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An Economic Interpretation of the Appearance of Economists at Political Summer Schools

By H. A. Innis, M.A., Ph.D.

Associate Professor of Economic Geography, University of Toronto

The appearance of an economist at the summer school of a political party may even at this late date give rise to some comment. I can assure you that it is not yet a result of the retreat of academic freedom to these bodies. The pronouncements of economists have so deteriorated in importance during the past few years that he has become the contempt of even the politicians, and no politician will treat with contempt any group which commands a vote. Nor can the economist be held free of responsibility for his present low status in the community. He has assumed that he could compete with demagogues and his assumption has proven to be palpably wrong, except to those economists who have become demagogues themselves in the competitive process. His excuse is understandable during a period of depression, if not during a period of prosperity—something should be done to relieve human misery and his knowledge should be applied to bring about alleviation, but the results are nevertheless unfortunate. Democracy will defeat the economist at every turn at its own game.

By this time I hope you will realize that I am under no illusions in appearing before this gathering. On the other hand, I hope that my appearance here may suggest that I am not entirely pessimistic as to the ultimate solution. I do not expect to exert any influence on your views on any question of public policy, and I do not expect that many of you will understand any economic exposition which may be advanced in this paper. I am sufficiently humble in the face of the extreme complexity of my subject to know first that I am not competent to understand the problems much less to propose solutions; and, second, that I am not confident that I can propose and explain solutions to you which I do not understand myself. This will be done for you by other ‘economists.’ But let me warn you that any exposition by any economist which explains the problems and their solutions with perfect clarity is certainly wrong. Economics is an extremely difficult biological subject not discussed or understood by groups of preferably about three trained economists.

Having said this perhaps I should explain my presence here. I came here partly because I was asked and therefore presumably because of some belief that any contribution I might make would be useful, but rather because I take it as symptomatic that a powerful political party at present in office is at least willing to consider possible contributions of an economist. Economists have been asked and are being asked to investigate particular problems by governmental authorities, but so far as I am aware they have never been asked to take part in political discussion. It may be that their possibilities as demagogues are being gradually appreciated in political circles, or it may be that the politicians still feel that they are not entirely beneath contempt particularly if they are cloaked with the University prestige which surrounds the academic economist. My belief that the invitation was genuine was based on broad historical grounds. The politician has realized finally that the place of an economist in political life should be discussed, and it is with reference to this problem that I propose to develop this paper.

The question as to the place of the economist has not arisen prior to this depression chiefly because no other depression has been so serious and because other depressions have been solved successfully by the politicians. The immediate problem has arisen partly because of the methods used by politicians to overcome previous depressions, but in the main Canadian politicians have used over a long period and in crude fashion the devices recommended by economists of the present day. A brief review of depressions ranging from 1835 to 1857, to 1873, 1893 and 1921 illustrate a striking uniformity in Canadian political methods in overcoming depressions. The depression of 1835 was followed by the rebellion of 1837 and by the recommendation under the Durham Report that the Provinces of Upper and Lower Canada should be united in order to provide the necessary financial arrangements for large-scale public works involved in the St. Lawrence canals. During the forties the canals were built but construction was not adequate to offset the effects of the repeal of the Corn Laws and the depression of that decade. Further efforts were necessary and substantial support was given to the construction of the Grand Trunk Railway. The depression of 1857 illustrated the problems involved in this method of attack. Outlays of the Government for the improvement of transportation involved heavy fixed charges during a period in which returns from revenue declined rapidly. The method and its effects were inevitable. The key position of the St. Lawrence necessitated dependence on government support and accentuated emphasis on staple products such as wheat and lumber. As a result fixed charges essential to improvement of transportation contrasted sharply with the wide fluctuations of returns and in turn of revenue from staple products. The severity of the problem of government finance involved solutions of a diverse character ranging from the issue of provincial notes—inflation by the printing machine if you will—an increase of the tariff which involved the beginnings of protection and the end of reciprocity, a search for a wider base for the increased debt which ended in Confederation, and attempts to build additional public works which ended in the construction of the Intercolonial Railway. But again the depression of 1873 brought fresh troubles in terms of government deficits arising from the same phenomenon of outlays by the Government to improve transportation, and the consequent heavy fixed charges supported by staples exposed to sharp fluctuations characteristic of the business cycle. The solution ran in similar terms—a rise of the tariff marking the beginning of the national policy, and arrangements for the construction of public works, in this case the Canadian Pacific Railway. The depression of the nineties brought a continuation of the problems and similar solutions—in this case a strong policy of immigration and construction of two new transcontinental railways, the Canadian Northern and the Grand Trunk Pacific. The difficulties of the war and the post-war period involved the most marked increase in debt and in turn bankruptcy of the railroads, amalgamation, and the appearance of the Canadian National Railways. In turn the time-honoured methods of recovery were invoked and railway construction increased on an unprecedented scale during the period of boom in the twenties. The results have followed according to form in the depression.

From the standpoint of strict accuracy the development has not been as simple as has been outlined but the broad outlines stand out with sufficient clarity to enable one to write this paper without any serious twinge of scientific conscience. In the main the solutions adopted by the politician were successful. At least two important considerations contributed to their success: 1. Each expansion of capital imports, particularly as directed to improvement of transportation, has tapped fresh natural resources; 2. or, and, it has involved reductions in cost of transportation of marked advantage to the competitive position of raw materials. Railway rates and the tariff, failing the possibility of charging canal tolls, have served in rough fashion as methods by which the improvements were financed.

It is crucial to our discussion that the two important considerations are destined to play a very much less important role in future development.^[2] Fresh natural resources have become much less conspicuous and cannot be expected to support a major expansion in the importation of capital. The tariff can no longer serve as a crude instrument designed to obtain a share of new resources and must take a less important place in governmental revenues. On the other hand improvements of transportation, with the possible exception of the St. Lawrence waterways, no longer offer a way of escape. The importance of government ownership and its consequent rigidity of fixed charges tend to make further improvements of transportation difficult. In the first place returns on further investment of capital in transportation improvements have become much more dubious, and in the second place transportation improvements may involve serious depreciation through obsolescence which involves an additional burden to the Government. Motor transportation, for example, has added through competition to costs of operating the Canadian National Railways. The Panama Canal and the Hudson Bay Railway will tend to have similar effects. The St. Lawrence waterways may increase the burden of fixed charges to the Government directly by cost of construction and indirectly through competition with the Canadian National Railways. Our past policies have been policies based on expansion. We are no longer able to rely on public works as a method of recovery from the depression and that we have relied on this policy has left us with a legacy of large government debts and heavy fixed costs which bear down with great pressure particularly during a period of low yield and low prices of staple products, especially wheat. The difficulties of this situation explain the attention given to the economist. We are obliged to adopt more refined methods than have been necessary in previous depressions and to set up more delicate machinery. Political parties must draw to an increasing extent on the economic intelligence which is at hand. Economic planning which characterized an era of expansion becomes inadequate and inefficient and serious for an era in which expansion ceases to play an important role.

It is fortunate that in Canada we have become accustomed over a long period to economic planning and without committing myself to the policies of any party it is only fair to point out the important part played by the party at present in power. It is possible that this tradition may be responsible for the steps which have already been taken toward the introduction of more adequate machinery. From the Board of Railway Commissioners and the Canadian National Railways we have been able to proceed by a logical step to the recent railway commission and the subsequent legislation. Tariff legislation will become more efficient with more adequate studies carried out under the tariff board. It is altogether probable that a Central Bank will be recommended to overcome the limitations of machinery set up under The Finance Act. Other types of machinery such as The Combines Investigation Act will suggest themselves to anyone caring to reflect on the whole subject.

Our brief survey of the history of economic planning in Canada points clearly to the dangers of inadequate planning. The rigidity of government debts which followed the construction of the St. Lawrence waterways in the forties becomes progressively more dangerous with the course of each business cycle and leads inevitably by such devious paths as additional governmental support to government ownership and in the case of the railways to the present arrangement. And this is not the end. Failure to maintain an even balance between the two railways will lead to further maladjustment^[3] and probably to larger government debts and to greater rigidity.

If in the case of transportation it has eventually been found impossible to operate part on a planned basis and another part on a basis of private enterprise it will be obvious that one cannot introduce planning for railways and leave unrestrained private enterprise in other activities. Planning leads inevitably to more planning. In an economy based on raw materials and exposed to violent fluctuations the extension of planning introduces a serious dilemma. With the basic importance of capital equipment in Canada we are forced to emphasize the drive of private initiative and the necessity of commanding the energy and enthusiasm of our population and particularly of our younger men.^[4] Even with improved transportation and communication a vast area with diverse densities of population cannot be developed economically without reliance on all the energy and skill and drive we can command. The development of an intense patriotic nationalism along the Russian lines to meet this problem would be undesirable, if not inadequate. The problem was solved by the Northwest Company by a co-partnership system on a basis of constant expansion, but constant expansion must be disregarded in any solution of the problem. The dilemma explains the necessity on the part of political parties of inviting the consideration of economists.

Interdependence in modern economic life necessitates the extension of planning once it has been started. Planning in any one direction introduces certain rigidities the impact of which is felt throughout the whole economy and with a violently fluctuating economy tends to produce inequalities and to create maladjustments which have serious consequences for the regions or classes most directly exposed to effects of world competition—for example, western agriculture and in turn labour in urban areas as shown in unemployment. To avoid the unfortunate consequences of such maladjustments—and no one who has visited the West can fail to appreciate the suffering and misery involved—further planning becomes essential. And the process continues. It will be obvious that machinery should be introduced rapidly and widely for the purpose of adjusting the burdens. Such machinery must be introduced, however, only after the most careful consideration and each piece of legislation should provide the basis for the next piece of legislation. Obviously it must permit of the greatest possible flexibility.^[5] Any large rapid extension of machinery with vague notions as to its character and effects would undoubtedly have serious consequences. But thorough study, careful integration, ample provisions for flexibility, and carefully adjusted relationships to existing machinery with a view to capitalizing available economic skill and intelligence should provide a base for a structure which can be gradually improved as experience is gained from its operations and effects.

The difficulties involved appear at times almost insuperable. An economist would find it extremely difficult to predict the effects of any proposed action assuming adequate control of disturbing factors, but with no control over labour movements or of capital movements the task becomes infinitely more difficult. Drastic checks on immigration and in turn on emigration are possible and their introduction would facilitate the work of the economist. Control over credit carried out under a proposed central bank could be made effective by extension to other forms of credit than commercial credit. Internal machinery involves, particularly for Canada with her dependence on foreign trade, the closest possible study of world trade. Canada must continue to play an increasingly prominent role in international developments and to contribute to the improvement of existing machinery. Nationalism provides the only sure basis for internationalism.

The most serious difficulty which underlies to a large extent all other problems is the ineffectiveness of the economist in a democracy. Maladjustments and rigidities involve vested interests which are vocal in politics. The economist dare not begin to meet this situation. He can only concentrate on the causes of disturbance and prepare himself for the occasion in which the politician may dare to consult him. I have already suggested that my appearance at the summer school of a powerful political party which has played an important role in economic planning in Canada in the past is an indication of my faith that this party will continue to play an important role in economic planning in the future and that the economist will be accepted as increasingly necessary in meeting new and more acute difficulties. I have indicated the inevitability of planning in Canada—it remains for the economist, realizing his limitations, to render the best advice of which he is capable that the plans may not do more harm than good to the economic structure.

This paper is concerned wholly with the place of the economist in the programmes of a political party. It is intended to suggest the dangers of confusion of economics and politics. Political summer schools have their ultimate concern in the winning of elections and economists cannot make any contribution along those lines. Economists cannot compete with politicians. The specialized character of the subject makes prohibitive public discussion. While the economist is forced to assume an increasingly smaller role in public discussion the demands for his services in the state become increasingly great.

Government ownership in Canada has assumed a crucial position and has developed as a result of strong underlying forces with a drift toward economic planning. The dangers of economic planning have become acute and the necessity of further planning has created a demand for the work of economists. Government ownership and the tariff have been employed during the present depression to undertake tasks including protection, unemployment relief, control of exchange, production of revenue, and transportation charges. The burden has proved far too heavy. New machinery has already been provided and more will follow.

It may be that we are already on the upward swing of the business cycle and that we will be able to invoke to a minor extent the old remedies. In that event and with a successful Conservative or Liberal election you will probably not hear from economists until the next depression. I can only assure you we will be on hand with the same arguments but reinforced.

APPENDIX 1

The present economy of Canada is dominated by wheat. Expansion of production of this commodity has involved the improvement of navigation on the St. Lawrence and the Great Lakes, the building of railroads, the opening of ports in the Maritimes, on the St. Lawrence, on Hudson Bay and on the Pacific, construction of elevators, growth of towns and the development of a vast proportion of Canada’s existing capital equipment. This expansion has had its effect directly in the emergence of the iron and steel industry in relation to the production of rails and railway supplies, of the lumber industry of Eastern Canada and British Columbia, in meeting the demands of increasingly large urban centres in Eastern Canada and in the Prairies, and of a great wealth of industries.^[6] Indirectly the railroads built to meet the demands of wheat have been responsible for the growth of the mining industry—the development of Sudbury on the Canadian Pacific main line, the opening of Cobalt, Porcupine, Kirkland Lake and Noranda, in territory tributary to the Temiskaming and Northern Ontario Railway, built to develop the clay belt of Northern Ontario and to link up with the National Transcontinental Railway, and expansion of the Kootenay in Southern British Columbia.

The capital necessary to support, this enormous investment was obtained to a large extent from Great Britain prior to the war and from the United States since the war. It involved credit instruments in the form of Canadian Pacific common stock, preferred stock and Canadian National bonds guaranteed by the Government, provincial debentures, municipal debentures, mortgages on farms, corporate securities, stock and bonds, and other evidences of debt. Interest on these securities has been paid in the form of dividends on Canadian Pacific stock and other corporate stocks and interest on bonds of the Canadian National, the Federal, provincial and municipal bodies and corporate organizations as well as on farm mortgages. In addition deficits have been paid by security holders and, in the case of the Canadian National, by the Government.

Interest on the various forms of securities and repayment of the securities has been made chiefly from the sale of wheat in Great Britain and has been collected as earnings on the railroads and on the operation of companies, as taxes in various forms levied by governments, as payments on mortgages and by security holders in case of deficits. The methods of collection varied from direct payments through railroad rates on wheat and on imports involved in the production and transportation of wheat to the infinite variety of taxes including the tariff. In the case of the Canadian National Railways and capital invested in improvement of navigation the deficits and interest on capital has been paid chiefly through the tariff on imports.

The ability to make these payments depends therefore on the returns from the sale of wheat and flour in export markets. These returns are a result of various factors such as the price of wheat, and the size of the crop which in turn is a result of yield and acreage. The price of wheat is determined by world factors particularly production in competing areas and demand. Yield is a result in the main of climatic factors and fluctuates violently. Acreage available for wheat is a result of competition for land of other agricultural products, of rotation systems, of settlement, and other factors. Expansion in production of wheat with constant price level or rising prices with constant production facilitate payments. Accessibility to new land has been largely responsible for an increase in production, and in turn for a lightening of the burden, unless it has been offset by the interest necessary to support new capital expenditures.

In an able analysis Dr. D. A. MacGibbon,^[7] Canadian Grain Commissioner, states, “I do not expect much increase. On the other hand I see no ground for believing that average exports will fall below 200,000,000 bushels for many years to come.” We cannot expect, therefore, that the burden of interest payments will be reduced materially through an expansion of wheat production. On the other hand, fluctuations in yield are inevitable and in turn fluctuations in price. Returns from wheat cannot be expected to increase naturally as a result of increased wheat production. It becomes increasingly necessary, therefore, to indicate the problems in relation to the burden of payments and to suggest possible solutions.

The depression has brought out sharply the character of the problems involved. Returns on wheat have been drastically reduced as a result of yields and prices. Earnings on the railroads have been reduced following decline in yield and decline in purchasing power in the West. In the case of the Canadian Pacific Railway it has been forced to reduce and later to pass dividends on common stock and has practically reached the position of a deficit in relation to the fixed charges on other securities. The Canadian National has been forced along with the Canadian Pacific to drastically reduce expenses and in spite of the reduction to show a large deficit primarily because of an inelastic financial structure in which the Government is directly involved through guarantee of securities. In the one case the loss has been shifted in part to the holder of Canadian Pacific securities and in the other to the general Canadian public, and in both cases part of the loss has been passed on to the employees. On securities outstanding in relation to navigation improvements such as canals and ports the loss is again carried by the Canadian public. These charges have been paid following the general policy of the Government chiefly by returns from revenue from customs. The implication has been that transportation improvements reduced the costs of transport on imports and that the tariff should be imposed to force the importer to contribute to the cost of the improvements.

Returns from the pulp and paper industry depend primarily on production and prices which in turn are a result chiefly of the demands of the United States for advertising. These demands are notoriously the result of swings in the business cycle and returns will fluctuate as to price and production accordingly. Decline in price involves a decline in production in high-cost mills and concentration on relatively efficient low-cost mills. The burden of depression consequently falls on the employees of high-cost mills and on the security holders of capital invested in those mills. Towns built up around these mills decline in population and depreciation through obsolescence is borne largely by investors and the people concerned. Fluctuations in production in relation to demand are limited to problems of supply. Following the boom of the past decade, further increase in paper-mill capacity cannot be expected. On the other hand pulp wood supplied by settlers tends to become exhausted and costs of pulpwood to increase in terms of prices paid or of lower standard of living for the settler provided he has not been able to shift to established agriculture. Low-cost mills operating continuously tend to exhaust the more available supplies unless reforestation from the standpoint of sustained yield has been adequately supported. Assuming adequate reforestation policies in relation to low-cost mills able to operate at capacity during a period of depression the burden of fluctuations is shifted to the marginal mills. The problems of reforestation, of labour, of investors, become more acute in direct ratio to the cost of operation of the mills. The basic importance of electric power to the newsprint industry and the importance of overhead charges in relation to the fixed type of capital equipment essential to development of electric power raise serious problems in the creation of alternative uses during periods of depression or off-peak periods for the newsprint industry as a whole. These problems are linked to those of labour and reforestation. Their solution in relation to a unified policy involves control over the resources of the provinces probably including Newfoundland.

Problems of the lumber industry have been solved in part by the emergence of the pulp and paper industry in relation to spruce. Demands for lumber in Eastern Canada vary largely with the construction industry in Canada and in the United States. Capital and labour have become adjusted over a long period to wide fluctuations and the industry has been integrated in part with agriculture and other activities. Flexibility of organization facilitates the introduction of remedies which follow intensive surveys. In British Columbia prices and demands are more largely determined on the coast by foreign demands and in the interior by the demands of the Prairies. Overhead costs on the coastal mill and the position of the industry from the standpoint of natural resources permits to some extent relatively continuous operations. The problem of mills advantageously located is similar to that of pulp and paper. Exhaustion of the accessible forests will place the industry in a weaker competitive position and protection from wide fluctuations will be linked in part to conservation measures.

The mineral industry from the standpoint of metallic minerals has been in some sense a by-product of wheat production. Railways built to produce and transport wheat were responsible for the discovery and development of minerals. The effects were evident in the impetus given by the development of mining in the Yukon and in the Kootenay, to the development of agriculture. The Crowsnest Pass Railway was directly linked by subsidy to a reduction of rates but the relation is generally more obscure. Expansion of mining tends to reduce costs on unremunerative sections of railway but on the other hand the inevitable exhaustion brings an increase in cost. The development of Cobalt, Porcupine, Kirkland Lake and Noranda provided a direct stimulus to agriculture and to the lowering of costs of transportation. Fortunately the decline of one camp, for example, Cobalt, has been offset by the rise of other camps, for example, Kirkland Lake, and the impermanence of previous metals, silver and gold, by the more permanent base metals. The inevitable shift to base metals accentuates the problem of competition from other countries and leads to a gradual weakening of our position as low-cost ore bodies are exhausted. Copper plants have already been forced to close down unless supported by exceptionally low costs of mining as at Flin Flon or by a heavy mixture of gold as at Noranda. The monopoly position of nickel places this industry on a more permanent basis. Asbestos on the other hand has felt the effects of foreign competition. The advantages of minerals as a by-product of agriculture and their position as a support during periods of depression will tend to become less obvious with exhaustion with the result that the effects of a fluctuation in wheat economy will become more pronounced. Lead and zinc mining, for example, as at Trail, has become an important supplement to wheat production through the supply of fertilizer. The possibilities of integration in the use of by-products through the development of research may tend to offset the effects of decline. Electric power and subsidiary development to mining may be shifted to alternative uses. Non-metallic minerals vary in relation to the demands of the foreign and domestic markets. Gypsum, brick and building materials are directly affected by the construction industries. Coal-mining in the Maritimes is related to increasing costs and increasing development of industry limited, of course, by the competition of electric power from the projected St. Lawrence waterways and to attempts to encourage and enlarge the domestic market by tariffs and bounties and again the St. Lawrence waterways. In Alberta and British Columbia it is related to the demands of mining and of the Prairies.

APPENDIX 2

It is a strange comment that finance should present the most serious aspect of the railway problem and yet remain the subject about which almost the least work has been done. Periodic crises lead to the establishment of Royal Commissions, and the results are in the form of panic literature rather than exhaustive studies of the field as a whole. Nevertheless, the recommendations of Royal Commissions indicate decided trends, especially when considered over a long period. It has become fairly obvious that transportation must be considered as a unit, and that navigation cannot be isolated from rail transportation nor the Canadian Pacific and private enterprise from the Canadian National and Government ownership.

The transportation problem began with the construction of canals and improvements of the St Lawrence waterways. Railways were built as supplements to the canals to overcome the hardships of slow transportation and closed seasons of navigation. Transportation was dependent, from the beginning, on government support. The Grand Trunk operated under private enterprise was given strong support by the Government; the canals and the Intercolonial and P.E.I. Railways were constructed by the Government. From the beginning, returns on capital invested were met by earnings on traffic in the case of the railways and to a certain extent in the case of canals by collection of tolls. It was obvious, however, that these means were inadequate, with the result that the tariff was imposed to meet the deficits. The tariff was regarded as a secondary toll or rate on traffic.

The overwhelming importance of water transportation in relation to the St. Lawrence contributed to an emphasis on the production and export of staples, as shown in the dominance at various stages of fur and lumber and, with the improvement of transportation by canals and railways, of wheat and agricultural products. Emphasis was on raw materials which were subject to wide fluctuations in returns as a result of prices or yields. Consequently, while on the one hand returns on capital invested by the Government in canals and by the Government and private enterprise in railways were inflexible as far as the Government was concerned and relatively inflexible (in so far as securities were in the form of bonds rather than stocks) as far as private enterprise was concerned, earnings were subject to wide fluctuations since returns from customs fluctuated with imports, which were directly affected by exports. Returns from freight rates and tolls fluctuated similarly.

During periods of depression government finance was exposed to serious deficits as a result of the importance of staples and of the tariff. Private enterprise in railways was exposed to losses from the same source. On the other hand, the tariff was more flexible than rates, and during a period of depression increases followed the problems of government deficits, and attempts of manufacturers to secure protection from manufactured products dumped by more highly industrialized countries. Increase in the tariff and attempts to stimulate imports of capital by further transportation improvements, coinciding with the prosperity phase of the business cycle, brought a temporary solution to the problem of deficits. Completion of the Intercolonial Railway by the Government in 1876, the national policy of 1878, and the plan to construct the Canadian Pacific Railway were factors overcoming the difficulties of the seventies. The importance of the Government in the construction and deepening of the canals and in the construction of the Intercolonial Railway, and the problems of fixed charges during a period of depression accentuated the importance attached to construction under private enterprise. The tariff tended to impose too heavy a burden on the staple industries. Private enterprise provided for greater flexibility without the danger of fixed charges and deficits during the depression stage. The determined attempts to enlist the interests of private capitalists for construction of the Canadian Pacific Railway, and the generous support in land, money and railways made possible avoidance of inflexible drains on the Government and provided a flexible financial structure for private enterprise.

Inflexibility of the tariff downwards contributed to the difficulties during the period of prosperity which began with the discovery of gold in the Klondike in 1896, the opening of the Kootenay by the Crowsnest Pass Railway and the lowering of railway rates on settlers’ effects and grain which accompanied the same development, completion of the St. Lawrence waterways to fourteen-foot draught, the opening of the West and its accompanying increase in immigration of labour and importation of capital. Expansion made possible a marked increase in dividends to Canadian Pacific shareholders, and a marked increase in surplus from the tariff which provided support for government construction of the Transcontinental Railway from Moncton to Winnipeg, and for construction of the Canadian Northern and the Grand Trunk under private enterprise with governmental assistance. With the war, the elasticity of private enterprise was not in evidence and the Canadian Northern, the Grand Trunk Pacific and Grand Trunk came into the hands of the Government. Attempts to locate a scapegoat for the present railroad problem have led to charges that the Laurier administration was responsible in not forcing an amalgamation of the Canadian Northern and the Grand Trunk Pacific^[8] and that the Borden administration should have refused assistance to the Canadian Northern Railway at the onset of the war. It is important to emphasize that expansion of credit in the period from 1900 to 1914 facilitated expansion of railroads with government assistance and under private enterprise by the Canadian Pacific Railway. In the war and the post-war period further expansion of credit, which followed the enormous speculative boom of the United States, led to marked expansion on the part of the Canadian Pacific and Canadian National Railways. Again attempts to locate a scapegoat have been in evidence.

The problem of government finance has become acute with the depression, partly because natural resources have not shown adequate resilience. Expansion of credit has crystallized with government ownership into heavy fixed charges during a period of depression. Moreover, the loss of traffic has been responsible for operating deficits which have accumulated with fixed charges. Private enterprise representing the alternative of elasticity has been forced to give evidence of elasticity by passing dividends. Government finance, in so far as it was related to lands and railroads, was dependent on earnings and on continued application of the tariff. Elimination of the elasticity feature, as shown in the disappearance of C.P.R. dividends, tends to accentuate the burden of government finance. The formation of the arbitration board centres directly on the problem of solving the inelastic factors, and renders more urgent an analysis of the position of the tariff and of government finance generally. The efficacy of the tariff from the standpoint of waterways and railways varies in part with imports, and in turn with exports and accordingly with earnings dependent on railway rates and traffic. Deficits on the railway and on canals are directly linked to returns from the tariff. The more complicated phases of the problem arise from the marked expansion incidental to rapid exploitation of virgin natural resources, accentuated by the prosperity phases of the business cycle. Whereas the tariff, by remaining at a high level, or by an increase, may lead to a substantial increase in revenue without affecting relatively the position of the burden, if this is followed by an increased expenditure on the part of the Government, and by new flotations of capital, the fixed charges increase rapidly. This results in increasing surpluses being devoted to an increasing extent to the payment of interest charges on capital when they should be devoted to an increasing extent to capital. As a result, during periods of depression, fixed charges on capital invested during the boom period become a serious burden. The burden may be borne without serious difficulty, provided the chief exports continue in a strong competitive position in relation to other exporting areas. On the other hand, falling prices and exploitation of virgin natural resources may seriously accentuate the burden. The tariff tends to become inadequate as a result and it may, by virtue of protective features, add to the burden. The impasse which develops under these conditions, and which has been evident in this depression, can be met in part by further improvements in transportation such as the St. Lawrence waterway, which will lower costs of transportation and strengthen the position of Canada as a wheat producer. The difficulties are, of course, obvious but not insuperable. It is a temporary solution and serves to emphasize the importance of making the tariff a more flexible and scientific instrument. During a period of prosperity the tariff should be raised to act as a brake and to provide for surpluses not only to meet the short-run railway operating deficits of Canadian transportation, but also the interest and depreciation of capital. If railroad rates are lowered at the beginning of a period of prosperity tariff rates should be raised accordingly. A scientific application of the tariff offers at least a partial solution to the dilemma which arises from fluctuations in a country dependent on staples, especially wheat, and in turn on government ownership and fixed charges. Lowering the tariff during the period of a depression^[9] and raising the tariff^[10] during a period of prosperity might do much to alleviate the problems of the staple-producing areas.

The disappearance of elasticity in railroad finance which follows the passing of dividends on common stock in the Canadian Pacific Railway and the emergence of the arbitral board involve consideration of fresh standards for rate adjustment. It is no longer feasible to regard 7 per cent. dividends on common stock of the Canadian Pacific Railway as a measuring rod for railway rates and it may no longer be feasible to regard the financially healthy state of the Canadian Pacific Railway as a guide. This arrangement implied that rates providing satisfactory returns for the Canadian Pacific did not necessarily provide satisfactory returns for the Government Railways. Earnings from these rates were necessarily supplemented by support from the Government to make up deficits either in terms of deficits on operation or of interest on capital. Assuming that the arbitral board maintains an even balance between the two railroads and avoids encroachment of the Canadian Pacific on the Canadian National or of the Canadian National on the Canadian Pacific, rates must be adjusted in relation to the total capital structure of the railways rather than to the capital structure of the line dominated by private enterprise. It becomes possible and essential that the burden of railroad finance be adjusted more closely to the relative ability of supporting areas. Assuming relative stability in the production of raw materials as a result of exhaustion of natural resources the tariff must assume to an increasing extent the position of a toll, as Galt originally planned, and should approximate the deficit on transportation finance. Consequently the tariff and railway rates but particularly the former must be linked in more direct fashion to the problem of returns on investment, whether in terms of government ownership or private enterprise. The tariff may serve to operate as a new base, in the place of dividends on Canadian Pacific stock, by which deficits on the Canadian National and on canals should approximate returns from the tariff and railway rates should provide in addition earnings on the Canadian National adequate to provide returns on Canadian Pacific securities.

Aside from the problem of meeting deficits on transportation, the public debt of Canada (provincial, municipal and Federal) remains of serious proportions. The transportation problem has accentuated the difficulties and has forced consideration of fiscal and monetary policy. Fiscal difficulties and inelasticity of structure have steadily driven toward a realignment of monetary policy. Commercial credit in a young country subject to wide fluctuations has been subject to systematic protection by banking policy and banking legislation. Governmental credit and corporate credit have suffered as a result of their relatively weaker position in the credit structure. Continued expansion of government credit in terms of continued deficits and increasing rigidity have become imperative factors in the appointment of a Royal Commission on banking and in the recommendation and establishment of new machinery designed to eliminate strains and so introduce unity, strength and flexibility.

APPENDIX 3

The effect of the industrial revolution on Canadian development as shown in the expansion of wheat production, of mining—for example in Northern Ontario and British Columbia—and of the lumber and pulp and paper industry has been obvious, not only in each basic industry but also in subordinate industries. Integration between basic industries has hastened development—for example, the development of mining as a by-product of wheat production, and the expansion of lumbering in British Columbia in relation to the demand of agriculture on the Prairies. Slowing down of the rate of expansion through exhaustion of raw materials necessitates (1) the development of export markets in basic industries, and (2) closer integration between basic industries—such integration as is evident in the development of the fertilizer industry in relation to mining at Trail to assist agriculture in Western Canada. This integration may be assisted materially by scientific research.

The development of subordinate industries in relation to basic industries has been evident primarily in areas of cheap power and cheap water transportation, as in Ontario and Quebec. The growth of industry in Ontario and Quebec has been evident in the urbanization of population, the revolution of agriculture in Eastern Canada to meet the demands of an industrial population (winter dairying) and in the emergence of large cities such as Toronto and Montreal. The development of the Hydro-Electric Power Commission in Ontario and of large power corporations in Quebec, and the rise of diversified industry has been chiefly a result of the demands of the basic industries. This industrial area is powerfully influenced by fluctuation in the basic industries as shown in wheat, pulp and paper and mining. The position of gold mining during a period of depression has tended to serve as a cushion for the decline in certain staples.

The problem of subordinate industries, particularly as represented by Eastern Canada, consists chiefly in the relative rigidity in the capital structure—for example, in government support to the Ontario Hydro-Electric Commission. The burden of this rigidity was not evident during a period of prosperity, and during a period in which relatively low costs were possible as a result of government ownership and of practically virgin natural resources in terms of a large untapped source of power such as Niagara Falls, and of the application of mature technique. Moreover, the burden of the tariff on sources of power—for example, coal and the subsidy to coal mines in Cape Breton operating on an increasing cost basis, tends to accentuate the effects of rigidity. Support of the iron and steel industry has the same effect. In addition to the problem of government ownership, emphasis on inefficiently capitalized industries, i.e., with emphasis on bonds and possibly over-capitalization, accentuates rigidity. The effect of this rigidity becomes serious with attempts to maintain prices of manufactured products with or without attempts at combination. Such rigidity bears with great severity on the staple-producing region in the form of debts, high costs of production, and lower standards of living during a period of depression. Elasticity in private enterprise provides limited relief as shown in the passing of dividends. The burden is shifted in part to employees and becomes evident in a lower standard of living in the East as in the West. The tendency of gold mining to buoy up the industrial East may have the effect of increasing the rigidity in relation to the West in so far as it makes less necessary the urgent scaling down of debts.

The burden is divided unevenly in the East, industries subject to marked competition being forced to lower prices, as in the case of agriculture, more rapidly than industries which possess greater possibilities of monopoly. In the meantime, certain industries have the advantage of foreign markets for specialized commodities such as apples, potatoes and fur, but the advantage has been offset in part by competition from other areas—for example, British Columbia as a result of the Panama Canal, by tariffs in the United States, by depreciated exchange in Great Britain, or by violent fluctuations in prices, such as have affected fur-farming. The fishing industry has been linked to an increasing extent with the internal market as a result of the development of the fresh-fish industry and the severe competition which has affected dry fishing.

From this analysis it becomes obvious that the fluctuations of the Canadian economy which follow from its dependence on wheat, demand the introduction of elastic machinery by which the burdens imposed may be adjusted with the greatest possible speed. Improvement of transportation for wheat with a view to lowering the cost of production, in the case of the St. Lawrence waterways or the Peace River outlet, may reduce the burden on Western Canada and strengthen the competitive position of Canada among the wheat producers of the world. On the other hand, along with technological improvements, political institutions must be developed to solve adequately the problem of inequality of burden. Such institutions involve adequate control in a federal centre, in order that mechanisms may be devised which will check the effects of rigidity and provide relief from the problems of a fluctuating economy. Such mechanism involves safeguards to labour in industry and agriculture.

TRANSCRIBER NOTES

Misspelled words and printer errors have been corrected. Where multiple spellings occur, majority use has been employed.

Punctuation has been maintained except where obvious printer errors occur.

The footnotes have been renumbered sequentially throughout the ebook.

A cover which is placed in the public domain was created for this ebook.

[The end of Government Ownership and the Canadian Scene by Harold Adams Innis]