Inflation and War Finance
The Empire Club of Canada Addresses (Toronto, Canada), 6 Feb 1941, p. 322-341
James, F. Cyril, Speaker
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Reference to the Savings Campaign. The dangers of an inflationary policy to finance the war, as shown through some of the experiences that some other nations have had with these policies. The demands that are being made for an inflationary policy in Canada. Remembering the "New Era" in the United States which led to the collapse between 1929 and 1933, and the inflation imposed by the German reparation problem. A simple example of how the inflationary process might have worked in a hypothetical case. Some words from Andrew Jackson White about what happened in the French Revolution with regard to inflation. The example of Solomon and his financial legacy. Why people still want the government to adopt inflationary policies, and reasons for that. What is meant by inflation. Effects of inflationary policy in a broad sense. The question as to whether or not Canada should resort to an inflationary policy, despite the consequences in order that she may put forth her maximum effort in the struggle. An examination of various ways of financing the war, and how nations have done it in the past. Arguments against a policy of inflation. The need to take thought now and rigorously decide on the fiscal policies that we wish to follow, if we are to save ourselves from the ghastly experiences of post-war deflation comparable to those from which the world suffered after 1920. Building the foundations of a satisfactory international monetary system at the end of this war. An examination of Keynesian theory and its inapplicability to the current situation. The lack of any valid argument which would justify resort to inflation in Canada at the present time. The role which Canada is called to play in the war effort.
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6 Feb 1941
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Chairman: The President, The Honourable G. Howard Ferguson.
Thursday, February 6, 1941

THE HONOURABLE G. HOWARD FERGUSON: Gentlemen, before we come to the regular business of the meeting I would like to ask Mr. Wilkinson to speak to us for a few moments on the War Savings Campaign.

MR. ELLIS H. WILKINSON: Mr. Chairman, Gentlemen: I feel it is rather an imposition that you should be asked to listen to these remarks, for most of you are so much more familiar with matters of finance than I am. Still the Chairman has asked me and I must obey. Ten minutes was first suggested as the period of my talk but a friend later told me that three minutes would be ample, and three minutes it is.

May I suggest that we should think of the campaign from three angles? Firtly, the social angle. We all realize that at the conclusion of the war there is bound to be a tremendous social readjustment. If everbody can put by money through the purchase of savings certificates the result will be a very valuable back-log of cash to help through the period of readjustment. Secondly, from the social angle may I suggest that the development of thrift is a vital help to a country at any time and particularly so in time of war. Even though the population of Canada has a large proportion of people of Scottish ancestry there is no reason why we should not endeavour to develop their natural thrift to an even greater extent.

And that reminds me of a story which has just come from Edinburgh about the War Savings Campaign in that city. A woman brought along 1O pounds to buy certificates and announced: "I have been saving up for some time to get a divorce from my husband but I think I can put up with him better than I can with Hitler, so please go and smash Hitler!" I am not suggesting that any of you are saving up with any such object in view, but undoubtedly many of us have expenditures that could be avoided and the money could be devoted to winning the war. As to the financial angle I can say absolutely nothing with intelligence because I know nothing about finance, but I would suggest that we consider the tremendous results that have been achieved in the Old Country in their War Savings Campaign. They have set an objective--and achieved it--of $55,000,000 a month. Australia for the past few months has been saving at the rate of $10,000,000 a month, and that is our objective here.

It was suggested to me that one should put a very strong patriotic appeal into a speech of this kind, but in my opinion such an attempt would only be an insult to members of the Empire Club, for we all know from week to week what members of this club are doing. I wonder how many of us have read The White Cliffs. Those of us who have, have probably found many parts of it provocative and annoying at times. The writer was an American gaining experiences of England and I would like to quote a couple of lines from the last chapter:

"If England should perish and fall, In this world I do not care to live."

THE HONOURABLE G. HOWARD FERGUSON: It is a rather unusual pleasure for one to introduce to this gathering one of our neighbours, Dr. James, head of McGill University, who is so widely known for his educational work in Canada. Dr. James has had rather a unique and remarkable career. An Englishman by birth, he is a graduate of London University and is one of those fortunate educators who has added much to the prestige of his country. He captured the Castle Fellowship which gave him the right to travel and study economic conditions. He came to America and at the University of Pennsylvania studied the economic structure of the United States. In the fall of 1939 he came to McGill as Director of the School of Commerce and Professor of Economics, and had been there only two months when he was appointed Principal of that great institution. Since that time his career has shown evidence not only of popularity, but of exceptional ability as an educator. Gentlemen, I have very great pleasure in introducing Dr. James, Principal of McGill University.

F. CYRIL JAMES, B.Com., M.A., PH.D.: Mr. Chairman, President Cody, Members of the Empire Club of 'Toronto: I searched around for some time, when I was invited to come here, to find a subject on which to speak to you. It seemed to me that at the present moment, when we have a Savings Campaign across the entire country, and at a time when some individuals, often more numerous than those whose names appear in the press, have been suggesting that only by an inflationary policy can we finance the war satisfactorily, that I should point out the dangers of such a policy and give some of the experiences that some other nations have had with these policies.

Those of us who have observed carefully the march of events in the past twenty-five years must catch a sardonic note today in the demands that are being made for an inflationary policy in Canada to finance the war. The words bring back haunting memories of the speeches that were made in the United States during those fabulous years of the "New Era" when unbridled expansion of bank deposits was building the fantastic house of cards that collapsed with such a resounding crash between 1929 and 1933. We have experienced the effects of that inflation at first hand but we have not yet plumbed the depths of the penalty that mankind must pay for that debauch. If there had been no inflation in the United States--inflation that facilitated the foreign loans that made it possible for the world to postpone a satisfactory settlement of the German reparation problem-Hitler might never have risen to power. If Germany herself had managed to avoid the inflationary spree of 1921 to 1923, Hitler might have had no Nazi followers to support him-for it was that ordeal that wrecked the economic machinery of the defeated nation and weakened the soul of its people.

How could men believe in the national honour of Germany when the mark was the laughing stock of the world, or have confidence in social justice when fortunes evaporated overnight? Dr. Schacht, who should have known the facts, tells us that at the peak of the inflation there were engaged on the production of notes for the Reichsbank, one hundred and thirty-three printing offices and seventeen hundred and eighty-three machines. Over thirty paper factories were working full time exclusively for the Reichsbank. How could a stable economic order be built on such a foundation?

Let me offer you a very simple example of how the inflationary process might have worked in a hypothetical case. Last year the total national income of the Dominion of Canada was about $4.650.000,000. Now let us suppose that in 1919, when the dollar was worth about ten marks, a man with a fortune of ten times that sum had invested the whole amount, as he might easily have done, in first class German securities. If that man at the end of 1923 had brought back to Canada all his investments he would have been offered for the lot one Canadian $10 bill.

Men who observed the nightmarish scenes of 1923 in Berlin and of 1933 in Washington, do not talk lightly of inflation. They saw the pillars of society pulled dowry by an unseen Samson and watched the victims crawling painfully from the ruins. Some of them indeed cherish the memories of those who did not ultimately escape.

There is nothing new about the evils of inflation. This is not the only generation to which they have been revealed. I would like to read you a quotation from Andrew Jackson

White about what happened in the French Revolution. White was a professor of History, President of Cornell and later Ambassador of the United States to Germany. He wrote a century after the events so that the heat of passion had cooled and reason held sway. Nevertheless his indictment is one that none of us would wish to see recorded as the epitaph of our generation. He wrote:

"Prices of the necessities of life increased: merchants were obliged to increase them, not only to cover depreciation of their merchandise, but also to cover their risk of loss from fluctuation; and while the prices of products thus rose, wages, which had at first gone up under the general stimulus, lagged behind. Under the universal doubt and discouragement, commerce and manufactures were checked or destroyed. As a consequence the demand for labour was diminished; labouring men were thrown out of employment, and, under the operation of the simplest law of supply and demand, the price of labour-the daily wages of the labouring class-went down until, at a time when prices of food, clothing and various articles of consumption were enormous, wages were nearly as low as at the time preceding the first issue of irredeemable currency.

"The mercantile classes at first thought themselves exempt from the general misfortune. They were delighted at the apparent advance in the value of the goods upon their shelves. But they soon found that, as they increased prices to cover the inflation of currency and the risk from fluctuation and uncertainty, purchases became less in amount and payments less sure; a feeling of insecurity spread throughout the country; enterprise was deadened and stagnation followed.

"New issues of paper were then clamored for as more drams are demanded by a drunkard. New issues only increased the evil; capitalists were all the more reluctant to embark their money on such a sea of doubt. Workmen of all sorts were more and more thrown out of employment. Issue after issue of currency came; but no relief resulted save a monetary stimulus, which aggravated the disease. The most ingenious evasions of the natural laws of finance which the most subtle theorists could contrive were tried--all in vain.... All thoughtful men had lost confidence. All men were waiting; stagnation became worse and worse. At last came the collapse, . . . the complete financial, moral and political prostration of France-a prostration from which only Napoleon could raise it."

We do not, however, have to stop at the French Revolution if we belong to that group of men who refuse to admit that the only lesson of history is that mankind never learns from it. John Law created the prosperity of the Mississippi Bubble in France and solemnly made himself the Duke of Arkansas to celebrate the prosperity that his bank had brought, as well as his own almost regal importance. Within five years the collapse of the Bubble had plunged France into the Slough of economic and moral Despond that bred the Revolution, and Law died, a homeless beggar in Venice.

There are hundreds of such examples in history, but I will content myself with one, the earliest of them all. I speak of King Solomon. His wisdom has become a by word to the ends of the earth. He would have understood very clearly the ideas of those who want the government to augment our economic effort by monetary inflation. When he came to the throne of Israel he found his country very poor from an economic standpoint and suffering from the effects of foreign wars. Having built up his defences and adopted a peaceful foreign policy, he set out to improve the economic position of his people by a huge programme of public works. He built the House of the Lord, a magnificent structure that took seven years to complete, and his own house, which took thirteen years, and the house in the forest of Lebanon. But that was not the whole of his programme, for Solomon also built "Millo, and the Wall of Jerusalem, and Hazor, and Megiddo and Gezer" together with "Beth-Horon the nether, and Baalath, and Tadmor in the wilderness . . . and all the cities of store that Solomon had, and cities for his chariots, and cities for his horsemen, and that which Solomon desired to build in Jerusalem, and in Lebanon, and in all the land of his dominion." In other words, Solomon, as the Bible informs us, not only spent money lavishly on defence but also set out to make a large number of long-range improvements in his capital.

As I have already pointed out, however, Israel at this period was comparatively poor. Where then, did the money come from to finance such a programme? Some, no doubt from taxation, some from the gold mines of Ophir, but most of it came from Hiram, King of Tyre. He it was who "furnished Solomon with cedar trees and fir trees and with gold according to his desire," contributions that were obviously inflationary in an age when the currency was gold and silver that rang on the counter. The Bible does not concern itself with such mundane things as prices and wages, but we do gather that there was very little unemployment during Solomon's reign. Skilled labourers had to be brought in from Tyre and Sidon. We may assume, too, that prices were high, and got steadily higher, for we are told that silver had so decreased in value that it was as common as stones in Jerusalem.

Israel prospered, and men came from far and wide to observe and admire the wisdom of Solomon. Somehow the account of these visits reminds us of the many foreign delegations and committees who came to the United States during the years of the inflationary bubble to learn the secret of American prosperity, though none of them was perhaps so glamorous as the Queen of Sheba, who was attracted to Jerusalem in the hope of learning something from that wizard of finance, King Solomon.

But there was an aftermath to these policies which we should do well to remember, lest we fall into the popular error of imagining that an inflationary increase in government spending is the key to prosperity and maximum output. Solomon, happily for his memory, "died at the appropriate time--a recipe for immortality that should be studied by all who wish to remain great--and Rehoboam reigned in his stead. By that time people were getting a little restive under the high taxes necessitated by the commitments on Solomon's loans. Prices were no longer rising: it would probably be correct to assume that they had started to go down. To Rehoboam, then, came delegations demanding greater economy in government and reduction of taxation. But the King took counsel with his young men-they would have been called his "Brain Trust" in the United States-who liked the ways of royal extravagance and advised him to keep on with the good work. It was pleasant advice, and Rehoboam told the delegation: "My little finger shall be thicker than my father's loins, and now, whereas my father did lade you with a heavy yoke, I will add to your yoke." That is the pictureque phraseology of an Oriental, but what it really meant was that not only would the income tax remain at the same rate, but a new super-tax would be added.

There is no need to study the details of the young King's reign. Nobody has written of the glory or wisdom of Rehoboam, for it was a reign of falling prices and high taxation--conditions that ultimately led to civil war and divided the Kingdom against itself. It was then that the ten tribes were lost; but that is all done with now for British Israel seems to have found them again.

And yet, with all this past record for our guidance, there still remain people who want the government to adopt inflationary policies, for the inflationists, like the poor, are always with us. Why? The answer is simple. Inflation is not a nauseous poison that frightens those who look on it: it is a seductive drug which, like opium, destroys its victims more effectively because it offers initial pleasure and inspires a taste for ever larger doses.

I will not attempt a precise scientific definition of the term "inflation" but I think we may take it to mean all those monetary policies which, usually by an expansion in the supply of money, attempt to increase prices or to keep them from falling in a period of declining cost of production. It is not the supply of money that is important, but the price system. In any economic society, save at moments of acute crisis or disturbance, the existing supply of money is always adequate to handle any volume of business, since price is the mechanism that automatically adjusts these two quantities. It is not an increased supply of money within the country that the inflationists desire, but the effects that they expect that increase to produce on prices and output.

A monetary stimulus, however, can only influence production through the mechanism of price, and the significant fact to remember is that individual prices react differently to the stimulus of inflation. If a doubling of the supply of money doubled all prices--including wages, rents and interest payments-there would be no inflationists. Everybody would have twice as many counters in his pockets, but he would be no better off in terms of the things he desired than he had been before the inflation occurred. The desire for inflation is born of the fact that it provides some people with increased quantities of money while the rest have no more than previously, and the stimulus that inflation gives to productive activity arises out of the fact that some prices rise more rapidly than others. These facts are equally true, no matter how inflation comes about. In the United States, from 1923 to 1929, inflation arose from bank deposit expansion resulting from increased business borrowing. It was the entrepreneurs, in this case, who enjoyed the initial advantage resulting from increased quantities of money, and the inflationary stimulus was first felt in the capital-goods industry. During the last world war, when inflation occurred in each of the belligerent countries, it was the government that obtained increased funds from either the banks or the printing-presses, and the munitions industry that felt the inflationary stimulus when these funds were spent.

I have not time, to-clay, to analyse in detail all the effects of an inflationary policy upon each member of the community, but I would, however, like to draw some broad outlines.

Because of what economists call the varying "elasticity" of different prices, it is broadly true that during an inflationary period raw material prices rise first and farthest; wholesale prices are almost as much affected, and retail prices lag considerably behind. Even in these clays of active trades unions and collective wage agreements, wage rates tend to rise much less rapidly than retail prices, while rents and interest rates are the slowest of all prices in their movement. In the light of this dispersion it is obvious that the industrialist and the producer of raw materials will tend to make increased profits while monetary inflation is forcing prices upwards. The prices at which they sell their products will rise very much more rapidly than the aggregate of the costs of production that each must pay. Speculators, too, will make fortunes since the articles in which they deal will increase in price with every passing day, and all the debtors of the community will reap advantage from the fact that they can obtain the dollars with which to pay their obligations through the sacrifice of a steadily diminishing quantity of real goods and services.

But, to make up for all these gains, someone must be the loser. Inflation does not necessarily increase the aggregate national income available for distribution amongst the members of the community. The chief losers, of course, are the working class and the creditor class. The wage earner finds that his standard of living is steadily depressed because his income increases much more slowly than the prices of the things he customarily purchases. The creditor is deprived of the substance because the dollars he receives when the loan is paid will purchase less of the necessities and comforts of life than they did when the loan was made. It should be remembered, too, that the creditor class, in a modern community, does not consist of the bloated plutocrats, with distended stomachs and gold watch chains as big as ships' anchors across their vests, who figured so largely in the biting cartoons with which Nast adorned the inflationary controversy that racked the United States in the 1890's. The great creditor institutions of today are the sayings banks and insurance companies, to which have been entrusted the funds of millions of ordinary men and women; the universities; educational endowments and charitable organizations, whose funds have been invested in bonds. When these groups suffer loss it is the community at large, and particularly the poorer members of the community, who suffer.

Perhaps I should reiterate the fact, already briefly mentioned, that the price dispersion which makes inflation attractive to those who expect to reap advantages from it is operative only while the supply of money is increasing. A pipe of opium does not make a man happy for the rest of his life. A single increase in the supply of money does not create prosperity for eternity. It merely sets in motion the forces that redistribute the national income along the lines I have mentioned. When the supply of money stops increasing, the upward spiral ceases and financial crisis descends with the nemesis of liquidation in its train. The United States learned that fact painfully between 1929 and 1933. It is for this reason that all inflations in history have ended so disastrously. Successive doses of money, continuously increasing in size, are necessary to keep the wheels of industry whirling feverishly until the point is reached at which money has lost its charm because men no longer believe in its value. At that point we descend into the abyss of industrial collapse.

It may be suggested, however, that, even if all this be true, inflation is still necessary today. War demands strong measures, and it may be that a tot of rum is necessary for the man in the trenches even though there be some danger that it may encourage deplorable alcoholic habits. Is it true that, even at the risk of ultimate collapse, Canada is compelled to resort to inflation in order that she may put forth her maximum effort in the struggle?

Looking at the war coolly and without emotion, it is obvious that the problem of financing it is simply that of finding practical means by which the government can ex tract from the total national income of goods and services an amount sufficient to provide the guns and shells and ships that it needs, as well as food and clothing for its troops. If the total national output of goods and services can be increased in the process, so much the better; but, at all costs, the government must obtain the quantity of munitions and foodstuffs that it needs for the war effort. In theory, the best and simplest way to attack the problem would be by the direct conscription of wealth. The government would nationalize the whole productive machinery of the country and arbitrarily decide what things should be produced, as well as what proportion of total production should be devoted to government (as distinct from private) uses. This, in fact, is what Germany has done under her elaborate system of economic controls, but such an approach is not appropriate to a democratic country. Our government is not organized to run Canadian factories and farms, and we may well doubt that government appointees, appointed hurriedly on the spur of the moment, could run them as well as the farmers and industrialists who have learned wisdom from a lifetime of experience. Such a policy, therefore, might tend to exacerbate the problem by reducing the real national income.

The second method, more appropriate to a democratic country, is that of taxation. The government may not operate factories of its own but, by imposing taxes on all members of the community, it will, at one and the same time, reduce their power to consume and provide itself with the funds necessary to purchase in the market all the munitions and foodstuffs it needs. If one quarter of the output of Canadian farms and factories is needed for the prosecution of the war, the government can take one quarter of the aggregate money income from Canadians as a group and use this revenue for purchasing the goods it needs. Naturally, some reorganization of factories would be necessary. We should need more shells and tanks and corvettes, fewer refrigerators and pleasure yachts; but the change over from one product to another would be made by business enterprises themselves under the stimulus of contracts and expected profits.

Pushed to its logical conclusion this form of war finance is as precise as the conscription of wealth I have already referred to, but it is very hard to push the matter to a completely logical conclusion because there is no perfect criterion of the incidence of taxation. No matter how well the government may work out the scheme under which taxes are imposed it is always certain that the taxes will bear more heavily upon some members of the community than upon others, so that, in actual practice the government tends to raise, by taxation, rather less than the total purchasing power it needs for the effort, relying upon the purchase of war bonds and war savings certificates by the public to make up the difference. Such bonds and certificates are purchased by those members of the community who still have a slight surplus left after taxes are paid and reasonable costs of living are provided for, while the total government revenues from taxes and loans provide it with the power to obtain an appropriate portion of the aggregate national output.

When it is impossible for a government to obtain, by any of these means, control over an adequate portion of the total national output, inflation becomes necessary. The form it takes is unimportant. Dionysius of Syracuse halved the metallic content of the silver coins in his treasury and thereby doubled the purchasing power of his resources. France, in the last war, printed vast quantities of bank notes which were placed at the disposal of the government. The British government sold bonds to the banks, which purchased them by newly created bank deposits. In each case the result was the same. The government obtained increased quantities of money without any reduction in the sums possessed by individual members of the community, so that prices were bound to rise as the result of the competitive spending by governments and private individuals. That rise in prices restricted the power of the average individual to consume, and so freed goods and services for the government war effort.

Frankly, however, we must admit that the whole process was nothing but self-deception and, as a matter of fact, during the last war, each of the governments pro tested violently that no inflation was occurring. In those gentler days it was still believed that the art of deception depended upon the power to deceive, whereas, today, we have reached that stage of mental weakness in which some people openly suggest that the government should deceive us in order to save us, temporarily, from the unpleasant pangs associated with the paying of taxes. In the long run we should be no better off as a result of this cooperative deception, since our individual standards of living would be as ruthlessly cut by the price increase resulting from inflation as by the heavier direct taxation. Thus, the only valid argument for inflation in Canada today would seem to be a frank admission that the people of this Dominion are not sufficiently interested in the results of the war to pay, honestly and directly, the taxes that are necessary for its successful prosecution. No one of us, I think, would dare to make that allegation.

Many people, though admitting the truth of this analysis, will still insist, however, that during the early days of a war some inflation is necessary in order to facilitate the mobilization of the nation's economic resources. It is not easy, overnight, for a government to develop appropriate legislation for the collecting of heavy taxes, so that some funds are needed to finance the war before increased tax revenues can be obtained. Moreover, the reorganization of the nation's productive facilities, so that factories, which normally produce consumer goods, can switch over to war activity, usually involves some delay and expenditure, so that, once again, substantial amounts of money may be necessary during the early months of any war.

This argument may be admitted, but it is spacious and does not apply to Canada at the present time. We have already experienced the initial inflation that was necessary to get the war effort under way, since the total supply of money in Canada (notes in circulation plus total deposits of the chartered banks) is already 16 per cent above the average level for 1938. The wholesale price of manufactures, during the same period has increased 15 per cent, and, as we should expect, the increase in the cost of living amounts to only about one half of this figure. Parenthetically, it may be pointed out that much the same thing has happened in England where the total supply of money (current accounts of London Clearing Banks plus currency in circulation) has increased by 30 per cent, while the wholesale prices of manufactured goods are more than 40 per cent above the level of 1938. The cost of living in Great Britain has gone up about 20 per cent, and the increase in weekly wages is very nearly as great-roughly, 18 per cent.

The present situation, therefore, is not one that calls for a little inflation to stimulate Canada's war effort, but one in which a small dose of inflation has already been injected into the economic system, so that we may be careful not to increase the dose and develop the drug habit. If we are to save ourselves from the ghastly experiences of post-war deflation comparable to those from which the world suffered after 1920, we must take thought now and rigorously decide on the fiscal policies that we wish to follow. Even in the case of the United States, which is not actively engaged in the struggle, there has already been a 15 per cent increase in the total supply of money, and Professor Irving Fisher has recently pointed out the necessity of taking stock of the whole situation if further inflation is to be avoided. The seriousness of Canada's position in this matter cannot be overemphasized. If the world is to achieve a satisfactory international monetary system at the end of this war we must obviously build the foundations now by avoiding further monetary inflation in each of the important countries I have mentioned.

Some of you may say that throughout this analysis I have made no reference to the doctrines with which the name of John Maynard Keynes is invariably associated. The omission, up to this point, has been deliberate, because the arguments of Mr. Keynes' school of thinkers apply specifically to periods of business depression and are intended to accelerate recovery from conditions approaching stagnation. It was for this reason that so much was heard of them during the years from 1931 to 1935.

The broad lines of the Keynesian theory are these In times of depression there are large numbers of skilled men out of work, factories idle and large stores of raw materials piling up largely because fear of one kind or another has inspired those individuals who still possess resources to restrict the volume of their spending. Funds are hoarded and not invested, so that the diminution in the demand for consumer goods is not compensated by any increase in the demand for producer goods. Moreover, at such a time it would be unreasonable to expect the investment of any large sums in new capital equipment, because the stagnation of the market, which has already reduced existing factories to idleness, offers little prospect that new factories could operate profitably, even if they were built. In modern communities such a state of affairs involves the government in substantial payments for the relief of those who are unemployed, but, if funds for this purpose are raised by increased taxation, there is a tendency to reduce further the consuming powers of those members of the population who still enjoy incomes.It is suggested, therefore, that the government should either print or borrow from the banks sufficient funds to pay unemployment allowances that will augment the total consumption of the community. Such augmentation of consumption, we are told, would encourage expanding production, increase employment, bring farmers and factories into operation again. It will not, however, increase prices, since the total output of goods will increase much more rapidly than the supply of funds, and the initial loan can soon be repaid out of the increased revenues from taxation.

So bald an outline does less than justice to the brilliant writings of Mr. Keynes, but it will serve our present purpose. I shall not even attempt to analyze its theoretical points of strength and weakness in respect to the conditions to which it is intended to apply, because the significant point for our purpose is that these conditions do not apply in Canada at the present time. The Keynesian theory, even if it be accepted wholeheartedly, applies only to periods of acute depression in which large numbers of efficient factories are idle and many employable men out of work. I do not see any evidence that such a state of affairs exists in any part of Canada today. The volume of employment is already some 16 per cent above the average for 1929, and the physical volume of production has increased by about a third since 1938. Our factories are working pretty close to capacity, and in many lines there is already a shortage of skilled labour. Naturally there are still some idle plants, but careful observation will usually reveal that these are obsolete, and that it would be cheaper, in the long run, to build new factories than to recondition them. Similarly there are still men and women unemployed, and all of us hope sincerely that tasks will soon be found for them in the expanding Canadian economy. These people, however, in almost all cases, are unskilled workers or those unfitted in some way for the special activities that war demands. No amount of inflation will turn the unskilled labourer into a tool maker or an expert machinist, and the problem here is one of training and aptitude rather than a by-product of a supply of money.

Unless it can be shown that large reservoirs of skilled labour and efficient capital facilities are at present unused, it is impossible to invoke the Keynesian argument for inflation, and even if such evidence were found, it does not seem apparent that that augmented production would be achieved more easily by inflation than by more legitimate fiscal policies.

To summarize, then, there is, so far as I can see, no valid argument which would justify resort to inflation in Canada at the present time. Our productive facilities are being rapidly brought into full utilization, and there is every evidence that the population is wholeheartedly behind the war effort. It should not be assumed, however, that this statement implies that Canada' is already doing all that she can. The available evidence suggests that the people of Great Britain are working harder and sacrificing more of their goods to the common effort than we on this side of the Atlantic. Even in 1938 the per capita taxes of Great Britain amounted to $107.80 as against the Canadian burden-Dominion, provincial and local-of $78.76, and there is no evidence to show that this differential has been wiped out in the past year.

As has been stated on many occasions, Canada and the United States constitute the arsenal of democracy which must supply ever-increasing quantities of food and munit ions to the men and women who are manning the front line in Britain today. Every Canadian is called upon to exert his greatest effort and to pool the maximum amount of his personal resources in order that we may prove worthy to be counted comrades of those who are at present bearing the burden of the struggle. Nay, more than that, Canada is developing rapidly during this war. She is called upon to play a more important part in world affairs than at any previous time in history, and I can foresee that, if she assumes her burden with efficiency and enthusiasm, she will, at the end of the war, have attained greater economic wealth and enhanced prestige. These things will not be achieved by self-deception, and we should be gambling with destiny and our childrens' happiness if we sold the priceless future for a devil's mess of potage. Inflation is not only unnecessary today: resort to it would be the bewildered confession of weakness from that member of the British Commonwealth of Nations to which the Mother Country-in common with the rest of the world-today looks for a special measure of strength and support.

THE HONOURABLE G. HOWARD FERGUSON: I would ask Dr. Cody to say on your behalf a few words of appreciation to Dr. James for his address. He hesitates to do so, but as one eminent educationist to another I think it is important that he should.

DR. H. L. CODs: Mr. Chairman, Dr. James and Gentlemen: Any hesitation I may have is due to the fact that I have just got out of bed after an attack of 'flu ant have not yet quite regained my vocal powers. But it does give me very great pleasure to voice your thanks and deep appreciation of what Principal James has so admirably and lucidly placed before us. He has thoroughly emphasized the vital necessity for careful thinking on these all-important questions. He has shown us the real issues involved, how inflation may seem very alluring and how it may lead to destruction. He has challenged us to let no such thoughts enter our minds until we have exhausted all our ability to sacrifice and to give. That, we have not yet done. And I trust Canada, nay I believe Canada will come out of this great struggle secure and strong, because we have given to the Empire's cause to the limit of our thought, service, life and treasure.

May I venture one word of a personal nature--two words? One is, may I recall to your memories the exceeding appropriateness of illustrations from the old Bible. There is nothing under the sun that turns up in our modern days that has not some reminder of it in the ever-living Book. The other day at a children's service the rector spoke from a text in the Proverbs of Solomon. He asked the children who was the wisest man. One youngster answered that he was Solomon. The rector asked why, and another boy--one I know well, for I christened him--rose and answered: "Because he had three hundred wives." One of the newspapers reporting this service commented that anyway Solomon had plenty of advice.

The other word is this: I thank you, sir, for giving me the privilege of saying a word of warm welcome to my fellow college head from McGill. Perhaps you do not know--the fact is only to be found in histories of education--that the real founder of McGill and Toronto Universities was one and the same person--John Strachan. It was John Strachan who married the widow of Andrew McGill and who persuaded James McGill that he could dispose of his money in no better way than by founding an institution of higher learning. It was the same John Strachan, then Archdeacon of Toronto, who went to England in 1827 and obtained the Charter for the establishment of King's College--the forerunner of Toronto University. But it is not only because of past history, nor because of the kindly relations that have ever existed between the two universities, that I welcome Dr. James. It is also because his great institution, along with other universities, is doing so much in these great days to educate the young men of this dominion to do the highly skilled tasks of war. It is for all those reasons that it is an especial pleasure to welcome Dr. James today and to express to him the hearty thanks of this great gathering.

THE HONOURABLE G. HOWARD FERGUSON: I would like to add my own word of appreciation for the great kindness of Dr. James in coming here today. The meeting is adjourned.

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Inflation and War Finance

Reference to the Savings Campaign. The dangers of an inflationary policy to finance the war, as shown through some of the experiences that some other nations have had with these policies. The demands that are being made for an inflationary policy in Canada. Remembering the "New Era" in the United States which led to the collapse between 1929 and 1933, and the inflation imposed by the German reparation problem. A simple example of how the inflationary process might have worked in a hypothetical case. Some words from Andrew Jackson White about what happened in the French Revolution with regard to inflation. The example of Solomon and his financial legacy. Why people still want the government to adopt inflationary policies, and reasons for that. What is meant by inflation. Effects of inflationary policy in a broad sense. The question as to whether or not Canada should resort to an inflationary policy, despite the consequences in order that she may put forth her maximum effort in the struggle. An examination of various ways of financing the war, and how nations have done it in the past. Arguments against a policy of inflation. The need to take thought now and rigorously decide on the fiscal policies that we wish to follow, if we are to save ourselves from the ghastly experiences of post-war deflation comparable to those from which the world suffered after 1920. Building the foundations of a satisfactory international monetary system at the end of this war. An examination of Keynesian theory and its inapplicability to the current situation. The lack of any valid argument which would justify resort to inflation in Canada at the present time. The role which Canada is called to play in the war effort.