To those of us who can remember the first world war and the high hopes that followed upon its successful conclusion for the Allies, there must come at times the most anxious apprehensions as to the peace which will follow upon the present one. The saying that we won the first war and lost the peace, annoying though it may be, is yet only too true. And even now, while the second struggle still rages, we may feel uncertainty, not that we shall not win in this war, for that is certain, but that once more the fruits of victory may turn to ashes and again we may lose the peace. We do not quail before the foe in the field; but we may well tremble at the thought of what may lie before us when the struggle is over, when we are faced with the awful task of reconstruction.

It is, I apprehend, by no means true to blame everything upon the Peace of Versailles. That settlement was framed with all the wisdom and ingenuity of which the statesmen of that time were capable, and we need not underrate their ability nor doubt their wisdom. It is so easy for anyone to be wise after the event; to find fault and point out the mistakes that were made. Wisdom lies in profiting by the mistakes of the past and determining not to commit similar ones a second time. I have nothing to say of the territorial provisions of the Treaty, because I do not think that they were the cause of the subsequent breakdown. Probably they were as good as the ingenuity of their authors could devise. But rather I would say the real mistake lay in an utter failure to grasp the one essential fact that the monetary set-up of the world was in complete chaos, a chaos more complete and devastating because bankers and finance ministers were still bemused with the preoccupation of the pre-war monetary theory.

The argument put forward in this paper assumes a point of view which it would be well to make clear at the beginning. Put briefly, it is that war today involves such a radical transformation of the economy that customary economic concepts which have been derived from peace-time experience, and even from the experience of earlier wars, no longer fit the facts. This war not only devours materials on an unprecedented scale, but it urgently imposes new and highly specialized objectives upon the whole scheme of economic activity, and with them new criteria and new methods. A new “war economy” has to be brought into being to meet these specifications.

I am concerned here simply with the role of financial policy in this war economy. As the questions which arise are to some extent questions of emphasis, it is desirable to avoid the misunderstanding which may easily occur if the emphasis is misplaced. It will not be disputed that fiscal policy and monetary policy are vital elements in the efficient conduct of the economy, in war as in peace, so far as their proper spheres of operation are concerned. But there is room for disagreement as to how far their proper spheres of operation actually do extend today. It is my thesis that as the organization of the war economy becomes more intensive, purely financial instruments of control necessarily yield diminishing returns, not merely in the literal and self-evident sense of the proportion of incomes which can be extracted from the pockets of the people, but in the sense of the objectives of organization which government policy may try by these means to achieve.

The past decade has witnessed a growing recognition of the economic effects of government finance. Government expenditures and revenues, government borrowing and debt repayment are studied, not for their impact on the Treasury, but for their impact on the economy. It is recognized now more than ever before that each aspect of government finance may be used as an instrument of economic policy to influence the size of the nation's income or alter the character of the nation's output. At first the problems of the depression and now the necessities of the war have converted “government finance” into “fiscal policy.” The theory of fiscal policy, reborn in the depression, nurtured during the recovery and matured in the war, has become the handmaiden of the government official and the political economist.

In spite of the great amount of attention it has received, the theory of fiscal policy still lacks complete co-ordination of its various faculties and still suffers from frequent reversion to its childhood days. During the time of deep depression when the multiplier theory was developed it was taken for granted by many economists that deficits were the appropriate instrument for raising the level of national income. Since widespread unemployment and underemployment existed there was little need for differentiating real from money income, since a general rise in prices was not very likely and, in any case, was desirable. During the war, however, we wish to raise only the real income or the physical output, and then only the output of war materials, and keep down as much as possible the money national income and the price level. How must the theory of fiscal policy be changed as a result of these new objectives and altered conditions? And when the war is over will we have to resort to deficit-spending to prevent a depression? Are deficits, which were required to raise the level of national income, appropriate for maintaining a high level of national income? We must exercise the greatest care in answering these questions and we must guard against glibly applying some ready formula which we ourselves have carried over from the pre-war days of business depression. It is necessary first of all to examine the structure of fiscal policy (Part i) and trace through the interrelations among expenditures, taxation, borrowing, debt repayment, and national income (Part ii). Then we can see how fiscal policy may be used to achieve desired ends and avoid dangerous pitfalls during the war (Part iii) and in the post-war period (Part iv).

To Canadians living in the 1860's, as to Canadians of the 1940's, the world seemed a very dangerous place. In many respects the threats to Canadian survival must have appeared even greater then than now. The American Civil War brought large-scale fighting closer than the present campaigns in Europe or Asia. The Fenian raids, apparently backed by wide American support, looked more ominous than U-boats in the St. Lawrence. The most disastrous international alignment that could ever befall Canadians—a war between the United States and Great Britain—appeared once again imminent. Internally there were equivalent dangers. The constitution of 1841 had broken down in the province of Canada, rendering stable government impossible. Political deadlock had been reached. Though French Canadians were able to enjoy the gratifying spectacle of British Canadians caught in the very constitutional trap—equal representation regardless of population—which had been designed to assure British supremacy, the situation could not continue. The economic outlook was no brighter. Imperial preferences had disappeared with the free trade movement, and though a successful readjustment had been made by the Reciprocity Treaty of 1854 this too was about to end. Notice of the cancellation of the Treaty was given by the United States in March, 1865. Thrust out into the economic world first by England, Canadians were rejected a second time by their other mainstay. And when they looked westward for new frontiers, they saw an advancing wave of American settlement, backed by western railways, threatening to engulf the unsettled prairies.

Under the broad title of this paper I propose to deal with some legislative and administrative aspects of municipal government rather than the more political phases, although, of course, these matters cannot be definitely segregated. It is my intention to note some points in connection with the present structure of municipal government in this province, to raise certain problems for discussion—problems which are vital even if obvious—and to make some suggestions.

These matters have interested me for some time both because of an academic interest, and because of the experience of seven or eight years' active participation in municipal affairs. I have held municipal office—both by appointment and election—and I have learned much about what is and what is not possible in the political processes. But I hasten to add that I have also been defeated for municipal office and probably that has taught me the most. However, I will not labour these points here.

The first elementary point that I should like to make is the constitutional one that in this country the municipality is the creature of the province. Our constitution establishes only the federal and provincial governments, and such power as municipalities have is delegated by the province. This means that changes in municipal structure depend on no complicated constitutional negotiations or charter but simply upon the willingness of the legislature to make changes which are believed to be generally acceptable.

Municipal institutions in Canada date their origin to the 1837 rebellions in Lower and Upper Canada, the Report of Lord Durham on the causes of the rebellions, and the action of Lord Sydenham in putting through legislation creating municipal institutions. He did this in 1841 while he was, as he called himself, “dictator.” Under Sydenham's system municipal officers were largely nominated by the Crown. This was changed in 1845 in Lower Canada, and in 1849 in Upper Canada, and an elective system was set up. These acts are the foundations of the municipal systems of Ontario and Quebec.

The rebellions in Lower and Upper Canada were the product of identical political systems under which vast areas were governed from provincial capitals remote from the people. There was an accumulation of grievances without a corresponding opportunity for redress by change of local government. Sydenham put the situation in his despatch (no. 160) of September 16, 1840: “The people acquire no habits of self-dependence for the attainment of their own local objects … Whatever little improvement in their respective neighborhoods may appear to be neglected affords grounds for complaint against the Executive. All this is charged directly upon the Government and a host of discontented spirits are ever ready to excite their feelings.” It is not too much to say that the granting of municipal self-government took the word rebellion out of provincial history for one hundred years. This was an achievement of the first order. It is to be ranked in the science of politics with some of the great discoveries in medicine. As there is a cause for the rash which appears on the skin of the child, so there is a cause for those disturbances in the political body which evidence themselves in rebellion.

I would like to confine my remarks today to a review of the last six months, outlining many of the practical problems that have been solved and perhaps forecasting a few of the conditions that may be present in the months to come. Since December 1, 1941, when retail prices went under control there has been little, if any, change in the retail price of goods. The cost-of-living index released two or three weeks ago shows practically no change since October, 1941. Much credit for the success so far is due to the thousands of retailers from coast to coast who have been, with few exceptions, eager and anxious to obey the law and to do everything possible to help work out the difficult price adjustments that had to be made between retailer, wholesaler, and manufacturer. These adjustments were necessary owing to the general retail price level which at the time of the basic period, September 15 to October 11, was much below replacement cost.

The subject allotted to me was “Retail Business Under the Price Ceiling,” which I propose to deal with under three general headings: (1) some of the immediate problems that arose; (2) the effects of this legislation to date; (3) some problems we see ahead.

Let us keep in mind that price ceiling legislation is only one of several methods that the government is using to avoid inflation, and that all are interdependent to some degree. Constantly increasing taxation in all its forms, and borrowing, in war savings stamps, certificates, and bonds, is siphoning off some of the excess spending power. Industrial rationing and priorities have been in effect for some time. Subsidies to agriculture, importers, and primary producers are now being paid. But there are already grave doubts if even all of these controls are enough. Forced savings, direct rationing to consumers, and many other controls may be just around the corner.

It is well to remember, too, that price ceiling legislation is even now less than six months old. It is still in the heat of a distilling process. The outbreak of war in the East and the tremendous loss of supply occasioned thereby was, and still is, a severe jolt. That it has withstood this shock so well up to date is at least encouraging. That the United States has adopted the Canadian plan with very few changes is evidence that they consider our controls effective so far and had no better ideas to offer. It seems reasonable to expect that both countries working on the same plan will relieve some of our difficulties, and our services as the guinea pig of experimentation should be of some assistance to them. In any comparisons, however, that may be made between the two countries, it must be remembered that the United States's spiral of prices was much more rapid than ours and continued for a longer period. Their ceiling prices are, therefore, on a generally higher level in most commodities.

Experiences during other war and post-war periods indicate that there is a close relationship in the field of economics between what happens during the war and what comes after it. In no division of our national economy is that more evident than in agriculture. It seems appropriate, therefore, to begin a paper such as this with a discussion of what is happening now—with the problems that are being encountered as the war progresses. This will provide a background for the consideration of some questions that may arise in the period following the war. The discussion of these invites consideration of steps that might be taken to deal with them. Some references will therefore be made to the latter although the treatment will, of necessity, be sketchy.

Prices and Income. First among the matters of concern to farmers now is the question of prices and income. It is not a new problem. For some years prior to this war the prices of farm products had been low relative to the prices of things farmers buy. This has been said so often that one may be accused of labouring the point to mention it again. It is a matter that must be appreciated, however, if one would understand the reason for some of the difficulties now being experienced by farmers.

For fourteen out of the twenty years, from 1920 to 1939 inclusive, the prices of farm products were below the prices of commodities in general. Even though the technique of farming has improved and costs have been reduced in the meantime, the returns have been insufficient to maintain the industry on a basis comparable with earlier years or with the status of many industries. It is not surprising, therefore, that there should be some mur-murings of dissatisfaction with efforts to prevent prices from rising, even though some farm products have been exempted from ceiling regulations or have been given special consideration in one way or another.

This brief article is concerned with the steps taken by the Dominion government to re-establish in civil life those who enter the armed forces of Canada, and to prepare economic and social policies for the post-war period. Provinces and municipalities also have obviously a role to play in reconstruction. I make no attempt here to examine that role, or to evaluate such extremely fragmentary schemes as may already be formulated.

The first responsibility of the Dominion government regarding reconstruction is to re-establish in civil life members of the armed forces, and already plans for this phase of reconstruction are well advanced. In December, 1939, a special committee of the Cabinet was constituted by Order in Council to examine “the problems which will arise from the demobilization and the discharge from time to time of members of the forces during and after the conclusion of the present war, and the rehabilitation of such members into civil life.” This committee duly formed an advisory interdepartmental committee, known as the General Advisory Committee on Demobilization and Rehabilitation, and sub-committees were organized to cope with specific portions of the subject. The net result of this varied committee activity was the formulation of specific policies which successively became implemented by Orders in Council or by Acts of parliament. An extensive and on the whole generous system for the wel-fare of the veteran emerged, with provision for pensions, hospitalization of the disabled, post-discharge allowances and treatment, vocational training, transitional re-establishment benefits, re-establishment in civil employment, allowances for resumption of interrupted education, allowances while await-ing returns from private enterprise or awaiting employment, and settlement on the land. Lessons have been gleaned from the experience of the last post-war period, and a praiseworthy attempt is made to avoid former mistakes.