ATLANTIC May 1952
on the World today
WHETHER Canada can maintain the present boom or will head down into a serious depression was the question of utmost concern as spring came to the north country. All the superficial signs, and even the portents beloved by government economists, pointed boomwards. Out of a population of 14 million, slightly over 5 million were gainfully employed at the highest wages in Canadian history. Corporation profits and dividends were running near record levels. Farm income last year, in dollars, nudged historic highs.
The Dominion Government, which last year anticipated a surplus of $30 million in a budget of $3.7 billion, found itself embarrassed by a whopping surplus that exceeded $500 million. The Canadian dollar reached parity with the American dollar in New York for the first time in thirteen years, and prices of Canadian stocks approached peak levels.
The prosperity mirage
If Canadians were living through the most prosperous year in history it was certainly a queer sort of prosperity that nobody enjoyed. It was a twilight, hazy kind of thing that fell rods short of everyone’s notion of what prosperity should be like. Employers, faced with cost-of-living statistics, caved in before demands for higher wages. Prices kept rising. They kept rising even for those items which were cluttering storage warehouses instead of moving into consumption.
Farmers found that the money that poured into their pockets poured out even faster when they went shopping for machinery, equipment, clothing, and food. In the cities, the clamor for price ceilings was persistent and prolonged. On the Atlantic coast the fishing industry ran out of fish. On the Pacific coast forest fires forced a shutdown of sawmills.
IliNcase hits the cattle
The panic that swept the country on the discovery of foot-and-mouth disease on the Saskatchewan plains on February 18 is an interesting study in political hysteria in its own right. But it is important as a symptom of the uneasiness that pervaded the country all last year.
Until this outbreak, Canada had been free of this livestock scourge for eighty years. That may, in part, explain the ineptitude of everyone concerned in the original diagnosis of the. disease. Because there was no foot-and-mouth in Canada, the symptoms must have been of some other affliction. The facts are these. On November 26, a dairy farmer south of Regina telephoned his veterinarian to report a slobbering sickness in his herd. The vet diagnosed the disease as stomatitis and prescribed treatment. A week later the farmer called in the Dominion Government veterinarian. He confirmed the stomatitis and so, subsequently, did five other vets.
On December 7, a sample of serum was sent to the Government laboratory at Ottawa. More than two months passed before it was analyzed and pronounced foot-and-mouth disease. By this time the infection had spread to 23 herds in nine municipalities. Only the fact that the outbreak came in the dead of winter, when Saskatchewan animals and humans are immobilized by the weather, prevented an international calamity.
The United States immediately sealed its borders against Canadian livestock. That was a shattering blow to the country’s $250 million livestock industry. Canada ships 400,000 head of cattle south annually. Normal livestock population of Canada is around 8 million head.
Both figures are insignificant compared with American livestock statistics. But the American market has been the frosting on the cake for both Canadian beef and dairy cattlemen, and the disease struck just when this trade was reaching its annual peak.
The Dominion Government slapped a rigid quarantine on the infected area and got machinery in motion to stamp out the disease. British Columbia and Ontario both placed strict embargoes on the importation of all livestock, meat, and meat products without exception. Manitoba followed suit. While the federal Minister of Agriculture, Rt. Hon. James G. Gardiner, publicly deplored the provincial embargoes and pleaded for reason and restraint, his own officials got the jitters. A directive went out to all Government experimental farms, some of them 1500 miles away from the outbreak, to close all livestock barns to all visitors.
The prairie provinces last year produced their second late crop in a row. In 1950, some 50 million bushels of wheat were still unthreshed when winter came. It was followed by a late spring, the wettest summer in a decade, and an even wetter fall. The biggest grain crop in history grew and ripened very slowly. Of the more than 500 million bushels of wheat produced, 30 per cent was still lying in the fields when winter set in. To this was added at least 100 million bushels of unharvested oats and barley. Of the crop that was harvested, at least 100 million bushels of wheat was so damp that it had to be dried before it could be safely stored. The country’s drying facilities could not cope with the problem.
A conservative estimate of the cost of the frightful autumn weather, in terms of the cash income lost to the farmers, has been put at $400 million. The adverse effect of this gigantic drop in purchasing power was naturally reflected in a slowdown of the nation’s business. By Christmas the unemployed numbered more than 300,000. Because most of them were drawing on the Government’s $800 million unemployment insurance fund, there was little concern about a depression setting in.
Some of the unemployment arose from a basic weakness of the Canadian economy — overexpanded capacity to produce for a small consumer market. A good deal of it was traceable to Government fiscal policy.
To pay for rearmament, the Liberal Government in April, 1951, imposed a tax load that was grim even by Canadian wartime standards. The tax on corporation profits was boosted to a whopping 45 per cent. Income taxes were raised 10 per cent. The excise tax on cigarettes was boosted to 23 cents a packet of twenty. The federal sales tax, already a crushing 8 per cent, was raised to 10 per cent. The excise tax on cars, radios, and furs was increased from 15 per cent to 25 per cent. A special 15 per cent was levied on refrigerators and stoves. To top it off, a 50 per cent down payment was required on all installment sales.
The impact of those imposts on the trades affected was immediate and profound. Yet—and this is important — some industries were already in serious trouble with buyer resistance prior to the budget. Radio was one, autos another, textiles still another. They were learning, the hard way, that dreams built upon national income statistics are unstable foundations on which to build production schedules.
Prior to the war, only the most theoretically inclined Canadian economists ever worried aboutnational income. During the war the term came into public circulation when it was used as a means of measuring taxation policies. As the dollar income of the nation rose, larger taxes could be collected without increased pain. After the war the phrase was redefined as “gross national product.” Business got interested. If the gross national product rose a couple of billion, it pointed to more spending for shoes, ships, and sealing wax. Therefore production goals should be raised.
Prices keep rising
But while dollar volume rose steadily, so did wages and living costs; hence unit consumption did not mount with dollar consumption after warcreated backlogs were filled.
Overcoats and blankets provide an example. The Korean buying spree cleared the stores of both. Fear of a woolen shortage caused Canadians to stock up. Anybody who needed an overcoat and blankets got them while the getting was good. Manufacturers, faced wit h a heavy demand, stocked up on high-priced wool.
When the next fall came around, interest in both had subsided. In Ontario, some retailers even went to the unheard-of length of having sales with genuine price reductions. But in Ontario, and in Quebec, too, the woolen industry was sick, and factory after factory closed down. Yet, at the consumer level, clothing prices actually rose 10 index points between August and November.
During 1951, ihe index of Canadian food prices rose 30 points. The public blamed the farmers. True, the beef producers, who had the slimmest pickings during the war, were riding the crest. But the bulk of the income of Canadian farmers comes from grain and not from meat. Field crop income was below previous years, while operating costs had gone up. Between 1945 and 1951, field crop prices rose by an average of 10 per cent. Tractor prices increased as much as 90 per cent, combines rose by 66 per cent, clothing prices had almost doubled, and house furnishings were up 50 per cent.
Trouble for the Government
The combination of pockets of unemployment, agrarian discontent, and a continuing rise in the cost of living made trouble for the Canadian Liberal Government.
The increase in the cigarette tax foundered on the rocks of diminishing returns. The income from this tax dropped $17 million as Canadians stopped buying 42-ccnt cigarettes and scurried for substitutes. They found them in smuggled American smokes. All along the border, smugglers did a big business at a tremendous profit. Millions of packages of popular American brands flooded the Canadian market and retailed at 30 to 35 cents each. Spokesmen for the tobacco growers buzzed around Ottawa like angry hornets, angrier even than spokesmen for the auto industry, the electrical industry, and the textile industry.
The Government had hoped by its stiff taxes and curtailment of installment spending to force prices down. Instead, prices kept rising, and the cost-of-living index rose from 180 at the end of March to 193 by January.
Wholesale and retail mark-ups are normally higher in Canada than in the United States. So are unit production costs, because of the smaller market. So are taxes, and the markups are taken on cost plus taxes. Canadian business as a normal practice includes its corporation taxes in its cost system. In such a system, taxes on corporation profits are passed on to consumers. Hence, Canadians live in a high-priced economy from which the consumer has no means of escape.
After losing four straight by-elections, the Government launched an oblique attack on prices by amending its anti-combines act. It made it illegal for manufacturers or wholesalers to fix prices at the retail level. Here it emerged with more enemies than it did friends, and accomplished nothing. The average Canadian merchant has become accustomed to living in comfort under the price-fixed umbrella. It enabled him to compete with the chains and big department stores and stay in business. Despite their new freedom from price dictation, most of them went gaily along at the old price level.
Another piece of legislation that party moguls believed would endear the Liberals to the electorate was the passage of a $300 million a year noncontributory old-age pension scheme. It backfired badly when opposition parties challenged the adequacy of $40 a month payable at 70. The mild praise was soon drowned out by the demands for a lower age and higher benefits.
St. Lawrence Seaway
The Liberals are convinced that the Government will ride out the storm. If industrial unemployment continues to rise, the slackness can be taken up by the St. Lawrence Seaway, which will proceed regardless of whether the United States takes part or not. It will cost $500 million, a terrific sum for any public works project in Canada. Yet it is hardly more than was spent, in uninflated dollars, on the completion of the Welland Canal twenty years ago.
Behind the decision to deepen the St. Lawrence lie the fabulous iron ore deposits in Labrador and Quebec. Part of the explanation of the steady rise of the Canadian dollar, in face of an increase in the trade deficit with the U.S., is the flow of American dollars into Canada for investment and development.
American millions will develop the new ore deposits. More millions are pouring into Saskatchewan and Alberta for oil development. American companies now hold 60 million acres of oil leases in Alberta and 20 million acres in Saskatchewan.
In the last year, a dozen new oil fields have been discovered and are being proved up. A pipeline to carry 75,000 barrels a day hits been built from Edmonton to Superior, Wisconsin, a distance of 1400 miles. Another is going over the Rockies to the Pacific coast. A group of Texas companies are trying to get permission to build a natural gas pipeline from Edmonton to Montreal at a cost of $225 million. Refining capacity is being increased all over the country to take care of the expanding potential production.
In the last two years, oil production has doubled and redoubled. This summer daily output will reach and pass the 200,000 barrel mark. This is in face of the most drastic restrictions on production to keep it within marketable limits. Wells capable of producing 250 to 500 barrels a day are held at 50 to 75 barrels.
The U.S. invests in Canada
Even more import anl than development capital has been the flow of investment capital from the U.S. The chemical industry alone is reported to have pumped $200 million into Canada in the last two years. Americans have been steadily buying into the Canadian Pacific Railway, until it is now one third American-owned. American institutions have been big buyers of provincial and municipal bonds, to the extent of $50 million last year.
The total American investment in Canada now exceeds $5 billion. It is growing like a snowball as profits from Canadian operations are plowed back into expansion. Now a third of the dividends declared in Canada go to American investors.
Either American investors are not nearly so smart as Canadians regard them, or these facts do not add up to a serious depression. More than likely, Canadians are destined for more of the things they experienced last year — higher wages and less real income, more jobs and more unemployed, greater farm income in dollars and less to show for it at the end of 1952. And if all this adds up to prosperity, Canadians at the moment would as lief try something else.