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By H. A. Innis

The Economic Journal, March, 1932, No. 163.

The available statistics on the external trade of Canada point directly to the outstanding effects of the depression. [TN: 1931 partial data has been completed using data from Canada Yearbook, 1932.]

The decline in exports and the appearance of an unfavourable balance in 1930 are significant facts. The character of the trade and the chief countries concerned are shown in the following table:

The weakness of the trade situation is shown in the decline of exports of vegetable products, in other words—wheat,^[1] as shown in values and volume in the following table:

The price of wheat in Canada declined from a yearly average for No. 1 Northern of 146 cents in 1927-8 to 124 cents in 1928-9, and from 160 cents in July 1929 to 95 cents in July 1930 and 53 cents in September 1931. It moved slightly upward to 67 cents in November.

It is difficult to over-estimate the importance of wheat to Canadian industrial development and to Canada’s present problems. The economic and political structure of Canada have been built up in relation to the production and export of wheat. Investments in canals on the St. Lawrence in the ’forties and in railroads in the ’fifties were designed to attract the wheat trade of the western states. Failure to attract this trade was accompanied by the expansion of wheat production, especially in Ontario, which was followed in turn by the construction of the Canadian Pacific Railway and the expansion of wheat production in Western Canada. The deepening of the St. Lawrence ship channel, of the St. Lawrence canals, and of the Welland and the Sault canals, the development of ports and of elevators, and the construction of through lines and branch lines were carried out in relation to wheat. Moreover, the expansion of industry in Eastern Canada, and the consequent revolution of eastern agriculture was largely a result of the opening of the West, especially after 1900. The development of the lumber industry in British Columbia and the development of coal-mining and the iron and steel industry in the Maritimes were stimulated by the marked increase in the production of wheat.

The rapidity of Western expansion which characterised the period from 1900 to 1914 declined after the war, and industries engaged in meeting the demands for permanent capital equipment, such as railroads, declined in relative importance with relation to the west and were forced to find new markets as in the case of the British Columbia lumber industry, or to become involved in financial difficulties as in the case of the iron and steel industry. Industries engaged in the production of consumers’ goods and of less permanent forms of capital equipment, such as agricultural implements, have reached a state of relative stability or have found possibilities of continued expansion in new markets. On the whole, wheat has continued in the war and the post-war periods as the raison d’être of enormous investments of capital in Canadian transport, industry, and agriculture, and fluctuations in the volume and value of wheat produced in Western Canada have been registered directly and indirectly in the economic conditions of other parts of Canada. Its influence has been tempered by the growth of mining and of pulp and paper industries, but it remains of basic importance.

A decline in the volume of production and in value of wheat has far-reaching ramifications. The effects on returns on the enormous investments of capital vary as usual with the policy of the organisations concerned, with their opportunities, and with the skill of management, but in the opening of the West, various incalculable and unpredictable factors have been in evidence. Canada emerged as an industrial country at a comparatively late date, and consequently was able to borrow the mature technique of other countries and apply it to virgin natural resources. Her development was therefore rapid. Her political boundaries had been hammered out in relation to the fur trade, and it was necessary to adapt the consequent geographic unit in the northern half of North America to the production of wheat. The importance of cheap water transportation on the St. Lawrence system, the heavy investment of capital on the part of the Government in the improvement of the system, the enormity of the task of bridging a continent and the necessity of accomplishing its completion in a short period of time were factors requiring substantial Government encouragement and support.^[2]

The character of Government support to the improvement of navigation and transportation varied. Improvement of the St. Lawrence system was undertaken as a direct Government work in the case of canals and the Intercolonial railway, and in the form of subsidies and loans in the case of the Grand Trunk and other railways. A cash subsidy, land grant, and numerous minor items of assistance were used in the construction of the Canadian Pacific Railway. Returns on the investments of the Government were obtained through the tariff. A. T. Galt, Minister of Finance, stated in 1862 that “the Government has increased the duties for the purpose of enabling them to meet the interest on the public works necessary to reduce all the various charges upon the imports and exports of the country—all these improvements have been undertaken with the twofold object of diminishing the cost to the consumer of what he imports and of increasing the net result of the labour of the country when finally realised in Great Britain.”^[3] With raw material such as wheat sold on the world market the tariff was devised as a clumsy but effective weapon to secure returns to meet the interest on capital investment. The element of protection was developed in tariffs following the abrogation of the reciprocity treaty in 1866, and especially in the national policy of 1878.^[4] The railroads were assisted by the development of industry and traffic under protection, and interest was paid from revenues obtained from duties on goods imported in spite of protective measures.

The problems involved in this method of receiving returns became evident in the sudden and unpredictable expansion of the West after 1900 which followed the completion of the Canadian Pacific Railway and the deepening of the St. Lawrence waterways. The tariff became successful to the point of embarrassment. The marked increase in revenue, the complaints in the West against monopoly,^[5] the profits of the Canadian Pacific Railway and the incentive to other lines, the Grand Trunk in the East and the Canadian Northern, to build competing transcontinental lines, led to the construction of the National Transcontinental line from Quebec to Winnipeg and its extension in the Grand Trunk Pacific to Prince Rupert in the West and Moncton in the East, and of the Canadian Northern from Vancouver to Montreal. These costly and marginal lines became involved in difficulties with the opening of the war and were forced through bankruptcy into the hands of the Government.^[6] Government assistance which through the disappearance of free land took the shape of direct contributions in the National Transcontinental and the guarantee of Government bonds in the case of the Canadian Northern led to Government ownership.

The post-war period has been characterised by attempts under Government ownership to merge various railway systems into the Canadian National Railways. Heavy investments of capital have been made in rolling stock, betterments, branch lines, directly concerned with Western traffic, and in hotels and steamships designed largely to round out the system and to reduce heavy overhead charges. The Government has been concerned with improvement of the St. Lawrence waterways, the enlargement of ports, the building of the Hudson Bay railway and in other developments requiring heavy capital outlays. The Canadian Pacific Railway has expanded the system to maintain and improve its position in the face of Canadian National competition. Expenditures on transport and navigation are indicated in the following table:

The effects of the decline in wheat production and exports on this huge capital outlay may be suggested. The more conservatively capitalised, earlier built and more strategically located line maintained a dividend rate of 10 per cent. on common stock from 1912 to 1930 and was forced to lower the rate to 5 per cent. in 1931.

The marginal, less elastic,^[7] Canadian National system warrants a more detailed analysis. Dependence of its finances on Government support renders its position crucial to an understanding of the problems of the Government and of Canada. The results of its operation since 1925 were as follows: Canadian National Railways.^[8]

The sharp decline in wheat^[9] production and export is suggested strikingly in the increased deficit. In some sense the deficit assumed by the Government might be regarded as a continuation of the principle by which the tariff was invoked to support transportation and navigation.

The railroad rate structure, in spite of various attempts to ease its weight on Western Canada, tends to rest more heavily on that area^[10] chiefly because of potential water competition in the East. The tariff had in part the effect of increasing westbound traffic in manufactured goods and in that way reducing the burden of the railways and in part the effect of providing the revenue by which the deficits on the railways could be met. In combination with Government ownership the tariff served as an effective weapon by which the returns accruing from the application of mature industrial technique to virgin natural resources were retained by Canada.

The effectiveness of this principle begins to show signs of serious weakness. Wheat production in Canada if it has not already reached its limit has approached very close to it.^[11] The cream has been skimmed off. The marked increase in immigration and in the importation of capital which characterised the period from 1900 to 1914 and to a less extent the period of the war has shown decided signs of falling off. The effects are cumulative. Falling off in the imports of capital leads directly to a decline in customs receipts and to a decline in railway revenue which benefited extensively from capital importations. Railway deficits increase along with the decline of important measures of paying for those deficits. The possibility of lessening the burden of the railway rates in the West disappears, and with it the difficulty of competing with the newly-opened wheat-producing areas of the world increases. The tariff, especially with the teeth inserted in the application of anti-dumping clauses and orders in council, becomes a means of protecting the Canadian manufacturer without compensation in traffic or revenue, and assists in holding up prices as a further burden to Western agriculture.^[12] These long-run factors have been obscured by the more obvious character of short-run factors.

A large portion of the Central wheat-producing area in the prairie regions, notably southern Saskatchewan, has been subject to severe drought, with the result that extensive relief measures have been necessary during this present winter. How far the soil drifting so conspicuous in 1931 may become a permanent feature of Western agriculture is as yet difficult to determine. The demands for relief have been extensive and urgent, and territory which formerly contributed largely to traffic and railway earnings and to revenue from the tariff, has become to some extent a negative area making drains on the federal and provincial governments and on the railroads for relief. The wheat crop for 1931 has been estimated at 271 million bushels.^[13]

The effect of these long- and short-run factors on Eastern Canada have been direct but complicated with other developments. The demand for Eastern manufactured products such as agricultural implements has been seriously affected, and the returns on Eastern investments in Western Canada, such as on mortgages, have fallen off materially. The post-war period was characterised, however, by rapid expansion of other important industries and by the importation of capital on a large scale in pulp and paper, mining, hydro-electric power and the tourist trade. The development of the automobile^[14] was followed by a marked increase in road construction and in fixed charges. The provinces have spent $326,658,798 on highways, or about one-third of the provincial debt. A total of $32,600,000 on maintenance and $19,300,000 on interest and sinking fund was spent by the provinces on highways in 1929-30, this item quadrupling in a decade.^[15] Interest on these heavy capital investments has been met in part by taxes on motor vehicles of about equal amounts from licences and gasolene (a total of $36,217,733 in 1929). In addition, revenue from the liquor traffic totalled $27,599,687. The relationship of these taxes to the tourist trade is difficult to determine accurately, but the decline of the latter has been generally noted. The statistics of 1930 and 1931 are

possibly over-estimates and the decline suggests, as in the case of wheat, a decrease of capital imports for the construction of roads and hotels, and consequently a cessation of traffic and industry concerned with these permanent developments, and an immediate decline in the tourist trade with a consequent increase in the burden of fixed charges. The problem is accentuated by the continual increase in capital outlays as part of relief programmes—an increase in fixed charges with little immediate prospect of increase in traffic. The railroads have suffered directly in the returns on heavy hotel investments and indirectly in the serious competition from trucks for the remunerative traffic of more densely populated areas. Municipalities have, along with the provinces, become involved in heavy outlays for highways and with similar results.

Like the tourist trade, the pulp and paper industry is closely linked to the swings of business conditions in the United States. But whereas the tourist trade has been greatly influenced by the rise of the automobile, the pulp and paper industry has been influenced by the marked increase in advertising and the general rise of the marketing problem. The exhaustion of raw materials in the United States, the application of mature technique to virgin natural resources in terms of spruce and water power, and the adoption of measures prohibiting the export of pulpwood on Crown lands, were factors contributing to a marked expansion of the industry in the war and the post-war period. Production of newsprint increased as follows:

Reduction in output has been accompanied by a reduction in prices from 55 to 50 on May 1, 1931, and to 46 in January 1932. In 1929 it was estimated that the capital invested totalled 645 millions (353 millions Quebec, 297 millions Ontario). The reduction in output and price has accentuated the problems of over-expansion and led to increasing concentration in the more efficient lower cost mills. The financial difficulties of organisations controlling marginal mills—for example, the reorganisation of Canada Power and Paper, and the reduction of capitalisation from nearly 104 millions to 51 millions—will tend to restrict further expansion. Moreover, the exhaustion of the more accessible resources^[16] supports the conclusion that marked expansion and importation of capital which characterised the last decade will decline to a marked extent. As in the case of wheat, revenue from customs will accordingly decline as well as the traffic and industry which accompany the installation of new mills.

The expansion of hydro-electric power has accompanied the growth of the pulp and paper industry and has stimulated industry generally.^[17]

The capital invested in central electric stations increased from 485 millions in 1921 to 1,056 in 1929 (314 millions Ontario Hydro-Electric). The rapid expansion in the production of hydro-electric power involved heavy imports of capital and intense activity on the part of the construction industries engaged in installation of plants. Demands for labour, materials and services decline precipitately with the completion of construction operations. In turn the heavy fixed charges involved in enormous initial capital investments, especially with large proportions under Government control, and which are generally carried by long-term contracts, prevent substantial reductions to industry.

The mineral industries were closely related to the development of hydro-electric power and expanded rapidly. Production increased as follows:

The industrial metals declined in value partly as a result of a fall in price and an increase in production, and partly as a result of a decline in production. These metals were affected primarily by the demands of the United States. Gold profited materially by the decline of wholesale prices and the weakening of exchange. The total capital employed in the mining industry increased from 632 millions in 1924 to 867 millions in 1929 (427 millions in the metallic industries). The continued expansion of mining with the marked improvement of prospecting methods may be expected, but with such uncertain regularity as to make prediction impossible. Mining development and production involved the import of capital and the growth of industry and traffic. Moreover, it has been important in reducing the overhead costs of the railways on long stretches of line designed for the handling of wheat but running through otherwise unremunerative territory. In-bound traffic for the mining industry offset to a certain extent the heavy overhead costs involved in handling out-bound traffic from Western agriculture.

The fishing industry in the Maritimes and in British Columbia has felt the effects of the depression from the standpoint of both the domestic and the world markets. The lumber industry of British Columbia and of the other provinces, as in the case of all industries producing construction material, has been particularly subject to depression.

In conclusion, it would appear that the long-run expansion of agriculture has tended to diminish materially and that this tendency has been accentuated by the short-run factors of small crops and low prices. The tourist trade has been subject to marked expansion in the post-war decade, but further expansion in permanent equipment, such as roads and hotels, will be much less in evidence, and during the depression the trade has suffered a decline. The pulp and paper industry similarly was subject to rapid expansion and its rate of expansion may be expected to take a decided drop. Hydro-electric power has had a rapid growth and has received a temporary check, but along with mining will probably expand, though much less rapidly. Mining and hydro-electric power, as is suggested by Beauharnois, still continue to offer free gifts, though probably of a much smaller value. Heavy capital investments involved in the initiation of new developments cannot be expected to continue.

The short-run effects of the depression have been obvious. Unemployment^[18] in Canada has increased from about 300,000 in 1930 to about 500,000 in 1931, or over 20 per cent. of the workers (August registration 1931, 397,000 + 130,000 farmers). As relief measures the Dominion Government spent from October 1930 to August 1931 over $2,000,000 direct relief, and under the Unemployment Relief Act of 1930, along with the provinces, municipalities and railroads, about $70,000,000 on relief works, of which perhaps half was distributed as wages. The problem of relief becomes serious in view of the difficult financial position of the provinces and municipalities. The bonded indebtedness of the provinces increased from 644 millions in 1923 to 820 millions in 1929 and was divided in the latter year as follows:

All of the provinces with the exception of Quebec have been unable to balance their budgets or have balanced them by drawing on reserves. In Saskatchewan the Dominion has assumed responsibility for outlays for relief.^[19]

The bonded indebtedness of municipalities increased from 917 millions in 1923 to 1,135 millions in 1929, and was divided as follows:

The provinces were indebted to the banks to the extent of $38,343,852 and the municipalities to the extent of $113,836,283 on October 31, 1931. The provinces are in some cases planning domestic loans, but with the difficulty of securing capital, the completion of relief works of a useful character, and the attempts of the banks to prevent further borrowing, increased unemployment appears inevitable, and in turn increased direct relief.

The position of the Dominion Government is suggested in the following table:

With revenues probably totalling about 310 millions in 1931-2 and with estimated expenditures of $430,000,000, and in addition $75,000,000 for relief and $50,000,000 for the Canadian National, the deficit will be approximately $250,000,000.^[20]

The uncertainty of the situation has been followed by the closing of the New York market, and loans to meet deficits and further expenditures of provinces and Dominion will necessarily be floated on the domestic market. The National Service loan for 150 millions, closed on December 12th, was over-subscribed to about 215 millions. With the operation of the Finance Act it will be difficult for the banks not to avoid depositing Government bonds with the Dominion Government, to receive in return Dominion notes to finance the purchase of more Government bonds.^[21]

In some sense this is Canada’s first serious depression. The long-run secular trend has coincided more definitely with the short-run trend. The cushion provided by virgin natural resources has for the first time shown signs of serious deflation. Its seriousness has been enhanced by the inelastic character of the financial structure. Government ownership has contributed to this inelasticity through such factors as heavy initial cost of constructing railways, through political influence, through construction during periods of high prices, and through the enormous outlays of capital, especially in transportation, which were only made possible through Government ownership. Conservative banking policy and heavy continual outlays of dividends on the part of large corporations have made for further inelasticity. The substantial profits of private enterprise have paralleled the heavy fixed charges of Government ownership. (The heavy inflexible load contrasts sharply with the violent fluctuations of the supporting economic structure. Hitherto the application of mature technique to virgin natural resources has served to support a balanced economy.^[22] In the last decade, in spite of the heavy debt assumed on account of the war, Canada was able by virtue of enormous expansion and the improvement of tax machinery to carry and reduce the load. Rising prices in the boom period in the United States stimulated expansion in Canada in new basic industries, and the period of depression and its serious effects on the prices of raw materials has enormously increased the burden of the debt.^[23] A balancing of the budget assumes a marked encroachment by virtue of fixed charges on the position of private enterprise, which has already been in evidence. In the interests of a continued balanced economy it is imperative that the revenue system should be drastically overhauled from a short-run as well as from a long-run point of view, and that the tariff should occupy a less important position.

By H. A. Innis

The Economic Journal, June, 1932, No. 166.

Publication of the report of the Canadian National Railways for 1931 and of the budget for 1932-3 warrants a brief supplementary note to Economic Conditions in Canada, 1931-2,^[24] in the interests of greater precision and with a view to reinforcement of the general conclusions. The budget speech of one Finance Minister announces a deficit of $119,000,000, expenditures $454,000,000, including $379,000,000 ordinary expenditures, $17,000,000 capital expenditures, $55,000,000 special expenditures and $3,000,000 non-active loans and advances, as against receipts $335,000,000. Net debt increased, therefore, from $2,262,000,000 in 1931 to $2,381,000,000 in 1932. In 1932-3 ordinary expenditures include $236,000,000 of uncontrollable expenditures ($10,000,000 over last year) and other items, practically uncontrollable as a result of severe reductions (to the extent of $35,800,000), making a total for the budget of $369,900,000. Old taxes are expected to yield $319,100,000 and new taxes involving an increase of the sales tax from 4 to 6 per cent., an increase in excise tax on imports from 1 to 3 per cent., and other forms of taxation, such as stamp taxes, are expected to bring in $55,000,000. With only slight changes in the tariff, customs are expected to yield $100,000,000; excise $45,000,000, sales tax $70,000,000 (last year $41,000,000) and income tax $48,000,000 (last year $61,000,000).

The new budget makes no provision for expenditures, other than ordinary expenditures. Other expenditures, including unemployment relief, totalled $75,000,000 last year. The policy of giving indirect relief through public works has been definitely abandoned, with the result that direct relief will become an important item. In addition, the Finance Minister estimates that $16,000,000 will be spent on projects initiated last year. The budget, following earlier practice, has been presented without reference to the Canadian National Railways. The report for the calendar year 1931 shows a decline in net revenue from $22,000,000 in 1930 to $1,000,000 in 1931 and an increase in the net income deficit from $36,000,000 to $61,000,000. In addition, the railroad owes the Government $33,000,000 for interest on loans. It will be necessary for the Government under these circumstances to float a substantial loan in the not distant future.

The demands of the Dominion Government have been paralleled by the demands of the provinces and municipalities. Bank loans have increased as follows:

Provinces and municipalities have been reluctant to convert borrowings to long-term bonds because of high interest rates. Ontario, for example, floated an issue on February 1 of $5,000,000 for three years at 6 per cent. and of $20,000,000 for fifteen years at 5½ per cent.

The demands for capital and high interest rates have contributed to the difficulties of private borrowers. The main items of the bank statements indicate the character of the problem.

Trade statistics for the fiscal year show a decline as follows:

On April 19, exchange on New York was 90-1/16 cents. National income^[25] is estimated to have declined from $5,123,000,000 in 1930 to $3,806,000,000 in 1931. Prospects are not bright for a good wheat crop in 1932.

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.

Some of the tables in the text version have been adjusted to accommodate limited column space.

Two related papers, “Economic Conditions in Canada in 1931-2”, and “Supplementary Note on Canadian Economic Conditions in 1931-2” have been combined into this one ebook.

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

[The end of Economic Conditions in Canada in 1931-2, by Harold Adams Innis]