Right Hon. R. B. BENNETT (Prime Minister):

Mr. Speaker, under the rules no debate is possible at this time with respect to this matter. I would assume that the hon. gentleman knew this, and I doubt whether he should have brought it up. There is a time and place for it, and I do not propose to debate it now. Observance of the rules of the house, as the right hon. leader of the opposition (Mr. Mackenzie King) observed the other day, is somewhat important, and there is a responsibility resting upon whoever is for the moment the leader of the house to see that the rules are observed, and when in opposition I ventured to point out the desirability of that practice being observed. There is a tendency, as may be noticed, to disregard the rules. I shall endeavour as long as I am here to see that the rules are observed. If the house desires, by unanimous consent, to depart from them, that of course is within the discretion of the house, the rules being made merely for the purpose of expediting the transaction of business. In this instance

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my hon. friend from Weyburn (Mr. Young) has raised a question of very serious concern, it touches the whole conduct of public business, and I prefer to deal with it in the manner prescribed by the rules.

Mr. G. G. COOTE (MacLeod) moved:

That, in the opinion of this house, there should be established in Canada a nationally owned central bank.

He said: Mr. Speaker, the question of establishing a central bank in Canada has been before the country and before this house for the past twelve years. As long ago as 1918 the then, president of the Royal Bank was reported as being strongly in favour of the establishment of such a bank. The Canadian Bankers' Association, I believe, have always been opposed to this proposal officially, and have thrown cold water on it, so that it has not made much headway in this house. But I believe there is a large and growing body of opinion in Canada in favour of the establishment of such a bank, and that the present would be a very opportune time to raise the question.

Of late some financial papers have been urging the establishment of a central bank, and some of our eminent economists have also been urging this in leading articles in the press. Both Professor Day of McGill and Professor Curtis of Queen's university have written some very interesting articles dealing with this question, and recently I had the pleasure of reading an article by Miss

M. L. Savage, of McGill university, dealing with the question of credit control in Canada, in which she strongly urged the establishment of a central bank. I should like to quote the foreword to this article by Miss Savage. It says:

It is estimated that at least ninety per cent of the business of Canada and the United States is carried on by means of credit and credit instruments. For this reason credit is sometimes described as the life blood sustaining the business body. Decrease its flow through one member and it languishes; divert it and it dies. A good system of creating _ and distributing credit is therefore of prime importance in the economic development of the country.

The creation, control and distribution of [DOT]credit are the most important factors in our modem business life, and credit no longer should be left to take care of itself; it should be intelligently and scientifically controlled. The responsibility of providing adequate credit facilities in Canada rests on this parliament.

The chartered banks of Canada, which are established under an act of parliament, until 1914 were practically the sole source of credit for business in this country, but in that year the Finance Act made available to the banks the full credit of the country and furnished for the first time in Canada what amounted to a rediscounting agency for our chartered banks.

I should like to quote the words of Sir Thomas White, who introduced the Finance Act of 1914, in a speech in explanation of the reason for the introduction of the measure. This quotation is taken from Hansard of 1924, at page 3936. Sir Thomas said:

We said to the banks: The Dominion government will loan you in dominion notes, which are legal tender, twenty-five, fifty million dollars; we put no limit, if you need it, you probably will not, but if you do, we will loan without limit on securities approved by the minister. You bring in high class securities, or commodity bills, because they represent their full value in goods, and we will lend to you at 5 per cent dominion notes that will make you liquid, and you need not worry about your reserves. There was mo more panic after that announcement was made. From that day to this there has been the utmost confidence in the Canadian banking situation, no sign of panic. That gave flexibility to our banking system, made our bankers Confident that they could meet any situation that could arise, and, of course, they could give the public very much more extensive credits than they otherwise would have got.

In order to give the house an idea of the extent to wihich the facilities afforded under this act have been used by the banks, I should like to place on Hansard a statement of t'he amount of advances under this act to the chartered banks, outstanding on the 30th of November of each year from 1914 to 1930.

If a central bank were established in Canada I presume it would take over many of the duties which are now carried on by the Department of Finance, including the administration of the Finance Act. The bank also could assume the duties now carried on by the trustees of the central gold reserve, and provide a more efficient system of inspection of banks. This bank could act as the fiscal agent of the government and the officials of the bank would be able to advise the government at all times with regard to financial matters. Such a bank would provide us with a national bank note issue and might possibly take charge of the issue of Dominion notes for the government. It would also take over the administration of the post office savings bank. The control of this bank should be vested in a board representative of the various industries in Canada, on which board the government should be represented as well. Such a bank

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would enable us to mobilize all our credit resources in Canada to a greater extent than has been possible in the past, and should provide intelligent and effective control of credit in the interests of the people of Canada.

The principal business of the central bank, of course, would be to take over the administration of the Finance Act. It is a matter of extreme importance to the people of Canada that rediscounting under this act should be under the most careful and intelligent control, and that any board entrusted with that control should be served by the best experts obtainable. The official attitude of the banks towards this question, I think, always has been that the Finance Act made it unnecessary for us to have a central bank in Canada, but our bankers are overlooking the most essential service which such a central bank could render to this country. In a book published recently, entitled "Central Banks," by Kisch and Elkin, the foreword for which is written by Sir Montagu Norman, the chairman of the Bank of England, who I suppose is regarded as one of the greatest authorities in the world on financial matters, I find these words, at page 149:

The preservation of stable prices in association with the maintenance of stable foreign exchange is the great service which the world hopes to receive from a sound central banking policy conceived and carried out in concert between the central banks.

I am quite sure that anyone who has examined the workings of the Finance Act since 1914 will agree that in the operation of the act, no effort has been made to secure stability of the price level. How can Canada do her share in achieving this stable price level for the world unless she has a central bank to represent her? In the article by Miss Savage, which I have already mentioned, dealing with the question of credit -control and price levels, she points out that such control cannot be exercised without a careful analysis of the price level, and that no attempt is being made to exercise such intelligent control by either the bankers' association or the Department of Finance. She refers to the evidence given before the banking committee in 1924, and I think I cannot do better than quote briefly from that evidence. This will be found in the journals of the House of Commons for 1928, at page 54, and the journals for 1924, at page 296.

Mr. GEARY:

Would the hon. member

mind telling me to what act he is referring in 1914? Surely he means the Dominion Notes Act and not the Finance Act.

Mr. COOTE:

No, I mean the Finance

Act. The deputy minister was being examined before the committee, and he said:

Q. Do you have a special knowledge of the problems, for example, of inflation or deflation?-A. I do not consider myself an expert, but I naturally have a little experience and knowledge of it.

Q. Do you recognize the interest rate, that is, the raising and the lowering of the interest rate, as an effective instrument, not perhaps thorough, but an effective instrument to cause deflation or to assist inflation?-A. Not in that light, no. It has always been considered as meeting the needs of the banks in their commercial business and work outside in the business world.

The assistant deputy Minister of Finance, before the same committee, in 1928, said:

The Finance Act has been used very little by the banks in the last few years, and any change in rate made by the treasury board I do not think would have any effect on the speculators.

To show how badly mistaken the assistant deputy minister was at that time, may I say that the advances under the Finance Act increased from 1927 to 1928 by practically $50,000,000, and from 1928 to 1929 by another $50,000,000, or an increase of $100,000,000 in those two years.

Mr. BENNETT:

What years did the hon. gentleman mention?

Mr. COOTE:

From 1927 to 1928 and from 1928 to 1929, taken as of November 30 in each case.

Mr. CHAPLIN:

What was it in 1930?

Mr. COOTE:

It dropped to S38,700,000.

Another of our leading bankers before the committee in 1924 was questioned as follows:

Q. I understand that you disclaim any power on the part of the bankers' association to control credit in respect to inflation and deflation?-A. That is so.

Q. Would you say that it is better that we have an uncontrolled credit system?-A. I would say so.

Apparently it is entirely uncontrolled. Then the question was asked:

Q. Just left anyway it wants to be?

A. The bankers, as bankers, must exercise their intelligence.

The past president of the same association voiced practically the same sentiments in- respect to the control of credit, when he appeared before the banking and commerce committee, in 1928.

The question naturally arises whether the bankers are using their intelligence to increase the profits of the shareholders of the banks or whether they are acting in the best

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interests of the people of Canada. As Miss Savage says:

They base their contentions on the old Smithsonian argument that the bankers, in acting according to their best interests, are incidentally acting for the best interests of all.

Conditions during the past year, however, seem to disprove this contention. I would think that when the banks were acting according to the interests of their clients they would be incidentally acting in their own best interests. There is always a danger that with such a system as we have in Canada, where a few large banks control most of the banking business, the adoption of an unwise policy by one of these banks might be followed by serious consequences to the whole banking system. It would surely be in the best interests of Canada to establish a central bank which could exercise some measure of control over the policy of banks chartered under authority of this parliament. The situation at present seems to be that the Finance Act is meeting the rediscounting requirements of the chartered banks, but not sufficient consideration is being given to the effect of such rediscounting operations. Miss Savage, in referring to this act, says:

Its operations in this respect have apparently necessitated the suspension of the gold standard in Canada.

Under such circumstances, it is vitally important that somebody should be responsible for the intelligent application of some recognized policy of general currency control, both in the present emergency, and in case the same situation should recur in the future. The Finance Act completely fails to provide for such control, or even to suggest its desirability. Moreover, all evidence seems to show that nobody in the banking system has, on his. own initiative, undertaken to apply any general control policy.

It is quite natural, under these circumstances, that thoughtful people, even though they may have the utmost confidence in the excellent abilities of Canadian bankers themselves, are beginning to realize that there is something lacking in our present banking system.

Another matter which is emphasized by so many economists at the present time is the need of cooperation among the central banks of the world to effect economy in the use of gold. Some of the leading authorities who have made a study of the gold situation agree that estimates of the world's gold production indicate that unless the banking institutions institute economy in the use of gold, there will not be sufficient gold to maintain the present price level. ,

Mr. Gustave Cassels states that an adequate restriction of the demand of the central banks for gold reserves is a very important part of the policy which must be pursued if stable monetary conditions are to be restored to the world. He says:

If for the future gold is to attain any stability of value, it is absolutely essential that the central banks should cooperate with one another in suitably limiting the demands for gold reserve.

To those who are interested in this matter I would suggest that they read the interim report of the gold delegation of the League of Nations issued at Geneva in 1930. This committee of the league seem to be quite positive that we may anticipate a reduction in the world's output of gold to take place in the near future.

I do not intend to deal with the question of whether or not Canada should adhere to the gold standard. Whether we do or not, I believe it would be to our advantage in either Case to have a central bank in Canada. If we are to remain on the gold standard, we should have a central bank to take care of all our gold holdings and, particularly, to represent Canada at any meeting of the central banks of the world which may be held to endeavour to arrange a common policy in economizing on the use of gold, and to endeavour to arrange for the free movement of gold.

If time permitted I would like to quote from Professor Curtis, who points out the desirability of a stable price level. He expresses the opinion that some control over the price level might 'be effected through intelligent operation of the Finance Act, and recommends that a central bank should be established to handle the rediscounting which is now done by the Finance Act.

In referring to the operation of this act during the period of inflation in Canada, the peak of which was reached in 1929, Professor Curtis says:

Such a condition Was precisely what developed in 1929, with the result that Canada extralegally, but effectively abandoned the gold standard.

After referring to the fact that apparently no attempt had been made to prevent the inflation, he says:

Another less drastic means of control would have been to increase the rate charged on advances.

Then he goes on to deal with the large increase in loans which took place in Canada in the years following 1926. There is a chart in connection with this article, giving current loans in Canada and call loans in Canada and elsewhere. Professor Curtis proceeds:

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An examination of this chart shows that until the end of 1923 there was a great increase in all of these and then a very sharp reduction. Current loans in Canada were well below the billion dollar mark in 1925, and these increased to a maximum of $1,473,000,000 in 1929. Call loans in Canada, which in 1925 were running around the $100,000,000 mark, increased to $280,000,000 in 1929. Call loans elsewhere than in Canada, which in 1925 and 1924 were below the $200,000,000 mark, increased to $330,000,000.

From this it can be seen that there was a large absolute growth in all classes, with a tremendous percentage growth. There can be little doubt that this extension was brought about by reserves, and it caused a substantial price inflation in Canada and a virtual abandonment of the gold standard. In Canada the maximum rediscountings were ten times that of the Canadian borrowings, which seems to be out of proportion. Clearly some restriction upon the obtaining of reserves is very much needed in Canada.

I anticipate it will be said that I am taking up the time of this house to discuss a purely academic question when I am dealing at such length with the question of price levels and the stability of price levels. Anticipating such criticism, I should like to quote Sir Josiah Stamp, as reported in Commerce of the Nation, February 1931:

A stable price level is the most bitterly practical of all questions.

I could not get anything more practical than that. And Owen D. Young, a prominent financier of the United States says:

Price stability is one of the most important factors facing the capitalistic system.

The Right Hon. Reginald McKenna, former Chancellor of the Exchequer and chairman of the Midland Bank Limited of London, has this to say:

A stable price level is a thing to be desired second only to international and domestic peace.

I do not need further to emphasize the importance of this question. Now I should like

1,0 quote a Canadian banker, and I am glad to be able to offer the testimony of Mr. C. E. Neill, vice president and managing director of the Royal Bank of Canada. Here I wish to compliment Mr. Neill on the speech which he delivered at the last annual meeting of the Royal Bank of Canada in Montreal. It was certainly a very great improvement upon the speeches generally heard at annual meetings of Canadian banks. At this meeting Mr. Neill said:

If on the collapse of the stock market boom the principal central banks of the' world had decided that drastic contraction of currency and credit was not to be permitted, a drastic fall in the price level oould not have occurred.

What has caused all this trouble through which we are now passing but a drastic fall in the price level? He goes on:

Thus the countries with fiat currencies, such as Argentina, Uruguay and Spain are not suffering anything like as acutely as the gold countries.

Mr. GARLAND (Bow River):

Page the Minister of Trade and Commerce.

Mr. COOTE:

The quotation continues:

If the central banks of all the countries on a gold basis should deliberately adopt a common policy they could within a certain time lag, raise or lower the price level almost at will. Without a common policy, movements of gold would in due course arrest action of one country not in harmony with the policies of others, although the United States, with a huge stock of gold, could probably afford to loose a quantity which no country or group of countries would be willing to receive. On the other hand, she has during the period of 1921-25 received gold on an unprecedented scale without allowing such receipts to creat inflation.

For the future it is absolutely essential that means should be devised to prevent the drastic changes in the price level which have been characteristic of the period since the close of the war. Such changes in their effect are not much less damaging to civilization than those produced by war.

I do not think a stronger statement could be made to this house than that as to the necessity of preventing these drastic changes. The quotation continues:

To change the present situation permanently it may be necessary to revise the charters of all the principal central banks and to come to some clear understanding regarding cooperation. The object to be attained is quite clear-

I want to emphasize these words-[DOT]

-namely, stability. The artificial exhilaration of inflation, and the agony of deflation must be avoided at all costs. If we go on as we are ait present, prospects over a long period point to further reductions in the price level, depressions and unemployment, such as were characteristic of the period of 1870-1896, but accentuated in the proportion that volume and tempo of business has increased.

That is not a very pleasant prospect, but Mr. Neill suggests a way out through cooperation among the central banks of the world. The quotation continues:

I am well aware that the question of central bank policy and its influence on prices is a much debated one; even in recent times, for example, many bankers in the United States have expressed the opinion that the federal reserve system exercises no dominant influence in the price field. Followed to their logical conclusion on a world-wide basis, these opinions indicate a belief that the stability of the world's medium of exchange is practically at the mercy of the elements; that man is incapable of controlling an instrument of his own devising; and that the instability which for generations has caused untold losses to business and suffering to workers must continue to exert its evil influence as chance dictates. I cannot subscribe to any such views. The situation can be remedied. It must be remedied.

The wisdom of that view must commend itself to all who have given, earnest thought

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155!

to this question. I agree absolutely with Mr. Neill that the situation must be remedied. I believe Mr. Neill would favour the establishment of such a bank, and how else can Canada cooperate in this movement which he suggests unless through such a bank? There is a disposition on the part of many hon. members of this house, and perhaps the majority, to say that the present depression is due to world^wide conditions over which we have no control and, therefore, we must wait until they improve. It seems to me it would be only common sense for us to say that we will do our .part to restore these conditions to their former state, and how else and in what better way can we do that than by the establishment of a central bank in Canada to cooperate with the central banks throughout the world in an endeavour to bring about a remedy for the situation? Canada is almost the only country in the world without a central bank. I have not a complete list, but the following will give an idea of those countries which have central banks:

Australia, Austria, Belgium, Bulgaria, Chile, Columbia, Czechoslovakia, Denmark, England, Estonia, Finland, France, Germany, Greece, Hungary, Italy, Japan, Latvia, Lithuania, Netherlands, Norway, Poland, Russia, South Africa, Spain, Sweden, Switzerland, United States.

Mr. BENNETT:

Would the Bank of England be regarded as a central reserve bank?

Mr. COOTE:

It is generally regarded as

such, and I am treating it in that way; the book from which I took this list treats it in that manner. It is well known that many New York bankers refer to Canada as the thirteenth federal reserve district, and I think there is more truth than poetry in that statement. That does not help us to carry out t'he policy of Canada first about which our Prime Minister is so enthusiastic at the present time.

Mr. BENNETT:

I did not catch my hon.

friend's last sentence; w'hat is it I am enthusiastic about?

Mr. COOTE:

The Canada first policy.

Mr. BENNETT:

And I will continue to

be.

Mr. COOTE:

I hope the Prime Minister

will continue to be enthusiastic, but I think if he would establish a central bank in Canada he would be helping to further that object. Anyone who has made a study of t'he administration of the Finance Act must realize that the present method of control is not very satisfactory. There seems to be no intelligent control over the granting of advances or con-22110- 99J

sideration of the effect which such advances may have upon the general business situation, particularly with regard to price levels.

Mr. BENNETT:

It is no use for the hon. gentleman to say that a central reserve bank would be better than something else unless he shows wherein it would be better. I should like to know just wherein a central reserve bank would at this time better serve our conditions than the present Finance Act

Mr. COOTE:

I will endeavour to do that

in just a moment.