There is an almost universal expectation of considerable social reconstruction in Great Britain as soon as the United Nations have achieved victory, and even of instalments in the course of the war itself. This expectation rests upon keen disapproval of certain British social and economie institutions, but also upon confidence in and respect for a national character, which, in the centuries of its development, has achieved mighty and noble works in the building of its political and economic habitation.

In the following observations on the subject of reconstruction we shall be chiefly concerned with four factors: the influences that have produced the manifestly strong impetus to reconstruct; the cardinal reforms that are in mind; the agencies which have been established to collate, ponder, and implement the proposals; and finally, it will be well to find an answer to the question, what are the prospects of substantial advance?

Britain entered the war in a deliberate, not a romantic frame of mind. There was a job to be done, a terrible problem to be solved, not an adventure to be enjoyed. This sobriety led to the immediate raising of the question, “How can this shocking event be prevented from recurring, and to what extent are we as a nation responsible for it?” The result was a widespread canvassing of war aims and peace aims—the newspapers were at once full of the discussion. Generally, the first phase of attention was to international arrangements, and, in the course of time, this produced a spate of suggestions revolving around the conception of federalism. We need not do more than point to the establishment of Federal Union, and the series of papers written on the subject of World Order under the auspices of the Royal Institute of International Affairs.

My purpose in this paper is to indicate the extent to which the United States seems to have learned something from history as regards the economic problems incident to the preparation for war by comparing the preparations made during the period of neutrality in 1914-17 with those of the corresponding period of 1939-41, though I shall at points go beyond the neutrality period. The topic is a wide-ranging one and in the time available I can only hope to touch rather sketchily upon the more important aspects of the problem. I shall not attempt any analysis of the factors which explain the greater results secured during the last two years than in the earlier period of neutrality, involving such things as the attitude of the administration, of Congress, and of the public, as well as the fact that so many of the generation that faced the problems of the last war are still alive, in marked contrast to the situation in 1861 or 1914, for to do this would carry me too far afield. I shall treat the subject topically under the headings of the chief economic problems of war.

These chief problems are: first, getting the goods and services required for fighting; second, providing for the essential needs of the civilian population; third, devising means to enable the government to pay for these goods and services, the problem of war finance. Sometimes a fourth problem is added to this list, that of preparing to meet and to minimize the inevitable post-war readjustments. While I think this last should be classed as a peace-time problem still it is one which should properly be held in mind in shaping war-time policy, but it must be kept strictly subordinated to the problems involved in the effort to win the war.

As indicated by the attribute “historical,” this essay is not concerned with evaluations on metaphysical grounds of life and the universe. Statements by philosophers to the effect that this is the best of all possible worlds, or that “life is a business the returns for which do not cover the costs by any means,” may indeed become objects of historical inquiry. After all, what has not become “historicized” these last hundred years! But investigations of that kind are not likely to yield any great results. Metaphysics, like mathematics, is all but timeless.

A good deal more closely related to historical and political categories are certain fundamental ideas regarding the nature of man. It has been observed that “the pessimistic view of human nature is, and has always been, the deepest sense of a conservative argument.” The inverse is true of a philosophy of progress, which is almost invariably based on an intrinsically optimistic evaluation of human nature. We shall have to touch occasionally upon that interdependence of metaphysical and politico-historical thought in the course of this inquiry. Our chief interest, however, centres on different problems.

Canadian constitutional lore is full of the most amazing paradoxes. The Dominion has a written constitution; but, if the function of a written constitution is to introduce certainty and finality into a polity, this is precisely what Canada's written constitution fails to accomplish. Preposterous as it may seem, no one knows where the constitution begins or ends. The usual answer to a question about the “document” is that the constitution consists of the British North America Act of 1867 and its amendments. The superficiality of this answer is immediately revealed when one asks, Which amendments? The Rowell-Sirois Commission, which made elaborate studies of the background and functioning of the constitutional system, accepts and prints six amendments, the last one of which is dated 1916. Yet this is patently mistaken, for the Statute of Westminster, 1931, placed by the Commission immediately after its “last” amendment, definitely implies at least one later change by its citation of the “British North America Acts, 1867 to 1930.” There is little doubt, too, that the British North America Acts referred to in the Statute of Westminster did not include two of the amendments printed by the Commission (those of 1907 and 1916) and possibly even a third (that of 1875). After meditating on the apparent inaccuracy of the Royal Commission, no one should be surprised to recall that in 1930 the Premier of Ontario (Mr. Ferguson) advanced the view that the number of constitutional “modifications” at that date totalled thirty-three instead of the three about which there is evidently no doubt. Indeed, even the Mother of Parliaments has been misled by one of her Daughter-Parliaments into an erroneous citation of these Acts in her most solemn constitutional enactment, the Statute of Westminster. This is clearly revealed by the belated and surreptitious attempt made in the constitutional amendment of 1940 to tack on one of the earlier amendments omitted from the British North America Acts as defined in the Statute.

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.

In contrast to the numerous expositions and commentaries concerning the origin, history, and nature of the doctrine of the separation of powers, early theories of parliamentary government have failed to attract the attention of historians of political thought. This negligence arises from two factors which must not be under-estimated. In the first place, it is generally asserted that Walter Bagehot was the first to appreciate the true nature of parliamentarism. Indeed, the penetration and lucidity of his famous essay on the English constitution overshadowed earlier attempts to grasp theoretically the mechanism of parliamentary government. In the second place, historians of political theory have been less prone to trace the roots of the theory of parliamentarism than those of the doctrine of the separation of powers because parliamentary government, although gradually introduced into a number of countries in the course of the nineteenth century, was not reduced to writing in any organic law prior to the World War. The development of the theory of parliamentary government is, therefore, one of the most neglected chapters in the history of constitutional ideas.

While the English to the end of the fifties of the last century looked upon and appraised their constitution through the eyes of Montesquieu, Blackstone, and De Lolme, continental theorists were busy in elaborating a new theory about the nature of the English constitution. The early history of parliamentary theory is determined, therefore, to no small extent by the way in which continental theorists observed and conceived the operation of English government. It was in France and Germany that the true nature of the English constitution was first discovered and a theory of parliamentarism formulated for the direct purpose of introducing the parliamentary system into those two countries.

Thus far in the twentieth century Canadian statesmen have been faced with two major constitutional problems, one relating to external autonomy, the other to internal economy. The first of these was the adaptation of existing governmental procedures in such fashion as to make Dominion nationhood a political reality by institutionalizing the processes appropriate to what is now called “Dominion Status.” The second has been the development of a more closely integrated national economy within the framework of a federal system. It is not necessary to consider the advisability or soundness of pursuing either of these purposes; it is enough for the student of constitutional machinery that they have been widely assumed as desirable ends, pursuit of which is considered to be progress. The very fact, however, that the attainment of these aims has had to be sought consciously in the past twenty-five years, more than half a century after the establishment of the Dominion, indicates that they were hardly in contemplation in 1867. And, as there can be no progress without change, it must be recognized that the progressive fulfilment of Dominion national aspirations, externally and internally, must carry with it very considerable if not almost revolutionary alteration in Canadian constitutionalism.

The obvious purpose of the formulation of the principles of Dominion status was to place each of the Dominions on terms of constitutional equality with Great Britain. If each Dominion had inherited British institutions in their pure form, the result would have been the creation of half a dozen reproductions of the British constitutional system. But no Dominion was actually a simple replica of the British polity, and in consequence the declaration of the new status created almost as many problems as it solved. With regard to the external aspects, the Dominions differed among themselves as to the immediate desirability of the legal consequences of the new status, so the Statute of Westminster, 1931, was drawn in such a way as to apply automatically only to Canada, the Irish Free State, and South Africa; for the other Dominions, the Statute was to come into operation only when adopted by them. So, also, with regard to the internal aspects, special reservations were made in the Statute to protect the constitutional systems of Canada, Australia, and New Zealand from change.

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.

Sometime in the future, I hope that there will be published an exhaustive account of one of the most revealing episodes in the recent history of our two countries. I refer to the propaganda for and against the proposed development of a great navigation and power project on the International Rapids Section of the St. Lawrence River.

Doubtless other political movements in our history have a public significance even greater than that of the St. Lawrence seaway. But the St. Lawrence project probably offers to historians, to political scientists, and to economists, a more illuminating study of the way in which our democracies act, or fail to act, under the drives of conflicting pressure groups and of conflicting social philosophies than does any other political controversy of recent years. This is true because the underlying motives of the people who have taken part in the fight for this project are more clear-cut and less camouflaged than those involved, say, in controversies about the protective tariff, or about the merits of American isolationism versus interventionism in international affairs. So broad is the significance of this case study in the realm of economic and social motives— so critical is its import for our democratic way of life—that I shall return to it later even at the expense of cutting short my comments on the merits of the St. Lawrence project itself.

The Dominion government's wheat policy for 1941-2 has been widely interpreted as marking the end of a great Canadian agricultural era. Historians, sporadically interested in Canadian agriculture, have emphasized the significance of events which occurred just over a decade ago, and have thought them sufficiently important to mark the end of the latest agricultural period. It is impossible yet to measure the relative importance for Canadian agriculture of war-created conditions as compared with those of the pre-war years. A decade more or less is of little consequence in relation to eras, and a lengthening of perspective forces us to recognize that the position of agriculture within the Canadian economy has changed markedly since 1920, and continues to change. Many factors such as drought and world depression, and possibly the far-reaching impact of the present war, have served to shrink the stature of the wheat economy; but, more particularly, the phenomenal rise since 1920 of the newer staples, minerals and newsprint, is placing the wheat economy and Canadian agriculture in general in a position of shrunken relative importance, despite record wheat acreage and production for the biennium 1939-40.

The main purposes of this paper develop in relation to the above considerations. Now is an obvious time to take stock in the field of Canadian agricultural history, and to note what research has been done. Since, however, bibliography requires some frame of reference, it is necessary to postulate something of the historical role of agriculture within the Canadian economic framework, and to use this hypothesis as a guide for the arrangement and evaluation of relevant materials. This approach is at once a method of analysis and a plea that agricultural history be not thought to consist solely in changing censuses of rural populations and farm stock, in acres cultivated and bushels produced. Detailed studies in agricultural history should be designed to integrate rather than to atomize the field.

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).

In one of his many famous speeches, Mr. Churchill predicted “the English-speaking democracies, the British Empire and the United States, will have to be somewhat mixed up together in some of their affairs for mutual and general advantage.” Mr. Churchill was thinking presumably of the fields of public finance, administration, and war strategy—of quasi-political affairs. This paper is concerned with some of the ways in which the economic affairs of nations are “mixed up together.” Now the economic structures of trading nations are intertwined both in war and peace, and whether trade is administered by public officials or planned by a multitude of private individuals. The importance of the entanglement corresponds to the importance of trading relations in the economic structure of each country. However, when trade is not administered its importance is less direct and obvious to governments and government officials. As controls are extended in the domestic realm, international trading relationships tend more and more to become subjects of administrative and even diplomatic interest. Administrators in the domestic fields are always tempted to simplify their problems by insulating the domestic economy from unexpected or unpredictable changes elsewhere, without considering the total effects of their regulations on the domestic and foreign economies as a whole. Accordingly, international administrative co-ordination in war time must increase very rapidly if it is to keep pace with the increase in domestic regulation and prevent a rapid diminution in the extent and quality of international economic co-operation.

There are two approaches to questions of earning power, the first, annual, which is the one adopted in this paper, the second, a whole-life study. Of the two the latter is incomparably superior. A study of annual rates of earnings is inevitably biased by the fact that it can include the surviving corporations only. Those which fail make no reports, nor are the capital losses in failure offset against the profits of the survivors to show the net return to capitalists as a class upon their ventures. In addition, the rates of earnings of any year are affected by the business conditions of that year. It is only when one has a series extending over a full business cycle that one has material from which to compute a “normal” rate of return, subject to the inclusion therein of a bias which is not open to any reasonably dependable estimate.

In the whole-life study the rate of return found is that rate which will equate the in-payments of capital by investors to the corporation with the dividends paid to investors including therein the liquidating dividend(s) if the corporation is wound up (or the current market value as a reasonable substitute therefor if it still continues). The beauty of this method is that it avoids the whole problem of allocating earnings to particular time-periods and escapes the illogicality of showing as earnings what never reaches the owner. Its disadvantage is that it is applicable to long periods only. A decade is probably the minimum and two are preferable. It is the only method of determining earning power which is logically defensible; but for many purposes the annual data, with all their imperfections, are still useful and it is for such uses that this study is presented.

Economists of the past century generally believed that, beneath the appearance of social conflict, there was a fundamental harmony, if not identity, of economic interest, and that this harmony of interest existed not only for different social classes and occupational groups, but also for different regions within a nation state and even for different nation states themselves. This belief in a universal community of interest, which led to the notion of a world policy which would serve human welfare conceived as a whole, rested on certain explicit and implied articles of faith, viz. (1) on the proposition derived from Pareto's law, that all social classes benefit from an increase, and suffer from a diminution, of the national real income; (2) on the assumption of mobility of labour and capital within the national state and even across international borders; (3) on the laissez-faire theory of international trade, which invoked the principle of comparative advantage; (4) on the belief that competitive private enterprise, if left alone, naturally achieved the maximization of production along the most economic lines. Competition among sellers led to the adoption of the most efficient processes and the extension of production to the point of least profitability, that is, to the point where the least efficient firm in the industry earned no profits above “normal” interest on capital and average wages of management. Competition among buyers was likewise an operative principle for social good, for it resulted in the allocation of the productive resources so as to satisfy in the order of their importance the most urgent social wants. A final assumption was that social welfare, consisting of the sum of satisfactions, could be measured in pecuniary terms. Thus an addition to the money income of a large group was held more than to offset the real sacrifices of any small group, regardless of the level of subsistence enjoyed by the two groups before the change occurred. The natural corollary of these assumptions was that the test of national policy was its effect on the national real income. But this could not always be determined or, with respect to future policy, accurately predicted. Since, however, profitability was regarded both as the guide to the most urgent in the hierarchy of social wants and as the single stimulus to increased production, it was believed that the anticipation of high profits was a rough and ready indication of an increase in the national real income. Hence profitability was the criterion of welfare and the compass of national policy. In policy so conceived and so directed all classes were held to have a common interest.

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.

The problem reviewed in this article is restricted to organized compulsory systems for ensuring the regular distribution of specified quantities of commodities or groups of commodities to consumers. Systems of rationing goods to producers or traders or of determining priorities or allocations to them are not considered, even though they result in shortages to consumers. Nor is attention directed to voluntary schemes of rationing introduced to meet shortages by retailers who may decide to sell the commodities concerned only to their regular customers or to allow each customer only a small amount of the commodity. Voluntary methods may be adequate for dealing with shortages of less essential goods or with temporary shortages of necessaries, but are not effective for meeting continuing shortages of necessaries. Such systems are distinct from that of consumer rationing, and would require separate review, which in dealing with Great Britain would be concerned with Limitation of Supplies Orders by which traders receive only a fraction of their peace-time supplies, and with the consequences of such Orders.

Consumer rationing has its greatest value where supplies of necessaries are short and are yet available in sufficient quantity to give each consumer a reasonable amount if supplies are equitably distributed. Until rationing is introduced shortages result in rush to buy supplies so that the shortage is aggravated. Some purchasers who have time and money go round from shop to shop buying such quantities as they can obtain to build up a private stock, and thus deprive others of their fair share of the limited supply. Queues are formed outside the shops and much annoyance and uneasiness results. These and other difficulties are avoided when rationing is introduced, and the psychology of the public towards the shortage is improved.

In pre-war days corporations paid a Dominion income tax of 15 per cent on net income, or 17 per cent if they consolidated their returns with those of subsidiaries. In the case of unincorporated businesses—partnerships and sole proprietorships—income tax was levied on the individual incomes of the persons participating in the business; no tax was levied on the business as a unit. Under present taxation schedules, the corporation income tax stands at 18 per cent; 20 per cent for companies making consolidated returns. Proprietorships pay higher taxes through the steeply increased individual income tax rates. And, finally, the excess profits tax has been superimposed on the previous tax structure.

The excess profits tax applies to all businesses, incorporated and unincorporated. In addition to the taxes assessed under the Income War Tax Act, they have paid up to the present either a flat rate on their total profits (in 1940, 12 per cent for all businesses; in 1941, 22 per cent in the case of corporations, 15 per cent in the case of other businesses) or 75 per cent on profits in excess of pre-war profits, whichever tax was the larger. The provisions listed in the Income War Tax Act for the exemption of educational, charitable, labour, farmers', and other such organizations apply equally to this tax. Otherwise it was assessed in 1940 and 1941 against every business in Canada having a profit, before any payments to partners, proprietors, or shareholders, of more than $5000, with the proviso that any part of the tax which would reduce the profit thus defined to less than $5000 was not to be paid.