SOME ASPECTS OF CANADIAN WAR FINANCE

ADAM SHORTT

Member Civil Service Commission of Canada, Ottawa, Canada

It is not necessary, in connection with the present treatment of Canadian war finance, to discuss at length the question as to why Canada is involved in the present European war. Suffice it to say that though Canada, like other selfgoverning sections of that indefinable combination known as the British Empire, is technically involved in war because Britain is involved in it, yet it is not because Britain either has, or claims to have, any unquestionable right to require Canada to come to her assistance. Canadians, like Americans, are racially a very mixed people, and many circumstances are conceivable in which conflicting sympathies and interests in international matters, which do not involve fundamental rights and liberties, would effectually prevent united action in support of any British policy of the day. Moreover, although the aggressive policy of the military and autocratic elements in Germany was well known and their unprecedented military preparation recognized as a menace to international peace, yet there were many in Canada, as in England and elsewhere, who believed that the forces of peace and humanity in Germany itself were sufficiently strong to hold the militarist element in check until the intolerable burdens which it imposed should be rejected and the nightmare of Europe and the world pass. When, however, in a moment all these hopes and beliefs were shattered and the worst fears of humanity were realized, Canadians, in common with the people of Britain and the other parts of the Empire, were instantly united in the consciousness not only of immediate danger but of the ultimate hopelessness of all their conceptions of domestic liberty and international safety, should the German militarist organization triumph abroad as it had

triumphed at home. With spontaneous unanimity, the people of Canada recognized that all that was worth living for and all that was worth dying for were to be at stake on the battlefields of Europe. All that Canada could contribute, therefore, was immediately offered to Britain, before it could be asked. The dominion government had not room for a moment's doubt as to the course which it should take and acted promptly, assured that Parliament would validate its action as soon as a special session could be called.

The provincial governments also, though not involved in international questions, yet responding to the unanimity of public sentiment, immediately undertook to furnish extensive supplies for the imperial army, mainly as a concrete evidence of their enthusiastic support of the mother country in the stand which it had taken in the common peril. Ontario and Manitoba gave flour; Quebec, cheese; New Brunswick, potatoes; Alberta and Prince Edward Island, oats; Saskatchewan, horses; and British Columbia, canned salmon. These provincial contributions amounted to nearly two and a quarter millions of dollars and, together with other generous contributions, entailed considerable additional taxation in each province.

It is not merely that Canada has come to the assistance of Britain in this war, as in some previous wars, the mother country meeting most of the expense. Canada conceives itself to be so vitally interested in the successful outcome of this struggle that it has undertaken to bear the entire cost of its participation in the war; including the military equipment, maintenance, transportation, munitions, hospital equipment, and all other supplies for the troops, from the period of their enlistment in Canada until their disbanding on their return, with provision for subsequent pensions where necessary. A total military force of 500,000 men, with all necessary accompaniments, has been authorized by the Canadian government. Considerably over 300,000 have been enlisted and are in various stages of preparation, of active service at the front, or convalescing from the effects of the war. This much it seemed necessary to state, in order to indicate the basis and extent of the obligations which Canada has assumed in con

nection with the war, and the spirit in which her people have undertaken the well-recognized sacrifices which it entails.

Under normal conditions, the revenue of the Canadian federal government is derived chiefly from customs tariffs on imports, supplemented by excise taxes on domestic products, with a few minor items which are of little financial importance. As is well recognized in the United States, where the chief revenue is also derived from customs duties, its amount depends more upon the volume of international trade than upon the specific needs of the exchequer. At the time of the sudden outbreak of war in 1914, the exceptional tide of prosperity which had been flowing in Canada for several years was somewhat on the ebb. One of the first effects of the outbreak of war was further to curtail the revenue, as also to close the British money market to all but war loans. While, therefore, arrangements were immediately made for the British treasury to provide such necessary advances as might be required for purely military purposes, the funds for all other needs could no longer be obtained from the center whence Canada had so long drawn the greater part of her financial assistance. Perforce a new and interesting chapter in Canadian finance was then opened, involving both new features of domestic finance and developing relations with the money markets of the United States, the ultimate significance of which it is impossible at this moment to forecast. Assuredly many changed relations and new departures will date from the Great War.

The first thought of the Canadian Finance Department on the outbreak of hostilities was to put the banking system of the country in a safe position, that it might most effectively adjust itself to the new conditions of trade and finance. The relatively small amount of specie required to maintain the validity of the large volume of credit documents employed in modern trade and industry by no means contemplates the reduction of any considerable proportion of exchange to an actual specie basis. This would involve, in any country, a very abnormal contraction of domestic as well as of foreign exchange. To prevent, therefore, any tendency to hamper the normal functions of the banks, and to prevent the mis

cellaneous withdrawal of gold for purposes of selfish individual hoarding and subsequent exceptional profit, the government, on the recommendation of the Finance Department, took power, by order-in-council of August 3, 1914, to render bank notes legal tender, along with dominion notes and gold, in ordinary payments to the general public. It also suspended the general specie redemption of dominion notes on demand. To provide for the possible diminution of payments by bank checks and the tendency to a greater proportionate employment of currency, the banks were authorized immediately to avail themselves of the special increase of 15 per cent in their authorized note issue, as permitted during the period of the moving of the crops. The government also took power to increase the issue of dominion notes and to offer these, where necessary, to the banks to supplement their own note issues, the government taking in pledge approved public securities and charging five per cent interest on the accommodation. The minister of finance organized an advisory board of well-known banking and financial authorities to assist with their counsels in the administration of these measures. How far the situation as developed was materially assisted by these precautions can doubtless never be fully determined. At any rate, the facilities thus afforded for dealing with an exceptional situation were availed of to a quite limited extent. The banking and financial situation, having exhibited no alarming symptoms, soon ceased to attract observation, the other features of the war entirely absorbing popular attention. In a few weeks and down to the present time, the banking and exchange business of the country has gone forward as though no war had occurred.

A special session of the dominion Parliament was called, opening August 18 and closing August 22. It dealt entirely with urgent matters relating to the war. At this session, the special measures adopted by the government were fully authorized and confirmed, while additional powers were given to the government, enabling it to exercise considerable discrimination in dealing with all matters connected with the actual prosecution of the war. Among other powers conferred upon the government was that of declaring a mora

torium, should circumstances warrant. Recognizing the great difference between the Canadian situation and that of England as the chief financial and exchange center of the world, the authority to proclaim a moratorium in matters affecting the Dominion as a whole was not exercised, and all possibility of such action has since passed away. Local moratoria, chiefly connected with actions on mortgages, have been declared in a few of the provinces and have been the subject of much criticism, both favorable and unfavorable.

At the special session of Parliament, the "dominion note act" was amended so as to permit the government to derive a further loan of $15,000,000 from the government note issue. Similar action has been rendered possible from time to time in the past by reason of the growing demand for dominion notes, owing to the exchange requirements of the country. A certain fixed amount of these notes is issued on a reserve deposit in standard gold of 25 per cent. For all additional notes issued, 100 per cent in gold is held. Naturally, the expanding needs of the country caused the issue with 100 per cent reserve steadily to increase, while the amount with 25 per cent reserve remains stationary, subject to parliamentary readjustment. The percentage of gold in relation to the total note issue had been rapidly expanding of late years. At the outbreak of the war, $112,793,833 dominion notes were outstanding, but only $30,000,000 were on the basis of 25 per cent reserve. By the amendment in 1914, this amount was raised to $50,000,000, thus practically furnishing the government with a loan of $15,000,000 without interest. The net result of the transaction was that the percentage of reserve on the total note issue fell from 81 per cent before the amendment to 71.7 per cent thereafter. This, it will be observed, is still a very substantial reserve for a government note issue.

At the special session of Parliament in 1914, an appropriation of $50,000,000 was made for purposes connected with the war. This was over and above the ordinary requirements of the government. The government was authorized to raise, by loan, so much as might be necessary to provide funds for this appropriation. With the object of furnishing a considerable portion of these extra funds by immediate taxation, additional