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Brokers at a phone booth on opening day of the merged Toronto Stock Exchange and Standard Stock and Mining Exchange. Picture dated 1934. (The Globe and Mail)
Brokers at a phone booth on opening day of the merged Toronto Stock Exchange and Standard Stock and Mining Exchange. Picture dated 1934. (The Globe and Mail)

Journalism's crucial role in financial market integrity Add to ...

Floyd Chalmers, the illustrious publisher (Maclean-Hunter) and philanthropist, was the intrepid editor-in-chief of the Financial Post (at age 27) when the stock markets crashed in the autumn of 1929. The date usually cited as the final day of the Roaring Twenties is Oct. 29: Black Tuesday. It didn’t take Mr. Chalmers, the young journalist, long to expose corrupt broker practices on Toronto’s stock markets – and, more specifically, on the phony trading of phantom securities on Toronto’s Standard Stock and Mining Exchange.

Launching a muckraker series on Nov. 29, Mr. Chalmers wrote memorably of the widespread cheating on the SSME. Using the movie-script language of the era, he began with a metaphor that evoked snakes in the Garden of Eden. Toronto stockbrokers had made a killing, he reported, by the duplicitous running up (and running down) of stock prices, by the secret alliances of brokerages and mining companies, by the fictitious mining reports these partnerships produced and by the commissions taken on trades that were never made.

“Canadians went into mining [stocks]as a crowd of boys runs to a new-found orchard from the trees of which are hanging clusters of luscious red pippins,” he wrote. “Canadians found many rich and juicy apples in the mining orchard. For a time, they feasted. But they also found, as the first intoxication died, that the pest and the worm and the parasite had entered the orchard.”

Mr. Chalmers was certainly not the last journalist to expose misconduct in the trading of mining securities in Canada. But he was, perhaps, the most effective. Within a month, his stories resulted in the arrest and prosecution of SSME profiteers (some of whom went to prison). Interestingly, the crash took down no Toronto brokerages – though Mr. Chalmers’ stories did.

In a research paper written for Professor Joe Martin at the University of Toronto’s Rotman School of Management (“How Toronto Became the Financial Capital of Canada”), Darren Karn described Mr. Chalmers’ work as the catalyst “for bringing about reforms to stop shady practices among stockbrokers of the day.” This, too, happened quickly. By December of 1929, the SSME was implementing more stringent regulation of trading practices.

Ironically, it was the excesses of the SSME that made Toronto, not Montreal, “the financial capital of Canada.” Excesses aside, the exuberant boom-and-bust mining exchange dramatically increased the volume of trades that took place in Toronto. In the 1920s, minerals and forests were the place to be for investors betting on an ever-lasting boom. An SSME membership cost $1,100 in 1922; $100,000 in 1929 – a hundredfold increase. Five years later, when the troubled SSME merged with the Toronto Stock Exchange, the trading volume of the TSE surpassed the trading volume of the Montreal Stock Exchange for the first time.

In his paper, Mr. Karn raised intriguing questions, among them: How did Canadian banks and Canadian brokerages survive the Great Depression? Few brokerages went bankrupt. No banks failed, although nine of the 10 largest Canadian banks were technically insolvent. How was it that Canada’s financial sector survived the same calamity that shut down American brokerages and American banks by the hundreds?

Mr. Karn suggests that enlightened self-interest preserved Canada’s brokerages and banks. Knowing they would recover nothing, the banks didn’t foreclose on the brokerages. Knowing it would salvage nothing, the government didn’t foreclose on the banks. Stringent regulation of these institutions wasn’t necessary. Canada’s financial sector apparently survived the Depression through a simple, brilliant policy: Don’t ask, don’t tell.

One Montreal brokerage did fail: Craig & Luther Co. On May 29, 1932, facing financial ruin, principal shareholder W.E.J. Luther met Sir Herbert Holt, president of the Royal Bank in Montreal, and appealed for help “as a matter of life or death.” Sir Herbert declined. Later that day, Mr. Luther approached him again and, on Sir Herbert’s doorstep, shot him three times. Thinking he was dead, Mr. Luther went home and killed himself. Craig & Luther closed the next day.

Sir Herbert survived his wounds, went into hiding until he healed – and kept the affair secret . He erased all record of it, even from the archives of the Royal Bank. No newspaper reported a single word, proving again that muckraking journalism is an essential part, however informal, of financial regulation: Ask, tell. In the end, as always, a more effective precaution ultimately prevails: Caveat emptor.

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