APRIL 6th, 1967
A Look Into The Financial Crystal Ball
AN ADDRESS BY
PRESIDENT & GENERAL MANAGER, THE CANADA TRUST CO., THE HURON & ERIE MORTGAGE CORPORATION
R. Bredin Stapells, Q.c.
In a small room over Macfie's store in London, Ontario, a group of citizens met and there founded The Huron & Erie Savings and Loan Society. The date was March 18, 1864.
As part of the annual meeting of the Huron & Erie one hundred years later, on March 18, 1964, that scene was re-enacted with an elaborate set and authentic costumes and with actors made up after the portraits of the founders. Thereafter, the shareholders and guests were treated to a luncheon prepared from early Upper Canada recipes in vogue at that time, which challenged the chefs of Hotel London.
The Huron & Erie thus had a thorough three year head start on this Centennial business. As a veteran employee of the company said then -
"In all the years I have been with the Company, there never has been a time when all our people, from the newest junior up to the President, seemed more conscious of our wonderful family spirit."
All of which brings me to that President, Winnipeg born Allyn Taylor. Can you imagine him with a high collar and side whiskers? Well, the fact that he affected these trimmings underscores that whatever he does he goes all the way. This total immersion means that since assuming the presidency of his companies in 1958, the watchword has been leadership, enterprise and enthusiasm.
The Trust Companies Association of Canada and the Dominion Mortgage and Investment Association have also experienced the Taylor thrust during his tenure as President of each of these associations.
And so, for A Look Into the Financial Crystal Ball, I am honoured to present to you J. Allyn Taylor, President and General Manager of The Canada Trust-Huron & Erie Mortgage Corporation.
Prophecy is a hazardous pastime unless you focus far enough ahead to be sure no one will be around to prove you were wrong.
The company with which I am associated is 103 years old. I have looked back in the dusty records to ascertain if any predictions of significance were left behind by the man with the mutton-chop whiskers who was our first president. There were none, and probably that is why he went down in history as being a very wise man. In his day a closed mouth and a reluctance to go out on a limb were the hallmarks of business acumen.
There may have been another good reason why he did not set down his views about the future. He lived in what he must have considered to be exceptionally troubled and uncertain times.
There seemed to be strife and tension all over the world. The inconclusive Crimean War and the horrors of the Sepoy Mutiny were fresh in his mind. The American Civil War was having profound effect upon this country--political, social and economic.
Throughout Upper and Lower Canada there was both surging hope and much disquietude over the first steps towards Confederation. There were bitter racial and religious overtones, fierce divisions of loyalty, widespread doubts about the rivalries and quality of political leadership.
The economic outlook was clouded. Adjustments in international trade were having adverse effects. The demand for wheat, long the economic mainstay of Canada West, had fallen sharply. There was little public faith in the stability of financial institutions, and even less in the values of the various currencies in vogue, including the newfangled dollars and cents which had but recently supplanted pounds and pence.
The great land boom of 1857 and 1858 had been an unhappy experience for many people, and a bonanza for a few. Interest rates had soared, with some unscrupulous private lenders charging as much as 60 per cent and then taking the first opportunity to foreclose. The boom left in its wake a storm of disillusionment, resentment and distrust that was to batter the financial houses of the country for years to come.
It led directly to the collapse in 1866 of the much respected Bank of Upper Canada, with severe losses to depositors, shareholders, noteholders, and the government itself. The blame was laid at the door of management, which was charged with over-optimism, unsound policies and faulty practices in the excitement of the boom. A year later the same sort of thing led to suspension of the Commercial Bank of Canada, one of the strongest in the country, but in this instance the effect was softened by eventual amalgamation with the Merchants Bank of Canada. It took many years to restore public confidence in banks.
The climate for financial prophecy today is remarkably like that of a century ago. It is tinged by the same elements of foreign wars, international tension, imbalance of trade, racial and provincial differences, political bickering, antiAmerican feeling, and financial scandal. The chances are that notwithstanding scientific progress and the healing balm of time, our descendants one hundred years hence may still be wrestling with many of the same problems and conditions, because nothing changes more gradually than the basic attitudes and behaviour patterns of human beings.
There is a popular science fiction show on television in_ which adventurous men travel back and forward in time through a "time tunnel". We see them one week stalking dinosaurs in a primeval jungle, and the next week they walk the streets of a wondrous city of 3000 A.D.
If my venerable corporate ancestor were to come through a time tunnel to visit us in this year of Canada's Centennial, what might he think of this land we live in and the changes that have taken place?
Were he to survive a journey on the Gardiner Expressway and find a place to park his horse and buggy, he would marvel at this metropolis that grew out of the city of 60,000 he knew a century ago. He would gape open-mouthed at the skyscrapers, the swarming traffic, the subway, and the new City Hall ... with at least a side glance at pretty girls in mini-skirts and micro-skirts and boys with hair to their shoulders.
I find myself wondering what he would think about our present day world of finance. For example, would he be able to believe that the current assets of our largest chartered bank exceed the total net worth of all the business enterprises in the country in 1867? Could he comprehend that the value of mortgages and debt instruments extended last year in a single square mile of Metro Toronto was undoubtedly greater than that of all mortgages in force in all Canada 100 years ago? Could his mind encompass the enormous transition in the mechanics of his own field of business from the goose quill pens and fat ledgers of his generation, to the uncanny computers, automated teller services, communications networks, and even closed circuit television devices that are becoming almost commonplace in our day?
This old corporate ancestor of mine was no doubt proud of the fact that the stock of his company was among a scant score of securities traded on the Toronto Stock Exchange that had been founded in 1851. Most of the stocks were those of banks and insurance companies. Would he not be flabbergasted by the range of listings and the volume of trade today, with most of the security values based upon products and services he had not even dreamed about?
So much for the past and the changes it has wrought. The past is interesting, and we profit from it. It teaches useful lessons, provides precedents, and offers limited guide lines. But we no longer can rely on history and tradition to the degree we used to. In this age of swift change as we mould our image of the future, we have to seize ideas and direction both from the present and from our educated guesses about tomorrow.
Let me quote a thoughtful statement by the American economist, Kenneth Boulding: "The present behaviour of the business firm, or any other social organization, depends on the image of the future which prevails in its decisionmakers. A positive image of the future is necessary in order to organize the present."
Neither Mr. Boulding nor anyone else can shape that image for us. Each individual, each business enterprise, must look deep into the crystal ball and catch a particular vision. There is a different picture for each of us, clear or cloudy, promising or depressing, helpful or frustrating.
I am going to tell you some of the things I see in my particular crystal ball, but in doing so I disclaim any special gifts of prophecy.
What is going to happen to this old world of ours in the years that lie ahead?
The all-pervasive fact of life facing mankind is the existence and the ever-present threat of nuclear and other weapons capable of wiping most of humanity from the face of the earth. If there were an atomic war, the few survivors would not have to worry about an economic system. They could start all over again with cowrie shells and coconuts.
Surely each of us must hold to the personal conviction that barring a tragic blunder or an act of sheer madness, which of course are not beyond the bounds of possibility, there will not be an atomic war. Indeed we have to believe that, for otherwise life loses much of its meaning. However, it would be naive to believe that anything approaching universal peace will be achieved in our lifetime, or in the lifetimes of our grandchildren. Pressures are building, especially in Asia and Africa, which could blow off in conflicts that would make the Vietnam struggle seem like a schoolboy row. The greatest and virtually uncontrollable pressure is that of the population explosion--from the present 3.3 billion humans to an estimated 7.1 billion by the end of this century--coupled with insufficiencies of food, of the wherewithal for a decent living, of individual opportunity, even of hope.
The Americans and the Russians will continue their efforts to establish a base on the moon or to shoot for Mars, spending billions in the process. The irony of it all is that Man may solve a tiny fraction of the secrets of infinite space long before he finds the answer to the relatively simple problem of getting along with the family next door, let alone the people on the other side of his own planet.
For Canada, surely any crystal ball reflects exciting progress, but the road of destiny will not be wholly free from some of the same kind of stumbling blocks we have encountered in our own generations. There need be no doubt, however, as to the eventual greatness of the Canadian nation, greatness not in the measures of wealth, population or military might, but in the contribution it makes and the respect it earns in the community of man. Canada has unique opportunities to help in the building of a better world. She can fill her vast empty spaces with new citizens from abroad, and share her abundant natural resources with some of the have-nots in other lands.
It is my conviction that 100 years from now Canada will have retained her sovereignty and distinctive national identity, although by then she may be a partner in an entirely different commonwealth of nations. There will be increasing pressures and temptations for economic or political union with the United States, but I think Canadians will resist, even though they will continue to be heavily dependent upon United States capital, industrial know-how, the fruits of research, and even military protection.
Comparison of world maps of 1967 with those of a few decades ago gives striking evidence of the tremendous change that has taken place in the shapes, sizes and names of dozens of countries. The roll call of the United Nations today contains a score of countries that have taken on new identity over the past five years. The process is bound to go on, and it is a safe prediction that our descendants will see the emergence of new and important groupings--perhaps a Commonwealth of Europe, a United States of Africa, a Federation of Latin American Republics, or some colossal coalescence of Asian peoples.
The drastic alterations in the patterns of world trade that have been going on since World War II will continue. For selfish and obvious reasons the developed nations will have no option but to find effective ways to help the emerging nations. The under-developed, under-organized and underfed areas of the world need food, manufactured goods, raw materials, technical knowledge, and help of all kinds. Unfortunately, few have resources with which to pay immediately for the things they need so desperately. It is quite possible that to meet this enormous capital demand an entirely new international monetary system will have to evolve, and I share the doubt of so many that it can be based wholly upon gold or hard currencies.
It is so easy to let one's imagination roam free in the wider spectrum of future possibilities, that I have almost departed from the subject of my talk--the forward view of the Canadian economy and our financial structure.
Money is, of course, both the fuel and the lubricant of the system which provides all Canadians with their livelihood, prosperity and security. And Canadians have never had it so good. Our national standard of living is about the highest in the world. We have had it so good, in fact, that the goose that lays our golden eggs is showing definite signs of fatigue.
The principal mechanisms maintaining the flow of money through the Canadian economy are governments, the Bank of Canada, the chartered banks, the life insurance industry, the loan and trust companies, and the sales finance and consumer loan group.
There was a time not so very long ago, when government had a relatively modest role, but today it is No. 1. Last year the federal, provincial and municipal governments in Canada spent almost one-third of our Gross National Product. Even in the United States, governments take less than 30 per cent of gross national product, notwithstanding the war in Vietnam, space research, the war on poverty, and everything else.
Obviously, any serious attempt to predict financial trends in the years ahead must take into account the overwhelming command of our legislators over a lion's share of national income. For some years past there has been an unceasing whittling-away of the rights of the individual to earn, to spend, to save, as he sees fit.
In the old days a politician knew he was doomed at the next election if he failed to give at least the appearance of trying to cut taxes. Now the name of the game seems to be "Spend your way to Victory". Politicians vie with one another in dreaming up costly programmes and projects they hope will garner support from the unthinking sector of the electorate. They have even come up with some neat gimmicks they call "sharing of tax revenues" . . . a sort of large scale shell game that keeps the citizen from knowing which tax collector has his fingers in the taxpayer's pocket. Municipal councils wheedle funds from the provinces, the provinces grab all they can get from the federal treasury, and the federal government derives its tax money from so many sources and in so many different ways that we lose track of where our money is going.
The result, of course, is that we live in a state of grand illusion. We think our municipality is getting a real bargain when we are-told, for example, that only one-third of the cost of a fancy new auditorium is being paid out of municipal taxes. The rest comes from provincial or federal grants, and we are able to kid ourselves that a mysterious "somebody else" is footing a big part of the bill.
We have before us now the findings of an able Commission on Taxation. The Carter Report is a massive document. I must acknowledge that so far I have read only two of the seven volumes. Like most Canadians I have to date largely contented myself with the excellent summaries in the newspapers, plus some extra delving on my own to examine the particular horns on which I'll be gored. In this I am no different than most other Canadians who have tried to assess the Carter recommendations. My reaction is like most others I have heard or read: "It is a very good report, it has a lot of meat in it, and I agree with most of its conclusions and recommendations except. . ." Even the Honorable Donald Fleming, the father of the Carter Commission who addressed you a few weeks ago in such extremely able fashion, gave a considered and restrained review of the Report rather liberally dotted with "excepts".
One thing of which I am fairly certain is that no government will fulfil the cherished hope of the authors of the majority report, that the recommendations be accepted as a package deal. Even the insertion of those honeyed words which convey the idea that if the over-all package were adopted, 46 per cent of the taxpayers would pay less, would not be enough to persuade vote-conscious politicians to close their ears to potent and responsible protests. Since in my view the government is not likely to accept the Carter Report on a package basis, if it decides instead to pick and choose from the recommendations, then I think the country faces a real danger. We of the business community will be in a particularly tough spot because the pick-andchoose techniques could lead to all kinds of discriminatory, inequitable and harmful taxation policies. We could see exploitation of the "soak-the-rich" theory at its very worst.
It will take perhaps a year or more for our parliamentarians to winnow through the formidable mass of comment and recommendation, by which time--with our national propensity for Commissions--they could well decide to set up a new commission to interpret and augment the Carter Report. Meanwhile this much can be said. The basic Carter assumption that equity in taxation be defined as taxation according to ability to pay is valid in theory, but it is dangerous in practice if incentive be destroyed in the process. This expression of social philosophy worries me because it could be a tool to move us further into the welfare state concept. We must retain our capacity for accomplishment and to this end we must resist a drift towards the Marxian concept of "from everyone according to his ability, to everyone according to his need". This theory does not work even in Russia, which is finding it increasingly necessary to offer material incentives to people of exceptional talents or capacities, and even to producers at the lower levels of the socialist society.
In any event the Carter recommendations must have most careful study for they represent a courageous, imaginative approach to how we get out of the tax maze we're now in. The ultimate fate of the report will be a test of the extent to which statesmanship rises above partisan politics and citizenship above selfish interests.
I must return to my earlier theme.
Canadians have created a rich, free society on principles of reward for personal and group accomplishment. In recent times there has been growing emphasis upon the idea of taking away from one man's effort to ease another man's burden. This is perhaps laudatory in some degree, and Canadians in general have signified their willingness to assure a better life for the less favoured members of our society-the aged, the very young, the handicapped, the unemployable. Unfortunately, there has been propagation of the false idea that personal security is an inalienable right of citizenship, that everyone is entitled to employment to his or her own taste and convenience, or an alternative guaranteed living from the state.
More and more sober voices are being raised in this country against the soaring cost of government, of which a huge part is attributable to social welfare. I am not against social progress. If I were, I would have little company. But I do firmly believe that we must not, dare not, bleed our economy to death by trying to attain the utopian welfare state overnight.
A few months ago the Economic Council said in its Annual Report: "The simple fact is that there is no way known to man of getting more out of the Canadian economy than is put into it." More recently, Dr. Rasminsky, the tremendously able Governor of the Bank of Canada, put it more colourfully in the last Annual Report of the Bank: "You cannot get a quart of wine out of a pint jug." He said it was clear to him that for much of the last two years we have overloaded the economy by trying to do too much too fast.
In the Report, Dr. Rasminsky also observed that "Costs increased more, and productivity increased less, in Canada than in the United States in 1966". The increase in output per worker in Canada in 1966 was no more than 1.1 per cent throughout the whole economy, apart from farming. This is only half the 1965 rate, and less than half the improvement in the United States, which is estimated at 2.5 per cent in the first nine months of 1966. At the same time negotiated wage gains in Canada in 1966 are estimated to have been in excess of eight per cent. It is all very well for governments to take cognizance of such facts and statements by sounding stern warnings about price rises and exhorbitant demands of labour, but such warnings have a hollow sound while governments go on spending our national income with a lavish hand. When politicians practise what they preach, we in the congregation may listen with more receptive ears. Unless effective action is taken soon by governments, by business, by labour, and by all of us, we will find ourselves in an even worse economic mess than Great Britain has gone through. We may have to take a big dose of austerity to make ourselves well again. Indeed my crystal ball tells me that unless we change our spending ways and give more heed to productivity, we face further devaluation of the Canadian dollar. It is a fundamental truth that a rising~standard of living can only come from rising production and not from patent medicine economics as some would have us believe. If we want to live better we have to produce more. Devaluation is the high price we're going to pay if we continue to ignore that fundamental truth. I have one more beef to register.
There have been some unhappy events in the financial community in the past couple of years which have demonstrated not only the lack or laxity of controlling legislation in some areas, but grave defects in the fabric of business morality. Most of us have been appalled by what we have read in the papers about unsavoury machinations of some people who had been entrusted with other people's money. There have been scandals of the kind before, and no set of laws can prevent scandals of the kind from happening in the future, no matter how many crooks are sent to jail. It is up to all of us in the financial field to do everything we can to win back public confidence and to mend all the holes we can find in the morality, the methods and the policies of our respective businesses.
It was natural that the recent scandals should bring forth public outcry and demand for legislative safeguards. It was equally natural for all levels of government with appropriate authority to respond to public pressure for new or amended laws. The trouble is that hasty thinking and undue speed in getting something into the statutes actually may do a great deal more harm than good.
The greatest danger is that sheer amateurism in the approach to this complex task can lead not only to inappropriate and ill-advised legislation, but to some wholly unsound and impractical guidelines for the conduct of financial businesses, set up by people who know very little about them.
On this score I think Mr. Robarts is to be commended for the procedure that he intends to follow in the introduction of legislation based on the Lawrence Report relating to changes in the Ontario Corporations Act. He has said that the proposals as announced yesterday can be regarded simply as a declaration of intent until business has a chance to study the new legislation and give considered reaction to it. This is the sensible way to handle complex legislation.
In the welter of legislative change that is besieging us today, we in the trust and loan business find ourselves in a difficult position. By and large, the chartered banks can speak with one voice in stating their case to governments. Even the sales finance and consumer loan industry speaks through a federated council. Unhappily, the trust companies are a heterogeneous bunch. Some are federally incorporated, some are provincially. Some operate on a national scale, some are purely local. Some conduct little more than an intermediary operation, while others emphasize the fiduciary functions. A number are related to chartered banks, and some are not. Trust Companies have been on record for the last five years in urging the Federal Government and the various provincial governments to bring about uniform legislation and supervision of all companies in the trust industry. Little indeed has been done to this end though there is a crying need for action and the trust business is being badly prejudiced meanwhile. The various governments are somehow going to have to resolve the constitutional problems involved in determining jurisdictions over various segments of finance. How that will be done is not for me to guess but it must be done and out of it I hope will come ground rules common to all.
Now that the revision of the Bank Act is behind us, what does the crystal ball show for the future of deposit-taking institutions in Canada? To me the picture is pretty clear. The banks now have virtually unlimited borrowing and lending powers, except for some diminishing statutory limits. The next thing they will go after will be fiduciary powers because this is all there is left for them to ask for. This would require prior constitutional agreement of course since fiduciary powers are clearly under provincial jurisdiction.
This is simply my assessment of what will happen but there are straws in the wind. The Porter Commission sidestepped the constitutional problem but recommended that all financial institutions come under the same broad umbrella. The Federal Government is now making noises that sound very much in support of this. So it is my guess that perhaps in the next decade or two, we can look for trust companies and banks coming into direct competition in all phases of activity. When that day comes there will be likelihood of trust company amalgamations because of the importance unit size would thus assume. The present 50 odd companies could be reduced to a fraction of that number, just as the banks themselves have gone from forty odd to ten since the turn of the century.
As I cover up my crystal ball, let me relate a story having to do with the shape of things to come. It's about the proverbial old lady on a sightseeing bus in New York City. The bus stops in the course of its tour in front of the Metropolitan Museum on 5th Avenue. The old lady from her seat in the bus looks up at an inscription carved into the stone over the entrance area. It reads "The Past Is Prologue to the Future". She doesn't understand and asks the driver what it means. He has stopped there a thousand times but he's never been asked the question before. However, typical of his breed, he's not easily stuck. He cranes his neck to get a view of the inscription, hesitates for a second and then says, "Lady, that means you ain't seen nothin' yet!"
Each of us here this afternoon can echo that bus driver as we attempt to peer into the future. "We ain't seen nothin' yet!"
by Mr. J. H. Joyce.
Thanks of the meeting were expressed