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War finance in Canada Ostle, Bernard 1946

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WAR  FINANCE  IN  CANADA  by BERNARD  0STLE  A T h e s i s submitted i n P a r t i a l F u l f i l m e n t o f The Requirements f o r the Degree o f MASTER OF ARTS i n the Department of ECONOMICS,  POLITICAL  SCIENCE  and  SOCIOLOGY  The U n i v e r s i t y o f B r i t i s h Columbia August,  1946  WAR FINANCE IN CANADA (An A b s t r a c t )  T h i s t h e s i s endeavours t o l i s t  and compare  the f i n a n c e measures undertaken by the Dominion Government d u r i n g the two great wars i n Canada's history. war e f f o r t  However, emphasis has been p l a c e d on t h e j u s t concluded.  C o n s i d e r a b l e space has  been g i v e n over t o a d i s c u s s i o n of the means by which the M i n i s t e r of Finance made a v a i l a b l e t h e funds necessary f o r t h e p r o s e c u t i o n o f t h e war  —  changes i n t h e t a x system, government borrowing, p r i c e and exchange c o n t r o l have been examined i n some d e t a i l .  A s h o r t note on Canadian A i d t o  A l l i e s has been i n c l u d e d .  GENERAL INTRODUCTION Wherever an organized p o l i t i c a l  s o c i e t y e x i s t s , i t be-  comes necessary f o r i t s government t o a c q u i r e funds i n o r d e r to d e f r a y the c o s t of the s e r v i c e s provided by t h a t government. T h i s i s e v i d e n t t o a h i g h degree i n s o c i e t y as we know i t t o day.  However, such has not always been the case; f o r when  people l i v e d o n l y as f a m i l i e s w i t h government a u t h o r i t y unknown, the problems of p u b l i c f i n a n c e as we know i t to-day d i d not exist.  As s o c i e t i e s advanced, however, the tendency  f o r the  d u t i e s of t h e i r governments t o i n c r e a s e both i n number and i n c o s t was marked and consequently government expenditure i n creased.  T h i s tendency  became much more marked i n the p e r i o d  1890-1914, a t the end of which time, the p u b l i c expenditures of every s t a t e had reached c o n s i d e r a b l e p r o p o r t i o n s .  In the y e a r s  1914-18, the heavy c o s t s of the war were evidenced i n the  un-  p a r a l l e l e d i n c r e a s e i n government spending i n a l l the b e l l i g e r ent s t a t e s . A f t e r the making of the peace, of  the b e l l i g e r e n t c o u n t r i e s remained  levels. war,  the p u b l i c  expenditures  f a r above t h e i r pre-war  Great p u b l i c debts had been accumulated  d u r i n g the  the annual i n t e r e s t on which ( i n many c o u n t r i e s ) f a r ex-  ceed the whole of t h e i r pre-war e x p e n d i t u r e s .  A p a r t from the  burden of war d e b t s , p u b l i c expenditure i n c r e a s e d a f t e r  1914,  p a r t l y because of the i n c r e a s e d c o s t o f d i s c h a r g i n g the o l d d u t i e s o f the governments and p a r t l y because of the new  demands  for  government h e l p which arose on every s i d e both d u r i n g the  war  and the d i f f i c u l t  6  p e r i o d of t r a n s i t i o n which f o l l o w e d .  ii N e u t r a l as w e l l as b e l l i g e r e n t s t a t e s were a f f e c t e d by the l a s t two  causes. In the years a f t e r the war,  n e a r l y every c o u n t r y  faced w i t h the problem o f f i n d i n g revenues needed i n the pre-war y e a r s — l a r g e as the pre-war revenues.  was  g r e a t e r than those  i n some cases many times as T h i s i n c r e a s e i n the s c a l e of  government f i n a n c e gave the whole q u e s t i o n a new  importance.  Both the r a i s i n g and spending of the g r e a t e r revenues were a f f e c t i n g people t o an extent never experienced b e f o r e .  The  h e a v i e r t a x a t i o n and h i g h e r p r i c e s 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 o t h e r hand, the i n c r e a s e d government spending meant a l a r g e i n c r e a s e i n the number of those d i r e c t l y a f f e c t e d by such spendi n g , e i t h e r as h o l d e r s of i n t e r e s t - b e a r i n g government bonds, as government employees o r as r e c i p i e n t s i n one way a s s i s t a n c e from p u b l i c  funds.  With the coming of the Second World War, cess was  repeated —  or another of  the whole p r o -  government expenditures rose r a p i d l y , t a x -  a t i o n measures s t i f f e n e d and economic a c t i v i t y had t o be to a new  pace.  geared  Governments were, however, i n p o s s e s s i o n of more  knowledge a t t h i s time than they were i n 1914-18 (mainly because of t h e i r e x p e r i e n c e s d u r i n g the "First World War)  and,  although  many of t h e i r methods of f i n a n c i n g were b a s i c a l l y the same, the e x e c u t i o n was more r e f i n e d . i o d of t r a n s i t i o n from war  We  are a g a i n i n t h a t d i f f i c u l t  per-  t o peace, more commonly r e f e r r e d to  as the "post-war p e r i o d " , and t h e r e i s much s p e c u l a t i o n as t o the methods of f i n a n c i n g d u r i n g the next few years and the proba b i l i t y of t h e i r s u c c e s s .  However, i n t h i s work, wevare not  iii  i n t e r e s t e d so much in. the post-war p e r i o d as i n the a c t u a l p e r i o d of war  finance.  To make a comprehensive survey of the war f i n a n c e p r o gram i n Canada, one must do more than j u s t 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 tem d u r i n g the a c t u a l war p e r i o d .  sys-  Such a procedure would g i v e  a v e r y narrow yiew o f 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 n o t h i n g .  When Canada made the  t r a n s i t i o n from a peacetime t o a wartime economy, her* economic outlook was changed.  whole  Many overseas markets were l o s t  to Canadian e x p o r t e r s , i t became n e c e s s a r y to conserve v i t a l f o r e i g n exchange and the e n t i r e e f f o r t o f the Canadian people had to be d i r e c t e d i n t o the needed channels.  Consequently,  every aspect o f the Canadian economy was a f f e c t e d by the g i g a n t i c war  effort. I n the f o l l o w i n g pages, the tremendous growth i n f e d e r a l  expenditure has been examined and an attempt has been made t o estimate the economic consequences o f these e x p e n d i t u r e s . C o n s i d e r a t i o n has been given to the means by which the M i n i s t e r of Finance r a i s e d the funds n e c e s s a r y f o r the l a r g e expenditure which were an i n t e g r a l p a r t of the war e f f o r t .  I t was no mean  f e a t to d i v e r t an e v e r - i n c r e a s i n g amount (both a b s o l u t e l y and p r o p o r t i o n a t e l y ) of the w e a l t h and energy of the Canadian peopl i n t o the p r o s e c u t i o n o f the war.  Many methods were employed t o  make the funds a v a i l a b l e and these, w i t h t h e i r consequences, have been examined  carefully.  We have d e s c r i b e d the s i t u a t i o n which brought v a r i o u s economic c o n t r o l s i n t o being and o u t l i n e d some of the problems  iv  involved.  The common genesis of a l l c o n t r o l s i s , of course,  war-created s c a r c i t i e s ; the common purpose, t o prevent the consequences  of inflation.  of a more o r l e s s temporary  These c o n t r o l s were consequently nature and adjustments had c o n t i n -  u a l l y t o be made t o meet the changing  situation.  The method used i n d e v e l o p i n g t h i s work was, i n the main, d e s c r i p t i v e .  However, numerous s t a t i s t i c a l r e f e r e n c e s  have been used and s p e c i a l i n f e r e n c e s drawn therefrom. I t i s our c o n t e n t i o n t h a t a s a t i s f a c t o r y study o f the s u b j e c t , "War  Finance i n Canada", cannot be made w i t h o u t a  comprehensive  review o f government f i n a n c e i n g e n e r a l , w i t h s p e c i a l on war f i n a n c e .  emphasis  A c c o r d i n g l y , t h i s paper has been s u b d i v i d e d  i n t o f o u r main t o p i c s as f o l l o w s : P a r t I d e a l s w i t h government f i n a n c e i n g e n e r a l and under t h i s heading we have attempted  to review the p r i n c i p l e s  of p u b l i c f i n a n c e and t o cover the more important problems which a p r o g r e s s i v e s t a t e encounters.:  We have t r i e d t o ex-  p l a i n the e f f e c t s o f the r a i s i n g and spending o f government revenues on the people o f a country as a whole, and i t has been noted t h a t the e n t i r e economic p o l i c y of a country may be a f f e c t e d by the methods o f government f i n a n c e employed. Although a war f i n a n c e program may n o t be f a i r l y judged on c r i t e r i a which a p p l y t o a peacetime p e r i o d , c o n s i d e r a t i o n must n e c e s s a r i l y be g i v e n t o the orthodox approach  to the f i n a n c e  problems o f governments. The second phase o f t h i s study has t o do w i t h the v a r i o u s adjustments  and problems which a r i s e i n government f i n a n c e i n  V  time of war.  A l l great wars i n modern times have been  financed  by means of i s s u e s o f paper money (government and bank n o t e s , c o n v e r t i b l e and i n c o n v e r t i b l e ) , by borrowing and by t a x a t i o n . Except as an extreme measure o f l a s t r e s o r t , paper money has come t o occupy a subordinate p o s i t i o n i n war f i n a n c e .  The  accepted p o l i c y i s t o i s s u e paper money s p a r i n g l y and to secure the bulk of the funds r e q u i r e d f o r war by means o f taxes and loans.  Even now, w i t h our tremendous t a x burdens, a l a r g e p a r t  of war f i n a n c i n g was c a r r i e d out by means o f l o a n s .  While  taxa-  t i o n , borrowing and c r e d i t expansion a r e the p r i n c i p a l methods of war f i n a n c e , they a r e u s u a l l y supplemented by other  devices  designed t o i n c r e a s e t h e i r e f f e c t i v e n e s s and t o f a c i l i t a t e the d i v e r s i o n o f the n a t i o n a l energies  toward t h e war e f f o r t .  These supplementary methods i n c l u d e p r i c e f i x i n g ,  exchange  c o n t r o l , r a t i o n i n g , wage c o n t r o l and a v a r i e t y o f Other of government r e g u l a t i o n and compulsion. not d i s c u s s e d  kinds  Although we have  these a d d i t i o n a l methods i n t h i s s e c t i o n , we  must keep i n mind t h a t they a r e p a r t o f the comprehensive and v a r i e d machinery o f war f i n a n c e .  Such items as (a) p r i c e s ,  (b) t a x a t i o n and borrowing, (c) f o r e i g n 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 t o the p a r t i c u l a r problem i n v o l v e d . A d e s c r i p t i o n o f the changes i n the Dominion's f i n a n c e measures d u r i n g and  serves  the F i r s t World War has been made i n P a r t I I I  both as a h i s t o r i c a l background and as a means o f  comparison i n the d i s c u s s i o n o f our more recent program o f war finance.  We have examined not o n l y the changes i n the f i n a n c e  vi  measures o f Canada and the accompanying growth i n the p u b l i c debt o f the Dominion but a l s o the e f f e c t s on the economic s t r u c t u r e of the country.  Much r e g u l a t i o n and c o n t r o l of  business took p l a c e d u r i n g the war p e r i o d and s e v e r a l pages have been u t i l i z e d i n d e s c r i b i n g the more important of such government i n t e r v e n t i o n w i t h the working of p r i v a t e  enterprise.  In the c o n c l u d i n g s e c t i o n , we have d e a l t w i t h the enormous war f i n a n c e program undertaken by the people of Canada duri n g the war j u s t concluded.  A c h r o n o l o g i c a l development o f the  changes i n the f i n a n c e measures o f the Dominion has been r e corded so t h a t one may f o l l o w through the growth i n s e v e r i t y of t a x a t i o n and other methods o f accumulating the necessary funds as t h e war program progressed both i n time and i n i n t e n sity.  A s h o r t note on the extent of Canadian a i d t o A l l i e s  has a l s o been i n c l u d e d t o show t h a t Canada r e a l l y entered the war as a U n i t e d N a t i o n .  C o n s i d e r a b l e space has been u t i l i z e d  to d e s c r i b e some of the more important economic and f i n a n c i a l c o n t r o l s imposed on the people of Canada during the war y e a r s . P r i c e c o n t r o l and exchange c o n t r o l i n p a r t i c u l a r , w i t h  their  c l o s e t i e - u p t o the problem of i n f l a t i o n , have been d i s c u s s e d a t some l e n g t h as they were not o n l y important d u r i n g the a c t u a l war p e r i o d but are of even g r e a t e r concern to-day as Canada endeavours to make a smooth swing from a wartime t o a peacetime economy. The author wishes t o acknowledge h i s indebtedness t o a l l those who have f u r n i s h e d him w i t h h e l p f u l suggestions and criticisms.  He hopes t h a t the f o l l o w i n g pages may h e l p the  vii  g e n e r a l p u b l i c t o understand the problem of war f i n a n c e has a f f e c t e d every i n d i v i d u a l i n Canada d u r i n g drawn t o a c l o s e , and how i t w i l l time t o come.  still  as i t  the p e r i o d  just  a f f e c t them f o r some  CONTENTS General I n t r o d u c t i o n .  Page i  PART I GOVERNMENT FINANCE Chapter I  REVENUE AND EXPENDITURE Methods o f R a i s i n g Revenue T a x a t i o n and Expenditure Productive Expenditure.. Unproductive Expenditure S t a t e Expenditure and D i s t r i b u t i o n Cost o f R a i s i n g Revenue E x t e n s i o n of Government Spending  2 2 3 4 6 8 10 12  II  TAXATION AND EQUITY Proportionate Taxation.. Progressive Taxation Equity i n Practice E q u i t y and Economy. P r o g r e s s i v e T a x a t i o n and Economy....  14 16 17 17 18 19  III  PRACTICAL PROBLEMS Administrative D i f f i c u l t i e s of Personal Taxes P r o d u c t i v e I n d i r e c t Taxes Taxation of N e c e s s a r i e s Case f o r I n d i r e c t Taxes L i m i t a t i o n s of I n d i r e c t Taxes A P r a c t i c a l Advantage of the Income Tax  22 23 25 26 27 28  TAXATION AND PRODUCTION D i f f e r e n t Uses of Income Expenditure Taxes Income Tax: Spending and Saving.... Income Tax: Earned and Unearned Income. Income Tax: I n c e n t i v e s t o P r o d u c t i o n . . . Income Tax: C a p a c i t y t o Produce Income Tax: Investment Abroad I n h e r i t a n c e Taxes Taxes on Land Value Excess P r o f i t s Tax  29 29 30 31 33 34 36 37 38 39 41  IV  22  ix  CONTENTS Chapter V OTHER ECONOMIC CONSIDERATIONS The S h i f t i n g o f T a x a t i o n . . . C a p i t a l i z a t i o n o f Taxes.... S h i f t i n g o f I n d i r e c t Taxes Taxes on Developing I n d u s t r i e s Import and Export D u t i e s Customs D u t i e s and F o r e i g n Exchange Rates..  Page 44 44, 45 45 46 46 47  • PART I I GOVERNMENT FINANCE IN TIME OF WAR VI  WAR FINANCE P r i c e F l u c t u a t i o n s , Taxing and Borrowing... R i s i n g P r i c e s and F o r e i g n Debts F a l l i n g P r i c e s and I n t e r n a l Debts Government Borrowing Loans v e r s u s Taxes i n War Finance D i f f e r e n t Methods of Borrowing Borrowing and I n f l a t i o n Irredeemable Paper Money i n War F i n a n c e . . . . Cost o f I n f l a t i o n  51 51 53 54 56 59 60 61 63 64  VII  THE POST-WAR BURDEN OF DEBT A: INTERNATIONAL DEBT The Growth o f I n t e r n a t i o n a l Indebtedness... Repayments: Debtor C o u n t r i e s Repayments: C r e d i t o r C o u n t r i e s Pre-war Debts B: INTERNAL DEBT..., The Repayment o f I n t e r n a l Debt S i n k i n g Fund Method Conversion o f Debt.. Postponement o f Repayment: What I t Means... The Advantages o f Immediate Repayment A Levy on C a p i t a l  67 67 67 68 70 73 75 75 76 77 78 80 81  PART I I I WAR FINANCE IN CANADA VIII  SOURCES OF REVENUE. Introduction P r e l i m i n a r y Steps 1914- 15 1915- 1 6 . . . . . 1916- 17 1917- 18  (1914-21) 87 87 89 90 92 97 99  CONTENTS Chapter VIII SOURCES OF REVENUE (Cont'd.) 1918-19 Demobilization Conclusion IX ECONOMIC MEASURES Introduction War-Time Regulation of Business Economic Effects of the War Conclusion  Page 102 103 104 107 107 107 Ill 114  PART IV WAR FINANCE IN CANADA (1939-46) X  XI  XII  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 ECONOMIC AND FINANCIAL CONTROLS 145 A: Control of War Supplies 145 B: Price Control 147 War Savings Stamps and C e r t i f i c a t e s 148 War Bonds 148 (a) Central Bank Loans 148 (b) Chartered Bank L o a n s , , , 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) F i n a n c i a l Controls 160 The Rate of Exchange 160 The Foreign Exchange Acquisition,Order and Exchange Fund Order ' 161 The War Exchange Conservation Act 162 CANADIAN AID TO ALLIES  CONCLUSION. .."  166 177  xi  CONTENTS APPENDICES A B C D E F G H I J  Estimated P o p u l a t i o n of Canada (1911-1946) Dominion Revenue and Expenditure (1911-1946)... Dominion Revenues (1911-1946). S u b d i v i s i o n o f C o l l e c t i o n s under the Income War Tax A c t (1919-1946) Dominion Expenditures (1911-1946) P u b l i c Debt of Canada (1911-1946) I n t e r e s t P a i d on the P u b l i c Debt o f Canada (1911-1946) Dominion Revenue and Expenditure as Percentages of N a t i o n a l Income (1919-1946) Statement of A s s e t s and L i a b i l i t i e s of Bank of Canada (1936-1946).... Statement of A s s e t s and L i a b i l i t i e s o f the Chartered Banks o f Canada (1936-1946)  BIBLIOGRAPHY  Page 179 180 181 183 184 185 186 187 188 189  190  LIST OF CHARTS Page I  II  A s s e t s and L i a b i l i t i e s (1936-1946)  o f the Bank of Canada  A s s e t s and L i a b i l i t i e s Canada (1936-1946)  of the Chartered Banks of  148(a)  148(b)  LISTLX3F  I II  TABLES  Gross Expenditures of the Mutual Aid Board for year ending March 31, 1944  IV  172  Gross Aid given by the Canadian Mutual Aid Board during 2 years ending March 31, 1945  III  Page.  174  Total Canadian Aid to A l l i e s up to March 31, 1945  175  Gross Expenditure'of the Mutual Aid Board during year ended March 31, 1946  175  PART I  GOVERNMENT  FINANCE  CHAPTER REVENUE AND  I  EXPENDITURE  Methods of R a i s i n g Revenue A government may  o b t a i n i t s revenue i n v a r i o u s ways.  F i r s t l y , state-owned p r o p e r t y may  y i e l d an income which can  used f o r p u b l i c purposes, and many c o u n t r i e s have i n the derived few  s u b s t a n t i a l revenues i n t h i s way.  c o u n t r i e s i n which i t now  insignificant  Secondly, a government may  money'by means of l o a n s , and  past  There a r e , however,  y i e l d s more than an  p a r t of the necessary funds.  be  raise  t h i s method i s e x t e n s i v e l y used  b e l l i g e r e n t s t a t e s d u r i n g war.  by  Borrowing can, however, never  a f f o r d a f i n a l s o l u t i o n o f a country's f i n a n c i a l problems, f o r borrowing i m p l i e s i n t e r e s t and may ment's c r e d i t .  u l t i m a t e l y destroy  T h i r d l y , a government may  a govern-  c a r r y on a commercial  or i n d u s t r i a l u n d e r t a k i n g , s e l l i n g i t s products a t a p r i c e c o v e r i n g t h e i r c o s t , and  p o s s i b l y making an a d d i t i o n a l p r o f i t  which can be used as g e n e r a l  revenue, . I t i s g e n e r a l l y  n i z e d i n c o u n t r i e s which propose to f o s t e r p r i v a t e t h a t s t a t e e n t e r p r i s e s should taking i s either unsuitable l o n g p e r i o d before 1.  Adams, H. C ,  any  The  recog-  enterprise  o n l y be operated where the under-  for private enterprise  (due  to  the  r e t u r n i s a v a i l a b l e ) , or where i t i s i n  Science  of Finance, p.  227  3. the i n t e r e s t of the people i n g e n e r a l t h a t the s t a t e should operate the business as a p u b l i c u t i l i t y .  1  F o u r t h l y , and  the most important method of r a i s i n g revenue,  i s taxation.  T h i s i s the method on which modern governments have come t o 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 s t a t e t o 2  d i l u t e the money stream of the country w i t h f i a t 1. e., a d e l i b e r a t e p o l i c y of i n f l a t i o n . d u r i n g war,  T h i s o f t e n takes p l a c e  and s e r i o u s consequences are i n e v i t a b l e u n l e s s the  situation i s quickly T a x a t i o n and  currency;  remedied.  Expenditure  Taxation has been d e f i n e d as: "A tax i s a l e v y by the s o v e r e i g n upon h i s s u b j e c t s f o r the purpose p e n d i t u r e undertaken  f o r the g e n e r a l belief i t  of meeting an  ex-  of h i s s u b j e c t s . " ^  I t f o l l o w s from t h i s d e f i n i t i o n t h a t the f i r s t r e s u l t of a tax i s to reduce the power o f the i n d i v i d u a l taxpayer t o spend or to his  save; f o r , when a man  c o m p u l s o r i l y pays a c e r t a i n p a r t of  wealth t o the s t a t e , he must reduce h i s p r i v a t e  expenditure  L  or  h i s investments by a corresponding amount.  Taxation, i n  so f a r as i t i s s u c c e s s f u l , does not d e s t r o y w e a l t h but t r a n s f e r s the c o n t r o l of i t from p r i v a t e i n d i v i d u a l s t o the s t a t e -1. Adams „ H..Q.,oThe. .Science of Finance,pp. 30-31 Pigou, A~. G..A Study i n P u b l i c Finance, pp. 44-50 2. D a l t o n , H., P r i n c i p l e s of P u b l i c F i n a n c e , p.27 3. Crumb, J". A., Le.cture Notes, U n i v e r s i t y of B r i t i s h Columbia 4. D a n i e l s , W. M., The Elements of P u b l i c F i n a n c e , 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 P u b l i c Finance,  p.41  —  so t h a t w h i l e t a x a t i o n reduces the power of the taxpayers to . -• spend  o r save as p r i v a t e i n d i v i d u a l s , i t i n c r e a s e s t h e i r power  to spend  o r save c o l l e c t i v e l y through the government.  Whether  the c o u n t r y w i l l l o s e o r g a i n by such proceedings depends upon whether the l o s s from reduced p r i v a t e expenditure i s g r e a t e r o r l e s s than the g a i n from the new In c o n s i d e r i n g t h i s , we  collective  expenditure.  have to take i n t o account the  effect  of the s t a t e expenditure both upon the amount of w e a l t h p r o 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.^" P r o d u c t i v e Expenditure There are v a r i o u s k i n d s of s t a t e expenditure which be expected t o i n c r e a s e the w e a l t h - p r o d u c i n g country. and  A government may  undertake  may  c a p a c i t y of a  the p r o v i s i o n o f goods  s e r v i c e s which, a l t h o u g h they would otherwise be p r o v i d e d  by p r i v a t e e n t e r p r i s e , can be p r o v i d e d most e c o n o m i c a l l y by the s t a t e .  There a r e , however, some u n d e r t a k i n g s which a l -  though they would not be same way)  undertaken  by p r i v a t e e n t e r p r i s e , may  (or undertaken  i n the  y e t i n c r e a s e the n a t i o n a l 2  productivity.  Expenditure on r a i l w a y s  i n a s p a r s e l y populated  country might not tempt the p r i v a t e i n v e s t o r , as i t would be years b e f o r e such an u n d e r t a k i n g would pay i t s own way;  but  such an expenditure might l e a d u l t i m a t e l y , d i r e c t l y and  indi-  r e c t l y , to an enormous i n c r e a s e i n the p r o s p e r i t y o f the community, and might, from the p o i n t of view of the country as a 12 .  DB a ls t oa nb ,l eH., , C. P r F., i n c iP pu l bl ei s c of Fin Pu ab n lc ie c, F p.129 i n a n c e , p.205 P i g o u , H.C., A Study i n P u b l i c Finance, p.45  5  whole, prove an extremely good  investment.  The years before the F i r s t World Yfar saw a e o n s i d e r a b l e increase i n nearly a l l progressive countries of that part o f s t a t e expenditure which may be regarded as being i n v e s t e d i n the human resources o f the n a t i o n s .  Under t h i s heading may  be i n c l u d e d a l l e d u c a t i o n a l expenditure and expenditure on public health — and mental  f o r a n y t h i n g r a i s i n g the l e v e l of p h y s i c a l  e f f i c i e n c y may be expected t o i n c r e a s e u l t i m a t e l y  the p r o d u c t i v e c a p a c i t y o f the community."*"  A l s o under t h i s  heading would come expenditure on the a d m i n i s t r a t i o n o f l e g i s l a t i o n intended t o prevent the w a s t e f u l use o f the human c a p i t a l o f the country; e.g., f a c t o r y l e g i s l a t i o n . The tendency  t o i n c r e a s i n g s o c i a l expenditure i s s u f -  f i c i e n t l y r a p i d t o be a cause o f g r e a t alarm to those who dread the e f f e c t s o f the h e a v i e r burdens o f t a x a t i o n necessary t o  2 meet i t .  Its justification,  a p a r t from the i n c r e a s i n g  sense  of r e s p o n s i b i l i t y t o the l e s s f o r t u n a t e members of s o c i e t y , i s i n the b e l i e f t h a t most o f the expenditure i s l i k e l y  ulti-  mately t o prove r e p r o d u c t i v e even from the revenue p o i n t o f view; f o r , i n so f a r as i t succeeds p h y s i c a l and mental  efficiencs*  -  i n r a i s i n g the l e v e l of  i n the n a t i o n , i t may be expected  to l e a d t o a g r e a t e r p r o d u c t i o n of wealth and t o c r e a t e new sources o f revenue t o meet the h i g h e r taxes. would, of course, o n l y show themselves 1. 2.  Such r e s u l t s  s l o w l y and would  B a s t a b l e , C.F., P u b l i c Finance, pp. 129-130 Pigou, H.G., A.Study i n Public" Finance, p. 46 D a l t o n , H., P r i n c i p l e s of P u b l i c Finance, pp.206-215  proba-  V  6  b l y always be d i f f i c u l t Unproductive  to measure.  Expenditure,--;  A g r e a t p a r t o f s t a t e expenditure to-day cannot  be ex-  pected e i t h e r d i r e c t l y o r i n d i r e c t l y t o develop p r o d u c t i v e capacity.''"  In expenditure on war, b e l l i g e r e n t s t a t e s t u r n  t h e i r r e s o u r c e s from p r o d u c t i o n t o a c t u a l d e s t r u c t i o n o f the m a t e r i a l and human r e s o u r c e s o f one another.  I n expenditure  on armaments i n time of peace, wealth i s used not t o d e v e l o p e x i s t i n g o r new,sources o f wealth, but merely t o p r o t e c t existing  wealth. War expenditure i s not the o n l y k i n d o f s t a t e  t u r e which may be regarded as u n p r o d u c t i v e .  expendi-  Expenditure on  the a d m i n i s t r a t i o n o f j u s t i c e can h a r d l y be c a l l e d r e p r o d u c t i v e  2 i n the economic sense.  Some s o c i a l expenditure, such as Old  Age Pensions, can h a r d l y be expected  t o prove r e p r o d u c t i v e .  The emphasis p l a c e d on war expenditure i s n o t due t o t h e f a c t that i t d i f f e r s from other unproductive  expenditure, but t h a t  expenditure on war, and on the p r e p a r a t i o n f o r war, and the payment o f i n t e r e s t on debts accumulated form t h e most important states.  d u r i n g past war years  items i n the budgets of most modern  I n the years a f t e r the A r m i s t i c e o f World War I , the  i n t e r e s t on the new war debts, t h e payment o f pensions and the i n c r e a s e d expenditure on armaments even i n the peace years meant an enormous i n c r e a s e i n the a b s o l u t e amount o f unproductive expenditure.  We can expect, indeed a l r e a d y have,  1. D a l t o n , H., P r i n c i p l e s o f P u b l i c F i n a n c e , p. 207 2.  I b i d , p. 209  7.  a r e p e t i t i o n of t h i s type of burden d u r i n g the next few  years.  The f a c t t h a t government expenditure does not l e a d t o any i n c r e a s e i n economic p r o s p e r i t y 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 m a i n t a i n i t s n a t i o n a l independence, t o i t s treaty obligations, to increase i t s t e r r i t o r i a l or  even t o p u n i s h i t s n a t i o n a l enemies are p o l i t i c a l  which can never be reduced  fulfil  possessions questions  t o p u r e l y economic terms.  There  are many other forms of government expenditure which can be judged  never  simply by t h e i r e f f e c t on economic p r o s p e r i t y .  Ex-  p e n d i t u r e on the a d m i n i s t r a t i o n 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 t o be e c o n o m i c a l l y u n p r o d u c t i v e , probably most modern communities would m a i n t a i n much of i t on humanitarian grounds; w h i l e , i n a democratic  community a t l e a s t , a p o l i t i c a l  case c o u l d be  made out f o r a good g e n e r a l e d u c a t i o n , even i f i t c o u l d be shown t h a t e d u c a t i o n a l expenditure showed no p r a c t i c a l economic 2  return.  We  a r e , however, o n l y concerned  w i t h the economic  e f f e c t s of such expenditure, and the p o i n t to emphasize i s t h a t when t a x a t i o n t r a n s f e r s wealth from p r i v a t e to  individuals  the s t a t e , the t a x a t i o n must reduce the power of those  3 taxed t o spend or t o save. way  Where the w e a l t h absorbed  in this  reduces t h e i r power t o make expenditure necessary f o r  e f f i c i e n c y , or to i n v e s t i n p r o d u c t i v e i n d u s t r y , then t a x a t i o n 1. B a s t a b l e , C. F,, P u b l i c F i n a n c e , p.131 2. I b i d . , p. 89 3.  D a l t o n , H.,  P r i n c i p l e s of P u b l i c F i n a n c e , p.  210  8.  w i l l reduce the f u t u r e p r o d u c t i o n o f w e a l t h .  Where t h e r e i s  no c o u n t e r b a l a n c i n g economic g a i n from the government expendit u r e , t h i s must mean a r e d u c t i o n i n the economic p r o s p e r i t y of  the community."''  S t a t e Expenditure and D i s t r i b u t i o n State expenditure, as w e l l as a l t e r i n g the t o t a l p r o d u c t i o n of a community, may have an important e f f e c t i n changing the way i n which 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  2 of the community.  T h i s may a r i s e i n v a r i o u s ways.  The most  d i r e c t i s probably when revenue i s r a i s e d by t a x a t i o n of one c l a s s and p a i d out i n the form o f money t o another.  The same  r e s u l t may be achieved more i n d i r e c t l y when wealth i s r a i s e d by t a x a t i o n o f one c l a s s and the revenue i s used i n p r o v i d i n g goods o r s e r v i c e s which a l s o b e n e f i t other c l a s s e s .  (or p o s s i b l y o n l y b e n e f i t )  When the s t a t e undertakes  expenditure which  does n o t y i e l d any d i r e c t r e t u r n ; e.g., the c o s t o f defence; i f the c o s t o f t h a t expenditure i s imposed mainly on c e r t a i n c l a s s e s , i t w i l l mean t h a t the n e t money incomes of those c l a s s e s w i l l be reduced as compared w i t h the incomes o f o t h e r classes. At the present time, t h e r e i s much t o be s a i d f o r r e -  3 ducing the g r e a t e x i s t i n g i n e q u a l i t i e s of w e a l t h .  As a man's  wealth i n c r e a s e s , the s a t i s f a c t i o n he gets from f u r t h e r i n c r e a s e s 1. Pigou, A. C , A Study i n P u b l i c Finance, pp. 19-55 2. D a l t o n , H., P r i n c i p l e s of P u b l i c Finance, pp. 222-226 3. I b i d . , p . 222 Buehler, A. G., P u b l i c Finance, pp. 184-185 Wagner, A., F i n a n z w i s s e n s c h a f t (1899) V o l . 1, 27, c i t e d i n Comstock, A . , T a x a t i o n i n the Modern S t a t e , pp.38-39  9.  i n wealth tends t o d i m i n i s h .  I t may  be argued t h a t a n y t h i n g  which tends to make the d i s t r i b u t i o n o f w e a l t h more equal w i l l . tend to i n c r e a s e the amount o f s a t i s f a c t i o n d e r i v e d from the same amount o f w e a l t h .  I t w i l l i n c r e a s e the economic p r o s -  p e r i t y o f the community because, a l t h o u g h not i n c r e a s i n g the t o t a l amount o f wealth, i t w i l l i n c r e a s e the s a t i s f a c t i o n  ob-  t a i n e d from i t by improving i t s d i s t r i b u t i o n . The g r e a t danger o f attempted t h a t i t may  r e - d i s t r i b u t i o n i s always  check the p r o d u c t i o n of w e a l t h .  b u t i o n o f the same amount of w e a l t h may  A better  distri-  be d e s i r a b l e , but i f arsmaller  the e f f e c t of t h i s i s t h a t i n the f u t u r e t h e r e w i l l be supply t o d i s t r i b u t e , the case i s not so c l e a r .  To take w e a l t h  from one c l a s s by t a x a t i o n and t o use i t f o r the b e n e f i t of o t h e r c l a s s e s may  check p r o d u c t i o n i n two ways.  burden of t a x a t i o n may  increasing  reduce p r o d u c t i v i t y 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 ) — of goods (or money) may  The  the f r e e p r o v i s i o n  check p r o d u c t i v i t y o f those who  benefit  2 from the s t a t e expenditure on the o t h e r .  I t i s for this  rea-  son t h a t most s o c i a l , expenditure takes the form o f the p r o v i s i o n of those goods and s e r v i c e s which, as i n the case o f f r e e edurc a t i o n , may  be expected to r a i s e the l e v e l o f n a t i o n a l  efficien-  cy and thus may  be expected to b e . p r o d u c t i v e i n the l o n g r u n .  In t h i s case —  the case of f r e e e d u c a t i o n —  e q u a l i t y of o p p o r t u n i t y i t i m p l i e s may,  the g r e a t e r  i n i t s e l f , do  something  to l e a d t o g r e a t e r e q u a l i t y o f d i s t r i b u t i o n . 1. D a l t o n , H., P r i n c i p l e s o f P u b l i c F i n a n c e , pp. 102-128 2. I b i d . , p. 128 and p. 220  10. Cost of R a i s i n g Revenue A l l t a x a t i o n must., i n the f i r s t i n s t a n c e , reduce  the  amount of wealth l e f t i n the hands o f p r i v a t e i n d i v i d u a l s t h e r e f o r e make the taxpayers poorer than b e f o r e . of  and  The r e a l c o s t s  r a i s i n g the same amount of t a x a t i o n w i l l , however, v a r y from  case t o case.  To take the same amount of wealth by  taxation  from i n d i v i d u a l s w i t h d i f f e r e n t incomes w i l l n o r m a l l y cause s a c r i f i c e to the r i c h e r than the poorer"'' — of  t a x a t i o n may  less  w h i l e the same amount  a f f e c t the wealth p r o d u c t i o n of the country d i f -  f e r e n t l y as i t may d i f f e r e n t purposes.  absorb wealth t h a t would have been used f o r I f a tax i s on a l u x u r y e x p e n d i t u r e , the  l o s s i n s a t i s f a c t i o n w i l l r e p r e s e n t the f u l l  economic l o s s .  On  the o t h e r hand, i f a tax absorbed money t h a t would otherwise spent on the necessary food of the poorer workers,  be  t h e r e would  not o n l y be an immediate l o s s i n s a t i s f a c t i o n t o the consumers, but a l s o —  by reducing the e f f i c i e n c y of the workers —  r e d u c t i o n i n t h e i r p r o d u c t i v e c a p a c i t y and thus reduce w e a l t h produced  i n the country as a whole.  be a the  I f the tax f e l l  w e a l t h which would otherwise not be consumed immediately would be used f o r investment  on  but  i n p r o d u c t i v e i n d u s t r y , there  would be no immediate l o s s through r e d u c t i o n o f consumption, but the p r o d u c t i o n of f u t u r e wealth would be  checked.  One more p o i n t must be taken i n t o account i n e s t i m a t i n g the e f f e c t of t a x a t i o n upon p r o d u c t i o n .  When a t a x i s imposed,  it  i s n o r m a l l y used f o r a number of y e a r s .  1.  B a s t a b l e , C. F., P u b l i c F i n a n c e , p.  2.  D a l t o n , H.,  p  People expect  the  289  P r i n c i p l e s of P u b l i c F i n a n c e , p.  38  and  pp.105-117  11. tax and  t h i s expectation  duction.  may  a f f e c t the amount of t h e i r pro-  A very h i g h tax on l a r g e incomes may  d u c t i o n o f such incomes —  check the  hut t h i s i s not l i k e l y ,  as  pro-  there  are other f a c t o r s (which- accompany h i g h incomes) which people f i n d a t t r a c t i v e , and up.  as a r u l e they do not d e s i r e to g i v e them  I f the p r o d u c t i o n  of one  k i n d of w e a l t h i s e x c e p t i o n a l l y  h e a v i l y h i t by t a x a t i o n as compared w i t h other k i n d s , i t s supply may  be reduced and  all  s a v i n g i s e x c e p t i o n a l l } ' h e a v i l y taxed, the p r o p o r t i o n  w e a l t h saved may  other k i n d s of p r o d u c t i o n  be reduced and  substituted.  the p r o p o r t i o n  spent may  If of be  increased. As mentioned p r e v i o u s l y , the p o s s i b l e e f f e c t s of s p e c i f i c taxes upon the p r o d u c t i o n Enough has  of wealth w i l l  be d e a l t w i t h l a t e r .  been s a i d here to show t h a t both the l o s s due d i -  r e c t l y to the l e v y of the tax, and t a t i o n of the tax have to be  the l o s s due  to the  taken i n t o account."*"  expec-  In p r a c t i c e ,  i t i s extremely d i f f i c u l t to t r a c e such r e s u l t s but one  point  2 seems c l e a r .  The  g r e a t e r the burden of t a x a t i o n r e l a t i v e  the w e a l t h of the community, the g r e a t e r w i l l be the  to  difficulty  of f i n d i n g new  sources of t a x a t i o n without a f f e c t i n g p r o d u c t i o n  adversely,  the g r e a t e r w i l l be the danger of the burden of  and  taxation reducing  the i n c e n t i v e s to p r o d u c t i o n .  From t h i s , a  general working r u l e seems to be t h a t the h e a v i e r the  burden  of t a x a t i o n , the g r e a t e r i s l i k e l y t o be the r e a l c o s t r a i s i n g f u r t h e r revenue, and  1.  Dalton,  2.  Hunter, M.  H.,  of  the g r e a t e r w i l l have to beethe  P r i n c i p l e s of P u b l i c F i n a n c e , pp. H, and A l l e n , H. K..  102-117  P r i n c i p l e s of P u b l i c Finance ^ p.  170  12.  g a i n s expected from f u r t h e r expenditure t o make i t worth w h i l e . E x t e n s i o n of Government  Spending  There has been c o n s i d e r a b l e d i s c u s s i o n as t o how l a r g e a p a r t of the wealth of a country should be absorbed poses o f s t a t e expenditure."'"  f o r pur-  The view of the c l a s s i c a l  nomists was t h a t , a p a r t from defence and  justice  (which  l o n g been regarded as the primary d u t i e s o f the s t a t e ) ,  ecohad state  i n t e r v e n t i o n and consequently s t a t e expenditure should be kept  2 to  a minimum..  These w r i t e r s were l a r g e l y i n f l u e n c e d by the  p r e v a i l i n g economic c o n d i t i o n s o f the l a t e e i g h t e e n t h and n i n e t e e n t h c e n t u r i e s , and a l s o by the c o r r u p t i o n and  early  inefficien^  cy which c h a r a c t e r i z e d government i n t e r v e n t i o n and f i n a n c e . Probably t h e i r p o l i c y was  best f o r the p e r i o d f o r which they  wrote, but the l a s t one hundred and f i f t y y e a r s have seen g r e a t changes both i n economic c o n d i t i o n s and i n the e f f i c i e n c y of government a d m i n i s t r a t i o n . There has been a tendency  (acceler-  ated d u r i n g the l a s t f i f t y years) t o extend the a c t i v i t i e s o f government — w i t h consequent  i n c r e a s e i n expense.  T h i s change  i s based on the r e a l i z a t i o n t h a t wealth i n the hands o f i n d i v i d u a l s may be wasted from the p o i n t of view o f s o c i e t y , and  that  the i n t e r e s t o f the i n d i v i d u a l does not i n v a r i a b l y serve t o f u r t h e r , i n the best way p o s s i b l e , the r e a l i n t e r e s t s o f the community.  There are probably few,  even of the most extreme  1. B a s t a b l e , C.F., P u b l i c F i n a n c e , pp. 37-53, PP. 125-140 Buehler, A.G., P u b l i c Finance, pp. 58-59 D a l t o n , H;, P r i n c i p l e s : .Of r u D l i c Finance p. 194 2. Smith, Adam, The Wealth of N a t i o n s , 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., P u b l i c F i n a n c e , pp. 32-33  i n d i v i d u a l i s t s , who would deny to-day t h a t  some government  spending i s i n the best economic i n t e r e s t s of s o c i e t y .  CHAPTER I I TAXATION AND  EQUITY  I f the payment of t a x a t i o n i s regarded as a burden t h a t i n d i v i d u a l s have to bear i n the p u b l i c i n t e r e s t , i t might seem t h a t 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 o f s o c i e t y to make an money c o n t r i b u t i o n . be both i m p r a c t i c a b l e  equal  Such a method would, f o r modern c o n d i t i o n s , and  unjust —  the r e a l burdens imposed  upon i n d i v i d u a l s would be very f a r from e q u a l .  Where there  i s no great d i f f e r e n c e i n the economic p r o s p e r i t y o f  indivi-  duals and where taxes are l i g h t , the same o b j e c t i o n s to u n i f o r m taxes per head of p o p u l a t i o n  do not e x i s t , and,  h i s t o r y , such p o l l taxes have played  as a matter of  an important p a r t i n the  f i n a n c e s of the most p r i m i t i v e economic s t a t e s . Where c o n s i d e r a b l e  i n e q u a l i t y of w e a l t h e x i s t s , i t has  g e n e r a l l y been h e l d t h a t t a x a t i o n should i n d i v i d u a l s according  be d i s t r i b u t e d among  to t h e i r a b i l i t y to pay."  L  The  problem 2  then r e s o l v e s i t s e l f i n t o f i n d i n g what c o n s t i t u t e s a b i l i t y . T h i s has  g e n e r a l l y been approached from the s i d e of the  or s a c r i f i c e ^ i n v o l v e d i n the tax payments, and 1. Dalton, H., P r i n c i p l e s of P u b l i c F i n a n c e , pp. 2. Lutz,H.L., P u b l i c Finance, p. 355 3. D a l t o n , op. c i t . , pp. 89-90  burden  i t i s held 88-89  that  15. people pay a c c o r d i n g  to t h e i r a b i l i t y  (and a r e f a i r l y  i f the payments exacted impose equal burdens. dominant i d e a i n the philosophy century,  treated)  T h i s was the  o f t a x a t i o n i n the n i n e t e e n t h  and many attempts have been made t o f i n d a working  -solution o f the problem o f d i s t r i b u t i n g t a x a t i o n i n a way t h a t will  r e s u l t i n equality of s a c r i f i c e . Although we a r e d i s c u s s i n g " t a x a t i o n and e q u i t y " i n  t h i s chapter,  i t seems an i d e a l point, a t which t o quote Adam  Smith's famous Canons o f T a x a t i o n , which form the b a s i s f o r almost a l l d i s c u s s i o n o f taxes and t a x a t i o n problems."'' "Before I e n t e r upon the examination of p a r t i c u l a r taxes, i t i s necessary t o premise the f o u r f o l l o w i n g maxims w i t h regards t o taxes i n g e n e r a l . I. The s u b j e c t s of every s t a t e ought t o c o n t r i b u t e towards the support o f the government, as n e a r l y as possible, i n proportion to t h e i r respective a b i l i t i e s ; t h a t i s , i n p r o p o r t i o n t o the revenue which they r e s p e c t i v e l y enjoy under the p r o t e c t i o n of the s t a t e . . . . In the o b s e r v a t i o n o r n e g l e c t o f t h i s maxim c o n s i s t s , what i s c a l l e d the e q u a l i t y o r i n e q u a l i t y o f t a x a t i o n . . . . I I . The t a x which each i n d i v i d u a l i s bound t o pay ought t o be c e r t a i n , and not a r b i t r a r y . The time o f payment, the manner o f payment, the q u a n t i t y ±.6 be p a i d , ought a l l t o be c l e a r and p l a i n t o the c o n t r i butor, and t o every other person«... I I I . Every t a x ought t o be l e v i e d a t the time, o r i n the manner, i n which i t i s most l i k e l y t o be conv i e n t f o r the c o n t r i b u t o r t o pay i t . As he i s a t l i b e r t y too, e i t h e r t o buy, o r not t o buy, as he p l e a s e s , i t must be h i s own f a u l t i f he s u f f e r s any c o n s i d e r a b l e inconveniency from such t a x e s . . IV. Every t a x ought t o be so c o n t r i v e d as both t o take out and to keep out o f the pockets of the people as l i t t l e as p o s s i b l e , over and above what i t b r i n g s i n t o the p u b l i c t r e a s u r y o f the s t a t e . . . . The evident j u s t i c e and u t i l i t y o f the f o r e g o i n g maxims have recommended them more o r l e s s t o the a t t e n t i o n o f a l l n a t i o n s . A l l n a t i o n s have endeavoured, to the best of t h e i r judgment, t o render t h e i r taxes v  1.  Smith, Adam, The Wealth o f N a t i o n s , pp.  777-779  16. as equal as they could contrive; as c e r t a i n , as convenient to the contributor, both i n the time and i n the mode of payment, and i n proportion to the revenue which they brought to the p r i n c e , as l i t t l e burdensome to the people." Having set down these p r i n c i p l e s to which so much of the work i n t h i s thesis has reference, we s h a l l now return to the problem of "taxation and equity" i n i t s own r i g h t , and trace the development of t h i s phase of government finance from the time of Smith to the present day. Proportionate Taxation In the middle of the nineteenth century, the most popular  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 i n equality of s a c r i f i c e . Stuart M i l l :  To quote John  1  "The p r i n c i p l e , therefore, of equality of taxat i o n , interpreted i n i t s only just sense, equality of s a c r i f i c e , requires that a person who has no means of providing for old age, or for those i n 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 r e a l l y and bona fide applied to that purpose. The existing tax treats a l l kinds of incomes exactly a l i k e , 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 i b l e i n j u s t i c e ; yet i t does not a r i t h m e t i c a l l y v i o l a t e the rule that taxation ought to be i n proportion to means." The r e a l weakness of M i l l ' s scheme from the point of view of equal s a c r i f i c e i s that there i s no r e a l evidence show that, even with the modifications he allows,  1,  Mill,  to  proportionate  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  17.  t a x a t i o n o f income r e a l l y imposes equal burdens on the t a x p a y e r s . I t i s probably a c l o s e r approximation than the payment o f equal money c o n t r i b u t i o n s , because i t recognizes  the f a c t t h a t equal  sums o f money g e n e r a l l y mean l e s s t o the r i c h than t o the poor. The  o n l y reason t h a t M i l l g i v e s f o r b e l i e v i n g t h a t  proportionate  t a x a t i o n l e a d s t o equal s a c r i f i c e i s t h a t he t h i n k s i t does. I t i s simply  a matter o f o p i n i o n .  Progressive  Taxation  During the years s i n c e M i l l wrote, o p i n i o n has changed and  i t i s now g e n e r a l l y h e l d t h a t t o a r r i v e a t approximately  equal burdens, the burden o f t a x a t i o n must be d i s t r i b u t e d i n such a way t h a t , as incomes i n c r e a s e , the amount p a i d i n t a x a t i o n should The  i n c r e a s e , not p r o p o r t i o n a t e l y but p r o g r e s s i v e l y .  idea of progression  f i t s i n w i t h our general  ness.  I t seems f a i r t h a t the broader shoulders  should  bear the h e a v i e s t  1  ideas of f a i r o f the r i c h  share o f the n a t i o n a l burden o f t a x a -  t i o n , and t h e r e seem r a t i o n a l grounds f o r assuming t h a t as i n comes i n c r e a s e and the s u r p l u s beyond n e c e s s a r y expenditure becomes l a r g e r and l a r g e r , these incomes can pay i n c r e a s i n g l y heavy r a t e s o f tax without encroaching on any n e c e s s a r y expenditure,  and without causing  any p o s i t i v e hardship  t o the  taxpayers• Equity i n Practice  1  When c o n s i d e r i n g e q u i t y , t h e r e a r e c e r t a i n p r i n c i p l e s which may be used as guides by the t a x i n g 1. D a l t o n ,  authority:-  H., P r i n c i p l e s o f P u b l i c F i n a n c e , p. 93  IS  1.  Some degree of p r o g r e s s i o n  is essential.  M i l l ' s scheme of the exemption of a minimum f o r r e s u l t e d i n a very s l i g h t p r o g r e s s i o n  Even  necessaries  i n the r a t e s of tax  on  t o t a l incomes. 2. at  The  progression  must never be  c a r r i e d to a p o i n t  which a man's net income i s a c t u a l l y reduced  ( a f t e r payment  of the tax) by an i n c r e a s e i n income. 3.  In no circumstances can t a x a t i o n be  equitably  based on p u r e l y a r b i t r a r y p r i n c i p l e s which can have no nection with taxable 4.  capacity.  Taxes.must not f a l l  the standard  so h e a v i l y upon one  of l i v i n g of that c l a s s has  duced, w h i l e other  con-  classes s t i l l  c l a s s that  to be a p p r e c i a b l y  re-  r e t a i n a s u r p l u s beyond a  reasonable s t a n d a r d . The little is has  above are a t most l i m i t i n g p r i n c i p l e s and  impossible  to prevent g r e a t r e a l s u f f e r i n g .  Economy concept of minimum s a c r i f i c e r a t h e r than equal  s a c r i f i c e was  the next theory  economic p o s i t i o n of the  put forward.  In t h i s , the  t a k i n g both present  that  T h i s i n v o l v e s c o n s i d e r i n g not only the  H.,  will,  f u t u r e p r o s p e r i t y i n t o account, i n j u r e  as p o s s i b l e the permanent economic i n t e r e s t s of  community."'' Dalton,  and  logi-  s t a t e would seem to be to attempt  as f a r as p o s s i b l e to d i s t r i b u t e t a x a t i o n i n the way  as l i t t l e  It  to say what a c t u a l l y c o n s t i t u t e s e q u i t y , but i t  been attempted i n order  The  1.  very  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 t a x a t i o n .  E q u i t y and  cal  give  P r i n c i p l e s of P u b l i c F i n a n c e ,  p.90  the  immediate  19. l o s s i n s a t i s f a c t i o n t o the taxpayer, hut a l s o the value o f the wealth t a x e d .  1  productive  I t i s not a p r i n c i p l e t h a t i s easy  of a p p l i c a t i o n , but i t i s c e r t a i n l y more d e s i r a b l e than the i d e a of equal  sacrifice. The d o c t r i n e of minimum s a c r i f i c e would not n e c e s s a r i l y  c l a s h i n p r a c t i c e w i t h the p r i n c i p l e s of e q u i t y which were the 2 o n l y d e f i n i t e r e s u l t s that the i d e a seemed to g i v e u s .  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 w e l l as of e q u i t y .  The r e a l change i n t r o d u c e d  by  the i d e a of minimum s a c r i f i c e i s the d e f i n i t e r e c o g n i t i o n o f the f a c t t h a t , i n c o n s i d e r i n g what c o n s t i t u t e s e q u i t y , not o n l y the immediate l o s s t o the consumer but a l s o the p r o d u c t i v e due t o the tax must be c o n s i d e r e d . cepted i n p r a c t i c e .  loss  T h i s i d e a has l o n g been a c -  The great recent developments i n progres-  s i v e t a x a t i o n seem t o have been accepted as much on the grounds t h a t they were the most economical methods o f g e t t i n g the h i g h revenues needed, as that they conformed to any a b s t r a c t  standards  3 of e q u i t y .  C e r t a i n l y , not many years ago, such steep  gradations  of t a x a t i o n as we have to-day would have been condemned i n unmeasured terms as robbery o f the r i c h . Progressive  Taxation  and Economy L  Progression  has been so g e n e r a l l y  j u s t i f i e d as l e a d i n g  to g r e a t e r e q u a l i t y of s a c r i f i c e t h a t i t seems worth emphasizing 1.  Dalton,  2.  I b i d . , p.  H., P r i n c i p l e s o f P u b l i c F i n a n c e , p.  3. L o c . c i t . 4. L o c . c i t .  93  90  20.  t h a t both o p i n i o n s and p r a c t i c e on t h i s p o i n t have been largelyformed by the economic c o n d i t i o n s and f i s c a l needs o f the time. When taxes were low and wealth was f a i r l y equal, p o l l - t a x e s presented  no g r e a t 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) p r o p o r t i o n of wealth,  taxation proportioned  to income caused no great h a r d s h i p , and when a minimum f o r p h y s i c a l n e c e s s a r i e s was exempted, d i d n o t encroach a p p r e c i a b l y upon necessary  expenditure.  When t a x a t i o n became i n c r e a s i n g l y  heavy and i n e q u a l i t i e s o f wealth  i n c r e a s i n g l y great,  progres-  s i v e t a x a t i o n became the o n l y p r a c t i c a l method o f r a i s i n g the revenue needed.  From the p o i n t of view o f e q u a l i t y o f s a c r i -  f i c e , i t i s d i f f i c u l t t o j u s t i f y any p a r t i c u l a r r a t e s o f p r o g r e s s i o n but, where the t o t a l revenue t o be r a i s e d i s h i g h , a s t r o n g er case f o r steep p r o g r e s s i o n can be made from the s i d e o f economy. One  l a s t p o i n t may be noted  i n t h i s connection.  A too  r i g i d i n s i s t a n c e upon the n e c e s s i t y of e q u a l i t y between taxpayers as the o n l y j u s t 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 o f most p r o g r e s s i v e states."'" are attempting and  Most c o u n t r i e s  ( i n one way o r another) t o b r i n g about some s o c i a l  economic readjustments  has been d e v e l o p i n g ,  —  expenditure  on h e a l t h and education  and more c o n s t r u c t i v e p o l i c i e s have been  adopted f o r the help o f the poor i n p e r i o d s of s p e c i a l necessity.  When the s t a t e r e c o g n i z e s i n i t s spending  p o l i c y that i t  1. Pigou, A. C , A Study i n P u b l i c Finance, pp. 59-63 D a l t o n , H., P r i n c i p l e s of P u b l i c Finance, pp. 170-172 L u t z , H. L., P u b l i c Finance, pp. 358-365  may  be i n the p u b l i c i n t e r e s t t h a t i n d i v i d u a l s should  receive  unequal treatment, i t seems t h a t an attempt t o aim a t r i g i d e q u a l i t y of treatment i n the c o l l e c t i o n o f revenues i s not consistent.  CHAPTER I I I PRACTICAL PROBLEMS A d m i n i s t r a t i v e D i f f i c u l t i e s o f P e r s o n a l Taxes Whatever t h e o r i e s o f t a x a t i o n may be accepted, a p p l i c a t i o n w i l l always be l i m i t e d by the p r a c t i c a l  their  difficulties  of a d m i n i s t r a t i o n . However a t t r a c t i v e a tax may seem i n t h e o r y , it  i s p r a c t i c a l l y u s e l e s s as an instrument of revenue i f the  l a r g e r p a r t o f i t s y i e l d i s swallowed lection.  up i n the c o s t s o f c o l -  However f a i r a tax may seem on paper, i t w i l l be  fundamentally u n j u s t i n p r a c t i c e i f a l a r g e p a r t o f the people who should pay i t can evade i t w i t h impunity. F o r many y e a r s , the development o f any s c i e n t i f i c of t a x a t i o n was h e a v i l y handicapped culties.  1  scheme  by a d m i n i s t r a t i v e d i f f i -  P e r s o n a l t a x e s ; i . e . , taxes l e v i e d d i r e c t l y upon the  income o r p r o p e r t y of the i n d i v i d u a l , were almost i m p o s s i b l e because o f the d i f f i c u l t i e s o f a s s e s s i n g the income o r w e a l t h to be taxed".  Immovable p r o p e r t y was easy t o assess —  v i s i b l e and f i x e d —  i t was  but t o assess p r o p e r t y h e l d i n the form  of investments, and t o 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 c o u n t r i e s have o n l y r e c e n t l y  partially  solved. Even when d i r e c t p e r s o n a l taxes were i n t r o d u c e d , admin1.  Hunter, M. H. and A l l e n , H.K., P r i n c i p l e s o f P u b l i c Finance  pp. 271-272  23.  istrative difficulties  prevented  any e l a b o r a t e g r a d u a t i o n , o r  the use o f any o t h e r method o f a d j u s t i n g taxes t o d i f f e r e n c e s i n ' t h e taxpayers!- needs.  A l l through  the n i n e t e e n t h  century,  the g r e a t f i n a n c e m i n i s t e r s l a i d emphasis on t h i s need f o r simplicity i n taxation.  Gladstone,  f o r instance, refused to  i n t r o d u c e i n the E n g l i s h income t a x the d i f f e r e n c e i n r a t e s charged  on earned and unearned incomes (suggested  by M i l l ) ,  not because he c o n s i d e r e d i t u n d e s i r a b l e , but because of administrative difficulties.  Any i n c r e a s e i n the complexity o f a  tax i n c r e a s e s a d m i n i s t r a t i v e d i f f i c u l t i e s  i n two ways:-  (a)  I t i n c r e a s e s the c o s t of c o l l e c t i o n .  (b)  I t i n c r e a s e s the p o s s i b i l i t y o f e v a s i o n .  In s p i t e o f the a d m i n i s t r a t i v e 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 p e r s o n a l t a x e s . These developments have made p o s s i b l e a much c l o s e r of  t a x a t i o n t o the means o f the taxpayer.  graduation  The changes have be-  come p r a c t i c a b l e o n l y through g r e a t a d m i n i s t r a t i v e changes and would have been c o n s i d e r e d i m p o s s i b l e q u i t e a few y e a r s ago. P r o d u c t i v e I n d i r e c t Taxes Before the great development of d i r e c t t a x e s , a l l count r i e s depended  ( f o r a l a r g e p a r t o f t h e i r revenue) upon taxes  imposed' on commodities.  Such taxes are normally c o l l e c t e d  from  the manufacturer o r importer o f t h e taxed goods, but i t i s i n tended  t h a t they s h a l l u l t i m a t e l y be s h i f t e d to the consumers  i n the form of an a d d i t i o n t o p r i c e .  1  I n d i r e c t taxes of t h i s  1. Adams, H. C., The Science o f Finance, p.3&4  24.  k i n d are s t i l l  an important source of revenue i n a l l c o u n t r i e s ,  although w i t h the (recent development of d i r e c t taxes, the p r o p o r t i o n of t o t a l revenue r a i s e d from them has tended t o d e c r e a s e . 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 l a r g e tax revenue is  limited.  Such taxes are expensive t o c o l l e c t u n l e s s they  can be imposed or checked a t c e r t a i n c e n t r a l i z e d p l a c e s .  The  p o p u l a r i t y of customs d u t i e s from the revenue p o i n t o f view i s e x p l a i n e d because i t i s p o s s i b l e to make a f a i r l y c l o s e i n s p e c t i o n of taxed a r t i c l e s a t p o r t s or i n t e r n a t i o n a l r a i l w a y and plane c e n t e r s , and the c o s t of c o l l e c t i o n i s cheapened. taxes are imposed on commodities produced  Where  and consumed i n the  t a x i n g country, t h e i r p r o d u c t i o n has to. be watched and,  except  when the p r o d u c t i o n i s c e n t r a l i z e d , the c o l l e c t i o n becomes c o s t l y and If  difficult. taxes are Imposed on commodities which are not  sumed on a l a r g e s c a l e , the y i e l d w i l l not be g r e a t .  con-  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 t o be t h o r o u g h l y uneconomical.  The r i s e i n p r i c e due to the tax w i l l k i l l  demand and d r y up the source of the t a x .  the  The consumer s u f f e r s  because he has to f i n d an a l t e r n a t i v e commodity, the  producer  s u f f e r s from the check t o h i s s a l e s and the n a t i o n a l t r e a s u r y does not g a i n .  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 g r e a t o n l y where the t h r e e f o l l o w i n g c o n d i t i o n s p r e v a i l : (1)  The tax must be capable of f a i r l y easy  collection.  (2)  The commodity taxed must be l a r g e l y consumed.  25.  (3)  The demand f o r the commodity must be so s t a b l e t h a t a f a i r l y heavy r a t e of t a x can be without  Taxation of The  destroying  imposed  consumption.  Necessaries commodities which f u l f i l  are c h i e f l y n e c e s s a r i e s ,  1  the l a s t two  conditions  f o r these are l a r g e l y consumed  people are not l i k e l y to economize on them to any g r e a t i f t h e i r p r i c e s r i s e moderately.  and extent  A small r i s e i n the p r i c e of  bread o r sugar or c o f f e e i s not l i k e l y to check demand, and all  n e c e s s a r i e s , a f a i r l y i n e l a s t i c demand probably  for  e x i s t s un-  l e s s there i s an obvious s u b s t i t u t e e a s i l y a v a i l a b l e .  Taxes on  c o n v e n t i o n a l n e c e s s a r i e s have some of the same advantages. Tobacco and  a l c o h o l are l a r g e l y consumed by a l l c l a s s e s , w h i l e  the demand f o r them (although they are not s t r i c t l y  necessaries) 2  is all  i n e l a s t i c enough to stand  considerable taxation.  such commodities would seem t o be  tion.  Technically,  s u i t a b l e objects f o r taxa-  But the great o b j e c t i o n to a l l taxes on a r t i c l e s of s t a p l e  consumption i s t h a t they are l i k e l y to f a l l more h e a v i l y on  the  3  poor than on the r i c h . on f o o d s t u f f s and  This i s t r u e , but i n p r a c t i c e , taxes  such c o n v e n t i o n a l n e c e s s a r i e s as tobacco  a l c o h o l seem to have proved the most remunerative.^ be no doubt t h a t taxes of t h i s k i n d may  There  be made t o y i e l d  and can  very  l a r g e revenues, but the g r e a t argumeht a g a i n s t them i s t h a t , as they cannot be a d j u s t e d to d i f f e r e n c e s i n means, they throw an 1. Plehn, C. C , I n t r o d u c t i o n t o P u b l i c Finance, p. 137 2. I b i d . , p. 138 3. Loc. c i t . 4. Loc. c i t .  26.  i n e q u i t a b l e burden on the poor. ventional necessaries case a g a i n s t  The case a g a i n s t taxes on con-  on these grounds i s not so s t r o n g as the  the t a x a t i o n o f n e c e s s a r i e s .  Case f o r I n d i r e c t Taxes In s p i t e o f the development o f d i r e c t taxes, taxes are s t i l l  used i n a l l t a x systems.  indirect  Their retention i s  g e n e r a l l y defended on the grounds t h a t they a r e a means o f reaching  the poorer c l a s s e s on whom i t i s d i f f i c u l t  d i r e c t taxes.  to levy  In a democratic country, i t i s argued t h a t i t  is essential for p o l i t i c a l  s e c u r i t y t h a t a l l c l a s s e s should be  made t o c o n t r i b u t e t o t a x a t i o n .  However, i t i s p o s s i b l e t o  make a f a i r l y strong economic case f o r the use o f some i n d i r e c t taxes.  They serve as a u s e f u l complement t o d i r e c t  taxes;  1  there can be no doubt t h a t some such taxes can be l e v i e d conv e n i e n t l y , a r e extremely p r o d u c t i v e  and a r e probably p a i d w i t h 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 f o r m a i n t a i n i n g  indirect  taxes i s , undoubtedly, t h a t i t i s always important t o have a  3 f a i r l y broad b a s i s f o r revenue. one  point i s l i k e l y  Too heavy t a x a t i o n a t any  to have d i s a s t r o u s r e s u l t s .  centive to fraud, t o a l l kinds  o f i n d i r e c t evasion which can-  not be regarded as f r a u d u l e n t , and i s l i k e l y off  the source o f the tax'.  I t i s an i n -  A t the present  u l t i m a t e l y to c u t  time, the h i g h  rates  of income tax seem t o be g e t t i n g near t h i s p o i n t , and we have the p e r i o d i c appearance o f a p p a r e n t l y  highly respectable  citi-  zens i n the p o l i c e c o u r t s charged w i t h extensive f r a u d s . The 1. Hunter, M.H. and A l l e n , H.K., P r i n c i p l e s o f P u b l i c Finance.p.193 2. L u t z , H.L., P u b l i c F i n a n c e , p. 692 3. I b i d . , p. 343  27. annual l o s s to income tax through e v a s i o n i s c o n s i d e r a b l e seems to be  and  inevitable.  There seems to be no doubt t h a t , u n l e s s there i s a measure of consent on the p a r t of the taxpayers, any tax i s d i f f i c u l t .  The  the c o l l e c t i o n  excess p r o f i t s tax probably  of  only  worked as w e l l as i t d i d because of a c e r t a i n measure of consent on the p a r t of those who  paid i t . Wherever a tax becomes  so h i g h t h a t i t s r a t e s become extremely burdensome, the  dif-  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 a t t i t u d e of the taxpayers, w h i l e  the y i e l d of the tax i s l i k e l y to  reduced by the r e a c t i o n of the tax on p r o d u c t i o n .  be  The use  .some i n d i r e c t t a x a t i o n i s v a l u a b l e because i t enables  of  increased  revenue to be r a i s e d at d i f f e r e n t p o i n t s i n s t e a d of by e x c l u s i v e c o n c e n t r a t i o n on the great d i r e c t  taxes.  L i m i t a t i o n s o f I n d i r e c t Taxes A l t h o u g h i n d i r e c t taxes may of revenue and  be used to r a i s e some p a r t  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 g e n e r a l l y l i m i t e d , and exaggerate t h e i r p o s s i b i l i t i e s . i n g l a r g e revenues economically  i t i s important  not  to  The number of commodities y i e l d i s s m a l l , and  these c o n s i s t  mainly of c o n v e n t i o n a l n e c e s s a r i e s 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 c r u s h i n g burden on the poor.  I f , on the other hand, the taxes are extended to many  other k i n d s of commodities, t h i s may  l e a d to the i n c l u s i o n of  un-  2  productive taxes.  I t may,  under present  p o s s i b l e to r e l y too g r e a t l y on one  1. 2.  Plehn, C. C , I b i d . , pp.  or two  day  c o n d i t i o n s , be  great taxes and  thus  I n t r o d u c t i o n to P u b l i c Finance, pp. 137-138  134-143  28.  impose too heavy burdens a t c e r t a i n p o i n t s , but i t i s c e r t a i n l y e n t i r e l y impossible  t o r a i s e the great modern revenues without  r e l y i n g on d i r e c t taxes f o r the bulk o f them. A P r a c t i c a l Advantage of t h e Income Tax One l a s t t e c h n i c a l advantage o f the income tax may n o t i c e d i n t h i s connection.  be  Where new i n d i r e c t taxes are needed,  new a d m i n i s t r a t i v e charges are n e c e s s a r i l y i n c u r r e d and, f u r t h e r , t h e i r development may  take time.  Where the n e c e s s a r y  admin-  i s t r a t i v e machinery i s once i n e x i s t e n c e , the y i e l d o f the income t a x can be i n c r e a s e d r a p i d l y (and without i n c r e a s e i n a d m i n i s t r a t i v e charges) by a simple rates.  corresponding i n c r e a s e i n the  T h i s e l a s t i c i t y i s o b v i o u s l y a g r e a t advantage where  sudden i n c r e a s e s i n revenue are needed.  CHAPTER IV TAXATION AND PRODUCTION D i f f e r e n t Uses of Income We have seen t h a t 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 f u t u r e p r o d u c t i v i t y o f the country.  Income spent on necessary consumption i s , from the  p o i n t o f view o f f u t u r e p r o d u c t i o n ,  money i n v e s t e d  i n main-  t a i n i n g the country's human c a p i t a l , and any d e t e r i o r a t i o n i n t h i s i s l i k e l y t o reduce production."*"  Income which i s not  consumed but i n v e s t e d f o r a f u t u r e r e t u r n i s expected t o add to f u t u r e output. does not,  Income spent on p u r e l y l u x u r y  expenditure  s t r i c t l y speaking, i n c r e a s e t h e producing  capacity  of e i t h e r human o r c a p i t a l m a t e r i a l , and to check i t w i l l h o t r e a c t d i r e c t l y upon f u t u r e p r o d u c t i v i t y . the p o i n t o f view o f n a t i o n a l p r o d u c t i o n p o i n t o f view t o be considered use  I t would seem from (which i s n o t the o n l y  i n p r a c t i c e ) t h a t the i n d i v i d u a l  o f income the country can best a f f o r d t o do without i s the  unproductive e x p e n d i t u r e .  I t follows, therefore, that i f taxa-  t i o n d i s c r i m i n a t e s a g a i n s t any i n d i v i d u a l uses o f wealth, the l o s s t o p r o d u c t i o n w i l l be l e s s when the unproductive than the p r o d u c t i v e 1.  Dalton,  uses are d i s c o u r a g e d .  H., P r i n c i p l e s o f P u b l i c F i n a n c e , p. 103  rather  30 Expenditure Taxes In p r a c t i c e , i t i s not easy to f i n d r e v e n u e - y i e l d i n g taxes which f a l l  c h i e f l y on the unproductive uses o f w e a l t h .  The most u s u a l method has been t o l e v y s p e c i a l t a x a t i o n on the l u x u r y commodities."''  Then, people would almost  certainly  spend more on t h i s commodity than they d i d b e f o r e , f o r many of them would regard i t as a n e c e s s a r y . h i g h t h a t consumption was  I f the tax were so  g r e a t l y reduced, t h i s would check  i t s y i e l d and would condemn i t from the p o i n t of view of the M i n i s t e r of Finance, whose f i r s t n e c e s s i t y i s to get  revenue.  When i n d i v i d u a l forms of expenditure are taxed., t h e r e i s a l ways t h i s danger.  Expenditure may  commodity to another  simply be d i v e r t e d from  one  ( i f o n l y one were taxed, or i f one were  taxed much more h e a v i l y ) , a r e s u l t which would p r o b a b l y  cause  some l o s s i n s a t i s f a c t i o n to the consumers, and would a f f o r d no corresponding g a i n t o  revenue.  The l a s t danger might be avoided i f t a x a t i o n were l e v i e d not upon i s o l a t e d commodities but upon a l l k i n d s o f expenditure which can be c o n s i d e r e d u n p r o d u c t i v e . t h i s was  attempted  of encouraging  approximating  i n the l u x u r y taxes which were imposed i n  many c o u n t r i e s d u r i n g the war. of the revenue,  Something  During t h i s p e r i o d , the need  the shortage of n e c e s s a r i e s and the  importance  saving made the case f o r t a x i n g unproductive  expenditure e x c e p t i o n a l l y s t r o n g .  E x p e r i e n c e , however, con-  firmed the b e l i e f that t a x a t i o n of t h i s k i n d would p r e s e n t 1.  D a l t o n , H.,  P r i n c i p l e s o f P u b l i c F i n a n c e , p.  121  31. difficulties  of both d e f i n i t i o n and administration.  On the other hand, wherever taxes can be  successfully-  imposed on i n d i v i d u a l forms of unproductive expenditure,  there  i s a case i n t h e i r favour (from the productive standpoint) fact that they h i t the l e s s productive uses of wealth. taxes are not without disadvantages.  i n the  Such  They may be p a r t l y met  by wealth drawn from other sources and thus i n d i r e c t l y react on p r o d u c t i v i t y .  By discriminating against one kind of ex-  penditure, they may check i t s development and may thus a l t e r the natural development of production.  A l l this i s t r u e .  But the real point i s that taxes almost inevitably discriminate against some use of wealth by i n d i v i d u a l s , 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 productive uses of wealth. As a matter of p r a c t i c e , there seems ho doubt that the bulk of our revenue w i l l have to come from direct taxes because of the p r a c t i c a l d i f f i c u l t y of finding s u f f i c i e n t  indi-  rect taxes y i e l d i n g considerable revenue without encroaching on necessaries.  But where taxable unproductive revenue can  be found, there i s much to be said for taxing i t .  In p r a c t i c e ,  however, taxes on commodities have tended to f a l l on necessary rather than unnecessary a r 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 d i s c r i m -  inating tax has been generally accepted,  and taxes on income  32. have been defended on the grounds t h a t duals f r e e to s e l e c t t h e i r own unnatural  t w i s t to p r o d u c t i o n .  the main, sound.  (as they l e a v e  Indivi-  economies) they do not g i v e  any  The g e n e r a l argument i s , i n  I t i s , however, not t r u e t h a t an income  tax does not show some d i s c r i m i n a t i o n between d i f f e r e n t uses of w e a l t h . 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 n e c e s s a r i e s by l e a v i n g a minimum o f income f r e e  from tax."*"  Apart  from these  exemptions, income taxes do  not  a p p a r e n t l y 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  l o o k i n g at the matter from a l o n g range p o i n t of view; i f yog spend the income, you have f i n i s h e d w i t h the tax; i f you i n v e s t so t h a t your investment becomes a source new  income becomes l i a b l e to t a x .  income, t h i s  F u r t h e r , as t h i s income w i l l  be d e r i v e d from an investment, i t may than earned income.  of new  be taxed a t a h i g h e r  F i n a l l y , as the income from the new  ment w i l l i n c r e a s e the t o t a l income of the taxpayer,  rate  invest-  i t may  happen t h a t under a p r o g r e s s i v e tax the i n c r e a s e i n t a x a t i o n i s p r o p o r t i o n a t e l y much g r e a t e r than the i n c r e a s e i n income. p  Many people s i n c e the time of John S t u a r t M i l l t h a t savings  held  should be exempted from income tax; t h a t , as  savings of one  year c o n s t i t u t e the new  they should be regarded t a x a t i o n as income.  as c a p i t a l and  the  c a p i t a l of the next, hence exempted from  T h i s argument d e r i v e s i t s f o r c e from the  f a c t t h a t c a p i t a l i s e s s e n t i a l f o r the development of i n d u s t r y , 1. C f . ,  2.  Canadian and U n i t e d S t a t e s Income Tax  M i l l , J . S.,  Acts  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 t h a t anything checking the supply of c a p i t a l must r e a c t upon f u t u r e p r o d u c t i o n .  Unless some such exemption i s g i v e n ,  an income tax must tend to encourage spending  a t the expense  of s a v i n g , and although t h i s i s p r a c t i c a l l y unimportant  when  the r a t e s o f t a x a t i o n are low,  important  i t becomes i n c r e a s i n g l y  as the r a t e s i n c r e a s e . The g e n e r a l exemption of savings has i n t o the sphere  of p r a c t i c a l p o l i t i c s .  so f a r not  entered  There are two  important  arguments a g a i n s t a g e n e r a l exemption, apart from the  practical  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  the bulk of the s a v i n g belong to the w e a l t h i e r class."**  To  exempt t h e i r savings would seen to g i v e them an a d d i t i o n a l r a t h e r u n f a i r advantage inaccumulating w e a l t h . to over-emphasize t h i s . of encouraging  people who  The  It i s possible  have the power e i t h e r to save or spend  l i k e l y to i n c r e a s e p r o d u c t i o n .  which i s (on the whole) most  Secondly,  d i f f e r e n t i a t i o n a g a i n s t saving,has  heavy.  and  exemption would be simply a method  to e x e r c i s e t h a t power i n the way  important  do  the r e s u l t o f the  o n l y become p r a c t i c a l l y .  s i n c e the r a t e s of t a x a t i o n became e x t r a o r d i n a r i l y  I f savings are exempted, the problem i s then to f i n d  o t h e r sources o f revenue.  The  r e a l d i f f i c u l t y i s not to show  the d e f e c t s 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  w i t h l e s s bad e f f e c t s on p r o d u c t i o n . Income Tax: Earned  and Unearned Income  In most income tax 'systems,  earned  incomes are  charged  1. Pigou, A. C , A Study i n P u b l i c F i n a n c e , 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 P u b l i c Finance p. 284 L u t z , H. L., P u b l i c Finance, pp. 490-491  34.  at s l i g h t l y lower rates than incomes from investment. may emphasize the discouragement to saving.  This  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 i n the case of a permanent income.  To some extent, the lower rate may be said  to' make saving possible.  The d i s t i n c t i o n seems a f a i r one,  especially where the earned incomes are s m a l l .  I t is  interest-  ing to note, that i n some European countries three rates of tax are charged: one on earned, one on unearned and one on mixed incomes."''  I t a l y 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  is  lower than the ordinary rate on earned incomes and i s apparently a recognition of the fact that as the government pays the s a l aries of those o f f i c i a l s i t knows what t h e i r earned incomes are, and consequently they do not stand on a f a i r competitive footing with other taxpayers when i t comes to making t h e i r income tax returns I Income Tax: Incentives  1,  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 tax3  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. D a l t o n . , H . , P r i n c i p l e s of Public Finance, p. 102  35.  t h i s question, i t i s worth emphasizing that the results are onlyl 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 ent i r e l y new importance during the l a s t t h i r t y years, which have seen the most extraordinary increases both i n the t o t a l amount of revenue raised by the tax and i n the rates imposed.  In  considering the effect upon the incentives to production, three possible cases may r e s u l t . (1)  People's willingness to increase t h e i r incomes may  not be affected at a l l — they may.be just as ready to work and save for the smaller as the l a r g e r increase.  Where the rates  are low, the influence would probably be n e g l i g i b l e ; 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 e n t i r e l y 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 t h e i r incomes.  In the same way, when  people are saving for old age or to make provision for a wife or c h i l d r e n , a tax may make i t necessary to save more before they can a t t a i n a net income which guarantees them reasonable comfort.  But the people who can only maintain t h e i r 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 l e s s wealthy classes whose contribution to saving constitutes only a small part of 2 the whole. Further, i f the tax i s maintained for a period 1. Dalton, H . , P r i n c i p l e s of Public Finance, pp. 106-113 2. I b i d . , p. 112  36. of y e a r s , the standard conditions.  o f l i f e may  be m o d i f i e d to meet the  new-  F i n a l l y , even i f people were w i l l i n g t o i n c r e a s e  t h e i r incomes and  t h e i r c o n t r i b u t i o n t o s a v i n g , i t i s by  no  means i n v a r i a b l y p o s s i b l e f o r the o r d i n a r y i n d i v i d u a l to do (3)  The  e f f e c t of the tax may  w i l l i n g to work and  save.  1  be to make people  T h i s r e s u l t would be more  where the r a t e s are h i g h , and  i s thus more important  upon the supply of new g r e a t , and  less  probable i n a pro-  g r e s s i v e tax f o r the l a r g e r than the s m a l l e r incomes. l a r g e r incomes are the main sources of new  so.  As  the  s a v i n g , the r e a c t i o n  c a p i t a l i s l i k e l y to be  particularly  i s emphasized by the f a c t than an income tax  (as  we  have a l r e a d y said) d i s c r i m i n a t e s to some extent i n favour of spending. est  F u r t h e r , as the h e a v i e s t t a x a t i o n f a l l s on the h i g h -  incomes, the r e c i p i e n t s of which are most l i k e l y to c o n t r o l  i n d u s t r y , there i s some f o r c e i n the argument t h a t the heavy t a x a t i o n of such incomes w i l l have more e f f e c t i n checking d u c t i o n than t a x a t i o n of s m a l l e r incomes, and may p u l s o r y i d l e n e s s upon o t h e r taxpayers who  pro-  enforce com-  would be w i l l i n g to  c o n t r i b u t e to p r o d u c t i o n . Income Tax:  C a p a c i t y t o Produce  Whatever the e f f e c t o f a h i g h income tax i n reducing people's w i l l i n g n e s s , there can be no q u e s t i o n t h a t h i g h r a t e s must reduce t h e i r c a p a c i t y to c o n t r i b u t e t o f u t u r e p r o d u c t i o n . A h i g h r a t e on the poor would cut i n t o t h e i r c a p a c i t y to p r o -  2 duce by r e d u c i n g expenditure  1. 2.  necessary f o r e f f i c i e n c y .  D a l t o n , H . , " P r i n c i p l e s of P u b l i c Finance, pp. I b i d . , p. 103  106-113  A  37  h i g h rate on h i g h incomes must almost c e r t a i n l y reduce t h e i r c a p a c i t y t o c o n t r i b u t e t o saving.''"  Even i f i t were p o s s i b l e t o  meet the tax e n t i r e l y out of economies i n unnecessary  expendi-  t u r e , i t i s improbable t h a t people would be w i l l i n g t o reduce t h e i r expenditure  v e r y f a r below t h e i r customary standard  out reducing the amount o f t h e i r s a v i n g . comes n o r m a l l y  with-  As the l a r g e s t i n -  c o n t r i b u t e the l a r g e s t p r o p o r t i o n t o s a v i n g  (having the l a r g e s t s u r p l u s t o save), the f a c t t h a t the h e a v i e s t r a t e s f a l l on them i s l i k e l y t o l e a d t o v e r y . c o n s i d e r a b l e r e ductions i n saving.  I n t h i s case, c o r p o r a t i o n s as w e l l as i n -  d i v i d u a l s are a f f e c t e d .  The c a p a c i t y of c o r p o r a t i o n s t o save  and  when t h e i r n e t p r o f i t s are reduced  t o expand i s reduced  by  heavy t a x a t i o n . Income Tax: Investment Abroad The  q u e s t i o n o f how f a r the r a t e o f r e t u r n from i n v e s t -  ment a f f e c t s the accumulation  o f s a v i n g i s one t h a t has never  had a s a t i s f a c t o r y answer, but experience  has shown t h a t i f ,  i n one country, any f a c t o r reduces the r a t e s earned by c a p i t a l as compared w i t h c a p i t a l abroad, t h i s w i l l have the e f f e c t o f checking f o r e i g n investments, i n v e s t o r s t o i n v e s t abroad.  and i s l i k e l y t o encourage home I t i s o f t e n argued t h a t a h i g h  income t a x , by r e d u c i n g the net r e t u r n from investments, check investment  may 2 i n the t a x i n g country i n both": these ways.  P r o f e s s o r Pigou-^ has p o i n t e d out t h a t i n an o l d country 1. D a l t o n , H., P r i n c i p l e s o f P u b l i c Finance, p. 105 2. I b i d . , p. 125 3. Pigou,- A. C , A Study i n P u b l i c Finance, pp. 189-191 D a l t o n , op. c i t . , p.125  38. l i k e England where t h e r e i s n o r m a l l y l i t t l e f o r e i g n investment, the  f i r s t r e s u l t w i l l be unimportant, w h i l e the e x i s t i n g t a x a -  t i o n cannot a f f o r d a s t i m u l u s to investment abroad as a l l i n t e r e s t from such investment payable t o r e s i d e n t s i n England I s l i a b l e to t a x .  I f the c a p i t a l i s t  t r a n s f e r r e d both h i m s e l f 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 w i t h o u t being l i a b l e to  tax.  As the w i l l i n g n e s s o f the wealthy t o 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 g r e a t , the i n f l u e n c e of heavy taxes i n t h i s d i r e c t i o n i s not important. Rather, i t i s probable t h a t heavy t a x a t i o n w i l l  check  r a t h e r than i n c r e a s e the f r e e i n t e r n a t i o n a l investment o f c a p i tal,  f o r income from such investment may  be s u b j e c t t o "double  t a x a t i o n " (both i n the country o f o r i g i n and the country o f residence)Some of  i n t e r n a t i o n a l agreement as to the treatment  such income i s becoming i n c r e a s i n g l y important as income  taxes develop i n use and magnitude.  Other t h i n g s being e q u a l ,  i f double t a x a t i o n checks f r e e investment, t h i s w i l l a l s o r e duce p r o s p e r i t y 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 u s e s . Inheritance  Taxes  The second method of d i r e c t t a x a t i o n which has been i n c r e a s i n g l y used d u r i n g the l a s t  f i f t y years i s t a x a t i o n of pro-  p e r t y p a s s i n g a t death, o r d i n a r i l y c a l l e d Taxes of t h i s k i n d may  succession duties.  be graduated on any one  (or on any  1. D a l t o n , H., P r i n c i p l e s o f P u b l i c Finance, p. 125 Plgou,-A.- C , A Study i n P u b l i c F i n a n c e , pp. 189-191  39. combination)  of t h r e e p r i n c i p l e s .  They may  v a r y w i t h the s i z e  of the e s t a t e l e f t , w i t h the degree of r e l a t i o n s h i p o f those  who  i n h e r i t the p r o p e r t y of the t e s t a t o r , or w i t h the amount i n h e r i t e d 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  h e a v i l y on l a r g e accumulations of wealth, the second on i n h e r i t a n c e by d i s t a n t h e i r s , w h i l e the t h i r d d i s c r i m i n a t e s a g a i n s t the l e a v i n g of accumulated wealth i n huge sums t o one or two individuals.  The t h i r d type of g r a d u a t i o n i s l i k e l y  (where  the r a t e s are heavy) to d i s c r i m i n a t e i n f a v o u r of more equal d i s t r i b u t i o n of p r o p e r t y .  In Canada,"'" the i n h e r i t a n c e tax  combines the above methods of computation  t o t r y and  a f a i r and reasonable b a s i s of t a x a t i o n .  How  affect  establish  f a r death d u t i e s  the w i l l to accumulate wealth i s (as i n the case of  income tax) a d i f f i c u l t  question.  the  Both t a x e s , of course, d i f -  f e r e n t i a t e i n one sense a g a i n s t l a r g e accumulations,  because  the l a r g e r the w e a l t h or income, the l a r g e r i s the t a x p a i d . In some ways, death d u t i e s may  prove l e s s of a d e t e r r e n t  —  they are a d e f e r r e d t a x , and most people v i s u a l i z e the d i s t a n t 2  l e s s c l e a r l y than the immediate f u t u r e . imposed a t a time which may  F i n a l l y , they are  r e a s o n a b l y be expected t o a f f e c t  the i n d i v i d u a l l e s s v i t a l l y than taxes imposed d u r i n g h i s l i f e -  ..  time.  3  Taxes oh Land  Values  The p o s s i b i l i t y of heavy t a x a t i o n r e d u c i n g the economic 1. Dominion S u c c e s s i o n Duty A c t , June 14, 1941 2. D a l t o n , I I . , P r i n c i p l e s of P u b l i c Finance, pp. 3. Loc. c i t .  113-115  40.  i n c e n t i v e t o p r o d u c t i o n has been g i v e n i n c r e a s i n g importance w i t h the h i g h e r r a t e s o f t a x a t i o n .  N e i t h e r death d u t i e s n o r  income t a x a r e f r e e from t h i s danger.  I f , however, i t were  p o s s i b l e t o i s o l a t e c e r t a i n p a r t s of wealth, which i t could be shown were not the reward o f any u s e f u l economic s e r v i c e , and which t h e r e f o r e were not necessary t o m a i n t a i n the supply o f such s e r v i c e , these could be taxed without Take a concrete example —  a f f e c t i n g production.'  the value o f unimproved l a n d does  not depend upon any work o r c a p i t a l put i n t o i t by the owner. The  owner o f a p i e c e o f l a n d near a growing i n d u s t r i a l town has  a v a l u a b l e p o s s e s s i o n simply because the growth o f the town has g i v e n value to h i s l a n d as an " e l i g i b l e b u i l d i n g s i t e " . town had n o t grown up, the l a n d would s t i l l value would be very a p p r e c i a b l y l e s s .  I f the.  be t h e r e , but i t s  When a t a x i s a p p l i e d on  l a n d v a l u e , t h e r e a r i s e two main o b j e c t i o n s : (1)  I t i s not always easy i n p r a c t i c e t o d i s t i n g u i s h  between t h a t p a r t o f the v a l u e of l a n d which i s and t h a t which i s not due t o "improvements", and taxes which  fall  on the former would be l i k e l y t o check the development of l a n d . (2)  Land d i f f e r s from o t h e r k i n d s o f c a p i t a l i n some  ways, but i n common w i t h other c a p i t a l i t i s bought and sold.  To put a s p e c i a l t a x upon l a n d i s simply t o put  a s p e c i a l t a x upon one k i n d o f investment  and seems an  i n e q u i t a b l e d i f f e r e n t i a t i o n a g a i n s t one c l a s s o f i n v e s t o r s . 1. Pigou, A. C , A Study i n P u b l i c Finance, pp. 171-177 2. I b i d . , p. 177  2  41  However, i t seems t h a t , i n most p r o g r e s s i v e s t a t e s , a t a x on l a n d value ( u s u a l l y a p p l i e d at the l o c a l government l e v e l ) i s here t o s t a y —  i n f a c t i t c o n t r i b u t e s handsomely t o the s t a t e  revenues. Excess P r o f i t s Tax The i n c r e a s e s i n l a n d v a l u e s a r e n o t the o n l y cases where i n d i v i d u a l s f i n d themselves  i n r e c e i p t o f an unearned  increment.  B u s i n e s s e s , e s p e c i a l l y businesses w i t h m o n o p o l i s t i c power,  1  may  show p r o f i t s f a r above those necessary to a t t r a c t t h e c a p i t a l and e n t e r p r i s e to m a i n t a i n p r o d u c t i o n .  Wherever c o n s i d e r a b l e  changes i n demand take p l a c e , the p r o f i t s o f a l l b u s i n e s s e s able t o take advantage o f the change a r e l i k e l y t o c o n t a i n an element o f s u r p l u s . The war c o n d i t i o n s w i t h the enormous government demands, the g e n e r a l shortage o f c e r t a i n goods, and the unprecedented p r i c e 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 h i g h e r than were necessary t o main2 t a i n output.  Temporarily, many producers  found themselves i n  the p o s i t i o n o f monopolists and, faced w i t h an extremely  rigid  government demand, were i n a p o s i t i o n to make almost any terms they  wished. The attempt  t o impose a s p e c i a l tax upon war p r o f i t s  o r i g i n a t e d i n the n e u t r a l Scandanavian  countries i n the early  s p r i n g o f 1915 t o reach the enormous p r o f i t s that e x p o r t e r s o f f o o d s t u f f s i n those c o u n t r i e s were making from t h e i r s a l e s t o 1. D a l t o n , H., P r i n c i p l e s o f P u b l i c Finance, p. 110 2. I b i d . , p. 87  42.  Germany.  By 1917, a special tax on high p r o f i t s had spread  to several countries and during the Second World War, the pro-, cedure was almost u n i v e r s a l .  In the f i r s t instance, the  sug-  gestion was generally to tax p r o f i t s which might be d i r e c t l y traced to war conditions, but the technical d i f f i c u l t i e s  of  distinguishing war from other p r o f i t s generally led to. the adoption of a tax imposed upon a l l p r o f i t s  (in excess of a deter-  mined normal rate of p r o f i t ) made during the war p e r i o d .  2  From the productive standpoint, the tax was generally subjected to c r i t i c i s m 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 p r i c e with the net r e s u l t i n addition to the general d i f f i c u l t i e s  that,  involved by the r i s i n g  p r i c e s , the government (as chief purchaser) was compelled to pay a large part of i t s own tax.  Apart from t h i s , 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 c r i t i c i s m s , since the. producers received t h e i r normal p r o f i t i n any case, there seems l i t t l e need to increase prices to an extreme.  It i s 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 . r a i s e d price d i r e c t l y . Re the second c r i t i c i s m , there can be no doubt that the motives to economy were reduced.  On the other hand, the high  1. "Excess P r o f i t s 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 t a x meant t h a t l i b e r a l any  e x p e n d i t u r e on  repairs,  a l l o w a n c e s had  renewals,  (in fact)  general  expenses.  limited  t h e power o f p r o d u c e r s t o t a k e a d v a n t a g e  can be no d o u b t  A l t h o u g h t h e war  or  t o be  that  The war  atoned  c o s t been i n e f f e c t enormous y i e l d  any way  f o r many o f i t s d e f i c i e n c i e s .  profits,  to the wealth  the f a c t  more  As  s t r o n g e r , and  that  carried not a  Tax  to  large  d u r i n g the  i t s yield  be l e s s .  t h e t a x was  o f i n d i v i d u a l s was  had  there  a permanent t a x ,  In the  in  more  special  not adjusted i n  a c c e p t e d ; y e t as  the d e t e r m i n a t i o n o f normal  w o u l d p r e s e n t even more c o m p l i c a t i o n s and criticism.  of  government.  of the Excess P r o f i t s  permanent t a x , b o t h t h e s e and fits  b o r n by t h e  circumstances would c e r t a i n l y  c a s e o f war  kind  of t h i s ,  e x p e n d i t u r e on t h e s e l i n e s was  t h e o b j e c t i o n s t o i t w o u l d be normal  any  c o n d i t i o n s t o some e x t e n t  a p o i n t w h i c h w o u l d n o t have been c o n t e m p l a t e d part of the  given f o r  be  open t o  a proeven  CHAPTER V OTHER ECONOMIC CONSIDERATIONS The S h i f t i n g of T a x a t i o n Where a tax t h r e a t e n s t o reduce the supply of any  neces-  sary economic s e r v i c e or commodity, i t i s u s u a l l y s h i f t e d away from the producers, even i f i t i s imposed on them i n the instance.  By the i n c i d e n c e o f taxes i s meant the f i n a l  first resting-  p l a c e 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 tax on to someone e l s e .  1  of the  S h i f t i n g g e n e r a l l y takes p l a c e 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 b e a r i n g the impact adds the t a x to the p r i c e of the goods he s e l l s .  S h i f t i n g i s thought t o take p l a c e most  commonly a l o n g the l i n e of exchanges by which a commodity i s moved from the producer of raw m a t e r i a l s t o the f i n a l  consumer.  3 But s h i f t i n g may  a l s o be backward  i n the form of a r e d u c t i o n  i n the p r i c e of raw m a t e r i a l s purchased by the p r o c e s s o r . 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  A the  case where the present owner of a commodity absorbs the taxes which i t s f u t u r e owner must pay. When the commodity i s s o l d , 1. Seligman, E.R.A., The S h i f t i n g and Incidence of T a x a t i o n , p . l 2.  3.  I b i d . , p. 3  Loc. c i t . 4. I b i d . , p. 4  45  all  the p r e d i c t a b l e f u t u r e taxes on i t a r e d i s c o u n t e d 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 p o s s i b l e , the t a x f a l l s on the owners o r producers o f the taxed commodity. tax  upon r e n t does not a f f e c t the supply o f l a n d , and a t a x  upon economic r e n t r e s t s on the landowner. the of  A  What i s more, i f  o r i g i n a l owner s e l l s , the buyers w i l l know o f the e x i s t e n c e the tax, and the p r i c e they a r e w i l l i n g to-pay w i l l be c o r -  r e s p o n d i n g l y reduced.  Future buyers w i l l  be r e s p o n s i b l e f o r the  annual payment o f the tax, but i t represents, no r e a l burden t o them as i t has been allowed f o r i n the purchase Shifting of Indirect  price.  1  Taxes  Economic f o r c e s o n l y work themselves out g r a d u a l l y , and even where a t a x i s imposed that i t w i l l  w i t h the e x p e c t a t i o n and i n t e n t i o n  be s h i f t e d 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.  I n the case o f a t a x imposed' on a com-  modity produced i n the t a x i n g country, the u s u a l procedure i s for  the t a x t o be c o l l e c t e d from the producer, i t being expected  t h a t he w i l l  r e f u n d h i m s e l f by a p r o p o r t i o n a t e i n c r e a s e o f p r i c e 2  to  the consumers.  However, i f the p r i c e i s r a i s e d , t h i s i s  l i k e l y to check the demand both by i n c r e a s e d economy i n the use of the 1.  the taxed a r t i c l e , use of untaxed  and by encouraging (wherever  substitutes.  possible)  Where the decrease i n demand  Seligman, E.R.A., The S h i f t i n g and I n c i d e n c e o f T a x a t i o n , pp. 174-183 2. I b i d . , pp. 372-373 and pp. 379-385  46  Is c o n s i d e r a b l e , the r e s u l t may be t h a t a l a r g e p r o p o r t i o n o f fixed capital w i l l  be thrown out o f p r o d u c t i o n and e n t a i l  s i d e r a b l e l o s s t o producers.  I n these  circumstances,  con-  i t is  p o s s i b l e t h a t i t may be to t h e i r i n t e r e s t t o i n c r e a s e p r i c e temp o r a r i l y by l e s s than the f u l l amount of the t a x , a c c e p t i n g a lower r a t e o f p r o f i t i n p r e f e r e n c e p a r t o f the demand.  to cutting o f f a considerable  The producers'  p o s i t i o n 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 t o a d j u s t without  loss.  supply  A c t u a l l y , we a r e accustomed t o a new o r i n c r e a s e d  tax being f o l l o w e d by an immediate p r o p o r t i o n a t e  increase i n  p r i c e , but t h i s i s p a r t l y accounted f o r by t h e f a c t t h a t 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 Taxes on Developing  demand.  Industries  A t a x imposed on a commodity which can be produced more economically  on a l a r g e than a small s c a l e may, by checking t h e  development o f the i n d u s t r y , f o r c e up the p r i c e to the consumer by more than the amount o f the t a x .  Such t a x a t i o n i s e s s e n t i a l -  l y w a s t e f u l , f o r the l o s s t o the taxpayers g a i n t o revenue. stances  I n p r a c t i c e , probably  i s g r e a t e r than the  the more important i n -  occur not where e x i s t i n g economics a r e l o s t by the r e -  d u c t i o n o f the amount produced, but where a t a x (by checking f u r t h e r expansion) d e l a y s the i n t r o d u c t i o n o f p o s s i b l e new economies.  A general  case a g a i n s t a tax on a d e v e l o p i n g man-  u f a c t u r i n g i n d u s t r y can always be made on these Import and Export  grounds.  Duties  Taxes which a r e imposed on imported and exported have a p r a c t i c a l advantage i n t h a t they a r e normally  goods  easy t o  47 c o l l e c t , but they have gained popular favour mainly on o t h e r grounds.  A l l customs d u t i e s seem to o f f e r the tempting  i t y of "making the f o r e i g n e r p a y " ,  1  possibil-  w h i l e import d u t i e s have  achieved p o p u l a r i t y as a method of " p r o t e c t i n g home i n d u s t r i e s " . An import duty., , i t should be n o t i c e d , i s p r o t e c t i v e , o n l y i f i t d i f f e r e n t i a t e s a g a i n s t f o r e i g n producers by imposing a tax on •' imported products without a corresponding e x c i s e tax on homeproduced  s u p p l i e s 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 e x c e p t i o n a l l y s t r o n g p o s i t i o n of being the o n l y a v a i l a b l e market f o r a f o r e i g n commodity, and  3 at the same time having a v e r y e l a s t i c demand f o r i t  —  in  f a c t , i t i s extremely d o u b t f u l i f a s i n g l e h i s t o r i c a l case can be c i t e d where t h e r e i s reason to t h i n k t h a t "the f o r e i g n e r " paid any c o n s i d e r a b l e p a r t of any import d u t y . In the case of an export duty, the p o s i t i o n of the producer i s weakened because  he may  f i n d h i m s e l f competing  e i g n markets w i t h o t h e r producers who tion.  are unhandicapped  in forby t a x a -  I f , however, the t a x i n g country has a monopoly (whole  or  p a r t i a l ) , and i f the demand i s urgent, the f o r e i g n consumers may  pay a p r i c e i n c r e a s e d by the amount of the t a x .  Cases of  t h i s k i n d are not unknown; e.g., C h i l e used to tax exports of n i t r a t e s before s y n t h e t i c s u b s t i t u t e s were developed. Customs D u t i e s and F o r e i g n Exchange Rates There i s a f u r t h e r c o n s i d e r a t i o n t o be taken i n t o  1. 2. 3.  account  Drummond, G. F., The Economics of I n t e r n a t i o n a l Trade Ch. 15-17 Loc. c i t . Seligman, E.R.A., The S h i f t i n g and I n c i d e n c e of T a x a t i o n , p.  375.  48.  w i t h regard t o the i n c i d e n c e of import and export d u t i e s .  In  buying and s e l l i n g between d i f f e r e n t c o u n t r i e s , not o n l y the p r i c e - l e v e l s of the two  c o u n t r i e s have to be c o n s i d e r e d but  a l s o the value of the currency of one country i n terms of the other.  I t i s o b v i o u s l y necessary, before coming to any r a -  1  t i o n a l c o n c l u s i o n as to the p r o f i t a b l e n e s s of buying goods i n England,  to know not o n l y the p r i c e i n s t e r l i n g i n England  the p r i c e i n d o l l a r s i n Canada' but a l s o the value of i n terms of d o l l a r s .  Now  and  sterling  the value of s t e r l i n g i n terms of  d o l l a r s depends p r i m a r i l y upon the r e l a t i v e demands f o r them; Anything t h a t i n c r e a s e s the demand i n Canada f o r E n g l i s h money w i l l push up the v a l u e of the pound' i n d o l l a r s —  anything i n -  c r e a s i n g the demand f o r Canadian money i n London w i l l push up i t s value i n terms of pounds. between two  c o u n t r i e s may  A tax on goods bought and  sold  have an e f f e c t upon the value of t h e i r  c u r r e n c i e s i n terms of one another by a f f e c t i n g the amount of the payments t h a t have to be made. I n the case of an import duty, the r e s u l t i s l i k e l y to  2 be t h a t the imports of the taxed goods w i l l be checked.  The  t a x i n g country w i l l have fewer payments t o make abroad, i t s demand f o r the currency o f the e x p o r t i n g country w i l l  be check-  ed, and the r e l a t i v e v a l u e of t h i s money ( e x p o r t e r ' s i n terms of importer's) w i l l f a l l .  T h i s would appear a t f i r s t to be to  the t a x i n g country's advantage, because even i f her consumers now  pay the o l d p r i c e f o r the taxed goods (say i n pounds s t e r -  l i n g ) , t h i s r e p r e s e n t s a s l i g h t l y lower p r i c e i n Canadian d o l lars. I t has been argued t h a t t h e r e i s a g e n e r a l presumption 1. Drummond, G. F., The Economics of I n t e r n a t i o n a l Trade Ch.12-17 2. Loc. c i t .  49.  i n favour o f import d u t i e s on the grounds t h a t they tend t o t u r n the f o r e i g n exchange r a t e s s l i g h t l y i n f a v o u r o f the t a x ing  country. I t should be r e a l i z e d ,  however, t h a t t h i s w i l l o n l y be.  important where the e f f e c t o f t h e t a x i s a v e r y c o n s i d e r a b l e check t o imports. ted,  F u r t h e r , as has been s u f f i c i e n t l y demonstra-  a n y t h i n g pushing up the value o f the currency o f one count-  r y i n terms of another has disadvantages  as w e l l 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 t o buy from abroad, to buy from us. it  but i t makes i t dearer f o r f o r e i g n e r s  Our g a i n as consumers i s p a r t l y  illusory,for  i s achieved a t the expense o f our export trade w i t h i t s con-  sequent  r e a c t i o n s on p r o d u c t i o n , p r o f i t s and employment.  1  1. Drummond, G. F., The Economics of I n t e r n a t i o n a l Trade, Ch. 12-18  PART  II  GOVERNMENT FINANCE IN  TIME OF WAR  CHAPTER VI WAR  FINANCE  P r i c e F l u c t u a t i o n s . Taxing and The  Borrowing  p e r i o d o f the F i r s t World War  f l u c t u a t i o n s i n world p r i c e s . r e a c t upon p u b l i c f i n a n c e .  was  one  Both r i s i n g and  1  of  f a l l i n g prices  R i s i n g p r i c e s mean t h a t the govern-  ment, l i k e every other purchaser, f i n d s the cost of goods and  s e r v i c e s i n c r e a s i n g , and  i t s d u t i e s grows as p r i c e s r i s e . c r e a s i n g money incomes (and m a l l y mean t h i s ) , there and  the taxpayer.  The  sensational  any  obtaining  the expense of c a r r y i n g out Where r i s i n g p r i c e s mean i n -  considerable  i n c r e a s e does nor-  i s some compensation both to the  treasury  same r a t e s o f tax w i l l y i e l d l a r g e r r e v -  enues, the money i s worth l e s s to the i n d i v i d u a l as w e l l as the  s t a t e , and  although the absolute  l a r g e r , the p r o p o r t i o n  new war,  taxa-  increased.  During a p e r i o d of war, creased  amount p a i d i n t a x a t i o n i s  of the n a t i o n a l income absorbed by  t i o n i s not n e c e s s a r i l y  to  government expenditure i s i n -  not o n l y by r i s i n g p r i c e s but a l s o by the  innumerable  expenses which are f o r c e d on the s t a t e by the e x i g e n c i e s and  revenue has  to the r i s i n g p r i c e s . 1. James, F. C ,  to be i n c r e a s e d No  of  f a r more than i n p r o p o r t i o n ,  government meets a l l these expenses  The Economics o f Money, C r e d i t and pp. 578 and 586  Banking,  52 by t a x a t i o n .  I n some c o u n t r i e s , i n c o n v e r t i b l e paper notes were  p r i n t e d and used t o meet p a r t o f the government's charges. P r a c t i c a l l y a l l c o u n t r i e s obtained p a r t of t h e i r revenue by loans.  I n some cases i t was p o s s i b l e f o r the b e l l i g e r e n t  count-  r i e s t o borrow abroad, and f o r e i g n debts were accumulated.  To  a g r e a t e r extent, the l o a n s were r a i s e d w i t h i n the borrowing countries —  i n t e r n a l debts were accumulated.  of the proper e x t e n t upon a comparison  1  o f borrowing  The d e t e r m i n a t i o n  i n war f i n a n c e i s dependent  of the economic e f f e c t s o f t h i s d e v i c e w i t h  f e a s i b l e a l t e r n a t i v e s ; namely, t a x a t i o n and the issuance o f irredeemable paper money. Borrowing  i n war time, e s p e c i a l l y when repeated l o a n s  are needed, i s g e n e r a l l y borrowing  on an u n f a v o u r a b l e market,  f o r the demand f o r c a p i t a l i s u n u s u a l l y g r e a t w h i l e the c r e d i t of the b e l l i g e r e n t country i s not a t i t s b e s t .  To some e x t e n t ,  p a t r i o t i c motives may o f f s e t these i n f l u e n c e s and l e a d  individ-  u a l s t o i n v e s t i n war l o a n s but, on the whole, experience seems to have shown that p a t r i o t i s m , u n l e s s backed  2  rates,  i s not s u f f i c i e n t t o a t t r a c t  sary s i z e .  by h i g h i n t e r e s t  s u b s c r i p t i o n s o f the neces-  Apart from the i n t e r e s t r a t e s , the h i g h p r i c e s mean  t h a t l o a n s necessary t o meet any g i v e n expenditure a r e g r e a t e r than they would have been had p r i c e s remained  unchanged —  the  government has to borrow more i n terms o f money because the v a l u e of money i s low. 1. Pigou, A. C , The P o l i t i c a l Economy o f War, pp. 2. I b i d . , p. 86  72-74  53  R i s i n g P r i c e s and F o r e i g n Debts Soaring p r i c e s d u r i n g war b r i n g g r e a t e v i l s i n t h e i r train.  Rising p r i c e s generally a f f e c t p r o f i t s favourably (for  s e l l i n g p r i c e s i n c r e a s e and expenses take some time t o r e a d j u s t themselves),  and i n t h i s there i s some g a i n t o the t r e a s u r y ,  both because incomes from p r o f i t s normally  c o n t r i b u t e more  l a r g e l y t o revenue than other incomes, and because such i n creases i n p r o f i t s are g e n e r a l l y a stimulus t o i n c r e a s e d a c t i v i t y and t o a f u r t h e r i n c r e a s e o f t a x a b l e w e a l t h .  1  trade The  i n c r e a s e i n p r o f i t s , however, i s gained a t the expense o f the other incomes which do not a u t o m a t i c a l l y a d j u s t themselves t o p r i c e changes.  During war, wages l a g behind  p r i c e s , and demands  f o r h i g h e r wages cause i n c e s s a n t s o c i a l f r i c t i o n . a d j u s t themselves even more s l o w l y , w h i l e cannot a d j u s t themselves a t a l l .  Other incomes  some f i x e d incomes  The p r i c e changes l e a d , i n  e f f e c t , to a c o n s i d e r a b l e r e d i s t r i b u t i o n o f r e a l income, and t h i s 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 o f social justice.  The i n s t a b i l i t y o f v a l u e s g i v e s an element o f  i n s t a b i l i t y to a l l contracts.  I t i s impossible  f o r the govern-  ment ( o r anyone e l s e ) t o make any r e l i a b l e estimate  o f expendi-  t u r e over any c o n s i d e r a b l e p e r i o d o f 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  p r i c e l e v e l s of any country a r e bound t o a f f e c t the value o f i t s currency i n terms o f the currency  o f other c o u n t r i e s .  To  some extent, t h i s r e s u l t was hidden d u r i n g the war by emergency 1.  S p i e g e l , H. W.,  The Economics o f T o t a l War, pp. 108-137  54  measures.  A p a r t from the d i f f i c u l t i e s t o which t h i s l e a d s i n  o r d i n a r y t r a d i n g , i t means a g r e a t c o m p l i c a t i o n i n the p u b l i c revenues of a l l c o u n t r i e s w i t h payments t o make abroad on beh a l f of government 1918)  indebtedness, and i n the worst cases  (after  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 h o p e l e s s . Each country has to r a i s e i t s revenue i n terms o f i t s  own currency.  I f i t has payments to make t o o t h e r c o u n t r i e s  which are f i x e d i n terms of t h e i r currency o r i n terms of g o l d , d e p r e c i a t i o n means t h a t an i n c r e a s i n g amount o f d e p r e c i a t e d currency w i l l  be needed to make the payments.  Where p r i c e s  w i t h i n the country have changed i n p r o p o r t i o n to the d e p r e c i a t i o n of the currency t h e r e i s no r e a l h a r d s h i p i n t h i s . however, d e p r e c i a t i o n i s s t i l l  If,  c o n t i n u i n g to such a n extent t h a t  d e a l i n g s i n the d e p r e c i a t e d currency have become l i t t l e more than a c h a o t i c s p e c u l a t i o n , there may  be v i o l e n t  fluctuations  i n the value of the currency i n terms of f o r e i g n c u r r e n c i e s , w h i l e there i s no immediate c o r r e s p o n d i n g change; home.  i n prices at  In a case o f t h i s k i n d , where l a r g e payments have to be  made abroad, the business of b a l a n c i n g the budget i s p r a c t i c a l l y hopeless. F a l l i n g P r i c e s and I n t e r n a l Debts Given these p o s s i b i l i t i e s , i t i s not s u r p r i s i n g t h a t p u b l i c o p i n i o n and economic t e a c h i n g were i n agreement a t the end of the F i r s t World War  i n advocating a check to f u r t h e r  r i s e s i n p r i c e s , and a s t a b i l i z a t i o n o f the exchange v a l u e s o f c u r r e n c i e s i n the c o u n t r i e s which had not a l r e a d y plunged too  55  far  i n t o the slough of d e p r e c i a t i o n .  arose. fall  Here another  difficulty-  To check the r i s e meant, i n most c o u n t r i e s , a n e c e s s a r y  i n p r i c e , f o r the h i g h p r i c e s were maintained  the e x p e c t a t i o n o f f u r t h e r r i s e s .  partly i n  From the p o i n t o f view o f  the t r e a s u r y , f a l l i n g p r i c e s have s e r i o u s disadvantages.  They  reduce money income, and by doing t h i s reduce the t a x a b l e capac i t y o f the country as measured i n terms o f money. p r o f i t s f i r s t , and by doing so reduce f i r s t y i e l d most t o the revenue.  They reduce  the incomes which  F u r t h e r , as f a l l i n g p r i c e s a r e a  cause o f t r a d e d e p r e s s i o n , r e d u c i n g output  tends to reduce t h e  r e a l t a x a b l e c a p a c i t y of the country. If  the payments t h a t the government has to make depends  e n t i r e l y on c u r r e n t p r i c e s , these r e s u l t s would n o t be  important.  In f a c t , as there i s some time l a g between the b e g i n n i n g o f the fall  i n p r i c e s and the f a l l  i n t h e y i e l d o f t a x e s , there might  even be a temporary g a i n t o revenue.  But where the government  has l i a b i l i t i e s f i x e d i n terms o f the currency o f i t s own country,  f a l l i n g p r i c e s cannot reduce t h i s p a r t o f i t s expenses.  F a l l i n g p r i c e s may, by pushing lar of  up the value o f t h e Canadian d o l -  i n terms o f American d o l l a r s , reduce t h e payments i n terms our money t h a t we s h a l l have t o make to the U.S.A.  i f prices f a l l ,  some of the government's home expenses —  a r i e s of a l l k i n d s , f o r i n s t a n c e — duced.  Further, sal-  may be c o r r e s p o n d i n g l y r e -  But as f a r as our enormous i n t e r n a l debt i s concerned,  no automatic  r e d u c t i o n can be hoped f o r .  The debt was f i x e d i n  terms of money, and i n t e r e s t has t o be p a i d a t a f i x e d r a t e un1.  Pigou, A.  The P o l i t i c a l Economy o f War, p . 162  56 til  other arrangements can be made o r the debt r e p a i d a t p a r .  Where a debt i s accumulated on these terms, s t e a d i l y f a l l i n g p r i c e s mean t h a t an i n c r e a s i n g p r o p o r t i o n  o f the money income  of the n a t i o n i s needed to meet the i n t e r e s t and u l t i m a t e r e payment o f the debt. v  As the p r i c e s f a l l ,  the p u r c h a s i n g power  of each u n i t of money i n c r e a s e s and the r e a l  sacrifice  involved  i n making the same money payment i n c r e a s e s .  The p o s i t i o n o f  b e l l i g e r e n t governments a t the end of a war i s n o t a comfortable one.  On the one hand, they a r e faced w i t h an urgent economic  need t o check the r i s e i n p r i c e s , on the other w i t h the danger t h a t f a l l i n g p r i c e s w i l l i n c r e a s e the r e a l burden o f the heavy i n t e r n a l debts. Government Borrowing The  c o n c l u s i o n would seem t o be t h a t i t i s always e x t r a -  vagent f o r a government t o accumulate debts i n a p e r i o d o f h i g h p r i c e s which may have to be r e p a i d of low p r i c e s .  The money borrowed and the money r e p a i d may be  the same i n both cases, money w i l l  (with i n t e r e s t ) i n a p e r i o d  but i n the l a t t e r , the value  be g r e a t e r than i n the former, the value  be g r e a t e r than the v a l u e  o f the repaid  will  received.  I t i s generally recognized  t h a t n e i t h e r governments n o r  i n d i v i d u a l s can hope t o remain s o l v e n t i f they borrow f o r o r d i n ary r e c u r r i n g expenditure.  I n the case of an i n d i v i d u a l o r  company, however, i t i s not considered  necessarily inconsistent  w i t h sound f i n a n c e t o r a i s e a l o a n i n a p e r i o d of e x c e p t i o n a l emergency t o be r e p a i d when the emergency i s over.  Government  borrowing i n time o f war has g e n e r a l l y been j u s t i f i e d  on the  57. same grounds. However, t o f i n a n c i n g a war mainly by borrowing, are fundamental  objections.  of incomes d u r i n g a war,  there  I t accentuates the r e d i s t r i b u t i o n  i t i m p a i r s a country's a b i l i t y t o  1  keep up i t s m i l i t a r y p r e p a r a t i o n s , i t i s u n j u s t to those i n the armed s e r v i c e s and i t enables a s e c t i o n of the p o p u l a t i o n t o o b t a i n a vested i n t e r e s t i n the government. it  On the other hand,  has one advantage which cannot be q u e s t i o n e d .  I f a people are h e a r t i l y i n support o f a war  I t works.  e f f o r t , governments  can secure command of a v e r y l a r g e p r o p o r t i o n of the l a b o u r f o r c e i n a country and the use of much of i t s c a p i t a l , e i t h e r d i r e c t l y through the funds s u b s c r i b e d t o l o a n s or i n d i r e c t l y through the f o r c e d economy of those with s t a t i o n a r y or d e c l i n i n g 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 t r a n s f e r of l a b o u r and c a p i t a l from the t i e s of peace t o those of war  i s successfully  activi-  accomplished.  The p o s i t i o n of the government d i f f e r s fundamentally t h a t of the i n d i v i d u a l .  The i n d i v i d u a l borrower  resources from someone e l s e and postpones date.  r e a l l y draws  repayment t o a f u t u r e  He makes no immediate c o n t r i b u t i o n h i m s e l f , and  avoids the immediate burden of payment. from abroad, the borrowing  thus  I f a government borrows  country i s i n the same p o s i t i o n .  however, a government borrows from i t s own bulk of government borrowing  from  If,  n a t i o n a l s (and the  comes from t h i s s o u r c e ) , 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 , I n t r o d u c t i o n to P u b l i c Finance, p. A05 Pigou, op. c i t . , p. 81 '  58.  resources  from them j u s t as much as i f i t taxed them.  1  Whether  the government r a i s e s revenue by t a x a t i o n or by an i n t e r n a l l o a n , the o n l y resources and  upon which i t can draw are the same,  the borrowing country cannot avoid the immediate burden of  f i n d i n g the necessary funds.  The  only d i f f e r e n c e i s t h a t , where  the money i s r a i s e d by t a x a t i o n , i t i s p a i d over f i n a l l y to  the  government; where i t i s r a i s e d by borrowing, there i s a c l a i m  2 for  i n t e r e s t and u l t i m a t e  repayment.  of i n d i v i d u a l s , however, t a x a t i o n and e x a c t l y the  same t h i n g .  From the p o i n t of view borrowing do not mean  Borrowing g i v e s the i n d i v i d u a l a f u t -  ure  c l a i m on the government which t a x a t i o n does not, and  war  bonds (or whatever other  for  r a i s i n g funds at any  s e c u r i t y he may  time.  hold) can  the  be used  A l s o , although the taxpayers as  a whole w i l l u l t i m a t e l y have to f i n d the money to meet i n t e r e s t and will  repayment, i t i s improbable t h a t the i n d i v i d u a l taxpayer f i n d that h i s i n c r e a s e d  taxation  (due  e x a c t l y cancels out h i s income from war more improbable t h a t he w i l l c o n s i d e r i n g h i s gains  to i n t e r e s t on debt)  bonds, and  set the two  a g a i n s t one  from s u b s c r i p t i o n s to war  the p o i n t of view of the government, t h i s has t h a t resources  will  i t is still another i n  loans.  From  the r e a l advantage  be l e n t w i t h l e s s i l l - f e e l i n g than they would  be p a i d i n t a x a t i o n , and  i t means t h a t the immediate  subjective  burden of the tax to the country i s l e s s than i f the money had been r a i s e d by t a x a t i o n .  In the f i r s t  i n s t a n c e , t h i s probably  1. Pigou, A. C , The P o l i t i c a l Economy o f War, p. 73 2. S t e i n e r , G. A., Economic Problems of War, Chap. 9,  p.  20  59  means l e s s discouragement to p r o d u c t i o n than equal t a x a t i o n . Where enormous war  revenues have t o be r a i s e d f o r a term of  y e a r s , i t i s p o s s i b l e t h a t to r a i s e the whole by t a x a t i o n would have a deadening e f f e c t upon i n c e n t i v e , and a government may by l o a n s .  i n any g r e a t  war  be j u s t i f i e d i n r a i s i n g p a r t of i t s revenue  I t should, however, be r e a l i z e d t h a t by borrowing  the government does not avoid f i n d i n g the immediate  resources  t h a t i t needs, i t o n l y adopts a d i f f e r e n t method of o b t a i n i n g them. Loans versus  Taxes i n War  Finance  I t seems a d v i s a b l e a t t h i s p o i n t to c o n s i d e r the question of "Loans versus Taxes i n War do t h i s , the best p o s s i b l e way E. R. A.  Finance".  important  In order  appears to be t o quote P r o f e s s o r  Seligman:-  "The f i s c a l problems of the war may be d i v i d e d i n t o those of a g e n e r a l and of a s p e c i f i c c h a r a c t e r . War expenditures can be met i n t h r e e ways: by t a x e s , by l o a n s , or by paper money. The s p e c i f i c problems have to d e a l w i t h the nature and the d e t a i l s of each of these expedients; the general problem i s concerned w i t h the p r i n c i p l e s t h a t u n d e r l i e the p r e f e r e n c e among the r e s p e c t i v e methods. Inasmuch as paper money i s by common consent to be regarded as the l a s t r e s o r t , the g e n e r a l problem at i s s u e here p e r t a i n s to the c h o i c e between loans and taxes and the r e l a t i v e p r o p o r t i o n s i n which each i s to be employed.... I t i s obvious t h a t a d i s t i n c t i o n must be made between the money c o s t s and the r e a l c o s t s o f a war. The money c o s t s o f a war are the a c t u a l o u t l a y s of the government f o r war purposes, t h a t i s , the s u r p l u s above the g e n e r a l 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 c o s t s of a war are to be measured by the d i m i n u t i o n of the s o c i a l patrimony  1. Pigou, A. C ,  to  The P o l i t i c a l Economy of War,  p.  78  60.  and by the d i v e r s i o n of c u r r e n t s o c i a l output from p r o d u c t i v e to unproductive channels, i . e . , by changes both i n the fund of accumulated w e a l t h and i n the flow of s o c i a l income.... The t r u e c o s t s of a war are the net s a c r i f i c e s or s u b j e c t i v e burdens which r e s u l t from the t r a n s i t i o n from a peace economy t o a war economy, and which are connected w i t h the fundamental p r o c e s s e s of p r o d u c t i o n and consumption. They c o n s i s t , on the one hand, of a l l those e f f o r t s i n v o l v e d i n the t r a n s f e r of e n t e r p r i s e s and investments from the o r d i n a r y channels of p r o d u c t i o n t o the new f i e l d s of primary importance i n the war. They c o n s i s t , on the o t h e r hand, of a l l those e f f o r t s i n v o l v e d i n the r e d u c t i o n and the change of consumption which w i l l serve t o counterbalance, i n p a r t a t l e a s t , the i n e v i t a b l e r e d u c t i o n of s o c i a l output. The net r e s u l t measured i n terms of aggregate s a c r i f i c e or s u b j e c t i v e c o s t c o n s t i t u t e s the r e a l burden of a war. The problem that c o n f r o n t s us i s to analyze the r e s u l t s of v a r i o u s f i s c a l expedients upon these changes i n p r o d u c t i o n and consumption from the p o i n t of view of the s u b j e c t i v e c o s t s or the r e a l burdens r e s t i n g on s o c i e t y . . . . I t s u t i l i t y c o n s i s t s i n the f a c t t h a t , through borrowing from those i n p o s s e s s i o n of the c a p i t a l r a t h e r than t a x i n g a l l the members of the community, whether or not they have the c a p i t a l , i t l e s s e n s s u b j e c t i v e c o s t s or s a c r i f i c e s and puts a t the d i s p o s a l of the government those s e r v i c e s i n the community w i t h which i t can most e a s i l y d i s p e n s e . . . . The c o n c l u s i o n , t h e r e f o r e , would be that i n the case of a g r e a t war i t would meet a l l the demands of j u s t i c e to put p a r t of the burden upon the present taxpayers and to s h i f t the remainder upon the tax-payers of succeeding y e a r s , w i t h the understanding t h a t a l l the charges of the war w i l l f i n a l l y have been met bef o r e the p e r i o d when the r e c u r r e n c e of a s i m i l a r outbreak i s w i t h i n the realm of p r o b a b i l i t y . T h i s conc l u s i o n i n other words shows the e s s e n t i a l l e g i t i m a c y of u t i l i z i n g both l o a n s and taxes i n times of war".... 1  D i f f e r e n t Methods of  Borrowing  Enormously the g r e a t e r p a r t o f our n a t i o n a l debt has been i n c u r r e d t o meet war  expenditure.  The government h o l d s no  1. Seligman, E.R.A., Essays i n T a x a t i o n , pp. 715-736  61.  a s s e t s a g a i n s t i t , and  the funds f o r i n t e r e s t and  have to come out o f t a x a t i o n . may  be d i v i d e d i n t o two  debt.  The  repayable  Deadweight debt o f t h i s k i n d  classes —  long-term and  former i s composed of permanent debt a t any  l a t t e r i s the  f i x e d date) and long-dated  short-term (which i s not  securities.  r e s u l t of short p e r i o d borrowing and  able at a f i x e d date at the end at the end of a few From 1914  The  i s repay-  of a few weeks, or a t the most,  years.  onward, the g r e a t f i n a n c i a l needs o f the govern-  ment made i t necessary Long-term war  repayment  to tap a l l p o s s i b l e sources  l o a n s , war  savings  c e r t i f i c a t e s and  of revenue. treasury  bills  were i s s u e d to meet the needs of a l l c l a s s e s of i n v e s t o r s . l o a n s were backed by every k i n d of p a t r i o t i c a p p e a l .  The  Posters,  propaganda, as w e l l as the m e r i t s of the l o a n s themselves, were a l l used to c a t c h s u b s c r i p t i o n s f o r the government n e t . Borrowing and The  Inflation  1  investments came from d i f f e r e n t sources.  they were subscribed by p r i v a t e i n d i v i d u a l s who ings i n t o war  loans i n p r e f e r e n c e  In p a r t ,  put  t h e i r sav-  to other investments,  perhaps cut down t h e i r normal expenditure  or  who  i n order to i n c r e a s e  p  t h e i r war-time s a v i n g s .  Where t h i s happened, r e s o u r c e s were  t r a n s f e r r e d to the s t a t e from the l e n d e r s j u s t as much as i f the t r a n s f e r e n c e had  been made through t a x a t i o n .  The  ment was a b l e to buy more, the spending power of the  governlenders  1. H a r r i s , S. E., I n f l a t i o n and the American Economy, Ch. 2. Pigou, A. C ,  The P o l i t i c a l Economy of War,  p.  7#  16  62.  was c o r r e s p o n d i n g l y reduced and the t o t a l volume of p u r c h a s i n g power i n the country remained the same. A l a r g e p a r t of the s u b s c r i p t i o n s t o t h e d i f f e r e n t d i d not come from i n d i v i d u a l s but from b a n k s .  1  loans  I n t h i s case,  i t was not so c l e a r whether t h i s saving r e a l l y represented a t r a n s f e r e n c e o f p u r c h a s i n g power, and i n c r e a s e d economy on the p a r t of the l e n d e r s or n o t .  Banks can i n c r e a s e the supply o f  c r e d i t by g i v i n g i n c r e a s e d power to draw cheques a g a i n s t them, and t h i s i s e q u i v a l e n t i n i t s e f f e c t on p r i c e s to an i n c r e a s e i n the supply o f money.  When e i t h e r i n d i v i d u a l s o r governments  borrow from banks, t h e r e i s a p o s s i b i l i t y t h a t p u r c h a s i n g power w i l l not be t r a n s f e r r e d , but t h a t new p u r c h a s i n g power w i l l created.  be  I f the banks gave c r e d i t to the government by r e s t r i c t  i n g the c r e d i t they were g i v i n g to business men,  t h e r e would  be no net i n c r e a s e but, as i t was, the i n c r e a s e d c r e d i t  was  f a r i n excess o f the pre-war c r e d i t i s s u e s of the banks.  There  can be no doubt that the banks' s u b s c r i p t i o n s t o war l o a n s l a r g e l y represented new i s s u e s of c r e d i t . Where i n d 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 s t a t e owned c e n t r a l bank, l i k e the Bank of Canada, would be d i r e c t l y inflationary.  T h i s would be done by handing over bonds (or  t r e a s u r y notes) to the Bank of Canada who  i n t u r n 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 o f War, Chap. 9, p. 21 2. Pigou, l o c . c i t .  f o r them by c r e a t i n g new  currency.  Such i n c r e a s e d  spending  power would always be l i k e l y t o come back to the government e i t h e r through, t a x a t i o n o r new  borrowing.  This method of bor-  rowing i n c r e a s e s the supply of p u r c h a s i n g power, and in inflating prices. ance  ( a f t e r 1918)  results  While p a r t o f the e v i l s o f post-war  fin-  arose out o f the f a c t that debts had been  accumulated w h i l e p r i c e s were h i g h , the h i g h e r p r i c e s were i n themselves, to some e x t e n t , a r e s u l t o f the government borrowing. Irredeemable Paper Money i n War  Finance  An e x c e l l e n t treatment of the above problem has been g i v e n us by P r o f e s s o r H. G. Brown i n h i s work, "The Economics tion".  We  s h a l l quote from t h i s i n the f o l l o w i n g  o f Taxa-  section:  " I f , w i t h paper money i n f l a t i o n , a l l p r i c e s should r i s e e q u a l l y and w i t h equal s w i f t n e s s , the burden o f 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 publ i c i n p r o p o r t i o n to purchases.... However, i n p r a c t i c e p r i c e s do not o r d i n a r i l y r i s e w i t h equal r a p i d i t y o r i n equal degree and, t h e r e f o r e , the burden i s not d i s t r i b u t e d i n p r o p o r t i o n to consumption o r t o purchasesi n - g e n e r a l . Upon some c l a s s e s the burden f a l l s w i t h c r u s h i n g weight w h i l e o t h e r c l a s s e s may g a i n , a t the expense o f the c l a s s e s who l o s e , more than the g a i n i n g c l a s s e s c o n t r i b u t e to the government.... During a process of i n f l a t i o n f i n a n c i n g , the government, as we have seen, i s c o n t i n u a l l y o u t b i d d i n g the p u b l i c f o r goods, so t h a t p r i c e s r i s e f a s t e r than, on the average, i n d i v i d u a l incomes i n c r e a s e . . . . I f government f i n a n c e 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 t a x a t i o n , and i f i t i s t a x a t i o n o f so unequal a k i n d as t o a c t u a l l y b e n e f i t some c l a s s e s (or tax them o n l y a l i t t l e ) w h i l e perhaps t a k i n g from o t h e r c l a s s e s 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 f i n a n c e of war or any o t h e r emergency?.... I f e x i s t i n g taxes are not h i g h enough to secure the needed revenue, then they can be r a i s e d h i g h e r as an a l t e r n a t i v e to money inflation. But a government may f e a r to l o s e p o p u l a r support i f i t d e f i n i t e l y thus i n c r e a s e s the tax r a t e , s i n c e such an i n c r e a s e 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 i n c r e a s e ; w h i l e the p u t t i n g i n t o c i r c u l a t i o n of i n c o n v e r t i b l e 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 l o a n s out of genuine s a v i n g s , i t i s c l e a r that the  meet the individuals  are poorer as an immediate r e s u l t of the government's command over i n c r e a s e d purchasing power.  Where new  p u r c h a s i n g power  i s c r e a t e d , there i s no t r a n s f e r e n c e ; no one  i s asked  render what the government g a i n s , and a t f i r s t seem a p a i n l e s s s o l u t i o n of the problem. untrue.  The new  to sur-  s i g h t i t might  This i s obviously  purchasing power i s not taken away from p r i v a t e  i n d i v i d u a l s , but i t s e x i s t e n c e r a i s e s p r i c e s and a r i s e i n p r i c e s reduces  the v a l u e s of a l l incomes.  t h i s means t h a t the same incomes w i l l  I f p r i c e s are  doubled,  o n l y go h a l f as f a r as  b e f o r e , and the r e s u l t i s e x a c t l y the same as i f a l l incomes were reduced  by h a l f , p r i c e s remaining unchanged.  Where the  government gets i t s funds by methods which r a i s e p r i c e s , 2 r e s u l t i s r e a l l y a hidden tax  the  p r o p o r t i o n e d to income which  works, not by r e d u c i n g the amount of purchasing power i n the hands of i n d i v i d u a l s , but by r e d u c i n g i t s v a l u e . In a l l our o v e r t t a x a t i o n , we  have been moving away from  the i d e a of a tax p r o p o r t i o n e d to income.  T h i s form of con-  c e a l e d t a x a t i o n (see above "hidden tax") does not a l l o w even, a minimum f o r n e c e s s a r i e s , nor does i t make any allowance 1.  Brown, H. G.,  The Economics o f T a x a t i o n , pp.  2.  Pigou, A. C ,  The P o l i t i c a l Economy of War,  21-25 p.  107  for  65 d i f f e r e n c e s i n f a m i l y needs , and  there seems no reason to r e -  gard i t as anything but i n e q u i t a b l e by our e x i s t i n g I t i s t r u e t h a t c o n s i d e r a b l e readjustments may for  standards.  be made.  1  Wages,  i n s t a n c e , w i l l g r a d u a l l y r i s e to meet the h i g h e r c o s t of  l i v i n g , and  the i n c r e a s e d 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 c l a s s e s , but the r e a d j u s t ment w i l l only take p l a c e s l o w l y and as the r e s u l t o f able f r i c t i o n .  consider-  F u r t h e r , to many c l a s s e s , there w i l l be no  pos-  2 s i b i l i t y of readjustment.  People w i t h f i x e d incomes w i l l  themselves permanently impoverished their old l e v e l .  find  u n l e s s p r i c e s r e t u r n to  There w i l l be c o n s i d e r a b l e t r a n s f e r e n c e  of  3  r e a l w e a l t h from them to other c l a s s e s .  F u r t h e r , although  the  e f f e c t of the i n f l a t i o n i s the same as the tax i n t h a t i t r e duces the r e a l incomes of i n d i v i d u a l s without  g i v i n g them a  c l a i m f o r repayment, from the p o i n t o f view of the government it  i s a l o a n f o r which i n t e r e s t has to be found and a  capital  L  repayment made. Where the l o a n s simply r e p r e s e n t i n c r e a s e s i n bank c r e d i t , the country  s u f f e r s immediately from the i n f l a t i o n ;  f u t u r e , the taxpayers  have the b i l l  f o r the  f o r i n t e r e s t and  repayment.  On the other hand, there i s no doubt t h a t the methods of borrowing from the banks have immediate conveniences to any ment.  govern-  Where a government i s eager to keep down the r a t e s of  i n t e r e s t on l o a n s , and 1.  Pigou, A. C...  2.  108  3.  I b i d . , p. Loc. c i t .  4.  I b i d . , p.  109  i t i s f e a r e d t h a t too high a r a t e might  The P o l i t i c a l Economy of War,  p.  107  66. i n j u r e the f i n a n c i a l  r e p u t a t i o n of the borrowing  i s probably the o n l y method which can be u s e d . days of a war,  1  country, i t In the e a r l y  before t a x a t i o n can be r e a d j u s t e d or the mach-  i n e r y of more permanent l o a n s t o be taken up by the g e n e r a l p u b l i c be s e t going, some borrowing from the banks by these 2 means i s p r o b a b l y i n e v i t a b l e .  But the heavy p r i c e t h a t must  u l t i m a t e l y be p a i d 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 c o s t to the government o f r i s i n g p r i c e s i n the time of i t s g r e a t e s t need f o r goods and s e r v i c e s , and the heavy burden o f debts accumulated  i n the p e r i o d of h i g h p r i c e s being c a r r i e d  over i n t o the p e r i o d of f a l l i n g p r i c e s , are s t r o n g arguments f o r the s t r i n g e n t l i m i t a t i o n of i t s use. One l a s t p o i n t may  be noted here.  Short-term debts  may  p o s s i b l y f a l l due a t times i n c o n v e n i e n t to the government and entail ing  f u r t h e r borrowing on l e s s f a v o u r a b l e terms.  of s h o r t - d a t e d l o a n s of any k i n d may  The matur-  be a s e r i o u s handicap  to a government.struggling w i t h the problems of post-war f i n a n c e , and may  f o r c e f u r t h e r borrowing  and p o s s i b l y f u r t h e r  1. Pigou, A. C , The P o l i t i c a l Economy of War, 2. I b i d . , p. 110  p. I l l  inflation.  -CHAPTER V I I THE  POST-WAR BURDEN OF DEBT A:  The  INTERNATIONAL DEBT  Growth of I n t e r n a t i o n a l  Indebtedness  Wars have n e a r l y always i n c r e a s e d the b e l l i g e r e n t s t a t e s .  The  the n a t i o n a l debts of  F i r s t World War  left  the world i n  a s t a t e of indebtedness which (up to t h a t time) was  unparalleled  both as regards the absolute  obligations  and  the  extraordinary  s i z e of the government  complexity of the i n t e r n a t i o n a l arrangements.  To-day the problem i s m a g n i f i e d many times o v e r . L e t us c o n s i d e r the war  years,  the i n t e r n a t i o n a l problem f i r s t .  the g r e a t e r  out of l o a n s between a l l i e d  During  p a r t of the i n t e r n a t i o n a l debts a r i s e states.  A f t e r the  are w r i t t e n , the added f a c t o r of r e p a r a t i o n s  peace.treaties  payments makes the  debt s t r u c t u r e even more c o m p l i c a t e d . In p r a c t i c e , although the debts stand, the they imply have not been s t r i n g e n t l y enforced I n t e r e s t payments have been deferred" * and 1  of making the payments were a l l e v i a t e d . -taken to exact some r e p a r a t i o n  obligations  between the  the a c t u a l  Allies.  difficulties  Although measures were  from Germany,even there  modifi-  c a t i o n s of the o r i g i n a l demands were admitted, the e x i s t i n g  1. Buehler, A.  G.,  P u b l i c F i n a n c e , pp.  815-817  claims  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 u n l e s s they are  for-  given.  1  T h i s i s one of the problems c o n f r o n t i n g the world t o -  day. From 1919  on, world f i n a n c e has been overshadowed by  the enormous i n t e r n a t i o n a l d e b t s .  The  claims they imply have  been a menace r a t h e r than an a c t i v e e v i l , but the u n c e r t a i n t y as t o whether (and to what extent) c o l l e c t i o n w i l l 2 to the e x i s t i n g c o n f u s i o n .  The tendency  be made, adds  t o r e g a r d c l a i m s as  a f i c t i o n that can be d i s r e g a r d e d , or a t worst as a problem  of  a very d i s t a n t to-morrow, makes i t p o s s i b l e f o r some c o u n t r i e s to postpone the measures t h a t are necessary t o meet the of the p o s i t i o n .  realities  In a l l cases, u n t i l a permanent s e t t l e m e n t  which i s both d e f i n i t e and p r a c t i c a b l e i s reached, the p u b l i c f i n a n c e s of the d i f f e r e n t s t a t e s cannot be put on a more permanent f o o t i n g , nor can the exchanges be expected to r e a c h anything l i k e a stable p o s i t i o n . cannot be over-emphasized. most c o n d i t i o n s .  The  full  e v i l of t h i s u n c e r t a i n t y  Trade can i n time adapt i t s e l f t o  The r e a l d i f f i c u l t y o f the present p e r i o d i s ,  that as the c o n d i t i o n s are c o n t i n u a l l y changing, no chance of a d a p t a t i o n can o c c u r . Repayments:  Debtor C o u n t r i e s  A country borrowing of  abroad  r a i s i n g the necessary revenue.  1. Buehler, A. G., 2. Loc. c i t .  escapes the immediate burden When the time f o r repayment  P u b l i c F i n a n c e , pp. 815-817  69. comes, the d e f e r r e d r e s p o n s i b i l i t y has t o be met and p r o v i s i o n made t o meet i n t e r e s t charges, and gradual repayment of the capital l i a b i l i t y .  P a r t o f the income o f the debtor has t o be  t r a n s f e r r e d t o the c r e d i t o r country, and the former i s poorer by the amount o f the transference.*"" To make payments abroad,^ a country has to r a i s e  revenue  j u s t as much as f o r any o t h e r payment, and has t o use the r e v enue t o o b t a i n c l a i m s on g o l d , on the c u r r e n c y o f the c r e d i t o r country o r t o purchase goods t o s n i p t o the c r e d i t o r c o u n t r y . She can o b t a i n the n e c e s s a r y revenue e i t h e r by t a x a t i o n , borrowing o r f u r t h e r i n f l a t i o n .  Whichever  o f these methods she  adopts means t h a t , i n one way o r another, the r e a l incomes o f her n a t i o n a l s a r e immediately reduced, and where", as a r e s u l t o f t h i s , p r o d u c t i v i t y i s checked  (and as the revenue i s t o be  t r a n s f e r r e d abroad, t h e r e can be no d i r e c t economic f o r the t a x a t i o n ) , i t means f u r t h e r impoverishment try.  compensation o f the coun-  The e v i l s of an a d d i t i o n t o revenue made n e c e s s a r y on be-  h a l f of f o r e i g n debt a r e g r e a t e r the worse the p o s i t i o n o f the paying country, the h e a v i e r i t s e x i s t i n g  burdens.  At any time, i t i s extremely d i f f i c u l t t o say how f a r a country can bear f u r t h e r t a x a t i o n . f a c t t h a t a f t e r World War I ,  But i t i s a q u e s t i o n o f  a l l the European  belligerents  were f i n d i n g the g r e a t e s t d i f f i c u l t y i n b a l a n c i n g t h e i r and many o f them were s t i l l inflation —  budgets,  o b t a i n i n g revenue by borrowing o r  mainly the l a t t e r .  1. Drummond, G. F., The Economics 2. I b i d . , Ch. 1-4  Even i f i t may seem t h a t  this  o f I n t e r n a t i o n a l Trade, Ch.4  70.  r e s u l t was new  p a r t l y due  to slovenly finance  openings f o r t a x a t i o n  could  and  i f , i n theory,  be found, i t i s always t r u e  t h a t a country cannot o u t s t r i p i t s a d m i n i s t r a t i v e machinery, and  the f a c t t h a t i t s t a x a t i o n  b a d l y o r g a n i z e d , might be a great way  financial  i n the past had  practical difficulty in  of r a i s i n g more revenue i n the immediate f u t u r e .  a country has  been  used i n f l a t i o n to meet e x i s t i n g  the  Where  difficulties,  an a d d i t i o n 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 l e a d d i r e c t l y and  i n d i r e c t l y to f u r t h e r i n f l a t i o n , f u r t h e r r i s e s of i n t e r n a l  p r i c e s , and on the  f u r t h e r f l u c t u a t i o n s of the value o f the  f o r e i g n exchanges.  We  have a l r e a d y  mentioned the  f i c u l t i e s i n which f l u c t u a t i n g exchange r a t e s may country w i t h payments to make abroad, but that the  greatest  currency  involve  a  i t i s worth emphasizing  h a r d s h i p from f u r t h e r i n f l a t i o n i s l i k e l y  f a l l on the poorer c l a s s e s o f the debtor c o u n t r i e s ,  and  l i k e l y permanently to reduce t h e i r standard o f l i v i n g . c l a i m f o r m i l l i o n s betv/een n a t i o n s may resolve i t s e l f into exacting  Creditor  to  is A  i n the paying c o u n t r y  sums from i n d i v i d u a l s to whom the  payments mean the d i f f e r e n c e between p o v e r t y and Repayments:  dif-  destitution.  Countries  A country w i t h claims on a f o r e i g n country i s e n t i t l e d to a net a d d i t i o n to her n a t i o n a l income of the amount of annual claims over and  above her own  national production.  the f a c e of i t , t h i s seems a d e s i r a b l e p o s i t i o n , but, there some c r e d i t o r c o u n t r i e s who  On are  s u f f e r i n g from c o n s i d e r I able doubts as to whether they can a f f o r d t o be p a i d ! To make 1. Buehler, A.  G.,  seem to be  her  P u b l i c Finance, p.  817  71.  the payments, the debtor country has t o get h o l d o f c r e d i t s i n the c r e d i t o r c o u n t r y .  The o n l y way she can do t h i s i s by s e l -  l i n g abroad, and by u s i n g t h e c r e d i t s which she'gains i n t h i s way, n o t t o buy goods from abroad, but t o pay h e r debts.**" Now, t h i s i s where the p o s s i b i l i t y o f i n j u r y t o the c r e d i t o r country a r i s e s , the p o s s i b i l i t y t h a t g e t t i n g "somet h i n g f o r n o t h i n g " i n i n t e r n a t i o n a l f i n a n c e may n o t be as 2 agreeable as one would expect.  F o r the pushing o f f o r e i g n  s a l e s and the check t o f o r e i g n buying w i l l  react  injuriously  upon a l l c o u n t r i e s t h a t e i t h e r s e l l t o the paying country o r compete w i t h h e r i n p r o d u c t i o n .  On the one hand, c o m p e t i t i v e  i n d u s t r i e s w i l l f i n d her c o m p e t i t i o n developing and encroaching on t h e i r markets; oh the o t h e r , the s e l l i n g i n d u s t r i e s w i l l f i n d h e r 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 t h a t h e r c u r r e n c y i s dep r e c i a t e d and worth l e s s abroad than i t i s a t home, the i n v a s i o n of  f o r e i g n markets w i l l be a c c e l e r a t e d , f o r she w i l l have, i n  e f f e c t , a bonus on h e r f o r e i g n s a l e s . the currency of the country o r i g i n a l l y , or  Whatever the p o s i t i o n o f the f a c t t h a t the debt-  country has t o make these payments ( i f they a r e on a l a r g e  s c a l e ) i s l i k e l y t o make h e r money cheap and t o g i v e her some bonus on e x p o r t s . Normally, the p o s i t i o n would r i g h t i t s e l f .  But where  the debtor country has l a r g e payments t o make, her a.emand f o r f o r e i g n c u r r e n c i e s w i l l keep up t h e i r v a l u e i n terms of her 1. Drummond, G. F., The .Economics o f I n t e r n a t i o n a l Trade, c h . 1-4 2. Buehler, A. G., P u b l i c F i n a n c e , p. 817 3. D a l t o n , H., P r i n c i p l e s o f P u b l i c F i n a n c e , 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  trade wherever p o s s i b l e .  Meanwhile, i n t e r n a l f i n a n c i a l  export dif-  f i c u l t i e s are l i k e l y to p r o l o n g the p o l i c y of i n f l a t i o n which i n t u r n h e l p s to keep the v a l u e of the currency of the country down.  The net r e s u l t must be t h a t she w i l l  debtor  s e l l more  and buy l e s s on f o r e i g n markets. I t i s important consumers we try.  1  not to make the p i c t u r e too b l a c k —  as  s h a l l g a i n from lower p r i c e s i n the c r e d i t o r coun-  I f the exports o f the debtor country are o n l y 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 not l o s e d i r e c t l y  should g a i n as consumers, and  (as producers)  we  from German c o m p e t i t i o n .  I f Germany's exports compete v e r y l a r g e l y w i t h our own the r e s u l t i s t h a t her i n v a s i o n of our home and  products,  f o r e i g n markets  i s a cause c o n t r i b u t i n g to unemployment and t r a d e s t a g n a t i o n . We might, of course, p r o t e c t our home markets by import d u t i e s a g a i n s t German goods but, a p a r t from the g e n e r a l o b j e c t i o n s i n herent i n any  schemes of t h i s k i n d , and the i n j u s t i c e and i n -  c o n s i s t e n c y of i n s i s t i n g upon payments and p u t t i n g o b s t a c l e s i n the way  of making them, we s h o u l d s t i l l  competition w i t h our producers  s u f f e r from her  i n f o r e i g n markets.  Any  general  p r o h i b i t i o n of her export t r a d e by j o i n t a l l i e d a c t i o n would simply d e p r i v e her of the means of paying her debts. g a i n from the repayments i f ,  and when, we  We  shall  get them, but we  s u f f e r c o n s i d e r a b l e i n c i d e n t a l trade d i s l o c a t i o n through  may  the  methods of payment. 1. Drummond, G. F., The Economics o f I n t e r n a t i o n a l Trade,  Ch.10  73. Although the degree o f c o m p e t i t i o n w i l l d i f f e r  from  case t o case, the r e s u l t of the payment of i n t e r n a t i o n a l  debts  must always l e a d t o s m a l l e r purchases and l a r g e r s a l e s abroad on the p a r t of the paying c o u n t r y . Pre-War Debts To these somewhat l u g u b r i o u s p i c t u r e s o f the c o s t l i n e s s of being p a i d what one i s owed, i t may be o b j e c t e d t h a t i n prewar days many c o u n t r i e s had enormous f o r e i g n investments  which,  although they were h e l d by i n d i v i d u a l s and not by governments, i n v o l v e d v e r y c o n s i d e r a b l e annual i n t e r n a t i o n a l s e t t l e m e n t s which were unattended i s true —  by t h e d i s a s t e r s we have suggested.  but these payments d i f f e r e d i n important  This  particulars  from the payment o f i n t e r e s t on war d e b t s . (1)  The f o r e i g n investments had been made mainly f o r  p r o d u c t i v e purposes.  I f Canada r a i s e d a l o a n i n England f o r  the purposes o f r a i l w a y development, she would have t o make annual i n t e r e s t payments, but she would expect the r a i l w a y t o g i v e her a p r o f i t on the u n d e r t a k i n g as w e l l . sumably would not be poorer than before because way  Canada p r e o f the. r a i l -  and i t s c o s t s , and the payments would not t h e r e f o r e neces-  s a r i l y reduce h e r power t o buy from abroad. (2)  The development o f investment abroad i n pre-war  days was g r a d u a l .  Any s l i g h t s t i m u l u s t h a t the e x p o r t i n g coun-  t r y gained developed s l o w l y , and the competing adjust t h e i r i n d u s t r i a l organization gradually. to r e a l i z e the importance o f t h i s .  c o u n t r i e s could I t is. e s s e n t i a l  A t any one time, a country  i s organized f o r a c e r t a i n k i n d o f p r o d u c t i o n .  This organiza-  74  t i o n i s always changing s l o w l y as some i n d u s t r i e s develop and o t h e r s decay, and i t i s always capable  o f gradual  readjustment.  But any sudden d i s t u r b i n g f a c t o r means t h a t a time must elapse before the o r g a n i z a t i o n can a d j u s t i t s e l f , and u n t i l  t h i s hap-  pens, the country s u f f e r s a l l t h e t r o u b l e s o f d i s l o c a t i o n , d e p r e s s i o n and Unemployment.  P r a c t i c a l l y a l l countries are  going through a p e r i o d o f d i s l o c a t i o n as a r e s u l t o f t r a n s i t i o n from war t o peace.  Where t h i s i s emphasized by a sudden change  i n the r e l a t i v e e x p o r t i n g and importing c a p a c i t y o f other count r i e s through i n t e r n a t i o n a l payments on b e h a l f o f war debts, the d i s t u r b a n c e i s l i k e l y t o be c o n s i d e r a b l e .  I f the payments  continue f o r a l o n g p e r i o d , the i n d u s t r y o f the r e c e i v i n g country w i l l a d j u s t i t s e l f .  I n d u s t r i e s i n which the new  competition i s not f e l t w i l l be developed, which find'themselves  undersold  the i n d u s t r i e s  w i l l g r a d u a l l y be abandoned.  When these adjustments have been made, the f u l l be drawn from the payments. a f u r t h e r readjustment  advantage w i l l  When the repayments a r e completed,  w i l l be needed.  1  1. D a l t o n , H., P r i n c i p l e s o f P u b l i c ' F i n a n c e , p. 287  B:^  INTERNAL DEBT  The Repayment of I n t e r n a l Debt The payment of i n t e r e s t on f o r e i g n debt reduces the net income of the paying country by t r a n s f e r r i n g a p a r t 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 d i r e c t e f f e c t o f t h i s k i n d ; money i s r a i s e d w i t h i n the country and p a i d out to h o l d e r s of government bonds a l s o w i t h i n the country.  To a l a r g e extent, i t i s simply an  and  expensive  ing  i t back i n t o another  elaborate  method of t a k i n g money out of one pocket  Although  and  pay-  of the same i n d i v i d u a l .  the payment of i n t e r e s t on war  debt does not  reduce the p r o d u c t i v e c a p a c i t y of the country as a whole, the necessary  t a x a t i o n may  production. may  We  discourage  have i n d i r e c t e f f e c t s i n d i s c o u r a g i n g  have seen how production,  1  the e x p e c t a t i o n of heavy t a x a t i o n  and  i n t h i s case there i s no com-  p e n s a t i n g g a i n to be set o f f a g a i n s t the discouragement.  The *  2 money i s simply r e d i s t r i b u t e d . h o l d e r s of war the t a x p a y e r s . redistribution.  There i s no presumption t h a t  bonds w i l l use i t b e t t e r or need i t more than I f a n y t h i n g , the presumption i s a g a i n s t  the  When the value o f money i s r i s i n g i n a p e r i o d  of f a l l i n g p r i c e s , the r e a l burden of the debt becomes h e a v i e r 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 o f the discouragement  by t a x a t i o n i n c r e a s e s .  The p o s i t i o n o f the h o l d e r s o f the war l o a n improves  a t the  expense of the taxpayers and an element o f i n j u s t i c e creeps i n .  1  These disadvantages make the paying o f f o f the debt d e s i r a b l e , w h i l e there i s the a d d i t i o n a l p r a c t i c a l c o n s i d e r a t i o n t h a t i f the government should need to borrow a g a i n , i t s c r e d i t i s not l i k e l y t o be improved i t s e a r l i e r debts.  i f i t has made no e f f o r t t o reduce  The r e a l problem r e s o l v e s i t s e l f i n t o the  q u e s t i o n whether i t i s p r e f e r a b l e t o impose heavy t a x a t i o n over a term o f years t o meet i n t e r e s t and a s i n k i n g fund f o r the g r a d u a l repayment o f debt, o r t o impose an e x t r a o r d i n a r y l e v y 2 to meet the emergency and pay o f f a p a r t o f the debt There i s a t h i r d a l t e r n a t i v e . the whole o r p a r t of i t s debts.  quickly.  The s t a t e might r e p u d i a t e  I n t h i s country, the suggestion  h a r d l y e n t e r s i n t o p r a c t i c a l p o l i t i c s , and i s u s u a l l y condemned on the grounds t h a t i t would i n v o l v e a breach of f a i t h on the p a r t o f t h e government w i t h the h o l d e r s - o f a l l war bonds. p u d i a t i o n would c e r t a i n l y cause  Re-  some great i n d i v i d u a l h a r d s h i p  and g i v e a severe shock to the n a t i o n a l c r e d i t , and may be r e garded as d e f i n i t e l y i n e x p e d i e n t . S i n k i n g Fund Method The t r a d i t i o n a l method o f r e p a y i n g debt has been t o r a i s e , wherever p o s s i b l e , an excess of revenue over c u r r e n t expenditure, paying  the balance i n t o a s i n k i n g fund and u s i n g  1. Mendershausen, H., The Economics o f War, pp. 296-297 2. Pigou, A. C , The P o l i t i c a l Economy o f War, pp. 190-191 3. P i g o u , A. C , A Study i n P u b l i c F i n a n c e , p. 288  77. it  t o 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 i n s t a n c e , the revenue r a i s e d must 'exceed t h a t  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 g r a d u a l l y reduced. days, repayment by the s i n k i n g fund method was business.  S i n k i n g funds are easy to r a i d .  In pre-war always a slow  In any  difficulty,  there i s a temptation f o r a harassed f i n a n c e m i n i s t e r to d i v e r t the funds t h a t would otherwise be used f o r redemption  of debt  r a t h e r than to use the i n e v i t a b l y unpopular method of f u r t h e r taxation. of any  Where t a x a t i o n i s so heavy t h a t the a v a i l a b l e  t a x a t i o n are exhausted, substantial surplus.  sources  i t i s extremely d i f f i c u l t to r a i s e A country t h a t i s h e a v i l y burdened  by taxes can, a t most, hope f o r a v e r y gradual r e d u c t i o n o f 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 p a s t , government debts have been put on more  f a v o u r a b l e terms from the t a x p a y e r s ' p o i n t o f view by p r o c e s ses of debt c o n v e r s i o n .  In the case of a permanent l o a n , the  government i s i n the p o s i t i o n of having undertaken fixed rate of interest u n t i l  t o pay a  the debt i s r e p a i d a t p a r , w i t h -  out having any o b l i g a t i o n to make the repayment a t any date.  fixed,  I f the c u r r e n t r a t e of i n t e r e s t f a l l s , t h e v a l u e of the  bonds w i l l r i s e ;  i n these circumstances, i t might be  possible  to  " c o n v e r t " the debt by r e d u c i n g the r a t e of i n t e r e s t ; i . e . ,  1.  Pigou, A. C ,  2.  D a l t o n , H.,  A Study i n P u b l i c F i n a n c e , p.  P r i n c i p l e s of P u b l i c F i n a n c e , pp.  289  276-281  /  78 from, yfo t o 2-§%.  The h o l d e r s would be g i v e n the o p t i o n of r e -  payment a t par, so they would s u f f e r no  injustice.  I n the case of debt repayable a t par a t a f i x e d the government has the o p p o r t u n i t y of reborrowing f a v o u r a b l e terms whenever the debt long-dated  f a l l s due.  date,  on more  In the case o f  s e c u r i t i e s , t h i s o p p o r t u n i t y o n l y occurs at the  end of l o n g p e r i o d s . h o l d e r s may  In the case of s h o r t - d a t e d  be w i l l i n g to convert i n t o long-term  securities, l o a n s at more  f a v o u r a b l e r a t e s from the taxpayers' p o i n t o f view.  Consider-  a b l e economies of t h i s k i n d are o n l y l i k e l y to be p o s s i b l e i f the f i n a n c i a l p o l i c y of the government commands c o n f i d e n c e , and i f the i n t e r e s t r a t e has f a l l e n s i n c e the o r i g i n a l  .  rowing.  bor-  1  Postponement o f Repayment: What i t Means The t r a d i t i o n a l methods o f repaying debt do not seem to promise more than a gradual r e d u c t i o n of c o s t , and we ready r e f e r r e d to the disadvantages the heavy r e c u r r i n g t a x a t i o n may development, and may  of t h i s .  have a l -  The burdens of  prove a handicap  on economic  make i t i m p o s s i b l e f o r the s t a t e to under-  take necessary p r o d u c t i v e expenditure.  Where p r i c e s are  l i n g , the arguments a g a i n s t the p e r p e t u a t i o n of the debt p a r t i c u l a r l y strong.  falare  The discouragement grows h e a v i e r and  the  bond h o l d i n g c l a s s g a i n s s t e a d i l y a t the expense of the taxpayers.  The  economic e v i l s of enormous debts and v e r y heavy  t a x a t i o n are s u f f i c i e n t l y apparent.  1.  Withers, W.,  But are the  difficulties  The Retirement of N a t i o n a l Debts, 1932, pp.311^ 325, c i t e d i n Fagan, E.D. and. Macy, C.W., P u b l i c Finance, p. 823  79. and disadvantages of immediate repayment any l e s s ? The most" popular argument a g a i n s t immediate repayment of war debt i s probably t h a t , as the present g e n e r a t i o n bore so much o f the c o s t o f the war, they are j u s t i f i e d  i n l e a v i n g the  burden o f the repayment of the war debts t o p o s t e r i t y .  This  1 might be t r u e i f p o s s i b l e .  But as f a r as the i n t e r n a l debt  i s concerned, the g e n e r a t i o n which makes the l o a n f i n d s the funds once and f o r a l l . war uses. will  They are t r a n s f e r r e d from peace t o  P o s t e r i t y s u f f e r s because new c a p i t a l  investments  be c u r t a i l e d and e x i s t i n g c a p i t a l allowed t o d e p r e c i a t e ,  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 and cannot be s h i f t e d on t o p o s t e r i t y .  i s not  I n the case of a t a x ,  the matter i s ended when the t a x i s p a i d .  In the case of a  l o a n , i n t e r e s t i s p a i d by succeeding g e n e r a t i o n s , but they pay it  t o bondholders o f the same g e n e r a t i o n .  repayment.  The same i s t r u e o f  I f we repay our debt now, we repay i t t o o u r s e l v e s .  I f we l e a v e i t to 1980,  taxpayers i n those years w i l l pay bond-  h o l d e r s i n those y e a r s , and taxpayers i n a l l the i n t e r v e n i n g years w i l l presumably those y e a r s .  pay those w i t h c l a i m s f o r i n t e r e s t i n  What p o s t e r i t y pays i t pays t o i t s e l f , and we  cannot make i t bear any of our burdens.  The o n l y q u e s t i o n i s  whether the disadvantages o f c o n t i n u a l r e d i s t r i b u t i o n  through  t a x a t i o n , i n t e r e s t payments and gradual repayment are l e s s than the disadvantages of one g r e a t upheaval and one g r e a t d i s t r i b u tion.  1. 2.  2  S p i e g e l , H. W.,  325-327 pp. 289-290  The Economics o f T o t a l War, pp.  Pigou, A..C.,. A Study i n P u b l i c Finance,,  80.  The Advantages of Immediate  Repayment  The main advantages o f a s p e c i a l l e v y t o repay debt seem to be: (1)  That as the l e v y would be imposed f o r a s p e c i a l pur-  pose and would be d e f i n i t e l y intended not t o r e c u r , any bad e f f e c t t h a t the e x p e c t a t i o n o f i t might have i n r e d u c i n g prod u c t i o n would be l i m i t e d i n time, and the r e d u c t i o n i n t a x a t i o n in  the f u t u r e would reduce i t s p o s s i b l e bad e f f e c t s on the  incentives to production.  The h e a v i e r the annual t a x a t i o n the  g r e a t e r the advantages o f a r e d u c t i o n would be, and a much s t r o n g e r case f o r an,immediate e x c e p t i o n a l e f f o r t t o repay debt e x i s t s when the annual t a x a t i o n i s heavy than when i t i s o n l y moderate as compared w i t h the t o t a l income o f the c o u n t r y . (2)  Where a f a l l  i n p r i c e s i s expected, the case f o r  immediate redemption i s e x c e p t i o n a l l y s t r o n g , f o r without i t the  burden o f debt i n c r e a s e s and the h o l d e r s o f government  s e c u r i t i e s g a i n a t the expense o f the taxpaying community.  If  a r i s e i n p r i c e s were expected, immediate repayment would be l e s s to the taxpayers' i n t e r e s t , . f o r the f u t u r e f a l l  i n the  value o f money would a u t o m a t i c a l l y reduce t h e i r burden a t the expense o f the h o l d e r s o f government  securities.  The two forms o f s p e c i a l l e v y t h a t have been suggested have been a s p e c i a l l e v y on a l l  accumulated w e a l t h and a s p e c i a l  l e v y on w e a l t h accumulated d u r i n g t h e war.  On the whole, a l -  though annual t a x a t i o n 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 c o n t r i b u t e t o one s p e c i a l l e v y depends upon h i s t o t a l r e s o u r c e s r a t h e r than upon h i s i n come a t the date a t which the l e v y i s imposed, and t o t a l r e -  81.  sources are p r o b a b l y probably p r a c t i c a l l y b e s t measured by accumulated  wealth.  A Levy on C a p i t a l The p r o p o s a l t o impose a g e n e r a l c a p i t a l l e v y has been condemned as i n e q u i t a b l e , i m p r a c t i c a b l e , and l i k e l y t o a f a t a l blow on our i n d u s t r i a l p r o s p e r i t y .  inflict  I t i s perhaps  im-  p o r t a n t to p o i n t out t h a t to answer these charges f o r p r a c t i c a l purposes,  s u p p o r t e r s of the l e v y have to show not t h a t i t i s  p e r f e c t l y e q u i t a b l e , capable of p e r f e c t a d m i n i s t r a t i o n o r w i t h out any i n j u r i o u s economic r e s u l t s , but only t h a t  (on the whole)  i t s e f f e c t s are l e s s bad than those of r e c u r r i n g annual t a x a tion. As f a r as e q u i t y i s concerned,  the e x i 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 t h a t i t h a r d l y 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 f a i r n e s s . was  open t o c r i t i c i s m .  The  accumulation of the debt  When people who  c a l l e d upon to make the most complete  itself  were a b l e t o f i g h t were  personal s a c r i f i c e s with  the minimum of p e c u n i a r y compensation,  the f a c t t h a t people  who  were a b l e to l e n d should have been e n t i t l e d to the v e r y f a v o u r a b l e terms they got f o r t h e i r l o a n s may  have been expedient,  but w i l l h a r d l y bear s t r i c t s c r u t i n y from the p o i n t of view of "equity".  There seems every reason to condemn those terms be-  i n g a u t o m a t i c a l l y 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  1. Pigou, A. C ,  selling  A Study i n P u b l i c Finance, pp. 298-299 and  PP. 303-304  82.  of  securities.  F u r t h e r , where i n d u s t r y i s depressed by the  heavy t a x a t i o n necessary to meet i n t e r e s t payments, we  have,  i n e f f e c t , a l l a c t i v e producers p e n a l i z e d i n the i n t e r e s t s of those who  h o l d o l d accumulations of w e a l t h w i t h c l a i m s to i n t e -  rest. I t i s c e r t a i n l y d i f f i c u l t t o make a c a p i t a l l e v y p e r f e c t ly fair  between i n d i v i d u a l s .  h e a v i l y on those who who  I t would appear t o f a l l most  have accumulated  have spent, on those who  pared w i t h those who  1  as compared w i t h those  work w i t h l a r g e c a p i t a l as com-  make l a r g e incomes by t h e i r p e r s o n a l ex-  e r t i o n s , w h i l e i n any heavy tax i t i s d i f f i c u l t to avoid cases 2 of p e r s o n a l h a r d s h i p .  As f a r as the f i r s t p o i n t i s concerned,  the d i f f e r e n t i a t i o n a g a i n s t accumulated w e a l t h i s found i n our e x i s t i n g t a x a t i o n as w e l l as i n the l e v y , and i t i s perhaps t r u e 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-  c e p t i o n a l circumstances which enabled people t o accumulate i n the past few y e a r s . lem, but a working  The  second p o i n t p r e s e n t s a r e a l  wealth  prob-  s o l u t i o n of i t . might be found by imposing an  a d d i t i o n a l tax on p r o f e s s i o n a l incomes f o r a term of y e a r s . far of  As  as cases of p e r s o n a l h a r d s h i p are concerned, the o n l y method a v o i d i n g them i s by exempting  a minimum of w e a l t h from the  l e v y and by g r a d u a t i o n of the r a t e s of tax on accumulations of c a p i t a l of d i f f e r e n t  size.  There seems ho e s s e n t i a l r e a s o n to  t h i n k that the h a r d s h i p would n e c e s s a r i l y be g r e a t e r than under the income t a x . The q u e s t i o n as to how  f a r the l e v y i s a d m i n i s t r a t i v e l y  1. Pigou, A. C , A Study i n P u b l i c F i n a n c e , p. 2. I b i d . , pp. 3 0 4 - 3 0 5  304  83. p r a c t i c a b l e i s v i t a l l y important.- -  The  1  to be taxed, whether and are to be i n c l u d e d , both here and  how  d e f i n i t i o n of the w e a l t h  f a r f u r n i t u r e and  abroad, the v a l u a t i o n of the p r o p e r t y the p r e v e n t i o n  evasion a l l present t e c h n i c a l d i f f i c u l t i e s . ( a f t e r World War  I) a l e v y was  p r i c e s r a t h e r than to any  inherent  w h i l e the E n g l i s h revenue experts w e a l t h was  tween "war" ficulty  and  But  even a f t e r ,  of undue i t i s to be noted  imposed i n Germany  breakdown of which seemed to be due  on war  effects  or the p o s i t i o n of those who.hold c a p i t a l  the d e f i n i t i o n i s a r r i v e d a t , and  that  personal  to the  (the  f l u c t u a t i o n s of  administrative  difficulties),  agreed t h a t a s p e c i a l l e v y  not unworkable, although the d i s t i n c t i o n be-  "other" w e a l t h would c e r t a i n l y add  of a d m i n i s t r a t i o n .  posed s p e c i a l l e v y on war  The  to the  great advantage of the  wealth was  f a l l on a c l a s s from whom e x c e p t i o n a l  t h a t i t was  dif-  pro-  intended to  payments could  be  fairly  demanded. I t i s claimed f o r the l e v y t h a t , as i t would not a f f e c t f u t u r e w e a l t h , i t s e f f e c t s on p r o d u c t i o n  would be l e s s bad  than  3 those of r e c u r r i n g t a x a t i o n .  On the o t h e r hand, i t i s argued  t h a t the e f f e c t of the l e v y would be to s h a t t e r confidence i n our economic s t a b i l i t y , would not be  repeated, the p s y c h o l o g i c a l  o r d i n a r i l y bad. this.  1. 2.  3.  and whatever pledges were given  that i t  e f f e c t s would be  I t i s not p o s s i b l e to e i t h e r prove or  extra-  disprove  I t i s p o s s i b l e t h a t the immediate shock to confidence  Pigou, A. C , A Study i n P u b l i c Finance, pp. 305-308 Colwyn Committee on N a t i o n a l Debt and T a x a t i o n , c i t e d i n Pigou, A.C., A Study i n P u b l i c Finance, P a r t I I I , Chap. VI and D a l t o n , H. P r i n c i p l e s of P u b l i c F i n a n c e , p. 265 t  Pigou, op.  c i t . , pp.  291-293  84 might he c o n s i d e r a b l e , but i t i s more d i f f i c u l t to b e l i e v e t h a t experience of the p o s i t i v e b e n e f i t of lower t a x a t i o n would not have a compensating  effect.  That a l e v y imposed on c a p i t a l would n e c e s s a r i l y  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.  Although the tax i s imposed on c a p i t a l , i t i s l i k e l y  1  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  c a p i t a l and u s i n g the proceeds  f o r payment of t a x .  existing In the  case  of a heavy tax on income, the tax i s l i k e l y t o be a t l e a s t p a r t l y met  by r e d u c i n g new  s a v i n g or by r e a l i z i n g e x i s t i n g  capital.  In the case of the c a p i t a l l e v y , although many people would have to r e a l i z e a v a i l a b l e c a p i t a l to meet the tax, the h o l d e r s of the war l o a n s who new  investments  n e c e s s a r i l y be Any  and  would be p a i d would presumably be  seeking  the t o t a l c a p i t a l of the c o u n t r y would not  reduced.  f i n a l c o n c l u s i o n as to the a d v i s a b i l i t y of t h e tax  must depend upon a d e t a i l e d i n v e s t i g a t i o n of the amount t h a t could be r e a l i z e d , and the r e d u c t i o n of t a x a t i o n t h a t would result.  F o r w h i l e i t might be worth r i s k i n g the d i s t u r b a n c e of  the l e v y f o r a c o n s i d e r a b l e r e t u r n , i t would not n e c e s s a r i l y worth i t f o r o n l y an i n s i g n i f i c a n t r e d u c t i o n .  Various  be  estimates  have been made, but the f l u c t u a t i o n s of money v a l u e s make a d e f i n i t e estimate i m p o s s i b l e .  One  point i s clear.  The  best  moment f o r a l e v y would be d u r i n g the p r i c e boom f o l l o w i n g the end of the war.  I f a l e v y were imposed a t such a time,  then,  because of the i n f l a t e d v a l u e s and i n f l a t e d money incomes, i t 1. Pigou, A. C., A Study i n P u b l i c F i n a n c e , pp.  297-298  85  would i n v o l v e the a b s o r p t i o n o f a s m a l l e r percentage  o f the  t o t a l income, the d i s t u r b a n c e would be l e s s , the p s y c h o l o g i c a l . e f f e c t i n the midst o f the boom would be l e s s s e r i o u s (and might even be b e n e f i c i a l i n checking o v e r - s p e c u l a t i o n ) , w h i l e we would be spared the a d d i t i o n a l handicap o f heavy debt t a x a t i o n when the boom and r i s i n g p r i c e s a r e f o l l o w e d by f a l l i n g p r i c e s and d e p r e s s i o n .  A p e r i o d o f d e p r e s s i o n does not appear  a f a v o u r a b l e moment f o r a l e v y , p a r t l y because i t might add t o the e x i s t i n g l a c k o f c o n f i d e n c e , and p a r t l y because i t would be an unfavourable time f o r the taxpayers t o r e a l i z e a s s e t s t o meet the n e c e s s a r y  their  payments."''  1. Dalton, H., P r i n c i p l e s of P u b l i c Finance, pp. 266-267 Pigou, A. C ,  A Study i n P u b l i c F i n a n c e , pp. 308-309  PART  WAR F I N A N C E  IN  III  CANADA  (1914-21)  CHAPTER V I I I SOURCES OE REVENUE Introduction " I t i s d o u b t f u l whether a country ever was more unprepared f o r p a r t i c i p a t i o n i n war i n 1914.  I t was  on a n a t i o n a l  s c a l e than Canada  a n a t i o n devoted t o p e a c e f u l p u r s u i t s , 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 c o u n t r i e s the world o v e r " .  1  "By 1914,  the investment boom based  on f o r e i g n borrowing had come to an end. t i v e to t u r n from the c o n s t r u c t i o n of  I t then became impera-  c a p i t a l works to g r e a t e r  p r o d u c t i o n of e x p o r t a b l e products i n o r d e r t o pay the i n t e r e s t on the l a r g e investments of the p r e c e d i n g decade.  T h i s major  s h i f t and readjustment t h r e a t e n e d to be p a i n f u l and prolonged, but under the stimulus of war  demands the Canadian  economy  turned the c o r n e r w i t h ease and expanded i t s p r o d u c t i o n immensely i n a v e r y s h o r t p e r i o d o f time.  By f o r c e of c i r c u m -  stances, Canada's  f o r e i g n borrowings dwindled u n t i l they d i s -  appeared  In the l a t e r years o f . t h e war,  i n 1917.  the g r e a t  expansion i n p r o d u c t i o n combined w i t h the p o l i c i e s of the Fede r a l Government enabled Canada to become an important l e n d e r , f i n a n c i n g B r i t i s h purchases of Canadian goods.... The requirements were f o o d s t u f f s and m u n i t i o n s . 1. Brown, F. H.,  principal  The former  was  The H i s t o r y of Canadian Yfar Finance 1914-1920 p. 1  88  Canada's main export and the p r o d u c t i o n o f the l a t t e r was  quickly-  undertaken by the depressed manufacturing i n d u s t r y . There i s no need to emphasize the unanimity of c o n v i c t i o n w i t h which Canada threw i t s e l f i n t o the s t r u g g l e . . . . The u n i t e d e f f o r t r e q u i r e d of a n a t i o n by modern war p l a c e s a great on the p o l i t i c a l u n i t y of any p e o p l e .  strain  But the events o f the  Great War p r o v i d e the most s t r i k i n g i l l u s t r a t i o n of the p e c u l i a r c h a r a c t e r 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 The War gave predominance t o the F e d e r a l Government single objective f o r a l l  Canadians.  system.  and s e t a  In a sense, the War was a  great n a t i o n a l e n t e r p r i s e , a corporate endeavour by the whole countryV.. .*"However, we are predominately i n t e r e s t e d i n the manner i n which Canada f i n a n c e d her war e f f o r t d u r i n g t h i s p e r i o d i n which the economy of the country underwent  such a severe  strain.  To make the best p o s s i b l e use o f the r e s o u r c e s o f the n a t i o n , the Dominion Government and f i n a n c i a l p o l i c i e s .  l e g i s l a t e d and enforced c e r t a i n economic These guided and governed the methods  of p u b l i c f i n a n c e employed by the F e d e r a l Government  d u r i n g the  war p e r i o d , and through them, Canada became a g r e a t source o f e s s e n t i a l s u p p l i e s f o r the A l l i e d  cause.  were implemented have had a permanent  The p o l i c i e s which  e f f e c t upon the economic  p  and s o c i a l s t r u c t u r e of the country. their effects i n sufficient detail  We must examine them and  so that we f u l l y understand  the problem as i t e x i s t e d then and as a s i m i l a r problem has e x i s t e d these past few y e a r s . 1. Report of the Royal Commission on Dominion P r o v i n c i a l Book I . pp. 89-97 2. I b i d . , p. 98 t  Relations.  89. P r e l i m i n a r y Steps The e x i g e n c i e s of war  immediately f o r c e d the F e d e r a l  Government i n t o adopting an a g r e s s i v e r o l e . p o l i t i c a l a c t i o n was war  1  A great deal of  necessary a t t h i s time, and a t a  special  s e s s i o n of P a r l i a m e n t i n August much l e g i s l a t i o n was  w i t h a minimum of d e b a t e . granted the sum of $50  2  The War A p p r o p r i a t i o n s A c t ,  c o n f e r r e d powers upon the  nor i n C o u n c i l and amended the Immigration A c t . 1914  1914  m i l l i o n f o r m i l i t a r y and n a v a l defence,  and the War Measures A c t , 1914  Act,  passed  Gover-  The Finance  and the Dominion Notes A c t were passed i n the com-  m e r c i a l and f i n a n c i a l i n t e r e s t s  of the Dominion under the  cumstances a r i s i n g out of the war.  cir-  A l s o , the Customs T a r i f f  Amendment A c t and an A c t t o amend the Inland Revenue A c t were passed t o p r o v i d e an i n c r e a s e i n government revenues. the end of J u l y 1914,  At  Canada w i t n e s s e d an  incipient  f i n a n c i a l p a n i c when the banks were faced w i t h a heavy demand for gold.^  The government suspended  notes i n g o l d , and l e g i s l a t i o n was l e g a l tender.  the redemption of Dominion  announced making bank notes  F u r t h e r , the banks were g i v e n emergency powers  to make use of the excess c i r c u l a t i o n p r i v i l e g e ^ " the year round and they could a l s o o b t a i n a d d i t i o n a l Dominion notes by p l e d g i n g approved  s e c u r i t i e s w i t h the M i n i s t e r of F i n a n c e .  ment measures a v e r t e d the immediate 1. 2.  3.  4.  These  govern-  danger to the banks but they  Report of the Royal Commission on D o m i n i o n - P r o v i n c i a l R e l a t i o n s , Book I , p. 98 Canada Year Book, 1914, p. 677 Brown, F.H., The H i s t o r y of Canadian War Finance 1914-1920,p.5 Before t h i s , the banks had been p e r m i t t e d to i s s u e 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 r e s t o r r e serve funds up t o 15% d u r i n g 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 . previous  By a b o l i s h i n g or w a i v i n g  r e s t r i c t i o n s , the F e d e r a l Government now  d i s p o s a l the machinery f o r an expansive and system.  had  the  at i t s  inflationary  credit  1  Another problem t h a t demanded immediate a c t i o n was of exchange.*"  A t the beginning  don were c h a o t i c .  of the war,  that  c o n d i t i o n s i n Lon-  The Bank r a t e 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 r a i d e r s on the  gold could not be s a f e l y shipped the M i n i s t e r of Finance, the Bank of England.  to England,  sea-lanes,  Canada, through  became t r u s t e e f o r gold consigned to  T h i s kept s t e r l i n g exchange at a moderate  premium f o r some months but  e v e n t u a l l y the r a t e tended to  go  a g a i n s t Great B r i t a i n w i t h the r e s u l t t h a t most of the g o l d which had  o r i g i n a l l y come from the U n i t e d  that, country. the war  and  f i n a n c e war  T h i s arrangement was  S t a t e s returned  i n operation  to  throughout,  Canada became the t r u s t e e f o r A l l i e d g o l d used to 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 c o u n t r i e s , government was of the war.  slow to r a i s e the t a x l e v e l s a f t e r the outbreak  T h i s was  yet f e e l t h a t the war cause Canada entered 1.  2.  the  p a r t l y because Canadian o p i n i o n d i d not would be of l o n g d u r a t i o n , and p a r t l y bethe war  i n a p e r i o d of d e p r e s s i o n  that  Report of' the Royal Commission on D o m i n i o n - P r o v i n c i a l Relat i o n s , Book I , p. 98 — — Brown, F. H., The H i s t o r y 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 .  F o r these reasons alone, a  s i 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  a t the beginning  o f the war.  Furthermore, any  tempt of the Dominion to gain more revenues almost i n v o l v e d some c o n f l i c t w i t h the p r o v i n c e s and  certainly  r e sources  o f revenue,  any such attempt seemed l i k e l y to i n v o l v e new tax  ments that would prove c o s t l y i n a s h o r t In the e a r l y days o f the war,  instru-  war.  there was no conception  of the magnitude o f the task a t h a n d . war would soon be over.  at-  1  Everyone thought  the  I n order to meet i t s f i n a n c i a l r e -  quirements, the F e d e r a l Government proceeded along  several  o  lines.  F i r s t l y , i t imposed s p e c i a l e x c i s e d u t i e s on tobacco  and l i q u o r s and r a i s e d the customs d u t i e s on c o f f e e , sugar, tobacco and l i q u o r s . was  Secondly, a short term l o a n o f $5 m i l l i o n  n e g o t i a t e d w i t h the Bank o f Montreal.  Thirdly, a £3 m i l - . .  l i o n i s s u e o f s i x month's t r e a s u r y b i l l s together w i t h  the  $8.7 m i l l i o n balance o f a $35.5 m i l l i o n funded loan'were f l o a t ed i n London.  F o u r t h l y , arrangements were made w i t h the Im-  p e r i a l Government t o a s s i s t Canada i n f i n a n c i n g i n t e r e s t payments on i t s debt and  the expense of her army i n England, i n  f a c t , t o f i n a n c e the whole Canadian c o s t o f the war. of £ 12 m i l l i o n was provided  f o r t h i s purpose.  A sum  L a s t l y , the  F e d e r a l Government a u t h o r i z e d the i s s u e o f more Dominion notes.^ 1. Brown, F. H., The H i s t o r y o f Canadian War Finance 1914-1920,p.7 2. I b i d , p . 8 Report o f the Royal Commission on Dominion P r o v i n c i a l R e l a t i o n s , Book I , p. 98 3. The amount of. Dominion notes t h a t could be i s s u e d a g a i n s t a 25% r e s e r v e of gold was i n c r e a s e d from $30 m i l l i o n t o $50 m i l l i o n , $16 m i l l i o n o f Dominion notes were i s s u e d a g a i n s t $20 m i l l i o n guaranteed r a i l w a y s e c u r i t i e s and $10 m i l l i o n were i s s u e d f o r general government purposes.  92. P a r t of t h i s i s s u e was t i o n , and The  an i n s t a n c e of d i r e c t c u r r e n c y  should be noted  infla-  carefully.  funds r a i s e d above were used to cover the c u r r e n t  d e f i c i t , the war  expenditures and  must mention here t h a t no new  c a p i t a l expenditures.  We  p u b l i c works were begun; the  c a p i t a l expenditures were c o n f i n e d to works under c o n t r a c t such as Welland Canal, N a t i o n a l T r a n s c o n t i n e n t a l Railway other important  p o r t and t e r m i n a l  undertakings.  and  1  1915-16 As the war advanced, a l l the f a c t o r s t h a t a f f e c t e d t i o n and borrowing had now and  i n Canada a l t e r e d t h e i r b e a r i n g .  been i n p r o g r e s s almost  The  taxawar  one year; t h e r e f o r e , a c l e a r e r  f u l l e r conception of the problem to be surmounted was  sible.  As Canadian war  expenditure  i n c r e a s e d and as  pos-  debts  mounted, i t seemed l i k e l y t h a t the Dominion would r e q u i r e l a r g e r revenues i n the f u t u r e , so t h a t the establishment new  tax machinery would f i l l  a r y need. gave way  Then, as the war  of  a permanent r a t h e r than a temporcontinued, the trade d e p r e s s i o n  to r e c o v e r y which i n c r e a s e d n a t i o n a l income and hence  the amounts a v a i l a b l e f o r t a x a t i o n o r borrowing.'  The  war  served to i n c r e a s e the demand f o r Canadian exports and  this,  combined w i t h a good wheat crop, brought a s u b s t a n t i a l measure  2 of r e c o v e r y . a war  Because the economy as a whole was  b a s i s , p s y c h o l o g i c a l change was  moving on  i n c r e a s i n g the  citizens*  w i l l i n g n e s s to make s a c r i f i c e s .  1.  Brown, P. H.,  2.  I b i d . , p.  10  The H i s t o r y of Canadian War p. 7  Finance  1914-1920,  93  A t e n t a t i v e a p p r o p r i a t i o n of $100 poses was  asked f o r i n t h i s p e r i o d and  t h i s might not be  enough.  1  m i l l i o n f o r war i t was  realized  A c u r r e n t d e f i c i t , of $20  was  expected, $40 m i l l i o n was  and  $20 m i l l i o n f o r repayment of temporary l o a n s .  the war  cost of around $166  r e q u i r e d re c a p i t a l  m i l l i o n was  purthat  million  expenditures However,  i n excess o f the  es-  timate by $66 m i l l i o n ; t h e r e f o r e , c o n s i d e r a b l e funds had be r a i s e d  to  by borrowing as the t a x a t i o n measures proposed  could not p o s s i b l y meet t h i s " E a r l y i n 1915,  total.  the f i r s t  s p e c i a l war  taxes were imposed.  Taxes were p l a c e d on bank note c i r c u l a t i o n , on the gross i n come of l o a n and l i f e insurance r a i l w a y and  t r u s t companies, on the premium income of  companies, on t e l e g r a p h and  steamship t i c k e t s and  accommodation.  on sleeping-and  Postage r a t e s were i n c r e a s e d and  placed on cheques, b i l l s of exchange, e t c . on patent medicines, a d d i t i o n a l 7s% Intermediate  cable messages, on  w  a  s  perfumery and  i s h Preference. to y i e l d about $25  stamp  taxes  Imposts were made  n o n - s p a r k l i n g wines.  l e v i e d on imports  t a r i f f schedules  p a r l o u r car  under the General  and  5% on items under the  and  An  Brit-  These t a x a t i o n i n c r e a s e s which were expected m i l l i o n went, however, o n l y a small way  ward meeting the Government's f i n a n c i a l needs o f $166 d u r i n g the f i s c a l year 1915-16".  'We  million  2  The main f e a t u r e of the budget was t a r i f f s as i n d i c a t e d above.  to-  the r a i s i n g o f the  should note t h a t , although  1. Brown, F. H.,  the  The H i s t o r y of Uanadian War Finance 1914-1920, PP. 9-10 Canada Year Book, 1915, pp. 678-679 2* Report of the Royal Commission on D o m i n i o n - P r o v i n c i a l R e l a t i o n s , Book I , p. 98 • • :  94.  revenue obtained  from t h i s i n c r e a s e  l i o n by the end of 1920)*** was owing to accounting and  (estimated a t $180  never shown as s p e c i a l war  d i f f i c u l t i e s , i t was  stopped a f t e r the end of t h e war.  revenues exceeded e x p e c t a t i o n s , due p r i c e s and  mil-  a s p e c i a l war  revenue  impost  A c t u a l l y the  year's  to a good crop,  rising  g e n e r a l l y improved c o n d i t i o n s , but e x t e n s i v e  bor-  2 rowing was  still  unavoidable.  In the f i r s t p a r t of the year, £5 m i l l i o n , 5 year, ksfo debentures were s o l d at 9'9i« s t e r l i n g exchange was  But i n the summer of 1915  (when  at a l a r g e d i s c o u n t ) , the arrangement  w i t h the B r i t i s h government to f i n a n c e the Canadian war collapsed. the war  A l l t h a t Great B r i t a i n c o u l d now  expenditures  which Canada made overseas.  other p o s s i b l e source d i a n government was the  s a l e of $45  r e s p e c t i v e l y was  do was  costs  to f i n a n c e  The  only  of f o r e i g n funds l e f t open to the Cana-  the New  York money market.  m i l l i o n 1 and arranged  In J u l y  1915,  2 year, 5% notes a t par and  i n this market.  i t s needs, the F e d e r a l government was  99-g  For the balance  of  next o b l i g e d to approach  the Canadian i n v e s t o r . The F e d e r a l Government was  now  faced w i t h the problem of  r a i s i n g the funds f o r the c o s t o f i t s own at home and to 1914,  to f i n a n c e B r i t i s h war  the government had  2. I b i d . , p.  10  e f f o r t incurred  purchases i n Canada.  never r a i s e d so much as $5  i n Canada as a l o n g term l o a n — 1. Brown, F. H.,  war  l e s s than $700,000 of  The H i s t o r y of Canadian War p. 9  Finance  Prior million the  1914-1920.  95.  t o t a l f e d e r a l debt was  payable  i n Canada.  1  I t was  b e l i e v e d by  many t h a t the maximum which the Canadian market could was  $25 m i l l i o n .  But t h i s was  not n e a r l y enough.  ment (which dare not r i s k f a i l u r e ) o f f e r e d $50  absorb  The  million,  govern5$  coupon r a t e , exempt from Dominion government t a x a t i o n a t a d i s c o u n t i n November, 1915• were unfounded.  The l o a n was  However, the government's f e a r s over-subscribed  (mainly by  c i a l i n s t i t u t i o n s and other business o r g a n i z a t i o n s ) , and government i n c r e a s e d the t o t a l a l l o t m e n t to $100 The a d d i t i o n a l $50  finanthe  million.^  m i l l i o n r a i s e d i n t h i s manner was  placed at  the d i s p o s a l of the B r i t i s h government to f i n a n c e the purchase of s u p p l i e s i n Canada and  the U n i t e d States.* " 4  T h i s not o n l y  b o l s t e r e d moral but a l s o marked the beginning o f what was  to  become the o u t s t a n d i n g f e a t u r e of Canada's war-time program of f i n a n c e ; i . e . , England would f i n a n c e Canadian t r o o p s i n Great B r i t a i n and om the c o n t i n e n t f o r our account w h i l e Canada would f i n a n c e E n g l i s h war  expenditures  i n the U n i t e d S t a t e s and  Can-  ada.  5 From 1915  "to 1918,  The growing burden was d i a n problem.  Canada's war  e f f o r t grew r a p i d l y .  becoming more and more a s t r i c t l y Cana-  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 R e l a t i o n s , Book I , p. 98 2. Brown, F. H., The H i s t o r y 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 D o m i n i o n - P r o v i n c i a l R e l a t i o n s , Book I,, p. 99  96.  to Canada.  E s s e n t i a l l y , Canada was  buying her own  s h i p p i n g them overseas t o her A l l i e s .  exports and  T h e r e f o r e , Canada's  c o n t r i b u t i o n i n c r e a s e d i n p r o p o r t i o n t o her a b i l i t y to r a i s e the necessary funds. courses open t o i t : paper money.  The F e d e r a l Government had t h r e e main t a x a t i o n , borrowing and the p r i n t i n g o f  The country ( p u b l i c o p i n i o n ) was  presumably not  ready f o r h i g h t a x a t i o n , the i s s u e of Dominion notes was dangerous p r a c t i c e , so the bulk of the revenue was  considered  raised  by  borrowing. The government's g e n e r a l f i n a n c i a l p o l i c y f o r the moment was  announced i n the 1916  the war mainly by b o r r o w i n g .  1  budget; v i z . , t o meet the c o s t of I t was  f e l t t h a t people would  be w i l l i n g to l e n d t h e i r money f o r the p r e s e r v a t i o n of n a t i o n a l and i n d i v i d u a l l i b e r t y which has been won w i t h great h a r d s h i p .  by t h e i r  forefathers  I t i s c l e a r that the government would  have p r e f e r r e d a p o l i c y i n v o l v i n g more t a x a t i o n and the Budget Speech o f t h a t year d i s c u s s e s the problem a t some l e n g t h .  How-  ever, business confidence was  was  none too h i g h , unemployment  a f a c t o r , and the n e c e s s i t y f o r m a i n t a i n i n g the l e v e l o f prod u c t i o n and the n a t i o n a l income was  of g r e a t importance.  People  were not used to heavy tax burdens and p r o d u c t i o n might have suffered.  A democratic government does not go f a s t e r than i t s  p u b l i c o p i n i o n , and we would not overlook t h i s p o i n t i n our d i s c u s s i o n of war f i n a n c e . The amount of money a v a i l a b l e f o r domestic l o a n s depended upon the savings of the people and the r e d u c t i o n i n 1. Brown, F. H.,  The H i s t o r y of Canadian War  P. 9  Finance 1914-1920.  97.  p r i v a t e investment.  The funds a v a i l a b l e became i n s u f f i c i e n t  and the F e d e r a l Government was f o r c e d t o b r i n g about through the agency o f bank c r e d i t .  inflation  T h i s occasioned an expan-  s i o n and r e d i s t r i b u t i o n o f the money income o f the n a t i o n . P r i c e s and hence the c o s t o f l i v i n g rose f a s t e r than  average  2 wage r a t e s and f i x e d incomes.  The p r o f i t s o f i n d u s t r y i n -  creased w h i l e t h e r e a l income o f wage earners and people f i x e d incomes d e c l i n e d o r rose l e s s  with  rapidly.  I t was t h i s r e d i s t r i b u t i o n o f r e a l wealth  i n the country,,  combined w i t h the i n c r e a s e i n p r o d u c t i o n , t h a t made the l a r g e war  loans a success.  1916-17 In the f i s c a l year 1916-17, the expansion r e a l l y got under way.^  Canadian war expenditures  of bank c r e d i t approximated  $306 m i l l i o n and c a p i t a l expenditures were about $26-$27 m i l l i o n ^  5 E a r l y i n 1916, the Business P r o f i t s War Tax A c t was imposed. 1. Report o f the Royal Commission on D o m i n i o n - P r o v i n c i a l R e l a t i o n s , Book I , p. 99 2. Wages i n c e r t a i n war i n d u s t r i e s and o f c e r t a i n u n s k i l l e d groups rose more r a p i d l y than the cost o f l i v i n g , but the wage r a t e s r e c e i v e d by a l a r g e s e c t i o n of l a b o u r , p a r t i c u l a r l y the s k i l l e d t r a d e s and the w h i t e - c o l l a r c l a s s , f e l l behind the r i s e i n the c o s t o f l i v i n g . The Dominion Department of Labour index o f the g e n e r a l movement o f wage r a t e s (exc l u d i n g p r o f e s s i o n a l workers and the w h i t e - c o l l a r c l a s s ) rose 2% between 1913 and 1917, w h i l e the Dominion Bureau o f S t a t i s t i c s index o f the c o s t o f l i v i n g rose 31%. 3. Report o f the Royal Commission on D o m i n i o n - P r o v i n c i a l R e l a t i o n s , Book I , p . 99 4. Appendix E 5. Canada Year Book, 1916-17, pp. 674-675  -  98.  I t was made r e t r o a c t i v e designed  t o the beginning o f the war.  This tax,  to reduce the n e t p r o f i t s obtained because o f the war,  took 25% o f a l l n e t p r o f i t s  (except i n l i f e  insurance and a g r i -  c u l t u r e ) i n excess o f 7% on the c a p i t a l o f c o r p o r a t i o n s and i n excess o f 10% on the c a p i t a l o f i n d i v i d u a l s , f a a r t n e r s h i p s , e t c . Any business w i t h a paid-up  c a p i t a l of l e s s than $50,000 was  exempted, u n l e s s engaged i n the p r o d u c t i o n o f war s u p p l i e s and munitions.  C o n s i d e r a b l e funds s t i l l  had t o be r a i s e d  by bor-  rowing and t o t h i s end, a $75 m i l l i o n l o a n was f l o a t e d York.  i n New  This was the s o l e long-term l o a n p l a c e d i n New York dur-  i n g the war. However, the requirements  o f the F e d e r a l Government were  f a r i n excess o f the revenues r a i s e d  above.  To h e l p meet the  s i t u a t i o n , a $100 m i l l i o n , 15 year, 5% t a x - f r e e l o a n was s o l d in  Canada a t 9 7 § along w i t h 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 s t o c k , etc." " 1  Then the banks stepped i n  and by use o f t h e i r c r e d i t machinery d i d much to h e l p the govern2 ment f i n a n c e the war.  Current bank l o a n s t o business rose by  $73 m i l l i o n d u r i n g 1916-17.  The banks purchased  of the government's short-term t r e a s u r y b i l l s . $100 m i l l i o n t o the I m p e r i a l Munitions Board in  Canada and e s t a b l i s h e d a  f o r the purchase  $100 m i l l i o n They advanced  f o r expenditures  r e v o l v i n g c r e d i t o f $20 m i l l i o n  o f wheat by the I m p e r i a l government.  These  banking c r e d i t s had as a b a s i s ah i s s u e o f £ 2 2 m i l l i o n , 3ir/4-g$ 1. Brown, F. H., The H i s t o r y o f Canadian War Finance 1914-1920, P. 13 2. Report o f the Royal Commission on D o m i n i o n - P r o v i n c i a l R e l a t i o n s . Book I , pp. 99-100  99.  bonds which Canada i s s u e d (they were not a c t u a l l y sold) t o Great B r i t a i n ,  1  A l l t h i s e x t r a purchasing power i n the country  caused a s w i f t r i s e i n p r i c e s , p r o d u c t i o n , money incomes,and p r o f i t s , thus making i t e a s i e r t o f l o a t domestic war l o a n s . We must not l o s e s i g h t o f the f a c t t h a t , w h i l e Canada was  expanding  her war  e f f o r t on the home f r o n t and  extending  v a l u a b l e a i d t o Great B r i t a i n , the I m p e r i a l government was s t i l l 2 f i n a n c i n g Canadian war  expenditures o v e r s e a s .  I n the  fiscal  year 1916-17, the I m p e r i a l government p a i d out on b e h a l f o f Canada some $151 m i l l i o n . Canadian  T h i s was,  of course, o f f s e t by the  advances t o the B r i t i s h government —  the I m p e r i a l  Munitions Board was producing war m a t e r i a l a t the r a t e o f $300 m i l l i o n a year by t h i s time, and the f i n a n c i n g o f such a l a r g e s c a l e o p e r a t i o n was no s m a l l problem. During the year j u s t reviewed, the government's f i n a n c i a l p o l i c y was  t o r e l y p r i n c i p a l l y on borrowing.  However, t o quote  the M i n i s t e r of F i n a n c e , "I do not d e s i r e t o be understood a s s a y i n g that we should not endeavour to r a i s e by t a x a t i o n a cons i d e r a b l e p a r t o f our war  expenditure.  On the c o n t r a r y , i t i s  my view t h a t i t i s bur c l e a r n a t i o n a l duty and supremely  in  the i n t e r e s t o f our c r e d i t t o p r o v i d e what we r e a s o n a b l y can without i m p a i r i n g our economic s t r e n g t h , " ^ 1917-18 - By now,  Canada had h a l f a m i l l i o n men under arms and  1. Brown, F. H., The H i s t o r y of Canadian War Finance 1 9 1 4 - 1 9 2 0 « P. 13 2* Loc. c i t . 3. Canada, P a r l i a m e n t , House o f Commons, O f f i c i a l Report o f Debates, February 15, 1916, p. 811  100.  the f i n a n c i a l needs of the government had The  p a t t e r n of f i n a n c e was  rowing was  now  increased  f a i r l y well established —  the key-note of the government's program.  During t h i s p e r i o d , Canada f l o a t e d $150  m i l l i o n 20 year 5% t a x - f r e e l o a n at  (b)  $100  million  2 year 5% l o a n i n New  (c)  $514  million  5, 10 and  T h i s l a s t l o a n l i s t e d above was  was  c o u n c i l was  York at  p r o v i n c e s , m u n i c i p a l i t i e s and  par  l o a n at  par.  the f i r s t V i c t o r y Loan million  In December, 1917,  passed p r o h i b i t i n g  96  year  o r i g i n a l l y announced as an o f f e r of $150  greatly over-subscribed.  taining  1  (a)  20  bor-  if  5 4 % t a x - f r e e war  and was  enormously.  but  am:order-in-  the i s s u e of s e c u r i t i e s  by  c o r p o r a t i o n s without f i r s t  the consent of the M i n i s t e r of F i n a n c e —  ob-  t h i s was  to  f a c i l i t a t e the marketing of Dominion s e c u r i t i e s " . ^ For the year 1917, l y $43 m i l l i o n and A l s o , some $112  the war  m i l l i o n was  Munitions Board and repaid.  c a p i t a l expenditures were approximate-  $120  expenditures t o t a l l e d $344 m i l l i o n . ^ made a v a i l a b l e f o r the  m i l l i o n i n temporary loans had  To cope w i t h t h i s g r e a t l y i n c r e a s e d  Business P r o f i t s Tax' was  1. Brown, F. H.,  5  increased  to 50%  The H i s t o r y of Canadian War p. 14  2. I b i d . , p. 15 Canada Year Book, 1918, 3. Brown, op. c i t . , p. 15 4. Appendix E 5. Canada Year Book, 1919,  p.  661  p.  645  to  be  need f o r money,  the government extended i t s t a x a t i o n measures t o new The  Imperial  extremes.  on p r o f i t s i n  Finance 1914-1920,  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 I n excess of 20%.  The Income War Tax Act" ' was enacted i n 1917, 1  c a l l i n g f o r a l e v y of 4% on s i n g l e persons w i t h incomes i n excess of $2,000 and on m a r r i e d persons w i t h incomes i n excess of $3,000.  I t a l s o c a l l e d f o r a s u r t a x 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 n e a r l y 40%.  Such a l a r g e ex-  pansion of c r e d i t was brought about by the f i n a n c i a l o f the F e d e r a l Government.  policies  In 1917, there was a f i d u c i a r y  i s s u e of $50 m i l l i o n Dominion n o t e s .  Under the Finance A c t ,  the banks were permitted to r e d i s c o u n t t h e i r s e c u r i t i e s w i t h the Dominion Government, r e c e i v i n g i n payment Dominion n o t e s . By means of such a p r o v i s i o n , the banks had almost an u n l i m i t e d o p p o r t u n i t y to expand t h e i r l e n d i n g o p e r a t i o n s .  By the end of  1918, bank cash and d e p o s i t s were n e a r l y 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 a f f e c t e d p r i c e s , and the. r e a l income of many wage-earners and people w i t h f i x e d incomes (from pre-war s e c u r i t i e s ) d e c l i n e d or rose l e s s  3  ly.  rapid-  Thus the incomes and p r o f i t s o f business i n c r e a s e d s w i f t -  l y , and t h i s , coupled w i t h the i n c r e a s e i n money income and r e d u c t i o n i n p r i v a t e investment, assured the F e d e r a l Govern1. Canada Year Book, 1916-17, PP. 674-675 2. Report of the Royal Commission on D o m i n i o n - P r o v i n c i a l R e l a t i o n s , Book I , p. 100 3. L o c . c i t .  102  merit of a l a r g e source of funds.  The  p o l i c i e s followed  to  make these funds a v a i l a b l e caused some groups to s u f f e r more than o t h e r s , but such was  p a r t o f the s a c r i f i c e n e c e s s a r y f o r  the s u c c e s s f u l p r o s e c u t i o n  of the  war.  1918-1919  Throughout t h i s l a s t year of the war,  the government  attempted t o i n f l u e n c e the people of Canada to reduce waste, to e l i m i n a t e l u x u r y spending and  t o save money.  works (Dominion, P r o v i n c i a l or M u n i c i p a l ) f a r as p o s s i b l e , u n t i l a f t e r the war. i n the U n i t e d  A l l public  1  were postponed, as  By r e s t r i c t e d  buying  S t a t e s , the s a l e o f f o r e i g n s e c u r i t i e s h e l d i n  Canada, a short-term  l o a n of $75  m i l l i o n i n New  York and  s i m i l a r measures, the F e d e r a l Government prevented too a f l u c t u a t i o n t a k i n g p l a c e i n exchange r a t e s due  great  to the  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 f a v o u r pay  pur debts i n the U n i t e d  other  difto  States.  Reduced exemptions re p e r s o n a l cess p r o f i t s t a x a t i o n together w i t h  income t a x a t i o n and  increased  r a t e s helped  exto  2 s w e l l the government c o f f e r s . and  e x t r a postage was  Customs d u t i e s were i n c r e a s e d  r e q u i r e d on l e t t e r s .  Increased  taxes were imposed on consumers' goods and l u x u r i e s ; on automobiles.  In June, 1918,  h i b i t e d except by permission August, 1918 1. Brown, F. H.,  saw  the export  of g o l d was  of the Department of  excise e.g., pro-  Finance.  the second V i c t o r y Loan announced  The H i s t o r y of Canadian War pp. 15-16 2. Canada Year Book. 1919, p. 645 Brown, op. c i t . , p. 16  by  Finance 1914-1920.  103. the F e d e r a l Government. 15 year, and  T h i s l o a n , which was  t a x - f r e e i s s u e , met  a t a peak.  5 and  with enthusiastic public  the f i n a l amount a l l o t t e d was  f e r v o u r was  a 5s%,  $678 m i l l i o n .  1  support  Patriotic  There were a c t u a l l y over 1 m i l l i o n  s u b s c r i b e r s out of a t o t a l p o p u l a t i o n 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  t a x - f r e e p r o v i s i o n , i t was continue  decided  t o be i n e x p e d i e n t  such a p r a c t i c e u n t i l the war  was  over  the  to d i s -  0  Demobilization A l t h o u g h the war  ended i n November, 1918, 2  d i d not cease f o r sometime. i o n expenditures  Demobilization  heading.^ due  A l s o , some  $363 m i l l i o n  the Business P r o f i t s Tax was  tax was  introduced  at 1%."*  Therefore,  i n c r e a s e d i n 1920,  t u a l l y removed e n t i r e l y i n 1921. We  and  r a t e s and  but i n 1919,  A l s o , i n 1920,  the r a t e of but was the  i n 1920  a surtax was  A f i n a l V i c t o r y Loan was  even-  sales  have a l r e a d y noted t h a t  i t was  1921-  l o a n s were  income tax r a t e s were i n c r e a s e d i n the h i g h e r income d u r i n g 1918,  from  i n c u r r e d under t h i s  i n short-term  f o r repayment on March 31, 1919*  expense  c o s t s kept Domin-  up around $347 m i l l i o n i n 1920  29, f u r t h e r expense of $24 m i l l i o n was  the  the  brackets  amended c o n s i d e r a b l y by  steeper  added on incomes over $5,000.  f l o a t e d i n the autumn of 1919.  1. Canada Year Book. 1918, p. 661 Brown, F. H. The H i s t o r y of Canadian War p. 17 2. Loc. c i t . 3. Appendix E 4. Canada Year Book, 1920, p. 714 5. Loc. c i t .  It  was  Finance 1914-1920,  104  a  5g$,  5 and 15 year i s s u e o r i g i n a l l y s e t a t $300 m i l l i o n  and as the war was over, i t was s u b j e c t t o t a x .  —  Again, the  people o f Canada g r e a t l y o v e r - s u b s c r i b e d 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 . Conclusion  1  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 t o be found i n the new l e v e l o f 3  the debt charges.  The war, by improving Canada's export t r a d e ,  had g r e a t l y added t o t h e n a t i o n a l income.  Had Canada been neu-  t r a l , and had the i n c r e a s e d income been used, n o t t o purchase more imports, but t o repay pre-war debt, t h e r e would have been a c o n s i d e r a b l e improvement i n Canada's e x t e r n a l debt  position.  However, the war boom d i d not a l l o w a debt r e d u c t i o n ; i t s t i m u l a t e d war consumption almost e n t i r e l y .  A c c o r d i n g l y , i n the  post-war p e r i o d , Canada was f a c e d w i t h a burden o f debt p l a c e d on i t by the war, d e m o b i l i z a t i o n and the r a i l w a y s .  The Cana-  d i a n people were faced w i t h the p r o s p e c t o f repaying most o f t h e i r pre-war (mainly r a i l w a y ) debts abroad, and making money t r a n s f e r s w i t h i n Canada from producers t o those who h e l d c l a i m s a g a i n s t the s t a t e ; i . e . , bond-holders, Canadian  etc.  Also, certain  outputs had been enlarged t o meet the war demands and  t h e r e f o r e 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 H i s t o r y o f Canadian War Finance 1 9 1 4 - 1 9 2 0 , p. 17 2 . c f . , Report o f t h e Royal Commission on D o m i n i o n - P r o v i n c i a l R e l a t i o n s . Book I , pp. 103-104 3 . Appendix F  105.  The war and d e m o b i l i z a t i o n had cost some $1,680 m i l l i o n and Canada had met  the major p o r t i o n of i t s war  rowing and c r e d i t expansions.  c o s t s by bor-  To pay f o r the war w h o l l y by  t a x a t i o n had not been p o s s i b l e — not  1  the p u b l i c was  ready f o r such a heavy burden of t a x a t i o n .  presumably P r i o r to t h i s  time, the main F e d e r a l revenues had come from customs d u t i e s and e x c i s e t a x e s ; t h e r e was no system o f income, o r p r o f i t t a x a tion.  Since Canada was  soon p l a c e d i n the p o s i t i o n o f b e i n g  unable to borrow abroad, the c o u n t r y as a whole p a i d f o r the war w h i l e i t was to  being f o u g h t .  A l l s u p p l i e s f o r the war  had  come out of c u r r e n t p r o d u c t i o n and the producers had t o be  paid.  Since p r o d u c t i o n had t o be i n c r e a s e d , i t was more ex-  p e d i t i o u s t o r a i s e funds by borrowing than t o r a i s e the r a t e s of  t a x a t i o n and run the r i s k o f hampering p r o d u c t i o n . The war  c o s t s and o t h e r c a p i t a l i z e d expenditures brought  about an i n c r e a s e i n the debt of the Dominion o f approximately $2,300 m i l l i o n and the assumption of the debts of the Canadian Northern and Grand Trunk r a i l w a y s added another $700 m i l l i o n t o the  total.  The changed debt s i t u a t i o n  (about $3 b i l l i o n i n -  c r e a s e , 1913-1921) was m a i n l y a t t r i b u t a b l e t o the war, r a i l w a y problem now  but the  r e f l e c t e d i t s e l f i n the balance sheet o f the  Dominion o f Canada. As we have seen, i t was tax  base was  not u n t i l 1920  s u f f i c i e n t l y broadened,  t h a t the Dominion  and by t h a t time economic  c o n d i t i o n s were not such as t o permit l a r g e tax y i e l d s .  1. Appendix  E  As a  106.  r e s u l t , war f i n a n c i n g had been v e r y much a matter o f government borrowing, more so than i f i t had been p o s s i b l e t o t a k e f u l l advantage o f people's w i l l i n g n e s s t o bear s a c r i f i c e s .  As  a r e s u l t o f d e l a y i n r e q u i r i n g f i n a n c i a l s a c r i f i c e s d u r i n g the war, the government ( i n the post-war p e r i o d ) found i t d i f f i c u l t to  j u s t i f y moderation i n g r a n t s o f s o c i a l and o t h e r s e r v i c e s .  These c o n d i t i o n s , when added t o o t h e r s , created budgetary as w e l l as economic  difficulties.  The war boom had done l i t t l e  t o reduce pre-war i n d e b t e d -  ness, and i n p a r t t h i s showed i t s e l f i n t h e r a i l w a y indebtedness in  the Dominion  balance s h e e t .  But the budgetary d i f f i c u l t y  was u n l i k e l y to be o n l y a matter of t h e new Dominion debt s t r u c ture.  The n e c e s s i t y o f economic  added to the budgetary problem. war f i n a n c e that was  readjustment w i t h i n Canada I t was post-war r a t h e r than  troublesome, and t h i s d i f f i c u l t y  only  arose when the p e r i o d of borrowing o r i n f l a t i o n ended.  The  sequent d e f l a t i o n which a p p r e c i a t e d the h o l d i n g s o f the  new  r e n t i e r c l a s s , a t the same time i n c r e a s e d the f r i c t i o n s  that  sub-  were p r e s e n t as the economy t r i e d t o a d j u s t i t s e l f from war t o normal requirements. f i n a n c i a l p o s i t i o n was war.  On s e v e r a l s i d e s , t h e r e f o r e , the Dominion rendered d i f f i c u l t a t the end of the  The government's expenditure needs were l i k e l y t o grow  and i t s revenue p o s s i b i l i t i e s t o d e c l i n e as d e f l a t i o n proceeded and the Canadian d o l l a r a p p r e c i a t e d i n terms o f the pound s t e r ling.  T h e r e f o r e , the broadening o f the base of t h e Dominion  revenue system toward the end o f t h e war was not l i k e l y t o prove o n l y a temporary  necessity.  CHAPTER IX ECONOMIC  MEASURES  Introduction The war p e r i o d i n every country was abnormal from tne economic p o i n t o f view and tne accompanying change i n the s o c i a l outlook was g r e a t , so that the a b i l i t y and t h e w i l l i n g ness o f p r i v a t e e n t e r p r i s e t o bear new burdens o f t a x e s , and of i n d i v i d u a l s t o make g r e a t savings f o r war purposes, p e r m i t t e d a s c a l e o f government t a x i n g and borrowing almost imp o s s i b l e i n a peacetime economy.  The war brought about many .  changes i n p u b l i c f i n a n c e , i n the economic s t r u c t u r e o f the country, i n s o c i a l c o n d i t i o n s and i n the p u b l i c conception o f 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 o f the Dominion occasioned by the war, we s h a l l now note the extent of government i n t e r v e n t i o n i n 2 economic l i f e which the war e f f o r t i n v o l v e d . War-time R e g u l a t i o n of Business The primary job o f the F e d e r a l Government was t o win  3 the war and i t endeavoured t o marshal a l l e f f o r t t o that end© Wherever n e c e s s a r y , the government t r i e d t o d i r e c t  the employ-  1. Report of the Royal Commission on D o m i n i o n - P r o v i n c i a l R e l a t i o n s , Book I p. 101 2. L o c . c i t . 3. Loc. c i t . f  108.  ment of the economic r e s o u r c e s of the country. the p r o d u c t i o n of munitions  I t encouraged  and pleaded w i t h farmers  crease the food p r o d u c t i o n o f the n a t i o n .  to i n -  However, the govern-  ment went beyond j u s t encouragement, i t went as f a r as a c t i v e i n t e r v e n t i o n and was  control.  made necessary  R a t i o n i n g of c e r t a i n v i t a l s u p p l i e s  1  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  c o s t of l i v i n g s k y - r o c k e t i n g , the government sought to f u r t h e r c o n t r o l business a c t i v i t y i n order t o l i m i t some of the  dire  e f f e o t s which always r e s u l t from i n f l a t i o n .  of the  war, life.  the government enjoyed  A t lithe c end  f a r - r e a c h i n g powers over economic  2  From the v e r y b e g i n n i n g of the war,  the govern-  ment e x e r c i s e d the power of c e n s o r s h i p of the p r e s s and messages. of  cable  L a t e r , when i n f l a t i o n made i t s e l f f e l t i n the c o s t  l i v i n g and  s e r i o u s shortages o c c u r r e d i n the supply of es-  s e n t i a l m a t e r i a l s , more e x t e n s i v e economic r e g u a l t i o n was taken by the F e d e r a l Government.  In November, 1916,  an  i n - c o u n c i l p r o h i b i t e d the hoarding of the n e c e s s a r i e s o f  under-  orderlife  and people w i t h e x c e s s i v e s t o c k s were r e q u i r e d to s e l l the same at  reasonable  prices.  I n 1918,  under the above heading.  housing  r e n t a l s were c l a s s i f i e d  M u n i c i p a l i t i e s were a u t h o r i z e d t o  form F a i r P r i c e Committees t o i n v e s t i g a t e and p u b l i s h what they considered t o be a f a i r p r i c e of the n e c e s s a r i e s to which the previous regulations a p p l i e d .  3  1. Report of the Royal Commission on D o m i n i o n - P r o v i n c i a l t i o n s . Book I , p. 101 2. Loc. c i t . 3. Loc. c i t .  Rela-  109.  In 1917,  the F e d e r a l government assumed c o n t r o l o f  the marketing of Canada's p r i n c i p a l p r o d u c t , wheat. c a l l y the t o t a l supply was  being shipped t o A l l i e d  1  Practi-  governments  and w i t h a poor crop i n s i g h t , e x c e s s i v e l y h i g h p r i c e s were a certainty.  Through the Board o f G r a i n S u p e r v i s o r s , who  had  power to i n v e s t i g a t e a l l sources o f supply and r a t i o n the a v a i l a b l e g r a i n between domestic m i l l e r s and the Wheat E x p o r t Company ( A l l i e d p u r c h a s i n g agency i n N o r t h America), the Canadian Government f i x e d both export and domestic p r i c e s . i z a t i o n was  T h i s organ-  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 o f the trade i n that year. The y e a r 1917 2 Control O f f i c e .  saw the e s t a b l i s h m e n t o f the Food  I t had power t o i n v e s t i g a t e shortages of  supply, h i g h p r i c e s , Canadian food requirements and t o f a c i l i t ate e x p o r t s .  A l s o , i t enjoyed the power t o r e g u l a t e  and f i x p r i c e s . Board.  In 1918,  The Board l i c e n s e d  i t was  succeeded by t h e Canada Food  (and imposed  p r o c e s s o r s and d e a l e r s i n f o o d s t u f f s . consumption  -- i t s main r a t i o n i n g was  b u t i o n of v a r i o u s commodities.  consumption  some r e s t r i c t i o n s It rarely  on)  rationed  i n the wholesale d i s t r i -  Importers and e x p o r t e r s were  l i c e n s e d , p u b l i c e a t i n g p l a c e s were s u p e r v i s e d and the use o f g r a i n 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 d i d not i n t e r v e n e i n the matter o f r e t a i l p r i c e s , but i t d i d attempt c o n t r o l of p r i c e s elsewhere; 1. Report of the Royal^Commission t i o n s , Book I , p. 101 2. I b i d . , pp. 101-102  on D o m i n i o n - P r o v i n c i a l R e l a -  110.  e.g.,  p r i c e of B. C. salmon (fishermen's  between wheat and  flour prices.  p r i c e ) and  Separate  i n - c o u n c i l f i x e d the p r i c e o f newsprint  the  and d i s t i n c t  spread orders-  and l i m i t e d the  profits  of pa citing companies. When the war the War  ended, many of the powers e x e r c i s e d under  Measures Act were t r a n s f e r r e d t o the Board o f Commerce.  I n 1919,  1  the Combines and F a i r P r i c e s A c t gave the Board much  power and  i t operated v i g o u r o u s l y d u r i n g 1919-20.  However,  such a c t i v i t y d i d not l a s t l o n g ; the l e g i s l a t i o n under which i t was  e x e r c i s e d being h e l d u n c o n s t i t u t i o n a l by the P r i v y  Council i n  1922.  Wages i n many occupations  had  f a i l e d t o keep pace w i t h  r i s i n g p r i c e s , and many s t r i k e s o c c u r r e d d u r i n g 1917 As these s e r i o u s l y i n t e r f e r e d w i t h v i t a l war 2 and l o c k o u t s were f o r b i d d e n i n  and  1918.  production,  strikes  1918.  Another example of government c o n t r o l was ment of a F u e l C o n t r o l l e r . He had  the  the power t o - a l l o t  appointthe  a v a i l a b l e supply among the p r o v i n c e s where, through p r o v i n c i a l and m u n i c i p a l a d m i n i s t r a t o r s , i t was as p o s s i b l e .  3  F i n a l l y , i n February,  1918,  d i s t r i b u t e d as e q u i t a b l y  the War  Trade Board was  es-  t a b l i s h e d whose powers a u t h o r i z e d "such s u p e r v i s i o n as may necessary  of a l l i n d u s t r i a l and  be 4 commercial e n t e r p r i s e s . . . . "  1. Report of the Royal Commission on D o m i n i o n - P r o v i n c i a l t i o n s , Book I , p. 102 2. L o c . c i t . 3. Canada Year Book. 1918, pp. 664-665 4. P.O. 337, February 9, 1918  Rela-  111.  These powers allowed i t t o d i s c r i m i n a t e between e s s e n t i a l and n o n - e s s e n t i a l f i r m s r e t h e supply o f scarce m a t e r i a l s .  Many  of i t s powers were never used w h i l e o t h e r s were used s p a r i n g l y but, n e v e r t h e l e s s , they were a v a i l a b l e i f needed.  1  The p r e c e d i n g review o f economic r e g u l a t i o n by t h e Fede r a l Government has n o t been a complete and d e t a i l e d  analysis,  r a t h e r i t has served o n l y - a s an i l l u s t r a t i o n o f the powers which the government may assume i n time o f war.  With the ex-  c e p t i o n of a few temporary and i s o l a t e d cases, the unusual e c onomic c o n t r o l s d i e d w i t h t h e end o f the war. With the coming o f peace came the b e l i e f t h a t  govern2  ments should use t h e i r powers t o improve s o c i a l c o n d i t i o n s . The g r e a t v a r i e t y and scope o f government a c t i o n d u r i n g the war  had many important  social effects.  S t a t i s t i c a l and o t h e r  i n f o r m a t i o n which was a n e c e s s a r y p a r t o f any government scheme of i n t e r v e n t i o n i n economic a f f a i r s had been accumulated.  The  experience w i t h r e g u l a t i o n o f b u s i n e s s d u r i n g t h e war years d i d much towards b r i n g i n g about a wide e x t e n s i o n o f p u b l i c  con-  t r o l i n the post-war y e a r s . Economic E f f e c t s o f the War Two o f the major c h a r a c t e r i s t i c s o f t h e war, from an economic s t a n d p o i n t , were t h e v i o l e n t r i s e i n commodity p r i c e s and the development o f g r e a t new p r o d u c t i v e capacities.-^ 1.  Report tions, 2. Ibid., 3 . Brown,  o f the Royal Commission on D o m i n i o n - P r o v i n c i a l R e l a Book I , p. 102 pp. 102-103 F. H., The H i s t o r y o f Canadian War Finance 1 9 1 4 - 1 9 2 0 . P. 31  112.  I t i s b e l i e v e d , however, t h a t the r i s e i n p r i c e s was  attribut-  a b l e more to e x t e r n a l f o r c e s than to f o r c e s from w i t h i n Canada. The  o n l y d i r e c t i n f l a t i o n of currency  to have a great e f f e c t on p r i c e s , chased very few war  and  i n Canada was  too  the c h a r t e r e d  banks pur-  account, n e i t h e r d i d 2 f o r such a purpose. Then, too,  the A l l i e d powers o f t e n b i d a g a i n s t one 3  another f o r war  thus f o o l i s h l y f o r c i n g p r i c e s up.  we  wealth as f a s t as we  Had  war  We  supplies,  not been d e s t r o y i n g  produced i t , the country would have exper-  ienced an i n c r e a s e i n w e a l t h much g r e a t e r than the -  small  bonds f o r t h e i r own  they l e n d much to i n d i v i d u a l s  r i s e i n prices.^*  1  equivalent  s h a l l assume, t h e r e f o r e , t h a t Canadian  f i n a n c e could not be h e l d r e s p o n s i b l e f o r the mad  rise in  5  p r i c e s d u r i n g the war  period.  As mentioned p r e v i o u s l y , Canada, at the beginning the war,  found i t n e c e s s a r y to change from the c o n s t r u c t i o n of 6  c a p i t a l works to the e x t e n s i o n made t h i s t r a n s i t i o n easy. enormously; e.g.,  of the export  Productive  trade.  c a p a c i t y was  The  increased  However, the r a p i d i t y of expan-  degree o f s p e c i a l i z a t i o n  i n t h i s export made the  t r y l a t e r r e q u i r e severe readjustment. i n l a n d , b u i l d i n g s and  war  increased  the wheat acreage under c u l t i v a t i o n  from 10 m i l l i o n to 18 m i l l i o n . s i o n and  of  indus-  Much of the expansion  equipment took p l a c e w h i l e p r i c e s were  h i g h , most of the c a p i t a l used was borrowed and a g r e a t d e a l of 1. Brown, F. H., The H i s t o r y of Canadian War Finance 1914-1920, p. 33 . 2. I b i d . , 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 D o m i n i o n - P r o v i n c i a l Relat i o n s , Book I , p. 108  113. sub-marginal l a n d was  cultivated.  Thus, when p r i c e s f e l l ,  the  debts became too heavy and d i s a s t e r s t r u c k many f a m i l i e s . There were many o t h e r 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 d u r i n g the war p e r i o d , most of which were based on f o r e i g n demand.  Mining o f non-ferrous metals  1  t o g e t h e r w i t h the a l l i e d processes of t r e a t i n g and were s t i m u l a t e d by the war.  refining  Pulp and paper p r o d u c t i o n i n c r e a s e d  tremendously and h y d r o - e l e c t r i c a l s o gained much ground period.  The d e c l i n e i n exports from Europe  enabled  manufacturers t o get a good h o l d on the home market. many o r d e r s were o f a temporary n a t u r e , a n o t i c e a b l e in technical efficiency resulted.  in this  Canadian Although increase  The Canadian manufacturing  i n d u s t r y emerged from the war w i t h a more dominant p l a c e i n the domestic market, w i t h an enlarged p r o d u c t i v e c a p a c i t y , and w i t h much improved and d i v e r s i f i e d  facilities.  The war p e r i o d a l s o e f f e c t e d a f i n a n c i a l t r a n s f o r m a t i o n of  g r e a t importance; i . e . , the development  of f i n a n c i a l  insti-  3 tutions.  As the London and New  York money markets became l e s s  a v a i l a b l e t o Canada, r e c o u r s e t o the domestic market c r e a t e d Canadian f i n a n c i a l machinery and changed Canadian habits. the  investment  The s a l e of war bonds s t i m u l a t e d the development  of  Canadian investment market, and Montreal and Toronto  em-  erged as f i n a n c i a l c e n t r e s f o r the Dominion.  Not o n l y i n v e s t -  ment houses but a l l f i n a n c i a l s e r v i c e s tended to g r a v i t a t e to 1. Report o f the Royal Commission on D o m i n i o n - P r o v i n c i a l R e l a t i o n s , Book I , p. 108 2. Loc. c i t . 3. Loc. c i t .  114.  these  cities. Canada's e x t e r n a l economic r e l a t i o n s were g r e a t l y d i f -  f e r e n t a f t e r the war,  1  p r i n c i p a l customer and  Before 1914,  Great B r i t a i n was  our  our main source of c a p i t a l funds; i n  the post-war p e r i o d , the U n i t e d S t a t e s took the premier Not  o n l y d i d the export-import  position.  t r a d e swing i n percent of t o t a l  from Great B r i t a i n t o the U n i t e d S t a t e s , but a l s o New  York s u r -  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 n a t u r a l resources  and i n c r e a s e the p r o d u c t i v e c a p a c i t i e s ; i n f a c t i n some cases, much of the p r o d u c t i v e c a p a c i t y was  redundant so that the r e -  2 adjustment of p r i c e s to more normal l e v e l s was  very  severe.  As l o n g as the h i g h p r i c e s continued the burden of e x t e r n a l debt was  not e x c e s s i v e , but when p r i c e s d e c l i n e d , the  became grim.  The p r o s p e r i t y of the country was  situation  more dependent  than ever upon the f a c t o r s a f f e c t i n g f o r e i g n t r a d e and  capital  3 movements. Conclusion The t r a n s i t i o n from war remarkable ease.^  Although war  t o peace was  accomplished  p r o d u c t i o n ceased  exports continued to Europe i n l a r g e volume.  with  immediately,  T h i s was  made  p o s s i b l e by advances o f c r e d i t to f o r e i g n c o u n t r i e s both by 1. Report of the Royal Commission on D o m i n i o n - P r o v i n c i a l R e l a t i o n s . Book I , p. 109 2. Brown, H., The H i s t o r y of Canadian War Finance 1914-1920. P. 35 4. I b i d . , pp. 100-101 3. R o w e l l - S i r o i s . op. c i t . , p. 109  the U n i t e d S t a t e s and  Canada.  Not  but manufactured goods experienced  o n l y were f o o d s t u f f s r e q u i r e d , a s t r o n g demand.  A large  s h i p b u i l d i n g program, both f o r Canada and f o r e i g n governments, helped f i l l other war  the gap c r e a t e d by t h e c e s s a t i o n of munitions  orders.  s t r u c t i o n and  Not a l l the stimulus came from abroad  and —  con-  consumer buying underwent a boom and a l l govern-  ments i n Canada took up the p u b l i c works postponed d u r i n g the war.  These a c t i v i t i e s , capped by the Dominion's heavy o u t l a y  on d e m o b i l i z a t i o n and the c i v i l maintained  r e - e s t a b l i s h m e n t of s o l d i e r s ,  the post-war boom u n t i l the summer o f 1 9 2 0 , when 1  the world-wide d e f l a t i o n f o r c e d i t s c o l l a p s e . Many-of the e f f e c t s of the war  upon the economic l i f e  of  2  Canada have since become apparent  to a l l of us.  The  became more c l o s e l y r e l a t e d , both e c o n o m i c a l l y and w i t h the U n i t e d S t a t e s , a Canadian investment  the u l t i m a t e e f f e c t s o f the war was  i n t e r n a t i o n a l t r a d e , and  t h i s , through  financially,  market was  and the export trade experienced much a c t i v i t y . of  country  born  However, one  the r i s e of b a r r i e r s to i t s e f f e c t on Canada's  export t r a d e , l e f t i t s mark on the whole Canadian economy. The people of Canada had g r a d u a l l y become more and more occupied i n s p e c i a l i z e d jobs as the economic d i v e r s i f i c a t i o n continued throughout of  the c o u n t r y .  T h i s decreased  l a b o u r , and as jobs became s c a r c e , a demand f o r p u b l i c p r o -  v i s i o n of s o c i a l s e c u r i t y began to be heard. 1.  the m o b i l i t y  Many people  Report of the Royal Commission on D o m i n i o n - P r o v i n c i a l t i o n s , Book I , pp 101 2. I b i d . , c f . , p. I l l  beRela  116  lieved  t h a t the governments could  s o c i a l welfare ment was way  as they had  (and would) organize  f o r war.  But  the F e d e r a l  burdened w i t h the c o s t o f the war  debts —  for  Govern-  p l u s the heavy  i t d i d not f e e l i t could undertake the added r e -  s p o n s i b i l i t y of s o c i a l w e l f a r e . Governments had  Consequently, the P r o v i n c i a l  to meet the p u b l i c demands f o r extended  social  s e r v i c e s a t a time when they were a l s o spending h e a v i l y p r o j e c t s d e f e r r e d d u r i n g the  war.  onomy i n many ways,only a few  on  1  I t i s apparent t h a t the war  above.  rail  a f f e c t e d the Canadian  ec-  of which have been mentioned  Others i n c l u d e : 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  a g r i c u l t u r e and  the  change i n p r o v i n c i a l - m u n i c i p a l f i n a n c e s .  A p a r t from the  im-  mediate e f f e c t of p r o v i d i n g r e l i e f from accumulating economic difficulties,  the war  l e f t i t s mark on the Canadian economy  down through the y e a r s . v a r i e d , but one  I t s i n f l u e n c e s have been many and  thing i s certain —  the' development of  economy as w e l l as the occupations and  i n t e r e s t s of the  were d i r e c t e d (and d i s t o r t e d ) by the war  the people  of 1914-18.  1. c f . , Report of the Royal Commission on R e l a t i o n s . Book I . p. I l l  Dominion-Provincial  PART  IV  WAR FINANCE IN CANADA  (1939-46)  CHAPTER_X  NATURE OF WAR  FINANCE MEASURES  When German f o r c e s c r o s s e d the P o l i s h border on September 1,  1939,  a p r o c l a m a t i o n was  i s s u e d d e c l a r i n g an  s t a t e o f war i n Canada s i n c e August  25.  apprehended  On September 9,  the  Parliament o f Canada voted t o d e c l a r e t h a t a s t a t e o f war  exist-  ed w i t h Germany, and the f o l l o w i n g day, Canada f o r m a l l y p r o claimed a s t a t e of war  e x i s t e d w i t h Germany.  In these f i r s t  few days, much government a c t i v i t y took p l a c e , some o f which we  s h a l l itemize  hereunder;-  1  Sept. 3  War-time P r i c e s and Trade Board  Sept. 11  The Canadian Government p r o h i b i t e d t r a d i n g w i t h the  established.  enemy and a Custodian o f Enemy P r o p e r t y was Sept. 12  Canada's War  Budget was  for a voluntary national Sept. 15  appointed.  passed and p l a n s were announced registration.  Formation of the F o r e i g n Exchange C o n t r o l Board  was  announced. Sept. 25 Oct.  2  War  Supply Board commenced o p e r a t i o n s .  A Canadian O r d e r - i n - C o u n c i l extended  the l i s t  of  a r t i c l e s f o r which export l i c e n c e s were r e q u i r e d , i n c l u d i n g s c r a p i r o n and  1.  Canada Tear Book,  1940,  pp.  steel.  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 Oct.  16  F i r s t Canadian War  Loan o f  $200  Commission.  m i l l i o n s o l d t o the  c h a r t e r e d banks. I t i s obvious, from the above few items, t h a t Canada l o s t no time i n e n t e r i n g the s t r u g g l e as a u n i t e d p e o p l e . c r i t i c i s m was  expressed because Canada's d e c l a r a t i o n o f (Sept. 3)  came a few days a f t e r t h a t of B r i t a i n t h i s was  but  of great value to the cause of freedom.  Some  war  actually  The U n i t e d  S t a t e s had a N e u t r a l i t y A c t which p r o h i b i t e d shipments of muni t i o n s t o combatants, and Canada was  able t o import v a l u a b l e  s u p p l i e s i n the days which elapsed b e f o r e her formal d e c l a r a t i o n of  war. In t h i s chapter, we  ology of war hardship.  s h a l l endeavour t o t r a c e the  chron-  f i n a n c e through the s i x years of s t r u g g l e and  By doing so, we may  many problems encountered  see how  Canada approached the  d u r i n g the war  p e r i o d , and  the methods used w i t h those..of the F i r s t Great  compare  War.  1939-40 . In the Budget Speeoh"""of September 12, J . L. I l s l e y  1939,  Hon.  ( A c t i n g M i n i s t e r of Finance) estimated t h a t the  t o t a l revenues f o r the year would be of the o r d e r of l i o n , and t h a t t o t a l expenditures  ( i n c l u d i n g a $100  temporary a p p r o p r i a t i o n f o r s p e c i a l war  1.  the  $495  mil-  million  expenditures) would  Canada, P a r l i a m e n t , House of Commons, O f f i c i a l Report Debates, S p e c i a l S e s s i o n , p. 137  of  120.  approximate #651  Hence, a d e f i c i t o f $156 m i l l i o n was  million.  a n t i c i p a t e d i f no changes were made i n the e x i s t i n g tax s t r u c t u r e . I t was n e c e s s a r y , t h e r e f o r e , t o propose c e r t a i n changes i n the t a x a t i o n measures of the Dominion i n order t o attempt t o reduce the above mentioned d e f i c i t  and t o f o l l o w , as f a r as was p r a c t i -  c a b l e , a "pay-as-you-go" p o l i c y . 1  The main f e a t u r e o f t h i s t a x program was an excess p r o -  2 f i t s t a x o f general  application.  T h i s tax was t o be c a l c u l a t e d  on e i t h e r o f two bases a t the o p t i o n o f the taxpayer.  One o p t i o n  embodied a graduated t a x on p r o f i t s when c a l c u l a t e d as a percentage of the c a p i t a l employed i n the undertaking,  w h i l e the  other r e q u i r e d a t a x payment of 50% on the i n c r e a s e i n p r o f i t s over the average p r o f i t s f o r the f o u r years 1936-1939* provided,  i n both cases,  t h a t o r d i n a r y income t a x p a i d  be deducted as an expense before  I t was should  c a l c u l a t i n g the excess p r o f i t s .  3 The  r a t e s under the f i r s t o p t i o n were s e t as f o l l o w s : 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  «  tt  !t  » 25%  60% n  tt  I t should  be p o i n t e d out here t h a t t h i s t a x on excess  p r o f i t s was l e v i e d on a l l businesses  whether i n c o r p o r a t e d o r  1. Canada, Parliament, House o f Commons, O f f i c i a l Report o f Debates, S p e c i a l S e s s i o n , pp. 138-140 2. I b i d . , p. 141 3. I b i d . , p. 142  121 .  not and whether i n c r e a s e d p r o f i t s were t h e r e s u l t o f war contracts or not. Under the Income War Tax A c t , the f o l l o w i n g changes were made.  1  A surtax o f 20% o f t h e t o t a l income t a x otherwise  payable was imposed on a l l persons other than c o r p o r a t i o n s . The  r a t e o f tax a p p l i c a b l e t o c o r p o r a t i o n s and j o i n t  stock  companies was i n c r e a s e d from 1$% t o 18%, and from 17% t o 20% where c o n s o l i d a t e d r e t u r n s a r e f i l e d .  Also, patriotic  t o approved o r g a n i z a t i o n s were allowed  as a deduction  donations from i n -  come up t o 50% o f the n e t t a x a b l e income. As was u s u a l i n any war budget, there were c e r t a i n i n creased d u t i e s and e x c i s e s p l a c e d on a r t i c l e s commonly r e g a r d 2 ed as l u x u r i e s .  Domestic and imported l i q u o r s , a l e , beer,  wine, e t c . , a l l had a d d i t i o n a l customs d u t i e s p l a c e d on them as d i d 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  e x c i s e taxes were a l s o p l a c e d on tobacco t o keep t h i s i n l i n e w i t h imported p r o d u c t s .  I n f a c t , we can see t h a t wherever the  customs d u t y was i n c r e a s e d so was tne e x c i s e tax on the domestic product. As no decreases i n the p e r s o n a l income t a x exemptions were asked f o r , the government f e l t t h a t the c i t i z e n s o f Canada  should make some c o n t r i b u t i o n t o the p r o s e c u t i o n o f the  war  through t h e i r purchases o f t e a and c o f f e e . ^  Both were  1. Canada, P a r l i a m e n t , House o f Commons, O f f i c i a l Report o f Debates. S p e c i a l S e s s i o n , p. 142 and p. 145 • 2. I b i d . , pp. 142-143 3. I b i d . , p. 143  122.  wholly  imported commodities, and t h e r e f o r e an i n c r e a s e i n cus-  toms d u t i e s would be wholly  f o r revenue purposes.  An i n c r e a s e  of 1 0 $ p e r l b . was t h e r e f o r e placed on c o f f e e and i n c r e a s e s o f 50,  7 2 0 and 1 0 0 p e r l b . on t e a depending on the p r i c e .  To b a l -  ance the e f f e c t s o f d u t i e s on l i q u o r , t e a and c o f f e e , a f u r t h e r tax o f 20 p e r l b . was p l a c e d on c a r b o n i c a c i d gas and s i m i l a r preparations  used i n the manufacture o f n o n - a l c o h o l i c  beverages.  From the s p e c i a l war l e v i e s j u s t mentioned, the government expected t o d e r i v e a revenue o f approximately $ 2 1 m i l l i o n d u r i n g the balance o f t h a t f i s c a l y e a r .  1  T h i s d i d n o t anywhere  near meet the a n t i c i p a t e d d e f i c i t and hence some borrowing was i n e v i t a b l e , but the government was t r y i n g t o a v o i d the mistake of World War I and was s t r i v i n g t o c a r r y a "pay-as-you-go" policy into effect.  C e r t a i n l y , they made an e x c e l l e n t s t a r t i n  these f i r s t few days o f the war, and we s h a l l determination  i n t h i s regard  see t h a t  their  grew as time went on.  On November 2 4 , Hon. J". L . R a l s t o n , M i n i s t e r o f Finance, announced t h a t the c o s t o f the f i r s t year o f the war t o Canada would be approximately $ 3 1 5 m i l l i o n , and on December 2 2 , t h e 2  N a t i o n a l War Loan Committee was s e t up.  The f i r s t p u b l i c l y  3  o f f e r e d war l o a n subscribed was  was placed on the market January 1 5 and was  i n the amount o f $ 2 5 0 m i l l i o n , $ 5 0 m i l l i o n o f which  used i n conversion  o f p a r t o f a l o a n maturing March 1 , 1 9 4 0 .  I t was a 34%, 1 0 year i s s u e . 1.  Canada, P a r l i a m e n t , House o f Commons, O f f i c i a l Report o f Debates, S p e c i a l S e s s i o n , p. 1 4 3 2 . Canada Year Book. 1 9 4 0 , pp. 3 9 - 4 0 3 . I b i d . , p. 856  1231940-41 During the f i r s t few days o f t h i s f i s c a l yearj  the Depart-  ment o f Munitions and Supply was formed,"*" and by May 22, t h e Department and i t s predecessor Boards had a l r e a d y purchased  $225  m i l l i o n worth o f equipment, m a t e r i a l and munitions f o r the  Canadian Forces and $75 m i l l i o n worth o f s u p p l i e s f o r Great B r i t a i n and France. 2 On A p r i l 30, an O r d e r - i n - C o u n c i l  ( F o r e i g n Exchange Ac-  q u s i t i o n Order) t r a n s f e r r e d a l l f o r e i g n exchange o f t h e Bank o f Canada and o f p r i v a t e owners t o the F o r e i g n Exchange C o n t r o l Board.  A t the same time, the Bank o f Canada a l s o s o l d i t s g o l d  r e s e r v e s t o the Board.  I n the Second War Budget (June 24), a  War Exchange Tax o f 10% was imposed from the Empire  —  on a l l imports except those  t h i s was a f u r t h e r measure t o conserve ex-  3 change. When P a r l i a m e n t assembled  i n May, a t e n t a t i v e War Ap-  p r o p r i a t i o n o f $700 m i l l i o n was passed t o h e l p meet t h e c o s t s 4 of a g r e a t l y extended war e f f o r t . The Budget Speech of June  5 24  l a t e r s e t a f i g u r e o f $850-$900 m i l l i o n f o r a n t i c i p a t e d war  expenditure t h a t y e a r .  Meanwhile, o t h e r expenditures were e s -  timated a t $448 m i l l i o n , a c o n s i d e r a b l e r e d u c t i o n from the m i l l i o n o f the p r e v i o u s y e a r .  $525  The t a x i n c r e a s e s and new taxes  proposed were expected t o y i e l d $280 m i l l i o n i n a y e a r . 1. Canada Year Book. 1940, pp. x x x i i - x x x i v 2. P.O., 1734, A p r i l 30, 1940 4. I b i d . , Year p . x x Book, xiv 3. Canada 1941, pp. 744-745 5. Canada, P a r l i a m e n t , House o f Commons, O f f i c i a l Report o f Debates, v o l . 2, p. 1020  124  T h i s budget,  f o l l o w i n g the p o l i c y o f attempting t o "pay-  as-we-go", proposed a t a x program s u r p a s s i n g i n s e v e r i t y anyt h i n g which the Canadian people had ever before been asked t o accept.  Taxes on tobacco were again r a i s e d s u b s t a n t i a l l y and  new l e v i e s were imposed phonographs.  1  on r a d i o s , r a d i o tubes, cameras and  Under the Customs T a r i f f , the r a t e s on tobacco  were i n c r e a s e d as were the s p e c i a l d u t i e s on t e a . o graduated taxes were imposed  on automobiles,  Steeply  and t h i s conserved  exchange as w e l l as c o n s e r v i n g p r o d u c t i v e c a p a c i t y f o r war equipment i n Canadian  plants.  In order t o ensure t h a t the war burdens would be d i s t r i b u t e d as f a r as p o s s i b l e a c c o r d i n g t o a b i l i t y t o pay, a s u b s t a n t i a l p a r t of the a d d i t i o n a l revenue was r a i s e d by d i r e c t  3 taxes on income.  P e r s o n a l exemptions  under the Income War Tax  A c t were lowered from $2000 and $1000 t o $1500 and married and s i n g l e persons r e s p e c t i v e l y .  $750  for  The e n t i r e tax s t r u c -  t u r e was r e v i s e d upward w i t h p a r t i c u l a r l y heavy i n c r e a s e s i n the middle and lower b r a c k e t s .  A N a t i o n a l Defense Tax was  i n t r o d u c e d a p p l y i n g t o m a r r i e d persons w i t h incomes over $1200 and amounting to-2% of t o t a l income; f o r s i n g l e persons t h e t a x was  t o be 2°/o o f income i f the t o t a l annual income was more than  $600 but l e s s than $1200, and J>% i f t o t a l income was more than $1200.  So f a r as p o s s i b l e , t h i s t a x was t o be deducted a t the  source. The Excess P r o f i t s Tax w a s . e x t e n s i v e l y r e v i s e d and made 1. Canada, P a r l i a m e n t , House of Commons, O f f i c i a l Report o f D e b a t e s , v o l . 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  and a minimum tax of 12%  to be taxed a t  75%,  of t o t a l p r o f i t s was p r o v i d e d f o r .  Although c o n s i d e r a b l e funds were r a i s e d by these t a x e s ,  2 recourse has t o be made t o borrowing f o r f u r t h e r  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 t r e a s u r y b i l l s were s o l d to the Bank of Canada t o f i n a n c e the o p e r a t i o n s of the F o r e i g n Exchange C o n t r o l Board. an i s s u e of $65 m i l l i o n 2%,  M a r c h . 1 , 1940  5 year bonds s o l d t o the Bank of  Canada and c h a r t e r e d banks f o r r e f u n d i n g purposes. 1940, War  had seen  In  May,  a N a t i o n a l Savings campaign was launched f o r t h e s a l e of Savings Stamps and C e r t i f i c a t e s .  These were t o mature i n  7ir years g i v i n g a r e t u r n of 25% on the money i n v e s t e d , amounti n g to 3% per year compound i n t e r e s t .  In J u l y , 1940,  the govern  ment a u t h o r i z e d the i s s u e of N o n - I n t e r e s t B e a r i n g C e r t i f i c a t e s — t h i s was  i n response t o many p u b l i c r e q u e s t s .  Of the above funds, most were f o r war purposes a l t h o u g h  3 c e r t a i n r e f u n d i n g o p e r a t i o n s were c a r r i e d out as  noted.To  f u r t h e r f i n a n c e the war e f f o r t , the Second War Loan was i n the f a l l of 1940  a t 3%.  of which $24,945,700 was 4 i % bonds which matured  The amount s o l d was  floated  $324,945,700  f o r the purpose o f c o n v e r t i n g some September 1.  In January, 1941,  there  were s o l d $250 m i l l i o n 2^ y e a r , Ijf/o notes t o the c h a r t e r e d banks the proceeds of which were used f o r war and g e n e r a l purposes. In a d d i t i o n to p r o v i d i n g funds f o r war and g e n e r a l purpose i t was necessary n i s h funds f o r the O rf fe ip ca it ar li a tReport i o n of o fs t e r 1. Canada, P a r l i ato m e nftu,r House of Commons, Debates, v o l . 2, pp. 1022-1023 2. Canada Year Book, 1941, p. 773 3. L o c . c i t .  126  l i n g i s s u e s h e l d i n Great B r i t a i n .  These r e p a t r i a t i o n  operations  had the u l t i m a t e e f f e c t o f making Canadian d o l l a r s a v a i l a b l e t o the U n i t e d Kingdom f o r t h e purchase o f Canadian primary comm o d i t i e s and manufactured products of the war.  The f i r s t  r e q u i r e d f o r the  such o p e r a t i o n was  prosecution  the redemption o f  £28, 162, 775 - 11 - 0 of 3$% Dominion of Canada R e g i s t e r e d Stock a g a i n s t whieh s i n k i n g funds e x i s t e d i n the amount of £ 7 , 732,  779 - 18 - 9.  As a r e s u l t o f t h i s t r a n s a c t i o n , Canadian  d o l l a r s t o the amount o f approximately a v a i l a b l e t o the U n i t e d Kingdom. redemption of £ 1 6 , 0 3 7 , 0 0 0 ada R e g i s t e r e d Stock.  $91 m i l l i o n were made  The next o p e r a t i o n was  the  (net amount) of k% Dominion of Can-  T h i s r e a l i z e d $74,900,000 a t the  pre-  v a i l i n g r a t e o f exchange. In a d d i t i o n to o p e r a t i o n s w i t h r e s p e c t t o the d i r e c t funded debt o f Canada, the Government made arrangements to purchase from the Government of the U n i t e d Kingdom the £ 2 4 , 6 2 4 , 4 5 5 of Grand Trunk Railway Company of Canada 4% P e r p e t u a l C o n s o l i dated Debenture Stock  (guaranteed  as to payment o f i n t e r e s t  by the Dominion of Canada) t h a t the B r i t i s h Government had  2 v e s t e d from the owners i n the U n i t e d Kingdom.  A t the c u r r e n t  r a t e of exchange, t h i s provided the B r i t i s h Government w i t h approximately  $109,579,000 i n Canadian d o l l a r s .  1941-42 Although first  war  expenditures were r e l a t i v e l y low d u r i n g  e i g h t or nine months o f the war,  1. Canada Year Book, 1941, pp. 773-774 2. I b i d . , p . 774  the  they rose r a p i d l y t h e r e -  127 a f t e r and by the end o f the f i r s t year o f war were running a t  $700 m i l l i o n per y e a r . of $968 m i l l i o n p e r y e a r .  the r a t e of more than they were a t a r a t e  S i x months l a t e r ,  an example o f how f a s t Canada's war e f f o r t was Financial  T h i s serves as  1  expanding.  a s s i s t a n c e was a l s o p r o v i d e d t o Great  Britain  2 on a r a p i d l y  r i s i n g s c a l e as the war p r o g r e s s e d .  Government r e q u i r e d Canadian d o l l a r s s e n t i a l s u p p l i e s produced  The B r i t i s h  t o meet the c o s t s o f es-  i n Canada.  Some o f these were ob-  t a i n e d i n the normal way from B r i t i s h exports t o 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 e a s i e r . Britain's  15/39  However, from September  t o March  31/41,  d e f i c i t i n her balance o f payments w i t h Canada amount-  ed t o about  $795  million.  P r i o r to  1941,  send some g o l d t o Canada f o r Canadian  B r i t a i n was a b l e to  dollars;  t h i s g o l d was  t r a n s f e r r e d to the U n i t e d S t a t e s i n p a r t s e t t l e m e n t o f Canada's d e f i c i t o f payments w i t h t h a t c o u n t r y . Canadian  dollars  t h a t the U n i t e d Kingdom needed was s u p p l i e d  i n two ways; about by the r e p a t r i a t i o n Great  The l a r g e balance o f  $337  million  of Canadian  (up t o March securities  31/41)  was  secured  f o r m e r l y owned i n  B r i t a i n ; the remainder was p r o v i d e d as s t e r l i n g  credits  4 i n London.  5  The T h i r d War Budget*^ ( A p r i l 29,  1941)  made p r o v i s i o n  f o 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. L o c . c i t . 3. War Exchange C o n s e r v a t i o n A c t , December 2, 1940 4. Canada Year Book, l o o , c i t . 5. Canada, P a r l i a m e n t , House o f Commons, O f f i c i a l Report o f 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 a t t h a t time. to  Canada's f i n a n c i a l commitments f o r the year were expected  be i n excess of  $2700  m i l l i o n , an amount exceeding by f a r  a n y t h i n g h i t h e r t o contemplated ance.  1  i n the f i e l d  o f Dominion  fin-  T h i s t o t a l was comprised o f :  $1300  (a)  d i r e c t war expenditures  (b)  a i d to B r i t a i n  900  million  (c)  normal c o s t o f government 468  million  I t was estimated t h a t a d e f i c i t o f about  $1500  million  (at the c u r r e n t r a t e s o f t a x a t i o n )  m i l l i o n would  arise.  Considerable i n c r e a s e s i n d i r e c t t a x a t i o n were a g a i n i n  2 evidence i n the budget p r o p o s a l s .  The r a t e s o f t h e N a t i o n a l  Defence Tax were r a i s e d from 2% and 3% t o 5% and 7% r e s p e c t i v e l y , w h i l e the minimum annual income below which no s i n g l e person i s l i a b l e f o r t h e tax was i n c r e a s e d from  $600  t i o n o f $20  was the new allowance  p e r annum ( i n s t e a d o f $8)  to  $660.  A deduc-  set  f o r dependents.  An important change i n the Income War Tax  Act  p r o v i d e d t h a t the t a x on i n t e r e s t and d i v i d e n d s going  abroad be i n c r e a s e d from 5% t o 15%.  S u b s t a n t i a l i n c r e a s e s J.n  the  graduated r a t e s of p e r s o n a l income t a x , made up i n such a  way  t h a t i n combination w i t h the i n c r e a s e i n the N a t i o n a l De-  fence Tax they would r e s u l t i n a p r o g r e s s i v e l y r i s i n g r a t e o f i n c r e a s e i n r e l a t i o n t o the income l e f t w i t h the taxpayers ( a f t e r payment o f taxes a t the then e x i s t i n g r a t e s ) , was proposed. 1.  2.  The s o - c a l l e d investment income s u r t a x (on a l l income  Canada, P a r l i a m e n t , House o f Commons, O f f i c i a l Report o f Debates, v o l . 3, pp. 2342-2343 I b i d . , pp. 2346-2349  129.  over $14,000) was absorbed i n t o the new graduated r a t e s .  A  new surtax of 4% on a c t u a l investment income i n excess o f $1500 was  proposed. The r a t e o f the Excess P r o f i t s Tax was boosted from 12%  to  22%, and t h i s taken w i t h the 18% l e v i e d under the Income  War Tax A c t meant a t a x o f a t l e a s t 40% on the incomes o f a l l corporations. of  1  A number o f t e c h n i c a l changes i n the s t r u c t u r e  t h i s A c t were a l s o made a t t h i s time. With the i n t r o d u c t i o n o f a S u c c e s s i o n D u t i e s A c t , the  Dominion f o r the f i r s t time entered a f i e l d which p r e v i o u s l y 2 had been l e f t e x c l u s i v e l y t o the p r o v i n c e s . 3  In made.  the f i e l d  of i n d i r e c t t a x e s , s e v e r a l changes were  The tax on sugar was i n c r e a s e d from If t o 20 per pound .  and was expected t o be h i g h l y p r o d u c t i v e .  Another tax, h i t h e r t o  o n l y l e v i e d by the p r o v i n c e s , was adopted by the Dominion. was lon.  This  the G a s o l i n e Tax, and i t was s e t a t the r a t e o f 3$ p e r g a l L e v i e s were a l s o p l a c e d on-admissions  to motion-picture  and o t h e r entertainments and on pari-mutual bets on horse r a c e s . A t a x of 10% was p l a c e d on a l l t r a v e l t i c k e t s , and the p r e v i o u s tax  on c a r b o n i c a c i d gas was r e p l a c e d by a 25% t a x on a l l bot-  tled soft drinks.  No i n c r e a s e i n s a l e s tax was made but many  items were removed from the exempt l i s t .  A l s o , the e x c i s e  taxes on many items were made s u b j e c t t o heavy i n c r e a s e s . At  t h i s time, the Dominion Government made an o f f e r t o  the p r o v i n c e s t h a t i f they would agree t o vacate t h e p e r s o n a l 1. Canada, P a r l i a m e n t , House of Commons, O f f i c i a l Debates, v o l . 3 . , p. 2352 2. I b i d . , pp. 2349-2351 3. I b i d . , pp. 2352-2354  Report o f  130.  income and  corporation  the F e d e r a l  tax f i e l d s f o r the d u r a t i o n of the  war,  Government would make c e r t a i n adjustments t o them."""  They proposed t o reimburse each province  e i t h e r by guaranteeing  payment o f (a) an amount equal to the c o l l e c t i o n s from the above taxes made by each p r o v i n c e f i s c a l year ended nearest  and  i t s m u n i c i p a l i t i e s during  the  t o December 31/40 o r (b) an amount  equal to the net debt s e r v i c e a c t u a l l y p a i d by the  province  d u r i n g the same f i s c a l p e r i o d as above, l e s s the revenue ob- ' t a i n e d from the p r o v i n c i a l s u c c e s s i o n iod.  I t was a l s o provided  p a i d to any  province  duties during that per-  t h a t f i s c a l - n e e d s u b s i d i e s would be  i f i t c o u l d be shown that.such  were r e q u i r e d t o enable the p r o v i n c e  subsidies  to stand on i t s own f e e t  financially.  In a d d i t i o n , the Dominion agreed t o compensate  the p r o v i n c e s  f o r l o s s e s i n t h e i r revenues from g a s o l i n e  t o the extent  that they f e l l below 1940 revenues.  I t was  taxes  again n e c e s s a r y to borrow l a r g e sums i n o r d e r  to  meet p a r t of the d i r e c t war  expenditures (which cannot be met  even by heavy t a x a t i o n )  t o provide  and  funds f o r Great  Britain.  2 In June 1941, the F i r s t V i c t o r y Loan war) was  ( t h i r d p u b l i c i s s u e o f the  was s o l d i n the t o t a l amount of $836,820,250. o f f e r e d i n two  This  issue  maturities:-  (a)  5h year 2% bonds at 99  (b)  10 year yfo bonds at  par  Of the t o t a l s u b s c r i p t i o n , #106,440,000 was i s s u e d i n conversion  of 5% bonds due November 15/41. 3  In February 1942, the o Second V i c t o rO fy f Loan solo d .f 1. Canada, Parliamen t , House f Commons. i c i a l was Report Debates, v o l . 3, pp. 2344-2346 2. Canada Year Book. 1942, pp. 776-777 3. I b i d . , p . 777  131.  T h i s i s s u e was the l a r g e s t i n the h i s t o r y of the Dominion up t o that time and r e a l i z e d $997,503,300.  T h i s time t h e r e were t h r e e  m a t u r i t i e s , a l l a t par:(a)  2& year  (b)  6 year  2\%  (c)  12 year  3%  In October, 1941, f u r t h e r r e p a t r i a t i o n of s e c u r i t i e s h e l d i n Great B r i t a i n was  accomplished.  1  The purchase o f three  Dominion of Canada Stocks t h a t had been vested by the Government of the U n i t e d Kingdom was approximately to  completed and, by t h i s t r a n s a c t i o n ,  $137 m i l l i o n i n Canadian funds was made a v a i l a b l e  the U n i t e d Kingdom. Two  other important moves were made d u r i n g t h i s  fiscal  2 year t o a i d i n the p r o s e c u t i o n o f the war.  On October 18,  Prime M i n i s t e r K i n g announced the f r e e z i n g of b a s i c wages and p r i c e s a t a fixed-pre-determined  l e v e l and the compulsory  exten-  s i o n 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  N a t i o n a l S e l e c t i v e S e r v i c e p l a n i n regard t o c i v i l i n c l u d i n g a l i s t of r e s t r i c t e d  employment,  occupations.  1942-43 Once a g a i n , the people  o f Canada were faced w i t h an  a n t i c i p a t e d i n c r e a s e i n government expenditures d u r i n g the coming  year.  Non-war expenditure was  estimated a t $455 m i l l i o n ,  refunds under the D o m i n i o n - P r o v i n c i a l T a x a t i o n Agreement A c t 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 t o be about  $85  m i l l i o n , a g i f t t o B r i t a i n o f $1000 m i l -  l i o n was p r o v i d e d f o r and d i r e c t war expenditures were ely set at  :  $2000  million.  These t o t a l some  $3570  tentativ-  m i l l i o n and,  at the present r a t e s o f t a x a t i o n , government revenues would only approximate  $1672  to be expected.  To meet t h i s v e r y c o n s i d e r a b l e f i n a n c i a l t a s k ,  million.  1  A l a r g e d e f i c i t was t h e r e f o r e  changes were made i n the t a x a t i o n system i n t h e F o u r t h War Bud-  2 get.  In the f i e l d  accomplished  of i n d i r e c t taxation,  by simply r a i s i n g the r a t e s on s p i r i t s ,  soft drinks, travel, etc.  level.  A  radical  departure  t a x a t i o n procedure was made w i t h the i n t r o d u c t i o n  of taxes t o be c o l l e c t e d list  tobacco,  C e r t a i n new taxes were i n t r o d u c e d  on l u x u r i e s a t the manufacturer's from e x i s t i n g  the main changes were  by stamps a t the r e t a i l l e v e l on a  of luxury a r t i c l e s . Under the p e r s o n a l income tax, the f i r s t  change was t o  combine the t h e n - e x i s t i n g N a t i o n a l Defence Tax and the graduated income t a x i n t o a s i n g l e  assessment.^  Thus, the N a t i o n a l Defence  Tax i s now i n c o r p o r a t e d i n t o the g e n e r a l income t a x as a "normal" t a x , but a t h i g h e r r a t e s than before — depending on the category o f t h e payer.  now 7%,  8% o r 9%  The graduated  rates of  tax were s t e e p l y i n c r e a s e d , and the c r e d i t f o r dependants was  4 changed from a d e d u c t i o n from income t o a deduction from t a x . C e r t a i n other minor changes i n c l u d e d the exemption o f pensions p a i d t o members o f the Armed Forces and allowance o f a d e d u c t i o n 1. Canada, P a r l i a m e n t , House o f Commons, O f f i c i a l Report o f Debates, v o l . 4, 3576 2. I b i d . , pp. 3588-3590 3. I b i d , p. 3579 4. I b i d . , pp. 3579-3580  133 5%  from income i n r e s p e c t of medical e x p e n d i t u r e s i n excess of of income. " E q u i t y , i n c e n t i v e , and the encouragement of s a v i n g  —  these are the c o n s i d e r a t i o n s which I have kept i n mind, but f i s c a l n e c e s s i t y and the rude f a c t s of war p r e s s us  hard."  1  F o l l o w i n g up t h i s l i n e of thought, the Budget p r o v i d e d t h a t p a r t 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  r e q u i r e d t o pay  this  p a r t of the t a x o n l y to the extent not o f f s e t by savings i n o t h e r forms,  such as l i f e i n s u r a n c e 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 superannuation fund.  I t was 3  d i r e c t l y a t the source September 1/42  c o n t r i b u t i o n s t o a pension or a l s o planned t o deduct income tax  from a l l s a l a r i e s and wages p a i d a f t e r  and f o r compulsory  payments of income tax on a  q u a r t e r l y i n s t a l l m e n t p l a n i n the case of o t h e r forms of income. The new  r a t e s w i t h the changes i n exemptions,  allowances  and  method of payment i n c r e a s e d v e r y s u b s t a n t i a l l y the amounts obt a i n e d from t a x p a y e r s .  For example, a married man  c h i l d r e n and having an income of  i n s t e a d of payer was  4 $400. paying 16  $3000  w i t h no  a year would pay  $884  However, we must remember t h a t the t a x months of taxes d u r i n g a 12  month p e r i o d ,  and t h i s made the burden much h e a v i e r . Under the Excess P r o f i t s Tax A c t the r a t e s o f taxes were  5  considerably increased.  •i 1.  2. 3. 4. 5.  The r a t e on excess p r o f i t s was  raised  •  Canada, P a r l i a m e n t , House of Commons, O f f i c i a l Report Debates, v o l . 4, p. 3579 I b i d . , pp. 3580-3581 I b i d . , pp. 3584-3585 I b i d . , p. 3580 I b i d . , pp. 3586-^3588  of  134  from 75% t o 100%  w i t h the p r o v i s i o n t h a t 20% o f the excess  (over the range where the 100%  p r o f i t s taken  refunded a f t e r the war.  i s e f f e c t i v e ) he  A l s o a change i n t h e method o f c a l -  c u l a t i n g the t a x was adopted which i n c r e a s e d the e f f e c t i v e 1  r a t e of the tax c o n s i d e r a b l y on businesses where p r o f i t s had i n c r e a s e d 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  t h a t c o r p o r a t i o n s having p r o f i t s ' i n excess of 116 standard p r o f i t s p a i d t a x a t a r a t e of 100%,  2/3%  was  of t h e i r  and no c o r p o r a t i o n  was allowed t o r e t a i n , a f t e r paying t a x e s , p r o f i t s equal to more than 70% of i t s standard Borrowing, through  profits.  the means o f bond s a l e s and the  s a l e o f war savings c e r t i f i c a t e s , again obtained funds f o r the government.  The T h i r d V i c t o r y Loan, i s s u e d i n  October and November of 1942,  1.  much-needed  resulted i n total subscriptions  T a x a t i o n S t a t i s t i c s , p. 19 "12%  of n e t t a x a b l e income (Part I I I ) p l u s the l a r g e r o f ( i ) 10% o f n e t t a x a b l e income (Part I) or ( i i ) 100% of excess p r o f i t s ; i . e . , the excess o f n e t t a x a b l e income over standard p r o f i t (Part I I )  F o r those making a study o f the excess p r o f i t s tax i t i s of v a l u e t o know a t what p o i n t the tax under P a r t I I equals the tax under P a r t I . By use o f a l g e b r a i c symbols and.equating the two taxes the "breaking p o i n t " i s e s t a b l i s h e d as f o l l o w s (where X r e p r e s e n t s net t a x a b l e income and Y r e p r e s e n t s standard p r o fit): Part I 10% of X  Part I I =  70% o f . (X-Y)  -  10 . 6 X  1 U  7 Y  .'. X = 7 Y = 116  10  2/3% of Y"  _> 30% tax a l r e a d y p a i d on t h i s  135 of  $991,389,050  from some  2,041,610 s u b s c r i b e r s .  1943-44 On March 2,  1943,  the Hon.  Budget t o the House of Commons. t h a t we  (the A l l i e s ) had  J". L. I l s l e y presented the In i t ,  he s t r e s s e d the  evidence  s e i z e d the o f f e n s i v e and t h a t the  fin-  a n c i a l and economic program of the n a t i o n should be  strengthened  to give our f i g h t i n g men  The  a l l the support we  could.  expendi-  2 t u r e s f o r the coming year were estimated a t  Bill  estimates t o t a l  $3890  — mil-  m i l l i o n w h i l e the Mutual A i d  $1000 m i l l i o n . At the c u r r e n t r a t e some $2900 m i l l i o n was a n t i c i p a t e d .  calls for  a d e f i c i t of  million  Of t h i s , non-war expenditures t o t a l $610  a g i g a n t i c sum. l i o n , war  $5500  of t a x a t i o n ,  Tax changes i n t r o d u c e d by t h i s budget were r e l a t i v e l y limited.  The r a t e s on c i g a r e t t e s , c i g a r s , manufactured  tobac3 co, raw l e a f tobacco and c i g a r e t t e papers were a l l i n c r e a s e d . The duty on a l c o h o l i c s p i r i t s and the tax on c a b a r e t s and n i g h t c l u b s were r a i s e d , and a one-cent was  4  provided.  i n c r e a s e i n the postage  rate  Only t e c h n i c a l changes were made i n the Excess  5  P r o f i t s Tax A c t . No  changes were made i n the g e n e r a l r a t e s o r exemptions  under the income tax, although s p e c i a l r e l i e f was  granted to  members of the Armed S e r v i c e s , Merchant Marine and the R.A.F.  6  T r a n s p o r t Command. Payments on a Dominion Government a n n u i t y 1. Canada Year Book, 1943-44, p. 835 2. Canada., P a r l i a m e n t , House of Commons, O f f i c i a l Report of Debates v o l . 1, pp. 845-846 3. I b i d . , p. 861 4. L o c . c i t . 5. I b i d . , p. 869 6. I b i d . , pp. 857-859 t  136. were allowed as a deduction from tne savings p o r t i o n o f the t a x . The most important change was t h e p l a c i n g o f the p e r s o n a l  2  income t a x on a "pay-as-you-go" b a s i s .  T h i s completed  the t r a n s -  f o r m a t i o n i n our income t a x begun w i t h t h e enactment o f the N a t i o n a l Defence Tax i n 1941  1942-43) tax  and c a r r i e d  ( d u r i n g the f i s c a l  year  t o an advanced stage both i n c o l l e c t i n g a graduated  a t the source and i n c o l l e c t i n g as e a r l y as p o s s i b l e  after  the income i s r e c e i v e d on which the t a x i s a s s e s s e d . The a d o p t i o n o f the "pay-as-you-go" p l a n o f income tax payment represented an important break w i t h the t r a d i t i o n a l method o f t a x c o l l e c t i o n — country t o make. tax  liability  $3000  a break t h a t Canada was t h e f i r s t  I t was a f f e c t e d by c a n c e l l i n g 50% o f the 1942  on earned income and on investment  and adding the remainder  bility.  income up t o  t o the taxpayer's c u r r e n t l i a -  I n v e s t i g a t i o n had shown t h a t , owing t o t h e d e d u c t i o n  of N a t i o n a l Defence Tax f o r the f i r s t  e i g h t months o f 1942 and  the p r i o r payment by most taxpayers o f o n e - t h i r d o f t h e i r liability  d u r i n g the l a s t f o u r months o f 1942,  o n e - s i x t h o f the 1942 l i a b i l i t y  remained  1942  o n l y approximately  t o be p a i d i n  1943*  N e v e r t h e l e s s , the taxpayer a c t u a l l y p a i d two and one-half y e a r s ' tax  liability  i n two years and the Finance M i n i s t e r had v e r y  s u b s t a n t i a l l y i n c r e a s e d h i s revenue without r e s o r t t o an i n crease i n r a t e s . Under t h i s new p l a n , a l l the deductions o f t a x made a t the source d u r i n g 1943, were a p p l i e d on t h e 1943 liability. 1. Canada, P a r l i a m e n t , House o f Commons, O f f i c i a l Report o f Debates, v o l . 1, p. 857 2. I b i d . , pp. 847-856  137.  Taxpayers would continue t o f i l e an annual r e t u r n by the 30th of A p r i l o f the year f o l l o w i n g t h a t i n which they r e c e i v e d the income. 95%  New deductions a t the source were designed t o withhold  of the tax l i a b i l i t y , thus l e a v i n g a s m a l l e r balance  due  the f o l l o w i n g A p r i l . During the year under review, two more V i c t o r y Loan i s s u e s were absorbed  by the Canadian  A p r i l , the F o u r t h V i c t o r y Loan was  investment m a r k e t .  1  In  s u b s c r i b e d to a t o t a l o f  $1,308,700,000 w h i l e i n October, the F i f t h V i c t o r y Loan r e a l i z e d $1,570,600,000 of which $195,600,000 was used f o r the conversion of p r e v i o u s i s s u e s .  1944-45 The Budget f o r the 1944-45 f i s c a l year was Parliament by the Hon. June 26, 1944.  presented t o  J". L . I l s l e y , M i n i s t e r of Finance, on  A t 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 o u t l a y s , not d e f i n a b l e as expenditures, would a l s o be r e q u i r e d , b r i n g i n g the t o t a l  cash  2 requirements t o 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  w i t h i n the e x i s t i n g tax  s t r u c t u r e than a g e n e r a l r e v i s i o n o r r e l a x a t i o n .  I n the main,  they had r e f e r e n c e t o p e r s o n a l income t a x e s , c o r p o r a t i o n income and excess p r o f i t s t a x e s , and other t a x e s . The M i n i s t e r of Finance recommended the removal  o f the  1. Canada Year Book, 1945, pp. 948-949 2. Canada, P a r l i a m e n t , House o f Commons, O f f i c i a l Report o f Debates, v o l . 4, pp. 4172-4174  138 compulsory savings p o r t i o n of the income tax as o f J u l y Thus, the savings requirement was reduced and completely removed i n 1945*  1, 1944«  by o n e - h a l f i n 1944  R e l i a n c e was t o be p l a c e d , i n  the f u t u r e , upon a f u r t h e r expansion o f v o l u n t a r y s a v i n g s . Because the compulsory s a v i n g s was commonly regarded as a t a x , some people thought t h a t i t c o n t r i b u t e d t o absenteeism and u n w i l l i n g n e s s t o work overtime and was, t h e r e f o r e , a d v e r s e l y a f f e c t i n g production.  But t h i s may have p r o v i d e d an excuse i n  an e l e c t i o n year f o r what appears  t o have been an u n f o r t u n a t e  relaxation i n policy. C e r t a i n changes were made i n the exchange c o n t r o l o r d e r s and customs d u t i e s 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 o f the War Exchange Tax and customs 2 d u t i e s on the i m p o r t a t i o n o f a g r i c u l t u r a l implements. War  The  Exchange C o n s e r v a t i o n A c t , which had p r o h i b i t e d the import-  a t i o n of a l o n g l i s t o f items i n order t o save d o l l a r exchange, was  a l s o 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 e x c i s e d u t i e s , but an amendment (to Speci a l War Revenue Act) changed the r a t e a p p l i c a b l e t o c i g a r s . The S i x t h V i c t o r y Loan, i s s u e d i n A p r i l and May, r a i s e d the sum o f  $1,405,013,350  w h i l e t h e Seventh V i c t o r y Loan  (October and November) was s u b s c r i b e d t o a t o t a l o f  700 o f which $147,544,000 1945-46  2.  3.  $1,665,184,  wa3 used f o r c o n v e r s i o n purposes.  With r e s p e c t t o the f i s c a l year 1.  1944,  1945-46,  the M i n i s t e r o f  Canada, P a r l i a m e n t , House o f Commons, O f f i c i a l Report o f Debates, v o l . 4, p. 4177 I b i d . , p. 4185 Canada Year Book, 1945, PP. 948-949  139 Finance, on A p r i l 3, 1945, asked i n t e r i m war expenditure  f o r o n l y $2,000 m i l l i o n as an  (including  period April-August i n c l u s i v e .  1  Mutual Aid) c o v e r i n g the  The reason f o r t h i s s m a l l  amount being requested was t h a t the e l e c t i o n ment was due t h a t summer. was  o f a new P a r l i a -  Under t h e circumstances, no Budget  presented, though an estimate of non-war expenditures f o r  the year was made a t $1,023,621,598.  Some t a x m o d i f i c a t i o n s  were announced a f t e r t h e end o f h o s t i l i t i e s i n Europe (May 8, 1945), i n order t h a t i n d u s t r y might be b e t t e r able t o p l a n f o r such r e c o n v e r s i o n to peacetime p u r s u i t s as the p r o g r e s s of the war  i n the P a c i f i c p e r m i t t e d .  These changes were not designed  to have much e f f e c t on c u r r e n t revenues but r a t h e r t o remove certain  r e s t r i c t i o n s on c i v i l i a n p r o d u c t i o n and consumption. October 12, 1945 brought  the p r e s e n t a t i o n o f the f i r s t  budget t o f o l l o w the c e s s a t i o n o f h o s t i l i t i e s both i n Europe 2 and i n t h e P a c i f i c .  The main e s t i m a t e s o f non-war expenditures  r e q u i r e d a sum o f $1,024 m i l l i o n w h i l e war estimates stood a t $3,365 m i l l i o n .  War s e r v i c e g r a t u i t i e s  and r e - e s t a b l i s h m e n t  c r e d i t s r e q u i r e d approximately $270 m i l l i o n .  Other  financial  needs, not u s u a l l y c l a s s e d as expenditures, such as l o a n s f o r export c r e d i t s  and advances t o the F o r e i g n Exchange C o n t r o l  Board, t o t a l l e d some $800 m i l l i o n , b r i n g i n g the t o t a l f i n a n c i a l requirements  f o r the y e a r to about $5,400 m i l l i o n .  Revenues  of approximately $2,500 m i l l i o n were a n t i c i p a t e d , hence a d e f i c i t of $2,900 would a r i s e .  No p r o v i s i o n was made i n t h i s Budget f o r  1. Canada, P a r l i a m e n t , House o f Commons, O f f i c i a l Report o f  Debates, v o l . 1, pp. 365-370  2. Canada, P a r l i a m e n t . House o f Commons, O f f i c i a l Report of Debates ( u n r e v i s e d ) , October 12, 1945, pp. 1036-1037  140 s u b s c r i p t i o n s t o the I n t e r n a t i o n a l Monetary Fund or the I n t e r n a t i o n a l Bank f o r R e c o n s t r u c t i o n as the l e g i s l a t i o n p e r t a i n i n g t h e r e t o had not yet been approved  by the House.  At t h i s time, d e s p i t e the l a r g e f i n a n c i a l  requirements,  i t became necessary to' make some r e d u c t i o n i n t a x e s .  In doing  so, the Government bore i n mind the paramount importance assisting  of  speedy r e c o n v e r s i o n , of r e s t o r i n g i n c e n t i v e s , and  of  encouraging enlarged and e f f i c i e n t p r o d u c t i o n and export upon which our employment, income and w e l f a r e depend* The the War  first  change along these l i n e s was  Exchange Tax of 10%  c o u n t r i e s imposed i n fully  1940.  the removal  on a l l imports from non-empire 1  The i m p o s i t i o n of t h i s tax  j u s t i f i e d by the circumstances of war  was  and by the acute  s c a r c i t y of U n i t e d S t a t e s d o l l a r s but, as i t was i t was  of  discriminatory,  o n l y proper t h a t i t should be removed as soon as p o s s i b l e .  Machinery  and apparatus  (not i n c l u d i n g o f f i c e equipment or mot-  or v e h i c l e s ) which were t o be used d i r e c t l y i n the manufacture or p r o d u c t i o n of goods were exempted from s a l e s t a x . "The Excess P r o f i t s Tax A c t i s a war measure which has commanded overwhelming support as an important and instrument of war  finance.  the stimulus toward  Unmodified,  the investment  o p e r a t i o n of e n t e r p r i s e s .  necessary  i t s e r i o u s l y weakens  of c a p i t a l and the e f f i c i e n t  In t h i s p e r i o d of r e c o n s t r u c t i o n i t  2 i s becoming a b a r r i e r t o expanding  employment'.'  With t h i s  thought  i n mind, t h r e e major changes were made i n t h i s a c t . The 15% 1. Canada, P a r l i a m e n t . House of Commons, O f f i c i a l Report of Debates ( u n r e v i s e d ) , October 12,1945, pp. 1039-1040 2.  I b i d . , p.  1041  141  r a t e on s o l e p r o p r i e t o r s h i p s and the excess r a t e s t i l l was  increased  $25,000  $25,000.  or more were not  tax reduced to 60%.  The  p r o f i t s i n excess of 116  partnerships,  117%  2/3%  abolished  and  The  the r a t e  o f t h i s l e g i s l a t i o n was and  20% of  that  corporate  of standard p r o f i t s would bear  In the  case of s o l e  proprietorships  the r a t e on p r o f i t s i n excess o f approximately  of standard would be  60%.  Although there was tax, from which we  present  a f f e c t e d by t h i s change.  effect  an a d d i t i o n a l tax of 20%.  but  F i r m s having a standard p r o f i t  c o r p o r a t e p r o f i t s would bear a r a t e of 40%,  and  removed  The s t a n d a r d p r o f i t of a l l f i r m s  r e f u n d a b l e p o r t i o n of the tax was  all  was  by h a l f the d i f f e r e n c e between t h e i r  standard p r o f i t s and of  stood.  partnerships  no doubt t h a t the p e r s o n a l  then d e r i v e d about 1/3  income  of our tax revenue,  would continue to occupy a major p l a c e i n our t a x a t i o n t u r e , some a l l e v i a t i o n was  expedient.  Though l a v i s h  strucreductions  were not p o s s i b l e , some r e l i e f could make a major c o n t r i b u t i o n t o the  s t i m u l a t i o n of i n i t i a t i v e and  the tax was  reduced by 16%,  employment.  effective  October 1, 1945*^"  meant an abatement on the tax l i a b i l i t y f o r 1945 was  Therefore,  o f 4%.  only an i n t e r i m measure to apply immediately and  u n t i l a complete overhaul of the p e r s o n a l s t r u c t u r e was the Income War  possible.  income tax  This This  continue rate  A l s o i n t h i s Budget, an amendment to  Tax A c t provided  t h a t the c a p i t a l  element i n  2 c o n t r a c t u a l a n n u i t i e s be exempted from 1.  2,  Tax.  Canada, P a r l i a m e n t . House of Commons, O f f i c i a l Report of Debates (unrevised;,. October 12, 1945, p. 1043 I b i d . , pp. 1043-1044  142. To meet the d i f f e r e n c e between our f i n a n c i a l requirments and the revenues a n t i c i p a t e d , two more bond i s s u e s were f l o a t e d d u r i n g the y e a r .  In A p r i l and May, 1945,  Loan r a i s e d the sum o f the  $1,568,927,350,  1  the E i g h t h V i c t o r y w h i l e l a t e r i n the y e a r ,  N i n t h V i c t o r y Loan produced cash a p p l i c a t i o n s o f approxim2  ately  $2,025  million.  1946-47 On June 27,  1946,  the M i n i s t e r of F i n a n c e , the Honour-  able J". L. I l s l e y , presented the most r e c e n t Budget to the people  3 of  Canada.  Since we are s t i l l l i v i n g i n h i g h l y abnormal times  and the f i n a n c i a l burdens of the Dominion Government out ed  of the war are s t i l l  of huge p r o p o r t i o n s , the r e l i e f  grant-  from t a x a t i o n measures was not as great as expected by many  people. the  arising  However, the changes made were d e f i n i t e l y a step i n  r i g h t 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 a t once.  The i n c r e a s e i n the N a t i o n a l Debt^" has been  tremendous d u r i n g the war years and we must be prepared t o make some s a c r i f i c e s toward reducing t h i s burden (and i t s accompanying  burden of i n t e r e s t payments)  i n the near f u t u r e .  Minor t a r i f f changes (with no i n c r e a s e s ) were made e f f e c t 5 i v e immediately. 1. 2. 3. 4.  5. 6.  Income Tax r e d u c t i o n s w i l l remove between 500,000 and Canada Year Book, 1945, p. x l i Appendix to the Budget Speech, June 27, 1946, p. 42 Canada, P a r l i a m e n t . House of Commons, O f f i c i a l Report o f Debates ( u n r e v i s e d ) , June 27, 1946 c f . Appendix F Hansard, op. c i t . , p. 3009 I b i d . , pp. 2999-3004  143.  600,000 persons from the l i s t  o f those paying the t a x .  The main  change r e the p e r s o n a l income t a x was the r a i s i n g of the exempt i o n s f o r s t a t u s from $660 t o $750 ( s i n g l e person) and from $1,200 t o $1,500 (married p e r s o n ) .  Other changes had t o do w i t h  Family Allowance payments and exemptions  f o r dependents.  Allow-  ances f o r dependents a r e a g a i n back to a deduction from income r a t h e r than a deduction from tax, the l a t t e r having been the case since 1942.  The r a t e s were a l s o reduced a n d the exemption  re investment income was r a i s e d from $1,500 t o $1,800.  Sim-  p l i f i c a t i o n of the t a x schedule comprises the combining i n t o a s i n g l e schedule o f graduated r a t e s the present normal tax, the graduated t a x and f a m i l y allowance "recoveries**, a l l o f which go i n t o the c a l c u l a t i o n o f income t a x on the b a s i s o f t h e c u r rent high rates. In the f i e l d o f c o r p o r a t i o n and excess p r o f i t s t a x e s , c o n s i d e r a b l e r e d u c t i o n s were made.  Se the Excess P r o f i t s Tax  A c t , Mr. I l s l e y s a i d , " A f t e r c a r e f u l c o n s i d e r a t i o n , the government has reached t h e c o n c l u s i o n t h a t the a c t should s t a y on the s t a t u t e books f o r another year u n l e s s p r o v i s i o n i s made a t the next s e s s i o n o f p a r l i a m e n t 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 t o be reduced from 20% t o 15% on a l l income above 116 2/3% o f standard p r o f i t s , and i t i s t o be removed e n t i r e l y from p a r t n e r s h i p s and s o l e p r o p r i e t o r s h i p s . The c o r p o r a t i o n t a x w i l l Succession D u t i e s  2  be c u t from 40% t o 30%. w i l l be doubled but t h i s , l i k e the  1. Canada, P a r l i a m e n t . House o f Commons, O f f i c i a l Report o f Debates ( u n r e v i s e d j , June 27, 1946, p . 3004 2. I b i d . , p. 3009 and pp. 3013-3014  144. p r e c e d i n g 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.  T h i s d o u b l i n g of the r a t e of Succession D u t i e s empha-  s i z e s the d e t e r m i n a t i o n of the Dominion Government as a t the D o m i n i o n - P r o v i n c i a l Conference i n the Succession Duty f i e l d . compiled  t h i s s p r i n g , to remain  In a s p e c i a l Budget summary  by the Finance Department, i t was  estimated  i n c r e a s e i n the amount of s u c c e s s i o n d u t i e s to be  c h i e f disappointment  was  A f t e r the immediate  the p u b l i c was  c i p a t i n g some "on the spot" tax c u t s . h i s arrangements f o r 1946  million.  t h a t none of the tax r e -  d u c t i o n s became e f f e c t i v e over n i g h t . cut i n the income tax l a s t October,  that the  collected  f o r a f u l l ,year w i l l be i n the neighbourhood of $25 The  expressed  again  However, Mr.  l a s t October and he i s not  them f o r the moment, but a complete o v e r h a u l i n g and  16%  anti-  I l s l e y made changing simplifica-  t i o n of p e r s o n a l income tax r a t e s t r u c t u r e s i s proposed i n the immediate f u t u r e . P u b l i c o p i n i o n seems t o have accepted manner which suggests  the budget i n a  t h a t , -although the changes made were  a l o n g the l i n e s demanded by the p u b l i c , more c o u l d have been done to a l l e v i a t e the tax burden. w i t h h i s ear to the ground, Mr. customers.  As a p u b l i c r e p r e s e n t a t i v e  I l s l e y has t r i e d to p l e a s e the  I t i s not h i s f a u l t i f p u b l i c o p i n i o n c o n f l i c t s  w i t h economic r e a l i t i e s .  CHARTER XI ECONOMIC and FINANCIAL CONTROLS A study o f Canada's wartime requirements had before h o s t i l i t i e s broke out and  been made  consequently i t was  possible  to q u i c k l y set up the emergency o r g a n i z a t i o n s needed. i t was  e s s e n t i a l to have an understanding of economic problems  a r i s i n g out of the war necessary to the war was  Since  and  to c o o r d i n a t e  e f f o r t , one  of the Government's f i r s t  the s e t t i n g up of an A d v i s o r y  T h i s Committee was vants who  the economic c o n t r o l s acts  Committee on Economic P o l i c y .  made up almost e n t i r e l y of s e n i o r c i v i l - s e r -  were presumably f a m i l i a r with the problems f a c i n g the  government and  i t played an a c t i v e r o l e i n the war  p a r t i c u l a r l y w i t h r e s p e c t to questions cial policy.  effort,  of economic and  Many emergency measures and  c o n t r o l s were  finaninstig-  ated d u r i n g the war  y e a r s , the more important of which were:  (a) c o n t r o l of war  s u p p l i e s , (b) p r i c e c o n t r o l , (c) wage con-  trol,  (d) r e n t a l c o n t r o l and  (e) f o r e i g n exchange c o n t r o l .  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  A the  l a t t e r appears i n the f o l l o w i n g s e c t i o n s . A;  C o n t r o l of War  C o n t r o l over the p r o d u c t i o n  Supplies"*' and  d i s t r i b u t i o n of c e r t a i n  1, c f . , "Wartime I n d u s t r i e s C o n t r o l Board", Economic C o n t r o l s , D o m i n i o n - P r o v i n c i a l Conference on R e c o n s t r u c t i o n , pp. 27-28  146.  b a s i c m a t e r i a l s and e f f o r t was  s e r v i c e s p e c u l i a r l y important to the  e x e r c i s e d by C o n t r o l l e r s who  War-Time I n d u s t r i e s C o n t r o l Board.  were members of  In t h i s category  war the  are  such  m a t e r i a l s as s t e e l , a l l n o n - f e r r o u s m e t a l s , chemicals, o i l , timber, rubber, power, s h i p r e p a i r s and and  aircraft.  salvage, motor v e h i c l e s  Other m a t e r i a l s have come under the Board from  time to time. C o n t r o l l e r s were f i r s t appointed subsequently b u i l t up an e x t e n s i v e ies,  et c e t e r a t o f a c i l i t a t e  Import and  export  t r o l structure. administered  system of c o n t r o l s ,  the p r o d u c t i o n  f o r the purpose of ensuring  war omy.  production  the other U n i t e d Nations would be  led  T h i s was  both i n war  production  activities  industrial  Trade Board, the s u p e r v i s i o n of  o f the  and  civilian  econWar-  production,  p r i c e of h i s r e s p e c t i v e m a t e r i a l was production  of  because most m a t e r i a l s e s s e n t i a l to  By making each C o n t r o l l e r an A d m i n i s t r a t o r  d i s t r i b u t i o n and  met.  a l s o extended somewhat i n t o the f i e l d  are a l s o b a s i c to the c i v i l i a n  Time P r i c e s and  items.  production  be noted t h a t , i n a d d i t i o n to the war  of C o n t r o l l e r s has supply.  priorit-  have been  t h a t the war  r e s p o n s i b i l i t i e s a l r e a d y r e f e r r e d t o , the scope of  civilian  they  of needed war  These c o n t r o l s were e s t a b l i s h e d and  should  and  c o n t r o l s formed an e s s e n t i a l p a r t o f the con-  needs of Canada and It  i n June, 1940  control-  economy by the same  person. As the t r a n s i t i o n p e r i o d i s , a t l e a s t i n i t s i n i t i a l stages, s t i l l  a p e r i o d of a c t i v e w a r f a r e , the W.I.C.B. may  remove a l l i t s c o n t r o l s immediately.  not  However, the W.I.C.B.,  i n accordance w i t h government p o l i c y , has  subjected  the oper-  147.  a t i o n of i t s c o n t r o l s and  the changing c o n d i t i o n s o f supply  the c l o s e s t s c r u t i n y , and  i s r e l a x i n g or removing supply  to  con-  t r o l s as r a p i d l y as p o s s i b l e . B; P r i c e C o n t r o l I t i s acknowledged by most economists t h a t the p r i c e l e v e l i s determined by f o r c e s which a f f e c t the of money, the v e l o c i t y of money and trade.  general quantity  the p h y s i c a l volume of  A primary i n f l u e n c e i n time of war  upon t h e ' q u a n t i t y  money i s the f i s c a l p o l i c y of the government.  The  of  purpose of  the f i s c a l p o l i c y of the government i s , p r i m a r i l y , to put i n t o the t r e a s u r y s u f f i c i e n t claims on w e a l t h to enable the government to purchase the goods and s e c u t i o n of the war  and  s e r v i c e s necessary f o r the  pro-  the maintenance of the o r d i n a r y govern-  ment d u t i e s . A v a r i e t y o f methods are used t o p l a c e these funds i n the t r e a s u r y .  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 t h a t put i n t o the t r e a s u r y .  I f the funds are r a i s e d by  t a x a t i o n , the g a i n t o the government i s d i r e c t l y o f f s e t by l o s s to the taxpayer.  When, however, revenue i s secured  the  by a  l o a n from the commercial banks or from a c e n t r a l bank of i s s u e , i t i n v o l v e s an i n f l a t i o n a r y i n c r e a s e i n the c i r c u l a t i n g media. Yet, an attempt to f i n a n c e a war would appear t o be q u i t e u n r e a l i s t i c . l a r g e and urgent and r a t e and has  e n t i r e l y by The  taxation  demands o f war  t a x a t i o n can be i n c r e a s e d o n l y a t a l i m i t e d  then o n l y a f t e r the economic base f o r the h i g h e r  been e s t a b l i s h e d .  are  Borrowing s u p p l i e s t h i s base and  rates  has  a  148.  d e f i n i t e p l a c e i n a wa.r f i n a n c e program.  When the l e g i t i m a t e  r e t u r n from t h i s source has been exhausted,  either indirect or  d i 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 tax  which by i t s v e r y nature i s r e p e l l a n t .  i t i s a type o f  Canada made u n p a r a l -  l e l e d use o f orthodox methods both i n t a x a t i o n and p u b l i c borrowing 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 o f the war c o s t s . War Savings Stamps and C e r t i f i c a t e s Though not revenue producers o f f i r s t  importance,  d e v i c e s do r e p r e s e n t the best type o f borrowing.  these  Because t h e i r  p r i c e i s s m a l l , t h e i r purchase i s u s u a l l y made p o s s i b l e by a r e d u c t i o n o f i n d i v i d u a l p u r c h a s i n g power.  The amount p a i d  into  the government by these d e v i c e s i s equal t o the r e d u c t i o n i n the p u r c h a s i n g power o f the p e o p l e . War Bonds Bond s a l e s made p o s s i b l e by a r e d u c t i o n i n spending o r by a change i n investment p l a n s n o t o n l y h e l p t o . r a i s e the needed revenues but a l s o serve the more fundamental  purpose o f  r e s t r i c t i n g n o n - e s s e n t i a l spending and c a p i t a l o u t l a y s .  How-  ever, bond s a l e s made p o s s i b l e by an advance o f bank c r e d i t are  inflationary.  was  still  I n Canada, the people responded w e l l but i t  n e c e s s a r y t o depend on the f i n a n c i a l  institutions,  p a r t i c u l a r l y the c h a r t e r e d banks and the Bank o f Canada. (a)  C e n t r a l Bank Loans The most i n f l a t i o n a r y o f a l l methods o f f i n a n c i n g  government i s borrowing from the c e n t r a l bank.  Such borrowing  i n c r e a s e s the c i r c u l a t i n g media p r o v i d e d by the c e n t r a l bank  APPENDIX ACCOUNTS  OF T H E  I  BANK O F CANADA  1936-1946  LIABILITIES* 1  1  2 0 0 6  1  I 1  1  1500 OTHER  A<X O U N T S  IOOO GOVT.  O E P O5  A C T I V Ez  /  I T 5 A  /  NOTE:  C I R C UL A T ION  500  C H A R T E:RED O  1936  1  37  1936 37 SOURCE*  FIGURES  SUM MAY 3/  1  1  38  39  38-39 OF  BANK.  OF EACH  BANK  OF YEAR  RET&f £ R V E  CASH  1.  1940 4\  42.  l9-¥0 41  42.  1 •  1  45  4€>  --44 45  46  44  43  CANAPA REPRESENTATIVE  OF  WHOLE  YEAR..  ACCOUNTS MILLIONS  F  R T H  FOR T O  C H A R T E R E D BANKS  E  O  F  CANADA 1936-46  L I A B I L I T I E S *  O F D O L L A R S  8000  eooo  ^ooo  2000  MILLIONS  O F  DOLLPvRS  8000  feOOO  ZJOOO  2.000  «93& 3oURCe*T FIGURES  37  STATISTICAL.  3 Q  39 S U M  19-40 MAfiy,  MAV 31 OF £/\CH VEfiiR  &P\NK  ~*4\  *KL  OF  "4"3  ""f~"r  45  CAA/APA  4£PRESEHMTRTiv£  OF U/HOLB  YEAR.  149. and makes p o s s i b l e a l a r g e i n c r e a s e i n the d e p o s i t c i r c u l a t i o n of subordinate p r i v a t e i n s t i t u t i o n s . In Canada, from the b e g i n n i n g o f the war t o May 31, the note and d e p o s i t l i a b i l i t i e s creased from approximately  $400  of the Bank of Canada have i n m i l l i o n to  T h i s i n c r e a s e has been due almost  $1,615  (with some j u s t i c e )  has abandoned i t s v i t a l  $1,690  million.  1  e n t i r e l y t o the purchase o f  m i l l i o n of government s e c u r i t i e s .  i t has been charged  1946,  Because of t h i s  fact,  t h a t the Bank o f Canada  f u n c t i o n o f r e g u l a t i o n of the c i r c u l a t -  i n g media i n order to m a i n t a i n more o r 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 i n c r e a s e found  i n the  bond h o l d i n g s and c i r c u l a t i o n of the Bank of Canada may noted i n the statements May 31,  1946,  o f the c h a r t e r e d banks.  be  From 1939  to  the h o l d i n g s o f D o m i n i o n - P r o v i n c i a l bonds o f the  c h a r t e r e d banks i n c r e a s e d by approximately meantime t o t a l d e p o s i t and note l i a b i l i t i e s  $2,525  m i l l i o n and  have r i s e n  from  p  $3,170  m i l l i o n to  $6,858  million.  Adding t h i s to the i n c r e a s e  i n the Bank of Canada's h o l d i n g s of government bonds, we t h a t there i s a t o t a l i n f l a t i o n of some  $4,140  note  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 f o r c e which caused  an i n c r e a s e i n the g e n e r a l  price l e v e l , irrespective  o f government f i s c a l  i n c r e a s e i n bank c r e d i t .  I n order t o make p o s s i b l e the prod-  1.  c f . Appendix I  2.  c f . Appendix J"  p o l i c y , was an  150 u o t i o n 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 l a r g e and  supply of wa.r m a t e r i a l s ,  varied  l a r g e extensions of c r e d i t were made  by the banks, n e c e s s a r i l y adding to an a l r e a d y  swollen money  stream. I r r e s p e c t i v e of changes i n the g e n e r a l p r i c e l e v e l , are,  i n time of war,  i n d i v i d u a l goods. ing conditions We  may  These f l u c t u a t i o n s are  of supply and  generated.  hours of the outbreak of war  i n Europe,  consumers i n t h i s country  consequences o f 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 . 3, 1939, and  the Wartime P r i c e s and  Trade Board was  charged w i t h the duty of p r o t e c t i n g  against  many  i n the g e n e r a l p r i c e  to v a r i a t i o n s i n r e l a t i v e p r i c e s are  the Government took steps to p r o t e c t from the  the r e s u l t of chang-  t h a t i n time of war  conducive to an i n c r e a s e  W i t h i n a few  of  demand.  conclude, t h e r e f o r e ,  f o r c e s which are l e v e l and  v i o l e n t f l u c t u a t i o n s i n the p r i c e s  there  increases  On  established  1  the Canadian p u b l i c  i n the c o s t s of the n e c e s s i t i e s o f  T h i s important body was  September  life.  to arrange f o r s u p p l i e s of n e c e s s i t i e s  where shortages appeared l i k e l y , to c o n t r o l p r i c e s 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 r a t i o n i n g and t r a t i v e organizations  control.  make and 1.  vegetable o i l s .  The  enforce r e g u l a t i o n s  Order-in-Council,  adminis-  were appointed by the Board to d e a l w i t h  such commodities as sugar, wool, h i d e s and animal and  Special  P.O.  Board was  and,  2516,  leather, coal  and  g i v e n wide powers to  i n general,  September 3,  i t secured 1939  the  151 c o o p e r a t i o n both of producers and consumers. Certain and  seasonal goods; e.g., f r e s h f r u i t s and v e g e t a b l e s ,  d e a l i n g s between farmers and producers i n c e r t a i n items were  exempted from the c e i l i n g .  I t i s the f a i l u r e o f the Board t o  p l a c e a c e i l i n g on the p r i c e s of f r e s h f r u i t s and v e g e t a b l e s which has met w i t h the g r e a t e s t  amount of c r i t i c i s m from the  people of Canada. We should note here t h a t goods s o l d to the Department of M u n i t i o n s and Supply were not s u b j e c t  to the p r i c e  ceiling.  This was an enormous e x c e p t i o n to the c o n t r o l measure — i t included country.  a l a r g e percentage of the t o t a l s a l e s made i n the The p r i c e o f such goods was to be t h a t p r i c e neces-  sary t o c a l l f o r t h the r e q u i r e d  production.  As a rule-of-thumb,  the Department of Munitions and Supply used the " C o s t - P l u s " method i n determining the p r i c e s i t would pay.  Omission from  p r i c e c o n t r o l of such a l a r g e volume of s a l e s was bound to have severe r e p u r c u s s i o n s on the economy through d i s r u p t i o n o f p r o d u c t i o n of "non-war (but e s s e n t i a l )  materials".  The development of p r i c e c o n t r o l was not o n l y a means of a s s u r i n g  the c i t i z e n s of Canada o f a f a i r d i s t r i b u t i o n of  consumers goods but a l s o of h o l d i n g degree.  down war c o s t s t o some  I n c i d e n t a l l y , Canada l e a d a l l o t h e r c o u n t r i e s  e f f e c t i v e application of price controls  i n the  and i n the b a t t l e  against  i n f l a t i o n but much o f the pressure on p r i c e s was  sipated  by the r e a l i s t i c t a x measures and by p u b l i c  to the war l o a n s .  response  However, we must g i v e p r i c e c o n t r o l  f o r the p a r t i t played i n t h e a n t i - i n f l a t i o n program. not  been f o r the h o l d i n g  dis-  credit Had i t  of p r i c e s a t a f i x e d l e v e l , the  152 I n f l a t i o n a r y media could not have been i s o l a t e d and made a v a i l able t o pay taxes or to s u b s c r i b e t o war C;  loans.  Wage C o n t r o l  T h i s p o l i c y i s p a r t of the F e d e r a l Government's g e n e r a l a n t i - i n f l a t i o n a r y program and was an a d v i s o r y p o l i c y .  1  adopted f i r s t i n 1940  However, by 1941,  because of the expansion of Canada's war  as  i t became apparent t h a t e f f o r t and  consequent  s c a r c i t i e s of m a t e r i a l s , s u p p l i e s and manpower, there would r e s u l t a s e r i o u s i n f l a t i o n i n Canada u n l e s s p r e v e n t i v e measures were taken.  Consequently, the Government of Canada deemed i t  e s s e n t i a l to the war i n the war ing  and  e f f o r t and  to the n a t i o n a l w e l f a r e ,  i n the post-war p e r i o d , to take measures l e a d -  to economic s t a b i l i z a t i o n i n Canada d u r i n g the 2  The wage on November 15, permitted  both  war.  3  and  salary  1941.  f r e e z i n g orders became e f f e c t i v e  Since t h a t date, no  employer has  been  to i n c r e a s e b a s i c wage r a t e s o r s a l a r i e s , except on 4  w r i t t e n permission  o f the Board.  The wage f r e e z i n g o r d e r i n -  cluded an order r e q u i r i n g employers to pay a C o s t - o f - L i v i n g Bonus to a l l employees who " s a l a r i e d o f f i c i a l " was than  $250  were not  "salaried o f f i c i a l s " .  A  d e f i n e d as any person r e c e i v i n g more  per month u n l e s s t h e i r d u t i e s 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 t h a t they were not above the rank of foreman or comparable rank.  Every person r e c e i v i n g l e s s than $175  month had to be p a i d the C o s t - o f - L i v i n g Bonus. 1. O r d e r - i n - C o u n c i l , P.C. 7440, December 16, 1940 2. O r d e r - i n - C o u n c i l , P.C. 8253, October 24, 1941 3. O r d e r - i n - C o u n c i l , P.C. 9298, November 7, 1941 4. N a t i o n a l War Labour Board 5. O r d e r - i n - C o u n c i l , P.C. 8253, October 24, 1941  per  153. As experience orders exist.  was  gained  i n a d m i n i s t e r i n g the  (and amendments), the need f o r r e v i s i o n was T h e r e f o r e , on December 9,  1943,  original,  seen to  "the o r i g i n a l order  revoked and r e p l a c e d by O r d e r - i n - C o u n c i l , P.O.  93#4,  the "War-Time Wages C o n t r o l Order,  1943".  t h a t a d m i n i s t r a t i o n would continue  by the N a t i o n a l War  Board and  by Regional 'War  Canadian p r o v i n c e s . P.O.  9384 was  was  entitled  This order  provided  Labour Boards i n each of the  Labour nine  When the War-Time Wages C o n t r o l Order,  1943,  promulgated, the Government of Canada took o c c a s i o n  to d e c l a r e as i t s p o l i c y t h a t i t would take a l l p r a c t i c a l measures to s t a b i l i z e l i v i n g c o s t s a t the l e v e l e x i s t i n g i n December, 1943,  and  announced t h a t such p o l i c y would be reviewed  i f any a p p r e c i a b l e change i n l i v i n g c o s t s o c c u r r e d . P r o v i s i o n was  made f o r amendment and  r e l a x a t i o n o f wage c o n t r o l s as  cir-  cumstances might render a change a d v i s a b l e . I t i s axiomatic  t h a t without  t h a t p o r t i o n of p r o d u c t i o n and  a degree o f s t a b i l i t y i n  d i s t r i b u t i o n costs  represented  by l a b o u r , i t would be d i f f i c u l t , i f not i m p o s s i b l e , to h o l d price ceilings.  I t may  be expected t h a t the t r a n s i t i o n p e r i o d  from a wartime economy to a peacetime economy w i l l many d i f f i c u l t i e s which would be accentuated  present  i f c o n t r o l s over  p r i c e s and wages are too suddenly removed. D:  Rental  Controls  Rent c o n t r o l came i n t o e f f e c t on December 1, same day as the p r i c e c e i l i n g , and  1941,  i s an i n t e g r a l p a r t of  F e d e r a l Government's p r i c e c o n t r o l p o l i c y . t a n t element i n the cost of l i v i n g and  the . the  Rent i s an impor-  one which, i n the absence  154. of  c o n t r o l , would have i n c r e a s e d i n many areas where housing  shortages have developed.  The demand f o r housing has grown  because o f the i n f l u x o f people t o c e r t a i n i n d u s t r i a l  areas  and m i l i t a r y c e n t e r s and as a r e s u l t o f h i g h e r earnings o f war workers and o t h e r s .  Wartime r e s t r i c t i o n s , shortage o f l a b o u r  and o t h e r f a c t o r s have prevented  a s u f f i c i e n t i n c r e a s e i n the  supply o f accomodation, and as a r e s u l t t h e r e has been c o n s i d e r a b l e upward p r e s s u r e on r e n t a l s .  1 An o r d e r - i n - c o u n c i l p r o v i d e d t h a t the maximum r e n t a l f o r any housing accomodation o r business premises was t o be the r e n t a l i n e f f e c t on October 11,  1941.  July. 1,  1943  saw the  a p p l i c a t i o n o f c o n t r o l s f o r rooming accomodation i n most a r e a s , w i t h s p e c i a l p r o v i s i o n s r e e v i c t i o n of t e n a n t s . From the p o i n t o f view o f a n t i - i n f l a t i o n p o l i c y as a whole, r e n t a l c o n t r o l s , a f f e c t i n g an item r e s p o n s i b l e f o r app r o x i m a t e l y o n e - f i f t h o f t h e average tenant f a m i l y ' s budget, undoubtedly c o n t r i b u t e d an important  s t a b i l i z i n g e f f e c t and  helped t o support o t h e r p a r t s o f the program.  I t appears t h a t ,  i n common w i t h o t h e r l i k e measures, the d e c o n t r o l o f r e n t a l s will  take p l a c e i n a g r a d u a l manner as our economy r e t u r n s t o  normal • E: The  F o r e i g n Exchange C o n t r o l  outbreak  o f war i n September, 1939  c r e a t e d new and  urgent problems i n c o n n e c t i o n w i t h Canada's f i n a n c i a l with other c o u n t r i e s .  1.  relations  These c o u l d be f o r e s e e n , t o a l a r g e e x t e n t  O r d e r - i n - C o u n c i l , P.O. 8965 November The Maximum Rentals R e g u l a t i o n s ?  21, 1941  f  155. as the I n e v i t a b l e 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 t o meet such an emergency had been worked out, b r o a d l y speaking, i n advance.  The c h i e f reasons f o r f o r e i g n  exchange c o n t r o l i n Canada were:(1)  To a s s i s t i n the c o n s e r v a t i o n of U.S. funds so t h a t purchases of war s u p p l i e s and payments on f o r e i g n currency debt might be e a s i l y handled.  (2)  To s t a b i l i z e exchange r a t e s .  (3)  To m o b i l i z e a l l  Canada's f o r e i g n a s s e t s i n a common  p o o l i n case of need. (4)  To prevent unnecessary exports of c a p i t a l .  (5)  To cooperate w i t h exchange c o n t r o l bodies of o t h e r Allied  (6)  countries.  To safeguard Canada's s e c u r i t i e s markets i n o r d e r to f a c i l i t a t e the o r d e r l y c a r r y i n g out o f the war f i n a n c e program.  C o n t r o l Measures One of the most important economic and f i n a n c i a l war measures was the establishment and o p e r a t i o n of the F o r e i g n Exchange C o n t r o l Board. in-Council day.  1  The Board was e s t a b l i s h e d by Order-  on September 15,  1939  and c o n t r o l began the next  The government was r e l u c t a n t to take t h i s step because  of the c l o s e commercial and f i n a n c i a l t i e s between Canada and other c o u n t r i e s , e s p e c i a l l y the U n i t e d S t a t e s .  Previously,  there had always been the g r e a t e s t freedom of f i n a n c i a l 1.  O r d e r - i n - C o u n c i l , P.C. 2716,  September 15,  1959  inter-  156 course between Canada and n e c e s s i t y of conserving eign exchange f o r war  the o u t s i d e w o r l d .  Canada's c a p i t a l and  capital.  J u l y , 1940, adian  forThe  other  I t adopted  the  as p o s s i b l e w i t h normal b u s i n e s s  t r a v e l but t r i e d to keep the outward movement of P a r t i c u l a r care was  coming to Canada were not  capital  taken to see t h a t t o u r i s t s  r e s t r i c t e d i n any way  but,  early i n  the Board ceased s e l l i n g f o r e i g n exchange to Can-  residents f o r pleasure  t r a v e l i n order to conserve  change f o r the purchase of e s s e n t i a l war On A p r i l 30, was  r e c e i p t s of  A l l transactions with residents of  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  to a minimum.  supreme  exports of goods, cur-  c o u n t r i e s were s u b j e c t t o i t s r e g u l a t i o n s .  and  the  purposes made c o n t r o l e s s e n t i a l .  Board had power t o l i c e n s e imports and rency and  But  1940,  ex-  supplies.  a F o r e i g n Exchange A c q u i s i t i o n O r d e r  passed r e q u i r i n g a l l Canadian r e s i d e n t s to s e l l t h e i r  hold-  i n g s of f o r e i g n exchange (but not of f o r e i g n s e c u r i t i e s ) to E.E.C.B. before needed a c u r r e n t  the end supply  off May.  The  Board permitted  those  of f o r e i g n exchange i n c a r r y i n g on  normal business to r e t a i n enough f o r t h i s purpose.  to  Board i n order t h a t a l l the n a t i o n ' s l i q u i d r e s e r v e s ,  Fund, e s t a b l i s h e d i n 1935 was  enlarged  by  $325  purchase the g o l d and 1.  Order-in-Council,  and  The  who their  the  both o f  exchange, might be c e n t r a l i z e d i n the hands of  agency r e s p o n s i b l e f o r managing the exchanges.  the  At the same  time, the Bank of Canada a l s o s o l d i t s g o l d r e s e r v e s  gold and  the  Exchange  used by the Board i n i t s o p e r a t i o n s ,  m i l l i o n i n order to enable the Board t o exchange r e f e r r e d to above. P.C.  1734,  1  A p r i l 30,  1940  157. A powerful o r g a n i z a t i o n had been c r e a t e d . and  A t i t s head,  c o n s t i t u t i n g the Board proper, were f i v e permanent  of the Canadian Government. ment o f Finance,  officials  From the Bank o f Canada, the Depart-  the Department o f N a t i o n a l Revenue, the Com-  m e r c i a l I n t e l l i g e n c e S e r v i c e and the Department o f E x t e r n a l A f f a i r s they brought a wide experience A s t a f f of w i d e l y v a r i e d experience and  private l i f e .  i n t o a concerted  was appointed  effort.  from p u b l i c  F i n a l l y , and most f o r t u n a t e l y , the s e r v i c e s  of the Canadian banking system, the Canadian Customs and E x c i s e and  the P o s t a l A u t h o r i t i e s were The  obtained.  Bank o f Canada acted as Agent o r Banker f o r the Board  and was o f f i c i a l l y the t e c h n i c a l a d v i s o r o f the Board.  As a  matter o f f a c t , the Board was r e a l l y a new department o f the Bank of Canada.  Complete c o n t r o l o f the f o r e i g n exchanges o f  a country w i t h a volume o f f o r e i g n t r a n s a c t i o n s such as Canada's was  a tremendous task f o r one c e n t r a l a u t h o r i t y .  The F o r e i g n  Exchange C o n t r o l Board was f o r t u n a t e , t h e r e f o r e , i n having the Bank o f Canada and other e s t a b l i s h e d agencies which c o u l d  assist  i t i n i t s task C o n t r o l of F o r e i g n Exchange The problem c o n f r o n t i n g those who were entrusted  with  the task o f e s t a b l i s h i n g complete c o n t r o l seemed insurmountable at f i r s t  sight.  considered,  There were so many types of t r a n s a c t i o n s t o be  time was short and s e c r e c y  ppder) was i m p e r a t i v e .  ( u n t i l issuance  of t h e  When f i n a l l y d r a f t e d , the d e t a i l s were  so numerous t h a t f o r purposes of examination we have  subdivided  the v a r i o u s items as f o l l o w s :  (b) C o n t r o l s  (a) General C o n t r o l s ,  158 f o r Goods and (a) The  S e r v i c e s and  General  (c) F i n a n c i a l C o n t r o l s .  Controls  d u t i e s of the Board seemed t o n e c e s s i t a t e  main p r i v i l e g e s : to i n s p e c t , impound and sources.  Therefore,  three  conserve f o r e i g n r e -  the Board r e q u i r e d d e c l a r a t i o n by  of a l l f o r e i g n exchange and  securities,  acquire  determined the c o n d i t i o n s under  these resources  which they could be  and  spent.  the r i g h t to  In r e q u i r i n g d e c l a r a t i o n of a l l  f o r e i g n exchange, the Board i n s p e c t e d  the extent  the f o r e i g n resources: a t i t s d i s p o s a l . of goods, currency,  1  reserved  residents  and nature of  A l l e x p o r t s and  f o r e i g n exchange or other p r o p e r t y  o n l y be made under permits and  i t s Agents.  foreign resources,  could  l i c e n s e s of the Board —  s u r v e i l l a n c e of f o r e i g n exchange t r a n s a c t i o n s was by the Board and  imports  constant  maintained  In r e s e r v i n g the r i g h t to  acquire  the Board foresaw such p o s s i b l e a c t i o n as  the F o r e i g n Exchange A c q u i s i t i o n Order of A p r i l 30,  1940.  f i n a l duty of the c o n t r o l s as o r i g i n a l l y e s t a b l i s h e d was  The to  prevent unnecessary c a p i t a l export to non-Empire c o u n t r i e s . T h i s i n v o l v e d c o n t r o l of merchandise as w e l l as f i n a n c i a l a c t i o n s and we  s h a l l examine the two  trans-  s e p a r a t e l y i n the next  two  pages. (b)  Controls  f o r Goods and  Services  Every export from Canada to non-Empire c o u n t r i e s expected t o produce U n i t e d and  these U n i t e d  of the Board. 1.  S t a t e s d o l l a r s (or t h e i r  was  equivalent)  States d o l l a r s were to be put a t the d i s p o s a l  On the import s i d e , the Board would  Order-in-Council,  P.C.  2716,  Sec. 14  (2),  provide  September 15,  1939  159.  f o r e i g n exchange a t i t s o f f i c i a l r a t e s f o r a l l goods and s e r v i c e s r e c e i v e d as p e r m i t t e d .  I n view o f s u p p o r t i n g  credit, a l l  debt s e r v i c e s were p a i d as s t i p u l a t e d by t h e i r c o n t r a c t s . was d e s i r e d t o i n t e r f e r e as l i t t l e  as p o s s i b l e w i t h e s t a b l i s h e d  p r a c t i c e s w h i l e a t t h e same time p r e v e n t i n g s i p a t i o n o f the country's r e s o u r c e s . businesses were provided  unnecessary d i s -  Therefore,  established  w i t h the f o r e i g n exchange n e c e s s a r y t o  t h e i r p u r s u i t s although they had t o i n c o r p o r a t e  a little  procedure i n t o t h e i r o f f i c e routine- so t h a t the c o n t r o l 5  be e f f e c t i v e l y operated.  It  extra could  A l l merchandise exports had t o be  accompanied by the r e q u i r e d forms o r the goods were  side-tracked.  Imports were c o n t r o l l e d by the customs and the goods were not • r e l e a s e d u n t i l a l l forms were i n o r d e r . abroad was a u t h o r i z e d The  dividends  The payment of d i v i d e n d s  i f they were reasonable and a u t h e n t i c .  had t o come out of c u r r e n t  the Income War Tax A c t .  Receipts  ments i n a f o r e i g n currency  earnings as d e f i n e d by  o f i n t e r e s t and d i v i d e n d  had t o be s o l d t o the Board.  payThe  t o u r i s t trade was encouraged as a source o f f o r e i g n exchange from the o u t s e t and p r a c t i c a l l y no r e g u l a t i o n s were made which would i n t e r f e r e d i r e c t l y w i t h Canada's g u e s t s .  However, i n  J u l y , 1940, the Government announced the p o l i c y o f r e s t r i c t i n g the use of Canada's resources  of U n i t e d  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 United  S t a t e s d o l l a r s f o r t h a t purpose.  selling  T r a v e l permits were  r e q u i r e d whether funds (Canadian o r f o r e i g n ) were c a r r i e d o r not.  160. (c)  F i n a n c i a l Controls  While the c o n t r o l s e s t a b l i s h e d f o r c u r r e n t account a c t i o n s , as d e s c r i b e d  trans-  above, were merely to prevent p o s s i b l e  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 to assure t h a t f o r e i g n exchange was  (as w e l l  as  forthcoming wherever pos-  s i b l e ) , the c o n t r o l s on c a p i t a l account t r a n s a c t i o n s were ed t o cope w i t h the a c t u a l c a p i t a l t r a n s f e r s .  As  a c t i o n s a f f o r d e d probably the g r e a t e s t o p p o r t u n i t y export,  i t was  design-  security transfor capital  necessary to g i v e them every p o s s i b l e a t t e n t i o n .  C o n t r o l of s e c u r i t y t r a n s a c t i o n s i n v o l v e d numerous r e g u l a t i o n s but they b o i l e d down to the s i n g l e p r o v i s i o n t h a t Canadians could not buy  any k i n d of s e c u r i t y from any r e s i d e n t o f a coun-  t r y o u t s i d e the S t e r l i n g a r e a .  Those e x t e r n a l s a l e s of s e c u r i t -  i e s by Canadians which would provide u r a l l y encouraged.  L i f e insurance  f o r e i g n exchange were n a t -  companies were permitted  continue i n accordance w i t h t h e i r u s u a l procedure. F o r e i g n Exchange A c q u i s i t i o n Order i n t r o d u c e d  to  After  the  a general p o l i c y  of commandeering f o r e i g n exchange r e c e i p t s f o r t h w i t h  (instead  of p e r i o d i c s a l e s of accumulated exchange t o the Board as  before),  commercial companies were able to r e t a i n a f o r e i g n currency  bank  account f o r immediate needs o n l y .  The  Rate of Exchange The  Board was  S t e r l i n g and United  empowered to f i x r a t e s of exchange f o r States d o l l a r s f o r conversion  Canadian d o l l a r s by A u t h o r i z e d were set a t :  $1.11  from the Board; $1.10  (later  Dealers.  $1,105)  The  to or from  official  Canadian to buy  $1.00  rates U.S.  Canadian r e c e i v e d from the Board i n  ex-  161.  change f o r $1.00  f o r one £ S t e r l i n g , the r a t e s were $4.47  U.S.;  and $4.43. The  problem of e s t a b l i s h i n g an a r b i t r a r y v a l u a t i o n f o r  Canadian funds i n terms of U n i t e d  S t a t e s d o l l a r s and S t e r l i n g  involved several considerations.  The  first  consideration  was  the need f o r complete c o n t r o l of f o r e i g n exchange t r a n s a c t i o n s , f o r to e f f i c i e n t l y a d m i n i s t e r  an o f f i c i a l r a t e , the Board  had  t o undertake to meet the necessary demands f o r f o r e i g n exchange out of a l i m i t e d supply. rate  ( i n terms of U.S.  The  arguments f o r a h i g h e r  Canadian  funds) i n v o l v e d the purchase a t lowest  p o s s i b l e cost of v i t a l l y needed s u p p l i e s from the U n i t e d and  States  the a s s i s t a n c e to Great B r i t a i n i n so f a r as. t h i s would  achieved f o r a low United  by a h i g h Canadian r a t e i n New  York.  The  arguments  Canadian r a t e i n v o l v e d the p o s s i b i l i t y of  S t a t e s ' purchases or investment at b a r g a i n  the funding  increased  prices  of Canadian s u p p l i e s t o Great B r i t a i n a t as  a c o s t to Great B r i t a i n as p o s s i b l e . ed by the n e c e s s i t y of r e n d e r i n g  The  be  and low  arguments were weight-  every p o s s i b l e a s s i s t a n c e  to  Great B r i t a i n w h i l e a t the same time o b t a i n i n g needed purchases i n the U n i t e d  S t a t e s f o r the common cause.  The F o r e i g n Exchange A c q u i s i t i o n Order and Order  the Exchange Fund  I t w i l l be r e c a l l e d t h a t the o r i g i n a l Order**" gave i n t o the custody of the Board the resources T h i s fund had  of the Exchange Fund.  been e s t a b l i s h e d by the Exchange Fund A c t of  To f u r t h e r a s s i s t i n i t s c o n t r o l measures, the Board, on 1.  Order-in-Council,  P.C.  2716,  September 15,  1939  1935.  April  162  30,  1940, purchased the e n t i r e f o r e i g n exchange h o l d i n g s o f the  country.  T h i s was accomplished through the F o r e i g n Exchange  2  1  A c q u i s i t i o n Order, and the Exchange Fund Order.  The  former  a p p l i e d t o a l l p r i v a t e h o l d i n g s o f f o r e i g n exchange and the l a t ter  to the Bank of Canada's gold and f o r e i g n exchange h o l d i n g s .  The t o t a l amount a u t h o r i z e d f o r t h i s purchase of p r i v a t e p u b l i c exchange was s e t a t $325 m i l l i o n .  and  (June 30,  A year l a t e r  1941), i t was i n c r e a s e d by a f u r t h e r $325 m i l l i o n , w i t h authority  t o extend t o $400 m i l l i o n .  To f i n a n c e the o r i g i n a l  pur-  chase o f t h i s f o r e i g n exchange, the M i n i s t e r of Finance s o l d to  the Bank of Canada the f o l l o w i n g s e c u r i t i e s : $250 m i l l i o n o f  1 year 1% notes a t par, $75 m i l l i o n o f Treasury B i l l s a t a d i s count e q u i v a l e n t t o a y i e l d of 739/1,000%. The War Exchange C o n s e r v a t i o n A c t On December 2, 1940, the M i n i s t e r of Finance i n t r o d u c e d a measure known as the War Exchange C o n s e r v a t i o n A c t which proh i b i t e d the i m p o r t a t i o n of a l o n g l i s t  of n o n - e s s e n t i a l imports  from n o n - s t e r l i n g c o u n t r i e s and p r o v i d e d f o r the g r a d u a l reduct i o n of another l i s t v i s i o n was  o f imports from the same c o u n t r i e s .  Pro-  a l s o made i n t h i s measure f o r the r e d u c t i o n of the  t a r i f f d u t i e s on a schedule o f 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 g e n e r a l purpose of the measure b e i n g to  d i s c o u r a g e the i m p o r t a t i o n of goods from hard c u r r e n c y coun-  t r i e s and t o encourage  trade with s t e r l i n g - a r e a  countries.  Having summarized the v a r i o u s r e s t r i c t i o n s and 1. O r d e r - i n - C o u n c i l , P.C. 2. O r d e r - i n - C o u n c i l , P.C.  1734, A p r i l 1735, A p r i l  30, 1940 30, 1940  controls  163. a f f e c t e d by the F o r e i g n  Exchange C o n t r o l  Board, the War Exchange  C o n s e r v a t i o n A c t and a l l i e d l e g i s l a t i o n , we can see t h a t 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 f o l l o w e d War I I .  d u r i n g World  The r e s t r i c t i o n s on the use o f f o r e i g n exchange have  continued i n e f f e c t much as d e s c r i b e d , has been p o s s i b l e .  though some r e l a x a t i o n  F o r example, t h e r e has been a moderation  of t r a v e l r e g u l a t i o n s  (so t h a t funds a r e now a v a i l a b l e f o r  p r a c t i c a l l y a l l normal t r a v e l ) and the p r o h i b i t i o n s o r r e s t r i c t i o n s imposed on imports under the War Exchange C o n s e r v a t i o n Act have been removed.  A t the time o f w r i t i n g , i t i s b e l i e v e d  t h a t f o r e i g n exchange c o n t r o l i n Canada may c o n t i n u e f o r an i n d e f i n i t e period, J u l y 5,  1946,  c e r t a i n l y two o r t h r e e y e a r s , although on  the F e d e r a l  Government took d r a s t i c a c t i o n t o  strengthen Canada's bulwarks a g a i n s t the  i n f l a t i o n by r e t u r n i n g  Canadian d o l l a r t o p a r i t y w i t h the U n i t e d S t a t e s  dollar,  c l a r i f y i n g the goods, and s e r v i c e s to which p r i c e c o n t r o l s and  apply  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 o f imported  goods.  The f o u r - p o i n t  realignment p o l i c y was o u t l i n e d by F i n -  ance M i n i s t e r I l s l e y i n a of Commons.  s u r p r i s e announcement  t o the House  He summarized the government's o b j e c t i v e  as the  maintenance o f " o r d e r , s t a b i l i t y and independence" i n the Domi n i o n ' s economic and f i n a n c i a l a f f a i r s . While the program was designed t o combat both domestic and  external  i n f l a t i o n a r y p r e s s u r e s , i t was evident  move, i n some r e s p e c t s States  current  t h a t the  a t l e a s t , was a r e s u l t o f the U n i t e d  p r i c e c o n t r o l d i f f i c u l t i e s a r i s i n g from the  abandonment of p r i c e  control.  164.  The f o u r steps taken t o p r o t e c t the Canadian  1  economy  were a s f o l l o w s : (1)  E f f e c t i v e a t 6 P.M., P.D.T., J u l y 5, 1946, t h e  Canadian d o l l a r was a d j u s t e d t o p a r i t y w i t h the U n i t e d S t a t e s d o l l a r , w i t h hanks and other a u t h o r i z e d agents o f t h e F o r e i g n Exchange C o n t r o l Board buying American d o l l a r s a t $1 Canadian funds and s e l l i n g them a t $1.00|r.  The buying r a t e o f 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 r a t e $4.04 (2)  A l o n g but simple and c l e a r l i s t  o f a l l goods and  s e r v i c e s which continue s u b j e c t t o p r i c e c o n t r o l was e s t a b l i s h e d , i n c l u d i n g p r a c t i c a l l y a l l a r t i c l e s o f s i g n i f i c a n c e i n the normal household  budget and i n the c o s t s o f p r o d u c t i o n of farmers,  fishermen and other primary p r o d u c e r s .  A number of l e s s impor-  t a n t a r t i c l e s were suspended from p r i c e  control.  (3) remained  The p r i n c i p l e s o f p r i c e c o n t r o l on domestic  products  unchanged but a l l imported goods o f a k i n d s u b j e c t t o  p r i c e c o n t r o l , u n l e s s s p e c i f i c a l l y d e a l t w i t h on another  basis,  were to be p r i c e d on the b a s i s o f t h e importer's landed c o s t p l u s a p r e s c r i b e d maximum mark-up which i n each case w i l l be somewhat l e s s than the mark-up n o r m a l l y obtained by d i s t r i b u t o r s of s i m i l a r domestic (4)  goods.  The p o l i c y o f paying s u b s i d i e s w i l l  remain i n e f f e c t  i n order t o prevent undue i n c r e a s e s i n p r i c e s o f a r t i c l e s o f major importance  i n the consumers' c o s t - o f - l i v i n g o r i n primary  producers' c o s t s o f p r o d u c t i o n . Mr. I l s l e y s a i d the new program was aimed a t p r e v e n t i n g 1. c f . , Yancouver News H e r a l d . J u l y 6, 1946  165.  undue i n c r e a s e s i n the c o s t - o f - l i v i n g and c o s t s of p r o d u c t i o n , improving  the e f f e c t i v e n e s s of p r i c e c o n t r o l , encouraging  g r e a t e r supply of s c a r c e goods imported  a  from o t h e r c o u n t r i e s  and f a c i l i t a t i n g an o r d e r l y post-war adjustment  of the Canadian  economy w h i l e p r o t e c t i n g i t from the major e f f e c t s o f adverse developments o u t s i d e our b o r d e r s .  CHAPTER CANADIAN AID We war  XII TO ALLIES  .  are about to d i s c u s s a most important  effort.  complicated  Besides being important,  p a r t of the  however, i t i s somewhat  and t h e r e f o r e i s o f t e n misunderstood.  the broad o u t l i n e s are c l e a r :  Fortunately,  Canada sends a l o t of a i d to  B r i t a i n , R u s s i a , A u s t r a l i a , . C h i n a , West I n d i e s and I n d i a ; receives aid —  although  considerably l e s s —  S t a t e s , and adds to her own ficial  war  from the U n i t e d  burden the d i f f e r e n c e .  c o m p l i c a t i o n s a r i s e from misconceptions  nature of economic a i d i n wartime .  Super-  r e g a r d i n g the  Basic complications a r i s e  from the f a c t t h a t the economic burden on the Canadian economy i s sometimes i n a c c u r a t e l y represented by the f i n a n c i a l burden on the Treasury a t Ottawa and from the f a c t t h a t t o some extent Canada i s an i n t e r m e d i a r y f o r American a i d to B r i t a i n . There are two  aspects of economic a i d , one  and the other s u p e r f i c i a l .  fundamental  Fundamentally, the a i d which  one  country sends another,  i n peace o r war,  c o n s i s t s of goods and  s e r v i c e s which the one  sends the o t h e r e i t h e r as a g i f t or a  loan.  A i d envoives an excess or s u r p l u s of t r a d e i n one  tion.  When a country g i v e s or r e c e i v e s i n 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 s u a l l y be a f f e c t e d . imposing  a burden on the economic system and  I f war  direc-  i s already  i f the customary  standard of l i v i n g i s thereby t h r e a t e n e d , the r e c e i p t of economic  167.  a i d 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 ; c o n v e r s e l y extension of a i d w i l l aggravate i t . Great  the  Since the outbreak of  war,  B r i t a i n has r e c e i v e d an enormous amount of economic a i d  from abroad and by, although  the standard  o f l i v i n g has  not a t i t s pre-war l e v e l .  been maintained  Canada, on the  hand, i s g i v i n g a great d e a l of a i d and the p o i n t was  there-  other approached  where, w i t h the economy a l r e a d y c a r r y i n g the l o a d of a s u b s t a n t i a l domestic war  e f f o r t , t h i s a i d would i n v o l v e s u b s t a n t i a l s a c r i -  fices. Now,  such a i d as d e s c r i b e d above.must somehow be  financed.  Under wartime c o n d i t i o n s , the government became i n v o l v e d i n practically a l l financing.  T h i s i s e a s i l y observed by n o t i n g  the work of the F o r e i g n Exchange C o n t r o l Board i n Canada.  From  the p o i n t of view of t i d i n g over an emergency, i t does not matt e r whether i n t e r n a t i o n a l a i d i s f i n a n c e d i n the form of a l o a n or a g i f t —  or a Lease-Lend o p e r a t i o n .  the d i f f e r e n c e may t o B r i t a i n was  be g r e a t .  During  But  i n the l o n g  the l a s t war,  run,  American a i d  f i n a n c e d , i n the e a r l y years, by American pur-  chases from B r i t a i n of o u t s t a n d i n g American securities.**" l a t e r stage of the war,  having  At a  e x t i n g u i s h e d most o f i t s debt,  the U n i t e d S t a t e s began l e n d i n g on a l a r g e s c a l e , and the subsequent h i s t o r y of the "War P r e s i d e n t Roosevelt any  Debts i s w e l l known.  The  sad  late  i n t r o d u c e d Lease-Lend i n an attempt to a v o i d  r e p e t i t i o n of t h a t acrimonious h i s t o r y .  I t i s worth n o t i n g ,  however, t h a t a i d t o B r i t a i n under Lease-Lend i s not a g i f t , any  r a t e not q u i t e .  1. Plehn, C. C ,  The  exact nature  at  of the t r a n s a c t i o n i s not  I n t r o d u c t i o n to P u b l i c Finance,  p.  413  168.  entirely clear. By June 30, 1941, Canada had provided wartime a i d f o r B r i t a i n valued  a t $1,070,000,000.  Canada had an export  I n the years before  the war,  s u r p l u s o f goods and s e r v i c e s t o 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 a n n u a l l y ,  but under  1  2 war c o n d i t i o n s t h i s s u r p l u s had swollen  enormously.  As t h e  demands f o r a c t u a l war s u p p l i e s i n c r e a s e d g r e a t l y , f a c t o r i e s had  t o be b u i l t , and i n the second h a l f o f 1940 and the f i r s t  h a l f o f 1941 B r i t a i n took much o f the a i d provided not i n the form o f Canadian exports,  by Canada,  but i n the form o f f a 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 a i d which Canada has s u p p l i e d t o B r i t a i n by the end of June 1941 (amounting t o $1,070,000,000) had been f i n a n c e d i n the f o l l o w i n g ways.  D u r i n g 1939 and 1940, a l a r g e p a r t ($250,  000. 000. was f i n a n c e d by payment i n g o l d . ^  A f u r t h e r $340,000,  000 was f i n a n c e d by r e p a t r i a t i n g Canadian s e c u r i t i e s h e l d i n Great B r i t a i n .  The remainder, $480,000,000, c o n s i s t e d o f tem-  porary  Each of these forms o f f i n a n c e deserves some  further  credits.  explanation. Two t h i n g s must be s a i d r e g a r d i n g  gold.  the, amount r e c e i v e d i n  I n the f i r s t p l a c e , the r e c e i p t o f g o l d , even i f i t had  been r e t a i n e d i n Canada, would not have eased i n any way the c u r r e n t burden imposed on the Canadian economic system by sup1. Canada Year Book, 1941, pp. 404-408 2. ICanada Book, 1945, p. 489 3. b i d . , Year pp. 557-558  4. I b i d . , p . 553 5. I b i d . , p. 558  169*  p l y i n g a i d to B r i t a i n .  Accumulating gold i n the v a u l t s o f 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 f o r the B r i t i s h .  second p l a c e , not an ounce of the g o l d was Canada.  1  In the  i n fact retained i n  A l l of i t had t o go t o the U n i t e d States to cover the  c o s t of imports from t h a t country which were b e i n g purchased by Canadians on account o f the B r i t i s h . her own  Canada was  also depleting  stocks o f gold i n buying goods from the U n i t e d  States  on her own account; but a l l the gold o b t a i n e d from B r i t a i n  was  needed t o pay f o r Canadian purchases i n the U n i t e d S t a t e s on B r i t i s h account. The second p o r t i o n o f Canadian a i d to B r i t a i n was  fin-  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 Britain.  Thus Canada i n World War I I , l i k e the U n i t e d  States  i n the e a r l y p a r t o f World War  I , redeemed many o f her I.O.U.s  o u t s t a n d i n g 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 t h a t p o s t -  war p o l i t i c a l acrimony a r o s e , not as a r e s u l t o f American r e p a t r i a t i o n o f s e c u r i t i e s from Great B r i t a i n but r a t h e r as a r e s u l t o f the d i r e c t i n t e r g o v e r n m e n t a l l o a n s which, i n the l a t e r years of the war, l a r g e l y r e p l a c e d the American  repatriation  programme. The t h i r d p o r t i o n of Canadian a i d t o B r i t a i n , to n e a r l y h a l f the t o t a l by June 1941,  was  amounting  f i n a n c e d by  temporary  c r e d i t s s u p p l i e d by the Bank of Canada and the F o r e i g n Exchange C o n t r o l Board on b e h a l f o f the Canadian Government.  Formally  speaking, t h i s amount does r e p r e s e n t a "debt", indeed a 1.  Canada Year Book. 1945,  p.  553  "war  170  debt", from Great B r i t a i n t o Canada.  However, i t was  already  ( t h i s was i n 1 9 4 1 ) , and i s s t i l l mounting so r a p i d l y ,  so l a r g e  t h a t there  i slittle  l i k e l i h o o d o f i t ever being r e p a i d i n f u l l . .  Many people, who have g i v e n  the s i t u a t i o n c o n s i d e r a t i o n , hope  t h a t some way w i l l be found t o p r o v i d e services to B r i t a i n free of cost. p o r t i o n o f t h e "debt" a l r e a d y We s h a l l  more r e l i e f s u p p l i e s and  Some advocate t h a t a l a r g e  accumulated should  be w r i t t e n o f f .  see the r e s u l t o f t h i s l a t e r when we note the famous  " g i f t " of $1,000,000,000  t o Great B r i t a i n by Canada.  On May 2 0 , 1 9 4 3 , arrangements f o r s u p p l y i n g equipment, raw m a t e r i a l s  Canadian war  and f o o d s t u f f s f o r which o t h e r  could n o t pay changed from a f i n a n c i a l t o a p h y s i c a l P r e v i o u s t o the p a s s i n g date, Canada provided nations Canada.  —  nations  basis.  1  o f the Mutual A i d A c t on t h a t  the United'Kingdom —  and i n d i r e c t l y  other  w i t h some o f the money used t o buy war s u p p l i e s i n  Under Mutual A i d , Canada provided  the U n i t e d  Kingdom  and  other nations  w i t h the a c t u a l war s u p p l i e s they needed over  and  above t h e i r c a p a c i t y t o pay.  and  s h i p s , wheat, bacon and lumber were made a v a i l a b l e i n the  Thus Canadian p l a n e s ,  tanks  common cause j u s t as were the s e r v i c e s o f the Canadian Navy, Army and A i r irorce.  The c h i e f c o n d i t i o n was t h a t they serve a  s t r a t e g i c need i n the " j o i n t and e f f e c t i v e p r o s e c u t i o n  o f the  war" In the f i r s t war  three  years o f the war, the f l o w o f Canadian  s u p p l i e s t o the A l l i e s was assured by p r o v i d i n g  w i t h the Canadian d o l l a r s n e c e s s a r y to pay f o r these 1. 2.  Canada a t War, p. 126 Loc. c i t .  Great B r i t a i n supplies.  171. C o u n t r i e s i n the B r i t i s h Commonwealth and a l s o the S o v i e t Union r e c e i v e d , through Great B r i t a i n , s u b s t a n t i a l amounts o f Canadian war s u p p l i e s i n t h i s way.  1  S e v e r a l methods o f extending t h i s f i n a n c i a l a i d , which amounted t o $2,700,000,000, were used. already discussed  Some of these we have  i n more g e n e r a l terms, but s p e c i f i c a l l y , the  2 most important were:(1)  The buying back o r " r e p a t r i a t i o n " o f B r i t i s h - h e l d Canadian s e c u r i t i e s  ( p r i v a t e , Canadian Government  and Canadian N a t i o n a l Railways s e c u r i t i e s ) amounti n g t o about $800,000,000. (2)  C o n s o l i d a t i o n of t h e major p a r t o f accumulated s t e r l i n g balances i n London, amounting  t o $700,000,  000, i n t o a l o a n t o Great B r i t a i n , i n t e r e s t f r e e f o r the d u r a t i o n of .the war.^ (3)  A c o n t r i b u t i o n o f $1,000,000,000 p l a c e d t o the c r e d i t 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 o f U n i t e d Kingdom i n t e r e s t s i n Canadian war p l a n t s amounting 000,000.  t o about $200,  During Canada's p e r i o d o f i n d u s t r i a l ex-  pansion, the B r i t i s h Government provided f o r the c o n s t r u c t i o n and equipment  capital  of many f a c t o r i e s  i n Canada to produce m u n i t i o n s f o r the B r i t i s h 1. 2. 3. 4.  forces. Canada a t War, p. 126 Loc. c i t . Canada Year Book, 1945, p . 553 Loc. c i t .  172  Now,  i n the two years a f t e r the s i g n i n g o f the  Mutual  A i d A c t ; i . e . , i n the two f i s c a l years which ended March 3 1 , 1945,  t o t a l expenditures under Mutual A i d were estimated a t  $1,727,603,000. Aid  The c o u n t r i e s w i t h which Canada had Mutual  agreements —  Great B r i t a i n ,  t r a l i a , New Zealand and I n d i a — aid directly  R u s s i a , China, France, Auspresented t h e i r  requests f o r  t o Canada, and Canada turned over the  supplies  d i r e c t l y t o them."** The t o t a l a p p r o p r i a t i o n f o r Mutual A i d i n i t s f i r s t f i s 2 c a l year ended March 3 1 , 1944, was $ 1 , 0 0 0 , 0 0 0 , 0 0 0 . Expenditures 3 were as f o l l o w s : TABLE I GROSS EXPENDITURES OF THE MUTUAL AID BOARD f o r 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 s u p p l i e s not y e t shipped A d m i n i s t r a t i v e Expense Total Source:  Annual  Completion  25,472 $  912,603,220  Report o f the Mutual A i d Board  o f t r a n s a c t i o n s w i t h France, begun b e f o r e  A p r i l 1 , 1944, f e l l w i t h i n the second 1. 2. 3.  139,123,564  Canada a t War, p . 127 Canada Year Book, 1 9 4 5 , p . 553 Canada A t War, l o c . c i t .  f i s c a l year.  The a v a i l -  173. a b l e a p p r o p r i a t i o n f o r t h a t year was $887,000,000 which $87,000,000 c a r r i e d over from the p r e v i o u s y e a r .  included  From i t was  to come Canada's c o n t r i b u t i o n t o U.N.R.R.A., o r i g i n a l l y s e t a t $77,000,000.  1  T o t a l expenditures under Mutual A i d f o r the f i s c a l year ended March 3 1 , 1945  were estimated a t about  $815,000,000.  Much l a r g e r expenditures were made d u r i n g the second year on b e h a l f o f R u s s i a , A u s t r a l i a , I n d i a , France, China and UNRRA w h i l e the amounts r e q u i r e d by Great B r i t a i n as Mutual A i d were reduced because  she was able t o pay f o r a l a r g e r p r o p o r t i o n o f  her requirements.  T h i s r e s u l t e d from the f a c t t h a t  British  r e c e i p t s o f Canadian d o l l a r s i n the payment o f the c o s t s o f  2 Canadian f o r c e s overseas were abnormally h i g h d u r i n g the y e a r . In the p r e v i o u s year, the t o t a l v a l u e o f goods and s e r v i c e s r e c e i v e d by B r i t a i n from Canada f o r which the f u l l amount 3  was  p a i d exceeded $1,200,000,000.  T h i s was i n a d d i t i o n t o  Mutual A i d . In the agreements which the n a t i o n s r e c e i v i n g Mutual A i d concluded w i t h Canada, there was p r o v i s i o n f o r Canada t o r e c e i v e such r e c i p r o c a l a i d as might be determined from time t o time i n the l i g h t o f the developments  o f the war. J u s t as  Mutual Aid.was provided o n l y t o the extent t h a t the country concerned was unable t o p r o v i d e Canadian d o l l a r s f o r i t s r e quirements, so no r e c i p r o c a l a i d was sought where Canada was able t o buy what she needed. 1. Canada a t War, p. 127 2. Loc. c i t . 3. I b i d . , p. 128  Canada always had funds t o pay  174  f o r Canadian requirements i n the c o u n t r i e s r e c e i v i n g Mutual Aid,  and t h e r e f o r e the r e c i p r o c a l a i d c l a u s e was not u s e d .  1  The U n i t e d S t a t e s needed no h e l p from Canada under Mutual A i d .  N e i t h e r d i d Canada r e c e i v e any a s s i s t a n c e f o r i t s e l f p  under U n i t e d S t a t e s Lease-Lend. The second annual r e p o r t o f t h e Mutual A i d Board cont a i n s the t o t a l f i g u r e s f o r the two complete y e a r s the Board had been i n e x i s t e n c e : TABLE I I GROSS AID GIVEN BY CANADIAN MUTUAL AID BOARD d u r i n g 2 years ending March "31, 1945 UNITED KINGDOM OTHER BRITISH COUNTRIES CHINA FRANCE UNION o f SOVIET SOCIALIST REPUBLICS U.N.R.R.A. Total Source:  $  1,442,000,000 113,000,000 21,000,000 18,000,000 121,000,000 11,000,000  I  1,726,000,000  Second Annual Report o f the Mutual A i d Board  The l a r g e s t items shipped were motor t r a n s p o r t ,  aircraft,  bacon and wheat. The f i g u r e o f $ 1 , 4 4 2 , 0 0 0 , 0 0 0 i s by no means the sum t o t a l o f a i d g i v e n t o Great B r i t a i n  by Canada d u r i n g the war.  The sum t o t a l o f a i d t o A l l i e s up t o March 3 1 , 1 9 4 5 may be summarized  ( i n terms o f f i n a n c i n g ) as f o l l o w s : -  1. Canada a t War, p . 128 2. Loc. c i t .  175*  TABLE I I I TOTAL CANADIAN AID TO ALLIES up t o March 3J., 1945  $  LOAN (NO INTEREST DURING WAMt-1942 OUTRIGHT GIFT TO BRITAIN-1942 REPATRIATION OF SECURITIES REFUNDING OF BRITISH EXPENDITURES ON CANADIAN WAR PLANTS MUTUAL AID  1,726,000,000 $ 4,426,000,000  Total Source:  700,000,000 1,000,000,000 800,000,000 200,000,000  Canada Year Book Annual Reports o f the Mutual A i d Board  This i s a g i g a n t i c sum f o r a country w i t h l e s s than onet w e l f t h the p o p u l a t i o n o r w e a l t h of the U n i t e d S t a t e s .  More-  over, i t does not i n c l u d e B r i t i s h purchases p a i d f o r i n cash hut  n e v e r t h e l e s s coming out o f Canadian p r o d u c t i o n . At  the time of w r i t i n g , d e t a i l e d f i g u r e s a r e n o t 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 -  a b l e i n the f i n a n c i a l white paper t a b l e d i n the House o f Commons along w i t h the Budget o f June 27, the  1946.  T h i s r e p o r t under  heading Mutual A i d Board shows expenditures as f o l l o w s : TABLE IV GROSS EXPENDITURE OF THE MUTUAL AID BOARD d u r i n g year ended March 3JL, 1946 MILITARY RELIEF MUTUAL AID UNITED NATIONS MUTUAL AID OTHER DEPARTMENTS Total Source:  $  34,000,000 725,900,000 84,042,000 3,161,000 $ 847,103,000  Appendix t o the Budget, June 27,  1946  In the Report o f the Mutual A i d Board, the phrase "outright  c o n t r i b u t i o n " i s used and t h i s i s e v i d e n t l y the way i n  which the Canadian Government l o o k s upon i t s Mutual A i d expendi t u r e s , which have been made without s t i p u l a t i o n  f o r r e t u r n or  even without thought o f u s i n g them as b a r g a i n i n g weapons.  This  i s Mutual A i d a t i t s f i n e s t . In a d d i t i o n , there i s the c u r r e n t l o a n of $1,250,000,000 to Great B r i t a i n and s i m i l a r type l o a n s t o China, the Netherl a n d s and Belgium which are v e r y d e f i n i t e l y a form o f a i d t o Allies,  even though they are l o a n s and have been granted s i n c e  the war ended. doing her p a r t .  Be i t a i d f o r war or r e c o n s t r u c t i o n , Canada i s  177.  CONCLUSION I t i s e v i d e n t t h a t g r e a t 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 o f 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, i n . t h e immediate p a s t , p a i d h i g h e r t a x e s , l o a n e d more money to t h e i r government and accepted a g r e a t e r degree  of  government c o n t r o l over t h e i r p r i v a t e l i v e s than any one would have thought p o s s i b l e a t the outbreak of the While i n World War  war.  I Canada depended on borrowing  abroad t o meet the bulk of her war  from  expenditures and thus  shift-  ed the immediate burden t o Great B r i t a i n and t o some extent the U n i t e d S t a t e s , i n the Second World War, realistic  tax measures which, from  the Government  1940-1946  adopted  inclusive,  covered  almost t w o - t h i r d s o f the country's war and d e m o b i l i z a t i o n expenditures.  In no o t h e r war  on r e c o r d has a country made such an  achievement and i t i s d o u b t f u l i f any o f her A l l i e s can match it.  , Government borrowing a l s o operated on a d i f f e r e n t  l o s o p h y d u r i n g t h i s l a s t war  —  funds and the bulk of them was  phi-  a l l the l o a n s were i n Canadian s o l d t o r e s i d e n t s of Canada.  Although the Gross P u b l i c Debt of Canada i n c r e a s e d by some  f14,000 nal.  m i l l i o n d u r i n g the years  1940-1946,  i t was mainly  Canada a c t u a l l y ended the war as a c r e d i t o r c o u n t r y .  interIt  i s e n t i r e l y l i k e l y t h a t the burden of the i n c r e a s e d amount w i l l , r e l a t i v e l y speaking, be no g r e a t e r than before the war  because  178.  of the improvement in the country's productive capacity and the reduction i n carrying charges. There is no gainsaying that maintaining the burden of war expenditures did f a 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 during World War I I .  Records show that Dominion Government ex-  penditures in 1919 were 18% of the National Income compared with the almost excessive 57% i n 1944.  While, compared to  past experiences, people lived better and had more l e f t 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 munitions 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 subscriptions 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 f r i c t i o n .  A P P E I D  I X  A  ESTIMATED POPULATION OF CANADA (1911-1946) Year  Estimated Population  1911 1912 1913 1914 1915 1916 1917 1918 1919 1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946  7 ,206.,643 7 ,343 ,000 7 ,530.,000 7 ,725.,000 7 ,928 ,000 8 ,140.,000 8 ,180 ,160 8 ,328.,382 8 ,478.,546 8 ,631 ,475 8 ,788.,483 8 ,908.,550 9 ,028 ,240 9 ,150 ,940 9 ,268 ,700 9 ,450 ,000 9 ,519 ,220 9 ,833.,000 10 ,027. 000 10 ,206.,000 10 ,376.,786 10 ,506 ,000 10.,681 ,000 10 ,824.,000 10.,935.,000 11 ,028.,000 11,,120.,000 11 ,209. 000 11 ,315i,000 11 ,422,,000 11 ,506, 655 11.,654, 000 11.,812, 000 11 ,975.,000 12 ,119. 000. 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 Total  1911 $117,780,409 2 136,108,217 3 168,689,903 4 163,174,395 5 133,073,482 6 172,147,838 7 232,701,294 8 260,778,953 9 312,946,747 1920 349,746,335 1 436,292,185 2 382,271,571 3 403,094,210 4 406,582,840 5 351,515,392 6 382,893,009 400,452,480 7 8 429,642,573 460,151,481 9 445,916,992 1930 356,160,876 1 336,721,305 2 311,126,329 3 324,471,271 4 361,871',929"5 372,595,996 6 454,153,747 7 516,692,749 8 502,171,354 9 562,093,35.9 1940 872,169,645 1 1,488,536,342 2 2,319,496,177 3 4^ 2,920,017,713 5 5 2,906,834,799 6* 3,028,104,000 Source:  Per Capita $ 16.34 18.54 22.40 21.15 16.79 21.15 28.45 31.31 36.91 40.52 49.64 42.91 44.65 44.43 37.92 40.52 42.07 43.69 45.89 43.69 34.32 32.05 29.13 29.98 33.09 33.79 40.84 46.10 44.38 49.21 75.80 127.73 190.44 230.90 239.86 246.79  E x p e n d Total $122,861,250 137,142,082 144,456,877 186,241,048 248,098,526 339,702,502 498,342,388 576,660,210 697,042,212 786,030,611 528,302,513 463,528,389 434,735,277 370,589,247 351,169,803 355,186,423 358,556,751 378,658,440 388,805,953 398,176,246 440,008,855 450,955,541 531,760,893 457,968,585 478,004,747 532,585,555 532,005,432 534,408,118 553,063,098 680,793,792 1249,601,446 1^85,066,056 4,387,124,117 5,322,253,505 5,245,611,924 4,691,307,000  Canada Year Book ft Appendix to Budget, June 27, 1946  i t u r e Per Capita $ 17.04 18.68 19.18 24.11 31.29 41.73 60.92 69.24 82,21 91.07 60.11 52.03 48.15 40.50 37,89 37.59 37.67 38.51 38.78 39.01 42.41 42.92 49.79 42.31 43,71 48.29 47.84 47.68 48.88 59.60 108.60 161,75 371.41 444.45 432.84 382.34  APPENDIX C;  D O M I N I O N  R E V E N U E S (For  Year  Customs Import Duties  $  71. 838. ,088 85,,051, ,872 111. ,764. ,699 104 ,691. ,238 75.,941 ,220 98.,649. ,409 134. ,043 ,842 144 ,172. ,630 147. ,169. ,188 168 ,796. ,823 163. ,266 ,804 105 ,686 ,645 118. ,056 ,469 121. ,500. ,799 108. ,146. ,871 127 ,355. ,144 141 ,968 ,678 156 ,985 ,818 187. ,206 ,332 179 ,429 ,920 131. ,208 ,955 104 ,132 ,677 70 ,072 ,932 66 ,305 ,356 76.,561 ,975 74 ,004 ,560 83. 771 ,091 93.,455. ,750 78. 751 ,111 104. ,301 ,487 130 ,757 ,011 142 ,392 ,233 118 ,962 ,839 167. 882, 089 115. 091, 000 6* 128, 877, ,000  1911 2 3 4 5 6 7 8 9 1920 1 2 3 4 5 6 7 8 9 1930 1 2 3 4 5 6 7 8 9 1940 1 2 3  %  Source:  Excise Duties  Fiscal  Income ^Tax  Years  Excessl Profits Tax  $  $  16.,869. ,837 19. 261, ,662 21,,447. ,445 21 ,452, ,037 21 ,479 ,731 22,,428. ,492 24.,412 ,348 27,,168 ,445 30.,342, ,034 42.,698. ,083 37.,118. ,367 36 ,755 ,207 35 ,761 ,997 38.,181 ,747 38.,603. ,489 42 ,923 ,549 48 ,513 ,160 57.,400 ,898 63 ,684 ,954 65 ,035 ,701 57 ,746 ,808 48 ,654 ,862 37.,833 ,858 35 ,494 ,220 43 ,189 ,655 44.,409 ,797 45.,956 ,857 52.,037. ,333 51.,313 ,658 61 ,032 ,044 88.,607 ,559 110 ,090 ,940 138. ,720 ,723 142. ,124. 331 151, 922. 000 186 ,726. ,000  9,349,720 20,263,740 46,381,824 78,684,355 59,711,538 54,204,028 56,248,043 55,571,962 47,386,309 56,571,047 59,422,323 69,020,726 71,048,022 61,254,400 62,066,697 61,399*172 66,808,066 82,709,803 102,365,242 120,365,532 142,026,138 134,448,566 248,143,022 510,243,017 910,188,672 1,151,757,035 1,072,758,068 937,730,000  12,506,517 21,271,084 32,970,062 44,145,184 40,841,401 22,815,667 13,031,462 4,752,681 2,704,427 1,173,448 710,102 956,031 455,232 173,300 34,430 3,000 54  23,995,269 135,168,345 454,580,677 468,717,840 465,805,356 494,196,000  Canada Year Book 1. " T a x a t i o n 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 t o Budget, June 27, 1946 3 . i n c l u d e s a l l o t h e r revenues  182.  19  11  -  19 4 6  ended March 31)  War Exchange Tax  $  61,932,029 100,873,982 94,553,380 118,912,840 98,164,000 41,198,000  1  Succession Duties  $  6,956,574 13,273,483 15,019,831 17,250,798 21,448,000  Total Tax Revenues 2  $ 88,707,925 104,313,534 133,212,144 126,143,275 97,519,008 124,698,683 174,758,428 196,720,976 233,688,730 293,706,840 368,770,498 319,926,013 335,453,341 341,718,807 293,914,518 327,575,013 346,649,272 364,705,803 395,921,028 378,551,626 296,276,396 275,053,603 254,318,801 271,851,549 304,443,729 317,311,809 386,550,869 448,651,061 435,706,794 468,224,595 778,175,450 1,360,912,838 2,136,719,961 2,591,811,485 2,374,126,000 2,234,859,000  3. T o t a l Revenues Year  $ 117. ,780. ,409 . 1911 136 ,108^ ,217 2 168. ,689 ,903 3 4 163 ,174 ,395 133. ,073 ,482 5 6 172. ,147. ,838 232. ,701 ,294 7 260 ,778. ,953 8 9 312 ,946 ,747 1920 349 ,746 ,335 436 ,292 ,185 1 382 ,271 ,571 2 403. ,094 ,210 3 406. ,582 ,840 4 351 ,515 ,392 5 6 382. ,893. ,009 400. ,452. ,480 7 429. ,642. ,577 8 460. ,151 ,481 9 1930 445 ,916 ,992 356. ,160 ,876 1 336. ,721. >305 2 311. ,126, 329 3 324, 471 271 4 361. 871. 929 5 372. 595. 996 6 454, 153, 747 7 516, 692, 749 8 502, 171, 354 9 562. 093, 459 1940 872, 169, 645 1 1,488, 536, 342 2 2,319, 496, 177 3 2,920, 017, 713 4. 2,906, 834, 799 5? 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)  Year  1919 1920 1 2 3 4 5 6 7 8 9 1930 1  2 3 4 5 6 7 8 9 1940 1 2 3 4  *  *  5  6  G e n e r a l Income Tax Individuals  Total Tax on Div., Int. Income G i f t and War Tax C o r p o r a t i o n s D e f e r r e d Tax  $  $  7,972,890 13,195,314 32,532,526 39,820,597 31,689,393 25,657,335 25,156,768 23,849,475 18,043,261 23,222,891 24,793,449 27,237,502 26,624,181 24,772,846 25,959,466 29,183,715 25,201,392 32,788,746 35,358,302 40,070,942 46,591,449 45,008,858 103,308,249 295,874,285 533,915,059 809,570,762 763,896,322 691,586,000  1,376,830 7,068,426 13,849,298 38,863,758 28,022,145 28,546,693 31,091,275 31,722,487 29,343,048 33,348,156 34,628,874 41,783,224 44,423,841 36,481,554 36,107,231 27,385,822 35,790,239 42,518,971 58,012,843 69,768,605 85,185,887 77,920,002 131,565,710 185,835,699 347,969,723 311,378,714 276,403,849 217,834,000  Source:  $  4,829,635 5,816,435 7,402,086 8,994,097 10,525,985 10,248,802 11,519,706 13,269,063 28,533,033 28,303,890 30,807,559 32,457,897 28,310,000  9 ,349,720 20 ,263,740 46 ,381,824 78 ,684,355 59 ,711,538 54 ,204,028 56 , 248*043 55 ,571,962 47 ,386,309 56 ,571,047 59 ,422,323 69 ,020,726 71 ,048,022 61 ,254,400 62 ,066,697 61 ,399,172 66 ,808,066 82 ,709,803 102. ,365,242 120. 365,532 142. 026,138 134. 448,566 248. 143,022 5 1 0 ; 243,017 910. 188,672 1,15.1 ,757,035 1,072, 758,068 937. 730,000  "Taxation S t a t i s t i c s " Ottawa, A p r i l , 1946 :& Appendix t o Budget, June 27, 1946 ( o n l y 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)  National Defence  Year  $ 1911 2 3 4 5 6 7 8 9 1920 1 2 3 4 5 6 7 8 9 1930 1 2 3 4 5 6 7 8 9 1940 1 2 3„  6,868 ,651 7,580 ,600 9,114 ,533 11,730.,964 10,573.,423 5,083 ,225 4,880 ,365 4,311 ,379 3,482 ,604 5,033 ,479 14,020.,854 16,412 ,602 13,448 ,176 13,757.,103 13,172 ,318 14,113.,167 14,909.,500 17,659 ,638 19,674 ,201 21,986.,537 23,736.,447 18,221 ,63.2 13,750 ,314 13,476 ,862 14,185 ,772 17,177.,074 22,923. 093 32,760.,307 34,432, 023 13,118,,732 193. 985 260, 482 415, 128 68, 713 69, 000 122, 000  Source:  War and Demobilization  Capital  Total  $  $  •$  30 ,813. ,767 30 ,939 ,576 27 ,206. ,046 37 ,180. ,176 41 ,447' ,320 60,750,476 38 ,566. ,951 166,197,755 306,488,815 I 26 ,880. ,032 ' 43,111 ,904 343,836,802 446,519,440 25 ,031 ,266 69 ,301 ,878 346,612,955 40 ,012 ,807 16,997,544 16 ,295 ,332 1,544,250 4,464,760 9 ,807. ,124 446,083 10 ,861 ,277 16 ,550 ,511 506,931 16 ,798 ,549 191,392 64,485 19 ,558 ,703 20 ,635 ,648 1,6^6,011 669,399 CR 22 ,809. ,275 25 ,726. ,720 28 ,710, 692 17.,165. ,943 9.,048. ,929 6 ,580: ,085 7.,107. 416 6.,544. 154 3. 491, 544 4,,430, 152 5, 424, 276 118,291,022 7. 030. 038 752,045,326 3j,357. 810 1,339,674,152 3. 430, 447 3,724,248,890 3 275, 685 4,587,023,094 2: 621, 978 4,418,446,000 3, 164, 000 3,558,454,000 4j 603, 000 3  Canada Year Book A Appendix t o Budget, June 27, 1946 1 Includes 'Other E x p e n d i t u r e s '  1  122 ,861,250 137 ,142,082 144 ,456,877 186. ,241,048 248 ,098,526 339 ,702,502 498. ,342,388 576 ,660,210 697 ,042,212 786 ,030,611 528 ,302,513 463 ,528,389 434 ,735,277 370. ,589,247 351 ,169,803 355 ,186,423 358 ,556,751 378 ,658,440 388. ,805,953 398. ,176,246 440, ,008,855 450. ,955,541 531 ,760,893 457. ,968,585 478. ,004,747 532. ,585,555 532, 005,432 534, 408,118 553, 063,098 680. 793,792 1,249, 601,446 1,885, 066,056 4,387, 124,117 5,322, 253,505 5,245, 611,924 4,691, 307,000  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  $ 1911 2 3 4 5 6 7 8 9 1920 1 2 3 4 5 6 7 8 9 1930 1 2 3 4 5 6 7 8 9 1940 1 2 3 4 5  474 ,941, 487 508. 338. 592 483.,232, 555 544.,391. 369 700. 473.,814 936.,987.,802 1,382, 003;,268 1,863 ,335 ,899 2,676. 635.,725 3,041,,529.,587 2,902, 482. 117 2,902,,347.,137 2,888. 827-,237 2,819. 610 ,470 2,818 ,066 ,523 2,768.,779 ,184 2,726.,298.,717 2,677. 137.,243 2,647.,033. 973 2,544, 586. 411 2,610.,265 698 2,831 ,743 ,563 2,996. 366 ,665 3,141 ,042 ,097 3,205. 956. 369 3,431 ,944.,027 3,542, 521, 139 3,540, 237, 614 3,710, 610 ,593 4,028, 728. 606 5,018, 928 ,037 6,648 ,823.,424 9,228, 252. 012 12,359, 123, 230 15,712, 182, 000 f t 19,005, 656. 000 ft  6  Source:  T o t a l Assets  Net Debt  $  $  134.,899.,435 168.,419.,131 168. 930.,930 208.,394. 519 251.,097 ,731 321 ,831 ,631 502.,816.,970 671 ,451 ,836 1 ,102 ,104 ,692 792.,660 ,963 561.,603 ,133 480 ,211 ,335 435 ,050 ,368 401 ,827 ,195 400 ,628 ,837 379 ,048 ,085 378 ,464 ,347 380 ,287 ,010 421 ,529 ,268 366 ,822 ,452 348 ,653 ,762 455 ,897 ,390 399 ,885.,839 411,,063 ,957 359 ,845 ,411 425.,843 ,510 458.,568.,937 438.,570 ,044 558.,051 ,279 757. 468.,959 1 ,370.,236, 588 2 ,603.,602.,263 3 ,045. 402.,911 3 ,619. 038, 337 4 ,413, 819, 982 5 ,971, 591 ,000  340.,042,052 339.,919, 461 314,,301, 625 335.,996, 850 449 ,376. 083 615.,156,,171 879. 186,,298 1 ,191 ,884,,063 1 ,574 ,531 ,033 2 ,248 ,868. 624 2 ,340.,878, 984 2 ,422 ,135 ,802 2 ,453..776,,869 2 ,417 ,783. 275 2 ,417 ,437.,686 2 ,389 ,731 ,099 2 ,347 ,834 370 2 ,296.,850 ,233 2 ,225 ,504. 705 2 ,177.,763. 959 2 ,261.,611. 937 2 ,375 .846, 172 2 ,596. 480 ,826 2 ,729 978.,141 2 ,846.,110.,958 3 ,006 ,400. 517 3 ,083, 952, 202 3 ,101.,667. 570 3 ,152 ,559 314 3 ,271 ,259, 647 3 ,648.,691,,449 4 ,045 ,221.,161 6 ,182. 849, 101 8 ,740. 084, 893 11 ,298, 362, 018 13 ,034. 065, 000  Canada Year Book ft Appendix t o Budget, June 27, 1946  Net Debt per Capita  $ 47.18 46.29 41.74 43,49 56.68 75.57 107.48 143.11 185.71 260.54 266,36 271.89 271.79 264.21 260.82 252.88 246.64 233,59 221.95 213.38 217.95 226.14 243.09 252.22 260.28 272,59 277.33 276.71 278.62 286.40 317.09 347.11 523.44 729.86 932.29 1,062.27  186.  A P P E N D I X  G_  INTEREST PAID ON THE PUBLIC DEBT OF CANADA ( F o r F i s c a l Years ended March 31)  Year 1911 2 3 4 5 6 7 8 9 1920 1 2 3 4 5 6 7 8 9 1930 1 2 3 4 5 6 7 8 9 1940 1 2 3 4^  i  5  6* Source:  Total  (1911 - 1946)  Per C a p i t a  $  $  12 ,535 ,851 12 ,259 ,397 12 ,605 ,882 12 ,893 ,505 15 ,736 ,743 21 ,421 ,585 35 ,802 ,567 47 ,845 ,585 77 ,431 ,432 107 ,527 ,089 139 ,551 ,520 135.,247 ,849 137 ,892 ,735 136 ,237 ,872 134 ,789 ,604 130 ,691 ,493 129 ,675 ,367 128 ,902 ,945 124 ,989.,950 121 ,566 ,213 121 ,289 ,844 121 ,151 ,106 134 ,999.,069 139.,725 ,417 138 ,533 ,202 134.,549 169 137.,410.,345 132.,117.,422 127 ,995 ,617 129.,315 ,442 139.,178 ,670 155.,017.,901 188.,556. 249 242. 681 ,180 318. 995.,000 408.,960.,000  1.74 1.67 1.67 1.67 1.98 2.63 4.38 5.74 9.13 12.46 15.88 15.18 15.27 14.89 14.54 13.83 13.62 13.11 12.47 11.91 11.69 11.53 12.64 12.91 12.67 12.20 12.36 11.79 11.31 11.32 12.10 13.30 15.96 20.27 26.32 33.33  Canada Year Book ft Appendix t o 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 o f d o l l a r s ) Revenue  Year  $ 1919 1920 1 2 3 4 5 6 7 8 9 1930 1 2 3 4 5 6 7 8 9 1940 1 2 3 4 5 1946  $ 312,947 349,746 436,292 382.272 403,094 406,583 351,515 382,893 400,452 429,643 460,151 445,917 356,161 336,721 311,126 324,471 361,872 372,596 454,154 516,693 502,171 562,093 872,170 1,488,536 2,319,496 2,920,018 2,906,835 3,028,104  Source:  , Expenditure  $ 697,042 786,031 528,303 463,528 434,735 370,589 351,170 355,186 358,557 378,658 388,806 398,176 440,009 450,956 531,761 457,969 478,005 532,586 532,005 534,408 553,063 680,794 1,249,601 1,885,066 4,387,124 5,322,254 5,245,612 4,691,307  National Income Produced  $ 3,816,113 4,597,853 3,507,220 3,670,975 3,847,059 3,865,446 4,238,980 4,507,335 4,738,360 5,269,467 5,272,619 4,452,419 3,579,535 2,812,905 2,722,504 3,147,164 3,371,254 3,827,255 4,367,704 4,288,349 , 4,569,703 5,390,982 6,425,620 8,043,713. 8,724,000* 9,186,000^ 1 1  Percentages Rev./N.I|. Expend/NI  % 8.20 7.61 12.44 10.41 10.48 10.52 8.29 8.49 8.45 8.15 8.73 10.02 9.95 11.97 11.43 10.31 10.73 9.74 10.40 12.05 10.99 10.43 13.57 18.51 26.59 31.79  ! 1  j 1  %  18.27 ! 17.10 j 15.06 ! 12.63 ! 11.30 1 9.59 8.28 j 7.88 ; ; 7.57 ! 7.19 7.37 j 8.94 12.29 16.03 19.53 14.55 14.18 13.92 12.18 12.46 12.10 12.63 19.45 23.44 50.29 57.94  Canada Year Book & Dominion Bureau of S t a t i s t i c s ( L e t t e r o f J u 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 f i g u r e s a r e n o t comparable.  188 A P P E N D I X  _I_  STATEMENT OF ASSETS AND LIABILITIES A OF BANE OF GANAPA (1936-1946) LIABILITIES (in m i l l i o n s of dollars) Year  1936 7 8 9 1940 1 2 3 4 5 6  2 Active Gov't. Chartered Bank Cash B. o f C. D e p o s i t s -Reserves Note Circulation $ 223.8 239.8 248.2 261.7 283.5 306.5 317.8 456.9 516.4 612.8 631.4  $ 55.2 84.5 102.1 110.8 157.1 277.0 404.4 605.3 772.8 907.8 972.0  Total Other Accounts L i a b i l i t i e s  $ 25.8 22.0 16.4 27.1 45.6 72.9 109.2 79.6 101.8 33.6 87.1  *  8.3 14.0 17.2 17.8 24.0 21.7 34.3 53.8 60.7 267.5 135.6  $  313.1 360.3 383.9 417.4 510.2 678.1 865.7 1,195.6 1,451.7 1,821.7 1,826.1  ASSETS (in m i l l i o n s of dollars) Year  1936 7 8 9 1940 1 2 3 4 5 6 Source:  Investments i Other Reserve Dom.-Prov. Dom.-Prov. Short Term Accounts Long Term 1  194.8 204.7 206.1 241.5 14.8 182.9 193.6 11.8 .3 177.9 2.0  $• 81.3 101.3 39.0 43.7 99.4 119.5 220.0 302.5 548.7 533.5 541.1  $ 29.9 47.7 120.7 122.8 384.8 364.9 427.6 826.1 879.0 1,068.3 1,240.1  $ 7.1 6.6 18.1 9.4 11.2 10.8 22.5 55.2 23.7 42.0 42.9  Total Assets  313.1 360.3 383.9 417.4 510.2 678.1 865.7 1,195.6 1,451.7 1,821.7 1,826.1  S t a t i s t i c a l Summary, Bank o f Canada. 4 F i g u r e s as a t May 31 o f each y e a r used as r e p r e s e n t a t i v e o f the whole y e a r 1 I n c l u d e s 'Other S e c u r i t i e s ' which a r e n e g l i g i b l e 2 Notes i n t i l l s and D e p o s i t s a t the Bank o f 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 Demand  1936 7 8 9 1940 1 2 3 4 5 6  1,527 1,573  *  1,625  1,678 1,643 1,695 1,556 1,732 2,094 2,563 3,306  578 700 670 684 817 1,105 1,133 1,452 1,711 1,792 2,207  Note Issue  123 110 97 90 94 83 74 51 37 29 24  Other Dep. 528 581 585 718 827 741 993 1,615 1,886  2,139  1,321  Other Total Acc'ts, L i a b i l i t i e s 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 (Millions of Dollars) Year  1936 7 8 9 1940 1 2 3 4 5 6 Source:  I n v e s t m e n t s Dom.-Prov. Dom.-Prov. Other Long Term Short Term S e c u r i t i e s # 588 643 700 754 629 794 915  830 1,155  $ 493 489 448 444 701 767 703 1,581 1,856  2,092  1,634  1,407  2,065  $  264 306 301  306 287 251 259 317 363 413 578  Loans  1,763 1,896 1,883 2,017 2,129 2,203 2,305 2,541 2,769 3,072 3,057  S t a t i s t i c a l Summary, Bank o f Canada & F i g u r e s as a t May 31 o f each y e a r used as r e p r e s e n t a t i v e o f t h e whole y e a r .  Total Assets  3,108 3,334  3,332 3,521 3,746  4,015  4,182 5,269 6,143 6,957 7,361  190.  BIBLIOGRAPHY I . Government  Documents:  Canada, Bank o f Canada, Annual Reports t o M i n i s t e r o f Finance Finance and Statements of Accounts. Canada, Bank o f Canada, S t a t i s t i c a l Summary, Ottawa. Canada, Canada a t War, Ottawa, Wartime Information Board, 1945. 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