Historicist: The Home Bank’s House of Cards
Its collapse in August 1923 wiped out thousands of Canadians' savings.
On the morning of Saturday, August 17, 1923, the head office and main branch of the Home Bank of Canada—an imposing stone building on King Street just west of Yonge—didn’t open as usual. Instead, a white cardboard placard scrawled with “Bank Closed. Payment Suspended” in blue letters was nailed to the door.
The Home Bank’s failure impacted more than 60,000 depositors across the country, who lost their life savings.
The effects were felt immediately in households in Toronto and across the nation. A Mrs. Hill, of Toronto’s working-class Corktown neighbourhood, lost the money she and her two small children needed for the “winter’s supply of clothing and coal.” The closure of the branch in Fernie—the only bank in the British Columbia mining town—devastated residents, including disabled miners who lost the funds needed to cover their medical costs. In Blairmore, Alberta, 10 miners’ widows lost their pension money. Charles Fitzpatrick, a 30-year-old farmer from Maidstone, Saskatchewan, committed suicide after losing his life savings.
“Never at any time in its career,” liquidator G.T. Clarkson wrote after thoroughly examining the Home Bank’s affairs, “was an experienced and trained banker at the head of the bank and in control of its affairs. It can be said that the [bank management] utterly failed to pay regard to or impose elementary safeguards in protection of the business of the bank.”
The Home Bank began as the Toronto Savings Bank in 1854. Because working-class Irish immigrants often sought financial guidance from the bishop, the Roman Catholic diocese established the institution to safeguard their savings. Headquartered at 78 Church Street, the Toronto Savings Bank counted nearly every Catholic priest, parishioner, and organization as a depositor and customer. With the introduction of the federal Bank Act in 1871, the institution was reorganized as the Home Savings and Loan. Business continued to flourish and in July 1903 the bank applied for and received a federal bank charter to become the Home Bank of Canada, empowered to issue its own bank notes, extend loans, and invest in business ventures.
With a board of directors that included respected members of the business establishment and, at its height, over 70 branches in towns large and small across the country, the Home Bank appeared as strong and prosperous as any of its larger competitors. Its new headquarters, a stone-columned building on King Street West built in 1906, was meant to project this confidence to the public.
An employee manual likewise underlined the sense of security customers of any class ought to expect. “When depositors entrust their money to a bank, they repose their utmost confidence in the institution and its officers,” read Service in Banking (c. 1919). “The fact that their wealth in ready cash may be small only makes the compliment the more sincere.” Depositors with modest savings accounts were, the manual continued, “just as much a customer of the bank as the big firm that conducts an active current account and also carries a substantial reserve to provide against contingencies.”
However, those noble principles were not fulfilled in practice. And the reality—which would not come to light until after the bank’s collapse—was much murkier. The bank president, James Mason, had joined the Toronto Savings Bank as a junior clerk and risen to general manager by the 1870s. Under his guidance the Home Bank made a large number of questionable investments. In an era when the idea of conflict-of-interest was much more rudimentary, Mason extended numerous loans to a close Mason family friend (entrepreneur and real estate speculator Sir Henry Pellatt), as well as to companies with which Mason or other directors were intimately involved, like the A.C. Frost Company that acquired timber rights in British Columbia. Another reckless investment was made in the New Orleans, Southern, and Grand Isle Railway, an ill-fated streetcar line through one of New Orleans’ poorer districts.
Loan payments went unpaid for years at a time, but for three of the bank’s largest client accounts, the debts owed to the Home Bank were so large (at one point Pellatt owed $4.5 million, or the equivalent of $75 million in today’s money) that the bank couldn’t afford to let them fail. The bank officers kept approving additional funds, and the accruing interest on the accounts was recapitalized onto the principal. This bit of fraudulent accounting enabled the bank to paint the financial picture as much rosier than it was, and to issue shareholder dividends (at 7% per annum) on the basis of this “profit.”
After receiving its federal charter, the Home Bank’s aggressive expansion across Canada was a means of increasing deposits. Although the Canadian West provided $500,000 of the bank’s paid-up capital, the Winnipeg-based directors had great difficulty in getting the bank to approve any loans for Western Canadian applicants. “It was obvious to anyone who had more than a passing acquaintance with the bank’s affairs,” Arthur Johnson writes in Breaking The Banks (Lester & Orpen Dennys Publishers, 1986), “that the West was simply the well-head to finance loans to the East, loans that were not being repaid.” The board of directors never cared to examine the books too closely and trusted Mason’s stewardship. Audits were performed by the firm’s loyal but untrained internal auditor, Sydney Jones.
The federal government’s official banking policy since Confederation had been distinctly non-interventionist, allowing banks to operate with as little interference and oversight as possible. What banking legislation was introduced was never enforced, and only offered a veneer of security. Federal authorities did not enforce their own stated requirement for banks to maintain minimum reserves on-hand so they might remain solvent in bad times. Furthermore, although banks were required to publish monthly statements with the Department of Finance, authorities never bothered verifying their accuracy. Banks were left to largely manage themselves, and establish industry-wide self-regulations through the Canadian Bankers Association after its establishment in 1891.
As early as 1914, the manager of the Winnipeg branch, William Machaffie, and the three Winnipeg-based bank directors complained to their colleagues of mismanagement and bad debts. When they were stonewalled by the Toronto-based board members and bank management, they contacted the Minister of Finance, Sir Thomas White, directly.
Fearful of the wide-ranging economic repercussions of a bank failing while the country was fighting the First World War, White hoped that the bank just needed time to stabilize its affairs. “I certainly would not have allowed a bank to fail during the war… you may cause an unspeakable calamity to the country,” he explained years later.
(Right: Looking west on King Street from Yonge Street, with Home Bank head office at centre, 1912, from City of Toronto Archives (Fonds 1244, Item 7155).)
And so, instead of a full-fledged investigation that might show cause for liquidating the bank, White satisfied himself with promises that an audit would take place—which, of course, showed a healthy financial picture—and that new management would take the Home Bank’s reins. W.J. Haney was appointed president to succeed James Mason, and was eventually succeeded himself by Herbert John Daly, who’d left an impoverished upbringing in Liverpool as a Barnardo child and proven so successful in sales and business that, at the time of his appointment, he was the youngest bank president in Canada. Mason’s son, James Cooper Mason, became general manager in late 1916. The new leadership simply continued the financial chicanery of their predecessors—although Daly never appeared to enrich himself.
Machaffie, who’d had ambitions for the general manager job, was thoroughly disappointed in the appointment of Mason’s son. When Machaffie continued to make waves for the board, he was fired. Then, when negotiations with the bank over his severance broke down, Machaffie once again petitioned the Finance Minister in 1918, alleging bad debts, delinquent loans, incompetent auditing, and accounting malpractice. But the Home Bank was able to characterize Machaffie as a disgruntled former employee, and White again refused to look at the bank’s affairs too closely.
Bank mergers after the war—including the absorption of the chronically mismanaged Merchants Bank by the Bank of Montreal—and public pressure to increase the accountability of bank directors led the new Liberal Finance Minister William Fielding, in March 1923, to introduce tighter bank regulations, including the provision of mandatory independent audits. No longer would debts go unpaid and be reported in good standing through accounting trickery. But the new legislation—which didn’t take effect until October—came too late to keep the Home Bank’s house of cards from collapsing.
The Canadian economy slumped into a post-war recession by 1920, as rising interest rates drove prices down. The value of assets fell as the costs of carrying these assets climbed. The value of Home Bank stock plummeted, and the firm’s outstanding liabilities were far in excess of its assets. Daly quietly took a loan of $120,000 from a New York bank to keep the Home Bank afloat. The bank’s request, in the spring of 1923, for an emergency bailout from the federal government was refused. But after James Cooper Mason’s death on August 9, 1923—long-rumoured to be the result of a self-inflicted gunshot, though the cause of death was never formally announced—the bank’s true financial picture became impossible to hide.
On Friday, August 17, the Home Bank operated business as usual for most of the day with tellers continuing to accept deposits of regular working-class customers, unaware of the bank’s dire predicament and that numerous major depositors, including the bank’s vice-president and a federal cabinet minister, had begun withdrawing significant sums in the last several days. Then, late that afternoon, after an emergency meeting of the board of directors, came the news that the bank was shuttering, unable to meet its obligations, and that a curator had been appointed to assume control.
Bank managers across the country received telegrams instructing them to close their doors and report as soon as possible to the head office. One dust-covered manager from afar took the instructions literally, arriving in front of the King Street West headquarters bearing a worried expression before dawn on August 18. Seeing the man pounding on the bank door, a neighbourhood policeman asked what the fuss was about. “Why, that is just what I would like to know,” the bank manager replied, explaining that he’d received a telegram. “I have been driving all night,” he added. “On the way down I hear rumors that the bank has failed—we have heard nothing of this in my branch. We have been doing a splendid business. I can’t understand it.”
On Saturday, a Star reporter knocked on the doors to seek information but was brusquely turned away by staff. “Is there—” he began. “No information,” the staff interrupted. “Can I—” the reporter tried. “No. We are sorry,” they replied as they closed the door. The Globe‘s reporter described a continuous stream of callers at numerous city branches. “It was very noticeable that most of the callers were people of apparently small means. Many wanted a personal interview with officials, but were told that this was impossible,” the Globe (August 20, 1923) reported. The newspaper concluded: “While there were many sad-eyed depositors, nothing like a panic revealed itself.” Indeed, the devastating impact of the bank’s closure didn’t reveal itself fully for days and weeks as newspapers carried accounts of long-time depositors who’d discovered their savings wiped out.
(Left: Article from the Toronto Globe, August 18, 1923.)
Several boys at St. John’s Industrial School lost the money they’d saved working for farmers north of Toronto. One boy had saved $900 and was one pay-cheque away from purchasing his own farm. “I am afraid,” Brother Pius, head of the reformatory, told the press, “that some of these boys will go back to a life of crime. They will say, ‘What is the use of us being honest when, if we save, those big guns downtown can get away with our money?'”
One young Toronto couple had to cancel their wedding. Walter Johnson, a Winnipegger visiting to Toronto with his daughter, was running short of funds because no banks would honour the bank orders he’d obtained from the Home Bank before his departure. Others impacted included disabled veterans of the late war, soldiers’ widows, and the elderly—some of whom had been Home Bank customers since childhood. There were countless stories of bricklayers, glove-makers, farmers, shoe-makers, and labourers who’d toiled for years, depositing what they had in the Home Bank, and were now too old or too ill to find work.
Individuals weren’t the only ones affected. The Toronto Separate School Board had had $71,000 on deposit, meaning all new school construction had to be immediately cancelled. A Toronto-based charity raising funds for famine relief in the Soviet Union lost $5,000. Within a couple of years, when officials from a Bloor Street West Orange lodge were brought up on charges of keeping a gaming house, their defence was that the lodge was simply trying to recoup the $700 lost when the Home Bank failed.
There was no federal deposit insurance in 1923. Angered depositors formed committees in communities across the country. They, and the citizens who were unaffected but feared the impact of the failure of their own bank, pressured the federal government to reimburse their lost savings. While the federal government might have no strict legal obligation, the argument insisted, White’s inaction created a moral obligation for assistance. “The Government, through its Finance Department, as well as the banks in Canada, must show more openly their interest in the welfare of the depositors and shareholders,” the Catholic Register and Canadian Extension argued, “unless they are willing to see confidence in chartered banks, already weak, utterly destroyed!”
By aggressively pursuing shareholders to fulfill the double liability obligation of their Home Bank stock and liquidating the firm’s assets, the Home Bank’s receiver was still only able to recoup just 25 cents on the dollar for depositors. This was eventually supplemented with another 35 cents on the dollar from a special relief fund established by the federal government as compensation for small depositors with accounts of up to $500. No compensation was offered for balances above $500.
In early October 1923, 10 Home Bank officials, including the officers, directors, accountant, and auditor, were arrested on criminal charges of fraud. Daly, under house arrest due to poor health, died a few weeks later without ever seeing a courtroom. After a long trial, the remaining officials were eventually found guilty and sentenced to a year each. All but one conviction was overturned on appeal—on the grounds that the board had been misled by Daly and the Masons, all of whom were deceased. In the absence of federal government regulations being enforced, John Turley-Ewart writes in Canadian Banker (Nov/Dec 1999) that the law had difficulty “distinguishing between incompetence and villainy.” Only the firm’s diminutive accountant, Ocean Smith, did not appeal his conviction—because he couldn’t afford it.
Beginning in February 1924, a Royal Commission under New Brunswick Chief Justice Harrison McKeown carried out an in-depth investigation of the Home Bank scandal, finding that, at numerous points in time, had the Finance Minister pushed, the bank could have been liquidated without any loss for depositors. Public outrage at the fiasco led to stricter government oversight of financial institutions, including the creation of the Office of the Inspector-General of Banks—the forerunner of today’s Office of the Superintendent of Financial Institutions.
Additional sources consulted: Paul Berry, “The Home Bank of Canada,” Bank of Canada Review (Autumn 2009); J. Patrick Boyer, A Passion for Justice (Blue Butterfly Books, 2008); Arthur Johnson, Breaking The Banks (Lester & Orpen Dennys Publishers, 1986); Byron Lew and Alan J. Richardson, “Institutional Responses to Bank Failure,” in Critical Perspectives on Accounting (1992); Robert MacIntosh, Different Drummers: Banking and Politics in Canada (Macmillan Canada, 1991); John Turley-Ewart, “Banking’s Hidden Past,” in Canadian Banker (Nov/Dec 1999); Turley-Ewart, “The Bank that Went Bust,” The Beaver (Aug/Sept 2004); and articles from Canadian Business (November 1994); the Financial Post; The Hill Times (November 16, 1998); the Mid-Island Coin Club Numismatic Journal (October, 2010); the Toronto Star (August 18 & 24, and November 1, 1923; September 25 & 29, and October 19, 1925; and June 22, 1992); and the Toronto Globe (August 7, 16, 18, 20, 23, 29 & 31, September 4, 6 & 27, and October 6, 8 & 13, 1923; January 24 and June 25, 1925).
Every Saturday, Historicist looks back at the events, places, and characters that have shaped Toronto into the city we know today.
This post originally referred to new management’s taking the bank’s “reigns” rather than its “reins.”