I found this informative post at Market Oracle which made reference to a little known fact about how Banks in Canada and the U.S. faired differently during the great depression.
The comments from Market Oracle about Americas current Housing Bubble crash, once again remind us that American Exceptionalism includes massive market failures due to speculation.
Greed is as American as apple pie.
A Letter from a former Banking President Discussing the Housing Bubble
an article that came out in the Saturday Evening Post in November of 1932 from a former bank president in New York, three years after the crash, highlighting the economic situation of a post bubble world.
“This is a shameful and humiliating exhibition. It is uniquely bad. Across the border in Canada, there was not a single bank failure during our period of depression, and one must go back to 1923 to find even a small one. Nowhere else in the world at any time, were it a time of war, or of famine, or of disaster, has any other people recorded so many bank failures in a similar period as did we. We were not experiencing a war, a famine or any other natural disaster. All the economic tribulations we have undergone in the past three years have been man-made troubles, and Nature has continued to shower us with an easy abundance – more, indeed, than we have known how to distribute with economic wisdom.”
Of course the banks in Canada foreclosed on Western Farmers, during the depression and used the land bank to shore up their wealth. Until the creation of Canada's National Bank the commercial banks issued dollars and currency from which they made their profit. Canadians were big savers after WWI but without deposit insurance found their savings wiped out during the depression.
According to the Department of Finance, two small regional banks failed in the mid-1980s, the only such failures since 1923, which is the year Home Bank failed. There were no bank failures during the Great Depression.
The Canadian recovery from the Great Depression proceeded slowly. Economists Pedro Amaral and James MacGee find that the Canadian recovery has important differences with the United States In the U.S. productivity recovered quickly while the labor force remained depressed throughout the decade. In Canada employment quickly recovered but productivity remained well below trend. Amaral and MacGee suggest that this decline is due to the sustained reduction in international trade during the 30's.
It took the outbreak of World War II to pull Canada out of the depression. From 1939, an increased demand in Europe for materials, and increased spending by the Canadian government created a strong boost for the economy. Unemployed men enlisted in the military. By 1939, Canada was in the first prosperity period in the business cycle in a decade.
The Depression also led governments to be more present in the economy. It brought about the creation in 1934 of the Bank of Canada, a central bank to manage the money supply and bring stability to the country’s financial system.
Hard to imagine now, but not too long ago paper money in Canada was issued by commercial banks. That was before 1934, when the Bank of Canada Act established a central bank with the sole right to issue paper money. It was just one of the many roles the Bank of Canada would take on.
Creating a central bank was one of the first major things Canada did on its own after becoming more independent of Great Britain in 1931 (with the Statute of Westminster). But the Bank of Canada was not established just to assert our independence. Instead, Prime Minister R.B. Bennett was frustrated that there was no way for Canada to settle international accounts with England. A central bank could do that.
The time was ripe to set up a central bank. During the Great Depression, Canadians had criticized and mistrusted the commercial banking system. They had doubts about the efficiency of Canada’s financial structure. Pressure also came from outside our borders to create a central bank to help settle international accounts. There was no independent agency issuing notes or managing government banking.
The creation of the Bank of Canada was the result of protests against the banks by Western farmers in particular those from Alberta! Like the Wheat Board farmers demanded and got a Central Bank.
At the same time that the Canadian
government was doing nothing on the monetary
front, the chartered banks were repaying their
borrowings from the government under the
Finance Act.63 The resulting monetary contraction
exacerbated the economic downturn. The banks
became increasingly cautious about their own
lending activities as the economic environment
deteriorated. Banks may have also repaid their
borrowings under the Finance Act in response to
earlier criticism for having borrowed so extensively
prior to the stock market crash (Fullerton 1986, 36).
While the extent of the economic downturn
in Canada was undoubtedly made worse by
these monetary developments, the monetary
contraction helped to strengthen the Canadian
dollar, which reached US$0.90 by the spring
The government finally reduced the
Advance Rate to 3 per cent in October 1931 and
to 2.5 per cent in May 1933. (See Chart C2 in
Appendix C.)64 In the autumn of 1932, it also used
moral suasion to force the banks to borrow under
the Finance Act and reflate the economy
(Bryce 1986, 132). This easing in monetary policy
led to some temporary weakness in the Canadian
dollar, which briefly fell as low as US$0.80. The
weakness was short-lived, however.
Following the U.S. decision to prohibit the export of
gold in April 1933 and similar efforts in the United
States to reflate, the Canadian dollar began
to strengthen.65 The Canadian government’s
decision in 1934 to expand the amount of Dominion
notes in circulation by reducing their gold backing
to 25 per cent did not have much impact on the
In the economic circumstances of the time,
and given similar developments in the
United States, this move was viewed as appropriate
and elicited little market reaction (Bryce 1986, 143).
The Canadian dollar returned to rough parity
with its U.S. counterpart by 1934 (Chart 3) and, at
times, even traded at a small premium. With the
U.S. dollar depreciating against gold and the pound
sterling, the Canadian dollar returned to its old
parity with sterling.
Not surprisingly, as the 1930s progressed
with little sign that the Depression was ending,
pressure began to mount on the government to do
something. In addition to concerns about the
adequacy of the Finance Act, there was also
widespread public distrust of the banking system,
largely because of the high cost and low availability
Farmers, especially those in western
Canada, who were suffering from a sharp fall in
both crop yields and prices, were particularly
critical of banks and consequently very supportive
of the formation of a central bank. They hoped
that a central bank would be a source of steady and
With effective nominal interest rates on farm loans in
excess of 7 per cent, real interest rates were very high
—about 17 per cent in 1931 and 1932, owing to
sharply declining consumer prices.
In July 1933, the government set up a
commission with a mandate to study the
functioning of the Finance Act and to make
“a careful consideration of the advisability
of establishing in Canada a Central Banking
Institution . . . .” (Macmillan Report 1933, 5).66
Lord Macmillan, a famous British jurist and known
supporter of a central bank, was chosen by Prime
Minister Bennett to chair the commission.
The other members were Sir Charles Addis, a
for mer director of the Bank of England;
Sir William T. White, the former wartime Canadian
Finance Minister and banker; John Brownlee,
Premier of Alberta; and Beaudry Leman, a
Public hearings began on 8 August 1933,
and the final report was presented to the government
less than seven weeks later on 28 September. While
the commission voted only narrowly in favour of
the establishment of a central bank, its conclusion
was never really in doubt. The two British
members of the committee, joined by Brownlee,
voted in favour of a central bank, a position
supported by both the Conservative government
and the Liberal opposition.
When we look back at the monetarist policies put in place during the Depression and those in effect today one gets a disturbing sense of Deja Vu.
Origins of the Capitalist State In Canada
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