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Canadian federal finance during the Great War Fournier, Leslie Thomas 1923

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Canadian Federal Finan  67 c a-  .'  '  CAEADIAN FEDERAL FINANCE DUHING THE (SEAT WAB.  *y Leslie Thomas Fournier.  A thesis submitted for the Degree of Master of Arts In The Department of Economics  The University of British Columbia, April, 1923.  m/t> kink* wJtf (jJlhaJ>  i  ZiSLlQi&LLZtu  House of Commons Debates - Canada. ^Statutes of Canada. s. Canada Year Book. The Canadian Annual Seview. Pi3ke, H. E. - The Dominion of Canada, K.Y., The Banker1 s Trust Company, 192C. Friedman, E. M. - International Finance and its .Reorganization, N.Y., E. P. Button & Company, 1922. Pigou, A. C. - The Economy and Finance of the War, London, J. M« Dent & Sons, Limited, 1916. Pigou, A. C. - The Political Economy of War, London, 1921, Macmillan <& Company, Limited. Mcholson, J. S. - War Finance, London, P. 3. King & Son, Limited, 1917.  Bogart, E. L. - Direct and I n d i r e c t Costs of the Great World War, Carnegie Endowment for I n t e r n a t i o n a l Peace, 1919. S h o r t t , A. - Early Economic Effects of the War upon Canada, Preliminary Economic Studies of the l a r , Carnegie "Endowment, 1918. I . H. Boggs - The I n t e r n a t i o n a l Trade Balance i n Theory and P r a c t i c e , H.Y., 1922, The Macmillan Company. Slcelton, .0. D. - Federal Finance, Queen's Q u a r t e r l y , 1915. Skelton, 0 . D. - Canadian Federal Finance, 1918. White, Sir Thomas - The Story of Canada's War Finance, Montreal, Canadian Banlc of Commerce, 1921. The Monetary Times - Toronto.  Canada's P a r t in the Great War, 1921 - issued by the Information Branch, Department of External A f f a i r s , Ottawa. Plehn, Carl C. - Introduction to Public Finance, 4th e d . , New York, The Macmillan Co., 1921. Seligman, Edwin R. - Essays i n Taxation, New York, The Macmillan Co., 1921.  CONTENTS CHAPTER I. - Canadian Methods of Finance before the War. i  CHAPTER I I . - A Survey of the Annual Financial Oondition of Canada from 1914 to 1920, with P a r t i c u l a r Emphasis upon the Various Measures Adopted by the Government to Raise Money for EverIncreasing War Expenditure. CHAPTER I I I . - The Cost of the War to Canada. CHAPTER IV. - A C r i t i c a l Examination of Canada 1 s War Finance Policy. CHAPTER Y.  :  - Problems of the Post-War Budget.  r^  l w  " "ETHnns ng giKiura  REMHS  m  gin.  The purpose of this t h e s i s i s to present a surrey and appraisal of Canada's financial policy during the Great War; and to point out some of the problems of the postwar budget.  In the  introductory chapter an attempt w i l l be made te outline federal methods of finance before the war* for the reason that 3anadian War finance polioy can best be examined in the light of previous finance methods. The British North America Act allows the Dominion Government to levy both direot and indirect taxes, whllo i t limits the Provincial Governments t o direot taxation.  Tnis distinction  between direot and indirect taxation i s one which economists commonly make, when c l a s s i f y i n g taxes; - direct taxes* being those collected from persons who are expeoted and intended to bear them; and indirect taxes, those collected from persons who are expeoted to pass them on by charging hleher prices for the objects taxed. Before the war, the federal government obtained practically a l l i t s tax revenue by means of import duties and excise taxes; that i s , by indirect taxation.  The only form of direot taxation was  a head tax on Chinamen coming into Canada. The distinction between direct and indirect taxes has psychological importance, because the individual, being taxed  n  .  indirectly, does not always realize,in the first place; that he is being taxed and if he does, he is ignorant of the amount of the tar.  Very often he is unaware that a large part of his grocery  and drygoods hill is really a payment to his government plus the merchants profit for advancing the amount of the tax. This psychological distinction is well illustrated by the fact that the Canadian tax payer before the war did not make the outcry about his tax bill that the Englishman made about his, and yet the average Canadian was taxed more heavily than the resident of the United Kingdom.  Professor 0. D« Bkelton has compared the  relative tax burdens in the United Kingdom and Canada for the year 1912-13.* ' His figures are compiled from British and Canadian blue books. Throughout his comparison he takes account only of taxes in the strict sense of the term,- receipts from State railways and the post office, which represent voluntary payments for specific services, are not included for either country. Uor is account taken of the burden throv/n on the tax payer by the higher prices charged for protected goods manufactured in Canada: only the taxes paid into the treasury are included. His conclusion is that the resident of Canada was taxed more than twice as heavily as the resident of the United Kingdom. And yet immigrants have long been attracted to Canada because of "our singularly light taxation"l  In fact, on more than one occasion  (1) Federal Finance, pp. 3 and 4.  B,  i n the House of Commons during the e a r l y p a r t of the war, the finance minister i n opposing the adoption of a federal Income tax, spoke of the adverse effect i t •would have on Canadian immigration. The Canadian system of public finance i s s i m i l a r to that of the B r i t i s h i n having a Consolidated .Fund to which are credited and out of which are paid the revenues and expenditures properly r e l a t i n g to each f i s c a l year ending March 3 1 s t .  There  are A so miscellaneous accounts dealing with l o a n s , debt-re lempti on, railway a d m i n i s t r a t i o n , c a p i t a l expenditure on public works, and a variety of other s u b j e c t s .  A, consideration of federal revenues  and federal expenditures i n the period from 1891 to 1914 w i l l i l l u s t r a t e pre-war methods of finance i n Canada.  The main souroes  of revenue of the federal government of Canada froni 1891 to 1S14 are given belcw In tabulated form (see Table I J.  The net debt  and the chief objects of expenditure for the same period are summarized in Tables I I and I I I * In the oost of every branch of administration i t w i l l be seen there was more or l e s s rapid growth.  Of the items of  ordinary or current expenditure charged to Consolidated fund, the chief increases were in subsidies paid to the provinces and in public works, with m i l i t a r y and naval expenditure coming n e x t . The expenditure for post-offioe and government railways showed a rapid i n c r e a s e , which was however more than offset by the fain i n •  See p p . 3a. and 3b.  3«.  Souroes of Bevenue,  Dominion of Canada, 1891-1914.  (Millions of Dollars)  1890-1 ' . : - ; : . :  -: '.:-.  •10-11 »11-12 •12-13 •13-14  H3.3  19.7  28*2  46.0  71.8  85.0  111.7  104.6  6.9  7.9  10.3  14.0  16.8  19.2  21.4  21.4  Chinese Head Sax  •1  •1  .1  1.1  1.6  1.7  1.3  Dominion Lands.  .2  .1  1.5  1.6  3.1  3.7  3.4  3.0  P o s t Of f l o e  2.5  2.9  3.4  5.9  9.1  10.4  lis.O  12.9  Hallways & P u b l i c Works  3.7  3.6  5.7  8.3  10.8  11.6  13.1  14.2  Other Sources  1.8  2.3  3.3  4.3  5.1  4.7  5.3  5.7  36.6  52.6  8 0 . 1 117.8  136.1  168.6  163.1  Customs Hxolse  Total  38.5  .0]  *Mift Ut Debt of Canada (In M i l l i o n s . ) 1690-1 • 9 5 - 6 1900-1 105-6 • 1 0 - 1 1 ' l l - U l o t Debt I n t e r e s t on Debt  2 3 7 . 6 258 . 4 9.6  10.5  266.4 267.0 10.8  10.6  »1*-13 i n * _ i A  340.0  389.0  314.3  385.9  12.5  12.2  12.6  12.8  *vM HI. 0HI£F OBJECTS Of ££tiami2U2Bv 1891-1914 (In Millions of Dollars) Consolidated Pond Debt Charges Subsidies to Provinces P u b l i a Works  1890-1  1895-6  1900-1  1905-6  11.7  12.8  13.4  13.4  14.1  4.2 1.3  1.2 3."  6.7 7.4 8-7 4.9  9.C 9.6  ?>••  :.: 7.5 1.9 4.7 *.1 8-7 3.1 2.2 1.3  1.2  8.0 5.S 1.4 ~.° 4.7 3.2 .  52.4  72.G  81.5  93.1  105.7  1.5 3.9  2.3 .0  2.5 1.6  2.2 2.5  2.0 4.5  21.1  13.7  12.6  1.1 6.0 4.?  2.0  !rH . - .  . •.  •••  •*•  *..' •••  1.3 •6 .1 2.3 .. .1  1.4 •9 . 1.0  7." 1.1 .6 1.5  1.9 1.3 .6 2.1  * J.  .1  .1  .4  29.9  30.5  35.2  1.2 1.2 ... ...  2.2 1.3  2.3 4.1 ... ... ...  °:  .-,.  „  C i v i l Government ,L : •< .. I C T . and S t a t i s t i c s j*^. . , u-itoms and ^xahanpM DO. i . . i o  i, -i-:  Jjjfligration TO*'AL Ci.,l<  I n t e r c o l . and t.±,.i. u^.». jo ' . ' > . ^ a.: . ......  ,  AX  ' ,.:.;(. 3  1' .11 , ,.Jr -  .  aiy.  Iff  | «| •••  -. •  .5  Sill- 1 .?.;, s u b s i d i e s .'' i.: IOi'-U QBAED TOIAX ( i n c l u d i n g other items 40.7 not here t a b u l a t e d . )  A  ••  r ...  9.1 '.: 5.1 1.3 2.6 3.9 1  14.7 11.2 19.C 14.9 12.8 11.1  .1 8.2  j. * J V P.  2.3 1.6  3.7 1.2  .1 »•» 4.1 .3  6.  q q  11.1  31.5  30.4  30.7  1C.1 19.0 56.4  57.9  83.2  122.8  137.1  144.4  186.2  44.0 1i  3.:  14.4 13.«i 13.4 13.7 10.6  1913-14  7.9 6.8 2.2 4.4 1.6 1.3 2.~ 1.8 1.0  3.6 1.1  w -  1912-13  ilil  t o s t Office l i i l i t i a and Defenoe  '.  1911-12 13.8 10.2 1C.3 12,3  1.9 4.5 3.1 1.3  JI-UJ.  1910-11  «•.  .1 ••  .  •••  ..  c  u receipts. Of the lesser items the increase in civil government or civil service expenditure was most noteworthy.  It was, however, the  increase in capital expenditures that accounted for much of the advance on the debit side of Canada's national accounts during this period.  It will be noted that in no year did expenditure on  consolidated account come near exceeding total receipts. When a Canadian finance minister announced a surplus, as was done every year from 1898 to 1914 and a good many years before 1898, he meant that the total receipts exceeded expenditure on consolidated account. Hie fact that the Canadian national debt (net) increased in spite of this apparent annual surplus was because consolidated and capital expenditure taken together exceeded total receipts each year following Confederation,with eight exceptions.  In the fifteen years  from 1900 to 1914 there was spent on capital account nearly three hundred million dollars. Yet the net debt had increased during this period by only seventy million dollars and interest on debt by only two millions a year. Canadian finanoe ministers have always regarded expenditure on capital account as extra-ordinary expenditure and have justified borrowing for that purpose. In this connection Professor Skelton says:-  "Assuming that the expenditures charged to capital  fund are really for permanent objects there seems to be no good (1)  1871, 1882, 1900, 1903, 1904, 1907, 1912, 1913.  5.  reason why they should not be so d i f f e r e n t i a t e d from current outlay as they would be in the case of a p r i v a t e corporation and why, f u r t h e r , the bulk of such expenditure should not be borrowed i f need be and the difference be Ween r e c e i p t s and consolidated fund expenditure be accounted the proper surplus or d e f i c i t .  The bulk  of such expenditure only - for in addition to the sinking fund, a t l e a s t so much should be provided from current revenues as would correspond to the allowance a p r i v a t e company makes for i t s depreciation.  That much p o s t e r i t y may reasonably ask from u s : i f  we do more, and pay for a l l our c a p i t a l expenditures as well out of current taxes, p o s t e r i t y w i l l bless us more abundantly, even though recognizing that our generosity was not i n t e n t i o n a l but was due to the quasi-automatic increase of revenue, following increa.se of imports." 1 An immediate effect of the war on Canada was to wipe out t h i s annual "surplus" over and above current expenditure.  From  1914 onwards the a l l important task w a s , - that of making ends meet on current expenditure.  Even for a year or two before the war, i t  was evident that the margin between current income and current expenditure was becoming a narrow one.  With the closing of the  great railway construction period, and the collapse of the land boom which accompanied i t , imports declined and customs revenues f e l l away.  Indeed, for the f i r s t seven months of 1914,  (calendar pear) federal revenues were 20$ less than for the same (1)  Federal Finances, 0. D. Skelton, p . 1 1 .  s«  period in 1913.  Then oame the war, on the one hand cutting down  revenue s t i l l further by the disturbanoe to shipping and financial arrangements, while, on the other, increasing expenditure tremendously through the instant determination of the people of Sanada to strain every nerve in the struggle fcr the l i b e r t i e s of the world.  7,  A 3UETBC OF TEE ANKUAL FINANCIAL QONDIl'ION Q¥ PANADA  Whan the war broke out Canada was experiencing a business reaction whioh had been in evidense for some months.  This came in  part as a result of the effeat of the Balkan, struggle on the London money market.  Then with the oessation of lntercoorse with the enemy  countries, the Interruption of trade with Great Britain and her allies, the demoralisation of the exchanges, the repositioning of shipping for war purposes, the restrictions placed by the Allies on exports and imports and the closing of the London money market,the external trade was thrown into confusion.  To suoh an extent was  this the case that froii April 1st, 1914, to the following January, the customs duties showed a falling off to +he extent of nearly thirty millions. With the public revenues declining and the London financial market closed, the question of raising money for Canada's capital expenditures and above all for her military effort was a most serious one.  So much so, that the Minister of Finance, Sir  Thomas White, wrote in the latter part of August, 1914, to the Prime Minister, the Ministers of Hallways and Public Works, urging U)  House of Commons Debates - 1915 - Budget speech.  .  that only the progra&ae of public works which was unier way be prooeeded with, and pointing out the serious financial condition with which Oanada was 3 on fronted It; laving to provide in addition to her other expenditures or. consolidate! an! capital account, *ar ll) expenJltaraa of 60 millions for the remainder of the fieoai year. At t h i s time Oanada1 s military • xf-.aniiture was mainly abroad so I t was deeaed advisable to borrow money froa the Britisi. Oovernaent.  fills  polioy was a sound one, since It would hare beer,  a mistake at the outset of the war, with exchange adverse to Oanada, to ralaa money in Qtrt**  to finar.o* military ^xper.iitnrea i s i r e s t  Britain and on the continent.  Furthermore Oanada*a banx deposits  ware fully employed In meeting oosxaeroial requirements.  Ihe lar&e  Canadian loans which were floated iuri:.^ th«: last years cf the war ware made possible by the increase! production withi:-. the country, promoted by the h i £ i prises and large profits,  i!heae profita were  available for war loans, the proceeds of which were a l l expended ir Oanada in the financing of further production,  aaaordingly, for  the period froa September to the en J of ILwoh, l ? l f , British Treasury advances to the Oanadian Government totalled twelve million pounds s t e r l i n g .  "Indeed, Oanada'a whole financial fabric  as a nation depended at the outbreak of the war upon conditions lr; London and upon the polioy of the British Administration."I 2 ' (1)  House of Oosmons Debates, 1916* Budget speech.  (2) file Story of Oanada's War Finanoe, p.  9.  With regard to Canada's c o n t r i b u t i o n in men, i t was thought by many public men t h a t a maximum of 25,000 i n the f i r s t contingent with an a d d i t i o n a l 25,000 l a t e r on, would be a mighty aohievenent on the p a r t of the Dominion and l i k e l y more than would be necessary.  I t was f e l t t h a t with B r i t a i n in the war,  the c e n t r a l Empires must speedily be crushed.  In the l i g h t of  these expectations, expressed in many q u a r t e r s a t the time, i t i s i n t e r e s t i n g to observe the aotual figures of Canada's war army. The t o t a l number of men e n l i s t e d i n Canada from the beginning of the war to November 15, 1918, was 595,441, out of which 418,052 had gone overseas in the Canadian Expeditionary Force.  Until  the winter of 1917-18 the Canadian Expeditionary Force was r e cruited by voluntary e n l i s t m e n t s .  During the winter the Military  Service Act which had been passed the previous July came i n t o operation, and a f t e r t h a t time 83,355 were obtained for the force. These were p a r t l y men who were drafted and p a r t l y men, in the classes called out, who reported v o l u n t a r i l y .  The movement of  troops overseas by years was as followst Before December 3 1 , 1914 Calendar Year 1915  30,999 84,334  " • 1916 165,553 • " 1917 63,536 January 1-November 15. 1918..73.830 TOTAL  418,052  (1) "Canada's Part in the Great War" - Govt. Statlstioe - Sage.  10.  I have said that when the Special Session of Parliament met in August of 1914, the financial prospect for the immediate future was none too bright. Boreover, all the elements contributory to a panic were then present in Canada, as elsewhere.  It  required but the slightest sign in high quarters to spread a laok of confidence, to cause a run on banks and to bring the oountry to financial and business disaster.  The manner in which  the government and the bankers handled the situation and their repidity of aotion was notable.  It drives home the fact that  Canadian executives have the British way of refusing to be stampeded in times of crises.  It is instructive to observe the  manner in which the financial aspect of the war situation was handled.  For this purpose I have summarized the financial  measures passed by the Special War Session of 1914* (1)  The Dominion Government stood ready to issue  Dominion notes to such an amount as was necessary against securities deposited by the banks and approved by the Minister of Pinanoe. This legislation was intended by Parliament "to enable the banks of Canada to extend in this time of stress such credit facilities to the community as may be proper, having regard to (2) prevailing oonditions and the observance of sound banking principle*. (1) The Pinanoe Act, 1914 - Statutes of Canada. (2) House of Commons Debates - Sir Thomas White.  11.  So we see that the finance department was authorized to make advances to the chartered banks by the issue of Dominion notes upon the pledge of securities, deposited with the minister of finance, of such kind and amount as might be approved by the treasury board, which was appointed for this purpose of advising the finance minister as to the securities to be acoepted.  Such advances were  to be repayable at such times as the board might determine, with interest at a rate likewise to be determined by the board but not less than five per cent per annum.  This legislation helped the  banks considerably in financing the operations of railroads, provincial governments, municipalities and corporations, while it also facilitated the financing of the crop movement. (2)  The government authorized the chartered banks of  (Canada to make payments in bank notes instead of in gold or (1) Dominion notes until further official announcement in that behalf. "This action will tend to preserve the Canadian gold supply (2) against demands from foreign sources."  This was in keeping with  the policy of the Imperial Government to conserve the commercial and financial interests of the United Kingdom.  The total amount  of the notes of any ohartered bank in circulation at any time was not to be in exoess of the amount of its notes issuable under the provisions of the Bank Act. (1)  Statutes of Canada - The Finance Act, 1914.  (2) Statutes of Canada - Order in Council, August 3rd, 1914.  12.  (3) pended.  The redemption in gold of Dominion notes was s u s -  The purpose of t h i s law was similar to t h a t of the one  Just described. (4)  The government authorized the chartered banks to  i i s u e excess c i r c u l a t i o n to an amount not exceeding 15$ of the combined unimpaired paid up c a p i t a l and r e s t or reserve fund of the respective banks.  I n t e r e s t not exceeding 5% was to be paid on  the excess c i r c u l a t i o n . (6)  The Governor-in-Souncil was authorized to proclaim  a moatorium i f n e c e s s a r y . I 1 '  Fortunately the necessity for the  proclamation of a moratorium by the Dominion Government did not arise. (6)  An act respecting Dominion notes was passed,  authorizing the finance minister to issue Dominion notes and to hold gold as s e c u r i t y for t h e i r redemption to the amount of E5$ of Dominion notes issued up to 50 million d o l l a r s .  Is security  for the redemption of Dominion notes issued In excess of  fifty  million d o l l a r s , the Minister was to hold an amount in gold equal 12) to such excess. The effect of t h i s aot was to change the previous Dominion Hotes l o t whereby a margin of 25$ gold might be held as s e c u r i t y for an issue of t h i r t y million d o l l a r s .  The  notes outstanding at the end of June, 1914, were |114,182,098 with (1)  Statutes of Canada - The Finance l o t , 1914.  (2)  S t a t u t e s of Canada - The Dominion Hotes l o t . 1914.  13.  a gold reserve of $92,663,575 so that the uncovered i s s u e amounted to $21,518,523 and the percentage of the r e s e r v e to n o t e s i n c i r o u (1) l a t i o n was 8 1 . The m i n i s t e r of finance soon found i t necessary to i s s u e twenty-six m i l l i o n s of Dominion  n o t e s , but was unable to oom(2)  ply with the section of the act regarding security.  Consequently  legislation was passed on this occasion confirming and authorizing these issues of Dominion notes. At the end of June, 1915, the notes outstanding amounted to $152,120,734, with a gold reserve of $89,573,041, so that the uncovered issue amounted to $62,547,693 and the percentage of the reserve to notes in circulation was 59. These figures remained substantially unchanged till the end of June, 1917. By the end of June, 1918, the ratio of the gold reserve to the notes outstanding had fallen to 41$ and to 33$ in 1920. (7) A war appropriation of 50 millions was voted for the remainder of the fiscal year ending March 31st, 1915. This was appropriation, as was likewise the case with eaoh succeeding one, (3) was issued for the following purposes: (a) the defence and security of Canada; (b) the conduct of naval and military operations in or beyond Canada; (c) promoting the continuance of trade, industry and business communications whether by means of insurance or indemnity against war wisk or otherwise; and (1) Canada Year Book. (2) Statutes of Canada (1915), An Act respecting certain issues of Dominion Notes - April, 1915. (3) Statutes of Canada (1915), An Act for granting to His Majesty aid for military and naval defence, April 1915.  14.  (d)  the carrying out of any measures deemed necessary or  advisable by the Governor-in-Oouncil i n consequence of the e x i s tence of a s t a t e of war. (8)  Tariff l e g i s l a t i o n was passed involving new taxa-  t i o n to increase revenues.  This s p e c i a l war t a x a t i o n ohiefly  affected the r a t e s of d u t i e s of customs and excise upon coffee, s u g a r , s p i r i t s and tobacco, and was estimated to b r i n g an e x t r a revenue of $7,200,000 for 1he remainder of the f i s c a l year to end March 3 1 , 1915. The opening of the year 1915 found Canada with her f i r s t contingent overseas and with 50,000 men i n t r a i n i n g a t home. I t was clear that she must r a i s e a d d i t i o n a l revenues.  Industry  and general business were s t i l l f e e l i n g the e f f e c t s of depression; and customs r e t u r n s were showing heavy d e c l i n e s ,  Canada was  obliged to depend upon the B r i t i s h Treasury i n order to meet not only her war expenditure i n England and in Canada, but a p a r t of her public works and railway expenditure as w e l l .  Since  London exchange was a t a premium the B r i t i s h Treasury was quite w i l l i n g to lend to the Dominion even for expenditure other than war expenditure i n Canada.  The s i t u a t i o n i n t h i s r e s p e c t , however,  gradually underwent a change, owing to the immense expenditure by Great B r i t a i n in the United States for munitions, s t e e l and other manufactured products.  foodstuffs,  Thus by June, 1915,  exchange had become unfavorable to Great B r i t a i n and the problem  of finding funds to purchase in constantly increasing amounts in the United States and Canada became a vital one for the British Treasury. It was this that led to the many issues of British Loans in the United States. J  The story of Canadian finance during the war was briefly  as followss Britain lent Canada the money in London to pay all her military expenses overseas. She repaid Britain by moneys placed to her credit in Canada, while Britain used these credits to purchase munitions, wheat, flour and other Canadian products. The sale of these products aided Canadians in subscribing to the war loans. In a sentence, Canada paid the cost of her military operations by her production; and Canadian goods and services constituted the price which Canada paid to Britain for providing flr her expenditure overseas. (Canada, before the end of the war, was to see that not only all her borrowings for this purpose from the British Treasury were repaid, but an indebtedness to her by the British Treasury would arise of 400 million dollars, one half of which would be owed to the Dominion and the other to the Banks. In his budget presented on February 11th, 1915, Sir Thomas White explained the financial arrangement which Canada had made with the Imperial Government. "We shall pay interest at the same rate as is paid by the Imperial Treasury upon its war loans, from the proceeds of which advances are to be made to us. At  16.  suoh time or times in the future as may be agreed upon by the British Chancellor of the Exchequer and the Canadian Minister of finance, a Canadian war loan or loans will be issued and the borrowing from the British Parliament repaid.  It seems to me  that no fairer terms could be named than those so generously (1) accorded us by the Imperial authorities."  He went on to point  out that the expenditure on oapital and consolidated account would be same 60 million dollars in excess of the consolidated revenue for the approaching fiscal year.  In addition to which, the pro-  posed war appropriation for the year was 100 million dollars. "Ify proposals for meeting the situation are as follows:  So far  as special war expenditures are concerned which may reach one hundred million dollars, I should be disposed, if we had not such heavy and uncontrollable oapital expenditure to meet, to recommend that we should pay at least a part of it from current revenue. But it is obvious upon a consideration of the figures which I have submitted that we shall not by any reasonable supplemental taxation measures be able to close the gap between revenue and expenditure, much less to pay a part of the principal of our special war outlay.  In the circumstances I have no hesitancy in proposing to  the House that we shall borrow the full amount required under this heading.  Canadian Governments have always justified public  borrowing for oapital account on the principle that expenditure upon enterprises permanent in their nature, enures to the benefit (1) House of Commons Debates, 1915.  17*  and advantage of future generations, who may therefore fairly be asked to pay interest on the debt contracted in respect to them. If this theory is correct and so far as I know it has never been challenged seriously, then we need have no reluctanoe in borrowing to meet the expense of this war, because such borrowing is for the purpose of accomplishing for future generations that which is infinitely more precious than material undertakings, namely the preservation of our national and individual liberty and the constitutional freedom won by our forefathers during centuries of struggle, enjoyed by us to-day, and destined, we believe, to be ours for all time."  I will reserve for chapter ¥  my criticism  of the idea expressed in this quotation. In order that the country's credit should not suffer it was necessary that an attempt be made to meet at least part of the huge defioit.  This attempt resulted in the passing of the Special  War Bevenue Act of 1915. There were a number cf special taxes which, in summary form, included:  (l) one  percent upon the note  circulation of all Banks, upon the gross income derived in Canada by all Trust and Loan Companies, upon net premiums received in Canada by all Insurance organizations other than Life, Fraternal, Benefit and Marine Association^  (2)  one per cent upon all cable  and telegraph despatches originating in Canada with a charge of fifteen cents or over;  (3) five cents upon railway and steamboat  (1) House of Commons Debates - Budget Speech, February 11/15.  18.  tickets purchased in Canada for any part of Canada, New Foundland, West Indies, and the United States, and five cents additional for eaoh five dollars or fractional part of five dollars; (4)  ten  cents upon every purchaser of a berth in a sleeping oar and five cents for eaoh seat in a parlour oar; (5)  one dollar upon every  purchaser of a ticket entitling the purchaser to transportation by vessel to ports or places other than those mentioned above in (3), if the cost exceeded ten dollars; three dollars if it exceeded thirty dollars and five dollars if it exceeded sixty dollars; (6)  a stamp tax of two cents upon cheques, receipts, bills of  exchange, bills of lading, express and post-office orders; and one cent upon patent-medicines and perfumes of retail price not over ten oents and two oents for over that amount; (7) a stamp tax upon wine, non-sparkling, sold in Canada, of five cents per bottle, one quart or under, and five cents per additional quart; of twenty-five cents per half-pint bottle of champagne and twenty-five oents on eaoh additional pint.  From these Sir Ihoruas White expected to raise  eight million dollars at least. Another fiscal measure was the uniform increase in general customs duties of 7 1/2 per cent and in British preferential rates of 5%,  Wheat, flour, tea, anthracite coal and several  other items were excepted from the increase.  The justification  for this unusual mode of raising tariff rates was that revenue was imperatively needed and it was no time in the midst of war to  19.  revise the whole t a r i f f , item by item.  Under ordinary oircumstanoea,  indeed, the f l a t i n c r e a s e of the preferential t a r i f f by five percent and of the general t a r i f f by seven and a h a l f would be open to grave c r i t i c i s m , and f u r t h e r , the imposition of a tax on a l l but a few a r t i o l e s in the free l i s t would be indefensible even on protectionist principles.  I t would appear strange that  fifty  y e a r s ' experience of t a r i f f s had not made i t possible to d i s criminate between d i f f e r e n t schedules, i n d i c a t i n g in what cases a higher t a r i f f would y i e l d more revenue and i n what cases i t would simply prevent further importation.  But, as pointed out above,  in the early months of the war, immediate revenue was more important than exact J u s t i c e , and a f l a t h o r i z o n t a l increase had the possible advantage that i t could be repealed en bloo in the future.  The new customs and excise taxes imposed in August  1914 were calculated to y i e l d 15 million d o l l a r s in a f u l l year and the additional taxes of 1915 twice that sum.  "The r e s u l t of  t h i s Customs Increase was to almost immediately Increase the national revenue and g r e a t l y stimulate business throughout the country.  I t encouraged production both on the farm and in the  factory; and a s s i s t e d i n conserving Canada's gold supply and the maintenance of our exchange with foreign nations by tending to reduoe our importation of many a r t i c l e s and foodstuffs which we ourselves could produce.  My own view i s that t h i s increase in  customs duties a t the beginning of the war was of the utmost  20.  value to Canada in maintaining general prosperity and financial stability during the war and in the period succeeding the armistice.n^1' In July, 1915, Canada sold in New York twenty five million dollars of one year five per cent notes at par, and twenty millions of two year notes at ninety-nine and a half with the option to holders of oonversicn into five per cent twenty year debentures.  By using the prooeeds for ordinary expenditure there-  by releasing the same amount of Canadian revenues for war purposes, the Canadian finance minister took this loan out of the category of war issue. This was the wish of the Amerioan Government which at this time was neutral.  The first domestic  loan was floated in November of the same year.  For some months  it had been under consideration and it was regarded as a somewhat doubtful experiment. No loan of over five million dollars had ever been subscribed in Canada before and a war issue of less than twenty-five millions would have been hardly worth while. There was, however, the necessity of discontinuing borrowing from the Imperial Treasury for war expenditures in Canada. Exchange with America was unfavorable now to Great Britain. Her purchases in the United States were on a constantly growing scale. Every withdrawal from London by the Canadian Government of funds advanced by the Imperial treasury aggravated the exchange  (1) "The Story of Canada's V/ar Finance" - Sir Thomas White, p.18  21.  s i t u a t i o n and added to the c o s t to the B r i t i s h Government of funds with which to make t r a n s - A t l a n t i c purchases.  Canada  assuredly d i d n ' t desire to lean upon the Imperial Treasury more than was absolutely necessary, but up to the spring of 1915, conditions were far from favorable for domestic financing on a large scale.  1 decided change took place in Autumn.  I t was the year  of the great wheat crop in the Canadian Northwest, and the year in which Canada began to manufacture munitions.  Probably the  most s i g n i f i c a n t sign of the changed conditions was the a l t e r a t i o n of Canada's trade balance. u a l l y adverse.  This for years past had been c o n t i n -  For the t h r e e years ending March 1913, the average  annual excess of imports was 239,000,000; for the year 1913-14 t h i s excess of imports was 180 m i l l i o n s ; by 1915 i t had been reduced to 36 millions and i n the year 1915-16 the balance was favorable (1) to Canada by an amount exceeding two hundred millions. This first Canadian war loan was of maturity of ten years.  It bore interest at five per cent and sold at ninety-  seven and a half.  This gave an interest yield of between five  and five and a quarter per cent.  This rate was considered  rather low in comparison to what could be obtained upon other high grade securities and it was issued free of taxation.  "This  had been insisted upon by the New York interests which floated our earlier loan there and was regarded as a specially attractive (1)  Canada Year Book.  22.  feature by Canadian finanoial experts."*  The privilege, also,  of converting at issue price into bonds of any succeeding domestic loan, was granted to holders of these bonds. The reason for this was that many investing interests were disposed to hold off until the next loan, believing that it must soon come and that with advancing interest rates it would be offered at a more favorable yield.  The objective of the loan was fifty million dollars, toward  which the banks promised to subscribe twenty-five millions.  This  was found unnecessary, however, for the people subscribed slightly over one hundred million dollars.  This notable and striking  success created a sensation at home and abroad; even more so in fact when it was learned that one half of the proceeds of the loan (i.e., 50 million dollars) was to be loaned to the British Government to enable her to purchase munitions, foodstuffs and other supplies in the Dominion. This and all subsequent Canadian war loans, with the exception of the third Victory Loan floated in 1919, were issued exempt from taxation. While it is true that the supreme necessity at the time was to raise funds for the vast war expenditures, the question none the less arises whether the exemption privilege was essential to this end.  So far as Canadian loans floated in the  United States were concerned, the privilege was essential. Yet giving exemption on Hew York issues did not in the least entail  (1)  "The Story of Canada's War Finance" - p. 26.  23.  giving exemption on issues floated at home.  Great Britain exempt-  ed every loan floated in the United States from British taxation, while at the saae time she made issues floated in Great Britain taxable.  There are many factors, indeed, making for the success  of a war loan aside from tax exemption privileges,- patriotism, organization, rate and conversion ptivileges. A comparison may be made between the Victory Loans of Canada and the Liberty Loans of the United States.  The United States was fresh and unpreoedented-  ly prosperous, while Canada had borne the brunt off the war for many months; on the other hand the Republic was planning a much more drastic tax programme. Patriotism counts in the success of a loan, not with all men, but with most, and surely that factor was as great in Canada as in the United States!  It scarcely  requires a great amount of patriotism to be induced to accept 5 1/2 percent tax free bonds for one's money on absolutely safe security.  The rate counts, and Canada offered 5 1/2 percent,  while the United States offered 4 l/2, with not nearly so tempting exemption privileges. 1 conclude this outline of the financial condition of Canada, for the year 1915, with a summary of the revenue and expenditures of the government for the fiscal year ending March 31st, 1916, and of the loans floated during the same period.  r  24.  Consolidated Fund Receipts -  Consolidated Fund Expenditures -  $172,147,483.27 Other Receipts $  $.30,350,726.90  - - - - - - -  1,555.30  Sinking fund |  Capital Expenditure & Other Exp.  1,773,021.11  $ 43,154,020.12  Net Addition to Debt -  War Expenditure  - - - - - - - -  $155,780,087.81  $166,197,755.47  $339,702,502.49  $339,702,502.49  The loans floated during the year: (1)  Amount - $ 23,332,500 - 5 year - 4 l/2$ bonds - March - London  (2)  rt  (3)  •  - $ 20,000,000 - 2  •  (4)  •  - $100,000,000 -10  "  - $ 25,000,000 - 1 year notes - 5% - July - New York »  •  bonds - "  "  •  •  - Nov. - Canada.  In his budget speech on February 15, 1916, Sir Thomas White reviewed the war expenditure, which involved appropriations of 50 million dollars in 1914, 100 millions in 1915, and an e s t i mated 250 million dollars for the coming year 1916 — to meet expenses of troops growing by stages from 50,000 to 100,000, then to 250,000 and with a new authorization in 1916 of a 500000 t o t a l . Sir Thomas White, in his 1915 budget speech, had urged strong objections against the adoption of a direct income tax.  I t will  be well before proceeding with the new features of the budget of  25  1916, to consider this question of the advisability of the adoption of an income tax in Canada in the earlier years of the war. I shall attempt to summarize the arguments both for and against its adoption. One of Sir Thomas White's objections was the heavy expense which he thought would be incurred in creating machinery for assessment, revision, and collection of the tax, as compared with the amount which would be realized. Using the United States as a basis for his argument, he did not see how Canada could hope to raise a sum in excess of two million dollars. Another alleged feature of the tax which made it appear unsatisfactory was the length of time that must elapse before it would become productive. The chief objection of Sir Thomas White's, however, was that under legislation existing in certain of the provinces, income was already subject to taxation by some municipalities and it was not his wish (1) to enter upon their domain.  So far as the immediate necessities  of the war budget were concerned, there is no question that the second objection above mentioned was sound. An income tax requires time, time for thorough investigation as to the best form to adopt, time for getting the machinery of assessment and collection in working order. or excise tax. U)  It could not give results as immediate as a customs But the fact that the war lasted longer than was  Budget Speech, 1915.  26.  expected and that it was found necessary in the following year to impose this "much-talked-of" income tax shows that it might have been better to have made earlier provisions for it. As regards the objection that the yield of the tax would be small as compared with the expense of collection it developed that Sir Thomas White's fears were ill-grounded. His chief objection, however, was the desirability of leaving this and other direct taxes to the provinces.  If the  municipalities and provinces in question had been using the income tax as the sole or even main basis of their tax systems - the objection might have been valid. in a later chapter.  More will appear on this subject  It will suffice here to note that the adoption  of the income tax in 1917 did not have the serious consequences or disadvantages anticipated by Sir Thomas White. An important feature of the budget of 1916 was the Business War Profits Act which provided for the talcing of a percentage of the profits of persons, firms, and companies carrying on business in Canada.  It provided for taxation to the amount of 1/4 of all  profits in excess of seven percent upon the paid up capital of imcorporated companies; except life insurance companies and those engaged in agriculture, and in excess often percent upon the oapital of persons and partnerships engaged in business. (l) Statutes of Canada, 1916.  It applied  27.  only to those firms with capital of $50,000 or over, except manufacutrers of munitions who were taxed under it without respect to capital. ^Furthermore the tax was made retroactive so as to apply to profits made since the beginning of the war.  It will be observ-  ed that incorporated companies were taxed upon a higher basis than individuals and partnerships.  "The reason for this is that  capital in the case of Joint stock companies frequently represents intangible assets or capitalized good-will or earning power. It was deemed impossible to ascertain the precise cash value of the assets of companies relative to their capitalized value - hence the higher tax. Provision is to be taken for preventing evasion of taxation by further stock issues or the incorporation of companies for the purpose of taking over existing businesses. Provision is also to be made for preventing the postponement of the taking of (1) profits in orders and contracts wholly or partially performed."* Banks and oompanies already taxed under the provision of the Special War Revenue Act of 1915 were exempt from this taxation to the extent which they were taxed by the earlier Act.  The yield of the Business  Profit Tax for the year ending March 31/17 was #12,500,000. The details of national financing during 1916 may be sumnarized at this point: (1) Loans in the United States; (2) Loans in Canada; (1)  Budget speech - 1916 - February 15th.  28.  (3)  Loans to Great B r i t a i n f o r the purpose of purchasing  munitions; w i t h a g e n e r a l r e o r g a n i z a t i o n of B r i t i s h and Canadian financial  relationship. In March, 1916, a 75 m i l l i o n d o l l a r loan was p l a c e d i n  New York i n three p o r t i o n s , a t 5%, and bearing f i v e , ten and f i f t e e n year terms.  In Canada two war loans were f l o a t e d during  the year; the f i r s t i s s u e d i n September was a loan of 100 m i l l i o n d o l l a r s , 5% gold bonds maturing i n f i f t e e n years, and the seoond was i s s u e d i n March 1917, t o the e x t e n t of 150 m i l l i o n s for 20 years a t 5$.  I t has a l r e a d y been s t a t e d t h a t 50 m i l l i o n d o l l a r s of the  o v e r - s u b s c r i p t i o n t o the 1915 domestic Canadian loan wa-s l e n t to the Imperial Treasury.  This p o l i c y was continued, a further ad-  vance of 75 m i l l i o n d o l l a r s b e i n g made out of the proceeds of the 1916 war loan; to t h i s the banks added 25 m i l l i o n d o l l a r s , making a t o t a l to that time of 150 m i l l i o n d o l l a r s loaned by the Dominion Government and Banks t o the Imperial Treasury.  By the end of the  year 1916, t h i s f i g u r e had increased to 250 m i l l i o n d o l l a r s . A summary of the revenues and expenditures of the •overnment for the f i s c a l year 1916-17 f o l l o w s ; Consolidated Fund R e o e i p t s 1232,701,294.00 Sinking Fund #  1,471,690.50  Het Addition t o Debt  Consolidated Fund Expenditures $148,597,343.23 Capital & Other Expenditures - # 43,114,960.42 War Expenditure  3264.C30.126.78  3306.488.814.63  $498,203,118.28  #498,203,118.28  29.  In his "budget speech delivered on April 24th, 1917, the finance minister made mention that the policy of the government was "to fund war indebtedness so as to postpone its maturities to periods well beyond the end of the war, and by increased taxation on the one hand, and the reduction of current expenditures on the other, to meet from the annual income all annual outlays, including interest and pension charges, and in addition a substantial amount of the war expenditure itself." There were no tariff changes announced;  but the Business Profits Tax Act of 1916 was amended as  follows: 50$ of all profits in excess of 15$, but not exceeding 20$ per annum and 75$ of all profits in excess of 20$ per annum upon capital.  "That is to say, up to 15$ the business interests  will be liable under the existing legislation and in addition we shall take one-half of their profits between 15$ and 20$ and three-quarters of their profits over 20$. The increased tax will chiefly affect manufacturers of munitions and other war supplies. While the percentage of excess profits which is taken is large, sufficient is left to provide incentive to effort 6n the part of all subject to War-tax."  (2)  The Minister discussed income tax  proposals again, but declared that in view of competitive continental conditions in wealth and population, with the balance in favor of the Unlved States this taxation should not be resorted to  (1) Statutes of Canada, 1917. (2)  Budget Speech - 1917 - April 24th.  30.  u n t i l absolutely necessary, in order that Canada's immigration might not be affected adversely. Financial i n t e r e s t s were in some measure opposed to this Ixoess Profits Tax and Sir Thomas White was strongly c r i t i c i s e d  ID  by the Financial Times of Montreal, in particular, on the ground that (1) the tax was not equitable and discriminated against one small group of c i t i z e n s ; (2) that i t would remove the inoentive to war a c t i v i t i e s of an industrial character and r e s t r l o t production; (3) that i t would eliminate the eouroe of large contributions to war loans and war requirements; (4) that i t was a tax on enterprise and on special a b i l i t y , on capital, on e f f i c i e n t production; (5) that the basis of the so-called excess profits was the keeping of capital and labour occupied twenty-four hours a day instead of eight hours and that the profits were not consequently excessive; (6) that war industries required capital, but only for a limited and doubtful period, and that in order to get and keep investments and increasing plants for a temporary business, large profits were essential.  The fact that none of these dreadful things happened  would lead one to take these arguments for what they are worth. The manufacturers' organ, "Industrial Canada'*, objected not to the principle, but to i t s application,and the Legislative Committee of Manufacturer's Association at Winnipeg on June 15th, 1917, claimed that no amount of revenue which the increased taxation of profits (1)  Canadian Annual Eeview - 1917 - The financial administration of Sir Thomas White.  31.  could possibly yield would compensate for the detrimental effect of such a tax upon the industrial future of the country. It seems to the writer that the war profits tax found its sanction in the conviction of patriotic men that no one should profit largely by the war. Apart from the patriotic aspect, however, there was the plain necessity for more direct taxation.  Taxes  based on consumption, so far as they are based on articles used mainly by the masses, as is often the case, are regressive and therefore undesirable.  Taxes such as tariff duties in so far as  they are levied on machinery, materials, or semi-finished goods, raise costs all along the line and put home industry at a disadvantage in world markets at least in peace time, when competitive conditions obtain. On July 25th, 1917, the minister of finance announced a (1) proposed national income tax. The Military Service Act was about to be passed, establishing conscription in Canada, and as a result increased war expenditure was expected.  Sir Thomas White, who up  to this time had been opposed to the adoption of a federal income tax, was at last obliged to give way.  "In view of the financial  situation, the increased demands which will be made upon us, and the purpose of the people of Canada in this war, it is manifest to me that the time has arrived when we must resort to this measure.* (1) Statutes of Canada - 1917 -August 29th. (2) House of Oonmons Debates - Sir Thomas White - July 25th, 1917. •  32.  He went on to state that apart from the necessity of the tax from a financial standpoint, there had arisen both in the House of Oommons and in the country a very natural and in his view a very Just sentiment that those who were in the enjoyment of substantial incomes should substantially and directly contribute to the growing war expenditure of the Dominion.  The adoption of an income tax  was an innovation in federal government finance; for apart from the Business War Profits tax whioh was a measure of direct taxation, although narrow in scope, the government had relied as we have seen chiefly on customs and excise taxes. The Inoorae War Tax Act which was finally passed on September 20th, 1917, provided for the levy of an inoome tax of 4$ upon all Incomes in excess of $1500 per annum in the case of unmarried men and widowers without dependent children, and upon all incomes exceeding ^3000 in the case of all other persons; and in addition thereto a supertax of 2% upon the amount by which the income exceeded $6,000 and did not exceed $10,000; 5$ of the amount over $10,000 to $20,000; Q% of the amount over $20,000 to $30,000; 10$ of the amount over $30,000 to $50,000; 15# of the amount over $50,000 to $100,000; 25$ of the amount over $100,000. The tax was to apply to all incomes beginning with year 1917. In framing the act the finance minister had regard to the greatly increased cost of living, the Municipal taxation upon incomes, running in some places as high as 3$; and the income taxes of some  33.  of the provinces.  Corporations and Joint stock companies were  required to pay the normal tax of 4% upon income exceeding $3,000 but were not subject to the supertax.  Further more they were  allowed to deduct from their taxes the amounts paid by them for the year under the Business War Profits Act of 1916 and the special War Revenue Act of 1915. The adoption of an Inoome Tax was a step in the direction of a sound financial policy and it is to be hoped it will have the effect of making the federal tax system as a whole proportionate and as time goes on progressive. A notable feature of Sir Thomas White's policy was his continuous financial cooperation with the British Treasury. Substantial sums had already been loaned by Canada to the British Government.  In July, 1917, most urgent despatches were sent to  the Canadian Government by the British authorities pointing out that it would be impossible for them to oontinue purchasing cheese, hay, oats and flour from Canada unless Canada provided the credits. As a result, advances totalling one hundred and seventy million dollars were made by the Canadian Government to the British authorities during the next four or five months. I have indicated elsewhere the extent of the indebtedness of the British Treasury to Government and banks of Canada as of March 31st, 1920. A review of the year 1917 would not be oomplete without some mention of the flotation of the first of Canada's three Victory loans. These three victory loans were floated in 1917,  ^  1918, 1919 respectively, and raised an aggregate of more than seventeen hundred million d o l l a r s .  When we consider that this  sum was almost twice the amount of a l l the deposits In a l l the chartered banks of Canada before the war, we realize why these three victory loans are spoken of as the greatest financial achievement of Canada during the war.  As has already been pointed  out, the business of Canada l i t e r a l l y depended upon her a b i l i t y to finance a large part of her foreign trade,  the people of Canada  met the situation by their subscriptions to the three victory loans.  These loan9 were the foundation of the enormous volume of  business done by Canada during the l a s t two years of the war. They kept the Dominion Treasury In funds through which i t was possible both to meet war expenditures in Canada and supply credits for Great Britain's purchases in Canada.  These loans,  moreover, enabled Canada to conclude the war with practically no floating debt. The year 1917 was probably the most trying period of the war. come.  I t was a time of deep anxiety and uncertainty as to the outWhile i t marked the entry of the United States on the side  of the A l l i e s , I t was also the year of Russia's revolution and subsequent collapse.  The German submarine oamprfgn was at the  height of i t s destruotiveness. (1)  I t was directed at enemy and  In the f i s c a l year 1918 there was an excess of merchandise exports of |622,637,214| in 1919 the excess was $349,053,680; «n& in 1980, |E82,130,586.  35.  neutral shipping alike in the desperate endeavour to starve Britain into submission and bring the war to an immediate end. In order to conserve food and meet as adequately as possible the overseas need, control was established in Canada and the nation put on rations. It was during this year as pointed out that the stress of the conflict and the strength of public opinion in favour of "equality of sacrifice" brought about oonscription. In the realm of finance, the sentiment of the public was refleoted in a desire for heavier taxation.  This desire for heavier taxation  resulted in the passing of the revised Business War Profits Act and the Income Tax Act both of which have been described.  A  statement of the revenues and expenditures for the year followss Consolidated Fund Revenue #260,778,953. Increase in net debt #315,455,066.  Consolidtaed Fund Expenditure $178,284,313. Capital fund Expenditure | 43,111,904 All other civil expenditure $ 11,000,000  War Expenditure $343,836,802. $576,233,019  $576,233,019  The Honorable Mr. A. K. EcLean, a c t i n g minister of finance i n 1918, during the absence of Sir Thomas White, described  36.  t i e f i n a n c i a l requirements for the f i s c a l year 1918-19 i n h i s budget speech delivered on April 30th, 1918, as follows: (1)  Obligations to be met during the year: Bor the c i v i l budget  $230,000,000  For the war budget  $425,000,000  For advances to the Imperial Govt.&325.000.000 TOTAL  (2)  .&980.000.000  Available for the above purposes: Revenue..  $270,000,000  Advances by Great B r i t a i n , t o pay for Sanadian troops overseas..$300,000,000 Unexpected balance of 1917 v i c t o r y loan as of March 3 1 , 1918  $130,000,000  TOTAL  1700.000.000  The amount therefore to be obtained by borrowing t o t a l l e d at l e a s t $280,000,000, and possibly a great deal more.  I t was  necessary t h a t taxes be increased, yet as Mr. MoLean pointed out, "no taxes should be imposed whioh would paralyze industry of any lcind, hamper e n t e r p r i s e , or breed discontent amongst the people; at the same time none should be avoided which were e s s e n t i a l to provide the revenue required and which would d i s t r i b u t e the i n (1) cidence of the burden e q u i t a b l y . "  He pointed out also that  prohibition e n t a i l e d a yearly l o s s of over f i f t e e n million d o l l a r s i n revenue. The Business P r o f i t s War Tax Act, under whioh (1) Budget Speech, April 30th, 1918.  37.  $12,506,516 had been received i n 1916 and $21,271,283 i n 1917, and an estimated $25,000,000 for 1918 was to be continued for another twelve months. The financial measures for the year included an amendment of the Business 'Profits War Tax Aot, in order to tax businesses with c a p i t a l of §25,000 to $50,000.  The tax was 25$ of the amount  of the p r o f i t s exceeding 10$ per annum.  The Income War Tax Act was  amended so as to reduce exemptions, and to increase the r a t e s of the supertax; i n addition to which there was a new war surtax as follows: upon income i n excess of $6,000 but not exceeding $10,000, five percent of the normal tax and supertax payable thereon; upon income in excess of $10,000 but not exceeding $100,000, ten percent of the normal tax and supertax payable thereon; upon income exceeding $100,000 but not exceeding $200,000 f i f t e e n percent of the normal tax and supertax payable thereon; upon income exceeding $200,000, t h i r t y - f i v e percent of the normal tax and supertax payable thereon.  The corporation income tax was  increased from four percent to s i x percent.  Sorporations were,  however, not l i a b l e to pay the supertax or the s u r t a x .  9 M Inland  Revenue Aot was amended to provide for increased taxes p r i n c i p a l l y on tobacco and c i g a r e t t e s .  The Special War Revenue Act was a l s o  amended providing for an increase in the tax on sleeping car berths and parlour oar s e a t s ; an excise tax of one percent per hundred matches, of 8 oents per pack of playing cards; a special ten percent  38.  on automobiles* jewelry, gramophones, ireahanioal pianos, when imported or manufactured in Canada; a tax of ten peroent on tea with corresponding inoreases in the taxes on ooffee and ahloory. In the summer of 1918 a loan of 65,000,COO was plaoed in Hew York, whioh made a t o t a l borrowed there during the war of $285,000,000,  The second riotory loan was issued in November and  realised $681,230,450.  Sir Henry Drayton, minister of finanoe in  1920, In answer to a question in the House of Commons on May 5th, 1920, as to the amount of Canadian government bonds issued in Qanada during the war and s t i l l outstanding, supplied the following figurest Date and Maturity War loan 1915-25  frm^  I'tMfX  Oy.t«t«fllttffi IsWfgh ?1/3C  #100,000,000  #43,246,300  •  " 1916-31  #106,706,300  #54,398,700  "  " 1917-37  #172,926,800  #92,652,800  #546,148,750  #513,628,150  Tiotory loan 1917 "  " 1918  #681,230,450  #676,938,050  •  "  #594,725,200  #666,302,847.42  TOTAL  1919  #1,947,166,847.42 With the exoeption of the 1919 Tiotory Loan these bonds  were a l l issued exempt from federal taxation; so that on Maroh 31/20 the t o t a l amount of outstanding bonds whioh were exen-pt from the operation of the Inoome War Tax l o t was #1,380,846,000.^0.  39.  We may now consider the revenues and expenditures for the f i s c a l year 1918-19.  During the year the expenditure of the  Dominion upon aocount of ordinary services of government amounted to$232,731,282;  the outlay upon c a p i t a l aocount was $25,031,266$  the war expenditure was $446,519,439.  On the other side of the  account we see t o t a l revenues of $312,946,747.  Of t h i s t o t a l  147,000,000 was received from customs, 30 million from excise taxesj 33 m i l l i o n from t a x a t i o n under the Business Profits War Tax A.ot»  10 millions under the Income War Tax Act; 14 millions from  other war taxation and 55 millions from miscellaneous sources including 38 millions from railways.  The increase in the net debt  for the year was ^391,345,240. This concludes the survey of the various financial measures passed by the Canadian government to meet c i v i l and war expenditures.  A c r i t i o a l examination of the p o l i c i e s adopted w i l l  be found in Chapter IV.  40.  3HAPTSE I I I . THE COST OF THE WAR TO CANADA. An a t t e m p t w i l l "be made i n t h i s c h a p t e r t o a p p r a i s e t h e d i r e c t c o s t of t h e war t o Canada.  The d i r e c t money c o s t s of t h e  war may be presumed t o c o n s i s t of t h e a c t u a l cash e x p e n d i t u r e s i n c i d e n t a l to i t s p r o s e c u t i o n .  The books of t h e f i n a n c e  depart-  ment show a t o t a l war e x p e n d i t u r e a s of March 3 1 s t , 1920, of $1,670,410,240.  The annual e x p e n d i t u r e s on war a c c o u n t d u r i n g t h e (1) y e a r s 1914 t o 1920 a r e g i v e n i n t h e f o l l o w i n g t a b l e : 1914-15  $60,750,476  1915-16  $166,197,755  1916-17  $306,488,814  1917-18  $343,836,802  1918-19  $446,519,439  1919-20  -1346.616.954  TOTAL  &1670.410.240  The y e a r 1919-1920 i s i n c l u d e d a s a war y e a r because of e x p e n d i t u r e incurred i n that year for demobilization.  The c o s t of t h e war t o  Canada a s s u b m i t t e d t o t h e S e p a r a t i o n Commission a t P a r i s were e s t i m a t e d a t $ 1 , 5 0 0 , 0 0 0 , 0 0 0 , a f i g u r e t h a t i s s l i g h t l y l e s s than (2) t h a t mentioned a b o v e .  (1)  Canada's P a r t i n t h e Great War - p .  (2)  B o g a r t , E . L . - D i r e c t and I n d i r e c t Costs of the War - p . 5 1 .  41.  There i s reason for Believing that the d i r e c t cost of the war to Canada was more than i s usually represented 'by the a c t u a l expenditures on war account.  The estimated annual i n t e r e s t  charge on Canada's n a t i o n a l debt for instance was on March 3 1 s t , 1920 - $107,000,000, whereas in the l a s t pre-war f i s c a l year, 1913-14, i t was but $12,893,534.  Purthermore there are the pensions  to s o l d i e r s and t h e i r dependents.  For the year 1918-19 the amount (1)  paid on t h i s account was $18,282,440 and for 1919-20 - $26,004,461. For a generation or more Canada may look forward to providing say 35 to 40 m i l l i o n d o l l a r s per annum for pensions.  In addition there  has been the annual expense for the maintenance of h o s p i t a l s , convalescent homes and other services e s t a b l i s h e d for the aid and comfort of the s o l d i e r s . Besides the a c t u a l money c o s t , the cost of a war c o n s i s t s in loss of l i f e , d e s t r u c t i o n of property and loss of economic efficiency.  I t i s impossible to appraise suoh varied values, for  some of them are c l e a r l y not reducible to monetary v a l u a t i o n . Accordingly, no attempt has been made to estimate the i n d i r e c t oost of the war to Canada.  Nor in the estimate of the d i r e c t money  outlay has consideration been taken of the increased expenditure of the federal government on ordinary account since the beginning of the war.  On account of i n f l a t i o n in Canada during the war, the  ordinary expenditures of the government were i n excess of normal (1)  Canada Year Book, 192C.  42.  years.  I t Is true that revenue increased for the sai» reason,  though I t i s extremely doubtful whether rerenue increased on aooount of inflation in the same proportion as expenditures.  In  so far as the exoess ordinary oost of government above normal years oan be measured (deducting the inorease in revenue due to Inflation) i t i s attributable and chargeable to the war. The total war expenditure of $1,670,410,240 for the six war years has already been set forward.  During the same period  the expenditure of the Dominion for c i v i l purposes was $1,425,6"$J3\ This includes the expenditure on current or consolidated fund aooount, oapital expenditure, (including construction of railways, and other publlo works, and railway subsidies) and other minor 11) charges. 1 detailed statement of the foregoing follows: f i s c a l Tear  Consolidated Fund  Oapital Xxp.  1  411 Other Ixp.  1914-16  136,623,206  • 41,447,320  1916-16  130,350,727  38,566,950  4.000,ror  1916-17  148.599,343  26,880,031  16,000,000  1917-18  178,284,313  43,111,904  ll.ooc,ore  1918-19  232,731,283  26,031,266  7,000,00^  1919-20  303,843,930  69,301,877  18,000,000  1,129,332,802  244,339,348  62,000,000  TOTAL  • (approximately) |1)  Oanada's Part in the Oreat War, p.  •  *  10,000,000  43.  !2he t o t a l expenditure for the six f i s c a l years 1914-2C i s therefore as follows: f i s e a l Year 1914- -20 - War E x p e n d l t u r e »  >»  M  it  »  N  N  m - Capital Expenditure...  «  I*  <t  N  - C o n s o l i d a t e d 3fund E x p .  > . - $ 1 ,670 ,410 ,240 • •'ipl  ,129 332 802 244  »UOi/  ,348  52 000 ,000  - A l l other Expenditure. * %  -43, ,096  082 390  During the same period the consolidated fund revenue, t h a t i s , r e c e i p t s from sources other than l o a n s , and including taxes, and Income from l a n d s , public works, p o s t - o f f i c e , e t c . was $1,461,394,649.  In the following t a b l e , i s given an itemized  account of the consolidated fund revenue for each year: (See Table p . 43a.) I t w i l l be noted t h a t in the f i r s t year, 1914-15, the revenue, so far from providing a surplus to be applied on war expenditure, did not  even cover the c i v i l budget, and that a sum  nearly double the amount spent on the war was added to the n a t i o n a l debt.  In the second y e a r , c i v i l r e c e i p t s and expenditures balanced  leaving the whole war outlay to be met by borrowing.  In the  t h i r d and fourth y e a r s , there were substantial surpluses over a l l c i v i l expenditure, making i t possible to apply $41,000,000 in one year and $28,000,000 in the other, to the p r i n c i p a l of the war (1)  Canada Year Book.  OONSOLIDATV-T)  BBBBtt.  (In millions of d o l l a r s ) Year ending Mar en 31st 1914-1915  Items  1915-1916-  1916-1917  1917-1918  1918-1919  1919-1920  Customs  75,941,220  93,640,409  134,043,842  144,172,630  147,169,108  168,796,823  Excise  21,479,731  22,428,492  24,412,343  27,168,445  30,342,034  42,698,083  3,620,782  16,302,238  25,379,901  56,177,508  82,079,302  20,902,384  21,345,394  21,603,542  24,471,709 (1  23,539,759  27,172,208  37,967,551  ) 4.622,592  4,055,662  4,443,758  3,539,927 7,421,002  17,086,981  3,094,012  4,466,724 8,725,995  9,990,345  312,945,747  349,746,335  War Taxes Post Office  13,046,665  18,858,690  Railways  12,149,357  18,427,909  Dominion Lands  2,859,715  2,299,550  I n t e r e s t on Investments  2,980,247  3,358,210  Other I t e m  4,518,490  4,504,796  TOTAL  133,075,482  172,147,838  6,351,049  6,629,893  232,701,294  206,778,953  -•sp*  (1)  $41,402,061 Bailway Revenue was transferred t c special aoooont.  44.  outlay.  In the year 1918-19, there was a surplus of $61,000,000  over all oivil expenditure hut in the following year there was a deficit of $48,000,000, Taking the six years of the war together, therefore, we find a surplus of revenue over all civil expenditure of $35,722,499.  In other words of the total principal of the war  outlay to March 31, 1920, amounting to $1,670,410,240, only $35,722,499, or slightly over 2$, was met out of current revenues. It must, however, he borne in mind that a heavy and rapidly increasing burden of war interest and pensions was met out of current revenue in this period.  On the other hand, the civil  budget had been relieved of the greater part of ordinary military and naval expenditure, running about $15,000,000 a year in peace time. It was suggested in 1919 by Sir Thomas White,  that all  revenues in excess of consolidated fund expenditure should be considered as a surplus applicable on the principal of the war outlay, and that we should consider that a portion of the increased debt has really been incurred for capital expenditure not ordinarily to be met out of current income. There is, of course, a oase for the contention that capital, non-recurring expenditure should be met by loans, not from current revenue. When the capital outlays recur year after year, however, this contention loses force. In any case the practical point is that in normal (l) House of Commons Debates , June 6th, 1919.  45.  pre-war years only a p a r t or none a t a l l of the c a p i t a l expenditure had required to be met by l o a n s .  Ordinary revenue  of l a t e years  had covered both current and o a p i t a l o u t l a y s , including the cost of railway construction and s b u s i d i e s .  iEhe net debt i n 1914 was  only $100,000,000 more than i t was a quarter of a century before so t h a t the annual average shortage was only .$4,000,000.  This  fact i n d i c a t e s , t h e r e f o r e , the basis to be taken in a comparison of war with pre-war Canadian finance. I t would seem that the b a s i s adopted i n estimating the proportion of war expenditures which were met out of war revenues i s p r a c t i c a l as well as f a i r . other bases have been adopted,  Yet i t i s i n t e r e s t i n g to note t h a t air. Friedman in h i s book " I n t e r -  n a t i o n a l Finance and i t s Beorganization", r e f e r r i n g to the r a t i o of war taxes to war expenditures i n the case of United S t a t e s , Great B r i t a i n , France, I t a l y and Germany, uses the terms war tax and war expenditure to mean the surplus over peace f i g u r e s .  Bo  t h a t the war figures are obtained by deducting from the t o t a l f i g u r e s , the figures of the l a s t peace year multiplied by the number of years of the war period.  On t h i s basis he reaches the  conclusion that the r a t i o of war taxes to war expenditures (excluding loans to A l l i e s ) in the case of United States was 31.4$; Great B r i t a i n , 23.1$; France 1.1$; I t a l y , 7$; Germany, 4$. Using t h i s same method of comparison i n the case of Canada, we discover that the war taxes in Canada bore a r a t i o of 24$ to war  46.  expenditures, as shown below: Ratio of war taxes t o war expenditures (1)  "Total expenditures 1914-1920 - - -  $3,096,082,390.  Peace expenditures for six years 6 x $186,000,000 - - - - - - - - - - - .*. (2)  war expenditures .  Total revenue 1914-1920  •-  - - _ •  $1,116,000,000. $1,980,082,390. $1,461,394,649.  Peace revenue for six years 6 x $163,000,000 - - - • ". war revenue •  -  $  978,000,000.  $  483,394,649.  • • Ratio of war revenues to war expenditure • 24$. I t i s evident therefore on t h i s b a s i s Canada does not compare very unfavorably w i t h Great B r i t a i n and the United S t a t e s . However, for the purpose of appraising Canada's war finance policy, i t i s probable t h a t the former basis suggested i s the more useful and satisfactiay. I t i s p e r t i n e n t to our study of the s t a t e of Canada's federal finances during and since the war to r e f e r to the annual increase i n the net n a t i o n a l debt.  I t i s customary for the finance  department when mentioning the public debt to r e f e r to the net debt, t h a t i s the gross debt l e s s c e r t a i n a s s e t s , such as i n v e s t ments and r e s e r v e s .  These a s s e t s are both active and no'n-active;  in the figures presented below, the net debt has been calculated by s u b t r a c t i n g only the a c t i v e a s s e t s from the gross debtx (See p . 46«.)  rear tnding Maroh 81  1914  1915  1916  1917  1918  1919  1920  Total daot  564,391,369 700,473,814 936,987,802 1,362,003,268 1,663,386,899 2,460,163,021 3,041,629,567  fetal Mieti  208,394,619 261,097,731 321,831,631  502,816,970  I t t Debt  836,996,860 449,376,063 615,166,171  879,186,298 1,191,884,063 1,812,584,819 2,248,868,624  I n U r t s t <m dabt I n U r e t t on lnrostMntt (1)  671,451,836  647,598,202  792,660,963  18,893,506  16,736,743  21,421,585  35,802,587  47,845,565  77,531,432  107,527,089  1,964.641  2,980,247  3,366,210  3,094,012  4,466,724  7,421,002  17,066,961  Oanada Toar Book.  47.  Thus the increase in the net debt for the six war years in $1,912,871,574. It is almost entirely attributable to war expenditure.  This is the financial situation so far as it relates  to the national debt.  The amount is large, and averages $250 per  head of population, and the annual debt charge averages $12.00 per head.  However, comparing it with the present national debts of  European countries, including Great Britain, who were active participants throughout the war, and having regard to the relation of  ID debt to number of population and to national wealth, regard it as distinctly more favorable.  we must  It will nevertheless  constitute a burden on the people of Canada for generations to come.  The proportion which the debt charges now bear to the  ordinary expenditures of government and to revenue appears in the following tables Year ending Population March 31.  Revenue per Head  Total Expenditure Debt Charge Civil & War per Head per Head.*  1914  7,725,000  21.12  $ 24.15  1915  7,928,000  16,78  31.00  2.32  1916  8,140,000  21.14  42.37  2.93  1917  8,360,000  27.82  60.00  4.52  1918  8,593,000  30.35  67.76  6.00  1919  8,835,000  35.42  79.20  9.08  1920  9,030,000  38.73  82.00  12.00  $ 2.00  of management, interest, sinking fund and premium, discount and exchange except for year 1919-20 when sinking made a special account. Coates, Dominion Statistician, in Journal Assooiatiation, October, 1919, as $16,060,000,000.  48.  In considering the subject of Canada's n a t i o n a l debt, an important aspect from the viewpoint of i t s bearing on Canada's f i n a n c i a l standing and c r e d i t i s whether i t is abroad.  owed a t home or  I t i s the view of some, including Sir Thomas White, that  a n a t i o n a l debt, no matter where i t i s owed, i s debt, i t does make some difference to n a t i o n a l s t r e n g t h , whether i t i s held in the country i t s e l f , t h a t i s to say whether the people regarded in the aggregate owe i t to individual members of the community, or whether i t i s owed to c i t i z e n s of other n a t i o n s .  From a n a t i o n a l  standpoint i t i s claimed, a public debt owed to a n a t i o n ' s own people i s not nearly so serious an obligation as i f owed abroad. The i n t e r e s t paid upon i t i s disbursed a t home and remains part o\ the n a t i o n a l resouroes.  When the p r i n c i p a l i s paid, there i s a  t r a n s f e r of wealth from the government to i t s own c i t i z e n s .  But  i f the debt i s held abroad every i n t e r e s t and p r i n c i p a l payment diminishes the resouroes of the debtor n a t i o n .  Before the war,  Canada's borrowings for f e d e r a l , p r o v i n c i a l , municipal and indus-j t r i a l purposes were p r i n c i p a l l y in Great B r i t a i n and the United States.  Therefore, i n t h i s r e s p e c t , the s i t u a t i o n as regards  Canada's n a t i o n a l debt may oe regarded with s a t i s f a c t i o n .  On  March 3 1 s t , 1920, the funded debt of the Dominion government was payable as follows:  London  #336,001,470,  Canada  #2,066,856,126,  New York...#135,873,000.  Besides which  there were floating or temporary loans amounting to #88,862,000.  49.  A a g g f l f l H l i m i g f l l 0^ CANADA'S WAR HHAK3IAL POLICY. •Hie purpose of t h i s Chapter i s to appraise the policy of war finance i n Canada i n the l i g h t of accepted p r i n c i p l e s of war finance.  The f i s c a l and sooial considerations to be accounted  for in an i d e a l policy of war finance w i l l be b r i e f l y reviewed, followed by a sketch and i f p o s s i b l e , defence of the shortoomings of Canada's policy in the l i g h t of these considerations. The g r e a t e s t problem t h a t faced the finance department of the federal government was t h a t of securing funds to pay for the vast war expenditures.  I t involved the question as to how far  the government should finance the war by taxes and how far by i n t e r n a l loans.  I n t e r n a l loans, be i t noted, because i t was not  possible to borrow e x t e r n a l l y to any great e x t e n t .  The loans  made by Great B r i t a i n to Canada e a r l y i n the war were but temporary advances to be repaid s h o r t l y from the proceeds of Canadian loans.  Likewise, Canadian loans floated i n New York were a l l  short-time issues with tiie exception of an issue i n March 1916 of $75,000,000 of 5, 10, and 15 year bonds and a r a t h e r unsuccessful issue in the summer of 1918 of $65,000,000. The only other plan a v a i l a b l e for r a i s i n g funds on a large scale - manipulation of the currency - has been almost u n i v e r s a l l y condemned.  The following table t e l l s the story of  Canada's issues of unconvertible Dominion notes:  50.  Year ending June 30th  Notes in Circulation  Specie Reserves  Circulation uncovered by specie.  1914  114,182,098  92,663,575  21,518,523  1915  152,120,734  89,573,041  62,547,693  1916  175,497,175  114,071,032  61,426,143  1917  178,568,009  119,110,113  59,457,896  1918  281,339,514  114,951,618  166,387,896  1919  300,749,844  118,268,407  182,481,437  1920  292,016,290  95,538,190  196,478,100  In respect of the vexed problem of taxes versus loans, let us search out the considerations which determine the proportion of total costs which it is desirable to meet by taxes and loans respectively.  In Chapter II, Sir Thomas White was quoted  to the effect that Canadian governments had always justified borrowing for oapital expenditure on the principle that expenditure upon enterprises permanent in their nature enures to the benefit and advantage of future generations who may, therefore, fairly be asked to pay interest on the debt contracted in respect of them; and that since war expenditure was for the purpose of accomplishing for future generations that which is infinitely more precious than material undertakings, namely the preservation of national and individual liberty, Canada need have no reluctance in borrowing to meet such war expenditure.  This statement illustrates a common  51.  confusion of thought.  I t i l l u s t r a t e s a b e l i e f t h a t i n so far as  war i s financed out of t a x a t i o n , the economic burden involved i n i t i s borne at the time of the war, whereas, in so far as i t i s financed out of l o a n s , the burden i s thrown forward upon the future.  This i s a misconception.  No doubt when Canada borrowed  from the United S t a t e s the burden was shifted to future tax-payers, but, as pointed out, t h i s course was only possible on a small s c a l e . P r a c t i c a l l y a l l Canada's funded debt had to be contracted in Canada.  Canada, by borrowing p r a c t i c a l l y her whole war expenditure  has simply given i n d i v i d u a l c r e d i t o r s the r i g h t to recoup themselves in the future from individual taxpayers.  Such an authority  as A.C. Pigou may be quoted to s u b s t a n t i a t e the theory t h a t "as regards the d i s t r i b u t i o n of war costs between present and future, the influence of the government's choice between taxes and loans (1) is secondary and remote".  We therefore may come to the con-  clusion that the desire to shift part of the financial burden of the war to future generations by a policy of war loans was based upon a misconception. There are several considerations which should determine the relative reliance upon loans and taxes in the financing of a war.  A sound financial program for the conduct of a war requires  first that taxation be adequate to meet interest on the growing debt so that the government may preserve its credit unimpaired (1)  The Economy and finance of the War. - p. 67.  51.  and support the prioe of i t s outstanding s e a u r i t l e s , and seoond that as muoh of the extraordinary expenditure of the war as i s expedient be met out of war taxation.  However, i t i s agreed on  a l l sides* that during the transition period at the outbreak of war* taxation should not be so increased as to prevent the rapid adjustment of industry to the war-time programme * though subsequently the rates should be increased and new taxes instituted to meet as muoh of the extraordinary expenditure of the war as i s possible, t o the limit that war-time production be not curtailed. The reason why a l l economists advocate heavy taxation (along the l i n e s whioh I w i l l indicate) in time of war are readily explained*  The most important reason possibly i s the unfair d i s -  tribution of the war burden between people of different grades of wealth which results from a policy of war loans.  Mr. Figou, in  his book "The Boonomy and Finance of the War",explains this point extremely wellt  "What i s the difference 4 , he asks,"between the  e f f e c t s of raising 1000 millions from the better-to-do classes by means of progressive taxation and by means of war loans, which w i l l , as a matter of f a c t , be subscribed in a progressive sense? I s regards Immediate e f f e c t s , there i s no difference.  These  people provide the money more or l e s s in the same proportion which ever plan i s adopted.  But, as regards aggregate e f f e c t s ,  there i s a great difference.  Under the tax method the rich and  moderately rich really shoulder the whole burden of the charge  53.  that i s laid upon them.  Under the loan method, they do not do  t h i s ; beoause they are compensated afterwards through taxes laid for that purpose partly on themselves, but partly also on the other and poorer sections of the oomraunlty.  Under the tax method  a great deal of money i s obtained from the very rioh and rioh of this generation without compensation.  Under the loan method the  same amount of money i s obtained from them, but a contract i s appended t o the effect that the poorer olasses in future generations • h a l l pay money to their descendants as a reward for their present patriotic conduct. methods.  That i s the v i t a l difference between the two  I t follows, that the root prinoiple, in accordance with  which the Government should decide how far to finance the war by taxes and how far by loans, i s the judgment that i t forms concerning the right ultimate distribution of war costs between people of different grades of wealth."  k second reason i s that  loans lead to inflation to a greater degree than does increased taxation.  Furthermore there are available durir<- a war, special  sources of taxation, such as war p r o f i t s , which should be largely drawn upon, not only on principles of equity but to avert popular discontent.  I t i s also a cardinal prinoiple of war ficanoe that  since inflation inevitably occurs in time of war, i t i s desirable to meet out of current taxation as mush of the inflated oosts of the war as possible* because after the war when prioes f a l l the government w i l l be paying back to the privileged holders <f war  54.  bonds more in commodities (over and above interest payments) than such creditors turned over to the government when they subscribed to the war loans. I t was for these reasons desirable that a large proportion of the oosts of the war should have been met out of ourrent taxation.  What oan Oanada aotually show in this respect?  We dis-  covered in Chapter III that Canada met just s l i g h t l y over ZjL of her war expenditure out of current taxation, using one basis of valuation and 24$ when we used another b a s i s .  Furthermore but  47$ of the total Canadian expenditure during the war was met out of ourrent revenue.  More significant are the figures showing  that federal government revenue averaged $21.40 per head in 1914 and 38.73 per head in 1919-20.  In the meantime, expenditure had  inoreased from 186 millions in 1914 to 736 millions in 1919-20 — that i s , four times the pre-war expenditure.  Owing to inflation  during the war i t i s d i f f i c u l t to form an accurate conclusion, yet i t must be evident that Canada did not pay out of current revenue that proportion of the t o t a l war cost which, in the light of the f i s c a l and social considerations mentioned above, was advisable, and which Canadian war time prosperity would have made possible. I t i s the opinion of most economists that not only should as large a proportion of war costs as possible be met out of ourrent revenues, but that a large proportion of whatever  :i.  ravatrw* ! • ral*»J »*cul4 i a » from tax** ".**'. *4 4;r**i'*jr rr. ;r.*«f»j or taooaa ratfc*r tha« ?r #xt«rS:tur».  Ir, •hi* r**i»i*. 3*..*'.* *»•  fall*4 a i o m i l y •>• *** foll^rlnr t»b»* l«h~«ri-.* th» proiwti ar.  f  4ir*ot to laAlroot tax** In daaada for *a*h of ?»* • !* y»*rtl lllu*trat*ti Taar  fur** on OoaoUBf tlaa  f i r Otnt  tun h r *»M or. Property * l&oom  1114-16  tTttM.OCO  loe  ltlA-14  ua.400,000  »9  l.tCCVC  :  Itl*-1T  ltC.tOC.OC*  n  lS.SCf.Ofr  n  ltit-ie  lfl.tcc.ccr  M  ta.rrr.r^  :>  ltlt-lt  ltt,4CC,flCC>  91  44,SrC.«V*  19  lflWftC  tt?,iec,ecr  TT  6«,ece.ccc  ta  *>IAA  m,scc,c*e  '7  ut.iw.TC  is  •«•  BOM  BM 4#aaa4 for progr***!** »7*t**j »Kl«C "*>r# »*** *"»*• t»i4»r.t Sr. r*yr.% j»*r».  f taxattcr 1* *«*tfc» ir* r.?l j«.I  » » > 9 t l c * to rrcgraoot** taxation, *f »arri*-4 ?vt to; ir%*f. rully, It that i t »oull ••rlcucl* -sv*3i aaxlr.* a-1 haapar 'MS.t'->.  >-i  th* o»>oticr It net <r*:i4 »• r*«ar4* • f*-si»i tax** «•»*•* a* an •xoaatloaal »t»»S9C for f1bar.3}r.« at u»rr*oa4»«t*4 »ar.  »w**.  tax** 414 act oarry an axjaMatioa -t •oatis^aaoa *-*! Si* - ' , m*r*for*. raaat span feat! to of aavta* aa* vent !s t»» « v t*»ai l**l*4 l a U a ariiaarx astro* »f j***.iJ ftaaaa* •..«*•* w  56,  expected to do.  The general effect of t h i s consideration i s to  convince us t h a t a very much larger proportion of the financial burden imposed by the war on the corrnrunity should have been l a i d upon the shoulders of the very r i c h and the r i c h than i t would be proper to lay upon them in respect of normal peace expenditure. In other words the r a t i o in which the war was financed with money borrowed from people with large incomes should have been diminished; and the r a t i o i n which i t was financed w i t h money c o l l e c t e d from them under some form of progressive taxation should have been much increased. Canada was d i s t i n c t l y a t a disadvantage in the e a r l y part  of the war in not having a d i v e r s i f i e d system of t a x a t i o n .  I t i s a circumstance to be r e g r e t t e d that the finance minister In 1914 and 1915 had no other recourse than to increase the customs and excise taxes on the old l i n e s , except the introduction of a few stamp taxes and taxes on a few c l a s s e s of corporations.  Income  taxes, land t a x e s , and general corporation taxes would a l l have required some time for i n v e s t i g a t i o n and for g e t t i n g the machinery i n t o play; and time was lacking.  Yet there can be l i t t l e doubt  that i t would have been possible and d e s i r a b l e to have had a federal income tax e a r l i e r than we did.  I t would then have been  p o s s i b l e to have obtained during the war a larger sum than $29,000,000 from t h i s desirable source.  In conclusion i t may be r e -  marked t h a t the redeeming feature in Canada's war financial policy  57.  was that our showing for the last two years of the war was a great lmprorement orer the earlier years.  i  58  CHAPTER V. ffiQBUHB nff fHHB POST-WAR BUDGET. The Finance Minister, i n h i s 1S23 budget speech, t o l d a story of the burden of debt as an aftermath of the war; of a surplus of revenue over ordinary expenditures swallowed up and turned into d e f i c i t s by expenditure on s p e c i a l accounts and r a i l w a y s .  Yet he closed w i t h a buoyant note of optimism,  arguing t h a t the period of depression through which Canada has been passing i s about over; and w i t h good times, w i l l come balanced budgets and a reduced n a t i o n a l d e b t . A comparison of the annual federal government expenditure for the three post-war y e a r s , 1921, 1922, 1923, with that of the three pre-war y e a r s , 1912, 1913 and 1914, i n d i c a t e s f a i r l y s a t i s f a c t o r i l y the extent of the post-war financial burden. The itemized figures for the pre-war years w i l l be found in Chapter I .  I t w i l l suffice here to again i n d i c a t e the t o t a l s : Total government expenditure for f i s c a l y e a r s : 1911-12  -  $137,100,000  1912-13  -  $144,400,000  1913-14  -  $186,200,000  The t o t a l government expenditure for the f i s c a l years, 1920-21, 1921-22, and 1922-23, were:  59. 1920-21  -  £416,600,000 • $109,997,000 advances to railways.  1921-22  -  £366,700,000 • £ 97,960,000  •  •  •  1922-23  -  •380,600,000 • £ 83,900,000  •  •  "  The explanation for the vaet increase In goveraaent expenditure for normal years It to bo looted for In n aooount of tht poet-war budget.  itemised  The figures for the f i s c a l years  1920-21, and 1921-22 are given below. Consolidated fund Expenditure - for year ending March 31st 140,663,607  1922 139,357,449  Subsidies to Provinces  11,490,860  12,211,924  Colleotlon of Revenue (including Poet Offioe  43,740,040  49,217,080  9,893,863  11,017,533  37,420,751  36,163,031  8,784,178  9,968.932  Publlo forte (Inoons)  10,846,876  10,574,364  Soldiers Civil He-Establishmsnt  36,174,788  17,147,651  63.113.183 361.118.146  61.913.691 347.56C.691  Capital expenditure  40.012,807  16,295,332  tar end Demobilisation  16,997,644  1.644,260  1921  Charge* on Debt  U i l l t i a end Defence Pensions Civil OoTernmsnt  Other Iteios TOTAL  Other Charges CBAKD TOTAL  W*M 418.620.SAa  2£U5iflL 368.T01.791  109,997,666  97,960,646  Canada has b u i l t up a very large public debt, so l a r g e , in f a c t , t h a t the i n t e r e s t alone on t h a t debt c a l l s for the payment of a sum of money g r e a t e r than the t o t a l expenditure of the federal government for the f i s c a l year 1912.  In addition, pay-  ments for pensions and other obligations incurred as a r e s u l t of the war, help to swell the t o t a l .  In a d d i t i o n , the annual d e f i c i t s  of Canada's n a t i o n a l railway system i s a source of worry to government o f f i c i a l s .  The advances made since the close of the war have  been i n d i c a t e d .  They c o n s t i t u t e one of the reasons for Canada's  increasing public debt, the figures of which are given below: Public Debt of C""^ft M of ^ r c n 3 1 s t . M Total Debt Total Assets  1521 2,902,482,117 561.S05.155  2 922 2,902,347,137 460.211.556  1925 2,888,827,237 455.050.568  Het Debt  2.540.878.984  2.422.155.801  2.453.776.869  139,551,520  135,247,849  137,892,735  24.815.246  21.961.515  16.465.503  I n t e r e s t on Debt I n t e r e s t on Investments  The gross n a t i o n a l debt of Canada on March 31st, 1914, was 544,391,369 as against a s s e t s of 208,394,519, leaving a net debt of $334,996,850'.  Comparatively small as was t h i s debt, i t  was a debt incurred almost altogether e i t h e r for public works of general u t i l i t y which, l i k e the I n t e r c o l o n i a l and Transcontinental railways and the canal system, remained a s s e t s , though, perhaps, not r e a l i z a b l e a s s e t s of the nation; or was expended as subsidies to e n t e r p r i s e s which, l i k e the Canadian P a c i f i c Railway, though not government owned, a s s i s t e d g r e a t l y in extending the area of (1) Canada Year Book, 1923.  61 settlement as well as the productive and therefore the taxable capa c i t y of the country. productive purposes.  Broadly speaking, i t was a debt incurred for Also i t was held mainly outside the country.  Great changes have taken place i n Canada's n a t i o n a l debt: (1) the extent of i t s growth has been i n d i c a t e d ; (2) as having been l a r g e l y incurred for war purposes, the gross debt i s not r e p r e s e n t ed by corresponding a s s e t s ; (3) the debt i s held mainly in Canada; (4) the average r a t e of i n t e r e s t paid on i n t e r e s t bearing debt has been considerably increased, namely from 3.52 per cent, as of March 31st, 1914, to 5.120 per c e n t , as of 1923.  Had i t been  possible to keep down the r a t e of i n t e r e s t to i t s pre-war l e v e l , the debt charge would be nearly $45,000,000 l e s s than i t i s . Post-war conversions of debt to lower r a t e s of i n t e r e s t are l i k e l y to reduce s u b s t a n t i a l l y the annual i n t e r e s t payments within the next few y e a r s . The main problem before the government i s to find suitable sources of revenue in order to accomplish the task of reducing Canada's public d e b t .  The d e s i r a b i l i t y t h a t government  revenue should be derived mainly from taxes levied d i r e c t l y on property and income rather than on expenditure, has been pointed out in an e a r l i e r chapter.  The record of Canada in t h i s respect  was not a l l t h a t could be desired u n t i l near the conclusion of the war.  However, a d i s t i n c t improvement in methods of taxation  was made during the war an3 has been followed up i n the post-war budgets.  In the f i s c a l year 1919-20 d i r e c t taxes constituted  62. 23/S of the t o t a l tax revenue for the y e a r .  The sources of r e -  venue for the f i s c a l years (ending Uarch 31st) 1921 and 1922 are given "below:  items  fleoeipts  Customs Excise War Taxes Post-Office Dominion Lands I n t e r e s t on Investments Other Items TOTAL  192j  Receipts 1522  163,266,804  105,686,645  37,118,367  36,755,206  168,385,327  177,484,161  26,706,198  26,402,299  3,955,326  2,799,450  24,815,246  21,961,513  12.044.917 436,292,185  11.173.297 382,262,571  ,  I t can be seen a t a glance t h a t the proportion which the war taxes (Business P r o f i t s Tax, Income Tax and s p e c i a l taxes under the heading of the Special War Revenue Act of 1915) bear to the customs and excise tax i s d i s t i n c t l y more favorable than in previous y e a r s .  Of the t o t a l war taxes i n 1921, the Business  P r o f i t s Tax yielded $40,841,401, the Income Tax, $46,381,824; and under the heading Inland Revenue comes the remainder- $78,803,099. Per 1922 the Income Tax on both personal and corporate income yielded $101,500,000, and Inland Revenue amounted to $75,981,161. The Business P r o f i t s War Tax Act took effect only to the 31st December, 1920. Although the Income Tax was proclaimed a war tax j u s t as the Business P r o f i t s Yv'ar Tax, there can be no doubt but that  63. i t i s here to s t a y .  The fact alone t h a t i t i s needed to a t l e a s t  counteract the r e g r e s s i v e character of some of the customs d u t i e s , i s a good reason for giving i t a permanent place i n Canada's system of t a x a t i o n .  Canada i s not l i k e l y , w i t h i n the next few  generations, to m a t e r i a l l y change her t a r i f f system; protectionism i s too strongly entranched.  Yet the advantages of d i r e c t taxation  in the federal tax system are now being seen and have become i n evidence i n recent l e g i s l a t i o n .  In the 1919 session of Parliament  the Income War Tax Act was amended so as to increase the general r a t e of taxation of the e a r l i e r a c t .  Under t h i s act a l l corpora-  t i o n s paid 10$ of t h e i r n e t income i n excess of $2,000 as against £>% under the former a c t .  In respect of i n d i v i d u a l s , the normal  r a t e of 4$ was to he levied on a l l incomes exceeding 4% but not exceeding $6,000, in the case of unmarried persons and widows or widowers without dependent c h i l d r e n ; and upon a l l incomes exceeding $2,000 but not exceeding $6,000, i n the case of a l l other persons, the respective minima being exempt from t a x a t i o n .  A  normal tax of Q% was levied on the excess of a l l incomes over $6,000.  The surtax was imposed on a progressive scale on a l l  incomes over $6,000 applying f i r s t at the r a t e of 1% on the amount by which the income exceeded $5,000 and did not exceed $6,000, 2% on the amount by which the income exceeded $6,000 but not $8,000; then a t a r a t e increasing by 1% for each $2,000 increase of income up to $100,000, so t h a t 48/& was levied on the amount by which the income exceeded $98,000 and did not exceed $100,000- then  at 52$ on the anount by which the income exceeded 100.000 but not 150,000 - 56$ on 150,000 to 200,000 - 60$, 200.000 to 300,000 - 63$, 300,000 to 500,000 - 64$, 500,000 to 1,000,000 65$ on excess over 1,000,000. In 1920 the Income Tax Act was further amended so as to increase the tax and surtax by 5% on incomes of $5,000 or more.  The present Act is essentially as here recorded.  


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