Probably no idea has been more widely propagated during the last few years than that a way out of the depression in Canada could be easily won by a thoroughgoing dose of inflation. In parts of western Canada the pursuit of cheap money has become not merely a cult but, with many of the characteristics of mass hysteria, has all the intolerance of an evangelical movement; anyone who ventures to disagree with the devotees of social credit is regarded by them as being either stone blind to the master evil in our present economic situation or woefully recreant to the obligations of human society. There are, however, many people in Canada, not associated with the social credit groups, who believe that the way to recovery lies along the road of inflation. The precise form that inflation should take differs from person to person but the general idea is in the air and is worthy of examination and, if possible, of some clarification.

Federalism has been described by Dicey as “a political contrivance intended to reconcile national unity and power with the maintenance of ‘state right’”. Dr. Schmitt, a contemporary German student of federal institutions, has stated that “the nature of union consists in a dualism of the political existence, in a combination of federative common existence and political unity on the one hand with the continuance of plurality, of a pluralism of political individual unities, on the other”. Lord Bryce had expressed the same thought in more picturesque language in his earlier study of federal institutions in the United States.

Some explanation of the origin of this short paper may assist in understanding its content and point of view. It is the result of a study of certain official papers dealing with cases of federal stress. These papers deserve, and indeed demand, careful study by all who exert any influence on government policy in Canada. I refer to (a) A Submission on Dominion-Provincial Relations and the Fiscal Disabilities of Nova Scotia within the Canadian Federation, presented by Professor Rogers to the Nova Scotia Royal Commission Provincial Economic Inquiry (1934); (b) Province of Nova Scotia, Report of the Royal Commission Provincial Economic Inquiry (1934), especially the supplementary report by Dr. Innis, and the memorandum by Professor R. A. MacKay on the “Financial Relations between the Provinces and the Dominion” published in the volume of Appendices to the Report; (c) British Columbia's Claim for Readjustment of Terms of Union presented by the Honourable T. D. Pattullo, the Honourable G. McG. Sloan, and the Honourable John Hart (1934); (d) The Case of the People of Western Australia in Support of their Desire to Withdraw from the Commonwealth of Australia (1934). Though these official papers have led me to try to think through the economic problems, and the economic philosophy, of federalism, the position I take is not new to me. It is simply a development of an attitude towards problems of regional conflict with an attempt to determine what difference exists when the state is federal rather than unitary. My attitude towards problems of regional conflict is exemplified in a paper contributed last year to The Canadian Economy and its Problems, but no reference is there made to the conflict of provinces as such. In view of this approach it may be less surprising if I add to the list of official papers given above one from the United Kingdom; (e) Reports of Investigations into the Industrial Conditions in Certain Depressed Areas of I West Cumberland, II Durham and Tyneside, III South Wales and Monmouthshire, IV Scotland (1934, Cmd. 4728).

As one reads the report of the Nova Scotia Royal Commission of Economic Inquiry, he becomes aware that he is in a new area lying between the field of economics proper and the field of political science. In this area the economist gropes uneasily, finding the familiar concepts of economics strained in an attempt to answer unfamiliar questions. There is an important difference, however, between the case for Nova Scotia, as it was presented to the Royal Commission and the case for the Prairie Provinces. A great part of the brief for Nova Scotia is concerned with negotiations preliminary to the passing of the British North America Act and many of the grievances rightly go back to that period. The Prairie Provinces entered a Confederation already in existence with a lively sense of benefits to be obtained. The alternative was not, as for Nova Scotia, of coming into Confederation or of remaining a separate colony, but of coming in or of remaining a territory of the Dominion. We were not beguiled into Confederation with the connivance of the secretary of state for the colonies. Nor have we since coming into Confederation seen our formerly prospering industries languish and die. We are not obsessed with the memory of a glory that has departed. On the contrary, our growth was steadily upward, interrupted only by disturbances that were common to the whole country. Our protest is hot concerning what we once were and now are but rather about what we are now and what we might be,—but this does not mean that the protest is any the less real. The protest of to-day is not new in anything except its vigour and yet it manifests a difference in degree that is equivalent to a change in quality.

In its report of 1926 the Duncan Commission found the claims of the Maritime Provinces for a larger federal subsidy so just and so urgent that it recommended an immediate increase in the form of interim payments (which were to form the minimum of any increased subsidy) and that the Dominion government should take immediate steps to secure “a complete revision”, “by detailed determination and assessment”, “of the financial arrangements as between them and the maritime provinces”.

The White Commission was accordingly appointed by the federal government in September, 1934, on the written request of the premiers of the Maritime Provinces to make this financial settlement. Sir Thomas White, as chairman, and Edward Walter Nesbitt, both of Ontario, and Chief Justice J. A. Mathieson of Charlottetown, P.E.I., were the Commission. Judge Mathieson brought in a dissenting report. Another Maritime commissioner would probably have changed materially the amount of the increase recommended, since in a report based not upon any accurate standards of measurement but upon “broad and general considerations”, political opinions and personal bias are important. Probably the personnel of the White Commission was not so favourable to these provinces as was that of the Turgeon Commission to the province of Manitoba. Yet the White Commission accepted without question the recommendations of the Duncan Commission and the Maritime Provinces were allowed to present their case before the Duncan Commission without any contesting case of the federal government.

It is a current fashion among economists of certain schools to spend a great deal of time and energy in attempting to ascertain the incidence of a given protective tariff upon some particular fraction of the total area at whose borders it is collected. This is not at all surprising, for economists are nothing if not obliging, and when they find a demand they are usually ready to supply it, just as lawyers when they find a case are usually ready to plead it; and there happens to be a keen demand at the moment for arguments which will support the claims of sections—Canadian provinces, Australian states, innumerable other sorts of local organisms within greater organisms—for better treatment by, or for separation from, their respective central authorities. Those economists who are not busy calculating this tariff incidence as felt by the village of Podunk or the Eastern Townships or the Peace River Valley are equally busy denouncing the methods employed by the other economists in their calculations. And I must say that I think the denouncers are doing the more useful job of the two.

In the brief for the Province of Nova Scotia, presented to the provincial Royal Commission inquiring into Nova Scotia's disabilities under the Canadian federal system, Professor Rogers includes an estimate of the regional incidence of the customs duties. This is the first study of its kind to be made in Canada. It may be expected to give rise to a good deal of controversy on account of the complexity of the problem and because other provinces are already beginning to make parallel estimates which do not altogether agree with those made for Nova Scotia. Professor Rogers's discussion of the burden of the tariff was condensed into a single chapter, owing to the large amount of general historical and argumentative material which it was necessary to include. It is therefore desirable to quote from the unpublished minutes of evidence in order to do full justice to the reservations which Professor Regers made in putting forward his estimates. In Halifax on August 13, 1934, he said:

We form a new and distinct political organization for promoting by a joint endeavour, the national interest upon a particular principle on which we are agreed.” So ran the “Address of the Canadian National Association to the People of Canada” in January, 1874. The Canada First movement of the early 1870's represents the first intrusion of intellectuals as such into the discussion of Canadian public problems. Its story has been surrounded with a romantic halo by our Canadian bourgeois political historians, prone as they are to fall an easy prey to the rhetoric of nationalism wherever they run across it. But the moral which really emerges from a study of the young idealists of Canada First is the difficulty of defining “the national interest” as something which comprehends and transcends those particular group interests whose competition with one another has ever since Confederation formed the subject matter of our day-to-day federal politics.

Between 1867 and 1934 over 136 constitutional cases have faced the Privy Council with the task of saying what the Canadian constitution means. Despite those cases, or because of them, it is still quite certain that unless legislation falls clearly within one of the specific heads of s. 91 or s. 92 of the B.N.A. Act, it is virtually impossible to guess where legislative authority over any question will finally be found to reside. In practice this depends not only on the Act and the cases but in part on the way the issue is raised and presented and in part on each judge's personal inclination towards federal or provincial authority. The further circumstances that the form of the proposed reform legislation has not been finally settled at the time of writing increases the difficulty of even describing fairly the constitutional issues raised by the government's social legislation which is the subject of this paper. It is like guessing what attitude the Privy Council in England will take to a series of constitutional earthquakes that have not yet happened.

In all this uncertainty one thing at least appeared to be certain. This was that everything proposed in Mr. Bennett's policy of social reform was beyond the powers of the Dominion. Out of all those who considered the question before the current session of Parliament, only four authorities seem to have thought it possible that the Dominion might have jurisdiction. The situation was recognized by Mr. Bennett last August when he wrote to the provinces indicating his intention to call a Conference to discuss, among other matters, the question: “Are the provinces prepared to surrender their exclusive jurisdiction over legislation dealing with such social problems as old-age pensions, unemployment and social insurance, hours and conditions for work, minimum wages, etc., to the Dominion Parliament? If so, on what terms and conditions?” But the provinces' cool response to this letter led to the proposed Conference being abandoned, and in January Mr. Bennett in five radio speeches broadcast the policy of reform. In introducing the Employment and Social Insurance Act on January 29, 1935, Mr. Bennett set under way the coach and four he was starting to drive through current conceptions of the constitution, if not through the constitution itself. It might almost seem that his reading of the speeches of the Fathers of Confederation led him into the error of thinking that the constitution was what they intended it to be.

The great economic depression from which we still suffer to-day has dealt a severe blow to individualistic thought, and a social or collectivist tendency has set in. The individual producer is no longer left to decide for himself what he wants to export and how much and at what price. Restrictions are put upon him under the Natural Products Marketing Act with regard to quantity, quality, and prices, to which he must submit in the interests of industry as a whole, although it may be to his own individual disadvantage. These restrictions originate as a rule from a voluntary agreement among producers. As soon, however, as the state recognizes the importance of such a regulation in the interests of national economy, it enforces it by a law, so as to protect the producing community and the general public against such producers as are not sufficiently farsighted to fall into line of their own accord. But the state must go only so far in exercising this influence and control over production and commerce as is necessary in the interests of the community, without limiting too much the private initiative which is essential for commercial success. Those aims are by no means incompatible, but are complementary to one another, like authority and freedom in the purely political sphere.

Canada and the United States seem to have accepted the principle of unemployment insurance almost simultaneously and to have recognized that a successful scheme must be substantially national in scope. The differences in the official plans, now under consideration in each country, make it of interest to trace briefly the development of American opinion, to note the different methods selected to achieve national uniformity despite the constitutional limitations on the competence of the federal governments, and to comment on certain major provisions of the Canadian Bill in the light of current American opinion.

The American attitude to unemployment and unemployment insurance or relief has developed through a series of distinct stages, which may be briefly summarized. The first Unemployment Insurance Bill introduced into any American Legislature was the Huber Bill of 1921 in Wisconsin. It was patterned after the usual Workmen's Compensation Act and laid the foundation for a distinctively American belief that the primary purpose of unemployment insurance should be to promote the stabilization of employment by giving employers an incentive to avoid the small but known costs of unemployment compensation. The wide acceptance of this thesis has definitely conditioned American developments in this field. From 1923 to 1929 there developed a unanimous conviction, that there was no unemployment, and that there could be no unemployment because the United States had sloughed off the shackles of European political economy and had entered a new economic era, in which a serious recession of business was inconceivable and from which competent management would eliminate possible fluctuations in production and employment. To suggest otherwise was heresy. During this same period skilful propaganda succeeded in stigmatizing unemployment insurance as a demoralizing “dole”, destructive alike of individual character and national prosperity. So strong were the emotions associated with this belief that the discussion of unemployment insurance was hardly tolerated; it verged on sedition. After 1929 the undeniable growth in the volume of unemployment compelled the successive abandonment of three cherished principles with respect to unemployment relief: that relief was unnecessary because prosperity was just around the corner, that necessary relief should and could be provided by private charity, that necessary public relief should come from local authorities. And by 1933 the federal government was forced to assume the major burden of unemployment relief on an unprecedented scale. The propaganda of the dole came home to roost. With one-sixth of the total population on public relief, unemployment insurance again entered the realm of possible discussion. But it was necessary to effect a transition by persuading American citizens that it could, should, and would be provided voluntarily by private employers. This was faith—the testimony of things hoped for, evidenced by very, few seen experiments—and was intimately associated with the doctrine of stabilization.

It is a satisfaction that the unemployment insurance legislation now proposed in Canada contemplates a national insurance and placement system as against the federal-state machinery which would be established by the Social Security Bill before the United States Congress. Argument based on the evolution of unemployment insurance in other countries or on the nature of insurance must favour a national system. If the Bills being considered by the two countries are passed in substantially their present form, Canada will have outstripped the United States in unemployment insurance and placement legislation. Indeed, for some years Canada has been to the fore not only in this field but with respect to social insurance and its administration generally. The Canadian law providing for a federal-provincial employment service was passed in 1918, the corresponding Wagner-Peyser Act in the United States in 1933. Workmen's compensation, the one important form of social insurance in which the two countries have had any considerable experience, has provided a high degree of uniform protection in Canada and practically complete coverage although controlled and administered entirely by the provinces. In the United States in an experience extending over almost the same period four states still have no legislation and in the others the great differences in benefit scales, organization, and procedure result in highly dissimilar measures of protection for the citizens of the country. In both old age and mothers' allowances conditioned on a means test, a much larger proportion of the population is covered in Canada than in the United States, and with respect to the former, the government of Canada has been assisting the provinces for several years while in the United States the federal government is only now considering aid to the states.

In the interpretation of the British North America Act the question which seems of paramount importance to the lay mind—and sometimes to the legal one—is “what was the intention of the Fathers of Confederation when the sections under consideration were enacted?” If it were not apparent before, it should have become apparent as a result of the Aviation Case and the Radio Case that any such test must be entirely fallacious. The Fathers of Confederation could not have anticipated the development of the methods of communication which were under review in these cases. Still less could they have anticipated the problems of modern business. They could not have thought that the Dominion government would require the power to protect majorities engaged in business against the reckless acts of uncontrolled minorities. The thought was rather of the necessity for the protection of minorities against the oppressive combination of majorities, and the gradual concentration of business in the hands of the few. We have, then, in the questions which arise in connection with the Natural Products Marketing Act, in a broad sense, a new constitutional question. With reference to the questions of aviation and radio new questions also arose, but the basic principles governing communications were the same as formerly. The personal and psychological factor which enters into the development of modern business was absent. The judgments in the Aviation and Radio Cases, indicating as they do some of the principles justifying the enactment of the Natural Products Marketing Act as Dominion legislation, demonstrate the difficulty which arises in suggesting any amendment to the constitution which would obviate possible contention on the question of jurisdiction. While our federal scheme exists and business affairs develop, that which to-day is a matter of provincial concern may to-morrow be a matter affecting the Dominion as a whole or affecting interprovincial relations.

Legislation in Great Britain and the United States. A few of the important differences between Canada's Natural Products Marketing Act and the British Marketing Act might be worthy of note. The Dominion Marketing Board cannot engage in marketing, fix prices, or control production and, of course, none of these powers can be delegated to Local Boards established under marketing schemes. However, as indicated in section 4, paragraph 1 (a), of the Act, a Local Board may designate a marketing agency or agencies, which will be the agency of the persons whose product is regulated, through which the product may be marketed, but the Local Board cannot engage in marketing. The British Act of 1931 provides that a Board created under its authority may engage in the marketing of a product. It may acquire facilities, take control of the product, and dispose of it and in so doing, may establish prices. The British Act also provides a definite percentage that must support a scheme before assent can be given to it.

That part of the Agricultural Adjustment Act of the United States which deals with marketing agreements in some respects resembles the Natural Products Marketing Act but there are some marked differences. Under marketing agreements provision may be made for setting prices. The Control Committees which administer marketing agreements are not corporate bodies and enforcement of regulations rests with the Administration in Washington. There is no provision for the designation of a marketing agency under the United States legislation. In both the United States and British legislation provision is made for Consumers' Councils or Committees to investigate schemes and agreements from the consumers' standpoint; there is no such provision in the Canadian legislation but, as I have mentioned above, the Canadian Act aims at the protection of both producer and consumer by making it an offence for anyone to charge an excessive amount for the marketing, processing, or converting of a natural product.

Government attempts to raise the price of wheat have been so widespread during the past six years that some such action by the Canadian government was inevitable. The particular form of Canadian efforts was the result of circumstances. Participation in the London Wheat Agreement came because it was possible to make that Agreement, and probably no other international wheat agreement. The guarantee of operations conducted in the wheat futures market by Canadian Co-operative Wheat Producers Limited, the Central Selling Agency through which the western pools formerly sold their wheat, resulted from the special difficulties of that agency at a particular time. Considering the magnitude and importance of the operations, there has been comparatively little criticism, until recently, of government market intervention although lately there has been controversy with respect to the way in which it has been carried out. It is to be hoped that no difference of opinion as to the correctness of procedure at different times during recent years will obscure consideration of the future course of action.

The pulp and paper industry has fallen on evil days since 1929. It is still our largest manufacturing industry both in value of output and amount of payroll, and still ranks second only to wheat among the export staples on which our economic life is built: in the calendar year 1934, wheat provided just over 20 per cent, of the value of our exports; pulp and paper, 17¼ per cent, a gain of 4¼ per cent, since 1930. Unhappily it is also second only to wheat in the calamities which have overtaken it. In 1933, its salary payments were barely 68 per cent, of the pre-depression figure, its wage bill not quite 50 per cent., its bond and debenture interest payments less than 15 per cent., its dividends about 9 per cent. Mr. C. P. Fell, in his valuable chapter in The Canadian Economy and its Problems, says that “mills having 58 per cent, of the total Canadian [newsprint] capacity are in bankruptcy or receivership, or are passing, or have recently passed through, some form of reorganization; … they include five out of eight of the larger newsprint manufacturers in North America.”

The general decline in prices and consumption will explain only a small part of the disaster. It is tempting to dismiss the rest as no more than an instance of the common plight of all export industries; especially as the only section of the pulp and paper industry in a reasonably satisfactory financial position is the small group of firms producing fine paper and specialty goods for the protected home market. But this explanation also is hardly adequate. The Canadian wheat grower has had to contend against the vagaries of nature, against foreign tariffs, quotas, and other such restrictions, against a considerable expansion of home production in his chief markets, and against the formidable competition of exporters from countries with depreciated exchanges. The Canadian newsprint manufacturer, on the other hand, faces no such obstacles. On the contrary, he has free entry into the United States market, and, until the worst of the depression was past, enjoyed the advantages of a depreciated exchange, netting him at times as much as $8.00 a ton, and an average of $3.00 in 1933. It is necessary, therefore, to look deeper to discover why the industry has suffered such exceptionally severe losses.

Whatever may be regarded as the immediate motives which impelled the Price Spreads investigation it will be generally agreed that a careful examination of the Canadian economy as a whole is long overdue, and that present conditions and current trends require the formulation of intelligent and co-ordinated economic policies. We are now in the sixth year of a major industrial depression and, while there has been a substantial measure of recovery from the low points of 1933, there is no clear indication of continued improvement and there is at least a possibility of the crumbling of the statistical ledge to which we have been rather precariously and nervously clinging for the past twelve months. Canada, with its large measure of dependence on the exports of two or three staple products, has always been in a vulnerable position, but this has been greatly accentuated by the widespread trend towards economic nationalism and self-sufficiency. Our professional optimists to the contrary, Canada has been one of the heaviest sufferers during the past five years and the outlook for the future is still uncertain and still threatening.

It is not necessary to elaborate the familiar problems of the Canadian economy: an income that fluctuates violently with the volume and value of our exports, and expenses that are made highly rigid by the dominating factors of heavy overhead costs; the wide differences in the technological problems of the several major industries; the concentration of staple industries in specialized geographical areas and the growing political and cultural domination of metropolitan centres which accentuate political and economic sectionalism, and at the same time a high degree of concentration of the control of finance, commerce, and manufacturing on a national scale—a concentration to which it is difficult to apply social regulation and control within the present framework of the British North America Act.