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


Thomas Langton Church

Conservative (1867-1942)

Mr. T. L. CHURCH (North Toronto):

Mr. Speaker, I would not have taken part in this debate but for the fact that I come from a city in which my office is a few doors away from the head office of the Home Bank and that a large number of the depositors have ajked me to speak on their behalf. I had a great deal of business to transact with nearly all the chartered banks of Canada while a municipal officer. The Home Bank had a lot of people trying to get the city of Toronto deposits. They offered a higher rate of interest to municipalities; they engaged lobbyists also, as you will see from the papers to secure business; they advertised for deposits and had a good advertising campaign. I remember the start of this bank. It commenced as a loan company and it started with poor people. Of the directors of the bank, with the exception of Mr. Daly, only two or three had as much as $3,000 or $4,000 stock in it. Mr. Daly had a large amount of stock in the bank, and some of it was transferred to his wife. Those in charge of the bank, the president, the directors, the manager and the rest of them, as Mr. Clarkson pointed out in his report, had no banking experience. In my opinion, the Bankers' Association should bear the-brunt of this disaster. All last year while we were getting the Bank Act revised, they appeared around these legislative halls asking that it should not be laid over, that not one day was to be lost to get the new act through. For it had been contended that the act should be laid over for a year and a survey made of all the banks, and that auditors should be put to work. It was proposed that a survey should be made in the recess of parliament in regard to all these banks, because what has happened to-day in the Home Bank may happen to another bank to-morrow. I do not think the Canadian Bankers' Association dealt fairly with this parliament in regard to this legislation. They .issued'booklets, pamphlets of all descriptions, and they described the Canadian

banking system as the finest system in the world. They talked in these treatises about the "uninformed agitators" amongst the farmers of the West. They put into the hands of members books containing a sort of catechism between the farmer and the student on the different banking systems in the world. This pamphlet in a white book is called Banks and Banldng, and there are articles under various headings such as "Protection to depositors", "Priority for depositors equal to that of note holders", "Redemption fund." The people of Canada had a shock last August from which they have not yet recovered. Members of the cabinet were over in the Old Land last summer looking for more capital to come to Canada. How can we expect to get capital in Canada under the present banking system and Bank Act? With all due respect to the gentlemen who compose the Canadian Bankers' Association, I would say that everything they say in this pamphlet can be proved to be incorrect since last August. They have criticised the banking systems of other countries, and we find, under our own banking system, the disaster of last August which happened only three months after these gentlemen had been running around these legislative halls telling us not to lay over the revision of the Bank Act, not to appoint auditors. They forced the act through, saying that not an hour was to be lost. With alf due respect to what the late government did in the case of the Farmers' Bank, I would say that that government took a certain stand at that particular time, but two wrongs do not make a right. Public confidence has been shaken in the banking system we have in this country. A few years ago there was a case in point when the Canadian Northern Railway was taken over by the government of Canada under an arbitration presided over by Chief Justice Meredith, to whom the hon. member for Halton (Mr. Anderson) referred tonight. There was a hypothecation of title deeds to the government by the Canadian Northern Railway for almost all their assets throughout Canada for advances. Subsequently to this claims were made for further advances. Some advances were made to the Canadian Northern by the Canadian Bank of Commerce amounting to $10,000,000 or $15,000,000. When the arbitration was in progress, what did this parliament do? Although the parliament of Canada had priority and could have foreclosed the system without paying a dollar, and preserved its priority under those title deeds of the Canadian Northern Railway System, this legislature paid them $10,000,000, although in my humble opinion, they had no legal claim, let alone a moral claim. What is good for a

Home Bank Investigation
large corporation like that should be good enough for the poor depositors in the Home Bank. We have been told that there is a difference between a note-holder and a depositor. A bank has two classes of first creditors. One is a note-holder and the other is a depositor. In the old days of the banking system of this country there was a difference in the way bank notes were regarded. Some people would prefer the notes of one bank to those of another.
I remember the time in Toronto when people would not take the notes of certain banks because they were not considered safe. After the disaster to which I have referred parliament revised the Bank Act and provided for a note redemption fund, which was formed by each bank contributing five per cent of its note circulation. This fund to-day amounts to six or seven million dollars, and noteholders are thus protected when a bank fails. The same legislation should be extended now to depositors and a sinking fund established.
Now a disaster has overtaken the depositors of the Home Bank, and I know that many people in Toronto have lost all their savings and will be driven into the poorhouse. All the inquiries whether by royal commission or otherwise will not recoup those unfortunate people. Instead of futile investigations, I contend this parliament should say to the Canadian Bankers' Association: "You were the leaders in passing our banking legislation, you are our partners by reason of the note redemption fund, and you are in charge of the banking system of this country; therefore it was your duty to save the Home Bank from going to the wall; you might very easily have saved it as you did the Merchants' Bank; we have enough problems on our shoulders without assuming your work; you must come across with sufficient financial assistance to take care of these depositors." Would it not have been far better if the Bankers' Association had come to the rescue of the depositors to the extent of six or seven million dollars? In fact, four or five million dollars would probably have been sufficient, because some of the securities of the defunct bank may yet be realized at par. Would it not have been far better for the credit of this country had the Bankers' Association taken that course? It must be borne in mind that the chartered banks have to come to this parliament for their charters, under which they are granted valuable and exclusive privileges, and as a result they have made and are still making millions of dollars of profit out of the people of this country. I do not think the Bankers Association played the game last year with this
parliament-they did not "play cricket"- because two or three months after the revision of the Bank Act was carried through by parliament, largely on the advice of the bankers themselves, large losses were written off by the Union Bank and the Standard Bank, the Bank of Hamilton was taken over by the Bank of Commerce, then came the failure of the Home Bank, and later La Banque Na-tionale was saved by the wise action of the government of Quebec. After all the assurances by eminent bankers that the Canadian banking system was absolutely sound, that government inspection of chartered banks was unnecessary and uncalled-for, and that everything in the Canadian banking world was perfectly satisfactory, it was a rude awakening for the people of this Dominion to find these assurances of the prosperous Bankers' Association were not borne out by subsequent events.
I repeat, the government should say to the Bankers' Association: "You must come across with such financial assistance as will take care of these unfortunate depositors of the Home Bank." And the association can do so if they want to. They have held up other weak banks, and have pointed with pride to their wonderful system which enables them to do this. Sir Edmund Walker wrote a little pamphlet on Canadian banking which was circulated at the time the revision of the Bank Act was proceeding, and dealing with depositors he laid down the following principles :
Under our banking laws, as is very properly the case, the claim of the noteholder is preferred to that of the depositor in the event of a bank getting into difficulties. .
We must not expect that any government will relieve a depositor from the necessity of using discretion as to where he places his money. Governments never have done and never can do that. Men must use their intelligence, and after measuring the security offered, judge where they should intrust their money. It is perhaps easier for a man with limited intelligence to make a selection if the banks have large capital and are of semi-national importance, provided, of course, the basis of the system is not unsound. In Canada, we do not obtain deposits from abroad, although we might not object to do so if money could be obtained at low enough rates of interest; and we do not lend on real estate. There are probably few countries in the world where greater security is offered to depositors.
His words were proved to be incorrect when a month or two later the country was shocked by the failure of the Home Bank.
There have been five revisions of the Bank Act since confederation, and amendments have been made from time to time to protect depositors and shareholders. But all to no purpose, as the Home Bank failure demon-
Home Bank Investigation

strates; losses still arise by reason, of gross mismanagement, and to-day the confidence of the public has been shaken in our banking system. Consequently it is now the duty of parliament to impose further restrictions to safeguard depositors on lines similar to those by which a few years ago noteholders were protected. To this end the Bank Act should be amended. The Bankers' Association say that depositors are voluntary creditors, while noteholders are involuntary creditors. In my opinion this 'is simply a distinction without a difference. Undoubtedly if the depositors of the Home Bank had been warned of the kind of directors to whom they had entrusted their deposits they would not have been voluntary creditors; they would have placed their money in the post office or in a provincial bank.
It is significant that the Home Bank used quite up-to-date advertising methods for the purpose of attracting deposits. For instance, in 1913 we find them using these axioms:
A dollar in the bank is worth two in the pocket. When in doubt, leave your money in the bank. Everything comes to him who saves his money while he waits.
Get the habit of learning to do without what you only think you want.
To make a dollar go further-put it in the bank. Dollars into riches run; not all at once, but one by one.
Never a borrower nor a lender be-unless it is to lend to your bank, by depositing your savings, and borrowing from the bank on good collateral at an equitable rate of interest.
People who live in mortgaged houses should not throw around their money.
Make haste to get rich slowly.
Spend carelessly and thrive miserably.
Banked money talks compound interest twice a year. On the average poverty is the result of bull-headed negligence.
Not only has the confidence of the public been shaken in our banking system and the Bankers' Association, but our courts are being subjected to considerable criticism. A large number of people in my city are disgusted with the manner in which the prosecution of the Home Bank directors is proceeding. The case has already been before several judges, and it seems likely to go to the Pricy Council before a note of evidence has been taken. For this reason the public are urging parliament to take action. Under our constitution parliament is the highest court in the land, and the people are urging, in view of the failure not only to hold an inquiry into the failure of the Home Bank but to bring the wreckers to justice, that up-to-date legislation be passed for the protection of depositors and also, that something be done in the premises to deal with the Bankers' Association.

I may say just here that I have received a petition from the depositors of the branch of the Home Bank in Toronto at the corner of Woodlawn avenue and Yonge street, signed by 1.372 persons. I wrote to the Canadian Bankers' Association last August asking that they do something for the depositors of the Home Bank, and I wish to read the reply which I received. It says:
. Edmund Walker's secretary has forwarded me your .otter of the 12th instant, addressed to me in Sir Edmund's care, in reference to Home Bank affairs.
The suggestion that the members of the Canadian Bankers' Association should take care of the probable losses of depositors in the Home Bank, while doubtless made with a desire to remedy an unfortunate situation, has not, if I may with respect say so, been considered m all its bearings. In the past the basis of the purchase by individual banks of the assets of weaker banks and the protection of their depositors, was that the assets purchased were at least of sufficient value to meet the demands of the depositors.
There is no legal or equitable ground, so far as I am aware, on which the shareholders of banks which have had prudent and conservative management should contribute out of their resources to make good losses which a bank imprudently managed has sustained If it were once understood that banks with prudent and conservative management were under obligation or were even likely to make good to depositors of a bank which closed its doors, all incentive to honest and careful management on the part of an executive with little sense of responsibility would be removed; capital would desert our banking institutions and the business of the country would as a result be seriously crippled.
These in my opinion are the probable consequences of the application of the doctrine that banks are guarantors of the deposits in every other bank I am, Yours very truly,
F. W. Taylor.
Well, it would not shake the confidence of the people half as much as the closing of the doors of the Home Bank did. It would not shake the confidence of the country half as much as the representations made by this association in the pamphlet which 1 hold in my hand and which was distributed among members of the House. Let me read a few more paragraphs from this pamphlet. With regard to noteholders and depositors, it says:
The creditors of the banks consist of noteholders and depositors, one of whom may be classed as involuntary, the other as voluntary. When a bank bill is paid out in settlement of wages or accounts, the receiver does not concern himself about the bank of issue; all bills look alike to him in regard to their value... What of the depositor? What protection is extended to him? Before answering this question it is pertinent to repeat that noteholders and depositors stand in different positions. The noteholder is an involuntary creditor. In the course of business, selling goods or receiving wages, he has practically no option other than to accept the currency given him, and is therefore entitled to have that currency made sound and unchangeable in value.
He says that this is the only country in the world where the depositors have protection. Then there follows a supposed con-

Home Bank Investigation
versation between a farmer and a student of finance-the student, I suppose, being the Canadian Bankers' Association. Then further on there is a reference to the western farmers being misled by uninformed agitators. Well, I think this legislature was misled by a lot of uninformed agitators when members were told that a bank could not fail without the depositors being protected. Otherwise I do not believe this parliament would ever have passed the act giving them their charter. All the cards should have been laid on the table. Parliament gave to the Canadian Bankers' Association tremendously wide powers. - Let me mention a few of the purposes of the association as set out in the act of incorporation:
(1) to promote the interests and efficiency of banks and bank officers, etc.; (2) to establish sub-sections of the Association; and (3) to establish clearing-houses for banks, by-laws regarding which require the consent of the Treasury Board. More serious powers were those imposed by the Bank Act. When the banks undertook to guarantee the note issue of every bank they found that they needed the power to inspect the note issue records of each bank and some protection at the moment of the suspension of a bank. For these purposes the Bank Act gives the Association power (1) to appoint a curator to supervise the affairs of any bank which may suspend payment, until the resumption of its business or the appointment of a liquidator; (2) to supervise the issue of bank-notes, including the making, delivery and destruction of the notes, and the inspection of the circulation accounts of the banks; (3) the custody and management of the Central Gold Reserves; and (4) to impose penalties for the breach or non-observance of any by-law, rule or regulation made by virtue of the section of the Act in question.
So that to all intents and purposes the Canadian Bankers' Association to-day have the powers of parliament, and instead of having only a Senate and a House of Commons in this country we have a Senate, a House of Commons and a house known as the Bankers' Association. Among the vast powers given to them under the act is that of inspection. But they did not inspect; they led us to believe everything was safe. Now, they say that the depositors of the Home Bank have no claim, but in my opinion they have a good moral claim. This legislature is responsible for the position in which these poor people who have lost everything now find themselves. They put their money in the bank because they thought they were protected. Let me quote just here the words of the Right Reverend Bishop Fallon of London in this connection: .
But how can this end be reached in the matter under consideration. By the simple method of making the banks collectively responsible for the money they accept as deposits. The banks borrow our money without other security than the charters the people give them; they pay no, or a very low, rate of interest. When they loan us our money they charge
us the highest rate of interest obtainable, and every shred of security that can be squeezed from us is rigorously exacted. We are actually made financial slaves by the very power of our own savings. And the bankers gamble with our earnings, and tell us to go whistle when the crash comes.
No further faith can be put in those who havebeen hitherto our financial guides. They have beenweighed and found wanting. And they know it themselves. We are now being told that the banks have no objection to " government inspection," butthat the government must bear the consequent
" responsibility." The people of Canada will not tolerate the placing of any such " responsibility " on their government, that is, on themselves. They shall demand an effective guarantee for their hard-earned savings, and they will look to the forthcoming session of the federal parliament to exact that effective guarantee from those to whom these savings are confided.
I had a resolution on the order paper, Mr. Speaker, asking the government to consider the advisability of assisting the depositors and of calling upon the Canadian Bankers' Association to that end, but the motion has been ruled out of order on the ground that it involves a matter of finance. In my opinion, if the Canadian Bankers' Association will not voluntarily come across with this money, their association should be assessed for the amount of loss sustained through their failure to carry out proper inspection and audits and to maintain a state of efficiency in the banking business. Hon. members of this House should put their heads together and see what can be done to bring about some active measure of relief for these unfortunate depositors, many of whom lost their all and can never get back to the position in which they were before. I hope that this parliament will take such steps as may be necessary to restore confidence in the banking system of the country, and will see to it that the Canadian Bankers' Association carry out the conditions under which they received their charter. I suggest that should they fail so to carry out those conditions, parliament should take their charter from them and vest those powers where in my opinion they should be vested, in the Finance department of this country.
Mr. FRANK S. CAHILL (Pontiac): I
agree with much that has been said by hon. members on both sides of the House with regard to the desire on the part of every person that the Home Bank depositors should be reimbursed if it is at all possible. I am not one of those who believe that our banking system is the last word in banking; I think that some useful amendments could, be made to the Bank Act, amendments that would serve a good purpose in this country. Only a very few years ago we had twice as many banks
Home Bank Investigation

in Canada as we have to-day. We had then a much better banking system than we have at the present time. The smaller banks in Canada are gradually being absorbed by the larger until it is perfectly obvious that within a very few years we shall have not more than three or four very large banks in Canada, serving the people by a system of branch banks. I do not believe that that system will serve the people in developing this Dominion. The branch banks to-day are merely gathering points for deposits. These deposits in turn are sent on to head office for investment. It is quite apparent to any person who will study the Canadian banking system that it would be impossible for these branch banks to make loans in the country; the system will not permit it. Some of our banks have three or four, and some as many as seven hundred, branches throughout Canada. They select a boy from school in the country, put him in the bank as messenger, later on he becomes an accountant, and in a very few years he blossoms out as a branch bank manager, with absolutely no experience in any kind of business except book-keeping and the making up of interest. Under the present system of banking a branch bank manager can make a good showing for his branch by not lending one cent from his branch. He can do that in this way: If he can get sufficient deposits in his bank to forward to head office he will be allowed enough interest on that to show a profit in his branch, and he does not need to lend a cent out of his branch. The result is that the cautious boy adopts that course and sends the deposits to head office. The money that is deposited in the branch banks all over Canada is forwarded to head office, and head office makes the loan.
I did not agree with much that was said in the Banking and Commerce committee last year about the banks not wanting to make loans. It goes without saying that no bank can make a profit and succeed unless it does make loans, for the only way they make a profit is by making loans, and the only way in which you can obtain a loan under the present system is by going to head office, where the money is accumulated from the branches. As a result of this accumulation, head offices have from time to time made improvident loans, and the bank failures in Canada in the past have been caused by head office loans. The money accumulates at head office, and if they cannot make legitimate loans they do what was done recently in the case of-the Home Bank, make speculative loans where the ordinary business man would say they have no chance of recovering their capital. The Home Bank failure has
brought to the notice of the Canadian people more forcibly than anything else the shortcomings of our banking system, but the Home Bank failure did not disrupt the business of this country to anything like the extent it was disrupted by the Merchants Bank fiasco. When the Merchants Bank closed its doors there were hundreds of thousands of customers and depositors who had to look elsewhere for their banking connection. They had to make new banking arrangements^ start all over again in the tedious business of building up a credit.
Let me say that I have no grievance against the bankers of this country. I have never in my life made an application to a bank for a loan that was refused. I could always get all the money I wanted from the bank, so I have no grievance on that score.

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