March 10, 1944 (19th Parliament, 5th Session)

SC

Victor Quelch

Social Credit

Mr. QUELCH:

Medium and long. The result will be you will not have a rapidly revolving fund and the amount of business the bank will be able to do will not be very great. When you think of a $9 billion economy it will be merely a drop in the bucket.
As I understand it, the bonds of this bank are not to be guaranteed by the government, but I think the minister will agree with me when I say that the government could not possibly allow this bank to go by default. If there were any danger of this bank going by default the government would have to be prepared to come to its assistance. On the other hand., as these bonds are not guaranteed by the government they will have to bear a higher rate of interest than dominion bonds. As the government will have to back them in the event of the bank getting into trouble, it seems to me they should take steps to see that the rate of interest to be paid is no higher than that paid on dominion bonds. Otherwise you will be compelling industry to pay unnecessarily high rates of interest.
The minister has stated that it is not intended that this bank shall compete with the chartered banks. Perhaps that is one reason why this bank is not to be a bank of issue. In other words, it is being shackled so that it cannot compete with the chartered banks. It is not a question of whether it wishes to compete; it is being placed in such a position that it cannot compete even though it desired to d,o so. Perhaps that is the reason why the bonds will likely be sold to the public or to the chartered banks rather than to the Bank of Canada. It seems to me that the government are deliberately creating a set-up which will bring about higher rates of interest on industrial loans.
The parliamentary assistant has stated that this bank is needed to fill a gap. I should like to quote what he said about that gap. On page 1059 of Hansard he is reported as follows:
The chartered banks are one source, of credit for industrial enterprises. But since the liabilities of these banks are mostly in the form of deposits withdrawable on demand or short notice, it has ahvays been thought desirable that they should keep their assets in rather liquid form-easily realizable in case of need.
And again:
For the reason I have just mentioned, the chartered banks for the most part have made short term loans to industry-loans which in the ordinary course of business can be paid off in full at least once a year. Accordingly, they have been most important as a source of working capital for industry rather than as suppliers of long term funds which might only be repaid over a period of several years.
And again:
It is to fill this gap in our financial structure and to ensure that adequate financing is forthcoming for desirable projects that the government proposes to establish the Industrial Development Bank.
That would seem to be a desirable objective, but unfortunately the resources of this bank are going to be limited and it is doubtful whether it will be in a position adequately to fill the gap. It seems to me that if there are gaps, and undoubtedly there are, then the first, step w'e should take is to amend the Bank Act in such a way that these may be filled. We could very well let this measure stand until the Bank Act has been revised. When that has been done, and we have found out what gaps are left still to be filled, there would then be plenty of time for the government to bring down a measure to provide for the filling of them.
I want to consider briefly the situation referred to by the parliamentary assistant. I quote again from page 1059 as follows:
But since the liabilities of these banks are mostly in the form of deposits withdrawable on demand or short notice, it has always been thought desirable that they should keep their assets in rather liquid form.
In other words, it might be said that the chartered banks are lending something which they do not in reality possess. Because the chartered banks are able to create loans at the ratio of ten to one against their cash reserves, they are not in a very sound position to make long term loans. If there was a run upon the banks they would be in the unfortunate position of being able to pay only approximately ten cents on the dollar. Naturally they try to remain in as liquid a position as possible.
On previous occasions in this house we have discussed this matter. Members of this group and of other parties in the house have suggested that it might be well worth while for the government to consider making amendments to the Bank Act along the line of the
Industrial Development Bank

one hundred per cent system. I think the minister is familiar with the proposal as suggested by Professor Soddy and later taken up by Professor Irving Fisher and later endorsed by Babson's Incorporated. Briefly the proposal is to amend the Bank Act so that the chartered banks will be compelled to maintain one hundred per cent cash reserves to the full amount of their demand deposit liabilities. If that were done, the banks would be in a position at all times to satisfy any demand against their demand deposits. The proposal is that the government should buy from the chartered banks a sufficient quantity of government securities to provide the legal tender backing required on that basis. The Minister of Finance has on several occasions opposed such a suggestion on the ground that it would be, in other words, a tax on the profits of the chartered banks. But there is an alternative to that proposal by which the banks would not be in any way penalized. That proposal is made by Babson's. It is a slight modification of the suggestions made by Professor Irving Fisher and Professor Soddy. I should like to quote briefly from Babson's Reports dated March 20, 1939, in regard to this proposal. I shall quote only paragraphs 7 and 10. Paragraph 7 reads:
In order that our monetary policy may be made to conform to the new standard and become the means of attaining a high degree of prosperity and stability, legislation should be enacted, embodying the following features: (a) there should be constituted a "monetary authority" clothed with carefully defined powers oyer our monetary system, also control of the circulating medium.
And paragraph 10:
The simplest method for making transition from the fractional to one hundred per cent reserves would be to authorize the monetary authority to lend, without interest, sufficient cash (federal reserve notes, credit, United States notes, or other lawful money) to every bank or other agency carrying demand deposits to make the reserve of each bank equal to its demand deposits on a specified date.
If that recommendation were carried out rather than the proposal by Professor Irving Fisher, it could not be charged that you would be taxing the profits of the chartered banks, because instead of buying up the bonds held by the chartered banks and thereby depriving them of the interest thereon, you would lend to them as collateral legal tender without interest against their holdings of government securities, and if there were a run on the chartered banks they, would then be in the position of being able to meet all demands one hundred per cent. Moreover, it would be a great help to the government, because there would be no danger of inflation. The
government would be in the position of issuing national money wtihout any danger of the chartered banks using the money issued by the government as a basis for expanding their loans in the ratio of ten to one. The charge has been made repeatedly in this house by the Minister of Finance and the former minister of finance who have refused to issue new money on the ground that it would create inflation. But this proposal would take care of that danger.
Some people object to the one hundred per cent idea on the ground, with a good deal of justification perhaps, that while the one hundred per cent system would prevent the banks from inflating the money in circulation, it would not, on the other hand, prevent the chartered banks from curtailing the issue of money, and therefore they say that other steps would have to be taken. I do not think it is quite fair to make that charge unless it has been proven. In other words, the government in power might decide to adopt the one hundred per cent system. They would seek the cooperation of the chartered banks and if they were unable to obtain the cooperation of the chartered banks they could adopt the alternative of nationalizing the whole banking system.
It is interesting to note this fact, that in New Zealand there is a government that was pledged to nationalize the chartered banks. That government has been in power for eight or nine years, and yet it has not nationalized the banking system of that country. It has been suggested that the reason why the banks have not been nationalized in New Zealand is that the government has never been able to get hold of enough money to buy the capital stock of the banks. But if the banks were nationalized, all that the government would be required to do would be to write a cheque against the bank itself to pay for the capital stock.
Some may say that that would be inflation. But remember, the capital stock of those banks is always readily saleable and if people wanted to obtain money for their bank stoek they could obtain it readily. The fact that the people have not sold their bank stock shows that they do not want the cash, but rather an investment. If the banks in New Zealand were nationalized I do not believe one need worry that the people on receipt of money in payment of their bank stock would at once go out to buy other goods and thereby cause inflation. Rather they would immediately look for another forth of investment. I just mention that fact to show that even though a nationalized banking system may

Industrial Development Bank
seem very desirable, as it seemed desirable in New Zealand, yet in spite of the fact that a farmer-labour government has been in power in New Zealand for about nine years they have never taken the step of nationalizing the banks there. They figure that they can control the banking system without nationalization. One can argue all one likes about the proposal, but it would be necessary to wait and see just what sort of cooperation you would obtain from the banks. If you could obtain the desired cooperation, there would be nothing to gain by nationalization so long as you had the one hundred per cent system in operation. On the other hand if they refused to cooperate, immediate steps could be taken to take them over.
As I understand it, the Bank Act is to be revised some time during tne session. There will be plenty of opportunity therefore to investigate the Bank Act and its operations. If there are any gaps which the Bank Act does not fill, surely that will be the time to bring forward the necessary amendments in order to fill the gaps. If we find that we cannot fill the gaps by amendments, surely that will be the time for the government to bring down a measure to take care of the situation. Therefore, Mr. Speaker, I move, seconded by the hon. member for Lethbridge (Mr. Blackmore), the following motion:
That this bill, No. 7, be not now read a second time but that the second reading be postponed until after the Bank Act shall have been reviewed and by parliament revised.

Topic:   INDUSTRIAL DEVELOPMENT BANK
Subtopic:   PROVISION OF ADDITIONAL CREDIT FACILITIES FOR FIXED AND WORKING CAPITAL
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