March 27, 1924 (14th Parliament, 3rd Session)


William Irvine


Mr. WILLIAM IRVINE (East Calgary) moved:

That, in the opinion of this House, a parliamentary commitee should be appointed immediately to investigate the Home Bank failure, with a view to discovering any weaknesses in the Bank Act which may be amended to prevent a similar occurrence; to devise some means of protecting depositors generally; and to make recommendations as to the possibility of saving the Home Bank depositors from loss.
He said: Mr. Speaker, I think it is somewhat unfortunate that through certain misunderstandings, which perhaps are difficult to avoid, and also through certain misrepresentations on the part of the press at times, I feel it incumbent upon me to say at the out-

Home Bank Investigation
set that I have not the slightest intention in the world of seeking to destroy the Canadian banking system. You will recall that our investigation of last year led to certain misunderstandings of that absurd character. Our investigation, of course, was dealing with the fundamentals of the finance system. Today we are dealing rather with the technique of that system; and while I believe that the time is coming when we shall have to have a new finance system, yet I want to see the system which is in vogue working as efficiently as it is possible for it to work while we are using it.
May I also add that in moving this resolution there is not the slightest intention on my part to seek to embarrass the government in any way. I recognize the difficulty of the situation with which the present government is confronted, and I am in hope that a frank discussion of this question by parliament, and some conclusion by. parliament thereon, will be of some assistance to the government in dealing with this question before this session closes.
The resolution proposes a course of action by parliament in respect to a grave situation which cannot possibly be ignored. The House will recall that at the last session of parliament the Bank Act was revised, or, to be more specific, it was reviewed, and the pronouncement was made to the country that we had the best banking system in the world. Impressions were created both by the Bankers' Association and. to some extent by this parliament that the banking system of Canada was on a very sound basis, that there was no chance of depositors suffering any loss whatsoever. That impression was undoubtedly created. The bill passed. And when we passed that bill we virtually said that this parliament can make no further improvements on this act, and upon this ground we granted a charter for ten years, notwithstanding the fact that a number of us pressed for the delaying of the ten-year charter for another year. But scarcely a year has passed when it is proven beyond the shadow of a doubt that there are grave weaknesses either in the Bank Act itself or in its administration. Under the present Bank Act, or in spite of the present Bank Act, wildcat schemes of financing have flourished undisturbed for decades. Gambling by responsible or irresponsible individuals who are regarded under the act as the guardians of the public savings has taken place. The depositors-including widows, orphans and the aged-are unprotected under this act; and recent events have swept the savings of 60,000 of the Canadian people away from them in one night. It is regrettable
that it required a catastrophe of this magnitude to convince the general public and perhaps to convince this parliament-I will not say to convince the Bankers' Association- that there is need for amendments somewhere in the Bank Act. There are, of course, greater and graver and more fundamental weaknesses with regard to our finance system, than the failure of a bank, but I will not deal with them here. I will merely express the hope that parliament will not delay action on these until a greater catastrophe compels attention. I need scarcely remind hon. members of the series of events since the last session of parliament which have not only justified many amendments to the Bank Act which were proposed and rejected, but which have shattered the confidence of the public to a dangerous degree, impoverished thousands, and created a situation which makes action by parliament imperative.
To go no further back than just a few short months we find ample cause for that approach to panic which has characterized the action of the public with regard to banks, and that is also sufficient reason, I trust, to convince this parliament that something must be done. What are these disturbing events? In recent months two banks, which were considered beyond reproach, have been forced through their speculative proclivities to write off millions of dollars of loss. It was only by the merest chance-not by the prudence, not by the integrity, not by the efficiency of the management-but by chance that these losses were not sufficiently great to wreck the institutions concerned. This was closely followed by the absorption of the Bank of Hamilton by another bank, as the only possible escape from bankruptcy of one or both institutions. Then came the crowning calamity of this short period in the failure of the Home Bank with all its attendant losses, followed by a comatose condition of La Banque Nationale which was only revived by the injection of $15,000,000 from the Quebec treasury. And the end is not yet. I regret as much as any hon. member, the unfortunate circumstances that necessitate the reiteration of these unpalatable facts; it brings no special comfort to me to draw the attention of the House to the danger signal which points toward the future. I do so, however, because I honestly believe that it is within the power of parliament to avert the impending danger, and this resolution indicates one way of averting it. Not only have these unfortunate incidents undermined confidence, but there is no reasonable means so far proposed, either by the Bankers' As-
Home Bonk Investigation

sociation or by this government, upon which confidence may be re-established. Our largest banks have, on an average, a surplus of about 12 per cent of assets over liabilities, but that 12 per cent includes frozen assets, profitless loans, depreciation of real estate, and fixture values, as well as bad debts. Our banking institutions are I submit not prepared for a situation which might very easily arise out of the present state of public opinion. If things go on as they are now going then further mergers, or the alternative of bankruptcy, is the inevitable destiny of a number of our financial institutions. In support of that contention I should like to quote one short paragraph from an editorial in the Vancouver Sun under the caption Canadian Banking System has Codlapsed:
When we say this, we mean it. We do not mean that the Canadian banks have collapsed but that their system has. The system of one man management; the system of public audit instead of government inspection; and the system which pays only three per cent on deposits and gives no guarantee; we repeat this system has utterly failed to sustain Canadian business and to maintain Canadian confidence.
When a paper of this repute and influence so boldly states that the system has collapsed, is it not reasonable for us to conclude that there is a very large percentage of the Canadian public that, with the editor of this paper, has lost confidence in the banking system? I do not need to tell this parliament that if the public have lost confidence in the banking system then the banking system has already gone, it cannot be maintained; and so the future can only be safeguarded by restoring public confidence. And public confidence cannot be restored by a pious expression of confidence on the part of the Bankers' Association. Public confidence cannot be restored by words from anybody, public confidence can only be restored by action; and the first act is to reimburse the 60,000 depositors who lost their money in the Home Bank failure. For I can assure this House that those depositors, with their families and friends numbering at least 300,000, a considerable percentage of the population, are not going to be lulled into quietness by assurances that this thing will not occur again. My argument is that the position of some of our banks is rendered more precarious by the well-founded fear inspired by recent events to which I have alluded. There have also occurred runs on banks which are evidences of the lack of public confidence. It is natural for people to think that the large banks are the safer institutions for them to put their savings in. It by no means
[Mr. Irvine.}
follows that because a bank is larger it is safer, but it is nevertheless a general idea. Now that will lead to this-has already led to it; that the public will draw their money from the smaller banks-which may be safer in reality than the larger banks-and will deposit in the latter institutions, but with the result that the smaller banks will be wrecked. So that I prophesy-whether it be dangerous to prophesy or not-that in a very few years we shall have a considerable number of bank failures or a considerable number of mergers. One of these two results is inevitable under our present banking system.
In further support of the argument that the confidence of the public has been shattered, and that the shattering of that confidence endangers the whole banking system of Canada, I would refer to the fact that the deposits in the provincial savings banks have increased enormously since the failure of the Home Bank. I would also refer to the fact that a great many people, some my personal acquaintances, are hoarding their savings,- afraid to put them into any bank whatsoever.
So that it is in the interest of the banks, as well as in the interest of business and industry and in the interest of the depositors generally, that we should take some action in this parliament to restore the confidence of the Canadian public. "But," you say, "they will read the bank reports of last year", and these reports, you will contend, are quite reassuring being as they are filled with optimism. For instance, I have here the last report of the Bank of Montreal. It is an excellent report. I have also the report of the Canadian Bank of Commerce, another excellent report. But I have also before me the last report of the Home Bank of Canada, which is also an excellent report. Now, what assurance have I, or what assurance has any person in Canada, that there is any more ground for confidence in these other reports than there was for confidence in this report of the Home Bank? These reports of the Bank of Montreal and of the Canadian Bank of Commerce may be truer than that of the Home Bank, and they may not; there is no basis for assurance that they are not of the same character. A bank report in one month may prove the bank to be in a healthy state, while, the next month it closes its doors, and the auditors discover that the bank has been in a bankrupt condition for a decade.
Now I anticipate that some hon. members may advance, against this point, that the amendments to the Bank Act of last year will

Home Bank Investigation
provide ground for greatei confidence in these bank reports than could have been inspired by the last report of the Home Bank which was made before the Bank Act revision. The Bankers' Association has anticipated this discussion, and has prepared for the edification of parliament a pamphlet entitled, The Bank Act, and seeing that they have dealt with this point, I must answer their arguments, because I am going to argue that there is a need for further amendment to *the Bank Act. But if this report of the Bankers' Association contains the truth, then any further amendments to the Bank Act would be superfluous. So that I must of necessity answer their argument if only on this one point. I would say the Bankers' Association, endeavours in this pamphlet to which I have referred to establish confidence on a false basis, and I have noticed also that a considerable section of the press, simultaneously with the issuing of this pamphlet, came out with editorials making a plea that the Bank Act, the dear Bank Act, should be given another trial. Now I recall an incident of my early boyhood. I remember seeing a couple of youths trying to get two roosters to fight; they succeeded, and one of the roosters was severely beaten. He ran to his own backyard around the barn, and got up on that old straw stack among the old hens, and he crowed and crowed as if he had been the master of all the henneries of the universe. Well I would characterize this pamphlet as the cock-a-doodle-doo of the Bankers' Association. Listen to it. It says:
But no one can candidly survey the business mortality-
Mark the word:
But no one can candidly survey the business mortality in 1920 and 1922 without reaching the conclusion that the bankers of Canada have marvellously well weathered the storm and conclusively demonstrated the soundness of the system under which they operate and the general prudence and skill of the management.
With studied care they have ignored the tragedy resulting from the mismanagement, the imprudence of bankers and the incompetence of the system over which they crow, and when they come to dealing with the merger of the Bank of Hamilton they say:
As to the merger of the Bank of Hamilton with the Bank of Commerce, it merely follows a long line of precedents that are numerous in Great Britain.
Now, if a doctor who had lost a patient with smallpox had said to the family, "Huh! this is following a long line of precedent very numerous in the Philippine islands," do you suppose it would be refreshing to the rest of the family? I cannot see the reassurance in that. Let me hasten to say that there is
not a single clause in the Bank Act that gives any basis for such assurance as is put forth by the Bankers' Association. I claim that it is immoral, it is criminal, for any institution, or for any parliament, to endeavour to build up an assurance on such an unstable foundation as that. Now the bankers' pamphlet in an endeavour to create the impression that the system is now safe, points to the great rock of safety-the efficient management, the integrity and so forth, of the banks and the bankers. There is no great change in this regard since the Bank Act was passed. The banking system is such as to force prudent men at times to be imprudent, to force well-balanced men to take chances. I say, the branch bank system of Canada, which gathers all the funds from the four corners of the Dominion and centralizes them in the hands of a few individuals who must lend out that money, sometimes actually compels men to be imprudent. But to answer their point: We had prudent bankers before the failure of the Home Bank, and yet their prudence did not save the Home Bank depositors. We had efficient management- before that, and that did not prevent this failure. If we have not been safeguarded by prudent management in the past, how can we feel sure that we shall be safeguarded by prudent management in the future? Prudent management is not enough.
The next safeguard which they lay down as a basis for confidence is a slight amendment to the clauses dealing with auditors, which were made at the last session of parliament. Now, there is no real safety in any scheme of audit. I am sure every hon. member will agree with me in that statement; if not I would be very much amused to hear some hon. gentleman argue the contrary. There is no real safety in any scheme of audit, and no real safety in any type of auditor. There is no scheme of audit provided for by the Bank Act which will warrant the public of Canada feeling safe with regard to any bank in Canada. The government system of audit, which was defeated largely at the behest of the representatives of the Bankers' Association last session, would come nearer being a safeguard than any other type of audit, but we have not got that, because the Bankers' Association said it would not work, or offered some such excuse as that. But by a strange disregard for logic, the Bankers' Association are more nearly correct in the latter part of their pamphlet, when arguing against the advisability of providing a guarantee to depositors. In this regard they say, first, that there can be no
Home Bank Investigation

guarantee of deposits which would be practicable, because deposits are without limit. I am glad to hear the Bankers' Association admit that. They would not admit it last year. We argued that deposits were without limit, and since deposits are without limit, the loans are without limit, and since the loans are without limit, we are virtually under a system of limitless issuance of paper currency. But they tried to saddle that on me and to say that I was a Bolshevik financier, who wanted to start a paper mill down in Ottawa to turn out bank notes. That was the impression they gave, but they virtually have that system now. I just point that out in passing.
Listen to this. On page 15 of the pamphlet they argue-in fact, they state-that deposits are a fourth mortgage. I hope that all depositors will realize fully their proper relationship to the bank. They have got a fourth mortgage which cannot go into effect if the first one goes into effect, because there will not likely be anything left with which to meet the fourth mortgage after the first, second and third mortgages have been paid. But here is the crowning absurdity of the Bankers' Association statement, and one which ought to be sufficient to induce that association to hire a logical thinker to prepare its propaganda. After having argued as to the safety of depositors under the audit-system which was provided at the last session of parliament, and finishing that section of the pamphlet with the striking, selfevident fact which I quote:
A law under which an unsound bank dare not continue to operate is a law which is effective.
-which was intended to apply to the present Bank Act, but which obviously does not; after having said that and argued that the auditing system is sufficient guarantee, the pamphlet releases the ferocious feline from the bankers' bag of tricks by proving the mpracticability of guaranteeing deposits. The writer of the pamphlet had forgotten all about his previous argument, about the safety provided by the new audit system. That had been completely wiped from his mind, and this is what he said:
If we had a system of guaranteeing deposits, there would then not be the same inducement to prudence on the part of the bank manager. He might, and very probably in some instances would enter upon speculation, incur grave risks, gamble on a chance with his funds knowing that if misfortune overtook his bank the depositors would suffer no loss.
May we not ask the Bankers' Association where their auditors would be all this time; the auditors considered a page or so before to be sufficient for the safeguarding of the

depositors? Could the auditor who is so well fitted to protect deposits not stop this banker who had forgotten about his prudence, who had gambled with public funds? In other words, if the audit is so perfect as to constitute a safe basis for depositors, would it not prevent a bank manager at the same time from gambling with the depositors' money? That is where their lack of logic lands them. No, there is no safety for deposits under the present act, and those who argue that are only opening the doors of a fool's paradise. The general public must have some assurance of safety beyond any provision that now exists. If this is not given, members of this House would not be honest with themselves if they endeavoured to restore confidence on the present basis. Therefore, in the best interests of the banks themselves, of business and of depositors, I urge that something must be done.
Some hon. members may argue that that is a pretty vague statement to make-something 1 -and no doubt a number of hon. members will ask: "Yes, but what is the something?" That is what I want the committee for. This resolution calls for the appointment of a parliamentary committee to find out what "something" should be selected. I cannot imagine any member of this House, however, disagreeing with me on the necessity for doing something at this time. We are dealing now, not with theories of banking, theories of finance, but with a menacing situation.
I will briefly state what, in my opinion, might be done under the purview of this resolution. First, though perhaps not most important from the future national viewpoint, the depositors of the Home Bank should be reimbursed. But immediately someone will say: "How can that be done?"
4 p.m. And some may even say that it cannot be done. I reply that this parliament should say unequivocally that it must be done; first, as a basis of re-establishing the necessary confidence for the continuation of banking and business in Canada; second, from the point of view of justice to those who have lost their savings in the Home Bank failure. While it is not for me to outline exactly how that should be done, yet I might intimate that, so far as I am aware, there are only two sources from which funds sufficient to reimburse the Home Bank depositors could possibly come. The first is from the banks themselves; the second is from the public treasury. Frankly, I believe

Home Bank Investigation
that in view of the nature of the charters under which the banks do business, it is the bounden duty of the banks to make good the loss of the Home Bank depositors and to create a fund, as well, which will be a guarantee against a similar occurrence in the future. I will go so far as to say that parliament should make it known to the Bankers' Association that unless this is done, their charters will be cancelled.
With regard to the other source, it will no doubt be argued by some that it is unfair to tax all the people of Canada to make up the losses of a few of the people of Canada. That sounds plausible; but since we, the representatives of the people, are ultimately to blame for having failed to safeguard the public interests to the extent that a large section of that public has sustained a severe loss, the people must be prepared, if necessary, to pay for the blunders of their representatives. In any case, it is going to be more difficult to continue with a banking system which is really now taking away from the many in order that the few may have some, than it would be even to tax the general public to make up the loss of the Home Bank depositors. It is going to be infinitely more difficult to continue a system which permits bankers to gamble with the savings of the people without giving any guarantee to depositors. In this connection, may I quote a pararaph from the editorial column of the Ottawa Citizen which suggests another way of doing this:
When the Canadian Northern Railway defaulted during the war, the government found it feasible to make an issue of financial credit from the national credit reserve. It would seem to be quite as necessary to protect the interests of bank depositors, as of railway financiers. National interests are just as much involved in the situation created by the failure of the Home Bank as they were in the failure of the private railway companies.
Perhaps the government and the Canadian Bankers' Association do intend together to consider the possibility of taking care of the Home Bank depositors.
But another point of even greater importance than that of reimbursing the Home Bank depositors is that the Bank Act must be amended so as to provide, so far as is humanly possible, against a similar occurrence. This could be done perhaps by instituting some method of government inspection. Such a proposal was repudiated last year both by the bankers and this parliament, but I shall quote a short extract from Mr. Clarkson's official report to show that had there been a government inspector or auditor as far back as 1915 or 1916 the true position of the Home Bank would have been disclosed with much less disastrous results to the public. He says:
It is submitted that an audit in 1916 would have revealed the fact that there was an absolute and
definite loss to the bank of $500,000 in respect to the New Orleans deal, which, in itself, would have wiped out the reserve of $300,000 and impaired the capital to the extent of $200,000. It would have disclosed that the so-called Pellatt loans were advances on securities of loan companies which were in effect indirect advances on the security of lands contrary to the provisions of Section 76 of the Bank Act. In addition to this, it would have shown that to a large extent the business done by the bank was not a regular banking business and that there were potential losses in many other accounts where interest had been accumulated on " frozen " and unreliable securities.
Since the bank was in this deplorable state of potential bankruptcy since 1916 and continued well on until 1923 without the public knowing anything of the risks they were taking as depositors, is it not possible, and even probable, that there are other banks in the same condition, their annual reports to the contrary notwithstanding?
What might render the appointment of a government auditor not so necessary would be guarantee of deposits. That is, as a condition of granting them their charters we should demand of the bankers that they set aside a fund as a guarantee to depositors. What is the actual situation to-day? The bankers take deposits without giving any security at all. They conduct their business almost entirely on these deposits. But they also gamble with them. If they win in the gamble they retain the winnings; if they lose, the depositors suffer. Or to put this in another way, the bankers own the banks while these institutions are making profits, but when they become bankrupt the depositors take the place of the bankers and bear the losses. The Bankers' Association in their pamphlet go into this question of a guarantee fund at some length in an effort to show its impracticability. I would refer hon. members to the pamphlet, for I believe they will find it the very best argument to prove not only the practicability but the necessity for providing the very security which the bankers object to.
Now, if the House agrees with me that something should be done, although there may be wide disagreement respecting the definite proposals which I have suggested, may I hope that all hon. members will endorse my statement that not only must something be done, but it must be done now, and no further dilly-dallying permitted? Immediate action is required in the best interests of the banks themselves. I need not recapitulate; I merely refer to what, I submit, I have already proven, that public confidence has been shattered, and that unless something is done to restore that confidence we are going to have more bank failures, we are going to have more bank mergers, we are going to have more difficulty

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