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By Harold. A. Innis

Journal of Political Economy

Vol. 43, No. 6 (Dec., 1935)

In the volumes reviewed in the October number of this Journal,^[1] Professor W. A. Mackintosh raises problems of fundamental importance to the Canadian economy which warrant emphasis and comment. He expresses the hope that the whole series of studies “will make some contribution toward the development of economic and social planning in a field where the costs of planless development are peculiarly heavy.” “The need for the systematic planning and control of settlements, if heavy financial and human costs are to be avoided, is likely to be greater in the future than it has been in the past.” The problems of planning are suggested in the concluding sentence of Volume IV. “In both public and private finance this region adapts itself to the most important economic characteristic, its highly variable income.” And again, “The combination of highly fluctuating gross incomes with relatively fixed expenses lies at the centre of the economic problems of the prairie regions”—and he might have added of Canada. He has placed before Canadian economists the dilemma of the Canadian economy in the conflict between variability and systematic planning.

The volumes proceed from a discussion of the broad geographical background of the prairie provinces and long-run price changes in relation to the secular trend in the opening of the West, to short-run fluctuations with such disturbances as the World War, and to a detailed analysis of immediate problems. The studies included in Volume IV are concerned chiefly with statistical material for the years ending in 1931.

Stress is laid on the inadequacy of institutions to equalize burdens and gains as between fringe areas and mature centres:

The difficulty of developing more efficient machinery in relation to variability, particularly in the fringe areas, is enhanced by the uncertainty of objectives. Social costs—“In too many instances taxes, interest or mortgages, and other obligations have so burdened the farmer as to place the health and happiness of his family in jeopardy”—are difficult to balance against pecuniary costs; and “however desirable the extension of social services, including the health program may be, they should be kept strictly within the limits of the taxpaying capacity of the people.”

The continuation of the depression and the drought years has enhanced the difficulties of immediate adjustment. Decline in wheat prices and relatively inelastic support from natural resources shown in retreat from drought areas and in advance in the park-belt areas emphasize rigidities shown in transportation costs and debt charges. “By 1932 the decline of wheat prices had been so great that in some cases half of the Liverpool price of wheat was absorbed in tonnage charges”—without allowing for the effects of the tariff and transportation on costs of manufactured products and on costs of production. The results have been evident in a wide range of expedients including relief, debt adjustment, and substantial governmental support of the wheat market; and of proposed expedients including lower tariffs, amalgamation of the railways, and social credit. The problem is not only one of adjustment between fringe areas and mature centres within the prairie provinces, but also between the prairie provinces and other parts of Canada. The problems of planning in Canadian federalism are extremely complex and alternatives or expedients are difficult to discover.

The problem has been raised in other regions such as British Columbia and the maritime provinces in the form of demands for compensation for burdens imposed by the tariff^[2] and for readjustment of the subsidies. While no formula can probably be devised which will avoid expedients, nevertheless basic considerations are essential to any approach to the subject. Subsidy arrangements are conceded as unsatisfactory, partly because of their rigid character. Not only has it been constantly necessary to struggle for, and to grant, revision, but numerous shifts have been necessary and have taken the form of additions to capital equipment such as railways, ports, and canals, statutory reductions in railway rates such as the Manitoba rate agreement, the Crows Nest Pass rate agreement, the British Columbia rate agreement, the maritime freight-rates act, and concessions of various sorts. Major adjustments as to natural resources of the provinces have been completed within the last year and the ground has been cleared for a general overhauling of the problem.

Enormous expenditures on the part of the government in improvement of navigation, particularly on the St. Lawrence River, the transcontinental railways (the Canadian National, besides assistance to the Canadian Pacific) and in port facilities, and the relative rigidity of interest rates on government borrowing to secure this equipment, especially with large amounts held abroad, implies inability to meet these charges directly from earnings and the necessity of relying on payments from revenues obtained chiefly from customs. The effect of the tariff has been partly to provide revenues to meet these charges and partly to prevent imports, and in turn to force areas most distant from the industrial centres of the St. Lawrence region to purchase from that region and to pay the freight on the manufactured goods involved. In so far as the tariff is not successful in keeping out goods and the railways are not used, customs are collected to meet the loss involved in not hauling the goods. The burden of transportation charges, either direct as railway rates, or indirect through the tariff, tends to be thrown on the more distant regions. These regions are, in the main, producers of raw materials, chiefly for export, and the weight of the burden varies with fluctuations in prices and in yield and with other factors.

The burden tends to fall more severely on an old region with relatively exhausted raw materials than on a new region with abundant and rich natural resources. A sudden improvement in transportation such as the Panama Canal may lower costs and consequently reduce the burden. An upward swing of the business cycle will tend to alleviate its severity, particularly in a region where lumbering is important. The character of the commodity produced and the character of economy involved will affect the weight of the burden. It follows that mathematical calculations as to the weight of the tariff, although suggestive, are of limited value and that adjustments should be made annually rather than over a long period of time.

Devices for achieving adjustments are limited in scope. Statutory reduction of railway rates has been a favorite device, but it involves rigidities. Statutory rates generally applicable to raw materials tend to force railways to rely on the higher rates of manufactured products and in turn on the tariff. Moreover, rates are compelled, to an important extent, to meet competition from American lines and this compulsion restricts not only Canadian manipulation of rates, but other possible lines of policy. Control over exchange rates involving wide variation between prices of Canadian and American funds creates difficulties in Canadian railway finance. Again, transcontinental railway systems become unwieldy and rate adjustments and railway policy tend to be developed in relation to long-haul traffic. These factors necessitate emphasis on the principle of charging what the traffic will bear, or increasing rates in non-competitive areas to meet losses in competitive areas. The advantages of water competition are evident in the growth of industrialism; and the development of truck competition again involves losses to the railways in heavy-traffic areas and accentuates reliance on higher rates in non-competitive raw material producing areas. Lowering of the tariff and further statutory reduction of rates in non-competitive areas which are generally raw material producing areas would in part solve the problem, particularly if these measures increased the revenue of the railroads through increased traffic.

Increased traffic in the crucial wheat-producing regions of the prairie provinces is dependent on the weather. A marked increase in volume of traffic following a good harvest—assuming a policy on the part of the government favorable to export—enormously increases gross earnings with a smaller proportional increase in expenses; and, conversely, a bad crop is followed by a marked decrease in volume and by a marked decline in receipts with a smaller decline in expenses. The accentuated character of depression and recovery incidental to the problem of overhead costs is reflected alternately in reduced or expanded earnings of the railways or in the passing or payment of dividends on the Canadian Pacific and the contraction or increase of deficits in the Canadian National. In the former case shareholders bear part of the loss and in the latter chiefly those who are compelled to bear the burden of the tariff, depending on the proportion of customs revenue going to the railway. Depression tends to accentuate the burden of those least able to bear it. Control over railway finance may, of course, reduce the burden, but the possibilities of such reductions are limited.

The difficulties involved in restricting crop acreage and volume of production are apparent. The relative inelasticity of railway rates^[3] during a period of depression is accompanied by difficulties of shifting labor to alternative occupations or to new land, in spite of the terrific pressure.^[4]

These circumstances provide the background for attempts to provide assistance to farmers in creditor-arrangement acts and direct relief for the more exposed groups of farmers, and bonuses on wheat and pegging of wheat prices of particular interest to less exposed groups. Again the losses tend to fall on those particularly exposed to the burden of the tariff. A policy of holding wheat, while it may reduce overhead costs incidental to elevators, leaves the railroads and transportation generally subject to fluctuations in traffic and earnings and thereby involves the government not only in the direct losses on wheat but also in indirect losses on transportation. Again, a policy of protection accentuates the necessity for these devices but they may flatten out the decline to the advantage of farmers in the acute stages of depression, even though the farmer pays for it from his own pocket.

As a result of these limitations on public action, widespread relief tends to wait upon developments in other countries, particularly the United States. Recent monetary adjustments in the United States have been accompanied by material improvement in Canada but the Canadian economy, with its relative inelasticity, tends to suffer as a result of a lag in American adjustment. British policy unfortunately was too far in advance of American policy, with the result that Canada was pulled between low prices in the British market and heavy interest charges on loans to the United States.

The difficulties of Western Canada contributed to and were accompanied by difficulties of a similar but divergent character in the maritime areas of the Atlantic and the Pacific, depending in part on the character of the commodities involved and on the geographic background. In British Columbia^[5] high transportation costs from the industrial areas of the St. Lawrence have been offset partly by lower statutory rates, by abundant natural resources in base metal and gold mining, forests, and fishing, and by the effects of the Panama Canal shown in imports, and in increasing exports of wheat from Alberta. But heavy transcontinental transportation costs, except in so far as the railroads are forced to meet water competition, tend to stress coastal rather than internal development and to warp the economic life of the area into specialization in raw materials, particularly lumber.^[6] Aside from the interrelations between British Columbia and the prairie provinces and the long-run effects of the burdens of protection, short-run fluctuations as shown in the present depression have peculiar effects on the coastal region. Lumber is particularly susceptible to price fluctuations but losses have been offset by the low cost and accessibility of raw materials. Metal mining (lead and zinc) has had the advantage of abundant raw material and the region covered has been assisted by heavy investments of capital in by-product industries such as fertilizers, and by the direct interest of a transcontinental railway. Gold mining has responded to the influence of the depression and to monetary policy. Agricultural exports, especially apples, have been handicapped by low prices and high costs of supplies. The fishing industry has been similarly burdened. In contrast to the effects of the depression, particularly in the coastal region with its severe problems of topography, heavy outlays of government expenditure on such items as bridges, roads, and railroads have involved fixed charges, deficits, lower standards of living, and unemployment.

The maritime provinces, with their dependence on lumbering, fishing, and agriculture, have been similarly exposed to sharp declines in export prices, have had less of the cushion of natural resources on which to rely, and have been directly affected by competition from commodities brought in from relatively unexploited areas on the Pacific Coast through the Panama Canal. Although nearer to the European market, they have been forced to meet more intense competition. Coal mining has gained from protection and subventions, but, as in the case of British Columbia and the prairie provinces, these concessions and statutory rates tend to be paid for by the regions concerned and/or at the expense of other regions similarly exposed.

The effects of the distribution of the burden of the fall in prices of raw materials have been evident in turn in the central provinces. Sheltered industries have been unable to dispose of their products and unemployment has been a result. The bankruptcy of municipalities has been conspicuous in this region as in other regions. Relief has perhaps been more generous and decline in the standard of living less conspicuous. But weaker groups have suffered here as elsewhere. The pulp and paper industry has suffered drastic capital reorganization. Gold mining has increased even more than in British Columbia. The advantages of the St. Lawrence region in cheap water transportation with an outlet for its own agricultural products and for those of the prairie provinces, with lower rates by rail, water, and motor truck as a result of competition, with cheap supplies of hydroelectric power, with important resources of mineral wealth, particularly nickel and gold, have been evident in a highly integrated economy with relatively high population density, with political power, and with possibilities of rapid shiftability of resources enabling the region to take advantage of low prices of raw materials in other parts of Canada, to break down possible industrial development of such regions which threaten competition, and to capitalize on advantages available in export markets, as, for example, through the Empire trade agreements.

A policy of protection increases the advantages of the St. Lawrence region by facilitating the establishment of additional industries and contributing to further integration. Manufactured products demanded by raw-material-producing regions are produced at higher costs and carried at high rates over long hauls. Railway rate policy favorable to development of long-haul traffic further weakens the industrial possibilities of raw-material-producing areas. The relative unshiftability of resources in raw-material-producing regions and consequent specialization, the emphasis on capital equipment in production of raw materials, subject to relatively inelastic demand, and possibilities of monopoly prices, slow up the adjustment of prices between raw materials for export and prices of manufactured goods for the sheltered market. Regions with advantages of natural resources, soil, climate, and the like, gain from the fact that industries are compelled to concentrate, to an increasing extent, in more efficient areas or firms. The contraction weakens the position of more marginal areas or firms and compels them to shift the burden particularly to labor in lower wages or unemployment. Credit difficulties imply bankruptcy or involve increases in government assistance. For example, automobiles produced in the St. Lawrence region and sold at higher prices than in adjoining areas in the United States are used in smaller numbers than they might be in the raw-material-producing regions, with the result that financial problems of roadbuilding become more acute, expenditures of provincial governments and municipalities are increased, and taxes on automobiles and gasoline are higher. Attempts to build up Canadian industries in relation to the demands of raw-material-producing regions tend to raise costs not only directly but also indirectly, by providing less efficient equipment than could be obtained abroad.

The impact of this background on the fundamental financial principle of confederation is evident in the contraction of the value of natural resources on which provincial finance was based. “At Confederation it was decided to make of the natural resources the cornerstone of provincial finance.” The financial basis of the provinces is weakened by reduction of exploitable natural resources and by additions to their burdens. The regional problem indicated by Professor Mackintosh has been accentuated, since not only the raw-material-producing regions are affected, but also the municipalities or subregions. Taxation rests with greater weight “on the pioneer than on the established communities” and the burden is accentuated during a period of depression with relative exhaustion of resources.

The limited possibilities of tariff reduction as a solution to these problems consequent upon the extent of fixed charges, and the inevitable significance of government ownership of railways, canals, and ports necessitates consideration of other alternatives.^[7] Expediency has necessitated contributions of relief from the federal government and assistance in various forms to the provinces. Suggestions that costs of social services should be transferred to the dominion neglect the complexity of the problem and probably would involve greater assistance to the provinces of the industrialized area than the raw-material-producing regions. It is of first importance that continued thorough investigation should be made by such bodies as economic councils in the separate provinces and the economic council of the Dominion. The character of the problem shifts in each region with phases of the business cycle and necessitates constant readjustment of provincial and federal relations. Increasing dependence on sources of revenue other than the tariff, such as the income tax, is inevitable. The depression has shown clearly the haphazard character of existing machinery and the necessity for continued application of economic intelligence. The development of new machinery must be such as will take into account problems of the Canadian economy as a whole and will rapidly adjust burdens and returns through the economy in relation not only to pecuniary but also to social costs. In some such way the dilemma propounded by Professor Mackintosh may be attacked.

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 Notes on Problems of Adjustment in Canada by Harold Adams Innis]