Inflation vs. Unemployment

LT. COL. MONTAGUE: Seldom is it our privilege to be addressed by a guest speaker who, by all the laws of normal expectancy, still has the greater portion of his career ahead of him. Usually we listen to those who are either at, approaching or just past the peak of their potential.

Consequently, it is with great pleasure that we welcome our fellow club member The Hon. Paul T. Hellyer, P.C., B.A., who--before his 34th birthday--was sworn of Her Majesty's Privy Council for Canada and Associate Minister of National Defence.

Mr. Hellyer was born on a farm near Waterford, Ontario, and, after his high school years there, enrolled at the Curtiss-Wright Technical Institute of Aeronautics in Glendale, California, from which he graduated in aeronautical engineering in 1941 before his 18th birthday.

His services were quickly snapped up by Fleet Aircraft Ltd. of Fort Erie, where he progressed from junior draughtsman to group leader in engineering on the Cornell elementary trainers being supplied to the R.C.A.F.

On the strength of the private pilot's license he had obtained while in California, Mr. Hellyer joined the

R.C.A.F., but its need for pilots ended before he had earned his wings so he promptly left to serve with the Royal Canadian Artillery until war's end.

Coming to Toronto on demobilization, he purchased a ladies' ready-to-wear business and enrolled at the University of Toronto from which he obtained his B.A. in 1949. He operated his shop until the building in which it was located changed hands in 1956.

Mr. Hellyer is now President of Curran Hall Limited, home builders, and of Trepil Realty Limited, a land development company.

In 1949, he entered politics as a Liberal candidate and was elected to the House of Commons as the Member for Toronto Davenport. He was re-elected in 1953 and defeated in 1957.

February, 1956, before his 33rd birthday, saw him appointed Parliamentary Assistant to The Hon. Ralph Campney, Minister of National Defence, and in April, 1957, he became Associate Minister, just eight weeks before The Right Hon. Mr. St. Laurent resigned as Prime Minister.

Somewhere along the line Mr. Hellyer has found the time and energy to study voice at the Toronto Conservatory; to attend the Banff School of Fine Arts and to participate in operas produced there. He continues to sing as a member of the Westmoreland United Church choir.

Today he will present his views on--"Inflation vs. Unemployment".

Gentlemen: The Hon. Paul T. Hellyer.

MR. HELLYER: I am honoured to have the opportunity to address the Empire Club. Last week you had a Minister of the Crown with you, and I understand that next week you will have another. In view of this, it is particularly gratifying that today you cheerfully came to listen to one of the unemployed.

Karl Marx said that inherent in the capitalist system was the seed of its own destruction. The influence of his writings has been so great that the Communist bloc of nations now poses a real threat to our national survival. It is true that our collective military strength has been a deterrent to communist aggression. It is equally true--now that both sides possess the means of mass annihilation--that military might alone will not solve our problems or protect us from encirclement. Our strength or weakness will depend on our success or failure to attract the loyalty and devotion of men at home and in the uncommitted nations. Our military strength has bought us time--expensive and precious time; time to examine the weaknesses in our private enterprise system and to make corrections--corrections needed to make the system more workable and more attractive to all.

The inference that our system is still far from perfect should not be regarded as heresy. Like Topsy, it just grew, and was not designed to cope with the almost unbelievable changes in society and technology. Like other things that just grow, a little judicious pruning and trimming can make it more productive.

Since the industrial revolution, we have been plagued with periodic recessions and depressions, described as the "lows" of the business cycle. It should be made perfectly clear that these recessions, unlike famines, are not Acts of God, but simply attributable to the folly and inflexibility of man. It is positively encouraging that more progress has been made toward the solution of this problem during the last twenty-five years than in the previous century.

Perhaps the greatest single step forward has been the introduction in most western countries of a central bank. The Bank of Canada, established in 1934 as a private institution and later nationalized, has exercised and incalculable influence on our wartime and post-war financial operations. In the Bank of Canada Act, Parliament gave the bank responsibility for exercising its influence in such a way as to maintain--in so far as may be possible within the scope of monetary action--both the purchasing power of the Canadian currency, and at the same time a high level of employment. This dual responsibility is not always contradictory. It is now obvious, however, that, under certain circumstances, the antidote for one may be the poison of the other.

Schools of thought emerge. There is a body of thought which believes that maintaining the purchasing power of money is of paramount importance, and must be achieved, even at the expense of putting up with something less than full employment.

Another school takes a different viewpoint, suggesting that full employment must be maintained at all times, even at the expense of "creeping inflation". Some of this group would tie social service payments, pensions, and even bond interest and principal, to the cost-of-living index, thereby creating an incredibly complex and administratively impossible set of circumstances.

A much smaller, but none the less important group believes that either continuous inflation, even of the "creeping" variety, or continuous unemployment beyond the seasonal and frictional types, could prove disastrous, and that, if our system is to survive and command confidence, we must avoid both.

In approaching the problems from this direction, we must consider both the short term and longer term prospects. A brief review of developments since 1954 may help to illustrate. During the winter 1954-55 we experienced considerably more unemployment than usual in the post-war period, and the alleviation of that unemployment became the immediate and urgent task at hand. A sharp, widespread tax cut was used as the mechanics recognized by most economists as the fastest, most effective, and most equitable way of infusing new purchasing power and new life into a sagging economy. At the same time, the Bank of Canada increased the money supply considerably, which not only made money more readily available, but also, because of the greater supply, caused interest rates to fall, thereby encouraging public and private investment.

The result of this parallel and complementary fiscal and monetary action, together with external demand for our primary products, was an early and sharp increase in economic activity, and a corresponding decrease in unemployment. The trickle developed into a torrent, and eventually there were indications of economic fever. Too much was happening too fast!

I would like at this time to emphasize that use of monetary and fiscal measures to help iron out economic fluctuations is still in its early and experimental stages. There are many theories, but, unfortunately, they cannot be proven or disproven in the controlled atmosphere of a laboratory. The experiments are being performed in a real society, and in real circumstances. Consequently, we must be patient, and accept mistakes as inevitable mileposts on the road to real achievement.

Perhaps, if we could relive the last four years, our central banks might increase the money supply more moderately in the early stages, and, consequently, have less restraint to exercise in subsequent years.

Now, just as some people thought the Central Bank was a little late in applying restraint in 1955, some argue that it was a little late in easing up its restraint in 1957. It is most difficult to say, with any authority, just when action should be taken, and to what extent. As I said earlier, experience is being gained on the basis of trial and error.

There is, however, an important time lag which must be taken into consideration. Action taken by the Central Bank is made effective through our chartered banking system and its many branches all across the country. Our chartered banks have an outstanding reputation for performing many useful and necessary services. The system was not, however, designed as a broad economic influence to mitigate cycles, and yet that is what it must become in addition to its historic role. Some bankers have been reluctant to assume this new role, and do so with reservation. All are more than anxious to co-operate in the common interest if they are convinced of the goal and familiar with the mechanics for reaching it. The time lag, which is quite significant, persists. It is being shortened as the banking system is streamlined, and made more responsive in its new and vital function.

Whether or not the central bank should have allowed the money supply to increase more than it did in 1957 is a matter of opinion. It is worth noting that, for the last half of the year, its policy was at right angles to governmental fiscal policy, and it is only since the turn of the year that we have seen the two tend again toward parallel.

It may well be that some officials of central banks feel that inflation is till a real problem, and that the only control is to make it difficult, if not impossible, for employers to pass wage increases on to their customers.

The average of weekly wages and salaries in Canadian industry rose from $64.18 in 1956 to $67.70 in 1957, an increase of 5.5%. During the same period industrial production fell .1%, while employment in manufacturing increased by .8%. Marry the two and you have a drop in output per man employed of .9%.

Now, I don't like using averages, and, whenever I do, I think of Mr. Justice Abbott's old story about the man who drowned crossing a river of average depth of four inches. Sometimes, however, averages are both useful and necessary by way of illustration, and surely the ones I have just quoted are worthy of note.

Last year was not typical, however, because usually there is an increase in output. When there is an increase it can be divided in an infinite number of ways. Part of it might be made available to government to meet increasing demands for social security payments and necessary public services. Part could be used to decrease our dependency on foreign capital; and part can be used for real wage increases which can be either saved or spent by the recipient. There are an infinite variety of ways in which the pie can be divided, but the important point is that there is only one pie. What is real can be divided. What is non-existent cannot be. If it is dispersed, it is a counterfeit dispersal, an inflationary fraud.

It is unfortunate that politicians appear to be inherently afraid of trade unionists. There is no need to fear working men. They are about the most sensible people you can talk with if you have time to talk with them. Some of us are guilty of sins of omission. I am convinced that the average working man would prefer a small increase in real wages, rather than a larger counterfeit one. The former is doubly beneficial because it protects the purchasing power of his hard won pension, and means that he will have a higher standard of living when retired.

Of course, if future wage increases were held within the limits of increased productivity, there might be a few negotiators with time on their hands. In that event, some of them could bend their efforts toward the emancipation of the great mass of unorganized politicians, white collar workers, etc. Others could join a great middle of the road political party, and seek election to Parliament where they could negotiate improvements for all the Canadian people.

At this moment, our urgent attention is focused on the employment aspect of our problem. To have so many able bodied men unemployed is a criminal waste of manpower. Not only is it wasteful, but, far worse, it is completely demoralizing. Men and women are going hungry. How can people contemplate the advantages of the economic and political system under which they live when they do not have sufficient money to look after the immediate needs of themselves and their families?

An immediate improvement must be found. Public works are a time honoured palliative. It takes months before such a program can achieve the desired effect. Even then, with the gigantic machinery used in many projects, the labour requirement is very small in relation to the expenditure involved. For example, the Canso Causeway, which cost $22 million provided peak on-site employment of about two hundred souls. Works projects should be recommended, or not, on the basis of their necessity and usefulness, and not just as a means of providing employment. There are stories to the effect that in some countries during the depression of the 1930's men were employed to dig a hole in the ground and then to fill it in again. That is not the type of solution which we seek.

The goal is useful employment in the production of needed goods and services. The consensus, as stated earlier, is that the fastest and most effective means of accomplishing this is to cut taxes on a broad base. The reaction is immediate and automatically channelled in accordance with the needs and wishes of all the people.

Assuming that the problem of unemployment can, and will be solved in the not too distant future, we must, I feel, heed the warning that the problem of inflation may still be with us. There are other facets of inflation which

I have not touched on today. It is a problem requiring the working--and I underline the word working--the working co-operation of management, labour and government, and all of us in our other roles as taxpayers and consumers. It is a problem of education. How many of us can explain, even in the simplest terms, the mechanics of our money supply and how its purchasing power is maintained or lost? The subject should be more widely taught in our educational institutions.

Many people are dedicated to preventing further inflation, and to maintaining the purchasing power of our currency. There are others who are equally, and perhaps just as exclusively, dedicated to the object of full employment, even at the cost of more inflation.

There is now sufficient evidence that I am willing to state the categorical opinion that it is possible in a diversified economy like ours to maintain both full employment and a stable dollar without socialism. Many adjustments may be needed, and the solution will not be easy or immediate. The ultimate power of an idea must not be underestimated, and, if enough of us are sufficiently concerned to make the necessary sacrifice, there is no doubt of ultimate success.

To complete the cycle, may I mention again the seeds of destruction mentioned at the outset. Like in the parable of "the sower", it depends on what kind of soil the seeds find themselves in. On the hard rock of conviction, exposed to the sunlight of truth, the "seeds of destruction" will lose their potency and power.

Each one of us has an important part to play.

THANKS OF THE MEETING were expressed by Controller F. Joseph Cornish, Q.C.