The Canadian Economy and Its International Aspects

The net debt of the Federal Government at 31st March, 1939, the end of its last fiscal year preceding the Second World War, was $3,152,560,000.

During the war years the debt necessarily increased tremendously. It multiplied more than four times over, rising from $3,000,000,000. to $13,000,000,000. last year.

In arriving at these figures I have accepted what the Government describes as "Active Assets"-$485,000,000. in 1939-$5,971,000,000. by the end of the war-as being worth their face value, but Fin very sceptical as to their realizability.

(The total public debt disregarding these assets was $3,638,321,000. in 1939 and $19,005,656,000. by the end of the war-increased by five times.)

We have come to deal with such huge figures that one is apt to find them difficult to handle. You know a Prince Edward Island girl was sent to Halifax to take singing lessons and word came back that she was making a name for herself. She returned to the Island and a concert was held in the church hall so that she could display her talent. It was well attended and the local auctioneer, who was full of words, acted as chairman. He opened by saying that they were gathered together to do honour to Mary after her triumphs in Halifax, and that she had kindly consented to sing "Ten Thousand Times Ten Thousand". The accompanist played the opening bars and Mary started but when she came to the high note she couldn't make it and broke down. The auctioneer was on his feet instantly and explained that Mary was nervous singing before the home folks but that she could sing it easily enough and would now do so. The accompanist began again and Mary tried and failed. This time the chairman said that this was quite extraordinary but that he was sure she would get through it all right if they gave her a little rest so they went on with the rest of the programme and finally lie announced that Mary was now rested and would sing "Ten Thousand Times Ten Thousand". I am sorry to say that she again failed and before the auctioneer could say anything further a youth at the back of the hall called out to him "Why don't you start her at Five Thousand?"

Next I think we might have a look at the amount raised by the Dominion through taxation.

For the year ended 31st March, 1938, it was $448,652,000.
For 1946, $2,274,858,000.
For 1947, $2,458,520,000.

In the 1938 fiscal year we were able to run the country on $534 millions.

In 1946, it took $5,136 millions, including war expenditures.
In 1947, $2,632 millions.

In spite of this Canada had an estimated surplus of $646 millions for the nine months to 31st December last, which may well be increased to $850 millions or better by the end of the current fiscal year on the 31st of this month.

One naturally hopes for a great decrease in public expenditure now that we have a kind of peace or at least a cold war instead of a very hot one although reading Hansard one finds almost constant suggestions which, if accepted, would involve the Government in further heavy expenses. We have had some relief in taxation and may hope for more but we can never get back to anything like a pre-war basis. We have to service our great debt and the Government has in the meantime embarked on such a vast social programme--such an arbitrary forced sharing or redistribution of wealth through taxation--that our tax load will always be burdensome. No government having embarked on schemes of social benefits to a large portion of the population is ever likely to face a serious downward adjustment of such benefits.

In the Analysis of Income and Expenditure published by the Dominion Bureau of Statistics for the years 1938 to 1946, transfers to persons from Government, that is government payments to persons for Family Allowances, War Service Gratuities, Re-establishment and Rehabilitation Grants, Pensions, Relief, Mothers' Allowances, Prairie Farm Assistance and Grants to Charities, etc., in fact money given away, amounted in 1938 to $216,00,000; in 1946 it had risen to one billion dollars. This added to interest on the public debt will give you some idea of the money that must be raised by taxation, and why we cannot hope for a return to even comparatively low taxation in future.

Our Foreign Trade is my next topic.

The shortage of United States dollars is a world problem. So long as the exports of the United States annually exceed imports by some $12,000,000,000 the world will be short of United States dollars to that extent. So long as the United States has a "favourable" balance with the world of 12 billion dollars, the world, ex the United States, must have an "unfavourable" balance with the United States of the same amount.

For 1947 Canada's imports from the United States amounted to $1,974,679,000., and her exports to that country $1,056,579,000., showing an adverse balance of $918,000,000.

The December debit balance against Canada was down to $34,000,000, from that in November of $79,800,000,000.

The chief imports were:

Metals, minerals and their products . . . . . . $826,000,000.
Agricultural and vegetable products . . . . . . 156,000.000.
Papers, textiles and their products . . . . . . 140,000,000.
Chemical and allied products . . . . . . 84,000,000.
While our chief exports to the United States were:--
Wood wood products and paper . . . . . . 448,000,000.
Agricultural and vegetable products,
animals and animal products . . . . . . . . . . 312,000.000.
Non-ferrous metals, non-metallic minerals
and their products . . . . . . 134,000,000.

CANADA-GREAT BRITAIN TRADE

The figures for Canada's trade with Great Britain in the pre-war year of 1938 as compared with 1946 were as follows:

Exports to Great Britain (1938). . . . . . . . $409,412,000.
Imports from Great Britain . . . . . . . . . . 145,009,000.
Net Credit Balance . . . . . . . . . . . $264,403,000.
Exports to Great Britain (1946) . . . . . $597,506,000.
Imports from Great Britain . . . . . . 201,433,000.
Net Credit Balance . . . . . . . . . . . $396,073,000.
A gain of $132,000,000.

It used to be our practice to pay the balance owing to the United States in dollars, with Sterling owed to us by Great Britain, Sterling being then readily convertible into dollars.

Under conditions such as those which existed before the first war, and to some extent between the two wars, Canada was able to balance her international position so long as world trade was largely unrestricted and national currencies exchangeable and convertible on some recognized and reasonably predictable basis. There can be no lasting cure for international financial difficulties without a return to free convertibility of national currencies at realistic exchange rates. Such a step might be premature at this juncture while the export capacity of war-torn nations is still far below normal, but ultimately it is going to be necessary to face up to the fact that maintenance of exchange rates above their intrinsic values can only be accomplished at the cost of controls that restrict rather than expand the volume of trade.

The end of the war left Canada with a greatly enlarged capacity to manufacture goods of all descriptions not only for home consumption but for export. All would be in the clear again if our capacity for production were matched by an ability on the part of Great Britain and other countries abroad which desire and get our goods to pay f or them.

In the past seven years Canada had given or lent to the United Kingdom

$1,000,000,000 under the War Appropriation Act, 1942.
$1,870,978,000 as Mutual Aid.
$ 700,000,000 War Loan, 1942.
$ 963,000,000 Loan tinder U.K. Financing Act, 1946.

We have also made gifts and loans to other countries, the whole to enable them to take our production.

When I was in England in November, 1945, attending the Conference of the Federation of Chambers of Commerce of the British Empire working on Empire Trade problems I found myself embarrassed in speaking after those who expressed what I thought to be too much admiration for Canada's generosity. I tried to make it plain that an important element which entered into the making of these gifts and loans, quite apart from the nobler instincts of it all, was that it very well suited the Government of Canada to keep its people fully employed and happy, through the creation of these goods even though to a great extent Canada herself was paying for them. We were lifting ourselves by our own boot straps. This is the only metaphor I am going to use as they are tricky things to handle-"kittle-cattle" as the Scots would say. A Winnipeg Professor was speaking to the Canadian Club of Montreal some years ago on the use or misuse of the English language. His best example of a mixed metaphor was that of a political orator who had said, "When the chickens come home to roost that will be a horse of another colour!" An inept metaphor is often amusing. I asked one of our representatives in Parliament why his party didn't come out for the removal of the ban on the importation, manufacture and sale of margarine. He replied that "Margarine was too hot a potato!"

To return to my visit to England--I went on to say that we were submitting to a high rate of taxation on incomes of persons and corporations and having a great deal of the proceeds of such taxation distributed by the Government to the farmers, the labourers, and the industrialists in the form of payment for goods exported, and not paid for, from abroad.

Now let us look at the personal incomes and expenditures of Canadians. Most of us have a natural curiosity about how others get and spend their incomes, and here's what happened in Canada in 1946:

Salaries, wages, etc., brought in ..... $4,968,000,000
(as against $2,500 000,000 in 1938)
Military pay and allowances ..... 315,000,000
(down from a peak of $1,132,000,000 in 1945)
Income from agriculture and other unincorporated business .. 2,151,000,000
(it was only $800,000,000 in 1938)
Interest, dividends and rents of persons ..... 833,000,000
Payments to persons by Government, etc ..... 1,116,000,000
A Total of $9,383,000,000

That's how we got it and this is how we disposed of it

We paid in direct personal taxes . . . . . . . . $ 781,000,000
This left us with a total sum to spend of 8,602,000,000
We bought in goods . . . . . . . . . . . . . . . . . . $5,343,000,000
Here are some of the interesting details
Food . . . . . . . . . . . $1,948,000,000 or about 36 1/2 %
Tobacco and Liquor . . 803,000,000 or about 15%
Gasoline and Lubricants 200,000,000 or about 3 3/4 %
Fuel 260,000.000 or about 5%
Clothing and furnishings, etc . . 1,190,000,000 or about 22 1/4 %
Automobiles . . . . . . . . . 88,000,000 or about 1 1/2 %
Furniture .. ....... 103,000,000 or about 2%
Household Appliances. 133,000,000 or about 2 1/2 %
Drugs, Stationery, etc 215,000,000 or about 4%
Jewellery . . . . . . . . . . . . 71,000,000 or about 1 1/4 %
Miscellaneous items . . 332,000,000 or about 6 1/4 %
$5,343,000,000 100%

We paid for services of all sorts $2,158,000,000. Here's where it went:--

In other words out of every dollar we spent about

Housekeeping . . . . . . . . . . . $ 903,000,000 42 cents
Attire and personal appearance 127,000,000 6 "
Medical care and death expenses 302,000,000 14 "
For education 35,000,000 2 "
Recreation . 148,000,000 7 "
Transportation 297,000,000 14 "
Communications ......... 98,000,000 4 "
Miscellaneous uncassified . . . . 248,000,000 11 "
$2,158,000,000 $1.00

We have done ourselves pretty well, but, nevertheless, we had over $9,383,000,000. National Income and saved $1,107,000,000.

Marked changes have taken place in our business activities in the past ten years.

Retail sales have grown from about $2,400 millions in 1938 to over $5,000 millions in 1947, bank debits have increased from $30,924 millions to over $75,000 millions. Our exports of newsprint have jumped from just under two and a-half million tons valued at $64,000,000, to nearly four and a-half million tons worth $356,000,000. Our output of electric power has risen from just over 26 million to more than 40 million kilowatt hours. We produced nearly 30 million barrels of flour in 1947, compared with less than 14 million in 1938. Pig iron production last year was 1,840,000 tons against 705,000 tons ten years previously. Canada's mineral production last year reached a high record of $620 millions. These figures do not give the complete story but they indicate progress and encourage Canadians to look forward confidently and not backward nostalgically.

Our greatest immediate problem is that of inflation. Until this is solved, neither Canadian business nor Canadian citizens can know any real stability or security.

Yet the solution is becoming increasingly clear. It is production, and production alone, that in the end will provide inflation with its sufficient answer. Only when the amount of goods is brought more nearly up to the demand will prices find their proper and reasonable level.

There is no other way. And there can be only anxiety over the continuing popular tendency to look to some method or plan, some control or regulation, which may adjust prices without increased production and without the greater effort that increased production requires. The re-imposition of regulations or controls, so far from providing an effective solution to inflation, would more likely only delay or discourage the higher productivity which is so urgently needed.

Some economists in this country, as in other lands, have recommended that inflation be counteracted by high taxes.

Surely this is a mistaken approach. For high taxes depress incentives; and if production is to be stimulated, the extra effort must receive the extra reward. To expect people to work harder, and to be practically penalized for doing so, is not to deal in the realities of human nature in a free society.

For this reason, it would seem more realistic, and therefore more effective, if taxation upon earnings were lowered, so that the greater impetus might be given to the added effort. Since we are dealing with human nature in a free society, it must be remembered that extra effort is not easy. "Overtime" in the widest sense of the word, and in all types of work, is not the line of least resistance but of greatest resistance. If high taxation diminishes to negligible proportions the reward for each degree of extra effort, the pleasures of idleness and of recreation and of "taking it easy" will be found to compete very effectively with the will to work. It was the old saying that it was well to scorn delights and live laborious days. But a policy of high taxation lends its encouragement to seeking delights and scorning laborious days.

One of the incentives for earning extra income is to have money to save. But this incentive is being discouraged in several ways.

The rates of interest have been so lowered by the Government's easy money policy that the possibility of providing a sizeable income from savings (which was quite feasible some years ago) is now beyond the power of most people. It would appear from the action taken on 5th January, and again more recently, in allowing Dominion Government Bonds to fall somewhat in market price, that the Government is pursuing less rigorously its low interest policy.

The value of savings, and therefore the incentive to save, is still more seriously lowered by succession duties. The theory advanced to justify succession duties is questionable. It holds that a certain person or persons, as legatee of an estate, are about to come, by a fortuitous event, into possession of the principal or income of assets which they did not create. Consequently, it is argued that it is no great hardship for them if the government claims part of the estate by the imposition of succession duties.

But it is often hard for the family of a man which was dependent upon him for support, and which because of age, health, educational needs, or other reasons, is dependent upon his estate after his death, to regard themselves as merely inheriting a windfall, of which the Government may fittingly claim a large portion. More often than not when a man dies his wife and children have to change their way of living and usually have a hard time getting along on such investments and life insurance as may have been left to them.

Succession duties are a form of double taxation. Estates created during the last 30 years are in most cases the result of savings from part of the income left after income taxes have been paid. That is to say, estates are built up out of tax-paid money. For this reason in claiming succession duties the Dominion Government is not entering a new field of taxation, but is in fact taxing the same money twice.

Now that the Government has introduced a bill to rewrite the Income Tax Act, it is opportune to suggest that the effect of heavy taxation upon all extra effort and productiveness should be seriously reconsidered. As for succession duties, the most obvious means of reducing this burden is for the Dominion Government to retire from this field of taxation. The Dominion Government inaugurated its tax on estates only some seven years ago (in 1941), many years after the provinces had enacted succession duty legislation. In the year ending March 31, 1946, the Dominion Government collected twenty-one and a-half million dollars in succession duties. Through this is a large sum to be taken from heirs, in addition to what has already been paid in income taxes and in provincial succession duties, it is a comparatively small sum in the total revenue of over three billion dollars raised by the Dominion Government in the same year. If the Dominion were to retire from the field of succession duties, it would not suffer a serious loss of revenue, but the relief that would be granted thereby would give new incentive to the earning citizen and a new security to those dependent upon him.

Before concluding I must give Free Enterprise an innings. It is the foundation of the prosperity of Canada and the United States. Under it these countries have attained the highest standards of living in the history of the world and under it alone is there strong hope of still higher standards. And this is the chief element in happiness. The pursuit of happiness is a legitimate national aspiration--life, liberty and the pursuit of happiness--is a grand phrase. It ties liberty to happiness, and the only liberty in political economy is that enjoyed under a system of Free Competitive Enterprise.

Thurman Arnold, whose duty it was, at one time, to enforce the laws of the United States against monopolies and combinations in restraint of trade, and who was thoroughly informed as to the methods of operation of the capitalistic system has since gone on record as follows:--

"Free capitalistic economy not only insures freedom of thought and action, but is the most efficient way of producing and distributing the wealth of the nations for the good of all."

The Editor of the Letter-Review published in Fort Erie said in December, speaking of the grave crises in France and Italy:--

"It remains our opinion that the Communists will not attempt and could not succeed in actual revolution. In both countries, however, there is exactly what we have in Canada-the tremendous mass of public opinion, economically illiterate, convinced that it is possible to have, at the same moment, political liberty and totalitarian control of economic affairs."

I am sorry to end with a word of warning but I think that we are facing a marked recession in business and should be preparing for it.

Canada's financial position also is difficult from the short-term view but the longer future is full of promise for us whose lives have indeed fallen in pleasant places.