Floyd S. Chalmers August 15 1934


Floyd S. Chalmers August 15 1934



Floyd S. Chalmers

THE word, WORLD’S D-E-B-T,” troubles Sir Thomas can be summed White, up Canada’s in one wartime Finance Minister and member of Canada’s Macmillan Commission, not long ago remarked to the writer.

More recently, I was asking questions of Henry Ford in his office at Dearborn, Michigan, He said: “The debt

business is one business that has not suffered from the depression.”

In a Senate debate, Right Hon. Arthur Meighen said in June: “The heart and centre of the world’s present difficulties is debt.”

This spring, Sir Herbert S. Holt, President of the Royal Bank of Canada, was giving evidence before the Banking and Commerce Committee of the House of Commons. He startled the committee by stating that, in twenty-five years as a bank president, he had never been in debt to a bank.

But Sir Herbert Holt is a debtor. Even if his own books and the books of all his companies showed not a cent owing to anyone else, he would nevertheless be numbered in the debtor class. Everyone owes money. If you do not borrow it directly, your government borrows it for you.

When the Dionne quintuplets arrived in Northern Ontario last spring, each one of them was in debt from the second she was born to the amount of more than $855, which is the Dominion Government direct and indirect net debt jx*r person, plus $135 which is the average Provincial Government debt i>er person in Canada. Just in these two items alone the quintuplets, between them, owed $2,450.

If debt is a millstone, it is around your neck when you arrive in this world. But you will not take it away with you. If you are like the generations who have preceded you, you will not even do very much to pay off your share of the world’s debt. You will simply try to pile it up and hand it on to your children and your grandchildren.

How long can that go on? Maybe it cannot go on much longer. Maybe it has already gone too far. Maybe Sir Thomas White is right when he says that our trouble is D-E-B-T.

Discussion of that phase of the subject can come later. What we want to do first of all is to answer four questions:

1. How much do we Canadians owe?

2. To whom do we owe it?

3. What have we got to show for it?

4. How can we pay our debts?

What Every Family Owes

T\0 NOT look in your little black account book to find out how much you owe. That may tell you the amount there is still outstanding on your mortgage, how much the doctor still has coming to him, what your account is at the comer grocery store, and the balance of the installments due on your car.

But that would only begin to represent a list of your debts. There are some otlier very important amounts for which you have been made responsible.

As an average citizen, you owe $355 on account of the direct debt of the Dominion Government and the organiza-

tions whose securities it has guaranteed, such as the Canadian National Railways.

You owe $135 on account of your provincial debt. That at least is the average figure for all Canada.

You owe $125 on account of your municipal debt. Again, the average for Canada as a whole.

All these items put together reach the very tidy sum of $615. If we figure five people to the average family, the public debt per family amounts to $3,075. Whew !

But Canadians owe a great deal more money than that.

On the farms there are $675,000,000 of mortgages, which is a modest «'venteen IXT cent of the value of our farms.

No one has ever estimated how much the mortgage debt on urban property is in Canada. With $8,000,000,000 of improved .urban property, it is likely that the debt is not much short of a billion and a half there.

Canadian corporations have bonded debts outstanding of $2,250,000,000.

People who own policies in our life insurance companies have borrowed $360,000,000 against those policies.

These are the major capital debts.

In addition there are all kinds of current debts. For instance, various people in Canada have borrowed $978,000,000 from the banks.

And there is an untold amount of debt represented by installment sales agreements, current accounts of businesses and individuals, minor borrowings, accommodation loans of one kind or another, etc.

Make your own estimate of that. I have no figures to guide me.

There is one kind of debt we do not owe in Canada. Our governments do not owe a cent to any other government. We are not on the promising end of any war debts. But there are a couple of governments—Roumania and Greece— that owe us some money, and our chances of getting it back soon are not good.

Add all these debts together and, making very rough

allowances for the debts which we cannot accurately determine, you will see that we have mortgaged our country to an amount of much more than ten billions of dollars.

Ten billion dollars! A thousand dollars for every man, woman and child. What a grand time we had spending it! What a tough job it is going to be to repay it !

A very authoritative statistical organization made an attempt to add up all the debts of the people of the United States and to balance them against all of their assets. They found that the country owed more than it was worth. Their conclusion was that the United States, as a state in society, was insolvent.

But it is a peculiar thing about debt that you cannot figure it that way. They had written down the assets to current distressed values and had assumed that the debts would all be paid in full. It is overly conservative to write all values down to accord with present commodity prices, and it is foolish to assume that all debts will be paid off at their book value.

Who Are Our Creditors?

TO WHOM do we owe all this money? Some we owe at home and some we owe abroad, and the distinction is of great importance.

When you or I owe money to our butcher we can pay it by writing a cheque and sending it to the butcher or by handing him the cash. Eventually, in the operation of the economic machine we will, by that act, transfer to him either goods or labor, or a title to one or the other that we have acquired, possibly by our own effort or by inheritance.

In that simple transaction the economy of the country at large is not very seriously affected.

But it would be different if our butcher lived in some foreign country. Then we could not pay him unless goods or gold were shipped out of the country, or unless he or someone else decided to reinvest the money in Canada—which means simply that some other Canadian would assume a debt in order that we might get rid of ours.

I here is a very real difference between the debts the people of a country owe among themselves and the debts they owe abroad. In settling the first kind of debt they simply shift goods or services or pieces of paper around among themselves. The country as a whole neither gains nor loses. But the debts we incur or pay abroad enter into che whole international scheme of things. Paying interest on the money we owe abroad is sometimes a problem. Even if we have the wealth to make the payment, we have to find a way to send it to the creditor. It is easy to ship pieces of paper but they are not wealth, merely a title to wealth, and wealth is what must be transferred eventually.

So we turn first to a discussion of the money we owe abroad. There has been invested in Canada some $6,400,000,000 of outside money. The United States has sent $4,000,000,000 of it here; Great Britain, $2,200,000,000; other countries, the small balance.

But we cannot regard that all as debt. Some of it is the property of people who sent their money here as owners, not as lenders.

But there are about $800,000,000 of Canadian Government, provincial, and municipal bonds held by Americans; about $500,000,000 held by residents of Great Britain.

• °4tside . de*:>^ has proved rather embarrassing at times dunng this depression. When people in New York or London bought our bonds they made us promise to pay them m their own money, regardless of what happened to Canadian money in world exchange markets. We were ready to do so; we did not think of the Canadian dollar selling at a great discount. Our promises came home to roost when we were forced off gold and our dollar slipped. It cost us a

great deal to buy foreign currencies, to honor our bond. The Dominion and all the provinces did honor their bond. Most of the municipalities did also.

Finally, and fortunately for Canada, the United States also went off gold. Recently the pound sterling, the Canadian dollar and the United States dollar have all been selling at fairly close to their old parity in relation to each other, and the problem of meeting our foreign obligations is not as serious as it was earlier.

All of these currencies are selling at a discount in terms of gold or of French francs, but no one, in the Anglo-Saxon world at least, is paying gold these days whether they promised to or not, and we have no public obligations payable in French currency or any other European currency.

Last year Canadians had to dig up $225,000,000 of foreign exchange to meet our interest abroad and another $40,000,(XX) to meet maturing obligations. We got it by having a favorable balance of commodity trade, by shipping out our gold production, by borrowing a little new money, from the money tourists left with us and in other minor ways.

Before the great depression we never had any difficulty meeting all of our obligations abroad because we always had new money coming in for investment. That is why we could stand an unfavorable balance of commodity trade and still be prosperous. Outside investors loaned us the money to buy more goods than we wTere selling.

Despite all the outside money invested in Canada, we have not mortgaged ourselves very heavily to the foreigner or the Britisher.

Canadians own seventy-five per cent of their government and municipal bonds. And by far the larger proportion of our other obligations we owe to one another.

It is obvious that if we have a large debtor class in Canada, then we must have a large creditor class. When we begin to examine into the composition of this creditor class we learn that it is very difficult to divide the people of Canada into two new neat groups—one of debtors and one of creditors. Scratch a debtor and you find a creditor. Recently when a Western city defaulted on its bonds there was great excitement in another city which had bought those bonds for its own sinking fund.

Who are some of our major creditors?

The largest creditors in the country are the life insurance companies. They own $900,(XX),(XX) of tonds ; $440,(XX),(XX) of mortgages. Their |x>licy holders have borrowed $360,000,000 against their policies.

But the life insurance companies owe all this money in turn to their policyholders. It is there to be drawn on when needed to pay death claims, annuities, cash surrender values, etc. The life companies merely hold it in trust for

some millions of people. They have set up policy reserves, in the names of the policyholders, of more than $1,200,000,000.

There are nearly 7,(XX),000 life insurance policies in force in Canada. The holders of these 7,(XX),(XX) policies are the real creditors of the governments and the corporations, the farmers and the home-owners, whose tonds and mortgages are held in the vaults of the companies.

Another large .group of creditors are the mortgage companies and the trust companies. These hold about $200,000,000 of mortgages and atout $30,000,000 of government and other bonds. They are big creditors. But they are also large debtors.

For every dollar of their assets they owe nearly a dollar to someone else, possibly a working man with a small savings account; possibly a farmer who has bought a $100 or $500 savings certificate as an investment; possibly a schoolgirl whose father has died and who is getting her education on the income from the small estate left to her which a trust company is managing.

There are, too, the banks. Governments owe them $800,(XX),000 on account of Dominion, provincial and municipal bonds held and current loans.

People who have borrowed money under call loans owe them $100,000,000, and Canadians who have borrowed to finance business transactions owe them $880,000,000.

But outside of their capital and reserve funds, the banks o¡)erate with other people’s money. The banks owe this money to their depositors, $1,900,000,000 in all. And there are about four and a half million savings accounts in Canadian banks.

Even the banks’ capital stock, which supplied a portion of the money on which they operate, is widely distributed. There are more women than men who own stock in Canadian banks. The directors of the banks are not in many caws large shareholders. The stock is distributed all over the country in small blocks, a few shares here and a few shares there. It is hard to think of the banks of Canada as a small and monojx)listic group of dominating financiers.

Thus are the creditors and the debtors intertwined. The farmer owes someone for the mortgage on his farm; in turn the bank owes him his bank balance, and the life insurance company holds in trust the fund that is accumulating under his insurance policy.

There is no debtor class and there is no creditor class, taking the country by and large.

When we look at enormous debts and ask to whom do we owe them, the answer is that we owe them very largely to ourselves.

Why We Borrowed

■V\7TIAT HAVE we got to show for all the money we

W have borrowed?

People do not borrow money just for the sake of getting into debt. They usually have a use or a need for it. tometimes it is borrowed to pay for water that has flowed under the bridge, such as the money you borrow to pay a doctor's bill or the money a government borrows to meet a deficit in its year’s accounts. When that happens, an item is set up in the liabilities side with no very tangible offsetting item on the other side of the balance sheet. It is borrowing of that character that runs an individual or a corporation or a government into insolvency.

There is another kind of debt creation that is not very satisfactory. That is borrowing money to buy something that turns out to be not very valuable after all. Canada owes a great deal of money that was spent on railways in excess of our requirements. We have torn up a great many of the tracks, but we have not been able to tear up the bonds wre signed. The pulp and paper companies issued hundreds of millions of dollars of bonds to build plants capable of producing more newsprint than we could sell. They are getting out of some of their debts by tearing up their bonds and giving the creditorsthe investors—new ones for smaller amounts. That is called bankruptcy or reorganization.

But most debts are assumed more carefully and for more productive purposes. People borrow part of the cost of a farm or a house, and when they are through, they have the farm or the house, subject, of course, to meeting their payments. Governments borrow to build highways and they have the highways. True, if they are improvident in their finance, as many of our governments are, the highways wall wear out before a start has been made at paying off the

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bonds. By and large, the creation of debt is simply an evidence of progress. In most

cases where it is not _

progress or development, we at least think it is at the time.

The last time the Dominion Bureau of Statistics estimated our national wealth they worked it out at $31,000,000.000. We had $8,000,000,000 worth of farm values, $3,150,000,000 of steam railways, $8,250,000,000 of urban property, $2,250,000,000 of industrial plants (counting their stocks on hand), and numerous other items of tangible realizable wealth. All of the debts we have been talking about do not add up to anything near $31,000,000,000, so that we are not insolvent, on paper anyway, the way the American people were supposed to be in that estimate we spoke of earlier.

But the date of that last estimate of our national wealth was 1929. And what a lot of difference a few years make!

Where is there a farm in Canada that is worth today what it was in 1929? Or a house? Or a factory? Or a mile of railway? Or almost any other asset, except perhaps a gold mine?

Values have changed. Prices of all material articles and of manual services have come down. All these things are worth less. But no one can figure how much less, so the Dominion Government has just thrown up its hands and decided not to try to make another estimate of the national wealth just now.

But while the values have come down, the debts have not come down in any large measure. In fact, the sum total of the debts of the people has gone up during the depression.

It takes a thumping bad depression, with a heavy fall in prices and values, to make people realize that they have got up to their necks in debt, whether as individuals, as a nation, or as a society at large.

Consider that six billions of dollars of public debtWhen prices fell by a third from the ix?ak, the net weight of that burden of debt increased by fifty per cent. It took fifty per cent more work by the Canadian farmer and the Canadian workingman to produce enough goods and services to meet the charges.

Thus the tangible values supporting the debt fell. And at the same time the total of the debt was rising because of the necessity of borrowing money to see people through the depression.

When times were good we mortgaged the future. Then when times got bad we increased the mortgage to tide us over. There was not much difference between individuals and governments.

Oh. yes, we have plenty of assets to support our debts in this country, and we are a long way from being insolvent. But our margins have run dangerously thin. If we are to have a vigorous and healthy national

life we have to approach the problem of reducing our debt the national debt, the provincial debt, the private debt.

The History of Debt

NOW, through the course of history, people and nations have found many ways to catch up with their debts when those debts seemed to be getting too heavy for them.

During various of Great Britain’s wars of the middle ages, the nation got almost intolerably in debt. Then over the term of a few generations the debts would be wiped out, sometimes by debasing the coinage; more often by sound finance and the building up of surpluses in the public treasury. But also the real burden of the debts was lowered by a steady rise in prices, sometimes boosted by new discoveries of gold or by the opening up of new colonies.

Between the time of William the Conqueror and of Napoleon, prices increased more than twenty fold. In Britain, the first great rise in prices came with the ravages of the Black Death from 1349 onward. The discovery of silver in America in the 1500's brought another rise; and the European wars that culminated in the Napoleonic campaigns were effective price stimulants. Throughout most of the last century, prices fell. The trend was reversed when the discovery of the cyanide process of gold extraction enabled the Rand to be developed; a new peak was reached in the Great War.

Thus, most of the present generation knew only of rising prices until recent years. They had not learned of the effect on debt of falling prices.

The fact that the world has been piling up a burden of debt since the dawn of time has been obscured by its rising material prosperity and the fairly steady rise in prices, punctuated by periods of prolonged decline such as those which ensued after the Napoleonic wars and the Great War. Whenever prices have declined we have worried about debt; whenever prices have risen we have forgotten about debt. Rapidly rising prices extinguish debts.

That is why inflation is so popular today with many people. If we could multiply present prices by some swift monetary device we would certainly lighten the deadweight of debts to a remarkable degree. But, of course, while we would effect a readjustment between Smith as a debtor and Jones as a creditor, we have seen that Smith and Jones are both debtor and creditor.

And when you wipe out debts by deliberate inflation you also wipe out the nation’s investment reserve and working capital at the same time. That is why Germany,

which was a nation virtually without debt either at home or abroad after the great

_ mark inflation of the

post-war period, never re-established itself economically and drifted through one social and political disturbance after another until Hitler came into power.

Russia wiped out its foreign debt after the revolution by refusing to recognize the obligations of the Imperial government, but Russia has been desperate for capital ever since.

Nations can default, 01 they can inflate, which amounts to much the same thing, as a process for getting rid of debt.

Individuals cannot inflate, but they can default. They can claim the protection of the bankruptcy courts or they can make settlements with their creditors. That is the process that is going on quietly now, reducing the burden of private debt throughout the country. Even farm mortgages are being written down, although few farmers are being dispossessed—almost none by the big lending institutions.

But all these methods are inconclusive as solutions for the problem of debt. The way we as a nation will reduce our debts will be by making a beginning at paying them off. The first step in paying off debts is to stop incurring new ones. The golden age of Queen Elizabeth was a period of debt reduction in Britain.

The debt that everyone owes is the governmental debt. We are not doing very much about reducing it. The Dominion Government has no plan for retiring the public debt. There are a few bonds with sinking funds, but they are only a fraction of the total. The provinces have bonds with sinking funds, but they, too, are piling up debt rather than paying it off. They pay their debts as they mature by incurring new ones.

Public borrowing is merely deferred taxation. Debt means taxes. Money has to be raised to pay the interest and eventually to repay the debts. If we want to get our taxes down, we have to get our debts down first.

Some things may happen to reduce the weight of our public debts in Canada. We may get a great many more people in the country and let them share our debt burdens. Prices may rise with remarkable swiftness and make the debts easier to carry. We may be able —by gradual refunding or forced conversion—to reduce interest rates still more and thus make the debts easier to support. These are but partial solutions.

What we should do is to start reducing our debts to a reasonable figure. We have no moral right to pass them on to our children and our grandchildren without passing on to them assets commensurate with the liabilities. Very seldom, anywhere in the world, does public borrowing establish an asset equal to the debt.