Bank of Canada

By Philippe Bérubé, M.A. Political Science    December 17, 2002

Part one: The 1933 Royal Commission on Banking and Currency

A season ago, I would have been cautious in proclaiming to thousands of readers that most Canadian politicians in 1933 were just as incompetent as today’s politicians in understanding monetary and fiscal policy. I can now justly say that even after seven decades of welfare state and massive government intervention, today’s political class are equally ignorant of the impact of a fiat currency system than the politicians of the post-Great depression years. However, the private bankers and their friends in the political class have always seem to have been, now and then, particularly supportive of the spectacular levels of inflation and debt creation wrought on the general population by this type of institution. Today the Bank of Canada, our very own central bank, stands with approximate reserves of 18,4 billion US dollars, $14 billion (US) of foreign currencies, but only $222 million (US) in gold reserves*.

These levels would seem very acceptable to most 21^st century Canadian citizens. Back in 1933, this number would have look dangerously low. Canada had been on a fiat currency system since the Dominion’s birth in 1867, but as Table 9 (p. 39) of the Report of Royal Commission on Banking and Currency (RCBC) ** indicates, percentage of gold reserves per total number of Canadian paper notes had always floated between 24 and 79% from 1891 up till the creation of the central bank. The politicians of 1933 would probably be very surprised to see our current gold reserve levels, but they nonetheless embraced a new system that would bring the precious metal-backed portion of our currency in the control of a non-governmental organization.

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The RCBC was appointed in 1933 to evaluate the impact of the creation of a central bank in Canada. They submitted their report on September 27th of that year and recommended that such an institution be established. While researching this paper at the National Archives, I came in with the same early expectations I brought during my M.A. thesis research pertaining to opposition to political corruption in early Canada. I looked forward to see many politicians bring forth technical, ideological and moral arguments in criticizing the federal government for their dubious and premature financial decisions. Alas, the critique on late 19^th century political corruption was usually expressed in strictly partisan terms and the same judgment can be applied to both the board of the Royal Commission who evaluated Canada’s need for a central bank and to the Members of Parliament who debated the Bank of Canada Bill in the House.

Mind you my inquiry for this editorial wasn’t nearly as exhaustive or covered as much publications as my thesis research (I have yet to plow the entire 6 volumes of RCBC testimony to get some non-political period opinions on the creation of our central bank), but the Parliament debates held before and after the Bank of Canada bill was ratified were mostly based on how much public/private influence should be present on the Bank of Canada board and not on the fact that the institution should exist or not in this country. I would state at this point though that all the people, groups and organizations that submitted testimony to the RCBC were Canadians, so no testimony from Americans who actually lived the previous two decade of "Federal Reserve experience" will show up in these full records. The party in power, the conservatives were for the creation of the central bank. The liberal opposition was also for the creation of the central bank. In pages 33 to 37 of the Debates of the Canadian House of Commons (January 1934)***, the opposition leader, William Lyon McKenzie King, admonishes the Prime Minister, Richard Bedford Bennett for having already made up his mind to establish a central bank in Canada back in 1931 at an international conference, even if he agrees with the principle of creating a central bank. To this accusation, Mr. Bennett states on page 35 that "If Canada was to be financially independent there had to be means of determining balances, of settling international accounts, and a central bank would provide this." I guess Mr. Borden did not bother to seek advice from Americans who had just lived through two straight decades of central banking, nor is he perfectly conscious that Canada was able to set its international accounts without the help of a central banking entity since Confederation.

A month later in February 1934, Bennett’s minister of finance, Edgar Rhodes, went further in stating vague and irrelevant arguments in favor of establishing a central bank in Canada while submitting the Report of the RCBC to the House in support of its pro-central bank conclusions: "The proposed central bank should not, I submit, be regarded as a break with the past; we are not departing from the system which has served us so well. Rather the central bank should be regarded as another stage in the natural evolution of our banking system". Mr. Rhodes then goes on thanking Lord Macmillan and Sir Charles Addis, pro-central bank chairmen of the RCBC, for their wide experience in the field and the considerable portion of their personal time given to the Royal Commission. Mr. Rhodes casually hints that: "since World War I, the spread of this type of institution to other countries has been very rapid. In fact Canada is in a unique position in being one of the few countries in the world, which to the present time has not had a Central Bank."

You’d think that the Report of the RCBC would greatly help Mr. Rhodes principal argument that existing international precedent would be sufficient to justify the creation of a central bank in Canada, but that is not the case. Even though Chapter 2 of the RCBC Report does a decent job at explaining the inflation of the money supply that occurred in 1914 with WWI and the modification of the Finance Act that gave the Canadian government permission to lower gold reserve requirements for chartered banks and to raise federal taxes, it does not describe the stock boom and bust of the 1925-33 period nor does it even bother to explain the inflationary or deflationary forces at work during those times. One has to look to Sir Thomas White’s addendum on page 83-84 to find mention of such important events in Canadian history as the sharp decline in world commodity prices from 1920-1925, the great volume of borrowing and financial expansion in North America from 1926-1929, the collapse of the boom in 1929 and the period of depression/deflation that followed. To omit these facts from Chapter 3 of the RCBC report adds very little credibility to its conclusion.

Following this addendum are two memoranda of dissent. The second one (pp. 95-97) written by Board Member Beaudry Leman basically states that the creation of a central bank in Canada is unconstitutional and that the provinces should unanimously agree on its structure before a bill is introduced in Federal Parliament. The first Memorandum of Dissent (pp. 85 to 91) is a brilliant argumentation by Sir Thomas White against the conclusion of the RCBC, mainly that a central bank be created in Canada strictly on the basis of international precedent and comments emanating from 1920’s international commissions. In his rebuttal, Mr. White states that (pp. 89-90):

1) The fact that central banks were created in numerous other countries did not constitute a valid argument for the establishment of such an institution in Canada. In the case of most other countries, the exchange value of their currencies back then was lower than that of Canada and their national credit not nearly so high. Notwithstanding the existence of their Central Banks, conditions within their areas were not nearly so good as those prevailing in Canada meaning that so far as Canada was concerned, the arguments must be considered in the light of its own situation and circumstances. Sir Thomas White adds that a disturbing feature of the financial statements of several of the Central Banks established since WWI is the unduly high ratio of floating governmental debt to the aggregate of assets against which currency may be issued. In these cases, the governments obtained easy financing and this obviated the immediate necessity of balancing their annual budgets and lead to the invalidation of their credit and the continuous depreciation in the exchange value of their currencies. The resulting loss of confidence made it difficult or impossible for them to refund their debt.

2) Expressions of opinions by International Conferences no longer carry weight in 1933 with the public in any part of the world. History records no more "tragic futilities" than the deliberations and resolutions of these "all too numerous gatherings" from the Treaty of Versailles up to 1933.

3) The Board of Directors of a central bank, wholly independent of the government of the day should not, in a country such as Canada where domestic prices so greatly depend upon world prices, be vested with the powers to influence the levels of economic activity and prices. Any action taken towards this end would be damaging and fraught with grave potentialities for causing business disturbance through its indirect effects. No Board of Directors, no matter how eminent its personnel, would be wise enough to be entrusted with such a duty.

4) The establishment of relationships between Central Banks in Canada and Central Banks in other parts of the world or with the Bank of International Settlements are not of sufficient importance to warrant the expense of establishing and operating a Central Bank in Canada.

Now before glorifying Sir Thomas White on such brilliant insight, I would like to point out that he is the father of our federal Income tax, measure he brought forth when he was finance minister of the country in 1917 under Mr. Borden (as shown in this article****), but nonetheless, I am grateful at least one member of the Commission had the presence of mind to point out that central banking experiences in other parts of the world are not sufficient to justify the creation of a similar institution in Canada. In fact, the entire Parliament debates (1934-1935) on the question, after the Bank of Canada bill was adopted pertain entirely on how much public/private influence and control should be exercised by the Board of Directors and not on the fact that the institution should even exist or not in Canada. This only goes to show that Parliament was more interested in debating the format of the central bank and not its necessity. It saddens me a great deal to see that the entire argument for transferring the entire gold and silver reserves (Debates of the house of Commons, 1935, p. 43) from the chartered banks to the newly created central bank was to benefit from the "stabilization advantages" of other central banks as evoked in various International Monetary Conferences (RCBC pp. 62-63) and found in the central banking experiences in South Africa and Australia in the 1920’s (RCBC pp. 64-65) and this, during a decade of great financial turbulence in Europe as well as in North America which was perhaps caused by the existence of all these central banking institutions in the first place.

Today, as in 1933 the Bank of Canada retains its original board of 13 voting members proposed by the RCBC (with the country’s elected Finance Minister sitting as a non-voting member). The crown corporation’s shares are still owned by private interests. We have to see a single statement from Bank of Canada explaining to the citizens of this country the real story behind the audited statements that are presented to Parliament each year. Our politicians could ask such questions as: Why is the existence of your institution based solely on the opinion of attendees to 1920’s international financial conferences? And why if we have entrusted them with all of our gold reserves in 1933, have we today practically no gold to back our total paper assets? Perhaps their answers would shed some light on the rumors that they are at the moment desperately trying buy back some these dilapidated gold reserves from Russia or other Asian nations which have came back to their economic senses after seven decades of paper expansion orgy.

********

Philippe Bérubé, M.A. Political Science

epb1886@hotmail.com

2002/12/13

* http://www.bankofcanada.ca/en/reserves.htm

** Report of the Royal Commission on banking and currency in Canada, Ottawa : J. O. Patenaude, Printer to the King, 1933, 119 p. Please note that I have the entire document scanned in "pdf" format. Readers who wish to consult a limited number of pages from the Report may email me and I will gladly provide them with the pages.

***Canadian Parliament, House of Commons, Official report of debates, House of Commons / Dominion of Canada, Ottawa, King's Printer, 1921-1951.

****http://wwlia.org/cahi1917.htm