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By H. A. Innis

Fifth Pacific Science Congress, 1933

The effects of a major improvement in water transportation are of profound significance to modern industrial development. The task of attempting to describe the changes following the opening of the Panama Canal demands an analysis of a far-reaching character. This paper cannot pretend to do more than outline the main results and suggest their complicated inter-relations.

The Panama Canal was opened on August 13, 1914, but it was not until difficulties with regard to slides in the cut, and the effects of war and its demands for ships, were overcome that traffic began to flow through this new channel.^[1] Depression in shipping rates after cessation of the War, and the consequent release of tonnage, was followed by a marked increase in cargoes. The most striking increase was shown in United States intercoastal traffic between the Atlantic and the Pacific. Ships released from control of the Shipping Board sought the protection of intercoastal acts, “the best of our privately owned merchant fleet deserted foreign trade routes and entered the protected trade between the Atlantic and Pacific coast . . . In spite of keen competition among intercoastal shipping lines this business is more profitable than most foreign routes.”^[2] In 1931 vessels of United States registration carried 11,805,132 tons or 47.1 per cent. of the total cargo locked through the canal. It has been of first importance to the United States, and in turn to the world as influenced by the expansion of the United States in the past decade, and of less importance to the development of trade between other countries.^[3]

The effects of the expansion of intercoastal trade were registered in the traffic of transcontinental railways, particularly lines west of the Mississippi to the Pacific, but statistics compiled to show the effects of canal competition are extremely difficult to interpret. Marked differences in business conditions, and a general increase in traffic following improvement of transportation with the opening of the canal, are factors disturbing the general trends. If, however, during a period showing a marked increase in total traffic, railroad traffic declines, it is obvious that competition is severe. The effectiveness of water competition is also evident during a period of decline in total traffic, in an even sharper decline of rail traffic. An extended study by A. K. Henry concludes that

The advantages of inland cities with reference to the Pacific market have been converted to penalties.

The railroads, particularly those running west of Chicago, have been handicapped in their attempts to offset loss of traffic and have presented elaborate briefs to the Interstate Commerce Commission asking for relief from rigid application of the long and short haul clause to Pacific ports.

It is evident from tables 1 to 6 that westbound rail traffic, excluding coal and coke, live-stock, and petroleum products, had an increase from 100 per cent. (1913-4) to 136 per cent. (1926), but a decline to 76 per cent. in 1931. Eastbound traffic, on the other hand, showed an increase from 100 per cent. in 1913-4 to 200 per cent. in 1926 but a decline to 133 per cent. in 1931. Total eastbound traffic increased more rapidly than westbound traffic and consequently the railroads were possibly in a stronger position to maintain and increase eastbound traffic while they lost westbound traffic. Coal and coke, live-stock, petroleum products, and all other commodities increased as to westbound rail traffic from 1913-4 to 1926 but declined sharply to below the 1913-4 level in 1931 and increased as to eastbound rail traffic in 1931 over 1913-4. The results were evident in a serious empty-car mileage problem. “It is this empty-car mileage which particularly concerns the transcontinental railroads.”^[5] The Panama Canal was regarded as a major factor in the receivership of the Chicago, Milwaukee, and St. Paul. The Interstate Commerce Commission, in spite of the arguments presented, has refused permission to establish rates to meet canal competition on grounds that such rates would not be “reasonably compensatory”.^[6]

The following statistics (tables 1, 2, and 3) have been taken from The Transportation Problem in the United States—Statement on behalf of the transcontinental railroads relating to water competition for transcontinental traffic and supplementary to report of the Association of Railway Executives to the National Transportation Committee (New York, Dec. 8, 1932).

These far-reaching effects are transmitted directly to Canada. In spite of greater flexibility of the rate structure under the Canadian Board of Railway Commissioners, which permits violation of the long and short haul clause on transcontinental traffic, Canadian rates are largely determined by American rates.^[7] Blanket rates prevail on intercoastal traffic between important ports and force down rates effectively in Canada. While competitive, transcontinental traffic of Canadian roads has suffered directly with transcontinental traffic of American roads, the effects of the Panama Canal on Canadian roads have been evident in widely different directions. The Canadian transcontinental systems have been profoundly affected by the staple product, wheat, and the effects of the Panama Canal have been most conspicuous in relation to that commodity. The position of Vancouver as a port for the export of wheat was improved with an order in 1925 requiring the Canadian Pacific Railway and the Canadian National Railway to reduce rates within Canada on grain and flour for export to Pacific ports, to the same level as such products would carry if moving eastward for export. In 1926 the Canadian Pacific Railway was allowed to assume a mileage of 766 miles (the distance from Edmonton to Vancouver) for a mileage of 642 from Calgary to Vancouver. Rates were equalized between Calgary and Edmonton to Vancouver and in turn by the Canadian National to Prince Rupert.^[8] Rates on grain from Calgary and Edmonton to Vancouver were 20 cents per 100 pounds or 12 cents per bushel in contrast with 26 cents per 100 pounds or 15 cents per bushel to Fort William. The advantage in rail rates was offset in part by the fact that in spite of a shortening of the route from Vancouver to Europe by 5,600 miles through construction of the Panama Canal, the distance from Vancouver to Europe was still 10,000 miles in contrast with 3,250 miles from Atlantic ports to Europe. The canal route is in consequence extremely sensitive to ocean shipping rates and shipments are discouraged in direct proportion to shipping rates. The effectiveness of Vancouver as a port of export for wheat from the interior varies with shipping rates. Low rates permit shipment from points farther east from Vancouver.^[9]

The first experimental cargo of grain was sent to Europe from Vancouver in the fall of 1917, but regular shipments were only inaugurated in 1921; since that date exports of wheat to Europe have increased year by year as shown in the Vancouver column of table 7.

The increase in exports from Vancouver has developed in spite of various handicaps. Limited storage capacity restricts the development of a market and grain moves from the interior on the basis of permits to avoid a blockade at the port. Moreover, the absence of a large local market for grain in British Columbia has restricted exports of certain grades.^[10] In eastern Canada a wider range of markets is available including the flour mills of eastern Canada and the United States, and more liners are available in a large number of Atlantic ports. Wheat can move to Fort William without affecting the range of markets. Extension of the storage capacity of internal points to facilitate shipments by Atlantic or Pacific ports may offset in part the handicap of Vancouver. Again the depression has been responsible for emphasis on hand-to-mouth buying from the European purchaser.^[11] He buys only a short time ahead and the length of time for the shipment becomes an important factor. A large proportion of wheat has been shipped from Vancouver unsold and at the risk of the shipper, whereas wheat is sold from Atlantic ports before shipment and the risk is consequently reduced. The demand of European importers for small lots weakens the position of large cargoes as opposed to mixed freights. These factors operate as deterrents to Vancouver. The lack of an exchange market in Vancouver has been offset in part by the expansion of the pools^[12], especially with their own elevators.

It has been suggested in the analysis by Mr. Evans that fluctuations in exports from Vancouver have been directly the result of fluctuations of the total crop rather than of Alberta crops.^[13] Navigation which is open all the year, as contrasted with the seasonal navigation of the St. Lawrence Waterways, has been responsible for the export of over 50 per cent. of the grain in the four months November to February. Exports on a large scale begin in October, reach a peak in December or January, decline after March or April, and reach a low point in August and September. He suggests that the expansion of Vancouver has been partly the result of the lag between the storage capacity of the eastern ports and the expansion of wheat production in western Canada.

The effect of the Panama Canal on the railways is difficult to estimate. In so far as it contributed to a reduction of rates, it accentuated the effects of the high price of wheat and the expansion of wheat production, which accompanied mechanization and the introduction of gasoline, and the introduction of new varieties of wheat. In Alberta expansion in acreage and production was more directly linked to the effects of the canal, and the shift of wheat movement to Vancouver has possibly increased costs through the re-arrangement of transport facilities, particularly in the handling of empty cars. In a period of expansion its effects would be less evident for the railroads, but in a period of depression the movement of wheat by Vancouver would assume a more serious aspect. Assuming a more direct relation to the expansion of production in Alberta and that the effect on the railways from the standpoint of wheat movement has been of minor importance, we have still to consider the effects of expansion on the more remunerative traffic of manufactured products. A decline in the movement of traffic in manufactured products from the industrial east to British Columbia and the west is of particular consequence.

The effect of the movement of bulk cargoes from the west coast to the east is shown in the unequal load factor of vessels. In 1925 Vancouver exported 6.9 tons to Europe for each ton imported; in 1926, 7.5 to 1; and in 1927, 8.1 to 1. “The load factor presented by Vancouver-Europe traffic is very unfavourable, the return traffic on the average, being insufficient for ballast.” The load factor from Europe to the west coast of North America is less unfavourable but important ranging from 3.2 to 1 in 1925, to 4.7 to 1 in 1926, and 5.2 to 1 in 1927. As a result, competition for west coast traffic is very keen and rates very low.^[14] A large part of the wheat traffic is handled in bulk on tramp steamers, which accentuates the unfavourable balance, but in addition steamships on regular schedule^[15] are sufficiently numerous to provide ample space. The Report on the Influence of the Panama Canal on Trade with Western Canada, June, 1930 (C. 3319) concludes that “in most cases Manitoba points are best reached via Eastern Canadian ports; Saskatchewan is border-line territory, but Alberta and British Columbia destinations can most cheaply be reached by all classes of commodities by means of the Panama Canal route”. The length of time, 33 to 49 days from the United Kingdom to Vancouver via Panama, is a serious handicap. The following comparisons in rates are illuminating:

The effect of the Panama Canal on transcontinental rail traffic from the Atlantic seaboard has undoubtedly been important. Not only has European traffic shifted but also traffic from eastern Canada. In spite of the fact that the distance by water from Vancouver to Montreal is 7,260 miles and by rail 2,905 miles, traffic has shifted from rail to water. Exports from British Columbia to eastern Canada have been primarily bulk raw materials and staple products in which the relatively virgin natural resources compete effectively with relatively exhausted resources in eastern Canada. For example, in 1931 Vancouver exported to eastern Canada 55 tons of pulp, 2,950 bundles of shingles, 97,043 cases of salmon, 14,968,024 board feet of lumber, 177,440 poles,—a total of 28,231 tons as contrasted with imports from eastern Canada of 38,388 tons. In spite of the difficulty of the sea route to Vancouver with the closed season on the St. Lawrence, eastern Canada increased exports to the Pacific seaboard and internal points from 6,315 tons in 1923, to 36,039 tons in 1928 and 67,201 tons in 1929. Competition of British Columbia lumber in eastern Canada and elsewhere weakened the position of eastern lumber^[16] manufacturers and accentuated the expansion of the paper industry, particularly in the Maritime Provinces. The difficulties of the paper industry have been partly the result of such expansion. The effects of this shift on the railroads, first by reducing transcontinental westbound and eastbound traffic, have been more important than the statistics indicate. Since 85 to 90 per cent. of eastbound traffic from British Columbia moves on commodity rates, i.e. lumber, shingles, canned, fresh, and pickled fish, canned fruits, vegetables, rice, and sugar, revenue is kept down by potential competition. The small proportion of traffic moving by class rates is even more seriously affected. Transcontinental Canadian traffic has been affected as well as traffic in eastern Canada. It would be difficult to estimate the extent to which industry has tended to shift to the seaboard, following the example of industry in the United States. Such tendency would favour Montreal and the Province of Quebec generally. The location of Canadian industry, and particularly the completion of the Welland Canal, will tend to make the pull toward the Atlantic less effective. On the other hand, competition by water will tend to reduce rail rates to western Canada and help to hold industry in Ontario.

The effects of the Panama Canal on traffic are of great importance to routes which include long stretches of ocean transport, and the shortening of long water routes has been of first importance as shown in traffic from Vancouver to Europe. Similarly for traffic from the Orient and the Pacific to eastern Canada, water routes have been shortened 3,000 miles between Montreal and Yokohama and 3,500 miles between Montreal and Sydney. The introduction of gasoline, the development of motor ships, and the opening of the Panama Canal have contributed to the marked expansion of the Pacific area. Lengthening of the range of vessels and reduction of bunkerage space with the use of oil have been responsible for marked development^[17] during the past decade in countries bordering the world’s largest ocean. This expansion has been evident in the growth of round-the-world services which place the Mediterranean and the Caribbean areas on through routes, and in the introduction of lines between distant points on the Pacific and the Atlantic. Opening of the Orient has accompanied and accentuated the growth of trade by the Panama to the eastern coast of North America, both of the United States and Canada. Lines have been developed between New Zealand and Great Britain to handle products in competition in that market with other countries. Undoubtedly the Panama Canal was an important factor in the growth in imports of New Zealand butter to eastern Canada. If the Liberal government went out of office in 1930 on skids greased with New Zealand butter, the Panama Canal^[18] may be shown to have had far-reaching economic and political results. Similarly eastern Canada has gained through supplies of oil and gasoline obtained from the western coast of South America and the United States.

The effects of the Panama Canal on the east and west coast trade of Canada in relation to external trade are evident in part in the total Canadian traffic passing through the canal.

Traffic passing through the canal to the Pacific increased rapidly from 1924 to 1927 but declined rapidly after that date, chiefly as a result of fluctuations in mineral oils. Traffic from the east coast to the Pacific is of relatively minor importance. As has been shown, traffic to the west coast increased rapidly in 1931 and was dependent to a very large extent on Europe and the United Kingdom. Wheat, lumber, apples, and fish were important items in traffic from the west coast. On the whole, it has been suggested that, excluding grain tonnage, the total tonnage to 1927 in and out of the east coast exceeds that of the west coast; that the east coast lost to the west coast part of the latter’s imports from Europe; and that the west coast lost to the east coast part of Canada’s imports from Pacific countries; and that the canal possibly diverted from British Columbia ports^[19] a little larger proportion of Canada’s growing traffic with the Pacific countries than it added in the way of direct imports from Europe. The east coast lost something to the west coast in exports, e.g. grain, and the west coast lost to the east coast a portion of Canada’s exports to Australia and the Orient.

The extremely complicated and far-reaching effects of a major improvement in water transportation are difficult to isolate. From the standpoint of general principles, the advantages of water transportation are most obvious in the movement of bulky commodities. Consequently, such improvements as the Panama Canal tend to widen the range from which raw materials may be brought and to lower costs of production in established industrial areas, particularly those areas which have grown up in relation to water transportation and coal. In part the results are shown in a rapid expansion of areas producing bulk raw material. Expansion in the production and movement of raw materials tends to foster industrial growth by giving a strong stimulus to a return cargo, although, on the other hand, such a return cargo will be made up of cheaper manufactured goods and industrial growth will be checked. Moreover, the tendency to develop special types of boats and to weaken the “tramp” has checked the importance of return cargoes. Undoubtedly the expansion involves a pull to the south and the development of the tropical regions—for example, South America and the West Indies^[20], and it enormously strengthens the importance of all-the-year-round navigation to industrial growth. Industrial centres, such as Great Britain, the eastern states and eastern Canada, and Japan, have gained enormously. With cheaper supplies of cotton, Japan has strengthened her position in the Far East and been able to purchase^[21] larger supplies of Canadian wheat. Specialization has been accentuated and industrialism stimulated.^[22]

Realignments have been of far-reaching importance—capital expansion in areas which have materially improved in relation to raw materials and markets, and depreciation through obsolescence of plants which have lost markets in the face of more effective competition. Resistance has been set up in tariffs designed to protect the Canadian dairy interest against New Zealand butter and to check losses to eastern Canada and the railroads,^[23] and in a changed fiscal policy and imperial conferences. The problems of Great Britain have been accentuated by the competition of Japan in the Orient, of the United States in South America, and by the increasing importance of round-the-world services and of oil in contrast to coal. The development of trade between Australia and New Zealand and eastern Canada, and in turn trade agreements between these areas, have been made possible by the Panama Canal. Decline of the lumber industry in eastern Canada and expansion of the pulp and paper industry have brought their own problems. The railroad problem of Canada has been accentuated by the problems of water competition and of competition from American lines. The industrialism of North America has been strengthened materially. In the main, the position of raw materials has been weakened as a result of competition from new areas. Production has increased with expansion to new areas and the decline in prices of raw materials has been accentuated. In turn the position of countries producing raw material has been weakened, and as a result the ability to pay fixed charges on capital investments acquired before completion of the canal, as well as during the period of expansion. The opening of the Panama Canal must be regarded as a factor of major importance in the disturbances of the post-War period.

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.

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

[The end of Canada and the Panama Canal, by Harold Adams Innis]