Financial history demonstrates that there has been a tradeoff between the dynamism of America and the stability of Canada.

The Canadian banking system did not suffer the same negative impact experienced by the U.S. financial system during the economic downturn from 2008 to 2010.

Canadian banks are generally regarded as some of the safest and most stable in the world, avoiding taxpayer funded bailouts and Canada's economy enjoyed a faster recovery than its neighbor to the south.

The United States and Canada are, in reality, financial brothers.

The father of banking in the U.S. and Canada was the same person, Alexander Hamilton.

The foundation of both financial systems, was laid by that innovative thinker.

Canada built its banking system on the Hamiltonian model and never departed from its Hamiltonian roots.

America, however, turned its back on the Hamiltonian system in the early 19th century.

The decision to move away from these founding tenants made an economic impact that can still be felt today.

Alexander Hamilton wasn't even born and what became the United States.

Of course, he was born on the island of Nevis in the Caribbean.

He was just a boy with a very ordinary background.

So he was sent to the United States and he ended up getting a tremendous education, educating himself, but also getting a broad education, university education.

He was a soldier, of course, in the American Revolution.

George Washington's right hand man.

He was converted to the side of the Patriots and is like any convert, he was more zealous than many of the many of the original followers.

Hamilton, the soldier.

The constitutionalist, the financier.

Finance minister.

It's hard to believe that a person could do all these different things so well, but he did.

When the whiskey rebellions going on in western Pennsylvania, he gets on his steed and heads west personally.

Can you imagine Steve Manoogian trying to personally collect taxes in a rebellious area?

Hamilton turned out to be a sort of very modern financial mind living in the 18th century.

Learned from financial history.

He knew a bit about Renaissance Italy.

He knew a bit more about the Dutch Republic.

And he knew even more about the British financial system.

Somewhere along the way, he decided that the war was going on much longer than it should have, and he told Robert Morris in 1781.

It's my getting our finances in order that will win, not by winning an occasional battle.

Hamilton set up the financial institutions of the U.S. and he redeemed the bonds of the revolutionary government too, so that there's an absolute integrity in fiscal terms of the United States going back to the so-called Continental Congress, which was completely incompetent group, infested with crooks, and Washington wish to hang most of them.

Well, Hamilton, as a soldier in the Army, decided that finance was not only the key to the power of a government, especially the power of a government to wage war, but that finance was the key to economic growth.

And he seemed to be the first person in history who put all this together, that the strength of a government depends on its finances and the strength of an economy depends on its finances.

And part of that financial program was repaying the country's debts.

And part of being sure that the government would be able to repay its debts in a timely manner, as promised, was to establish a bank for the federal government.

When Hamilton founded the bank, he was opposed by Thomas Jefferson and James Madison and also by Attorney General Edmund Randolph.

These were pretty big players in the American scheme.

You know, they were limited government people, strict constructionists of the Constitution.

And so they felt since the Constitution had mentioned banking, it was probably unconstitutional to form a Bank of the United States by act of Congress.

Washington receive these advices and was perplexed actually about whether he should sign the bill.

And Hamilton, basically in 10 days time, produces a great report.

It's called The Opinion on the Constitutionality of the Bank of the United States.

And he blew his opponents out of the water with his opinion.

So Alexander Hamilton just established a commercial bank that was headquartered in Philadelphia, which was the financial capital of the United States at the time.

It allowed for branches in other places in Pennsylvania, as well as other states and the new United States.

And the US economy almost immediately began to grow at modern rates, which is like one percent a year or more per capita.

The United States was actually the first country to have modern economic growth.

This infrastructure gets set up, and so then it's very easy for corporations to form.

So we see a flowering, a proliferation of business corporations in the United States starting in the nineties.

Hamilton gave the country a respectable, solid financial lunch and founded the principal institutions financially, the country.

The United States had a dual system with a national bank for all but five years in the 45 year period, 1791 to 1836.

In addition, they encouraged state chartering of banks.

The federal government did not have control of banking in the United States, it was state governments that established banks.

So apart from this one central bank all the other banks in the United States were established by charters from state governments.

But Hamilton had a role in that because his bank of the United States was a very large corporation, so he set that as a model for the American people.

He had the United States government invest that became a 20 percent owner, and I believe that he was telling state legislators that, look, if you charter banks, you too can profit from it.

So the next thing you know, American state governments are establishing banks all over the place.

Go online to look at our Constitution, the United States of America, and you will not see banking mentioned at all, and that has been one of the reasons why you've had so many battles in the United States around banking.

By the nature of the central bank, it was a very large branching nationwide.

But the Bank of the United States was also allowed to engage in a commercial banking business, which it did.

And that made it a competitor of the state banks.

That's where it ran into trouble politically at the United States, Say by 1811, there Salem between 100 and 200 state banks.

And they're all saying, let's tell our congressmen and senators to get rid of the Bank of the United States because if we do that, we'll get rid of a regulator.

We'll get rid of a competitor.

And if it's not around, the government will have to use us for its banking business.

And that's what happened in the United States.

Politics can defeat economics sometimes.

The first bank of the United States is not re chartered for political reasons in 1811.

But then we fight this war in 1812.

We try to invade Canada and get repulsed.

And one of the reasons was that they didn't have this bank, they could have financed a lot of the military buildup in operations.

So right after the War of 1812 in 1816, they chartered a Second Bank of the United States Which was an enlarged version of Hamilton's first bank.

Hamilton, of course, was dead for a number of years.

He died in 1804 in a duel with Aaron Burr.

Just like the first and second banks of the U.S.. Banks in Canada were allowed to have branches, branch banking has become a fundamental characteristic of the Canadian banking system.

Because when the Bank of Montreal came into existence, the first bank that was chartered in Canada, the charter was lifted verbatim from the first bank of the United States.

Those Hamiltonian principles were baked into the first bank act of Canada, the Bank of Montreal, and continued throughout our history.

Some American banks did this, too, but they were state banks, so they couldn't go national.

Let me just say by the time Canada had its first bank, I think, by that time the U.S. had like 300 banks already .

All but one established by the state governments.

The American system of unit banking ensures that the depositors money stays in the local community.

The Canadian branch banking system means that money can flow freely between different parts of the country to help alleviate pressure during times of economic hardship.

Branch banking also ensures that smaller communities can stay connected to larger financial centers.

What happened in the United States of America is when Andrew Jackson was elected in 1828.

That really upset the political apple cart nearly as much, if not as much as when Trump was elected.

His claim to greatness really is that he he threatened to hang anyone who voted for the so-called doctrine of nullification in South Carolina, including the then vice president of the United States, John C. Calhoun, and the governor of South Carolina.

He said surely the president's exaggerating.

And Senator Benton said, I've known General Jackson a great many years and he speaks of hanging.

It's time to look for rope.

So Andrew Jackson, Old Hickory, you know, tough as nails becomes president and it was very little about the financial system, doesn't even know who really to ask.

I wouldn't credit Jackson with a great deal of economic thinking as such.

He as a frontiersman, he was mistrustful of paper money and as a frontiersman, he was mistrustful of an eastern bank that acted as if it was a government institution.

But it wasn't just that a license from the government.

Some congressmen decided to force Andrew Jackson's the president's hand by rushing a bill through Congress to re-charter, on an early basis, The second bank of the United States.

Than the president of the bank, Nicholas Biddle of Philadelphia, goes to Congress and says, you know, we'd like to re charter our bank.

Remember what happened when we let the first bank of the United States go under?

That was chaos.

And Congress says, yeah, sure.

You know, we'll extend your charter.

And Jackson veto that bill.

And so we lost our second central bank.

Now, there have been very few vetoes in U.S. history up to that point, but the way he did it, I guess we would call it class warfare today.

His veto speech says that government, by chartering the second Bank of the United States, had essentially impoverished one part of the nation in order to enrich a few, what would later be called, fat cats.

Well, partly it was a sociological thing, he was a rough, tough Tennessee frontiersmen, you know.

He owned a lot of people personally, had duels with people and had terrible arguments.

Basically Biddle was a refined, sophisticated Philadelphian financier, who was a was a banker.

So he revoked the license.

But as you know, it brought on a terrible depression.

And we end up in a period, you could call it Jacksonian banking, where we just have lots of small local unit banks throughout the country.

Remember, under the Jacksonians system, no bank was allowed to cross state borders, whereas in Canada early on, they went from Quebec to Ontario and vice versa, and then if you're a Canadian, if you're in Victoria or you're in St. John's, Newfoundland, you ca go to a branch of your bank.

That was not the case in the United States, indeed, within certain states you could only have one branch.

I think the big fear in America, where we had a lot of banks, by 1817, we had 300 banks, and by the eighteen thirties we had seven to eight hundred banks, and by the Civil War, we had sixteen hundred banks.

The peak was in 1922 when the U.S. had 30000 independent banks.

And what happened there is that the large number of small banks that were spread across the United States, they basically put in these unit banking laws to protect them from big city competition.

And they could call on the other people in their communities to back them up and say, we don't want to have those big city banks to come in.

You know, in Illinois, say some small town banker, the last thing he wants is for a big Chicago bank to come and open a branch there, because that'll be competition for him.

But he doesn't say that.

What he says is that they'll come in here and you'll put your money in them.

And the next thing you know, your money will be in Chicago.

It won't be in our community.

And so they use this political clout to maintain this system for close to two centuries.

During this time, the U.S. economy grew dramatically.

However, there were also many panics and recessions.

The pattern in the U.S. was growth.

But with volatility.

That never existed in Canada, the model of community banking, which is a few national banks, is radically different than the United States.

If you look at the history of the Canadian banks, Canadian banks were seen as an important part of building the country.

And the branch banking system became fundamental to the way the country operates.

And it enabled the banks to expand across the country.

They followed the railway to British Columbia.

They followed where the population was moving in.

That's how we got to have the system that we have.

And I think we developed a sense of community much more.

I'm not talking about banks, just the whole Canadian experience.

I think it was Pierre Burton that said the American West was open by a sheriff getting off the train with a six gun and the Canadian West was opened by a banker getting off the CPR with a little safe to start a branch.

The banks, the financial institutions played such an important role in opening up wide parts of the country.

Basically, the job of a banker was to go, you know, and of course, assess credit, but to be well known in the community, which is another reason why institutions like this, you know, they build this country.

I mean, I used to talk to these guys had been there 50 years with the bank, they'd moved 100 times.

And these were thousands and thousands of people, you know, knits together a country.

One of the good things about the U.S. is that different states could adopt different models in their approach to banking and other things, and then other states could learn from them.

But it's peculiar that the U.S. hung on to this unit banking model for as long as it did when north of the border here in Canada.

You had a few very large banks that were branching nationwide.

Of course, there are pluses and minuses to both systems, I think.

It's good in the sense that you can go to the local banker, you grew up with them.

He knows your situation perfectly and local capital stays local.

It's not like your deposits go and then find some merchant in some distant metropolis, right.

During this time, both economies grew significantly.

However, financial crises were more frequent and severe in the U.S. than they were in British North America or Canada.

But the government of Canada under Johnny McDonald says banking is very important.

The Americans are next door.

The American economy is growing by leaps and bounds.

We have a fragile economy.

Let's make sure that we're not suffering the highs and lows of bank failures that would cripple our system.

During that time in the United States of America, there were bank failures and extreme inflation caused by the Civil War.

In the case of Canada, by the time the Canadian institutions were set up nearly 100 years after the American Revolution, the concept of the financial institution was much better established.

Not in the USA particularly, but in Britain and France, for example.

So I think Canada just benefited from more human experience in democratic countries in this area.

So we have an act called the British North America Act is passed and proclaimed on July 1st, 1867, which makes banking and currency, federal responsibilities.

So you got a brand new country.

You got a whole raft of things you've got to do.

And this was compounded in the banking sphere because the two largest banks in what is now Ontario and the second and third largest bank in all of Canada both failed.

Alexander Tillack Gault, Canada's first finance minister and a shareholder in one of the failed banks, demanded a government bailout as a result.

He was replaced by Sir John Rose.

So the combination of the failure of the Bank of Upper Canada, the failure of the commercial bank, really put the idea in the government that something had to be done to fix the banks, to come to some agreement.

The banks wanted federal support.

Now, John Rose brought in a piece of legislation in 1869, a bank act, and the effect of it would have been to take the bank of Montreal in, in esse make it like the Bank of England and the rest of the banks would be little county banks.

Well, you could imagine the reaction that caused.

The prime minister recognized that Rose had outlived his usefulness and he resigned.

Macdonald then asked Sir Francis Hinks to become his third finance minister in three years.

Rose, I believe, was just a fill.

He was the kind of person that Macdonald moved around as a troubleshooter and then he brought Hinks back, he'd been a governor in the Caribbean and in British Guiana, and set him up as minister of finance, and he was extremely effective.

I think it would be perhaps adding a cubitt to a statue to say that he was in the class of Alexander Hamilton, but he wasn't far assured of it.

He was energetic and he went out and consulted politicians.

He consulted news editors, he consulted bankers, and he brought forward a bank act which became the foundation stone of banking in Canada.

It's not a bulletproof assurance, but there's an assurance that the banking system is going to be stable and that that stability will be achieved because the banks are under strict orders not to issue loans that they can't cover and the assurance that the federal government is looking over them.

The bank act will be reviewed in 1881, again under Johnny McDonald.

And from there, a tradition is built that the governor candidate will review the bank act every decade that will eventually become every five years.

Very interesting and as far as I know, unique to us.

And it's been very useful.

I mean, let's face facts, banking is not a subject that very many people in public life know anything about.

If you don't have that clause or something like it, the system just carries on until it breaks down and everybody gets up on their soapboxes and says it's a disgrace and demands let all the bankers be thrown in prison and let's start over again.

But if you're renewing it every 10 years, you had a much better chance of acting previously and preempting crises.

The most recent example in the United States is you have Dodd-Frank.

That legislation came out of the 2007 2008 crisis.

It was the first change since the Great Depression, and you had Glass-Steagall passed.

And so that's from the 1930s to 2007 Thats seventy five years with no change.

Well, when you got something as sensitive as a financial system, how can you make that kind of dramatic change?

You have to have a more evolutionary process.

The early founders of corporations in the U.S., like Hamilton, said they believed in checks and balances built right into the corporate charter and right into the bylaws.

And I've seen evidence that these persist in Canadian banks, whereas in the United States, by the late 19th century, there's more and more lip service being paid.

And many of those checks and balances were eroded over time to the point that when the restrictions against branching within states and then across states are lifted, you have very poor bank governance.

And so you have bank CEOs who essentially write their own contracts, their own checks.

Banking in North America expanded rapidly on both sides of the border as the economies of Canada and the United States grew dramatically at the start of the new century.

However, a new crisis quickly emerged on the horizon.

Well, if you know anything about financial history, you know about the panic of 1907.

How J.P. Morgan saved the Street The panic of 1907 was, in fact, triggered in Wall Street.

There was a dramatic drop in the stock market.

It caused a dramatic squeeze on credit.

Life savings were often wiped out as a result of these crises.

So the classic thing where all of a sudden there is a news story where something's gone wrong in the financial system, everyone gets worried.

Everyone goes to the bank, withdraws their funds.

So if there's no money in the bank, you can't loan out money to anyone else.

And all of a sudden now the bank is stuck there and insolvent position.

The situations where you see the big lineups outside of banks with people trying to get their money before the bank closed down or ran out of cash.

There is the famous story of JPMorgan saving the street to really try and prevent the wholesale collapse of the U.S. financial system.

He brought all the bankers together in his mansion in New York.

Locked all the doors, including the washrooms and required everybody present to commit to so much money so the street would be saved and it was.

Rather than people thinking that was a wonderful thing, a lot of people got very upset and said, why are we reliant on one financier?

This led to the creation of the Federal Reserve Bank at the time of World War One.

And by that time, the notion that a central bank was something that was bad was so widespread in the United States that it took the financial crisis of 1907, which happened to the U.S. as the biggest economy in the world.

That was sort of an embarrassment.

So we finally got a central bank.

And here's how the Federal Reserve differs from the first and second banks.

It does not compete with them.

It regulates them, but it doesn't compete with them.

And we had a similar problem in Canada, perhaps not as bad as in the United States.

The problems were similar in that.

Our economies at the time, they were very much crop economies.

And when you grow a crop.

You plant the seed in the spring and you harvest it in the fall, and that's when you need the money.

And there's a terrific demand for money.

It really pinched where the Western farmers were concerned, Eastern farmers too, but the Western farmers and the reason why was because it takes a lot of money and it takes a lot of transactions to get the crop to market.

The crises led to a restriction of lending by banks, which would have been a disaster for Western farmers.

So the minister of finance and the day, Mr.

Fielding, modified the provisions of the reserves that the banks required and lessened them for the crop season and that simple measure.

Got Canada through the crisis, so we did not have the trauma that the Americans had, and perhaps because we didn't have the trauma, we didn't get around to creating a central bank until the 1930s.

The crisis of 1937 was averted.

War erupted seven years later in Europe to finance the war Canada introduced the income tax.

The USA followed suit.

A few years later.

Postwar prosperity was cut short by the Great Depression.

In that depression per capita income in Canada declined by 50 percent.

The province of Saskatchewan declined by 75 percent.

So this was a devastating depression, particularly hard hit for Canada because we were so dependent on commodities and price of wheat, 1932 reached its lowest point in 300 years.

Very much compounded by the Smoot Hawley tariff in the United States, putting in prohibitive tariffs on the import of Canadian agricultural products.

It led to a world war, if you like, of beggar thy neighbor.

The Smoot Hawley tariff caused other countries to raise their tariffs, ultimately exacerbating unemployment.

Turns to banking.

There was massive bank failures in the United States and none in Canada.

Prime Minister Bennett had been a director of the Royal Bank, and he talked about the principles of banking and that the Canadian bankers had paid attention to those principles.

Having larger banks with wide geographical base means that's when part of the economy is hurting, that doesn't mean that the bank has to go down as well.

You don't have that high failure rate like you do in the U.S., where, you know, we lost thousands of banks during the Great Depression.

These banks mind you're these tiny unit banks, as they're called.

When times go bad, the local banker just has a portfolio of local loans and they start going south.

He's got nowhere to turn for the liquidity that he needs to have or to keep the bank going through the rough times.

So they end up failing and then the depositors lose a quarter or a half of their deposits.

When Roosevelt was inaugurated in March of 1933, there were machine gun nests, in corners of the great federal buildings in Washington for the first time since the Civil War.

And the unemployment rates conceded that it was between 25 and 33 percent.

And there was no direct relief for them, nothing.

So it was a desperate situation.

So Roosevelt shortened the workweek, stimulated the economy, an attempt to generate a little bit of inflation.

So it partly demonetized gold, but he set up these vast workfare programs.

He was a different type of operator politically to anything we've ever seen in Canada.

Franklin Delano Roosevelt was elected with the hope that he would take a whole new approach to the American economy.

Roosevelt introduced the Glass-Steagall Act, which resulted in the separation of commercial and investment banking.

In Canada, there was no great innovator, but the government did create a central bank to mitigate the crisis.

The outbreak of World War Two and the war effort ended the Great Depression.

After the war a new era of prosperity emerged.

The U.S. banks continued to compete, thrive and innovate.

While Canadian banks grew as the economy expanded.

One of the more interesting modern era revisions in the bank act occurred in 1967, which gave banks more power to get into consumer lending and mortgage loans.

In the 1950s, the banks were not in mortgages they were not in personal loans, they couldn't do brokerage.

Couldn't do investment dering.

They could not act as investment advisers.

Almost all of the activities that are most profitable to them now were prohibited.

They were really strictly confined to being commercial bankers, loaning to businesses.

And that, of course, is now a relatively small part of their business.

Well, I don't say I don't admire them.

In fact, I do admire them.

But I think they're in the Canadian context, they're really too big and too powerful.

I mean, they really control all aspects of our financial services industry.

I have a good friend, a fellow economic historian named Eugene White at Rutgers, and he explored the problems of unit banking and he basically decided that the Canadian system, even then, it was a better system.

You know, the banks could diversify their loan portfolios and that that made them safer.

The U.S. didn't look as good as Canada.

And he came up to Canada to talk about this.

And he thought, well, I'll be greeted as a hero because I'm going to Canada as an American banking scholar, and I'm going to tell the Canadians that this American thinks your banking system is a lot better.

He was surprised to find out that the academic audiences in Canada had a slightly more negative view of Canadian banking.

They thought it was some sort of big cartel where these banks, in return for their influence with the government and the government's influence with them, were basically protected.

You know, they're safer, but it's only because they're restricting credit and making the best loans and not making widespread loans.

Put it this way., they're Very, very strong stability.

You can't call them kind of world beaters in innovating.

And I think probably the way Canadians like it.

In the States, it's a much more kind of dog eat dog system.

When the music is playing, you have to dance, something like that.

One of the more unfortunate phrases.

I would say the American system, just from the fact that it was so peculiar, was pretty good at fostering financial innovation.

People could experiment, you know, in ways that maybe in Canada, if you had a few big banks, they didn't have to innovate quite as much because they were pretty comfortable in their cartwell, if that's what it was.

And the American banks competing with each other came up with a lot of innovations in terms of financial products.

And I think the American banks were pretty much in the forefront of putting in ATMs and things like that and online banking.

Of course, this is copied all over the world, but a lot of it started in the United States.

Banking in the Americas experienced unparalleled growth to fuel the emerging global economy.

However, with every boom, there must be a bust.

In the early 60s, there was something called the Yom Kippur War in the Middle East.

And to punish Western support of the Israelis, the Arab states dramatically increased the price of oil.

And so suddenly these really undeveloped countries in the Middle East were awash in cash, which they could news with surplus.

So the International Monetary Fund and other agencies created what became petro dollars.

Circulate this money look like something made in heaven, because that money could be taken from where it was surplus and applied in underdeveloped countries to build schools and hospitals, educate people, etc.. Well, it didn't quite work out that way.

A lot of the undeveloped countries took this money invested in their military.

And indeed, some of the money, I gather, went into Swiss bank accounts for individuals when the inevitable happened and the price of oil declined.

There was a default and the first default was Mexico.

That was the, how can I put it, the 'er' moment when Mexico said it didn't have its money and then the banks, all of them, I guess mainly the U.S. but everybody, the Japanese were in big time as well.

Had to figure out how could they get the money out?

There wasn't any.

So their lines, their credit, they could withdraw.

But it was kind of academic.

It's not the right word.

But you know what I mean.

It's the classic banking issue.

If if people run out of money, you have a problem with your assets because you can't unload your asses the same pace as you can your liabilities and the liabilities went south.

They just threw away their manual of criteria for lending without any security from their sponsoring government.

And it became fairly early on, we were just going to have to take our lumps and we'd all be taking them together.

You know it's bad.

What do they it, a bad loan experience.

One of the basic problems is when people start talking about the possibility of a crisis, people who should know what they're talking about, it becomes a crisis.

You run into this problem of people who knew about the issue, couldn't talk about it, not in public, because that would bring it about.

And you try to fix it.

So the fix was to try to get the banks together one way or another to hold off in the common interest.

And they got regulatory forbearance is the term, from the Fed up her would have been the inspector general of banks that basically you're not going to get your money out.

So you might as well kind of pitch in and make a cooperative effort to solve this issue.

There's the issue if you started writing off the claims on Mexico, ect.. you have no capital left, so you declare your banks bankrupt.

Well, that's not a very pleasant thing to do.

That has implications all down the line.

These things can become quite dramatic quite soon, but only talked about in whispered tones, in quiet rooms.

The Latin American debt crisis had a worldwide impact and resulted in large loan defaults globally.

Another financial catastrophe more specific to the United States was the savings and loans crisis.

S & Ls were the primary mortgage lenders in the U.S. As interest rates skyrocketed, over a thousand S & Ls went bankrupt.

In desperation, the industry lobbied Congress to ease interest rate restrictions.

The deregulation that resulted led to further instability and even reckless and fraudulent behavior.

Both countries responded to the dramatic instability of the period, but in different ways.

So it was as bad a time in banking as Canada ever had and led directly to the creation of the office of the superintendent of financial institutions, which is a major reason why Canada has been so healthy ever since.

I'll tell you now that I think most bankers regard OFSI as a very good thing.

I'm saying now, in retrospect, at the time, I won't pretend that we all were think it was the most wonderful thing.

We thought that the superintendent was a little ham fisted at times.

But time has shown that it was a very healthy thing.

The fact that we have one incredibly strong regulator in the case of OFSI, I think has stood us in very good stead and not the least of which it covered a much wider specter of the financial system than simply the banks, which meant that there was an impairment over here, that in fact, there was somebody who was going to be watching over their.

In this country, you've got this body called OFSI, which is the main prudential regulator, but you also have the Bank of Canada that looks after the systemic risk in the system.

You have a deposit insurance corporation.

So when there is trouble, they're the ones that cover the depositors.

And you have people in the Department of Finance and think about policy in some countries, these guys would totally be down each other's throats looking for more turf.

In this country that doesn't happen.

The regulatory framework in which they operate is one that doesn't too much restrain their better instincts and does protect them when they have a bad brainwave, which everybody does sometimes.

It's a question of culture and the institutions.

And when you see in other countries that don't have those institutions or in those countries which have a plethora of institutions all trying to do what our one institution is trying to do, I believe that OFSI is a huge success.

The response in the United States was very different to Canada's.

While there was some attempt at regulation like the Office of Thrift Supervision, the primary response was for less regulation.

The cutting of red tape resulted in growth and expansion, but the lack of regulation would have repercussions.

By the late 80s, there was an explosion in financial services.

In the United States there was a gradual erosion of the Glass-Steagall Act, which separated banks from engaging in investment banking.

In Canada this change happened abruptly and was called the little bang.

So we had the amalgamation of those two groups that had been kept separate by the four pillars and also a Glass-Steagall in the United States.

And so that changed the direction of banking entirely.

And the thing that was happening at the very same time was the growth of derivatives.

So the two things together supercharged the growth in the industry.

The American dealers were coming into Canada, Goldman Sachs, Merrill Lynch, Morgan Stanley, and in particular, Salomon Brothers, who was a big force at the time.

So we felt it probably did make sense for us to tie in with one of the banks and Royal Bank was our choice.

If you recall, interest rates peaked out in the late 1980s.

And as they came down, the Royal Banks customers were looking for alternative investments.

They had huge deposits with the bank.

In the early 90s, billions and billions of dollars flowed out of the Royal Bank into the Dominion's Securities Retail Network.

It was a tsunami, really, of money coming out of our retail sales force.

Investment banks could bring in large profits and these mergers paid large dividends.

However, the securities business can be risky and these institutions can get into trouble, if not careful.

You know, in the securities businesses, those people eat what they kill.

I mean, you know, if they don't go out and come home with some revenue, they don't get paid.

It's not quite as stark as that, but a lot of it is incentive driven and performance driven and transaction driven.

If you closed a deal, you get something.

It doesn't matter.

A deal is good or not.

You got to, you know, have a transaction.

So it appeals to a more aggressive, a more entrepreneurial personality.

So, you know, when he first came into contact, you know, there was a natural tension, you know, between the staid bankers on our side of the table and these guys with the beautiful.

You know.

The financial system is very entwined and the empowerment in one part of it will actually have an effect on the other.

So I had no problem with the little bank as long as the bank culture did not find itself at the mercy of the traders culture.

This is a cultural issue and that the banking culture was the key.

And if there's any reason as to why in the mess occurred in the United States, it is because, in fact, it was the trading culture that took over.

The trading culture was taking hold on Wall Street, creating exciting risk opportunities and rapid growth.

In Canada, banks looked to merge to gain a larger place on the world stage.

After much consideration, Minister of Finance Paul Martin rejected the bank merger requests.

Essentially what was going to happen is that you would have these two big banks merge, these two big banks merge.

Under those circumstances, it was going to be very hard for the national or the Nova Scotia to basically stay outside of this package.

And it wouldn't be a merger between those two that would happen.

But in fact, it would be now the big four split into two that would take each of them.

So you'd end up with in Canada, two gigantic banks.

And the question that was going to arise was, what happened if one of those banks got itself into real difficulty?

Nobody thought that would happen in Canada at that time, to be quite honest nobody thought it would happen in the United States, not that far thereafter.

And and under those circumstances, it was just inconceivable that we allow that merger.

And that was really at the basis of my decision.

The two countries experienced dramatic growth, however, in 2007, a major crisis hit.

Warren Buffett said You can never tell who's swimming naked until the tide goes out.

The tide went out 2008 and the Australians and the Canadians look pretty good.

And before that, we were probably looked on as being too conservative or too too stodgy.

People say, well, it's not as innovative.

Well, I'm not sure that the innovation in financial services over the last number of years has been terribly helpful.

I mean, it's a casino that's been created for the benefit of the gamblers.

You and I provide the money.

I mean, the argument that all these financially synthetic instruments that derive their value from underlying instruments that are controlled and sold and bought and regulated marketplace, these instruments have no purpose.

I mean, you might argue that they provide liquidity and they make the markets deeper, but it's the side effects, as we saw.

You know, 30, 40 years ago if you want to lose a billion dollars as a banker, you had to work really hard.

I mean, you had to make a hell of a lot of bad loans.

And you can do it in a nanosecond by, you know, going short some currency or some yield curve or something For the small benefit we got from all of this financial engineering or innovation and all of these instruments was enormously outweighed by the the consequences that have been visited on everybody, because you would not have had this type of financial crisis that we had if it were not because of these synthetic instruments.

Some of the problems in the global crisis was mortgages and dividing them up into small bits and selling them elsewhere, and they weren't really worth what the sellers were saying they were worth.

The housing bubble that preceded the 2008 crisis was financed with mortgage backed securities and collateralized debt obligations.

They were highly rated and offered great rates of return.

But the vast majority of these mortgages were unstable.

Let's go back a little bit, 1913.

Americans brought in an income tax.

1917 Canada does the same, but there's a couple of major differences.

In the United States of America from day one mortgage interest or deductible.

What's the implication of that?

Well, I used to be in a big partnership, my Canadian partners.

We always said the first thing we must do is get rid of our mortgage.

Our American partners collected mortgages.

The American system.

Starting in 1913 has encouraged irresponsibility and home ownership.

In the depths of the Great Depression, the policy of the government of Canada was a home of your own is a reward for sacrifice and frugal living, not the gift of a benevolent government.

I mentioned that to my old colleague, and he said, well, I don't see how you get elected to Congress with a resolution like that .

And the mortgage business generally in Canada, I think, had historically been much more conservative, and of course, the laws are different, too, I believe in the states people can walk from their mortgage and leave their house behind.

It's nonrecourse.

I think that makes a difference from both the point of view of the banks and the point of view of the borrower as well.

The borrowers taking on much more personal responsibility.

You can't just say, well, I know I can walk from that if house prices decline.

I think it really is a cultural difference.

I mean, certainly in terms of the comparison with the United States.

There is no doubt the trading culture took over.

You saw that just in terms of bank attitudes, but you also saw it in in other things.

I mean, we built in this more conservative culture, to use a word I wouldn't normally use in terms of housing.

Our banks did not engage in the retail type of operations that the American banks did, where they were buying mortgages That meant that you weren't dealing with a bunch of subprime mortgages.

originated by some broker who was not part of the institution that was going to have to bear the cost.

I think it is really a cultural thing that goes right through.

You know, when you start driving competition to the point where people do crazy things and there's a theory that says that's the reason that all these American banks got in trouble and led the whole world down this hole, was because they there unrelenting need to compete and deliver superior returns and show growth all the time no matter what.

And over time, the kind of people that ran these institutions became very short termists.

And that's what you have.

The traders started to run the place, and that was the consequence.

In Wall Street, in my opinion, there came to be a view that if it's legal, it's OK. and that's not the test.

You know, you take being legal and integrity for granted.

Is it ethical?

How are you doing the right thing for your clients?

They forgot that.

Charlie Bailey made a speech and he was saying that U.S. banks have paid as a result of 2008 meltdown, over 100 billion dollars in fines.

But nobody has gone to jail.

It's a major failure of the system.

I was not aware of just how loose the system was in the United States in terms of the origination from all of these independent brokers and the degree to which bonuses within these institutions in the states were dependent upon them.

Canada did not suffer nearly as much from the financial crisis in 2008 because its banks were much more soundly governed, and part of that sound governance comes from the Hamiltonian tradition of having checks and balances in your bank governance.

It's a little bit like you got an oligopoly in the banking industry, you got a little bit of an oligopoly in government as well, because you have these four agencies that actually sit down around a table and strategize.

They each know their respective roles.

The fact that we have that kind of regulatory system.

Four government agencies that knew exactly what their job was, Didn't fight among each other and were able to sit down daily, pick up the phone more often if they needed to, and talked about what needed to be done.

That is a pretty unique situation for a banking system.

The United States is and has been the world's most dynamic economy of the modern era.

This would not have been possible without an equally dynamic banking sector.

The U.S. and Canadian banking systems are very different.

One country drives competition and the other puts an emphasis on stability.

However, maybe a little more stability would create a safer and more stable basis for the world's largest economy.

Canadian banks have been stable, not because of regulators, they've been stable because they've got the market cornered.

It's called an oligopoly, and they haven't gotten into mortgages and investment banking and life insurance.

And they just they just get bigger and bigger because there's nobody else out there that can do all the things that they can do.

They just run the country.

Yes, they have an oligopoly, which, yes, they exploit.

But the banks are truly owned by Canadians, by Canadians.

I mean, you don't even know that you own it.

But you know, Canada pension plan is one of the biggest owners of the Royal Bank and the other bank.

So if these banks do well, it's not like Mr. Desmarais you know, is going to buy another castle someplace.

This means your pension and your standard of living.

And everybody else does, by the way.

I couldn't imagine there's any Canadian with any money at all in the nature of investments that doesn't have a stake in the well-being of our banks.

Yeah, we all don't like to pay the fees we pay and they don't negotiate with you.

They send you a note and we resent all of those things.

But, you know, those profits, by and large, go to rewarding shareholders, building communities, financing the development of our country.

I just can't imagine that we would have a modern, prosperous economy like we have in a reasonably autonomous, you know, independent and politically independent country if we didn't have our system.

Because of their differences and the positive attributes found in each system, Canadian and U.S. banks could learn from each other and gain insights on how to improve banking.

Past experience tells us that every period of rapid growth is followed by crisis like the recent Covid pandemic.

One thing is certain.

A strong and stable banking system will help us meet the challenge.