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MINUTES OF A MEETING OF A GROUP ON CANADIAN
CONSTITUTIONAL PROBLEMS HELD AT THE HOME OF
F.R. SCOTT, ON TUESDAY, MARCH 17TH, 1936
AT 8.15 P.M.

Speakers: Messrs. Sheard and Douglas.

Subject: Agenda.

Sheard in opening stated that he would treat the present situation of the Canadian public debts and that Douglas would amplify his remarks and suggest a remedy or remedies for the situation.

In 1929 there was no problem in Canada except the railway debt. The Dominion was achieving a fairly steady annual reduction in the direct debt. Annual deficits were entirely due to railways. Similarly in the provinces the debt problem was not serious. The only difficulty was that the divided authority between the provinces and the Dominion produced as Brady says in “The Canadian Economy and its Problems”, competition amongst the provinces and the Dominion to float bond issues which probably increased the cost of borrowing. Statistics do not show that in 1929 Canada had been developed in the middle at the expense of the extremities in spite of Norman Roger’s contention. The per capita natural wealth of the provinces was highest in British Columbia, second in Alberta and third in Saskatchewan. These figures are, of course, not conclusive, but it is impossible to obtain figures segregating national income among the various provinces. However, broadly speaking, in 1929 in spite of acertain amount of extravagance, the financial situation was comparatively satisfactory and showed no indication of a trend toward the present financial impasse. Up until Great Britain went off Gold in 1931 the security

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market pretty well reflected the above situation. The yield of long term securities in August 1931 was approximately,

Canada – 4.35%
British Columbia – 4.50%
Saskatchewan – 4.60%
Manitoba – 4.55%

During the depression the four Western provinces rapidly got to the point where they could not carry their burdens without assistance. This situation was accentuated by the fact that the debts of these four were themselves as different in amount as they were from those of the central provinces. The only fair way to compare debts is by comparing the interest per capita.

In 1933 the net interest per capita was:

British Columbia – $9.60
Alberta – 5.70
Saskatchewan – 3.64
Ontario – 4.15
Quebec – 1.25

Hence B.C. with a population one-half that of Saskatchewan had a per capita debt more than twice as great.

The tendency towards an increase of fixed per capita charges combined with decreased income reached its peak in 1934 with a total deficit for the Dominion and Provinces, including railways and relief, of $190,000.000.

One must, however, not forget that if the 1929 revenue could be restored the budget of the Dominion Government to-day would, even with relief charges, be not seriously out of balance. But, in the Dominion so large a proportion of income goes towards fixed debt charges (60%) that we must accept the politicians’ statement that the operating expenses of government are cut to a minimum. Therefore conversion is necessary.

From the constitutional point of view the difficulty is that our borrowing is concurrent in Canada whereas the credit of the Dominion and the nine provinces is more or less a unit. It is interesting to note, however, that in the U.S. almost every state has defaulted at one time or other.

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It does not seem that a default on the part of one province would necessarily ruin Dominion credit as a whole. The situation has so far been met by loans by the Dominion to the provinces totalling some $100,000,000. which may never be recovered. The only possible remedies outside a loan council are,

1. Inflation – which has already gone quite far;
2. Increased population by immigration – of doubtful value.
3. Repudiation.

Douglas. The provinces are by the B.N.A. Act given financial responsibilities and borrowing powers which economically they do not possess – particularly in hard times.

The problem is the short term is one of redistributing the financial burden from the wealthier to poorer provinces, and, over the long term, of arranging for the transfer to the Dominion of greater permanent financial responsibility in return for an agreement by the provinces to submit to a certain degree of financial control by the Dominion.

There was proposed last Autumn a Dominion Loan Council. Subsidiary to that was suggested a Dominion Finance Council, a purely advisory body to deal with such questions as the spacing of loans. These proposals were accepted in principle in the Autumn, but now a considerable opposition has appeared in the West.

The Dominion Government has just recently stated its intention of asking the Imperial parliament to pass an amendment to the B.N.A. Act setting up a so called loan council. Loan council plan is defective in that:-

1. It is a purely emergency proposal with no suggestion of permanency.

2. A piecemeal scheme.

3. Involves a sort of stigma for the province that accepts the advice of the Council.

4. Purely permissive as for provinces, and may come to nothing because of provincial politics.

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In order to be able to weight the merits of the proposed council it is useful to summarize the Australian Loan Council which was set up in 1929 after several years negotiations and after a referendum in each state. The Commonwealth took over the existing debt of the states. The existing annual subsidy to the states was abolished and the Commonwealth agreed to make an annual contribution to the interest charges of each state. The Council was composed of one representative from the Commonwealth and from each state with the Commonwealth having a casting vote in the case of a tie. All borrowing both Federal and State is under the control of the Council. The Commonwealth has the right to attach the revenues of any state defaulting on its obligations.

The Council has been very successful.

One characteristic of the Australian Loan Council is applicable to Canada. The main objection of the provinces is that acceptance of a Loan Council will in restricting their borrowing powers, restrict their entire policy and subject them to the dictates of the Dominion. However, in the Australian Loan Council the states surrender no powers to the Commonwealth. Both states and Common- wealth surrender powers to a highly autocratic independent body. This would get around the provincial jealousies of the Dominion and the feeling that they would have to submit to dictation by the Bank of Canada. If it were absolutely impossible for a complete Dominion Loan Council to be accepted one must at least deal with the short term problem arising from the present crisis.

Fisher. asked Douglas to draw a parallel between Australian States and Canadian Provinces as to localization and differentiation of industry in the various units.

Douglas. Impression that differentiation not so great.

Scott and Sheard Secession movement in Western Australia would indicate a situation akin to that of our Western Provinces for Western Australia is largely agricultural.

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Hankin. Must remember that Australia was favoured by circumstances. They had a number of callable issues and some favourable maturities after 1934.

Scott. Sheard did not deal with municipal debt. Can you separate this debt from problem.

Sheard. I did not deal with this because municipal debt is not a constitutional problem.

They are entirely creations of provincial government. The total municipal debt figures do not mean much as the situation of municipalities differs. Some of them have municipal power plants and other abilities; even though their per capita debt is large this may not be a serious situation. Would not like to give impression that he does not consider debt situation grave – it is our most pressing problem today.

Serious problem arises with situation in Alberta where Aberhart, apparently realizing that social credit and loan councils don’t mix, intends to refuse a council and to substitute compulsory conversion.

There is no constitutional method of forcing a province to pay interest charges, though, of course, compulsory conversion legislation could be disallowed by Dominion. This, however, would not prevent default.

Situation is Alberta is made more serious by fact that Aberhart is not a Liberal, owes no allegiance to party, and so is not subject to any sort of indirect discipline.

Scott. Possibly we could allow Alberta to default and maybe other provinces for we don’t need any more capital equipment.

Sheard. Any important default would drive down the price of bonds – possibly wipe out bond market, affect banks and insurance companies. Our commerce would probably suffer as well.

Douglas. It is not true that a pronounced general conversion is necessary for interest charges are already low. It was different in Australia where interest rates before conversion were on a default basis and so very high – over 5%.

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Sheard. Prospective conversion of three quarter billion dollars Dominion Government debt as it matures will involve considerable shift of income, $500,000,000. of tax free bonds will be converted to taxable bonds. Take a millionaire today with $2,000,000. tax free bonds – he gets $110,000. income and pays no income tax. After conversion he will get $60,000. and will have to pay over 35% of this in income tax.

Hankin This will not solve problem which can only be solved in two ways.

1. Increase national income
2. Repudiate by: A. forced conversion
B. inflation.

Sheard Railway problem should be left out of picture so it is not a constitutional problem.

Sheard. Inflation no longer open to us since trade treaty for Canada must not debase coinage. If we are to keep this treaty we can only inflate in co-operation with the U.S.A.

Inflation as shown in 1931-32 sometimes accentuates debt problem for many of our bonds payable in Foreign currencies were held in Dominion and inflation increased proportion of national income that holders of these bonds received.

Fisher. Was situation of British Columbia not serious before depression?

Sheard. Figures of 1929 show British Columbia with nominal provincial surplus of revenue over expenditure but, of course, these figures do not tell the whole story and indeed it is impossible to get a true picture of the situation in 1929 from the available figures.

Fisher. It is entirely true that centre of Canada was not over developed at expense of ends and furthermore was West not gambling in developing nothing but Wheat?

Scott. Roger’s statement re ends and centre of Canada was particularly intended to apply to case of tariff. You cannot say that West was gambling. In any

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capitalistic economy it is natural that capital will be allotted to a profitable field of endeavour. On this provincial question Canada’s position is very similar to that of England with its unitary form of government and faced with the problem of depressed areas. The situation must be met with certain public services being taken over by the Dominion.

Fisher. Does not adoption of C.L.C. involve a very material departure from, if not an abandonment of, the Federal principle?

It is interesting that certain U.S. States, notably Indiana, have no debt at all and have paid relief charges out of current revenue. However, at present in Alberta for instance with over $7,000,000. annual interest charges, it is almost inconceivable that current charges could be met out of revenue and it is doubtful if without interest charges, the province could make its ledger balance.

At the moment there seems to be no way out of debt problem. Repudiation is, one says, out of the question. Conversion only results in a saving, small in comparison to total interest charges. Inflation is out of the question. Is not the only solution increased taxation and is it not a fact that even increased taxation would in no way solve the problem.

Sheard. In theory at least is it not necessary at the moment to scrap the constitution because of urgency of situation? Of course, politically we are driven to conclusion that provinces will not so agree.

Fisher. It is difficult to get provinces to give up their financial prerogatives – with them having varying opinions as to degree of education necessary and also to other types of what might be called social expenditure.

Bruneau. Why exactly can we not repudiate? If we are able to survive one crucial week would real wealth of country not be the same in spite of repudiation.

Hankin. It is difficult to follow out repercussions of repudiation, but

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Scott It is not true that C.L.C. would involve scrapping of Constitution. It was intended to give provinces control of matters of more local importance. Now the financial situation of provinces has reached a point where it imperils national credit and becomes a matter of national emergency and concern. It is not contrary to spirit of constitution to give Dominion Loan Council the power to control provincial finances to the extent necessary to prevent further weakening of provincial financial position. This would not involve a very great surrender of provincial rights.

Fisher It would seem that public opinion in Western Provinces is against C.L.C.

Scott did not agree – public opinion favours some sort of control though it is not educated to the point where complete strong C.L.C. would be accepted.

Fisher Aberhart in Alberta may repudiate in the belief that Alberta has all the plant that it needs and that, therefore, he can repudiate obligations because Alberta does not need any more loans and can be self-supporting.

Scott It is interesting that Statute of Westminster specifically gives Imperial Parliament power to disallow any legislation of Dominion which could imperil position of Dominion securities which are trustee securities. Any compulsory refunding legislation by Dominion would in theory at least be subject to such disallowances though as a matter of practical fact it is almost inconceivable that such disallowance would take place.

The Meeting adjourned for refreshments at 11 P.M.

The next meeting was tentatively arranged to be held at the home of Francis Hankin, 648 Murray Hill Avenue, on Tuesday, March 21st, at 8.15. P.M.