Why Did Canada Have no Mass Banking Failures in the Great Depression?

Many have argued that it was because of Canada’s successful bank branching system. That is most probably partly true, but it ignores other factors, including Canada’s history of government interventions to stabilise its banking system and the implicit promises by both Conservative and Liberal party governments from the 1920s to protect depositors.

The background to this issue is that in the 1800s Canada had a large private bank called the “Bank of Montreal” that in some ways acted like a de facto central bank (Bordo 2002: 121), by taking over insolvent banks and being committed to the stability of the system.

In both 1907 and 1914, Canadian governments had intervened to stop financial crises in the banking system by providing reserves (Bordo 2002: 121).

Moreover, the Canadian Conservative party (during its tenure from 1911–1917) had implemented the “Finance Act” of 1914, which gave the government the authority to issue its own paper, so that it now had lender of last resort powers (Grossman 2010: 99). An Amendment of 1923 extended this Finance Act, and Canada continued to have a discount window and lender of last resort facility (Bordo 2002: 121), even though there was no formal central bank until 1934.

From 1920–1921, Canada was also ruled by the Conservative party (or the “National Liberal and Conservative Party” as it was called at the time) and credible measures were taken by that government to prevent a serious bank failure by allowing a merger in 1921. In this year, the Conservative Minister of finance Sir Henry Lumley Drayton defended the government’s action and explicitly said of the Merchants Bank that “the interests of the depositors themselves required to be guaranteed” (Kryzanowski and Roberts 1993: 365). This was publicly reported in the press.

The same Conservative party was in power from 1930–1935 during the most serious years of the Great Depression, and the Prime Minister R. B. Bennett even agreed to establish the Bank of Canada – Canada’s modern central bank – in July 1934.

From 1935–1948 the Liberal party was in power, and there is no doubt they had given implicit banking deposit guarantees from 1923. When in 1923, the Home Bank of Canada failed, “depositors in the Home Bank petitioned the Canadian Government for compensation and received payment up to 35 percent of the value of their deposits” (Kryzanowski and Roberts 1993: 365).

The Minister of Finance at the time later explained to the McKeown Commission (1924) the government’s policy:

“Under no circumstances would I have allowed a bank to fail during the period in question . . . If it had appeared to me that the bank was not able to meet its public obligations, I should have taken steps to have it taken over by some other bank or banks, or failing that, would have given it necessary assistance under the Finance Act, 1914.” (Kryzanowski and Roberts 1993: 366).

Even provincial governments had provided some stability: in 1923 the government of Quebec provided $15 million for the merger of the Bank Nationale with the Banque d’Hochelaga to avoid a bank failure (Kryzanowski and Roberts 1993: 365).

Later in 1924 after the merger of the Sterling Bank with the Standard Bank, the Canadian press reported that the government “is determined that there shall be no more bank failures, if reasonable action on its part will obviate them” (Kryzanowski and Roberts 1993: 366).

Kryzanowski and Roberts conclude:

“… the archival evidence is consistent with our hypothesis that beginning in 1923, an implicit guarantee from the Canadian government (amounting to 100 percent implicit insurance) stood behind all domestic bank deposits. The government actively facilitated mergers during the 1920s to avoid firesale insolvency and successfully created public confidence that no bank would be allowed to fail. This confidence persisted during the 1930s” (Kryzanowski and Roberts 1993: 366).

BIBLIOGRAPHY
Bordo, M. D. 2002. “The Lender of Last Resort: Alternative Views and Historical Experience,” in Charles Goodhart and Gerhard Illing (eds.). Financial Crises, Contagion, and the Lender of Last Resort: A Reader. Oxford University Press, Oxford. 109–125.

Grossman, Richard S. 2010. Unsettled Account: The Evolution of Banking in the Industrialized World since 1800. Princeton University Press, Princeton.

Kryzanowski, Lawrence and Gordon S. Roberts. 1993. “Canadian Banking Solvency, 1922–1940,” Journal of Money, Credit, and Banking 25: 361–376.