"CANADA'S POSITION IN A CHANGING WORLD"
An Address by MR. JAMES STEWART President, The Canadian Bank of Commerce
Thursday, January 14th, 1954
CHAIRMAN: The President, Mr. A. E. M. Inwood.
MR. INWOOD: I regret that this meeting is opened with a note of sadness due to the death on Monday of Dr. Elias Clouse.
Dr. Elias Clouse was one of the founders of this Club back in 1903 and himself a past president of the Club. Although in his 99th year, he still maintained his keen interest in our affairs and but a few years ago donated the flag of our Club that you see behind me.
We will always remember and miss him and we offer our deepest sympathy to his family.
It has been no easy task to bring our honoured guest to speak to this club today. In fact, it has taken fifty years for the Empire Club to succeed in having a Canadian bank president address our meeting. I believe there are only 11 of them in Canada and all notoriously reticent to speak in public.
The closest we came to succeeding was in 1905 when Mr. D. M. Stewart, general manager of the Sovereign Bank of Canada gave the club a most interesting story on Canadian banks and I recommend it to you to read in our year book of 1905-6. We had one other Canadian banker address the club in 1931 but he was just a budding chief inspector for The Royal Bank of Canada whose name is Graham F. Towers, the present governor of the Bank of Canada. I congratulate the president of that year Mr. H. G. Stapells for his foresight.
The Empire Club cannot promise any promotion for our guest of honour today as he is already there, but we are proud Sir, that this time we did not pick a bud, but rather picked the heather in full bloom.
Mr. James Stewart, C.B.E. was born and educated in Perth, Scotland. He emigrated to Canada when he was under 20 years of age and immediately joined The Canadian Bank of Commerce upon his arrival,
He served through the ranks of this bank in Sherbrooke, New York, Toronto, Hamilton, Halifax and Mexico City.
In 1937 he was chosen as assistant general manager of the bank and general manager ten years later. In 1952 he became president of this great Canadian financial institution He was awarded the C.B.E. for his distinguished service as administrator of services with the Wartime Prices & Trade Board at Ottawa during the war.
The Canadian Bank of Commerce was founded in 1867 and today shows assets to be in excess of one billion, nine hundred million dollars. It conducts business in 651 branches from coast to coast and employs some 9,000 Canadians on its staff. Last year it paid Dominion Government taxes of some 5 1/2 million dollars. All this being evidence of the important role this bank plays in our Canadian economy.
It gives me very great pleasure to present to you Mr. James Stewart who has chosen as his topic, "Canada's position in a Changing World."
MR. STEWART: I appreciate very much the invitation to participate in your Empire Club meeting today. When your Chairman invited me to address you he did not place any restrictions on his invitation: the subject was left in my hands.
The seemingly-popular crystal ball has not been called into use for this occasion, because I feel that we now are sufficiently far into the new year that you would not want yet another version of the course of business. A backward look, on the other hand, might be timely, for the Canadian business scene has changed a great deal since the outbreak of war in 1939. Whether the changes have followed so closely that there has not been time for each to exercise its impact upon thinking, or whether the war pattern for Canada was such that continual change has been accepted as part of our living is a debatable issue. For the present I take the view that under the insidious influence of inflation and international uncertainty we have accepted a changing pattern of economic activity as part of the Canadian scene.
The developments in the past eight to nine years are significant and the implications far-reaching. They may have been lost sight of because the way in which they happened to emerge has tended to obscure their significance and potentiality.
I do not intend to burden you with statistics but to point up some of the changes that have taken place a few figures are useful, and I have selected some that show interesting contrasts and indicate the kind of changes that have been taking place.
For instance, the population of this country in 1941, which was a census year, was 111/z millions as against an estimate today of 15 millions, or an increase of over 30 percent.
The number of dwellings in existence in 1939 was in the neighbourhood of 2,600,000 as against an estimated total of 3,641,000 today, an increase of over 40 percent.
The spending for capital development in 1939 was $765 million as against a figure of $51/2 billion estimated for 1953.
The Canadian budget for taxing and spending was $553 million for the year 1938-39 as against $4.4 billion today; and the value of goods and services produced in Canada has risen from $5.2 billion in 1939 to a total of $24.2 billion today.
An increase in population of some 30 percent as against a rise in the production of goods and services of some 400 percent, in current dollars, is an illustration of the kind of problem we face and points up the growing dependence on markets outside our boundaries for the maintenance of a high standard of living.
I think you will agree that these few figures represent vast changes, and the changes represented by these figures have a bearing on our mode of living and the character and manner in which we are doing business today, and how, and to some extent where, we will have to do it in the future.
The year before the war broke out, Canada, like most other countries, was slowly working its way out of a widespread depression. We entered the war with a surplus of manpower, a surplus of industrial capacity--although we were not, in the true sense of the term, a highly industrialized country--and a surplus of resources. The insatiable demands of war forced the development of our resources at an accelerated rate and our geographic situation permitted us not only to use our productive factors at all out capacity, but forced us into new and ever enlarging plant.
We consequently wound up the war with plant, machinery and equipment capable of turning out goods beyond our capacity to use economically. Since 1945, our productive capacity has been further increased by expanded plant and by reconversion of war plant to peacetime uses.
During the war years it was necessary to rebuild and to expand existing industrial plants and in some cases to create new plants in order to meet the military and domestic requirements and to discharge our war obligations in a fitting manner. This, in terms of pre-war experience, required large amounts of capital. But the post-war developments saw even larger capital requirements and since 1945 the trend in capital formation has been of a size and magnitude overshadowing any other period in Canadian development. From 1945 to 1953 inclusive some 31.2 billions of dollars have been invested in wealth-producing activity.
Another significant development in the economic scene was what has been termed our second period of resource development. Time does not permit me to deal with the many aspects of this topic, and in any event it is not necessary in this audience to do other than to point out one or two important results. As you know, we were a large importer of oil and the oil discoveries and subsequent refining activities took some of the pressures off the demand for foreign exchange at a time when our balances of gold and U.S. dollars were declining. Equally, if not more significantly, the discoveries of iron ore, titanium and other base metals as well as oil drew attention to the investment opportunities in Canada, and, while I am convinced that our development up to now well could have been financed within Canada, the interest of American investors and American know-how was welcomed. Moreover, American dollar investment at this time further improved our balance of payments position and our reserve position.
The end of the war saw the economy and productive capacity of many countries reduced and thus we had no difficulty in finding outlets for our enlarged production; in fact, where pre-war we were interested in trade largely as an exporter of raw or semi-processed materials and an importer of manufactured goods, now we had become interested in international trade in a much broader way. The disruption of productive capacity was not the only aftermath of the war for many countries-their income had also been impaired and the trade patterns distorted, or at least disturbed. This situation led to the creation of the World Bank and the International Monetary Fund, both with a view to freeing the channels of trade.
Now I would direct your attention to a series of significant figures that cannot be overlooked in our own particular economic position.
In 1939 we exported goods and services to the extent of $908 million, whereas in 1952 this figure stood at $4.3 billion. On the other side of the ledger we imported goods and services of all kinds in 1939 to the amount of $750 million and this figure contrasts with $4 billion in 1952. Our trade position, briefly stated, in 1939 was 47 percent of exports to the United Kingdom and Commonwealth Countries as against 23 percent in 1952.
Again, looking on the other side of the ledger, our imports came to 25 percent from the United Kingdom and Commonwealth Countries in 1939 as against 13.5 percent in 1952.
The contraction in the United Kingdom figures between 1939 and 1952 was made up in the main by increases to and from the United States, the relative figures being 41 percent exports to the United States in 1939 as against 53 percent in 1952. Imports from the United States in 1939 were 66 percent as against 74 percent in 1952.
Our trade figures in recent years show a strong northsouth bias. There is no need to stress unduly the potential difficulties of too close a tie-up and the resultant dependence on any one country, but I should like to make the point that so long as this condition exists, particularly in our export trade, we must produce to a preponderant extent the goods that are readily salable in the United States.
The similarity of our economy to that of the United States limits the expansion of that market for many of our products. Consequently while we may in future find a ready demand for our natural resources the rate of expansion in that market established in recent years could well decrease. For our own good we must be internationally-minded and diversify our markets to the fullest possible extent.
It is difficult to determine the precise relationship of employment to foreign trade but the figure of three out of eight gainfully employed in foreign trade is an estimate that may be on the low side. This beyond any other relationship that one may care to select indicates for our economy the importance of healthy trade relations. In fact the figure that I have just mentioned of 4 billion dollars indicates the export target at current levels of prices, that we must concern ourselves with this year. Any significant drop from this level will affect our ability to import and will have an unfavourable influence on employment. We cannot therefore be other than concerned with any development that will serve to restrict the flow of goods into as well as out of our country.
Our task is to reconcile the diverse factors, and bearing in mind the substantial dependence on foreign trade for employment, and that pre-fabricated solutions generally are ineffectual, we must mesh the international and the domestic ingredients with national objectives in mind.
Apart from trade I would draw attention particularly to our international position which has arisen from our acceptance of responsibilities as a nation, first of all in the United Nations and secondly in the North Atlantic Treaty Organization. I do not propose to dwell to any extent on the manifold aspects of the United Nations' activities but I would note the fact that we are contributing financially and technically to such activities as the Colombo Plan and to other similar schemes which are designed to vitalize the economies of backward nations.
Our NATO contributions are somewhat different in the sense that the North Atlantic arrangement, designed for protection, also has economic overtones of significance to Canadian resources and to Canada's fiscal planning. With particular reference to NATO obligations, Canada will send to its European partners in the coming year items from our production lines, such as aircraft and electronic equipment.
There is a tendency, not great as yet, to think of Canada as an isolated unit. It is possible that the current levels of prosperity may have developed a belief that this has been achieved within our own boundaries. I would emphasize that the abundance of our resources, the size of our population (and our markets) in relation to our productive capacity, and the kinds of the resources indigenous to Canada, have made us, and made us for the foreseeable future, a trading nation with a growing dependence on the rest of the world.
Pre-war the differences in trade, usually favourable with the United Kingdom and unfavourable with the United States, offered no payments difficulties. The triangular movement between the three countries tended to adjust the over-all balance and the operations of the Bank of England and the British money market could be relied upon, almost automatically, to make the necessary currency conversions.
However, because of necessary war expenditures by Britain in North America the usual means of settling trade balances could not be followed. In the early stages of the war the United Kingdom met its unfavourable balances by the conversion of its accumulated sterling balances and the repatriation of British investments in Canada.
In 1942 the accumulated sterling obligations were converted into a loan of $700 million and the balance of the sterling area deficiency was covered by a gift of $1 billion. From 1943 to March 1946, shipments to the United Kingdom and Allies were financed by Mutual Aid, which was the Canadian equivalent of Lend-Lease.
Foreign trade normally has its basis in international differences in resources or specialization and, therefore, in the exchange of goods. Unfortunately, conditions in the early post-war period made the exchange of goods extremely difficult. That is to say, the bulk of goods, generally speaking, was flowing in one direction and then only if some effective purchasing power was provided by the exporter.
We in Canada had a surplus or were able to produce a surplus of goods. The means of bridging the gap between an abundance of supplies and the demands of countries devastated by war was by a series of loans and credits of which the United Kingdom was the principal beneficiary. Humanitarian reasons dictated that dollars should not provide a road-block to needed goods and services.
As we move further away from the war period, and despite increases in population and the like, our industrial development has continued to produce surpluses in many fields of activity. More and more therefore are we drawn into the international field in our search for markets.
The present level of industrial development throughout the free world has created new demands for resources and wider markets for the distribution of end products. Fear has been expressed in certain quarters that the development in backward countries will diminish the markets for exports from the more highly developed countries. Expansion in any one country does not necessarily lead to a greater degree of self-sufficiency and consequently to less dependence on the outside world. A good example of this is in the case of our own expanding industrialization which might suggest a trend towards greater self-sufficiency, yet the ratio of our imports to national production remains high. Industrial expansion has made us, not a poorer, but a better customer of other countries.
In a progressive industrial economy specialized groups with their publicity paraphernalia often distort a situation. To the exporter, for example, markets are of prime importance, so emphasis is placed on the need for favourable markets abroad. But the countries to which we export must under ordinary circumstances earn the means of paying for our exports. That is to say we must buy their exports. It is not enough to suggest that we should have export targets of so many millions of dollars unless we are, at the same time, prepared over the long run to import roughly in like amount.
Means of payment and price are two of our continuing problems to which I would direct a comment or two. We have yet to find a means of achieving a state of affairs in which the great trading area, based on the pound, can work freely with the other great trading area, based on the dollar. It is possible that in our preoccupation with convertibility we have not given enough attention to the fact that if trade policies in the two areas differ, convertibility as such wilt offer no solution. As the Chairman of Barclays Bank (D. C. & O.) recently pointed out: "If the two areas follow mutually incompatible policies, based on faulty economics, no truly effective 'arrangement' will ever be possible between them. On the other hand, if they were to be founded on mutual trust and a real understanding of the basic principles of trade, then I believe 'convertibility' could not only be achieved, but achieved soon."
Bearing in mind the fact that relatively we are a high income and a high cost country we are a good market for foreign products, while our position as an exporter is becoming weakened due to differentials between our prices and prices in existence in foreign countries. In earlier times when more automatic checks and balances sufficed, differences in price levels as between trading nations tended to adjust themselves. Quotas, exchange controls licensing and so on, the paraphernalia of the planner, now make adjustments in price levels difficult. If, as our statesmen have reiterated, we must focus our attention on the freest trade possible, then we must be prepared to make the cost and price adjustments necessary to this end. Otherwise a creeping economic isolationism can submerge us, reduce our standard of living, and make our international position untenable. The realization of our problem will, I hope, be widespread and timely.
For many years both the U.S. and Canada were able to develop and expand under the shielding umbrella of Pax Britannica. I wish it were possible to devote some time to the importance of pre-war British foreign policy on North America. For present purposes I would draw attention to the fact that even in peace-time the British taxpayer contributed a large proportion of taxes to this end. In the last pre-war British budget for the fiscal year 1938 of an estimated expenditure of one billion pounds sterling 260 million pounds or about 26 percent were allocated to military purposes around the globe. The year before the first world war, 1913, the military outlay was 39 percent of the total budget. I could go back to earlier years but these figures I think establish my point. Remember too that these are figures in $4.86 pounds.
Let us look at the Canadian budget for the last prewar year. The largest item of government expenditure was the debt service charge, which debt we had accumulated over the years prior to the last war. This amounted to about $128 million. Other items of expenditure were divided among the other departments of government, but national defence at $34 million stands out in interesting contrast. Our military outlays amounted to about 6.5 percent of total expenditures. Today our military outlays are estimated at over $2 billion per year-about 50 percent of the total budget.
The position of the United States is not dissimilar. In 1938 approximately $1.4 billion were allocated to military requirements which was approximately 15.6 percent of total federal expenditures. In 1953 military outlays were in the neighbourhood of $44.6 billion out of a total of $74.5 billion, approximately 60 percent.
If, as it now appears, Pax Britannica is giving way to Pax Americana one can safely forecast that this is going to cost the American taxpayer and the Canadian taxpayer a not inconsiderable sum each year. Our proximity to the U.S. and the interdependence of our economies that has resulted from the pursuit of Communist ideology by the Kremlin will make us internationally conscious for the foreseeable future.
The importance of the Commonwealth to us and of us to the Commonwealth is, I think, increasing in this complex scene in which we have become more of a player and less of a spectator, and that growing strength not for war, but for peace, must be a stabilizing factor both behind and on this side of the Iron Curtain.
THANKS OF THE MEETING were expressed by Mr. John W. Griffin, immediate Past President of the Club.