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War finance in Canada Ostle, Bernard 1946

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WAR FINANCE IN CANADA by BERNARD 0STLE A Thesis submitted i n P a r t i a l Fulfilment of The Requirements f o r the Degree of MASTER OF ARTS i n the Department of ECONOMICS, POLITICAL SCIENCE and SOCIOLOGY The Unive r s i t y of B r i t i s h Columbia August, 1946 WAR FINANCE IN CANADA (An Abstract) This thesis endeavours to l i s t and compare the finance measures undertaken by the Dominion Government during the two great wars i n Canada's his t o r y . However, emphasis has been placed on the war e f f o r t just concluded. Considerable space has been given over to a discussion of the means by which the Minister of Finance made available the funds necessary f o r the prosecution of the war — changes i n the tax system, government borrowing, price and exchange control have been examined i n some d e t a i l . A short note on Canadian Aid to A l l i e s has been included. GENERAL INTRODUCTION Wherever an organized p o l i t i c a l society e x i s t s , i t be-comes necessary f o r i t s government to acquire funds i n order to defray the cost of the services provided by that government. This i s evident to a high degree i n society as we know i t to-day. However, such has not always been the case; f o r when people l i v e d only as families with government authority unknown, the problems of public finance as we know i t to-day did not e x i s t . As s o c i e t i e s advanced, however, the tendency f o r the duties of t h e i r governments to increase both i n number and i n cost was marked and consequently government expenditure i n -creased. This tendency became much more marked i n the period 1890-1914, at the end of which time, the public expenditures of every state had reached considerable proportions. In the years 1914-18, the heavy costs of the war were evidenced i n the un-pa r a l l e l e d increase i n government spending i n a l l the b e l l i g e r -ent states. A f t e r the making of the peace, the public expenditures of the b e l l i g e r e n t countries remained f a r above t h e i r pre-war l e v e l s . Great public debts had been accumulated during the war, the annual i n t e r e s t on which (in many countries) f a r ex-ceed the whole of t h e i r pre-war expenditures. Apart from the burden of war debts, public expenditure increased a f t e r 1914, p a r t l y because of the increased cost of discharging the old duties of the governments and p a r t l y because of the new demands f o r government help which arose on every side both during the war and the d i f f i c u l t period of t r a n s i t i o n which followed. 6 i i Neutral as well as b e l l i g e r e n t states were affected by the l a s t two causes. In the years a f t e r the war, nearly every country was faced with the problem of finding revenues greater than those needed i n the pre-war years — i n some cases many times as large as the pre-war revenues. This increase i n the scale of government finance gave the whole question a new importance. Both the r a i s i n g and spending of the greater revenues were af-f e c t i n g people to an extent never experienced before. The heavier taxation and higher prices imposed heavy burdens, and had a v i t a l e f f e c t upon every branch of economic a c t i v i t y . On the other hand, the increased government spending meant a large increase i n the number of those d i r e c t l y affected by such spend-ing, e i t h e r as holders of interest-bearing government bonds, as government employees or as recipients i n one way or another of assistance from public funds. With the coming of the Second World War, the whole pro-cess was repeated — government expenditures rose rapidly, tax-ation measures st i f f e n e d and economic a c t i v i t y had to be geared to a new pace. Governments were, however, i n possession of more knowledge at t h i s time than they were i n 1914-18 (mainly because of t h e i r experiences during the "First World War) and, although many of t h e i r methods of financing were b a s i c a l l y the same, the execution was more refined. We are again i n that d i f f i c u l t per-iod of t r a n s i t i o n from war to peace, more commonly referred to as the "post-war period", and there i s much speculation as to the methods of financing during the next few years and the prob-a b i l i t y of t h e i r success. However, i n t h i s work, wevare not i i i interested so much in. the post-war period as i n the actual per-iod of war finance. To make a comprehensive survey of the war finance pro-gram i n Canada, one must do more than just compile s t a t i s t i c s and note the changes wrought i n the Dominion's f i n a n c i a l sys-tem during the actual war period. Such a procedure would give a very narrow yiew of the whole problem — i n f a c t , one might say i t would t e l l us p r a c t i c a l l y nothing. When Canada made the t r a n s i t i o n from a peacetime to a wartime economy, her* whole economic outlook was changed. Many overseas markets were l o s t to Canadian exporters, i t became necessary to conserve v i t a l foreign exchange and the entire e f f o r t of the Canadian people had to be directed i n t o the needed channels. Consequently, every aspect of the Canadian economy was affected by the gigan-t i c war e f f o r t . In the following pages, the tremendous growth i n federal expenditure has been examined and an attempt has been made to estimate the economic consequences of these expenditures. Consideration has been given to the means by which the Minister of Finance raised the funds necessary f o r the large expenditure which were an i n t e g r a l part of the war e f f o r t . I t was no mean feat to d i v e r t an ever-increasing amount (both absolutely and proportionately) of the wealth and energy of the Canadian peopl into the prosecution of the war. Many methods were employed to make the funds available and these, with t h e i r consequences, have been examined c a r e f u l l y . We have described the s i t u a t i o n which brought various economic controls into being and outlined some of the problems i v involved. The common genesis of a l l controls i s , of course, war-created s c a r c i t i e s ; the common purpose, to prevent the consequences of i n f l a t i o n . These controls were consequently of a more or le s s temporary nature and adjustments had contin-u a l l y to be made to meet the changing s i t u a t i o n . The method used i n developing t h i s work was, i n the main, de s c r i p t i v e . However, numerous s t a t i s t i c a l references have been used and special inferences drawn therefrom. I t i s our contention that a s a t i s f a c t o r y study of the subject, "War Finance i n Canada", cannot be made without a comprehensive review of government finance i n general, with special emphasis on war finance. Accordingly, t h i s paper has been subdivided into four main topics as follows: Part I deals with government finance i n general and under t h i s heading we have attempted to review the p r i n c i p l e s of public finance and to cover the more important problems which a progressive state encounters.: We have t r i e d to ex-pl a i n the eff e c t s of the r a i s i n g and spending of government revenues on the people of a country as a whole, and i t has been noted that the entire economic p o l i c y of a country may be affected by the methods of government finance employed. Although a war finance program may not be f a i r l y judged on c r i t e r i a which apply to a peacetime period, consideration must necessarily be given to the orthodox approach to the finance problems of governments. The second phase of t h i s study has to do with the various adjustments and problems which aris e i n government finance i n V time of war. A l l great wars i n modern times have been financed by means of issues of paper money (government and bank notes, convertible and inc o n v e r t i b l e ) , by borrowing and by taxation. Except as an extreme measure of l a s t resort, paper money has come to occupy a subordinate p o s i t i o n i n war finance. The accepted p o l i c y i s to issue paper money sparingly and to secure the bulk of the funds required f o r war by means of taxes and loans. Even now, with our tremendous tax burdens, a large part of war financing was carried out by means of loans. While taxa-t i o n , borrowing and cr e d i t expansion are the p r i n c i p a l methods of war finance, they are usually supplemented by other devices designed to increase t h e i r effectiveness and to f a c i l i t a t e the diversion of the national energies toward the war e f f o r t . These supplementary methods include price f i x i n g , exchange control, rationing, wage control and a va r i e t y of Other kinds of government regulation and compulsion. Although we have not discussed these additional methods i n t h i s section, we must keep i n mind that they are part of the comprehensive and varied machinery of war finance. Such items as (a) pri c e s , (b) taxation and borrowing, (c) foreign and i n t e r n a l debts and (d) i n f l a t i o n are examined i n such d e t a i l as appeared neces-sary to the p a r t i c u l a r problem involved. A description of the changes i n the Dominion's finance measures during the F i r s t World War has been made i n Part I I I and serves both as a h i s t o r i c a l background and as a means of comparison i n the discussion of our more recent program of war finance. We have examined not only the changes i n the finance v i measures of Canada and the accompanying growth i n the public debt of the Dominion but also the ef f e c t s on the economic structure of the country. Much regulation and control of business took place during the war period and several pages have been u t i l i z e d i n describing the more important of such government intervention with the working of private enterprise. In the concluding section, we have dealt with the enor-mous war finance program undertaken by the people of Canada dur-ing the war just concluded. A chronological development of the changes i n the finance measures of the Dominion has been re-corded so that one may follow through the growth i n severity of taxation and other methods of accumulating the necessary funds as the war program progressed both i n time and i n inten-s i t y . A short note on the extent of Canadian aid to A l l i e s has also been included to show that Canada r e a l l y entered the war as a United Nation. Considerable space has been u t i l i z e d to describe some of the more important economic and f i n a n c i a l controls imposed on the people of Canada during the war years. Price control and exchange control i n p a r t i c u l a r , with t h e i r close tie-up to the problem of i n f l a t i o n , have been discussed at some length as they were not only important during the actual war period but are of even greater concern to-day as Canada endeavours to make a smooth swing from a wartime to a peacetime economy. The author wishes to acknowledge h i s indebtedness to a l l those who have furnished him with h e l p f u l suggestions and c r i t i c i s m s . He hopes that the following pages may help the v i i general public to understand the problem of war finance as i t has affected every i n d i v i d u a l i n Canada during the period just drawn to a close, and how i t w i l l s t i l l a f f e c t them f o r some time to come. CONTENTS Page General Introduction. i PART I GOVERNMENT FINANCE Chapter I REVENUE AND EXPENDITURE 2 Methods of Raising Revenue 2 Taxation and Expenditure 3 Productive Expenditure.. 4 Unproductive Expenditure 6 State Expenditure and D i s t r i b u t i o n 8 Cost of Raising Revenue 10 Extension of Government Spending 12 I I TAXATION AND EQUITY 14 Proportionate Taxation.. 16 Progressive Taxation 17 Equity i n Practice 17 Equity and Economy. 18 Progressive Taxation and Economy.... 19 I I I PRACTICAL PROBLEMS 22 Administrative D i f f i c u l t i e s of Personal Taxes 22 Productive Indirect Taxes 23 Taxation of Necessaries 25 Case f o r Indirect Taxes 26 Limitations of Indirect Taxes 27 A P r a c t i c a l Advantage of the Income Tax 28 IV TAXATION AND PRODUCTION 29 D i f f e r e n t Uses of Income 29 Expenditure Taxes 30 Income Tax: Spending and Saving.... 31 Income Tax: Earned and Unearned Income. 33 Income Tax: Incentives to Production... 34 Income Tax: Capacity to Produce 36 Income Tax: Investment Abroad 37 Inheritance Taxes 38 Taxes on Land Value 39 Excess P r o f i t s Tax 41 i x CONTENTS Chapter Page V OTHER ECONOMIC CONSIDERATIONS 44 The S h i f t i n g of Taxation... 44, C a p i t a l i z a t i o n of Taxes.... 45 S h i f t i n g of Indirect Taxes 45 Taxes on Developing Industries 46 Import and Export Duties 46 Customs Duties and Foreign Exchange Rates.. 47 • PART I I GOVERNMENT FINANCE IN TIME OF WAR VI WAR FINANCE 51 Price Fluctuations, Taxing and Borrowing... 51 Rising Prices and Foreign Debts 53 F a l l i n g Prices and Internal Debts 54 Government Borrowing 56 Loans versus Taxes i n War Finance 59 Different Methods of Borrowing 60 Borrowing and I n f l a t i o n 61 Irredeemable Paper Money i n War Finance.... 63 Cost of I n f l a t i o n 64 VII THE POST-WAR BURDEN OF DEBT 67 A: INTERNATIONAL DEBT 67 The Growth of International Indebtedness... 67 Repayments: Debtor Countries 68 Repayments: Creditor Countries 70 Pre-war Debts 73 B: INTERNAL DEBT..., 75 The Repayment of Internal Debt 75 Sinking Fund Method 76 Conversion of Debt.. 77 Postponement of Repayment: What I t Means... 78 The Advantages of Immediate Repayment 80 A Levy on Capital 81 PART I I I WAR FINANCE IN CANADA (1914-21) VIII SOURCES OF REVENUE. 87 Introduction 87 Preliminary Steps 89 1914- 15 90 1915- 1 6 . . . . . 92 1916- 17 97 1917- 18 99 CONTENTS Chapter Page VIII SOURCES OF REVENUE (Cont'd.) 1918-19 102 Demobilization 103 Conclusion 104 IX ECONOMIC MEASURES 107 Introduction 107 War-Time Regulation of Business 107 Economic Effects of the War I l l Conclusion 114 PART IV WAR FINANCE IN CANADA (1939-46) X NATURE OF WAR FINANCE MEASURES. 118 1939- 4 0 . .T 119 1940- 41 123 1941- 4 2 . . . . 126 1942- 43. 131 1943- 44.. 135 1944- 45 137 1945- 46 138 1946- 47 142 XI ECONOMIC AND FINANCIAL CONTROLS 145 A: Control of War Supplies 145 B: Price Control 147 War Savings Stamps and Certificates 148 War Bonds 148 (a) Central Bank Loans 148 (b) Chartered Bank Loans, , , 149 C: Wage Control 152 D: Rental Controls 153 E: Foreign Exchange Control 154 Control Measures 155 Control of Foreign Exchange 157 (a) General Controls 158 (b) Controls for Goods and Services 158 (c) Financial Controls 160 The Rate of Exchange 160 The Foreign Exchange Acquisition,Order and Exchange Fund Order ' 161 The War Exchange Conservation Act 162 XII CANADIAN AID TO ALLIES 166 CONCLUSION. .." 177 x i CONTENTS APPENDICES Page A Estimated Population of Canada (1911-1946) 179 B Dominion Revenue and Expenditure (1911-1946)... 180 C Dominion Revenues (1911-1946). 181 D Subdivision of Collections under the Income War Tax Act (1919-1946) 183 E Dominion Expenditures (1911-1946) 184 F Public Debt of Canada (1911-1946) 185 G Interest Paid on the Public Debt of Canada (1911-1946) 186 H Dominion Revenue and Expenditure as Percentages of National Income (1919-1946) 187 I Statement of Assets and L i a b i l i t i e s of Bank of Canada (1936-1946).... 188 J Statement of Assets and L i a b i l i t i e s of the Chartered Banks of Canada (1936-1946) 189 BIBLIOGRAPHY 190 LIST OF CHARTS Page I Assets and L i a b i l i t i e s of the Bank of Canada (1936-1946) 148(a) II Assets and L i a b i l i t i e s of the Chartered Banks of Canada (1936-1946) 148(b) LISTLX3F TABLES Page. I Gross Expenditures of the Mutual Aid Board for year ending March 31, 1944 172 II Gross Aid given by the Canadian Mutual Aid Board during 2 years ending March 31, 1945 174 III Total Canadian Aid to A l l i e s up to March 31, 1945 175 IV Gross Expenditure'of the Mutual Aid Board during year ended March 31, 1946 175 PART I GOVERNMENT FINANCE CHAPTER I REVENUE AND EXPENDITURE Methods of Raising Revenue A government may obtain i t s revenue i n various ways. F i r s t l y , state-owned property may y i e l d an income which can be used for public purposes, and many countries have i n the past derived substantial revenues i n t h i s way. There are, however, few countries i n which i t now y i e l d s more than an i n s i g n i f i c a n t part of the necessary funds. Secondly, a government may r a i s e money'by means of loans, and t h i s method i s extensively used by b e l l i g e r e n t states during war. Borrowing can, however, never afford a f i n a l solution of a country's f i n a n c i a l problems, f o r borrowing implies i n t e r e s t and may ultimately destroy a govern-ment's c r e d i t . Thirdly, a government may carry on a commercial or i n d u s t r i a l undertaking, s e l l i n g i t s products at a price covering t h e i r cost, and possibly making an a d d i t i o n a l p r o f i t which can be used as general revenue, . I t i s generally recog-nized i n countries which propose to foster private enterprise that state enterprises should only be operated where the under-taking i s either unsuitable f o r private enterprise (due to the long period before any return i s a v a i l a b l e ) , or where i t i s i n 1. Adams, H. C , The Science of Finance, p. 227 3. the i n t e r e s t of the people i n general that the state should operate the business as a public u t i l i t y . 1 Fourthly, and the most important method of r a i s i n g revenue, i s taxation. This i s the method on which modern governments have come to r e l y more and more as the means of r a i s i n g the bulk of t h e i r revenue. Another method of r a i s i n g revenue i s f o r the state to 2 d i l u t e the money stream of the country with f i a t currency; 1. e., a deliberate p o l i c y of i n f l a t i o n . This often takes place during war, and serious consequences are inevitable unless the s i t u a t i o n i s quickly remedied. Taxation and Expenditure Taxation has been defined as: "A tax i s a levy by the sovereign upon his subjects f o r the purpose of meeting an ex-penditure undertaken f o r the general belief i t of h i s subjects."^ I t follows from t h i s d e f i n i t i o n that the f i r s t r e s u l t of a tax i s to reduce the power of the i n d i v i d u a l taxpayer to spend or to save; f o r , when a man compulsorily pays a cert a i n part of his wealth to the state, he must reduce h i s private expenditure L or his investments by a corresponding amount. Taxation, i n so f a r as i t i s successful, does not destroy wealth but trans-f e r s the control of i t from private i n d i v i d u a l s to the state — -1. Adams „ H..Q.,oThe. .Science of Finance,pp. 30-31 Pigou, A~. G..A Study i n Public Finance, pp. 44-50 2. Dalton, H., P r i n c i p l e s of Public Finance, p.27 3. Crumb, J". A., Le.cture Notes, University of B r i t i s h Columbia 4. Daniels, W. M., The Elements of Public Finance, p.61 4. Hunter, M. H. and A l l e n , H. K., P r i n c i p l e s of Public Finance, p.41 so that while taxation reduces the power of the taxpayers to . -• spend or save as private i n d i v i d u a l s , i t increases t h e i r power to spend or save c o l l e c t i v e l y through the government. Whether the country w i l l lose or gain by such proceedings depends upon whether the l o s s from reduced private expenditure i s greater or l e s s than the gain from the new c o l l e c t i v e expenditure. In considering t h i s , we have to take into account the e f f e c t of the state expenditure both upon the amount of wealth pro-duced i n the country.and upon the way i n which the wealth i s d i s t r i b u t e d between d i f f e r e n t members of society.^" Productive Expenditure There are various kinds of state expenditure which may be expected to increase the wealth-producing capacity of a country. A government may undertake the provision of goods and services which, although they would otherwise be provided by private enterprise, can be provided most economically by the state. There are, however, some undertakings which a l -though they would not be undertaken (or undertaken i n the same way) by private enterprise, may yet increase the national 2 productivity. Expenditure on railways i n a sparsely populated country might not tempt the private investor, as i t would be years before such an undertaking would pay i t s own way; but such an expenditure might lead ultimately, d i r e c t l y and i n d i -r e c t l y , to an enormous increase i n the prosperity of the com-munity, and might, from the point of view of the country as a 1 . Dalton, H., P r i n c i p l e s of Public Finance, p.205 2 B s able, C. F., Public Finance, p.129 Pigou, H.C., A Study i n Public Finance, p.45 5 whole, prove an extremely good investment. The years before the F i r s t World Yfar saw a eonsiderable increase i n nearly a l l progressive countries of that part of state expenditure which may be regarded as being invested i n the human resources of the nations. Under t h i s heading may be included a l l educational expenditure and expenditure on public health — f o r anything r a i s i n g the l e v e l of physical and mental e f f i c i e n c y may be expected to increase ultimately the productive capacity of the community."*" Also under t h i s heading would come expenditure on the administration of l e g i s -l a t i o n intended to prevent the wasteful use of the human capi-t a l of the country; e.g., factory l e g i s l a t i o n . The tendency to increasing s o c i a l expenditure i s suf-f i c i e n t l y rapid to be a cause of great alarm to those who dread the effects of the heavier burdens of taxation necessary to 2 meet i t . I t s j u s t i f i c a t i o n , apart from the increasing sense of r e s p o n s i b i l i t y to the les s fortunate members of society, i s i n the b e l i e f that most of the expenditure i s l i k e l y u l t i -mately to prove reproductive even from the revenue point of view; f o r , i n so fa r as i t succeeds i n r a i s i n g the l e v e l of physical and mental efficiencs* - i n the nation, i t may be expected to lead to a greater production of wealth and to create new sources of revenue to meet the higher taxes. Such r e s u l t s would, of course, only show themselves slowly and would proba-1. Bastable, C.F., Public Finance, pp. 129-130 Pigou, H.G., A.Study i n Public" Finance, p. 46 2. Dalton, H., P r i n c i p l e s of Public Finance, pp.206-215 V 6 bly always be d i f f i c u l t to measure. Unproductive Expenditure,--; A great part of state expenditure to-day cannot be ex-pected either d i r e c t l y or i n d i r e c t l y to develop productive capacity.''" In expenditure on war, bel l i g e r e n t states turn t h e i r resources from production to actual destruction of the material and human resources of one another. In expenditure on armaments i n time of peace, wealth i s used not to develop exis t i n g or new,sources of wealth, but merely to protect ex-i s t i n g wealth. War expenditure i s not the only kind of state expendi-ture which may be regarded as unproductive. Expenditure on the administration of j u s t i c e can hardly be ca l l e d reproductive 2 i n the economic sense. Some s o c i a l expenditure, such as Old Age Pensions, can hardly be expected to prove reproductive. The emphasis placed on war expenditure i s not due to the fac t that i t d i f f e r s from other unproductive expenditure, but that expenditure on war, and on the preparation for war, and the payment of in t e r e s t on debts accumulated during past war years form the most important items i n the budgets of most modern states. In the years a f t e r the Armistice of World War I, the inte r e s t on the new war debts, the payment of pensions and the increased expenditure on armaments even i n the peace years meant an enormous increase i n the absolute amount of unpro-ductive expenditure. We can expect, indeed already have, 1. Dalton, H., P r i n c i p l e s of Public Finance, p. 207 2. Ibid, p. 209 7 . a r e p e t i t i o n of t h i s type of burden during the next few years. The f a c t that government expenditure does not lead to any increase i n economic prosperity i s no f i n a l reason f o r condemning it."*" How f a r a country may be j u s t i f i e d i n making any s a c r i f i c e to maintain i t s national independence, to f u l f i l i t s treaty obligations, to increase i t s t e r r i t o r i a l possessions or even to punish i t s national enemies are p o l i t i c a l questions which can never be reduced to purely economic terms. There are many other forms of government expenditure which can never be judged simply by t h e i r e f f e c t on economic prosperity. Ex-penditure on the administration of j u s t i c e i s an example. Even i f much s o c i a l expenditure could be shown d e f i n i t e l y to be economically unproductive, probably most modern communities would maintain much of i t on humanitarian grounds; while, i n a democratic community at l e a s t , a p o l i t i c a l case could be made out f o r a good general education, even i f i t could be shown that educational expenditure showed no p r a c t i c a l economic 2 return. We are, however, only concerned with the economic eff e c t s of such expenditure, and the point to emphasize i s that when taxation transfers wealth from private i n d i v i d u a l s to the state, the taxation must reduce the power of those 3 taxed to spend or to save. Where the wealth absorbed i n t h i s way reduces t h e i r power to make expenditure necessary f o r e f f i c i e n c y , or to invest i n productive industry, then taxation 1. Bastable, C. F,, Public Finance, p.131 2. I b i d . , p. 89 3. Dalton, H., P r i n c i p l e s of Public Finance, p. 210 8. w i l l reduce the future production of wealth. Where there i s no counterbalancing economic gain from the government expendi-ture, t h i s must mean a reduction i n the economic prosperity of the community."'' State Expenditure and D i s t r i b u t i o n State expenditure, as well as a l t e r i n g the t o t a l pro-duction of a community, may have an important e f f e c t i n changing the way i n which wealth i s di s t r i b u t e d between d i f f e r e n t members 2 of the community. This may arise i n various ways. The most d i r e c t i s probably when revenue i s raised by taxation of one class and paid out i n the form of money to another. The same res u l t may be achieved more i n d i r e c t l y when wealth i s raised by taxation of one class and the revenue i s used i n providing goods or services which also benefit (or possibly only benefit) other classes. When the state undertakes expenditure which does not y i e l d any d i r e c t return; e.g., the cost of defence; i f the cost of that expenditure i s imposed mainly on ce r t a i n classes, i t w i l l mean that the net money incomes of those classes w i l l be reduced as compared with the incomes of other classes. At the present time, there i s much to be said for re-3 ducing the great e x i s t i n g i n e q u a l i t i e s of wealth. As a man's wealth increases, the s a t i s f a c t i o n he gets from f u r t h e r increases 1. Pigou, A. C , A Study i n Public Finance, pp. 19-55 2. Dalton, H., P r i n c i p l e s of Public Finance, pp. 222-226 3. Ibid., p. 222 Buehler, A. G., Public Finance, pp. 184-185 Wagner, A., Finanzwissenschaft (1899) V o l . 1, 27, cited i n Comstock, A . , Taxation i n the Modern State, pp.38-39 9 . i n wealth tends to diminish. I t may be argued that anything which tends to make the d i s t r i b u t i o n of wealth more equal w i l l . tend to increase the amount of s a t i s f a c t i o n derived from the same amount of wealth. I t w i l l increase the economic pros-p e r i t y of the community because, although not increasing the t o t a l amount of wealth, i t w i l l increase the s a t i s f a c t i o n ob-tained from i t by improving i t s d i s t r i b u t i o n . The great danger of attempted r e - d i s t r i b u t i o n i s always that i t may check the production of wealth. A better d i s t r i -bution of the same amount of wealth may be desirable, but i f the e f f e c t of t h i s i s that i n the future there w i l l be arsmaller supply to d i s t r i b u t e , the case i s not so c l e a r . To take wealth from one class by taxation and to use i t f o r the benefit of other classes may check production i n two ways. The increasing burden of taxation may reduce productivity on the one hand^" — (we s h a l l examine t h i s i n d e t a i l l a t e r ) — the free provision of goods (or money) may check productivity of those who benefit 2 from the state expenditure on the other. I t i s f o r t h i s rea-son that most social, expenditure takes the form of the provision of those goods and services which, as i n the case of free edur-cation, may be expected to rai s e the l e v e l of national e f f i c i e n -cy and thus may be expected to be.productive i n the long run. In t h i s case — the case of free education — the greater equality of opportunity i t implies may, i n i t s e l f , do something to lead to greater equality of d i s t r i b u t i o n . 1. Dalton, H., P r i n c i p l e s of Public Finance, pp. 102-128 2. Ibid. , p. 128 and p. 220 10. Cost of Raising Revenue A l l taxation must., i n the f i r s t instance, reduce the amount of wealth l e f t i n the hands of private i n d i v i d u a l s and therefore make the taxpayers poorer than before. The r e a l costs of r a i s i n g the same amount of taxation w i l l , however, vary from case to case. To take the same amount of wealth by taxation from i n d i v i d u a l s with d i f f e r e n t incomes w i l l normally cause l e s s s a c r i f i c e to the r i c h e r than the poorer"'' — while the same amount of taxation may a f f e c t the wealth production of the country d i f -f e r e n t l y as i t may absorb wealth that would have been used f o r d i f f e r e n t purposes. I f a tax i s on a luxury expenditure, the loss i n s a t i s f a c t i o n w i l l represent the f u l l economic l o s s . On the other hand, i f a tax absorbed money that would otherwise be spent on the necessary food of the poorer workers, there would not only be an immediate loss i n s a t i s f a c t i o n to the consumers, but also — by reducing the e f f i c i e n c y of the workers — be a reduction i n t h e i r productive capacity and thus reduce the wealth produced i n the country as a whole. I f the tax f e l l on wealth which would otherwise not be consumed immediately but would be used f o r investment i n productive industry, there would be no immediate loss through reduction of consumption, but the production of future wealth would be checked. One more point must be taken into account i n estimating the ef f e c t of taxation upon production. When a tax i s imposed, p i t i s normally used f o r a number of years. People expect the 1. Bastable, C. F., Public Finance, p. 289 2. Dalton, H., P r i n c i p l e s of Public Finance, p. 38 and pp.105-117 11. tax and t h i s expectation may a f f e c t the amount of t h e i r pro-duction. A very high tax on large incomes may check the pro-duction of such incomes — hut t h i s i s not l i k e l y , as there are other factors (which- accompany high incomes) which people f i n d a t t r a c t i v e , and as a rule they do not desire to give them up. I f the production of one kind of wealth i s exceptionally heavily h i t by taxation as compared with other kinds, i t s supply may be reduced and other kinds of production substituted. I f a l l saving i s exceptionall}' heavily taxed, the proportion of wealth saved may be reduced and the proportion spent may be increased. As mentioned previously, the possible effects of speci-f i c taxes upon the production of wealth w i l l be dealt with l a t e r . Enough has been said here to show that both the lo s s due d i -r e c t l y to the levy of the tax, and the l o s s due to the expec-tati o n of the tax have to be taken into account."*" In p r a c t i c e , i t i s extremely d i f f i c u l t to trace such r e s u l t s but one point 2 seems c l e a r . The greater the burden of taxation r e l a t i v e to the wealth of the community, the greater w i l l be the d i f f i c u l t y of finding new sources of taxation without a f f e c t i n g production adversely, and the greater w i l l be the danger of the burden of taxation reducing the incentives to production. From t h i s , a general working rule seems to be that the heavier the burden of taxation, the greater i s l i k e l y to be the r e a l cost of r a i s i n g further revenue, and the greater w i l l have to beethe 1. Dalton, H., P r i n c i p l e s of Public Finance, pp. 102-117 2. Hunter, M. H, and A l l e n , H. K.. P r i n c i p l e s of Public Finance ^  p. 170 12. gains expected from further expenditure to make i t worth while. Extension of Government Spending There has been considerable discussion as to how large a part of the wealth of a country should be absorbed f o r pur-poses of state expenditure."'" The view of the c l a s s i c a l eco-nomists was that, apart from defence and j u s t i c e (which had long been regarded as the primary duties of the st a t e ) , state intervention and consequently state expenditure should be kept 2 to a minimum.. These writers were l a r g e l y influenced by the pr e v a i l i n g economic conditions of the l a t e eighteenth and early nineteenth centuries, and also by the corruption and i n e f f i c i e n ^ cy which characterized government intervention and finance. Probably t h e i r p o l i c y was best f o r the period f o r which they wrote, but the l a s t one hundred and f i f t y years have seen great changes both i n economic conditions and i n the e f f i c i e n c y of government administration. There has been a tendency (acceler-ated during the l a s t f i f t y years) to extend the a c t i v i t i e s of government — with consequent increase i n expense. This change i s based on the r e a l i z a t i o n that wealth i n the hands of i n d i v i -duals may be wasted from the point of view of society, and that the i n t e r e s t of the i n d i v i d u a l does not i n v a r i a b l y serve to further, i n the best way possible, the r e a l i n t e r e s t s of the community. There are probably few, even of the most extreme 1. Bastable, C.F., Public Finance, pp. 37-53, PP. 125-140 Buehler, A.G., Public Finance, pp. 58-59 Dalton, H;, Pr i n c i p l e s : .Of ruDlic Finance p. 194 2. Smith, Adam, The Wealth of Nations, pp. 653-768 M i l l , J".S., P r i n c i p l e s of P o l i t i c a l Economy, pp. 531-591 3. Fagan, E.D. and Macy, C.W., Public Finance, pp. 32-33 i n d i v i d u a l i s t s , who would deny to-day that some government spending i s i n the best economic i n t e r e s t s of society. CHAPTER II TAXATION AND EQUITY I f the payment of taxation i s regarded as a burden that in d i v i d u a l s have to bear i n the public i n t e r e s t , i t might seem that the most obvious and f a i r e s t way of d i s t r i b u t i n g i t would be to c a l l upon each member of society to make an equal money contribution. Such a method would, f o r modern conditions, be both impracticable and unjust — the r e a l burdens imposed upon in d i v i d u a l s would be very f a r from equal. Where there i s no great difference i n the economic prosperity of i n d i v i -duals and where taxes are l i g h t , the same objections to uniform taxes per head of population do not e x i s t , and, as a matter of history, such p o l l taxes have played an important part i n the finances of the most pr i m i t i v e economic states. Where considerable inequality of wealth e x i s t s , i t has generally been held that taxation should be d i s t r i b u t e d among indi v i d u a l s according to t h e i r a b i l i t y to pay."L The problem 2 then resolves i t s e l f into f i n d i n g what constitutes a b i l i t y . This has generally been approached from the side of the burden or s a c r i f i c e ^ involved i n the tax payments, and i t i s held that 1. Dalton, H., P r i n c i p l e s of Public Finance, pp. 88-89 2. Lutz,H.L., Public Finance, p. 355 3. Dalton, op. c i t . , pp. 89-90 15. people pay according to t h e i r a b i l i t y (and are f a i r l y treated) i f the payments exacted impose equal burdens. This was the dominant idea i n the philosophy of taxation i n the nineteenth century, and many attempts have been made to f i n d a working -solution of the problem of d i s t r i b u t i n g taxation i n a way that w i l l r e s u l t i n equality of s a c r i f i c e . Although we are discussing "taxation and equity" i n th i s chapter, i t seems an ide a l point, at which to quote Adam Smith's famous Canons of Taxation, which form the basis f o r almost a l l discussion of taxes and taxation problems."'' "Before I enter upon the examination of p a r t i c u l a r taxes, i t i s necessary to premise the four following v maxims with regards to taxes i n general. I. The subjects of every state ought to contribute towards the support of the government, as nearly as possible, i n proportion to th e i r respective a b i l i t i e s ; that i s , i n proportion to the revenue which they re-spectively enjoy under the protection of the s t a t e . . . . In the observation or neglect of t h i s maxim consists, what i s called the equality or in e q u a l i t y of taxation.... I I . The tax which each i n d i v i d u a l i s bound to pay ought to be certai n , and not a r b i t r a r y . The time of payment, the manner of payment, the quantity ±.6 be paid, ought a l l to be clear and p l a i n to the c o n t r i -butor, and to every other person«... I I I . Every tax ought to be l e v i e d at the time, or i n the manner, i n which i t i s most l i k e l y to be con-vient f o r the contributor to pay i t . As he i s at l i b e r t y too, either to buy, or not to buy, as he pleases, i t must be his own f a u l t i f he suffers any considerable inconveniency from such taxes. . IV. Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as l i t t l e as possible, over and above what i t brings into the public treasury of the s t a t e . . . . The evident j u s t i c e and u t i l i t y of the foregoing maxims have recommended them more or l e s s to the attention of a l l nations. A l l nations have endeavoured, to the best of t h e i r judgment, to render t h e i r taxes 1. Smith, Adam, The Wealth of Nations, pp. 777-779 16. as equal as they could contrive; as certain, as convenient to the contributor, both in the time and in the mode of payment, and in proportion to the revenue which they brought to the prince, as l i t t l e burdensome to the people." Having set down these principles to which so much of the work in this thesis has reference, we shall now return to the problem of "taxation and equity" in i t s own r ight , and trace the development of this phase of government finance from the time of Smith to the present day. Proportionate Taxation In the middle of the nineteenth century, the most popu-l a r solution seems to have been that taxable a b i l i t y increased in proportion to income, so that taxation proportioned to i n -come would result in equality of sacr i f i ce . To quote John Stuart M i l l : 1 "The pr inc ip le , therefore, of equality of taxa-t ion, interpreted in i t s only just sense, equality of sacr i f ice , requires that a person who has no means of providing for old age, or for those in whom he i s interested, except by saving from income, should have the tax remitted on a l l that part of his income which i s real ly and bona fide applied to that purpose. The existing tax treats a l l kinds of incomes exactly a l ike , taking i t s sevenpence (now sixpence) in the pound as well from the person whose income . dies with him, as from the landholder, stockholder, or mortgagee, who can transmit his fortune undiminished to his descendants. This i s a v i s ib le injust ice; yet i t does not arithmetically violate the rule that taxation ought to be in proportion to means." The real weakness of M i l l ' s scheme from the point of view of equal sacrif ice i s that there i s no real evidence to show that, even with the modifications he allows, proportionate 1, M i l l , J . S., Principles of P o l i t i c a l Economy, pp. 483-495 17. taxation of income r e a l l y imposes equal burdens on the taxpayers. I t i s probably a closer approximation than the payment of equal money contributions, because i t recognizes the fac t that equal sums of money generally mean les s to the r i c h than to the poor. The only reason that M i l l gives f o r believing that proportionate taxation leads to equal s a c r i f i c e i s that he thinks i t does. I t i s simply a matter of opinion. Progressive Taxation During the years since M i l l wrote, opinion has changed and i t i s now generally held that to arr i v e at approximately equal burdens, the burden of taxation must be d i s t r i b u t e d i n such a way that, as incomes increase, the amount paid i n taxa-t i o n should increase, not proportionately but prog r e s s i v e l y . 1 The idea of progression f i t s i n with our general ideas of f a i r -ness. I t seems f a i r that the broader shoulders of the r i c h should bear the heaviest share of the national burden of taxa-t i o n , and there seem r a t i o n a l grounds f o r assuming that as i n -comes increase and the surplus beyond necessary expenditure becomes lar g e r and larger, these incomes can pay increasingly heavy rates of tax without encroaching on any necessary ex-penditure, and without causing any p o s i t i v e hardship to the taxpayers• Equity i n Practice 1 When considering equity, there are certain p r i n c i p l e s which may be used as guides by the taxing authority:-1. Dalton, H., P r i n c i p l e s of Public Finance, p. 93 IS 1. Some degree of progression i s e s s e n t i a l . Even M i l l ' s scheme of the exemption of a minimum f o r necessaries resulted i n a very s l i g h t progression i n the rates of tax on t o t a l incomes. 2 . The progression must never be carried to a point at which a man's net income i s a c t u a l l y reduced (after payment of the tax) by an increase i n income. 3. In no circumstances can taxation be equitably based on purely a r b i t r a r y p r i n c i p l e s which can have no con-nection with taxable capacity. 4. Taxes.must not f a l l so heavily upon one class that the standard of l i v i n g of that class has to be appreciably re-duced, while other classes s t i l l r e tain a surplus beyond a reasonable standard. The above are at most l i m i t i n g p r i n c i p l e s and give very l i t t l e p o s i t i v e guidance f o r the d i s t r i b u t i o n of taxation. I t i s impossible to say what a c t u a l l y constitutes equity, but i t has been attempted i n order to prevent great r e a l s u f f e r i n g . Equity and Economy The concept of minimum s a c r i f i c e rather than equal s a c r i f i c e was the next theory put forward. In t h i s , the l o g i -cal economic po s i t i o n of the state would seem to be to attempt as f a r as possible to d i s t r i b u t e taxation i n the way that w i l l , taking both present and future prosperity into account, injure as l i t t l e as possible the permanent economic i n t e r e s t s of the community."'' This involves considering not only the immediate 1. Dalton, H., P r i n c i p l e s of Public Finance, p.90 19. l o s s i n s a t i s f a c t i o n to the taxpayer, hut also the productive value of the wealth taxed. 1 I t i s not a p r i n c i p l e that i s easy of application, but i t i s c e r t a i n l y more desirable than the idea of equal s a c r i f i c e . The doctrine of minimum s a c r i f i c e would not necessarily clash i n practice with the p r i n c i p l e s of equity which were the 2 only d e f i n i t e results that the idea seemed to give us. Certain-l y a l l these p r i n c i p l e s seem j u s t i f i a b l e both on the grounds of economy as well as of equity. The real change introduced by the idea of minimum s a c r i f i c e i s the d e f i n i t e recognition of the f a c t that, i n considering what constitutes equity, not only the immediate loss to the consumer but also the productive l o s s due to the tax must be considered. This idea has long been ac-cepted i n p r a c t i c e . The great recent developments i n progres-sive taxation seem to have been accepted as much on the grounds that they were the most economical methods of getting the high revenues needed, as that they conformed to any abstract standards 3 of equity. Certainly, not many years ago, such steep gradations of taxation as we have to-day would have been condemned i n un-measured terms as robbery of the r i c h . Progressive Taxation and Economy L Progression has been so generally j u s t i f i e d as leading to greater equality of s a c r i f i c e that i t seems worth emphasizing 1. Dalton, H., P r i n c i p l e s of Public Finance, p. 90 2. I b i d . , p. 93 3. Loc. c i t . 4. Loc. c i t . 20. that both opinions and practice on t h i s point have been largely-formed by the economic conditions and f i s c a l needs of the time. When taxes were low and wealth was f a i r l y equal, poll-taxes presented no great d i f f i c u l t i e s . When taxes absorbed a l a r g e r (but s t i l l moderate) proportion of wealth, taxation proportioned to income caused no great hardship, and when a minimum f o r physical necessaries was exempted, did not encroach appreciably upon necessary expenditure. When taxation became increasingly heavy and i n e q u a l i t i e s of wealth increasingly great, progres-sive taxation became the only p r a c t i c a l method of r a i s i n g the revenue needed. From the point of view of equality of s a c r i -f i c e , i t i s d i f f i c u l t to j u s t i f y any p a r t i c u l a r rates of progres-sion but, where the t o t a l revenue to be raised i s high, a strong-er case f o r steep progression can be made from the side of ec-onomy. One l a s t point may be noted i n t h i s connection. A too r i g i d insistance upon the necessity of equality between tax-payers as the only just treatment seems i r r a t i o n a l i n the l i g h t of the s o c i a l p o l i c y of most progressive states."'" Most countries are attempting ( i n one way or another) to bring about some s o c i a l and economic readjustments — expenditure on health and education has been developing, and more constructive p o l i c i e s have been adopted f o r the help of the poor i n periods of special neces-s i t y . When the state recognizes i n i t s spending p o l i c y that i t 1. Pigou, A. C , A Study i n Public Finance, pp. 59-63 Dalton, H., P r i n c i p l e s of Public Finance, pp. 170-172 Lutz, H. L., Public Finance, pp. 358-365 may be i n the public i n t e r e s t that i n d i v i d u a l s should receive unequal treatment, i t seems that an attempt to aim at r i g i d equality of treatment i n the c o l l e c t i o n of revenues i s not consistent. CHAPTER I I I PRACTICAL PROBLEMS Administrative D i f f i c u l t i e s of Personal Taxes Whatever theories of taxation may be accepted, t h e i r application w i l l always be li m i t e d by the p r a c t i c a l d i f f i c u l t i e s of administration. However a t t r a c t i v e a tax may seem i n theory, i t i s p r a c t i c a l l y useless as an instrument of revenue i f the large r part of i t s y i e l d i s swallowed up i n the costs of c o l -l e c t i o n . However f a i r a tax may seem on paper, i t w i l l be fundamentally unjust i n practice i f a large part of the people who should pay i t can evade i t with impunity. For many years, the development of any s c i e n t i f i c scheme of taxation was heavily handicapped by administrative d i f f i -c u l t i e s . 1 Personal taxes; i . e . , taxes l e v i e d d i r e c t l y upon the income or property of the i n d i v i d u a l , were almost impossible because of the d i f f i c u l t i e s of assessing the income or wealth to be taxed". Immovable property was easy to assess — i t was v i s i b l e and fixed — but to assess property held i n the form of investments, and to assess annual ihcome, i n v o l v e d . d i f f 1 -c u l t i e s which most countries have only recently p a r t i a l l y solved. Even when d i r e c t personal taxes were introduced, admin-1. Hunter, M. H. and A l l e n , H.K., Pr i n c i p l e s of Public Finance pp. 271-272 23. i s t r a t i v e d i f f i c u l t i e s prevented any elaborate graduation, or the use of any other method of adjusting taxes to differences in'the taxpayers!- needs. A l l through the nineteenth century, the great finance ministers l a i d emphasis on t h i s need f o r s i m p l i c i t y i n taxation. Gladstone, f o r instance, refused to introduce i n the English income tax the difference i n rates charged on earned and unearned incomes (suggested by M i l l ) , not because he considered i t undesirable, but because of admin-i s t r a t i v e d i f f i c u l t i e s . Any increase i n the complexity of a tax increases administrative d i f f i c u l t i e s i n two ways:-(a) I t increases the cost of c o l l e c t i o n . (b) I t increases the p o s s i b i l i t y of evasion. In spite of the administrative d i f f i c u l t i e s , the l a s t f i f t y years have seen an enormous development i n personal taxes. These developments have made possible a much closer graduation of taxation to the means of the taxpayer. The changes have be-come practicable only through great administrative changes and would have been considered impossible quite a few years ago. Productive Indirect Taxes Before the great development of d i r e c t taxes, a l l coun-t r i e s depended (for a large part of t h e i r revenue) upon taxes imposed' on commodities. Such taxes are normally co l l e c t e d from the manufacturer or importer of the taxed goods, but i t i s i n -tended that they s h a l l ultimately be shifted to the consumers i n the form of an addition to p r i c e . 1 Indirect taxes of t h i s 1. Adams, H. C., The Science of Finance, p.3&4 24. kind are s t i l l an important source of revenue i n a l l countries, although with the (recent development of d i r e c t taxes, the pro-portion of t o t a l revenue raised from them has tended to decrease. The number of taxes on commodities which are capable both of cheap c o l l e c t i o n and of y i e l d i n g a large tax revenue i s l i m i t e d . Such taxes are expensive to c o l l e c t unless they can be imposed or checked at cert a i n centralized places. The popularity of customs duties from the revenue point of view i s explained because i t i s possible to make a f a i r l y close inspec-t i o n of taxed a r t i c l e s at ports or international railway and plane centers, and the cost of c o l l e c t i o n i s cheapened. Where taxes are imposed on commodities produced and consumed i n the taxing country, t h e i r production has to. be watched and, except when the production i s centralized, the c o l l e c t i o n becomes cos t l y and d i f f i c u l t . I f taxes are Imposed on commodities which are not con-sumed on a large scale, the y i e l d w i l l not be great. I f the taxed commodity i s one where.a s l i g h t r i s e i n p r i c e means a f a l l i n g o f f i n consumption, the tax i s l i k e l y to be thoroughly uneconomical. The r i s e i n price due to the tax w i l l k i l l the demand and dry up the source of the tax. The consumer suffers because he has to f i n d an al t e r n a t i v e commodity, the producer suffers from the check to his sales and the national treasury does not gain. The net y i e l d of an i n d i r e c t tax i s l i k e l y to be great only where the three following conditions p r e v a i l : -(1) The tax must be capable of f a i r l y easy c o l l e c t i o n . (2) The commodity taxed must be l a r g e l y consumed. 25. (3) The demand for the commodity must be so stable that a f a i r l y heavy rate of tax can be imposed without destroying consumption. Taxation of Necessaries The commodities which f u l f i l the l a s t two conditions are c h i e f l y necessaries, 1 f o r these are l a r g e l y consumed and people are not l i k e l y to economize on them to any great extent i f t h e i r prices r i s e moderately. A small r i s e i n the price of bread or sugar or coffee i s not l i k e l y to check demand, and f o r a l l necessaries, a f a i r l y i n e l a s t i c demand probably exists un-le s s there i s an obvious substitute e a s i l y a v a i l a b l e . Taxes on conventional necessaries have some of the same advantages. Tobacco and alcohol are l a r g e l y consumed by a l l classes, while the demand f o r them (although they are not s t r i c t l y necessaries) 2 i s i n e l a s t i c enough to stand considerable taxation. Technically, a l l such commodities would seem to be suitable objects f o r taxa-t i o n . But the great objection to a l l taxes on a r t i c l e s of staple consumption i s that they are l i k e l y to f a l l more heavily on the 3 poor than on the r i c h . This i s true, but i n practice, taxes on foodstuffs and such conventional necessaries as tobacco and alcohol seem to have proved the most remunerative.^ There can be no doubt that taxes of t h i s kind may be made to y i e l d very large revenues, but the great argumeht against them i s that, as they cannot be adjusted to differences i n means, they throw an 1. Plehn, C. C , Introduction to Public Finance, p. 137 2. I b i d . , p. 138 3. Loc. c i t . 4. Loc. c i t . 26. inequitable burden on the poor. The case against taxes on con-ventional necessaries on these grounds i s not so strong as the case against the taxation of necessaries. Case for Indirect Taxes In spite of the development of d i r e c t taxes, i n d i r e c t taxes are s t i l l used i n a l l tax systems. Their retention i s generally defended on the grounds that they are a means of reaching the poorer classes on whom i t i s d i f f i c u l t to levy d i r e c t taxes. In a democratic country, i t i s argued that i t i s essential f o r p o l i t i c a l s ecurity that a l l classes should be made to contribute to taxation. However, i t i s possible to make a f a i r l y strong economic case f o r the use of some i n d i r e c t taxes. They serve as a useful complement to d i r e c t taxes; 1 there can be no doubt that some such taxes can be l e v i e d con-veniently, are extremely productive and are probably paid with l e s s p conscious i l l - f e e l i n g than d i r e c t taxes. The most important argument fo r maintaining i n d i r e c t taxes i s , undoubtedly, that i t i s always important to have a 3 f a i r l y broad basis f o r revenue. Too heavy taxation at any one point i s l i k e l y to have disastrous r e s u l t s . I t i s an i n -centive to fraud, to a l l kinds of i n d i r e c t evasion which can-not be regarded as fraudulent, and i s l i k e l y u ltimately to cut off the source of the tax'. At the present time, the high rates of income tax seem to be getting near t h i s point, and we have the periodic appearance of apparently highly respectable c i t i -zens i n the police courts charged with extensive frauds. The 1. Hunter, M.H. and A l l e n , H.K., P r i n c i p l e s of Public Finance.p.193 2. Lutz, H.L., Public Finance, p. 692 3. Ibi d . , p. 343 27. annual l o s s to income tax through evasion i s considerable and seems to be i n e v i t a b l e . There seems to be no doubt that, unless there i s a mea-sure of consent on the part of the taxpayers, the c o l l e c t i o n of any tax i s d i f f i c u l t . The excess p r o f i t s tax probably only worked as well as i t did because of a c e r t a i n measure of con-sent on the part of those who paid i t . Wherever a tax becomes so high that i t s rates become extremely burdensome, the d i f -f i c u l t y of c o l l e c t i o n i s l i k e l y to be enhanced by the attitude of the taxpayers, while the y i e l d of the tax i s l i k e l y to be reduced by the reaction of the tax on production. The use of .some i n d i r e c t taxation i s valuable because i t enables increased revenue to be raised at d i f f e r e n t points instead of by exclusive concentration on the great d i r e c t taxes. Limitations of Indirect Taxes Although i n d i r e c t taxes may be used to raise some part of revenue and to r e l i e v e the d i r e c t taxes, t h e i r u t i l i t y i n t h i s d i r e c t i o n i s generally l i m i t e d , and i t i s important not to exaggerate t h e i r p o s s i b i l i t i e s . The number of commodities y i e l d -ing large revenues economically i s small, and these consist mainly of conventional necessaries and n e c e s s a r i e s . I f these taxes are extended too f a r , the r e s u l t i s a crushing burden on the poor. I f , on the other hand, the taxes are extended to many other kinds of commodities, t h i s may lead to the i n c l u s i o n of un-2 productive taxes. I t may, under present day conditions, be possible to r e l y too greatly on one or two great taxes and thus 1. Plehn, C. C , Introduction to Public Finance, pp. 137-138 2. I b i d . , pp. 134-143 2 8 . impose too heavy burdens at cert a i n points, but i t i s c e r t a i n l y e n t i r e l y impossible to raise the great modern revenues without r e l y i n g on d i r e c t taxes for the bulk of them. A P r a c t i c a l Advantage of the Income Tax One l a s t technical advantage of the income tax may be noticed i n t h i s connection. Where new i n d i r e c t taxes are needed, new administrative charges are necessarily incurred and, further, t h e i r development may take time. Where the necessary admin-i s t r a t i v e machinery i s once i n existence, the y i e l d of the income tax can be increased r a p i d l y (and without corresponding increase i n administrative charges) by a simple increase i n the rates. This e l a s t i c i t y i s obviously a great advantage where sudden increases i n revenue are needed. CHAPTER IV TAXATION AND PRODUCTION Different Uses of Income We have seen that i n d i v i d u a l s may use t h e i r incomes i n ways which a f f e c t d i f f e r e n t l y the future productivity of the country. Income spent on necessary consumption i s , from the point of view of future production, money invested i n main-taining the country's human c a p i t a l , and any deterioration i n th i s i s l i k e l y to reduce production."*" Income which i s not consumed but invested f o r a future return i s expected to add to future output. Income spent on purely luxury expenditure does not, s t r i c t l y speaking, increase the producing capacity of either human or c a p i t a l material, and to check i t w i l l hot react d i r e c t l y upon future productivity. I t would seem from the point of view of national production (which i s not the only point of view to be considered i n practice) that the i n d i v i d u a l use of income the country can best afford to do without i s the unproductive expenditure. I t follows, therefore, that i f taxa-t i o n discriminates against any in d i v i d u a l uses of wealth, the loss to production w i l l be l e s s when the unproductive rather than the productive uses are discouraged. 1. Dalton, H., P r i n c i p l e s of Public Finance, p. 103 30 Expenditure Taxes In practice, i t i s not easy to f i n d revenue-yielding taxes which f a l l c h i e f l y on the unproductive uses of wealth. The most usual method has been to levy special taxation on the luxury commodities."'' Then, people would almost c e r t a i n l y spend more on t h i s commodity than they did before, for many of them would regard i t as a necessary. I f the tax were so high that consumption was greatly reduced, t h i s would check i t s y i e l d and would condemn i t from the point of view of the Minister of Finance, whose f i r s t necessity i s to get revenue. When in d i v i d u a l forms of expenditure are taxed., there i s a l -ways t h i s danger. Expenditure may simply be diverted from one commodity to another ( i f only one were taxed, or i f one were taxed much more hea v i l y ) , a r e s u l t which would probably cause some loss i n s a t i s f a c t i o n to the consumers, and would afford no corresponding gain to revenue. The l a s t danger might be avoided i f taxation were le v i e d not upon isol a t e d commodities but upon a l l kinds of expenditure which can be considered unproductive. Something approximating t h i s was attempted i n the luxury taxes which were imposed i n many countries during the war. During t h i s period, the need of the revenue, the shortage of necessaries and the importance of encouraging saving made the case f o r taxing unproductive expenditure exceptionally strong. Experience, however, con-firmed the b e l i e f that taxation of t h i s kind would present 1 . Dalton, H., P r i n c i p l e s of Public Finance, p. 1 2 1 31. di f f i cu l t i e s of both definit ion and administration. On the other hand, wherever taxes can be successfully-imposed on individual forms of unproductive expenditure, there is a case in their favour (from the productive standpoint) in the fact that they hit the less productive uses of wealth. Such taxes are not without disadvantages. They may be partly met by wealth drawn from other sources and thus indirect ly react on productivity. By discriminating against one kind of ex-penditure, they may check i t s development and may thus a l ter the natural development of production. A l l this i s true. But the real point i s that taxes almost inevitably discriminate against some use of wealth by individuals, and i t i s arguable that the state ( i f i t wishes to maintain production) should deliberately discourage the less rather than the more prod-uctive uses of wealth. As a matter of practice, there seems ho doubt that the bulk of our revenue w i l l have to come from direct taxes be-cause of the practical d i f f i c u l t y of finding sufficient i n d i -rect taxes yielding considerable revenue without encroaching on necessaries. But where taxable unproductive revenue can be found, there is much to be said for taxing i t . In practice, however, taxes on commodities have tended to f a l l on necessary rather than unnecessary ar t i c l e s .o f consumption. Income Tax: Spending and Saving The name income tax suggests a tax imposed upon income irrespective of i t s use. The view that i t i s not a discrim-inating tax has been generally accepted, and taxes on income 32. have been defended on the grounds that (as they leave I n d i v i -duals free to select t h e i r own economies) they do not give any unnatural twist to production. The general argument i s , i n the main, sound. I t i s , however, not true that an income tax does not show some discrimination between d i f f e r e n t uses of wealth. P r a c t i c a l l y every income tax makes some e f f o r t to exempt expenditure on necessaries by leaving a minimum of income free from tax."*" Apart from these exemptions, income taxes do not apparently d i s t i n g u i s h between d i f f e r e n t uses of income. But looking at the matter from a long range point of view; i f yog spend the income, you have finished with the tax; i f you invest so that your investment becomes a source of new income, t h i s new income becomes l i a b l e to tax. Further, as t h i s income w i l l be derived from an investment, i t may be taxed at a higher rate than earned income. F i n a l l y , as the income from the new invest-ment w i l l increase the t o t a l income of the taxpayer, i t may happen that under a progressive tax the increase i n taxation i s proportionately much greater than the increase i n income. p Many people since the time of John Stuart M i l l held that savings should be exempted from income tax; that, as the savings of one year constitute the new c a p i t a l of the next, they should be regarded as c a p i t a l and hence exempted from taxation as income. This argument derives i t s force from the fact that c a p i t a l i s essential f o r the development of industry, 1. C f . , Canadian and United States Income Tax Acts 2. M i l l , J. S., P r i n c i p l e s of P o l i t i c a l Economy, pp. 483-495 33 and that anything checking the supply of c a p i t a l must react upon future production. Unless some such exemption i s given, an income tax must tend to encourage spending at the expense of saving, and although t h i s i s p r a c t i c a l l y unimportant when the rates of taxation are low, i t becomes increasingly important as the rates increase. The general exemption of savings has so f a r not entered into the sphere of p r a c t i c a l p o l i t i c s . There are two important arguments against a general exemption, apart from the p r a c t i c a l administrative d i f f i c u l t i e s . F i r s t l y , the i n d i v i d u a l s who do the bulk of the saving belong to the wealthier class."** To exempt t h e i r savings would seen to give them an additional and rather unf a i r advantage inaccumulating wealth. I t i s possible to over-emphasize t h i s . The exemption would be simply a method of encouraging people who have the power either to save or spend to exercise that power i n the way which i s (on the whole) most l i k e l y to increase production. Secondly, the r e s u l t of the d i f f e r e n t i a t i o n against saving,has only become p r a c t i c a l l y . important since the rates of taxation became ex t r a o r d i n a r i l y heavy. I f savings are exempted, the problem i s then to f i n d other sources of revenue. The r e a l d i f f i c u l t y i s not to show the defects of an e x i s t i n g tax, but to f i n d a l t e r n a t i v e taxes with l e s s bad effects on production. Income Tax: Earned and Unearned Income In most income tax 'systems, earned incomes are charged 1. Pigou, A. C , A Study i n Public Finance, p. 142 2. Hunter, M.H. and A l l e n , H.K., P r i n c i p l e s of Public Finance p. 284 Lutz, H. L., Public Finance, pp. 490-491 34. at s l ight ly lower rates than incomes from investment. This may emphasize the discouragement to saving. The lower rate on earned income i s , however, a concession to the fact that people with earned incomes, have to make a provision for the future by saving, which i s not necessary in the case of a permanent income. To some extent, the lower rate may be said to' make saving possible. The dist inct ion seems a f a i r one, especially where the earned incomes are small. I t i s interest-ing to note, that in some European countries three rates of tax are charged: one on earned, one on unearned and one on mixed incomes."'' I taly even had (may s t i l l have) a fourth rate which 2 was imposed on the salaries of government o f f i c i a l s . It i s lower than the ordinary rate on earned incomes and is apparently a recognition of the fact that as the government pays the sa l -aries of those o f f i c ia l s i t knows what their earned incomes are, and consequently they do not stand on a f a i r competitive foot-ing with other taxpayers when i t comes to making their income tax returns I Income Tax: Incentives1, to Production Apart from any question of discrimination between d i f -ferent uses of wealth, an income tax may react upon production by affecting both the willingness and the capacity of the tax-3 payers to contribute to future production. In considering 1. "Income Tax", Encyclopaedia Britannioa, 11th.ed.,1910, V o l . 14, pp. 356-359 2. Loc. c i t . 3. Dalton., H . , Principles of Public Finance, p. 102 35. this question, i t i s worth emphasizing that the results are only-l i k e l y to be important where the rates of taxation are high. The effects of income tax upon production have gained an en-t i r e l y new importance during the last th ir ty years, which have seen the most extraordinary increases both in the total amount of revenue raised by the tax and in the rates imposed. In considering the effect upon the incentives to production, three possible cases may result . (1) People's willingness to increase their incomes may not be affected at a l l — they may.be just as ready to work and save for the smaller as the larger increase. Where the rates are low, the influence would probably be negligible; but; when the rates increase sharply, i t i s more d i f f i c u l t to believe that a large number of individuals w i l l be entirely unaffected. (2) People may be induced by taxation to work harder and save more. 1 A tax may make i t d i f f i c u l t for people to maintain the standard of l i f e to which they are accustomed unless they can increase their incomes. In the same way, when people are saving for old age or to make provision for a wife or children, a tax may make i t necessary to save more before they can attain a net income which guarantees them reasonable comfort. But the people who can only maintain their standard of l i f e by harder work, and who are saving as a provison for the future, are l i k e l y to belong to the less wealthy classes whose contribution to saving constitutes only a small part of 2 the whole. Further, i f the tax is maintained for a period 1. Dalton, H . , Principles of Public Finance, pp. 106-113 2. I b i d . , p. 112 36. of years, the standard of l i f e may be modified to meet the new-conditions. F i n a l l y , even i f people were w i l l i n g to increase t h e i r incomes and t h e i r contribution to saving, i t i s by no means in v a r i a b l y possible for the ordinary i n d i v i d u a l to do so. (3) The e f f e c t of the tax may be to make people l e s s w i l l i n g to work and save. 1 This r e s u l t would be more probable where the rates are high, and i s thus more important i n a pro-gressive tax f o r the l a r g e r than the smaller incomes. As the larger incomes are the main sources of new saving, the reaction upon the supply of new c a p i t a l i s l i k e l y to be p a r t i c u l a r l y great, and i s emphasized by the fact than an income tax (as we have already said) discriminates to some extent i n favour of spending. Further, as the heaviest taxation f a l l s on the high-est incomes, the recipi e n t s of which are most l i k e l y to control industry, there i s some force i n the argument that the heavy taxation of such incomes w i l l have more e f f e c t i n checking pro-duction than taxation of smaller incomes, and may enforce com-pulsory idleness upon other taxpayers who would be w i l l i n g to contribute to production. Income Tax: Capacity to Produce Whatever the e f f e c t of a high income tax i n reducing people's willingness, there can be no question that high rates must reduce t h e i r capacity to contribute to future production. A high rate on the poor would cut into t h e i r capacity to pro-2 duce by reducing expenditure necessary f o r e f f i c i e n c y . A 1. Dalton, H.,"Principles of Public Finance, pp. 106-113 2. Ibid., p. 103 37 high rate on high incomes must almost c e r t a i n l y reduce t h e i r capacity to contribute to saving.''" Even i f i t were possible to meet the tax e n t i r e l y out of economies i n unnecessary expendi-ture, i t i s improbable that people would be w i l l i n g to reduce t h e i r expenditure very f a r below t h e i r customary standard with-out reducing the amount of t h e i r saving. As the larg e s t i n -comes normally contribute the largest proportion to saving (having the largest surplus to save), the fac t that the heaviest rates f a l l on them i s l i k e l y to lead to very.considerable re-ductions i n saving. In t h i s case, corporations as well as i n -dividu a l s are affected. The capacity of corporations to save and to expand i s reduced when t h e i r net p r o f i t s are reduced by heavy taxation. Income Tax: Investment Abroad The question of how f a r the rate of return from invest-ment a f f e c t s the accumulation of saving i s one that has never had a s a t i s f a c t o r y answer, but experience has shown that i f , i n one country, any fac t o r reduces the rates earned by c a p i t a l as compared with c a p i t a l abroad, th i s w i l l have the e f f e c t of checking foreign investments, and i s l i k e l y to encourage home investors to invest abroad. I t i s often argued that a high income tax, by reducing the net return from investments, may 2 check investment i n the taxing country i n both": these ways. Professor Pigou-^ has pointed out that i n an old country 1. Dalton, H., P r i n c i p l e s of Public Finance, p. 105 2. Ibid. , p. 125 3. Pigou,- A. C , A Study i n Public Finance, pp. 189-191 Dalton, op. c i t . , p.125 38. l i k e England where there i s normally l i t t l e foreign investment, the f i r s t r e s u l t w i l l be unimportant, while the exi s t i n g taxa-ti o n cannot afford a stimulus to investment abroad as a l l i n t e r e s t from such investment payable to residents i n England Is l i a b l e to tax. I f the c a p i t a l i s t transferred both himself and h i s c a p i t a l , he would evade the tax, but he cannot l i v e i n England on the i n t e r e s t from investments abroad without being l i a b l e to tax. As the willingness of the wealthy to l i v e permanently abroad i s not l i k e l y to be p a r t i c u l a r l y great, the influence of heavy taxes i n th i s d i r e c t i o n i s not important. Rather, i t i s probable that heavy taxation w i l l check rather than increase the free international investment of capi-t a l , f o r income from such investment may be subject to "double taxation" (both i n the country of o r i g i n and the country of r e s i d e n c e ) S o m e international agreement as to the treatment of such income i s becoming increasingly important as income taxes develop i n use and magnitude. Other things being equal, i f double taxation checks free investment, t h i s w i l l also re-duce prosperity because i t w i l l prevent c a p i t a l f i n d i n g the most p r o f i t a b l e uses. Inheritance Taxes The second method of d i r e c t taxation which has been i n -creasingly used during the l a s t f i f t y years i s taxation of pro-perty passing at death, o r d i n a r i l y c a l l e d succession duties. Taxes of t h i s kind may be graduated on any one (or on any 1. Dalton, H., P r i n c i p l e s of Public Finance, p. 125 Plgou,-A.- C , A Study i n Public Finance, pp. 189-191 39. combination) of three p r i n c i p l e s . They may vary with the size of the estate l e f t , with the degree of relationship of those who i n h e r i t the property of the testator, or with the amount i n -herited by each i n d i v i d u a l h e i r . The f i r s t of these f a l l s most heavily on large accumulations of wealth, the second on inher-itance by distant h e i r s , while the t h i r d discriminates against the leaving of accumulated wealth i n huge sums to one or two i n d i v i d u a l s . The t h i r d type of graduation i s l i k e l y (where the rates are heavy) to discriminate i n favour of more equal d i s t r i b u t i o n of property. In Canada,"'" the inheritance tax combines the above methods of computation to t r y and est a b l i s h a f a i r and reasonable basis of taxation. How f a r death duties a f f e c t the w i l l to accumulate wealth i s (as i n the case of the income tax) a d i f f i c u l t question. Both taxes, of course, d i f -f e rentiate i n one sense against large accumulations, because the larger the wealth or income, the la r g e r i s the tax paid. In some ways, death duties may prove le s s of a deterrent — they are a deferred tax, and most people v i s u a l i z e the distant 2 l e s s c l e a r l y than the immediate future. F i n a l l y , they are imposed at a time which may reasonably be expected to a f f e c t the in d i v i d u a l l e s s v i t a l l y than taxes imposed during his l i f e -.. 3 time. Taxes oh Land Values The p o s s i b i l i t y of heavy taxation reducing the economic 1. Dominion Succession Duty Act, June 14, 1941 2. Dalton, I I . , P r i n c i p l e s of Public Finance, pp. 113-115 3. Loc. c i t . 40. incentive to production has been given increasing importance with the higher rates of taxation. Neither death duties nor income tax are free from t h i s danger. I f , however, i t were possible to i s o l a t e c e r t a i n parts of wealth, which i t could be shown were not the reward of any useful economic service, and which therefore were not necessary to maintain the supply of such service, these could be taxed without a f f e c t i n g production.' Take a concrete example — the value of unimproved land does not depend upon any work or c a p i t a l put into i t by the owner. The owner of a piece of land near a growing i n d u s t r i a l town has a valuable possession simply because the growth of the town has given value to his land as an " e l i g i b l e building s i t e " . I f the. town had not grown up, the land would s t i l l be there, but i t s value would be very appreciably l e s s . When a tax i s applied on land value, there a r i s e two main objections: (1) I t i s not always easy i n practice to d i s t i n g u i s h between that part of the value of land which i s and that which i s not due to "improvements", and taxes which f a l l on the former would be l i k e l y to check the development of land. (2) Land d i f f e r s from other kinds of c a p i t a l i n some ways, but i n common with other c a p i t a l i t i s bought and sold. To put a special tax upon land i s simply to put a special tax upon one kind of investment and seems an inequitable d i f f e r e n t i a t i o n against one class of i n v e s t o r s . 2 1. Pigou, A. C , A Study i n Public Finance, pp. 171-177 2. I b i d . , p. 177 41 However, i t seems that, i n most progressive states, a tax on land value (usually applied at the l o c a l government le v e l ) i s here to stay — i n fact i t contributes handsomely to the state revenues. Excess P r o f i t s Tax The increases i n land values are not the only cases where indi v i d u a l s f i n d themselves i n receipt of an unearned increment. Businesses, e s p e c i a l l y businesses with monopolistic power, 1 may show p r o f i t s f a r above those necessary to at t r a c t the c a p i t a l and enterprise to maintain production. Wherever considerable changes i n demand take place, the p r o f i t s of a l l businesses able to take advantage of the change are l i k e l y to contain an element of surplus. The war conditions with the enormous government demands, the general shortage of certa i n goods, and the unprecedented price changes enabled many producers to make p r o f i t s f a r above the pre-war l e v e l , and f a r higher than were necessary to main-2 ta i n output. Temporarily, many producers found themselves i n the position of monopolists and, faced with an extremely r i g i d government demand, were i n a pos i t i o n to make almost any terms they wished. The attempt to impose a special tax upon war p r o f i t s originated i n the neutral Scandanavian countries i n the early spring of 1915 to reach the enormous p r o f i t s that exporters of foodstuffs i n those countries were making from t h e i r sales to 1. Dalton, H., P r i n c i p l e s of Public Finance, p. 110 2. Ibid., p. 87 42. Germany. By 1917, a special tax on high profits had spread to several countries and during the Second World War, the pro-, cedure was almost universal. In the f i r s t instance, the sug-gestion was generally to tax profits which might be d irect ly traced to war conditions, but the technical d i f f i cu l t i e s of distinguishing war from other profits generally led to. the adop-tion of a tax imposed upon a l l profits (in excess of a deter-mined normal rate of profit) made during the war p e r i o d . 2 From the productive standpoint, the tax was generally subjected to cr i t i c i sm of two kinds. On the one hand, i t was claimed that the tax was regarded by producers as an addition to cost, and was added to the price with the net result that, in addition to the general d i f f i c u l t i e s involved by the r is ing prices, the government (as chief purchaser) was compelled to pay a large part of i t s own tax. Apart from this , i t was held that the very heavy rates of taxation led to wasteful production. In examining the f i r s t of these crit ic isms, since the. producers received their normal prof i t in any case, there seems l i t t l e need to increase prices to an extreme. It is probable that the f u l l monopoly prices would have been charged whether the tax was imposed or not, and i t was only when the tax gave an opportunity for charging more by the threat of checking supply that i t . ra i sed price d irec t ly . Re the second cr i t ic i sm, there can be no doubt that the motives to economy were reduced. On the other hand, the high 1. "Excess Profits Tax", Encarclopaedia of the Social Sciences, 1931, v o l . 5, PP. 664-666 2 . Pigou, A. C . The P o l i t i c a l Economy of War, p. 114 3. I b i d . , p. 116 43 r a t e s o f tax meant t h a t l i b e r a l allowances had to be g i v e n f o r any expenditure on r e p a i r s , renewals, or ( i n f a c t ) any k i n d of g e n e r a l expenses. Although the war c o n d i t i o n s to some extent l i m i t e d the power of producers to take advantage o f t h i s , t here can be no doubt t h a t expenditure on these l i n e s was c a r r i e d t o a p o i n t which would not have been contemplated had not a l a r g e p a r t of the c o s t been i n e f f e c t born by the government. The enormous y i e l d o f the Excess P r o f i t s Tax d u r i n g the war atoned f o r many of i t s d e f i c i e n c i e s . As a permanent tax, the o b j e c t i o n s to i t would be s t r o n g e r , and i t s y i e l d in more normal circumstances would c e r t a i n l y be l e s s . I n the s p e c i a l case of war p r o f i t s , the f a c t t h a t the tax was not a d j u s t e d i n any way to the wealth of i n d i v i d u a l s was accepted; y e t as a permanent tax, both these and the d e t e r m i n a t i o n of normal pro-f i t s would pres e n t even more c o m p l i c a t i o n s and be open to even more c r i t i c i s m . CHAPTER V OTHER ECONOMIC CONSIDERATIONS The S h i f t i n g of Taxation Where a tax threatens to reduce the supply of any neces-sary economic service or commodity, i t i s usually shifted away from the producers, even i f i t i s imposed on them i n the f i r s t instance. By the incidence of taxes i s meant the f i n a l r e s t i n g -place of t h e i r payment; by the s h i f t i n g of taxes i s meant the process by which the o r i g i n a l taxpayer passes the burden of the tax on to someone e l s e . 1 S h i f t i n g generally takes place through 2 a change i n p r i c e s . The s h i f t may be forward, i n which case the taxpayer bearing the impact adds the tax to the price of the goods he s e l l s . S h i f t i n g i s thought to take place most commonly along the l i n e of exchanges by which a commodity i s moved from the producer of raw materials to the f i n a l consumer. 3 But s h i f t i n g may also be backward i n the form of a reduction i n the price of raw materials purchased by the processor. A t h i r d form of s h i f t i n g , known as c a p i t a l i z a t i o n c o v e r s the case where the present owner of a commodity absorbs the taxes which i t s future owner must pay. When the commodity i s sold, 1. Seligman, E.R.A., The S h i f t i n g and Incidence of Taxation, p . l 2. Ibid., p. 3 3. Loc. c i t . 4. Ibid., p. 4 45 a l l the predictable future taxes on i t are discounted by the purchaser. C a p i t a l i z a t i o n of Taxes Where no readjustment of supply i s possible, the tax f a l l s on the owners or producers of the taxed commodity. A tax upon rent does not a f f e c t the supply of land, and a tax upon economic rent rests on the landowner. What i s more, i f the o r i g i n a l owner s e l l s , the buyers w i l l know of the existence of the tax, and the price they are w i l l i n g to-pay w i l l be cor-respondingly reduced. Future buyers w i l l be responsible f o r the annual payment of the tax, but i t represents, no re a l burden to them as i t has been allowed f o r i n the purchase p r i c e . 1 S h i f t i n g of Indirect Taxes Economic forces only work themselves out gradually, and even where a tax i s imposed with the expectation and intention that i t w i l l be shifted away from the o r i g i n a l taxpayer, t h i s s h i f t i n g may take time. In the case of a tax imposed' on a com-modity produced i n the taxing country, the usual procedure i s for the tax to be collected from the producer, i t being expected that he w i l l refund himself by a proportionate increase of price 2 to the consumers. However, i f the price i s raised, t h i s i s l i k e l y to check the demand both by increased economy i n the use of the taxed a r t i c l e , and by encouraging (wherever possible) the use of untaxed substitutes. Where the decrease i n demand 1. Seligman, E.R.A., The S h i f t i n g and Incidence of Taxation, pp. 174-183 2. I b i d . , pp. 372-373 and pp. 379-385 46 Is considerable, the r e s u l t may be that a large proportion of fixed c a p i t a l w i l l be thrown out of production and e n t a i l con-siderable loss to producers. In these circumstances, i t i s possible that i t may be to t h e i r i n t e r e s t to increase price tem-p o r a r i l y by l e s s than the f u l l amount of the tax, accepting a lower rate of p r o f i t i n preference to cutting o f f a considerable part of the demand. The producers' position i s weakest where the demand i s e l a s t i c and where i t i s d i f f i c u l t to adjust supply without l o s s . A c t u a l l y , we are accustomed to a new or increased tax being followed by an immediate proportionate increase i n pric e , but t h i s i s p a r t l y accounted f o r by the fact that the a r t i c l e s selected f o r taxation are a r t i c l e s of i n e l a s t i c demand. Taxes on Developing Industries A tax imposed on a commodity which can be produced more economically on a large than a small scale may, by checking the development of the industry, force up the price to the consumer by more than the amount of the tax. Such taxation i s e s s e n t i a l -l y wasteful, f o r the loss to the taxpayers i s greater than the gain to revenue. In practice, probably the more important i n -stances occur not where existing economics are l o s t by the re-duction of the amount produced, but where a tax (by checking further expansion) delays the introduction of possible new economies. A general case against a tax on a developing man-ufacturing industry can always be made on these grounds. Import and Export Duties Taxes which are imposed on imported and exported goods have a p r a c t i c a l advantage i n that they are normally easy to 47 c o l l e c t , but they have gained popular favour mainly on other grounds. A l l customs duties seem to o f f e r the tempting p o s s i b i l -i t y of "making the foreigner pay", 1 while import duties have achieved popularity as a method of "protecting home in d u s t r i e s " . An import duty., , i t should be noticed, i s protective, only i f i t d i f f e r e n t i a t e s against foreign producers by imposing a tax on •' imported products without a corresponding excise tax on home-produced supplies of the same a r t i c l e . In p r a c t i c e , few cases a r i s e i n which a country i s i n the exceptionally strong position of being the only available market f o r a foreign commodity, and 3 at the same time having a very e l a s t i c demand f o r i t — i n f a c t , i t i s extremely doubtful i f a single h i s t o r i c a l case can be cited where there i s reason to think that "the foreigner" paid any considerable part of any import duty. In the case of an export duty, the po s i t i o n of the pro-ducer i s weakened because he may f i n d himself competing i n f o r -eign markets with other producers who are unhandicapped by taxa-t i o n . I f , however, the taxing country has a monopoly (whole or p a r t i a l ) , and i f the demand i s urgent, the foreign consumers may pay a price increased by the amount of the tax. Cases of t h i s kind are not unknown; e.g., Chile used to tax exports of n i t r a t e s before synthetic substitutes were developed. Customs Duties and Foreign Exchange Rates There i s a further consideration to be taken into account 1. Drummond, G. F., The Economics of International Trade Ch. 15-17 2. Loc. c i t . 3. Seligman, E.R.A., The S h i f t i n g and Incidence of Taxation, p. 375. 4 8 . with regard to the incidence of import and export duties. In buying and s e l l i n g between d i f f e r e n t countries, not only the p r i c e - l e v e l s of the two countries have to be considered but also the value of the currency of one country i n terms of the other. 1 I t i s obviously necessary, before coming to any ra-t i o n a l conclusion as to the profitableness of buying goods i n England, to know not only the price i n s t e r l i n g i n England and the price i n d o l l a r s i n Canada' but also the value of s t e r l i n g i n terms of d o l l a r s . Now the value of s t e r l i n g i n terms of d o l l a r s depends primarily upon the r e l a t i v e demands f o r them; Anything that increases the demand i n Canada f o r English money w i l l push up the value of the pound' i n d o l l a r s — anything i n -creasing the demand for Canadian money i n London w i l l push up i t s value i n terms of pounds. A tax on goods bought and sold between two countries may have an e f f e c t upon the value of t h e i r currencies i n terms of one another by a f f e c t i n g the amount of the payments that have to be made. In the case of an import duty, the r e s u l t i s l i k e l y to 2 be that the imports of the taxed goods w i l l be checked. The taxing country w i l l have fewer payments to make abroad, i t s demand fo r the currency of the exporting country w i l l be check-ed, and the r e l a t i v e value of t h i s money (exporter's i n terms of importer's) w i l l f a l l . This would appear at f i r s t to be to the taxing country's advantage, because even i f her consumers now pay the old price f o r the taxed goods (say i n pounds ster-ling) , t h i s represents a s l i g h t l y lower price i n Canadian d o l -l a r s . I t has been argued that there i s a general presumption 1. Drummond, G. F., The Economics of International Trade Ch.12-17 2. Loc. c i t . 4 9 . i n favour of import duties on the grounds that they tend to turn the foreign exchange rates s l i g h t l y i n favour of the tax-ing country. I t should be r e a l i z e d , however, that t h i s w i l l only be. important where the eff e c t of the tax i s a very considerable check to imports. Further, as has been s u f f i c i e n t l y demonstra-ted, anything pushing up the value of the currency of one count-ry i n terms of another has disadvantages as well as advantages. When our currency r i s e s i n value i t c e r t a i n l y makes i t cheaper f o r us to buy from abroad, but i t makes i t dearer f o r foreigners to buy from us. Our gain as consumers i s p a r t l y i l l u s o r y , f o r i t i s achieved at the expense of our export trade with i t s con-sequent reactions on production, p r o f i t s and employment.1 1. Drummond, G. F., The Economics of International Trade, Ch. 12-18 PART I I GOVERNMENT FINANCE IN TIME OF WAR CHAPTER VI WAR FINANCE Price Fluctuations. Taxing and Borrowing The period of the F i r s t World War was one of sensational fluctuations i n world p r i c e s . 1 Both r i s i n g and f a l l i n g prices react upon public finance. Rising prices mean that the govern-ment, l i k e every other purchaser, finds the cost of obtaining goods and services increasing, and the expense of carrying out i t s duties grows as prices r i s e . Where r i s i n g prices mean i n -creasing money incomes (and any considerable increase does nor-mally mean t h i s ) , there i s some compensation both to the treasury and the taxpayer. The same rates of tax w i l l y i e l d l a r g e r rev-enues, the money i s worth le s s to the i n d i v i d u a l as well as to the state, and although the absolute amount paid i n taxation i s larger, the proportion of the national income absorbed by taxa-t i o n i s not necessarily increased. During a period of war, government expenditure i s i n -creased not only by r i s i n g prices but also by the innumerable new expenses which are forced on the state by the exigencies of war, and revenue has to be increased f a r more than i n proportion, to the r i s i n g p r i c e s . No government meets a l l these expenses 1. James, F. C , The Economics of Money, Credit and Banking, pp. 578 and 586 52 by taxation. In some countries, inconvertible paper notes were printed and used to meet part of the government's charges. P r a c t i c a l l y a l l countries obtained part of t h e i r revenue by loans. In some cases i t was possible f o r the be l l i g e r e n t count-r i e s to borrow abroad, and foreign debts were accumulated. To a greater extent, the loans were raised w i t h i n the borrowing countries — in t e r n a l debts were accumulated. The determination of the proper extent 1 of borrowing i n war finance i s dependent upon a comparison of the economic effects of t h i s device with fe a s i b l e alternatives; namely, taxation and the issuance of irredeemable paper money. Borrowing i n war time, e s p e c i a l l y when repeated loans are needed, i s generally borrowing on an unfavourable market, f o r the demand f o r c a p i t a l i s unusually great while the credi t of the bellige r e n t country i s not at i t s best. To some extent, p a t r i o t i c motives may o f f s e t these influences and lead i n d i v i d -uals to invest i n war loans but, on the whole, experience seems to have shown that patriotism, unless backed by high i n t e r e s t 2 rates, i s not s u f f i c i e n t to a t t r a c t subscriptions of the neces-sary s i z e . Apart from the intere s t rates, the high prices mean that loans necessary to meet any given expenditure are greater than they would have been had prices remained unchanged — the government has to borrow more i n terms of money because the value of money i s low. 1. Pigou, A. C , The P o l i t i c a l Economy of War, pp. 72-74 2. Ibid., p. 86 53 Rising Prices and Foreign Debts Soaring prices during war bring great e v i l s i n t h e i r t r a i n . Rising prices generally a f f e c t p r o f i t s favourably (for s e l l i n g prices increase and expenses take some time to readjust themselves), and i n t h i s there i s some gain to the treasury, both because incomes from p r o f i t s normally contribute more l a r g e l y to revenue than other incomes, and because such i n -creases i n p r o f i t s are generally a stimulus to increased trade a c t i v i t y and to a further increase of taxable wealth. 1 The increase i n p r o f i t s , however, i s gained at the expense of the other incomes which do not automatically adjust themselves to price changes. During war, wages l a g behind prices, and demands for higher wages cause incessant s o c i a l f r i c t i o n . Other incomes adjust themselves even more slowly, while some fix e d incomes cannot adjust themselves at a l l . The price changes lead, i n ef f e c t , to a considerable r e d i s t r i b u t i o n of r e a l income, and this r e d i s t r i b u t i o n cannot be j u s t i f i e d on any p r i n c i p l e of s o c i a l j u s t i c e . The i n s t a b i l i t y of values gives an element of i n s t a b i l i t y to a l l contracts. I t i s impossible for the govern-ment (or anyone else) to make any r e l i a b l e estimate of expendi-ture over any considerable period of time. Apart from i n t e r n a l d i f f i c u l t i e s , v i o l e n t changes i n the price l e v e l s of any country are bound to a f f e c t the value of i t s currency i n terms of the currency of other countries. To some extent, t h i s r e s u l t was hidden during the war by emergency 1. Spiegel, H. W., The Economics of Total War, pp. 108-137 54 measures. Apart from the d i f f i c u l t i e s to which t h i s leads i n ordinary trading, i t means a great complication i n the public revenues of a l l countries with payments to make abroad on be-ha l f of government indebtedness, and i n the worst cases (after 1918) made the f i n a n c i a l p o s i t i o n p r a c t i c a l l y hopeless. Each country has to raise i t s revenue i n terms of i t s own currency. I f i t has payments to make to other countries which are fix e d i n terms of t h e i r currency or i n terms of gold, depreciation means that an increasing amount of depreciated currency w i l l be needed to make the payments. Where prices within the country have changed i n proportion to the deprecia-t i o n of the currency there i s no rea l hardship i n t h i s . I f , however, depreciation i s s t i l l continuing to such an extent that dealings i n the depreciated currency have become l i t t l e more than a chaotic speculation, there may be violent fluctuations i n the value of the currency i n terms of foreign currencies, while there i s no immediate corresponding change; i n prices at home. In a case of t h i s kind, where large payments have to be made abroad, the business of balancing the budget i s p r a c t i c a l l y hopeless. F a l l i n g Prices and Internal Debts Given these p o s s i b i l i t i e s , i t i s not sur p r i s i n g that public opinion and economic teaching were i n agreement at the end of the F i r s t World War i n advocating a check to further r i s e s i n pr i c e s , and a s t a b i l i z a t i o n of the exchange values of currencies i n the countries which had not already plunged too 55 f a r into the slough of depreciation. Here another d i f f i c u l t y -arose. To check the r i s e meant, i n most countries, a necessary f a l l i n p r i c e , f o r the high prices were maintained p a r t l y i n the expectation of further r i s e s . From the point of view of the treasury, f a l l i n g prices have serious disadvantages. They reduce money income, and by doing t h i s reduce the taxable capa-c i t y of the country as measured i n terms of money. They reduce p r o f i t s f i r s t , and by doing so reduce f i r s t the incomes which y i e l d most to the revenue. Further, as f a l l i n g prices are a cause of trade depression, reducing output tends to reduce the r e a l taxable capacity of the country. I f the payments that the government has to make depends e n t i r e l y on current prices, these r e s u l t s would not be important. In f a c t , as there i s some time l a g between the beginning of the f a l l i n prices and the f a l l i n the y i e l d of taxes, there might even be a temporary gain to revenue. But where the government has l i a b i l i t i e s f ixed i n terms of the currency of i t s own coun-tr y , f a l l i n g prices cannot reduce t h i s part of i t s expenses. F a l l i n g prices may, by pushing up the value of the Canadian d o l -l a r i n terms of American d o l l a r s , reduce the payments i n terms of our money that we s h a l l have to make to the U.S.A. Further, i f prices f a l l , some of the government's home expenses — s a l -a ries of a l l kinds, f o r instance — may be correspondingly re-duced. But as fa r as our enormous i n t e r n a l debt i s concerned, no automatic reduction can be hoped f o r . The debt was fixed i n terms of money, and in t e r e s t has to be paid at a fixed rate un-1. Pigou, A. The P o l i t i c a l Economy of War, p. 162 56 t i l other arrangements can be made or the debt repaid at par. Where a debt i s accumulated on these terms, s t e a d i l y f a l l i n g prices mean that an increasing proportion of the money income of the nation i s needed to meet the in t e r e s t and ultimate re-payment vof the debt. As the prices f a l l , the purchasing power of each unit of money increases and the re a l s a c r i f i c e involved i n making the same money payment increases. The po s i t i o n of bell i g e r e n t governments at the end of a war i s not a comfortable one. On the one hand, they are faced with an urgent economic need to check the r i s e i n prices, on the other with the danger that f a l l i n g prices w i l l increase the r e a l burden of the heavy in t e r n a l debts. Government Borrowing The conclusion would seem to be that i t i s always extra-vagent f o r a government to accumulate debts i n a period of high prices which may have to be repaid (with interest) i n a period of low p r i c e s . The money borrowed and the money repaid may be the same i n both cases, but i n the l a t t e r , the value of the money w i l l be greater than i n the former, the value repaid w i l l be greater than the value received. I t i s generally recognized that neither governments nor individu a l s can hope to remain solvent i f they borrow f o r ordin-ary recurring expenditure. In the case of an i n d i v i d u a l or company, however, i t i s not considered necessarily inconsistent with sound finance to raise a loan i n a period of exceptional emergency to be repaid when the emergency i s over. Government borrowing i n time of war has generally been j u s t i f i e d on the 57. same grounds. However, to financing a war mainly by borrowing, there are fundamental objections. I t accentuates the r e d i s t r i b u t i o n of incomes during a war, 1 i t impairs a country's a b i l i t y to keep up i t s m i l i t a r y preparations, i t i s unjust to those i n the armed services and i t enables a section of the population to obtain a vested i n t e r e s t i n the government. On the other hand, i t has one advantage which cannot be questioned. I t works. I f a people are h e a r t i l y i n support of a war e f f o r t , governments can secure command of a very large proportion of the labour force i n a country and the use of much of i t s c a p i t a l , either d i r e c t l y through the funds subscribed to loans or i n d i r e c t l y through the forced economy of those with stationary or declining incomes occasioned by r i s i n g p r i c e s . Even though the burden i s unevenly d i s t r i b u t e d , the transfer of labour and c a p i t a l from the a c t i v i -t i e s of peace to those of war i s successfully accomplished. The position of the government d i f f e r s fundamentally from that of the i n d i v i d u a l . The i n d i v i d u a l borrower r e a l l y draws resources from someone else and postpones repayment to a future date. He makes no immediate contribution himself, and thus avoids the immediate burden of payment. I f a government borrows from abroad, the borrowing country i s i n the same pos i t i o n . I f , however, a government borrows from i t s own nationals (and the bulk of government borrowing comes from t h i s source), i t draws 1. Pigou, A. C , The P o l i t i c a l Economy of War, p. 78 2. Plehn, C. C , Introduction to Public Finance, p. A05 Pigou, op. c i t . , p. 81 ' 58. resources from them just as much as i f i t taxed them.1 Whether the government raises revenue by taxation or by an i n t e r n a l loan, the only resources upon which i t can draw are the same, and the borrowing country cannot avoid the immediate burden of finding the necessary funds. The only difference i s that, where the money i s raised by taxation, i t i s paid over f i n a l l y to the government; where i t i s raised by borrowing, there i s a claim 2 f o r i n t e r e s t and ultimate repayment. From the point of view of i n d i v i d u a l s , however, taxation and borrowing do not mean exactly the same thing. Borrowing gives the i n d i v i d u a l a f u t -ure claim on the government which taxation does not, and the war bonds (or whatever other security he may hold) can be used for r a i s i n g funds at any time. Also, although the taxpayers as a whole w i l l ultimately have to f i n d the money to meet i n t e r e s t and repayment, i t i s improbable that the i n d i v i d u a l taxpayer w i l l f i n d that his increased taxation (due to i n t e r e s t on debt) exactly cancels out h i s income from war bonds, and i t i s s t i l l more improbable that he w i l l set the two against one another i n considering his gains from subscriptions to war loans. From the point of view of the government, t h i s has the r e a l advantage that resources w i l l be l e n t with l e s s i l l - f e e l i n g than they would be paid i n taxation, and i t means that the immediate subjective burden of the tax to the country i s l e s s than i f the money had been raised by taxation. In the f i r s t instance, t h i s probably 1. Pigou, A. C , The P o l i t i c a l Economy of War, p. 73 2. Steiner, G. A., Economic Problems of War, Chap. 9, p. 20 59 means l e s s discouragement to production than equal taxation. Where enormous war revenues have to be raised f o r a term of years, i t i s possible that to rai s e the whole by taxation would have a deadening e f f e c t upon incentive, and i n any great war a government may be j u s t i f i e d i n r a i s i n g part of i t s revenue by loans. I t should, however, be r e a l i z e d that by borrowing the government does not avoid f i n d i n g the immediate resources that i t needs, i t only adopts a d i f f e r e n t method of obtaining them. Loans versus Taxes i n War Finance I t seems advisable at t h i s point to consider the important question of "Loans versus Taxes i n War Finance". In order to do t h i s , the best possible way appears to be to quote Professor E. R. A. Seligman:-"The f i s c a l problems of the war may be divided into those of a general and of a s p e c i f i c character. War expenditures can be met i n three ways: by taxes, by loans, or by paper money. The s p e c i f i c problems have to deal with the nature and the d e t a i l s of each of these expedients; the general problem i s concerned with the p r i n c i p l e s that underlie the preference among the respective methods. Inasmuch as paper money i s by common consent to be regarded as the l a s t resort, the general problem at issue here pertains to the choice between loans and taxes and the r e l a t i v e proportions i n which each i s to be employed.... I t i s obvious that a d i s t i n c t i o n must be made between the money costs and the r e a l costs of a war. The money costs of a war are the actual outlays of the government fo r war purposes, that i s , the surplus above the general expenditures i n time of peace, making due allowance f o r changes i n the purchasing power of money.... The r e a l costs of a war are to be measured by the diminution of the s o c i a l patrimony 1. Pigou, A. C , The P o l i t i c a l Economy of War, p. 78 60. and by the diversion of current s o c i a l output from productive to unproductive channels, i . e . , by changes both i n the fund of accumulated wealth and i n the flow of s o c i a l income.... The true costs of a war are the net s a c r i f i c e s or subjective burdens which result from the t r a n s i t i o n from a peace economy to a war economy, and which are connected with the fundamental processes of production and consumption. They consist, on the one hand, of a l l those e f f o r t s involved i n the transfer of enter-prises and investments from the ordinary channels of production to the new f i e l d s of primary importance i n the war. They consist, on the other hand, of a l l those e f f o r t s involved i n the reduction and the change of consumption which w i l l serve to counterbalance, i n part at l e a s t , the inevitable reduction of s o c i a l out-put. The net res u l t measured i n terms of aggregate s a c r i f i c e or subjective cost constitutes the r e a l burden of a war. The problem that confronts us i s to analyze the results of various f i s c a l expedients upon these changes i n production and consumption from the point of view of the subjective costs or the r e a l bur-dens r e s t i n g on society.... I t s u t i l i t y consists i n the fa c t that, through borrowing from those i n possession of the c a p i t a l rather than taxing a l l the members of the community, whether or not they have the c a p i t a l , i t lessens subjective costs or s a c r i f i c e s and puts at the disposal of the government those services i n the community with which i t can most e a s i l y dispense.... The conclusion, therefore, would be that i n the case of a great war i t would meet a l l the demands of ju s t i c e to put part of the burden upon the present tax-payers and to s h i f t the remainder upon the tax-payers of succeeding years, with the understanding that a l l the charges of the war w i l l f i n a l l y have been met be-fore the period when the recurrence of a s i m i l a r out-break i s within the realm of p r o b a b i l i t y . This con-clusion i n other words shows the e s s e n t i a l legitimacy of u t i l i z i n g both loans and taxes i n times of war"....1 D i f f e r e n t Methods of Borrowing Enormously the greater part of our national debt has been incurred to meet war expenditure. The government holds no 1. Seligman, E.R.A., Essays i n Taxation, pp. 715-736 61. assets against i t , and the funds f o r i n t e r e s t and repayment have to come out of taxation. Deadweight debt of this kind may be divided into two classes — long-term and short-term debt. The former i s composed of permanent debt (which i s not repayable at any fixed date) and long-dated s e c u r i t i e s . The l a t t e r i s the result of short period borrowing and i s repay-able at a fixed date at the end of a few weeks, or at the most, at the end of a few years. From 1914 onward, the great f i n a n c i a l needs of the govern-ment made i t necessary to tap a l l possible sources of revenue. Long-term war loans, war savings c e r t i f i c a t e s and treasury b i l l s were issued to meet the needs of a l l classes of investors. The loans were backed by every kind of p a t r i o t i c appeal. Posters, propaganda, as well as the merits of the loans themselves, were a l l used to catch subscriptions f o r the government net. Borrowing and I n f l a t i o n 1 The investments came from d i f f e r e n t sources. In part, they were subscribed by private i n d i v i d u a l s who put t h e i r sav-ings into war loans i n preference to other investments, or who perhaps cut down t h e i r normal expenditure i n order to increase p t h e i r war-time savings. Where t h i s happened, resources were transferred to the state from the lenders just as much as i f the transference had been made through taxation. The govern-ment was able to buy more, the spending power of the lenders 1. Harris, S. E., I n f l a t i o n and the American Economy, Ch. 16 2. Pigou, A. C , The P o l i t i c a l Economy of War, p. 7# 6 2 . was correspondingly reduced and the t o t a l volume of purchasing power i n the country remained the same. A large part of the subscriptions to the d i f f e r e n t loans did not come from indivi d u a l s but from banks. 1 In t h i s case, i t was not so clear whether t h i s saving r e a l l y represented a transference of purchasing power, and increased economy on the part of the lenders or not. Banks can increase the supply of credi t by giving increased power to draw cheques against them, and t h i s i s equivalent i n i t s ef f e c t on prices to an increase i n the supply of money. When either i n d i v i d u a l s or governments borrow from banks, there i s a p o s s i b i l i t y that purchasing power w i l l not be transferred, but that new purchasing power w i l l be created. I f the banks gave c r e d i t to the government by r e s t r i c t ing the credit they were giving to business men, there would be no net increase but, as i t was, the increased c r e d i t was f a r i n excess of the pre-war c r e d i t issues of the banks. There can be no doubt that the banks' subscriptions to war loans l a r g e l y represented new issues of c r e d i t . Where ind i v i d u a l s borrowed from t h e i r banks and l e n t to the government, the r e s u l t was the same as i f the government 2 borrowed d i r e c t from the banks. Any borrowing done by the government d i r e c t from a state-owned central bank, l i k e the Bank of Canada, would be d i r e c t l y i n f l a t i o n a r y . This would be done by handing over bonds (or treasury notes) to the Bank of Canada who i n turn would pay 1. Pigou, A. C , The P o l i t i c a l Economy of War, p. 79 Steiner, A., Economic Problems of War, Chap. 9, p. 21 2. Pigou, l o c . c i t . f o r them by creating new currency. Such increased spending power would always be l i k e l y to come back to the government either through, taxation or new borrowing. This method of bor-rowing increases the supply of purchasing power, and r e s u l t s i n i n f l a t i n g p r i c e s . While part of the e v i l s of post-war f i n -ance (after 1918) arose out of the fact that debts had been accumulated while prices were high, the higher prices were i n themselves, to some extent, a r e s u l t of the government borrow-ing. Irredeemable Paper Money i n War Finance An excellent treatment of the above problem has been given us by Professor H. G. Brown i n his work, "The Economics of Taxa-t i o n " . We s h a l l quote from t h i s i n the following section: " I f , with paper money i n f l a t i o n , a l l prices should r i s e equally and with equal swiftness, the burden of / the i n f l a t i o n tax would be d i s t r i b u t e d over the pub-l i c i n proportion to purchases.... However, i n practice prices do not o r d i n a r i l y r i s e with equal r a p i d i t y or i n equal degree and, therefore, the burden i s not d i s -tributed i n proportion to consumption or to purchases-in-general. Upon some classes the burden f a l l s with crushing weight while other classes may gain, at the expense of the classes who lose, more than the gaining classes contribute to the government.... During a process of i n f l a t i o n financing, the government, as we have seen, i s continually outbidding the public f o r goods, so that prices r i s e faster than, on the average, i n d i v i d u a l incomes increase.... I f government finance through paper money i n f l a t i o n i s , as we have shown, i n e f f e c t taxation, and i f i t i s taxation of so un-equal a kind as to actually benefit some classes (or tax them only a l i t t l e ) while perhaps taking from other classes more than i t y i e l d s to government, why i s paper money i n f l a t i o n ever adopted f o r the finance of war or any other emergency?.... I f exi s t i n g taxes are not high enough to secure the needed revenue, then they can be raised higher as an a l t e r n a t i v e to money i n f l a t i o n . But a government may fear to lose popular support i f i t d e f i n i t e l y thus increases the tax rate, since such an increase can be c l e a r l y seen and w i l l be 64. understood by c i t i z e n s to be an increase; while the putting into c i r c u l a t i o n of inconvertible paper money taxes them i n s i d i o u s l y without t h e i r being, as a r u l e , f o r some time aware what i s the cause of t h e i r new poverty."^ Cost of I n f l a t i o n When governments borrow from i n d i v i d u a l s who meet the loans out of genuine savings, i t i s clear that the i n d i v i d u a l s are poorer as an immediate r e s u l t of the government's command over increased purchasing power. Where new purchasing power i s created, there i s no transference; no one i s asked to sur-render what the government gains, and at f i r s t sight i t might seem a painless solution of the problem. This i s obviously untrue. The new purchasing power i s not taken away from private i n d i v i d u a l s , but i t s existence raises prices and a r i s e i n prices reduces the values of a l l incomes. I f prices are doubled, t h i s means that the same incomes w i l l only go h a l f as f a r as before, and the r e s u l t i s exactly the same as i f a l l incomes were reduced by h a l f , prices remaining unchanged. Where the government gets i t s funds by methods which raise p r i c e s , the 2 r e s u l t i s r e a l l y a hidden tax proportioned to income which works, not by reducing the amount of purchasing power i n the hands of i n d i v i d u a l s , but by reducing i t s value. In a l l our overt taxation, we have been moving away from the idea of a tax proportioned to income. This form of con-cealed taxation (see above "hidden tax") does not allow even, a minimum f o r necessaries, nor does i t make any allowance f o r 1. Brown, H. G., The Economics of Taxation, pp. 21-25 2. Pigou, A. C , The P o l i t i c a l Economy of War, p. 107 65 differences i n family needs , and there seems no reason to re-gard i t as anything but inequitable by our ex i s t i n g standards. 1 I t i s true that considerable readjustments may be made. Wages, fo r instance, w i l l gradually r i s e to meet the higher cost of l i v i n g , and the increased supply of purchasing power w i l l grad-u a l l y be d i s t r i b u t e d among d i f f e r e n t classes, but the readjust-ment w i l l only take place slowly and as the r e s u l t of consider-able f r i c t i o n . Further, to many classes, there w i l l be no pos-2 s i b i l i t y of readjustment. People with fixed incomes w i l l f i n d themselves permanently impoverished unless prices return to t h e i r old l e v e l . There w i l l be considerable transference of 3 r e a l wealth from them to other classes. Further, although the effect of the i n f l a t i o n i s the same as the tax i n that i t re-duces the real incomes of i n d i v i d u a l s without giving them a claim f o r repayment, from the point of view of the government i t i s a loan f o r which i n t e r e s t has to be found and a c a p i t a l L repayment made. Where the loans simply represent increases i n bank c r e d i t , the country suffers immediately from the i n f l a t i o n ; f o r the future, the taxpayers have the b i l l f o r i n t e r e s t and repayment. On the other hand, there i s no doubt that the methods of bor-rowing from the banks have immediate conveniences to any govern-ment. Where a government i s eager to keep down the rates of i n t e r e s t on loans, and i t i s feared that too high a rate might 1. Pigou, A. C... The P o l i t i c a l Economy of War, p. 107 2 . I b i d . , p. 108 3. Loc. c i t . 4. Ibid., p. 109 66. injure the f i n a n c i a l reputation of the borrowing country, i t i s probably the only method which can be used. 1 In the early days of a war, before taxation can be readjusted or the mach-inery of more permanent loans to be taken up by the general public be set going, some borrowing from the banks by these 2 means i s probably i n e v i t a b l e . But the heavy pr i c e that must ultimately be paid i n the f r i c t i o n of r i s i n g and f a l l i n g p r i c e s , the cost to the government of r i s i n g prices i n the time of i t s greatest need for goods and services, and the heavy burden of debts accumulated i n the period of high prices being carried over into the period of f a l l i n g prices, are strong arguments for the stringent l i m i t a t i o n of i t s use. One l a s t point may be noted here. Short-term debts may possibly f a l l due at times inconvenient to the government and e n t a i l further borrowing on l e s s favourable terms. The matur-ing of short-dated loans of any kind may be a serious handicap to a government.struggling with the problems of post-war finance, and may force further borrowing and possibly further i n f l a t i o n . 1. Pigou, A. C , The P o l i t i c a l Economy of War, p. I l l 2. Ibid . , p. 110 -CHAPTER VII THE POST-WAR BURDEN OF DEBT  A: INTERNATIONAL DEBT The Growth of International Indebtedness Wars have nearly always increased the national debts of the b e l l i g e r e n t states. The F i r s t World War l e f t the world i n a state of indebtedness which (up to that time) was unparalleled both as regards the absolute size of the government obligations and the extraordinary complexity of the i n t e r n a t i o n a l arrangements. To-day the problem i s magnified many times over. Let us consider the i n t e r n a t i o n a l problem f i r s t . During the war years, the greater part of the international debts ari s e out of loans between a l l i e d states. A f t e r the peace.treaties are written, the added fac t o r of reparations payments makes the debt structure even more complicated. In practice, although the debts stand, the obligations they imply have not been stringently enforced between the A l l i e s . Interest payments have been deferred"1* and the actual d i f f i c u l t i e s of making the payments were a l l e v i a t e d . Although measures were -taken to exact some reparation from Germany,even there modifi-cations of the o r i g i n a l demands were admitted, the e x i s t i n g claims 1. Buehler, A. G., Public Finance, pp. 815-817 68 were not exacted i n f u l l and i t i s debatable whether any such debts w i l l ever be completely l i q u i d a t e d unless they are fo r -g i ven. 1 This i s one of the problems confronting the world to-day. From 1919 on, world finance has been overshadowed by the enormous international debts. The claims they imply have been a menace rather than an active e v i l , but the uncertainty as to whether (and to what extent) c o l l e c t i o n w i l l be made, adds 2 to the exi s t i n g confusion. The tendency to regard claims as a f i c t i o n that can be disregarded, or at worst as a problem of a very distant to-morrow, makes i t possible f o r some countries to postpone the measures that are necessary to meet the r e a l i t i e s of the p o s i t i o n . In a l l cases, u n t i l a permanent settlement which i s both d e f i n i t e and practicable i s reached, the public finances of the d i f f e r e n t states cannot be put on a more perm-anent footing, nor can the exchanges be expected to reach any-thing l i k e a stable p o s i t i o n . The f u l l e v i l of t h i s uncertainty cannot be over-emphasized. Trade can i n time adapt i t s e l f to most conditions. The r e a l d i f f i c u l t y of the present period i s , that as the conditions are continually changing, no chance of adaptation can occur. Repayments: Debtor Countries A country borrowing abroad escapes the immediate burden of r a i s i n g the necessary revenue. When the time f o r repayment 1. Buehler, A. G., Public Finance, pp. 815-817 2. Loc. c i t . 69. comes, the deferred r e s p o n s i b i l i t y has to be met and provision made to meet i n t e r e s t charges, and gradual repayment of the c a p i t a l l i a b i l i t y . Part of the income of the debtor has to be transferred to the cre d i t o r country, and the former i s poorer by the amount of the transference.*"" To make payments abroad,^ a country has to raise revenue just as much as fo r any other payment, and has to use the rev-enue to obtain claims on gold, on the currency of the cre d i t o r country or to purchase goods to snip to the cr e d i t o r country. She can obtain the necessary revenue either by taxation, bor-rowing or further i n f l a t i o n . Whichever of these methods she adopts means that, i n one way or another, the re a l incomes of her nationals are immediately reduced, and where", as a r e s u l t of t h i s , productivity i s checked (and as the revenue i s to be transferred abroad, there can be no d i r e c t economic compensation f o r the taxation), i t means further impoverishment of the coun-t r y . The e v i l s of an addition to revenue made necessary on be-half of foreign debt are greater the worse the po s i t i o n of the paying country, the heavier i t s exi s t i n g burdens. At any time, i t i s extremely d i f f i c u l t to say how f a r a country can bear further taxation. But i t i s a question of fact that a f t e r World War I , a l l the European be l l i g e r e n t s were finding the greatest d i f f i c u l t y i n balancing t h e i r budgets, and many of them were s t i l l obtaining revenue by borrowing or i n f l a t i o n — mainly the l a t t e r . Even i f i t may seem that t h i s 1. Drummond, G. F., The Economics of International Trade, Ch.4 2. I b i d . , Ch. 1-4 70. r e s u l t was p a r t l y due to slovenly finance and i f , i n theory, new openings for taxation could be found, i t i s always true that a country cannot ou t s t r i p i t s administrative f i n a n c i a l machinery, and the f a c t that i t s taxation i n the past had been badly organized, might be a great p r a c t i c a l d i f f i c u l t y i n the way of r a i s i n g more revenue i n the immediate future. Where a country has used i n f l a t i o n to meet ex i s t i n g d i f f i c u l t i e s , an addition to her r e s p o n s i b i l i t i e s i s l i k e l y to lead d i r e c t l y and i n d i r e c t l y to further i n f l a t i o n , further r i s e s of i n t e r n a l prices, and further fluctuations of the value of the currency on the foreign exchanges. We have already mentioned the d i f -f i c u l t i e s i n which f l u c t u a t i n g exchange rates may involve a country with payments to make abroad, but i t i s worth emphasizing that the greatest hardship from further i n f l a t i o n i s l i k e l y to f a l l on the poorer classes of the debtor countries, and i s l i k e l y permanently to reduce t h e i r standard of l i v i n g . A claim f o r m i l l i o n s betv/een nations may i n the paying country resolve i t s e l f into exacting sums from i n d i v i d u a l s to whom the payments mean the difference between poverty and d e s t i t u t i o n . Repayments: Creditor Countries A country with claims on a foreign country i s e n t i t l e d to a net addition to her national income of the amount of her annual claims over and above her own national production. On the face of i t , t h i s seems a desirable p o s i t i o n , but, there are some creditor countries who seem to be suffering from consider-I able doubts as to whether they can afford to be paid! To make 1. Buehler, A. G., Public Finance, p. 817 71. the payments, the debtor country has to get hold of cr e d i t s i n the creditor country. The only way she can do t h i s i s by s e l -l i n g abroad, and by using the credits which she'gains i n t h i s way, not to buy goods from abroad, but to pay her debts.**" Now, t h i s i s where the p o s s i b i l i t y of i n j u r y to the creditor country a r i s e s , the p o s s i b i l i t y that getting "some-thing for nothing" i n international finance may not be as 2 agreeable as one would expect. For the pushing of foreign sales and the check to foreign buying w i l l react i n j u r i o u s l y upon a l l countries that either s e l l to the paying country or compete with her i n production. On the one hand, competitive industries w i l l f i n d her competition developing and encroaching on t h e i r markets; oh the other, the s e l l i n g industries w i l l f i n d her demands from them checked.-^ Where the f i n a n c i a l posi-t i o n of the debtor country i s so bad that her currency i s de-preciated and worth l e s s abroad than i t i s at home, the invasion of foreign markets w i l l be accelerated, f o r she w i l l have, i n eff e c t , a bonus on her foreign sales. Whatever the position of the currency of the country o r i g i n a l l y , the fact that the debt-or country has to make these payments ( i f they are on a large scale) i s l i k e l y to make her money cheap and to give her some bonus on exports. Normally, the pos i t i o n would r i g h t i t s e l f . But where the debtor country has large payments to make, her a.emand f o r foreign currencies w i l l keep up t h e i r value i n terms of her 1. Drummond, G. F., The .Economics of International Trade, ch. 1-4 2. Buehler, A. G., Public Finance, p. 817 3. Dalton, H., P r i n c i p l e s of Public Finance, p. 286 72 own currency, and i t w i l l be i n her i n t e r e s t to push her export trade wherever possible. Meanwhile, i n t e r n a l f i n a n c i a l d i f -f i c u l t i e s are l i k e l y to prolong the p o l i c y of i n f l a t i o n which i n turn helps to keep the value of the currency of the debtor country down. The net r e s u l t must be that she w i l l s e l l more and buy l e s s on foreign markets. It i s important not to make the picture too black — as consumers we s h a l l gain from lower prices i n the cred i t o r coun-t r y . 1 I f the exports of the debtor country are only raw mater-i a l s which could not be produced i n the c r e d i t o r country ( l e t us say Germany and Canada), we should gain as consumers, and we should not lose d i r e c t l y (as producers) from German competition. I f Germany's exports compete very l a r g e l y with our own products, the result i s that her invasion of our home and foreign markets i s a cause contributing to unemployment and trade stagnation. We might, of course, protect our home markets by import duties against German goods but, apart from the general objections i n -herent i n any schemes of t h i s kind, and the i n j u s t i c e and i n -consistency of i n s i s t i n g upon payments and putting obstacles i n the way of making them, we should s t i l l s uffer from her competition with our producers i n foreign markets. Any general prohibition of her export trade by joint a l l i e d action would simply deprive her of the means of paying her debts. We s h a l l gain from the repayments i f , and when, we get them, but we may suffer considerable i n c i d e n t a l trade d i s l o c a t i o n through the methods of payment. 1. Drummond, G. F., The Economics of International Trade, Ch.10 73. Although the degree of competition w i l l d i f f e r from case to case, the resu l t of the payment of inte r n a t i o n a l debts must always lead to smaller purchases and la r g e r sales abroad on the part of the paying country. Pre-War Debts To these somewhat lugubrious pictures of the costliness of being paid what one i s owed, i t may be objected that i n pre-war days many countries had enormous foreign investments which, although they were held by ind i v i d u a l s and not by governments, involved very considerable annual international settlements which were unattended by the disasters we have suggested. This i s true — but these payments d i f f e r e d i n important p a r t i c u l a r s from the payment of in t e r e s t on war debts. (1) The foreign investments had been made mainly f o r productive purposes. I f Canada raised a loan i n England f o r the purposes of railway development, she would have to make annual i n t e r e s t payments, but she would expect the railway to give her a p r o f i t on the undertaking as w e l l . Canada pre-sumably would not be poorer than before because of the. r a i l -way and i t s costs, and the payments would not therefore neces-s a r i l y reduce her power to buy from abroad. ( 2 ) The development of investment abroad i n pre-war days was gradual. Any s l i g h t stimulus that the exporting coun-t r y gained developed slowly, and the competing countries could adjust t h e i r i n d u s t r i a l organization gradually. I t is. e s s e n t i a l to r e a l i z e the importance of t h i s . At any one time, a country i s organized f o r a certain kind of production. This organiza-74 ti o n i s always changing slowly as some industries develop and others decay, and i t i s always capable of gradual readjustment. But any sudden disturbing factor means that a time must elapse before the organization can adjust i t s e l f , and u n t i l t h i s hap-pens, the country suffers a l l the troubles of d i s l o c a t i o n , depression and Unemployment. P r a c t i c a l l y a l l countries are going through a period of d i s l o c a t i o n as a r e s u l t of t r a n s i t i o n from war to peace. Where t h i s i s emphasized by a sudden change i n the r e l a t i v e exporting and importing capacity of other coun-t r i e s through international payments on behalf of war debts, the disturbance i s l i k e l y to be considerable. I f the payments continue for a long period, the industry of the receiving country w i l l adjust i t s e l f . Industries i n which the new competition i s not f e l t w i l l be developed, the industries which find'themselves undersold w i l l gradually be abandoned. When these adjustments have been made, the f u l l advantage w i l l be drawn from the payments. When the repayments are completed, a further readjustment w i l l be needed. 1 1. Dalton, H., P r i n c i p l e s of Public'Finance, p. 287 B:^ INTERNAL DEBT The Repayment of Internal Debt The payment of i n t e r e s t on foreign debt reduces the net income of the paying country by t r a n s f e r r i n g a part of i t s income abroad. The payment of i n t e r e s t on an i n t e r n a l debt has no dir e c t e f f e c t of t h i s kind; money i s raised within the country and paid out to holders of government bonds also with-i n the country. To a large extent, i t i s simply an elaborate and expensive method of taking money out of one pocket and pay-ing i t back into another of the same i n d i v i d u a l . Although the payment of i n t e r e s t on war debt does not reduce the productive capacity of the country as a whole, the necessary taxation may have i n d i r e c t e f f e c t s i n discouraging production. We have seen how the expectation of heavy taxation may discourage production, 1 and i n t h i s case there i s no com-pensating gain to be set o f f against the discouragement. The * 2 money i s simply r e d i s t r i b u t e d . There i s no presumption that holders of war bonds w i l l use i t better or need i t more than the taxpayers. I f anything, the presumption i s against the r e d i s t r i b u t i o n . When the value of money i s r i s i n g i n a period of f a l l i n g p r i c e s , the r e a l burden of the debt becomes heavier 1. c f . , Chapter IV 2. Pigou, A. C., The P o l i t i c a l Economy of War, p. 192 76. and the p o s s i b i l i t y of the discouragement by taxation increases. The position of the holders of the war loan improves at the expense of the taxpayers and an element of i n j u s t i c e creeps i n . 1 These disadvantages make the paying o f f of the debt desirable, while there i s the additional p r a c t i c a l consideration that i f the government should need to borrow again, i t s c r e d i t i s not l i k e l y to be improved i f i t has made no e f f o r t to reduce i t s e a r l i e r debts. The r e a l problem resolves i t s e l f into the question whether i t i s preferable to impose heavy taxation over a term of years to meet in t e r e s t and a sinking fund f o r the gradual repayment of debt, or to impose an extraordinary levy 2 to meet the emergency and pay o f f a part of the debt quickly. There i s a t h i r d a l t e r n a t i v e . The state might repudiate the whole or part of i t s debts. In t h i s country, the suggestion hardly enters into p r a c t i c a l p o l i t i c s , and i s usually condemned on the grounds that i t would involve a breach of f a i t h on the part of the government with the holders-of a l l war bonds. Re-pudiation would c e r t a i n l y cause some great i n d i v i d u a l hardship and give a severe shock to the national c r e d i t , and may be re-garded as d e f i n i t e l y inexpedient. Sinking Fund Method The t r a d i t i o n a l method of repaying debt has been to rai s e , wherever possible, an excess of revenue over current expenditure, paying the balance into a sinking fund and using 1. Mendershausen, H., The Economics of War, pp. 296-297 2. Pigou, A. C , The P o l i t i c a l Economy of War, pp. 190-191 3. Pigou, A. C , A Study i n Public Finance, p. 288 77. i t to reduce the p r i n c i p a l of the debt. This implies that, i n the f i r s t instance, the revenue raised must 'exceed that neces-sary f o r i n t e r e s t payment, but as the p r i n c i p a l decreases, the annual debt charges w i l l be gradually reduced. In pre-war days, repayment by the sinking fund method was always a slow business. Sinking funds are easy to r a i d . In any d i f f i c u l t y , there i s a temptation f o r a harassed finance minister to d i v e r t the funds that would otherwise be used f o r redemption of debt rather than to use the i n e v i t a b l y unpopular method of further taxation. Where taxation i s so heavy that the available sources of taxation are exhausted, i t i s extremely d i f f i c u l t to rai s e any substantial surplus. A country that i s heavily burdened by taxes can, at most, hope f o r a very gradual reduction of i t s burdens by repayment of the p r i n c i p a l of the debt by t h i s mehtod. 2 Conversion of Debt In the past, government debts have been put on more favourable terms from the taxpayers' point of view by proces-ses of debt conversion. In the case of a permanent loan, the government i s i n the position of having undertaken to pay a fixed rate of i n t e r e s t u n t i l the debt i s repaid at par, with-out having any obligation to make the repayment at any fixed, date. I f the current rate of i n t e r e s t f a l l s , t h e value of the bonds w i l l r i s e ; i n these circumstances, i t might be possible to "convert" the debt by reducing the rate of i n t e r e s t ; i . e . , 1. Pigou, A. C , A Study i n Public Finance, p. 289 2. Dalton, H., P r i n c i p l e s of Public Finance, pp. 276-281 / 78 from, yfo to 2-§%. The holders would be given the option of re-payment at par, so they would suffer no i n j u s t i c e . In the case of debt repayable at par at a fixed date, the government has the opportunity of reborrowing on more favourable terms whenever the debt f a l l s due. In the case of long-dated s e c u r i t i e s , t h i s opportunity only occurs at the end of long periods. In the case of short-dated s e c u r i t i e s , holders may be w i l l i n g to convert into long-term loans at more favourable rates from the taxpayers' point of view. Consider-able economies of t h i s kind are only l i k e l y to be possible i f the f i n a n c i a l p o l i c y of the government commands confidence, and i f the i n t e r e s t rate has f a l l e n since the o r i g i n a l bor-. 1 rowing. Postponement of Repayment: What i t Means The t r a d i t i o n a l methods of repaying debt do not seem to promise more than a gradual reduction of cost, and we have a l -ready referred to the disadvantages of t h i s . The burdens of the heavy recurring taxation may prove a handicap on economic development, and may make i t impossible f o r the state to under-take necessary productive expenditure. Where prices are f a l -l i n g , the arguments against the perpetuation of the debt are p a r t i c u l a r l y strong. The discouragement grows heavier and the bond holding class gains s t e a d i l y at the expense of the tax-payers. The economic e v i l s of enormous debts and very heavy taxation are s u f f i c i e n t l y apparent. But are the d i f f i c u l t i e s 1. Withers, W., The Retirement of National Debts, 1932, pp.311^ 325, c i t e d i n Fagan, E.D. and. Macy, C.W., Public Finance, p. 823 79. and disadvantages of immediate repayment any less? The most" popular argument against immediate repayment of war debt i s probably that, as the present generation bore so much of the cost of the war, they are j u s t i f i e d i n leaving the burden of the repayment of the war debts to po s t e r i t y . This 1 might be true i f possible. But as f a r as the i n t e r n a l debt i s concerned, the generation which makes the loan finds the funds once and f o r a l l . They are transferred from peace to war uses. Post e r i t y suffers because new c a p i t a l investments w i l l be cu r t a i l e d and existing c a p i t a l allowed to depreciate, but beyond t h i s important i n c i d e n t a l i n j u r y , the burden i s not and cannot be shifted on to po s t e r i t y . In the case of a tax, the matter i s ended when the tax i s paid. In the case of a loan, i n t e r e s t i s paid by succeeding generations, but they pay i t to bondholders of the same generation. The same i s true of repayment. I f we repay our debt now, we repay i t to ourselves. If we leave i t to 1980, taxpayers i n those years w i l l pay bond-holders i n those years, and taxpayers i n a l l the intervening years w i l l presumably pay those with claims f o r i n t e r e s t i n those years. What posterity pays i t pays to i t s e l f , and we cannot make i t bear any of our burdens. The only question i s whether the disadvantages of continual r e d i s t r i b u t i o n through taxation, i n t e r e s t payments and gradual repayment are l e s s than the disadvantages of one great upheaval and one great d i s t r i b u -t i o n . 2 1. Spiegel, H. W., The Economics of Total War, pp. 325-327 2. Pigou, A..C.,. A Study i n Public Finance,, pp. 289-290 80. The Advantages of Immediate Repayment The main advantages of a special levy to repay debt seem to be: (1) That as the levy would be imposed f o r a special pur-pose and would be d e f i n i t e l y intended not to recur, any bad ef f e c t that the expectation of i t might have i n reducing pro-duction would be l i m i t e d i n time, and the reduction i n taxation i n the future would reduce i t s possible bad effects on the incentives to production. The heavier the annual taxation the greater the advantages of a reduction would be, and a much stronger case f o r an,immediate exceptional e f f o r t to repay debt exists when the annual taxation i s heavy than when i t i s only moderate as compared with the t o t a l income of the country. ( 2 ) Where a f a l l i n prices i s expected, the case f o r immediate redemption i s exceptionally strong, for without i t the burden of debt increases and the holders of government s e c u r i t i e s gain at the expense of the taxpaying community. I f a r i s e i n prices were expected, immediate repayment would be le s s to the taxpayers' i n t e r e s t , . f o r the future f a l l i n the value of money would automatically reduce t h e i r burden at the expense of the holders of government s e c u r i t i e s . The two forms of special levy that have been suggested have been a special levy on a l l accumulated wealth and a special levy on wealth accumulated during the war. On the whole, a l -though annual taxation i s probably most s a t i s f a c t o r i l y based upon annual income, a man's a b i l i t y to contribute to one special levy depends upon his t o t a l resources rather than upon his i n -come at the date at which the levy i s imposed, and t o t a l re-81. sources are probably probably p r a c t i c a l l y best measured by accumulated wealth. A Levy on Capital The proposal to impose a general c a p i t a l levy has been condemned as inequitable, impracticable, and l i k e l y to i n f l i c t a f a t a l blow on our i n d u s t r i a l prosperity. I t i s perhaps im-portant to point out that to answer these charges f o r p r a c t i c a l purposes, supporters of the levy have to show not that i t i s p e r f e c t l y equitable, capable of perfect administration or with-out any injurious economic r e s u l t s , but only that (on the whole) i t s e f f e c ts are l e s s bad than those of recurring annual taxa-t i o n . As f a r as equity i s concerned, the exi s t i n g system seems i n i t s e l f to present so many i n j u s t i c e s that i t hardly becomes those who oppose an a l t e r a t i o n to l a y too much emphasis upon the aspect of fa i r n e s s . The accumulation of the debt i t s e l f was open to c r i t i c i s m . When people who were able to f i g h t were ca l l e d upon to make the most complete personal s a c r i f i c e s with the minimum of pecuniary compensation, the fact that people who were able to lend should have been e n t i t l e d to the very favour-able terms they got f o r t h e i r loans may have been expedient, but w i l l hardly bear s t r i c t scrutiny from the point of view of "equity". There seems every reason to condemn those terms be-ing automatically improved by f a l l i n g p r i c e s , although as time passes the p o s i t i o n i s complicated by the buying and s e l l i n g 1. Pigou, A. C , A Study i n Public Finance, pp. 298-299 and PP. 303-304 82. of s e c u r i t i e s . Further, where industry i s depressed by the heavy taxation necessary to meet intere s t payments, we have, i n e f f e c t , a l l active producers penalized i n the int e r e s t s of those who hold old accumulations of wealth with claims to i n t e -r e s t . I t i s c e r t a i n l y d i f f i c u l t to make a c a p i t a l levy perfect-l y f a i r between i n d i v i d u a l s . 1 I t would appear to f a l l most heavily on those who have accumulated as compared with those who have spent, on those who work with large c a p i t a l as com-pared with those who make large incomes by t h e i r personal ex-ertions, while i n any heavy tax i t i s d i f f i c u l t to avoid cases 2 of personal hardship. As f a r as the f i r s t point i s concerned, the d i f f e r e n t i a t i o n against accumulated wealth i s found i n our existing taxation as well as i n the levy, and i t i s perhaps true that some rough j u s t i f i c a t i o n f o r i t may be found i n the ex-ceptional circumstances which enabled people to accumulate wealth i n the past few years. The second point presents a r e a l prob-lem, but a working solution of i t . might be found by imposing an additional tax on professional incomes for a term of years. As f a r as cases of personal hardship are concerned, the only method of avoiding them i s by exempting a minimum of wealth from the levy and by graduation of the rates of tax on accumulations of c a p i t a l of d i f f e r e n t s i z e . There seems ho ess e n t i a l reason to think that the hardship would necessarily be greater than under the income tax. The question as to how far the levy i s administratively 1. Pigou, A. C , A Study i n Public Finance, p. 304 2. Ibid . , pp. 3 0 4 - 3 0 5 83. practicable i s v i t a l l y important.-1- The d e f i n i t i o n of the wealth to be taxed, whether and how f a r furniture and personal e f f e c t s are to be included, or the p o s i t i o n of those who.hold c a p i t a l both here and abroad, the valuation of the property even af t e r , the d e f i n i t i o n i s arrived at, and the prevention of undue evasion a l l present technical d i f f i c u l t i e s . But i t i s to be noted that (after World War I) a levy was imposed i n Germany (the breakdown of which seemed to be due to the fluctuations of prices rather than to any inherent administrative d i f f i c u l t i e s ) , while the English revenue experts agreed that a special levy on war wealth was not unworkable, although the d i s t i n c t i o n be-tween "war" and "other" wealth would c e r t a i n l y add to the d i f -f i c u l t y of administration. The great advantage of the pro-posed special levy on war wealth was that i t was intended to f a l l on a class from whom exceptional payments could be f a i r l y demanded. I t i s claimed f o r the levy that, as i t would not a f f e c t future wealth, i t s e f f e c t s on production would be l e s s bad than 3 those of recurring taxation. On the other hand, i t i s argued that the e f f e c t of the levy would be to shatter confidence i n our economic s t a b i l i t y , and whatever pledges were given that i t would not be repeated, the psychological e f f e c t s would be extra-o r d i n a r i l y bad. I t i s not possible to either prove or disprove t h i s . I t i s possible that the immediate shock to confidence 1. Pigou, A. C , A Study i n Public Finance, pp. 305-308 2. Colwyn Committee on National Debt and Taxation, c i t e d i n Pigou, A.C., A Study i n Public Finance, Part I I I , Chap. VI and Dalton, H.t P r i n c i p l e s of Public Finance, p. 265 3. Pigou, op. c i t . , pp. 291-293 84 might he considerable, but i t i s more d i f f i c u l t to believe that experience of the p o s i t i v e benefit of lower taxation would not have a compensating e f f e c t . That a levy imposed on c a p i t a l would necessarily reduce the c a p i t a l of the country more than s i m i l a r taxes on income i s untrue. 1 Although the tax i s imposed on c a p i t a l , i t i s l i k e l y to be met p a r t l y out of income and p a r t l y by s e l l i n g e x i s t i n g c a p i t a l and using the proceeds f o r payment of tax. In the case of a heavy tax on income, the tax i s l i k e l y to be at l e a s t part-l y met by reducing new saving or by r e a l i z i n g e x i s t i n g c a p i t a l . In the case of the c a p i t a l levy, although many people would have to r e a l i z e available c a p i t a l to meet the tax, the holders of the war loans who would be paid would presumably be seeking new investments and the t o t a l c a p i t a l of the country would not necessarily be reduced. Any f i n a l conclusion as to the a d v i s a b i l i t y of the tax must depend upon a de t a i l e d investigation of the amount that could be r e a l i z e d , and the reduction of taxation that would r e s u l t . For while i t might be worth r i s k i n g the disturbance of the levy f o r a considerable return, i t would not necessarily be worth i t f o r only an i n s i g n i f i c a n t reduction. Various estimates have been made, but the fluctuations of money values make a d e f i n i t e estimate impossible. One point i s clear. The best moment for a levy would be during the price boom following the end of the war. I f a levy were imposed at such a time, then, because of the i n f l a t e d values and i n f l a t e d money incomes, i t 1. Pigou, A. C., A Study i n Public Finance, pp. 297-298 85 would involve the absorption of a smaller percentage of the t o t a l income, the disturbance would be l e s s , the psychological .effect i n the midst of the boom would be l e s s serious (and might even be b e n e f i c i a l i n checking over-speculation), while we would be spared the addit i o n a l handicap of heavy debt taxa-t i o n when the boom and r i s i n g prices are followed by f a l l i n g prices and depression. A period of depression does not appear a favourable moment fo r a levy, partly because i t might add to the existing lack of confidence, and p a r t l y because i t would be an unfavourable time f o r the taxpayers to r e a l i z e t h e i r assets to meet the necessary payments."'' 1. Dalton, H., P r i n c i p l e s of Public Finance, pp. 266-267 Pigou, A. C , A Study i n Public Finance, pp. 308-309 P A R T I I I WAR F I N A N C E I N C A N A D A (1914-21) CHAPTER VIII SOURCES OE REVENUE Introduction " I t i s doubtful whether a country ever was more unpre-pared f o r p a r t i c i p a t i o n i n war on a national scale than Canada i n 1914. I t was a nation devoted to peaceful pursuits, happy i n i t s i n t e r n a l a f f a i r s and amicable i n i t s r e l a t i o n s with:.other countries the world over". 1 "By 1914, the investment boom based on foreign borrowing had come to an end. I t then became impera-ti v e to turn from the construction of c a p i t a l works to greater production of exportable products i n order to pay the i n t e r e s t on the large investments of the preceding decade. This major s h i f t and readjustment threatened to be p a i n f u l and prolonged, but under the stimulus of war demands the Canadian economy turned the corner with ease and expanded i t s production im-mensely i n a very short period of time. By force of circum-stances, Canada's foreign borrowings dwindled u n t i l they d i s -appeared i n 1917. In the l a t e r years of.the war, the great expansion i n production combined with the p o l i c i e s of the Fed-e r a l Government enabled Canada to become an important lender, financing B r i t i s h purchases of Canadian goods.... The p r i n c i p a l requirements were foodstuffs and munitions. The former was 1. Brown, F. H., The History of Canadian Yfar Finance 1914-1920 p. 1 88 Canada's main export and the production of the l a t t e r was quickly-undertaken by the depressed manufacturing industry. There i s no need to emphasize the unanimity of conviction with which Canada threw i t s e l f into the struggle.... The united e f f o r t required of a nation by modern war places a great s t r a i n on the p o l i t i c a l unity of any people. But the events of the Great War provide the most s t r i k i n g i l l u s t r a t i o n of the peculiar character and the l i m i t a t i o n s of the Canadian p o l i t i c a l system. The War gave predominance to the Federal Government and set a single objective f o r a l l Canadians. In a sense, the War was a great national enterprise, a corporate endeavour by the whole countryV.. .*"-However, we are predominately interested i n the manner i n which Canada financed her war e f f o r t during t h i s period i n which the economy of the country underwent such a severe s t r a i n . To make the best possible use of the resources of the nation, the Dominion Government l e g i s l a t e d and enforced certain economic and f i n a n c i a l p o l i c i e s . These guided and governed the methods of public finance employed by the Federal Government during the war period, and through them, Canada became a great source of essential supplies f o r the A l l i e d cause. The p o l i c i e s which were implemented have had a permanent e f f e c t upon the economic p and s o c i a l structure of the country. We must examine them and t h e i r e f f e c t s i n s u f f i c i e n t d e t a i l so that we f u l l y understand the problem as i t existed then and as a s i m i l a r problem has existed these past few years. 1. Report of the Royal Commission on Dominion P r o v i n c i a l Relations. Book I . t pp. 89-97 2. Ibid., p. 98 89. Preliminary Steps The exigencies of war immediately forced the Federal Government into adopting an agressive r o l e . 1 A great deal of p o l i t i c a l action was necessary at this time, and at a special war session of Parliament i n August much l e g i s l a t i o n was passed with a minimum of debate. 2 The War Appropriations Act, 1914 granted the sum of $50 m i l l i o n f o r m i l i t a r y and naval defence, and the War Measures Act, 1914 conferred powers upon the Gover-nor i n Council and amended the Immigration Act. The Finance Act, 1914 and the Dominion Notes Act were passed i n the com-mercial and f i n a n c i a l i n t e r e s t s of the Dominion under the c i r -cumstances a r i s i n g out of the war. Also, the Customs T a r i f f Amendment Act and an Act to amend the Inland Revenue Act were passed to provide an increase i n government revenues. At the end of July 1914, Canada witnessed an i n c i p i e n t f i n a n c i a l panic when the banks were faced with a heavy demand for gold.^ The government suspended the redemption of Dominion notes i n gold, and l e g i s l a t i o n was announced making bank notes l e g a l tender. Further, the banks were given emergency powers to make use of the excess c i r c u l a t i o n privilege^" the year round and they could also obtain additional Dominion notes by pledging approved s e c u r i t i e s with the Minister of Finance. These govern-ment measures averted the immediate danger to the banks but they 1. Report of the Royal Commission on Dominion-Provincial Relations, Book I, p. 98 2. Canada Year Book, 1914, p. 677 3. Brown, F.H., The History of Canadian War Finance 1914-1920,p.5 4. Before t h i s , the banks had been permitted to issue t h e i r notes i n excess of t h e i r combined paid-up c a p i t a l and rest or re-serve funds up to 15% during the crop moving season from September to February i n c l u s i v e . 90 opened the door to i n f l a t i o n . By abolishing or waiving the previous r e s t r i c t i o n s , the Federal Government now had at i t s disposal the machinery f o r an expansive and i n f l a t i o n a r y c r e d i t system. 1 Another problem that demanded immediate action was that of exchange.*" At the beginning of the war, conditions i n Lon-don were chaotic. The Bank rate rose by 5% i n two days and England found i t necessary to c a l l i n some of i t s balances abroad. However, due to the presence of German raiders on the sea-lanes, gold could not be safely shipped to England, Canada, through the Minister of Finance, became trustee for gold consigned to the Bank of England. This kept s t e r l i n g exchange at a moderate premium f o r some months but eventually the rate tended to go against Great B r i t a i n with the r e s u l t that most of the gold which had o r i g i n a l l y come from the United States returned to that, country. This arrangement was i n operation throughout, the war and Canada became the trustee f o r A l l i e d gold used to finance war expenditures i n the United States. 1914-15 In Canada, as i n the other b e l l i g e r e n t countries, the government was slow to raise the tax l e v e l s a f t e r the outbreak of the war. This was p a r t l y because Canadian opinion did not yet f e e l that the war would be of long duration, and p a r t l y be-cause Canada entered the war i n a period of depression that 1. Report of' the Royal Commission on Dominion-Provincial Rela-tions, Book I, p. 98 — — 2. Brown, F. H., The History of Canadian War Finance 1914-1920, p. 6 91. made new tax e f f o r t s d i f f i c u l t . For these reasons alone, a si g n i f i c a n t change i n the Dominion revenue system was d i f f i c u l t to achieve at the beginning of the war. Furthermore, any at-tempt of the Dominion to gain more revenues almost c e r t a i n l y involved some c o n f l i c t with the provinces re sources of revenue, and any such attempt seemed l i k e l y to involve new tax i n s t r u -ments that would prove costly i n a short war. In the early days of the war, there was no conception of the magnitude of the task at hand. 1 Everyone thought the war would soon be over. In order to meet i t s f i n a n c i a l re-quirements, the Federal Government proceeded along several o l i n e s . F i r s t l y , i t imposed special excise duties on tobacco and l i q u o r s and raised the customs duties on coffee, sugar, tobacco and l i q u o r s . Secondly, a short term loan of $5 m i l l i o n was negotiated with the Bank of Montreal. Thirdly, a £3 m i l - .. l i o n issue of six month's treasury b i l l s together with the $8.7 m i l l i o n balance of a $35.5 m i l l i o n funded loan'were f l o a t -ed i n London. Fourthly, arrangements were made with the Im-p e r i a l Government to a s s i s t Canada i n financing i n t e r e s t pay-ments on i t s debt and the expense of her army i n England, i n fa c t , to finance the whole Canadian cost of the war. A sum of £ 12 m i l l i o n was provided for this purpose. L a s t l y , the Federal Government authorized the issue of more Dominion notes.^ 1. Brown, F. H., The History of Canadian War Finance 1914-1920,p.7 2. Ibid, p. 8 Report of the Royal Commission on Dominion P r o v i n c i a l Rela-tions, Book I, p. 98 3. The amount of. Dominion notes that could be issued against a 25% reserve of gold was increased from $30 m i l l i o n to $50 m i l l i o n , $16 m i l l i o n of Dominion notes were issued against $20 m i l l i o n guaranteed railway s e c u r i t i e s and $10 m i l l i o n were issued f o r general government purposes. 92. Part of t h i s issue was an instance of d i r e c t currency i n f l a -t i o n , and should be noted c a r e f u l l y . The funds raised above were used to cover the current d e f i c i t , the war expenditures and c a p i t a l expenditures. We must mention here that no new public works were begun; the c a p i t a l expenditures were confined to works under contract such as Welland Canal, National Transcontinental Railway and other important port and terminal undertakings. 1 1915-16 As the war advanced, a l l the factors that affected taxa-t i o n and borrowing i n Canada altered t h e i r bearing. The war had now been i n progress almost one year; therefore, a clearer and f u l l e r conception of the problem to be surmounted was pos-s i b l e . As Canadian war expenditure increased and as debts mounted, i t seemed l i k e l y that the Dominion would require la r g e r revenues i n the future, so that the establishment of new tax machinery would f i l l a permanent rather than a tempor-ary need. Then, as the war continued, the trade depression gave way to recovery which increased national income and hence the amounts available f o r taxation or borrowing.' The war served to increase the demand fo r Canadian exports and t h i s , combined with a good wheat crop, brought a substantial measure 2 of recovery. Because the economy as a whole was moving on a war basis, psychological change was increasing the c i t i z e n s * willingness to make s a c r i f i c e s . 1. Brown, P. H., The History of Canadian War Finance 1914-1920, p. 7 2. I b i d . , p. 10 93 A tentative appropriation of $100 m i l l i o n f o r war pur-poses was asked for i n t h i s period and i t was r e a l i z e d that t h i s might not be enough.1 A current defic i t , of $20 m i l l i o n was expected, $40 m i l l i o n was required re c a p i t a l expenditures and $20 m i l l i o n f o r repayment of temporary loans. However, the war cost of around $166 m i l l i o n was i n excess of the es-timate by $66 m i l l i o n ; therefore, considerable funds had to be raised by borrowing as the taxation measures proposed could not possibly meet t h i s t o t a l . "Early i n 1915, the f i r s t special war taxes were imposed. Taxes were placed on bank note c i r c u l a t i o n , on the gross i n -come of loan and trust companies, on the premium income of l i f e insurance companies, on telegraph and cable messages, on railway and steamship t i c k e t s and on sleeping-and parlour car accommodation. Postage rates were increased and stamp taxes placed on cheques, b i l l s of exchange, etc. Imposts were made on patent medicines, perfumery and non-sparkling wines. An additional 7s% w a s l e v i e d on imports under the General and Intermediate t a r i f f schedules and 5% on items under the B r i t -i s h Preference. These taxation increases which were expected to y i e l d about $25 m i l l i o n went, however, only a small way to-ward meeting the Government's f i n a n c i a l needs of $166 m i l l i o n during the f i s c a l year 1915-16".2 The main feature of the budget was the r a i s i n g of the t a r i f f s as indicated above. 'We should note that, although the 1. Brown, F. H., The History of Uanadian War Finance 1914-1920, PP. 9-10 Canada Year Book, 1915, pp. 678-679 2* Report of the Royal Commission on Dominion-Provincial Rela- tions, Book I, p. 98 • • : 94. revenue obtained from th i s increase (estimated at $180 m i l -l i o n by the end of 1920)*** was never shown as special war revenue owing to accounting d i f f i c u l t i e s , i t was a special war impost and stopped a f t e r the end of the war. A c t u a l l y the year's revenues exceeded expectations, due to a good crop, r i s i n g prices and generally improved conditions, but extensive bor-2 rowing was s t i l l unavoidable. In the f i r s t part of the year, £5 m i l l i o n , 5 year, ksfo debentures were sold at 9'9i« But i n the summer of 1915 (when s t e r l i n g exchange was at a large discount), the arrangement with the B r i t i s h government to finance the Canadian war costs collapsed. A l l that Great B r i t a i n could now do was to finance the war expenditures which Canada made overseas. The only other possible source of foreign funds l e f t open to the Cana-dian government was the New York money market. In July 1915, the sale of $45 m i l l i o n 1 and 2 year, 5% notes at par and 99-g respectively was arranged i n this market. For the balance of i t s needs, the Federal government was next obliged to approach the Canadian investor. The Federal Government was now faced with the problem of r a i s i n g the funds for the cost of i t s own war e f f o r t incurred at home and to finance B r i t i s h war purchases i n Canada. P r i o r to 1914, the government had never raised so much as $5 m i l l i o n i n Canada as a long term loan — l e s s than $700,000 of the 1. Brown, F. H., The History of Canadian War Finance 1914-1920. p. 9 2. Ibid., p. 10 95. t o t a l federal debt was payable i n Canada. 1 I t was believed by many that the maximum which the Canadian market could absorb was $25 m i l l i o n . But t h i s was not nearly enough. The govern-ment (which dare not r i s k f a i l u r e ) offered $50 m i l l i o n , 5$ coupon rate, exempt from Dominion government taxation at a discount i n November, 1915• However, the government's fears were unfounded. The loan was over-subscribed (mainly by finan-c i a l i n s t i t u t i o n s and other business organizations), and the government increased the t o t a l allotment to $100 m i l l i o n . ^ The additional $50 m i l l i o n raised i n t h i s manner was placed at the disposal of the B r i t i s h government to finance the purchase of supplies i n Canada and the United States.*4" This not only bolstered moral but also marked the beginning of what was to become the outstanding feature of Canada's war-time program of finance; i . e . , England would finance Canadian troops i n Great B r i t a i n and om the continent f o r our account while Canada would finance English war expenditures i n the United States and Can-ada. 5 From 1915 "to 1918, Canada's war e f f o r t grew r a p i d l y . The growing burden was becoming more and more a s t r i c t l y Cana-dian problem. During the l a s t two years of the war, Canada's advances to Great B r i t a i n f a r exceeded Great B r i t a i n ' s advances 1. Report of the Royal Commission on Domion-Provincial Rela-tions, Book I, p. 98 2. Brown, F. H., The History of Canadian War Finance 1914-1920, "p. 11 3. Canada Year Book, 1915, p. 679 4. Brown, l o c . c i t . 5. Report of the Royal Commission on Dominion-Provincial Rela-tions, Book I,, p. 99 96. to Canada. E s s e n t i a l l y , Canada was buying her own exports and shipping them overseas to her A l l i e s . Therefore, Canada's contribution increased i n proportion to her a b i l i t y to r a i s e the necessary funds. The Federal Government had three main courses open to i t : taxation, borrowing and the p r i n t i n g of paper money. The country (public opinion) was presumably not ready f o r high taxation, the issue of Dominion notes was considered dangerous practice, so the bulk of the revenue was raised by borrowing. The government's general f i n a n c i a l p o l i c y f o r the mom-ent was announced i n the 1916 budget; v i z . , to meet the cost of the war mainly by borrowing. 1 I t was f e l t that people would be w i l l i n g to lend t h e i r money f o r the preservation of national and i n d i v i d u a l l i b e r t y which has been won by t h e i r forefathers with great hardship. I t i s cl e a r that the government would have preferred a p o l i c y involving more taxation and the Budget Speech of that year discusses the problem at some length. How-ever, business confidence was none too high, unemployment was a factor, and the necessity f o r maintaining the l e v e l of pro-duction and the national income was of great importance. People were not used to heavy tax burdens and production might have suffered. A democratic government does not go f a s t e r than i t s public opinion, and we would not overlook t h i s point i n our discussion of war finance. The amount of money available f o r domestic loans de-pended upon the savings of the people and the reduction i n 1. Brown, F. H., The History of Canadian War Finance 1914-1920. P. 9 97. private investment. The funds available became i n s u f f i c i e n t and the Federal Government was forced to bring about i n f l a t i o n through the agency of bank c r e d i t . This occasioned an expan-sion and r e d i s t r i b u t i o n of the money income of the nation. Prices and hence the cost of l i v i n g rose faster than average 2 wage rates and fixed incomes. The p r o f i t s of industry i n -creased while the real income of wage earners and people with fix e d incomes declined or rose l e s s r a p i d l y . I t was thi s r e d i s t r i b u t i o n of r e a l wealth i n the country,, combined with the increase i n production, that made the large war loans a success. 1916-17 In the f i s c a l year 1916-17, the expansion of bank cr e d i t r e a l l y got under way.^ Canadian war expenditures approximated $306 m i l l i o n and c a p i t a l expenditures were about $26-$27 million^ -5 Early i n 1916, the Business P r o f i t s War Tax Act was imposed. 1. Report of the Royal Commission on Dominion-Provincial Rela-tions, Book I, p. 99 2. Wages i n certain war industries and of certain u n s k i l l e d groups rose more ra p i d l y than the cost of l i v i n g , but the wage rates received by a large section of labour, p a r t i c u l a r -l y the s k i l l e d trades and the white-collar c l a s s , f e l l be-hind the r i s e i n the cost of l i v i n g . The Dominion Department of Labour index of the general movement of wage rates (ex-cluding professional workers and the white-collar class) rose 2% between 1913 and 1917, while the Dominion Bureau of S t a t i s t i c s index of the cost of l i v i n g rose 31%. 3. Report of the Royal Commission on Dominion-Provincial Rela-tions, Book I, p. 99 4. Appendix E 5. Canada Year Book, 1916-17, pp. 674-675 98. I t was made retroactive to the beginning of the war. This tax, designed to reduce the net p r o f i t s obtained because of the war, took 25% of a l l net p r o f i t s (except i n l i f e insurance and a g r i -culture) i n excess of 7% on the c a p i t a l of corporations and i n excess of 10% on the c a p i t a l of in d i v i d u a l s , faartnerships, etc. Any business with a paid-up c a p i t a l of l e s s than $50,000 was exempted, unless engaged i n the production of war supplies and munitions. Considerable funds s t i l l had to be raised by bor-rowing and to t h i s end, a $75 m i l l i o n loan was floated i n New York. This was the sole long-term loan placed i n New York dur-ing the war. However, the requirements of the Federal Government were f a r i n excess of the revenues raised above. To help meet the si t u a t i o n , a $100 m i l l i o n , 15 year, 5% tax-free loan was sold i n Canada at 97§ along with some $14 m i l l i o n i n war savings c e r t i f i c a t e s , Dominion stock, etc."1" Then the banks stepped i n and by use of t h e i r credit machinery did much to help the govern-2 ment finance the war. Current bank loans to business rose by $73 m i l l i o n during 1916-17. The banks purchased $100 m i l l i o n of the government's short-term treasury b i l l s . They advanced $100 m i l l i o n to the Imperial Munitions Board f o r expenditures i n Canada and established a revolving c r e d i t of $20 m i l l i o n f o r the purchase of wheat by the Imperial government. These banking credits had as a basis ah issue of £22 m i l l i o n , 3ir/4-g$ 1. Brown, F. H., The History of Canadian War Finance 1914-1920, P. 13 2. Report of the Royal Commission on Dominion-Provincial Rela-tio n s . Book I, pp. 99-100 99. bonds which Canada issued (they were not a c t u a l l y sold) to Great B r i t a i n , 1 A l l t h i s extra purchasing power i n the country caused a swift r i s e i n prices, production, money incomes,and p r o f i t s , thus making i t easier to f l o a t domestic war loans. We must not lose sight of the f a c t that, while Canada was expanding her war e f f o r t on the home front and extending valuable aid to Great B r i t a i n , the Imperial government was s t i l l 2 financing Canadian war expenditures overseas. In the f i s c a l year 1916-17, the Imperial government paid out on behalf of Canada some $151 m i l l i o n . This was, of course, o f f s e t by the Canadian advances to the B r i t i s h government — the Imperial Munitions Board was producing war material at the rate of $300 m i l l i o n a year by th i s time, and the financing of such a large scale operation was no small problem. During the year just reviewed, the government's f i n a n c i a l p o l i c y was to r e l y p r i n c i p a l l y on borrowing. However, to quote the Minister of Finance, "I do not desire to be understood as saying that we should not endeavour to raise by taxation a con-siderable part of our war expenditure. On the contrary, i t i s my view that i t i s bur clear national duty and supremely i n the i n t e r e s t of our c r e d i t to provide what we reasonably can without impairing our economic strength," ^  1917-18 - By now, Canada had half a m i l l i o n men under arms and 1. Brown, F. H., The History of Canadian War Finance 1914-1920« P. 13 2* Loc. c i t . 3. Canada, Parliament, House of Commons, O f f i c i a l Report of  Debates, February 15, 1916, p. 811 100. the f i n a n c i a l needs of the government had increased enormously. The pattern of finance was now f a i r l y well established — bor-rowing was the key-note of the government's program. 1 During t h i s period, Canada floated if (a) $150 m i l l i o n 20 year 5% tax-free loan at 96 (b) $100 m i l l i o n 2 year 5% loan i n New York at par (c) $514 m i l l i o n 5, 10 and 20 year 5 4 % tax-free war loan at par. This l a s t loan l i s t e d above was the f i r s t V i c t o r y Loan and was o r i g i n a l l y announced as an o f f e r of $150 m i l l i o n but was greatly over-subscribed. In December, 1917, am:order-in-council was passed p r o h i b i t i n g the issue of s e c u r i t i e s by provinces, municipalities and corporations without f i r s t ob-taining the consent of the Minister of Finance — t h i s was to f a c i l i t a t e the marketing of Dominion securities". ^  For the year 1917, c a p i t a l expenditures were approximate-l y $43 m i l l i o n and the war expenditures t o t a l l e d $344 m i l l i o n . ^ Also, some $112 m i l l i o n was made av a i l a b l e f o r the Imperial Munitions Board and $120 m i l l i o n i n temporary loans had to be repaid. To cope with t h i s greatly increased need f o r money, the government extended i t s taxation measures to new extremes. The Business P r o f i t s Tax'5 was increased to 50% on p r o f i t s i n 1. Brown, F. H., The History of Canadian War Finance 1914-1920, p. 14 2. Ibi d . , p. 15 Canada Year Book, 1918, p. 661 3. Brown, op. c i t . , p. 15 4. Appendix E 5. Canada Year Book, 1919, p. 645 101. excess of 15% but under 20% of c a p i t a l , and to 75% on p r o f i t s In excess of 20%. The Income War Tax Act"1' was enacted i n 1917, c a l l i n g f o r a levy of 4% on single persons with incomes i n ex-cess of $2,000 and on married persons with incomes i n excess of $3,000. I t also c a l l e d f o r a surtax up to 25% on incomes i n excess of $100,000. During the two years 1917 and 1918, the quantity, of . 2 money i n the country rose by nearly 40%. Such a large ex-pansion of cred i t was brought about by the f i n a n c i a l p o l i c i e s of the Federal Government. In 1917, there was a f i d u c i a r y issue of $50 m i l l i o n Dominion notes. Under the Finance Act, the banks were permitted to rediscount t h e i r s e c u r i t i e s with the Dominion Government, receiving i n payment Dominion notes. By means of such a provision, the banks had almost an unlimited opportunity to expand t h e i r lending operations. By the end of 1918, bank cash and deposits were nearly double what they had been i n 1913. This expansion of c r e d i t d i r e c t l y affected prices, and the. re a l income of many wage-earners and people with fixed incomes (from pre-war securities) declined or rose l e s s rapid-3 l y . Thus the incomes and p r o f i t s of business increased swift-l y , and t h i s , coupled with the increase i n money income and reduction i n private investment, assured the Federal Govern-1. Canada Year Book, 1916-17, PP. 674-675 2. Report of the Royal Commission on Dominion-Provincial Rela-tions, Book I, p. 100 3. Loc. c i t . 102 merit of a large source of funds. The p o l i c i e s followed to make these funds available caused some groups to suffer more than others, but such was part of the s a c r i f i c e necessary f o r the successful prosecution of the war. 1918-1919 Throughout t h i s l a s t year of the war, the government attempted to influence the people of Canada to reduce waste, to eliminate luxury spending and to save money.1 A l l public works (Dominion, P r o v i n c i a l or Municipal) were postponed, as f a r as possible, u n t i l a f t e r the war. By r e s t r i c t e d buying i n the United States, the sale of foreign s e c u r i t i e s held i n Canada, a short-term loan of $75 m i l l i o n i n New York and other si m i l a r measures, the Federal Government prevented too great a f l u c t u a t i o n taking place i n exchange rates due to the d i f -f i c u l t y of t r a n s f e r r i n g a B r i t i s h balance i n our favour to pay pur debts i n the United States. Reduced exemptions re personal income taxation and ex-cess p r o f i t s taxation together with increased rates helped to 2 swell the government c o f f e r s . Customs duties were increased and extra postage was required on l e t t e r s . Increased excise taxes were imposed on consumers' goods and luxuries; e.g., on automobiles. In June, 1918, the export of gold was pro-h i b i t e d except by permission of the Department of Finance. August, 1918 saw the second Vi c t o r y Loan announced by 1. Brown, F. H., The History of Canadian War Finance 1914-1920. pp. 15-16 2. Canada Year Book. 1919, p. 645 Brown, op. c i t . , p. 16 103. the Federal Government. This loan, which was a 5s%, 5 and 15 year, tax-free issue, met with enthusiastic public support and the f i n a l amount a l l o t t e d was $678 m i l l i o n . 1 P a t r i o t i c fervour was at a peak. There were a c t u a l l y over 1 m i l l i o n subscribers out of a t o t a l population of under 9 m i l l i o n . Although there was some c r i t i c i s m i n f i n a n c i a l c i r c l e s of the tax-free provision, i t was decided to be inexpedient to d i s -continue such a practice u n t i l the war was over 0 Demobilization Although the war ended i n November, 1918, the expense 2 did not cease f o r sometime. Demobilization costs kept Domin-ion expenditures up around $347 m i l l i o n i n 1920 and from 1921-29, further expense of $24 m i l l i o n was incurred under t h i s heading.^ Also, some $363 m i l l i o n i n short-term loans were due f o r repayment on March 31, 1919* Therefore, the rate of the Business P r o f i t s Tax was increased i n 1920, but was even-t u a l l y removed e n t i r e l y i n 1921. Also, i n 1920, the sales tax was introduced at 1%."* We have already noted that the income tax rates were increased i n the higher income brackets during 1918, but i n 1919, i t was amended considerably by steeper rates and i n 1920 a surtax was added on incomes over $5,000. A f i n a l Victory Loan was floated i n the autumn of 1919. I t was 1. Canada Year Book. 1918, p. 661 Brown, F. H. The History of Canadian War Finance 1914-1920, p. 17 2. Loc. c i t . 3. Appendix E 4. Canada Year Book, 1920, p. 714 5. Loc. c i t . 104 a 5g$, 5 and 15 year issue o r i g i n a l l y set at $300 m i l l i o n — and as the war was over, i t was subject to tax. Again, the people of Canada greatly over-subscribed the o f f e r r i n g and the government f i n a l l y a l l o t t e d $587 m i l l i o n . 1 Conclusion 2 The s i g n i f i c e n t change i n the Dominion f i n a n c i a l posi-t i o n as a r e s u l t of the war i s to be found i n the new l e v e l of 3 the debt charges. The war, by improving Canada's export trade, had greatly added to the national income. Had Canada been neu-t r a l , and had the increased income been used, not to purchase more imports, but to repay pre-war debt, there would have been a considerable improvement i n Canada's external debt p o s i t i o n . However, the war boom did not allow a debt reduction; i t stim-ulated war consumption almost e n t i r e l y . Accordingly, i n the post-war period, Canada was faced with a burden of debt placed on i t by the war, demobilization and the railways. The Cana-dian people were faced with the prospect of repaying most of t h e i r pre-war (mainly railway) debts abroad, and making money transfers within Canada from producers to those who held claims against the state; i . e . , bond-holders, etc. Also, cert a i n Canadian outputs had been enlarged to meet the war demands and therefore some a g r i c u l t u r a l and i n d u s t r i a l readjustment was necessary. 1 . Brown, F. H., The History of Canadian War Finance 1914-1920, p. 17 2 . c f . , Report of the Royal Commission on Dominion-Provincial Relations. Book I, pp. 103-104 3 . Appendix F 105. The war and demobilization had cost some $1,680 m i l l i o n 1 and Canada had met the major portion of i t s war costs by bor-rowing and cre d i t expansions. To pay f o r the war wholly by taxation had not been possible — the public was presumably not ready f o r such a heavy burden of taxation. P r i o r to t h i s time, the main Federal revenues had come from customs duties and excise taxes; there was no system of income, or p r o f i t taxa-t i o n . Since Canada was soon placed i n the p o s i t i o n of being unable to borrow abroad, the country as a whole paid f o r the war while i t was being fought. A l l supplies f o r the war had to come out of current production and the producers had to be paid. Since production had to be increased, i t was more ex-peditious to raise funds by borrowing than to rais e the rates of taxation and run the r i s k of hampering production. The war costs and other c a p i t a l i z e d expenditures brought about an increase i n the debt of the Dominion of approximately $2,300 m i l l i o n and the assumption of the debts of the Canadian Northern and Grand Trunk railways added another $700 m i l l i o n to the t o t a l . The changed debt s i t u a t i o n (about $3 b i l l i o n i n -crease, 1913-1921) was mainly a t t r i b u t a b l e to the war, but the railway problem now r e f l e c t e d i t s e l f i n the balance sheet of the Dominion of Canada. As we have seen, i t was not u n t i l 1920 that the Dominion tax base was s u f f i c i e n t l y broadened, and by that time economic conditions were not such as to permit large tax y i e l d s . As a 1. Appendix E 106. r e s u l t , war financing had been very much a matter of govern-ment borrowing, more so than i f i t had been possible to take f u l l advantage of people's willingness to bear s a c r i f i c e s . As a r e s u l t of delay i n requiring f i n a n c i a l s a c r i f i c e s during the war, the government (in the post-war period) found i t d i f f i c u l t to j u s t i f y moderation i n grants of s o c i a l and other services. These conditions, when added to others, created budgetary as well as economic d i f f i c u l t i e s . The war boom had done l i t t l e to reduce pre-war indebted-ness, and i n part t h i s showed i t s e l f i n the railway indebtedness i n the Dominion balance sheet. But the budgetary d i f f i c u l t y was u n l i k e l y to be only a matter of the new Dominion debt struc-ture. The necessity of economic readjustment within Canada added to the budgetary problem. I t was post-war rather than war finance that was troublesome, and t h i s d i f f i c u l t y only arose when the period of borrowing or i n f l a t i o n ended. The sub-sequent d e f l a t i o n which appreciated the holdings of the new r e n t i e r class, at the same time increased the f r i c t i o n s that were present as the economy t r i e d to adjust i t s e l f from war to normal requirements. On several sides, therefore, the Dominion f i n a n c i a l p osition was rendered d i f f i c u l t at the end of the war. The government's expenditure needs were l i k e l y to grow and i t s revenue p o s s i b i l i t i e s to decline as d e f l a t i o n proceeded and the Canadian d o l l a r appreciated i n terms of the pound s t e r -l i n g . Therefore, the broadening of the base of the Dominion revenue system toward the end of the war was not l i k e l y to prove only a temporary necessity. CHAPTER IX ECONOMIC MEASURES Introduction The war period i n every country was abnormal from tne economic point of view and tne accompanying change i n the so c i a l outlook was great, so that the a b i l i t y and the w i l l i n g -ness of private enterprise to bear new burdens of taxes, and of indi v i d u a l s to make great savings f o r war purposes, per-mitted a scale of government taxing and borrowing almost im-possible i n a peacetime economy. The war brought about many . changes i n public finance, i n the economic structure of the country, i n s o c i a l conditions and i n the public conception of government's r o l e i n s o c i e t y . 1 Having examined the changes i n the f i n a n c i a l p o s i t i o n of the Dominion occasioned by the war, we s h a l l now note the extent of government intervention i n 2 economic l i f e which the war e f f o r t involved. War-time Regulation of Business The primary job of the Federal Government was to win 3 the war and i t endeavoured to marshal a l l e f f o r t to that end© Wherever necessary, the government t r i e d to d i r e c t the employ-1. Report of the Royal Commission on Dominion-Provincial Rela-tions , Book I f p. 101 2. Loc. c i t . 3. Loc. c i t . 108. ment of the economic resources of the country. I t encouraged the production of munitions and pleaded with farmers to i n -crease the food production of the nation. However, the govern-ment went beyond just encouragement, i t went as f a r as active intervention and c o n t r o l . 1 Rationing of cer t a i n v i t a l supplies was made necessary by t h e i r s c a r c i t y . As i n f l a t i o n sent the cost of l i v i n g sky-rocketing, the government sought to further control business a c t i v i t y i n order to l i m i t some of the d i r e effeots which always r e s u l t from i n f l a t i o n . At lithe c end of the war, the government enjoyed far-reaching powers over economic l i f e . 2 From the very beginning of the war, the govern-ment exercised the power of censorship of the press and cable messages. Later, when i n f l a t i o n made i t s e l f f e l t i n the cost of l i v i n g and serious shortages occurred i n the supply of es-s e n t i a l materials, more extensive economic regualtion was under-taken by the Federal Government. In November, 1916, an order-in-council prohibited the hoarding of the necessaries of l i f e and people with excessive stocks were required to s e l l the same at reasonable p r i c e s . In 1918, housing rentals were c l a s s i f i e d under the above heading. M u n i c i p a l i t i e s were authorized to form F a i r Price Committees to investigate and publish what they considered to be a f a i r p rice of the necessaries to which the 3 previous regulations applied. 1. Report of the Royal Commission on Dominion-Provincial Rela- tions . Book I, p. 101 2. Loc. c i t . 3. Loc. c i t . 109. In 1917, the Federal government assumed control of the marketing of Canada's p r i n c i p a l product, wheat. 1 P r a c t i -c a l l y the t o t a l supply was being shipped to A l l i e d governments and with a poor crop i n sight, excessively high prices were a certainty. Through the Board of Grain Supervisors, who had power to investigate a l l sources of supply and r a t i o n the a v a i l -able grain between domestic m i l l e r s and the Wheat Export Com-pany ( A l l i e d purchasing agency i n North America), the Canadian Government fixed both export and domestic p r i c e s . This organ-i z a t i o n was succeeded by the Canadian Wheat Board i n 1919, and t h i s Board superseded the normal marketing f a c i l i t i e s of the trade i n that year. The year 1917 saw the establishment of the Food 2 Control O f f i c e . I t had power to investigate shortages of supply, high prices, Canadian food requirements and to f a c i l i t -ate exports. Also, i t enjoyed the power to regulate consumption and f i x p r i c e s . In 1918, i t was succeeded by the Canada Food Board. The Board licensed (and imposed some r e s t r i c t i o n s on) processors and dealers i n foodstuffs. I t r a r e l y rationed consumption -- i t s main rationing was i n the wholesale d i s t r i -bution of various commodities. Importers and exporters were licensed, public eating places were supervised and the use of grain i n the d i s t i l l a t i o n of l i q u o r was prohibited. The Board did not intervene i n the matter of re-t a i l p r i c e s , but i t did attempt control of prices elsewhere; 1. Report of the Royal^Commission on Dominion-Provincial Rela- tion s , Book I, p. 101 2. I b i d . , pp. 101-102 110. e.g., price of B. C. salmon (fishermen's price) and the spread between wheat and f l o u r p r i c e s . Separate and d i s t i n c t orders-in-council fixed the price of newsprint and l i m i t e d the p r o f i t s of pa citing companies. When the war ended, many of the powers exercised under the War Measures Act were transferred to the Board of Commerce.1 In 1919, the Combines and F a i r Prices Act gave the Board much power and i t operated vigourously during 1919-20. However, such a c t i v i t y d i d not l a s t long; the l e g i s l a t i o n under which i t was exercised being held unconstitutional by the Privy Council i n 1922. Wages i n many occupations had f a i l e d to keep pace with r i s i n g p rices, and many s t r i k e s occurred during 1917 and 1918. As these seriously i n t e r f e r e d with v i t a l war production, s t r i k e s 2 and lockouts were forbidden i n 1918. Another example of government control was the appoint-ment of a Fuel C o n t r o l l e r . He had the power t o - a l l o t the available supply among the provinces where, through p r o v i n c i a l and municipal administrators, i t was d i s t r i b u t e d as equitably 3 as possible. F i n a l l y , i n February, 1918, the War Trade Board was es-tablished whose powers authorized "such supervision as may be 4 necessary of a l l i n d u s t r i a l and commercial enterprises...." 1. Report of the Royal Commission on Dominion-Provincial Rela-t i o n s , Book I, p. 102 2. Loc. c i t . 3. Canada Year Book. 1918, pp. 664-665 4. P.O. 337, February 9, 1918 111 . These powers allowed i t to discriminate between essential and non-essential firms re the supply of scarce materials. Many of i t s powers were never used while others were used sparingly but, nevertheless, they were available i f needed. 1 The preceding review of economic regulation by the Fed-er a l Government has not been a complete and detailed analysis, rather i t has served only-as an i l l u s t r a t i o n of the powers which the government may assume i n time of war. With the ex-ception of a few temporary and is o l a t e d cases, the unusual ec-onomic controls died with the end of the war. With the coming of peace came the b e l i e f that govern-2 ments should use t h e i r powers to improve s o c i a l conditions. The great va r i e t y and scope of government action during the war had many important s o c i a l e f f e c t s . S t a t i s t i c a l and other information which was a necessary part of any government scheme of intervention i n economic a f f a i r s had been accumulated. The experience with regulation of business during the war years did much towards bringing about a wide extension of public con-t r o l i n the post-war years. Economic E f f e c t s of the War Two of the major c h a r a c t e r i s t i c s of the war, from an economic standpoint, were the v i o l e n t r i s e i n commodity prices and the development of great new productive capacities.-^ 1 . Report of the Royal Commission on Dominion-Provincial Rela-tion s , Book I, p. 102 2 . I b i d . , pp. 102-103 3 . Brown, F. H., The History of Canadian War Finance 1914-1920. P. 31 112. I t i s believed, however, that the r i s e i n prices was a t t r i b u t -able more to external forces than to forces from within Canada. 1 The only d i r e c t i n f l a t i o n of currency i n Canada was too small to have a great e f f e c t on p r i c e s , and the chartered banks pur-chased very few war bonds fo r t h e i r own account, neither did 2 they lend much to indiv i d u a l s f o r such a purpose. Then, too, the A l l i e d powers often bid against one another f o r war supplies, 3 thus f o o l i s h l y forcing prices up. Had we not been destroying wealth as fast as we produced i t , the country would have exper-ienced an increase i n wealth much greater than the equivalent r i s e i n prices.^* - We s h a l l assume, therefore, that Canadian war finance could not be held responsible f o r the mad r i s e i n 5 prices during the war period. As mentioned previously, Canada, at the beginning of the war, found i t necessary to change from the construction of 6 c a p i t a l works to the extension of the export trade. The war made t h i s t r a n s i t i o n easy. Productive capacity was increased enormously; e.g., the wheat acreage under c u l t i v a t i o n increased from 10 m i l l i o n to 18 m i l l i o n . However, the r a p i d i t y of expan-sion and degree of s p e c i a l i z a t i o n i n t h i s export made the indus-t r y l a t e r require severe readjustment. Much of the expansion i n land, buildings and equipment took place while prices were high, most of the c a p i t a l used was borrowed and a great deal of 1. Brown, F. H., The History of Canadian War Finance 1914-1920, p. 33 . 2. Ibid . , p. 31 3. Loc. c i t . 4. Loc. c i t . 5. I b i d . , p. 35 6. Report of the Royal Commission on Dominion-Provincial Rela-tio n s , Book I, p. 108 113. sub-marginal land was c u l t i v a t e d . Thus, when prices f e l l , the debts became too heavy and disa s t e r struck many f a m i l i e s . There were many other developments i n the i n d u s t r i a l a c t i v i t y of the Dominion during the war period, most of which were based on foreign demand.1 Mining of non-ferrous metals together with the a l l i e d processes of t r e a t i n g and r e f i n i n g were stimulated by the war. Pulp and paper production increased tremendously and hydro-electric also gained much ground i n t h i s period. The decline i n exports from Europe enabled Canadian manufacturers to get a good hold on the home market. Although many orders were of a temporary nature, a noticeable increase i n technical e f f i c i e n c y resulted. The Canadian manufacturing industry emerged from the war with a more dominant place i n the domestic market, with an enlarged productive capacity, and with much improved and d i v e r s i f i e d f a c i l i t i e s . The war period also effected a f i n a n c i a l transformation of great importance; i . e . , the development of f i n a n c i a l i n s t i -3 tutions. As the London and New York money markets became l e s s available to Canada, recourse to the domestic market created Canadian f i n a n c i a l machinery and changed Canadian investment habits. The sale of war bonds stimulated the development of the Canadian investment market, and Montreal and Toronto em-erged as f i n a n c i a l centres f o r the Dominion. Not only invest-ment houses but a l l f i n a n c i a l services tended to gravitate to 1. Report of the Royal Commission on Dominion-Provincial Relations, Book I, p. 108 2. Loc. c i t . 3. Loc. c i t . 114. these c i t i e s . Canada's external economic r e l a t i o n s were greatly d i f -ferent a f t e r the war, 1 Before 1914, Great B r i t a i n was our p r i n c i p a l customer and our main source of c a p i t a l funds; i n the post-war period, the United States took the premier p o s i t i o n . Not only did the export-import trade swing i n percent of t o t a l from Great B r i t a i n to the United States, but also New York sur-passed London i n f i n a n c i a l importance r e l a t i v e to Canada. The war had helped to develop Canada's natural resources and increase the productive capacities; i n f a c t i n some cases, much of the productive capacity was redundant so that the re-2 adjustment of prices to more normal l e v e l s was very severe. As long as the high prices continued the burden of external debt was not excessive, but when prices declined, the s i t u a t i o n became grim. The prosperity of the country was more dependent than ever upon the factors a f f e c t i n g foreign trade and c a p i t a l 3 movements. Conclusion The t r a n s i t i o n from war to peace was accomplished with remarkable ease.^ Although war production ceased immediately, exports continued to Europe i n large volume. This was made possible by advances of c r e d i t to foreign countries both by 1. Report of the Royal Commission on Dominion-Provincial Rela-t i o n s . Book I, p. 109 2. Brown, H., The History of Canadian War Finance 1914-1920. P. 35 3. Rowell-Sirois. op. c i t . , p. 109 4. I b i d . , pp. 100-101 the United States and Canada. Not only were foodstuffs required, but manufactured goods experienced a strong demand. A large shipbuilding program, both f o r Canada and foreign governments, helped f i l l the gap created by the cessation of munitions and other war orders. Not a l l the stimulus came from abroad — con-st r u c t i o n and consumer buying underwent a boom and a l l govern-ments i n Canada took up the public works postponed during the war. These a c t i v i t i e s , capped by the Dominion's heavy outlay on demobilization and the c i v i l re-establishment of s o l d i e r s , maintained the post-war boom u n t i l the summer of 1 9 2 0 , when 1 the world-wide d e f l a t i o n forced i t s collapse. Many-of the effects of the war upon the economic l i f e of 2 Canada have since become apparent to a l l of us. The country became more cl o s e l y related, both economically and f i n a n c i a l l y , with the United States, a Canadian investment market was born and the export trade experienced much a c t i v i t y . However, one of the ultimate e f f e c t s of the war was the r i s e of bar r i e r s to international trade, and t h i s , through i t s e f f e c t on Canada's export trade, l e f t i t s mark on the whole Canadian economy. The people of Canada had gradually become more and more occupied i n specialized jobs as the economic d i v e r s i f i c a t i o n continued throughout the country. This decreased the mobility of labour, and as jobs became scarce, a demand f o r public pro-v i s i o n of s o c i a l security began to be heard. Many people be-1. Report of the Royal Commission on Dominion-Provincial Rela tions, Book I, pp 101 2. I b i d . , c f . , p. I l l 116 l i e v e d that the governments could (and would) organize f o r s o c i a l welfare as they had f o r war. But the Federal Govern-ment was burdened with the cost of the war plus the heavy r a i l way debts — i t did not f e e l i t could undertake the added re-s p o n s i b i l i t y of s o c i a l welfare. Consequently, the P r o v i n c i a l Governments had to meet the public demands for extended s o c i a l services at a time when they were also spending heavily on projects deferred during the war. 1 I t i s apparent that the war affected the Canadian ec-onomy i n many ways,only a few of which have been mentioned above. Others include: the growth of organized labour, the r i s e i n the p o l i t i c a l power of organized agriculture and the change i n provincial-municipal finances. Apart from the im-mediate ef f e c t of providing r e l i e f from accumulating economic d i f f i c u l t i e s , the war l e f t i t s mark on the Canadian economy down through the years. I t s influences have been many and varied, but one thing i s certain — the' development of the economy as well as the occupations and i n t e r e s t s of the people were directed (and distorted) by the war of 1914-18. 1. c f . , Report of the Royal Commission on Dominion-Provincial Relations. Book I. p. I l l PART IV WAR FINANCE IN CANADA (1939-46) CHAPTER_X NATURE OF WAR FINANCE MEASURES When German forces crossed the P o l i s h border on Septem-ber 1, 1939, a proclamation was issued declaring an apprehended state of war i n Canada since August 25. On September 9, the Parliament of Canada voted to declare that a state of war e x i s t -ed with Germany, and the following day, Canada formally pro-claimed a state of war existed with Germany. In these f i r s t few days, much government a c t i v i t y took place, some of which we s h a l l itemize hereunder;- 1 Sept. 3 War-time Prices and Trade Board established. Sept. 11 The Canadian Government prohibited trading with the enemy and a Custodian of Enemy Property was appointed. Sept. 12 Canada's War Budget was passed and plans were announced f o r a voluntary national r e g i s t r a t i o n . Sept. 15 Formation of the Foreign Exchange Control Board was announced. Sept. 25 War Supply Board commenced operations. Oct. 2 A Canadian Order-in-Council extended the l i s t of a r t i c l e s for which export licences were required, including scrap iron and s t e e l . 1. Canada Tear Book, 1940, pp. 36-38 119. Oct. 6 Canadian War Supply Board was appointed as agent i n Canada f o r the B r i t i s h Purchasing Commission. Oct. 16 F i r s t Canadian War Loan of $200 m i l l i o n sold to the chartered banks. It i s obvious, from the above few items, that Canada l o s t no time i n entering the struggle as a united people. Some c r i t i c i s m was expressed because Canada's declaration of war came a few days a f t e r that of B r i t a i n (Sept. 3) but a c t u a l l y t h i s was of great value to the cause of freedom. The United States had a N e u t r a l i t y Act which prohibited shipments of mun-i t i o n s to combatants, and Canada was able to import valuable supplies i n the days which elapsed before her formal declaration of war. In t h i s chapter, we s h a l l endeavour to trace the chron-ology of war finance through the six years of struggle and hardship. By doing so, we may see how Canada approached the many problems encountered during the war period, and compare the methods used with those..of the F i r s t Great War. 1939-40 . In the Budget Speeoh"""of September 12, 1939, the Hon. J. L. I l s l e y (Acting Minister of Finance) estimated that the t o t a l revenues f o r the year would be of the order of $495 m i l -l i o n , and that t o t a l expenditures (including a $100 m i l l i o n temporary appropriation for special war expenditures) would 1. Canada, Parliament, House of Commons, O f f i c i a l Report of  Debates, Special Session, p. 137 120. approximate #651 m i l l i o n . Hence, a d e f i c i t of $156 m i l l i o n was anticipated i f no changes were made i n the e x i s t i n g tax structure. I t was necessary, therefore, to propose certain changes i n the taxation measures of the Dominion i n order to attempt to reduce the above mentioned d e f i c i t and to follow, as fa r as was p r a c t i -cable, a "pay-as-you-go" 1 p o l i c y . The main feature of t h i s tax program was an excess pro-2 f i t s tax of general a p p l i c a t i o n . This tax was to be calculated on e i t h e r of two bases at the option of the taxpayer. One option embodied a graduated tax on p r o f i t s when calculated as a per-centage of the c a p i t a l employed i n the undertaking, while the other required a tax payment of 50% on the increase i n p r o f i t s over the average p r o f i t s f o r the four years 1936-1939* I t was provided, i n both cases, that ordinary income tax paid should be deducted as an expense before c a l c u l a t i n g the excess p r o f i t s . 3 The rates under the f i r s t option were set as follows: 10% of excess p r o f i t s i n excess of 5% and under 10% of c a p i t a l 20% ti tt t» tt tt " 10% tt tt 15% tt tt 30% t» tt tt tt t» " 15% tt tt 20% tt tt 40% ti tt tt tt tt " 20% tt tt 25% tt tt 60% n tt « tt !t » 25% I t should be pointed out here that t h i s tax on excess p r o f i t s was le v i e d on a l l businesses whether incorporated or 1. Canada, Parliament, House of Commons, O f f i c i a l Report of  Debates, Special Session, pp. 138-140 2. Ibi d . , p. 141 3. Ibid., p. 142 121 . not and whether increased p r o f i t s were the r e s u l t of war con-t r a c t s or not. Under the Income War Tax Act, the following changes were made.1 A surtax of 20% of the t o t a l income tax otherwise payable was imposed on a l l persons other than corporations. The rate of tax applicable to corporations and j o i n t stock companies was increased from 1$% to 18%, and from 17% to 20% where consolidated returns are f i l e d . Also, p a t r i o t i c donations to approved organizations were allowed as a deduction from i n -come up to 50% of the net taxable income. As was usual i n any war budget, there were certain i n -creased duties and excises placed on a r t i c l e s commonly regard-2 ed as lux u r i e s . Domestic and imported l i q u o r s , a l e , beer, wine, etc., a l l had additional customs duties placed on them as did tobacco. S p i r i t s d i s t i l l e d i n Canada, Canadian brandy and malt manufactures experienced further excise duties. Extra excise taxes were also placed on tobacco to keep t h i s i n l i n e with imported products. In f a c t , we can see that wherever the customs duty was increased so was tne excise tax on the domestic product. As no decreases i n the personal income tax exemptions were asked f o r , the government f e l t that the c i t i z e n s of Can-ada should make some contribution to the prosecution of the war through t h e i r purchases of tea and coffee.^ Both were 1. Canada, Parliament, House of Commons, O f f i c i a l Report of  Debates. Special Session, p. 142 and p. 145 • 2. Ibi d . , pp. 142-143 3. I b i d . , p. 143 1 2 2 . wholly imported commodities, and therefore an increase i n cus-toms duties would be wholly f o r revenue purposes. An increase of 10$ per l b . was therefore placed on coffee and increases of 50, 720 and 100 per l b . on tea depending on the p r i c e . To bal-ance the effects of duties on l i q u o r , tea and coffee, a further tax of 20 per l b . was placed on carbonic acid gas and si m i l a r preparations used i n the manufacture of non-alcoholic beverages. From the special war l e v i e s just mentioned, the govern-ment expected to derive a revenue of approximately $21 m i l l i o n during the balance of that f i s c a l year. 1 This did not anywhere near meet the anticipated d e f i c i t and hence some borrowing was ine v i t a b l e , but the government was t r y i n g to avoid the mistake of World War I and was s t r i v i n g to carry a "pay-as-you-go" po l i c y into e f f e c t . Certainly, they made an excellent s t a r t i n these f i r s t few days of the war, and we s h a l l see that t h e i r determination i n t h i s regard grew as time went on. On November 2 4 , Hon. J". L. Ralston, Minister of Finance, announced that the cost of the f i r s t year of the war to Canada would be approximately $315 m i l l i o n , and on December 2 2 , the 2 National War Loan Committee was set up. The f i r s t p u b l i c l y 3 offered war loan was placed on the market January 15 and was subscribed i n the amount of $250 m i l l i o n , $50 m i l l i o n of which was used i n conversion of part of a loan maturing March 1 , 1 9 4 0 . I t was a 34%, 10 year issue. 1 . Canada, Parliament, House of Commons, O f f i c i a l Report of  Debates, Special Session, p. 143 2 . Canada Year Book. 1 9 4 0 , pp. 3 9 - 4 0 3 . I b i d . , p. 856 123-1940-41 During the f i r s t few days of t h i s f i s c a l yearj the Depart-ment of Munitions and Supply was formed,"*" and by May 22, the Department and i t s predecessor Boards had already purchased $225 m i l l i o n worth of equipment, material and munitions f o r the Canadian Forces and $75 m i l l i o n worth of supplies for Great B r i -t a i n and France. 2 On A p r i l 30, an Order-in-Council (Foreign Exchange Ac-qusition Order) transferred a l l foreign exchange of the Bank of Canada and of private owners to the Foreign Exchange Control Board. At the same time, the Bank of Canada also sold i t s gold reserves to the Board. In the Second War Budget (June 24), a War Exchange Tax of 10% was imposed on a l l imports except those from the Empire — t h i s was a further measure to conserve ex-3 change. When Parliament assembled i n May, a tentative War Ap-propriation of $700 m i l l i o n was passed to help meet the costs 4 of a greatly extended war e f f o r t . The Budget Speech of June 5 24 l a t e r set a figure of $850-$900 m i l l i o n f o r anticipated war expenditure that year. Meanwhile, other expenditures were es-timated at $448 m i l l i o n , a considerable reduction from the $525 m i l l i o n of the previous year. The tax increases and new taxes proposed were expected to y i e l d $280 m i l l i o n i n a year. 1. Canada Year Book. 1940, pp. xxxii-xxxiv 2. P.O., 1734, A p r i l 30, 1940 3. Canada Year Book, 1941, pp. 744-745 4. I b i d . , p. xxxiv 5. Canada, Parliament, House of Commons, O f f i c i a l Report of  Debates, v o l . 2, p. 1020 124 This budget, following the p o l i c y of attempting to "pay-as-we-go", proposed a tax program surpassing i n severity any-thing which the Canadian people had ever before been asked to accept. Taxes on tobacco were again raised s u b s t a n t i a l l y and new l e v i e s were imposed on radios, radio tubes, cameras and phonographs. 1 Under the Customs T a r i f f , the rates on tobacco were increased as were the special duties on tea. Steeply o graduated taxes were imposed on automobiles, and t h i s conserved exchange as well as conserving productive capacity f o r war equipment i n Canadian plants. In order to ensure that the war burdens would be d i s -tributed as f a r as possible according to a b i l i t y to pay, a substantial part of the additional revenue was raised by d i r e c t 3 taxes on income. Personal exemptions under the Income War Tax Act were lowered from $2000 and $1000 to $1500 and $750 f o r married and single persons respectively. The entire tax struc-ture was revised upward with p a r t i c u l a r l y heavy increases i n the middle and lower brackets. A National Defense Tax was introduced applying to married persons with incomes over $1200 and amounting to-2% of t o t a l income; f o r single persons the tax was to be 2°/o of income i f the t o t a l annual income was more than $600 but le s s than $1200, and J>% i f t o t a l income was more than $1200. So f a r as possible, t h i s tax was to be deducted at the source. The Excess P r o f i t s Tax was.extensively revised and made 1. Canada, Parliament, House of Commons, O f f i c i a l Report of  Debates,vol. 2, p. 1028 2. I b i d . , p. 1021 3. I b i d . , pp. 1024-1026 125. much more severe. Excess p r o f i t s were now to be taxed at 75%, and a minimum tax of 12% of t o t a l p r o f i t s was provided f o r . Although considerable funds were raised by these taxes, 2 recourse has to be made to borrowing f o r further revenue. $250 m i l l i o n i n 1 year, 1% notes and $75 m i l l i o n i n treasury b i l l s were sold to the Bank of Canada to finance the operations of the Foreign Exchange Control Board. March . 1 , 1940 had seen an issue of $65 m i l l i o n 2%, 5 year bonds sold to the Bank of Canada and chartered banks f o r refunding purposes. In May, 1940, a National Savings campaign was launched f o r the sale of War Savings Stamps and C e r t i f i c a t e s . These were to mature i n 7ir years giving a return of 25% on the money invested, amount-ing to 3% per year compound i n t e r e s t . In July, 1940, the govern ment authorized the issue of Non-Interest Bearing C e r t i f i c a t e s — t h i s was i n response to many public requests. Of the above funds, most were f o r war purposes although 3 certain refunding operations were carried out as n o t e d . T o further finance the war e f f o r t , the Second War Loan was floated i n the f a l l of 1940 at 3%. The amount sold was $324,945,700 of which $24,945,700 was f o r the purpose of converting some 4 i % bonds which matured September 1. In January, 1941, there were sold $250 m i l l i o n 2^ year, Ijf/o notes to the chartered banks the proceeds of which were used for war and general purposes. In addition to providing funds f o r war and general purpose i t was necessary to furnish funds f o r the r e p a t r i a t i o n of ster-1. Canada, Parliament, House of Commons, O f f i c i a l Report of  Debates, v o l . 2, pp. 1022-1023 2. Canada Year Book, 1941, p. 773 3. Loc. c i t . 126 l i n g issues held i n Great B r i t a i n . These r e p a t r i a t i o n operations had the ultimate e f f e c t of making Canadian d o l l a r s available to the United Kingdom f o r the purchase of Canadian primary com-modities and manufactured products required for the prosecution of the war. The f i r s t such operation was the redemption of £28, 162, 775 - 11 - 0 of 3$% Dominion of Canada Registered Stock against whieh sinking funds existed i n the amount of £ 7 , 732, 779 - 18 - 9. As a res u l t of t h i s transaction, Canadian d o l l a r s to the amount of approximately $91 m i l l i o n were made available to the United Kingdom. The next operation was the redemption of £ 1 6 , 0 3 7 , 0 0 0 (net amount) of k% Dominion of Can-ada Registered Stock. This r e a l i z e d $74,900,000 at the pre-v a i l i n g rate of exchange. In addition to operations with respect to the d i r e c t funded debt of Canada, the Government made arrangements to pur-chase from the Government of the United Kingdom the £ 2 4 , 6 2 4 , 4 5 5 of Grand Trunk Railway Company of Canada 4% Perpetual Consoli-dated Debenture Stock (guaranteed as to payment of in t e r e s t by the Dominion of Canada) that the B r i t i s h Government had 2 vested from the owners i n the United Kingdom. At the current rate of exchange, t h i s provided the B r i t i s h Government with approximately $109,579,000 i n Canadian d o l l a r s . 1941-42 Although war expenditures were r e l a t i v e l y low during the f i r s t eight or nine months of the war, they rose r a p i d l y there-1. Canada Year Book, 1941, pp. 773-774 2. I b i d . , p. 774 127 a f t e r and by the end of the f i r s t year of war were running at the rate of more than $700 m i l l i o n per year. Six months l a t e r , they were at a rate of $968 m i l l i o n per year. 1 This serves as an example of how fast Canada's war e f f o r t was expanding. F i n a n c i a l assistance was also provided to Great B r i t a i n 2 on a rapidly r i s i n g scale as the war progressed. The B r i t i s h Government required Canadian d o l l a r s to meet the costs of es-s e n t i a l supplies produced i n Canada. Some of these were ob-tained i n the normal way from B r i t i s h exports to Canada, and Canadian t a r i f f s on B r i t i s h goods were d r a s t i c a l l y reduced to make t h i s easier. However, from September 15/39 to March 31/41, B r i t a i n ' s d e f i c i t i n her balance of payments with Canada amount-ed to about $795 m i l l i o n . P r i o r to 1941, B r i t a i n was able to send some gold to Canada f o r Canadian d o l l a r s ; t h i s gold was transferred to the United States i n part settlement of Canada's d e f i c i t of payments with that country. The large balance of Canadian d o l l a r s that the United Kingdom needed was supplied i n two ways; about $337 m i l l i o n (up to March 31/41) was secured by the r e p a t r i a t i o n of Canadian s e c u r i t i e s formerly owned i n Great B r i t a i n ; the remainder was provided as s t e r l i n g credits 4 i n London. 5 The Third War Budget*^ (A p r i l 29, 1941) made provision fo r war expenditures i n the f i s c a l year 1941-42, and Canada's 1. Canada Year Book, 1942, p. 746 2. Loc. c i t . 3. War Exchange Conservation Act, December 2, 1940 4. Canada Year Book, l o o , c i t . 5. Canada, Parliament, House of Commons, O f f i c i a l Report of  Debates, v o l . 3, pp. 2334-2393 128. f i n a n c i a l burden i n the war was f o r c e f u l l y brought home at that time. Canada's f i n a n c i a l commitments for the year were expected to be i n excess of $2700 m i l l i o n , an amount exceeding by f a r anything hitherto contemplated i n the f i e l d of Dominion f i n -ance. 1 This t o t a l was comprised of: (a) d i r e c t war expenditures $1300 m i l l i o n (b) aid to B r i t a i n 900 m i l l i o n (c) normal cost of government 468 m i l l i o n I t was estimated that (at the current rates of taxation) a d e f i c i t of about $1500 m i l l i o n would a r i s e . Considerable increases i n d i r e c t taxation were again i n 2 evidence i n the budget proposals. The rates of the National Defence Tax were raised from 2% and 3% to 5% and 7% respectively, while the minimum annual income below which no single person i s l i a b l e for the tax was increased from $600 to $660. A deduc-tio n of $20 per annum (instead of $8) was the new allowance set f o r dependents. An important change i n the Income War Tax Act provided that the tax on i n t e r e s t and dividends going abroad be increased from 5% to 15%. Substantial increases J.n the graduated rates of personal income tax, made up i n such a way that i n combination with the increase i n the National De-fence Tax they would resu l t i n a progressively r i s i n g rate of increase i n r e l a t i o n to the income l e f t with the taxpayers (after payment of taxes at the then e x i s t i n g rates), was pro-posed. The so-called investment income surtax (on a l l income 1. Canada, Parliament, House of Commons, O f f i c i a l Report of  Debates, v o l . 3, pp. 2342-2343 2. I b i d . , pp. 2346-2349 129. over $14,000) was absorbed into the new graduated rates. A new surtax of 4% on actual investment income i n excess of $1500 was proposed. The rate of the Excess P r o f i t s Tax was boosted from 12% to 22%, and t h i s taken with the 18% le v i e d under the Income War Tax Act meant a tax of at l e a s t 40% on the incomes of a l l corporations. 1 A number of technical changes i n the structure of t h i s Act were also made at t h i s time. With the introduction of a Succession Duties Act, the Dominion f o r the f i r s t time entered a f i e l d which previously 2 had been l e f t exclusively to the provinces. 3 In the f i e l d of i n d i r e c t taxes, several changes were made. The tax on sugar was increased from If to 20 per pound . and was expected to be highly productive. Another tax, hitherto only l e v i e d by the provinces, was adopted by the Dominion. This was the Gasoline Tax, and i t was set at the rate of 3$ per g a l -lo n . Levies were also placed on-admissions to motion-picture and other entertainments and on pari-mutual bets on horse races. A tax of 10% was placed on a l l t r a v e l t i c k e t s , and the previous tax on carbonic acid gas was replaced by a 25% tax on a l l bot-t l e d soft drinks. No increase i n sales tax was made but many items were removed from the exempt l i s t . Also, the excise taxes on many items were made subject to heavy increases. At t h i s time, the Dominion Government made an o f f e r to the provinces that i f they would agree to vacate the personal 1. Canada, Parliament, House of Commons, O f f i c i a l Report of Debates, v o l . 3 . , p. 2352 2. Ibid., pp. 2349-2351 3. I b i d . , pp. 2352-2354 130. income and corporation tax f i e l d s f o r the duration of the war, the Federal Government would make certa i n adjustments to them.""" They proposed to reimburse each province either by guaranteeing payment of (a) an amount equal to the c o l l e c t i o n s from the above taxes made by each province and i t s m u n i c i p a l i t i e s during the f i s c a l year ended nearest to December 31/40 or (b) an amount equal to the net debt service a c t u a l l y paid by the province during the same f i s c a l period as above, l e s s the revenue ob- ' tained from the p r o v i n c i a l succession duties during that per-iod. I t was also provided that fiscal-need subsidies would be paid to any province i f i t could be shown that.such subsidies were required to enable the province to stand on i t s own feet f i n a n c i a l l y . In addition, the Dominion agreed to compensate the provinces f o r losses i n t h e i r revenues from gasoline taxes to the extent that they f e l l below 1940 revenues. I t was again necessary to borrow large sums i n order to meet part of the d i r e c t war expenditures (which cannot be met even by heavy taxation) and to provide funds f o r Great B r i t a i n . 2 In June 1941, the F i r s t V i c t o r y Loan ( t h i r d public issue of the war) was sold i n the t o t a l amount of $836,820,250. This issue was offered i n two maturities:-(a) 5h year 2% bonds at 99 (b) 10 year yfo bonds at par Of the t o t a l subscription, #106,440,000 was issued i n conversion of 5% bonds due November 15/41. 3 In February 1942, the Second Vi c t o r y Loan was sold. 1. Canada, Parliament, House of Commons. O f f i c i a l Report of Debates, v o l . 3, pp. 2344-2346 2. Canada Year Book. 1942, pp. 776-777 3. I b i d . , p. 777 131. This issue was the lar g e s t i n the h i s t o r y of the Dominion up to that time and r e a l i z e d $997,503,300. This time there were three maturities, a l l at par:-(a) 2& year (b) 6 year 2\% (c) 12 year 3% In October, 1941, further r e p a t r i a t i o n of s e c u r i t i e s held i n Great B r i t a i n was accomplished. 1 The purchase of three Dominion of Canada Stocks that had been vested by the Govern-ment of the United Kingdom was completed and, by t h i s transaction, approximately $137 m i l l i o n i n Canadian funds was made available to the United Kingdom. Two other important moves were made during t h i s f i s c a l 2 year to aid i n the prosecution of the war. On October 18, Prime Minister King announced the freezing of basic wages and prices at a fixed-pre-determined l e v e l and the compulsory exten-sion of the c o s t - o f - l i v i n g bonus p o l i c y to a l l wage-earners, e f f e c t i v e November 17/41. March 24 saw the announcement of a National Selective Service plan i n regard to c i v i l employment, including a l i s t of r e s t r i c t e d occupations. 1942-43 Once again, the people of Canada were faced with an anticipated increase i n government expenditures during the com-ing year. Non-war expenditure was estimated at $455 m i l l i o n , refunds under the Dominion-Provincial Taxation Agreement Act 1. Canada Year Book. 1942, p. 778 2. I b i d . , pp. x x x v i i - x x x v i i i 132 were to be about $85 m i l l i o n , a g i f t to B r i t a i n of $1000 m i l -l i o n was provided f o r and d i r e c t war expenditures were t e n t a t i v -ely set at : $2000 m i l l i o n . These t o t a l some $3570 m i l l i o n and, at the present rates of taxation, government revenues would only approximate $1672 m i l l i o n . 1 A large d e f i c i t was therefore to be expected. To meet t h i s very considerable f i n a n c i a l task, changes were made i n the taxation system i n the Fourth War Bud-2 get. In the f i e l d of i n d i r e c t taxation, the main changes were accomplished by simply r a i s i n g the rates on s p i r i t s , tobacco, soft drinks, t r a v e l , etc. Certain new taxes were introduced on luxuries at the manufacturer's l e v e l . A r a d i c a l departure from e x i s t i n g taxation procedure was made with the introduction of taxes to be collected by stamps at the r e t a i l l e v e l on a l i s t of luxury a r t i c l e s . Under the personal income tax, the f i r s t change was to combine the then-existing National Defence Tax and the graduated income tax into a single assessment.^ Thus, the National Defence Tax i s now incorporated into the general income tax as a "nor-mal" tax, but at higher rates than before — now 7%, 8% or 9% depending on the category of the payer. The graduated rates of tax were steeply increased, and the c r e d i t f o r dependants was 4 changed from a deduction from income to a deduction from tax. Certain other minor changes included the exemption of pensions paid to members of the Armed Forces and allowance of a deduction 1. Canada, Parliament, House of Commons, O f f i c i a l Report of  Debates, v o l . 4, 3576 2. I b i d . , pp. 3588-3590 3. Ibid, p. 3579 4. I b i d . , pp. 3579-3580 133 from income i n respect of medical expenditures i n excess of 5% of income. "Equity, incentive, and the encouragement of saving — these are the considerations which I have kept i n mind, but f i s c a l necessity and the rude facts of war press us hard." 1 Following up t h i s l i n e of thought, the Budget provided that part of the t o t a l tax would be refunded a f t e r the war as a form 2 of compulsory savings. The taxpayer was required to pay t h i s part of the tax only to the extent not o f f s e t by savings i n other forms, such as l i f e insurance premiums, p r i n c i p a l payments on a r e s i d e n t i a l mortgage and contributions to a pension or superannuation fund. I t was also planned to deduct income tax 3 d i r e c t l y at the source from a l l s a l a r i e s and wages paid aft e r September 1/42 and f o r compulsory payments of income tax on a quarterly installment plan i n the case of other forms of income. The new rates with the changes i n exemptions, allowances and method of payment increased very s u b s t a n t i a l l y the amounts ob-tained from taxpayers. For example, a married man with no children and having an income of $3000 a year would pay $884 4 instead of $400. However, we must remember that the tax-payer was paying 16 months of taxes during a 12 month period, and t h i s made the burden much heavier. Under the Excess P r o f i t s Tax Act the rates of taxes were 5 considerably increased. The rate on excess p r o f i t s was raised •i • 1. Canada, Parliament, House of Commons, O f f i c i a l Report of Debates, v o l . 4, p. 3579 2. I b i d . , pp. 3580-3581 3. I b i d . , pp. 3584-3585 4. I b i d . , p. 3580 5. I b i d . , pp. 3586-^ 3588 134 from 75% to 100% with the provision that 20% of the excess p r o f i t s taken (over the range where the 100% i s effective) he refunded a f t e r the war. Also a change i n the method of c a l -culating the t a x 1 was adopted which increased the e f f e c t i v e rate of the tax considerably on businesses where p r o f i t s had increased s i g n i f i c a n t l y over pre-war l e v e l s . The r e s u l t was that corporations having p r o f i t s ' i n excess of 116 2/3% of t h e i r standard p r o f i t s paid tax at a rate of 100%, and no corporation was allowed to r e t a i n , a f t e r paying taxes, p r o f i t s equal to more than 70% of i t s standard p r o f i t s . Borrowing, through the means of bond sales and the sale of war savings c e r t i f i c a t e s , again obtained much-needed funds for the government. The Third Victory Loan, issued i n October and November of 1942, resulted i n t o t a l subscriptions 1. Taxation S t a t i s t i c s , p. 19 "12% of net taxable income (Part III) plus the lar g e r of (i) 10% of net taxable income (Part I) or ( i i ) 100% of excess p r o f i t s ; i . e . , the excess of net taxable income over standard p r o f i t (Part II) For those making a study of the excess p r o f i t s tax i t i s of value to know at what point the tax under Part II equals the tax under Part I. By use of algebraic symbols and.equating the two taxes the "breaking point" i s established as follows (where X represents net taxable income and Y represents standard pro-f i t ) : Part I Part II 10% of X = 70% of . (X-Y) _> 30% tax already paid on t h i s 1 U 10 . 10 7 Y - 6 X .'. X = 7 Y = 116 2/3% of Y" 135 of $991,389,050 from some 2,041,610 subscribers. 1943-44 On March 2, 1943, the Hon. J". L. I l s l e y presented the Budget to the House of Commons. In i t , he stressed the evidence that we (the A l l i e s ) had seized the offensive and that the f i n -a n c i a l and economic program of the nation should be strengthened to give our f i g h t i n g men a l l the support we could. The expendi-2 tures f o r the coming year were estimated at $5500 m i l l i o n — a gigantic sum. Of t h i s , non-war expenditures t o t a l $610 m i l -l i o n , war estimates t o t a l $3890 m i l l i o n while the Mutual Aid B i l l c a l l s f o r $1000 m i l l i o n . At the current rate of taxation, a d e f i c i t of some $2900 m i l l i o n was anticipated. Tax changes introduced by t h i s budget were r e l a t i v e l y l i m i t e d . The rates on cigarettes, cigars, manufactured tobac-3 co, raw l e a f tobacco and cigarette papers were a l l increased. The duty on a l c o h o l i c s p i r i t s and the tax on cabarets and night clubs were raised, and a one-cent increase i n the postage rate 4 was provided. Only technical changes were made i n the Excess 5 P r o f i t s Tax Act. No changes were made i n the general rates or exemptions under the income tax, although special r e l i e f was granted to members of the Armed Services, Merchant Marine and the R.A.F. 6 Transport Command. Payments on a Dominion Government annuity 1. Canada Year Book, 1943-44, p. 835 2. Canada., Parliament, House of Commons, O f f i c i a l Report of  Debates t v o l . 1, pp. 845-846 3. I b i d . , p. 861 4. Loc. c i t . 5. I b i d . , p. 869 6. Ibid., pp. 857-859 136. were allowed as a deduction from tne savings portion of the tax. The most important change was the placing of the personal 2 income tax on a "pay-as-you-go" basis. This completed the trans-formation i n our income tax begun with the enactment of the National Defence Tax i n 1941 and carried (during the f i s c a l year 1942-43) to an advanced stage both i n c o l l e c t i n g a graduated tax at the source and i n c o l l e c t i n g as early as possible a f t e r the income i s received on which the tax i s assessed. The adoption of the "pay-as-you-go" plan of income tax payment represented an important break with the t r a d i t i o n a l method of tax c o l l e c t i o n — a break that Canada was the f i r s t country to make. I t was affected by cancelling 50% of the 1942 tax l i a b i l i t y on earned income and on investment income up to $3000 and adding the remainder to the taxpayer's current l i a -b i l i t y . Investigation had shown that, owing to the deduction of National Defence Tax f o r the f i r s t eight months of 1942 and the p r i o r payment by most taxpayers of one-third of t h e i r 1942 l i a b i l i t y during the l a s t four months of 1942, only approximately one-sixth of the 1942 l i a b i l i t y remained to be paid i n 1943* Nevertheless, the taxpayer a c t u a l l y paid two and one-half years' tax l i a b i l i t y i n two years and the Finance Minister had very su b s t a n t i a l l y increased his revenue without resort to an i n -crease i n rates. Under t h i s new plan, a l l the deductions of tax made at the source during 1943, were applied on the 1943 l i a b i l i t y . 1. Canada, Parliament, House of Commons, O f f i c i a l Report of Debates, v o l . 1, p. 857 2. I b i d . , pp. 847-856 137. Taxpayers would continue to f i l e an annual return by the 30th of A p r i l of the year following that i n which they received the income. New deductions at the source were designed to withhold 95% of the tax l i a b i l i t y , thus leaving a smaller balance due the following A p r i l . During the year under review, two more Victory Loan issues were absorbed by the Canadian investment market. 1 In A p r i l , the Fourth Victory Loan was subscribed to a t o t a l of $1,308,700,000 while i n October, the F i f t h Victory Loan r e a l -ized $1,570,600,000 of which $195,600,000 was used f o r the conversion of previous issues. 1944-45 The Budget for the 1944-45 f i s c a l year was presented to Parliament by the Hon. J". L. I l s l e y , Minister of Finance, on June 26, 1944. At t h i s time, the expenditures f o r the year were estimated at $5,152 m i l l i o n (about one-half of which was to be met from tax revenues); other outlays, not definable as expenditures, would also be required, bringing the t o t a l cash 2 requirements to over $6,000 m i l l i o n . Tax changes announced i n t h i s Budget were numerous but were more i n the nature of adjustments within the e x i s t i n g tax structure than a general r e v i s i o n or relaxation. In the main, they had reference to personal income taxes, corporation income and excess p r o f i t s taxes, and other taxes. The Minister of Finance recommended the removal of the 1. Canada Year Book, 1945, pp. 948-949 2. Canada, Parliament, House of Commons, O f f i c i a l Report of Debates, v o l . 4, pp. 4172-4174 138 compulsory savings portion of the income tax as of July 1, 1944« Thus, the savings requirement was reduced by one-half i n 1944 and completely removed i n 1945* Reliance was to be placed, i n the future, upon a further expansion of voluntary savings. Because the compulsory savings was commonly regarded as a tax, some people thought that i t contributed to absenteeism and unwillingness to work overtime and was, therefore, adversely a f f e c t i n g production. But t h i s may have provided an excuse i n an e l e c t i o n year f o r what appears to have been an unfortunate relaxation i n p o l i c y . Certain changes were made i n the exchange control orders and customs duties which were then i n e f f e c t . The p r i n c i p a l change was the removal of the War Exchange Tax and customs 2 duties on the importation of a g r i c u l t u r a l implements. The War Exchange Conservation Act, which had prohibited the import-ation of a long l i s t of items i n order to save d o l l a r exchange, was also repealed i n so f a r as these r e s t r i c t i o n s were concerned. No change was made i n excise duties, but an amendment (to Spec-i a l War Revenue Act) changed the rate applicable to cigars. The Sixth V i c t o r y Loan, issued i n A p r i l and May, 1944, raised the sum of $1,405,013,350 while the Seventh Vi c t o r y Loan (October and November) was subscribed to a t o t a l of $1,665,184, 700 of which $147,544,000 wa3 used f o r conversion purposes. 1945-46 With respect to the f i s c a l year 1945-46, the Minister of 1. Canada, Parliament, House of Commons, O f f i c i a l Report of  Debates, v o l . 4, p. 4177 2. I b i d . , p. 4185 3. Canada Year Book, 1945, PP. 948-949 139 Finance, on A p r i l 3, 1945, asked f o r only $2,000 m i l l i o n as an interim war expenditure (including Mutual Aid) covering the period April-August i n c l u s i v e . 1 The reason f o r t h i s small amount being requested was that the elec t i o n of a new P a r l i a -ment was due that summer. Under the circumstances, no Budget was presented, though an estimate of non-war expenditures f o r the year was made at $1,023,621,598. Some tax modifications were announced a f t e r the end of h o s t i l i t i e s i n Europe (May 8, 1945), i n order that industry might be better able to plan f o r such reconversion to peacetime pursuits as the progress of the war i n the P a c i f i c permitted. These changes were not designed to have much ef f e c t on current revenues but rather to remove certain r e s t r i c t i o n s on c i v i l i a n production and consumption. October 12, 1945 brought the presentation of the f i r s t budget to follow the cessation of h o s t i l i t i e s both i n Europe 2 and i n the P a c i f i c . The main estimates of non-war expenditures required a sum of $1,024 m i l l i o n while war estimates stood at $3,365 m i l l i o n . War service g r a t u i t i e s and re-establishment credits required approximately $270 m i l l i o n . Other f i n a n c i a l needs, not usually classed as expenditures, such as loans f o r export cr e d i t s and advances to the Foreign Exchange Control Board, t o t a l l e d some $800 m i l l i o n , bringing the t o t a l f i n a n c i a l requirements f o r the year to about $5,400 m i l l i o n . Revenues of approximately $2,500 m i l l i o n were anticipated, hence a d e f i c i t of $2,900 would a r i s e . No provision was made i n t h i s Budget f o r 1. Canada, Parliament, House of Commons, O f f i c i a l Report of  Debates, v o l . 1, pp. 365-370 2. Canada, Parliament. House of Commons, O f f i c i a l Report of  Debates (unrevised), October 12, 1945, pp. 1036-1037 140 subscriptions to the International Monetary Fund or the Inter-national Bank fo r Reconstruction as the l e g i s l a t i o n pertaining thereto had not yet been approved by the House. At t h i s time, despite the large f i n a n c i a l requirements, i t became necessary to' make some reduction i n taxes. In doing so, the Government bore i n mind the paramount importance of a s s i s t i n g speedy reconversion, of restoring incentives, and of encouraging enlarged and e f f i c i e n t production and export upon which our employment, income and welfare depend* The f i r s t change along these l i n e s was the removal of the War Exchange Tax of 10% on a l l imports from non-empire countries imposed i n 1940.1 The imposition of t h i s tax was f u l l y j u s t i f i e d by the circumstances of war and by the acute s c a r c i t y of United States d o l l a r s but, as i t was discriminatory, i t was only proper that i t should be removed as soon as possible. Machinery and apparatus (not i n c l u d i n g o f f i c e equipment or mot-or vehicles) which were to be used d i r e c t l y i n the manufacture or production of goods were exempted from sales tax. "The Excess P r o f i t s Tax Act i s a war measure which has commanded overwhelming support as an important and necessary instrument of war finance. Unmodified, i t s e r i o u s l y weakens the stimulus toward the investment of c a p i t a l and the e f f i c i e n t operation of enterprises. In t h i s period of reconstruction i t 2 i s becoming a b a r r i e r to expanding employment'.' With t h i s thought i n mind, three major changes were made i n t h i s act. The 15% 1. Canada, Parliament. House of Commons, O f f i c i a l Report of  Debates (unrevised), October 12,1945, pp. 1039-1040 2. Ibid., p. 1041 141 rate on sole proprietorships and partnerships was removed but the excess rate s t i l l stood. The standard p r o f i t of a l l firms was increased by h a l f the difference between t h e i r present standard p r o f i t s and $25,000. Firms having a standard p r o f i t of $25,000 or more were not affected by t h i s change. The 20% refundable portion of the tax was abolished and the rate of tax reduced to 60%. The e f f e c t of t h i s l e g i s l a t i o n was that a l l corporate p r o f i t s would bear a rate of 40%, and corporate p r o f i t s i n excess of 116 2/3% of standard p r o f i t s would bear an additional tax of 20%. In the case of sole proprietorships and partnerships, the rate on p r o f i t s i n excess of approximately 117% of standard would be 60%. Although there was no doubt that the personal income tax, from which we then derived about 1/3 of our tax revenue, would continue to occupy a major place i n our taxation struc-ture, some a l l e v i a t i o n was expedient. Though l a v i s h reductions were not possible, some r e l i e f could make a major contribution to the stimulation of i n i t i a t i v e and employment. Therefore, the tax was reduced by 16%, e f f e c t i v e October 1, 1945*^" This meant an abatement on the tax l i a b i l i t y f o r 1945 of 4%. This was only an interim measure to apply immediately and continue u n t i l a complete overhaul of the personal income tax rate structure was possible. Also i n t h i s Budget, an amendment to the Income War Tax Act provided that the c a p i t a l element i n 2 contractual annuities be exempted from Tax. 1. Canada, Parliament. House of Commons, O f f i c i a l Report of  Debates (unrevised;,. October 12, 1945, p. 1043 2, I b i d . , pp. 1043-1044 142. To meet the difference between our f i n a n c i a l requirments and the revenues anticipated, two more bond issues were floated during the year. In A p r i l and May, 1945, the Eighth V i c t o r y Loan raised the sum of $1,568,927,350,1 while l a t e r i n the year, the Ninth V i c t o r y Loan produced cash applications of approxim-2 ately $2,025 m i l l i o n . 1946-47 On June 27, 1946, the Minister of Finance, the Honour-able J". L. I l s l e y , presented the most recent Budget to the people 3 of Canada. Since we are s t i l l l i v i n g i n highly abnormal times and the f i n a n c i a l burdens of the Dominion Government a r i s i n g out of the war are s t i l l of huge proportions, the r e l i e f grant-ed from taxation measures was not as great as expected by many people. However, the changes made were d e f i n i t e l y a step i n the r ight d i r e c t i o n and we may not expect to stop paying f o r the war a l l at once. The increase i n the National Debt^" has been tremendous during the war years and we must be prepared to make some s a c r i f i c e s toward reducing t h i s burden (and i t s accompany-ing burden of in t e r e s t payments) i n the near future. Minor t a r i f f changes (with no increases) were made e f f e c t -5 ive immediately. Income Tax reductions w i l l remove between 500,000 and 1. Canada Year Book, 1945, p. x l i 2. Appendix to the Budget Speech, June 27, 1946, p. 42 3. Canada, Parliament. House of Commons, O f f i c i a l Report of  Debates (unrevised), June 27, 1946 4. c f . Appendix F 5. Hansard, op. c i t . , p. 3009 6. I b i d . , pp. 2999-3004 143. 600,000 persons from the l i s t of those paying the tax. The main change re the personal income tax was the r a i s i n g of the exemp-tions f o r status from $660 to $750 (single person) and from $1,200 to $1,500 (married person). Other changes had to do with Family Allowance payments and exemptions f o r dependents. Allow-ances f o r dependents are again back to a deduction from income rather than a deduction from tax, the l a t t e r having been the case since 1942. The rates were also reduced and the exemption re investment income was raised from $1,500 to $1,800. Sim-p l i f i c a t i o n of the tax schedule comprises the combining into a single schedule of graduated rates the present normal tax, the graduated tax and family allowance "recoveries**, a l l of which go into the calcu l a t i o n of income tax on the basis of the cur-rent high rates. In the f i e l d of corporation and excess p r o f i t s taxes, considerable reductions were made. Se the Excess P r o f i t s Tax Act, Mr. I l s l e y said, "After careful consideration, the govern-ment has reached the conclusion that the act should stay on the statute books f o r another year unless provision i s made at the next session of parliament f o r i t s e a r l i e r repeal.""*" Consequent-l y , the Excess P r o f i t s Tax i s to be reduced from 20% to 15% on a l l income above 116 2/3% of standard p r o f i t s , and i t i s to be removed e n t i r e l y from partnerships and sole proprietorships. The corporation tax w i l l be cut from 40% to 30%. 2 Succession Duties w i l l be doubled but t h i s , l i k e the 1. Canada, Parliament. House of Commons, O f f i c i a l Report of Debates (unrevisedj, June 27, 1946, p. 3004 2. Ibid., p. 3009 and pp. 3013-3014 144. preceding tax changes, w i l l not become e f f e c t i v e u n t i l January -1, 1947. This doubling of the rate of Succession Duties empha-sizes the determination of the Dominion Government as expressed at the Dominion-Provincial Conference t h i s spring, to remain i n the Succession Duty f i e l d . In a special Budget summary compiled by the Finance Department, i t was estimated that the increase i n the amount of succession duties to be co l l e c t e d f o r a f u l l ,year w i l l be i n the neighbourhood of $25 m i l l i o n . The chief disappointment was that none of the tax re-ductions became e f f e c t i v e over night. A f t e r the immediate 16% cut i n the income tax l a s t October, the public was again a n t i -cipating some "on the spot" tax cuts. However, Mr. I l s l e y made his arrangements for 1946 l a s t October and he i s not changing them fo r the moment, but a complete overhauling and s i m p l i f i c a -t i o n of personal income tax rate structures i s proposed i n the immediate future. Public opinion seems to have accepted the budget i n a manner which suggests that, -although the changes made were along the l i n e s demanded by the public, more could have been done to a l l e v i a t e the tax burden. As a public representative with h i s ear to the ground, Mr. I l s l e y has t r i e d to please the customers. I t i s not his f a u l t i f public opinion c o n f l i c t s with economic r e a l i t i e s . CHARTER XI ECONOMIC and FINANCIAL CONTROLS A study of Canada's wartime requirements had been made before h o s t i l i t i e s broke out and consequently i t was possible to quickly set up the emergency organizations needed. Since i t was essential to have an understanding of economic problems a r i s i n g out of the war and to coordinate the economic controls necessary to the war e f f o r t , one of the Government's f i r s t acts was the setting up of an Advisory Committee on Economic P o l i c y . This Committee was made up almost e n t i r e l y of senior c i v i l - s e r -vants who were presumably f a m i l i a r with the problems facing the government and i t played an active role i n the war e f f o r t , p a r t i c u l a r l y with respect to questions of economic and f i n a n -c i a l p o l i c y . Many emergency measures and controls were i n s t i g -ated during the war years, the more important of which were: (a) control of war supplies, (b) price control, (c) wage con-t r o l , (d) r e n t a l control and (e) foreign exchange co n t r o l . A summary of the p r i n c i p a l a t t r i b u t e s and accomplishments of the l a t t e r appears i n the following sections. A; Control of War Supplies"*' Control over the production and d i s t r i b u t i o n of certain 1, c f . , "Wartime Industries Control Board", Economic Controls, Dominion-Provincial Conference on Reconstruction, pp. 27-28 1 4 6 . basic materials and services p e c u l i a r l y important to the war e f f o r t was exercised by Controllers who were members of the War-Time Industries Control Board. In t h i s category are such materials as s t e e l , a l l non-ferrous metals, chemicals, o i l , timber, rubber, power, ship repairs and salvage, motor vehicles and a i r c r a f t . Other materials have come under the Board from time to time. Controllers were f i r s t appointed i n June, 1940 and they subsequently b u i l t up an extensive system of controls, p r i o r i t -i e s , et cetera to f a c i l i t a t e the production of needed war items. Import and export controls formed an essential part of the con-t r o l structure. These controls were established and have been administered f o r the purpose of ensuring that the war production needs of Canada and the other United Nations would be met. I t should be noted that, i n addition to the war production r e s p o n s i b i l i t i e s already referred to, the scope of a c t i v i t i e s of Controllers has also extended somewhat into the f i e l d of c i v i l i a n supply. This was because most materials e s s e n t i a l to war production are also basic to the c i v i l i a n i n d u s t r i a l econ-omy. By making each Controller an Administrator of the War-Time Prices and Trade Board, the supervision of production, d i s t r i b u t i o n and price of his respective material was control-led both i n war production and c i v i l i a n economy by the same person. As the t r a n s i t i o n period i s , at l e a s t i n i t s i n i t i a l stages, s t i l l a period of active warfare, the W.I.C.B. may not remove a l l i t s controls immediately. However, the W.I.C.B., i n accordance with government p o l i c y , has subjected the oper-147. ation of i t s controls and the changing conditions of supply to the closest scrutiny, and i s relaxing or removing supply con-t r o l s as rapidly as possible. B; Price Control I t i s acknowledged by most economists that the general price l e v e l i s determined by forces which a f f e c t the quantity of money, the v e l o c i t y of money and the physical volume of trade. A primary influence i n time of war upon the'quantity of money i s the f i s c a l p o l i c y of the government. The purpose of the f i s c a l p o l i c y of the government i s , primarily, to put into the treasury s u f f i c i e n t claims on wealth to enable the govern-ment to purchase the goods and services necessary f o r the pro-secution of the war and the maintenance of the ordinary govern-ment duties. A v a r i e t y of methods are used to place these funds i n the treasury. They may be termed i n f l a t i o n a r y i f they do not take out of the pockets of the populace a volume of money claims equal that put into the treasury. I f the funds are raised by taxation, the gain to the government i s d i r e c t l y o f f s e t by the loss to the taxpayer. When, however, revenue i s secured by a loan from the commercial banks or from a central bank of issue, i t involves an i n f l a t i o n a r y increase i n the c i r c u l a t i n g media. Yet, an attempt to finance a war e n t i r e l y by taxation would appear to be quite u n r e a l i s t i c . The demands of war are large and urgent and taxation can be increased only at a l i m i t e d rate and then only a f t e r the economic base for the higher rates has been established. Borrowing supplies t h i s base and has a 148. d e f i n i t e place i n a wa.r finance program. When the legitimate return from t h i s source has been exhausted, either i n d i r e c t or di r e c t i n f l a t i o n can be j u s t i f i e d , even though i t i s a type of tax which by i t s very nature i s repellant. Canada made unparal-l e l e d use of orthodox methods both i n taxation and public bor-rowing but, as we s h a l l see, was s t i l l driven to i n f l a t i o n to meet the balance of the war costs. War Savings Stamps and C e r t i f i c a t e s Though not revenue producers of f i r s t importance, these devices do represent the best type of borrowing. Because t h e i r price i s small, t h e i r purchase i s usually made possible by a reduction of i n d i v i d u a l purchasing power. The amount paid into the government by these devices i s equal to the reduction i n the purchasing power of the people. War Bonds Bond sales made possible by a reduction i n spending or by a change i n investment plans not only help to.raise the needed revenues but also serve the more fundamental purpose of r e s t r i c t i n g non-essential spending and c a p i t a l outlays. How-ever, bond sales made possible by an advance of bank cr e d i t are i n f l a t i o n a r y . In Canada, the people responded well but i t was s t i l l necessary to depend on the f i n a n c i a l i n s t i t u t i o n s , p a r t i c u l a r l y the chartered banks and the Bank of Canada. (a) Central Bank Loans The most i n f l a t i o n a r y of a l l methods of financing government i s borrowing from the central bank. Such borrowing increases the c i r c u l a t i n g media provided by the central bank APPENDIX I A C C O U N T S OF T H E BANK O F CANADA 1936-1946 LIABILITIES* I 2 0 0 6 1 5 0 0 I O O O 5 0 0 O 1 1 1 1 1 O T H E R A< X O U N T S GOVT. O E P O 5 I T 5 A / A C T I V E / C I R C U z N O T E : L A T I O N 1 C H A R T E :RED B A N K C A S H RET&f £ R V E 1 1 1. 1 1 1936 37 38 39 1940 4\ 42. • 44 45 4€> 1936 37 38-39 l9-¥0 41 42. 43 --44 45 46 SOURCE- SUM OF BANK. OF CANAPA * FIGURES MAY 3/ OF EACH YEAR REPRESENTATIVE OF WHOLE YEAR.. ACCOUNTS F O R T H E CHARTERED BANKS O F CANADA 1936-46 L I A B I L I T I E S * F O R T M I L L I O N S O F D O L L A R S 8000 eooo ^ooo 2000 feOOO Z J O O O 2.000 M I L L I O N S O F D O L L P v R S 8000 «93& 37 3 Q 39 19-40 ~*4\ *KL "4"3 ""f~"r 4 5 3oURCe- STATISTICAL. S U M M A f i y , &P\NK OF C A A / A P A *T FIGURES MAV 31 OF £/\CH VEfiiR 4£PRESEHMTRTiv£ OF U/HOLB YEAR. 149. and makes possible a large increase i n the deposit c i r c u l a t i o n of subordinate private i n s t i t u t i o n s . In Canada, from the beginning of the war to May 31, 1946, the note and deposit l i a b i l i t i e s of the Bank of Canada have i n -creased from approximately $400 m i l l i o n to $1,690 m i l l i o n . 1 This increase has been due almost e n t i r e l y to the purchase of $1,615 m i l l i o n of government s e c u r i t i e s . Because of t h i s f a c t , i t has been charged (with some justice) that the Bank of Canada has abandoned i t s v i t a l function of regulation of the c i r c u l a t -ing media i n order to maintain more or l e s s f i c t i o n a l l y the government's c r e d i t . (b) Chartered Bank Loans An obvious p a r a l l e l to the increase found i n the bond holdings and c i r c u l a t i o n of the Bank of Canada may be noted i n the statements of the chartered banks. From 1939 to May 31, 1946, the holdings of Dominion-Provincial bonds of the chartered banks increased by approximately $2,525 m i l l i o n and meantime t o t a l deposit and note l i a b i l i t i e s have r i s e n from p $3,170 m i l l i o n to $6,858 m i l l i o n . Adding t h i s to the increase i n the Bank of Canada's holdings of government bonds, we note that there i s a t o t a l i n f l a t i o n of some $4,140 m i l l i o n i n Can-ada to-day as a r e s u l t of the war. Another force which caused an increase i n the general price l e v e l , i r r e s p e c t i v e of government f i s c a l p o l i c y , was an increase i n bank c r e d i t . In order to make possible the prod-1. c f . Appendix I 2. c f . Appendix J" 150 uotion and d i s t r i b u t i o n of a s u f f i c i e n t l y large and varied supply of wa.r materials, large extensions of c r e d i t were made by the banks, necessarily adding to an already swollen money stream. Irrespective of changes i n the general price l e v e l , there are, i n time of war, v i o l e n t f l u c t u a t i o n s i n the prices of i n d i v i d u a l goods. These fluctuations are the r e s u l t of chang-ing conditions of supply and demand. We may conclude, therefore, that i n time of war many forces which are conducive to an increase i n the general price l e v e l and to v a r i a t i o n s i n r e l a t i v e prices are generated. Within a few hours of the outbreak of war i n Europe, the Government took steps to protect consumers i n t h i s country from the consequences of i n f l a t i o n which experience subsequent-l y proved to have been more or l e s s i n e v i t a b l e . On September 3, 1939, the Wartime Prices and Trade Board was e s t a b l i s h e d 1 and charged with the duty of protecting the Canadian public against increases i n the costs of the necessities of l i f e . This important body was to arrange f o r supplies of n e c e s s i t i e s where shortages appeared l i k e l y , to control prices i n such a way as to prevent p r o f i t e e r i n g and (when and where necessary) to i n s t i t u t e systems of rationing and c o n t r o l . Special adminis-t r a t i v e organizations were appointed by the Board to deal with such commodities as sugar, wool, hides and leather, coal and animal and vegetable o i l s . The Board was given wide powers to make and enforce regulations and, i n general, i t secured the 1. Order-in-Council, P.O. 2516, September 3, 1939 151 cooperation both of producers and consumers. Certain seasonal goods; e.g., fresh f r u i t s and vegetables, and dealings between farmers and producers i n certain items were exempted from the c e i l i n g . I t i s the f a i l u r e of the Board to place a c e i l i n g on the prices of fresh f r u i t s and vegetables which has met with the greatest amount of c r i t i c i s m from the people of Canada. We should note here that goods sold to the Department of Munitions and Supply were not subject to the price c e i l i n g . This was an enormous exception to the control measure — i t included a large percentage of the t o t a l sales made i n the country. The price of such goods was to be that price neces-sary to c a l l f o r t h the required production. As a rule-of-thumb, the Department of Munitions and Supply used the "Cost-Plus" method i n determining the prices i t would pay. Omission from price control of such a large volume of sales was bound to have severe repurcussions on the economy through disruption of production of "non-war (but essential) materials". The development of price control was not only a means of assuring the c i t i z e n s of Canada of a f a i r d i s t r i b u t i o n of consumers goods but also of holding down war costs to some degree. Incidentally, Canada lead a l l other countries i n the e f f e c t i v e application of price controls and i n the b a t t l e against i n f l a t i o n but much of the pressure on prices was d i s -sipated by the r e a l i s t i c tax measures and by public response to the war loans. However, we must give price control c r e d i t f o r the part i t played i n the a n t i - i n f l a t i o n program. Had i t not been f o r the holding of prices at a fixed l e v e l , the 152 Inflationary media could not have been i s o l a t e d and made a v a i l -able to pay taxes or to subscribe to war loans. C; Wage Control This p o l i c y i s part of the Federal Government's general a n t i - i n f l a t i o n a r y program and was adopted f i r s t i n 1940 as an advisory p o l i c y . 1 However, by 1941, i t became apparent that because of the expansion of Canada's war e f f o r t and consequent s c a r c i t i e s of materials, supplies and manpower, there would re s u l t a serious i n f l a t i o n i n Canada unless preventive measures were taken. Consequently, the Government of Canada deemed i t ess e n t i a l to the war e f f o r t and to the national welfare, both i n the war and i n the post-war period, to take measures lead-ing to economic s t a b i l i z a t i o n i n Canada during the war. 2 3 The wage and salary freezing orders became e f f e c t i v e on November 15, 1941. Since that date, no employer has been permitted to increase basic wage rates or s a l a r i e s , except on 4 written permission of the Board. The wage freezing order i n -cluded an order requiring employers to pay a Cost-of-Living Bonus to a l l employees who were not " s a l a r i e d o f f i c i a l s " . A "salaried o f f i c i a l " was defined as any person receiving more than $250 per month unless t h e i r duties or r e s p o n s i b i l i t i e s showed c l e a r l y that they were not above the rank of foreman or comparable rank. Every person receiving l e s s than $175 per month had to be paid the Cost-of-Living Bonus. 1. Order-in-Council, P.C. 7440, December 16, 1940 2. Order-in-Council, P.C. 8253, October 24, 1941 3. Order-in-Council, P.C. 9298, November 7, 1941 4. National War Labour Board 5. Order-in-Council, P.C. 8253, October 24, 1941 153. As experience was gained i n administering the original, orders (and amendments), the need fo r r e v i s i o n was seen to e x i s t . Therefore, on December 9, 1943, "the o r i g i n a l order was revoked and replaced by Order-in-Council, P.O. 93#4, e n t i t l e d the "War-Time Wages Control Order, 1943". This order provided that administration would continue by the National War Labour Board and by Regional 'War Labour Boards i n each of the nine Canadian provinces. When the War-Time Wages Control Order, 1943, P.O. 9384 was promulgated, the Government of Canada took occasion to declare as i t s p o l i c y that i t would take a l l p r a c t i c a l mea-sures to s t a b i l i z e l i v i n g costs at the l e v e l e x i s t i n g i n Dec-ember, 1943, and announced that such p o l i c y would be reviewed i f any appreciable change i n l i v i n g costs occurred. Provision was made f o r amendment and relaxation of wage controls as c i r -cumstances might render a change advisable. I t i s axiomatic that without a degree of s t a b i l i t y i n that portion of production and d i s t r i b u t i o n costs represented by labour, i t would be d i f f i c u l t , i f not impossible, to hold price c e i l i n g s . I t may be expected that the t r a n s i t i o n period from a wartime economy to a peacetime economy w i l l present many d i f f i c u l t i e s which would be accentuated i f controls over prices and wages are too suddenly removed. D: Rental Controls Rent control came into e f f e c t on December 1, 1941, the . same day as the price c e i l i n g , and i s an i n t e g r a l part of the Federal Government's price control p o l i c y . Rent i s an impor-tant element i n the cost of l i v i n g and one which, i n the absence 154. of control, would have increased i n many areas where housing shortages have developed. The demand f o r housing has grown because of the i n f l u x of people to certain i n d u s t r i a l areas and m i l i t a r y centers and as a re s u l t of higher earnings of war workers and others. Wartime r e s t r i c t i o n s , shortage of labour and other factors have prevented a s u f f i c i e n t increase i n the supply of accomodation, and as a r e s u l t there has been consider-able upward pressure on renta l s . 1 An order-in-council provided that the maximum rental for any housing accomodation or business premises was to be the rental i n e f f e c t on October 11, 1941. July. 1, 1943 saw the application of controls f o r rooming accomodation i n most areas, with special provisions re e v i c t i o n of tenants. From the point of view of a n t i - i n f l a t i o n p o l i c y as a whole, rental controls, a f f e c t i n g an item responsible f o r ap-proximately o n e - f i f t h of the average tenant family's budget, undoubtedly contributed an important s t a b i l i z i n g e f f e c t and helped to support other parts of the program. I t appears that, i n common with other l i k e measures, the decontrol of rentals w i l l take place i n a gradual manner as our economy returns to normal • E: Foreign Exchange Control The outbreak of war i n September, 1939 created new and urgent problems i n connection with Canada's f i n a n c i a l r e l a t i o n s with other countries. These could be foreseen,to a large extent f 1. Order-in-Council, P.O. 8965 ? November 21, 1941 The Maximum Rentals Regulations 155. as the Inevitable r e s u l t s of " a l l - o u t " p a r t i c i p a t i o n i n modern war and plans to meet such an emergency had been worked out, broadly speaking, i n advance. The chief reasons f o r foreign exchange control i n Canada were:-(1) To a s s i s t i n the conservation of U.S. funds so that purchases of war supplies and payments on foreign-currency debt might be e a s i l y handled. (2) To s t a b i l i z e exchange rates. (3) To mobilize a l l Canada's foreign assets i n a common pool i n case of need. (4) To prevent unnecessary exports of c a p i t a l . (5) To cooperate with exchange control bodies of other A l l i e d countries. (6) To safeguard Canada's s e c u r i t i e s markets i n order to f a c i l i t a t e the orderly carrying out of the war finance program. Control Measures One of the most important economic and f i n a n c i a l war measures was the establishment and operation of the Foreign Exchange Control Board. The Board was established by Order-i n - C o u n c i l 1 on September 15, 1939 and control began the next day. The government was reluctant to take t h i s step because of the close commercial and f i n a n c i a l t i e s between Canada and other countries, e s p e c i a l l y the United States. Previously, there had always been the greatest freedom of f i n a n c i a l i n t e r -1. Order-in-Council, P.C. 2716, September 15, 1959 156 course between Canada and the outside world. But the supreme necessity of conserving Canada's c a p i t a l and receipts of f o r -eign exchange for war purposes made control e s s e n t i a l . The Board had power to l i c e n s e imports and exports of goods, cur-rency and c a p i t a l . A l l transactions with residents of other countries were subject to i t s regulations. I t adopted the p o l i c y of i n t e r f e r i n g as l i t t l e as possible with normal business and t r a v e l but t r i e d to keep the outward movement of c a p i t a l to a minimum. P a r t i c u l a r care was taken to see that t o u r i s t s coming to Canada were not r e s t r i c t e d i n any way but, early i n July, 1940, the Board ceased s e l l i n g foreign exchange to Can-adian residents f o r pleasure t r a v e l i n order to conserve ex-change f o r the purchase of essential war s u p p l i e s . On A p r i l 30, 1940, a Foreign Exchange A c q u i s i t i o n Order 1 was passed requiring a l l Canadian residents to s e l l t h e i r hold-ings of foreign exchange (but not of foreign s e c u r i t i e s ) to the E.E.C.B. before the end off May. The Board permitted those who needed a current supply of foreign exchange i n carrying on t h e i r normal business to retain enough f o r t h i s purpose. At the same time, the Bank of Canada also sold i t s gold reserves to the Board i n order that a l l the nation's l i q u i d reserves, both of gold and exchange, might be centralized i n the hands of the agency responsible f o r managing the exchanges. The Exchange Fund, established i n 1935 and used by the Board i n i t s operations, was enlarged by $325 m i l l i o n i n order to enable the Board to purchase the gold and exchange referred to above. 1. Order-in-Council, P.C. 1734, A p r i l 30, 1940 157. A powerful organization had been created. At i t s head, and constituting the Board proper, were f i v e permanent o f f i c i a l s of the Canadian Government. From the Bank of Canada, the Depart-ment of Finance, the Department of National Revenue, the Com-mercial Intelligence Service and the Department of External A f f a i r s they brought a wide experience into a concerted e f f o r t . A s t a f f of widely varied experience was appointed from public and private l i f e . F i n a l l y , and most fortunately, the services of the Canadian banking system, the Canadian Customs and Excise and the Postal Authorities were obtained. The Bank of Canada acted as Agent or Banker f o r the Board and was o f f i c i a l l y the technical advisor of the Board. As a matter of f a c t , the Board was r e a l l y a new department of the Bank of Canada. Complete control of the foreign exchanges of a country with a volume of foreign transactions such as Canada's was a tremendous task f o r one central authority. The Foreign Exchange Control Board was fortunate, therefore, i n having the Bank of Canada and other established agencies which could a s s i s t i t i n i t s task Control of Foreign Exchange The problem confronting those who were entrusted with the task of establishing complete control seemed insurmountable at f i r s t sight. There were so many types of transactions to be considered, time was short and secrecy ( u n t i l issuance of the ppder) was imperative. When f i n a l l y drafted, the d e t a i l s were so numerous that f o r purposes of examination we have subdivided the various items as follows: (a) General Controls, (b) Controls 158 f o r Goods and Services and (c) F i n a n c i a l Controls. (a) General Controls The duties of the Board seemed to necessitate three main p r i v i l e g e s : to inspect, impound and conserve foreign re-sources. Therefore, the Board required declaration by residents of a l l foreign exchange and s e c u r i t i e s , 1 reserved the r i g h t to acquire these resources and determined the conditions under which they could be spent. In requiring declaration of a l l foreign exchange, the Board inspected the extent and nature of the foreign resources: at i t s d i s p o s a l . A l l exports and imports of goods, currency, foreign exchange or other property could only be made under permits and licenses of the Board — constant surveillance of foreign exchange transactions was maintained by the Board and i t s Agents. In reserving the r i g h t to acquire foreign resources, the Board foresaw such possible action as the Foreign Exchange A c q u i s i t i o n Order of A p r i l 30, 1940. The f i n a l duty of the controls as o r i g i n a l l y established was to prevent unnecessary c a p i t a l export to non-Empire countries. This involved control of merchandise as well as f i n a n c i a l trans-actions and we s h a l l examine the two separately i n the next two pages. (b) Controls f o r Goods and Services Every export from Canada to non-Empire countries was expected to produce United States d o l l a r s (or t h e i r equivalent) and these United States d o l l a r s were to be put at the disposal of the Board. On the import side, the Board would provide 1. Order-in-Council, P.C. 2716, Sec. 14 (2), September 15, 1939 159. foreign exchange at i t s o f f i c i a l rates f o r a l l goods and ser-vices received as permitted. In view of supporting c r e d i t , a l l debt services were paid as stipulated by t h e i r contracts. I t was desired to i n t e r f e r e as l i t t l e as possible with established practices while at the same time preventing unnecessary d i s -sipation of the country's resources. Therefore, established businesses were provided with the foreign exchange necessary to th e i r pursuits although they had to incorporate a l i t t l e extra procedure into t h e i r o f f i c e routine- 5 so that the control could be e f f e c t i v e l y operated. A l l merchandise exports had to be accompanied by the required forms or the goods were side-tracked. Imports were controlled by the customs and the goods were not • released u n t i l a l l forms were i n order. The payment of dividends abroad was authorized i f they were reasonable and authentic. The dividends had to come out of current earnings as defined by the Income War Tax Act. Receipts of i n t e r e s t and dividend pay-ments i n a foreign currency had to be sold to the Board. The t o u r i s t trade was encouraged as a source of foreign exchange from the outset and p r a c t i c a l l y no regulations were made which would i n t e r f e r e d i r e c t l y with Canada's guests. However, i n July, 1940, the Government announced the p o l i c y of r e s t r i c t i n g the use of Canada's resources of United States d o l l a r s f o r plea-sure t r a v e l abroad and the Board consequently stopped s e l l i n g United States d o l l a r s f o r that purpose. Travel permits were required whether funds (Canadian or foreign) were carried or not. 160. (c) F i n a n c i a l Controls While the controls established f o r current account trans-actions, as described above, were merely to prevent possible evasions of the r e s t r i c t i o n s on export of c a p i t a l (as well as to assure that foreign exchange was forthcoming wherever pos-sible) , the controls on c a p i t a l account transactions were design-ed to cope with the actual c a p i t a l transfers. As security trans-actions afforded probably the greatest opportunity f o r c a p i t a l export, i t was necessary to give them every possible attention. Control of security transactions involved numerous regulations but they boiled down to the single provision that Canadians could not buy any kind of security from any resident of a coun-t r y outside the S t e r l i n g area. Those external sales of s e c u r i t -ies by Canadians which would provide foreign exchange were nat-u r a l l y encouraged. L i f e insurance companies were permitted to continue i n accordance with t h e i r usual procedure. A f t e r the Foreign Exchange A c q u i s i t i o n Order introduced a general p o l i c y of commandeering foreign exchange receipts forthwith (instead of periodic sales of accumulated exchange to the Board as before), commercial companies were able to r e t a i n a foreign currency bank account f o r immediate needs only. The Rate of Exchange The Board was empowered to f i x rates of exchange for S t e r l i n g and United States d o l l a r s f o r conversion to or from Canadian d o l l a r s by Authorized Dealers. The o f f i c i a l rates were set at: $1.11 ( l a t e r $1,105) Canadian to buy $1.00 U.S. from the Board; $1.10 Canadian received from the Board i n ex-161. change fo r $1.00 U.S.; f o r one £ S t e r l i n g , the rates were $4.47 and $4.43. The problem of establishing an a r b i t r a r y valuation f o r Canadian funds i n terms of United States d o l l a r s and S t e r l i n g involved several considerations. The f i r s t consideration was the need f o r complete control of foreign exchange transactions, f o r to e f f i c i e n t l y administer an o f f i c i a l rate, the Board had to undertake to meet the necessary demands f o r foreign exchange out of a l i m i t e d supply. The arguments f o r a higher Canadian rate (in terms of U.S. funds) involved the purchase at lowest possible cost of v i t a l l y needed supplies from the United States and the assistance to Great B r i t a i n i n so f a r as. t h i s would be achieved by a high Canadian rate i n New York. The arguments f o r a low Canadian rate involved the p o s s i b i l i t y of increased United States' purchases or investment at bargain prices and the funding of Canadian supplies to Great B r i t a i n at as low a cost to Great B r i t a i n as possible. The arguments were weight-ed by the necessity of rendering every possible assistance to Great B r i t a i n while at the same time obtaining needed purchases i n the United States f o r the common cause. The Foreign Exchange A c q u i s i t i o n Order and the Exchange Fund  Order I t w i l l be r e c a l l e d that the o r i g i n a l Order**" gave into the custody of the Board the resources of the Exchange Fund. This fund had been established by the Exchange Fund Act of 1935. To further a s s i s t i n i t s control measures, the Board, on A p r i l 1. Order-in-Council, P.C. 2716, September 15, 1939 162 30, 1940, purchased the entire foreign exchange holdings of the country. This was accomplished through the Foreign Exchange 1 2 A c q u i s i t i o n Order, and the Exchange Fund Order. The former applied to a l l private holdings of foreign exchange and the l a t -t e r to the Bank of Canada's gold and foreign exchange holdings. The t o t a l amount authorized f o r t h i s purchase of private and public exchange was set at $325 m i l l i o n . A year l a t e r (June 30, 1941), i t was increased by a further $325 m i l l i o n , with author-i t y to extend to $400 m i l l i o n . To finance the o r i g i n a l pur-chase of t h i s foreign exchange, the Minister of Finance sold to the Bank of Canada the following s e c u r i t i e s : $250 m i l l i o n of 1 year 1% notes at par, $75 m i l l i o n of Treasury B i l l s at a d i s -count equivalent to a y i e l d of 739/1,000%. The War Exchange Conservation Act On December 2, 1940, the Minister of Finance introduced a measure known as the War Exchange Conservation Act which pro-hi b i t e d the importation of a long l i s t of non-essential imports from non-sterling countries and provided f o r the gradual reduc-ti o n of another l i s t of imports from the same countries. Pro-v i s i o n was also made i n t h i s measure f o r the reduction of the t a r i f f duties on a schedule of items imported under the B r i t i s h P r e f e r e n t i a l T a r i f f , the general purpose of the measure being to discourage the importation of goods from hard currency coun-t r i e s and to encourage trade with sterling-area countries. Having summarized the various r e s t r i c t i o n s and controls 1. Order-in-Council, P.C. 1734, A p r i l 30, 1940 2. Order-in-Council, P.C. 1735, A p r i l 30, 1940 163. affected by the Foreign Exchange Control Board, the War Exchange Conservation Act and a l l i e d l e g i s l a t i o n , we can see that a " l a i s s e z - f a i r e " p o l i c y was d e f i n i t e l y not followed during World War I I . The r e s t r i c t i o n s on the use of foreign exchange have continued i n e f f e c t much as described, though some relaxation has been possible. For example, there has been a moderation of t r a v e l regulations (so that funds are now available f o r p r a c t i c a l l y a l l normal travel) and the prohibitions or r e s t r i c -tions imposed on imports under the War Exchange Conservation Act have been removed. At the time of writing, i t i s believed that foreign exchange control i n Canada may continue f o r an i n d e f i n i t e period, c e r t a i n l y two or three years, although on July 5, 1946, the Federal Government took d r a s t i c action to strengthen Canada's bulwarks against i n f l a t i o n by returning the Canadian d o l l a r to p a r i t y with the United States d o l l a r , c l a r i f y i n g the goods, and services to which price controls apply and r e v i s i n g the c e i l i n g p o l i c y on a wide range of imported goods. The four-point realignment policy was outlined by F i n -ance Minister I l s l e y i n a surprise announcement to the House of Commons. He summarized the government's objective as the maintenance of "order, s t a b i l i t y and independence" i n the Dom-inion's economic and f i n a n c i a l a f f a i r s . While the program was designed to combat both domestic and external i n f l a t i o n a r y pressures, i t was evident that the move, i n some respects at l e a s t , was a re s u l t of the United States current price control d i f f i c u l t i e s a r i s i n g from the abandonment of price c o n t r o l . 164. The four steps taken to protect the Canadian economy 1 were as follows: (1) E f f e c t i v e at 6 P.M., P.D.T., July 5, 1946, the Canadian d o l l a r was adjusted to p a r i t y with the United States d o l l a r , with hanks and other authorized agents of the Foreign Exchange Control Board buying American d o l l a r s at $1 Canadian funds and s e l l i n g them at $1.00|r. The buying rate of pounds s t e r l i n g now w i l l be $4.02 and the s e l l i n g rate $4.04 (2) A long but simple and clear l i s t of a l l goods and services which continue subject to price control was established, including p r a c t i c a l l y a l l a r t i c l e s of signi f i c a n c e i n the nor-mal household budget and i n the costs of production of farmers, fishermen and other primary producers. A number of l e s s impor-tant a r t i c l e s were suspended from price control. (3) The p r i n c i p l e s of price control on domestic products remained unchanged but a l l imported goods of a kind subject to price control, unless s p e c i f i c a l l y dealt with on another basis, were to be priced on the basis of the importer's landed cost plus a prescribed maximum mark-up which i n each case w i l l be somewhat les s than the mark-up normally obtained by d i s t r i b u t o r s of similar domestic goods. (4) The pol i c y of paying subsidies w i l l remain i n e f f e c t i n order to prevent undue increases i n prices of a r t i c l e s of major importance i n the consumers' c o s t - o f - l i v i n g or i n primary producers' costs of production. Mr. I l s l e y said the new program was aimed at preventing 1. c f . , Yancouver News Herald. July 6, 1946 165. undue increases i n the c o s t - o f - l i v i n g and costs of production, improving the effectiveness of price control, encouraging a greater supply of scarce goods imported from other countries and f a c i l i t a t i n g an orderly post-war adjustment of the Canadian economy while protecting i t from the major e f f e c t s of adverse developments outside our borders. CHAPTER XII CANADIAN AID TO ALLIES . We are about to discuss a most important part of the war e f f o r t . Besides being important, however, i t i s somewhat complicated and therefore i s often misunderstood. Fortunately, the broad outlines are clear: Canada sends a l o t of aid to B r i t a i n , Russia, Australia,.China, West Indies and India; receives aid — although considerably l e s s — from the United States, and adds to her own war burden the difference. Super-f i c i a l complications ari s e from misconceptions regarding the nature of economic aid i n wartime . Basic complications a r i s e from the fact that the economic burden on the Canadian economy i s sometimes inaccurately represented by the f i n a n c i a l burden on the Treasury at Ottawa and from the f a c t that to some extent Canada i s an intermediary f o r American aid to B r i t a i n . There are two aspects of economic a i d , one fundamental and the other s u p e r f i c i a l . Fundamentally, the aid which one country sends another, i n peace or war, consists of goods and services which the one sends the other either as a g i f t or a loan. Aid envoives an excess or surplus of trade i n one d i r e c -t i o n . When a country gives or receives in t e r n a t i o n a l a i d , i t s standard of l i v i n g w i l l u sually be affected. I f war i s already imposing a burden on the economic system and i f the customary standard of l i v i n g i s thereby threatened, the receipt of economic 167. aid from abroad w i l l a l l e v i a t e the s i t u a t i o n ; conversely the extension of aid w i l l aggravate i t . Since the outbreak of war, Great B r i t a i n has received an enormous amount of economic aid from abroad and the standard of l i v i n g has been maintained there-by, although not at i t s pre-war l e v e l . Canada, on the other hand, i s giving a great deal of aid and the point was approached where, with the economy already carrying the load of a substantial domestic war e f f o r t , t h i s a id would involve substantial s a c r i -f i c e s . Now, such aid as described above.must somehow be financed. Under wartime conditions, the government became involved i n p r a c t i c a l l y a l l financing. This i s e a s i l y observed by noting the work of the Foreign Exchange Control Board i n Canada. From the point of view of t i d i n g over an emergency, i t does not mat-ter whether international aid i s financed i n the form of a loan or a g i f t — or a Lease-Lend operation. But i n the long run, the difference may be great. During the l a s t war, American aid to B r i t a i n was financed, i n the early years, by American pur-chases from B r i t a i n of outstanding American securities.**" At a l a t e r stage of the war, having extinguished most of i t s debt, the United States began lending on a large scale, and the sad subsequent hi s t o r y of the "War Debts i s well known. The l a t e President Roosevelt introduced Lease-Lend i n an attempt to avoid any r e p e t i t i o n of that acrimonious h i s t o r y . I t i s worth noting, however, that aid to B r i t a i n under Lease-Lend i s not a g i f t , at any rate not quite. The exact nature of the transaction i s not 1. Plehn, C. C , Introduction to Public Finance, p. 413 168. e n t i r e l y c l e a r . By June 30, 1941, Canada had provided wartime aid f o r B r i t a i n valued at $1,070,000,000. In the years before the war, Canada had an export surplus of goods and services to B r i t a i n of between $100 m i l l i o n and $200 m i l l i o n annually, 1 but under 2 war conditions t h i s surplus had swollen enormously. As the demands f o r actual war supplies increased greatly, f a c t o r i e s had to be b u i l t , and i n the second half of 1940 and the f i r s t h alf of 1941 B r i t a i n took much of the aid provided by Canada, not i n the form of Canadian exports, but i n the form of fa c t o r i e s b u i l t i n Canada by Canadian workmen but owned by the B r i t i s h 3 Government. The aid which Canada has supplied to B r i t a i n by the end of June 1941 (amounting to $1,070,000,000) had been financed i n the following ways. During 1939 and 1940, a large part ($250, 000. 000. was financed by payment i n gold.^ A further $340,000, 000 was financed by re p a t r i a t i n g Canadian s e c u r i t i e s held i n Great B r i t a i n . The remainder, $480,000,000, consisted of tem-porary c r e d i t s . Each of these forms of finance deserves some further explanation. Two things must be said regarding the, amount received i n gold. In the f i r s t place, the receipt of gold, even i f i t had been retained i n Canada, would not have eased i n any way the current burden imposed on the Canadian economic system by sup-1. Canada Year Book, 1941, pp. 404-408 2. Canada Year Book, 1945, p. 489 3. I b i d . , pp. 557-558 4. Ibid., p. 553 5. I b i d . , p. 558 169* plying aid to B r i t a i n . Accumulating gold i n the vaults of the Bank of Canada does not l i g h t e n the t o i l or feed the mouths of Canadians engaged i n producing goods for the B r i t i s h . In the second place, not an ounce of the gold was i n fact retained i n Canada. 1 A l l of i t had to go to the United States to cover the cost of imports from that country which were being purchased by Canadians on account of the B r i t i s h . Canada was also depleting her own stocks of gold i n buying goods from the United States on her own account; but a l l the gold obtained from B r i t a i n was needed to pay f o r Canadian purchases i n the United States on B r i t i s h account. The second portion of Canadian aid to B r i t a i n was f i n -anced by the r e p a t r i a t i o n of Canadian s e c u r i t i e s from Great B r i t a i n . Thus Canada i n World War I I , l i k e the United States i n the early part of World War I, redeemed many of her I.O.U.s outstanding i n Great B r i t a i n . I t w i l l be r e c a l l e d that post-war p o l i t i c a l acrimony arose, not as a r e s u l t of American re-p a t r i a t i o n of s e c u r i t i e s from Great B r i t a i n but rather as a re-sul t of the d i r e c t intergovernmental loans which, i n the l a t e r years of the war, l a r g e l y replaced the American r e p a t r i a t i o n programme. The t h i r d portion of Canadian aid to B r i t a i n , amounting to nearly hal f the t o t a l by June 1941, was financed by temporary cre d i t s supplied by the Bank of Canada and the Foreign Exchange Control Board on behalf of the Canadian Government. Formally speaking, t h i s amount does represent a "debt", indeed a "war 1. Canada Year Book. 1945, p. 553 170 debt", from Great B r i t a i n to Canada. However, i t was already so large (this was i n 1941), and i s s t i l l mounting so rap i d l y , that there i s l i t t l e l i k e l i h o o d of i t ever being repaid i n f u l l . . Many people, who have given the s i t u a t i o n consideration, hope that some way w i l l be found to provide more r e l i e f supplies and services to B r i t a i n free of cost. Some advocate that a large portion of the "debt" already accumulated should be written o f f . We s h a l l see the re s u l t of t h i s l a t e r when we note the famous " g i f t " of $1 ,000 ,000 ,000 to Great B r i t a i n by Canada. On May 20, 1943, arrangements f o r supplying Canadian war equipment, raw materials and foodstuffs f o r which other nations could not pay changed from a f i n a n c i a l to a physical b a s i s . 1 Previous to the passing of the Mutual Aid Act on that date, Canada provided the United'Kingdom — and i n d i r e c t l y other nations — with some of the money used to buy war supplies i n Canada. Under Mutual Aid, Canada provided the United Kingdom and other nations with the actual war supplies they needed over and above t h e i r capacity to pay. Thus Canadian planes, tanks and ships, wheat, bacon and lumber were made available i n the common cause just as were the services of the Canadian Navy, Army and A i r irorce. The chief condition was that they serve a strategic need i n the " j o i n t and e f f e c t i v e prosecution of the war" In the f i r s t three years of the war, the flow of Canadian war supplies to the A l l i e s was assured by providing Great B r i t a i n with the Canadian d o l l a r s necessary to pay for these supplies. 1 . Canada at War, p. 126 2 . Loc. c i t . 171. Countries i n the B r i t i s h Commonwealth and also the Soviet Union received, through Great B r i t a i n , substantial amounts of Canadian war supplies i n t h i s way.1 Several methods of extending t h i s f i n a n c i a l a i d , which amounted to $2,700,000,000, were used. Some of these we have already discussed i n more general terms, but s p e c i f i c a l l y , the 2 most important were:-(1) The buying back or " r e p a t r i a t i o n " of B r i t i s h - h e l d Canadian s e c u r i t i e s (private, Canadian Government and Canadian National Railways s e c u r i t i e s ) amount-ing to about $800,000,000. (2) Consolidation of the major part of accumulated s t e r l i n g balances i n London, amounting to $700,000, 000, into a loan to Great B r i t a i n , i n t e r e s t free f o r the duration of .the war.^ (3) A contribution of $1,000,000,000 placed to the credit of Great B r i t a i n i n Canada f o r the purchase of Canadian war supplies.^*" (4) Assumption of the ownership of United Kingdom i n t e r -ests i n Canadian war plants amounting to about $200, 000,000. During Canada's period of i n d u s t r i a l ex-pansion, the B r i t i s h Government provided c a p i t a l f o r the construction and equipment of many f a c t o r i e s i n Canada to produce munitions for the B r i t i s h forces. 1. Canada at War, p. 126 2. Loc. c i t . 3. Canada Year Book, 1945, p . 553 4. Loc. c i t . 172 Now, i n the two years a f t e r the signing of the Mutual Aid Act; i . e . , i n the two f i s c a l years which ended March 31, 1945, t o t a l expenditures under Mutual Aid were estimated at $1,727,603,000. The countries with which Canada had Mutual Aid agreements — Great B r i t a i n , Russia, China, France, Aus-t r a l i a , New Zealand and India — presented t h e i r requests f o r aid d i r e c t l y to Canada, and Canada turned over the supplies d i r e c t l y to them."** The t o t a l appropriation f o r Mutual Aid i n i t s f i r s t f i s -2 cal year ended March 31, 1944, was $1 ,000,000,000. Expenditures 3 were as follows:-TABLE I GROSS EXPENDITURES OF THE MUTUAL AID BOARD  for year ending March 31, 1944. GREAT BRITAIN RUSSIA AUSTRALIA CHINA . WEST INDIES INDIA $ 723,753,787 23,282,292 20,959,845 4,101,588 874,479 482,193 Sub-Total $ 773,454,184 Expenditure f o r supplies not yet shipped Administrative Expense 139,123,564 25,472 Total $ 912,603,220 Source: Annual Report of the Mutual Aid Board Completion of transactions with France, begun before A p r i l 1, 1944, f e l l within the second f i s c a l year. The a v a i l -1. Canada at War, p. 127 2. Canada Year Book, 1945, p. 553 3. Canada At War, l o c . c i t . 173. able appropriation f o r that year was $887,000,000 which included $87,000,000 carried over from the previous year. From i t was to come Canada's contribution to U.N.R.R.A., o r i g i n a l l y set at $77,000,000. 1 Total expenditures under Mutual Aid f o r the f i s c a l year ended March 31 , 1945 were estimated at about $815,000,000. Much larg e r expenditures were made during the second year on behalf of Russia, A u s t r a l i a , India, France, China and UNRRA while the amounts required by Great B r i t a i n as Mutual Aid were reduced because she was able to pay f o r a larger proportion of her requirements. This resulted from the fact that B r i t i s h receipts of Canadian d o l l a r s i n the payment of the costs of 2 Canadian forces overseas were abnormally high during the year. In the previous year, the t o t a l value of goods and ser-vices received by B r i t a i n from Canada for which the f u l l amount 3 was paid exceeded $1,200,000,000. This was i n addition to Mutual A i d . In the agreements which the nations receiving Mutual Aid concluded with Canada, there was provision f o r Canada to re-ceive such rec i p r o c a l aid as might be determined from time to time i n the l i g h t of the developments of the war. Just as Mutual Aid.was provided only to the extent that the country concerned was unable to provide Canadian d o l l a r s f o r i t s re-quirements, so no rec i p r o c a l aid was sought where Canada was able to buy what she needed. Canada always had funds to pay 1. Canada at War, p. 127 2. Loc. c i t . 3. I b i d . , p. 128 174 f o r Canadian requirements i n the countries receiving Mutual Aid, and therefore the recip r o c a l aid clause was not used. 1 The United States needed no help from Canada under Mut-ual Aid. Neither did Canada receive any assistance f o r i t s e l f p under United States Lease-Lend. The second annual report of the Mutual Aid Board con-tains the t o t a l figures for the two complete years the Board had been i n existence:-TABLE I I GROSS AID GIVEN BY CANADIAN MUTUAL AID BOARD  during 2 years ending March "31, 1945 UNITED KINGDOM OTHER BRITISH COUNTRIES CHINA FRANCE UNION of SOVIET SOCIALIST REPUBLICS U.N.R.R.A. Total $ 1 , 4 4 2 , 0 0 0 , 0 0 0 1 1 3 , 0 0 0 , 0 0 0 21 ,000,000 18 ,000 ,000 121,000,000 11 ,000 ,000 I 1 , 7 2 6 , 0 0 0 , 0 0 0 Source: Second Annual Report of the Mutual Aid Board The largest items shipped were motor transport, a i r c r a f t , bacon and wheat. The figure of $ 1 , 4 4 2 , 0 0 0 , 0 0 0 i s by no means the sum to t a l of aid given to Great B r i t a i n by Canada during the war. The sum t o t a l of aid to A l l i e s up to March 3 1 , 1945 may be sum-marized (in terms of financing) as follows:-1. Canada at War, p. 128 2. Loc. c i t . 175* TABLE III TOTAL CANADIAN AID TO ALLIES up to March 3J., 1945 LOAN (NO INTEREST DURING WAMt-1942 $ 700,000,000 OUTRIGHT GIFT TO BRITAIN-1942 1,000,000,000 REPATRIATION OF SECURITIES 800,000,000 REFUNDING OF BRITISH EXPENDITURES 200,000,000 ON CANADIAN WAR PLANTS MUTUAL AID 1,726,000,000 Total $ 4,426,000,000 Source: Canada Year Book Annual Reports of the Mutual A id Board This i s a gigantic sum f o r a country with l e s s than one-twelfth the population or wealth of the United States. More-over, i t does not include B r i t i s h purchases paid f o r i n cash hut nevertheless coming out of Canadian production. At the time of writing, detailed figures are not a v a i l -able f o r the year ending March 31, 1946, but a summary i s a v a i l -able i n the f i n a n c i a l white paper tabled i n the House of Com-mons along with the Budget of June 27, 1946. This report under the heading Mutual Aid Board shows expenditures as follows:-TABLE IV GROSS EXPENDITURE OF THE MUTUAL AID BOARD  during year ended March 3JL, 1946 MILITARY RELIEF $ 34,000,000 MUTUAL AID 725,900,000 UNITED NATIONS MUTUAL AID 84,042,000 OTHER DEPARTMENTS 3,161,000 Total $ 847,103,000 Source: Appendix to the Budget, June 27, 1946 In the Report of the Mutual Aid Board, the phrase "out-right contribution" i s used and t h i s i s evidently the way i n which the Canadian Government looks upon i t s Mutual Aid expend-i t u r e s , which have been made without s t i p u l a t i o n f o r return or even without thought of using them as bargaining weapons. This i s Mutual Aid at i t s f i n e s t . In addition, there i s the current loan of $1,250,000,000 to Great B r i t a i n and s i m i l a r type loans to China, the Nether-lands and Belgium which are very d e f i n i t e l y a form of aid to A l l i e s , even though they are loans and have been granted since the war ended. Be i t aid f o r war or reconstruction, Canada i s doing her part. 177. CONCLUSION I t i s evident that great p o l i t i c a l , s o c i a l and economic changes have been wrought i n Canada as a r e s u l t of the country's p a r t i c i p a t i o n i n two wars of world-wide magnitude. Canadians have, in.the immediate past, paid higher taxes, loaned more money to t h e i r government and accepted a greater degree of government control over t h e i r private l i v e s than any one would have thought possible at the outbreak of the war. While i n World War I Canada depended on borrowing from abroad to meet the bulk of her war expenditures and thus s h i f t -ed the immediate burden to Great B r i t a i n and to some extent the United States, i n the Second World War, the Government adopted r e a l i s t i c tax measures which, from 1940-1946 i n c l u s i v e , covered almost two-thirds of the country's war and demobilization expend-i t u r e s . In no other war on record has a country made such an achievement and i t i s doubtful i f any of her A l l i e s can match i t . , Government borrowing also operated on a d i f f e r e n t phi-losophy during t h i s l a s t war — a l l the loans were i n Canadian funds and the bulk of them was sold to residents of Canada. Although the Gross Public Debt of Canada increased by some f14,000 m i l l i o n during the years 1940-1946, i t was mainly i n t e r -n a l . Canada a c t u a l l y ended the war as a c r e d i t o r country. I t i s e n t i r e l y l i k e l y that the burden of the increased amount w i l l , r e l a t i v e l y speaking, be no greater than before the war because 178. of the improvement in the country's productive capacity and the reduction in carrying charges. There is no gainsaying that maintaining the burden of war expenditures did fa l l heavily on the Canadian people. The whole expense of the First World "War, estimated at less than $2,000 million, did not equal one year's expenditure dur-ing World War II. Records show that Dominion Government ex-penditures in 1919 were 18% of the National Income compared with the almost excessive 57% in 1944. While, compared to past experiences, people lived better and had more left over during the last conflict, a man probably s t i l l thinks in terms of that portion of his income, great or small, which he must give up. In the course of the war of 1914-18, production of muni-tions and other exportable goods increased rapidly and prices rose to high levels. During the war just concluded, production again increased, not only rapidly but also in much greater quantities. However, the Government, through central planning, price and exchange control measures, was able to control the inflationary forces in the money structure and thus make the redundant means available for the payment of taxes and sub-scriptions to war loans. Most authorities agree that Canada not only gave an excellent example of how a democratic country could be organized for a total war effort but also carried i t out with a minimum of friction. A P P E I D I X A ESTIMATED POPULATION OF CANADA (1911-1946) Year Estimated Population 1911 7 ,206. ,643 1912 7 ,343 ,000 1913 7 ,530. ,000 1914 7 ,725. ,000 1915 7 ,928 ,000 1916 8 ,140. ,000 1917 8 ,180 ,160 1918 8 ,328. ,382 1919 8 ,478. ,546 1920 8 ,631 ,475 1921 8 ,788. ,483 1922 8 ,908. ,550 1923 9 ,028 ,240 1924 9 ,150 ,940 1925 9 ,268 ,700 1926 9 ,450 ,000 1927 9 ,519 ,220 1928 9 ,833. ,000 1929 10 ,027. 000 1930 10 ,206. ,000 1931 10 ,376. ,786 1932 10 ,506 ,000 1933 10. ,681 ,000 1934 10 ,824. ,000 1935 10. ,935. ,000 1936 11 ,028. ,000 1937 11, ,120. ,000 1938 11 ,209. 000 1939 11 ,315i ,000 1940 11 ,422, ,000 1941 11 ,506, 655 1942 11. ,654, 000 1943 11. ,812, 000 1944 11 ,975. ,000 1945 12 ,119. 000. 1946 12 ,270, 000* Source: Canada Year Bo©k ft Estimated by author. 180. A P P E N D I X _B_ DOMINION REVENUE AND EXPENDITURE (1911 - 1946) Y e a r R e v e n u e E x p e n d i t u r e Total Per Capita Total Per Capita 1911 $117,780,409 $ 16.34 $122,861,250 $ 17.04 2 136,108,217 18.54 137,142,082 18.68 3 168,689,903 22.40 144,456,877 19.18 4 163,174,395 21.15 186,241,048 24.11 5 133,073,482 16.79 248,098,526 31.29 6 172,147,838 21.15 339,702,502 41.73 7 232,701,294 28.45 498,342,388 60.92 8 260,778,953 31.31 576,660,210 69.24 9 312,946,747 36.91 697,042,212 82,21 1920 349,746,335 40.52 786,030,611 91.07 1 436,292,185 49.64 528,302,513 60.11 2 382,271,571 42.91 463,528,389 52.03 3 403,094,210 44.65 434,735,277 48.15 4 406,582,840 44.43 370,589,247 40.50 5 351,515,392 37.92 351,169,803 37,89 6 382,893,009 40.52 355,186,423 37.59 7 400,452,480 42.07 358,556,751 37.67 8 429,642,573 43.69 378,658,440 38.51 9 460,151,481 45.89 388,805,953 38.78 1930 445,916,992 43.69 398,176,246 39.01 1 356,160,876 34.32 440,008,855 42.41 2 336,721,305 32.05 450,955,541 42.92 3 311,126,329 29.13 531,760,893 49.79 4 324,471,271 29.98 457,968,585 42.31 5 361,871',929"-372,595,996 33.09 478,004,747 43,71 6 33.79 532,585,555 48.29 7 454,153,747 40.84 532,005,432 47.84 8 516,692,749 46.10 534,408,118 47.68 9 502,171,354 44.38 553,063,098 48.88 1940 562,093,35.9 49.21 680,793,792 59.60 1 872,169,645 75.80 1249,601,446 1^85,066,056 108.60 2 1,488,536,342 127.73 161,75 3 2,319,496,177 190.44 4,387,124,117 371.41 4^ 2,920,017,713 230.90 5,322,253,505 444.45 5 5 2,906,834,799 239.86 5,245,611,924 432.84 6* 3,028,104,000 246.79 4,691,307,000 382.34 Source: Canada Year Book ft Appendix to Budget, June 27, 1946 APPENDIX C; D O M I N I O N R E V E N U E S (For F i s c a l Years Year Customs Import Duties Excise Duties Income ^-Tax Excessl P r o f i t s Tax $ $ $ 1911 71. 838. ,088 16. ,869. ,837 2 85, ,051, ,872 19. 261, ,662 3 111. ,764. ,699 21, ,447. ,445 4 104 ,691. ,238 21 ,452, ,037 5 75. ,941 ,220 21 ,479 ,731 6 98. ,649. ,409 22, ,428. ,492 7 134. ,043 ,842 24. ,412 ,348 12,506,517 8 144 ,172. ,630 27, ,168 ,445 21,271,084 9 147. ,169. ,188 30. ,342, ,034 9,349,720 32,970,062 1920 168 ,796. ,823 42. ,698. ,083 20,263,740 44,145,184 1 163. ,266 ,804 37. ,118. ,367 46,381,824 40,841,401 2 105 ,686 ,645 36 ,755 ,207 78,684,355 22,815,667 3 118. ,056 ,469 35 ,761 ,997 59,711,538 13,031,462 4 121. ,500. ,799 38. ,181 ,747 54,204,028 4,752,681 5 108. ,146. ,871 38. ,603. ,489 56,248,043 2,704,427 6 127 ,355. ,144 42 ,923 ,549 55,571,962 1,173,448 7 141 ,968 ,678 48 ,513 ,160 47,386,309 710,102 8 156 ,985 ,818 57. ,400 ,898 56,571,047 956,031 9 187. ,206 ,332 63 ,684 ,954 59,422,323 455,232 1930 179 ,429 ,920 65 ,035 ,701 69,020,726 173,300 1 131. ,208 ,955 57 ,746 ,808 71,048,022 34,430 2 104 ,132 ,677 48 ,654 ,862 61,254,400 3,000 3 70 ,072 ,932 37. ,833 ,858 62,066,697 54 4 66 ,305 ,356 35 ,494 ,220 61,399*172 5 76. ,561 ,975 43 ,189 ,655 66,808,066 6 74 ,004 ,560 44. ,409 ,797 82,709,803 7 83. 771 ,091 45. ,956 ,857 102,365,242 8 93. ,455. ,750 52. ,037. ,333 120,365,532 9 78. 751 ,111 51. ,313 ,658 142,026,138 1940 104. ,301 ,487 61 ,032 ,044 134,448,566 1 130 ,757 ,011 88. ,607 ,559 248,143,022 23,995,269 2 142 ,392 ,233 110 ,090 ,940 510,243,017 135,168,345 3 118 ,962 ,839 138. ,720 ,723 910,188,672 454,580,677 % 167. 882, 089 142. ,124. 331 1,151,757,035 468,717,840 115. 091, 000 151, 922. 000 1,072,758,068 465,805,356 6* 128, 877, ,000 186 ,726. ,000 937,730,000 494,196,000 Source: Canada Year Book 1. "Taxation S t a t i s t i c s " , Ottawa, A p r i l , 1946 2. Includes a l l other taxes & Appendix to Budget, June 27, 1946 3 . includes a l l other revenues 182. 1 9 1 1 - 1 9 4 6 ended March 31) War 1 Succession T o t a l 2 3. Exchange Tax Duties Tax Revenues Total Revenues Year $ $ $ $ 88,707,925 117. ,780. ,409 . 1911 104,313,534 136 ,108^ ,217 2 133,212,144 168. ,689 ,903 3 126,143,275 163 ,174 ,395 4 97,519,008 133. ,073 ,482 5 124,698,683 172. ,147. ,838 6 174,758,428 232. ,701 ,294 7 196,720,976 260 ,778. ,953 8 233,688,730 293,706,840 312 ,946 ,747 9 349 ,746 ,335 1920 368,770,498 436 ,292 ,185 1 319,926,013 382 ,271 ,571 2 335,453,341 403. ,094 ,210 3 341,718,807 406. ,582 ,840 4 293,914,518 351 ,515 ,392 5 327,575,013 382. ,893. ,009 6 346,649,272 400. ,452. ,480 7 364,705,803 429. ,642. ,577 8 395,921,028 460. ,151 ,481 9 378,551,626 445 ,916 ,992 1930 296,276,396 356. ,160 ,876 1 275,053,603 336. ,721. >305 2 254,318,801 311. ,126, 329 3 271,851,549 324, 471 271 4 304,443,729 361. 871. 929 5 317,311,809 372. 595. 996 6 386,550,869 454, 153, 747 7 448,651,061 516, 692, 749 8 435,706,794 502, 171, 354 9 468,224,595 562. 093, 459 1940 61,932,029 778,175,450 872, 169, 645 1 100,873,982 6,956,574 1,360,912,838 1,488, 536, 342 2 94,553,380 13,273,483 2,136,719,961 2,319, 496, 177 3 118,912,840 15,019,831 2,591,811,485 2,920, 017, 713 4. 98,164,000 17,250,798 2,374,126,000 2,906, 834, 799 5? 41,198,000 21,448,000 2,234,859,000 3,028, 104, 000 6* 183 A P P E N D I X D_ SUBDIVISION OF COLLECTIONS UNDER THE INCOME WAR TAB ACT (For F i s c a l Years ended March 31) General Income Tax Tax on Div., Int. Total Year G i f t and Income Individuals Corporations Deferred Tax War Tax $ $ $ 1919 7,972,890 1,376,830 9 ,349,720 1920 13,195,314 7,068,426 20 ,263,740 1 32,532,526 13,849,298 46 ,381,824 2 39,820,597 38,863,758 78 ,684,355 3 31,689,393 28,022,145 59 ,711,538 4 25,657,335 28,546,693 54 ,204,028 5 25,156,768 31,091,275 56 , 248*043 6 23,849,475 31,722,487 55 ,571,962 7 18,043,261 29,343,048 47 ,386,309 8 23,222,891 33,348,156 56 ,571,047 9 24,793,449 34,628,874 59 ,422,323 1930 27,237,502 41,783,224 69 ,020,726 1 26,624,181 44,423,841 71 ,048,022 2 24,772,846 36,481,554 61 ,254,400 3 25,959,466 36,107,231 62 ,066,697 4 29,183,715 27,385,822 4,829,635 61 ,399,172 5 25,201,392 35,790,239 5,816,435 66 ,808,066 6 32,788,746 42,518,971 7,402,086 82 ,709,803 7 35,358,302 58,012,843 8,994,097 102. ,365,242 8 40,070,942 69,768,605 10,525,985 120. 365,532 9 46,591,449 85,185,887 10,248,802 142. 026,138 1940 45,008,858 77,920,002 11,519,706 134. 448,566 1 103,308,249 131,565,710 13,269,063 248. 143,022 2 295,874,285 185,835,699 28,533,033 510; 243,017 3 533,915,059 347,969,723 28,303,890 910. 188,672 4 809,570,762 311,378,714 30,807,559 1,15.1 ,757,035 * 5 763,896,322 276,403,849 32,457,897 1,072, 758,068 * 6 691,586,000 217,834,000 28,310,000 937. 730,000 Source: "Taxation S t a t i s t i c s " Ottawa, A p r i l , 1946 :& Appendix to Budget, June 27, 1946 -(only approximations) 184. A P P E N D I X E DOMINION EXPENDITURES (1911 - 1946) (For F i s c a l Years ended March 31) Year National Defence War and Demobilization C a p i t a l T o t a l1 $ • $ $ $ 1911 6,868 ,651 30 ,813. ,767 122 ,861,250 2 7,580 ,600 30 ,939 ,576 137 ,142,082 3 9,114 ,533 27 ,206. ,046 144 ,456,877 4 11,730. ,964 37 ,180. ,176 186. ,241,048 5 10,573. ,423 60,750,476 41 ,447' ,320 248 ,098,526 6 5,083 ,225 166,197,755 38 ,566. ,951 339 ,702,502 7 4,880 ,365 306,488,815 I 26 ,880. ,032 498. ,342,388 8 4,311 ,379 343,836,802 ' 43 ,111 ,904 576 ,660,210 9 3,482 ,604 446,519,440 25 ,031 ,266 697 ,042,212 1920 5,033 ,479 346,612,955 69 ,301 ,878 786 ,030,611 1 14,020. ,854 16,997,544 40 ,012 ,807 528 ,302,513 2 16,412 ,602 1,544,250 16 ,295 ,332 463 ,528,389 3 13,448 ,176 4,464,760 9 ,807. ,124 434 ,735,277 4 13,757. ,103 446,083 10 ,861 ,277 370. ,589,247 5 13,172 ,318 506,931 16 ,550 ,511 351 ,169,803 6 14,113. ,167 191,392 16 ,798 ,549 355 ,186,423 7 14,909. ,500 64,485 19 ,558 ,703 358 ,556,751 8 17,659 ,638 1,6^6,011 20 ,635 ,648 378 ,658,440 9 19,674 ,201 669,399 CR 22 ,809. ,275 388. ,805,953 1930 21,986. ,537 25 ,726. ,720 398. ,176,246 1 23,736. ,447 28 ,710, 692 440, ,008,855 2 18,221 ,63.2 17. ,165. ,943 450. ,955,541 3 13,750 ,314 9. ,048. ,929 531 ,760,893 4 13,476 ,862 6 ,580: ,085 457. ,968,585 5 14,185 ,772 7. ,107. 416 478. ,004,747 6 17,177. ,074 6. ,544. 154 532. ,585,555 7 22,923. 093 3. 491, 544 532, 005,432 8 32,760. ,307 4, ,430, 152 534, 408,118 9 34,432, 023 5, 424, 276 553, 063,098 1940 13,118, ,732 118,291,022 7. 030. 038 680. 793,792 1 193. 985 752,045,326 3j ,357. 810 1,249, 601,446 2 260, 482 1,339,674,152 3. 430, 447 1,885, 066,056 3„ 415, 128 3,724,248,890 3 3 275, 685 4,387, 124,117 68, 713 4,587,023,094 2: 621, 978 5,322, 253,505 69, 000 4,418,446,000 3, 164, 000 5,245, 611,924 122, 000 3,558,454,000 4j 603, 000 4,691, 307,000 Source: Canada Year Book A Appendix to Budget, June 27, 1946 1 Includes 'Other Expenditures' 185, A P P E N D I X F PUBLIC DEBT _0F CANADA (1911 - 1946) (For F i s c a l Years ended March 31) Year Gross Debt Total Assets Net Debt Net Debt per Capita $ $ $ $ 1911 474 ,941, 487 134. ,899. ,435 340. ,042, 052 47.18 2 508. 338. 592 168. ,419. ,131 339. ,919, 461 46.29 3 483. ,232, 555 168. 930. ,930 314, ,301, 625 41.74 4 544. ,391. 369 208. ,394. 519 335. ,996, 850 43,49 5 700. 473. ,814 251. ,097 ,731 449 ,376. 083 56.68 6 936. ,987. ,802 321 ,831 ,631 615. ,156, ,171 75.57 7 1,382, 003; ,268 502. ,816. ,970 879. 186, ,298 107.48 8 1,863 ,335 ,899 671 ,451 ,836 1 ,191 ,884, ,063 143.11 9 2,676. 635. ,725 1 ,102 ,104 ,692 1 ,574 ,531 ,033 185.71 1920 3,041, ,529. ,587 792. ,660 ,963 2 ,248 ,868. 624 260.54 1 2,902, 482. 117 561. ,603 ,133 2 ,340. ,878, 984 266,36 2 2,902, ,347. ,137 480 ,211 ,335 2 ,422 ,135 ,802 271.89 3 2,888. 827-,237 435 ,050 ,368 2 ,453. .776, ,869 271.79 4 2,819. 610 ,470 401 ,827 ,195 2 ,417 ,783. 275 264.21 5 2,818 ,066 ,523 400 ,628 ,837 2 ,417 ,437. ,686 260.82 6 2,768. ,779 ,184 379 ,048 ,085 2 ,389 ,731 ,099 252.88 7 2,726. ,298. ,717 378 ,464 ,347 2 ,347 ,834 370 246.64 8 2,677. 137. ,243 380 ,287 ,010 2 ,296. ,850 ,233 233,59 9 2,647. ,033. 973 421 ,529 ,268 2 ,225 ,504. 705 221.95 1930 2,544, 586. 411 366 ,822 ,452 2 ,177. ,763. 959 213.38 1 2,610. ,265 698 348 ,653 ,762 2 ,261. ,611. 937 217.95 2 2,831 ,743 ,563 455 ,897 ,390 2 ,375 .846, 172 226.14 3 2,996. 366 ,665 399 ,885. ,839 2 ,596. 480 ,826 243.09 4 3,141 ,042 ,097 411, ,063 ,957 2 ,729 978. ,141 252.22 5 3,205. 956. 369 359 ,845 ,411 2 ,846. ,110. ,958 260.28 6 3,431 ,944. ,027 425. ,843 ,510 3 ,006 ,400. 517 272,59 7 3,542, 521, 139 458. ,568. ,937 3 ,083, 952, 202 277.33 8 3,540, 237, 614 438. ,570 ,044 3 ,101. ,667. 570 276.71 9 3,710, 610 ,593 558. ,051 ,279 3 ,152 ,559 314 278.62 1940 4,028, 728. 606 757. 468. ,959 3 ,271 ,259, 647 286.40 1 5,018, 928 ,037 1 ,370. ,236, 588 3 ,648. ,691, ,449 317.09 2 6,648 ,823. ,424 2 ,603. ,602. ,263 4 ,045 ,221. ,161 347.11 3 9,228, 252. 012 3 ,045. 402. ,911 6 ,182. 849, 101 523.44 4 12,359, 123, 230 3 ,619. 038, 337 8 ,740. 084, 893 729.86 5 f t 15,712, 182, 000 4 ,413, 819, 982 11 ,298, 362, 018 932.29 6 f t 19,005, 656. 000 5 ,971, 591 ,000 13 ,034. 065, 000 1,062.27 Source: Canada Year Book ft Appendix to Budget, June 27, 1946 186. A P P E N D I X G_ INTEREST PAID ON THE PUBLIC DEBT OF CANADA (1911 - 1946) (For F i s c a l Years ended March 31) Year Tot a l Per Capita $ $ 1911 12 ,535 ,851 1.74 2 12 ,259 ,397 1.67 3 12 ,605 ,882 1.67 4 12 ,893 ,505 1.67 5 15 ,736 ,743 1.98 6 21 ,421 ,585 2.63 7 35 ,802 ,567 4.38 8 47 ,845 ,585 5.74 9 77 ,431 ,432 9.13 1920 107 ,527 ,089 12.46 1 139 ,551 ,520 15.88 2 135. ,247 ,849 15.18 3 137 ,892 ,735 15.27 4 136 ,237 ,872 14.89 5 134 ,789 ,604 14.54 6 130 ,691 ,493 13.83 7 129 ,675 ,367 13.62 8 128 ,902 ,945 13.11 9 124 ,989. ,950 12.47 1930 121 ,566 ,213 11.91 1 121 ,289 ,844 11.69 2 121 ,151 ,106 11.53 3 134 ,999. ,069 12.64 4 139. ,725 ,417 12.91 5 138 ,533 ,202 12.67 6 134. ,549 169 12.20 7 137. ,410. ,345 12.36 8 132. ,117. ,422 11.79 9 127 ,995 ,617 11.31 1940 129. ,315 ,442 11.32 1 139. ,178 ,670 12.10 2 155. ,017. ,901 13.30 3 188. ,556. 249 15.96 4^ 242. 681 ,180 20.27 5i 318. 995. ,000 26.32 6* 408. ,960. ,000 33.33 Source: Canada Year Book ft Appendix to Budget, June 27, 1946 187. A P P E N D I X H DOMINION REVENUE AND EXPENDITURE AS PERCENTAGES GF NATIONAL INCOME (1919 - 1946) ( i n thousands of d o l l a r s ) Revenue , Expenditure National Percentages Year Income Rev./N.I|. ! 1 Expend/NI Produced $ $ $ $ % j % 1919 312,947 697,042 3,816,113 8.20 1 18.27 1920 349,746 786,031 4,597,853 7.61 ! 17.10 1 436,292 528,303 3,507,220 12.44 j 15.06 2 382.272 463,528 3,670,975 10.41 ! 12.63 3 403,094 434,735 3,847,059 10.48 ! 11.30 4 406,583 370,589 3,865,446 10.52 1 9.59 5 351,515 351,170 4,238,980 8.29 j 8.28 6 382,893 355,186 4,507,335 8.49 ; 7.88 7 400,452 358,557 4,738,360 8.45 ; 7.57 8 429,643 378,658 5,269,467 8.15 ! 7.19 9 460,151 388,806 5,272,619 8.73 j 7.37 1930 445,917 398,176 4,452,419 10.02 8.94 1 356,161 440,009 3,579,535 9.95 12.29 2 336,721 450,956 2,812,905 11.97 16.03 3 311,126 531,761 2,722,504 11.43 19.53 4 324,471 457,969 3,147,164 10.31 14.55 5 361,872 478,005 3,371,254 10.73 14.18 6 372,596 532,586 3,827,255 9.74 13.92 7 454,154 532,005 4,367,704 10.40 12.18 8 516,693 534,408 4,288,349 12.05 12.46 9 502,171 553,063 , 4,569,703 10.99 12.10 1940 562,093 680,794 5,390,982 10.43 12.63 1 872,170 1,249,601 6,425,620 13.57 19.45 2 1,488,536 1,885,066 8,043,713. 8,724,000* 9,186,000^ 18.51 23.44 3 2,319,496 4,387,124 26.59 50.29 4 2,920,018 5,322,254 31.79 57.94 5 2,906,835 5,245,612 1 1946 3,028,104 4,691,307 1 Source: Canada Year Book & Dominion Bureau of S t a t i s t i c s (Letter of Ju l y 18, 1946) 1 New method adopted i n 1945 f o r c a l c u l a t i n g these f i g u r e s . New figures are not comparable. 188 A P P E N D I X _I_ STATEMENT OF ASSETS AND LIABILITIES OF BANE OF GANAPA (1936-1946)A LIABILITIES (in m i l l i o n s of dollars) Year 2 Chartered Active Gov't. Other Total Bank Cash B. of C. Deposits Accounts L i a b i l i t i e s -Reserves Note Ci r c u l a t i o n 1936 $ 223.8 $ 55.2 $ 25.8 * 8.3 $ 313.1 7 239.8 84.5 22.0 14.0 360.3 8 248.2 102.1 16.4 17.2 383.9 9 261.7 110.8 27.1 17.8 417.4 1940 283.5 157.1 45.6 24.0 510.2 1 306.5 277.0 72.9 21.7 678.1 2 317.8 404.4 109.2 34.3 865.7 3 456.9 605.3 79.6 53.8 1,195.6 4 516.4 772.8 101.8 60.7 1,451.7 5 612.8 907.8 33.6 267.5 1,821.7 6 631.4 972.0 87.1 135.6 1,826.1 ASSETS (in m i l l i o n s of dollars) Investments i Year Reserve Dom.-Prov. Dom.-Prov. Other Total Long Term Short Term Accounts Assets 1936 1 194.8 $• 81.3 $ 29.9 $ 7.1 313.1 7 204.7 101.3 47.7 6.6 360.3 8 206.1 39.0 120.7 18.1 383.9 9 241.5 43.7 122.8 9.4 417.4 1940 14.8 99.4 384.8 11.2 510.2 1 182.9 119.5 364.9 10.8 678.1 2 193.6 220.0 427.6 22.5 865.7 3 11.8 302.5 826.1 55.2 1,195.6 4 .3 548.7 879.0 23.7 1,451.7 5 177.9 533.5 1,068.3 42.0 1,821.7 6 2.0 541.1 1,240.1 42.9 1,826.1 Source: S t a t i s t i c a l Summary, Bank of Canada. 4 Figures as at May 31 of each year used as representative of the whole year 1 Includes 'Other S e c u r i t i e s ' which are n e g l i g i b l e 2 Notes i n t i l l s and Deposits at the Bank of Canada. 189. A P P E N D I X STATEMENT OE ASSETS AND LIABILITIES Of THE  CHARTERED BANKS OF CANADA (1936-1946)& LIABILITIES (M i l l i o n s of Dollars) Year Deposits Notice 1936 * 1,527 7 1,573 8 1,625 9 1,678 1940 1,643 1 1,695 2 1,556 3 1,732 4 2,094 2,563 5 6 3,306 Demand Note Issue Other Dep. Other Acc'ts, Total L i a b i l i t i e s 578 700 670 684 817 1,105 1,133 1,452 1,711 1,792 2,207 123 110 97 90 94 83 74 51 37 29 24 528 581 585 718 827 741 993 1,615 1,886 2,139 1,321 352 370 355 351 365 391 426 419 415 434 503 3,108 3,334 3,332 3,521 3,746 4,015 4,182 5,269 6,143 6,957 7,361 ASSETS (Mi l l i o n s of Dollars) Year I n v e s t m e n t s Dom.-Prov. Long Term Dom.-Prov. Short Term Other Sec u r i t i e s Loans Total Assets 1936 # 588 $ 493 $ 264 7 643 489 306 8 700 448 301 9 754 444 306 1940 629 701 287 1 794 767 251 2 915 703 259 3 830 1,581 317 4 1,155 1,856 363 5 1,407 2,065 413 6 2,092 1,634 578 1,763 1,896 1,883 2,017 2,129 2,203 2,305 2,541 2,769 3,072 3,057 3,108 3,334 3,332 3,521 3,746 4,015 4,182 5,269 6,143 6,957 7,361 Source: S t a t i s t i c a l Summary, Bank of Canada & Figures as at May 31 of each year used as representative of the whole year. 190. BIBLIOGRAPHY I. Government Documents: Canada, Bank of Canada, Annual Reports to Minister of Finance  Finance and Statements of Accounts. Canada, Bank of Canada, S t a t i s t i c a l Summary, Ottawa. Canada, Canada at War, Ottawa, Wartime Information Board, 1945. Canada, Canada's Wartime Measures f o r Economic S t a b i l i t y to keep down the Cost of L i v i n g , Ottawa, King's P r i n t e r , 1943^ Canada, Canada Year Book, Ottawa, King's P r i n t e r , 1911-45. Canada, Dominion-Provincial Conference on Reconstruction, (1) "Comparative S t a t i s t i c s of Public Finance" (2) "Economic Controls" Ottawa, King's P r i n t e r , 1944 Canada, Gazette, Ottawa, King's P r i n t e r , P.O.337 - February 9, 1918 P.O. 1734 - The Foreign Exchange A c q u i s i t i o n Order, A p r i l 30, 1940. P.C. 1735 - Exchange Fund Order, A p r i l 30, 1940. P.C. 2516 - The Wartime Prices and Trade Board, September 3, 1939. P.C. 2716 - The Foreign Exchange Control Order, September 15, 1939. P.C. 7378 - May 8, 1941. P.C. 7440 - December 16, 1940. P.O. 8253 - The Wage-Freezing Order, October 24, 1941. P.C. 8527 - The Maximum Prices Regulations, November 1, 1941. P.C. 8528 - The-Wartime Prices and Trade Regulations, November 1, 1941 P.C. 8965 - The Maximum Rentals Regulations, November 21, 1941. P.C. 9298 - November 7, 1941 P.C. 9384 - War-Time Wages Control Order, 1943, December 9, 1943 Canada, Gazette Extra, Notice, Regulation 1 (d) May 2, 1940. Canada, O f f i c i a l Handbook of Present Conditions and Recent  Progress, Ottawa, King's P r i n t e r , 1946 Canada, Parliament, House of Commons, O f f i c i a l Report of Debates, Ottawa, King's P r i n t e r , 1916, v o l . 1 1939, Special Session. 1940, v o l . 1 1940, v o l . 2 191. Canada, Parliament, House of Commons, O f f i c i a l Report of Debates, Ottawa, King's P r i n t e r , 1941, v o l . 3 1942, v o l . 4 1943, v o l . 1 1944, v o l . 4 1945, v o l . 1^  1945, October 12 (unrevised) 1946, June 27 (unrevised) Canada, Report of the Royal Commission on Dominion-Provincial  Relations, (.1) "Book 1: Canada, 1867-1939" (2) "Book 3: Documentation" Ottawa, King's P r i n t e r , 1940. Canada, Taxation S t a t i s t i c s , Ottawa, King's P r i n t e r , A p r i l , 1946. Canada, Wartime Prices and Trade Board, Booklet No. 1, "Price Control i n Canada", Ottawa, King's P r i n t e r , 1941. Canada, Wartime Prices and Trade Board, Report of the, January 1, 1944 - December 31, 1944 Ottawa, King's P r i n t e r , 1945. 192. I I . P e r i o d i c a l s and Newspapers: A. Pe r i o d i c a l s : Auld, George P., "A Way to Finance B r i t i s h Purchases", The Canadian Chartered Accountant, v o l . 38, no. 1, January, 1941• Bank of Nova Scotia, Monthly Review. June, 1941. Burland, E.G., "The Trend of Economic Restoration since the Dawes Reparation Settlement", International C o n c i l i a t i o n , Carnegie Endowment f o r International Peace, no. 215, December, 1925. Carter, K.LeM., "Taxation of Corporate Income by the Dominion Government'.', The Canadian Chartered Accountant, v o l . 42, no. 5., May, 1943. Clarke, E.R., "Canadian Foreign Exchange Problems", Canadian  Banker, A p r i l , 1941. Comstock, A., "Canada Freezes Wages and Pr i c e s " , Current History, n.s. v o l . 1, pp. 332-333, December, 1941. C u r t i s , C.A., "The Canadian Banks and War Finance", University  of Toronto Studies, Contributions to Canadian Economics, v o l . 3», 1931, and "Public Finance", The Canadian Char-tered Accountant, v o l . 34, no. 5, January 1940. E l l i s , H.S., "Exchange Control", Quarterly Journal of Economics, August, 1940, and "Foreign Exchange Control and Free", Canadian Banker, July 1941. "Excess P r o f i t s Tax", Encyclopaedia of the Social Sciences, 1931, v o l . 5, pp. 664-666. ! "Income Tax", Encylopaedia Britannica, 11th. ed., 1910, v o l , 14, pp. 356-359. I l s l e y , Hon. J.L., "The Conservation of Foreign Exchange", The Canadian Chartered Accountant, v o l . 38, no. 1 . January, 1941. "Inflation? Canada Has just a Mild Attack", Monetary Times, v o l , 114, no. 2, February, 1946. "Is Ottawa too Lavish with our Money"., A Monetary Times Symposium, Monetary Times, v o l . 114, no. 2, February, 1946. 193. Jack, Lawrence B., "War and the S i r o i s Commission Report'/, The Canadian Chartered Accountant, v o l . 39, no. 3,-September 1941, and "Threats to the Canadian Price Structure", The Canadian Chartered Accountant, v o l . 39, no. 1, July, 1941. Mackintosh, W.A., "Economics, Prices and the War", B u l l e t i n of the Departments of History and P o l i t i c a l and Economic  Science m Queen's University, no. 31, A p r i l , 1919. McQueen, R., "War-Time Finance", The Canadian Chartered Account-ant , v o l . 36, no. 1., January, 1940. Nash, H.H., "Some Reflections on the 'Ruml" Plan", The Canadian  Chartered Accountant, v o l . 42, no. 2, February, 1943. Perry, J.R., "Public Debts i n Canada", University of Toronto  Studies, Economic Series, v o l . . 1 , no. 3, 1898. Petri e , J.R., "Canadian War Taxation", Canadian Forum, v o l . 20, no. 233, June, 1940. Pigou, A . C, "War Finance and I n f l a t i o n " , The Economic Journal, v o l , 50, pp. 46I-468, December 1940. Skelton, O.D., "Federal Finance", B u l l e t i n of the Departments  of History and P o l i t i c a l and Economic Science i n Queen's  University, no. 16, July, 1915, and "Canadian Federal Finance - I I " , B u l l e t i n of the Departments of History  and P o l i t i c a l and Economic Science i n Queen's University. n o < 29, October, 1918. "Statement of Po l i c y and O f f i c i a l Documents of the War-Time Prices and Trade Board", The Canadian Chartered Account-ant, v o l , 40, no. 3, March, 1942. Wynne, William H., "Double Taxation of Inheritances i n Canada", The Canadian Chartered Accountant, v o l . 39, no. 3, September, 1941• B. Newspapers: "Canadian Dollar at P a r i t y with U.S.", Vancouver News Herald, July 6, 1946. "Canadian Subsidy Total $200 M i l l i o n " , Vancouver News Herald, June 26, 1946. "Federal Revenue Jumps $6 m i l l i o n i n A p r i l " , Vancouver .Daily Province, May 20, 1946. "New Budget, The", Vancouver News Herald, June 29, 1946. 194. "Synopsis of the Budget", Ottawa Evening Journal, June 28, 1946. "Synopsis of the Budget", Vancouver News Herald, June 28, 1946. "U.S. Dollar Premium to Remain", Vancouver Daily Province, June 5, 1946. 195 I I I . General Works: Adams, H.C., The Science of Finance, New York, Henry Holt & Co., 1898"^  Bastable, C. F., Public Finance, London, Macmillan & Co., 1895. Boulding, K.E., The Economic of Peace. New York, Prentice-Hall, Inc., 1945. Brown, H.G., The Economics of Taxation. New York, Henry Holt & Co., 1924. Buehler, A.G., Public Finance. New York, McGraw-Hill Book Co., Inc., 1940. Clark, J.M., Hamilton, W.H., Moulton, H.G., Readings i n the Economics of War. Chicago, University of Chicago Press, 1918. Comstock, A., Taxation i n the Modern State, New York, Longmans, Green & Co., 1929. ' Croxton, F.E. and Cowden, D.J.., Applied General S t a t i s t i c s , New York, Prentice-Hall, Inc., 1945. Dalton, H., P r i n c i p l e s of Public Finance, London, George Rout-ledge & Sons, 1929. Daniels, W.M., The Elements of Public Finance, New York, Henry Holt & Co., 1904. Deibler, F.S., P r i n c i p l e s of Economics, New York, McGraw-Hill Book Co., Inc., 1936. Drummond, G.F., The Economics of International Trade.(Manuscript Form), University of B r i t i s h Columbia, 1946. Fagan, E.D. and Macy, C.W., ed., Public Finance, New York, Longmans, Green & Co., 1934. F a i r c h i l d , F.R., Furniss E.S. and Buck N.S., Elementary Econ-omics. New York, Macmillan Co., 1941, 2 v o l s . Garver, F.B. and Hansen, AT»H., P r i n c i p l e s of Economics. Boston, Ginn and Co., 1938. Groves, H.M., Financing Government. New York, Henry Holt & Co., 1939. Harris, S.E., I n f l a t i o n and the American Economy, New York, McGraw-Hill Book Co., Inc., 1945. 196. Hunter, M.H., and A l l e n , H.K., P r i n c i p l e s of Public Finance, New York, Harper & Brothers, 1940. James, F.C., The Economics of Money, Credit and Banking, New York, The Ronald Press Co., 1942. Keynes, J.M., The Economic Consequences of the Peace, New York, Harcourt, Brace and Howe, 1920. Keynes, J.M., How to Pay f o r the War, London, Macmillan & Co., 1940. Lloyd-George, D., The Truth about Reparations arid War Debts, London, William Heinemanm Ltd., 1932. Logan, H.A. and Inman, M.K., A Social Approach to Economics, Toronto, University of Toronto Press, 1939 Lutz, H.L., Public Finance, New York, D. Appieton-Century Co., 1936. Mendershausen, H., The Economics of War, New York, Prentice-H a l l , Inc., 1941.. M i l l , J.S., P r i n c i p l e s of P o l i t i c a l Economy (1847), London, Longmans, Green & Co., 1900. M i l l s , M.C. and Starr, G.W., Readings i n Public Finance and  Taxation, New York, Macmillan Co., 1932. Parkinson, J.F., ed., Canadian Investment and Foreign Exchange  Problems. Toronto, University of Toronto Press, 1940. Parkinson, J.F., Canadian War Economics, Toronto, U n i v e r s i t y of Toronto Press, 1941. Peck, H.W., Taxation and Welfare. New York, Macmillan Co., 1925. Pethwick-Lawrence, F.W., Why Prices Rise and F a l l , London, Oxford University Press, 1920. Pigou, A.C, The Economy and Finance of the War, London, J.M., Dent & Sons, 1916. Pigou, A.C, The P o l i t i c a l Economy of War, London, Macmillan &.Co., 1921. Pigou, A . C , A Study i n Public Finance, London, Macmillan & Co., 1929. Plehn, C.C, Introduction to Public Finance, New York, Macmil-lan Co., 1925. 197. Plumptre, A.F.W., Mobilizing Canada's Resources f o r War, Toronto, Macmillan Co., of Canada, 1941. Ricardo, D.. P r i n c i p l e s of P o l i t i c a l Economics and Taxation, (1821), London, G.Bell & Sons Ltd., 1911. Seligman, E.R.A., The S h i f t i n g and Incidence of Taxation, New York, Columbia University Press, 1910. Seligman, E.R.A., Essays i n Taxation, New York, Macmillan Co., 1921. Seligman, E.R.A., Studies i n Public Finance, New York, Macmillan Co., 1925. Shirras, G.F., Science of Public Finance, London, Macmillan & Co., 193o~ Smith, Adam, An Inquiry into the Nature and Causes of the Wealth of Nations (1776), New York, Random House Inc., 19371 : Spiegel, H.W., The Economics of Total War, New York, D. Apple-ton-Century Co., 1942. Steiner, G.A., ed., Economic Problems of War, New York, John . Wiley & Sons, 1942. Wright, C.W., Economic Problems of War and i t s Aftermath, Chicago, University of Chicago Press, 1942. 198 IV. Special Works and Pamphlets: Brown, F.H., The History of Canadian War Finance 1914-1920, Canadian I n s t i t u t e of International A f f a i r s , Toronto, The Ryerson Press, 1940, Crumb, Joseph A., Canada's Burden of War Finance. Gibson, J . D., P r i n c i p l e s of War Finance, Canadian I n s t i t u t e of International A f f a i r s , Toronto, The Ryerson Press, 1940. McDougall, J.L., I n f l a t i o n and Decontrol, The Canadian R e t a i l Federation, Toronto, 1946. McDougall, J.L., The Post-War Tax Load, The Canadian Manufactur-ers' Association, Toronto, 1945. Plumptre, A.F.W., The F i n a n c i a l Outlook, Canadian I n s t i t u t e of International A f f a i r s , Toronto, The Ryerson Press, 1940. Woodward, E.S., Budget Should Aid Incentive, Vancouver News Herald, June 2 9 , 1946. 

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