Mr. VICTOR QUELCH (Acadia):
The Minister of Finance (Mr. Usley) in moving the second reading of this banking bill is asking the house to endorse the principle of a debt-creating system. Before that is done, I think we should consider very carefully the consequences of this system on the economy of Canada in the past, and what the actual consequences will be in the future.
The minister, in his remarks, emphasized the fact that in his opinion the banks had operated efficiently in the past. I would ask, efficiently from whose point of view? If we regard the banks as manufacturing money, lending money at a substantial rate of interest, returning to their shareholders a substantial profit, then no doubt from the point of view of the shareholders we may say that the banks have operated efficiently in the past. And when one remembers that during the depression years, when practically every other concern was showing a loss, the banks were still able to pay an average return of around eleven to twelve per cent on their paid-up capital, then they did not do so badly. If, on the other hand, we regard the banks as institutions to serve the people in order to maintain the optimum development of the resources of the nation, then L do not think it can be said that the banks have operated efficiently in the past, so far as the people of this country are concerned.
It is true the minister has said that in the past the banks were hampered by certain limitations. To a certain extent some of those limitations were removed when the Bank of Canada was instituted. Many people believe that there are still limitations that should be removed. Therefore I feel at this time, before this bill is passed, that the necessary changes
should be made so that the banks may serve the people efficiently in the future.
The minister has said that it is not fair to blame the Canadian banks for the depression that was of a world-wide nature. I would agree that it is not fair to blame the Canadian banks for the depression throughout the world; but I do think that the banks of all countries alike, with international finance, will have to take a very large responsibility for the conditions that existed in this country and in the world in general from 1930 to 1939. I would say that the financial policies carried out in the various countries of the world during that period were largely to blame for that situation.
It will be remembered that during the years 1926, 1927, 1928 and 1929 there was a fair degree of prosperity throughout the world. By 1929 some of those prosperous nations had started to have an unfavourable balance of payments. From 1923 to 1928 Canada had a favourable balance of payments, but in 1929 Canada had an unfavourable balance of payments of 865,000,000. In 1930 that unfavourable balance of payments had increased to 8159,000,000. It was then decided, apparently, to impose a deflationary policy, not only in Canada, but in other countries that were in the same condition. For instance, we have the example of the Otto Niemeyer mission that was sent to Australia in order to try to bring about a balance of payments in that country. An ultimatum was placed before the Australian government, demanding that they take the necessary action to bring about a balance. They were urged to balance their budget and to curtail their general expenditures, and that largely was the policy which was adopted in this country. In other words, we attempted to bring about a balance of payments by a policy of restriction. Fortunately, I think it is generally realized to-day that when there is an unbalance of payments, a balance should be brought about by a policy of expansion. That is to say, we should try to expand the production of the debtor nations and expand the consumption of the creditor nations instead of doing as we have in the past, reduce the consumption of the debtor nations and reduce the production of the creditor nations. In view of the fact that that seems to be generally understood to-day I was surprised when the Minister of Finance criticized the chartered banks for not having put on the brakes sooner than they did, criticized them for waiting until 1929 before they started to restrict credit. I suggest to the Minister of Finance that had the banks started to put on the brakes prior to 1929 the only difference would have been that we would have gone into the depression in 1926, 1927 or
Bank Act-Mr. Quelch
The Minister of Finance has also suggested that part of the problem that arose during 1930 to 1934 was owing to the fact that there was no central bank in Canada. An interesting point to note is that Australia had a central bank and their depression was every bit as serious, as the depression in Canada. England had a central bank also. Central banks were not able to prevent the depression, and I doubt very much whether it would have made any difference to Canada if we had one. Probably the only difference would have been that through the services of a central bank we would have been able to organize our deflationary policy a little quicker than we did.
In 1936 the government established majority control over the Bank of Canada. We were told then most emphatically by various ministers of the government that we had established in this country effective control over the issue of currency and credit. The people expected that the government would then put into operation the policy that had been declared by the Prime Minister during the election- campaign of 1935 when he stated that a nationally and publicly controlled central bank was needed in order to maintain the issue of currency and credit in terms of public need to meet the domestic and social requirements of the Canadian people.
I doubt very much if the Minister of Finance would try to argue that from 1935 to 1939 that policy was maintained. The
minister surely will not try to argue that currency and credit were made available in terms of public need during those years. It is only necessary to remind the house that during those years we had in the neighbourhood of half a million unemployed and a million people on relief. Industry was operating at less than fifty per cent of its capacity and at the same time we had an average favourable balance of payments of $218,000,000.
The minister will also recall how during that period the members of this group continuously urged upon the government the necessity and desirability of issuing money for the purpose of maintaining and developing the resources of this nation in order to give employment so that the money paid out in that employment would help to create demand against the goods that could be produced by industry working at full capacity; or, on the other hand, the money could have been used in payment for the imports that could have been brought into this country, using our favourable balance of payments abroad. I do not think it is necessary for me to remind the Minister of Finance of the kind of criticism we ran into during that period. We were always told by the former Minister of Finance, 100-172
the Hon. Charles Dunning, that no money was available for the purpose. When we suggested that national money should be issued we were told that such a policy would be inflation. I have here an extract from Hansard of 1938, and I shall quote the words of the then Minister of Finance so that no one will be able to say that I am trying to distort them. We were discussing the action that should be taken to develop the natural resources, and when it was proposed that a certain amount of national money should be issued for that purpose the then minister had this is say on March 8, 1938, as reported on page 1152 of Hansard:
Inflation may look like a scheme by which governments can get something out of nothing. It is not so. The mind of man has not yet solved that particular problem, and never will. Governments have only one source for the funds which they use, and that is the pockets of their people.
Does the minister agree with that statement? During the period 1935 to 1939 the resources of this country were systematically sabotaged while Germany was aggressively preparing for war. That was especially so in 1938 when the then Minister of Finance made that statement. We allowed men to remain unemployed, we allowed our resources to remain undeveloped, and we made no attempt to build up the defences of the country. Why? Because the then Minister of Finance told the country that there was no money available to put the unemployed to work. We are told that finance is largely a matter for experts to deal with, that it is impossible for a layman to understand the intricate details of finance. I think our past experience demonstrates clearly that in the future the people will have to be more interested in the financial policy of this country than they have been in the past. I do not think I am exaggerating at all when I say that had the people who were responsible for the financial policy of Canada during that period been the paid servants of Germany they could not have maintained a policy which would have been of greater benefit to that country.
Then came the war and, strangely enough, we had a very quick change in the attitude of the government on this question of money. Where as the pleadings of the people had failed to get the government to issue the money that was needed to maintain full employment, a new motive was able to spur on the government. That motive was fear. I have seen a man run faster than he ever ran before when machine gun bullets played around him, and the same motive caused this government to act when the pleadings of the people in the past had had no effect.
Bank Act-Mr. Quelch
What happened? Within six weeks of the declaration of war the government hired the chartered banks to create $200,000,000 of money for the purpose-let me quote the present Minister of Finance who was then Acting Minister of Finance as to why it was necessary to have- a certain amount of credit expansion as soon as war was declared. I quote from a speech made by the minister on September 12, 1939, as reported on page 140 of Hansard, as follows:
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. It must be small and carefully controlled because its effects which may not appear immediately are cumulative and otherwise might get out of hand. 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 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.
I could agree with a great deal of that statement. What puzzles me, however, is this. If six weeks after the declaration of war it was necessary to have monetary expansion in order to provide full employment so that we might develop the resources of the country, why was it not just as sound to have that expansion two months before war was declared when we had exactly the same situation? Why was it not possible to have that credit expansion in 1938, 1937 or 1936 when we had large undeveloped resources in this Dominion? We had to wait for war before the government would make a move.
During the fall and winter of 1939 there was not very great activity in Canada. It took Dunkirk to really waken this government. Fear then became more prevalent throughout the country, fear as to what might happen if we did not wake up. We then had a declaration from the government that no financial restrictions would be allowed to impede our war effort, that the only limit to our war effort would be the men and materials necessary to produce a total war. On several occasions we have asked the government to make a similar declaration regarding the post-war period, but so far that declaration has not been made. I think the Canadian people have a right to ask that this government shall assure to them at the conclusion of hostilities whatever money is needed to maintain the full development of the resources of this country. We have been able to find it in waT time and there is no reason why we cannot find it in peace time.
Let me continue the quotation of the remarks of the Minister of Finance on September 12, 1939, as follows:
However, as soon as the expansion of employment and production gets well under way and certainly before it approaches its limits, further expansion of the supply of money and credit must be stopped if the danger of progressive inflation is to be avoided. With an economy at full production and employment, the only result of expanding money and credit is to raise prices without increasing production.
The minister must have changed his ideas to-day, because we know that last year employment was at a very high level and we were told that we were rapidly approaching the full development of the resources of the nation and that our main difficulty was to find the people required to develop them. In spite of that fact we created $980,000,000 of new money last year through the chartered banks and the Bank of Canada. Yet in his speech in September the minister stated that as soon as we approach full employment no more money must be created because it would not expand production. Last year, although we were warned that we had reached the peak of the development of the resources of the nation, nevertheless we created $980,000,000 of new money. Why? To maintain a total war effort. I suggest that in the future, even when peace time comes, if we are to maintain the full development of the resources of the nation it will always be necessary from time to time to have an expansion of money. I think this is endorsed by the governor of the Bank of Canada. Last year, on April 4, 1943, I participated in a broadcast with Mr. Graham Towers and asked him this question:
After the war the need will be to encourage private spending. Heavy taxes and public borrowing will be contrary to the public welfare. Will the government finance all desirable public projects by credit expansion when necessary?
Mr. Towers replied:
In circumstances such as Mr. Qijelch describes, I would say there would be grounds for government not meeting the entire cost of its programmes by taxing and drawing on public sayings. The desire would be to encourage private spending and make government investment -more of a residual item. If part of the necessary money had to come from credit expansion-and the projects were sound and in the public interest-then I should say go ahead.
Mind you, the governor of the Bank of Canada does not say that the only money that can be obtained for the government is out of the people's pockets. He says that money can be created. Yet in 1938 we were told that the government had only one source for its funds. I think that after the war the minister will agree that it will be necessary from time to time to create new money in order to maintain the full development of the resources of
Bank Act-Mr. Quelch
this country. The question then becomes mainly one of, where shall the money be obtained from? Will it be obtained from a national agency or from a private money monopoly, the chartered banks? This group has always urged and insisted that the money should be made available through some form of national agency, and then no debt need be incurred, or if it is incurred it will be a debt to ourselves and will never have to be repaid.
The minister has argued in the past that money issued by a national agency will expand the reserves of the chartered banks and thereby make it possible for them to bring about inflation. That merely proves that up to the present time we have not established effective control over the issue of currency and credit. The minister says that we have controls by which the amount of money in circulation can be regulated. But when these controls are put into operation, the result is that the country goes farther into debt. You cannot call that type of control an effective one, when its result is an increse in debt.
Of course I realize that the minister may pride himself on being a student of what some people call the modem school of thought, that school of thought which argues that the national debt is a national asset and the greater the debt the greater.the asset; so why worry about the size of the debt? I do not know whether the minister agrees with that or not, but it is the stand that has been taken by the governor of the Bank of Canada in the past. I do not want to be accused of misrepresenting what he said so that I will quote his words. Before the banking and commerce committee in 1939 Mr. Graham Towers, at page 80 of the committees' report, was asked this question:
Is it possible for you to imagine any way by which we are ever going to pay the debt we have got?
Mr. Towers replied:
As the debts of the government are an asset of the Canadian people, I do not see much point in the thing; except that, to the extent that the government thinks that the distribution of those assets of the Canadian people-which are its debt-is unsatisfactory, it may take steps to remedy that distribution in any way that lies within the legislative power; in fact, in any way, I suppose-by income tax or succession duties or any other action it cares to take.
Further on, at page 235, he said:
So that all I can say would be this, that in a country where the sum total of public and private debt was decreasing you have a country which is going backward and which is becoming more poverty stricken. Generally speaking, in a country where you find there is no public and private debt you have a country resembling darkest Africa; there is nothing else.
That apparently is the idea of the governor of the bank of Canada, that we do not need 100-172J
to worry about the debt because it is a debt owed to the people of this country; we need not worry about it so long as it is not owed externally. I mentioned the fact that the people who support that philosophy like to look upon themselves as belonging to a modern school of thought. But I would point out that there is nothing modern in it at all. It is very, very old. It is a type of philosophy that has been propagated throughout the world by banking institutions for centuries. Just to show you how old it is, I should like to quote a statement made in 1813 by Thomas Jefferson.
It is to be found in a booklet entitled, "Out of Debt, Out of Danger," by Jerry Voorhis, where at page 15 I find this:
The American people would have avoided a great deal of misery and difficulty had they taken to heart Thomas Jefferson's exposure of the "art and mystery of banks." Here is what he wrote on one occasion.
This was in a letter written to John W. Eppes, November 6, 1813. I continue the quotation, giving what Jefferson wrote:
At the time we were funding our national debt, we heard much about "a public debt being a public blessing"; that the stock representing it was a creation of active capital for the aliment of commerce, manufactures and agriculture. This paradox was well adapted to the minds of believers in dreams, and the gulls of that size entered bona fide into it.
It looks as though to-day we have plenty of gulls, gullible enough to believe in that type of philosophy which is deliberately propagated by banking institutions to-day. I must congratulate the Minister of Finance upon following that philosophy energetically, for in the last year we have an increase of two and a half billion dollars in the national debt and if the war lasts much longer we shall have a ' national debt of from fifteen to sixteen billion dollars, which will require $450,000,000 to $480,000,000 in interest charges alone.
I do not agree with some people who say that we can never have prosperity so long as we continue under the present financial system.
I believe that even if we continue under the present system it would be possible to maintain prosperity just so long as we absolutely ignore the size of the national debt and then borrow from the chartered banks the money necessary to pay the interest on that debt. If we are willing to do that, we can pile up the debt to astronomical figures, to the point where ultimately the debt charges will be greater than the total revenue of the nation. But long before that time comes the confidence of the people of the country would be destroyed, and once the confidence of the people starts to waver it would be impossible to maintain
full employment and prosperity in this nation. I believe that there is a sound alternative to that dangerous type of policy.
I should like to quote from a book written by Stuart Chase entitled, "Where's the Money Coming From?", in which he states at page 105:
If the government borrowed solely from its own central bank without interest, there need be no interest burden at all. There would be amortization of the principal, and the fundamental prohibition not to pump too many new dollars into the system would still stand. The national resources planning board has said, "Should the day arrive when the carrying charge on the federal debt becomes oppressive, serious thought should be given to the creation by our modern banking and treasury institutions of non-interest-bearing debt."
What seems strange to me is, why wait until you reach a crisis before adopting an alternative which may save the situation.? The national resources planning board says, "When the crisis has developed we may have to use non-interest bearing debt." Surely, whefi you see you are heading for a precipice you do not wait until your front wheels are over it before you change your course; you change your course long before you reach there. And when you realize, as all people who study the economic system to-day must realize, that a continuation of the present method of financing can lead only to disaster, surely it is time to adopt a policy of utilizing non-interest-bearing debt; I would say, non-interest-bearing debt in the sense that money could be borrowed from the national institution, the Bank of Canada, without any obligation to repay it.
This group has always stressed that it is necessary to maintain absolute and effective control over the banking system. In the past we have suggested that one way to bring this about would be the 100 per cent reserve system. I want to emphasize the fact that the Social Credit group has never stated that the 100 per cent system is the only way by which such effective control can be established. In view of the fact that our amendment has been voted on and disposed of, I suppose it would be hardly in order to continue that line of discussion at the present time. But, without referring to the 100 per cent system since it has been already dealt with on the amendment, I might deal with one of the statements which the minister made in that regard. He stated that it would be altogether too great a tax on the chartered banks if such a system were adopted; if over a period of time several hundred million dollars were issued, that money would eventually become deposited in the char-
tered banks, with the result that the chartered banks would have to service it without any compensation.
I think the minister's own statement which he placed before the house the other day showed that it would be no great handicap on the banks if they had to do it. On page 2550 of Hansard we find this statement regarding the chartered banks: during their operation for the fifteen-year period from 1929 to 1943 their current operating expenses amounted to 112-3 million dollars, and in 1943 those operating expenses had risen to 114-9 million dollars, an increase of 2-6 million dollars. Then we find that during the fifteen-year period the average of the amount deposit liabilities was 2,936-9 million dollars. In 1943 the amount of the deposits had increased to 4,606-9 million dollars, or an increase of 1,660 million dollars. So that concurrently with an increase in deposits of 1,660. million dollars you have an increase of only 2-6 million dollars in operating expenses. It is true that there was a reduction in operating costs owing to the fact that the interest payments had been reduced; but if the actual cost of issuing credit was in reality around two or three per cent, as was suggested by the governor of the Bank of Canada before the banking - committee in 1939, when he said that it was three per cent including interest payments on deposits and1 two per cent without them, you would have had an increased operating expenditure of $48 millions, so that even with a decrease of expenses of $10 millions representing interest payments, you would still have had an increase of $38 millions in operating expenses, yet all you had w-as an increase of 2-6 million dollars. I mention that fact to prove that evidently there is a very large fixed overhead cost in banking; therefore you can increase or decrease the amount of deposits without altering very much the operating expenses of the banks. It would be possible, for instance, to increase deposits by $500 millions without involving any great increase of expense on the part of the banks, because they have had surplus capacity for taking care of increased business. I think the minister's statement proves that conclusively, showing as it does an increase of $1,600 millions in deposits with an increase' of only $2,600,000 in operating expenses.
The minister made another point. He showed that the shareholders' net income amounted to only 5-09 per cent of their total equity on the average of the fifteen year period 1929-43, and 6-03 per cent in the year 1943. Personally I do not think that is a fair basis. I think the only fair basis is to
Bank Act-Mr. Quelch
take the paid-up capital. For instance, if I bought a S100 bond bearing an interest rate of four per cent, and I purchased it for $60, the interest rate on that bond would still be four per cent. The interest on my investment, it is true, would be more than that, but the interest rate on the bond would remain at four per cent. The same would apply if I paid more than $100 for it. I think this principle applies to the paid-up capital of a bank. The actual dividend is declared on the paid-up capital. In 1941 the dividend of the Bank of Toronto was twenty-five per cent. True, there is a big variation in the dividends of various banks. For instance, we find that in 1941, the percentage of net profits to paid up capital, after deductions for income taxes and appropriations for bank premises, pension funds and other published allocations, was 8-16 for the Bank of Montreal, 12-34 for t'he Bank of Nova Scotia-, 1S-69 for the Bank of Toronto, 6-04 for the Provincial bank, 8-03 for the Bank of Commerce, and 10-06 few the Dominion bank. These, I think, can certainly be regarded as substantial profits.
Subtopic: CONDITIONS GOVERNING TEN-YEAR EXTENSION OF BANK CHARTERS