It is felt by many people that the refusal of the government of Alberta to accept the Loan Council principle, and the similar views expressed by other provincial governments, have sounded the death knell of a Loan Council in this country; and moreover, that Mr. Dunning's recently announced modifications of the plan will have little effect as a revitalizer. It is my belief that the scheme of individual provincial Loan Councils, while desirable as a means of giving the Dominion government a measure of control in situations where it has been obliged to become financially interested, is not calculated to pave the way towards a more comprehensive system of controlling government borrowing, along the lines of the Australian Loan Council. A more effective instrument for this purpose might well prove to be the National Finance Council; its evolution into a body with effective powers of control may take a period of years, but that is not necessarily an objection, since in matters of constitutional development the tortoise not infrequently defeats the hare. This, in brief, is the thesis which is developed in the following paper.

For the purpose of this paper, discussion is limited to the control of federal and provincial governmental borrowing, and no consideration is given to the control of municipal borrowing. This is not because the latter problem is lacking in importance, or is irrelevant to the whole problem, but since the municipalities are the creations of the provincial government, and because they vary so widely in size, etc. , their control presents many fresh problems, the consideration of which would more than double the length of the present paper.

The Legislature of Alberta has distinguished itself by enacting the most drastic reform measures ever seen in Canada. Supported by a very large body of public opinion, it has reduced debts, both public and private, has attempted to take several matters out of the hands of the Courts, and has, so far as legal enactment could do so, substituted the people’s own credit—Social Credit—for the financial credit which has hitherto been relied on. It is thought that this substitution is possible and might be complete. Whether or not this belief is sound, time only can tell. The present, however, offers a good opportunity to survey the situation in the light of the circumstances of the province and the general characteristics of its people.

When Mr. Aberhart's government took office in August, 1935, it found the provincial treasury empty and a long series of budget deficits. Almost the first act of the new administration was the appointment of Mr. R. J. Magor, a well-known Montreal industrialist, to make a report on the financial position of the province preliminary to an attempt to balance the budget. After a report from Mr. Magor, the Hon. E. C. Manning, acting premier of the province, on December 5, 1935, wrote to the investment houses and chartered banks stating that the government had “been forced to the conclusion that an adjustment in our debt charges seems unavoidable if we are to meet our necessary obligations and balance our Budget”. The co-operation of the investment houses and banks was requested in setting up a medium for negotiation with the holders of Alberta securities with a view to converting the existing indebtedness of the province amounting to about $160 million into new securities bearing “an interest rate of approximately two and three quarters per cent. plus the full Sinking Fund” which the government felt “would approximate the annual capacity of the Province to pay on debt account”. Some compensation for a lower interest rate would be afforded through “alteration of maturities and increased assurance of security”, though it was asserted that the government had “not formulated any cut and dried plan because it desires fully to learn and consider the views of the holders of the securities”. With the Dominion-Provincial Conference about to meet in Ottawa and much current discussion of Loan Council schemes to refund provincial indebtedness under Dominion guarantee, Messrs. Elliott and Walker observe, concerning the attitudes of investment houses to the Alberta government's proposals, that “it was apparently considered unwise to intrude into inter-governmental plans and no complete replies to the Government's suggestions were received” (ch. ii, p. 2).

It is only since the War that federal-provincial financial relations have received serious attention. In the years up to 1914 there was much petty bickering about better terms, but most of this was political by-play. The growth of Dominion and provincial expenditures was at about the same rate, and the distribution of functions and fiscal resources between the governments appeared to be in balance. The War was responsible for a major dislocation. The Dominion was forced to reach into the field of direct taxation and since 1921 the balance of fiscal superiority has swung heavily in its favour.

During the post-War decade 1919-29 the Dominion proceeded to liquidate some part of its War debt, and, while reducing rates of taxation, it did not feel able to relinquish its hold on any important sources of revenue. The trend of Dominion expenditure and debt was slightly downward. But, as everyone knows, the trend of provincial expenditure and debt was sharply upward. Ordinary provincial expenditures were $76,404,000 in 1919 and $177,542,000 in 1929 (an increase of 132 per cent.), while bonded debt and treasury bills amounted to $304,146,000 in 1919 and to $895,334,000 in 1929 (an increase of 198 per cent.). The increase in the burden of the debt was greater than these figures indicate, because interest payments grew from $11,926,000 in 1919 to $41,207,000 in 1929 (an increase of 245 per cent.). It is not possible to show in detail for what purposes the increase in expenditures took place. Ordinary expenditures can, of course, be analysed and it will be convenient in considering them to omit expenditure for interest. Ordinary expenditures (omitting interest) rose by 112 per cent, from 1919 to 1929. But there was great variation in the rate of increase of the principal items. Thus ordinary expenditure for highways and bridges rose by 152 per cent., for education by 145 per cent., and for welfare functions by 154 per cent. All other items increased only by 78 per cent. In this remainder is expenditure for such purposes as legislation, legal administration, and civil government, which rose by 34 per cent., 69 per cent., and 83 per cent. respectively.

The present paper is intended as the background to a more detailed discussion of the facts of agricultural debt adjustment. I propose to discuss briefly the nature and objectives of our machinery of agricultural debt adjustment, the background against which it works, and some of the more important difficulties encountered in practice. The observations are based largely upon experience acquired in the West, although the setting concerns the country as a whole.

Problems of debt adjustment are primarily problems in the economics of distribution. Measures taken in this direction affect transfers of income between individuals, groups, and sections of the country. Their chief objective is to relieve the pressure on exposed groups and to allay the tensions created thereby. They constitute a part of the machinery of adjustment so essential in an economy subject to extreme variation of income and afflicted with rigidities which obstruct or divert forces tending to equilibrium. The tendency has been to concentrate upon the economics of the long run and to ignore obstacles to the free play of such forces. The importance of these obstacles is most manifest in the lower phases of the business cycle, and the presence of corrective or compensatory measures is in large part due to the cumulative effects of the inflexibility characteristic of a continental type of development and to the difficulty of planning for an economy in which variability is so marked. The results are seen in a wide range of expedients of which debt adjustment is an example. Difficulties arise owing to the failure to distinguish between social and pecuniary costs, to the widely different interpretations of what the term “justice” implies, and to differences in points of view which range from an insistence upon a strictly legal interpretation of rights and obligations to demands for debt reductions upon the basis of present income.

The Report of the Alberta Bondholders' Committee contains the most detailed application of Canadian national income figures yet published for purposes of argument. Owing to the difficulty of breaking down national figures for provincial purposes, and the important effect of small errors in the total income upon the residual “margin of income”, the corrections presented below are of interest. Certain deductions from Alberta's income are made to avoid double counting (table I) while the value of “necessary expenses” is estimated with more care (table II).

A detailed explanation and justification of the revised estimates of income in table I is given below in section B, and of table II within the table, and in section C. It is only fair to add that there is more room for difference of opinion in the interpretation of necessary expenses than in correcting estimates of income. More than statistical technique is involved, as there must also be some value judgments.

In a few economics text-books the labour market is still an area in which the free play of supply and demand brings about the equation of wages to the marginal product of labour. But the modern economist knows very well that “free competition” and “a living wage” are often incompatible, and that free competition itself is to-day little more than an expository device. The determination of wages, and of labour conditions generally, must take into account two important sets of influences, (a) the circumstances which affect the wage bargain between employers and employees, and (b) the extent to which “minimum wages” and basic living and working standards are fixed by the state. To the economic historian each of these opens up long chapters of social movements and state legislation which are more complete in most of the older industrial countries but to which many new pages have been added on this continent in recent times.

This experience has established the recognition of two main methods, and their accompanying sets of principles, by which wages and working conditions have been raised irrespective of the rate set in theory or practice “by the market”. The first is that of collective as distinct from individual bargaining. Collective—which is for all practical purposes, trade union— negotiation involves two principles, of which one is better known than the other. The first is that the ordinary wage-earner, even vis à vis the small employer, has little or no bargaining power on his own: not only is his labour a perishable commodity, but also his employer is likely to be a great corporation and he is beset by the potential competition of the army of the unemployed—and it may be added, even in the best of times by the potential competition of the migrant from the farm, the real “marginal worker” of an agricultural country.

The Report to the Alberta Bondholders' Committee is not, and was not intended to be, a report upon the economic and social conditions of that province, and it contains no recommendations for settlement of present-day problems. It is a report upon the fiscal problems of the provincial government, which have their origin in economic and social conditions generally common to the Prairie Provinces, as well as in a cleavage of financial philosophies most apparent in Alberta alone. Had the survey been broadened to require a report on the income, wealth, and indebtedness of the province and its people, we have no doubt that some of the criticisms expressed by Messrs. MacGregor and Britnell would be justified—but the investigators would still be investigating and the Report would not yet be written.

As it is, the Report was completed in thirty days. Not a figure (except one table relating to the domicile of Canadian bonds) has any other source than the published data of the Dominion Bureau of Statistics or of the provinces. No statement of fact relating to the present fiscal position of Alberta has any other origin than the published documents or the transcribed words of officials of that province. Only on such a basis could an impartial yet sympathetic study of this important Canadian problem proceed.

The modern state whose youth was spent in strife has entered its turbulent old age. Now, as then, the old order is marshalling its forces of arms and ideas to defend itself against the impact of the new. Just as the medieval church-state was once attacked by the protagonists of the national state, so this latter is now attacked in turn by those seeking to break the bonds of a narrow nationalism. Beneath the struggle lies the ineradicable craving for fulfilment. Where once it was expressed in terms of unity under the headship of the Vicar of Christ, since the Reformation it has taken the form of unity within a sovereign state. And where once the claims of the Pope were subjected to a merciless criticism, now the claims of the sovereign are subjected to an equally relentless stricture. The opposition is no new thing, for the history of political thought in the last five centuries revolves around the attempt to impose restrictions upon the sovereign authority of the state. But it is significant that not until recently has the argument taken the form of a denial of sovereignty. This means, of course, that the assumptions underlying the political system are being challenged. Nor is it only ideas; it is also the social and economic institutions which are being poured into the crucible of criticism. The result of the withdrawal of reverence is to illuminate the nature of sovereignty, thereby enabling us to clarify its functions and to evaluate its worth.