Fallow of the Canadian Bankers* Assoeiation)
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CANADIAN BANKING I N HiiSTIll by R.I.C. Heard, id. A. (Fallow of the Canadian Bankers* Assoeiation) n*6 «ftv. 'A *' ' Iffiii ' /',u Ottawa ^RYAVftS* April 15, 19A5 Subadtted to the University of Ottawa aa e thesis for the Ph. D. degree UMI Number: DC53805 INFORMATION TO USERS The quality of this reproduction is dependent upon the quality of the copy submitted. Broken or indistinct print, colored or poor quality illustrations and photographs, print bleed-through, substandard margins, and improper alignment can adversely affect reproduction. In the unlikely event that the author did not send a complete manuscript and there are missing pages, these will be noted. Also, if unauthorized copyright material had to be removed, a note will indicate the deletion. UMI UMI Microform DC53805 Copyright 2011 by ProQuest LLC All rights reserved. This microform edition is protected against unauthorized copying under Title 17, United States Code. ProQuest LLC 789 East Eisenhower Parkway P.O. Box 1346 Ann Arbor, Ml 48106-1346 . 2 - I AS&5 21 CONTENTS CHAPTER PAGE I 3 II • Bank Liabilities 12 14 31 C. Shareholders1 Equity • 32 III 39 43 57 64 IT - 72 f 93 71 - 105 YII - Iliaeellaneous Bank Services .... 121 VIII m 131 n - 150 X 1944 Revision of The Bank Act .. 168 XI m Intermediate and Long-Term Credit 191 XII m 215 BIBLIOGRAPHY 232 - 3 - CHAPTER I INTRODUCTION Writing of banking in his inimitable style, the late Stephen Leacock once declared ironically, "What a serious trade it has becomel" He then vent on to draw a picture of life in his home town of "Mariposa* in which the local banker never worked very hard and yet business came bis way and "the world went very well then". Banking! however, is a major commerical undertaking in Canada today and with the complex problems introduced by the war has become a very serious trade. Moreover, it is one in which the keenest competition exists, despite the claims of critics that there is in Canada a "financial monopoly". Broadly, banking is usually meant to refer to the operations of the ten commercial banks which are chartered under The Bank Act. There are, however, a number of savings banks, credit unions, trust, loan and mortgage companies, etc., some of whose activities are in certain respeets similar to those of the chartered banks. Reference will be made to most of them but in the main this discussion of banking in wartime must necessarily be confined largely to the operations of the chartered banks. The effects of five and a half years of war on their liabilities and assets ami -4- their ability to earn profits and pay dividends will be considered ,as wall as the extent of their co-operation with the Federal Oovernment in the administration of foreign aawhange control and ration coupon bank accounts and in the sale of fiatory Loan bonds and Kar f-nvin^s Cartificataa. An assessment will then bo made of their aontribution to the national war effort. Finally, recent legislation affecting banking will be discussed as well as the outlook for the post war years. Central banking, a highly specialised field of banking, will only be referred to incidentally. First, it is necessary to examine briefly the eooooaio background of Canada before outlining the part played by the chartered banks and ot! cr commercial in stitutions. Early in the war years it bt case apparent that Canada was to make a major contribution in the form of agricultural and industrial oro^uetion. Food, raw mater iala, finished Ooods and all tie equipment and -mraphernelia of modern warfare oould, in tiote, be :r~duced in large quantities thousands of miles away from the t xcat of enemy bombers. Even the ships in which the output of Canadian farms, mines and factories was to be transported to the theatres if cor.L" *; oould be constructed in the Dominion as wall as the escort vessels and patrol ships neoeasary for the protection «• 5 — of the marohant fleeta. But such a vast program of agricultural and industrial effort would requlro not only wast quantities of capital, labour and materials but also a sanothly running efficient banking system to finance the various stages of production and the transportation of finished products to their destination. Canada was fortunate in having just such a system at the outbreak of hostilities. All eoasaeraial banking is carried on by the ten ehartered banks which, in September, 1*39 were operating over 39300 braaohes throughout the Dominion. In other worda, for ovary 3»500 parsons there was an office provided with all normal banking facilities. The comparable figure x'or the United States was one banking office for every 7,100 persons. Trained personnel aggregating approximately 20,150 were ready to meet all demands. On August 31* 1939 the assets of the chartered banks totalled $3,546 million and deposits in Canada $2,56% million. The ratio of currant loans to total deposits was only 40.09$ indicating the ability of the banks to make substantial additional loans at the existing level of deposits. As loans offer a higher return than first grade seouritias all banks prefer to exploit this outlet as an alternative to adding to thoir inveatwnt portfolios. Za 1939 Dominion of Ca ada bonds yielded on the m (^ m average) between l*54Jf and 3*20% interest, under the terms of The Bank Aet, however, a rata of in' rarest on loans as hi^h aa 7% oould be stipulated for by the banks. In practice, they sell soma of their security holdings when there are proeoects of expanding their loaning business. Of the volume of deposit liabilities outstanding in August, 1939, vis., $2,965 million, about two-thirds re presented time deposits* This figure «aa a record at that time and ooapared with $2,1% Billion in 1929, the previous high. Branches of the chartered tanks tap all the real and potential souroes of deposits throughout Canada and thus provide the oouatry with an unrivalled system for mobilizing its cash resourees and distributing them where they are most required. Agriculture, industry and comiseroe were not the only potential benoficiariec of Canada's well organized tanking systesi under wartime conditions. The Federal Governi&*nt was faoad with the prospect of having to raise vast oucis of money to finance warfare on a scale not ^revioualy thought possible. The chartered banks offered a ready-made network of branches which would provide suitable machinery for the wale of war loan bonds and war savings certificates in addition to providing the Government with direct accommodation by way of advances, •a and when required. Such an organisation would also oake • 7* passible the immediate introduction of foreign exchange con trol measures, handled by bank personnel already trained in foreign exchange dealings, as well as any special schemes designed to restrict the salt or distribution of commodities in short supply. The impact of war, then, found the banks well prepared to meet all emergencies. Measured by the surplus of dspoaits over loans and the character of aaset8,t?<eir position was strong and liquid* Reserves against public liabilities, notes outstanding and deposits in Canada consisted chiefly of Dominion Government securities| over 10$ of all deposits in Canada, however, ware held in cash, I.e., Bank of Canada notes or deposits with the Bank of Canada. The liquid position of the banks was due to a large extent to the easy ntonoy policy pursued by the Bank of Canada ^ince its inception in 1935. By enlarging the cash reserves of the chartered banks, the Bank of Canada made it possible for them to expand their assets and deposits at a time when Canadian agriculture anH industry were beginning to revive after the Great Depression of the early and middle 'thirties. When he appeared before the House of Coraroonc Standing Committee on Banking and Commerce in 1944, Mr. G. F. Towers, Governor of the Bank of Canada, referring to economic coaditione in 1939» said, "The volume of Canadian money has been expanded substantially above the 1926-1929 level and ;,he - a - eomnsrsial ***** kept in a liquid cash resorve position so that they ware wall situated to meet demands from the public for loans or to purahaas government securities." The aotive oontrol of monetary policy .:nd the influence exerted on the chartered hanks by the Bank of Canada have provided the financial system with a flexibility and strength which were absent during the war of 1914-1918. While the Finance Act of 1914 did set up certain central banking facilities which became a permanent feature of tho Canadian banking system in 1923, there was no broad conception of the economic effects of monetary expansion. The next of the Bank of Canada in controlling credit during the war, while not forming part of this discussion, cannot be overlooked entirely because of its tremendous influence on the finanoi&l organization of Canada and,In particular, on the operations of tht chartered banks* A study of the banking picture in 1939 and the dsvelopaente which have taken place dttrin^ the war ncuet be viewed in the light of Canada's economic position as a whole. The Dominion entered the war with one of the brat all-round crops in the country's history. In particular, the wheat harvest was unusually large and of a good quality. Cwch in come from the sale of farm products wns the* higtast since 1928. The tread of business, which had suffered o temporary act- -9 - back in 1938, bad resumed its upward course oven before the pressure of var orders began to be felt.