All federal systems of government have been subjected to severe strain in recent years. It is not Canada alone that has felt the onslaught of economic and social change. The German federation went down before the Nazi tidal wave. The Australian federation was hard put to it to weather its difficulties in the early thirties. The United States of America, the greatest of them all, has been through continuous rack and strain in the past decade. What the permanent ravages of depression and the New Deal on the federal structure will be is as yet far from clear. The devices of navigation to which the national and state governments have been driven are described by some as the rise of a new federalism to meet the challenge of new conditions and by others as the destruction of the independence of the states. Observers in the other countries concerned are equally at variance in their interpretations, except, of course, in Germany where the results are fairly conclusive. There have been so many bad guesses in predicting political trends in the past few years that the prudent will hesitate to lay bets. But the nature of the predicament which generates strain in federal systems has become sufficiently clear that the main elements can be outlined with some confidence.

In this paper I am going to tr y to present the business man's point of view towards the Excess Profits Tax Act and to discuss some of the problems which confront him as a result of it. By way of introduction I should like to make it quite clear that I do not write here as an apologist of tax evasion or as a critic of the pay-as-you-go policy or as an opponent of taxing those best able to pay. Rather I shall try to explain some of the problems and some of the objections without necessarily expressing an opinion in every case as to whether or not the objections are justifiable.

One of the issues which apparently will be decided by this war is the survival, or otherwise, of capitalism even in modified form; but in this country for the time being a decision on that point has not yet been reached, and the profit motive and individual incentive are still the driving forces of our businesses and industries which the government is depending upon in a large measure to provide the instruments of war and the money with which to pay for them. The government is not yet prepared to underwrite business risks. It shares in the profits without sharing in the losses, and does not even allow the losses of one year to be offset by the profits of another, for tax purposes. In times of high taxes, the result, in many cases, is to convert taxes on income and profits into a confiscation of capital. These circumstances must be kept in mind as the background of what I have to say.

Political science has not yet advanced, if indeed it ever will, to the stage where accurate measure of contemporary forces is possible; much less can it be used to predict the future. Since I deal with both the present and the future my remarks are largely a venture in political speculation rather than a discourse on political science. But I make no apology for the subject. Canada faces a difficult and dangerous future. It is our primary duty as citizens of a democracy to face the stark realities of the present crisis, and to attempt as best we can to assess this significance for our country. It is particularly the duty of those of us who by reason of our vocation can snatch time for leisured thought amid a world given over to violent action.

In the quiet days before Munich we were wont to classify Canadians who had anything to say about the external policy of their country as “imperialists,” “collectivists,” “isolationists,” or “traditionalists.” Few, if any, Canadians fitted neatly into these pigeon-holes, but the classification was convenient for distinguishing between different trends or schools of thought. But whether these were possible alternatives of policy in the pre-Munich days, it is obvious that they no longer have much validity. We have passed from the apparently static world of the twenty years' armistice to the dynamic world of the present. In war there can be only one foreign policy and that the vigorous prosecution of the war. In the post-war world our freedom of choice may be scarcely less limited.

This is the report of an attempt to learn something about the effect of the war on the pattern of consumption in Canada—that is, on the changes caused by the war in the way people spend their money. Everyone knows, of course, that we as a country have had more money to spend since the war started than we had before, and it is possible to estimate the amount of the increase with a fair degree of confidence. The question of how this increased purchasing power has been used is a great deal harder to answer because of the limited statistical evidence. Nevertheless, it is a rather important part of any evaluation of the effect of the war on the economy, and in spite of the limited basis for conclusion, well worth looking into.

Most discussion about the effect of the war on consumer purchases has hinged about the so-called luxury items, and especially about automobiles. There is one school of thought which says that Canadian consumers are tending to defeat the war effort by their insistence on buying more and more of these luxury items instead of putting their money into war savings. Others, seeing somewhat the same ultimate result, place the blame on business men, and say that their pleas for “business as usual” really mean “twice as much business as usual”; these people feel that the makers and sellers of luxury items are guilty of sabotaging the war effort.

War-time Agricultural Exports. The first world war and the present world war were preceded by periods marked by fundamentally opposite trends in international agricultural trade. The period extending roughly from about 1840 to the outbreak of war in 1914 was characterized by a continuous expansion in the volume and range of importation of foodstuffs and agricultural raw materials into the British Isles and later into industrialized continental Europe from overseas countries. While the dominant position in this expanding overseas agricultural export trade was held by the United States, a definitely rising participation developed after the turn of the century by the British Dominions, Latin American countries, British and Netherlands India, and the African possessions of European powers. Despite the rise after 1880 of agricultural protectionism in such European countries as France and Germany, growth of population and industrialization in Europe was reflected in a steadily increasing volume of agricultural imports into that continent, and after 1896 by a gradually rising trend in world prices of most agricultural staples. This was the great era of the international gold standard, of the free export of private capital, and of free world markets.

Although the first world war disrupted this competitive pattern of world agricultural specialization and trade, it greatly stimulated the agricultural export trade of overseas countries, especially of North America, to the allied countries, and this movement to Europe was substantially maintained during the twenties through the twofold influence of American and British foreign lending and investment and of the virtual disappearance of Russia as a significant and dependable agricultural exporter. Between 1925 and 1930 world agricultural trade rose to record levels, but in the later years mounting world stocks and gradually falling gold prices of most staples gave statistical warning of a developing disequilibrium.

A Canadian wheat problem had existed, in one form or another, for ten years prior to the outbreak of war in September, 1939. Economic nationalism and world depression had brought shrinking export markets and ruinously low prices to the wheat economy of the Prairie Provinces; drought and soil drifting had brought complete destitution over wide areas; and crop failures in Western Canada had placed a heavy relief burden on the federal Treasury and redacted sharply on the economic life of every province in the Dominion. Surplus world wheat stocks had accumulated rapidly after 1928 (see Table I) but were reduced between 1934 and 1938 by lower average yields so that by the end of the 1937-8 crop-marketing season both world and Canadian carry-overs were back to normal levels or even lower. As a result, both world and Canadian wheat prices began to rise in 1936 and, although subject to fairly wide swings, were maintained for nearly two years at the highest levels since the fall of 1929. However, in 1938 world wheat production reached an all-time peak with good yields harvested from a record world wheat acreage; the Winnipeg cash price of No. 1 Manitoba Northern wheat, basis in store Fort William-Port Arthur, fell from $1.49 a bushel in January, to an average of 59 cents in November, and governments intervened to support prices paid to growers in each of the four major wheat-exporting countries of Canada, the United States, Argentina, and Australia. A t the end of the 1938-9 crop year, despite a moderate increase in international trade in wheat, the world wheat carry-over was approaching the 1934 peak; world wheat production in 1939 was second only to the large crop of 1938; and world supplies of wheat were the largest on record.

The defence effort, including the aid-to-Britain programme, dominates the economic life of the United States today. Whereas expenditures for defence materials were running at a level of about $2 billion a year during the first half of 1940, they are now running at an annual rate of about $13 billion. This six-fold increase in the level of defence expenditures has already resulted in a net increase in employment of about 2½ million, not counting in this figure an increase in the armed forces of nearly 900,000.

The formulation of any labour policy for the existing emergency must be built around the nature of the problem that is created by the emergency itself. Our problem is to transform the billions of dollars that have been authorized or appropriated into ships and planes, tanks and shells—into the thousands of items that are needed to meet the requirements of our own Army and Navy and Maritime Commission, as well as of the democracies of this and other continents. This means that we must mobilize the human and economic resources of the United States so that these munitions may be made available as efficiently and as quickly as is possible.

The first step in approaching this problem is to determine what resources are going to be needed. I am concerned in this discussion exclusively with our labour resources and the problems that affect labour.