IN THE spring of 1958, Prime Minister John Diefenbaker personally carried his Conservative Party to the greatest political triumph in Canada’s history. His Conservatives elected 208 members in the 265-seat House of Commons, decimated the once invulnerable Liberal Party, and shattered two minority groups. Four years later, in June, 1962, Diefenbaker led his forces into another general election which became an equally spectacular political ambush. Only the emergence of a third party in rural Quebec saved Mr. Diefenbaker from disaster and enabled him to carry on with a minority government until Parliament meets this fall.

More important even than the election result was the foreign-exchange crisis, which had been developing for fifteen years and which exploded unexpectedly on May 2. Without it, there were no real issues, and the Diefenbaker government would undoubtedly have retained a small majority. It was public alarm over the suddenly devalued Canadian dollar that gave his opponents a focal point on which to concentrate. They did so with great effect.

Diefenbaker’s fumbling

Diefenbaker had been in 1958 a happy warrior who coasted into office inveighing against American domination of Canadian industry. With a florid style of gesticulating oratory reminiscent of William Jennings Bryan’s, he rang all the changes on the nationalistic theme. Now he was the chastened, often irascible leader of a star-crossed regime which seemed unable to do much right.

The Diefenbaker government tried to court American friendship by agreeing quickly to joint development of the Columbia River and was deeply embarrassed when the government of British Columbia refused to give its consent. It scrapped Canada’s own Arrow jet fighters and had to settle for Bomarc missiles without warheads. It tried to expand tariff protection for Canadian industry by changing customs definitions and was unexpectedly circumvented by the traditionally pliant Canadian Senate.

It crusaded against the export of natural gas to the United States and wound up approving it. It fought to discourage British entry into the Common Market and was slapped down by London and Washington. It resolutely refused to devalue the Canadian dollar; then, when it changed its mind, fell into an exchange crisis.

The effect of these and other examples of government fumbling tarnished the Diefenbaker image, yet they were hardly the sort of issues that decide elections. In early spring all the auguries pointed to a Conservative victory with a much reduced majority.

The economy was coming out of the recession. National income was at an all-time high. More people — 7 million in a population of 18 million — had jobs, at the highest wage level in history. Unemployment, which had reached an alarming 10 percent of the labor force in 1960 and 1961, was dropping rapidly to a manageable 5 percent. The 400-million-bushel wheat surplus, which had jammed public elevators and backed up onto prairie farms, disappeared. The government sold it to Communist China. The oil industry, the Tory whipping boy of 1957 and 1958, got some belated encouragement and pushed production to record levels. Rising oil and gas exports in 1961, plus wheat sales to China, helped give Canada its first favorable trade balance since 1952.

The Diefenbaker administration embraced deficit financing with $3 billion in budgetary deficits in five years. It raised old-age pensions, liberalized unemployment-insurance payments, increased subsidies to wheat farmers, dispensed larger subsidies to all the provinces, expanded hospital construction, and undertook public works on a grand scale. It even found $5 million to subsidize amateur athletes and exercise addicts.

Canadian dollar crisis

In its early stages, the political campaign could not sustain much public interest. Lester B. Pearson and his Liberals electrified nobody with promises of a much deeper plunge into the welfare state. Then, on May 2, the government announced that it had been forced to fix the Canadian dollar at 92.5 U.S. cents, a drop of 5 cents in six months and 2.5 cents below the previous rate of 95 cents.

Canadians may not have understood much about international monetary markets. But the drop of the Canadian dollar from its former pre-eminent position hurt their pride. For five years, the Canadian dollar had sold at a premium of up to 5 cents more than the U.S, dollar. To Canadians, the premium was one thing they had which was superior to something American. When the dollar slumped to 92.5 cents and could not be held there, it was ego-shattering.

When the dollar crisis broke on May 2, the Conservatives quickly blamed the “gloom and doom” of the Liberals for impairment of confidence abroad. They also blamed dollar selling by currency speculators for the currency crisis, then argued that a discounted dollar would benefit the Canadian economy. It would create jobs in Canada, widen exports, and above all, it was a boon to agriculture.

There was no economic crisis, said Diefenbaker, again and again. Never in Canadian history had so many people had it so good, and the new dollar would make it even better. The opposition unitedly seized the dollar crisis to chastise the government because it would raise Canadian prices. The Liberals charged that the devaluation of the Canadian dollar was final proof of the fiscal incompetence of the Diefenbaker government. They printed a million “Diefenbucks” of 92.5 cents face value, and the electorate was highly amused.

The Conservatives, the Liberals charged, had jolted American confidence in Canada when they imposed a special 15 percent tax on dividends in 1960. Their long string of whopping budget deficits had destroyed world confidence in Canada and started a flight of capital from Canada. Then, to top it off, the Canadian stock markets slumped with U.S. markets.

Behind all the campaign oratory lay a simple fact that was ignored by all parties: the dollar crisis was the result of fifteen years of borrowing from Peter to pay Paul, of selling off the country’s assets to pay its current debts. Since World War II Canada habitually has had an adverse balance of merchandise trade. Its excess of imports over exports often ran as high as a half billion dollars a year. The difference was made up by Canadian industrial and municipal borrowings in New York, where interest rates were lower than in Canada, and by a massive flow of American investment into Canadian industry.

American investments

Under the British preference system, goods from Canada enter other Commonwealth countries at rates of duty below the rate paid on imports from the United States. American industry, for that reason, was encouraged to locate branch plants in Canada. It could then bring in its components from the United States duty free, assemble the finished product in Canada, and undersell domestic U.S. competitors in the Commonwealth. After World War II, the trickle of branch-plant investment northward became a flood. At the same time, discoveries of large Canadian fields of oil and gas and iron ore and base metal deposits attracted billions of U.S. dollars, Finally, Canada had a reputation as a safe investment haven replete with profitable opportunities.

The growth of American investment in Canada increased from just under $5 billion in 1945 to $17.5 billion in 1961. As this investment has grown, interest charges on it have increased steadily and have accentuated the balance of payments deficit from trade. Canadian interest and dividend payments to United States residents in 1961 exceeded $620 million, compared with $427 million in 1956 and $250 million in 1946. Nevertheless, the balance of payments problem was never acute as long as Canadians borrowed heavily in New York and American industry invested a billion dollars a year in Canada.

However, in 1961 Canadians did not borrow as much as they had formerly borrowed. With the oil and gas industry becoming fully developed, and with much of the manufacturing and service industry overdeveloped, investment opportunities for American capital declined. The combination reduced the Canadian dollar demand in New York, and its value gradually sank as the government decided it preferred to have it below par anyway. Then, when the interest payments on the U.S. investment increased, the downward pressure became too much for the Canadian government to cope with.

Obvious as these facts are, they were ignored completely in the election issue oratory, and for good reason. Canada’s external debt, despite its awesome bulk, is unique, because it lies completely outside normal definitions, of external debt. It is not a debt owed by the government of Canada to the government of the United States. It is not a debt of the government of Canada to bondholders in the United States. It is real property and profit-making business in Canada owned by individual citizens and corporations in the United States. Or it is real property in Canada which has been mortgaged by Canadians to individual citizens and corporations in the United States, ft is several billions in municipal and provincial debentures owned by individual citizens and corporations in the United States. It is common stock in thousands of Canadian companies, and in American plants in Canada, owned in the United States.

Because the American dollar investment in Canada does not showup anywhere in the balance sheet of the Canadian government, Canadian cabinet ministers and their advisers never concern themselves with it. For them, it exists only in the obscure but finely detailed publications of the Dominion Bureau of the Statistics.

Coyne’s austerity

There was one notable exception — James E. Coyne, deposed governor of the Bank of Canada. Mr. Coyne started to worry about the implications to Canada of the flood | of American capital into the country almost a decade ago. Then he began making speeches about it, and as time passed he became more outspoken. He was the only vocal advocate of belt tightening and living within the country’s means.

In a memo to the government, he urged a sharp curtailment of imports. much tighter money to discourage overexpansion, and other 1 measures designed to generate within Canada the capital needed to develop the country. In the summer of 1961 the government fired the governor and precipitated a parliamentary debate that ended only when the Senate defied the government and gave Mr. Coyne a public hearing. He promptly resigned and withdrew completely from public affairs.

In his struggle with the government, Mr. Coyne attracted little public sympathy. The Liberal Party fought to give him a chance to deI fend himself before the House of Commons, but the Liberals disassociated themselves completely from his austerity program. So, without exception, did the newspapers of Canada. So, indeed, did most of its economists.

But when the dollar crisis worsened. belated respect developed for Mr. Coyne. This was heightened only three days after the election, when the government was forced to take drastic action to save the dollar from further decline. It borrowed $1 billion from the International Monetary Fund, the Bank of England, and the Federal Reserve Bank. It promised the banks to cut its own expenditures by $250 million a year and raise a like amount by imposition of emergency duties up to 15 percent on $3 billion in imports. It fixed the bank rate at an unprecedented 6 percent, and Canada was given a stiff dose of austerity. Yet, in doing so the government evinced a curious blindness to the cause of its trouble, for it also expressed the hope that the measures taken would restore the flow of foreign capital into the country.

The exchange problem

If American investors in Canada are to get a satisfactory return on their $I7 billion investment, Canada must somehow manage a favorable balance of trade with the United States of something better than $1.5 billion a year, instead of a deficit of $600 million a year. The American market must be opened to manufactured goods from Canada, for only in that way can dollars be earned to pay interest, principal, and dividends to American investors.

The choice is an impossible one for American industry, since it means American owners of Canada’s manufacturing industry must import the products of their Canadian factories to displace, in the American market, the products from their American factories. Or they can reconcile themselves in the future to operating their Canadian branch plants for fun and experience, but not for profit they can take home to spend.

I here is an American side to the Canadian difficulty, and that is the side on which the solution must ultimately be found. The investment seed which American industry and commerce sowed in Canada now yields a bumper crop of Canadian dollars. But the crop will not be worth much to the harvesters unless they can discover how to get their crop home to the States. Or, inelegantly. it is the crop owner’s problem rather than the hired man’s.

Meanwhile, the International Monetary Fund loan will tide the government over until midwinter, when the flow of dividends and interest to the United States again reaches its peak. If pressure on the dollar becomes unbearable, the Canadian government may have to take more extreme measures. In 1948, in a similar balance of payments crisis, the Liberal government practically shut the border to American imports and cut Canadian tourist travel to the south to a minimum.

A strong government might be prepared to take such drastic action again. A minority government can hardly be expected to do so. Out of the next crisis may well come another general election which will produce a stable government. No other country in the world today has anything even remotely resembling (Canada’s exchange problem, so there is nowhere any Canadian government can turn for direction. One thing is certain: the Canadian balance of payments drama has settled in for a very long run on the international stage.