March 8, 1938

LIB

Charles Avery Dunning (Minister of Finance and Receiver General)

Liberal

Mr. DUNNING:

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SC

Eric Joseph Poole

Social Credit

Mr. POOLE:

The Liberals denied that in Alberta.

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LIB

Charles Avery Dunning (Minister of Finance and Receiver General)

Liberal

Mr. DUNNING:

As I stated a moment ago, the velocity of circulation of both money and credit tends to rise very rapidly as confidence returns and business activity increases. If the ipublic believes that inflation is under way and that the government or the central bank is going to continue to inject new currency or credit into the monetary system, as would necessarily be the case if the program suggested by my hon. friend were accepted by the government, then they would begin to lose faith in the integrity of the monetary unit and a race from the dollar would begin. In other words, the velocity of circulation would increase with enormous rapidity and prices would tend to soar with ever-increasing rapidity.

During a period when this process is under way it is perfectly obvious that there is fertile ground for the development of those maladjustments in the economy which I have already mentioned. Prices do not rise at the same rate in all industries. In those industries where prices tend to rise most rapidly, the prospect of increased future profits acts as a magnet to new capital, and business men increase their investment in fixed plant and equipment. Much of the new investment will prove to be unwise. Speculative activity will become excessive and may find an outlet in commodities or in securities or in real estate, producing the whole series of evils with which we are all too familiar.

Furthermore, there will be maladjustments between the various types of prices-retail prices, wholesale prices, security prices, wage rates, prices of raw materials, prices of finished commodities, etc. All these conditions are the familiar product of an inflationary boom

which is bound to result in a serious depression. Essentially, a depression is a state of business in which maladjustments between various industries and between costs and prices make it impossible for a system of private enterprise to function normally, and a business recovery is the stage in which normal equilibrium is gradually being restored.

It may be asked why the central bank could not control such an inflationary boom as I have been describing and prevent these excesses from developing. My answer to that is that the central bank could probably perform that function, in large measure at least, if it began to exert its controls at a sufficiently early stage. But the point is that if there is a too rapid, and a too extensive, expansion of credit with a view to hastening recovery, the central bank's control is bound to be ineffective. Once the situation gets out of hand, the only thing which the central bank and the government can do is to introduce restrictive measures of such a drastic and comprehensive nature as to bring about the very depression which they had been trying to guard against.

The importance of this point will be recognized when it is remembered that the proposal being considered involves an immediate or rapid increase in bank cash of 240 per cent. I am aware, of course, that the hon. member for Rosthem has suggested that if inflation should threaten as a result of his program, the legal reserve requirement of the chartered banks might be raised to prevent any secondary expansion of bank deposits. Let us assume, first, for the sake of argument, that this could be worked out, although I believe my hon. friend would be the first to recognize the difficulties involved in timing and calculating the necessary adjustments in the reserve ratio to avoid inflationary expansion or deflationary restriction-as his construction program would necessarily extend over two or three years at least.

But if we assume it could be done, what would be the effect? I submit that one of the effects would be that we would be paying for the 8350,000,000 program by an indirect tax on the shareholders, depositors and borrowing clients of chartered banks. The banks would have additional deposits of $350,000,000, on most of which they would be paying interest, but through the control of the legal reserve an equal amount would have to be carried by them as idle cash reserves bringing no return. The additional interest load would be met either by reducing the interest paid on all savings deposits or by raising the rate of interest on bank loans, or by reducing dividends to shareholders, or by all three methods.

Use of Canada's Financial Resources

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CON

Richard Bedford Bennett (Leader of the Official Opposition)

Conservative (1867-1942)

Mr. BENNETT:

Or by expanding business.

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LIB

Charles Avery Dunning (Minister of Finance and Receiver General)

Liberal

Mr. DUNNING:

Yes, I shall deal with that phase of it in a moment. Even if we are not concerned with any long run adverse effects upon our banking system, I ask if it is fair that the whole burden of such a program should be thrown on those classes in the community which use our chartered banking system. Alternatively, if this is the desire, why not impose a tax directly and be done with it, instead of assuming all the risks involved in tinkering with our currency and credit structure?

Apart from the initial effects of such a program, I shall mention only one other difficulty in the proposal to offset increases in bank cash by raising the legal reserve ratio. What is to happen when the $350,000,000 program has been completed? When the funds are all spent and the banks' cash reserve has been raised to twenty-one per cent, what will take the place of the artificial purchasing power injected into our monetary system? The program in itself will likely have done nothing to restore the normal functioning of the economic system. On the other hand, it may have done much to retard recovery by undermining confidence, by promoting undue expansion in one or more industries, 'by raising the prices of certain commodities, and by creating a more rigid and a more expensive banking system. If private enterprise is, as is probable, not ready to take up the slack, why not another $350,000,000 program of the same type? Moreover, if a $350,000,000 program is good, why not a $500,000,000 program? Why not, indeed, a billion dollar program? This is the inevitable record of such experiments with the currency.

Returning to the main proposal, I should mention the possibility that the increased bank cash might not immediately result in a tenfold or, indeed, in any expansion of circulating credit in use. If the business and financial world saw that the government and the central bank had committed themselves to a program of progressively expanding the volume of cash on a huge scale, precisely the opposite result might occur, at least for a time. Although ultimately the process of inflation would be almost certain to get under way, the first effects might be a general stagnation of business. Private business would be reluctant to make future commitments. Private individuals would hold a larger proportion of their funds in idle cash. The velocity of circulation of money and credit would decline, and this decline in the rate of turn-over would offset or possibly more than offset the increase in the volume of cur-

[Mr. Dunning.)

rency and credit. In other words, a contemplated program involving such vast inflationary possibilities might destroy the confidence of the business world in the soundness of conditions, and of the public generally in the future of their currency. In recent years we have seen more than one instance of such lack of confidence causing an almost insuperable obstacle to business recovery. The government would, of course, be creating purchasing power by its large public works program financed by inflation, but it would probably be found that the retarding of private business enterprise would much more than offset the stimulus which the government was trying to give.

The fact is, Mr. Speaker, that government spending cannot make up for the paralysis of private enterprise and of private spending which is created by fear and uncertainty. Under an absolute dictatorship, with complete regimentation of business and the private citizen conditions might be different; but under an economic and political system such as ours it is essential to maintain the confidence of the millions of individuals and organizations that make their own decisions as to whether they will or will not spend and invest.

The second suggested program for expanding currency and credit to which I wish to devote some attention is that series of proposals which goes under the general title of social credit. Hon. members will realize that most of what I have already said is a criticism of this doctrine, although I have not addressed myself to the precise terms in which social credit theories are couched. Also, hon. members who have sponsored social credit in the house will not expect me to deal with all their arguments or all their definitions of terms or all the variants of their theory, as presented by themselves or by the founder of their school. Even they, I think, must realize that the numerous volumes in which their high priest has expounded his doctrines are masterpieces either of confused thought or of studied ambiguity, and that every time he has been put up against prescribing a concrete program for a specific problem, he has again been a master of evasion. I am afraid that even my hon. friends have learned much from him in this respect. The debates of the house contain many social credit speeches, but it would take a magnifying glass to discover any concrete explanations made in those speeches as to how the program is to be carried out. The other evening when the leader of the social credit group (Mr. Black-more) was advocating the creation of credit to supply all the needs of our people, he was asked by the hon. member for Selkirk (Mr. Thorson) to explain just how it was to be

Use of Canada's Financial Resources

done. He proceeded to explain in some detail what scarcely needed explanation, why the United States should have more money and credit than Newfoundland; but the explanation asked for was left for another time; and I know my hon. friend will forgive me if I say that this afternoon, after inviting questions, he always carefully deferred an answer to a specific question to some future occasion.

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SC

John Horne Blackmore

Social Credit

Mr. BLACKMORE:

If my hon. friend will permit a question, has he now proved to his own satisfaction that six billion dollars in the banks -would cause inflation?

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LIB

Charles Avery Dunning (Minister of Finance and Receiver General)

Liberal

Mr. DUNNING:

I have no doubt of that.

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SC
LIB

Charles Avery Dunning (Minister of Finance and Receiver General)

Liberal

Mr. DUNNING:

I think so.

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SC
LIB

Charles Avery Dunning (Minister of Finance and Receiver General)

Liberal

Mr. DUNNING:

However, with the background which I have already given of monetary policy in this country, I propose to comment on a few of the special points in the social credit doctrines.

Let me say at once that, in my opinion, social credit rests upon an incorrect diagnosis of an existing malady and prescribes a cure which would be dangerous in the extreme. In other words, the whole theory is based upon a false premise, and the whole program which derives from that theory is unsound and pernicious.

The false premise to which I refer is that, as an inevitable result of the working of our present economic and financial system, there is a chronic shortage of purchasing power in the hands of consumers. This deficiency is supposed to arise from the fact that, of the costs incurred in the production of commodities for sale, only a part have involved the distribution of purchasing power to potential consumers. In other words, if the cost of a pair of shoes is ten dollars, only, say six dollars of that cost represent all the payments that have been made to individuals as wages, salaries or dividends-which are called "A" payments by Major Douglas-and the remaining four dollars represent payments made to other organizations for raw materials, bank charges, etc.-which are called "B" payments. Similar assumptions are made as to all other commodities sold in the community in the course of a year. Now, the theory alleges that, as individuals who are the potential consumers always receive for their work in production less than the total cost of the products of industry, they never have enough purchasing power, enough money and credit, with which to buy those products of industry. We

have all heard that stated in the house time and time again. Because of this shortage of purchasing power, which according to the analysis is inevitable and also permanent, we are bound, it is alleged, to have gluts of commodities, surpluses of goods that cannot be used by the public because they have not enough money with which to buy them, "poverty in the midst of plenty," periodic depressions, wars and tariff struggles and all the other evils to which flesh is heir.

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SC
?

An hon. MEMBER:

Mr. Speaker-

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LIB

Charles Avery Dunning (Minister of Finance and Receiver General)

Liberal

Mr. DUNNING:

One at a time, now.

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SC

Archibald Hugh Mitchell

Social Credit

Mr. MITCHELL:

I should like to ask the hon. gentleman, if the theory which he has just explained does not cause the difficulty that he has referred to, what does?

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LIB

Charles Avery Dunning (Minister of Finance and Receiver General)

Liberal

Mr. DUNNING:

I understand the hon. member is speaking next. If I omit anything along the line of his question, I trust he will develop it.

This which I am quoting is an analysis, oriefly stated, upon which Major Douglas has stated his whole program must stand or fall. In the language I have just used I have been paraphrasing as fairly as I can Major Douglas. Does it sound convincing to hon. members?

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SC

Eric Joseph Poole

Social Credit

Mr. POOLE:

Mr. Speaker, will the hon. gentleman permit a question? I want to ask him if he did not make a mistake when he said that our theory was that the system did not supply a sufficiency of purchasing power at any one time. That is not the premise of our argument at all.

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?

Some hon. MEMBERS:

Order.

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SC

Eric Joseph Poole

Social Credit

Mr. POOLE:

It should be this way, I think.

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?

Some hon. MEMBERS:

Order.

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March 8, 1938