March 20, 1941

LIB

James Lorimer Ilsley (Minister of Finance and Receiver General)

Liberal

Mr. ILSLEY:

I do not think I ever said that monetary expansion of itself would bring about increased production. There are a number of factors that bring about increased production and increased employment. I should be very much surprised if I ever said-

Topic:   WAR APPROPRIATION BILL
Subtopic:   PROVISION FOR GRANTING TO HIS MAJESTY AID FOR NATIONAL DEFENCE AND SECURITY
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SC

Victor Quelch

Social Credit

Mr. QUELCH:

I quoted the minister's

exact words.

Topic:   WAR APPROPRIATION BILL
Subtopic:   PROVISION FOR GRANTING TO HIS MAJESTY AID FOR NATIONAL DEFENCE AND SECURITY
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LIB

James Lorimer Ilsley (Minister of Finance and Receiver General)

Liberal

Mr. ILSLEY:

Just quote them again and let us see what they were.

Topic:   WAR APPROPRIATION BILL
Subtopic:   PROVISION FOR GRANTING TO HIS MAJESTY AID FOR NATIONAL DEFENCE AND SECURITY
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SC

Victor Quelch

Social Credit

Mr. QUELCH:

The minister had been

criticizing the idea of inflation, and then he went on to say:

All this is not to say that a small and carefully regulated amount of credit expansion may not be desirable in the early stages of the war in order to assist the increase of production and employment. ... If at the beginning of the war there are unemployed resources, some credit expansion may give an impetus to their prompt utilization. If it is carefully controlled, the expansion of production may prevent any

War Appropriation Bill

abnormal rise in prices, confidence may be maintained and the initial impetus may be carried on and accelerated by the insistent demand that exists for supplies.

Topic:   WAR APPROPRIATION BILL
Subtopic:   PROVISION FOR GRANTING TO HIS MAJESTY AID FOR NATIONAL DEFENCE AND SECURITY
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LIB

James Lorimer Ilsley (Minister of Finance and Receiver General)

Liberal

Mr. ILSLEY:

Oh, well, that is different from bringing about increased employment or production by that one thing alone. In the early stages of a war there will be, for a number of reasons, increased production and increased employment. For one thing, the psychological state of the people is altogether different, and I said in that speech that some monetary expansion might be necessary to assist in the increase that was taking place, so as perhaps to give an additional impetus.

That, however, is quite different from saying that that one factor, monetary expansion, would in a period like 1936, 1937, or 1938, have brought the same results. As a matter of fact, it might not have brought those results at all. It might simply have scared capital at that time, so that you would lose more in unemployment than you would gain by increasing employment.

I believe we are facing the old issue which has existed for a long time, namely, as to whether monetary measures alone can bring about prosperity or increased employment. I do not think they can. I do not believe the Cooperative Commonwealth Federation think so. I believe that is a theory held by a comparatively small group of people in the world, some of whom are monetary reformers. They hold the view that everything depends on the amount of money. That is not so.

Topic:   WAR APPROPRIATION BILL
Subtopic:   PROVISION FOR GRANTING TO HIS MAJESTY AID FOR NATIONAL DEFENCE AND SECURITY
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SC

Victor Quelch

Social Credit

Mr. QUELCH:

I am not suggesting that various precautions and other means would not have to be taken. I am pointing out that it does not matter what you do, in a time of depression you cannot improve conditions until first of all you have monetary expansion. In September, the minister admitted that it would be desirable to have monetary expansion. Why? The minister realized that if they tried to borrow money from the people they would be drawing money out of circulation, and reducing production. Therefore, first of all they hire-and I use the word advisedly -the chartered banks to create $200,000,000. I remember well the statement made at that time by the Minister of Finance. He said, "When this money is paid out it will increase the savings of the people, and then we will be able to borrow those savings." But the minister realized that the government would not be able to borrow savings from the people until it had created those savings by an expansion of money. In other words, the expansion must come first.

The minister has said he cannot see the similarity between the condition in September and the condition between 1935 and 1939. I

will give the similarity. During that time industry was running at about 50 per cent of its capacity. We had in the neighbourhood of half a million unemployed. We had, in the form of a million people on relief, a tremendous undeveloped market for goods. The logical question, then, is this: Why did we not put people to work in industry to produce goods to satisfy that market? Why did industry not expand? I have heard the criticism of industry that it did not have sufficient confidence to expand during that time. To me the reason is obvious; industry at that time could not sell the products it was already producing. It knew well that if it expanded production it would have a still greater unsold surplus of goods.

I say to the minister that if during that period of time we had had monetary expansion for the purpose of putting a certain proportion of the unemployed to work in capital goods industries-such as armaments, road building, the elimination of railway crossings, and so on-and had we utilized the remainder of the unemployed for the purpose of expanding production of consumer goods, then those goods would have been available to satisfy demands which would have been created by payment of moneys to those people working in capital goods industries. I am satisfied that industry in Canada will always be ready to increase production, when it knows that it is going to be able to sell what it produces. The trouble between 1935 and 1939 was that it could not sell what it produced. During that time we had a favourable balance of trade amounting to about $200,000,000 annually. In the committee I asked the governor of the Bank of Canada this question: During that period why could we not have put into operation $200,000,000 worth of national projects, so that the money paid out in these projects would have created in this country a demand for the $200,000,000 worth of goods that were credited to us abroad? He did not deny that this could be done, but said that it was purely a matter of government policy.

I remember that in 1935 in his pre-election speeches the Prime Minister (Mr. Mackenzie King) stated that if the Liberal party were elected, a great battle would be engaged in between the government and the money powers. I make this charge: Had the government engaged in that battle with the money powers, and had the governments of Great Britain and of France engaged in that great battle, the history of Dunkirk as we have it to-day would not have been written. Because of the deflationary policy which existed throughout those years, defences were allowed to deteriorate.

War Appropriation Bill

I want to refer now to a statement placed on record by the minister in his reply to a question I asked on February 20. According to that statement we have borrowed from the chartered banks in the neighbourhood of half a billion dollars. The minister will agree that, other things being equal, deposits would have increased by a like amount. As a matter of fact, it is admitted in the state: lent that in so far as the $250,000,000 that was borrowed in the spring of 1941 is concerned, deposits would have increased by that amount, other things being equal. That is to say, when we borrowed the money from the chartered banks, they lent us that money by creating the means of payment. I do not believe the minister would disagree with that statement. It is true that for years prominent officials of various banking institutions in this country have carried on the delusion or the hoax that they are in a position to lend only their depositors' money. We have heard members in this chamber say that banks are able to lend only their depositors' money. I do not doubt that many hon. members are still in that fog, or confused state of mind.

In any event, it was refreshing in 1939 to have a statement by the deputy governor of the Bank of Canada to the effect that it was nonsense to suggest that chartered banks could lend their deposits, because it was pointed out that deposits are liabilities, and that it would be impossible to lend their liabilities. Then, again, when giving evidence before the committee on banking and commerce in 1939, the governor of the Bank of Canada said, as reported at page 455 of the proceedings, that the chartered banks cannot, of course, loan the money of their depositors. He also admitted that they lend by creating the means of payment. Hon. members may verify this, if they wish, by turning to the evidence of the banking and commerce committee of 1939, page 456, where it was pointed out that the banks lend by the simple procedure of creating the means of payment.

The main question in connection with which I am particularly interested in receiving an answer from the minister is this-and I want to put it accurately. When we have obtained from the people all the money we consider it wise to take, whether by taxation or by the sale of war savings certificates, and when we deem it necessary to indulge in a form of inflationary borrowing, why do we not obtain the money from our own bank, the Bank of Canada, instead of from the chartered banks, who will merely create the amounts of payment?

Topic:   WAR APPROPRIATION BILL
Subtopic:   PROVISION FOR GRANTING TO HIS MAJESTY AID FOR NATIONAL DEFENCE AND SECURITY
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LIB

James Lorimer Ilsley (Minister of Finance and Receiver General)

Liberal

Mr. ILSLEY:

That would be far more

inflationary.

Topic:   WAR APPROPRIATION BILL
Subtopic:   PROVISION FOR GRANTING TO HIS MAJESTY AID FOR NATIONAL DEFENCE AND SECURITY
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SC

Victor Quelch

Social Credit

Mr. QUELCH:

Why?

Topic:   WAR APPROPRIATION BILL
Subtopic:   PROVISION FOR GRANTING TO HIS MAJESTY AID FOR NATIONAL DEFENCE AND SECURITY
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NAT

Richard Burpee Hanson (Leader of the Official Opposition)

National Government

Mr. HANSON (York-Sunbury):

It would

be pure inflation.

Topic:   WAR APPROPRIATION BILL
Subtopic:   PROVISION FOR GRANTING TO HIS MAJESTY AID FOR NATIONAL DEFENCE AND SECURITY
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LIB

James Lorimer Ilsley (Minister of Finance and Receiver General)

Liberal

Mr. ILSLEY:

It would be far more inflationary to borrow from the Bank of Canada than it would be to borrow from the chartered banks.

Topic:   WAR APPROPRIATION BILL
Subtopic:   PROVISION FOR GRANTING TO HIS MAJESTY AID FOR NATIONAL DEFENCE AND SECURITY
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SC

Victor Quelch

Social Credit

Mr. QUELCH:

Why?

Topic:   WAR APPROPRIATION BILL
Subtopic:   PROVISION FOR GRANTING TO HIS MAJESTY AID FOR NATIONAL DEFENCE AND SECURITY
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LIB

James Lorimer Ilsley (Minister of Finance and Receiver General)

Liberal

Mr. ILSLEY:

Because, if we borrow from the chartered banks, the amount of new money, or the additional deposit liability, is the amount that we borrow. For instance, if we borrow $250,000,000 from the chartered banks, there are deposits immediately in existence, after the loan, of $250,000,000 more than there was before. That is inflationary, to a certain extent, other things being equal. If we borrow from the Bank of Canada, the result of a loan of $250,000,000 from that bank is a deposit in the Bank of Canada of $250,000,000 which, when we use it, finds itself in the possession of the chartered banks, as cash reserves.

The banks, in order to carry on a banking business along the lines commercial banks have always followed the world over, must lend a good deal more than $250,000,000 to the public. The ratio is nine or ten times as much as that, and that in turn creates deposit liabilities, which add to the total deposits of the country a very large sum and are very much more inflationary in their effect than borrowing from the banks would be. This could be nullified or offset if we were to raise the reserve ratio. The legal reserve ratio at the present time, as the hon. gentleman knows, is 5 per cent. If we were to make it 100 per cent, we would have no more inflationary effect if we borrowed from the Bank of Canada than if we borrowed from the banks, because when that $250,000,000 found itself in the commercial banks as cash reserves, the banks could not lend a thing on it. There would be a deposit liability of $250,000,000 and a reserve of $250,000,000.

There is, however, a certain cost- for carrying deposits. In addition to the cost of carrying on the banks, there is the interest which the banks must pay on their savings bank deposits. When the money comes back to the banks in the form of savings bank deposits, the banks have to pay one and a half per cent interest on it. It is estimated that nearly one per cent is paid in interest. Therefore, to create a 100 per cent reserve ratio which would nullify or equalize the inflationary effect in the way I have mentioned, would mean that you would, in effect, be asking the banks to carry on at a substantial loss in respect of that transaction.

War Appropriation Bill

In other words, it would be a tax on the banks which would be passed on either to the depositors of the banks or the shareholders of the banks, or passed on in some other way. If, as a matter of policy, we decided to lay that additional tax on the banks, we could borrow from the Bank of Canada instead of from the commercial banks and have exactly the same effect. Unless, however, we take some steps like that, if we merely change that feature of the present system which is the only feature which the hon. member is talking about now, we would be setting in motion . forces which would have a powerful inflationary effect.

Topic:   WAR APPROPRIATION BILL
Subtopic:   PROVISION FOR GRANTING TO HIS MAJESTY AID FOR NATIONAL DEFENCE AND SECURITY
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SC

Victor Quelch

Social Credit

Mr. QUELCH:

I appreciate that answer of the minister. It is similar to the answer given by his predecessor, Mr. Dunning. The minister is aware of the fact that many prominent bankers of the United States have advocated the adoption of what is known as the 100 per cent system. That is the policy which the minister has just mentioned. If he has read "One Hundred Per Cent Money" by Irving Fisher, he will have seen there a long list of prominent bankers of the United States who advocated that this system should be put into operation. Therefore, evidently they did not visualize being put out of operation by its adoption. Furthermore, it is advocated strongly by Robert Hemphil, former credit manager of the federal reserve bank at Atlanta, and more recently by Babson's Incorporated in their letter of March 20, 1939, where they point out that the banks would still continue to make a fair profit. They also point out that you would have to differentiate between current accounts and savings. At the present time a depositor is supposed to give notice before he can draw out his money from a savings account; but, as a matter of fact, savings accounts are treated the same as current accounts in that respect. As Babsons, however, point out, you would have to have the savings banks deposits withdrawable on notice only.

Topic:   WAR APPROPRIATION BILL
Subtopic:   PROVISION FOR GRANTING TO HIS MAJESTY AID FOR NATIONAL DEFENCE AND SECURITY
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LIB

James Lorimer Ilsley (Minister of Finance and Receiver General)

Liberal

Mr. ILSLEY:

If the hon. member will permit a question, while I do not think this is really the occasion for a protracted debate on monetary policy, may I ask if he is advocating the adoption of the 100 per cent system, plus borrowing from the Bank of Canada instead of from the commercial banks? Does he advocate that as the financial policy of the government?

Topic:   WAR APPROPRIATION BILL
Subtopic:   PROVISION FOR GRANTING TO HIS MAJESTY AID FOR NATIONAL DEFENCE AND SECURITY
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SC

Victor Quelch

Social Credit

Mr. QUELCH:

No; but I would say that the 100 per cent system would meet the objection which the minister has raised.

I would advocate the 100 per cent system so far as current accounts are concerned, but not as regards savings accounts, which should be

treated the same as any other investment. Money in savings accounts should be treated as an investment and as the property of the bank. I would apply it as Irving Fisher and Babson's advocate, and use it only in so far as current accounts are concerned. The banks would still have their savings accounts to lend from, if they need more money to put into circulation they can borrow money from the Bank of Canada at a nominal sum and then lend it at a higher rate. They would, however, be in a position to expand their loans only provided the Bank of Canada gave them authority. Unless they got the money from the Bank of Canada they would not be able to expand their loans. In that way the government would have effective control over the volume of money in circulation.

You do not, however, have to go as far as the 100 per cent system. Increase the cash reserve requirements of the chartered banks to the extent necessary to prevent an expansion of loans. If they were at the time operating on a ten to one basis, for example, you could increase the cash reserve requirements of the banks to the extent necessary to prevent them from expanding their loans on the basis of their increased cash reserves.

Topic:   WAR APPROPRIATION BILL
Subtopic:   PROVISION FOR GRANTING TO HIS MAJESTY AID FOR NATIONAL DEFENCE AND SECURITY
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LIB

James Lorimer Ilsley (Minister of Finance and Receiver General)

Liberal

Mr. ILSLEY:

Would you be any further

ahead?

Topic:   WAR APPROPRIATION BILL
Subtopic:   PROVISION FOR GRANTING TO HIS MAJESTY AID FOR NATIONAL DEFENCE AND SECURITY
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SC

Victor Quelch

Social Credit

Mr. QUELCH:

If I remember rightlyand I am speaking more now from hearsay- the government of the United States of America in 1937 increased the cash reserve requirements of their banks to 20 per cent. The cash reserve requirements of the banks in Canada could be increased to 12 or 15 per cent or to whatever degree was necessary to prevent the chartered banks from taking advantage of that new issue of money further to increase their loans.

Some people may argue that it would not be fair to the chartered banks, that it would seriously decrease their profits if we took such action. On the other hand, when one considers the profits of the chartered banks for the past ten years, I think it will be agreed that they are in a position where they can readily stand a reduction in their profits. I have figures taken from the "Canada Year Book'' showing the profits of the various chartered banks over the past ten years, and I find that on their paid-up capital the profits are as follows for the ten-year period:

Per cent

Bank of Montreal 9-35

Bank of Nova Scotia 13-15

Bank of Toronto 10-6

Dominion bank 10-6

Imperial bank 10-6

Royal bank 9-35

War Appropriation Bill

That is the profit on their paid-up capital, and that ten-year period includes one of the worst depressions this country has ever known. No one can say that a business which is making 10 per cent profit over a period that includes the worst depression ever known is not doing very well indeed. In addition, they have built up their reserves and built up a number of fine capital structures; they also have their hidden reserves. I think the position of the banks so far as their profits are concerned is a very satisfactory one, and that their profits are greater than necessary, especially when one considers that they were made over the period of the depression. If one takes the period just prior to that ten-year period, they were then making as high as 14 to 16 per cent. It was the depression that brought their profits down to approximately 10 per cent. I have not seen tlhe figures for 1940, but I have no doubt the profits of the banks are now increasing. The Financial Post stated that their assets were increasing, although their liabilities might be increasing in the same proportion.

Topic:   WAR APPROPRIATION BILL
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LIB

James Lorimer Ilsley (Minister of Finance and Receiver General)

Liberal

Mr. ILSLEY:

I wonder whether the hon. member would care to express an opinion on this point. Was it not a good thing for the country that the profits which the chartered banks were receiving in the decade of the twenties were sufficient to enable them to accumulate reserves which kept them solvent in the early thirties and prevented bank failures in this country such as they had in the United States? In other words, is it not a matter of considerable importance to the public that the banks should at all times be solvent?

Topic:   WAR APPROPRIATION BILL
Subtopic:   PROVISION FOR GRANTING TO HIS MAJESTY AID FOR NATIONAL DEFENCE AND SECURITY
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SC

Victor Quelch

Social Credit

Mr. QUELCH:

I quite agree, but the minister will admit that under the 100 per cent system the banks would be in a safe position because they would have one dollar of cash behind every dollar of their deposits. A run on the banks would be absolutely impossible. That is why so many bankers support the idea of the 100 per cent system in the United States. They got such a cleaning up through what happened in years gone by, that no doubt it would relieve their anxiety if there were no danger of a run. Under those circumstances they could very well suffer a decrease of profits. There would be under this system no danger of insolvency, because any time the banks needed money for this purpose they could obtain it from the Bank of Canada. That bank would have absolute control.

What happens at the present time? The Bank of Canada issues a certain amount of money, or the government through the Bank of Canada issues a certain amount of money, and they do not know what the result will be.

The banks may expand it by ten times, or they may not. There is no direct control under this system.

I have heard this argument advanced against the proposal, that in view of the fact that people bought shares in the chartered banks in good faith, in the belief that the same system would be maintained in operation and that, therefore, they could expect to continue to draw the same profits, it would not be fair to the shareholders of the chartered banks to change the system to one whereby those profits would be reduced. That may be a fair argument. In that event, however, the only thing would be for the government to undertake to buy up the shares of the chartered banks and then there would be a government-owned system. I am very much in favour of buying up the shares of the chartered banks and having a publicly-owned banking system, because I do not believe it is a desirable state of affairs to have any body of private persons in a position where they can increase or decrease the amount of money in circulation. When you are in a position to do that you are also in a position to raise or lower prices.

Topic:   WAR APPROPRIATION BILL
Subtopic:   PROVISION FOR GRANTING TO HIS MAJESTY AID FOR NATIONAL DEFENCE AND SECURITY
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LIB

James Lorimer Ilsley (Minister of Finance and Receiver General)

Liberal

Mr. ILSLEY:

Does the hon. gentleman

think it would be a desirable state of affairs to have the government of Canada making all the commercial loans required by the people of Canada?

Topic:   WAR APPROPRIATION BILL
Subtopic:   PROVISION FOR GRANTING TO HIS MAJESTY AID FOR NATIONAL DEFENCE AND SECURITY
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March 20, 1941