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By H. A. Innis

Papers and Proceedings of

The Canadian Political Science Association Vol. VI, 1934

This paper cannot do more than pretend to indicate the drift of economic nationalism and it must remain content with an outline of the indications which seem to point in a certain direction. I shall proceed from the following conclusion of a careful student of the subject:

The trend of industrialism has strengthened the trend of nationalism. Industrialism based on coal and iron and on all the year round water transportation implied a world dominated by the Atlantic basin and by areas with ample reserves of these basic commodities. Population density in the coal producing regions assumed transportation and finance for the movement of raw materials inward and of manufactured products outward. Areas with access to cheap all the year round water transportation became dominant as termini of ocean routes and of land routes and were supported by nuclei of economic activity developed in smaller metropolitan centres. These centres have gradually emerged to a position of relative financial independence and metropolitan stature.

The twentieth century and especially the post-war period has witnessed an expansion of new areas, beyond the territory dominated by cheap water transportation and abundant supplies of coal, to territory in which hydro-electric power and oil have played an important role. Oil and electric power have contributed to the flexibility and expansion of metropolitan centres based on coal and to the widening of the whole base to areas formerly handicapped by a lack of cheap supply of that commodity^[2]—for example the opening of the Pacific, or Russia and northern Canada. The last regions of expansion have been staked.

The marked realignment of the post-war period was in large part a result of the contributions to mechanistic improvement of the war period, of the application of new sources of power to transportation, for example the aeroplane, and of a major technological transport improvement the Panama Canal The expansion of mining, and of wheat production, and the Ottawa agreements may be cited as results of interest to Canada. The Hochkapitalismus of Sombart reached immediately before the war and based on coal and coke and iron and steel was rounded out in the post-war period by oil, hydro-electric power and the new industrial metals.

Hydro-electric power development implies a geographic background of adequate rainfall and uneven topography and a region relatively inaccessible to coal in which its competitive advantage is enhanced. Regions formerly under a decided handicap from the standpoint of industrialism as dependent on coal become endowed with decided advantages. Power sites involve enormous initial investments of capital in many cases requiring support of the state. The significance of overhead costs necessitates expansion of power consumption to capacity and in turn the development and encouragement of exploitation of natural resources in the growth of basic industries, such as mining and pulp and paper, and of more highly integrated industries. Whereas hydro-electric power development is strongly characterized by regionalism and tends to be concentrated in a few areas, oil is essentially a basis of mobility since it is widely available and provides its own means of transport. Its impact has been primarily on transportation and distribution. Areas with emphasis on labour rather than on supplies of coal and iron have succeeded, as in the case of Japan in the production of textiles, in expanding the range of markets. Production of raw materials dependent on cheap supplies of power has increased materially for example in the case of wheat as it has been influenced by the tractor, the truck and mechanization generally. In conjunction with the Panama Canal, oil burning vessels have increased the range of markets for Pacific countries and introduced disturbances of far-reaching proportions.

New sources of power strengthened tendencies emerging from the war. Emphasis on the iron and steel industries and on the wide range of industries linked to war demands brought fresh impetus to post-war industrialism. The peace consolidated the gains of industrialism of the war. New nations were carved out and industries which had grown up during the war were supported by nationalism and tariff barriers. Competition from highly industrialized areas with industries stimulated by the war was checked in areas more recently industrialized. Nationalist sentiment and organization developed during the war provided support for tariffs to protect new industries. In turn competition from more recently industrialized areas based on hydro-electric power and the drive of overhead costs, and on oil, on improved technique, and on less exhausted natural resources was followed by tariffs imposed by highly industrialized regions; to protect older industries based on coal and iron, more exhausted natural resources, less tractable labour, and plant affected by depreciation through obsolescence; and to stimulate new industries based on new sources of power as in Great Britain. Nationalism becomes cumulatively more intense. Migration of improved technique and the shift from primary production to secondary production has been hastened by expanding purchasing power and a wider range of markets in the large number of new industrial areas. Increased mobility through transportation facilities particularly evident in the completion of road systems in the last decade and the advantages of new plant and equipment working on lower cost raw materials contributed to the movement in these areas.

The pressure of industrialism based on new sources of power has been most striking in continental regions and large political organizations. Freedom of trade, diversified resources, mature industrial equipment (including the Panama Canal), enormous supplies of capital and skilled labour contributed to the expansion of the United States in the boom of the twenties. Centralized political control, and in turn concentration on the development of natural resources through application of mature capital equipment and skilled labour imported from highly industrialized countries culminating in five year plans in the second large continental region, Russia, combined with expansion in the United States to give capitalism a final strong upward swing which collapsed in 1929. State activity in Europe supported restoration of the devastated areas and credit organization characteristic of the boom in the United States contributed to reconstruction of the capital equipment of Europe following inflation. The marked expansion of credit and of capital equipment in the twenties assumed the efficiency of private enterprise and the support of weaker economic and political organizations to mention only the guarantees of the Canadian government of borrowings of the Canadian National Railways, and loans to Australia, South American republics and to Russia. The pressure of continental industrialism during a period of expansion was followed by resistance on the part of more recently industrialized areas in the form of protection to infant industries. Moreover, the importance of state support for capital borrowings strengthened this trend through reliance on tariffs as a source of revenue to meet interest on loans. United States tariffs accentuated this trend by making it difficult to export goods in payment. More recently industrialized areas, more dependent on production and export of raw materials have been subjected to the effects of the more rapid decline in prices of raw materials and have found it more difficult to meet the burden of fixed charges of capital borrowed during the boom period. They have been subjected as a result of extensive state intervention to heavy fixed charges partly through more rapid decline of prices of raw material and partly through depreciation from obsolescence which accompanied the introduction of new sources of power. In Canada motor competition in areas with heavy traffic density and competition of the Panama Canal have been partly responsible for larger railway deficits to be borne by the government.

Nationalism fostered by the war and the boom period became more intense as a result of depression. Dumping from more highly industrialized countries presents serious problems to industries of recent growth in weaker industrial regions particularly in the form of unemployment and is followed by increased tariffs and anti-dumping legislation. The national policy of 1878 in Canada followed the long period of depression in the seventies, and the present Canadian tariff belongs to the present depression. Relative lack of governmental machinery in weaker industrial regions tends to throw increased burdens on customs administration which becomes in turn a means of controlling exchange, of relieving unemployment, of producing revenue and of maintaining railway rates. Difficulties become evident in internal rigidities and unequal spreading of the burden. Prices of raw materials for exports exposed to world competition crush the primary producer between declining returns and relatively stable costs in terms of prices of manufactured products, of interest on debts, and of railway rates.

Within national boundaries the effects of these strains have been evident in the increasing strength of metropolitan centres. New sources of power and increasing industrialism have been responsible for increasing urbanization and increasing dominance of the city. Democratic institutions accentuate the influence of urban population and metropolitan centres and in turn mechanization strengthens the position of centralized control. Improved communication such as the press and the radio, improved transportation, and the development of modern architecture, for example, the skyscraper, tend to stress similarities of language and ideas. Expansion of the pulp and paper industry has supported intensive advertising and revolutions in marketing essential to the demands of the city. It has coincided with the decline of editorials and of freedom of speech, and the emergence of headlines and the modern newspaper with its demands for excitement including wars and peace to appeal to a large range of lower mental types. The coincidence with the advent of radio of dictatorship in Russia, Germany, Italy, Great Britain, the United States or Canada is not accidental. Mechanization moreover implies more effective utilization of physical force. Machine guns are effective keys to the city. Metropolitan centres have continued to play increasingly important roles in the war, the peace and the post-war period. The peace set its seal on the ambitions of older European metropolitan centres in the breakup of large political units. New nations brought into existence by the Treaty of Versailles reflected the demands of Prague and other centres in opposition to Vienna. Further realignments in the post-war period have continued in the increasing control of metropolitan centres, the weakening of competitors, the decline or disappearance of powers of subsidiary units such as the state or the province in Germany, Italy, the United States, and Canada.

Metropolitan centres in recently industrialized regions which are still important producers of raw materials are strengthened in part by new sources of power^[4] and lower prices of raw materials in contrast with metropolitan centres in highly industrialized regions which have been weakened by higher prices of raw material incidental to protection and economic self-sufficiency, and particularly in relation to wheat. The trend of modern industrialism has been toward the more recently industrialized regions with new sources of power, and less exhausted natural resources, but this trend has been strengthened by cumulative forces in economic nationalism. The results have been evident in the increasing disparity between standards of living of urban and rural population—a disparity accentuated by the increasing strength of established metropolitan centres as opposed to more recently developed centres. The political strength of metropolitan areas implies support of the depressed classes in unemployment relief and the forging of political weapons to operate more effectively to advance metropolitan demands. Recent legislation in the United States tends to reflect the interests of large manufacturers through its emphasis on price fixing arrangements and in spite of determined efforts to relieve agriculture and the exposed industries. The struggle between miner and peasant which has characterized the industrial revolution becomes progressively more intense. Relief through the application of science and closer integration holds little promise, since scientific advance has been particularly important in the production of raw materials. Pressure of technological innovations particularly in large political units with free trade, a large market, and adequate resources tends to be restricted with the growth of nationalism to internal development and in turn leads to the development of internal resistances which take the form of regionalism. Internal pressure again supports attempts to restrict imports of goods produced by lower cost producing regions and reinforces the demand for higher tariff barriers. The results have been evident in the growth of regionalism in the United States, in the recent legislation of British Columbia, and Alberta, and the unrest of the maritimes and threats of secession in Western Australia. Failure to accept the St. Lawrence waterway may be interpreted in part as a reflection of the increasing strength of New York and of Chicago as metropolitan areas and of the increasing difficulty of political organizations in breaking the grip of rigidities characteristic of rail transport.

The development of rigidities has strengthened the growth of nationalism and in turn of regionalism. Large political organizations adapted to periods of expansion become inefficient with the decline in importance of virgin natural resources, and metropolitan areas become increasingly significant. The position of the state in the more recently industrialized areas especially in relation to guarantees of loans to transportation implies ability to rely on general taxing power rather than direct returns and involves a lower interest rate, but this is offset by larger capital outlay than is involved by reliance on private enterprise. Guaranteed fixed interest rates on large capital outlay creates serious rigidities in an economy dependent on raw materials subject to wide fluctuations in price and yield. Governmental guarantees imply an intensification of nationalism on the part of the borrower and the lender. The post-war business cycle has been enormously influenced by the rigidities which have emerged with nationalism.^[5] Rigidities of labour costs in Great Britain and Australia have paralleled rigidities of capital charges, railway rates and interest levels in Canada. The importance of fixed capital equipment characteristic of modern industrialism and particularly in recently industrialized continental countries with emphasis on transportation, on hydro-electric power, and on the expansion of metropolitan centres has emphasized the increasing significance of overhead costs. Heavy fixed charges and overhead costs particularly in continental countries were responsible for policies favoring marked increase in the production of raw materials. These policies became more effective with the addition of motor power notably in the production of wheat^[6] and of minerals. The impact of overhead costs in increased production of raw materials and declining prices has coincided with the extension of fixed charges. Increased specialization in production of raw materials and decline of self-sufficiency involved further extension of a monetary economy and additional burdens with the depression. The low price of raw materials necessitated additional support of the state in relief measures and in market control in various forms. Within the political units involved, metropolitan areas have gained with lower prices of raw materials and have been forced less quickly to adjust prices of finished products particularly with the coincident existence of demand from raw material producing regions which have gained in importance as a result of the depression^[7]—gold mining in Northern Ontario. Prices of foodstuffs (wheat) have been held down further by the spread of nationalism in more highly industrialized regions and the trend toward self-sufficiency. As a result of the importance of overhead costs, in its effects on inelastic supply and especially joint supply, the price level has become an uncertain and far from delicate indicator in adjusting supply and demand. The state has been concerned either with attempts, as in Canada, to restrict production and to maintain railway rates, interest levels and other indications of rigidity in order to avoid the vicious circle of inflation on the ground of attracting capital, or with attempts to reduce interest rates and to eliminate rigidities rather than to restrict production as in the case of Australia. Canada with inadequate, badly co-ordinated, machinery stands on the one hand in danger of being burned at the stake of natural resources and on the other hand of being boiled in the oil of unrestricted competition. It is only necessary to mention the writings of J. M. Clark and the pronounced swing of economic theory to problems of monopoly rather than competition to note the reflection of recent trends in economic development.

The implications of the increasing importance of overhead costs are significant to capital and to labour. Increasing intervention of the state may involve a marked improvement in efficiency and offset in part the stifling effects of rigidities. The pronounced swing from gold and the shift to a commodity basis for the value of the monetary unit is evidence even of the possibility of weakening rigidities! But the difficulties which have involved these developments, as well as the developments themselves, tend to restrict capital movements. Extensive borrowings of recently industrialized countries for purposes of transportation, urbanization and the war have involved a long term burden of fixed charges at a relatively high level and marked increase in production of raw materials for export with consequent lower prices with which to meet heavy charges payable abroad. The effect of uncertain prices of raw materials has been evident in the freezing of short term credit shown in the insistence of the banks on governmental guarantees for the handling of wheat and the decline of speculative activity. Governmental control weakens speculative interest in commodities and securities. Internal control and the shift on the part of new countries from capital importing to capital exporting regions or the marked decline of capital movements between countries implies increasing internal absorption of surplus capital and with determined financial control may be followed by lower interest rates. Increased taxation as a result of the war either directly or by inflation has wiped out capital reserves and the capital supporting middle classes. The emergence of urban centres to metropolitan status assumes not only financial independence but with the demands of modern democracy the absorption of capital surplus in government services. Increasing complexity facilitates bureaucracy and dictatorship. Financial institutions such as insurance companies or investment trusts engaged as capital distributing organizations tend to become more concerned with internal investments which promise greater security. Skill and technique are moved more easily than commodities. Henry Ford prefers to establish plants in other countries rather than export automobiles from the United States.

Population like capital has declined in mobility. Democracy, nationalism and regionalism are involved in vicious circles which imply lowering of the standard of living and protection in unemployment relief and restrictions on immigration. Restriction of immigration is followed by more rapid distribution of population within nations and in turn by the growth of metropolitan regions at the expense of regions producing goods for export. Increasing industrialization and urbanization implies higher standards of living for urban than for rural labour and inability to promote readjustments by back to the land movements or immigration of agricultural labour from European countries. The effects are evident in areas formerly supporting substantial migration such as Italy and the activity of the state in developing industrialism to absorb population and in areas such as Japan which has attempted to combine industrialism with population increase and an improved standard of living. In highly industrialized countries, restrictions on immigration and urbanization have been accompanied in the main by a decline in the birth rate. Lowering of the death rate and decline of the birth rate imply larger numbers of the population in advanced age levels and less flexibility. The war accentuated the contrast between upper and lower age limits and in the youth movements contributed to dictatorship.

The rapid strides of technological improvement which accompanied the war and the use of new sources of power have involved relative exhaustion of the last virgin natural resources. The disappearance of free land has coincided with the rise of nationalism.^[8] The pressure of population on the land has been interpreted as a basic factor in the marked emigration of the last century and the discontent which has characterized the trend toward nationalism in older agricultural regions for example Ireland, Russia, Germany and other countries.^[9] Rise in cost of production, especially transportation, in the agriculture of new countries strengthens the position of agriculture in old countries. Consequently, demands for more adequate domestic wheat supply become less difficult to meet and restricted imports involve less serious burdens on the general economy. Pressure of natural resources and sudden disturbances which accompanied new developments will tend to be less severe. The determining factors in recently industrialized countries have spent their force and flexibility has declined. The trust movement has solidified industrial development. Inventions are patented and placed in cold storage. The metal industries have been influenced to an increasing extent by the market for scrap and to a lesser extent by new ore production. The costs of protecting established industries based on more exhausted resources tend to decline. On the other hand demand tends to become saturated and stable. We have begun the process of abandoning rather than constructing railways, of restricting rather than increasing wheat production, of closing down pulp and paper plants rather than opening them. We avoid saturation in the automobile industry by new models. We protect obsolescence in the iron and steel industry by substantial tariffs. The enormous impetus of the war to iron and steel industries and the relatively light demands, of armaments following the peace treaty, and of railroads with the competition of motor transport, created a surplus of steel for the construction of skyscrapers, bridges and motor cars. But the vital relationship of militarism to capitalism and the modern state which has become to a large extent a collector and distributor of funds for war purposes persists. The depression closed these new outlets for iron and steel products and has led to search for new possibilities which have been satisfied in part by minor wars, the manufacture of beverages following the repeal of prohibition, and the cleaning of slums. Armaments and housing supported by the state appear at the moment the more promising outlets and these strengthen nationalism and metropolitan growth. Russia remains as a possible safety valve for capitalism. The enormous increase in production of raw materials which followed the pressure of the iron and steel industries and new sources of power, whether it is fish or wheat has so disorganized the price structure that it restricts the possibility of financial support to further expansion of iron and steel.

Continental areas with emphasis on capitalistic types of development in terms of heavy equipment, mass production and overhead costs have through mature metropolitan regions witnessed the emergence of rigidities. Maritime areas characterized by increasing density of population without relief by immigration and with access to new sources of power such as Italy and Japan have concentrated on types of industrialism which stress the importance of labour—for example the textile industry. Low prices of raw materials and accessibility to wheat and wool as in the case of Australia, and to products of the Atlantic basin in the case of the Panama Canal have supported strong competition with established textile industries in England and the United States. Retreat from the markets of Pacific areas by Atlantic basin industries accentuated competition between nations in this area and in turn substantial protective duties as in the case of Canada. Continental areas characterized by rigidities tend to be exposed to competition from maritime regions characterized by flexibility.

In conclusion, we have reached the stage in which natural resources in the form of free land have relatively disappeared. In continental countries the importance of fixed capital especially as to transportation, and in turn, of overhead costs, and the importance of new sources of power—oil and hydro-electric power—have involved a marked increase in the production of raw materials and a decline in price.^[10] Cheap raw material, new sources of power and the opening of the Panama Canal have hastened the development of the Pacific and particularly the industrial growth of Japan. Competition from cheap raw materials involved depreciation through obsolescence on a wide scale particularly in established industrial regions based on coal. The rigidity of the credit structure in the coal regions and depreciation through obsolescence has necessitated the introduction of protection and in turn of the complex machinery of economic nationalism. We are faced with the problems of overhead cost on a vast scale, prices have become less satisfactory as indicators, the solution depends on the introduction of economic intelligence which avoids monopoly and perfect competition—nationalism with intelligence—an intelligent dictator (e.g. civil service) preferred. Democracy in its attempt to force governments to meet the difficulties of an increasingly complex economic development has been met with the loss of leadership during the war and the rise of the youth movement, and has been forced to emphasize centralization of control and various forms of dictatorship.^[11] Political duplicity has become an asset of first importance in democratic countries. The stakes are not the downfall of western civilization and the beginning of the new middle ages but a standard of living.

The implications of the struggle for Canada are serious.^[12] Canada developed at the latest stages of modern industrialism and is among the first to feel the effects of the turn. The importance of the state, reliance on production of raw materials for export particularly wheat and the rigidities of continental development create serious problems of internal maladjustment as shown by quotas, bonuses, unemployment relief, the breakdown of provincial federal relations and the like. The sheltered metropolitan areas tend to impose burdens on regions exposed to world fluctuations. These problems have already contributed to a marked extension of governmental machinery and governmental machinery involves more machinery. It would appear probable as has been suggested that areas producing a surplus of raw material may be forced to extend the two price system by which world market price becomes a price of dumped goods and domestic prices are increased by protection.^[13] The resulting disturbances can be prevented only by recourse to the new devices which have already made substantial advances. Exchange controls, quotas, dumping legislation, empire agreements, regional arrangements may endanger or offset the implications of the decline of the most favored nation clause, Elliotism, economic autarchy, and the new weapons which have grown up to take the place of war, according to the wisdom with which they are designed. “The new internationalism is upon us.”^[14] No country stands to gain or lose more than Canada.

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 Economic Nationalism, by Harold Adams Innis]