WHAT WENT WRONG WITH CANADA?

Our crumbled dollar is only the most visible sign of the crisis that has reversed our postwar boom. A report from Maclean's Ottawa editor on our economic change of life

PETER C. NEWMAN September 22 1962

WHAT WENT WRONG WITH CANADA?

Our crumbled dollar is only the most visible sign of the crisis that has reversed our postwar boom. A report from Maclean's Ottawa editor on our economic change of life

PETER C. NEWMAN September 22 1962

WHAT WENT WRONG WITH CANADA?

Our crumbled dollar is only the most visible sign of the crisis that has reversed our postwar boom. A report from Maclean's Ottawa editor on our economic change of life

PETER C. NEWMAN

FROM 1945 UNTIL 1957 Canada was the envy of the world. No nation on earth seemed to place as few limitations on man's universal dream of attaining wealth and material comfort. Some two million people lined up at docks on the other side of the Atlantic for the privilege of sharing in a prosperity which, it then seemed, would never end.

Everywhere, for those dozen years, there was an intemperate rush among normally temperate businessmen to exploit the nation’s assets. London's authoritative Financial Times commented in awed envy: “The whole world appears to be in a conspiracy to find more and more uses for Canada’s natural resources.” Besides all the funds required to exploit its economic potential. Canada had enough money left over to help substantially in the postwar recovery of Great Britain with billion-dollar loans and food shipments. The Canadian standard of living climbed ever closer to that of the United States—Toronto’s per-capita population of Cadillacs, for instance, increased at a rate

that ranked the city ahead of Los Angeles and Detroit. "The rest of the world," according to Prof. Clarence Barber, the University of Manitoba economist, “was having a love affair with the future of our economy."

Now, just five years later, that love affair is as dead as an aproned middle-aged housewife's first springtime flirtation. This nation is in the grip of an austerity program more commonly associated with wartime emergencies, and the British are lending ns $100 million to maintain our currency at its devalued rate. More people arc leaving than entering the country, and the Financial Times is righteously warning that “the process of adjustment will be painful.”

Canada's currency, once the hardest dollar on earth, is now supported at its low'er rate through the kind of international bank loans usually given to second-rate African republics dimly struggling toward solvency.

The Aluminum Company of Canada's magnificent smelter at Kitimat—which came to symbolize the postwar boom—has operated at eighty percent of capacity or less since 1957. Canada has dropped from first to eighth place in the world in per-capita trade, ;yid tiny Sweden has usurped our position as the country with the world's second-highest standard of living. Since 1957, almost 12.000 Canadian business enterprises have gone bankrupt; the profits (after taxes) of Canadian corporations are down 5.4 percent.

In terms of providing adequate job opportunities for its citizens— one of the most important standards by which the performance of a modern society is measured -— Canada in the past five years has done so badly that its unemployment rate exceeded that of any other industrialized nation in the world. Last winter there were four times as many jobless in Canada as in France and three times as many as in Germany, although we have less than a third the population of those countries.

For all these reasons and more, the free world’s businessmen are inclined this fall to view Canada with either indifference or outright contempt. American investment funds, which during the first decade after World War II cascaded into Canada at a gross rate of three million dollars a day, during the first six months of this year began to flow out at the rate of one million daily. Worse than that, Canadians able to move their funds abroad have been sending their money out of the country in unprecedented quantities—$72 million were spent on foreign security purchases by Canadians during the

fust halt of the current year.

Clearly, the past five years have drastically altered the economic climate in which Canadians live and work. Now, instead of being able to revel in a century that was supposed to belong to us. we find ourselves beset by grave problems and plagued by misgivings about the national future.

What happened?

The circumstances which have come together to turn our prosperity into economic stagnation are just as varied and complex as the factors which combined to generate the boom in the first place. But the basic reason why we re in trouble is simply that during the past live years, the Canadian economy stopped expanding.

CANADA’S BIGGEST SPENDING SPREE

Many factors have been responsible for this decline. The discovery in Africa of alternative (and far cheaper) raw' materials, particularly iron ore, removed much of the glitter from our natural resources. When we might have changed from a raw-material to a manufacturing economy, the rapid recovery of the Japanese and German economies stopped us. The overwhelming control of Canada's industries by foreigners meant that the country’s economic growth was often directed in a way to suit head offices outside the country, rather than coinciding with our national aspirations. The drop in our political prestige abroad, which came with the change of government, implanted serious doubts about the wisdom of the Diefenbaker administration's domestic economic policies in the minds of our trading partners. The abrupt expropriation by Premier W. A. C. Bennett of the B.C. Electric Company led some potential investors to believe that Canada was no longer a safe haven for their funds. Finally, and perhaps most important of all, during the first decade and a half after the war, our galloping growth had come to be taken as a measure of normality, so that when the pace of growth slowed down, it looked as if the economy was shrinking more than it actually was. Just as a race horse can’t easily be harnessed to pull a milk wagon, so an economy which sprinted ahead for a dozen years, is now having trouble adjusting itself to far less buoyant conditions.

It’s impossible to plot the reasons why the pace of business growth stumbled so badly without first briefly reviewing how the postwar economic climate shaped the booming Canada of the fifties. The end of World War II automatically canceled two billion dollars’ worth of defense orders and terminated the jobs of half a million defense

workers. Meanwhile close to a million Canadian servicemen were waiting impatiently to rejoin the labor force. Nearly everyone expected serious unemployment to develop. J. D. Dean, a prominent London financier, flew to Ottawa with a plan for converting Canadas shipyards to build whaling fleets.

Pockets of unemployment did develop, especially in Quebec armaments centres, but Canadians never found time to go whale-hunting. Canadian industry—its capacity boosted by the seven billion dollars invested in new machinerv during the war—rushed its conversion to civilian production. With a war-accumulated backlog of nearly eight billion dollars in savings, (money for which no civilian goods had been available), Canadians set off on the biggest spending spree in our histor>'. Even before this demand for goods could be filled, a new wave of investment activity in Canada was triggered by the discovery of the petroleum deposits at Leduc, Alta., on February 13, 1947. Americans poured so much money into the exploitation of natural resources that Canada became the world’s largest importer of private capital.

The first wave of prosperity was just slowing down (there was a minor recession from October 1948 to September 1949) when the impetus of the Korean War and its accompanying demand for the raw materials from which armaments are manufactured, launched another wave of investment in Canada. At the same time, the warshattered economies of Japan and western Europe had reached the stage of rehabilitation when their factories required the products of Canada’s mines and forests. Meanwhile, domestic demand for consumer goods was kept at peak levels by the high rate of immigration from Europe. Following a brief recession from May 1953 to June 1954, fresh foreign capital led the way into the third and final great wave of postwar prosperity.

At the beginning of 1957, Canada's boom—which had lasted a dozen years with only two brief interruptions — finally lost its momentum. By the autumn of that year an unsalable surplus of wheat, timber, paper and minerals was plugging our trade channels and for the first time since the thirties, unemployment was becoming a national problem, with 7.1 percent of the labor force out of work during the winter of 1958.

The massive development projects which had powered Canada’s postwar growth such as the oil of Leduc, the iron ore of Ungava, the uranium of Blind River, the aluminum

CONTINUED ON PAGE 58

continued from page 19

Coyne addressed Canadian Club members as “my fellow debtors”

of Kitimat. the building of the St. Lawrence Seaway and the pipeline construction of Trans-Canada, Irans

Mountain and West Coast Transmission, all happened to come to an end at about the same time. There were no new projects of similar scale to take their place. Furthermore, the decline of immigration (which meant that Canadian business wasn't gaining as many new customers) and the sideeffects of unemployment. which placed a damper on consumer spending, meant that most Canadian factories found themselves with excess, idle capacity. This, in turn, seriously

reduced the total amount of private capital investment flowing into the economy. Between 1957 and 1962, the total amount of money invested in plant construction, industrial machinery and other fixed assets that help to guarantee an economy’s future expansion, dropped by twentyfive percent.

The paradoxical fact about this ticcrease in private investment has been that until the recent dollar crisis, the inflow of American and other foreign

capital into the country did not suffer a corresponding decline. During the past five years, while the share of business capital spending financed by Canadian funds has been shrinking. Americans and other outsiders continued to pour an average of $100 million per month into the acquisition of our resources and factories.

The postwar influx of foreign investment funds is generally viewed with alarm by Canadians because it has meant that sixty percent of our manufacturing industries, about eighty percent of the petroleum holdings, and sixty-one percent of the mining enterprises have come under outside control. But there’s been an even more serious short-term effect. The investments made here by foreign investors now earn dividends and interest of nearly three quarters of a billion dollars a year which are sent out of the country. And the only way we can afford this outflow of funds is to keep encouraging more investment dollars to come in. That leaves us in a unique economic trap: in order to raise the foreign funds needed to pay the financial obligations we owe on that portion of our assets already in foreign hands, we must keep selling more and more of the assets we still possess. That's what James Coyne was referring to when he began some of his talks to Canadian Clubs during his last days as Bank of Canada Governor. with the words “My fellow debtors ..."

Proof that we can't afford to do without the continued inflow of foreign currency was last spring's dollar crisis, caused primarily by a temporary reversal of the foreign investment influx. The current austerity program, announced by Prime Minister Diefenbaker on June 24. has proved to be a successful stopgap measure in halting the run against our currency. But the tough measures that accompanied it —especially the Bank of Canada's tight money policy — may further dampen the potential growth of the Canadian economy by making domestic expansion capital harder to obtain. Also, by slapping surcharges on imports, we arc running against the world trend of lowering trade barriers.

Because Canada's economic change of life coincided with of

government, politicians of all parties have inundated voters with blasts of statistics trying to prove that the slowdown has been due largely to their opponents' bungling. The Liberals have revived the slogan "Tory times are hard times," first applied to R. B. Bennett's 1930-35 administration and. during last spring's election campaign, Liberal Leader Lester Pearson repeatedly charged that the devaluation of the dollar represented "a confession of complete failure of the government's economic policies." The Conservatives, on the other hand, have righteously contended that they have done the best they could to improve the messy economic situation they inherited from twenty-two years of Liberal rule. The NDP and the Social Credit parties have been blaming the nation's economic difficulties on the hidebound, outdated philosophies of both the old-line parties.

Weighing these charges impartially, it's difficult not to agree with them all. Certainly, the drastically altered world business climate of the sixties would appear to require something better than the tradition-encrusted economic thinking of the present Conservative and past Liberal cabinets. There seems to be little excuse, for instance, for Canada not following the example of such western European countries as France which, despite severe political turmoil during the postwar years, has managed to keep its economy expanding at a healthy rate by instituting a system of federal planning which coordinates the policies of government, business and labor.

The Tories have some justification for accusing the Liberals of bequeathing them an economy that was on the verge of inevitable collapse. Foreign demand for Canadian raw materials began to decline just as the Conservatives were taking office and the rate of family formations, w'hich is one of the main stimulants of the economy, was lower in 1958 and 1959 than in any other postwar year. Without some of the measures adopted by the Diefenbaker government — particularly the winter w'orks program—unemployment during the past five years would have been much w'orse than it was.

But the Liberals have a strong case when they condemn the Diefenbaker regime for some of Canada’s current difficulties, because the loss of confidence in the Canadian economy by the world's investment community has been due largely to the way the Conservative government has handled economic issues. From the point of view' of external confidence, the worst of these was the manner in which James Covnc was relieved of his job as Governor of the Bank of Canada. Although that unsightly squabble had no connection at all with the country's chartered banks, many foreign investors interpreted it as somehow casting doubt on the integrity of Canada's entire banking system. By its repeated assertions during 19b I that Canada would retaliate against the Common Market countries with higher tariffs, and its bitter opposition to Britain's entry into the trading bloc, the Canadian government spread the impression abroad that it was only interested in preserving the international status quo. ‘ Mr. Diefenbaker." commented London's

usually sympathetic Daily Mail, “has got himself into the difficult position of opposing the future. After five years in office he and his cabinet still bring to their affairs an almost evangelical naïveté, to the despair of sophisticated Canadians and the irritation of Washington and London."

This was the kind of comment which most foreign observers were making about the Diefenbaker administration—an attitude bound to make our efforts at recovery that much more difficult. Domestic investors also quickly lost faith in the Conservative administration, but for different reasons. Their initial disillusionment was probably due to the consequences of the government's much-heralded Conversion Loan of 1958. This project, which was the biggest bond refunding operation ever attempted in Canada, was designed to extend the terms of Canada’s national debt by substituting long-term, high-interest bearing bonds for the Victory Loan issues then coming due. Three advertising firms were paid two million dollars by the government to promote the new issues, anil nearly all the holders of the Victory bonds converted their holdings. But so many purchasers sold them that six months later the bonds they had bought at $100 were being quoted at only $93 5/16 and by December 1960, they were selling at $88%. Ever since, the government has had to pay a higher price for money — thus disrupting the market for other issues.

Probably the one attitude of John Diefenbaker which has caused the most consternation among investors has been the prime minister's com-

plete disregard for the deficits that new spending for political projects automatically cause. To have budgetary deficits during times when the nation is in a business decline is sound economic theory, because otherwise the high taxes needed to balance the bmlget would act as a damper on economic activity. But when federal expenditures grow at the same time as deficits, then, as Graham Towers, the former Bank of Canada Governor puts it, “the national economy is not being given the chance to grow sufficiently to keep abreast of the state’s ever-increasing demands on it.’’ Also, much of the potential expansionary effect which the budgetary deficits might have had was offset by Bank of Canada policies during 1959 and I960 of restricting Canada's money supply, by keeping interest rates high.

Few Canadians are aware of the real size of the Diefenbaker government's deficits. Donald Fleming, when he was recently moved to the justice portfolio, had been minister of finance for 1,857 days. In that time, he had accumulated deficits ( not counting the depiction of the Unemployment Insurance Fund or the Special Defense Fund) of $2.50 billion. This meant that during his tenure in office, he was spending $1.30 million more per day than he was taking in through taxes.

If the dollar crisis had not occurred, and if the Diefenbaker government had continued spending money at the same rate as during its first five years in office for two more years, its total expenditures would have been equal to the total amount

of money spent by Canadian governments between Confederation in 1867 and 1946, including the cost of two world wars. it is, John Diefenbaker has already spent more money during his time in power than was expended on Canada’s immense defense efforts during World War 11.

These aren't merely rarefied calculations that affect only the confidence of investors. Every Canadian suffers from this mounting debt, because just like every other debt it must eventually be repaid. The interest Canadians are paying this year on the national debt amounts to more than $800 millions — an amount which exceeds the cost of the old age pensions.

The concept of national debt may be something that doesn't touch directly on the life of most Canadians, but unemployment or the threat of unemployment does. It is in the economy's ability to provide enough jobs that Canada really faces a bleak outlook. A secret report by the impartial Ciill Committee investigating the Unemployment Insurance Fund, released by the Liberals during last spring’s campaign, predicted a thirty-four percent increase in unemployment for the next two years. Frank S. Capon, a vice-president of Du Pont of Canada and one of the shrewdest businessmen in the country, recently forecast that unless something drastic is done about it, within five years one in every four members of the labor force may be jobless.

Such predictions are discouragingly easy to document. Nearly all of the men and women who'll be seeking work during the next five years can now be accurately counted. The largest group are the teen-agers—now in school—who'll be trying to join the labor force at the rate of at least thirty-five hundred a w'eek from now' until 1966. (Because these youngsters are the product of the unusually high birth rate during the immediate postwar period, they’ll be hitting the job pool at three times the number normal for recent years.) Add to this the many Canadians who will no longer be able to earn their living in agriculture and who'll try to move into industry, plus the three hundred thousand or so citizens who don't nowhave, but arc seeking, steady jobs. Thus even without counting the number of job-seeking immigrants who'll be arriving in Canada in the next few years, a total of more than a mil-

lion jobs must be created by 1966.

During the decade from 1950 to 1960. when Canada's economy was booming, the number of available jobs grew by only about 1.60 millions, or 160,000 per year.

To create the required extra one million jobs by 1966 means that we must somehow find new jobs for 250,000 people every year for the next four years. If during the boom years the Canadian economy was creating only 160,000 new jobs a

year, how can we now, in a period of economic stagnation, cope with half as many people again trying to market their skills?

The awful truth—which few politicians are willing to admit publicly—is that it now very much looks as if we won’t manage to achieve it. Aside from all our other troubles, Canada is beset by changing trade patterns which threaten to alter drastically even the traditional markets for foodstuffs and raw materials which first allowed

this colony to evolve into a nation.

The economists who spend their days plotting our business future agree that unless we make some kind of dramatic breakthrough that can lead us to an industrial renascence, the agonies of unemployment will continue to plague the natural vitality of this young country.

Whether such a breakthrough is indeed possible, and just how it might be achieved, is the subject of a second report to appear soon in Maclean's. ★