Home Bank
Encyclopedia
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The Home Bank of Canada was a Canadian
Canada
Canada is a North American country consisting of ten provinces and three territories. Located in the northern part of the continent, it extends from the Atlantic Ocean in the east to the Pacific Ocean in the west, and northward into the Arctic Ocean...
bank
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
that was incorporated July 10, 1903 in Toronto. It failed August 18, 1923 and was the subject of a Canadian Royal Commission
Royal Commission
In Commonwealth realms and other monarchies a Royal Commission is a major ad-hoc formal public inquiry into a defined issue. They have been held in various countries such as the United Kingdom, Australia, Canada, New Zealand, and Saudi Arabia...
initiated by Prime Minister Mackenzie King
William Lyon Mackenzie King
William Lyon Mackenzie King, PC, OM, CMG was the dominant Canadian political leader from the 1920s through the 1940s. He served as the tenth Prime Minister of Canada from December 29, 1921 to June 28, 1926; from September 25, 1926 to August 7, 1930; and from October 23, 1935 to November 15, 1948...
in 1924.
Founded with the support of the Roman Catholic Church, James Mason and Henry Pellatt
Henry Pellatt
Major-General Sir Henry Mill Pellatt, C.V.O. was a well-known Canadian financier and soldier....
represented a benign board of directors including E.G. Gooderham, Claude Macdonnell and 3 other directors from Winnipeg, Manitoba affiliated with the United Grain Growers
United Grain Growers
United Grain Growers, or UGG, was a Canadian grain distributor. Founded in 1906 in Winnipeg, UGG was active in grain sales, crop inputs and livestock production services...
.
Early controversies
Early in its history a number of questionable loans were advanced, including one to A.C. Frost Company to buy timber rights in British ColumbiaBritish Columbia
British Columbia is the westernmost of Canada's provinces and is known for its natural beauty, as reflected in its Latin motto, Splendor sine occasu . Its name was chosen by Queen Victoria in 1858...
, and another to the New Orleans Gouther and Grand Isle Railway secured by a rolling stock of dilapidated rail cars. In 1912 it undertook a campaign of expanding in Quebec and eastern Canada, to the chagrin of the western Canadian Directors who were seeing much of the banks capital unavailable for western loans. At the same time, many of the large loans went unpaid and the accrued interest, through a form of bank fraud, was recapitalized onto the principal of the loans.
William Machaffie, Manager of the Winnipeg Branch and a banker since 1882 told the western directors as early as 1914 that the "cooking of the books" through the adding of unpaid interest to the principal and then calculating the interest as profit to pay dividends to major shareholders and directors was wrong. Machaffie wanted to tell the minister of finance at the time, Thomas White, but the western directors were not so sure.
This was war time and this issue of a Bank Crisis was not something the government of the time was prepared to deal with. After a leave of absence in 1917 Machaffie returned to his desk to find his position was gone. He in turn wrote a letter to the minster of finance outlined issues regarding bad loans, capitalization of unpaid interest, and accounting malpractice at head office, and stated the only hope for the banks survival was a merger. He made the decision not to send the letter to the minister but instead to the Board to "stir things up a bit". He was fired. On Aug 29 1918 he drafted a new letter and this time sent it to the Minister of Finance outlining his concerns and a litany of delinquent and non-arms length loans as well as issues related to serious flaws in the Home Bank's internal auditing process.
Collapse
The Post-war period brought prosperity and the inflationary boom gave Home Bank its share of the Canadian penchant for saving money, opening an additional 28 branches (for a total of 82) between 1921 and 1923. Though this period, under greater government scrutiny and with the death of Senator Mason in 1918, the new President of the bank, Herbert Daly was challenged to "keep all the balls in the air at the same time".The bank's circus act fell to the ground and it fell hard, in what was an alarmingly familiar pattern. The major chartered banks intervened in 1920 to control rising prices by raising interest rates. Demand for credit fell and the resulting recession
Recession
In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way...
drove prices down dramatically, making assets worth less than the money loaned to acquire them. During this time, and with the dust storms of the 1922-1923 drought, many farmers lost their land and livelihood.
The indifference of the Eastern banking community led to the success of populist parties in Western Canada and Ontario. In 1922 the United Grain Growers, whose officers comprised the western bank board members, sold all of their shares in the bank. At the same time the Western Canada Pulp and Paper Company had defaulted and, in the spring of 1923 the bank asked Mackenzie King's Liberal government for help, which was refused. The stock plummeted and depositors withdrew money in ever-swelling streams. On the August civic-holiday, J. Cooper Mason, son of the founder and a Director, retired to his study and put a service revolver to his head.
The Canadian National Railway, whose director Richard F. Gough was also a member of the bank's board, withdrew $1 million just before the collapse. The bank closed for good August 17, 1923. Ten officials from Home Bank were arrested on charges ranging from concurring with false returns to fraud
Fraud
In criminal law, a fraud is an intentional deception made for personal gain or to damage another individual; the related adjective is fraudulent. The specific legal definition varies by legal jurisdiction. Fraud is a crime, and also a civil law violation...
on October 4, 1923 at a time when the bank's assets were estimated at $2.7 million and liabilities at $15.5 million. 60,000 prairie farmers and a substantial portion of Toronto's Catholic community lost their savings. In the panic that followed the bank's closure, the Ontario Government shored up the Dominion Bank with $1.5 million to stop a deposit run. Herbert Daly was unable to testify after a nervous breakdown and he died on October 22, 1923.
Cabinet secrecy rules protected politicians from any liability in the matter and, in a precedent setting bailout, the federal government agreed to pay $5,450,000 to depositors (Deposit Insurance
Deposit insurance
Explicit deposit insurance is a measure implemented in many countries to protect bank depositors, in full or in part, from losses caused by a bank's inability to pay its debts when due...
was not enacted until 1967 in Canada), providing some settlement to the thousands who lost money as a result of the failure which, had the bank been liquidated or merged in 1916 or 1918 would have been without any loss to depositors.