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The attitudes of Canada's bankers towards their role during the depression, 1930-1935 Newell, George Russell 1967

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THE ATTITUDES OF CANADA'S BANKERS TOWARDS THEIR ROLE DURING THE DEPRESSION, 1930-1935  by George R u s s e l l Newell B.A., Mount A l l i s o n U n i v e r s i t y ,  1966  A Thesis Submitted i n P a r t i a l Fulfilment of The Requirements f o r t h e Degree of Master of A r t s i n the Department of H i s t o r y  We accept t h i s t h e s i s as conforming t o the required standards.  The U n i v e r s i t y of B r i t i s h Columbia September, I967  i  In p r e s e n t i n g t h i s t h e s i s  in p a r t i a l f u l f i l m e n t of the requirements  f o r an advanced degree at the U n i v e r s i t y of B r i t i s h Columbia,  I agree  t h a t the L i b r a r y s h a l l make i t f r e e l y a v a i l a b l e f o r r e f e r e n c e and Study. thesis  | f u r t h e r agree t h a t p e r m i s s i o n  this  f o r s c h o l a r l y purposes may be g r a n t e d by the Head of my  Department or by hi):; r e p r e s e n t a t i v e s . or p u b l i c a t i o n o f t h i s t h e s i s  Department of  History  The U n i v e r s i t y of B r i t i s h Columbia Vancouver 8, Canada September 20. 1967.  It  i s understood t h a t  copying  f o r f i n a n c i a l g a i n s h a l l not be a l l o w e d  w i t h o u t my w r i t t e n p e r m i s s i o n .  Date  f o r e x t e n s i v e c o p y i n g of  ABSTRACT  The Problem The subject of t h i s paper i s the Canadian chartered banks during the period from 1930  t o 1935.  I n these years of economic d i s r u p t i o n ,  s t r a i n s were imposed on the banking system and c r i t i c i s m s l e v e l l e d a t the banks t o an unprecedented extent.  These s t r a i n s and c r i t i c i s m s  came from d i v e r s e sources, and the problem has been t o i d e n t i f y the demands which they made on the banks, the sources o f the demands, the nature of t h e banks' responses, and the e f f e c t i v e n e s s of t h e banks' reactions.  The I n v e s t i g a t i o n The problem was t a c k l e d f i r s t through a consideration o f the main features of the Canadian banking system.  This involved not only t h e  determination of t h e machinery of the banks but a l s o the main ideas which determined the conduct o f the bankers.  The former aspect of  t h i s question was determined not only from statements by the bankers and books published under the aegis of the banks, but a l s o from governmental and academic accounts o f the system.  The question o f the  bankers' r a t i o n a l e was l a r g e l y i n v e s t i g a t e d through the statements of the leading bankers and from t h e nature of t h e proposals made by t h e bankers i n response t o s p e c i f i c s i t u a t i o n s . The i n v e s t i g a t i o n was then concentrated on the p o s i t i o n taken by the banks w i t h respect t o c e r t a i n economic problems of importance. The  ii  period saw considerable d i s c u s s i o n o f these problems by both bankers and non-bankers, and much o f the commentary on the questions was garnered from that d i s c u s s i o n .  The f i n a l area i n v e s t i g a t e d was t h a t  of problems r a i s e d by various groups i n Canada and the response o f the banks t o these. In general, the method followed was t o determine the p r e c i s e nature o f each problem, the sources from which these came and t h e i r reasons f o r r a i s i n g the questions, and t h e p o s i t i o n taken by the banks i n response.  Conclusions The study concludes that the Canadian chartered banks performed a commendable f u n c t i o n f o r Canada during the f i r s t years o f the Great Depression.  I n a period which saw f i n a n c i a l d i s r u p t i o n s and i n -  numerable bank f a i l u r e s i n other countries, t h e chartered banks provided Canada w i t h stable i n s t i t u t i o n s which commanded n a t i o n a l as w e l l as i n t e r n a t i o n a l respect.  The s e c u r i t y of Canada's banks was  never s e r i o u s l y questioned. I t i s not p o s s i b l e t o evaluate t h e importance of t h i s confidence i n s t i l l e d by the banks; t h a t i t was e s s e n t i a l to the economic welfare o f the nation was evident.  That the bankers  pursued p o l i c i e s which showered on t h e i r heads the abuses of many people does not a l t e r the f a c t t h a t those p o l i c i e s i n the long run were e s s e n t i a l t o the f i n a n c i a l well-being of t h e n a t i o n . be commended f o r pursuing unpopular courses.  iii  The bankers must  But t h i s p r a i s e of the banks i s tempered. They were p r i v a t e i n s t i t u t i o n s of n a t i o n a l importance.  Consequently they had a respon-  s i b i l i t y f o r the p u b l i c repercussions of t h e i r p o l i c i e s .  They must be  c r i t i c i s e d not t h a t they pursued p o l i c i e s a n t a g o n i s t i c t o the general welfare but r a t h e r that they were never w i l l i n g t o consider the broader consequences of t h e i r a c t i o n s .  Compounding t h i s shortcoming  was the f a c t that the ' l a i s s e z - f a i r e ' philosophy expounded by the bankers could no longer be sustained, since the gold standard, on which the operation o f that philosophy had rested, had been abandoned. I n the hiatus of leadership, the banks declined t o contribute t o the c r e a t i o n o f a managing a u t h o r i t y .  iv  Contents Pa i  raj  I.  INTRODUCTION  1  II.  THE CANADIAN BANKING SYSTEM  4  III.  THE BANKERS' RATIONALE  17  IV.  DEPRESSION  24  V.  BANK CREDIT AND THE SUPPLY OF MONET  35  VI.  THE BANKS, FOREIGN TRADE, AND FOREIGN EXCHANGE  kk  VII.  THE CENTRAL BANK CONTROVERSY  52  VIII.  THE BANKS, INDUSTRY, AND COMMERCE  62  IX.  THE BANKS AND AGRICULTURE  72  X.  CANADIAN GOVERNMENTS  S4  XI.  ATTITUDES TOWARDS THE BANKS AND THE BANKERS  95  XII.  CONCLUSION  102  SELECTED BIBLIOGRAPHY  114  1  I. INTRODUCTION  The relationship existing between the commercial banks i n a country and the various interests i n the community i s one which i s not duplicated i n the relationships of other businesses. Possibly this i s because the affairs of the banks touch a l l business i n a particularly sensitive place, that of financial affairs.  One author  notes that "To the physician, an individual entrusts his health; to the banker, his money. Both are prized possessions. Neither can be neglected with impunity."  1  Possibly, too, the unique relationship  i s due to the esoteric aura which surrounds the banks making them incomprehensible to a l l but the initiated.  In part because of this  relationship, and because of the v i t a l role of the chartered banks i n the economy, the Canadian banks i n the early 1930 s found themselves f  and the monetary principles which they upheld at the centre of a sustained debate*  This debate, conducted during a depression unprece-  dented i n severity i n Canadian history, forms a central theme in this study. The closing quarter of the year 1929 provided the i n i t i a l impetus to that depression, and i t i s with that date that the period considered in the study commences. It ends early i n 1935, for i n March of that year the Bank of Canada opened i t s doors for business and ushered in a new era i n Canadian banking.  By that time, there were strong indications  that the worst of the depression had passed, a low point i n economic  2 conditions having been reached i n the s p r i n g of 1933, date the economy recovered.  a f t e r which  A l i n e on a graph i n d i c a t i n g the general  s t a t e of the economy would, t h e r e f o r e , f a l l sharply from l a t e to a n a d i r e a r l y i n 1933 i n 1935  1929  from which i t would gradually r i s e t o a point  somewhat below the 1929  level.  The response of the chartered  banks to the problems created by t h i s depression c o n s t i t u t e s the other major theme i n the paper. The problem of t r e a t i n g w i t h the conduct of the chartered banks from 1930  t o 1935  and w i t h the d i s c u s s i o n of the banking system which  took place concurrently had been met by f i r s t of a l l o u t l i n i n g the important features of the Canadian banking system at the time. i s done i n s e c t i o n s I I and I I I of the paper.  This  In the next four sections  (IV t o V I I i n c l u s i v e ) some questions which were of i n t e r e s t are cons i d e r e d , s e c t i o n IV w i t h t h e general response of the banks t o the c o n d i t i o n s , and s e c t i o n s V, V I , and V I I w i t h some s p e c i f i c t o p i c s . Sections V I I I , IX, and X d e a l w i t h problems r a i s e d by various sectors of the Canadian community, and to complete the paper, sections XI and X I I r e c a p i t u l a t e the general a t t i t u d e towards the banks and the bankers and summarise the study. The years d e a l t w i t h i n the paper were r e v o l u t i o n a r y ones i n Canadian banking h i s t o r y . I t was a period during which the chartered banks faced unprecedented c r i t i c i s m .  I t was a p e r i o d , t o o , during  which the banks had t o manage t h e i r a f f a i r s w i t h extraordinary caution i n order to secure t h e i r s t a b i l i t y .  That they managed to survive the  3 stresses without permanent damage and w i t h a minimum of c r i s e s was i n d i c a t i v e o f the adequacy o f the banking system and of the c a l i b r e of the bankers' leadership.  And i t was a v i n d i c a t i o n of t h e i r  policies.  1. A l b e r t U. Romasco, The Poverty of Abundance; Hoover. the Nation and the Depression (New York, Oxford U n i v e r s i t y Press,  196517^97  4 II.  THE CANADIAN BANKING SYSTEM  In the 1930's the Canadian chartered banks comprised a key sector i n the economy of the country. As the main instrument i n the nation for the exchange of money and f o r the control of credit, the banks i n t h e i r operations stood at the cross-roads of economic a c t i v i t y .  On t h e i r  well-being depended i n great part the smooth continuity of business activity.  In consequence the banks played a pre-eminent role i n the  business community's response to the conditions imposed by the depression, a role which was shaped largely by two considerations.  One of  these was the nature of the banking system, the i n s t i t u t i o n a l machinery of the banks and the practices followed by them under the powers granted for the conduct of t h e i r a f f a i r s .  The other was the rationale which  permeated the bankers' a c t i v i t i e s , the fundamental ideas which were accepted among bankers and which formed the basis f o r t h e i r conduct. Though i t bore many resemblances to the banking systems of Great B r i t a i n and of the United States, and Canadian bankers f r e e l y acknowledged debt to those systems, banking i n Canada manifested a large number of features which, i n sum, created an i n s t i t u t i o n quite peculiar to Canada and w e l l adapted to Canadian conditions.  One outstanding  feature of the system i n 1930 was the very small number of banks doing business. There were only eleven i n that year. One of these, Barclay's Bank (Canada), had begun business i n the previous year and another, the Weyburn Security Bank, was to be amalgamated i n 1931 with the Imperial Bank of Canada, leaving a t o t a l of ten which was to remain unchanged throughout the rest of the decade.  They were large banks, very  5 large f o r the most part, and i n comparison with banks i n other parts of the world quite out of proportion t o the economic s i z e of the Three of them were, i n 1930,  country.  rated among the top twenty i n the world  i n terms of t o t a l assets.  With j u s t i f i c a t i o n i t was  claimed by many of Canada's leading  bankers that the existence of t h i s small number of large banks was  due  to the demands imposed by the Canadian environment rather than to a r t i f i c i a l stimulants from governments or f i n a n c i e r s . This claim was  impor-  tant i n j u s t i f y i n g the large number of mergers which had been a feature of Canadian banking h i s t o r y and which l a r g e l y accounted f o r the s i z e of the banks.  By 1930,  amalgamations had brought most l o c a l and  regional banks together so that eight of the banks then doing had branches i n at least s i x of the nine provinces.'*"  business  of the other three,  the Weyburn Security Bank ceased to exist as an independent i n s t i t u t i o n i n 1931,  and Barclay's Bank (Canada) operated as a subsidiary of i t s  great B r i t i s h namesake.  Since the beginning of the century, twenty-  2 eight banks had l o s t t h e i r separate i d e n t i t i e s through amalgamation. Undoubtedly they were n a t i o n a l rather than l o c a l or regional i n s t i t u t i o n s , and r e f l e c t e d i n t h e i r operations the f a c t that t h e i r charters were granted by the f e d e r a l Parliament. This coming together of l o c a l and regional banks t o form banking organisations of n a t i o n a l scope meant that the f i n a n c i a l resources of the nation could be mobilised more extensively than might otherwise have been possible.  Excess deposits i n one area were made available to  areas i n which the demands f o r loans exceeded funds a v a i l a b l e l o c a l l y , a f a c t o r which bankers pointed out was  p a r t i c u l a r l y valuable i n a  6 country such as Canada where new areas which required large i n f u s i o n s of c a p i t a l were constantly being developed.  N a t i o n a l organisation  meant, too, t h a t the s t r a i n s of an economic recession i n one  region  were absorbed w i t h i n large and d i v e r s i f i e d i n s t i t u t i o n s whose vast r e sources provided s e c u r i t y to t h e i r c r e d i t o r s .  By 1930,  i t was  evident  a l s o that the banks had attained such importance i n the economy that the f e d e r a l government could not remain i n d i f f e r e n t t o the soundness of the banks.  Their s e c u r i t y was c l e a r l y of more than p r i v a t e i n t e r e s t .  f a t e of the Home Bank subsequent t o i t s f a i l u r e i n 1923,  The  and the c o n t r i -  b u t i o n made by the government of the day t o the bank's c r e d i t o r s were demonstrative of t h i s f a c t . Competition, number of banks.  of course, was another f a c t o r which r e s t r i c t e d the I t was d i f f i c u l t f o r a new banking i n s t i t u t i o n t o  compete s u c c e s s f u l l y w i t h the established ones. c i a l l y easy to s t a r t a bank i n Canada.  And i t was not f i n a n -  The thought of a number of  u n p r o f i t a b l e years o f operation prevented a l l but the most o p t i m i s t i c and r e s o u r c e f u l from applying f o r a bank charter.  The requirements of  the Bank Act of a subscribed c a p i t a l of $500,000 and a paid up c a p i t a l of $250,000 was a l s o a major consideration, a requirement which the supporters of the banking system claimed kept economically unsound and unworthy promoters from entering the banking f i e l d .  Subscribers t o  the c a p i t a l stock of a bank were a l s o l e g a l l y l i a b l e f o r a double subs c r i p t i o n should t h e i r bank go i n t o l i q u i d a t i o n .  Even when these  conditions f o r the s t a r t i n g of a bank had been met,  i t was required t h a t  the Treasury Board be assured of the good f a i t h and adequate means of the applicants f o r a bank charter, and no new i n s t i t u t i o n was  permitted  to open f o r business u n t i l that Board had issued the c e r t i f i c a t e of  7 incorporation.  Subsequent additions to the stock issue of a bank also  needed the authorization of the Board. A corollary of the feature of largeness was the branch banking scheme which was i n use i n Canada and which, i t was claimed, was uniquely appropriate t o Canadian conditions.  In the great expanse of Canada, with  i t s widely dispersed population with t h e i r diverse banking requirements, large numbers of branches of a l l sizes brought to the most remote corners of the country the banking services of great and" stable institutions which, through separate accounting at each branch coupled with centralised control, made available the resources of nation-wide institutions to the very smallest communities. As mentioned above, t h i s system meant also that each bank could minimise i t s risks through having i t s assets distributed over the various parts of the country. At the same time,' the branch banking system permitted a f l e x i b i l i t y within each bank which allowed each branch to be managed i n accord with l o c a l requirements. In view of the importance of the banking function to the nation, there was surprisingly l i t t l e public control over bank a f f a i r s .  For the  most part, the banks enjoyed a high degree of independence from governmental regulation, a freedom which the bankers saw as contributing to the s t a b i l i t y of the banking system. However, there were a few regulations, such as those already mentioned concerning capitalisation, which determined the essential features of the banks. The principal l e g i s l a t i o n s p e c i f i c a l l y tailored to the banks was  3 that of the Bank Act and the Finance Act. The former act made provision for the establishment of banks, and restricted the use of the term 'bank'  8 i n Canada to those i n s t i t u t i o n s incorporated i n accordance with the provisions of the act.  Requirements concerning the supplying of d e t a i l s  of operations were also outlined.  Every ten years the Bank Act was r e -  vised, a procedure which allowed f o r Parliamentary consideration of the a f f a i r s of the chartered banks, f o r reappraisals of the need f o r change, and f o r the introduction of measures designed to improve the functioning of the system.  On the whole, the procedure requiring decennial r e v i s i o n  of the Bank Act met with acceptance from the Canadian banking world as w e l l as from non-bankers.  The Finance Act^ provided the banks with a source of funds t o be -  used to s t a b i l i s e t h e i r loaning capacity. The Act had been introduced at the beginning of the F i r s t World War as an emergency measure to provide f o r the expansion of the supply of credit when conditions so demanded, and had been retained i n use a f t e r the War had ended.  A r e v i s i o n of  the act i n 1923 had not changed the basic feature of the act which was that the Treasury Board, on behalf of the f e d e r a l government, could issue Dominion notes to the chartered banks against government and other forms of s e c u r i t i e s .  As t h i s provision permitted the increase of the  Dominion note issue without reference to the amount of gold held i n reserve by the government, i t meant that the volume of money i n c i r c u l a t i o n could be expanded greatly at any time.  Furthermore, while the  Treasury Board was charged with the ad^ministration of the provisions of the Act, there were no d i r e c t means by which the extent of use of the Act by the banks could be controlled.  The banks themselves had to  i n i t i a t e any move to create a d d i t i o n a l money through t h i s source, and the Treasury Board d i d not accept r e s p o n s i b i l i t y f o r the extent of the  9  banks' borrowings. Nor did the Board attempt to influence the banks through the manipulation of the interest rate charged on Finance Act loans.^  Essentially, t h i s f a i l u r e to direct closely the supply of money  i n circulation was due not only to the shortccmiings i n the arrangements provided by the Act but also to a willingness on the part of p o l i t i c i a n s , c i v i l servants, and bankers to accept the idea that monetary fluctuations were self-adjusting and that the banking community contained within i t self the means t o ensure a healthy supply of money. I t was believed i n o f f i c i a l c i r c l e s that a need for more money i n the community would be met by the banks borrowing under the provisions of the Act.  On the other  hand, a decrease i n the demand f o r money would lead to a reduction i n the t o t a l bank borrowings from the government.^ Apart from the broad framework provided by the Bank and Finance Acts f o r the operation of the banks, there were a number of other forms of control existing. Permanent Parliamentary committees served to remind the banks that they were subject to the control of Parliament.  In  addition, to ensure closer supervision of the day-to-day operations, l e g i s l a t i o n provided f o r i n t e r n a l as w e l l as external audit of each bank's a f f a i r s .  Every branch bank was audited at least once each year  at an irregular time by o f f i c i a l s of the bank concerned, and shareholders' auditors were appointed to satisfy the owners of the banks of the veracity of the banks' annual reports.  Provisions were also made for  external audits conducted through the offices of the Inspector General of Banks who, on behalf of the government of the day, was authorised to inspect the a f f a i r s of any bank, this power including the right to enter and inspect the books of individual branches. This l a t t e r provision  10 permitted a form of inspection which had been discussed f o r many years but which, u n t i l the collapse of the Home Bank, had become bogged down on every occasion due to the problems involved i n i t s execution. The special requirements f o r inspection of the a f f a i r s of the chartered banks was deemed necessary largely because of the unique position of the banks i n the Canadian "economy. This public concern was especially evident i n the provisions made f o r control over the note issue of the banks.  The banks i n 1930 were permitted to issue notes  for circulation i n denominations of $5. or multiples thereof up to the amount of t h e i r paid-up c a p i t a l , and paid a one per cent charge on the value of notes issued f o r t h i s privilege.  Though not deemed to be legal  tender under normal conditions, these notes were to be the f i r s t charge on a bank's assets i n the event of liquidation.  During the period from  September 1 to the end of February each year—the time when crops were being moved and there was an extraordinary demand f o r money—additional notes could be issued up to an amount equal to f i f t e e n per cent of the combined paid-up c a p i t a l and 'reserve' account of each bank, but the banks were required to pay f i v e per cent interest on any such "excess" notes circulated.  In order to extend i t s issue of notes beyond these  l i m i t s , a bank was required to deposit an amount equal to the extra issue of notes i n the form of gold or i n Dominion notes with the Central Gold Reserves.  In order to secure bank note holders against the f a i l u r e of  a bank, a "circulation redemption fund" was created through the contributing by each bank of an amount equal to f i v e per cent of i t s average 7 note circulation. The supply of circulating currency i n Canada was composed of these  11  bank notes and of Dominion notes which were issued by the government and managed by the Treasury Board.  Parliamentary enactment established  the amount of Dominion notes that could be i n circulation at any one time, but additional amounts were issued on the basis of the provisions of the Finance Act which, as noted above, allowed the chartered banks to borrow Dominion notes against various types of securities.  Because  of t h i s l a t t e r provision, there was l i t t l e direct control over the t o t a l amount of currency i n circulation, and only the w i l l i n g co-operation of bankers with the Treasury Board ensured that the supply of currency was not extended to unreasonable l i m i t s . This lack of governmental controls over the supply of currency was duplicated i n the lack of enactments concerning the holding of reserves. In 1930, there were no l e g i s l a t i v e provisions requiring the chartered banks of Canada to keep reserves as security for t h e i r l i a b i l i t i e s , and the Bank Act only demanded that of those reserves which a bank elected to hold, forty per cent had to be i n Dominion notes or i n gold deposited i n the Central Gold Reserves.  The banks, however, elected to maintain  reserves, and usually kept a reserve of about ten per cent of deposit l i a b i l i t i e s i n the form of l i q u i d assets. Treated as acceptable assets for t h i s purpose'were Dominion notes, gold balances, cash balances with foreign banks, c a l l and short loans, especially i n the New York c a l l loan market, and readily marketable government securities.  Again, how-  ever, there were no specific requirements other than the one mentioned. "Liquid assets" formed along with the rest of a bank's investment portfolio one of the two major parts of each bank's assets; the other part was composed of the banks' commercial loans issued i n Canada.  Two  12 aspects of the lending business of the Canadian chartered banks are particularly noteworthy since these singular features were major factors i n the functioning of the banking system. One was the provision made i n the "pledge" or "section 88" of the Bank Act. This provision permitted the giving to and acceptance by the banks of security i n the form of assignments of goods i n storage or i n t r a n s i t , and was designed to make i t possible f o r funds to be loaned to producers and manufacturers before the proceeds from the sale of the commodities was realised. Since the goods assigned to a bank under "section 88" provisions could remain i n the hands of the borrower rather than be physically transferred t o the control of the lending banks, t h i s provision added a feature to Canadian banking procedures not generally found i n banking systems i n other countries.  Especially f o r Canada's farmers and their  marketing organisations, t h i s provision of the Bank Act was of primary importance.  I t was widely considered indicative of the shaping of the  banking system to meeting the peculiar requirements of the economy. The second noteworthy characteristic of the banks' credit business was that the Bank Act prohibited the acceptance by the chartered banks of r e a l estate as security for loans. Designed as a measure of protection against speculation i n land and the vagaries of r e a l estate values, t h i s r e s t r i c t i o n , while l i m i t i n g the loaning capacities of the banks, provided a curtailment of investment i n a sphere notoriously susceptible to severe fluctuations.  I t also discouraged the banks from  committing their assets t o long-term loans, a necessary precaution i n view of the fact that the banks' l i a b i l i t i e s were largely i n the form of demand or short-notice deposits. While on occasion unhappy with t h i s r e s t r i c t i o n of t h e i r a c t i v i t i e s , Canadian bankers on the whole tended to  13 recognise the merits of t h i s provision and to accept i t . The other major item i n the assets of the chartered banks i n 1930 was t h e i r holdings of s e c u r i t i e s which could not be termed l i q u i d . the of  For  most part, these were composed of debentures of the highest degree security, usually ones carrying f e d e r a l or p r o v i n c i a l government  guarantees.  As a consequence of using t h i s means of employing funds, the  banks established permanent investment departments which had gradually expanded t h e i r a c t i v i t i e s into acting also as jobbers f o r the purchase and sale of high-grade s e c u r i t i e s .  The chartered banks as a c o r o l l a r y  of these functions were also involved as members of syndicates i n underwriting issues of bonds, usually governmental, school board or h o s p i t a l board issues.  Another important function of the Canadian banks was the maintenance of a system f a c i l i t a t i n g the exchange o f foreign currencies, and thereby aiding the conduct of Canada's trade abroad.  The banks,  with the a i d o f several exchange brokers i n Montreal and Toronto, bought and sold f o r e i g n exchanges i n order to meet the needs of t h e i r customers, and when unable to f u l f i l t h e i r obligations i n t h i s respect within Canada would resort t o the New York or London exchange markets.  At the  same time, the Canadian banks were equipped to aid Canadian merchants through the purchase of b i l l s of sale and b i l l s of lading.  A number  of branches of Canadian banks i n other lands f a c i l i t a t e d the carrying out  of these functions and helped to provide detailed information on  trading conditions abroad to Canadian businessmen.  In spite of these a c t i v i t i e s i n the s e c u r i t i e s and foreign exchange markets by the banks, there was not a money market i n Canada i n  14 1930.  Nor was there an authority charged with c o n t r o l l i n g the amount  of money i n c i r c u l a t i o n , and the bankers themselves, rather than acknowledging any influence over the supply of money through t h e i r loaning business, denied the existence of such a function, claiming that the money supply was determined by economic conditions and the volume of credit by the demands of the market.  This lack of a controlled money  market meant that i n times of economic d i s r u p t i o n there was no authority i n Canada charged with manipulation of the money supply i n order to a l l e v i a t e conditions. In conducting t h e i r business, the chartered banks were completely independent of each other though they d i d come together i n the Canadian Bankers' Association i n order to aid i n the smooth performance of common functions.  Possibly because of the limited number of banks and t h e i r  8 large s i z e , there were few matters which required formal  co-operation.  To f a c i l i t a t e whatever co-operation was deemed necessary was, the function of the Association. purpose i n 1900,  however,  I t had been incorporated f o r t h i s  but more s p e c i f i c a l l y to supervise the operation of  clearing houses and to appoint  curators to supervise the a f f a i r s of banks  9 which ceased payment.  The Association also arranged for the p r i n t i n g  of chartered banks notes and ensured that notes were not issued i n excess of the unimpaired and paid-up c a p i t a l of each bank since every bank was responsible i n proportion to the value of i t s own note issue f o r the outstanding portion of a f a i l e d bank's notes.  The management of the  educational programme for banking employees was  another purpose of the  Association, as was the presentation of the banks' viewpoints on some questions to Canadian governments.  In spite of the power of the  15 individual banks, and their reluctance to delegate authority, i t was generally acknowledged that the Association had great influence i n government c i r c l e s , but i t should be noted that the Association's primary function was to aid the technical operation of the chartered banking system rather than t o form common policies for the banks. In spite of the considerable degree of independence from government control which the banks enjoyed, and their great economic strength and s t a b i l i t y , i t was acknowledged that the banks were susceptible to many pressures which restricted t h e i r a c t i v i t i e s .  The position of the  banks i n relation t o the other sectors of the economic community made them a convenient whipping-boy for p o l i t i c i a n s , especially those of the agrarian West. The powers of moral suasion enjoyed within Parliament by the permanent parliamentary committees on banking and by the federal government were considerable, and were one of the important features of the system. The need f o r amendment of the Bank Act every ten years served to remind the bankers that they were not without public responsibilities.  The need to make numerous reports to the federal government  served the same purpose. And, of course, the "near banks" performed functions which provided alternatives t o the services of the chartered banks. More abstract and less easily identified than were the technical aspects of the banking system, these matters were nevertheless as essential to the operation of the banks.  1.  1930, &5#.  Canada, Dominion Bureau of S t a t i s t i c s , The Canada Year Book.  2. M. C. Urquhart & K. A. H. Buckley, eds., H i s t o r i c a l S t a t i s t i c s of Canada (Toronto, Macmillan, 1965), 246.  16 3.  Canada, 13-14 George V, c. 32.  4.  Canada, 5 George V, c. 3;  13-14 George V, c. 28.  5. C. A. Curtis, "Credit Control i n Canada, " Papers and Proceedings of the Canadian P o l i t i c a l Science Association,  1930,  109.  6. J . W. O'Brien, Canadian Money and Banking (New York, McGraw H i l l , 1964), 186-7. 7. Canada Year Book. 1930, 843. 8. See especially the evidence of Jackson Dodds, General Manager of the Bank of Montreal and President of the Canadian Bankers' Association, before the Commons Committee on Banking and Commerce i n 1934. Canada, House of Commons, Standing Committee on Banking and Commerce, Minutes of Proceedings and Evidence. 1934, Appendix 2. (Hereafter cited as Commons' Committee). 9. This l a t t e r power was transferred to the Minister of Finance by the Bank Act of 1934.  17  III.  THE BANKERS' RATIONALE  Of great importance to the operation of Canada's banking system was the rationale which shaped the conduct of the men c o n t r o l l i n g the banks.  During the depression years with t h e i r extended c r i t i c i s m of the  banking system, the bankers exhibited a remarkable consistency i n t h e i r support of a number of ideas.  These ideas were as e s s e n t i a l t o the  operation of the system, and t o the economy, as were the other aspects of the banking system.  The chartered banks, of course, occupied a p o s i t i o n of surpassing importance i n the a f f a i r s of the nation.  The f a c t that there were so  few of them and these were so large magnified t h i s f a c t .  Because of the  importance of that position, the conduct of the banks was at a l l times of public moment. As more than one writer observed, the fate of the chartered banks was not one which could be divorced from public or By 1930,  governmental i n t e r e s t .  i t was commonly accepted that the  f e d e r a l government could not permit the f a i l u r e of any of the banks because of the great threat to the entire economy of such an event.  The  f a i l u r e of the Home Bank i n 1923 had i l l u s t r a t e d t h i s . The importance of the banks to the economy was f r e e l y acknowledged by Canadian bankers, and so i t appears odd that at the same time the bankers had a singular obsession with the welfare of t h e i r own i n s t i t u t i o n s which precluded t h e i r showing interest i n the effects of t h e i r actions on the rest of the economy.  One author thought that "they  neither understood nor were w i l l i n g to learn the economic of t h e i r own a c t i o n s . "  X  consequences  The bankers made l i t t l e e f f o r t to conceal t h e i r  ia a t t i t u d e i n t h i s matter.  They were p r a c t i c a l men going about managing  the  a f f a i r s of t h e i r companies, and devoted no e f f o r t t o considering  the  broader issues involved by t h e i r conduct. In f a c t , Canadian bankers took pride i n being down-to-earth  business men.  They were s c e p t i c a l of the ideas and ideals of those who  propounded theories about banking and monetary a f f a i r s . the  The r e p l i e s of  bankers t o the r a d i c a l economic t h e o r i s t s l e f t the clear impression  that they f e l t theorising to be valueless.  "The trouble with many of  these banking t h e o r i s t s , " thought the editor of the Journal of the Canadian Bankers' Association, " i s that they have had no p r a c t i c a l  2 experxence i n banking."  The bankers, as one author expressed i t ,  exhibited "a frankness i n the admission of ignorance (about monetary theory) which was l a r g e l y the r e f l e c t i o n of c o n t e m p t . T o the suggest i o n that "Economics i s as s c i e n t i f i c as any other branch of science," one banker r e p l i e d that " I t must be lovely t o be that sure; I am not."^ To say that the bankers ignored i n t h e i r every day management of the  banks the broader consequences of t h e i r p o l i c i e s and the proposals  of monetary t h e o r i s t s i s not to say that the bankers d i d not have t h e i r own b e l i e f s about the s o c i a l role of the banking function.  The rationale  of the bankers rested i n the 1930's on c l a s s i c a l economic theories. They believed that banking, l i k e other aspects of economic a c t i v i t y , operated best under a system of free enterprise, of self-regulation, and of natural readjustment t o demands within the economic community. Monetary management, consequently, was unnecessary.  The "needs of trade"  would ensure, i t was f e l t , that at a l l times the banking world would adjust to provide the best possible l e v e l of economic a c t i v i t y .  Further  19 theorising had no place i n t h i s scheme. Minimal intervention from human i n s t i t u t i o n s , including governments, was desirable.  Rather than  being helpful, i t was thought that tampering with the natural machinery would lead to harmful imbalances which could be corrected only by returning to the natural system and not through attempting to restore balance by a r t i f i c i a l means. This f a i t h i n the self-adjusting powers of economic forces explains much of the bankers' conduct during the depression. Hence the bankers saw t h e i r own role as involving simple responses to the demands made on their f a c i l i t i e s .  They did not believe that they could improve  the situation by taking positive action i n any direction.  Mr. Jackson  Dodds, the General Manager of the Bank of Montreal, suggested i n  1934  that "the banks could hardly 'combat' the effects of deflation as that would imply active, aggressive action which i s not descriptive of the  5 part played i n the economic system by the commercial banks."  A similar  attitude was taken by the banks i n t h e i r reaction to many other problems. "Natural correctives," Dodds said to the annual meeting of his bank i n 1933,  "are •working towards world recovery, but many a r t i f i c i a l barriers  s t i l l impede progress."^ Economic nationalisms, t a r i f f s , and the operations of central banks were thought unnecessary restrictions on the free movement of goods and the stabilisation of the world economy. Canada, the bankers thought, could only wait i n the hope that these hurdles to world recovery would be removed and natural forces permitted to take effect. A key issue i n the debates of the early 1930's, one which demonstrated the bankers' attitude, was that concerning the volume of the  20 c r e d i t supply  i n t h e c o u n t r y , t h e banks' r e l a t i o n s h i p t o t h i s , and t h e  e f f e c t o f t h e volume o f c r e d i t on p r i c e l e v e l s .  As a l r e a d y mentioned,  the bankers b e l i e v e d t h a t t h e volume o f t h e money s u p p l y was determined by t h e "needs o f t r a d e . "  They f e l t a l s o t h a t t h e i r l e n d i n g  was determined by t h e volume o f t h e i r d e p o s i t s loans.  capacity  as w e l l a s t h e demand f o r  Statements o f t h e bankers made i t c l e a r t h a t t h e y d i d n o t con-  s i d e r the consequences on t h e economy as a whole o f c r e d i t d e c i s i o n s made b y them i n t h e i r own s e l f - i n t e r e s t .  Canadian bank o f f i c i a l s  also  r e f u s e d t o acknowledge t h a t t h e y c o u l d c r e a t e bank d e p o s i t s t h r o u g h t h e g r a n t i n g o f l o a n s o r , i n many i n s t a n c e s , t h a t demand d e p o s i t s banks r e p r e s e n t e d  a p a r t o f t h e money  i n the  supply.  Having t a k e n t h i s p o s i t i o n c o n c e r n i n g  t h e s u p p l y o f money, t h e  bankers t h e n r e f u s e d t o admit any c o n n e c t i o n  between t h e i r  a c t i v i t i e s and t h e g e n e r a l l e v e l o f p r i c e s .  The banker, s a i d the  president  o f t h e Canadian Bankers' A s s o c i a t i o n i n 1923,  loaning  " i s not t h i n k i n g  about 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 the e f f e c t which t h e granting o r withholding  of c r e d i t i n t h e p a r t i c u l a r i n s t a n c e w i l l have  7 upon t h e p r i c e l e v e l o f commodities i n t h e c o u n t r y . " 1  theory  The q u a n t i t y  o f money, which r e l a t e d t h e p r i c e l e v e l t o t h e money  r e c e i v e d a c o l d r e c e p t i o n from t h e b a n k e r s . supply was a p a s s i v e t h i n g which v/as a d j u s t e d o f t h e economy. the banks i n 1930  supply,  F o r the bankers, t h e money by the i m p e r s o n a l needs  Having managed s u c c e s s f u l l y on t h a t b a s i s f o r many y e a r s , n a t u r a l l y thought i t b e s t t o c o n t i n u e w i t h i t .  T h e i r a c c e p t a n c e o f t h i s r a t i o n a l e by t h e Canadian bankers can be explained  only i f i t i s recognised  t h a t t h e y b e l i e v e d t h e mechanics o f  t h e economy t o be s e l f - a d j u s t i n g and t e n d i n g  towards e q u i l i b r i u m .  At  21 the source of t h i s belief was a f a i t h i n the theory of the gold standard, a theory which provided the bankers with a simple explanation of economic a c t i v i t y which obviated the need for more complicated economic theories. Not without j u s t i f i c a t i o n did Canadian bankers adhere to i t s principlesj t h e i r country had prospered under the gold standard since the 1850's, and consciously or unconsciously they were unwilling to desert i t s premises i n 1930.  Asked i n 1934 why he believed that Canada would re-  turn to the gold standard, Dodds replied, "Because no better system had been found."  That was the position of most of Canada's bankers.  The bankers' belief i n the gold standard, t h e i r reluctance t o consider new economic theories, their insistence on "laissez-faire" principles, t h e i r attitude on the questions of the supply of credit and of the connection between the volume of loans and price levels were a l l aspects of the bankers' concept of t h e i r role i n the economy. The opposition which developed to the position assumed by the bankers angered them. They sincerely believed that they and their system had performed w e l l under demanding conditions, a b e l i e f which a large part of the business community echoed. Moreover, they f e l t that banking was the concern of bankers, and not of outsiders.  For years their opinions on  a l l aspects of banking had been accepted without serious question by the larger part of the country. The depression changed that situation, and the bankers found themselves faced by a phalanx of authorities on banking questions. They resented t h i s intrusion into what had been a private club. Hence their retrenchment and t h e i r stubborn clinging to conservative principles. The bankers believed, too, that the depression was a natural  22 phenomenon. thought  G e n e r a l Manager M. W. W i l s o n o f t h e R o y a l Bank o f Canada  i t was due t o "human n a t u r e , " and saw no o p t i o n t o p e r i o d i c  r e c e s s i o n s because "as a normal impulse we go w i t h t h e crowd, and i f  9  the crowd i s r i g h t . . . c o n d i t i o n s a r e a l l r i g h t , i f n o t , i t i s t o o bad." Consequently t h e a b i l i t y o f human i n s t i t u t i o n s t o a l t e r t h e c o n d i t i o n s was s t r i c t l y l i m i t e d .  " P r a c t i c a l e x p e r i e n c e , " suggested t h e G e n e r a l  Manager o f t h e Bank o f Nova S c o t i a i n h i s r e p o r t f o r 1932, upon them/_the bankers/.  "has impressed  . .the l i m i t e d p o s s i b i l i t i e s o f banking  action  10 i n a s i n g l e country t o stave o f f the hardships of depression."  The  c o r o l l a r y o f t h i s a t t i t u d e , o f c o u r s e , was t h a t t h e banks c o u l d not b e held r e s p o n s i b l e f o r the conditions then p r e v a i l i n g . measures changing t h e banking system b r i n g about  Nor would extreme  recovery.  In t h e bankers' p h i l o s o p h y , however, t h e d e p r e s s i o n s e r v e d a v e r y u s e f u l purpose.  I t cleansed t h e business world o f t h e unhealthy.  was t h e agent o f c a t h a r s i s ; i t purged t h e s i n f u l .  It  "The s p e c u l a t i v e  p o s i t i o n o f t h e c o u n t r y , " Mr. A. E . Phipps t h e G e n e r a l Manager o f t h e I m p e r i a l Bank o f Canada s a i d t o h i s annual meeting  i n 1930,  "has been, i f  not e n t i r e l y , a t l e a s t t o a v e r y great extent, l i q u i d a t e d ; t h e p u b l i c a p p e t i t e f o r s p e c u l a t i o n i f n o t s a t i s f i e d has been d u l l e d . " " ^  T h i s was  not an a t t i t u d e d e s t i n e d t o endear t h e bankers t o t h e l e s s f o r t u n a t e members o f t h e community, n o r was t h e b e l i e f t h a t t h e b e s t p o l i c y f o r Canada was t o keep h e r own house i n o r d e r and await r e c o v e r y .  "Normal  12 times w i l l r e t u r n , " was a common m o t i f o f t h e bankers. motif i n keeping with t h e i r " l a i s s e z - f a i r e " a t t i t u d e s . a c c e p t a b l e t o a l l Canadians.  i t was a But i t was n o t  23  1. R. C. Mclvor, Canadian Monetary, Banking and F i s c a l Development (Toronto, Macmillan, 1958), 130. Journal of the Canadian Bankers Association, 1934-5, 447. (Hereafter cited as J.C.B.A.) 2.  1  3. Irving Brecher, Monetary and F i s c a l Thought and Policy i n Canada, 1919-39 (Toronto, University of Toronto Press, 1957), 35. 4.  Commons Committee, 1934, App, 2, 430.  5.  Ibid., 285.  6.  Bank of Montreal, Annual Report. 1933, 11-12.  7.  Commons Committee, 1923 , 26; quoted i n Brecher, Op_. c i t . . 38.  8.  Commons' Committee, 1934, App. 2, 301.  9.  Ibid., 453.  1  10.  Bank of Nova Scotia, Annual Report, 1932, 22.  11.  Imperial Bank of Canada, Annual Report, 1930. 35.  12.  Bank of Montreal, Annual Report, 1933. H .  24 IV. DEPRESSION  Although an essential part of the Canadian economy, the chartered banks i n the f i r s t years of the depression did not decline i n p r o f i t earning to an extent equal to the decline i n the economy as a whole. While businesses and agricultural enterprises floundered i n the recession, often to a state of bankruptcy or near-bankruptcy, the banks continued to maintain strong l i q u i d positions. In part t h i s resilience of the banking system, i t s a b i l i t y to weather the storm with minimum disruption at a time when many businesses were i n acute distress, was a cause of acriminious verbal abuses directed at the banks. Rightly or wrongly, the banks were for many of the unfortunate the symbols of conservative complacency and of the comfort of the affluent. The response of the banks to the conditions was one which might w e l l have been anticipated, although among the banks themselves "no concerted policy was followed."  1  Their immediate reaction was to re-  trench, to argue the merits of the banking system, and to c a l l f o r patience and economy from the Canadian people i n the expectation of early improvements. The s t a b i l i t y of the banks themselves provided, of course, an invaluable basis of argument f o r the bankers who could point with some pride to the large numbers of bank failures i n the United States and i n other countries and contrast these with the s t a b i l i t y of the Canadian banking structure. Among other comparisons of a similar temper, the Canadian banking system was visualised as resembling " i n many respects a staunch and seaworthy vessel capable of riding the waves 2 not only at high t i d e but also at ebb-tide."  This l i n e of argument was  not to be ignored especially by those who acknowledged that the f i r s t  25 responsibilities of the banks were to their depositors and that the maintenance of their a f f a i r s on a sound basis was essential to the nation as a whole. But while the bankers were issuing assurances of the merits of the banking system, there were several factors i n the situation which accentuated the general unease.  One of these was the i n a b i l i t y of the  chartered banks to propose any positive and appealing remedy to meet the depression. Many people thought that imaginative leadership should have come from the banks because of their important position.  For their  part, i f there was a consistent policy pursued by the banks i t was that no major changes ought to be i n i t i a t e d during the disturbed economic conditions prevailing i n the early 'thirties and that the economy was strong enough to recover on i t s own with the aid which could be given through the practicing of reasonable economy by a l l Canadians.  Industry,  prudence, and self-restraint were thought commendable characteristics. When, however, the depression continued and became more severe, the a b i l i t y of people to accept these panaceas was exhausted, and agitation for more vigorous policies developed. For many i t was incongruous that the bankers should relax i n t h e i r padded leather chairs waiting for improved conditions while the victims of the depression bore the brunt of the suffering. A second feature which caused distrust of the banks among large numbers of people was the decrease i n the volume of bank loans during the early 1930's. Between October, 1929,  and October, 1933,  the t o t a l  of outstanding loans i n Canada declined from $1,863 thousand to fl,l60 thousand, a decrease which the banks argued was largely due to the lack  26 of worthy borrowers rather than to any desire on t h e i r part t o reduce 3  loans.  The banks vehemently and consistently denied having as t h e i r  policy the r e s t r i c t i o n of credit.  Indeed, bank interest rates on loans  declined s l i g h t l y i n these years, but as the bankers pointed out t h i s had not alleviated the situation since i t was necessary that "producers must have confidence that they can profitably employ credit" before they w i l l a v a i l themselves of the banks' resources.^ The reduction i n the volume of credit issued by the banks, whether as a matter of policy or a trend necessitated by the conditions of the economy and the lack of confidence among businessmen, and the awareness of large numbers of people of that reduction, had important  effects.  Usually i t was thought that the banks were attempting to improve t h e i r l i q u i d position and that to do so they curtailed credit and as a consequence lessened business a c t i v i t y .  I t appeared as though the banks  were withholding loans when they ought t o have been promoting borrowing. To many people, then, the position of the chartered banks i n the early 1930's demonstrated the cost to the country of the pursuit by the banks of self-interests and consequently of the need for some means of making them responsible to the public for t h e i r policies. Another element i n the alienation of the banking community was the argument which developed over the question of bank credit and the connection of t h i s with the t o t a l supply of money i n the country.  The crux  of the debate concerning the volume of credit and the price levels lay i n the unwillingness, or the i n a b i l i t y , of the bankers t o acknowledge f i r s t of a l l that there was any connection between their own loaning policies and the aggregate amount of money i n circulation and therefore  27 with the l e v e l of prices, and, secondly, i n the bankers' contention that i n any event the r e a l i t i e s of the Canadian economy ensured that the finances of the nation were self-regulating and that i t was f o l l y to intervene i n the self-adjusting mechanisms of the market.  Unfortunately  the persistence of the bankers i n these matters was interpreted as unwarranted stubbornness and created further antagonism. In these circumstances, the bankers suggested a number of factors which they f e l t demonstrated that they and their institutions and the system under which they operated were not to blame f o r the adverse conditions.  The f i r s t fact to be borne i n mind, i t was proposed repeatedly,  was that the depression was a world-wide phenomenon over which neither they nor any other single element could exert much control.  Canada was  only one sector of a much larger arena of suffering and, i n part because of i t s remarkably secure banking system, had suffered less than most of the other sectors. The conservatism of the bankers and t h e i r unwillingness to abandon t r i e d principles i n favour of more exciting and popular proposals were suggested as essential factors i n gaining that fortunate position. From the argument that the source of the problems were to be found outside Canada a number of conclusions were drawn. Because of the international disruption of trade, and the deflation on a number of foreign currencies, Canada had been affected through decreased sales abroad, and by lower prices f o r those goods which were sold.  As a  result, within Canada i t s e l f prices had f a l l e n especially i n the major export areas of primary products.  I t was the deflationary movement, the  bankers suggested, and the fact that i t f e l l with unequal severity on  28 primary producers and manufacturers that had been a root cause of Canada's troubles.  Since, however, the Canadian banks had no control  whatsoever over the prices which were paid i n foreign markets f o r Canadian goods—these were determined by the forces of supply and demand tempered by economic nationalisms—the bankers thought that they could hardly be charged with the blame for the consequences.  Nor did they f e e l that i t  was possible f o r any Canadian i n s t i t u t i o n to improve the circumstances through efforts to influence the value of the Canadian dollar i n foreign exchange markets.  As a result, they maintained that the depression i n  Canada was not essentially caused by a money c r i s i s but by the aberrations i n international commerce. Monetary problems were thought t o be the  outcome of these i n s t a b i l i t i e s rather than the cause. At the same time, as a result of the lower price levels for goods  and the lack of confidence i n stable future price levels and i n the market conditions i n general, manufacturers tended to decrease t h e i r inventories and thereby cut back on t h e i r need f o r credit from the banks. In t h i s way, the bankers explained, the f a l l i n loans to non-farmers had come about, a f a l l which v/as not caused by any policy on their part but because of the exigencies of the prevalent conditions.  As for the  farmers, i t was argued that the banks continued to offer credit to those whose circumstances warranted i t .  At no time would the leading bankers  admit that i t was t h e i r policy to r e s t r i c t credit.  In fact they suggested  that they were more prepared than ever to aid any business man who could come t o them with a reasonable proposition.  The editor of Canadian  Business supported the bankers viewpoint. "The Canadian banks are 1  l i q u i d , " he suggested,"not through fear of withdrawals but because of the lack of satisfactory borrowers."^ Circumstances, however, made i t  29 impossible for large numbers of people and firms to f u l f i l the banks' credit requirements. The bankers also argued that even before the depression h i t Canada they had been advising caution on the part of some sectors of the economy and had attempted to restrain the demands f o r credit.  To one banker  t h i s had been an even more unpopular course than that taken during the early 1930's since i n the late 'twenties people were obsessed with an over-confidence i n their a b i l i t i e s to profit from the expansion of the economy and any efforts by the bankers to curtail.individual p a r t i c i pation i n the expansion was met by strong opposition.  Particularly the  banks had stressed the need f o r caution by persons investing i n securities, a c t i v i t i e s which had become s i g n i f i c a n t l y influenced by the optimism of the times and for which the bankers considered i t ill-advised to grant credit.  I t had, however, been most d i f f i c u l t to assume the  role of a Cassandra. The accuracy of the bankers' statements i n t h i s regard were, however, doubtful.  The claim of the bankers that they had advised against  over-investment i n the late 1920's was not reflected i n their loaning business.  Late i n 1928 and early i n 1929, the banks increased their  borrowings under the Finance Act, presumably i n order to issue more credit. And the volume of bank loans increased i n the period. S. R. Noble, an Assistant General Manager of the Royal Bank of Canada wrote i n 1937 that "As might have been expected with the boom conditions then existing, the general banking condition was over-extended."^ No matter how the banks argued during the depression, they could not evade the s t a t i s t i c s .  30  With the coming of the depression, the bankers' f i r s t considerat i o n was, as the General Manager of the Bank of Montreal expressed i t , "Protecting depositors and conserving the assets of borrowing customers." By and large, the o f f i c i a l s of the other banks took the same position. This they claimed to do primarily i n co-operation with their borrowing customers who agreed with the need to bring their inventories into l i n e with current prices and marketing prospects, and to extend a l l their efforts towards making their businesses profitable.  For t h e i r own part,  bankers pointed to the r e l a t i v e l y high degree of l i q u i d i t y with which they had entered the 1930's, and claimed to have sought to maintain that position i n spite of adverse pressures.  In order to secure their  institutions further, most of the banks made transfers from their reserve funds into the hidden reserves which were held against losses on loans. The Inspector General of Banks reported to the Prime Minister early i n 1934 that i n spite of fears to the contrary on the part of the government and the bankers, these transfers had not created any general unease 8 concerning the s t a b i l i t y of the banks. It must be noted that the bankers saw their policies as essential to combat the effects of the depression.  They suggested that, while  searching for l i q u i d i t y i n t h e i r own assets, and conservative and stable policies i n the a f f a i r s of their customers, that they also carried on t h e i r books many creditors whose a f f a i r s were not i n the same strong positions that they had been i n when the loans had been granted.  That  so many businesses had been able to continue i n operation i n spite of the conditions was thought demonstrative of the value of the banks' policies.  Similarly, the bankers stated that they had continued to give  f i r s t consideration to farmers and to carry loans made to t h i s class of  31  borrower even when their circumstances were becoming less attractive. To the charge that the banks had restricted the lending powers which were granted to individual managers, the banks replied that t h i s contention was without basis and that no general changes had been made i n the discretionary limits of branch bank managers. Of course i t was argued that the banks were not pursuing policies which agreed with these statements, a charge which was met o f f i c i a l l y by the representatives of the banks i n their evidence given before the Commons Committee on Banking and Currency i n 1934 through quotations from circulars issued by a number of the banks to t h e i r branch managers. These circulars had exhorted the managers to use a l l possible means to aid t h e i r customers bearing i n mind while doing so that the safety of the bank's position must be preserved. The attitude taken by the banks towards public bodies was much the same as that followed with respect to private companies and individuals. The banks again proposed the necessity f o r economy, and stated their belief that governmental budgets must be balanced, a suggestion i n which they were supported by the Committee on Banking and Currency i n i t s report to the House of Commons i n 1932. For their own part, the banks claimed that they were attempting to eliminate unnecessary expenses, collect a l l revenues where these were due, especially through the imposition of service charges on unprofitable accounts and on cheques returned through the clearing houses.  They noted, however, that they  had deferred reducing the salaries of their employees u n t i l they had had no alternative. But a l l these factors were regarded by the banks as but atoms i n  32 a larger whole, and that only i n the aggregation of innumerable contributions to the economic well-being of the nation would improvement be attained.  The editor of the Journal of the Canadian Bankers'  Association expressed t h i s feeling t h i s way:  "Banking, money, credit,  industry, commerce and prices are organically interrelated, and these, i n turn, cannot be considered without regard to international trade. I t i s therefore impossible to restore equilibrium to the whole by conceng trating efforts upon one of the parts." For the bankers, not unreasonably, i t was prime evidence of the efficiency of their institutions and of the established system of monetary control that the banks had proven themselves capable of f u l f i l l i n g their functions i n times of stress.  I t was suggested i n 1931  by one banker that nothing could be wrong with a banking system which 10 had not suffered a single bank f a i l u r e i n spite of the upheavals. But the depression brought new conditions to Canada and changed the temper of the people towards the banks. The Report of the Royal Commission on Banking and Currency commented on t h i s change: The commercial banker has very properly i n the past regarded h i s responsibility as mainly confined to safeguarding the interests of his depositors and shareholders and to making judicious loans and investments with the funds entrusted to him. But i t now i s coming to be realised that other less obvious but more important responsibilities rest upon the banking system of a country. I t must bear a share i n trying to maintain s t a b i l i t y and to regulate the quantity and flow of credit, i t must interest i t s e l f i n price levels, and i n the fluctuations of exchange, i n international monetary co-operation—in short, i n a l l the matters which concern national finance. 11 In the end analysis, too many people were suffering from the depressed conditions, and i n looking for the causes of that suffering found i n  33 the free enterprise system weaknesses they f e l t ought to be removed. The a b i l i t y of the banks to maintain reasonable s t a b i l i t y over a long period of time was not sufficient cause for the acceptance of the situation of the early 1930 s with the complacent remark that t h i s was !  but a swing of the pendulum of economic a c t i v i t y to the negative side. This type of explanation was not acceptable after a long period of depression, and the condition of large numbers of people served to ignite smoldering animosities against the banks. These animosities were largely responsible for the demands which aimed at creating a monetary authority responsible to the nation as a whole. The Royal Commission on Banking and Currency acknowledged "the 12 absence i n Canada of any single banking authority" charged with responsibility f o r national financial matters, for as one commentator on the banking system has observed, the policies of the chartered banks were concerned with "such technical problems as the choice of proper credit r i s k s " the effects of which on t o t a l deposits and on interest 13 rates v/as entirely fortuitous.  The f a i l u r e of the bankers to consider  the wider ramifications of this hiatus was one of the more unfortunate aspects of their conduct.  1. H. F. Patterson, General Manager of the Bank of Nova Scotia; Commons' Committee, 1934, App. 2, 372. 2. M. Beaudry Leman, President of the Canadian Bankers' Association; J.C.B.A.. 1930-1, 149.  34  . 3. Commons' Committee, 1934, App. 2, 350. In his budget speech to the 1932-33 session of the Canadian Parliament, the Minister of Finance, Hon. E. N. Rhodes, commented that "The chief concern of our banks would appear to be the d i f f i c u l t y of finding satisfactory outlets for the investment of their surplus reserves." House of Commons, Debates. 1932-3 Session, 3209. 4. Editor, J.C.B.A.. 1934-5, 443.  5. Canadian Business. A p r i l , 1933, 21. 6. S. R. Noble, "The Monetary Experience of Canada During the Depression," i n A. D. Gayer, ed., The Lessons of Monetary Experience (New York, Farrar & Rinehart, 1 9 3 7 ) , 118. See also Mark K. Inman, "Experience i n Canadian Banking, 1929-1934." Unpublished Ph.D. dissertation, Harvard University, 1937, 357. 7.  Commons' Committee, 1934, App. 2, 285.  8. Public Archives of Canada, R. B. Bennett Papers, microfilm; 61979, C. S. Tompkins to Bennett, New Year's Day, 1934. (Hereafter cited as Bennett Papers). 9.  Editor. J.C.B.A.. 1934-5. 443.  10.  M. Beaudry Leman, Ibid..  11.  Royal Commission on Banking and Currency, Report, 12..  12.  Ibid.. 6 1 .  1931-32,  166.  13. R. C. Mclvor, Canadian Monetary. Banking and F i s c a l Development (Toronto, Macmillan, 1958), 129-30.  35 y.  BANK CREDIT AND THE SUPPLY OF MONEY  Of the functions of the banking system i n Canada i n the early 1930' s, the mobilization of the money supply and the provision of credit were among the more important.  Prior to the 1930's, the policies  followed by the chartered banks were not associated with the supply of money i n the community as a whole. Under the gold standard system there was no necessity to watch closely the banks conduct since the* supply 1  of credit was adjusted automatically through the movement of gold to the demands of the economy. The extreme conditions of the 'thirties precipitated, however, a revolution i n the attitudes towards the financ i a l principles prevalent i n the business community. There was great interest shown i n monetary matters, an interest which led to changes i n the manner i n which many Canadians approached the question of control of the nation's money supply.  Problems involving the volume of money  i n circulation and the effects of fluctuations i n the supply of money became of pre-eminent interest and were the subject of much debate among economists, politicians, and lay people.  The banking system, and the  conduct of the banks, were, naturally, an integral part of the debate. There were three main elements composing the money supply of Canada i n 1930:  Dominion notes i n circulation, chartered bank notes,  and deposits i n the chartered banks which were payable i n Canada i n Canadian dollars.  Although this latter part consisted largely of de-  posits which were legally subject to notice before withdrawal, for practical purposes they were demand deposits and served as money. Bank deposits made up by far the largest part of the money supply, although many bankers would have denied that deposits were i n fact money.  36 Since the value of Dominion and Bank Notes i n circulation at anyone time was limited by parliamentary legislation, with the exception of the Dominion Notes issued under the Finance Act, the principal fluctuations i n the supply of money tended to take place i n the deposits held by the chartered banks. The unfortunate aspect of the situation i n Canada was that the banks did not acknowledge any responsibility for these fluctuations. Canadian bankers believed that the volume of deposits lodged i n their institutions was determined by the money available within the community and the willingness of individuals to save. According to their thinking, the t o t a l of deposits was not dependent on the credit policies followed by the banks. To suggest that i t was possible for the banks to create deposits, and therefore money, was anathema to the bankers.  "The assertion i s made that the banks create credit," one  writer noted i n the Journal of the Canadian Bankers' Association, and then continued with the claim that "Banks have not the power to create something out of nothing—no man has."*'" Before the Commons Committee on Banking and Commerce i n 1934,  the bankers were obliged to defend their  position, but no essential concessions were made. Mr. Jackson Dodd of the Bank of Montreal did allow that "every bank loan creates a deposit momentarily," but pointed out that the increase i n deposits was quickly  2  nullified by the reduction of another loan.  Instead of allowing that bank credit determined the level of deposits, the banks claimed that i t was the volume of deposits which determined the level of credit. One writer sympathetic to the bankers" position thought that the banks "provide the reservoirs and channels into which the available funds of the public gravitate," and are then,  37 by gravity, directed "to the depressions. • .where funds are most needed. Mr. Dodds made t h i s clear i n an a r t i c l e i n the bankers' journal, noting that " i t i s upon notice of savings deposits that banks depend f o r funds to lend to borrowers."  He voiced contempt f o r those "whose minds, work  i n reverse" and who believed "loans r e a l l y create deposits."^  Coupled with t h i s unwillingness to acknowledge the a b i l i t y of the banks t o expand the money supply through t h e i r loaning a c t i v i t i e s was the r e f u s a l o f the bankers to accept any r e s p o n s i b i l i t y f o r c o n t r o l over the t o t a l supply of c r e d i t .  Moreover, the bankers believed that i n view  of the n a t u r a l forces at work i n the economy, i t was unnecessary to t r y to c o n t r o l the volume o f c r e d i t .  Insofar as the Canadian bankers d i d  have a credit p o l i c y i n the early 1930' s, i t was that loans were to be made s o l e l y on the merits of i n d i v i d u a l applications, on what they chose to term the 'legitimate requirements' of the economy, and when t h i s conception of t h e i r function i s coupled with the b e l i e f that the demands of the market determined interest rates, i t i s evident that the bankers recognised no need to i n t e r f e r e i n the normal functionings of the market. For commercial banks t h i s p o s i t i o n was unassailable.  As commercial  banks, the Canadian chartered banks performed commendably.  A comparison  with t h e i r counterparts i n other countries demonstrated t h i s .  But the  e f f e c t s of the Canadian banks' credit p o l i c i e s on the money supply and on i n t e r e s t rates i n Canada was accidental.  The banks were, therefore,  open to c r i t i c i s m f o r f a i l i n g to consider the consequences f o r the community of t h e i r credit p o l i c i e s .  In spite o f the bankers' arguments, c r i t i c i s m was heaped on the banks because of t h e i r c r e d i t a c t i v i t i e s .  In the early 1930's, the t o t a l  38 volume of bank loans, declined causing charges that i t was the policy of the banks to c u r t a i l credit. It was thought that the banks were employing funds abroad because of the higher interest rates available there, and that the banks had maintained interest rates at a high level i n Canada at a time when low rates were to be desired.  The movement of bank funds  into more liquid assets, largely first-class securities, was also attacked as detrimental to recovery. In one respect i n particular the effects of the banks policies 1  came i n for severe attack.  It was charged that the banks i n their  curtailment of credit were reducing the general level of prices i n Canada. The economist of the Royal Bank of Canada fed this feeling i n his letter of February, 1932 when he stated that the controlling influence (in the present depression) had been the mismanagement of money and credit. The average price level i s determined by the relation of goods and services rendered to the volume of money supply, and the disastrous f a l l i n the general price level would not have occurred had the money supply been properly regulated. 5 Vancouver bank c r i t i c , G. G. McGeer, found this passage useful i n attacking the banking system i n spite of the fact that the banks did not acknowledge any responsibility for the total money supply. The banks were equally adamant that their policies were not responsible for the conditions.  It was pointed out to the Commons Committee  on Banking and Commerce that "the f a l l i n prices. . .was not confined to Canada," and that " i n looking to the relationship between the decline of wholesale prices i n Canada and the shrinkage of current loans, the latter should be regarded as proceeding from the former, and not as being the cause of i t . " ^  Similarly the bankers argued that the drop i n total bank  39 loans was a result rather than a cause of- the depressed conditions. Other factors also contributed to the decline i n loans, not least of these being the general desire on the part of business men to evade the repercussions should there be further deflation of prices. Purchases of durable goods decreased as did business inventories as precautions were taken to guard against lower prices. The quest for liquidity was, consequently, general, and was reflected i n the lower volume of loans. The banks stressed that they were not restricting credit as a matter of policy.  "There i s an abundance of money available f o r sound commercial  purposes and credit i s not stinted," the president of the Bank of Montreal  & claimed i n  1930.  Nor would the banks admit to having raised their interest charges on loans.  When requested by Prime Minister Bennett i n 1932 to reply to  charges i n this respect, the banks had no hesitation i n denying the claim that loan interest rates had been raised by the banks.^ The banks claimed before the Royal Commission on Banking and Currency that " i t has been the aim of the Chartered Banks to maintain rates of interest at a steady rate," so that borrowers could "make their commitments without fear of their interest costs being subject to violent fluctuations.""^ At the same time, however, the investments of the chartered banks i n securities were being increased, and this increase drew criticism on the banks. Again the banks argued that they were the victims of the conditions.  It was pointed out to the Commons Committee on Banking and  Currency by Mr. Dodd  of the Bank of Montreal that the increase i n bond  holdings which was a feature of the banks' assets statements was something which the banks did not desire. He pointed out rather effectively  40 that the banks stood to profit more from the employment of their funds i n loans than they did i n most s e c u r i t i e s .  11  The charge levelled against the banks that they were investing funds i n the New York money market which should have been employed i n Canada was also vehemently rejected by the bankers.  In their rebuttal  of the charge, they suggested that their affairs necessitated the maintenance of a portion of their assets i n liquid form and that the New York c a l l loan market provided the best possible means of doing so. But only the minimal amount of money was employed i n this way, a policy which the banks claimed was not only costly to the banks i n terms of earning power, but vfaich was one which aided the Canadian economy by keeping the maximum amount of money available to Canadian borrowers. president of the Bank of Montreal pointed out at the end of 1929  The  that  the banks had had the opportunity to invest funds for long terms at high rates of interest i n New York but had declined to do so as a result of which "every legal need of this country was taken care of at much lower rates than prevailed i n the United States,"  12  In these circumstances, the lack of an institution charged with controlling the monetary supply of Canada had unfortunate consequences. At a time vihen every available resource ought to have been employed to stimulate the banks' loaning capacities and to increase the volume of money i n circulation, the supply of credit was being contracted. To the charge that they were constricting loans through tightened credit requirements the banks replied that they were employing normal credit standards and were continuing to cater to the justified needs of business. They repeatedly denied having a policy aimed at reducing loans. But the  41 e f f e c t was, none the l e s s , that the t o t a l volume of loans was declining since fewer i n d i v i d u a l s and businesses found i t possible to meet the banks' requirements.  The key to the s i t u a t i o n l a y not with the banks, but with the Canadian government.  The instrument at hand was the Finance Act. In  s p i t e o f the f a c t that the Treasury Board was empowered to administer the provisions o f the Act, that body was averse t o influencing the amount o f notes which the banks chose to take up under the Act. The Board f a i l e d also to manipulate the i n t e r e s t rate i n order to stimulate or retard the volume of bank c r e d i t , and although the claim was made i n evidence given t o the Commons' Committee on Banking and Commerce i n 1928 that the rate was changed i n response to the general movement o f i n t e r e s t rates on the New York c a l l loan market, there i s no evidence that t h i s was i n f a c t the case i n the e a r l y 1930's.  The banks, however, chose not t o u t i l i s e the f a c i l i t i e s provided by the Finance Act.  Although the Department o f Finance could have  influenced the actions of the banks, there was no guarantee that the banks would have co-operated f u l l y .  This state of a f f a i r s was made.clear i n  November, 1932, when the chartered banks were required to borrow $35 m i l l i o n under the Act, but chose subsequently to reduce t h e i r indebtedness t o the government to t h i s minimal l e v e l rather than expand t h e i r loaning business. place.  Consequently the anticipated expansion of money d i d not take  The fact that i t had been necessary to v i r t u a l l y force the banks  to take up the #35 m i l l i o n was, too, i n d i c a t i v e of the inadequacy of the arrangements to provide machinery f o r the regular manipulation of the money supply.  As a means o f contracting the money supply the Act was  42  also powerless since the chartered banks did not rely on borrowings Tinder  the Act to any extent, a tendency forced on them because any  Finance Act borrowings were for short terms only, and i t was generally accepted among bankers that loans under the Act were a sign of weakness within the bank borrowing. ^ 1  The conduct of the Treasury Board and of the Ministry of Finance reflected the "orthodox" financial policy followed by the Canadian government in the first part of the  1930's.  Essentially the Bennett adminis-  tration stood by the conservatism of the chartered banks, and looked on the proposals to make changes in the monetary system as nothing short of immoral. The stalemate in monetary control which was the outcome of this situation was resolved only by the repeal of the Finance Act and the creation of the central bank.  1.  R. J. Deachman, "Credit and Money," J,C.B.A.. 1 9 3 4 - 5 .  2.  Commons' Committee, 1 9 3 4 , App. 2 , 3 4 3 .  3.  E.L.S. Patterson, Canadian Banking (Toronto, Ryerson, 1932), 16.  4.  Jackson Dodds, "Banking and Currency," J.C.B.A.. 1 9 3 2 - 3 ,  5.  Financial Post. Sept.. 2 , 1933, 13.  6.  H. F. Patterson, Commons' Committee, 1 9 3 4 , App, 2 , 3 7 4 .  7. Bennett Papers; Bennett, Feb. 1 2 , 1 9 3 2 .  8.  61987-91,  495.  305.  Canadian Bankers' Association to  Bank of Montreal, Annual Report. 1930 . 6",  9. Bennett Papers; Bennett, March 1 8 , 1 9 3 2 .  62040-5,  Canadian Bankers' Association to  1 0 . Royal Commission on Banking and Currency, Proceedings. 3 2 8 1 ; quoted R. C, Mclvor, Canadian Monetary. Banking and Fiscal Development (Toronto, Macmillan, 1 9 5 8 ) , 1 2 9 - 3 0 .  43 11.  Commons' Committee, 1934, App. 2, 336.  12. Bank of Montreal, Annual Report. 1929; quoted J . Castell Hopkins, ed., The Canadian Annual Review of Public Affairs (Toronto, Canadian Annual Review Company, 1930), 1929-30, 670-1. 13. An o f f i c i a l of one of the banks noted later that "During this period (1929-32) two of the larger banks had not found i t necessary to borrow (under the provisions of the Finance Act) and, as a result, invidious comparisons were being made at t he expense of those who were borrowing." S. R. Noble, "The Monetary Experience of Canada During the Depression," i n A. D. Gayer, ed., The Lessons of Monetary Experience (New York, Farrar & Rinehart, 1937)* U 9 .  44 VI.  THE BANKS, FOREIGN TRADE, AND FOREIGN EXCHANGE  P r i o r t o the establishment of the Bank of Canada, the chartered banks provided the sole machinery i n Canada f o r the making of transactions i n foreign exchanges.  Consequently they were deeply concerned  with the exchange value of the Canadian d o l l a r and with the f a c t o r s which determined that value.  The amount of attention given trade and  foreign exchange questions i n the annual reports o f the banks was i n d i c a t i v e of t h i s i n t e r e s t .  The banks, however, were not alone i n  t h i s respect, f o r many other groups shared t h e i r concern.  In the f i r s t  part o f the 1930's, the exchange value of the Canadian d o l l a r i n i n t e r n a t i o n a l markets commanded a great d e a l of attention from most sectors of the economy, and provided the t o p i c f o r a large part of the discussions of the time.  Of course t h i s was a matter which concerned a very  large number of people.  There were few business men or farmers not  dependent to some extent on the export trade.  Involvement  of Canadians i n questions r e l a t i n g to exchange matters was  on the part heightened  by the f a c t that statements were being issued r e g u l a r l y by various bodies a t t r i b u t i n g the depression t o causes which had t h e i r sources outside Canada.  To these statements, the bankers were contributors.  I t was not always c l e a r what r o l e the Canadian chartered banks played i n Canada's i n t e r n a t i o n a l dealings.  The usual concept, held i n  common by the bankers and most men involved d i r e c t l y i n commercial a c t i v i t i e s , was that the banks dealt i n foreign exchange and generally aided the conduct of Canada's foreign trade without having any r e a l c o n t r o l over the t o t a l volume of transactions or the market value of the  45 Canadian dollar.  The matters, i t was thought, were determined by  "world conditions." Hence Canadian bank o f f i c i a l s saw their role as that of purchasers of foreign exchanges for importers and debtors with obligations abroad, and as sellers of exchange for exporters. They believed themselves to be middlemen or agents.  Their dealings i n  foreign exchange on their own account was thought of limited moment i n determining exchange valuations.  In any event, Canadian transactions  were insignificant i n the world trading arena.  President S. J . Moore  of The Bank of Nova Scotia synopsised the nation's position of dependence on external conditions and Canada's relative impotence i n determining those conditions i n his report for 1930. dependent on a world market," he claimed.  "We are a l l of us  "We cannot have a healthy  condition of prosperity here unless those to whom we s e l l are also prosperous."  1  Hence the chartered banks were always dubious of the value  of a central bank as a force i n international dealings.  The banks saw  their own offices abroad as aids i n performing the functions of exchange as well as providers of information to Canadian exporters and as aids i n the bringing of new business to Canada. They did not.view them as v i t a l factors i n the determination of currency values i n international markets. Having the concept of an impersonal world exchange market, the bankers denied responsibility for foreign exchange and trade conditions. Opinion outside the banks was not, however, i n f u l l agreement with this opinion.  There was deep unease i n some circles within Canada about the  operations of the foreign exchange markets and the consequences for Canada of those operations. This unease was explicit i n much of the evidence given before the Royal Commission on Banking and Currency i n 1933, for example, that of the City of Calgary which was disturbed with  46 the exchange rate of Canada's dollar, and questioned the role of the  2 chartered banks i n exchange operations and i n gold transactions. The vagueness of the knowledge held about the nature of the exchange markets and of the factors which determined the value of Canada's dollar abroad appears to have stimulated distrust of the existing situation. There were two proposals which dominated the suggestions made by those interested i n the topics of exchange and trade.  One was that i t  would be most helpful i f the exchange value of the Canadian dollar could be stabilised.  It was generally believed that the extent of  Canada's exports had been curtailed severely because of exchange f l u ctuations which made both sellers and buyers reluctant to trade. The uncertainties i n the rates of exchange were immediately translated into uncertainties i n trading circles.  Either the seller or the buyer was  hurt by exchange fluctuations, and the dread of changes consequently retarded trade.  Canadian Business thought that "world trade has been  3 choked by the gyrations i n exchange."  The bankers were prominent too  in suggesting the importance of exchange stability, but differed from many who shared this conviction i n that they maintained that Canada could do l i t t l e to bring about stability through management of Canada's exchange transactions. The second popular proposition was that the immediate trade and exchange problems facing Canada could be resolved by the deliberate devaluation of the Canadian dollar.  It was claimed by those who sup-  ported this proposition that the chief advantage to be gained was that of increased exports due to the lowering of costs to foreign buyers, and that greater revenues i n Canadian dollars would be obtained because of  47 t h e h i g h e r exchange v a l u e o f f o r e i g n c u r r e n c i e s i n terms o f t h e  dollar.  The c h i e f s t i m u l u s t o t h i s p r o p o s a l came from w i t h i n t h e P r a i r i e g r a i n t r a d e , and wheat p r o d u c e r s p o i n t e d out t o t h e b a n k e r s t h a t d e v a l u a t i o n would e n a b l e them b e t t e r t o pay o f f t h e i r d e b t s t o t h e b a n k s .  For the  p r o p o n e n t s o f t h e d e v a l u a t i o n i d e a , t h e arguments s u p p o r t i n g t h e p l a n were s t r a i g h t f o r w a r d , as was e v i d e n t i n t h e p r e s e n t a t i o n o f t h e V i k i n g S e r v i c e C l u b o f W i n n i p e g t o t h e R o y a l Commission on B a n k i n g and C u r r e n c y . The C l u b t h o u g h t t h a t s i n c e " o u r c h i e f c o m p e t i t o r s , A u s t r a l i a and A r g e n t i n a , a r e o p e r a t i n g a t a c u r r e n c y c o n s i d e r a b l y b e l o w o u r s , we a r e a t a g r e a t d i s a d v a n t a g e i n the e x p o r t m a r k e t . " ^  V a r i a t i o n s on t h i s  theme were p o p u l a r t h r o u g h o u t t h e P r a i r i e s .  On few m a t t e r s were t h e bankers more v o c i f e r o u s t h a n i n t h e i r opposition to devaluation.  M o r e o v e r , t h e y were not a l o n e i n h o l d i n g  t h a t o p i n i o n * t h e World Economic S u r v e y o f  1932-33 o f  t h e League o f  N a t i o n s a l s o s t a t e d c o n c e r n about t h e e f f e c t s o f d e v a l u a t i o n .  5  The  C a n a d i a n b a n k e r s saw l i t t l e b u t e v i l , o r m i s g u i d e d i n t e n t , i n a movement t o d e v a l u e t h e d o l l a r , a s t h e y f e a r e d t h a t such a move would h u r t C a n a d a ' s c r e d i t a b r o a d a t a t i m e when she was s t i l l l a r g e l y dependent on f o r e i g n c a p i t a l sources.  "Among t h e s u p p o r t s t o be m a i n t a i n e d - i n good c o n d i t i o n  6 i s our n a t i o n a l c r e d i t , " one b a n k e r suggested i n 1932.  The f e d e r a l  government t o o k t h e same p o s i t i o n a s d i d many p r o v i n c i a l and m u n i c i p a l governments w h i c h had o b l i g a t i o n s t o meet o u t s i d e o f Canada.  The banks  p o i n t e d out a l s o the a d d i t i o n a l s t r a i n w h i c h d e v a l u a t i o n p l a c e d on t h e payment of i n t e r e s t on d e b t s p a y a b l e a b r o a d , and doubted t h e  validity  o f t h e i d e a t h a t e x p o r t revenues would be i m m e d i a t e l y r a i s e d b y a i n the value of the d o l l a r .  fall  Bankers f e a r e d t h a t once d e p r e c i a t i o n o f  48 the dollar had been started i t could not readily be stopped, or that other countries would depreciate their currencies i n retaliation, there7 by causing a universal competitive devaluation of currencies.  On top  of these arguments was a sentiment among businessmen and government  8  leaders that deliberate depreciation of the currency would be immoral. The bankers proposed that to uphold the position of Canada and  her currency i n international markets exports must be maintained, imports limited, including imports of capital, and devaluation of the dollar rejected.  The demand for a favourable balance of international payments  on current account transactions was believed by the chartered banks to be essential since current account deficits would mean either that Canada would have to import capital from abroad, or that Canadian exchange and  9 gold holdings i n other countries would have to be reduced,  i t was pointed  out, too, that there was a possibility that loans could not be floated abroad under the prevailing conditions, or that when possible to find a supply of capital -it would be obtainable only at a higher rate of interest.  Already, the bankers claimed in 1931,  Canada was handicapped  by a large indebtedness to other countries which caused a costly drain on her reserves of foreign exchange and gold, and that this drain could not be continued without great cost to the Canadian economy. The fears of the bankers were largely realised when, i n 1931>  the  deficit in the current account transactions led to a decrease i n the external holdings of the chartered banks and to a f a l l i n the exchange value of the Canadian dollar.  However, the depreciated dollar appeared  to enable greater export revenues to be realised than might otherwise have been the case and, as some bankers admitted, gave American  49  manufacturers an incentive to invest directly i n Canada. Most important was the fact that the large Canadian indebtedness to other countries involved with the depreciation i n the value of the Canadian dollar ancl even greater drain on Canadian exchange reserves which could not be offset by the higher revenues realised.  According to the president of the  Canadian Bankers' Association, M. Beaudry Leman, the imbalance i n foreign exchange "put an overstrain on our gold holdings which they should not be called upon to bear."*** 1  Moreover, numerous public bodies were con-  cerned with their position and voiced their discomfort at having to meet foreign interest payments when the Canadian dollar was depreciated i n value.  11  The proposals made by the bankers to meet these problems were i n keeping with their conservative rationale.  They suggested balanced  budgets, mild austerity as conditions made this possible, and diligent attention to public expenses. Outside Canada they wished to see international co-operation, but they did not believe that a Canadian central bank could contribute to such co-operation and they claimed that they themselves were helpless.  They called also for the removal of trade  barriers and a l l forms of economic nationalism, and insisted on the need for the return to the gold standard.  In addition, the bankers defended  their own role i n the international money markets. As one banker expressed i t , "Canadians are not handicapped by the method now followed i n 12 buying and/or selling their exchange."  However, the supporters of a  central bank opposed these ideas i n large part, and argued that centralised control of exchange matters i n Canada would aid i n the formation of a viable and valuable foreign exchange policy and of a role for  50 Canada i n co-operative i n t e r n a t i o n a l f i n a n c i a l undertakings.  This  l a t t e r suggestion pre-supposed that world trading conditions could be changed through the p a r t i c i p a t i o n o f Canadian i n s t i t u t i o n s , a supposit i o n which, o f course, the bankers r e j e c t e d .  The dilemma which faced the chartered banks and the Canadian government was p a r t i c u l a r l y acute a f t e r the removal of the pound s t e r l i n g from the gold standard i n September, 1931, and the subsequent deprec i a t i o n i n the value of the Canadian d o l l a r .  Faced by considerable  p o l i t i c a l pressure, but fearing with the bankers the repercussions i n f o r e i g n capitals t o any move which would a r t i f i c a l l y change the value of the d o l l a r , the Canadian government elected t o wait out the c r i s i s , and was rewarded i n 1933 when the d o l l a r rose along with the pound and 13 regained i n that year an approximation t o i t s former value.  However,  i n s p i t e o f what might have been considered a fortunate turn of events f o r the chartered banks, the Report of the Royal Commission on Banking and Currency recommended that a c e n t r a l bank be established, numbering among i t s reasons f o r so proposing that such a bank would be important "In the c o n t r o l over the external value of the monetary u n i t , " and would a i d i n promoting i n t e r n a t i o n a l monetary c o - o p e r a t i o n . ^  Essen-  t i a l l y t h i s constituted a r e j e c t i o n o f the arguments of the banks and r e f l e c t e d t h e general opinion o f the early 1930's that some form o f formal control of Canada's f o r e i g n exchange dealings ought t o be i n s t i tuted t o replace t h e inadequacies of the system i n vogue under the banks.  51 1.  The Bank of Nova S c o t i a , Annual Report. 1930. 9.  2.  Royal Commission on Banking and Currency, Proceedings, 732.  3.  "How's Business,"  Canadian Business. Oct. 1933, 2 1 .  4 . Royal Commission on Banking and Currency, Proceedings. 1883. See a l s o , speech o f Mr. G. G. Coote, House o f Commons, Debates. 1931 Session, 2343. 5. C M . Short, "Exchange Depreciation and Trade," J.C.B.A.. 1934-5, 223. 6. Mr. S. H. Logan, General Manager, The Canadian Bank o f Commerce, Annual Report. 1932, 2 5 . 7. Mr. J . A. McLeod, General Manager, The Bank of Nova S c o t i a , Annual Report. 1932, 2 0 - 1 . 8. S. R. Noble, "The Monetary Experience of Canada During the Depression," i n A. D. Gayer, ed., The Lessons o f Monetary Experience (New York, F a r r a r & Rinehart, 1937), 122. 9. 10.  M. Beaudry Leman, J.C.B.A.. 1931-2, 163. Idem.  11. F o r example, the C i t y o f V i c t o r i a , B. C.j Royal Commission on Banking and Currency, Proceedings. 259. 12.  E d i t o r , J.C.B.A.. 1931-2, 299.  13. A. E. S a f a r i a n , The Canadian Economy i n the Great Depression (Toronto, U n i v e r s i t y o f Toronto Press, 1 9 5 9 ) , 9 3 . 14.  Royal Commission on Banking and Currency, Report, 6 3 - 4 .  52  VII.  THE CENTRAL BANK CONTROVERSY  A s i g n a l feature of the 1930  to 1935  period was the i n t e r e s t shown  i n the establishment of a c e n t r a l bank i n Canada. matter was  The debate over t h i s  a p a r t i c u l a r l y acriminous one which held the attention of  many people f o r a considerable period of time." " The heatedness of the 1  argument was  i n part a cause of the deep i n t e r e s t , but of even greater  moment was the conviction of many people that on t h i s problem depended i n large part the future prosperity of the economy.  Monetary problems  and banking assumed, f o r a period of time i n the early 1930*s, a prominence not u s u a l l y attained, and bankers gained an uncommon and equally unwelcome notoriety.  I t was  not, however, a new  experience f o r Canada to witness demands  f o r a c e n t r a l banking i n s t i t u t i o n , and as the depression prolonged and the persuasion of the v i t a l r o l e of monetary matters i n causing that prolongation became more widespread, the thought took form that f i n a n c i a l leadership other than that provided by the banking system under the Bank and Finance Acts was  necessary.  Resolutions  i n favour of basic changes  i n the f i n a n c i a l machinery of the nation were general.  T y p i c a l was  of the Guelph Trades and Labor Council passed on March 2, stated that the Council was  1933,  that  which  " i n favour of placing the i s s u i n g of currency  i n the hands of the elected representatives of the people of the House and taken out of the hands of the banking monopoly."  Federal  For a  large section of the people, i t was  obvious that the e x i s t i n g system had  f a i l e d , and that the "sine qua non"  of recovery was  change i n the management of f i n a n c i a l a f f a i r s .  to bring about a  53 The demands f o r a c e n t r a l bank which culminated i n the e s t a b l i s h ment of the Bank of Canada i n 1935  d i d not v i s u a l i s e the c e n t r a l bank  as an end, but as the means t o an end. c e n t r a l bank therefore had two aspects.  The arguments f o r and against a On the one hand, there was  the  question of the end i n view, whether that end was worth while and a t t a i n able under the economic conditions of the depression.  On the other  hand, there was the question of whether or not a c e n t r a l bank was  indeed  the best method of attaining the end i n view. The basic quest of those advocating reform of the banking system was to establish a sound monetary u n i t .  It was proposed that t h i s could  be achieved through the s e t t i n g up of machinery to maintain the value of the Canadian d o l l a r at a r e l a t i v e l y stable l e v e l both within Canada and i n f o r e i g n money markets. an honourable goal.  The chartered banks agreed that t h i s was  Differences occurred i n the means proposed t o  a t t a i n these goals and, indeed, on whether or not the goals could be obtained through human interference i n monetary matters.  The depression  had not existed f o r many months before i t had become the conviction of many observers that the lack of an authoritative managing body was detrimental to both the control of the money supply and the exchange rate for Canadian d o l l a r s .  The v i c t i m i s a t i o n of many by the depression had  helped convince large numbers of people that blame was at least i n part to be found i n the lack of leadership. As one w r i t e r l a t e r commented, "experience would have taught us nothing i f , as a r e s u l t of the l a s t seven years, we do not conclude that p o s i t i v e action from a monetary point of view i s the f i r s t e s s e n t i a l i n c o n t r o l l i n g excesses of both boom and depression."  That conclusion was not uncommon early i n the  54 decade of the - t h i r t i e s .  The persistence with which both the f e d e r a l  government and the bankers advocated a "wait and see" p o l i c y which negated the giving of p o s i t i v e leadership alienated those demanding change.  The advocates of change proposed that the chief means by which the value of the Canadian d o l l a r could be s t a b i l i z e d was by the manipulation of the supply of credit i n Canada.  Working from the contention that the  general p r i c e l e v e l depended on the supply of money a v a i l a b l e within the community, the v e l o c i t y o f c i r c u l a t i o n remaining f a i r l y constant and i n any event l a r g e l y unmanageable, i t was argued that by i n s t i t u t i n g a c a r e f u l l y managed supply o f c r e d i t , c o n t r o l could be maintained over the l e v e l of p r i c e s .  The basic argument of some was that i n times o f  boom, i t was the function of monetary leadership t o c u r t a i l the flow o f money by putting s l i g h t r e s t r i c t i o n s on the volume of credit a v a i l a b l e . In t h i s way the expansion of the economy would be s t a b i l i s e d and kept within manageable l i m i t s .  On the other hand, i t was proposed that i n  times when business a c t i v i t y was i n a decline i t was desirable that c r e d i t should be stimulated and the money supply increased so that greater a c t i v i t y might take place and business recovery be f a c i l i t a t e d . However, instead of t h i s balancing e f f e c t being performed, i n Canada, i t was proposed that the Canadian monetary system, depending, of course, i n large part on the a c t i v i t i e s of the chartered banks, tended t o increase the supply of c r e d i t — h e n c e of money—in times of business expansion and optimism when a check should be kept on the supply of money and, conversely, to c u r t a i l c r e d i t i n times of recession when c r e d i t ought t o be being stimulated. Therefore, argued the opponents o f the chartered banks, the Canadian c r e d i t system tended t o exaggerate d i f f i c u l t i e s  55 rather than to alleviate them. In a similar way, through the purchase and sale of currency reserves, the value of the Canadian dollar could be stabilised on international exchange markets. To these contentions Canadian bankers were almost universally opposed.  They simply refused to acknowledge f i r s t the connection between  the volume of bank credit i n the community and the supply of money, and second, the connection between the total supply of money and the general price level.  In the former matter, the bankers reasoned that they  loaned out to borrowers the money which had been loaned to them by their depositors.  Loans were only possible i f the banks had deposits of the  same or greater amounts, and none of the expositions of the theory of the multiple expansion of deposits could dislodge them from this position. In the second matter, that of the connection between the level of prices and the volume of money i n circulation, the bankers likewise rejected a l l the theories by suggesting that the level of prices i n Canada was determined by the supply of commodities and the demand f o r them and not by the banks' credit activities.  It was pointed out by the bankers  that i n any event i t would not be possible for the central bank to cont r o l credit because there was not an established money market i n Canada, and l i t t l e chance that one would develop i n the immediate future. And while the chartered banks had recourse to the New York money market, this source prevented a Canadian central bank from controlling the money supply through direct market operations. The Canadian chartered banks were also opposed to bringing the note issue of Canada under one institution.  The adequacy of the existing  system was pointed out, especially the f l e x i b i l i t y with which the volume  56 of bank notes outstanding adjusted to needs.  The p o s i t i o n of the  chartered banks on t h i s question was stated by the Assistant General Manager of the Bank of Montreal, Mr. Bog, i n 1934.  "Canadian bank notes,"  he observed, "are issued only as business a c t i v i t y requires and when the immediate need i s f i l l e d the notes flow back to the banks and are  4 redeemed."  The bankers feared also that giving the note i s s u e to a  p o l i t i c a l l y controlled body would lead to misuse of the p r i v i l e g e , e s p e c i a l l y i f the volume of currency issued was not dependent on an adequate gold reserve. actions.  P a r t i c u l a r l y the banks dreaded i n f l a t i o n a r y  " I f there i s one f a c t i n finance more f i r m l y f i x e d than another,"  warned S i r Charles Gordon, the President of the Bank of Montreal, " i t i s the certainty that the unrestricted issue of paper currency culminates  5 i n disaster."  The bankers noted also that t h e i r notes provided an  inexpensive currency medium which was highly regarded at home and abroad. Moreover, the provision of services i n many of Canada's smaller communities was possible only i f the banks could continue to enjoy the revenues which resulted from the note i s s u e .  The banks thought also that the  high regard which Canada's currency system held abroad might be jeopardised by the i s s u e of larger volumes of Dominion notes without a corresponding increase i n gold reserves.^  1  In a d d i t i o n , there were a number of other factors which divided the supporters of a c e n t r a l bank from those who opposed i t s formation. Usually these tended to take the form of attacks on the existing banking structure, on i t s inadequacies i n c e r t a i n respects. was that of government monetary management.  One such question  To the supporters of a  c e n t r a l bank, such a bank was v i s u a l i s e d as a means of performing the  57 important functions of managing the government's debt and of providing the government with expert and unbiased advice on monetary matters. The banks, of course, responded to these suggestions by pointing out that the chartered banks already performed these functions admirably at minimum cost to the government.  To introduce a r a d i c a l new  concept  was, i t was claimed, an extreme and r i s k y , and p o s s i b l y very c o s t l y solution to what were r e l a t i v e l y minor problems.  To such claims by the bankers, i t was  suggested that a c e n t r a l  bank would not constitute such a thoroughgoing  revolution as  was  alleged, but would simply provide an i n s t i t u t i o n which would co-ordinate the functions of the f i n a n c i a l system of Canada as i t existed i n a way increasingly common i n economically matured nations.  A c e n t r a l bank, i t  was suggested, would enable economies to be effected i n the holding of gold reserves i n Canada, and would thereby make more e f f e c t i v e use of the nation's resources i n gold.  I t would also f a c i l i t a t e the adminis-  t r a t i o n of banking l e g i s l a t i o n and generally r a t i o n a l i s e the management of f i n a n c i a l a f f a i r s i n the country.  The banks, however, remained unconverted by these arguments.  The  c e n t r a l bank represented an i n t r u s i o n i n t o an arena i n which they had successfully conducted the f i n a n c i a l battles of the nation f o r many years. Even the strongest supporters of the idea of a c e n t r a l bank acknowledged the merits of the f a c i l i t i e s provided by the existing system which would be usurped by the creation of a c e n t r a l banking i n s t i t u t i o n .  The  editor of Canadian Business thought many Canadians "pondered that under the present system h i s deposits were safe, his dividends came i n regularly; he obtained loans when reasonable c o l l a t e r a l could be supplied;  58 and so he continued to doubt the value of introducing a disturbing factor  7 i n t o the s i t u a t i o n . "  The chartered banks continued with a long l i s t  of reasons which spoke against a c e n t r a l bank.  I t would involve Canada  i n a d d i t i o n a l new administrative expenses which were unnecessary.  Minor  alternations i n the e x i s t i n g system could be made without r i s k i n g major changes.  And there was the undeniable f a c t that the time was not con-  ducive to a l t e r a t i o n s . i n Canada.  Economic conditions were worse than ever before  To lop o f f an established system and graft on a new part  at such a time seemed to many to be f o l l y indeed.  Why not, the bankers  suggested, await a more opportune moment. The bankers a l s o expressed t h e i r doubt about the e f f i c a c y of c e n t r a l banks.  While the supporters of the c e n t r a l bank concept claimed  success f o r other c e n t r a l banking systems, the chartered banks and some other sectors of the business community found cause to question these claims.  8  "We know from the recent economic h i s t o r y of the United States,"  suggested the General Manager of the Bank of Montreal at the end of 1931,  "Something o f the impotence o f a Central Bank i n maintaining a  .  9  stable p r i c e l e v e l . "  Moreover, the bankers continued, a c e n t r a l bank  would become the t o o l of the p o l i t i c a l party i n power and consequently would act with p o l i t i c a l goals i n mind rather than with the economic interests of the nation foremost.  Also, i f the bank should f a i l to  bring about the promised Utopia, the psychological reaction among Canadians would be most harmful.  The bankers suggested, too, that i t  would be impossible to f i n d capable management which could command the respect of the business community necessary f o r the success of such an institution.  Bankers were concerned also that i f a c e n t r a l bank were  59 established they would be required to keep reserves on deposit with i t . This would, of course, cut i n t o the revenues of the chartered banks since the reserves would be unproductive.  The banks argued that the  depositing of funds with the c e n t r a l bank would also c u r t a i l the r e sources a v a i l a b l e f o r loan, and would weaken the p o s i t i o n o f the banks since the reserves would not be available to the banks i n emergency.  The bankers were correct i n thinking that i t was not the opportune time to introduce a c e n t r a l bank. economic standpoint.  But they were correct only from the  P o l i t i c a l l y the times were favourable.  was ready f o r a change i n the banking system.  The country  The Prime Minister and  the Leader o f the Opposition supported a c e n t r a l banking i n s t i t u t i o n f o r Canada i n 1933,  though both had e a r l i e r opposed the idea.  In  1931  Mr. Bennett had f e l t that "to set up a Central Bank would not do a s i n g l e thing beyond what we are doing now through the operations o f the Finance Act.  i n 1933,  both were r e f l e c t i n g popular opinion.  Many people  f e l t that the banks had f a i l e d i n the time o f t r i a l , that i n part the inadequacies o f the banking system were t o blame f o r the prolongation of the adverse conditions.  The r e s u l t o f such sentiments was the growth  of the f e e l i n g that the banks were private i n s t i t u t i o n s which acted on purely s e l f i s h , profit-seeking motives which made t h e i r i n t e r e s t s antagonistic to those of the community.  The arguments o f the bankers  served only to deepen that antagonism, and, led by the c a r e f u l l y developed theses of the economic t h e o r i s t s , popular opinion had by  1933  accepted the p r i n c i p l e that some form of s o c i a l l y conscious i n s t i t u t i o n responsible f o r monetary p o l i c i e s was necessary.  A c e n t r a l bank came  to represent the s o c i a l l y responsible instrument which  they desired.  60 A resolution of the Teachers' Federation of Vancouver i s indicative of the sentiment of the times; i t read, "We think perhaps that the control of the monetary system should be i n the hands of a central national bank, directed i n the interests of the whole of the people, rather than i n the pursuit of private gain."  11  Many people were also feeling as  was A. J. GLazebrook of the University of Toronto when he noted that the "psychological effects on the Canadian people of the establishment of a central bank would be very valuable."  12  The position of the banks i n the central bank controversy was essentially a defensive one.  It was almost inevitable that central  banking was to come to Canada. A l l of the great Western nations, from which i n large part Canada drew her inspiration i n other respects, had accepted the institution.  To argue that Canada's peculiar circumstances  warranted a peculiar banking system was a rearguard action.  Like most  economic institutions which operated under the "laissez-faire," minimum intervention principles, the Canadian banking system needed f a i r weather i n order to prosper.  In the early 1930's, the only criteria available  to the public, that of success or failure, condemned, the banks. A central bank appeared to offer the only alternative.  1. Not everyone was convinced that there was a valid debate. One author, writing i n the Canadian Forum shortly after the publication of the Report of the Royal Commission on Banking and Currency, talked of "The elaborate sham battle over a Central Bank." Earlier, i n the same magazine, the editor had argued that "The financial powers which control our present system w i l l also control the central bank." The contention of the Forum was that the opposition of the chartered banks to the establishment of a central bank was window-dressing. See J . A. Westman, "Wanted—A Bank Investigation," Canadian Forum. Dec. 1933, 89; also Ibid...Nov. 1933, 43-4.  61 2. Bennett.  Bennett Papersj 62184, Guelph Trades and Labor Council t o  3. S. R. Noble, "The Monetary Experience of Canada During the Depression," i n A. D. Gayer, ed., The Lessons of Monetary Experience (New York, Farrar & Rinehart, 1937), 128. 4.  Bank of Montreal, Annual Report. 1934. l l .  5.  I b i d . . 1932. 6.  6. J . A. McLeod, "The Present Working of the Canadian Banking System," J.C.B.A.. 1933-4, 34; Bennett Papers; 63366, memorandum of the Canadian Bankers' Association t o Bennett concerning the retention of note issue p r i v i l e g e s by the chartered banks a f t e r the e s t a b l i s h ment of a c e n t r a l bank. 7.  Canadian Business. Dec. 1933, H .  8. See e s p e c i a l l y the president of the Canadian Bankers' Association, J.C.B.A.. 1934-5, 184. 9.  Bank o f Montreal, Annual Report. 1931. 9.  ID.  House of Commons, Debates. May 13, 1931, 1691.  11.  Royal Commission on Banking and Currency, Proceedings. 664.  12-  F i n a n c i a l Post. Sept. 23, 1933, 14.  62 VIII.  THE BANKS, INDUSTRY, AND COMMERCE  Canadian i n d u s t r i a l and commercial i n t e r e s t s shared the misfortunes of other sectors of the economy during the depression though the extent of decline i n a c t i v i t y varied considerably among the various parts. The gross value o f production of manufacturing f e l l from the 1929 l e v e l of #3,841 m i l l i o n t o #1,953 m i l l i o n i n 1933,  and other sectors o f  industry declined i n much the same manner.  Fixed c a p i t a l investment  1  i n industry i s estimated to have decreased from $224.5 m i l l i o n to #42.0 m i l l i o n i n the same years, while current assets i n goods i n progress and f i n i s h e d goods on hand f e l l from #878.8 m i l l i o n i n 1929 t o $608.9  2 m i l l i o n i n 1932.  Commercial a c t i v i t i e s showed s i m i l a r declines and  r e f l e c t e d the o v e r a l l decline i n business transactions.  In these circum-  stances, i t was to be expected that companies pressured because of the depressed business conditions would c u r t a i l t h e i r a c t i v i t i e s and retrench, cutting back on production, on inventory holdings, and on operating costs.  In many instances these were the courses followed.  However, the  majority of firms seem to have accepted that t h e i r a f f a i r s were not s u f f e r i n g because o f any f a i l u r e on the part of the banks, but as a r e s u l t of world conditions and the dependence of the Canadian economy on those conditions. Generally, manufacturing and commercial businesses were not c r i t i c a l of the conduct o f the Canadian banks.  There i s s u r p r i s i n g l y  l i t t l e evidence on record o f complaints o f ill-treatment from these sectors of the economy.  "Our r e l a t i o n s with the Banks have been very  3  happy," thought a representative of the meat packing industry i n Alberta.  63 In B r i t i s h Columbia, the canned salmon industry had had experience,  and i n New  "satisfactory  Brunswick, the Forest Products Association  complimented the chartered banks on t h e i r contribution to the  5  of the nation.  welfare  The Canadian Chamber of Commerce, a f t e r c i r c u l a t i n g  i t s members across Canada, reported that i t was the basic view o f i t s members that "our banking system has stood Canada i n good stead and more p a r t i c u l a r l y so i n these l a t t e r days, when there has been so much  6 uncertainty and apprehension among businessmen."  As a r e s u l t ,  few  businessmen were i n favour of any d r a s t i c r e v i s i o n of the banking system, the New Brunswick Forest Products Association suggesting that " I t seems unnecessary and dangerous to meddle with or change a banking system that has so successfully stood the very severe t e s t to which i t has been  7 subjected by world conditions of the past four years." In spite of the general s a t i s f a c t i o n , there were instances of complaints from various sectors of the i n d u s t r i a l and commercial communities concerning  s p e c i f i c shortcomings i n the conduct of the banks.  La Commission des Produits F o r e s t i e r s de Quebec, f o r example, f e l t that i t s members received credit "at reasonable rates of i n t e r e s t , " the New  while  Brunswick Forest Products Association was not s a t i s f i e d that  the rates being charged by the banks could not be reduced.  I t was  sug-  gested by t h i s l a t t e r organisation that the reduction i n the banks' earnings which a lower rate of i n t e r e s t would cause could best be  ab-  o sorbed by reducing the dividends paid to shareholders.  One marketing  organisation suggested that bank i n t e r e s t charges should be t i e d to the rate of interest paid on savings deposits,"^ but on the whole, the c r i t i c i s m s of the bank interest rates were not extreme.  64 A more pressing problem i n the opinion of the Quebec A s s o c i a t i o n was the demand o c c a s i o n a l l y made by the banks f o r the s a l e of goods  11  assigned to the banks as s e c u r i t y under "Section 88" of the Bank Act.  I t was pointed out t h a t i n t a k i n g t h i s a c t i o n , the banks o f t e n obliged lumber merchants to reduce t h e i r stocks at a time when market conditions were unfavourable,  and the banks' demands l e d to a f u r t h e r glut on an  already over-supplied market.  This complaint was voiced by other indus-  t r i a l concerns but, on the other hand, some business recognised the n e c e s s i t y  organisations  f o r the course adopted by the banks and the  merit of t h e i r r e q u i r i n g reduced i n v e n t o r i e s and lower production.  The  chartered banks agreed t h a t they had suggested to some of t h e i r debtors that inventory stocks must be reduced i n order to l i q u i d a t e outstanding loans, but denied that t h i s could be regarded as a p o l i c y among the banks.  The chartered banks had not co-ordinated t h e i r p o l i c i e s i n t h i s  matter, but t r i e d t o assess the merits of each borrower's p o s i t i o n and advise t h e course to be followed i n the l i g h t of p r e v a i l i n g conditions and the prospects f o r the f u t u r e .  12  On the question of the a v a i l a b i l i t y of c r e d i t , opinions again d i f f e r e d w i t h the m a j o r i t y f e e l i n g that the banks were providing adequate f a c i l i t i e s i n t h i s regard.  L'Association de Ghaussures de Quebec stated  t h a t "Manufacturers cannot say t h a t c r e d i t has been unduly withheld by the banks," and suggested that the banks had maintained whenever conditions had warranted t h e i r doing s o . ^ 1  One  credit levels representative  of the Quebec lumbering i n d u s t r y complained that the banks had  granted  too much c r e d i t to t h a t i n d u s t r y . """^ Many companies supported the c l a i m of the banks that the d e c l i n e i n t o t a l c r e d i t outstanding which took  65 place i n the early years of the depression was due to lower inventory values and lower demands f o r c r e d i t , while i n some sectors companies admitted that t h e i r a f f a i r s and the prospects of t h e i r i n d i v i d u a l companies d i d not warrant the granting of bank loans.  Such was  a t t i t u d e of most persons involved i n the mining industry.  the  A representative  of the banks appearing before the Macmillan Commission noted that mining enterprises "do not o r d i n a r i l y c a l l f o r bank c r e d i t , " a claim which was  15 substantiated from within the industry. But there were those who  disagreed with these suggestions.  The  Calgary Board of Trade, while on the whole not opposed to the conduct of the banks, was  concerned that the banks' assets were being directed  to an unprecedented extent i n t o holdings o f P r o v i n c i a l and  Municipal  s e c u r i t i e s at the expense of commercial borrowers."""^ Lord Beaverbrook was  also c r i t i c a l of the banks.  He suggested i n a l e t t e r t o the Share-  holders Protective Association of the P r i c e Brothers pulp company that i f the banks did not provide the funds necessary f o r the reconstruction of that company they should not have t h e i r charters renewed. c r e d i t , he proposed, " i s the purpose f o r which they e x i s t . "  17 to f u l f i l l that function, they should be discontinued.  Issuing Having f a i l e d  The  National  Construction Council of Canada, representing an industry most severely b i t by the depression, was not so extreme as Beaverbrook.  Though expres-  sing s a t i s f a c t i o n with the o v e r - a l l conduct of the banks, the Council f e l t that i n such depressions  as then prevailed the state should step i n  and stimulate industry by making credit easier to obtain and l e s s c o s t l y . The Council noted an "almost complete absence of co-operation between the f i n a n c i a l i n s t i t u t i o n s o f the country and the construction industry" 19 i n the matter of c r e d i t f a c i l i t i e s .  66  In spite of these adverse comments and suggestions, industrial and commercial concerns were generally prepared to accept the credit policies of the chartered banks. A similar attitude marked their response to the questions of foreign trade and exchange rates.  A large  number of companies suffered, of course, because of a decline i n their exports, a trend often due to the fluctuations i n the value of the dollar.  However, there was no strong body of opinion within industry  and commerce which laid the blame for this on the banks, i t being generally held that exchange vacillations were beyond manipulation by Canadian institutions. The sympathetic understanding of the banks' position i n t h i s matter which was evidenced i n the conduct of industry and commerce helped maintain a good relationship between the two groups.  The banks responded to  the situation with somewhat more i n the form of paternal advice than was usually the case. Several bankers accounted for the relatively strong position of many businesses by noting the self-control which had prevented the over-investment i n capital expenditures during the optimist i c years of the 1920's, a self-control which the bankers thought was especially rewarding i n the 1930's when the carrying charges on loans 21  would have been most demanding.  The bankers suggested also that com-  panies were following a good policy i n reducing their inventories and curtailing production to reflect retractions i n market demands.  The  banks thought, however, that industry should not revert to reducing the 22 wages paid to i t s employees except as a last resort.  Apparently i t was  considered best that buying power should be maintained. In their own response to the business community, the banks  67  maintained that they were aiming at giving the maximum aid possible under the circumstances bearing i n mind the obligations of the banks to their own depositors and to their shareholders.  They maintained  throughout the early 1930's that their relationship was a good one, and attributed this not only to the reasonable conduct of industrial and commercial firms, but to the fact that the banks had not allowed themselves i n the past to become involved i n the financing of long-term undertakings. It was noted by one banker that "our banks and financial institutions have not had their resources tied up i n frozen loans," and consequently were not affected greatly by the cut back i n production 23  and the lower sale of manufactured goods. One of the few business groups which did cause deep concern to the bankers i n the early 1930-s was that of the investment dealers. The latter were, of course, dependent to a large extent on the banks to carry their security portfolios, and the volume of loans for this purpose declined considerably following the collapse.of the New York Stock Exchange i n October, 1 9 2 9 . The Canadian bankers consistently denied responsibility for the adverse trends which characterised the stock markets after that date, and pointed out that i t had been their practice even before the crash to advocate caution on the part of those dealing i n securities.^  -  When i t was suggested that the chartered banks had made  i t their policy after the crash to curtail loans on the security of stock, the banks denied the charge. They suggested that they had continued to consider each application for credit on i t s own merits and had not called existing brokers  1  loans but simply required each borrower to  maintain the margin requirements agreed upon when the loan was granted.  68 The bankers did admit, however, that faced with the unsteady securities market of 1930 and 1931, they had instructed their branch managers to 25  use restraint i n granting new loans. There i s no doubt that the bankers f e l t that they had performed their responsibilities to the investing public well. They claimed to have "gone along" with accounts when they could have realised on the collateral held, and one banker noted that his own bank had retained some bonds of the City of Calgary even after these had defaulted and numerous creditors were suing the city.  Again the banks noted that they  had supported the pegging of stock prices on the Montreal and Toronto Stock Exchanges i n order to aid i n the stabilization of the market. Another lengthy and heated discussion took place between the bankers and the investment dealers concerning the role of the chartered banks i n handling security transactions.  The banks, of course, held a considerable  volume of securities for their own account, and an increasingly large part of their assets was employed i n this manner. They also acted as agents for persons wishing to boy and s e l l securities, and this business they usually routed through investment brokers.  What concerned many  c r i t i c s of the banks was that the banks were becoming involved i n selling securities directly from their own holdings, and i t was argued that the position of trust held by the banks would be violated at public cost by their doing this.  In this claim, there was the inference that by dealing  in securities^as principals, the banks could unload on unwary investors securities which the banks had obtained i n the liquidation of loans and which might not command an attractive price on the open market. A small investment company complained i n 1934 of the "Scandalous instances of  69 26 banks taking advantage of their position i n high grade securities."  it  was also suggested that the banks ought not to lend their names to new issues of securities nor participate i n underwriting bonds since these activities could carry to the public a false impression of the merit of the issues involved. In spite of the objections raised, however, the Royal Commission on Banking and Currency had no recommendations to make i n these matters i n i t s report. Some complaints were also received by the banks from representatives of insurance companies who claimed that the banks were intruding into their business by recommending to their customers that insurance should be placed through certain agencies.  Since the banks appeared to favour  companies associated with the banks through the major trust companies, the insurance agents were disturbed and thought i t desirable that bank managers be restrained from recommending any particular agency. It was pointed out, too, that the insurance business was a specialised occupation i n which the bankers did not have the experience necessary to give good advice. Again no action was recommended by the Royal Commission on Banking i n answer to the complaints. That there should have been a good relationship between the banks and other businesses was, of course, desirable from both the bankers' and the non-bankers' viewpoint.  Managing Director C. E. N e i l l reminded  the annual meeting of the Royal Bank of Canada in 1929 that "The continued growth and success of the bank primarily depends upon the 27 prosperity of trade and industry of the country."  The reason for the  community of sentiment may have been caused above a l l by the fact that  70  businessmen and the bankers held basically the same views.  Each saw  the other as being of essential importance to the economy. And each thought the other caught powerless i n conditions beyond their control. Both groups were prepared to wait out the d i f f i c u l t i e s i n the assurance that improved circumstances would return.  1. M. C. Urquhart and K. A. H. Buckley, eds., Historical Statistics of Canada (Toronto, Macmillan, 1965), 246..  2.  Canada Year Book.  1934-5, 488.  3.  Royal Commission on Banking and Currency, Proceedings.  4.  Ibid..  5.  Ibid..  2222-3.  6.  Ibid..  2508.  7.  Ibid..  2222-3.  8.  Ibid..  2323.  9.  Ibid..  2223.  781.  325.  10. Representation of the Prince Edward Island Egg.and Poultry Association; Ibid.. 2161.  11.  Ibid..  2323.  12.  CommonsV Committee, 1934,  13.  Royal Commission on Banking and Currency, Proceedings. 2328.  14.  Financial Post. Sept. 9, 1933,  App. 2,  356.  13.  15. Royal Commission on Banking and Currency, Proceedings. 2489. also Mr. J . Taylor, mining promoter, presentation to the Commission; Ibid.. 320. 16. Ibid..  17.  752.  Commons' Committee,  1934,. App. 2, 442.  71  18.  Royal Commission on Banking and Currency, Proceedings. 2715.  19. Bennett Papersj 62690, National Construction Council of Canada brief to the Royal Commission on Banking and Currency, Sept. 8, 1933.  20. For example, the evidence before the Royal Commission on Banking and Commerce of the Nova Scotia canned lobster industry. Proceedings. 2099.  21.  Bank of Montreal, Annual Report. 1931, 7.  22.  Imperial Bank of Canada, Annual Report. 1930, 23.  23. S i r Charles Gordon, President, Bank of Montreal, Annual Report. 1931. 7. 24. Mr. H. B. Henwood, General Manager of the Bank of Toronto, in a speech to the Canadian Chamber of Commerce stated that "While the Canadian banks have been subjected to considerable pressure for advances against the security of stock exchange collateral, I think i t can be said that they have very wisely maintained a measure of control upon this class of borrower that has prevented manipulation and skyrocketing of security prices such as we have seen i n the United States. . . . " J.C.B.A.. 1929-30, 107. 25.  Commons' Committee, 1934, App. 2, 354-5.  26. Bennett Papers, 62337, John Graham & Company, Ottawa, to Bennett, Feb. 15, 1934.  27. The Royal Bank of Canada, Annual Report. 1929: quoted J. Castell Hopkins, ed., The Canadian Annual Review of Public Affairs (Toronto, Canadian Annual Review Company, 1930), 1929-30, 685.  72 IX.  THE BANKS AND AGRICULTURE  One of the claims of the Canadian bankers was that the banking system enabled the various sectors of a widely diversified economy to be given adequate banking services tailored to specific needs, and the advantages of large multi-branched banks providing f u l l services to every part of the nation was repeatedly pointed out. The agricultural community tested that claim during the depression. Agriculture i n Canada was as varied as was the geography of the land i t s e l f , and so were i t s requirements i n the form of banking services.  The needs of  the Prairie Grain grower were vastly different from those of the cattle rancher of Alberta, or from those of the fruit farmer of Nova Scotia or the dairy farmer of British Columbia.  Whether or not the banks met  those varied needs adequately was a matter of diverse opinions. bankers said that they did.  The  The consensus among farmers was that the  banks did not. The bankers supported the existing banking system; the farmers called for changes.  But the farmers pleas were not, i n the  majority, for complete change of the system. of Canada had, i n 1924,  Although the Farmers Union  proposed nationalization of the chartered banks  of Canada, and the idea had survived, i t i s doubtful that most farmers would have supported such an extreme measure i n the early 1930's.""* One representative of agricultural feelings thought the farmer wanted "some big changes which w i l l serve to stabilize his industry."  Essen-  t i a l l y that was the farmers position. 1  As a group, farmers i n Canada were from 1930  to 1935  ferous i n their complaints concerning the banking system.  most vociThey were  73 over-represented i n the making o f submissions t o the Royal Commission on Banking and Currency, e s p e c i a l l y i n t h e Western provinces. I n  1931,  the e d i t o r o f the Farm and Ranch Review noted that "Without exaggeration f u l l y f o r t y per cent o f my voluminous m a i l deals w i t h t h e subject of banking c r e d i t , sometimes defending the chartered bank and i t s p o l i c i e s ,  3 but g e n e r a l l y c r i t i c i s i n g i t . "  This c r i t i c i s m appears reasonable,  however, when one considers that t h e r e a l i s e d net income o f Canadian farmers f e l l from a 1929 l e v e l of $544.8 m i l l i o n s t o #109.9 millions i n 1932,  and takes i n t o account a l s o the independence w i t h which farmers  had t r a d i t i o n a l l y a i r e d t h e i r views.^  The farmers, t o o , were very  aware o f the extent t o which they had been handicapped by the depression. I t was not uncommon t o f i n d expressions such as "The farmer has suffered  -5 more s e v e r e l y than any other c l a s s of producers." I n looking f o r the source o f t h e i r problems, the farmers often placed the blame on the chartered banks.  One farmer i n Saskatchewan,  w h i l e n o t i n g that those farmers who had had poor crops tended t o blame the weather and t h e vagaries o f farming, those who had had good crop. y i e l d s "are more disappointed and more v i c i o u s minded and more c r i t i c a l 6 of our s o c i a l order and of our banks and other i n s t i t u t i o n s . "  The  president o f the U.F.A. thought "The farmers' greatest d i s a b i l i t y was caused by an unstable p r i c e l e v e l " which i n t u r n was due t o "inherent  7 f a u l t s i n the present monetary system."  And, of course, t h e banks  were t h e guardians of the monetary system. The l a c k o f a sympathetic understanding between the farmers and the bankers aggravated t h e s i t u a t i o n , and the banks found themselves unable to develop a c l o s e r rapport. I n part that i n a b i l i t y was due t o  74  the a t t i t u d e of t h e farmer who f e l t himself i n a hopeless p o s i t i o n i n the face of an incomprehensible s i t u a t i o n .  Possibly the temper of the  farmer was w e l l captured by one Regina farmer who f e l t "tangled up i n something that I do not very w e l l understand," and who noted that "my  8 neighbours seem t o be i n the same position also."  An Alberta farmer  voiced i d e n t i c a l misgivings, and noted that while he had been quite  9 w e l l o f f i n 1928,  by 1933  he "was busted. . .through no f a u l t of mine."  Men who had successfully devoted t h e i r l i v e s t o the c u l t i v a t i o n of the land suddenly found themselves on the edge of f a i l u r e .  To many the  monetary system and the banks seemed t o be the source of t h e i r problems. Part of the problem l a y i n the f a c t that the chartered banks had become f o r the farmers gigantic and impersonal i n s t i t u t i o n s which cont r o l l e d monetary a f f a i r s with a ruthless abandon.  The farmers feared  a money t r u s t was c o n t r o l l i n g the finances of the nation.  The Quebec  branch of the United Farmers of Canada was very b i t t e r about "organised bodies such as the banks, r a i l r o a d unions, milk d i s t r i b u t o r s and c o a l combines, which are d r i v i n g them (the farmers) i n t o the dust and w i l l eventually p u l l a l l other classes i n t o the same p i t i f not checked soon." Most farmers saw the l o c a l bank manager as but a pawn f o r the banks' head o f f i c e s , and they complained that the severity of the s i t u a t i o n combined with the banks' attitude threatened to degrade the farming profession to t h e state where agriculture would no longer be an honourable occupation.  For most farmers i t was incomprehensible that they should  be treated with such disregard f o r t h e i r interests i n view of the v i t a l r o l e they performed i n the economic l i f e of the nation. The dilemma of the farmers was accentuated by the f a c t that they  75 did not speak with one voice. Not a l l were prepared to say that the chartered banks were to blame for their troubles.  It was only the more  daring who would propose grave reforms for the banking system.  It was  only the most extreme who presumed to identify the source of the problems and propose a solution. the economic system.  A l l farmers knew that something was wrong with  Those who spoke with the greatest assurance  concerning the source of guilt and the path to salvation had one basic belief: actions.  that the troubles were caused by and redeemable by human ••Recurring depressions, of which we are now experiencing the  most severe i n modern times, are not due to acts of God but to acts of men," was the opinion of Robert Gardiner, a member of Parliament and President of the United Farmers of Alberta.'  11  diametrically opposed to that of the bankers.  This was a position Possibly i t was i n this  basic divergence of views that the root of the antagonism between the two groups lay. Bankers talked of waiting for better times; farmers talked of doing something to speed the return of better times. Understandably, the question of credit f a c i l i t i e s became a main source of contention. On the one hand, i t was suggested that the banks had made too much money available i n the years prior to the depression. Gardiner noted the large capital debt which the farmers had assumed during the 1920's, a debt which they found impossible to carry when faced with low prices for their products i n the 1930's. On the other hand, he pointed out that "After the past three years of deflation, our  1? farmers find themselves practically without credit f a c i l i t i e s . " Senator W. A. Buchanan of Lethbridge, Alberta, thought the farmer wanted "a central bank which w i l l give a measure of credit control," i n order to prevent the violent fluctuations i n farm commodity prices so costly  76 to the farmer.  13  The problem of c r e d i t loomed large with the farmers,  while the banks f o r t h e i r part denied that t h e i r c r e d i t p o l i c i e s aggravated a g r i c u l t u r a l problems. The banks d i d not, however, oppose the position taken by the farmers on the question of the length of time allowed t o them on loans granted by the banks.  E s s e n t i a l l y the contention of the farming com-  munity on t h i s problem was that bank loans ran f o r periods, usually s i x t y or ninety days, which were inconsistent with the requirements of  14  . „ most farmers.  Whereas short-term loans were i d e a l f o r manufacturers  and d i s t r i b u t o r s , whose accounts revolved several times each year, t h i s was not the case with the farmers who f o r the most part required working funds f o r a large portion of the year.  The persistence of t h e banks i n  issuing notes f o r short terms, even when i t was obvious that renewal would be required, agitated the farmers.  The practice was a neverM  ending source of i r r i t a t i o n " according to the Treasurer of the Province 15 of A l b e r t a .  The farmers, too, were not convinced that they could be  assured of renewal.  "My own experience," suggested one representative  of the farmers, " i s that no matter what agreement you may enter into as to the renewal of a note at the expiry of the three months, i t w i l l depend upon the i n d i v i d u a l — t h e bank manager—backed, as a r u l e , by the head o f f i c e which knows very l i t t l e of the circumstances.""'*^ And i t hurt the farmers' p r o f i t s since the banks on renewal of a note compounded the i n t e r e s t .  Unfortunately t h i s question was thought by the farmers  to be demonstrative of a more basic e v i l i n the banking system:  that  the banks were not modelled to the requirements of the farming community but t o those of industry and commerce.  I t was one more point, too,  77 which helped convince t h e farmers of the West t h a t t h e i r i n t e r e s t s were disregarded by the banks which favoured the more urban and i n d u s t r i a l i s e d East. In response, the bankers met the contentions of the farmers i n two ways.  F i r s t , they argued t h a t t h e nature of t h e i r business preven-  ted t h e i r i s s u i n g c r e d i t on an intermediate or long-term b a s i s .  The  banks, they f e l t , should not be blamed f o r f a i l i n g to do something which was beyond t h e i r c a p a b i l i t i e s .  I t was e s s e n t i a l f o r t h e i r  l i q u i d i t y , i t was i n d i c a t e d to the farmers, t h a t the banks keep t h e i r loans on a demand or short-term b a s i s .  In any event, the bankers added,  a c r e d i t worthy farmer could depend on having hi3 note renewed when i t expired, and the compounding of i n t e r e s t added but a t r i v i a l amount t o the t o t a l costs o f the farmer's operations. The second part of the bankers' response was t o a i d i n the establishment of means by which intermediate c r e d i t would be made a v a i l a b l e to t h e farmers.  Leading bankers never denied the r i g h t of the farmers  to c r e d i t on a longer term than was a v a i l a b l e through the banks, and i n f a c t thought i t necessary f o r the welfare of the country that t h i s l e g i t i m a t e request of the farmers should be met.  What they d i d deny  was t h e a b i l i t y of t h e i r i n s t i t u t i o n s t o provide loans f o r other than short-terms. 1931  Consequently they were pleased to be a b l e t o a s s i s t i n  w i t h the establishment of the Dominion A g r i c u l t u r a l C r e d i t Company  which helped f i l l the gap i n t h e supply of c r e d i t t o the farmers u n t i l the passage of the Farm Improvement Loans Act i n 1944.  I t i s doubtful,  however, i f a l l farmers ever r e a l l y appreciated the banks' p o s i t i o n on t h i s problem.  T h e i r continued a g i t a t i o n indicated t h a t they d i d not.  78 The problem of interest rates charged to agricultural borrowers was another popular topic of discussion.  Again the greater participa-  tion i n debate came from the farmers of the Prairie region who reverted in part to the argument that they were being victimised because they were situated far from the head offices of the banks.  There appeared,  however, to be no good cause for complaint i n this regard. The rates charged  by the banks on loans to farmers i n Western Canada compared  very favourably with those charged i n similar areas of the United States by small highly-competitive banking institutions.  And there was no  denying that the risks involved i n farming operations were usually greater than i n other areas of the economy i n which prospects could be predicted with greater assurance of accuracy. Particularly, as General Manager S. H. Logan of the Canadian Bank of Commerce pointed out i n his report for 1932, farmers were susceptible to an unusual extent to the 17 vagaries of weather conditions and to changing markets.  Similarly  differences i n the rates charged i n the more settled areas of Eastern Canada and those charged i n the West were explained i n terms of the degree of risk involved. The sectional argument of Western farmers was continued i n the question of the degree of discretion i n credit granting which was enjoyed by the local bank manager. Mr. Alfred Speakman, the member of the House of Commons for Red Deer, thought that "The branch bank manager, as a rule, has l i t t l e power to make loans," an attitude common i n 18 farming communities of the West.  It was an attitude, too, which some  bank managers appear to have promoted since i t enabled them to shift the onus when refusing an application for credit on to their regional  79 or head office o f f i c i a l s .  Unfortunately, the end result was a further  alienation of the farmer from the chartered banks, and stimulation of the general sentiment that the banks were gigantic city organisations out of touch with the needs of the farmer. Another feature of the situation, one which the bankers quite correctly claimed as a deterrent to their a b i l i t y to issue credit to the farmers, was the legislation of various provincial governments which restricted the rights of farmers' creditors.  Usually these restrictions  took the form of limitations on the creditors' powers to realise on collateral security, and from the point of view of the economy as a whole as well as from a humanitarian viewpoint, were probably of great value.  But they did adversely affect the worth of a farmer's security  offered i n support of a loan application, a situation which not only  19 the banks but other business groups recognised.  Consequently the  provincial regulations aimed at improving the lot of the farmer helped at the same time to widen the chasm between the farmer and the banks. It was problems such as these which made their experiences with the farmers most trying for the bankers, especially since many additional areas of criticism appeared to be either insignificant or unjustifiable. One rather contentious problem which had repercussions quite out of proportion to i t s i n i t i a l importance, was that of the availability of credit to enable farmers to buy binder twine i n order to complete the harvest.  Strong criticism of the bankers was made on this matter since,  as the farmers claimed, the refusal of a small loan for this purpose often meant the loss of a large part of a farmer's harvest. In reply the banks could state only that they did not have a policy of refusing  80 loans f o r the purchase of binder twine and t h a t should such a loan have been refused to a worthy farmer i t was, as one l e a d i n g banker expressed 20 i t , "because o f some stupid manager out there." A s i m i l a r problem developed over the granting of c r e d i t t o organisations processing a g r i c u l t u r a l products.  In some i n s t a n c e s , i t was  claimed, the banks had d e c l i n e d to a i d co-operatives at a time when a small amount o f cash was needed i n order to process and market a v a l u a b l e crop, or had demanded s e c u r i t y undertakings considered q u i t e unreasonable. Delay, the farmers claimed, had on occasion been imposed at a c r u c i a l moment and a l a r g e part of the harvest l o s t as a r e s u l t .  Again the  question of the extent of the l o c a l banker's a u t h o r i t y was c a l l e d i n t o question.  And again the bankers reverted i n r e p l y t o p o i n t i n g out t h a t  normal s e c u r i t y requirements had to be met before loans could be granted. I n view of the l a c k of rapport between the farmers and the banks, i t i s not s u r p r i s i n g t h a t the banks were very r e l u c t a n t t o suggest t o the farmers means t o a l l e v i a t e t h e i r c o n d i t i o n s . One notable exception, however, was the proposal by the banks t h a t the farmers ought to d i v e r s i f y t h e i r operations where t h i s was p o s s i b l e . This was  especially  d i r e c t e d at the g r a i n farmers of Western Canada, and the Dominion A g r i c u l t u r a l C r e d i t Company was designed to help i n t h i s respect by making i t p o s s i b l e f o r the farmers t o borrow funds f o r the purchase of 22 breeding stock.  But t h a t Company, whose c a p i t a l i s a t i o n was  reduced  from $5 mil3 i o n t o #1 m i l l i o n s h o r t l y a f t e r i t s formation, d i d not provide c a p i t a l i n s u f f i c i e n t q u a n t i t y . Nor d i d the banks' suggestion i n f l u e n c e the farmers to any considerable extent. I f the banks f a i l e d to create a good r e l a t i o n s h i p w i t h the farmers  during the e a r l y 1930's, i t was l a r g e l y due to t h e i r i n a b i l i t y t o convince the farmers of the s i t u a t i o n faced by the banks.  Perhaps i t  would have been impossible f o r the banks to have done so.  The banks  were p r i v a t e corporations whose p r o s p e r i t y depended on t a k i n g measures to secure l i q u i d i t y which o f t e n a f f e c t e d the farmers i n an adverse way. However, i t was r e a l l y not the f a u l t of most farmers t h a t they were unable to meet the c r e d i t requirements o f the banks.  For t h a t they would have  to blame world conditions and the r i s k s inherent i n farming.  But the  farmers, q u i t e understandably, were never able to comprehend f u l l y  why  they were not able to o b t a i n money when they knew at heart that t h e i r c o n t r i b u t i o n was e s s e n t i a l t o the economy of the n a t i o n and that i n the long run were almost assured of making good t h e i r debts. knew t h i s , and the bankers acknowledged i t .  The farmers  But that d i d not remove  from the banks the n e c e s s i t y of guarding the s e c u r i t y of t h e i r a s s e t s . This was t h e i r f i r s t consideration.  And the banks were not capable of  b r i n g i n g the farmers to acknowledge t h a t requirement.  Bankers could  never a f f o r d to f o r g e t or disregard the b a s i c precautions which formed sound c r e d i t p r i n c i p l e s i n s p i t e of the apparent abandonment of humanit a r i a n p r i n c i p l e s which t h i s might i n v o l v e .  They had t o employ t h e i r  funds i n t h e best p o s s i b l e ways, and a l a r g e number of farmers simply d i d not s a t i s f y the conditions of s e c u r i t y which they knew were e s s e n t i a l . The r e l a t i o n s h i p was aggravated by the bankers' persistence i n propounding t h e i r conservative economic philosophy. i n the circumstances  Government a c t i o n  could only be regarded as a temporary expedient;  the farmer "must work out h i s ultimate s a l v a t i o n f o r himself by reducing h i s costs and r e a d j u s t i n g h i s u t i l i z a t i o n of land more economically." ^ 2  82 To farmers who had faced extreme weather and marketing c o n d i t i o n s f o r s e v e r a l y e a r s , such advise served only t o deepen e x i s t i n g d i s t r u s t and anger.  The Western L i v e Stock Union noted t h a t "The desperate f i n a n -  c i a l p o s i t i o n o f the farmer i s probably accountable f o r h i s a t t i t u d e towards our bank system.  This a t t i t u d e may be based on h i s i n d i v i d u a l  experience o r the anti-bank complex which o f t e n goes w i t h a r u r a l community.  I t i s due, i n many instances, t o a l a c k of understanding  between the banker and the farmer."  Neither group i n the e a r l y years  of the depression was e f f e c t i v e i n e l i m i n a t i n g these d i f f e r e n c e s or i n c r e a t i n g understanding.  1. S... M. L i p s e t , Agrarian S o c i a l i s m (Berkeley, U n i v e r s i t y o f C a l i f o r n i a Press, 1959), 75. 2. Senator W. A. Buchanan, "How i s the P r a i r i e Farmer Faring?" Canadian Business. May, 1933, U . This f e e l i n g was evident i n much of the evidence given before the Royal Commission on Banking and Currency. See a l s o R. C. Mclvor, Canadian Monetary. Banking and F i s c a l Development (Toronto, Macmillan, 1958), 151. 3. Quoted J.C.B.A.. 1930-1, 370. Mr. W. J . Loucks, member o f Parliament f o r Rosetovm, Saskatchewan, noted: " I am not much i n sympathy w i t h / t h e banking system i n Western Canada/ and n e i t h e r i s any other Western farmer." House o f Commons, Debates, 1931 Session, 234. 4. M. C. Urquhart & K.A.H. Buckley, eds., H i s t o r i c a l S t a t i s t i c s of Canada (Toronto, Macmillan, 1965), 246. 5. Royal Commission on Banking and Currency, Proceedings. 823. 1535.  6.  Ibid..  7.  I b i d . . 823-4.  8.  I b i d . . 1531.  9.  Ibid.. 846.  10.  I b i d . . 2394.  83 11.  Ibid.. 818.  12.  Ibid.. 817.  13.  Canadian Business. May, 1933> 11»  14.. Mclvor, op_. ext., 150. 15.  Quoted, Financial Post. August 26, 1933, 13.  16.  Commons- Committee, June 10, 1931, 1»  17.  The Canadian Bank of Commerce. Annual Report. 1932. 22.  18.  Commons' Committee, June 10, 1931, 1.  19. See especially the evidence of Jackson Dodds and S. H. Logan given before the Commons' Committee, 1934, App. 2. Also the submission of the Calgary Chamber of Commerce, Royal Commission on Banking and Currency, Proceedings. 752. 20.  Commons' Committee, 1934, App. 2, 441.  21. Royal Commission on Banking and Currency, Proceedings. 628, 2124. 22.  M. Leman i n J.C.B.A.. 1930-1, 369-70.  23. Editor, J.C.B.A.. 1930-1, 135; also Mr. S. H. Logan, Commons' Committee, 1934, App. 2, 395. 24.  Royal Commission on Banking and. Currency, Proceedings, 1494*  84 X.  CANADIAN GOVERNMENTS  The r e l a t i o n s h i p which existed between the banks and p r o v i n c i a l and municipal governments was not greatly strained by the depression though some tensions d i d develop.  Although general s a t i s f a c t i o n was  expressed concerning the banking system, governments usually f e l t that there were some shortcomings i n the system which ought to be removed. Complaints, i t seemed, were most often, though not u n i v e r s a l l y , directed against i n d i v i d u a l incidents, a s i t u a t i o n which was w e l l summarised i n the statement of Mr. William Grouch as the representative of the Union of B r i t i s h Columbia M u n i c i p a l i t i e s t o the Royal Commission on Banking and Currency.  "We have no r e a l cause of complaint regarding  the banks," Mr. Grouch claimed, "but I have heard one o r two complaints from d i f f e r e n t reeves regarding the way t h e i r municipalities have been treated by d i f f e r e n t bank managers."" " 1  Nevertheless, there was a r e p e t i t i o n of some complaints which gave them a more than l o c a l i n t e r e s t .  I t seemed to be the opinion i n  many c i t i e s and r u r a l m u n i c i p a l i t i e s that the banks were not doing a l l that they ought to have been doing to help a l l e v i a t e the conditions. Often the arguments displayed a moral tone and usually involved some aspect of the question of c r e d i t f a c i l i t i e s .  In essence, the claim was  that the c i t i e s and the municipalities needed money f o r bona f i d e purposes and that money was not always forthcoming.  Therefore there  was something wrong with the e x i s t i n g system.  As the main source of  money, the banks were singled out f o r attack.  To the l o c a l c o u n c i l  member, i t was incomprehensible that the l o c a l authorities should be unable to f i n d c a p i t a l f o r what were evidently good purposes, e s p e c i a l l y  85 when the economic s t a b i l i t y of the area of the municipality was  not  i n question and repayment of advances would be secured by assignment of tax l e v i e s .  One problem which was  p a r t i c u l a r l y pressing was that of the  provision of loans to l o c a l a u t h o r i t i e s to enable them to meet current unemployment r e l i e f expenses pending the receipt of f e d e r a l and provinc i a l grants.  The Union of B r i t i s h Columbia M u n i c i p a l i t i e s claimed  quite c a t e g o r i c a l l y i n 1933  that the banks were quite unwilling to loan  money against the assignment of r e l i e f moneys to be paid to l o c a l governments, and stated that t h i s was a matter of p o l i c y with the banks  2 who  opposed r e l i e f payments and refused the loans f o r that reason.  When a representative of the Canadian Bankers that t h i s was  simply not the case, i t was  1  Association suggested  stated that many instances  i l l u s t r a t i v e o f the Union's claim could be provided. S i m i l a r l y there were many complaints that the governments of Western Canada were being victimised, as w e l l as Western Canada as a whole, because of the l o c a t i o n of the banks' head o f f i c e s i n Eastern Canada.  One consequence of the s i t u a t i o n was the slowness with which  loans were processed, a feature which could be c r i p p l i n g to businesses which had to meet c e r t a i n costs immediately at c e r t a i n times of the year.  E s p e c i a l l y i n harvesting perishable crops, delay due to lack of  ready cash could be disastrous.  "There i s not time to r e f e r to aboard  two or three thousand miles away, which may  have only a very general  knowledge of l o c a l a f f a i r s , " Premier Tolmie of B r i t i s h Columbia pointed  3 out.  The counsel f o r the C i t y of Calgary argued that "Any a d d i t i o n a l  d i f f i c u l t y / i n obtaining c r e d i t ^ i s no doubt caused by the apparent  86  unwillingness of the head offices of the banks to allow any power or discretion to local managers or superintendents,"  and i n singularly  strong language talked of an "apparent financial dictatorship" i n Eastern Canada which increased municipal problems and public unrest i n  4 the West,  To meet these problems, the governments of the West sugges-  ted that greater authority be given to local and regional bank o f f i c i a l s or that more powerful regional credit review boards be established within the various banks. The question of disadvantages being imposed on Western Canada again came up i n the discussion of the rates of interest charged by the chartered banks. The city and municipal o f f i c i a l s again tended to point out their position i n a moral argument: i t was incorrect, they contended, i n times of adverse conditions to impose higher rates of interest than was absolutely necessary. A representative of the Saskatchewan Association of Rural Municipalities saw the problem clearly and with an admirable simplicity:  "A rate of seven per cent interest  on ordinary municipal loans we consider unreasonable for this reason:  5 the rural municipalities are discharging public functions."^  i t was  pointed out i n elaboration of the point that the rural municipality was required by law to meet certain expenditures for schools, hospitals, and local administration, and that while these expenditures were made at a l l times during the year, the municipalities revenues could not be collected 1  u n t i l the farmers had sold their crops i n the f a l l and winter.  Although  the City of Victoria seemed quite happy i n 1933 with i t s banking arrangements i n respect of interest rates, and the reeve of the municipality of de Salabery i n Manitoba stated that "Our municipality has also been able to obtain from the bank everything that i t required at a l l times,"  87 these were the attitudes of but a small minority.  6  For the Union of  B r i t i s h Columbia M u n i c i p a l i t i e s , the wrong people were p r o f i t i n g from high i n t e r e s t charges.  I t was  suggested by the Union that "the persons  who b e n e f i t from an increase i n interest charges are i n the great  7 majority of cases i n the best p o s i t i o n to stand  decreases."'  There were no secrets made of the fact that most Western governments saw Eastern Canadians as being the r e c i p i e n t s of the benefits of higher rates. the East.  The West, i n short, was the v i c t i m of the Shylocks of  To the C i t y of Calgary council, which moved a formal protest  against "any d i f f e r e n t i a t i o n i n the rates of i n t e r e s t chargeable  as  between Eastern and Western Canada," the s o l u t i o n appeared to be to recognise that the banks were national i n s t i t u t i o n s operating under f e d e r a l charters and that t h i s obliged them to consider i n t e r e s t rates as a n a t i o n a l matter which was not t o be determined by the distance of the borrower from the banks  1  head o f f i c e s .  Alderman Humble of Calgary  suggested a more r a d i c a l s o l u t i o n to the problem.  "My  present views,"  he announced, "are that we should challenge the r i g h t of private owner9 ship of p u b l i c c r e d i t ; we should n a t i o n a l i z e the means of exchange." But few people were prepared to follow Mr. Humble's suggestions. The banks f o r t h e i r part possessed a considerable arsenal with which to reject the governments' contentions.  I t was pointed out that  the r u r a l m u n i c i p a l i t i e s and the c i t y administrations i n Western Canada were often i n a precarious f i n a n c i a l p o s i t i o n and were poor credit r i s k s . Many had already defaulted on t h e i r obligations. In the case of numerous r u r a l areas, i t was not known f o r sure that a major part of the current l e v i e s would be c o l l e c t e d .  In some instances only ten or f i f t e e n per cent  88 of the l e v y had been r e a l i s e d i n bad years.  Another problem was  that  numerous administrations had overloaded themselves w i t h a p u b l i c debt the s e r v i c i n g of which placed a s u b s t a n t i a l d r a i n on revenues. Brecken of Manitoba recognised t h i s problem.  Premier  " I t i s q u i t e evident  now,"  he s a i d , "that the borrowings of the past. . .are beyond our wealth producing capacity at present p r i c e l e v e l s to p a y . "  10  i t was these  considerations which led the banks to suggest that i n t e r e s t rates i n the West should be higher.  Mr. H. S. Henwood of the Bank of Toronto  summed up the banks' p o s i t i o n by saying that the cost of loans i n the West was s l i g h t l y more than i n the East because of the greater r i s k of default coupled w i t h higher operating c o s t s .  1 1  P u b l i c o f f i c i a l s t a c k l e d the problem of c r e d i t i n another way during the e a r l y 1930's. Under the provisions of the Finance Act, the chartered banks borrowed funds from the Treasury Board against s e c u r i t i e s which often included bonds issued by l o c a l a u t h o r i t i e s .  For these loans,  the banks paid a r a t e of i n t e r e s t which was considerably below that paid on loans granted by the banks.  To p u b l i c o f f i c i a l s the r a t i o n a l e  behind t h i s scheme was incomprehensible.  P u b l i c funds were being loaned  to p r i v a t e i n s t i t u t i o n s at lower rates than those at which p u b l i c bodies could borrow.  I t seemed obvious that i t would be much more d e s i r a b l e  f o r the provinces, c i t i e s and m u n i c i p a l i t i e s to borrow d i r e c t from the f e d e r a l government or a f e d e r a l government agency or t o have s p e c i a l arrangements established w i t h the chartered banks which would enable loans to be procured at a r a t e close to or equal to that of Finance Act borrowings. To t h i s suggestion the banks contended that to f o l l o w the  proposals  89  would be to make i t possible for the money supply to be expanded without limit since any government could apply for a loan against i t s bond issues.  Some form of management would clearly be needed, and as was  commonly recognised, i f this control lay i n a public body that body would be susceptible to a l l the i l l s associated with p o l i t i c a l intrigue. The banks, too, declined to treat their Finance Act borrowings as distinct from their other sources of funds, claiming that "there i s no reason why such funds should be loaned at lower rates than those charged 12  for funds derived from deposits."  To have differentiated between the  two sources would have placed an interpretation on the provisions of the Finance Act which the Act had not intended. The Royal Commission on Banking and Currency accepted this view and rejected the municipalities' suggestions, and claimed that the Finance Act was designed to permit the increase of bank reserves as conditions i n the country warranted, concluding with the short statement that "If. . .governments were to issue Dominion Notes to finance the requirements of Provincial Governments, Municipalities and School Boards, i t would engage i n a dangerous policy."  At that the matter rested, and no special provisions were  made to satisfy the wishes of the cities and municipalities when the Bank Act was revised i n 1934. Another interesting question, raised primarily by the City of Winnipeg, concerned the role of the chartered banks as participants i n syndicates underwriting bond issues of municipal and other public bodies.  The submission of the City of Winnipeg to the Royal Commission  on Banking and Currency argued that under the conditions then prevailing i t was possible for the banks to oblige a city or municipality to go to  90 the bond market w i t h an i s s u e o f bonds at a time which was inopportune to t h e c i t y .  I n t h i s way a higher r a t e o f i n t e r e s t might have t o be  paid on t h e i s s u e than might otherwise have been the c a s e .  1 4  The banks,  t o o , stood t o g a i n since they were r e g u l a r holders of c i t y and municipal debentures, and could take up part of an i s s u e t o y i e l d a h i g h return.  To these charges o f using t h e i r p o s i t i o n i n an u n e t h i c a l manner,  the banks i s s u e d d e n i a l s , and the Royal Commission upheld t h e banks' contentions i n i t s Report. The resentment of the r o l e o f t h e banks which was a f e a t u r e of the representations o f most o f the Western governments t o the MacMillan Commission was not a feature o f those o f the governments o f C e n t r a l and Eastern Canada. The t r e a s u r e r of t h e Province o f Quebec was sympathetic t o the banks, suggesting that "the banking i n s t i t u t i o n s o f Canada, as p r e s e n t l y organised, have i n p r a c t i c e rendered reasonable f i n a n c i a l a s s i s t a n c e , a t reasonable charges, t o p u b l i c i n s t i t u t i o n s o f a l l kinds i n Canada. . . .", and went on t o point out t h a t t h e branch banking system was a decided advantage s i n c e i t allowed t h e banks t o consider each l o a n on an impersonal b a s i s without undue attachment t o l o c a l  15 interests.  At the same time, the i n s i s t e n c e of bank o f f i c i a l s that  c a r e f u l i n v e s t i g a t i o n of t h e a f f a i r s o f p u b l i c a u t h o r i t i e s be made before c r e d i t be granted was lauded as having provided a r e i n on the borrowings of p u b l i c bodies. On t h e whole, the banks were none t o o happy w i t h t h e conduct o f p r o v i n c i a l , c i t y and r u r a l governments i n Canada, and there was some genuine concern i n banking c i r c l e s about some aspects of the p o l i c i e s being f o l l o w e d by these governments.  E s p e c i a l l y the bankers were  91 troubled by the i n a b i l i t y of a number of m u n i c i p a l i t i e s t o meet t h e i r o b l i g a t i o n s as they f e l l due.  They saw Canada's c r e d i t abroad threatened  by t h i s and c a l l e d on a l l p u b l i c bodies to administer t h e i r a f f a i r s w i t h the greatest of care. meeting of 1931  The Canadian Bankers' A s s o c i a t i o n i n i t s annual  thought t h a t p r o v i n c i a l and municipal a u t h o r i t i e s were  i n some instances "not f u l l y seized of the present f i n a n c i a l conditions" and suggested t h a t continued d e f i c i t budgets threatened t o r a i s e taxes 16 t o unbearable l i m i t s with c o s t l y consequences f o r the n a t i o n . I n b r i e f , then, the arguments of the c i t i e s and the r u r a l municip a l i t i e s were o f t e n based on the assumption that being p u b l i c bodies they ought t o r e c e i v e s p e c i a l consideration. E i t h e r t h i s would have t o come from a governmental body or from the chartered banks.  However, i t  should be noted t h a t not a l l governments f e l t t h i s way, and n e i t h e r d i d the banks nor the Royal Commission on Banking and Currency.  This l a t t e r  body observed r a t h e r c u r t l y i n i t s conclusions t h a t f o r the banks to provide s p e c i a l p r i v i l e g e s t o p u b l i c bodies would mean s h i f t i n g the burden of expenses elsewhere, a move which would hardiy have any permanent advantage f o r the n a t i o n as a whole. i n 1934,  I n the r e v i s i o n of the Bank Act  no changes were made t o s u b s t a n t i a l l y a l t e r t h e e x i s t i n g  arrangements i n those matters r a i s e d by the l o c a l governments. The r e l a t i o n s h i p between the chartered banks and the f e d e r a l government was e n t i r e l y d i f f e r e n t from that which existed between the banks and other Canadian governments.  Largely t h i s was because the  f e d e r a l parliament was the a u t h o r i t y charged w i t h c o n t r o l of the banking a f f a i r s of the n a t i o n , and any attacks by the f e d e r a l government on the banks obliged the f e d e r a l government t o take measures t o remove the  92 areas of complaint. Consequently there was l i t t l e f r i c t i o n between the Bennett a d m i n i s t r a t i o n and the banks i n the e a r l y part o f the depression.  I n h i s correspondence, Bennett g e n e r a l l y defended the  banking system, and h i s m i n i s t r y took the same p o s i t i o n i n the Canadian 17 Parliament. The i d e n t i c a l a t t i t u d e s o f the f e d e r a l government and the chartered banks was p a r t i c u l a r l y noticeable i n the p o l i c i e s which both groups advocated.  Both groups b e l i e v e d t h a t monetary matters should be l e f t  t o p r i v a t e e n t e r p r i s e as f a r as t h i s was p o s s i b l e .  L i k e the banks, the  government proposed that t o attempt t o manipulate the volume of c r e d i t or the e x t e r n a l v a l u e of Canada's d o l l a r was t o court d i s a s t e r .  In  a d d i t i o n , i t was thought t h a t Canada must maintain her i n t e g r i t y i n f i n a n c i a l matters by pursuing a p o l i c y of "sound money." This concord, however, d i d not o u t l i v e the Bennett a d m i n i s t r a t i o n . By 1933,  the Prime M i n i s t e r had moved away from h i s former p o s i t i o n of  complete sympathy t o the banks.  P o s s i b l y h i s move was a r e f l e c t i o n of  the popular demands f o r changes i n the banking system.  I n June,  1933,  Bennett's temper towards the banks had changed t o the extent t h a t he wrote J . A. McLeod, the President of the Canadian Bankers' A s s o c i a t i o n , complaining o f the d i s s a t i s f a c t i o n w i t h the conduct of the banks which was general throughout the country. He saw the banks as " d r i v i n g people to the w a l l , " and suggested t o McLeod that the chartered banks had placed h i s government i n an awkward p o s i t i o n but a short time before  18 the Bank Act was due f o r r e v i s i o n .  i n November of t h a t same year,  he wrote i n confidence t o F. D. L. Smith, the Chief E d i t o r of the M a i l and Empire, that " I f the people must engage i n c o n f l i c t w i t h those who  93 worship p r o f i t s as t h e i r God and who regard the welfare of the n a t i o n as being of secondary importance, then I know i n whose camp I w i l l be 19 enlisted."  7  T h i s divergence o f the Bennett a d m i n i s t r a t i o n and the banks was fed by the Prime M i n i s t e r ' s quest f o r a c e n t r a l bank f o r Canada. However, the chartered banks appear t o have r e a l i s e d that the move to create a c e n t r a l bank was one which must be accepted g r a c e f u l l y .  By  1935, the r e l a t i o n s h i p between the two groups had not d e t e r i o r a t e d t o open antagonism, and the bankers by t h e i r attacks on the more r a d i c a l p o l i t i c i a n s made i t c l e a r t h a t they appreciated the moderate p o s i t i o n which t h e Bennett government took under pressures from c r i t i c s of the administration.  1.  Royal Commission on Banking and Currency, Proceedings. 278-9.  2.  I b i d . . 282.  3.  I b i d . . 217.  4.  I b i d . , 727-8.  5.  I b i d . . 1446.  6.  I b i d . . 255, 1869.  7.  I b i d . . 281.  8.  I b i d . . 725.  9.  I b i d . . 896.  10.  I b i d . . 1698.  11.  I b i d . . 3265.  12.  Idem.  94  13. Royal Commission on Banking and Currency, Report. 75-6. An amendment t o the Finance Act which would have permitted the provinces t o borrow d i r e c t l y from the f e d e r a l government was defeated i n the 1932 session o f Parliament; House of Commons, Debates, 1932 Session, 690. 14.  Royal Commission on Banking and Currency, Proceedings. 1707-8.  15.  Ibid..  16.  J.C.B.A..  2261-2. 1931-2, 271.  17. The Minister of Finance, Hon. E. N. Rhodes, stated t o Parliament, "I wish t o r e f e r t o the contribution o f the chartered banks t o the orderly financing of our economic l i f e . " House of Commons, Debates. 1932-33 Session, 3209. 18.  Bennett Papers;  62215,  Bennett t o J . A. McLeod, June  1, 1933.  19.  Bennett Papers;  62873,  Bennett t o F. D. L. Smith, Nov.  24, 1933.  95  XI.  ATTITUDES TOWARDS THE BANKS AND THE BANKERS  "There i s a very b i t t e r f e e l i n g abroad towards the whole banking system," the Women's Conservative Association of Notre Dame de Grace, Montreal, thought i n 1933.^" This opinion was borne out i n the hearings of the Royal Commission on Banking and Currency which were held i n that year, and i n the conduct of the bankers i n t h e i r repeated e f f o r t s to j u s t i f y t h e i r p o s i t i o n which they made i n t h e i r annual statements. I t was a f e e l i n g which, of course, had not been conceived i n the depression years, but was one to which the harsh conditions of the ' t h i r t i e s l e n t a new b i t t e r n e s s .  One c r i t i c o f the banks commented i n 1933 that "There  i s no need to increase public d i s t r u s t of bankers i n these days; the events of the present and the revelations of the past are doing that i n f u l l measure."  A "representative of the unemployed" t o l d the Commis-  sion that the unemployed "have no use f o r banks, and i t might be said 3  that the banks have no use f o r them." The d i s t r u s t was not, however, a u n i v e r s a l emotion.  Some sectors  of the Canadian community d i d not indicate a strong abhorrence of the bankers and the banks. the  Usually such sectors were c l o s e l y connected to  business i n t e r e s t s , and included Chambers of Commerce, Boards of  Trade, and i n d i v i d u a l i n d u s t r i a l companies.  They tended to be, as one  c r i t i c of the banks put i t , those who were doing w e l l and whose p o l i c y  4 was t o " l e t w e l l enough alone."  The most b i t t e r f e e l i n g s came f o r the  most part from i n d i v i d u a l farmers and businessmen whose a f f a i r s had suffered and who saw i n the banks a source of t h e i r problems.  96 P o s s i b l y t h e major cause o f a l i e n a t i o n was the s i z e of the banks and the impersonal r e l a t i o n s h i p which had been created between banker and customer.  There were many references made t o the f e a r o f a "banking  monopoly" i n Canada.  The Women's Conservative A s s o c i a t i o n o f Notre  Dame de Grace spoke of the " g i g a n t i c money t r u s t s t i f l i n g a l l hope o f the i n d i v i d u a l ' s development of i n i t i a t i v e and daring" which people v i s u a l i s e d because of the r e s t r i c t e d number o f large banks which r e g u l a r l y absorbed smaller and weaker ones.  They also thought the s i t u a -  t i o n was made worse by the curtailment of t h e a u t h o r i t y o f branch managers which had taken p l a c e , t h e existence o f i n t e r - l o e k i n g d i r e c t o r a t e s , and the i n t r u s i o n o f t h e chartered banks through t r u s t companies  5 i n t o other l i n e s o f business.' The i n d i v i d u a l bank manager was thought by one a s s o c i a t i o n t o have a "cold-blooded, business view-point" i n h i s r e l a t i o n s h i p w i t h h i s customers and consequently was unable t o develop 6 a personal i n t e r e s t i n t h e i r a f f a i r s . There was a l s o a f e a r of the t r u e extent of the power of the bankers.  The connection between the p o l i t i c i a n s and t h e bankers caused  some concern outside t h e major c i t i e s of C e n t r a l Canada.  I n connection  w i t h t h e Report of t h e Macmillan Commission, a Nova S c o t i a man commented that "many people are wondering i f the banks w i l l permit t h e Government  7 to pass these recommendations."  Another wrote of t h e "apparent sanctions  of the Government" which permitted the banks t o exert " p e r s i s t e n t and 8 demoralising pressure" on small business men.  There was a l s o consider-  able concern among wage-earners about the a c t i v i t i e s of t h e banks, e s p e c i a l l y as t h e banks were l a b e l l e d as g i g a n t i c money t r u s t s , and the b e l i e f spread of t h e i r power i n the n a t i o n .  One l e t t e r w r i t t e n t o  97  Prime Minister Bennett i n 1932 requested the Prime Minister to give consideration to the "efforts being made by the Banking Institutions and Financial Groups i n Canada to reduce wages and living conditions of the working people."  Moreover, i t was suggested to Bennett that "while  wages of labour have suffered reductions, wages of capital have i n many o instances received increases."  7  It was noted too, that while many  people were out of work through no fault of their own, the banks continued to operate with a shortage of s t a f f . ^ Although much of the criticism of the bankers appears to have been caused by the economic position of the c r i t i c s , the antagonism towards the banks and towards the bankers may also have been due i n large part to the very nature of the work which the banks performed. They were not i n the same position as most business firms, and their contact directly with large numbers of persons meant that virtually every Canadian had personal experiences with the banks. The loaning function of the chartered banks was one aspect of their work which was particularly prone to the creation of strained relations, and the League for Social Reconstruction noted the existence of an "anti-banker complex among debtor groups."  11  The attempts of the banks to erase the differences between themselves and the public were largely unsuccessful. Normally their only activities i n this regard were through their monthly letters and annual reports, and both of these media were doomed to failure since few people outside the business community were regular readers of these statements. Moreover, the bankers maintained their reluctance to enter into public debate of the banking function, Sir John Aird, the President of the  98 Canadian Bank of Commerce, suggesting at one time that this was desirable and that "the less bankers talk about the banks the better."  12  This reluctance to discuss their affairs the Financial Post regarded as costly to the banks' public image. Particularly i t was suggested that the banks ought to carefully explain to customers the reasons why  13  applications for credit were declined.  When they did come to defend themselves in public, the bankers further alienated their antagonists. This was particularly evident during the hearings of the Commons' Committee on Banking and Commerce in 1934 at which members of Parliament cross-examined the bankers about their policies. The opposition of the banks to a central bank served also to alienate some of the supporters of the banks. Gn the question of a central bank and the chartered banks' defence of the existing system, one academic was reminded of the dictum of J. M. Keynes that "Bankers are by nature blind."  14  The Canadian Forum in January, 1934,  wondered i f some statements by the bankers "were the sincere utterances of our gentlemen whose comprehension of monetary questions is as childish as that of Mr. Bennett himself." * 1  5  The criticism of the banks took on a more pressing tone with the development of sectional grievances. Combined with genuine economic complaints, the belief that certain areas of the nation were victimised by the banking system as i t existed in the 1930's became a major contention of a large number of critics of the banks. The grievances were particularly strong in Western Canada where the pre-dominance of Eastern Canadians in control of the banks was thought detrimental to the economy of the West. The government of British Columbia in its  99  presentation t o the Royal Commission on Banking and Currency believed that the West had not received the consideration from the banks which was i t s due.  P a r t i c u l a r l y i t was thought t h a t the banks had not been  prepared t o extend c r e d i t i n the West i n order t o develop the economy. This short-coming was b e l i e v e d caused i n part by the f a c t t h a t c r e d i t d e c i s i o n s were being made i n Eastern Canada by persons l a r g e l y ignorant of the s i t u a t i o n i n the West.  I t was a l s o thought due t o the monopoly  s i t u a t i o n enjoyed by Canada's bankers.  One member of Parliament noted  concerning the government's proposals f o r a c e n t r a l bank t h a t "the s e l l i n g of f i v e m i l l i o n d o l l a r s worth o f shares t o the p u b l i c w i l l j u s t n a t u r a l l y give the c o n t r o l t o a new f i n a n c i a l o l i g a r c h y and w i l l i n no way assuage the s e c t i o n a l d i s t r u s t o f our banking management.""^ The p o s i t i o n o f the government o f B r i t i s h Columbia was taken by a l a r g e number o f the representative bodies o f Western Canada. The s o l u t i o n s preferred d i d not, however, have unanimity.  For the  p a r t , Western Canadians f e l t t h a t the v i r t u a l monopoly of the banks should be broken by the establishment p r e f e r a b l y a c e n t r a l bank.  greater Eastern  o f a c e n t r a l r e g u l a t o r y body,  On the other hand, a strong body of opinion  based on wide farmer support, proposed that i n a d d i t i o n t o a c e n t r a l bank, the commercial banks ought t o be n a t i o n a l i z e d and c r e d i t organised on a n a t i o n a l b a s i s . In the Maritime and C e n t r a l provinces the opposition t o the e x i s t i n g system was not so extreme.  C e n t r a l Canada, o f course, housed  the home o f f i c e s o f the chartered banks and so could not e a s i l y r a i s e a s e c t i o n a l argument.  The Maritime provinces, though not so heated i n  argument as were the Western ones, thought that i t was t o t h e i r  100 disadvantage that a l l the main banking decisions should be made i n Ontario and Quebec.  On the whole, there was not a strong movement i n  the Maritimes f o r n a t i o n a l i z a t i o n of the chartered banks nor f o r a c e n t r a l bank, though there was some a g i t a t i o n f o r greater l o c a l autonomy i n management.  The a t t i t u d e s , then, which were exhibited towards the banks and the banks and the bankers appear to have been shaped l a r g e l y by the nature of the economic a c t i v i t y of each sector of the community combined with  17 a strong sense of r e g i o n a l i n t e r e s t .  The representations made to the  Royal Commission on Banking and Currency demonstrated the greater a l i e n a t i o n of the agrarian West from the banks. there was  S u r p r i s i n g l y , however,  l i t t l e mention made by e i t h e r the opponents or supporters of  the banking system of the investigations i n t o the a f f a i r s of bankers which was arousing such intense i n t e r e s t i n the United States. there was  Although  considerable uneasiness over the existence of a "banking  monopoly" and of a "money t r u s t , " and the Commons Committee on Banking and Commerce investigated the i n t e r l o c k i n g directorates of bankers i n 1934,  there were very few attacks on the personal i n t e g r i t y of Canada's  bankers.  Of the general strength of the Canadian banks there was also  l i t t l e question.  101  1. Royal Commission on Banking and Currency, Proceedings. 2535. 2. A. Goulding, "The Banks Oppose I n f l a t i o n , " J u l y , 1933, 375.  Canadian Forum.  3.  Royal Commission on Banking and Currency, Proceedings. 893-4.  4.  I b i d . . 2070.  5. I b i d . , 2535-6. 6. I b i d . . 886; submission of the R e t a i l Merchants A s s o c i a t i o n of A l b e r t a .  1933.  7. Bennett Papers; 62268, H. P. Blanchard to Bennett, Nov. 18, 8. Bennett Papers; 62109, N i p i s s i n g Laundry Company to Bennett,  Sept. 20,  1932.  9. Bennett Papers; 62175, F o r t W i l l i a m Trades and Labor C o u n c i l , t o Bennett, Feb. 11, 1932. 10.  J u l y 13,  Bennett Papers; 62478, l e t t e r i n the Montreal D a i l y S t a r . 1935.  11. League f o r S o c i a l Reconstruction, S o c i a l Planning f o r Canada (Toronto, Nelson, 1935), 316. 12.  F i n a n c i a l Post. August 12, 1933,  13.  I b i d . . Nov. 4, 1933,  2.  12.  14. A. F. W. Plumptre, "The Point o f View of a C e n t r a l Bank," Canadian Forum. Jan. 1933, 133.  15.  Canadian Forum. January, 1934, 123-4.  16. Bennett Papers; 62720, Raymond P. Murand t o Bennett, Nov. 18, 1933. 17. A. F. W. Plumptre, "The Evidence Presented t o the Canadian Macmillan Commission," Canadian J o u r n a l of Economics and P o l i t i c a l  Science. I I , 54-67.  102  XII.  CONCLUSION .  The depressed economic conditions i n Canada i n the early 1930's put an uncommon strain on the various sectors of the economy. Under the circumstances, i t was almost inevitable that men should look for the cause of their problems and for a way out of the situation.  For  many, monetary problems appeared to be at the root of their adversities.  When prices fluctuated, i t seemed that some effort to stabilise  those prices should be made, and that this could best be done through manipulation of the t o t a l supply of money. Similarly some form of control over Canada s external monetary trading seemed necessary i n 1  order to keep Canada's dollar at a reasonably stable exchange rate. The chartered banks were, of course, the instruments by which the greatest part of Canada's monetary affairs were conducted.  Through  them the business man arranged to make his payments and to receive payments due to him.  To the nation, the banks were closely identified  with the monetary system. Consequently the banks became the object of criticism as some groups found fault with the monetary situation. These groups believed that there were a number of problems which warranted change i n the existing arrangements of the nation's monetary affairs.  One problem was the stabilization of the value of money.  In the firart year of the depression, the general price level i n Canada f e l l so that goods sold brought fewer dollars than i n 1929.  This meant  that debtors were obliged to pay more i n terms of goods i n order to meet obligations assumed before the depression. To a debtor group such as the Prairie farmers, this was a crippling blow to their economic  103 condition.  The s o l u t i o n appeared t o be t o have more money i s s u e d , but  t h i s move the banks opposed claiming that t o do so would r i s k uncontrollable inflation.  The banks held that the best volume of money was  obtained by i s s u i n g currency only t o the extent required by the n a t u r a l demands of the market, and t h a t t h e arrangements e x i s t i n g under the Finance Act were adequate f o r that purpose. The banks took a s i m i l a r p o s i t i o n concerning the r o l e they were able t o play i n the determination of the e x t e r n a l value of the Canadian d o l l a r .  They f e l t that i t was  f o o l i s h t o attempt t o change a r t i f i c i a l l y the conditions imposed by world c o n d i t i o n s . The f a i l u r e of the chartered banks t o provide a monetary p o l i c y acceptable to a l a r g e part of the n a t i o n was unfortunately coupled with a s i m i l a r f a i l u r e on t h e part of Canada's f e d e r a l government.  The banks  defended t h e i r p o s i t i o n on two bases. F i r s t , that i t was not t h e i r r o l e as commercial banks t o co-ordinate f i s c a l p o l i c i e s f o r t h e n a t i o n , and second, that economic forces were s e l f - r e g u l a t o r y and required only the existence o f machinery which could respond t o market demands i n order t o be e f f i c i e n t .  The government f o r i t s part wished t o leave  p r i v a t e e n t e r p r i s e t o the task of meeting the exigencies of the depression. As one w r i t e r viewed the s i t u a t i o n , "Government monetary p o l i c y was conspicuous by i t s v i r t u a l absence, r e f l e c t i n g the l a c k of instruments of c o n t r o l , the varying needs of d i f f e r e n t parts of the economy, and a d e s i r e t o avoid experimentation i n view of the l a r g e f o r e i g n d e b t . "  1  The main objective was t h e maintenance o f "sound money" and presumably t h i s meant i n t e r f e r i n g with the monetary system as l i t t l e as p o s s i b l e . I t was a p o l i c y of f i n a n c i a l orthodoxy, and duplicated the a t t i t u d e of  104 the bankers.  The president of the Canadian Bankers' A s s o c i a t i o n  sxmimed up the a t t i t u d e of both the f e d e r a l government and h i s own constituents i n 1933  by remarking that "We s h a l l be wise i f we con-  t i n u e t o proceed w i t h caution."  2  The approach t o t h e problems which was taken by the c e n t r a l government and by the chartered banks was not one which would endear them t o a l l Canadians.  While t h e government and t h e banks favoured  the i d e a that the depression was caused by forces beyond t h e i r c o n t r o l , an i d e a p a r t i c u l a r l y convenient since i t removed blame from t h e i r shoulders, i t was a concept e n t i r e l y unacceptable t o l a r g e numbers o f people.  Many believed that the s i t u a t i o n was one amenable t o human  correctives.  They f e l t that some form of c e n t r a l i s e d leadership ought  t o be given, both t o regulate the t o t a l supply o f c r e d i t and of money and t o work t o m i t i g a t e f l u c t u a t i o n s i n the value of Canada's d o l l a r abroad.  Eventually t h e f e d e r a l government bowed t o t h i s group by  c r e a t i n g the c e n t r a l bank. The r o l e of the chartered banks i n the period from 1930  t o 1935  was not, however, d i s a s t r o u s to the economy. The bankers' c o n t r i b u t i o n to the economic h e a l t h of the nation was a valuable one. One commentator noted c o r r e c t l y that "The r e t e n t i o n of p u b l i c confidence and sense o f s e c u r i t y i n Canadian banking i n s t i t u t i o n s was an immensely more heroic p o l i c y than t a k i n g a chance with i n f l a t i o n a r y o r semi-  3 i n f l a t i o n a r y measures."  That there were no bank f a i l u r e s i n Canada  at a time when these were common i n other countries was e s s e n t i a l t o the continued s t a b i l i t y of Canada.  The hearings of the Macmillan  Commission made i t c l e a r that c r i t i c i s m was often d i r e c t e d a t the  105 monetary system r a t h e r than at the banks.  That Canada should l a c k  co-ordinated f i n a n c i a l p o l i c i e s was not the f a u l t o f the banks which were chartered t o f u l f i l l other functions which they performed admirably. As one business man expressed the problem, "the i n d i v i d u a l banks cannot help themselves. They are bound to regulate t h e i r i n d i v i d u a l p o l i c i e s from day t o day t o safeguard t h e i r p o s i t i o n s without regard t o the compound e f f e c t of those p o l i c i e s upon the n a t i o n a l welfare.""* I f the banks a r e t o be c r i t i c i s e d f o r t h e i r conduct, i t must be f o r t h e i r unwillingness t o consider the a l t e r n a t e p o l i c i e s which were proposed f o r the a l l e v i a t i o n of c o n d i t i o n s .  The banks d i d not bear  t h e i r share o f the burdens imposed on the economy.  P o s s i b l y through  lowering t h e i r i n t e r e s t r a t e s , even where t h i s meant a reduction of t h e i r earnings, business could have been stimulated and recovery aided. The f a i l u r e t o enter f r e e l y i n t o the d i s c u s s i o n of monetary matters was i n d i c a t i v e of a l a c k o f i n t e r e s t i n the p u b l i c w e l f a r e . i t may be conceded t h a t t h e i r b e l i e f i n orthodox economic  Although  principles  formed a philosophic base f o r t h e i r conduct, t h i s ought not t o have prevented t h e i r consideration of a l t e r n a t i v e suggestions. Nor was the tone o f the bankers* utterances conducive t o t h e idea t h a t they were w i l l i n g t o even consider changes.  They f u r t h e r a l i e n a t e d themselves  from large numbers o f people by p l a y i n g down the s e v e r i t y of the conditions.  Moreover, t h e bankers thought that Canada must wait out the  i n t e r n a t i o n a l debacle, preserve her economic resources, put her own house i n order, balance government budgets, and r e t a i n optimism i n her a b i l i t y t o survive and recover. E s s e n t i a l l y t h i s was an a t t i t u d e which the economic c o n d i t i o n o f many Canadians would not a l l o w them t o accept,  106 and the dichotomy which resulted could only be r e l i e v e d by changes i n the banking system. During the depression, the Canadian chartered banks were more fortunate than most sectors of the economy. the conservatism of t h e i r p o l i c i e s .  In part, t h i s was due t o  Unfortunately t h e i r r e l a t i v e  prosperity made the banks appear opportunistic i n the eyes o f those less fortunate.  The c r i t i c i s m s l e v e l l e d at the banks i n the period must be  accepted with t h i s i n mind.  But the c r i t i c i s m s must not be permitted  t o conceal the r e a l contribution which the banks d i d make.  The impact  of a bank f a i l u r e would have, as a spokesman f o r the banks noted, put a s t r a i n "not only on the banks' shareholders and depositors, but on  5 a l l the community."  Recognition must be given to the s o l i d a r i t y which  the conduct o f the chartered banks and of the bankers gave t o the Canadian economy at a time of great economic i n s e c u r i t y .  As commercial  banks, the Canadian chartered banks were remarkably successful.  1. A. E. Safarian, The Canadian Economy i n the Great Depression (Toronto, University of Toronto Press, 1959), 65.  2.  J.C.B.A.. 1934-5, 177.  3. Mark K. Inman, "Experience i n Canadian Banking, 1929-1934," Unpublished Ph.D. d i s s e r t a t i o n , Harvard University, 1937, 375. 4.  Royal Commission on Banking and Currency, Proceedings. 2440.  5. F. C. Biggar, "Canadian Bankers and a Central Bank," Papers and Proceedings o f the Canadian P o l i t i c a l Science Association. 1933,  228-9.  107 SELECTED BIBLIOGRAPHY  a.  Sources.  (i)  Manuscript C o l l e c t i o n s .  P u b l i c Archives of Canada, R. B. Bennett Papers. r e e l s M-960 t o M-964 i n c l u s i v e .  Microfilm  Contains papers r e l a t i n g t o banking matters. Very u s e f u l though most documents are given t o problems o f a r o u t i n e nature. The l e t t e r s c r i t i c a l of the banks served t o i l l u s t r a t e i n d e t a i l some o f the areas of complaint. Bennett's r e p l i e s t o these l e t t e r s and h i s comments i n notes t o t h e bankers are i n d i c a t i v e of h i s own p o s i t i o n on banking questions.  (ii)  P u b l i c Documents.  Canada, House o f Commons, O f f i c i a l Report o f Debates« 1930-35. The i n t e r e s t i n monetary questions and i n banking which was common a t the time i s r e f l e c t e d i n the debates. The debates are p a r t i c u l a r l y u s e f u l f o r the d e t a i l s which they give i n support o f proposals f o r change i n the banking system. Canada, House of Commons, Standing Committee on Banking and Commerce, Minutes o f Proceedings and Evidence. 1923, 1930, 1931, 1932, 1933, 1934. An invaluable source. E s p e c i a l l y h e l p f u l i n g i v i n g t h e p o s i t i o n of various i n t e r e s t groups from across the n a t i o n . The Committee was composed o f members from a l l regions who gave the f u l l spectrum o f opinions concerning banking matters. The hearings o f the Committee i n 1934, when t h e Bank Act was before t h e House of Commons f o r r e v i s i o n , are p a r t i c u l a r l y important. At that time, representatives o f the banks appeared before the Committee and the cross examination o f these men by p o l i t i c i a n s i s very i l l u m i n a t i n g . Canada, Senate, O f f i c i a l Report of Debates,  1930-35.  S u r p r i s i n g l y l i t t l e d i s c u s s i o n o f the banking s i t u a t i o n .  Canada, Senate, Standing Committee on Banking and Commerce, Proceedings. 1930-35. Nothing of moment for this study. Canada, Dominion Bureau of Statistics, The Canada Year Book.  1929-1935.  A valuable source of statistics, and contains useful material concerning the history of banking especially the development of banking legislation i n Canada. Canada, Royal Commission on Banking and Currency, Proceedings.  1933.  Canada, Royal Commission on Banking and Currency, Report, 1933. The Commission was established to enquire into and report on "The operation of the banking and monetary system of Canada" and '.'the advisability of establishing a Central Banking Institution." Hearings were held i n major cities across Canada and submissions, solicited from any interested party. The briefs presented represented varied interests, from individuals to national organisations. The banks made use of the opportunity to present their position. The Proceedings and Report are essential to this study.  (iii)  Newspapers, Periodicals, and Reports.  Canadian Business. O f f i c i a l publication of the Canadian Chamber of Commerce, 193I-35. A monthly magazine, generally sympathetic to the bankers. Nevertheless valuable as indicative of the position, of a large organisation of business men. Contains many pertinent articles and editorial comments. Canadian Forum^ 1929-35. Opposed to the bankers' position and favourable to a central banking institution. Articles generally uphold the need for monetary reform. A useful source of anti-bank opinion. Chartered Banks, Annual Reports* 1928-36. The Annual Reports of the various chartered banks are useful for the Presidents' and General Managers' assessments of the economic conditions, and for their statements on bank policies.  109 F i n a n c i a l Post, Toronto,  1930-35.  A weekly business newspaper. Contains very u s e f u l excerpts and comments on the hearings o f the Royal Commission on Banking and Currency. However, the tendency was t o report rather than t o analyse or comment so that the paper i s of l i m i t e d value f o r t h e purposes o f t h i s study. J o u r n a l of the Canadian Bankers' A s s o c i a t i o n .  1929-36.  The q u a r t e r l y p u b l i c a t i o n o f the bankers' s o c i e t y . Valuable e d i t o r i a l comments and a r t i c l e s . U s e f u l i n providing i l l u s t r a t i o n s o f the a t t i t u d e o f the bankers. Monetary Times. Toronto,  1933-34.  Weekly f i n a n c i a l newspaper. Reported news rather than commented and consequently o f l i m i t e d help.  (iv)  A r t i c l e s and Books.  Biggar, F. C , "Canadian Bankers and a C e n t r a l Bank," Papers and Proceedings o f the Canadian P o l i t i c a l Science A s s o c i a t i o n . 1933, 227-42. Mr. Biggar was the Secretary of the Canadian Bank of Commerce. The a r t i c l e i s a defence o f the bankers' p o s i t i o n . Dodds, Jackson, "Banking and Currency," J o u r n a l o f the Canadian  Bankers' A s s o c i a t i o n . 1932-33, 299-314.  Speech d e l i v e r e d by Mr. Dodds, General Manager o f the Bank of Montreal, before the Winnipeg Board of Trade. An able defence o f the banks. Hopkins, J . C a s t e l l , ed., The Canadian Annual Review o f P u b l i c A f f a i r s . Toronto: Canadian Annual Review Company, 1929-1936. While the Review contains commentary on contemporary events, t h e books were u s e f u l t o provide background o f the times. Most h e l p f u l were the s e l e c t i o n s from the annual reports o f the banks. League f o r S o c i a l Reconstruction, S o c i a l Planning f o r Canada. Toronto; Nelson, 1935.  110 C o n t a i n s a few v a l u a b l e comments on t h e b a n k i n g scene from t h e s o c i a l i s t point-of-view.  L i g g i n s , H. F., "The R e l a t i o n s h i p o f Bank D e p o s i t s and Loans," J o u r n a l o f t h e Canadian Bankers' A s s o c i a t i o n . 1933-34, 86-8. An a d d r e s s g i v e n by Mr. l i g g i n s w h i l e he was s u p e r i n t e n d e n t o f Saskatchewan branches f o r t h e Canadian Bank o f Commerce. A good statement o f t h e banks' a t t i t u d e .  McLeod, J . A., "The P r e s e n t Working o f t h e Canadian Banking System," J o u r n a l o f t h e Canadian Bankers' A s s o c i a t i o n . 1933-4, 31-47. The p r e s e n t a t i o n made by Mr. McLeod i n h i s c a p a c i t y as p r e s i d e n t o f t h e Canadian Bankers' A s s o c i a t i o n t o t h e R o y a l Commission on Banking and C u r r e n c y .  N o b l e , S. R., "The Monetary E x p e r i e n c e o f Canada D u r i n g t h e D e p r e s s i o n , " i n Gayer, A. D. ed., The Lessons o f Monetary E x p e r i e n c e . New Y o r k : F a r r a r & R i n e h a r t , 1937. 117-128. A l t h o u g h a banker, Noble p r e s e n t e d some i d e a s n o t g e n e r a l l y a c c e p t e d w i t h i n t h e banking community. A u s e f u l treatment o f some a s p e c t s o f the money s i t u a t i o n .  P a t t e r s o n , E . L. S., Canadian Banking.  Toronto:  Ryerson,  1932.  Statement of t h e f u n c t i o n s and o p e r a t i o n s o f t h e Canadian banking system. Some comments on b a n k i n g t h e o r y , but t h e emphasis i s on p r a c t i c e . P a t t e r s o n was a banker, and h i s work f l a t t e r s t h e banking system.  S a n d w e l l , B. K., N i g h t . Dec. 30, 1933,  "Ideas o f Banking Must be R e v i s e d , " S a t u r d a y 17, 24.  S c e p t i c a l t h a t t h e l e g i s l a t i o n on banking i n t r o d u c e d by t h e Bennett government w i l l change t h e e s s e n t i a l n a t u r e o f t h e banking system. But sympathetic t o some o f t h e arguments o f t h e c h a r t e r e d banks.  Towers, Graham, F i n a n c i n g F o r e i g n T r a d e . Bank of Canada, 1927.  Montreal:  The R o y a l  A d e t a i l e d statement o f the banks' r o l e i n f o r e i g n t r a d e .  b.  Secondary Works  (i)  Books.  Brecher, Irving, Monetary and F i s c a l Thought and P o l i c y i n Canada. 1919-39. Toronto: University of Toronto Press, 1957. An economic consideration of the various monetary p o l i c i e s proposed during the depression. P a r t i c u l a r l y valuable are chapters on "The I n f l a t i o n Controversy," "The End of the Central Bank Controversy," and "Canadian Monetary P o l i c y i n Depression and Recovery  Creighton, James H., C e n t r a l Banking i n Canada. Clarke & Stuart, 1933.  Vancouver:  The t h e o r i s t s ' position; completely rejects the banks' arguments concerning the c e n t r a l bank question. Emphasizes that the c e n t r a l bank must have a s o c i a l objective. Day, J . P., Considerations on the Demand f o r a Central Bank i n Canada. Toronto: Macmillan, 1933. ~" Supports the establishment of a central bank. Holladay, James, The Canadian Banking System. Bankers' Publishing, 1938.  New York:  A u s e f u l outline of the banking system a f t e r the establishment of the c e n t r a l bank. Innis, H. A. & Plumptre, A. F. W., eds., The Canadian Economy and I t s Problems. Toronto: Canadian Institute" of International Affairs, 1934. Chapter V c - "Canadian Monetary P o l i c y , " pertinent to the t h e s i s A valuable commentary on the monetary s i t u a t i o n . The author regrets the lack of d e f i n i t e p o l i c y formulation. Jamieson, A. B., Chartered Banking i n Canada. Press, 1952.  Toronto; Ryerson  Written from the bankers' viewpoint. Some h e l p f u l comments on the p o l i c i e s of the banks during the depression.  112  Knox, F. A., Dominion Monetary P o l i c y . 1 9 2 9 - 3 4 .  Ottawa, 1939.  Study made on behalf of the R o y a l Commission on DominionP r o v i n e i a l R e l a t i o n s . Largely concerned w i t h the balance of payments question. Mclvor, R. C r a i g , Canadian Monetary, Banking and F i s c a l Development. Toronto: Macmillan, 1958. Mclvor's chapter 7—The Great D e p r e s s i o n — i s e x c e l l e n t f o r the t o p i c of t h i s paper. An astute a n a l y s i s of the p o s i t i o n of the banks i n t h e Canadian economy during t h e depression. O'Brien, J . W., Canadian Money and Banking. Hew York: H i l l , 1964.  McGraw,  U s e f u l f o r a p i c t u r e of the operation of the banking system. S a f a r i a n , A. E., The Canadian Economy i n t h e Great Depression. Toronto: U n i v e r s i t y of Toronto Press, 1959. An i n v a l u a b l e book f o r t h i s paper. major sectors o f the economy.  (ii)  Contains a good a n a l y s i s of  Articles.  Addis, S i r Charles, "Canada and I t s Banks," J o u r n a l of the Canadian Bankers' A s s o c i a t i o n . 1934-35, 3 6 - 4 7 . The author served on the Royal Commission on Banking and Currency i n 1933. The a r t i c l e i s generally sympathetic t o the banks. C u r t i s , C. A., "The Canadian Macmillan Commission," J o u r n a l . 1934, 4 8 - 5 9 .  Economic  An a s t u t e a n a l y s i s of the Commission's Report from an academic. C u r t i s , C. A., "The Canadian Monetary S i t u a t i o n , " J o u r n a l of P o l i t i c a l Economy. 1932, 3 1 4 - 3 7 . A good treatment a d m i n i s t r a t i o n of the f i n a n c i a l leadership. question o f a c e n t r a l  of the inadequacies o f the p r o v i s i o n s and Finance A c t , of the need f o r some form of Welcomes Bennett's proposal to consider the bank before the r e v i s i o n of the Bank A c t .  113  C u r t i s , C. A., "Credit Control i n Canada," Papers and Proceedings of the Canadian P o l i t i c a l Science Association. 1930, 101-22. A consideration of the questions of credit c o n t r o l and of a c e n t r a l bank f o r Canada. A good commentary on the Finance Act. Day, J . P., "Canadian Monetary P o l i c y — A n International Standard," Papers and Proceedings of the Canadian P o l i t i c a l Science Association. 1934, 263-71. A study of the problems inherent i n Canada's attempting to l i n k i t s money to that of other countries. Also the question of i n t e r national exchange markets. The author i s i n favour of some form of i n t e r n a t i o n a l monetary agreement, but makes l i t t l e comment on the r o l e of the chartered banks.  E l l i o t t , G. A., "Canadian Monetary P o l i c y — D r i f t , Domestic Management and Debts," Papers and Proceedings of the Canadian P o l i t i c a l Science Association. 1934, 251-62. Mr. E l l i o t t i s concerned with the lack of leadership i n monetary a f f a i r s i n Canada. His statement i s p a r t i c u l a r l y i n t e r e s t i n g because he was at the University of Alberta and appreciated the unrest concerning f i n a n c i a l matters which had gripped that province.  "Money and Credit," Vancouver D a i l y Province. March 3, 1932. A c r i t i c i s m of the banks, and of the credit  facilities.  Plumptre, A.F. W., "Currency management i n Canada," Papers and Proceedings of the Canadian P o l i t i c a l Science Association. 1932, 139-50. A treatment of the problems of currency management i n Canada. A u s e f u l i n s i g h t into some of the problems encountered p r i o r t o the depression.  Plumptre, A. F. ¥., "The Point of View of a Central Bank," Canadian Forum, Jan. 1933, 132-3. Short c r i t i c i s m of the bankers' p o s i t i o n with respect to the c e n t r a l bank question.  114  Plumptre, A. F. W., "The Evidence Presented t o the Canadian Macmillan Commission," Canadian Journal of Economics and P o l i t i c a l Science, I I , 54-67. Plumptre was an a s s i s t a n t secretary f o r the Commission and c a l l s on h i s experience i n that capacity t o w r i t e a h e l p f u l a n a l y s i s of the evidence presented. Van Buskirk, J . E., "The Proposal f o r a Canadian C e n t r a l Bank," Papers and Proceedings of the Canadian P o l i t i c a l Science A s s o c i a t i o n , 1933, 21SI26. An appeal f o r a more o b j e c t i v e approach to the problem of e s t a b l i s h i n g a c e n t r a l bank. A sensible commentary on some of the opinions, both f o r and a g a i n s t , on the c e n t r a l bank question. Mr. Van Buskirk considers i n t u r n each of a number of the more important problems i n v o l v e d .  (iii)  Theses.  Inman, Mark K., "Experience I n Canadian Banking, 1929-1934." Unpublished Ph.D. d i s s e r t a t i o n , Harvard U n i v e r s i t y , 1937. An e x c e l l e n t treatment of the monetary p o l i c i e s pursued by the Canadian banks during the e a r l y 1930" s.  

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