March 20, 1941 (19th Parliament, 2nd Session)


James Lorimer Ilsley (Minister of Finance and Receiver General)



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.

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