Probably no idea has been more widely propagated during the last few years than that a way out of the depression in Canada could be easily won by a thoroughgoing dose of inflation. In parts of western Canada the pursuit of cheap money has become not merely a cult but, with many of the characteristics of mass hysteria, has all the intolerance of an evangelical movement; anyone who ventures to disagree with the devotees of social credit is regarded by them as being either stone blind to the master evil in our present economic situation or woefully recreant to the obligations of human society. There are, however, many people in Canada, not associated with the social credit groups, who believe that the way to recovery lies along the road of inflation. The precise form that inflation should take differs from person to person but the general idea is in the air and is worthy of examination and, if possible, of some clarification.

During 1934 three countries of the British Empire established Central Banks. The Reserve Bank of India was established by an Act which received the Governor-General's assent on March 6 of that year; on July 3 assent was given to the Act to incorporate the Bank of Canada which opened for business in March, 1935; and on August 1, 1934, the Reserve Bank of New Zealand opened its doors. The fortunes of these new Central Banks will be keenly watched by those interested in central banking and the influence of monetary policy on economic welfare.

Only one British oversea Dominion has, as yet, any experience of the running of a newly-created Central Bank. In Australia, the Commonwealth Bank is a commercial bank which has acquired the functions of a Central Bank, but the Union of South Africa in 1920 established an entirely new bank, just as Canada has now done, and the fourteen years' experience of the Reserve Bank of South Africa may usefully be studied by those who are taking an interest in the future of the Bank of Canada. Indeed, in several respects there is similarity between Canada and South Africa; in neither country is there a developed money market for short loans, nor is there much scope for open market operations; both countries possess valuable gold fields; both are debtor countries; each is linked closely to a foreign financial centre, South Africa with London, and Canada with New York.

In the present paper I propose first to discuss the place of geography among the sciences, and then to show how modern geographical technique can be applied with fruitful results in the fields of history, economics, anthropology, sociology, and linguistics.

At the University of Chicago, one of the three leading research institutions in America, the four general divisions of undergraduate study are the social, physical, and biological sciences and the humanities. It was found desirable to give geography a place in the first two divisions, thus emphasizing its liaison character. Indeed the relations between geographical research and such subjects as history and biology are so close that the writer feels that geography might well have been given representation on the boards of all four divisions!

On the assumption that the primary interest in the “ancients” in such a field as economics is to learn from their mistakes, the principal theme of this discussion will be the contrast between the “classical” system and “correct” views. The system is taken in the sense indicated by the title, with little regard to other writers than Ricardo's own great master and the two successors most competent and closest to his own spirit, Senior and Mill. While our special interest is distribution theory, it is useful to have in the background clear views of essential doctrines or points of view in the authors' theory of value or price; for these are often closely connected with fallacies in the other field. It will be appropriate to give by way of introduction a kind of formal list of main deficiencies and sources of error in the system as a whole. At least seven such “aberrations” appear to have vital importance.

The first to be noticed is the unfortunate conception of value, in negative terms—cost, interpreted as “pain”—instead of positive terms—desire or utility. This fallacy occurs explicitly in the parts of the argument which have come to be referred to in the literature as the “philosophical” account of value. Specific discussion of the determination of value (price) as a quantity (the “empirical account”) runs, indeed, largely in other, more “correct” terms, of the equalization of return from productive expenditure in different fields through correct allocation.

Federalism has been described by Dicey as “a political contrivance intended to reconcile national unity and power with the maintenance of ‘state right’”. Dr. Schmitt, a contemporary German student of federal institutions, has stated that “the nature of union consists in a dualism of the political existence, in a combination of federative common existence and political unity on the one hand with the continuance of plurality, of a pluralism of political individual unities, on the other”. Lord Bryce had expressed the same thought in more picturesque language in his earlier study of federal institutions in the United States.

From an early date Canada has been on an export basis in respect of dairy products considered as a group. From Confederation until the early years of the present century, expansion of production was to a large extent dependent upon the expansion of export markets. The extent of this dependence is indicated by the figures showing the exports of cheese and butter which, in the period in question, were the only dairy products exported. In the case of cheese, exports mounted steadily from 6,141,570 pounds in 1868 to the high point of 233,980,716 pounds in 1904. As for butter the amount exported, while somewhat irregular, was on the whole very considerable and in the later years of the period became extremely large. In 1868 exports of butter amounted to 10,649,733 pounds, whereas in each of the two high years, 1903 and 1906, they exceeded 34 million pounds. Since the latest years mentioned above, however, exports of both cheese and butter have tended decidedly downward. From the high point reached in 1904, cheese exports have fallen until for the year ending March 31, 1935, they were only 60,213,000 pounds. The amount of butter exported has varied widely but in only three different years since 1906 have exports exceeded 20 million pounds and in most years they have been well under 10 million pounds. In several years they have been from one to two million pounds and in the year ended March 31 last they fell to the record low level of 446,600 pounds.

Optional payment bonds are a distinctive feature of the Canadian debt structure and give rise to a set of conditions quite peculiar to the Canadian economy.

As to the facts, it may be said that a very considerable proportion of Canada's federal, provincial, municipal, and corporate indebtedness has been issued with principal and interest payable at the holder's option in either or both London and New York funds as well as in Canadian currency. A smaller amount is payable in London only and in New York only. The proportionate distribution of Canadian public issues according to payment feature is estimated, very approximately, as follows:

Something over 55 per cent, of Canada's bonded indebtedness, therefore, has an external payment feature in some form or other.

These combinations of payment feature are the consequence of several rather clearly defined phases of our economic development. The historical aspects of our capital imports constitute a study in itself beyond the scope of this article. Suffice it to say that most of our “Canada and London” and “London only” debt was acquired in the years from 1900 to 1913, a period in which we were absorbing outside capital at a more rapid rate than any other capital-importing nation and depending for our requirements almost solely on the London money market.

A study of the trade position of the province of British Columbia shows clearly that the major part of the manufactured goods consumed in the province are imported from Eastern Canada, mainly Ontario and Quebec. At the same time the major portion of British Columbia products must be sold in outside markets. Thus British Columbia citizens are directly or indirectly dependent upon the revenue arising from British Columbia exports with which to pay for imports from Eastern Canada. It is obvious, therefore, that if British Columbia export prices fall as a consequence of declining prices on world markets, British Columbia will not be able to purchase Eastern Canadian manufactures to the same extent as formerly unless a corresponding reduction takes place in Eastern Canadian prices. Should British Columbia continue to purchase at the former rate, ultimately a financial strain would be placed on the province. Further, when British Columbia producers find their export prices declining, they must sooner or later make internal adjustments to meet reduced income. As a result, employment and other factors in economic activity will ultimately be adversely affected. Our study of British Columbia's trade position has shown very clearly a definite relation between the general economic activity of the province and world trading conditions.

The unusual stresses and strains of the depression during the last four years have drawn attention more definitely to certain weaknesses in the financial structure of the Canadian federation. The province of Nova Scotia has performed a very valuable service in initiating an economic inquiry into Dominion-provincial relations as affecting that province. An inquiry such as this removes the problem from the realm of speculation and political expediency and relates it to the actual facts of the situation. It would be of great value if similar investigations were made by the other provinces into their own peculiar problems, followed by an examination of the whole question by an impartial body from the point of view of the Dominion as a whole. Investigations along this line have been carried out in the Commonwealth of Australia and a Commission appointed which has reported on the applications made by the states of South Australia, Western Australia, and Tasmania for financial assistance from the Commonwealth, based on certain disabilities affecting these states as a result of Commonwealth policy.

The financial arrangements made between the Dominion and the provinces at the time of Confederation were essentially in the nature of a compromise and designed to meet the situation as it then existed. This appears to have been more or less the situation in the original financial arrangements of practically all existing federations. Apparently, however, it was considered at the time of the Canadian Confederation that these arrangements would be of a somewhat permanent character. This optimistic view was early shown to be wrong when within two years it was necessary to make adjustments. Further, it was not anticipated at that time that there would be any change in the accepted functions of government. The prevailing idea was that the fewer functions surrendered by the individual to the government, the better. John Stuart Mill was still the authority, and his ideas with regard to the limitation of government marked the general line of thought. While there were those who took a wider view of the functions of government and who anticipated the collectivist movement of the last quarter of the century, the echo of this was at that time scarcely heard in Canada. There was no thought that many of the services now rendered to the community by governments would become necessary. Consequently, the division of authority, both political and financial, in the British North America Act, was based on a form of society and an idea of government which no longer exists.

Some explanation of the origin of this short paper may assist in understanding its content and point of view. It is the result of a study of certain official papers dealing with cases of federal stress. These papers deserve, and indeed demand, careful study by all who exert any influence on government policy in Canada. I refer to (a) A Submission on Dominion-Provincial Relations and the Fiscal Disabilities of Nova Scotia within the Canadian Federation, presented by Professor Rogers to the Nova Scotia Royal Commission Provincial Economic Inquiry (1934); (b) Province of Nova Scotia, Report of the Royal Commission Provincial Economic Inquiry (1934), especially the supplementary report by Dr. Innis, and the memorandum by Professor R. A. MacKay on the “Financial Relations between the Provinces and the Dominion” published in the volume of Appendices to the Report; (c) British Columbia's Claim for Readjustment of Terms of Union presented by the Honourable T. D. Pattullo, the Honourable G. McG. Sloan, and the Honourable John Hart (1934); (d) The Case of the People of Western Australia in Support of their Desire to Withdraw from the Commonwealth of Australia (1934). Though these official papers have led me to try to think through the economic problems, and the economic philosophy, of federalism, the position I take is not new to me. It is simply a development of an attitude towards problems of regional conflict with an attempt to determine what difference exists when the state is federal rather than unitary. My attitude towards problems of regional conflict is exemplified in a paper contributed last year to The Canadian Economy and its Problems, but no reference is there made to the conflict of provinces as such. In view of this approach it may be less surprising if I add to the list of official papers given above one from the United Kingdom; (e) Reports of Investigations into the Industrial Conditions in Certain Depressed Areas of I West Cumberland, II Durham and Tyneside, III South Wales and Monmouthshire, IV Scotland (1934, Cmd. 4728).

The “correct” approach to the theory of distribution in economics is by way of a theory of productive organization; in fact, a sound distribution theory is hardly more than a corollary or footnote to an exposition of the mechanism by which resources are apportioned among different uses, and organized in each use, under the forces of price competition. The “sense” in economics as a subject for study is derived from the idea of increasing the efficiency of action (i.e., of “economy of resources”) through mutual rendering of services by individuals. Historically, the development of the science may be imputed to the realization that purchase and sale represent and mediate such an exchange of services; with a few individual exceptions, men seem never to have had this realization before the eighteenth century, but to have regarded it as axiomatic that what anyone gains in a pecuniary transaction, someone else must lose. Under analysis, a socially general effort to profit by exchange relations takes the form of a tendency toward a maximum (viewed as a state of equilibrium for the society as a whole) through the attraction of every increment of service capacity into its “best” use for the mutual advantage of both parties, i.e., the owner of the increment of capacity and the consumer of its service (who gets the service in exchange for that of some increment of capacity owned by him). If it is seen that this urge on the part of individuals as owners of service capacity is the organizing force in all price relations, and in the economic life which prices mediate and reflect, it becomes truistical to remark that the distribution of the product of all service capacity, considered as acting jointly, is on the basis of increments of yield.

Here are two sciences—Philosophy and Political Economy—both bankrupt. The one went through the courts at least a hundred years ago and is now a cheery old bankrupt, bright and garrulous in old age. It talks most interestingly about its case, citing a long list of opinions and judgments that go back to the Greeks. The other bankrupt has just been thrown into the receiver's hands, still protesting angrily, still claiming that it has wonderful assets, that everything will be all right. It cites a wilderness, not of opinion, but of statistics and facts, all apparently bearing on nothing, gets confused, breaks down and cries—a very picture of senile collapse.

There are those who dislike metaphor; let us say the same thing in a plain way. Philosophy means the attempt to discover the ultimate nature of existence, of consciousness, of time and space. Has it found it? No. Is it going to? Not a chance of it. Where is it? Nowhere. Some people do not understand this. They read of the work of the Mayos and the Carrels and the Rutherfords and think that they are getting somewhere. In the philosophical sense it is not so. No ultimate dissection of the human body will ever find the human soul. The substitution of Rutherford's atom for Huxley's—replacing a solid particle infinitely small by a huge cavern empty except for centres of force—does not carry us one inch further in our quest of the final relations of mind and matter. Our greatest medical men know no more of the ultimate nature of consciousness than did a horse doctor in Asia Minor B.C. 500. Einstein, as far as the ultimate truth of space, time, and number goes, is no further on than Rodin's “Penseur”—his statue of the primitive man, buried in stubborn thought and trying, let us say, to think out whether two and two is four, or is five.

Rural population in the three Prairie Provinces increased from 1921 to 1931 by 17 per cent., and land in farms in these provinces in 1931 totalled 110,000,000 acres, an increase of 23 per cent. since 1921. A study of the census returns reveals that the largest population increases occurred in the northern territory. Rural population in Manitoba has been relatively stable with normal increases in the northern census divisions 14 and 15, while there is a 50 per cent. increase in population—over 10,000—in census division 16 which reflects the mining development of The Pas. When we turn to Saskatchewan we find that the census divisions 9, 10, 14, 15, 16, and 17 had a population of 234,015 in 1921 and the 1931 census lists the population at 308,399, an increase of one-third in the decade. As we move further west we find that in Alberta the census divisions 10, 12, 13, and 14 were rather less than 100,000 in 1921 (95,916) and this increased to 136,308 in 1931, an increase of slightly less than 40 per cent. The Peace River population in census divisions 15 and 16 increased from 18,000 to over 41,000, an increase of over 100 per cent. The census divisions in which Saskatoon and Edmonton are to be found are not included in these figures. Both these cities increased their population heavily in the period.

Environment and heredity affect the development of the nation as much as they affect the development of the individual; and Canadian history is written, for the most part, around the conflicting forces of British inheritance and American propinquity. An excellent example of the latter is found in the low condition of Canadian political morality which was most conspicuous during the first fifty years of responsible government. While this was unmistakably national in many of its manifestations, its rise and continuance were due in no small measure to the proximity of the United States; and the temptation for the Canadian politician to emulate in a modest way the methods of a Tweed, a Croker, or a Philadelphia Gas Ring, proved in a deplorable number of instances to be irresistible. The prevalence of bribery at elections (particularly before the introduction of the ballot in 1874), the strengthening of the party position by the award of contracts and the appointment of supporters to office, the series of questionable “deals” and practices of which the Pacific Scandal was the most notorious—these were evidences of native sins which had received American inspiration and encouragement and which corrupted extensively Canadian political life.

As one reads the report of the Nova Scotia Royal Commission of Economic Inquiry, he becomes aware that he is in a new area lying between the field of economics proper and the field of political science. In this area the economist gropes uneasily, finding the familiar concepts of economics strained in an attempt to answer unfamiliar questions. There is an important difference, however, between the case for Nova Scotia, as it was presented to the Royal Commission and the case for the Prairie Provinces. A great part of the brief for Nova Scotia is concerned with negotiations preliminary to the passing of the British North America Act and many of the grievances rightly go back to that period. The Prairie Provinces entered a Confederation already in existence with a lively sense of benefits to be obtained. The alternative was not, as for Nova Scotia, of coming into Confederation or of remaining a separate colony, but of coming in or of remaining a territory of the Dominion. We were not beguiled into Confederation with the connivance of the secretary of state for the colonies. Nor have we since coming into Confederation seen our formerly prospering industries languish and die. We are not obsessed with the memory of a glory that has departed. On the contrary, our growth was steadily upward, interrupted only by disturbances that were common to the whole country. Our protest is hot concerning what we once were and now are but rather about what we are now and what we might be,—but this does not mean that the protest is any the less real. The protest of to-day is not new in anything except its vigour and yet it manifests a difference in degree that is equivalent to a change in quality.

In an earlier paper an attempt was made to isolate certain of the major population movements occurring in Canada during the last intercensal decade and to demonstrate their bearing on the current situation in, and the future outlook for, the country as a whole. Recently available provincial data have made possible the elaboration of the preceding analysis and the addition of many essential details to the picture. A summary of the more important findings from this supplementary study is given in part I. This article also affords an opportunity to make one or two minor revisions, the necessity for which was revealed when the provincial estimates were balanced against the earlier totals derived from figures for the Dominion as a whole.

It is self-evident that the existence of ten jurisdictions, each having the right to make its own laws for the incorporation and regulation of limited liability companies and each exercising that right, must not only complicate matters greatly for the individual investor, shareholder, or creditor but must also operate as a serious drag on the commercial and industrial development of the nation. One way out of the impasse in which Canada finds herself would be to secure an amendment to her constitution whereby the federal legislature would be given exclusive jurisdiction over companies, and the provinces would surrender their exclusive jurisdiction over property and civil rights so far as was necessary to ensure the effectiveness of the federal control over corporations. This solution is ideal rather than practical, for it assumes self-negation on the part of politicians and comprehension on the part of the electorates greatly exceeding any yet evinced.

An alternative, but distinctly inferior, solution would leave the jurisdiction divided as it is at present but induce all ten legislatures to agree upon uniformity in the essential features of their company laws. This plan would do nothing to remove the handicap under which the federal legislature labours by reason of its lack of jurisdiction in the law of contract, but it has been talked about and is regarded by the mass of people as a practical step—notwithstanding the abortive results of the two Dominion-Provincial Conferences already held on the subject.

By the gains of trade is meant the gains from free trade between nations or the advantages of free trade as against no trade or the advantages of more free trade as against less. Historically the concept has been bound up with the doctrine of comparative costs, which has purported to be not only an explanation of the terms of international trade—of the conditions of international equilibrium—but also a guide to policy, a demonstration that each nation's gains are a maximum under free trade.

Lately the doctrine of comparative costs has been attacked by Angell and Ohlin among others on the ground that it does not provide an adequate account of equilibrium. With this side of the subject I shall not deal, taking it for granted that an account of international trade equilibrium should be at least as adequate as the present theories of general equilibrium, and that, therefore, the doctrine of comparative costs must either be dropped or be so transformed as to be indistinguishable from the ordinary price theory, or perhaps be retained for a while simply as a pedagogic device. But as Viner has pointed out in his notable article on the subject, the critics of the doctrine overlook the fact that it was forged as an instrument of policy and they themselves, though dropping real costs, make statements about policy which are very infirm without a basis in real cost theory.

In its report of 1926 the Duncan Commission found the claims of the Maritime Provinces for a larger federal subsidy so just and so urgent that it recommended an immediate increase in the form of interim payments (which were to form the minimum of any increased subsidy) and that the Dominion government should take immediate steps to secure “a complete revision”, “by detailed determination and assessment”, “of the financial arrangements as between them and the maritime provinces”.

The White Commission was accordingly appointed by the federal government in September, 1934, on the written request of the premiers of the Maritime Provinces to make this financial settlement. Sir Thomas White, as chairman, and Edward Walter Nesbitt, both of Ontario, and Chief Justice J. A. Mathieson of Charlottetown, P.E.I., were the Commission. Judge Mathieson brought in a dissenting report. Another Maritime commissioner would probably have changed materially the amount of the increase recommended, since in a report based not upon any accurate standards of measurement but upon “broad and general considerations”, political opinions and personal bias are important. Probably the personnel of the White Commission was not so favourable to these provinces as was that of the Turgeon Commission to the province of Manitoba. Yet the White Commission accepted without question the recommendations of the Duncan Commission and the Maritime Provinces were allowed to present their case before the Duncan Commission without any contesting case of the federal government.