and mon e t a r y s y s t e m was d e s i r a b l e b e f o r e a n o t h e r r e v i s i o n , and t h a t i t w i s h e d t o a w a i t the outcome o f t h e p r o p o s e d w o r l d e c o n o m i c c o n f e r e n c e , the government on F e b r u a r y 15, 1933, a s k e d f o r and r e c e i v e d p e r m i s s i o n t o e x t e n d t h e e x i s t i n g c h a r t e r s u n t i l J u l y 1, 1934. I n t e r e s t t h a t was a r o u s e d i n a n t i c i p a t i o n o f a r e v i s i o n t h i s y e a r y e a r w i l l now be f o c u s e d on the p a r l i a m e n t a r y s e s s i o n o f o f 1934. P a s t r e v i s i o n s have n o t u s u a l l y a r o u s e d v e r y g e n e r a l i n t e r e s t . Owing to the f a c t , however, t h a t t h e 2. R e p o r t o f the 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. House o f Commons Debates; F e b . 15, 1933, p . 2275. See a l s o House o f Commons D e b a t e s , M a r c h 21. 1933 p . 3444. • ' 3. p r e s e n t d e p r e s s i o n has c a u s e d economic s u b j e c t s t o be more w i d e l y and more d e e p l y s t u d i e d t h a n e v e r b e f o r e , t h e coming r e v i s i o n i s a l r e a d y a r o u s i n g w i d e s p r e a d i n t e r e s t . T h i s u n u s u a l i n t e r e s t on t h e p a r t o f t h e g e n e r a l p u b l i c , t o g e t h e r w i t h the p r o x i m i t y o f t h e d a t e o f r e v i s i o n o f the Bank A c t , g i v e s e n c o u r a g e m e n t t o t h o s e who would have a c e n t r a l bank c r e a t e d i n Canada. L o o k i n g b a c k beyond the i m m e d i a t e p r e s e n t t h e c e n t r a l bank p r o t a g o n i s t s f i n d s u p p o r t i n the b a n k i n g t e n d e n c y o f the p o s t - w a r p e r i o d . I n 1920, when the I n t e r n a t i o n a l F i n a n c i a l C o n f e r e n c e met i n B r u s s e l s , one o f t h e r e s o l u - t i o n s w h i c h i t p a s s e d was t o t h e e f f e c t t h a t i n c o u n t r i e s where t h e r e i s no C e n t r a l Bank o f I s s u e one s h o u l d be e s t a b l i s h e d . " 4 B e f o r e t h e war many o f t h e a d v a n c e d c o m m e r c i a l c o u n - t r i e s , s u c h a s G r e a t B r i t a i n , F r a n c e , I t a l y , Germany, J a p a n , the u n i t e d S t a t e s , A u s t r a l i a and o t h e r s had c e n t r a l b a n k s , b u t s i n c e t h e war c e n t r a l banks have g r e a t l y i n c r e a s e d b o t h i n number and i n s c o p e . The y e a r 1980 saw the o r g a n i z a t i o n o f the C z e c h o - S l o v a k N a t i o n a l Bank and the S o u t h A f r i c a n R e s e r v e Bank. I n 192£ t h e Genoa C o n f e r e n c e o f t h e League o f N a t i o n s a d v i s e d 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 by 4. K i s c h and E l k i n . C e n t r a l B a n k s , p . 2. 4. e a c h o f the n e w l y - c r e a t e d s t a t e s o f E u r o p e , and recommended " t h a t s u c h c e n t r a l banks s h o u l d s t a n d i n c l o s e r e l a t i o n s h i p t o t h e g o v e r n m e n t s o f the c o u n t r i e s i n w h i c h t h e y were l o c a t e d . " The y e a r s t h a t have f o l l o w e d have s e e n t h e c r e a t i o n o f many c e n t r a l b a n k i n g i n s t i t u t i o n s . Out o f t h e Dawes P l a n came the r e o r g a n i z a t i o n of t h e German R e i c h s b a n k . C e n t r a l banks were i n s t i t u t e d i n S o v i e t R u s s i a , i n some o f the B a l k a n c o u n t r i e s , i n c e r t a i n o f t h e c o u n t r i e s hewed o u t o f t e r r i t o r y t h a t had b e l o n g e d to t h e e m p i r e s o f A u s t r i a and R u s s i a , and i n a few o f the S o u t h A m e r i c a n s t a t e s . A r e s e r v e bank was p l a n n e d f o r I n d i a , b u t t h e p l a n has s i n c e b e e n d r o p p e d . The most r e c e n t , and t o C a n a d i a n s t h e most i n t e r e s t i n g , d e v e l o p m e n t i n c e n t r a l b a n k i n g c i r c l e s , however, i s t o be f o u n d i n New Z e a l a n d . I n 1930 S i r O t t o H e m e ye r o f t h e Bank o f E n g l a n d s u r v e y e d the b a n k i n g s y s t e m t h e r e . F o l l o w i n g h i s r e c o m m e n d a t i o n s , as Hon. J. G. C o a t e s , M i n i s t e r o f F i n a n c e o f New Z e a l a n d , s a y s : "The Government i s g o i n g ahead 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 bank i n New Z e a l a n d . 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 , and New Z e a l a n d i s g o i n g t o s u p p l y h e r l i n k . " - 6 The e x t e n t o f t h e g r o w t h o f c e n t r a l banks may b e s t be p i c t u r e d , however, from the f o l l o w i n g t a b l e a d a p t e d f r o m a 5. W i l l i s and B e c k h a r t . F o r e i g n B a n k i n g S y s t e m s , p . 1 0 . 6. The F i n a n c i a l P o s t , T o r o n t o , D e c . 17, 1932. 5. l i s t g i v e n i n " F o r e i g n B a n k i n g S y s t e m s " , by W i l l i s and B e e k h a r t . ^ I t w i l l be s e e n t h a t t h i s b e a r s o u t t h e s t a t e - ment o f K i s c h and E l k i n t h a t , "The l a c k o f a C e n t r a l Bank Q i s now e x c e p t i o n a l i n a d v a n c e d c o u n t r i e s . " 1656 - Bank o f Sweden 1694 - Bank o f E n g l a n d 1800 - Bank o f F r a n c e 1809 - Bank o f F i n l a n d 1814 - N e t h e r l a n d s Bank 1816 - Bank o f Norway 1817 - A u s t r i a n N a t i o n a l Bank 1818 - N a t i o n a l Bank o f Denmark 1821 - Bank o f P o r t u g a l 1828 - Bank o f J a v a 1829 - Bank o f S p a i n 1835 - N a t i o n a l Bank o f B e l g i u m 1842 - N a t i o n a l Bank o f G r e e c e 1859 - Bank o f I t a l y 1875 - German R e i c h s b a n k 1880 - N a t i o n a l Bank o f Roumania 1882 - Bank o f J a p a n 1883 - N a t i o n a l Bank o f S e r b i a 1885 - N a t i o n a l Bank o f B u l g a r i a 1896 - Bank o f U r u g u a y 1898 - N a t i o n a l Bank o f E g y p t 1905 - S w i s s N a t i o n a l Bank #1912 - Commonwealth Bank o f A u s t r a l i a #1914 - The F e d e r a l R e s e r v e System o f t h e U n i t e d S t a t e s 1920 - C z e e h o - S l o v a k N a t i o n a l Bank 1920 - S o u t h A f r i c a n R e s e r v e Bank 1922 - Bank o f L a t v i a 1922 - Bank o f L i t h u a n i a 1922 - R e s e r v e Bank o f P e r u 1922 - S t a t e Bank o f R u s s i a 1924 - Bank o f D a n z i g 1924 - Bank o f P o l a n d 1924 - N a t i o n a l Bank o f H u n g a r y 1925 - C e n t r a l Bank o f C h i l e 1927 - Bank o f E s t h o n i a #1933 - Bank o f New Z e a l a n d 7. W i l l i s and B e c k h a r t . F o r e i g n B a n k i n g S y s t e m s , p . 10. 8. K i s c h and E l k i n . C e n t r a l B a n k s , p . 1 1 . . # A d d i t i o n s by w r i t e r . 6. I t i s n o t w i t h o u t p o w e r f u l and r e p u t a b l e o p p o s i t i o n , however, t h a t the march t o w a r d s more and g r e a t e r c e n t r a l banks g o e s on. The b a n k e r s o f New Z e a l a n d , f o r i n s t a n c e , have been u n i t e d i n p r o t e s t a g a i n s t t h e d e c l a r e d p o l i c y o f t h e g o v e r n m e n t t o f o u n d a c e n t r a l bank t h e r e , and t h e v e r y a b l e M i n i s t e r o f F i n a n c e , t h e Hon. Downie S t e w a r t , has r e s i g n e d f r o m the c a b i n e t owing to d i s a g r e e m e n t w i t h t h e o t h e r members o f t h e m i n i s t r y on b a n k i n g and m o n e t a r y p o l i c y . I n Canada, t o o , t h e banks a p p e a r t o be a u n i t i n r e s i s t i n g t h e p r o p o s a l t h a t a c e n t r a l bank be o r g a n i z e d h e r e . D u r i n g t h e p a s t few months a n n u a l m e e t i n g s have b e e n h e l d by t h e t e n C a n a d i a n c h a r t e r e d banks and by 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 . A t t h e s e m e e t i n g s a p u b l i c d e c l a r a t i o n o f a t t i t u d e t o w a r d s the p r o p o s a l f o r a c e n t r a l bank f o r Canada has been made b y : Mr. J . A. McLeod P r e s i d e n t o f 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 S i r C h a r l e s G o r d o n P r e s i d e n t of t h e Bank of M o n t r e a l Mr. 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 Mr. S. H. L o g a n G e n e r a l Manager, C a n a d i a n Bank of Commerce Mr. J . A. McLeod G e n e r a l Manager, Bank of Nova S c o t i a Mr. 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 Mr. H. B. Henwood G e n e r a l Manager, Bank of T o r o n t o Mr. C. A. B o g e r t G e n e r a l Manager, The D o m i n i o n Bank Mr. C. A. Roy 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. B e a u d r y L e m a n G e n e r a l Manager, Banque C a n a d i e n n e H a t i o n a l e I t w i l l be n o t e d t h a t t h e o n l y bank n o t r e p r e s e n t e d i n t h e above l i s t i s B a r c l a y ' s ( C a n a d a ) . T h e r e was no d e f i n i t e e x p r e s s i o n o f o p i n i o n g i v e n a t t h e a n n u a l m e e t i n g of t h i s bank by t h e p r e s i d e n t , S i r R o b e r t B o r d e n . Whether t h e t e n b a n k e r s l i s t e d above were e x p r e s s i n g t h e i r own p e r s o n a l o p i n i o n s , o r " o f f i c i a l " o p i n i o n s , o r b o t h , i s n o t c l e a r , but w i t n o u t e x c e p t i o n t h e a t t i t u d e e x p r e s s e d i s one o f s t e r n w a r n i n g a g a i n s t and s t r o n g o p p o s i t i o n t o t h e s u g g e s - t i o n o f a C a n a d i a n c e n t r a l b a n k . They o b j e c t t o s u c h a bank on t h e g r o u n d s t h a t i t would be d a n g e r o u s t o d i s t u r b t h e p r e s e n t b a n k i n g s y s t e m w i t h i t s p r o v e n e f f i c i e n c y , s e c u r i t y , and s t a b i l i t y ; t h a t t h e r e i s g r a v e d o u b t as t o t h e e f f i c a c y o f c e n t r a l banks g e n e r a l l y ; t h a t t h e r e w o u l d be d a n g e r f r o m th e p o l i t i c a l f a c t o r ; t h a t i n a c o u n t r y l i k e Canada, w h i c h i s a d e b t o r c o u n t r y and has no money m a r k e t , a c e n t r a l bank c o u l d n o t f u n c t i o n a d e q u a t e l y ; t h a t a c e n t r a l bank c o u l d n o t c r e a t e any more c r e d i t t h a n a l r e a d y e x i s t s ; t h a t t h e c o s t would be burdensome; t h a t i n any ease we have i n t h e F i n a n c e A c t a l l t h a t i s n e e d e d i n t h e way o f c e n t r a l b a n k i n g m a c h i n e r y . S i r C h a r l e s Gordon, P r e s i d e n t o f t h e Bank of M o n t r e a l , s a y s , f o r i n s t a n c e , " T h e r e i s no n e e d o f a c e n t r a l bank i n Canada. F o r a l l p r a c t i c a l p u r p o s e s s u c h an a g e n c y a l r e a d y e x i s t s u n d e r the 8. " F i n a n c e A c t , w h i c h f o r e i g h t e e n y e a r s has a d m i r a b l y p e r - 9 formed i t s p u r p o s e . " Mr. M. W. W i l s o n , G e n e r a l Manager o f t h e R o y a l Bank o f Canada, e x p r e s s e s h i m s e l f 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 t h e 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 s e r v e s the n e e d s o f t h i s c o u n t r y I c o n f e s s a r e l u c t a n c e t o t i n k e r w i t h o u r f i n a n c i a l m a c h i n e r y i n a time l i k e t h i s . " 1 0 The P r e s i d e n t o f 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 , Mr. J . A. McLeod, s a y s i n p a r t : " I have, p e r h a p s , s a i d enough t o make i t c l e a r t h a t t h e p r o j e c t e d e s t a b l i s h m e n t of a c e n t r a l bank i n Canada 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 p r o b l e m s , and i s n o t w i t h o u t e l e m e n t s 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 would y o u w i s h me t o do so) to t a k e a p o s i t i o n on t h i s g r e a t q u e s t i o n a t the 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 s u r r o u n d e d w i t h s u c h d i f f i c u l t i e s , y o u w i l l a g r e e w i t h me t h a t t h e time has come when, i n no c o n t r o v e r s i a l s p i r i t , the 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 T h us we see t h a t e x p r e s s i o n s o f o p i n i o n s u p p o r t i n g b o t h s i d e s o f t h e argument w i t h r e s p e c t t o c e n t r a l b a n k i n g i n Canada have come f r o m s o u r c e s t h a t have g r e a t w e i g h t and must command a t t e n t i o n . I f we add t o t h e s e t h e i n - n u m e r a b l e a r t i c l e s w r i t t e n by newspaper e d i t o r s , and b y c o n t r i b u t o r s t o p o p u l a r m a g a z i n e s , to t h e " f i n a n c i a l p a g e " , 9. The V a n c o u v e r D a i l y P r o v i n c e , V a n c o u v e r , B.C., Dec. 5, 193E. 10. The V a n c o u v e r Sun, V a n c o u v e r B.C., J a n . 12, 1933. 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 a n n u a l m e e t i n g of 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, 1932 -- p r i v a t e c o p y . 9. e t c . , we a s s u r e d l y nave need t o " r e a d n o t t o b e l i e v e b u t t o w e i g h and c o n s i d e r . " 10. C h a p t e r £ . The G e n e r a l F u n c t i o n s o f a C e n t r a l Bank:. I t i s e s s e n t i a l , t h e r e f o r e , t h a t i f t h e q u e s t i o n o f a c e n t r a l bank i n Canada i s t o be "weighed and c o n s i d e r e d " i m p a r t i a l l y , we s h o u l d have a n i n f o r m e d c o n c e p t i o n o f what s u c h an i n s t i t u t i o n i s and what i t s c h i e f f u n c t i o n s a r e . I n the f i r s t p l a c e i t must n o t be c o n f u s e d w i t h the many s o - c a l l e d " n a t i o n a l " banks o f v a r i o u s c o u n t r i e s , f u n c t i o n i n g i n t h e same way a s o r d i n a r y p r i v a t e b a n k s . T h e r e a r e many banks i n t h e U n i t e d S t a t e s , f o r i n s t a n c e , b e a r i n g the name " n a t i o n a l " t h a t have no more t r u l y n a t i o n a l s i g n i f i c a n c e t h a n , say, " N a t i o n a l B i s c u i t s " , o r t h e " N a t i o n a l Waste M a n u f a c t u r i n g Company". On t h e o t h e r hand a l l c e n t r a l banks a r e n a t i o n a l i n t h a t t h e y have a n a t i o n - w i d e i n f l u e n c e . Some o f t h e s e a r e p r i v a t e l y owned and c o m p l e t e l y i n d e p e n d e n t o f the government, s u c h a s t h e Bank o f E n g l a n d and t h e German R e i c h s b a n k . O t h e r s a r e n a t i o n a l i n the a d d i t i o n a l sense t h a t t h e y a r e t r u e s t a t e o r g a n i z a t i o n s , s u c h as t h e F e d e r a l R e s e r v e B o a r d of t h e U n i t e d S t a t e s , t h e R i k s b a n k o f Sweden, and t h e Common- w e a l t h Bank o f A u s t r a l i a . Whether i n d e p e n d e n t o f t h e government o r f u l l y s t a t e - c o n t r o l l e d , however, a c e n t r a l bank may, i n a b r o a d g e n e r a l way, be r e g a r d e d as p l a y i n g 11 t h r e e m a i n r 6 l e s - - a b a n k e r s ' bank, a g o v e r n m e n t ' s bank, a ' ^ e o p l e ' s " bank. The c h i e f f e a t u r e w h i c h d i s t i n g u i s h e s a c e n t r a l bank f r o m an o r d i n a r y c o m m e r c i a l bank i s t h a t i t i s e s s e n t i a l l y a b a n k e r s ' b a n k . T h o u g h some c e n t r a l banks do a c e r t a i n amount o f b u s i n e s s d i r e c t l y w i t h the p u b l i c , t h e c e n t r a l bank as a r u l e does n o t e n t e r i n t o c o m p e t i t i o n w i t h t h e o t h e r b a n k s . I t s c h i e f c u s t o m e r s a r e the c o m m e r c i a l banks and o t h e r f i n a n c i a l h o u s e s r a t h e r t han the g e n e r a l p u b l i c . I t i s t o t h e o r d i n a r y b a n k s as t h o s e banks a r e t o the p e o p l e . J u s t a s p r i v a t e i n d i v i d u a l s and c o r p o r a t i o n s d e p o s i t t h e i r f u n d s w i t h t h e i r bank, so the c e n t r a l bank i s t h e d e p o s i t o r y o f the c a s h r e s e r v e s o f t h e c o m m e r c i a l b a n k s . T h i s c o n c e n t r a t i o n o f c a s h i n one c e n t r a l s t o r e - house r e d u c e s the t o t a l volume o f r e s e r v e s n e e d e d by t h e whole b a n k i n g s y s t e m and hence makes f o r more e f f i c i e n t u s e of t h e s e r e s e r v e s t h a n i f t h e y were i m m o b i l i z e d i n the hands o f a number o f b a n k s . Such c e n t r a l i z a t i o n i s a l s o n e c e s s a r y i f t h e c e n t r a l bank i s to be a b l e t o e x e r c i s e c r e d i t c o n t r o l o v e r the b a n k i n g s y s t e m . The c e n t r a l bank a l s o p e r f o r m s a g r e a t s e r v i c e f o r t h e com- m e r c i a l banks by a c t i n g as a c l e a r i n g house a g e n c y . T h e s e banks may s e t t l e t h e i r c l e a r i n g house b a l a n c e s by d r a w i n g cheques upon t h e i r r e s e r v e b a l a n c e s i n t h e c e n t r a l bank. 12. T h i s l a r g e l y e l i m i n a t e s t h e c o s t o f t r a n s f e r r i n g c a s h f r o m one bank t o a n o t h e r u n d e r p o l i c e p r o t e c t i o n . A g a i n , j u s t as many p r i v a t e banks i s s u e n o t e s t o t h e p u b l i c , so d o e s the c e n t r a l bank i s s u e c u r r e n c y t o member b a n k s . L o a n s , t o o , may be made by t h e c e n t r a l bank t o c o m m e r c i a l banks a g a i n s t d e p o s i t e d c o l l a t e r a l , j u s t a s an o r d i n a r y bank may i s s u e l o a n s t o i n d i v i d u a l s on s a t i s f a c t o r y s e c u r i t i e s . A n o t h e r f u n d a m e n t a l f u n c t i o n o f a c e n t r a l bank i s t h a t o f r e d i s c o u n t i n g . When a p r i v a t e i n d i v i d u a l g e t s s h o r t o f r e a d y c a s h he may, i f he i s f o r t u n a t e enough to p o s s e s s bonds, o r good n o t e s o r b i l l s o f exchange, t a k e t h e s e t o h i s bank as c o l l a t e r a l s e c u r i t y f o r a c a s h l o a n . I n t h e same way, when a c o m m e r c i a l bank becomes o v e r l o a d e d w i t h c o m m e r c i a l p a p e r o r s e c u r i t i e s , and has r e a c h e d i t s l o a n a b l e c a p a c i t y , i t may go t o the c e n t r a l bank and have i t s p a p e r r e d i s c o u n t e d f o r c u r r e n c y . F i n a l l y , t h e c e n t r a l bank i s l a r g e l y r e s p o n s i b l e 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 s y s t e m o f t h e c o u n t r y . A l e a d i n g f u n c t i o n o f a c e n t r a l bank t o d a y i s t h a t o f a c t i n g a s t h e g o v e r n m e n t ' s bank. U s u a l l y i t i s t h e de- p o s i t o r y o f t h e g o v e r n m e n t ' s f u n d s and o f i t s g o l d r e s e r v e s . The g o v ernment i s one of i t s c h i e f c u s t o m e r s . The " M a c M i l l a n Committee" o f B r i t i s h f i n a n c i a l e x p e r t s s a i d i n 193L: 13 " I n p r a c t i c e t h e t a s k s w h i c h have b e e n imposed upon the c e n t r a l bank 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 o f t h e government, f o r the f i n a n c i a l o p e r a t i o n s o f t h e government a r e c o n d u c t e d on a s c a l e so g r e a t as s e r i o u s l y t o d e r a n g e the money ma 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 the 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 o f r e v e n u e o r t h e t e m p o r a r y 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 p a y m e n t s . T h i s t a s k ought t o d e v o l v e upon t h e 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 as g u a r d i a n of the money m a r k e t , and does i n f a c t d e v o l v e upon i t when i t c a r r i e s the Government a c c o u n t . " 1 2 The c e n t r a l bank a l s o becomes t h e f i s c a l a g e n t o f t h e g o v e r n - ment, r e c e i v i n g t a x f u n d s , a d v a n c i n g s h o r t t e r m l o a n s i n t i m e s o f t e m p o r a r y s h o r t a g e , and i n many o t h e r ways a c t i n g as an i n t e r m e d i a r y t o smooth t h e r e l a t i o n s h i p between t h e D e p a r t m e n t o f F i n a n c e and b u s i n e s s . A t a l l t i m e s i t must be r e a d y t o make l a r g e p a y m e n t s , n a t i o n a l o r i n t e r n a t i o n a l - - payments w h i c h may s e r i o u s l y i n v o l v e the " t r a n s f e r p r o b l e m " - - t r a n s a c t i o n s w h i c h few p r i v a t e banks w o u l d be p r e p a r e d t o a r r a n g e . S p e a k i n g o f t h e Commonwealth Bank o f A u s t r a l i a , W i l l i s and B e c k h a r t s a y : "....some r e f e r e n c e s h o u l d be made t o t h e war s e r v i c e s i t r e n d e r e d . 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 t h e 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 t h e mechanism o f A u s t r a l i a b a n k i n g t h e 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 war l o a n s i n A u s t r a l i a , a c o u n t r y h i t h e r t o q u i t e u n a c q u a i n t e d w i t h t h e f l o t a t i o n o f l a r g e s e c u r i t y i s s u e s . " ^ 18. 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 , L o n d o n , June, 1931. (The M a c M i l l a n R e p o r t ) , p . 16. 13. W i l l i s and B e c k h a r t . F o r e i g n B a n k i n g S y s t e m s , p . 87 14. S i m i l a r l y , remembering the huge f i n a n c i a l o p e r a t i o n s o f the U n i t e d S t a t e s d u r i n g and a f t e r t h e war, i n f o r m e d p e r s o n s c o n s i d e r t h a t i t was an e x c e e d i n g l y happy c i r c u m s t a n c e w h i c h b r o u g h t the F e d e r a l R e s e r v e s y s t e m i n t o e x i s t e n c e i n 1914. T h e n a g a i n , r e p r e s e n t a t i v e s o f t h e c e n t r a l bank i n s t e a d o f t h e government, may o f t e n r e p r e s e n t t h e c o u n t r y a t v a r i o u s c o n f e r e n c e s where the e x p e r t knowledge o f t h e f i n a n c i a l c o n d i t i o n o f t h e c o u n t r y i s r e q u i r e d . Then, t o o , when i t assumes t h e d u t y of i s s u i n g the l e g a l t e n d e r n o t e s o f the c o u n t r y , as p r e v i o u s l y m e n t i o n e d , i t p e r f o r m s a go v e r n m e n t s e r v i c e . I n a d d i t i o n t o b e i n g a b a n k e r s ' bank and a g o v e r n - ment's bank, however, the c e n t r a l bank i s coming t o be r e g a r d e d by many as a " p e o p l e ' s " bank. I t s v a s t power i s n o t j u s t a p r i v i l e g e , b u t i s bound up w i t h heavy b u r d e n s and s e r i o u s r e s p o n s i b i l i t i e s . W i l l i s and B e c k h a r t p o i n t o u t t h a t many p e o p l e a r e o f t h e o p i n i o n : ".... t h a t a c e n t r a l bank s h o u l d be a t hand as 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 (non- c e n t r a l ) banks t o a c c e p t t h e o r d e r s o f t h e government, 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 o ut 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 the money market s i t u a t i o n on b e h a l f o f government o p e r a t i o n s . I t has t h u s come a b o u t t h a t t h e a d v o c a c y o f c e n t r a l b a n k i n g and the 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 powers has t a k e n shape as a " s o c i a l " move- ment. "14 14. W i l l i s and B e c k h a r t . F o r e i g n B a n k i n g S y s t e m s , p . 11. 15. W i t h t h i s " s o c i a l " f u n c t i o n i n mind, a d v o c a t e s of a c e n t r a l bank m a i n t a i n t h a t c o n t r o l o f money and c r e d i t i s a p r i m e f u n c t i o n o f government, and t h a t t h a t f u n c t i o n s h o u l d be v e s t e d i n a s t a t e - c o n t r o l l e d i n s t i t u t i o n e x e r - c i s i n g i t s powers i n the i n t e r e s t s of t h e p e o p l e as a whole r a t h e r t h a n h a v i n g i t o p e r a t e d i n t h e p u r s u i t o f p r o f i t f o r the s h a r e h o l d e r s o f a p r i v a t e i n s t i t u t i o n . W i t h s o m e t h i n g o f t h i s i n mind the " M a c M i l l a n Committee" r e m a r k s : " I t f o l l o w s t h a t t h e 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 upon i t a r e o f a v e r y s p e c i a l c h a r a c t e r , c a l l i n g f o r s k i l l , ex- p e r i e n c e 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 b a n k e r s . No b a n k e r c a n n e g l e c t the 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 to make a p r o f i t . The s i t u a t i o n o f the 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 o n l y n o t p r o f i t a b l e , b u t r e s u l t i n l o s s e s - . . 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 s y s t e m and t h e economic w e l f a r e o f t h e c o u n t r y . " 1 5 Of s i m i l a r o p i n i o n i s a C a n a d i a n a u t h o r i t y , Mr. A. F. W. P l u m p t r e , l e c t u r e r i n money and p r i c e s a t t h e U n i v e r s i t y of T o r o n t o . A s e r i e s o f a r t i c l e s by him a p p e a r e d i n The F i n a n c i a l P o s t l a t e i n 1932 on t h e p r o b l e m o f a c e n t r a l bank f o r Canada i n the l i g h t o f f o r e i g n e x p e r i e n c e and o f C a n a d i a n c o n d i t i o n s . E x p r e s s i n g h i m s e l f i n f a v o r o f s u c h 15. 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 , L ondon, June, 1931. (The M a c M i l l a n R e p o r t . ) p . 16 16. a bank f o r Canada he d o e s so on t h e b a s i s o f t h e b e n e f i t s t o be d e r i v e d f r o m i t s " s o c i a l " f u n c t i o n i n t h e s e n s e s u g g e s t e d a b o v e . A f t e r e n u m e r a t i n g s i x o b j e c t s o f a c e n t r a l bank, a l l o f w h i c h a r e i n c l u d e d i n t h e o u t l i n e o f f u n c t i o n s above, he i n d i c a t e s t h a t i t i s t h e s i x t h o b j e c t w h i c h w o u l d r e a l l y make t h e g a i n w o r t h t h e c o s t . T h i s s i x t h o b j e c t he d e f i n e s as f o l l o w s : "To e n s u r e t h a t c r e d i t and n o t e i s s u e were 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 p u b l i c i n t e r e s t . " 1 6 16. P l u m p t r e , A. F. W. A C e n t r a l Bank f o r Canada, p . 21. 17. C h a p t e r 3. The C o n t r o l o f Money and C r e d i t and t h e C e n t r a l Bank. I f , t h e n , t h i s " s o c i a l " f u n c t i o n i s as i m p o r t a n t i n c e n t r a l b a n k i n g g e n e r a l l y as t h e M a c M i l l a n Committee w o u l d seem to i n d i c a t e , and i f i n Canada, i n p a r t i c u l a r , i t i s t h e a l l - i m p o r t a n t f e a t u r e r e l a t i v e t o a c e n t r a l bank, a s Mr. P l u m p t r e d e c l a r e s , i t i s h i g h l y n e c e s s a r y t h a t i t s h o u l d be t h o r o u g h l y a n a l y z e d . N o t h i n g h a s y e t been s a i d h e r e , f o r i n s t a n c e , a s t o how t h i s s u p p o s e d l y d e s i r a b l e f u n c t i o n may be c a r r i e d out by a c e n t r a l bank. Y e t t h e whol e q u e s t i o n i s h i g h l y c o n t r o v e r s i a l . I n s u c c e e d i n g p a r a g r a p h s a n a t t e m p t w i l l be made, t h e r e f o r e , t o e x p l o r e b r i e f l y t h e p o s s i b i l i t i e s of c o n t r o l o f money and c r e d i t g e n e r a l l y and t h e s o - c a l l e d "management" q u e s t i o n , and i n t h e l i g h t o f knowledge t h u s g a i n e d a d e t a i l e d e x a m i n a t i o n w i l l t h e n be made i n t o t h e s i t u a t i o n i n Canada, p a s t and p r e s e n t , r e l a t i v e t o t h e same p r o b l e m . I f c o n t r o l o f money and c r e d i t i s t o be e x e r c i s e d i n - t e l l i g e n t l y i n Canada t h e f i r s t n e c e s s i t y i s t h a t t h e o b j e c t i v e s o f s u c h c o n t r o l be c l e a r l y d e f i n e d . I n g e n e r a l we t h i n k o f two m a i n p u r p o s e s , (a) t h e c o n t r o l o f f o r e i g n 18. e xchange r a t e s and (b) t h e c o n t r o l o f t h e g e n e r a l p r i c e l e v e l . F o r t h e s a k e o f commerce and f o r the p u r p o s e o f f a c i - l i t a t i n g i n t e r n a t i o n a l f i n a n c i a l t r a n s a c t i o n s i n g e n e r a l , we u s u a l l y d e s i r e r e a s o n a b l y s t a b l e f o r e i g n e x c h ange. A t t i m e s , o f c o u r s e , a c o u n t r y may, a s a m a t t e r of p o l i c y , d e l i b e r a t e l y c r e a t e an e x c h a n g e d i s p a r i t y , s u c h as when New Z e a l a n d r e c e n t l y m a n i p u l a t e d i t s exc h a n g e t o a c h i e v e c e r t a i n e n d s . New Z e a l a n d i s v i t a l l y c o n c e r n e d w i t h t h e e x p o r t of a g r i c u l t u r a l p r o d u c t s , and she hoped t h a t d e- p r e c i a t i o n o f h e r c u r r e n c y would e n c o u r a g e t h e s e e x p o r t s . On the o t h e r hand, i f a r i s e i n i n t e r n a l p r i c e s s h o u l d accompany t h i s d e p r e c i a t i o n , t h e b u r d e n s o f t h e d e p r e s s i o n w ould be r e d i s t r i b u t e d w i t h i n New Z e a l a n d . B o t h t h e s e ends m i g h t be a t t a i n e d i n a measure i f t h e r i s e i n home p r i c e s s h o u l d be s m a l l enough t o l e a v e a d i s p a r i t y between t h i s r i s e and t h e r i s e i n t h e p r i c e o f f o r e i g n money. I n Canada d u r i n g the p a s t y e a r we have h a d v e r y r e a l and p a i n f u l e x p e r i e n c e w i t h an u n c o n t r o l l e d e x c h a n g e . I m p o r t e r s and e x p o r t e r s , a s w e l l a s t h o s e who have had d e b t s t o pay i n A m e r i c a n o r o t h e r f u n d s , have been co n - f r o n t e d w i t h c o n t i n u o u s c h a n g e s i n exchange r a t e s . They have had t o pay a premium o f f r o m t e n p e r c e n t , t o t w e n t y p e r c e n t , on A m e r i c a n d o l l a r s , b u t have been a b l e to 19. o b t a i n E n g l i s h pounds a t a d i s c o u n t of f r o m t e n p e r c e n t , t o t w e n t y p e r c e n t . C a n a d i a n i m p o r t e r s and d e b t o r s h a v e n o t e n j o y e d t h e a d v a n t a g e s o f a n exchange r a t e a t p a r w i t h t h e U n i t e d S t a t e s , and o u r m a n u f a c t u r e r s and e x p o r t e r s have n o t h a d t h e a d v a n t a g e s of a p a r exch a n g e w i t h s t e r l i n g . I t i s g e n e r a l l y a d m i t t e d now t h a t t h e t r a d e a r r a n g e m e n t s made a t t h e I m p e r i a l E c o n o m i c C o n f e r e n c e a t Ottawa l a s t summer were l a r g e l y i n v a l i d a t e d w i t h i n two months by ex- change h a n d i c a p s . Worst of a l l , p e r h a p s , was the u n - c e r t a i n t y o f t h e r a t e s . The t r o u b l e seems t o have been t h a t t h e r e was no c e n t r a l , r e s p o n s i b l e , d i r e c t i n g a u t h o r i t y p l a n n i n g or p u r s u i n g any p o l i c y a t a l l . T h e r e i s room f o r g r e a t d i f f e r e n c e o f o p i n i o n as t o what p o l i c y s h o u l d h a v e been a d o p t e d . Many b e l i e v e t h a t i t s h o u l d have been our p o l i c y t o a d h e r e s t r i c t l y t o t h e g o l d s t a n d a r d , t h u s m a i n t a i n i n g a p a r i t y between our c u r r e n c y and t h o s e o f o t h e r ' g o l d ' c o u n t r i e s — a s s u m i n g , o f c o u r s e , t h a t t h i s c o u l d be done. O t h e r s m a i n t a i n t h a t we s h o u l d have d e - p r e c i a t e d our c u r r e n c y to t h e l e v e l o f s t e r l i n g and s h o u l d have s t a b i l i z e d i t t h e r e . I n o t h e r words we s h o u l d h a v e j o i n e d t h e " s t e r l i n g b l o c " . S t i l l o t h e r s a s s e r t t h a t we s h o u l d h a v e t i e d our money n e i t h e r t o g o l d n o r t o s t e r l i n g , but s h o u l d have f i x e d a s t a n d a r d o f our own b a s e d on com- m o d i t y p r i c e i n d e x e s . S i n c e Canada r e t u r n e d t o t h e g o l d s t a n d a r d i n 1926 h e r o f f i c i a l m o netary p o l i c y h a s been t h e 20. f i r s t one o u t l i n e d a b o v e — t h a t of s t a b i l i z i n g h e r exchange by a d h e r e n c e t o t h e g o l d s t a n d a r d . Whether or n o t t h i s was the w i s e s t p o l i c y , t h e u n f o r t u n a t e p o i n t i s , as w i l l be shown i n a l a t e r s e c t i o n , t h a t t h e F i n a n c e A c t ( o u r s u b s t i t u t e f o r a c e n t r a l bank) p e r m i t s u n l i m i t e d i n f l a t i o n , and i s , t h e r e f o r e , i n i t s v e r y p r i n c i p l e , o p p o s e d to t h e s u c c e s s f u l f u n c t i o n i n g of t h e o r t h o d o x g o l d s t a n d a r d . I n o t h e r w ords, w h i l e our p o l i c y r a n i n one d i r e c t i o n our " m a c h i n e r y " r a n i n t h e o p p o s i t e d i r e c t i o n , w i t h r e s u l t a n t i n s t a b i l i t y i n our e x c h a n g e . Our f i r s t o b j e c t i v e , t h e n , i n t h e c o n t r o l o f money and c r e d i t , s h o u l d be t o d e t e r m i n e upon a m o n e t a r y p o l i c y and t h e n " s t i c k " to. i t and s e e t h a t i t i s c a r r i e d o u t . So much f o r t h e o b j e c t i v e s o f f o r e i g n e x c h a n g e c o n t r o l . P r i c e c o n t r o l , on t h e o t h e r hand, aims a t p r e v e n t i n g i n - j u s t i c e s between d e b t o r s and c r e d i t o r s ; g u a r d i n g s a v i n g s a g a i n s t l o s s t h r o u g h c u r r e n c y d e p r e c i a t i o n ; i n c r e a s i n g t h e r e g u l a r i t y o f employment; l e s s e n i n g t h e e x t r e m e s between booms and d e p r e s s i o n s ; p r e v e n t i n g one c l a s s o f income f r o m i n c r e a s i n g a t t h e exp e n s e o f a n o t h e r t h r o u g h m o n e t a r y phenomena; a v o i d i n g s o c i a l f r i c t i o n and d i s t u r b a n c e g e n e r a l l y , e t c . Low p r i c e s a r e n o t n e c e s s a r i l y h a r m f u l . N e i t h e r a r e h i g h p r i c e s . I t i s the change i n t h e l e v e l o f p r i c e s t h a t c a u s e s t h e s u f f e r i n g a t t e n d i n g b u s i n e s s d e p r e s s i o n s and booms, b e c a u s e t h e r e i s i n e q u a l i t y o f g a i n a n d l o s s between v a r i o u s e conomic g r o u p s . The o b j e c t i v e o f p r i c e c o n t r o l i n Canada, t h e n , w o u l d be t h e s m o o t h i n g out of the p e a k s an d v a l l e y s o f our p r i c e h i s t o r y . H a v i n g s t a t e d what m i g h t be t h e o b j e c t i v e s o f m o n e t a r y c o n t r o l i n t h e common i n t e r e s t , i t w i l l n e x t be n e c e s s a r y t o s e e i f t h e i r a t t a i n m e n t i s p o s s i b l e , and i f so, how. L e t u s , t h e n , c o n s i d e r t h e p o s s i b i l i t i e s o f c o n t r o l o f f o r e i g n e xchange. I t h a s g e n e r a l l y been c o n s i d e r e d t h a t t h e b e s t way t o m a i n t a i n s t a b i l i t y i n f o r e i g n exchange i s t o a d h e r e s t r i c t l y t o t h e g o l d s t a n d a r d . B e f o r e t h e W o r l d War most ' g o l d ' c o u n t r i e s m a i n t a i n e d a s y s t e m whereby t h e s t a n d a r d u n i t o f a c c o u n t and o f v a l u e was d e f i n e d by s t a t u t e a s a f i x e d w e i g h t o f g o l d o f a s p e c i f i e d f i n e n e s s ; t h i s g o l d u n i t was made f u l l l e g a l t e n d e r ; t h e r e was f r e e ( u n l i m i t e d ) c o i n a g e o f g o l d ; r e s e r v e s o f g o l d were u s e d t o e n s u r e un- r e s t r i c t e d a n d f r e e c o n v e r t i b i l i t y of a l l p a p e r money i n t o g o l d a t p a r ; t h e r e was f r e e d o m o f exchange back and f o r t h between g o l d i n the f o r m o f money and g o l d i n the i n d u s t r i a l a r t s ; and the i m p o r t a n d e x p o r t , o r t h e i n t e r - n a t i o n a l movement o f g o l d , was u n t r a m m e l l e d . T h i s s y s t e m was r e g a r d e d a s " a u t o m a t i c " . T h e r e was no p o l i t i c a l "management". The number o f u n i t s o f p u r c h a s i n g power 22. depended upon t h e p r o d u c t i v e n e s s o f t h e g o l d m i n e s and t h e e x t e n t t o w h i c h g o l d was u s e d i n t h e i n d u s t r i a l a r t s . E x - change r a t e s were k e p t m o d e r a t e l y s t a b l e by r e a s o n of t h e f a c t t h a t i f t h e y r o s e a b o v e , or f e l l below, t h e s p e c i e p o i n t s , g o l d w o u l d be e x p o r t e d or i m p o r t e d t o e f f e c t i n t e r - n a t i o n a l a d j u s t m e n t o f b a l a n c e s o f payments i n s t e a d o f b u y i n g or s e l l i n g f o r e i g n e x c h a n g e . I t was t h i s " a u t o m a t i c " s y s t e m t h a t h a d b e e n i n f o r c e i n t h e p r o v i n c e of Canada o r i n ;,the D o m i n i o n o f Canada f o r t h e s i x t y y e a r s p r e c e d i n g 1914, and a g a i n f r o m 1916 t o t h e end o f 1928 when o p e r a t i o n s u n d e r t h e F i n a n c e A c t p u s h e d u s o f f t h e edge of t h e g o l d s t a n d a r d . Whether or n o t t h a t was t h e b e s t s y s t e m f o r Canada t h e n , or w o u l d be t h e b e s t now, w i l l n o t be a r g u e d h e r e . What i n t e r e s t s us now i s s i m p l y t h a t s u c h was t h e s y s t e m u s e d , and i n s u c h a way d i d C a n a d i a n and most o t h e r exchange r a t e s o p e r a t e . S i n c e t h e G r e a t War, however, t h e g o l d s t a n d a r d h a s u n d e r g o n e many c h a n g e s . Thus we s p e a k o f g o l d exchange or g o l d b u l l i o n s t a n d a r d s . The m o n e t a r y u n i t of a c o u n t r y h a v i n g s u c h a s t a n d a r d i s s t i l l d e f i n e d a s a f i x e d w e i g h t o f g o l d , b u t t h i s u n i t i s d e r i v e d by l i n k i n g t h e d o m e s t i c u n i t w i t h t h e g o l d u n i t o f some o t h e r c o u n t r y h a v i n g a more o r t h o d o x g o l d s t a n d a r d . Hence u n l i m i t e d c o i n a g e of g o l d i s u s u a l l y p r o h i b i t e d , c o n v e r t i b i l i t y of c u r r e n c y i n t o g o l d i s abandoned, e x p o r t of g o l d i s r e - s t r i c t e d , e t c e t e r a . Then, a g a i n , r e p a r a t i o n s and war d e b t payments, t h e m o n e t a r y and b a n k i n g h a b i t s of a p e o p l e , c e n t r a l bank p o l i c i e s , a r b i t r a r i l y f i x e d e x c h a n g e r a t e s , t a r i f f s , q u o t a s , dumping d u t i e s , and a l l t h e o t h e r i m p e d i - ments t o i n t e r n a t i o n a l t r a d e h a v e r a d i c a l l y m o d i f i e d t h e " a u t o m a t i c " n a t u r e o f t h e g o l d s t a n d a r d . T h e r e f o r e we f i n d t h e M a c M i l l a n Committee s a y i n g , "The s e n s e i n w h i c h t h e g o l d s t a n d a r d can be s a i d t o be a u t o m a t i c i s t h u s v e r y 1 7 l i m i t e d . " x Hence t h e same c o m m i t t e e t a x e s i t f o r g r a n t e d t h a t u n d e r the g o l d s t a n d a r d t h e r e h a s been, and must be, management, b u t t h e a c t i o n t o be t a k e n and t h e p r e - c i s e moment a t w h i c h i t s h o u l d be t a k e n , r e m a i n i n t h e s p h e r e o f d i s c r e t i o n and judgment, i n a word, w i t h "manage- ment"."-^ B r . G u s t a v C a s s e l n o t o n l y m a i n t a i n s t h a t money and e x c h a n g e r a t e s h a v e b e e n managed b u t t h a t a g r e a t d e a l o f our t r o u b l e i s due t o t h e f a c t t h a t t h e y h a v e been b a d l y managed.19 Whatever may have been t h e c a s e i n t h e p a s t , t h e r e f o r e , we c a n n o t now l o o k f o r s t a b i l i t y o f f o r e i g n e x c h a n g e i n any s o - c a l l e d " a u t o m a t i c " s y s t e m . What, t h e n , a r e t h e p o s s i b i l i t i e s o f management o r 17. 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, J u n e , 1931. (The M a c M i l l a n R e p o r t . ) p. 21. 18. I b i d . 19. The C r i s i s i n t h e W o r l d ' s M o n e t a r y System, C h a p t e r I . 24. c o n t r o l of exchange? The M a c M i l l a n Committee s p e a k s o f : " C e r t a i n t e c h n i c a l d e v i c e s f o r d i r e c t l y i n f l u e n - c i n g t h e f o r e i g n e x c h a n g e s , n a m e l y , s a l e s o r p u r c h a s e s o f f o r e i g n "balances ( i . e . s o - c a l l e d " g o l d - e x c h a n g e " m e t h o d s ) , d e a l i n g s i n f o r e i g n e x c hange, a n d s m a l l v a r i a t i o n s i n t h e Bank's b u y i n g p r i c e f o r g o l d . " 2 0 E a r l y i n t h e c o u r s e of t h e G r e a t War t h e B r i t i s h Government d e t e r m i n e d t o s t a b i l i z e t h e r a t e o f e x c h a n g e between s t e r l i n g and t h e A m e r i c a n d o l l a r . D u r i n g t h e f i r s t f e w months a h e a v y demand f o r f u n d s i n E n g l a n d , a s f o r e i g n s e c u r i t i e s were s o l d , l e d to a h i g h exchange r a t e i n New Y o r k . Then t h e h e a v y i m p o r t s o f g o o d s f r o m t h e U n i t e d S t a t e s l o w e r e d the r a t e i n New Y o r k . G o l d c o u l d n o t be s h i p p e d f r o m E n g l a n d , s o s t e r l i n g f e l l f u r t h e r i n t h e U n i t e d S t a t e s . Then t h e B r i t i s h Government, by p u r c h a s i n g A m e r i c a n s e c u r i - t i e s i n E n g l a n d and by n e g o t i a t i n g a l a r g e l o a n i n t h e U n i t e d S t a t e s , was a b l e t o "peg" t h e pound a t $4.76. T h e r e t h e pound was k e p t u n t i l a f t e r t h e war. More r e c e n t l y when s t e r l i n g d r o p p e d r a p i d l y i n New Y o r k as a r e s u l t o f B r i t a i n g o i n g o f f t h e g o l d s t a n d a r d i n September, 1931, the B r i t i s h Government e s t a b l i s h e d a n "Exchange E q u a l i z a t i o n F u n d " t o be u s e d , a s t h e name s u g g e s t s , t o m o d e r a t e t h e f l u c t u a t i o n s between the pound and t h e d o l l a r . I n f o r m a t i o n i s l a c k i n g as t o t h e d e g r e e o f s u c c e s s o r f a i l u r e o f t h e 20• R e p o r t of the Committee on F i n a n c e and I n d u s t r y , London, J u n e . 1931, (The M a c M i l l a n R e p o r t ) , p . 152, S e c . 356, ( 4 ) . 25. p l a n , b u t a C a n a d i a n b a n k e r , who doe s n o t w i s h t o be named, p r e d i c t s t h e f a i l u r e of an " e x p e r i m e n t w h i c h w i l l h a v e c o s t upwards o f $150,000,000". Yi/hether t h i s b a n k e r means t h a t t h e f l u c t u a t i o n s w i l l n o t have been m i t i g a t e d , o r t h e f u n d w i l l n o t show a p r o f i t , or b o t h , he d o e s n o t s a y . I t i s n o t our p u r p o s e a t t h i s s t a g e t o p a s s judgment upon t h e wisdom, or o t h e r w i s e , o f a t t e m p t s t o c o n t r o l f o r e i g n e x - change r a t e s . I t i s i n t e r e s t i n g t o n o t e h e r e , however, t h a t D r . C a s s e l , s p e a k i n g to t h e R o y a l I n s t i t u t e o f I n t e r n a t i o n a l A f f a i r s , London, i n September, 1932, on " M o n e t a r y R e c o n - s t r u c t i o n " , s a i d : " 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 wisdom of any e n d e a v o u r 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 e x change i s t o 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 of y o u r own c u r r e n c y and t h e v a l u e o f some o t h e r c u r r e n c y . Y o u may be 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 you c a n n o t be 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 t h e o t h e r hand Mr. A. F. W. P l u m p t r e , l e c t u r e r on money and p r i c e s a t T o r o n t o U n i v e r s i t y , i n h i s r e c e n t w r i t i n g s i n s u p p o r t of a c e n t r a l bank f o r Canada s a y s : " T h e r e f o r e , a p r o p o s e d C a n a d i a n 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 n o t e 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. C a s s e l , D r . G u s t a v . I n t e r n a t i o n a l A f f a i r s , September, 1932, p . 665. 22. P l u m p t r e , A. F. W. A C e n t r a l Bank f o r Canada, p . 20. 26. I t c a n s c a r c e l y 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 t h a t Canada has made up h e r o f f i c i a l mind on t h e r e l a t i v e m e r i t s o f c o n t r o l o r l a i s s e z - f a i r e w i t h r e s p e c t t o exch a n g e r a t e s . G e n e r a l l y she h a s been b l i s s f u l l y u n c o n s c i o u s even o f t h e e x i s t e n c e o f s u c h a p r o b l e m . L a t e i n 1931, however, t h e government c a l l e d a m e e t i n g o f Cana.dian b a n k e r s t o c o n s i d e r the a d v i s a b i l i t y o f o r g a n i z i n g a f o r e i g n e x c h a n g e m a r k e t . The i d e a was t h a t Canada m i g h t t h e r e b y be e n a b l e d t o make h e r own exchange r a t e s w i t h o t h e r c o u n t r i e s i n d e p e n d e n t of New Y o r k and t h u s p r e v e n t the l a t t e r f r o m d e p r e c i a t i n g C a n a d i a n money. The m e e t i n g e v i d e n t l y d e c i d e d t h a t t h e p r o p o s a l was u n w i s e , b u t a n o t h e r p l a n was d e c i d e d upon. T h i s was t o e a s e t h e p r e s s u r e on t h e exchange r a t e by p r e - 24 v e n t i n g t h e e x p o r t of C a n a d i a n c a p i t a l . An u n o f f i c i a l a t t e m p t was made t o p e r s u a d e C a n a d i a n s n o t t o buy f o r e i g n s e c u r i t i e s a n d n o t t o r e c a l l C a n a d i a n s e c u r i t i e s f r o m a b r o a d by p u r c h a s e . To a c e r t a i n e x t e n t , t h e r e f o r e , f o r e i g n f u n d s were r e t a i n e d i n Canada. T h i s a t t e m p t a t c o n t r o l of t h e exchange was g i v e n up, however, a f t e r a few weeks o f h a l f - h e a r t e d e f f o r t . A t p r e s e n t o f f i c i a l e f f o r t s t o w a r d s c o n t r o l seem t o be l i m i t e d t o e x h o r t a t i o n s 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 by C. A. C u r t i s , i n "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 " . 24. The M a i l and E m p i r e , T o r o n t o , December 22, 1 9 3 1 — q u o t e d a g a i n by C. A. C u r t i s . 27. v i r t u e s o f " p r o u d " or " sound" money w i t h t h e a p p a r e n t hope t h a t c o n f i d e n c e i n our c r e d i t w i l l "be t h e r e b y i n s t i l l e d i n t h e minds of f o r e i g n e r s a n d f o r t i t u d e and f a i t h w i l l c o n - t i n u e to be an a t t r i b u t e of t h e C a n a d i a n mind, t h e g r o u n d s f o r s u c h p r i d e , s o u n d n e s s , a n d f a i t h b e i n g c o n v e n i e n t l y l e f t t o t h e i m a g i n a t i o n . I n the p a s t i t seems n o t t o h a v e been the p o l i c y of e i t h e r t h e banks or t h e government t o e x e r c i s e c o n t r o l o v e r o u r exchange r a t e s . U n t i l t h e p a s s a g e o f t h e F i n a n c e A c t i n 1914 s u c h m a t t e r s were e n t i r e l y i n t h e h ands o f t h e banks, but t h e r e i s no e v i d e n c e t h a t t h e y e x e r c i s e d t h e i r powers i n t h i s r e s p e c t . S i n c e 1914 t h e r e s p o n s i b i l i t y f o r s u c h c o n t r o l has r e s t e d w i t h t h e D e p a r t m e n t o f F i n a n c e , b u t t h e r e h a s b e e n no m a n i p u l a t i o n o f i n t e r e s t o r d i s c o u n t r a t e s w i t h the o b j e c t o f r e g u l a t i n g t h e e x c h a n g e . N e i t h e r do the banks t o - d a y p r a c t i s e s u c h c o n t r o l . R e c e n t l y an a u t h o r i t a t i v e spokesman o f e a c h o f f o u r of our l a r g e s t banks was a s k e d t h e q u e s t i o n : "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 o r 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 e x c h a n g e ? " W i t h one s l i g h t m o d i f i c a t i o n t h e answer was a n u n q u a l i f i e d , "No". One answer went on to show t h a t s u c h an a t t e m p t a t r e g u l a t i o n w o u l d be f r u i t l e s s and p o s s i b l y h a r m f u l . I n d e e d C a n a d i a n b a n k e r s g e n e r a l l y seem t o s e e g r e a t d i f f i c u l t i e s 28. and l i t t l e hope o f s u c c e s s i n a t t e m p t s a t e x c h a n g e c o n t r o l . I n t h e F i n a n c i a l P o s t S 5 o f T o r o n t o r e c e n t l y h a v e "been ap- p e a r i n g a number of a r t i c l e s i n o p p o s i t i o n t o the s u g g e s t i o n o f a c e n t r a l bank, by one who s i g n s h i m s e l f , "A C a n a d i a n B a n k e r " , and who c l a i m s to e x p r e s s t h e v i e w s o f 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 . One whole a r t i c l e , p r a c t i - c a l l y , i s d e v o t e d t o d i s c o u r a g e m e n t of the i d e a o f e xchange c o n t r o l . Some o f t h e e f f e c t s o f c e n t r a l bank c o n t r o l of t h e f o r e i g n e x c h a n g e s s h o u l d be c o n s i d e r e d . I t h a s f r e q u e n t l y t h e e f f e c t of a p r o t e c t i v e t a r i f f . I t i s l i k e l y t o c r e a t e o r p e r p e t u a t e a c o n d i t i o n of d i s - e q u i l i b r i u m i n i n t e r n a t i o n a l p r i c e l e v e l s . I n a d d i t i o n , t o t h e e x t e n t t h a t e x c h a n g e c o n t r o l p r o t e c t s c e r t a i n i n d u s t r i e s , i t i s open t o t h e f a m i l i a r o b j e c t i o n s to t a r i f f p r o t e c t i o n . The most e f f e c t i v e e x p o r t i n d u s t r i e s a r e h a n d i c a p p e d b e c a u s e t h e r e s t r i c t i o n s r e d u c e f o r e i g n demand by r e d u c i n g t h e means of payment and b e c a u s e t h e y may be p l a c e d a t a d i s a d v a n t a g e i n s e c u r i n g raw m a t e r i a l s . The r e d u c t i o n i n t o t a l t r a d e r e d u c e s s p e c i a l i z a t i o n , and t h e u n i t c o s t o f t r a n s a c t i n g a s m a l l e r volume o f t r a d e w i l l p r o b a b l y be i n c r e a s e d . The u s e o f e xchange r e s t r i c t i o n s t o f o r c e e x p o r t s and r e s i s t i m p o r t s £5. F i n a n c i a l P o s t , T o r o n t o , J a n u a r y 7, 1933. 29 may e x e r t a d e p r e s s i n g i n f l u e n c e on commodity p r i c e s and i n j u r e t h e v e r y c o u n t r y t h a t imposes t h e r e s t r i c t i o n s . I f a c o u n t r y has an i n t e r n a t i o n a l s t a n d a r d , s u c h a s the g o l d s t a n d a r d , i t s m o n e t a r y c o n t r o l a g e n c y w i l l l i k e l y c o n s i d e r t h a t i t s f i r s t and f u n d a m e n t a l d u t y i s to m a i n t a i n the d o m e s t i c c u r r e n c y a t p a r w i t h g o l d . T h i s may mean t h a t t h e d o m e s t i c c u r r e n c y w i l l b e m a i n t a i n e d a t a n a r t i f i c i a l l y h i g h v a l u e by r e s t r i c t i v e l e g i s l a t i o n . I f so, e x p o r t s w i l l be d i s c o u r a g e d . To t h e e x t e n t t h a t t h e exchange r a t e p r e - s c r i b e d o v e r v a l u e s t h e l o c a l c u r r e n c y , a s i s u s u a l l y t h e c a s e , t h e e f f e c t i s t o r a i s e t h e p r i c e s o f c o m m o d i t i e s t o f o r e i g n b u y e r s , r e l a t i v e t o t h e p r i c e s t h a t w o u l d o t h e r w i s e p r e v a i l . E x p o r t s a r e t h u s impeded. F o r i n s t a n c e , a f t e r E n g l a n d r e t u r n e d to t h e g o l d s t a n d a r d i n 1925, she u s e d t h e movement o f exchange r a t e s a s a g u i d e t o bank p o l i c y , and economic p o l i c y had t o c o n f o r m . The a r t i f i c i a l l y h i g h v a l u a t i o n w h i c h she p l a c e d upon h e r c u r r e n c y p u t h e r a t a d i s a d v a n t a g e i n i n t e r n a t i o n a l t r a d e . D e p r e s s i o n and u n - employment were t h e r e b y i n t e n s i f i e d . D i s c o u n t r a t e r e g u l a t i o n i s f a i r e r t h a n exchange r e - s t r i c t i o n . I t does n o t c a u s e anyone t o be a r b i t r a r i l y ex- e l u d e d f r o m o b t a i n i n g f u n d s . Those whose n e e d and e c o n o m i c s t r e n g t h a r e t h e g r e a t e s t a r e a s s u r e d o f accommodation by t h e v e r y f a c t t h a t t h e l e s s u r g e n t demand i s e x c l u d e d by 30. t h e h i g h e r r a t e e x a c t e d . E x c h a n g e c o n t r o l i s s u b j e c t t o t h e a r b i t r a r y judgment o f i n d i v i d u a l s . The w e a k e s t , r a t h e r t h a n t h e s t r o n g e s t , may s u r v i v e . B e s i d e s , e xchange c o n t r o l i s o f t e n t i n c t u r e d w i t h m e r c a n t i l i s m , n a t i o n a l i s m , and t h e s e l f i s h i n t e r e s t o f i n f l u e n t i a l i n d i v i d u a l s . I f t h e r e e x i s t e d an e f f e c t i v e i n t e r n a t i o n a l bank, i f the w o r l d ' s 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 c o - o p e r a t i o n , i f we had an a g r e e d e s t i m a t e of t h e p r e s e n t s t o c k o f g o l d a v a i l a b l e f o r m o n e t a r y p u r p o s e s , and i f t h e amount of new g o l d l i k e l y t o be added a n n u a l l y were known, t h e n g o l d c o u l d be s o u s e d a s t o keep i t s commodity p u r - c h a s i n g power f r o m v a r y i n g g r e a t l y . But t h e s e c o n d i t i o n s do n o t e x i s t . Hence the v a l u e o f g o l d i s d e t e r m i n e d b y t h e m o n e t a r y p o l i c i e s o f t h e l e a d i n g ' g o l d ' c o u n t r i e s . I f , t h e n , Canada c o n t r o l s h e r e x c h a n g e t o m a i n t a i n h e r money s t a b l e i n t e r m s of g o l d , h e r economic p o l i c i e s have t o c o n f o r m , and h e r p r i c e l e v e l f l u c t u a t e s w i t h the g o l d p r i c e s o f t h e l e a d i n g ' g o l d ' c o u n t r y — t h e U n i t e d S t a t e s . The m o n e t a r y p o l i c y o f t h e U n i t e d S t a t e s i n r e c e n t y e a r s has been s u c h a s t o c a u s e p r o g r e s s i v e d e p r e s s i o n o f commodity p r i c e s . V/hatever t h e m e r i t s o r d e m e r i t s o f a t t e m p t s a t c o n t r o l o f f o r e i g n exchange may be, t h e f a c t i s t h a t p r a c t i c a l l y n o t h i n g has b e e n a t t e m p t e d i n t h a t c o n n e c t i o n i n Canada. 31. Should 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 i n the f u t u r e , study- s h o u l d be g i v e n t o the p o s s i b i l i t i e s i n the f o l l o w i n g * ^ - a r b i t r a g e , f o r w a r d b u y i n g , the b a l a n c i n g o f the budget as a r e g u l a r p o l i c y i n n o r m a l t i m e s , a normal b a l a n c e between i m p o r t s 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 bank 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 , and r e g u l a - t i o n of the q u a n t i t y of home c u r r e n c y and o f the domesti c p r i c e l e v e l . H a v ing now c o n s i d e r e d some of the 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 c o n s i d e r p r i c e r e g u l a t i o n i n the same way. Here a g a i n we have a s u b j e c t t h a t i s e x t r e m e l y c o n t r o v e r s i a l . I n the Q u a n t i t y Theory of Money we f i n d e x p r e s s e d t h e r e l a t i o n between money, c r e d i t and p r i c e s . S t a t e d s i m p l y t h i s t h e o r y i s t h a t , o t h e r t h i n g s r e m a i n i n g the same, t h e p u r c h a s i n g power o f money and c r e d i t v a r i e s i n v e r s e l y w i t h the q u a n t i t y i n c i r c u l a t i o n . I t i s now acknowledged by i t s s u p p o r t e r s t h a t many c i r c u m - s t a n c e s e n t e r i n — s u c h as b u s i n e s s p s y c h o l o g y , t h e use t o 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 , t he q u a n t i t y of commodities, e t c e t e r a — t o d i s t o r t the r e l a t i o n s h i p e x p ressed i n t h i s t h e o r y . A t l e a s t i t i s t r u e , however, as L i o n e l D. E d i e s a y s : E-'6» l a r g e l y based on the s u g g e s t i o n s of L i o n e l D. E d i e i n "Money, Bank C r e d i t and P r i c e s " , p. 56. 32. "That 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 e l e m e n t a r y 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 have no key t o any o f the o t h e r s . " 2 7 T h i s t h e o r y has an i m p o r t a n t b e a r i n g upon t h e r e l a t i o n between t h e g o l d s t a n d a r d and i n t e r n a t i o n a l p r i c e s . Among th e c a u s e s t h a t a r e t e n d i n g t o a f f e c t t h e g e n e r a l l e v e l o f p r i c e s i s a f l u c t u a t i o n i n t h e r a t i o between t h e s u p p l y o f and t h e demand f o r g o l d . Those c o u n t r i e s w h i c h a d h e r e t o t h e g o l d s t a n d a r d have t i e d t h e i r f o r t u n e s t o t h e unknown f a c t o r o f t h e f u t u r e demand f o r and s u p p l y o f g o l d . G o l d as a money b a s i s has a c h i e v e d s i g n i f i c a n c e by r e a s o n o f i t s s c a r c i t y . The most i m p o r t a n t demand f o r i t i s f o r m o n e t a r y u s e . I t i s of g r e a t i m p o r t a n c e , t h e n , t h a t c o n s i d e r a t i o n s h o u l d be g i v e n t o t h e q u a n t i t y of g o l d a v a i l a b l e f o r m o n e t a r y p u r p o s e s . go A c c o r d i n g t o t h e c a l c u l a t i o n s made by Mr. J o s e p h K i t c h i n i n 1931, t h e n e t a n n u a l i n c r e a s e o f m o n e t a r y g o l d n e c e s s a r y t o m a i n t a i n s t a b i l i t y o f t h e commodity p r i c e l e v e l w ould be f r o m 3.1 p e r c e n t , t o 3.4 p e r c e n t , i f t h e w o r l d ' s r a t e o f d e v elopment d i d n o t slow down. On t h e o t h e r hand he e s t i m a t e d t h a t f o r the t w e n t y y e a r s f o l l o w i n g 27. E d i e , L i o n e l D. Money, Bank C r e d i t and P r i c e s , p . 188. 28. K i t c h i n , J o s e p h . The I n t e r n a t i o n a l C o l d P r o b l e m , p . 68. 33. 1930 t h e p r o b a b l e n e t i n c r e a s e w o u l d be 1 l / 2 p e r c e n t . A s s u m i n g , t h e n , t h a t .the e x i s t i n g a v a i l a b l e s u p p l y o f m o n e t a r y g o l d i s n o t g r e a t , and t h a t f u t u r e p r o d u c t i o n i s more l i x e l y to d e c r e a s e t h a n i n c r e a s e , o n l y d r a s t i c e c o n o m i e s i n t h e u s e o f g o l d as a b a s i s f o r t h e s u p e r - s t r u c t u r e o f c r e d i t c a n p r e v e n t a s t e a d y f a l l i n commodity p r i c e s . I t w i l l be w e l l , t h e n , t o examine some of t h e f a c t o r s b e a r i n g on t h e u s e o f g o l d i n r e c e n t y e a r s . A tremendous s a v i n g h a s t a x e n p l a c e owing to t h e d e c r e a s e o f g o l d c o i n s i n c i r c u l a t i o n and t h e v a s t i n c r e a s e i n t h e u s e o f c h e q u e s and c r e d i t g e n e r a l l y . On t h e o t h e r hand t h e r e t u r n o f so many c o u n t r i e s to t h e g o l d s t a n d a r d f o l l o w i n g t h e war i n c r e a s e d g r e a t l y t h e w o r l d ' s t o t a l banx r e s e r v e r e q u i r e - ments. A c c o r d i n g to M. C h a r l e s R i s t ? 9 d u r i n g t h e f o u r y e a r s c e n t e r i n g a r o u n d 1925, t w e n t y new c o u n t r i e s c o n t r i b u t e d t o t h e e x t e n s i o n of t h e a r e a o f the g o l d s t a n d a r d . P e r h a p s t h e g r e a t e s t c a u s e of t h e i n e f f i c i e n t u s e o f g o l d , however, i s t o be f o u n d i n i t s m a l - d i s t r i b u t i o n . The payment o f war d e b t s a n d r e p a r a t i o n s , and t h e g r o w t h o f n a t i o n a l i s t e c o nomic p o l i c i e s , t o g e t h e r w i t h t h e a b s e n c e o f any g r e a t d e g r e e o f i n t e r n a t i o n a l c o - o p e r a t i o n , b r o u g h t a b o u t 29. R i s t , C h a r l e s . The I n t e r n a t i o n a l G o l d P r o b l e m , p . 195. 34 movements of g o l d on an u n p r e c e d e n t e d s c a l e . The n e t r e s u l t was t h a t t h e U n i t e d S t a t e s and F r a n c e a c q u i r e d f a r more t h a n t h e i r p r o p e r s h a r e of t h e w o r l d ' s g o l d s u p p l y , w i t h t h e c o n s e q u e n c e t h a t o t h e r n a t i o n s , s u c h as Germany and G r e a t B r i t a i n , had t o o l i t t l e . G i v e n a l i m i t e d s u p p l y o f g o l d t o b e g i n w i t h ; a d e c r e a s e i n p r o d u c t i o n o f new g o l d ; an i n c r e a s e i n c e n t r a l bank r e s e r v e r e q u i r e m e n t s ; huge i n t e r n a t i o n a l t r a n s f e r s o f f u n d s n e c e s s i t a t e d by payments o f war d e b t s and r e p a r a t i o n s ; i m p e d i m e n t s t o t h e f r e e movement of g o o d s owing t o n a t i o n a - l i s t i c economic p o l i c i e s ; and t h e m a l - d i s t r i b u t i o n of g o l d ; i t i s n o t s u r p r i s i n g t h a t a d r a s t i c f a l l i n t h e p r i c e l e v e l t o o k p l a c e , and many c o u n t r i e s were f o r c e d o f f t h e g o l d s t a n d a r d . I f , t h e n , the g o l d s t a n d a r d i s t o be . m a i n t a i n e d i n t h e f u t u r e ; i f t h o s e c o u n t r i e s w h i c h have abandoned i t a r e t o r e t u r n t o i t ; and i f t h e r e i s , a t t h e same t i m e , t o be s t a b i l i t y i n commodity p r i c e s , many of t h o s e c a u s e s c i t e d above as r e s p o n s i b l e f o r t h e p r e s e n t s i t u a t i o n , w i l l h a v e t o be removed. I n a d d i t i o n t o the e c o n o m i e s i n the u s e o f g o l d a l r e a d y s u g g e s t e d a s p o s s i b l e i n t h e a b o v e d i s c u s s i o n , t h e r e r e m a i n s t h e g r e a t s a v i n g t h a t c o u l d be made i f b a n k e r s and t h e p u b l i c g e n e r a l l y u n d e r s t o o d t h e t r u e f u n c t i o n o f g o l d t o - d a y . G o l d i s no l o n g e r n e c e s s a r y a s b a c k i n g f o r n o t e s . F u r t h e r m o r e 35 i t i s n o t now i n r e a l i t y u s e d as s u c h . Y e t c i t i z e n s who c a n not g e t g o l d f o r n o t e s , and b a n k e r s who have n o t the g o l d t o g i v e f o r n o t e s , s t i l l i m a g i n e t h a t g o l d b a c k i n g i s d e s i r a b l e . On t h i s p o i n t i t w i l l be w e l l t o h e a r t h e views o f two eminent e c o n o m i s t s . S i r C e c i l B l a c k e t t s a y s : "The i d e a t h a t y o u keep g o l d f o r t h e p u r p o s e o f making t h e i n t e r n a l c u r r e n c y o f a n y c o u n t r y , o r a n y W e s t e r n c o u n t r y 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 ought t o be e x p l o d e d r i g h t nway. I t w o u l d be a tremendous 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 of 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 . . . . . . and 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 of c u r r e n c y t h a t - i s o u t . "The amount o f g o l d t h a t a c e n t r a l bank 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 the 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 any g i v e n moment. T h a t ought 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 g o l d r e s e r v e 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 o f payments t h a t i s a g a i n s t t h a t country." 3 0 M r . J . M. Keynes s a y s : "...» 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 have 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 i s s u e 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 demands t h a t a c o u n t r y may be s u b j e c t t o i n t e r - n a t i o n a l l y b e f o r e i t c a n t a k e o t h e r measures o f r e g u l a t i o n "31 I t i s v i t a l l y i m p o r t a n t , t h e n , t h a t t h e p r o p e r f u n c t i o n o f g o l d s h o u l d be u n d e r s t o o d . I t s m i s u s e had b e e n a l e a d i n g 30. B l a c k e t t , S i r C e c i l . The I n t e r n a t i o n a l G o l d P r o b l e m . P. 179. 31. K e y n e s , J . M. The I n t e r n a t i o n a l G o l d P r o b l e m , p . 186. 36. c a u s e o f t h e r e c e n t d r a s t i c f a l l i n commodity p r i c e s . Y/ith i n t e l l i g e n t management, and a r e a s o n a b l e d e g r e e o f c o - o p e r a t i o n , however, the c e n t r a l b a n k s o f t h e w o r l d c o u l d d i c t a t e g o l d ' s v a l u e i n terms o f o t h e r c o m m o d i t i e s . I n s h o r t , w i s e m o n e t a r y p o l i c y c o u l d m a i n t a i n a r e a s o n a b l e d e g r e e o f s t a b i l i t y i n i n t e r n a t i o n a l p r i c e s . B e f o r e g o i n g on to e x p l o r e t h e means by w h i c h c o n t r o l o f p r i c e s i s a t t e m p t e d i t may be w e l l t o examine t h e e v i - d ence b o t h o f t h e opponent and of t h e a d v o c a t e o f s u c h c o n t r o l . Owing p a r t l y , no d o u b t , t o t h e f a c t t h a t a t i m e o f d e p r e s s i o n makes r e f o r m s p o p u l a r , t h e r e a r e n o t as many w i t n e s s e s i n d e f e n c e of o u r p r e s e n t s y s t e m a s t h e r e a r e p r o p o n e n t s of g r e a t e r p r i c e r e g u l a t i o n . One o f t h e s t r o n g e s t c a s e s made a g a i n s t c e n t r a l bank p r i c e c o n t r o l i s t h a t made by a v e r y n o t e d A m e r i c a n b a n k e r , D r . B e n j a m i n M. A n d e r s o n , E c o n o m i s t o f t h e Chase N a t i o n a l Bank o f t h e C i t y of New 32 Y o r k . I n h i s bank b u l l e t i n o f May 16, 1932' , he a t t a c k e d t h e G o l d s b o r o u g h B i l l b e c a u s e i t d i r e c t e d t h e F e d e r a l Re- s e r v e a u t h o r i t i e s to r a i s e and s t a b i l i z e t h e g e n e r a l a v e r a g e o f commodity p r i c e s . A f t e r d e s c r i b i n g " t h e o l d - f a s h i o n e d d o c t r i n e " r e l a t i v e t o c e n t r a l bank p o l i c y he s a y s : 32. The Chase Economic B u l l e t i n , May 16, 1932. The G o l d s - b o r o u g h B i l l and t h e Government S e c u r i t y P u r c h a s e s o f t h e F e d e r a l R e s e r v e B a n k s . 37. "VYhereas t h e new t h e o r y a s k s c e n t r a l banks t o s t a b i l i z e t h e c o m m o d i t i e s m a r k e t , I m a i n t a i n t h a t t h e y 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 he goe s on to ask what c e n t r a l banks c a n do w i t h r e s p e c t t o commodity p r i c e s , and a n s w e r s : " 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 and c a p i t a l m a r k e t s . Second, 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 volume of money and 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 . " T h e r e 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 b a c k 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 e s p e c i a l l y t h e 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 , as 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 grow i n s t e a d o f s e l l i n g o f f the a n n u a l i n c r e a s e , (5) New Bank 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 , b a s e d on e x c e s s bank r e s e r v e s , w h i c h may grow out 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 c r e d i t . I t i s t h e a b u s e of t h i s s o u r c e of c a p i t a l w h i c h i s r e s p o n s i b l e f o r our p r e s e n t f i n a n c i a l p r o b l e m s . " 3 4 C o n t i n u i n g h i s argument he a s k s v/hat t h e power o f c e n t r a l bank p o l i c y i s w i t h r e s p e c t t o money and t h e c a p i t a l m a r k e t , and a n s w e r s : " 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 t h e c a p i t a l m a r k e t o n l y i n d i r e c t l y a s i t f i r s t a f f e c t s t h e money m a r k e t . S e c o n d , 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 can a f f e c t o n l y t h e s u p p l y 33. The Chase E c o n o m i c B u l l e t i n , May 16, 1932, p . 4 34. The Chase E c o n o m i c B u l l e t i n , May 16, 1932, p . 5 " s i d e . 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 mai n s o u r c e s of c a p i t a l , our number (5) a b o v e . . . "35 Then he f o l l o w s up h i s argument w i t h : " I f i t i s u n r e a s o n a b l e t o a s k a c e n t r a l b ank t o f i x money r a t e s and i n t e r e s t r a t e s , f a r more u n - r e a s o n a b l e i s i t to a s k a c e n t r a l bank: t o f i x th e l e v e l o f commodity p r i c e s . C e n t r a l 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 money and 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 one 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 no 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 of t h e money and c a p i t a l m a r k e t s , c a n t h e c e n t r a l b a n k s i n f l u e n c e com- m 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 s e c o n d or t h i r d remove and o f i n d e t e r m i n a t e d e g r e e . " 3 6 The same w r i t e r t h e n g o e s on to t r y t o show t h a t t h e w h o l e Q u a n t i t y T h e o r y of Money i s f a l l a c i o u s . 3 7 Commenting i n a p p r o v a l u p o n Dr. A n d e r s o n ' s argument, a p r o m i n e n t C a n a d i a n b a n k e r , who d o e s n o t w i s h t o be named, s a y s : " W i t h r e g a r d t o t h e 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 g o i n g 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 of 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 en 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 . " W i t h r e s p e c t t o t h e u s e o f t h e bank r a t e a s a method o f c o n t r o l t h e same b a n k e r q u o t e d V i s c o u n t Snowden a s f o l l o w s : "The e f f e c t of t h e Bank R a t e on i n d u s t r y i s much e x a g g e r a t e d . I have s t u d i e d t h e r e l a t i o n of t h e 35. The Chase E c o n o m i c B u l l e t i n , May 16, 193S, p . 6 36. I b i d . , p . 8. 37. I b i d . , p . 9. 39. "Bank R a t e t o t h e volume o f i n d u s t r i a l o u t p u t 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 t o f i n d any c o n n e c t i o n . " 3 8 I n Canada our b a n k e r s seem to be a l m o s t a u n i t i n op- p o s i t i o n t o a n y t h i n g i n t h e n a t u r e of p r i c e c o n t r o l t h r o u g h t h e m o n e t a r y a g e n c y . "A C a n a d i a n B a n k e r " , who r e p r e s e n t s t h e v i e w s 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 , w r i t i n g i n a December, 1938, i s s u e o f t h e F i n a n c i a l P o s t of T o r o n t o , s a y s : "We h a v e been s u r f e i t e d i n t h e p a s t f e w 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 more 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 e a s y to e x e r c i s e i n c o u n t r i e s s u c h as Canada where t h e t o t a l t r a d e i s s o v i t a l l y a f f e c t e d by t h e volume and v a l u e of the e x p o r t s o f one or two c o m m o d i t i e s and where t h e s e c o m m o d i t i e s may v a r y so g r e a t l y i n p r i c e and i n t h e q u a n t i t y p r o d u c e d , t h a t i f h a r v e s t s a r e g o c d a.nd p r i c e s h i g h a t t e m p t s t o c o n t r a c t a r e n o t 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 and 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 to pump money i n t o c i r c u l a t i o n " w i l l be v e r y e f f e c t i v e . " 3 9 I n r e c e n t weeks p r a c t i c a l l y a l l t h e C a n a d i a n b a n k s h a v e h e l d t h e i r a n n u a l m e e t i n g s . A t t h e s e m e e t i n g s t h e P r e s i d e n t s a n d G e n e r a l M a n a g e r s have p r o n o u n c e d t h e i r v i e w s upon many t o p i c s o f c u r r e n t i n t e r e s t . They a r e unanimous i n t h e i r o p p o s i t i o n t o i n f l a t i o n a s a means o f r a i s i n g t h e p r i c e 38. V i s c o u n t Snowden. London S p e c t a t o r , O c t o b e r 8, 1932 39. F i n a n c i a l P o s t , December 17, 1932. l e v e l . F o r i n s t a n c e , s t e r n o p p o s i t i o n was v o i c e d by S i r C h a r l e s G o r d o n ^ , P r e s i d e n t of t h e Bank o f M o n t r e a l , a t t h e a n n u a l m e e t i n g i n M o n t r e a l on December 5, 1932. Mr. 1/7. G. Gooderham, P r e s i d e n t o f t h e Bank o f T o r o n t o , s a y s : " 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 t e m p o r a r y 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 dose 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 , and who i s t o s a y where the l i n e s h o u l d be drawn? I n any e v e n t i n f l a t i o n i s n o t t h e remedy f o r d e p r e s s e d p r i c e s . "41 Mr. M. W. W i l s o n , G e n e r a l Manager o f t h e R o y a l Bank o f Canada, a d m i t s t h e n e e d o f p r i c e a d j u s t m e n t t o - d a y , but d o e s n o t s a y how i t c o u l d be b r o u g h t a b o u t : "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 i m p o r t a n c e o f r e s t o r i n g t h e w o r l d p r i c e 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 a s t h e d e p r e s s i o n c o n t i n u e s . " 4 2 I n 1928, t h e P r e s i d e n t o f 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 , g i v i n g e v i d e n c e b e f o r e the B a n k i n g and Commerce Com- m i t t e e a t Ottawa s a i d : "The Banker i s p r i m a r i l y and m a i n l y c o n c e r n e d about 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 a b o u t t h e volume o f c r e d i t i n t h e c o u n t r y n o r t h e e f f e c t w h i c h the g r a n t i n g o r w i t h h o l d i n g o f c r e d i t i n t h e p a r t i c u l a r 46* V a n c o u v e r D a i l y P r o v i n c e , V a n c o u v e r , B. C , December 5, 1932. 41. The F i n a n c i a l P o s t , T o r o n t o , J a n u a r y 21, 1933. 42. I b i d . 41. " i n s t a n c e w i l l h a v e upon t h e p r i c e l e v e l of c o m m o d i t i e s i n t h e c o u n t r y . " 4 3 A s h o r t t i m e ago a r e s p o n s i b l e o f f i c i a l o f e a c h o f f o u r of our l a r g e s t C a n a d i a n b a n k s was a s k e d t h e q u e s t i o n : "Does y o u r bank i n any way, i n c o - o p e r a t i o n w i t h o t h e r banks and t h e D e p a r t m e n t o f F i n a n c e , a t t e m p t t o i n f l u e n c e commodity p r i c e s ? " The unanimous answer was, "No". A t t h e same t i m e t h e y w e r e a s k e d : " I n y o u r e s t i m a t i o n c o u l d commodity p r i c e s and f o r e i g n exchange be r e g u l a t e d t o a w o r t h - w 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 by some a g e n c y o f t h e g o v e r n m e n t ? " W i t h one e x c e p t i o n t h e answer was, "No". On t h e e v i d e n c e t h a t has b e e n c i t e d above i t i s c l e a r t h a t t h e banks o f Canada t o - d a y p u r s u e no c o n s c i o u s p o l i c y w i t h r e s p e c t t o t h e volume o f money and c r e d i t a n d h a v e no f a i t h i n p o s i t i v e m o n e t a r y a c t i o n f o r t h e c o n t r o l o f p r i c e s . We s h a l l now s t a t e the c a s e f o r c o n t r o l o f t h e p r i c e l e v e l . I n h i s p r i z e e s s a y e n t i t l e d , " P r i c e S t a b i l i z a t i o n " , p r i n t e d i n t h e May, 1932, l e t t e r of t h e R o y a l Bank of Canada, Mr. J . F. C l a r k , a s t u d e n t o f M c G i l l U n i v e r s i t y , s a y s : " S i r J o s i a h Stamp h a s s t i g m a t i z e d t h e i n s t a - b i l i t y o f t h e v a l u e o f t h e m o n e t a r y u n i t a s t h e g r e a t e s t e v i l o f our t i m e . The r e c e n t c a t a s t r o p h i c f a l l i n p r i c e s h a s s h a k e n t h e v e r y f o u n d a t i o n s o f o u r 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 t h e . C o m m i t t e e o f t h e House o f Commons on B a n k i n g and Commerce, 1928. 42 " e c o n o m i c s t r u c t u r e . I t i s a b s o l u t e l y i m p e r a - t i v e , i f modern c i v i l i z a t i o n i s t o e n d u r e , t o s o l v e t h e p r o b l e m o f p r e v e n t i n g d r a s t i c e l i a n g e s i n t h e p r i c e l e v e l . " 4 4 A f t e r r e l a t i n g some of t h e d i f f i c u l t i e s and some of t h e a c h i e v e m e n t s o f c e n t r a l bank e f f o r t s t o c o n t r o l p r i c e s t h r o u g h c o n t r o l o f money and c r e d i t t h e same w r i t e r s a y s : "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 of 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 I n t h e M a r c h , 1932, M o n t h l y L e t t e r o f t h e R o y a l Bank o f Canada, t h e r e a p p e a r e x t e n s i v e q u o t a t i o n s f r o m R i g h t Hon. R e g i n a l d M c K e n n a 4 6 , Chairm a n o f t h e M i d l a n d Bank, E n g l a n d , w h i c h have t h e a p p r o v a l of t h e w r i t e r o f t h e l e t t e r . Mr. McKenna c l a i m s t h a t i f p e o p l e a r e n o t f r i g h t e n e d b y t h e t e r m "managed c u r r e n c y " , a n d a r e w i l l i n g t o r i s k e x c h a n g e f l u c - t u a t i o n s , t h e y c a n keep t h e i r c u r r e n c y c o n s t a n t i n p u r c h a s i n g 47 power e i t h e r on or o f f t h e g o l d s t a n d a r d . I n a p r e v i o u s p a r a g r a p h i t h a s been s t a t e d t h a t on t h e b a s i s o f t h e i r r e c e n t u t t e r a n c e s t h e p r e s i d e n t s and g e n e r a l managers o f our C a n a d i a n b a n k s can be s a i d t o be p r a c t i c a l l y unanimous i n t h e i r o p p o s i t i o n t o a t t e m p t e d c o n t r o l of p r i c e s by m o n e t a r y p o l i c y . An i n t e r e s t i n g e x c e p t i o n a p p e a r s t o 44. M o n t h l y L e t t e r o f t h e R o y a l Bank o f Canada, M o n t r e a l , May, 1932. 45. I b i d . 46. I b i d . , M a r ch, 1932. 47. I b i d . 43. e x i s t among our b a n k e r s , however, i n t h e p e r s o n of Dr. D o n a l d M a r v i n , E c o n o m i s t o f t h e R o y a l Bank o f Canada. I n t h e June, 1931, i s s u e o f h i s bank's m o n t h l y l e t t e r he d i s c u s s e s a t g r e a t l e n g t h , and w i t h e v i d e n t a p p r o v a l , t h e r e c e n t f i n d i n g s o f t h e F e d e r a l R e s e r v e Bank of New Y o r k r e l a t i v e t o c r e d i t and p r i c e s . 4 ^ He p o i n t s out t h a t , f o r t h e p a s t t e n y e a r s , one of t h e b e s t e q u i p p e d s t a t i s t i c a l l a b o r a t o r i e s i n t h e w o r l d , a t t h i s bank i n Hew Y o r k , u n d e r the g u i d a n c e o f Mr. C a r l S n y d e r , ha.s been g a t h e r i n g t h e d a t a f r o m w h i c h t h e t r e n d o f p r o d u c t i o n , c r e d i t , and p r i c e s may be c a l c u l a t e d . He r e p r o d u c e s f o u r c h a r t s i l l u s t r a t i n g Mr. S n y d e r ' s f i n d i n g s . The f o u r t h one shows the c l o s e r e l a t i o n o f t r a d e c r e d i t and t h e g e n e r a l p r i c e l e v e l . I t i s i n t e r e s t i n g to n o t e t h e comments o f an a c a d e m i c a l l y t r a i n e d C a n a d i a n e c o n o m i s t - b a n k e r , s u c h a s D r . M a r v i n , upon t h e f i n d i n g s d e p i c t e d b y t h e s e c h a r t s . He s a y s i n p a r t : " T h i s r e l a t i o n s h i p between volume of p r o d u c t i o n and t r a d e a n d volume of 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 has e v e r been made by t h e s t a t i s t i c i a n . I t i m p l i e s t h a t t h e r e i s a m a t h e m a t i c a l r e l a t i o n s h i p between volume of p r o d u c t i o n and c r e d i t on the one hand, and 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 w h i c h t h e l i n e s h o w i n g t h e t h e o - r e t i c a l p r i c e l e v e l c o r r e s p o n d s t o t h e a c t u a l p r i c e l e v e l i s , i n i t s e l f , a r e m a r k a b l e 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. R o y a l Bank o f Canada M o n t h l y L e t t e r , J une, 1931. 49. I b i d . 44. T hen i n c o n c l u s i o n he s a y s : " Can i t be t h a t had 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 t h e i n c r e a s e i n volume o f p r o d u c t i o n and t r a d e t h e r e would have b e e n no s u b s t a n t i a l c h a n g e s i n t h e 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 s e v e r e d e p r e s s i o n s ? T h i s i s i n d e e d a s t a r t l i n g c o n c e p t , a f f o r d i n g hope t h a t t h e 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 m a j o r changes i n t h e g e n e r a l p r i c e l e v e l m i g h t be a v o i d e d b y p r o p e r c o n t r o l of c r e d i t . T h i s i s s u r e l y a c o u n s e l 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 , but i t i s c l e a r l y w i t h i n t h e power of t h e g r e a t c e n t r a . l b a n k s , t h r o u g h a p p r o p r i a t e i n t e r e s t 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 r e a s o n a b l e 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 o f c r e d i t and a l s o t o p r e v e n t c o n t r a c t i o n o f t h e n o r m a l g r o w t h o f c r e d i t , w h i c h i s t h e b a s i s o f the p r e s e n t w o r l d t r a g e d y . " 5 0 I t would seem a p p r o p r i a t e h e r e t o add t o t h e w e i g h t o f argument a l r e a d y g i v e n i n s u p p o r t o f t h e c o n t r o l o f money, c r e d i t and p r i c e s , one o f t h e c o n c l u s i o n s o f t h e M a c M i l l a n Committee, w i d e l y r e c o g n i z e d a s p e r h a p s t h e a b l e s t a u t h o r i t y on t h e s u b j e c t t o - d a y . I n t h e i r r e p o r t we f i n d : " I t w i l l be s u f f i c i e n t f o r our 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 t h e r e p o r t , to h o l d t h a t i t s h o u l d be o u r o b j e c t t o 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 o v e r t h e p r i c e l e v e l ; t h a t t h e r e i s n o t h i n g i n h e r e n t l y i m p r a c t i c a b l e 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 know- l 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 w i t h t h e f u r t h e r d e v e l o p m e n t o f s u i t a b l e m a c h i n e r y 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 ; and t h a t we s h o u l d f o r w a r d t h e s e ends t o t h e b e s t of our powers by b e i n g 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 e x p e r i e n c e by p r a c t i s e . " 5 1 50. R o y a l Bank of Canada M o n t h l y L e t t e r , June, 1931. 51. 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, J u n e , 1931. (The M a c M i l l a n R e p o r t . ) p . 94. 45. H a v i n g d e a l t w i t h t h e q u e s t i o n of p r i c e c o n t r o l a t c o n s i d e r a b l e l e n g t h f r o m t h e p o i n t o f v i e w o f t h e o r y , w i t h t h e p u r p o s e o f s h o w i n g the p o s s i b i l i t i e s of s u c h c o n t r o l a p p l i e d t o Canada, i t w o u l d seem a d v i s a b l e to g i v e a p r a c t i c a l and r e c e n t i l l u s t r a t i o n of t h e t h e o r y i n a c t u a l o p e r a t i o n . T h i s we f i n d i n t h e r e c e n t e x p e r i e n c e i n Sweden , and i t i s t h e more a p p r o p r i a t e i n t h e l i g h t o f t h e v e r y g r e a t s i m i l a r i t y b etween Sweden a n d Canada i n many r e s p e c t s . B o t h c o u n t r i e s — ( 1 ) a r e o f f the g o l d s t a n d a r d (2) e x p o r t t i m b e r , wood p u l p , p a p e r , and raw o r e s (3) p r o d u c e t h e b u l k of t h e i r own f o o d s u p p l i e s (4) i m p o r t f o o d s n o t p r o d u c e d a t home (5) i m p o r t c o a l and m i n e r a l o i l s (6) have a h i g h s t a n d a r d of l i v i n g and r a t h e r r i g i d , h i g h wages (7) h a v e h e a v y t a x a t i o n (8) h a v e v a r i a b l e b a l a n c e o f t r a d e (9) c o n d u c t t h e i r t r a d e l a r g e l y i n terms of f o r e i g n c u r r e n c y , and (10) have no b i l l or money m a r k e t s . Sweden, however, has a c e n t r a l bank, t h e S v e r i g e s R i k s - bank, and t h i s bank has b e e n c o n d u c t i n g s o m e t h i n g of a m o n e t a r y e x p e r i m e n t s i n c e Sweden end s o many o t h e r c o u n t r i e s f o l l o w e d B r i t a i n i n h e r d e p a r t u r e f r o m t h e g o l d s t a n d a r d i n September, 1931. Of a l l t h e c o u n t r i e s o p e r a t i n g managed c u r r e n c i e s none o f f e r s an i n s t a n c e of m o n e t a r y p o l i c y more 52. Most o f t h e d a t a on Sweden was t a k e n f r o m an a r t i c l e i n t h e M i d l a n d Bank M o n t h l y Review, October-November, 1932. 46. c l o s e l y a d a p t e d t o l o c a l c o n d i t i o n s or more c l e a r l y d e f i n e d t h a n Sweden. B e c a u s e o f t h e g e n e r a l u n c e r t a i n t y o f t h e w o r l d ' s m o n e t a r y s i t u a t i o n a f t e r G r e a t B r i t a i n ' s s u s p e n s i o n o f g o l d payments, and b e c a u s e of a l a c k of d e c l a r a t i o n o f a p o s i t i v e m o n e t a r y p o l i c y b y G r e a t B r i t a i n , Sweden f e l t i t i m p o s s i b l e to p u r s u e any d e f i n i t e p o l i c y i n r e l a t i o n to s t e r l i n g . I t was t h e r e f o r e d e c i d e d to a t t e m p t s t a b i l i z a t i o n o f 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 . Sweden's monetary a u t h o r i t i e s h a d two o b j e c t s i n v i e w . I n t h e f i r s t p l a c e i t was d e s i r e d i n t h e i n t e r e s t s of p u b l i c c o n f i d e n c e t o a v o i d any marked r i s e i n p r i c e s . S e c o n d l y , i t was d e s i r e d i n t h e i n t e r e s t s of i n d u s t r y , a l r e a d y s t r u g g l i n g a g a i n s t t h e impediment of i n e l a s t i c c o s t s , t o a r r e s t t h e l o n g - s t a n d i n g downward t r e n d . I t was c o n s i d e r e d n e c e s s a r y to c o l l e c t e x t e n s i v e s t a t i s t i c a l m a t e r i a l showing the p r o d u c t i o n and t u r n o v e r as w e l l a s t h e movement o f p r i c e s o f d i f f e r e n t goods and s e r v i c e s . Weekly t a b u l a t e d s t a t e m e n t s were o b t a i n e d c o v e r i n g t h e e n t i r e p r i c e s y s t e m . T h e s e s t a t e m e n t s c o n t a i n e d f o r e i g n q u o t a t i o n s , S w e d i s h w h o l e s a l e p r i c e s a t d i f f e r e n t s t a g e s , and S w e d i s h r e t a i l p r i c e s . G u i d e d by the i n f o r m a t i o n t h u s o b t a i n e d , t h e R i k s b a n k p u r s u e d i t s p o l i c y o f i n t e r n a l p r i c e s t a b i l i z a t i o n . S i n c e t h e r e i s no money market i n Sweden, and s i n c e t h e c e n t r a l 47. bank h a s l i t t l e c o n t r o l over t h e v o l u m e o f bank d e p o s i t s owing t o t h e f a c t t h a t i t h o l d s o n l y a p a r t o f t h e c a s h r e s e r v e s o f t h e c o m m e r i c a l b a n k s , i t c a n n o t a c t t h r o u g h the q u a n t i t y of money. I t i s c o n f i n e d , t h e r e f o r e , t o o p e r a t i n g on the a l l o c a t i o n o f bank a s s e t s t h r o u g h i n t e r e s t r a t e s , and t o e x e r t i n g a d i r e c t i n f l u e n c e o v e r e x c h a n g e r a t e s . Commenting upon t h e a p p a r e n t s u c c e s s o f t h e R i k s - bank:' s p o l i c y a w r i t e r i n t h e M i d l a n d Bank M o n t l y R e v i e w s a y s : " I t can be s a i d , however, 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 h a s been 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 o f t h e 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 , i n d u s t r i a l , t r a d i n g and f i n a n c i a l , b o t h w i t h i n Sweden a n d • w i t h o u t . " 5 3 A t f i r s t , t h e n , i n t e r n a l p r i c e l e v e l s t a b i l i z a t i o n was i Sweden's p r i m e c o n s i d e r a t i o n . A t a l a t e r s t a g e , however, i t was f o u n d p o s s i b l e t o a c h i e v e a p p r o x i m a t e s t a b i l i t y o f t h e s t e r l i n g exchange i n c o n j u n c t i o n w i t h s t a b i l i t y o f t h e p r i c e l e v e l . I n a p r e v i o u s p a r a g r a p h many p o i n t s o f s i m i l a r i t y were n o t e d between Sweden a n d Canada. H e r e i t m i g h t be w e l l to o b s e r v e some d i f f e r e n c e s between t h e two c o u n t r i e s . One d i f f e r e n c e i s t o be s e e n i n t h e i r p o s i t i o n s i n i n t e r n a t i o n a l f i n a n c e . F o r t h e p a s t two d e c a d e s Sweden h a s b e e n a 53. I b i d 48. capital-exporting country, though only on a small scale. Another i s that Sweden has set an outstanding example of r e s t r a i n t with regard to the import trade and transactions i n exchange. Her t a r i f f rates have been kept comparatively low, and the import quota system has been sedulously avoided. Only mild and temporary r e s t r i c t i o n s have been placed upon purchases and sales of foreign currencies. Hence i t may be said that few countries have preserved freedom of movement for goods and capital, i n so high a degree as Sweden. As Canadians considering the a d v i s a b i l i t y of organizing a central.bank for Canada we must weigh and consider the case for and against the p o s s i b i l i t i e s of control of money and credit i n a " s o c i a l " sense. Balancing the evidence available, i t seems f a i r to conclude that i n general, at least, control of money and credit i s possible, that prices can be regulated to a very p r o f i t a b l e degree, and tha.t very extensive s o c i a l advantages can be r e a l i z e d by such control. 49 C h a p t e r 4. M o n e t a r y C o n t r o l i n Canada P r e v i o u s t o 1914. I n t h e l i g h t o f what we have s e e n w i t h r e s p e c t t o r e - g u l a t i o n o f f o r e i g n exchange, c o n t r o l o f t h e p r i c e l e v e l , a n d management o f m o n e t a r y q u e s t i o n s i n t h e s o c i a l i n t e r e s t g e n e r a l l y , we s h a l l now examine t h e C a n a d i a n p r e - w a r mone- t a r y s y s t e m . 54 D u r i n g t h e e a r l y F r e n c h r e g i m e the money u s e d i n Canada was m a i n l y t h e money of F r a n c e , t h e d e n i e r , t h e s o l , and t h e l i v r e . I n 1685 Canada made h e r f i r s t g r e a t m o n e t a r y e x p e r i m e n t , the i n t r o d u c t i o n o f c a r d money. The F r e n c h c o u r t had f a i l e d t o s e n d out a s u p p l y o f money f o r t h e payment o f i t s s o l d i e r s a n d o f f i c i a l s b e f o r e " f r e e z e - u p " on t h e S t . Lawr e n c e R i v e r , so t h e I n t e n d a n t , De M e u l l e s , o b t a i n e d a q u a n t i t y of p l a y i n g c a r d s , c u t them i n q u a r t e r s , and marked and s e a l e d them f o r d i f f e r e n t amounts. The o n l y b a c k i n g o f t h i s p a p e r money was c o n f i - d e n c e i n t h e p r o m i s e of t h e I n t e n d a n t t o redeem i t when " r e a l " money a r r i v e d i n the s p r i n g . I t was a c c e p t e d by t h e m e r c h a n t s and o t h e r p e o p l e o f Quebec and was d u l y redeemed a s p r o m i s e d . 54. The 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 , "The Romance o f Canada's Money", by P a u l Montgomery. 50. Many and v a r i e d were t h e k i n d s of money u s e d d u r i n g t h e n e x t c e n t u r y and a h a l f , b ut i t i s n o t n e c e s s a r y t o m e n t i o n them h e r e . D u r i n g t h e war o f 1812-14 p a p e r money i n t h e f o r m of Army B i l l s was u s e d t o f i n a n c e C a n a d i a n m i l i t a r y o p e r a t i o n s . The y e a r s 1817 a n d 1818 saw the o p e n i n g of our f i r s t C a n a d i a n banks, t h e M o n t r e a l Bank, an d t h e Quebec Bank, r e s p e c t i v e l y . E a c h o f t h e s e banks i s s u e d i t s own p r i n t e d n o t e s . I t was n o t u n t i l 1853, however, t h a t t h e r e a l b a s i s f o r our p r e - w a r m o n e t a r y s t r u c t u r e was l a i d . I n t h a t y e a r t h e p r o v i n c e o f Canada a d o p t e d the g o l d s t a n d a r d and t h i s s t a n d a r d was m a i n t a i n e d w i t h o u t b r e a c h u n t i l 1914. I n 1871 t h e p a s s i n g o f t h e U n i f o r m C u r r e n c y A c t g a v e 56 t h e C a n a d i a n m o n e t a r y s y s t e m l e g a l s a n c t i o n . The C a n a d i a n g o l d d o l l a r c o n t a i n e d t h e same q u a n t i t y o f g o l d as t h e A m e r i c a n — 2 3 . 2 2 g r a i n s o f p u r e g o l d . The A m e r i c a n g o l d d o l l a r and B r i t i s h s o v e r e i g n s ( a t $4.86 /g) were l e g a l t e n d e r , l i t t l e C a n a d i a n g o l d c o i n was s t r u c k , a s C a n a d i a n s p r e f e r r e d t o u s e p a p e r money i n t h e form of D o m i n i o n n o t e s o r o f t h e n o t e s o f t h e c h a r t e r e d b a n k s . Thus we s e e t h a t t h e p r e - w a r C a n a d i a n money s y s t e m was b a s e d on t h e g o l d s t a n d a r d . I t c o n s i s t e d o f two 55. C u r t i s , C.A. 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 , p. 314. 56. 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 Canada, p. 291. d i v i s i o n s , however, (1) t h e g o v e r n m e n t i s s u e and (2) t h e hank i s s u e . Of t h e s e v/e s h a l l f i r s t c o n s i d e r t h e g o v e r n - ment i s s u e . A f t e r the e s t a b l i s h m e n t o f a b r a n c h o f t h e R o y a l M i n t i n Ottawa i n 1908 a f e w $5 a n d $10 C a n a d i a n g o l d c o i n s were s t r u c k . Our f r a c t i o n a l c u r r e n c y c o n s i s t s of f i f t y , t w e n t y - f i v e , t e n , and f i v e - c e n t s i l v e r p i e c e s , and b r o n z e c e n t s o r c o p p e r s , a l l of w h i c h a r e l i m i t e d l e g a l t e n d e r , b u t n o t r e d e e m a b l e i n s t a n d a r d money. D o m i n i o n n o t e s may be d i v i d e d i n t o two g r o u p s . F i r s t t h e r e a r e t h e n o t e s o f l e s s t h a n $5 i n d e n o m i n a t i o n . S i n c e t h e r e are no b a n k n o t e s u n d e r $5 t h e s m a l l D o m i n i o n n o t e s s e r v e a s h a n d - t o - h a n d c u r r e n c y . T h e s e were t h e r e f o r e n e v e r p r e s e n t e d f o r r e d e m p t i o n i n any l a r g e numbers. I n 1914 the amount o f s u c h n o t e s i n c i r c u l a t i o n a v e r a g e d $ 2 4 , 5 8 6 , 0 0 0 . 5 8 S e c o n d l y t h e r e a r e l a r g e n o t e s o f $ 5 0 — $5,000 u s e d a s c a s h r e s e r v e s f o r the c o m m e r c i a l b a n k s . T h e s e n o t e s were i n c i r c u l a t i o n i n 1914 t o t h e v a l u e o f 59 $89,596,000. The banks f i n d t h e s e n o t e s more c o n v e n i e n t to h a n d l e t h a n g o l d , so t h e y u s e them more than the l a t t e r f o r r e s e r v e s . No s p e c i f i e d r e s e r v e s a r e r e q u i r e d o f banks 57. B e c k h a r t , B. H. The B a n k i n g S y s t e m of Canada, p . 292. 58. The Canada Y e a r Book, 1931, p . 885. 59. I b i d . 52. by law, b u t of s u c h r e s e r v e s as t h e y k e e p , 40 p e r c e n t , must be D o m i n i o n n o t e s . S i n c e t h e l a r g e D o m i n i o n n o t e s a r e u s e d m a i n l y f o r t h e s e t t l e m e n t o f c l e a r i n g h o u s e b a l a n c e s , and f o r r e s e r v e s , t h e y a r e o f t e n p r e s e n t e d f o r r e d e m p t i o n . P r e v i o u s to 1914, however, t h e r e was n e v e r a n y d o u b t o f the a b i l i t y o f t h e T r e a s u r y to redeem i t s n o t e s . As Mr. 0. A. C u r t i s s a y s : " 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 ex- change 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 I t s h o u l d be s a i d h e r e t h a t d u r i n g t h e p e r i o d f r o m 1868 t o 1914 t h e p r o p o r t i o n s o f g o l d b a c k i n g r e q u i r e d b y law were f r e q u e n t l y a l t e r e d , y e t t h e g e n e r a l p r i n c i p l e a l w a y s was t h a t a s e t maximum ($50,000,000 i n 1914, b e f o r e the p a s s i n g o f t h e F i n a n c e A c t ) n e e d o n l y be p a r t l y b a c k e d by g o l d , but a l l i s s u e d i n e x c e s s of t h i s f i x e d sum s h o u l d be c o v e r e d d o l l a r f o r d o l l a r by g o l d . Thus we had an o r t h o d o x f o r m o f g o l d s t a n d a r d . I t was t h e " a u t o m a t i c " s y s t e m s o - c a l l e d . Hence t h e Department o f F i n a n c e was n o t c a l l e d u p o n f o r any d e g r e e o f "management". The s e c o n d d i v i s i o n o f our p r e - w a r money s y s t e m w i l l now be c o n s i d e r e d . T h i s was t h e bank s y s t e m . T h e r e was no c e n t r a l bank i n f a c t o r t h e o r y . E a c h of t h e banks was a bank o f b r a n c h e s ( n o t a bank w i t h b r a n c h e s ) , s p r e a d a l l 60. C u r t i s , C. A. 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 , p. 316. 53. o v e r t h e c o u n t r y . The head o f f i c e , i t i s t r u e , a c t e d some- what a s a c e n t r a l hank f o r t h e b r a n c h e s . I t d i r e c t e d t h e i r p o l i c y , p r o v i d e d them w i t h f u n d s , and t o a c e r t a i n e x t e n t a c t e d as a r e d i s c o u n t i n g a g e n c y . As a b r a n c h m i g h t be 3,000 m i l e s away f r o m th e head o f f i c e , however, r e d i s - c o u n t i n g f a c i l i t i e s w ere n o t a d e q u a t e , e s p e c i a l l y i n an emergency. As f o r t h e w h o l e banking' s y s t e m , i t c o u l d g e t c a s h r e s e r v e s i n a d d i t i o n to i t s own t o t a l o f g o l d and g o l d - c o v e r e d D o m i n i o n n o t e s o n l y o u t s i d e of Canada. To do t h i s i t had to b o r r o w a b r o a d , o r w i t h d r a w i t s c a l l l o a n s f r o m .abroad, o r s e l l i t s s e c u r i t i e s . Thus t h e r e was a s e r i o u s l a c k o f r e d i s c o u n t i n g f a c i l i t i e s f o r t h e banks a s a w h o l e . The s e r i o u s n e s s o f t h i s l a c k was n o t f e l t a t f i r s t , however, on a c c o u n t of t h e e l a s t i c i t y o f t h e n o t e i s s u e . Bank n o t e s w e r e e l a s t i c b e c a u s e t h e y were c r e d i t i s s u e s , a n d b e c a u s e t h e y were p r o f i t a b l e and c o n v e n i e n t f o r t h e b a n k s . C h a r t e r e d banks were p e r m i t t e d to i s s u e t h e i r own n o t e s up t o t h e f u l l amount of t h e i r u n i m p a i r e d p a i d - u p c a p i t a l . By about 1907, however, i t was e v i d e n t t h a t e x p a n s i o n o f t h e n o t e i s s u e had p r a c t i c a l l y r e a c h e d i t s l i m i t due t o t h e f a i l u r e of bank c a p i t a l t o i n c r e a s e . T h i s was t h e y e a r o f t h e f i n a n c i a l p a n i c i n the U n i t e d S t a t e s . T h e r e was no s u c h p a n i c i n Canada, but t h e banks 54. t o o k e v e r y p r e c a u t i o n . They g a v e w a r n i n g s t o t h e i r c u s - t o m e r s , w i t h d r e w c a l l l o a n s f r o m New Y o r k and London, s o l d s e c u r i t i e s , and c o n t r a c t e d t h e i r l o a n s a s much a s p o s s i b l e . N e v e r t h e l e s s a s e r i o u s s h o r t a g e o f c u r r e n c y was e v i d e n t , and t h e government met t h e s i t u a t i o n by s u s p e n d i n g 1 t h e D o m i n i o n N o t e s A c t t o p e r m i t o f t h e i s s u e o f f> 10,000,000 a d d i t i o n a l n o t e s , w h i c h t h e banks m i g h t borrow a t 4 p e r c e n t , on c e r t a i n s e c u r i t i e s . Thus t h e much-vaunted e l a s t i c i t y of t h e bank n o t e s h a d f o r t h e f i r s t t i m e been p r o v e n t o be i n a d e q u a t e . B e c a u s e o f a l a c k o f s u f f i c i e n t c u r r e n c y t h e banks had b e e n f o r c e d t o c o n t r a c t t h e i r o p e r a t i o n s and t h e government had come to t h e i r a s s i s t a n c e . G rowing out of t h i s e v i d e n t i n a d e q u a c y o f t h e bank n o t e s we have what i s known a s t h e c r o p - m o v i n g p r o v i s i o n i n t h e amendment o f 1908. T h i s p r o v i s i o n , f u r t h e r e x t e n d e d i n 1912, p e r m i t s t h e banks t o i n c r e a s e t h e i r c i r c u l a t i o n , f r o m September to F e b r u a r y i n c l u s i v e , up t o 15 p e r c e n t , o f t h e i r p a i d - u p c a p i t a l and s u r p l u s . N o t e s so i s s u e d a r e s u b j e c t t o a D o m i n i o n t a x n o t t o e x c e e d 5 p e r c e n t , p e r annum. I t i s i n t e r e s t i n g t o n o t e , t h e n , t h a t ; — ( 1 ) i n a t i m e o f emergency (1907) t h e banks by t h e m s e l v e s had been 61. M i n u t e s o f P r o c e e d i n g s , E v i d e n c e , e t c . , 1913, p . 551 55. u n e q u a l to t h e s i t u a t i o n and t h e government had come t o t h e i r a s s i s t a n c e , and (2) t o meet a w h o l l y n o r m a l , r e c u r r e n t , s e a s o n a l n e e d t h e y had r e q u i r e d "emergency" c u r r e n c y t o s u p p l e m e n t t h e i r own o r d i n a r y r e s o u r c e s . The n e x t d e m o n s t r a t i o n of t h e i n a d e q u a c y of t h e p r e - war b a n k i n g f a c i l i t i e s was t o h e r a l d t h e end of en e r a i n t h e w hole h i s t o r y o f our b a n k i n g s y s t e m . The o u t b r e a k o f t h e war i n 1914 c r e a t e d an emergency w h i c h t h e banks were i n c a p a b l e o f m e e t i n g . To cope w i t h t h e h e a v y w i t h d r a w a l s o f g o l d f r o m t h e banks by n e r v o u s d e p o s i t o r s an O r d e r - i n - C o u n c i l was p a s s e d , w h i c h l a t e r became the F i n a n c e A c t , p e r m i t t i n g a d v a n c e s of D o m i n i o n n o t e s t o the banks a g a i n s t c o l l a t e r a l d e p o s i t e d i n t h e F i n a n c e D e p a r t m e n t . R e f e r r i n g t o t h i s B. H. B e c k h a r t s a y s : "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 weak- n e s s i n t h e 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 expand to meet a war demand f o r c u r r e n c y . 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 t h e F e d e r a l R e s e r v e Banks, w h i c h were empowered t o c o i n c o m m e r c i a l p a p e r 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 been met. "62 P r e v i o u s to t h e p a s s i n g o f t h e O r d e r - i n - C o u n c i l i n 1914 t h e u t t e r l a c k o f r e g u l a r r e d i s c o u n t i n g f a c i l i t i e s , o t h e r t h a n t h o s e p r o v i d e d f o r t h e b r a n c h e s by the h e a d o f f i c e s , 62. B e c k h a r t , B. H. The B a n k i n g S y s t e m of Canada, p. 294. made t h e banks a b s o l u t e l y s e l f - d e p e n d e n t w i t h r e s p e c t t o c a s h r e s e r v e s . They h a d , t h e r e f o r e , t o keep a c o n s t a n t w a t c h on t h e l i q u i d i t y of t h e i r p o s i t i o n . Ho m a t t e r what the c a l l f o r c a s h , e a c h bank had a t a l l t i m e s t o be a b l e t o p a y on demand or a d m i t i n s o l v e n c y and c l o s e i t s d o o r s . Thus t h e y g u a r d e d t h e i r p o s i t i o n c a u t i o u s l y , and i n so d o i n g k e p t t h e g o l d s t a n d a r d s e c u r e . As f a r a s t h e D e partment of F i n a n c e was c o n c e r n e d , as s t a t e d b e f o r e , i t s f u n c t i o n w i t h r e s p e c t to the g o l d s t a n d a r d was a u t o m a t i c . Any n e c e s s a r y management o f t h e g o l d s t a n d a r d r e s t e d w i t h t h e b a n k s . I n s o f a r , t h e n , a s any c o n t r o l was e x e r c i s e d — c o n t r o l o f money and c r e d i t g e n e r a l l y , c o n t r o l o f e x c h a n g e , o r c o n t r o l of p r i c e s — i t was e i t h e r t h r o u g h t h e somewhat a u t o m a t i c w o r k i n g of t h e g o l d s t a n d a r d i t s e l f , or t h r o u g h the r e g u l a t i n g o f t h a t s t a n d a r d by t h e b a n k s . Or, a s Mr. C. A. C u r t i s p u t s 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 t h e c o m m e r c i a l baj i k s of Canada and was bound up w i t h t h e i r own s o l v e n c y . "63 As we s h a l l see l a t e r , however, the p a s s a g e o f t h e F i n a n c e A c t removed t h i s r e s p o n s i b i l i t y f r o m t h e s h o u l d e r s of t h e banks and p l a c e d i t upon t h e g o v e r n m e n t , t h u s c l o s i n g an e r a o f our b a n k i n g h i s t o r y . 63. C u r t i s , C. A. 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 , p . 317. C h a p t e r 5. The F i n a n c e A c t as a S u b s t i t u t e f o r a C e n t r a l Bank I t i s t h e m a i n t h e s i s of C a n a d i a n b a n k e r s and o t h e r s o p p o s i n g t h e c r e a t i o n of a c e n t r a l bank f o r Canada t h a t we have a l r e a d y i n t h e f o r m of t h e F i n a n c e A c t a De F a c t o c e n t r a l bank t h a t i s e n t i r e l y a d e q u a t e . R e c e n t u t t e r a n c e s o f spokesmen of some of o u r banks c o n s t i t u t e a v e r i t a b l e hymn o f p r a i s e f o r t h e F i n a n c e A c t a s a s u b s t i t u t e f o r a 64 c e n t r a l bank. H e a r S i r C h a r l e s Gordon , P r e s i d e n t o f t h e Bank o f M o n t r e a l : " T h e r e i s ho n e e d o f a c e n t r a l bank i n Canada", S i r C h a r l e s d e c l a r e d . " F o r a l l p r a c t i c a l p u r - p o s e s s u c h an a g e n c y a l r e a d y e x i s t e d u n d e r t h e F i n a n c e A c t , w h i c h f o r e i g h t e e n y e a r s had a d m i r a b l y p e r f o r m e d i t s p u r p o s e . " Mr. F r a n k A. R o l f e 6 5 , P r e s i d e n t o f t h e I m p e r i a l Bank o f Canada, s a i d : "The p r o p o s a l to e s t a b l i s h a c e n t r a l bank i n Canada 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 t h e n e c e s s i t y . I t w o u l d n o t 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 C a n a d i a n B a n k i n g S y stems, w i t h t h e a s s i s t a n c e o f t h e p r e s e n t F i n a n c e A c t . " Mr. A. E . P h i p p s 6 6 , G e n e r a l Manager o f t h e same bank 64. V a n c o u v e r D a i l y P r o v i n c e , D e c . 5, 1932. 65. S a t u r d a y N i g h t , D e c. 3, 1932. 66. I b i d . 58. i s q u o t e d as s a y i n g i n r e f e r e n c e t o t h e R e c o n s t r u c t i o n F i n a n c e C o r p o r a t i o n o f t h e U n i t e d S t a t e s : I f y o u c a n i m a g i n e t h e U n i t e d S t a t e s w i t h a F i n a n c e A c t i n s t e a d o f a F e d e r a l Re- s e r v e System, t h e r e w o u l d h a v e been no c a u s e f o r 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 i n f a c t t h e r e n e e d n e v e r have been any money p a n i c . " 67 Mr. H. B. Henwood , G e n e r a l Manager o f t h e Bank o f T o r o n t o , i s q u o t e d a s s a y i n g : r r...., 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 and e f f e c t i v e m a c h i n e r y by w h i c h we a r e a b l e t o borrow 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 , b y 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 . " 68 Mr. S. H. Logan , G e n e r a l Manager of t h e C a n a d i a n Bank o f Commerce, o b s e r v e s : "...., 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 b e i n g f u l f i l l e d t h r o u g h t h e o p e r a t i o n o f our e x i s t i n g banks w i t h t h e a u x i l i a r y s e r v i c e o f t h e F i n a n c e A c t , " A n o t h e r w e l l known C a n a d i a n b a n k e r , who d o e s n o t w i s h t o be named, has been k i n d enough t o e x p r e s s h i s o p i n i o n on t h e same theme. I t i s i n p a r t a s f o l l o w s : " H a v i n g r e g a r d t o Canada's economic p o s i t i o n t h e F i n a n c e A c t a f f o r d s an e f f e c t i v e s u b s t i t u t e f o r a C e n t r a l Bank. The f a c i l i t i e s o f r e d i s - c o u n t w h i c h i t o f f e r s a r e , a s y o u may know, as 67. The F i n a n c i a l P o s t , J a n . 21, 1933. 68. The V a n c o u v e r D a i l y P r o v i n c e , J a n . 10, 1933. 59. "wide a s t h o s e p r o v i d e d by any c e n t r a l hank a n d l e s s encumbered w i t h l e g a l i s t i c r e s t r i c t i o n s t h a n 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 t h e 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 o b v i o u s 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 p u r p o s e s s o l o n g a s C a n a d i a n b a n k s h a v e t h i s f a c i l i t y at 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 Bank f o r t h i s c o u n t r y . " I n 1923 P r o f e s s o r S w a n s o n ^ g a v e t e s t i m o n y as f o l l o w s p e r t i n e n t t o t h e c e n t r a l bank q u e s t i o n : ".... I d o n ' t t h i n k i t i s r e q u i r e d i n Canada. Our banks have t h e r e s o u r c e s r i g h t now. I t i s n o t t h e e a s e t h a t we have n o t t h e money. 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 t h e c r e d i t to a much g r e a t e r d e g r e e t h a n t h e 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 " P r o f e s s o r B e c k h a r t 7 ^ , i n h i s book on our b a n k i n g s y s t e m , s a y s o f t h e F i n a n c e A c t , a f t e r m a k i n g a number o f c r i t i c i s m s : " .... A t t h e 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 Canada n e e d s by way of a c e n t r a l bank. I f u s e d b y t h e banks, n o t 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 - q u i r e m e n t s , i t s i n t r o d u c t i o n w i l l p r o b a b l y be b e n e f i c i a l . " I n v i e w o f t h e f a c t t h a t P r o f e s s o r s Swanson and B e c k - h a r t so e x p r e s s e d t h e m s e l v e s b e f o r e our e x p e r i e n c e v.'itn t h e boom o f 1928-29 and t h e p r e s e n t d e p r e s s i o n , i t w o u l d be i n t e r e s t i n g to know w h e t h e r o r n o t t h e y would, v o i c e t h e same o p i n i o n i n 1933. 69. 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 and Commerce, 1923, p. 784. 70. B e c k h a r t , B. H. The B a n k i n g System o f Canada, p . 400. 60. S u f f i c i e n t e v i d e n c e has 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 oppose the i n s t i t u t i o n of a c e n t r a l bank on t h e s c o r e t h a t the F i n a n c e A c t i s an adequate s u b s t i t u t e . T h i s e v i d e n c e e s t a b l i s h e s the n e c e s s i t y f o r a c l o s e e x a m i n a t i o n of the A c t i f t h e q u e s t i o n of the c e n t r a l bank i s t o be u n d e r s t o o d a d e q u a t e l y . I n l a t e r s e c t i o n s a n s w e r i n g arguments w i l l 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 be made i n t o the o p e r a t i o n s of the A c t t o make i t p o s s i b l e to a r r i v e a t c o n c l u s i o n s . B e f o r e d o i n g t h i s , however, i t w i l l be n e c e s s a r y t o e n q u i r e i n t o t h e h i s t o r y o f the A c t . The c i r c u m s t a n c e s s u r r o u n d i n g the p a s s i n g 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 the M i n i s t e r o f F i n a n c e of the war p e r i o d i n "The S t o r y of Canada's War 71 F i n a n c e " . He p i c t u r e d the s t a t e of e x c i t e m e n t o f t h e w o r l d a t t h e end of J u l y f o l l o w i n g t h e d e l i v e r y of t h e u l t i m a t u m t o S e r b i a b y . A u s t r i a . The s t o c k exchanges o f a l l 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 . U n e a s i n e s s and a p p r e h e n s i o n 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 ex- changes. E v e n t u a l l y t h i s p a n i c k y g o l d p s y c h o l o g y s p r e a d to Canada and soon c r e a t e d a s e r i o u s s i t u a t i o n . Heavy 71. White, S i r Thomas. The S t o r y o f Canada's War F i n a n c e . w i t h d r a w a l s o f g o l d f r o m t h e banks t o o k p l a c e i n v a r i o u s p a r t s o f t h e c o u n t r y , and more s e r i o u s r u n s on t h e b a n k s were f e a r e d . The s i t u a t i o n became so g r a v e t h a t o n A u g u s t 3 a d e l e g a t i o n f r o m 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 , i n c l u d i n g t h e i r P r e s i d e n t , Mr. D. R. V / i l k i e , went t o Ottawa t o o b t a i n g o v e r n m e n t a s s i s t a n c e t o meet t h e emergency. No m a c h i n e r y e x i s t e d t o t a k e c a r e o f s u c h a s i t u a t i o n . The r e a d y c a s h r e s e r v e s of t h e banks w o u l d n o t meet t h e demands o f t h e i r c r e d i t o r s . As e x p l a i n e d i n C h a p t e r 4 above, t h e p r e - w a r b a n k i n g s y s t e m was s u c h t h a t e a c h c h a r t e r e d bank was c o m p l e t e l y r e s p o n s i b l e f o r i t s own s o l v e n c y , and i f i t c o u l d n o t meet demands upon i t f o r c a s h i t must c l o s e i t s d o o r s . R e s e r v e s w h i c h had seemed a d e q u a t e f o r t h e b a n k s i n p e a c e - t i m e were t o t a l l y i n a d e q u a t e to meet t h e w a r - t i m e s i t u a t i o n . T h e r e was no c e n t r a l bank t o go t o f o r a d d i - t i o n a l c a s h . No l e g i s l a t i o n e x i s t e d t o p r o v i d e f o r s u c h an emergency. A s s i s t a n c e must be o b t a i n e d f r o m t h e g o v e r n - ment o r t h e banks f a c e d p r o b a b l e i n s o l v e n c y a n d c l o s i n g o f t h e i r d o o r s . Hence on t h e same day, A u g u s t 3, an O r d e r - i n - C o u n c i l was i s s u e d p r o v i d i n g p r o t e c t i o n f o r t h e b a n k s a g a i n s t t h e i r t h r e a t e n e d i n s o l v e n c y . I t made bank n o t e s l e g a l t e n d e r , t h u s p e r m i t t i n g t h e banks t o meet t h e i r d e p o s i t o r s ' demands w i t h t h e i r own n o t e s i n s t e a d o f h a v i n g to pay o u t g o l d or 62. D o m i n i o n n o t e s . But t h i s was n o t enough. The q u a n t i t y of • t h e i r own bank n o t e s was l i m i t e d t o t h e amount o f t h e i r u n i m p a i r e d p a i d - u p c a p i t a l t o g e t h e r w i t h the g o l d and. D o m i n i o n n o t e s w h i c h t h e y h a d on d e p o s i t i n t h e C e n t r a l G o l d R e s e r v e s . To make an i n c r e a s e o f bank not es p o s s i b l e ' i t was p r o v i d e d t h a t t h e emergency c i r c u l a t i o n , h i t h e r t o c o n f i n e d to t h e c r o p - m o v i n g s e a s o n f r o m September t o F e b r u a r y i n c l u s i v e , m i g h t be i s s u e d t h r o u g h t h e w h o l e y e a r . I n a d d i t i o n t h e Government was t o i s s u e D o m i n i o n n o t e s t o t h e b a n k s , a t i n t e r e s t , a g a i n s t s e c u r i t i e s d e p o s i t e d by them w i t h the D e p a r t m e n t o f F i n a n c e . T h i s e x t r a s u p p l y o f D o m i n i o n " l e g a l s " m i ght be u s e d d i r e c t l y or m i g h t be d e p o s i t e d i n t h e C e n t r a l G o l d R e s e r v e s and s o u s e d as a b a s e on w h i c h ba.nk n o t e s c o u l d be i s s u e d . Upon t h e a b o v e O r d e r - i n - C o u n c i l b e i n g s i g n e d by t h e G o v e r n o r - G e n e r a l , a s i t was i m m e d i a t e l y , a v e r y f u l l a c c o u n t o f what had b e e n done was g i v e n t o t h e p a p e r s . The a c t i o n t a k e n was e x p l a i n e d a s b e i n g n e c e s s a r y i n o r d e r t o c o n s e r v e g o l d , t o i n c r e a s e t h e c u r r e n c y and make i t more f l e x i b l e , and i n g e n e r a l t o e n s u r e s t a b i l i t y of t h e f i n a n c i a l s t r u c - t u r e . The p u b l i c was r e a s s u r e d , and c o n f i d e n c e was m a i n t a i n e d t h r o u g h t h e whole c o u r s e o f t h e war. I n t h e f o l l o w i n g week ( A u g u s t 10) a s e c o n d O r d e r - i n - C o u n c i l was p a s s e d . T h i s one s u p p l e m e n t e d t h e f i r s t b y 63. s u s p e n d i n g t h e r e d e m p t i o n o f D o m i n i o n n o t e s i n s p e c i e . Thus t h e g o l d s t a n d a r d was l e g a l l y abandoned, a n d, a s i t t u r n e d o u t , was n o t t o be r e s t o r e d u n t i l 1926. As s t a t e d a b ove, p u b l i c c o n f i d e n c e h a d a l r e a d y b e e n r e s t o r e d by t h e O r d e r - i n - C o u n c i l of A u g u s t 3. The e f f e c t of t h e two O r d e r s - i n - C o u n c i l was to s u p p l y a d e q u a t e c u r r e n c y to the p u b l i c and to p r o t e c t t h e g o l d r e s e r v e s o f t h e c o u n t r y . A l t o g e t h e r t h e emergency s i t u a t i o n was met v e r y e f f e c t i v e l y by t h e s e emergency m e a s u r e s . A t t h e s p e c i a l s e s s i o n o f P a r l i a m e n t c a l l e d a l i t t l e l a t e r i n A u g u s t t o cope w i t h t h e war s i t u a t i o n , t h e a b o v e - m e n t i o n e d O r d e r s - i n - C o u n c i l were embodied i n t h e F i n a n c e A c t and t h e r e b y r a t i f i e d . The w o r d i n g o f c e r t a i n p a r t s o f t h e A c t makes i n t e r e s t i n g r e a d i n g i n v i e w o f t h e c i r c u m - s t a n c e s s u r r o u n d i n g i t s g e n e s i s . T h e r e c a n be no c o n - t r o v e r t i n g t h e f a c t t h a t t h e A c t was p a s s e d t o s a v e t h e banks f r o m i n s o l v e n c y , as a b u n d a n t l y p r o v e d b y t h e s t a t e - ments o f no l e s s an a u t h o r i t y than S i r Thomas W h i t e , c i t e d i n a p r e v i o u s p a r a g r a p h . Hence t h e a l l - i n c l u s i v e n a t u r e of the f u l l t i t l e i s w o r t h n o t i n g — " A n A c t t o c o n s e r v e t h e C o m m e r c i a l and F i n a n c i a l I n t e r e s t s o f Canada". Then a g a i n , i n v i e w o f t h e f a c t t h a t i t was t h e d e s i r e t o s a v e t h e banks t h a t made t h e Government w i l l i n g t o go so f a r a s e v e n to abandon t h e g o l d s t a n d a r d , t h e f o l l o w i n g 64. words o f t h e A c t a r e i n t r i g u i n g : " I n 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 a p p r e h e n d e d , and i n c a s e o f a n y r e a l or a p p r e h e n d e d f i n a n c i a l c r i s i s , t h e G o v e r n o r i n C o u n c i l may, by 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 ( I t t h e n g o e s on t o s a y what may be done u n d e r t h e s e c o n d i t i o n s . ) W h i l e a p r e a m b l e i n s u c h t e r m s may h a v e been d e s i r a b l e , to s a y t h e l e a s t i t l a c k s f r a n k n e s s a s a s t a t e m e n t o f t h e p u r p o s e o f t h e p r o v i s i o n s of t h e A c t . I t m i g h t be m e n t i o n e d h e r e i n p a s s i n g t h a t some of t h e l e a s t w e l l - i n f o r m e d o f t h o s e who u p h o l d t h e a d e q u a c y o f t h e F i n a n c e A c t as a s u b s t i t u t e f o r a c e n t r a l bank make two a s s e r t i o n s : (1) T h a t the a b o v e q u o t e d c l a u s e r e "war, r i o t o r i n s u r r e c t i o n " , e t c . s t i l l h o l d s , r e g a r d l e s s of t h e 1923 r e v i s i o n . ( T h i s i s u s u a l l y s t a t e d by suc h p e o p l e i n d e f e n c e a g a i n s t t h e argument t h a t t h e A c t p e r m i t s of u n c o n t r o l l e d i n f l a t i o n . ) (2) And a t t h e same t i m e — t h a t t h e F i n a n c e A c t i s a l l we n e e d i n t h e way o f a c e n t r a l bank. I t i s s u r e l y a b s u r d to t r y t o m a i n t a i n t h e s e two p r e m i s e s a t t h e same t i m e . O t h e r w i s e we must c o n c l u d e t h a t : (1) we must have a " r i o t " to p r o d u c e our c e n t r a l 72. The F i n a n c e A c t , P a r t I , 4. 65. bank, and t h a t (2) a l l we n e e d i n t h e f o r m of a c e n t r a l b ank i s a s o r t o f an " u n s u b s t a n t i a l f a e r y t h i n g " t h a t a p p e a r s o n l y i n t i m e s of emergency. The argument i s r a t h e r t r i v i a l , i t i s t r u e , but n e v e r - t h e l e s s much c o n f u s e d t h i n k i n g i s met w i t h on t h e s u b j e c t o f c e n t r a l b a n k i n g , and s h o u l d be c o m b a t t e d . I n t h e m a i n t h e F i n a n c e A c t i s a r e c a p i t u l a t i o n of t h e W o e a r l i e r O r d e r s - i n - G o u n c i l . I t s most i m p o r t a n t p r o - v i s i o n s f o l l o w t h e p r e a m b l e q u o t e d a b o v e i n S e c t i o n 4, P a r t I . Summarized, t h e y a r e a s f o l l o w s : Under t h e c o n d i t i o n s d e s c r i b e d i n t h e p r e a m b l e t h e Government was a u t h o r i z e d : (a) t o make a d v a n c e s to t h e banks by t h e i s s u e o f D o m i n i o n n o t e s upon t h e p l e d g e o f s e c u r i t i e s d e p o s i t e d w i t h t h e M i n i s t e r o f F i n a n c e . (b) t o a l l o w t h e banks to pay out t h e i r own n o t e s as l e g a l t e n d e r i n s t e a d o f g o l d or D o m i n i o n n o t e s . ( c ) t o e x t e n d t h e " c r o p - m o v i n g " p r o v i s i o n f o r t h e i s s u e o f e x c e s s c i r c u l a t i o n o v e r t h e w h o l e y e a r . (d) t o s u s p e n d t h e r e d e m p t i o n i n g o l d of D o m i n i o n n o t e s . (e) t o p r o c l a i m a m o r a t o r i u m on d e b t s . 66. The o t h e r s e c t i o n s o f t h e a c t i n l a r g e p a r t m e r e l y e l u c i d a t e f u r t h e r t h e a b o v e p r o v i s i o n s and l a y down r e g u l a - t i o n s f o r t h e i r o p e r a t i o n . I n v i e w of t h e v i t a l i m p o r t a n c e o f t h e F i n a n c e A c t i t w i l l be w e l l t o summarize c e r t a i n f a c t s a b o u t i t b e f o r e g o i n g on. I t s h o u l d be remembered t h a t : (a) i t was i n t r o d u c e d i n 1914 as an emergency measure t o p r e v e n t i n s o l v e n c y o f t h e banks and t o a v o i d a f i n a n c i a l p a n i c . (b) i t was c o n t i n u e d i n f o r c e t h r o u g h o u t t h e war b e c a u s e of an " a p p r e h e n d e d f i n a n c i a l c r i s i s " . ( c ) i t a l l o w e d t h e w a r - t i m e i n f l a t i o n of t h e c u r r e n c y , and t h i s i n t u r n f o r m e d t h e b a s e f o r "an i n f l a t e d 73 s u p e r - s t r u c t u r e of c r e d i t . " (d) i t was u s e d to f i n a n c e t h e war, o r , a s B e c k h a r t s a y s , " . . . . as a means of s e c u r i n g men and s u p p l i e s 7 on t h e b a s i s of ' m a n u f a c t u r e d 1 p u r c h a s i n g power." I t i s o f v i t a l i m p o r t a n c e t o n o t e t h a t a l t h o u g h t h e F i n a n c e A c t was p a s s e d a s a war emergency measure o n l y , i t has been c o n t i n u e d a s a s o r t o f r e d i s c o u n t i n g m a c h i n e r y . The p r o v i s i o n f o r making a d v a n c e s of D o m i n i o n n o t e s t o t h e 73. B e c k h a r t , B. H. The B a n k i n g System of Canada, p . 400. 74. I b i d . banks upon t h e d e p o s i t of c o l l a t e r a l w i t h t h e D e p a r t m e n t o f F i n a n c e — t h e t e m p o r a r y p r o v i s i o n w h i c h p e r m i t t e d u n l i m i t e d w a r - t i m e i n f l a t i o n — h a s b e en made a. permanent f e a t u r e o f t h e C a n a d i a n m o n e t a r y s y s t e m . T h i s was d o n e by p a s s i n g t h e F i n a n c e A c t o f 1923, w h i c h g a v e permanent a u t h o r i t y to t h e D e p a r t m e n t of F i n a n c e t o make a d v a n c e s of D o m i n i o n n o t e s t o t h e b a n k s , g a v e c o m p l e t e c o n t r o l o v e r t h e r a t e o f i n t e r e s t t o the T r e a s u r y B o a r d , and i n a g e n e r a l way e l a b o r a t e d t h e A c t of 1914. The f a c t t h a t t h e emergency measure of 1914 was made permanent i n 1923 i s known by a l l t o o few p e o p l e . The r e a l s i g n i f i c a n c e o f t h e f a c t i s a p p r e c i a t e d by s t i l l f e w e r p e r s o n s . I t i s w e l l t h e n t h a t the s i g n i f i c a n t p a r t of t h e 1923 A c t , S e c t i o n 5, s h o u l d be q u o t e d word f o r word: 75 " A t 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 u n d e r the a u t h o r i t y of p a r a g r a p h (a) o f s e c t i o n f o u r of 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 D o m i n i o n n o t e s upon t h e p l e d g e of the s e c u r i t i e s h e r e i n a f t e r men- t i o n e d : (a) T r e a s u r y b i l l s , b o n ds, d e b e n t u r e s o r s t o c k s 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 , any p r o v i n c e of Canada, and o f any B r i t i s h p o s s e s s i o n ; (b) P u b l i c s e c u r i t i e s o f t h e Government o f t h e U n i t e d S t a t e s ; 75. I t a l i c s by w r i t e r (e) C a n a d i a n m u n i c i p a l s e c u r i t i e s ; (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 e x c h a n g e 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 , buckwheat, f l a x o r o t h e r com- m o d i t y ; (e) P r o m i s s o r y n o t e s a n d b i l l s o f e x c h a n g e 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 f o r s u c h p u r p o s e s . 1923, c. 48, s. 2." I t w i l l be n o t e d t h a t when t h e r e _is a p r o c l a m a t i o n i n f o r c e u n d e r t h e a u t h o r i t y of p a r a g r a p h (a) o f s e c t i o n 4 o f th e A c t a d v a n c e s may be made, and when t h e r e i s not a p r o - c l a m a t i o n i n f o r c e a d v a n c e s may be made by a u t h o r i t y o f s e c t i o n 5 above q u o t e d . Hence a t a l l t i m e s , and n o t j u s t i n t h e c a s e o f e m e r g e n c i e s , s u c h a d v a n c e s may be made t o the banks by t h e M i n i s t e r o f F i n a n c e . The R t . Hon. A r t h u r 76 M e i g h e n , ex-Prime M i n i s t e r of Canada, e x h i b i t e d a k e e n a p p r e c i a t i o n o f t h e s i g n i f i c a n c e of t h i s p r o v i s i o n f o r m a k i n g a d v a n c e s t o the banks when, b e f o r e t h e B a n k e r s ' E d u c a t i o n a l A s s o c i a t i o n a t T o r o n t o , on J a n u a r y 21, 1931, he spoke t h e s e w o r d s : "....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 government was a u t h o r i z e d to a d v a n c e t o banks 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 vernment n o t e s by way o f t e m p o r a r y l o a n s , and no 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 t h e F i n a n c e A c t i t i s i n d e f i n i t e , c o n s e q u e n t l y 76. Q u o t e d f r o m a p o p u l a r p a m p h l e t e n t i t l e d , "Bank o f Canada, Why Wot?" p . 6. " l o a n s o f u n s t a t e d amounts, WITHOUT LIMIT , d e p e n d i n g 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 , can be made WITHOUT A GOLD RESERVE."78 Nowhere h a s t h e w r i t e r f o u n d t h e i m p o r t a n c e of t h e change wrought i n o u r m o n e t a r y s y s t e m b y the F i n a n c e A c t as c l e a r l y i n t e r p r e t e d a s i n t h e w r i t i n g s o f P r o f e s s o r C. 79 A. C u r t i s . Summing up t h e p r e - w a r m o n e t a r y s i t u a t i o n 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 m i g h t a l m o s t be d e s c r i b e d a s an o n l o o k e r a t t h e c r e d i t s y s t e m . The b a n k i n g s y s t e m , 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 s t a n d a r d . And I h a v e assumed t h a t t h e m a i n - t 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 o f 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 - 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 t h e c o m m e r c i a l banks of Canada and 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 whole s y s t e m was c o m p l e t e l y t r a n s - f o r m e d by t h e ch a n g e s c o n s e q u e n t on t h e o u t - b r e a k o f war i n 1914." (He goe s on to r e c i t e 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 A c t . ) A g a i n he s a y s : " 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 r e s t e d s o l e l y w i t h t h e banks t h e m s e l v e s , but now i t was t r a n s f e r r e d t o t h e agen c y w h i c h had t h e power to add to 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 D e p a r t m e n t of F i n a n c e . The A c t w h i c h made t h i s f u n d a m e n t a l c h a n g e i n the C a n a d i a n m o n e t a r y 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 any o t h e r m a j o r c h a n g e e v e r made i n C a n a d i a n m o n e t a r y l e g i s l a t i o n I t i s t o be d o u b t e d i f t h e government o r t h e p u b l i c ever a d e q u a t e l y r e a l i z e d t h e s i g n i f i c a n c e o f t h e A c t . " 8 0 77. I t a l i c s by w r i t e r . 78. I t a l i c s by w r i t e r . 79. The C a n a d i a n Forum, M a r c h , 1932, p . 207. 80. 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 . 319. 70. I n l a t e r s e c t i o n s o f t h i s c h a p t e r i t w i l l he shown t h a t the Department of F i n a n c e has not been c o n s c i o u s of t h e new r e s p o n s i b i l i t y placed, upon i t by the F i n a n c e A c t , t h a t the 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 passed, and t h a t t h e r e f o r e Canada's monetary system i s one i n whi c h no one a c c e p t s 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 . I n a d d i t i o n to making permanent the arrangement f o r making advances t o t h e banks, the F i n a n c e A c t of 1923 p r o v i d e d : (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 to be l e g a l t e n d e r f o r 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 Dominion n o t e s would not be redeemable 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 l i c e n s e ; (4) t h a t the above p r o v i s i o n s would l a p s e u n l e s s s p e c i f i c a l l y extended a t the end of t h e t h r e e y e a r s . As i t t u r n e d out they were not extended, so Canada a u t o m a t i c a l l y resumed t h e g o l d s t a n d a r d on d u l y 1 s t , 1926. Havi n g n o t e d the e v i d e n c e t o the e f f e c t t h a t t h e F i n a n c e A c t i s r e g a r d e d by many as an adequate s u b s t i t u t e f o r a c e n t r a l bank, and h a v i n g t r a c e d the 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 see w h e r e i n i t does or does not 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 i s i t l i k e a b a n k e r s ' bank? I n Chapter 2, when the g e n e r a l f u n c t i o n s of a c e n t r a l bank as a ba n k e r s ' bank were b e i n g d i s c u s s e d , i t was s t a t e d t h a t such a bank had as i t s customers the commercial, banks, t h a t i t made l o a n s t o t h e banks, 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 as a r e d i s c o u n t i n g agency f o r them, that i t u s u a l l y i s s u e d n o t e s and sometimes had a monopoly of the n o t e i s s u e , t h a t i t a c t e d as a c l e a r i n g - house f o r them, t h a t i t was the d e p o s i t o r y o f t h e cash r e s e r v e s of the banks, and f i n a l l y , t h a t i t was r e s p o n s i b l e f o r t h e s o l v e n c y of t h e whole b a n k i n g system. There i s no doubt of t h e t e n commercial banks b e i n g t h e customers of t h e F i n a n c e A c t . Not o n l y t h a t , they a r e the s o l e customers. Even t h e F e d e r a l Government cannot borrow f r o m i t s " c e n t r a l bank". The n a t i o n ' s c r e d i t i s not c o n s i d e r e d to be "sound" or " h e a l t h y " as b a c k i n g f o r the i s s u a n c e o f c u r r e n c y u n t i l i t has been " d i s i n f e c t e d " by p a s s i n g through the hands of t h e banks and u n t i l i t has 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 . Thus the " c e n t r a l bank" may not 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 the l a t t e r ' s own c r e d i t . On the o t h e r hand a bank may take some o f the n a t i o n ' s c r e d i t ( i n the form of ?2. a v i c t o r y bond, s h a l l we s a y ? ) t o t h e M i n i s t e r o f F i n a n c e a n d R e c e i v e r G e n e r a l a t Ottawa ( o r t o an A s s i s t a n t Re- c e i v e r G e n e r a l O f f i c e a t H a l i f a x , C h a r i o t t e t o w n , S t . J o h n , M o n t r e a l , T o r o n t o , W i n n i p e g , R e g i n a , C a l g a r y , or V i c t o r i a ) , d e p o s i t i t t h e r e , and r e c e i v e l e g a l t e n d e r D o m i n i o n n o t e s d o l l a r f o r d o l l a r on t h e d e p o s i t e d c r e d i t (bond) a s s e c u r i t y , p a y i n g 3-g- p e r c e n t , on t h e money s o b o r r o w e d . I f t h e Government i s i n n e e d , t h e bank may t u r n a r o u n d and l o a n t h e s e same n o t e s b a c k to i t a t , s a y , 4 p e r c e n t , o r f i v e p e r c e n t . Or t h e Bank o f M o n t r e a l may s e c u r e a q u a n t i t y o f t h e s e D o m i n i o n n o t e s i n t h i s way at 3-§- p e r c e n t , and l o a n them t o t h e n e e d y c i t y o f V a n c o u v e r a t 6 p e r c e n t . , t h u s c h a r g i n g 2-g- p e r c e n t , f o r t h e c o s t o f t r a n s f e r r i n g t h e f u n d s f r o m Ottawa by t e l e g r a p h or m a i l , and f o r the o t h e r s e r v i c e s o f an " h o n e s t b r o k e r " and m i d d l e m a n . The c i t y o f V a n c o u v e r may n o t borrow d i r e c t l y f r o m t h e " c e n t r a l bank", ( t h e F i n a n c e A c t ) ; i t must borrow t h r o u g h t h e "middleman" i n o r d e r t h a t t h e t r a n s a c t i o n may be " s o u n d " . I n f a i r n e s s t o t h e banks i t s h o u l d be p o i n t e d out t h a t a s "middlemen" t h e y sometimes p e r f o r m a s e r v i c e t h a t m i g h t e a s i l y be o v e r l o o k e d . F o r i n s t a n c e , i f t h e Bank o f M o n t r e a l a c c e p t e d V a n c o u v e r c i t y bonds as s e c u r i t y f o r a l o a n t o t h a t c i t y a n d t h e n d e p o s i t e d t h o s e b o n d s w i t h t h e D e p a r t m e n t of F i n a n c e a s c o l l a t e r a l s e c u r i t y f o r an a d v a n c e u n d e r t h e F i n a n c e A c t , i t w o u l d b e a r the r i s k o f V a n c o u v e r ' s d e f a u l t . On t h e o t h e r hand, i f i t a c c e p t e d f r o m V a n c o u v e r s e c u r i t i e s o t h e r t h a n t h e c i t y ' s own b o n d s , i t would, assume two r i s k s . Hence p a r t of t h e i n t e r e s t c h a r g e d i n s u c h c a s e s i s to c o m p e n s a t e t h e bank f o r r i s k s assumed. More o f t e n t h a n n o t , however, t h e bank w i l l n o t r e l o a n t h e D o m i n i o n n o t e s t h e m s e l v e s , t h a t i t h a s s e c u r e d i n t h e a b o v e way. I n s t e a d , i t may t a k e t h e D o m i n i o n n o t e s so o b t a i n e d t o t h e C e n t r a l G o l d R e s e r v e s , d e p o s i t them t h e r e i n s t e a d o f g o l d a s b a c k i n g on w h i c h t o i s s u e i t s own bank n o t e s d o l l a r f o r d o l l a r . I t c o s t s t h e bank s o m e t h i n g to p r i n t i t s own n o t e s , b u t i t c o n s i d e r s t h a t t h e p r e s t i g e and a d v e r t i s i n g r e s u l t i n g t h e r e f r o m w i l l more t h a n r e p a y t h e a d d i t i o n a l c o s t . Then i t may l o a n i t s own bank n o t e s t o t h e Government or t o t h e c i t y o f V a n c o u v e r as s u g g e s t e d a.bove. Ho more t h a n what has j u s t b e e n s a i d above and what was s t a t e d i n our d i s c u s s i o n of t h e h i s t o r y o f t h e F i n a n c e A e t i s n e e d e d t o show t h a t t h i s A c t d o e s s e r v e as a b a n k e r s ' bank to t h e e x t e n t t h a t t h e banks are i t s c u s - t o m e r s , t h a t i t makes l o a n s t o them, and t h a t i t s u p p l i e s them w i t h emergency c u r r e n c y . The ma.in b u l w a r k o f t h e d e f e n c e o f t h e F i n a n c e A c t as a b a n k e r s ' bank, however, i s s u p p o s e d t o be f o u n d i n t h e c l a i m t h a t i t s e r v e s a s an 74. a d e q u a t e r e d i s c o u n t i n g a g e n c y . Most o f o u r b a n k e r s n a ve made t h i s c l a i m i n r e c e n t months. One s t a t e m e n t w i l l be s u f f i c i e n t t o i n d i c a t e t h e i r g e n e r a l v i e w . Mr. S. H. Logan, G e n e r a l Manager o f t h e C a n a d i a n Bank o f Commerce a t t h e bank's a n n u a l m e e t i n g i n T o r o n t o , on J a n u a r y 10, 1933, s p o k e a s f o l l o w s : " I t may be 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 t h a n i s p e r m i t t e d i n t h e U n i t e d 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 i n t h e w o r l d . " 8 1 I t i s q u i t e t r u e t h a t a d v a n c e s may be a.nd a r e o b t a i n e d q u i t e r e a d i l y by t h e banks t h r o u g h the o p e r a t i o n o f t h e 82 A c t . F o r i n s t a n c e , a c c o r d i n g t o t h e m o n t h l y r e t u r n s o f t h e banks t o t h e M i n i s t e r o f F i n a n c e , we f i n d t h a t on December 31, 1932, e v e r y one o f the t e n b a n k s h a d a d v a n c e s o u t s t a n d i n g , t h a t one bank h a d a d v a n c e s to t h e a.mount o f $25,000,000, t h a t t h e bank w i t h t h e s m a l l e s t amount h a d $84,000, and t h a t a l l o f them t o g e t h e r h a d $56,988,000. As l i s t e d i n a p r e v i o u s s e c t i o n t h e s e c u r i t i e s o r p a p e r made e l i g i b l e by law f o r s u c h a d v a n c e s show q u i t e a v a r i e t y — f r o m D o m i n i o n t r e a s u r y b i l l s and bonds t o p r o - m i s s o r y n o t e s and b i l l s o f e x c h a n g e . V e r y l i t t l e t r a d e 81. The V a n c o u v e r D a i l y P r o v i n c e , J a n . 10, 1933 82. The F i n a n c i a l P o s t , F e b . 11, 1933. 75. p a p e r i s s o u s e d , however. I n most c a s e s t h e s e c u r i t i e s d e p o s i t e d a r e b o n d s . A c c o r d i n g t o a T r e a s u r y B o a r d M i n u t e 8 3 o f May 30, 1923, t h e m a r g i n s by w h i c h t h e d i f f e r e n t c l a s s e s o f s e c u r i t i e s d e p o s i t e d s h o u l d exceed i n v a l u e t h e amount o f t h e l o a n s r a n g e f r o m n o t h i n g , on D o m i n i o n T r e a s u r y B i l l s and Bonds, t o 25 p e r c e n t , on a s s i g n m e n t s s e c u r e d by documents c o v e r i n g g r a i n , f l o u r , c e r e a l s and f e e d . From what has been s t a t e d above i t c a n r e a d i l y be s e e n t h a t t h i s s o - c a l l e d " r e d i s c o u n t i n g " i s n o t r e a l l y r e d i s - c o u n t i n g a t a l l , b u t j u s t an o r d i n a r y p r o c e s s o f m a k i n g l o a n s on d e p o s i t e d c o l l a t e r a l . The words " l o a n " and " a d v a n c e s " a r e u s e d i n t h e A c t , but t h e word " r e d i s c o u n t " does n o t a p p e a r a t a l l . When s e c u r i t i e s or t r a d e p a p e r a r e r e a l l y r e d i s c o u n t e d t h e y a r e n e g o t i a t e d and t h e p u r - c h a s e r may n e g o t i a t e them a g a i n o r h o l d them t i l l m a t u r i t y . A l t h o u g h t h e f i r s t bank t h a t h a s them r e d i s c o u n t e d r e m a i n s l i a b l e , i t h a s e n d o r s e d them i n f a v o r of t h e new h o l d e r . On t h e o t h e r hand, when l o a n s a r e made on s e c u r i t i e s , t h e s e s e c u r i t i e s r e m a i n t h e p r o p e r t y o f t h e b o r r o w e r and a r e redeemed on t h e l o a n m a t u r i t y d a t e . The v e r y f a c t s t h a t t h e Department o f F i n a n c e r e q u i r e s m a r g i n , and t h a t the maximum p e r i o d f o r w h i c h t h e a d v a n c e s are made i s one 83. B e c k h a r t , B. H. The B a n k i n g System o f Canada, p . 391. 76. y e a r , a r e i n t h e m s e l v e s p r o o f t h a t t h e o p e r a t i o n s of t h e 84 A c t a r e n o t r e d i s c o u n t i n g . I n f a c t one b a n k e r p u t s i t c l e a r l y when h e s a y s : 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 and e f f e c t i v e m a c h i n e r y by w h i c h we a r e a b l e t o b o rrow85 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 o f 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 Government." C e n t r a l b a n k s , on t h e o t h e r hand, b o t h r e d i s c o u n t i n t h e r e a l s e n s e and make l o a n s on d e p o s i t e d c o l l a t e r a l . T h a t t h e r e i s a d i s t i n c t i o n b e t w e e n t h e two t r a n s a c t i o n s i s shown i n t h e f a c t t h a t t h e r a t e s d i f f e r . The r a t e on l o a n s i s u s u a l l y h i g h e r t h a n t h e d i s c o u n t r a t e . Of t h e two 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 b y t h e c e n t r a l bank f o r t h e c o m m e r c i a l banks i s much t h e more i m p o r t a n t . The F i n a n c e A c t ( a s a " c e n t r a l bank") does i s s u e n o t e s a s we h a v e a l r e a d y s e e n , b u t i t d o e s n o t p o s s e s s a monopoly o f t h e n o t e i s s u e , s i n c e t h e banks t h e m s e l v e s may and do i s s u e bank n o t e s . I t c a n n o t be s a i d t h a t t h e A c t s e r v e s a s a c e n t r a l bank by a c t i n g as a c l e a r i n g h o u s e f o r t h e c o m m e r c i a l b a n k s . They p r o v i d e t h e i r own c l e a r i n g h o u s e f a c i l i t i e s . The A c t does, however, p r o v i d e them w i t h l e g a l t e n d e r n o t e s w h i c h 84. Henwood, H. G., G e n e r a l Manager o f t h e Bank o f T o r o n t o , as r e p o r t e d i n t h e F i n a n c i a l P o s t of J a n . £ 1 , 1933, p . 5. 85. U n d e r l i n i n g by w r i t e r . t h e y u s e a s a medium of exchange i n s e t t l i n g c l e a r i n g h o u s e b a l a n c e s . U n l i k e a b a n k e r s 1 bank t h e F i n a n c e A c t i s n o t t h e d e - p o s i t o r y o f t h e c a s h r e s e r v e s o f t h e b a n k s . They h o l d t h e i r own r e s e r v e s . I f t h e y h a v e a g r e a t e r q u a n t i t y of g o l d and D o m i n i o n n o t e s d e p o s i t e d i n t h e C e n t r a l G o l d R e s e r v e s t h a n t h e y h a v e u s e d a s b a c k i n g f o r n o t e s o f t h e i r own, t h e d i f f e r e n c e c o n s t i t u t e s a p a r t o f t h e i r c a s h r e s e r v e s , b u t t h e C e n t r a l G o l d R e s e r v e s a r e d i s t i n c t i n l o c a t i o n and a d - m i n i s t r a t i v e p e r s o n n e l f r o m t h e D e p a r t m e n t o f F i n a n c e . S i n c e , t h e r e f o r e , t h e c a s h r e s e r v e s a r e d e c e n t r a l i z e d i n t h a t t h e y a r e h e l d i n p a r t by e a c h o f t h e t e n b a n k s and t h e C e n t r a l G o l d R e s e r v e s , t h e y a r e n o t u s e d as e c o n o m i c a l l y and e f f i c i e n t l y as t h e y w o u l d be i f t h e y were c o n c e n t r a t e d i n one p l a c e s u c h as i n a r e a l c e n t r a l bank. l i k e a b a n k e r s ' bank, on t h e o t h e r hand, t h e F i n a n c e A c t d o e s e n s u r e t h e s o l v e n c y o f t h e w h o l e b a n k i n g s y s t e m . The f e w n e s s o f t h e c h a r t e r e d banks (10) l e a d s a l m o s t i n - e v i t a b l y t o a k i n d o f Government g u a r a n t e e o f b a n k i n g . 8ft As B e c k h a r t s a y s : "The C a n a d i a n Government c o u l d n o t a l l o w a n y o f t h e l a r g e r banks t o f a i l , f o r s u c h w o u l d be most d i s a s t r o u s to the e n t i r e e c o n o m i c s t r u c t u r e o f t h e c o u n t r y . The Government v/ould have t o 86. 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 Canada, p . 328. 78. - " l e n d s u p p o r t i f s u c h a n i n s t i t u t i o n were ap- p 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 pon t o do on one o c c a s i o n "before t h e war." As we have a l r e a d y s e e n , when, t h e G r e a t War b r o k e o u t the Government met t h e d a n g e r of i n s o l v e n c y o f t h e b a n k s b y p a s s i n g t h e F i n a n c e A c t . Made permanent i n 19£3, t h i s A c t i s t o - d a y the medium t h r o u g h w h i c h a t h r e a t e n e d , bank i n - s o l v e n c y would be p r e v e n t e d f r o m o c c u r r i n g . I n t h e s e n s e , t h e n , t h a t i t assumes 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 w h o l e b a n k i n g s y s t e m , t h e F i n a n c e A c t s e r v e s a s a b a n k e r s ' bank and i n p a r t p l a y s t h e r f t l e o f a c e n t r a l b ank. C a r r y i n g f u r t h e r t h e i d e a t h a t t h e F i n a n c e A c t i s a good s u b s t i t u t e f o r a b a n k e r s ' bank, some of i t s s u p p o r t e r s go so f a r a s t o compare our w h o l e b a n k i n g s y s t e m w i t h t h e F e d e r a l R e s e r v e System o f t h e U n i t e d S t a t e s . They p o i n t out t h a t t h i s s y s t e m c o n s i s t s o f t w e l v e r e g i o n a l F e d e r a l R e s e r v e Banks and a F e d e r a l R e s e r v e B o a r d . T h e n t h e y s a y t h a t our F i n a n c e A c t c o r r e s p o n d s w i t h t h e F e d e r a l R e s e r v e B o a r d and our t e n b a n k s w i t h t h e F e d e r a l R e s e r v e B a n k s . I n numbers i t i s t r u e t h e r e i s o n l y t h e d i f f e r e n c e b e t w e e n 11 and 13, b u t i n o t h e r ways t h e r e i s a v a s t d i f f e r e n c e . L a t e r on, when we come t o c o n s i d e r t h e F i n a n c e A c t a s a " p e o p l e ' s " bank, we s h a l l s ee t h a t t h e a d m i n i s t r a t o r s o f th e A c t h a v e , i n t h e p a s t a t l e a s t , e x e r c i s e d no c o n s c i o u s c o n t r o l o v e r t h e c h a r t e r e d banks o r o v e r money and c r e d i t . 7 9 . The F e d e r a l R e s e r v e B o a r d , on t h e o t h e r hand, d o e s e x e r c i s e d i r e c t and v e r y r e a l c o n t r o l o v e r the F e d e r a l R e s e r v e Banks, and does p u r s u e a d e f i n i t e p o l i c y o f m o n e t a r y c o n t r o l . The head o f f i c e o f each o f our b a n k s , i t i s s a i d , d i s c o u n t s f o r t h e b r a n c h e s , and i n o t h e r ways a c t s as a c e n t r a l bank, w h i l e t h e b r a n c h e s a r e t h e u n i t b a n k s . Though i t h a s l i t t l e t o do w i t h t h e argument, i t may be i n t e r e s t i n g t o p o i n t out h e r e t h a t t h e head o f f i c e o f a C a n a d i a n bank is n o t i t s e l f a bank. I t d o e s , however, d i s c o u n t f o r t h e b r a n c h e s , and t h i s i s one o f t h e s t r o n g e s t p o i n t s made by t h o s e who oppose t h e c r e a t i o n o f a c e n t r a l bank f o r Canada. I f e a c h head o f f i c e i s a c e n t r a l bank, t h e n we have i n e f f e c t t e n c e n t r a l b anks. But i t i s h a r d l y l o g i c a l to s a y t h a t b e c a u s e one c e n t r a l bank i s a good t h i n g , t e n would be s t i l l b e t t e r . I n f a c t , o f c o u r s e , t h e o p p o s i t e i s t r u e . I f i t i s a good t h i n g t h a t t h e c o n t r o l of a l l our b r a n c h , or " u n i t " banks, s h o u l d be c o n c e n t r a t e d i n t h e hands of t e n i n s t i t u t i o n s i t i s l o g i c a l to a r g u e t h a t s t i l l f u r t h e r c e n t r a l i z a t i o n i n one r e a l c e n t r a l bank w o u l d be s t i l l b e t t e r . Though c o n t r o l of t h e r a m i f i c a t i o n s o f a l l t h e b r a n c h e s of one c h a r t e r e d bank i s c o n c e n t r a t e d i n t h e head o f f i c e , a s has been s a i d b e f o r e , a b r a n c h may be t h r e e o r more t h o u s a n d s o f m i l e s f r o m the d i s c o u n t i n g a g e n c y o f t h e head o f f i c e . Hence i n c o m p a r i n g o u r t e n head o f f i c e s 80. w i t h t h e t w e l v e F e d e r a l R e s e r v e Banks of t h e U n i t e d S t a t e s we must remember t h a t t h e l a t t e r a r e r e g i o n a l w h i l e t h e f o r m e r a r e n o t . Then, t o o , we s h o u l d r e a l i z e t h a t our t e n " c e n t r a l banks" a r e n o t u n i f i e d u n d e r a F e d e r a l R e s e r v e B o a r d . As we h a v e s e e n , t h e F i n a n c e A c t d o e s n o t c o - o r d i n a t e them. T r u e t h e r e i s a 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 , b ut i t d o e s n o t p e r f o r m t h e o r d i n a r y f u n c t i o n s o f a c e n t r a l b a n k . A n o t h e r argument p u t f o r t h i n s u p p o r t o f t h e a d e q u a c y of t h e head o f f i c e p l u s t h e F i n a n c e A c t as a, b a n k e r s ' bank i s t h e c o m p a r a t i v e s e c u r i t y of d e p o s i t s i n Ca.n8.da. When we r e a l i z e t h a t t h e r e have been o n l y t w e n t y - s i x bank f a i l u r e s 8 ' ' ' i n Canada s i n c e C o n f e d e r a t i o n , t h a t t h e r e h a v e o n l y b e e n n i n e s i n c e 1900, a n d t h a t t h e l a s t o c c u r r e d i n 1 9 2 3 8 8 , w h i l e i n t h e U n i t e d S t a t e s f a i l u r e s have r e a c h e d f o u r f i g u r e s 8 ^ i n t h e l a s t t h r e e y e a r s , a s many as s i x t y - 90 s i x ha.ving f a i l e d d u r i n g one week, we a r e i n c l i n e d t o a g r e e t h a t our banks have g i v e n us a h i g h d e g r e e of s e c u r i t y f o r our d e p o s i t s . I n f u r t h e r c o n d e m n a t i o n o f t h e b a n k i n g s y s t e m of t h e U n i t e d S t a t e s i t may be s t a t e d 87. B e c k h a r t , B. H. The B a n k i n g System of Canada, p . 480. 88. The Home Bank. 89 and 90. 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 by J o h n McLean, a b o u t M a r c h 1, 1932. 81. t h a t i n 19E9 t h e r e were i n a l l 25,110 banks, w h i l e i n December, 1932, t h e r e were o n l y 19,046, a d e c r e a s e of 6,064 i n t h r e e y e a r s , most o f them h a v i n g c l o s e d t h e i r d o o r s owing to i n s o l v e n c y . But c o n d e m n a t i o n of one s y s t e m does n o t n e c e s s a r i l y d e f e n d a n o t h e r . A g r e a t many b r a n c h e s of our banks have been c l o s e d s i n c e 1929. S i n c e t h e s e were b r a n c h e s and n o t u n i t banks we do n o t c l a s s them a s f a i l u r e s . Nor were t h e y t r u e f a i l u r e s . They meant s i m p l y t h e v o l u n t a r y w i n d i n g up of b r a n c h e s o f a s o l v e n t bank. N e v e r t h e l e s s i n t h e U n i t e d S t a t e s , where t h e r e i s l i t t l e b r a n c h b a n k i n g , e a c h o f t h e s e c l o s i n g s would have c o n s t i - t u t e d a bank f a i l u r e f o r e a c h w o u l d h a v e been an i n v o l u n - t a r y c l o s i n g o f an i n s o l v e n t u n i t bank. S i x t y p e r c e n t , o f t h e f a i l u r e s i n t h e U n i t e d S t a t e s were o f banks u n d e r $25,000 c a p i t a l i z a t i o n , and 60 p e r c e n t , of t h e c o m m e r c i a l banks ( n o t 60 p e r c e n t , of t h e n a t i o n ' s c o m m e r c i a l b a n k i n g power) were non-members o f t h e F e d e r a l R e s e r v e System, made up o f s t a t e banks and t r u s t c o m p a n i e s , p r e p o n d e r a n t l y s m a l l i n s t i t u t i o n s i n r u r a l d i s t r i c t s . ^ On t h e o t h e r hand, i n v i e w o f t h e f a c t t h a t the minimum c a p i t a l i z a t i o n o f a bank i n Canada i s $500,000, t h a t e a c h c h a r t e r e d bank 91. 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 an a r t i c l e on " U n i t e d S t a t e s B a n k s" by 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 R e v i e w o f R e v i e w s and V/orld V/ork f o r D e c , 1932. h a s a g r e a t many b r a n c h e s , and t h a t t h e f a c i l i t i e s of t h e F i n a n c e A c t e x i s t , i t w o u l d be a d i s g r a c e f o r one o f our t e n b a n k s to f a i l . So ca.lamitous w o u l d i t be t h a t , t o r e c a l l t h e words o f B e c k h a r t 9 * ' a g a i n : "The C a n a d i a n Government c o u l d n o t a l l o w a n y of th e l a r g e r banks t o f a i l " I t w i l l be w e l l to n o t e t h e s t r e s s l a i d upon v/hat i s s a i d t o be t h e g r e a t s e c u r i t y of d e p o s i t s u n d e r our C a n a d i a n b a n k i n g s y s t e m . S p e a k i n g a t t h e l a s t a n n u a l m e e t i n g o f 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 on November 10, 1932, t h e P r e s i d e n t 9 3 s a i d : "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 o f t h e p e o p l e ' s money. I n t h e t o t a l o f our b a n k i n g a s s e t s t h e s h a r e h o l d e r s ' e q u i t y f o r m s a v e r y s m a l l p r o p o r - t i o n . Most o f t h e v a s t sum f o r w h i c h t h e banks a r e r e s p o n s i b l e has b een l e f t i n t h e i r s a f e - k e e p i n g by t h e p e o p l e of Canada.. "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 d u t i e s ; f i r s t l y , t h a t o f p r o v i d i n g c u r r e n c y f o r t h e d a i l y c o n d u c t o f b u s i n e s s , a s a n d when r e q u i r e d , and i n a d e q u a t e amounts; and s e c o n d l y , t h a t o f h o l d i n g i n s a f e c u s t o d y t h e 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 i n C a n ada. " I t i s u n n e c e s s a r y t o s t a t e t h a t b o t h o f . t h e s e f u n c t i o n s have been p e r f o r m e d w i t h c o m p l e t e s moothness a n d c e r t a i n t y t h r o u g h o u t t h e d e p r e s - s i o n . "....The s a f e t y o f d e p o s i t s h a s n e v e r b e e n 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 t h e m e e t i n g o f a l l l a w f u l demands." 92. B e c k h a r t , B. H. The B a n k i n g System o f Canada, p . 328. 93. M c l e o d , «T. A. A d d r e s s t o t h e A n n u a l G e n e r a l M e e t i n g o f 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. - P a r e n t h e s i s by t h e w r i t e r . 83. I n a p r e v i o u s c h a p t e r i t was m e n t i o n e d t h a t i n t h e l a s t t h r e e months a n n u a l m e e t i n g s o f a l m o s t a l l t h e b a n k s h a v e b e e n h e l d . I n n e a r l y e v e r y c a s e e i t h e r t h e p r e s i d e n t or t h e g e n e r a l manager spoke a g a i n s t t h e i d e a o f a c e n t r a l bank b e i n g i n s t i t u t e d . One o f t h e methods u s e d a l m o s t i n v a r i a b l y was n o t t o show t h a t a c e n t r a l bank w o u l d be bad, b u t to l a u d t h e e x i s t i n g s y s t e m , p a r t i c u l a r l y w i t h r e s p e c t t o t h e s a f e t y o f d e p o s i t s . The P r e s i d e n t o f t h e B a n k e r s ' A s s o c i a t i o n a s q u o t e d a b o v e , however, c o v e r s t h e i r p o i n t f u l l y , so none o f t h e o t h e r s n e e d be q u o t e d h e r e . I t w o u l d be w e l l t o s t a t e h e r e , p e r h a p s , i n n e i t h e r c r i t i c i s m n o r a p p r o v a l , t h e s t a t u s o f t h e d e p o s i t o r a s a c l a i m a n t a g a i n s t t h e a s s e t s of a f a i l e d bank. The law d oes n o t g i v e h i m a p r i o r l i e n on t h e s e a s s e t s . I n t h e m a t t e r o f p r i o r i t y , t h e n o t e s c o n s t i t u t e t h e f i r s t l i e n on t h e s e a s s e t s ; t h e c l a i m s o f t h e D o m i n i o n Government, t h e s e c o n d ; o f t h e P r o v i n c i a l Governments, t h e t h i r d ; t h e d e p o s i t o r s ' c l a i m s , t h e f o u r t h . On December 24, 1932, "A C a n a d i a n B a n k e r " , w r i t i n g t o g i v e t h e v i e w p o i n t o f C a n a d i a n c h a r t e r e d banks on t h e q u e s t i o n o f a c e n t r a l bank f o r Canada, s a y s w i t h r e f e r e n c e t o d e p o s i t s : 95. B e c k h a r t , B. H. The B a n k i n g System o f Canada, p . 403. 84. " l o n g e x p e r i e n c e h a s i n d i c a t e d t h a t i f a p p r o x i - m a t e l y 10 p e r c e n t , of t h e amount of t h e d e - p o s i t s i s h e l d i n c a s h 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 ) and 25 p e r c e n t , i n s e c u r i t i e s , t h e * r e q u i r e m e n t s 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 f a c t t h a t t h e banks have made a p r a c t i c e o f h o l d i n g i n r e s e r v e a g a i n s t demand o n l y 10 p e r c e n t , o f t h e amount o f d e p o s i t s h a s u s u a l l y b e e n a c k n o w l e d g e d i n t h e p a s t w i t h o u t c r i t i c i s m f r o m t h e p u b l i c . C o n d i t i o n s r e - s u l t i n g f r o m d e p r e s s i o n , however, h a v e c a u s e d more p e o p l e t o become i n t e r e s t e d i n b a n k i n g a f f a i r s , and many have been r e c e n t l y c r i t i c i z i n g t h i s " p y r a m i d i n g " of c r e d i t , and h a v e been p o i n t i n g o ut t h a t i t c o n s t i t u t e s a method of v e r y extreme i n f l a t i o n . l e t us q u o t e one p o p u l a r w r i t e r a s a n i l l u s t r a t i o n : " A r e t h e Banks G a m b l i n g W i t h 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 by t h e banks t o be on d e p o s i t w i t h them on A p r i l 30, 1931 $2,049,002,583.00 T o t a l amount of c a s h i n t h e f o r m o f l e g a l t e n d e r t h r o u g h o u t t h e e n t i r e D o m i n i o n out o f w h i c h t o pay t h e s e d e p o s i t s $ 214,814,046.00 B a l a n c e n o t c o v e r e d by l e g a l t e n d e r i n c a s h $1,834,188,537.00 How c o u l d t h e y pay t h e i r d e p o s i t o r s e v e n 11 p e r c e n t , o f what t h e y show t h e y owe them....? Can t h i s be c o n s i d e r e d a s a f e and c o n s e r v a t i v e p o l i c y t o p u r s u e 96. The F i n a n c i a l P o s t , D e c. 24, 1932, p. 15 " i n our b a n k i n g s y s t e m ; p a r t i c u l a r l y i f we s h o u l d be a p p r o a c h i n g a p e r i o d o f p a n i c ? " 9 7 And now we come t o t h e l a s t , b u t by no means t h e l e a s t , c o n s i d e r a t i o n r e l a t i v e t o t h e argument t h a t t h e F i n a n c e A c t c o n s t i t u t e s a s a t i s f a c t o r y s u b s t i t u t e f o r a b a n k e r s ' b a n k — t h e q u e s t i o n o f a d m i n i s t r a t i o n . I n i t s a d m i n i s t r a t i o n , more t h a n i n any o t h e r way, t h e F i n a n c e A c t f a i l s t o e x h i b i t t h e symptoms of a c e n t r a l bank. The v i t a l f a c t o r , t h e r e a l k ey to t h e s u c c e s s o f a c e n t r a l bank, i s t o be f o u n d i n i t s a d m i n i s t r a t i v e p e r - s o n n e l . S p e a k i n g a b o u t m o n e t a r y c o n t r o l l i o n e l D. E d i e s a y s : " I t s s u c c e s s depends upon t h e 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 o f f i n a n c e and t r a d e . " 9 8 And a g a i n : " F i n a n c i a l s t a t e s m a n s h i p o f a h i g h o r d e r i s t h e c a r d i n a l r e q u i r e m e n t . " 9 9 I n o t h e r words, a s Bagehot once s a i d : "Good b a n k i n g i s made by good b a n k e r s and n o t by good l a w s . " Or, a s one o f o u r most e n l i g h t e n e d C a n a d i a n bank e c o n o m i s t s s a y s : 97. Bank o f Canada, Why N o t ? p . 7. 98. Money, Bank C r e d i t , and P r i c e s , p . 475. 99. I b i d . , p . 483. 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 d e p e n d 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 w i t h w h i c h t h e y e x e r c i s e t h e e x p e d i e n t s a t t h e i r command."100 I t i s above a l l i m p o r t a n t , t h e n , t h a t t h e a d m i n i s t r a - t i o n o f a c e n t r a l bank s h o u l d be i n t h e hands o f e x p e r t s o f u n q u e s t i o n e d i n t e l l i g e n c e and p r o f e s s i o n a l q u a l i f i c a - t i o n who w i l l be a b l e t o i n t e r p r e t economic and f i n a n c i a l s i t u a t i o n s and see ahead f a r enough t o " a p p l y t h e b r a k e s " b e f o r e t h e d a n g e r s p o t i s r e a c h e d . The a d m i n i s t r a t i o n o f t h e F i n a n c e A c t i s i n t h e hands o f t h e T r e a s u r y B o a r d . T h i s B o a r d i s p r e s i d e d o v e r by t h e M i n i s t e r of F i n a n c e . The D e p u t y M i n i s t e r o f F i n a n c e i s S e c r e t a r y , e x - o f f i e i o . 1 0 " 1 " W i t h t h e s e two o f f i c i a l s a r e f i v e members of H i s M a j e s t y ' s P r i v y C o u n c i l who a r e a p p o i n t e d by t h e G o v e r n o r - G e n e r a l - i n - C o u n c i l . Canada h a s u s u a l l y e n j o y e d t h e good f o r t u n e of h a v i n g v e r y a b l e and t r u s t w o r t h y men as M i n i s t e r s o f F i n a n c e . T h e i r q u a l i f i c a t i o n s h a v e been s u c h as t o f i t them v e r y w e l l f o r t h e p o s i t i o n of head of t h e Department o f F i n a n c e . However, r a r e l y i f e v e r , h a s one o f them b e e n a p r o f e s s i o n a l e c o n o m i s t o r a n e x p e r i e n c e d b a n k e r . Hence i t i s t o o much to e x p e c t t h a t s u c h m i n i s t e r s s h o u l d g i v e e x p e r t d i r e c t i o n 100. M o n t h l y L e t t e r o f t h e R o y a l Bank of Canada, May, 1932. 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 and Commerce, 1924, pp. 344 a n d 347. 87. t o t h e a d m i n i s t r a t i o n o f t h e F i n a n c e A c t . The f i v e P r i v y C o u n c i l l o r s a r e C a b i n e t M i n i s t e r s . As h e a d s o f v a r i o u s d e p a r t m e n t s t h e y have o t h e r h e a v y d u t i e s . They a r e a b l e , t h e r e f o r e , to d e v o t e l i t t l e t i m e o r t h o u g h t to m a t t e r s r e l a t i v e t o t h e F i n a n c e A c t . B e s i d e s , t h e y and t h e F i n a n c e M i n i s t e r f o r m a p o l i t i c a l b o d y s u b j ect t o change i n p e r s o n n e l w i t h s h i f t s w i t h i n t h e C a b i n e t and w i t h c h a n g e s o f g o v e r n m e n t s . U n l i k e t h e a d m i n i s t r a t o r s o f most c e n t r a l b a n k s , - t h e members o f t h e T r e a s u r y B o a r d a r e n o t a i d e d by e x p e r t a d v i c e , e x c e p t i n t h e c a s e o f t h e v a l u a t i o n o f t h e s e c u r i t i e s d e p o s i t e d by banks a s c o l l a t e r a l f o r a l o a n , when t h e T r u s t e e s o f t h e C e n t r a l G o l d R e s e r v e s may be r e q u e s t e d t o l e n d t h e i r a d v i c e . I n v i e w of t h e f a c t t h a t t h e h e a d o f a c e n t r a l bank a d m i t t e d l y s h o u l d be a l m o s t an " e x p e r t o f e x p e r t s " i n a l l t h i n g s f i n a n c i a l , i t i s somewhat amusing t o f i n d t h a t t h e a d m i n i s t r a t o r s o f our " c e n t r a l bank" ( t h e F i n a n c e A e t ) h a v e t o go to t h e T r u s t e e s of t h e C e n t r a l G o l d R e s e r v e s f o r a d v i c e on t h e q u a l i t y of c o m m e r c i a l p a p e r . T h e r e a r e f o u r of t h e s e T r u s t e e s . One i s a p p o i n t e d b y t h e M i n i s t e r o f F i n a n c e . The o t h e r t h r e e a r e a p p o i n t e d b y 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 , w i t h t h e a p p r o v a l o f the M i n i s t e r . R e f e r r i n g t o t h e T r u s t e e s B e c k h a r t s a y s ; " I n 19E4 t h e T r u s t e e s were t h e R o y a l T r u s t Company, t h e Bank o f M o n t r e a l , t h e C a n a d i a n 88. "Bank o f Commerce and the R o y a l Bank.. " l u < ! i I t i s s t a t e d t o be t h e c u s t o m t h a t when one o f t h e t r u s t e e s , o r h i s bank, i s i n t e r e s t e d i n t h e s e c u r i t i e s u n d e r c o n s i d e r a t i o n , he i s n o t c o n s u l t e d . S i n c e i t i s t h e b a n k s t h a t are i n t e r e s t e d i n t h e t r a n s a c t i o n s , however, a d v i c e o b t a i n e d e l s e w h e r e w o u l d be l e s s open to s u s p i c i o n t h a n t h a t o b t a i n e d f r o m T r u s t e e s who a r e members o f t h e B a n k e r s ' A s s o c i a t i o n . As Mr. D o n a l d W a t s o n ^ 3 s a y s , t h e T r u s t e e s o f t h e C e n t r a l G o l d R e s e r v e s a r e a body t h a t , ''does n o t p o s s e s s t h e u l t i m a t e i n i m p a r t i a l i t y and d i s i n t e r e s t e d n e s s . " Thus we s e e t h a t t h e M i n i s t e r o f F i n a n c e a n d t h e f i v e P r i v y C o u n c i l l o r s a r e n o t t r a i n e d f o r t h e d u t i e s o f c e n t r a l b a n k i n g and a r e t o o busy w i t h o t h e r d u t i e s t o g i v e much t h o u g h t o r a t t e n t i o n to a d m i n i s t r a t i o n o f t h e F i n a n c e A c t . They p r o b a b l y a c c e p t w i t h l i t t l e q u e s t i o n i n g t h e s u g g e s - t i o n s of t h e D e p u t y M i n i s t e r . T h e i r c o n c e p t i o n o f t h e r e s p o n s i b i l i t i e s d e v o l v i n g upon them a s a T r e a s u r y B o a r d i n c h a r g e of t h e A c t ' s a d m i n i s t r a t i o n i s p r o b a b l y a c c u r a t e l y i n d i c a t e d by t h e c a s u a l n a t u r e of t h e r e m a r k s o f one o f them b e f o r e t h e B a n k i n g Committee when h e s a i d t h e y " t r y 104 t o meet onee a week". 102. B e c k h a r t , B. H. The B a n k i n g System o f Canada, p. 385. 103. Watson, D o n a l d , E s s a y on "The F i n a n c e A c t " . 104. 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. 392. 89. The D e p u t y M i n i s t e r o f a d e p a r t m e n t o f government i s u s u a l l y r e g a r d e d a s t h e e x p e r t o f t h a t d e p a r t m e n t , and i s , g e n e r a l l y s p e a x i n g , a permanent c i v i l s e r v a n t . I t i s n a t u r a l t h a t t h e M i n i s t e r s h o u l d l e a v e d e t a i l s o f a d m i n i - s t r a t i o n t o him. I t i s t h e r e f o r e t h e D e p u t y M i n i s t e r o f F i n a n c e who i s t h e r e a l a d m i n i s t r a t o r of t h e F i n a n c e A c t i n p r a c t i c e . I n f a c t one s u c h Deputy s a i d he was 105 " s u p p o s e d to be t h e a d v i s e r " . Most D e p u t i e s h a v e been v e r y e f f i c i e n t and f a i t h f u l c i v i l s e r v a n t s . I t i s no c r i t i c i s m o f them a s s u c h , t h e r e f o r e , to s a y t h a t t h e y h a v e n o t , i n t h e p a s t a t l e a s t , b e e n f i t t e d a s c e n t r a l b a n k i n g e x p e r t s t o a d m i n i s t e r t h e F i n a n c e A c t . R a t h e r , any c r i t i c i s m s h o u l d be d i r e c t e d a g a i n s t the s y s t e m by w h i c h t h e r e h a v e been imposed upon a c i v i l s e r v i c e d e p a r t m e n t d u t i e s w h i c h r i g h t l y b e l o n g t o a s p e c i a l i z e d i n s t i t u t i o n . The D e p u t i e s h a v e had n e i t h e r an a c a d e m i c t r a i n i n g i n e c o n o m i c s n o r p r a c t i c a l e x p e r i e n c e i n b a n k i n g . The same may be s a i d o f the C o m p t r o l l e r o f t h e C u r r e n c y who l o o k s a f t e r some o f t h e d e t a i l s of t h e o p e r a t i o n s o f t h e A c t . T h e r e a r e i n f a c t no s t a t u t o r y r e q u i r e m e n t s a s t o t h e q u a l i f i c a t i o n s o f a n y o f f i c i a l r e s p o n s i b l e f o r t h e a d m i n i - s t r a t i o n o f t h e A c t . 105. I b i d . , p . 388 90. I n a l a t e r s e c t i o n , when t h e A c t w i l l be j u d g e d a s a " p e o p l e ' s " bank, i t w i l l be shown f u l l y t h a t t h e a d m i n i s t r a - t i o n e x e r t s no c o n t r o l o v e r m o n e t a r y m a t t e r s i n t h e s o c i a l s e n s e . S u f f i c e i t t o say h e r e t h a t , i n t h e p a s t a t l e a s t , i t h as n o t b een t h e p o l i c y o f t h e a d m i n i s t r a t o r s t o v a r y the i n t e r e s t r a t e f o r t h e p u r p o s e o f c o n t r o l l i n g c r e d i t , or r e g u l a t i n g commodity p r i c e s , or f o r e i g n e x c h a n g e . J u s t one 106 or two e x c e r p t s f r o m t h e P r o c e e d i n g s o f t h e B a n k i n g Committee w i l l be g i v e n h e r e i n p a s s i n g a s e v i d e n c e o f t h e f a c t t h a t t h e D e p u t y has n o t even been c o n s c i o u s t h a t s u c h c o n t r o l c o u l d be e x e r t e d . " Q u e s t i o n : Can y o u t e l l me w h e t h e r or 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 of 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 m i g h t be u s e d a g a i n s t i n f l a t i o n ? Answer: I do n o t q u i t e g e t t h a t . Q u e s t i o n : Do you r e c o g n i z e t h e i n t e r e s t r a t e , t h a t i s , t h e r a i s i n g and l o w e r i n g o f t h e i n t e r e s t r a t e , a s an e f f e c - t i v e i n st rumen t , no t. p er hap s t h o r o u g h , b u t an e f f e c t i v e i n s t r u - ment, t o c a u s e d e f l a t i o n o r t o a s s i s t i n f l a t i o n ? A nswer: I do n o t t h i n k s o . " I t i s i n t e r e s t i n g t o n o t e t h a t t h e r e was no D e p u t y M i n i s t e r o f F i n a n c e f o r more than two y e a r s . The l a t e Mr. 106. 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 Committee on B a n k i n g a n d Commerce, 1924, p. 393. 91. J . C. S a u n d e r s , who had become D e p u t y M i n i s t e r i n 1920, d i e d on A p r i l 1, 1930. H i s s u c c e s s o r was n o t a p p o i n t e d u n t i l November, 1932. Now i f we were c o r r e c t i n our p r e v i o u s a s s u m p t i o n t h a t t h e D e p u t y M i n i s t e r i s t h e r e a l a d m i n i s t r a t o r o f t h e F i n a n c e A c t , t h e n t h e r e e x i s t e d an anomalous s i t u a t i o n d u r i n g t h e s e two and a h a l f y e a r s . The a s s i s t a n t , a c i v i l s e r v a n t , v,/ho d i d t h e w o r k o f t h e D eputy, was no d o u b t a v e r y c a p a b l e man ( f o r a n o t h e r p o s i t i o n ) . T h a t he was n o t c o n s i d e r e d q u a l i f i e d s u f f i c i e n t l y as an e x p e r t t o a d m i n i s t e r the A c t i s e v i d e n c e d by t h e f a c t t h a t he d i d not become t h e new D e p u t y when the a p p o i n t m e n t was f i n a l l y made. I t i s a l s o v e r y u n l i k e l y t h a t the M i n i s t e r was a b l e t o assume a n y g r e a t e r s h a r e o f t h e w o r k t h e n t h a n u s u a l . D u r i n g t h e g r e a t e r p a r t o f t h e t i m e t h e M i n i s t e r o f F i n a n c e was a l s o P r i m e M i n i s t e r a n d M i n i s t e r o f E x t e r n a l A f f a i r s . F o r a p e r i o d o f two and a h a l f y e a r s , t h e n , when Canada was o f f t h e g o l d s t a n d a r d and t h e r e f o r e d i d n o t have e v e n t h a t semblance o f s o - c a l l e d " a u t o m a t i c " c o n t r o l , our w o u l d - be " c e n t r a l bank" was a d m i n i s t e r e d b y a c i v i l s e r v a n t who was t a c i t l y a c k n o w l e d g e d t o be u n s u i t e ' d f o r t h e t a s k . And t h i s was a p e r i o d t h a t saw the H o o v e r m o r a t o r i u m on d e b t s , t h e f a l l o f B r i t a i n f r o m t h e g o l d s t a n d a r d , a f i n a n c i a l p a n i c i n t h e U n i t e d S t a t e s , t h e I m p e r i a l E conomic C o n f e r e n c e a t O t tawa, and our C a n a d i a n d o l l a r a t a n u n p r e c e d e n t e d d i s c o u n t — a p e r i o d , i n f a c t , u n p a r a l l e l e d , i n t h e number o f c r i s e s t h a t shook t h e f i n a n c i a l and economic s t r u c t u r e o f the w o r l d . As s t a t e d above, a new Deputy M i n i s t e r was f i n a l l y a p p o i n t e d to t h e D e p a r t m e n t o f F i n a n c e i n November, 1932. In t h e l i g h t of what has a l r e a d y been s a i d i t w i l l be i n t e r e s t i n g to n o t e t h e q u a l i f i c a t i o n s o f t h i s new o f f i c i a l . He i s Dr. V/. . C. C l a r k , r e c e n t l y o f t h e D e p a r t - ment o f E c o n o m i e s o f Queen's U n i v e r s i t y . B e f o r e j o i n i n g t h e s t a f f o f Queen's U n i v e r s i t y he had c o n s i d e r a b l e " p r a c t i c a l " e x p e r i e n c e i n t h e b u s i n e s s a n d f i n a n c i a l -world. F o r t h e f i r s t t i m e , t h e n , i n t h e h i s t o r y of t h e F i n a n c e A c t t h e a d m i n i s t r a t o r i s a n e x p e r t s e e m i n g l y w e l l q u a l i f i e d t o d i r e c t c e n t r a l bank p o l i c y . D r . C l a r k v/as a d v i s e r t o t h e C a n a d i a n r e p r e s e n t a t i v e s on m o n e t a r y m a t t e r s a t t h e I m p e r i a l E conomic C o n f e r e n c e i n Ottav/a i n 1932. A t a l m o s t t h e e x a c t moment t h a t he was b e i n g a p p o i n t e d D e p u t y , Canada was t a k i n g h e r f i r s t t a s t e of " r e f l a t i o n " ( t o t h e e x t e n t o f some $35,000,000 i n n e w l y i s s u e d D o m i n i o n n o t e s ) . T h i s c r e a t e d $35,000,000 i n new bank d e p o s i t s , f o r t h e Government r e c e i v e d bank a d v a n c e s to t h a t amount. I t a l s o c r e a t e d t h e p o s s i b i l i t y o f a $350,000,000 e x t e n s i o n o f bank c r e d i t , when and i f t h e o u t l e t , b a c k e d by a d e q u a t e c o l l a t e r a l , i s f o u n d f o r i t , b e c a u s e t h e $35,000,000 becomes a n a d d i t i o n t o the c a s h r e s e r v e s o f t h e banks, a n d b a n k s make a p r a c t i c e of p e r m i t t i n g t h e i r d e p o s i t s to grow up t o a p p r o x i m a t e l y t e n t i m e s t h e i r c a s h r e s e r v e s . I t i s n o t t h e p u r p o s e of t h i s t h e s i s t o s p e c u l a t e , but i n v i e w of t h e f a c t t h a t t h e p r e s e n t P r i m e M i n i s t e r h a s so f r e q u e n t l y e x p r e s s e d h i m s e l f as b e i n g i n f a v o r o f "s o u n d " money, one i s i n c l i n e d t o c o n c l u d e t h a t t h e new D e p u t y a d v i s e d a n d c o n v i n c e d h i m t h a t a measure o f i n f l a - i n ? t i o n was n e c e s s a r y . The F i n a n c i a l P o s t t h i n k s t h a t t h e P r e m i e r was a l s o i n f l u e n c e d b y t h e f a c t t h a t " t h e r i s e i n our d o l l a r was damming up t h e e x p o r t f l o w o f C a n a d i a n wheat". Y/hatever t h e i n f l u e n c e , t h e i n t e r e s t i n g f a c t r e m a i n s t h a t f o r t h e f i r s t t i m e i n Canada's h i s t o r y we h a v e w i t n e s s e d an e x p e r i m e n t i n s e e m i n g l y c o n s c i o u s m o n e t a r y management. The q u a l i f i c a t i o n s o f D r . C l a r k a n d t h e i n i t i a t i o n i n t o m o netary management w h i c h we h a v e a l r e a d y e x p e r i e n c e d w o u l d g i v e us r e a s o n to a n t i c i p a t e u n d e r t h e r e g i m e o f t h e new D e p u t y M i n i s t e r o f F i n a n c e an a t t e m p t t o r e g u l a r i z e our m o n e t a r y and b a n k i n g c o n t r o l and t h e o p e r a t i o n s of t h e d e p a r t m e n t g e n e r a l l y . I t w i l l be o f i n t e r e s t t h e n t o l e a r n s o m e t h i n g o f Dr. C l a r k ' s v i e w s . T h e r e h a s been s o m e t h i n g of t h e n a t u r e 107. The F i n a n c i a l P o s t , T o r o n t o , Nov. 26, 1932 94. o f a c o n t r o v e r s y a s t o w h e t h e r o r n o t Canada i s s t i l l on the g o l d s t a n d a r d . The P r i m e M i n i s t e r d e c l a r e d when G r e a t B r i t a i n abandoned g o l d t h a t Canada w o u l d n o t d o s o , and up to t h e p r e s e n t d e c l a r e s h i s i n t e n t i o n to a d h e r e t o "s o u n d " money. Of our p o s i t i o n w i t h r e s p e c t t o g o l d t h e new D e p u t y s a y s : " . . . . P r o h i b i t i o n o f g o l d e x p o r t i s t a n t a m o u n t t o s u s p e n s i o n of t h e g o l d s t a n d a r d , though t h e n i c e t i e s o f f o r m a l l o g i c w o u l d a l s o 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 p r o h i b i t i o n o f t h e c o n v e r s i o n o f D o m i n i o n n o t e s i n t o g o l d f o r d o m e s t i c as w e l l a s e x p o r t p u r - p o s e s . " 1 0 8 I n t h e same a r t i c l e he s a y s : " S e p t . E l , 1931, marked t h e end o f an epoch 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 t h e p e r i o d when Canada had 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 b a n k i n g " m a c h i n e r y . ) A g a i n he s t a t e s : "We would be i n a s o u n d e r p o s i t i o n , however, 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 e q u i p p e d 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 emergency o f t h i s c h a r a - c t e r i n s t e a d o f t h e 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 b a n k s and t h e government and l a c k of s p e c i a l equipment or 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 G o l d S t a n d a r d " , Queen's... Q u a r t e r l y , Autumn, 1931, p . 760. 109. I b i d . 110. I b i d . , p . 761. A r e we, t h e n , to h a v e " t r a d i t i o n s " b u i l t up a r o u n d our F i n a n c e A c t ? C e r t a i n l y no s u c h t r a d i t i o n s e x i s t y e t . I n f a c t t h e l a c k o f s u c h t r a d i t i o n s c o n s t i t u t e s an a r g u - ment a g a i n s t t h e t h e o r y t h a t t h e F i n a n c e A c t i s i n e f f e c t a centra.1 bank. T r a d i t i o n s a r e a g r e a t a s s e t to a c e n t r a l bank. The v a s t p r e s t i g e o f t h e Bank o f E n g l a n d , f o r i n s t a n c e , i s to a l a r g e e x t e n t due t o i t s t r a d i t i o n s . I f t h e new D e p u t y i s a b l e t o c o n v i n c e t h e Government t h a t we s h o u l d h a v e d e l i b e r a t e management o f our m o n e t a r y s y s t e m , and i f h e s u c c e e d s i n b u i l d i n g up t r a d i t i o n s a r o u n d o u r c e n t r a l b a n k i n g m a c h i n e r y , November, 1932, w i l l mark t h e b e g i n n i n g o f a new e p o c h i n t h e f i n a n c i a l h i s t o r y o f Canada. Dr. C l a r k s p e a k s of " t h e 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 a n d t h e g o v e r n - ment". C e r t a i n l y the a d m i n i s t r a t i o n o f our s o - c a l l e d c e n t r a l b a n k i n g m a c h i n e r y i l l u s t r a t e s a d m i r a b l y t h e e c o n o m i s e s p h r a s e " d i v i s i o n o f l a b o r " . I f we a r e t o c o n - s i d e r t h a t t h e F i n a n c e A c t and our b a n k i n g s y s t e m t o g e t h e r c o n s t i t u t e i n e f f e c t a c e n t r a l bank we have the powers o f a d m i n i s t r a t i o n d i v i d e d amont t h e f o l l o w i n g : (1) The b a n k s ,—10 c e n t r a l banks w o r k i n g i n d e p e n d e n t l y - o r a d e c e n t r a l i z e d c e n t r a l bank. (2) The F i n a n c e A c t — a d m i n i s t e r e d by t h e T r e a s u r y 96. B o a r d — g r a n t s l o a n s t o b a n k s . (3) The T r u s t e e s o f t h e C e n t r a l G o l d R e s e r v e s — i n t h e i r c a p a c i t y a s e x p e r t s a d v i s i n g t h e T r e a s u r y B o a r d a s t o t h e v a l u e s o f c o m m e r c i a l p a p e r on w h i c h l o a n s a r e s o u g h t . (4) The G o v e r n o r - i n - C o u n c i l - r e s p o n s i b l e f o r t h e i s s u e o f l e g a l t e n d e r ( D o m i n i o n n o t e s ) . (5) The C e n t r a l G o l d R e s e r v e s - a d m i n i s t e r e d by f o u r t r u s t e e s , one a p p o i n t e d by t h e M i n i s t e r o f F i n a n c e and t h r e e by t h e B a n k e r s ' A s s o c i a t i o n - r e s p o n s i b l e f o r t h e g o l d and D o m i n i o n n o t e s d e p o s i t e d by t h e banks as b a c k i n g f o r t h e i s s u e of bank n o t e s i n e x c e s s o f t h e amount of t h e i r p a i d - u p c a p i t a l . (6) The M i n i s t e r of F i n a n c e i n h i s c a p a c i t y as s u p e r - v i s o r o f t h e C i r c u l a t i o n R e d e m p t i o n F u n d . (7) 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 i n i t s c a p a c i t y as s u p e r v i s o r o v e r - (a) c l e a r i n g h o u s e s . (b) t h e p r i n t i n g and d i s t r i b u t i n g o f n o t e s t o t h e banks and t h e i r d e s t r u c t i o n . ( c ) t h e a p p o i n t m e n t o f a c u r a t o r t o assume s u p e r v i s i o n o f t h e a f f a i r s o f s u s p e n d e d b a n k s . (8) The P o s t a l S a v i n g s Banks - s t a t e i n s t i t u t i o n s . 97. (9) The I n s p e c t o r G e n e r a l o f Banks — m a k e s e x t e r n a l i n s p e c t i o n , a t l e a s t one a y e a r , of e a c h c h a r t e r e d b a n k . When one s u r v e y s t h i s m e d l e y of powers t h a t s h a r e t h e a d m i n i s t r a t i o n of our " c e n t r a l b a n k i n g " m a c h i n e r y he i s n o t s u r p r i s e d t h a t K i s c h and E l k i n ^ ^ " , a u t h o r i t i e s on c e n t r a l b a n k s , s h o u l d s p e a k of " t h e s e r i o u s draw-backs t o th e C a n a d i a n s y s t e m " , u n d e r t h e f o l l o w i n g h e a d s : (1) D i v i d e d r e s p o n s i b i l i t y . (2) L a c k o f l e a d e r s h i p . (3) G o l d s t a n d a r d n o t an a u t o m a t i c s y s t e m . F o l l o w i n g i s t h e i r comment i n p a r t : "Whether t h e r e i s a g o l d s t a n d a r d o r n o t t h e c o n t r o l o f t h e c r e d i t and t h e m o n e t a r y s y s t e m i n v o l v e s t h e s o l u t i o n of many d i f f i c u l t p r o - blems 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 . But 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 mo n e t a r y p o l i c y o f t h e c o u n t r y , and t h i s i s bound to be a s o u r c e o f weakness, e s p e c i a l l y a t a t i m e of s e r i o u s c r i s i s , when a w e l l - d e v i s e d and c o h e r e n t p l a n o f a c t i o n v i g o r o u s l y a p p l i e d i s e s s e n t i a l . " 1 1 2 W h i l e on the s u b j e c t o f a d m i n i s t r a t i o n we must g i v e c o n s i d e r a t i o n to t h e p o l i t i c a l f a c t o r , and t h e g e n e r a l r e l a t i o n s h i p between t h e " c e n t r a l bank" and t h e Government. T h i s i s a s u b j e c t on w h i c h t h e r e i s room f o r much h o n e s t 111. K i s c h and E l k i n . C e n t r a l Banks, p. 6. 112. I b i d . d i f f e r e n c e o f o p i n i o n . B a n k e r s i n p a r t i c u l a r , and o p p o n e n t s o f t h e c e n t r a l bank i d e a g e n e r a l l y , i n Canada, g i v e v o i c e t o t h e i r a p p r e h e n s i o n l e s t t h e c r e a t i o n of a c e n t r a l bank might mark t h e e n t r y o f p o l i t i c s i n t o t h e m o n e t a r y and b a n k i n g m a c h i n e r y o f our c o u n t r y . The d e s i r a b i l i t y of k e e p i n g p o l i t i c s ( i n t h e e v i l s e n s e ) out o f s u c h m a t t e r s i s so s e l f - e v i d e n t t h a t t h e r e i s no d i f f e r e n c e of o p i n i o n 113 on t h a t p o i n t . K i s c h and E l k i n i n e f f e c t s a y t h a t i t i s o f t h e utmo s t i m p o r t a n c e t h a t m o n e t a r y m a t t e r s s h o u l d be k e p t c l e a r " f r o m t h e e x i g e n c i e s of p a r t y p o l i t i c s and c o n t r o v e r s y " , and t h a t i t i s d e s i r a b l e t h a t t h e c e n t r a l bank s h o u l d be "independent o r q u a s i i n d e p e n d e n t " . I t i s the d e g r e e and k i n d of i n d e p e n d e n c e t h a t g i v e s r i s e t o d i f f e r e n c e of o p i n i o n . Some b e l i e v e t h a t t h e c e n t r a l b a n k s h o u l d be p r i v a t e l y owned and c o m p l e t e l y i n d e p e n d e n t o f government c o n t r o l l i k e t h e R e i c h s b a n k o f Germany and t h e Bank o f E n g l a n d . O t h e r s i n s i s t t h a t i t s h o u l d be a r e a l s t a t e bank l i k e t h e N o r g e s Bank of Norway, t h e R i k s b a n k of Sweden and the Commonwealth Bank o f A u s t r a l i a . Then i n between t h e s e two t y p e s t h e r e a r e a l m o s t as many v a r i e t i e s and d e g r e e s o f i n d e p e n d e n c e a s t h e r e a r e c e n t r a l b a n k s . 113. K i s c h and E l k i n . C e n t r a l B a n k s , p . 27. 9 9 What now o f t h e F i n a n c e A c t a s a c e n t r a l bank? I f i t be a c e n t r a l banlc i t i s i n d i s p u t a b l y a more c o m p l e t e l y s t a t e bank t h a n any o t h e r bank i n t h e w o r l d , w i t h t h e p o s s i b l e e x c e p t i o n o f t h e s t a t e bank o f R u s s i a , g o v e r n e d by t h e " P e o p l e ' s Commissary of F i n a n c e s " . I t w i l l be remembered t h a t t h e F i n a n c e A c t i s a d m i n i s t e r e d c o m p l e t e l y by a p o l i t i c a l b o d y - - t h e T r e a s u r y B o a r d . A t i t s h e a d i s t h e M i n i s t e r o f F i n a n c e , g e n e r a l l y a l e a d i n g p a r t y l i g h t , immersed as c o m p l e t e l y a s anyone c o u l d be i n t h e t h i c k o f p a r t i s a n p a r t y c o n t r o v e r s y . The D e p u t y t o whom f a l l s t h e r e a l work o f a d m i n i s t e r i n g t h e A c t i s a p p o i n t e d b y and i s r e s p o n s i b l e t o t h e M i n i s t e r . The f i v e P r i v y C o u n c i l l o r s a r e p a r t y men. A l l , w i t h t h e e x c e p t i o n of t h e D e p u t y , a r e members o f t h e Government, and t h e i r t e r m o f o f f i c e i s d e p e n d e n t upon t h e f o r t u n e s of p a r t y . I n a d d i t i o n , i f one may c o n c e i v e o f an a c t b e i n g "owned", t h e n o u r " c e n t r a l bank", the F i n a n c e A c t , i s c o m p l e t e l y s t a t e owned. The f a c t t h a t t h e a d m i n i s t r a t i o n o f t h e F i n a n c e A c t i s so c o m p l e t e l y p o l i t i c a l and t h a t o u r " c e n t r a l bank" i s so i n c o n t r o v e r t i b l y a s t a t e "banic" s h o u l d g i v e r i s e t o c o n s i d e r a b l e amusement i n v i e w of t h e o p p o s i t i o n shown to w a r d s t h e i n s t i t u t i o n of a r e a l c e n t r a l bank f o r Canada. The v o i c e s o f t h e b a n k e r s compose a symphony i n p r a i s e o f t h e v i r t u e s of t h e F i n a n c e A c t . 'Yet t h e y u t t e r a d i r e w a r n i n g 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 . I f p o l i t i c a l c o n t r o l o f b a n k i n g i s dangerous, t h e n the F i n a n c e A c t i s a most dangerous i n s t r u m e n t . I f the F i n a n c e A c t has as m any v i r t u e s as we a r e t o l d , t h e n s t a t e ownership and c o n t r o l a r e n o t n e c e s s a r i l y e v i l . Opponents of a c e n t r a l bank cannot h o l d t o two o p p o s i t e s and be l o g i c a l . They must " c l e a v e t o t h e one and d e s p i s e the o t h e r " . As i n d i c a t e d 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 are many f a u l t s t o be f o u n d i n the F i n a n c e A c t . One o f t h e s e i s t h a t 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 the danger o f the p o l i t i c a l f a c t o r . Y e t the w r i t e r has s e a r c h e d i n v a i n f o r any s u g g e s t i o n of p o l i t i c a l i n t e r f e r e n c e ( i n t h e e v i l sense) i n c o n n e c t i o n w i t h the a d m i n i s t r a t i o n of the A c t from the time i t was passed i n 1914 to the p r e s e n t . M i s t a k e s t h e r e no doubt have been. Y e t , a l t h o u g h not p r o p e r l y q u a l i f i e d f o r t h i s s p e c i a l work, o u r M i n i s t e r s and. c i v i l s e r v a n t s a t l e a s t have not a l l o w e d the e v i l of p o l i t i c s to show i t s e l f 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 . As Mr. A. F. V/. P l u m p t r e s a y s : " . . . . 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 t h e c r e d i t and money system i s n o t a problem i n Canada a t p r e s e n t . " 1 1 4 114. A C e n t r a l Bank f o r Canada, p. 3. 101. That i s not to say, however, that the dangers of the p o l i t i c a l factor should not be guarded against. Here i n passing i t may be suggested, however, that i f under un- guarded, "wide open" conditions the p o l i t i c a l e v i l has not appeared, supporters of a state owned central bank may be encouraged to believe that in" a Canadian central bank with proper safeguards there need not necessarily be any great danger from the p o l i t i c a l angle. A very important objection that may be offered against the Finance Act 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 the banks desire advances they may apply f o r them under the provisions of the Act, and presumably, i f the s e c u r i t i e s which they offer are acceptable, the Department of Finance has no option but to make the advances sought. On the other hand our "central bank" has not the power to force i t s "member" banks to accept advances when i t wishes to i n i t i a t e an "easy money" policy with the idea of encouraging investment. No doubt this explains why the banks prefer the Finance Act to a rea l c entral bank. And no?/ we may summarize the arguments for and against the Finance Act as a bankers' bank: It 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 l o a n s to t h e b a n k s , and i n t h i s g e n e r a l o p e r a t i o n o f making advances' i t b e a r s some s e m b l a n c e t o a c e n t r a l bank. (2) I t p r o v i d e s emergency c u r r e n c y f o r the b a n k s . (3) I n a l o o s e way i t may be s a i d t o h a v e t e n "member b a n k s " t h a t d o r e d i s c o u n t i n g , f o r t h e head o f f i c e s o f t h e c h a r t e r e d banks do r e d i s c o u n t i n g f o r the b r a n c h e s . (4) I t s c u s t o m e r s a r e t h e c o m m e r c i a l b a n k s . (5) I t i s s u e s n o t e s ( i f i n a b r o a d way you t h i n k o f t h e D epartment o f F i n a n c e a s b e i n g a p a r t o f t h e " c e n t r a l b a n k " ) , but d o e s n o t p o s s e s s a. m onopoly o f t h e n o t e i s s u e . (6) I t m i g h t be s a i d to be r e s p o n s i b l e f o r t h e s o l v e n c y of t h e w h o l e b a n k i n g s y s t e m , f o r t h r o u g h i t ' t h e Government comes t o t h e r e s c u e of t h e b anks. I t i s u n l i k e a b a n k e r s ' bank i n t h a t - (1) I t i s n o t t h e d e p o s i t o r y o f t h e c a s h r e s e r v e s o f . t h e b a n k s . (2) I t i s t h e r e f o r e u n a b l e t o e c o n o m i z e t h e c a s h r e - s e r v e s by c o n c e n t r a t i o n . (3) I t d o e s n o t a c t a s a c l e a r i n g h o u s e f o r i n t e r - bank s e t t l e m e n t s . 103. (4) I t has not a monopoly of t h e n o t e i s s u e (though not a l l c e n t r a l banks h a v e ) . (5) I t does not r e d i s c o u n t f o r t h e banks i n t h e r e a l sense; i t m e r e l y makes l o a n s to them on d e p o s i t e d s e c u r i t i e s . (6) I t s a d m i n i s t r a t i o n i s f a u l t y . i n t h a t - (a) the 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 t h e M i n i s t e r o f F i n a n c e who has n e i t h e r t h e time nor the Q u a l i f i c a t i o n s f o r these . d u t i e s . (b) the o f f i c i a l s who do the r e a l work a r e c i v i l s e r v a n t s who have i n the p a s t a t l e a s t been incompetent f o r t h i s s p e c i a l work. (e) the Tr e a s u r y Board n o m i n a l l y r e s p o n s i b l e i s 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 the 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 to the dangers of the p o l i t i c a l f a c t o r . (g) a s i d e f r o m the p e r s o n n e l t h e r e i s a complete l a c k of c e n t r a l banking machinery and e q u i p - ment. (h) i t o p e r a t e s a t t h e o p t i o n of the banks o n l y . I n C h a p t e r 2 the f u n c t i o n s of a c e n t r a l bank were d i s c u s s e d , u n d e r t h r e e h e a d i n g s — ( 1 ) a b a n k e r s ' bank, (2) a g o v e r n m e n t ' s bank, and (3) a " p e o p l e ' s " bank. The F i n a n c e A c t has a l r e a d y b e e n c o n s i d e r e d i n t h e l i g h t o f a b a n k e r s ' bank. We s h a l l now c o n s i d e r i t as a g o v e r n - ment's bank. Where t h e r e i s a r e a l c e n t r a l bank one o f t h e c h i e f c u s t o m e r s o f t h a t bank i s t h e g o v e r n m e n t . The c e n t r a l bank h o l d s t h e a c c o u n t o f t h e g o v e r n m e n t ; i t i s t h e d e p o s i t o r y o f t h e g o v e r n m e n t ' s f u n d s a n d o f t h e n a t i o n ' s r e s e r v e s . I n f a c t t h e t a s k s w h i c h t h e g o v e r n m e n t i m p o s e s on t h e bank 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 t h e g o v e r n m e n t ' s f u n d s . As was shown i n a p r e v i o u s s e c t i o n t h e C a n a d i a n Government h a s n o t t h e p r i v i l e g e o f b e i n g a " c u s t o m e r " of t h e F i n a n c e A c t } t h e b a n k s a r e i t s o n l y c u s t o m e r s . They may r e c e i v e a d v a n c e s t h r o u g h i t , b u t a s a " c e n t r a l bank" i t d o e s n o t make a d v a n c e s t o t h e G o v e r n - ment. I t p r o v i d e s t h e means whereby banks may s e c u r e l o a n s of u n s t a t e d amounts, w i t h o u t l i m i t , a n d w i t h o u t a n y g o l d r e s e r v e w h a t e v e r . The A c t g i v e s no s u c h accommoda- t i o n t o t h e Government, however. An a c t o f 1914 g i v e s the D o m i n i o n Government a u t h o r i t y to i s s u e n o t e s up t o 115 and i n c l u d i n g $50,000,000 a g a i n s t w h i c h a g o l d r e s e r v e o f 115. S t a t u t e s o f Canada,5 George V, C h a p t e r 4. 25 p e r c e n t , h a s t o be m a i n t a i n e d . An a c t of 1915 p e r - m i t t e d t h e Government t o i s s u e n o t e s up t o $2 6,000,000^ 117 w i t h o u t a n y r e s e r v e of g o l d . Of t h e s e $16,000,000 were t o be b a c k e d by C a n a d i a n N o r t h e r n and Grand T r u n k P a c i f i c R a i l w a y s e c u r i t i e s , a n d $10,000,000 were u n c o v e r e d n o t e s 118 i s s u e d f o r g e n e r a l g o v e r n m e n t a l p u r p o s e s . The same a c t r e q u i r e d t h a t D o m i n i o n n o t e s i n e x c e s s o f $76,000,000 were t o be s e c u r e d d o l l a r f o r d o l l a r by g o l d , e x c e p t a s p r o - v i d e d i n t h e F i n a n c e A e t of 1914. Thus we see' t h a t i n t h e i s s u e o f n o t e s f o r i t s own p u r p o s e s t h e Government i s v e r y d e f i n i t e l y r e s t r i c t e d a s t o t h e q u a n t i t y , by a c t o f P a r l i a - ment. I n the i s s u e o f n o t e s f o r t h e c o n v e n i e n c e o f the ba n k s , on t h e o t h e r hand, t h e Government i s l i m i t e d o n l y by t h e judgment o f i n e x p e r t members o f t h e T r e a s u r y B o a r d , as a d v i s e d by t h e f o u r T r u s t e e s o f t h e G o l d R e s e r v e s , t h r e e o f whom a r e a p p o i n t e d by t h e B a n k e r s ' A s s o c i a t i o n . I n the i s s u e o f n o t e s f o r i t s own p u r p o s e s the Government must h a v e $50,000,000 b a c k e d to t h e e x t e n t o f 25 p e r c e n t , by g o l d , and a l l o v e r $76,000,000 must be ba c k e d d o l l a r f o r d o l l a r by g o l d . I n t h e i s s u e of n o t e s f o r t h e c o n - v e n i e n c e o f t h e banks, t h r o u g h t h e F i n a n c e A c t , no g o l d 116. S t a t u t e s o f Canada, 5 George 7, C h a p t e r 4. 117. I b i d . 118. I b i d . 106. b a c k i n g i s r e q u i r e d a t a l l . Hence we s e e t h a t the F i n a n c e A c t c e r t a i n l y d o e s n o t s e r v e as a g o v e r n m e n t ' s bank i n t h e s e n s e of making l o a n s to t h e Government o r o f h a v i n g t h e Government as a c u s - tomer. I t would be a b s u r d , t o o , t o s u g g e s t t h a t an " a c t " c o u l d be t h e d e p o s i t o r y of the Government. Most c e n t r a l banks a r e t h e f i s c a l a g e n t s o f t h e i r g o v e r n m e n t s . The f i n a n c i a l o p e r a t i o n s of g o v e r n m e n t s a r e c o n d u c t e d on a s c a l e so g r e a t t h a t n o t many p r i v a t e banks c o u l d h a n d l e them. Where t h e r e i s a c e n t r a l bank i t r e c e i v e s t a x f u n d s f o r t h e government, a d v a n c e s s h o r t t e r m l o a n s i n t i m e s of t e m p o r a r y s h o r t a g e , and i n g e n e r a l a c t s a s a n i n t e r m e d i a r y between t h e D e p a r t m e n t o f F i n a n c e and b u s i n e s s . None o f t h e s e f u n c t i o n s , o f c o u r s e , c a n be p e r f o r m e d by the F i n a n c e A c t f o r t h e Government o f Canada. A g a i n , a s h a s b e e n s a i d b e f o r e , where t h e r e a r e c e n t r a l banks, t h e c e n t r a l bank e x p e r t s o f t e n r e p r e s e n t t h e c o u n t r y a t f i n a n c i a l and economic c o n f e r e n c e s of v a r i o u s k i n d s . C e r t a i n l y t h e F i n a n c e A c t p e r f o r m s no s u c h s e r v i c e f o r Canada. When the I m p e r i a l E conomic C o n f e r e n c e was h e l d a t Ottawa i n t h e summer of 1932 the C a n a d i a n Government had no c e n t r a l bank e x p e r t s t o c a l l u p on f o r a d v i c e on f i n a n c i a l or m o n e t a r y m a t t e r s . We e v e n had no D e p u t y M i n i s t e r o f F i n a n c e a t t h e t i m e . The Government c a l l e d 107. upon a Queen's U n i v e r s i t y p r o f e s s o r , Dr. C l a r k , f o r s u c h a d v i c e . D r . C l a r k was l a t e r a p p o i n t e d D e p u t y M i n i s t e r , as p r e v i o u s l y s t a t e d . The a p p o i n t m e n t o f t h i s e x p e r t s h o u l d v e r y g r e a t l y i m p r o v e t h e a d m i n i s t r a t i o n o f t h e F i n a n c e A c t , but w i t h o u t p r o p e r c e n t r a l bank f a c i l i t i e s and equipment he c a n n o t hope t o g i v e Canada the. a d v a n t a g e s of a r e a l c e n t r a l bank. When summing up t h e argument f o r and a g a i n s t t h e F i n a n c e A c t a s a b a n k e r s ' bank we f o u n d many p o i n t s i n s u p p o r t o f e a c h s i d e . We may, however, sum up t h e a r g u - ment w i t h r e f e r e n c e t o t h e A c t b e i n g a g o v e r n m e n t ' s bank by s a y i n g t h a t i n no s i n g l e r e s p e c t d o e s i t p e r f o r m t h e f u n c t i o n of s u c h a bank. And now we come t o a c o n s i d e r a t i o n o f t h e F i n a n c e A c t as a " p e o p l e ' s " bank. I n t h i s l i g h t a c e n t r a l bank i s r e g a r d e d a s h a v i n g a " s o c i a l " f u n c t i o n . As s t a t e d i n C h a p t e r 2, i t i s t h e o p i n i o n o f many t h a t t h e c o n t r o l o f money and c r e d i t i s a m a t t e r o f s u c h v i t a l i m p o r t a n c e i n t h e l i v e s o f a p e o p l e t h a t i t s h o u l d be a p r i m e f u n c t i o n o f g o v e r n m e n t — t h a t i t s h o u l d be i n t h e hands of d i s - i n t e r e s t e d e x p e r t s e x e r c i s i n g t h e i r powers i n t h e g e n e r a l i n t e r e s t r a t h e r t h a n b e i n g i n t h e hands o f a p r i v a t e i n s t i t u t i o n o r g a n i z e d f o r t h e p u r s u i t of p r i v a t e g a i n . I n C h a p t e r 3 the t h e o r y o f m o n e t a r y c o n t r o l i n g e n e r a l was s t u d i e d . The o b j e c t i v e s o f t h i s c o n t r o l were o u t l i n e d u n d e r t h e h e a d i n g ' s — ( a ) c o n t r o l o f f o r e i g n ex- change, (b) c o n t r o l of t h e p r i c e l e v e l . E v i d e n c e f o r and a g a i n s t t h e p o s s i b i l i t i e s o f s u c h c o n t r o l was examined. As a r e s u l t t h e f o l l o w i n g c o n c l u s i o n s were a r r i v e d a t : (1) B a l a n c i n g t h e e v i d e n c e a v a i l a b l e i t w o u l d seem t h a t c o n t r o l o f money and c r e d i t i s q u i t e p o s s i b l e . (2) T h a t t h e v a r i a t i o n s i n f o r e i g n exchange c a n be k e p t w i t h i n r e a s o n a b l e l i m i t s , o r (3) T h a t a v e r y w o r t h - w h i l e d e g r e e o f c o n t r o l o v e r t h e p r i c e l e v e l c a n be e x e r c i s e d , a n d (4) T h a t a r e a s o n a b l e m easure o f c o n t r o l o f b o t h exchange and p r i c e s c a n be a t t a i n e d i n n o r m a l t i m e s a t l e a s t . (5) T h a t the r e s p o n s i b l e g o v e r n m e n t a l o f f i c i a l s h a v e n e v e r s e r i o u s l y a t t e m p t e d m o n e t a r y c o n t r o l i n Canada, and h a v e a t t i m e s , a t l e a s t , b e e n e n t i r e l y unaware of i t s p o s s i b i l i t y . (6) T h a t C a n a d i a n banks have p u r s u e d no c o n s c i o u s , p o s i t i v e p o l i c y w i t h r e s p e c t t o t h e volume of money and c r e d i t , and a r e s k e p t i c a l o f a n y a t t e m p t s a t d e l i b e r a t e c o n t r o l of exchange and the p r i c e l e v e l . I n C h a p t e r 4 p a r t i c u l a r a t t e n t i o n was g i v e n t o m o n e t a r y c o n t r o l i n Canada p r e v i o u s t o 1914. R e s u l t i n g c o n c l u s i o n s were t o t h e e f f e c t t h a t : (1) A f a i r l y o r t h o d o x g o l d s t a n d a r d v/as m a i n t a i n e d up t o t h a t d a t e . (2) The Government's d u t i e s w i t h r e s p e c t t o t h e m o n e t a r y s y s t e m 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 o f 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 . (3) The y e a r 1907 b r o u g h t t h e f i r s t e v i d e n c e o f i n s u f f i c i e n t e l a s t i c i t y o f t h e bank n o t e i s s u e , r e s u l t i n g i n t h e Government coming t o t h e a s s i s - t a n c e of t h e banks w i t h the " c r o p - m o v i n g " p r o - v i s i o n . (4) P r e v i o u s t o 1914 a l l 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 e n t i r e l y w i t h t h e banks. The p a s s i n g of t h e F i n a n c e A c t , however, c o m p l e t e l y a l t e r e d t h e whole s t r u c t u r e o f t h e C a n a d i a n m o n e t a r y s y s t e m . P r e v i o u s t o 1914 t h e banks c o u l d o n l y i n c r e a s e t h e i r r e s e r v e s by b o r r o w i n g a b r o a d , by w i t h d r a w i n g c a l l l o a n s f r o m a b r o a d , o r by s e l l i n g s e c u r i t i e s . T h e r e were no f a c i l i t i e s i n Canada f o r i n c r e a s i n g t h e i r r e s e r v e s . The F i n a n c e A c t p r o v i d e d t h e s e f a c i l i t i e s , however. Now t h a t t h e banks c o u l d e a s i l y and q u i c k l y i n c r e a s e t h e i r r e s e r v e s , t h e i r a b i l i t y t o expand c r e d i t v/as a l s o g r e a t l y 110. i n c r e a s e d . T h i s a b i l i t y was a l l t h e g r e a t e r b y r e a s o n o f t h e f a c t t h a t Canada has s o f e w banks. The s i g n i f i c a n c e o f t h e c h a n g e wrought by t h e F i n a n c e A c t c a n t h u s s c a r c e l y be o v e r - e m p h a s i z e d . As Mr. C. A. C u r t i s s a y s : " 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 t h e banks t h e m s e l v e s , b u t 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 had t h e power t o add 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 t h e Department o f F i n a n c e . " 1 1 9 C e r t a i n l y i t w o u l d seem t h a t n e i t h e r t h e g o v e r n m e n t s o f 1914 and 1923, n o r t h e p u b l i c e v e r f u l l y r e a l i z e d t h e t r u e s i g n i f i c a n c e o f t h i s A c t . We may now a s k w h e t h e r o r no t t h e D e p a r t m e n t o f F i n a n c e has been m e e t i n g t h e new r e s p o n s i b i l i t y , w h i c h i t t a c i t l y assumed when the F i n a n c e A c t was p a s s e d . The best-known method o f m o n e t a r y c o n t r o l i n t h e s o c i a l s e n s e i s t h a t o f m a n i p u l a t i n g t h e d i s c o u n t r a t e . I n s u p p o r t o f t h i s s t a t e m e n t t h e M a c M i l l a n Committee may be q u o t e d : "Thus v a r i a t i o n s i n t h e r a t e o f i n t e r e s t c h a r g e d a p p e a r t o be t h e a p p r o p r i a t e i n s t r u m e n t t o b r i n g a b o u t harmony."120 " T h e r e can be no d o u b t , i n our judgment, t h a t 'bank r a t e p o l i c y * i s an a b s o l u t e n e c e s s i t y f o r 119. 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 . 319. 120. 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 ) 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 , an 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 summary o f t h e d e s c r i p t i o n by Mr. L i o n e l D. E d i e o f t h e o p e r a t i o n o f t h e d i s c o u n t r a t e w i l l e x p l a i n how m a n i p u l a t i o n o f t h e r a t e may be made t o e f f e c t c o n t r o l . As he p o i n t s o u t , t h e d i s c o u n t r a t e s h o u l d be r a i s e d t o p r e v e n t p r i c e s f r o m r i s i n g e x c e s s i v e l y d u r i n g booms and l o w e r e d t o p r e v e n t p r i c e s f r o m f a l l i n g e x c e s s i v e l y d u r i n g d e p r e s s i o n s . An a d v a n c e i n t h e d i s c o u n t r a t e s h o u l d r e - s t r i c t t h e volume o f b o r r o w i n g d u r i n g a wave o f b u s i n e s s e x p a n s i o n , and t h i s r e s t r i c t i o n s h o u l d c u r t a i l t h e means of payment and so c u r t a i l t h e a b i l i t y o f t r a d e r s a n d o f t h e p u b l i c to b i d up t h e p r i c e s o f g o o d s . A r e d u c t i o n i n t h e d i s c o u n t r a t e w o u l d a i m t o s t i m u l a t e t h e volume o f b o r r o w i n g d u r i n g a wave o f r e c e d i n g b u s i n e s s , t h u s a u g - m e n t i n g the means of payment and so s u s t a i n i n g the a b i l i t y o f t h e p u b l i c t o b i d up p r i c e s o f g o o d s . The r a i s i n g o f t h e r a t e s h o u l d be a d a n g e r s i g n a l . I f s u c c e s s i s t o be a t t a i n e d , however, t h e c e n t r a l bank p o l i c y must be d i r e c t e d by the d i s c r i m i n a t i o n and judgment of e x p e r t s . As s t a t e d i n a p r e v i o u s p a r a g r a p h , t h e s e e x p e r t s must be a b l e t o j u d g e t h e v a r i o u s c r i t e r i a and see ahead so t h a t 121. I b i d . 122. Money, Bank C r e d i t and P r i c e s , p . 474. t h e y may be a b l e t o " a p p l y the b r a k e s " b e f o r e r e a c h i n g t h e dan g e r s p o t . Now l e t us s e e how t h e " d i s c o u n t " r a t e , or i n t e r e s t r a t e , h as b e e n u s e d i n c o n n e c t i o n w i t h t h e o p e r a t i o n o f the F i n a n c e A c t . ' When t h e A c t o f 1914 was b e i n g i n t r o - d uced the M i n i s t e r s a i d n o t h i n g t o i n d i c a t e t h a t t h e r a t e s were t o be m a n i p u l a t e d t o c o n t r o l c r e d i t o r p r i c e s . Nor was a n y t h i n g s a i d about t h i s by t h e M i n i s t e r i n 1923. When a s k e d w h e t h e r t h e A c t would m e r e l y p r o v i d e l o a n s when r e q u i r e d by t h e b a n k s , o r w h e t h e r i t w o u l d i n a b r o a d e r way do c e n t r a l bank r e - d i s c o u n t i n g l i k e the F e d e r a l Re- s e r v e Banks of t h e U n i t e d S t a t e s , t h e M i n i s t e r i n 1923 s a i d : " There i s no d o u b t 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 as t h e n a t i o n a l r e s e r v e s y s t e m 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 a s a p i e c e o f i t , p o s s i b l y . " 1 2 3 I t i s q u i t e e v i d e n t t h a t t h e A c t was n o t i n t e n d e d by th e M i n i s t e r t o do r e a l r e d i s c o u n t i n g i n v o l v i n g c o n s c i o u s c r e d i t c o n t r o l . A t b e s t t h e A c t i s o n l y " a p i e c e o f a c e n t r a l bank". Nor i s t h e r e a n y t h i n g i n t h e A c t i t s e l f t o s u g g e s t 123. D e b a t e s o f t h e House o f Commons, 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 B o a r d 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 , o f p r e v e n t i n g i n f l a t i o n o r de- f 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 , o r of p e r f o r m i n g t h e f u n c t i o n s e x p e c t e d ' o f t h e r a t e o f d i s c o u n t of a c e n t r a l bank."124 Evidence-*- 2 5 o f t h e D e p u t y M i n i s t e r o f F i n a n c e i n 1924 shows t h a t he, t h e o f f i c i a l c h i e f l y c o n c e r n e d w i t h t h e a d m i n i s t r a t i o n o f t h e A c t , knew n o t h i n g o f "management" o f the r a t e s f o r t h e p u r p o s e o f c o n t r o l l i n g c r e d i t : " Q u e s t i o n . You t h i n k t h a t t h e i n t e r e s t r a t e w o u l d have 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 ? I do n o t t h i n k s o . 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 t o h a v e e i t h e r an i n c r e a s e o r d e c r e a s e i n t h e i n t e r e s t r a t e f o r t h a t p u r p o s e u n d e r the p r o v i s i o n s o f t h e War F i n a n c e A c t ? 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 way, n o r c o n s i d e r e d i t i n t h a t way. Then i t w o u l d be f a i r t o say t h a t a s an i n s t r u m e n t f o r t h e p u r p o s e I have men- t i o n e d , t h e T r e a s u r y B o a r d does n o t 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 i t ? N o t i n t h a t l i g h t , n o. 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 t h e n e e d s of t h e banks i n t h e i r c o m m e r c i a l b u s i - n 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 w o r l d . " 124. 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 Canada, p. 392. 125. P r o c e e d i n g s of t h e S e l e c t S t a n d i n g Committee on 3 a n k i n g and Commerce, 1924, p . 343. Answer. Q u e s t i o n . Answer. Q u e s t i o n . Answer. 114. Then a g a i n , i n t e s t i f y i n g i n 1924, Mr. George Edwards, a c h a r t e r e d a c c o u n t a n t , v e r y d e f i n i t e l y s t a t e d t h a t any c hanges i n t h e r a t e s c h a r g e d were n o t made w i t h a v i e w . t o c h e c k i n g i n f l a t i o n o r d e f l a t i o n , or f o r t h e p u r p o s e o f s t a b i l i z i n g e conomic c o n d i t i o n s . L e t us now s e e what changes i n t h e r a t e s h a v e been made s i n c e 1914. From 1914 u n t i l November 1, 1924, t h e r a t e was 5 p e r c e n t , e x c e p t t h a t f r o m O c t o b e r 20, 1917, t h e r a t e on a d - v a n c e s a g a i n s t I m p e r i a l T r e a s u r y B i l l s was 3-g- p e r c e n t . From November 1, 1924, u n t i l November 1, 1927, t h e r a t e was 4f- p e r c e n t . , f r o m t h a t d a t e u n t i l December 1, 1927, t h e r a t e was 4 p e r c e n t . , and f r o m th e l a t t e r d a t e u n t i l J u ne 8, 1928, t h e r a t e was 3 3/4 p e r c e n t . From t h a t d a t e u n t i l September 1, 1928, the r a t e was 5 p e r c e n t . , e x c e p t f o r a d v a n c e s a g a i n s t 4 p e r c e n t . T r e a s u r y N o t e s when t h e a u t h o r i z e d r a t e was 3 3/4 p e r c e n t . From September 1, 1928, to O c t o b e r 26, 1931, t h e g e n e r a l r a t e was 4§- p e r c e n t . , e x c e p t on a d v a n c e s a g a i n s t T r e a s u r y N o t e s when t h e r a t e was 3 3/4 p e r c e n t . From O c t o b e r 26, 1931, to May 2, 1932, t h e r a t e was 3 p e r c e n t . , and f r o m t h a t d a t e t h e g e n e r a l r a t e r e m a i n e d a t 3|- p e r c e n t , t i l l t h e d a t e t h e s e f i g u r e s were o b t a i n e d — N o v e m b e r 19, 1932. 126. 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 and Commerce, 1924, pp. 46, 349 and 375. 115. Ho wonder a w i t n e s s s a i d i n 1928 ( w i t h o u t i n t e n d i n g t o 127 be h u morous), " t h e r e i s a s t e a d i n e s s about the r a t e h e r e " . F o r t e n y e a r s , f r o m 1914 to November 1, 1924, t h e r a t e was k e p t c a l m l y a t 5 p e r c e n t . And t h i s was a p e r i o d i n v/hich the c e n t r a l banks o f t h e w o r l d made many and d r a s t i c c h a n g e s i n t h e i r r e d i s c o u n t r a t e s - - a p e r i o d o f a l m o s t u n p a r a l l e l e d and s w e e p i n g c h anges i n a l l p h a s e s o f b u s i n e s s , f i n a n c e , and b a n k i n g . No wonder,' t h e n , t h a t B e c k h a r t s a y s : "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 the w o r l d s o a r e d skyward, .when t h e d i s c o u n t r a t e a t the F e d e r a l R e s e r v e Bank of 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 e v i d e n c e i n i t s e l f t h a t t h e T r e a s u r y B o a r d d i d n o t l o o k upon t h e r a t e a s 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 th 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 have f l u c t u a t e d w i t h economic and f i n a n c i a l c o n d i t i o n s . " 1 2 8 I n t h i s p e r i o d i n Canada we e x p e r i e n c e d r a p i d and h i g h i n f l a t i o n f o l l o w e d by d r a s t i c d e f l a t i o n . P r i c e s r o s e r a p i d l y u n t i l 1920 and t h e n f e l l p r e c i p i t o u s l y i n 1921. A d v a n c e s u n d e r t h e A c t r o s e f r o m $12,767,500 i n 1914 t o $123,689,025 i n 1 9 2 0 . 1 2 9 Y e t i n s p i t e of a l l t h i s t h e i n t e r e s t r e m a i n e d unchanged a t 5 p e r c e n t . A c c o r d i n g t o the t h e n D e p u t y M i n i s t e r o f F i n a n c e t h e r a t e was l o w e r e d i n 127. I b i d . , 1928, p . 384. 128. B e c k h a r t , B. H. The B a n k i n g System o f Canada, p . 392. 129. I b i d . , p . 397. 1927 t o 3 3/4 p e r c e n t , b e c a u s e t h e money r a t e s were l o w e r i n l e w Y o r k and i t was d e s i r e d t h a t t h e banks s h o u l d b o rrow a t home r a t h e r t h a n i n New Y o r k . From September 1, 1928, t o O c t o b e r 26, 1931, t h e g e n e r a l r a t e s t o o d s t i l l a t 4 f p e r c e n t . Y e t t h e Bank o f E n g l a n d i n 1929 a l o n e c h a n g e d i t s r a t e f o u r t i m e s and t h e F e d e r a l R e s e r v e Bank c h a n g e d i t s 131 r a t e t h r e e t i m e s . S i n c e E n g l a n d abandoned t h e g o l d s t a n d a r d on September 21, 1931, Canada's r a t e h a s been changed t h r e e t i m e s . I n t h e same t i m e the d i s c o u n t r a t e o f t h e R i k s b a n k of Sweden has been r a i s e d f i r s t f r o m 4 t o 5 p e r c e n t . , l a t e r to 8 p e r c e n t , ( a t t h e t i m e o f Sweden's d e p a r t u r e f r o m t h e g o l d s t a n d a r d ) , t h e n down t o 6, i n O c t o b e r , 1931. By the b e g i n n i n g of June a f o u r t h s u c c e s s i v e r e d u c t i o n had t a k e n p l a c e i n t h e r a t e , b r i n g i n g i t down to 4 p e r c e n t . , and at September 1, 1932, i t was l o w e r e d t o 3J- p e r c e n t . I t w o u l d seem, t h e n , t h a t no v e r y d e f i n i t e r e a s o n i n g , e x c e p t p e r h a p s f o r t h e g e n e r a l p o s i t i o n of t h e New Y o r k money r a t e s , h a s b e e n t h e c a u s e o f t h e few c h a n g e s t h a t h a v e been made by t h e T r e a s u r y B o a r d . S e e m i n g l y t h e B o a r d h a s 130. P r o c e e d i n g s of S e l e c t S t a n d i n g Committee on B a n k i n g and Commerce, 1928, p . 53. 131. The M o n e t a r y Times A n n u a l f o r 1930, p . 38. 132. The F i n a n c i a l P o s t , Dec. 31, 1932. 117. n o t y e t d i s c o v e r e d t h a t t h e r a t e i s " a d e l i c a t e and b e a u t i - f u l i n s t r u m e n t " to r e s t r i c t f l o w s of g o l d or t o c o n t r o l c r e d i t c o n d i t i o n s . C e r t a i n l y we may s a y t h a t t h e F i n a n c e A c t has n e v e r b een a d m i n i s t e r e d i n t h e p a s t t o c o n t r o l money and c r e d i t i n t h e s o c i a l s e n s e by means of t h e i n t e r e s t o r d i s c o u n t r a t e . I n i t s a t t e m p t a t m o n e t a r y c o n t r o l t h e c e n t r a l bank f i n d s t h a t m a n i p u l a t i o n of t h e d i s c o u n t r a t e r e q u i r e s v a r i o u s s u p p l e m e n t a r y d e v i c e s i f t h e o f f i c i a l r a t e i s t o be made e f f e c t i v e . One o f t h e s e d e v i c e s i s m o r a l s u a s i o n . I t must be remembered t h a t e x p e r t s of t h e c e n t r a l bank have t o be a b l e t o s e e a h e a d and a n t i c i p a t e d a n g e r s b e f o r e t h e y a r e r e a c h e d i n o r d e r t h a t p r e v e n t i v e m e a s u r e s may be t a k e n . They a r e d o i n g t h i s w i t h t h e i n t e r e s t o f t h e w h o l e p e o p l e i n mind. C o m m e r c i a l b a n k e r s , on t h e o t h e r hand, a r e i n t e r e s t e d i n m a k i n g p r o f i t s and i n the m i d d l e o f a boom a r e n o t d i s p o s e d t o s a c r i f i c e e a s i l y won p r o f i t s f o r t h e sake o f t h e f u t u r e w e l f a r e o f t h e p e o p l e g e n e r a l l y . Hence t h e c e n t r a l bank commences t o w a r n t h e b a n k i n g f r a t e r n i t y t h a t i n f l a t i o n h as gone f a r enough and t r i e s t o s e c u r e t h e i r c o - o p e r a t i o n i n r e s t r i c t i n g c r e d i t . I t may go f u r t h e r and t r y to engender a n a t t i t u d e o f c a u t i o n and c o n s e r v a t i s m on t h e p a r t o f t h e g e n e r a l p u b l i c by p u b l i c s t a t e m e n t s a n d p e r s o n a l c o n f e r e n c e s . As s a i d b e f o r e t h e mere r a i s i n g o f t h e d i s c o u n t r a t e s h o u l d be r e g a r d e d by t h e p e o p l e as a, 118. clanger s i g n a l . I t g e n e r a l l y h as a p s y c h o l o g i c a l e f f e c t upon b o t h b a n k e r s and b u s i n e s s men and c r e a t e s an atmos- p h e r e of h e s i t a t i o n and r e t r e n c h m e n t . The l o w e r i n g o f t h e r a t e , on t h e o t h e r hand, s h o u l d have j u s t t h e o p p o s i t e e f f e c t . I t w o u l d be f o o l i s h to s u g g e s t t h a t the F i n a n c e A c t a s a c e n t r a l bank has i n t h e p a s t u s e d m o r a l s u a s i o n . I f , however,- we were t o take t h e b r o a d v i e w t h a t a s a c e n t r a l bank the F i n a n c e A c t i s m e r e l y - t h e " F e d e r a l R e s e r v e B o a r d " , and t h e t e n c h a r t e r e d banks a r e the " R e s e r v e Banks", we might be a b l e t o d i s c o v e r s o m e t h i n g i n t h e n a t u r e of m o r a l s u a s i o n b e i n g u s e d a t t i m e s . The A c t i s a d m i n i s t e r e d by a d e p a r t m e n t o f t h e Government, and i n war t i m e t h e r e i s g e n e r a l l y a common and c l o s e u n d e r s t a n d i n g between t h e banks and t h e Government. I t mi g h t be added a l s o t h a t C a n a d i a n banks a r e u n d o u b t e d l y i n f l u e n c e d by t h e p o l i c i e s o f 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 Bank of t h e U n i t e d S t a t e s . W h i l e t h e s e i n f l u e n c e s f o r t u n a t e l y a r e g e n e r a l l y f o r good, t h e r e i s t h e p o s s i b i l i t y t h a t a t some time our banks m i g h t be t h e r e b y i n f l u e n c e d by a f o r e i g n m o n e t a r y p o l i c y c o n f l i c t i n g w i t h t h e i n t e r e s t s of our own p e o p l e . A n o t h e r s u p p l e m e n t a r y d e v i c e f o r making t h e d i s c o u n t r a t e more e f f e c t i v e i s f o u n d i n open-market t r a n s a c t i o n s . When t h e r a t e i s r a i s e d , t h e c e n t r a l bank may s e l l some o f 119. i t s c o m m e r c i a l p a p e r o r s e c u r i t i e s . I n t h i s way money w i l l he drawn out o f t h e m a r k e t , a n d t h i s v a i l t e n d t o t i g h t e n . up the m a r k e t and d i s c o u r a g e f u r t h e r e x p a n s i o n of b u s i n e s s t r a n s a c t i o n s . On t h e o t h e r hand t h e c e n t r a l bank may buy c o m m e r c i a l p a p e r and s e c u r i t i e s i n t h e open m a r k e t and t h e r e b y i n j e c t new f u n d s i n t o i t . The r e s u l t s h o u l d be e a s y money, l o w e r r a t e s , and g r e a t e r encouragement t o b u s i n e s s . I t c a n s c a r c e l y be s a i d t h a t t h e F i n a n c e A c t as a c e n t r a l bank c a r r i e s on open-market t r a n s a c t i o n s . As we have s e e n a l r e a d y i n p r e v i o u s s e c t i o n s t h e t r a n s a c t i o n s p e r f o r m e d t h r o u g h t h e A c t amount t o n o t h i n g more t h a n t h e making o f l o a n s to t h e banks. I n f a c t , a s we s h a l l s e e i n the n e x t c h a p t e r , one o f t h e a r g u m e n t s p u t f o r t h a g a i n s t t h e c r e a t i o n o f a c e n t r a l bank f o r Canada i s t h a t s u c h a bank c o u l d n o t c o n t r o l money and c r e d i t b e c a u s e t h e r e i s no s u c h t h i n g a s a money m a r k e t i n Canada i n w h i c h a c e n t r a l bank c o u l d o p e r a t e . I f c e n t r a l bank c o n t r o l i s t o be e f f e c t i v e , i t i s g e n e r a l l y a d m i t t e d t h a t t h e r e s e r v e s o f t h e c o m m e r c i a l banks s h o u l d be h e l d by i t . As t h e M a c M i l l a n Committee h a s s a i d : " . . . . o n c e t h e c o m m e r c i a l 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 o f c o n t r o l b y t h e c e n t r a l b a n k a r i s e s . " 1 3 3 133. 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 . ) London, J u n e , 1931, p . 16. 120 When we were d e a l i n g w i t h t h e F i n a n c e A c t a s a b a n k e r s ' bank, i t was shown t h a t t h i s A c t was n o t the d e p o s i t o r y o f t h e r e s e r v e s of our c h a r t e r e d b a n k s . Hence t h e A c t has n o t t h i s means to a s s i s t i t i n any m easure o f c o n t r o l t h a t i t s a d m i n i s t r a t o r s m i g h t t r y t o e x e r c i s e . I t i s u s u a l l y c o n s i d e r e d t h a t t o make p o s s i b l e t h e g r e a t e s t measure o f c o n t r o l 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 monopoly of t h e n o t e i s s u e . F r eedom of i s s u e of p a p e r money might e a s i l y , u n d e r t h e i n f l u e n c e o f t h e d e s i r e f o r p r o f i t s , l e a d e a c h i s s u i n g body t o expand i t s i s s u e t o t h e e x t e n t t h a t t h e r e s e r v e o f g o l d w o u l d be i n a d e q u a t e ( i n t h e c a s e of a c o u n t r y on t h e g o l d s t a n d a r d ) . When a c o u n t r y i s n o t on t h e g o l d s t a n d a r d t h e n e e d f o r e f f e c t i v e management i s even' g r e a t e r . As has a l r e a d y b e e n s t a t e d i n a p r e v i o u s p a r a g r a p h , t h e F i n a n c e A c t as a c e n t r a l bank has no monopoly o f t h e n o t e i s s u e i n Canada. Hence i t l a c k s t h i s , a n o t h e r , means of c o n t r o l . We s h a l l now c o n s i d e r t h e F i n a n c e A c t w i t h r e s p e c t to c o n t r o l of exchange. I n d e a l i n g w i t h t h e h i s t o r y o f t h e A c t i n an e a r l i e r p a r t of t h i s p r e s e n t c h a p t e r i t h a s a l r e a d y been n o t e d t h a t i t was t h i s A c t t h a t p e r m i t t e d t h e w a r - t i m e i n f l a t i o n 1 3 4 . T h i s i n f l a t i o n was p a r t of t h e 134. See B e c k h a r t , B. H. The B a n k i n g System of Canada, p . 400. 121. c a u s e o f t h e d i s t u r b e d c o n d i t i o n of our f o r e i g n e xchange a t t h a t t i m e . S i n c e e x c h a n g e was a f f e c t e d b y war c o n d i t i o n s g e n e r a l l y , however, we n e e d n o t d w e l l on t h a t p e r i o d f u r t h e r . The A c t was c o n t i n u e d i n f o r c e u n t i l 1923, when, as a l r e a d y e x p l a i n e d , c e r t a i n f e a t u r e s were made permanent, and o t h e r s were p e r m i t t e d t o c o n t i n u e f o r t h r e e y e a r s more. Then i n 1926 Canada o f f i c i a l l y r e t u r n e d t o t h e g o l d s t a n d a r d . YiTe may now c o n s i d e r t h e o p e r a t i o n and management o f t h e A c t , t h e r e f o r e , u n d e r g o l d s t a n d a r d c o n d i t i o n s , p a r t i c u l a r l y i n r e l a t i o n t o the f o r e i g n e x c hanges. As n o t e d p r e v i o u s l y , D o m i n i o n n o t e s i s s u e d u n d e r t h e a u t h o r i t y of t h e A c t a r e n o t r e q u i r e d t o h a v e a n y gold, r e s e r v e s b e h i n d them a t a l l . Y e t when t h e s e n o t e s go o u t i n t o c i r c u l a t i o n t h e r e i s n o t h i n g t o d i s t i n g u i s h them f r o m t h e D o m i n i o n n o t e s i s s u e d u n d e r t h e D o m i n i o n N o t e s A c t and h a v i n g d e f i n i t e g o l d b a c k i n g . They become, i n f a c t , a n i n s e p a r a b l e p a r t o f t h e t o t a l D o m i n i o n i s s u e . As s u c h t h e y a r e l e g a l l y r e d e e m a b l e i n g o l d upon demand. Hence i f i t i s c o n s i d e r e d d e s i r a b l e to be on a g o l d s t a n d a r d t h e r e i s h e r e a v e r y r e a l d a n g e r to t h a t s t a n d a r d . S h o u l d the b a n k s s e c u r e t h r o u g h t h e F i n a n c e A c t a v e r y l a r g e q u a n t i t y o f D o m i n i o n n o t e s ( w i t h no g o l d r e s e r v e ) , t h e n t h e g o l d r e s e r v e s o f t h e n o t e s t h a t were i s s u e d on a g o l d b a s i s m i ght be so d i l u t e d t h a t t h e p e r c e n t a g e o f g o l d b a c k i n g 122. t o t h e t o t a l body o f n o t e s w o u l d become a l m o s t i n f i n i t e s i m a l . I n f a c t , a s we s h a l l s ee l a t e r , t h i s " d i l u t i o n " was what c a u s e d Canada t o s l i p o f f t h e g o l d s t a n d a r d i n 1 9 £ 9 . Such a d a n g e r d i d n o t e x i s t f r o m 1914 t o 1926 b e c a u s e Canada was n o t t h e n on t h e g o l d s t a n d a r d . When t h e p r o v i s i o n o f t h e 1914 A c t f o r making a d v a n c e s t o t h e banks on c o l l a t e r a l was b e i n g made permanent by t h e A c t o f 1923 a p p a r e n t l y t h e d a n g e r was n o t r e a l i z e d . The r e a s o n i s n o t d i f f i c u l t t o s e e . The whole e x p e r i e n c e i n t h e o p e r a t i o n of t h e A c t , b o t h b e f o r e a n d a f t e r t h e war, was g a i n e d when Canada was on p a p e r money. A p p a r e n t l y the f r a m e r s of t h e 1923 A c t d i d n o t r e a l i z e t h a t when Canada went back on t h e g o l d s t a n d a r d , as she d i d i n 1926, the e f f e c t s of t h e o p e r a t i o n s o f t h e A c t w o u l d be v i t a l l y d i f f e r e n t f r o m what t h e y were d u r i n g t h e p a p e r money p e r i o d . As h a s p r e v i o u s l y been s t a t e d , a f t e r 1926 t h e Government's p o l i c y was t o a d h e r e t o t h e g o l d s t a n d a r d w h i l e h e r m o n e t a r y m a c h i n e r y i n t h e f o r m o f t h e F i n a n c e A c t was g o i n g t h e o p p o s i t e w a y — p u s h i n g h e r o f f t h e g o l d s t a n d a r d . From o u r p o i n t o f v i e w i n Canada exchange r a t e s r e - p r e s e n t t h e p r i c e i n our money a t w h i c h t h e c u r r e n c y u n i t of any o t h e r c o u n t r y may be bought o r s o l d . W h i l e Canada and o t h e r c o u n t r i e s were on t h e g o l d s t a n d a r d t h e p r i c e s w h i c h we had t o pay f o r t h e i r c u r r e n c i e s v a r i e d o n l y v e r y s l i g h t l y . O t h e r w i s e i f , s a y , the c o s t o f t h e U n i t e d S t a t e s 123. d o l l a r r o s e above or f e l l b e low t h e c o s t o f s h i p p i n g g o l d f r o m Canada t o t h e U n i t e d S t a t e s , or v i c e v e r s a , o b l i g a - t i o n s would be s e t t l e d by t r a n s f e r o f g o l d i n s t e a d o f by th e p u r c h a s e or s a l e of exchange. I n o t h e r w o rds, when exchange r a t e s r i s e o r f a l l beyond t h e g o l d p o i n t s (between Canada and t h e U n i t e d S t a t e s t h e g o l d p o i n t s a r e / 135 a p p r o x i m a t e l y 5/32 o f one p e r c e n t , f r o m p a r i t y ) g o l d w i l l be s h i p p e d i n s e t t l e m e n t o f b a l a n c e s . Thus when th e o r t h o d o x g o l d s t a n d a r d w o r k s " a u t o m a t i c a l l y " , w i t h o u t i n t e r f e r e n c e , t h i s movement o f g o l d t e n d s t o c o r r e c t a b n o r m a l e x c h a n g e s i t u a t i o n s . When Canada was on t h e g o l d s t a n d a r d she p r o m i s e d t o g i v e on demand a s t a t e d sum i n g o l d f o r any a n d ' a l l o f h e r p a p e r c u r r e n c y . I t was i m p l i e d a l s o t h a t she wo u l d p e r m i t t h e e x p o r t and i m p o r t o f g o l d w i t h o u t r e s t r i c t i o n . From t h e t i m e Canada r e t u r n e d t o t h e g o l d s t a n d a r d i n 1926 u n t i l t h e end of 1928 C a n a d i a n - U n i t e d S t a t e s e x c h a n g e r a t e s r e m a i n e d p r e t t y s t e a d i l y w i t h i n t h e g o l d p o i n t s . Towards t h e end of 1928, however, t h e premium on U n i t e d S t a t e s f u n d s began t o r i s e , and f r o m then u n t i l 1930 i t r e m a i n e d c o n s i d e r a b l y above t h e g o l d e x p o r t p o i n t . A l m o s t no g o l d was e x p o r t e d , however. Our Department o f F i n a n c e 135. C u r t i s , C. A. 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 , p.320. 124. had p r a c t i c a l l y s u s p e n d e d r e d e m p t i o n of D o m i n i o n n o t e s i n g o l d . Hence g o l d c o u l d n o t he o b t a i n e d f r e e l y f o r e x p o r t . A c c o r d i n g t o our d e f i n i t i o n of t h e g o l d s t a n d a r d , t h e n , Canada had i n e f f e c t abandoned t h a t s t a n d a r d i n 1929. As p r e v i o u s l y s t a t e d , a d v a n c e s u n d e r t h e F i n a n c e A c t r o s e f r o m $12,767,500 i n 1914 t o $123,689,025 i n 1920. A f t e r t h a t t h e t e n d e n c y was downward u n t i l 1927 when t h e y began to i n c r e a s e a g a i n . They r o s e r a p i d l y " i n 1928 and 1929. As A m e r i c a n f u n d s were a t a premium, ou r C a m d i a n banks were s e c u r i n g l o a n s o f D o m i n i o n n o t e s on d e p o s i t e d s e c u r i t i e s u n d e r the p r o v i s i o n s of t h e F i n a n c e A c t . T h e s e n o t e s t h e y v/ere t h e n p r e s e n t i n g to t h e D e p a r t m e n t o f F i n a n c e f o r r e d e m p t i o n i n g o l d , w h i c h i n t u r n t h e y w e r e s h i p p i n g t o t h e U n i t e d S t a t e s t o a v o i d p a y i n g t h e premium w h i c h t h e y would have had t o do i f t h e y had bought U n i t e d S t a t e s e x - change. The e f f e c t o f t h i s p r o c e s s was s o o n 'seen. The a v e r a g e r a t i o o f g o l d t o D o m i n i o n n o t e s o u t s t a n d i n g d r o p p e d f r o m 57 1/3 p e r c e n t , i n 1926 t o 29 1/6 p e r c e n t , i n 1929. I t w i l l be remembered t h a t t h i s r e s u l t was p o s s i b l e b e c a u s e o f t h e f a c t t h a t w h i l e t h e i s s u e of D o m i n i o n n o t e s u n d e r t h e D o m i n i o n N o t e s A c t i s r i g i d l y l i m i t e d , t h e i s s u e o f s u c h n o t e s u n d e r the F i n a n c e A c t i s u n l i m i t e d and r e q u i r e s 136. Computed f r o m t h e m o n t h l y r e t u r n s made on " C i r c u l a - t i o n a n d S 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 g o l d b a c k i n g . As t h e Government saw i t s g o l d r e s e r v e s b ecoming d e p l e t e d i t was f o r c e d to s u s p e n d r e d e m p t i o n o f i t s n o t e s i n g o l d and i n e f f e c t t o p r o h i b i t the e x p o r t of g o l d . Hence we s e e t h a t t h e o p e r a t i o n s of t h e F i n a n c e A c t f o r c e d Canada o f f the g o l d s t a n d a r d i n 1929. Under c i r c u m s t a n c e s s u c h a s t h o s e d e s c r i b e d an o r d i n a r y c e n t r a l bank w o u l d h a v e u s e d i t s d i s c o u n t r a t e as a weapon t o p r o t e c t i t s g o l d r e s e r v e s . No s u c h u s e of t h e i n t e r e s t r a t e , or d i s c o u n t r a t e , was made by t h e a d m i n i s - t r a t o r s o f t h e F i n a n c e A c t . From September 1, 1928, t o O c t o b e r 26, 1931, t h e g e n e r a l r a t e was 4-§- p e r c e n t . , e x c e p t on a d v a n c e s a g a i n s t T r e a s u r y N o t e s , when t h e r a t e was 3f; p e r c e n t . The a d m i n i s t r a t o r s o f t h e A c t t h e r e f o r e w a t c h e d the c o u n t r y b e i n g f o r c e d o f f t h e g o l d s t a n d a r d by i t s o p e r a t i o n s w i t h o u t e v e n once r a i s i n g t h e r a t e i n an a t t e m p t t o h a l t t h e p r o c e s s . The f o r e i g n e x c h a n g e s were thus a l l o w e d t o a c t a s t h e y w o u l d . C e r t a i n l y t h e F i n a n c e A c t p r o v e d t o be a p o o r s u b s t i t u t e f o r a c e n t r a l bank a t t h a t t i m e . Whether o r n o t C a n a d i a n banks d u r i n g 1928 and 1929 b o r r o w e d money u n d e r t h e F i n a n c e A c t t o u s e on c a l l l o a n s i n New Y o r k o r f o r i n v e s t m e n t i n s t o c k s i s h a r d t o d e t e r m i n e . 137 P a r t 2., S e c t i o n 14, o f the A c t s a y s : 137. The F i n a n c e A c t , P a r t 2, S e c . 5. "No a d v a n c e s s h a l l be 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 e x c h a n g e i s s u e d or drawn 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 , b o nds, or o t h e r s e c u r i t i e s and the M i n i s t e r may d i r e c t the 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 a s t o w h e t h e r any n o t e s o r 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 t h e p r o h i b i - t i o n o f t h i s s e c t i o n . " On f i r s t a p p e a r a n c e t h i s c l a u s e o f t h e A c t w o u l d seem to p r o v i d e an a d e q u a t e s a f e g u a r d . I t must be b o r n e i n mind, however, t h a t t r a n s a c t i o n s g i v i n g r i s e t o an a d v a n c e . u n d e r t h e A c t do n o t n e c e s s a r i l y have any c o n n e c t i o n w i t h t h e c h a r a c t e r of t h e s e c u r i t i e s or p a p e r d e p o s i t e d as c o l l a t e r a l . Hence t h e r e i s a t l e a s t a h o l e i n the w o o d p i l e b i g enough to h o u s e the c e l e b r a t e d n i g g e r . I n a d d i t i o n , one i s a g a i n r e m i n d e d o f t h e f a c t t h a t t h e e x p e r t s c a l l e d u p on t o a d v i s e a s to t h e wisdom of m a k i n g t h e p r o p o s e d a d v a n c e s a r e t h e T r u s t e e s of t h e C e n t r a l C o l d R e s e r v e s , f o u r i n number, o f whom t h r e e a r e b a n k e r s a p p o i n t e d b y t h e C a m d i a n B a n k e r s ' A s s o c i a t i o n . I n a n y c a s e , w h e t h e r o r n o t t h e p r o v i s i o n s o f t h e A c t h a v e been a b u s e d i n t h e ways s u g g e s t e d above as p o s s i b l e , t h e f a c t i s t h a t , a s Mr. 138 W. H. Budden s a y s , " t h i s s t a t e of a f f a i r s i s d a n g e r o u s n o t o n l y i n t h e o r y b u t i n p r a c t i c e . . . . " I t w o u l d seem t o be e x p e c t i n g t o o much of any b a n k e r to r e s i s t b o r r o w i n g 138. Budden, W. H. " F i n a n c e " , p . 7 — p r i v a t e c o p y . 127. u n d e r t h e F i n a n c e A c t a t 4§- p e r c e n t , a t a t i m e when money c o u l d be p u t out on c a l l l o a n s i n New Y o r k a t a s h i g h a r a t e a s 20 p e r c e n t . To s a y t h e l e a s t t h e e x i s t e n c e o f s u c h p o s s i b i l i t i e s as t h o s e above s u g g e s t e d r e n d e r s c o n t r o l o f the e x c h a n g e s most p r e c a r i o u s . However, t h e premium on New'York exchange was n e v e r more t h a n Z\ p e r c e n t , u n t i l September, 1951. A f t e r t h a t d a t e i t a l m o s t r e a c h e d 25 p e r c e n t . A t d a t e o f w r i t i n g ( M a r c h 2, 1933) i t i s 19.76 p e r c e n t . The sudden d r o p i n t h e v a l u e o f t h e C a n a d i a n d o l l a r a b r o a d f o l l o w e d G r e a t B r i t a i n ' s f a l l f r o m t h e g o l d s t a n d a r d on September 21, 1931. The b a l a n c e of t r a d e a n d i n t e r n a t i o n a l payments g e n e r a l l y does n o t seem t o o f f e r a n a d e q u a t e e x p l a n a t i o n o f our exchange s i t u a t i o n . From 1921 to 1928 we had a n e x c e s s o f e x p o r t s o v e r i m p o r t s . I n t h e l a t t e r y e a r t h e s o - c a l l e d " f a v o r a b l e " b a l a n c e o f t r a d e amounted t o $152,000,000. I t i s t r u e t h a t we had an " u n f a v o r a b l e " t r a d e b a l a n c e o f $91,000,000 i n 1929 a n d $103,000,000 i n 1930, b u t a c c o m p a n i e d w i t h a d r a s t i c f a l l i n our t o t a l t r a d e we f i n d a g r o w i n g d e c r e a s e i n our a d v e r s e b a l a n c e u n t i l i n 1932 we had a n e t m e r c h a n d i s e c r e d i t b a l a n c e o f $82,000,000 and a c r e d i t b a l a n c e on a l l i n t e r n a t i o n a l p a y - ments of $ 6 1 , 0 0 0 , 0 0 0 . 1 3 9 Y e t o u r d o l l a r i s s t i l l a t a 139. D a t a 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 , F e b . 18, 1933. 128. b i g d i s c o u n t i n t h e U n i t e d S t a t e s . U n d o u b t e d l y the s h o c k g i v e n t o t h e f a i t h of a l l n a t i o n s i n f o r e i g n i n v e s t m e n t s g e n e r a l l y by E n g l a n d ' s f a l l f r o m t h e g o l d s t a n d a r d i n September 1, 1931, c a u s e d f o r e i g n demand ( p a r t i c u l a r l y A m e r i c a n ) f o r C a n a d i a n s e c u r i t i e s t o c e a s e a l m o s t a l t o g e t h e r , l l e v e r b e f o r e , p r o b a b l y , h a ve the money m a r k e t s o f t h e w o r l d b e e n so c o m p l e t e l y c l o s e d t o even f i r s t - c l a s s f o r e i g n b o r r o w i n g s . Then a g a i n t h i s g e n e r a l s t a t e of l a c k o f c o n f i d e n c e l e d to a c l o s e r e x a m i n a t i o n of Canada's f i n a n c i a l c o n d i t i o n . The f a c t o f our h a v i n g p l a y e d w i t h t h e g o l d s t a n d a r d f r o m 1929 t o t h e p r e s e n t , t h e weakened c o n d i t i o n of o u r g o l d r e s e r v e s , and t h e e x t e n t of our f u n d e d d e b t p r o b a b l y a l l t e n d e d t o make p r o s p e c t i v e i n v e s t o r s e v e n more n e r v o u s . As s t a t e d a b ove, f o r e i g n m a r k e t s were p r a c t i c a l l y c l o s e d . Bond i s s u e s c o u l d n o t be f l o a t e d , s h o r t - t e r m l o a n s c o u l d n o t be r e f i n a n c e d , and C a n a d i a n b o r r o w i n g a b r o a d c e a s e d . T h i s c e s s a t i o n of b o r r o w i n g h a d an u n f a v o r a b l e e f f e c t on our e x c h a n g e s i t u a t i o n . Then o f c o u r s e v/e h a d h e a v y i n t e r e s t payments t o maJce on C a n a d i a n s e c u r i t i e s h e l d i n t h e U n i t e d S t a t e s a n d t h e u n f a v o r a b l e e x c h a n g e added g r e a t l y t o t h i s b u r d e n . The b u r d e n o f t h e h i g h premium on A m e r i c a n f u n d s was e v i d e n c e d i n a n o t h e r way. Many C a n a d i a n s e c u r i t i e s h e l d i n Canada a r e p a y a b l e i n 129. e i t h e r C a n a d i a n or U n i t e d S t a t e s f u n d s a t t h e h o l d e r ' s o p t i o n . Many owners o f s u c h s e c u r i t i e s h e l d i n Canada s e n t them to New Y o r k f o r payment t o g e t t h e a d v a n t a g e o f payment i n U n i t e d S t a t e s f u n d s . T h i s a d d e d to t h e p a y e r ' s b u r d e n . I n a d d i t i o n , i f t h e f u l l amount o f t h e s e payments was n o t b r o u g h t back t o Canada t h e r e was a n e t a d d i t i o n a l demand f o r U n i t e d S t a t e s exchange w h i c h i n t u r n f u r t h e r d e p r e s s e d our d o l l a r . U n d o u b t e d l y , t o o , t h e g e n e r a l f e e l i n g of i n s e c u r i t y a f t e r B r i t a i n ' s f a l l f r o m t h e gold, s t a n d a r d c a u s e d t h e r e p a t r i a t i o n o f U n i t e d S t a t e s f u n d s i n Canada and t h i s a f f e c t e d Canada's e x c h a n g e s i t u a t i o n u n - f a v o r a b l y . Had t h e C a n a d i a n Government been c o n c e r n e d s o l e l y w i t h i t s own f i n a n c i a l o b l i g a t i o n s and had - i t n o t f e l t i t n e c e s s a r y t o a s s i s t t h e banks i t w o u l d v e r y l i k e l y n o t h a v e been l e d t o p l a y a s i t d i d w i t h the g o l d s t a n d a r d . As we have s e e n , d u r i n g 1929 we were d e f i n i t e l y o f f t h e g o l d s t a n d a r d , and a f t e r 1929 t i l l O c t o b e r , 1931, we were "on and o f f " . .Then on t h e l a t t e r d a t e g o l d e x p o r t was o f f i c i a l l y p r o h i b i t e d , e x c e p t u n d e r l i c e n s e , a n d we were a d m i t t e d l y o f f t h e g o l d s t a n d a r d a g a i n . But j u s t p r e v i o u s 140 t o t h i s the Government's r e s e r v e p o s i t i o n was s o u n d . 140. The m a t e r i a l h e r e u s e d i s a summary o f Mr. C. A. C u r t i s ' t r e a t m e n t 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, i s s u e of t h e J o u r n a l o f P o l i t i c a l Economy. 130. D o m i n i o n n o t e s o u t s t a n d i n g amounted t o $150,000,000 o f w h i c h $28,000,000 was i n t h e hands of t h e p u b l i c . The banks h a d $12,000,000 of t h e r e s t on d e p o s i t i n t h e C e n t r a l G o l d R e s e r v e s and $110,000,000 i n t h e i r p o s s e s s i o n , and t h e Government had $67,000,000 i n s p e c i e . By law 40 p e r c e n t , o f the r e s e r v e s o f t h e b a n k s must be i n the f o r m of D o m i n i o n n o t e s . I t i s a l t o g e t h e r u n l i k e l y t h a t t h e banks c o u l d have r e d u c e d t h e i r r e s e r v e s t o an e x t e n t g r e a t enough t o endanger t h e Government's g o l d p o s i t i o n . T h e r e - f o r e , had t h e Government c o n c e r n e d i t s e l f s o l e l y w i t h i t s own p o s i t i o n , i t need n o t have been w o r r i e d a b o u t i t s g o l d r e s e r v e s . But i t had come t o t h e r e s c u e o f t h e banks i n 1914 w i t h t h e F i n a n c e A c t . They h a d become a c c u s t o m e d to r e l y on t h i s Government a s s i s t a n c e p r o v i d e d by t h e terms of t h a t A c t . I n o t h e r words, t h e p a s s i n g o f t h e F i n a n c e A c t i n 1914 marked t h e t r a n s f e r o f r e s p o n s i b i l i t y f o r m o n e t a r y c o n t r o l f r o m the banks t o t h e a d m i n i s t r a t o r s o f t h e A c t . The Government h a d s u p p o r t e d the banks up to t h i s t i m e . I t a d m i t t e d l y c o u l d n o t p e r m i t any o f t h e banks t o f a i l . I t c o u l d n o t , t h e r e f o r e , abandon them now. The p r i c e o f i t s a s s i s t a n c e to them was t h e abandonment o f t h e g o l d s t a n d a r d . I t would a p p e a r to be beyond q u e s t i o n , t h e n , t h a t t h e r e i s a s e r i o u s weakness i n our C a n a d i a n m o n e t a r y s y s t e m . I t 131. may be t h a t t h e r e a r e enough m i n o r d e f e c t s t o make a g e n e r a l o v e r h a u l i n g o f t h e ?/hole s t r u c t u r e d e s i r a b l e . The r e a l l y v i t a l d e f e c t , however, i s t o be f o u n d i n t h e F i n a n c e A c t . I t n o t o n l y d o e s n o t c o n t r o l , i t a t t i m e s i s a p o s i t i v e f o r c e w o r k i n g i n the o p p o s i t e d i r e c t i o n . The w r i t e r h a s no i n c l i n a t i o n t o u p h o l d t h e g o l d s t a n d a r d , b u t would p o i n t o u t t h a t i f s u c h a s t a n d a r d i s t o be m a i n t a i n e d i n Canada the F i n a n c e A c t w i l l be a c o n s t a n t s o u r c e o f d a n g e r t o i t s s t a b i l i t y . On t h e o t h e r hand i f some o t h e r s t a n d a r d i s a d o p t e d , a g r e a t e r d e g r e e of i n t e l l i g e n t c o n t r o l w i l l be n e c e s s a r y t h a n u n d e r g o l d s t a n d a r d c o n d i t i o n s . I n t h i s c h a p t e r we h a v e examined t h e F i n a n c e A c t t o see i f i t c o n s t i t u t e s an a d e q u a t e s u b s t i t u t e f o r a c e n t r a l bank. A f t e r w e i g h i n g t h e e v i d e n c e w i t h r e s p e c t t o i t s o p e r a t i o n we f o u n d t h a t i n some r e s p e c t s i t i s l i k e a b a n k e r s ' bank, p a r t i c u l a r l y i n t h a t i t p r o v i d e s l o a n s f o r t h e b a n k s , s u p p l i e s emergency c u r r e n c y , and h a s t h e c o m m e r c i a l b a n k s a s i t s o n l y c u s t o m e r s . On t h e o t h e r hand we f o u n d t h a t a s a b a n k e r s ' bank i t i s . v e r y i n a d e q u a t e i n t h a t i t does n o t h o l d t h e r e s e r v e f u n d s of t h e b a n k s , t h a t i t d o e s n o t a c t a s a c l e a r i n g h o u s e f o r t h e banks, t h a t i t s l o a n i n g f u n c t i o n d o e s not c o n s t i t u t e r e a l r e d i s c o u n t i n g , and t h a t i t s a d m i n i s t r a t i o n h as b e e n h o p e l e s s l y i n e f f i c i e n t f r o m t h e p o i n t o f v i e w o f c e n t r a l b a n k i n g . As a b a n k e r s ' 132. bank, t h e n , i t i s o n l y a " p i e c e of a bank". We have p r e - v i o u s l y s e e n t h a t i n no s e n s e does i t s e r v e as a g o v e r n - ment's bank. Now we may add t h a t i t i s even w o r s e as a " p e o p l e ' s " bank t h a n a s a g o v e r n m e n t ' s bank, f o r i t n o t o n l y f a i l s to p r o v i d e any s o c i a l c o n t r o l w h a t e v e r , b u t a c t u a l l y i s a d a n g e r o u s s o u r c e of i n s t a b i l i t y i n o u r m o n e t a r y s t r u c t u r e . I n c o n c l u d i n g t h i s c h a p t e r we may o b s e r v e t h a t an i n - s t i t u t i o n w h i c h d o e s no r e a l r e d i s c o u n t i n g , w h i c h p e r f o r m s no d i r e c t s e r v i c e f o r t h e Government, w h i c h e x e r c i s e s no c o n t r o l o v e r t h e c o m m e r c i a l banics, w h i c h p u r s u e s no c r e d i t p o l i c y , w h i c h i s u n c o n s c i o u s ©f a p o s s i b i l i t y o f p r i c e c o n t r o l , w h i c h makes no a t t e m p t a t e x c h a n g e c o n t r o l , w h i c h i n s h o r t p r o v i d e s n o t e v e n a modicum o f c o n t r o l i n t h e s o c i a l s e n s e , and w h i c h i s r e s p o n s i b l e f o r i t s c o u n t r y b e i n g d r i v e n o f f i t s a d o p t e d m o n e t a r y s t a n d a r d , may be one o f a number o f t h i n g s , b u t most c e r t a i n l y i t i s n o t a c e n t r a l bank. Chapter 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 Canada. S i n c e the q u e s t i o n of a c e n t r a l hank f o r Canada has r e a c h e d the s t a g e 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 show f i r s t , t h a t i t i s u n n e c e s s a r y , and then t h a t t h e r e would he many d i f f i c u l t i e s i n t h e way of c r e a t i n g an i n s t i t u t i o n t h a t c o u l d r e n d e r e f f e c t i v e s e r v i c e . The argument most f r e q u e n t l y put f o r t h i n o p p o s i t i o n i s t h a t i n the F i n a n c e A c t we have a l l t h a t we need i n the way of a c e n t r a l hank. An o t h e r argument i s t h a t the head o f f i c e s o f the c h a r t e r e d banks p r o v i d e adequate 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 b ranches. With t h e s e two arguments we have a l r e a d y d e a l t a t l e n g t h i n the p r e v i o u s c h a p t e r . When the argument i s advanced t h a t a c e n t r a l bank i s r e q u i r e d f o r t h e purpose of c o n t r o l l i n g c r e d i t , opponents c l a i m t h a t the c h a r t e r e d 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 to an adequate degree. I t i s t r u e t h a t they do have 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 c o n s t r a i n e d t o keep cash h o l d i n g s about e q u a l to 10 p e r c e n t , of t h e i r l i a b i l i t i e s . Then 154. a g a i n they a r e i n c l i n e d t o have a "b a l a n c e sheet c o n c e p t " . They watch one a n o t h e r ' s s t a t e m e n t s to see whether t h e i 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 or n o t . They a r e no doubt to a c o n s i d e r a b l e e x t e n t i n f l u e n c e d by the Bank of England and the F e d e r a l R e s e rve Banks. I n a d d i t i o n , i t i s t r u e t h a t the Lar g e r banks, a t l e a s t , have, a t c e r t a i n t i m e s , a common u n d e r s t a n d i n g w i t h t h e Government on c r e d i t p o l i c y . T h i s i s p a r t i c u l a r l y t r u e i n time of war. I n the broader sense of c r e d i t c o n t r o l as a s o c i a l f u n c t i o n , however, as seen i n Cha p t e r s 3 and 5, p r a c t i c a l l y n o t h i n g i s done by the c h a r t e r e d banks i n Canada. One of the f i r s t r e a c t i o n s of Canadian bankers to t h e s u g g e s t i o n t h a t we s h o u l d have a c e n t r a l bank i s to e x p r e s s a n x i e t y l e s t the p r e s e n t b a n k i n g system be d i s t u r b e d . They l o o k upon t h i s system as t r i e d , p r oven, and e f f i c i e n t . Why then s h o u l d we t i n k e r w i t h i t ? Why endanger i t w i t h an i n n o v a t i o n ? Mr. C. A. B o g e r t , V i c e P r e s i d e n t and G e n e r a l Manager of the Dominion Bank, s a y s : "Throughout t h i s d e p r e s s i o n , the Canadian banking- system has f u n c t i o n e d so 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 , and competent 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 not h e s i t a t e to pronounce 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 , Vancouver, B. C , J a n . 31, 1933, p. 3. 135. Mr. J . A. M c l e o d , P r e s i d e n t o f 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 , s a y s : " I h a v e , perhaps,' s a i d enough to make i t c l e a r t h a t t h e p r o j e c t e d e s t a b l i s h m e n t ' of a c e n t r a l bank i n Canada 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 p r o b l e m s , and i s not w i t h o u t e l e m e n t s o f danger."142 "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 v i e w - p o i n t o f C a n a d i a n c h a r t e r e d b a n k s , e x p r e s s e s h i m s e l f i n p a r t a s f o l l o w s : " . . . . I b e l i e v e t h a t 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 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 i n v o l v e a d r a s t i c and d a n g e r o u s change i n Canada'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 the i n t e r e s t s and w e l l - b e i n g of e v e r y C a n a d i a n . , ."143 Bo d o u b t t h e above q u o t a t i o n s e x p r e s s t h e s i n c e r e c o n - v i c t i o n s of t h e g r e a t m a j o r i t y of o u r b a n k e r s . I t i s p e r - h a p s n a t u r a l t h a t t h e y s h o u l d v i e w w i t h a n x i e t y any p r o j e c t e d change i n a s y s t e m w h i c h , f r o m t h e i r p o i n t o f v i e w , a p p e a r s t o be e x c e l l e n t . N e v e r t h e l e s s , when t h e q u e s t i o n i s g i v e n c o n s i d e r a t i o n f r e e f r o m b i a s , t h e r e w o u l d seem t o be l i t t l e v a l i d r e a s o n f o r t h e i r o p p o s i t i o n . A c e n t r a l bank need n o t i n t e r f e r e w i t h t h e i r o r d i n a r y p r i v i l e g e s n o r l e a d t o u n c o n t r o l l e d i n f l a t i o n , w h i c h t h e y 142. McLeod, J". A. A d d r e s s t o t h e A n n u a l G e n e r a l M e e t i n g 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, 193'2, p. 13. 143. The F i n a n c i a l P o s t , Dec. 10, 1932. 136. f e a r . I n f a c t a g e n u i n e c e n t r a l bank w o u l d a s s i s t t h e b a n k e r s t o s o l v e many of t h e i r p r o b l e m s and w o u l d l i m i t them o n l y i n - s o - f a r a s i t w o u l d be n e c e s s a r y t o p r e v e n t a b u s e s . The s i t u a t i o n of our C a n a d i a n b a n k e r s m i g h t b e s t be summed up i n the words o f K i s c h and E l k i n : " I n some i n s t a n c e s when the C e n t r a l Bank i s s u p e r i m p o s e d on an e x i s t i n g b a n k i n g s y s t e m the c o m m e r c i a l banks w h i c h h a ve 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 p e r h a p s n o t f u l l y a p p r e c i a t e i t s a d v a n t a g e s 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 e x p e d i e n c y o f t h e i n n o v a t i o n . " 1 4 4 Our C a n a d i a n b a n k e r s a r e f o r t h e most p a r t s k e p t i c a l of t h e e f f i c a c y of c e n t r a l b a n k s g e n e r a l l y . I n t h e f i r s t p l a c e t h e y have l i t t l e f a i t h i n the g e n e r a l t h e o r y o f m o n e t a r y c o n t r o l i n t h e s o c i a l s e n s e . They a r e i n c l i n e d t o s hy a t t h e s u g g e s t i o n of c o n t r o l of f o r e i g n e x c h a n g e and o f t h e p r i c e l e v e l . The ar g u m e n t s on t h i s q u e s t i o n were p r e s e n t e d i n C h a p t e r 3, however, so t h a t p h a s e o f t h e b r o a d e r q u e s t i o n o f c e n t r a l bank e f f i c a c y w i l l n o t be l a b o r e d f u r t h e r h e r e . M i e n we l o o k a t the m i s t a k e s and f a i l u r e s of c e n t r a l banks t o d a t e , however, i t must be a d m i t t e d t h a t t h e r e i s c o n s i d e r a b l e g r o u n d f o r our b a n k e r s ' d o u b t s . They p o i n t , f o r i n s t a n c e , t o t h e Bank of E n g l a n d , t h e most famous 144. K i s c h and E l k i n . C e n t r a l Banks, p . 117 137. c e n t r a l bank i n t h e w o r l d , and r e m i n d us t h a t t h i s g r e a t bank was p o w e r l e s s to p r e v e n t t h e f i n a n c i a l c r i s i s o f 1931 i n t h a t c o u n t r y . C e r t a i n l y t h e w r i t e r d o e s n o t t h i n k t h a t the Bank o f E n g l a n d i s b y any means p e r f e c t . I t i s n o t a government bank. I t i s r e a l l y a p r i v a t e c o r - p o r a t i o n owned and c o n t r o l l e d b y i t s s h a r e h o l d e r s . T h e s e s h a r e h o l d e r s e l e c t a b o a r d o f t w e n t y - f o u r d i r e c t o r s who c h o o s e one o f t h e i r number a s G o v e r n o r and one a s D e p u t y G o v e r n o r . I t i s q u i t e t r u e t h a t t h e Bank's p o l i c y u s u a l l y i n d i c a t e s a h i g h s e n s e o f d u t y t o t h e n a t i o n on t h e p a r t o f t h e d i r e c t o r a t e . T h e r e c a n be no d o u b t t h a t t h e d i r e c - t o r s o f t e n p l a c e t h e i r m o r a l o b l i g a t i o n s to t h e c o u n t r y a bove t h e p r o f i t m o t i v e . N e v e r t h e l e s s , i t w o u l d a p p e a r t h a t v e r y o f t e n the d i r e c t o r a t e ' s i d e a o f what i s t h e b e s t p o l i c y f o r t h e n a t i o n i s r e a l l y what i s t h e b e s t p o l i c y f o r " t h e c i t y " . Whether c o n s c i o u s l y or o t h e r w i s e , t h e d i r e c t o r s seem a l l t o o o f t e n t o be t o o much i n f l u e n c e d by " t h e c i t y " . U n f o r t u n a t e l y t h e i n t e r e s t s o f " t h e c i t y " and o f t h e n a t i o n a s a w h o l e a r e n o t a l w a y s one and t h e same. An i l l u s t r a t i o n of t h i s may be seen i n t h e e v e n t s of t h e c r i s i s o f 1931. From w h a t e v e r m o t i v e i t may have been p u r s u e d , th e f a c t r e m a i n s t h a t t h e p o l i c y o f " t h e c i t y " , and n o t any p o l i c y o f t h e government of t h e day, r e s u l t e d i n f r o z e n a s s e t s and i n a f i n a n c i a l c r i s i s . I t was n o t n e c e s s a r i l y i n t h e i n t e r e s t s of t h e p e o p l e g e n e r a l l y t h a t wages s h o u l d be r e d u c e d , t h a t t h e d o l e s h o u l d be c u t , t h a t t h e s t a n d a r d o f l i v i n g s h o u l d be l o w e r e d , and t h a t t h e g o l d s t a n d a r d s h o u l d be g l o r i f i e d one d a y and d e s p i s e d t h e n e x t i n o r d e r t h a t " t h e c i t y ' s " c h e s t n u t m i g h t be p u l l e d f r o m the f i r e . Y e t t h e f i n a n c i a l p o l i c y o f " t h e c i t y " , l e d b y t h e Bank o f E n g l a n d , f o r c e d t h e d o w n f a l l o f one government and t h e c r e a t i o n of a n o t h e r t o do t h e s e t h i n g s . Had t h e Banx o f E n g l a n d been a r e a l g o v e r n m e n t ' s bank, had i t s p o l i c y b e en f o r m u l a t e d by a d i r e c t o r a t e h a v i n g an en- l i g h t e n e d s o c i a l c o n s c i o u s n e s s , u n i n f l u e n c e d by s p e c i a l i n t e r e s t s , t h e s e t h i n g s w o u l d n o t l i k e l y have h a p p e n e d . One i l l u s t r a t i o n a l o n e seems t o be p r o o f enough t h a t t h e p e r s o n n e l o f t h e management o f t h e Bank of E n g l a n d i s n o t a l l t h a t i t m ight be, i n s p i t e of t h e f a c t t h a t un- d o u b t e d l y t h e r e a r e many s p l e n d i d and a b l e men on i t s d i r e c t o r a t e . The G o v e r n o r , Mr. Montagu Norman, i s q u o t e d as s a y i n g l a s t autumn: "The d i f f i c u l t i e s of t h e p r e s e n t economic 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 n o t o n l y i n i g n o r a n c e b u t i n h u m i l i t y . I t i s t o o much f o r me I hope 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 t h e end of t h e t u n n e l . Some p e o p l e have been a b l e t o p o i n t out t h a t l i g h t t o u s . 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 way i s n o t c l e a r . " 1 4 5 145. The F i n a n c i a l P o s t , O c t . 29, 1932. 139. The f r a n k n e s s of t h i s u t t e r a n c e i s i n d e e d to be com- mended. F o r h u m i l i t y t h e r e i s g r e a t n e e d . F o r i g n o r a n c e , however, t h e r e s h o u l d be no p l a c e i n t h e g o v e r n o r s h i p o f the Bank of E n g l a n d . R e s p e c t e d as he must be f o r h i s c a n d o u r , t h e G o v e r n o r w o u l d have been much more r e s p e c t e d had he, f o l l o w i n g t h i s f r a n k u t t e r a n c e , r e s i g n e d and g i v e n p l a c e t o some one who c o u l d " see t h e l i g h t a t t h e end o f th e t u n n e l " l e s s i n d i s t i n c t l y . T u r n i n g now to t h e F e d e r a l R e s e r v e System of t h e u n i t e d S t a t e s we may a g a i n f i n d - i m p e r f e c t i o n s . B e f o r e t h e F e d e r a l R e s e r v e A c t of 1913 was p a s s e d , t h e A m e r i c a n b a n k i n g s y s t e m was p a r t i c u l a r l y d e f i c i e n t i n s o c i a l c o n t r o l o f t h e m o n e t a r y s t r u c t u r e . The t h o u s a n d s o f banks were u n a b l e t o cope w i t h i n f l a t i o n and s p e c u l a t i o n . As a m a t t e r o f f a c t t h e i r i n f l u e n c e was o f t e n e x e r t e d i n the d i r e c t i o n o f a g g r a v a t i n g t h e i n s t a b i l i t y t h a t e x i s t e d . U n i t e d a c t i o n was i m p o s s i b l e . E a c h bank f o l l o w e d i t s own p o l i c y , w h i c h was u s u a l l y t o expand i t s c r e d i t i n c o m p e t i t i o n w i t h t h e o t h e r banks a t a t i m e when c o n c e r t e d r e s t r i c t i o n s h o u l d h a v e been u s e d a s a b r a k e on the i n f l a t i o n of a boom p e r i o d . The weakness of t h e s y s t e m was s e e n c l e a r l y i n t h e p a n i c o f 1907. The U n i t e d S t a t e s now h a s a F e d e r a l R e s e r v e System w i t h t w e l v e r e g i o n a l banks headed by a F e d e r a l R e s e r v e 14.0. B o a r d . The R e s e r v e Banks a r e e x p e c t e d t o f o l l o w b u s i n e s s d e v e l o p m e n t s c l o s e l y and to v a r y t h e i r d i s c o u n t and open m a r k e t o p e r a t i o n s a c c o r d i n g l y . I t i s p e r h a p s n o t s u r - p r i s i n g t h a t t h e y h a v e n o t a l w a y s done t h i s . I n t h e f i r s t p l a c e t h e F e d e r a l R e s e r v e System i s v e r y young, h a v i n g been e s t a b l i s h e d a s r e c e n t l y as 1913. D u r i n g t h e f i r s t f e w y e a r s , t i l l 1916, s h a l l we s a y , i t was n o t s t r o n g enough t o c a r r y out a v e r y a m b i t i o u s p o l i c y . The p e r i o d of t h e p a r t i c i p a t i o n of t h e U n i t e d S t a t e s i n t h e war w i t n e s s e d t h e s u b o r d i n a t i o n of t h e R e s e r v e B o a r d ' s p o l i c i e s t o t h e 146 m i s t a k e n i d e a s of t h e S e c r e t a r y of t h e T r e a s u r y . The F e d e r a l R e s e r v e B o a r d ' s p o l i c y has n e v e r b e e n 3 4-7 v e r y d e f i n i t e l y s t a t e d . The B o a r d has o f f i c i a l l y a c k n o w l e d g e d t h e p r i c e l e v e l a s one g u i d e t o d i s c o u n t p o l i c y , but o n l y one among many. " S t a b i l i t y " h a s n o t b e e n d e f i n e d . What i n d e x or i n d e x e s a r e u s e d i n n o t c l e a r . The S t r o n g B i l l , v/hich w o u l d d e f i n i t e l y have c o m m i t t e d t h e B o a r d and t h e R e s e r v e Banks t o " p r o m o t i n g a s t a b l e p r i c e l e v e l f o r c o m m o d i t i e s i n g e n e r a l " , was opposed by them. B o t h B o a r d and Banks i n 19S7 d i s o w n e d any r e s p o n s i b i l i t y 146. B e c k h a r t , B. H. The B a n k i n g System o f Canada, p . 485. 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 the v i e w s o f L i o n e l D. E d i e i n "Money, Bank C r e d i t a n d P r i c e s " , pp. 491-92. 141 f o r the d r a s t i c d e c l i n e o f commodity p r i c e s w h i c h had s t a r t e d i n 1925. I n 1929 the g r o w t h o f t h e s p e c u l a t i v e boom c a u s e d g r e a t c o n c e r n on t h e p a r t of b o t h t h e F e d e r a l 148 R e s e r v e Bank of New Y o r k and the B o a r d . U n f o r t u n a t e l y t h e two c o u l d n o t a g r e e upon r e m e d i a l m e asures t o be t a k e n , t h e f o r m e r w i s h i n g to r a i s e the d i s c o u n t r a t e s , t h e l a t t e r d e s i r i n g t o r e l y upon d i r e c t a c t i o n a n d w a r n i n g s . C o n s e q u e n t l a c k o f c o - o p e r a t i o n n a t u r a l l y weakened t h e i r e f f o r t s to b r i n g a b o u t s t a b i l i t y . E a r l y i n t h e p r e s e n t d e p r e s s i o n t h e F e d e r a l R e s e r v e System was f o u n d to be t o o r i g i d , h e n c e t h e o r g a n i z a t i o n o f t h e R e c o n s t r u c t i o n F i n a n c e C o r p o r a t i o n and t h e p a s s i n g o f t h e G l a s s - S t e a g a l l B i l l . The p o l i c y of open market o p e r a t i o n s i n a u g u r a t e d i n 1932 seems t o have been s u c c e s s - f u l i n a r r e s t i n g bank f a i l u r e s and i n r e v e r s i n g t h e h o a r d i n g 14-9 movement f o r a t i m e . The s u c c e s s was o n l y t e m p o r a r y , however, and t h e r e a l bank c r i s i s came on March 4, 1933. The w o r s t f e a t u r e o f t h e F e d e r a l R e s e r v e S y s t e m seems t o be t h a t t h e p e r s o n n e l a r e a p p a r e n t l y u n a b l e t o d e c i d e 148. Bopp, K a r l R. Two N o t e s on 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 E c o n o m i c B u l l e t i n o f May 16, 1932, p . 18. 142. r e a d i l y upon t h e p o l i c y to he c a r r i e d o u t and c o n s e q u e n t l y t h e y have n o t made d e f i n i t e d e c l a r a t i o n s a s - t o what t h e i r p o l i c y i s . The c a u s e of t h i s c o n d i t i o n o f a f f a i r s c a n 150 p e r h a p s he f o u n d i n t h e s t r u c t u r e of t h e R e s e r v e S y s t e m . . I t s c o m p l i c a t e d n a t u r e r e n d e r s i t d i f f i c u l t t o o b t a i n a c o n s i s t e n t l o n g - r u n p o l i c y . The F e d e r a l R e s e r v e A c t s e t s up many a g e n c i e s h a v i n g e i t h e r d i r e c t or i n d i r e c t i n f l u e n c e on p o l i c y . T h e r e i s f i r s t t h e F e d e r a l R e s e r v e B o a r d of e i g h t members. Then t h e r e a r e t h e b o a r d s o f d i r e c t o r s o f e a c h F e d e r a l R e s e r v e Bank h a v i n g i n a l l 108 d i r e c t o r s . T h e r e i s a l s o t h e F e d e r a l A d v i s o r y C o u n c i l o f 12 members made up o f one f r o m e a c h R e s e r v e d i s t r i c t . T h e r e a r e i n a d d i t i o n t h e 12 g o v e r n o r s of t h e s e v e r a l r e g i o n a l h a n k s . T h e s e 12 g o v e r n o r s ' i n t u r n c o n s t i t u t e an open m a r k e t p o l i c y c o n f e r e n c e . I n a l l , t h e n , t h e r e a r e a t l e a s t 140 i n d i v i d u a l s c o n c e r n e d w i t h p o l i c y d e v e l o p m e n t . P o l i c y i s t h e r e f o r e o f t e n t h e r e s u l t o f compromise o r b a l a n c e o f power. Add t o t h i s the f a c t t h a t o f t h e 25,110 hanks i n o p e r a t i o n i n t h e U n i t e d S t a t e s i n 1 9 2 9 1 5 ^ more t h a n 60 p e r c e n t , of the c o m m e r c i a l banks were non-members made 150. See Bopp, K a r l R. Two N o t e s on 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 of P o l i t i c a l Economy, J u n e , 1932, p. 379. 151. S i s s o n , F r a n c i s H. U n i t e d S t a t e s Banks. R eview o f R e v i e w s and W o r l d ' s Work, D e c , 1932. 143. up of state banks and trust 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 enforcing a u n i f i e d banking poli c y . nevertheless the Federal Reserve System in i t s b r i e f existence has already been of untold benefit to the c o u n t r y — i n the financing of the Great War, i n making possible at least some degree of concerted action, and in helping to meet the present c r i t i c a l f i n a n c i a l s i t u a t i o n . Neither time, space, nor purpose permits a further examination into the general efficacy, or lack of i t , of the various central banks. In the l i g h t of what has been said of two of these banks, however, i t i s not altogether surprising that the President of the Canadian Bankers' Association should say: "May I say, with regard to central banks, that there has been a great deal of misapprehension as to what they can do: that even today there exists a great deal of misapprehension as to what they have been able to do elsewhere." When "Christian" met "Atheist", i n Pilgrim's Progress, trudging along with his back to the C e l e s t i a l City, the following conversation i s supposed to have taken place: "Where are you going?" asked Atheist, laughing at C h r i s t i a n . "To the C e l e s t i a l City", r e p l i e d Christian, his face a l l aglow with heavenly l i g h t . "You fool.'" said Atheist, laughing as he trudged X44. on i n t o the 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 twenty y e a r s and have seen 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 . " Heaven was b e h i n d him. The bankers of Canada can see no "heaven" i n a c e n t r a l bank f o r our c o u n t r y . T h e i r backs a r e t u r n e d a g a i n s t i t . But even i f c e n t r a l banks i n e x i s t e n c e e l s e w h e r e have not been a l l t h a t they might have been, even i f the c r e a t i o n of a c e n t r a l bank i n Canada would n o t i m m e d i a t e l y u s h e r us i n t o a f i n a n c i a l or monetary heaven, i t would at l e a s t be a c o n s o l a t i o n t o know t h a t we were w a l k i n g i n t h e r i g h t d i r e c t i o n . A t the same t i m e i f we a r e t o have 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 to remember t h a t the mere e r e c t i n g o f a c e n t r a l bank of "some k i n d " would be f u t i l e a n d a waste of time and money. We do n o t want to copy any 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 have one t h a t would f i t our p a r t i c u l a r needs and one t h a t w i l l be f r e e from the f a u l t s of the p r e s e n t c e n t r a l banks. We s h o u l d adopt 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 enough f o r u s . Anot h e r o b j e c t i o n t h a t our bankers r a i s e a g a i n s t the p r o p o s a l of a c e n t r a l bank f o r Canada i s t h a t the p o l i t i c a l f a c t o r may t h e r e b y come to have an e v i l i n f l u e n c e upon t h e ba n k i n g system. I n the p r e v i o u s c h a p t e r t h i s p o i n t was d e a l t w i t h r a t h e r f u l l y and need not be c o n s i d e r e d a t 145. l e n g t h h e r e . I t w i l l he r e c a l l e d t h a t we found th e F i n a n c e A c t "wide open" to p o s s i b l e p o l i t i c a l i n f l u e n c e , y e t t h e r e was no e v idence of any e v i l i n t h i s r e g a r d . Speaking r e c e n t l y i n f a v o r of a c e n t r a l bank and d e n y i n g t h a t such a bank would be s u b j e c t to p o l i t i c a l i n f l u e n c e , the Hon. V i n c e n t Massey s a i d : "The need i s t o take the banks out of p o l i t i c s , and i f t h e r e i s one agency w h i c h would keep, a l l the d e l i c a t e mechanism of f i n a n c i a l p o l i c y out of p o l i t i c a l debate i t i s a c e n t r a l bank."152 In agreement w i t h Mr. Massey one may observe that a p r o p e r l y c o n s t i t u t e d c e n t r a l bank would a t l e a s t l e a v e our b a n k i n g system l e s s open to the p o l i t i c a l f a c t o r than i t i s at p r e s e n t w i t h the e x i s t i n g s u b s t i t u t e f o r a c e n t r a l bank i n the form of the F i n a n c e A c t . I t i s contended a l s o t h a t i t would be d i f f i c u l t t o s e c u r e e f f i c i e n t management f o r the p r o j e c t e d c e n t r a l bank. T h i s o b j e c t i o n can s c a r c e l y be t a k e n s e r i o u s l y , however. In f a c t , "A Canadian Banker", w i t h the v e r y b r e a t h i n w h i c h he 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, u n i n t e n t i o n a l l y i m p l i e s t h a t t h e r e Y/ould be no d i f f i c u l t y i n s e c u r i n g t h e needed e x p e r t s . 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 hank, he s a y s i n p a r t : 152. The F i n a n c i a l P o s t , Feb. 4, 1933. " T h i s c ommittee 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 and p r a c t i c a l men i t i s p o s s i b l e t o s e c u r e . C o n s i d e r a t i o n m ight be g i v e n t o o b t a i n i n g a s 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 the d e - l i b e r a t i o n s o f t h e c o m m i t t e e a b r o a d i n t e r - n a t i o n a l p o i n t o f v i e w . " 1 5 3 T h i s i s i n d e e d a good d e s c r i p t i o n of what e x p e r t s a d m i n i s t e r i n g a c e n t r a l banx s h o u l d b e . I t c a n n o t t o o o f t e n o r t o o s t r o n g l y be s t r e s s e d t h a t t h e p e r s o n n e l o f a c e n t r a l banx i s t h e v i t a l f a c t o r . A mere bank and a h i g h s o u n d i n g c o n s t i t u t i o n a r e n o t enough. I n agreement w i t h "A C a n a d i a n B a n k e r " one may w e l l admit t h a t our c e n t r a l bank e x p e r t s c o u l d n o t be t o o i n t e l l i g e n t or t o o e x p e r i e n c e d . T h e r e i s a d a n g e r , however, o f o v e r - e m p h a s i s on the w o r d " p r a c t i c a l " . I t i s p o s s i b l e f o r s o - c a l l e d e m i n e n t b u s i n e s s men and b a n k e r s t o be so " p r a c t i c a l " t h a t t h e y c a n n o t s e e t h e f o r e s t f o r t h e t r e e s . C o n s i d e r a t i o n o f t h e s o c i a l f u n c t i o n of a c e n t r a l bank i n Canada s h o u l d be p aramount. Hence i t w o u l d seem a d v i s a b l e to h a v e i n t h e key p o s i t i o n w i t h r e s p e c t t o c e n t r a l bank p o l i c y f o r m a t i o n a p e r s o n w i t h p r o f e s s i o n a l a c a d e m i c t r a i n i n g — a p e r s o n whose knowledge o f money and b a n k i n g has been g a i n e d as a r e s u l t o f d i s - i n t e r e s t e d s t u d y — a n e c o n o m i s t who i s a n e x p e r t i n the. f i e l d o f money and b a n k i n g i n some u n i v e r s i t y . Then, i f 153. The F i n a n c i a l P o s t , f i n a l a r t i c l e by "A C a n a d i a n B a n k e r " . 147. n e c e s s a r y , s u r e l y the v e r y a b l e b a n k e r s t h a t - w e h a v e i n . Canada c o u l d s u p p l y us w i t h some of t h e management p e r s o n n e l . A more s e r i o u s c o n t e n t i o n i s t h a t a c e n t r a l bank c o u l d n o t f u n c t i o n e f f e c t i v e l y i n Canada b e c a u s e of our l a c k o f a money m a r k e t . The P r e s i d e n t o f 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 s a y s : " I t may be q u e s t i o n e d w h e t h e r i n any 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 d o e s p o s s e s s power, t o b r i n g i t s i n f l u e n c e t o b e a r 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 s t r u c t u r e , i t 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 money ma r k e t and, i f p o s s i b l e , a m a r k e t w h i c h c r e a t e s b i l l s o f exchange i n i t s own c u r r e n c y . Where t h e s e 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 r e s e m b l e an i m p r e s s i v e f a c a d e .with a s m a l l a n d r a t h e r f l i m s y b u i l d i n g b e h i n d i t . " 1 5 4 As o u t l i n e d i n t h e p r e v i o u s c h a p t e r , when t h e F i n a n c e A c t was b e i n g a p p r a i s e d as a' " p e o p l e ' s " bank, t h e d i s c o u n t r a t e o f t h e c e n t r a l bank i s t h e p r i m a r y d e v i c e f o r t h e c o n t r o l o f money and c r e d i t . One o f t h e means of m a k i n g t h i s d e v i c e e f f e c t i v e i s f o u n d i n open market o p e r a t i o n s . The c e n t r a l bank u s e s t h i s method of making money " t i g h t " , o r d e a r , " e a s y " , o r cheap. I f money i s t o o p l e n t i f u l , t h e d i s c o u n t r a t e w i l l be r a i s e d and c o m m e r c i a l p a p e r o r s e c u r i t i e s w i l l be s o l d i n t h e open m a r k e t . Money i s t h e r e b y t a k e n out o f the m a r k e t , a n d t h i s t e n d s t o t i g h t e n 154. M c l e o d , J. A. A d d r e s s t o the A n n u a l G e n e r a l M e e t i n g 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, 1932. 148. t h e m a r k e t . The c o m m e r c i a l banks w i l l n o t t h e n have as l i b e r a l a s u p p l y of f u n d s w i t h w h i c h to make new l o a n s t o c u s t o m e r s . I f t h e y go t o t h e c e n t r a l bank t h e y w i l l be c o n f r o n t e d w i t h t h e h i g h d i s c o u n t r a t e w h i c h w i l l dampen t h e i r e n t h u s i a s m f o r f u r t h e r e x p a n s i o n o f c r e d i t . On t h e o t h e r hand, i f money i s t o o s c a r c e , t h e c e n t r a l bank w i l l buy s e c u r i t i e s i n t h e open m a r k e t . I t may do so b y i s s u i n g new n o t e s , o r s i m p l y by c r e d i t i n g t h e s e l l e r s w i t h " d e p o s i t s " . The s e l l e r s may t h e n t r a n s f e r t h e s e new n o t e s o r d e p o s i t s t o t h e i r own b a n k s . The c o m m e r c i a l b a n k s t h u s r e c e i v e added r e s e r v e s , and on t h e s e new r e s e r v e s t h e y may make new and p r o f i t a b l e l o a n s t o t h e i r c u s t o m e r s . I n t h i s way^the bank c r e d i t of t h e w h o l e c o u n t r y may be i n c r e a s e d by c e n t r a l bank open m a r k e t t r a n s a c t i o n s . But Canada, has no s e n s i t i v e m a r k e t i n w h i c h s u c h open market t r a n s a c t i o n s c o u l d be c a r r i e d o u t * B u s i n e s s men d o d i s c o u n t t h e i r b i l l s w i t h t h e i r b a n k e r s , b u t we have no a d e q u a t e m a r k e t f o r d e a l i n g i n b i l l s of exchange. N e i t h e r h a v e we t h e m a c h i n e r y f o r d e a l i n g w i t h them, s u c h a s i s to be f o u n d i n f i n a n c i a l c e n t r e s l i k e Few Y o r k and London. When one o f our banks d i s c o u n t s a b i l l , i t u s u a l l y r e t a i n s i t u n t i l t h e d a t e of m a t u r i t y . V e r y o f t e n , t o o , s u c h b i l l s a r e drawn i n t e r m s o f s t e r l i n g o r A m e r i c a n d o l l a r s r a t h e r t h a n i n C a n a d i a n money. 1 4 9 . I t i s , u s u a l l y d e s i r a b l e t h a t ' t h e r e s h o u l d be, f o r c e n t r a l bank o p e r a t i o n s , a p l e n t i f u l s u p p l y o f i n v e s t m e n t m e d i a i n t h e f o r m o f s h o r t - t e r m c o m m e r c i a l p a p e r and s h o r t - t e r m Government t r e a s u r y b i l l s . I n Canada the s u p p l y o f t r e a s u r y b i l l s i s u s u a l l y n e i t h e r l a r g e n o r c o n s t a n t , a l - t h o u g h t h e s u p p l y was augmented to t h e e x t e n t o f $35,000,000 l a s t autumn. As f o r the s u p p l y o f c o m m e r c i a l p a p e r , w h i l e i t t o t a l s up t o a n immense sum, the i n d i v i d u a l i t e m s a r e s m a l l and a r e n o t c o n c e n t r a t e d t o a n y e x t e n t i n any one o r i n a few c e n t r e s . In c o n s i d e r i n g t h e p o s s i b i l i t i e s o f a c e n t r a l bank i n Canada, t h e n , t h i s d r awback of a l a c k o f a money m a r k e t must n o t be m i n i m i z e d . N e v e r t h e l e s s t h i s u n d o u b t e d l y p o t e n t o b s t a c l e s h o u l d n o t be o v e r - e m p h a s i z e d e i t h e r . O t h e r means o f c o n t r o l a r e p o s s i b l e . The d i s c o u n t r a t e i t s e l f i s the p r i m a r y d e v i c e f o r s u c h c o n t r o l . M o r a l s u a s i o n i s a l s o o f t e n more e f f e c t i v e t h a n a n y t h i n g e l s e . The p s y c h o - l o g i c a l e f f e c t on t h e b a n k i n g f r a t e r n i t y and on the g e n e r a l p u b l i c , when a c e n t r a l bank a n n o u n c e s a change o f p o l i c y , may be g r e a t e r i n c h e c k i n g unsound d e v e l o p m e n t s t h a n any o t h e r d e v i c e . I n Sweden t h e r e i s no - s h o r t - t e r m money m a r k e t n o r b i l l m a r k e t , y e t t h a t c o u n t r y h a s a v e r y e f f e c t i v e c e n t r a l bank, the S v e r i g e s R i k s b a n k . Sweden f o l l o w e d G r e a t B r i t a i n i n 150. g o i n g o f f the g o l d s t a n d a r d i n 1931. S i n c e that time the c e n t r a l bank has been f o l l o w i n g a p o l i c y of r e g u l a t i n g the i n t e r n a l p r i c e l e v e l and more or l e s s i g n o r i n g the f o r e i g n exchanges. T h i s p o l i c y has been r e m a r k a b l y s u c c e s s f u l to d a t e i n s t a b i l i z i n g the i n t e r n a l p u r c h a s i n g power o f the k r o n a . As i n the case of Canada, 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 terms of f o r e i g n c u r r e n c y , and as s t a t e d above she has no money or b i l l market. Her c e n t r a l bank o p e r a t i o n s are t h e r e f o r e l a r g e l y c o n f i n e d to d i s c o u n t and exchange r a t e m a n i p u l a t i o n supplemented by m o r a l s u a s i o n , j u s t as would l a r g e l y be the case w i t h a c e n t r a l bank i n Canada. I n New Zealand a l s o we f i n d t h e r e i s no money or b i l l market, y e t t h e M i n i s t e r of F i n a n c e , Mr. C o a t e s , has announced o f f i c i a l l y t h a t the Government i s g o i n g t o 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 ask to what e x t e n t our l a c k of a money market, or b i l l s of exchange, or s h o r t - t e r m c o m m e r c i a l paper 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 as a r e s u l t o f h a v i n g no c e n t r a l bank, r a t h e r than as a good cause f o r not c r e a t i n g one. I s i t not to be expected a l s o 155. See F i n a n c i a l P o s t , Dec. 31, 1932. 156. See F i n a n c i a l P o s t , Dec. 17, 1932. 151. t h a t our f o r e i g n t r a n s a c t i o n s w i l l he i n terms of s t e r l i n g , or of American d o l l a r s , i n s t e a d of i n terms of Canadian d o l l a r s , as l o n g as we have no c e n t r a l hank f a c i l i t i e s ? A t a l l events' we s h o u l d not p e r m i t th e l a c k of a money market a l o n e t o d i s c o u r a g e the i d e a of a c e n t r a l hank, f o r as K i s c h and E l k i n say: " . . . . t h e 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 o f a c e n t r a l h a n k i n g system s h o u l d 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 , hecause t h e r e i s no i n f l u e n c e so p o t e n t i n the way of d e v e l o p i n g the c r e d i t system on sound 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 a r e v e r y s e n s i t i v e to t h e c r i t i c i s m t h a t t h e y do not meet the needs of t h e p u b l i c i n t h e m a t t e r of c r e d i t . P r a c t i c a l l y e v e r y one of them who has i n r e c e n t months spoken a g a i n s t the proposed c e n t r a l hank, seems t o have assumed t h a t the uppermost thought i n the minds of the a d v o c a t e s of such a bank i s t h a t i t would g r e a t l y i n c r e a s e c r e d i t . One of the arguments most f r e - q u e n t l y put f o r t h by them, t h e r e f o r e , i s t h a t a c e n t r a l bank would not i n c r e a s e c r e d i t . F o r i n s t a n c e we f i n d "A Canadian Banker" s a y i n g : "The e s t a b l i s h m e n t of a c e n t r a l hank cannot, 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 the s u p p l y of commercial c r e d i t now a v a i l a b l e i n t h i s c ountry."158 157. K i s c h and E l k i n . C e n t r a l Banks, p. 12. 158. The F i n a n c i a l P o s t . F i n a l A r t i c l e by "A Canadian Banker". 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 of 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 thought t h a t a c e n t r a l . bank would 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 to f a r m e r s and o t h e r s . T h i s i s not the ease. At no time d u r i n g the p r e s e n t d e p r e s s i o n has 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 commercial purposes 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 the q u e s t i o n of a v a i l a b i l i t y of c r e d i t s . Whether 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 or n ot the f a c t remains t h a t the c r i t i c i s m o f our banks most commonly v o i c e d i s t h a t they a r e not accommodating enough i n the m a t t e r of c r e d i t . The West i n p a r t i c u l a r keeps up an almost c o n t i n u a l c r y a g a i n s t i n a d e q u a t e c r e d i t f a c i l i t i e s . Some of the p e o p l e t h e r e t h i n k t h a t u n i t banks would s e r v e l o c a l needs b e t t e r than the p r e s e n t banks. They f e e l t h a t w i t h the branch b a n k i n g system money i s c o n c e n t r a t e d too much i n the l a r g e f i n a n c i a l c e n t r e s of t h e E a s t , such as M o n t r e a l and T o r o n t o , and t h a t the West i s d i s c r i m i n a t e d a g a i n s t . I t i s no doubt h a r d e r to i n t e r e s t a bank o f f i c i a l of t h e E a s t i n a l o a n i n t h e West t h a n i t would be to i n t e r e s t the o f f i c i a l of a l o c a l u n i t bank. However, i f t h e West had u n i t banks i t i s d o u b t f u l i f c r e d i t would be any "cheaper". The West 159. I b i d . , Jan..21, 1933 153. i s an area, o f excess of l o a n s over d e p o s i t s , and c r e d i t would have t o come from the " s u r p l u s f u n d " a r e a s . W i t h u n i t banks such an a r e a as the M a r i t i m e P r o v i n c e s , however, w i t h an excess o f d e p o s i t s , might expect t o o b t a i n l a r g e r amounts of c r e d i t a t lower r a t e s . The c r i t i c i s m of t h e moment, however, i s t h a t the c h a r t e r e d 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 q u i t e n a t u r a l l y and' r i g h t l y c o n c e r n e d . p r i m a r i 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 too f r e e l y i n p r o s p e r o u s times and r e s t r i c t i t t o o r i g i d l y i n t i m e s of d e p r e s s i o n l i k e t h e p r e s e n t . The i d e a of t h e c e n t r a l bank a d v o c a t e , on the o t h e r hand, i s t h a t such a bank would be more f a r - s e e i n g i n i t s p o l i c y , would not be concerned w i t h p r o f i t s but r a t h e r w i t h the g e n e r a l w e l l - b e i n g of the n a t i o n , and w o u l d tend to r e s t r i c t c r e d i t i n boom t i m e s and be more accommodating i n d e p r e s s i o n p e r i o d s . A good sample of the type of c r i t i c i s m h e a r d i s to be found i n an e d i t o r i a l e n t i t l e d "Money and C r e d i t " i n an 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 have: "The c r e d i t s i t u a t i o n has become a s e r i o u s one i n the Dominion. There 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 the means of 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 don't go t o g e t h e r . While t h e men of money w h i s p e r of t h e i r c o n f i d e n c e , t h e i r a c t i o n s i n d e n y i n g 154. " c r e d i t to 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 per c e n t , f a i r l y shout t h e o p p o s i t e . Where i s the money to 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 from? I t can 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 c r e d i t . Undoubtedly the system needs i n - v e s t i g a t i n g . " I n the same e d i t o r i a l Mr. R e g i n a l d McKenna i s quoted as s a y i n g : "The amount of 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 the a c t i o n of t h e hanks i n i n c r e a s i n g or . d i m i n i s h i n g d e p o s i t s . We know how t h i s i s e f f e c t e d . 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 repayment of a bank l o a n d e s t r o y s one." Bankers m a i n t a i n t h a t they l o a n t o b o r r o w e r s the s a v i n g s of d e p o s i t o r s . T h i s of c o u r s e I s t r u e , but i t i s not the whole t r u t h . They a r e r e a l l y "merchants of c r e d i t " r a t h e r than "merchants of money". When they r e g a r d c o n d i t i o n s as f a v o r a b l e t hey make a p r a c t i c e of l o a n i n g t o customers ten t i m e s the amount of the money a c t u a l l y p l a c e d on de- p o s i t v/ith them. T h i s p r a c t i c e g i v e s b i r t h t o the c u r r e n t l y p o p u l a r statement t h a t banks " l o a n what they h a v e n ' t ' g o t " . As Mr. P l u m p t r e s a y s : "The f a l l a c y t h a t bankers as a body r e c e i v e and r e - l o a n the ' s a v i n g s ' of the 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 the b a n k e r s . But i t i s a f a l l a c y . " 1 6 0 160. P l u m p t r e , A. F. W. The P o i n t . o f 7iew of a C e n t r a l Bank. p. 132. The amount of r e a l money i n Canada a t any g i v e n time i s e x t r e m e l y s m a l l compared w i t h "money" i n the form of bank d e p o s i t s . These d e p o s i t s a r e n o t h i n g more t h a n book e n t r i e s , and s u r e l y i t i s r e a s o n a b l e to say that t h e bankers can e x e r c i s e c o n s i d e r a b l e c o n t r o l over t h e s e e n t r i e s . Hence i t i s l o g i c a l to assume t h a t our bankers can i n c r e a s e c r e d i t i f they d e s i r e , and i f the c h a r t e r e d bank can do t h i s , s u r e l y a c e n t r a l bank c o u l d . I t i s u t t e r l y u n r e a s o n a b l e , then, f o r "A Canadian Banker" to say that a c e n t r a l bank c o u l d not i n c r e a s e by one d o l l a r the s u p p l y of c o m m e r c i a l c r e d i t . I t w i l l be n o t e d f r o m t h e q u o t a t i o n g i v e n above f r o m Mr.- M. W. W i l s o n of t h e R o y a l Bank, t h a t i t i s the c o n t e n - t i o n o f bankers t h a t even today i n the m i d s t of d e p r e s s i o n t h e r e i s no l a c k of c r e d i t f o r 'sound' b o r r o w e r s . They m a i n t a i n t h a t d e c r e a s e d l o a n s are a r e s u l t of t h e l a c k o f b o r r owers w i t h adequate s e c u r i t y . They a r e u n w i l l i n g t o admit t h a t a s t r i n g e n c y of c r e d i t may have c o n t r i b u t e d t o the 'unsoundness' of p r o s p e c t i v e b o r r o w e r s . ' To them t h e r e appears to be no r e l a t i o n between the abundance of c r e d i t i n 19E9, f o r i n s t a n c e , and t h e 'soundness' of b orrowers a t t h a t time. I t i s h a r d 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 t h e o r y t h a t r e s t r i c t e d c r e d i t and abundant c r e d i t are not even c o n t r i b u t a r y causes of 156. the ' s o l v e n c y ' and ' i n s o l v e n c y ' , r e s p e c t i v e l y , o f b o r r o w e r s . As Mr. P l u m p t r e v e r y a p t l y s a y s : "The main d i f f e r e n c e (between a c e n t r a l bank and a p r i v a t e bank) 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 p o i n t o f view."161 The p o i n t of v i e w of our c h a r t e r e d banks p r i m a r i l y i s t h a t p r o f i t s s h o u l d 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 a t the 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 guarded a g a i n s t i n s o l v e n c y . So f a r as i s c o n s i s t e n t w i t h t h i s p r i m a r y o b j e c t i v e c r e d i t accommodation and g e n e r a l s e r v i c e s may be g i v e n to the p u b l i c . T h i s , of c o u r s e , i s the n a t u r a l and r e a s o n a b l e p o i n t of v i e w f o r the banks t o t a k e . The p o i n t , o f v i e w of a c e n t r a l bank would be v e r y d i f f e r e n t . I t would n o t be concerned p r i m a r i l y w i t h p r o f i t s . P r o f i t s i t m i g ht, and l i k e l y w ould, make, but they would be of secondary c o n s i d e r a t i o n . T r a n s a c t i o n s might 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 o r d e r to s e r v e a g r e a t e r purpose. Hot the s e c u r i t y of a bank, or of a b anking system a l o n e , but the ' s e c u r i t y ' of a whole p e o p l e , would be the o b j e c t i v e . A nother o b s t a c l e i n the way of t h e c r e a t i o n o f a 161. P l u m p t r e , A. F. W. The P o i n t o f View of a C e n t r a l Bank. p. 152. 157. c e n t r a l bank f o r Canada, say i t s opponents, i s the m a t t e r of c o s t s . T h i s i s a q u e s t i o n which of c o u r s e demands s e r i o u s c o n s i d e r a t i o n . L e t us hear f i r s t f r o m banker opponents. Mr. A. E. P h i p p s , G e n e r a l Manager of the Im- p e r i a l Bank of Canada, s a y s : rrA c e n t r a l bank cannot 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 s p o n s o r s w i l l say o t h e r w i s e , but once i t i s launched expenses w i l l be h a r d t o c o n t r o l . " 1 6 2 Mr. H. B. Henwood, G e n e r a l Manager of the Bank of Toron t o , s a y s : " . . . . 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 to our p r e s e n t b a n k i n g system were added, i t would mean a heavy i n c r e a s e i n expense w i t h l i t t l e or no o f f s e t t i n g b e n e f i t s t o the banking f a c i l i t i e s of the cou n t r y . . . . " 1 6 3 The b a n k e r s , i n f a c t , seem t o be p r e t t y unanimous i n t h e i r s u p p o r t of the g e n e r a l s t a t e m e n t t h a t t h e c o s t s of a c e n t r a l bank would be t o o great.. Not many of them go i n t o d e t a i l s , but Mr. P h i p p s 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 im 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 p a i d Managers and s t a f f a t the Head O f f i c e and t h e Branches w i t h no b e n e f i t s to the country,..."164 I t i s of c o u r s e o b v i o u s t h a t t h e r e would be an i n i t i a l 162. S a t u r d a y N i g h t , Dec. 3, 1932, p. 27. 163. The F i n a n c i a l P o s t , J a n . 21, 1933, p. 5 164. Saturday N i g h t , Dec. 3, 1932, p. 27. 158. o r g a n i z i n g c o s t , but t h i s would not be a r e c u r r i n g i t e m . Nor need i t be the s p e c t r e t h a t Mr. P h i p p s i m a g i n e s . I t i s t o be f e a r e d t h a t Mr. P h i p p s e n v i s i o n s a c e n t r a l bank e d i f i c e as i m p o s i n g as, s a y , the main branch of one o f the c h a r t e r e d banks i n the c i t y of M o n t r e a l or T o r o n t o . One of t h e s e i n the c i t y of Toronto i s t h i r t y - e i g h t s t o r e y s h i g h — t h e t a l l e s t b u i l d i n g i n the B r i t i s h E m p i r e — a n d a l l i t s appointments a r e i n k e e p i n g w i t h i t s h e i g h t . Only two or three b l o c k s away t h e same bank has another branch b u i l d i n g a t l e a s t about h a l f as l a r g e . 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 bank to be housed i n such a p a l a t i a l b u i l d i n g . I t would n o t aim to make p r o f i t s enough t o i n v e s t i n r e a l e s t a t e to such an e x t e n t . B e s i d e s , i n most of our l a r g e c i t i e ; s the Government spends 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 ce. Should the c e n t r a l bank, or a b r a n c h o f f i c e , have space to s p a r e , i t c o u l d be used f o r Government o f f i c e s . T h i s would work p a r t i c u l a r l y w e l l i f the c e n t r a l bank were e n t i r e l y s t a t e - owned. A m a t t e r o f g r e a t e r importance would be the o p e r a t i n g c o s t s . Mr. P h i p p s s a y s : "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 , and the expense goes on f o r e v e r . " 1 6 5 165. Saturday N i g h t , Dec. 3, 1932, p. 27. 159. I f i t i s e s t a b l i s h e d f o r a l l t i m e , then presumably the i n i t i a l o r g a n i z i n g c o s t i s p a i d f o r a l l t i m e . Un- d o u b t e d l y o p e r a t i n g c o s t s would go on i n d e f i n i t e l y . But do n o t the c o s t s of Mr. P h i p p s ' bank "go on f o r e v e r " ? H i s 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 as an argument a g a i n s t a. c e n t r a l bank. S i x of the U n i t e d S t a t e s F e d e r a l Reserve banks had A 166 c u r r e n t expenses of l e s s than $2,000,000 i n 1929. I n the same y e a r the s m a l l e s t one, the R e s e r v e Bank i n 167 M i n n e a p o l i s , k e p t i t s c u r r e n t expenses undier $1,000,000. I t would seem f a i r to assume t h a t t h e c o s t s of a Canadian c e n t r a l bank would be lower than t h o s e c o s t s - i n the U n i t e d S t a t e s . Then t h e r e i s the q u e s t i o n of c a p i t a l f o r the c e n t r a l bank. "A Canadian Banker" s a y s : "There a r e sound p o l i t i c a l r e a s o n s why the i n - s t i t u t i o n s h o u l d not be government-owned and s i n c e i t i s to be a "bank f o r b a n k e r s " the c h a r t e r e d banks would p r o b a b l y be c a l l e d upon to s u b s c r i b e f o r t h e 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 8 166. See C u r t i s , C.A., i n P r o c e e d i n g s of the Canadian 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. 111. 167. I b i d . 168. The F i n a n c i a l P o s t , J a n . 28, 1933. 160. T h i s banker 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 F i n a n c e A c t w h i c h bankers l a u d as a p e r f e c t s u b s t i t u t e f o r a c e n t r a l bank i s , as we saw p r e v i o u s l y , e n t i r e l y "govern- ment-owned", y e t the banker sees no "sound p o l i t i c a l r e a s o n s " f o r o b j e c t i n g to i t . I t might be t h a t i f a c e n t r a l bank were s e t up i n Canada, th e banks h e r e , as i n the u n i t e d S t a t e s , would be asked to s u b s c r i b e some or a l l of the c a p i t a l . The w r i t e r can see no v a l i d r e a s o n , how- ever, why the bank s h o u l d not be c o m p l e t e l y state-owned. He can, on the o t h e r hand, see s e v e r a l v e r y v i t a l r e a s o n s why i t s h o u l d be so owned. The c e n t r a l bank s h o u l d be more than a mere b a n k e r s ' bank. I t s h o u l d be a government's bank, and above a l l a " p e o p l e ' s " bank i n the manner des- c r i b e d i n p r e v i o u s c h a p t e r s . As a government-owned i n s t i t u - t i o n c o m p l e t e l y independent of the o t h e r banks i t would be i n a p o s i t i o n t o a c t as the g u a r d i a n of p u b l i c w e l f a r e to a g r e a t e r degree than i f p a r t l y or e n t i r e l y owned by t h e c h a r t e r e d b anks. The w r i t e r f e e l s t h a t the p o l i t i c a l f a c t o r has been met w i t h so r e p e a t e d l y i n h i s t o r y as a "bogey" r a i s e d i n d e f e n c e of v e s t e d i n t e r e s t s whenever i t has been suggested t h a t t h e s t a t e s h o u l d o p e r a t e a s e r v i c e i n the i n t e r e s t s o f the p e o p l e g e n e r a l l y , t h a t i t has l a r g e l y l o s t i t s e f f e c t . The A t l a n t a Reserve Bank has a c a p i t a l i z a t i o n of about 161. 169 170 $5,000,000. A t the b e g i n n i n g of 1930 i t had $138,000,000 of F e d e r a l Reserve Notes 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 rve 171 Bank of South A f r i c a .has a c a p i t a l of $5,000,000. S i x of the F e d e r a l Reserve 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 1 7 2 of Canada on December 31, 1932, had a t o t a l p aid-up c a p i t a l o f $144,500,000. The average number of branches of a l l t h e s e t e n banks f o r the y e a r 1931 was 3,506. One bank w i t h 141 branches has a paid-up c a p i t a l of $4,000,000. Three o t h e r banks w i t h a combined c a p i t a l o f $27,000,000 have t o g e t h e r 636 branches. I t would seem r e a s o n a b l e to s u g g e s t , t h e n , t h a t the c a p i t a l of the proposed c e n t r a l bank f o r Canada need not exceed $10,000,000 a t most. W i t h the e s t a b l i s h m e n t o f a c e n t r a l bank the C e n t r a l Gold R eserves would no l o n g e r be r e q u i r e d . I f an e n t i r e l y state-owned bank were c r e a t e d , the Government's s u p p l y of g o l d c o u l d be used as c a p i t a l and r e s e r v e s and would be more than adequate as such. On October 31, 1932, g o l d h e l d by the M i n i s t e r of Finance- 1- 7 3 was as 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 the Canadian 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. 111. 172. The above i n f o r m a t i o n on c a p i t a l of Canadian Banks was o b t a i n e d f r om the F i n a n c i a l P o s t of J a n . 28, 1933, w h i l e i n f o r m a t i o n as t o t h e i r branches was ta k e n from "Canada, 1933", p. 156. 173. Statement from the Department o f F i n a n c e o f Nov. 10, 1932, and p u b l i s h e d i n the Canada G a z e t t e . 162. A g a i n s t S a v i n g s Bank d e p o s i t s | 2,312,316.06 A g a i n s t Dominion Notes 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 174 wonders where the d e p o s i t s r e - q u i r e d to b u i l d up the c e n t r a l bank would be o b t a i n e d . T h i s would not seem to be a v e r y g r e a t d i f f i c u l t y . The Government's account 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 the c e n t r a l bank. "A Canadian Banker" g i v e s f i g u r e s to show t h a t i n 1931 the average b a l a n c e c a r r i e d by the Dominion w i t h the banks was $ 4 9 , 0 0 0 , 0 0 0 . 1 7 5 Monthly r e t u r n s to the M i n i s t e r o f F i n a n c e show under t h e h e a d i n g , " B a l a n c e Due t o Dominion Government", the sum of $53,107,707 as a t December 31, 1932. Such f u n d s would seem t o be ample as d e p o s i t s f o r t h e c e n t r a l bank to s t a r t w i t h . "A Canadian B a n k e r " 1 7 6 a l s o says t h a t w i t h t h e ap- pearance of the c e n t r a l bank the Dominion Government would" 174. See Address of Mr. P h i p p s i n " S a t u r d a y N i g h t " , Dec. 3, 1932, p. 27. 175. The F i n a n c i a l P o s t , J a n . 28, 1933. 176. I b i d . 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 banks on l o a n s under the F i n a n c e A c t . The average a n n u a l revenue r e c e i v e d by the Government from t h i s s o u r c e d u r i n g t h e past f i v e y e a r s has been 11,250,000. T h i s i s o f c o u r s e q u i t e t r u e , but what the Government w o u l d l o s e d i r e c t l y i n t h i s way the c e n t r a l bank would g a i n because the c e n t r a l bank would r e p l a c e t h e F i n a n c e A c t . I f the bank were e n t i r e l y state-owned the Government would presumably r e c e i v e the e q u i v a l e n t sum t h r o u g h i t i n the f o r m o f p r o f i t s , assuming t h a t the bank i s not to be o p e r a t e d on a s e r v i c e - c o s t b a s i s . In f a c t , even i f the c e n t r a l bank were e n t i r e l y p r i v a t e l y owned, i t would be r e a s o n a b l e to assume t h a t i t would t u r n over to the Government t h e e q u i v a l e n t of t h e n e t p r o f i t on what i s now the Dominion n o t e i s s u e . I f t h e bank v^ere r u n p u r e l y 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 banks, b u s i n e s s , and the g e n e r a l p u b l i c w o u l d b e n e f i t a c c o r d i n g l y , and would be the b e t t e r a b l e to pay t a x e s to the Government to make up f o r i t s i n i t i a l l o s s . The v e r y f a c t t h a t the o p e r a t i o n s o f the F i n a n c e A c t ar e p r o f i t a b l e tends t o prove t h a t the c e n t r a l bank would be p r o f i t a b l e . I t i s t r u e 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 , much l e s s , no doubt, than 177. House of Commons Debates (Can., 1923, V o l . 5, p. 4408). would be the case w i t h t h e c e n t r a l bank. On the o t h e r hand r e d i s c o u n t s would not be the o n l y s o u r c e of revenue f o r t h e c e n t r a l bank. The maximum g r o s s e a r n i n g s under t h e F i n a n c e A c t o c c u r r e d i n 1920-21, amounting to $3,568,000. We f i n d t h a t the minimum y e a r l y e a r n i n g s s i n c e 1917 appeared i n 1925-26 and amounted t o $313,000. The y e a r 1929-30 brought e a r n i n g s of $2,235,000, and t h e average a n n u a l e a r n i n g s from 1914 t o 1930 were a p p r o x i m a t e l y $1,300,000. From t h i s i t w i l l be seen t h a t t h e c e n t r a l bank would have an ex- c e e d i n g l y l u c r a t i v e b u s i n e s s t o s t a r t w i t h . W ith the added f a c i l i t i e s w h i c h i t would p r o v i d e t r u e r e d i s c o u n t i n g would be i n c r e a s e d and would not be c o n f i n e d l a r g e l y t o government bonds, as a t p r e s e n t under t h e F i n a n c e 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 the income of the c e n t r a l bank f a r beyond t h a t of the p r e s e n t F i n a n c e A c t . C e n t r a l banking i n any case i s g e n e r a l l y p r o f i t a b l e . The p r e s t i g e of a p r o p e r l y r u n c e n t r a l bank r a r e l y s u f f e r s f r o m f i n a n c i a l l o s s e s . A l a r g e amount of a b s o l u t e l y s a f e 178. 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 the Canadian 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. 113. 165. "business i s brought to i t by i t s c u s t o m e r s . I n t e r e s t i s not u s u a l l y p a i d on d e p o s i t s w h i c h i t h o l d s . I t s a s s e t s , on the o t h e r hand, except f o r cash h o l d i n g s and r e a l e s t a t e , a r e u s u a l l y v e r y p r o d u c t i v e . A d d i t i o n a l p r o f i t s c o u l d be made by the c e n t r a l banx t a l c i n g over the monopoly of the n o t e i s s u e and by e n t e r i n g i n t o c o m p e t i t i o n w i t h the com-' m e r c i a l banks i n the r e a l m of b u s i n e s s and f i n a n c e g e n e r a l l y , but these p o i n t s w i l l be d e a l t w i t h i n l a t e r p a r a g r a p h s . I t can 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 , however, t h a t p r o f i t - m a k i n g s h o u l d be of o n l y v e r y secondary c o n c e r n t o th e c e n t r a l bank. • I f the bank i s e n t i r e l y , o r i n p a r t , 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 payment o f a r e a s o n - a b l e r a t e of i n t e r e s t to the s h a r e h o l d e r s s h o u l d be ensured. But i t i s of supreme i m p o r t a n c e t h a t the e a r n i n g of d i v i d e n d s s h o u l d n o t be made the prime c o n s i d e r a t i o n . F o r t h i s a d d i t i o n a l r e a s o n i t would appear t h a t a s t a t e - owned i n s t i t u t i o n would be b e s t , f o r the n t h e r e would be l e s s tendency to become concerned over p r o f i t s . As K i s c h and E l k i n say: "The a c t i v i t i e s of a C e n t r a l Bank have s u c h f a r - r e a c h i n g e f f e c t s on the economic w e l f a r e of the whole n a t i o n t h a t no inducement must be a l l o w e d t o d i v e r t t h e Bank from the p u r s u i t of the 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 of e a r n i n g i n c r e a s e d p r o f i t s . " 1 7 9 179. K i s c h . a n d 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 ' L O U of Wesley C o l l e g e , Winnipeg, however, we can say t h a t "a c e n t r a l bank would u n d o u b t e d l y y i e l d a p r o f i t to the t r e a s u r y " , and, whether t h e Govern- ment were p a r t or whole owner of 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 would be a most welcome a d d i t i o n t o revenue. Our Canadian 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 t h e p o s s i b i l i t y of c o m p e t i t i o n from the p r o j e c t e d c e n t r a l bank i n the o r d i n a r y f i e l d of comm e r c i a l banking.' I t i s the v i e w of t h e w r i t e r t h a t t h e r e s h o u l d be no such c o m p e t i - t i o n . There a r e many and s u b s t a n t i a l r e a s o n s why i t might 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 system c o m p l e t e l y . In t h a t ease, however, t h e r e would be no c o m p e t i t i o n , because b a n k i n g would be a Government monopoly. I f , however, our p r e s e n t commercial banks a r e t o be a l l o w e d t o c o n t i n u e a f t e r the c r e a t i o n o f a c e n t r a l bank v e r y much as b e f o r e , i t would seem t o be b e t t e r t h a t t h e c e n t r a l bank s h o u l d s t a y out of the commercial f i e l d . A c e n t r a l bank s h o u l d be s e t up t o do i t s own p a r t i c u l a r j o b . I t has a v e r y s p e c i a l m i s s i o n to p e r f o r m . I t would be v e r y a p t t o f a i l i n the performance of i t s t r u e f u n c t i o n s i f i t attem p t e d as w e l l t o p e r f o r m the f u n c t i o n s of c o m p e t i t i v e commercial 180. See F i n a n c i a l P o s t , Feb. 14, 193S. 167. b a n k i n g . A f u r t h e r s u b j e c t of c o n c e r n to Canadian h a n k e r s , growing out of the p r o p o s a l o f a c e n t r a l hank, i s to he found i n the n o t e i s s u e . They f e a r t h a t t h e c e n t r a l hank would u l t i m a t e l y I f not o r i g i n a l l y he g i v e n a monopoly of the n o t e i s s u e . "A Canadian Banker" s a y s : " I have l i t t l e doubt t h a t , were a c e n t r a l bank formed, i t would i n due course be g i v e n a monopoly of the n o t e i s s u e , even were t h i s monopoly d e n i e d to i t a t t h e time o f i t s o r g a n i - z a t i o n . "181 I n h i s r a t h e r s u p e r f i c i a l t r e a t m e n t o f t h e n o t e i s s u e q u e s t i o n i n h i s w r i t i n g s on "A C e n t r a l Bank f o r Canada" Mr.. A. F. W. P l u m p t r e s a y s : "But there, seems no r e a s o n why, a t t h e same tim e , the c h a r t e r e d hanks s h o u l d not he a l l o w e d t o c o n t i n u e t o i s s u e n o t e s 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 t o t h o s e a l r e a d y l a i d down i n the Bank £ct."182 I t i s q u i t e 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 i s s u e might not prevent the c e n t r a l hank f r o m b e i n g a u s e f u l i n s t i t u t i o n , but i t seems t o the w r i t e r t h a t "A Canadian Banker" has f a c e d t h e r e a l i t i e s of t h e s i t u a t i o n more f r a n k l y than Mr. P l u m p t r e . To deny t h e c e n t r a l hank a monopoly of t h e n o t e i s s u e would mean th a t we would be b u t p l a y i n g w i t h c e n t r a l banking. I t i s w r e l l t h a t t h e i s s u e 181. F i n a n c i a l P o s t , J a n . 28, 1933, p. 11. 182. P l u m p t r e , A. F. YT. A C e n t r a l Bank f o r Canada, p. 3. 168. shoulcl.be met h o n e s t l y , c o l d - b l o o d e d l y , w i t h o u t compromise, w i t h o u t any a t t e m p t t o p l a c a t e t h o s e who oppose a c e n t r a l bank, by p r e t e n d i n g t h a t t h e y would not l o s e the n o t e i s s u e p r i v i l e g e . Mr. C. A. C u r t i s showed a keen a p p r e c i a t i o n of the n o t e i s s u e problem i n h i s a d d r e s s g i v e n to the Canadian 183 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 i n 1930. There he e s t i - mated the l o s s e s t h a t t h e c h a r t e r e d banks might s u f f e r i n t h e c a n c e l l i n g of t h e i r n o t e i s s u e p r i v i l e g e , and t h e n s t a t e d : , rThe c o n c l u s i o n would appear to be t h a t w h i l e t h e banks might l o s e s l i g h t l y by h a v i n g t h e i r n o t e i s s u e p r i v i l e g e c a n c e l l e d , t h e l o s s would not be as 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 . " I t i s not easy to e s t i m a t e a c c u r a t e l y what t h e l o s s of n o t e i s s u e would mean to the c h a r t e r e d banks. R e c e n t l y a number of q u e s t i o n s were a d d r e s s e d t o the o f f i c i a l s of the head o f f i c e s of s e v e r a l of our Canadian banks. Among th e s e q u e s t i o n s was the f o l l o w i n g : "Do banks to-day depend v e r y much upon 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 b r a n c h of t h e i r b u s i n e s s ? " One o f f i c i a l answered t h a t " i t would be c o n t r a r y t o our p o l i c y to g i v e you i n f o r m a t i o n a l o n g t h e l i n e s asked 183. P r o c e e d i n g s of Canadian 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. 115. i n y o u r q u e s t i o n n a i r e " . The o f f i c i a l s o f two of t h e hanks were k i n d enough t o answer t h e ahove q u e s t i o n . One of t h e s e was good enough t o g i v e p e r m i s s i o n to quote what he s a i d . F o l l o w i n g i s h i s complete 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 the Government c i r c u l a t i o n t a x (1$>}184, a n d t h e n hy the expense of 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 r e d e m p t i o n , 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 a d v e r s e 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 t o p o i n t , the p r i n t i n g of new and d e s t r u c t i o n of o l d n o t e s , and the employment of s t a f f whose d u t i e s are 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 , however, r e p r e s e n t a form of p u b l i c i t y and would he c o n t i n u e d even at a l o s s f o r r e a s o n s of p r e s t i g e . A c o n s i d e r a t i o n which has always been i m p o r t a n t i n Canada i s t h a t our n o t e system e n a b l e s branches 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 because of t h e f a c t t h a t such branches can 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 form of the bank'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 hould i t become n e c e s s a r y f o r branches t o c a r r y t h e i r working- cash 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 burden of i n t e r e s t l o s s would make t h e o p e r a t i o n of many e x i s t i n g branches too u n p r o f i t a b l e to p e r m i t c o n t i n u a n c e of b a n k i n g s e r v i c e . " The matter of t i l l money i s no doubt i m p o r t a n t . As the above quoted hanker s a y s , i t i s d e s i r a b l e t h a t t h e r e s e r v e s of n o t e s needed f o r b u s i n e s s purposes by the branches s h o u l d not e n t a i l a heavy c o s t . I t might he 184. P a r e n t h e s i s by the w r i t e r 170. p o i n t e d out, 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 bank wo\ild e nable the branches to do w i t h l e s s t i l l money tha n under t h e p r e s e n t system. Presumably the c e n t r a l bank would have a g e n c i e s 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 . E v e r y b r a n c h of t h e c h a r t e r e d banks would be w i t h i n a few hours of the s u p p l y of 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 c u r r e n c y would n o t be the commercial bank's own c u r r e n c y , i t w o u l d not have to worry about the r e d e m p t i o n of i t . Redemption would be the concern of t h e c e n t r a l 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, each bank a t p r e s e n t must p r o v i d e f o r the r e d e m p t i o n of i t s 185 n o t e s i n s p e c i f i e d c e n t r e s throughout Canada. The n o t e s a r e redeemed d a i l y . Each bank keeps a l l the n o t e s of o t h e r banks and pays out i t s own n o t e s . The o t h e r bank's n o t e s a r e p r e s e n t e d f o r r e d e m p t i o n a t the end of the day. T h i s 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 n o t e s r e q u i r e d by the bra n c h e s . With a c e n t r a l bank t h i s e x t r a q u a n t i t y would not be r e q u i r e d . S i r Edmund W a l k e r ^ ^ n a s p o i n t e d out t h a t a g a i n s t the not e i s s u e must be charge d t h e e n t i r e c o s t of m a i n t a i n i n g 185. Walker, S i r Edmund. Canadian B a n k i n g , p. 23. 186. I b i d . , p. 26. 171. the C e n t r a l Gold R e s erve fu n d . I n a d d i t i o n 5 per c e n t . i n t e r e s t i s charged by the Government on a l l emergency n o t e s . S i r Edmund e s t i m a t e d i n 1922 t h a t 71 per c e n t . of the n o t e s 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 and 29 per c e n t , a l o s s . Another q u e s t i o n a d d r e s s e d t o t h e bankers a t t h e same time as the one quoted above was as f o l l o w s : " A p p r o x i m a t e l y what per c e n t , of p r o f i t can a bank make on n o t e s i s s u e d ? " Only one answered t h i s q u e s t i o n . 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 here i s t h e i n t e r e s t v a l u e to the bank of 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 the i n t e r e s t v a l u e or e a r n i n g power of the funds i t r e c e i v e s on d e p o s i t , and hence i s c o n t i n u a l l y v a r y i n g . Some of the c o s t - f a c t o r s have been i n d i c a t e d above. 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 the net 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 the low l e v e l s of 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 the p r e s e n t t i m e . To t h e best of our knowledge no e s t i m a t e s t h a t have been made i n the p a s t have 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 above 3#.ff I n 1923 S i r Edmund Walker e s t i m a t e d t h e net p r o f i t s from t h e note i s s u e t o be between 1 per c e n t , and 1-g- 188 p e r c e n t . On December 31, 1933, the t e n c h a r t e r e d 187. Walker, S i r Edmund. Canadian B a n k i n g , p. 26. 188. P r o c e e d i n g s of Committee on Banking and Commerce, 1923, p. 528. 172. banks had more than $127,000,000 w o r t h o f n o t e s i n c i r c u l a - t i o n . To the l a y mind one to t h r e e per c e n t , on t h a t amount s h o u l d not be d e s p i s e d . Moreover, i t i s the v i e w of t h e w r i t e r t h a t i n e s t i m a t i n g , the p r o f i t on the no t e i s s u e n e i t h e r the above quoted banker n o r S i r Edmund Walker gave adequate w e i g h t 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 on n o t e s i s s u e d as a r e s u l t of the f a c i l i t i e s p r o v i d e d by t h e F i n a n c e A c t . Under the p r o v i s i o n s of t h a t A c t a bank may t a k e , f o r i n s t a n c e , a Dominion V i c t o r y Bond of $100 i n v a l u e , d e p o s i t i t w i t h t h e M i n i s t e r o f F i n a n c e , r e c e i v e i n r e t u r n a $100 Dominion n o t e , d e p o s i t the n o t e i n the C e n t r a l Gold R e s e r v e s and on i t as b a c k i n g i s s u e one of i t s own bank n o t e s f o r $100. At t h e p r e s e n t time the bank would have t o pay 3§- per ce n t , t o the Government on t h e $100 Dominion n o t e . I f i t s h o u l d t h e n l o a n i t s own bank n o t e f o r $100 to a customer at 7 p e r c e n t , i t would be making a v e r y c o n s i d e r a b l e p r o f i t . A t t h e p r e s e n t time banks are c h a r g i n g m u n i c i p a l i t i e s as h i g h a.' r a t e as 6 p e r c e n t , on advances. I f the money so l o a n e d were o b t a i n e d f r o m the Government under the F i n a n c e Act a t 3-§- p e r ce n t , the t r a n s a c t i o n would be a most l u c r a t i v e one. A l l t h r e e bankers quoted above, t h e n , S i r Edmund Walker, "A Canadian Banker" w r i t i n g i n the F i n a n c i a l P o s t , and the banker (not t o be named) who answered the two q u e s t i o n s quoted above, m i n i m i z e t h e p r o f i t s g a i n e d by t h e banks on t h e i r n o t e i s s u e . I f they are r i g h t , t h e n the banks s h o u l d not o b j e c t to a c e n t r a l bank on the s c o r e t h a t i t w i l l d e p r i v e them of p r o f i t s on the n o t e i s s u e . On the o t h e r hand t h e r e i s no doubt that they would s u f f e r some l o s s ' i n the way of p u b l i c i t y and p r e s t i g e . But t h i s s h o u l d not be too g r e a t a s a c r i f i c e f o r t h e b e n e f i t s t h a t would be d e r i v e d from a c e n t r a l bank. I t i s t r u e t h a t i n a few cases where t h e r e a r e c e n t r a l banks t h e r e i s s t i l l more than one n o t e i s s u i n g a u t h o r i t y . In Germany, f o r i n s t a n c e , f o u r banks o t h e r than the R e i c h s b a n k may s t i l l i s s u e n o t e s . T h e i r t o t a l p e r m i s s i b l e i s s u e i s o n l y 194 m i l l i o n marks, however, and i s o n l y a v e r y s m a l l p r o p o r t i o n of the t o t a l n o t e i s s u e . T h e r e f o r e the c e n t r a l bank has contro}. over th e i s s u e o f 189 paper money. In the U n i t e d S t a t e s t h e N a t i o n a l Banks s t i l l i s s u e n o t e s , but t h e s e are very i n e l a s t i c . Hence the r e s p o n s i - b i l i t y f o r the e x p a n s i o n and c o n t r a c t i o n of the c u r r e n c y 190 r e s t s p r e d o m i n a n t l y w i t h the F e d e r a l Reserve Banks. As an i l l u s t r a t i o n of t h i s f a c t we may n o t e t h a t i n t h e 189. K i s c h and E l k i n . C e n t r a l Banks, p. 79 190. I b i d . , p . 77. 174. p r e s e n t f i n a n c i a l c r i s i s in" t h e U n i t e d S t a t e s i t i s F e d e r a l Reserve Bank n o t e s t h a t a r e "being i s s u e d as emergency c u r r e n c y . I n f a c t the d i s a d v a n t a g e i n the U n i t e d S t a t e s of h a v i n g more t h a n one i s s u i n g body i s more ap p a r e n t than r e a l . Here we might quote K i s c h a n d - E l k i n 1 9 ! - w i t h p r o f i t : "With m u l t i p l e banks of i s s u e t h e r e can be no s i n g l e d i r e c t i n g i m p u l s e . " "Ho c e n t r a l b a n k i n g system can r e a l l y be the 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 can be s t u l t i f i e d by u n c o r r e l a t e d a c t i o n on the p a r t o f numerous commercial banks of i s s u e . " Undoubtedly 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 be quoted 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 Committee. I n t h e i r r e p o r t we f i n d t h i s s t a t e m e n t : " S i n c e freedom of i s s u e of paper money may e a s i l y , under the s t i m u l u s of t h e d e s i r e to •• make p r o f i t s , l e a d each i s s u e r t o expand u n t i l the 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 that 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 monopoly of n o t e i s s u e , and t h i s i s i n d e e d the almost u n i v e r s a l p r a c t i c e of t h e modern world."192 The same M a c M i l l a n Committee says t h a t t h e r e a r e f o u r r i g h t s 1 ° t h a t a r e e s s e n t i a l to a c e n t r a l b a n k — ( 1 ) 191. I b i d . , p. 76. 192. The Report of the 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 . ) London, June, 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 (2) the r i g h t to h o l d t h e r e s e r v e s of c o m m e r c i a l banks (3) the r i g h t to buy and s e l l s e c u r i t i e s , and (4) the r i g h t to- d i s c o u n t . I n cases we n o t e d , where a u t h o r i t i e s , o r banks o t h e r than the c e n t r a l bank, have the r i g h t of n o t e i s s u e we saw t h a t the "independent" i s s u e , a d d i t i o n a l to t h e c e n t r a l bank i s s u e , was s m a l l i n comparison w i t h the t o t a l n o t e i s s u e . I n Canada t h a t i s not the' case under the p r e s e n t system, The. number o f Dominion n o t e s a c t u a l l y i n c i r c u l a t i o n i s 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 c i r c u l a t i o n . Hence t h e r e can be ho predominant c e n t r a l c o n t r o l l i n g a u t h o r i t y . I n view of t h i s f a c t , t hen, and i n the f a c e of t h e o p i n i o n s e xpressed 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 t h a t r e t e n t i o n by t h e c h a r t e r e d banks o f t h e n o t e i s s u e p r i v i l e g e , a f t e r t h e c r e a t i o n of a c e n t r a l bank i n Canada, c o u l d be j u s t i f i e d . So f a r i n t h i s c h a p t e r we have been concerned almost e n t i r e l y w i t h s t a t i n g 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 bank i n Canada. In the p r o c e s s o f answering o b j e c t i o n s and i n p r e v i o u s c h a p t e r s , arguments i n f a v o r o f s u c h a bank have been advanced. I n a d d i t i o n t o t h e s e , however,-we might h e r e p o i n t out some f u r t h e r advantages t h a t might be e x p e c t e d . 176. I n Chapter 5 we noted the p r o f u s i o n of a d m i n i s t r a t i v e b o d i e s concerned w i t h o u r f i n a n c i a l s t r u c t u r e . There were the c h a r t e r e d banks, the F i n a n c e A c t a d m i n i s t r a t o r s , t h e T r u s t e e s of the C e n t r a l Gold R e s e r v e s i n t h e i r cape, c i t y as a d v i s e r s , the C e n t r a l Gold R e s e r v e s a d m i n i s t r a t i o n , the C i r c u l a t i o n Redemption Fund s u p e r v i s i o n , the 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 S a v i n g s 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 of t h e s e and t a k e over t h e i r d u t i e s . I t would t a k e over t h e banking d u t i e s of the M i n i s t e r of F i n a n c e , the Deputy M i n i s t e r and the T r e a s u r y Board as a w h o l e — i n s h o r t , the work t h a t now comes under the a d m i n i s t r a t i o n o f the F i n a n c e A c t . I t would not r e q u i r e a d v i s e r s , as i t s own management would c o n s i s t o f e x p e r t s . The C e n t r a l G o l d R e s e r v e s , most o f the d u t i e s of t h e Bankers' A s s o c i a t i o n ( s u p e r v i s i o n o v e r c l e a r i n g houses, n o t e p r i n t i n g , t h e appointment of c u r a t o r f o r suspended banks, e t c . ) , t h e Dominion note i s s u e , r e d i s c o u n t i n g o p e r a t i o n s , p u b l i c a t i o n of f i n a n c i a l d a t a , and i n s p e c t i o n of banks would a l l be ha n d l e d or r e p l a c e d by the c e n t r a l bank. Much has a l r e a d y been made of t h e importance of the s o c i a l f u n c t i o n of a c e n t r a l bank i n c o n t r o l l i n g the monetary and b a n k i n g s t r u c t u r e i n the common good. A problem of c u r r e n t i n t e r e s t i n Canada might be c i t e d h e r e 177. as a case i n p o i n t . Owing t o the l e n g t h t o w h i c h the. p r e s e n t d e p r e s s i o n has gone t h e "burden of debt and i n t e r e s t has 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 have gone down, the "wages o f money" has not d e c r e a s e d i n p r o p o r t i o n . I t i s v e r y g e n e r a l l y ad- m i t t e d t h a t i n t e r e s t r a t e s s h o u l d be l o w e r e d . I f g o v e r n - mental a u t h o r i t i e s b e l i e v e t h a t the r a t e s should be lowered they have not as y e t p r o c l a i m e d any p l a n f o r b r i n g i n g about the d e s i r e d r e s u l t . I n E n g l a n d , on the o t h e r hand, r a t e s have been lo w e r e d g e n e r a l l y , and the Government was s u c c e s s f u l i n r e f u n d i n g a l a r g e p a r t of. i t s debt at a v e r y much lower r a t e . T h i s was brought about by 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 . F i r s t t h e Bank of England lowered t h e d i s c o u n t r a t e t o 2 per c e n t , and k e p t i t low. 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 ' , and 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 . In a d d i t i o n the banks, under t h e l e a d e r s h i p of t h e Bank o f E n g l a n d , r e d u c e d the i n t e r e s t r a t e on d e p o s i t s to \ per c e n t . As a r e s u l t of these measures t a k e n by the Government and the Bank of' England i n c l o s e c o - o p e r a t i o n , the demand f o r f u n d s was g r e a t l y r e d u c e d , and the reduced demand caused a r e d u c t i o n i n the " p r i c e " , or the i n t e r e s t . Thus the i n t e l l i g e n t l y p l a n n e d , d e l i b e r a t e , " c e n t r a l b a n k i n g " 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 where t h e i n v e s t o r was w i l l i n g to t a k e a lower r a t e of i n t e r e s t on h i s money. F o r t u n a t e l y , i n a d d i t i o n , many of the Government s e c u r i t i e s were c a l l a b l e on s h o r t n o t i c e . Hence when t h e Government gave t h e h o l d e r s t h e c h o i c e of renewing t h e i r h o l d i n g s a t a reduced r a t e o f i n t e r e s t or of t u r n i n g them i n f o r r e d e m p t i o n they were g l a d t o exchange them f o r bonds b e a r i n g a l o w e r r a t e o f i n t e r e s t . I n Canada, i f we had a c e n t r a l bank managed by an i n t e l l i g e n t b qard o f monetary and f ' i n a n c i a l e x p e r t s w o r k i n g i n c o - o p e r a t i o n w i t h (or perhaps i n s p i r i n g ) an e n l i g h t e n e d Government p o l i c y , some such r e s u l t might have been a c h i e v e d , 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 our Government bonds, are o f l o n g term i s s u e and not r e - deemable a t the c h o i c e of the Government. T h i s f a c t b u 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 bank or i t s e q u i v a l e n t . I f we had had a w i s e . c e n t r a l bank b o a r d i n the p a s t i t would have been 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 t h e r e i s a f a i n t f l i c k e r of a s u g g e s t i o n t h a t t h e r e may r e c e n t l y have been a c o n s c i o u s monetary p o l i c y i n o p e r a t i o n i n Canada. Or i s t h e r e ? I t might n o t even be a f l i c k e r , but t h e p o s s i b i l i t y i s a t l e a s t i n t r i g u i n g . Much has been h e a r d a t l a r g e , and something has been s a i d 179. h e r e a l r e a d y , o f t h e $35,000,000 advance to the banks o f l a s t November under t h e p r o v i s i o n s of t h e F i n a n c e A c t . 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 have been c a r r i e d out on t h e a d v i c e of the p r e s e n t Deputy M i n i s t e r of F i n a n c e who was a p p o i n t e d j u s t about' t h e same time t h a t t h e advance was made. And- now we hear r u m o r s 1 9 ^ t o t h e e f f e c t t h a t the 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 be lowered. I t i s s u g g e s t e d t h a t the banks, h a v i n g no need f o r the $35,000,000 were f o r c e d t o employ 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 inve s t m e n t i n Govern- ment s e c u r i t i e s . ( I n December, 1932, they h e l d o r e r . $562,000,000 w o r t h . 1 9 5 ) But t h e banks f i n d t h a t they a r e a b l e t o earn o n l y &|- to 4§- p e r c e n t , on prime Government s e c u r i t i e s * Hence they would perhaps be g r e a t l y r e l i e v e d a t h a v i n g to pay l e s s than the p r e s e n t 3 per c e n t , on s a v i n g s d e p o s i t s . Then i f the i n t e r e s t on s a v i n g s d e p o s i t s were lowered, f u n d s now i d l e might be i n d u c e d to seek more p r o f i t a b l e employment i n h i g h grade bonds, then i n second grade bonds, and f i n a l l y i n more s p e c u l a t i v e b u s i n e s s e n t e r p r i s e s . T h i s would make i t e a s i e r f o r the Government t o do t h e g r e a t amount of f i n a n c i n g t h a t w i l l s h o r t l y be n e c e s s a r y . 194. F i n a n c i a l P o s t , Feb. 18, 1933., p. 16. 195. I b i d . , Feb. 11, 1933, p. 12. 180. I f one were to 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 might even see a r e l a t i o n between p o s s i b l e b u s i n e s s r e v i v a l and t h e now famous $35,000,000 t r a n s a c t i o n . Even i f the " f l i c k e r " s h o u l d prove t o have been a myth, however, the s u g g e s t i o n a t l e a s t w i l l t end t o i n d i c a t e something of "what might have been" under i n t e l l i g e n t c e n t r a l banking l e a d e r s h i p . 181. Chap ter 7. Summary and C o n c l u s i o n s . A c a r e f u l e x a m i n a t i o n o f ̂ t h e monetary ana b a n k i n g s t r u c t u r e of 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 im- p r e s s e d upon the m i n d — f i r s t l y t h a t i n t h e p a s t t h e r e has been a r e l a t i v e l y e f f i c i e n t system, s e c o n d l y t h a t t h e events of 1907, 1914 and 1923 marked s t a g e s i n a t r a n s i t i o n p e r i o d , and t h i r d l y t h a t the c r o s s - r o a d s where i t i s e s s e n t i a l t h a t a d e l i b e r a t e , i n t e l l i g e n t l y p l a n n e d p o l i c y s h o u l d be d e c i d e d upon, have been r e a c h e d . I n the e x i s t i n g d i s o r d e r of a w o r l d of f i n a n c i a l anarchy Canada has been p o s s e s s e d of a monetary and b a n k i n g s t r u c t u r e somewhat l e s s c h a o t i c and incompetent than t h e average. 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 have been due to a number of f a c t o r s , such as the branch b a n k i n g system; the s m a l l number of l a r g e banks; a c o n s i d e r a b l e 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 by t h e Canadian 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 e l a s t i c i t y of t h e system. T h i s e l a s t i c i t y , due i n p a r t t o t h e la. ck of f o r m a l r e s e r v e r e q u i r e m e n t s , the comparative c o n c e n t r a t i o n o f r e s e r v e s i n a few l a r g e banks, and t h e degree of g e n e r a l u n i t y of t h e system, was more p a r t i c u l a r l y e f f e c t e d by t h e note i s s u e p r o v i s i o n s . The ba.nic n o t e s were o r i g i n a l l y e l a s t i c because they were a s s e t i s s u e s based on paid-up c a p i t a l . P a i d - u p 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 . Hence, as we have seen, bank n o t e s h a v i n g reached t h e l i m i t s of t h e i r o r i g i n a l e l a s t i c i t y i n 1907, the Government came t o the r e s c u e of t h e banks w i t h an emergency p r o v i s i o n f o r e x t r a Dominion n o t e s , and the crop-moving p r o v i s i o n f o r bank notes.was i n a u g u r a t e d i n 1908. 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 throughout Canada, the banks f o u n d themselves i n the p o s i t i o n where they were u s i n g even t h i s emergency n o t e i s s u e p r i v i l e g e t o the l i m i t . I t i s not to be wondered a t , t h e n , t h a t the 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 banking s t r u c t u r e . T h i s shock came w i t h the outbreak: of the Great War i n 1914. The r e s u l t was, as r e l a t e d i n Chapter 6, the p a s s i n g o f t h e F i n a n c e A c t . The advent of t h i s A c t marked t h e most p r o - f o u n d l y s i g n i f i c a n t change i n our ban k i n g and monetary s t r u c t u r e s i n c e t h e p a s s i n g of t h e Bank A c t of 1871. As a war-time emergency e x p e d i e n t the A c t no doubt s e r v e d a u s e f u l purpose even though i t may be c r i t i c i z e d as t h e i n s t r u m e n t of the i n f l a t i o n of t h a t p e r i o d . Tested o n l y under abnormal c o n d i t i o n s and i n a paper money p e r i o d , t h e 183. main p r o v i s i o n s of t h i s A c t were made permanent i n 1923. O p e r a t i n g i n normal t i m e s , under g o l d s t a n d a r d c o n d i t i o n s , t h i s A c t , by p e r m i t t i n g our. monetary and c r e d i t system t o 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 and t h e d e p r e c i a t i o n of our d o l l a r . P r e v i o u s t o the p a s s i n g of t h e A c t the r e s p o n s i b i l i t y f o r the s o l v e n c y of the b a n k i n g system and f o r the s o c i a l c o n t r o l of money and 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 banks themselves. The p a s s i n g of t h e A c t t r a n s f e r r e d t h i s r e s - p o n s i b i l i t y t o t h e Department of F i n a n c e . U n f o r t u n a t e l y t h e Government was not aware of i t s new r e s p o n s i b i l i t y . C a st o f f by i t s f o r m e r owners, 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 a i m l e s s l y i n t h e c u r r e n t s of w o r l d f i n a n c e . I t i s h i g h t i m e , t h e n , t h a t c o n s i d e r a t i o n 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 the course 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 has d e p a r t e d f rom the g o l d s t a n d a r d . I n the 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 . We do n o t seem, how- eve r , t o have gone o f f the g o l d m e n t a l i t y . H a v i n g de- p a r t e d from ;gold 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 ar e s t i l l t h i n k i n g i n terms of g o l d . L i k e L o t ' s w i f e we are h a z a r d i n g our p o s i t i o n by the backward l o o k . Going o f f t h e g o l d s t a n d a r d was m e r e l y a n e g a t i v e a c t . We must 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 s h o u l d be 184. t a k e n t h a t t h i s p o s i t i v e move s h o u l d be the w i s e s t one p o s s i b l e . But the need f o r courage i s no l e s s than the need f o r c a u t i o n . I t i s e s s e n t i a l t h a t a d e l i b e r a t e , 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 and b o l d l y de- c l a r e d . I f we a l l o w o u r s e l v e s t o d r i f t u n t i l we a r e f o r c e d i n t o a c e r t a i n a c t i o n , the v e r y f a c t that our a c t i o n was f o r c e d and n o t d e l i b e r a t e l y p l a n n e d w i l l of i t s e l f g e n e r a t e a l a c k of c o n f i d e n c e . Y/e must n o t be f o r c e d i n t o a c t i o n , we must f o r c e a c t i o n " 0 i n t o our system. A. b o l d d e c l a r a t i o n t h a t we are d e l i b e r a t e l y a.dopting a p o l i c y w h ich i s the r e s u l t of calm and i n t e l l i g e n t c o n s i d e r a t i o n w i l l of i t s e l f beget c o n f i d e n c e . I n t e r n a t i o n a l c o n c e r t e d a c t i o n i n monetary p o l i c y would be i d e a l a s s i s t a n c e f o r u s. Perhaps t h e n e x t g r e a t e s t h e l p c o u l d come from a d e c l a r a t i o n o f the a d o p t i o n of a p o s i t i v e monetary p o l i c y by Great B r i t a i n . American monetary p o l i c y has been such as t o make her c u r r e n c y t h e l e a s t s t a b l e o f a l l i n p u r c h a s i n g power, and i t seems l i k e l y t h a t ' g o l d ' c u r r e n c i e s w i l l c o n t i n u e to f l u c t u a t e i n p u r c h a s i n g power whether d e f l a t i o n c o n t i n u e s or a p o l i c y of i n f l a t i o n i s adopted. Hence i t would seem unwise f o r Canada, t o t r y to f o l l o w the course of t h e American d o l l a r . On the o t h e r hand i f Great B r i t a i n were t o make a b o l d d e c l a r a t i o n o f p o s i t i v e p o l i c y , i f she were t o adopt a d e f i n i t e s t a n d a r d , and i f she r e s o l v e d t o manage t h a t s t a n d a r d 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 , membership•in the s t e r l i n g b l o c would be of g r e a t b e n e f i t t o Canada. The i n t e r n a l p u r c h a s i n g power of s t e r l i n g i s ' a l r e a d y r e l a t i v e l y s t a b l e . 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 m a j o r i t y of the n a t i o n s a r e now o f f .the g o l d s t a n d a r d , and, under the l e a d e r s h i p of Great B r i t a i n , would f o r m a s t a b l e s t e r l i n g b l o c . By j o i n i n g s u c h a group Canada would be g r e a t l y h e l p e d . But Great B r i t a i n and the o t h e r n a t i o n s have not done thes e t h i n g s . I n t e r n a t i o n a l c o - o p e r a t i o n h o l d s out l i t t l e immediate hope. Yet Canada has t a k e n no c o n s t r u c t i v e a c t i o n of her own. She cannot a f f o r d l o n g e r m e r e l y to a w a i t t h a t a c t i o n on the p a r t of o t h e r s w h i c h does n o t come. N e g l e c t by t h o s e who have the g r e a t e s t r e s p o n s i b i l i t y does not r e l i e v e Canada of the sh a r e of r e s p o n s i b i l i t y t h a t i s her own. The e n t i r e p r o c e s s of abandoning the g o l d s t a n d a r d 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 of f o r e i g n c u r r e n c i e s has p r o b a b l y caused us t o t h i n k t o o much o f t h e exchange s i d e of our money problem. True, Canada i s a g r e a t e x p o r t i n g n a t i o n , and as such, i n normal t i m e s , she s h o u l d 186. p r o b a b l y be more concerned about exchange c o n t r o l than most n a t i o n s . However, the p r e s e n t d e p r e s s i o n has a l r e a d y gone so f a r , f o r e i g n exchange as a whole i s so u n s t a b l e , and f o r e i g n t r a d e has d e c r e a s e d so g r e a t l y t h a t a s t a t e o f emergency e x i s t s , and i n t h a t s t a t e of emergency i t would seem t h a t Canada's f i r s t duty i s to s e t her house . i n o r d e r . At the p r e s e n t time, t h e n , i t would appear t h a t we s h o u l d c o n c e r n 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 of our d o l l a r and g i v e our f i r s t a t t e n t i o n t o management of our i n t e r n a l p r i c e l e v e l . Undoubtedly we have a v e r y g r e a t problem i n the repayment of d e b t s which we owe abroad. But i f p r e s e n t c o n d i t i o n s a r e a l l o w e d t o c o n t i n u e , we s h a l l not much l o n g e r be a b l e to 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 exchange r a t e s may be. We 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 o f de- c l a r i n g t h a t we a r e g o i n g to r a i s e the i n t e r n a l p r i c e l e v e l t o a determined l e v e l , say t h a t of 19S6. H a v i n g so d e t e r m i n e d and d e c l a r e d we s h o u l d r e s o l u t e l y a d m i n i s t e r our money and c r e d i t to t h a t end. But who w i l l do t h i s ? Where i s t h e machinery f o r c a r r y i n g out such a p o l i c y ? I n t h e p a s t , as we have seen, both the Government and the c h a r t e r e d banks have disowned r e s p o n s i b i l i t y f o r s o c i a l c o n t r o l of money and c r e d i t . TTone of the r e q u i r e d m achinery e x i s t s . What, t h e n , can be 187. done to remedy our s i t u a t i o n ? As we have seen i n Chapter 5, Canadian hankers c l a i m t h a t the F i n a n c e A c t p r o v i d e s a l l t h a t i s n e c e s s a r y i n the way of a c e n t r a l hank. On the o t h e r hand c r i t i c s have r o u n d l y condemned the A c t and have p o i n t e d to the need f o r a r e a l c e n t r a l hank. I t i s not u n n a t u r a l , t h e r e f o r e , t h a t a compromise, i n the f o r m of amendments to t h e F i n a n c e A c t , s h o u l d he proposed hy some as the remedy. The amounts t h a t c o u l d he advanced under the F i n a n c e A c t a g a i n s t s e c u r i t i e s a l one might he l i m i t e d and p r o v i s i o n made f o r a measure of g o l d 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 ex c e e d i n g the s p e c i f i e d l i m i t . Or, a d e f i n i t e minimum per c e n t a g e of g o l d r e s e r v e s f o r the t o t a l Dominion n o t e i s s u e might he s e t and advances made o n l y to an e x t e n t c o n s i s t e n t w i t h the s a f e t y o f t h a t minimum. Ho doubt these amendments would tend to s a f e g u a r d t h e g o l d s t a n d a r d i n a s i t u a t i o n l i k e t h a t w h i c h e x i s t e d i n Canada i n 1929. But these p r o p o s a l s a r e based on the a s s u m p t i o n t h a t Canada w i l l go back t o the g o l d s t a n d a r d , and Canada may n e v e r r e t u r n t o t h a t s t a n d a r d . I t i s t r u e o f c o u r s e t h a t o t h e r amendments c o u l d be d e v i s e d as a s a f e g u a r d i f t h e A c t were oper a t e d under paper money c o n d i t i o n s . . A d m i t t e d l y the A c t c o u l d be so changed as to remove £he dangers i n h e r e n t i n i t under any and a l l 180. c o n d i t i o n s , but even i n a ha r m l e s s f o r m i t would not be a c e n t r a l bank. Governments and c i v i l s e r v a n t s , as such, would ha.ve n e i t h e r t h e t i m e , the i n c l i n a t i o n , the ma c h i n e r y , nor the q u a l i f i c a t i o n s t o o p e r a t e t h e A c t as a c e n t r a l bank. On the o t h e r hand, i f p r o p e r l y q u a l i f i e d a d m i n i s t r a t o r s and the n e c e s s a r y c e n t r a l b a n k i n g equipment have to be p r o v i d e d to make the A c t e f f e c t i v e , i t would be more r e a s o n a b l e t o ta k e the f i n a l step of c r e a t i n g a genuine 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 Canadian Banker" w r i t i n g to g i v e t h e p o i n t o f v i e w of Canadian c h a r t e r e d banks on the q u e s t i o n of a c e n t r a l bank f o r 196 Canada. I n s t e a d o f a c e n t r a l bank he ad v o c a t e s the s e t t i n g up of a permanent economic a d v i s o r y committee,, " T h i s committee", he s a y s , " 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 and p r a c t i c a l men i t i s p o s s i b l e 197 t o s e c u r e . " He would go o u t s i d e of Canada, to Great B r i t a i n — p r e s u m a b l y a n y w h e r e — t o get a s u i t a b l e p e r s o n n e l . Summarized are h i s main i d e a s as to what such a committee would .do: 1. 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 196. F i n a n c i a l P o s t — f i n a l a r t i c l e by "A Canadian Banker". 197. I b i d . X C */ o 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 we a r e e n t a n g l e d . 2. Examine and pass judgment d i s p a s s i o n a t e l j r upon 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 t r i e d e l s e w h e r e . 3- 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 o f i n t e r e s t on l o a n s under t h e F i n a n c e A c t . 4. Hake p o s s i b l e an i n t e l l i g e n t a t t e m p t at exchange r a t e s t a b i l i z a t i o n . 5. Make f o r g e n e r a l s t a b i l i t y by c r e a t i n g an en- l i g h t e n e d p u b l i c o p i n i o n . 6. Represent Canada at i n t e r n a t i o n a l economic con- f e r e n c e s or a c t as 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 o f t h i s p r o p o s a l t h e 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 of t h e p e r s o n n e l w h i c h "Canadian Banker" proposes f o r h i s committee i s j u s t 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? Of such d u t i e s as he would a s s i g n t o the committee, as f a r as t h e y go, one would h e a r t i l y approve. Moreover, a, committee.of t h i s c h a r a c t e r c o u l d p e r f o r m those d u t i e s a d m i r a b l y and t o t h e v e r y g r e a t advantage of Canada. To c r e a t e such a committee would be t o t a k e a b i g s t e p i n the r i g h t d i r e c t i o n . I t 190. would mean a v a s t improvement over trie e x i s t i n g system. The committee would be a v e r i t a b l e p h y s i c i a n f o r our s i d e monetary and b a n k i n g system, y e t as a p h y s i c i a n i t would have no s u r g i c a l i n s t r u m e n t s . I t c o u l d p r e s c r i b e but i t c o u l d not o p e r a t e . B e f o r e t e n banks and t h e Govern- ment c o u l d be p r e v a i l e d upon t o a c t i n an emergency i t i s t o be f e a r e d the p a t i e n t would d i e . N e v e r t h e l e s s , i f we cannot have a complete remedy f o r our s i t u a t i o n , l e t us have a p a r t i a l one. The p r o p o s a l t h a t i s c u r r e n t l y the most p o p u l a r w i t h t h e g e n e r a l p u b l i c i s t h a t our banks s h o u l d be n a t i o n a l i z e d . T h i s means t h a t a l l banks s h o u l d be owned and o p e r a t e d as a p u b l i c s e r v i c e . Commercial b a n k i n g and the c o n t r o l of money and c r e d i t would be a s t a t e monopoly. To the w r i t e r t h i s i s the l o g i c a l and almost the i n - e v i t a b l e u l t i m a t e c o u r s e . To the t h r e a d - b a r e and d i s c r e d i t e d argument t h a t s t a t e i n s t i t u t i o n s cannot be o p e r a t e d as e f f i c i e n t l y as t h o s e t h a t are p r i v a t e l y owned one ms.y r e p l y t h a t t h i s i s the s t o c k argument t h a t has been used down thr o u g h the c e n t u r i e s every time i t has been proposed t h a t the s t a t e s h o u l d remove from v e s t e d i n t e r e s t s and p e r - form i n the s o c i a l i n t e r e s t - any a d d i t i o n a l f u n c t i o n . The o c c u r r e n c e s d u r i n g the c o u r s e of the p r e s e n t d e p r e s s i o n s h o u l d be s u f f i c i e n t t o g i v e t h i s argument i t s f i n a l q u i e t u s . Through i t s own incompetence 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 f i r s t . Then, t h r o w i n g the r e s p o n s i b i l i t y f o r i t s employees as an 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 has been g r a d u a l l y d r a g g i n g t h e s e governments down to b a n k r u p t c y a f t e r i t . Moreover, 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 move- ment a f o o t t h a t i s g a i n i n g impetus w i t h the march of t i m e . To the -writer g e n e r a l s t a t e ov/nership and 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 merely a ma t t e r of time , and ba n k i n g i s not l i k e l y to be the l a s t t o e x p e r i e n c e t h i s change. T h e r e f o r e , i f we do not n a t i o n a l i z e our Canadian b a n k i n g system now, i t w i l l l i k e l y mean t h a t we s h a l l m e r e l y be p o s t p o n i n g t h e e v e n t . I t would be e n t i r e l y f e a s i b l e f o r t h e Canadian Govern- ment to t a k e over a l l the banks and not do anyone an i n - 198 j u s t i c e . The t o t a l paid-up c a p i t a l of the t e n c h a r t e r e d banks amounts to $144,500,000 and the t o t a l 199 r e s e r v e s amount to tfl62,000,000. Of the l a s t p a i d Eon d i v i d e n d s - o n e was a t the r a t e o f 7 per c e n t . , one a t 198-200 F i n a n c i a l P o s t , Feb. 11, 1933. 14 per c e n t . , end e i g h t a t 10 p e r c e n t . T h i s r a t e i s based on paid-up c a p i t a l . ."A Canadian Banker" s t a t e s t h a t on the b a s i s of combined c a p i t a l and r e s e r v e s Canadian bank s h a r e h o l d e r s r e c e i v e d i n 1932 a r e t u r n s l i g h t l y l e s s 201 than 5± per c e n t . I f the Government i s s u e d bonds to the s h a r e h o l d e r s t o t h e amount of the combined pa.id-up c a p i t a l and r e s e r v e s , and g u a r a n t e e d , say, even 6 per c e n t , on them, the s h a r e h o l d e r s c o u l d not j u s t l y c o m p l a i n of any u n f a i r n e s s , p a r t i c u l a r l y i n v i e w - o f the f a c t t h a t they would be r e l i e v e d of the "double l i a b i l i t y " t o which bank sha r e s a r e s u b j e c t . N e i t h e r s h o u l d t h e r e 'he any d i f f i c u l t y f o r t h e Government i n meeting the i n t e r e s t g u a r a n t e e . Hundreds of bank o f f i c e s c o u l d be c l o s e d as n e e d l e s s , f a c i n g one a n o t h e r a c r o s s t h e s t r e e t as t h e y do i n so many p l a c e s under the p r e s e n t e x p e n s i v e , c o m p e t i t i v e system. N e i t h e r would i t be n e c e s s a r y i n f u t u r e to e r e c t 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 b u i l d i n c o m p e t i t i o n w i t h one a n o t h e r . W i t h t h e s e 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 s t a f f of employees, and w i t h the demonstrated a b i l i t y of t h e banks to pay handsome d i v i d e n d s i n t h e s e t i m e s of d e p r e s s i o n , i t s h o u l d not 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 , u n i f i e d system to pay the i n t e r e s t g u a r a n t e e d . 201. I b i d . , J a n . 28, 1933. 193. The w r i t e r l a b o r s under no d e l u s i o n as t o the d i f f i - c u l t y of b r i n g i n g about the complete n a t i o n a l i z a t i o n of the b a n k i n g system i m m e d i a t e l y . Q u i t e n a t u r a l l y the bankers would s t r e n u o u s l y r e s i s t such a p r o p o s a l . A g a i n s t i t a l s o would be t h e o l d e r p e o p l e and the more c o n s e r v a t i v e - minded persons who have l i t t l e f a i t h i n p u b l i c e n t e r p r i s e g e n e r a l l y . I t may be, t h e r e f o r e , t h a t the s p i r i t of y o u t h , w h i c h a l o n e would appear t o be c a p a b l e o f l i f t i n g us out of our p r e s e n t despondency, may have t o await t h e r e f o r m w h i c h w i l l come w i t h the n a t u r a l removal of t h e 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 l a c k of r e s o l u t i o n i n - h e r e n t I n the apparent s e n i l i t y t h a t now g u i d e s the hands of government and f i n a n c e . Of a l l 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 monetary and b a n k i n g system the one most g e n e r a l l y a c c e p t a b l e i s the suggested c r e a t i o n o f a c e n t r a l bank. In the f i r s t p l a c e , as we have seen, i n f o r m e d , d i s i n - t e r e s t e d o p i n i o n s u p p o r t s t h e e f f i c a c y o f such an i n s t i t u - t i o n p r o p e r l y c o n s t i t u t e d . S e c o n d l y , n e i t h e r a p r i v a t e l y owned nor a s t a t e owned c e n t r a l bank need 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 i t would n o t l i k e l y be expected to compete'with the c h a r t e r e d banks i n the commercial b a n k i n g b u s i n e s s . I t s i n t e r e s t would be i n the "money b u s i n e s s " r a t h e r than i n the b a n k i n g 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 b a n k i n g system were l a t e r d e t e r m i n e d upon, the 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 would be i n r e a d i n e s s i n the form of the c e n t r a l bank. I t would be most i n e p t of us, however, to o r g a n i z e a c e n t r a l bank j u s t because i t might r e p r e s e n t a. c o n v e n i e n t compromise between more c o n t e n t i o u s p r o p o s a l s . Canada must have a c e n t r a l bank. She must i n s t i t u t e such a bank on no b a s i s of compromise, however. She must c r e a t e i t because i t c o u l d be of tremendous b e n e f i t t o her p e o p l e . Here i s a summary o f what our proposed c e n t r a l bank c o u l d do: 1. 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 r e d i s c o u n t i n g . 4. Assume the d u t i e s p erformed a t p r e s e n t by the T r u s t e e s of the C e n t r a l Gold R e s e r v e s . 5. Take over t h e s u p e r v i s i o n of the C i r c u l a t i o n Redemption Fund. 6. C a r r y out the work o f bank i n s p e c t i o n . 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 the whole b a n k i n g s t r u c t u r e . 8. R e l i e v e t h e Department o f F i n a n c e of the duty 195. of a d m i n i s t r a t i o n of the F i n a n c e A c t . 9. Encourage t h e growth o f money and b i l l markets i n Canada. 10. A c t as the 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 agent of the Government. 12. Represent t h e Government a t f i n a n c i a l c o n f e r e n c e s . 13. Assume the monopoly of the n o t e i s s u e . 14. A c t i n the c a p a c i t y of e x p e r t f i n a n c i a l a d v i s e r to G o v e r n m e n t s — f e d e r a l , p r o v i n c i a l , and muni- c i p a l — s u c h as i n the m a t t e r o f f o r e i g n b o r r o w i n g . 15. Determine a l l c u r r e n c y and c r e d i t problems. 16. E x e r c i s e c o n t r o l over, f o r e i g n exchange. 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 l e v e l . 18. P u b l i s h f i n a n c i a l d a t a . 19. Guard the money and b a n k i n g system from the dangers of the p o l i t i c a l ' f a c t o r and t h e m a n i p u l a - t i o n s of p r i v a t e s e l f i n t e r e s t s . 20. E x e r c i s e complete c o n t r o l over money and c r e d i t i n t he g e n e r a l i n t e r e s t r a t h e r than i n the i n t e r e s t of p r o f i t . A few of the s e d u t i e s d e s e r v e s p e c i a l emphasis. I t 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 r e p e a t e d h e r e i n , t h a t one of the l e a d i n g f u n c t i o n s of a c e n t r a l 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 g r e a t danger t h a t t h i s f u n c t i o n might be over-emphasized* Our Canadian c e n t r a l bank must be a bank of r e d i s c o u n t , but i t must be more than t h a t . A c e n t r a l bank t h a t would be a bank of r e d i s c o u n t and l i t t l e more would be a l a s t i n g monument to 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 p r o g e n i t o r . The l a s t i t e m i n the l i s t of d u t i e s — t h a t of con- t r o l l i n g money and c r e d i t f o r the g e n e r a l w e l f a r e — i s by f a r the most i m p o r t a n t . The i n f l u e n c e of the w o r k i n g s o f money and c r e d i t on the l i v e s of the people to-day i s so profound t h a t 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 be one o f the prime f u n c t i o n s of g o v e r n m e n t — t h o u g h not n e c e s s a r i l y a d i r e c t one. I n Canada, we have d e l e g a t e d t h i s v i t a l f u n c t i o n t o i n s t i t u t i o n s o r g a n i z e d f o r t h e p u r s u i t of p r i v a t e p r o f i t . I t should be removed from such i n s t i t u - t i o n s and i n t r u s t e d to a c e n t r a l bank whose monetary e x p e r t s would 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 as a whole. I f the proposed c e n t r a l bank i s t o be t h e i n s t i t u t i o n of s e r v i c e t h a t i t ought t o be, i t must be p r o p e r l y con- s t i t u t e d and empowered. I n the f i r s t p l a c e i t must be a NATIONAL c e n t r a l bank. I t i s not the purpose of t h i s p a r a g r a p h t o r e p e a t t h e arguments f o r and a g a i n s t p u b l i c ownership o f the c e n t r a l bank, but t o r e i t e r a t e the f a c t 197. t h a t t h e proposed bank s h o u l d be " n a t i o n a l " i n the sense t h a t i t w i l l be s t a t e owned. To make i t o t h e r w i s e would be, i n the o p i n i o n of the w r i t e r , but t o p l a y w i t h t h e 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 way. The q u e s t i o n of the d e t a i l s of t h e c o n s t i t u t i o n of the c e n t r a l bank must be l e f t t o e x p e r t s , but i t cannot be t o o o f t e n r e p e a t e d t h a t the type of the p e r s o n n e l of i t s a d m i n i s t r a t i o n i s a l l - i m p o r t a n t . As s t a t e d i n C h a p t e r 6, i t would appear a d v i s a b l e to have i n t h e key p o s i t i o n d e t e r m i n i n g p o l i c y , a man w i t h p r o f e s s i o n a l academic t r a i n i n g — a man whose .knowledge of monetary and b a n k i n g m a t t e r s has been g a i n e d as a r e s u l t of d i s i n t e r e s t e d s t u d y — a p r o f e s s i o n a l economist who i s , s a y , an e x p e r t i n the f i e l d of money and b a n k i n g i n some u n i v e r s i t y . W ith him on the board of d i r e c t o r s s hould be a t lea.st one o u t - 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 e x p e r i e n c e . C o n s i d e r a - t i o n s h o u l d be g i v e n t o t h e q u e s t i o n as to whether or n o t c e r t a i n s p e c i a l i n t e r e s t s might be r e p r e s e n t e d i n minor r S l e s on t h e board, such as A g r i c u l t u r e , Commerce, L a b o r , the Canadian Bankers' A s s o c i a t i o n , e t c . The m a j o r i t y o f the members of the board and the d o m i n a t i n g o f f i c i a l s , a t l e a s t , s h o u l d be a p p o i n t e d by the Government. Each sh o u l d be a s s u r e d of r e l a t i v e l y l o n g and .secure t e n u r e of o f f i c e . 198. Even under s t a t e ownership and w i t h an a b l e p e r s o n n e l , however, the c e n t r a l bank c o u l d not a t t a i n r e s u l t s w i t h o u t the p r o p e r powers. I t s h o u l d be g r a n t e d t h e monopoly of the note i s s u e , c o n t r o l of the r e s e r v e s of t h e commercial banks, and the r i g h t t o do r e d i s c o u n t i n g . I n a d d i t i o n i t s h o u l d be empowered t o buy and s e l l s e c u r i t i e s i n the open market when n e c e s s a r y , and to de 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 exchange. 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 ensure complete mastery o f the c o u n t r y ' s e n t i r e money and c r e d i t s ystem. While i t i s no c r i t i c i s m of a c e n t r a l banking system to p o i n t out t h a t i n c o u n t r i e s where c e n t r a l banks a r e e s t a b l i s h e d bank f a i l u r e s , and f i n a n c i a l and b u s i n e s s c r i s e s s t i l l o c c u r , y e t t o o much may ea.sily 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 say: "Advocacy of a c e n t r a l b a n k i n g system r e s t s not on the v i e w t h a t i t i s a panacea or a s u b s t i t u t e f o r prudent b a n k i n g , but on t h e v i e w t h a t i t a f f o r d s the b e s t b a s i s f o r a sound b a n k i n g and 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 cu r r e n c y . " 2 0 2 A c e n t r a l bank would not be a c u r e - a l l and e n d - a l l f o r our t r o u b l e s , but i t would be of v e r y r e a l v a l u e . I t would a t l e a s t mean the c o n t r o l of money and c r e d i t i n the 202. K i s c h and E l k i n . C e n t r a l Banks, p. 112. 199 i n t e r e s t of the p e o p l e as a whole r a t h e r than i n the i n t e r e s t of p r i v a t e p r o f i t . A d m i t t e d l y , we a r e but a p a r t of a w o r l d economic u n i t . Owing t o the w o r l d - w i d e i n - f l u e n c e s the c e n t r a l bank c o u l d n o t guarantee even our own economic w e l f a r e . N e v e r t h e l e s s , by e s t a b l i s h i n g such 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 c e n t r a l banks and an e f f e c t i v e w o r l d bank (which t h e Bank of I n t e r - n a t i o n a l S e t t l e m e n t s may become), we would at l e a s t be • c o n t r i b u t i n g our share towards ending t h e p r e s e n t anarchy i n i n t e r n a t i o n a l f i n a n c e . Our monetary and b a n k i n g system i s i n a s t a t e of f l u x . The p a s s i n g of the F i n a n c e A c t commenced t h e t r a n s i t i o n f r o m t h e o l d to a new f i n a n c i a l e r a . To make c e r t a i n t h a t the f o u n d a t i o n s of the new o r d e r s h o u l d be w i s e l y l a i d i t would seem a d v i s a b l e t h a t we should have a " M a c M i l l a n 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. Here a g a i n t h e v i t a l p o i n t would be the p e r s o n n e l of t h e committee. P r o f e s s i o n a l e c o n o m i s t s — e x p e r t s i n money and b a n k i n g — w o u l d be r e q u i r e d , n o t m e r e l y f i n a n c i e r s , " b i g b u s i n e s s " men and b a n k e r s . The time f o r a c t i o n i s upon us. A r e we g o i n g to be any l o n g e r c o n t e n t w i t h the i d e a l of an o r d e r i n w h i c h s o c i a l good i s n o t h i n g more than t h e i n a d v e r t e n t and 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 p r i v a t e g a i n ? 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