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Canadian Monetary Thought and Policy in the 1920's*

Published online by Cambridge University Press:  07 November 2014

Irving Brecher
Irving Brecher*
Affiliation:
Northwestern University
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During the decade of the twenties, monetary theory and policy became a major focal point in the economic literature of the Western world. Although central-banking machinery had long since been in operation in England, France, and Germany, and the Federal Reserve System had been established in the United States about six months prior to the outbreak of the First World War, it remained for the post-war world to see the emergence of centralized monetary control in a recognized and accepted form.

The experience during the war in the techniques and dangers of large-scale financial operations, together with the unprecedented post-war inflation of currency in Germany, left a vivid impression with economists, bankers, politicians, and business men. As a result, there occurred in the following years a lively discussion both of the workings of monetary and banking systems and of their implications for policy. The discussion soon became a definite controversy in terms of adherence to, and dissent from, the philosophy of “monetary orthodoxy.”

To some extent, it was a continuation of the split which had grown out of the English Bullion Report of 1810 and had centered around the Banking and Currency Schools. There was, indeed, much debate over issues which had previously inspired the able analysis of such pioneers as Thornton, Tooke, and Overton. But there was a great deal more than that. Investigation was directed towards the most challenging problems of monetary theory, and policy recommendations took on a tone of urgency matched only by their infinite variety.

Type
Research Article
Information
Canadian Journal of Economics and Political Science/Revue canadienne de economiques et science politique , Volume 21 , Issue 2 , May 1955 , pp. 154 - 173
Copyright
Copyright © Canadian Political Science Association 1955

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Footnotes

*

This article is adapted from a forthcoming study by the author, “Monetary and Fiscal Thought and Policy in Canada, 1919-39,” to be published by the University of Toronto Press under the auspices of the Canadian Social Science Research Council. The publication will be one of a series of Canadian Economic Studies edited by Professor V. W. Bladen of the University of Toronto.

References

1 Cf. Hawtrey, R. G., Currency and Credit (London, 1919, 1923, 1928)Google Scholar, and Trade and Credit (London, 1928)Google Scholar; Fisher, I., The Purchasing Power of Money (New York, 1922)Google Scholar, and The Theory of Interest (New York, 1930)Google Scholar; Keynes, J. M., A Tract on Monetary Reform (London, 1924)Google Scholar, and A Treatise on Money (2 vols., New York, 1930).Google Scholar Wicksell occupies a position of distinction among these writers, although his most important works ( Interest and Prices, London, 1936 Google Scholar; and Lectures on Political Economy, London, 1934–1935 Google Scholar) originally appeared (in German) at the turn of the twentieth century (Jena, 1898 and 1906, respectively). For comprehensive analysis of the development of monetary theory, see Marget, A. W., The Theory of Prices (2 vols., New York, 1938).Google Scholar

2 It was not until the early thirties that these three economists began to part company. Fisher's position remained substantially unchanged. Hawtrey's important contribution was an increased recognition of the importance of the income flow. Keynes, of course, made the greatest change of all—a drastic shift of emphasis from the monetary to the fiscal sphere. (Interestingly enough, evidence of a current reversal of the trend is not unimpressive.)

3 No distinction is made here between Progressives and those individuals (like Mr. William Irvine after 1926, and Mr. G. G. Coote) associated with semi-autonomous radical groups (such as U.F.A.) which retained provincial importance after the Progressive party had ceased (and the C.C.F. party had begun) to be significant in federal politics.

4 For a more detailed treatment of this matter, see: Beckhart, B. H., “The Banking System of Canada,” in Foreign Banking Systems, ed. Willis, H. P. and Beckhart, B. H. (New York, 1929)Google Scholar; Curtis, C. A., “The Canadian Monetary Situation,” Journal of Political Economy, XI, no. 3, 06, 1932 Google Scholar; Holladay, J., The Canadian Banking System (Boston, 1938)Google Scholar; Inman, M. K., “Experience in Canadian Banking, 1929-1934,” unpublished Ph.D. thesis, Cambridge, Mass., 1938 Google Scholar; Stokes, M. L., The Bank of Canada (Toronto, 1939), 1–26.Google Scholar

5 Obviously (apart from central-bank considerations), the advantages and disadvantages of the Canadian system, or of the British joint-stock banking system, would be disadvantages and advantages, respectively, of the American system comprising thousands of small, localized, unit banks. (There is, in the textbook literature, ample comparative analysis of concentrated branch banking and atomistic unit banking.)

6 It should be understood, however, that the basic factor making for a common policy among banks was the concentration of control in Toronto and Montreal. That being so, the true function of the Canadian Bankers' Association was to formalize and strengthen the long-existent practice of co-operation among the chartered banks.

7 Cf. Stokes, , The Bank of Canada, 2, 4.Google Scholar

8 League of Nations, International Currency Experience (Princeton, 1944), 98, 99.Google Scholar Empirical investigations have failed to yield conclusive verification of this “classical” view of the process of adjustment. This lack of empirical proof has been one important factor contributing to the formulation of the modern theory of adjustment in terms of changes in the income flows of the countries concerned. Actually, no contradiction is involved; the new approach (developed by Ohlin, Whale, Harrod, and others) does not invalidate, but rather supplements, the answer once regarded as adequate. Curiously enough, in this connection, the famous controversy of the twenties between Keynes and Ohlin, which threw much heat, if not light, on this problem, revealed a very 'classical” Keynes and a very “Keynesian” Ohlin. Cf. Haberler, G., The Theory of International Trade (London, 1937), chap, VIIGoogle Scholar; also Malach, V., International Cycles and Canada's Balance of Payments, 1921–33 (Toronto, 1954), chap. VII.Google Scholar

9 It is, perhaps, more accurate to state that Canada first abandoned the gold standard on August 10, 1914, when an Order in Council was decreed, suspending the redemption of Dominion notes in specie. The “suspension” provision (among others) of the Finance Act did not actually become effective until September 3, 1914; on that date, the Order in Council was revoked. Cf. Beckhart, , “The Banking System of Canada,” 389 Google Scholar; and Holladay, , The Canadian Banking System, 188, 190.Google Scholar

10 As noted below, no operational content was given the Treasury Board's powers of monetary supervision. The fact is that initiative under the Finance Act was largely in the hands of the commercial banks; and, indeed, that the latter's discretion was limited by their customary attempt to maintain predetermined ratios between primary and secondary reserves.

11 This term was used to describe the then prevailing Canadian outlook on international monetary relations by Creighton, J. H., Central Banking in Canada (Vancouver, 1933), 169.Google Scholar

12 Many successful attempts at analytical clarification have since been made. Outstanding among these are: Phillips, C. A., Bank Credit (New York, 1920)Google Scholar; Keynes, J. M., A Treatise on Money (New York, 1930), I, chap, II, and II, chap, XXVGoogle Scholar; Marget, , The Theory of Prices, I, chap. VII.Google Scholar

13 The elimination of this form of monetary instability has, of course, been the objective of the numerous “100 per cent reserve” proposals which have been advanced by economists since the early 1930's.

14 Canada, House of Commons Debates, 05 18, 1920, III, 2480.Google Scholar

15 The possibility of adding to existing stocks of gold through international trade was apparently overlooked.

16 H. of C. Debates, 04 14, 1926, III, 2416.Google Scholar

17 This limitation exists whether the reserve ratios are required by law, or, as was the case in Canada, customarily maintained. The reserve ratios of the Canadian chartered banks remained relatively stable over long periods of time. Cf. Curtis, C. A., Statistical Contributions to Canadian Economic History (Toronto, 1931), I, 22, 38 Google Scholar; also Plumptre, A. F. W., Central Banking in the British Dominions (Toronto, 1940), 238.Google Scholar

18 For a Canadian exposition of the credit-creation thesis, later and sounder than the radical view, see Hackett, W. T. G., A Background of Banking Theory (Toronto, 1945), chap. IV.Google Scholar

19 H. of C. Debates, 06 18, 1923, V, 4020 Google Scholar; April 14, 1926, III, 2416, 2420.

20 Ibid., May 8, 1924, II, 1894.

21 The following argument, made in 1926 by Mr. J. A. Robb, Minister of Finance, suggests that the members of the Government shared this attitude of distrust with the bankers: “I do not object to bringing gentlemen before the Committee on Banking and Commerce who are able to give us information that will be of any value, but as to our paying heavy travelling expenses for men who have simply theories to advance and who come possibly from a long distance and have heavy accounts, I submit that the … Committee might very well pass upon that, and help the Finance Minister to keep down expenses.” Ibid., April 14, 1926, III, 2429.

22 Canada, House of Commons, Proceedings of the Select Standing Committee on Banking and Commerce (hereafter, H. of C, Banking Committee Proceedings), 1923, 352, 379.Google Scholar

23 Ibid., 406.

24 Ibid., 325.

25 Carl Snyder was at that time advancing the thesis that changes in these two components of the equation of exchange tend to cancel each other. Cf. Snyder, C., Business Cycles and Their Measurement (New York, 1927).Google Scholar

26 The banking principle was, in turn, only one of at least three important supporting arguments—the others being expressed in terms of liquidity and productivity—for the “commercial-loan theory” traditionally espoused by Canadian, American, and British bankers. See Currie, L., The Supply and Control of Money in the United States (Cambridge, Mass., 1935), chap. IV.Google Scholar

27 Mackintosh, W. A., The Economic Background of Dominion-Provincial Relations, A Study Prepared for the Royal Commission on Dominion-Provincial Relations (Ottawa, 1939), 98.Google Scholar

28 H. of C., Banking Committee Proceedings, 1923, 541.Google Scholar

29 Mackintosh, , The Economic Background of Dominion-Provincial Relations, 100.Google Scholar

30 This is the major topic of Stokes, The Bank of Canada.

31 This Committee provided the setting for most of the bankers' arguments which follow.

32 See, for example, the speeches of such far-seeing central-bank supporters as Mr. D. R. Wilkie, a former President of the Imperial Bank of Canada, and of the Canadian Bankers' Association; Mr. E. L. Pease, a former President of the Royal Bank of Canada, and of the Canadian Bankers' Association; and Mr. W. F. Maclean, Conservative member of Parliament from 1892 to 1926. Probably the earhest suggestion for the establishment of a central bank in Canada was that of the Governor General, Lord Sydenham, in 1841 (see Plumptre, A. F. W., “The Arguments for Central Banking in the British Dominions,” Essays in Political Economy, ed. Innis, H. A., Toronto, 1938, 193 Google Scholar).

33 H. of C., Banking Committee Proceedings, 1928, 26.Google Scholar

34 Ibid., 1923, 325.

35 Cf. ibid., 282.

36 Ibid., 511.

37 Ibid., 559. Sir John Aird's point of view was substantially the same, as was that of Mr. H. T. Ross, Secretary of the Canadian Bankers' Association, who said that he “would hesitate offhand to express an opinion” as to whether there was any relationship between the amount of money in circulation and the price level. Ibid., 113.

38 Ibid., 878. The nature and significance of these attitudes have been more thoroughly summarized by a member of the 1933 Canadian Royal Commission on Banking and Currency: “Canadian bankers … placed an exaggerated and unwarranted emphasis on the automatic action of the gold standard in regulating the volume of currency and the internal price level and disclaimed for their part any responsibility for their control.… This was not, they held, a banking function at all. These were matters which might safely be left to the play of supply and demand without any interference on the part of the banks. The proper functions of a bank began and ended with receiving deposits from one section of the community and lending them out to another. The truth, of course, was far otherwise. The banks had no choice in the matter.… The banks had in fact been managing the currency all along.… They could not help themselves. Consciously or unconsciously, whether they liked it or not, it was the banks who, by their daily operations, were responsible for regulating the volume of credit by which the stability of the price level … was largely determined.” SirAddis, C., “Canada and Its Banks,” Journal of the Canadian Bankers' Association, XLII, no. 1, 10, 1934, 42.Google Scholar

39 H. of C., Banking Committee Proceedings, 1923, 298.Google Scholar

40 Ibid., 558.

41 Ibid., 363.

42 Ibid., 1924, 278.

43 Ibid., 1928, 22.

44 That American bankers were similarly impressed is evident from the opinion expressed in 1924 before the Banking Committee by Mr. J. W. Pole, Chief National Bank Examiner of the United States, to the effect that the Finance Act provided Canada with practically every facility that the Federal Reserve System offered the United States, and at far less cost. (Ibid., 1924, 139.) Appearing four years later before this Committee, Mr. W. P. G. Harding, Governor of the Federal Reserve Bank of Boston, stated: “I have never heard any criticism of the Canadian banking system in the United States. We have always regarded it as a system that, under your conditions, was adequate.” (Ibid., 1928, 90.)

45 H. of C., Banking Committee Proceedings, 1928, 52.Google Scholar

46 Prior to his appointment in 1924, Mr. Tompkins had been a banker by profession. His attitude becomes particularly understandable in the light of this fact.

47 H. of C., Banking Committee Proceedings, 1928, 1.Google Scholar

48 There is a strong presumption in favour of this generalization—and it is hardly more than that, since, as already noted, there were important exceptions, such as Mr. W. F. Maclean, who had been advocating a central bank since 1913. This presumption is based partly on the fact that the two Finance Acts received less parliamentary consideration than any other major change previously made in Canadian monetary legislation. The discussion of the 1914 Act occupies only half a dozen pages in the Debates of the House of Commons; the discussion of the 1923 Act about three pages. It is to be doubted if the government or the public ever adequately realized the significance of these Acts. In the second place, it is highly probable that the following opinion of Mr. H. Marler, Liberal member of Parliament in 1924, typified the approach of rank-and-file Liberals and Conservatives: “Our Finance Act as it is now and our branch bank system as it is now fully cover all the necessities of elasticity of credit and banking in this country, and our Finance Act as it exists is quite sufficient to meet the requirements without any question of a federal reserve bank being taken into consideration at all.” H. of C. Debates, 07 2, 1924, IV, 3945.Google Scholar

49 Ibid., June 19, 1923, V, 4092. In 1926, the next Minister of Finance, Mr. J. A. Robb, gave more definite support to the bankers' judgment that the banking system of the Dominion was quite suited to the country's requirements. Ibid., April 14, 1926, III, 2427, 2428.

50 Mackintosh, W. A., “Doctoring the Gold Standard,” Journal of the Canadian Bankers' Association, XXI, no. 1, 10, 1923, 67, 69.Google Scholar

51 Jackson, G. E., “The Gold Standard (III),” Canadian Forum, IV, no. 43, 04, 1924, 22.Google Scholar

52 Dr. Shortt had been a federal civil servant since 1908, when he had resigned as Professor of Political Science at Queen's University. However, he was, unlike most contemporary civil servants, a professional economist—in fact one of the first economists that Canada produced. For this reason, his views are considered here. It should be added that Dr, Shortt was also one of the first Canadians to forge what was to become a vital link between academic economists and civil servants, and so to render unrealistic any rigid separation of these two groups.

53 Professor Fisher explained to the same committee that his proposal was designed to eliminate cyclical fluctuations by making statutory changes in the gold value of the dollar commensurate with changes in the level of prices.

54 H. of C., Banking Committee Proceedings, 1923, 682.Google Scholar

55 Ibid., 693.

56 Ibid., 776.

57 Ibid., 798. It could be argued that this view was not inconsistent with the contention that unsound banking policy was not the primary, independent causal factor in the 1921 break-down. It remains open to question, however, whether this was the interpretation that Professor Swanson wished to be made; and, in any case, whether it would have clarified all the ambiguities and conflicts in his testimony.

58 Ibid., 795.

59 Ibid., 783.

60 Among the members of the Progressive group who made motions in favour of central and national banking were (dates and pages of Hansard in parentheses): Mr. Irvine (May 1, 1922, 1289; Feb. 26, 1923, 627); Mr. J. T. Shaw (May 21, 1924, 2371); and and Mr. Woodsworth (March 4, 1925, 753; April 14, 1926, 2416; Feb. 13, 1928, 387). As already noted, the term, “Progressive group,” is here broadly interpreted. Thus, in the present instance, it comprises one Independent (Mr. Shaw) and two Labour representatives.

61 In 1923 Mr. Bevington, an Alberta fanner and articulate monetary reformer, told the Banking and Commerce Committee (as did Major Douglas) that financial credit should be based, not on the traditional types of collateral, but on the number, intelligence, and industry of the people of the nation, plus the capital equipment and natural resources within its borders. His particular proposal would have resulted “in the Dominion government supplying a constant stream of legal tender notes, a definite and continuous redemption of which was not contemplated, and which ultimately would lead to dangerous inflation” ( Stokes, , Bank of Canada, 46 Google Scholar).

62 A careful reading of the House of Commons Debates, and of the Proceedings of the Select Standing Committee on Banking and Commerce, provides ample justification for this critical summary.

63 This is not to deny the importance of the contributions of other forces to the creation of Canada's central bank. Of particular interest, in this connection, is the fact that the timing of, and at least part of the rationale for, the establishment of the Canadian Macmillan Commission were closely associated with the monetary conclusions reached at the Ottawa Conference of 1932, where expanded central banking was recommended as a significant prerequisite to the resurrection of the gold standard.

64 Mr. Coote was appointed to the Board of Directors of the Bank of Canada in 1936, and has served continuously in the same capacity since that time.

65 Notable contributions to the central-bank debate were also made by Mr. E. J. Garland, Mr. Shaw, and Mr. L. J. Ladner (a western Liberal-Conservative). Their views, as well as those of the entire radical group, were well represented in the arguments put forward by the three men cited in the text.

66 H. of C. Debates, 02. 13, 1928, I, 393.Google Scholar

67 Ibid., 1924, IV, 3938, 3939.

68 Ibid., 3948-55.

69 Ibid., 3949, 3950.

70 Ibid., 3951.

71 Cf. Mackintosh, The Economic Background of Dominion-Provincial Relations; Canada, Report of the Royal Commission on Dominion-Provincial Relations (Ottawa, 1940), Book IGoogle Scholar; Higgins, B. H., The War and Postwar Cycle in Canada, 1914–23, Report Submitted to the Advisory Committee on Reconstruction (Ottawa, 1944).Google Scholar

72 Higgins, , The War and Postwar Cycle in Canada, 40.Google Scholar

73 Curtis, , Statistical Contributions to Canadian Economic History, 27, 46, 50, 51, 53.Google Scholar

74 Cf. Higgins, , The War and Postwar Cycle in Canada, 58.Google Scholar

75 Cf. Curtis, C. A., “Canada and the Gold Standard,” Queen's Quarterly, winter, 1931 Google Scholar, and “The Canadian Monetary Situation” Plumptre, A. F. W., “Our Glittering Monetary Standard,” Dalhousie Review, XI, no. 3, 10, 1931 Google Scholar; C. Elliott, “Bank Cash,” this Journal, IV, no. 3, Aug., 1938, 432-59; McLeod, A. N., “Maintaining Employment and Incomes in Canada,” unpublished Ph.D. thesis, Cambridge, Mass., 1949, chap. VII.Google Scholar

76 Curtis, , Statistical Contributions to Canadian Economic History, 27, 51, 53.Google Scholar

77 Plumptre, , “Our Glittering Monetary Standard,” 305.Google Scholar

78 Curtis, , “The Canadian Monetary Situation,” 324.Google Scholar The relative stability in the volume of chartered-bank cash should not, of course, obscure the inflationary effects of Finance-Act operations.

79 Stokes, , The Bank of Canada, 23, 24.Google Scholar

80 F. A. Knox, Dominion Monetary Policy, 1929-1934, A Study Prepared for the Royal Commission on Dominion-Provincial Relations (Ottawa, 1939), 57. The convertibility of Dominion notes into gold was not formally suspended until April 10, 1933 (ibid.). (But see Holladay, The Canadian Banking System, 190, for the view that Canada's second abandonment of the gold standard occurred in May, 1932. This discrepancy may result simply from the use of different criteria—legislation in one case, and administrative decree in the other.)

81 Elliott, “Bank Cash,” 442.

82 There are undoubtedly those who would deny the possibility of “errors of commercial-bank policy” on the ground that the monetary policy of a country is not the responsibility of the commercial banks. In the writer's view, this line of reasoning misses the main point at issue, namely, whether the successful execution of monetary policy, especially within the structural framework of an economy like Canada's, is not exceedingly difficult, if not impossible, when the commercial-banking community has not a sound understanding of the principles of economics.

83 No attempt was made to use the rediscount rate for purposes of control. From 1914 until November, 1924, the rate stood at 5 per cent. From November 1, 1924, to November 1, 1927, it was 4½ per cent. On November 1, 1927, it was reduced to 4 per cent, and one month later it was further reduced to 3¾ per cent, where it remained until June 8, 1928, when it was increased to 5 per cent. On September 1, 1928, the rate was lowered to 4½ per cent, where it remained until October 26, 1931, when it was reduced to 3 per cent. It would appear from these figures that no very specific reasoning actuated the Treasury Board in changing the rate. The evidence given before the House Banking and Commerce Committee in 1924 and 1928 corroborates mis view. The only criterion of rate-setting which did receive mention was the general position of money rates in New York. However, a comparison of the Finance-Act rate with that of the Federal Reserve Bank of New York, or the commercial paper rate in New York, shows no close connection. Cf. Curtis, “The Canadian Monetary Situation,” 326, 327.