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Canadian War-Time Fiscal Policy, 1939–45

Published online by Cambridge University Press:  07 November 2014

R. Craig McIvor
R. Craig McIvor*
Affiliation:
McMaster University
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Extract

Modern war has frequently been described as “total” war. While such a description may not be precisely meaningful, it serves to emphasize the magnitude of the social changes which are now inevitably associated with a major war effort. Modern war has been well described as an industrial art, whose effective prosecution necessitates fundamental alterations in the manner of operation of the democratic peace-time economy.

The basic problems which confront a country in time of war may be classified as follows: (1) producing the goods and services necessary for carrying on the war; (2) paying for the goods and services used for war purposes; (3) supplying the everyday needs of the civilian population. While it is with the second problem, that of financing the war effort, that we shall be directly concerned in this paper, the fundamental and most immediate problem is that of production, to which all others must always be subordinated. Because of the enormous technological advances in the methods of modern warfare, World War II presented all of these problems on a scale vastly greater than ever before.

In time of war there occurs a revaluation of social ends, and maintenance of the state itself becomes the supreme social objective. To accomplish this objective under conditions of modern warfare, it is essential that, the organization and expansion of war production be accomplished with the utmost, possible speed. This point was well illustrated by the experience in World War II, where the problem of mobilizing the required quantities of productive resources was extremely complex, and where various nations with superior economic war potentials found themselves in imminent danger of suffering defeat before their full economic strength could be directed effectively against the enemy. Under these circumstances, where speed is the essence of effective economic mobilization, the sudden demand for an ever-increasing quantity and variety of war goods and services is likely to be highly inelastic, since the needs must be satisfied, if at all possible, regardless of price. But in the short run, supply is also relatively inelastic, and the government consequently finds itself confronted with immediate problems of procurement.

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Articles
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Canadian Journal of Economics and Political Science/Revue canadienne de economiques et science politique , Volume 14 , Issue 1 , February 1948 , pp. 62 - 93
Copyright
Copyright © Canadian Political Science Association 1948

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References

1 For a discussion of these problems, see Wright, Chester W., “Economic Lessons From Previous Wars” (in Economic Problems of War and its Aftermath, ed. by Wright, Chester W., Chicago, 1942).Google Scholar

2 See T. O. Yntema, “Price Controls,” ibid., p. 112.

3 War-time fiscal policy must of course be determined hot only in the light of its economic desirability but also in terms of its political acceptability. If fiscal measures hitherto considered drastic are to be successfully introduced, the public must first be taught to recognize their necessity. The Canadian deputy minister of finance believed that one of the good things about the war was that it led to a process of general economic education.

4 For a summary of the failings of the competitive price system in the war economy, see Bates, Stewart, “The Price System and the War Economy” (Canadian Journal of Economics and Political Science, vol. VII, 1941, pp. 333–4Google Scholar).

5 For an explanation of the lack of industrial mobilization during the early months of the war, see Dawson, R. MacG., Canada in World Affairs, 1939-1941 (Toronto, 1943), pp. 16-17, 116.Google Scholar

6 See Plumptre, A. F. W., Canadian War Finance, 1939-1940 (Washington, 1941), pp. 8–68.Google Scholar

7 See note on Foreign Exchange Control Board, infra.

8 Ilsley, J. L., House of Commons Debates, 07 30, 1940.Google Scholar

9 See Wright, “Economic Lessons from Previous Wars.”

10 Ibid.

11 See Ilsley, J. I., Budget Speech, 09 12, 1939, p. 3.Google Scholar

12 In referring to “inflation” as one source of war finance, the government usually meant the creation of new money; this terminology at least clarifies the basis for the government's threefold division of the sources of funds—taxes, loans from current income, and new money. For a much more satisfactory classification of the instruments of war-time fiscal policy, according to their expansive or contractive influences upon the economy, see Plumptre, A. F. W., “An Approach to War Finance” (Canadian Journal of Economics and Political Science, vol. VII, 1941, pp. 1–12).CrossRefGoogle Scholar

13 Plumptre, A. F . W., Canadian War Finance, 1930-1940 (Washington, 1941), p. 111.Google Scholar

14 Rasminsky, Louis, “Foreign Exchange Control in Canada: Purposes and Methods” (in Canadian War Economics, ed. by Parkinson, J. F., Toronto, 1941, pp. 1–16).Google Scholar

15 Foreign Exchange Control Board, Report to the Minister of Finance (Ottawa, 1946), p. 7.Google Scholar

16 Ibid., p. 20.

17 For the growth of the national debt since Confederation, see Public Accounts, 1939, p. 64. The only period in which the debt showed annual reductions was between 1923 and 1930.

18 Ibid., pp. 20-1, 68.

19 Bank of Canada, Statistical Summary, 06-July, 1939, p. 11.Google Scholar

20 Bank of Canada, Statistical Summary, 1946 Supplement, p. 46.Google Scholar

21 See the Public Accounts, 1939, pp. xii-xiii; Public Accounts, 1940.

22 For the detailed tax measures, see Ilsley, J. L., Budget Speech, 09 12, 1939, pp. 6–11.Google Scholar

23 Public Accounts.

24 Bank of Canada, Statistical Summary, 06-July, 1946, pp. 51–2.Google Scholar

25 For a discussion of the velocity of circulation of the Canadian money supply, see MacGregor, D. C., “The Problem of Price Level in Canada” (Canadian Journal of Economics and Political Science, vol. XIII, 1947, and particularly pp. 186–92).Google Scholar

26 See Whittlesey, Charles R., “Problems of Our Domestic Money and Banking System” (American Economic Review, vol. XXXIV, 1944).Google Scholar

27 See Ralston, J. L., Budget Speech, 06 24, 1940, p. 5.Google Scholar

28 Bank of Canada, Statistical Summary, 06-July, 1946, pp. 51–2.Google Scholar

29 This view did not pass unchallenged. For a summary of the economic objections voiced against a continuation of the policy, see Parkinson, J. F., “Some Problems of War Finance in Canada” (Canadian Journal of Economics and Political Science, vol. VI, 1940, 403–21).CrossRefGoogle Scholar

30 For the changing war-time distribution of total tax collections, see the Bank of Canada, Statistical Summary, 04-May, 1947, p. 45.Google Scholar

31 For the details of these tax measures, see Ralston, J. L., Budget Speech, 06 24, 1940.Google Scholar

32 The original Canadian dollar resources of the Board consisted of the profit arising from the revaluation of the gold stock of the Bank of Canada in 1935, this being credited to an Exchange Fund. The Fund was not operative until its proceeds, were taken over by the Foreign Exchange Control Board at the time of its inception.

33 In determining the changes in the effective supply of money, changes in the velocity of the means of payment must of course be considered. The exchange velocity of “all” bank deposits in Canada snowed a small annual increase during the first three years of the war, and a corresponding annual decrease thereafter. To this extent, changes in the means of payment do not correctly reflect changes in the effective supply of money, but in this case, the error is relatively small. For data on velocity of bank deposits, see MacGregor, , “The Problem of Price Level in Canada,” p. 187.Google Scholar

34 Report of the Wartime Prices and Trade Board (Ottawa, 1943), p. 68.Google Scholar

35 For a discussion of the development of war-time price-control, see Taylor, K. W., “Canadian Wartime Price Controls, 1941-46” (Canadian Journal of Economics and Political Science, vol. XIII, 1947, pp. 81–98).CrossRefGoogle Scholar

36 Ilsley, J. L., Halifax Speech, 10 6, 1941.Google Scholar

37 Bank of Canada, Statistical Summary, 06-July, 1946, pp. 51–2.Google Scholar

38 Ilsley, J. L., Budget Speech, 06 23, 1942, p. 3.Google Scholar

39 For the detailed tax measures, see Ilsley, J. L., Budget Speech, 04 29, 1941.Google Scholar

40 Bank of Canada, Statistical Summary, 06-July, 1946, pp. 51–2.Google Scholar

41 For the distribution of all public loan issues, classified as to types of purchasers, see National War Finance Committee, Statistics and Information on Dominion Government Public Borrowing Operations from September, 1939 to December, 1945 (Ottawa, 1946), p. 21.Google Scholar

42 See the Bank of Canada, Annual Report, 1942, pp. 6–7.Google Scholar

43 Report of the Wartime Prices and Trade Board, pp. 112-15.

44 Ilsley, J. L., Budget Speech, 06 23, 1942, p. 8.Google Scholar

45 For the detailed tax measures, see Ilsley, J. L., Budget Speech, 06 23, 1942, pp. 29–31.Google Scholar

46 Bank of Canada, Statistical Summary, 06-July, 1946, pp. 51–2.Google Scholar

47 See Foreign Exchange Control Board, Report to the Minister of Finance, p. 34.Google Scholar

48 See Ilsley, J. L., Budget Speech, 03 2, 1943, p. 6 Google Scholar, and Bank of Canada, Annual Report, 02 9, 1943, p. 10.Google Scholar

49 Report of the Wartime Prices and Trade Board, pp. 112-15.

50 Ilsley, J. L., Budget Speech, 03 2, 1943, p. 1.Google Scholar Factors contributing to the inflationary pressure, other than monetary expansion, included a state of full employment, a continuing decline in the output of consumers' goods, fewer and higher cost imports, and widespread cost-price selling-price squeezes.

51 Ibid., p. 8.

52 Ibid., p. 22. The following comment by the minister of finance is interesting: “The customs tariff has fallen from the high position it has previously held as an instrument of fiscal and economic policy. Under the circumstances of war, the tariff has little effect except as a producer of revenue. The scope and direction of trade are now governed by the considerations of supply, transportation and enemy action and not by the tariff. … There will again, however, be a time when the tariff will be an important instrument of policy and when this country will have to decide whether it will play its part with other countries which are prepared to help in freeing the world's trade, in enlarging markets, and in promoting the full and effective use of the world's resources.”

53 See The War Appropriation (United Nations Mutual Aid) Act, May 20, 1943.

54 Bank of Canada, Annual Report, 02 10, 1944, pp. 5–6.Google Scholar

55 See also MacGregor, , “The Problem of Price Level in Canada,” p. 185.Google Scholar

56 Report of the Wartime Prices and Trade Board, pp. 68-70.

57 The term “budgetary deficit” is used to indicate the increase in net debt, hence does not represent the amount of the government's borrowing needs. This latter amount is equal to total cash requirements less total revenues, and is known as the “cash deficiency.” In the 1944 fiscal year, the cash deficiency was 10 per cent higher than the budgetary deficit, but in three of the earlier war years, when repatriation and the accumulation of sterling balances was proceeding on a large scale, the cash deficiency was more than double the budgetary deficit. For the war period to the end of fiscal year 1944, the cash deficiency was 50 per cent greater than the budgetary deficit.

58 Bank of Canada, Statistical Summary, 06-July, 1946, pp. 51–2.Google Scholar

59 Bank of Canada, Statistical Summary, 1946 Supplement, p. 64.Google Scholar

60 Bank of Canada, Statistical Summary, 06-July, 1946, pp. 51–2.Google Scholar

61 Report of the Wartime Prices and Trade Board (Ottawa, 1945), pp. 68–70.Google Scholar

62 Ibid., pp. 3-4.

63 Ilsley, J. L., Budget Speech, 10 12, 1945, pp. 3–4.Google Scholar

64 See ibid., pp. 6, 13.

65 Bank of Canada, Statistical Summary, 06-July, 1946, pp. 51–2.Google Scholar

66 The rate on these obligations was reduced to five-eighths of 1 per cent on March 5, 1946. At the same time, the government reached an agreement with the chartered banks which limited their holdings of government securities, other than very short-term securities, to 90 per cent of Canadian savings deposits. See the Canadian Banker, 1946, p. 32.Google Scholar

67 The difficulties associated with maintaining a realistic cost-of-living index in war-time were generally recognized. Few persons accepted the official figures as indicating the realities of the situation.

68 Public Accounts, 1945, p. 41. See also Ilsley, J. L., Appendix to the Budget, 1946-47, p. 41.Google Scholar

69 National War Finance Committee, Dominion Government Public Borrowing, p. 16.Google Scholar

70 For a concise account of the early experience, see Deutsch, J. J., “War Finance and the Canadian Economy, 1914-1920” (Canadian Journal of Economics and Political Science, vol. VI, 1940).Google Scholar The contributions of the banking system to war finance are best described by Curtis, C. A., “The Canadian Banks of War Finance” (in Contributions to Canadian Economics, Toronto, 1931), III.Google Scholar See also Knox, F. A., “Canadian War Finance and the Balance of Payments, 1914-18” (Canadian Journal of Economics and Political Science, vol. VI, 1940).Google Scholar

71 Deutsch, , “War Finance and the Canadian Economy,” especially pp. 530, 532.Google Scholar

72 Ibid.

73 See Higgins, Benjamin H., Canada's Financial System in War (New York, 1944).Google Scholar The introduction of consumer rationing, the increased use of subsidies and the introduction of higher income taxes were additional factors to be considered.

74 See Bank of Canada, Statistical Summary, 1946 Supplement, pp. 102–3, 107.Google Scholar The index of the farm price of agricultural products rose from 91.8 in 1939 to 176.5 in 1945 (1935-9 = 100). Using the same base, farm operating costs rose from 99.5 to 123.5 in the same interval. The index of average wage rates in ten major groups of industries rose from 105.3 to 147.8, and the cost-of-living index from 101.5 to 119.5. See also Ilsley, J. L., Budget Speech, 03 2, 1943, pp. 5–6.Google Scholar

75 The relative unimportance of agricultural income as a source of tax revenue is indicated by the fact that in the taxation year 1941, for example, the total tax levied amounted to only $1.6 million, on an assessed income of $18.2 million. On this point, see Department of National Revenue, Taxation Statistics (Ottawa, 1946), p. 115.Google Scholar

76 Ilsley, J. L., Budget Speech, 06 23, 1942, p. 9.Google Scholar

77 For an analysis of the war-time profits statistics of selected groups of business enterprise in Canada, see the Bank of Canada, Statistical Summary, 1946 Supplement, pp. 52–62.Google Scholar

78 Deutsch, , “War Finance and the Canadian Economy,” p. 540.Google Scholar

79 Enman, H. L., “Annual Report of the General Manager of the Bank of Nova Scotia” (Canadian Finance, 12 19, 1945, p. 16).Google Scholar

80 For a discussion of the considerations involved in the desirable levels of post-war interest rates, see Wallich, H. C., “Changing Significance of the Interest Rate” (American Economic Review, vol. XXXVI, 12, 1946, pp. 761–87).Google Scholar

81 The question of how great was the real cost of the war (the amount of real income actually sacrificed) is of considerable interest, in view of the amount of unemployment prevailing in Canada in 1939. Despite the substantial diversion of resources to war purposes, the level of civilian consumption may not have declined by a very considerable amount. On the basis of figures supplied by the Dominion Bureau of Statistics, an interesting investigation might be pursued along these lines. It is a matter for speculation as to how the actual output of civilian goods during the war (under conditions approximating full employment) would compare with the output that would have been produced had the war not occurred, in which case unemployment would almost certainly have continued on some appreciable scale. While such an investigation would perhaps not justify the conclusion that the war was economically “costless,” it may well be that the real cost might be found to be considerably less than commonly supposed.